Document of The World Bank Report No: 31015 IMPLEMENTATION COMPLETION REPORT (IDA-33490 PPFI-Q0850 PPFI-Q0851 TF-24227) ON A CREDIT IN THE AMOUNT OF US$ 25 MILLION TO THE REPUBLIC OF GUINEA-BISSAU FOR AN ECONOMIC REHABILITATION & RECOVERY CREDIT December 27, 2004 CURRENCY EQUIVALENTS (Exchange Rate Effective June 30, 2004) Currency Unit = CFA Francs CFAF 544.78 = US$ 1.00 US$ 0.001835 = CFAF 1.00 GUINEA-BISSAU FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS Vice President: Gobind T. Nankani Country Director: Madani M.Tall Sector Manager: Robert R. Blake Task Team Leader: Boubacar-Sid Barry GUINEA-BISSAU ECONOMIC REHABILITATION & RECOVERY CREDIT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 14 6. Sustainability 15 7. Bank and Borrower Performance 16 8. Lessons Learned 18 9. Partner Comments 19 10. Additional Information 19 Annex 1. Key Performance Indicators/Log Frame Matrix 20 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 28 Annex 7. List of Supporting Documents 29 Annex 8. Status of Implementation of the Demobilization Phase 30 Project ID: P065725 Project Name: ECONOMIC REHABILITATION & RECOVERY CRDIT Team Leader: Boubacar-Sid Barry TL Unit: AFTP4 ICR Type: Core ICR Report Date: December 27, 2004 1. Project Data Name: ECONOMIC REHABILITATION & L/C/TF Number: IDA-33490; PPFI-Q0850; RECOVERY CRDIT PPFI-Q0851; TF-24227 Country/Department: GUINEA-BISSAU Region: Africa Regional Office Sector/subsector: Other social services (25%); Central government administration (25%); General industry and trade sector (25%); General education sector (13%); Health (12%) Theme: Conflict prevention and post-conflict reconstruction (P); Improving labor markets (S); Other financial and private sector development (S); Tax policy and administration (S); Health system performance (S) KEY DATES Original Revised/Actual PCD: 08/26/1999 Effective: 06/28/2000 06/28/2000 Appraisal: 11/04/1999 MTR: Approval: 05/16/2000 Closing: 12/31/2001 06/30/2004 Borrower/Implementing Agency: GOVERNMENT OF GUINEA-BISSAU/MINISTRY OF ECONOMY AND FINANCE Other Partners: STAFF Current At Appraisal Vice President: Gobind T. Nankani Callisto E. Madavo Country Director: Madani M. Tall John McIntire Sector Manager: Robert R. Blake Emmanuel Akpa Team Leader at ICR: Boubacar-Sid Barry Marcelo Andrade ICR Primary Author: Boubacar-Sid Barry 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: UN Institutional Development Impact: N Bank Performance: S Borrower Performance: U QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Economic Rehabilitation and Recovery Credit (ERRC) was a quick-disbursing credit in the amount of SDR18 million (US$25 equivalent) that supported the implementation of Guinea-Bissau's National Reconciliation and Reconstruction Program (NRRP). The Program's key policy objectives, and hence of the Credit, were to support peace building, promote the revival of the economy and encourage the pursuit of reforms within a sound macroeconomic framework. The NRRP was prepared by the Government of National Unity (GNU) that emerged after an armed conflict broke out in June 1998 between forces loyal to President Vieira and the Joint Chief of Staff of the armed forces, Brigadier Mane. The NRRP was endorsed by donors at a well attended UN-sponsored Geneva Round Table, in May 1999, with pledges totaling more than $US200 million. The Program focused on tackling post-conflict needs arising from the 11-month armed conflict that displaced one-third of Guinea-Bissau's population, worsened the country's widespread poverty, destroyed many administrative buildings, schools, hospitals, and other infrastructure, and caused a sharp decline in GDP of 28 percent in 1998. The ERRC provided critical budgetary support to finance part of the costs associated with the implementation of the 2000/01 slice of the NRRP. In this context, the ERRC aimed at supporting the preparation and launching of a credible demobilization program, and the implementation of key measures to promote macroeconomic stability and restore economic growth and basic public services. The objectives of the Credit directly reflected the Government's priorities and were appropriate in view of the country's broader context. Until the mid-1980s, Guinea-Bissau was characterized by low social indicators and inadequate infrastructure, as the result of a highly state-controlled development strategy. By the end-1980s, the authorities embarked on a reform program which continued through 1997, when the country adhered to the West African Economic Monetary Union (WAEMU). On June 10, 1997, the Board approved a Country Assistance Strategy (CAS) for Guinea-Bissau, which aimed at supporting sustainable economic and social development with lending operations targeted to assist education, health, private sector and water and energy reforms. Completion of the third-year ESAF arrangement supported by the International Monetary Fund (IMF), paved the way for the favorable preliminary review by the World Bank and IMF Boards of Guinea-Bissau's eligibility for assistance under the Heavily Indebted Poor Countries (HIPC) Initiative, in April 1998. The civil conflict that broke out in June 1998 led to the suspension of the Bank's ongoing operations totaling US$29 million of undisbursed resources, of which about 85 percent in recently approved education (FY97) and health (FY98) projects and most of the rest in a transport and urban infrastructure credit. The outbreak of the conflict also prevented consideration by the Board of the Bank of an energy and water project, planned for June 1998, and led to suspension of preparation of a third structural adjustment credit (SAC III) and a Private Sector Capacity Building Project. The Bank's response to Guinea-Bissau's post-conflict needs consisted of a four-point strategy, of which the ERRC was a key part. This strategy, revised the 1997 CAS and focuses on: (i) reallocation of uncommitted resources from ongoing operations to finance urgent social sector and infrastructure recovery activities; (ii) preparation of a special assistance, under the ERRC, to contribute to macroeconomic stability, and support key NRRP policy objectives; (iii) support to the energy and water sectors under a separate IDA-funded project; and (iv) assistance to longer-term institutional development (during FY01) to support public and private sector capacity building (MOP, para. 44). The Bank's revised strategy was part of a coordinated program of assistance put in place by bilateral and multilateral donors and the ERRC complemented similar and broad support provided by the African Development Bank (AfDB), the European Commission (EC), the UN Agencies, France, Japan, the Netherlands, Portugal, and Sweden. The ERRC was also prepared in close collaboration with the International Monetary Fund (IMF). The IMF - 2 - Board approved in September 1999 and January 2000 purchases under the emergency post-conflict assistance (EPCA), totaling about US$5 million, to support encouraging developments after the 1999 Geneva Round Table. Overall, the Credit envisaged to support favorable prospects for a successful transition to peace given that a new coalition government (headed by the former opposition) was installed in early 2000, after free and fair elections, and the newly appointed Government endorsed the policy objectives spelled out in the NRRP. Moreover, as stated in a donor conference in Bissau, in April 2000, the authorities' commitment to complete an Interim Poverty Reduction Strategy Paper (I-PRSP) was expected to form the basis of support under an IMF-financed Poverty Reduction and Growth Facility (PRGF), planned to be requested by mid-2000, and to clear the way for the HIPC decision point later in 2000 (MOP para. 17). 3.2 Revised Objective: Development objectives remained unchanged. 3.3 Original Components: The ERRC was designed to support the implementation of the 2000/01 slice of national program of peace building, promotion of the revival of the economy, and the pursuit of reforms. The credit was structured around four main components. (1) Maintain Macro-Economic Stability: Late in 1999, the Government, the Fund and the Bank agreed upon a macroeconomic framework for the period 2000-2001, whose objectives were to accelerate economic growth to more than 8 percent in 2001; reduce inflation to less than 3 percent; and limit fiscal and external gaps to financially sustainable levels (MOP, para. 37). Disbursement of funds under the ERRC required that the macroeconomic policy framework would be consistent with the objectives of the program, a goal to be achieved through the orderly financing of internal and external gaps, including with donor assistance, and the implementation of public resource management reform measures (revenue centralization, budget execution, and public procurement reform). (2) Peace Building. The Government considered national reconciliation as the cornerstone of the country's long-term stability. In this context the demilitarization of the country was a top priority and critical for improved governance and the resumption of economic growth and poverty reduction. The main element of this component was the preparation and launching of demobilization, reinsertion, and reintegration program (DRRP) to tackle sources of continuous social and political tensions and the serious burden on the budget of a large military and paramilitary force. The Government recognized that the challenge would be to prepare a comprehensive program anchored on appropriate policy choices aimed at establishing a clear institutional framework, defining acceptable vulnerability criteria to identify target groups to be assisted, and setting up transparent financial arrangements with appropriate safeguards. The latter were particularly important in view of the authorities intention to mobilize significant financial support through a Multi-Donor Trust Fund (MDTF). At the time of Credit preparation, the authorities estimated the size of its security forces at around 23,000. The Credit aimed at supporting the preparation of a credible DRRP, including its pilot testing, so that 4,000 ex-combatants would have been reinserted in civilian life by mid-2001 (MOP, para. 21). The expected outcome of the DRRP, was that the post-demobilization strength of the security forces would be decreased by about 50 percent to 11,000 [1] (MOP, para. 19). (3) Revival of the Economy. The mitigation of the conflict's social and economic effects was to be achieved by (i) relaunching critical basic public services, and (ii) revitalizing the private sector by enabling it to recover its financial strength through implementation of a Domestic Arrears Settlement Program (DASP). Basic public services were to be restored to a pre-conflict level in a number of targeted areas, with - 3 - priority attached to delivery of education and health services, particularly at the primary level. Other goals of this poverty alleviation effort were to restore the sense of security and strengthen the rule of law, assist the poor to rehabilitate their homes, and finally, to encourage the rural population to return to their normal vocations (MOP, para. 24). To achieve its goals, the Government would rely on several donor-funded projects, including those funded by the Bank in the areas of education, health and transport and urban infrastructure, and budget support would help fill the remaining gaps. With a view to revitalize the private sector, severely weakened by losses of about $90 million during the conflict, one of the Government's key measures was to settle a significant amount of its domestic arrears. The authorities considered that this would contribute to enable the private sector to recover its financial strength, help to restore discipline in terms of public finances and boost output and job creation. The Government acknowledged that the challenge would be to prepare and implement a settlement plan in a transparent and equitable manner after completion of an inventory of appropriately verified and validated domestic arrears. At the time the program was prepared, preliminary estimates pointed to arrears of about CFAF 12.5 billion, equivalent to approximately 9 percent of the estimated 1999 GDP (MOP, para 27). The Credit aimed at supporting upstream work required to put in place a credible DASP and sustaining the Government's efforts to restore fiscal discipline through the adoption of manual setting out the expenditure justification requirements (Manuel des Pièces Justificatives). (4) Pursuit of Reforms. The near-term reconstruction effort was lodged within a longer-term reform strategy that sought to strengthen public resource management (MOP, para. 30) and improve the business environment for the private sector (MOP, para. 35). The former, entailed : (i) resuming implementation of tax reforms which entered into effect in April 1998, modernizing the external customs tariff system with a view to future convergence to the WAEMU level, and reducing the total tax burden on cashew nuts exports (MOP, para. 31); (ii) improving budget execution by strengthening expenditure management procedures and establishing the public procurement regulatory framework and piloting it in 5 ministries later in 2000; (iii) reducing budget allocations for security-related outlays, from planned 23 percent of primary expenditures in 2000 to about 19 percent in 2001, in order to reallocate resources to social sectors; and (iv) increasing transparency and accountability in the budget execution by making public twice a year a report on the execution of the budget during the preceding six months. In terms of improving the business environment for the private sector, reforms would focus on proceeding with the privatization of commercial public sector enterprises and increasing private participation in the infrastructure sector. 3.4 Revised Components: The closing date of the Credit was modified twice. The original closing date of December 31, 2001 was amended to December 31, 2002 and a second extension was granted setting a closing date of June 30, 2004. These extensions were granted to give more time to the Government to implement the agreed program given that its implementation had been considerably affected by continued political instability in the period 2001-2003. In February 2004, the Board approved the release of the remaining two floating tranches, along with a third amendment of the DCA to reflect a reallocation of resources between the two floating tranches. At the Government request, to enable the reimbursement of the small depositors of the former International Bank of Guinea-Bissau (BIGB), resources from the DRRP tranche were reallocated in the DASP tranche. About seven months earlier, on July 31, 2003 (IDA/R2003-0172), the Bank amended the Private Sector Rehabilitation and Development Credit (Cr. No. 3622-GUB) to ensure that reconstruction actions to be carried out under the DRRP reintegration activities could proceed as scheduled. The Government requested this amendment to minimize the risk of unrest among demobilized soldiers, given that at the time no ERRC disbursement was envisaged in the near future. - 4 - 3.5 Quality at Entry: This operation was formally evaluated for quality at entry by the Quality Assurance Group (QAG) and rated as marginally satisfactory. QAG's review agreed that peace building is critical to poverty reduction and economic development and that demobilization, in particular, can play an important role in the process. Areas of the operation viewed as strong were: (i) the region's pro-active role in post-conflict peace building; (ii) Government's solid ownership of the program; (iii) delaying Board consideration of ERRC, to allow the Government that would emerge from the late 1999 elections to review and approve the Credit documents negotiated in November 1999; (iv) drawing effectively on Bank's experience in other post-conflict situations to deal with important DRRP design issues (e.g. transparency, equity and gender); and (v) ensuring close coordination with IMF and other donors. The points identified as weak were: (vi) unclear context and the underpinning of the operation due to the lack of a Transitional Support Strategy or equivalent; (vii) appropriateness of the choice of lending instrument, and of its "fit" with the medium-term structural adjustment framework and relationship with the HIPC; (viii) ambitious set of multiple objectives and paucity of measurable benchmarks against which progress could be judged; and (ix) extent to which proposed implementation arrangements under an adjustment operation were adequate to ensure that components would be implemented fairly and efficiently or that they would be sustainable. Consistency with Bank and Government Priorities. The Credit was well aligned with priorities for economic and social rehabilitation as set forth in the Government's National Reconciliation and Reconstruction Program and summarized in its Letter of Development Policy (LDP). It complemented other Bank operations in education, health, transport and infrastructure sectors (see 3.1) and was consistent with the Bank's transitional strategy for Guinea-Bissau identified in paras. 42-44 of the ERRC MOP. The ERRC was broadly consistent with the Framework for World Bank Involvement in Post-Conflict Operations, approved by the Board in May 1997, and the findings of an Operations Evaluation Department (OED) report of 1997 [2] which stressed that successful implementation of post-conflict reconstruction should include: (i) early involvement in post-conflict support to policy formulation; (ii) support for the achievement of macroeconomic stability; (iii) a good assessment of damages and needs; (iv) flexibility in design and implementation to respond to volatile and changing circumstances; and (v) diversification of reconstruction into various sectors. The Credit was prepared after consultations with the Government, stakeholders, and major development partners. The latter was evidenced by the donor's Round Table in Geneva (May 1999) and donor conference in Bissau (April 2000) that helped to mobilize considerable parallel support to the Government's reconstruction program, and assistance to clear overdue payments to the Bank and other multilaterals. The Credit was well articulated with the IMF support to Guinea-Bissau following two disbursements under the EPCA (September 1999 and January 2000) and the ongoing negotiation of three-year Poverty Reduction and Growth Facility (PRGF) which was concluded in the third quarter of 2000. Quality of Design. The choice of lending instrument to support the country's post conflict efforts was considered at the Concept Review stage and explored the options of rehabilitation, hybrid and emergency recovery loans. Given the investment features of the last two instruments, quick-disbursing was considered more appropriate given the rehabilitation and adjustment elements of the proposed operation and the fact that such lending instrument would allow tranching disbursements upon compliance of a few meaningful conditionalities and safeguards. The review also recommended that conditionalities should target issues critical to the successful implementation of the Government's program. As for the front-loading of the Credit, it was discussed at length by the Regional Operations Committee (ROC) and risk taking was endorsed after a careful review of cash flow gaps of budgetary expenditures and imports and the sizable needs of the early months of 2000 exacerbated by seasonality of the country's export and fiscal revenues. - 5 - The Credit is a three tranche operation. The designation of the second and third tranches as floating rightly gave the Government added flexibility in dealing with complex issues at an appropriate pace and made available financing once components would be ready for implementation. Furthermore ­ in recognition of the fragile social and political post-conflict situation ­ credit conditionalities correctly focused on measures drawn from key NRRP components with maximum buy-in from important segments of the society and avoided issues that could exacerbate social tensions (e.g. privatization). Tranche release conditions listed in the Development Credit Agreement (DCA), were cross-referenced with specific paragraphs in the LDP, reflecting the close mutuality of purpose between the Credit and the Government's program. In order to monitor the Credit's impact, selected indicators were defined in the MOP. Finally, a ring fencing mechanism for a better management of counterpart funds was appropriately introduced in the credit's design (DRRP and DASP Accounts - MOP, paras. 23 and 28), which contributed to the involvement of other donors, as evidenced by the successful establishment of the MDTF, funded by the Dutch and the Swedish and managed by the Bank in support of the Government's DRRP. Risk Assessment. The MOP spelled out the risks affecting the project and the operation helped some of these risk from materializing. The risk associated with the renewal of hostilities was mitigated by: (i) offering immediate peace benefits and giving different socio-economic groups a stake in the success of the peace process; and (ii) helping to protect some groups, such as vulnerable ex-combatants. As for the risk of the Government not following through the reform program, as intended, it was largely managed by the floating tranche approach. In terms of risk of insufficient institutional capacity, donor support, including from the Bank, and contracting out critical DRRP and DASP tasks have largely minimized critical gaps. It was anticipated that the prospect of going back to the HIPC Initiative would encourage the government to keep its macroeconomic performance on track. Encouraging progress up to the third quarter of 2000 and the completion of a well received I-PRSP in September 2000, as expected paved the way for an agreement with the IMF under the PRGF facility in December 2000. At the same time, a favorable decision was made by the Boards of the Bank and the IMF with regard to the Decision Point under the Initiative for Highly Indebted Poor Countries (HIPC). Subsequent developments proved that this incentive was insufficient. By contrast, there were a number of factors that were not anticipated in the MOP -- such as the persistent fall of the cashew nut prices on the world market during the past three years -- but which negatively affected the economy. Given the importance of cashew nuts ­ which account for 95 percent of export earnings ­ this was a significant omission, and the consequent shortfall of budgetary revenues, in combination with imprudent policies, led to fiscal slippages that weakened the macroeconomic framework and delayed the implementation of the ERRC. Other factors that could probably not have been anticipated but which affected credit implementation were: (i) the considerable deterioration of the security situation on the northern border with Senegal, which continued until early 2002 and contributed to the increase in military expenditures; (ii) continued widespread political instability during 2001-2003, which delayed DRRP preparation and implementation; and (iii) appreciation of the CFAF, which exacerbated the financing gap and reduced the funds available for financing the DRRP. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Achievement of objectives and outputs under the credit is judged to be marginally satisfactory because they were only partially met. A few months after the effectiveness of the credit, domestic and external developments unrelated to the Credit considerably affected the achievement of its objectives and outcomes. On the domestic front, later in 2000, the country's security weakened considerably due to heightened tensions on the northern border with - 6 - Senegal, a situation that continued until early 2002. Moreover, as a result of a minority-led Government's erratic actions, the political and social climate remained highly volatile due to continued conflicts between the Presidency, the legislative and the judicial branches, in the period 2001-2003. During this period, allegations of three coup attempts surfaced and several government reshuffles caused the virtual collapse of the administration, ultimately leading to the removal of President Yala in a bloodless coup in September 2003. On the external front, over the period 2001-2003, the country also faced the adverse impact from a sharp terms-of-trade deterioration related to a prolonged slump of cashew nut prices on the world market. To control for the previously described developments, the ICR focuses on Credit achievements up to mid-2004. The objective of the ERRC was to support the Government in achieving peace building, the revival of the economy and the pursuit of reforms within a sound macroeconomic framework. The Government's macroeconomic performance fell short of expectations and only as a result of recognized Government efforts, since late 2003, economic growth has recovered and is expected to reach 4.3 percent in 2004. However, the government's financial position remains critical and the legacy of the 2001-2003 administration poses serious challenges. In the area of peace building, notwithstanding the challenges, demobilization under the Government's DRRP was satisfactorily completed by September 2002 and allowed discharging and reinserting into civilian life about 4,000 ex-combatants. While downsizing was smaller than initially expected, security forces were reduced by about 32 percent. The last phase of the program is currently under way, has allowed the reintegration of approximately 3,000 ex-combatants and is expected to be finalized by June 2005. With regard to revival of the economy, re-launching of basic public services progressed satisfactorily, about 20 percent of the Government's domestic arrears were settled through DASP and payment of former Bank BIGB small depositors will soon be completed. With respect to economic reforms, despite encouraging developments in customs and tax reforms, considerable challenges remain in the area of public expenditure management. However, promising progress was achieved in improving the business environment for private sector, especially in the area of privatization. - 7 - Table 1. Guinea-Bissau: Selected Macroeconomic Indicators, 1999-2004 1999 2000 2001 2002 2003 2004 Proj. Actual Proj. Actual Proj. Actual Actual Actual estimate Growth Rates (% change) Real GDP 7.5 7.6 7.6 7.5 8.5 0.2 -7.2 0.6 4.3 Consumer prices (annual average) 6.0 -2.1 3.0 8.0 2.9 3.3 3.3 -3.5 2.3 Terms of trade (deterioration -) .. 19.5 .. -0.1 .. -18.3 2.7 -1.5 -3.8 National Accounts (% of GDP) Gross investment 24.3 16.8 26.8 11.3 26.0 14.4 8.9 11.1 15.2 Private investment 5.4 6.0 5.0 1.3 6.4 0.4 0.2 0.1 1.4 Gross domestic savings -9.4 -1.1 -3.3 -8.5 2.9 -19.8 -12.5 -2.9 0.2 Balance of Payments (% of GDP) External current account (incl. Grants) -21.8 -13.1 -16.9 -5.4 -11.3 -20.6 -10.8 -2.8 0.8 Government Finance (% of GDP) Total revenue, excluding all grants 11.7 17.3 14.0 19.2 14.3 16.1 15.3 15.6 17.8 Total expenditures 41.7 31.3 43.9 44.1 40.3 43.0 33.4 37.1 46.2 Current primary balance 1/ -1.9 3.1 -0.9 -11.1 0.9 -4.7 -4.2 -4.3 -3.5 Overall balance (comm. Basis) Excluding all grants -30.0 -14.0 -29.9 -24.9 -26.0 -26.2 -18.1 -21.6 -28.3 Including all grants -20.9 -9.7 -19.7 -10.8 -15.0 -11.7 -12.0 -13.9 -12.7 Source : IMF 1/Revenues excluding all grants less non-interest current expenditures. 4.2 Outputs by components: The Credit's outcome in terms of each component is discussed below. 1) Maintain Macro-Economic Stability: This component is rated marginally unsatisfactory. Macro-economic performance has been disappointing during most of the period covered by the Credit, with some improvement at the end of the credit period. In the period through September 2000, progress continued to be encouraging on the macroeconomic front and the country completed an I-PRSP, discussed at the Board in December, that reaffirmed the key objectives and priorities spelled out in the NRRP. As expected, such developments paved the way for a US$18 million agreement with the IMF under a three-year PRGF and the decision by the Boards of the Bank and the IMF that the country had fulfilled the conditions for reaching the Decision Point under the HIPC Initiative, both in December 2000. However, early in 2001, the macro-program was found to be substantially off track owing to large unbudgeted expenditures later in 2000, mainly on defense, and financed by credit from the banking system and promissory notes. This slippage led to a significant expenditure overrun and a primary budget deficit 10 percentage points of GDP above the target of about 1 percent. In 2001, the loss of budgetary control continued leading to a primary fiscal deficit of 4.7 percent compared to the targeted surplus of 0.9 percent. The external current account deficit further worsened by 8.3 percent of GDP, partially due to the shortfall in donor assistance (equivalent to 4 percent of GDP), as the Fund's first PRGF review in April 2001 was not completed. Coupled with the 30 percent decline in world market cashew prices (95 percent of exports), GDP growth contracted to an estimated 0.2 percent by end-2001 -- far below the 8.5 percent growth that was projected in the MOP -- and fell to minus 7.2 percent in 2002 (see Table 1). Main contributing factors to the 2002 economic contraction were the 15 percent fall of the production of cashew nuts and lower food crops, due to - 8 - unfavorable weather conditions, and the suspension of donor-funded policy lending (about 7 percent of GDP), respectively. The fiscal situation continued to be precarious as revenues worsened due to the sharp decline in economic activity and the implementation of a number of policy decisions outside of an Emergency Financial Management Framework agreed with the IMF and the Bank. In view of the disappointing developments, at the time, the IMF established that it would be unlikely that Guinea-Bissau would be able to meet PRGF standards in the near future. Real GDP growth in 2003 remained flat and fiscal management deteriorated further with a substantial diversion of resources to expenditures taking place outside the legally established budgetary procedures. Consequently, most public sector wages remained unpaid in the first nine months of 2003. Growing instability led to a military coup in September 2003. Following the 2003 coup, an interim civilian President and Government was appointed by the military junta, and the international community expressed broad support for the transition arrangements in Guinea-Bissau. Interim President Rosa confirmed the Government's strong commitment to return the country to the rule of law and to reassert control over public finances. Later in 2003, a joint IMF/World Bank/AfDB mission and the Government agreed on a draft 2004 budget, verified that the Government had put in place a set of measures to restore control over public finances (e.g. salaries paid upon presentation of proper identification, weeded out ghost workers and allowed savings of up to 25 percent) and helped the authorities to prepare an emergency economic management plan (EEMP). The authorities presented the EEMP to donors in Paris on December 18, 2003. In view of positive developments, the macroeconomic framework was deemed adequate given that measures necessary to restore an environment consistent with the ERRC objectives were being implemented. The two ERRC floating tranches were released in February 2004 (IDA/SecM2004-0079). Real GDP is projected to increase by an estimated 4.3 percent in 2004. As a result, gross domestic investment is expected to reach 15 percent of GDP in 2004, improving from the 11 percent ratio averaged between 2001-2003. By the same token, export volumes are expected to grow by 6 percent in 2004, as opposed to the average increase of 3 percent recorded in 2001-2003, as a result of record cashew production. Inflation remains under control at an average of 3 percent per annum, in line with the average for the WAEMU countries. In the meantime, Parliamentary elections were held in March 2004 and an orderly transition to a Government elected on the basis of a broad reform platform took place in May 2004. Presidential elections are expected to take place in the second quarter of 2005. (2) Peace building. Achievement of this component is rated as satisfactory. Building on worldwide experience in post-conflict countries (MOP para 21), a key objective of this component supported by the ERRC was achieved ­ downsizing of security forces. A credible DRRP was approved by the Council of Ministers in May 2002, although later than expected due to problems in carrying out the security forces census. The program involved three phases: demobilization, reinsertion, and reintegration. (a) Regular Demobilization. According to census of security forces carried out by DRRP, the size of the security forces was much smaller than initially reported by the GNU - 12,595 compared to about 23,000, respectively. The regular demobilization operation was carried out on a decentralized basis in the existing units (for military and paramilitary personnel) and in especially identified demobilization centers (for militia members). Following a pilot program in May 2001, during which 571 personnel were demobilized, the regular demobilization was conducted in July-September 2002. Of the 4,392 surplus military and paramilitary personnel planned for demobilization 3,929 were effectively demobilized (representing a 90% implementation rate, see Annex 8) and approximately a 1 percent of GDP savings on the defense and security budget in the first year. The actual savings are somewhat greater because these figures include only the wage bill of the demobilized individuals and do not take into account the cost of their food, uniforms, and equipment. Overall, the post-demobilization strength of the security forces was smaller (8,200) than initially planned (11,000) as a result of a lower than expected (32 percent) downsizing. - 9 - (b) Reinsertion. Reinsertion is the transition phase between the actual demobilization of a combatant and the commencement of his/her social and economic reintegration. The duration of the reinsertion period under the DRRP was twelve months. The assistance provided combined a system of subsidies with counseling services and institutional monitoring by a dozen of local NGOs. Three types of reinsertion benefits were established by the DRRP: (i) counseling and referral service; (ii) immediate reinstallation subsidy, and (iii) reinsertion support subsidy. These three benefits were granted at the time of effective demobilization and graduated according to the duration of the reinsertion period. Payment of the two subsidies was implemented through the Western Union Agency, with a total of CFAF 392.6 million being paid out for the immediate reinstallation subsidy and CFAF 1.6 billion for the reinsertion support subsidy. (c) Reintegration. Reintegration is a phase of financial, technical, and institutional assistance designed to facilitate the incorporation of the vulnerable ex-combatants into their chosen community. Due to the program's financial constraints, socio-economic vulnerability criteria were established under the DRRP in order to identify ex-combatants entitled to reintegration benefits. The Decree-Law of 02/01 on reinsertion and reintegration benefits sets forth the benefits system and identifies the eligible groups, together with the eligibility criteria [3]. To reduce the degree of socio-economic vulnerability of the groups at risk, eligible ex-combatants were encouraged to participate in a community-based productive system for promoting income-generating activities and improving their housing conditions and physical rehabilitation. Similarly, a set of manuals spells out the procedures for obtaining these benefits. Two support services for the reintegration of vulnerable ex-combatants were established in each DRRP Zone Offices. The Counseling and Referral Service provided guidance for the program target group, and the Reintegration Fund promoted and financed the reintegration activities. These two services worked closely together; the first made helpful information accessible for the ex-combatants and the receiving communities, while the second enabled implementation of the reintegration activities. Although initially scheduled to start in July 2002, reintegration activities were launched only in April 2003 and as of end-June 2004, approximately 3,000 ex-combatants had been reintegrated. Of the 11,300 vulnerable ex-combatants initially identified for reintegration, about 7,200 are expected to be reintegrated by July 2005 (closing date of DRRP in the approved Program document). The 36 percent shortfall (4,100 ex-combatants), to be handled through tighter eligibility criteria, is essentially due to a higher than expected depreciation of the dollar vis-à-vis the CFA franc that occurred during implementation, and the fact that Government did not fully reimburse DRRP of CFAF 1.1 billion that were diverted by the Treasury from the program in 2000, prior to full establishment of an independent financial management and procurement unit through an international bidding process. The Bank's catalytic role in the DRRP was also highlighted by the successful establishment of a Multi-Donor Trust Fund (MULT 24227) supported by the Netherlands and Sweden (US$5.8 million). According to a study carried out by the National Institute of Research (INEP) the DRRP provided immediate benefits to the ex-combatants during 2001-02. The resources of the program were mainly used to finance small scale productive activities in agriculture trade and housing. Data collected by the Ministry of Finance and National Institute for Survey and Census (INEC) show that economic and social activities (crop productions, livestock, fishing activities, trade and small scale businesses) have benefited from the the implementation of the DRRP during the period 2002-2003 and the first half of 2004 (see Tables 2 and 3), despite the difficult macroeconomic situation of the country. Moreover, the DRRP allowed reintegrating a relatively large number of ex-combatants women (19 percent of total) into civilian live, mainly though trading activities (see Table 3). These positive results are largely explained by the fact that subsidies and grants of the DRRP contributed to redirect a large number of people (ex-combatants and their direct and extended families) toward productive activities. - 10 - Table 2. Evolution of major Crops, 2002-04 (in thousand of metric tons) 2002 2003 Sugarcane 26.9 27.2 Fresh fruits 289.5 347.4 of which Cashew (whole fruit) 123.6 128.5 Cashew nuts 67.4 79.6 Artisal fishing 18.9 19.9 Source : IMF and National Institute of Statistics and Census (INEC) Table 3. Sectoral Distribution of Microprojects financed by the DRRP During Reintegration Phase 1/ Area Activity Micro Projects Financed by DRRP Number of Ex-combatants Amount CFA mil. Share of total (%) Women Men Share of total (%) Agriculture 104.4 3.2 19 140 3.7 Livestock 531.1 16.3 31 703 17.2 Forestry 0 0.0 0 0 0.0 Economic Artisanal Fishing 62.2 1.9 3 77 1.9 Trade 962.7 29.6 398 894 30.3 Industrial Fishing 563.2 17.3 213 473 16.1 Small scale enterprises 479.5 14.7 86 531 14.5 Transport 7.3 0.2 0 9 0.2 Sub-total 1 2710.4 83.3 750 2827 83.9 Social Housing 206.9 6.4 48 149 4.6 Sub-total 2 206.9 6.4 48 149 4.6 Electricien 51.2 1.6 0 81 1.9 Accounting 0.6 0.0 0 1 0.0 Computer Science 110.9 3.4 11 120 3.1 Construction 31.2 1.0 1 49 1.2 Training Mechanics 31.2 1.0 0 51 1.2 Driving 68 2.1 0 107 2.5 Security 3.8 0.1 0 6 0.1 Carpentry 11.5 0.4 0 18 0.4 Air conditioning 9.6 0.3 1 14 0.4 Other 16.6 0.5 2 25 0.6 Sub-total 3 334.6 10.3 15 472 11.4 Total 3251.9 100.0 813.0 3448.0 Total in percentage 100.0 o.w. women 19.1 men 80.9 Source: Ministry of Finance 1/ The total number of ex-combatants reported here (813+3,448=4,261) reflects data compiled from the DRRP database at mid-December 2004, slightly higher than the figure reported at Credit closure (3,000). (3) Revival of the economy: Achievement of this component is rated as satisfactory. Relaunch of basic public services. The goal was to re-establish pre-conflict level of basic education and health service delivery, and restore the sense of security and strengthen the rule of law by accelerating the demining process and reviving the judicial system. In the education sector, gross primary enrollment - 11 - increased from 57 percent in 1999 to 75 percent in 2003, about 10 percentage points higher than the pre-conflict level of 62 percent. In the health sector, an estimated 27 percent of primary health care centers (PHC) are in full operation compared to about 5 percent in 1999. While the expected 32 percent coverage was not reached, key health indicators recovered to pre-war levels (Table 4 below). Overall, the Government's introduction of a free tuition system in primary education and the introduction of a minimum PHC benefit package (including immunization, reproductive health, prenatal care, and prevention and treatment of malaria) succeeded in promoting recovery of service delivery. Table 4: Key Health Indicators Indicators Baseline As of March (1998) 1/ 2004 1/ Actual Actual 1 % of births attended 30% 28.80% by trained midwives EPI program 2 BCG 72% 84% 3 DTP3 56% 77% 4 Polio3 58% 75% 5 Sarampo 52% 62% 6 TT2-5 25% 38% 1/ Supervision of National Health Development Program Security has also been improved. The demining operation made satisfactory progress under the supervision of the Mine Action Centre, with the assistance of the Netherlands and UNDP. From January 2000 to November 2002, about 18,300 mines and explosive devices had been destroyed largely clearing the Bissau area and the Casamance region. In terms of restoring the rule of law, after a continued crisis during 2001-2003, it has been strengthened early in 2004 when an independent solicitor-general was nominated and new Supreme Court justices have been elected. As far as internally displaced people is concerned, by the time the ERRC was firmed up, the Government reported that their situation had largely been normalized, with support provided by the European Commission and UN agencies as well, including with the recovery of about 60 percent of damaged houses. Revitalization of the Private Sector. The Government ensured that the DASP was prepared in an orderly, transparent, and equitable fashion and a program document was approved in November 2002. The preliminary estimates of the amount of these arrears were confirmed early in 2001 (at CFA 25.6 billion) by means of an inventory established by an external auditor on the basis of the Manual of Procedures for the verification and payment of domestic arrears that was approved by the Minister of Finance in November 2000. Earlier in 2000, the government also settled arrears to an estimated 2630 pensioners, a vocal group receiving an average pension estimated at about $15 a month. The payment process took place in two phases: an initial (pilot) phase was completed in January 2001, for which counterpart funds from ERRC were made available (CFAF 1 billion), which was followed by a second phase during March-April 2004 for which the DASP floating tranche of CFAF 4.2 billion was disbursed. Overall, DASP was satisfactorily implemented as it allowed to clear arrears to 86 percent of creditors (218 creditors were paid out of a possible total of 253). Payments to small depositors of BIGB will soon be completed, after legal requirements to enforce the liquidation of BIGB, already approved by Government and shareholders, have been dealt with. With regard to efforts to restore fiscal discipline - 12 - through the adoption of manual setting out the expenditure justification requirements (Manuel des Pièces Justificatives), the rules were approved by a Government Decree of May 2002. . Overall, the DASP allowed the settlement of about 20 percent of the pre-2000 Government's domestic debt arrears vis-à-vis the private sector (about 5 percent of GDP). This outcome was, however, less than initially expected, because the verified and validated stock of arrears was twice the amount initially estimated by the authorities, other donors cancelled their participation, and offsetting public debt with non-contested debt to the government by the private sector proved to be difficult. Initial data show that the arrears paid off under the DASP program have been used for transactions on cashew nuts and other domestic investments. However, it is too early to judge the impact of the program on job creation, as the survey on the activities of a sample of beneficiary enterprises have yet to be carried out. Preliminary estimates for 2004 indicate that private investment has increased by 1.3 percent of GDP above the previous year's level, as a result of increased investments in cashew and other domestic activities, largely due to the additional resources injected in the economy by the DASP. (see Table 1 above) 4) Pursuit of Reforms. Achievement of this component is rated as marginally satisfactory. Despite encouraging developments in customs, tax and procurement reforms, considerable challenges remain in the area of public expenditure management and policies. Promising progress was achieved in improving the business environment for private sector, especially in the area of privatization. Tax and Customs Reform. The Taxpayers' Identification Number database was developed, enabling management of the domestic tax and customs administration. After introducing the generalized sales tax (GST) in 2000, at a rate of 10 percent, the tax was increased to 15 percent in 2001 along with an increase of the special tax on consumption of imported beer and tobacco (from 20 to 35 percent). Revenue collection, including from customs, was also centralized in the Ministry of Economy and Finance. The external common tariff, broadly aligned with the framework of the WAEMU, became operational in 2001. Expenditure Management and Composition. With regard to expenditure management, Government approved by decree- law a manual setting out the public expenditure justification requirements in May 2002. However, as reported above, compliance with established rules was less than satisfactory until later in 2003. Progress was achieved in reforming the public procurement system. In January 2002, a legal and regulatory framework endorsed by the Bank was approved by the Council of Ministers and a pilot phase, involving five key ministries, was broadly completed in March 2002. Changes in expenditure composition fell short of expectations. Higher defense outlays, as a result of increased security concerns at the border with Senegal in 2001/2002, made it difficult to maintain spending at levels as initially planned. The share of public spending on defense and security reached 21 percent of current expenditure at end-2001 ( higher than the target of 19 percent, but slightly lower than the 22 percent observed in 1999). Throughout the period 2002-2003, however, mounting pressures from the military and continued political uncertainty led to further pressure on the Government's budget -- particularly from unsustainable military salary increases in 2003 -- which brought defense and security spending up to about 23 percent of current primary expenditures by end-2003, well above the targeted level of 19 percent. With regard to social sectors, the education sector budget rose from approximately 7 percent of current primary expenditures in 2000, to almost 9 percent in 2003. During the same period, the share observed in the health sector remained broadly unchanged at 3 percent, after representing more than 5 percent in 2002. - 13 - Transparency and Accountability in the Budget Execution. Less than satisfactory progress achieved, as Government released to the public the first comprehensive budget execution reports during the second half of 2001 and the first half of 2002, but no reports were published afterwards. An external audit of the budget outturns for the period 1997-2000 was completed in 2002. No budget was prepared in 2003. For 2004, Government prepared an emergency budget with the assistance of the Bank, the Fund and the AfDB, which serves as basis for the implementation of the Government's Emergency Economic Management Plan (EEMP). Improving the Business Environment for the Private Sector. Promising progress was achieved. The tax on industries (contribution industrielle) was lowered from 39 percent to 30 percent, and a large number of small tax items was removed from the tax code. The tax burden on the cashew sector was lowered from 12 percent to 6 percent of the export value, based on the reference price between 1999 and 2002. This reduced the effective tax rate by 52 percent, and exceeded the planned reduction by 10 percent (MOP, para 31). A Privatization Law was enacted in March 2001, and the Government made measurable progress in the implementation of its action plan. Twelve enterprises out of eighteen were divested by end-2003. Divestiture studies of the remaining companies are under way. With respect to the energy sector less progress was achieved and the Government has launched a study, which aims at restructuring the country's ailing water and electricity (EAGB) company. The liquidation of the former bank BIGB was approved and payments of retrenchments and small depositors is expected soon. In the infrastructure sector noticeable progress was made in rehabilitating the national airport of Bissau and the airport has recently started to operate night flights. Discussions are currently under way to place the management of the airport under the regional company for airport surveillance (ASECNA). In the area of telecommunication the Government has completed the biding of the GSM system and has selected a regulator for telecommunication sector in 2004. Currently, two cellular phone companies, Guinétel and Spacetel, are providing both local and international service in Guinea-Bissau. 4.3 Net Present Value/Economic rate of return: Not applicable 4.4 Financial rate of return: Not applicable 4.5 Institutional development impact: Achievement under this component is rated as negligible. Overall, the ERRC has had little capacity building impact on the public administration, due to the continued political and macroeconomic instability and the absence of growth during most of the Credit's period of effectiveness. With regard to the impact on the budgetary process, the Technical Committee (TC) -- whose role was to supervise the implementation of the ERRC -- was not fully operational as a result of political instability and frequent staff changes. However, experience amassed and local capacity created during the implementation of the DRRP reintegration phase is valuable in terms of future community-development type of projects. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The implementation of the reform program was adversely impacted by several exogenous factors. First, the deterioration of the security situation at the northern border with Senegal in 2001/2002, in combination with widespread internal political instability in 2001-2003, considerably delayed the preparation and implementation of the DRRP. The implementation of the demobilization and reinsertion phase and the - 14 - launching of reintegration activities, initially scheduled for June 2001, was completed only in September 2002 and March 2003, respectively, as insecurity or instability prevented access to major demobilization zones. Second, some donors (one multilateral and another bilateral) who initially pledged support to the DASP cancelled their participation in the program. Finally, adverse external terms of trade shocks resulting from a 18.3 percent decrease in cashew nut prices on the world market, and adverse weather conditions in 2001, also resulted in a sharp decline of economic activity. 5.2 Factors generally subject to government control: Several factors under Government control impacted the implementation of the reform program supported by the credit. On the positive side, decree-laws and program documents governing the DRRP and the DASP were adopted, although in general later than expected. Government proactively requested and obtained a partial restructuring of the Bank portfolio, thereby enabling use of part of the private sector project's resources to finance demobilization and reinsertion activities. This also permitted the reallocation of resources within the DASP floating tranches for payments to small depositors of the BIGB. On the negative side, delays in completing the census of the military delayed the launching of the DRRP. In addition, the lack of commitment to sound budgetary management led to major fiscal slippages and the deterioration of the overall macroeconomic framework in 2001, which led to suspension of the IMF's PRGF program, subsequent loss of support in the context of the HIPC, suspension of donor disbursements, and delays in the disbursement of the two remaining tranches of the Credit, thereby slowing the implementation of the reform program. Another negative factor was the political uncertainty during the period 2000-2002, which led to frequent staff changes in key departments in charge of program supervision, as a result of recurrent cabinet reshuffles. 5.3 Factors generally subject to implementing agency control: On the positive side, the Ministry of Finance, the implementing agency responsible for program coordination, maintained effective communications with the Bank, facilitated program supervision and despite serious challenges was instrumental in ensuring progress in major elements of the ERRC supported program. On the negative side, part of the DRRP resources (about CFAF 1.1 billion) were diverted to finance spending under the Government's budget in late 2000. This practice not only contributed to derail the macroeconomic program supported by the PRGF, but ­ combined with the appreciation of the CFA franc ­ has led to a shortfall in DRRP funds that is resulting in fewer ex-combatants being reintegrated into civil society. Finally, the national steering committee chaired by the Minister of Finance that was designed to manage project implementation and monitoring was not fully operational. 5.4 Costs and financing: The full amount of the Credit was disbursed in three tranches, as designed. However, a higher than expected appreciation of the CFA franc vis-à-vis the US dollar during implementation has generated a financing gap of about US$2 million. Between effectiveness in June 2000 and final disbursement in February 2004, the closing date of the credit was extended twice due to implementation delays owing to the absence of an adequate macroeconomic framework, which was a tranche release condition. By the same token, parallel financing from other donors has experienced similar delays or has been simply cancelled. 6. Sustainability 6.1 Rationale for sustainability rating: The sustainability of reforms implemented during the ERRC is rated unlikely. Insufficient progress in creating a sound macroeconomic environment and lack of progress in implementing reforms to restore fiscal discipline will continue to hinder the country's prospect to make sustainable progress on growth and - 15 - poverty reduction. This situation is further exacerbated by the extreme fragility of the political and security environment as demonstrated by the recent mutiny of soldiers in October 2004 which led to another increase in the wage bill of almost 50 percent [4]. However, a number of achievements are likely to be sustained as those in the area of downsizing the security forces, restoring basic services and privatization of state owned companies. 6.2 Transition arrangement to regular operations: The ERRC was a budgetary support operation to assist the implementation of the Government's post conflict transitional reconstruction program. Continued progress towards restoration of fiscal discipline and improvement of macroeconomic balances, and the preparation of the full PRSP will be critical for the transition to regular operations for supporting the implementation of the Government's poverty reduction strategy. Achieving political stability remains the major challenge toward achieving this objective. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank lending performance is satisfactory. The Government and the Bank prepared the ERRC at a time when the country was emerging from war and vitally needed support for its reconstruction program. While recognizing to be a risky operation (MOP, para. 58), the alternative of withholding post-conflict assistance to an untested government that emerged from the late 1999 elections also carried high risks (rapid return to renewed hostilities, unraveling of the democratic process and possibly spill over effects in other countries in the region). IDA correctly responded proactively to Guinea-Bissau's needs and review meetings tightened the Credit focus so as to accommodate the new challenges faced by the country in the postwar period. The Bank made available a PPF to support local teams in project preparation and supplied specialized expertise when and where needed. Project design was broadly adequate despite the overly optimistic multiple objectives and the fact that rationale of the reform program could have usefully be better presented. Attention was paid to the Borrower's institutional weaknesses and provision was made to address these by ensuring additional support from other donors and outsourcing of key DRRP and DASP tasks. Policy objectives, implementation measures and output indicators were clearly spelled out in the form of a project description summary attached to the MOP. The floating tranches/menu-based budget support program was appropriate and allowed the disbursement of the first tranche upon effectiveness. During credit implementation the Borrower satisfied all tranche release conditions but the one concerned with maintaining an adequate macroeconomic performance, which accordingly delayed the release of the two remaining tranches. Bank close coordination with other donors and the IMF was also instrumental in assisting the country. The Bank's pro-active stance helped in the successful establishment of the MDTF, which mobilized considerable resources to support DRRP implementation, and to clear considerable arrears to other multilateral institutions in the context of the HIPC Initiative (AfDB). 7.2 Supervision: Bank supervisory performance is rated satisfactory. Periodic supervision missions were appropriately staffed, with specialized expertise in private sector development, demobilization and community participation. Joint missions with the Fund were held in connection with the preparation and review of the annual budgets, Article IV consultations and the supervision of the macroeconomic program. Coordination with multilateral and bilateral agencies was well organized, and inter-agency cooperation was close and productive. - 16 - 7.3 Overall Bank performance: Overall, the Bank's performance is rated satisfactory. Borrower 7.4 Preparation: The Borrower's performance in preparation is assessed as satisfactory. The Borrower had full ownership of the program, as indicated by the following: (i) the program was based on the country's own NRRP; (ii) top government officials were actively involved in the design of the program supported by the ERRC; and (iii) the Borrower complied with the end-September 1999 fiscal targets agreed to in the context of the IMF's Post-Conflict Emergency Assistance program. In addition, staff consultations indicated broad consensus among political parties, unions, and the private sector for the priorities supported by the ERRC, and the newly elected authorities endorsed the ERRC package before its presentation to the Board. (MOP, para 41). Finally, the Government took several prior actions, including the preparation of a coherent Letter of Development Policy, which focused on priority reform areas as laid out in the NRRP. 7.5 Government implementation performance: The Government's implementation performance is assessed as unsatisfactory because the macroeconomic framework was not adequate for most of the program implementation period -- as a result of the Government wavering commitment to fiscal discipline -- despite the achievement of a certain number of positive actions. On the positive side. The Government, prepared studies on the key aspects of the program implementation and the participatory design of a package of technical, administrative, and financial management tools, studies, and manuals necessary to the successful implementation of the DRRP facilitated implementation [5]. The Government also established a Technical Management Team (TMT) for the implementation of the DRRP. In that vein, a technical assistance contract was signed with the International Organization for Migration (IOM), which enabled the establishment of an international technical support team to assist in the design and planning of the program. Furthermore, the Government established an independent Financial Management and Procurement Unit (UGFA), which was entrusted with all the financial management aspect of the DRRP. With regard to the DASP, external expertise was also contracted and played a critical role when the pilot phase was successfully completed in 2001, and was key to allow the settlement of payments in March-April 2004. Progress on restoring basic services and on the divestiture program should also be recognized. On the negative side. The implementation of the reform program was delayed by a number of factors. First, the late completion of the military census significantly delayed the planning of the regular demobilization operation. While the list of ex-combatants was initially to be provided in May 2002, the list of the ex-combatants were not made available until July/September, thus delaying the starting of the demobilization. Second, the disbursements of the credit was halted owing to the Government's failure to maintain macroeconomic stability, which led to the subsequent suspension of the IMF's PRGF-supported program. Third, part of the DRRP funds were used by the Government to pay salaries in 2001. Finally, unsustainable policies such as the ones on employment and wages in the public sector have created a challenging situation with the country's fiscal situation remaining critical in the near future. 7.6 Implementing Agency: Despite weaknesses (see 5.3) of the implementing agency, the Ministry of Finance, its performance was marginally satisfactory as it maintained open lines of communications with the Bank, facilitated program supervision and, despite facing a challenging environment, ensured progress in major elements of the - 17 - ERRC supported program. 7.7 Overall Borrower performance: The overall performance of the Government is assessed as marginally unsatisfactory 8. Lessons Learned This credit provides a number of lessons learned with regard to tranche design and conditionality in post-conflict countries; implementation of the DASP program; and implementation of the DRRP program. These lessons should be incorporated into future post-conflict program design. They are: There is a need for more realistic program design to avoid overloading the recognized weak capacity of post-conflict countries. Policy based lending and the use of floating tranches proved to be a useful approach to make resources available when key program components, and related expenditures, are ready to be implemented. However, selectivity in objectives that are mutually-enhancing is important to keep the program focus on fundamentals of the reform agenda. The use of ring fencing mechanisms in the later stages of the Credit proved to be a useful alternative to ensure progress in key elements of the program supported by the Credit. The lessons learned from the design and implementation of the DASP Program include the following: The retention of an independent audit firm to handle DASP payments in the second phase was a positive move. Despite the difficulties encountered during the second phase (primarily due to the elections taking place in the country at that time), the presence of international consultants assured the efficiency and transparency necessary for the payment process to be successful. The timely implementation of the payments by the international consultant in the second phase suggests that a consulting firm is a more efficient mechanism than an Ad-hoc Committee. Unlike the later, the former offers technical expertise needed to deal with complex issues; moreover, a consulting firm is less likely to be subject to bribery compared to an Ad hoc Committee. Finally, future DRRP efforts in other countries should take into account the following: 1. The international technical assistance (TA) provided to the DRRP by the IOM contributed substantially to the success of the preparation and implementation of the program. Similar TA could usefully be incorporated in the design of future DRRP programs. 2. The aim of ensuring the widest representation of the main players in the steering entity of the DRRP hindered the efficacy and efficiency of program implementation. In the future, it is necessary to strike a balance between the maximum representation possible and operational efficacy. 3. The introduction of the ring fencing mechanism in the design of the project proved to be successful as it allowed involving other donors in processes such as the MDTF and created conditions for better management of counterpart funds. 4. The budget cycles, disbursement conditions, and procedures of the donors were not always compatible with the DRRP's schedules; consequently, an additional coordination effort was needed. A possible solution might be to make the donors, and specifically the lead donor, responsible for coordination. 5. In the design and implementation of the DRRP, the long-term sustainability aspects of the reintegration activities were not always sufficiently taken into account, which could lessen the impact achieved. - 18 - Therefore, future reintegration activities should be included in a national poverty reduction strategy. 6. The establishment of the Zonal Reintegration Councils -- made up of representatives of civil society and the local communities -- enabled these groups to participate actively in decision-making on ex-combatant reintegration and to develop ownership of the process, thereby enhancing the likelihood of success of reintegration efforts. 9. Partner Comments (a) Borrower/implementing agency: The Borrower prepared a closing report on the credit in September 2004. The report's main comments are summarized below. IDA played a major role as lead donor in supporting the Government's NRRP, and the ERRC's objectives were fully consistent with the NRRP. While the ERRC contributed to rebuilding peace and reviving the economy of the country, and a number of major reforms were initiated under the credit. Guinea-Bissau's difficult economic situation hindered sustained implementation of the reform program in key areas. In particular, the country's growing political instability and frequent Government changes undermined the Government's implementation performance. Consequently, the Government believes that the ERRC's tranche release conditions tied to macroeconomic performance should have been more flexible. The Government believes that the continued sustainability of the DRRP program will require the inclusion of the reintegration program into the PRSP process and the provision of further donor support. The Government also envisions requesting additional financial donor support for the financing of the unsettled arrears of the DASP component. (b) Cofinanciers: Not applicable (c) Other partners (NGOs/private sector): Not applicable 10. Additional Information None ________________________________ [1] World Bank worked closely with the United Nations Office for Peace Building in Guinea-Bissau (UNOGBIS) to deal with issues related to demobilization. A census of the military was agreed to be necessary before launching of the DRRP (MOP para. 19). [2] The World Bank's Experience with Post-Conflict Reconstruction, World Bank, Report No. 17769, 1998. [3] The reintegration phase of the DRRP targeted 11,300 representing the total number of vulnerable ex-combatants in the history of the country (includes part of the combatants of 1998 conflict and veterans of the independence war). The Government considered that limiting the program to only those who had taken up arms during the civil conflict would give premium to violence, and incite other veterans of the independence war to take up arms (MOP para. 20). [4] Preliminary estimates point to an average wage of about 20 percent of the average of the public sector in Senegal. [5] These efforts included the following : A study of the prior demobilization experiments in Guinea-Bissau; a general census of all categories of ex-combatants, both paramilitary and military; a study aimed at defining an appropriate legal mechanism for demobilization and reintegration; a study of local institutional capacity for implementation of the reintegration component; a study aimed at formulating a demobilization and reintegration strategy for physically disabled ex-combatants and devising tools for managing the process, especially the procedures for determining degree of disability; and a study on the institutional, social, and financial feasibility of self-help housing construction in order to support the reintegration of vulnerable ex-combatants in the rural areas. In addition, the Government established a computerized data management system, and performed an experimental demobilization exercise involving 571 former combatants, in order to test the demobilization mechanism. Finally, the following manuals and documents were prepared and approved by the Government and IDA: Institutional Framework Manual; Manual of Demobilization Procedures; Manual of Procedures for the Granting of Demobilization and Reintegration Benefits; Manual of Procedures for the Counseling and Referral Service; Manual of Procedures for Determining Degree of Vulnerability; Manual of Procedures for the Reintegration Fund; Basic concepts and methodology for use in cost-benefit analysis of the DRRP; Manual of Financial and Procurement Procedures; and finally, a Program Document, summarizing the objectives and expected outcomes and impact of the program, together with the implementation of each component, its budgetary implications, and the monitoring, audit and evaluation system. - 19 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate a/ Reduction of military expenditures initiated by At least 4000 ex-combatants reinserted in By June 2004, 3,929 ex-combatants had end-2001. civilian life. been demobilized and reinserted into civilian life. This corresponds to 32 percent dowsize of the security forces and a saving of 1 percent of GDP in defense and securit outlays for the first year of DRRP implementation. By end- June 2004, 3,000 ex-combatants have been reintegrated into civilian life. Higher than expected salary increases to the military in 2003 brought military expenditures up to 23 percent of current expenditures. Domestic public debt significantly reduced Satisfactory implementation of the approved DASP was satisfactorily implemented ad with turnover and employment of a sample of DASP measured by compliance with the allowed clearing 20 percent of the pre-2000 enterprises owed arrears increased and reduction of domestic debt agreed in its domestic debt arrears (86 percent of all arrears to public sector pensioners context. creditors), and arrears to 2630 public eliminated. pensioners.These debt arrears were verified and validated by a comprehensive and independent external audit which established that arrears were twice the amount initially expected. Contribution from other donors (one multilateral and one bilateral) did not materialize. Transparency of budgetary management Comprehensive final report on 2001 budget Comprehensive reports on budget execution enhanced. execution (end-November) released to the were release for the second half of 2001 and public. first half of 2002. No budget prepared in 2003 and therefore no budget execution report released to the public since then. Emergency Economic Management Fund managed by UNDP monitoring execution of cash flow plan for 2004 prepared by the Bank, Fund and AfDB. Macroeconomic stability maintained and Continued satisfactory implementation of the No program with IMF since 2001. growth reestablished. macroeconomic program agreed between the Satisfactory implementation of measures to GOGB, IMF and Bank and progress towards restore fiscal discipline in the context of HIPC Completion Point triggers. EEMP prepared by IMF, Bank, AfDB. Inflation controled at 3 percent per year. GDP is estimated to have grown by 2.5% in 2004 as a result of record cashew production. Social service delivery in education and health were basically restored to prewar levels. a/ Information in last PSR updated to reflect latest estimates Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1. DRRP prepared and tested A1 1a. Action Plan for preparatory phase of A1 DRRP approved * - 20 - 1b. Decree on Institutional Framework of A1 DRRP promulgated * 1c. Manual of Procedures for DRRP agreed A1 with IDA **. 1d. Independent financial management and A1 procurement system established ** 1e. Census of military and paramilitary A1 personnel completed 1f. Decree on demobilization criteria for A1 soldiers promulgated ** 1g. Decree on eligibility criteria for assistance A1 under DRRP promulgated ** 1h. Pilot test involving 500 ex-combatants A1 completed ** 1i. DRRP approved by Council of Ministers A1 2. Basic services revived GPER is estimated at 75 percent in 2003. 2a. Percentage of basic health units Preliminary estimates point to 27 percent of functioning normally back to 32% GPER back at 62 percent. PHC centers in PHC centers in full operation in 2003 (this full operation at 32 percent. number may be underestimated as several 2b. Gross enrollment rate in basic PHC centers are being equipped with trained education back to 62% personnel and equipment). 3. Private sector revitalized 3a. Decree establishing Ad Hoc Committee A1 for PRAI issued * 3b. Manual of Procedures for PRAI agreed A1 on with IDA *** 3c. Pilot test involving settlement of domestic A1 arrears of CFAF 1 billion concluded 3d. Complete inventory of domestic arrears made *** A1 3e. Plan for final settlement of domestic arrears approved *** A2 3f. Measures to prevent fresh build-up of arrears put in place by MF *** Manuel des pieces justificatives approved in November 2002 but implementation weaker than expected. 4. Management of public funds strengthened 4a. General sales tax (GST), including single taxpayer number (TIN) system, operational General sales tax (GST) was introduced in 1998 at the the rate of 10 percent and was increased to 15 percent in 2001. Taxpayer 4b. TEC at 20% of maximum rate in effect identification number (TIN) operational. Since 2001, broadly aligned with rate in WAEMU countries with a maximum rate of - 21 - 4c. Decree establishing procedures for public 20 percent. expenditure adopted A2 4d. Provision of precise and timely data on budgetary developments promoted 4e. Action plan for reform of public A1 procurement adopted * 4f. Regulatory framework for public A2 procurement approved 4g. Budget for 2001 approved on schedule A2 A1 5. Business environment for private sector improved 5a. Total tax burden on cashew exports In 2002, the tax burden on the cashew sector reduced to 10% was lowered from 10 percent to 6 percent of the export value based on the reference price, reducing the effective tax rate by 52 percent. . 5b. Policy for telecommunications sector A2 adopted 5c. Global strategy for reforms concerning privatization and promotion of private sector A1 participation in infrastructure, including an action plan setting schedule, approved 5d. Electricity Law submitted to Parliament N 1End of project * Conditions for submission of project to IDA Board ** Conditions for release of floating DRRP tranche *** Conditions for release of floating PRAI tranche A1= Reported as accomplished in the PSR of December 2001 A2= Reported as accomplished in the PSR of December 2002 N= Not accomplished - 22 - Annex 2. Project Costs and Financing Not Applicable - 23 - Annex 3. Economic Costs and Benefits Not Applicable - 24 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 09/13/1999 4 TASK TEAM LEADER (1); SECTOR MANAGER (1); PRIVATE SECTOR DEVELOPMENT SPECIALIST (1); DEMOBILIZATION EXPERT (1); 10/08/1999 7 TASK TEAM LEADER (1); SR.FIN. MGMT. EXPERT (1); LAWYER (2); OPERATIONS OFFICER (1); DEMOBILIZATION (1); SOCIAL DEVEL. EXPERT (1); Appraisal/Negotiation 11/15/1999 8 TASK TEAM LEADER (1); SR.FIN. MGMT. EXPERT (1); LAWYER (1); DISBURSEMENT OFFIC. (1); ECONOMIST (1); TEAM ASSISTANT (1) DEMOBILIZATION (1); SOCIAL DEVEL. EXPERT (1); 11/24/1999 6 TASK TEAM LEADER (1); SR.FIN. MGMT. EXPERT (1); LAWYER (1); DISBURSEMENT OFFIC. (1); ECONOMIST (1); TEAM ASSISTANT (1) Supervision 12/21/2000 TASK TEAM LEADER (1); S S 05/30/2001 6 TASK TEAM LEADER (1); U U LEAD SPECIAL. POSTCONF (1); CONSULTANT, DEMOBILIZ. (1); SR.FIN. MGMT. EXPERT (1); SR.PUBLIC SECTOR SPEC. (1); CONSULT. PUB. FIN. MGT (1) 11/10/2001 3 TASK TEAM LEADER (1); S S - 25 - RESEARCH ANALYST (1); CONSULTANT DEMOBILIZ. (1) 04/30/2002 2 TASK TEAM LEADER (1); U S ECONOMIST (1) 11/12/2002 5 TASK TEAM LEADER (1); S U ECONOMIST (1); EXPERT DEMOBILIZATION (1); SOCIAL DEVEL. EXPERT (1); OPERATIONS OFFICER (1) 04/24/03 1 ASK TEAM LEADER (1) S U 10/28/2003 2 TASK TEAM LEADER (1); U U ECONOMIST (1) 06/22/2004 TASK TEAM LEADER (1) S S ICR 11/222004 1 TASK TEAM LEADER (1) S U (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 6.46 23.6 Appraisal/Negotiation 13.21 69.7 Supervision 46.64 206.8 ICR 4.6 24.7 Total 70.91 324.8 - 26 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 27 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 28 - Annex 7. List of Supporting Documents 1. Memorandum of the President No. 16568-GUB, "Country assistance Strategy (CAS) for Guinea-Bissau" May 1997 2. President Report No. P7373-GUB, "Proposed Economic Rehabilitation and Recovery Credit (ERRC) of SDR 18 million (US$25 million equivalent)", April 2000 3. Project Information Document No. PID8401, "Economic Rehabilitation and Recovery Credit (ERRC)" November 2000 4. Memorandum of the President, "Proposed Amendments to Two Development Credit Agreements for Basic Education (Cr. No. 2960-GUB) and Private Sector Rehabilitation and Development Project (Cr. No. 3622-GUB), Report No. IDA/R2003-0172, August 13, 2003. 5. Memorandum of the President, "Release of the Two Floating Tranches, Full Compliance for the Republic of Guinea-Bissau, ERRC (Cr. No. 3349-GUB) February 10, 2004 6. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, February 28, 2001" 7. Back-to-Office Report and Aide-memoire "ERRC Pre-Appraisal Mission, September 13-23, 1999" 8. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, January 28- February 9, 2001" 9. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, October 22-31, 2001" 10. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, January 19- February9, 2002" 11. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, March 12-21, 2002" 12. Back-to-Office Report and Aide-memoire "ERRC Supervision Mission, November 4-12, 2002" 13. Back-to-Office Report and Aide-memoire "ICR Mission, June 5-25, 2004" 14. Public Expenditure Review, " Guinea-Bissau: the Challenge of Restoring Budgetary Discipline" Report No. 27175-GW", February 5, 2004 15. Republique de Guinee-Bissau: "Etude de l'Evaluation de l'Impact des Avantages Distribues Durant la Demobilisation", Version Preliminaire, INEP, Bissau juin 2003. 16. Republica da Guine-Bissau: Orcamento Geral do Estado, 2000 17. Republica da Guine-Bissau: Orcamento Geral do Estado, 2001 18. Republica da Guine-Bissau: Orcamento Geral do Estado, 2002 19. Guinea-Bissau: ERRC Draft Indepth Quality at Entry Assessment (QEA 4), Panel Report, August 2001 20. Guinea-Bissau: ERRC QAE 4, Feedback on Additional Panel Questions - 29 - Additional Annex 8. Status of Implementation of the Demobilization Phase Situation before demobilization Situation after demobilization Categories Women Men Total Estimated End Total Number Number number of demobilized demobilized demobilized (experimental) (regular) persons Military Active force ** 296 6 835 7 131 1 246 5 885 28 1 373 Minor soldiers 16 51 67 67 - - 58 Former POWs 3 634 637 637 - - 547 Subtotal 315 7 520 7 835 1 950 5 885 28 1978 Paramilitary Active service 402 2 307 2 709 391 2 318 55 191 Subtotal 402 2 307 2 709 391 2 318 55 191 Militias "Junta Militar" followers 112 543 655 655 - 110 566 Remobilized "CLP" 15 362 377 377 - 377 - "Anguentas" 7 888 895 895 - - 736 Remobilized SMO 8 92 100 100 - - 65 Underage combatants 4 20 24 24 - 1 16 Subtotal 146 1 905 2 051 2 051 - 488 1760 TOTAL 863 11 732 12 595 4 392 8 203 571 3929 ** The total also includes the border guards. - 30 - - 31 -