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         Privatization and industrial reform adjustment project

The Zambia Privatization and Industrial Reform Credit (PIRC I), supported by Credit 2405-ZA for US$200 million equivalent, plus $38.7 million in IDA reflows, was approved in FY92. The Second Privatization and Industrial Reform Credit (PIRC II), supported by Credit 2523-ZA for US$100 million equivalent, plus $10 million under an IDA reflow, was approved in FY93. PIRC I was closed in FY95, ten months late, and was fully disbursed. PIRC II is expected to close on June 30, 1997, two years behind schedule. The Implementation Completion Report (ICR) was prepared by the Africa Regional Office. The Borrower’s report is included as Appendix B.

The two PIRC programs were designed to continue the implementation of the privatization and parastatal reforms and the macroeconomic stabilization started under the preceding Economic Recovery Credit. PIRC I attempted to (i) revise laws and regulations to make them appropriate for a private sector-oriented, market driven economy; (ii) consolidate the establishment of a market-based exchange rate, foreign trade system and domestic financial market; (iii) privatize most state-owned enterprises over a five-to-seven-year period and increase the autonomy and efficiency of remaining publicly-owned ones; and (iv) improve the effectiveness and efficiency of the civil service. PIRC II supported these objectives and added others, including (i) the development of financing arrangements to facilitate local participation in privatization; (ii) a deepening of the absorptive capacity of the local capital market; (iii) the establishment of an affordable program of compensation, counseling and training for redundant workers; and (iv) an improved capacity of key institutions to deal with the privatization program.

The projects achieved many of their objectives. After a slow start, the Zambia Privatization Agency has established a framework for privatization, with the help of technical assistance. Privatization has been the most successful component: as of late 1996, 165 of 271 firms and productive undertakings had been privatized, including a number of major industrial enterprises, and preliminary evidence indicates increased efficiency and better products. The process is expected to be completed within two to three years. The liquidation of Zambia Airways ended its drain on the budget. The remaining public utilities have performance contracts granting them autonomy in key business decisions. The government has revised most business-related legislation, strengthened regulation and supervision of banks and nonbank lending institutions, and issued guidelines for capital market transactions and stock exchange operations. The major shortcoming in the area of privatization was delaying the privatization of ZCCM, the copper mining company. The subsequent sharp fall in output, deteriorating financial performance, and declining contribution to government revenues have been major impediments to economic growth and macroeconomic stability. Progress in other areas has been mixed, with improvements in the duty drawback scheme for exporters and liberalization of foreign exchange markets, but a still incomplete tariff reform. Civil service reform has not shown significant results, due in part to the lack of an affordable severance package and a shortage of budgetary funds. Delays resulted in part from the government’s limited capacity to carry out such a complex program. Macroeconomic stabilization lagged: inflation remains high, the revenue base continues to stagnate, and GDP growth has been positive in only one year since 1991.

The ICR rates project outcome for both projects as satisfactory, sustainability as likely, institutional development as substantial, and Bank performance as satisfactory. OED agrees with these ratings. Sustainability will depend in large part on accelerated and broad-based growth in output and employment that can generate an improvement in living standards, as well as on continued government commitment to the reform process and stabilization. Privatization of ZCCM will be critical for the recovery of copper mining and an improved fiscal performance, an essential requirement for Zambia’s economic growth.

The project's main lessons, as noted in the ICR, are that: (i) macroeconomic stabilization is fundamental to private sector investment and growth; (ii) reform programs should take into account the implementation capacity of the government, e.g. in preparing legislation, and should avoid excessive conditionality, while at the same time taking steps to build up capacity; (iii) civil service reform requires an affordable compensation package; and (iv) public enterprises in sectors that are critical for economic growth and government revenue should be included in the privatization process from the beginning.

The quality of the ICR is satisfactory, although it would benefit from more information on the importance of the enterprises which have been privatized, in terms of their value added, employment and impact on the budget.

The projects will be audited, along with the Economic and Social Adjustment Program (Credit 2577-ZA). The audit will concentrate on forward looking issues, including the prospects for sustainability.

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