Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10184-BU Type: (SAR) Report No. 10184-BU DIOP, M / X34369 / J-7069/ AF3IE STAFF APPRAISAL REPORT REPUBLIC OF BURUNDI PRIVATE SECTOR DEVELOPMENT PROJECT MARCH 31, 1992 Industry and Energy Operations Division South-Central and Indian Ocean Department Africa Region This document has a restricted distibution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS Currency unit = Burundi franc (FBu) 1991 US$1 = FBu 20C (as of December 1991) Period Ayerg: 1990 US$I = FBu 171 1989 US$1 = FBu 159 1988 US$I = FBu 140 1987 US$I = FBu 124 WEIGHTS AND MEASURES Metric International Standard System I meter (m) = 3.3 feet I hectare (ha) = 2.47 acres I kilometer (km) = 0.62 mile I sq kilometer (km2) = 0.39 sq mile (sq mi) i kilogram (kg) = 2.2 pounds Ob) I liter (1) = 0.26 US gallon (gal) I metric ton (m ton) = 2,204 lb GLOSSARY OF ABBREVIATIONS AfDB = African Development Bank AGCD = Administration Generale de la Cooperation au Ddveloppement (Belgian Aid Agency) APEE = Agence de Promotion des Echanges Extdrieurs BANCOBU = Banque Comsnerciale du Burundi BBCI = Banque Burundaise de Credit et d'lnvestissement BCB = Banque de Credit de Bujumbura BEST = Burundi Enterprise Support and Training BNDE = Banque Nationale de Ddveloppement Economique (Development Bank) BRB = Banque de la Rdpublique du Burundi - Central Bank CADEBU = Caisse d'Epargne du Burundi CAMOFI = Caisse de Mobilisation et de Financement CCCE = Caisse Centrale de Cooperation Economique (French Aid Agency) CCIB = Chamber of Commerce and Industry of Burundi CEC = Commission of European Communities COOPECs = Cooperatives d'Epargne et de Credit EDF European Development Fund EIB = European Investment Bank ESAF Enhanced Structural Adjustment Facility FAC = Fonds d'Aide et de Cooperation (French Aid Agency) FNG = Fonds National de Garantie FOSIP = Fonds de Soutien a l'lnvestissement Prive FPHU = Fonds de Promotion de l'Habitat Urbain IFC = International Finance Corporation ILO = International Labor Organization IMF = International Monetary Fund KfW = Kreditanstalt fMr Wiederaufbau (German Aid Agency) MBB = Meridien Bank of Burundi MCI - Ministry of Commerce and Industry MPWUD = Ministry of Public Works and Urban Development OGL = Open General Licensing PCU = Policy Coordinating Unit PE = Public Enterprise PFI = Participating Financial Intermediaries PMU = Project Management Unit PSD = Private Sector Development PTA = Preferential Trade Agreement SAL = Structural Adjustment CredittLoan SBF = Societe Burundalse de Financement SCEP = Public Enterprise Reform Office SOCABU = Socete d'Assurances du Burundi SOFIDHAR = Societe de Financement de l'Habitat Rural SSE/APEX = Small-Scale Enterprise Project TT = Tumover or Transaction Tax UCAR = Union Commerciale des Assurances au Burundi UTNDP = United Nations Development Program UNIDO = United Nations Industrial Development Organization USAID = United States Agency for International Development GOVERNMENT OF BURUNDI FISCAL YEAR January I to December 31 FOR OFFICIAL USE ONLY KEPUBIC CBURU NDI PRfVATE SYCTOR DEVELOPENT POJECT STAFFAPPRAASAL REPORT Table of Contents CREDrr AND PROJECT SUMMARY ............................... I. INTRODUCTlON .....................1.................... II. THE BUSINESS ENVIRONMENT ..................... 2 A. Overview of the Industrial Sector ............................ 2 - Efficiency and Performance .............................. 3 - Informal Sector ..................................... 4 B. Export Orientation and Performance ............ ......... S C. Overview of the Financial Sector ......7.... .......... 7 - Financial Situation and Profitability ......................... 7 - Institutional Capacity .............. 8 III. A PRIVATE SECTOR DEVELOPMENT STRATEGY ................... 8 A. Issues and Constraints ............. 8 B. Government Strategy for Private Sector Development ................ 16 - In the Enterprise and Industrial Sector ....................... 16 - In the Financial Sector ................................. 17 This report is based on the findings of a preappraisal mission which took place in March, 1991, and of an appraisal mission which visited Burundi from June 19 to July 9, 1991. Both missions consisted of Messrs. Mohamadou Diop, Sr. Operations Officer (AF31E, mission leader and task manager), Andr6 Ryba, Banling Sector Specialist (AFTEP - financial sector), Iradj Alikhani, Industrial Economist (AP31B - industrial and business environment). Mr. Paul Ballard, Principal Industrial Economist was peer reviewer. Contributions are acknowledged from Messrs. J-F Drdau (AF31N, Sites and Services), and J. Rwamabuga, Operations Officer (RMB - business investment climate and prospects), Mr. Nguyen Tu Son, Consultant (regulatory framework), and Mme. Lucie C. Philips, Consultant (private enterprises and the new business environment) in the course of their work on the Burlndi Industrial Sector Report. Bilingual secretaial support was provided by Mme Fran9oise Schatten, Staff Assistant, (AP31E). Messrs. Francisco Aguirrrn-Sacasa (AF3DR) and Michael N. Sarris (AP31E) art the Department Director and the managing Division Chief, respectively. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. IV. THIE PROJECT .................................................. 19 Project Objectives and Justification ..................... ....... 19 Lessons Learned from Previous Operations ....20 Project Description and Design .................... 21 Institutional Arrangements ................................... 27 V. THE PROPOSED CRED1T AND MAIN FEATURES ................. 30 VI. PROJECTBENEFITS AND RISKS ............................. 38 VII. AGREEMENTS AND UNDERSTANDINGS REACHED .... ........... 38 :DM 2.1 Evolution of Principal Exports. 7 5.1 Summary of Proposed Procurement Arrangements .34 5.2 Estimated Project Cost .37 ANMIM 2.1 Status of Business and Enterprise Regulatory Reforms 2.2 Policy Matrix of Private Sector Developmeat Measures 2.3 Structure and Characteristics of the Financial Sector 2.4 Policy Matrix of Financial Sector Development Measures 4.1 Integrated Project Management Unit 4.2 Estimated Cost of Technicai Assistance 4.3 Sites and Services - Estimated Investment Costs 4.4 Selected Documents and Data Available in the Project File 5.1 Schedule of IDA Credit Disbursements 5.2 Bank Supervision Plan TABLES (ANNEEX 2.3) 1 Burundi Commercial Banks: Key Indicators 2 Characteristics of Main Institutions Operating Under the Banking Legislation 3 Summary Balance Sheet of Commercial Banks (Unaudited) 4 BNDE - Summary Balance Sheet (Unaudited) 5 SBF - Summary Balance Sheet (Unaudited) 6 Reported Profitability of Banking Institutions 7 Distribution of Demand Deposits by Institution 8 Distribution of Term Deposits by Institution 9 Structure and Evolution of Commercial Bank Deposits 10 Sectoral Distribution of Credits to the Economy 11 Structure and Evolution of Credits Distributed Credit d ProMect Summary lBoMrower: Republic of Burundi. BneficlAdir^ Central Bank of Burundi (BRB), Participating Financial Intermediaries (PFIs), Private Enterprises, Ministry of Commerce and Industry (MCI), Ministry of Public Works and Urban Development (MPWUD), Ministry of Energy and Mining, Ministry of Justice, and Public Enterprise Reform Office (Service Charge des Entreprises Publiques - SCEP). Amoun: SDR 12.4 million (US$17.0 million equivalent). Terms: Standard IDA terms, with 40 years maturity. Prolect Comnonen and Onlendin TeM: The project consists of a line of credit for productive investments, industrial infrastructure, improvements in the business environment and in financial intermediation, and technical assistance in support of private sector development. (i) LiM of Credit. The Borrower would pass on US$11.0 million equivalent as a loan to the Central Bank (BRB) at the prevailing market determined average yield of the auction market for three-month Treasury Certificate (IC), minus an amnual administrative fee of at least 1.0 percent of the outstanding subloans refinanced under the Credit. This fee would be reviewed periodically to ensure that the operating costs of the Project Management Unit (PMU) within the Central Bank are covered. The loan to the Central Bank would be for 15 years, including a grace period of 5 years. The Central Bank would onlend the funds to qualified PFIs at the TC average yield, with a flexible amortization schedule reflecting the aggregate maturities of subloans extended by intermediaries. Onlending interest rates charged by PFIs to sub-borrowers would be variable and market-determined. The onlending rates would be reviewed periodically to ensure that they continue to reflect market rates. The foreign exchange risk would be borne by the Government. (ii) Sites and Servies, US$3.5 million through the MPWDU for an investment program in astes and services in the undeveloped industrial zone of Bujumbura, the capital city, to be recovered through the sale of industrial plots. (iii) tnic Assn. US$2.5 million to be passed on as a grant by Government to implementing institutions for a multifaceted training and technical assistance to (a) participating intermediaries, and private entrepreneurs through the PMU, with emphasis on project implementation, - ii - marketing and export promotion; (b) the Central Bank and banks to implement staff training and capacity building programs, to improve banking supervision, economic and monetary analyses as well as credit evaluation; (c) Ministry of Commerce and Industry for a Policy Coordinating Unit (PCU), (d) Ministry of Energy and Mining to assist in reforming mining investment and regulatory policies; (e) SCEP for legal reform studies, and (f) Ministry of Justice and Tribunal of Commerce for staff training and provision of office equipment and technology to improve its efficiency and speed in processing business litigations. Beneflts and Risks: Major expected benefits would stem from an enhanced supply response to ongoing structural adjustment reforms through increased local and foreign private investment that would contribute in attaining Burundi's export diversification and growth objectives. Rapid response by private sector investors, encouraged by improved business conditions, would create the employment opportunities that are critical for the success of adjustment. The process of fully revamping the regulatory framework, and the implementation of fiscal and labor policy reforms may experience delays during the political transition, thereby slowing investments. The consensus built around the need for effective reform of the business environment and the strong voice of a rapidly emerging private sector should minimize this risk and ensure thae effective implementation of the project. Estimatedr Prie Cos: LO9'al Foreian Total -(US$1,000) … (A) Investments Subprojects 8,100.0 14,000.0 22,200.0 Site. and Services 900.0 3.000.0 3.900.0 Subtotal 9.000.0 17.000.0 26O0.0 (B) Technical Aegistance and Trainina Project Management 300.0 40.0 340.0 Enterprise Consultant Services 100.0 240.0 340.0 Ministry of Mining* - 400.0 400.0 Legal Reforms* 145.0 375.0 520.0 Tribunal of Commerce* 30.0 150.0 250.0 Central Bank - BRB* - 2,060.0 2,060.0 Ministry of Commerce & Industry* 2§Q.Q 200.0 450.0 Subtotal . 825.0 3.465.0 4.290.0 TOTAL 9,825.0 20,465.0 30,290.0 * Advanced Funding under PPF - iii - FinancinLe Plan: *mountœ Percentaae d (US$1,000) Investment Prolectt Subborrowrex 5,100.0 22.60 Participating Institutlons 6,000.0 31.70 IDA 11UL000.0 45.70 Subtotal 22.100,0 100.00 Sites a§ ervices Borrower 400.0 10.26 IDA 3.500.0 Suhtotal 1 0900.0 0.Q0QQ Technical Apsistance Borrower 600.0 2.00 Other Donors 1,190.0 28.80 IDA 2.5000Q 69.20 Subtotal 4.290s0 100.00 TOTAL 30,290.0 100.00 Estimated IDA Disbursements: IDA Fiscal Year py :9^3 1994 1995 1996 1997 1998 …US-----------------US$million…----------------------- Annual 1.0 5.8 3.7 2.5 2.5 1.5 Cumulative 1.0 6.8 10.5 13.0 15.5 17.0 Economic Rate of Reurn: Credit component: N/A Sites and services: Cost rlvery Map No.: IBRD 23604 SECTR DEVELOPETOJCT I. RCQD 1.1 Burundi is a small landlocked country In Central Africa. Its per capita GDP is about US$210 (1990). With a population of about 5.5 million growing at 3 percent per annum, Burundi has the second highest population density in Africa (193 persons/square kilometer). Almost 94 percent of the population lives in rural areas and the economy is dependent on agriculture for more than half of GDP, 90 percent of employment and 90 percent of export earnings. Coffee accounts for about 80 percent of total exports. The secondary sector (mining and manufacturing) represents only 14 percent of GDP and 5 percent of exports. Ethnic rivalry has been a major feature of Burundi's political history since the country's independence in 1962. A policy of national reconciliation and unity, initiated in 1988 following new unrest, is being successfully pursued and a significant opening-up of the political system is underway. 1.2 Burundi has been implementing an adjustment program since 1986. During this period, per capita GDP growth has remained slightly positive despite the fall in the international price of coffee, the country's main source of export revenue. However, there has been limited export response in other subsectors, characterized by an increase in the number of products exported by the private sectr, and leading to a modest growth in the total volume of exports. Under the Government's comprehensive adjustment program, stabilization measures were introduced, and steps taken to bring about structural changes: the exchange rate was devalued, and has since been maintained competitive through an active exchange rate policy, most industrial prices were decontrolled, the tariff structure was rationalized, trade policy was liberalized and significant budgetary reforms were introduced. 1.3 The adjustment program has not yet stimulated a strong supply response, partly because of the mixed signals given by the Government to the private sector. Even though the elaborate system of controls regulating private activity has been eased, the public enterprise (PE) sector has remained essentially unchanged, and the private sector has been hesitating to undertake productive investments. The critical mass of effective reforms needed to elicit sustainable supply response by the private sector has not yet been attained. The present development strategy for Burundi calls for the creation of a business environment that would enable the private sector to provide the main impetus for growth. Meeting the challenge of creating a smaller, more efficiently managed PE sector, and a rapidly emerging private sector, requires the participation of local and foreign private investors, spurred on by an appropriate mix of a far-reaching overhaul of policy barriers and regulatory constraints, and effective assistance to promoters. Ihe immediate objective is to provide the private sector with both the incentives and the means to launch new ventures, and to take over economically viable public enterprises. 1.4 In the context of the dialogue for the preparation of the operation described in this report, and the continuation of the overall adjustment program, the Government is already taking strong action to ensure that an enabling environment for private sector development is put in place. Priorities include the removal of institutional, legal and regulatory impediments to private enterprise creation. The implementation of sharply-focused financial intermediation and financial policy reforms is also a key factor for the promotion of productive investments. The proposed private sector development project will support changes to improve the business environment, provide technical assistance to ensure their implementation and help finance new productive investments as well as the rehabilitation and redimensioning of existing enterprises. The success of this three-pronged strategy of reform, technical assistance and investment funding hinges upon Burundi's ability to maintain a supportive economic and -2- political environment to attract and develop export-minded private entrepreneurship. The lhird Structural Adjustment Credit (SAC-Ill, which will be implemented in parallel with the proposed operation, will concentrate on further reform of public enterprises, including nonviable financial institutions, labor market deregulation, a reduction and more even distribution of the tax burden on productive activities, and liberalization in the agricultural sector. 1.5 In parallel, policy and financing constraints are being tackled with Bank support through a series of lending operations. Th. ongoing Small Scale Enterprises project (SSE/APEX- Credit 1889-BU), and the Coffee Sector Project (Cr. 2123-BU) have provided funds for investments. SAC-II (Cr. 1919-BU) and the SSE/APEX Project have supported improvements in financial sector policies, including liberalization of Interest rates, successful launching of an auction market for Treasury Certificates ('Cs), and important steps towards rationalizing monetary and credit policy regulations and instruments. The problems of the Public Enterprise (PE) sector have begun to be tackled under a Technical Assistance Project for Public Enterprise Reform and Economic Management (Cr. 1795-BU) and the Coffee Sector Project (Cr. 2123-BU). . THE BUSINESS ENVIRON 2.1 The private sector plays a major role in agricultural production (through small holder farming) and in the transportation sector. Thus, the private sector is involved in the production of both export and food crops, while the public sector enjoys a quasi-monopolistic position in the processing and export of primary commodities and manufacturing, and generates half of the country's formal employment. Non industrial private sector activities outside the agricultural sector are found principally in the informal sector (paras. 2.10 and 2.11), in international trade, where some 150 modem firms, mostly importers, currently operate, and in a growing but limited service industry, principally in consulting. Following simplification of business licensing procedures, 200 new importers, mostly informal sector businessmen, were registered during 1991. The private business sector is organized around the Chamber of Commerce and Industry of Burundi (CCIB), where industry, agricultural and trade associations, with a total membership of 2,000 businesses, send representatives and contribute to the operating budget. CCIB, a private non-profit organization, is now relatively more autonomous, as Government's hitherto direct control has been significantly diminished (para. 4.21). A. Ovlew nof the Industrial Sector 2.2 A report entitled Private Sector Development in the Iustrial Sector provides details on the structure, performance and prospects of the sector 1/. Modem manufacturing accounts for about 5 percent of GDP (PBu 9 billion, US$60 million), i.e., about half the average contribution to GDP for low- income developing countries. It employs about 20,000 people-less than one percent of the active population. Some 200 formal enterprises are presently engaged in niamufacturing up from the 189 firms Identified in a 1988 survey. Most local enterprises enjoy a monopoly or duopoly status for individual product lines. Competition emanates from imports or, in some subsectors such as soap, from informal sector firms. Eighty five percent of the enterprises are private but mostly engaged in small-scale activities. Thus, about two thirds of Burundi's industrial output originates from PEs, reflecting the heavy large-scale public investment undertaken during 1978-86. A/ Report No. 9422-BU dated February 10, 1992 -3 - 2.3 Priate-Entarise. Private manufacturing Is dominated by the two breweries, employing 1,000 people and generating FBu 2.5 billion (US$15 million) of value added. These two firms have minority public ownership, but are operated by independent private management. Mhe rest of the sector is currently composed of some 175 private small and medium enterprises (up from 163 in 1988), employing 100 workers and generating value added of FBu 40 million (US$200,000) per enterprise. Although foreign investors, mainly from Europe and the Indian subcontinent, operate about half of the private firms, foreign investment and ownership have declined since the early 1980s. Under the new private sector development strategy, renewed emphasis will be placed on the promotion of foreign investment, particularly in export-oriented ventures. 2.4 Public terprises (PEs) dominate the industrial sector in investment, equity and assets --more than 75 percent of total industrial assets. This large PE sector and the support it has received from the Government have hindered private sector initiatives. The IDA-financed technical assistance project (Cr. 1795-BU) provides funding to undertake analyses necessary for privatizing/liquidating PEs not slated to remain in the Government's portfolio. Implementation of PE restructuring has been slow but is expected to improve with the inclusion of monitorble targets under the proposed SAC-HI. The program includes: (a) increasing managerial autonomy; (b) phasing out direct and indirect subsidies to productive or commercial PEs, which after a reasonable period will be expected to operate on the same commercial basis as the private sector or be liquidated; and (c) privatization and liquidation of an agreed list of PEs. As a result, at least 34 enterprises will have private management and/or majority ownership, and 22 will be liquidated or reintegrated into the public service. Implementation of restructuring of financial institutions and agro-industries targeted under SAC-III will be supported by two investment operations: (i) the proposed project, and (ii) an agro-business promotion operation currently under preparation. Based on enterprise-specific targets, elaborated as part of the Government's ESAF program with the Fund, direct and indirect subsidies to the sector are expected to decline from about 3 percent of GDP in 1990 to 1 percent in 1992. Efficiency and Performance 2.5 Growth. Industrial output grew at about 3 percent per year between 1986 and 1989. According to preliminary estimates, growth accelerated in 1990 and 1991, but remains constrained by lack of competitiveness and responsiveness to incentives. Until recendy, high tariff protection and excessive production costs dissuaded exports. Even though since 1986 the top tariff rate has been reduced from 250 percent to 40 percent, tariff protection remains high. A vigorous supply response from the existing sector remains elusive because of obsolete equipment and poor product designs, inadequate management and the high cost of doing business, in particular excessive personnel costs caused by labor laws. New activities and expansion of existing ventures have been limited by the same factors as well as by the cumbersome legal and regulatory framework, the absence of business know-how, the ballooning of the initial investment cCst because of the need to invest in sites and services, and the general climate of uncertainty over future Government policy. The proposed operation will strive to remove policy barriers and, in coordination with other donor and IDA-funded projects, put in place measures and financial resources to alleviate some of these constraints and support the Government in sustaining its liberalization policies. 2.6 Investment Response. Despite these problerms, the private sector has begun to respond, albeit moderately, to the liberalization measures of the past five years. For example, between 1978 and 1982, investment in industry averaged about FBu 900 million (IJS$10 million) per year and slowly grew, specially in 1986-89, to reach FBu 3 billion (US$20 million) in 1989 (excluding SOSUMO, a large sugar processing PE). The private sector accounts for much of- the increase, as its share in industrial investments went up from about 25 percent during the 1978-82 period to 65 percent in the 1989-91 -4- period. On average five new private enterprises per year came to existence between 1986 and 1989, compared to an average of three per year during the first half of the 1980s. Commercial activities also grew rapidly, with the number of active informal and modem importers almost doubling between 1985 and 1988, reaching about 300 in the latter year. 2.7 Inve,tment P Xot. Based on a sample of 60 large enterprises (excluding the brewery and SOSUMO), investments in 1989 are ostimated to total over FB3u 2.1 billion (US$13.2 million), of which FBu 1,500 million (US$9.4 million) by existing private industrial firms, and FBu 300 million (US$1.9 million) by industrial PEs. A fairther FBu 300 million (US$1.9 million) was invested by new firms. Investments in commercial activities also increased to about FBu 1 billion (US$6.3 million) during 1988- 89. Extrapolated to include all firms, total investment in commercial and Industrial activities currerntly surpasses FBu 3 billion (US$17.5 million) each year. These trends are supported by reliable data on official investment approvals and the pipeline of projects Identified by the Bank during project appraisal. 2.8 Under the investment code, the National Investment Commission (NIC) approved 20 projects totaling FBu 1.9 billion (US$11 million) in investments during 1990, (e:cluding a large extension projent of FBu 3 billion (US$17.5 million) by COTEBU, a PE textile firm). Currently 21 investment projects are linder implementation for a total investment cost of FBu 3 billion (US$17.5 million), excluding CCO17EBU. Some 42 additional small-scale enterprise (SSE) projects (investments under US$350,000) have been guaranteed by National Guarantee Fund (FNG), the mixed private/public guarantee institution. These SSE investments are estimated at FBu 340 million (US$2 million). More SSE projects are also under study or ?ieing processed by the Investment Commission and the FNG. In sum, there are 62 investment projects requiring an estimated financing of about US$20 million in an advanced stage of preparation. 'The foreign excbange requirement of these projects is estimated to range between US$10 to 15 million. 2.9 The significant improvements in the enabling environment for the private sector and the opening of new opportunities in commercial and productive activities, hitherto the exclusive domains of the State, are expected to lead to substantial increases in private investment activities. The mix of macroeconomic reforms, and the proposed microeconomic and sectoral measures are likely to create the critical mass of effective reforms needed to stimulate a supply response. Based on this expectation, and in view of actual response to past liberalization efforts, total private sector investnent within the next two to three years is expected to surpass FBu 5 billion (US$25 million) in constant 1990 prices. 2.10 ThLInformal Setor. According to two recent USAID and International Labor Office (ILO) studies, the informal sector's production was estimated at about FBu 8 billion (US$53.3 million) in 1988- 89, approximately equal to modern manufacturing output. The sector grew briskly between 1986 and 1989, doubling in size in nominal terms and employing an estimated 10,000 people. The number of units in Bujumbura is estimated at about 3,000 dealing with food products, garment (half the sector), wood and metal-working, low cost housing construction, and repairs. The sector consists mainly of self-employed individuals (64 percent) with less than 4 percent of the enterprises employing more than 5 people. On average the start-up capital is estimated at less than US$1,000 equivalent. Business activities are conducted 50 percent in private homes and about 20 percent with leased equipment from other entrepreneurs. Workers consist essentially of men in their thirties and with little formal education. There are 300 to 500 entrepreneurs who, with the appropriate incentive and focused assistance, could expand the scope of their activities and forn a pool from which formal sector entrepreneurs could emerge. 2.11 Data compiled by the SSE/APEX unit in the Chamber of Commerce and Industry of Burundi (CCIB) indicates growing demand for investment funds from SSEs, some of which are presently in the informal sector. Women, who are virtually absent from the sector, are now being targeted for assistance -5 - by otlier donors. Several among the latter are moWitoring and helping the development of Informal a,tivities. Under the ongoing SSE/APEX (Cr. 1889-BU), Second Urban Developmewt (Cr. 1968-BU) and Transport Sector (Cr.2105-BU) projects, IDS 1f providing technical and financial tupport to this sector, and thus gaining a better understanding orl ' " ablems and prospects. The SSE/infozmal sector could move into maintenance and other service activities. However, this hinges upon greater supply responses in the economy as a whole, and upon the success of the strategy aimed at increasing the purchasing power of the rural population. B. xport OrIentat1on and Perfornmnee 2.12 Burundi's long-term private sector growth is dependent upon a successful export drive. The current level of export development is low. Imports are more than twice as high as exports and the ratio of exports of goods and non-factor services to GDP is only 12 percent, compared to 19 percent for low income developing countries.Z/ Burundi's exports are dominated by coffee, which accounted for about 75 percent of export revenues between 1987 and 1989 and now hovers around 80 percent. Gold re- exports (mined mainly in Zaire), an unregulated activity, are estimated at close to $50 million but remain largely unrecorded by customs administration. In response to the increasing competitiveness of the exchange rate, other exports have begun to grow and to become more diversified. However, manufactured exports have declined. The structure of official exports is shown below (Table 2.1 and para 2.17). Primary Export Products 2.13 Issues and prospects of Burundi's agro-industries are detailed in the agricultural sector memorandum entitled: Private Sector Dvelopment in Agriult. I During the 1990s, increased production, and improved coffee quality, are expected to lead to higher export volumes and above average prices. Thus Burundi's dependence on coffee for export revenue is expected to contiaue for some time. In order to improve the sector's performance and to create opportunities for the private sector, coffee processing and markping activities, up to now a public sector monopoly, are being progres!>;vely privatized under the Coffee Secor Project (Cr. 2123-BU). 2.14 Burundi's second most important export commodity is tea, which contribmited close to 7 percent of export receipts between 1987 and 1990. As in the case of coffee, most of the value-added is attributable to the agricultural activity itself. Tea processing and packaging factories provide the only industrial activity. Cotton exports have remained stagnant over the past five years, and have been constrained by monopolistic links with the publicly-owned textile complex, COTEBU. The issues related to liberalizing, restructuring and opening-up of the traditional export sector to private promoters, are expected to be tackded in the context of the proposed Agro-Business Promotion Project under preparation. 2.15 Non-Traditional Primn _ Exports. Non-traditional exports include tobacco, hides and skins, fish, plants, rice and quinquina, and horticulture products. These exports have responded favorably to exchange rate adjustments and are growing rapidly. The main logistical constraint facing horticulture is the unavailability of reliable, and relatively frequent, flights to Europe. A study of air transport is underway. It is expected to lead to a set of measures to alleviate this and other transport related I/ As defined by the World Development Report, 1991, excluding India and China. 3/ Report No. 9686-BU dated September 16, 1991. -6- constraints to trade and export development. Immediate measures would be taken under the proposed project (para. 3.16). 2.16 Mining Exports. Burundi has a variety of ore deposits includirng gold, tin and nickel, as well as other resources such as rare earth. Only gold mining appears to be economically and financially viable, given current world prices. A privately controlled, and operated, joint venture with Government has been active in gold prospecting and plans further investments in development of small-scale mining activities. A major multinational mining company has officially requested an exploration permit to prospect for nickel deposits that may be viable given large deposits identified in neighboring Tanzania. The Government has requested Bank assistance during negotiations for the requested mining permit, and to implement the proposed policy and regulatory reforms recommended in the course of ongoing dialogues on the prospects of Burundi's mining sector. Under the project, funds have been allocated to provide this assistance. 2.17 Manufactured Exports. Most of Burundi's manufactured exports are relatively recent. The main manufactured exports are bottles, beer and textiles, as well as cement roof tiles, electrical spare parts, and garments. At its peak in 1987, the value C4 manufactured exports accounted for about 1J percent of total export revenues. However, during the 1988-90 period, m&nufactures accounted for only about 5 percent of exports--around US$5 million. The main problem facing producers in Burundi is that they are often not competitive due to high production costs and inappropriate technology acquired from external donors. Investments in new export-oriented ventures, and in existing finms, are needed to improve product quality, and lower production cost, in order to significantly boost growth of these exports. 2.18 Export Promotion Policies. The macroeconomic reforms of the past five years, particularly the adoption of a more competitive exchange rate, and progressive reduction of anti-export biases through trade policy and tariff reforms, have helped increase export competitiveness. However, specific export promotion measures adopted so far (the duty drawback and partial income tax holiday for exporters), have had limited impact due to slow and partial implementation. Under the proposed project, additional export promotion measures will be implemented (para. 3.5, 3.30 and 3.31). 2.19 Export Markets. The EC and other European countries purchase about 75 percent of Burundi's exports, primarily coffee. Regional African partners are next, accounting for 14 percent of exports. The principal African importers from Burundi are: Zaire, Kenya, Rwanda, and Zimbabwe (primarily tobacco). Non-tariff barriers remain the chief constrain upon Burundi's regional trade. Most of the Zaire and Rwanda export trade is conducted informally owing to proximity and ease of access. This trade is very important, estimated at times to equal or surpass official transactions in manufactures: unrecorded exports of textiles alone are estimated to be around FBu 1 billion -- US$6 million - during 1989-90. Removing trade restrictions with Zaire and Rwanda would boost official trade, but may have limited impact on trade creation in the short-run. The adoption of an open general licensing (OGL) system in Zambia may also boost Burundi's exports to that country. 2.20 Development of nontraditional exports to industrial countries, particularly Europe, offers the greatest potential in the long run, but may be arduous due to distances, natural obstacles and marketing challenges. Products exported to African countries will be different from those exported to Europe. A concerted export drive towards both markets would require substantial diversification to manufacture a broad range of exportable top-quality products. Industrial countries require high quality and competitively priced products and insist on timely deliveries. In order to be successful, local exporters .7 - will have to be nurtured and assisted. USAID's BEST project 4/ is providing some enterprise-based assistance to private firms, particularly in the garment industry. The European Development Fund (EDF) has been finding a relatively successful technical assistance unit, attached to the export promotion agency (APEE) and targeted to horticulture exporters. Table 2.1: EVOLUTION OF PRINCIPAL EXPORTS 1986-1990 (PBu billion) 1986 1987 1988 1989 1990 PRIMARY PRODUCTS: 16.59 9.53 17.57 11.64 12.09 (of which coffee) (15.34) (7.89) (16.01) (9.50) (9.57) MANUFACTURED PRODUCTS: 1.09 1.59 1.02 0.66 0.71 TOTAL q 17.68 11.12 18.59 12.30 12.80 TOTAL (US$ million equivalent) (155) (90) (133) (77) (75) MEMO ITEM Exchange Rate (114) (124) (140) (159) (171) (US$/PBu, period average) Source: Central Bank and mission estimates C. Overview of th Fnandal Sector 2.21 Burundi's financial sector consists of the Central Bank (Banque de la Republique du Burundi - BRB), four commercial banks, three other deposit-taking institutions, including the postal savings system, two development banks, two insurance companies, a network of 70 savings and cooperative banks (COOPECs), several "special funds", specializing chiefly in housing finance and guarantee operations, and the Institut National de la Securite Sociale (INSS), a publicly-controlled pension and social security fund. The sector is heavily dominated by the Government either directly or through public sector entities, although all indications point to management and decision-making processes that are relatively free of political interference. As part of the public enterprise reform component under SAC-m, financial institutions will be liquidated, privatized or rehabilitated as required. A detailed review and analysis of the characteristics and structure of financial institutions, policies and issues is provided in Annex 2.3. 2.22 Financial Situation and Profitability. Arrears on banks' loan portfolio vary from 3 percent to 25 percent of loans outstanding, but do not appear to pose a major problem yet. However, provisions for risks, which are not tax-deductible, tend to be understated, thus artificially improving profits and equity positions. Moreover the high level of credit risk exposure, and concentration, permissible under current Central Bank regulations, makes some banks vulnerable to a downturn in economic activity. Capitalization levels of banks seem adequate, and reported profitability for the six institutions expected to participate in the proposed IDA-financed project is good. Banking institutions appear to benefit from adequate interest margins, supplemented by high levels of commissions and fees levied on banking services. As regard the wholly Government owned and operated " special funds", most of them are dependent on A/ Burundi Enterprise Support and Training (BEST) -8- budgetary subsidies, and are not viable, while the system of credit and cooperative banks is still in its infant stage, and is not yet fincially self-sustaining. Most institutions have experienced a tightening liquidity situation due to increased competition for resources, which resulted in higher deposit interest, and greater recourse to Central Bank refinancing, principally for crop marketing and export. 2.23 i gEa Cag:iV. Management staff of the banking institutions are spread thin, and have not demonstrated the ability to deal with a crisis situation. There is limited internal capacity to perform reliable financial risk analysis., There are no internal systems of formal loan classification by risk category or well established provisioning policies. Satisfactory internal auditing and control mechanisms do not exist. Loan recovery procedures are inadequate. While this situation, along with some weaknesses in financial accounting, raises serious institutional development concerns, the current financial situation and prospects of banks and financial institutions appears generally satisfactory, compared to banks in many similar sub-saharan African countries. However, unless the institutional deficiencies are dealt with soon, there is a risk of rapid deterioration of the financial situation. As the fimancial landscape is being remapped, care must be taken to ensure that the financial system will perfBorm efficiently its task of mobilizing resources and financing economic activity. This will be achieved by seting an appropriate policy, regulatory and legal environment, and establishing an adequate structure of financial institutions and markets. One of the principal objectives of the proposed project is to strengthen the internal capacity of banking institutions, including, the Central Bank, to enable them to implement remedial measures and deal effectively with the coming challenges. The proposed technical assistance component has been conceived, and will provide a comprehensive and broad program of actions to meet these objectives. M. A.JVATE STRDEV-LOENT A. IssuesandCnstrainfs C=?tral D§Yelopment Issues 3.1 The Role of thhe State. Burndi's formal economy is still overwhelmingly public and is supported by substantial official development assistance. A major challenge for the years ahead is to shift to a smaller, more efficiently managed public sector, co-existing with an emerging private sector. The Government has significantly reduced the pace of new investments in productive public enterprises. However, effective disengagement from existing activities is just getting launched. The Government is now expected to focus on improving public sector management, and give priority to the removal of bottlenecks at the micro/sectoral level in order to stimulate growth. Public officials have also initiated a more effective dialogue with representatives of the private sector. Tbis is expected to lead to earlier identification of problems and should encourage feedback from the private sector to fine tune the reform process. Finally, the Government will be relied upon to coordinate and pass on to executing agencies, several technical assistance programs financed by donors, for private sector development 3.2 EJ.ersification of the Economy. Sustained growth in Burundi should result in a long-run reduction of dependency on primay production and coffee exports. Continued efforts to liberalize the economy and, in particular, to implement an appropriate legal and regulatory framework should provide a favorable enabling environment for stimulating export-led private sector growth over the medium term. In the short term, economic growth and diversification will be supported by increasing agricultural productivity and Improving the efficiency of existig enterprises (both public and private). Thus, more emphasis will be put on restructuring agro-industries. 9 - 3.3 Industrial Infrastructure. Infrastructure in Burundi is by and large adequate and relatively well maintained. Within the capital city, where industries are concentrated, substantial undeveloped land has been set aside for industrial use in a 400 hectare zone set aside following a 1985 prefeasibility study commissioned by the Government. However, acquisition and development of such lands for industrial purposes constitute major constraints due to high speculative real estate prices, long administrative procedures for titling, permits or leasing arrangements and limited financial resources to develop sites and services. Private promoters have to build connector roads, sewers, and extend connections to utilities, an expensive proposition. There are no waste water processing facilities. Raw industrial and other wastes are dumped into nearby Lake Tanganyika, thus posing significant polluting and environmental safety hazards. These civil works increase investment costs, while creating additional delays, and discourage investors, particularly small ones. This is a patent case of market failure since (a) there are significant economies of scale associated with developing sites and services for a whole area at once, and (b) private real estate investors, either for housing or industrial development, are put off by the substantial capital investments and long payback periods. The proposed project would finance such investment in sites and services in a limited area of the zone (para 4.12). Future expansion and development of the entire zone will be the object of an updating of the prefeasibility study currently underway (para. 4.37). Exchange and Trade Policies 3.4 Exchange rate. The Burundi Franc is presently pegged to the SDR at a periodically adjusted rate. The peg was adjusted in four stages between 1986 and 1991, resulting In a nominal devaluation of 65 percent and a real devaluation of about 45 percent. These adjustments have improved competitiveness and the profitability of traditional exports, while supporting diversification of exports of non-traditional products. The devaluations have not had a significant inflationary impact; they helped reduce the fiscal deficit and led to decreases in labor costs of more than 25 percent in dollar terms. The Government, with the help of the IMP, is looking for ways of introducing greater automaticity of exchange rate adjustments. 3.5 Foreign Exchange Allocation and Import Controls. Following the removal of all quantitative restrictions, and since February 1992, import and export licensing authorities are delegated to commercial banks. Commercial bank- 'ill be given greater responsibilities as accredited and accountable foreign trade intermediaries, following the progressive introduction of an OGL for imports during 1992 and full liberalization in 1993. Exchange liberalization, which will include the freeing-up of external service transactions by mid-1992 has been agreed to in principle by Government. Other key liberalizing measures being implemented include: (a) automatic and immediate repatriation of dividends and expatriate workers' income ; (b) increased allowances for travel and tourism; and (c) liberalized international transport and insurance. These measures are to help exporters by eliminating barriers faced by foreign export oriented ventures, and facilitating export markets prospecting by Burundi producers. More transparent and flexible rules are also being established for repatriation of capital. 3.6 Tariffs. Tariff levels and dispersion were reduced, through a series of reforms implemented in 1986 - 1989. However, firm level estimates show that effective tariff protection rates remain too high. Also, collection rates, which remain around 50 percent, are inadequate. Further tariff reforms already underway, or planned under SAC-I/ESAF, will address these issues. Their thrust will be to improve tariff administration, reduce effective protection rates and eliminate anti-export bias. Tariff administration will be improved with the adoption of the Harmonized System (HS) tariff nomenclature and by the ongoing French-assisted installation of a computerized customs administration (SYDONIA). Other measures include merging the service tax into a single tariff instrument, and harmonizing of tariffs within broad sectors. Efforts are also underway to strengthen tariff collection by granting fewer exemptions. Finally, much of the reduction in the anti-export bias will come from a lowering of top rates. - 10- Tax and Investment Eolicies 3.7 Corporate income and other direct taxes accounted for only about 14 percent of total tax revenue (less than FBu 3 billion (US$22 million) in 19&6-89), as the budget relies heavily on indirect taxation to generate revenues. All registered enterprises, including PEs, are subjected to the same nominal tax system. In practice, most PEs and many locally-owned private enterprises have not paid taxes, while other firms still enjoy tax holidays granted under the investment code. One of the objectives under the IMF-supported ESAF is to improve tax administration by bringing these firms into the tax net. However, in order for this not to have a negative impact on business development, corporate income tax rates would have to be reduced accordingly. At present, the corporate income tax rate of 45 percent and the 20 percent dividend withholding tax rate combine to an effective 57 percent tax on corporate profits. When net income is less than 2.2 percent of gross sales, a minimum flat fee of one percent of gross receipts is levied. Operating losses can be carrtiW forward for a period of four years. Other corporate taxes include: a turnover tax (IC of 15 percent on goods and 7 percent on services; property taxes, collected by the local government in Bujumbura, and assessed on land, buildings and vehicles; and a 1.2 percent tax on capital subscriptions collected by the Tribunal of Commerce upon registration of corporations. 3.8 The Comrorate Tax System in Burundi, if applied, would discourage investments by heavily taxing nominal returns. It could also distort resource allocation due to more favorable tax treatment of debt- financed investments and by imposing a relatively heavier effective tax burden an slowly depreciating assets (i.e., industrial machinery). A good part of these problems could be tackled through fiscal reforms. In parallel, other problems are created by an overly complex tax code, which leaves a lot to the discretion of individual tax officials, and, in particular, to uneven enforcement of tax rules by tax inspectors. These issues will be tackled through the computerization of the Ministry of Finance's tax department and training of inspectors, as well as the redrafting and streamlining of the tax code. A joint Bank/Fund mission has started work on a comprehensive fiscal reform program. Its recommendations are expected to be implemented in the context of SAC-i/ESAF after a joint review with the Government, Bank and IMF. The mission will also examine the Investment Code with a view to reducing corporate tax rates, and generalizing access to investment incentives in coordination with general tax reforms. The joint Bank-Fund fiscal mission will recommend a comprehensive tax reform package covering reduction in rates in exchange for broadening of the tax base. During negotiations, agreement was reached with the Government to: (a) take necessary measures satisfactory to IDA, and as a condition of effectiveness of the proposed credit (para. 7.4(v)) to: (i) allow banks and financial institutions to deduct allocations to provisions for doubtful loans from taxable profits when such allocations are made in accordance with loan classification and provisioning guidelines issued by the Central Bank on February 17, 1992, and (ii) rationalize the fiscal regime of financial instruments through institution of a unique securities tax levy. (b) issue, by December 1992, a policy statement and a timetable, satisfactory to IDA (para. 7.6(xi)), to undertake tax reforms to encourage private investors and entrepreneurs, including, inter alia, the following areas: (i) frrnoyrI: examination of (a) a system of tax credits on inputs in order to avoid undesirable cascading effects (deductibility is allowed by law but not implemented); (b) the possibility of excluding financial transactions and realized capital gains from the turnover; (c) the - 11 - appropriateness of the turnover tax rate of 15 percent and (d) the feasibility of introducing a value-added tax (VAT); (ii) (orphrate Income. Tx: examination of possible reductions of the rate over a three-year period, in combination with a reduction in d' v1dmd taxation; (iii) Depreciation Allowanc: to counteract the effects of lack of inflation accounting and of depreciation allowances, which encourage investnent in short-lived assets and reliance on debt financing, examination of the possibility of faster depreciation schedules on machinery and equipment, and of allowing to carry-forward losses over five years instead of four years. 3.9 E rise Reglations. Burundi's administrative regulations have, until recently, substantially hindered private investment and entry into new business activities. For example, during the second half of the 1980s, incorporation could take a year or more and the simple (redundant) act of being accredited as an importer or exporter took more than three months. The origins of this regulatory system date back to the 1970s when administrative controls were created in response to severe macro-imbalances and a growing public enterprise sector. These regulations controlled the ethnic origin of capital and ventures and were driven largely by security considerations. The time-consuming nature of these procedures deterred many potential entrepreneurs. As part of the political and economic liberalization process initiated since the mid-1980s, the Government has modified many of the key restrictive laws and regulations. The project is expected to support further significant steps towards the goal of establishing freedom of enterprise for all. 3.10 Recent reforms have focused on eliminating redundant regulations and rationalizing the remaining procedures governing enterprise creation and registration, import and export trading and licensing procedures, etc... (see details in A_q.12_J). In particular, prior appwoval of Ministry of Justice is no longer required for enterprise creation. Furthermore, procedures governing investment project approval under the Burundi Investment Code will be simplified and accelerated, with some benefits made automatically available to new investors, in the course of the ongoing revision of the Code. Other procedures related to investment project implementation will also be revised and accelerated through better coordination of various agencies involved (para. 4.14). 3.11 Effective implementation of the new liberal regulatory system has posed significant problems, as medium and lower levels of the bureaucracy continue to resist loss in their power and influence, as well as of petty financial revenues. A priority objective of this project will be to ensure effective and speedy implementation of the reform measures. The transparency and effective implementation would be ensured by adopting a number of additional measures. In order to simplify enterprise registration, a simple Unified Single Form in a multi-copy form is expected to be adopted for the whole administration. Additionally, in order to ensure adequate flow of information within public agencies and other interested institutions a management information system will be setup through computerization of the commercial registry process and files in the Tribunal of Commerce. Finally an operational manual, setting transparent rules and procedures for enterprise creation and related regulatory provisions, would also be adopted to anchor firmly the reforms and prevent backtracking. Funds will be allocated under the project to finance the required technical assistance and institutional support to the Tribunal of Commerce (para. 4.22). The Chamber of Commerce and Industry is establishing an optional one-stop window to assist private promoters, and fiuther simplify procedures for enterprise creation and registration. The French aid agency Fonds d'Aide et de Coop6ration (FAC) will provide required grant fiunds, and the Bordeaux (France) Chamber of Commerce, the technical assistance to CCIB. Close coordination with the IDA project is planned in the context of the assistance to Tribunal of Commerce (para. 4.22). - 12 - 3.12 Te Lea Framework. The legal framework and many of the existing business laws originate from Burundi's pre-independence period. There has also been an accumulation of ad-hoc legal texts, in the absence of any single codified and coherent set of legal provisions on business, real estate, fiscal and related matters. Some conmnercial rules are included in real estate laws, others in fiscal texts, etc.. The present situation impedes quick and equitablejudgements on disputes concerning enforcement of contracts and property rights. Moreover, there is no clear definition of delimitation among judicial, legislative and executive authorities, leading to a lack of checks and balances and transparency. Often, the same institution is responsible for drafting, interpreting and executing a law (e.g., the Directorate of Notary- Public and Titles). Prior to the establishment of a relatively independent and well functioning Tribunal of Commerce, in 1988, the legal system tended to be biased against the private sector, both with regards to claims against Government and in the enforcement of contracts with individuals and firms. The ongoing political liberalization process has created favorable conditions for changing the legal environment. 3.13 The legal regime of various types of firms (e.g., corporation (or soci&e anonyme), limited liability (or SARL)) is incomplete and limited. Likewise, bankruptcy regulations enacted in 1925 and 1934 need updating. Currently, these regulations are virtually not operational, making it extremely difficult for the Tribunal of Commerce to expedite litigation, or collect debts from bankrupt individuals or firms. This situation is complicated by the absence of a clear legal and regulatory framework for private para-legal professionals, such as liquidators, auditors, process-servers and auctioneers to assist in the management and disposal of repossessed assets of bankrupt firms. Moreover, the bankruptcy laws do not apply to public enterprises, the liquidation of which is defined in each case by an ad hoc liquidation decree signed by the President of Burundi. 3.14 The proposed project will contribute to the financing of legal consultancy services and studies designed to codify and modernize Burundi's commercial real estate, and other economic regulatory and legal texts. Satisfactory implementation of the legal reforms will be a condition of SAC-M. USAID has agreed, in principle, to provide grant financing of the legal reform program, including the drafting of the regulatory framework and creation of private legal professions. The Government and USAID have agreed to consult and closely coordinate with IDA in the implementation of the legal reform programs. Particular attention will be paid under the commercial code to financial instruments (e.g., bankers' acceptances, drafts, cheques, warrant papers, and securities) and regulations with a view to facilitating and developing transactions-based lending (using commercial paper, mortgaging of contracts, goodwill and merchandise). There will be close coordination with the Central Bank's technical assistance component regarding reform and modernization of banking laws, and with Ministry of Cc.nmerce and Industry regarding free-zone legislation as well as environmental protection regulations. 3.15 Auxiliaries of Justice. The absence, or insufficient development, of private auxiliaries of justice and notaries-public is a serious shortcoming of the legal structure in Burundi. Without these legal professions, it is difficult, and lengthy, to implement legal decisions with respect to repossession and liquidation of assets of delinquent or bankrupt debtors. These professions could be exercised by private individuals based on revocable authority granted by the State. In Burundi, there exists only one official civil servant - the Director of Notary-Public and Titles and Deeds in the Ministry of Justice -empowered for the whole country as notary-public, and he is located in Bujumbura. As for other auxiliaries of justice, their functions are limited and exercised exclusively by other civil servants in the Ministry of Justice. The prohibition of private notaries public and other legal auxiliary activities (e.g., process- servers, auditors, evaluators, receivership judges, auctioneers) constitutes a constraint to simplifying and expediting contract processing and enforcement. Establishment of a regulatory framework is, however, a prerequisite to the creation of private legal professions. This will be undertaken in conjunction with the planned overhaul of existing legal texts, under the proposed project. As a condition of the proposed - 13 - credit (para. 7.6 (xii)), and by October 1993, the Government has agreed during negotiations to take the necessary measures designed to: (i) restructure the Directorate of Notary Public and Titles in order to limit its role to that of custodian of titles and deeds, and to decentralize and privatize its notary public functions; (ii) authorize the existence and functioning of private auxiliary legal professions referred to above and to reform relevant existing regulations accordingly if needed, and (iii) simplify the lengthy procedures of property title and deed creation and administration so as to accelerate mortgage registration, and enforcement of related loan contracts. 3.16 Air Transport. Adequate and speedy access to air transport at reasonable prices is critical to the development of an export-oriented private secor, particularly because Burundi is landlocked. Air freight to Europe, except for the occasional charter, is provided by a duopoly constituted by two international commercial carriers. A Bank-financed sector study under the Transport Sector Project (Cr. 2105-BU), is reviewing policy and regulatory issues, as well as prospects, with particular reference to international waterways and air transport policies. The study will also undertake a comparative study of tariff policies and freight costs to determine the possible impact and justification of further deregulation. Air-Burundi, the national, publicly-owned and operated carrier, has a monopoly on international air transportation rights, distribution and sale of airline fuels and other airport services. This monopoly creates distortions that contribute to higher air transport and transit costs and conflicts of interest, and fiurher constrains the sector's development. As part of the PE reform program, under SAC-HI, Air Burundi is expected to be privatized, and its monopolies eliminated. To reduce some of these distorsions, while the appropriate analytical work is underway, the Government has agreed during negotiations to allow, by Mid-Term Review, unscheduled chartered freight and passenger flights, and establish a transparent system for operators to obtain traffic rights within twenty four hours. Under SAC-m, the Government is expected to implement fiuther air transport deregulation and reforms, to review various airport fees in order to recover the costs of services provided, and eliminate Air Burundi's remaining monopolies (para. 7.6(ix)). 3.17 Labor Laws. Current labor laws hinder private sectr and export development in labor-intensive activities due to high, officially imposed labor wages and charges (averaging US$85 per month for unskilled workers in manufacturing), which are higher than in Mauritius and Madagascar. The labor market in Burundi is segmented into the modern and informal sectors. The modern sector is essentially concentrated in, and around, Bujumbura and Gitega while the informal sector dominates in the rural parts of the country. The informal sector provides the bulk of available employment opportunities. The approximately 80,000 employees in the modern sector in Bujumbura account for only 3.3 percent of the total labor force. Conditions of employment are governed by the Burundi Labor Code, whose stated objective is the protection of workers. Tbis Code sets conditions of employment, and hiring and firing of workers have been supervised by the Ministry of Labor until June 1991, when hiring of workers in private and mixed enterprises was fully liberalized. The Code sets a minimum daily wage rate at US$1.00 per day equivalent, to which social security charges of 40 percent must be added. As a result, labor compensation remains too high in Burundi to promote the development of labor intensive export- oriented industries. 3.18 The Bank has been conducting a dialogue on the labor Issue; however, it is sensitive owing to its implications in the ongoing process of ethnic reconciliation and attempts to improve fair representation of the various groups in the labor market. A revised labor code was reviewed in February 1992, by a joint Bank and lnternational Labor Office (ILO) mission. While incorporating a number of improvements over the existing code, the revised text still remains restrictive or unclear in several aspects. Under the - 14 - proposed SAC-E, these rigidities will be addressed through a comprehensive revision of the labor code, Including, inter alia, (i) the lifting of constraints on firing practices, (ii) elimination of mandatory wage fixing for various professional groups, and (iii) elimination of requirements for 100 percent medical coverage from private employees. Adoption of satisfactory labor legislation wll be a condition of second tranche release of the proposed SAC-rI. Creit and Mona Poliies 3.19 The principal financial sector weaknesses constraining private sector development are traceable to institutional wealmesses of commercial banks and also to the Central Bank's inadequate regulatory and policy formulating and implementing capacity. Issues and remedies of commercial bank weaknesses are discussed in more detail in Annex 2.3. Widt a staff of 437 in 14 divisions and two branches, Banque de la Rdpublique du Burundi (BRB), the Central Bank is a highly centralized and compartmentalized institution, with no clearly defined structures or procedures, and until recently, virtually no meaningful policy dialogue with banks and financial institutions. There are no training programs, salaries are low compared to banks, and turn over of quality staff is high. During the preparation of the project the Central bank has come to recognize these institutional weaknesses, and started the implementation of a number of reforms with respect to: (a) interest rate policies; (b) credit allocation; (c) the conduct of monetary policy, and (d) banking regulation and supervision. Sustained and successful implementation of these reforms will require extensive institutional capacity building, for the Central Bank, to properly analyze, monitor and forecast macroeconomic developments, and to define and implement monetary policies, or manage adequately foreign exchange reserves and operations. The Central Bank has, consequently, requested a comprehensive program of technical assistance and training to tackle these institutional weaknesses, including those of banks and financial institutions. Funding will be provided under the proposed Credit, and by other donors under close coordination with the IMF and the Bank (paras. 4.18 and 4.26). 3.20 Itst Rate Policies. Significant progress was achieved under SAC-Il (Cr. 1919-BU) and the ongoing SSE/APEX Project (Cr. 1889-Bu), and interest rates are now determined by market forces through the auction market for Treasury Certificates (TCs). The auction system now works well, and interest rates are freely determined, without manipulation from the Central Bank. Current TC average yields, now the reference rate in the financial sector, hover around the 11.0 percent mark, compared to an annual average inflation rate of 9 percent. Since July, 1991, the Central Bank's preferential refinancing rate of 6 percent for coffee export credits was abolished and aligned to a normal unified, refinancing rate set at a level of 10 percent, i.e., above the TC rate prevailing at the time. Banks' administered 1 percent margin on commodities credits, has also been liberalized. The differentiated taxation rates of financial instruments, that are close substitutes (e.g., Treasury Certificates and Certificates of Deposit), constitute the only remaining distortions in borrowing rates. Interest on deposits vary currently from 1 percent for some sight deposits to 9 percent for one-month and 12 percent for one-year deposits, with the bulk of term deposits remunerated above 9 percent, the current average annual rate of inflation. Interest charged on commercial bank loans ranges from 7 percent to 19 percent. These rates fluctuate according to market conditions. 3.21 Credit Policies. The Central bank does not have any directed credit policies, except for minimum requirements for commercial and development banks to allocate 15 percent and 60 percent for term lending, respectively. By and large, this term lending ratio is not respected by most commercial banks who lack adequate term resources. Tiese ratios have no credit control or prudential meaning; they prevent independent decision-making for investment financing. It was agreed during negotiations to eliminate such target lending requirements by Mid-Term Review of policy and institutional reforms. - 15 - The Central Bank has eliminated the distinction between rediscountable and non-rediscountable, priority and non-priority credits. 3.22 Re Requreme. Currently, changes in the money supply are effected through conversions of external credits and Central Bank refinancing of eligible credits, in practice coffee marketing and export financing. More flexibility is needed in the condct of monetary policy. This could be achieved by moving toward indirect instruments of monetary control such as reserve requirements, and open market operations (OMO). A system of reserve requirements was imposed in July, 1991, on all deposit taking institutions, but faced implementation problems due to: (a) the target level of the reserves which is too high; (b) the form in which they must be held; (c) the need to meet the requirements on a daily basis, (d) the low penalty for non-compliance; and (e) the number of deposit-taking institutions that escape this requirement. The Central Bank has agreed, prior to negotiations, to improve the reserve requirement system and to extend it to all deposit-taking institutions. It is now implementing lower reserve requirements of 7.5 percent applicable across the board to all deposits of all banks and financial institutions, in lieu of 5% and 10% of sight and term deposits, respectively, applied previously. Moreover, the penalty for non compliance is expected to be stiffened and set at a rate of 8 percent above the rediscount rate. 3.23 On Malke Operations. In addition to reserve requirements, the Central Bank has agreed to begin developing other indirect credit and monetary policy instruments. The Treasury certificates (TC) market offers the basis upon which to develop an active money market which, with time, would permit the development of Open Market Operations (OMO). A restructuring of the TC market has already been implemented by the Central Bank during project preparation. As a first step, the Central Bank has lowered the minimum denomination of certificates from FBu 500,000 to 100,000 (US$2,500 to 500), and introduced semi-monthly auctions. Bearer, and freely negotiable, certificates have also been introduced, and the Central Bank has agreed to actively participate in the market with its own TC portfolio. It was also agreed during negotiations that the market would be enlarged by Mid-Term Review to include negotiable short-term instruments issued by banks. 3.24 Central Bank Refini of Last Resort. As recourse to indirect instruments of monetary control increases, access to the rediscounting window will be gradually phased out. When OMOs have been fully operational, the only Central Bank lending would take the form of temporary overdrafts, at penalty rates, as part of its function as lender of last resort. The refinancing rate itself would be established in relation to the rate on TCs. In the meantime better quality control of the credits submitted for refinancing is called for at the Central Bank. Rediscounted credits are currently not subjected to periodic reviews, and monitoring. As commercial banks often condition credit approval to Central Bank notification of the rediscountability of such credits, there exists a de facto reliance on Central Bank assessment of the quality of the proposed credits. The Central Bank is currently overhauling its procedures to address this problem. During negotiations, the Central Bank has agreed to present a plan to reinforce its credit analysis capacity, satisfactory to IDA, by December 31, 1992, as a condition of the proposed credit (paras. 3.36 and 7.6 (x)). Regulatorv Framework for Banks 3.25 Supervision and monitoring activities by the Central Bank remain limited in scope and quality. On-site supervision is limited, and until very recently no banking institution had been subjected to a comprehensive external audit. And while tentatives are being made to introduce uniform accounting practices among banks, off-site supervision is still conducted on the basis of inadequate reports often filed with substantial delays by many banks. On-site inspection reports are not available to the banks concerned which cannot comment on them, and there is no fbllow-up to ensure that corrective measures - 16- have been taken. The prudential ratios dealing with capital adequacy requirements and liquidity levels, which constitute two of the most critical monitoring instruments for such supervision, have been revised in December 1991, in accordance with IDA and IMF recommendations. However, the risk concentration and division ratio, which is defined in the Banking Law, and regulations application to non-deposit taking financial institutions, cannot be revised prior to the revision and drafting of a comprehensive new banking law, to remedy the remaining deficiencies described above. The Central Bank's ability to monitor the quality of bank loan portfolio is enhanced, since February 1992, with the issuance of an instruction to all banks and financial institutions to start classifying their loan risks Into four categories: performing, under surveillance, non-performing and litigious ; the instruction also defines new provisioning procedures and guidelines. Progress with overhauling Burundi's Banking Law and regulations, with particular reference to the aforementioned prudential regulations on risk concentrations, and on non-bank financial regulations is a condition of the proposed credit and will be monitored during the proposed mid- term review of project implementation (para. 5.8). Further strengthening of banking regulation and supervision will be part of the Government's strategy in the financial sector (para. 3.36) B. Government Strate tor Priyate Str Beveopment In the Enterprise and Industrial Sector 3.26 Invstent Strategy. The Government's industrial strategy aims at promoting investments in efficient import-substitution and export-oriented ventures. Within this strategy, specific emphasis is put on attracting foreign investors who can provide know-how and capital as well as adopting specific measures to encourage exports. The dearth of competent local entrepreneurs and the limited absorptive capacity of the domestic market underline the importance of promoting export oriented activities. The implementation of the general policy is based on a three-pronged approach. 3.27 First, an investor-friendly business climate wIll be created. The thrust of the Government's efforts will focus on facilitating, rather than on regulating, private investment, on providing an appropriate enabling environment and on reducing uncertainty, particularly with regard to legal enforcement of contractual obligations. This wIll involve continuing to pursue stable macroeconomic policies and liberalizing the economhy. Among new measures to be put in place, priority will be given to: (a) providing freedom to invest without restrictions on the size of the investment, the sector and ownership, both domestic and foreign; (b) eliminating industrial licensing, except in limited and exceptional cases specified in a short negative list, and further simplifying company registration; (c) increasing international competitiveness through tax, foreign exchange and trade reform programs; and (d) effectively liberalizing factor markets, particularly easing labor regulations with respect to compensation and hiring. Second, the Government will carefilly monitor and improve its effectiveness in implementing policy reform measures and in providing better public services. Apart from the policy areas listed above, the Goverment will: (i) speedily implement the agreed PE privatization and restructuring program, and retrenchment from public sector investments in productive activities; (ii) continue its effort to secure reciprocal opening of regional trade in goods and services; (iii) provide necessary industrial infrastructure, including secure and efficient liberalized international transport, and adequate demand-driven sites and services for industrial investment. 3.28 Finally, the Government will support adequate provision of investment assistance, and will facilitate acquisition of know-how and the development of private sector institutions, particularly the Chamber of Commerce and Industry (CCIB). This support will be given indirectly, and provided and managed by private institutions, including the CCIB. All private firms will be eligible for assistance in specific areas such as project preparation, production management, accounting and export development. - 17 - 3.29 Attacing orelen InCv=esor. Burundi is relatively advanced In adopting economic and regulatory policy reforms. Further efforts, hand in hand with better implementation, should make the country attractive to foreign investors, relative to other Af&ican countries. However, given that the country is not well known, except for ethnic conflicts of the recent past, a concentrated public Infornation effort Is required to attract potential investors. To address this issue, the Government has recently successfully organized in Bujumbura a private sector round table attended by some 500 business managers and trade association representatives and by an important delegation of bankers and donors. Further similar initiatives are underway. 3.30 Exnort Promotion. Within a general framework to enpourage investments, specific additional measures aimed at promoting export-oriented ventures are desirable. The experience of Mauritius suggests that, while It may not be possible to quickly simplify the general regime, exporters should be eligible for special promotion measures. A number of such measures --duty drawback, preferential income tax, etc.- are already in place and additional ones, including technical assistance to exporters, promoting free-trade zones, will be supported under the proposed project. 3.31 The export promotion objectives of the Government will additionally require the development of bonded warehousing capacities to enable the expansion of free-trade zone and reexport, as well as domestic trading activities by private entrepreneurs. To 'that end, with assistance from Caisse Centrale de Cooperation (CCCE) and European Development Fund (EFD), the Government already disposes of ample storage capacities in bonded warehousing facilities at the Port of Bujumbura, which appear sufficient to meet current demand. Funds have been made available under IDA Credit (1795-BU) for Economic Management to further study the economic justification for the expansion of bonded warehousing facilities and to review pricing policies, marketing strategy and various private management schemes for the bonded warehouses, as well as for the Port and the Airport of Bujumbura. 3.32 The above strategy and the detailed sector policy and institutional reform measures are reflected in the draft LettXe of Priyae Sctr Development Policy and the annexed matrix of reforms (Annex 2.2), signed by the Government. In the Financial Sector 3.33 The financial sector of Burundi is still in the development stage and thus suffers from a number of shortcomings. The Government has agreed at an early stage to a number of reforms centering around improving financial intermediation which is particularly important for the expansion of the private sector. These reforms include (i) the strengthening of financial institutions and the development of new financial instruments for improved savings mobilization and greater efficiency in investment lending and (ii) strengthening the legal and regulatory framework governing financial institutions and improving supervision to ensure financial stability. 3.34 The ongoing reforms in the financial and legal/regulatory environment, the relatively stable macroeconomic framework and the deepening of the economic adjustment process provide good opportunities for future financial sector development. Ihe Government's strategy in the financial sector, with Bank Group support, will be built around a fully liberalized interest rate regime in the context of single digit inflation and a flexible exchange rate policy. Its focus will be on institutional capacity -18 - building while monetary and credit policies are fine-tuned, and sharpened, to maintain and strengthen the significant progress achieved so far on the policy front. The proposed policies and reform measures are detailed as a matrix (Annex 2.4) in the draft Letter of Finnil Ser De lopment Policy signed by Government. 3.35 In order to improve resource mobilization prospects, and provide additional indirect monetary policy instruments, emphasis will be put on the development of the Treasury Certificate market, and particularly on the emergence of an active secondary market. The Central Bank will play a leading role in this respect, through constitution of its own portfolio of TCs, and direct active trading in the secondary market. Banks, enterprises and private individuals will be encouraged to place their excess funds in the TC market. Banks will also be encouraged to borrow overnight funds la that market through progressive dephasing of the rediscount mechanism and appropriate interest rate policies. The development of suih a money market will contribute to improving the management of liquidity in the economy, and constitute the embryo for the development, in the longer run, of a securities market. 3.36 Institutional capacity building will be required to enable the Central bank and banking institutions to effectively play their assigned roles in these developments. In the context of economic liberalization and greater role played by the private sector, this capacity building will enable: (a) the Central Bank to improve the conduct of monetary and credit policy; and tighten its prudential supervision of financial institutions; and (b) banking institutions to improve financial accounting systems and procedures as well as risk evaluation and management. The Central Bank's capacity for banking supervision, will also be substantially improved to enable it to: (i) redefine and improve the effectiveness of all prudential ratios; (ii) establish, in cooperation with banking institutions, a financial accounting system based on internationally accepted standards; (iii) finalize a reliable periodic bank reporting system; (d) draft a procedural manual for off- and on-site supervision; (iv) train its supervisory staff. During negotiations, the Central Bank has agreed to submit a plan to undertake this capacity building for supervision, satisfactory to IDA, as a condition of effectiveness of the Credit, and to be implemented by October 1993 (para. 7.4 (iv)). The development of a data processing, budgeting, credit and economic analyses capacities, with computer assisted techniques, will complement the above actions and substantially improve central banking functions in Burundi. During negotiations, the Central Bank has also agreed to submit plans, satisfactory to IDA in this regard, by December 1992, for implementation by October 1993 (para 7.6 (x)). 3.37 Capacity-building support to banks and financial institutions will include staff training to: (a) develop internal capacity to assess and manage risks; (b) introduce a loan classification system; (c) put in place internal control mechanisms; (d) establish guidelines for provisioning, and for the treatnent of interest accrued but not paid; (e) design appropriate loan documentation and loan monitoring system; (f) develop the capacity to integrate the accounting plan devoloped by the Central bank. The Government will also utilize funds under the SSE/APEX project (Cr. 1889-BU) to finance training courses for bank and financial institutions personnel. Banks and financial institutions will be required to agree to implement such capacity building measures as a condition of participation in the credit component (paras 4.28 and 7.7 (xv)). 3.38 Private sector development will require the availability of some venture capital. This cannot be provided either by commercial or development banks of Burundi as this is a longer term and high risk commitment which would endanger the safety of bank deposits, their main source of funds. Consideration is being given to establishing specialized private institutions with the assistance of IFC and other donors. Owing to the inadequate legal (commercial and banking) frameworks, to the underdeveloped state of accounting standards and professions, and to limited opportuities, such specialized institutions will require substantial capacity building and subsidies to succeed and become financially self-sustainable. -19- A CCCE funded study is expected to review these issues. Priority actions should, In the meanwhile, be placed on Improving regulations and accounting standards, and on facilitating access to institutional lending for private sector borrowers. The technical assistance component will further familiarize private entrepreneurs with basic accounting procedures and methods so that they could provide potential lenders with credible financial statements. Private sector development will also require a channel for selling shares of public enterprises to the public at large. Commercial banks appear to be the most suitable institutions to perform such task at this stage. IV. E PROT Project Obiectives and Justirication 4.1 The Bank's main objective in Burundi is to promote sustained growth by supporting the establishment of an incentive framework for export-oriented private sector invesunent. As noted above, while structural adjustment operations and technical assistance projects have supported significant steps towards opening up Burundi's economy, an array of institutional, legal and regulatory obstacles still need to be removed to liberalize domestic markets and stimulate the private investment response necessary for economic growth and the diversification of the economy. So far the Government, financed by external donors, has remained the major investor in productive activities, albeit on a much reduced scope. The specific incentives, institutional, legal and regulatory issues hindering private investment response (and, therefore, delaying Government retrenchment from the productive sector) cannot be addressed exclusively by macroeconomic reforms. The removal of micro-policy and specific institutional barriers is crucial for a rapid and substantial supply response. It is an essential complement through more focused interventions with a direct impact at the enterprise and financial institution levels. The Government has therefore requested Bank support in these areas. 4.2 As Burundi has been able to weather external shocks and to rebuild its reserves mainly through substantial external balance of payments support, the Bank's focus is shifting towards the provision of investment resources. Other donors are following the same strategy. But effective use of these resources by the private sector requires significant improvements in the business climate. The thrust of monetary policy, its conduct and the institutional capacity of the Central Bank to assess economic conditions, set monetary targets accordingly, and implement monetary policy has a direct impact on private sector development. Significant institutional weaknesses in this area would need to be addressed. The Bank is expected to take the lead in these areas in close cooperation with IMF as they directly impact on the success of private sector development efforts. 4.3 The proposed operation would therefore support sector specific policy measures based on a jointly agreed strategy with Government and other donors, and designed to foster private enterprise development through financial, economic and institutional reforms. Several critical measures, already discussed extensively and agreed with the Government during project preparation and with support from the IMP ESAF program, have or are being implemented. They include wide-ranging improvements in the legal and regulatory framework (e.g., rules of entry, import/export licensing); and removal of unnecessary administcative requirements impeding exporters from taking advantage of export promotion incentives, etc.. Under the project, IDA will provide multi-faceted technical assistance to Government, financial institutions and the private non-banking sector to implement and take advantage of the reform measures. Other donors are also providing technical assistance and expertise in enterprise management and training, export and private sector promotion. -20 - Lesns Learned from Prfious Bak Onpal 4.4 Investment financing by IDA in Burundi has focused principally on intermediary loans targeted mainly to SSE activity. The first IDA credit line of US$3.4 million to BNDE (Cr. 731-BU) was approved in 1977 and closed in 1983, and covered investments for projects of all sizes. No project Performance Audit Report has been issued on the IDA Credit. A Project Completion Report of January 1987, however, noted that the two main objectives of the IDA credit, were only partially met at the time. BNDE did succeed in improving its performance and maintaining a relatively sound portfolio. However, while the bulk of financing went to few large companies, experience from the eighteen SSE projects financed by BNDE with IDA funds shows that lack of direct and appropriate technical assistance contributed to the mixed success record of projects. In the ongoing first SSE/APEX line of credit (1889- BU), implemented through the banking system and originally targeted exclusively to SSEs, experience has shown that without the proper macroeconomic policy and a liberalized legal and regulatory framework, not only SSEs but also medium and larger enterprises' prospects for entry and successful development are gready hindered. Furthermore, it became apparent that technical assistance alone for project identification and appraisal was not sufficient. Hands on and permanent assistance for project implementation, Including administrative advice and help to go through, and ultimately eliminate, the red tape, are critical. Performance Under Credit 1889-BU 4.5 The IDA Credit of US$8 million was signed June 8, 1988, and became effective on March 6, 1989. Effectiveness was delayed by lengthy administrative procedures to obtain a satisfactory legal opinion. As of March 31, 1992, commitments amounted to US$2.7 million (i.e. 45 percent of the credit component) on some 57 subprojects involving total estimated investments of US$ 7.4 million. Disbursements, including technical assistance, amounted to US$2.0 million. ThiBs mixed performance is attributable to several factors. First, the Credit was targeted exclusively to SSEs with total net assets, or to investment projects with total estimated costs, not exceeding US$300,000. However, the creditworthy and viable investment demand from ftis segment of the market was overestimated. Second, Government real estate regulations enacted between 1987 and 1991 gave automatic first ranked mortgage to public treasury, ahead of institutional lenders, thus stifling term lending activities. Third, the APEX project management organization, with two separate technical assistance and subloan administrative units, did not facilitate resolution of problems, including the long process of project implementation stemming from: a) lengthy administrative procedures to acquire land and various building permits and authorizations; b) lack of developed sites and services for industrial construction; and c) lack of interest and weaker than expected appraisal capacity, of local banks. The APEX unit at the Central Bank did not liaise with the CCIB/TA bureau and was prevented from direct contacts with private promoters by Central Bank rules. 4.6 In order to address these issues, the APEX project is being progressively restructured. A first project amendment has widened the eligibility criteria to include medium and larger investment projecs and enterprises, and agreement has been reached to restructre the project management t.its (para. 4.27 and Annex41). The country's level of private entrepreneurial development and capacity was also overestimated. Government economic and regulatory policies, which were not fully targeted for reforms, continued to hamper enterprise creation and operation and thus discouraged many private promoters, including foreign investors. The aforementioned loan guarantee issue posed by the real estate regulation, Art. 149, the only regulatory issue addressed by the APEX project, was removed in early 1991, two full years after effectiveness. -21 - 4.7 In spite of these operational shortcomings, there were significant gains made in monetary and credit policy reforms, including creation of an auction market for Treasury certificates and market determined interests rates. Technical assistance provided by the Chamber of Commerce and Industry of Burundi (CCIB) to prospective SSE promoters under the APEX project, was instrumental in encouraging new vocations and greater interest in private entrepreneurship. Since it became operational in June 1989, the CCIBI/TA bureau has screened and studied 310 SSE investment projects, of which 98 were found bankable, and sent to participating financial intermediaries (PFIs) for financing as of October 22, 1991. Among these, 41 were financed by PFIs (28 for FBu 259 million (US$1.3 million) through the IDA line of credit, and 13 for FBu 188 million (US$0.9 million) through other sources). Other activities include technical visits and advice, organization of training programs for PFIs and local consulting firm staff, annual industrial exhibition of Burundi's enterprises and information services, etc. While achievements in effective project investment financing have fallen short of expectations, as indicated above, the technical assistance unit has shown its usefilness in several areas. Other donors, notably USAID, have seconded staff to the CCIB/SSE bureau, and contributed to its greater impact. New computer- assisted project appraisal methodology (i.e., a software called LEFA), and procedures were developed by the CCIB and adapted to local conditions. 'he LEFA software, and its accompanying appraisal procedures, have been purchased and adopted by some local bankers and consultant firms J/. The technical assistance program was consequently renewed for an additional two-year period through March 1993, following a request from the authorities, and in order to consolidate the acquired experience and maintain needed technical assistance to Burundi entrepreneurs and promoters. Project Description and Design 4.8 The project consists of line of credit for productive investments, support to industrial infrastrucre, improvements in the business environment and in financial intermediation, and technical assistance in support of private sector development. A. Credit CQmpogLne 4.9 The cost of the credit component (subproject investment financing) is estimated at US$22.1 million based on the pipeline of projects approved by the National Investment Commission (para. 2.8) and on the list of likely investment financing submitted by the financial institutions which are expected to participate in the project. These estimates were reviewed to establish the prospects and viability of individual investmient proposals, and their expected implementation schedules. Taking into account likely equity and other funding by PFPs, notably BNDE's foreign exchange resources, IDA financing will be through an APEX line of credit of US$11.0 million to provide foreign exchange, through eligible fnancial intermediaries, to finance economically viable, financially profitable and environmentally sound projects submitted by local and foreign private borrowers. Eligible projects include: (i) investment projects in all productive sectors, with particular emphasis on export-oriented manufacturing, small-scale mining, and agro-industrial projeets; and (ii) modernization of equipment, rehabilitation and restructuring of productive private firms, including newly privatized public enterprises; 4.10 Assuming the continuing puruit of flexible exchange rate policies, and timely implementation of business environment policy reform measures, it is expected that substantial demand will be forthcoming E/ The LEFA programn was also successfully presented in Zaire through BEDEPE, the IDA financed SSE project management unit under Credit 1791-ZR. Loca PFIs have requested adaptation of the program. -22 - for efficient import substituting and export-oriented projects, including small-scale mining ventures. On the basis of survey work on investor interest, and assuming continued and speedy implementation of the legal and regulatory reforms, the prospective economy-wide Investment demand is estimated to range from US$15 to US$20 million a year for the next four to five years. On a commitment basis such levels of investment demand imply an annual gross term credit demand of US$10 to US$15 million In local and foreign currencies. 4.11 Taking into account the implementation experience of investment projects, and the supply of term credit resources in the banking system and from external donors, including IFC's Africa Enterprise Fund, it is estimated that during the commitment period of September 1992 - June 30, 1997, demand for IDA funds would amount to 25.0 percent of the total estimated term credit demand of US$40 to US$50 million, i.e., US$10.0 to US$12.5 million. B. Sites and Services C:oMponen 4.12 To further ease the constraints faced by most promoters in project implementation due to lack of developed industrial plots in Bujumbura, funds would be made available to the Ministry of Public Works and Urban Development for a limited investment program in sites and services (e.g., access roads, utility and telecommunication networks). Under the proposed project, industrial plots, including road network, would be developed in a 45 hectare area (i.e., 11.3 percent of the total surface of the industrial zone) and sold to private investors for relocation and/or plant construction. Actual demand for sites and services, screened and registered, at the Directorate of Urban Development amounts to 71 promoters, of whom 38 requesting to build an industrial plant and 33 for commercial, artisanal, warehousing and other service industries. Based on this identified demand and potential requirements of industry, commerce and transport activities expected to build plant sheds and warehouses in the next four to five years, 90 lots of 2,500 square meters on average will be developed with a total usable surface of 30 hectares (i.e., 67 percent of the land mass, with 15 hectares going for access and other secondary road networks). Tle lots would range in sizes from 400 to 2,000 square meters for artisans to 2,000 to 10,000 square meters for industrial and other uses. 4.13 Estimated InvesNMent Cost. The total estimated investment cost Is detailed in Annex 4.3, and involves construction of primary and secondary access roads, connections to existing utility lines, and consultant services, amounting to US$3.9 million. IDA financing will amount to US$3.5 million through Ministry of Public Works and Urban Development, with Government funding of US$0,4 million. Consistent with Bank policy on infrastructure financing, cost recovery for all investments, except for the paving of a 2-km access road that wIll service the entire industrial zone, would amnount to an estimated US$2.8 million, or 72 percent of the total investment cost. In order to ensure free and transparent access to plots by both local and foreign private entrepreneurs, at market-based selling prices, agreement was reached with the Government to market developed plots through an auction system. Marketng policies will be implemented through an independent commission, including private sector representatives from the CCIB, the Director of the proposed IDA Project Management Unit, and Directorate of Urban Development. 4.14 Availability of developed plots alone would not be sufficient to spur project implementation and improve investment prospects. Administrative procedures govering land acquisition and titling, various building and utility permits will, at the same time, be substantially simplified and accelerated, and an action plan to that effect proposed by the commission referred to above for implementation through the Directorate General of Housing and Urban Development (AnDDAS. Progress in these areas would be assessed at mid-term review of project implementation. A well functioning and computerized urban cadastre is being installed with French assistance and is expected to facilitate operations of the proposed -23 - commission. Access to .,e urban cadastre files and Information will be facilitated to private promoters, and legal professions, in order to fiurber accelerate land acquisition procedures and operations. The commission will be empowored by the Government to facilitate access to the cadastre and to market developed plots following procedtures and criteria satisfactory to IDA. The creation of the proposed commission, including the establishment of its terms of reference and operating procedures satisfactory to IDA, is a condition of disbursement of the sites and services component of the proposed Credit (para. 7.5 (viii)). 4.15 Elnvironmental imoact onsiderations. The Government is formulating a National Environmental Action Plan with IDA's assistance, and to that effect, a review of pertinent environmental laws and regulations will be undertaken under this project's legal assistance program. Finally, the sites and services component, as well as the proposed Af)EB and KfW-funded industrial waste water purification plant, will provide opportunities to initiate a meaningful dialogue between Government and the private sector on environmental protection regulations and policy issues. The Water Purification project is expected to resolve many industrial pollution related issues since, under that project, the Government will implement new industrial pollution control regulations by December 1993. These regulations will require pretreatment of industrial waste of polluting industries. The AfDB appraisal has already identified 14 selected industrial firms falling into that category, and estimated the cost of the investment required for pretreatment. Moreover, the Government will reinforce the staffing and policing capacity of the National Institute for Environmental Protection, and promulgate a water purification code. Under the proposed project, subproject appraisal procedures and training seminars will include environmental protection features. During negotiations, it was agreed to include selection criteria to identify subprojects that may raise environmental concerns, and require particular safeguards before PMU approval (Annex 4.1 . This agreement will be reflected in the terms of reference and operating procedures of the PMU, to be finalized as a condition of disbursement of the credit component (para. 7.5 (vii)). C. Policy and Institutional Reform Cormonent 4.16 To further encourage private, and particularly foreign investors, the project will also seek to create a more propitious and open business environment likely to streamline rules of entry and operation for new and existing enterprises. To that end, a policy package of institutional, legal and regulatory reforms will be implemented. The underlying constraints and proposed strategy for addressing them were oudined in Chapters II and m above, and the Government has agreed to the strategy and signed two letters of development policy, one each for the private sector and the financial sector, including relevant policy matrices of reform measures (detailed in Annex 2.2 and A 2.4). 4.17 The two distinct letters of development policy are designed to facilitate implementation and monitoring of policy measures. The MCI will have overall responsibility for implementation of the first letter and the Central Bank for the second. To ensure timely and effective implementation of the proposed measures, it was agreed during negotiations that a Mid-Term Review will be undertaken jointly by the Borlo.. er and IDA, and corrective actions, if necessary, taken to ensure that policy and institutional objectives remain on target (paras. 5.8 and 7.8 (xvi)). D. Tehl Assistance and Trainine Component 4.18 The proposed technical assistance, training and studies component will provide the Government, Central Bank, private and public entrepreneurs and their trade associations with the technical expertise and institutional support to implement, and reap the potential benefits of the policy reform package. Several features of the technical assistance were requested for inclusion by the Central Bank, and prepared jointly with private associations, and the Government. The design and execution of the technical -24 - assistance and training subcomponent for private enterprises, PFIs and the Central Bank reflect the close cooperation with other active and interested donors such as USAID, CCCE/FAC, AGCD, the EDF, UNDP, and the IMF. The Government is keen on speedy implementation of the technical assistance, and an advance of US$1.1 million has been granted under IDA's Project Preparation Facility (PPF) for initial funding of several subcomponents. The technical assistance component is estimated to cost US$4.3 million, of which IDA will finance US$2.5 million (details in AnneA2), including PPF refinancing. Government and Central Bank finan¢ing is estimated at US$0.6 million. Oter donors are expected to finance the balance of US$1.2 million on a grant basis. (i) lb ai 4.19 The Entrepreneurship Development Program initiated under the ongoing IDA financed APEX project will be continued through end 1994, and expanded under the sponsorship of USAID and European Development Fund (EDP). IFC's Africa Project Development Facility (APDF) has been active in Burundi and expects to contribute to project promotion and to increased funding available from its Africa Enterprise Fund. Increased emphasis will be put on project preparation and timely, direct assistance in project implementation. Export promotion activities will continue to be funded by USAID and will include, in addition to funding of promotional and marketing activities overseas, specifically tailored enterprise level assistance with product design and specification, quality control and marketing strategies. Enterprise-based technical assistance will also be provided through the proposed new integrated Project Management Unit (PMU) (AanumA), with the assistance of expatriate consultants, at an estimated cost of $200,000, and of local consultants, at an estimated cost of about US$100,000 over a three-year period. Activities financed through these consultant services would emphasize trouble-shooting and problem solving, including advice on technical matters such as plant lay-out, selection of equipment, cost accounting and marketing. Expatriate consultants will assist PMU local staff in furither improving technical assistance packages and design, and participate in more elaborate technical assistance to project evaluation and trouble-shooting. During the commitment phase of this operation the PMU would, however, put particular emphasis on assisting subproject implementation and start-up activities, with a view to accelerating disbursement and minimizing start up problems. In this regard, in association with MPWUD, Justice and MCI ministries, the PMU would devise special procedures designed to ease the banking and administrative constraints faced by promoters (paras 4.13 and 4.14). 4.20 Both the entrepreneurship development program and the financial sector and legal reform technical assistance are expected to rely substantially, but not exclusively, on foreign experts, in conjunction with appropriately qualified local counterparts to allow for smooth and timely takeover by nationals where feasible. In view of the dearth of technologically qualified and experienced Burundians to deliver the needed technical expertise in project appraisal and implementation, continued reliance on foreign advice is expected to last three to four years. As experienced under the ongoing APEX SSE project, it takes time, energy and patience to get things going in Burundi. However, in order to allow for flexibility in the selection and tenure of foreign advisors their contracts would be limited to two years maximum, with preference given to short term, two to three-month contracts in cases where this is feasible and practical. Expatriate advisors would be required by contract to devote 25 percent of their time to on-site, on the job training of counterparts. 4.21 Ihe Chamber of Commerce (CCIB) has been receiving substantial assistance from donors but has not been performing satisfactorily due to limited quality and quantity of its staff, and the still insufficient, though growing, support it receives from member entrepreneurs. In particular, satisfactory performance under the APEX project was very slow to materialize due to politicization of the SSE and APEX promotional campaign, which had led entrepreneurs to believe that credit would be available with virtually no conditions, and that loans would not have to be repaid. Performance improved significantly -25 - only after eighteen months of project implementation, and picked up with the addition in June 1990, of two well qualified U.S. Peace Corps volunteers whose contribution gave dynamism to the technical assistance team. Under the proposed operation, the CCIB's oversight role would be eliminated and the SSE/TA component would be placed under the Central Bank's administrative supervision. Currently, CCIB is benefiting from USAID, French (FAC) and Belgian (AGCD) technical assistance In enterprise support, training for middle and high-level accountancy, and for the establishment of a one-stop window to assist in enterprise creation. CCIB will, therefore, not be affected by the proposed restructuring and delinking from IDA's APEX project, and will continue to provide office space to PMU staff, in their new headquarters in Bujumbura. (ii) The Legal Assistance -Progam 4.22 This component. will Include three items: legal environment, paralegal activlties and operation of the Tribunal of Commerce. Consultancy services will be provided to the Public Enterprise Reform Office (Service Charge des Enterprises Pub!iques - SCEP) in the Prime Minister's office to reform various legal texts governing business enterprise activities, including Burundi's outdated commercial code, real estate regulations, environmental protection laws, etc.. The estimated consultant services, training, and other costs amount to US$520,000 for implementation of some of the projected legal reforms, and for the creation, and establishment, of a regulatory framework of new paralegal professions, such as private notaries- public, process-servers, and other auxiliary legal activities. The studies already undertaken by CCIB, and the Ministry of Justice, will be expanded to include financial feasibility studies and assessment of the financial requirements and viability of the proposed private legal professions. As USAID is expected to fund most of the legal reforms, under the proposed Credit, only US$70,000 is allocated to this component. Funds amounting to US$150,000 will also be allocated from the credit to improve the processing and administrative capacity of the Tribunal of Commerce created in 1987. The Tribunal, which has so far handled over 700 cases, still lacks the most elementary office equipment and facilities to efficiently and speedily deliver the legal services required by a growing private sector: litigations, registration of various types of contracts, including loans and guarantees, commercial registry administration, etc.. Such equipment will be supplied under the project. The Tribunal also collects various fees that accrue to the general budget without allocating for its own financing requirements. These fees will be reviewed during the proposed fiscal reform studies (para. 3.8). The Tribunal's commercial registry system and archives need to be better organized and computerized to facilitate document filing, information retrieval and research, and to safeguard the vital business archives. The Tribunal staff also requires some minimal training in basic accounting and financial analysis, as well as in business English language to help them better understand and handle business litigation originating in neighboring Anglophone, as well as in Francophone, trading partners. (iii) Assistance for Policy and Technical Assistance Coordination 4.23 Several ongoing and planned technical assistance and studies programs are targeting enterprise and export development in Burundi. A three-person USAID funded team of experts has been in Burundi since September 1991, for a three-year assignment to assist export as well as private enterprise development and promotion. The team is working with the Chamber of Commerce and the Agence de Promotion des Echanges Extdrieurs (APEE), the official public export promotion agency of Burundi. A USAID-funded team of legal consultants is also expected in Burundi. Moreover, the EDF is also planning a technical assistance program in the same field and is expected to undertake a country-wide export promotion study for the formulation of a comprehensive strategy for Burundi in close coordination with IDA. Furthermore, the UNDP has commissioned studies for a private sector development project currently under preparation and expected to focus on micro enterprise and rural development activities. -26 - An ongoing EDF fRnded assistance to APEE is currently targeting horticultute export activities and promotion. 4.24 Both donors and the Government agreed on the necessity to rationalize and coordinate these technical assistance projects. To address this need, the Government requested that IDA fund a small Policy Advisory and Coordinating Unit (PCU) to help implement a coherent and comprehensive private sector and export promotion strategy, and to coordinate and optimize the various donor programs of assistance available to that effect. The unit will be staffed by two full time Burundian consultant experts assisted by an expatriate advisor on a full or part-time basis. The unit would be located in the MCI Minister's cabinet and report directly to him. A small study fund, minimum administrative equipment, and recurrent costs would bring the estimated total cost to US$445,000 over three years. Agreement on the terns of reference, staffing and operating procedure of the unit is a condition of disbursement of the credit component of the proposed project (para. 7.5 (vii)). (iv) Assis_ce to Ministrv of Enerey and Mining 4.25 The Ministry of Energy and Mining has requested Bank assistance for the funding of a legal mining advisor and a mining expert to advise in the negotiations for nickel mining exploration with a major multinational corporation, to initiate reforms of its mining regulations and codes, and to Improve the institutional capacity of the Directorate General of Geology and Mining. The estimated cost of the component amounts to US$400,000, including institutional support and office equipment for the Directorate of Geology and Mining. This technical assistance is currently being implemented with initial support from UNDP. Funds amounting to US$75,000 have been allocated under the proposed Credit to supplement UNDP financing, if required. (v) Financial Sector Technical Assistace oam 4.26 The financial sector technical assistance program would consist of components conceived in close coordination with the IMF's Central Banking Department, designed to upgrade know-how and institutional capacities of the Central Bank, and to improve management of banking institutions. The estimated cost of the component amounts to US$2 million, which the Govermnent also expects to finance with grant funds from FAC and CCCE. The French development assistance institutions have given their agreement in principle and plan to start assisting the Central Bank to improve its supervision capacity with support from Banque de France, the French central bank. Implementation of the component has started with PPF financing pending availability of the expected grant funding. An amount of US$75,000 is allocated from the proposed Credit to the component which is detailed below: (a) the Central Bank's supervision functions and capacity to conduct monetary and credit policies will be strengthened through reorganization, training and professional advice. This will involve, inter gj, (i) capacity to assess economic conditions and the current thrust of monetary policy; (ii) capacity to determine money and credit growth targets; (iii) capacity to translate these targets into intermediate monetary base and intermediate interest rate targets; (d) capacity to implement policy through open market operations, changes in reserve requirements and (e) capacity to better manage foreign exchange reserves with particular reference to conducting hiternational exchange transactions, and supervising commercial bank activities, following full liberalization; (b) training vd11 continue to be provided to staff of banks and Central Bank under the ongoing SSEIAPEX project. Training will be in project analysis and risk evaluation. Under this project, an assessment will be undertaken to define better focused training requirements of banks and - 27 - Central Bank staff in operations, accounting, auditing and other banking professional activities, and formulate a more comprehensive bank training program. (c) Assistance and training will also be provided to Central Bank for the implementation of new money market mechanisms, including expansion of the scope, and improvement, of the transparency of the TC auction market, the introduction of new financial instruments and securities, all measures to be implemented as part of the proposed financial sector reforms under the project. Intitutional ArrangWemnts 4.27 The credit component would be made available under an APEX arrangement to all sound financial institutions supervised by the Central Bank and described in detail in A1- Funds under the Credit would be channelled through the Central Bank to the commercial and development banks, which would in turn grant loans to the final beneficiaries of the project. The Central Bank would continue, as under the ongoing operation, to act as the APEX institution. However, in view of the problems encountered with the existence of two different entities, one at Chamber of Commerce and the other at Central Bank (see paras 4.5-4.6), the Government has agreed, during negotiations, to the creation of an integrated and autonomous Project Management Unit (PMU). The incremental operating costs of the PMU are estimated at US$300,000 over a three-year period, and will be financed under the Credit on a declining scale basis. The PMU will, under the administrative supervision of the Central Bank, deliver the technical assistance to investment projects and enterprises (para. 4.19), and undertake appraisal review and approval, as well as subloan administration and supervision (Annex 4.1?. Implementation of this agreement through appointment of the PMU Director, approval of its organizational structure, staffing and operational procedures, and signing of a Management Agreement between the Government and the Central Bank defining the functions and responsibilities of the latter, under terms and conditions satisfactory to IDA, are a condition of disbursement of the credit component of the proposed project (para. 7.5 (vii)). 4.28 Eliaible Internediaries. Currenly, only those commercial and development banks that satisfy the eligibility criteria and agree to implement institution-building requirements (para. 3.37), contingent upon satisfactory, audited financial statements, will be allowed to participate in the project (para. 7.7 (xv)). An eligible financial intermediary will be able to participate in the project, provided it has entered into a Participating Agreement with the Central Bank. This Agreement wi!l, inter- Ui, specify that the participating financial institutions (PFIs) should: (a) designate qualified staff to manage the credits financed by the project; (b) perform satisfactory subproject appraisals based on agreed procedures and formats and submit the appraisal reports to the PMU; in so doing PFIs will pay particular attention to sensitizing project promoters on potential environmental hazards of individual subprojects, and adhering to Bank Procurement Guidelines agreed under the project, in close coordination with PMU; (c) simplify their administrative, lending, guarantee, and disbursement procedures in order to accelerate commitment and disbursement of investment projects; (d) ensure that resources are used by the final borrowers for the purposes intended; (e) supervise the implementation phase of subprojects and promptly inform the project unit of major problems expected to delay disbursements and project completion; to that effect submit periodic reports on the status of subprojects; -28- (f) help identify and provide input to the PMU about technical assistance needs of borrowing enterprises; (g) agree to receive training for their operational staff and technical assistance to build up internal capacity to carry out the tasks described above; (h) adhere to agreed terms and conditions of lending and repayment of loans; and (i) provide the PMU and IDA with such information as they would reasonably request, including annual audits of their financial accounts and statements performed by qualified and independent auditors, acceptable to IDA. 4.29 A draft participating agreement, based on a modified version of the existing one under APEX, was finalized with the interested parties during negotiations. Receipt by IDA of a satisfactory signed agreement between the Central Bank and a participating intermediary is a condition of disbursement of the credit component for that PFI (para 7.5 (vi)). Eligible Beneficiaries and Subprojics. 4.3f All productive and extractive activities, transport, trade and all other services which contribute to the economic development of Burundi will be eligible for financing. The only exception will be the financing of land and housing construction, which will not be eligible. The line of credit will finance fixed assets and associated permanent working capital for new operations, extensions and rehabilitations. 4.31 Eligible subprojects will be required to demonstrate viability both financially and economically, based on indicators such as minimum financial and economic rates of return, foreign exchange savings, job creation, etc., and will have to meet the following criteria in order to be approved for refinancing under the credit: (a) a minimum expected financial rate of return of at least 10.0 percent will be required for all subprojects; for subprojects with estimated investment costs of US$350,000.0, or more, a minimum expected economic rate of return of 10.0 percent will be required; (b) The projected debt servicing capacity (defined as the ratio of interest and principal annual payments to cash-flow generated from operations), should be no less than 1.5 over the life of the subproject and the debt to equity ratio should be no more than 2.33: 1.0, with the ratios calculated on the basis of the enterprise's total debts, inclusive of those to be incurred under the subproject; and (c) satisfactory environmental impact reviews to be undertaken according to Burundian regulations, and as deemed necessary by the PMU or IDA, following the technical review of appraisal report of selected projects presenting potential environmental hazards. Sub-loan Procesing and Administration 4.32 Sub-loan processing under the project will be coordinated and centralized by the PMU, which will serve as the principal link between IDA, the participating intermediaries and the beneficiaries for the project's investment as well as technical assistance components. Subprojects would be prepared by the beneficiaries with, if needed, assistance from the PMU, and presented to the financial intermediaries. The -29 - latter would review the subprojects in accordance with the agreed project analysis procedures and internal operating requirements, and submit an appraisal report conform to the agreed format to the PMU for refinancing approval under the line of credit. 1 4.33 The PMU would review the appraisal reports to verify that all eligibility and financing criteria and conditions are met. This appraisal review would be carried out in the form of a simplified appraisal report for projects with an estimated Investment cost of US$350,000 or less (within 5 working days) and through a more in-depth review for projects with a higher investment cost (within 10 working days). These reviews will also focus on ensuring that subborrowers have undertaken procurement consistent with agreed Bank Group guidelines (para.5. 1S). If the subproject is eligible for refinancing and satisfies the required technical, economic, and financial rates of return criteria, the PMU will authorize the intermediary to present the relevant disbursement documents for reimbursement of eligible expenditures or opening of letters of credits for foreign suppliers. Subprojects requiring subloans equivalent to, and exceeding 9 percent of the proposed credit component, i.e., US$1 million, will be reviewed for approval by IMA, on a non-objection basis. 4.34 In order to ensure continued internalization of project appraisal procedures, and taking into account the experience acquired under the ongoing APEX operation, only PFIs that did not perform well under that operation would require prior IDA approval of their first three appraisal reports, including at least one requiring an economic rate of return calculation. The Commercial Bank of Burundi (BANCOBU), the Credit Bank of Burundi (BCB), the Burundi Financial Corporation (SBF), and the Burundi Bank for Credit and Investment (BBCI) currently fall under that category. Thereafter, assuming satisfactory performance, the PMU would review and approve PFI requests unless IDA otherwise agrees. IDA would review a sample of subprojects, appraisal reports, and approvals on an ex-post basis during supervision missions. 4.35 The Central Bank, through its Credit Department and PMU, will serve as disbursement and collection agent for the financing granted to intermediaries. The PMU would directly manage subloan refinancing and collection operations upon approval. On the basis of the PMU's instructions and authorizations, the Credit Department of the Central Bank would debit or credit the appropriate financial intermediary's accounts, and execute letters of credit confirmations and other disbursement operations without further intervention in subloan processing. IThe Sites and Services component 4.36 The component will be executed by the Directorate-General of Urban Development and Housing which is experienced in such matters and has a well-qualified techWical staff. The Directorate will undertake technical supervision of the works that will be executed following international competitive bidding procedures (para 5.15). The component execution and other institutional arrangements, including mechanisms and procedures for pricing and sales of developed lots, cost recovery, and utilization of proceeds generated therefrom, etc., have been agreed upon during negotiations (paras. 4.13-4.14). 4.37 The Government is undertaking an updating of the aforementioned prefeasibility study of the Bujumbura industrial zone (para. 3.3), to be financed under IDA Credit (Cr. 1795-BU). Terms of reference of the study have been reviewed with the Government to ensure that environmental impact issues are addressed. The results of the study, which has been initiated, will provide Government with options for further development and commercialization of the industrial zone, and for additional environmental policies and safeguards. Experience to be learned from the Second Urban project, as well as the expected implementation of the proposed Industrial Waste Water Purification project, to be jointly financed by AfDB and KfW will be also utilized (paras. 4.13 - 4.15). - 30 - V. THE PRO SDCREDi am Amount nd Aocation of Fd 5.1 The proposed IDA Credit of US$17.0 million would be lent to the Government, which would onlend the credit component (US$11.0 million) In local currency through the Central Bank, to financial institutions which in turn would onlend it to beneficiary private enterprises. The US$3.5 million component for Sites and Services will be Implemented by Ministry of Public Works and Urban Development (MPWUD) and recovered through the sale of industrial plots. The US$2.5 million Technical Assistance component will be made available as a Government grant to executing agencies. Terms and Conditions of Financing 5.2 The Government and the Central Bank will enter into a subsidiary loan agreement by which the Government will pass on the funds under the credit component to the Central Bank at the weighted average yield of the auction market for three-month treasury certificates, minus an administrative fee of at least one percent per annum that would accrue to the Central Bank to compensate it for costs incurred for the execution of the project through its Project Management Unit (PMU). That fee would be reviewed periodically to ensure that it sufficiently covers the operating costs of the PMU. In view of the low inflation rate, and the continuation of flexible exchange rate and interest rate policies, the proposed cost to PFIs for IDA funds will approximate the international cost of funds. The foreign exchange risk will accordingly be borne by the Government. The onlending rate to financial intermediaries would be equal to the weighted average yield of three-month T.C.s. Intermediaries will be free to charge final beneficiaries the ongoing market interest rates. Signature of the Subsidiary Lo&- Agreement between the Central Bank and the Government is a condition of effectiveness of the proposed Credit (para. 7.4 (iii)). 5.3 Under the credit component the Government and Central Bank onlending rates would be reviewed at least every 12 months and modified by agreement between IDA and the Government, as necessary, to ensure that they continue to adequately compensate the Government for assuming the foreign exchange risk, and to reflect the cost of foreign exchange and local resources for financial intermediaries and subborrowers. 5.4 The Central Bank will receive the funds for a period of 15 years, including five years of grace starting after the date of credit effectiveness. The Central Bank would reimburse the funds to the Government in ten equal annual installments starting five years after the effectiveness date of the Credit. 5.5 Funds relent under the credit component to participating intermediaries would be denominated in local currency, with the same maturities as the individual subloans to final beneficiaries. Maturities of subloans to final beneficiaries would be limited to a maximum of thirteen years, including grace periods of up to three years. 5.6 Subloans granted under the line of credit would finance up to 80 percent of the total project cost for extension/rehabilitation subprojects, and-up to 70 percent for new subprojects to limit the debt to equity ratio of new projects. Unless the Association otherwise agrees, the maximum size of any subloan would be limited to 9 percent of the proposed credit component, i.e., US$1 million for all subprojects to ensure a greater number of credit beneficiaries. Promoters would be required to finance a minimum of 20 percent of subproject cost for extensions and 30 percent of subprojec cost for new projects. Commitments under the subloan component are expected to last through June 30, 1997. - 31 - 5.7 Funds allocated for the technical assistance component, and currently estimated at US$2.5 million, would be passed on as a grant from the Government to the PMU and other project units and would be available for commitment until June 30, 1997. The component would be managed on behalf of the Government by the PCU in Ministry of Commerce and Industry, PMU, the Central Bank (financial sector), the Public Enterprise Reform Office (egal reforms and assistance), and the Tribunal of Commerce. These project units would review requests for financing before submitting them to IDA for approval along with a brief justification and description of the qualification of the experts, and would also process disbursement requests. The DirectorateGeneral of Geology and Mining will likewise administer the technical assistance for mining development. Proiect Management. Monitoring and Evaluation 5.8 MidlTerm Review. One of the major constraints to project implementation faced in Burundi is the slow pace of implementation of agreed policy and institutional covenants, thereby making it difficult to test, at an early stage in the project cycle, the effectiveness of such agreed measures, and to change course based on sufficient and timely feedback. In view of the crucial importance of effective implementation, and preliminary assessment of the impact of many of the policy and institutional reform measures, and in order to test the effectiveness of new project management and execution procedures, a mid-term review of project progress and implementation wi1l be undertaken. This review will focus in particular, on impediments to enterprise creation, including administrative regulations for land titles, building permits and other project implementation features. The mid-term review would be initiated fifteen months after credit effectiveness, on or about October 30, 1993. Te review would be a joint exercise witi the Government, to be undertaken with the cooperation of the Project Management and Policy Coordinating Units of the Central Bank and of the Ministry of Commerce and Industry respectively. The basic reference documents of such a review mission will be the policy matrices of private sector and financial sector development, as well as other agreed credit and project documents. The general terms of reference, staffing, and timing of the review will be agreed with the Government. 5.9 The Joint Bank/Government Mid-Term Review will: (a) review project progress with respect to institutional and policy reforms; and (b) agree on an action program, if necessary, for inplementing additional policy measures, analytical studies as the basis for future reforms, and additional institutional reforms and strengthening measures. The participating IDA review mission will summarize conclusions and recommended actions for addressing outstanding issues in a detailed aide-memoire. Implementing agencies would be responsible for follow-up to be reviewed by subsequent supervision missions. During negotiations, agreement was reached with the Government to undertake the Mid-Term Review by October, 1993, with significant Government participation and analytical input, and that recommended actions agreed during the Review would be implemented in consultation with IDA (para. 7.8 (xvi)). 5.10 The Ministry of Commerce and Industry will be responsible for overall project coordinationunder the policy component, through the Policy Coordinating Unit (PCU), and will be responsible for the coordination of the Mid-Term Review, as well as of policy discussions and follow-up with other ministries and executing agencies, e.g., Tribunal of Commerce, Public Enterprise Reform Office (SCEP), Ministry of Energy and Mines, Central Bank. 5.11 The PMU will be the implementing agency for both the credit, and eiterprise training and technical assistance, components. The Directorate-General of Housing and Urban Development will execute the site and services component, while that of Geology and Mining will oversee studies and consultancy services for the Ministry of Mining and Energy. -32 - 5.12 Progress reports on the execution of the various subcomponents will be prepared and submitted quarterly to the MCI Policy Unit as regard the policy component for private sector (summary of activities, use of project funds, Implementation plan and progress of studies planned, and reforms under process, etc.). The PMU, the Central Bank, SCEP, Tribunal of Commerce and Directorates of Mining and Urban Development, and MCI's Policy Unit will submit six-monthly progress reports to IDA summarizing project component eventual problems and progress in implementation. 5.13 A Project Completion Report (PCR), the content and format of which to be agreed upon with IDA, would be submitted to IDA within six months after the project closing date of December 31, 1997. The PMU will prepare this PCR in close cooperation with the other project units, which will also provide input to the PCR exercise. IDA Supervision 5.14 The Project Management Unit, the Public Enterprise Reform Office, the Directorate General of Urban Development, and the Central Bank, are fully familiar with IDA's disbursement and procurement procedures, and will require only normal support from supervision missions and resident mission staff. Particular emphasis will, however, be put on further, and timely, training in procurement and disbursement, as well as environmental safeguard procedures for the PMU and the Urban Development Directorate General. The Ministry of Justice's Tribunal of Commerce and the new Policy Unit in Ministry of Commerce and Industry, and Ministry of Mining will require training in these areas, to be provided through the PMU and Resident Mission by Bank staff and, if required, by a consultant. In view of the many technical assistance components of the project, intensive supervision (14 staff weeks annually) will be required in the first two years after effectfveness. Detailed IDA supervision plans into key activities are given in Annex 5.2. Procurement Arrangement= 5.15 (a) Creit ComN. Procurement for subprojects financed under the credit component will be made on the basis of procurement procedures consistent with Bank's Procurement Guidelines, and agreed under APEX (Cr. 1889-BU) with the participating financial institutions. These procedures will require international shopping procedures for contracts of US$750,000 or below for each beneficiary, on the basis of at least three quotations from reputable suppliers in at least two different geographical areas. For contracts above US$750,000 international competitive bidding (ICB) procedures, in accordance with Bank's Procurement Guidelines, will be applicable to goods and services to be procured for subprojects refinanced by IDA. A statement to this effect will be included in the Cooperation Agreement between Government and the PMU through the Central Bank. (b) Sites and Seige. Contracts for goods and services, such as road paving and electricity and water connections, etc., estimated to cost the equivalent of more than US$300,000 under the Sites and Services component, will be awarded through ICB, in accordance with Bank's Procurement Guidelines. Items or groups of items, required under this component and estimated to cost up to an aggregate amount of US$300,000 equivalent, may be procured under contracts awarded on the basis of competitive bidding advertised locally, in accordance with procedures satisfactory to IDA. Bid documents and contracts for civil works, goods and services will be based on Bank's sample bidding documents, and would inc:ude safeguards to minimize potential environmental damage caused by civil works. (c) I&_nicaI.AsistancemandaInig. Procurement of equipment and goods under the technical assistance component will be made through international shopping procedures in accordance with Bank's Procurement Guidelines, on the basis of at least three quotations from reputable suppliers. A statement - 33 - to that effect will be included In the Cooperation Agreement between the Government and the PMU through the Central Bank. Selection of consultants will be made in accordance with Bank's Guidelines on the Use of Consultants. 5.16 A country procurement assessment mission conducted in 1986 found the existing local procedures generally acceptable, except for preferential treatment for local bidders. In this project, preferences for domestic manufacturers and constructors will follow the provisions of the Bank's Procurement Guidelines. A summary of procurement methods is presented in Tab1QS. 1. All invitations to bid, proposed awards and final contracts under the sites and services component will be subject to prior IDA reviews for contracts above US$150,000. Ihis represents 96 percent of IDA financing under that component. No advance contracting or retroactive financing would be required in this project. Under the credit component, prior review of procurement documents will be required for contracts of US$1 million and above for each beneficiary subproject approved for financing. The technical assistance component wil be executed by six different project entities and individual consultancy contracts are not expected to exceed US$100,000. Procurement of vehicles, desk computers and other office equipments will likewise be through small contracts below US$50,000 aggregating to amounts not to exceed US$130,000, to be awarded under international shopping procedures. An advance of US$ 1.1 million under the Project Preparation Facility was approved for the technical assistance component. - 34 - TaWe5.1: SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (LTS$ million) Project Element - Procurement Method------------------- ICe LCB Other N/A Total A. Crodit ComPOnet (subprojects) Goods. works and service contracts - 22.1 - 22.1 / ~~~~~~~(11.0) IL/ 01.0) S. Sites and Services Convonent 1. Works 1.1 Roads 1.90 0.3 2.20 (1.70) (0.3) (2.00) 1.2 Utilities 1.50 - 1.50 (1.17) (1.17) 2. Vehictes and Office Equipment 0.06 - - 0.06 (0.06) (0.06) 3. Consultant Services - - 0.04 0.04 C. Tethnical Assistance Com onent 1. Consultancies - 2.89 2.89 (1.10) / (1.10) 2. Training and Seminars - 0.31 0.31 (0.12) bl (0.12) 3. VehIcles & Office Equipment - 0.84 0.84 (0.13) p/ (0.13) 4. Operating Costs PHU/PCU - - - 0.35 0.35 (0.32)c/ (0.32) D. EPF Refnancna - (1.10) (1.10) TOTAL 3.46 0.3 26.14 0.39 30.29 IDA (2.93) (0.3) (12.35) (1.42) (17.00) Figures in parentheses are the respective amounts financed by the IDA credit. Cost figures shown above are rounded and include contingencies, excluding duties and taxes. I/ For contracts of US$750,000 or below, international shopping procedures - Subborrowers will be required to submit to PFIs at least three quotations from suppliers of goods to be procured; contracts in excess of US$750,000 will be procured through ICB in accordance with Bank Group Guidelines for Procuremnent (May 1985). k/ In accordance with Bank Group's Guidelines on Use of Consultants by World Bank Borrowers and by the Bank as Executing Agency (August 1981). ;I According to Government procedures which have been reviewed as acceptable. -35 - DisburstmLnt. llhe proceeds of the proposed Credit would be disbursed as follows: (a) rediCoinpig ein: US$11.0 million (i) 100 percent of expenditures for up to 70 per- cent of total subproject cost for new operations; (ii) 100 percent of expendituees for up to 80 percent of total cost of subprojicts for extensions, modernization and rehabilitation; (b) Sites and Seic Cmmypt: US$2.9 million (i) 100 percent of foreign expenditures for goods and services; (ii) 90 percent of locally procured goods and services; (c) l nchcAl Assistne Compoen (exclusive of tax) US$1.5 million 100 percent of the cost of consultants, assistance and training, 100 percent of the c.i.f. cost of goods direcly imported, 90 percent of the local cost for materials and supplies, 80 percent for salaries and operating expenditures, the first year, 70 percent the second year, and 50 percent the third year. (i) Proect ManagentUi Enterprise Consultant Services $340,000 Incremental Operating Costs 300,000 Vehicles 4Q00Q0 $680.00 (ii) Poligy Cordi Consultant Services and Training $370,000 Incremental Operating Costs 50,000 Office Equipment, Vehicles (iii) Tribunalof Commerce: Consultant Services and Training $ 90,000 Office Equipment/P.C.s 40,000 Vehicles 20,Q0 (iv) Eigi& Enterprise R r fce (SCEP) Consultant Services and Training -36 - (v) lStra Bank: Consultant Services and Training (vi) Ministy of MinIng and Energy: Consultant Services 75.000 (d) Audit of Project Acco : n20tQ (e) Reinbursement PPF Advance $1.1 miliQo (f) Unadlocated $2 5.18 The project disbursement schedule is based on the relevant disbursement profile for industrial development and finance projects in Africa, taking into account the particularly difficult project implementation eavironment of a land locked country like Burundi. It is expected that the investment component would be disbursed in five years and the technical assistance component over four years, aking into account expected improvement in capacities for project appraisal, financing approval, and implementation. Funds under the credit component would be available for commitment until June 30, 1997. Disbursements would be completed by December 31, 1997, the proposed closing date. 5.19 Sia LAc . To expedite disbursement of funds, three Special Accounts for BRB3 and the PMU, Directorate of Urban Development, and PCU will be set up in a financial Institution acceptable to IDA, into which IDA would make initial estimated deposits totalling US$500,000, US$300,000, aid US$50,000, respectively, from the proposed Credit immediately after effectiveness. These amounts reflect the estimated requirements for operating costs, equipment procurement and consultant services, for a three to four month period. Applications for replenishment of the special accounts will be submitted on a monthly basis. The Special Accounts and associated statements of expenditures (SOEs) will be audited annually by independent auditors, and the audit reports submitted to IDA within six months of the end of the fiscal year. Disbursements for expenditures for all contracts for goods and services or individual items wider US$50,000 will be made on the basis of statements of expenditures. The documentation for withdrawals made under SOEs will be retained by the PMU on behalf of other project units involved (i.e., for rites and services, and other technical assistance units) for ten years and will be reviewed by Bank supervision missions- All other disbursements will be made on the basis of fully documented applications. 5.20 Auditing and Reporting. Ite PMU and other project units will have their accounts, as well as the Special Accounts and SOEs audited annually by independent auditors acceptable to IDA and will furnish to IDA certified copies of their audited accounts together with the corresponding management letters within six months of the end of the fiscal year. The PMU will submit to IDA quarterly and annual progress reports (including financial and budgetary accounts) on the technical assistance and the investment components. Furthermore, the PMU will review the annual audits of Participating Financial Intermediaries and inforrm IDA of the conclusions of such audit reviews. - 37 - Estimated Project Coss and Financing Pan 5.21 Total project cost Is estimated at US$30.3 million equivalent, of which US$20.5 million equivalent (68.0 percent) would be in foreign exchange. A summary of the project cost and its expected financing are given in the table below: Table 5.2: ESTIMATED PROJECT COST AND FINANCING Locral Foreian Total - (USS1,000)…--------- A) Xnvestmefta Subprojects 8,100.0 14,000.0 22,1D.0 Sites and Services 90.300.0 3.Q03.0 Subtotal 9.000.0 17.000.0 2§.QM.0 (B) Technical Assistance and Trainkno Project Management 300.0 40.0 340.0 Enterprise Consultant Services 100.0 240.0 340.0 Ministry of Mining* - 400.0 400.0 Legal Reforms* 145.0 375.0 S20.0 Tribunal of Commerce* 30.0 150.0 M0.0 Central Bank - BRB* - 2,060.0 2,060.0 Ministry of Commerce & Industry* 250.0 .20.Q 4DQ Subtotal _825.A 3,465,0 4.WO TOTAL 9,825.0 20,465.0 30,290.0 * Advanced Funding under PPF Financing Plant Amounts Percentages (US$1,000) Investment Proiects Subborrowers 5,100.0 22.60 Participating Institutions 6,000.0 31.70 IDA 11.000.0 45.7Q Subtotal 22,100,0 100,00 Sites and Services Borrower 400.0 10.26 IDA 0.0 89.74 Subtotal 3.900.O 00.00 Technieal Assistance Borrower 600.0 2.00 Other Donors 1,190.0 28.80 IDA 2.500.0 69.20 Subtotal 4,290,0 100.0Q TOTAL 30,290.0 100.00 .m-.mm-- smuinmi - 38 - VI. PROJECT BENEFITS AND MISKS Benefits 6.1 Major expected benefits would stem from an enhanced supply response to the ongoing structural adjustment efforts through the implementation of local and foreign private investments that would in turn contribute to attaining Burundi's export diversification and growth objectives. Rapid response by private sector Investors would create the employment opportunities that are critical for supporting the public sector retrenchment from productive activities. The project is expected to contribute to the achievement of these objectives through the provision of long-term credit and the creation of a fully liberalized business environment, including freedom to create and operate an enterprise, and a reliable legal system guaranteeing transparent enforcement of contractual agreements between lenders and borrowers in particular. By supporting effective monetary and credit policies, and promoting better managed banking institutions, the project would improve their capacities for increased resource mobilization, and diversified and expanded risk taking activities in productive sectors. RisMA 6.2 The Government of Burundi is currently undertaking a two-pronged series of major political and economic reforms designed to lead to greater national unity, and opening-up the political system while maintaining the thrust of the economic adjustment process, and liberalization of the legal and regulatory environment. The process of fully revamping the legal and regulatory framework for enterprises and banks, as well as the introduction of substantial fiscal and labor policies may experience some delays in the political transition period. This could mean that the implementation of a well focused private sector development strategy could be lengthy, thereby creating a risk that the pace of private sector investment would be slower than expected. These risks will be monitored closely in the context of implementation of the proposed SAC-HI and IMF ESAF, and through an early assessment undertaken during the Mid- Term Review of project implementation planned for October 1993. Furthermore, the consensus built around the need for effective reform of the business environment and the strong voice of a rapidly emerging private sector should ensure the effective implementation of the project. VII. A_RE_ME S AND NERSTANDIS REA_CfD 7.1 During project preparation and appraisal, the following measures, which were identified as urgent, and expected to be in place prior to negotiations of the proposed credit, have been enacted and implemented by the Government, with support from the ESAF/SAC-M operations in some cases: Private Sector Development Policies (a) Enterprise Regulation Simplification of regulations for enterprise creation and operation, and for import and export activities, elimination of redundant procedures and controls, and of prior approval of Ministry of Justice with respect to enterprise creation; elimination of requirements for a commercial identification card for registered business enterprises and individuals (para. 3.10 and Annex&2, para. 4). - 39 - (b) ImportfExrx Licensing Elimination of Central Bank role in the administration of procedures for import and export licensing of business firms and individuals, in favor of increased delegation of responsibilities for such licensing to commercial banks; elimination of prior accreditation of exporters and importers by Ministry of Commerce and Industry; elimination of compulsory deposits by foreign importers (para. 4 of Annx 2.1; (c) Foreign Exchange Controls Liberalization of controls limiting the transfers overseas of business earned divldends and of salaries of foreign workers in Burundi; and increased foreign exchange allowances for business travel and tourism; and liberalized international transport and insurance (para. 3.5). Financial Sector Development Policies Elimination of Central Bank preferential rediscount of 6 percent, and institution of a single rediscount rate of 10 percent, i.e., at a level above the then prevailing average yield of 3-month Treasury certificates (para 3.20); Elimination of distinction between priority and non-priority sectors, and between rediscountable and non-rediscountable credits, in allocating credits (para. 3.21); Establishment and implementation of reserve requirements (para. 3.22); Reduction of minimum face value of Treasury certificates, from FBU 500,000 to 100,000 (UIS$ 2,500. to 500) and introduction of semi-monthly auctions of Treasury certificates (para. 3.23); 7.2 During negotiations, agreements and understandings on the following additional policy and institutional measures, and project implementation related measures, have been reached: 7.3 Policy Reform Measures (i) Signature by the Government of the Letters of Development Policy for the Private Sector, and the Financial Sector, including the annexed matrices of dated policy and institutional reform measures (paras 3.32, 3.34); (ii) Issuance by the Central Bank of instructions to banks and financial institutions, satisfactory to IDA, defining (a) loan classification and provisioning guidelines on February 17, 1992, and (b) capital adequacy requirement ratio (Cooke ratio), and liquidity level ratio on December 30, 1991 (para. 3.25). The Central Bank has also agreed to redefine and extend the application of reserve requirements to all banks and financial institutions receiving deposits (paras. 3.22). B. Cn_dtions ot Creit Effectiyns 7.4 Project Implementation (iii) Signature of the Subsidiary Loan Agreement between the Central Bank and Government (para. 5.2). -40- Fjnancial Sector Policies (iv) the Central Bank will have submitted an action plan, satisfactory to IDA, to reinforce the staffing capacity and performance of its Inspection Department, and, to improve on-site and off-site inspection, and controls, of banks and financial institutions (para. 3.36). This plan would be implemented by October 1993, before Mid-term Review. PrivateSctor Policies (v) The Government will take necessary measures to (a) allow tax-deductibility of provisions against risks of losses on doubtful loans of banks, based on the Central Bank's new guidelines on bank loan risk classification and provisions thereof, and (b) rationalize the fiscal regime of financial instruments (para. 3.8). C. Conditions of DisbursOmt 7.5 (vi) Signature of the Participation Agreement by eligible PFPs and the Central Bank is a condition of disbursement of the credit component for each PFI, (para. 4.29); (vii) As a condition of disbursement of the credit component, the Government, through the Central Bank and MCI, will have created the Project Management Unit at the Central Bank, and the Policy Coordinating Unit at MCI, and appointed their respective director and supervisor, approved their organizational structures, staffing, budgets, operating policies and procedures, satisfactory to IDA. Ihis agreement will also be reflected in the Project Management Agreement between the Central Bank and the Government as regards the PMU (paras. 4.24-4.27); (viii) Creation by the Government of a Commission empowered to oversee the marketing and distribution of the developed plots in the IDA fianced sites and services area of the Bujumbura industrial zone on terms and conditions satisfactory to IDA, as a condition of disbursement of the sites and services component (para. 4.14). The Commission will also review existing, and propose new procedures, satisfactory to IDA, and designed to simplify and accelerate project implementation through quicker access to developed lands and utilities, building permits, etc., for privately sponsored investment projects. Implementation of the recommended streamlined procedures and administrative requirements for land titling, leasing and acquisitions, issuance of various building and utility permits wHI be undertaken by Directorate General of Housing and Urban Development (para. 4.14). D. 1 7.6 Other dated covenants are detailed in the policy matrices of reform measures in Annexes 2.2 and 2A, including In particular: (ix) Simplification of procedures for authorization of unscheduled freight and passenger charter flights, by Mid-Term Review; implementation of air transport deregulation, privatization and elimination of Air Bumndi monopolies under SAC-m (para. 3.16); (x) Submission by the Central Bank of action plans satisfactory to IDA, to reinforce the staffing capacity and performance of its Research and Credit Department, and, inter -41- alia, improve macro- economic, monetary and credit policy analysis, and bank lending policy formulation and monitoring, and credit management and monitoring, with particular reference to rediscountable credits, and economic and financial analysis of Investment and other lending operations requiring Central Bank review or approval, and financial analysis of business firms. Such action plans will be submitted by December 1992 and implemented by October 1993 (paras. 3.24 - 3.36 and MAu_lq 2, para. 40); (xi) Adoption before December 1992, by Government of a Policy Statement on tax reform, based on a timetable of implementation satisfactory to IDA, aimed at (a) a reduction of corporate income and dividend taxation rates, (b) institution of official schedules of depreciation allowances, and of a five-year tax credit allowance for operating losses of business firms (para. 3.8); (xii) Signature by Government of a decree satisfactory to IDA reforming and decentralizing the Directorate of Notary Public and authorizing the creation and functioning of private paralegal professions including notaries-public, process-servers, liquidators and auctioneers (para. 3.15). E. Eligibility Conditions of Particinating Flnanipglnter-mediarj 7.7 (xiii) Each PFI will submit independently audited and satisfactory financial accounts and statements on their financial and operating results (para. 4.28); (xiv) Signature of Participating Agreement with the Central Bank (para. 4.29); (xv) Each PFI will submit to the Central Bank acceptable plans (paras. 3.37 - 4.28): - to reinforce their loan supervision and collection of bad debts; - to reinforce their internal auditing and accounting control procedures; - to upgrade and train their professional and junior professional staff. F. Mid-Term Review of Project Implementation 7.8 (xvi) Agreement by the Government to (a) undertake jointly with IDA by October 1993 a Mid-Term Review of progress in project implementation, with particular reference to policy and institutional reform measures, and (b) take action, as required, to implement the recommendations stemming from such review (paras. 5.8 - 5.9). -Annex 2.1 Page 1 of 4 BURNJ)-PRIVATE SECTOR DEVELOPMENT AM EXPR PRO-MOTON PROJET Status of Business and Enterprise Rejulator1 Reforms Background 1. Studies undertaken during project preparation had identified a number of core reforms aimed at streamlining and simplifying enterprise creation procedures and business licensing. The adoption of these reforms and implementation of accompanying supporting measures were set as conditions of negotiation of the proposed private sector project. The Government began the deregulation process in late 1990. The implementation of this undertaking was monitored by the mission which recommended additional measures needed to support further simplification and prevent backtracking. 2. This review draws from and complements separate work by Ms. L. C. Phillips, consultant, who was commissioned to undertake a more detailed review and analysis of reform measures. This consultant report not only covers issues related to the effectiveness of regulatory reforms from the standpoint of the private sector, but also identifies other regulatory and legal constraints that may need to be addressed in the context of the proposed legal technical assistance component of the aforementioned project. (Ms. Phillips' report is available in Project Files.) 3. The analysis below concludes that the revised regulations are consistent with the intended objectives. However, monitoring of their implementation will have to be continued to ensure that new bottlenecks do not develop. A possible draw back is that inadequate information flow may force the administration to impose new requirements. The project will support appropriate technical assistance to prevent this from happening. Measures Take 4. The following key laws have been amended and simplified: Enterprise Creation (amendments to 1979 enterprise law) (i) The t"bicalaproval of the Ministry of Commerce and Industry is no longer required and registration requirements under the Tax Code imposed by the Ministry of Finances have been disassociated from incorporation procedures. Thus, enterprise creation is conditioned only on preparation of company statutes by the Notary-Public and recording at the commercial registry of Tribunal of Commerce. Also, publication of notification of enterprise creation in local, but not official, newspapers is now the only official requirement. (ii) The prior anproval of the Minister of Justice has been eliminated. Full disassociation from the Ministry of Justice will be achieved once the establishment and de- monopolization of private notary public functions are effective. Annex 2.1 Page 2 of 4 Business UAcenslng (iii) The conditions for obtaining the commercial carte have been simplified. Ministries are no longer consulted and the card is delivered automatically at the time the commercial registry is undertaken in the modern sector. For the informal sector (street peddlers in particular) a version of this card will be delivered by local authorities (implementation schedule is for late 1991). This card will be in lieu of legal status and will specify areas where the activity is allowed and a broad list of authorized products that can be traded. The objective is to shelter this group of informal micro enterprises from petty harassments by civilian and police authorities. This initiative is fully supported by the USAID who will monitor its effective implementation. (iv) porters no longer need to be accredited a priori by the Ministry of Commerce and Industry. The Central Bank, BRB, no longer plays any role in the process and the paperwork has been greatly simplified. The mission has collected data on administrative delays experienced by importers prior to the ex-post registration. In about 70 percent of the cases, the accreditation was granted in less than 10 days and only in a handful of cases did it surpass one month (often for reasons unrelated to the procedure itself). About 105 importers have been registered since the new law was passed. Some are existing industrial companies but 75 percent are individual entrants. Given that in 1987- 89 there were less than 300 private importers, this business is clearly becoming more competitive thanks to the new law. (v) The procedures for accreditation of eiorters have been simplified similarly to those for importers and are now undertaken g st. The Ministry of Commerce and Industry is solely responsible for its implementation and the BRB no longer plays a role in the approval process. (vi) In the context of simplifying procedures for importers the Government has eliminated the obligatory deposits for foreign imrters located outside the capital city and for those who invest in productive activities. Seven new foreign importers have taken advantage of the new regime and were accredited as importers without paying the Fbu 10 million deposit. Other Regulations (vii) Compulsory officially sanctioned contributions for membership to the Chamber of merce of Burundi (CCIB) have been eliminated. A non-profit private institution, CCIB has adjusted smoothly to the new liberalized environment and, according to its secretary-general, voluntary contributions have continued to flow at the same rate as before (about 40 percent of resources) if not more so. Thus, total resources have not declined and the CCIB can continue to perform its mandate, with more independence and accountability to its members. However, the institution still requires Government subsidies to continue operating smoothly. QQonW3pns aMd Recmmendations 5. As indicated by the above analysis the Government has already met in theory and practice point 1.1 of the draft policy matrix (enterprise creation). Tle remaining condition to be fulfilled is drafting Amex.1 Page 3 of 4 the procedure manual, discussed below. Similarly, the delivery of business licenses has either become automatic (commercial card) or been streamlined (ex-post accreditation of importer and exporter). (A) Emcedure Manual 6. Remaining regulatory requirements are manained owing to legitimate concerns over legal, statistical and economic information collection, and dissemination to various users. 'here is an urgent need to computerize the commercial registry for instance, and to ensure that various administrations and institutions (particularly the economic ministries, the BRB and the CCIB) continue to receive key data they require for their day to day activities. Once instiutions receive the necessary information, the probability of imposing new regulatory measures would decrease significantly. 7. Another tool needed to help underpin the reforms is the drafting of a Procedure Manual intended to guide civil servants and businessmen, and better explain to them the new procedures. This objective is closely linked to the computerization of the commercial registry, so that management and economic information requirements are met. In view of the previous analysis the policy matrix includes the following: (i) The preparation of a procedure manual. (ii) The computerization of the commercial registry. 8. The completion of both tasks will be achieved by Mid-Term Review and finds are allocated under the technical assistance component for their timely undertaking. 9. The remuneration of foreign importers' obligatory deposits is already prescribed by the law and should be implemented as soon as possible and the interest rate to be applied should be aligned to that of treasury certificates. Also, in cases where the criteria for reimbursement of these deposits have been met the repayment schedule should be published. Reimbursement should be completed within two years. The Ministry of Finance is responsible for the implementation of these measures. (B) One-Sto Windo 10. The creation of a one-stop window responsible for helping promoters through various regulatory requirements may help underpin the reforms. However, at this stage technical analysis has concluded that the creation of such a structure within the public service is premature. The main concern is that this facility may itself become another botteneck if it becomes an obligatory step. 11. The Government has authorized CCIB to create an unofficial, optional, one-stop window, to be organized with assistance from the Chamber of Commerce of Bordeaux (France). This facility will thus be administered by the private sector and is intended to help the promoter. "mplementation and Technical Assistance 12. Technical assistance will be required for the computerization of the commercial registry and the preparation of the Procedure Manual. This assistance will be coordinated with CCIB one-stop window project. In the case of the Manual the output should contain the following information: Page 4 of 4 (i) Explain the responsibilities of the private sector and describe all the formal regulatory requirements. Tbis should cover enterprise creation, business licensing and other requirements (such as registration with tax authorities). (ii) Describe the paperwork that is needed and identify all the statistical requirements. The information requested should be merged and streamlined into a single questionnaire. The commercial registry should also contain this information. (iii) Maximum response periods should be specifled in the manual and a copy of all relevant regulations annexed. (iv) The Manual should be prepared in close cooperation with, and formally adopted by the various administrations concerned with enterprise creation and regulation . 13. This undertaking will require the intervention of an independent consultant to ensure appropriate coordination and coherence. In the context of computerizing the commercial registry the following steps will have to be taken: (i) The consultant should agree with the administration on the database, which should contain all the information required by the commercial registry as well as any additional data that may be useful or required by other relevant institutions and administrations. (ii) The consultant should select a well suited hardware and supporting software. At this stage the use of PCs seem indicated and that the software could be written in a compilable database program, such as CLIPPER. (iii) A computer program should be written so that data can be selected and printed or displayed according to pre-established criteria. (iv) The software should contain appropriate 'read only" protection of the database so that unauthorized manipulations are avoided. Also, a simple backup procedure should be written into the software. (v) The consultant should assess how data is to be shared with various administration (i.e., networking, transfer vis modem, or daily update vis a diskette). (vi) Users should be trained on the operation of the system. 14. Computerization of the commercial registry will require at least two months of work. More than half this time is expected to be spent in writing and testing the software. A related issue is the need to make sure that all users have access to adequate hardware; one laser printer and two computers at the commercial registry; a computer and a printer for each of the users. Even though some administration may already have this equipment, total requirements include about seven "386" type of PCs and six printers (the commercial registry (2), Ministries of Plan, Industry and Finance, the BRB and the CCIB). In the case of access to the data by the CCIB some of the database may have to be made unavailable in order to preserve its confidentiality. 1,A.:REGS.8UR Vet 2:D.cember 21,1991 Anntx 2.2 Page 1 of 4 BURUNDI: PRIVATE SECTOR DEVELOPMENT PROJECT PROPOSED DRAfi' POLICY MATRIX Private Sector Development AREA OBJECTIVE MEASURES TIMEABLE 1. Legal and Regulatoy Create an appropriate enbling Framework environment for private enter- pim. 1.1 EnrpriseCreaon Speed and simplify entrprse Modify and simplify relevant laws and regulaons and eliminat lement and operation registration and operaio. redundaucies. Abrogate system of prior approval by Ministry of Justice and rplace, if necessary, with a negative list of strategic activities subject to approval. Create a transarent regulatory Wnte a Procedure Manual to guide civil serv and investors. October 1993 system. 1.2 Business ic n Eliminate redundant controlsl Elminate requirement, or issue automatically, the commercial card mlemented licensig of private business for registered businesses. activities. Remove accreditation of exporters and importers by Ministry of Implemened Commerce and Industry; replace, if needed, by a posteri registaton for statiscal purposes. 1.3 Reform of the Rationalize and privatize functions of Separate functions of cutanship of Titles and Deeds from legal October 1993 Directorate of the notaies public to speed legal notary public functions, create regional notaries public, increase Notary Public and procedures and eliminate bottleneck. their number and privatize in Bugjumbura. Titles Create pnvate legal functions to 1.4 Creation of private facilitate and speed legal Authorize the eistence, and free functioning, of private legal and October 1993 legal and paralegal enfrcementof contracts paralegal professions, including notary public, process servers, professions liquidators and auctioneers, and eliminate such functions in the civil service. Annex 2.2 Page 2 of 4 1.5 Revision of Rationale and harmonize existing Complete revision of commercial code and related business December 1993 commercial code of commercial laws, and complete them enterprise laws. Burundi, and the laws with new articles on vanous governing public enterpnrs regimes, liquidation enterprise and procedures, etc. liquidationprocedus 2. Trade Promotion Expand role of commercial banks. Devise rules and regulations, delegating to bankB rpobiltis to Octber 1993 Policy act as accredited intermediaries for all external trade operations and foreign exchange trade and transacions to be legally and financialy accountable for their customers' compliance vnth rules and reglations with provisions for legal co-responsibility of bank and their customers. Encourg foreign investment Lerize transfer of dividends and foreign workers' earning. Implemented (ESAP) Eliminate prior compulsory deposits for forein imp orte implemeted _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~~ ~~~~~(ESA P) 3. Tariff Policies Lialize and simplify. Further reduction in effective protection. Under SAC-M 4. Labor Poicies and Libeaize labor hiring and firing. Revision of Labor Code and regulations. Under SAC-M Regulatons Decrease cost of labor. Encourag labor ftrning and upgrding Annex 2.2 Page 3 of 4 S. Investment Policy State policies and principles, Prep General Investment Policy Statement affiming freedom of October 1993 including: enterprise for all investos in all sectors. a) clarification of general policy vis- A-vis investors; Revise existing code to incorpate two types of regimes: October 1993 (i) an automatic regime of incentives available to all new b) remvise Inestment Code investments (excluding extensions and modernizations), accorditgy incorpraing S-year tax holidays and duty free import of initial investment goods; and c) provide for grdual integration of (u) a case-by-case exemption regime granted to activities with investment and tax codes into one demo d viability. single code; The regime under (i) will require no formal approval but will have a registration requirement; the regime under (i) will be granted by the Investment Commission but approval by the Council of Misters will no longer be required. Extension and modeniation proects should gealay not be eligible for exemptions fiom import duty or d) adopt geneal free trade zone tanaction tax October 1993 legilation, and develop activities; Adopt fiee trade zome legislation acceptable to IDA, including clauses to libraize re-export through entpt trade, and allow opation of bonded wahoues. 6. Tax Policy Decaea# distortions in the corporae Adopt a policy slatement and timetable to undertake, during the next December 1992 tax stem, elimin cascading tree years, tx reforms to encouage private entrpreneurs and effect inves, includig inter alia, the following meaums Pvide further inctves for invesTent m poducetve ass - dubility of tansction taxes (CM) paid on inputs for manufacuing pupoes, from taxes paid on output, to eliminate casadg effact; - Emination of TT on intres paid on bank loans; - Elimination of tax on equity paid at incorporation; - caryover of lobs for 5 years; - Lower dividend tax rae; - Lower corporate income ta rames; - Autho zed officil amortzation schedules for accting and finl pupows, and - Fanser deprecitionof productive asets Annex 2.2 Page 4 of 4 7. Fi=acial accounting Develop and improve financial - Create a board of private chartered accountants and take steps to March 1994 and auditing accounting by local firms, and revise, as rqured, and make business enterpnses comply with itoduce compulsoy external audits procedures and accounting norms of the National Accounting Plan, of entepris. including cost accounting procedures. S. Export promotion Implement measmes for non- - Take concre measures for effective and automatic October 1993 traditioal exporteo. implementation of the 10% drawback system, and of the 50% reuction of income tax rate in favor of exporters Libalim international air tran - Adopt a transparent and simple system to pemt fright and October 1993 activities. passnger chater flights on 24 hours notice. Dmevlop trae-fre zon activities (se S. above). Mah 20, 1992 Annex 2.3 Page 1 of 23 BURUNDI: PRIVATE SECTOR DEVEIO T PROJECT Structure and Characteristics of the Financial tor 1. The financial sector of Burundi is in an early stage of development and suffers from a number of shortcomings. The Government has agreed to a number of reforms centering around improving financial intermediation which is particularly important for the expansion of the private sector. These reforms include: (i) the strengthening of financial institutions and the development of new financial instruments for improved savings mobilization and greater efficiency in investment lending; and (ii) strengthening the legal and regulatory framework governing financial institutions and improving supervision to ensuzre financial stability. 2. Burundi's financial sector consists of the Central Bank (Banque de la Republique du Burundi - BRB), four comuiercial banks, three other deposit-taking institutions, including the postal savings system, two development banks, two insurance companies, a network of 70 savings cooperatives, several "special funds", specializing clhiefly in housing finance and guarantee operations, the Institut National de la Securit6 Sociale (INSS), a publicly-controlled pension and social security fund and the Mutuelle des Employes de la Fonction Publique, which provides medicare insurance and disability pensions. A joint- venture holding bank with Arab partners and Goverment, and CADEBU, a publicly-controlled and operated savings bank, are in the process of liquidation. Table I (at the end of this Annex) provides an overview of the relative importance of these institutions. 3. The sector is heavily dominated by the Government either directly or through public sector entities, although all indications point to management and decision-making processes that are relatively free of political interference. Government holds a 42 percent share in the capital of the two largest and oldest commercial banks, with foreign parent banks holding 49 percent of the capital. The Meridien Bank of Burundi (MBB) has 25% of its capital controlled by Meridien International Bank. One commercial bank, BBCI, is 10% Government owned with other public enterprises holding relative majority, central and private burundian the balance. The remaining financial institutions are fully Government-controlled and operated, but appear also free of interference. As part of the public enterprise component under SAC- Ill financial institutions will be liquidated, privatized or rehabilitated as required. Inslitutiional Strixchtj Cmmercial B}anks 4. The two largest commercial banks, BCD, the Credit bank of 3urundi, and BANCOBU, the Commercial Bank of BIurundi, have operated for maniy years as wholly-owned subsidiaries of foreign banks. In 1985, the foreign parent companies sold 51 percent of their shares to Burundian interests, Government and public sector enterprises, but retained control of management. Expatriate management is now being gradually replaced by qualified local professionals with continued involvement of the foreign banks. 'nTe policies, procedures, and management practices of these two banks still reflect those of the parent companies. 'Ihe two other commercial banks, MBB and BBCI, started operations in 1988 and 1990 respectively. MBB maintains close technical assistance ties with its parent Mdridien International, which provides a management team, procedures and extemal auditing. A consolidated Anax 2.U Page 2 of 23 balance sheet of the banks is presented in able 2 (at the end of this annex), and some key indicators provided below: Burundi CoMMeggial ganks a Key Indicators (as of may 31, 1991) (FBu 1,000 million) 1 C la TOTAL Total Assets 13.6 11.1 .7.3 2.1 34.1 Total Deposits 6.6 6.4 5.3 1.2 19.5 Loans outstanding 7.5 7.8 5.3 1.5 22.1 Number of Staff 200 250 118 N/A Number of Branches 5 7 3 N/A 5. Commercial banks extend mainly short-term credit in overdraft form, with a large proportion of such credits financing export and import operations. Coffee marketing and export financing constitute a central part of banks' lending business. Until recently commercial banks were the only institutions engaged in this, heretofore very profitable, and virtually risk-free activity, but lately, in line with the policy to Improve competition among banks, other financial institutions, such as BNDE (Banque Nationale de Developpement Economique), CAMOFI (Caisse de Mobiisation et de Financement) and SBF (Societe Burundaise de Financement), have become involved in coffee financing. The emphasis on short-term credit is such that banks have generally not allocated the minimum 15 percent of their outstanding portfolio to medium-term (2-7 years) and long-term (over 7 years) loans, as required by Central bank regulation. The few term loans in their portfolio were granted almost exclusively to well-established clients. 6. Practically all bank lending is backed by some form of collateral (mortgages, floating charges on stocks or other assets, personal guarantees, overseas bank guarantees, etc.), even though the registration and ultimate enforceability of most of these guarantees remain difficult and time-consuming. The numerous collateral requirements are an obstacle for private borrowers, particularly SSEs, and limit their access to institutional credit. The recendy-created and publicly controlled guarantee fund (FNG) has not had much of an impact yet, due to limited resources and institutional capacity. 7. Qber Di sit-aking k1 titutiok . The publicly owned and operated CAMOFI started its operations in 1979 with a mandate to channel savings of public enterprises into investments in public sector projects to support the Government's investment policy. CAMOFI invests in Treasury Bills, Treasury Certificates and Investment Bonds , but also extends loans to fund large public sector projects (e.g., SIP, a housing developer, SOSUMO, the sugar complex). At the end of December 1990, total assets amounted to FBu S billion (USS 29.2 million) and total loans to PBu 1.2 billion (US$ 7 million) while investment in Govenument securities stood at FBu 1.9 billion (US$11.1 million). Deposits amnounted to almost FBu 3 billion (US$17.5 million). Though profitable, and relatively well managed, I1 Investment Bonds, which are the long term versions of Treasury Bills, and the latter are no longer issued and have been replaced by Treasury Certificates. Annpa2 Page 3 of 23 with a total staff of 25, the rationale for the continued existence of CAMOFI as a public institvt.,on must be reviewed. Indeed, its functons could be performed as well, If not more efficiently, by commercial banks. Developmet Banks 8. Two development banks operate in Burundi. The Banque Nationale de Ddveloppement Economique (BNDE), Burundi's first and largest development finance institution, was established in 1967 as a limited liability company with a share capital of FBu 60 million (USS 0.7 million), subscribed 75 percent by Government and public institutions, and 25 percent by Burundi's commercial banks. BNDE's objectives at its inception were to provide term loan and equity fumds to agricultural, industrial and tourism enterprises and to finance housing. The institution received strong support from the intemational community (the French Caisse Centrale de Cooperation Economique - CCCE - provided the general management of the bank until 1970) and subsequently from the Bank Group (para. 9), and its equity base was expanded to allow international development assistance organizations to participate in its shareholding. BNDE's capital of PBu 740 million (US$4.3 million) at end 1990, is subscribed 46 percent by the European Investment Bank (EIB), CCCE, German Development Bank (DEG) and Belgian Development Agency (AGCD), 40 percent by the Government and the Central Bank, and 14 percent by commercial banks and other public sector institutions. Though majority owned by the Government, BNDE's management has been relatively autonomous thanks to the Board membership of bilateral development agencies, and well-defined policies and procedures that have been generally adhered to. 9. Strong international support has allowed BNDE to establish itself as an important institution for development financing in Burundi. In addition to an IDA Credit (Cr. 731-Bu) approved in 1977 and amounting to US$3.4 million, significant institutional and financial support came from CCCE, EIB and the African Development Bank (AfDB). Over the years, this allowed BNDE to build significant institutional capacity. In December 1990, BNDE employed 61 agents. Its only office is in Bujumbura. able 4 provides a summary balance sheet of BNDE. 10. BNDE had an outstanding loan porfolio of almost FBu 5.0 billion (US$29.2 million equivalent) at the end of 1990. BNDE's operations have been sectorally diverse and cover agriculture, manufacturing, mining, handicraft and housing. About two thirds of all loans are to enterprises located in the capital city, Bujumbura, with the balance distributed throughout the provinces. About 70 percent of outstanding loans are medium/long-term. Real estate and industrial loans account for about 44 percent of the portfolio and coffee crop financing for another 14 percent. BNDE loans are mainly financed by foreign lines of credit. Under the SSE APEX project, BNDE is the most dynamic participating financial intermediary (PFI) accounting for over 80 percent of commitments to 45 subprojects. 11. BNDE has recently taken measures to significantly improve its internal procedures with respect to loan administration and portfolio supervision. It is currently one of the few financial institutions in Burundi that apply clearly defined policies with regard to non-performing loans and risk provisioning. Loans are classified as overdue as soon as a repayment installment has been missed, an action that immediately triggers a review of the borrower's situation and may lead to classification of the loan as doubtfiu. BNDE continues to enjoy substantial support from donors and foreign shareholders. 12. Burundi's other development finance institution, the Socit Burundaise de Financement (SBF), started operations in 1'-2. It provides mainly medium- and long-term loans for housing, commercial and transport equiprt. t and, to a lesser extent, short-erm loans for agriculture, chiefly for coffee marketing. Total medium- and long-term loans at the end of December 1990 amounted to FBu Annex 2.3 Page 4 of 23 5,584 million (US$32.6 million). Most of its activities are finded through deposits which accounted for 60 percent of liabilities and financed 85 percent of loans and overdrafts as at December 31, 1990. SBF's financial prospects may be negatively affected by the tendency to transform short-term resources into long-term loans, which leads to a potentially dangerous mismatch. SBF management is reviewing the problem and is expected to implement corrective measures. Table 5 presents a summary balance sheet of SBF. 13. Special Funds. The Government has established special funds in an haphazard way, without prior reliable financial and economic feasibility analyses. These fiuds are mainly dependent on budgetary subsidies for their survival. The Rural Housing Financial Corporation (SOFIDHAR), established in 1990 with the objective of financing rural construction, has not been able to mobilize resources to supplement its initial paid-in capital allocation of FBu 300 million (US$1.8 million). This, together with high risk loans to farmers at an interest a rate of 13.5 percent, much too low to compensate for the risks, threatens the survival of the institution. The Urban Housing Promotion Fund (FPHU), created in 1989, funds long- term urban housing construction loans with, principally, term deposits, leading to a possibly fatal mismatch, and increased subsidies. As of March 31, 1991, FPHU had deposits of FBu 410 million (US$2.4 million), accounting for 60 percent of total assets, and financing 82 percent of loans outstanding. Both SOFIDHAR and FPHU have a staff out of proportion with their level of activity, 12 employees for the former and 19 for the latter. These two institutions are not viable, their restructuring and/or phasing out will be sought as a condition second tranche release of the proposed SAL-m operation. 14. Savings and Credit Cooperatives (COOPECs). The Cooperatives d'Epargne et de Crddit were established in 1984 with French financial and technical assistance. As of December 31, 1990, the COOPECs had a network of 70 cooperatives in rural areas, with over 102,000 members, deposits of FBu 505 million (US$3 million approximately), and outstanding credits of about FBu 207 million (US$1.3 million). A "head office" located in Gitega, acts as a central bank to individual cooperatives, and manages the whole network. The COOPECs are the first financial institutions to operate mainly in rural areas. Seventy-two percent of the volume of loans outstanding (fifty-three percent of the number) are small, low-cost housing credits. Agricultural credits account for 13 percent of the volume (29 percent of the number) and credits to small traders for 6 percent. On average, the volume of delinquent loans represents 15 percent of total credits outstanding, but this ratio does rise as high as 70 percent for some individual cooperatives. This system of rural savings institutions, which has the potential to play a key role in the mobilization of rural savings and in providing local financial support to rural activities, is still in its infancy, and has not been proven to be financially self-sustaining. The network is in the midst of a reorganization to consolidate and strengthen management, with increased EDF, CCCE and other donor financial and technical support. Internal management and control procedures are being introduced and effective Central Bank supervision is being established. Performance of Banking and Tinandal ItItutions 15. Financialsituation. The financial statements of Burundi banks have recently been the subject of external audits under the APEX project (Cr. 1889-BU). The audits have revealed that accounting systems and procedures need to be improved. Problems arise, for instance, with respect to: (a) the treatment of unpaid interest accruals which are sometimes included in income, or consolidated with the loan principal outstanding, without adequate provisioning, and (b) the lack of distinction between "specific" and "general" provisions, and the assimilation of all such provisions to ftee reserves and hence equity. To deal with these problems, a new financial reporting format has been introduced by the Central Annex 2.3 Page 5 of 23 Bank and a new accounting system for financial institutions wIll be gradually developed (para. 49). The development of the new accounting system will be the subject of the midterm review of this operation. 16. Loa 1pgElio. Banks suffer from arrears as high as 25 percent of their loan portfolio. Doubtful loans represent 12 percent of loans outstanding for SBF, and 10.4 Percent for BNDE. Provisions for risks on doubtful loans are not tax-deductible at least, in part due to difficulties in monitoring proposed tax deductions, given the lack of transparent accounting by the banks. Such provisions tend therefore to be limited. In view of this underprovisioning, the reliability of reported profitability and equity figures is questionable. Moreover, the high level of credit concentration raises concern about the vulnerability of some banks to a downturn in economic activity (para 40). For instance, the five largest users of credit at one commercial bank account for 40 percent of loans outstanding, the twenty largest for 68 percent. To redress the situation, the Central Bank has, for the first time, issued provisioning guidelines (para. 42). Government has agreed, as a condition to effectiveness, to allow the tax deductibility of provisions realized in accordance with Central Bank guidelines (para 3.8). 17. Profitability and Liquidity. Reported profitability for the six institutions expected to participate in the proposed IDA-financed project is satisfactory (Table 0. The two development banks have a somewhat lower profitability performance. The two newer commercial banks, MBB and BBCI, have only recently turned a profit. Although BCB's overall profitability is high, two of its rural branches are unprofitable. Generally, banking institutions appear to benefit from a more than adequate interest margin. Interest income is supplemented by substantial commissions and fees levied by banks. During 1990, most institutions have experienced a tightening liquidity situation which resulted in increased recourse to Central Bank refinancing. The latter more than doubled from FBu 2.1 billion (US$13.1 million) in December 1989 to FB3u 4.9 billion (US$28.7 million) in December 1990. 18. Management and Procedur. Management staff of the banking institutions are spread thin, and lack the ability to deal with a crisis situation. There is limited internal capacity to perform reliable financial risk analysis. There are no internal systems of formal loan classification by risk category or well established provisioning policies. Satisfactory internal auditing and control mechanisms do not exist. Loan recovery procedures are inadequate. This situation, along with the aforementioned weaknesses in financial accounting, raises serious institutional development issues that require resolution over time. Some banking institutions have launched internal institutional strengthening programs. For instance, one bank is establishing a loan recovery unit and a legal service including guarantee management and registration activities. Another is establishing an internal management control unit to oversee the profitability of its various activities and keep operating costs under control. Prospective participating financial institutions will be required to submit and implement measures to train staff, and strengthen management and internal control procedures, as a condition of participation in the proposed credit. 19. Overall siMgf1Q_n. The current financial situation of banks and financial Institutions appears satisfactory despite these deficiencies, compared to banks in comparable Subsaharan African countries. However, unless these deficiencies are dealt with soon, there is a risk of rapid deterioration of the financial situation. Tlhe special public sector funds (para.13) are generally not viable, while the cooperative banks have not yet reached a financially self-sustaining stage (para. 14). There is still time to better identify the problems of viable institutions and implement corrective measures. One of the principal objectives of the proposed project is to strengthen the internal capacity of banking institutions, including the Central Bank, to enable them to implement remedial measures and response more effectively to the coming challenge of financing private sector development. Tle proposed technical assistance Annex 2.3 Page 6 of 23 component has been conceived, and will provide a comprehensive and broad program of actions to meet these objectives. Market tuue 20. Competitiveness. There is a fair degree of competition for resources among banking institutions. Both, MBB and BBCI, relative newcomers, have made significant inroads in resource mobilization. In the demand deposit market, both BCB and BANCOBU lost significant.market shares (Ia-b- 7!. The postal savings system has been able to hold on to its modest 3 percent market share. In the savings and term deposit market, the gains of the two new commercial banks came at the expense of CADEBU and CAMOFI (IMle 8). Also, fluctuating market shares, for each individual institution, reflect the competition for funds, which has increased in intensity in recent years. By contrast, market shares appear to be more stable in the credit market. While the two new banks made important inroads in the last two years, at the expense of BANCOBU, BCB and BNDE, there are fewer year-to-year credit fluctuations, reflecting a degree of loyalty of borrowers towards the banking institutions they deal with. However, in the credit market, competitive success cannot be measured only by quantitative gains in market share. The quality of the credit extended is also a factor to be taken into consideration. For instance, while one bank gained significant market shares in 1989 and 1990, several loans it granted turned out to be of high risk. 21. Resource Mnbilization. Deposits are the main instrument of savings mobilization in Burundi. Financial institutions' performance in resource mobilization appears rather mixed. Table 9 shows the evolution of demand and time deposits by category of holders between 1985 and 1990. Total deposits declined between 1985 and 1987. They rose 38 percent between 1987 and 1990. Almost all of the increase in the latter years came from time and savings deposits. The evolution of deposits in recent years is the combined result of three factors: (a) the development of the auction market for Treasury Certificates (TCs), with monthly subscriptions, averaging FBu 200 million (US$1 million), mainly funds diverted from demand deposits, particularly in the case of public sector enterprises; (b) the progressive liberalization, and ensuing increases in interest yields of deposits and savings accounts, contributed to raise the volume of deposits, particularly term deposits; and (c) wider competition for funds, triggered by the entry of two new commercial banks, MBB and BBCI, contributed to the increase in deposits since 1988. Crdit kisribullon and Evolution 22. Total credit outstanding by financial institutions at the end of 1990 amounted to FBu 37.0 billion (US$216 million). As shown In Tables 10 n , the main recipients of bank credits during 1988 and 1989 were the trade sector (including coffee), industry, and construction (mainly housing loans), with 47 percent, 18 percent and 15 percent, respectively, of total credit outstanding. The remaining 20 percent went to agriculture, transport and other miscellaneous activities. There are no reliable data on geographical distribution of credit, but the majority of medium to long-term, and larger short-term facilities are approved and granted in Bujumbura for medium and large public and private sector enterprises. 23. Ierm-Lending. Medium-term loans for investment represented less than 18 percent of total credits outstanding in 1989 and has grown on average by 31.2 percent per annum since 1985, compared to 0.1 percent for long-term credit and 25.5 percent for short-term loans. In 1989, medium term loans Page 7 of 23 outstanding amounted to FBu 5,100 million (US$32 million), of which 4,119 million (US$25.9 million) for productive investment. Long-term credit amounted to FBu 4,069 million (US$25.6 million), of which US$7.6 million for public sector investments. The availability of term credit was constrained by the system of guarantees introduced in effect between January, 1987, and January 1991. The Government was granted a prior claim on all guaranteed property (most guarantees in Burundi being based on real estate mortgages), even when the State had not previously laid claim to the mortgage. Under this system, a bank may have held a mortgage, as a guarantee on a loan, for 10 years, but if the debtor develops tax arrears with the Government at any time, the Treasury automatically has the prior claim on all assets, with no ceiling. Ibis issue, raised during APEX credit negotiations, was finally resolved with the revision of Article 149. Tle revised law gives back priority to banks and lending institutions which had previously registered first ranked mortgages. The availability of credit is also constrained by the lack of reliable financial accounts from most small, and some larger, borrowers. This issue is being addressed under the technical assistance component of the project in favor of private entrepreneurs. 24. Term lending in Burundi, which only a few years ago was almost the exclusive domain of BNDE, has experienced some diversification principally with the creation of SBF and CAMOFI, and to a lesser extent SOFIIDHAR and FPHU. While the recently created two commercial banks, MBB and BBCI are showing more interest in this type of lending as a matter of competitive necessity, the two largest and most experienced banks, BCB and BANCOBU, remain lukewarm and cautious. The ongoing economic, monetary and credit reform measures, in particular the liberalization of the interest rate and guaranty regimes, and the deductibility of provisions for risks, are designed to encourage banks to increase their exposures in private sector term lending. 25. Burundi entrepreneurs and promoters generally suffer from insufficient equity capital funds. This constraint, already felt in investment project financing, further complicates the proposed program of privatization of public enterprises. Private investors who dispose of funds tend to limit their financial participation in enterprises. Banks and term lenders are not geared, because of the nature of their liabilities, to providing equity financing. As venture capital firms do no exist, and financial markets are undeveloped, equity funding resources are scarce in Burundi. The proposed financial and legal reforms to introduce new financing instruments, particularly negotiable, bearer treasury certificates and similar borrowing instruments, are expected to improve investor confidence, and levels of equity financing. A study financed by CCCE is also scheduled to begin shortly to examine the feasibility of a private venture capital institution in Burundi. 26. Ihe ongoing simplification of entry rules for new entrepreneurs, and the proposed further improvements in the regulatory environment, as well as proposed new, more balanced and liberal fiscal, investment and labour codes, should further boost local and foreign investor confidence. As the credibility in the sustainability of reforms increases, new investments will occur through the creation of new enterprises. Existing firms will also rehabilitate their productive capital assets as opposed to investing the minimum needed to maintain current level of operations. Ihere Is also growing interest in the purchase of assets of viable PEs, which, once privatized, will have to be redimensionned and rehabilitated. 27. While the banks expressed their willingness to participate in foreign lines of credit earmarked for investment financing, their capacity to provide term loans still requires significant improvements, particularly in project appraisal, which they have committed themselves to do. Furthermore, they need to simplify and accelerate their lending procedures by relaxing many of the redundant and unnecessary conditions they impose on their customers (e.g., requirements to submit various certificates of creditworthihless, morality, etc., from all lending institutions in Burundi). Tbey Annex2. Page 8 of 23 also need to address their weaknesses in areas such as financial accounting and analysis, auditing and control, and be willing to allocate more resources for staff training. These issues are addressed under the project and are the object of agreed covenants and technical assistance. MAnetry =ud Credit Polides The Central Bank 28. Many of the weaknesses discussed in preceding paragraphs result from an inadequate policy and regulatory environment and institutional weaknesses of the Central Bank. The latter devises and implements monetary and credit policies, regulates and supervises financial institutions. It issues the currency, manages the foreign exchange reserves and acts as the Government's banker. At the end of December 1990, it had assets of FBu 41.9 billion (US$245 million) and a staff of 437 in 14 divisions and two branches. The Central Bank is a highly centralized and compartmentalized institution. During the preparation of the project, and with support from the IMF's ESAF program, the Central Bank has implemented a number of reforms with respect to: (a) interest rate policies; (b) credit allocation; and (c) the conduct of monetary policy. Further reforms are planned. The successful implementation of these reforms will require extensive institutional capacity building. The central bank does not currently have the staff nor the know-how to properly analyze, monitor and forecast macroeconomic developments, and to define and implement monetary policies, or manage adequately foreign exchange reserves and operations. These institutional weaknesses have been thoroughly reviewed and analyzed, during the preparation of this project, with Central Bank officials. They have also been raised by a recent IMP - Central Banking Department (CBD) - technical assistance mission. The Central Bank has consequently requested a comprehensive program of technical assistance and training to tackle these institutional weaknesses. Funding will be provided under the proposed credit, and by other donors under close coordination with the IMF and the Bank. Interet Rate Policies 29. Significant progress was achieved under the recently completed SAC-1I (Cr. 1919-BU) and the ongoing APEX Project (Cr. 1889-Bu). Interest rates are now influenced by market forces through the auction market for Treasury Certificates (TCs) which was initiated under APEX and established in August 1988. After overcoming some growing pains, the auction system now works well, and interest rates are freely determined, without manipulation from the Central Bank. Currently rates on TCs hover around the 11.0 percent mark, compared to an average annual inflation rate of 9 percent. The TC average yield constitutes the reference rate for bank lending rates. 30. Three important distortions in the establishment of borrowing rates have been removed in July, 1991. First the preferential refinancing rate for coffee export credits was abolished and aligned to the normal, single, Central Bank refinancing rate. Secondly, the single refinancing rate was raised to above the TC rate prevailing at the time. Thirdly, bank margins on commodities credits, which were administratively limited to 1.0 percentage point, have been liberalized. The reference margin on other credits used to be fixed by an interbank non-binding agreement at 4.0 percentage points above the TC rate for rediscountable credits and 9.0 percentage points for other credits. Such practices have been prohibited by the Central Bank, and are no longer used. Tle only remaining distortions are the differentiated taxation rates of financial instruments that are close substitutes (e.g., Treasury Ccrtificates and Certificates of Deposit). The Government has agreed to rationalize the fiscal regime of financial Page 9 of 23 instruments through institution of a single securities tax levy. This and other fiscal issues will be addressed in the context of an upcoming joint Bank/IMF study of fiscal and tax reforms (para 3.8). 31. Interest rates on deposits currendy vary from I percent for some sight deposits to 9 percent for one month and 12 percent for one year deposits, with the bulk of term deposits remunerated above 9 percent, the current average annual rate of inflation. Interest charged on commercial bank loans ranges from 11 percent to 19 percent. These rates fluctuate according to market conditions. Credit Policies 32. The Central Bank does not have any directd credit policies, except for minimum requirements for commercial and development banks to allocate 15 percent and 60 percent of their portfolio, for medium (2 - 7 years) and long (over 7 years) term lending, respectively. By and large, this term lending ratio is not respected by most commercial banks who lack long to medium term resources. These ratios have no credit control or prudential meaning; they prevent independent decision-making for investment financing, and should be eliminated. The Central Bank has agreed to abolish both ratios before Mid-Term Review. Monetary Policies 33. Reserv Requirements. Currently, changes in the money supply are effected through conversions of external credits and Central Bank refinancing of eligible credits, in practice coffee marketing and export financing. More flexibility is needed in the conduct of monetary policy to provide banks with more options for financing their activities, and to increase savings mobilization, thereby giving them the needed resources for increased private investment financing. This could be achieved by moving toward indirect instruments of monetary control such as reserve requirements, and open market operations (OMO). In view of the rapid expansion of domestic credits in the past two years, the IMF and the Central Bank agreed to introduce a system of reserve requirements applicable to all deposit taking institutions. The system, instituted in July 1991, sets reserve requirements at 10 percent of sight (demand) deposits and 5 percent of term deposits. Reserves are constituted by special deposits held by banking institutions with the Central Bank. Banks must adhere. to this requirement on a daily basis, with penalties for non- compliance, set at 10 percent of the shortfall. Several problems have emerged with the implementation of the new system of required reserves: (a) the target level of the reserves is too high; (b) the form in which they must be held is too restrictive; (c) the need to meet the requirements on a daily basis, does not provide for sufficient flexibility (d) the penalty for non-ompliance is too low; and (e) there are a number of deposit-taking institutions that are not required to comply. 34. Following a joint IDA and IMF/CBD mission in November 1991, the Central Bank has agreed, in principle, to: (a) establish a single reserve requirement at 7.5 percent, independently of the category of deposits it is applied to; (b) modify the form in which required reserves must be held to remove the special deposit at Central Bank and include cash on hand; (c) increase the time span over which the requirement must be met; and (d) increase the penalty for non-compliance. SBF, BNDE, FPHU and SOFIDHAR, while accepting deposits, are not subject to the reserve requirement. As far as FPHU and SOFIDHAR are concerned, the funding of housing loans with short term deposits poses problems (para. 13). The Central Bank has agreed to review the operation of these funds and to either stop their deposit-taking activities or subject them to reserve requirements. The Central Bank will also review the situation at BNDE and SBF. Furthermnore, under the teclnical assistance component of the project the Central Bank's capacity to use reserve requirements effectively, will be strengthened. Anne 2.3 Page 10 of 23 35. Oen_ Ma_ket Qorations. In addition to the reserve requirement, the Central Bank has agreed to begin developing other indirect credit and monetary policy instruments. The Treasury certificates (TC) market offers the basis upon which to develop an active money market which, with time, would permit the development of Open Market Operations (OMO). Currently it is only a primary market for 1-and 3-month TCs. The amount issued is predetermined. All bids are satisfied at the rate asked until the total amount offered has been subscribed. The Central Bank remains passive during the whole process. Individuals, commercial banks, public corporations and private enterprises participate in the auctions. In the first six months of 1991, between 6 and 15 bidders participated in the auctions for 1- month TCs and between 3 and 11 bidders for the 3-mcnth TCs. In recent months, the total amount bid has fallen far short of the amount tendered, both for 1-and 3-month TCs. This is mainly attributable to the temporary withdrawal of institutional bidders, principally PEs, and to increased competition among banks for deposits. On the other hand, more individuals have been attracted to the auctions. As a result, the number of bidders has remained stable despite the decline in large institutional participants. The increased participation of individuals augurs well for the future development of the market, particularly as the institutional withdrawal is only a temporary phenomenon. While the Central Bank's passive role limits interference with the process of interest rate determination, it subjects the Government to the risk of having to pay unduly high interest rates, particularly when bids fall short of the amount tendered. Since the TC rates provide the reference for the country's interest rate structure, the Central Bank is in effect losing control over interest rates as a policy instrument. The high spreads on accepted bids in May, 1991, (7 percent to 11 percent) illustrate this risk. 36. A restructuring of the TC market has already been agreed to and implemented by the Central bank during project preparation. As a first step,the Central Bank has lowered the minimum denomination of certificates from FBu 500,000 to 100,000 (US$2,500 to 500), introduced bearer certificate and commenced semi-monthly auctions. The market should also be enlarged to include short- term instruments issued by financial institutions (Banking Certificates). This would allow institutions to invest their short term excess liquidity or to borrow to fill a temporary deficit. The existing interbank call Money market has never been widely used, and interest rates on that market no longer reflect demand and supply conditions. 37. Furthermore, the Central Bank should constitute a limited portfolio of Treasury Certificates, thus allowing it to engage in open market operations in order to influence bank liquidity and interest rates. The Central Bank could thus enter reserve bids in the auction market at rates consistent with the intended rate of growth of the money supply. The amount to be issued at each auction would be determined in relation to the behavior of the market during previous issues. If an issue has been undersubscribed, the amount offered would be significantly reduced. If an issue has been oversubscribed, the amount offered at the next auction would be increased. 38. Central Bank Refinancing of Last Rot. As the use of indirect instruments of monetary control increases, access to the rediscounting window would be graiually phased-out. When OMOs are fully operational,Central bank lending would take the form of temporary overdrafts, at penalty rates, as part of its function of lender of last resort. In the meantinme, access to the refinancing window would be limited to maintain control over money supply growth. A global refinancing ceiling would be established annually, taking Into account money supply growth objectives and other macro targets, and be large enough to meet the financing needs of commodities marketing and export while, at the same time, limiting overall money supply growth. Once this ceiling has been reached, an institution will be allowed access to the refinancing window only if it faces a temporary liquidity shortage, at which time it will be charged a penalty rate. A healthy bank which encounters a temporary liquidity shortage after exhausting its rediscountable paper, could exceptionally have recourse to a Central Bank temporary overdraft at a Annlex 2 Page 11 of 23 penalty rate. That rate would be established at several percentage points above the normal refinancing rate. The refinancing rate itself would be established in relation to the rate on TCs. Moreover control of the quality of loans submitted for refinancing needs to be reinforced at the Central Bank and subjected to periodic reviews. The quality review and monitoring by the Central Bank of paper submitted for refinacing must be substantially improved. As commercial banks often condition credit approval to Central Bank notification of the rediscountability of such credits, there exists a de fo reliance on Central Bank assessment of the quality of the proposed credits. Agreement has been reached under this project and IMP/ESAF for Central Bank to start implementing the above proposed monetary policy measures. 39 It is recognized however that to implement this new approach to the conduct of monetary policy, the Central Bank's internal capacity must be reinforced, with substantial technical assistance and training. The central Bank will strengthen its analytical and processing capacity to: (a) establish targets for money supply and credit growth from projected macro variables such as inflation and GDP (gross domestic product) growti; (b) translate these objectives into monetary base and interest rate intermediate targets; and (c) achieve those targets through refinancing, changes in the reserve requirement and open market operations. This will, inter alia, involve developing a securities trading capability in the future. It wIll also require speeding the on-going computerization of the Central Bank. Currently, few Central Bank departments are computerized, and no integral systems analysis has ever been performed. The development of a computeriaion plan, based on a detaied systems anaysis, and the elaboration of an action plan to strengthen the Research and Credit departments, will be initiated with funding from the advance under the Project Preparation Facility (PPF) of IDA. The Central Bank will be required, by December 31, 1992, to submit satisfactory plans for computerization and strengthening of the Research and Credit Departments as a condition of the proposed credit. Banklne Refuation and Sunervsion 40. Padential rtlos. Supervision and monitoring activities by the Central Bank remain limited in scope and quality. The prudential ratios were ill defined, ap;d their managenmnt inflexible. The principal ratio are as follows: (i) !iguidity ratio - non-rediscounted paper eligible for refinancing is considered by definition as part of a bank's liquidity. Tbis is a misconception, as recourse to rediscount facilities mainly occurs when banks are in liquidity squeeze; (ii) Minimum Capital Ratio. As currendy defined, the capital adequacy ratio does not take into account a number of credit categories, and overstates equity by the Inclusion of all provisions for bad loans into capital funds. (iii) TM Lend9ne Ratio. The minimum required ratio of term lending, (15 and 60 percent of total lending by commercial and development banks, respectively) when binding, constitutes an unnecessary constraint on the management of the institutions portfoli. (iv) Risk Concentration and Exposure. The risk concentration limit is set by the Banking Law at 30 percent of equity, a high level compared to the 10 to 15 percent of net equity capital limitations under most international standards. In practice, the ratio in Bumndi is much higher than 30 percent as credit for commodities marketing and export through parastatals (guaranteed by chattel Annex 2.3 Page 12 of 23 mortgages and other lien on the products) and credits guaranteed by a mortgage, and Government guaranteed credits are not subject to these limits. 41. The Banking Law, which defines and specifies some of these ratios, will need to be revised to remedy the deficiencies described above. The liquitidy and capital-asset ratios have been redefined by Central Bank directives issued in December 30, 1991. Further progress with overhauling Burundi's Banking Law and regulations will be assessed during the mid-term review of project implementation (para. 5.8). 42. Loan classification by risk category (i.e. performing, non-performing and litigious) and provisioning guidelines were lacking in almost all banking institutions. The Central Bank has issued a satisfactory directive dealing with these issues in February 1992. 43. Some prudential regulations apply only to banks and deposit taking institutions. For instance, the Banking Law sets minimum capital requirements which do not cover non-bank financial institutions (e.g., minimum capital requirement). While all prudential ratios theoretically also apply to non-bank financial institutions, they have been established with deposit taking financial institutions and banks in mind and would be difficult to apply to other institutions. As agreed during negotiations, the revision of the Banking law and the establishment of prudential norms specific to non-bank financial institutions by the Central Bank are priority measures to be implemented by October 30, 1993. Banking-Supervision 44. The Central Bank's supervision department lacks the necessary know-how, resources and clout to undertake any meaningful supervision of banks and financial institutions. Turnover of personnel is high, as remuneration is low compared to compensation paid to equivalent officers in financial institutions. The status of inspectors in the banking and financial community is also relatively low. As a result, on-site supervision is limited, and no banking institution has been the subject of a comprehensive external audit. While attempts are being made to introduce standardized accounting practices among banks, off-site supervision is still conducted on the basis of inadequate reports often filed with substantial delays by many banks. On-site inspection reports are not available to the banks concerned which cannot comment on them, and there is no follow-up to ensure that corrective measures have been taken. 45. Strengthening bank regulation and supervision would include, int_r alia: (a) establishing a single and well-structured accounting plan for all institutions falling under the purview of the Central Bank; (b) drawing up standard, comprehensive reporting forms for all these institutions; (c) preparing a procedural manual for on- and off-site supervision; (d) training personnel; (e) increasing salaries and benefits to reduce personnel turnover; and (f) establishing the policy that supervision staff will not be subjected to the internal policy ap!,lied to Central Bank personnel. Aimex-2.3 Page 13 of 23 FSnanclal Sector Development Strategy 46. The ongoing reforms in the financial and legal/regulatory environment, the relatively stable macroeconomic framework and the deepening of the economic adjustnent process provide good opportunities for future financial sector development. The Government's strategy in the financial sector with Bank Group support will be built around a fully liberalized interest rate regime feasible in the current context of low average inflation and flexible exchange rate policy. Its focus will be on institutional capacity building while monetary and credit policies are fine-tuned, and sharpened, to maintain and strengthen the significant progress achieved so far on the policy front. The proposed policies and reform measures are detailed in the draft Letter of Financial Setor Development Policy signed by Government. 47. In order to improve resource mobilization prospects, and provide additional indirect monetary policy instruments, emphasis will be put on the development of the Treasury Certificate market, and particularly on the emergence of an active secondary market. The Central Bank is expected to play a lead role in this respect. The Central Bank will constitute its own portfolio of TCs and become an active trader in the secondary market. Banks, enterprises and private individuals will be encouraged to place their excess funds in the TC market. Banks will also be encouraged to borrow overnight funds in that market through progressive reduction in recourse to rediscounting and appropriate interest rate policies. The development of such a money market will contribute to improving the management of liquidity in the economy, and constitute the embryo for the development, in the longer run, of a securities market crucial to private sector development 48. Institutional capacity building will be required to enable the Central Bank and banking institutions to effectively play their assigned roles in these developments. In the context of economic liberalization and a greater role for the private sector, this capacity buildinig will enable: (a) the Central bank to improve the conduct of monetary and credit policy; and tighten its prudential supervision of financial institutions thus encouraging banks to diversify lending away from public enterprises and short- term financing; and (b) banking institutions to improve financial accounting systems and procedures as well as risk evaluation and management. 49. Capacity-building support to banks and financial institutions will include staff training to: (a) develop intemal capacity to assess and manage risks; (b) introduce a loan classification system; (c) put in place internal control mechanisms; (d) establish guidelines for provisioning, the treatment of interest accrued but not paid; (e) design appropriate loan documentation and loan monitoring system; (f) develop the capac:ty to integrate the standardized accounting plan developed by the Central Bank. 50. Private sector development will require the availability of venture capital. This cannot be provided either by commercial or development banks of Burundi as this is a longer termn and high tisk commitment which would endanger the safety of bank deposits, their main source of funds. Consideration is being given to establishing specialized private institutions with the assistance of IFC and other donors. Priority actions will be on improving access to institutional lending for private sector borrowers. The technical assistance component will further familiarize private entrepreneurs with basic accounting procedures and methods so that they could provide potential lenders with credible financial statements. Private sector development will also tequire a channel for selling shares of public enterprises to the public at large. Commercial banks appear to be the most likely institutions to perform such task. ANNEX 2U Page 14 of 23 PRIVATE SECTOR LEoPA PROJECT Wle 2: CHARACTERISTICS OF MAIN INSTITUTIONS OPERATING UNDER MHE BANKING LEGISLATION (Fbu Million) (1990) Assets LQa Dmo5i BCB 12,163 8233 5813 Bancobu 10,286 9152 6490 MBB 6,111 4220 4597 BBCI 1,724 1400 1055 Commercial Banks 30,284 2300S 1795S BNDE 6,067 4965 21 SBP 6,362 5584 - Development Banks 12,429 10549 21 CADEBU 2,961 1617 2841 CAMOFI 5,044 1245 4052 CCI' 358 - 272 HALB 919 82 SOFIDHAR 308 210 Coopecs 0 h a Other Financial 10,294 3,806 7,553 LInttutions &ZMM: Uiiaudted Financil Statement AIRURCI Unaudited Financial Statements ANNEX 2.3 Page 15 of 23 REBLIC OUND EPWVATE SECTOR DEVELOPMEM PRO.ECT Table 3: SUMMARY BALANCE SHEET OF COMMERCIAL BANKS (UNAUDITED) A_of mber31: I P ASES (FBU Million) Cash Reserves 353 812 737 Assets in foreign banks 798 782 879 Loans and Credits: Fin. Institutions 880 820 1,117 Government 1,597 1,157 1,017 Public enterprises 5,397 6,128 7,123 Private enterprises 8,577 11,818 16,068 Other Assets 1,458 1,580 2,507 Total Assets A2IQQ Z244 Demand Deposits 7,881 8,300 9,705 Time Deposits 2,966 5,670 6,490 External Borrowings 1,201 1,106 1,377 Other liabilities 4,738 5,453 8,307 Equity 2,274 2,568 3,569 Q i nuidaaleosobk fncl . . ..... .n s. ...i.i SP_QR: Unaudited annual feporl of banks md finiancial institutlotts AL4NEX 2.3 Page 16 of 23 REPUBLIC OF BURMNDI PRIVAT-E SECTOR DEVELOPMENTPOJECT Tble 4: BNDE - SUMMARY BALANCE SHEET (UNAUDITED) As of Dee_mber _31 1282 L22R ASSEr1 (FBU Million) Cash Reserves 23.9 49.9 13.9 Loans and Credits: Financial Institutions 1.5 6.0 11.0 Public Enterprises 1,303.2 1,349.6 1,350.3 Private Sector 2,978.9 3,349.6 3,688.2 Other Assets 532.5 743.1 608.3 Total Assets 5.671.7 LIAB-LITIFS Bank Loans 837.0 1.030.7 697.8 Public Funds 924.7 1,229.0 1,449.2 Foreign Loans 1,746.9 1,847.5 1,908.3 Deposits 112.9 111.8 87.6 Equity 1,218.5 1,279.2 1,528.8 : Central Bank ANNEX .3 Page 17 of 23 P.PUUCOF RUD PRIVATE SECTOR DEVELOPMENT PROJECT Tabie S: SBF - SUMMARY BALANCE SHEET (UNAUDfTED) As of December 31: 1988 122 1990 AUM (FBU Million) Cash Reserves 22.3 118.0 43.3 Loans and Credits: Govenmnent 1,514.8 1,312.1 1,014.3 Financial Institutions 65.2 65.2 65.2 Public Enterprises 1,313.1 1,127.9 1,215.1 Private Sector 2,236.2 3,047.5 3,691.5 Other Assets 86.1 - 57.8 IaW-lAs set 6.087.2 Borrowing from: Financial Institutions 218.9 218.9 390.6 Government Funds 2,230.1 2,404.1 1,885.9 Deposits 1,145.0 1,281.5 1,773.4 Public Enterprises (710.0) (893.0) (980.0) Private Sector (933.7) (873.2) (1,057.3) Equity 1,145.0 1,281.5 1,773.4 Total Liabilities & Equity 0,Z LgZ.8. SQIJ: Central Bank Annual Reports ANNE 2.3 Page 18 of 23 IPIUTE SECTOR OYDLEVITOM OE able 6: REPORTED PROFITABILrTY OF SELECIED BANKS (December 31, 1990) As a Percentage As a Percentage Average of Average Equity of Total Assets BCB 24.2 1.3 BANCOBU 6.9 0.7 MBB 11.2 1.4 BBCI 15.4 3.1 BNDE 4.5 1.0 SBF 5.3 1.9 SOURCE: Unaudited Financial Statements of Banks A=12 2.3 Page 19 of 23 EWAU SECTOR 1;gE1PA Ia1zI.: DISTRIBUTION OF DEMAND DEPOSITS BY INSlTUTrMON (Percentages) i2fE L1987iB 12f J Q ERD 17.3 18.8 11.4 12.9 13.3 9.5 Commercial Banks 73.0 73.0 79.2 78.9 80.0 83.6 BANCOBU N/A N/A N/A (40.1) (34.7) (31.7) BCB N/A N/A N/A (35.4) (34.6) (32.7) MBB N/A N/A N/A (2.2) (8.1) (14.9) BBCI N/A N/A N/A (1.2) (2.6) (4.3) CADEBU 7.4 6.0 6.2 4.7 3.7 3.9 CCP 2.3 2.2 3.2 3.5 3.0 2.9 TOTAL _ 1 Q, IQ Q £Qi2 N/A: Not Available sQ1IB~l: Central Bank A-NN13X 2.3 Page 20 of 23 REPUBLIC OF BURUNI ble 8: DISTRIBUTION OF TERM DEPOSITS BY INSTITUTION (Percentages) 1225 I2B6 1987 128I 12fi2 19XQ Commercial Banks 42.4 20.7 27.3 45.5 61.8 65.3 BANCOBU N/A N/A N/A (13.8) (23.2) (24.8) BCB N/A N/A N/A (30.5) (24.6) (24.8) MBB N/A N/A N/A (1.2) (11.6) (10.7) BBCI N/A N/A N/A (-) (2.4) (5.0) CAMOFI 24.6 26.4 20.0 22.1 12.6 10.5 CADEBU 33.0 52.9 52.7 32.4 25.6 24.2 TOTAL l0 .0 10.0 10 N/A: Not Available SQIE: Central Bank ANNE 2.3 Page 21 of 23 REPUBLIC OF BURUNDI PRIVATE SECTOR DEVELOPMENT PROJECT Tabl 9: STRUCTURE AND EVOLUTION OF COMMERCIAL BANK DEPOSITS (Percentages) Demand DLeyosils Term and Savings Deposits 18 I 1986 I I2 I2 I2 12 1987 I2M I198 I1Q Persona Deposits 24.3 30.9 37.8 31.9 30.8 34.4 39.5 62.2 60.7 41.1 35.0 35.1 Priwme Enterprises 21.7 18.2 20.9 22.5 27.1 23.9 9.5 10.7 17.7 26.9 28.7 26.4 Public Enterprises 51.2 48.7 37.7 40.6 36.9 33.0 48.9 25.3 17.8 25.8 29.1 30.6 Other Accounts 2.8 2.2 3.6 5.0 5.2 8.7 2.1 1.8 3.8 6.2 7.2 7.9 TCJTAL 10 10 J00. £02 10Q0 A2RIR 1 100. J0I 10. 10.0 190.0 (Toal in FBU Million): (10,840 11,670 10,489 9,989 10,373 11,607 5,729 4,151 5,064 7,028 9,166 9,937) SO1ABF: Central Bank AN-MM 2.3 Page 22 of 23 EUBC OF BURUNDI PIV/D SECTOR DEVEWIMT PROJECI Table 10: SECIORAL DISTRIBUTION OF CREDrrS TO THE ECONOMY (FBu Million) Sector Short Tam NIedimn Term Long Term TOTAL I288 199 9O 88 1!212 1so 2 1989 1990 1211 1212 1990 AuricuttI 366.5 318.3 382.7 1,369.3 281.8 Z80.9 248.2 212.4 210.0 1.984.0 815.5 873.6 trdustrr 2,967.2 3,424.0 4,033.7 1,346.3 1,430.0 1,278.3 548.4 562.2 655.2 4,861.9 5,416.2 6,237.2 Cw.ruction 863.4 32.0 1,452.2 1,002.0 1,35.0 913.7 2,515.1 2,863.6 3,169.9 4,360.5 4,730.9 5,600.8 Trminrt s22.3 331.9 357.9 179.0 247.9 251.7 20.6 15.8 13.3 721.9 S95.6 622.9 Suivlcus 155.4 186.5 223.6 39.7 81.9 62.8 8 183. 124.8 383.9 4s5.3 411.2 Trudu 10,301.3 12,435.4 15,105.4 621.6 661.4 M58.5 64.; 102.4 146.3 10,967.3 13,199.2 16,010.2 cOh r 2,329.6 3,8w.7 S,966.6 927.s 1,358.9 1,677.6 132.4 129.3 105.3 3,389.7 5,288.9 7,769.5 ......... .. .......,, ........ ..... ........ ..... ....... ..... ..,.. ......... ......... ......... TUAL L=. 21-3Z385 2 5.28.1 2!Z 5,AS S29 LB.7.19. 4-6. 4.424.8 26-689.2 fr.8 375sz.4 :iQ1ji: 23R}BPf: Annual Rept ANNEX 2.3 Page 23 of 23 RE,PUBLIC OF BURUNDI PRIV&113 SECIBrO DEY-E:L01M1N O Tabl IL: STRUCTURE AND EVOLUTION OF CREDlTS DISBUED (PBu Milon Ogtading) As of Dember 31: 1981 12B2 12iQ _t-tuu Credt 11,65;5.8 12.724.7 17,.1 ,328.8 27,814.3 - Coffee export 4,78.9 53D7.7 6,481.2 7,024.5 8,626.6 - Cther export 225.5 4.3 540.0 487.5 154.1 - Overdraft 5,334.1 6,526.5 8,437.0 11,726.3 16,509.8 - Other short tem 1,307.3 936.2 1,987.9 2,090.5 2,523.8 rliwti u Credts 2,542.1 3,402.2 4.255.4 5,100.2 5,288.5 - Rwing 673.1 641.8 974.8 981.1 998.7 Eqit 1,869.0 2,560.4 3,280.6 4,119.1 4,289.8 t.WTem Crests 3,607.4 3,936.7 3,719.9 4,068.8 4,451.8 - bluini 2,474.6 2,761.6 2,515.1 2,663.6 3,196.9 - equipet 1.132.8 1175.1 0 1252 125.9 TAL 17 8053 20.063.6 25.42.4 30.497.8 37.554.6 SQUjCE: Cenr Bak Annual Rers ANEX2.4 Page I of S BURUNDI: PRILVATE SECWOR DEVELOPMT PROJ= FROPOSME DLF APOLICY MAT Fmnwl Sector Devetonment hz! abi Measures Timetable e! Rte Establisb a sge Centa Bank (BRB), Eliminate the preferential rediscount rte. Set one rediscount ate and expand Implemented Regime rediscount gate, and rationalize fixation of eligibility of credits to be refinanced to all wectors and types of credit. (ESAF) rediscount rate. istablish an accepWtble formula designed to set the rediscount rate at a level above June 1992 the weighted average yield of the auction of three-month Treasury Certificate (M.C.), and ensmuing at all times positive interest rates in real terms. Credit Ps7icv Elimiate the diced credit policies. Eliminate the disinction between priority and non-priority sectors, and between Implemented rediscountable and non-rediscountable credits in allocating credit. Eliminate medium-term credit target requirements of 15% and 60% of lending October 1993 . _________________________________ operations by commercial and development banks, respectively ANNEX 2.4 Page 2 of 5 Obiectives Masures Timetable Controt d Move to indirect control of monetary Develop and submit plans to improve internal capacity of BRB to: (a) analyze December 1992 Mondarv aggregate. evolution of macro and financial variables; (b) establish economic forecasts; AS;osates . (c) establish monetary targets; (d) implement desired monetary policy and Improve -qaityof policyfomnlation and (e) better analyze credits approved by bank, includig analysis of company implemenion, redisountable redits, and accounts and financial projections. analytical capacity. Implement such capacity buldig pln Marh 1993 Set rsurve requiremertsat 7.5% of all deposits of all banks and financial May 1992 institutions in accordance with RDF agreement. Establish a global refinancing ceiling and develop lender of last resort mechanisms. June 1992 Gradualy introduce open mrket operations. October 1994 Page 3 of S am Oaoectives Measues rnuetXlc Moncrxd Ca l _Encour development of money marit Restutre and ecpand TC auction market system tbrough: - rduction of face value to FEIulOO,O0, Impkmonted - introductionof ni-montl auctions, ImPloemd * introducton of beuar negotiable cotficas, Implemoentd - development of a ecocdry market tiough oved dealer (bab insurance October 92 compane, se.), - aie Centa ank nterveio in eondy market hrgh its own portfolio Ocber 1992 of securities, - developmen of a mkt for negotiable bak ertficate iwaod by b and December 1993 fin.a- i..itu.on. ANNEX 2.4 Page 4 of S Ama ~~~~Obiectives mesreTimetabe B&ikine Expand and stengthen BRWs capacity to Draft a detailed action plan to recruit, train and better remunerate the taff of the Su"erVision and oversee and apeise all banks and finmcial supevision department, and develop on and off-site supervision. Effectiveness oversinht institutions. Emplement such an action plan. October 1992 Daft a detailed standardized accounting m for all bank and financial October 1994 institutiOn Develop prndential norms and regulations for Implement policy requiring extemal audits of banks and fnancial institutions Underway banks and financial institutions. Development and application of a system of loan classification by risk category, Implemented including accounting rules for intercst accruals, and for allocations to provisions for risks of loss on doubtful loans Development and application of new or revised prudential ratio, including: - asset-based capital adequacy rado. Implemented - liquidity ratio (excluding rediscountable paper). Implemented - risk exposure limits and concentration (excluding any reference to guarantees, October 1993 sovereign risks, and refinancing of commodities marketing and export). Establishment of prdential norms for development banks and other non banking October 1993 financial institutions. Central Bank CComputeriz operations. Undertake ystems analysis and prepare computerization plan. December 1992 ANNEX 2.4 Page 5 of s I______Are _ I Measures Timetabl 1 FCiial Strengthen credit analyis and loan recoery Prepare aisfatory plans to improve staff training, loan monitoring and recovery October 1993 Institutions fntjoi. functions and procedures, credit and internal control functions. Istitute intrnal auditing and accounting control functions. Rationahze government policy ftgarding the Government will commit itself to implement recommendations of audits of May 1992 creation, and pport of publicly controlled financial irutios, and of ongoing financial, fiscal and legal studies, after financial institutions througb structuring and consultations with IDA and IMF consolidation of non-viable andlor redundant institution kmplementation of ecomnmendations SAC-M ZMPAOon of Increase profitability of banks by developing Submit plan to (a) revise tax treatment of provisions against risk on loans, and (b) Effectiveness financial instituons their capacity to provision against riks. rtonalize taxation of financial insruments. and g ion Provide incentives for increased resure mobilization aad risktaking by bank. leizaland- De-sig and put in place updated and Revise banking law and amend regulatory framework to allow development of new October 1993 Renulatorv modernized banking la and regulations, financial instruments. Ftameworc plaeo all banks and financial institutions under effective control and supervision of Central Bank Mamb 20, 1992 EXNe 4,1 Page I of 4 PRIVATE SECTOR DEVELQMENT P0E&C laffAw ~ g~~eent Unit aPmU 1. To help manage the investment component of the project, it is agreed to establish an integrated Project Management Unit (PMU) which would combine into one unit the current SSEIrA Bureau at the CCIB and the APEX project management unit located at the Central Bank. The new unit would be headed by an experienced senior banking official, to be recruited. The head of the new unit would be relatively autonomous, but administratively would report to the Central Bank Governor. The objective is to establish his authority and credibility vis-&-vis his colleagues in the banking system and avoid a repetition of the unsatisfactory experience under APEX. The PMU activities would be governed by a Management Agreement to be signed, as a condition of disbursement, between the Central Bank and the Government. The Government would provide offices and the Central Bank the necessary administrative and accounting logistics for the PMU, which would be autonomous, with own staff, operating policies and procedures. 2. In addition to staff inherited from the CCIB unit, the staff of the PMU would consist of a qualified, senior level, project analyst who would be the subproject appraisal and subloan administration section chief, and an accountant/financial analyst. The newly reorganized Enterprise Technical Assistance section would build from the existing CCIB unit and keep the same local and expatriate staff. The TA section would be headed by a qualified and experienced Burundi engineer or entrepreneur to be recruited as counterpart to the expatriate engineer. 3. The PMU would receive a spread cf at least one percent p.a. on the outstanding amount of IDA financed subloans to cover its administrative expenses. As this spread might not be fully sufficient to cover the expenses during the first two to three years of project implementation, as has been the experience in other Bank financed similar projects, including the ongoing SSE/APEX project, this spread would be reviewed periodically. The revision would take into account the pace of commitments and disbursements and the evolution of the volume of subloans outstanding, which tends to be small. Agreement will be sought to ensure proper funding of the unit by BRB and Government at all times. 4. The functions of the PMU would be as follows: (a) ensure adherence of participating intermediaries to established procedures in selecting eligible subprojects, and ensure application of appropriate standards for subloan appraisals, including appropriate environmental impact tests to individual subprojects; (b) review the eligibility and authorize financing under the line of credit for subprojects submitted by participating intermediaries. For subprojects costing US$350,("0 equivalent or less, the PMU would only insure that the requests meet the eligibility criteria and would give its approval within five working days from submission. For subprojects costing US$350,000 or more, the PMU would review, within a maximum period of ten working days, the requests in more detail, would give its comments on the quality of the appraisal to the participating intermediary and would ensure that the eligibility and financing criteria are met; A~&ANo Page 2 of 4 (c) ensure adherence by sub-borrowers and PFIs to Bank's Procurement Guidelines, including application of inrternational competitive bidding ([CB) procedures for contr, as of more than US$750,000 and prior Bank review of procurement decisions for contracts of US$1,000,000 or more. (d) ensure proper screening of subprojects likely to pose environmentally hazardous pollution problems, through applications of environmental assessment tests to be developed in agreement with IDA. (e) administer the Project Special Account, and ensure proper disbursements of all fimds allocated for subloans and technical assistance, and supervise and centralize the collection and forwarding of supporting documentation; (f) supervise the participating intermediaries' compliance with the various obligations under the projec,; (g) supervise, on a sample basis, subprojects; and (h) ensure liaison between IDA, the participating intermediaries and other donors on matters related to subprojects: (i) provide guidance to potential beneficiaries for the preparation of subprojects to be financed under the line of credit; (ii) implement the general private enterprise ar-istance program and manage funds allocated for that purpose, as per the Subsidiary Loan Agreement and Management Agreement between the Government and the Central Bank; (iii) organize the training courses and seminars for banks and Central Bank staff, selected private entrepreneurs, including local consulting firms. 5. The PMU will participate actively in the preparation and conduct of the Mid-Term Review of Project Implementation in October 1993. The PMU will also draft a Project Completion Report (PCR), the content and format of which to be agreed with PIoA, within six months after the project closing date of December 31, 1997. Staffinla 6. The PMU will consist of the following staff: LO Sff 1 Director to be recruited 2 credit analysts from BRB 1 financial analyst CCIB/APEX 1 engineer/computer analyst to be reeruited I technical engineer CCIB 1 executive secretary CCIB I secretarial assistant to be recruiti 2 clerical assistants CCIB ANNEL-N 4N.1 Page 3 of 4 1 driver to be recruited I messenger CCIB 2 security guards CCIB Eatrir Staff 1 economist/financial analyst CCOMAPBX 1 maintenance engineer I management specialist OCD/ace Coqs I financial analyst 4uinment 2 vehicles to be purchased 1 maintenance/repair kit 2 micro-computers Audio-visual training equipment Blue print drafting equipment restimated ggeratLno Costs* andI Finanoing (FBu 1,000) Before After Incromental Protcgt s Soiet U. G21tOL CCIB/M-_S^SE Director 4,000 21,600 17,600 Professionals 4,200 42,000 37,800 other Personnel 3.400 5?200 __2Q0 Subtotal $1.600 22R 616200 Other Operating Charges 10,000 24,000 14,000 Total .CCID/TA-SSE 9,60 36,800 75,20o BEDiroiect UnLt Dlrector 5,900 (5,900) ProfessLonals 500 - fiukto2t^1 R8 11.800 6.0 5.2900) TOTAL (Integrated PHU) 33,400 102,700 69,300 inammmin mmian:m mmmm US$ Equlvalent US$167,000 US$513,500 US$346,500 minaftin inuummm wasnua nmms I, Through December 31, 1994 2I Through December 31, 1997 AMN No 4.1 Page 4 of 4 zLnancina Plan (USs) Goverrunent 50,000 BRB 58,500 IDA Cr. 1889-BU 105,000 IDA PSD Credit 300,000 )80% 513,500 n--r-u-x Page 1 of 2 BEuw OF DRUMD PREEMT SECTR ME BELOPMAT E?LQJT ESTIMATED COST OF TECHNICAL ASSISTANCE COMPONENT (USs.000) A. Project Management Unit (PMU) Operating Costs 300.0 , 300.0 Enterprise Consulting 100.0 240.0 340.0 Vehicle/Equipment -40 Q Total Project Management Unit Q n 60 B. Legal Assistance Program (i) Legal Mfnms (SCEP) Phase I Consultant Services 53.0 150.0 203.0 Fellowships - 20.0 20.0 Seminars 10.0 - 10.0 Equipment and Supplies - 10.0 10.0 Contingencies - J1 Subtotal Phase I 6.1LQ PhaseL1 Consultant Services 72.0 160.0 232.0 Fellowships - 10.0 10.0 Seminars 10.0 - 10.0 Supplies - 5.0 5.0 Contingencies -1 Subtotal Phase BI 85 6 Total Legal Reforms* (ii) Tribund f Comme (Ministry of Justice) Consultant Services - 60.0 60.0 Training Fellowships - 30.0 30.0 Office Equipment/lPCs 30.0 40.0 70.0 Vehicle Z- -2%LD ZQLQ Total Tribunal of Commerce* nu ANE No. 4.2 Page 2 of 2 LNFocalgp Total C. Policy Coordinating Unit (Ministry of Commerce and Industry) Operating Costs 50.0 - 50.0 Consultant Services, Training 200.0 150.0 350.0 Office Equipment/Vehicles 50.0 50.0 Total Policy Coordinating Unit* 25 20 D. Financial Secr (BRB/Banks) Consultant Services - 1,300.0 1,300.0 Training (Banks/BRB) 300.0 300.0 Computer Hardware (PCs) - 350.0 350.0 Office Equipment and Telephone - 80.0 80.0 Velicles - 3 Total Financial Sector - 20601 2.060.00 E. Ministr gf Enagy and Mininz Consultant Services* - _0Q GRAND TOTAL TECHNICAL ASSISTANCE 3,465.0 4,20S * Includes advance funding under the PPF. Annex a Page I of 2 BURUNDI: PRIVATE SE= DEVELOMNT PRJE1 Sites and Serims - Estimated Investment Costs (US S) 1. Roads and Drainage System Paved Primary Road (2 knm) $ 850,000.00 Unpaved Secondary Roads (4.2 km) 945.000.00 Su1btotal (1) S 1a22~aQ~1Q4~Q 2. Electic Power & Water Distribution Water distribution (6.2 km) S 372,000.00 Electric Power Transmission - Medium voltage (3.6 km) $ 180,000.00 - Low voltage (2.6 km) 105,000.00 - Transformers (3) 210,000.00 - Public Lighting LOAD Subta (2) S 242Q,00-oo 3. Sewage Connections S 225,000.00 4. Vehicle and Office Equipment $ 50,000.00 5. Control and Work Supervision (5%) S 145.00,0 lst S 3,16200 6. Physical Contingencies (15%) S 473,000.00 7. Price Contingencies (8%) S 265,000.00 otal Cost S 3.900.000.00 Estimatirect Cost Recovery (including contingencies) Secondary Unpaved Roads (100%) 1,162,350.00 Water Distribution (100%) 457,560.00 Electric Power Transmission (100%) 707,250.00 Sewage Connections (100%) 276,750.00 Control and Supervision (100%) 178,350.00 Total Direct Cost Recovered (71.3%) $ Estimated Development Costlm2 $ 13.00/m2 Estimated Direct Cost Recovered $ 9.27/m2 Page 2 of 2 BURUNDI- PRIVATE SECTOR DEVELOPMENT PROJECT Sites and evim Compnent: al Ing j=jI g 1. Ihe borrower shall appoint a Special Commission to oversee the program of construction and marketing of developed plots in the sites and services areas developed with funding from the IDA credit for the development of the private sector in Burundi. 2. The Government will draft and sign a decree, satisfactory to the Association, empowering the Commission to set transparent and fair rules and criteria, also satisfactory to the Association, setting forth terms and conditions of sale and marketing of the developed plots to both local and foreign private industrial promoters. The determination of the selling prices to be applied by the Commission shall ensure maximum direct cost recovery (excluding investment in the primary paved road), and take into account fair and free market based land prices. Should demand for the developed plots exceed supply, the Commission shall consider an auction system of sales based on the same market principles. 3. The Commission shall include representatives of the private sector through both the Chamber of Commerce and Industry, and the various industrial trade associations including participating financial intermediaries (PFIs), the director of the Prqc,t Management Unit of the PSD project, National Investment Commission, the directors of Urban Development and Housing, REGIDESO, etc.,. 4. In order to take full advantage of the availability of developed plots, and make them easily accessible to private project promoters, there is an urgent need to simplify and accelerate investment project approvals and implementation. To achieve this objective, the Commission will also be mandated by the Government to undertake a detailed review and propose simplification, coordinate and implement measures concerning administrative, legal and regulatory procedures governing, inter alia, (i) the process of land acquisition through sale, lease or permits, including titling and registration procedures through the Directorate General of Urban Development and Housing, and the Directorate of Notary Public and Deeds in particular; (ii) the obtention of building construction permits and clearances, including permits from Directorates of Roads, Energy and Water Supply, public utility companies such as REGIDESO and ONATEL for power, water and telecommunication connections, and municipal authorities as required; (iii) the cleaance and approval of investment projects by the National Investment Commission as the case may require; and (iv) the process of registering and clearing real estate guaranties and other collateral required by participating financial intermediaries under the IDA financed project. 5. The Commission shall also undertake a complementary review of lending and guaranty procedures applied by PFIs to private investment borrower with a view to their voluntary simplification and acceleration. The Commission will utilize to that effect the finding of an ongoing study of bank and financial institutions"lending and guaranty procedures under the Public Enterprise Reform and Economic Management project (cr.1795-BU) by the Public Enterprise Reform Office (SCEP). Page I of 2 B-URUNDI: PIUYATE SECTOR KkLDMMPROEC SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE 1. Rport d'Evaluation Projet d'Evacuation des Eaux Us&es de Ia Vile de Bujumbura. African Development Fund Appraisal of a Waste Water Disposal System in Bujumbura. Report dated Nov. 20, 1990. 2. Notes on the Evaluation of the Bujumbura Sites and Services Component. Ministry of Public Works and Urban Development. 3. EPyiate Secr Development in the Industrial Sector of Eurund|. Report No. 9422-Bu, dated February 10, 1992. 4. private Secor Ievelop t in Agrdicu. Report No. 9686-1u, dated September 16, 1991. 5. Draft Letters of Pinancial and Private Sector Development Policies. 6. Rgform of Monetar Policy Instruments in Burundi. IMF/CBD, Technical Assistance Report dated November 22, 1989. 7. M IMFICBD, Report dated January 27, 1992. 8. A Review of the Exchange Arrangement nd Exchange SystM of Burundi. Technical Assistance Mission Report- IMF/EIT Department, September 1991. 9. The Regulatory Framework for the Private Sector in Burundi. Evaluation of Measures taken under SAC-H and proposed under SAC-HI/PSD. Consultant report by Ms. L. C. Philips. 10. Projet de Rdforme du Droit des Affaires au Bumndi. Draft Project Document by Service Charge des Entreprises Publiqties. Premier Ministhre. 11. Proposed Revision of Burundi's Investment Policies and Code (May 17-24, 1991). Back-to-Office Report by Robb E. Smith, (CEIFI) 12. . Simplification des Proc6dures au Burundi. July, 1990, Consultant report by Nguyen Tu Son (DFC Consultant). 13. &uMndi Mlning Sector Review (AF31E, Desk Report) dated May 31, 1991. 14. Terms of Reference of Technical Assistance Component. ANNEX 4A4 Page 2 of 2 15. Pipeline of Private Investment Project In Burundi. 16. Draft Participating Agreement between BRB and PFI, including Appraisal and Supervision Procedures. PRIVATE SECTOR _OPMEN AND E_OR EROM PROJECT Sch_edule of Disbursement (Cumulative US$.OO0) Sites & IDA Fiscal Year Credit TA Services and Ouarter Ending Qagpoaenlt * m. Comn Tota FY93 December 31, 1992 300 300 March 31, 1993 700 700 June 30, 1993 - 1,000 1,000 FY_94 September 30, 1993 500 400 1,400 2,300 December 31, 1993 800 600 2,000 3,400 March 31, 1994 1,400 1,000 3,500 5,900 June 30, 1994 2,100 1,200 - 6,800 FY95 September 30, 1994 2,800 1,600 - 7,900 December 31, 1994 3,500 1,800 - 8,800 March 31, 1995 4,200 2,000 - 9,700 June 30, 1995 4,800 2,200 - 10,500 September 30, 1995 5,400 2,400 - 11,300 December 31, 1995 5,800 2,500 11,800 March 31, 1996 6,400 - - 12,400 June 30, 1996 7,000 - 13,000 FY97 September 30, 1996 7,500 - 13,500 December 31, 1996 8,000 - 14,000 March 31, 1997 8,800 - 14,800 June 30, 1997 9,500 - 15,500 EX2U September 30, 1997 10,300 - 16,300 December 31, 1997 11,000 - 17,000 *Including PPF financing Bank Supervision into Key Activities Approximate Dates Activity Expeged Skills (SV) May 1992 Supervision Mission - (a) finalization of project implementing arrangements, Operations Officer (2) schedules, staffing and consultancy requests for PMU and PCU; (b) preparation of bidding documents for sites and services; (c) launching Consultant (2) technical assistance for Tribunal of Commerce; (d) follow up co-financing of T.A. components by other donors; (e) follow up on conditions of effectiveness and disbursements. August 1992 Supervision Mission - (a) follow up on conditions of effectiveness andlor Operations Officer (2) disbursement, and project implementation; (b) first review of progress in regulatory reforms for enterprises, in financial sector reforms and legal studies Financial Sector and reforms; (c) review the Central Bank's supervision overhaul plans and Specialist (2) implementation of s rch plans; (d) T.A. for Tribunal of Commerce; (e) organization training i procurement. December 1992 Supervision Mission - (a) Assessment of PMU and PCU functioning, Operations Officer (2) preparation of reporting and auditing arrangements; (b) selection criteria for environmental impact tests of subprojects and review of environmental Financial Sector regulations; (c) review of Central Bank and PFI plans to strengthen the Specialist (2) capacity for economic, monetary and credit analysis, and for implementation of such plans; (d) installation of a special commission for marketing sites and Ecologist) services plot. Environmentalist (1) February 1993 Supervision Mission - Review progress (a) in implementation of air transport Operations Officer (2) regulations and privatization of Air Burundi; (b) in implementation of legal reforms and studies; (c) assessment of expatriate consultant requirements for Lawyer (2) PMU and PCU (d) assessment of demand under the credit and sites and services components; (e) review of progress under other T.A. subcomponents IMF/CBD (2) x and donors'contributions and plans. May 1993 Sunervision Mission - Preparation of detailed terms of reference, staffing and Operations Officer (2) schedule of execution of Mid-Term Review of project implementation. Regulatory Economist Review of project implementation. (2) Financial Sector Specialist (2) October 1993 Joint Bank/Government Mid-Term Review of Progress in Project Operations Officer (2) Implementation Regulat. Economist (2) Financial Sector Specialist (2) Disbursement (1) Febr'ary 1994 Supervision Mission - Presentation and review of issues, conclusions and Operations Officer (2) recommendations of Mid-Term Review. Preparation of follow-up action plan Lawyer (1) and implementing calendar. Regulatory Economist (2) Consultant (2) May 1994 Supervisi onMission - Follow up of Mid-Term Review actioir plan-and revisedf Operations Officer (2) policy matrix. Review of progress in project implementation and other reforms and studies. Industrial/Regul- tory Economist (2) September 1994 Supervision Mission - Review of progress in project implementation and of Operations Officer (2) outstanding issues. March 1995 Supervision Mission - Review of progress in project implementation. Operations Officer (2) Consultant (2) October 1995 Supervision Mssion - (as above) Operations Officer (2) l . _ . . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~b D: Supervision Mission - (as above) Operations Officer (2) October 1996 Supervision Mission - PCR preparation IBRD 2360 BU RUN DI PRIVATE SECTOR DEVELOPMENT PROJECT BUJUMBURA INDUSTRIAL SITES & SERVICES PROJECT AREA / ALLOCATED INDUSTRIAL ZONE*" / EXISTING INDUSTRIAL ZONE/ / SITE AND SERVICE AREA F- " UPGRADING NEIGHBORHOODS ///////////,URBANIZED AREAS ' 7 ~-'RIVERS - -INTERNATIONAL BOUNDARIES ~I, .1 41'/\ I / / -(~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4., I D bl(Ff PIAIGAA/lAA 0 Y, A Y.~ ~ ~ ~ ~~~'7 1///; RWANDA ZAIRE UU /,,,. on h £ snap~~exci,, dY fot l, onthe TANZANIA 1 A ,porH of The World Bank Group, / /11 021'~~~~~~~~~~~~n judrsnen on the legal stw yterritory 0, 0ny. enod merrnet or acceptonce of tbudresMARCH 1992