c/ A$ (W/ C - < Dcannot of The World Bank FOR OMCIAL USE ONLY MI CROFICHE CO1PY Report No. :P- 5832-KE ype: (PR)t Title: PARASTATAL REFORM & PRIVATIZAT R4rtNo P-3832KE Au1thor: ATJEEM, I ExT,. :34755 Room:J10261 Dept. :AF2TE MEMORANDUM OF TME PRESIDENT OF THE INTERN&TIONAL DEVELOPMENT ASSOCIATION TO THE EECUTIVE DIRECTORS ON A PRIOPOSED IDA CREDIT OF SDR 16.10 MILLION (US$23.32 MLLION) TO THIE REPUBLIC OF KEA IN SUPPORT OF A PARASTATAL REFORM & PRIVATIZATION TECHNICAL ASSISTANCE PROJECT November 9, 1992 public and Private Enterprise Division Eastern Africa Department This document has a restricted distribution and mnay be used by recipients only in the performance of heir offcial dutis its contents may not otherwise be dislsed without World BSAn authorization. CURRENCY EQUIVALENTS Exchange rate used in the report: US$1.00 = KSh. 30.0 I/ Ksh. 1.00 = US$0.0333 FISCAL YEAR July 1 - June 30 ABBREVIATIONS CBK Central Bank of Kenya CMA Capital Markets Authority DGIPE Department of Government Investments and Public Enterprises ESOP Employee Stock Ownership Plans ESTU Executive Secretariat Technical Unit GOK Government of Kenya GID Government Investment Department (MOF) ICDC Industrial and Commercial Development Corporation IDA International Development Association IDB Industrial Development Bank ISAC Industrial Sector Adjustment Credit KPA Kenya Ports Authority KPTC Kenya Posts and Telecommunications Corporation KR Kenya Railways KTDA Kenya Tea Development Authority NCPB National Cereals and Produce Board NSE Nairobi Stock Exchange PE Public Enterprises PERP Public Enterprise Reform Program PRPC Parastatal Reform Program Committee SOE Statement of Expenditures MOF Ministry of Finance WEIGHS AND MEASURES Metric System tI The period average exchange rate for January - June, 1992 was US$1.00 = KSh. 30.27 or KSh. 1.00 US$0.03304 FOR OMCIL USE ONLY KENYA PARASIATAL REFORM AND PRIVATIZATION TENICAL ASSISANCE PROJECT Credit and r"Qect Swm Borrower: Govenment of Kenya Benefldarles: Ministry of Finance Credit Amount: SDR 16.10 million (US$ 23.32 million equivalen) Tam: Standard VDA tms with a 40 year matuity Onlanding Terms: Not Applicable Flandn Plan: IDA US$ 23.32 million Government US$ 2.97 million ODA US$ 4.18 m1ion Other US$ 1.36 mfllion Total US$ 31.83 million Economic Rate of Retun: Not applicable Staff Appraisal Report: 11248-KE This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwie be disclosed without World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INERNATIONAL DEVELOPMENT ASSOCATION TO TIRE EXECTV DJRFC ROPS ON A PROPOSED CREDIT TO THE REPUBLIC OF KENYA FOR A PAIP1SATM RME AMA3O TACLA AS&E PROJET I submit for your approval the following memorandum and recommeaions on a proposed development credit to the Republic of Kenya for SDR 16.10 million (US$23.32 million equivalent) to help finance a Parastatal Reform and Privtization Project. Ihe credit would be on standard IDA terms, with a murity of 40 years. The U.K. Oversea Develaopent Association has ageed to provide the project with co-financing of about US$4.18 million equivaien Other donors prving co-fiancing include the EEC, UNDP and the Netherlands. EART I: COUNTRY POLICIES AND BANK GROUP'S ASSISTANCE STRATEGY 1.1 The Board last disused the Country Policies and Bank Group's Assistance Str for Kenya on September S, 1991, when the Education Sector Adjustmen Credit (EDSAC) was presented. Bank Group assistance continues to be governed by ihat strategy. A. BACKGROUND 1.2 Kenya is a low-income country which had a per capita imcome of $340 in 1991. Its popultb growth rate has fallen to 3.6 percent but this remains one of the highest in the world. Some thre quas of the country is cssified as aid or semi-arid (ASAL). The ecomy is heavily dependent on agriculture, which employs about 80 percent of the labor force and ctut more than one quarter of GDP. Coffee and tea accoun for close to one half of merchandise exports. Mhe service sector accounts for about 45 perenit of GDP and is an impont source of enmloyment. It includes tourism which in recent years has become Kenyas leadig foreign exchange eaner. The manufactrIg sector is relatively developed and dvesHied, contrte about 12 percent of GDP and employs close to 8 percent of the labor force. The sector, however, has been producing mainly for a protected domesdc market. Pa%uatals account for about one quarter of the value added in manufacturing, and 11 pecent of GDP. 1.3 Four phases cm be distinguished in Keya's economic peomance since Indepece in 1963: (a) rapid growth and low inflation in the first decade until 1973; (b) slower growth and ring iflation durig 1973-80, due to adverse terms of trade and the emergence of structural and policy-induced ntrain in agriculture and ma ing; (c) serious macroeconomic imbalances and low growth during 1980-8S, caused mainly by the second oil shock in 1979, the erosion of fiscal discipline and a severe drought in 1984; and (d) renewed economic growth duing 1986-90, largely the result of structural reforms and progress toward stabilization. -2- However, 1991 saw renewed destabilizing fiscal pressures, a weaker reform effort and slower growth. Fiscal discipline improved by mid-1992 but monetary expansion has continued (paras. 1.6-1.10) and performance on structural reforms has betn mixed (paras. 1.19-1.22). B. RECENT STABilZATION EFFORITS 1.4 During 198687, the G;overnment begM implementig a major stabilizaton and adjustment program supported by the IMP ttiough a stand-by arrangement and a SAF (ater converted into an ESAF). Support from the Bank was provided through sectr adjustment operations in agriculture, industry, the financial sector, expott development and educatio (pam. 1.19-1.22). Several donors co-financed these operations. 1.5 Since 1987 Kenya's stabilization efforts have been uneven and therefore, have produced mixed results. The budget deficit was reduced from 6.6 percent of GDP (including grants) in FY87 to 4.5 percent in FY90 primarily through efforts to limit the growth in development expenditu and contain the growth in the employment of civi servants. Meanwhile, high aggegate demand, International price increases and an accommodaiing monetary policy 4teled domestic inflation, which remained above 10 perwant throughout 1988-90. During this period, the Govaerments exchange rate policy wis appropriate but the etWnal account was adversely affeted by deteriorating terms of trade, especia1ly low coffee prices and high oil prices. Nonethless, Kenya was able to meet on time its external debt service obligations which averaged over 35 percent of export earings. (Table 1.1). 1.6 The Gulf crisis and the deteriorat terms of trade weakened the balance of payments in late 1990 and early 1991. To restain the growth in aregate demand and, therby, reduce prssures on the extenal account, the Government revised its fiscal deficit target for FY91 from 3.8 percent of GDP (including grnUts) to 2.5 percent of GDP. However, effots to control the fiscal deflcit and credit expnson in FY91 were inadequate. Instead of falling, the budget deficit rose sharply to 7.1 percent of GDP in FY91 (Table 1.1). Meanwhile, the net domestic assts of the banki system increase by 23.3 percent in 1991 compared with a progrmmed increase of 10 percent 1.7 The FY92 budget, a read before Parliament in June 1991, lowered the deficit target to 2 percent of GDP (imcluding grants). New revenue-raising measures were inroduced. Also, In an attempt to tighten expenditure, a high level budget review committee at the Ministry of Fane met each month and inteified monitoring of the fiscal situation. Cash management by the officers of all ministries was also enhanced. 1.8 Nonetheless, mid-way through FY92 (Der 1991), the full year budget deficit was projected at well above the origial 2 percent target primarily due to a sizable Suppleme Budget, enditure over In a number of the large mhdstries, the assumption of signficant amounts of parastatal external debt service obligations, and continuing weakess in tax adminitration Meanwhile, the current account of the balance of paymens improved In 1991, mostdy becas the Government canceled or postponed non-essental imports. Inflation increased from 15.7 percent in 1990 to 19.6 percent in 1991. - 3 - TABLE 1. 1 KENYA - KEY INDICATORS Prel.Act. Proj. 1988 1989 1990 1991 1992 1993 1994 1995 1996 Real Growth Rates (t): Gross Domestic Product (UDPqp) 6.2X 4.a 4.3X 1.7X 2.0X 3.8X 4.5X 5.0K 5.5K Gross DomestSc Irncne (6DY) 7.3X 3.1X 6.3X 1.7K 1.9X 4.12 4.8K 5.3X 5.7? Reat Per Capita Growth Rates (X): Gross Domestic Product (CDP) 2.3 0.8 0.5 -1.9 -1.6 0.1 0.8 1.4 1.8 Totat ConsumptSon 2.8 1.1 3.3 -3.1 -2.6 1.0 0.4 0.8 1.0 PrSvate Conauption 4.2 2.0 4.0 -9.4 12.1 2.1 -2.0 *0.8 0.0 Debt & D. Services (LT+ST+INF) 1/: Total D00 (USSN) 5756.7 5783.1 7005.8 7014.1 7235.5 7459.5 7784.6 8078.2 8293.1 DOD t GOP (K) 67.8 69.1 81.4 82.9 83.1 80.0 77.1 73.5 69.1 Oebt Service (USSR) 730.8 705.2 770.1 719.3 S69.9 1112.7 69Z.3 676.2 658.2 Debt Service I Exports (t) 38.8 36.5 34.6 31.9 24.3 42.7 23.9 20.9 18.2 Debt Service / CP (K) 8.6 8.4 8.9 8.5 6.5 11.9 6.9 6.2 5.5 Interest Burden (LT*ST+INF): Interest Paid (USSN) 310.1 283.4 331.5 319.8 193.2 422.5 243.7 23S.1 225.1 Interest t Exports (K) 16.5 14.7 14.9 14.2 8.2 16.2 8.4 7.3 6.2 Interest G OP (S) 3.7 3.4 3.8 3.8 2.2 4.5 2.4 2.1 1.9 Gross Investment / GOP (K) 25.0 24.5 23.9 20.7 21.7 20.5 20.6 20.8 21.1 ICORs (5-yr endng year shown) 4.97 4.65 4.53 .5.50 6.4 6.95 6.60 6.09 S.05 3CORS (annual) 4.3 5.7 5.6 12.1 10.9 5.5 4.7 4.2 4.0 Domestic Savings / CDP (X) 19.8 17.2 18.7 19.3 19.9 19.4 20.0 20.8 21.7 BOP Resource Balance / QDP X) -5.2 -7.3 -5.2 -1.5 -1.8 -1.1 -0.6 0.0 0.7 National Savings / GDP (K) 16.8 13.8 16.1 15.8 18.3 15.6 18.1 19.3 20.5 BOP Curr. Acet. talance/GP (K) 21 -8.0 -10.0 -7.5 -5.1 *3.4 -4.9 -2.5 -1.6 -0.6 Marginal DomestSc Savings Rate 0.24 -0.01 0.29 0.23 0.22 0.17 0.24 0.29 0.30 Narginal National Savings Rate 0.22 -0.07 0.33 0.16 0.27 0.02 0.32 0.30 0.31 Government Fixed Investment /GDP (K) 5.2 5.7 6.4 5.3 7.8 6.9 6.9 6.9 7.0 Government Savings I UOP X) -2.2 -2.4 -2.1 -1.1 2.9 3.5 5.8 7.0 7.2 Private Fixed Investment /GDP (K) 11.8 11.1 10.8 15.4 13.9 13.6 13.7 13.9 14.1 Private Savings / GDP (K) 19.1 16.9 18.4 16.8 15.5 12.1 12.3 12.3 13.3 Gov t Revenues & Grants / GDP (K) 25.4 26.0 24.5 20.7 24.0 24.1 24.7 25.5 25.4 Gov't Exp.(fncl.net lendgn)/GDP (X) 30.2 30.6 31.0 24.7 27.0 26.0 24.3 24.1 24.0 Budg. Def. (-)incl. grants/GP (K) -4.7 -4.5 -7.1 -4.0 -3.1 2.0 0.4 1.4 1.4 Primary Def. C-) or Surplus/GDP (X) 1.2 6.2 5.4 0.6 1.9 4.1 3.8 4.0 3.7 Consuer Price Index (K growth) 3/ 12.3 13.5 15.7 19.6 21.0 15.0 10.0 5.0 5.0 GDP Deflator (K growth ra'e) 8.5 9.3 10.3 12.4 21.0 15.0 10.0 5.0 5.0 Real Exchange Rate (1987=100) 95.1 87.3 86.0 79.9 86.9 86.9 86.9 86.9 86.9 Terms of Trade Index (1987.100) 104.5 93.1 83.9 96.3 105.7 106.8 107.5 108.5 109.1 Export (GNFS) Volume Growth Rate (K) 4.6X 9.2K 17.3K -0.5K 2.0% 6.5K 6.6X 6.8X 7.2K Exports (GNFS) / GDP (K) 21.0 21.9 24.7 24.2 24.2 24.8 25.3 25.7 26.1 loports (GNFS) Vol. Growth Rate (K) 9.0X 9.3K 15.6 -12.6X 3.0X 4.6X 5.4K 5.5X 5.5K Inprts (ONFS) / GDP (K) 27.1 28.4 31.4 27.0 27.3 27.5 27.7 27.9 27.9 BOP Current Balance (USSN) -682.6 -838.0 -647.4 -431.0 -291.9 -458.5 -250.3 -170.9 -76.2 Resrves excluding gold (USSR) 263.7 284.6 205.4 116.9 299.5 551.2 717.2 854.4 967.5 Reserves excl.gold (Cths lap. goods) 1.5 1.6 1.1 0.7 1.6 2.7 3.2 3.5 3.6 Source: IMF (for fiscal data); Government of Kenya and staff estimates. Note: Nistor cal fiscal data Is In fiscal year beginning July 1 of year shown, projections are n calendar year begfnnng In 1991. 1/ Projections assume that the accumulated arrears for 1991-92, estimated at $325 milL., are paid off fully in 199M. 2/ Excluding grants. 3/ Average amual Nairobi Corner Price (revised) IndeA excluding rent. -4- 1.9 Pardy becase of the deteriorating macroeconomic policy performance, and party in concer over Increasngly poor governan, donors at the Consultative Group (CG) meeting in November 1991, decided to postpone aid pledges and agreed that there should be fiurther consultains in about six months to review progress in a number of areas. Later, in December 1991, the IMF was unable to complete the mid-term review of the third year of the ESAF becaue Kenya missed three of the four ESAF quantitative performance criteria. However, after another round of consultations between the IMF and the Government in April 1992, a Shadow Program was agreed and the Government adopted new measures to achieve fiscal compression during the latter part of the fiscal year, in line with a revised deficit target of 3.5 percent of GDP (including grants). During this period the monitoring of unauthorized overdrafts by Minitres was tigened, and higher VAT rates were levied on oil products, soft drinks, beer and tobacco producs. A panel of enior permanent secretaries also undertook a review of own-financed development projects and stopped several low-priority investmenrs which were not at an advanced stage oi Implemetation. During the last six weeks of FY92, the Government froze al expende (commt and cash), except wages, salaries and essential services. 1.10 An IMFtIDA mission conducted an interim review of the Shadow Program in September 1992. It found preliminary indications that fiscal discipline had increased and that this had helped to reduce the fiscal deficit to about 3.8 percent of GDP (including grant, commitment basis) for FY92. But although the growth in expenditure and credit to the Central Government slowed, the money supply has continued to expand by about 20 percent per annum. The expansion has been driven largely by the access of a number of distressed banks to the overdraft facility of the Central Bank and signals a failure to enforce prudential regulations. This has fuelled ina (which reached over 25 percent in June 1992 on a year-over-year basis), rendered open market operations ineffective, increased pressures for large wage increases in the Central Government, tred real deposit interest rates negative and eroded real producer incenives. In turn, higher inflation seriously undermined some of the recent positive developments in the foreign exchage regime-including the Introduction of convertible foreign exchange bearer certificates (FOREX-Cs) in October 1991-by causing the real effective official exchange rate to appreciate, and widening the sra between this rate and the premum on FOREX-Cs. Arrears on extel debt are also accumlating. Several measures in the IMF Shadow Program address these macroeconomic difficulties. Their implemeon and impact are scheduled for review by the IMF in Janwury 1993. C. DEVELOpM bT sRTEGY AND MIUM-TERM ECONOMIC FRAMEWORIK 1.11 The Govenent's Strategy. The Governmen's long-tena development strategy is articlated in Sessional Paper No. 1 of 1986, Economic Management for Renewed Growth, and the series of policy framework papers (PFPs), including the most recent one which covers 1991192-93194. lhe Sessional Paper emphasizes the need to creae productive employment oppornities for a labor force that is expected to increase annually by about 400,000 entrns over the next 15 years. GDP growth is to be generated primarily by the private sector. 'he Gov 'ments role increasingly is expected to be the provision of an appropriate enabling environmenlt for private sector development rather than direct participation in economic activity. The sategy, which is sound, emphasizes the need to stghen lins between rural non-frm activities and the formal sector, and restucture manufactring to improve efficiency and enhace export competitiveness. It ailo calls for sound macroeconomic management involving the reduction in the fiscal and external deficits, and a contractionary monetary stance. 1.12 When formulated in 1991, the PFP for 1991192-93/94 specified the aims of the Government as: achieving output growth of over 5 percent; reducing inflation to the average level forecast for Kenya's main trading partners (about 5 percent); and reducing the external current account deficit to a susinable level of 2.8 percent Including grants by 1993/94. Toward this end, the Government indicated that it would: (a) downsize the parastatal sector and limit the growth in the civil service; (b) reduce the budget deficit to levels which do not crowd out the private sector, and which can be sustained by foreign and non-inflationary domestic financing; (c) limit the use of new non-concessional external financing; (d) pursue a flexible exchange rate policy; (e) reorient trade and industrial incentives to reduce the anti-export bias, encourage efficiency, promote the growth of non-tradidonal exports, and encourage domestic and foreig invesmt; (f) rationalize the b-.dget by limiting public sector employment and improving the quality and implemenion of the public investment program (PIP); and (g) fiurther improve farmer incentives, agricultur input supply and agricultural services, particularly for smallholders. hIe Shadow Program of April 1992 supports the broad objectives and strategy of the PFP. D. COUNTRY ASSISTANCE STRATEGY 1.i13 Objectives. The Bank shares the vision of the Sessional Paper No. 1. Accordingly, IDA's country assisace strategy has four main objectives: (a) encouraging the Government to provide a stable mareconmic enironment; (b) supporting changes in the incentive framework and infrastructure that would facilitate the development of an efficient and export-oriented private sector; (c) significandy increasing the efficiency of the public sector, including the parstatals; and (d) addressing longer-term human resource issues and arresting the deterioration of Keonyas fragile environment. IDA Is pursuing these objectives through policy-based sector adjustment lending, investment lending and economic and sector work QA"SW) in priority areas. 1.14 Priorifies. The priority areas for IDA's country assistance are: (a) improving publc sector efficiency, by conaining fiscal expansion, improving the efficiency of public spending, rationalizing public sector employment, and limiting the scope and size of the parastatal sector. This objective Is being pursued through, inter alia, the Parastatal Technical Assin Credit in support of parastat reform, and through EDSAC which was approved by the Board in 1991. Ihe latter focuses on fiscal containment of the largest public-spending sector (para. 1.22); (b) developing an export-oriented private sector to reduce depndence on foreign sains. Supot for these efforts is being provided through policy-based lending-the Agriculture Sector Adjusment Operations (ASAOs) and the Export Development Program (EDP)-and infrastructure investme to relieve transport and other physical bottlenecks; and (c) st the basis for equitable and sustainable development, by addressing hulman resource and env m issues. ITe human resource sategy is being implemented throu EDSAC, and inestment operations for the universities, health rehabilitation and population. The Prtcted Areas and Wildlife Project, which was approved in 1992, is providing assistance in the area of wildlife and vonment managemnt (Table 1.2). -6- TABLE 1. 2 %DW K AW P OVATOI IN ENYA AS AT EID OCIC ,1992 St Mllitsm) .................. ..,,,, ... Q..... ,........,,........,... .................................... Lwdrg by Sector 1w Wa 198? 1990 1991 19SC Total (to at) ,.,,........ ..,,,,......... . ................................... ................................ . ........... ..,,..,.. IDA asm Aricatu 8l65 19.A 132.4 0.0 119.8 103.7 452.0 ..........._ ....... ... .... ........... ........ . .... .... . .... .... . .... .... HlCutwal Sector DdJtut 40.0 40.0 FAgrAUatul Sectwr kMUuit 2D.0 20.0 Agricutultu Sectorw N t 11.5 11.5 Anwim Heatth Svices 15.0 15.0 NtItnl Agric. Ru arch 19.4 19.6 *Nut Sevics Dasio 2.8 2a.8 Third Uairrbl 1t 9wly 64.8 64.8 Sed Cdoffe. I unt 46.8 46.8 Forty Oelqumt 19.9 19.9 Seawd Natlat Arfe. Exteuln 24.9 24.9 Seawad Ari. Sectwr AdJusunt V 5.0 75.0 Sod HeiNaa irta aLy 43.2 43.2 Protected Arm rd Wildtife 60.5 60.5 Infr hItn u. 28.0 0.0 0.0 0.0 0.0 0.0 28.0 ,..... .... ..... .... .... . .... .... . .... ..... .. ..... lewd Rslltm 28.0 2L0 PqulAtin ard HAn Rewes 0.0 12.2 0.0 35.0 186.0 0.0 233.2 ................I............. .... ... .... ... .. ... ... Third Pq*pstlan 12.2 12.2 Ftrth Pqxa&tstl 35.0 35.0 Ed Iton Sector Adjumt 100.0 100.0 llwelftfes hwtomt 55.0 55.0 eltth Iddtftatfsn 31.0 31.0 PRb1e ard Prfute 0torprfs. 0.0 112.0 263.4 173.3 0.0 49.2 597.9 ,_ . .. .... .... ...... .... . ..... .... .... . .... .... . .... .... . .... I,kat al Sector AOUsit 10.0 10.0 mistrial Sector Adjusnt 102.0 53.7 155.7 Firemial Sector AdJuwit 164.0 67.3 31.3 Gotmml Demlqnt & EwW 40.7 40.7 FfI,mal Secor Tedmical Assistt 5.0 5.0 Fin. Paastatais Tedrdcal AsgIstue 6.0 6.0 En=t Dowlqaut 1 V 100.0 49.2 149.2 IFC I_ESITS 0.0 49.8 0.0 0.0 0.0 0.0 49.8 .... .... .... . .... .... . .... ..... ....... ..... Va*e c*ital O Imp e 2.8 2.8 RAPp P r & Pqsrbtud ft Rcove 47.0 47.0 W 5llK GP 114.5 193.6 395.8 208.3 305.8 152.9 1370.9 ..... .. .... _ .... .... . .... .... --- 1138 3M 114.5 143.8 395.8 208.3 305.8 152.9 1321.1 Adj i 71.5 112.0 217. 67.3 100.0 0.0 568.5 i1wtout 43.0 31.8 178.1 41.0 130.8 103.7 528.4 H d 0.0 0.0 0.0 10 75.0 49.2 224.2 oe ata O s fi wvaeit dete. V H6d redit. -7 - 1. 1S Cunrent Status ot Country Assistance. Kenya has received six sector adjusutm credits since 1986. The sector approach to adjustment was adopted for three main rzasons: (a) two SALs in the early 1980s were largely unsuccessfiul because of limited implementation capcity, inadequate preparatory economic and sector work, unrealistic time schedules for Implementation, and unwarted optim about the likely impact of adjustment; (b) sectoral programs stressed incremental changes that were implementable and politically sustainable; and (c) sector ministries were expected to eoxercise greater ownersiip and accountability if they were difretly iolved in the design and implementation of the reforms. 1.16 After the conditionality had been met, the final tranches of ASAO I, the Industial Sector Adjustment Credit (SAC) and the Financial Sector Adjustment Credit (PSAC) were disbursed In 1988, 1990 and 1991, respectively. However, the Bank is holding socond tranche releases of ASAO H, EDP, and EDSAC because of the Government's recent poor m nic management (paras. 1.6-1.10) and failure to meet sector-spocific conditions. This is consistent with the country assistance strategy articulated in February 1991 and discussed by the Board in September 1991. It calls for a reduction in the proposed lending program under two sets of circumstances. First, in the event that macroeconomic management remains sound, but progrss on the proposed adjustment operations proves difficult or is delayed, the particular adjstment operation and assoated IDA projects would be dropped from the lending program in that year. Second, in the event that the macroeconomic framework is no longer on track, IDA would cut back the lending program by dropping all adjustment lending and those investmt projects which would not be viable in such an environment. The second situation now obtains in Kenya. Accordingly, IDA is expected to commit only about $60 million for projects in FY93-the parastatal reform technical assistance project, an agricultural sector management project and a drought recovery project-compared with $339 million wbich was committed in FY92 for adjustment programs and investment projects. 1.17 The resumption of disbursements from ongoing adjustment operations would require continued fiscal discipline, significant monetary tightening and implemenion of agreed sectoral reform measures. Furthermore, for the Bank to consider adjustment operations in the fire, the Government needs to adopt viable macroeconomic policies, make progress on agreed sectora reforms, and demonst a strong commitment to much improved publc sector management. Specificaily, this entails: (a) progress in implementing a strong and tran parast l refm program; (b) commitment and inital steps toward a comprehensive civil service reform program; and (c) improvements in the efficiency of public expenditures, especily a well-prioritized public investme program (PIP) (paras. 1.24-1.29). The Government also needs to demonsta commitment to private sector development by adopting measures which improve macroeconomic management, and the regulatory and incuive framework (par. 1.30-1.33). 1.18 At the same time, the straty calls for a continuation of ESW. The reason is that ESW enhces the policy dialogue and strengthens aid coordination. Of course, it also meets the nalytical needs of the current and prospective lending program. At present, it is focused on three key areas of the country strategy: (a) deepening structural adjustment in order to accelerate growth and employment; (b) rationalizing public expenditures; and (c) addressing longer-term issues of sustainable and equitable development. The recent country economic memorandum (CEM) focused on the linkages between public sector adjustment, and stabilization and growth. The CEM for FY93 is addressing the issue of employment creation. A private sector asesmet -8- by IDA is at an advanced stage of preparation. A public expenditure review is scheded to begi In mid-FY93 and a povet proflle will be completed early In FY94. Poligy Reform Issues 1.19 Adjustment Undermined by Stabllizdtlon Problems and BackTraclh ng. Kenyes first seor adjustment credit-ASAO I-was approved in 1986 and included measures to improve the timelins, availability and applicaion of key agricultural Inputs, enhance innives to farmers, tionalize public expenditures, amd restructr key agriculu partatals. Indeed, producer prices were improved, feilizer imports and prices were liberalized, and meat prices were decontrolled. However, progress in eliminating movement controls on maize was slow due to Government concens over food security and a lack of commitment by the implementg agenc. The parastta restucturing was also slower than expected. ASAO) U was a follow-on operation and was intended to broaden and deepen the policy reforms begun under the previous operatio, including the eliminaion of cotrols in maize marketing. But at end-October 1992, sveral of the sector-specific conditions for releasing the second tranche of ASAO II had not been met. 1.20 ISAC was approved in 1988. I objectives were to: initate the process of import liberalization by introducing a system of automatic licensing for most imports and replacing quantitative restrictions with equivalent tariffs for a large number of imports; decontrol prices of selected commodities; Improve investment incentives; and begin the process of reforming two development finance instituions (DFIs). Progress in implementing the program was satsfactory In all areas and the second tranche of the credit was released on schedule in October 1989. The Import licensing system was liberalized in principle, although long administive delays are now apparent. Meanwhile, the maximum t declined from 170 percent to 60 percet wbile the number of tariff rates from 24 to 10. The remainig quantitve restrictions on imports, which in 1987/88 covered 24 percent of all imported items, were eliminated except for items reicted for security, environmental and health reasons Oess than one percent). Exot incentives are being improved and a privae export processing zone has begu opeations. Price contls have been substantially reduced. The marginal company tax rate was lowered from 45 perent to 35 percent and the DPI restructuring was initiated. A follow-on opeation (EDP) focusing on export development was presented to the Board in December 1990. In August 1992 the Government began serious attmpts to meet the sector-specific conditos for the release of the second wanche of EDP. At present, a few outstanding sector-specific issues remain 1.21 PSAC was approved in 1989 to support the first phase of refoms in the financial sect and was disbursed as scheduled. Under this operation interest rates were liberalized, open market opetions were introduced, baking legisaton was modernized, and staff of the Cental Bank were trained in bank supervision. A number of troubled financial instiutons were restuced and the opeation of the Stock Excnge were streamlined. However, there are inraing concerns about: (a) weaknesses in prudendal supevision; and (b) the financial distress of some istiutions whose problems were not addressed under PSAC. These combined wealmesses are now undermining the objectives of financial reform and raising concerns about the stability of the finanial system. 1.22 In 1991, the Goverment embraced educadon reforms under EDSAC. The aim was to reduce the rapid growth in public spending on education which had become fiscally unsstnable and, because it is exclusively driven by excessive recruitment of teachers, has crowded out non- -9 - wage ependitures. It has also severely imjacted on the qualkt of public educaion. Measures were agreed to reduce the rate of growth of the recurrent budget for education; expand access to education and Increas retention at the primary and secondary levels; enhance the quality and relevance of education at all levels; and strengthen sector management and planning. In addition, in early 1992, the Government Introduced user charges In public universities. Implementaion of EDSAC generally has been good but further actions are required in some areas to meet the sector specific conditions for second tranche release. 1.23 At present, the dialogue on sectoral adjustment continues with the Kenyan Authorities, In the context of tmauche release conditions for EUSAC, EDP and ASAO Il.However, the overal effectiveness of the sectoral reforms which are in place is being seriously compromised by recurring stabilization problems which are linked to inaction and back-tracking on public sector issues. Paras. 1.6-1.10 have already explained that in FY91 the fiscal deficit widened, monetary growth quickened and inflation rose. At the same time, evidence indicated that dinisraive controls on imports and maize movement were re-emerging. Analysis also showed that the public sector was: (a) eroding the gkowth in total factor productivity and national income; (b) undermining the private sector's ability to respond to the reform measures introduced since 1986; and (c) discouraging private invement by creating an uncertain business environment which Is characteized by government interfence and corruption. The corollary is that public sector adjustment is of the bighest priority for stabilization and growth in the short as well as long-term. 1.24 PubUc Sector Adj ent Urgently Needed. Stabilization and accelered growth require inter alia significant improvements in the efficiency of current and development expendits, and part reform. Improving the efficiency of current expet requires tackling the civil service wage bill and the underlying strucural factors which drive it-the complex organization and functions of the central government, overstaffing and the deteriorating poductivity of the civil service. Over the medium- and long-erm, comprehensive civil service reform should aim tO improve organizational synergy, reduce vacancies at higher levels of the sevice, rmse wage mpession, and raise substantaialy exenditure on non-wage oprations and maence (O&M). Ihe Govarnment has accepted the need for civil service reform and in early 1992 prepared a detailed action plan. However, this action plan reman an intnal working document; the extent of the Government's commitment to the reform proposals is unknown. 1.25 Efforts to improve the efficiency of public expenditures have included the budget raionalization program (BRP) and public investment program3nin. lhe BRP was epected to acieve its objective, in part by ensuring the provision of adequate resources for O&M, and by concentrating financial and managerial resoi V es on a smaller munber of high-priority projects. Ihe need for the BRP stemmed from the Government's recognition of the principal limitation of the budgetary process, nmely, the absence of a clear prioritization of expendues. One consequence was that ministries frequentiy violated expenditure ceilings set by the Trasury. Anher was a blurring of the distnction between recurrent and development estmates, with Ministries atemptng to finance underfAuded items in the former through the latter. 1.26 To date the BRP has achieved some success in process issues but this has not translated it a more efficient allocation and udlization of expenditure. On the contray, the ratio of O&M expenditure to personne expelnditures continued to decline even after the BRP was Introduced. For Instce, between FY81 and FY86, non-wage O&M declined as a perntage of tota -10- recurent expenditures from 36 percent to 26 percent. Since FY86, when the BRP was Intrduced, it declined even further to 22 percent. The decline was even more pronounced in somn3 sectors. The following two factors are among the reasons why the BRP has failed to achieve its targets. First, personnel emoluments were a significant and seemingly intractable amount of recurrent expenditure while the share of interest payments doubled. Second, because the burden of expenditure cuts fell primarily on nonwage recurrent expenditure, ministries depended on the development budget to finance O&M. Subsequently, releases from the development vote have become more erratic. Ministries have reacted to this by turning more and more to the donor-financed portion of the development budget for the funding of their non-wage O&M. Consequently, they have been reluctant to reduce the number of projects in their portfolios as this would limit the number of candidates for aid funds. 1.27 Not surprisingly, the designation of projects as high priority in Kenya's PIP does not appear to be based on any economic analysis or sectoral strategy. Tbis is the case, notwithstanding the fact that the PIP comprises three main elements needed for well-founded prioritization: (a) policy statements and lists of priority activities prepared by ministries and some state corporations; (b) an enumeration of projects together with information on their total estimated costs, cumulative expenditures, and the balance required for completion; and (c) expenditure phasing for each project. Furthermore, the absence of recurrent cost estimates for projects is another major deficiency. Ihe challenge for the Government is to reintroduce elements of financial planning and discipline into the budgetary process, including the programming of public investment. 1.28 Parastatal reform is also crucial if Kenya is to attain its medium-term stabilization and growth objectives, and improve the longer term prospects for sustained and accelerated private sector development. The reasons are three-fold. Fhrst, data for 1986-90 show that the produtivity of the sector worsened by about 2 percent anmnlly. During the same period, the prgoductiity of the private sector improved by around 5 percent each year. Accordingly, Bank estmates suggest that GDP growth during the period could have been at least 2 percentage points higher per year if productivity growth in the parastatal sector were similar to that of the private sector. This would cut the time for doubling Kenya's per capita income from approximately 35 years of GDP growth continues at historical levels) to around 17 years. Second, the parastatal sector is a drain on the Government's budget. For instance, the net outflows from the Cental Government budget to parastaas were equivalent to at least one percent of GDP in FY91, mainly reflecting debt servica payments assumed by the Government and taxes collected but not remitted to the Treasury. Thrd, releasing resources which are being used inefficiendy, reducing the pressures on the fiscal deficit and eliminating statutory parastatal monopolies would all support private sector development. 1.29 In 1991 the Government announced its intention to carry out a comprehensive parastatal reform program. On July 1, 1992, the Government made public its Policy Paper on Public Enterprise Reform and Privatization. It has also established a Parastawl Reform Policy Committee (PRPC) to guide the divestiture process, a technical secretariat to support the work of the PRPC and the Department of Government Investment and Public Enterprises which inter alia will design and implement the reform of public enterprises. To date, divestitre and liqcauon of a few enterprie is near completion and agreement has been reached on a target of at least 20 firms to be divested over the next sixteen months, out of the 207 enterprises identified for pdvadzaton b:, 3OK. The Government has also defined major restructuring plans for five of the -11- largest 'strategic0 parastatals. MTe proposed actions will focus inter alia on: (a) orgzational and operational restructuring, including the divestiture of 'non-core' activlties; (b) market liberalization to encourage competition; and (c) the introduction of performance contats. In addition, the Government has outlined a new system of corporate governance to rationalize the relationship between the Govenment and the parastatal sector. The system requires that senior appointments and compensation should be linked to ability and performance. The Parastat Technical Assistance Project will assist the Govermment in implementing these difficult tasks. 1.30 Actions Required to Promote Private Sector Development. The on-going private sector assessment by MDA has Identified several constraints to private sector development and investment in Kenya. The main disincentive stems from the high levels of uncertnty associated with conducting business in Kenya. Physical infrstructure is also a major constraint. 1.31 Apart from the destabilizing effects of macroeconomic Imbalances, uncertaity arises from the discretionary treatment of businesses by Government. An example is the adoption of automatic import licensing under ISAC and EDP (pars. 1.20), which was intended to reduce the scope for the harassment (i.e. discretionary treatment) of businesses by the Govemment. However, during periods of foreign exchange sbortages, the "automaticity of import licensing dispea. Future reforms should focus on removing the licensing system all together. Relatedly, in August, 1992, the Government introduced a very limited foreign exchange retention scheme for non-traditional exporters. This scheme needs to be broadened considerably. The coverge of the import duty/VAT exemption scheme should also be expanded, and fbreign xchange and price controls elhiinated. There is also a need to improve the investment climate by: (a) redefining the criteria applied by the Government in evaluating applications for investment approvals so that the private sector has greater freedom to take appropriate commercial risks; (b) removing all restrictive provisions of the Trade Licensing Act, thereby dereating retail and wholesale trade; (c) simplifying tlve business registration process and licensing requirements; (d) updating the legal provisions for bankruptcy and liquidation to improve speed and flexibility; and (e) abolishing all parastatal monopolies of a statutory nature. At present, many of the Acts establhing parastatals allow them to restrict and regulate the movement, use, storage, packagg and prcing of the product or service in question. 1.32 In agriculture, uncertaity stems from the pervasiveness of controls, and delays in payments to producers from Government controlted-marketing boards. Reforms should include: (a) the elimination of all movement controls on maie, adminstered producer and consumer prices and the marketing role of the National Cereals and Produce Board; @b) the remova of the miling monopoly in coffee operated by the Kenya Planters Coopeatve Union, and the processing and marketng monopoly for smallholder coffee given to the cooperative sector; (c) an irement in the system of admstred payments to coffee processors and traders; (d) the phasing out of the marketing functions of the Cotwon Board and the need for its approval for lint imports, divesting te primary marketing functions of cooperatives, and introducing an open auction system for lint; and (e) the elimination of government control of ownership, production, disbtion and prices in the sugar sub-sector. In the financial sector, unceranty stems from the erratic performance of the Central Bank in safeguarding the ingriy of the financial system. Ihere needs to be more selective use of Cental Bank financing of insolvent financial institutions. Also, the Central Bank should abandon its reliance on credit controls and resort to more Indirect and market-based instruments of monetary management. - 12 - 1.33 Another iimpiment to private sector development is the fact that although Kenas physical inaue Is relatively developed, it is inadequately mainUined. Tbis is particularly oticeable in the transport sector where sections of the highway system need complete rehabiliton, and In Mombasa Port where efficiency has deteriorated markedly. Issues related to cost recovery, the composition of expenditures, particularly inadequate allocations for nonwage O&M, and procedures for allocating budgetary resurces, are common to most subsectors. The delivery of cetain services, such as rural water and municipal services, Is also weak. Most towns face severe financial containts and find it difficult to provide services (water, transport and egy) for their growing populations. 1.34 Targeted Interventions Needed for the Poor. The Government needs to supplement its growth-oriemed policies with clearly defined poverty alleviation initiatives. Indeed, the sheer magnitude of the projected increases in the labor force-over 400,000 new entrants compared with modern sector job creation (during 1986-90) of about 90,000 per annum-suggests that the majority of potential new entrants will not find work and may end up living in poverty. At the same time, the Government will face the difficult task of coupling fiscal prudence with expditures which target the poor. This will be especially true in the provision of socia services. 1.35 The resurgence of old diseases such as maia, growing regional and gender diqsaities in terms of education, health and nutrition, and increasing population pressures on the envirment, are some of the areas which need to be urgently addressed. Meanwhile, AIDS has become a significant new public health problem. About 200,000 Kenyans are now estimated to be HIV- positive and around 2,500 new AIDS cases are diagnosed annually. By mid-1991, about 10,000 AIDS cases had been recorded. 1.36 Efforts to improve access and raise the quality of social services should include stronger attempts to reoriet public expenditures rather than increase them. One reason is that the provision of social services already is a large claimant on the Govermnent's resources. In health, outpatient charges were recently reintroduced in Nairobi along with a mechanm to protect access to medical services by disadvantaged groups. A direct charge for students in public universities was also intoduced with provisions to assist individuals from economically disadvantaged backgrounds. Still, continbutions by beneficiaries, especially in primary and secondary education, e already a major item in many family budgets; increased contributions may conflict with the investment outlays in farms and small businesses that are essential for private sector growth. 1.37 Poverty reduction in Kenya also requires efforts to increase women's agricultura productivity and income. Ths stems from the migration of men to the cities leaving many women with sole responsibility for sustaining their families. These households are generally poorer than male-headed ones, with less access to land, credit and extemion services. EfWxts are underay to identify ways of assisting women, reducing poverty among female-haded households, increasing agricultural productivity, and Improving mitrition. The primary focus is on reaching women through agricultura etension. However, greater attention should be placed on expanding secondary school places for girls, and improving community-based water supply schemes. Incrases In women's incomes will also have a direct bearing on efforts to reduce the population growth rate (para. 1.40). - 13 - 1.38 Sharper social targeting will impoii new and more complex demands on Kenyas insttonal capacity for designing and implemendng human resource policies and Interveadons. But although the Government has a relatively good capacity for the designing and Implementation of surveys, there Is a need to improve the processing and analysis of data. A permanent capability should also be developed to monitor the impact of policies on the most vulnerale groups in Kenya and, through regular feedback, to inform policy design. This capability would enable the fmmulation of a comprehensive approach to poverty reduction including a program of well-targeted trnfers and safety nets. Hence, the shift from expansion to quality and equity Improvements must be accompanied by a commensurate effort to build institonal capacity in tIe human resource sectors. 1.39 Management of Environment DegrJation and Population Pressures Should Be Strenlgthened. Poverty and population pressures on limited land resources are the main ontributors to environmental degradadon in Kenya. Depletion of forests and woodlands is a major cause of soil erosion and land degradation, contributing to reduced fertiity, lower water- holding capacity, a reduction of dry season water resources, and the destruction of wildlife and nral abitats. Environmental problems are particularly severe in ASAL regions, which are more susceptible to ecological damage resultig from population pressures. Huma encroachment i excerbaing conflicts with wildlife, particularly in dispersal areas around nadonal parks where Increased faming activides are cuttng off wildlife's migratory routes and access to dry season waer and pasture. In addition to its importance in terms of biodiversity and habitat presvaion, wildlife is the cornerne of the toudsm industry. Aside from Its efforts to deal with forestry issues, the Government has strenhened overall environmental management. Priorities are to inprove policies and insttutions in the forestry sector, arrest the recent deterioration in the wildlife sector, and formulate a strategy for environmenlly sustainable development in ASAL areas. However, whUe the preparation of the strategy for the ASAL areas is proceeding apace, work on the national environmental action plan (NEAP) has ewpeienced significant delays. IDA wM shortly provide financial support for the preparation of NEAP but the success of the effort wil depend ultimately on strong Government commitment. 1.40 Evidence from the 1989 Kenya Demographic and Health Survey points to a marked drop in the fertlity rate-from 7.7 in 1984 to 6.7 in 1989. The Survey indicates widespread awareness and approval of family planning and a sharp increase in the prevalence of moder contraceptive methods. However, although the decline has been remarkable, Kenya's population wi contine to grow rapidly because there are stUl large numbers of women entering their childbearing years. Ihe challenge, therefore, is to strengthen the Government's family planning program not only to flitate the pace of fertility decline in the short-run, but also sustain the pace over time. 1.41 Summing Up the Reform Agenda. The Government should proceed agessively and decisively with public sector adjustment, including paras reform. This is crucial to the success of past sectora adjustment and growth. In addition, growth needs to rise and remain above historica levels if Kenya is to reduce existing unemployment and absorb future large increases in the labor force. This will require the sinultaneous implementaton of two sets of strategies. First, the adoption of a comprehensive set of initatives aimed at speeding up public sector adjustment (paras. 1.24-1.29) and the emergence of an outward looking private sector (paras. 1.30-1.33). Second, reaching the poor must be a priority in its own right. Kenya's achivements in terms of human resource development have been uneven among regions and socioeconomic groups. Thus, reform efforts in the social sectors should explicitly incorporate the - 14- objective of mproving both quality and access for low-income groups. Such an approach calls for improved targeting of social expenetures and a clear Government commitment which is reflected in the organzation of the human resource sectors and in the way they are financed (paas, 1.34-1.39). Ote Isues 1.42 IBID and IDA Portfolo Perforance Should Be hnproved. At present, the Bank Group has one loan and 27 IDA credits under implementation in Kenya. Total amounrs outstandng on loans and IDA credits are $450 million and $1,931 million respectively. Ninety- five loans and credits have been disbursed fully. Since 1987, new IDA commitments amounted to $1,321 million (able 1.2) for a total of 21 credits, including six sector adjustment operations. There has been no IBRD lending since 1986, when the debt service ratio began to exceed 20 percat. Meanwhile, net Bank Group transfers to Kenya were negative $39 million in 1987 and about negative $1 million in 1991. The negative transfeas resulted from: (a) the rising burden of interest payments; and (b) the restructuring of the project portfolio. Net transfers increased in recent years due to the resumption of quick-disbursing lending and the IDA reflows initiave. However, they fell agin In FY92 when IDA held tranche release of ASAO II, EDP and EDSAC foUowing the deteioration in the macroeconomic framework and failure to meet sector-specific conditionalities. 1.43 Several areas for improvement have been identified in the Bank's portfolio and in Implementa-tion performance. Credit effectiveness is often delayed because of the dme taken to obtain the Government's legal opinion and clearance of project documents. The management of procuvment, especially of technical assistance, needs to be standardized and speeded-up. Compliance with audit requirements should be significantly improved. Further, delays in inta- governmental payments and in the setting of domestic tarfs (e.g. railways), and lack of effeive coordination among official agencies have resulted in project implementation delays. A comprehensive action plan to taclde these and other portfolio management issues in Kenya was lauched by IDA during 1989/90 and is beghing to yield encouraging results. 1.44 Futwe IDA Lending Stil Depends Upon Maeroeconomc mt and the bmplementa--on of Econodic Reforms. The need to grow qicldy, create gnmificandy more jobs and reduce poverty suggests tha the Govermnent should make a much more ambidous and sustained adjustment effort. As indicated earlier, this requires actions such as ineasg the efficiency of public inves inter alia Improving the allocations for non-wage O&M; pastatal reform, including the divesture of producdon and service actvities better suited for the private sector; and regulatory reform aimed at promoting private sector development The leading program envisages a volume of IDA asistance to Kenya of rougly $240 million per fisc year if these actions are taken. As the balance of payments position is ptojected to improve under the medium-term stabilization/adjustment program, the strategy calls for a reduction of quick4-dirsing assistance, which will fall from roughly 50 perce of Bank lending over FY90- 91, toon annual average of 35 percent duing FY92-94. In FY92-93, the share Is 31 percent. If the maroeonoDmXic framework is inappropriate or implementation of adjustment meae Is poor, th Bank would not provide any adjustment lending and would reduce new investment lendig to core projects only (paras. 1.16-1.17). In essence, these are the criteria by which Kenya's pefDrmace will be judged and resources allocated. - 15 - 1.45 Given the issues raised earlier, investment projects are contemplated in areas such as rural water supply (para. 1.37). To improve Kenya's neglected infrastructure, the lending program also includes projects for ASAL (para. 1.39), transportation, energy and the strengthening of local government self-financing (para. 1.33). The human resource element will feature lending for the population program and health (para. 1.35). Consistent with the Women in Development Action Plan for Kenya, attention is being given to gender issues in projects. A primary focus will be on agriculture, where efforts are underway to increase the productivity of women farmers through extension. 1.46 If the lending level of approximately $240 million per year is realized, IBRD's share of total debt is expected to fall to 5 percent, and IDA's to rise to 30 percent by 1995. At the end of 1991, IBRD and IDA respectively held 14 percent and 24 percent of Kenya's stock of long-term public and publicly-guaranteed debt (excluding IMF). With respect to scheduled public debt service, IBRD's share is expected to fall below 25 percent by 1995 while IDA's share may rise to about 5 percent. Within the preferred creditor category, which includes IMF, AFDB and EIB, IBRD's share in disbursed and outstanding debt is expected to declicr to about 11 percent by 1995. 1.47 The Scope for IFC Activities Affected by Inplementation of Reforms. IFC has invested in 15 enterprises in the industrial, financial and tourism sectors, with total gross commitments of $149 million, of which $21 million represents equity holdings. In industry, IFC has invested in the pulp and paper, textiles, leather, cement, and agro-processing subsectors. IFC has also broadened its involvement with the private sector in Kenya through the establishment in 1989 of the Nairobi office of the African Enterprise Fund (AEF). The AEF allows IFC to make loan and equity investments in smaller projects than IFC's mainline business. In addition, the Africa Project Development Facility (APDF), based in Nairobi, continues to assist entrepreneurs to prepare project proposals and financing. To date, APDF has assisted 17 Kenyan firms and channelled about $50 million to them in loans and equity. 1.48 During the early 1980s IFC was able to average two new projects per year but the last three years have wvitnessed a decline to one per year. The prospects for the next few years wiUl depend on the Government's ability to reduce the large public sector claims on the economy's resources, and to improve the climate for private investment. 1.49 MIGA Activities. Kenya has been a full member of MIGA since November 1988. At present, the IFC/MIGA affiliate, Foreign Investment Advisory Services (FIAS), is providing assistance to the Government in preparing an investment policy statement. Four projects have also been registered with MIGA. This is a necessary precondition for securing guarantees. To date, however, no guarantees have been requested. E. DONOR ACTIVITIS 1.50 Kenya is assisted by a large number of bilateral and multilatera donors who have ctively supported the Government's adjustment efforts. Japan recently became the largest bilateral donor to Kenya, followed by the United States and the United Kingdom. A significant number of bilateral donors extend only grant assistance to Kenya. Over the years, the country has also benefitted from debt forgiveness of bilateral loans, most notably from the United Kingdom, - 16 - Germany, the United States and France. Major multilateral donors, besides the World Bank Group, include the African Deve!opment Bank, the European Community, and the European Investment Bank. The country also participates in the Special Program of Assistance (SPA), which has proven to be an effective vehicle for mobilizing and coordinating donor support. 1.51 Effective donor coordination will remain an important element of the country strategy. At the CG in November 1991, all participants agreed that new commitments should only be made after the Government had demonstrated its commitment to decisive action to correct macroeconomnic imbalances; to rationalize public enterprises and improve their financial discipline, accountability and transparency; to launch a substantial civil service reform effort; to improve the efficiency of public expenditure as a vehicle for providing basic economic and social infrastructure to the people of Kenya; and to provide an environment which is consistently supportive of private investment and initiative. Bilateral donors also wish to see progress on political reforms which would reinforce the benefits of economic structural change. 1.52 The Bank remains committed to mobilizing resources for Kenya through avenues such as the SPA, to the extent that Kenya's policy performance justifies. When appropriate, the Bank will continue the practice of holding CG meetings. Monthly informal donor meetings in the Resident Mission and sector coordination groups will continue to be convened, and the close working relationship with the IMF will be preserved. - 17 - PART 11: THE PROECT 2.1 Bacl.Ugd: Kenya's government involvement in the economy is highly intrusive; the public sector accounts for about 16 percent of output directly, while about 240 state-owned enterprises account for an additional 10-12 percent of GDP. In 1990, public investment reached 53 percent of the total, of which more than half was accounted by the parastatal sector. Parastatals are fully or partly owned by the Government, direcdy or through development finance institutions. A number of government departments and regulatory bodies are involved in commercial activities, often in conflict with their regulatory roles. Poor accountability to either supervising agencies or market forces has led to widespread inefficiency, bad business practices, and misallocation of resources. Most parastatals are less profitable than comparable private sector firms, although they are accorded preferential treatment and are subsidizeu, mostly through indirect or off-budget subsidies. A large number of them incur persistent losses and constitute a significant drain on the Govermuent budget; during FY91 net budgetary contributions to parastatals was equivalent to at least 1 percent of GDP. At the same time inefficient modes of government regulation raise business costs and afford considerable scope for rent seeking. Past attempts at parastatal reforms and restructurings have failed to yield adequate efficiency gains as they were viewed mainly as technical exercises, were ad-hoc in nature without a policy framework, and failed to address the underlying causes of inefficiency. 2.2 Since 1986, Kenya's sectoral reform programs (supported by five adjustment credits) have aimed at improving economic efficiency by focusing on competition and liberalization policies, and institution strengthening. Reforms are improving incentives in production, trade and finance, and broadening the role of market signals in guiding resource allocation decisions. The transition, however, has been marked by persistent and large budgetary and external payments deficits, as productive capacities are reoriented, and the Government continues to face difficulties in reducing the growth of public spending. It is clear that the major impediments to increased economic efficiency are the presence of a large paatatal sector, that contributes to the budget deficit and is largely unresponsive to market incentives, and the anti-competitive and distortionary activities of public regulatory bodies. To enhance the response of productive sectors to liberalization, the next stage of economic adjustment will need to: (i) reduce the Government's role in productive activities that are better left to the private sector; (ii) improve the efficiency of public enterprises (PEs) that will remain in state hands (referred to as strategic PEs); and (iii) ensure that regulatory institutions and mechanisms are used to supplement rather than supplant market mechanisms, by reducing unnecessary controls, ensuring transparency, and strengthening competition policies. 2.3 In November 1991, the Government of Kenya announced a comprehensive framework and strategy for Parastatal Reform as a reflection of its renewed commitment to reform and adjustment to economic realities. It has since taken the following steps to initiate the program including: (i) publication of a list of 207 public enterprises to be eventually divested through a competitive and transparent process, (ii) appointment by Presidential decree of a Parastatal Refbrm Program Committee (PRPC), headed by the Vice President, (iii) establishment of an executive secretariat and technical unit (ESTU), headed by a senior experienced Kenyan manager, to act as the implementation unit of the privatization program, and (iv) establishment in the MOF of the Department of Government Investment and Public Enterprises (DGIPE), headed by a person of Permanent Secretary rank, to take a lead role in the reform of the 33 strategic PEs which will - 18- remain in the public sector. Although the PRPC has a wide mandate to oversee the parastatal reform program in general, the Government has decided to restrict its activities to privatization. DGIPE has been given the authority to carry out effective oversight of the reforms involving PEs that remain in state hands (either permanently or temporarily), as well as the permanent supervisory functions appropriate to the Government as owner of PEs. More recently, on July 1, 1992, the Government published a policy paper outlining (i) objectives of the reforn program which are to enhance the role of the private sector in the economy, to reduce the role and rationalize the operations of the public enterprise sector, and to improve the regulatory environment; (ii) the two insruments that will be used to achieve Govermnent's aims - a privatization progcau and a public enterprise reform program; and (iii) the principles, policies, and procedures which will guide the reform program. 2.4 Project Objectives and Outcomes: The main objective of the TA Project is to support the Government's parastatal reform program by providing the technical, financial and institutional assistance which it requires over the next 24 months. The project will help in laying the basis of a successful and credible series of reforms which are aimed at improving resource allocation and increasing production efficiency. Expected key outcomes by project's end include: (i) privatization of at least 20 PEs out of the 207 earmarked for eventual divestiture and liquidation of a number of uneconomic PEs; (ii) improvement of the efficiency, profitability and accountability of the remaining PEs, both the 33 to be retained and those to be divested (187 out of the 207) beyond a 24 month time frame, by phasing out subsidies, establishing a corporate governance system that reduces political interference, and dealing with excess indebtedness; (iii) adoption and implementation of restructuring plans for S of the largest PEs which will involve partial privatization and the cessation of uneconomic activities; and (iv) a more efficient, experienced and sophisticated stock exchange. 2.5 In addition, the project's broader impact is expected to include significant reductions in the PE sector's drain on the exchequer and concomitant increases in tax revemne through improved profitability, and improvements in the, enabling and competitive environment through changes in the legal and regulatory framework, the reduction of entry and exit restrains, and rationalization of public service regulation. These gains will, in turn, contribute to the positive momentum of a shift of emphasis in economic activity from the public to the private sector. 2.6 Proed Des.rtion: The proposed TA project would consist of a coordinated set of technical assistance interventions over the next 2 years directed at both the parastatal sector and the enabling environment for the parastatal and private sectors. Approximately 27 percent of the funds from the credit ($8.85 million) are designed to support institutional development and build capacity for implementing reforms; another 13 percent ($4.19 million) covers the costs of studies, reviews, and data base development (which directly or indirectly support institudonal performance); and the remainder of the funds must under 60 percent, or $18.79 million) are for specialized technical assistance to support the divestiture and restructuring of the selected public enterprises mentioned above. Total project costs are estimated at US$31 '3 million equivalent, of which US$28.86 million are foreign costs. The IDA Credit of US$23.32 million would finance about 81 percent of foreign costs and 73 percent of total costs. Government's contribution of about US$2.97 million equivalent would finance almost 10 percent of total costs. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Kenya are given in .19- SdLgot C and D respectively. More detailed infmatim on the proposed project s po in the Staff Appraisa Report No.P-1 1248-KE, Including a detailed Impemnaon Volume. (Voum U of the SAR). 2.7 Teo project will have two major components: a. Prtvavatlonldivestlture component. Instaduon sg Thef ESTU ($2.63 milon IThe project will finance the seri of key non civll-service staff for the ESTU including a project accountant for project management. t wki also fmd logistical and operadtonal support for PRPC and BSTU, and a pubic disemiion campaign (mcluding brochures, other publcit materias and seminars) designed to build undetanding and domestic consesu around the refom program. Wivestiture of selected PEs ($9.43 million). Ihe project will provide support to pratize, or brng to the point of sale, at least 20 PEs, and liquidate a nber of nonviable PEs. To fidliate the divestiture transactions, the ESTU will need fiacng to se up Pbrvat on mplementation Teams (PMTs) to prepare individa PEs for privatat At the request of the Government, the budget for divestiure ass IWludes a coniagncy for adding a few additional PEs to the divestiatre program to be supported by the TA project, iudin Kenya Alays. oM for Ca"El Market Development ($330.0001. Ihe project will find thnica assine to fuiter develop the Capital Market Autoriy (CMA) and the Nairobi Stock exchange (NSE) through Improvements in the leaing and setlement system, simplifcation in rules and regulations governing now listing, and the development of the brokee industry. .Jpeized stde. viten rmoiativies, and imainW f74.00. Ibe project wil finmce special studies, training and specific aivities related to investment b. PE reform component. Insttutiona u for DGIPE 34.4 miion). Ihe Project wI provie fimding to strengthen DGIPE through the provision of key advisors (who wil also tain Kenya counterpart staff through on-the-job tain, short term expets in debt mnagment, computers od staff training in all aspects of PE reform. prt for sector wide reforms ($344 million). Support wil be provide to DWPE in the form of consultancy services to (i) Improve its cpacity In th area of corporate planng and perfomace moioring, and (i) to carry out studies for changes to the policy famework for PEs and to facilitate Imple nI of their recomm . ^estrubn of S major PVA ($.34 milhloio. Ite Project wil fund digostic and rdated studies, and expertse to hep DGIPE monitor, coordinate, and 1facilta -2. - restructuring of five large "target" enterprises (KR, KPA, KPTC, KTDA, NCPB) through the implementation of agreed target actions. Suppon for Safety Net Design and Implmentation ($1Q. miilloM. The Project will provide funds for the design and administration of a safety net for retrenched workers. ICprt to Related Institutions ($1 .48 million). 'Me project will fund compleme reforms in the Office of the Auditor General (StaWe Corporations) to imrove auditing and oversight functions, the Regrar-General's Department to Improve data bases and Information management, and the Attorney General's Office to design reforms In the uatorylegal framework. 2.8 LI wj Learned snd PWeet utginabIll: The design of the proposed TA Project has benefted from experience in implemeing similar projects in Sub-Saharan Africa as well as previous TA projects in Kenya. The key lessons include: (I) the importance of a link between the degree of Govemment commiment to the TA project in question and parallel (as well as subsequent) adjustment operations; (ii) the need to support in-country training programs based on borrower needs and resources and to limit overseas training to justifiable exceptons; (iii) the Importance of clearly defining the responsibilities of any project implementation unis, (lv) providing systematic and adequate supervision with appropriate technical experdse, (v) avoiding where possible the use of expatriates (funded from the project) in line management positions and Instead using arrangements whereby a Kenyan manager works closely with, and learns fom, the expatriate advisor, and (vi) building in flexibility to modify the project during implementatio ralher than setting up a rigid "blueprint approach" more suited to capital iDVnem projects. 2.9 BwoJd Jnb_en;taUor The following understandings have been reached with respect to arrangemen for implemenion, project monitoring and for the mid-term review. In tem of project implemenation, the responsibility for implementing the TA will be primarily divided betwen the ESTU and the DGIPE as follows: (1) ESTU will have full responsibility for managing the pydvazation component of the TA and intactng direcdy with IIDA on all matters reated to Implementation of tli component; (i) DGIPE will have fuil responsibiliy for managing the PE reform component of the TA and ieracting directly with IDA on all matters related to implemention of this component; (iii) to ensure consistency and integrity of the overall TA, GIPE will also coordie the TA sub-components designed to stengthen the Auditor Gnerals Office (State Corporation's), the Registar General's Deparmnt, the Capital Markets Authority and the Nairobi Stock Exchange, and the Office of the Attorney General in close consultation with the agencies involved, and (v) ESTU and DGIPE will each appoint erionaly recoized expes in appropriate fields, acceptable to IDA, to visit Kenya at least twice a year to help the management of these units in overseeing project imlementation and provide appropriate advice. 2.10 Ratioalem orlnArohiemmt: Reducing the Govermet role in the economy and more rapid development of the private sector are essential steps for deepening the reform pocess and sustaing growth. In addition, reducing parastata claims on budgetary resources wDI be critcal to the achievement of the Government's stabilization aims. At the same time, the Government i keenly aware of the highly political nature of the reforms it plans to undertake. In ligt of these political concerns, the Government feels that a too-visible donor invlvement, especially in setting the type of conditionality that would have to be associated with an adjustmen operstion, would be politically inappropriae at the present time. However, the Governmt -21 ^ recognis that It does not have the necessary technical expertise to design and implement a comprehensive parsatal reform proam. For this rewn, it has Indicated that at this stage of the reform program It wishes only technical assistance from IDA. Policy-based suppot would come at a later stage once the Government has demonstraed to local constiuencies that it filly owns the reform program and that it Is not donor driven. Tbe sustainability of the program, especially given the difficulties such reforms have faced in the past, will depend critically on (i) providing the necessary technical expertise (drawing on experience In other countries), (ii) developing a program of reform which is comprehensive in scope covering both privatization and PE reform, and (il) coalescing the domestic actors involved In the reform program, ensuring transparency in hmplementatrou, and designing mechanisms to mitigate the adverse social effects that would inevitably result from a parasttal reform program. 2.11 A*mW A Prior to negotiations, agreement was reached iu=ulia on the creation, staffing and detailed work programs of ESTU and DGIPE; GOK's PE reform and prvtzation policy which was published as an official document; how many enrprises would be prvatzed and when; an administrative arrangements for managing and coordinating the two project components and implemeon of their action plans. During negotiations, agreement was reahed on the enterprise to be liquidated; technical assistance required to Implement the agreed restructui of 5 major enterprises remaining in GOK ownership; a mid-term review one year after credit effectiveness; and a new corporate governance system providing adequate autonomy to managements and accountability to supervising GOK agencies. Actions to be taken prior to include formal Government approval of a new system of corporate goverance; privatiztion, or bringing to point of sale, of 5 enterprises; agreement on a tentative timetable for phasing-out direct subsidies and eliminating indirect ones; and appointment of key staff to ESTU. In additon, detailed provisions will have been put in place for efficient and transparent implementation of the privatization procedures agreed on earlier. By the end of the Sect iondmwsoft ghZs a total of 20 enterprises will have been brought to the point of sale and all privaton transactdons for 10 of them will have been completed. 2.12 Befnti: The main benefits of the proposed project are those that would accrue from Implementation by the Government of an efficient, transparent and sustainable paastatal reform program. These would include: (i) improvements in allocative and productive efficiency which would raise employment and incomes over the long run; (ii) enhancement of investment opportunities for the private sector which could attract additional foreign investment; (iii) divestture of non-strategic parastals and improvements in the performance of strategic flrms that would increse the Govermen's net worth and improve Its budgetary siion; and (iv) separai of regultory from commercial hmctions to level the playing field between the public and private sectors. As the Implementtion of parastat reforms would also require complementary policies of a broader, economy-wide naure (eg, to deepen tancal and capital marets), economic benefits would be larger than those measured through quani ve indicators. The proposed project will be judged succsfil if all the indicators of expected outcomes (see param 2.4) are realized. 2.13 BILm: The main risks associated with the operation are: ) Government unwillingness or inability to adhere to agreed policies and procedures that can ensure the transparency and efficiency of the reform process; (i) inability of the Govemment to sustain its commitment to parast refrm in the face of social dislocations and opposition resulting from the loss of patrnage and rent-seeking oppornties by some groups; Qii) inability or disinterest by the local -22 - market and frign Investo to absorb divested asets. As part of a sategy to deal with these risb the Project seek to ensure that (a) the ttutiondl setup and Implementation capacity b adequte to neet the needs of the proposed reform program, (b) agreed procedures provide, to the ext possibl, safeguard that can ure the transparency of the divetue process, and (c) desig of the comporens of the TA, and the monitoring process (including mid-term review) will fac ethe Impl on of a comprehesive program of refoms Including critical cages In tih leg/ ypoliy freworks. This has been secured, not only through geral ud_ with the Goverment, but also by ascaining at negodadons how agreed policies and m im are bein Implemented in practice. To deal with the socio-political risks the Govemna has ke upfront actions that demonstathe iseriousess of its anm _ d is ImplementIng a safety net mechaism to m ine the transitional costs for displaced labor. To deal with a cauous market, the Govenmment will need to focus on ensuing some eady prlvation successes to enhance credibiity among private investors and implement complentay policies to improve the enabling emironment for domeic and fin invetors. 2.14 I am sadsfled that the proposed credit would comply with the Articles of Agreement of the Asocation and recommend that the Executive Directors approve it. Lewis T. Preston Pteident by: Att ao Attachments Washingto, D.C. November 9, 1992 -23 - Page I of 2 POECT =CQSI AMI XNANC1N (US$'000) A. DEMALe OS= 1ABM Al I&I f' oeaigr DQIa I. io l Cm A. Institudonl support (ESO 1,100 1,530 2,630 of which: Incremental operating costs! (1,100) (1,160) (2,260) Marketing Campaign (370) (370) B. Support to diesti actions - 9,435 9,435 C. Studies/consultants/training - 748 748 D. Capital market support * 330 330 Component subtotal 112. 13.143 IL PE Refopn suport to: A. Sector-wide reform actions - 3,445 3,445 B. Restruuing of 5 target PEs - 8,340 8,340 C. Safety net - 1,009 1,009 D. Ins onal Support (DOP}E) 1,862 2,542 4,404 of which: Ir n opeating costs: (1,862) C2) (2.064) Consultant services/trIining (2,34 (2,340) E. Reted uional support - 1,484 1,484 of which: Incremental operating costs: (500) (500) Consultant services/training (984) (984) Component subtotal 1 18Z6R2 PROJECT TOTAL gI bIcludes cotngencies esimated at 10% of base costs. k, Cnveted at KSh 301US$. g/ Logtical/opralonal support, vehicles and supplies, and local pesomel co. -24 - SCHED2ULE A Page 2 of 2 B. PINA PLAN: PEo=osd Project Fingang (US$'000) .______________ 0K I DA ODA MEC IV UNDP Netherlands #I Tot I. Prvatiza Compont A. Jnstitudonl sprt 1,102 1,528 - - -2,630 of which: Inmrmentad operating Costa: (1,102) (1,158) (26 Madoeting campig_ ( 370) _ _ _(370) D. Support todl uro di 8,955 480 9,435 C. 7tdls uan | - 748 - | _ _ 748 D. Capilal market suppowt - 330 r 330 ComponentSubtol 1,102 11,561 - 480 = 13,143 IL FE Rdom Componnt A. Sector-wit refom - 1,575 1,740 130 3,44S5 3. Resmutuiag of S taet - 8,340 S 8,340 PBs C.Sfeyna - 360 649 - - = 1,009 D. DCPE, of which: 1,862 - 1,792 - 270 480 4,404 Incremenlw operaig coat: (1,862) ( 202) ,064) Consuutan servicealimining: (1,590) (270) (480) (2,340) B. Relatd institutons, 1,484 - 1,484 of which: Incresuental operating coo: ( 500) ( S00) Consultant ( 984) ( 984) Compout Subtoal 1,862 11,759 4,181 400 480 18,682 PROJECT TOTAL 2,964 23,320 4,181 480 400 480 31,82 I Have dicatd ntntion of contriuting dircty to afnet fund to be set up. -25 - Page 1 of 1 RMUgp90 (US$,M) (Amount of IDA finanoing s in brakt) _____ . ..Pocurmt Method' EIOnl_ Other ICB LCB Local Rwulneat Toal 1. Load Pesomel 1,802 1,802 940) (940) 2. LogIsand operanal suppot 2,872 1SO 3,022 equipmest, supplies, (550) (150) (700) services and vehcls. Subtotal 2872 150 1802 482A (5S0) (150) (940) (1640) Consulant Service, Studies, 2S,131 25,131 trining, less PW/SPPF (19,810) (19,810) Marbing campaigs fr 370 370 p d 'iatzlon (370) (370) PPFISPPP 1,500 1,S00 (1500) _ (1,SO0) Total 26,631 2,872 520 I10 31,2 (21,310) (550) [(520) 1 (940) (23,30 Due to rounding, numbers may not add up eactly. lsimatd D _ewmm: IDA Flsea Year I, ................. 1992 1993 1994 1 1995 1996 .____._____ (US$ million) Aal 1.S 11.0 7.5 3.12 0.2 Cunwladvo 1.5 12.5 20.0 23.12 23.32 -26 - SCNMULEKC Ti abble of Key Proieet Procssing Events m. tAken to ppm: 7 montfs Prpaed by: Mossa/Mmes. hfa Alem, AP2PE (Misdon Leader); Henry Launa, CECPS, Toby Buto and OUio Haggty, Consultants (Pubi Enterpise Rorm); Jamal Saghf, CFSPS, and Khaed Sher, APTIM Piva n); Bdrian Taylor, Conlant (Capta Madrs); and Blizabeh Otubea Au, LBGA (LA Famework). First IDA mision: Februy 1992 Apps Misdon: Aprl 1992 Notiations: October 1992 Pland daft for efthclvaes: Marh 1, 1993 List of rlva PCRs and PPARs: Not appHiable SATUS OF BANK GROUP OPERATIONS IN KENYA Sohedul D A. STATEMENT OF SANK LOANS AND IDA CREODITS h 1 of3 (as of September 30. 1992) ----(USS Millilon)*-- (Less Cancelelatiofs) Undis- Credit Va. Year Borrower Purpose Bank IDA bursed ,.......... ......... ...... ............ ....... ......... .... ........ . ... Forty-five (4S) Loans and fifty (S0) credits futly disbursed 928.41 968.49 Of which SECALs, SALs amd Program LoansJCreditss a/ Cr.C990-O 1980 Kenya Struct. AdJ. Credit 55.00 Cr.1276-0 1983 Kenya Struct. AdJ. Credit II 70.00 Cr.A021-0 1986 Kenya Agriculture Sector 40.00 Cr.1717-0 1986 Kenya Agriculture Sector 20.00 Cr.A036-0 1988 Kenya Industrial Sector Operation 10.00 Cr. 1927-0 1988 Kenya Industrial Sector Operation 102.00 Cr.1927-1 1988 Kenya Industrial Sector Operation 53.70 Cr.2049-0 1989 Kenya Financial Sector Operation 120.00 Cr.2049-1 1990 Kenya Financial Sector Operation 44.00 Cr.2049-2 1991 Kenya Financial Sect. Oper. 67.30 Ln.2190-0 1983 Kenya Structural AdJ. Credit II 60.90 0.00 582.00 0.00 Cr. 123O 1982 Kenya Population II 23.00 0.99 Cr.13900 1983 Kenya Secondary Towns 22.00 11.15 Cr.t0170 1984 Kenya Second Highway Sector 40.00 11.90 Cr.16730 1986 Kenya Sixth Education 37.50 20.79 Cr.16750 1986 Kenya Petroleim Explor. Tech. Assist. 6.00 1.45 Cr.17180 1986 Kenya Agric. Sector Management 11.50 1.17 Cr.17580 1987 Kenya Animal Health Services 1S.00 12.24 Cr.18200 1987 Kenya Second Ralwmay 28.00 6.84 Cr. 18490 19M8 Kenya Agriculture Research 19.60 13.02 Cr.19040 1988 Kenya Population III 12.20 9.69 Cr.19730 1989 Kenya Geothermtl Development 40.70 13.48 Cr.19740 1989 Kenya Rural Services 20.80 15.97 Cr.20580 1990 Kenya TA 5.00 4.61 Cr.20600 1990 Kenya Third Nairobi Water Suppl. Proj 64.80 45.81 Cr.20620 1990 Kenya Coffee II 46.80 36.86 Cr.21110 1990 Kenya Population IV 35.00 33.58 Cr.21470 1990 Kenya TA-DFI Res/Exp. Prqm 6.00 5.35 Cr.21970 b/ 1991 Kenya Export Development 100.00 50.03 Cr.21980 c/ 1991 Kenya Forest Developumnt 19.90 20.17 Cr.21990 1991 Kenya Agr..Notl. Ext. II 24.90 22.94 Cr.22040 bl 1991 Kenya Agric. Sector Adjust. It 75.00 41.30 Cr.21971 b 1992 Keny Export Development 49.20 54.13 Cr.229SO bl 1992 Kenya Education Sect. AdJ. Cr. 100.00 72.56 Cr.23090 1992 Kenya Universities 5.00 55.91 Cr.23100 1992 Kenya Heolth Rehabilitation 31.00 28.04 Cr.23330 1992 Kenya Mnbasa Vater 11 Eng. 43.20 42.09 Cr.23340 1992 Kenya Wildlife Services Pr. 60.50 62.14 Ln.24090 1984 Kenya Second Highway Sector 5.00 3.31 Total 933.41 1961.09 697.52 of which repid 483.14 29.51 Total held by 8ank & IDA 450.27 1931.58 Amoet sold 11.74 of whtch reped 11.74 Total undisbursd 697.S2 ............... ........................................_.. of Appoved after FY80 bJ SAL, SECAL or Program Loan/Credit c/ Not yet effective. (kenledl.wkl) 10-1692 Soho D Pap 2 of 3 8. STATENENT Of IPC INVESTMENTS IN KENYA (as of Septecher 30 1992) Amount In USS Nillion Fiscal Year Obligor Type of Business Loan Equity Total ...... ....... ~~~................... ... ... 1991 AEF-ALAM Agric. Wholesale & Retail 0.53 0.16 0.68 1962 3amburf Cement Cement Lime & Plaster 4.43 0.00 4.43 1984 1980 DFCK DFC, Ifs Pupt Paper & Paperboard 5.07 1.31 6.38 1982 OTI Merchant Banks 0.00 0.80 0.80 1986 BP Restaurants and Hotels 3.67 0.00 3.67 1982 IPS (K) Venture Capital ComanIes 0.00 0.55 0.55 197 1988. IPS (1)-AL Venture Capital Coapanies 0.00 2.82 2.82 1989 1990, 1991, 1992 1961 KDFC Sm. & Ned. Scale Enterprises 5.00 0.00 5.00 1967. 1968 1973, 1992 Keny Hotel Restaurants and Notels 5.16 0.75 5.91 1984 LIK Tarweries & Leather Finishing 2.12 0.60 2.71 1986 1a"upper Nfg. Pulp Paper & Paperboard 37.16 1.97 39.12 1986 Oll Crop Nfg. Veetbbles & Animtl ot 9.65 2.14 11.79 1970 1974. Pan African Nfg. Pulp Paper & Paperboard 40.74 6.27 47.01 1977, 1979. Weaving, Hotels & Restaurants 1981, 1988 1990 1976. 1985 Rvotex Spfming, Weaving * Finishfng 8.16 3.35 11.51 19q7 ISIE - KE sall & Ned. Stale Enterrises 2.00 0.00 2.00 198 TETM PAK Nf. Containers & Boxes 2.17 0.37 2.54 1972 TPS (Kenya) Tourism Servfces 2.42 0.05 2.4? ........ ..... -----. ... Total gross Comitments 128.28 21.14 149.39 Less: repayments, canellatifons exhane adJustments, writeoffs, torminatons and seles 104.89 11.65 116.54 ..... ....... .. .... .. Total Conitmonts now held by IFC 23.39 9.49 32.85 Total Undisabursed 0.58 0.67 1.25 Total Outstanding IFC 22.81 8.82 31.60 ken2edlt.uk 10-16-92 -29 - SCHE!DULE D Page 3 of 3 DisburUm k Iwes 1. Overall disbursements of the 28 investment projects In the Kenya portfolio are about the same as andcipated under the disbursement profile for such projects, though for the last two years actual disbursements have lagged estimates - by 21 percent in FY91 and 24 percent In FY92. 2. Two projects financed prior to FY84 (Credit 1238-KE, Population 11 and Credit 1390-KE, Secondary Towns) closed on December 31, 1990, but are still showing up In the Schedule D because of delays in reconciling the balance under the special accounts. 3. Several older projects can be considered as slow disbursing. In the case of the Second Highways Sector project (1984), lack of counterpart funding has been a major cause of disbursemet lags, while increasing construction contact prices and has required two extensions of the closing date for the project which is now expected to be on December 31, 1992. Regardn the Sixth Education project (1986), which is generally progressing well, the main source of delay has been the slow tendering and contract award procedures relating to one of the project components. Slow disbursements on the Animal Health Services project (1987) are due in pat to the restucturing of the project which will henceforth provide services through the private, rather than the public sector; and in part to IDA being the financier of last resort under this cofinanced project. 4. Counter,,=t funding issues and implementation issues in general, will be reviewed with the Goverment during, respectively, a Public Expenditure Review, and a Country Implementation Review, both of which are scheduled for the second half of FY93. SCHEPULE E Kw"~ - EMMJQ4IC INDICATORS PAGE I OF 3 Nid-1991 Pqputation (oils.) 25 199 Per Capita Wi In US$: 340 A. Shares of Gross Doistic Produjct S. Growth Rates(% e wn.ia) (from current price data) (from moutant price dafta) 1965 1973 198 1989 1990 1991 1965-73 1973-80 1980-91 1990 1991 Gross Dometic Predict m.p. 100.0' 100.0, ;o 10. 100.0 100.0 100.0 8.7 S 5. 4.2 4.3 1.7 Net Indirec Taxes 8.1 10.1 14.7 13.8 14.1 13.7.. . Agricutture 32.4 31.9 27.8 26.3 24.6 22.9 6.2 4.2 3.2 3.5 -0.7 IncJsttry 16.? 18.6 17.8 16.9 17.8 19.3 12.4 5.2 4.0 5.2 3.5 (Of %ihch Namafactuiring) 10.5 10.8 10.9 9.9 9.9 10.3 12.4 6.9 4.9 5.2 3.8 Services 42.8 39.4 39.7 43.1 43.6 44.0 8.4 5.9 4.9 4.5 3.4 Resoure Bsalrkce 0.7 -1.3 -11.1 -7.3 -5.2 -1.5.. . Exports of SNPS 31.4 27.4 27.9 22.9 25.7 26.6 4.3 0.3 4.5 17.3 -0.5 laport of GNFS 30.7 28.7 39.1 30.2 30.9 28.1 5.7 2.5 2.7 15.6 .12.6 Total Expenditures 99.3 101.3 111.1 107.3 105.2 101.5 8.5 5.4 3.6 4.6 -2.0 Total Consuipion 84.9 75.5 61.8 82.8 81.3 80.7 5.8 5.9 4.7 7.1 0.3 Private Cwonsption 70.1 59.0 62.0 64.5 63.9 63.4 4.4 4.8 5.1 7.8 Genrwal Govwnvawt 14.8 16.5 19.8 18.3 17.4 17.3 13.1 9.7 3.4 4.6 Gross Domestic Irntmsun 14.4 25.8 29.2 24.5 23.9 20.7 15.9 4.4 0.6 -3.7 -10.7 F'ixed Investment 12.8 20.4 23.0 19.2 20.4 18.8 . .. 0.6 3.4 -2.9 0uies Int Stodcks 1.6 5.4 6.2 5.3 3.5 1.9 . . . Gross Dojestic Saving 15.1 24.5 18.1 17.2 18.7 19.3 12.5 1.0 0.9 2.5 7.8 Net Factor Income -2.6 -5.0 -3.1 -4.5 -4.6 -5.2 . . . Mat Darret Transfers 0.0 0.0 0.4 1.2 1.9 1.8. . Gross Natinalt Saving 12.5 19.5 15.4 13.7 16.1 15.9 12.6 1.7 -0.1 6.1 4.4 in billionsa of LOis 1965 1973 1960 1989 1990 1991 (at cowstant 198 prices) ... .. ... .. ... .. Gross Domestic Procact 35 71 101 146 152 154 8.7 5.4 4.2 4.3 1.7 Capaity to laport 26 35 32 31 40 40 3.9 -0.4 3.3 27.0 -0.4 Term of Trade Adjtuunot 10 13 7 -1 2 2 . . . Gross Domteti Itcm 46 85 109 145 154 1S7 7.6 4.5 3.9 6.3 1.7 Gross Natifalt Predxct 34 67 98 139 145 146 8.5 5.6 4.1 4.1 1.1 Gros National Income 44 80 105 138 147 149 7.5 4.7 3.7 6.2 1.1 ---------(198 a 100) -------- ----Inflatfon Rates(% P.a.)----- C. Price Indices 1980 1986 1988 1969 1990 1991 1965-73 1973-80 1980-91 199 1991 Camnsuer Prices (IFS Q4'j ii 48.9 95.1 108.3 118.9 132.9 152.6 2.8 14.3 10.0 11.7 14.8 Whotesat* Prices (IFS 63) . . . . . .. . lapticft GDP Deflator 53.2 94.8 108.6 118.7 130.9 147.1 2.2 11.7 9~.2 10.3 12.4 lapticit Expenditures Deft1. 49.4 92.5 107.6 119.7 128.9 145.1 2.8 12.6 9.6 7.7 12.6 P. Other Indicators: 1965-73 1973-80 1980-91 GrwhRates(% P.O.): Popuatfon 3.4 3.8 3.8 Lbr Forc 3.5 3.7 3.6 Gross Mott. Incom p.c. 3.9 0.8 0.0 Private Cowuiption p.c. 0.9 0.9 1.3 Ioport Elasticity: Inports ("'FS) I GDPOrp) 0.7 0.5 0.6 Marginal Swirngs Rates: Gross Natfamt Saving 30.0 1.1 Gross Domestic Saving 35.5 -3.9 22.0 ICOR (Weiod averages): .. . .9 Shae of Touta 1965 1973 1980 1990 1991 Labor Forc in: Agriculture 86.1 836'1. Imtistry 5.1 6.0 6.8 Services 8.8 10.4 12.1 Total 100.0 100.0 100.0 100.0 100 ….............. ......... . ......................................... SCHEDUXE Kenya - ECCUOMIC INDICAT08S ........................... PAGE 2 OF 3 ......... ........................_. .. ................................................................................................................ Votuaw Index Value at Ourant Prices (lflctias US)2/ ............................................................ E. MNrdwdise Exports 1980 1987 1988 1969 1990 1991 1980 1987 1988 1989 1990 1991 . ........................... . .... ... ... ... ... ... ... ... ... ... ... ... X.RhEL 237.2 100.0 123.1 97.4 96.2 123.1 439 76.7 83.7 54.5 59 68.4 X.LEVWCfFEE 80.1 100.0 90.8 98.1 114.4 8K.1 291 236.1 275 197.S 194.5 162.7 X.EV.TEA 55.6 100.0 102.5 121.3 123.6 130.4 156 198.2 208 263.4 299.3 284.2 X.CAGRI 15.2 100.0 110.3 91.5 128.8 11S.S 31 90.4 106.4 74.4 100.8 160.2 Mbmfactwes 113.3 100.0 132.7 135.7 173.5 165.3 181 122.6 139.3 137.3 140.3 149.8 Residial .. .. .. .. .. .. 292 182.5 201.2 194.8 209 244.3 Total Exports FCB 99.1 100.0 105.5 104.5 110.9 120.0 1390 906.5 1013.6 921.9 1002.9 1069.6 F. MNerdndise Inports Food 108.0 100.0 61.1 94.7 192.0 131.0 199 130.3 138.1 12b.? 124.9 136.8 fuel and enerOy 130.0 1C0.0 98.0 101.0 104.0 94.0 676 348.1 288.1 343.5 465.5 394.8 Oth. conmuw goods 181.0 100.0 119.0 121.0 102.9 106.7 48 647.6 72.8 794.? 7.7 596.3 ther intenud goods .. .. .. .. .. .. 316 338.4 376 351.4 320.2 366.6 Capital goods 156.9 100.0 131.4 149.0 132.4 93.1 726 433.3 571 541.5 670.8 539.8 Total Isports CIF 142.5 100.0 112.3 117.9 112.3 104.7 2585 1897.7 2101 2155.8 2309.1 2034.3 L. NerchEndlast Teom of Trade 1960 1987 1986 1989 1990 1991 ............................... ....... ....... ....... ....... ....... ....... NMrdh. Exports Price Index 65.9 100.0 115.1 123.8 134.1 171.4 Mftdh. hpforts Price Index 45.6 100.0 110.1 132.9 159.7 177.9 Mardc. Toves of Trade 144.3 100.0 104.5 93.1 83.9 96.3 US millites (at current prices): ............ ...w...... ................ H. altarce of Paymmnts 3/ 6 1987 1988 1969 1990 1991 ............................... .............. .................... .... ..... .... ..... .. .... ..... ...... Exportsf Goods & PS 2144 1698 1869 1914 2212 2250 ibrdwancise (FOB) 1363 907 1014 922 1003 1070 NbnrFactor Services 782 792 856 992 1209 1180 lmports of Goods & NPS 3182 2104 2306 2528 2659 2374 N Crchudse (CIF) 255 1898 2101 216 2309 2034 NOnFact Srvices 597 207 205 372 350 340 Resarce g aIa -1108 - 437 -614 -447 -125 Net Factr I ac -222 -282 -334 .32S 367 654 (interest per ORS) 25 278 310 283 331 320 Net current Tr ers 27 72 89 101 167 148 Cwwkwe reldttws) .. . .. .. .. Ourr A/C Cal Before Off. CSras -1233 -616 -3 838 -647 -431 at Official Trdars 118 159 256 250 205 2C9 Curr A/C Bal After Off. GrSts -1115 -457 -47 -S88 -4 -222 L,-Term Capita Irnf I 510 334 393 605 42S 164 5ract irwest 78 32 9 101 58 40 Net LT Loom CMS dita) 432 302 384 S04 366 124 Other LT Inflow (net) 0 0 0 0 0 0 Totat Othr It"s (nrt) 474 558 404 204 424 -304 Net Short Tem Capital 0 219 -61 67 317 -230 Captat FtlaeaN.E.I. 0 0 0 0 0 0 Errorm ad Olssfams 474 339 46 137 107 -74 Carwe fn hIt Rsees 131 -435 -371 -22 406 362 Net Crdit fr then w 85 -122 75 -29 33 8 Ower Reserva Chanes 46 -314 446 -192 -439 354 As Share of 0Ps Resource Batance -14.3 -5.1 -5.1 -7.3 -S.2 -1.5 Inrest Pents 3.2 3.5 3.6 3.4 3.8 3.9 Crrent Acsomt Btence -17.0 -7.7 -8.0 -10.0 .7.5 -5.2 Numo dm Itos ReIsevs ml. Cold (nil. US1) 492 256 264 285 205 117 Rserves Inl. Gold (al. US) 539 294 ai6 317 26 145 Official X-Rote (La/USA ) 7.42 16.45 17.75 20.57 22.91 27.51 Indr Root Eff. X-R Bas 1960 100.00 79.42 73.48 70.27 62.5S 58.62 CDP tllta of currt USS) 7265 7972 8519 803 8675 l61 .................................................................................................................................... lOBULE E Krvaa E-CIOIC IIDICATOSE ........................... PFAE 3 OF 3 ... ... ................... .. ............. ....................... ................................................................................. Share of MP 4 () Growth Rates Cntrat Go unt Firme 5/ 1979/80 19B66/7 1987B/8 19811 19 19B9/90 19/t F1T- 19878 198/89 t /90 1990/91 OMrent Receipts 6/ 24.3 22.4 23.1 22.7 2.1 22.6 11.7 17.0 12.6 16.6 12.3 Ozrent Expultes 21.7 24.3 22.1 24.2 24.7 24.9 14.4 3.2 25.9 16.9 15.9 Ouvet sat BEt-cme 2.6 -1.9 1.0 -1.5 -16 2.3 . . . . . C Ital Receipts 0.0 0.0 0.1 0.4 .. .. .. 40.8 638.9 .. Capital bpeite 7/ 93 S.8 6.3 6.0 6.0 6.0 4.5 23.0 8.2 14.9 15.5 Overall oef cit 7J / -6.8 -7.6 -6S -7.0 .7.4 -9.0 .. .. . .. Official Capital Grnts 0.8 1.0 2.3 2.3 2.9 1.9 17.8 153.8 17.1 43.9 -24.7 External Sorrowiag (net) 3.0 0.0 1.0 2.5 3.4 1.9 .. . .. DOmstic NowU borraw,rW 9/ 1.0 2.5 3.3 0.9 0.9 0.8 . 49.5 -6S.9 11.0 .5.7 Doestic Bank Finrsca .. 4.0 .0.1 1.3 0.3 4.5 .. .. .. . . llet Disbwsamnt (US$ miltions) Oebt Ojtsandfn & Disbrsed (U#$ mlat ) J. Extema.l Capital Vlo.is. --------------e------------------------------ and Debt lurden Ratios 1960 1967 196 1989 1990 1991 1980 1967 198B 1989 1990 1991 Putl& Publicty6uIar. LU 433 265 2;3 518 349 104 2120 4140 4114 40-4 4702 4789 Offcil.t Creditors 208 2M8 249 404 198 118 16.0 3625 3629 3493 38B 4005 lIti laterat 144 113 103 302 185 72 630 1984 1950 2227 2587 2678 of diA h IIIRD 35 -21 .52 -58 -92 -96 308 1128 973 9 872 783 of eh IDA 71 71 133 224 230 173 220 553 673 893 1185 1370 Si Latwal 64 175 146 102 12 46 630 1640 1679 1266 1301 12 Private Creditors 225 -a 4 114 151 -14 860 516 484 591 815 785 O.Wifers 1 0 11 69 15 -14 186 30 36 109 138 122 Filawial Narkets 223 -23 -6 45 136 0 674 485 448 482 676 663 Private NOnguranteed -1 37 131 -14 18 20 437 593 648 670 890 987 Total LT 432 302 384 504 366 124 2557 4733 4762 4754 5582 sm U cradit 80 -122 75 -29 31 8 254 401 455 41S 482 493 Met Short-Ten Capital 0 219 -61 67 317 -30 638 596 540 614 941 744 Total mel. DIV 6 Net ST 517 400 398 542 714 -98 3449 53 SW75 5783 7006 7014 3snk ard IDA Ratios 19B0 1987 1988 1989 1990 1991 ==................... . .... .... .... ..... .... ..... .... ........ ..... ..... Share of Total Long-Term DOD Notes: 1. IRD as of Total 12.06 23J84 20.43 18.70 15.61 13.56 2. DM as of Total 8.60 11.69 14.13 18.79 21.22 23.72 1/ Average Nairfbi lower Inome prife 3. IBDRDOA as X of Total 20.66 35.53 34.56 37.49 36.83 37.2A indie s (includinig rent) based on the old seris (Jan.-JAm. 1975 a 100). Shar of LT Debt Servce Thw revised saries yidt ds nflation 1. 1BRD as % of total 11.21 28.79 29.A6 30.52 30.65 27.14 rates of 15.6X sd 19.88 for 1990 ad 2. IDA as X of Total 0.45 1.33 1.44 1.69 1.95 2.24 1991 respectively for this Sncom gr*;. 3. 1BND+1A a X of Total 11.66 30.12 31.12 32.21 32.61 29°8 2/ Dt Is from th Central Bank of Kenva DOD-to-Exports Ratios *rd Central Burea of Statistics. 1. Long-Tern Debt/Exports 116.36 276.65 252.71 246.36 250.94 255.92 3/ Data sources are VASE,N? and Goverrnent 2. DIV Credit/Exports 11.S5 23.46 24.17 21.53 21.67 21.86 of Kenya. 3. ShortmTern Det/WExports 29.04 34.83 28.60 31.83 42.32 32.98 4. LT*N+f4ST DOD/EXports 156.96 334.93 30S.53 299.72 314.93 310.76 4/ Fiscal year P Is calculated as a siWopt average of caleidr year data. DOD-toOGDP Ratios ................. ----5/ Data ln ffstal year (July I to Jm 30). 1. LawTone Debt/VP 35.19 59.37 55.89 56.57 64.35 69.92 2. W Credit/VP 3.49 5.03 S.35 4.94 5.56 S.97 6/ From 1989/90, data is for total rome. 3 Short-Ter De P 8.78 7.47 6.34 7.31 10.15 9.01 4. LT+IIVST Omi/P 47.47 71.88 67.57 68.83 80.76 84.91 T/ Incltdus net lending. Debt Slece /E*orts S/ Includes adjustant to cash. ..................... 1. Pi.ltc & Girnteed Lt 11.24 24.43 23.8 21.98 21.97 23.14 9/ 1979/80 data is for totr. dwmstic 2. Private Ibn-greed LI 5.78 S.03 5A3 3.47 337 3.77 -flnsirg. 3. totol LW-Term Debt Service 17.02 29.46 29.50 25.46 25.34 26.90 4. WIF s Chgs. 0.76 8.93 6.86 8.4 5.89 2.57 S. Interest onlyon sT Debt 2.64 2.03 2.45 2.64 3.49 2.42 6. Total (LTI3FST Int.) 20.42 40.42 38.81 36.54 34.72 31.89 ....................................................................................................................................