Document of The World Bank Public Disclosure Authorized Report No: 20016-UG Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT
ONA
PROPOSED CREDIT
IN THE AMOUNT OF SDR 36.2 MILLION (US$ 48.5 MILLION EQUIVALENT)
TO THE
REPUBLIC OF UGANDA Public Disclosure Authorized FOR A
PRIVATIZATION & UTILITY SECTOR REFORM
PROJECT
May 22, 2000
Public Disclosure Authorized Private Sector and Finance Unit Country Department AFC04 Africa Region CURRENCY EQUIVALENTS
(Exchange Rate Effective January 14, 2000)
Currency Unit = Uganda Shilling Uganda Shilling 1 = US$ 0.0006622 US$ 1 = Uganda Shilling 15.10
FISCAL YEAR July 1 June 30
ABBREVIATIONS AND ACRONYMS
CAS Country Assistance Strategy PMU Parastatal Monitoring Unit CFR Country Framework Report PPF Project Preparation Facility DRIC Divestiture and Reform Implementation Committee PPI Private Participation in Infrastructure EDP Enterprise Development Project PPIAF Public Private Infrastructure Advisory Facility ERA Electricity Regulatory Authority PMR Project Management Report FMS Financial Management System PSP Private Sector Participation GDP Gross Domestic Product PSF Private Sector Foundation GOU Government of Uganda PTC Privatization Technical Committees GPN General Procurement Notice PU Privatization Unit IDA International Development Association PUSRP Privatization and Utility Sector Reform Project LACI Loan Administration Change Initiative TA Technical Assistance LSP Letter of Sector Policy TOR Terms of Reference MFPED Ministry of Finance, Planning and Economic UEB Uganda Electricity Board Development NEMA National Environmental Management Authority UCC Uganda Communication Commission NWSC National Water and Sewerage Corporation UMA Uganda Manufacturers Association PCU Project Coordinating Unit UPTC Uganda Posts and Telecommunications Company NPV Net Present Value UPL Uganda Posts Ltd PE Public Enterprises URC Uganda Railways Corporation PERD Public Enterprise Reform and Divestiture Statute URU Utility Reform Unit Statute PIM Project Implementation Manual UTL Uganda Telecom Ltd. PIP Project Implementation Plan WG Working Groups
Vice President: Callisto Madavo Country Manager/Director: JamnesW. Adams Sector Manager/Director: Demba Ba Task Team Leader/Task Manager: Edgar Saravia UGANDA PRIVATIZATION & UTILITY SECTOR REFORM
CONTENTS
A. Project DevelopmentObjective Page
1. Project developmentobjective 2 2. Key performance indicators 2
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issuesto be addressed by the project and strategicchoices 6
C. Project Description Summary
1. Project components 9 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 10 4. Institutional and implementationarrangements 11 D. Project Rationale
1. Project alternativesconsidered and reasons for rejection 12 2. Major related projects financed by the Bank and other development agencies 13 3. Lessons learned and reflected in proposed project design 14 4. Indications of borrower commitment and ownership 15 5. Value added of Bank support in this project 15
E. Summary Project Analysis
1. Economic 16 2. Financial 16 3. Technical 16 4. Institutional 17 5. Social 18 6. Environment 18 7. Participatory Approach 19
F. Sustainability and Risks
1. Sustainability 20 2. Critical risks 20 3. Possible controversial aspects 21 G. Main Credit Conditions
1. EffectivenessCondition 22 2. Other 22
H. Readiness for Implementation 22
I. Compliancewith Bank Policies 23
Annexes
Annex 1: Project Design Summary 24 Annex 2: Project Description 30 Annex 3: Estimated Project Costs 38 Annex 4: Cost Benefit Analysis Summary 39 Annex 5: Financial Summary 50 Annex 6: Procurement and DisbursementArrangements 51 Annex 7: Project Processing Schedule 60 Annex 8: Documents in the Project File 61 Annex 9: Statement of Loans and Credits 62 Annex 10: Country at a Glance 64 Annex 11: CommunicationAudit (Executive Summary) 66 Annex 12: EnvirorunmentalAudit (Executive Summary) 68 Annex 13: Letter of Sector Policy 77
MAP(S) UGANDA PRIVATIZATION & UTILITY SECTOR REFORM Project Appraisal Document
Africa Regional Office AFTPS Date: May 22, 2000 Team Leader: Edgar Saravia Country Manager/Director: James W. Adams Sector Manager/Director: Demba Ba Project ID: P050439 Sector(s): BP - Privatization Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: N ProjectFinancing Data [ Loan Z Credit DzGrant OI Guarantee El Other (Speciify)
For Loans/CreditslOthers: Amount(US$m): 48.5 ProposedTerms: Currency Pool Loan (CPL) Graceperiod (years): 10 Yearsto maturity:40 Commitmentfee: 0.5 Servicecharge: 0.75% FinancingPlan: Source Local foreign Total GOVERNMENT 46.80 0.00 46.80 IDA 48.50 0.00 48.50 Total: 95.30 0.00 95.30 Borrower: Responsibleagency: Ministry of Finance, Planning and Economic Development Address: P.O Box 8147, Kampala, Uganda Contact Person: C.M. Kassami, Permanent Secretary/Deputy Secretary to the Treasury Tel: 256 41 232759 Fax: 256 41 230163 Email: [email protected] Other Agency(ies): Project Coordinating Unit Address: Communication House: I1th Floor, P.O. Box 10944, Kampala, Uganda Contact Person: Michael Opagi, Director. Tel: 256 41 256467/250108 Fax: 256 41 259997 Email: [email protected] Estimateddisbursements (Bank FY/US$M): FY 2001 2002 2003 2004 2005 Annual 11.5 11.ILL0.0 9.8 6.0 L Cumulative 11.5 22.7 32.7 42.5 48.5 Projectimplementation period: 5 Expectedeffectiveness date: 10/15/2000 Expectedclosing date: 01/31/2006 &CS PAD Fo-n. Rev Mar:h, XDII A. Project Development Objective
1. Project developmentobjective: (see Annex 1) The Project's developmentobjective is to improve the quality,coverage and economic efficiencyof commercial and utility services,through privatization, private participation in infrastructure (PPI), and an improvedregulatory framework. This objective will be achieved by a higher level of private investment, and better quality and access of services in the telecommunication,water, electricity and transport sectors; divestiture and improved efficiency of remaining public enterprises (PEs); and strengthening of the regulatory framework and institutions in relevant sectors.
2. Key performanceindicators: (see Annex 1) The following key performanceindicators, agreed with the Government of Uganda (GOU), will be monitoredthroughout the project to assess success in achieving the project's development objectives (for detailed informationsee Annex 1):
1. Privatization of 42 PEs by the end of project:
* 15 PEs by mid-term review * remaining PEs by June 30, 2005
2. Established and fully operational (i.e., enactmentof legislation and its institutionalization) sectoral regulatory agencies in electricity, water and sewerage and transport by the end of the project:
* electricity regulator by mid-term review * remaining regulators by June 30, 2005
3. Fiscal impact of privatization measured by reduced subsidies (net of one time privatization cost) to public enterprise (PE) sector (excluding Class I enterprises) by:
* 10% in year 2001 * 20% in year 2002 * 50% in year 2003 * 100% by June 30, 2005
4. Improved quality and coverage of services in the telecommunication,electricity and railways sectors by the end of the project (see Table on Ugandan infrastructure indicators attached in Annex 1).
5. Implementationof the privatization program in strict adherence to the Public Enterprise Reform and Divestiture (PERD) Statute, and the procedures manual for divestiture and use of divestiture proceeds.
-2 - B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16540-UG Dateof latestCAS discussion: 05/20/97 Poor quality of infrastructure services has been reported as the most significant constraint to private sector growth and development. Utility sector reform and privatizationwere identifiedas priority measures of the Bank's assistance strategy to help GOU improve the economy's competitiveness and achieve annual GDP growth rate of over 7 percent over the next five years. By supporting these reforns, the Project will contributeto meeting the CAS objective of poverty reduction through broad-based economic growth led by the private sector, as well as improving the welfare of the entire population by reducing costs, improving the quality of, and access to infrastructure services.
2. Main sector issues and Government strategy: GOU embarked on a program of PE sector reform and privatization in 1992, with the aim of redefining the role of the State in the economy, reducing the financial and administrative burden of the PE sector on Govemment, improving PE efficiency and encouragingprivate investment.At the beginning of the program, there were over 150 parastatals involved in virtually all sectors of the economy, most of which were majority owned by the State. They employed more than 30,000 persons, accounting for 25 percent of total formal employment, and generated about 10 percent of GDP. The sector's performance was characterized by low productivity, high losses and rising debts, which placed a concurrent burden on the banking system, public finances and the balance of payments. Most PEs owed their viability to: (a) receiving direct and indirect subsidies from GOU, the costs of which were estimated at 50 percent of total governmentrevenues in 1992-93; (b) receiving credits from the banking system, amounting about 17.8 percent of total credit extended to the economy in 1992; (c) obtaining grants and foreign loans, which accounted for 3.8 percent of outstanding external debt obligations services during the 1980s; and (d) accumulating internal and external arrears.
From its early stages IDA supported GOU's reform program, which was first facilitated by the Technical Assistance(TA) operation that helped to prepare the privatization program, and later by the Enterprise DevelopmentProject (EDP, Credit 2315-UG, 1993-2000)that supported its implementation.As of end-December 1999, GOU completed 93 divestitures of enterprises in the industrial, commercial, agricultural and hotel sectors, of which 62 firms were privatized and the others liquidated. Thus far, one firm (Uganda Clays Ltd.) has been offered to the public through share sale on the Uganda Stock Exchange, and successfully sold. Twenty firms were sold to foreign investors, of which half exercised their pre-emptiverights. Most of the divestitures to date include loss-making enterprises. As of June 30, 1999 total net privatization proceeds (i.e., gross privatization proceeds minus liabilities assumed by the buyers) amounted to Shs 108.5 billion, while total costs related to divestiture came to Shs 132.7 billion, which resulted from the fact that: (i) firms' valuation was based on book value, which in many cases was lower than market value; (ii) the size of debts and arrears was higher than expected; and (iii) liberalizationof the economy and reduction of subsidies negatively affected the firms' value as going concerns . Nonetheless, the overall benefits of the privatization process to the economy are undeniable. In most cases, privatization led to increased output and efficiency, higher tax revenue, significant new investmentand job creation. Therefore,the forward and backward linkages in the economy outweighed the direct immediate monetary benefits after sale. GOU also reduced direct subsidies to the PE sector (i.e., cash injections, investment subsidies and donors' grants) from a record high of Shs 87 billion (47 percent of the total state subsidies) in 1997 to Shs 9 billion (4 percent of the total state subsidies) in 1998. However, between 1997-98 indirect
-3 - subsidies doubled reaching Shs 203 billion. This increase was mainly due to increases in loan and tax arrears in the utilities (see Table 1).
Table 1: Direct and Indirect Subsidiesto PE sector in Uganda l 19931 19941 19951 19961 19971 1998 FLOW (in Shs billion; annual % chan e) Total Subsidies 141.6 154.6 174.7 178.1 186.9 212.3 36%° 9% 13% 2% 5% 14% Direct subsidies 8.4 14.9 48.3 44.0 87.3 8.9 150% 77% 226% -9% 98% -90% Indirect subsidies 133.2 139.7 126.3 134.1 99.7 203.4 32% 5% -10% 6% -26% 104% STRUCTURE (in %) Total Subsidies 100% 100% 100% 100% 100% 100% * utilities 38%1 59% 52% 41% 29% 65% * finan. inst. 37_____ 18% 31% 19% 41% 3% * authorities 0%j 1% 5% 8% 7% 7% * other 25%j 22% 12% 32% 23% 25% Source:Financial Flows between Government and Public Enterprises in Uganda. Fiscal Year 1998; MFPED, December 1999.
However,the impact of privatization could have been higher had it not been for the uneven implementation of the program and other shortcomings.Among the key shortcomings were: inadequate legal and institutionalarrangements, ill-defined responsibilities and accountability,inappropriate divestiture procedures,lack of broad-based ownership of the program, lack of transparency in a number of transactions,failure by the executing agency to collect payments from buyers, and the financial burden resulting from PE employee retrenchmentcosts. All these led to the Parliament's decision to partially suspend and investigate the privatizationprogram in early 1999 (under the partial suspension, the program was allowed to proceed for selected enterprises which were at an advanced stage in the divestiture process; prior approval of the Parliament subcommittee in charge of the investigation was required).
The Parliamentary investigation and its conclusions constituted a turning point in the privatization program in Uganda for the following reasons: (i) it was a recognition of the need to criticallyre-assess the program; and (ii) it led to a series of specific actions designedto address the problems with the privatization process identifiedabove. Furthermore, it led to a closer cooperation between the Parliament and GOU in identificationof the problems and their resolution through a series of changes in the institutionaland legal environment:
* EDP was restructured in the first quarter of 1999 by simplifying its structure and focusing its efforts on fewer and selected transactions to improve their quality and maximize their overall impact.
* Detailed procedures for divestitureand for use of the divestiture proceeds designedto maximize transparency and quality were prepared and approved by GOU in June 1999.
* The PERD Statute was amended in January 2000 to clarify the roles and responsibilities of the various parties involved in the privatization process and streamlinethe decision-makingprocess, including the role and composition of the Divestiture and Reform ImplementationCommittee (DRIC).
A fnal key result of the investigationwas the renewed commitment of GOU to the privatization process with a call for greater transparency and quality of transactions as pre-requisites for continuation.
The remaining parastatals account for the bulk of the Uganda's employment, fiscal burden and overall contributionto the economy. They include utilities, comprising of the telecommunication,electricity, water and sewage, and transport services, and other large PEs, which are mostly involved in manufacturing,
-4- construction, agri-business,tourism, trade and financial services.
Uganda's indicators for infrastructure services are far below African averages (Table 2). As noted above, the poor and deterioratingquality of these services has been reported as the most binding constraint to private investmentand growth. A snapshot of utilities reveals that they are facing major financial and operational deficiencies,their service coverage is extremely limited and the quality of service is very poor. These services are provided almost exclusivelyby monopoly state-ownedenterprises, which are inefficient and overstaffed.They charge distortionarytariffs which are, in some cases, insufficientto cover costs, and operate under stifling regulations, with no incentive for sustainability. These enterprises constitute a heavy burden on the budget. State subsidies to their operations were estimated at Shs 137 billion in 1998, which accounted for about 65 percent of the total state subsidies. Among the top ten subsidy recipients were Uganda Telecom Ltd. (UTL), followed by Uganda Railways Corporation (URC) and Uganda Electricity Board (UEB). Their fiscal impact is further rising from accumulated accounts receivable, arrears and large debts. Public resources are lacking to restore their financial viability, maintain existing infrastructure,let alone improvecoverage and quality of services.
Table 2: Uganda'sUtility Performance Comparedwith other African Countries Services UgandanIndicator Africa as a Whole 1995 Mean Low High Electricity Access (%of population) 5.0 44.9 5.0 100.0 Losses (% total production) 40.0 18.1 4.0 40.0 telecommunication Lines /1,000 population 2.4 9.6 1.0 89.0 Faults /line p.a. 58.0 95.2 17.0 327.0 Water Access to safe water (%/6) 15.0 44.9 7.0 100.0 Network losses(%) 31.6 16.0 47.0 Paved Roads Density (km/Mnpopulation) 118.0 540.6 56.0 2,279 Paved roads (%) 10.0 44.7 10.0 95 Railways Traffic volume (traf. uniV$m GNP) 20.0 199.8 17.0 804.0 Diesels in use (%) _ 67.0 56.8 18.0 83.0 Source: Privatizing Africa's Infrastructure: Promise and Challenge, World Bank Technical Paper No. 337, 1996
This situation,combined with the crucial importance of adequate infrastructureservices to improve social welfare and fuel overall economic development,underlies GOU's drive for prompt and effective reforns. However,GOU faces a number of challengesin designing and implementingthese reforms. They include constraints in the public budget, gaps and uncertaintiesin the legal and regulatory framework,weak institutionalcapacity, weak financial system, low income of the population with per capita GNP estimated at US$ 320 in 1998, and investor perception of high country risk. Over the last years, utility reforns were slow, mainly due to the piecemeal approach being taken to restructureeach sector, lack of clarity on the institutional responsibilityto lead the process, and weak capacity to design and manage the reforms. However, GOU achieved some progress.
* In the telecommunicationarea an important step was the enactment of the Uganda Communications Act in August 1997. Subsequently, GOU restructuredthe previous Uganda Postal and TelecommunicationsCompany (UPTC), separated its businesses and created new entities: UTL, Uganda Posts Ltd. (UPL) and Post Bank Uganda. GOU also established the Uganda Communication Commission (UCC), as the independent sector regulatory agency. The sector was open to competition and GOU awarded two licenses (Celtel and MTN) for basic telecommunication services through a competitiveprocess. The results to date have been positive and the number of lines in service in the
-5 - country has more than doubled. Finally, after two unsuccessful attempts to privatize UTL (mainlydue to lack of investor interest), in the third quarter of 1999 GOU re-launched the privatization by offering 51 percent of its shares for sale to a strategic investorthrough a competitive bidding process. The process was perceived as a test of the "new approach" and "new procedures" as specified in the amended PERD Statute and Procedures Manual. As a result of a transparent and competitive process, in February 2000 the majority stake in UTL was awarded to a consortium led by a reputable German operator for US$ 33.5 million. The completion of the transaction is expected in the second quarter of year 2000.
* For electricity and air transport, significant sector restructuringinitiatives involving greater reliance on private participation have been approved by GOU and are at various stages of implementation. However, in other sectors, such as rail transport, water and sewage, reforms were attempted without a clear assessment of the sectors' requirements, little competition and poor risk allocations.
* In so far as the regulatoryframework is concemed, it is the intention of GOU to analyze the possible establishmentof a multi-sectorregulatory agency in the mediumterm, which would include UCC and the newly created electricityregulator. GOU will draft legislation to facilitate this process. In the short term, however (in addition to already operational UCC), an independent power regulator Electricity Regulatory Authority (ERA) was created and will become operational by year-end 2000.
- To further streamline and improve the quality and transparency of the divestiture process, a manual which establishes detailed procedures for the divestitureof PEs and for the use of divestiture proceeds, including a clear definition of roles and responsibilitiesfor implementation,was designed and approved by GOU. Amendments to the PERD Statute clarifying the institutional framework for privatization were enacted in January 2000, following their approval by Parliament.
Against this background,GOU has decided to undertake a comprehensive overhaul of key utility sectors, including telecommunications,electricity, water and sewage, and rail transport, and to recast the reforms within a single unified program. GOU's overall strategy is to, inter alia: (a) completethe on-going PE reform agenda through privatization of remaining commercial and industrial PEs, and strengthening of financial discipline in other parastatals; (b) establish a sound enabling environment providing private investors with clear and stable "rules of the game", through an adequate legal and regulatoryframework; (c) restructure the utility sectors and open them to private participation, as a means to promote competition, improve operating efficiency, maximize the commercial orientation of infrastructureenterprises, and bring in needed managementexpertise and investment funds; and (d) strengthen the technical and managerial capacity of privatization,regulatory and sector policy institutions.
3. Sector issues to be addressed by the project and strategic choices: The Project seeks to address the following issues:
(a) Divestiture of Industrial and Commercial PEs: The Project will support GOU's withdrawal from 39 industrial and commercial PEs through privatization and divestiture of shareholdings, severalof which have pre-emptiverights. In 1997, the combined gross assets of majority-owned PEs exceeded US$ 0.6 billion equivalent,and they employed over 23,000 people. The Project will provide resources for advisory services for privatization and broad-based participation.
- 6 - (b) Utility Sector Reforms: The Project will help GOU in the final design and implementationof reforms in the telecommunication,electricity, water and sewage, and rail transport sectors. These reforms aim at increasingcompetition, enhancingthe sector's regulatory framework and institutions, and fostering new private participation in infrastructureservices. The reforms will be implemented on the basis of sector reform strategies approved by GOU. The strategies are expectedto provide a coherent analytical framework for sector reform, recommend appropriate sector structure, including private sector participation,and propose an implementationplan. Reform and privatization strategies have already been approved for the telecommunicationand electricity sectors. Strategies for the reform and privatization of the railway and water sectors are being prepared with financing from other sources. The Uganda Country Framework Report (CFR), which has been prepared with the assistance of the Public Private Infrastructure Advisory Facility (PPIAF) and IDA has clarified GOU's broad objectives for infrastructure services.
The Project will bring in qualified and specialized experts to advise GOU on the sectoral reforms necessary to allow the entry of the private sector, particularly in such areas as overhaul of sector's legal and regulatory framework,establishment of regulatory mechanisms,preparation of bidding documents, evaluation of bids, and negotiations with the winning bidders. The Project will also help provide regulatory expertise devoted to capacity building.
(c) Labor Retrenchment: Most PEs are overstaffed and require downsizing to become attractive to investors. It is estimated that excess staff account for 20 to 40 percent of their workforce, representing approximately 5,000-9,000 employees. Based on the previous experience of the privatization program in Uganda (about 5,000 employees have been retrenched as a result of privatization) and on work carried out during project preparation, the key concernsof the workers are information about retrenchmentas early as possible in the privatization process and payment of severance packages in a timely manner. With these concems in mind, GOU designed and adopted a policy for retrenchmentof workers in public enterprises. The retrenchmentpolicy includes: (i) circumstancesunder which retrenchmentoccurs excludingnormal retirement and disciplinary cases; (ii) terms and conditions of servicewhich includes pay in lieu of notice, severance and transport, ensuring that the labor laws are not contradicted;(iii) selection criteria for the redundancieswithout underminingthe essential skills required by the enterprisefor the continuation of business; (iv) compositionof the package as per the terms and conditionsof service; and (v) safety net measures including initial communicationto public enterprisesworkers on the subject of retrenchmentand privatization, as well as counseling and retraining on demand.
The retrenchmentpolicy also provides guidelineson settlementof the package and protection of the remaining employees. This policy conforms with IDA's principles of affordability, economic justification, respect for existing contractual obligations and prior retrenchmentconditions for individual PEs. Based on this policy, the retrenchment costs for the remaining privatizationprogram are estimated to be about US$60.2 million. The privatization program is likely to be delayed if resources to address these costs are not mobilized in a timely fashion. The Project will help mitigate the social impact of labor retrenchmentby supportingthe implementationof GOU's policy in this area. The Project will fnance approximately23 percent of the total retrenchment costs in the form of partial funding of the costs in the four largest PEs: UPTC, UEB, URC and the National Water and Sewerage Corporatioh (NWSC) subject to the guidelines defined in the operationalmemorandum of March 5, 1996;the balance will be financed by the relevant PE with its own resources and by GOU from the privatizationproceeds. Any project funds for retrenchment costs not used after payment in the four PEs listed above, can be used for payment in other PEs subjectto the provisions described below and in Annex 6. The Project will also include as part of a communication program, an employee communication program to ensure timely informationto workers and that the views, concerns and preferences of the PE workers are addressed. Finally, in order to ensure adherence to the policy and proper use of IDA resources, detailed procedures for disbursement of funds as well as specific
-7 - and general audits have been agreed with GOU (see Annex 6 for details).
(d) Environment: An enviromnentalpre-audit identifiedthe need to carry out comprehensiveaudits and remediation plans in ten PEs prior to their privatization in order to identify pre-existing liabilities and determine responsibility for their clean-up. A partial audit is required in one PE and detailed de-commissioningplans will be prepared and implemented in four PEs (for details on the pre-audit see Annexes 2 and 12). The Project will fnance the costs of preparing the relevant comprehensive and partial audits, as well as the costs of preparing and implementingde-commissioning plans. The costs of monitoring compliance with environmental standards after privatizationwill also be partially funded by the project.
(e) Strengtheningof Parastatal Financial Oversight: According to the classificationof public enterprises used by GOU, even after the privatization process of industrial and commercial PEs and utilities is completed, some enterpriseswill remain under state ownership (i.e., Class I enterprises). They will be comprised of: any regulatory agencies formed as a result of sectoral reform; Civil Aviation Authority; Cotton Development Organization;National Social Security Fund; Uganda Coffee Development Authority; Uganda Tea Authority; Uganda Tourist Board and Uganda Wildlife Authority. Improvement of fnancial discipline and promotion of good governance in the PEs scheduled for privatization as well as in the Class I enterprises are of utmost importance.The Project will assist in achieving these objectives through improvedfinancial oversight exercisedby the Ministry of Finance, Planning and Economic Development (MFPED). To that effect it will support the Parastatal Monitoring Unit (PMU) under MFPED and its key areas of responsibility,which are to: (i) coordinate and facilitate the settlement of cross-arrears between PEs and GOU; (ii) monitor the conversion from indirect to direct subsidies to the PE sector and eventually eliminate them; (iii) monitor the performance of the PEs (both financial and operational)to ensure retention of asset value and improvement in performance;and (iv) oversee timely compliance of PEs with statutory requirements such as preparation of annual audits and reports.
-8 - C. ProjectDescription Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):
Indicative Bank- % of Component Sector Costs % of financing Bank-
WUS$M) Total wSSM). .. 1. CapacityBuilding for Privatization Institutional 71.70 77.9 25.50 56.3 (US$ 71.7 Mn): (a) Technical Development assistance (TA) and on-the-job training to help GOU design and implementthe privatization program (US$ 3 Mn); (b) communication program (US$ 2.8 Mn); (c) PE enviromnentalaudits and contingency plans (US$ 5.7 Mn); (d) severance payments and redeployment support to PE retrenched workers (US$ 60.2 Mn). 2. Strengtheningof PE Financial Institutional 2.00 2.2 1.90 4.2 Oversight facilitated by TA, training Development and technical support provided to PMU under MFPED to help improve its financial oversight over remaining parastatals (US$ 2 Mn). 3. Utility SectorReform (telecom, Privatization 9.00 9.8 9.00 19.9 energy, transport and water). TA and training to help GOU (US$ 9 Mn): (a) implementutility sector reform strategies (US$ 6.6 Mn); (b) establish and strengthen regulatory agencies (US$ 1 Mn); (c) provide training and experts to advise in regulation during the stage devoted to local capacity building (US$ 1.4 Mn) 4. Project Management: TA, training Institutional 9.40 10.2 8.90 19.6 and technical support to help the PCU Development carry out a sound project execution (US$ 9.4 Mn). Total Project Costs 92.10 100.0 45.30 100.0 A~~~~~~~~~~~~~~~ Total FinancingRequired 92.10 100.0 45.30 100.0
Note: The Total project cost is US$ 95.2 Mn. The above figures do not include contingencies of US$ 2.3 Mn and PPF of $ 0.9 Mn.
9- 2. Key policy and institutional reforms supported by the project: GOU has carried out several legal and institutionalchanges up-front, including: (i) amendmentof the PERD Statute to improve the privatization process; (ii) enactment of legislation to create an electricity regulatory agency; (iii) enactment of legislation to give the MFPED the authority to oversee parastatal financial performance; (iv) adoption of procedures for competitive and transparent divestitures; and (v) adoption of transparent guidelines for the use of divestiture proceeds. In addition GOU has decided to adopt two separate approachestowards the regulation of utilities framework. In the short term sector-specific regulatory agencies will be established,but with a view to merge them in the mediumterm to create one or more multi-sector regulatoryagencies.
The Project will support key policy reforms, including: (a) privatization of the remaining PEs and implementationof a standard labor retrenchment for the PE sector; (b) competition, legal and regulatory reforms in telecommunications,transport, electricity and water sectors; and (c) policies affectingthe fnancial context in which utilities operate, such as pricing of utility services, targeted subsidizationwhere it is essential for increasingconnection rates in some network industries,granting of GOU guarantees when appropriate, and absorptionby the public sector of payments arrears which constitute a bottleneck in many utilities' financial situation. The Project will further support the already established regulatory agencies (i.e., UCC and ERA), as well as the agencies to be created during project implementation. Most of the assistance will be in the form of capacity building and training, both in house as well as outside Uganda. The Project will also assist GOU in analyzing and designing a strategy for merging the sector-specific agencies to create one or more multi-sector regulatory agencies.
Finally, the Projectwill help build the institutional capacity of the project implementationand management by supportingthe Project CoordinationUnit (PCU), which is in charge of coordinating and carrying out the privatization process.
3. Benefits and target population: In recent years, it has been recognized by economists and policy-makersthat there are strong links between governmentpolicies, economic growth and poverty reduction.Widespread poverty hinders growth both in the short- and long-termby limiting the pace and scope of development, discouragingthe inflow of capital, and creating social and political tensions. Poverty eradication became the number one priority for GOU. The Project supports GOU's efforts to eradicate poverty in two ways. First, it is expected to increase the welfare of the local population - the end users of the utilities' services - through increased quantity and improved quality of infrastructure services. Second, the Project is expected to enhance and stimulate private sector-led economic growth by improving the economic environment,encouraging private investmentand increasingproductivity. Three broad target groups will benefit:
(i) Private Sector: The business communitywill enjoy new investment opportunitiesthrough privatization.It will also benefit from better quality utility services and reduced costs of factors of production (e.g., electricity,water and communication)which would lead to increased competitiveness of the economy;
(ii) Local Population: In the short run, the PE workforce will be downsized as a result of retrenchmentof excess staff. However, in the mediumterm, the Project would lead to a reduction in unemployment through more rapid growth of privatized PEs' activities, and its indirect effect on the creation of more employment opportunities in the private sector. The local population, in particular users of privatized utilities' services, will also gain from improved access, quantity and quality of services
- 1 0 - resulting from improvementsin operationalefficiency and network extension;
(iii) Government: The Project will help GOU implementits privatizationand utility sector reform program. The completion of this program will result in a lower fiscal and administrative burden of PEs on Government, increased fiscal revenues from privatization proceeds maximized through transparent and competitive transaction procedures. It will also enable GOU to free up budgetary resources for re-allocation to urgent investments in priority activities, such as health and education.
4. Institutionaland implementationarrangements: ImplementationPeriod: Five years, October 2000 - June 2005
ExecutingAgency: The Minister of State responsible for Privatization, under the MFPED, will ensure overall project implementationand coordination. According to the amended PERD Statute, this Minister would assume full responsibility and accountabilityfor the privatizationof PEs and for the reform and divestitureof the utilities. This Minister is vested with the powers to determine, formulate and execute detailed plans for the reform of any PE in consultation with the line Minister.
The Minister of State responsible for Privatization will be supported by PCU, which will carry out the technical work and coordinate the implementationof the different componentsof the Project. The timing of the commencementof the preparatory activities for divestiture is decided by the Privatization Unit in consultation with the line Minister, stakeholders and the relevant PE board and management. The PCU will build upon the experience of the EDP unit. Over the past twelve months significant progress was made in terms of structure, management and staffing arrangements of EDP to ensure more efficient implementation of the new project. These changes, inter alia, have simplifiedthe structure and at the same time focused the efforts of the unit by removing unnecessary layers (2 out of 4), and by creating teams that work on specific transactions (for details see Annex 2). EDP today is a smaller,more efficient implementationunit and provides a solid base on which to build the proposed project's PCU. Additional staff will be required to enable PCU to carry out monitoring of the communicationsprogram, strengthening of the administration function for The Loan AdministrationChange Initiative (LACI) compliance, and for the utilities reform activities. The Project will provide support to further strengthen PCU's implementationskills. The Project component on parastatalfinancial oversight will be implementedby PMU under the MFPED. At the conclusion of the Project, having completed the privatizationprogram, PCU would cease to exist and PMU would have been fully absorbed into the structure of MFPED.
The Minister of State responsible for Privatization will be advised by DRIC, a policy advisory board comprising representativesof key stakeholders, including the private sector. DRIC is vested with the power to approve the commercial terms of any divestiture upon the request from the Minister of State responsible for Privatization. Prior to the commencement of the divestiture for each PE, DRIC will also approve the Divestiture Action Plan for the PE concemed.
In addition to the institutionalarrangements, it is equally important to establish informal mechanisms to ensure that coordination of all parties concerned (i.e., MFPED, line Ministries and PEs) works in practice. This is especially important in the case of utilities, as their privatization will be complex. To this end GOU, in cooperation with PCU, will establishPrivatization Technical Committees (PTC) and Working Groups (WG) for each of the utilities. A PTC has been established for electricity and is working well, and a WG was established in the first quarter of 2000 after recruitment of the external transaction advisors for the power sector reform.
-11 - Monitoring and Evaluation: A Project ImplementationPlan (PIP), Financial Management Plan and overall Procurement Plan were designed and finalized during project preparation to produce a Project Implementation Manual (PIM). The PIM includes, inter alia, all periodic reporting, monitoring and evaluation arrangementsthroughout the project cycle.
Financial Reporting and Auditing: During project preparation, IDA prepared an assessment of the Financial Management Systems (FMS) of EDP, including a time bound plan to achieve LACI compliance. The FMS as well as auditing arrangements satisfactory to IDA were agreed with GOU during preparation. The Project will be audited accordingto internationalauditing standards by the Office of Auditor General and/or an independentaccounting firm to be selected.
D. ProjectRationale 1. Project alternatives consideredand reasons for rejection: A number of alternative project designs were considered. One option considered was to carry out the privatization and utility sector reform under a sectoral adjustment operation: Under this option, the Bank's funds would be disbursed on the basis of progress in institutionaland policy-based reforms. This option was rejected to avoid a hybrid operation and because it would not provide the necessary TA and resources to carry out the program in a timely fashion. A project-based TA option was chosen because of the need for: (a) an appropriateinstitutional framework to implement these reforms; (b) specific resources to finance the preparation and implementationof divestiture transactions; and (c) specialized skills and TA required to develop regulatorycapacity.
Another alternativeconsidered was to split the Project into two operations on privatization and regulatory reform, respectively. This option was rejected because it was unsuited for utility sector reform. The success of utility privatization would be enhanced if both, the divestitureprocess and the sector regulations, were clearly defined up-front and subsequentlyimplemented accordingto agreed procedures. The proposed Project would maintain close coordination and linkage of both aspects.
- 12 - 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingand planned). Latest Supervision Sectorissue Project (PSR) Ratings i______i______:t(Bank-financed projectsonly) Implementation Development Bank-financed Progress(IP) Objective(DO) Enterprise DevelopmentProject: EDP - Credit 231 5-UG S S Technical assistance for privatization (on-going,closing date 6/30/00) and private sector development
Private Sector CompetitivenessProject: PSCP - Credit 2798-UG S S Support to private sector promotion (on-going)
InstitutionalCapacity Building Project: ICBP - Credit 2736-UG S S Central and local government capacity (on-going) building, legal sector reform and accountancy strengthening and training
Second Structural Adjustment SAC II - Credit 2608-UG S S Program: Poverty reduction through (closed on 03/31/96) acceleratedeconomic growth and rapid human resource development
Second Economic and Financial EFMP II - Credit 3297-UG ManagementProject: Improve the (approved by the Board on effectivenessof public expenditure 11/30/99) management, i.e., government planning/budgeting,fnancial management,monitoring and evaluation.
Power III Credit 2268-UG, Ongoing S S
Power III Supplemental Credit 2268-1, (approved by the Board in January 2000)
Power IV: Power sector support to Under preparation meet growing demand for electricity by expansion of generation capacity and support power sector reform and privatization. Otherdevelopment agencies
IP/DORatings: HS (HighlySatisfactory), S (Satisfactory),U (Unsatisfactory),HU (HighlyUnsatisfactory)
- 13 - 3. Lessons learned and reflected in the project design: The design of this Project draws on the lessons learned from implementingprivatization and PPI program in many countries,including Uganda. These lessons include:
* Governmentownership and Parliament support.Government commitmentto and leadershipof the privatizationprogram are essential to success. GOU has demonstrated its commitmentto these reforms through several actions, including sustained progress in privatization under EDP and decisive measures to restore the technical credibilityand transparency of the program during and after the suspension of the privatization process by Parliament in 1999 followed by a Parliamentary investigation.As a result of the Parliamentary investigation GOU has restructured the privatization implementingunit (EDP) and modified the scope and composition of DRIC, and in conjunction with Parliament, amended the PERD Statute to increasethe accountability for and transparency of the process. Subsequently,the Parliament reiterated its support to the reforms and stressed its insistence on transparency, integrity and efficiency in their implementation.
* Leadership and strong privatization agency,with skilled staff and empowered with appropriate authority to carry out the reform. This lesson has been taken into account by placing privatization and utility sector reform under the authority of one Minister who will be accountable for performance and results, and who has the support of the highest authorities (the Minister of State responsiblefor Privatizationunder MFPED). The Project will be executed by a coordination unit which is operational and staffed with highly competent professionals, has a track record of managing projects of this kind, and would be further strengthened through technical assistance.
* Need to ensure availability of resources to address the social cost of reform This lesson has been taken into account by funding severance packages for redundant employees from privatization proceeds and/or project resources.
* Need to keep the stakeholders informed and to engage them from early on in the processto ensure their active participation in designing the policies and implementationof the reform. To this effect the project includes a communication program that will conduct a public information campaign and facilitate participatory approach through fora, special committees, etc.
= Need to ensure a consistent approach between the privatization process, regulatoryreform and capacity/institutionbuilding. This lesson has been taken into account by including into the design of the Project all the above aspects as well as coordinatingwith other World Bank projects that are supportingthe transactional side of the privatization process.
* Regulatory agency independent from political influence and interference.This lesson is facilitated by assisting GOU design an adequate legal and regulatory framework and by providing financing for capacity building of the regulatory agencies. Since capacity building will take time, the privatization of the utilities subject to regulation will include a transitional period of several years of regulation by contract.
- 14 - 4. Indications of borrower commitmentand ownership:
* Uganda has a very good track record for implementingthe macro-economicreform program,which now has to be followed by similar performance in utility sector reforms. Despite ongoing difficulties, commitment at the highest level has been expressed in favor of ambitious privatization,which explains why achievementsto date were possible. This commitmenthas been reconfirmed and the project design incorporates feed-back mechanismsto ensure its continuation. In addition, MFPED is firmly committed to the privatization process and, with clarificationof its financial authority over PEs, it will be in a better position to lead the reforms. The private sector and Parliamentarians have also endorsed the privatization process, on the condition that their concern over transparency is addressed.The recent privatization of UTL, with bids awarded in February 2000, gave testimony to GOU's commitmentto address these concerns. * GOU appointed a Project Design Team, comprising representativesof key stakeholders,to design the proposed reform program. This Team prepared a Draft Concept Paper, which identifiedkey policy, institutionaland operational issues that GOU must address under the program. The findings and analysis of this Paper have been incorporated in the project design.
* GOU has designed a medium- to long- term Private Sector Development strategy in a draft paper "Medium-Term CompetitiveStrategy for the Private Sector (2000-2005). Making Institutions Support Private Sector Growth", which was subsequentlywidely discussedand distributed. The main goal of this strategy is to improve Uganda's competitiveness by increasing productivity at the firn/industry level through reform of the infrastructure sector, an appropriatepolicy, regulatory and institutional framework in support of efficient allocation of resources, promote competition, spur innovation, and reduce the cost of doing business. The ultimate objective is to raise the standard of living of the population. To achieve these objectives, GOU has identified several key medium-term priority areas for this strategy: (i) greater involvement of the private sector in the provision of infrastructureservices; (ii) carrying out institutional reforms to support the private sector with an effective legal system; (iii) improving the investrnentclimate by simplifying administrativeprocedures through deregulation, enacting a non-discriminatoryinvestment law; and (iv) and streamlining investment support services and facilitation.
5. Value added of Bank support in this project: The Bank is seen by local actors, donor community and private sector as having credibility in the field of privatization, competition, legal and regulatory reforms. The Bank has supported GOU's previous efforts in these areas through its policy dialogue and two projects. This project aims to conclude the privatization process of the PE sector in Uganda, including utilities. It will benefit from lessons learned from the previous projects and changes introduced in the institutional and legal framework to increase the transparency, accountabilityand decision-makingprocess. The Bank's participation would enhancethe credibility of GOU's efforts, particularly regarding the transparency of the divestiture process and soundness of its regulatoryframework. The Bank could also help GOU design a competitive regulatory framework that maximizes the social benefits of private participationin PEs, while minimizing the risk exposure assumed by Government through guarantees and other financial obligations to private investors.
- 15- E. SummaryProject Analysis (Detailed assessmentsare in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$104.1 million; ERR = 25.5 % (see Annex 4) O Costeffectiveness O Other(specify) The net present value of the project is estimated at about US$ 104.1 million for a 12% discount rate, and its internal economic rate of return is estimated at 25.5%. The net present value of the project varies from about US$ 119.3 million to US$ 50.3 million for discount rates of 10% and 17%, respectively. Most of the expected benefits would occur in the medium to long term since the project is expected to facilitate institutionaldevelopment in both the public and private sectors. The identified indirect benefits were quantified to obtain their monetary values because no direct recovery mechanisms have been built into the project. Monetary values imputed to the indirect benefits represent measurablegains from additional income generated from the newly createdjobs, economic efficiency from the reduction in factor costs and consumer surplus. Furthermore, expectednon-monetized benefits from the Project include improved management, changes in quality and quantity of services, conducivebusiness environment,poverty alleviation and lower level of social distress. Non cash flow financialvalues such as amortization charges, sunk costs for physical requirements,and debt service obligationswere considered only in relation to fiscal impact of the Project. Moreover, it is expected that the Project would help increase performance and efficiency of privatized enterprises,promote investment, facilitate private sector and economic growth and help reduce the level of poverty in the country.
The identifiedproject benefits include: (i) productivity gains; (ii) increased output resulting from additional capital investmentby privatized firms; (iii) additional income from the net creation of jobs in the private sector; (iv) factor cost savings from the reduction of average production costs of selected utility and transport companies;and (v) consumer surplus from lower tariffs, improved access and quality of the utility and transport services provided. These benefits are classified as indirect benefits expected during the project implementationperiod. They would contribute to the projects long-term development impact.
In measuring economic costs of the project the following categorieswere identified:(i) IDA credit amountingUS$ 48.5 million; (ii) Donor co-financing amountingUS$ 3.1 million; and (iii) GOU contributionsin the form of: (a) direct costs equivalent to US$ 43.5 million for Project counterpart funds and labor retrenchment funding; and (b) indirect costs for PEs' debts and other liabilities assumed by Government prior to divestiture.
2. Financial(see Annex 5): NPV=US$ million; FRR= % (see Annex 4) Not Applicable
Fiscal Impact: The Project will contribute to the gradual elimination of subsidiesto the PE sector (excluding Class I) as defined in Annex I (Outcome/ImpactIndicators).
3. Technical: Technical issues addressed during project preparation include: (a) the design of a time-bound divestiture action plan, including cash flow projection of divestiture proceeds and retrenchment plan; and (b) the design of the market structures and regulatory framework in the context of the particular circumstances of
- 16 - Uganda, rather than by simply borrowing the models applied elsewhere without adaptation. This component'sdesign will be further detailed during project implementationon the basis of findings of the Country Framework Report (CFR) and the work of financial and regulatory advisors in consultation with Ugandan stakeholders and bidders. Moreover,the scope of work for the Financial Advisors and Regulatory Experts respectively for the privatization and private sector participation in the telecommunications, electricity, rail transport and water sectors will be prepared and completed by MFPED and PCU in consultationwith IDA.
4. Institutional: a. Executing agencies: Institutional issues clarified during project preparation include:
* Amendmentof PERD Statute sets out the institutional framework and implementationarrangements for privatizationand clarifies the institutionalresponsibility for privatizationbetween the Minister of State responsiblefor Privatization, line Ministers and DRIC. Accordingly, the Minister of State responsible for Privatization, under the MFPED, will ensure overall project implementationand coordination,and assume full responsibility and accountability for the privatization and utility sector reform program. The role of DRIC has been streamlined to that of advising the MFPED and approving policies for the reform and privatization of PE sector.
* Implementationof the project component on parastatal financial oversight will be carried out by PMU under the MFPED. At the conclusion of the Project, PMU should be fully integrated into the structure of MFPED. e Establishment of PCU, which will support the Minister of State responsible for Privatization to carry out the technical work and coordinatethe implementationof the different componentsof the Project and selectionof staff, building upon experienced and top performing staff of EDP (see below). At the end of the Project, after completing the implementationof the privatizationprogram in Uganda, PCU will close and cease to exist.
* Establishmentof sustainable regulatory agencies, funding of initial operating costs, and capacity building.
* Taking necessary steps to establish the informal mechanisms (such as Privatization Technical Committeesand Working Groups) for each utility, facilitating coordination of all concerned parties (i.e., Minister of State responsible for Privatization, line Ministries and PEs) during the implementation of the project. b. Project management: PCU has been established under the MFPED to execute the approved Project Preparation Facility (PPF) for the Credit and, during project implementation,to support the MFPED by carrying out the technical work and coordinate different componentsof the Project. Based on past experience with EDP several changes were introduced in the structure and management arrangements(see Annex 2 for details) to ensure more efficient implementation.PCU is staffed with qualified professionalstransferred from the previous EDP project unit. Additional staff will be required to enable PCU to7carry out monitoring of the communicationsprogram, strengthening of the administrationfunction for LACI compliance, and for the utilities reform activities. The Project will strengthen PCU's skills and qualifications necessary to execute its various components. At the conclusion of the Project, PCU will cease to exist.
- 17 - 5. Social: * Expanding the access of key public services (such as electricity, telecommunicationsand water and sewage)to a greater number of people in Uganda through the liberalizationand deregulation of state monopolies,participation of know-how private operators, provision of private capital for new investmentsand economic regulationto ensure efficiency and sustainability.
* Contributingto the reduction of poverty by removing one of the most significant obstacles to private sector developmentin the form of limited, unreliable and inefficientpublic services and transportation.
* Addressingthe key concerns related to labor retrenchmentresulting from privatization of PEs: (i) early informationabout retrenchment and (ii) timely payment of end-of-servicebenefits. The Project will support a communications program with a specific sub-programaimed at workers of PEs and designed to provide early information about the privatizationprocess and determnineworkers' special needs and concerns. The Project will also fund approximately 23% of the retrenchmentcosts; the remaining balance will be covered by the privatization proceeds and PEs' own resources.
6. Environmentalassessment: Environment Category: B (Partial Assessment) The Bank is assisting GOU to develop its private sector and to improve its environmental managementand regulatory systems. The 42 enterprises to be privatized include various environmentallysensitive activities such as industrial manufacturing, mining, sugar production and utility services. Moving these enterprises from the public domain to the private sector is not neutral in environmental terms as it raises the issue of responsibility for environmental impacts from past and ongoing operations as well as the broader concerns of environmentalmanagement. Many of the 42 privatization candidates, particularly in certain industries, may leave behind significant environmentalrisks or have already caused serious impacts from their production and waste handling practices. The project recognized these facts and during preparation a pre-audit study was undertaken that:
* covered compliance and contingent liabilityassessments, mitigation and monitoring procedures; i focused on environmental impacts associatedwith air and water quality, solid and hazardous waste discharges,and occupational health and safety issues at the facility under investigation; i helped to rank the enterprises accordingto the anticipated environmentalliability and determine which of the enterprisesneed to have comprehensiveaudits and assessments and which need partial and no audit at all prior to their privatization.
The pre-audit study included a total of 45 enterprises, the 42 slated for privatization less UEB (a full audit and remediation plan will be undertaken under separate Terms of Reference (TORs) as part of the preparatory work for reform in the sector and privatization)and including 4 PEs that were recently privatized or in advanced stages of divestiture under EDP. As a result of this study, 10 PEs will require full audits and remediation plans; one PE will require a partial audit; five PEs will require full assessment and properly costed de-commissioningplans; and four PEs recently privatized will require monitoring plans with measurableindicators (for details see Annex 12). This work will be implemented as part of the transaction process for these PEs and prior to their divestiture, with funding provided by the Project. The Project will also provide funding to cover the costs of preparing the monitoring plans for the four PEs recently privatized, as well as for monitoring compliance of these plans for all relevant PEs to be privatized. National Environment ManagementAuthority (NEMA) will be in charge of monitoring compliance. It is envisaged that the environmentalmanagement plans for privatized PEs should include an HIV/AIDS awareness program for employees in accordance with guidelines from the country wide HIV/AIDS program.Implementation of this component will be monitored by the relevant authorities in
- 18 - country; NEMA's role will be to ensure that environmentalmanagement plans include an H1V/AIDS awareness program and that compliance is being monitored by the relevant authorities.Furthermore, it is envisaged that a training of trainers program be provided to the management of the relevant PEs on good practices of environmentalmanagement. It will be based on actual demand and be made part of the environmentalaudit activities before the completionof the privatization process of the PEs.
7. ParticipatoryApproach (key stakeholders,how involved, and what they have influencedor may influence; if participatoryapproach not used, describe why not applicable): a. Primary beneficiariesand other affected groups: Government: Line ministriesof PEs were involved from the outset and have been closely consulted throughoutthe project to ensure their effective participation. Key ministries are represented in the project design team. In addition to the formal consultation required by the PERD Statute, during project implementationGOU through PCU will establish informal mechanisms in the form of Privatization Technical Committees(PTC) and Working Groups (WG) for each of the utilities. A PTC has been established for electricity and is working well and a WG was established in the first quarter of year 2000 after the external transaction advisors for the power sector reform were recruited.
Private Sector: The project design has benefited from cooperation of the Ugandan Manufacturing Association (UMA) and Private Sector Foundation (PSF). Private sector representatives are in the majority in DRIC, the policy advisory committee advising the Minister of State responsible for Privatization. During the pre-appraisal mission, a half day CFR workshop was conductedwith the private sector representatives as the primary participants. The discussions on the regulatory framework stressed on the importance of balancing the interests of GOU, consumers and service providers.
Parliament and Civil Society: In April 1998, GOU organized a seminar on privatizationand PPI for members of Parliament as well as journalists and civil society to sensitize them. The proceedingsfrom the seminar were taken into account in designing this Project. In late 1998, following concernsabout the integrity, transparencyand efficiency of the privatization program,the Parliament launched comprehensive investigations,which led to substantial institutional reforms in the program. Parliament's collaborationwill also be essential to pass relevant legislation during project implementation. The Project includes a communicationstrategy, including information campaignsto the public and specific audience (e.g., PE employees, businesscommunity, Parliamentarians).
Labor Unions: During project appraisal, representatives of the labor unions and a Member of Parliament for Workers were briefed on the project's components and consulted on its potential impact on workers. Two key recommendationsemerged, consistent with the design of the project: (i) the need to inform workers of individualPEs early in the divestitureprocess and to keep them informedthroughout; and (ii) fair and prompt payment of retrenchmentbenefits and severanceto those workers made redundant as a result of the process. The project will address these concernsthrough its comprehensivecommunications program and through the policy, guidelines and financing of retrenchment benefits.
Other Donors: Donors supportingthe privatization and utility sector reform programs were consulted for co-financing during preparation and supervision missions. b. Other key stakeholders: Not Applicable
- 19 - F. Sustainabilityand Risks 1. Sustainability: Critical factors to enhance the sustainability of the Project include: (a) GOU's commitment to implementa sound and transparent privatizationprogram; (b) establishment of effective regulatory framework, with autonomous and financiallyviable institutions able to operate without interference from political and vested interests; and (c) timely private sector response to new privatization opportunities.
2. CriticalRisks (reflectingassumptions in the fourth column of Annex 1):
i::fi t;;:0Riski;0-:0j::RiskSS Ratinig Risk MinimizationMeasure FromOutputs to Objective Reduced GOU's commitmentto M GOU's sustained privatization efforts under the privatization. previous EDP is a testament to its commitment to this reform. Close Bank supervisionwill be carried out to make sure that the objectives set out are maintained throughout implementation.
Weak private sector response to M Improvementin the business environmentwould privatization opportunities. greatly enhance the private sector's response to the privatization program. GOU will carry out extensive information campaignsto promote the privatization investment opportunitiesat home and abroad.
Reduced GOU's commitmentto S The Project would help strengthen the regulatory implementthe regulatory framework in a agencies, in order to reduce the risk of political manner to promote competition and capture and increase its ability to administer efficiency, includingthe risk of regulatory rules, including on tariff matters. backtracking on tariffs policy for public Regulation in the initial years after reforms and utilities. privatization will be by contract to allow regulators sufficient time to build their capacity and establish their independence.
FromComponents to Outputs Lack of progress in reforms due to M The Minister of State responsiblefor interferencefrom political and vested Privatizationwill lead the privatizationand interests. regulatory reforms and be responsibleand accountable for results. The reforms will be designed in close consultationwith the line ministries and management of the utility to ensure ownership. WGs will be funded by the project and established for each of the utilities at PCU with the participation of the relevant line ministry and utility will ensure day-to-day technical coordination and cooperation.
-20 - Lack of progress in divestiture due to M GOU has adopted guidelinesfor the use of GOU's delays in mobilizing privatization divestiture proceeds, which give priority to proceeds and allocatingthem to finance funding workers' end-of-servicebenefits. The labor retrenchment costs. Project would also co-finance the retrenchment program.
Implementationof reforms could be M Approval of policy and guidelines for delayed by social unrest due to PE determinationof benefits reduce the risk of employee retrenchment. prolonged controversies.Full fnancing of the end-of-servicebenefits is planned. The Project will co-finance about 23% of the total cost of the end-of-servicebenefits, while the remaining balance will be financed from PEs' own resources and privatization proceeds. Provision of the redeploymentsupport for some retrenched workers is also considered. These actions will be carried out in close consultation with beneficiaries, including labor unions, to ensure ownership.
Lack of transparency in divestiture and S Implementationof the program will strictly accountability,and financial follow the Procedures Manual that provides for mismanagement. a competitive and objective selectionof buyers and transparent guidelines for the use of divestitureproceeds. A high level government official (Minister of State responsible for Privatization) will be accountable for performance and results. Public information, policies of open disclosure and stakeholders' scrutiny, including Parliament's, will also improve transparency.
Overall Risk Rating M Risk Rating- H (High Risk),S (SubstantialRisk), M (ModestRisk), N(Negligible or Low Risk)
3. Possible Controversial Aspects: None.
- 21 - G. Main Credit Conditions 1. EffectivenessCondition * Formal adoption by GOU of the Project ImplementationManual reviewed during appraisal.
2. Other [classify according to covenant types used in the Legal Agreements.] * Timely execution by GOU of an agreed action plan to strengthenthe project's financial management and reporting systems in order to become LACI/PMR compliant no later than January 1,2001.
* Preparation by GOU and review with IDA by May 31 and November 30 of each year of the report that integrates the results of the monitoring and evaluation activities in the implementationof the project and the achievement of project objectives.
* Maintenance of the Project CoordinatingUnit under MFPED in the form and with functions, staffing and resources satisfactory to IDA.
* Meeting the agreed performance indicators, including carrying out environmental audits for all the relevant PEs before completion of each transaction.
3Disbursements for severance payments to be made to staff retrenched from the relevant PEs conditionalto submission by GOU of: (i) a detailed retrenchmentplan for the relevant PEs in form and substance satisfactory to IDA; and (ii) evidence of certification issued by the Auditor General's Office.
H. Readinessfor Implementation D11. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable.
1 2. The procurement documents for the first year's activities are complete and ready for the start of project.implementation. 1 3. The Project ImplementationPlan has been appraised and found to be realistic and of satisfactory quality. 1 4. The following items are lacking and are discussed under loan conditions (Section G):
-22 - Readiness for implementationwas further enhanced by the following actions taken prior to Appraisal and Negotiations:
Conditionsfor Appraisalwhich were fulfilled included presentationof: 1. Draft of the Letter of Sectoral Policy; 2. Draft Project Implementation Manual (PIM, FMS and Procurement Plan); 3. Confirmationof arrangements with the Auditor Generars Office to appoint an independent auditor for the Project. 4. Completion of the environmentalassessment of PEs. 5. LACI Certificate.
Conditionsof Negotiations: 1. Final draft version of the Letter of SectoralPolicy including policy for treatment of retrenchment benefits.
1. Compliancewith Bank Policies ER 1. This project complies with all applicable Bank policies. O 2. The followingexceptions to Bank policies are recommendedfor approval. The project complies with all other applicable Bank policies.
dvSaravia Demb Ba James W. Adams Team Leader SectorManager/Director CountryManager/Director
-23 - Annex 1: Project Design Summary UGANDA: PRIVATIZATION & UTILITY SECTOR REFORM
Sector-relatedCAS Goal: SectorIndicators: Sector!country reports: (fromGoal to BankMission) To promotea broad-based, 1. AnnualGDP growthrate of Nationalstatistics Achievementof broadbased privatesector-led growth of 7% over the next fiveyears. growthand povertyreduction the economy. as a result of existing programsunder the CAS. 2. Increaseof private Politicaland civil stability, investmentto GDP ratio from includingsecurity. 12%in 1997to over 17%in 2004.
ProjectDevelopment OutcomeI Impact Projectreports: (fromObjective to Goal) Objective: Indicators: To improvethe quality, 1. Privatizationof 42 PEsby Bankmissions reports No sectorpolicy reversal. coverageand economic June 30, 2005: efficiencyof servicesin utility, * 15 PEs by mid-term Sufficientinvestor interest to transportand other review allowsuccessful divestiture. commercialand industrial * remainingPEs by June sectors,under competitiveand 30, 2005 regulatedconditions. 2. Establishedand operational Surveysof regulatory Regulatoryagencies are not (i.e., enactmentof legislation agencies. co-optedby specialinterests. and its institutionalization) sectoral regulatoryagencies AnnualRegulatory Reports Competitivecost structures in electricity,water and wouldbe achievedfor sewerage,and transport,by productionfactors of the end of the project: privatizedpublic service and * electricityby mid-term utilitycompanies review * remainingagencies by June 30, 2005
3. Fiscal impactof Budgetand Subsidyreports. privatizationmeasured by reducedsubsidies to PE sector (excludingClass I enterprises) by: * 10%in year 2001 * 20% in year 2002 * 50% in year 2003 * 100%by June 30, 2005
- 24 - 4. Improved quality and Household survey studies and coverage of services in Poverty Updates/Profile telecommunications, reports providing information electricity and railways sectors on access to infrastructure by the end of the project: services Table I on Ugandan infrastructure indicators Surveys of utility performance (attached)
Outputfrom each OutputIndicators: Projectreports: (fromOutputs to Objective) component: A. Privatization of remaining 1. Sale contracts are signed for Quarterly Privatization GOU remains committed to its industrial and commercial PEs and payments collected from progress reports prepared by privatization agenda. has been carried out, in a divestiture of PEs. the PCU. transparent and competitive There is no significant lag in fashion. 2. End-of-service benefits for Quarterly Divestiture and private sector response to the retrenched workers paid in Redundancy Accounts' reports privatization opportunities. accordance with GOU policy prepared by PCU. Such lag could stem from the for retrenchment and in a overall country risk timely fashion from the Supervision mission reports. assessment and perception of Redundancy Account the sovereign and political (replenished with privatization Feedback reports from risk by private investors. revenues) and Project's funds. stakeholders facilitated by the Communication Unit. Transactions are carried out 3. Environmental Audits according to the PIP. carried out for all identified Annual Communication PEs before completion of each Survey Reports. Program is implemented in transaction: conformity with PERD statute, * full audits for 10 PEs Environmental Audit Reports and both Divestiture * partial audits for I PE cleared by IDA Procedures Manual, and * decommissioning of 5 Guidelines for the Use of PEs Divestiture Proceeds are * preparation of enforced. monitoring protocols with monitorable GOU is able to mobilize indicators for 4 PEs. divestiture proceeds and other funds, and allocates them to 4. At least four finance retrenchment costs in Communication programs a timely fashion. are carried out annually, including information to the GOU remains committed to general public and specific implement the regulatory audiences (e.g., business framework in a manner to community, PE workers, promote competition and Parliament). efficiency.
-25 - B. Sector reforms have been 1. Adoption of Govermment's Sector Reform policies GOU maintains efficient entry implemented and institutional sector policy and enactment of approved by GOU (Cabinet). and exit conditions into utility capacity strengthened to appropriate legislation, for: services markets, and does not regulate private participation * telecommunications and Publication in Official Gazette backtrack on tariff policy. in: electricity by mid-term of new legislation. review; and Regulatory agencies are * water and sewage and Annual reports of regulatory adequately staffed and funded, rail transport by June agencies. and able to work without 30, 2005 interference from political and Project progress reports. vested interests. 2. Environmental Audits Environmental Audits cleared were carried out for all by IDA. identified PEs before completion of each transaction.
1. Telecommunications: Regulator has in-house Risks: Increase competition in the technical capacity to manage Delays in decision-making market; and develop capacity the frequency spectrum by due to poor coordination of of regulator to manage end-2002. utility sector reform between frequency spectrum. Ministry of Privatization and line ministries. 2. Electricity: Separate (i) Development of new generation, transmission and electricity sector structure, Lack of clear delineation of distribution assets of UEB and including grid code and responsibilities between privatize them commercial and financial policy-makers and regulators. arrangements by end-2001; Delays in enacting new (ii) Private Sector legislation. Participation (PSP) in electricity distribution by Parastatals and line ministries end-2001; cooperate with PMU as established in the PERD (iii) PSP in electricity Statue to ensure timely generation by end-2002; and reporting of PEs' financial data to the MIS. (iv) Regulator in place and operational by end-2001 The PCU is adequately staffed and fully operational. 3. Railways: Develop and (i) Framework for implement sector policy and privatization of railway URC privatization framework. transport services completed and adopted by GOU by end-2001
(ii) PSP in rail transport by end-2003
- 26 - 4. Water and sewage: Develop (i) Framework for and implement a framework privatization of water and for privatization of utilities; sewage services completed and increase competition in and adopted by GOU by markets. end-2001
(ii) PSP and operation of some existing assets in water and sewage sector by end-2003.
C. A Parastatal Monitoring (i) The PMU has installed and PMU progress reports Unit (PMU) has been operates a management established under the MFPED information system to monitor Budget and Subsidy reports to oversee the financial the financial performance of performance of parastatals. non-commercial PEs by end-2001
(ii) Settlement of cross-arrears between PEs and GOU by June 30, 2005.
D. A Project Coordinating (i) Transparency of PCU and supervision mission Unit (PCU) has been privatization transactions is reports established under the MFPED, maintained throughout; and monitoring tools and evaluation systems have been (ii) Timely reporting on work installed. program and auditing of accounts by June 30, 2001;
(iii) Procurement process is efficient, timely and competitive throughout the Project.
-27 - ProjectComponents / Inputs: (budgetfor each Projectreports: (fromComponents to Sub-components: component) Outputs) 1. Privatization Capacity Inputs: US$ 71.7 million Supervision mission reports. The MFPED (Privatization) is Building: allowed to exercise its * Capacity strengthening PCU progress reports mandate and authority to carry of Privatization Unit (bi-annual). out the privatization and * PE labor retrenchment utility sector reform. program * Communication GOU applies to all campaign transactions the revised * PE enviromnental audits Divestiture Procedures Manual and the Guidelines for Use of Divestiture Proceeds. 2. Strengthening of PMU: Inputs: US$ 2.0 million Semi-annual progress reports Technical ministries and TA and on-the-job training for MFPED work together in financial oversight of reform process. parastatals.
3. Utility Sector Reform: Inputs: US$ 9.0 million. Draft laws and regulations. Resources to address the social costs of reforms are made a. TA and on-the-job training Draft decrees to establish available in a timely fashion, to design and implement new regulatory bodies and appoint including privatization sector structure in telecoms regulators. proceeds. and electricity. Regulators are empowered and b. TA and on-the-job training equipped to exercise their to prepare and implement functions. reforms in railway transport and water and sanitation. Political and vested interests do not obstruct the regulatory c. Regulatory institutions reform process. building and strengthening: * TA to establish one or Timely provision of more multi-sector counterpart funding. regulatory agencies and strengthen their Timely contracting of capabilities. consultants and other services. * provide training and help regulate during interim period devoted to capacity building, including twinning arrangements with foreign regulators. * provide working tools and equipment support to regulatory agencies.
- 28 - 4. Project Management: Inputs: US$ 9.6 million Supervision reports (periodic)
TA to strengthen the PCU, Disbursement report including technical expertise (quarterly). (e.g., privatization, regulation), project TORs of consultants and management skills (e.g., requests for no-objection and project planing, accounting, disbursement. auditing, procurement), training and equipment
Table 1: Uganda's Utility Performance Indicators Services Indicator Target Indicator in 1999 by June 30, 2005 Electricity Access to grid-based connections (% of population) 3.8 7 Losses (units billed as % of units produced) 34 25 Telecommunications Lines / 1,000 population 6 20 Faults / line p.a. 0.84 0.4 Railways Traffic volume (tones hauled/$m GDP) 134 150
-29 - Annex 2: Project Description UGANDA: PRIVATIZATION& UTILITY SECTOR REFORM
This project aims to support Government'spolicy to accelerate private sector-led economic growth and development.It is expectedthat achievementof this goal will be facilitated by: (i) divestiture and restructuringof the remaining 42 PEs operating in industry, commerce, services and utilities; (ii) increased private sector participation in the provision of infrastructure (PPI) includingtelecommunications, electricity, water and sewerage, and rail transport; and (iii) strengtheningof the regulatory framework and institutions.
In 1992 GOU embarked on the public sector restructuringprogram, including restructuring and privatization of over 150 parastatals operating in virtually every sector of the economy that accounted for about 25 percent of employment and generated about 10 percent of GDP. The PE sector's productivity was low, PEs incurred high losses and rising debts placing a concurrentburden on the banking system, public finances and the balance of payments. Privatization of PEs became a priority for GOU as the measure to rid the budget from the recurrent direct and indirect subsidies and to encourage increased productivity and profitability through private ownership and competition.
This project is a continuation of the TA operation that helped to prepare the privatization program and of the Enterprise Development Project (EDP, Credit 231 5-UG; scheduledto close by the end of June 2000), which supported the implementationof the privatizationprocess. Its specific aim is to conclude the privatization agenda of GOU by liquidating and divesting the remaining industrialand commercial PEs and to help improve the quality, coverage and economic efficiency of utility services through increasingprivate sector participation,competition and proper economic regulation in the provision of these services. The project has four main components:
1. Capacity Building for Privatization 2. Strengthening of Financial Oversight of Parastatals 3. Utility Sector Reform 4. Project Management
The Minister of State responsible for Privatization, under the Ministry of Finance, Planning and Economic Development(MFPED) will be responsible for overall project coordination and implementation.The Minister will be advised by the Divestiture and Reform ImplementationCommittee (DRIC), a policy advisory board comprising representatives of key stakeholders,including the private sector. DRIC's mandate, role and composition as defined in the PERD Statute vests it with the power to approve the commercial terms of any divestiture. This approval in each case is to be sought by the Minister of State responsible for Privatization. Prior to the commencementof the divestiture for each PE, DRIC will also approve the Divestiture Action Plan formulated in each case. Financial oversight of parastatals will be performed by the Parastatal Monitoring Unit (PMU) under the MFPED. Functions related to technical work and coordinationof the sector reform and privatization will be undertaken by a special Project CoordinationUnit (PCU) under the MFPED comprising of the PrivatizationUnit (PU) and the Utility Reform Unit (URU). Both PU and URU will be built on the basis of the EDP Project Unit, which will implementthe project until its closure in June 2000. Key activities related to utility reform preparation and implementationof privatization transactions will be contracted out to private consultants and coordinated by the PCU.
- 30 - In addition to the institutional arrangements, informal mechanisms will be established to ensure the required coordination of all concerned parties (i.e., MFPED, line Ministries and PEs). To this end GOU through PCU will establish Privatization Technical Committees (PTC) and Working Groups (WG) for each of the utilities.
The overall organizational structure is presented in Figure 1 below.
Figure 1: Institutional Organization
DRIC L- Sector Ministry (PERD)
MFPED Rt------Minister of State for Finance Director EA (Privatization)I
Director of Privatization Unit (PU) Director of Utility Head Parastatal & Project Coordination Unit (PCU) Reform Unit (URU) Monitoring Unit (PMU)
SUPPORTIVE SERVICES -Legal Advisors ------
.______*Accounting& Administration *Procurement TEAM 1: Large PEs *IT and clerical work TEAM 2: Large PEs *PRand Public Info Advisors TEAM 1: Electricity TEAM 3: Preemptive Rights TEAM 2: Water TEAM 4: SMEs---______L______TEAM 3: Rail
_____-__ Advisory authority ST/DST: Secretary to the Treasury/Deputy Secretary to the Treasury Line authority EA: Economic Affairs
- 31 - By Component:
ProjectComponent I - US$71.70million Capacity Building for Privatization
This component will assist GOU in bringing the PE privatization program to its conclusion.More specifically,it will provide technical assistance to GOU to prepare and implementthe privatization of the remaining PEs. Labor retrenchment and redeploymentas well as issues related to environmental contingencieswill be addressed. Information sharing will be facilitated through communicationcampaigns to the general public and targeted audiences.This component consists of the following four subcomponents:
(a) Privatizationof Commercial and IndustrialPEs (US$ 3.0 million). This sub-componentwill provide the necessary technical assistance and advisory services for implementing the divestiture of the remaining PEs in Class II to IV of the PERD Statute 1993, as amended, in a manner that ensures efficiency, integrity and transparency. Technical assistance and advisory serviceswill be required in such areas as technical, legal, accounting,investment banking (including bidding and/or listing on the stock exchange), and development and implementationof employee share ownership schemes.
(b) PE Labor RetrenchmentProgram (US$ 60.2 million). Although in the majority of the divestitures to date, the Govermnent has not faced seriousproblems dealing with the labor force, the treatment of employment liabilities on an ad hoc basis and the lack of a clear retrenchmentbenefits policy has resulted in growing disputes over termination benefits and delays in their payment. The privatization of the remaining PEs is expected to have significant social implications,as the majority of these PEs are overstaffed. It is estimated that a reduction of about 20 percent to 40 percent in employment(i.e., about 5,000 people) will be necessary in order to attract potential investors. If social impacts are not addressed properly and in a timely manner, the Government will encounter increasing labor-relateddifficulties in implementing its divestiture program and, as a result, the privatization process could be severely delayed.
In order to avoid these potential problems, during project preparation GOU carried out a study to provide a design and implementationmethod for a consistent employee retrenchmentplan, includinga terminal benefits policy for PE employees, and pre and post-layoff support (i.e., counseling, retraining and redeploymentprograms that would help laid-off workers reintegrate into the labor market). The study also provided cost estimates associated with the retrenchment of workers for the PEs that are part of this project, includingthe utilities. Finally, based on this work, GOU approved a retrenchment policy for PE workers (April 30, 2000), which has the following key features:
* GOU will act to ensure the phased right-sizing of PE workforces as soon as practicable and where possible in advance of privatization. * Payments of benefits will be made using the resources of the relevant PEs. To the extent that these resources are not sufficient to cover the required amount, privatization proceeds will be used. For UEB, UTL, URC and NWSC and any other PE agreed with IDA, if the two above mentioned sources are not sufficient,IDA resources provided by the Project would be used. * PEs will be encouragedto make special efforts to identify and retain key skills. * Dialogue with workers and unions will be a key component of planning and implementing retrenchment. * Retrenchmentpackages will be paid to the day on which the package has been calculated. Where funds
- 32 - are not available,affected staff will receive their full salary until it is possible to settle their terminal dues. * Retrenched employeeswill not be settled in other PEs or Government institutions. * PEs will be encouragedto provide retrenched workers with counseling and retrainingwhere appropriate. * Governmentwill require PEs to seek PU approval if they intend to change terms of service in ways that affects terminal benefit liabilities. After a PE is selected for privatization, no changes in terms and conditions of servicecan be made. * Retrenchment packageswill be paid in accordance with the established terms and conditions of service. For those PEs that have retrenched workers in the recent past, the future retrenchmentpackages will be paid in accordancewith established terms and conditionsof service at that time. * The benefits to be settled include only accrued benefits and no special/additionalpackages will be paid to any employees.
This subcomponentof the project will help implementGOU's labor retrenchmentplan, including end-of-servicebenefits to PE employees and provision of assistance to mitigate the social impact of labor retrenchmentin two ways:
1. Financing a portion of expected retrenchment costs (severancepayments). The Project will finance (subject to the guidelinesdefined in the operational memorandumof March 5, 1996) 23.3 percent of the total retrenchmentcosts estimated at US$ 60.2 million; the remaining balance of 76.7 percent will be financed by the relevant PE from its own resources and by GOU from the privatization proceeds. The project will specifically finance a portion of the costs associatedwith the privatization of the four largest PEs (UPTC, UEB, URC and NWSC).
2. Providing financing and/or technical assistance for counseling on the basis of actual demand. Although, based on previous experience with the retrenchmentprogram in Uganda, it is envisaged that demand will be low as most workers are concerned with receiving information about retrenchmentas early as possible in the divestitureprocess and receiving payment of end-of-service benefits in a timely manner. For these reasons, the Project will also include as a part of the overall privatization communications program, an employee communicationsprogram which will be undertaken to ensure that the views, concerns and preferences of the PE workers are addressed. Finally, the Project will provide financing for a tracer study to follow-up on a few of the retrenched workers (100-150 workers) to analyze the impact of safety net measures.
(c) CommunicationsProgram (US$ 2.8 million). As part of project preparation, a communications audit (financedby the Bank) was conducted in August-September 1999. Its objective was to assess existing perceptions about privatization, examine the communicationsneeds and make recommendationsfor future communicationsoutreach where necessary. The communications audit indicates that public awareness about privatization is high, primarily as a result of the public relations program previously implementedby EDP. There is a clear understandingof privatization,its benefits and risks. There seems to be a consensus of opinion (even among the employees of enterprises scheduled for privatization), that privatization is an important step that the country needs and must take. However,there are also concerns with the program,mainly related to the perceived lack of transparency and insufficientconsultation with the public.
GOU recognizesthe need to reinstate the communicationsprogram. Its development and implementationis, therefore, one of the sub-componentsof this project. The new communicationsprogram will build on the
- 33 - initiativesundertaken earlier, and will involve a few new areas of activity. It will be coordinated across ministries and sectors, and will be integrated with Government'splanning and actions. On the basis of the communicationsaudit and GOU priorities, a short-term communicationsstrategy (until June 30, 2000) will be designed and implementedby consultants at EDP. The same consultants will prepare a detailed scope of work and assist GOU in the recruitment of consultants that will design and implement the overall communicationsstrategy for the life of the Project.
GOU's preference is to have promotionalactivities vis-a-vis potential international investors handled primarily by the transaction advisors of each specific PE. The communicationsteam will concentrate its efforts on internal communications,addressing two of the most prevalent concerns: (i) lack of transparency and (ii) insufficientconsultation with the public. The program will be focused on a few key areas: Restoring public confidence on the transparency issue (not awarenessbuilding) and profiling the Governments ability and commitment to implement its divestiture strategy, as well as its chosen method for privatization. Progress and short-term achievements would be broughtto public attention; government officials would routinely meet with the people to obtain their feedback on proposed measures and explain their importance within the framework of a broader vision. To achieve the objectives outlined above, the following initiativeswill be employed:
* Outreach to specific target audiences 9 Engage managementand employees of PEs scheduled for privatization _ Provide continuous feedback to PCU on stakeholders' perceptions about privatization * Proactive media relations * Successfulmarketing of PEs to domestic and internationalinvestor audiences
In order to carry out the proposed communications program effectively, it is important to have a full-time communicationsofficer at PCU. He or she would have overall responsibility for managing the communicationseffort, and would meet regularly with key players in governmentto agree on strategic options and planned actions as well as with members of Parliament,management and employees of PEs and civil society to ensure that their views are being considered,and that messages and communications channels are appropriate. He or she would be responsible for out-sourcing individual tasks that can not be undertaken in-house, such as opinion research and advertisementproduction.
(d) PE Environmental Audits (US$ 5.7 million).
In Uganda, the critical and most immediate environmentalproblems are the health impacts of pollution that derive from inadequate water, electricity, sanitation, drainage and solid waste services, poor urban and industrial waste management, air pollution (especially from particulates).In addition there is a low coverage and access to basic services such as water supply and sanitation, drainage, and solid waste collection. Controlledlandfills, incinerationand resource recovery are few; ineffective land use controls impact on land management for the urban areas. Because unemployment remains relatively high and unskilled manual labor is easily accessible, most of the requirements for maintaining proper environmentallyfriendly working conditions are non-existent.As a result, several PEs have unresolved health and safety issues, including medical monitoring and provision of an appropriate industrial hygiene environment for workers.
Against this background, a PE environmental audit (financed from the Privatization Trust Fund (PTF) - a Japanese Grant) was conducted as a part of project preparation. Between November 1999 and February 2000 an external consultant (Geomatric Technology Corporation of Fairfax, Virginia, USA) carried out field visits at and around specific sites of PEs intended for privatization.The auditing process focused on
- 34- environmental impacts associatedwith air and water quality, solid and hazardous waste discharges, and occupationalhealth and safety issues.The scope of the assessment included environmental legislation currently in place, compliance and contingent liability assessments, mitigation and monitoring procedures. The aim was to:
* scrutinize firns' environmentalconditions, * identify all environmental and occupationalhealth and safety concems related to both past and ongoing activities * deterrninethe potential for contamination and pollution to the environment emanating from the PEs; * provide indications of their need for clean up and other remedial and mitigation measures that should be included in full audits; * provide cost estimates for the full audits that should be undertaken.
As a result of the analysis based on the scores for the Audit Index Factors (for details refer to Annex 11), enterprises were divided into three groups based on their probabilityof having a high, medium or low environmentalimpact in their past and ongoing activities.Ten PEs were found with high environmental concerns and thus will require full audits and remediation plans (See Table 2 below). One PE was classified as having medium environmentalconcerns (Associated Match Co. Ltd.) and will require a partial audit. Five PEs will require full assessmentsand properly costed de-commissioningplans. Four PEs recently privatized will require establishment of Monitoring Plans with measurable indicators to enhance their environmentalmanagement activities.PEs that were classified as having low environmentalconcerns, and not requiring any environmental audits,were hotels, financial and holding institutions,publishing and printing companies.
Table 2: Results of environmentalpraudit
1. SugarCompany of Uganda(SCOUL) 2. KakiraSugar Works(1985) Ltd. 3. KinyaraSugar Works Ltd. 4. KaseseCobalt Company Ltd. 5. NationalWater and SewerageCorporation (11 Water Districts) 6. NationalHousing and ConstructionCorporation Corp. 7. UgandaRailways Corporation 8. UnitedGarment Industries Ltd. (Textiles) 9. UGMAEngineering Corp. 10. DairyCorporation
1. CoffeeMarketing Board Ltd. 2. KilembeMines Ltd. 3. Lake KatweSalt Co. Ltd. 4. UgandaSpinning Mill 5. SugarCorporation of Uganda(first plant)
1. UgandaClays Ltd. 2. B.A.T.(U) Ltd. 3. RwenzoriHighland Tea Co. Ltd. 4. SorotiAgricultural Implements Mach. Co. (SAMMCO)
- 35 - The consultantsprovided the scope and cost of work for comprehensiveaudits, which will be implemented as part of the transaction process for these PEs and prior to their divestiture,with funding provided by this project. The project will also provide funding to cover the costs of preparing and implementingthe environmentalassessment and the de-commissioningplans for five PEs. The costs associated with the preparationof environmental managementplans for the 4 PEs recently privatized, as well as for monitoring compliance of these plans for all relevant PEs to be privatized will also be covered by the project. NEMA will be in charge of monitoring compliance.The environmentalmanagement plans for privatized PEs would include an WIV/AIDSawareness program for employees in accordance with guidelines from the country wide HI1V/AIDSprogram. Implementationof this component will be tmonitoredby the relevant authorities in country;NEMA's role will be to ensure that environmentalmanagement plans include an HIIV/AIDS awarenessprogram and that compliance is being monitored by the relevant authorities. Furthermore, it is envisaged that a training of trainers program be developed and provided to the management of the relevant PEs on good practicesof environmentalmanagement. It will be based on actual demand and be made part of the environmentalaudit activities before the completion of the privatization process of the PEs.
ProjectComponent 2 - US$2.00million Strengthening of Financial Oversight of Parastatals
One of the objectives of the EDP project was to provide the MFPED with responsibilitiesfor monitoring of public entities. To that effect the Parastatal Monitoring Unit (PMU) was integrated into the structures of the Ministry, while the remaining privatization and restructuring functions were transferred to the PCU. This component aims at building and further strengthening PMU's institutional capacity to provide effective parastatal monitoring within MFPED. The Project will finance technical assistance and on-the-job training to enable financial oversight of parastatals. It will provide funding for necessary equipment. As a result of better financial oversight, financial discipline in the parastatal sector should be improved leading to settling cross-arrearsand reducing budgetary subsidies to PEs.
ProjectComponent 3 - US$ 9.00 million Utility Sector Reform
Utility SectorReform supported by the project, includes the following sectors: telecom, electricity, water and rail. The ultimate goal is to increasethe quality, quantity and operation/deliveryefficiency of a variety of services through stronger competition,enhanced regulatory framework and institutions,and new private participation in infrastructure.This multifaceted approach is mirrored in the design of this project component,which covers all aspects of the reform: transactions, regulation and institutions.
The reformswill be implementedon the basis of sector reform strategies approved by GOU. The strategies are expected to recommend the appropriate sector structure, includingthe form and scope for private sector participation,the form and scope for regulation and propose an implementationplan. Detailed design of the sector structureas well as other elements of the reform, specificallythose related to service delivery goals (e.g. cost, quality and coverage) will be determined for each sector during project implementationin consultationwith stakeholders, including private sector bidders. Reform and privatization strategies have already been approved by GOU for the telecommunicationsand electricity sectors. Strategies for the rail transport and water and sewage sectors are being prepared with funding from other sources. The Uganda Country Framework Report (CFR), which was prepared with the assistance of the Public-Private Infrastructure Advisory Facility and the Bank served to clarify GOU's broad objectives for infrastructure services and provide an analytic basis for detailed design of the sector structure and reform implementation. The Project will help GOU with final design and implementationof selected utility sector reforms. In particularthe following activities will be provided:
-36 - 1. TA and on-the-jobtraining to finalize the design and implementnew sector structures in electricity, rail transport and water and sewage services, including the selection of private sector buyers and/or concessionaires; 2. TA and on-the-job training to prepare regulatory reforms in electricity, railways and water and sanitation; and 3. TA to establish and/or build the capacity of independentregulators in the electricity, telecommunications,water and transport sectors, including training and facilitating of twinning arrangementswith foreign regulators, supplyingworking tools and equipment.
ProjectComponent 4 - US$9.40million
Project Management A Project CoordinationUnit (PCU) - a special unit built on the basis of improvedand simplified EDP Project Unit - will be supportingthe MFPED in implementationof the privatization program and will ensure the overall coordinationand coherence between various sector strategies. PCU will include as part of its structure:(i) PU, charged with implementationof the privatizationof the remaining commercial and industrial PEs; (ii) URU, charged with the implementationof the strategies for the reform and privatization of the telecommunications,electricity, rail transport and water and sewage services; and (iii) all the necessary support services in the areas of procurement, accounting and administration, communications and legal. To focus the efforts of PCU while ensuring maximum coordination across sectors, teams will be created in PU and URU for specific transactions (as presented in Figure 1).
This component will provide financial resources for: (i) salaries of all PCU staff; (ii) covering operational expenses of the PCU throughout the life of the project; and (iii) purchasing necessary office equipment and supplies. The project will also finance both necessary staff training including technical expertise (e.g., privatization, regulation)and project management skills (e.g., project planing, accounting,auditing, procurement).
- 37 - Annex3: EstimatedProject Costs UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM
1. Capacity Building for Privatization (US$ 71.7 million): 0.00 (a) Technical assistance (TA) and on-the-job training to help 0.00 3.00 3.00 GOU design and implementthe privatization of commercial and industrial PEs (US$ 3.0 million); (b) communicationcampaigns (US$2.8 million 1.70 1.10 2.80 (c) PE enviromnentalcontingency plans (US$ 5.7million); 3.10 2.60 5.70 (d) severance payments and redeployment support of PE 60.20 0.00 60.20 retrenched workers US$ 60.2 million IDA financed).
2. Strengthening of PE Financial Oversight: (US$ 2.Omillion) 1.60 0.40 2.00
3. Utility Sector Refonn (Telecom, water, electricity and rail 0.00 transport). TA for final design and implementation, and training to help GOU (US$ 9.0 million) (a) implementutility sector reform strategies approved by GOU 0.70 5.90 6.60 (US$ 6.6 million); (b) establish and strengthen regulatory agencies (US$ 1.0 0.50 0.50 1.00 million); (c) provide training and experts to advise in regulation during 0.70 0.70 1.40 the stage devoted to local capacity building (US$ 1.4 million)
4. Project Management (US$ 9.4 million): 8.20 1.20 9.40
5. PPF 0.15 0.75 0.90 Total Baseline Cost 76.85 16.15 93.00 PhysicalContingencies 0.00 0.00 0.00 PriceContingencies 2.30 0.00 2.30 Total ProjectCosts 79.15 16.15 95.30 TotalFinancing Required 79.15 16.15 95.30
Goods 0.45 0.30 0.75 Services 10.30 13.22 23.52 Training 2.70 1.63 4.33 SeverancePay 60.20 0.00 60.20 IncrementalCost 3.20 1.00 4.20 Total ProjectCosts 76.85 16.15 93.00 Total FinancingRequired 76.85 16.15 93.00 This table does not include unallocated amount of US$ 2.3 million
- 38 - Annex4: Cost BenefitAnalysis Summary UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM
[Forprojects with benefits that are measured in monetaryterms]
-- lPresentaueoflows - Fiscal Impact EcoO Financial Analyssi' ______ATA.al is ______aes Subsidies Benefits: 188.1 76.4 49.6
Costs: 84.0 N/A N/A
Net Benefits: 104.1 76.4 49.6 IRR: 25.5
Notes:a) Usinga discountrate of 12 percent.(b) Benefitsare estimatedusing incrementaltaxes obtainedfrom privatizedenterprises and new businesses.(c) Savingsderived from reduced direct subsidies to public enterprises
Base Case Results. The net present value of the project is estimated at about US $ 104.1 million for a 12 percent discount rate, and its internal economic rate of return is estimated at 25.5 percent. The net present value of the project varies from about US$ 119.3 million to US$ 50.3 million for discount rates of 10 percent and 17 percent, respectively. The ERR for the retrenchmentprogram is 14.9 percent and it is sensitive to success of the SMEs.
Suimmaryof Benefits and Costs:
Main Assumptions: 1. Stable macroeconomicsenvironment as projected in the CAS with real GDP growth averaging at 7 percent per year. 2. Additionalcapital investmentwill be available for rehabilitation of equipment, new technology, training of staff, which will boost capacity utilization rates and increase productivity. 3. The project would develop a market friendly and competitive environmentthrough the establishmentof an appropriate regulatory framework,which, in turn, would help attract foreign capital, technology, and managerial expertise required to improve the efficiency of the sectors and their value added contributionsto GDP. 4. GOU is fully committed to the Privatizationand Utility sector reform Program.
Sensitivity analysis / Switching values of critical items: Switchingvalues of critical items: Two sensitivitytests were carried out: (a) the first test assumed that gains in productivity and output were half of the case base; (b) the second test assumed a 75 percent reduction in gains in productivity and output and the consumer gains in price/tariffand a zero growth in employmentopportunities. They show an ERR at 18.9 percent and a NPV at $ 44.5 million and an ERR at 13.8 percent and a NPV at $ 9.5 million, respectively. These tests demonstratethat this project produces solid results. See Table 3 and 4 for details.
-39 - Annex 4-1
Privatizationand Utility Sector Reform Project
Economic Analysis of Overall Project
I. Recent Macro-EconomicDevelopments
I. Uganda is one of the poorest countries in the world with a per capita income of US$ 320 with an economy and social indicators severely affected by the nearly 15 years of politicalturmoil and economic decline. Since 1987 GOU has been implementingan economic reform program supportedby a large number of donors. The program promoted prudent fiscal and monetary management, improvements of private sector incentives,regulatory framework reform and human capital development through investment in health and education. In this context, GOU has decided to implement a reform program aimed at promoting an accelerated private sector led development of economic activities and supported by Bank assistance.
II. Objectives and Description of the Project
2. The overall objective of the project is to support the Government'spolicy of divestiture in the productivesectors and promote an accelerated private sector led development of economic activities. Specifically,the project will support three major components: (a) capacity building for privatization which includes privatization of 39 commercial and industrial PEs, (b) strengthening of PE fnancial oversight; and (c) implementationof the utility sector strategies in railway, electricity and water and sewage sectors includingcapacity building for the regulatoryagencies. A specific retrenchmentprogram has been built into the project to alleviate the hardship of layoffs resulting from the privatization program. The proposed project would partially finance severance payments subject to the guidelinesdefined in the operational memorandumof March 5, 1996. It is expected that the project would help increase performance and efficiency of privatized enterprises,promote private investmentand facilitate private sector and economic growth and help reduce the level of poverty in the country. The economic analysis of the overall project is presented in Section III and the analysis of the retrenchmentprogram in Section IV. mI Cost-BenefitAnalysis of the Overall Project
3. Methodology. The cost-benefit analysis concentrates on identificationand measurement problems that are encountered in all project-evaluations.Therefore, to address the identificationissue for the project costs and benefits, only direct and indirect incremental impacts on the Government and society of Uganda were considered.The welfare gains and losses were estimated by using net change in average economic output price. Where explicit prices were not available, and or non-indicativeof true socioeconomic cost and benefits, indicativeproxies have been applied. The evaluation was done in terms of economic cash flow analysis that was developed from the fnancial cash flow of the project. Recognition was given to the fact that not all-economic cost and benefits are measurable in monetary terms.
4. Most of the expected benefits would occur in the medium term since the project is expected to facilitate essentially institutional development in both public and private sectors. The identified indirect benefits were quantified to obtain their monetary values because no direct cost recovery mechanisms have
-40 - been built into the project. Monetary values imputedto the indirect benefits represents measurablegains from additional income generated from newly createdjobs, economic efficiency from reduction in factor costs and consumer surplus. Furthermore, expected non-monetizedbenefits from the project include improved management,changes in quality and quantity of services, conducive business environment, changes in poverty alleviation and social distress. Non cash flow financial values such as amortization charges, sunk costs for physical requirements, and the debt service obligations were considered only in relation to fiscal impact of the project. See Table 2 which illustrates quantificationof the benefits.
5. By evaluating all project components together in a project cost-benefit analysis framework,the economic rate of return and net present value were produced. The distributionalaspects of the benefits have been analyzedby identificationof the project beneficiaries. In addition, a separate economic analysis was conducted for the retrenchmentprogram and the results were incorporated in the overall project economic analysis framework.
6. It has been difficult to deal with inter-firm linkages and inter-industrydependencies within the PE sector and other firms. For example, UEB benefits from monopoly charges to other PEs and indirectly provides short term financing in the form of large receivableaccounts. It would be difficult to include such costs in the economic analysis. Therefore, it is assumed that the benefits such as reduction in factor costs, incrementalemployment opportunities, value added through productivity enhancementsand gains in efficiency of service delivery, include inter-firm benefits.
7. Assumptions. It has been assumed that:
a) GOU is fully committedto the Privatizationand Utility Sector Reform program. The project design reflectsthe need to complete PE reform by accommodatingcountry and politicalobjectives of employment opportunities, public participation and awareness, enterprise continuity and social obligations.
b) GOU will continue with its prudent economic policies to stabilize the country's macroeconomics environment.The GDP growth rate is estimatedto average at 7.0 percent per annum during the life of the project. c) the project would develop a market friendly and competitiveenvironment through the establishment of an appropriateregulatory framework which would, in tum, help attract foreign capital, technology, and managerial expertise required to improve the efficiency of the sectors and their value added contributionsto GDP. d) the private sector, both local and foreign investors, will respond positively to the sector reforms from the project. A positive response is critical for the realization of the indirect benefits.
8. Project Costs. The estimated total project costs for the PUSRP during the five-year period 2000 to 2005 is US$ 95.2 million. The costs would finance technical assistance requirements,transaction costs for restructuringand privatization of the utility enterprises,retrenchment costs, institutional and capacity building support, management and operating costs of the project. They include GOU's contributionwhich is estimated at 49 percent of total project costs. The price contingency amounts of 2.6 percent of the total project costs are included in the total project costs amount. Price contingencies are usually for the unexpected changes in the general price level of capital goods and/or project-specificreal cost increases. The real cost increasescould be as a result of unforeseen difficulties and expendituresor increases in the scope of the project.
-41 - Table 1. Project Costs by Component (US $ million)
PROJECT COMPONENT TOTAL 1. Capacity Building for Privatization 71.7 2. Strengtheningof PE Financial Oversight 2.0 3. Support for Utility Sector reform 9.0 4. Project Management 9.4 5. Contingencies (2.6 percent) 2.3 + PPF 0.9 TOTAL PROJECT COSTS 95.3
9. The proposed project will neither affect the ability of businesses in the private sector to survive, plan or grow; nor will it affect availability of services to the consumer. Therefore, indirect costs have not been included in the cost-benefit analysis of the project.
10. Project Benefits. Four major economic benefits have been identified and quantified (see Table 2): a) Benefits from newly created employmentopportunities in the private sector. Governmentand the public enterprise sectors account for about 30 percent of overall formal employment. It was estimated that employment in the private sector has increased by 5 percent since 1993. The additional income from newly created employment opportunitieshas been estimatedon the basis of expected additionaljob creation due to new investmentand new demand for services. b) Benefits in Productivity and Output. Gains are expected from higher total factor productivity, resulting from lower prices for utility services as well as positive changes brought about by private ownership (i.e., better work ethics, training, management, equipment and new technology). Additionalgains will also be derived from efficiency in the business environment. c) ConsumerSurplus (gains in price and tariff): Benefits to the consumer are expectedin the form of lower price/tariffsand improved service quality, wider coverage due to competition and private sector involvement. Only benefits from reduced prices have been quantifiedfor the analysis. Gains accrued to consumers due to service accessibilityhave not been quantified. d) Benefits from the RetrenchmentProgram: They include additional contributionto the economy that the workers will be able to make by working where there is (a) an effective demand for their services, and or (b) by developing their own economic activities, and (c) through cost savings from the Privatization and restructuring of utility enterprises prior to privatization referred as "loss of current wages" (see Section IV).
Table 2. Projected Economic Benefits 2000-2014 (US $ thousand)
Economic Benefit Total A. AdditionalIncome from Employment 5,182 Opportunities B. Gains in Productivity & Output 116,986 C. Consumer Gains in Price/Tariff 2,126 D. RetrenchmentProgram Benefits 63,848 TOTAL 188,141
-42 - 11. Target groups. Key target groups have been identifiedand include: a) Consumerswould gain about US $ 2.1 million. The sources of benefits (consumer surplus) include expected reductions in tariffs, expected increase in access to services,expected eliminationof waste, expedited accounts receivable collection and probable productivitygains. b) Retrenched employees would benefit from project's resources through safety net measures of adequate communication,counseling and retraining, the project would also generate more sustainable employment opportunitiesfor individuals who will opt to be self-employed. c) Employees welfare in the privatized enterprises is expected to increase. This would be achieved either through employee share purchase plans and new labor contractsthat normally accompany privatizationor through expected gains from increases in the average wage bill due to private enterprise productivityperformance and additional employment opportunities. d) Workingadult populationwill have an opportunityto changejobs best suited to their skills as employment criteria in the privatized enterprises is expected to change. Moreover, the private sector would benefit from the project due to expectedgrowth in the private sector, which will generate new employment opportunitiesto assist in poverty alleviation. e) Unemployed people and new graduates would also benefit from the new jobs expected to be created by privatized firms and new entrants in the productive sectors of the economy.
1) The private sector, including both local and foreign investors, whose investmentopportunities have been restrained due to unfavorablebusiness environment resulting from public enterprise monopoly power, would benefit from removal of entry barriers and reduction in factor costs of production like in telecommunications.This is shown on the economic benefit values on estimated increases in productivity and output, and in reduced costs of investment. See Table 1. Growth in the private sector is expectedto generateemployment opportunitiesto further alleviate the social costs of unemployment. These economic benefits are reflected in the estimated benefits from increased employment,productivity and output. g) Micro, Small and Medium sized Enterprises would benefit from the project in form of conducive business environmnent.Businesses in the informal sector and small and micro enterprises would be freed from constraints encountered in high factor costs of production and financial market distortions.
12. Base Case Results. The net present value of the project is estimated at about US$ 104.1 million for a 12 percent discount rate, and its intemal economic rate of return is estimated at 25.5 percent. The net present value of the project varies from about US$ 119.2 million to US$ 50.3 million for discount rates of 10 percent and 17 percent, respectively. See Table 5 for details.
13. Sensitivity Analysis. Two sensitivitytests were carried out. The first test assumed that gains in productivity and output and the gains in consumer gains from price/tariff were half of the base case. The second test assumed a 75 percent reduction in gains in productivity and output and a 75 percent reduction in consumer gains from price/tariff, coupled with a zero growth in additional income from employment opportunities. The results (presented in Table 3) show an IRR at 18.9percent and a NPV at $ 44.5 million, and an IRR at 13.8 percent and a NPV at $ 9.5 million, respectively. This demonstratesthat the
-43 - project produces robust results.
Table 3. Sensitivity Analysis
Gains in productivityand output Base Case -50% -75%
Consumer gains in price/tariff as estimnated -50% -75%
Additionalincome from employment as estimated as estimated Zero growth opportunities Overall Project v IR (%) 25.5% 18.9% 13.8% * NPV (US$ million) $104.1m $44.5m $9.5m
14. In addition, the project will generate $ 125.9 million of savings in public finance in the form of resource allocation efficiency. These savings are expected to come from significant reduction in direct and indirect subsidies to public enterprises - $49.6 million, reduction of transfer of productive capital resources into the PE sector and increase in corporate and other tax gains from privatized and new firms - $76.4 million. This would reduce govemment fiscal burden and would free resources for new investmentin the social sectors.
IV. Staff RetrenchmentProgram Economic Analysis
Introduction
15. GOU embarked on a program of PE sector reform and privatization in 1992, with the aim of redefiningthe role of the State in the economy,reducing the financial and administrativeburden of the PE sector on Govemment, improvingPE efficiency and encouragingprivate investment.At the beginning of the program, there were over 150 public enterprises involved in virtually all sectors of the economy, most of which were majority owned by the State. They employed more than 30,000 persons, accounting for 25 percent of total formal employment, and generated about 10 percent of GDP. The sector's performnance was characterizedby low productivity, high losses and rising debts, which placed a concurrent burden on the banking system, public finances and the balance of payments. As of end-December 1999, GOU completed 93 divestitures of enterprises in the industrial, commercial, agricultural and hotel sectors, of which 62 firms were privatized and the others liquidated. One firm (Uganda Clays Ltd.) has been offered to the public through share sale on the Uganda Stock Exchange and successfullysold. Twenty firms were sold to foreign investors, of which half exercised their pre-emptiverights.
16. However, the impact of the privatization process would have been higher had it not been for the uneven implementation. The remaining parastatalsaccount for the bulk of the Uganda's employment (30 percent), fiscal burden and overall contributionto the economy. They include utilities, comprising of the telecommunications,energy, water, and transport services, and other large PEs, which are mostly involved in manufacturing, construction, agri-business,tourism, trade and financial services. GOU also holds important minority shares in a variety of companies, Against this background, GOU has decided to undertake a comprehensive overhaul of key utility sectors and to recast the reforms within a single unified progran. GOU's overall strategy is to therefore, complete the on-going PE reform agenda through privatization of remaining commercial and industrial PEs.
-44- Labor Market and Characteristicsof Laid-off Employees
17. Labor situation in Uganda. The labor force accounts for about 50 percent of the total population of 22 million with an estimated annual growth rate of 3.1 percent. The formal employment includes some 120,000 employeesof which 30 percent are in the public enterprise sector. Formal employment has decreased by 5 percent since 1993 (at the beginning of the privatization program). An analysis by sector shows an increasein employment in the agriculture sector, manufacturing and services sectors.The majority of employment is in the eastern region and urban areas.
18. On the other hand, employment in the informal sector has increased significantly. It is estimated that the informal sector employs some 1.5 million from the estimated 800,000 establishments in a variety of activities includingtraders, craftsmen, etc., of which two-thirds are in the capital city. The annual growth rate in 1997 has been estimated at 25 percent and is believed that this sector has enormous potential to spur overall economic growth in Uganda (Source: Government of Uganda. Poverty EradicationAction Plan. 1997 Report by MFPED).
19. Key characteristics of employees. A detailed study has been carried out in order to identify the likely target groups to be laid off and possible remedial measures to be implemented,aimed at facilitating their re-absorption into the productive economy.The study reviewed 8 Parastatals as follows: Uganda Railways Corporation, Dairy Corporation, National Water Corporation, Nile Hotel, National Housing Corporation,New Vision (newspaper), Uganda Electricity Board, National Insurance Company; These parastatalswill be affected by the retrenchmentprogram, operating mainly in the utilities, hotels and service sectors, and covering some 6,200 employees. The population is, on average, 37 years of age and with roughly 12 years of service.
Proposed RetrenchmentProgram
20. The program would cover the following costs: (i) severance payments for all employees, and (ii) assistance including early and sustained communicationto PE workers on the subject of retrenchmentand privatization,as well as (iii) counseling and retraining.
* SeverancePayments. The project will finance the costs of settling benefits to all employeesof PEs scheduled for divestiture, excluding PEs with pre-emptive rights. This will cover all legal indemnities, in line with the Labor Code and collective bargaining agreements. It is estimated that this would represent, on average, 24 months of salary.
* Safety Net Measures. All employees will be interviewed by a team of counselorsand will prepare their assessment of their own achievements and capabilities. The idea is to provide assistance to those who want it either for training in developing their entrepreneurial skills or retraining those who are job seekers.The program intends to finance, upon request by the retrenched, a scheme to assist entrepreneursto develop their projects. This would include: (i) specific retraining at the beginning, includingassistance for the preparationof a business plan, and (ii) monitoring during the first years of implementation.There will also be a tracer study to assess the well-being of the retrenched employees.
Economic analysis
21. A cost benefit analysis has been carried out in order to assess the relevance of the program. It includes a specific analysis of the retrenchmentprogram and an analysis of the impact on the sectors involved.
- 45 - 22. Methodology. The economic costs and benefits of the program are compared as follows: (a) costs cover both severance payments and re-deploymentcosts, and (b) benefits include the additional contributionto the economythat the workers will be able to make by working where there is an effective demand for their services,or by developing their own economic activities. Severance paymentshave been calculated on the basis of the collective bargaining agreementsapplicable to each economic sector.
23. Costs. The costs of the retrenchmentprogram are given by the sum of the following items:
1. Severancepayments + other benefits (SP) 2. Outplacementcosts to assist job seekers/counseling(OC) 3. Training costs (TC) 4. Costs of administeringthe program (PC)
The marginalproductivity value of privatized enterpriseretrenched employees has not been included because the labor reduction does not affect remaining personnel ability to carry out current production levels. The marginal productivityvalue of the retrenched employees is equal to zero. The item (1) would not have been consideredeconomic costs if there were no budgetary constraints in Uganda. Instead they would have been considered as income-efficienttransfers to the retrenched employeesand thus not included in the cost-benefit analysis. The inclusion recognizesthe importance of the cost of public funds. The item (2), (3) and (4) have been included because they have an economic component in each of them that have alternative use of the resources.
24. Benefits. The benefits of redundancy reduction in each year are given by the:
1. Marginal productivity of laid-off employees elsewhere in the economy (PE) 2. Marginal revenues of laid-off employees creating their new enterprises (PSM) 3. Marginal productivity value of the forgone labor cost of privatized enterprises (LCW)
The marginal productivity value of the retrenched employee (1) and (2) is the product of: (i) probability of the employee'sengagement in another activity, which depends on the effectivenessof the retraining and assistance that the employee receives, by (ii) the net income produced by such activity. The activities could be new employmentthrough replacement or self-employedactivities. The marginal productivityof the value forgone labor cost of privatized enterprises represents (3) the opportunity cost of the outlays that will be saved by the program. These savings in labor costs can be used in investments in other sectors of Uganda's economy.In the cost-benefit analysis they have been considered to be equivalent to foregone labor cost. However,a non-productivityindicator has been factored-into reflect social factors that have reduce the levels of cost savings to society. In the overall economic analysis of the project, the savings in labor costs have translated in terms of reduction in the long-run marginal factor costs. This cost reduction is expected to increasethe privatized enterprises competitivenesswhich would explain the improvementin the private sector contributionsto economic growth.
25. Assumptions. The model identifies the employeesthat are likely to develop their own project and the ones that are likely to seek out new jobs (90 percent and 10 percent respectively). These numbers are derived from the results of the labor study carried out during project preparation, which interviewed and analyzed the case of 6,200 employees. It is assumed that the probability of finding new jobs is 25 percent. This result is based on an analysis of the job market over the past three years, using several sets of available data (employmentagency, national social security board, private placement finmsand surveys). However, with the impact of the outplacementprogram, the probabilityof finding new jobs could go up to
-46 - 30 percent. It is also assumed that the salary reduction would be about 30 percent. This number has been obtained from a detailed analysis of the private salary structure from the Collective Bargaining Agreements. Finally, the probability of developing a privatelyowned business successfully has been estimated at around 50 percent.
27. Results. The net present value (NPV) of the retrenchmentprogram is estimated at US$ 8.6 million for a 12 percent discount rate and the internal economic rate of return is estimated at 14.9 percent under the base case. This rate is sensitive to the revenues expected from self-owned businesses. If revenues from SMEs are assumed to be 50 percent less than expected, the estimatedrate of return would be reduced to 10.9 percent with a negative NPV. If the probability of successfully established enterprises increasesto 70 percent, the rate would increase to 17.9 percent and it reduces to 11.6 percent if the probability of successfully established enterprises is reduced to 30 percent. On the other hand, if the probability of finding jobs is increased to 38 percent, the estimated rate of return of the program would also increase to be as much as 15.9percent. Consequently,the safety net measures have been designed to focus primarily on communicationsupport for the preparedness of the retrenched employeesand retraining/trainingfor development of new entrepreneurs.See Table 4 for details.
28. These results show that the retrenchmentprogram has a social value even under the most pessimistic assumptions.The social value does not come from the fact that the employees of privatized enterprises are retrenched, but rather on the fact that the retrenched employees can be better used in the other sectors of the economy where their demand has been identified, and from the specific efforts made to ensure that the quality of this labor force will be enhanced through training and other support programs. Moreover, it also shows that scarce public resources are better utilized if the beneficiaries are targeted.
29. In addition, an analysis of the impact of the program for the sectors involved has been carried out and is included in the overall economic analysis of the project. Based on experience derived from the former privatization programs and the financial information generated by new entrants, it appears that the productivity (i.e. revenue per employee) is, at least, twice than that of the public sector. It is, therefore, reasonableto expect that the project would have a significant impact on the sectors involved.Finally, the program will have a social impact since it includes safety nets measures aimed at reducing the hardship of layoffs.
-47 - Table 4. Summary of Economic Analysis of RetrenchmentProgram
Amounts 1. No of Employees 13,000 2. No of estimated Layoffs 6,200 3. Average Annual Salary (US$) 1,880 4. Average age 38 5. Proportion of employees (10%) 620 6. Proportion of SMEs (90%) 5580 7. Probability of Finding a Job 0,25 S. Probability of Successful SME 0.50 9. Wage Reduction Coefficient 0.70 10. Average Salary Elsewhere (US$) 1,200 11. Average Revenue From SME (US$) 1,240 12. SeverancePayments & Other Liabilities('000 60,200 US$) 16. Annual Wage Savings ('000 US$) 5,580 17. Annual Revenues from employees('000 US$) 279 18. Annual Revenues from SMEs ('000 US$) 3,515 19. Net Present Value US$ million 8,427 20. Estimated IRR, Base Case 14.9% - Wages Reduced 50% 14.5% - Revenues from SMEs Reduced by 50% 10.9% - 38% Probability to find ajob Within One Year 15.9% - 30% Probability of Successful SMEs 11.6% - 70% Probability of Successful SMEs 17.9%
-48 - Table 5. Cost - Benefit Analysis. Basecase Scenario (US $ Thousand)
|______COSTS BENEFITS Additional Income Gains in Consumer Retrenchm. Net Cost or Project Government Generation Productivity Gains in Price Program Benefit for YEAR Costs Contribution from and Output and Tariffs Benefits the Year Employment ______O pportunity 1 (7,400.0) (12,300.0) . 4,527 - 9,347 (5,797) 2 (11,875.0) (10,714.3) - 4,891 317 9,347 (8,004) 3 (9,805.5) (9,247.4) 230 5,111 419 9,347 (3,916) 4 (7,971.9) (8,541.4) 473 10,048 350 9,347 3,735 5 (3,050.5) (3,177.6) 730 10,729 281 9,347 . _ 14,891 6 ______, 754 11,459 332 9,347 21,925 7 1,046 20,211 346 9,347 30,985 8 _ 1,088 22,035 406 9,347 32,911 9 1,154 24,071 294 9,347 34,903 10 ______1,530 32,602 324 9,347 43,841 11 1,624 35,898 356 9,347 47,263 12 1 ,723 39,532 392 9,347 51,033 13 1,827 43,538 431 9,347 55,184 14 1,939 47,955 474 9,347 59,757 15 2,057 52,825 522 9,347 64,793 NPV @12% 104,058 (40,103) (43 981) 16,174 365,433 5,245 140,616 IRR 25.48% Assumptions:
1. Stable macroeconomicenvironment as projected in CAS with real GDP growth averaging at 7 percent. 2. Additionalcapital investmentsfrom the private sector will be available for rehabilitationof equipment, new technology, training of staff that will increasecapacity utilization and productivity. 3. Reduction in electricity,water and railway losses will increaseconsumption of current output by 15 percent, thus, causing savings through reduction in tariffsand factor costs.
If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs."
- 49 - Annex 5: Financial Summary UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM Years Ending July 1 - June 30
I Year1 I Year 2 1 Year 3 Year4 i Year I Year 6 Year 7 Total Financing Required Project Costs InvestmentCosts 20.7 22.3 20.6 19.6 12.0 0.0 0.0 RecurrentCosts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 20.7 22.3 20.6 19.6 12.0 0.0 0.0 Total Financing 20.7 22.3 20.6 19.6 12.0 0.0 0.0 Financing IBRDIIDA 11.5 11.2 10.0 9.8 6.0 0.0 0.0 Government 9.2 11.1 10.6 9.8 6.0 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 UserFees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 20.7 22.3 20.6 19.6 12.0 0.0 0.0
Main assumptions:
The first year includes PPF of US$ 0.9 million. The last year includes US$ 2.3 million contigencies although it will be reallocatedduring the midterm review of the project. GOU will contribute substantially on the SeverancePay sub-component.Source of funding will be primarily from PEs and Divestiture Proceeds Account.
- 50 - Annex6: Procurementand DisbursementArrangements UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM
Procurement
General
1. All goods, works and services will be procured in accordancewith IDA ProcurementGuidelines: Procurement under IBRD Loans and IDA Credits, January 1995, revised January and August 1996, September 1997 and January 1999; and Guidelines: Use of consultants by World Bank Borrowers and by the World Bank as Executing Agency, January 1997, revised September 1997 and January 1999. Bank's standard bidding documents for goods, works and services will be used. For details on project costs by procurement arrangements refer to Table A.
Procurement Organization
2. Procurement Capacity. A procurement capacity assessment was undertaken and it was agreed with GOU to recruit one additional procurement specialist and a ProcurementAdvisor to give overall guidance to the procurement staff and to provide strategy, planning and monitoring and back-up services in support of the project staff. Provision for additional training will be provided during the first six months of the project to the procurement staff to familiarize themselves with World Bank guidelines and procedures.
3. Advertising. A General ProcurementNotice (GPN) has been prepared for the project and will be published in the UN DevelopmentBusiness (UNDB) in June 2000. It indicates all the procurement contracts (> US$ 100,000)where the ICB method of procurement would be used. The GPN will be updated annually. All consultancy assignments estimated to cost the equivalent of US$ 200,000 or more will be advertised in an internationalnewspaper and in the UNDB. In addition, expressions of interest may also be sought from prospective consultants by advertising in a national newspaper or technical magazine. In the case of assignments estimated at US$ 100,000 or less the assignment may be advertised nationally and the shortlist may be made up entirely of national consultants provided that at least three qualified national firms are available in the country and foreign consultants who wish to participate are not excluded from consideration.
4. Procurement Plan. An final Overall Procurement Plan (OPP) and the first year's Detailed Procurement Plan (DPP) was agreed upon during negotiations. DPPs for each subsequent year of the project, showing the procurementmethod and processing time for each contract, will be submittedto IDA every year for its review and comments by April 30.
- 51 - Procurementmethods (Table A)
Table A: Project Costs by Procurement Arrangements (US$ million equivalent)
1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 0.55 0.10 0.10 0.00 0.75 (0.55) (0.10) (0.00) (0.00) (0.65) 3. Services 0.00 0.00 23.52 0.00 23.52 Consultants (0.00) (0.00) (23.52) (0.00) (23.52) 4. Training 0.00 0.00 4.33 0.00 4.33 (0.00) (0.00) (4.33) (0.00) (4.33) 5. Severance Costs 0.00 0.00 60.20 0.00 60.20 (0.00) (0.00) (14.00) (0.00) (14.00) 6. Operating Costs (4) 0.00 0.70 3.50 0.00 4.20 (0.00) (0.60) (3.10) (0.00) (3.70) Total 0.55 0.80 91.65 0.00 93.00 (0.55) (0.70) (44.95) (0.00) (46.20)
i' Figures in parenthesis are the amounts to be fmanced by the IDA Credit. All costs include contingencies Includes goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.
3/ The numbers indicating IDA credit financing include amounts advanced by the PPF as follows: (i) goods US$ 50,000; (ii) consultant services US$ 620,000; (iii) training US$ 130,000; and (iv) operating costs US$ 100,000.
4/ "Operating Costs" means the incremental operating costs (not related to training) arising under the Project on account of maintenance of vehicles, fuel, equipment, office supplies, utilities, consumables, travel and accommodation excluding salaries of the Borrower's civil servants.
- 52 - Procurement of Goods and Equipment
5. Goods and Equipment: All goods and equipmentand servicesunder IDA Credit will be procured under contracts awarded in accordance with Guidelines for goods, works and services: Procurementunder IBRD loans and IDA Credits, January 1995, revised in January and August 1996, September 1997 and January 1999 (Procurement Guidelines). IDA standard bidding documents will be used. Contracts for goods, such as office equipment, computers, and furniture costing between US$ 30,000 and US$ 100,000 equivalentwill be procured by national competitive bidding (NCB). Internationalcompetitive bidding (ICB) will be used for any amount greater than US$ 100,000 .
Procurement of Consultant Services
6. Procurement Methods: As a rule, consultant services would be procured through Quality and Cost Based Selection (QCBS) methodology. All consulting service contracts costing more than US$ 100,000 equivalent for firms, will be awarded using the QCBS method. Consulting service contracts estimatedto cost less than US$ 100,000 for firms will be awarded through the Consultants' Qualifications (CQ) selectionmethod. Services of individualconsultants will be procured under individual contracts in accordancewith the provisions of paragraphs 5.1 to 5.3 of the Guidelines.
7. The Bank's Standard Request for Proposals - Selection of Consultants containing the standard Letter of Invitation, Information to Consultants, and Standard Form of contract will be used for hiring consultants.Simplified contracts will be used for short-term assignments and for contracts of local consultantsimplementing the project.
Review by IDA
8. Table B provides the prior review thresholds. Each goods contract estimated to cost US$ 100,000 equivalent or more will be subject to IDA prior review as per AppendixI of the Guidelines. Other contracts will be subject to post review in accordance with paragraph 4 of Appendix I of the Guidelines. All selection of consultants, all terms of reference, all consulting contracts exceeding US$ 50,000 for individuals and US$ 100,000 for firms, and all training will be subjectto IDA prior review, whereby IDA non-objectionsare required for the Requests for Proposals, Evaluations and Negotiated Contract Signing. For consulting contracts less than or equal to US$ 50,000 for individuals and US$ 100,000 for firms, a non-objectionis required for the Requests for Proposals. Extensions to all consulting contracts will be subject to prior review.
- 53 - Table Al: ConsultantSelection Arrangements (optional) (US$million equivalent)
A. Firms 15.01 0.00 0.00 1.00 0.00 0.00 0.00 16.01 (15.01) (0.00) (0.00) (1.00) (0.00) (0.00) (0.00) (16.01) B. Individuals 1.11 0.00 0.00 2.40 4.00 0.00 0.00 7.51 (1.11 ) (0.00) (0.00) (2.40) (4.00) (0.00) (0.00) (7.51) Total 16.12 0.00 0.00 3.40 4.00 0.00 0.00 23.52 1 (16.12) (0.00) (0.00) (3.40) (4.00) (0.00) (0.00) (23.52) 1\ Includingcontingencies
Note: QCBS= Quality-and Cost-BasedSelection QBS= Quality-basedSelectiorn SFB= Selectionunder a FixedBudget LCS = Least-CostSelection CQ = SelectionBased on Consultants'Qualifications Other= Selectionof individualconsultants (per SectionV of ConsultantsGuidelines), CommercialPractices, etc.
N.B.F.= Not Bank-financed Figuresin parenthesisare the amountsto be financedby the BankCredit.
-54 - Priorreview thresholds (Table B) CQ - Selection Based on Consultant's Qualifications ICB - International Competitive Bidding QCBS - Quality and Cost Based Selection NCB - National Competitive Bidding IS - International Shopping NS - National Shopping SOE - Statement of Expenses Note: All sole source assignments would be subject to prior review All TORs for consulting assignments would be subject to prior review.
TableB: Thresholdsfor ProcurementMethods and Prior Review'
. . ii muThreshold PrOcuren v -:Pr.iorRpview-:
.Expenditre. Ca.;.--.- US$t-'ans i e:o ______;::--_-;_''..-,:;:._- 1. Works
2. Goods Greater than or equal to ICB All (Equipment,Furniture) 100 Greater than or equal to 30 NCB Post Review and less than 100 Less than 30 Shopping (IS) Post Review 3. Services Greater than or equal to QCBS (Intl. Advert) All (Consultants) 200 Greater than or equal to QCBS (Intl. Shortlist) All 100 and less than 200
Firms Less than 100 CQ TORs
Individuals Greater than or equal to 50 CQ - Individual All TORs Less than 50 CQ -Individual Post Review 4. Training SOE All 5. Severance Costs SOE Prior for 4 PEs Post Review for others 6. Operating Costs SOE None
Total valueof contractssubject to priorreview:
OverallProcurement Risk Assessment
Low
Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits)
Thresholdsgenerally differ by countryand project. ConsultOD 11.04"Review of Procurement Documentation"and contactthe RegionalProcurement Adviser for guidance.
- 55- Disbursement
Allocationof creditproceeds (Table C)
Table C: Allocationof CreditProceeds
:x'i(tIture Ca~g 4 Amu ;0h~U0$m~ion --AFfpiL AP tSWiLR t&~e 1. Goods and Services 0.60 90% a) CapacityBuilding for Priv. b) PE Fin. Oversight Strengthening c) Utility Sector Reform d) Project Management TA 2. Consultants 22.90 100% a) Capacity Building for Priv. b) PE Fin. Oversight Strengthening c) Utility Sector Reform d) Project Management TA 3. Training 4.20 100% a) Capacity Building for Priv. b) PE Fin. Oversight Strengthening c) Utility Sector Reform d) Project Management TA 4. Severance 14.00 100% a) Capacity Building for Priv. 5. Operating costs 3.60 90% a) Capacity Building for Priv. b) PE Fin. Oversight Strengthening c) Utility Sector Reform d) Project Management TA 6. Refunding of PPF Advance 0.90 7. Unallocated costs 2.30
Total Project Costs 48.50 Total 48.50
Use of statements of expenditures (SOEs): 9. The threshold for SOEs would be set at US$ 100,000 for goods and consultancy contracts for firms and at US$ 50,000 for consultancy contracts for individuals, and training. However,there will be no limits for Severancepay category. Disbursement of funds for eligible enterprises will be to the Special Account (for payment through the Redundancy Account at PCU) after IDA prior review of the detailed retrenchment plan as submitted by PCU and cleared by the Auditor General of Uganda. Following payment to an eligible enterprise,and within 90 days of the advance from the Special Account, such payment should be accounted for; an audit will follow within 180 days of the date of advance. As for the remaining enterprises, IDA will conduct post review after the Auditor General has audited the account.
- 56- Special account: 10. The project will have three accounts: (i) a Special Account managed by the Ministry of Finance, Planning and Economic Development(Planning and Budgeting and Financial ManagementComponents); (ii) Redundancy account; and (iii) counterpart fund account. The authorized allocation for the Special Account will be set originally at US$ 0.5 million until the aggregate amount of withdrawals from the Credit Account plus the total amount of all outstanding special commitments shall be equal to or exceed the equivalent of SDR 6 million, at which time the authorized allocation will be set at US$ 1 million.
FinancialManagement System
Summary Assessment
11. Although the project's current financial management arrangementssatisfy the Bank's minimum requirements under OP/BP 10.02,they are not adequate to provide, with reasonable assurance, accurate and timely information on the status of the Project as required by the IDA for PMR-based disbursements. The project is therefore not yet ready for PMR-based disbursements, as outlined in the World Bank's Loan Administration Change Initiative Handbook (LACI, September 1998). An Action Plan has been agreed with GOU during project preparation to ensure that its completion will allow the project to become LACI compliant and for the IDA credit to be disbursed on the basis of PMR's by January 1, 2001.
12. The Project CoordinationUnit has established a Management Committee which will be responsible for overall policy guidance of the project's financial management. The compositionof this body, together with its terms of reference relating to financial managementhave been prepared and reviewed by the Bank. The committee will have adequate representationfrom DRIC. The project's accounts will be maintained on the computerized software package, Solomon IV, as the one used under the EDP. The main books of accounts are: (a) Cash Book; (b) Ledgers (c) Journal Vouchers; and (d) Fixed Asset Register.
Staffing
13. A Chief Accountant for the project will be in office by end May, 2000 and he/she will head the accounting department. The duties of project accountant are currently undertaken by a part qualified accountant who is studying to finalize her professional qualification. There is also currently an accounts assistant, and it is planned to recruit another one. Recruitment plans for positions below that of Chief Accountant together with TORs and allocation of responsibilitiesfor staff positions have been finalized by the Chief Accountant.
FinancialReporting
Periodic financial reports will be similar to those produced under the EDP. These include the following: * Quarterly financial reports which include comparisons of actual amounts against budgeted amounts; * Quarterly divestiture and redundancy account financial reports; * Monthly World Bank special account reconciliationwith bank and loan statements and quarterly and six month eligible disbursementanalysis with actual compared to budget; and * Bi-annual financial report which indicatesvariances between actual outputs and matched costs, compared to forecasts and measured against budget.
- 57 - Other monitoring reports are outlined in the PIP section on monitoring. In addition, a database on statistics, performance indicators,outputs by component, economic indicators,targets is maintained by the PrivatizationUnit for its projects, and a similar one will be set up for the PUSRP. The reports mentioned above will be tailored further to suit the requirements of LACI. It is also planned that the accounting software used by the project will be programmedby Syscorp, the systems consultants, to automatically generate all the reports that are required. Reports produced on a quarterly basis to support requests for replenishmentof the Special Account would include the following: (i) Financial Statements:These are to provide information on the sources and uses of funds by loan category and by project activity, forecasts of expenditure, amount of disbursement requested and a reconciliation of the SA; (ii) Project Progress Reports: These are to provide information on project implementationprogress in physical and financial terms using monitoring indicators,including identifyingdeviations from plan and explaining reasons for such variations; (iii) Procurement ManagementReports: These are to indicate the status of procurement and contract commitments and expenditure including source of supply data for contracts subject to the Bank's prior review, as well as post-review contracts above a certain threshold.
Annual Financial Statementsand Annexes for the project will include: (i) A Statement of Sources and Uses of Funds showing funds from IDA and Counterpart Funds separately, a summary of expendituresanalyzed under the main headings and by main category of expenditures (consistentwith the Chart of Accounts), both for the current fiscal year and accumulated to date. (ii) A Balance Sheet showing accumulated funds for the Project, bank balances as well as other assets and liabilities of the Project, if any; (iii) Notes in respect of significant accounting policies and accounting standards adopted by managementwhen preparing the accounts and any supplementary information or explanationsthat may be deemed appropriate by managementin order to enhance the presentation of a "true andfair view "; (iv) Special Account Statement showing deposits and replenishmentsreceived, payments substantiatedby withdrawal applications, interest that may be earned on the account and the balance at the end of the fiscal year; (v) A Reconciliationbetween the amounts shown as "Received by the Project from IDA and that shown as having been "Disbursed" by them; (vi) ImplementationReport, which would be a narrative summary of the implementationprogress for the project; (vii) Summary of Credit Withdrawals using SOE's or PMR's, listing individualwithdrawal applicationsby reference number, date and amount. Indicative formats of these statementswould be developed in accordance with IDA requirementsby 30 April 2000.
FinancialProcedures Manual
An Authority and Procedures Manual that documents accounting procedures that were used for the EDP exists. It is planned that the same procedureswill be used for the PUSRP and that a consultant will be hired to document these procedures in the Financial Procedures Manual (FPM) and to train staff in its use. Terms of Reference for the consultancy are currently being drawn up and cleared by IDA.
Internal Controls
The control environment consists of the actions, policies and procedures that reflect the overall attitude and awareness of the senior management regarding the importance of control. The control environment includes: (i) organizational structure of the project management; (ii) methods of assigning authority and responsibility;(iii) management supervision and methods for monitoring performance; (iv) internal audit function; (v) personnel policies and practices; and (vi) external influences, such as regulatory bodies. In addition the PCU has taken steps to ensure that the project will be managed by financial efficiency and integrity. These steps constitute the internal controls for the project included policies and procedures adopted by managementto assist it in achieving its objectives of ensuring, as far as possible, the orderly and efficient conduct of its operations, including:adherence to management policies, laws and regulations;
- 58 - safeguarding of assets; prevention and detection of fraud and error; etc.
Auditing
The Auditor General is primarily responsiblefor the auditing of all government projects. Usually, the audit is subcontractedto a firm of private auditors, with the final report being issued by the Auditor General, based on the tests carried out by the subcontractedfirm. Project accounts will be audited annually, special accounts and disbursements under SOE will be audited semi-annually for two years. The audit report will be submittedto IDA within six months after end of each financial year. Any firm of aaditors subcontracted to carry out the audit should meet the IDA's requirementsin terms of independence,qualifications and experience and should be subject to review by the Financial Management Specialist prior to appointment. Appropriateterms of reference for the external auditor were developed and agreed during Appraisal Mission. The Auditor will give opinion on:
(a) Adequacy of Accounting and Internal Control System (b) Financial Management System (c) Project Financial Statements (d) SpecialAccounts and Statement of Expenditure, including payment of severance.
- 59 - Annex 7: ProjectProcessing Schedule UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM
Time taken to prepare the project (months) First Bank mission (identification) 06/01/99 06/02/99 Appraisal mission departure 02/28/2000 02/08/2000 Negotiations 04/30/2000 04/07/2000 Planned Date of Effectiveness 10/15/2000
Prepared by:
Preparation assistance: Japanese PHRD Grant TF025452
Bank staff who worked on the project included:
Name 'alt S Edgar Saravia Task Team Leader TLUcy Fye Private Sector Development Specialist/Operations Agata E. Pawlowska Economist Faris Hadad-Zervos Associate Private Sector Development Specialist Jean-Michel Happi Private Sector DevelopmentSpecialist Nelson Ofwono Operations Specialist Rogati Kayani Procurement Specialist Peter Kyle Legal Advisor Aberra Zerabruk Legal Advisor Serigne Omar Fye Environmental Specialist Modupe Adebowale Financial Management Spec./DisbursementOfficer Alan Townsend Infrastructure Specialist Russell Muir Infrastructure Specialist lain Christie Lead Specialist Joseph Kizito Financial Specialist Rona Cook Task Team Assistance Richard Uku CommunicationsSpecialist Jose-Manuel Bassat Communications Specialist Onno Ruhl Country Anchor Herminia Martinez Lead Specialist Operations- Peer Reviewer Roy Pepper Principal Industrial Economist- Peer Reviewer Alfonso Revollo Senior Advisor - Peer Reviewer Irene Chacon Program Assistant
- 60 - Annex 8: Documents in the Project File* UGANDA: PRIVATIZATION& UTILITY SECTOR REFORM
A. ProjectImplementation Plan Detail Cost Tables Draft Project Implementation Manual
B. Bank StaffAssessments Project ManagementAssessment Financial ManagementAssessment Aide Memoires from IdentificationMission Aide Memoire from Pre-AppraisalMission Aide Memoire from Appraisal Mission
C. Other List of PEs scheduled for privatization Labour Study EnvironmentalAudit Study Assessing the Impact of the Privatization Process in Uganda - GOU (February, 2000) Financial Flows Between Government and Public Enterprises in Uganda - Fiscal Year 1998 Performance MonitoringReport - December 1998- June 1999 Bi-Annual Debt Management Report for Period Ending June 30, 1998 UEB's Debt Stock Verification - June 30, 1999 Information Memorandum: Privatizationof Uganda Telecom - February 1998 *Includingelectronic files
-61 - Annex 9: Statement of Loans and Credits UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM
Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd
P002938 1993 Uganda AGRIC.RES & TRG.PHASE I 0.00 25.04 0.00 1.19 0.09 0.00 P059127 1999 Uganda AGRICRES& TRNG.II 0.00 26.00 0.00 24.69 2.02 0.00 P002977 1994 Uganda COTTONSECTOR DEVELO 0.00 14 00 0.00 1.94 1.86 1.59 P002971 1995 Uganda DISTRICTHEALTH 0.00 45.00 0.00 13.70 4.88 0.00 P002972 1998 Uganda EDUCSECTOR ADJ CRED 0.00 80.00 0.00 34.83 -4.80 0.00 P057007 1998 Uganda EL NINOEMERG RD REP 0.00 27.60 0.00 24.69 19.60 0.00 P002968 1992 Uganda ENTERPRISEDEVELOPMENT 0.00 65.60 0.00 0.56 22.04 -1.71 P002978 1996 Uganda ENVIRONMENTMANAGEMT 0.00 11.80 0.00 3.41 3.69 0.00 P044213 1999 Uganda FINMKTSASSISTANCE 0.00 13.00 0.00 12.93 5.89 0.00 P002941 1999 Uganda ICB-PAMSU 0.00 12.37 0.00 7.00 2.23 0.00 P002976 1995 Uganda INST. CAPACITYBLDG 0.00 36.40 0.00 8.53 9.51 0.00 P046836 1997 Uganda LAKE VICTORIA ENV. 0.00 12.10 0.00 7.05 2.56 0.00 P002992 2000 Uganda LOCAL GOV DEVE.PROGRAM 0.00 80.90 0.00 78.93 0.00 0.00 P059223 1999 Uganda NAKIVUBO CHANNEL REH 0.00 22.38 0.00 22.19 5.07 0.00 P040551 1998 Uganda NUTRITCHILD DEV 0.00 34.00 0.00 29.27 4.20 0.00 P002929 1991 Uganda POWER 1II 0.00 158.00 0.00 32.89 4.41 3.57 P002953 1993 Uganda PRIMARY EDUC. & TEAC 0.00 52.60 0.00 12.37 12.00 0.65 P035634 1996 Uganda PRIV. SECTORCOMPETI 0.00 12.30 0.00 6.17 5.83 0.00 P049543 1998 Uganda ROAD SECT/INST.SUPP o.00 30.00 0.00 25.68 22.77 0.00 P002970 1999 Uganda ROADSDEVTPROGRAM 0.00 90.98 0.00 86.43 -2.66 0.00 P002987 1997 Uganda SAC III 0.00 125.00 0.00 78.37 81.17 40.14 P002963 1994 Uganda SEXUAL.TRANSIN 0.00 50.00 0.00 14.19 13.03 0.00 P002957 1994 Uganda SMALL TOWNS WATER 0.00 42.30 0.00 17.10 13.33 0.00 P044679 2000 Uganda Second Economic and Fin. Mgmt. Project 0.00 34.04 0.00 33.19 1.35 0.00 P002923 1994 Uganda TRANSP. REHAB. 0.00 75.00 0.00 30.78 31.26 0.00 P002933 1991 Uganda URBAN I 0.00 26.70 0.00 2.05 1.31 0.00
Total: 0.00 1205.11 0.00 610.13 262.64 44.24
- 62 - UGANDA STATEMENT OF IFC's Held and Disbursed Portfolio 3 1-Jul-1999 In MillionsUS Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1996 AEF Agro Mgmt 0.60 0.40 0.00 0.00 0.55 0.40 0.00 0.00 1992 AEF Clovergem 0.84 0.00 0.00 0.00 0.84 0.00 0.00 0.00 1997 AEF Conrad Plaza 1.31 0.00 0.00 0.00 1.31 0.00 0.00 0.00 1998 AEF Exec. Invmnt 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 1999 AEF Gomba 1.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 AEF Kampala Flwr 0.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 AEF Kiwa Indust 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 AEF Ladoto 0.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 AEF Mosa Court 0.72 0.00 0.00 0.00 0.72 0.00 0.00 0.00 1998 AEF Nile Roses 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00 1993 AEF Polypack 0.20 0.00 0.00 0.00 0.20 0.00 0.00 0.00 1994 AEF Rainbow 0.79 0.00 0.00 0.00 0.79 0.00 0.00 0.00 1995 AEF Rwenzori 0.40 0.19 0.00 0.00 0.40 0.19 0.00 0.00 1993 AEF Skay Electro 0.22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 AEF Skyblue 0.51 0.00 0.00 0.00 0.51 0.00 0.00 0.00 1994 AEF White Nile 0.30 0.00 0.00 0.00 0.30 0.00 0.00 0.00 1998 AEF Wstem Hgh 0.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1999 Celtel 1.29 0.64 0.80 0.00 1.29 0.64 0.80 0.00 1994 DFCU 0.00 0.60 0.00 0.00 0.00 0.60 0.00 0.00 1984/92 Jubilee 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1993 Kasese Cobalt 14.67 3.60 0.00 0.00 14.67 3.60 0.00 0.00 1996 Tilda Rice 2.40 0.00 0.00 0.00 1.90 0.00 0.00 0.00 1998 Uganda Leasing 1.35 0.00 0.00 0.00 0.75 0.00 0.00 0.00 1995/96 Uganda Sugar 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1983 Total Portfolio: 35.96 5.53 0.80 0.00 31.39 5.53 0.80 0.00
Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2000 AEF Kasainbya 986.00 0.00 0.00 0.00 1998 AEF Ram Oil 1000.00 0.00 0.00 0.00 Total Pending Commitment: 1986.00 0.00 0.00 0.00
-63 - Annex 10: Country at a Glance UGANDA:PRIVATIZATION & UTILITYSECTOR REFORM Sub- POVERTY an6dSOCIAL Saharan Low- Uasa Aftica jsneom Development diamond'
Ponnulalion miri-vear i'mitfionsI 201A 628 X 5Lie xpctnc GNP Der saDits (Atlas n'tethod.US$1 320 480 520Liexpcay GNP IA ties method, US$ billions) 6 7 A04 1; 844.. Averao, annual orowth. 1992-98 Pon,ilation. (161 3 A 1 7 Labor force M% 2.7 2.5 1.9 GNP Gross most recent estimate (latest yea avial. g 9gipe rmr Povertv t% of ooouW64lobelow national n 4vertva enmelm4n Urban nonutiation(1 6of total ooou/Ationl) 13 33 31 Lifa extoectancy at b*rthi (vears) 42 51 83, lnfant mortality (net ?.OO d0liebuthsl f 9 I to Child malnutrition t% of children under 51 26 Access to safe water Access to safe water (% of oooulationl. 41 ~ 47 7 Illiteracy f% of oooulation aae 15+) 42 3 Gross orimarv enrollmentt (% of sCJoot-aoeoooWeatioo) 91 77 18Uganda Male 99) 54 113 Low-incomegroup
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1977 18 07 19 Economic ratios' GOP 1USSbiltiorrsl 63 83 8 G'ro-n do,mesic inveslmenllfop97 6. 15 1 Fxnorls of "Mrd, and qftrvic.ArlGDP 82 ~ 1 ~ 3Trade Gross domestic savi'naslGOP . . -0 1 7,9 5.7 rros.s national savinnslctnp, 08A 12 7 IN32
Current account balancelGOP -2.2 -8i3 -10.2 Intaront oavmAntr/A0P 0-6 1 Domestic Ivsmn Thtal dabtIG/r 701)8 81 3 6 Savings Total debt servlcie,Jxnorlt 19.4 25.4 Present valuieof deh/CI/GP 32 7 Present value of debt/axoorts,. 238.5 Indebtedness 1977-87 1958.93 1997 1998 1999-Os faverace annual omowthl crOp oq 4.7 6 70: Ulganda G NP oar canita 348 2 4 2.7 Low-income oroUD Exoorts of noods and services .. 1,0 29.8. -14 9 128
STRUCTURE of the ECONOMY 1977 1987 1997 1998 Growth rates of output and investment(% (16of GDP) 45 Anrinutture 56 8 4201 446R Industrv . 10.1 17.8 17.8 30 Manrifaciurinn . 69 86F 8.9 1: Services .. 33.2 40.5 37.8 Private consumntion 92.1 81.6 84 7 -10 5 9 7 9 rGeneral mnvarnment cnnsumnntinn a 0 10 4 9 6 GDI -*GDP Imoorts of aoods and services -. 18.0 21.2 19.7 - *
(averaae annual arowthl 1977-87 1988-98 1997 1998 Growth rates of exports and imports (%) Aariculture 3.8 1 1 1 9 as Industrv -. 11.3 11.4 11i.5 40 Mantifaatlurino 12.8 13 4 14 4 Services 80c 5.7 6.8 2019 PrivAte cnnsumoftion 6,.3 1 6 7 2 Geaneral ofnvernment consumnntion 7 2 7 0 8 0 9 9 4 95 6 Gross domestic investment .. 7.5 -2.6 10.5 -20 lmnnrtsq of noods and services 7 6 2 0) a 1 Exports l--mports Gross national oroduct .. 7.1 5.4 5.7
Note: 1998 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) cornnared with its income-orouo averace. If data are miasina, the diamond will hp incomnelet
-64 - Uganda
PRICES and GOVERNMENTFINANCE 1977 1987 1997 1998 Inflation (%) Domestic prices (% change) 40 Consumer prices .. 216.5 7.8 5.8 30 Implicit GDP deflator . 181.0 3.9 10.7 20 Government finance I1 (% of GDP,includes current grants) o Current revenue .. 4.7 11.0 10.2 93 94 95 99 97 99 Current budget balance . -0.9 1.0 0.8 GDPdeflator CPI Overall surplus/deficit .. -4.2 -6.2 -5.7
TRADE (UJS$millions) 1977 1987 1997 1998 Export and import levels (USSmillions) Total exports (fob) .. 384 671 466 1,600 Coffee . 365 366 288 Cotton .. . 26 15 1,200 Manufactures .800 Total imports (cif) .. 514 1,246 1,393
FuelFood and energy ... 63.. 92* 84 4000 _ 5 , s a Capital goods . ... 0 92 92 94 95 90 97 95 Fxnnrt nrice index (1995=100) Imoort orice index M199S=100) .. .. . Exports UImports Terms of trade t1995=100)
BALANCE of PAYMENTS 1977 1987 1997 1998 Current account balance to GOPratio (%) rUSS millions) Exports of goods and services 406 825 641 0 Imports of goodsand services 600 1,651 1,844 Resource balance . -194 -826 -1,203 -4 Netincome -3 -47 -17 Net current transfers 3 100 322 521 II4 ' II Current account balance -3 -141 -521 -692 -12 Financing items (net) 4 119 653 826 Changesin net reserves -1 22 -132 -134 -16 Memo: Reserves includina oold (USS millions) 53 622 750 Conversinn rate (DEC. local/USSI .. 19.8 1,058.0 1.150.0
EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 IUSS millionsl Composition of total debt, 1998(US$ millions) Total debt outstanding and disbursed . 1,306 3.660 3,631 IBRD .. 0 0 0 F:56 IDA .. 0 1,916 1,997E:4
Total debt service . .. 166 174 IBRD 0 0 0
IDA .. 0 21 24 Composition of net resource flows D445 6: 1,997
Official grantscreditors ... Private creditors . . Foreign direct investment . . Portfolio equity .. .C .. C:35 World Bank program Commitments 0 137 247 A - lBRD E - Bilateral Disbursements .. 0 166 242 B- iDA D - Othermultilateral F - Prvote Principal repayments .. 0 8 10 CC-MF G - Short-term Net flows .. 0 158 231 Interest payments . 0 13 14 Net transfers . 0 144 217
DevelopmentEconomics
-65 - Additional Annex No.: 11
CommunicationAudit (Executive Summary) UGANDA: PRIVATIZATION & UTILITY SECTOR REFORM
TABLE 1: Possible activities during the communicationcampaign
OUTREACH TO PARLIAMENTARIANS AND OTHER OPINION LEADERS * Updateand maintaina currentopinion leader database of MPs and other influentialopinion leaders. * Resumeproduction and distributionof the monthlynewsletter, Outlook. * Organizeperiodic briefing sessions for Parliamentariansand other opinionleaders with the ministerof stateor the PU. Wherepossible, sessions could be recordedfor public broadcaston radio and TV, and print coveragecould also be encouraged. * Organizepublic meetingsfocused on specificPEs beingprivatized to help restorepublic confidence in the PU's (and hencethe government's)ability to run the privatizationprogram in as unencumberedand transparenta manneras possible. FOCUSEDMEDIA CAMPAIGN * Mediadatabase - continueto developthe media databasethat was createdduring the earliercommunications program. * Mediamonitoring - ensurethat a mediamonitoring service is securedto enableit to keep track of all relevantmedia coverage. * Mediarelations - maintainan ongoingcontact with the national,regional and internationalmedia as each transaction takes shape. * Privatization column - select a key print medium (New Vision, Monitor, East African) to run a monthly privatization updates. * Media seminars - conduct informational seminars for members of the media to keep them abreast of divestiture developments. * Press packet - develop one standard "privatization press packet" containing key press releases, individual leaflets on each transaction, Q & A fact sheet, etc. * National Advertising - focused and geared towards the transparency issue. * Strategic Advertising - ad placement in the Financial Times, Wall Street Journal or The Economist for cross-sector ads of enterprises for international investors. PEs which may only attract domestic or regional investors should be advertised in local or regional publications. * Special TV/Radio Programming - short TV/radio programming (e.g., public service announcement; promotional documentary). * Opinion Research - carry out surveys and focus groups on a regular basis to monitor the efficacy of the communication activities. EMPLOYEE COMMUNICATIONS * Keeping Staff Informed of the reasons for privatized; why this is inevitable, what the implications the sale of the enterprise will have for them. This can be facilitated by: personal letters; management presentations; privatization newsletter or video. * Enhancing Dialogue by creating a two-way communications process between the management and the employees. The primary vehicles could include on-going staff briefings and meetings and worker-manager task forces, combined with feedback tools such as employee forums, bulletin boards, question boxes and question-and-answer columns in the internal newsletters. * Aching Adoption, i.e., targeting communications directed at specific employee groups depending on their support for privatization (i.e., strong support for the sale; contingent support (wait and see); uncertain; and strongly against the sale). The aim is to build alliances with those employees who support privatization and converting those employees whose support is uncertain
-66 - MARKETING PUBLIC ENTERPRISES FOR SALE * Communications Training for a senior PE management or communications staff, who will act as company spokespersons. * Research to determine staff attitudes and support for the sale; interest in participation; and potential barriers to investment. * Positioning sessions for PEs, their financial advisors and representatives of PU to identify critical issues impacting the successful marketing of the PE domestically and internationally and to develop joint solutions to overcome them. * Programming of a communications program for each PE including a communications strategy, audience analysis, core communications messages, tactics, and a detailed timetable with responsibilities. * Materials Development, based on a set of core materials for all PEs, and adapted to the communications strategy and messages, as well as the corporate style and character, of the individual PE. * Contingency Planning outlining potential issues and possible scenarios, such as financial results, unfavorable media or investor response, poor analyst ratings, internal opposition, and political events, among others. * Corporate Campaign, if required, should be shaped by the needs and nature of the PE, and will typically include corporate advertising, media relations and employee relations. * Support to the Investor Meeting(s) including development of a preliminary investor presentation, presentation skills training and rehearsals, and logistical support as required by the financial advisors. * Employee Meetings on how they qualify or can participate in the share offer, if applicable. Employee share ownership programs have proven to be effective tools in gaining employee support for the privatization of their enterprise. * Financial Marketing to support initial public offerings. This includes final tracking research to fine-tune materials and messages; domestic advertising; a press conference; domestic investor presentation(s); international investor road show (referred to earlier), and post-offer announcements. * Program Evaluation/Documentation at the conclusion of each sale with representatives of PE, financial advisors and PU. COMMUNICATIONS KNOWLEDGE TRANSFER TO PEs * Communications Workshop for PE managers, PE communications officers, financial advisors, and representatives of the PU. The workshop would include program positioning, program co-ordination, using research and developing financial communications strategies. A communications manual could be developed to support the session and to serve as a reference for participants. * Branding, which was already done at the onset of the earlier communications program. The PU already has a logo associated with the program. It is recommended that the logo be maintained and be used on all core materials. * Standardized Core Materials which will carry a standard look within guidelines, for each PE. INTERNATIONAL MARKETING SUPPORT The level of international marketing support for individual PEs should be determined by the investment strategy developed by the PU and its financial advisors asit is costly and would be entirely at the PU's discretion. Possible tools could include: * Marketing Individual PEs to selected capital markets. Support would be required for the targeting of investors; logistical support for the road show presentations; development of market briefing materials; presentation development and rehearsals; and media relations support. * Group Marketing of PEs on a six-month or annual basis (depending on the number of relevant PEs coming to market in the given time period), a group road show could be mounted in key capital markets. * Putting Uganda's Diplomatic Missions to Use by providing Uganda's diplomatic missions with current materials regarding the privatization program. * Internet Opportunities by utilizing a website of the Capital Markets Authority with which the PU is already associated. * In-Country Investment Promotional Tours (i.e. in Uganda) whereby potential foreign investors could visit enterprises.
-67 - Additional Annex No.: 12
EnvironmentalAudit (Executive Summary) UGANDA: PRIVATIZATION & UTIL1TY SECTOR REFORM
1. GOU is involved in redefining its role in the economy,while reducing the financial and administrativeburden of the PE sector on the Government.Hence, PUSRP has been identifiedas a priority measure that can contribute to improve the economy'scompetitiveness. By supportingthese reforms, GOU has the objective of poverty reduction through broad-based economic growth led by the private sector.
2. A total of 42 PEs are being privatized in Uganda. As part of the privatization process, the environmental issues at the enterprises are being addressed during project preparation by including environmentalaudits to analyze existing conditions at and around specific sites of selected PEs that are identified as having significant environmentalimpact. Environmentalpre-audits were carried out in order to select PEs requiring full environmental audits to be undertaken.
3. The work was carried out in two phases: Phase I covering thirty-five (35) PEs and phase II covering ten (10) PEs located in the westem and northern regions of the country, which were inaccessible during the initial phase. Four (4) PEs covered by the pre-audits were in final stages of privatization or had been recently divested. The visits to the PEs in Uganda were conducted from November to December, 1999 by a team of experts from Geomatric Technology Corporation of Fairfax, Virginia, USA. Additional visits were conducted in January and February, 2000 during an appraisal mission with the World Bank Team during which confirmationwas made on the recommendationby visiting randomly selected enterprises.
. Objectives
4. The primary objective of the environmentalpre-audits is to select, out of the 45 PEs, those that qualify for full environmentalaudits by carrying out the following activities:
* review and evaluate the existing and on-going activities of the PEs; * make a determinationof the potential for contamination and pollution to the environmentemanating from the PEs; = provide indicationsof action plans for remedial and mitigation measures that should be included in full audits; and * provide cost estimates for the full audits that should be undertaken.
Other secondaryobjectives were to determine the role and responsibilitiesof the regulatory and legislativebodies in Uganda on the identified environmentalliabilities of the PEs, and to assess the training and capacity building needs for environmentalmanagement of the enterprises.
II. Environmental Setting
5. The critical and most immediate problems facing Uganda are the health impacts of pollution that derive from inadequate water, electricity, sanitation, drainage and solid waste services, poor urban and industrial waste management, and air pollution (especially from particulates).These problems are closely linked to the poverty-environmentnexus, and typically involve inappropriateland-uses, depletion of water and forest resources, degradation of environmentallyfragile lands, noise pollution and air quality problems.
-68 - 6. In Uganda there is relatively low coverage and access to basic services such as water supply and sanitation, drainage, and solid waste collection.Controlled landfills, incinerationand resource recovery are few; ineffectiveland use controls impact on land managementfor the urban areas. Because unemploymentremains relatively high and unskilled manual labor is easily accessible,most of the requirements for maintaining proper environmentallyfriendly working conditions are non-existent.As a result, several PEs have unresolved health and safety issues,including medical monitoring and provision of an appropriateindustrial hygiene environment for workers.
7. The environmentalproblems in Uganda are further complicated by the interaction of numerous public, private, non-governmental,community and household actors. The National EnvironmentalManagement Authority (NEMA) is responsible for setting environmentalregulations and standards, as well as for monitoring and enforcement. However, because NEMA is understaffed, the enforcement and monitoring are lax or inconsistent. Furthermore, public, private and informal sector enterprises concerned about the costs burden of environmentalrules and regulationson their businesses,implement the required environmental mitigation measures for upgrading their enterprises at a much slower pace.
III. Statutory Framework
8. The implementationof the PUSR Project is being governed by the PERD Statute, that came into effect in October 1993 and was amended several times, most recently in January 2000. The PERD Statute sets out the institutional framework and implementationarrangements for privatization.The Ministry of State responsible for Privatization, under MFPED will ensure overall project implementationand coordination.Furthermore, the utility reforms will be implemented on the basis of findings of the Uganda Country Framework Report (CFR), which has clarified GOU's broad objectives for infrastructure services.
9. The policy initiativesof GOU are consistent with the framework of the country's natural resource management policies for those related to private sector development,which were created by the Government and embodied in the following initiatives and documents:
* The National Environment Management Policy - 1994 - SupplementalStatute No. 3 of the National Environment Statute (NES) - 1995 * The National Environment Action Plan (NEAP) - 1995 * Guidelinesfor EnvironmentalImpact Assessment (EIA) in Uganda - 1997 * Statutory Instruments Supplement No. 8 of the EnvironmentalImpact and Assessment Regulations - 1998 * Environmental Audit Guidelines for Uganda - 1999
The studies have been carried out in accordancewith GOU requirementsand with the World Bank environmental assessment procedures described in OP/BP/GP 4.01, Operational Policy, Bank Procedures, and Good Practices.
10. Uganda has achieved considerableprogress in integrating environmentalconcerns into private sector plans, programs and development actions facilitated by including the EIA requirements in the EnvironmentStatute. These policy initiatives provided the national policy framework for the use of environmentalaudit as a managementtool. Other laws, for example the Factories Act, have provisions aimed at promoting environmentalmanagement.
11. The NES made environmentalaudits an involuntary and mandatory legal requirement. The draft national standards on effluents, noise and air (currently in a draft version) would help implementing the audits. The NES vested the regulatory authority NEMA with power to enforce the environmentalaudits. In 1999 NEMA developedguidelines for environmentalaudits that, inter alia, would ensure that the audits are carried out by various organizationsand verify that they have been completed.NEMA would carry out this responsibility through appointedenvironmental inspectors who determine whether the activities carried out on the property or premises conform with the statements
-69 - made in the EIS.
12. During the appraisal NEMA was requestedto investigate and ascertain who assumes the responsibilities for environmentalliabilities at the PEs (i.e., whether the new owners would assume the environmental liabilities;who is responsible for past liabilities of contamination at the facilities/sites;and how these issues are treated accordingto Ugandan law). Since this issue is not adequately covered by the laws of Uganda, it is essential that the contractsthat will be part of the divestiture of individual PEs cover this issue explicitly, so that there would be a clear understanding of who is liable for contamination, both past, current and in the future.
IV Selection of PEs for EnvironmentalAudits
13. In order to determine which of the PEs require a full audit, facilities were ranked based on their risk characteristics. The risk characterizationis a process of estimating the probable incidence of adverse impactsto potential receptors under various exposure conditions, including an elaboration of uncertainties associated with such estimates.The ranking process involved only the qualitative estimation of the potential risks and/or hazards due to activities at the PEs, since no quantitative data were obtained for any of the facilities.
14. The PEs were assigned scores on the basis of Audit Index Factors (AIF) which have been determined for the facilities. The AIF is the degree of pollution potential for an enterprise by which assessment for full audits can be determined.The criteria considered to have a little impact on the environmentwere ranked by assigning the lowest rating of one (1), and the criteria with a significant impact on the environmentwere assigned the highest rating of ten (10).
15. The evaluation factors for characterizingthe audit potential of a site were as follows:
* Type of Enterprise (i.e. activities at facilities) * Air Emissions * Wastewater (i.e. impact on surface water and groundwaterreceptors) * Solid Waste (i.e. impact on the environment) e Noise * OccupationalHealth and Safety Issues e EnvironmentalManagement and Regulatory Framework * Capacity Building, Training and Awareness
16. Each Audit Factor was assigned a relative weight ranging from one (1) to five (5), where a weight of 1 means the least significant and a weight of 5 means very significant.For example, a factor such as 'Air Emission' is assigned a weight of 5, if the impact is very significantand a weight of 1, if the impact is of least significance. Each Audit Factor was assessed on the overall affects on pollution potential for the sites by considering weighting components such as depth to water, soil and aquifer media, topography, impact on land-use and planning, impact to wetlands and impact to workers.
17. The Audit Factors were incorporated into a relative ranking scheme that used a combination of weights and ratings to produce a numerical value called Audit Index. To obtain the number from each Audit Factor, which determinedthe index for the pollution potential, the weight was multiplied by the ranking. The total of the numbers for individualAudit Factors gave the Audit Index. Evaluation of the Audit Index with respect to the PEs provided the relative significanceof each site with respect to pollution potential.The cumulative scores for each enterprisewere determined, and the site with the highest score was considered as the most likely to require a full audit. The ranking procedure is similar to the scoring process of the DRASTIC Index (Aller, et al., 1987; Atobrah, et all., 1989; Atobrah, 1990; Asante-Duah, 1993; Asante-Duah, et al., 1996). The Audit Index gives a measure of whether a site is
-70 - located in a generally sensitive or vulnerable area and has a significant pollution potential to the environment.
18. In the first phase, based on the cumulative Audit Index Factors (AIF), PEs were ranked into three categories:
* High risk PEs requiring full audits (AIF above 140) * Medium risk PEs requiring partial audits (AIF ranging from 80 to 140) * Low risk PEs that do not need any audits (AIF less than 80)
PEs requiring DecommissioningPlans (DPs) and PEs requiring monitoring protocols with measurable indicators were identified in Phase II.
V Results
19. As a result of environmentalpre-audits, almost 40% of 45 PEs required some form of environmental assessment, while 60% did not require environmentalaudits (see Figure 1). In particular:
* Ten PEs required full environmental audits. * One PE required partial audit * Five PEs required decommissioningplans * Four PEs required setting up of monitoring protocols.
FIGURE 1: Summary of Audit Index Factor for 45 PEs
_. S _ = ERA.L_ ...... _ .
-71 - 20. The ten (10) PEs requiring full environmentalaudits are (with scores ranging 147 - 213, see Figure 2):
* Dairy Corporation * Kakira Sugar Works (1985) Ltd. * Kasese Cobalt Company Ltd. * Kinyara Sugar Works * National Housing and Construction Corporation * National Water & Sewerage Corporation (11 Water Districts) * Sugar Corporation of Uganda (SCOUL) * Uganda Railways Corporation * UGMA Engineering Corporation(Foundry) * United Garment Industries Ltd.
FIGURE 2: PEs requiring full environmentalaudit
21. One enterprise,Associated Match Co. Ltd. in Jinja, requires a partial audit. The PE had Audit Index Factors with a cumulative score of 115.
22. Five (5) PEs require DecommissioningPlans (DP). These are:
* Coffee Marketing Board Ltd.; * Kilembe Mines Ltd.; * Lake Katwe Salt Co. Ltd.; * Sugar Corporation of Uganda (first plant); * Uganda Spinning Mill at Lira
- 72 - Figure 3: Enterprises Requiring Decommissioning Plans
PES REQUIRINGDECOMMISSIONING PLANS
250
~150
2C0 50;
i - - Coffee -Kllembe Lake Katwe LU;anda Sugar Marketing Mines Ltd. Salt Co. Ltd. S inning Corporation Board Ltd. ll of Uganda
t- ~~~~PRIVATEENTERP>RJSEi
23. Four (4) PEs require that monitoring Protocol be established with monitorable and measurable environmental performance indicators at their sites. These are:
* B. A. T. (U) Ltd. Kampala Facility * Rwenzori Highland Tea Co. Ltd. = Soroti Agricultural implements Mach. Co. (SAMMCO) * Uganda Clays Ltd.
Figure 4: Enterprises Requiring Monitorable and Measurable Indicators
ENTERPRISESREQUIRING MONITORING
- 12060 | 3;iy
60
20 UgandaClays :&.T(UBUd.B Rwe Sorofi t ~~Ltd. KampaFactiyHglanae-o AgmltuanXCo; . ~Imnplements , ' --' ' . - . . _ch, C
24. The PEs requiring no audits produced Audit Index Factors with cumulative scores less than 100. The majority of them are hotels, financial and holding institutions, publishing and printing companies (see Figure 1).
- 73 - VI. Description of Pre-Audit Findings and Action Plans
25. The primary wastes and contaminant sources found during the pre-audits indicated that most facilities have effluent discharges into surface and groundwaterresources. These are normally of routine releases from waste handling/preparationactivities and from leakage due to mechanical failure. Other sources are stack emissions,surface impoundment(i.e., ponds, in the case of the sugar factories), waste pile and waste management zones.
26. The key findings and required action plans on remedial and mitigation measures that should be included in full environmental audits are shown in Table 1.
TABLE I: Summary of Proposed Activities Nameof PE Key Remedialand MitigationMeasures Cost estimates 1. SCOUL(SUGAR) Co-generation;Solid Waste Mgmt; Wastewater Mgmt; $100,000 LandusePlanning; Noise; Air Quality;Env. MgmntPlan 2. KAKIRA(SUGAR) Co-generation;Wastewater Mgmt; LanduseMgmt; Solid $100,000 WasteMgmt; Noise;Air Quality; Env. Mgmt;Health & Safety 3. NWSC(WATER) WetlandsImpact; Lab QA/QC;Pollution Mgmt; $285,000 (11 Districts) WastewaterMgmt; Env. Mgmt; CapacityBuilding 4. UGANDARAILWAYS WasteOil and WastewaterMgmt; EmissionControl; $70,000 (TOROROFACILITY) Pre-treatmentSystem; Env. Mgmt;Noise Abatement. 5. UNITEDGARMENT WastewaterMgmt. and Pre-Treatment;Emission Control; $70,000 (TEXTILES) Noise;Env. Mgmt. 6. UGMAENGINEERING SolidWaste Mgmt; EmissionControls; Occupational $70,000 (FOUNDRY) Health& Safety;Noise; Env. Mgmt;Wastewater Mgmt and Treatment 7. KASESECOBALT Air QualityMgmt; Landuse Mgmt; Occupational Health & $100,000 (MINES) Safety;Wastewater Mgmt; Env. Mgmt. 8. DAIRYCORPORATION Occupational Health & Safety;Wastewater Mgmt; Emission $70,000 (DAIRYPRODUCTS) Control;Lab QA/QC;Env. Mgmt. 9. KINYARASUGAR NoiseAbatement; Wastewater Mgmt; SolidWaste Mgrnt; $100,000 WORKS OccupationalH & S; EmissionControl; Env. Mgrnt. 10. NATIONALHOUSING Land-UsePlanning and Mgmt.; SolidWaste Mgmt.; $100,000 HumanSettlement. I1. ASSOCIATEDMATCH PARTIALAUDITS $50,000 12. FIVE PEs DECOMMISSIONINGPLANS $3,500,000 13. FOURPEs MONITORINGPROTOCOLS $100,000 Measurable PerformnanceIndicators (by NEMA) 14. ALLPEs TRAINING,WORKSHOPS, SEMINAR $1,000,000
VII Cost Estimatesfor EnvironmentalAudit Activities
27. The overall cost estimates for carrying out all aspects of the enviromnental management activities in the privatization processes range from four to six million dollars (US$ 4 million to US$ 6 million). This will cover the following tasks:
* environmental audits for ten (10) PEs; * partial audits for one (1) PE; * training after the audits is completed, but before completion of the privatization processes for all 45 PEs; * decommissioningplans for five (5) PEs; and * monitoring protocols and indicators for sites (NEMA).
- 74 - TABLE 2: Breakdown of the cost estimates Description Cost Ten PEs Full Audits $1,065,000 One PE Partial Audit $50,000 45 PEs Training $1,000,000 5 PEs Decommissioningplans $3,500,000 4 PEs Monitoring Protocol $100,000.00 Cost Estimates for Completing EnvironmentalAuditing for the PEs $5,715,000
28. If at all possible the cost data on operation and maintenance (O& M) and other recurrent costs should be made available during the full audits. It may be difficult to separate operating and recurrent costs from capital costs during the audits. However, it is important to obtain the information to make meaningful cost comparisonsbetween simplified systems and other alternatives.
VIII Recommendations
29. It is recommendedthat full environmentalaudits be conducted for the ten PEs indicated above. Also, it is suggested that a 'training of trainers' program should be developed and providedto the senior management of the PEs on environmentalmanagement and good practices as part of the environmentalaudit activities before the completion of the privatizationprocess.
30. NEMA must be responsible for determining and preparing guidelinesand environmentalperformance indicators which are measurablefor monitoring sites and facilities of the PEs that have already been privatized (e.g., Uganda Clays Ltd.). The cost estimates for developing the monitoring protocols and implementingthe guidelineshave been estimated at one hundred thousand dollars US$ 100,000.00The allocated amount must be given to NEMA, which may retain local environmentalconsultants to provide the technical assistance.The performance indicators can serve as the instrumentfor responding to any potential environmental hazard that may occur as a result of activities at the PEs, either currently or in the future. Also, NEMA must set up a monitoring and accountabilityprotocol that would require either monthly, quarterly or yearly reports from the PEs with respect to addressing significant mitigation measures and meeting the environmentalmanagement challengesof the enterprises.
31. The monitoring protocol will require working in partnership with the leading agencies, such as NWSC and DWD on water quality for example, and with the other government institutions.In this regard, it is recommendedthat NEMA should provide the lead in setting up comprehensiveinter-agency mechanismsthat will bring all the relevant agencies in Uganda to work together on environmental issues.The Inter-Agency relationshipsmust involve positive contributions from the PEs, NEMA, DWD, FIRI, NWSC, the Physical Planning Dept., and the Ministries of Agriculture; Water, Lands and Environment; Energy and Minerals; the Privatization Unit of EDP; and the Uganda Manufacturers Association (UMA).
32. Each PE should have on its premise a Senior Official responsible for Environmental Management activities of the enterprise.Such a person will liaise with NEMA and be abreast of environmental laws and regulations pertaining to the activities of the enterprise,participate in training, and be part of the capacity building for environmental management.Furthermore, the senior official responsiblefor the environmentmust support the development of contingencyplans for the enterprise that link city/urban contingency plans with that of the PE.
33. Decommissioning:During the appraisal it was found that some of the PEs will need decommissioningof plants, equipment,and buildings. The PEs are: Sugar Company of Uganda (SCOUL) with the decommissioningof the old
- 75 - (first) plant at the premises in Lugazi; Coffee Marketing Ltd. in Kampala; Lake Katwe Salt Co. and Kilembe Mines Ltd. in the western region; and Uganda Spinning Mills at Lira. The decommissioningof these PEs must be conducted separately from the environmental audits, and must adhere to the World Bank regulations which demand a Decommissioning Plan with a full environmentalassessment and cost estimates.
34. Legal Framework on Liabilities:NEMA is requested to investigate and ascertain who assumes responsibility for environmentalliabilities of the PEs (i.e., whether the liabilities fall on the new owners or on the former owners). It seems that the laws of Uganda are silent on these issues, and hence NEMA is required to determine the appropriate law(s) covering environmentalliabilities with respect to: privatizationpolicy, due diligence and indemnification,so that there would be a clear understandingof who is liable for contamination,both past, current and future.
35. Training and Capacity Building: It is recommendedthat NEMA participate effectively in providing training for the senior management of all the PEs. The assignment should comprise of "train the trainers" sessions for NEMA officials in the short-tenn, and in turn provide long-term training to the PEs. This can form a basis for capacity building of NEMA and the senior management of the PEs. The initial training may be provided by a qualified internationalenvironmental management firm as part of the environmental audits for the privatizationprocesses.
36. HIV/AIDS Awareness Programs: It is strongly recommendedthat as part of the environmentalmanagement activitiesNEMA places greater emphasis on the eradication and preventionof HIV/AIDS in all the PEs. This requires that NEMA works in close partnership with the Ministries of Health and Labor as well as with the urban and rural health clinics and hospitals and the non-govermnentalorganizations (NGOs). NEMA should make the HIV/AIDS program an essential part of its responsibilitiesin monitoring the environrmentalmanagement of the PEs. It is also recommendedto strengthen HIV/AIDS awarenessprograms at the senior managementlevel of the hotels. In particular, to institute good practicesto separate any blood contaminatedmaterials (by accidental occurrences) from the other solid wastes, and to conduct medical monitoring of worker health and safety on HIV/AIDS at the sensitive stations of operations.
38. EnvironmentalManagement Plans/Systems: It is recommended that all the PEs develop and incorporate environmentalmanagement plans or systems (EMP/EMS) into its managementstructure. Such a plan or system can includecontingency plans linked up with the city or urban contingencyplans that can address incidents, such as, fire, accidents, security, and other basic activities of the enterprises. Also, the focus of the EMP/EMS should be on the following issues:
* execute short- and long-term enviromnentalmonitoring programs at the PEs; * conduct occasional drills for the PEs, especially the hotels, in order to alert the staff and workers on how to react and operate in cases of emergencies; * conduct training and awareness programs for the senior staff and workers on environmental managementas part of good managementpractices and promotion of capacity building within the enterprises; * develop contingency plans for safe environmentalcontrols and emergencies,including spill prevention, hazardous waste handling, health and safety issues (as well as HIV/AIDS programs), accident preventionand security measures, fire protection, medical monitoring, etc.; * advise on regulatory and legislative framework,compliance of applicable environmentallaws and regulations and development of guidelines appropriateto the environmentalmanagement services of the particular enterprise; and * develop environmentalinformation management and database systems that can provide reports (monthly, quarterly or annually) and liaise with NEMA.
- 76 - Additional Annex No.: 13
Letter of Sector Policy UGANDA: PRIVATIZATION & UTILITY SECTOR REFORM
Mr. J. Wolfensohn President The World Bank 1818 H Street, N.W. Washington D.C. 20433 USA
Dear Mr. Wolfensohn
Letter of public enterprise Reform policy
1. I am writing on behalf of the Governmentof the Republic of Uganda to indicate its policy on public enterprises and its strategy for their reforn and privatisation. The letter also describes the actions that Governmentwill take to implement these measures through the proposed Privatisationand Utility Sector Reform Project (PUSRP).
A. Background
2. Since 1987 Government of Uganda has been implementinga radical economic and institutional structural reform programme, premised upon private sector driven economic growth. To this end markets, trade and capital follows have been liberalised,taxation has been reformed, fiscal responsibility has been decentralisedas part of an on-going programme; the civil service has been restructured, and Government has participated actively in initiatives for increased regional economic integration. The reform and privatisation of public enterprises,which formally began in 1991, is a key component of Government's strategy to promote the developmentof the private sector. Since 1997, Government has also (within the limits of prudent fiscal management) been actively re-directing resources to expenditureswith the highest potential for poverty reduction - the 1998/9 budget for the poverty programme increased 258% compared to 1995/6, and by the end of 1998/9 the Poverty Action Fund had mobilised Shs 70 bn, principally from the proceeds of debt relief from the international communityunder the HIPC initiative. In addition, Government has submitted a revised version of the poverty EradicationAction Plan (PEAP), which will be presented as a Poverty Reduction Strategy Paper to the IDA Board.
3. The impact of the economic reform programme has to date been impressive. Between 1989 and 1998 GDP growth was on average 6.4%, and inflation has been sharply reduced from double digits in 1987 to single digits in the last six years. Domestic Government revenue has increased from the equivalent of 4% of GDP in 1986/ to 12% of GDP in 1998/9 and, while maintaining macroeconomic stability, the Government has increased expendituresfrom the equivalent of 8.6% of GDP in 1986/7 to 18.6% of GDP in 1998/9. Foreign direct investment,albeit low, has been steadily increasing in recent years and stood at US$ 230 million-in 1998/9, a 21% increase on the previous year.
- 77 - 4. Since its initiation in 1991 the objectives of the public enterprisereform and divestiture programme have been to: (i) reduce the size of the public sector; (ii) promote the development of an efficient market-led private sector; (iii) improve the performanceof the remaining public sector enterprises, and (iv) reduce the financial burden of PE's upon the Treasury and generate revenues from privatisation proceeds. Under the forthcomingPUSRP, these high level objectives translate into more specific policy objectives and measures,which are presented in the following sections. A key event in the privatisation programme was the enactment of the Public Enterprise Reform and Divestiture Statute in 1993, which providedthe legal and institutional frameworkfor implementationof the programme.
5. From 1993 to 31 March 2000, 93 public enterprises have been divested (including 31 liquidations). Beginning with small commercial public enterprises,such as manufacturing, agro-businessesand hotels, the programme has recently progressed to larger and more strategic enterprises such as banks and telecommunications. There are now 46 public enterprises remaining for privatisation (as defined by the PERD Statute). Recent independent analysis (UMACIS, 1999, Assessment of the Impact of the Privatisation Programme in Uganda: Draft Statistical Report) demonstratesthat the economic impact of the privatisation been strongly positive. In general,following privatisation enterprises have posted growth in income and productivity; increased employment (in all sectors bar trade); increased employment of women; and increasedtax revenue.
6. Despite, the early success of the economic reform programme poor infrastructurehas been revealed as an increasingconstraint to private sector development. Indeed a 1998 survey of the private sector (UMACIS, 1998,Investment Response to Structural Reforms and Remaining Constraints) identified poor infrastructureto be the single greatest constraintto private sector development. The high cost, poor quality and low levels of access to infrastructurehas a severe negative irnpact on Uganda's prospects for economic development- businesses and householdsface higher costs of production; the range of feasible productive technologies is reduced; access to markets is limited, and in the case of water and sewerage supply basic needs go unserved.
7. Notwithstanding,the strong positive economic impact of the privatisation programme to date, Governmrenthas experienceda number of constraints to more successful implementation. Significantly these constraints relate to the perceived transparency of the privatisation process; settlement of employee liabilities;utilisation of divestiture proceeds, broadening share ownership amongst Ugandans and the general public's understanding of the programme. These factors in particular were highlighted by the October 1999 report of the Parliamentary Select Committee on Privatisation, which in addition to PE specific actions made the following general recommendations:(i) sale of shares on the stock exchange should be the preferred method of future privatisations,especially for infrastructurePE's, in order to encourage broad ownership by Ugandans (ii) stricter controls on expenditures from the Divestiture Account.
8. Govermmentis committedto the actions necessary to address the concerns of stakeholders. Indeed Government has already achieved a major milestone in this regard - the enactment of the PERD Amendment Act, which was assentedto in January 2000. The PERD Amendment Act, amongst other things, increasesthe accountabilityof the managers and directors of the public enterprises, and the implementers of privatisations;increases Government's powers to monitor PE's oversight; clarifies institutional responsibilityfor implementation,and updates guidelines for implementing privatisations and the use of divestitureproceeds. Furthermore, Government is committedto the following actions in order to re-establish the credibility of the privatisation process: (i) implementation of improved communicationsstrategy for the programme; (ii) development of a coherent policy for retrenched workers, (iii) development of mechanisms for broad public participation in share ownership, and (iv)
- 78 - promotion of active stakeholderparticipation in the implementationof the privatisation programme.
B. Overarchingprinciples for public enterprise reform policy
9. The overall goal of public enterprise reform policy is to contribute to growth and poverty eradication through the promotion of private sector development. The PUSRP will be the principal mechanismfor implementingpublic enterprisereform policy. While the three sub-programmesof the PUSRP, privatisation of remaining commercial and industrial PE's, utility reform and parastatal monitoring will contribute to this goal in different ways, Government has identified a number of over-archingprinciples that will be applied equally to all componentson the PUSRP:
10. Re-definition ofpublic and private roles: Government'score strategy for realisation of the PE sector objectives is to maximise the role of the private sector in ownership, financing and management of enterprise in Uganda. Government's future role will be limited to policy-makingand promotion of conducivebusiness enviromnent for private enterprise.
11. Transparency: The absence of transparency permits and encourages corrupt and unprofessionalpractices. Government is therefore committed to the introductionof procedures to maximise the transparency of all aspects of the public enterprise reform programme, including the policy-makingprocess (Section F describes the actions that will be taken to this end).
12. Professionalism: Government intends to make best use of local and international expertise in implementingthe PUSRP and to offer terms of employment to the implementersof the PUSRP which are competitive with those prevailing in the private sector.
13. Objectivity and competition: Competition in the selectionof private participants is key to transparencyand the maximisation of Government'sobjectives for each privatisation. Competitionis undermined where success is determined by a complex of factors or qualitativejudgments. It is therefore Government's intentionto employ competitive selectionsbased on an objective criterion.
14. Legislative Reform: Infrastructure PE's and others such as NHCC are statutory corporations. Implementing privatisation and introducing competition and autonomous regulation therefore requires legislativereform. Line ministries will play a central role in the process of preparing and enacting new legislation, and in this context URU, PU and the Ministers of Finance will advise the line-ministryto ensure that legislative reform promotes the goals of PE reform and privatisation.
15. Subsidy: The parastatal sector continues to impose a substantial drain on public resources as a result of inefficienciesthat have been financed (and encouraged) by both direct and indirect subsidies. The consequenceof past PE subsidy has been the worst of all outcomes:increasingly poor PE performance, escalating subsidy cost, and deterioration in the value of Government's interest in the enterprise. Against this background Government has made good progress on subsidy reduction to date, reducing PE subsidy (excluding one-off restructuring costs) by 48% from Shs 209 bn in 1995 to Shs 108 bn in 1998. Government'sintention is to further reduce subsidies in order that it may continue to reallocate resources to social missions in the areas of poverty eradication and infrastructure development.It is ultimately Government'sobjective to reduce and eventually eliminate subsidiesto public enterprises. Where it is not possibleto remove subsidies immediately,they will be made transparent and explicit and reflected in the Budget Framework.
- 79 - 16. Maintenance of a conducive policy environment: Government will continue to implementthe other policy initiatives supportive of privatisation and utility reform, for example, prudent fiscal and monetary policy, financial sector reform and improvedtax administration. Government will also pay special considerationto the ways in which it can maximise the positive synergies between public enterprisepolicy and the rest of its policy agenda, for example by developing the linkages between infrastructureprivatisation and regional economic integration; improvedfiscal management and subsidy reduction, and; privatisation and stock market development.
C. Policy Framework for InfrastructureReform
Linkages between infrastructurepolicy and economic development and poverty eradication
17. Improved infrastructureprovision will contribute in many ways to the goal of private sector led economic development.In particular improved infrastructurewill reduce input costs for Uganda businesses,increase access to markets, reduce informational asymmetries, and permit the introduction of new technologies.
18. In additionto promoting economic growth, improved infrastructurewill directly contributeto Government'spoverty eradication goals via its positive impact on rural incomes and basic needs. For example, access to infrastructureeffects rural incomes by permitting the introduction of new technologiesthus expanding the range of productive opportunities. As an alternativeexample, infrastructurehas positive impacts on the productivity of households, as access to clean water reduces the number of working days lost due to ill-health, and electric light permits a longer working day. Improved infrastructurealso supports progress in meeting basic needs: water and sanitation are basic needs in themselves, while access to electricity,for example, permits improved services from hospitals and schools, and communications support access to improved learning resources.
19. Importantly, reducing the subsidy cost of infrastructure and attracting private finance for new investments will permit Government to allocate a greater proportion of its resources to expenditures with a greater impact on poverty eradication.
Policy Objectives
20. Government'sgeneral infrastructurepolicy objectives are: (i) to improve, quality, cost and access to infrastructure (ii) to ensure the financial viability of infrastructureat minimum cost to Government
In meeting the above objectives, Governmentwill try to mitigate any negative social impact of infrastructure reform.
21. Govermmentintends to apply the policy elaborated herein to the electricity, water, rail, communications and aviation sectors, but excludingthe road sector (which is the subject of separate policy statements). Given that reform of the communicationssector is well advanced, Government now attaches priority to reform of the electricity and rail sectors as these are judged to (i) be the most significant infrastructureconstraints to private sector development and (ii) offer the greatest benefits from private participation.
- 80 - Policy measures
22. Competition: Govermmentsintention is that competition should be the key driver of improved quality, cost and access to infrastructure. As such vertically integrated monopolies will be unbundled and liberalised,and competition between infrastructureservice providers will be promoted wherever feasible. In market segments where direct competition is not possible, Government will employ other competitive mechanismsin order to (i) reveal market prices which will act as incentives for efficient investment and operation, and (ii) provide informationto aid regulation.
23. Regulation: Where direct competition is not possible, for example, the natural monopoly element of water and electricity distribution networks, or its potential is limited, for example, because of the small market size, Government will ensure the regulation of markets in order to balance the interests of serviceproviders and consumers. As required by the PERD Statute, Government will not divest unregulatedmonopolies. In all circumstancesinfrastructure regulation, will be stable and predictable, and autonomous from political and industry capture.
24. Market development: De-monopolisationand un-bundlingof former state-monopolieswill present numerous opportunitiesfor local entrepreneursto provide infrastructure services in the domestic marketplace. Local infrastructureproviders have the advantage of being well positioned to (i) identify commerciallyviable infrastructureinvestments (ii) be responsive to the needs of specificuser groups, and (iii) select technologies appropriateto local conditions. Government therefore intends to develop initiativesto promote the developmentof local markets in infrastructureequipment and services, for example, removing barriers to entry, reducing transaction costs, and facilitating entrepreneurship.
25. Necessary Subsidy: In addition to the general subsidy policy outlined in Section B, Government recognisesthat in order to achieve its goal of increased access to infrastructurea policy of 'necessary subsidy' will be required in the some sectors, notably power and water. Such necessary subsidieswill adhere to the following principles: (i) efficient and market friendly application,(ii) strong incentives for cost minimisation, (iii) transparent and objective allocation, and (iv) sustainability.
26. Social safety nets: Government believesthat utility reform will ultimately be to the benefit of all stakeholders,however it is reasonable to expect that in the near and medium term, utility reform will impose costs on certain groups. It is therefore Government'sintention to mitigate the negative impact of utility reform where the costs are borne by the poor and vulnerable.
27. Sectoral reform strategies: In order to foster the confidence of the public and prospective private participants in its infrastructure reform programme, Government intends to develop and publish clear and time-bound reform strategies for each sector. These strategieswill be developed with the active participationof stakeholders in order to ensure that time-schedules are realistic and achievable.
28. Special incentivesfor private participation in infrastructure: Government is committedto all actions necessary to create and maintain a conducive environment for private participation in infrastructure. Nonetheless, as a general principle, Government will not offer special taxation or guarantee incentivesfor private participation in infrastructure,other than those normally available to private investors.Within this general principle for tax incentives,a change in tax policy will be consideredwhere it offers to have a significantirnpact on infrastructuredevelopment with minimum revenue impact. Exemptions will not, however, be granted exclusively to particular firms or projects. Despite the general principle stated for guarantees, Government does acknowledgethat for 'pioneer'
-81 - private investments in sectors associated with significant market failure, certain guarantees may be a minimum requirementof financiers. Such instances will be considered on a case-by-case basis. In the event that Government does provide a guarantee for a private infrastructure provider, it will (i) only cover specific non-commercialrisks that cannot be borne or mitigated by the private sector at a reasonable cost (ii) have a fixed term, or defined criteria by which Government may exit, and (iii) be reflected in the Budget Framework.
D. Policy Frameworkfor Privatisation of Remaining Industrial& CommercialPE's
Linkages betweenprivatisation of residual PE's and economic development and poverty eradication
29. Privatisation of residual PE's contributes to the goal of private sector led economic development by directly expandingthe size of the private sector. As demonstrated in Section A, privatisation has contributedto economic development goals by increasing income, productivity, employment, investment and Govermmenttax revenues. Privatisation also has strong strategic linkages with other aspects of economic policy, for example, privatisation of Uganda Clays Ltd via floatation enabled the first trading of shares on the infant Uganda Stock Exchange, and the on-going privatisation of banks will promote the re-capitalisationand development of the financial sector.
Policy objectives
30. Government'sprincipal objective is to privatise all residual industrial and commercial PE's by end June 2005. As a general objective,Government will seek to maximise the proceeds from each privatisation while transferringminimum liabilities to Government. However it is importantto recognise that this objective may not be appropriate in all instances,for example in enterprises with strategic importance, such as banks, a commitment to re-capitalise may have a higher priority.
Policy measures
31. Mode ofprivatisation: It is Government'spolicy to divest its interest in commercial PE's via sale of shares. In some instances, however, this will not be possible, for example where the enterprise is not deemed to have value as a going concern, and in these cases sale of assets or liquidationwill be employed. It is also Government'spreference, in line with the report of the Parliamentary Select Committee on Privatisation,that future divestitures should maximise public participation in share ownership. All divestitureswill be via competitive tender, except for instances such as the pre-emptive rights cases and Management and Employee Buy-out offers.
32. Minimum privatisation actions: In implementingprivatisations PU will perform the following minimum actions (i) obtain policy approval of the proposed privatisation (ii) legal, financial and environmentalaudit (iii) obtain DRIC approval of Divestiture Action Plan. Privatisation actions will also conform to the 'Privatisation Procedures Manual'.
33. Public offerings: In line with Parliament's recommendation,Government will focus on divestiture via sale of shares on the stock exchange, either directly or following a transfer to a strategic equity partner. However, it is important to note that in some instances this may not be possible, for example, where the PE does not meet the minimum listing requirements.Where appropriatelistings will be phased in order to promote the stable development of the share market.
- 82 - 34. Pre-emptive rights cases: Government will undertake an independent share valuation as a basis for negotiations,which will be conducted in accordancewith the companies articles of association. Negotiationswill be conducted with the objective of reaching agreement with the pre-emptive party.
E. Policy Framework for ParastatalMonitoring
Linkages betweenparastatal monitoring policy and economic development and poverty eradication
35. Some parastatals (those presently listed under class one of the second schedule of the PERD Statute) are not slated for divestiture. Others in Class II to IV, will remain in Government ownership for some time pending their privatisation. Government is concerned that even these public enterprises should make their full contributionto its goals of economic developmentand poverty eradication.Most importantlya reduction in the subsidy cost of public enterpriseswill permit Government to allocate a greater proportion of its resources to poverty eradication goals. Improvements in the performance and profitability will also contribute to economic development goals by increasingincome, tax revenues and employment. PE's may also make a positive contribution to non-tax revenues through dividend payments, though it should be noted that these instances are expectedto be limited.
Policy objectives
36. The overall objective of parastatal monitoring policy is to eliminate subsidies to PE's and improve their performance in order that they make a positive contributionto the economy in terms of income, employment,tax revenues and so on. Where it is not possibleto eliminate subsidies immediately,they will at a minimum be made explicit and transparent.
Policy measures
37. The PERD Statute requires the Minister of Finance to: (i) exercise a strategic economic monitoring role in relation to PE's (ii) participate in the developmentand supervision of operating plans (iii) monitor public enterprise subsidies both direct and indirectwith a view to the phased elimination of all PE subsidies (iv) identifyfnancial flows and dues between public enterprises and the Government and arrange for their settlement (v) oversee caretaker costs and activities of PE which have been selected for divestiture and those that are financially distressed
38. PMU will provide the Ministry of Finance with the informationaland technical resources to fulfill these responsibilities. SpecificallyPMU will employ the following actions:
* subsidy monitoring and report * performance monitoring and report * minimum compliance monitoring and reporting * settlement of cross-indebtedness * corporate governance
39. Subsidy monitoring and reporting: PMU will analyse financial flows between Governmentand PE's. This will include analysis of long-term trends and recommendationson subsidy reduction. This information will be presented annually to the relevant agencies, includingMinistry of Finance,
- 83 - line-ministries,the Auditor General, the Inspector General of Government, and the Parliamentary Committee on State Enterprises, for their necessary action. The information will also be used by PU and URU in preparing PE reform strategies.
40. Performance monitoring and reporting: PMU will conduct semi-annualmonitoring of the financialand operational performance of PE's. PE's progress in implementingpre-divestiture activities will also be monitored.
41. Minimum compliance monitoring and reporting: The PERD Statute defnes the minimum requirementsof PE managers and directors. PMU will monitor compliance of PE's to these requirements,and advise the Minister of Finance in order that the Minister may exercise the powers granted by the Act accordingly. The Ministry of Finance will also publish a statement of PE compliance in the press.
42. Settlement of cross-indebtedness:Cross-indebtedness between Government and PE's underminesGovermnent fiscal managementand PE financial performance. Traditionally debt-swappinghas been employed to settle cross-indebtedness,however this practice has serious flaws. Specifically,debt-swapping (i) underminesGovernment fiscal policy (ii) encourages inefficientuse of goods and services from PE's (iii) encourages laxity in the settlement of bills, and (iv) creates cash-flow problems for public enterprises. Indeed Government'sexperience has been that the practice of debt-swappingactually exacerbates the problems of cross indebtedness, rather than solving them. As such, the Government terminated the practice of debt-swapping from 1st July 1999. Cross-indebtednesswill now be settled by normalising financial flows between Government and PE's. Responsibilityfor accounting for financial flows and enforcing payment lies with the Ministry of Finance, in particularthe Treasury Office of Accounts. PMU will facilitate the settlement of cross-indebtednessby improving information flows between Government and PE's (in particular performing the verification of debts in association with the Auditor General), and by providing technical support and capacity building services to the Ministry of Finance.
43. Corporate Governance: PMU will continue to implementactivities to promote good corporate governance, including the provision of technical and support servicesto the Uganda Institute of Corporate Governance.
F. Constraints and correspondingGovernment actions
44. Transparency: Government recognises that inadequate transparencyhas been a significant factor in failed privatisations. While allegations of corruption and / or malpractice have not been proven in most cases, the lack of transparencyhas given the allegations credence and damaged the integrity of the privatisation programme. While previously Government has not restricted access to information about the privatisation process, this alone has proven to be insufficientto ensure transparency. Therefore, under PUSRP Government will pursue a pro-active communications strategy to maximise the transparency of the programme. The strategy will make use of all available communicationchannels to promote the transparency, and it will also include an element of public education in order to improve the quality of dialogue regarding the privatisation programme, The communications strategy will include a baseline survey of public opinion to ensure that the communications strategy responds to the concems of stakeholders. The base-line survey will also permit Governmentto monitor the success of the strategy.
- 84 - 45. Stakeholder Participation: The success and sustainability of the programme is therefore predicated on its ability to respond to the concerns of all interested parties. While previous privatisation programmes have included substantialelements of stakeholder consultation, this alone has not been sufficientto engender a critical mass of support for the programme. Government therefore intends a paradigm shift in the nature and quality of stakeholderparticipation: stakeholders will now be encouraged to actively participate in the making and implementationof public enterprisereform strategies. Governmentwill also encourage interest groups to organise in ways that will permit them to convey their concernsconstructively.
46. Employee liabilities: While privatisation usually offers improved employment prospects in a particular industry or sector, it is not possible to guarantee that this will be the case for all workers retrenched in the course of PE restructuring and divestiture. In the past delays in verifying and settling terminal benefits have stalled privatisations and caused distress to workers. Government must be able to adequately respond to the concerns of workers if privatisationsare to be concluded successfully and fairly. Governmenthas therefore adopted a policy for retrenchmentof PE employees, which has the following key features:
(i) Government will act to ensure the phased right-sizing of PE workforces as soon as practicable and where possible in advance of privatization. (ii) Payments of benefits will be made using the resources of the relevant PEs, to the extent that these resources are not sufficient to cover the required amount, privatization proceedswill be used. For UEB, UTL, URC and NWSC and any other PEs agreed with IDA, if the two above mentioned sources are not sufficient, IDA resources provided by the Project would be used. (iii) PEs will be encouraged to take special efforts to identify and retain key skills. (iv) Dialoguewith workers and unions will be a key component of planning and implementing retrenchment. (v) Retrenchmentpackages will be paid to the day on which the package has been calculated. Where funds are not available, affected staff will receive their full salary until it is possible to settle their terminal dues. (vi) Retrenchedemployees will not be settled in other PEs or Government institutions. (vii) PEs will be encouraged to provide retrenched workers with counseling and retraining where appropriate. (viii) Governmentwill require PEs to seek PU approval if they intend to change terms of service in ways that affects terminal benefit liabilities.After a PE is selected for privatization, no changes in the terms and conditions of service can be made. (ix) Retrenchmentpackages will be paid in accordancewith the established terms and conditions of service. For those PEs that have retrenched workers in the recent past, the future retrenchment packages will be paid in accordance with established terms and conditions of service at that time. (x) The benefits to be settled include only accrued benefits and no special/additionalpackages will be paid to any employees.
47. Utilisationof divestiture proceeds: Divestiture proceeds will be banked in the divestitureand redundancyaccounts, the operation of which is a responsibility vested in the Minister Finance. Utilisation of these funds will be in accordancewith the PERD Statute, which prioritises costs relating to the termination of contracts between PE's and their employees.
48. . Co-ordination Government implementing agencies: In some instances conflicts between the policy agendaof different Government departments have delayed implementationof PE reform. More often poor information flow has underminedthe policy dialogue that should produce common agendas
- 85 - and concerted action. Government will therefore now give PU, URU and PMU specific responsibility for the quality of informationflow between responsibleGovernment agencies. To this end the implementingunits will adopt new roles as resources of information and expertise which may be placed at the service of stakeholders. For complex privatisationsGovernment will also institute transaction working groups which will co-opt representativesfrom stakeholder Government agencies (see section F).
G. Implementation& co-ordinationarrangements
49. Ministry of Finance, Planning and Economic Development: The Minister of Finance, Planning and Economic Development is the Chairman of the Divestiture and Reform Implementation Committee as defined by the PERD Statue, and be responsible for the passing of public enterprise reform and divestiture matters through Cabinet and Parliament
50. Minister of State for Finance, Planning and Economic Development (Privatisation):The Minister of State for Privatisation will continue to be the Minister responsible for reform and divestiture of public enterprises as defined by the PERD Statute, and provide the day-to-day political leadership of the programme. In particular, the Minister of State for Finance in charge of Privatisation will be responsiblefor the presentation of PU and URU business in DRIC.
51. Divestiture Reform Implementation Committee: As stated in the PERD Statute DRIC is responsible for implementingGovernment's policy on reform and divestiture of public enterprises. As defined by the Second Schedule of the PERD Statute and the Divestiture Procedures Manual, DRIC will specificallybe responsiblefor prioritising PE's for reform and divestiture; approval of Divestiture ActiornPlans and Restructuring Action Plans; approving the pre-qualificationof prospective private participants, and; approving the commercial terms of privatisation transaction.
52. Followingthe PERD (Amendment) Act, DRIC has the following membership: (i) the Minister of Finance (ii) the Minister of State for Finance in charge of Privatisation (iii) four eminent Ugandans (iv) the Chairman of the Uganda Investment Authority (v) the Attorney General as ex-officio and (vi) the relevant line-ministerwhere appropriate. The Minister of State for Finance in charge of Privatisation will present PU and URU business in DRIC. As defined by the Fourth Schedule of the PERD Statute, decisions in DRIC will be made by simple majorityvoting.
53. Ministry of Finance: The Ministry of Finance will be responsible for administrative supervision of the PUSRP through the office of the Permanent Secretary/Deputy Secretaryto the Treasury. The Ministry of Finance is responsible for all elements of parastatal monitoring, which will be implementedby PMU on its behalf. In performing this function PMU will report directly to the Director, Economic Affairs in the Ministry of Finance. The Ministry of Finance will also continue to be responsible for monitoring the overall performance of the PUSRP. PU and URU will advise the Ministry at both technical and policy levels with regard to the public enterprise and infrastructure sectors.
54. Privatisation Unit: The PERD Statute mandates the Privatisation Unit to implement Government PE reform and divestiture policy on behalf of DRIC. The PU will be staffed with long term consultants,organised in teams with a designatedteam leader. PU will also make best use of expert advice. The objectives of the PU and the policy measures it will employ are described in section D of this letter. The expected activities of the PU are described in the PUSRP Project Implementation Plan.
- 86 - 55. Utility.Reform Unit: The URU has been established in recognition of (i) the broad range of activities required by utility reform and (ii) the relative size and complexity of the privatisations(iii) the special mix of skills required by the transactions. URU will therefore act under delegated authority from the PU to perform its functions as they relate to the reform and privatisation of infrastructurePE' s. URU will also act as a resource of information and technical expertise, which may be utilised by other Government stakeholder agencies. The URU will be staffed with long term consultants,organised in sectoralteams, which will also include officials co-opted from other Government stakeholder agencies and professional staff of new regulatory institutions. URU will also make best use of expert advice. The objectives of the URU and the policy measures it will employ are described in section C of this letter. The expected activities of the URU are described in the PUSRP Project Implementation Plan.
56. Parastatal Monitoring Unit: PMU will perform the parastatal monitoring functions assigned to the Minister of Finance by the PERD Statute. The PMU will be staffed with long term consultants, with a designatedteam leader who will report directly to the Director, Economic Affairs in the Ministry of Finance. The objectives of the PMU and the policy measures it will employ are described in section E of this letter. The expected activities of the PMU are described in the PUSRP Project ImplementationPlan.
57. PUSRP Central Services: Centralised units under the PUSRP will provide PU, URU and PMU with legal, IT, accounting, audit, transport and other support services.
58. Inter-ministerial working groups: For large and complex transactions special inter-ministerial technical and policy committees will be established to (i) provide technical and / or policy input (ii) aid information flow and co-ordinationand (iii) promote policy dialogue. PUSRP will provide technical and secretarial support to these committees as required. Participants in the working group will be sufficientlysenior to make decisions and act on behalf of their parent agencies.
H. Risk Analysis
59. While Government is fully committedto implementthe policy stated in this letter, it is prudent to recognisethat a number of factors beyond Government's control will influence the success of the policy and the speed of its implementation. The key risks which Government considers likely to influence the impact of public enterprise sector policy are (i) external macroeconomic shocks (ii) competition from other internationalprivatisation transactions (iii) delays in conclusion necessary regional political agreements, and (iv) delays in the passage of PE sector matters through Parliament.
- 87 - I. Conclusion
60. I would like to take this opportunityto reiterate Government'scommitment to the implementationof the policies, programmes and initiatives outlined in this letter of public enterprise reform policy.
Yours sincerely
Manzi Tumubweinee Minister of State for Finance, Planning and Economic Development (Privatisation) Holding The Portfolio of Minister of Finance,Planning and Economic Development
Distribution:
Minister of Finance, Planning and Economic Development Permanent Secretary/Secretaryto the Treasury Permanent Secretary/Deputy Secretary to the Treasury Solicitor General Director, Budget Director, Economic Affairs Director, Privatisation Unit Director, Utility Reform Unit
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