Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 18084

IMPLEMENTATION COMPLETION REPORT

DEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

SECOND MULTISECTOR PROJECT(Cr. 2280-STP)

June 25, 1998

Water and Urban 2Country Department 15Africa Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTSCurrency Unit = Dobra (Db)

US$1.00 = Db6,970(atclosing,December31, 1997)US$1.00 = Db 140 (at appraisal, 1991)

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR OF BORROWER

January 1 - December 31

ABBREVILATIONS AND ACRONYMS

AfDB African Development BankAFD Agence Franqaise de DeveloppementEC European CommunityEMAE Empresa de Agua e Energia (Energy and Water public utility)EIB European Investment BankERR Economic Rate of ReturnEU European UnionFAO Food and Agriculture OrganizationGNP Gross National ProductINDES Institute for Economic and Social DevelopmentMESA Ministry of Social Equipment and EnvironmentMSP Multisector I ProjectNGO Non-governmental OrganizationOPEC Organization of Petroleum Exporting CountriesPPF Project Preparation FacilitySAC Structural Adjustment CreditSAP Structural Adjustment ProgramSEDA Swedish International Development AgencySIF Social and Infrastructure FundSTP Sao Tome and PrincipeUNICEF United Nations Children's FundURRA Unidade de Reabilitaqdo da Rede de Abastecimento de Agua

(Water Supply Network Rehabilitation Unit)URRIL Urban Project Implementation Unit

Vice President: Jean-Louis Sarbib, AFRCountry Director: Hasan Tuluy, AFCl5Sector Manager: Letitia A. Obeng, AFTU2Team Leader: Leslie Pean, AFTU2

FOR OFFICIAL USE ONLYDEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

SECOND MULTISECTOR PROJECT(Credit 2280-STP)

IMPLEMENTATION COMPLETION REPORT

TABLE OF CONTENTS

Page

PREFACE.i

EVALUATION SUMMARY.11

PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A. Project Identity ................................ 1............... B. Background ................................................ 1C. Statement and Evaluation of Project Objectives ................... ............................ 2D. Achievement of Project Objectives ................................................ 2E. Implementation Record ....... 3........................................3F. Major Factors Affecting the Project ................................................ 5G. Project Sustainability ................................................ 6H. Bank Perfornmance. 61. Borrower Performance. 7J. Assessment of Outcome. 8K. Future Operation ............................................... 8L. Key Lessons Learned ............................................... 8

PART II. TABLES

Table I - Summary of Assessments ............................................... 10Table 2 - Related Bank Loans/Credits ............................................... 12Table 3 - Project Timetable ............................................... 12Table 4 - Loan/Credit Disbursements ............................................... 13Table 5 - Key Indicators for Project Implementation ............................................... 13Table 6A - Project Costs ............................................... 14Table 6B - Project Financing ............................................... 15Table 7 - Economic Costs and Benefits (pre-appraised sub-projects) ........................................ 15Table 8 - Status of Legal Covenants ............................................... 16Table 9 - Bank Resources: Staff Inputs ............................................... 19Table 10 - Bank Resources: Missions ............................................... 19

ANNEXES

ANNEX 1 - BORROWER'S COMMENTSANNEX 2 - LAST MIssIoN'S AIDE MEMOIREMAP - IBRD No. 27245

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

DEMOCRATIC REPUBL][C OF SAo TOME AND PRtNCIPE

SECOND MULTISECTOR PROJECT(Credit 2280-STP)

IMPLEMENTATION COMPLETION REPORT

PREFACE

This is the Implementation Completion Report (ICR) for the Second MultisectorProject in SAo Tom6 and Principe (STP) for which Credit 2280-STP in the amount of SDR4.5million (US$6.0 million equivalent) was approved on June 27, 1991, and made effective onDecember 18, 1992.

The Credit was closed on December 31, 1997, one year after the original closing date.It was fully disbursed, and the last disbursement took place on January 28, 1998.

The ICR was prepared by Messrs. Leslie Pean, Task Manager, and George Faillace,Consultant, and reviewed by Mr. Hasan Tuluy, Country Director, AFC 15 and Letitia A. Obeng,Sector Manager, AFTU2. The Borrower provided comments that are included as an annex tothe ICR.

Preparation of this ICR began dluring the Bank's supervision mission in June 1997. Itis based on materials in the project files and interviews with IDA staff involved in the project'spreparation and implementation. The Borrower's views are reflected in this report, a draft ofwhich was discussed with the Borrower during a field mission in October 1997.

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DEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

SECOND MULTISECTOR PROJECT(Credit 2280-STP)

IMPLEMENTATION COMPLETION REPORT

EVALUATION SUMMARY

INTRODUCTION

1. The Government of Sao Tom6 and Principe adopted, in 1987, a comprehensive StructuralAdjustment Program (SAP) supported by two Structural Adjustment Credits from the InternationalDevelopment Association (IDA). The first ]DA Structural Adjustment credit was approved in 1987(US$4.0 million plus US$3.0 million from the Special Facility for Africa), and the second in 1990(US$9.75 million equivalent). The first phase of the SAP made short-term progress to move Sao Tom6and Principe (STP) from a centrally planned to a market-based economy. The second phase (1991-96),supported by IDA and donors, emphasized reduction of the public sector and a growing role for theprivate sector. Aside from stabilization measures, it addressed structural reforms such as landdistribution, privatization of public enterprises, and financial sector reform. Unfortunately, thefundamental changes sought in the economy were not achieved, because of political instability andexcessively expansive fiscal and monetary policies.

2. The Government also took measures to protect the vulnerable groups most affected by theadjustment process. IDA supported this through the Economic Rehabilitation and Modernization Project(Cr. 1590-STP, 1985). This project was designed to remove critical physical constraints to productionthrough small investments in agriculture, fisheries, transport, and energy as well as studies, technicalassistance (TA), and training. In response to the need for further assistance, IDA approved the FirstMultisector Project (MSP) in mid-1989 and the Second Multisector Project in June 1992. The FirstMultisector Project sought to mitigate the social and economic impact of economic decline and structuraladjustment by generating income and employment opportunities for low-income households throughinvestments in the social and basic infrastructure sectors.

PROJECT OBJECTIVES

3. The objectives of the Second Multisector Project (Cr. 2280-STP) were to: (a) mitigate the socialimpact of economic decline and structural adjustment; (b) improve the Borrower's basic infrastructure inorder to promote private economic activity; (c) help generate income and employment opportunities forlow income groups; and (d) increase local technical capacity for implementing infrastructureimprovement projects.

4. Project objectives were clearly stated, responding correctly to the difficult economic and socialconditions in the country at that time. A CAS (country assistance strategy) did not exist when theproject was being prepared. The infrastructure development program was well defined, but themechanisms for achieving the social objectives were less clearly articulated. Given the country'sfragile institutional infrastructure, project implementation was demanding for the Borrower. As theGovernment was unable to make its counterpart contributions, IDA agreed to increase its share of theproject's operational costs and the Credit Agreement was amended accordingly.

IMPLEMENTATION EXPERIENCE AND RESULTS

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5. The physical achievements of the project are significant. The rehabilitation of the GuegueHydroelectric Power plant, the upgrading of the low income settlement of Riboque Lucumi, and theexecution of small priority works and repair of secondary roads are some examples of projects thatbenefited all together an appreciable share (70%) of the population of Sao Tome. These physical workswere executed by the private sector for a total of US$6.81 million, representing 75% of the totalexpenditures of the implementing agency, INDES (Institute for Economic and Social Development).Incremental private sector activity occurred in spite of the fact that a line of credit to be channeled to theprivate sector through commercial banks was dropped from the project because of delays in financialsector reforms. In addition to helping decrease the percentage of the population living in slumsettlements, the project helped to create 350 jobs, thereby distributing income to the population in theneighborhoods affected by these activities. Also, INDES strengthened its capacity to develop andimplement infrastructure improvement projects and several Government units concerned with landmanagement, housing and road maintenance improved their technical capacities.

6. The Second Multisector Project was funded with the intention of accompanying the transitionalperiod of structural refonn with income and employment creation as well as social and economicinfrastructure. The objective was to improve living conditions and to create the capacity to deliver suchservices through an efficient executing agency. Of the four components, three in the narrow senseachieved what they were set out to do. However, contrary to expectations, the structural reform did nottake place and the economic situation continued to worsen. As a result, jobs and income generation couldniot be sustained because the economy did not pick up and public revenue did not improve, jeopardisingfuture operation and maintenance of the facilities (unless communities are willing to finance maintenancethemselves). The project outcomes are therefore unlikely to be sustainable.

7. The project was completed within the original cost estimate of US$7.6 million, except for somehealth-related components (US$0.45 million) of the urban slum upgrading sub-project that will becompleted under the ongoing Health and Education Project (Cr. 2343-STP).

8. Key factors that negatively affected the achievement of major objectives were: (i) lowcommitment from Government to the operation, particularly in the first three or four years of projectimplementation; (ii) weak institutional capacity in the Government units involved in the project andcumbersome administrative procedures; (iii) delays in the payment of counterpart funds and lack ofautonomy of the implementing agency (INDES) which impacted on the efficiency of its operations.

9. The Bank's performance during project identification is rated unsatisfactory because some ofthe institutional problems that were apparent under the First Multisector Project, such as themanagement autonomy of INDES, were not dealt with. Preparation and appraisal performance arerated satisfactory. However, the Bank should have defined and quantified the project's socialobjectives more clearly, indicating how targets in the social area were to be achieved throughinvestments in hardware. Project supervision was satisfactory; at least two annual supervision missionswere carried out and almost continuous long-distance advice and support was given. Repeatedly duringsupervision missions and from headquarters, the Bank addressed the issues of counterpart funding andgovernment support. Despite these efforts, Government was not responsive and the counterpartfunding problems persisted. On the other hand, frequent changes in Task Managers, adding up to atotal three different managers throughout implementation, and the Bank's reorganizations contributedto lack of continuity in project support and negatively affected the project's supervision.

10. The Borrower's performance was satisfactory during preparation but deficient duringimplementation due to declining commitment. Evidence of this is found in the dismissal of theimplementing agency's managing director. The Government has changed directors three times, and has

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failed to pay its counterpart contributions. Despite wavering government support the executing agencyhas carried out its obligations satisfactorily and implemented sub-projects efficiently.

11. Overall project outcome is consideredl satisfactory.

FUTURE OPERATIONS AND KEY LESSONS L]EARNED

12. Preparation of a follow up project vvas canceled after the Bank and the Borrower could notagree on a new structure for the implemeniting agency i.e., an autonomous, private-sector led unit,better equipped to manage social infrastructure operations than INDES. There are no plans for afollow-up operation at this time.

13. Lessons learned for future projects in the sector include:

(a) In a small country such as So Tome and Principe, contract management agencies suchas the Social and Infrastructure Fund (SIF), or its successor the Institute for Economic andSocial Development (INDES), can be a good mechanism for implementing small-scale, multi-sectoral investment projects, provided that the agency has sufficient operational and financialautonomy; operates under a contractual relationship with the Government; uses a marketapproach in its operations, without Government interference; has the freedom to recruit itsown staff and pay them adequately; and can generate revenues from its operations. Indesigning a multisector operation with this kind of implementation structure, it is important toagree on the rules of the game early on, well before negotiations.

(b) A multi-sectoral program intended to tackle social issues through infrastructureinvestments runs the risk of focusing its efforts on the physical aspects of the program, i.e. theexecution of civil works, at the expense of the software aspects (poverty alleviation,employment creation, income generation, etc.). To avoid this tendency, it is necessary to setrealistic targets for achievements in the social sector, and to clearly map out programs andinterventions that will lead to reaching these targets. This is especially important in smalleconomies such as Sao Tome and Principe, where donor-financed projects tend to be smalland few in number.

(c) The project could have benefited from a mid-term review which would have been helpfulto restructure the project and make the necessary adjustments to deal with the worsenedmacroeconomic reality of Sao Torne and Principe.

(d) Although there was complete consensus from the Borrower and the Bank to useUS$450,000 to carry out studies to prepare follow up projects, it should have been made clearthat this consensus did not represent a commitment on the part of the Bank to finance a followup project. In order to assure that the Borrower will not feel that expenditures on futureproject preparation are reducing financial resources available for current activities, it isrecommended to include in a specific line item for studies that could identify and lead to afollow up operation.

(e) The Bank should have paid rnore attention earlier to the conflictual relationship betweenINDES and the Government, and should have pressed the issue of the independence andautonomy of INDES as a criterion for its continuous involvement in the provision ofdevelopment assistance. Such a proactive stance would have contributed to a sharedunderstanding and prevented the deterioration of the situation.

DEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

SECOND MULTISECTOR PROJECT(Credit 2280-STP)

IMPLEMENTATION COMPLETION REPORT

PART I - PROJECT REVIEVV FROM THE BANK'S PERSPECTIVE

A. PROJECT IDENTITY

Name . Second Multisector ProjectCredit Number: Cr. 2280-STPRVP Unit . AFRICA RegionCountry . Sao Tom6 and PrincipeSector . Multisector

B. BACKGROUND

1. Sao Tom6 and Principe (STP) is a small, two-island country in the Gulf of Guinea, with apopulation estimated at about 145,000, a third of whom live in urban centers, including thecapital city of Sao Tome (population of 20,000). On gaining independence in 1975, the countryinherited an economy based exclusively on agriculture and geared almost entirely to theproduction and export of a single crop, cocoa. In the early years of independence, the countryfaced a steadily deteriorating economic situation. Declining cocoa production, a diminishingsupply of foreign exchange, un-economic public investments and a rising public debt caused theGovernment to embark, in early 1987, on a structural adjustment program (SAP), which wassupported by IDA through two structural adjustment credits (SAC, 1987 and 1990). While someprogress was achieved under the SAP, economic stabilization was elusive and self-sustaininggrowth was not attained. In addition, the lowest income groups were negatively affected by theadjustment program.

2. IDA supported the Government's efforts to protect disadvantaged groups of thepopulation against the negative impact of economic decline and adjustment, through theEconomic Rehabilitation and Modernization Project (Cr. 1590-STP, 1985). This credit, the firstIDA operation in the country, aimed to remove critical physical constraints that had developed asa result of the economic crisis, through small investments in agriculture, fisheries, transport andenergy, and the provision of technical assistance and training. Support for these types ofinvestments continued through the First Multisector Project or MSP (Cr. 2038-STP, 1989).

3. The MSP sought to mitigate the social and economic impact of the economic downturnby generating income and employment opportunities for low-income urban and rural householdsthrough small investments in the social and infrastructure sectors. The project also sought tosupport the emerging private sector with lines of credit. An important aspect of the MSP was theestablishment of a Social and Infrastructure Fund (SIF), conceived as a pragmatic mechanism tochannel external financial resources to social infrastructure development projects.

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C. STATEMENT AND EVALUATION OF PROJECT OBJECTIVES

4. The objectives of the Second Multisector Project (Cr. 2280-STP) were to: (a) mitigate thesocial impact of economic decline and structural adjustment; (b) improve the Borrower's basicinfrastructure in order to promote private economic activity; (c) help generate income andemployment opportunities for low income groups; and (d) increase local technical capacity forimplementing infrastructure improvement projects.

5. Achievement of these objectives was supported by the construction and/or rehabilitationof social infrastructure. The project provided financing for: (a) social infrastructureimprovement projects (sub-projects) that included the construction and rehabilitation of watersupply systems, sanitary and storm drainage systems, solid waste management services, urbanroads and streets, and electricity generation and distribution systems; and (b) institutionaldevelopment by providing technical assistance and staff training to strengthen local capacity toidentify, appraise, prepare and monitor the implementation of sub-projects.

6. Project objectives were clearly stated and responded to the difficult economic and socialconditions in the country at that time. They were also consistent with IDA's country assistancestrategy. The infrastructure development program and implementation arrangements were welldefined, but the mechanisms for achieving the social objectives were less clearly articulated. Asa result, their pursuit turned out to be difficult for all parties, including the Bank and theBorrower. Given the country's fragile institutional infrastructure, project implementation wasdemanding for the Borrower and its executing agency, SIF. Halfway through the project, theCredit Agreement was amended to provide for an increase in IDA's share of financing SIF'soperational costs, as the Government had problems to reliably provide its counterpartcontributions. Main risks identified at appraisal were (i) a shortage of adequate technicalexpertise in SIF to appraise and supervise relatively complex infrastructure projects; and (ii)SIF's high operational costs and an insufficient increase in revenue generation to offset them.

D. ACHIEVEMENT OF PROJECT OBJECTIVES

7. The physical achievements of the project are significant. The rehabilitation of theGuegue Hydroelectric Power plant, the upgrading of the low income settlement of RiboqueLucumi, and the execution of small priority works and repair of secondary roads are someexamples of projects that benefited all together an appreciable share (70%) of the population ofSao Tome. These physical works, executed by the private sector for a total of US$6.81 million,represent 75% of the total expenditures of the implementing agency, INDES. The remaining25% financed studies, training, audits and project management activities. Incremental privatesector activity occurred in spite of the fact that a line of credit to be channeled to the privatesector through commercial banks was dropped from the project because of delays in financialsector reforms. In addition to helping decrease the percentage of the population living in slumsettlements through the Riboque/Lucumi sub-project, the project helped to create 350 jobs,thereby distributing income to the population in the neighborhoods affected by these activities.Also SIF strengthened its capacity for developing and implementing infrastructure improvementprojects and several Government units concerned with land management, housing and roadmaintenance improved their technical capacities.

8. Despite these concrete achievements, the overall economic context has had an adverseimpact on the project. At the time of project approval, Sao Tome and Principe was facing the

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major task of rebuilding its economy, which had been deteriorating for some time. The projectintended to alleviate the social impact of the Structural Adjustment Program during the transitionperiod by providing improved basic infrastructure, generating income and employment andincreasing local technical capacity. However, the original hopes of reforming macroeconomicimbalances within a stable political enavironment have not materialised, and the project'sachievements, namely institutional development, generation of income and employment andcapacity building, are not sustainable. From this perspective, the project did not succeed inmeeting its first objective which was to mnitigate the social impact of the adjustment process.

E. IMPLEMENTATION RECORD

I. Social Infrastructure Improvement Projects (Sub-projects)

9. A start-up phase of four priority sub-projects, jointly identified by INDES and IDAbefore Credit effectiveness, allowed for a quick initiation of disbursements. This programconsisted of: (i) the rehabilitation and expansion of the Guegue hydroelectric plant; (ii) the firstphase of the upgrading of the Riboque/Lucumi peri-urban area in Sao Tome; (iii) therehabilitation of secondary roads; and (iv) priority urban and rural small works. Total estimatedcost of the four sub-projects was US$5.4 million, of which IDA financed US$5.0 million or 83%of the Credit. The four sub-projects supported, in various ways, the objectives of employmentand income generation, alleviation of poverty and improvement of living standards, andpromotion of private economic activity. The following paragraphs summarize implementationdetails:

10. Rehabilitation of the Guegue hydiroelectric plant. This sub-project provided for a newpenstock, turbine generator, high-voltage switchgear, rehabilitation of an aerial distribution line,and associated civil works. The project was satisfactorily completed at a cost of about US$1.7million as compared to the appraisal estimate of US$0.9 million. The increase in cost was theresult of additional works needed to improve the physical facilities of housing the plant. Therefurbished plant was put into service in early 1994. The successful and timely completion ofthis component is attributed to good quality design and construction work by the electrical andcivil engineering contractors, and effective monitoring by INDES. Although a maintenanceprogram was included in this package, adequate maintenance of the plant remains an area ofconcern.

11. Upgrading of the Riboque/Lucuini Urban Area. This sub-project involved the provisionor upgrading of basic infrastructure in an urban slum area, including water and electricity supply,latrines, community washing facilities, (Irainage improvements, footpath rehabilitation and thelike. The project suffered delays due to problems in getting designs approved, preparing anenvironmental impact study, and developing a cost recovery mechanism. The first phase of theproject (design work, tender documents and work on the eastern part of the settlement) hasremaining drainage works yet to be completed due to a shortage of funds of US$450,000, whichwere used to finance preparatory studies under the then-proposed Multisector III Project. Theremaining drainage works of the first phase and the second phase (works on the western part ofthe settlement) of this sub-project will be financed under the Malaria component of the IDAHealth and Education Project (Cr. 2343-STP).

12. Rehabilitation of Secondary Roadls. This sub-project was designed to improve about 60kms of secondary roads, complementing an ongoing AfDB-financed Primary Roads

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Rehabilitation Project covering about 82 kms of roads. The project was successfully completedby private contractors within about 10 months, at an average cost of US$32,000 per km,considerably lower than the US$90,000/km cost experienced by AfDB. The quality of the workswas good, the contractor and supervising engineer performed well, and INDES managed theimplementation of the program effectively. Lack of maintenance remains a problem and has, forthe donor community, become an issue of concern that will condition further investments in thesector.

13. Priority Urban and Rural Small Works. The implementation of this sub-component,designed to execute labor-intensive works with high social and economic rates of return, and tobe carried out through small contracts with local contractors started very slowly. The mainproblem was preparing an inventory of needed repairs and effectively supervising the executionof the small-scale works. Eventually, a number of small works in urban areas, including simplerepairs to sidewalks, street lamps, etc. were successfully executed for an amount of US$800,000,slightly less than estimated at appraisal.

14. Other demand-driven infrastructure investments not identified at appraisal were preparedand appraised by INDES during project implementation. These include sites and services project,water supply and drainage, a community infrastructure project and the rehabilitation of the SaoTom6 Hospital. These were valued at about US$0.5 million and were financed by other donors.

15. In addition to these investments, INDES has conducted several pre-investment studiesand infrastructure project designs, some of which have led to projects financed by other donors.For example, project-financed studies for the rehabilitation of the port and airport in the island ofPrincipe resulted in investments of about US$2.0 million financed by the Agence Francaise deDeveloppement (AFD). These were completed in 1997.

II. Institutional Development

16. INDES' capacity to identify, prepare, and manage the implementation of infrastructureinvestments was successfully strengthened under the project. An excellent monitoring andevaluation system was also set up under the project. As a result, INDES built a strong reputationamong the donor community for being able to follow up on project implementation and get thingsdone. In addition, two units in the Ministry of Social Equipment and Environment (MESA) - theDepartment of Environment and Territorial Planning, and the Housing Institute - werestrengthened. MESA developed a strategy for a cadastral and land information system for thecountry and set up cadastral surveys. Technical assistance provided to the Housing Institutehelped define a housing policy and action plans for low-income housing developments. Inaddition, the Housing Institute gained practical experience - through the Urban ProjectImplementing Unit (URRIL) - in the rehabilitation of low income urban settlements.

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F. MAJOR FACTORS AFFECTING TIHE PROJECT

L Factors Subject to Government Control

17. Lack of commitment. Initially, during project preparation and appraisal, the Governmentwas strongly committed to the project. However, when a new Government took office in January1991 (before Credit effectiveness), support for the project began to weaken, even though IDAsupervision missions carefully explained the project's objectives and design to the newGovernment officials. Also at that time, the Government removed the Managing Director of theexecuting agency (SIF) and, after a long delay, replaced him by a new Director who did not havestrong political support. These events, as well as bureaucratic obstacles, disrupted projectprocessing and delayed effectiveness by about one year. Although the organizational structureand responsibilities of SIF (later INDES) were well-defined and appropriate regulations,guidelines and procedures were firmly put in place, the Government did not clearly understandthe role of the implementing agency and continued to view INDES with suspicion openlycriticizing the agency for operating outsicle the bureaucracy. This lack of support continued afterthe 1995 elections when the Managing Director of INDES was again replaced. Although weakGovernment commitment to the project affected INDES staff's morale, the impact on projectimplementation was marginal. Government did not interfere with the appointment of other keystaff at INDES and the agency maintained sufficient autonomy to function efficiently.

18. Weak administrative capacity. Weak institutional capacity of Ministries and otherGovernment agencies involved in the project, and cumbersome administrative procedures,particularly with respect to procurement, resulted in long implementation delays. Delays ofseveral months in obtaining the results of bid evaluations and other technical reports; forexample, were not unusual.

19. Delays in the provision of counterpart funds. As a result of persistent budgetaryshortfalls and weak budgetary management, the Government did not regularly pay its share of theoperational costs of INDES (its counterpart contribution to the project). As a result, INDES staffwere not paid on time (or not paid at all) and operational expenses were not reimbursed. Thisimpacted on staff morale and slowed project implementation. Eventually, IDA agreed to increaseits share of financing operational costs, from 50% to 70% through December 31, 1993, 65%through December 31, 1994 and 60% thereafter, subject to agreed ceilings. The CreditAgreement was amended accordingly. ]NDES functioned efficiently and eventually built up aportfolio of contracts financed from other external sources, so that its operational costs are nowpaid almost exclusively from project handling fees. This is expected to continue for theforeseeable future.

II. Factors Subject to Implementing Agency Control

20. Salaries of INDES staff were considerably higher than those in the public sector, butabout in line with the private sector from, where most of the staff were recruited. This became acontentious issue in mid-1995 when INDES management approved a salary adjustment, the firstsince 1991. The Government intervened and rejected the proposed salary increases and this wasperceived as evidence of lack of support for the project. In retrospect, INDES should have beenmore cautious about the timing of the salary adjustment, particularly when agency autonomy wasa sensitive but unresolved issue.

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21. The situation deteriorated further in early 1996 during preparation of the ThirdMultisector Project, when the Bank argued that INDES, as then structured, could not adequatelyperform its expanded functions of managing small-size labor-intensive works implemented bysmall contractors and needed to be restructured into a privately-run agency, along the lines of theAGETIP model. The Government and the Bank were not able to agree on a structure for theimplementing agency and further preparation of the new project was canceled.

G. PROJECT SUSTAINABILITY

22. The project would have been sustainable if the overall economic environment hadimproved as envisaged at the beginning of its implementation. In particular, an improved generaleconomic situation would have offered the possibility of carrying out the follow-up maintenancefor the physical achievements. However, the worsening economic situation negatively affectedthe project, thereby jeopardizing the outcome that otherwise would have been highly satisfactory.The achievement of project objectives is satisfactory but in light of the overall economicsituation, these satisfactory outcomes are unlikely to be sustainable. The social achievements ofthe project can be sustained only if the infrastructure constructed or rehabilitated under theproject is maintained and funding is obtained for additional infrastructure investments. Lack ofmaintenance is the real issue. With respect to road construction and rehabilitation, a roadmaintenance unit was set up but it remains inoperative for lack of funds. Similarly, efforts havebeen made by communities to ensure the upkeep of the upgraded infrastructure, throughcommunity contributions or through water and electricity tariffs, but this system is in its infancyand needs to be strengthened to become viable. Therefore, the long-term sustainability of theseinvestments and their social impact is quite unlikely. Achievements in terms of employment andincome generation are sustainable if additional work becomes available in the construction sector,either in maintenance or new construction. Therefore, sustainability in all cases largely dependson the success of the economic recovery and the availability of financial resources needed to payfor new investments and their maintenance.

23. The sustainability of institutional achievements of the project are uncertain. INDES hasestablished itself as a dynamic, competent organization, capable of accessing financial resourcesand of developing and monitoring the implementation of infrastructure development projects.1NDES has already received funding to implement projects under OPEC and the FrenchCooperation. Further evolution in the way INDES operates is expected when the economicsituation of the country improves and new investments come along. In the longer term, INDES'role is likely to shift to facilitating access to donor funds for communities, local governments andNGOs, and to monitoring the implementation of investment projects (i.e. as contract managementagency).

H. BANK PERFORMANCE

24. The Bank's performance during project identification is rated unsatisfactory becausesome of the institutional problems that were apparent under the former project Multisector Isuch as the management autonomy of INDES were not dealt with. Preparation and appraisalperformance are rated satisfactory. However, the Bank should have defined and quantified theproject's social objectives more clearly, indicating how targets in the social area were to beachieved through investments in hardware. Project supervision was satisfactory; at least twoannual supervision missions were carried out and almost continuous long-distance advice and

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support was given. On the other hand, frequent changes in Task Managers, adding up to a totalof three different managers throughout implementation, and the Bank's reorganizationscontributed to lack of continuity in prcoject support and negatively affected the project'ssupervision.

25. Bank staff and consultants providled an unusually high level of technical support to theGovernment and the executing agency (SIF/INDES) during project implementation. However,more efforts should have been made to excplain the role of the executing agency to Governmentofficials in the early stages of project implementation (1991) when a new Government tookoffice, in order to secure commitment to the project. Also, stronger arguments might have beenused in 1995 to convince the Government of the need to change INDES from a quasi-Government entity into a fully autonomous, private-sector contract management agency. As itturned out, the Bank and the Government could not agree on a new structure for INDES and theproposed Third Multisector Project was canceled in early 1996. A year later, the Governmentrevised its position on the issues of autonomy and private sector management of INDES;however, by that time, the macroeconomic conditions in Sao Tome had deteriorated to such apoint that funding for a new operation was' no longer a viable option.

1. BORROWER PERFORMANCE

26. During preparation, the Borrower fully supported the project's scope and design,including SIF as the implementing agency. However, when the new Govennment took office inJanuary 1991, commitment to the project waned, the director of SIF was replaced and Crediteffectiveness was delayed by more than a year. Subsequently, the Government did not makecounterpart funds available (mainly to fintance INDES' staff salaries) for almost a year, and as aresult the Special Account was frozen. Thlis not only affected staff morale at INDES, but also thepace of project implementation. The Borrower's performance during the first three or four yearsof implementation was clearly deficient.

27. However, following the change in Government in 1995, the relationship between theGovernment and INDES improved, thanks in part to the persistent efforts of the Bank'ssupervision team. Government support for INDES became stronger, especially during the lastyear of implementation. Toward the credit closing date, the Government seemed to havereversed its position on the issue of autonomy and private-sector management for INDES, andINDES was becoming the executing agenicy for several donor-funded projects. This is a goodstep forward and has also provided INDES with the opportunity to fund most if not all of itsoperational expenses from handling fees collected from the funding agencies.

28. INDES correctly maintained consolidated project accounts as well as individual sub-project accounts, and operated the Special Account. The accounting system, installed byconsultants who operated the system initially while training local staff, was adequate. Independentauditors carried out annual audits of project accounts, including the Special Account, and auditreports were submitted to IDA within six months of the end of each fiscal year, es required. INDESprepared quarterly and annual budgets, advised the Treasury regarding disbursement forecasts andcompleted disbursement applications for ihe release of IDA funds. INDES reported regularly toIDA on the status of project implementation and financing.

8

29. Given the good performance of INDES throughout most of the project implementationperiod (in spite of wavering Government support), the Borrower's performance overall is rated assatisfactory.

J. ASSESSMENT OF OUTCOME

30. The infrastructure program was implemented as planned; institutional objectives werelargely achieved, particularly with respect to the implementing agency INDES; and most of thesocial objectives were at least partially attained, with the exception of mitigating the social impactof adjustment which was only achieved in the areas covered by the sub-projects. Institutionalachievements concerning INDES are sustainable, provided the Government sticks with its recentposition that INDES should be an autonomous contract management agency. More generally, thesustainability of project achievements in the areas of poverty alleviation and improvement ofliving conditions is threatened by budgetary problems that do not allow for the maintenance ofsocial infrastructure. In spite of this somber assessment, overall project outcome is judgedsatisfactory.

K. FUTURE OPERATION

31. Preparation for a Third Multisector Project was initiated in November, 1994, with a PPFadvance of US$250,000. In addition, about US$450,000 was used from the budget of the SecondMultisector Project, pending approval of a supplementary PPF advance. Because governmentinterference in the decision-making and management of INDES has hindered INDES' operationduring this project, the Bank proposed converting INDES into an autonomous, private-sectorcontract management agency to carry out civil works projects. However, the Borrower and theBank could not agree on a new structure of the agency, leading to the cancellation of thisoperation from the lending program. A follow-up operation is not planned at this time. Some ofthe studies completed for the preparation of the Third Multisector Project were later used byother donors to finance the execution of infrastructure-related activities.

L. KEY LESSONS LEARNED

32. Key lessons learned from the project's implementation are:

(a) In a small country such as Sao Tome and Principe, contract managementagencies such as the Social and Infrastructure Fund (SIF), or its successor the Institutefor Economic and Social Development (INDES), can be a good mechanism forimplementing small-scale, multi-sectoral investment projects, provided that theagency has sufficient operational and financial autonomy; operates under acontractual relationship with the Government; uses a market approach in itsoperations, without Government interference; has the freedom to recruit its own staffand pay them adequately; and can generate revenues from its operations. In designinga multisector operation with this kind of implementation structure, it is important toagree on the rules of the game early on, well before negotiations.

(b) A multi-sectoral program intended to tackle social issues through infrastructureinvestments runs the risk of focusing its efforts on the physical aspects of theprogram, i.e. the execution of civil works, at the expense of the software aspects(poverty alleviation, employment creation, income generation, etc.). To avoid this

9

tendency, it is necessary to set realistic targets for achievements in the social sector,and to clearly map out programs and interventions that will lead to reaching thesetargets. This is especially important in small economies such as Sao Tom6 andPrincipe, where donor-financed projects tend to be small and few in number.

(c) The project could have benefited from a mid-term review which would havebeen helpful to restructure the project and make the necessary adjustments to dealwith the worsened macroeconomric reality of Sao Tome and Principe.

(d) Although there was complete consensus from the Borrower and the Bank to useUS$450,000 to carry out studies to prepare follow up projects, it should have beenmade clear that this consensus did not represent a commitment on the part of the Bankto finance a follow up project. ][n order to assure that the Borrower will not feel thatexpenditures on future project preparation are reducing financial resources availablefor current activities, it is recomnmended to include in a specific line item for studiesthat could identify and lead to a f5ollow up operation.

(e) The Bank should have paid. more attention earlier to the conflictual relationshipbetween INDES and the Government, and should have pressed the issue of theindependence and autonomy of INDES as a criterion for its continuous involvement inthe provision of development assistance. Such a proactive stance would havecontributed to a shared understanding and prevented the deterioration of the situation.

10

SAO TOME AND PRINCIPE

MULTISECTOR II PROJECT(Credit 2280-STP)

IMPLEMENTATION COMPLETION REPORT

PART II. TABLES

TABLE 1- SUMMARY OF ASSESSMENTS

A. Achievement of Obiectives Substantial Partial Negligible Not applicable(10 (10 (10 (V)

Macro policies LIF E1 1Sector policies ED EI 111 W5Financial objectives E] EI Lz IInstitutional development Em m C [IPhysical objectives LI LI El

Poverty reduction LI L LI

Gender issues L I LI EL E

Other social objectives LI W LI LIEnvironmental objectives EM LI [ICPublic sector management LI LI LIPrivate sector development FIL LI ]

Other (capacity building) LI LI LI

11

B. Project sustainability Likely Unlikely Uncertain(1) (1) (V)

C. Bank performance Highysatisfactory Satisfactory Deficient

(I) (1) (V)

Identification LO E WPreparation assistance [ E I]Appraisal [a [2 Supervision l m FD. Borrower performance

satisfacton Satisfactory Deficient(/) (/) (/)

Preparation ] [ 0]

Implementation [ ] E

Covenant compliance(counterpart funds) L] D Operation (if applicable) K] K]

E. Assessment of Outcome Higly Hisatisfactory Satisfactory Unsatisfactory unsatisfactor

(]) V ) LI )

ED m FO E

12

TABLE 2 - RELATED BANK LOANS/CREDITS

PrecedingOprdn

15905IP-Economic Removal of physical constraints 1985 CompletedRehabilitation and Modernization

Following operations

2343-STI-Health and Educadon Help reverse the decline in health and 1992 Under Implementationeducation and support malaria eradication

TABLE 3 - PROJECT TIMETABLE

Identification (Executive Project Summar)

Preparation 10129/90 10129190

Pre-Appraisal /Appraisal 03/08//91 03/14/91

Negotiations 06/04/91 06104/91

Board Presentation 06/91 06/27/91

Signing 08/91 01/10/92

Effectiveness 10/91 12/18/92

Project Completion 12/31/96 12/31/97

Loan Closing 12/31/96 12/31/97

13

TABLE 4 - LOAN/CREDIT DISBURSEMENTS

(in US$ millions)

June 1992 0.00 0.80 0

June 1993 0.69 1.90 36

June 1994 3.58 3.10 115

June 1995 5.17 4.70 1

June 1996 5.71 6.00 95l

June 1997 6.17 6.00 103

December 1997 6.34 6.00 106

March 1998 6.00

TABLE 5 - KEY INDICATORS FOR PROJECT IMPLEMENTATION

Infrastructure Rehabilitation and Constructloil

Mini- Hydroelectric plant (Project Expanded) 1 1,700 1 1,700. Secondary Roads I 2,400 1 2,400Upgrading Low Income Settlement 1 1,300 1 1,990Rehabilitation of Central Hospital 1 150 1 150Small Priority Works 8 800 8 700Sites & Services (Vila Femanda) 1 200 1 250

Subtotal 13 6,550 13 7,190Community Facilities

Water Supply for small communities 2 50 2 24Community infrastructure (Boa Entrada) 1 40 1 76

Subtotal 3 90 3 100Studies and sub-project Preparation

Evaluation Hydro Potential 1 50 1 110Bridge Rehab. Needs 1 30 1 N/ACapacity Building Seminar for Small Contractors 1 30 1 20Community Development 1 60 1 60National Electrification 1 250 1 250Electrification Needs Principe 1 120 1 100Design Contadora Hydro Access Road 1 154 1 40Design Priority Street Repairs 1/ 1 90 1 20Design Secondary Roads 1/ 1 281 1 100Design Rehab. Airport Principe I N/A 1 50Design Rehab. Port PrHncipe I N/A 1 20Consulting Services Preparation Multi III 1 242 1 350

Subtotal 12 1,327 12 1,120Institutional Development

Cadastal and GIS Planning- MESA 1 51 1 57

Housing Policy and Strategy- MESA 1 50 1 92

Institutional Support and TA for INDES 1 210 1 760

Subtotal 3 311 3 909Totals 31 8,278 31 9,319

1/ Scope of design reduced as Multi III canceled.

14

TABLE 6A - PROJECT COSTS

(US$ Millions)

Start-up sub-projects

Mini Hydroelectric Plant (c) 1/ 0.10 0.80 0.90 0.26 1.40 1.70

Secondary Roads 0.20 2.20 2.40 0.20 2.22 2.42

Upgrading Low Income Settlement (c) 0.40 0.85 1.25 0.19 1.80 1.99

Small Priority Works 0.20 0.60 0.80 0.15 0.65 0.80

Demand-Driven Projects

Sites and Services (Vila Fernanda) 2/ 2/ 2/ 0.05 0.20 0.25

Water Supply (Sao Marcal) 2/ 2/ 2/ 0.00 0.02 0.02

Community Facilities 2/ 2/ 2/ 0.02 0.06 0.08

Rehabilitation of Sao Tome Hospital 2/ 2/ 2/ 0.05 0.10 0.15

Studies

Evaluation Hydro Potential (c) 2/ 2/ 2/ 0.00 0.11 0.11

Bridge Rehab. Needs 2/ 2/ 2/ N/A N/A N/A

Capacity Build. Sem. for Small Contractors 2/ 2/ 2/ 0.00 0.02 0.02

Electrification needs Principe (c) 2/ 2/ 2/ 0.00 0.10 0.10

National Electrification (c) 2/ 2/ 2/ 0.00 0.25 0.25

Sub-project preparation

Design Contadora Hydro Access Road 2/ 2/ 2/ 0.00 0.04 0.04

Design Priority Street Repairs 2/ 2/ 2/ 0.00 0.02 0.02

Communities Facilities 2/ 2/ 2/ 0.02 0.04 0.06

Design Secondary Roads 2/ 2/ 2/ 0.00 0.10 0.10

Design Rehab. Airport Principe 2/ 2/ 2/ 0.00 0.02 0.02

Design Rehab. Port Principe 2/ 2/ 2/ 0.00 0.05 0.05

Preparation Multisector m 2/ 2/ 2/ 0.10 0.25 0.35

Unallocated (for Misc. Sub-projects) _---=--- ---

Subtotal 0 0.90 5.00 5.90 1.19 7.55 8.74

Institutional Support - MESA 0.05 0.27 0.32 0.00 0.15 0.15

Oper. Expenses Support- INDES 0.45 0.13 0.58 0.14 0.51 0.65

Technical Assistance - INDES 0.20 0.40 0.60 0.00 0.25 0.25

Subtotal 0.70 0.80 1.50 0.14 0.91 1.05

Total 1.60 5.80 7.40 1.33 8.46 9.791/ Project scope expanded2/ Not identified at appraisal(c) Co-financed

15

TABLE 6B - PROJECT FINANCING

(IYS$ Millions)

IDA - 6.0 6.0 - 6.50 6.50

Government 1.6 - 1.6 0.43 - 0.43

INDES 0 - 0 0.14 - 0.14

Cofmancing - 0 0 - 2.26 2.26

TOTAL: 1.6 6.0 7.6 0.57 8.76 9.33

TABLE 7 - ECONOMIC COSTS AND BENEFITS (PRE-APPRAISED SUB-PROJECTS)

31 psa

1. Mini- Hydroelectric plant 17% 19.0%

2. Roads greater than 12% Not Available

3. Upgrading Low Income Not Available Not AvailableSettlement

4. Small Priority Works Not Available Not Available

16

TABLE 8- STATUS OF LEGAL COVENANTS

Credit 3.01(b) C 01/92 The Borrower shall enter into a Subsidiary CompliedAdministration Agreement with INDES underterms and conditions acceptable to theAssociation

Credit 3.02 C 01/92 Procurement of the goods, works and services Compliedrequired for the Project and to be financed outof the proceeds of the Credit shall be governedby the provisions of Schedule I to the ProjectAgreement.

Credit 3.04 C 01/92 The Borrower shall not permit INDES' Complied.Statements of Policies to be modified withoutthe prior consent of the Association.

Project 2.04 C 01/92 INDES shall manage each sub-project .in Complied.Agreement accordance with the provisions of Schedule 2 of

the Project Agreement.

Project 2.05(a) C 01/92 INDES shall, at the request of the Association, Complied.Agreement exchange views with regard to progress of the

Project, the performance of its obligationsunder the Project Agreement and under theSubsidiawy Agreement and other mattersrelating to the Purposes of the Credit.

Project 2.05(b) C 01/92 INDES shall promptly inform the Association Complied. INDES informed theAgreement of any condition which interferes or threatens to Association of the lack of performance

interfere with the progress of the Project, the of its Board of Directors, and with IDAaccomplishments of the purposes of the Credit took actions to try to correct thisor the performance by INDES of its obligations problem. An amendment to INDES'under the Project Agreement and under the Decree Law (Decreto Lei 19/89 andSubsidiary Agreement. 20/89) was approved by the

Govemment on December 7, 1994, toenable INDES to operate more freely.The change was only partiallysuccessful in reducing interference.

Project 3.01 C 01/92 INDES shall carry on its operations and Generally complied. However,Agreement conduct its affairs in accordance with sound management decisions were hampered

administrative and managerial practices under by the non-performance of the Board ofthe supervision of qualified and experienced Directors. This situation was correctedmanagement assisted by competent staff in in the last 2 years.adequate numbers.

Project 3.02 C 01/92 INDES shall at all times operate and maintain CompliedAgreement its plant, machinery equipment and other

property and make the necessary repairsthereof.

Project 3.03 NC 01/92 INDES shall take out and maintain with Not complied. The only insuranceAgreement responsible insurers, or make other provision company in STP is a bankrupt

satisfactory to the Association for insurance parastatal company. Private insuranceagainst such risks and in such amounts as shall companies cannot operate in thebe consistent with appropriate practice. country. INDES' attempts to obtain

insurance abroad proved to beunfeasible because of the highpremiums.

_ . ..~-

17

Project 3.04(a) C 01/92 INDES shall conduct its operations in CompliedAgreement accordance with its Statements of Policy and

shall not modify such Statements without priorconsent of the Association.

Project 3.04(b) C 10/91 INDES shall modify not later than 31 Oct. 1991 Complied.Agreement its Operational Procedures to include

assessment of environmental considerations ina manner acceptable to the Association.

Project 3.05 NC 12/91 For purposes of Part B of the Project, INDES Not applicable. In agreement with theAgreement shall eriploy not later than December 31, 1991, Association, the contracting of such

an agricultural specialist to assist in preparing specialist was canceled given that theand supervising INDES' agriculture sub- institution was (following theprojects amendment of its statutes no longer

involved in direct lending to the privatesector. Instead, a Civil Engineer washired to assist in the monitoring ofinfrastructure sub-projects.

Project 3.06 NC 10/91 For purposes of Part B of the Project, INDES Not applicable as the three yearAgreement shall, by October 31, 1991, and each October horizon proved too long. Training and

31 thereafter present to the Association a use of consultants was discussed androlling three year training program for its staff agreed with supervision missions on afor the succeeding three years and an action year by year basis.plan for the succeeding calendar year foremployrnent of short-term consultants to fillany existing gaps in INDES' operationalcapabilit:ies.

Project 3.07 C 12/91 INDES shall fully implement not later than Not fully complied within the time-Agreement December 31, 1991, all tasks required under the frame set. Improvements in

action plan, to improve its loan and grant accounting and record keeping, foradminislration, its accounting and record example, only took place after thekeeping practices and its management deadline.information systems.

Project 3.08(a) C 11/91 Beginning on November 30, 1991, and not later Not fully complied. INDES carried outAgreement than each November 30 thereafter, for the sub-projects pre-identified during

duration of the Project, INDES shall furnish to preparation of the Multisector n Ithe Association for comments and approval: (i) Project. However, demand driven sub-its business plan for the following calendar projects were discussed in detail withyear, including a list of the proposed sub- supervision missions prior to approval.projects together with a summary description INDES subsequently requested formalthereof, the financing required; and, (ii) its no-objections from the Association forfinancing projections for the succeeding three all demand-driven projects. INDESyears. carried out periodically short-term and

long-term financial projectionsincluding detailed cash-flowprojections. These are reviewed andadjusted as required during thesupervision missions.

Project 3.08(b) C 11/91 INDES shall carry out business plans as (see above comment)Agreement approvecl by the Association.

Project 3.09 C 01/92 INDES shall, following the end of each six- Complied.Agreement month pe:riod, submit to the Association a

report describing its operations.

18

Project 3.10 C 01/92 INDES shall carny out no earlier than Not fully complied. A review ofAgreement September 30 and no later than December 31, performance of INDES and the Project

1993, jointly with the Association and the was carried out in the context of theBorrower, a mid-term review of the progress preparation of a Third Multisectormade in carrying out the Project. Project. It was at this point clear that a

significant change in INDES' structurewas in order, by converting INDESinto an AGETIP-type institution. Thisconcept was rejected by theGovernment in power at that time

Project 4.01(b) C 01/92 INDES shall: Complied with all clauses.

Agreement (i) have its records , financial statements foreach fiscal year audited, in accordance withappropriate auditing principles by independentauditor acceptable to the Association; (ii)fumish to the Association as soon as available,but not later than six months after the end ofeach such year: (A) certified copies of itsfinancial statements for each such year as soaudited; and (B) the report of such auditors ofsuch scope and in such detail as the Associationshall have reasonably requested; and (ii) fumishto the Association such information concemingsaid records accounts and financial statementsas well as the audit thereof as the Associationshall request.

Project 4.01 (c)(i) NC 01/92 For all expenditures with respect to which Generally complied. However, whenAgreement withdrawals from the Credit Account were the Govemment ffiled to make its

made on the basis of statements of expenditures counterpart contributions, INDES usedINDES shall: (i) maintain or cause to be Bank fund from the Special Accountmaintain in accordance with sound accounting for operational expenditures whichprinciples records and accounts reflecting such should have been financed by theexpenditures. Govemment.

Project 4.01(c)(ii) C 01/92 INDES shall: ensure that all records evidencing PendingAgreement such expenditures are retained until at least one

year after the Association has received the auditreport for the fiscal year in which the lastwithdrawal was made.

Project 4.0 1(c)(iii) C 01/92 INDES shall enable the Association CompliedAgreement representatives to examine such records.

Project 4.01(c)(iii) C 01/92 INDES shall ensure that such records and CompliedAgreement accounts are included in the annual audit

referred to in para. 4.0 1(b) and that the report ofsuch audit contains a separate opinion by saidauditors as to whether the statements ofexpenditure submitted during such fiscal yeartogether with the procedures and intemalcontrols involved in their preparation can berelied upon to support the related withdrawal.

- . - . =. .... .. ....

19

TABLE 9 - BANK RESOURCES: STAFF INPUTS

Through Appraisal 28.0 73.0

Appraisal-Board 8.6 19.8

Board-Effectiveness 7.8 22.6

Supervision 32.4 119.3

Completion 5.7 19.6

Total 82.5 254.3

TABLE 10 - BANK RESOURCES: MISSIONS

Sde rtisication 05/92 1 8 ________10190 1 _ m

Srparation 10190 =91 1Pre-Appraisal/ Appraisal 03/91 2 1Tm, E

Supervision 05/92 1 8 FA 2 I 2

Supervision 09/92 31 15 FA 2 I 2

Su ervision 02/93 1 :10 FA 2 5_ 2

Supervision 03/93 1 7 D

Supervision 06/93 1 .6 FA 2 S 2

Supervision 081/93 615 FA 2 I 2

Supervision 01/94 1 15 FA I I

Supervision 06/94 I 116 FA S S

Supervision 01/96 2 115 1TIL, FA S S

Supervision 10196 I 7 FA S S

Supervision 05/97 1 7 FA S S

Supervision 10/97 1 7 FA S S

- Last SPN Mission 1 12/97 - I 7 m TTsL S

CON - Consultant I -Minor ProblemEC - Economist 2 -Moderat ProblemEN Engineer 3 -Major ProblemnFA - Financial Analyst S - SatisfactoryPO - Project OfficerTTL - Task Team LeaderD Disbursement Officer

Annex 1Page I of 2

DEMOCRATIC REPUBLIC OF SAO TOME AND PRINCIPE

GOVERNMENT COMMENTS ON THEIMPLEMENTATION COMPLETION REPORTFOR THE SECOND MULTISECTOR PROJECT

CREDIT 2280-STP

The following conclusions can be drawn from an analysis of the document prepared by the World Bankon the programs and projects implemented under the Second Multisector Project (SMP):

a) The SMP was executed very satisfactorily, as is demonstrated by the fact that most subprojectswere implemented on schedule, while the Credit was also fully disbursed, i.e. there were no componentsthat were not executed. The experience derived from implementation of the First Multisector Project wasa determining factor in the improved management of the SMP.

b) The SIF, which in August 1994 became the INDES, consolidated its capital, skills, prestige andconfidence vis-a-vis the Government, World Bank and other development partners, such as the AFD andthe OPEC Fund, which financed projects for execution by INDES in the total amount of $4,515,000.

The following points should, however, be made:

1. The conversion of the SIF into INDES was a gain in itself: its management structures wereslimmed down and made more flexible, leading to more autonomous and efficient management. The SIFManaging Director (Director of INDES) became Chairman of the Board of Directors, which ensured thatthat body met regularly, as indeed it does, unlike what happened before.

Nonetheless, for lack of political will at the right time, INDES lost a great opportunity to adaptmore effectively to the "winds of change." By not allowing INDES to become an AGETIP-typeorganization (a model that has been a great success in many developing countries), the Government in1995 in practice damaged the agency; its action not only resulted in the cancellation of the ThirdMultisector Project, which at the time was at an advanced stage of preparation (SAR completed), but hadan immediate financial impact on INDES, which had advanced $446,155.15 from Multisector I andMultisector II for the preparation of Multisector III.

It should be pointed out that the present Government has already indicated on a number of occasions itsgreat readiness to reopen the AGETIP issue, and sets no preconditions for resolving the matter. It wouldtherefore be beneficial if the Bank clarified whether it is still possible to turn 1NDES into an AGETIP-type agency.

2. Para. 19 of the ICR mentions the salary adjustments in INDES decided by its Board on 4/28/95.The ICR's criticisms are not on target, in that one very important fact is omitted: the salary adjustmentsreceived the Bank's "no objection" in fax WBKS3764 FAXX2432 of 5/25/95, which means that theprovisions of the Credit Agreement were complied with. The rejection of the increases by the thenGovernment was incomprehensible and entirely inappropriate, since the Government was represented onthe Board of INDES, which unanimously approved the salary increases.

Annex 1Page 2 of 2

The ICR also mentions that in 1991 the Managing Director of SIF was removed for political reasons. Onthis point, we reaffirm that he left at his own request for the reasons that he gave at the time in hisresignation request, a copy of which is in the Bank's files.

4. The replacement of the Managing Director of INDES at the end of 1995 without priorconsultation with the Bank was a serious violation of the Credit Agreement. However, the Bank, normallyso quick to pronounce on the legality of Borrower actions, remained remarkably silent in this case; asilence that first allowed an illegal action and subsequently validated it. This was an unfortunateproceeding by the Bank, and it had an immediate adverse impact on INDES, since the signal sent wasthat, in certain circumstances, the law (the agreernent between the parties) could be broken with impunity.

5. As part of several measures taken by its ]Board to reduce operating costs, INDES reduced its staffby releasing 6 people between March 1996 and May 1997. This significant step resulted from the declinein the agency's activities as a consequence of the cancellation of the Third Multisector Project.

6. The ICR does not comment on the feasibility of a new INDES program that could result from thetransfer to INDES of the balance of the funds from the Health and Education project, to finance malariaeradication projects. This possibility is now being studied by the relevant authorities at the Bank; all theinformation requested by the Bank has been provided and the Government will therefore await theoutcome, which it trusts will be favorable, especially as the Bank has given signs in this sense.

Lessons To Be Drawn

- -INDES is in a unique position as regards its capacity to manage multisectoral projects,particularly in the infrastructure and social areas; efforts must therefore be made to continue its existence.

- Since it is apparent that the best form of management for INDES would be an AGETIP-typestructure, steps should be taken to effect this change.

- A Credit Agreement should be scrupulously respected. Violations of any of its provisions by anyof the contracting parties should not be passed over in silence, otherwise the entire Agreement isundermined.

To sum up:

The Second Multisector Project achieved its objectives and had a direct, immediate and positive impacton the lives of the beneficiaries as a result of the improvements made through the Riboque/Lucumiprojects, the rehabilitation of the Guegue hydroelectric plant, rehabilitation of secondary roads, priorityworks and pilot projects.

The project beneficiaries are now living in better conditions, and this is unquestionably a matter of greatpride to us all.

Annex 2Page 1 of 2

AIDE-MEMOIRESAO TOME, AND PRINCIPE

SUPERVISION MISSIONSECOND MULTISECTOR PROJECT

December 9 - 12, 1997

1. Mission Composition and Objectives A World Bank supervision mission led by Mr. LesliePean visited Sao Tome in order to study procedures for allocating the remaining funds earmarked for theMalaria Eradication component of the Health and Education Project (Credit 2343), totaling $3,100,000,as follows: Ribogue/Lucumi Urban Sanitation sub-project, US$539,000 (Second Multisector Project);Consolidation of storm water run-off works at Quinta de Sto. Antonio, $161,000 ; and Ponta Mina, VilaMaria S. Gabriel, Pantufo and Praia Melao drainage works, $2,400,000. The mission coordinated itsactivities with the mission for Health and Education Project, led by Ms. Tonia Marek, which was also inthe country.

SUMMARY OF THE WORK PERFORMED BY THE MISSION

2. After considering the Government's request for the reallocation of surplus funds from the Healthand Education Project (see Annex 1) and confirming that some US$3,500,000 were available for thispurpose, the mission conveyed IDA's non-objection in principle to Mr. Acacio Bonfim, Minister ofFinance and Planning. The Minister gave the mission a letter addressed to Mr. Hasan Tuluy (see Annex2) asking that the Malaria Eradication component be extended for one year, along with an Action Planand a schedule for implementation of sub-projects by INDES indicating the complementarity between thelatter and the Malaria Control project.

This Aide-memoire describes the legal framework and defines procedures to facilitate theexecution of the activities mentioned in para. 1 above. The background to this process is set out in Mr.Tuluy's reply to the Minister (see Annex 3). The mission confirmed that funds were available to cover thecosts of the sub-projects referred to above, and asked that a contract management agreement for thispurpose between INDES and the Ministry of Health be prepared and submitted to the Bank.

3. The mission visited Vila Maria, S. Gabriel and S. Marcal, in which drainage works have beenimplemented under the Health Project, and noted that adjacent areas have not benefited from suchprojects despite their dense population and the incidence of malaria. Consequently, drainage works innew areas such as Ponta Mina, Pantufo and Praia Melao are among the sub-projects which theGovernment will undertake under the Malaria Eradication project.

The particular feature of these works is that they have been undertaken in a swampy part of thecity in which the houses have been built on columns because of the accumulation of water during therainy season, as a result of the lack of main drainage channels. This water creates a favorableenvironment for mosquitoes, and hence for malaria, in an area which it is estimated has some 20,000inhabitants.

4. The mission met with the INDES technical team working on the Riboque/Lucumi project and theURRIL coordinators to check on the following aspects of project implementation:

a) preparation of specificationsb) updating of the execution schedule

Annex 2Page 2 of 2

5. The mission noted that the original execution schedule was no longer current, since the first steps(preparation of bidding documents) had been pllanned for October/November. To enable the sub-projectsto be implemented in accordance with the revised schedule (see Annex 3) and in order not to conflict withthe spirit of the two Credit Agreements (Credit 2280, Multisector Project, and Credit 2343, Health andEducation), which close on December 31, 1997, the mission decided, in conjunction with the Minister ofFinance and Planning and the mission for the Health and Education Project, to extend the closing date ofthe Malaria Eradication component of Credit 2343 until December 31, 1998.

6. Next Steps

a) After discussion with the Disbursements Division, the mission will inform INDES fromWashington regarding the possibility of opening a special account with an advance of 15% of the totalcost of the works to be executed. The mission will also let 1NDES know whether disbursement requestssigned by its Executive Director can be submitted directly to Washington.

b) Credit 2343 will close as planned on December 31, 1997, except for the Malaria Eradicationsub-project; in this connection, the World Bank will send a formal "non-objection" in response to theGovernment's request for the extension referred to above, and the component will remain open foranother 12 months until December 31, 1998, with a total budget of $3,100,000, as per para. I above.

c) In the contract management agreement the Ministry of Health will authorize INDES to utilizethe proceeds of the Credit directly, as per paraLs. 1, 2 and 5 a), to facilitate implementation of the sub-projects mentioned above.

d) INDES will forward the management agreement made between itself and the Ministry ofHealth.

7. Supervision of the implementation of the sub-projects, namely Riboque/Lucumi urban sanitation,and consolidation of storm water run-off works in the districts of Quinta de Sto. Antonio and PontaMina, Vilka Maria, S. Gabriel, Pantufo and Praia Melao, will be performed by Mr. Leslie Pean, taskmanager for the Second Multisector Project.

Sao Tome, December 12, 1997.

For INDES For the Mission

Anastacio Oliveira Leslie Pean Tonia MarekActing Executive Task Manager Task ManagerPresident

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