Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6053-COM MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 9.2 MILLION TO THE FEDERAL ISLAMIC REPUBLIC OF COMOROS FOR A POPULATION AND HUMAN RESOURCES PROJECT November 19, 1993 Population and Human Resources Division Department M MICROGRAPHICS Africa Region Report No: P- 6053 COM Type: MOP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency unit = Comorian Franc (CF) 1990 US$1 = CF 272 1991 US$1 = CF 282 1992 US$1 = CF 264 1993 US$1 = CF 273 MEASUREMENTS 1 meter = 3.28 feet 1 kilometer = 0.62 mile 1 square kilometer = 0.39 square mile 1 hectare = 2.47 acres FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AIDS - Acquired Immunodeficiency Syndrome CDSF - Community Development Support Fund FP - Family Planning IDA - International Development Association IMF - International Monetary Fund MERCAP - Macro-economic Reform and Capacity Building Credit MOH - Ministry of Health NGO - Non-governmental Organization SDR - Special Drawing Right FOR OFFICIAL USE ONLY FEDERAL ISLAMIC REPUBLIC OF COMOROS POPULATION AND HUMAN RESOURCES PROJECT Credit and Project Summary Borrower : Federal Islamic Republic of Comoros Amount : SDR 9.2 million (US$13.0 million equivalent) Terms : Standard IDA terms with 40 years maturity Financing Plan: Local Foreign Total IDA 9.6 3.4 13.0 Governmentl/ 3.0 - 3.0 Total 12.6 3.4 16.0 11 Includes contributions by beneficiaries, calculated at minimum level. Rate of Return : N.A. Staff Appraisal Report : 11788-COM Map : No. IBRD 24860 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE FEDERAL ISLAMIC REPUBLIC OF COMOROS FOR A POPULATION AND HUMAN RESOURCES PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Federal Islamic Republic of Comoros for SDR 9.2 million, the equivalent of US$13.0 million, on standard IDA terms with a maturity of 40 years, to help finance a population and human resources project. PART I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Introduction 2. The Comoros is going through a period of economic and political reform unparalleled in its short history as an independent nation since 1975. High growth during the first decade of independence was fueled by ambitious, but low-return public investment. In 1986, the economy started to stagnabe, which led to an average annual decline of 2 percent in real per- capita income since then. In 1991 the Government has embarked on a program of economic reforms that could permit it to play a credible and constructive role in the management of the financial and economic affairs of the country, and help reverse the declining trend in per-capita income. 3. During the recent past, the Comoros has experienced the political turbulence associated with the introduction of multi-party democracy into a traditional society with strong and often competing regional, community, and family interests. Following elections in .ate 1992, successive Governments rose and fell at a rapid pace with no single political party In a position to command a majority of parliamentary votes. The Federal Assembly was dissolved in June 1993 for lack of working majority and the President called for new elections in late November 1993. B. Recent Economic and Social Performance 4. Overview. The Comoros is an archipelago of three islands, inhabited by a largely homogeneous islamic population of about 510,000, with a GNP per capita of US$510 in 1992. it is predominantly a rural country: 40 percent of GDP is produced by agriculture, 50 percent by trade and services, and 10 percent by industry. Export earnings are concentrated on three commodities (vanilla, cloves and perfume essence) and cover on average about 40 percent of imports. Because of rudimentary agriculture practices and inadequate marketing, as well as due to an overvalued currency, the country has become increasingly dependent on imported food (rice and meat). The industrial sector is limited to small manufacturing, and tourism is at an early stage. The country has maintained close relations with France: the Comorian franc is pegged to the French franc under a bilateral "Franc zone" arrangement, and France is the main source of external assistance, including budgetary support. 2 5. The Comoros has not yet been able to establish the base for sustained economic growth and financial viability. It relies heavily on external assistance. Annual net official development assistance transfers per capita averaged US$115 in 1980-92, about four times the sub-Saharan Africa (SSA) average. A large part of external aid was used to finance consumption and low-return projects. Nevertheless, external assistance helped develop a fairly good road network, an international airport, and a deep water port on the second largest island (Anjouan). External assistance also helped improve social infrastructure, and the Comoros' social indicators compare favorably with the average of SSA countries: life expectancy increased from 49 years in 1975 to 56 in 1992; infant mortality rate declined from 126 to 90 per thousand; primary school enrollment increased from 46 to 75 percent of the school-age group, and the enrollment ratio for girls of this age group jumped from 29 to 67 percent. However, in spite of the increase in primary school enrollment, adult literacy remains at 50 percent and the Comoros still has a large pool of unskilled labor due largely to an inadequate vocational training system. 6. Poverty situation. A poverty assessment is being carried out and the report is scheduled to be completed by end FY94. The preliminary findings of the report show that the incidence of poverty varies among the islands. The severity of poverty is identifiable in high malnutrition rates in some areas, in particular in the island of Anjouan, where population is dense (470 per square km.), the total fertility rate is high (more than 7) and arable land is very limited due to the mountainous topography. Fishing villages tend to be poorer than other villages and contain the largest number of the poor. Homelessness and starvation are rare in the Comoros owing mostly to the traditional system of safety net, strong village and family links, and remittances from the Comorlans abroad. The report will assist the Government to prepare a strategy for improving the conditions of low-income groups and formulate policies aiming at (i) promoting faster and sustained economic growth, i.e., developing private sector through specific interventions in assisting small-scale farmers and entrepreneurs; (ii) improving infrastructure in support of private sector development; (iii) upgrading the quality of basic services in health and education and increasing access to water; and (iv) reducing population growth. Social Indicators are reflected in Annex B, page 1. 7. Environment. The natural environment of the Comoros is under pressure in Anjouan and parts of Grande Comore and needs protection from future degradation in Moheli. Among the overt symptoms are the excess exploitation of fragile soils leading to soil erosion, the clearing of land for agriculture and disappearance of forests on steep mountain slopes, the drying up of inland streams, the exploitation of coral reefs and the aging and non-replacement of tree crop plantations. For example, in 1972 there were 8,260 ha. of primary forest, but by 1987 only 1,109 ha. were left, i.e., a deforestation rate of more than 3 percent a year. The Government has taken some steps to control soil erosion but their long-term impact depends on the success in lowering rapid population growth. A long-term environment strategy is nearing completion; the Government is expected to adopt integrated conservation measures to protect the fragile ecosystem and develop local capacity to manage environment issues. 8. Economic developments. The economy grew at 6 percent p.a. on average during the first decade after independence, fueled by ambitious but low-return public investment. When major infrastructure projects were completed in mid-1980s, real GDP growth slowed to an annual average of 1.2 percent in 1986-92. In 1993, GDP could grow by about 2 percent, owing to the recovery in construction activities. Domestic savings have been consistently negative until 1992. Consumption rose from 101 percent of GDP in 1986 to a peak of 107 3 percent in 1989, before gradually declining to nearly 100 percent in 1992. Gross investment declined from 24 percent of GDP in 1986 to 14.5 percent in 1991 before picking up to 20 percent in 1992, when the Comoros resumed normal relations with donors, following the settlement of external arrears. The current account deficit of the balance of payments increased from 17 percent of GDP in 1991 to an estimated 20 percent of GDP in 1993, because of high import requirements and stagnant export earnings. Nevertheless, inflatioin har been below 4 percent per annum due to monetary discipline imposed by the country's link with the Franc zone. Key economic indicators are reflected in Annex B, pages 3 and 4. 9. Government finances are imbalanced. Domestic resources have been consistently lower than Government consumption and debt service requirements, and the Comoros has relied since independence en substantial external budgetary support. Government expenditures are high at nearly 35 percent of GDP. But Government finances are severely constrained by the narrow fiscal base and low tax collection yields, and the instability of external trade, which generates about 37 percent of the budget revenue. The overall budget deficit (before grants) increased from 17 percent of GD2 in 1980 to an average of 26 percent of GDP in 1986-1989, of which about 80 percent was financea by external grants. In 1992, the Government took measures to reduce the deficit to 19 percent of GDP through a 20-25 percent cut in the wage bill. The improvement in the financial situation has enabled the Government to pay civil servants on time since January 1993, compared with four to five months delay in the past. Resources and expenditures indicators are reflected in Annex B, page 2. 10. Adjustment program. In 1991, to restore macroeconomic stability and lay the foundation for sustained economic growth, the Government launched an adjustment program, which is described in the first Policy Framework Paper (1991-93). The program is supported by an IDA credit of US$8 million (MERCAP, approved in June 1991, of which $6 million quick disbursing) and an IMF SAF arrangement of SDR3 million. However, soon after the approval of MERCAP, the adjustment program went off-track due to the volatile political environment. 11. The program was restored and the pace of implementation accelerated after a new economic management team was appointed in July 1992. To date, the civil service has been downsized by nearly 20 percent, the role of the state reduced by privatizing three hotels, liquidating the meat importing monopoly, and merging two maritime companies, and trade liberalized, including exports of vanilla and imports of meat and higher-grade rice. The Government has simplified administrative procedures for business creation to promote private sector development. It has also eliminated low priority projects from the 1993-95 Public Investment Program. Release of the second tranche of MERCAP is expected in March/April 1994, following the adoption of a second Policy Framework Paper and a satisfactory 1994 budget and 1994-96 Public Investment Program (PIP). The future of the reform process depends to a large extent on the commitment of the new Government which will emerge after the November legislative elections and the quality of its economic management team. 12. Past IDA lending. Since joining the Bank in 1976, the Comoros has received ten IDA credits totaling US$55 million, of which 34 percent for infrastructure rehabilitation, 32 percent for education, health and population, 20 percent for agriculture and rural services, and 15 percent to support adjustment and capacity building. Two investment projects (education and road maintenance) and one adjustment operation are currently under implementation. Although project implementation has faced some problems, project objectives have generally been met. 4 For instance, primary school enrollment and access to essential drugs have increased, agricultural technique has improved, and local capacity in road maintenance has increased. On the adjustment front, progress has been made towards reducing the fiscal deficit, liberalizing trade, and promoting private sector development. C. External Environment 13. The Comoros is vulnerable to external shocks and faces structural balance of payments problems, due to volatile world demand for its exports, eroding competitiveness coupled with a deterioration in the terms of trade (6 percent decline between 1989 and 1992), and heavy borrowing for low-return projects in the past. Export earnings have been adversely affected by sluggish world demand for vanilla and cloves (which together make up about 70 percent of exports) and the appreciation of the Comorian franc vis-a-vis the US dollar. Oil imports account for about iO percent of total imports and their price movements have a significant effect on the balance of payments. To reduce the country's reliance on the volatile traditional crops, the Government has recently adopted an agriculture strategy with special emphasis on diversifying export crops and has taken steps to promote export oriented manufacturing. 14. As a consequence of the surge in public investment in the early 1980s, the Comoros faces a heavy debt burden. External debt increased from US$43 million in 1980 to US$165 million at end 1992. Nearly all external debt is owed to multilateral institutions (54 percent) and Arab creditors (41 percent). Although most of this debt was contracted on concessiona' terms, one large investment for the port in Anjouan was financed by a non-concessional loan from the African Development Bank (AtDB), which figures prominently in the debt service profile (18 percent of total debt service obligations). The scheduled debt service ratio increased steadily from 3 percent of export earnings in 1980 to a peak of 25 percent in 1990, leading to the accumulation of sizeable arrears (US$42 million). In 1993, the scheduled debt service ratio was reduced to 20 percent, but external arrears accumulated . During a meeting which took place in November 1993, Arab creditors agreed to reschedule arrears. While progress was also made on debt reduction, more remains to be done to find a more permanent solution to the debt issue. Key exposure indicators are reflected in Annex B, page 5. D. Development Objectives and Policies 15. An Economic Strategy Note (ESN) has been drafted by the Bank and is being discussed with the Comoros. The Note provides a long-term vision of the Comoros and a policy agenda to achieve sustained per-capita growth with poverty alleviation. It also indicates that, with better macroeconomic policies, an appropriate enabling environment for the private sector, outward orientation, and human resource development, the Comoros could emulate the successful growth experience of Its neighbors in the Indian Ocean - Mauritius and Seychelles - - and improve the standard of living of its population. 16. Development constraints. The Comorian economy is relatively open but constrained by structural problems: (i) limited natural resources, small domestic market and remoteness of the country; (ii) poor human capital and high unemployment with a large surplus of unskilled labor; (iii) high cost structure linked to the real appreciation of the Comorian franc; (iv) weak export base depending on three commodities (vanilla, cloves and perfume essence) which mostly face a volatile world demand; (v) weak public sector management capacity coupled with a large civil service (about 15 per thousand population, compared with 6 in Rwanda, and 10 in 5 Madagascar); (vi) heavy reliance on external assistance with consistent negative domestic savings; and (vil) high population growth of over 3 percent a year, which puts increasing pressure on the fragile ecosystem, including severe soil erosion on the second largest island of Anjouan. 17. Because of poor economic management, external resources were largely used to finance low priority investment projects and consumption. However, even so the Comoros has been able to maintain non-development expenditures at a relatively low level. Since the reorganization of the army in 1990, the size of the military has been reduced by one third and its expenditures represent about 14 percent of the total wage bill. 18. Sources of potential growth. The Comoros has unrealized economic potential, with possibilities of diversifying agriculture towards new exports and developing some export- oriented industry and ecotourism. Agriculture will remain the main source of growth i the foreseeable future. The recent Agriculture Strategy Study, undertaken with UNDP and Bank assistance, identified important opportunities to increase production and diversify exports - exotic fruits and flowers, herbs and spices, quality perfume essence, etc. - by rationalizing farming systems, intensifying production, reviewing land use rights in the context of a new national land tenure and titling policy, improving marketing, and conserving natur& resources. Small scale fishing is a highly efficient activity for home consumption, urban markets and inter-island trade and has good growth potential, albeit sensitive to the cost of capital and imported tools and equipment. Deep sea and high-tech fishing is likely to remain beyond the reach of the Comoros in the medium term, but regional cooperation initiatives may hold promise in the longer term. 19. The development of the manufacturing sector is constrained by the small domestic market, lack of competitiveness and shortage of skilled labor. The country's lack of competitiveness is due not only to appreciation in the real exchange rate, but also to the high cost of infrastructure services and utilities, e.g., the electricity tariff of $0.60 per kwh is among the highest in the world. If the Comoros is to diversify its activities into labor- intensive, export-oriented industries following the example of Mauritius, it will need to reduce production costs and provide appropriate training for the labor force; these efforts are likely to take several years to yield full results. 20. The Comoros has also good tourism potential, but the Government is concerned that net gains generated by this sector would be small because of the high investment required in infrastructure and the high import content (including Imported food and hotel management). A competitive exchange rate could make investment in tourism more attractive. There is also considerable scope to enhance efficiency in existing services and move to new ones through training, market research and promotion, as external communications improve and tha Comoros emerges from its relative isolation and develops closer links with the rest of the world. 21. Development policies. In the short-term, the policy options are limited to internal adjustment: restraining wage, enhancing labor skills, relaxing the regulatory environment, providing incentives for private investment, and implementing well-conceived investment projects to improve infrastructure and reduce internal costs. In the long-term, sustained per capita growth combined with poverty alleviation hinges on: (i) Increased productivity through human capital development; (ii) reduced population growth; (iii) infrastructure development; 6 and (iv) good macroeconomic management including a competitive exchange rate and a business environment relying on market forces and encouraging private initiative. Using the full range of economic policy instruments, the Comoros could embark on an export-led and labor-intensive growth strategy based on the development of manufacturing and high-value crops for the European and Arab markets, as will as become a destination for ecotourism. To do so, it would have to promote regional integration by encouraging cross-border private investment, trade and payments. 22. The potential for accelerating long-term economic growth in the Comoros is burdened by the rapid rise in population of over 3 percent p.a.. Unless population growth can be significantly reduced, the scope for increased domestic savings and higher living standards will be limited. Although the Government has taken steps to encourage birth spacing, vigorous action will ned to be taken to ensure the availability of family planning services to all individuals in all income groups. Efforts are being made to sensitize both political and religious leaders on the urgency of reducing population growth and adopting and implementing strong population policies. They will be supported under the proposed project. E. Country Priority Issues and Bank Assistance Strategy 23. The Bank's policy dialogue with the Government has been good and open. Country dialogue aims at building a shared long-term vision for the Comoros and promoting appropriate policies to move the country onto a path of financially and environmentally sustainable growth with equity. The Government and the Bank have concluded that the Comoros' development priorities should be built on three main pillars: (i) enhancing competitiveness for sustained growth; (ii) developing human capital, alleviating poverty, and reducing population growth; and (iii) protecting the environment. 24. The first priority is to enhance the Comoros' competitiveness for sustained growth. The key policy elements to compress costs and raise efficiency are: improving the quality of public expenditure, reducing the role of the State, and reforming the regulatory environment for private investment. Under the current exchange regime, the country's competitiveness could be partially improved through internal adjustment (with regulatory reform, wage compression), lower prices for utilities through efficient management, and increased labor productivity. The main instruments of the Bank's strategy in this priority area are the effective implementation of the MERCAP, the private sector development project under preparation and associated ESW. Implementation of MERCAP focuses on actions to: strengthen capacity for economic management, especially public expenditure programming; accelerate privatization, liquidation, and restructuring of the remaining state enterprises; restructure the civil service to increase its efficiency including a major reduction in the size of the public administration and the public sector wage bill; implement the tariff reform; and adopt a regulatory framework that would promote private investment. 25. The second priority is human capital development, poverty alleviation and reduction of population growh. Rapid economic growth is the best antidote to poverty especially in the long term. In the short term, there is a need to protect real expenditures on basic social services. Smaller number of better-qualified staff, provided with more non-wage recurrent inputs such as drugs and textbooks, w11 deliver better services. 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Education needs to be complemented by better health standards, strong family planning and good maternal and child health services. The authorities Initiated a family planning program under the first IDA- financed Health and Population project in FY84 and as a result, the idea of family planning has become more acceptable to Comorlan society and the contraceptive prevalence rate increased, but is still at an extremely low level of 4 percent. The Government plans to expand and concentrate efforts to supply family planning materials and provide more information, education and communication regarding family plarming. Targets in this effort will be opinion leaders, the youth, and women in their childbearing yew. In health, the Government plans to expand the quality and reliability of services provided, with empbasis on a streamlined regional management and public health service and Improved functioning of district health centers, with particular emphasis on primary health care. The main instruments of the Bank's strategy In this priority area are the proposed Population and Human Resource Development and the Third Education project programmed for FY97. 7be poverty assessment under preparation will identify poverty issues and will be complemented by a household consumption survey to be conducted in 1994 and financed under MERCAP. Ibis will provide the basis fbr preparing a strategy of targeted interventions as a complement to the overall growth strategy. 26. The third priority is to protect thA ComoMfi' ft ile econ and develop local capacity to manage environmental issues. 7be on-going programs to protect the environment will need to be reinforced: control soil erosion, including reforestation; ban the use of sea sand and crushed corals in constructiop; discourage the consumption of dwindling fuelwood, and protect the indigenous fauna species, e.g., the coelacanth and sea turtle. 7be recently completed Agriculture Strategy Study provides the basis for a dialogue on policies to increase agriculture production, formulate a new national land tenure and titling policy and protect the environment. A National Environmental Action Plan (NEAP) is being prepared with UNDP funding. Bank assistance in these areas would be provided through policy advice based on the agriculture study, review of the Government's NEAP, participation in the UNDP-sponsored Round Table meetings on agriculture and environment scheduled for 1994, and support for the implementation of the NEAP through the Environment Protection project programmed for FY96. 27. Growth prospects and financing requirements. With adequate policies within the framework of the three development priorities discussed above, GDP growth could accelerate gradually from 2 percent in 1993 to 4 percent by 1997. Fixed investment would increase from 18 percent of GDP in 1993 to 22 percent in 1997, with private investment expected to expand from 40 percent of total investment to 50 percent by the end of the period. The balance of payments will remain highly dependent on substantial Inflows of concessional external assistance. External financing requirements are projected at some US$380 million over 1993- 97. This amount is expected to be covered largely by disbursements from existing and new project-related loans and grants (some US$310 million) and net direct foreign investment (some US$10 million). The remaining US$60 million is expected to be covered by debt relief or rescheduling of external arrears, and by exceptional financing from key bilateral donors. Comoros is eligible under the Special Program of Assistance to Africa (SPA) and donors have indicated a readiness to support the country's devei,)pment needs provided the authorities stay on the adjustment path. 9 28. IDA assistance program. France is expected to continue to play the lead donor role in the country's economic development. It has In the past provided about 40 percent of the total external aid to the Comoros in the form of budgetary and technical assistance and project financing. The Bank will continue its supportive role and its assistance will focus on priority areas, where It has a comparative advantage in blending effective policy advice with carefully selected lending operations. It will also support the Comoros in mobilizing external resources through the SPA. Selected indicators of Portfolio Performance and Management are reflected in Annex C, page 1. Table 1: COMOROS: Key Macroeconomic Indicators (percent, except where indicated) 1991 1992 1993 1993-97 98-2002 (estimate) (average) (average) GDP growth rate 2.1 1.6 2.0 3.0 5.1 GDI per capita growth rate -3.0 -0.1 -2.0 -0.2 2.2 Debt Service (US$ million)i 9.3 9.7 10.3 1.8 12.0 Debt Service Ratio 1 18.8 19.0 27.4 19.8 13.9 Debt Service as % of GDP 3.8 3.7 4.0 3.8 3.1 Investment/GDP2 12.3 16.9 18.3 20.3 23.7 Domestic Savings/GDP -4.8 -3.9 -5.6 -2.1 2.7 National Savings/GDP -3.4 -2.0 -4.0 -0.4 4.8 Public Investment/GDP3 6.9 12.0 13.3 11.0 9.5 Private Investment/GDP 5.4 4.9 5.0 9.3 14.2 Government Revenue/GDP4 14.2 16.1 17.1 17.8 17.8 Government Expenditure/GDP 33.4 35.3 36.7 32.7 27.9 Deficit (-) or surplus -19.2 -19.2 -19.6 -14.9 -10.2 (+)/GDPs Export(G&NFS) Growth 49.6 -8.6 4.0 4.6 5.0 Rate Import (G&NSF) Growth Rate 0.2 13.2 4.3 3.1 4.8 Current Account Balance/GDP6 -17.2 -21.1 -23.7 -21.9 -19.9 1. Schdulted laterest and amaortstm (excluding e epaymnsa of aae..). 2. Exclding changes in stocks, which fluctuate utantially up to as high as 8 percent of the GDP. S. Including public entprise. 4. Exclding grms. 5. On payment oder basis; excluding Oant. 6. Excluding official trasfer and capital grants. 29. The Bank's support to the Comoros during FY94-98 will be guided by the three strategic priorities discussed above. The five-year lending p rm includes three projects: the proposed Population and Human Resources project, a Third Education project in FY97, and an 10 Environment Protection project in FY96. Two reserve projects are also programmed: a Private Sector Development in FY95 and an Agriculture Services project in FY98 ( see Annex A, page 1). The lending program averages US$11 per capita per annum, which is in line with past trends. No new adjustment lending is proposed at this time. If, however, the Comoros decided to use external adjustment, the Bank would consider supporting the reform program with additional balance of payments assistance. On the downside, if there is deterioration in macroeconomic performance (especially in the fiscal area) and portfolio implementation, the lending program will be reduced. Table 2 Comoros Composition of IDA Lending (Percentages) FY88 - FY93 FY94 - FY98 Adjustment Lending 46 Investment Lending Infrastructure 54 Human Resources 76 Environment 24 Total 100 100 30. The ESW program focuses on medium- and long-term development issues through the recently completed ESN; a CEM in FY96; and other work on public expenditure priorities. Special attention is placed on analyzing the impact of the adjustment program on the economy and identifying the sources of potential growth as well as policy options to accelerate economic growth and alleviate poverty. The budget and public investment reviews in the context of the supervision of MERCAP and the proposed project are a major instrument to help ensure a social safety net, and to improve the efficiency of public resource allocation and the quality of the public investment program. In the framework of MERCAP implementation, a legal study proposes reforms in the legal and regulatory framework, particularly with regard to legal enforcement of contractual obligations, reduction of barriers constraining enterprise creation, and simplification of labor regulations. In addition to the recently completed Agriculture Strategy Study, sector work will focus on private sector development, environmental protection, education, health and population issues. 31. Portfollo management. The Comoros has made significant progress in project implementation. The portfolio has been upgraded from a poor performer in the FY92 bankwide annual review, with three out of four projects rated as problem projects, to a better than average performer in FY93. Past problems in project implementation, e.g, weak project management and shortage of local operating funds, have been largely corrected. Sustained efforts by Bank staff and government agencies, including a Country Implementation Review in FY93, led to vigorous actions to improve project execution, including restructuring of local management teams, improved allocation of operating funds in the budget and close monitoring of cey project components. The Comoros' portfolio includes two investment projects and one adjustment operation, with a total commitment of currently US$22.5 million, of which US$6.6 million was disbursed. The disbursement factor for investment projects has consistently increased from 11 percent in FY91 and 15 percent in FY92 to 18 percent in FY93. 11 To further strengthen portfolio management, Bank staff will: (i) help improve the management capacity of the executing agencies; (ii) raise annual staff resources for supervision from the current 26 percent of total country allocation to 34 percent; and (iii) continue to address the key issue of inadequate local funding in the context of the macroeconomic dialogue. A Procurement Assessment mission is scheduled in FY94 to address procurement issues in the Comoros. 32. IFC and MIGA activities. The Comoros became a member of IFC in July 1992, but has not yet joined MIGA. IFC has not yet made any investment in the Comoros and does not have any immediate plans to do so given the lack of sizeable private investment projects. 33. Role of other donors and aid coordination. Besides France and the Bank, other key donors include UNDP, European Community, African Development Bank, and the Arab funds. Belgium, China, and Japan have recently become more active in financing projects in infrastructure, fisheries, and telecommunications. Since 1991, the Bank has been working closely with the IMF and main donors in mobilizing quick-disbursing assistace and debt relief to help the country implement its adjustment program, redirect investment to priority areas, and build local capacity. For instance, the Bank actively participated in the Round Table meeting in Geneva in 1991 organized by the UNDP and the Djeddah meeting of Arab creditors on debt issues in November 1993. The Bank has also coordinated with other donors in sector work, e.g., agriculture strategy, legal system, environmental action plan, and tourism. The Bank will continue to coordinate with other donors and will join in aid coordination efforts through: (i) participation in the forthcoming Round Table meetings on agriculture and environment; (ii) soliciting donors' participation in ESW, especially in CEM and public expenditure program; (iii) SPA country specific meeting; and (iv) co-financing of projects. F. Agenda for Board Consideration 34. Board consideration should focus on the following: (a) To help the Comoros achieve sustained growth with equity, the Bank's assistance strategy would support the Government's development priorities in three main areas: (i) enhance competitiveness and promote private sector development; (ii) develop human capital, alleviate poverty, and reduce population growth; and (iii) protect the fragile environment; (b) The lending program for FY94-98 consists of three projects and averages US$11 p.c.p.a. No further adjustment lending is proposed at this juncture; it could, however, be considered if the real exchange rate becomes available as an instrument of adjustment to increase the Comoros' competitiveness. On the downside, if there is deterioration in macroeconomic performance (especially in the fiscal area) and portfolio implementation, the lending program will be adjusted downward as needed; (c) Risks. There are risks associated with the future of the economic management team, future Government commitment and political uncertainties. The current economic management team, which has remained largely intact despite frequent 12 changes in Government since the last legislative elections in late 1992, has been effective in implementing the reform measures to put the Comoros back on the adjustment path. However, the future of the reform process and the development program depends to a large extent on the commitment of the new Government which will emerge from the November 1993 legislative elections and the quality of the next economic management team. Moreover, the Government might not enjoy a working majority in the Federal Assembly, and its members might need time to fully internalize the need for reforms and convince the population that only bold measures could put the Comoros onto the path of sustained growth and poverty alleviation; (d) Criteria to evaluate progress. In the near term, criteria to assess progress will be centered on the implementation of the adjustment program, in particular fiscal performance, the civil service reform, the public enterprises restructuring, and the promotion of private sector development. In the medium term, the Government's commitment to reduce the population growth and to protect the environment will be the main criteria for continued Bank assistance at the level proposed. PART II - PROPOSED PROJECT 35. Project Objective. The overall objective of the project is to strengthen the development of human resources in the Comoros by: (i) increasing the efficiency and effectiveness of basic health services, through the establishment of efficient regional health administrations and other supportive services, which will be capable of providing comprehensive good quality and cost effective health care; these will include family planning services and Acquired Immunodeficiency Syndrome (AIDS) prevention, and will involve community participation, self-management and cost recovery; and (ii) promoting complementary community development initiatives to develop social infrastructure and grassroots participation in small-scale productive activitih3s, through a Community Development Support Fund (CDSF). 36. Project Description. The project has two components: (a) population and health and (b) community development. (a) The population and health component will build upon existing successful pilot programs for self-management and cost-recovery to establish services capable of ensuring cost-effective and sustainable provision of comprehensive and good quality health care, including family planning and AIDS control services. To that end, the component will: (I) strengthen the capacities of the three health regions to plan, implement, administer, and supervise health care services, in part through improving and expanding the training of district health personnel; (ii) equip and rehabilitate two regional hospitals and a number of health centers; and (iii) promote family planning and AIDS control services. (b) In the second component of the project, complementary community development activities as well as activities to encourage sustainable economic 13 development would be supported through a Community Development Suport FAn (CDSF). While demand driven, the CDSF would focus primarily on: training of communities and groups in micro-project development, manage- ment, and implementation; rehabilitation of social infrastructure (especially primary schools, water supply, and health posts); activities to promote the well-being and development of women; and income generating activities. 37. Project Fnandng. Total project cost is estimated at US$16.0 million of which US$13.0 million would be financed by IDA and US$3.0 million by the Government and beneficiaries. Credit proceeds would finance priority investment expenditures in technical assistance and training, civil works, equipment, and materials, as well as selected incremental recurrent expenditures. 38. Project Implementation. Activities under the health and population component would be implemented by the MOH, health regions, and communities with the support of a unit under the Directorate General of the MOH which would perform the administrative functions of monitoring project implementation. This unit would receive the support of both national and international consultants to help build capacity within the MOH. The CDSF would be implemented by an autonomous agency which has already been created and which operates according to an established manual of procedures setting out project selection criteria (including beneficiaries' contribution to investment and maintenance), project Implementation and supervision guidelines (including procurement and contracting regulations), and internal administrative and financial management guidelines. 39. Project Sustainability. The project is designed to improve sustainability of social sector activities by putting strong emphasis on community participation, including financial participation. This would be done by: training communities to increase the efficiency of their already active involvement in the social sectors; expanding upon existing successful pilot operations of self-financing and self-management of health facilities in close collaboration with the communities they serve; helping to rationalize and increase the efficiency of the MOH's support to the peripheral services; improving the efficiency of existing resources in part through the integration of vertical programs into the main programs of health services; and training health sector personnel to build an appropriate capacity to implement the country's health sector program. With the exception of the operating costs of the project office, which will cease when the project is completed, the health and population component is budget- neutral and supports the overall reform of the Comorian public administration. At the mid- term review, it will be decided whether the CDSF institution should be maintained and if so, funding from the Government and from other donors will be sought. 40. Lessons from Previous Bank/IDA Involvement. The main lessons learned from implementation experience in Comoros are: (i) project preparation needs to involve the implementing agency and beneficiaries from the start; (ii) project design should be simple; (iii) technical and procurement aspects of the project should be specified early in project design; and (iv) because of the Government's fiscal constraints, popular participation and cost-recovery should be factored in to enhance sustainability prospects. These lessons have been internalized in the design of the project. 41. Rationale for IDA Involvement. As reflected in the Country Assistance Strategy, the development of human resources is one of the main objectives of IDA's assistance strategy in 14 the Comoros. The proposed project would help establish a sustainable health system and foster family planning activities which are crucial for Comoros' long-term development. The project would complement both the macroeconomic adjustment program, which is centered on the reduction of the role and size of the public sector in the economy, and the second education project which aims to improve primary education and manpower development. 42. Agreed Actions. The overriding issue, linked to the macro-economic dialogue, relates to the Government's precarious financial situation and its difficulty in financing the operating costs (including counterpart funding of externally financed projects) of the social sectors. While the MERCAP is addressing the overall fiscal situation, the proposed project would contribute to maintaining the 1992 level of Government health expenditures In real terms, the rationalization of expenditures in the health sector (at least 20% of budget allocations would be for non-wage expenditures) and would establish cost-recovery formulae that would improve financial management of health facilities. The main policy decisions incorporated into a health policy letter provided by the Government to IDA are: (i) the introduction of co-management (with clients and community) and cost-recovery in hospitals and health centers; (ii) a simplification of the health system to one of regional hospitals and health centers with strong community involvement; and (iii) the integration of vertical health programs at the regional level into the main services of the MOH. Other agreements cover: (i) annual review of and agreement on the health sector budget; and (ii) the establishment of a multi-year public expenditure program in the health sector by the end of 1994. Conditions of effectiveness include: the signature of a financing agreement between the Government and the CDSF; the adoption of the Procedures Manual by the CDSF; the recruitment by the Government of private firms or NGOs required for the first year's procurement of goods, preparation of architectural designs and bidding documents, supervision of civil works, and preparation and supervision of training programs, the signature of contracts for auditors and for the installation of a management information system for the CDSF; and the deposit of US$5,000 equivalent in each of the three regional bank accounts of the CDSF. 43. Environmental Aspects. Because sea-sand or ground coral is often used in construction in Comoros despite the fact that this is illegal, the project has been rated "B." To avoid environmental damage, IDA would carefully monitor project rehabilitation activities and would not finance the use of these materials. 44. Program Objective Categories. The project would contribute to the following Program Objective Categories: (a) improve health status; (b) poverty alleviation; and (c) capacity building (NGOs, communities, and MOH). 45. Benefits. The project is expected to enhance the development of human resources by improving the health, education, and income status of the population. Through the health and population component, available primary health care is expected to improve with the strengthening of peripheral services and closer involvement of communities In their provision; information, education, and communication and better family planning services should increase the contraceptive prevalence rate, reducing fertility, as well as raising awareness of the need for AIDS prevention. The CDSF would complement activities in the health component by building upon strong community involvement and aiding communities and individuals to more effectively and efficiently channel community resources and implement local development efforts, including much needed rehabilitation of primary schools, water supply and health posts. It would provide an opportunity to strengthen the capacity of local associations and 15 NGOs, as well as encourage the creation of new NGOs, In addition to enhancing the well-being and economic role of women in society. 46. Risks. The main risks to the implementation of the project are weak Government capacity and potential delays due to political uncertainties. To address the first, the goal of the health and population component is to strengthen community involvement, both financially and managerially, In the provision of basic health services as well as to build Government capacity and improve the efficiency of these services. More specifically, personnel would be trained, a unit within the Ministry of Health would be created under the Directorate General of Health Services fe: procurement and administration of Implementation, and technical assistance would be provided in key areas for capacity building. To insulate the CDSF from weak Government capacity and political interference, an autonomous agency staffed by selected, contractual employees would manage the fund. In addition, community training, strong CDSF supervision, a transparent management information system, and semi-annual auditing of accounts would enhance the overall efficiency of the community development component of the project. 47. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. November 19, 1993 ('HEDULE A Page 1 of 1 FEDERAL ISLAMIC REPUBLIC OF COMOROS POPULATION AND HUMAN RESOURCES PROJECT Estimated Costs and Financing Plan Estimated Costs US$ thousand % Foreign Total Exchange Base Costs Local Foregn Total A. Support to Health Sector 1. Support to Central Level 272 384 656 59 5 2. Support to Regional Level 165 275 440 63 3 3. Health Facilities Rehabilitation 3,829 996 4,825 21 33 4. Family Planning Program 106 151 257 59 2 5. STDIAIDS Program 107 182 289 63 2 Sub-Total 4931 2,056 6,987 29 48 B. Community Development Support Fund 1. Administration 1,075 0 1,075 0 7 2. Sub-Projects 4,904 911 5,815 16 40 Sub-Total 5,979 911 6,890 13 47 C. PPF 500 300 800 38 5 TOTAL BASELINE COSTS 11,410 3,267 14,677 22 100 Price Contingencies 1,184 175 1359 13 9 TOTAL PROJECT COSTS 12t594 3,442 16,036 21 109 Financing Plan (US$ thousand) Local Foreign Total IDA 9,587 3,442 13,029 Governmentp 3,007 - 3,007 Total 12594 34442 16,0 1/ Government contribution will include US$2 million in budgetary assurances to ensure adequate funding of health facilities to be rehabilitated; and US$1 million in community counterpart contribution to the CDSF. SCHEDULE FEDERAL ISLAMIC REPUBLIC OF COMOROS POPULATION AND HUMAN RESOURCES PROJECT Procurement and Disbursement Procurement (US$ million) Project Element ICB LCB Other Total Costs 1. Goods 1.27 0.56 1.83 (1.27) (0.56) (1.83) 2. Civil works 1.76 1.76 (1.76) (1.76) 3. Consultancies 0.42 0.42 (0.42) (0.42) 4. Training 1.15 1.15 (1.15) (1.15) 5. MOH Oper. Costs 2.44 2.44 (0.45) (0.45) 6. CDSF Inc. Op. Cost 1.19 1.19 (1.19) (1.19) 7. CDSF Sub-Projects 4.93 1.52 6.45 (4.93) (0.50) (5.43) 8. Refinancing PPF 0.80 0.80 (0.80) (0.80) Total 1.27 6.69 8.08 16.04 _ (1.27) (6.69) (5.07) - (13.03) Figures in parenthesis are the respective amounts financed by IDA. SCH!'QLE B Page 2 of 2 ALLOCATION OF IDA CREDIT BY DISBURSEMENT CATEGORY US$ thousand Goods Equipment, vehicles, 1,700 100 furniture, supplies Civil Works 1,600 100 Consultancies 400 100 Training 1,100 100 MOH Oper. Costs 400 100 CDSF Inc. Operating Costs 1,100 100 CDSF Sub-Projects 4,900 100 PPF 800 100 Non-Allocated - TOTAL 13, Note: Health component: Government contribution of staff and supplies for which IDA does not disburse are not shown. CDSP component: contribution of the beneficiaries in kind and in manpower are not shown. Government will also contribute US$15,000 to cover small expenditures, which will be reimbursed 100% through the special account. ESTIMATED IDA DISBURSEMENTS (US$ million) IDA's Fiscal FY94 FY95 FY96 FY97 FY98 FY99 Years Annual 0.8 2.5 3.5 3.1 2.2 0.9 Cumulative 0.8 3.3 6.8 9.9 12.1 13.0 SCREDULE C Page 1 of 1 FEDERAL ISLAMIC REPUBLIC OF COMOROS POPULATION AND HUMAN RESOURCES PROJECT TIMETABLE OF KEY PROCESSING EVENTS: Time taken to prepare project : Two years Prepared by : Government with IDA assistance First IDA Mission : December 1990 Appraisal Mission Departure : March 1993 Negotiations October 1993 Planned Effectiveness March 1994 SCHDUL D Page 1-of 2 The Staus of Bank Group Oper0811a in COMOROS: SaUtment of Bank Loans and IDA Credits (As of 9130193) Last ARPP Undisbursed Supervision Rating Loan or Fiscal Appraisal Development Overall Credit No. Year Borrower Purose Bank IDA ProLection Actual Objectives - Rating Credits 7 Credits closed 30.41 C17510-C 1987 COMOROS Education l 7.90 0.00 3.91 2 2 C22070-C 1991 COMOROS Road Maintenance 6.60 6.25 5.70 1 i C22700-C 1991 COMOROS Macroecon. Reform 8.00 1.00 6.28 2 2 Total number of Credits: 3 22.50 15.89 Total 52.91 Of which has been repaid 0.66 Total now held by Bank and IDA 52.24 Amount sold Of which repaid 0.0 Total Undisbursed SCHED-hE D Page 2 of 2 NOTE ON PROJECTS WITH SIGNIFICANT DISBURSEMENT LAGS 1. A review of the portfolio took place in March 1993. Implementation of the three active projects in the Comoros has significantly improved. Disbursement lags of two projects have been brought down to 36% and one operation improved from 100% to 69%. This resulted from sustained efforts of the Government implementation agencies to improve project execution, including change of the local management teams, adequate allocation of local operating funds In the budget, and close monitoring of key project components: 2. Status of the three on-going projects is summarized below: (a) Macro-economic Reform and Capacity Building Credit (2270-COM). Implementation of MERCAP has substantially improved following the appointment of a new economic management team in July 1992. The rising trend of current expenditures was reversed, the civil service reform has been accelerated, and trade liberalization has progressed well. Based on this progress the Bank declared the credit effective in December 1992 and released the first tranche. Since then, the Comoros has kept the adjustment program on course and the credit has been upgraded from a 3 rating to a 2 rating in January 1993. Progress on MERCAP implementation will continue to be closely monitored and, if it continues to be satisfactory, the second tranche of $3 million will be released in March 1994. (b) Higbway.Maintenance (2207-COM). Implementation of the Road Maintenance Project is now making good progress, despite some delays in effectiveness and initial difficulties by pioject unit in handling the project. This is due mostly to the improvement in the overall financial situation, including regular replenishment of the Road Fund and the timely payments of civil servant salaries. Bidding for periodic maintenance works by contractors is underway according to detailed schedule and routine maintenance works have started on the three islands. Disbursements on this credit are expected to accelerate from $0.3 million in FY93 to $1.7 million in FY94. (c) Second Education (1751-COM. Following the mid-term review in March 1992 combined with the appointment of a new project director, implementation of the Second Education project has significantly improved. Accordingly, the project has been raised from a 3 rating tc a 2 rating in March 1993 and the closing date has been extended by one more year to June 30, 1994. Measures recommended during the review have been largely implemented, namely the restructuring of the Ministry of Education and redeployment of staff to improve internal efficiency, strengthening of inspection services and reduction of repetition rates, and improved procurement and distribution of textbooks to schools. The remaining 42% of the credit is expected to be fully disbursed by end-1994 as large commitments have already been made for textbooks and school equipment. at.93 AnnexA Banic Fact Sh-t Page 1 of 1 COMOROS Ban1~ Lan Prov FY~ sy Seo and Lmig-twn~umen (%ofToMl Comimntfi!ursm Pat PlaCn== a/ Fyll FY92 FYT3 FYS r~~ IK GSRO . Commltmen (UUm) 14.6 13. 7.0 8. Seotor (%) hl 45.2% Agriculture tndustry and Finnc Power Pubbic Sectar Managemnt infratucture & Urban Dev. 100.0 Human Resource 100,0 10 1100.0 Mining & OUh Extrctve Multiscr------ Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 L-ending instrumen (%) 54.8% Adju~tment Lanm cf 100.0 Specifn av. an. & Othes Total 10. 100 0. 100. 100.0 100.0 Disturmt (S$) 1.1 2.2 4.5 5.0 Adjusrnt Lum c/ 57.9 60.0 Specific Inv. L.ans & Oter 100.0 100.0 42.1 40.0 IFC Approval (USSm) n.a. n.a. n.. n.a. Sector (%) hI Agi-Iiness Cap. Mat Che.m-FrdIa Iifratucture Mamanurg Oil-.mining__ __ --- Total 100.0 100.0 100.0 100.0 Investrmt instrument (%) U.ans Equity Quasi-equity d/ Total 100.0 100.0 100.0 100.0 a/ Use rang ta rußt m st Ikdly ii preented in th CSP. b/ For fu ~ lemndng, rud to nrm~t 0 or 5%. cl Program and Sucturl Acgimnt Lo~ns, SeAtr Mjustmnt Lan~ and OMbtAjustmn Lans. dl ineudes boff quee¼quity an nd qumuity equity typ. Cot 1893 Ann~x a Comors: Prirky Povety tudicators Pgo 1.o8 Mk~ SM56we aeme MvqhN rad~ alue aa. POVERTY Uppe povemy un locl ur. - H.••A-a in %otpop. --- - . L Pomerty in loem aar. -- Etdaou ~ %ofpp - - oNp pr capita US 80 170 500 350 350 1.610 SHORT TERM ~NCOME INDICATORS IJnemt ubaa wage loal cur. . - 3.500- UnkiG4 rur wagi m Rurd 'temsofutrdn Co~~ume pic inm 1987-100 Food -100 Rurå SOCIAL INDTCATORS Publicxpediamonbaicacci i %o(ODP .. .. 5 - - - Prn~ary %adsoolagepop. 24 46 75 70 113 100 Makt 36 64 82 76 12 106 Fana 12 29 67 60 106 98 Monality nfat~mortality thoU.tivebirth 132 126 90 104 70 40 Und.r$mrtality -- 128 177 98 53 Ml %agegrep . .. 71 40 73 70 DPT . .. 71 35 Sl 74 chuid=nalnuriio(1 356 Wo Goup,any\ bnen n d MOZAMBIQUE era c3n trccessancœ áKKI MOMETERS 0o 200 30 eo 100 2l0 MA3AGASCAR NGAZ IDJA 3us (GRANDE _ _ _ _ '' _ COMORE) COMO ROS "..PUBUC SECTOR HEALTH FACIUTIES ROADS 0 TOWNS O HOSPITALS ················~ PATHS CONTOURS (elevations in feet) 0 HEALTH CENTERS 4 AIRPORTS • SPOT ELEVATIONS (in fee) .1- PORTS REEFS -12° 12° 1. NZWANI UJ ~(ANAN) MWALI -sm2 .OHE) T Pomon D~ Mlmani 5 0 25 O,foi 5 0 25 KlOMETERS