Document of The World Bank Report No:ICR-000041 IMPLEMENTATION COMPLETION AND RESULTS REPORT (Credit Number 3411-UG) ON A CREDIT IN THE AMOUNT OF SDR 36.2 MILLION (US$ 48.5 MILLION EQUIVALENT) TO REPUBLIC OF UGANDA FOR A PRIVATIZATION & UTILITY SECTOR REFORM PROJECT JULY 31, 2006 Private Sector Development Unit Africa Region CURRENCY EQUIVALENTS ( Exchange Rate Effective 05/22/2006 ) Currency Unit = Ush Ush 1.00 = US$ 0.00055 US$ 1.00 = Ush 1832.75 Fiscal Year July 1 - June 30 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy DRIC Divestiture and Reform Implementation Committee EDP Enterprise Development Project ERA Electricity Regulatory Agency FDI Foreign Direct Investment GDP Gross Domestic Product GOU Government of Uganda IDA International Development Association LACI Loan Administration Change Initiative MFPED Ministry of Finance, Planning and Economic Development NEMA National Environmental Management Authority NWSC National Water and Sewerage Corporation PCU Project Coordinating Unit PE Public Enterprise PEAP Poverty Eradication Action Plan PERD Public Enterprise Reform and Divestiture Statute PMU Parastatal Monitoring Unit PPI Private Participation in Infrastructure PU Privatization Unit PUSRP Privatization and Utility Sector Reform Project UCC Uganda Communications Commission UEB Uganda Electricity Board UEDCL Uganda Electricity Distribution Company Ltd UEGCL Uganda Electricity Generation Company Ltd. UJAS Uganda Joint Assistance Strategy URA Uganda Revenue Authority URC Uganda Railways Corporation URU Utility Reform Unit Vice President: Gobind T. Nankani Country Director: Judy M. O'Connor Sector Manager: Demba Ba Project Team Leader: Lucy M. Fye 1 Uganda Privatization & Utility Sector Reform CONTENTS Page No. 1. Basic Information 3 2. Key Dates 3 3. Ratings Summary 3 4. Sector and Theme Codes 4 5. Bank Staff 4 6. Project Context, Development Objectives and Design 4 7. Key Factors Affecting Implementation and Outcomes 8 8. Assessment of Outcomes 10 9. Assessment of Risk to Development Outcome 15 10. Assessment of Bank and Borrower Performance 15 11. Lessons Learned 17 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 18 Annex 1. Results Framework Analysis 19 Annex 2: Restructuring 26 Annex 3. Project Costs and Financing 27 Annex 4. Outputs by Component 28 Annex 5. Economic and Financial Analysis 37 Annex 6. Bank Lending and Implementation Support/Supervision Processes 39 Annex 7. Detailed Ratings of Bank and Borrower Performance 42 Annex 8. Beneficiary Survey Result 43 Annex 9. Stakeholder Workshop Report and Results 44 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR 45 Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders 49 Annex 12. List of Supporting Documents 50 2 1. Basic Information Country: Privatization & Utility Uganda Project Name: Sector Reform Project ID: IDA-34110,IDA- P050439 L/C/TF Number(s): 3411A ICR Date: 08/22/2006 ICR Type: Core ICR Lending Instrument: SIL Borrower: REPUBLIC OF UGANDA Original Total Commitment: XDR 36.2M Disbursed Amount: XDR 22.5M Environmental Category:B Implementing Agencies Ministry of Finance, Planning and Economic Development Cofinanciers and Other External Partners 2. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 07/30/1999 Effectiveness: 01/31/2001 01/31/2001 Appraisal: 02/08/2000 Restructuring(s): 12/14/2004 Approval: 08/24/2000 Mid-term Review: 01/24/2005 01/31/2005 Closing: 01/31/2006 03/31/2013 3. Ratings Summary 3.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory 3.2 Quality at Entry and Implementation Performance Indicators Implementation Performance Indicators QAG Assessments (if any) Rating: Potential Problem Project at any No Quality at Entry (QEA): None time (Yes/No): Problem Project at any time No Quality of Supervision (QSA): None (Yes/No): DO rating before Satisfactory Closing/Inactive status: 3 4. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 52 55 Other social services 48 45 Original Priority Actual Priority Theme Code (Primary/Secondary) Regulation and competition policy Primary Primary State enterprise/bank restructuring and privatization Primary Primary 5. Bank Staff Positions At ICR At Approval Gobind T. Callisto E. Vice President: Nankani Madavo Country Director: Judy M. O'Connor James M. Adams Sector Manager: Demba Ba Demba Ba Project Team Leader: Lucy M. Fye Edgar Saravia ICR Team Leader: Lucy M. Fye ICR Primary Author: Linda Cotton 6. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative) 6.1 Context at Appraisal (brief summary of country macroeconomic and structural/sector background, rationale for Bank assistance) The Government of Uganda (GOU) started public enterprise (PE) sector reform and privatization in 1992 when there were over 150 parastatals in virtually all sectors of the economy, employing more than 30,000 people, accounting for 25 percent of total formal employment and generating about 10 percent of Gross Domestic Product (GDP). The aim of the reforms was to redefine the role of the state in the economy, reduce the financial and administrative burden of the PE sector on Government, improve PE efficiency and encourage investment. At that point in time, PEs were receiving direct and indirect subsidies at a cost of an estimated 50 percent of total government revenues in 1992-93. PEs accounted for about 17.8 percent of total credit to the economy in 1992 and 3.8 percent of external debt obligations services during the 1980s in addition to accumulating internal and external arrears. The Public Enterprise Reform and Divestiture (PERD) statute was passed in 1993 to allow for reducing the states share in economic activity and improving the efficiency of remaining enterprises. The Enterprise Development Project (EDP, Credit 2315-UG, 1993-2000) supported implementation of the privatization program. As of end 1999, 93 divestures had been completed, 4 62 privatized and 31 liquidated. However, due to lack of transparency and allegations of corruption, Parliament suspended the program in early 1999 and began an investigation by the Parliamentary Select Committee on Privatization. Detailed procedures were approved in June 1999 during preparation of this project. The PERD statute was amended in 2000 to clarify the roles and responsibilities of the various bodies and establish clear procedures. These actions signaled the commitment of the GOU to transparent and high quality privatization transactions. In utilities, reforms during the previous decade had been slow due to the piecemeal sectoral approach taken to restructure each sector separately, lack of clarity on the institutional responsibility to lead the process and weak capacity to design and manage the reforms. 6.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The project's development objective is to improve the quality, coverage and economic efficiency of commercial and utility services, through privatization, private participation in infrastructure (PPI) and an improved regulatory framework. This objective will be achieved by a higher level of private investment, and better quality and access of services in telecommunication, water, electricity and transport sectors divestiture and improved efficiency of remaining public enterprises (PEs); and strengthening of the regulatory framework and institutions in relevant sectors. 6.3 Revised PDO and Key Indicators (as approved by original approving authority), and reasons/justification The PDO was not revised. 6.4 Main Beneficiaries, original and revised (briefly describe the "the primary target group" identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) 1) Private Sector - The business community (in particular, mining, tourism, construction, and retail) was to enjoy business opportunities through privatization. It also was to benefit from better quality of utility services and reduced costs of factors of production, leading to increased competitiveness of the economy. 2) Local Population - As end users of the utility services, the local population was to benefit significantly through increased quantity, quality and accessibility of infrastructure services. As for the retrenched staff from the public enterprise workforce, they were to receive their severance pay in a timely manner and benefit from programs to help integrate them into other economic activities. 3) Government - The project was to help the GOU implement its privatization and utility sector reform program resulting in lower fiscal and administrative burdens on the government budget. 6.5 Original Components (as approved) 5 Part A: Capacity Building for Privatization, (US$25.5 million IDA allocated, 56.3 percent) 1. Technical Assistance. Strengthening the technical, legal, accounting and investment banking capacity of the Government of Uganda's (GOU's) departments and agencies responsible for privatization through the provision of technical advisory services for (i) the bidding and listing of the remaining public enterprises (PEs) on the GOU's stock exchange; and (ii) the development and carrying out of any employee share ownership schemes required by the applicable divestiture programs. 2. Retrenchment Program. The carrying out of a program designed to mitigate the social impact of labor retrenchment including (i) the funding of a portion of severance and other retrenchment costs of staff of the PEs; and (ii) the provision of technical advisory services to assist in the carrying out of the program, including counseling and retraining. 3. Communication Program for Privatization. The carrying out of a communication program designed to: (a) strengthen public confidence in the transparency of the GOU's divestiture procedures; and (b) convince the public of the GOU's commitment to: (i) the carrying out of its divestiture strategy, and (ii) the selection of a sound and appropriate method for the privatization, including; (A) initiatives by the GOU to explain the benefits of its privatization and divestiture program to specific targeted audiences; (B) provision by the GOU of relevant information to management and employees of PEs scheduled for privatization; (C) the development of a specially tailored employee relations program to explain, among other things, the benefits and protection which the said program can offer to the employees; and (D) the establishment of means through which stakeholders can express their opinions and concerns on privatization and divestiture issues and also provide feedback to the Project Coordination Unit (PCU) on stakeholders' perceptions on privatization and divestiture issues. 4. Communication Strategy for PUSRP. The designing and carrying out of the overall communications strategy for the project, including a determination of the costs associated with the production of promotional and information materials, through the provision of technical advisory services. 5. Environmental Liabilities. The preparation of comprehensive environmental audits and remediation plans for the PEs scheduled for privatization, including the determination of responsibility for pre-existing environmental liabilities and their clean-up, through the provision of technical advisory services. (b) The preparation and carrying out of de-commissioning plans for the PEs and assets scheduled for closure, through the provision of technical advisory services. (c) The preparation and monitoring of environmental management plans to bring privatized enterprises into compliance with environmental requirements mandated by Ugandan laws and regulations, through the provision of technical advisory services. Part B: Strengthening Financial Oversight of Public Enterprises, (US$1.9 million IDA allocated, 4.2 percent) The carrying out of financial oversight of PEs with a view to (i) improving financial discipline in the public enterprise sector and facilitating the settlement of cross arrears (A) between the GOU 6 and PEs and (B) among public enterprises; and (ii) reducing budgetary subsidies to the PEs, through the provision of technical advisory services and training. This includes the acquisition of equipment required for the financial oversight of PEs. Part C: Utility Sector Reform (US$9.0 million IDA allocated, 19.9 percent) The design and carrying out of reforms in the utility sector to improve the quality of, and increase access to, telecommunications, electricity, water and sewage, and rail transport services. The finalization of the design and operation of new sector structures in the telecommunications, electricity, rail transport and water and sewage services through the provision of technical advisory services, training and the selection of private sector buyers and concessionaires interested in the acquisition of public enterprises in the sectors referred to above. The preparation of proposals for regulatory reforms in the electricity, railways, and water and sanitation services through the provision of technical advisory services for (i) the establishment and building up of the capacity of independent regulators in the telecommunications, electricity, water and sewage, and transportation sectors; (ii) the training of staff; (iii) the conclusion of twinning arrangements with foreign regulators; and (iv) the acquisition of equipment for the relevant regulatory body. Part D: Project Management (US$8.9 million IDA allocated, 19.6 percent) The training of project staff in (i) privatization policies, procedures and regulation; and (ii) project planning, accounting, auditing, procurement and other project management skills, through the provision of technical advisory services. 6.6 Revised Components The components were not revised. 6.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) There were two amendments to the Development Credit Agreement. The first amendment in 2002 added a Special Account for severance payments, created a new category of expenditures for audits, and revised aggregate procurement amounts upwards for National Competitive Bidding and National Shopping. The second amendment in 2004 reallocated US$5.5 million to support the concessioning of the Uganda Electricity Distribution Company Ltd (UEDCL). Specific amendments included the addition of a new component to backstop a Letter of Credit Facility, and the extension of the Closing Date to March 31, 2013 for one component. This component will allow for disbursements of the Credit to the L/C issuing bank in the event of a repayment default by UEDCL. The project will be supervised by the Africa Region Energy Group after January 31, 2006 until the second closing date of March 31, 2013 and a supplemental ICR covering activities associated with UEDCL will be prepared within six months of Closing. Although there is an undisbursed and uncommitted amount of about US$10 million, an extension was not granted because Bank management considered the majority of the projects objectives met. 7 7. Key Factors Affecting Implementation and Outcomes 7.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) Project preparation was participatory and included representatives from relevant ministries, parliament, labor unions and the private sector. Project design consisted largely of adapting the structures of the previous project, the Enterprise Development Project (EDP), to the new context. Lessons learned in previous privatization projects were taken into account when designing the PUSRP. These were as follows: inadequate legal and institutional arrangements, ill-defined responsibilities and accountability, unclear divestiture procedures, lack of broad-based ownership of the program, lack of transparency in a number of transactions, failure by the executing agency to collect payments from buyers and the financial burden resulting from PE employment retrenchment costs. Government showed its commitment to reversing the negative experiences of EDP with the approval and adoption of a 2000 amendment to the Public Enterprises Reform and Divestiture (PERD) Statute of 1993, with IDA inputs. The amendment clarified the roles of various actors in the process and a divestiture procedures manual was approved, which includes provisions regarding the use of privatization proceeds. Also approved during project preparation was the Uganda Power Sector Restructuring and Privatization Strategy. Institutional arrangements were based on EDP but refined by the amendment to the PERD statue which was approved before PUSRP became effective. These arrangements were one of the major factors for ensuring transparency, accountability and efficiency, (see Annex 4). One of the risks identified was a reduction in government commitment to privatization which was judged to be modest, given the commitment to previous privatization projects and solid government involvement in preparation of PUSRP. The risk that there would be weak private sector response to privatization opportunities was also modest. The water and electricity sectors became less attractive world-wide during the project period, though there is little more that could have been done to mitigate these trends. The risk that government commitment to implement regulatory frameworks was rightly judged as substantial, as in the case of water and railways, independent, capable regulatory institutions were not established. Likewise, interference from political and vested interests were able to slow the privatization of a few companies and the water sector. The utility reforms that have taken place, though, were completed in close cooperation with line ministries and are unlikely to be reversed. The government-established guidelines on the use of privatization proceeds have helped to avoid a lack of progress due to insufficient funds for retrenchment. Social unrest has largely been limited, due to the establishment of a uniform policy on retrenchment benefits and swift payment of laid-off workers. The possible exception to this may be the railway workers strike in June 2005 due to the difference in payments given to Ugandan workers versus Kenyan workers. 7.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) 8 The market for international investments in the water sector changed so that the perception of risks associated with the sector in sub-Saharan Africa were deemed too high. In the electricity sector, the collapse of Enron led to the emergence of alternative investment opportunities which proved more attractive than Uganda, reducing competition in the bidding and the leverage of the GOU in negotiations. There were various sector and strategy reversals which delayed the divestiture program. For example, Parliament reclassified the Uganda Printing and Publishing Corporation and National Medical Stores after the divestiture processes had started. In other cases the GOU had agreed to specific divestiture plans but then changed the type of transaction, requiring renewed consensus building among stakeholders as well as additional fees for transaction advisors, most notably in the cases of the Dairy Corporation and Kinyara Sugar. Adding the $5.5 million for the UEDCL letter of credit to the disbursed amount of $31.8 million in IDA funds, yields an expenditure rate of 82 percent for the project at final closure in 2013. 7.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Relatively well-designed, detailed key performance indicators of output and outcome were identified at the beginning of the project and were regularly updated by the Project Coordinating Unit (PCU), (Annex 4). The Parastatal Monitoring Unit was proficient in the consistent gathering useful data and creation of new indicators as needed. The project was exceptionally good in terms of the quality and quantity of tracked indicators, which assisted in monitoring progress. 7.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable) During project preparation it was realized that some of the enterprises to be privatized involved environmentally sensitive activities (industrial manufacturing, mining, sugar production, utility services). In this regard, an environmental audit was carried out to categorize the task involved in each enterprise. Some of the enterprises needed full assessments and the PUSRP was deemed a category B (partial assessment) project. During project implementation, the environmental assessments were carried out for 11 enterprises and some enterprises needed decommissioning plans which were largely completed. However, the assessments and the decommissioning plans revealed that the task involved for some of the enterprises in the mining sector (Kasese, Kilembe and Lake Katwe) were beyond the capacity, resources and the mandate of PUSRP. Moreover, the National Environment Management Authority (NEMA) partially carried out the monitoring and compliance on the action plans due to frequent changes of staff in NEMA. Compliance with environmental safeguards was rated satisfactory throughout the project as most of the work was related to conducting the studies and the decommissioning plans. At the closing of the project, it was strongly suggested that the Ministry of Energy and Mining take over the responsibility of the mining enterprises as they were unprivatizable. For the first half of the project, there were problems with the quality of the procurement documents submitted to IDA. Slow procurement affected the implementation of some 9 components, including the training of regulators, environmental audits and decommissioning plans. Several steps were taken to address the issues. Greater communication between PCU and IDA was instituted with monthly clearance of pending issues. Processing began to be done from the Country Office instead of at Headquarters. The Procurement Advisor who helped with the original procurement plan also returned to assist with major procurements. Procurement planning improved considerably. An ex-post procurement review (PPR) conducted in May 2004 deemed the overall system satisfactory. During 2001 and 2002 disbursement was low due to procurement problems and government interference in some privatization transactions. The procurement problems were largely solved but government interference continued. This was a result of the mentioned changes in sectoral policy direction and frequent changes of privatization approaches on the part of the GOU. The slow start resulted in a difference between the disbursement plans and the actual amount disbursed throughout the project. However, disbursement picked up considerably in 2003 and continued to progress without major delays. 7.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) Moving the PU and PMU into the Ministry of Finance is envisioned in order to complete the remaining privatizations and utility sector reforms. In addition, there is a need for work on post- privatization issues (e.g. advisory services for the management of leases, concessions, and contract renegotiations), and on promoting additional public-private partnerships. The GOU has officially communicated that the agencies still have a mandate to conclude privatizations and public-private participation transactions for the next three years. The agencies are to be scaled down and absorbed into the Ministry of Finance, who will pay salaries (albeit, within their pay scales which are lower than current levels). There are concerns among staff about losing operational independence and about the differential in pay. The possibility of supporting the completion of remaining privatizations under the ongoing Private Sector Competitiveness Project II is currently being explored. Also under discussion is the transfer of responsibilities for implementation of decommissioning plans for mines into the new mining sector project. 8. Assessment of Outcomes 8.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) The objectives, design and implementation of the project are relevant to current country and Bank assistance policies. The GOU's Poverty Eradication Action Plan (PEAP) of 2004 focuses on objectives grouped under five pillars:1) Economic management, 2) Enhancing competitiveness, production and incomes, 3) Security, conflict resolution, and disaster management, 4) Governance and 5) Human resources development. The objectives of PUSRP contributed to the second pillar and the fourth. For the 2005 Uganda Joint Assistance Strategy (UJAS), the World Bank Group joined with six 10 other donors to harmonize their implementation of the PEAP, focusing on certain areas judged to be especially important for achieving the PEAP's overarching strategic results. These areas are: 1) strengthening the budget process and public sector management, 2) promoting private sector development and economic growth, 3) strengthening governance, 4) improving education and health outcomes, and 5) promoting the resolution of the conflict in the north and fostering the social and economic development of the region. Since the UJAS is largely consistent with the PEAP, it follows that the PUSRP supports the UJAS as well, specifically the first three areas. 8.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 4) The first PDO indicator is the growth of Gross Domestic Product (GDP). While the linkage of the PUSRP to growth is indirect and affected by a multitude of other factors, privatization and utility reform are considered important contributing factors, a target was set for 7 percent GDP growth a year. The average growth rate from 2001 to 2005 was maintained at a respectable average of 5.4 percent, although this represents somewhat of a decline from the 1996-2000 average rate of 6.6 percent annual growth. Private investment as a percentage of GDP is decidedly more directly linked to privatization which can bring in considerable foreign investment as well as domestic investment. The baseline figure was private investment at 12 percent of GDP in 1997 and the target was 17 percent in 2004. This target was indeed met, as in 2004 private investment was 16.9 percent of GDP (and increased to 17.3 percent in 2005) after a steady climb during the previous five years As discussed in further detail in Annex 4 on project indicators, during the years of the project, 2001 to 2006, subsidies for privatized commercial PEs (or those about to be privatized) increased overall, due to long-term loan interest and principal arrears which are being addressed through upcoming reforms (Annex 13, Table 6 and Figure 1). The project indicator targeted measurement of commercial PEs but subsidies for parastatals that will remain in the hands of the government, in particular infrastructure parastatals, have increased as well. This is mainly due to prices which do not fully cover costs, the indebtedness of the infrastructure PEs and their need for government guarantees. Also on the macroeconomic level, the Uganda Investment Authority confirms that the privatization program has been key to attracting foreign direct investment; the largest FDI projects involved privatizations. FDI has seen an upward trend in last several years, increasing 84 percent from US$133.4 million in 2001 to US$245.4 million in 2005. Access to electricity, telecommunications and water has improved dramatically over the past five years. Between 2001 and the first quarter of 2006, the number of electricity connections increased from 200,217 to 291,140. This implies that the coverage rate for the power sector was 8 percent by the beginning of 2006 far higher than the 3.8 percent rate observed in 1999 and also higher than the target rate of 7 percent by the end of project. Access to telecommunications services increased even more dramatically. There were about 6 fixed line and cellular subscribers for every 1,000 people in Uganda in 1999. By the end of 2005, there were about 56 subscribers for 11 every 1,000 people. This was more than twice as high as the target of 20 subscribers. Access to water also improved, with the total number of connections increasing from 66,104 in 2000/01 to 123,046 by 2004/05. In addition to improved access, service quality and sector efficiency also improved in the water and telecommunications sectors. Unaccounted-for-water was reduced from 43 percent in 2000/01 to 34 percent by 2004/05. The number of staff per 1,000 connections also fell from 16 in 2000/01 to 9 in 2004/05. Although data on faults per fixed line were not available after 1999 the fact that over 93 percent of subscribers were mobile subscribers makes this indicator less appropriate. Other indicators suggest that service quality has improved. For example, the percent of faults cleared within 24 hours increased from 36 percent in 1998 to 100 percent by 2004. In contrast, service quality has improved less significantly in the power sector. Electricity losses (i.e., the difference between power generated and power sold), which were estimated to be about 34 percent of power generated in 1999, had not improved dramatically by 2006. Although the regulator and UMEME, the private operator, disagreed on the extent of the problem, there was little indication of a significant improvement. According to UMEME, losses were about 35-36 percent by the end of 2005. Collection efficiency (amount collected over amount billed) has improved more significantly. In 2001, collection efficiency was about 61 percent. This had increased to 81 percent in 2004 and to 93 percent by the first quarter of 2006. Despite the reform, the power sector has fallen into an acute crisis in late 2005 and early 2006. Falling water levels in Lake Victoria, due to a regional drought, and the over-subtraction of water have led to serious problems with load shedding. Current generation capacity has been reduced to only about 195MW; this may fall further unless water levels improve. Current capacity is only about half of peak demand (375-385MW). The gap has led to daily outages in most urban areas. This, in turn, is likely to seriously affect economic growth in the near term. In May 2005, the Bank of Uganda reduced its forecast for GDP growth in 2006 from 6 percent to 5 percent. The recent crisis in the power sector is due to external circumstances and would have occurred even in the absence of reform. The drop in generation capacity is primarily due to the drought which has led to water levels dropping precipitously in Lake Victoria and over subtraction of water. If the reform had successfully resulted in reduced losses, for example, to the levels envisioned at the time of reform (i.e., about 25 percent) this would have had a small impact on effective capacity. Because the shortage is so severe, even a small increase would have been important. The modest effect of reform on losses can be attributed to the delays in attracting an international operator into the sector (see Annex 4). The private operator, UMEME, only became responsible for distribution in March 2005, meaning that it has had little time to reduce losses. Although, as discussed in Annex 4, water sector reforms were less comprehensive than initially planned, the performance contracts between the Government of Uganda and the National Water and Sewerage Company, which were negotiated with substantial input from the Utility Reform Unit, have led to reforms that have resulted in improved sector performance. Funding for significant retrenchment in National Water and Sewage Company (NWSC) from the project has also contributed to improved efficiency in the sector. 12 In addition to the Project Development Objective indicators discussed above, indicators which have become best practice for privatization evaluations are also presented. A total of Ush 44.7 billion (US$25 million) have been collected from buyers in privatization transactions and there are no payment arrears. In fact, arrears from the transactions of the previous project were reduced from Ush 21 billion (US$12.3 million) to Ush 1.7 billion (US$1 million) for an arrear reduction of over 90 percent. A Privatization Impact study conducted in 2005 with a sample of 19 firms indicated that not all new owners and operators of privatized enterprises seem to have improved profitability, efficiency and productivity. The most profitable privatized enterprises are among the banking and telecom sectors. Improvements are most likely needed in aspects of the investment climate to bring about the desired increased productivity in privatized firms (e.g. lack of long-term finance, poor infrastructure, high taxes and lack of a qualified labor force). The same 2005 Privatization Impact study showed that only around half of the enterprises privatized have been paying taxes regularly. The amount of taxes paid by privatized firms increased only 4.4 percent from 1999/00 to 2002/03. Despite this, privatized enterprises have been paying the bulk of all taxes paid to the Uganda Revenue Authority, ranging from 74 percent to 91 percent. The project made a substantial impact in the development of the Uganda Securities Exchange. The privatizations in this project were the sole supplier of local equity products to the capital market which has raised US$18 million as gross proceeds for the privatization program through Initial Public Offers (IPOs) which have created over 10,000 new shareholders. 8.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) The economic costs and benefits of the program were calculated using the appraisal methodology for components of the project related to severance payments and re-deployment support for retrenched workers. This component accounted for 63 percent of total project costs (including both IDA and government contributions). The NPV of other components was not calculated because the details of the original methodology used to calculate the NPV was not available. Further, data needed to calculate the NPV for these components using alternative methodologies were not available. The net present value of this component is estimated at about US$30 million for a 12 percent discount rate, and its economic rate of return is estimated at 47 percent. This was higher than the expected NPV calculated at the time of appraisal (see Annex 5). The main reason for the difference was that salaries of retrenched workers in the private sector were higher than expected at the time of appraisal. 8.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs, and efficiency) Rating: Satisfactory 13 The overall outcome rating is Satisfactory due to significant impact of the project on the economy through privatizations of commercial enterprises contributing to average GDP growth of 5.4 percent during the project, private investment increased to 17 percent of GDP, an 84 percent increase in FDI, increased private participation in water and electricity, improved access, service quality and sector efficiency in the water and telecommunications sectors. For example, the electricity coverage rate rose to 8 percent from 3 percent and unaccounted-for-water was reduced from 43 percent to 34 percent. These improvements have also contributed to increased investment and economic growth. It should be noted, however, that not all firms targeted were privatized, and 2 of 4 regulatory agencies were not established. The NPV calculated for the most important components was higher than the expected NPV for these same components at the time of appraisal, (using the same methodology). 8.5 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development A draft retrenchee tracer study supported by PUSRP notes that about 75 percent of the 400 retrenched workers in the sample were able to reinsert themselves into the economy. 25 percent of retrenchees are re-employed in other organizations, another 25 percent receive regular income from farming and another 24 percent receive a regular income from self-employment. 60 percent of the sample felt that the termination payment process was efficient and acceptable, an indication of the effectiveness of the retrenchment policy introduced in 2001. Another 56 percent of the sample felt that they had used their payment wisely, a possible sign of the impact of the training and counseling conducted before retrenchment. (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) Within the framework established by the PERD amendment, the project significantly strengthened the implementing agencies' capacity to undertake their mandates by funding staff training and additional studies to increase base knowledge feeding into policy decisions. The Privatization Unit has built significant capacity which it is continuing to utilize while completing the remaining transactions. The Parastatal Monitoring Unit has built a database of information on the health of PEs to which it continues to add. The PMU monitors whether or not PEs are complying with detailed requirements on audited accounts, board of directors, budget and operating plans, reports every six months and internal audits. By law, the DRIC is still mandated to approve the privatization approach used in each transaction and mechanisms to maintain transparency are still in place. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) The environmental assessments and decommissioning plans uncovered problems which were much worse than imagined at the time of appraisal. The actions required to resolve the issues were beyond the scope and resources of the project. 14 8.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) N/A 9. Assessment of Risk to Development Outcome Rating: Moderate Privatizations are by nature generally irreversible. Public-private partnerships are as well but perhaps to a lesser extent. The reforms are robust though there are sector-specific problems that may affect the quality of and access to services. For example, UMEME, the electricity distribution concessionaire, is nearly at the end of its 18 month trial period and must decide in the next two months whether to stay long term or leave. Given the difficulties in electricity generation, it is not clear which direction the company will take. However, the capacity is there to repeat the process that brought in UMEME. The electricity crisis, increased fuel prices from thermal generation and limited generation overall mean limited revenues and a less attractive deal for potential concessionaires. In addition, it is difficult for the public to discern the effects of the current crisis in generation from the unbundling and private sector participation in the sector. This unfortunate timing may reduce public support for private sector participation in electricity. Moving the PU/URU/PMU into Ministry of Finance is envisioned in order to deal with post- privatization issues and promote public-private partnerships. The GOU has officially communicated that the agencies still have a mandate to conclude privatizations and public-private participation transactions for the next three years. There are concerns about losing operational independence and the differential in pay. However, the integration into MOF will likely take place within the next three years. Parliamentary and Presidential elections have just been held and the cabinet has been dissolved. President Museveni, who was just re-elected has named a new Minister of Privatization. 10. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues) 10.1 Bank (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Satisfactory The design of the project grew out of a similar previous project, EDP. The lessons learned during that project were effectively taken into account. The adaptation of the previous project was truly a cooperative effort between the Bank, Borrower and the private sector in consultations with line ministries and labor unions. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Satisfactory 15 The continuity of staff in the Bank played an important role in eventually attaining the project achievements. There were only three task team leaders, two of whom were involved from project preparation, which helped continuity of the process. The last TTL was based in the region since 2004. There were a total of nine supervision missions for a project of five years, close to the usual amount of two per year. The quality of project status reporting was at an acceptable level during the first two years and improved during the last three years. The Mid Term Review was over one year later than originally scheduled due to delays in completing critical studies to be the basis of discussions and the availability of key officials and stakeholders. The need for an extension was not established early enough to allow for proper arrangements. The subject was discussed at the Mid Term Review, which was completed when there were only six months left in the project. Although the majority of activities were addressed, some activities were left undone. These were public-private participation in water and rail, some privatization transactions, a reconsideration of the environmental liability issues, transition of the project unit to MFPED, and the establishment and consolidation of water and transport regulatory agencies. The closure of the project also made sense because privatization has become an outdated strategy and has been replaced by Public-Private Participation in infrastructure. It was felt that an emphasis should be given to the new strategy in a new context. In addition, IDA considered the interference of the government in privatization an increasing trend. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The project was adequately designed and supervised to engender significant benefits. 10.2 Borrower (a) Government Performance Rating: Moderately Satisfactory The Borrower was thoroughly engaged in the project design. A special task force created in the GOU included private sector representatives and was active during the design phase. The Government did interfere in some transactions by reversing the privatization strategy or holding up approval of sector strategies. However, the government was largely supportive of the work, providing significant funds for retrenchments and eventually providing most approvals. (b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory Implementing Agency Performance 1.Project Coordinating Unit Ministry of Finance, Planning and Economic There was excellent capacity and continuity among the staff of the PCU. Development Performance with respect to accounting and auditing was satisfactory. Audit reports were carried out on a timely basis and in accordance with international 16 auditing standards. Procurement and disbursement functions were carried in a satisfactory manner. The systems were singled out as best practice and other country teams visited the PCU to learn from them. Reporting and monitoring of project indicators were generally regular. 2. Privatization Unit The privatization unit should be commended for the transparency of their work in a difficult environment. 3. Public Enterprise Monitoring Unit Their consistency in data collection and analysis and timely reporting of results were notable. 4. Utility Reform Unit Realized and acted upon the importance of gaining consensus in parliament and cabinet as well as line ministries, and the importance of informal relations in moving reforms ahead. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory The implementing agencies performed well and the government was generally committed despite interference with some transactions which slowed down the process. 11. Lessons Learned (both project-specific and of wide general application) The following lessons can be drawn from project experience: · A proper legal environment is essential for forcing procedural discipline in privatization transactions. The PERD Statute and the Divestiture Procedures Manual were instrumental in maintaining transparency and competitiveness. Strong institutions, robust laws, clear guidelines, parliamentary and ministerial champions are all needed to successfully avert attempts at political interference. · The monitoring and evaluation system was well developed and therefore was effective in tracking implementation progress. · The environmental assessments and decommissioning plans led to unexpected results which were beyond the scope of the project. Earlier, more detailed pre-assessments may have helped to avoid this situation. · Although there was a full time coordinator for the environmental subcomponent, NEMA has indicated that the presence of an environmental specialist in the PU would have improved communication between them considerably and perhaps more could have been achieved. · Policy consensus is essential before major reform programs are implemented to ensure success and minimize reversals. · Not overselling the benefits of privatization and openly addressing the inevitable negative aspects 17 helps dissipate fears and create realistic expectations among the public. The communication campaign helped to avoid some of the public outcry regarding privatization programs which has occurred in other sub-Saharan countries. According to exit interviews, the counseling and training for retrenchees should be done early in the privatization process to give individuals a chance to absorb the ideas and start to prepare, both financially and mentally. Shorter review courses could be done just before the actual layoffs to refresh the lessons and ideas. 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The borrower reviewed the ICR and was satisfied with the document. (b) Cofinanciers N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) The National Organization of Trade Unions, an umbrella organization, has expressed disagreement with the projects assessment of the labor retrenchment program. Their position, paraphrased, is that not all workers have been paid their benefits, that the 25 percent of the sample retrenches in our study that do not have a regular income should have also been taken into account, and essentially that the privatization program has done nothing but harm to the situation of workers in Uganda. In response, the reference to unpaid staff actually applied to privatizations under EDP not PUSRP and this problem was addressed in the designed of PUSRP. Under PUSPR, there are less than 10 cases where workers were not satisfied with the amount of the packages they were given. These cases have gone to court and the payments are indeed suspended pending final decision by the judge. Also, in comparison with privatization projects in other African countries, a rate of 75 percent of retrenched employees having found income is quite an achievement. It is true that in the short term, net unemployment increases with privatization. The long term effects on the economy, (efficiency of services, productivity of firms, and efficient allocation of resources) outweigh the short term consequences for individuals, as difficult as they may be. 18 Annex 1. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project's development objective is to improve the quality, coverage and economic efficiency of commercial and utility services, through privatization, private participation in infrastructure (PPI) and an improved regulatory framework. This objective will be achieved by a higher level of private investment, and better quality and access of services in telecommunication, water, electricity and transport sectors divestiture and improved efficiency of remaining public enterprises (PEs); and strengthening of the regulatory framework and institutions in relevant sectors. Revised Project Development Objectives (as approved by original approving authority) N/A (a) PDO Indicator(s) Original Target Values Formally Actual Value Achieved Indicator Baseline Revised Value (from approval at Completion or documents) Target Values Target Years Indicator 1 : 1. Average Annual GDP Growth Value 6.6 % (1996- (quantitative or 7 % (2001-2005) 5.4 % for 2001-2005 2000) Qualitative) Date achieved Comments (incl. % achievement) Indicator 2 : 2. Private Investment to GDP ratio Value (quantitative or 12 % (1997) 17 % (2004) 16.9 % (2004) Qualitative) Date achieved Comments (incl. % achievement) Indicator 3 : 3. Reduction of subsidies to PE Sector Zero subsidies to PE sector. -20.3% in 2001/02 +110.9% US$ 147. 3 Value Reductions by: -10% in year in 2002/2003 +351% in million as (quantitative or 2001 -20% in year 2002 -50% 2003/2004 +166.8% in subsidies to PE Qualitative) in year 2003 -100% by June 2004/2005 -29% in sector 20 05 2005/2006 19 Date achieved Comments Commercial and Divested PEs are only measured here. The percentages are in relation to (incl. % the base year of 2000. The subsidies increased but did not exceed pre-project rates which achievement) averaged Ush.130.5 m. (1996- 2000). Indicator 4 : 4. Coverage Rate (% of population with grid-based connections) in Electricity Value (quantitative or 3.9 % (1999) 7 % (2005) 8 % (1st Quarter 2006) Qualitative) Date achieved Comments (incl. % achievement) Indicator 5 : 5. Losses in power sector (units billed as % of units produced) Value (quantitative or 34 % (1999) 25 % (June 2005) 35-36 % (2005) Qualitative) Date achieved Comments Some disagreement on extent of losses exists with the private operator claiming higher (incl. % baseline numbers at contract signing than the regulator. However, all estimates suggest achievement) little improvement. Indicator 6 : 6. Telecommunication Lines (fixed and mobile) per 1000 people. Value (quantitative or 6 (1999) 20 (June 2005) 56 (2004) Qualitative) Date achieved Comments (incl. % achievement) Indicator 7 : 7. Telecommunications faults per fixed line Value (quantitative or 0.84 (1999) 0.4 see comments Qualitative) Date achieved Comments Indicator not collected by regulator or operators. Note that this measure is based upon (incl. % fixed lines. Therefore, it is less useful now than in the past since over 93 % of lines in achievement) Uganda are mobile. Indicator 8 : 8. Railways - Traffic Volume (tonnes hauled/$m GDP) Value 134.4 (2003) 10.4 (2004) (quantitative or 134 (1999) 150 (June 2005) see comments Qualitative) 20 Date achieved Comments (incl. % More recent data not available. achievement) (b) Intermediate Outcome Indicator(s) Baseli Original Target Values Formally Indicator ne (from approval Revised Actual Value Achieved at Value documents) Target Completion or Target Years Values Indicator 1 : 1. Privatization of PEs with signed sales contracts and payment collected. Value 19 by mid-term review. 24 privatized, 42 PEs to be privatized. 15 by (quantitative or 6 liquidated, 5 in progress (January mid-term review. (June 2005) Qualitative) 2006) Date achieved Comments (incl. % achievement) 2. End of Services benefits for retrenched workers paid in accordance with GOU policy Indicator 2 : for retrenchment and in a timely fashion from the Redundancy Accounts and Project funds. Value 20,845 employees were paid $70 (quantitative or na na million. Qualitative) Date achieved Comments (incl. % All benefits were paid to retrenched workers in a timely fashion. achievement) Indicator 3 : 3. Environmental Audits carried out for all PEs before completion of each transaction. 10 PEs - full audits 1 PE - 10 PEs - full audits 1 PE - partial audit partial audit 5 PEs - Value 4 of 5 PEs - decommissioning plans 4 decommissioning plans 4 PEs (quantitative or - PEs - preparation of monitoring proto - preparation of monitoring Qualitative) cols-to be replaced by an protocols with monitorable Environmental Management Review indicators Date achieved Comments (incl. % achievement) Indicator 4 : 4.Communications Programs 21 Value Four Communications (quantitative or 2005 - yes Programs Qualitative) Date achieved Comments (incl. % Annually achievement) Indicator 5 : 5. Adoption of Government's Sector Policy Telecommunications - mid- Telecommunications - End-2001; Value term review; Power - mid- Power - End-2001; Water and (quantitative or term review; Water and Sewerage - October 2003; Rail Qualitative) Sewerage - June 30, 2005; Transport - August 2005 Rail transport - June 30, 2005 Date achieved 08/30/2005 Comments (incl. % achievement) 6. Regulator has in-house technical capacity to manage the frequency spectrum by end- Indicator 6 : 2002 Value (quantitative or Completed End-2002 Completed Mid-Term Review Qualitative) Date achieved Comments (incl. % achievement) Indicator 7 : 7. Development of new electricity sector structure Value (quantitative or Completed End-2001 Completed March 2001 Qualitative) Date achieved Comments (incl. % achievement) Indicator 8 : 8. Private Sector Participation in Electricity Distribution Value (quantitative or Completed End 2001 Completed April 2005 Qualitative) Date achieved Comments 22 (incl. % achievement) Indicator 9 : 9. Private Sector Participation in Electricity Generation Value (quantitative or Completed End 2002 Completed April 2003 Qualitative) Date achieved Comments (incl. % achievement) Indicator 10 : 10. Electricity Regulator in place and operational Value (quantitative or In Place End-2001 In place April 2000 Qualitative) Date achieved Comments (incl. % achievement) 11. Framework for Privatization of railway transportation services completed and Indicator 11 : adopted by GOU Value Completed and Adopted End- (quantitative or Completed and Adopted August 2004 2001 Qualitative) Date achieved Comments (incl. % achievement) Indicator 12 : 12. PSP in rail transport Value (quantitative or Completed End 2003 Completed April 2006 Qualitative) Date achieved 12/31/2003 Comments (incl. % achievement) Indicator 13 : 13. Sectoral regulatory agency in transportation established and operational Value (quantitative or Completed Not Completed May 2006 Qualitative) Date achieved 06/30/2005 23 Comments (incl. % achievement) Framework for privatization of water and sewerage services completed and adopted by Indicator 14 : GOU Value Completed and Adopted June Completed and Adopted October (quantitative or 2001 2003 Qualitative) Date achieved Comments (incl. % achievement) Indicator 15 : 15. PSP and operation of some existing assets in water and sewerage sector Not Completed for main urban water Value utility, NWSC. Completed for 50 of (quantitative or Completed 73 small towns. Management contract Qualitative) for Kampala between 2002 and 2004 (not extended). April 2006. Date achieved 12/31/2003 Comments (incl. % achievement) Indicator 16 : 16. Sectoral regulatory agency in water and sewerage established and operational Value (quantitative or Completed Not Completed May 2006 Qualitative) Date achieved 06/30/2005 Comments (incl. % achievement) 17. PMU installed and operates management information system to monitor the financial Indicator 17 : performance of non-commercial PEs Value (quantitative or Complete Complete Qualitative) Date achieved 01/31/2006 01/31/2006 Comments (incl. % achievement) Indicator 18 : 18. Settlement of cross-arrears between PEs and GOU 24 Value (quantitative or Complete Not Complete Qualitative) Date achieved 01/31/2006 01/31/2006 Comments The level of debt verification by GOU internal auditors was low. Information and (incl. % awareness have increased and pre-pay mechanisms were established to prevent adding to achievement) the debt. Indicator 19 : 19. Transparency of privatization transaction is maintained throughout Value (quantitative or Complete Qualitative) Date achieved 01/31/2006 Comments Transparency was only questioned in two privatizations which in the end were not (incl. % carried out. achievement) Indicator 20 : 20. Timely reporting on work program and auditing of accounts Value (quantitative or Complete Qualitative) Date achieved 01/31/2006 Comments Bi-annual project progress reports were produced. Audits were generally submitted on (incl. % time and were unqualified. achievement) Indicator 21 : 21. Procurement process is efficient, timely and competitive throughout project Value (quantitative or Complete Qualitative) Date achieved 01/31/2006 Comments (incl. % Initial slow procurement was resolved. achievement) 25 Annex 2. Restructuring (if any) Restructuring Board ISR Ratings at Amount Disbursed at Reason for Date(s) Approved Restructuring Restructuring in US$ Restructuring & PDO Change DO IP Millions Key Changes Made 12/14/2004 N S S 20.53 see section 6.7 26 Annex 3. Project Costs and Financing (a) Project Cost by Component (in US$ Millions equivalent) Components Appraisal Estimate Actual/Latest Estimate Percentage of (US$ Millions) (US$ Millions) Appraisal Capacity Building for 25.5 16.4 64.3 Privatization Strengthening of PE 1.9 1.6 84.2 Financial Utility Sector Reform 9.0 5.4 60.0 Project Management 8.9 8.4 94.4 Total Baseline Cost 45.3 31.8 Physical Contingencies 0.0 0.0 0.0 Price Contingencies 2.3 0.0 0.0 Total Project Costs 47.6 31.8 Project Preparation 0.9 0.0 0.0 Facility (PPF) Front-end fee IBRD 0.0 0.0 0.0 Total Financing 48.5 31.8 Required (b) Financing Source of Type of Appraisal Estimate Actual/Latest Estimate Percentage of Funds Cofinancing (US$ Millions) (US$ Millions) Appraisal IDA 45.3 31.8 70.2 (c) Disbursement Profile 27 Annex 4. Outputs by Component Part A. Capacity Building for Privatization (US$ 16.4, 51.6 percent - Actual) The rating for this component is Satisfactory because the majority of the work was completed with extraordinary attention to maintaining transparency. Communications were especially effective with Parliament though there was no resolution of the lack of progress in the environmental monitoring sub-component of the project. 1. Technical Assistance. This sub-component included the strengthening the technical, legal, accounting and investment banking capacity of the Government of Uganda's (GOU's) departments and agencies responsible for privatization through the provision of technical advisory services for (i) the bidding and listing of the remaining public enterprises (PEs) on the GOU s stock exchange; and (ii) the development and carrying out of any employee share ownership schemes required by the applicable divestiture programs. Institutional arrangements were based on the previous project but were adjusted by amendment to the PERD statute. The amendment defined the Minister of State for Privatization in the Ministry of Finance, Planning and Economic Development (MFPED) as the leader and the responsible party for implementation of the privatization process. This Minister was responsible for overall project implementation and coordination and was vested with the powers to determine, formulate and execute detailed plans for the reform of any PE in consultation with the line Minister. The Minister of Privatization was advised by the Divestiture and Reform Implementation Committee, DRIC, a policy advisory board established by the PERD Statue comprising representatives of key stakeholders including the private sector. DRIC is vested with the power to approve the commercial terms of any divestiture. This approval is sought in each case by the Minister of Privatization. Informal mechanisms were established to ensure coordination among all parties. Technical Committees and Working Groups were established for each utility. The Minister was supported by the PCU which carried out the technical work and coordinated the implementation of the privatizations and sector reforms. The PCU was comprised of the Privatization Unit and the Utility Reform Unit. Parastatal financial oversight was implemented by the Parastatal Monitoring Unit under the MFPED. Twenty-four PEs have been privatized and 6 PEs liquidated under the project following the Divestiture Procedures Manual and Guidelines put in place in May 1999 (Annex 1). These 30 firms account for 71.4 percent of the 42 firms originally envisioned for privatization. The difference between achievement and target can largely be attributed to the slow start in the project and the transaction strategy reversals of the government. Payments for purchased PEs have been made in lump sum amounts upon signature of sale contract/agreement, so no arrears were accumulated. The owners of privatized companies differ in their assessment of post-privatization performance, but generally praise the Privatization Unit's adherence to procedure, transparency and competence and the quality of the legal and investment banking advisors brought in to assist in transactions. The PERD privatization procedure laws, procedure manual, and the 28 Divestiture and Reform Implementation Committee (DRIC) were instrumental in maintaining the transparency. There were few instances of blatant attempts by the GOU to defy the established divestiture procedures. There was public outcry and these attempts were successfully fought by the PU, (e.g. Kinyara Sugar and Dairy Corporation). It seems that the lessons learned in the earlier privatization project, Enterprise Development Project were integrated into the program and legal institutions in an effective way. 2. Retrenchment Program. This sub-component included the carrying out of a program designed to mitigate the social impact of labor retrenchment including (i) the funding of a portion of severance and other retrenchment costs of staff of the PEs; and (ii) the provision of technical advisory services to assist in the carrying out of the program, including counseling and retraining. Based on previous experiences in the privatization program and on work carried out during project preparation, the key concerns of workers during privatization are information about retrenchment as possible in the process and payment of severance packages in a timely manner. The GOU designed and adopted a policy for retrenchment of workers in 2001 which includes criteria for retrenchment in a given enterprise, selection criteria for retrenchment of specific workers, composition of several package and safety net measures including early notification and counseling and retraining on demand. Funds for retrenchment are sourced first from company resources. If that does not suffice, privatization proceeds are used and the last resort is IDA funding. IDA partially funded the retrenchment in the four largest PEs, Uganda Post and Telecommunication Company (UPTC), Uganda Electricity Board (UEB), Uganda Rail Company (URC) and the National Water and Sewerage Company (NWSC). The retrenchment policy ensured that payments were made as soon as the retrenches were named and the amounts calculated. The Terminal Benefits paid during PUSRP total Ush 70 billion broken down into Ush 55 billion from the GOU and Ush 15 billion from IDA, (or US$9,071,523), paid to 20,845 employees (Annex 13, Table 4). The total number of employees benefiting from training/counseling under PUSRP is 2,152 (Annex 13, Table 5). The PUSRP Retrenchee Tracer study showed that retrenchment is perceived to have a less negative impact after the social safety net measures were introduced at the beginning of the project. The study also showed that early pre-retrenchment counseling is beneficial in preparing workers and has contributed substantially to limiting the negative impact on their lives. According to exit interviews, the counseling and training for retrenchees should be done early in the privatization process to give them a chance to absorb the ideas and start to prepare, both financially and mentally. 3. Communication Program for Privatization. This sub-component included the carrying out of a communication program designed to: (a) strengthen public confidence in the transparency of the GOU s divestiture procedures; and (b) convince the public of the GOU s commitment to: (i) the carrying out of its divestiture strategy, and (ii) the selection of a sound and appropriate method for the privatization. Specific actions 29 included (A) initiatives by the GOU to explain the benefits of its privatization and divestiture program to specific targeted audiences; (B) provision by the GOU of relevant information to management and employees of PEs scheduled for privatization; (C) the development of a specially tailored employee relations program to explain, among other things, the benefits and protection which the said program can offer to the employees; and (D) the establishment of means through which stakeholders can express their opinions and concerns on privatization and divestiture issues and also provide feedback to the Project Coordination Unit (PCU) on stakeholders perceptions on privatization and divestiture issues. The PU prepared a communication plan and employed a full-time communications officer, reporting to the head of the PU. Privatization Open Day for public discussion of concerns were held in October 2004 and 2005, as were pre-divestiture employee counseling programs, quarterly press briefings and media training for reporters. The public relations program seems to have made a positive impact on public opinion of privatization. This is not to say that there are now many vocal advocates of privatization. Rather, there seems to be a more of a sober understanding of the costs and benefits and a reduction in hostile opposition. In addition, a new Parliament was put in place just after the project became effective and IDA agreed with PCU to undertake specific measures to sensitize and build consensus among Parliamentarians on privatization. The education and engagement of parliamentarians, though difficult at times, proved effective in gaining essential champions of the project within Parliament. The bi-annual reports prepared specifically for Parliament, study tours, workshops, committee meetings and informal relationships brought about regular information exchange and addressing of concerns. This atmosphere facilitated the general progress of the majority of the transactions without major conflicts. 4. Environmental Liabilities. This sub-component included (a) the preparation of comprehensive environmental audits and remediation plans for the PEs scheduled for privatization, including the determination of responsibility for pre-existing environmental liabilities and their clean-up, through the provision of technical advisory services, (b) The preparation and carrying out of de-commissioning plans for the PEs and assets scheduled for closure, through the provision of technical advisory services, and (c) The preparation and monitoring of environmental management plans to bring privatized enterprises into compliance with environmental requirements mandated by Ugandan laws and regulations, through the provision of technical advisory services. During preparation, an environmental pre-audit was conducted and identified the need for full audits and remediation plans in 10 PEs prior to their privatization plus one partial audit and detailed de-commissioning plans for five PEs. PUSRP was to fund the costs of preparing the audits and preparation and implementation of the de-commissioning plans. Costs of monitoring compliance after privatization were also to be partially funded by IDA. PUSPR completed all 10 of the full environmental audits recommended by the environmental pre-audit. The one partial audit was also completed as were 4 of the 5 30 decommissioning plans, (one decommissioning plan remained incomplete only because the company was liquidated). All of these audits and plans were subsequently approved by the National Environmental Management Authority (NEMA). Most assessments were completed before privatization as planned, but three were done post-privatization because they were privatized early in the project and the audits were not completed until 2003 or later. It was realized by the Mid-Term Review that the identified scope of work on decommissioning was beyond the capacity in PUSRP and that lack of capacity at NEMA was to preclude their assumption of a role in monitoring compliance with recommendations. NEMA has advised that the responsibility for monitoring and managing mitigation rests with PUSRP. It was agreed with IDA that Lake Katwe Salt Company could be divested despite the remaining environmental issues with the condition that the buyer would implement the necessary mitigation measures identified in the environmental audit. IDA is considering transferring Kilembe Mines to the Mining Project for resolution of decommissioning issues. Part B: Strengthening Financial Oversight of Public Enterprises (US$1.6 million, 5.0 percent) The rating for this component is Satisfactory because the monitoring work was expertly conducted. However, the aim of reducing subsidies and settling utility arrears was not achieved by project end due to slow government action. This component included the carrying out of financial oversight of PEs with a view to (i) improving financial discipline in the public enterprise sector and facilitating the settlement of cross arrears (A) between the GOU and PEs and (B) among public enterprises; and (ii) reducing budgetary subsidies to the PEs, through the provision of technical advisory services and training. This includes the acquisition of equipment required for the financial oversight of PEs. Financial oversight of compliance with statutory requirements by public enterprises continues to be monitored by the Parastatal Monitoring Unit (PMU) to improve performance and corporate governance. Using basic indicators for measuring compliance, such as the existence of a board of directors, budgets and operating plans and audited accounts, the PMU analysis shows that average compliance among PEs improved from 12 percent to 54 percent during the project period. From 1999/00 to 2004/03 the result of this compliance is evidenced by an increase in net worth of Ush. 278 billion and in profitability of Ush. 7.5 billion. The financial oversight has also included the restructuring of the following companies: Uganda Seeds Ltd, Mandela National Stadium, National Medical Stores, Kilembe Mines Ltd and Uganda Post Ltd. Under its mandate as secretariat to the Debt Settlement Committee (DSC), the PMU coordinates the debt settlement of PEs. The GOU ministries and departments agree to their respective positions on each debt, which are then verified by the GOU internal auditors. The level of verification has remained low during the project period, below 40 31 percent, resulting in an inability to utilize the results of the DSC activities. Therefore, more information on debts has been produced and awareness of the problem has been increased but this has not translated into improved GOU payments. The unverified utility arrears for the 3 major utilities (electricity distribution, telecommunications and water) were Ush 27.9 billion at project-end. Pre-pay mechanisms are now in place and are working well to ensure that no new arrears are accumulated in telecommunications and water. Debt-equity swaps have been proposed to deal with arrears in electricity and telecommunications. In 2000, total subsidies to commercial public enterprises (and divested commercial enterprises) dropped sharply by 87% to Ush 0.23 billion as a result of the restructuring of long-term debt to the Telecom and Sugar sectors as part of their divestiture process, (Annex 13, Table 6 and Figure 1). Thereafter, subsidies have increased contrary to GOU targets. The PMU identification of this trend and subsequent analysis showed that the increase is mainly due to the continued accumulation of un-serviced long-term loan interest and principal arrears. This scrutiny of the subsidies led to the commissioning of the recently completed debt restructuring study financed by the project. This study's recommendations, awaiting approval in Parliament, aim to ameliorate the debt position of PEs which is undermining the government's policy of phasing out indirect subsidies. The project indicator singled out commercial public enterprises, but it should be noted that infrastructure PE subsidies have increased as well. Part C: Utility Sector Reform (US$5.4 million, 17.0 percent) The project s development objective in the infrastructure sector is to improve the quality, coverage and economic efficiency of utility services, through privatization, private participation in infrastructure (PPI) and an improved regulatory framework. To achieve this, the planned steps included: (i) establishing and making operational independent regulators in the power, water and transportation sectors; (ii) adopting sector policies in the telecommunications, electricity, water and sewerage and rail transport sectors; (iii) developing frequency management system in the telecommunications sector; (iv) developing a new electricity sector structure and introducing private sector participation in electricity distribution and generation; (v) completing and adopting a framework for privatization and introducing private sector participation in existing assets in the water and sewerage sectors; and (vi) completing and adopting a framework for privatization of railway transport services and introducing private sector participation in Uganda Railways Corporation (URC). In the railway sector, the project supported a reform that was considerably more ambitious than had been originally planned. In July 2003, the Governments of Kenya and Uganda agreed on the structure of a joint concession, including agreeing on a single transaction, similar regulatory frameworks and contracts, and a single operator for both countries. The joint concession was the preferred sale method given that the railway system in Kenya yields ocean shipping access, improving the attractiveness of the package. Because the Government of Kenya had made less progress in preparing for the concession transaction, this led to some delays. By December 2003, the Joint Steering 32 Committee had harmonized the two strategies and drafted a Memorandum of Understanding and a joint strategy. The MOU was signed by both Ministers of Transport in August 2004. The pre-qualification process started in September 2004 and bids were received in September 2005. After delays due to court procedures in Uganda, the contract was signed in April 2006. The handover is expected to take place in August 2006. A draft bill that would include provisions to set up an independent regulator was under consideration at the cabinet level in mid-2006. Much of the reform in the telecommunications sector had been completed before the PUSRP became operational. In particular, the regulator, Uganda Communications Commission (UCC), the second network operator and the third cellular operator had all started operating before the project and the incumbent operator had been partially (51 percent) privatized by May 2000. The PUSRP provided for support for capacity building (e.g., training) for UCC to ensure that the reforms would be sustained. Although funds were also available to help UCC procure equipment for spectrum monitoring, UCC financed this purchase using alternate funds. There was also significant support for retrenchment from the GOU and IDA. In the power sector, the PUSRP supported a bold and far-reaching reform that was consistent with the output indicators envisioned at the beginning of the project. The strategy for reform and privatization of the electricity sector was approved by the Government of Uganda before the project became operational. The independent regulator, the Electricity Regulatory Authority (ERA), was put in place in April 2000, when its commissioners were appointed. The assets of the vertically-integrated publicly- owned monopoly, the Uganda Electricity Board (UEB), were transferred to separate limited liability companies for generation, transmission, and distribution in March 2001. After some delays due to the initial timing of the issuing of tender documents in September 2001, a 20-year concession contract for existing generation assets were signed between ESKOM Uganda Ltd, a wholly-owned subsidiary of ESKOM Enterprises SA, the state-owned holding company for generation assets (UEGCL), and the Government of Uganda in November 2002. The handover was completed in April 2003. The contract required ESKOM Uganda to pay the Government a concession fee and to invest at least $6.7 million in the first five years of the concession. ESKOM was on schedule with the required levels of investment at the end of the project. In distribution a 20-year concession contract was signed between a consortium of CDC Globaleq and ESKOM and the Government of Uganda in May 2004 the first concession for an unbundled distribution network in sub-Saharan Africa. The private operator, UMEME, took over operation of the system in April 2005. The process, which started in 2001, had been slowed down by developments in the international market. About 5 or 6 companies had been interested in participating in the process in the beginning. However, interest declined significantly before the bidding process started for a number of external reasons such as the collapse of ENRON and a re-assessment of the potential for profits in small markets such as Uganda. The two remaining companies, ESKOM and CDC Globaleq, joined together to form a consortium. ESKOM was the smaller partner, with 33 44 percent of shares and 2 of the 5 board appointments. Shortly after UMEME began operations, the sector slipped into a serious crisis. After a prolonged drought, water levels in Lake Victoria fell by about a meter, considerably reducing generation capacity at the hydroelectric facilities at Jinja. The Government of Uganda commissioned a 50 MW thermal plant, significantly increasing the average cost of power. Since tariffs were not increased, this led to a large deficit in the sector requiring subsidies estimated at about Ush.10.9 billion per month. Despite a 37 percent tariff increase in mid-2006, which is intended to correct for inflation and rising fuel costs, the regulator expects that similar subsidies will be required in the near term. If additional thermal plants are commissioned to provide emergency power as planned, the Government will either have to increase tariffs or subsidies. Despite the commissioning of the thermal plant, total capacity (about 195MW in mid- 2006) was less than peak demand (between 375-385MW). This, in turn, has led to massive load-shedding and power outages. In addition to having a negative impact on the economy, since UMEME is selling considerably less power than if the dams were producing at full capacity, this has also had a negative impact on UMEME s expected revenues. In May 2006, UMEME was considering using an exit clause that allowed it to exit after 18 months, a decision due by July 2006. Although the crisis has negatively impacted sector performance and has affected public perceptions about the success of the reform, it is important to note that they were exogenous to the reform. That is, the main problem was that water levels in Lake Victoria had fallen due to a drought and over-subtraction of water, reducing generating capacity. Effective capacity would be higher if losses had been successfully reduced. But the timing of reform meant that this was difficult since the new operator had not had sufficient time to complete system improvements when the crisis occurred. As in other countries, reform of the water and sewerage sector was more difficult than reform in other infrastructure sectors. Due to concerns about access and affordability and the difficulty of introducing competition into the sector in small markets reform has been more politically sensitive than in other infrastructure sectors. Although the reforms that were enacted were considerably less ambitious than originally anticipated, they were consistent with the aims of the reform and appear to have resulted in improved sector performance. The Cabinet approved a sector reform strategy for the water sector in October 2003 and a Sector Reform Implementation Committee was established in November 2003. The plan included steps to introduce private sector participation into the sector through a lease contract with a private operator. Although steps were taken to procure a transaction adviser who would help develop a regulatory framework and help with the procurement of a private operator, selection of the transaction adviser was delayed due to technical procurement issues. The Inspector General of the Government (IGG) initiated an investigation into the procurement of the transaction advisor, instructing the Utility Reform Unit (URU) to suspend the process. After a two-year investigation and numerous 34 discussions between the IGG and the URU, the IGG issued a letter to PUSRP stating that there was no need to issue a final report since both parties were at fault. By the time the investigation was complete, the market had changed considerably with international investors less interested in the water sectors of small, low-income countries. Furthermore, progress had been made in the water sector with other reforms and sector performance had continued to improve, reducing the Government's desire to sign a lease contract with a private operator. Consequently, it was decided that PUSRP should seek an alternate reform strategy for the sector. As a result, a lease contract was not signed and an independent sector regulator did not become operational during the project. Significant reforms did take place, however, and sector performance improved both in terms of access to service and the quality of service (see Section 8.2). In September 2003, the URU drafted and negotiated a new performance contract between the state- owned water utility, National Water and Sewerage Company (NWSC), and the Government of Uganda. This contract replaced an earlier performance contract between NWSC and the Ministry of Water, Lands and Environment and Ministry of Finance, Planning and Economic Development that had been in place between 1999 and 2002. In 2004, the NWSC also implemented Internally Delegated Area Management Contracts (IDAMs). IDAMs are performance contracts signed between existing local managers in NWSC and the NWSC. When the three-year contracts expire in 2006, NWSC is planning to join urban centers into a number of clusters and allow managers in each cluster to bid against each other with proposed business plans. The winning management team will then become responsible for the entire cluster. When the next round of IDAMs is bid in 2008, the Directorate of Water Policy suggested that local private operators might also be able to submit business plans. Although the main urban water utility, NWSC, remained fully state-owned, some private sector participation was introduced into the sector during the PUSRP. In small towns, 50 of the 73 water authorities have signed management contracts with private firms. Between 2002 and 2004, an international water firm (Ondeo) had a management contract with NWSC to operate the water system in Kampala. After the contract expired in 2004, it was not renewed because the partners could not agree on a management fee for an extension. Part D: Project Management (US$8.4 million, 26.4 percent) The rating for this component is Satisfactory because the relevant training was supported by the Bank and the Borrower took advantage of it and benefited, as evidenced by good quality project performance and monitoring. This component included the training of project staff in (i) privatization policies, procedures and regulation; and (ii) project planning, accounting, auditing, procurement and other project management skills, through the provision of technical advisory services Project staff was able to take full advantage of training on privatization policies and regulation as well as project planning, accounting, auditing and procurement. The 35 general consensus was that this training was of high quality and relevance and it was readily made available to staff members. All professional staff was covered and various officials from relevant Ministries were able to benefit as well. 36 Annex 5. Economic and Financial Analysis (including assumptions in the analysis) The economic costs and benefits of the program were calculated using the original appraisal methodology for components of the project related to severance payments and re-deployment support for retrenched workers. This component accounted for 63 percent of total project costs (including both IDA and government contributions). The NPV of other components was not calculated because the details of the original methodology used to calculate the NPV was not available. Further, data needed to calculate the NPV for these components using alternative methodologies were not available. For the retrenchment component, benefits include the additional contribution to the economy that the workers will be able to make by working where there is an effective demand for their services, or by developing their own economic activities. Severance payments were calculated on the basis of the collective bargaining agreements applicable to each economic sector. Costs Therefore, the costs of the retrenchment program were calculated as the sum of the following items: 1. Severance payments plus other benefits 2. Outplacement costs to assist job seekers/counseling 3. Training costs 4. Costs of administering the program. Item 1 was considered an economic cost due to the budgetary constraints in Uganda and its inclusion recognizes the importance of the costs of public funds. Items 2, 3 and 4 were included because they have an economic component in that the resources could have been used in alternative ways. Benefits The benefits of redundancy reduction are given by the: 1. Marginal productivity of laid-off employees elsewhere in the economy 2. Marginal revenues of laid-off employees creating their new enterprise 3. Marginal productivity value of the forgone labor cost of privatized enterprises (i.e. cost savings to government from laying off workers) Results In the Project Appraisal Document, it was estimated the Net Present Value of this component would US$8.6 million and that the ERR would be 14.9 percent. Using updated figures for an ex-post evaluation, calculations based on the original methodology 37 used at Appraisal resulted in an NPV of US$114 million and an ERR of 76 percent. The main reason that NPV was higher in the ex-post evaluation was that actual income of retrenched workers, estimated along with re-employment probabilities from the Retrenched Employees Tracer Study, was higher than expected at the time of appraisal. Another difference was that the productivity gains from privatization, which were estimated using the results from the Privatization Impact Assessment completed under the project, were slightly lower than expected. If the productivity gains had been as high as expected at appraisal, the actual NPV would have been even higher. Subsequently, two adjustments were made to the original methodology in order to improve the estimation. First, the severance payments were treated as a transfer, not solely as a cost, since benefits did, in fact, accrue to the workers. Second, as before, the public wages saved through retrenchment was counted as a savings to the state. However, these losses also represent a loss to workers and were counted as such in the adjusted calculations. The net present value of the project is estimated at about US$30 million for a 12 percent discount rate, and its economic rate of return is estimated at 47 percent. It should be noted that additional important benefits exist which could not be quantified, such as improved management in public and privatized enterprises, changes in quality and quantity of services and a more conducive business environment. 38 Annex 6. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/Specialty Lending Supervision/ICR Aberra Zerabruk Consultant LEGAF Agata E. Pawlowska Senior Economist AFTPS Agnes Kaye Program Assistant AFMUG Alan F. Townsend Sr. Energy Spec. SASEI Mining Alfonso Cristobal Alt. Executive Dir. EDS08 Peer Reviewer Revollo Amadou Dem Young Professional YPP Claude P. Sorel Consultant AFTU2 Edgar Saravia Country Manager ECCU7 TTL Senior Country Faris H. Hadad-Zervos MNC04 Operations Officer Francis Ato Brown Sr. Sanitary Engineer AFTU1 George R. Clarke Senior Economist AFTPS Herminia Martinez Consultant AFTPS Peer Reviewer Iain Thornton Christie Consultant AFTPS Irene F. Chacon Operations Analyst AFTPS Itzhak Goldberg Lead Specialist ECSPF Jean-Michel Happi Country Manager AFMCD Senior Infrastructure Jeffrey John Delmon IEF Specialist Sr. Communications Jose-Manuel Bassat EXTCD Officer Sr. Financial Joseph Kizito Mubiru AFTFM Management Specialist Linda Cotton Consultant AFTPS Sr. Private Sector Lucy M. Fye AFTPS TTL Development Senior ICT Policy Mavis A. Ampah CITPO Specialist Sr. Private Sector Michael D. Wong AFTPS Development Modupe A. Adebowale Senior Finance Officer LOAG2 39 Nelson Frederick O. Consultant AFMUG Ofwono Onno Ruhl Manager AFTRL Patrick Piker Umah Sr. Financial AFTFM Tete Management Specialist Peter R. Kyle Lead Counsel LEGPS Sr. Communications Richard M. Uku INFVP Officer Richard Olowo Procurement Spec. AFTPC Rogati Anael Kayani Consultant AFTNL Rona P. Cook Program Assistant AFTPS Lead Private Sector Ronald J. Kopicki AFTPS Development Lead Investment Roy Pepper CICFI Peer Reviewer Policy Officer Russell A. Muir Lead Economist CICAP Sr. Environmental Serigne Omar Fye AFTS1 Specialist Sunita Kikeri Adviser PSDPO Yeshareg Dagne Program Assistant AFTPS (b) Ratings of Project Performance in ISRs No. Date ISR Archived IP DO Actual Disbursements (US$ Millions) 1 02/12/2001 Satisfactory Satisfactory 0.00 2 05/22/2001 Satisfactory Satisfactory 0.76 3 06/28/2001 Satisfactory Satisfactory 0.97 4 12/18/2001 Satisfactory Satisfactory 1.44 5 05/16/2002 Satisfactory Satisfactory 2.77 6 12/20/2002 Satisfactory Satisfactory 10.43 7 05/30/2003 Satisfactory Satisfactory 12.61 8 10/24/2003 Satisfactory Satisfactory 15.45 9 05/27/2004 Satisfactory Satisfactory 18.18 10 11/19/2004 Satisfactory Satisfactory 20.32 11 06/24/2005 Satisfactory Moderately Satisfactory 22.77 12 12/28/2005 Satisfactory Satisfactory 24.50 13 06/26/2006 Satisfactory Satisfactory 31.16 40 (c) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands No. of staff weeks (including travel and consultant costs) Lending FY00 159.02 FY01 32.07 FY02 0.00 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 Total: 191.09 Supervision/ICR FY00 0.59 FY01 64.71 FY02 95.84 FY03 160.96 FY04 169.91 FY05 195.02 FY06 162.83 FY07 1.81 Total: 851.67 41 Annex 7. Detailed Ratings of Bank and Borrower Performance Bank Ratings Borrower Ratings Ensuring Quality at Satisfactory Government: Moderately Satisfactory Entry: Implementing Quality of Supervision: Satisfactory Highly Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance: 42 Annex 8. Beneficiary Survey Results (if any) N/A 43 Annex 9. Stakeholder Workshop Report and Results (if any) N/A 44 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR The Borrower has submitted a draft ICR which is on file for reference. A summary, produced by the ICR team, follows. Achievements and Major Issues Affecting Performance Capacity Building for Privatization Component Of the 42 divestitures planned for the project period, 28 have been completed in strict adherence to the Divestiture Procedures Manual and Guidelines. However, there were reversals in divestiture strategy and sector strategies on the part of GOU which resulted in delays and increased costs. Also, in 2002 in particular, the departure of key technical staff and the lengthy procurement procedures to replace them led to delays in several transactions. The GOU s commitment to the privatization programme together with the recognition of the need for expanded private sector participation for some PEs that were not initially in the project resulted in the inclusion of an additional 17 enterprises to the project s scope of work. For the completed divestitures, terminal benefits have been paid prior to or upon divestiture, in accordance with GOU policy. To date, approximately 49 billion Ush have been paid to 20,845 employees. The retrenchee tracer study shows that the pre-retrenchment counseling that is now being carried out is beneficial in preparing workers and has contributed substantially to limiting the negative impacts on the lives of the retrenched workers. All divestitures have been carried out after the environmental audits were completed. 10 public enterprises were also identified for environmental audits, which were carried out and approved by NEMA. NEMA was expected to develop environmental monitoring protocols and ensure their implementation but lacked the capacity to do so. In addition, at least four communications programmes have been carried out during the previous two years (2004 and 2005) including Privatization Open Day, pre-divestiture employee counseling programmes, stakeholder consultations for MPs, NGOs and the private sector, proactive media relations including quarterly press briefings, radio programs and training for reporters. Utility Sector Reform Component - Energy. The Uganda Electricity Generation Company Limited (UEGCL) concessioning process was completed in November 2002 with the signing of agreements with Eskom Uganda Ltd, a wholly-owned subsidiary of Eskom Enterprises SA. The concessioning negotiations concerning the Uganda Electricity Distribution Company (UEDCL) were completed in May 2004 with the signing of the agreement with CDC (56 percent) and Eskom Enterprises (44 percent) which formed a local company, UMEME Ltd., to operate the electricity distribution system for 20 years. - Water Sector. The reform strategy containing specific proposals for reforming the 45 sector were approved by the GOU in 2001. In February 2002, private sector participation was achieved in the sector through the signing of an agreement with an international water operator (Ondeo services) to provide management services to the Kampala area. This agreement expired in February 2004 but was not renewed mainly because 1) the services fee demanded by Ondeo was too high and 2) Ondeo's global corporate strategy changed and became more negative regarding the perception of global water markets, especially in Sub- Saharan Africa. A transaction advisor was selected to implement the lease option by March 2003. The procurement process for this advisor was interrupted by an investigation of the Inspectorate of Government which lasted 18 months. In the meantime, Internally Delegated Management Contracts (IDMCs) were launched in seven towns, followed by Kampala, in 2004. These performance enhancement programs have resulted in modest improvements in performance. In October 2003, the Cabinet revisited the reform strategy and approved a wider range of PPI as opposed to previously focusing on a lease arrangement. Reforms in the water sector have been characterized by a general lack of consensus. Studies confirm that the recent trends both within Uganda and in the international market for water operators and that the assumptions on which the decision to pursue a lease contract with an international water operator were based, are no longer valid. It was recognized that there are existing regulatory mandates which are not being effectively carried out but these can be dealt with by strengthening the existing regulatory mechanism rather than creating a new agency. - Railway Sector. The concessioning of the Uganda Railways Corporation was completed with the signature of the concession agreement in early 2006. - Telecommunications Sector. Capacity building has been undertaken for the regulating agency. The regulatory agency also procured equipment and now has the capacity to carry out mobile spectrum monitoring and management. Significant growth has been achieved in the mobile telephone market. There has also been growth in the number of jobs in the sector resulting from liberalization of the provision of services. - Regulatory Framework. It was agreed with IDA that a consultant be hired to review the existing regulatory framework in Uganda and make recommendations on necessary restructuring options. A shortlist was prepared and the request for proposals was issued with IDA s approval before credit closure. It was agreed that this assignment is still necessary and that government will seek to fund it from the Private Sector Competitiveness II Project. Financial Oversight of Public Enterprises - Subsidies. A review of the period FY 1999/00 to FY 2002/03 indicates that the recurrent subsidies from the state to the PE sector declined from Shs. 101 B in FY 1999/00 to Shs 92 B in FY 2002/03. Subsidies to Class I PEs (those that will remain under state ownership) steadily increased from Shs 27.7 B in FY 1999/00 and Shs. 43.4 B in FY 2002/03 while the subsidies to the Commercial PEs declined from Shs 73.7 B in FY 1999/00 to Shs 48.9 B in FY 2002/03. With respect to commercial PEs the cumulative decline in subsidies has been 34 percent for the period 1999/00 to 2002/03. 46 The Shs. 25 B decline in subsidies between 1999/00 and 2002/03 for the commercial PEs has largely been a result of a variety of measures including divestitures, PUSRP board representation, the Parastatal Monitoring Unit's (PMU's) annual PE budget review and discipline at various government centres in recognition of GOU's policy to minimize direct funding and other forms of direct subsidies. - Debt. A PE Loan Restructuring Study was conducted and the findings were that PEs, over the years, have generally not serviced their loan obligations and have continued to accumulate loan arrears which stood at Shs. 492 B, representing 30 percent of the total PE GOU loan indebtedness (as of June 30, 2004). The study recommends extending loan periods and in some cases, writing off interest payments rather than principal amounts. It was noted that a large number of loans are undocumented and need to be regularized for tracking and repayment purposes. Implementation of the restructuring recommendations was underway by credit closure and the exercise is expected to be concluded by the PMU with the oversight of the Ministry of Finance. - Statutory Compliance. Compliance with statutory requirements by PEs continued to be monitored in an effort to improve performance and corporate governance in the sector using five indicators. - Public Enterprise Restructuring. Under financial oversight of PEs, several restructuring programmes have been implemented for various enterprises: National Medical Stores, Kilembe Mines, Post Bank Uganda, Uganda Posts, Mandela National Stadium, Uganda Seeds, Uganda Printing and Publishing Corporation and National Housing and Construction, with varying results in improving financial performance and delivery of services. Project Coordination Component - Staffing. Since the Mid-term review, two PUSRP professional staff left the project and were not replaced due to the uncertainty about the project closure date. - Financial and Work Program Reporting. The project met all IDA and GOU reporting requirements. Quarterly Project Management/Monitoring Reports are prepared and submitted to IDA within 45 days after the end of each quarter as required. Proper financial records are maintained and accounts are audited as required. The slow start in project implementation resulted in a difference between disbursement plans and the amount actually disbursed. Between 2001 and 2002 there was limited disbursement from the credit proceeds arising from the delay in project effectiveness and the nullification of pre-effectiveness procurement actions. Significant disbursement started in the first quarter of 2003. This was a result of a slow start in procurement of goods and services due to the continued GOU interference in privatization procedures, mainly through divestiture strategy reversals. These reversals created delays in the procurement of transaction advisors which in turn, resulted in delays in the completion of transactions. - Procurement. At the beginning of project implementation, the project experienced 47 procurement delays due to learning effects and the streamlining of the procurement procedures. By the Mid-term Review, project procurement capacity had improved substantially and communication with IDA had improved as well. A post-procurement review in May 2005 commended the PUSRP for their Procurement Tracking System and recommended that other IDA-funded projects in Uganda visit the PUSRP to learn best practice in procurement management. Lessons Learned 1. Inconsistency by IDA on Decision on Credit Closure - During the Mid-term review, it was agreed that PUSRP concentrate on certain activities which would guide the decision on the government's request for an extension to the credit. The review to determine whether or not there would be an extension was held too late, in December 2005, one month before the closing date. As a result, there were a number of outstanding activities which are expected to be completed with funding from the government as it becomes available. 2. Consensus building It is very important to have consensus between stakeholders otherwise delays arise from differing strategies. This is clearly illustrated in the case of Uganda Development Bank where the government wanted to retain the bank but the International Monetary Fund wanted it sold. 3. Pressure to meet privatizations in numbers This approach does not adequately take into account the possible obstacles. 4. Legal Environment The role of the law is very important and having the PERD Act in place has helped provide discipline in the procedures. Discipline has also been enhanced by the use of the detailed Divestitures Procedures Manual. 5. Labour Issues Labour issues should always be dealt with upfront. Leaving them to the end may disrupt the divestiture process. A clear example can be seen in the proposed joint concession of Uganda Railways and Kenya Railways. The workers at Uganda Railways halted the transaction demanding to have "fair" compensation from the Government. 6. Transparency It is important for the divestiture or reform exercise to be done transparently. Otherwise, the various stakeholders and interested parties can disrupt the process. 7. Timeliness of information It is important that information is provided in a timely and efficient manner to ensure that there are no delays in the transaction. 8. Policy Consensus It is essential that policy consensus is obtained before major reform programmes are implemented if they are to be successful. 48 Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders N/A 49 Annex 12. List of Supporting Documents 1. Aide Memoires, Back to Office Reports, Project Supervision Reports, Implementation Status and Results Reports, Public Enterprise Monitoring Reports, Financial Flows between Government and Public Enterprises Reports. 2. Development Credit Agreement, Uganda Privatization and Utility Sector Reform Project, December 18, 2000 3. Implementation Completion Report, Privatization and Utility Sector Reform Project, Republic of Uganda, May 2006. 4. Privatization Impact Assessment for Uganda, prepared for the PUSRP and the Ministry of Finance and Economic Planning by Adam Smith International in cooperation with Ernst & Young, April 2005. 5. Project Appraisal Document on a Proposed Credit to the Republic of Uganda for a Privatization and Utility Sector Reform Project, Private Sector and Finance Unit, Africa Region, May 22, 2000. 6. Project Implementation Manual, Privatization and Utility Sector Reform Project, 2000. 7. Public Enterprises Reform and Divestiture Statute of 1993 and PERD Amendment of 2000. 8. Public Sector Loan and Debt Restructuring Report for Uganda, prepared for the PUSRP and the Ministry of Finance and Economic Planning by Deloitte & Touche, March 2006. 9. Retrenched Employees Tracer Study (1992-2004) Draft prepared for the PUSRP and the Ministry of Finance and Economic Planning, May 2006. 10. Uganda Country Framework Report, Infrastructure Policy Memorandum, Pricewaterhouse Coopers, October 1999. 50