Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 25048

IMPLEMENTATION COMPLETION REPORT(IDA-33920; IDA-33921; IDA-33922; IDA-33923)

ON

IDA CREDIT 3392-ZA

IN THE AMOUNT OF SDR 135.9 MILLION

TO THE

REPUBLIC OF ZAMBIA

FOR

FISCAL SUSTAINABILITY

December 28, 2002

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective )

Currency Unit = Zambian Kwacha (K)= US$ I = 2654 Kwacha (Average exchange rate

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

ATAF Automatic Tariff Adjustment FormulaBoZ Bank of ZambiaCAS Country Assistance StrategyCDE Committee on Development EffectivenessCMU Committee Monitoring UnitERB Energy Regulation BoardERIPTA Economic Recovery and Investment Promotion Technical Assistance

CreditFSC Fiscal Sustainability CreditGDP Gross Domestic ProductGRZ Government of the Republic of ZambiaHIPC Highly Indebted Poor CountriesIDA International Development Association1MF International Monetary FundLASF Local Authorities Superannuating FundLDP Letter of Development PolicyMCT Ministry of Communications and TransportMoFNP Ministry of Finance and National Planning (previously MOFED)MoEWD Ministry of Energy and Water DevelopmentMTEF Medium Term Expenditure FrameworkNAPSA National Pension Scheme AuthorityNPS National Pension SchemeNSSN National Social Safety NetOMCs Oil Marketing CompaniesPCF Pneumoconiosis Compensation FundPEMFAR Public Expenditure Management and Financial Accountability ReviewPER Public Expenditure ReviewPRGF Poverty Reduction Growth FacilityPSCAP Public Sector Capacity Building ProjectPSREP Public Sector Reform and Export PromotionPSPF Public Sector Pension FundQAG Quality Assurance GroupRDCs Recurrent Departmental Charges

SoEs State-owned EnterprisesUNCTAD United Nations Conference on Trade and DevelopmentWCF Workers Compensation FundZCCM Zambia Consolidated Copper MinesZESCO Zambia Electricity Supply Co.ZNOC Zambia National Oil CompanyZNPF Zambia National Provident FundZPA Zambia Privatization AgencyZR Zambia RailwaysZSIC Zambia State Insurance Corp

Vice President: Callisto MadavoCountry Manager/Director: Yaw Ansu

Sector Manager/Director: Philippe Le HouerouTask Team Leader/Task Manager: Hinh Dinh

ZAMBIAFISCAL SUSTAINABILITY CREDIT

CONTENTS

Page No.1. Project Data2. Prncipal Performance Ratings3 Assessment of Development Objective and Design, and of Quality at Entry4. Achievement of Objective and Outputs5. Major Factors Affecting Implementation and Outcome6. Sustainability7. Bank and Borrower Performance8. Lessons Learned9. Partner Comments10. Additional InformationAnnex 1. Key Performance Indicators/Log Frame MatrixAnnex 2. Project Costs and FinancingAnnex 3. Economic Costs and BenefitsAnnex 4. Bank InputsAnnex 5. Ratings for Achievement of Objectives/Outputs of ComponentsAnnex 6. Ratings of Bank and Borrower PerformanceAnnex 7. List of Supporting Documents

Project ID: P039016 Project Name: FISC SUST.CR. ITeanm Leader Hinh T. Dinh TL Unit: AFTPI

ICR Type: Core ICR Report Date: December 28, 2002

1. Project Data

Name. FISC SUST.CR. I L/C/TFNumber: IDA-33920;IDA-33921;IDA-33922;IDA-33923

Country/Department: ZAMBIA Region: Afnca Regional OfficeSector/subsector: Compulsory pension and unemployment insurance

(28%); Banking (19%); Central governmentadministration (19%); Oil & gas (19%); Mining andother extractive (15%)

KEY DATESOriginal Revzsed/Actual

PCD: 12/13/1999 Effective: 08/04/2000Appraisal: 05/03/2000 MTR: 10/12/2001 11/26/2001Approval: 06/27/2000 Closing: 12/31/2001 06/27/2002

Borrower/Implementing Agency: GOVT OF ZAMBIA/Ministry of Fmance and National PlanningOther Partners

STAFF Current At AppraisalVice President- Callisto E. Madavo Callisto E. MadavoCountry Manager: Yaw Ansu Michael N. SarrisSector Manager: Philippe H. Le Houerou Philippe H. Le HouerouTeam Leader at ICR: Hinh T. Dinh Hinh T. DinhICR Primary Author Clarence F. Ellis; with

contribution from LeonidKoryukin and Dotilda Sidibe

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN--HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry:

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective

At the time the FSC was appraised in 2000, Zambia was facing serious problems in publicfinances. First, while the central government budget deficit had declined markedly during the1990s, the overall fiscal position of the public sector did not improve over this period as theGovermment was not able to control the non-central government components of the public sector.Of these components, the most important deficits were those of state-owned enterprises, the Bankof Zambia, pension funds, and local governments. It is estimated that the overall public sectordeficit (quasi-fiscal deficit) -- which includes the central government deficit plus the deficits oflocal governments, extrabudgetary accounts, state-owned enterprises, and the Central Bank --amounted to about 13.6 percent of GDP in 1997 and there were indications that this deficit hadwidened between 1997 and 2000. Second, this slow progress on the fiscal front has been due inpart to the lack of sufficient funds and delays in the privatization of the mines and in part toinefficiencies in the budget management process, including arbitrary cuts, ad hoc decision -makingin response to cash shortfalls, and above all, a cash rationing system that creates distortions at themicro levels.

In this context, the Fiscal Sustainability Credit aimed to help Zambia sustain recent fiscalprogress by: (i) extending fiscal adjustment beyond the central government to other public sectorentities (state-owned enterprises, pension funds, and the Bank of Zambia); and (ii) strengtheningfiscal discipline through improvement in the predictability, accountability, and transparency ofpublic spending. In line with the poverty reduction strategy articulated in the last CountryAssistance Strategy (CAS), the Credit addressed poverty reduction objectives in two importantways. First, at the general level, it directly contributed to the maintenance of a stablemacroeconomic framework conducive to economic growth by ensuring the sustainability of thefiscal progress achieved in the preceding few years. Second, the proposed reforms in budgetmanagement helped to ensure that public expenditures, especially social expenditures, reach thepoor in the most effective way.

3.2 Revised Objective:The objectives have undergone no significant changes.

3.3 Original Components:A. REDUCING THE QUASI-FISCAL DEFICIT (FLOATING TRANCHE); SDR37,700,000.00;B. FISCAL MANAGEMENT; SDR 33,900,000.00;

C. PENSION REFORMS; SDR 33,900,000.00;

3.4 Revised Components:Component; Cost; RatingA. REDUCING THE QUASI-FISCAL DEFICIT (FLOATING TRANCHE); SDR37,700,000.00;B. FISCAL MANAGEMENT; SDR 33,900,000.00;C. PENSION REFORMS; SDR 57,400,000.00 (supplemental credit of SDR23,500,000);

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3.5 Quality at Entrv.On May 2, 2000, the ROC authorized the team to appraise and negotiate the FSC,

assuring satisfactory preparation of the Credit. The meeting asked the task team to strengthen thelinks of the proposed Operation with the HIPC initiative,with the PRSP framework, with HIV/AIDS, and with enhanced savings mobilization consequent upon the implementation of theproposed pension scheme. The possibility of developing a program for similar operations in thefuture was mentioned.

4. Achievement of Objective and Outputs

4.1 Outcome/ach/evement of objective:Despite difficulties that still remain in rationalizing the oil sector and the problems that still

exist with predictability and accountability in Government spending, the FSC managed to achievethe majority of its objectives. As an adjustment credit, the FSC was targeted at specific entitiesbut the operations were either quantitatively significant or structurally important to have a moregeneral impact on the economy. Implementation of the FSC helped Zambia stay on course withthe reform program and reach the decision point for the enhanced HIPC Initiative, which allowsZambia to receive debt relief of over several hundred million dollars a year. In accordance withthe CAS, the FSC advanced the process of privatization of state-owned enterprises and addressedpension reforms including administrative reforms and its consequent retrenchments. The FSC hasestablished the importance of regulatory arrangements to protect consumers in the petroleumsector while protecting the competitive environment. In regard to management of the budget andof the macro-economy, the FSC has made some improvement in predictability and transparency ofpublic spending by ensuring that the 80% rule (according to which line ministries were guaranteed80% of the budget allocation as shown in the voted Budget) was implemented and by itsprovision of macroeconomic indicators. Finally, in the financial sector, the FSC helped theGovernment of the Republic Zambia (GRZ) to increase efficiency through improving cashmanagement and debt management.

4.2 Outputs by components:A. Reduction of the Deficits of the State-owned Enterprises

In the areas of electricity and railways, the FSC supported other Bank projects such as thePower Rehabilitation project and the Railways Restructuring project. In the oil sector, the FSCresumed the policy dialogue which was discontinued after the Petroleum Rehabilitation projectwas canceled (1999). While, due to data paucity, an estimate of the deficit of all state-ownedenterprises (SOEs) in Zambia is not available at this time, this ICR provides the fiscal impact ofthe FSC measures for the power, oil, and railways sectors.

(i) ZESCO: resolving and implementing a plan to settle the debt and cross debt ofZCCM

Agreement on the amount of debt and cross-debt associated with ZCCM and on a plan tosettle the associated arrears was arrived at expeditiously. A cash settlement of US$15 million toZESCO was completed by May 2001 and final agreement on the amount of debts owed toZESCO by the public sector was reached in October 2002.

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(ii) Unbundling and privatizing ZESCO

The Bank made, prior to the provision of the FSC, a Power Rehabilitation Project credit(PRPC) in the amount of US$75 million to the GRZ for upgrading the installations at ZESCO.The FSC provided the opportunity to improve further the financial position of the entity. Thus, inApril 2000, before IDA Board of Directors' discussions of the FSC, ZESCO increased its tariffsby 25%. An increase of 16% followed in February 2001 as the Automatic Tariff AdjustmentFormula (ATAF), which was designed in the PRPC and supported by the FSC, was applied.These measures were followed by efforts to reduce costs, particularly as appeals were made bythe public to avoid further tariff increases because of their impact on the cost of living and on thecost of business operations. In addition, the Energy Regulation Board (ERB) intervened, pointingout that there were, in the law, approaches for determining rate increases. If these approacheswere not pursued, ZESCO could be exposed to legal action by the consumers and to thelikelihood of a worsened financial position. The ERB would be required to base its decisions oncosts of production which, it is generally agreed, could be substantially reduced.

A revitalized management at ZESCO is making arrangements to sell electricity wholesaleto the City Councils which will be responsible for full payments of the quantities that they receive.In addition, the use of pre-paid meters will reduce considerably the loss of electricity, estimated atbetween 20% to 40% of transmission, to consumers who use electricity illegally. As agreed in thecontext of the PRPC and supported by the FSC, ZESCO has contained its staff to a level of about3800, has converted its short-term debt into longer term loans and has reduced its ownership ofresidencies. Table 1 below shows the achievement in reducing operating losses at ZESCO. Lagsin billing have been reduced but there are limitations to further improved efficiency, given thecapability of a system designed for billing 100,000 consumers but that now bills 270,000. Illnessand death have taken a tragic toll on work plans, thereby making it difficult at times to raiseproductivity.

Arrangements for the privatization of ZESCO are proceeding in the context of the plans todevelop the vast potential for power generation in Zambia and in the Southem Africa Region.While an original decision was taken to unbundle and privatize ZESCO, it was decided later bythe GRZ with the support of the World Bank, to privatize ZESCO by concessioning withoutunbundling in the first instance. The privatization arrangements envisage regulatory oversight bythe ERB. The World Bank assisted with the finance of consultants by providing resources from asupplementary Credit (ERIPTA), to pursue studies of the envisaged privatization. Progress hasbeen made and the GRZ has requested the additional assistance of a Transactions Adviser, on ano objection basis, to assist with the preparation of bidding documents.

However, at the time of this ICR preparation, the Zambia public is raising many doubtsand questions regarding whether the country should continue with the privatization program. Anumber of NGOs and civil societies have openly opposed the privatization of ZESCO and otherstate-owed enterprises. As discussed below in Section 5.2, this view was formulated in theabsence of any public education program on privatization, and was largely influenced by the presswhich was not provided with adequate and timely information.

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Table 1: Reduction in Operating Losses of ZESCO

in Kwacha billion2000/1 2001/2 2002 (April-August)

Fuel for vehicle 5.0 8.9 4.5Repair&maintenance of 5.8 7.4 1.4vehicleHuman Resources and 14 14 7Administration (staffreduced from 4337 in1998 to 3807 in 2002)

Total (in Kwacha 24.8 30.3 12.9billion) 8.0 8.4 3.3

in million USdollars

Source ZESCO MD letter dated Sep 18, 2002 and IFS, October 2002.

(iii) Liberalizing the petroleum sector in an orderly fashion

To improve efficiency of the petroleum sector, the FSC aimed to liberalize the retaildomestic prices of petroleum products. In this regard, the FSC has achieved its objective. All oilmarketing companies (OMCs) are now free to import petroleum products directly. OMCs arefree to set pump prices without applying to the regulatory agency Economic Regulatory Board(ERB). The ERB amended the licenses issued to the OMCs by removing the requirement toapply for price adjustments. The ERB now monitors prices on an ex-post rather than on anex-ante basis. The oil marketing companies openly compete with each other and this has led tolower prices to consumers. For the first time in many decades, gas stations display retail prices sothat consumers can choose the cheapest places to buy petroleum products.

Another major objective of the FSC in the oil sector is streamlining the operations of theoil parastatal, Zambia National Oil Company (ZNOC), which has been responsible for huge lossesand inefficiencies in the system. This objective was met with delays. ZNOC finally was put undera liquidation plan when its losses caused the largest commercial (and state-owned) bank ZambiaNational Commercial Bank (ZNCB) to become insolvent. Other objectives include the offer forsale of a majority controlling interest in the refinery, pipeline and terninal, to a strategic partner orgroup of partners. These objectives were also achieved after some delays. The concessioning ofthe TAZAMA pipeline (which partially belongs to Tanzania) is proceeding after agreement withthe Tanzanian Government has been reached. The Cabinet approved the sale of governmentshares in the INDENI refinery in order to reduce its equity from 50 to 45 percent. These sharesare now in the Zambian Privatization Trust Fund in preparation for public offer to Zambians. TheNdola terminal, which belongs to ZNOC, is being put on sale by the ZNOC liquidator.

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The liquidation of ZNOC alone could save the Government millions of dollars per annum.Despite its monopolistic position in the oil sector, ZNOC incurred losses to the tune of $50million which it had to borrow from ZNCB in 1999. In 2002, ZNCB experienced financialdifficulties because of those losses and the Government had to assume these liabilities by issuingbonds in April 2002.

Recently, and after the last tranche of the FSC had been disbursed, the Governmentbecame involved in a dispute with the equity partner of the refinery, Total Elf Aquitaine (TFE)and has asked TFE to reduce its share in the refinery to reduce its monopoly power, since TFEalso competes in the retail market with the other OMC's which obtain their products from TFE.At the time of this ICR, negotiations are being conducted between the Govermment and TFE onthe latter's holding of INDENI shares.

(iv) Privatization of Zambia Railways (ZR) and the institution of an autonomousregulatory framework for railways.

The FSC aimed to support the Railways Restructuring Project (RRP) approved in FY00to create conditions for involvement of the private sector in the operation and management of keyrailway functions as well as open up the railway infrastructure to more competition and to reduceGovernment's financial support to the railway sector.

The Government has decided to increase private sector participation through privateconcessioning of the infrastructure and selling or leasing of locomotives and rolling stock. Theprocess of concessioning Zambia Railways (ZR) is underway with ZPA being in charge of theoperation. A request for expressions of interest appeared in the UN Development Business inJuly 2001. No less important were the considerations given to staff rationalization. ZR which hada staff of 9000 in the early 1980s was able to reduce its staff to less than 1600 by November 2002.The concessionaire was expected to decide on further staff reductions after performing its duediligence checks. In the context of the RRP, the Bank has agreed to fund the retrenchmentbenefits of the staff. It is expected that ZR will operate with a small staff to oversee therehabilitation of the assets and the environmental mitigation works, including the removal ofcontaminated soil and its replacement with good soil. The GRZ has appointed an Inspector ofRailways and the Ministry of Communications and Transport (MCT) is establishing acomprehensive regulatory framework. ZR will, in all probability, be wound up when the existingrehabilitation works are completed.

As a result of the above measures implemented in the context of the RRP, ZR no longerincurs any operating losses and instead has made a significant profit in the first three quarters of2002. Total profit for 2002 is estimated at about $2.3 million, compared to a loss of $3.5 milliontwo years ago (Table 2 below). There is no doubt that ZR is in a better financial position than afew years ago and the quasi-fiscal deficit was reduced.

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Table 2: Reduction in Operating Losses of Zambia Railways

2000 2001 2002Operating Surplus -11,007 -5,339 10,500(-deficit)in Kwacha millionIn million US dollars -3.5 -1.48 2.3

Source: Zambia Railways Limited, Statement by the Managing Director on December 18, 2002.

(v) Reduction of the Risk of Contingent Liabilities of the Bank of Zambia (BOZ)

This component of the project was executed expeditiously. The formulation of the changein the law to enhance the powers of BOZ to act promptly and effectively to sanction, take controlof and de-licence banks was a condition for Board presentation of the FSC. The plan of actionfor improvement of cash management practices was also a condition for Board presentation.Both proposals were put into effect as conditions for release of the second tranche. In addition,GOZ was to improve the database on domestic and external debt at the MoFNP.

The FSC achieved its objective in this regard. The Amendment to the Banking andFinancial Services Act 1994 took effect on September 1st, 2000. The Bank of Zambia has notbeen called on to provide any guarantees in the last two years. The GRZ and the BOZ haveadopted UNCTAD'S DMFAS computer based data system for recording both the domestic andthe external debt.

Throughout 2000, ministry accounts were consolidated and processes streamlined toreduce the ability of commercial banks to make money on ministerial accounts. The Governmentconducted an audit of government accounts held by Lusaka based ministries in commercial banksand reduced the number of accounts from over 1100 at end 1999 to less than 600 by end 2000.By end 2000, the bank accounts (excluding the donor controlled accounts) operated by eachcontrolling officer were merged into no more than one account in each commercial bank.

(vi) Pension Reform is arguably the most ambitious of the FSC undertakings to reduce thequasi-fiscal deficit. The newly formed National Pension Scheme (NPS) which is administered bythe National Pension Scheme Authority (NAPSA), made outstanding progress during theimplementation of the FSC. The contribution of the NPS was an operating surplus of K78 billionin 2001. The accumulated assets in the NPS amount to K108.9 billion at the end of 2001. This isin marked contrast to 2000, when the operating surplus and assets were each K3 1.0 billion.

NAPSA has honored the collective bargaining agreement negotiated by ZNPF in 1998,retained the mission of national comprehensiveness but tailored its contributions to actuariallydetermined pension benefits that take the form of a future stream of payments instead of lump

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sum benefits.

The NAPSA improvements are instructive for several reasons. First, productivityincreased dramatically. Resource mobilization jumped from K4 billion per month to K7 billion permonth with about a half of the staff. This was the direct result of greater efficiency in workarrangements. The new scheme covers the same private sector work force as the old providentfund, with some minor exceptions. Copper workers are exempted from the new scheme andnewly hired government workers are to be enrolled, although nearly none have been to date.However, the new scheme has registered more covered workers and, more importantly, collecteda greater percent of contributions from their employers. In addition, administrative expenses havebeen held in check. In 2000, administrative expenses absorbed over 50% of income. In 2001,expenses were 32% of income and falling. Second, there was a very thorough restructuring of thestaff. Of a total staff of about 1050, around 800 were retrenched. This permitted the redesign ofjob positions and a rigorous test of the suitability of the 300 new staff and the 250 old staff for there-designed job positions. Adequate finance for the retrenchment arrangements was alsoprovided. After careful consideration, the Bank agreed to the funding of retrenchment to beon-lent to NAPSA by the Ministry of Finance. Third, the restructuring of NAPSA was supervisedby a management team that was highly qualified. It helped also that the team enjoyed excellentworking relations with the World Bank team who assisted in the design of the retrenchment andthe rehiring operations. Fourth, NAPSA's managers and staff, previously wedded to manualmethods, have switched to computer operations, negating the assumption that workers in Zambiaexhibit indifference in the work place. When worker indifference is in evidence, it is often areflection of the inadequacy of management. NAPSA now covers 23 stations country wide whichare interlinked by efficient telephone communications. The World Bank has upgraded NAPSA'scomputing capacity including the design of software adjustments. This intemalizes the capabilityto maintain and improve the operations without external assistance.

It should be noted that the FSC did not intend to follow up on the placement ofretrenchees in alternative occupations or in starting businesses. The difficulty is similar to thatexperienced by ZR: the adjustment process is not sufficiently robust to generate employment andsmall business investment opportunities.

NAPSA has deepened reforms to achieve national comprehensiveness and to provideportability of pension benefits across employment opportunities, thereby contributing to greaterflexibility in the labour markets. The portfolio of the National Pension Scheme is at presentinvested under transparent and open guidelines that permit investments in selected overseasassets.

The FSC had proposed altemative pillars to provide greater diversity in pension savingoptions. But debate during the implementation of the FSC concluded that pillar diversificationshould await furither actuarial examination and a consolidation of the relatively new NPS. Apriority higher than multi-pillar arrangements is the extension of pension reforms to the largelyunfunded liabilities of the Public Service Pension Fund (PSPF), the non-compliant LocalAuthorities Superannuation Fund (LASF), the negative returns on the assets of the WorkersCompensation Fund (WCF), etc. Together those schemes include another 200,000 workerswhose pension anrangements are either not covered at all or are inefficiently provided for.

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GRZ is in arrears to the PSPF to the extent of K 254 billion. The already accrued benefitswill remain unpayable with the clearing of the arrears unless a change can be made to theConstitution to adjust the benefits of the members of the PSPF. In about 15 years, benefits to bepaid to the group who are now between the ages of 38 to 42 are estimated to amount to at leastUS$225 million and possibly to as much as US$ 450 million. There is need for both policy andadministrative reform to minimize the cost of these demands. A strategic plan is necessary for theperiod up to 2050 to provide the context for the policy reform.

The FSC recognized the serious problems of PSPF but argued that the only viable way toreform PSPF is through amendments to the pension provisions in the Constitution so that benefitsof workers who joined the Government before 1996 can be reduced. These amendmends wouldrequire a two-thirds majority vote in Parliament as well as approval in a popular referendum.Given the constitutional hurdle, the FSC proposed to phase down the PSPF over the long-term,while consolidating and improving NPS to make it fair and cost-effective and to allow portability(i.e. compatibility) with the private sector. The new national pension scheme then houses the newcivil servants joining the labor force.

The effect of the reform of pension schemes needs to be seen in the context of the widerproblem of termination benefits that represents a overhang from the more state controlledeconomy. Termination benefits on retrenchment and on retirement are factors that contributefurther to the inflexibility of labour markets. This contributes to the high cost of privatization.The need to make provision for retrenchment benefits reduces the capacity to pay higher wagesand to secure greater productivity even under efficient management. This indicates that there is astructural problem of low wages that business enterprises cannot easily overcome. Theconsequence is that the commitment of Zambian enterprises to the Zambian economy is oftenweak.

C. Improving the effectiveness of public spending

The FSC only partially achieved the objectives set out in this area. FiscalManagement was a difficult component of the project because it was, and is, systems wide and,within the time frame of an adjustment credit, tries to reverse a behavioral pattem that has existedfor decades. The Letter of Development Policy recognized the difficulties and committed thereforms to spending rules that aimed to achieve greater predictability, accountability andtransparency in Central Govemment spending.

Greater predictability in effect protects the share of expenditure allocated to lineMinistries in the budget by requiring the MoFNP to allocate to these Ministries at least 80% ofwhat they are entitled to receive from the voted budget. The FSC also continued the tradition ofprevious adjustment credits to protect social spending through requiring that the share ofdiscretionary expenditure (defined as domestic expenditure net of debt service payment) allocatedto social sectors be kept at least to 36%.

The 80% rule was used to allocate public spending between the 4th quarter of 2000 and

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December 2001. As a result, erratic monthly fluctuations in cash releases were smoothed-outand reduced. Cash releases were more clearly targeted to socially and economically relevantministries. However, since January 2002, a new budget system consolidated domestic andforeign resources (i.e., the cash budget and the debt service budget). Prior to January 2002,domestic spending was based entirely on domestic revenue, hence domestic spending was stableas fluctuations in foreign aid were limited to the foreign budget from which debt service paymentswere adjusted accordingly. With foreign and domestic budget consolidation, shortfalls in foreignaid directly affected domestic spending, making the 80% difficult to keep.

Concerning the 36% share condition, the recent PER found that in an environment ofresource constraint, protecting the social sectors means that there was little left for infrastructureand therefore there was an adverse impact on economic growth which in tum could lead toreduced social spending. Another difficulty arose from the definition of what expenditures wereindeed discretionary. Some officials now believe that only the Recurrent Departmental Changes(RDCs) were indeed discretionary. Wages and salaries, in that view, are not truly discretionary. Ifthis approach is taken to its logical conclusion, very little expenditure would be left for allocationto social and/or economic sector spending.

During the supervision mission carried out by the Bank in June 2001, the intended ratioswere found not being observed. Corrective measures were suggested and implemented. As aresult, the year end totals restored the required shares of total spending. This demonstrated thatresource flows continued to exhibit considerable variability and can be assumed to have led toconsiderable inefficiency. The performance has not improved with respect to social sectorspending in the first six months of 2002.

The shift to greater predictability in the implementation of the budget was intended to be apreliminary step towards the Medium Term Expenditure Framework (MTEF) on which the Bankand the MoFNP have been working.

The accountability commitment in the LDP related primarily to strengthening controlover commitments of line Ministries to suppliers when no resources have been approved for suchspending. This is, in some ways, a consequence of the unpredictability of cash flow and it isconsistent to expect that improvement in predictability would reduce commitments for whichthere is no approval.

To improve accountability, a number of important measures were announced to allcontrolling officers in MOFED Circular dated 28th June 2000. They called for, among others,that (i) monthly cash releases to line ministries will be made dependent on their submission ofaccurate, comprehensive and timely commitment reports. (ii) over-comrmitted ministries will seetheir cash releases cut, (iii) disciplinary measures will be taken against offending controllingofficers, and (iv) competent accounting staff will be posted in all line ministries. Furthermore,MOFED prepared and disseminated quarterly reports on over-commitments, cash outlays, andpayment arrears.

With the exception of disciplinary measures in (iii) above, the above measures were

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implemented at the time the FSC was in effect. But subsequently, after the FSC was closed, theyhave not been continued. The Commitment Monitoring Unit which was envisaged in the LDP hasessentially been disbanded and the function transferred to the Accountant General's office. TheWorld Bank mission at the time of the mid-term mission expressed considerable concerns onefforts to strengthen accountability and requested quarterly reports on outstanding commitmentsto be reported to the Bank.

The third commitment on fiscal management was that of transparency. The MoFNPundertook to publish a quarterly report on Government expenditures in the monthly Macroeconomic Indicators report, setting out the Budget totals of the various expenditure heads and thequarterly releases with respect to the Budget totals. The Macro-economic Indicators have beenpublished regularly since 2000, providing a wide range of government financial statistics forassessing performances in relation to the Budget and to the economy. Partial information on thelevel and composition of external and domestic government debt has also been published in thisreport. Finally, the 2001 budget shows a substantial increase (50%) in budget allocation for theOffice of the Auditor General, strengthening its ability to undertake timely audits of governmentaccounts.

While, in many ways, the transparency commitment was better met than that ofpredictability and accountability, the original intention of building transparency into governmentdecision making in order to achieve better sectoral allocations of expenditure was not met. Therewas no systematic use of the cash releases published in the Macro-economic Indicators by the lineministries in order to claim a better share in spending from the MoFNP. In the end, therefore,final decisions on cash releases continue to be made by the MoFNP, often under heavy politicalpressures from other parts of the government. In part, this was caused by the lack of timelyinformation from the MoFNP to the line ministries as the latter complain they receive thesereleases too late, long after the ad-hoc spending decisions have been made. In part, the lineministries claim that while the Indicators do provide a significant amount of information on a widerange of statistics related to the macro-economy, the data are too much and that there are notenough analyses of the data. But more analyses of the statistics were not envisaged at the time ofthe design of the FSC and will certainly follow the refreshing start that has been made.

There are many reasons why GRZ should monitor very closely the allocation of sectoralspending. The first is that a start should be made with respect to the shift to the MTEF that theMoFNP is at present planning with the World Bank. The MoFNP is also working with the Bankon the Public Expenditure Management and Financial Accountability Review (PEMFAR) as wellas on the Public Service Capacity Building Project (PSCAP). The data requirements for thepredictability requirement represent a preparatory step in that direction. The second is that a startshould be made to provide some strategic direction for the economy and the MoFNP shouldwelcome the opportunity to view spending plans of the Ministries in the broader context of thatoverall direction. The third reason is that the adjustment process is exceedingly fragile, as isevident with the very high rates of interest, and the MoFNP is expected to review spendingexpenditure priorities that can improve the adjustment performance.

4.3 Net Present Valte/Economic rate of rehtrn:This Credit was an adjustment operation.

4.4 Financial rate of return.

This Credit was an adjustment operation.

4.5 Institutional development impact:

Because this credit was an adjustment operation, the impact on institutional developmentwas minimal. The institutional development impact is rated as modest.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors ouitside the control of government or implenmenting agency:

In addition to copper price declines, a major factor affecting implementation and outcomecontinues to be the weak export performance of the copper and the non-copper sectors. Zambiais landlocked but has liberalized its markets. To the extent that Zambia's neighbors do not followsimilar policies and in fact even practiced export dumping (to take advantage of exchange ratecontrols in the home market), the revival of investment and growth in Zambia via regional trade isstill facing difficulties. Joint ownership of the petroleum pipe line is an example of a factor thatwas outside of the Government's control and that affected decision making adversely. Whilecollaboration with neighboring states has advantages, the sharing of decision making can reducethe speed with which decisions are made. In some ways, the donor community has affected theimplementation of the reform program by delays in disbursing resource flows, which adverselyaffected fiscal management.

Skilled manpower is not readily available and therefore affects the quality and speed ofimplementation. This factor may be considered one that the Government can control except thatgestation periods of training programs can sometimes be long. In the areas of accountability,predictability, and transparency, the limited capacity of key Government officials were taxed tothe limit by the relatively complicated set of rules set out as conditions in the FSC.

5.2 Factors generally subject to government control:

There are three factors that are subject to government control and that seriously affectedproject implementation. First, the lack of consensus and/or of full commitment to reformobjectives that conflict with prevailing norms and expectations often resulted in delays in takingkey policy decisions. This is the case for the oil sector conditions. Second, there was no seriousgovernment effort to present the reform case to the public in order to gather support for difficultpolicy actions to be taken, particularly those related to privatization. In an environment where thepress does not have the right and/or timely information, this leads to many misconceptions fromthe public. The public outcry of ZESCO privatization at the time of this ICR is a case in point.Third, Zambia's history of economic development since Independence has been more dominatedby a state-controlled, dirigiste approach than by free market one. The task of building marketinsitutions in this environment necessarily takes a long time. Yet, both the government and thedevelopment partners have consistently under-estimated the time required to achieve reformobjectives. In the case of the FSC, the objective of achieving fiscal accountability, predictabilityand transparency in public spending would require a series of credits, beginning with the FSC, fornecessary changes to take hold.

The lack of consensus and/or sustained commitment to reforms in the oil sector resulted in

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a six month delay in closing the FSC. The MoFNP was fully on board and was the driving forcefor reforms in this sector. Yet the Ministry of Energy and Water Development (MoEWD) wasthe executing ministry and was not fully convinced of the case for reform. Very few measureswere taken until the arrival of a capable and effective Permanent Secretary. After the FSC wasclosed, that PS was moved to a different post, and implementation difficulties began to emergealmost immediately (Section 4.2). By contrast, when commitment exists, and where managementis qualified and confident, commitment compensates considerably for deficiencies in some skillareas. For example, in the National Pension Scheme Authority (NAPSA), productivity rosebecause management is both efficient and committed.

Over and above the commitment problem, the absence of public campaigns to explain tothe public why certain actions, for example, the concessioning of ZESCO and of Tazama pipeline,were needed hampered government progress as the public was often misinformed aboutgovernment actions. In addition, there was a serious lack of data and information aboutgovernment actions taken, particularly in the area of privatization. The fact that state ownedenterprises do not produce quarterly financial statements contributes considerably to their weakperformances which are not subject to critical priodical assessments.

With regard to the third factor, a serious constraint to private sector development inZambia is, increasingly, the entrepreneurship, managerial abilities and skills of the Zambianpeople. When a country has for decades pursued a state-owned and state-directed economy, thehabits of thought are not automatically entrepreneurial. The mere dismantling of the stateapparatus is necessary but not sufficient. The hard task of building institutions to promote,support, and regulate a private sector economy is still ahead. Fortunately, many of the FSCmeasures were supported by a parallel operation aimed to build capacity in the public sector. ThePublic Service Capacity Building Project (PSCAP) has been designed to strengthen the ability ofcivil servants to perform the wide range of tasks, including those supported by the FSC. Thus,PSCAP provides technical assistance and equipment for the government to implement a MediumTerm Expenditure Framework, which would help improve predictability and accountability inpublic spending in the longer run.

5.3 Factors generally subject to implementing agency control:There are two issues with the MoFNP as the major executing agency for the FSC. First,

the MoFNP should undertake for itself the task of developing a mission. MoFNP is an apexinstitution of Ministries that are connected to one another in the pursuit of the development ofZambia. The fact that decentralization will be pursued does not mean that coordination will beabandoned. But coordination should be informed by an overall goal, a country goal. Ideally thisgoal should result from the views of the Government as well as from the Opposition and from theNGO community. It is within that overall context that the MoFNP will find it useful to havemacro economic indicators for its own guidance as well as for its fellow Ministries. Second, theMoFNP should not embark on any reform program which involves one or more of the lineministries without making sure these line ministries understand the required policy actions and arefully on board.

The other agencies in the public sector in general suffered from insufficient data for

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assessing their performances. Corporation leaders should be supplied with monthly statements offinancial performances. The ERB has the very difficult task of developing regulatory capabilitiesfor oil prices and electricity tariffs. This requires top-level analytical skills.

5 4 Costs andfinancing.The Fiscal Sustainability Credit, in the amount of SDR105.5 million (USD140 million

equivalent) was approved on June 27, 2000 and made effective on August 8, 2002. Actualdisbursement amounted to SDR 135.9 million to support economic reform and adjustmentpolicies. The initial tranche of SDR33.9 million was released on August 14, 2000; the secondtranche of SDR33.9 million was released on September 27, 2001; and the floating tranche ofSDR37.7 million was disbursed on June 27, 2002. In addition, a supplementary credit ofSDR23.5 million in relation to oil shock was disbursed, together with two other Fifth Dirnensioncredits totaling SDR6.91 million.

6. Sustainability

6.1 Rationalefor sustainability rating:From a macroeconomic perspective, the Credit came at the right time for Zamnbia and

allows the adjustment program to continue until today. This is because the Credit came at acrucial time when Zambia was under the heavy pressures of extemal debt and copper pricedeclines. Six months after the first tranche was disbursed, Zambia was qualified for enhancedHIPC decision point and has since then received substantial debt relief of over several hundredmillion dollars a year. It is entirely possible that without the budget support provided by theCredit, Zambia would have found itself difficult to stay the course. About two years afer theCredit was approved, Zambia successfully completed a PRSP. The Credit, together with theIMF's PRGF, provided financial support to Zambia during this critical phase, hence helped sustainthe reform process.

At the sector level, sustainability is a mixed picture. One of the difficult parts of thisproject was the liberalization of the oil sector. The liberalization of prices, imports, and theliquidation af ZNOC appear irreversible. The concessioning of Zambia Railways also appearsirreversible. However, it is not clear whether the ownership structure of the refinery INDENI willbe in favor of the private sector. It was also clear that in fiscal management, predictability ingovernment spending will be difficult to sustain given the resource constraints and the lack offiscal discipline. The design of the Credit did not foresee the combination of a decline ingovermment resources and the merging of the two budgets (domestic and foreign) in the face ofspending arising from political decisions. Merging facilitated prompt debt service payment, forexample, to the intemational community but introduced more uncertainty in the domestic budget.As a result , the improvement in predictability of public spending did not last for long.

Further developments in fiscal management have been initiated and include the MediumTerm Expenditure Framework (MTEF), the Public Expenditure Management and FinancialAccountability Review (PEMFAR) and the Public Service Capacity Building Project (PSCAP).Even without these projects, the MoFNP has already embarked on small steps towardspredictability, accountability and transparency which will not be easily reversed unless there issome total change in the system of govemment.

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The significant progress in pension reforms at NAPSA is likely to be sustained. Theefficiency gains discussed earlier will increase more over time as administrative costs continue tofall. Also, there should be some additional efficiency gains as NAPSA staff becomes moreexperienced. The investment strategy and guidelines that FSC helped establish mean that thereare no more investments in non-productive real estate assets with zero or negative returns. Inaddition, investment income now exceeds wage growth (the growth in program costs dependsonly upon wage growth) by a large margin. Higher investment returns means a greater surplus in2002 when the final numbers are in. This will help hold contribution rates at their current level,especially since investment returns are greater than wage growth.

6.2 Transition arrangement to regular operations:Zambia's development needs in the areas of pension reform and fiscal management will

require substantial amounts of assistance. The upcoming Poverty Reduction Support Credit willassist with the implementation of the Poverty Reduction Strategy. An under-utilised dimension inthe Poverty Reduction Strategy is that relating to Facilitating Empowerment, that is, thearrangements by which "state institutions are made more accountable and responsive to poorpeople, strengthening the participation of poor people in political processes and local decisionmaking, and removing the social barriers that result from distinctions of gender, ethnicity, race,religion, and social status." World Development Report, 2000 / 2001: Attacking PovertyParticipation by poor people in the design stage of PRSP forrmulation is more difficult than mereconsultation but more sustainable.

7. Bank and Borrower Performance

Bank7 1 Lending:

The performance of the Bank was satisfactory. The Bank was willing to undertake the secondgeneration of adjustment reforms and embarked upon a hybrid operation combining specificsubsector reforms with economy- wide reforrns for more efficient public spending. The projectincluded macro-economic measures and sector/micro-economic improvements and included oilsector reforms which the Bank had repeatedly tried to help support without any success overalmost a decade (1991-2000). The reliance on the Country Assistance Strategy broughtcoherence to project design.

7.2 Supervision:The Bank's supervision was good. The thoroughness with which the tranche releases were

analysed for their consistency with project objectives was very commendable. The Country Officetook an active part in assisting with preparation and with blending its representative andinterlocutary roles to encourage modifications to project conditions when practical circumstanceswarranted them. The mid-term missions to Zambia very thoroughly examined borrowerperformance.

7.3 Overall Bankperformance:Based on 7.1. and 7.2., the overall rating is Satisfactory

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Borrower7.4 Preparation:

At the preparation stage, no principal difficulties or misunderstanding arose between theGovermment and the Bank.

7.5 Government implementation perfornmance:

The implementation performance was mixed. There were seven components of the adjustmentoperation. Two components, the oil sector operation and improved fiscal management presentedimplementation difficulties. The former was due to a lack of concensus from all parties involvedand the latter due to insufficient donor funding. Performances in pension reform and in thepreparation of the railways for concessioning were satisfactorily pursued.

7.6 Implementing Agency:

The operation pernitted interface with several agencies including the Ministry of FInance andNational Planning, the Ministry of Energy and Water Development, and NAPSA . The GRZ hasappointed an officer who has become the point of contact between the GRZ and the Bank. Thisarrangement has facilitated implementation by the GRZ and the Bank. The presence of theCountry Office also helped significantly in the relation between GRZ and the Bank duringimplementation.

7.7 Overall Borrower performance:

The overall Borrower performance is satisfactory. Although there was delays inimplementation of the oil sector conditions, in the end, the liquidation of ZNOC was a majorpolicy measure and one that will improve efficiency in that sector in the long run. The need forcontinuing efforts in the areas of accountability, predictability, and transparency of publicspending should be stressed in subsequent operations.

8. Lessons Learned

(i) Development is a long and arduous process. There are special interests in the oil sector andin budget management that make the desired changes difficult to implement. Changing thestructures and the mind sets takes time. The measures supported by the FSC are only a steptowards the final goal of fiscal sustainability and need to be reinforced by subsequentoperations. Future adjustment operations therefore should be designed explicitly as a series ofsuccessive Credits, each focusing on a time tranche of the reform program, and each buildingon progress achieved from the previous one.

(ii) Many of the FSC measures were supported by a parallel operation aimed to build capacityin the public sector. The Public Service Capacity Building Project (PSCAP) has beendesigned to strengthen the ability of civil servants to perform a wide range of tasks to improveaccountability and predictability in public spending. Future adjustment operations shouldcontinue to be paired with the PSCAP program. One key aspect of capacity building shouldbe training in management. Competence in management has been an important lesson learnedfrom implementation of NAPSA reforms. Managerial ability is important especially forMoFNP which is an apex institution that should begin to see the Civil Service as a system andnot as a set of disconnected parts.

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(iii) The coordination role of MoFNP vis a vis the line ministries needs to be strengthenedconsiderably. MoFNP should help develop a vision for the country along the PRSP. A veryfirm vision of a private sector driven economy is necessary to overcome the hesitation thataccompanies decisions to pursue privatization. Vision is also important in the povertyreduction dimensioning in which "state institutions are made more accountable and responsiveto poor people, strengthening the participation of poor people in political processes and localdecision making" (WDR, 2001).

(iv) In order to make the reforms irreversible, particularly in the area of privatization, there isa need to build coalitions across different segments of the society to support the requiredchanges. This would require efforts on the part of the Government to communicate with thepublic, to collect, analyze and disseminate facts on privatization to dispel many of theemotional charges that are made by the public against the structural reform programs. Inparticular, there is a need to buid a database on SOEs in order to monitor and evaluateprogress in this important area. The Bank, too would need to reach beyond the Governmentand the main stake holders to help present the case to the public.

(v) Equally important as building support from the public is building consensus in the Cabineton key decisions to be taken. As discussed earlier, the lack of agreement between MoFNPand MoEWD was the cause for the delay in implementation of oil sector reforms. It isessental that the line ministries be given time to study and agree to decisions which seemobvious from the Ministry of Finance's standpoint.

9. Partner Comments

(a) Borrower/implementing agency:

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REPUBLIC OF ZAMBIA

Communicatoins should be addressedTo the Secretary to TreasuryTelephone 00 260-1-250544, 250945250940, 250946, 254995, 252121Telex, ZA 4221Fax 00 260-1-253-494 - 250012, 250719, 251078Telegrams: FINANCE RIGEGWAY

MINISTRY OF FINANCE & NATIONAL PLANNINGAll cor,espondences, should be addressed to the Secretary to the Treasury,

P.O. BOX 50062RIDGEWAY, 15101CHEIMANGA ROADLUSAKA

MFAL/ 102/ 11 /240

December 13, 2002

Mr Yaw AnsuCountry Director for Zambia World Bank181.8 H StreetWASHINGTON D CUNITED STATES OF AMERICA

ICR FOR FISCAL SUSTAINABILITY CREDIT

I refer to the draft ICR for the above project. The Government as you may be aware undertook boldsteps and actions within its limited means and against a less conducive environment especially in theareas of budget reform and oil sector reform.

This notwithstanding, Government feels fairly satisfied with the outcome of the credit. In particularirreversible reform has been accomplished in the oil sector. The Energy Regulation Board will withinthe pursuit of its mandate under the law continue to review the price adjustment for electricity. Whilethe FSC did not introduce the automatic tariff adjustment formula it supported it which was introducedby the Power Rehabilitation Project. In retrospect the ATAF did not fully take into account therequirements of the law. More so it would now seem obvious by the effects this has had on other sectorsof the economy and the public that inadequate analysis was given to the effects of applying the ATAFon other sectors to achieve financial viability of ZESCO.

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Govemment by requesting a reduction of ownership in INDENI by Total wants to: reduce monopolypowers and its possible abuse. The shares given-up by Total will be sold to other buyers, and is notintended to restore govermnent monopoly as has been interpreted by some analysts. This is to forestallin advance a monopoly situation arising which could inadvertently jeopardize the oil sector strategicinterests of Zambia downstream.

The objective to improve public spending effectiveness was, as admitted by the ICR, the most difficultto achieve mainly because the resource base under the control of MoFNP at any one time has continuedto be less than optimal to service the appropriations which Ministries are entitled to form the votedbudget. But moreso changing a system which has entrenched itself, particularly the demand side overtime during a lifespan of an adjustment operation, was rather optimistic. This is an area for reform notover a short term but medium term. We (the Bank and Government) should continue to pursue theobjective of public spending effectiveness in subsequent adjustment operations. The adoption of theMTEF and its internalization will go a long way towards achieving this goal.

The ICR statement "however since January 2002, a new budget system consolidated domestic andforeign resources" is misleading because the budget system has always reflected both on the expenditureand revenue side the two sources of resources - domestic and foreign. The sentence should read"however since January 2002 a new budget system consolidated domestic and foreign BOP resources".However' between 1994 and 2001 balance of payments support was only reflected in foreign budget byBank of Zambia and no corresponding local currency equivalent was provided in the Yellow Book.

It is worth noting that in future operations design of a package of reforms should avoid third partiesover which Govermment may not have controls. Tazama Pipelines is an example.

Yours sincerely,

Anna 0. Chifungula (Ms.)ACTING SECRETARY TO THE TREASURYMINISTRY OF FINANCE AND NATIONAL PLANNING

(b) Cofinanciers:

(c) Other partners (NGOs/private sector) -

10. Additional Information

In addition to the main credit of SDR 105.5 million (33920), three supplementary credits were providedunder the same project:33921 - Fifth Dimension, Dec. 2002,33922 - Oil Supplemental (to provide additional BoP support required in light of the oil price increases),Dec. 2002,33923 - Fifth Dimension, May 2002.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:i - nIrdIcalorlMa" ix-R--- -- i- ce nl - *t at- i

-~~~ ~~~: P6eedjiiat-PSR14' ~-cua Lts EstimateT

A. Deficits of State-Owaned EnterprisesA 1 ZESCOA 1 1 Clearance of Arrears On-goingA. 1 2 Completion of cost reduction measures Effects begun but not completed

A. 1.3 Tariff increases according to cnteria set out Two tariffs increased according to criteria.Subsequent increases to be determined byERB

A. 2 ZNOCA 2 1 Clearance of arrears to TAZAMA and other Done ZNOC put into liquidaton

public entitiesA 2 2 Offering for sale a majorty controlling interest Govemment sold 50% share of INDENI

in the package of INDENI, TAZAMA and Refinery managed by pnvate entity BiddingRefinery documents for TAZAMA prepared

A 2 3. Retail pnces of petroleum products to be Retail prices of petroleum productssignificanUy lowered. liberalized E R B. to monitor retail prices

after they have been determined by the oilcompanies

A 24 Role of ZNOC limited to noncommercial ZNOC put into liquidationoperations

A 3 Zambia RailwaysA. 3.1 Improve short-term cost recovery ZR is being privatized by concessioning

A 3 2 Improved capital maintenance and provision A small staff at ZR will oversee rehabilitationof better services of assets and environmental mitigation works

B Bank of Zambia (BoZ)B 1. Reducion of BoZ deficit in relation to GDP DoneB 2 Improvement in cash management flow to Arrangements completed

spending ministries to minimize arbitrageC Pension ReformsC. 1 First pillar of NPS set up and operational Completed

C 2. Prudential investment guidelines issued and Completedimplemented

C 3 Staff retrenchment at NAPSA carried out Completedsatisfactorily and audit completed.

D Fiscal ManagementD 1 Replacement of ad-hoc budget cash The b ud e to allocate cash according to e he

management by rule-based system. budget was parbaliy implemented

Monitoring of commitments and applicabton of This was done in 2001 and 2002D 2 penarltes to officers who exceeded

allocationsD 3. In the process of implementabon

Monitoring of commitments and applicabon of Mechanism moved to the Accountantpenarltes to officers who exceeded General's Office.allocations

D 4 Some protection of social sector shares wasProtection of shares of expenditure of social provided. Expenditures to economicand economic ministries ministries were not adhered to

D. 5.Greater transparency in budget Publicabon of cash outlays implemented butimplementation by timely publication of cash checks on budget allocation were notoutays transparent.

Output Indicators:

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"7 lndi M tni, -- f - -- ---.P :P .ii laI j W -- al Ii a r

End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)-Appraisal , -Actual/Latest:+ -.Percentage of

.'' ''- :..Estimate,,, Estimate 'AppraisalProject Cost By Component , . US$.million US$ rnilfloin r

Balance of Payments Support Credit (credit 33920): 45.00 44.70 98.6Tranche 1, August 14, 2000,

Tranche 2, September 27, 2001, 45.00 43.85 97.4

Floating Tranche, June 27, 2002. 50.00 49.43 98.9Fifth Dimension (credit 33921), Dec. 27, 2000. 2.09 2.09 100

Oil Supplemental (credit 33922), Dec. 27, 2000. 30.66 30.66 100Fifth Dimension (credit 33923), May 21, 2002. 6.84 6.84 100

Total Baseline Cost 179.59 177.57

Total Project Costs 179.59 177.57Total Financing Required 179.59 177.57

Project Financing by Component (in US$ million equivalent). , i . P P * t , , ̂ ! | ~~~~~~~~~Percentage, Of Appraisal

Component Appraisal Estimate - Actual/LatestEstimate- Bank GovL I CoF.* Bank I Govt - CoF.. -. 4vfnk- Govt. .CoF.

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Annex 3. Economic Costs and Benefits

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Annex 4. Bank Inputs

(a) Missions.

Stage of Project Cycle No. of Persons and Specialty Performance Rating(e.g. 2 Economists, I FMS, etc) Implementafion Development

Month/Year Count Specialty Progress Objective

Identification/Preparation05/17/1999 - 5 1 Lead Economist and I S S11/9/99 Economist (HQ); I Sector

Specialist (HQ) 2 Consultant

Appraisal/Negotiation05/08-18/2000 4 1 Lead Economist (HQ); I S S

Economist (RM); 1 Lawer(HQ); I Consultant

5/11-16/1999 2 1 Country Director for Zambia; S S1 Zainbia Res. Rep.

Supervision06/13-28/2001 6 1 Lead Economist (HQ); 1 S S

Economist (RM); 1 SectorSpecialist (RM); 1 FiscalManagement Consultant; 1State Owned EnterprisesConsultant; Res. Rep.

10/27/2001 12 3 Economists (HQ); 1 Budget S SManagement Spec. (RM); 2Budget ManagementConsultants; 2 Pension ReformConsultants; 1 Capacity buildingspecialist (HQ); 1 PetroleumSpecialist (RS); 1 PetroleumConsultant

ICR09/16/2002 2 Lead Economist and 1 S S

Economists ( Consultant)

(b) Staff

Stage of Project Cycle Actual/Laiest Estimate

l__ __ __ __ __ __ __ _ No. Staff weeks US$ ('000)

Identification/Preparation 54.9 123,000Appraisal/Negotiation 24.60 442,920.64Supervision 61.15 384319.24ICR 3.49 37,066Total 144 14 887315.88

Actuals include expenses on supplementary credits (Oil Supplement and Fifth Dimension). US$ amountsinclude indirects.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Neghgible, NA=Not Applicable)Rating

FMacro policies O H OSUOM O N O NA3Sector Policies O H OSUOM O N O NA

LII Physical O H OSUOM O N O NALi Financial OH OSUOM O N O NAZ Institutional Development O H O SU O M O N 0 NALO Environmental O H OSUOM O N O NA

Social

N Poverty Reduction O H OSUOM O N O NAEjGender O H OSUOM O N O NAO Other (Please specify) O H OSUOM O N O NA

O Private sector development 0 H O SU O M 0 N 0 NAO Public sector management 0 H O SU O M 0 N 0 NAO Other (Please specify) O H OSUOM O N O NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

X Lending OHS*S OU OHUZ Supervision OHS OS OU O HUZ Overall OHS OS O U O HU

6.2 Borrowerperformance Rating

Z Preparation OHS Os Ou O HUX Government implementation performance O HS O S 0 U 0 HUO Implementation agency performance OHS OS O U O HUO Overall OHS OS O u O HU

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Report No.: 25048Type: ICR