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Implementation Completion Report (ICR) Review - Economic Recovery Credit


  
1. Project Data:   
ES Date Posted:
09/13/2004   
PROJ ID:
P057293
Appraisal
Actual
Project Name:
Economic Recovery Credit
Project Costs(US $M)
 450.00  481.10
Country:
Congo Democratic Republic
Loan/Credit (US $M)
 450.00  481.10
Sector, Major Sect.:
Forestry, Central government administration, Banking, Mining and other extractive, General industry and trade sector,
Agriculture fishing and forestry; Law and justice and public administration; Finance; Energy and mining; Industry and trade
Cofinancing (US $M)
   
L/C Number:
C3660      
   
Board Approval (FY)
  2
Partners involved
 
Closing Date
06/30/2003 06/30/2003
         
Prepared by: Reviewed by: Group Manager: Group:  
Pierre M. De Raet
John H. Johnson Kyle Peters OEDCR

2. Project Objectives and Components:

a. Objectives
To help advance the goals of supporting economic stabilization and structural reforms to lay the basis for recovery within the I-PRSP strategy. Specifically: 1) To improve governance and reduce corruption with the objectives of fostering PSD and increasing the supply of public services;

2) To improve public sector financial management, especially regarding public expenditures;
3) To continue the reform and restructuring of the public enterprise (PE) sector;
4) To begin the reform of the financial sector, especially the restructuring of commercial banks;
5) To support policy actions in the forestry sector in anticipation of implementation of new regulations; and
6) To provide support to urgent special actions within the mining sector that support prospects for fostering restructuring of the sector.

b. Components
The Credit supported reforms in the following areas:
1) Improving governance as it affects the poor and the allocation of resources and the efficiency of their use, including: (i) strengthening the rule of law and the judiciary and improving the regulatory framework for PSD; and (ii) reducing corruption in the public sector by the adoption of a new Ethics Code, the formulation of a Governance and Anti-corruption Strategy and Action Plan, the establishment of an Anti-corruption Commission, the overhauling of public procurement, and the preparation of a coherent program of reforms to correct abuses identified by the Cour des Comptes and the Inspection Générale des Finances.
2) Increasing public expenditure and improving its management, by undertaking: (i) a PER in 2002 expected to lead to a 2003 budget with improved estimates for budget allocations for all categories of recurrent and capital expenditures, and (ii) a poverty expenditure tracking assessment to properly account for the use of debt relief savings generated by the HIPC initiative.
3) Extending and deepening the reform of the PE sector, by: (i) conducting a two-step financial and technical audit of each PE followed by the elaboration of a reform strategy; (ii) revamping the legal framework for PEs and the law on privatization with a view to submitting enabling legislation to the National Assembly by December 2002; and (iii) initiating the process of restructuring/liquidation after the legislative process is complete.
4) Restructuring the financial sector by: (i) conducting an audit of the Central Bank leading to a corrective action plan; (ii) placing three public sector banks into liquidation by September 2002 and limiting State shareholding in banks to under 20 percent; (iii) adopting an overall financial sector strategy by June 2003; and (iv) conducting audits of additional banks to determine their future status.
5) Establishing a legal and regulatory framework for the sound development of the forestry sector by: (i) adopting a new Forestry Code; (ii) suspending the issuance of new concessions as well as the extension or renewal of existing ones, until publication of the implementation decrees of the new code; (iii) reviewing all concession contracts issued under the old code to eliminate those that have expired or are not in compliance; and (iv) increasing the annual area fees on all existing concession contracts.
6) Initiating the economic reform of the mining sector by: (i) revising the legal and regulatory framework, including the adoption of a new mining code, the creation of a new mining cadastre, and the establishment of a commission to review and validate all mining titles in accordance with the new code; (ii) initiating the restructuring of Gécamines by establishing a voluntary separation plan for redundant workers and by creating a high-level committee to oversee the restructuring of the company, including the implementation of the voluntary separation plan.

c. Comments on Project Cost, Financing and Dates
The Credit included three tranches: (i) the first one of SDR 328.4 million, disbursed upon effectiveness in July 2002, of which SDR 264.3 million served to reimburse bridge loans extended by bilateral donors to the DRC for settling arrears to the Bank, thereby enabling resumption of operations with the Bank, and 64.1 million to finance imports; (ii) the floating Forestry tranche of SDR 12 million disbursed in February 2003, upon satisfying the sole release condition, i.e., submission of a new draft Forestry Code to the National Assembly; and (iii) the floating Mining tranche of SDR 20 million disbursed in June 2003, upon satisfying the release conditions. The Credit closed on June 30, 2003, the original date.


3. Achievement of Relevant Objectives:

Objectives were partially achieved.
1) Governance: (i) new Investment, Labor and Ethics codes were adopted; (ii) an Anti-corruption Commission was created; and (iii) a comprehensive action plan for the implementation of the anti-corruption legislation was prepared. However, little progress was achieved in the all-important area of public procurement and audit.
2) Public expenditure management: (i) the 2003 budget was adopted with improved estimates for public and capital expenditures; (ii) the budgeting process was streamlined; (iii) expenditure tracking systems were created to trace spending to ultimate beneficiaries and, particularly, to asses poverty reduction expenditures; and (iv) communications on fiscal data between the Treasury and the Central Bank were improved.
3) PE sector: (i) legal frameworks for reforming the PE sector and for promoting privatization were formulated; (ii) an audit of PEs was completed and working groups established to formulate strategies case by case; (iii) a review of indebtedness of PEs was undertaken; and (iv) the fiscal regime of PEs was reviewed.
4) Financial sector: (i) the independence of the Central Bank was confirmed by a new Charter issued in May 2002; (ii) an audit of the operations of the Central Bank was completed; (ii) new legislation was prepared for financial institutions; (iv) audits and strategies were completed to determine the liquidation, privatization, or restructuring of several public and private banks; and (v) a financial sector strategy was adopted.
5) Forestry sector: the objective of improving the regulatory framework of the forestry sector was partially achieved by the promulgation of the Forestry Code in August 2002, and the adoption of related measures. However, as of July 2004, implementation decrees had not been issued. Furthermore, the moratorium (Arrêté Ministériel of May 2002) on issuance of new allocations, extensions, or renewals of forestry concessions until publication of the implementation decrees of the new code, was breached in March-April 2003, one month after tranche release.
6) Mining sector: the objective of initiating reforms in the mining sector was partially achieved by the promulgation of a new Mining Code in July 2002, and the issuance in March-April 2003 of decrees creating a Mining Cadastre and a Commission responsible for the validation of mining titles. However, the new Mining Cadatre operates with difficulties and the Commission is not yet operational. The voluntary separation program covering 10,000 redundant Gécamines workers was completed in January 2004, with compensation financed by the Mining Tranche.

It is difficult to assess the extent to which achievement of some of these objectives has had any concrete impact so far. The ICR attributes outcome as (i) "not yet visible" to objectives relating to governance and PE reform; (ii) "fairly fragile" to objective relating to the financial sector; and (iii) "premature to judge" to the objective relating to public expenditure management.

4. Significant Outcomes/Impacts:

1) The most significant outcome is that the project, together with assistance from other donors, notably the IMF, has permitted the DRC to reestablish relations with the international donor community and regain its creditworthiness, thanks to the clearance of arrears to the Bank and the IMF.
2) Partly as a result of 1), the DRC has reached the enhanced HIPC initiative decision point in July 2003.
3) The promulgation of new Forestry and Mining Codes marks important initial steps towards a more transparent management of these key sectors.
4) The successful voluntary separation program of Gécamines can play an important role as a model for the restructuring of other large PEs.

5. Significant Shortcomings (include non-compliance with safeguard features):

Considerable delays in the issuance of the implementation decrees of the Forestry Code and reversal in policies regarding the suspension of allocations, extensions and renewals of concessions.

6. Ratings:ICROED ReviewReason for Disagreement/Comments
Outcome:
SatisfactorySatisfactory
Institutional Dev.:
ModestModest
Sustainability:
LikelyLikely
Bank Performance:
SatisfactorySatisfactoryHowever, at preparation/appraisal, the Bank (i) overstated DRC' s commitment, capacity, and control over the country; and (ii) designed a program encompassing too many policy areas and too complex for DRC' s coordination capacity.
Borrower Perf.:
SatisfactorySatisfactory
Quality of ICR:
Unsatisfactory

7. Lessons of Broad Applicablity:

1) In post conflict countries, the Bank should design modest but well focused reform programs, because borrowers have lost to a large extent the capacity to manage and coordinate a wide array of policies and measures. In addition, they remain distracted by security problems. It is probably preferable to have several smaller operations.
2) In designing conditionality for adjustment operations, where legislation is to be created or amended, the focus should be on: (i) requiring the issuance of implementation decrees rather than only submission of drafts to parliament; and (ii) evidence that an effective institutional framework is in place to implement and enforce the legislation. In this regard, the Legal Department should have a much larger role and earlier input in designing conditionality. The lack of - or considerable delay in - effective implementation of revised legislation is a recurring issue in adjustment operations largely undermining their success.

8. Audit Recommended?  No

          Why?  

9. Comments on Quality of ICR:

The ICR is unsatisfactory in several respects:
1) It fails to discuss developments in the macro-economic situation over 2002-03, except to state that the February 2004 review under the IMF program was satisfactory; similarly, it is silent on progress - or lack thereof - in reaching the decision point under HIPC, preparing the final PRSP, or adhering to the Kimberley Accord.
2) It fails to discuss and comment on the extent to which the first four objectives were reached, and why. In the same vein, the discussion of "outcomes" and "outputs" is blurred and not presented according to standard ICR format. Outputs are listed in the same order as in the PR, as if all had been achieved and without discussion/assessment. Moreover, measures taken prior to Board, are listed again as if they were new outputs. As a result, the basis for assessing performance is somewhat uncertain.
4) There is no discussion of the institutional development impact of the project, except to say that "...it was not the primary objective of the program". Even if IDI is not a major objective of a program or project, it is a critical requirement for progress towards sustainability of reforms, especially in adjustment operations and it is certainly worth discussing.
5 The ICR errs in discussing major factors affecting implementation and outcome as well as transition arrangements to regular operations.
6) Finally, the ICR should be regarded as a comprehensive but concise self-evaluation by the region of program achievements at the time of writing.

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