Document of The WorldBank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 3343-BU

BURUNDI

STAFF APPRAISAL REPORT Public Disclosure Authorized OF

A PILOT PROJECT TO ASSIST

THE LOCAL INDUSTRY Public Disclosure Authorized

March 25, 1982

Public Disclosure Authorized Eastern Africa Projects Department Industrial Development and Finance Division

This document has a restricted distribution and may be used by recipients only in the performance oet their official duties. Its contents may not otherwise be disclosed without Worid Bank authorization. CURRENCY EQUIVALENTS

Currency Unit Francs (BuF) US$1.00 = BuF90 US$0.0111 BuFl BuFl million US$11,111

WEIGHTS AND MEASURES (metric system)

1 cubic meter 35.31 cubic feet (cu ft) 1 meter (m) 2 39.37 inches (in) or 3.28 feet (ft) 1 square meter (m ) = 10.9 square feet (sq ft) 1 kilometer (km) 0.62 milrs (mi) 1 hectare (ha) 10,000 m or 2.471 acres 1 kilogram (kg) 2.2 pounds (lbs) 1 metric ton = 1,000 kgs or 2,204 pounds

GLOSSARY OF ABBREVIATIONS

BANCOBU - Banque Commerciale de BCB - Banque de Credit de Bujumbura BNDE - Banque Nationale pour le Developpement Economique (Development Bank) BRB - Banque de la Republique du Burundi (Central Bank) CADEBU - Caisse d'Epargne du Burundi (Savings Bank) CAMOFI - Caisse Centrale de Mobilisation et de Financement (National Bank for Savings and Investments) DETN - Direction des Etudes et Travaux Neufs (New Works Directorate) EDF - European Development Fund EEC - European Economic Community EIB - European Investment Bank ENACCI - Entreprise Nationale de Chaux et de Ciment IDA - International Development Association ILO - International Labor Organization MTPEM - Ministere des Travaux Publics, de l'Energie et des Mines (Ministry of Public Works, Energy and Mining) OCIBU - Office des Cultures Industrielles du Burundi ONABOIS - Office National du Bois ONIMAC - Office National d'Importation et de Commercialisation des Materiaux de Construction et d'Equipement Domesti- que (National Office for the Import and Marketing of Construction Materials and Domestic Equipment) ONL - Office National du Logement (National Housing Office) REGIDESO - ("Regie des Eaux") National Water and Electricity Authority FOR OFFICIAL USE ONLY

SOMIBUROM - Societe Mixte Miniere et Industrielle Burundo - Roumaine (Burundo-Rumanian Mining & Industrial Company) SIP - Societe Immobiliere Publique (Public Housing Corporation) SSE - Small Scale Enterprises g UNCDF - United Nations Capital Development Fund UNDP - United Nations Development Programme UNIDO - United Nations Industrial Development Organization UPRONA - Union pour le Progres National (Union for National Progress)

GOVERNMENT OF BURUNDI

January 1 - December 31

This documenthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without authorization. I

f0

I

tr BURUNDI

APPRAISAL OF A PILOT PROJECT TO ASSIST

THE LOCAL CONSTRUCTION INDUSTRY *~~~~~~~~~~~~~~~~~~~~~~~~~~

Table of Contents

Page No.

I. INTRODUCTION ...... - ...... 1

II. THE LOCAL CONSTRUCTION INDUSTRY ...... - 2

A. Construction Activities. 2 B. Construction Materials. 8 C. The Financial Framework of the Construction Industry. 13

III. THE PROJECT ...... 17

A. Background and Objectives ...... 17 B. Detailed Features ...... 19 C. Terms and Conditions Specific to the Credit Component .23 D. Project Cost ...... 24 E. Financing Plan .26 F. Project Management and Implementation 28

IV. PROJECT JUSTIFICATION .32

A. General Justification and Project Benefits 32 B. Benefits from Specifie Project Components 33 C. Risks Associated with the Project .35

V. RECOMMENDATIONS AND CREDIT CONDITIONS.36

This report was prepared by Messrs. Philippe Beuzelin, Michel Cramer, Ms. Fatoumata Sylla, Mrs. Fernande Lancksweirt (Consultant) on the basis of an appraisal mission which visited Burundi in September 1980. List of Annexes

Page No.

1. Selected Major InvestmentProjects to be Implementedin 1981-1984 ...... 39

2. The Main Imported ConstructionMaterials in Burundi (1977-1979)...... 40

3. The Production of Local ConstructionMaterials (1979) ...... 41

4. Staffing of the Project Unit ...... 42

5. Selected Documents and Data Available in the Project File ... 43 BURUNDI STAFF APPRAISAL REPORT OR A PILOT PROJECT TO ASSIST THE LOCAL CONSTRUCTION INDUSTRY

I. INTRODUCTION

Project Background

1.01 The proposed project is the first systematic effort by the Bank to assist in the development of the local construction industry in a country of the Eastern Africa Region. The idea of providing assistance to the sector was prompted by a growing recognition by the Bank of the significance of the construction industry in the development process. Furthermore, the implemen- tation of Bank-financed projects have, in many instances, been hindered by weaknesses of the industry. Typically, this occurred on projects involving construction works not large enough to be of interest to the large construc- tion enterprises and which small local firms were not technically nor finan- cially equipped to carry out.

1.02 Burundi was selected for an initial effort because of the strong iiuterestwhich the Governnent showed toward Bank assistance to the sector and also in view of the acute needs of the local industry: the local construction industry, which is largely foreign-controlled, is overstretched and cannot meet the demand and, furthermore 90%, by value, of the materials used by the formal sector are imported.

1.03 Being experimental in nature, this project does not purport to address itself to all the needs of the construction industry but only to those which have been identified as priority or those where something effective could be done within the framework of a relatively small operation. On that basis the following components have been included in the project: (1) develop- ment and improvement of the local production of construction materials; (2) assistance to the Ministry of Public Works, Energy and Mining; (3) assis- tance to the local enterprises to expand their activities in the building sector where their share is still relatively small; it does not aim at promoting their role in road construction nor maintenance which most of the local firms are not prepared to tackle. - 2 -

II. THE LOCAL CONSTRUCTION INDUSTRY

A. Construction Activities 1/

The Demand for Construction

2.01 Overall Volume of Investment in Burundi. In recent years, the Government has engaged in important efforts to mobilize external aid financing to step up Burundi's investment rate, which had long been one of the lowest in the world, averaging about 7% of GDP in 1960-76. Gross fixed investments have increased in real terms by 47% in 1977, 15% in 1978, 4% in 1979; and reached s BuF11.5 billion in 1980, representing still a moderate share of about 14% of GDP. During 1977-80, 91% of investments were made by the public sector; 57% were financed by external grants and soft-term loans.

2.02 Future investments are mostly constrained by the implementing capa- city and financial condition of the country. Burundi continues to have a low external debt and has secured donors commitments for many multi-years investment programs, particularly for roads, education, power and housing (para. 2.04). Since 1978, however, it has been affected by large trade deficits and increased budgetary constraints, like many other African countries. In the medium term, Burundi may have to call upon some general external financing for balance of payment support, probably accompanied with conditions limiting investments. Although the Planning Ministry has revised downwards the level of the investment program in the 1978-82 Plan, it continues to project an investment growth of 12% per year in real terms through 1984. In view of th- abave. < ie findings of IDA's economic mission in December 1979 also suggest a concinued but more moderate investment growth in a range of 5%-8% per year (Economic Memorandum No. 3071-BU).

2.03 The Demand for Construction Investment. Construction investments which have accounted for a fairly stable proportion of 52% to 60% of total investments in the years 1977-79, would thus be expected to increase from the actual amount of BuF5.5 billion in 1979 to around BuF7-8 billion at 1979 prices in 1984. In 1980, however, the large majority of locally based con- struction enterprises were found to be already working at almost full capacity, and major obstacles, such as shortages on construction materials, were prevent- ing further increase in construction output. Clearly, the capacity of the construction industry is likely to become a serious cause of delays in the implementation of major investment programs, and a significant constraint to economic development in general. The Government needs therefore to promote the rapid development of domestic contractors.

2.04 Structure of the Demand. Based on the investment projections of the Planning Ministry for 1980-1984, it may be estimated that the future demand for construction works will be composed of: 20% for roads, 17% for energy,

1/ Defined to include both buildings and civil work. - 3 -

15% for the rural sector, 13% for education,8% for ,6% for housing, and 21% for investmentsin other sectors. Annex 1 presents the constructioncosts of some 15 major investmentprojects in various sectors, for which preparationis well advanced and financing appears assured; these projects alone require constructionexpenditures of up to BuF3.8 billion per year in 1981/82.

The Producersof Construction

2.05 Following the upsurge of national investment the value of total constructionoutput in constant prices increasedby 96% in 1977 and 20% in 1978, but decreased by 9% in 1979, mostly due to the shortages in construction materials. In 1979, constructionwork still representedonly 4.9% of Burundi's GDP, but accounted for 52% of total investmentsand approximately20% of employmentin the formal sector. Based on the limited data available, the table below provides an estimate of the distributionof the employmentand output value in 1979 among the main producers in the formal sector:

Number of Employees Estimated Share (%) ConstructionProducers in Construction_/ of Output Value 2/

Government,3/ 1 Parastatal (REGIDESO) 6,200 10 National Housing Agency (ONL) 600 3 Private Enterprises: Burundi-Owned 4/ 3,000 13 Foreign-Controlled 7,100 70

ReligiousMissions 1,100 4

Total 18,000 100%

1/ Source: "Statistiquesdu Travail,"UNDP/ILO Project, April 1980.

2/ Main Source: World Bank/UNIDO CooperativeProgram, March 1979 Mission Report.

3/ Excluding the undeterminedproportion of the 15,000 day-laborersemployed by the Ministries of and Defense who are partly involved in constructionwork.

4/ Excluding artisans and owner-builders(para. 2.18). -4-

Government and Parastatals

2.06 The Ministry of Public Works, Energy and Mining (MTPEM) 1/ is the public agency most active in the construction sector. It is composed of a Roads Directorate, a Buildings Directorate and a Directorate for the planning of energy, infrastructure and housing programs. The Roads Directorate executes all maintenance and small new works (below BuF50 million) for roads with its own construction staff including more than 3,000 laborers, and supervises the preparation and the execution of the larger road projects by contractors.

2.07 The Maintenance Department of the Buildings Directorate executes all maintenance for the 1,500 Government buildings and houses with its limited staff including about 7 professionals and 90 skilled workers. The Studies and New Works Department (DETN) of the Buildings Directorate is in charge of policies regarding the construction industry (e.g. contract conditions, cons- truction standards) and generally assists in the preparation and supervision of major Government building works with a staff of about 20 construction technicians including 5 expatriates.

2.08 Other ministries (particularly Agriculture, Army and Education) do some construction work on force account, mostly for building maintenance and generally under MTPEM's supervision, but their joint construction output is notably smaller. However, the Project Implementation Unit (PIU) of IDA's First Education Project, set up in 1977 under the Ministry of Education has undertaken a large construction program for 100 primary schools with its own departmental force including 5 professionals; in 1979, it succeeded in parti- cular in importing cement directly at prices about 30% below local market rates.

2.09 REGIDESO, the parastatal for water and power development, executes all maintenance and some new works in the water sector, and all maintenance and about 25% of new works in the power sector. It is subcontracting all the larger or technically complex new works solely to foreign contractors, as it does not consider the local contractors qualified for them. REGIDESO's staff includes 28 engineers and technicians, 35 skilled workers, and about 1,400 laborers, who are mostly involved in civil works.

2.10 National Housing Agency (ONL) 2/ is a parastatal created in 1974 to complement the small capacity of the private sector in the construction of Government housing. Following poor financial management, it is now being reorganized to become a profitable construction enterprise, with Dutch Aid providing two management staff. The Dutch construction enterprise providing two project managers and an accountant might eventually become a minority shareholder. Aside from Government housing, ONL produces bricks (para. 2.42) and intends to engage in small road maintenance. In 1980, ONL had 15 profes- sional staff and 430 skilled workers.

1/ Ministere des Travaux Publics, de l'Energie et des Mines.

2/ Office National du Logement. Private ConstructionSector

2.11 Foreign Contractors. These contractorsinclude 7 subsidiaries or branches of large foreign companies,mostly Belgian and Italians,and about 10 smaller enterprisesowned and managed by expatriateindividuals. The largest foreign subsidiaryhas in Burundi a total staff of 3,500 and has been producingabout a third of contract value in the formal sector, with a quasi-monopolyin new road construction.

2.12 The remaining6 foreign subsidiarieseach have a total staff of 200 - 1,000 and net fixed assets of BuF20 - 200 million; and may thus be defined as medium-scaleenterprises (MSE). These MSEs generallyhave ade- quate equipmentand qualifiedstaff, with the management and about a third of professionalpositions held by expatriates. They benefit from the parent company-s technicaland commercialassistance, particularly for the direct importationof raw materials in periods of shortages. The foreign subsidiaries generallyhave the monopoly for civil works, technicallycomplex works (e.g., high buildings, new roads, new power plants works) and larger contracts(above BuF300 million); they have little interest and activity in the smaller building and housing constructionworks.

2.13 The about 10 expatriate-ownedfirms are small-scaleenterprises (SSEs), each wîth a staff of 20 to 200 and fixed assets below BuF20 million. These SSEs are very similar to the Burundi-ownedSSEs (para. 2.14), except that they were often created before 1970, and have been operating for a longer time.

2.14 Domestic Contractors. Excluding the ONL and artisans (paras. 2.10 and 2.18), there are about 20 enterpriseswith a Burundianowner-manager: 3 MSEs and about 17 SSEs as defined above, including3 SSEs with only irregular activity. The typicalMSE was founded in 1972-75 by a businessmanwithout constructionbackground who has recruited technicalstaff. It is staffed with 2 engineers/architects,6 technicians/foremen,1 accountantand 300 skilled workers; equipped with 4 tippers, 1 heavy truck, 6 light vehicles, 5 mixers and 3 welding machines; and does contracts of BuF5 - 200 million. About 20% of its technical staff (engineers,technicians) are expatriates. The typical SSE was founded in 1978-80 by an experiencedconstruction techni- cian. Its staff includes 4 foremen, 50 skilled workers, and no engineersand accountants;it is equipped with 1 tipper, 1 truck, 2 light vehicles, 1 mixer and 1 welding machine; and does contracts of BuFO.5 - 25 million.

2.15 These domestic enterprisesmostly work on Governmentbuildings and housing, and, in the case of SSEs, some high-incomeprivate housing. They are generally underequippedand labor-intensive. These enterprisesgenerally have a weak liquiditysituation, but are profitableand resisted well the constructionmaterial shortages in 1979. They have a low indebtedness,with a debt/equityratio generally below 0.4:1, suggestinga strong borrowing capacity. -6-

2.16 Constraints to the Development of Domestic Contractors. Domestic enterprises interviewed cite as major problems lack of finance and shortages of construction materials. Commercial banks mainly provide performance bonds and guarantees for advance payments, as required from contractors for Govern- ment contracts (para. 2.23). They also provide short-term credit against bills certified by the Government, and occasionally loans of up to 3 years for vehicle purchases. However, they tend to limit these credit/guarantee facilities and require a security coverage of more than 100%, generally through mortgages on real estate (and not on vehicles and other equipment). Most contractors having totally mortgaged their real estate assets, mainly rely on their cash-flow for pre-financing new contracts and renewing/expanding equipment and working capital, and this restricts their growth. t

2.17 Although availability of construction materials has improved since the acute cement shortage in 1979 (para. 2.28), local contractors continue to suffer from intermittent shortages of various materials in addition to cement: reinforcing steel, timber, and several hardware items with a small demand, which are not kept in stock by importers. These shortages delay contract completion and thus further weaken the cash-flow of local contractors. In addition, contractors report difficulties with Government procurement proce- dures. The general contract conditions based on the Belgian model are complex and sometimes unsuitable for Burundi, while the special conditions prepared for individual contracts often are rudimentary and provide little guidance to contractors.

2.18 Artisans and Self-Construction. In addition to the modern construc- tion sector, there is a large number of self-employed artisans in both urban and rural areas. Actually, most families can only afford traditional houses that they build themselves or with the help of these artisans. Such houses typically have mud-brick walls and a corrugated iron roof, and cost about BuF160,000 each, as compared to BuF2.5 million for a modern house built by the formal construction sector. In Bujumbura, 700 traditional houses have been built per year during 1970-78, as compared to only 25 modern houses per year. In 1978, there were about 2,300 construction artisans and apprentices in Bujumbura, mostly masons, carpenters, brickmakers and metalworkers. These artisans lack tools and their competence is uneven; some 200 of them are expected to receive financial and technical assistance in the framework of the Urban Project approved by IDA in June 1980 (report No. 2850-BU).

Availability of Construction Manpower

2.19 The lack of qualified local manpower is a constraint to growth and a cause of foreign dominance in the construction industry. In addition to a few local civil engineers and architects trained abroad, the yearly average output of graduates from local technical schools during 1975-79 was limited to 13 surveyors and general construction technicians, 12 carpenters and masons, 10 electricians, and about 50 semi-skilled carpenters and masons. Contractors have been hiring some operators and foremen particularly from Zaire and other neighboring countries, but shortages of specialized workers appear more difficult to overcome. Qualified plumbers are reportedly in particularly short supply. - 7 -

2.20 The major thrust of the Second Education Project approved by IDA on January 29, 1980 (Report No. 2659-BU), is to set up two constructionschools which are expected to start graduatingin 1987 some 80 middle-leveltechnicians and 125 skilledworkers per year (including27 plumbers). The total annual output of specializedmanpower would then represent 45% of the projected requirementsof the constructionsector; the remainderwould have to be trained on the job.

RegulatoryFramework

2.21 General regulationsaffecting constructionactivities (e.g. contract- ing, constructionstandards, labor, safety) are mostly based on the original Belgian legislation,partly updated and adapted by several decrees. These regulationsare generally sound but rather complex, and are not systematically publicizedand enforced. Constructionstandards, however, have become obsolete and do not take into account the local constructiontechniques and materials. In practice,foreign contractorsrefer to current European standards for large works, but for small works, contractorsreceive only limited instructionson the special conditionsof Governmentcontracts. Simple general guidelines for small works would need to be drawn up and publicizedamong contractorsand home-builders.

2.22 Procurement. The Governmentprocurement procedure is of particular importance,since about 80% of the total value of constructionwork is produced through Governmentcontracting of private enterprises. This procedure is simple. For every constructionproject, the implementingMinistry has to submit a project proposal file includingthe constructionplans, special contract conditionsand tender form, to an interministerialTender Committee (TC) chaired L.ya representativeof the Finance Ministry and includingrepre- sentativesof MTPEM and the Planning Ministry. Before approval, the TC normally requires a technical review which is generally conductedby MTPEM.

2.23 Locally advertised competitivebidding is required for contractsof more than BuFl million, and internationalcompetitive bidding is decided on a case by case basis. Following a review of bids by a technicalcommittee including staff of MTPEM, the TC selects a contractor;among recent contracts, the lowest bidder was rejected in only 20% of the cases, mostly for lack of technicalreferences. Until now, the Governmenthas not felt the need for a price preference for local contractors,presumably because large foreign contractorsconcentrate on large and technicallycomplex works, where they are irreplaceable. Foreign contractorsrequire on average 50% of payments in foreign exchange. The Government uses fixed-pricecontracts for small jobs, and, for large works, admeasurementcontracts where most of the activities are paid according to unit rates and actual quantities. The Governnent normally requires performancebonds of 10-20% of contracts, retentionmoney of 5-10%, and bank guarantees for the advance payments which have been limited to 15% of contracts since 1980. The supervisionof contracts is generally entrusted to MTPEM's staff who regularlyvisits the work sites and certifiesthe contractors bills for disbursements. - 8 -

2.24 The overall procurement procedure is generally sound but not rigorously applied. The major shortcomings are: (i) special contract con- ditions which are often scanty or incomplete, due to insufficient technical project preparation; (ii) the absence of a classification of contractors leading to inefficiencies in contractor selection; and, (iii) the shortage of qualified staff for contract supervision.

2.25 In summary, although the construction production sector achieved a remarkable increase in output in 1977/78, it may have reached its limits and it will have increasing difficulties to meet the growth of the demand due to major general constraints: (i) the irregular supply of construction materials (para. 2.31); (ii) the lack of financing for contractors (para. 2.16); and (iii) the shortage of qualified manpower (para. 2.19). In addition, the regulatory framework and procurement procedure need to be updated and more rigorously enforced.

B. Construction Materials

2.26 The production of local materials has been neglected in the past; therefore Burundi has to rely heavily on imported construction materials. Ninety percent by value of the materials used by the formal sector (specializ- ing in the construction of high-grade housing and public works) is imported. In the informal sector which accounts for about 5% of building activities in the country, the proportion is about 40% and consists mainly of corrugated galvanized sheet, cement and hardware. In 1979, the imported construction materials amounted to 36,000 tons with a total value of BuFl.2 billion. This represented 25% of the country-s imports in volume and 9% in value.

2.27 The construction material market in Burundi is generally character- ized by high irregularities in supply, sharp variations in prices, and periodic shortages of such basic materials as cement and reinforcing steel. During the last 2 years (1978-80), these constraints have become more acute with the rapid development of the country-s overall investments, particularly in the housing, power and road sectors. Because of cement shortages, only two-third of investments projected for 1979 in the 1978-82 five-year plan were realized, thus causing a decline of over 6% in real terms in the value added of the construction sector.

Imported Materials 1/

2.28 Cement, galvanized sheet and reinforcing rods for concrete are the three main materials used in construction. In 1979 they alone accounted for

1/ Burundi's main sources of supply are the EEC countries, the People's Republic of , Zaire and Tanzania. In 1979/80 the latter two major African suppliers furnished more than 60% of Burundi's imports from Africa and 30% of its total imports. - 9 -

88% of the volume of constructionmaterial imports and for 62% of their CIF value, Cement is the primary material used in the constructionsector, accounting for over 74% (27,000 tons) of total constructionmaterial imports by volume in 1979 and 32% (BuF381million) of theîr CIF value. However, the consumptionof cement in 1979 remained below the projectionsof the 1978-82 five-yearplan (30,000 tons). This discrepancywas due to import difficulties (para. 2.31). The same remark applies to the consumptionof reinforcing steel, which fell from 3,500 tons in 1978 to 995 tons in 1979. However, consumptionof galvanized sheet rose by 53% from 2,194 tons in 1978 to 4,100 tons in 1979. This latter material is mostly used in the informal sector for low-incomehousing.

2.29 Mainly because of shortages,prices of imported construction materials are subject to wide variations. For instance price of cement in 1979 fluctuated between BuF16,000per ton and BuF36,000.

2.30 In the coming years, consideringthe stagnation in the purchasing power of the population and the foreseen increase in the price of galvanized sheet due to high cost in transport,the annual demand for this material is expected to remain stable at the 1979 level of about 4,000 tons. On the contrary,the consumptionof cement in the formal sector, where 70-80% of the imported cement is used, is expected to more than triple, increasingfrom 27,000 tons in 1979 to about 88,000 tons in 1985. Therefore,given the large demand for cement, its great impact on the developmentof the sector, and its high selling price, a promotion policy in favor of local materials should fo.iuson those that are likely to partiallyreplace the use of cement.

Import Difficulties

2.31 Because it is land-lockedand suffers from poorly organized trans- port facilities (congestionin ports of Dar es Salaam and Mombasa, difficult rail links, hazardous roads) Burundi obtains its constructionmaterials under the most adverse conditions,involving merchandize losses, excessivefreight costs and delivery times ranging from seven months to a year. This irregularity in supply results in disorganizedconstruction sites and excessivelyhigh operatingcosts, while also making it difficult for contractorsto complete jobs on schedule. Moreover, in 1978/79, because of the political/military conflict in the countriesof transit (Tanzaniaand ) supply problems worsened, resultingin hikes of more than 25% in the prices of materials.

2.32 Besides the shortage of basic materials, the lack of secondary materials (such as sanitary and electrical equipment,hardware, faucets and fittings,pipes) also hampers the progress of constructionprojects. In the face of all these constraintsprivate local Burundian 1/ and foreign 2/ importersand the National Office for Trade (ONC), a public parastatal

1/ Such as Impex, Socimex.

2/ Such as Utema-Travhydro(a Belgian subsidiary);Hatton and Cokson (a subsidiary of the Unilever group). - 10 - company importing a wide variety of goods, do not ensure a regular supply of imported constructionmaterials. ONC and the private Burundian importers lack managementcapabilities, particularly in inventory control. This results in stocks being continuouslyexhausted and those who do have supplies tend to hold them from the market in order to create speculativeprice increases.

ONIMAC 1/

2.33 To alleviate the problems caused by such variations in price levels and import volumes, and in an effort to rationalizethe country's supply of constructionmaterials, the Governmentdecided to set up ONIMAC which was created as a public parastatal company, specificallyresponsible for the import of constructionmaterials. It was created in October 1978 with a capital of BuF12.5 million, subsequentlyincreased to BuF17.5 million in 1980. The purpose of this new agency placed under the responsibilityof the Minister of Trade and Industry is to ensure the availabilityof imported construction materials in the country and therefore regularizeat more normal levels the price of these goods.

2.34 The management of ONIMAC intends to concentrateits activities on importing high prioritymaterials such as cement, reinforcing steel, pipes and tubes, corrugated sheets.

2.35 ONIMAC has an importantrole to play in regulating the influx of constructionmaterials in the country and in stabilizingthe pricing of these goods. As mentioned earlier (para. 2.32) the private importerswhich presently enjoy an oligopolisticsituation do not ensure an adequate supply of construc- tion materials in the country and tend to speculate on their prices.

Local Materials

2.36 Locally produced constructionmaterials include: bricks, lime and tiles. These could replace some of the cement and galvanized iron sheet in construction. A number of other natural resources, such as sand, stone, gravel, wood, bamboo, are also currentlyused in construction.

2.37 Lime and Pozzolanic Cement. Fifty years ago the use of lime in Burundi declined sharply when Portland cement became the preferredmaterial. During 1950-65 Burundi was regularly supplied with cement from a plant located in Bujumbura, which was producingcement from imported clinker from Kalemie, (Zaire). As cement was easy to use, compared to lime, it rapidly replaced it

1/ Office National d'Importationet de Commercialisationdes Materiaux de Constructionet d'EquipementDomestique (NationalOffice for the Import and Marketing of ConstructionMaterials and Domestic Equipment). - hl -

in construction. But since 1966, wîth the closing down of the cement factory because of flooding,Burundi started to import cement. In 1979, it imported 27,000 tons of cement at an average CIF price of about BuF14,000 per ton.

2.38 In view of the present problems regarding the supply and cost of cement and because Burundi has large deposits of limestone (400 million tons), the Ministry of Trade and Industry decided to expand domestic lime production. SOMIBUROM,a public company formed in 1978, has been assigned the geological explorationand the developmentof the country'smajor lime deposits. 1/ In 1979, 480 tons of lime were produced in the Southern part of Burundi by six privately-ownedsmall limekilns. These limekilnsare inefficient,underequipped, and are facing shortagesof fuel wood. UNIDO in conjunctionwith the United Nations Capital DevelopmentFund (UNCDF) has introduceda program (for 1980/81) to build three limekilns. One of these, with an annual production capacity of 1,500 tons, has already been set up, and a second one of 2,500 tons is under construction.

2.39 Starting in 1982, at least 4,000 tons should be available. This would still be well below the 15,000 tons which the market could absorb annually. Presentlylime is used only for painting low-incomehouses, although it could have been more widely used in construction2/, in agriculture,textiles, and waste treatment. Moreover, besides these possible uses, lime can be used in the manufacture of pozzolaniccement (lime ani activatedkaolin). Pozzolaniccement, (with a,strengthof 105 kg/cm ) could replace two-thirds of the Portland cement in all types of construction(low-cost and private housi2g, public buildings) except in those where a higher strength than 105 kg/cm is required,such as reinforced concrete in buildings and bridges.

2.40 In order to promote the production of pozzolaniccement, the Governrentdecided to rehabilitatethe former cement plant by setting up in 1977, a new company, the Enterprise Nationalede Chaux et de Ciment (ENACCI). It is currently in the process of modernizingits equipment and plans to install a 10,000 tons capacity limekiln (betweennow and 1982) that will enable it to produce 20,000 tons of pozzolaniccement a year. A decrease in imported cement consumptionin Burundi could be effected if the Government encourageda larger use of lime and pozzolaniccement in all the projects being currentlyimplemented including projects under the financialassistance of IDA 3/, EDF and UNCDF. p __ 2.41 Furthermorea UN mining explorationproject (UNDP/BDI/77/003)has identifieda large deposit of carbonatitein the Matongo-Bandagaarea, which could be used for the domestic manufactureof Portland cement. Feasi- bility studies are under way to assess the financialand economic feasibility

1/ Bubanza, Buganba, Bukemba, Butare, Gihungwe,Kiofi, Makamba, Ngozi.

2/ For instance as lime mortar, or stabilizedsoil for road surfacing. Mixed with sand, it can also be used to make bricks.

3/ Such as the Education and Urban Developmentprojects. - 12 - of this project. However, in view of the characteristics of this deposit wnich is located from 20 to 60 meters underground, the economic and financial viability of this project appears doubtful.

2.42 Bricks. Bricks are produced in most regions of Burundi (Gitega, Giheta, Bukema, etc) by private manufacturers and by ONL. In 1979 production was around 20 million bricks, 5.2 million of which were made by ONL.

2.43 In general, bricks made in Burundi are of uneven sizes and forms and their resistance to compression and erosion is low. Their use in modern construction leads to a larger use of cement as mortar than it would be necessary with bricks of better quality. The low quality of these bricks is due to poor mixing of clay, lack of shelter for storing and protecting bricks during drying, and lack of skill in the building of kilns, so that many bricks are baked insufficiently or too much. Moreover, in Bujumbura, the clay of the quarry being exploited contains 40% of sand, making the bricks made in this area of poorer quality compared to those from Muramvya, Giheta or Gitega. Because of these defects in brick production, wastage is sometimes as high as 30-50%, making production costs high. 1/

2.44 Without going into mechanized methods of production, it would be possible to improve significantly the quality of the bricks, in particular by using some simple equipment for the preparation of the clay. The construc- tion of shelters for storing the bricks before they are baked would prevent them from being damaged by rain. The provision of technical and financial assistance on a modest scale, could contribute to a significant improvement in the production of this basic material leading to its utilization on a larger scale in construction. This would result in savings in cement requirements of at least 2,000 tons/year 2/, (or 7.5% of 1979 cement imports). UNIDO is currently preparing a long-term study for an industrial-scalé brick plant with an annual capacity of 15 million bricks.

2.45 Other Local Materials. Burundi produces also some baked tiles in the areas of Gitega, and has quite large reserves of sand, gravel, pebbles and stone from its rivers, thousands of hectares of bamboo in the south as yet unused and some forests.

2.46 Baked Tiles and Bamboo. Four different types of baked tiles (machine-made, pantiles, flat and round) were widely used in Burundi, but were progressively supplanted by galvanized sheets. Now only a small amount of round tiles is still produced in the Gitega areas. However, a promotion of round tiles (by improving their quality and increasing annual production to 10 million) would make it possible to substitute these for three-quarters of the

1/ The selling price per brick ranges from BuF2-4 in Bujumbura, BuF2-3 in Gitega and BuFl.3-2 in Ngozi, depending on the quality of the bricks.

2/ Substitution of 1 million cement blocks by bricks will result in an annual saving of 2,000 tons of cement. - 13 -

corrugatedsheet presently imported. Experimentshave shown that a combination of eucalyptus,bamboo (providingit is treated against termites)and round tiles makes an excellentroofing material. However, further studies on productionmethods of light tiles, and on the possible uses of bamboo and its treatmentagainst insects are still necessary to enable larger uses of these local materials in construction.

2.47 Lumber. Wood is becoming increasinglyscarce in Burundi since most of the forests have been cleared under populationpressure and for fuel wood. A reforestationcampaign is underway with assistance from EDF, IDA, FAC, , and EIB. The Office National du Bois -- ONABOIS -- (National Forestry Office) was formed in April 1980 to implementthis reforestation policy and to take steps to ensure better handling and maintenance of the remainingnational forestry resources. With a budgetary appropriationof BuFlO million, ONABOIS started its activities in July 1980, and seems to have difficultiesin hiring the necessaryqualified staff. Saw wood totals only 4,000 ha, and is often of mediocre quality. Thus this wood can be only used in constructionfor forms and frames. Some 70-80% of the lumber for modern constructionis currently imported. For low-cost housing most of the framework is made of eucalyptus poles.

2.48 In summary, various efforts are underway to increase the local productionof constructionmaterials with a view toward their replacing imported cement which is costly to the country. These programs include the productionof pozzolanic cement and of lime, the improvementof the quality of the bricks produced and an increase in the volume of production. It is estimatedthat if these programs develop as expected,about 22,000 tons of the 1985 forecast demand for Portland cement could be replaced by domestically producedmaterials. This would result in foreign exchange savings (in 1980 prices) of BuF330 million.

C. The Financial Framework of the ConstructionIndustry

General

2.49 Most major financial institutionsplay some role in the financing of construction: the Central Bank, (BRB), the three commercial banks (BANCOBU, BCB, and Banque Belgo-Africaine),the developmentbank (BNDE), and two special- ized institutions(CAMOFI and CADEBU). BRB issues import licenses for building materials and rediscountscredit; commercial banks and CAMOFI extend short-term credit guarantees;and CADEBU and BNDE mostly extend medium- and long-term credit. In 1979, these institutionsexcluding BRB had total assets of BuFll billion, distributed between: BANCOBU - 29%, BCD - 25%, Banque Belgo-Africaine - 7%, BNDE - 12%, CADEBU - 14% and CAMOFI - 13%. They had credits outstanding totalling BuF8.1 billion. Based on limited data, the share of those credits related to constructionactivities may be estimatedat about BuFl.8 billion or 23%; it was mainly composed of medium- and long-termcredit for public and private housing (60%), and short-termcredit (30%) mostly as advances under large Government contracts. - 14 -

The CommercialBanks

2.50 In 1979, credits outstanding from the three commercialbanks totalled BuF5.3 billion. The share of the constructionsector was estimated at about BuF600 million, of which more than 90% was short-termcredit. In addition, commercialbanks had extended performancebonds and guaranteestotalling more than BuFl billion under contracts. Generally,the commercial banks artz wary of granting medium- to long-term loans, and only do so when assured of BRB refinancing,or the Government'sguarantee. The assistance they provide to constructionenterprises is thus limited to granting of contract performance bonds, guarantees for advances under contracts,and mostly short-termadvances through the discountingof contractor invoices certified by Government agencies.

Banque Nationale de DeveloppementEconomique (BNDE)

2.51 This developmentbank provides medium- and long-term financing to medium- and small-scaleindustries, agriculture, tourism and housing. On March 27, 1978, BNDE was granted a first IDA credit of US$3.4 million equiva- lent, of which US$3 million were for financingof the foreign exchange costs of industrial subprojects,and US$0.4 million for technical assistance (2 experts). After a slow start, BNDE has recently made progress in the imple- mentation of this project and the credit is almost fully committed. BNDE has thus requested a second line of credit from IDA. IDA's mission to BNDE in November 1981 recommendedthat, before a second line of credit be approved, a study of the financial set-up should be done to clarify BNDE's role vis-a-vis other term financing institutions.

2.52 In 1980, BNDE had a total portfolio outstandingof about BuFl.2 billion. The share of the constructionsector amounted to BuF384 million (31%) and was for financing individualprivate housing, and housing programs sponsored by the public real estate agency (SIP).

Caisse d'Epargne du Burundi (CADEBU)

2.53 This savings bank receives deposits from Government agencies (12%), and deposits from private individuals(88%). Most of its lending in the constructionsector is for the financingof houses. In proportion to the size of their savings deposits, CADEBU customersare granted short-term loans for the financingof durable consumer goods, or working capital, or long-term loans for the constructionor improvementof housing and investment projects in the social, agriculturalor craft-industrysectors. Following the intro- duction of savings at source and forced savings in Burundi in 1976/77, the deposits collected by CADEBU have been increasing rapidly to reach about BuFl.5 billion in 1979 and its lending operationshave followed the same trend. In 1979, the total loan portfolio outstandinghad reached BuFl.1 billion, includingabout BuF800 million (70%) for housing construction and improvementloans mostly for urban areas. - 15 -

Caisse Centrale de Mobilisation et de Financement (CAMOFI)

2.54 CAMOFI was set up in January 1979 by the Government with the objec- tive to centralize all non-productive financial resources and re-inject them into the economy through long- and medium-term loans for the financing of development projects. It is to support the other financial institutions in operations on a scale that exceeds their own financing capacity, by participat- ing with them in consortium loans or by refinancing some of their lending operations. The institution's present resources come principally from deposits by the public or quasi-public 1/ sector and mixed-economy corporations and from certificates of deposits taken by the banks in lieu of maintaining their own obligatory minimum cash reserves. CAMOFI may also engage in borrowings in the domestic and external markets.

2.55 As of December 1979, CAMOFI had already collected deposits totalling BuF918 million, and extended a total credit amount of about BuF510 million; of which BuF130 million (25%) went to the construction sector as bridging loans (BuF65 million), prefinancing for 300 dwellings (BuF65 million), and a short- term advance to ONL (BuFl5 million). For the period up to 1982, CAMOFI's objective is to invest BuF2 billion in a series of projects including ware- houses in Bujumbura, new housing for civil servants and expatriate assistance personnel, and construction of new administrative buildings.

Credit Control

2.56 In May 1978, a new credit policy was introduced defining which lending operations by financial institutions would require prior consent from BRB. The present situation is that the total credit made available by the financial institutions as a group to any individual enterprise may not exceed BuF3 million 2/ without the prior authorization from BRB. A global volume of short-term rediscountable credit is fixed for every enterprise. Furthermore, the new policy distinguishes between rediscountable and non-rediscountable credits. The former are granted only for the financing of priority, public contracts and economic investments that yield an adequate return or are socially necessary. For instance, loans made for importing urgently needed construction materials by local contractors or by ONC, and financing made available to SIP for the construction of social housing or Government office premises, would fall into this category. Consent to rediscounting is given only if the financial structure of the enterprise in question is regarded as satisfactory and if the need for financing can be justified. In practice, only major domestic and foreign contractors obtain access to this type of credit.

1/ Savings, social security and insurance entities or SIP, CADEBU, ONIMAC, etc.

2/ Including both rediscountable and non-rediscountable credit. - 16 -

Interest Rates

2.57 The Central Bank sets limits on all interest rates for lending, rediscountingand deposits. Lending rates vary dependingon whether the operationsare rediscountableor not. Following the readjustmentin the structureof interest rate on October 1, 1981 lending rates on non-rediscount- able loans vary between 11% and 15%, according to the nature of the invest- ment. Rediscountablemedium credits are subject to lending rates of 7% to 11%, depending on what priority ranking the investmenthas. The same condi- tions exist with regard to BRB rediscount rates, which vary between 4.5% and 9%. The minimum rates on savings and terms deposits range from 4.5% to 8%.

Inflation

2.58 The rate of price inflationhas been high for several years, aver- aging 22.1% in 1976-78, 25% in 1979 and 15% in 1980-81. In 1979, the main causes of the increased price inflationwere: (a) a growth of 20% in the money supply (as compared to a growth of 2.7% in GDP); (b) the unsatisfied demand for both domestic and imported goods; (c) high transportcosts in the border countries;and (d) imported . Inflationwas one of the major causes of the rise in building material prices, and cost overruns lead to suspensionof work on numerous constructionsites. As the local inflation rate is projected to be in the order of 12% in 1982-84 the current interest rates are slightly negative in real terms despite the recent readjustment. The Bank and IMF are engaged in a dialogue with the Government on the interest structure. A Bank mission visited Burundi in May 1981 to review the financial set-up, including the interest rate structure. Its report is under D:eparation.

Effectivenessof the Financial Set-up for ConstructionFinancing

2.59 Overall, the financialsector in Burundi is relativelydeveloped and even somewhat overcrowdedby the multiplicityof institutionsand Governnent agencies involved in promoting and financing industry. However, most of the financial institutionsare either mainly interested in financing trade or not adapted to efficientlymeet the needs of Burundian constructionenterprises. The general weakness of the constructionindustry dissuadesthe financial institutions,and particularlythe commercialbanks, from taking a more active role in financing that sector. When they do so, they insist on a security coverage which many local contractingfirms are unable to provide (100% of their total medium- and long-termloans). As a consequence,if construction firms in Burundi are to develop further, they will require assistance on flexible terms in financing their equipment and working capital needs. - 17 -

III. THE PROJECT

A. Backgroundand Objectives

3.01 The main bottlenecksthat are constrainingthe developmentof the local constructionindustry include a heavy dependenceon imported construc- tion materials due to the insufficientproduction of local materials (paras 2.26 and 2.27) and obsolete constructionstandards (para. 2.21); the lack of adequate financialand technicalsupport to permit the growth of domestic contractorswho have developmentpotential (para. 2.15 and 2.16); the lack of qualified local manpower (para. 2.19). The project aims at removing some of these obstaclesthrough a number of actions that are distinct but interrelated:

(i) at the sector level, it would: (a) foster the productionof local materials to reduce the historicalhigh dependenceon imports; (b) improve the industry'sefficiency and reduce constructioncosts by adapting to local realities the building code which still requires European standards;and (c) strengthenthe capacitiesof the Ministry of Public Works, Energy and Mining (MTPEM) to supervise the implementationof constructionprojects;

(ii) at the enterpriselevel, it would assist in the development of small and medium-sizedcontractors and also of producersof local materials through provisionof financialand technicalassistance in a coordinatedway.

3.02 The overall responsibilityfor the executionof the project and the coordinationof the various actions includedwould be assumed by a Project Unit within MTPEM. As the project deals with a large number or private entrepreneurs,ministerial departments and parastatals,the Project Unit would be attached directly to the Minister of Public Works, Energy and Mining, to ensure its autonomy and efficiency.

3.03 To meet the objectivesstated in para. 3.01, the project includes the followingmain components:

(i) at the sector level: developmentof the productionof lime and bricks; assessmentof the viabilityof developingother local constructionmaterials, and study of ways and means to improve the availabilityand regularityof imported con- structionmaterials, and stabilize their prices; technical assistanceto MTPEM to improve its capabilityto supervise and administergovernment-financed construction projects, and to update and improve the constructioncode;

(ii) at the enterprise level: fundswould be made available to BNDE under a line of credit approach to finance producers of local constructionmaterials and contractors,with technicalassistance being provided by the Project Unit in coordinationwith BNDE. - 18 -

3.04 Although the actions to be taken under the project are distinct and diverse, it is expected that they will be mutually reinforcing. For instance, a revision of the building code would permit to make greater use of locally produced constructionmaterials while technicaland financial assistance to producerswould assist in expanding the volume and improving the quality of these materials; furthermore,a strengtheningof local contractorsthrough financialand technicalassistance would make them more capable of participat- ing in Government constructionprojects while the training of the staff of the MTPEM would result in a more efficient supervisionof these government- financed projects.

3.05 These project components are summarizedas follows and explained in detail in subsequentparagraphs:

Base Cost % of US$ million Base Cost

1. Develop and improve the production of local constructionmaterials _/ 1.4 29

2. Assist the Ministry of Public Works, Energy and Mining (MTPEM) 0.4 8

3. Assist local constructioncompanies 2.5 52

4. Operate the Project Unit 0.5 il

4.8 100

3.06 This project is experimentaland pilot in the sense that: (i) it does not address all the needs and constraintsof the sector (e.g. it does not aim at assistingenterprises in the roads constructionand maintenancesector, and will only prepare for solutions to improve regularityand availabilityof imported raw materials);and (ii) there are uncertaintiesabout the reactions of beneficiariesduring project implementation,as it is the first attempt at providing coordinated assistance to producers and contractors. It is hoped that, through this project, experiencewill be gained and lessonswill be learnt that permit to prepare a larger project to assist the construction industry in a more integratedfashion. The Project Unit will be responsible for preparing such a project, with IDA's assistance.

1/ This component also includes the preparation of a follow-up project. - 19 -

B. Detailed Features

1. Developmentand Improvementof Local ConstructionMaterials

(a) Constructionof Limekilns

3.07 This componentwould finance the constructionof two limekilnswith a production capacity each of 2,500 tons of lime per annum. These kilns would be located one in the area of Bujumbura and the other in the Southern part of the Country (Mosso area). These locationshave been selected on the basis of their relative proximity to the limestonedeposits, the peat-bogs and the fuel wood.

3.08 It is expected that the kilns would be owned and operated by private contractorswho would receive financial,technical and managerial assistance under the project. The promoters to be selected by the Project Unit on the basis of their technicaland managerial capabilitieswould provide 25% of the investmentcost of the kilns and the balance would be financed by BNDE as subloans from resources to be provided under the project. The Project Unit will prepare and implementa program to promote the use of lime in the con- structionsector in Burundi.

3.09 At present, the limestoneused to produce the lime is picked up by the producers in form of loose stones which are scattered through the countryside. A more intensivedevelopment of lime productionwill require that SOMIBUROM,a company jointly owned by the Burundian and Rumanian Govern- ments, which is responsiblefor the exploitationof Burundi'smineral resources, develop the extractionof limestone in quarries. The company has the technical and managerialcapabilities required to do so.

3.10 SOMIBUROMwhich already has informationon limestonedeposits in Burundi would identify those deposits which would be the most appropriatefor lime production,particularly in the areas of Bujumburaand the Mosso and prepare for the Governmentand IDA-s approval a program of developmentand exploitationof these deposits within a time frame correspondingto the forecast dates of constructionof the limekilns (end of 1982) and their start of operations (middle of 1983). During negotiations,agreement was reachedwith the Government that SOMIBUROMwill supply the limestone required by the kilns, i.e. about 4,500 tons per annum in the Mosso area and 4,500 tons per annum in the area of Bujumburaand this at a price sufficient: (i) to cover at least SOMIBUROM'sdirect costs of productionand an appropriateshare of its management,general and administrativecosts; and (ii) to generate a 12% return before taxes of the value of the assets used for the productionof the limestone, includingprovisions for necessaryworking capital. The sub- mission by SOMIBUROMof a program satisfactoryto IDA and the signing of a subsidiaryagreement between the Government and SOMIBUROMwould be a condi- tion of effectiveness.

3.11 The kilns envisagedunder the project use a combinationof wood and peat as fuel. Under the present conditionsof operation of these kilns, it seems unlikely that the proportion of wood can be much lower than 50%. Each kiln, to produce annually 2,500 tons of lime, will require 1,900 cubic meters of wood per year, which correspondsto the exploitationof 37.5 ha. - 20 -

3.I2 In view of the deforestation problem in Burundi and the increasing shortage of burning wood in the country, the project would include the set- ting-up of plantations of eucalyptus in the vicinity of each of the two pro- posed kilns. As the trees require seven years to grow, seven successive blocks will need to be planted to ensure an adequate supply of wood for the kilns, i.e., a total of 265 ha of eucalyptus for each kiln. The Director of the Water and Forest Administration has indicated that such plantations are quite feasible and that, until the new plantations are ready for exploita- tion, a sufficient amount of fuel wood could be found within a 60 km radius from the kilns.

3.13 In order to ensure in the future a regular supply of fuel wood for the two limekilns, during negotiations, agreement was reached with the Government that the Water and Forest Administration will: (i) plant 37.5 ha of eucalyptus per annum (i.e. 265 ha within a seven-year period) in the areas of Bujumbura and the Mosso; (ii) start such plantation toward the end of 1982; (iii) maintain and exploit these plantations; (iv) reserve the production from these plantations for the limekilns to be financed by the project and to charge them a price covering the full investment, operation and maintenance costs of the plantations. This price will be reviewed annually by the Govern- ment and the Association. Although the Water and Forest Administration's technical and managerial capabilities are presently strained, there should be no problem in view of the relatively small size of the plantations envisaged under the project.

(b) Improvement of Brick Production

3.14 This component would provide financial, technical and managerial assistance to brick manufacturers for the purpose of improving their opera- tions and the quality of bricks produced. This could result in a wider use of bricks in construction work.

3.15 The financial assistance would be geared toward the acquisition of small equipment such as mixers and molds to obtain a better preparation of the bricks, the construction of shelters for the bricks before they are cooked, to avoid their being damaged by rain. The resources to be made available for that purpose will be channelled through BNDE. A limited number of brickmakers are expected to receive loans for that purpose. The managerial assistance would be mainly in the areas of accounting and financial management while the technical assistance would be, for selection of equipment, the exploitation of deposits and the construction of the kilns where the bricks are baked. To that end, two experts, one in bricks and one in management, assisted by Burundian counterparts, will be posted in the Project Unit which will be responsible for implementing the project (para. 3.33). The management expert will also advise the limekiln owners and the construction enterprises.

3.16 The project will provide assistance to improve the technology for producing bricks. However, a major gause of present deficiencies is the use of inadequate soil extracted from the quarry being exploited. In order to improve significantly, in the immediate future, the quality of bricks pro- duced in the area of Bujumbura, it was agreed with the Government during - 21 -

negotiations,that it will make available to the brickmakers,for periods of up to two years, a portion of the quarry of Kamenge, which has been prospected for the establishmentof an industrialbrick plant and found to be of suffi- cient size and satisfactoryquality. To have access to the quarry, the brickmakerswill have to agree to following requirements: (i) produce bricks of a single standardizedformat; (ii) exploit the quarry according to a method which optimizesthe quality of the bricks produced. This method will be determinedby the Project Unit. After the initial two-year period this arrangementwill be reviewed by the Associationand the Government.

(c) FeasibilityStudies and Preparationof Follow-upProject

3.17 This componentwould finance feasibilitystudies with a view toward expanding the production of constructionmaterials, improving the availability and price of imported constructionmaterials and strengtheningthe construc- tion industry. For instance,other constructionmaterials such as timber or bamboo might be utilized more efficiently. Small-scaleproduction of building hardware, and the manufactureof constructiontools better adapted to the needs of the country,might usefully be developed.

3.18 The Project Unit (para. 3.33) will be responsiblefor preparinga list of priority topics for investigationand a program for conducting these studies. This document will specify the objectivesof each individual feasi- bility study, the staffing requirementsin terms of man-months and particular technicalcapabilities of participants,the expected costs, elapsed time, possible consultants. This program, once approved by the local authorities, will be submittedto IDA's approval before any study can be launched.

3.19 Before starting a particular study, the Project Unit will prepare detailed terms of reference and a short list of consultantswhich will be submittedto IDA's approval. If necessary, IDA shall assist in identifying qualified consultants. The contracts to be signed wîth the firms selected to carry out the feasibilitystudies shall be submitted to IDA for its review and concurrence. The above procedurewas discussedand agreed upon with the Governmentduring negotiations.

3.20 Finally, the Project Unit will be responsiblefor the preparationof a project to follow this pilot project that would assist the construction industry in a more comprehensiveand integrated fashion (para. 3.06). To that end, US$220,000 have been allocatedunder the project.

2. TechnicalAssistance to the Ministry of Public Works, Energy and Mining (MTPEM)

3.21 This component would finance technicalassistance to the Studies and New Works Department of the BuildingsDirectorate (DETN) 1/ of MTPEM which generallyacts as the agent of all Governmentbodies to complete tender documents,analyze bids and supervise executionof contracts, except for works under force account by specializedagencies (i.e. the Water Agency). At

1/ Direction des Etudes et Travaux Neufs (DETN). - 22 - present the DETN has to follow up on about 70 contracts (of which 40 are major contracts),with a staff of 20 experiencedtechnicians (including5 expatri- ates). In addition, the basic legal and technical documents and procedures need to be improved. The strengtheningof DETN-s staff and procedures is of particularimportance because: (i) the Government,being the purchaser of more than 90% of all constructioncontract value, has a determinantimpact on the sector; and (ii) the Government technicianssupervising contracts often have a decisive role in directing the work and staff of constructionenter- prises in Burundi.

3.22 It is proposed that the project finance the following two staff to be posted in DETN: (i) a constructionengineer for two years to elaborate a general document specifyingnorms and proceduresfor the use of materials and constructionmethods; to review the tenderingdocuments used by the Government (generaland specific clauses),and set up a system of classifica- tion for constructionenterprises; (ii) a constructiontechnician for two years to provide on-the-job training for the staff of DETN regarding con- structionprocurement and follow-up in the field.

3.23 In order to draw maximum benefits from the advice and training of these experts, and ensure adequate preparationand follow-upof the increasing number of contracts it is important that at all times during the implementa- tion of the project DETN be staffed with adequatelyqualified pesonnel in appropriatenumber. The present staffing of DETN was reviewed during negotia- tions and found satisfactory. It was also agreed that the Governmentand the Associationwould exchange views annually on the adequacy of the staffing of the DETN.

3. Assistance to Local Contractors

3.24 (a) TechnicalAssistance. Two experts, a constructionand a management specialist,posted for two years in the Project Unit (para. 3.34) and assisted by two Burundian professionalswould be responsiblefor providing professionalassistance to enterprisesupon request. The constructionexpert would visit enterprisesand give advice on the use of materials, construction techniquesand on the preparationand follow-up in the field of the most difficultcontracts. He would organize training courses for general foremen (chefs de chantier). The management expert would give advice on accounting, supply management,and organize courses for accountants,technicians and foremen. These two experts would also help enterprisesto prepare their requests for financial assistance. In addition, during a one year period, an experiencedtechnician would organize a series of courses for plumbers, carpenters and masons to alleviate the existing shortage of qualifiedstaff in these fields. Furthermore,the management expert would give general assis- tance to those local constructionenterprises that will be selected for civil works under the World Bank Third Highway Project.

3.25 (b) Financial Assistance. The project would include loans to local enterprisesfor financing equipment renewal and expansion. These enterprises - 23 - would be selected on the basis of the followingcriteria 1/ which were agreed upon with the Governmentduring negotiations:

(a) maximum net fixed assets of BuFlO0 million (in 1980 prices);

(b) potential to develop into enterpriseswith qualifiedmanagement and staff, and suitable accountingsystems;

(c) inability to obtain term finance through normal commercial bank channels or from parent companiesabroad;

(d) having been establishedand operated for at least 3 years in Burundi.

3.26 It is estimatedthat 10 to 15 local enterprises,will fulfill the requirementsin terms of management,financial structure, technical capabili- ties, to obtain those loans and be able with this financing to increase their production capacity by about 30% within two years. These loans would be tied to an expansionplan for the whole enterpriserather than to specific contracts.

3.27 Given that the proposed loan program is meant to promote on an ex- perimentalbasis and at Governmentinitiative, a new and fragile sector, the Governmentwould assume the foreign exchange risk on these loans and a seventy five percent (75%) of the risk of non-repayment. In addition, BNDE which would be responsiblefor administeringthis loan program (para. 3.36) would receive an adequatemargin in interest rates (4%) in order to bear the remain- ing credit risk without-weakening its already low profitability. The condi- tions to be included in a subsidiaryloan agreement between the Governmentand BNDE were agreed upon during negotiations. The signing of such an agreement would be a conditionof effectiveness.

C. Terms and Conditions Specifie to the Credit Component 2/

3.28 (a) Subloan Approval. All subloansmade by BNDE to enterprises would be subject to IDA's review and approval.

(b) Interest Rates. The Governmentwould lend to BNDE the funds to be used for the subloans at a rate which would be 4 per- centage points below the interest rate charged on these subloans. BNDE would in turn lend these funds initiallyat a rate of 12%. Although this rate will probably be negative in real terms, it will be high compared to those charged by other institutions. The interest rate charged to sub-borrowers will be reviewed annually with BNDE and the Goverunent to determine its adequacy.

I/ These criteria will also apply for the selection of lime and brick manu- facturers.

2/ Subloans to construction enterprises, lime and brick manufacturers. These terms and conditions apply to all subloans whether financed by IDA or from the Government s contribution. - 24 -

(c) Foreign Exchange Risk. The Government would assume the foreign exchange risk on the subloans.

(d) Amortization Schedule. In conformity with IDA-s standard policy, BNDE would repay to the Government the funds it would have lent to local companies according to a flexible amor- tization schedule that would conform substantially with the aggregate of the amortization schedules of BNDE-s subloans financed under this component, subject to a maximum of 15 years including a grace period not to exceed five years.

(e) Security. BNDE shall not reject, for security reason only, an application for a subloan as long as such security would repre- sent 50% of the amount of the subloan in the case of construc- tion enterprises and 25% of the amount of the subloan in the case of a limekiln promoter of brickmaker.

(f) Sharing of Risk between BNDE and the Government. The risk on the subloans would be shared between BNDE and the Government in a proportion of 25/75 respectively.

(g) Subloan Limit. To avoid that the resources available for financing of enterprises be used only for a few projects or enterprises: (i) the maximum subloan granted by BNDE for a single project would be limited to US$400,000; (ii) no subloan shall exceed 75% of the cost of the project it finances; and (iii) a single enterprise would not receive subloans amounting to more than the equivalent of US$400,000 in the aggregate. These limits will apply regardless of whether the subloan is financed from the IDA credit or from the Government's contribu- tion to the financing of enterprises (para 3.32).

D. Project Cost

3.29 The total cost of the project is estimated at about US$7.4 million (BuF663.6 million) of which US$4.8 million or about 65% represent the foreign exchange component. The estimated costs and foreign exchange components are summarized in table III-1 below. Base cost estimates are expressed in prices as of September 1980. Costs for the construction of the limekilns were based on data provided by the UNIDO expert who supervised the construction of the two existing limekilns in Burundi; those related to the eucalyptus plantations were provided by the Water and Forest Administration in Burundi. The average annual cost of expatriate staff (including international travel, salary and benefits) was estimated at about US$100,000 or about US$8,300 per staff-month. The cost of counterpart staff was based on current civil base pay and benefits. The financial assistance to local contractors was determined after a detailed examination of their needs for equipment and permanent working capital. Other costs financed within the project include gasoline, insurance and maintenance for project vehicles for a period of two years. The project cost estimate will be discussed and agreed upon with the Goverument during negotiations. - 25 - TABLE III -

BURUNDI

PILOT PROJEC-iFOR DOMESTICCONSTRUCTION INDUSTRY

Summar y- cf Project Costs (Base costs at 'ptember 1980 prices)

BuF mi'lion US$ thousand % Foreign Project Component Local Foreign Total Local Foreign Total Exchange

I. Develop and Improve Local Construction Materials

1. Limekiln construction 14.7 19.2 33.9 162.8 213.5 376.3 57 2. Eucalyptus plantation 7.5 - 7.5 83.4 - 83.4 - 3. Equipment for brick production 0.9 8.1 9.0 10.0 90.0 100.0 90 4. Technical assistarce !/ 13.3 25.2 38.5 148.0 280o0 428.0 65 5. Feasibility studiEf 3.6 36.0 39.6 40.0 400.0 440.0 91

Sub-total I 40.0 88.5 128.5 444.2 983.5 1,427.7 65

II. Assist Ministry of Public Works, Eqergy & Mining (MTPEM)

Technical'Assistance2/ 12.5 23.2 35.7 138.5 258.0 396.5 65

Sub-total Il 12.5 23.2 35.7 138.5 258.0 396.5 65

III. Assist Domestic Con2truction Compan ees

1. Financial assistance 64.7 121.8 186.5 719.0 1,353.0 2,072.0 65 2. Technical assistance 3 / 13.2 27,2 40,4 146.5 302.5 449.o 67

Sub-total III 77.9 149.0 226.9 865.5 1,655.5 2,521.0 66

IV. Operate Project Unit

1. Staffing 4 / 10.4 14.4 24.8 116.0 160.0 276.0 58 2, Premises 2.4 _ 2.4 27.0 - 27.0 - 3. Vehicles 5.0 10.6 15.6 55.0 118.3 173.3 68 4. Office furniture and equipment 0.5 1.8 2.3 5.0 20.0 25.0 80 5. Miscellaneous 0.7 o.6 1.3 8.0 7.0 15.0 47

Sub-totai IV 19.0 27.4 46.4 211.0 305.3 516.3 59

Base Costs 149.4 288.1 437.5 1,659.2 3,202.3 4,861.5 66 (Sub-total I - IV)

Physical Contingencies 8.0 12.2 20.2 89.0 135.9 224.9 60 (4.6% of total base cost)

Price Contingencies 77.4 128.5 205.9 859.8 1,427.7 2,287.5 62 47% of total base cost)

TOTAL PROJECTCOST 234.8 428.8 663.6 2,608.0 4,765.9 7,373.9 65

EAPID March 1982

I/ One lime and one brick experts with counterparts. 2/ One construction engineer and o,e construction technician with counterparts. 3/ One technical adviser, one management adviser, and one training specialist with counterparts. -The Director of the Project Unit, his Burundian couterpart, clerical and other staff. - 26 -

3.30 Contingency Allowance. Physical contingencies of 10% have been allowed for the construction of the limekilns, the eucalyptus plantations and the technical assistance components. Estimated price increases are based upon the following annual rates for which price escalation has been calculated from the base costs (September 1980) in accordance with the implementation schedule presented in table III-3 below. As particularly steep increases in transport costs to Burundi can be expected, contingencies for the foreign components with such costs have been adjusted to take these costs into con- sideration.

1980 1981 1982 1983 1984

Local Component 20% 15% 12% 12% 12% Foreign Component 17% 12% 10% 10% 10%

Total price contingencies including those on the physical contingencies are estimated at 47.0% of the total base cost of the project.

Duties and Taxes

3.31 Equipment and material imported under the project by the local con- struction companies, the lime and brick producers would be subject to the import duties and taxes normally levied on these items. However, all items specifically imported for the administration of the project and the salaries of expatriate staff would be exempt from customs duties and taxes in accor- dance with the normal practice of the Government. The total amount of taxes expected to be levied by the Government is estimrted at about US$0.631 million.

E. Financing Plan

3.32 An IDA Credit of US$5.2 million (BuF468 million) is proposed which would finance about 70% of total project cost including 100% of the foreign exchange requirements and about 17% of local cost. The total Government contribution would be of about US$1.2 million equivalent i.e. BuF108 million (of which about US$0.6 million would be recovered in duties and taxes) which would represent about 17% of total project cost (about 8% after recovery of duties and taxes). It would include a line of credit of US$430,000 (BuF39 million) to BNDE for financing part of the local costs of subloans to local enterprises (lime producers, brickmakers, contractors) and US$810,000 (BuF73 million) for financing other components of the project. As conditions of effectiveness, the Government would: (i) open the line of credit to BNDE by depositing the equivalent of US$110,000 in a BNDE account to be opened at the Central Bank; and (ii) deposit the equivalent of US$110,000 in the Project account at the Central Bank for the financing of other components. Subsequent deposits in the BNDE account would be as follows: the equivalent of US$110,000 by July 31, 1982 and the equivalent of US$210,000 by January 31, 1983. Other deposits in the Project account would be as follows: the equivalent of US$33,000 by July 31, 1982 and, commencing January 31, 1983 four semiannual installments each amounting to no less than the equivalent of US$167,000. The contribution from the producers of lime and bricks and from the local contrac- tors would amount to about US$900,000 equivalent, or about 13% of the total project cost. The financing plan of the project is presented in Table III-2 below. It was discussed and agreed upon with the Government during negotiations. BURUNDI

PILOT PROJECT FOR LOCAL CONSTRUCTION INDUSTRY

Financing Plan (Amounts in thousand of dollars)

IDA National Government Local Coppanies

Component Total.Cost Amount _ _ Amount % Amount %

Loans to enterprises (lime producers, brick- makers, contractors) 3,733 2,370 63 429 12 934 25

Technical assistance to enterprises and MTPEM 2,279 1,850 81 429 19 - -

Studies (feasibility studies and preparation of second project) 600 540 90 60 10

Tree plantation 182 - - 182 100

Equipment and operation of Project Unit 380 240 63 140 37

Unallocated 200 200 100 - -

7,374 5,200 70 1,240 171/ 934 13

1/ Including taxes of $631,300 to be levied from the project (import duties). When taxes are deducted f rom the Government's contribution to the project, its share of the financing of the project represents about 8% of total project cost.

EAPID March 1982 - 28 -

F. Project Management and Implementation

Project Unit

3.33 Overall responsibility for project execution would be with the Ministry of Public Works, Energy and Mining. A Project Unit would be estab- lished in this Ministry to coordinate and supervise all aspects of project implementation. It would report directly to the Minister of Public Works, Energy and Mining and would oversee the technical, administrative and finan- cial aspects of project execution. In particular, it will ensure adequate coordination between the two Ministries involved in the project: Public Works, Energy and Mining; Commerce and Industry. Although the latter Ministry would not receive direct assistance under the project, it would be consulted on all aspects of the project related to industrial production (lime, brick manufacturing) because of its responsibilities in the sector.

3.34 The staffing of the Unit is presented in Annex 4. In addition to an expatriate director, a Burundian codirector and a Burundian deputy director, the unit would include one lime and one brick expert responsible for providing technical assistance to the lime producers and the brickmakers; one construction expert to provide technical assistance to the contractors; one management expert to assist the entrepreneurs in the three sectors of activity (lime, brick, construction). Furthermore, a training specialist would prepare and conduct courses and workshops for plumbers, carpenters and masons. These experts, likely to be expatriates, will have Burundian counterparts. During negotiations, it was agreed that the Government and the Association would exchange views, annually, on the adequacy of the Ftaffing of the Project Unit.

3.35 The provision of technical assistance to producers and contractors has been assigned to the Project Unit rather than to BNDE because experience with other projects, notably SSI, has shown that it is preferable to separate the technical assistance and the financial assistance functions rather than combining them into a single institution. Furthermore, the technical assist- ance provided by the Project Unit will not be limited to enterprises receiving financial assistance under the project. During the preparation of the follow- up project, alternative ways of providing both types of assistance will be explored. The Project Unit would provide assistance to the small contractors in obtaining imported construction materials. It would also make recommenda- tions to the Government toward improving the availability and prices of these materials.

Financial Intermediary

3.36 The expert team in the Project Unit would help the local contractors and lime and brick manufacturers prepare request for loans and would do preliminary project appraisals. They would also remain available for consul- tation to resolve major problems occurring during loan follow-up and collec- tion; BNDE would take charge of the general administration of these loans: appraisals, approvals, disbursements, follow-up and collections. - 29 -

Schedule

3.37 The projectwould be implementedover a period of about two and a half years after the date of credit effectiveness. Project completionis expected by December 31, 1984 except for the credit componentwhich is expected to be fully disbursedby June 1986. During negotiations,the implementation schedule presented in table III-3 was discussed and agreed upon with the Government.

Monitoring and Reporting

3.38 Monitoring of project componentsby the Project Unit would ensure that informationessential to project execution is available. Quarterly reports would be prepared to monitor progress toward project goals. The format of these reportswas discussedand agreed upon at negotiations.

Recovery of Costs from Beneficiaries

3.39 The recipientsof the subloans will repay them to BNDE under amor- tization schedulesin line with the conditionsdescribed in para 3.28(d). The technicalassistance to the local firms (lime producers,brickmakers, con- tractors),will be provided free of charge, so that these beneficiarieswould be encouragedto use these services.

Procurement

3.40 Subloans. BNDE would superviseprocurements under subloans for brick and lime producersand for contractors. BNDE-s procurementpractices are generally acceptable,and normally involve the review of offers from at least three suppliers. In addition,IDA would review procurementadequacy as part of its standard procedure for the approval of individualsubprojects.

3.41 TechnicalAssistance. The Government had invited 8 consulting firms, acceptable to the Associationin terms of experienceand qualification, to submit proposalsand, among those, it selectedLouis Berger International, Inc. The 8 experts in the Project Unit and MTPEM (para. 3.34) would be employedunder a contract of about US$1.1 million equivalentwith the consultant. The Governmenthas submittedto the Associationfor its concurrencea draft of the proposed contractwith Louis Berger International,Inc. g 3.42 The Project Unit would be responsiblefor administeringthe procure- ment of consultingand expert services for the feasibilitystudies, with IDA's assistance and in accordancewith IDA-s respectiveguidelines. The contracts for these studies totallingUS$220,000 are expected to be directly negotiated with individualconsultants, gîven their costs and specializednature (para. 3.15).

3.43 Equipment of the Project Unit. The purchase of vehicles,office equipment, furnitureand furnishingsfor the Project Unit would be under BURUNDI

PILOT PROJECT FOR LOCAL CONSTRUCTION INDUSTRY

Proposed Project Schedule

1981 1982 1983 1984 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12

Negotiations x Board x Effectivenes a x

I. Develop and Improve Local Construction Materials

1. Construction of 2 limekilns. Lime promotion __...... 2. Plantation of eucalyptus 3. Purchase of equipment for brickmakers -___-_- 4. Technical assistance __ 5. Feasibility studies. Preparation second project

II. Assist Ministry of Public Works, Energy and Mining (MTPEM)

Technical Assistance ____

III. Assist Local Construction Companies

1. Financial assistance 2. Technical assistance

IV. Operate Project Unit

Staffing _

LEGEND

Design/Preparation Construction/Implementation .... Promotion

EAPID March 1982

ta~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- - 31 - competitive bidding advertised locally but would also be open to bidders without local representation. Under local competitive bidding, procedures for bid evaluation and award are patterned after those commonly used interna- tionally, and winning foreign bidders may be paid in foreign exchange.

Disbursement

3.44 Disbursements would be made on the basis of:

(a) 100% of foreign expenditures for directly imported equipment, vehicles, materials and furniture, and 75% of local expenditures for goods procured locally but previously imported;

(b) 65% of total expenditures for civil work;

(c) 100% of foreign and 50% of local expenditures for consultant services for the Project Unit;

(d) 100% of foreign and 80% of local expenditures for consultant services for feasibility and other studies;

(e) 100% of foreign and 80% of local expenditures for the purchase of equipment for the Project Unit and for the cost of operation of the Project Unit.

(f) 100% reimbursement of the PPF advance to complete the preparation of the project and establish the Project Unit.

3.45 All disbursements would be fully documented. In the case of subloans to lime and brick producers and contractors, BNDE would be required to apply a disbursement supervision procedure acceptable to IDA, and involving physical inspections upon delivery with a view to discourage possible over- invoicing.

3.46 The schedule of estimated disbursements of the proposed IDA Credit is given in Table III-4 below: - 32 -

Table III-4 Estimated Disbursement Schedule

IDA Disbursement Cumulative Disburse- % Quarter each quarter mends, end of quarter Cumulative IDA FY Ending (US$ million) (US$ million) Disbursements

1983 September 30, 1982 0.2 0.2 4 December 31, 1982 0.3 0.5 10 March 31, 1983 0.3 0.8 16 June 30, 1983 0.3 1.1 22

1984 September 30, 1983 0.4 1.5 30 December 31, 1983 0.4 1.9 38 March 31, 1984 0.5 2.4 48 June 30, 1984 0.5 2.9 58

1985 September 30, 1984 0.4 3.3 66 December 31, 1984 0.4 3.7 74 March 31, 1985 0.4 4.1 79 June 30, 1985 0.3 4.4 85

1986 September 30, 1985 0.3 4.7 90 December 31, 1985 0.2 4.9 94 March 31, 1986 0.2 5.1 98 June 30, 1986 0.1 5.2 100

Audit

3.47 Not later than six months after the close of each Government fiscal year, the management of the Project Unit would submit to IDA suitable finan- cial statements reflecting the financial operations and position of the proj- ect. These financial statements would be audited by an independent auditor acceptable to IDA. The cost of these audits would be financed under the technical assistance component of the project. BNDE already submits audited annual statements to IDA.

IV. PROJECT JUSTIFICATION

A. General Justification and Project Benefits

4.01 The value added of the construction sector of Burundi increased from 1.9% of GDP in 1974 (BuF3,481 million) to 4.9% in 1979. 1/ However, between 1978 and 1979, the value added decreased by 6% in real terms because of a cement shortage due to transportation problems in neighboring countries in a state of war. Now that the situation has normalized, the growth of the sector is likely to continue.

1/ Source: "The Economy of Burundi in 1979.` Ministere du Plan. - 33 -

4.02 The development of local lime production and the improvement of the quality of brick production should lessen the burden of irregular imports in terms of prices and shortages; the expected consequence is a substantial improvement of the contractors construction material supply and, consequently, of their financial and economic returns. The assistance to Burundian companies will allow them to take full advantage of these improvements while giving them the technical and organizational means they need to participate in the growth of the sector and to enhance their share of the market.

4.03 Overall, one should therefore expect a substantial positive effect on the balance of payments, growth of industrial activity and, consequently, of the GDP. Moreover, the development of new jobs and the rise of a class of domestic contractors are likely to strengthen the economy of the country with new initiative and organizational skills.

4.04 As the elements pertaining to the economic valuation of the various project components are very dissimilar, the analysis has to be limited to each element of the project without losing sight of their complementarity nor of the additional benefits that will be derived from it.

B. Benefits from Specific Project Components

The Limekilns

4.05 Economic Rate of Return. The economic benefits of the project are estimated on the assumption that, for some work, locally produced lime will substitute for imported cement. The results of the economic caleulation are as follows:

Rates of Return 2,500 tons 2,500 tons Mosso Bubanza

1. Basic assumption: 83.6% 121.4% Cement price constant

2. Cement cost 92.7% 132.3% + 1% per year

3. Cement cost 101.9% 143.3% + 2% per year

4. Fuel Cost 80.5% 120.2% + 7% per year

5. Using shadow exchange rate 1/ 93.1% 135.9%

1/ Official rate of exchange: US$ = BuF90 Shadow exchange rate: US$ = BuFlOO - 34 -

4.06 The rates of return are rather high, which is quite logical in view of the low investment costs required for semi-industrial limekilns and the high price of imported cement compared to the costs of lime produced domestically.

4.07 Effects on the Balance of Payments. These effects calculated in 1980 prices are as follows:

BuFmillion

2,500 tons 2,500 tons Mosso Bubanza

1. Gross annual foreign exchange savings 45.5 45.5

2. Annual costs in foreign currencies

- fuel 5.2 1.9 - truck maintenance 2.4 1.3

3. Net annual foreign exchange savings 37.9 42.3

As can be seen, the substitution of lime for imported cement will have a favor- able impact on the balance of payment.

4.08 Effects on Employment and Manpower Development. The two limekilns will generate a total of about 165 permanent jobs, which is rather low. However, if, on the whole, the numerical effect on employment will be limited, the construction of the limekilns will cause another, hardly measurable, effect on a certain category of the population: the managers of small enter- prises and staff members to whom this experience will be an initiation to production technique, organization methods and industrial management. There are good reasons to think that, after a few years, the best among the entre- preneurs will be able to expand their business and use more advanced technolo- gies and means. In a country like Burundi which has little or no industrial tradition, this kind of evolution will be most beneficial.

Assistance to Local Contractors

4.09 The primary benefit of this component would be to assist in the development of local entrepreneurs and strengthen the financial capabilities of their enterprises through access to credit, in a construction sector overly dominated by large foreign enterprises. The larger part of IDA-s contribution (81%) under this component would be to finance through BNDE subprojects for the consolidation and expansion of the production capacity of some 10 to 15 selected local contractors. Benefits in terns of value-added, employment and foreign exchange savings are expected to be substantial, in view of the high capital productivity and labor-intensity of the sector, and considering that foreign contractors require on average 50% of payments in foreign exchange. IDA would review the financial profitability and other benefits of specific subprojects at the time each subproject is formulated and submitted for approval, according to the usual procedure for DFC projects. - 35 -

Assistance to the Brick Industry

4.10 Burundi produced some 20 million bricks in 1979 and the 1980 pro- duction is estimated at some 25 million. Bricks cost BuF3 1/ and sell BuF4 each. However, 40 to 50% of production are lost at the brickyards, during transportation, or at the construction site and, as a result, the industry as a whole is operating at a loss. Taking these losses into account, the 1980 turnover of the sector was in the BuF50 to BuF60 million range, with an operating deficit of BuF15 to BuF25 million.

4.11 The main purpose of the assistance to be provided by the project is to reduce losses to a level not exceeding 30% of production after two years of assistance. As a result, the total turnover of the brick industry should increase by 10 to 20 million BuF and, consequently, its profitability should improve. To reach this objective, the following investments (in 1980 prices) will be made:

Equipment: US$100,000 or BuF 9,000,000

Consultancy services during two years: US$200,000 or BuF18,000,000

Total US$300,000 BuF27,000,000

4.12 It is estimated that five years with a discount rate of 15% would be sufficient to make the sectoral profits balance the cost of assistance.

C. Risks Associated with the Project

4.13 Despite its relatively limited scope, the proposed project is nevertheless a complex and multi-faceted one which is likely to be difficult to implement. First, it involves various public and private institutions: two ministries 2/, the development bank, promoters of limekilns, brickmakers, local contractors. As a result, the task of coordinating the assistance could be quite burdensome. Second, BNDE, the financial intermediary proposed for the project, still has some internal problems which could be a delaying factor in project implementation. These risks are the usual ones associated with a project providing under several components technical and financial assistance in a country whose absorptive capacity is limited. In addition, there are the risks associated to dealing with the construction sector, a difficult and risk sector indeed and, in particular the uncertainties about the reaction of beneficiaries to the proposed assistance.

1/ Source: ONL.

2/ Public Works, Energy and Mining; Commerce and Industry. - 36 -

4.14 In order to ensure an effective coordinationof the various institu- tions involved in the project, responsibilityfor its implementationwill be assigned to one entity, i.e. the Project Unit. To reduce the risk associated with the staffing of the Project Unit, a contract will be signed with a single consultingfirm that will be responsiblefor finding the required experts. Finally, IDA-s associationwith BNDE will permit to improve its performance.

4.15 The risks associated with the sector and the beneficiariesare more difficult to anticipate. To a certain extent, the careful preparationof the project resultingin a design where emphasis has been put on coordinationof multifacetedefforts and selection of beneficiarieswill go some way to reducing these risks. However, there is no doubt that there is a strong pilot and experimentalelement in this project and we hope that lessons learnt and experiencegained under the project will permit to minimize the risks in further similar programs.

V. RECOMMENDATIONSAND CREDIT CONDITIONS

5.01 This report recommends an IDA Credit of US$5.2 million to assist the local constructionindustry.

5.02 During negotiations,agreement was reached with the Governmenton the following:

(a) SOMIBUROMwill: (i) identify those deposits of limestonewhich would be most appropriatefor lime production,particularly in the areas of Bujumburaand the Mosso; (ii) prepare for the Government and IDA's approval a program of developmentand exploitationof these deposits; (iii) supply the amount of limestonerequired by the kilns at a price covering SOMIBUROMs costs of productionplus an adequate margin. These matters will be included in a subsidiaryagreement between the Governmentand SOMIBUROM(para. 3.10);

(b) the Water and Forest Administrationwill: (i) plant 37.5 ha of eucalyptus per annum in the areas of Bujumburaand the Mosso; (ii) start such plantation toward the end of 1982; (iii) maintain and exploit.theseplantations; (iv) reserve the productionfrom these plantationsfor the limekilns to be financed by the project and to charge them a price covering the operationsand mainten- ance costs of the plantations. This price will be reviewed annually by the Government and the Association (para. 3.13);

(c) Governmentwill make available to the brickmakersa portion of the quarry of Kamenge (para. 3.16); - 37 -

(d) the procedurefor the feasibilitystudies (para. 3.19);

(e) The Governmentand the Associationwill exchange views annually on the adequacy of the staffing of the New Works Directorate(para. 3.33) and of the staffing of the Project Unit (para 3.34);

(f) the criteria for the selectionof enterprisesthat will receive financialassistance under the project (para 3.25);

(g) from the proceeds of the IDA Credit the Governmentwill on-lend to BNDE up to US$2.4 million for subloans to local enterprises(limekiln promoters, brickmakers,construction companies)at a rate of 8%; it will assume the foreign exchange risk on the funds used for such loans; it will assume 75% of credit risk on these loans (para. 3.28);

(h) the Governmentwill open a line of credit of US$430,000 equivalent to BNDE as its contributiontoward meeting the local costs of subloans to local enterprises(lime producers, brickmakers,contractors) and deposit the corresponding amount in three installmentsin a BNDE account at the Central Bank (para 3.32);

(i) the Governmentwill contribute the equivalentof US$810,000 for the financing of the componentsof the project other than the subloans to lime producers,brickmakers and contractors. Such contributionshall be deposited in tranches in a project account at the Central Bank (para 3.32);

(j) the Project Unit will submit to IDA quarterlyreports on the status of the project (para. 3.38);

(k) the conditions to be included in the subsidiarycredit agreementbetween the Government and BNDE (para 3.27).

5.03 Furthermore,agreement was reached with BNDE that:

(a) it will provide subloans to the local enterprisesto be financed under the project at the rate of 12%; this interestrate will be reviewed annually by the Associa- tion, the Governmentand BNDE to determineits adequacy (para. 3.28);

(b) it will assume 25% of the credit risk on these subloans (para. 3.28);

(c) it will not request from the beneficiariesof these subloans security exceeding 50% of the amount of the subloans in the case of constructionenterprises and 25% of the amount of the subloans in the case of limekiln promoters or brickmakers (para 3.28). - 38 -

5.04 Conditions of Effectiveness:

(a) approval by BNDE's Board of Director of a subsidiaryloan agreement acceptable to IDA and the signing of such an agree- ment by the Government and BNDE (para. 3.27);

(b) submissionby SOMIBUROMof a program satisfactoryto IDA and the signing of a subsidiaryagreement between the Government and SOMIBUROM (para. 3.10);

(c) the opening of a line of credit to BNDE of US$430,000 equivalent (BuF39 million) to cover the Government'scontribu- tion to the financingof subprojectsby depositing the equiva- lent of US$110,000 in a BNDE account to be opened at the Central Bank (para. 3.32);

(d) the deposit by the Government of a first tranche of US$110,000 equivalent in the project account at the Central Bank (para. 3.32). e

BURUNDI

LOCAL CONSTRUCTION INDUSTRY

Selected Major Investment Projects to be Implemented in 1981-1984: Estimated Construction Expenditures

Construction Costs (BuF millions) Status of Projects Total (1981-1984) During 1981-1982 Construction Component Project Financing

Roads (MTPEL)

32 Km Kayanz2 - Ngozi 700 700 Work started in Nov 1980 EDF No. 4, Approved 93 Km Gitega - Gihofi 2,500 2,000 Contractor seclected in Sept.1980 KfW Saoudi, Approved 160 Km Bujumbura - Rutovu 3,000 1,280 Preparation completed China, Expected 46 Km Mutambara - Nyanza Lake 1,150 750 Preparation completed AfDB, Approved 73 Km Ngozi - Muyinga 2,660 470 Preparation completed Appraised by IDA in June 1980

Power/Water (RECIDESO)

Power plant, Muyinga 160 160 Preparation completed KfW,Approved Electrification, Ngozi - Kayanza 460 240 Preparation completed KfW,Approved Electification, Kirunda and (above Rutana. - Gihofi 400) n.a. Preparation completed KfW, Approved in principle Water supply, Bujumbura 250 250 n.a. KfW, Approved Water supply, 9 rural towns 220 110 n.a. KfW, Approved

Educationc

4 Secondary Schools (2 new, 2 expansion) 690 200 Vnder preparation IDA, Approved (To be completed by Education Division - Belgian Aid?

Housing

Bujumbura - Infrastructure, low-cost housing loans, community facilities 370 370 Preparation mostly completed IDA, Approved

SIP - 300 modern houses, Bujumbura 900 450 Work started in July 1979 CAMOFI, Approved - 400 modern houses, Bujumbura 920 580 Preparation completed CAMOFI, Expected - 200 units, Bujumbura, Gitega, Ngozi 100 50 Preparation completed CAMOFI, Expected

14,080 7,610

EAPID March 1982 BURUNDI

LOCAL CONSTRUCTIONINDUSTRY

The Main Iwported Construction Matertals in Burundi (1977-79)

1977 1978 1979 January-June 1980 Net weight Value c.t.f. % in Net Welght Value c.l.f. % in Net weight Value c.i.f. % in Net weight Value c.i.f.

Source: Central Bank Statistical Office

EAPID match 1982 - 41 - ANNEX 3

BURUNDI

LOCAL CONSTRUCTIONINDUSTRY

The Productionof Local ConstructionMaterials

1979 Unit Price in 1979 Units (BuF)

Dried brick 25,000,000 3 to 4/piece

Burned brick 30,000,000I/ 4 to 5/piece

Gravel 85,000 m 3 2,600 to 3,500/m 3

Sand 54,400 m 3 1,100/m 3

Rubblestone 1,000 to 2,000 m3 375 to 1,500/m 3

Lime 480 tons 13 to 14/kg

These data are the mission'sestimates.

_/ 30% are not marketable.

EAPID March 1982 - 42 - ANNEX 4

BURUNDI

PILOT PROJECT FOR LOCAL CONSTRUCTION INDUSTRY

Staffing of the Project Unit

Foreign Counterpart Duration

Director of Unit 1 - 2 years Codirector of Unit - 1 2 years Assistant 1 2 years Lime expert 1 2 2 years Brick expert 1 2 2.years Construction expert 1 1 2 years Management expert 1/ 1 1 2 years Training specialists for workers 1 - 1 year Construction engineer 2/ 1 1 2 years Construction technician 2/ 1 1 2 years

TOTAL 8 10

1, For trickmakers, lime producers and contractors.

2/ Working mainly at MTPEM.

EAPID March 1982 - 43 - ANNEX 5

BURUNDI

PILOT PROJECT FOR LOCAL CONSTRUCTION INDUSTRY

Selected Documents and Data Available in the Project File

1. Direction des Etudes de la Banque de la Republique du Burundi Bulletin Mensuel No. 1 Janvie 80 et No. 6 Juin 80.

2. Burundi, Industrie Locale de Construction Hugo G. Houben; Ing. T., Consultant Bruxelles 25/1/80 Rapport de Mission 3-23 Dec. 1979 - Programme mixte Banque Mondiale/ONUDI.

3. World Bank Economic Memorandum. The Burundian Economy: Current Situation and Socio-Economic and Organizational Constraints. July 30, 1980.

4. Burundi - Local Construction Industry Project; Mission Report - June 4, 1980. World ORT Union, London.

5. Republique du Burundi-- Industrie Locale de Construction; contraintes, entrepreneurs locaux, volume previsionnel, recommandations. C.C.M.E. Janvier 1980. Philîppe Paux, conjointement avec Hugo Houben

6. Rapport Annuel 1979 de la BNDE.

7. Rapport Annuel 1979 de la Caisse Centrale de Mobilisation et de Financement (CAMOFI).

8. Bulletin Economique et Financier de la CAMOFI (Bimestriel) No. 11, Mars-April 1979 Ministere des Finances, du Commerce et de l'Industrie.

9. Rapports et Bilan 1979 de la Banque de Credit de Bujumbura.

10. Rapport Annuel 1979 de la Banque Belgo-Africaine du Burundi.

11. L-Economie Burundaise en 1979. Ministere du Plan.

12. A Framework for the Promotion of Construction Industries in the Developing Countries. I.B.R.D.; Bank Staff Working Paper No. 168, November 1973.

13. The Construction Industry - Survey and Identification Report. World Bank/UNIDO Co-operative Programme UNIDO, Vienna (Austria), March 1979.

EAPID March 1982