Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 18638

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(Cr. 2718-GH)

November 30, 1998

Private Sector and FinanceEconomic Management and Social Policy DepartmentAFRICA REGION

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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Currency Equivalents

Currency unit: CediUS$1 = Cedi 2,320 (February, 1998)

Weights and Measures

Metric System

Fiscal Year of Borrower

January 1-December 31

Abbreviations and Acronyms

BOG - Bank of GhanaBPEMS - Budget and Public Expenditure Management SystemDCA - Development Credit AgreementDIC - Divestiture Implementation CommitteeEDP - Entrepreneurship Development ProgramERP - Economic Recovery ProgramERSO - Economic Reform Support OperationGPTC - Ghana Posts and Telecommunications CorporationKFW - Kreditanstalt fur WeideraufbauIDA - International Development AssociationME - Micro EnterpriseMOF - Ministry of FinanceMRH - Ministry of Roads and HighwaysMTEF - Medium Term Expenditure FrameworkMWH - Ministry of Works and HousingPEPTA - Public Enterprise and Privatization Technical AssistancePETA - Public Enterprise Technical AssistancePSAC - Private Sector Adjustment CreditPSD - Private Sector DevelopmentPUFMARP - Public Financial Management Reform ProjectSEC - State Enterprises CommissionSHC - State Housing CorporationSIC - State Insurance CorporationSME - Small and Medium EnterpriseSOE - State-owned Enterprise

Vice President Jean-Louis SarbibCountry Director Peter HarroldSector Manager Thomas W. AllenTask Team Leader Gerard Byarn

REPUBLIC OF GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

TABLE OF CONTENTS

PREFACE

EVALUATION SUMMARY ................................................ i -iv

PART I: PROGRAM IMPLEMENTATION ASSESSMENT ............................. 1A. Background ............................................... 1B. Statement of Project Objectives and Evaluation of Design ................ ............2C. Achievement of Project Objectives ................................................ 4D. Major Factors Affecting the Program ............................................... X7

(a) Implementation Capacity ............................................... X7

(b) Defects in the original design ................................................ 8E. Implementation Record ................................................ 9F. Program Sustainability ............................................... 9G. Bank Performance ............................................... 10H. Borrower Performance ............................................... 10I. Assessment of Outcome ............................................... 10J. Future Operations ............................................... 11K. Key Lessons Learned ............................................... 11

PART II: STATISTICAL ANNEXES ............................................... 13Table 1: Summary of Assessments ............................................... 13Table 2: Related Bank Loans and Credits ............................................... 14Table 3: Project Timetable ............................................... 15Table 4: Credit Disbursements: Cumulative Estimated and

Actual Disbursements ................ ............................... 16Table 5: Key Indicators for Project Implementation ......................................... 16Table 6: Status of Legal Covenants ............................................... 17Table 7: Bank Resources: Staff Inputs ............................................... 19Table 8: Bank Resources: Missions ............................................... 19

PART III: APPENDXES ............................................... 20

APPENDIX I ............................................... 21

APPENDIX II ............................................... 24

APPENDIX III ............................................... 34

MAP ............................................... 40

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

PREFACE

This is the Implementation Completion Report (ICR) for the Private SectorAdjustment Credit in Ghana for which IDA Credit 2718-GH in the amount of SDR 46.9million (US$70 million equivalent) was approved on July 25, 1995 and made effective onSeptember 20, 1995.

The credit was closed on April 30, 1998. As of April 30, 1998, the credit wasfully disbursed. The credit was co-financed by Japan, through OECF, with a grant ofUS$59.9 million and by the Federal Republic of Germany with a credit fromKreditwnstalt fur Weideraufbau (KFW) for approximately US$26.8 million.

The ICR was prepared by John Byamukama with the guidance of Gerard Byam,Task Manager for the Private Sector Adjustment Credit (PSAC) project, and OliverCampbell -White. It is based on material in the project files. In addition to commentingon the draft ICR, the Borrower also contributed its own evaluation of the project'spreparation and execution, which is attached as an appendix to the ICR. Thememorandum for the release of the third tranche is also attached as an appendix.

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT(CR. 2718-GH)

EVALUATION SUMMARY

Project Objectives

1. The objectives of PSAC were to: (i) accelerate the divestiture of state-ownedenterprises (SOEs); (ii) create a macroeconomic environment that would generate theinvestment necessary to raise real GDP growth to 5.5 percent in 1997 and to attain anannual inflation rate not exceeding 5 percent; and (iii) support the improvement of publicexpenditure management, including the poverty-orientation of public expenditure.

2. The objectives of PSAC were adequate and responsive to tfhe needs of Ghana,especially at a time when the Government sought to further reduce its role in the servicesand productive sectors and to signal its strong commitment to enhancing the role of theprivate sector in the economy. Although the program design had specific and quantifiabletargets set for the different stages of project implementation upon which the release of thesecond and third tranches were based, a major setback was the lack of emphasis on thequality of the privatization transactions and the definition of what constituted a successfuldivestiture.

Implementation Experience and Results

3. The Borrower made satisfactory progress in improving the macroeconomicframework, in accelerating the pace of privatization, and in improving the managementand poverty-orientation of public expenditure. The Government's main policy focus wasto improve fiscal performance and by 1997 there was improved budgetary and monetarymanagement which led to a significant fiscal turnaround. This helped in slowing downinflation, improving the macroeconomic environment and advancing the structural reformagenda. The domestic primary surplus reached 3.3 percent of GDP and inflation wasbrought down to 28.5 percent from 45.6 percent in 1996. Non-wage expenditures inprimary health care, basic education and rural infrastructure were raised in real terms by288 per cent, 103 per cent and 266 per cent, respectively, in the 1994-1996 period. In

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addition, the Ministry of Roads and Highways introduced in May 1996 a computer-basedmonthly Contract Information System to strengthen the management of its multi-yearcontracts.

4. A limited expenditure monitoring system envisaged by PSAC was also introducedand this has since evolved into an integrated public financial management system withsub-systems covering budget preparation, budget implementation, accounting, cashmanagement, debt management, revenue management, auditing and procurement. This morecomprehensive system is supported by the IDA-financed Public Financial ManagementReform Project. The process involved is complex and long term, but the initial steps havebeen taken and progress on implementing that project is satisfactory. Under PSAC, amedium-term expenditure framework (MTEF) for priority sectors which will form thebasis for annual budgeting was prepared and had been launched by June 1998. Inaddition, a new computer-based budget and public expenditure management system(BPEMS' has been designed and invitations to tender for software have been sent out.

5. The privatization component ran into unforeseen implementation delays. Of the149 enterprises that were handed over to the Divestiture Implementation Committee(DIC) for divestiture, 50 enterprises had been privatized or liquidated as of February 1998(see Appendix III), of which 16 were medium sized. Although this was in line with theF'SAC target of selling or liquidating at least 48 small and medium SOEs during thepirogran period, of which 14 were medium sized, it took a year longer to achieve. Amongthe four large and strategic enterprises, only Ghana Telecom was privatized. DIC decidedin early 1998 to outsource the divestiture of Mim Timber following the collapse ofnegotiations with the original owner of Mim Timber for the return of the property. At thesame time, private firms were contracted to prepare State Housing Corporation (SHC)and State Insurance Corporation (SIC) for privatization and the transactions are expectedto be completed before the end of 1998. The outsourcing of Mim Timber, SIC and SHCshows that the Government has begun an irreversible divestiture process, with theoutsourcing contracts covering the full process from enterprise appraisal to completion ofsales contracts.

6. The estimated cost of the project was US$143 million of which IDA was toprovide US$70 million, Japan was to provide a grant of about US$56 million throughCIECF, and the Federal Republic of Germany was to provide a credit for approximatelyUS$17 million from Kreditanstalt fur Weideraufbau (KFW). The actual cost of theproject was US$156.7 million of which US$70 million was provided by IDA, US$59.9million was from OECF and US$26.8 million was from KFW The IDA Credit becameeffective on September 20, 1995 upon which the first tranche of US$30 million wasreleased. The second tranche of US$15 million which was supposed to be released 10mLonths later was released in December 1996 due to the unfavorable macroeconomic

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conditions and delays in completing the number of divestitures specified in theDevelopment Credit Agreement (DCA). The third and last tranche of US$25 million wasreleased in April 1998. Because of the delays in releasing the second and third tranches,the closing date of the Credit was extended from October 31, 1997 to April 30, 1998.Three IDA reflows of SDR 3.2 million, SDR 2.4 million and SDR 1.7 million in October1996, July 1997 and August 1998 respectively were associated with this Credit.

7. The Bank's performance in the preparation and supervision of PSAC wassatisfactory. The Bank allowed intensive Borrower participation at the design stage, eventhough this was a time-consuming process. It also carried on continuous dialogue withthe Borrower during the implementation period, putting in 21 weeks of supervision forthe period September 1995 to February 1998, of which 3 weeks were spent in the field.Effectively, PSAC received considerably more than the documented 21 weeks ofsupervision as the privatization component was also being reviewed during the PublicEnterprise and Privatization Technical Assistance Project (PEPTA) supervision missions.However, the Bank could have been more specific at the design stage by spelling outwhat it considered a completed (and successful) divestiture rather than merely focusingon the number of completed divestitures. The Bank was also not coordinated in its policyregarding the preparation of enterprises for privatization. For example, while the PSACwas focusing on the privatization of the State Insurance Corporation (SIC), the Non-BankFinancial Institutions Project was proposing to finance the restructuring of the SIC. Thisgave conflicting signals to the Borrower.

8. The performance of the Borrower at the preparation stage was satisfactory asevidenced by the useful feedback they provided during program design. The Borrower'sperformance in the implementation of the macroeconomic policy framework componentwas also satisfactory, however, after significant delays. The Borrower's performance inthe implementation of the privatization component of the program was less thansatisfactory. The implementation capacity was weak leading to delays both in theappointment of outsourcing consultants and initiating actions on the preparation of thelarge strategic enterprises for sale.

9. The outcome of PSAC is rated satisfactory because the project achieved itsobjectives. Despite some delays in the divestiture process, all the components of theproject were effectively implemented resulting in a substantial reduction of governmentownership of commercial enterprises and improved public expenditure management.Furthermore, the project has signaled stronger government commitment to enhancing therole of the private sector in the economy. Actions implemented under PSAC are likely tobe sustainable.

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Fquture Operations

10. The Economic Reform Support Operation (ERSO) program was approved by theEBoard in June 1998. It provided balance of payments support and created the foundationsfor the next phase of difficult and complex reforms in the areas of privatization, publicsector reform, public expenditure management, and restructuring of the energy and cocoasectors. Specifically, under the privatization component, the focus to the divestiture of thelarge economically significant enterprises. This will be followed by another adjustmentcredit (ERSO II) which wou!d address the remaining agenda in privatization and therestructuring of both the cocoa and energy sectors.

Key Lessons Learned

11. Several main lessons can be drawn from the experience of this operation:

(i) Emphasizing the need for quality privatizations. The success of aprivatization program should not only be measured by the number ofdivestitures completed, but also on the quality of the divestitures. To theextent that quantitative privatization targets will be required for theseoperations, distinct improvements are required in defining, and agreeing inadvance, how performance is to be measured specifically. Theimplementing agency should also ensure that the p.ocess is widelypublicized so as to generate a lot of interest and thus attract as 'manycompetitive bidders as possible. The selected buyers should be committedto returning the enterprises to viability. At the same time, the buyersshould be capable and willing to meet their outstanding obligations arisingout of the sale transactions. Compliance on payment obligations can beachieved by writing default clauses into the sales contracts and invokingthese clauses when default occurs. This mechanism would minimize thenumber of divestitures that would need to be canceled, an action whichsets tht privatization clock backwards, and would also save on theresources spent on the supervision of the project.

(ii) Privatization is a complex process. Privatization of SOEs is a complicatedprocess that involves many facets. These include, among others, themanagement of the privatization process, development of implementationcapacity, capital market development, creating political consensus on thebenefits of privatization and ironing out policy issues that could hamperthe progress of privatization.

(iii) Privatization requires more intense supervision. Being a complex process,privatization requires more intense supervision than other adjustmentoperations. The combination of PSAC and PEPTA was very helpfiul as the

two projects were conducted and coordinated as one operation with somemutual conditionalities, which effectively meant more supervision time forthe PSAC privatization component.

(iv) PSAC as a catalyst for moving the privatization program ahead. Decisionsabout privatization can cause political controversy and are thereforepolitically difficult to make. However, those decisions are not impossibleto make. PSAC was basically a balance of payment support operation, butit gave the Government the necessary incentive to build politicalconsensus about the need to push ahead with the privatization program.

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

PART I: PROGRAM IMPLEMENTATION ASSESSMENT

A. Background

12. The Private Sector Adjustment Credit (PSAC) provided balance of paymentsfinancing in support of the Government's program to promote private sector growth byaccelerating the pace of privatization and by maintaining an appropriate macroeconomicpolicy framework. The latter included improved management and poverty-orientation ofpublic expenditures. The program was aimed at increasing the efficiency and level ofinvestment in the Ghanaian economy and thus permitting an acceleration of growth.While PSAC was aimed at providing the incentive and a conducive environment forprivate sector development, a parallel operation, the Public Enterprise and PrivatizationTechnical Assistance (PEPTA), was set up to support the actual implementation of theprivatization program. The two operations were designed to build on the groundwork laidby the Public Enterprise Technical Assistance Project (PETA) which supported therestructuring of state-owned enterprises into viable entities and provided advisoryservices for implementing the first phase of the divestiture program.

13. Although Ghana's Economic Recovery Program enjoyed substantial success inthe seven years following its adoption in 1983, higher than planned public spending in1991 worsened fiscal imbalances and increased inflationary pressures. The fiscal balancewhich had shown a surplus of 1.5 percent of GDP in 1991 deteriorated to a deficit of 10.4percent of GDP in 1996 and the domestic financing of the budget rose to 5.1 percent ofGDP, which increased interest payments and kept nominal and real interest rates high.Annual inflation also rose from 18.0 percent in 1991 to 45.6 percent in 1996.

Table 1: Selected Economic Indicators, 1991-97(in percent)

Indicator FY91 FY92 FY93 FY94 FY95 FY96 FY97

GDPgrowthrate 5.3 3.9 5.0 3.8 4.5 5.2 3.0

Budget deficit (percent of GDP)' 1.5 -10.4 -9.3 -6.7 -10.4 -8.6

Annual inflation (period average) 18.0 10.1 25.0 24.9 59.5 45.6 28.5

M2 growth 27.2 50.3 27.4 46.2 37.5 34.3 36.9

Source: Government of Ghana

Including grants

14. In 1988 the Government initiated a program to divest 260 state-owned enterprises(SOEs) that were either owned directly by the Government or through state-owned bankswhere the Government had majority shareholding. Between 1989 and March 1995, only74 SOEs were divested; a pace that was due mainly to weak administrative capacitywithin the Government, slowness in taking necessary administrative decisions, and an adhoc and non-transparent divestiture process. As a result, transaction costs were high andoutcomes were unpredictable, undermining investor interest. There were no clearprocedures for selecting SOEs for divestiture or for determining the role of ministries oralgencies in the implementation proc. 3s. The Secretariat for the DivestitureImplementation Committee (DIC), charged with implementing divestiture, lackedsufficient staff and skills to implement the process more expeditiously. In addition, theGovernment initially saw divestiture as a means of reducing the fiscal burden byliquidating SOEs. Subsequently, there was a gradual recognition that the sale of SOEs toprivate sector entrepreneurs could also improve efficiency and promote the growth of theprivate sector. This led to a desire to accelerate the pace of divestiture.

15. Following the 1996 elections, the Government formulated a new economic programwhich focused on improving fiscal perfornance. As a result, macroeconomic performanceimproved in 1997. Real GDP grew by 3.0 percent in 1997, the fiscal deficit (excluding grants)w,as reduced to 11. I percent of GDP in 1997 and inflation was brought down to 28.5 percent.

16. In 1998, the Government began implementation of the next phase of policyreforms with the support of an Economic Reform Support Operation, a new adjustmentcredit, that was approved by the Board in June 1998. This new phase will include difficultand complex reforms in the areas of public sector reform, public expendituremanagement, infrastructure (to promote increased private participation) and the cocoasector. In February, two major policy initiatives were implemented: (i) legislation for theimplementation of a value added tax (VAT) was passed; and (ii) the newly created PublicUtilities Regulatory Commission announced a 90 percent adjustment in water andelectricity tariffs.

B. Statement of Project Objectives and Evaluation of Design

17. Statement of Objectives. PSAC was a three tranche adjustment credit whichaimed to support the Government's program to promote private sector growth byaccelerating the pace of privatization and by maintaining an appropriate macroeconomicframework, including improvements in the management and poverty-orientation of publicexpenditures. The first tranche was to be released upon effectiveness of the credit. Thesecond and third tranches were to be released at 1 0-month intervals followingeffectiveness, subject to the fulfillment by the Government of specific conditionalitieslaid out in the Development Credit Agreement.

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18. Specifically, the objectives of PSAC were:

* Improved public expenditure management. This would involve the rationalization of thedevelopment budget in order to improve the overall efficiency and growth of theeconomy, including a public campaign about the quality and targets of the publicinvestment programme. There would also be better planning of the recurrent budgetalong with the introduction of variance analysis to assess the departure of actual frombudget allocations, and thus facilitate quick corrective actions. The comprnhensive publicexpenditure management would be supported by the IDA-financed Public FinancialManagement Reform Project (PUFMARP).

* Accelerated divestiture of SOEs. This would include a more transparent set ofprocedures for divestiture of SOEs (fully disseminated to the public), the use of privatefirms to implement privatization on behalf of the Divestiture Implementation Committee(DIC) and the Government, the use of uniform procedures by both DIC and the privateimplementing firms and the greater participation of all Ghanaians in the divestitureprocess. Divestiture targets were set to include the sale or liquidation of a total of 48small and medium SOEs out of the pre-specified list of 110 enterprises and the pre-privatizdtion preparation for four large and strategic SOEs, of which three would beoffered for sale within the program period2 . In addition, the divestiture componentsought to develop Ghanaian consensus on private participation in cocoa export marketingand on ways to introduce such participation. The program included a study on the scope,method and potential impact of cocoa export liberalization.

- To generate the investment necessary to raise real GDP growth to S.5 percent in 1997and to attain an annual inflation rate not exceeding 5 percent. The Government realizedthat a stable and viable macroeconomic policy framework is a pre-condition for sustainedprivate sector growth. This stability would be achieved through further fiscal adjustment,including revenue raising measures, reduction of the civil service while training andemunerating the retained staff better, introduction of expenditure monitoring system and

poverty-orientation of expenditures.

19. Evaluation. The concept and design of PSAC were adequate and in line with theFlank's country assistance strategy which aimed at helping the Government to achieve itsobjectives of faster growth and poverty reduction. The Government hoped to achievethese objectives through restoration and maintenance of macroeconomic stability andimplementation of the unfinished policy agenda for private sector development. Thus,PSAC was designed as the first of three adjustment operations planned to support thepolicy reform agenda for private sector development. The subsequent two operationswould support further privatization, the restructuring of the cocoa and petroleum sectors,public service restructuring and the remaining financial sector reforms.

2 The original PSAC list consisted of 114 enterprises: 46 medium-size SOEs, 64 small SOEs, and 4 large andstrategic SOEs. The large SOEs included Ghana Telecom, State Insurance Corporation, State Housing

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20. Over the last eight years, the Government has changed its attitude towards theprivate sector and has sought them out as partners. The initial relationship between theGovernment and the private sector was one of mutual suspicion. A public/private sectordialogue was initiated under the Private Sector Advisory Group in 1991 and the dialoguehas been broadened and strengthened through the Private Sector Roundtable. The lattercomprised of representatives from Government, Ghanaian entrepreneurs and academiawho met regularly to discuss relevant policy issues; areas discussed include, amongothers, macroeconomic stability, privatization, technology development, human capitaldevelopment, financial sector liberalization, and legal and financial infrastructuredevelopment. The p licy reforms supported by PSAC were identified as a result of thisdialogue.

21. A significant number of up-front actions were required prior to negotiations of theCredit as proof of Government's commitment to the actions stated in its Letter ofDevelopment Policy. In addition, specific and quantifiable targets were set for thedifferent stages of project implementition upon which the release of the second and thirdtranches were based. While this was meant to make the monitoring of programimplementation easy, a major weakness was the lack of emphasis on the quality of theprivatization transactions (including the economic impact) and the definition of whatconstituted a successful divestiture. As a result, monitoring of program implementationproved cumbersome as the Government and the Bank disagreed on the definition of acompleted divestiture.

22. The risks facing the program were identified at the design stage, taking intoaccount Ghana's past experience with adjustment operations. The risks were evaluatedand deemed to be manageable. Most notable was the expected resistance to privatizationfrom SOE workers. At the design stage, this risk was considered manageable in view ofthe large end-of-service benefits for SOE workers, the ease with which the retrenchedci il servants in 1990 and 1991 were absorbed into the economy, and to a lesser extent,the assumption that most SOEs would be sold as going concerns and many wouldretrench only a small part of their workforce. However, there were no specific provisionsfor the funding of end-of-service benefits. Generally, the design of PSAC underestimatedthe difficulties involved in achieving the privatization targets and there was no estimationof the economic impact of the privatization. For example, there was no estimate of theeconomic value of the enterprises to be privatized or the number of employees whoseservices could be terminated following the divestitures. An impact assessment study expostfacto was included in the PEPTA project and is ongoing.

C. Achievement of Project Objectives

23. Overall, the objectives of the project were achieved. The Borrower madesatisfactory progress in improving the macroeconomic framework, in accelerating the

Corporation and Mim Timber. During the course of PSAC's implementation, the divestiture list was expandedto 149 enterprises.

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pace of privatization, and in improving the management and poverty-orientation of publicexpenditure.

24. Attaining macroeconomic stability. Ghana's political liberalization during 1992-96 was marked by growing fiscal difficulties. Higher than planned public spendingworsened fiscal imbalances and increased inflationary pressures. The domestic primarybalance deteriorated from a surplus of 0.8 percent of CDP in 1994 to 0.3 percent in 1996causing a crowding out of private sector access to credit. Annual inflation increased from25 percent in 1994 to 45.6 percent in 1996. Against this macroeconomic setting, theGovernment began to formulate a new economic program after the 1996 elections.

25. Beginning in 1997, the Government's main policy focus was to improve fiscalperformance. The year recorded improved budgetary and monetary management whichled to a significant fiscal turnaround. This helped in slowing down inflation, theimprovement of the macroeconomic environment and advancing the structural reformagenda. The domestic primary surplus reached 3.3 percent of GDP and inflation wasbrought down to 28.5 percent. Macroeconomic stabilization was achieved largelythrough expenditure restraint, with non-interest spending falling by 4.6 percentage pointsof GDP and the wage bill declining by 0.5 percent of GDP. In addition, the Governmentcontinued to improve the efficiency and buoyancy of the tax system. Specifically, itremoved the number of exemptions, advising that any customs exemptions must beapproved by Parliament, and duty-free imports under public and donor-funded projectswere substantially reduced. Nevertheless, revenue fell by 1.6 percentage points of GDP,mainly on account of lower collections of petroleum taxes and, to a lesser extent, due to adrop in cocoa export duties because of a decrease in the volume of exports. In February1998 a Value Added Tax (VAT) law was passed by Parliament and effective December1998, VAT will replace the present sales and services tax.

26. In 1996, Bank of Ghana (BOG) discontinued its practice of issuing Treasury Bills inretail auctions and, in 1997, discontinued the practice of tapping sales for small investors.Government paper is instead being issued in wholesale auctions and BOG is developing anetwork of primary dealers. Monetary policy continued to be dominated by the Government'slarge financing requirements and broad money increase was estimated at 41 percent. However,the Government's domestic financing needs for 1998 are projected to be much lower than in1997 and broad money is expected to grow by about 18 percent and in line with the growth of theeconomy thereafter. Based on these projections, annual inflation is expected to decline to about19 percent by the end of 1998.

27. In the external sector, declining export receipts from cocoa and gold in 1997 weremore than offset by lower import levels resulting from tighter financial policies. Thecurrent account deficit (excluding grants) as a share of GDP narrowed from 8.3 percentin 1996 to 6.7 percent in 1997 and is projected at 7 percent in 1998. Increased externalgrants and positive net capital flows during 1997 led to a small surplus in the overallbalance of payments (US$25 million). However, gross international reserves fell belowthree months of imports equivalent as the BOG reduced its external liabilities.

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28. Public expenditure management. Non-wage expenditures in primary health care,basic education and rural infrastructure were raised in real terms by 288 per cent, 103 percent and 266 per cent, respectively, in the 1994-1996 period. Data for 1997 are not yetavailable. However, the 1997 budget provided for a maintenance of expenditures at 1996levels. The Ministry of Roads and Highways introduced in May 1996 a computer-basedmonthly Contract Information System to strengthen the management of its multi-yearcontracts. The new contracting system has been implemented with the publication of anotice formally increasing tender board limits. In addition, a limited expendituremonitoring system envisaged by PSAC was introduced and this has since evolved into aninitegrated public financial management system with sub-systems covering budgetpreparation, budget implementation, accounting, cash management, debt management,revenue management, auditing and procurement. This more comprehensive system issupported by the IDA-financed Public Financial Management Reform Project. Theprocess involved is complex and long term, but the initial steps have been taker. andprogress on implementing that project is satisfactory.

29. A medium-term expenditure framework (MTEF) for priority sectors which willform the basis for annual budgeting was prepared and had been launched by June 1998 .In addition, a new computer-based budget and public expenditure management system(]3PEMS) has been designed and invitations to tender for software have been sent out.Phased implementation will begin in 1998 with the start of software customization andtraining of staff, and the BPEMS is expected to be fully operational for the budget cyclefor the calendar year 2000.

30. Accelerated privatization. The privatization component ran into unforeseenirnplementation delays. Of the 149 enterprises that were handed over to DIC fordivestiture, 50 enterprises had been privatized or liquidated as of February 1998 (seeAppendix III), of which 16 were medium sized. Although this was in line with the PSACtarget of selling or liquidating at least 48 small and mediunm SOEs during the programperiod, of which 14 were medium sized, it took a year longer than had been envisaged.Among the four large and strategic enterprises, a strategic investor acquired a 30% stakein, and management control, of Ghana Telecom. Separately, the Government also granteda license to a second national operator for the private provision of basic telephonyservices. These two developments, taken together, meant the effective privatization ofGhana's telecom services even though the offer for sale of Ghana Telecom was notstrictly in accordance with the agreed definition of the term (i.e. the sale, throughcompetitive bidding, of at least 51% of the Government's shares).

31. Progress on the divestiture of the other named strategic enterprises, Mim Timber,SIC and SHC, was slower than expected. The divestiture of Mim Timber was outsourcedat the beginning of 1998 following the collapse of negotiations with the original ownerfor the return of the property. The divestiture of SIC and SHC has also been outsourcedbut, because of the size of both companies and the complicated legal issues that needed tobe addressed as part of their divestiture, the privatizations will not be completed beforethe second half of 1998. Some of these complications had not been fully appreciated at

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the time of appraisal. However, the outsourcing of SIC and SHC shows that theGovernment has begun an irreversible divestiture process, since the outsourcing contractscover the full process from enterprise appraisal to completion of sales contracts.

32. The study on the external marketing of Ghana's cocoa was carried out in 1995/96and presented to the Government in June 1996.3 The study was intended to provide thebasis for policy and institutional reforms concerning cocoa exports. It assessed theexisting export marketing arrangements in Ghana, compared these with arrangements inother major cocoa and coffee exporting countries, and presented several options forconsideration by policy makers. Since then, the share of the FOB price going to farnnershas been increased several times, and additional private operators have been licensed toengage in domestic cocoa marketing. Seeking to embed decisions on cocoa export policyin a broader sectoral context than that provided in the 1996 study, the Government hasrecently established a task force to review all aspects of the Ghanaian cocoa industry withthe objective of defining a longer-term strategy for the subsector.

D. Major Factors Affecting the Program

33. The key factors which affected the implementation of the program were largelydue to the weak capacity to manage the divestiture process and, to some extent, defects inthe original design of PSAC.

(a) Implementation Capacity

(i) Weak Organization at DIC. Although the DIC received technical assistancepersonnel from the UK's DFID (formerly the ODA) and other technicalassistance from the IDA-financed PETA and PEPTA, the overall capacityto manage the program remained weak. Specifically, the assistanceprovided by PEPTA was not as effective as expected. It was very difficultto get data on completed transactions, transaction files were not readilyavailable and in many cases enterprises counted as completed divestituresby DIC were found to be incomplete by supervision missions. In addition,sales agreements for many divestiture transactions were not signed by theChairman of the DIC Board as required by law. From the outset, DIC didnot have a mechanism in place to ensure timely payments of the agreedinstallments by the buyers and immediate follow-up in the case of default.As such, a lot of buyers were in default for a number of years and DIC onlyhired a collection lawyer at the end of 1997 to enforce compliance. Inaddition, routine public reporting on the diVestiture progress wasinadequate. These factors contributed to the delay in meeting some of theconditions for the release of both the second and third tranches.

LMC International, "The External Marketing of Ghana's Cocoa" (2 vols.). Prepared for the Ministry of Finance;Oxford, England, June 1996.

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(ii) Systemic issues. The design of PSAC had envisaged that private sectorcompanies (merchant banks, consulting companies, legal and auditingfirms) would implement most of the privatization transactions on contractto the Government. However, the appointment of outsourcing consultantsto carry out the divestiture process on behalf of DIC took much longerthan originally envisaged. Although the register of consultants to be usedin outsourcing was compiled in mid-1995, the first divestiture consultancyappointments were made in the second quarter of 1996 and the firstoutsourced divestiture was completed in January 1998. This was not inline with the program design, where the outsourcing process was supposedto be an effort to harness the drive and energy of the private sector'smarketing capacity. As it turned out, for the first two years, DIC took onthe divestiture process almost single-handedly, a task for which it did notpossess the required capacity. Moreover, the DIC legislation did not giveDIC sufficient powers as the body with the sole responsibility fordivestiture of SOEs.

Another systemic problem was that of legal and land title issues. Many transactionsinvolved transfer of land and although some of the buyers paid to acquire the land andtook possession, legal documentation to support the transfer of title was frequently notavailable. This constrained the work of DIC and later, the outsourcing consultants. Theland title problem is a system wide issue and was difficult to handle on a transaction bytransaction basis. The Government should have addressed this problem upfront as amatter of policy.

(iii) Failure to follow the agreed divestiture procedures. Although the newdivestiture procedures manual was introduced on April 22, 1996, therewere subsequent divestitures where these procedures were not followed.

(b) Defects in the original design

(i) Emphasis on number of completed divestitures without regard to quality.The design of the program focused primarily on the number of completeddivestitures without sufficient regard to the quality of the transactions. Thedesign did not ensure that there would be measures to stimulate interest inthe process, attract as many competitors as possible in the bidding andascertain the willingness and ability of the winning bidders to invest in theenterprises. As a result, there was a rush on the part of the Borrower tocomplete transactions in order to meet the conditionality on the number ofdivestitures completed. A large number of transactions have ended up withthe buyers defaulting on payments; some buyers have been in default forseveral years. This has meant that DIC could not complete post divestitureactions, and some of the divestitures which had been considered complete

-9 -

during the second and third tranche releases have since been suspended4 .Additionally, in an effort to satisfy the 'numbers' requirement, theBorrower presented the sales of subsidiaries or branches of companies asseparate divestitures. In most cases, only the parent company had beenlisted in the original PSAC list, the assumption being that the sale of thecompany and its subsidiaries or branches would constitute a singledivestiture. The process of sorting out which divestitures were acceptableto IDA as per the DCA definition consumed a lot of staff time during thesupervision missions.

The focus on meeting quantitative targets diverted much of DIC's activities and resourcesinto completing small, troublesome sales and away from preparing for the larger, moreimportant ones. The PSAC conditions arguably inserted some distortions into DIC's ownallocation of effort and resource, though it is possible that DIC's performance might nothave been any better without the conditions in place.

E. Implementation Record

34. As ment' -ned earlier, the project called for a significant number of up.lont actionsprior to negotiation of the Credit. Most of these were agreements on policy issues oraction plans which were taken care of prior to the negotiations. The rest were completionof sale of 10 enterprises to the private sector and invitation of bids to register privatefirms for award of contracts to implement the divestiture of SOEs.

35. The second tranche of the Credit(of US$15 million) whose release had originallybeen scheduled for July 1996, ten months after the Credit became effective, was releasedin December 1996. The release of the third tranche (of US$25 million) which shouldhave been in October 1997 (ten months after December 1996), was not effected untilApril 1998. The slippages resulted from weak macroeconomic performance, delays incompleting the targeted number of divestitures and issues that emerged in the divestitureprocess for the completed transactions.

F. Program Sustainability

36. PSAC's sustainability is measured by the irreversibility of the reforms itsupported. The macroeconomic and public sector reform components are directly linked.The Government's ability to maintain its e--penditure targets in the social sectors and forpoverty related initiatives will depend to a large extent on macroeconomic performance.Adherence to the targets will be difficult if unplanned expenditures begin to strain thefiscal budget. Improvements in the management and poverty-orientation of publicexpenditure are supported by a parallel technical assistance credit, the Public Financial

4 Among the suspended divestiture transactions are the sale of Automotive and Technical Services (Sabat Motors).

- 10-

Management Reform Project. The divestiture component of PSAC is sustainable since itentails a once and for all (and irreversible) transfer of assets to the private sector.

G. Bank Performance

37. The Bank's performance in the preparation and supervision of PSAC wassatis:factory. There was intensive Borrower participation at the design stage, even thoughthis was a time-consuming process. It also carried on continuous dialogue with theBorrower during the implementation period, putting in 21 weeks of supervision for theperiod September 1995 to February 1998. Effectively, PSAC received considerably morethan the documented 21 weeks of supervision as the privatization component was alsobeing reviewed during PEPTA supervision missions.

38. However, the Bank could have been more specific at the design stage by spellingout what it considered a completed (and successful) divestiture rather than merelyfocusing on the number of completed divestitures. For example, the DCA should havestate,d upfront that for a divestiture to be considered complete, the buyer must have paidat least 50 percent of the purchase price. In addition, the Bank did not discuss and agreewith the Government on the composition of the original list of 114 enterprises. As itturned out, there were only 108 actual enterprises and the rest were duplications. Therewas also lack of coordination within the Bank. For example, while PSAC required theimmediate divestiture of the State Insurance Corporation (SIC), a parallel technicalassistance credit was financing its restructuring.

H. Borrower Performance

39. The performance of the Borrower at the preparation stage was satisfactory. TheBorrower's performance in the implementation of the macroeconomic policy frameworkcomponent was generally satisfactory, although there were some fiscal slippages in 1996and the first half of 1997. Measures were taken beginning with the second half of 1997 toreverse this situation. However, the Borrower's performance in the implementation of theprivatization component of the program was less than satisfactory. As mentioned above,implementation capacity was weak leading to delays both in the appointment ofoutsourcing consultants and initiating actions on the preparation of the large strategicenterprises for sale. The issue of implementation capacity is to be addressed during themid-term review of PEPTA which is scheduled for early 1999.

I. Assessment of Outcome

40. The outcome of the Credit is rated satisfactory because the project achieved itsobjectives. Despite some delays in the divestiture process, all the components of theproject were effectively implemented resulting in substantial reduction of governmentownership of commercial enterprises and the associated fiscal saving. Furthermore, theproject has signaled stronger government commitment to enhance the role of the private

- 11 -

sector in the economy. This satisfactory rating is also augmented by the fact that there arealready other projects in place to build on the achievements under PSAC.

J. Future Operations

41. The Government approached the Bank seeking assistance for an EconomicReform Support Operation which would provide balance of payment support as theGovernment pursues its privatization program. The ERSO program was approved by theBoard in June 1998. Specifically, under the privatization component, the focus shifted tothe divestiture of the large economically significant utilities and enterprises. The ERSOwill be followed by another adjustment credit which would address the remaining agendain the privatization of SOEs and the restructuring of both the cocoa and energy sectors.

K. Key Lessons Learned

42. Based on the experience of this Credit, several lessons can be drawn:

(i) Emphasizing the need for quality privatizations. The success of a privatizationprogram should not only be measured by the number of divestitures completed, but alsoon the quality of the divestitures. To the extent that quantitative privatization targets willbe required for these operations, distinct improvements are required in defining, andagreeing in advance, how performance is to be measured specifically. In the case ofPSAC, privatization was set as a target but not specifically defined. Definition isrequired in several domains. PSAC progress was hampered by ambiguity in several keyareas: (a) the composition of the list of 114 enterprises was not agreed upon and the listended up with several duplications and inconsistencies in classification; (b) proportion ofproceeds required to be received to constitute a privatization; and (c) extent ofmanagement control transfer required, and the extent to which this could substitute othercriteria.

The implementing agency should ensure that the process is widely publicized so as togenerate a lot of interest and thus attract as many competitive bidders as possible. Theselected buyers should be committed to returning the enterprises to viability. At the sametime, the buyers should be capable and willing to meet their outstanding obligations.Compliance can be achieved by writing default clauses into the sales contracts andinvoking these clauses when default occurs. This mechanism would minimize the numberof divestitures that would need to be canceled, an action which sets the privatizationclock backwards, and would also save on the resources spent on the supervision of theproject.

(ii) Privatization is a complex process. Privatization of SOEs is a complicatedprocess that involves many facets. These include, among others, themanagement of the privatization process, development of implementationcapacity, capital market development, creating political consensus on thebenefits of privatization, and ironing out policy issues that could hamper

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the progress of privatization. In Ghana, PSAC assumed that process issuescould be resolved in a shorter period of time and the outsourcing processwas oversimplified. This led to unforeseen delays in implementing thedivestiture program. There were fundamental issues, like the legalitiesinvolved in the transfer of land titles, which should have been addressedon a system wide basis by the DIC instead of expecting the outsourcingconsultants to address them during the course of their duties.

(iii) Privatization requires more intense supervision. Being a complex process,privatization requires more intense supervision than other adjustmentoperations. The combination of PSAC and PEPTA was very helpful as thetwo projects were conducted and coordinated as one operation with somemutual conditionalities, which effectively meant more supervision time forthe PSAC privatization component.

(iv) PSA C as a catalyst for moving the privatization program ahead. Decisionsabout privatization can cause political controversy and are thereforepolitically difficult to make. However, those decisions are not impossible tomake. PSAC was basically a balance of payment support operation, but itgave the Government the necessary incentive to build political consensusabout the need to push ahead with the privatization program.

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PART II: STATISTICAL ANNEXES

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible NAMacro Policies /

Sector Policies /

Legal Objectives V

Institutional Development /

Poverty Objectives V

Gender Issues V

Other Social Objectives .

Environmental Objectives V/

Public Sector Management V

Private Sector Development /

Other

B. Project Sustainability Likely Unlikely Uncertain

v

C. Bank Performance Highly Satisfactory UnsatisfactorySatisfactory

Identification V/

Preparation assistance /

Appraisal

Supervision ,D. Borrower Performance HS S U

Preparation V

Implementation v

Covenant compliance v

E. Assessment of Outcome HS S U HU

Vi'NA: Not Applicable; HS: Highly Satisfactory, S: Satisfactory; U: Unsatisfactory; HU: Highly Unsatisfactory.

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Table 2: Related Bank Loans and Credits

Loan/Credit Title Purpose CY of Statusapproval

1. Structural Adjustment Loan (SAL) * To support the Government's structural adjustment 1987 Closedprogram, which aimed to: (i) establish an incentiveframework that stimulates growth, encourages savings andinvestment, and strengthens the balance of payments; and(ii) improve resource use, particularly in the public sector,while ensuring fiscal and monetary stability .

2. SAC 11 * To support the second phase of the Government's 1989 Closedstructural adjustment program (1989-90) which aimed tomaintain an average GDP growth rate of at least 5% peryear, raise investment to 16% of GDP by 1990 and raisenational savings to 8.5% of GDP.

3. Public Enterprises Technical * To provide technical assistance/institutional support to 1987 ClosedAssistance the SEC and DIC for the implementation of the public

enterprise reform program. It included: design andimplementation of performance monitoring and evaluationsystem including performance agreements based oncorporate plans and for assessment and development of SOEpolicy, institutional and legal reform, and advisory servicesfor implementing the divestiture program. In addition,project funds were available to finance an SOE restructuringfund to assist SOEs to identify restructuring measuresrequired to implement operational and managerialimprovements. -

4. Industrial Sector Adjustment Credit * To support reform of incentive policies, provision of 1986 Closedfinance for industrial inputs, rehabilitation and newinvestments, strengthening of policy planning and projectimplementation capabilities in Ministries of Industry andFinance, Bank of Ghana, and support institutions.

5. Private Investment Promotion * The credit supported the Government's program to 1991 Closedpromote higher levels and more efficient investment in theeconomy in order to achieve an average growth rate of about5 percent per year, raise investment to 18 percent of GDP by1992, and raise national savings to 12 percent of GDP.

6. Economic Management Support * To improve analytical and administrative capability in 1991 Project is still ongoingthe core economic management agencies: the Ministry ofFinance and Economic Planning, National Revenue Service,Controller-Accountant General, Office of the Head of CivilService, Audit Service, and the Ghana Statistical Service.

7. Enterprise Development Project * To provide foreign exchange for export finance and 1993 Project closed on March 31,develop a credit enhancement program to encourage the 1998 owing to unsatisfactoryinclusion of incremental exporters in the effort to expand performancenon-traditional exports.

8. Private Sector Development * To foster the development of a competitive private 1994 Mid term review was completedsector by: (a) assisting the Government in its efforts to in June 1998 and project is to berestructure, reform and commercialize its technical research restructuredand development along competitive and demand-drivenprinciples; (b) providing a broad segment of the privatesector with the necessary financial and technical assistanceto support the development of commercially bankableprojects by improving their feasibility and quality; (c)supporting efforts by the export industry to improve their

I_________________________________ design and the promotion of their products; and (d) assisting

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Loan/Credit Title Purpose CY of Statusapproval

the Government in developing a program to upgrade thedelivery of legal services to the commercial andmanufacturing sectors.

9. Public Enterprise and Privatization * Public Enterprise Reform: To strengthen management 1996 Mid term review planned forTA of the SOE reform program, develop capacity to manage November 1998

declining portfolio of loans and investments in SOEs, andreform policies and regulations in key sectors.* Privatization: To transfer ownership and managementof commercial SOEs to the private sector, and build andsustain public and stakeholder support and investorconfidence

10. Public Finance Management * To promote efficient fiscal management. This will be 1996 Mid term review scheduled forachieved through better monitoring and control of public late 1999.expenditures, improved allocation of resources consistentwith national priorities, and enhanced accountability andtransparency in the use of public resources.

11. Economic Reform Support * To support completion of an important phase in the 1998 Ongoing. Was approved by theOperation Ghanaian reform program and lay the foundations for the next Board in June 1998

phase of difficult and complex reforms. The later phase includesa comprehensive public sector reform program, publicexpenditure management, deepening the privatization programand restructuring the energy and cocoa sectors.* To provide external financing requirements of Ghana in thecontext of a vulnerable external position and low level ofexternal reserves

Table 3: Project Timetable

Steps in Project Cycle Date Planned Actual DateIdentification September 1993

Preparation October 1993-July 1994Appraisal September/October 1994Negotiations March 23-24, 1995

Letter of Development Policy March 24, 1995Board Presentation May 9, 1995Signing July 25, 1995

Effectiveness May 31, 1995 September 20, 1995

First Tranche Release May 31, 1995 September 20, 1995Mid-term Review N.A N.A.Second Tranche Release March 31, 1996 December 1996

Third Tranche Release January 31, 1997 April 1998

Project Completion April 30, 1997 April 30, 1998

Loan Closing October 31, 1997 April 30, 1998

- 16-

Table 4: Credit Disbursements: Cumulative Estimated and Actual Disbursements

(US $ million)

FY95 FY96 FY97 FY98

Appraisal Estimate 0.00 30.00 45.00 70.00

Actual5 0.00 34.71 49.26 75.02Actual as a % of Estimate 0.0 115.7 109.5 107.2Date of Final Disbursement: April 28, 1998

Table 5: Key Indicators for Project Implementation

Programmed Actual

(i) Approve, at the Cabinet level, the accelerated divestiture program This was done before Board presentationand the selection of the 110 small and medium SOEs and the 4 largestrategic SOEs

(ii) Approve, at the Cabinet level, the procedures for divestiture and This was done before Board presentationdisseminate them to the public.

(iii ) Cornplete sale of 10 enterprises to the private sector This was done before Board presentation

(iv) Agreed on an action plan for pre-privatization preparation of the This was done before Board presentationfour strategic enterprises: Ghana Telecom, SIC, SHC, Mim Timber.

(v) Agreed on the terms of reference of the cocoa export marketing This was done before Board presentationstudy(vi) Adopted an action plan for implementing a satisfactory This was done before Board presentationaccounting and expenditure monitoring system as well as a newcontracting system over the program period

(vii) Agreed on a Policy Framework Paper (PFP) for 1995-97 This was done before Board presentation

It Condlde*for seownd fr. 'anchemeles 4 '

(i) Ensuring macroeconomic policy framework of the Borrower consistent * Borrower satisfied the quantitative macroeconomicwith the objectives of the Program and satisfactory performance in criteria and benchmarks incorporated in the PFP agreedcarrying cut the Program jointly by the Borrower, the IMF and the Bank.(ii) Complete sale or liquidation of at least 14 enterprises, including at * This was achieved with some delay of 5 monthsleast 4 medium-sized enterprises(iii) Increase by FY95, by at least 10% in real terms based on FY94, actual * This was achieved in FY95expenditures on both (i) recurrent non-wage expenditures and (ii)development expenditures for basic education, primary health and ruralinfrastructure.

(iv) Complete and deliver to IDA the study regarding the liberalization of * The study was delivered to IDA in June 1996cocoa export marketing(v) Complete the assessment of the contracting system employed by the * This was achieved before second tranche releaseMinistry of Roads and Highways (MRH) and Ministry of Works andHousing (MWH) and design a revised contracting system, satisfactory toIDA.

5 These include the IDA Reflows

- 17 -

Programmed Actual(vi) Implement an expenditure monitoring system in six pre-specified * This was achieved before second tranche releaseministries, satisfactory to IDA(vii) Design an accounting system, satisfactory to IDA, meeting the * This was achieved before second tranche releaseobjectives set out in the Program for use by the six ministries mentioned incondition (vi) above

(i) Ensuring macroeconomic policy framework of the Borrower consistent * The macroeconomic policy framework which hadwith the objectives of the Program and satisfactory performance in suffered some slippages in FY96 was put back on track incarrying out the Program FY97 and performance under the PSAC Program was

satisfactory(ii) Complete the sale or liquidation of at least 24 enterprises provided that * This was achieved after a six month delaysuch 24 enterprises taken together with the 14 enterprises divested by thesecond tranche release, include at least 14 medium-sized enterprises(iii) Offer for sale: (a) the company to which the assets of the * Only (a) was achieved. A waiver was sought for (b)Telecommunications Division of GPTC have been transferred; and (b) at on the basis that action to prepare the enterprises for saleleast two of the other three strategic SOEs--Mim Timber, SIC and SHC had been initiated.(iv) Increase by at least 20 percent, in real terms, recurrent non-wage * This was achieved in FY96expenditure and development expenditure on social sectors in FY 1996based on FY94.(v) Implement in the MRH and MWH the revised contracting system * This was achieved before the third tranche releasereferred to above(vi) Implement the expenditure monitoring system in at least another 10 * This was achieved before the third tranche releaseministries responsible for at least 30% of allocations of the annual budget(vii) Implement the new accounting system (referred to above) in the first * This was achieved before the third tranche releasesix specified ministries

Table 6: Status of Legal Covenants

Development Credit Agreement

2.03 3 Closing date | CD | 10/31/1997 |4/30/1998 |Delays in meeting tranche |

. l l l | ~~~~~~~~~~~~~~~~~~~~~~release conditions led to 1

l l l | ~~~~~~~~~extension of closing date. |3.01 4 Exchange of views with IDA on |

progress on the program C Continuous3.03 1,4 Preparation of financial records June 30, every

and audit reports yearI C_I_I_1_11

Sch. 1 2 Withdrawal of proceedsC Continuous

Sch. 2 2 Procurement of goodsC Continuous

Sch. 3, A (1) 5 Complete the sale of at least 14 Second tranche The outsourcing programenterprises, including at least 4 release for private consultants wasmedium-sized ones CD delayed

Sch. 3, A (2) 5 Complete and deliver to IDA Second tranchestudy on liberalization of cocoa releaseexport marketing C

Sch. 3, A (3) 5 Increasing recurrent non-wage Second tranche

- 18-

expenditures and development releaseexpenditures in social sectors byre10% (in real terms) during FY95 C

Sch. 3, A (4) 5 Assess the existing, and re-design, Second tranchethe contracting system used by the releaseMRH and MWH Cl

Sch. 3, A (i5) 5 Introduce expenditure monitoring Second tranche Tsystem in six ministries specified release f pin the Programl

Sch. 3, A (2a) 5 Design an accounting system for Second trancheuse by the six ministries above release

_ _ _ _ _ _ _ _ _ G T CC I__ _ _ _

Sch. 3, B (21) 5 Completr fse sale of another 24 Third tranche The outsourcing prografoenterprises, including 14 medium- release for private consultants wassized ones CD delayed.

Sch. 3, B (2a) 5 Offer for sale the Third trancheTelecommunications division of releaseGPTC Cl

Sch. 3, B (2b) 5 Offer for sale at least two of Mim Third tranche The offer for sale of 2 ofTimber, SIC and SHC release these 3 strategic

CP enterprises was delayed. iA waiver was sought from fthe Board a

Sch. 3, B (3) 5 Increase recurrent non-wage Third trancheexpenditure and social sectors releaseexpenditure (in real terms) in cFY96 by 20% based on FY94 Cl

Sch. 3, B (4o 5 Implement the revised contracting Third tranchesystem IC MRcI and MWH C release

Sch. 3, B Flo 5 Implement expenditure monitor Third ranchesystem in another 10 ministries releaselresponsible for at least 30% oflallocations in the annual budget Cl

Sch. 3, B (6) 5 Implement accounting system Third tranchereferred to in Sch. 3, A (6) in the releaselsix ministries mentioned in Sch.l3, A(5) C

Covenant types: Present status:

1: Accounts/Audits C: covenant complied with.2: Flow and utilization of project funds CD: complied with after delay3: Management aspects of the projectlexecuting agency CP: complied with partially4: Monitoring, review and reporting NC: not complied with5: Project implementation not covered by categories 1-4

-19-

Table 7: Bank Resources; Staff Inputs

Stage of Project Cycle Weeks USS '000

Preparation to appraisal 148.1 452.2

Appraisal 27.0 84.3

Negotiations through Board approval 9.0 23.1

Supervision 20.3 91.3

Completion (to be added)

TOTAL 204.4 650.9

Table 8: Bank Resources : Missions

Month/Year No. of No. of Staff skills Performance rating Types of problemsPersons Weeks represented

Implementation | DevelopmentStatus ! Objectives

Identification

Pre-Appraisal July 1994 3 2.5 PS

Appraisal

Supervision I April 1996 l

Supervision 11 July 1996

Supervision III Feb. 19976 3 2 EC, PS

Supervision IV Sept. 1997 3 1.6 EC, PS S S Delays in startingdivestitureof the 2 large

Supervision V Feb.9987 4 2 EC,PS S S

Staff Skills: EC - Economist PS - Private Sector Specialist

Performance Rating: I - Minor Problems,; 2 - Moderate Problems; 3 - Major problems, actions taken;U - Unsatisfactory; S - Satisfactory

6 This was a combined PSAC and PEPTA supervision mission

7 This was also a combined PSAC and PEPTA supervision mission

- 20 -

REPUBLIC OF GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

PART III: APPENDIXES

- 21 -

GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

APPENDIX I

BORROWER'S CONTRIBUTION TO

THE IMPLEMENTATION COMPLETION REPORT

- 22 -

GHANA

PRIVATE SECTOR ADJEUSTMENT PROGRAMME

GOVERNMENT'S IMPLEMENTATION COMPLETION REPORT

Introduction

The Private Sector Adjustment Programme was negotiated between the Government ofGhana ((iOG) and the Interational Development Association (IDA) in May. 1995. TheDevelopment Credit Agreement was signed on 25th July, 1995 and the credit became effectiveon 20th September, 1995.

Programmne 04Jectivg

The pnimary objective of the pfogtamwe aiuhed at promoting rapid private sector growththrough sustenance of macroeconomic stability, accelerating divestiture of SOEs and improvingmanagement and poverty-orientation of public expenditures.

The credit which was meant to provide balance of payment support was designed as a threetranche operation, the first to be released upon effectiveness. The second and third trancheswere to be released at 10-month intervals subject to the fulfillment by GOG of specificcondirionalities agreed with IDA and outlined in the Development Credit Agreement.

Conditioalitics

The conditionalities were designed to ensure that the programme will be implemented toachieve the programme objectives. The conditionalities included macroeconomic targets,expenditure management reforms, poverty reduction expenditures and privatisation targets.

The difficulties encountered during the implementation of the programme, especially theprivatisation component, delayed the fulfillment of these conditionalities and for that mattertranche releascs. The second tranche was released 15 months (instead of 10) after the first,whilst the third tranche was released 16 months after the second.

Achievernent of Project Objectives

The Govemment of Ghana did achieve very significant success with regard to projectobjectives. By the end of December 1997, domestic primary surplus has increased from 0.3% ofGDP in 1996 to 3.3% of same. Inflation slowed from 45.6% in 1996 to 28.5% by end of 1997.

The Government also increased in real terms budgetary allocations in favour of poverty-reduction programmes - primary health care, basic education and rural infrastmcture. It is also

- 23 -

improving its expenditure management through the IDA- financed Public FinancialManagement Reform Project.

The priva;isarinn rargerm were achieved ro a very large exrenr. Over SO small andmedium enterprises were privanised or liquidated during the duration of the project. Of the 4large/strategic enterprises agreed under the project. only Ghana Telecom was privatised and theGovernment therefore requested for a waiver of the conditionaIity relating to this component.

Imillementaiion Problems

Apart from the privatisaiion programune. all the other components of the programmewere implemented without significant problems.

The numerical targets set under the privatisation programme to a large excent affectedthe pace and quality of the progranme leading to tranche release delays. During the appraisaland credit negotiations, the GOG delegation repeatedly advised against the use of numericaltargets to measure the success of privatisation. The advise was based on experiences andproblems encountered with previous privatisations in the country. The delegation suggested theuse of qualitative measures such as overall government comimitrnent, the economic importanceof SOEs on sale, cumulative sales revenue among others, to measure the success. Thissuggestion was not accepted by the IDA team and the GOG delegation reluctantly accepted thenumerical targets in order not to jeopardize the negotiations.

It was assumed that the use of private consultants (including merchant banks), inaddition to the Divestiture Implementation Committee (DIC), to undertake the pnvatisation onbehalf of government will accelerate the programme. Though several private consultants weremourced for the privati.cation of over 20 SQEc, only one enterprise had been completelyprivatised by these firms at the close of the project. The rest were completed by DIC through itsin-house programme. One masor. for the failure of the ousourcing programme to deliver theexpected numbers was the late commencement of the programme due to the time it took todevelop aa appioptiaLe Pzcedufes Manual. The unfanmiliarity with the process requiredextensive consultations in the attempt to develope the appropriate rules and procedures to standthe test of time.

The second sct of problems that affccted the privatisatioon programTme were; noneavailability of land itles, legal challenge by SOE workers and lack of appr,. riate records onSOEs. Furthermore, there were occasional delays in securing 'no objection' from the TDA toprocure consultants.

Co.clus.ron

Oa the whole the PSAC programme did achieve the sec objectives. It is however advieu'that in future programmes, the IDA team should lend its ear to suggestions which areparticularly based on experience and knowledge of unique local conditions-

- 24 -

GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

APPENDIX II

THIRD TRANCHE RELEASE MEMORANDUM

-25 -

Intemational Development Assc(ciationFOR OFFICIAL USE ONIL, X

IDA/R98-41

From: The Secretary April 7, 1998

GHANA - Private Sector Adjustment Credit (PSAC)

(Credit 2718-GH)

Release of the Third Tranche - Waiver of One Condition

1. Attached is a Memorandun from the President entitled "Ghana: Private SectorAdjustment Credit (Credit 2718-GH) - Release of the Third Tranche - Waiver of OneCondition" dated April 1, 1998.

2. In the absence of objections (to be communicated to the Secretary by the close ofbusiness on April 16, 1998), the recommendation contained in paragraph 22 of the Memorandumwill be deemed approved and so recorded in the minutes of a subsequent meeting of theExecutive Directors.

3. Questions on this document may be referred to Mr. Gerard Byam (ext. 34159).

Distribution:Executive Directors and AlternatesPresidentBank Group Senior ManagementVice Presidents, Bank, IFC and MIGADirectors and Department Heads, Bank, IFC and MIGA

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

- 26 -

FROM: The President April 1, 1998

GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT (Credit 2718-Gl)

RELEASE OF THE THIRD TRANCHE - Waiver of One Condition

I. INTRODUCTION

1. The purpose of this memorandum is to inform the Board that the third tanche of SDR16.7 rillion is available for disbursement. The memorandum summarizes: (a) features of thePrivate Sector Adjustment Credit (PSAC); (b) recent macroeconomic developmnits and the currentoutloo]k; and (c) the progress made in meeting the criteria established for the release of the Credit'sthird and final tranche as set out in Paragraph 4 (b) of Schedule 1 and Section B of Schedule 3 ofthe Development Credit Agreement (DCA).

II. BACKGROUND

2. On May 9, 1995, the Board of Executive Directors approved Credit mumber 2718-OH inthe amount of SDR 46.9 million (US$70 million equivalent) for the Republic of Ghana to supportthe Government's private sector adjustmnt program. The program is described in a Lr= ofDevelopnat Policy datod March 24, 1995. The Development Credit Armnent (DCA) wassigned on July 25, 1995. The Credit was declared effictive on Septmber 20, 1995, and the firsttranche of SDR 20.1 million was released upon effectiveness and disbursed in October andNovmber 1995. The second tranche of SDR 10.1 million was disbursed in December 1996.

3. The Private Sector Adjusta.z Credit (PSAC) is a three twance opeato and providesfinancal support for the Govement's program to promote private sector growth. TeGovernment hopes to achieve this partly trwough: (i) acceleating the pace of privaition; and (ii)maintaining an appropriate oi c policy fiamework, including improved managentand poverty-orientation of public expenditures. The Credit, one of the three envisaged in thecountry assistance strategy of 1995, sought to deepen and strengthen policy reforms implementedunder previous adjustment and investment operations.

4. In accordance with Section 3.03 (b) (ii) of the DCA, the Borrower has fumished certifiedaudit reports for the fiscal years ending June 96 and June 97.

Vice President: Jean-Louis Sarbib Country Director: Peter C. HarmoldTechnical Manager Thomas Allen Task Team Leader: Gerard Byam

-27 -

III. RECENT ECONOMIC DEVELOPMENTS

Macroeconomic Situation

5. Ihe Ghanaian authorities have pursued a number of important econamic refonns with amedium-term perspective. An important recent developmet was Parliament's enactment inFebruary 1998 of a value added tax (VAT). Other economic reforms aim to encourage: (i) acomprehensive overhaul of expditure nitormg and control; (ii) control of reseve moneygrowh to provide the nominal anchor necessary to reduce infation; (iii) market determination ofthe exchange rate, with the Bank of Ghana's itervention policy directed toward smoothing shortterm fluctuaions; (iv) the strgting of bank supnvsmin and enforcement of bankngregulations; and (v) structr;al reforms that include the coaiung divesire of public enterprsesand the refomi of the public service. These policies and related reforms are presented in theGovernmt of Ghana's Policy Framework Paper for 1998-2000, being circuld to the ExecutiveDirectors at the same tme as this document.

6. Following the December 1996 elections and the formation of a new cabinet, the Ghanaianauthorites made a commitment to regain the mometum of adjustnment and reduce inflation.Ghana's econormic and financial performance in 1996 had reflected an unsustanable combinationof financial policies. The new Govemment realized that lapses in discipline on public expenditucould not be allowed to recur.

7. Real GDP grew by an estimated 5.2 percet in 1996 (compared to 4.5 percent in 1995) asa result of a good harvest, strong export growth (due to a bumper cocoa crop) and a vibrant tradeand serices sector. The return to a nornal cocoa crop and attempts to reduce the govenmentdeficit slowed the growth of GDP to an estimatd 3 pernt in 1997, but a rebound to more than 5percent is projected for 1998. nflation, on an end-of-year basis feil fiom 71 perent in Dcember1995 to 33 percent in December 1996 anmf to 21 percent in December 1997. The significant declinein 1996 reflected the efFtcts of a good harvest and a policy of wage restaint. Central bankintervention to support the cedi, and Go srnmcnt's decision not to raise retail petroleum prices,also contributed to a decline in inflation. The automatic pricing mecanism of petroleum products,implemented in June 1996, was supended when its application (in the context of singintemational oil prices) called for an incrase in petrolum prices. The reluctance to raisepetroleum prices and the central bank's support of the exchange rate resuld in lowr thanexpected govemment revenues and a decline in foreign exchange reserves respectvely. Howev, itshould be noted that recent developments in the petroleum market permitted the re-introduction ofthe automatic pricing formula for petroleum products, permitting a drop in ex-refinety prices andan increase in retail petroleum prices.

8. Ghana's present ESAF-supported program, which was formul in 1995 under abackground of strong inflationary pressures, had an uneven implementation record under the firstannual arrangement during 1996. There were substantial slippages in fiscal performance during thesecond half of 1996. The government budget recorded a deficit on a comwitmt basis of 10.4percent of GDP or about 6 percentage poits of GDP higher than progammed. Ghana's balanceof payments position also deteriorated in 1996, with the currant accout deficit (including pants)widening to 5 percent of GDP from 2.3 percent in 1995 and gross internaional reserves docliningto 3.4 months of imports. lle prograsn targets were 3.4 percent and 4.7 months of importsrespectively. As a result of the implementation of tight financial policies in 1997, the governent'sdeficit fell to 8.6 percent of GDP, with the primary surplus improving by 3 percentage points of

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GDP and with total expenditure declining by 5.4 percentage points. At dte same time, the curentaccunt deficit improved to 3.3 percent. On March 23, 1998, the IMF's Executive Directorsapproved Ghana's requet for the second annual aragement under the ESAF. At dte heart of thenew arrangement are continued fiscal refomxs, expected to reduce the fiscal deficit to under 4percent of GDP in the year 2000, not least as the result of lower interest payments.

9. The Ninth Consultative Group on Ghana met in Paris in November, 1997. Commitmentsof some S1.6 billion of exemal assistance were given to Ghana at this meefing. While this wassimilar to the esinated needs in total, there was a shortfall of some $150 million in the requestedlevel of balance of payments support of $600 million. A number of donors, icluding the Bank,are therefore considering incrental adjustment assistance to Ghana over e next 2-3 years to fillthis gap, especially in the light of Ghana's decision not to seek additionl debt reschdulng oraccess to the HIPC nitiative.

Dveldopments in the Private Sector

10. Tlhe Goverment's efforts to facilitate private investment encountered mixed results in1997. Th=e were two positive developments following the adoption of legislation to allow privatepartcipation in telecommunications. First, a stategic investor purchased a 30% stake in GhanaTelecom and assumed management control. Second, a license was granted to a second nationaloperator for the provision of basic telephony services. Efforts to improve the regulatoryenvironment and encourage private invesnent in infrastuctire were strngthnd with theestablishment of an iependet Public Utilities Regulatory Commission. In a first step to restoreeconomic viability to the utilities, the Commission raised both electricity and water tariffs by overlOID percent. However, the program to divest state-owned banks suffeed a setback when, as aresult of the Asian financial crisis, the stategic ivestor i Ghana Commercial Bank was unable tofinalize the sale by the deadline of December 31, 1997.

11. There was a series of confierences during 1997, with strong representation by the privatesector, to discuss the difficult choices facing Ghana if it is to achieve the objectives of "Ghana-Vision 2020. "' A workshop sponsored by the Private Enterprise Foundation of Ghana (PEF) inAkosombo in March 1997, idenified a number of critical issues that need to be addressed urgentlyif the objectives are to be achieved. The participants agreed that PEF would organize a follow-upmecting for private and public sector leaders aimed at forging a consens on an appropriatestraltegy.

12. The subsequent confce was convend in Chapel Hill North Carolina in June 1997and, in addition to private participants, was atended by Ghana's Vice President, Minister ofState, and Menbers of Parliament. The cornce concluded that an average growth rate of 8percent fiom 1995 to 2020 would be required for Ghana to achieve Vision 2020, and that thepresent policy fianework in Ghana impeded such accelerated and susanable economic growth. Inorder to pronote broad-based and sustinable growth, Ghana needed to commit itsdf to achievinginternational competitiveness. The policy impedimnts to competitiveness were discused andrecommnations fonmulated under the headings: (i) macroeconomic instabilitr; (i) dysfimctionalfinancial markets; (iii) low productivity of labor, and (iv) re-energizing the private sector withpohcies to link the lauge informal sector to the formal sector (by addressing the maket filures)

Vision 2020 is di catchword for Ghana's aspirations to become a middle income country by theyear 2020.

-29 -

and frming an ntgtd natioal ecmomy-the "Push-Pull straty. lhe cofrec agreed thatthe pubLUc/private partersip forgod neoded to hold consutatin fireqety in an iformed,respectful, andid, polite and inclusive manner.

13. The first such consultation was held at the National Econonic Forum in Accra onSeptember 2-3, 1997 with a theme of "Achieving national consensus on policy measures foraccelerated economic growth within the framework of Ghana-Vision 2020 ". The forum broughttogether representatives of the private sector, public sector (Govermment), labor and academia. Theforum made recommendations on policies necessary to support macroeconomic stability,manufacturing gro- , agricultural growth, and employment and human development. It also drewup an action plan for the implementation of recommendations on each of these four issues. A post-forum comnuttee composed of the major stakeholders was established to synthesize and harmonizethe recommendations on the four major issues, and to produce a comprehensive Forum Report,which has been widely circulated in Ghana.

Outlook

14. The Govemment recognizes that restoring financial discipline and bringg inflation undercontrol are necessary for achieving higher private sector led growth. Thus, over the next two years,the authorities intend to reduce monetary growth to rates conistent with single digit inflation andincrease the domestic prmary surplus of the govemment to nearly 5 percent of GDP. Thepolicies, which would be associated with an ncrease in govermnent savings, are expected toencourage private inwvestet and unprove the extenal currnt accot. Annual real GDP growthshould excoed 5 percent, approaching 2.5 perce on a per capita basis. In the next two years,Ghana's extemal situation is projectod to remai vulnerable, owing to smaller cocoa crops, lowergold prices and reduced aid fiom bilateral donors while gross international reserves ar expectod toremain slightly below the equivalent of 3 months of imports. At the same time, assuming that theGovernment does not undertke any new external borrowing on non-concessional terms and that itstrictly adheres to tight financial policies, the debt-service ratio is projected to fall to 29 percent by1999 and to decline thereafter without any need for rescheduling.

15. The Governnent will continue to implement structural and institutional reforms in order toencourage pnvate investment and improve resource allocation. These reforms include expansion ofthe divestiture program to include state-owned utilities, enlarging the scope for private sectoractivity by continuing to modify the regulatory framework for private participation, reforming thepublic service, and improving tax adminion and public expenditure managment. Otherstructural reforms aimed at curaging growth and reducing poverty will include improvingagriculture and the envirounent, strngteing infistrucure (especially in the rural areas) anddeveloping human resources. The Government's new agricultural growth policy will emphasizedecentraliztion of the delivery of social services, improvement in post-harvest fcilities, increasingthe fanner's share in the f£o.b. export price of cocoa to 60 percent (over the medium term) largdyat the expense of the Cocoa Board's share, as well as reduced taxation of exports as new forms ofrevenue generation becone established. The Governmt plans to re,ssess options for eliminatngthe Cocoa Board's export monopoly, while safeguarding the quality of the cocoa crop. TheGovernmet also plams to deregulate the petrleum sector and, following the successfulliberaliaion of teleconummications, increase private participation in the development of thenation's other infrastructure.

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IV. PROGRESS AGAINST CONDITIONS FOR THIRD TRANCHE RELEASE

16. Progress in carrying out the private sector adjustme program supported by this Credit 6.been saisfactory. In addition to measures to sustain macro-ccononic stability, the progran, whichaddresses the need to promote rapid private sector growth, consists of measures to acceleratedivestiture of SOEs and inprove management and poverty-orientation of public xenditurm. Thevanous measures of divestiture include liquidation, or sale by public auction, sale by privateplacement coupled with public offering of minority shares, and by public offering of majority SOEshares. The Goveent approved at the cabinet level the procedures for divestiture, includingthkose for subcontating ("outsurcing") imnplmentation to private firms.

17. ITe Govermnme launched the accelerated divestue program in Jamuary, 1995 when ithanded over 114 SOEs to the Divestiture Implementation Committee (DIC) for divestitur. Afirther 35 terprises have b dded since that time. The accelerated divestiture program underthe Credit was expacted to sell or liquidate a total of 48 small and medium SOEs. In addition, theGovemment would offer for sale three of four specified large and sategic SOEs.

18. As of January 1998, DIC had completed 50 divesires. In addition, DIC's work programconsisted of 53 divesttures in progress of which twenty have been contracted out to consultants.The other 33 divestiures currently in the work progran are made up of small privattions camedout in-house by DIC, liquidations being undertaken by liquidators appointed by DIC, and othersales subject to completion and which were started by DIC before the outsourcig program began.

19. An area where the Govemment has made marked progress is in post divestiture completiontasks. Sales contracts have been signed for almost all the divestitures concluded since theaccelerated divestiture program started. An area where further progress is roquired is in improvingthe diagnosis of a number of common obstacles which delay the implementation of manydivestitures at their early stages, particularly the resolution of land title issues.

Summary Status of Conditions

20. The specific conditions for the release of the third tranche (Schedule 1, paragh 4(b) andScJheule 3, Section B of the DCA) and their status of compliance are sunmmaized below.

a) The Association sha be satisfied with the progress achieved by the Borrower inthe carrying out of the Program (Schedule 1, paragraph 4(b)(i) and (iii)).

This condition has been met. The Borrower has made satisfactory progress in tryingto attain macroeconomic stability, in accelerating the pace of privi7ation, and inimproving the management and poverty-orientation of public expenditure.

b) The Borrower has, in accordance with the Privatization Program, completed theSale or Liquidation of at least 24 enterprises as provided in paragraph 20 (b) ofthe Program, provided that such 24 enterprises taken together with the 14enterprises [for release of the second tranchel indude at least 14 medium-sizedenterprises.

-31 -

This condition has bee met. The Govnment launchd the acceerated divestitumprogram in January, 1995 whe it handed over 114 SOEs to DIC for divestitr. Afiwther 35 enterprises have boe added since that time. Of the 149 SOEs, a total of 50anterprise had been divesdo as of January 31, 1998, includig 14 medium-sizcdenterprises. Twenty six of the reported tra ctions (including 14 diuqualify for the purpose of the third tranche release

c) The Borrower has, in accordance with the Privatization Program, offered forsale: (a) the company to which the assets of the Telecommunications Division ofGhana Posts and Telecommunications Corporation have been transferred (asprovided in The Statutory Corporations (Conversion to Companies) Act, 1993,Act No. 461) and which is responsible for the telecommunications operationspreviously carried out by such division; and (b) at least two of the following threeenterprises: Mim Timber Company Limited, State Insurance Corporation ofGhana, and State Housing Corporation.

(a) This conditon has been substantiall met. A strategic investr has acquired 30%stake in, and management control, of Ghana Telecom. Separately, the Govermentalso has granted a license to a second national operator for the prvate provision ofbasic telephony services. These two developments, taken together, mean the effectiveprivaization of Ghana's telecom serices even tugh the offer for sale of GhanaTelecomn was not strictly in accordance with the agreed defition of the term (i.e. thesale, throi competitive bidding, of at least 51% of the Govenment's shares).

(b) This conditon has not bee met and a waiver is souzht. Progress on the divestitureof the other named strategic enterpnses, Mimn Timber, SIC and SHC, has been slowerthan expected. The Governmt had enterd into negotiations with the original ownerof Min Timber for the return of the property, but these negoiati have collapsed.DIC is currently preparing to outsource the divestiure of Mim Tinber. The divestitureof SIC and SHC has been outsourced but, because of the size of both companies andthe complicated legal issues that will need to be addressed as part of their divestiure,the privatizations will not be completed before the second half of 1998. Some of thesecomplications had not been fully appreciated at the time of appraisal. However, theoutsourcing of SIC and SHC shows that the Government has begun an irreversibledivestiture process, with the outsourcing contracts covering the full process fromenterprise appraisal to completion of sales contracts.

d) The Borrower has during fiscal year 1996 increased by at lest 20%, in realterms based on fiscal year 1994, actual expenditures on both (a) recurrent Won-

wage expenditures and (b) development expenditures for the following sub-sectors: (i) basic education, (ii) primary bealh, ad (iii) rural ifrtructure, 'andthereafter has at least maintained such level of actual expenditures.

This condition has been met. Non-wage expditur in primary health care, basiceducation and rural infrastuu were raised in real tems by 288 per cent, 103 percent and 266 per cent, respectively, in the 1994-1996 period. Data for 1997 are notyet available. However, the 1997 budget provided for a maintance of expendituesat 1996 levels.

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e) The Borrower has implemented in its Ministry of Roads and Highways and itsMiistry of Works and Housing the revised contracting system referred to inParagraph A. 4(b) of Schedule 3 to the DCA.

This cnitn has beo 4 The Minisy of Roads and Highways itroduced in May1996 a cmputer-based monly Ctract Innaixm System to sughen themanagemnt of its mult-year conacu. Ie new conacting systm has beenimplemented with the publication of a notice formally increasing te board limits.

f) The Borrower has implmented the expenditure monitoring system referred to inParagraph A.5 of Schedule 3 to the DCA in at least ten ministries (in addition tothe six listed in paragraph 39 of the Program) responsible for at klat 30% ofalocations in its most recent annual budget.

This conditon has been substantially met. PSAC envisaged a limited expendituremonitorg system which has since evolved into an integrated public financialmanagement system with sub-systems covering budget preparation, budgetimplementation, accounting, cash management, debt managmet, revenuem^anagement, auditing and procurement. The more comprehensive system is supportedby the IDA-financed Public Financial Management Reform Project. Progress onirnplementing the project is satisfactory. A medium-term expenditure fiamework(MTEF) for pnority sectors which will form the basis for annual budgeting has beenprepared and will be launched in June 1998. In addition, a new computer-basedbudget and public expenditure managemeat system (BPEMS) has_ben desied andivitions to tender for software have been sent out. Phased implementation willbegin in 1998 with the start of software ausiaion and taining of stafti and theBPEMS is cxpected to be fully operatoal for the budget cycle for the calndar year2000.

g) The Borrower has implemented in the six ministries lted in paragraph 39 of theProgram the accounting system referred to in Paragraph A.6 of Schedule 3 to theDCA.

This condition has been substantially met. (See (f) above).

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V. OVERALL ASSESSMENT

21. In sum, progress under the Program has been saisfactory. The one condition for which awaiver is sought is that requiring the Borrower to have offered for sale at least two of thefollowing enterprises: Mim Timber Company Ltd., State Insurance Corporation and State HousingCorporation. The Credit Agreemt defines "offer for sale" as: (i) undertaing a valuation of theenterpnse, (ii) preparmg a prospectus or information memorandum for the enterprise, and (iii)soliciting offers for the sale of the enteprise either direly or through adverments. ITeBorrower has con$acted with consulng firms to carry out this process with respect to SIC andSHC. In fact, the contactig out process tas th enteprises beyond the PSAC cdtio in tdatthe consultng firms are also required to negotiate with potcntial investors. The firms intd tocomplete their assignments by the second half of 1998. Hence, by eltering into these contracts, theBorrower has acted in accordance with the spirit of the Program and has begun an irTeversibleprocess to divest SIC and SHC.

VI. CONCLUSION

22. In view of the overall salisfiory pefrmance of the program suppted by this Credit,the Borrower's efforts to comply with the specific coditions for the third traunhe release and thewaiver sought on Conditio No. B.2(b) of Schedule 3 of the DCA, I recommd Board approval ofthe waiver and release of the third tanche.

James D. Wolfensobnby esidst

by Sven Sandsto

GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

APPENDIX III

Status of the Accelerated Divestiture Program as at February 3, 1998

j| Enterprise Size Status Sale Price Amount Completion/ Exec. CommentsPaid

US$ US$ ExpectedI____________________________ ________________ million million Completion

From Original PSAC List

1 Ehwiaa Wood Products M Withdrawn Withdrawn by Ministry of Lands2 GNTC Properties S Various div. stages DIC3 Cocoa Processing Taksi M Suspended Indefinite4 Crystal Oil Company S Suspended Indefinite Dispute with other shareholders5 GIHOC Footwear S Suspended Indefinite Czech firm to finance restructuring6 GNTC Heavy Equipment M Suspended Indefinite7 Accra City Hotels (Novotel) M Seeking Authorization Indefinite8 Accra Markets Co M Seeking Authorization Indefinite9 Ainynase Oil Mills S Seeking Authorization Indefinite10 Anwiakanta Oil Mills S Seeking Authorization Indefinite11 BHC Mechanical Workshop S Seeking Authorization Indefinite12 Cape Coast Quarry S Seeking Authorization Indefinite13 Clay Prodcuts Ltd S Seeking Authorization Indefinite14 Ghana Stone Quarry S Seeking Authorization Indefinite15 Nasia Rice S Seeking Authorization Indefinite16 National Trust and Holding M Seeking Authorization Indefinite17 Plant Pool M Seeking Authorization Indefinite

18 Shai Hills Ranch SJSeeking Authorization Indefinite19 Tongu Ranch Ltd S JSeeking Authorization Indefinite20 Wulugu Livestock Products S jSeeking Authorization Indefinite l

21 City Express M Pre-bidding l Sep-98 O/S

22 Ejura Farms S Pre-bidding Jun-98 O/S23 Ghana Sanyo Co. S Pre-bidding Dec-98 O/S24 GIHOC Meat Products S Pre-bidding Sep-98 O/S25 Mim Timber L Pre-bidding Dec-98 O/S26 Omnibus Services Authority M Pre-bidding Sep-98 O/S27 Pomadze Poultry S Pre-bidding Sep-98 O/S28 State Housing Corpooration L Pre-bidding Dec-98 O/S29 State Insurance Corporation L Pre-bidding Sep-98 O/S30 Africa Timber and Plywood M Pending Completion 0.205 Indefinite DIC Payments were delayed31 Ghana Oil Palm Dev. Corp M Pending completion 6.95 4.50 Indefinite DIC indirect state-owned interests32 GNTC Bakery S Pending completion DIC Payments schedule lapsed33 Juapong Textiles M Pending completion 0.320 Indefinite DIC Govemment shareholding is 49%34 Loyalty Industries S Pending completion Jun-98 DIC MOU has been signed35 Tema Shipyard M Pending Completion 4.35 2.10 Indefinite36 Ghana Bauxite Co M Not yet started Indefinite MIC37 Ghana Food Distribution M Not yet Started Indefinite Policy issues38 Ghana National Procurement M Not yet started Indefinite O/S39 Ghana Oil Company M Not yet started Indefinite Policy issues40 Ghana Reinsurance Co M Not yet started Indefinite Policy issues41 Precious Minerals Marketing M Not yet started Indefinite Policy issues42 State Enterprise Audit Corp S Not yet started Dec-98 DIC43 Tema Oil Refinery M Not yet started Indefinite Policy issues44 Ghana Airways - Catering M Not started yet Indefinite To be done with Ghana Airways45 Ghana Publishing Tema M Negotiations ongoing Jun-98 DIC46 GIHOC Fibre M Negotiations ongoing Sep-98 O/S47 GNTC Motors M Negotiations ongoing Sep-98 DIC

Sta.e Construction Company Negotiations ongoing Jun-98 O/S49 State Shipping Corporation M Negotiations ongoing Jun-98 O/S50 State Transport Corp M Negotiations ongoing Apr-98 O/S51 Bonsa Tyre Company M Negotiations ongoing Jun-98 O/S52 Ghana Bottling Company M Negotiaions ongoing Jun-98 DIC53 Ghana Airways - Handling M More info required Indefinite54 Ashanti RDC S Liquidation ongoing Jun-98 DIC legal changes needed55 Brong Ahafo RDC S Liquidation ongoing Jun-98 DIC legal changes needed56 Central RDC S Liquidation ongoing Jun-98 DIC legal changes needed57 Eastem RDC S Liquidation ongoing Jun-98 DIC legal changes needed58 Ghana Seed Co S Liquidation ongoing Dec-98 LIQ59 GIHOC Vegetable Oil-Tamale S Liquidation ongoing Dec-98 LIQ60 Greater Accra RDC S Liquidation ongoing Jun-98 DIC legal changes needed61 Meat Marketing Board S Liquidation ongoing Dec-98 LIQ62 Northem RDC S Liquidation ongoing Jun-98 DIC legal changes needed63 Upper East RDC S Liquidation ongoing Jun-98 DIC legal changes needed64 Upper West RDC S Liquidation ongoing Jun-98 DIC legal changes needed65 Volta RDC S Liquidation ongoing Jun-98 DIC legal changes needed66 Westem RDC S Liquidation ongoing Jun-98 DIC legal changes needed67 City Hotel Kumasi M Contract pending Jun-98 DIC Buyer had defaulted on payments68 Ghamot Motors Company M Contract pending Mar-98 DIC69 GIHOC Pharmaceuticals M Contract pending 9.1 Apr-98 O/S First outsourced divestiture70 Twifo Oil Palm Plantation M Contract pending 6.39 Apr-98 DIC President's approval awaited71 Westem Veneer and Lumber M Contract pending Jun-9872 Aluworks Ltd M Complete 2.07 2.07 Nov-97 DIC public offering73 Automotive Technical Services M Complete 1.6 0.838 Feb-97 DIC Lawyers followig up on unpaid

balances74 Ceramica Cordero S Complete 0.230 DIC liquidated75 Dorado Garment S Complete 0.173 0.173 Dec-96 DIC Fully paid76 Fafla Auto S Complete DIC77 Ghana Film Industries S Complete 1.4 1.4 Nov-96 DIC Fully paid78 Ghana Manufacturing Co S Complete DIC79 Ghana National Manganese Co M Complete 4.0 2.0 Dec-95 DIC Payment plan agreed for remaining

____ .__ ________ __________ _____________ paym ents80 Ghana Rubber Estates I M IComplete 3.6 3.6 Nov-9681 Ghana Telecom |L Complete I j [ DICT

82 Ghana Textile Printing M Complete DIC83 GIHOC Central Advertising S Complete .043 .043 DIC84 GIHOC Central Co HQ S Complete Apr-97 SEC Some of the buildings re-allocated to Govt

agencies85 GIHOC Marble Works S Complete DIC86 GIHOC Paper Conversion M Complete DIC87 GNTC Bottling Co M Complete 7.0 7.0 Dec-95 DIG Govt shares worth $2 million sold in

Jan 9888 GNTC Clinic S Complete 0.274 0.137 Jul-97 Lawyers following up on unpaid

balances89 GNTC Metal Works S Complete 0.173 0.173 Jan-98 DIG Fully paid90 GNTC Olivetti S Complete Sep-97 DIC Balance due of Cedi 0.5 million91 GNTC Pharmaceutical S Complete 0.091 0.091 Sep-97 DIC Fully paid92 GNTC Technical S Complete 0.566 0.351 Sep-97 DIC93 GNTC Textiles M Complete Sep-97 DIC94 ICAP GIHOC Pharmaceutical S Complete DIG A-G Opinion received (restitution)95 Kentinkrono Poultry S Complete DIC A-G opinion received (restitution)96 Kumasi Catering S Complete DIC97 National Industries Corp HQ S Complete 0.55 0.55 Dec-96 DIC98 NIC Chemicals and Paints S Complete DIC More info needed99 NIC Vehicle Assembly Plant S Complete DIC More info needed100 Pankrono Poultry S Complete DIC101 Prefab Concrete Products S Complete 0.302 0.302 Feb-96 DIC Fully paid102 Sunyani Catering Rest Hse S Complete103 Tema Food Complex M Complete104 Tomos Ghana S Complete DIC105 Buipe Lime Limited S Bidding ongoing Sep-98 DIC106 Gliksten West Africa M Bidding ongoing Sep-98 O/S107 Fafia Machine Shop S No information avalable108 GIHOC Manufacturing S No infornation available

109 GIHOC Vegetabe Oil-Kasima S No infornation available110 GNTC Buying Division S No inforfnation available111 GNTC Department Stores S No information available112 GNTC General Foods M No infonnation available113 GNTC Head Office S No infornation available114 Volta Lake Transport M O/S

Enterprises Added to PSAC115 Amerhia Farms Suspended Returned to Min of Agric; demo school116 Atebubu Commercial Farms Pre-bidding Dec-98 O/S117 Benso Oil Palm Plantation Pre-bidding Jun-98 DIC118 Bolgatanga Catering Guest Pre-bidding Sep-98 O/S

House119 Graphic Corporation Pre-bidding Dec-98 O/S120 National Oil Palm Planation Pre-bidding Dec-98 DIC121 New Times Corporation Pre-bidding Dec-98 O/S122 Atlantic Hotel Pending completion 1.0 0.33 Feb-98 DIC ADB to pay the guarantee123 Food Production Corporation Pending completion Dec-98 DIC Problem of land title124 GIHOC Cannery Pwalugu Pending Completion Jun-98 O/S Only 10% paid125 GIHOC Refrigeration Pending completion Indefinite DIC Problem of land ownership; currently in the

courts126 State Farm Corporation Pending completion Dec-98 DIC Problem of title to land & building127 Tema Textiles Pending completion Indefinite Indirect state-owned interests128 GIHOC Distilleries Not yet started Indefinite O/S Permission from Minister awaited129 Akwaaba Tourist Not for divestiture130 Navrongo Catering Guest House Not for Divestiture131 Takoradi Catering Guesthouse Not for Divestiture132 Ghana Sugar Estates Negotiations ongoing Sep-98 O/S133 Bunso Poultry Farm Negotiations ongoing Jun-98 DIC134 GIHOC Boatyards Tema Liquidation ongoing Dec-98 LIQ All three operations to be liquidated135 New Match Factory Liquidation ongoing Dec-98 LIQ

136 Ghana Consolidated Diamonds Contract pending Jun-98 M/C Awaiting President's approval137 Akokerri Oil Palm Plantation S Complete 0.032 0.032 Nov-95 DIC Fully paid; formerly part of State

Farms Co138 FPC Farm Assin Bosomadwe S Complete May-97 DIC Fully paid; Formerly part of Food

Production Co139 GIHOC Brick and Tile S Complete 0.02 0.02 Apr-96 DIC Fully paid140 GIHOC Cannery (Wenchi) S Complete 0.35 0.175 Jun-97 DIC Lawyers following up on unpaid

,balances141 GIHOC Nzema S Complete142 Ho Catering Guesthouse S Complete 0.112 0.056 Apr-97 DIC Lawyers following up on unpaid

balances143 Meridien Hotel M Complete 0.25 0.25 Jul-97 DIC Fully paid144 NIC Electrical S Complete Dec-96 CAC Returned to original owner145 NIC Estates S Complete Dec-96 CAC Returned to original owner146 NIC Farms S Complete DIC A-G opinion received147 Nsamanko Press Limited S Complete DIC A-G opinion received148 State Fishing Corporation M Complete 2.0 1.7 DIC149 Topease, Akim, Manso Rubber S Complete 0.073 0.048 Jan-96 DIC Formerly part of State Farms Co

S: Small, M: Medium, L: Large, O/S: Outsourcing, M/C: Mines Commission, LIQ: Liquidator

Exec: Executing Agency

GHANA

PRIVATE SECTOR ADJUSTMENT CREDIT

(CR. 2718-GH)

MAP

IBRD 265

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