Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 10628-BU

STAFF APPRAISAL REPORT

BURUNDI

AGRIBUSIESS PRO4TTION PROJ3CT

JULY 21, 1992

N I 'RF I CHE C'OPYheport No :IO 6258--PJ]r L.i-+r: FAUPUSIP2;s-

I(9l'RCMOT'N PRO)JECTExt. : 4255 1v c J i09?7 Dept. :Ah AFP

Agriculture Operation DivisiOUSouth-Central and Indian Ocean Departimelat

This document has a restricted disttibutOn and myis be used by rcipients only in the performancetheir f dties. Its contents ,*Y not Otbefwb

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Currency Enuivalents

Period Average

Currency unit = Burundi Franc (FBu)1992 USS1.00 FBU 200 (as of March 1992)1991 US$1.00 = FBu 181.51990 US$1.00 = FBu 1711989 US$1.00 = FBu 1591988 USS1.00 = FBu 1401987 US$1.00 = FBu 124

WEIGHTS AND MEASURES

Metric International Standard System

GLOSSARY OF ABBREVIATIONS

ADAP Association pour le developpemcntagro-pastoral (Farmers' professional association)AfDB = African Development BankAGCD = Administration Gdnerale de la Coopdration au Developpement (Belgian)APDF = African Project Development FacilityAPEE = Agence de promotion des echanges exterieurs (Export Promotion Agency)BCC = Burundi Coffee CompanyBEST = Burundi Enterprise Support and Training Pr( lectBNDE = Banque nationale de d6v-loppement economique (Development Bank)BTC = Burundi Tobacco Comp:.nyCCCE = Caisse Centrale de Coop6ration Economique (French Aid Agency)CCIB = Chamber of Commerce and Industry of BurundiCOGERCO = Compagnie de gdrance du coton (Cottun Company)COTEBU = Complexe textile dt; Burundi (Textile Company)EAP = Environmental Action PlanEC = European CommunitiesEB = European Investment BankFMA = Fund Management AgencyPMU F Pund Management UnitICP = Interministerial Committee for PrivatizationIFC = International Finance CorporationMCI = Ministry of Commerce and IndustryMOAL = Ministry of Agriculture and LivestockNGO - Non-governmental organizationOCIBU = Office du Cafe du Burundi (Coffee Board)OTB = Office du the du Burundi (Tea Board)PE Public EnterprisePA = Project AdministratorPSD Private Sector DevelopmentRDC Regional Development CompanySAC Structural Adjustment CreditSAE Service d'appui aux exportations (Export Promotion Service)SCEP Service Charge des Entreprises Publiques (Public Enterprises Reform Office)SEM SociEe6 d'economie mixte (Mixed-capital Company)SIDI Societe d'investissement et de ddveloppement international (Internatioral Investment

and Development Company)SODECO = Societe de deparchage et de commercialisation (Hulling and Marketing Company)SOCESTAL = Societe de gestion des stations de lavage (Washing Stations Managernent Company)SOSUMO = Societe sucriere du Mosso (Mosso Sugar Company)SRDI = Societe rdgionale do developpemcnt de l'lmbo (Imbo Regional Development

Company)SSE/APEX Small-scale Enterprise ProjectTC Treasury CertificatesTEC = Technical Evaluation CommissionsUSAID = United States Agency of International DevelopmentVAT = Value-added Tax

GOVERNMENT OF BURUNDI FISCAL YEAR

January I to December31

FOR OMCIL USE ONLY

BLRUNDI

AGRIBUSINESS PR0MC0Q

D. Organization and Management ............................... 15E. Reporting and Monitoring .................................. iSF. Estimated Costs and Financing Plan ............................ 16G. Project Financing ...................................... 18H. Procurement ............... ........................ 19I. Disbursements ....................................... 20J. Accounts and Audits ...................................... 21K. Environmental Inpact ..................................... 22

V. BENEFITS JUSIfFICATION AND RISKS ............. ............... 22A. Benefits ............................................. 22B. Risks ........................................... 23

VI. AGREEMENTS REACHED AND RECOMMENDATIONS ....... .......... 23A. Agreements Reached . .................................... 23B. Agreements reached at Negotiations ............................ 24C. Conditions of Effectiveness ........... ...................... 25D. Conditions of Disbursement ........... ...................... 26

TABLES IN MAIN TEXT

Table 1: Burundian Companies by Sector and Management Type ................... 5Table 2: Summary of Project Cost . .................................... 17Table 3: Project Financing Plan ....................................... 8Table 4: Procurement Method . ...................................... 19Table 5: Disbursements ........................................... 21

ANNEXES

Annex I Declaration de politique sectorielle relative I l'agrobusinessAppendix 1 Proposed Draft Policy Matrix

Annex 2Appendix 1 Project Cost SummaryAppendix 2 Summary Accounts by YearAppendix 3 Financing Plan by Project ComponentAppendix 4 Project Components by Year

Annex 3 Procurement MethodDisbursement Table

Annex 4 Agribusiness Development FundPotential Demand

Annex 5 Supervision PlanAnnex 6 The Public Agro-Industries SectorAnnex 7 The Private SectorAnnex 8 Key IndicatorsAnnex 9 Institutional ArrangementsAnnex 10 List of Documents in Project File

MAP

IBRD 23199

BUR-UNDI

AGRIBUSINESS PROMOTION PROJECT

Credit and Project Summary

Borrower: Republic of Burundi

AmQoun¢: SDR 2.3 million (US$3.096 million equivalent)

Terms: Standard IDA terms, with 40 years maturity

Project Description: The project is designed to accelerate a private sector supply response to theGovernment's more liberal policies in the area of agro-processing. Itsobjectives are to increase and diversify agricultural exports and inducegreater efficiency in agricultural production, processing and marketing.The project will include: (i) the privatization of government owned agro-industries in the tea, sugar, cotton and rice sub-sectors; and (ii) theestablishment of an agribusiness development fund, which will financeprofessional training and commercial services to private entrepreneurs andprofessional organizations, for market development, on a matching fundbasis.

Benefits and Risks: The proposed project will complement the recently signed Third StructuralAdjustment Credit (SAC IL' and Private Sector Development Project byeliciting a supply response in a key sector of the economy. It will improvethe efficiency and viability of existing agro-industries and contribute toexport diversification and private sector development. The mechanisms tobe established under the project for private sector promotion are innovativein Burundi, but they have been tried successfully in other countries. Theachievement of the project's objectives depends on the success of reformswhich the government is undertaking in the financial sector and of theprivatization policy. External risks include setbacks in the government policyon national unity that could delay privatization of industries. Any seriousdisruption would affect new investments and diminish the return to them.

Estimated Project Cost (US$ million)

Local Foreign Total

Public Sector Privatization 0.3 1.5 1.8

Agribusiness Development Fund 1.2 2.1 3.3

Project Administration Unit 0.3 0.4 0.3

Contingencies 0.3 0.5 0.8

TOTAL Project Cost 2.1 4.1 6.2

ii

FinaningPlan

Amounts Percentages(US$ mill on'

Government 0.3 4Private Enterprises 1.4 23IDA 3.1 49Belgium 0.1 2EC 1.2 20CCCE 0.1 2

TOTAL 6.2 100

Estimated Disbursements

IDA Fiscal Year(US$ million)

FY 93 94 95 96 97 98 99

Annual 0.2 0.4 0.6 0.7 0.6 0.5 0.1Cumulative 0.2 0.6 1.2 1.9 2.5 3.0 3.1

; ¢tKf R=m: not calculated

MM IBRD 23199

AGRIBUSINESS PROMQTON PROJECT

I. INTROL)UCT, 10

1.1 Bunrwldi is a small landlocked country in Central Africa. Its per capita GDP is about US$210(1990). With a population of about 5.5 million growing at 3 percent per annum, Burundi has thesecond highest population density in Africa (193 persons/square kilometer). Almost 94 percent ofthe population lives in mural areas. The country has limited resources other than relatively fertileagricultural land. Identified minerals include nickel, phosphate, petroleum, vanadium and comealluvial gold, but their exploitation has not yet been proven to be economically viable.

1.2 Agriculture is the predominant activity, contributing half of GDP, 90 percent of employmentand 90 percent of export earnings. It is largely subsistence oriented. The main export crop is coffee,which on average accounts for about 80 percent of total exports. Burundi is one of the few Africancountries that is self-sufficient in food; per cap a foodcrop production is stable and, at least in theshort term, food security is not an issue. However, seasonal shortages do occur, and serious childmalnutrition can be observed in certain regions. The secondary sector (mining and manufacturing)is small, accounting for only 14 percent of GDP and 5 percent of exports in 1990. By comparison,the public sector dominates manufacturing, energy and infrastructure and contributes half of thecountry's formal employment. As a landlocked country, Burundi is vulnerable to transportationproblems in neighboring countries. Although progress has been made in recent years to improvephysical infrastructure and to simplify transit fornmalities, transport costs to and from Indian Oceanports remain high. Air transport is unreliable and its high cost is a handicap to Burundi's exportcompetitiveness.

1.3 Since the onset of the Third Republic, which came to power following a military coup inSeptember 1987, the country has been gradually moving toward a more liberal economic and politicalregime. A national policy of reconciliation and unity between the country's major ethnic groups hasbeen largely successful so far. There have been outbursts of violence in November 1991 and anaborted coup d'etat preceded the referendum on the democratic constitution in March 1992.However, none of the disturbances has succeeded in disrupting the national consensus towardsopening up the political system.

1.4 Burundi has been implementing an adjustment program since 1985. During the 1986-90period, stabilization achievements were affected by world coffee prices. World prices of coffee beganto decline in 1987 and fell on average by 15 percent each year during the period. Burundi's foreignexchange loss from coffee exports due to this price decline amounted to US$186 million in those fiveyears. Per capita GDP growth has remained slightly positive despite the coffee decline and there hasbeen a small but encouraging export response by the private sector, leading to a modest growth inthe total volume of non-coffee exports. Under the adjustment program, stabilization meesures wereintroduced and steps taken to bring about stuctural changes: the exchange rate was devalued and hassince been maintained at a competitive level through subsequent small devaluations; most industrialprices were decontrolled, the tariff structure was rationalized, trade policy was liberalized andsignificant budgetary reforms were introduced.

1.5 The adjustment program has not yet stimulated a strong supply response, partly because ofmixed signals given by the government to the private sector and because of rigidities still prevailingin the public enterprise (PE) sector. Even though the elaborate system of controls regulating privateactivity has been eased, the private sector hesitated to undertake productive investments because ofthe dominant position of the PE sector. The critical mass of effective reforms needed to elicit a

2

sustainable supply response by the private sector appears to be in place following the negotiation andapproval of the Third Structural Adjustment CredJt (SAC III). Tne government has agreed on anambiticus program of PE reform which includes privatization of capital/management of about 70percent of the government's portfolio.

1.6 The proposed agribusiness promotion r,oject has been designed to help governmentimplement the reform in agro-industries. It will provide technical expertise to the government forthe privatization of several important PEs (i.e. in tea, cotton, sugar, rice). At tlse same time it willstrengthen and promote private entrepreneurs in agribusiness activities. In keeping with Bankobjectives, this project has been designed in close consultation with other donors to ensure that itcomplemented their on-going sector assistance.

1.7 In parallel, policy and fir- ^ing constraints are being tackled with Bank support through aseries of lending operations. The ongoing Agricultural Services Sector Project (Cr. 2024-BU), whichis improving services delivery at farm level, the Small Scale Enterprises Project (SSE/APEX-Credit1889-BU), and the Coffee Sector Project (Cr. 2123-BU) which are providing funds for investments.SAC-TI (Cr. 1919-BU) and the Small Scale Enterprise Project (SSE/APEX) have supportedimprovements in financial sector policies, including liberalization of interest rates, successfullaunching of an auctioii market for Treasury Certificates, and important steps towards rationalizingmonetary and credit policy regulations and instruments. Further reforms in the financial sector willbe supported by the recently signed Private Sector Development Project (Cr 2359-BU). Theproblems of the Public Enterprise (PE) sector have begun to be tackled under a Technical AssistanceProject for P._ic Enterprise Reform and Economic Management (Cr. 1795-BU) and the CoffeeSector Project (Cr. 2123-BU).

II. SECTOR BACKGROUND

2.1 A recent Bank review of the agricultural sector " highlighted the predominant role ofgovernment in the sector and the large inefficiencies of public monopolies as key constraints to astrong agricultural supply response. In the 1970s and early 1980s many public enterprises andparastatals were created, each with a de facto monopsony in a key sector. Complex administrativeand currency controls gave the government wide discretionary powers over business activity. rhishas limited private sector activities to agricultural production and trade, while the public sector hashad a quasi-monopolistic role in the processing and export of primary commodities andmanufacturing, generating half of the country's formal c; iployment. A total of 968 formal private-sector firms have been identified in a recent study of the Burundi private sector, of which 200 newenterprises registered in 1991, following simplification of business licensing procedures. About 70percent are in trade and services and 30 percent in industry. The private business sector is organizedaround the Chamber of Commerce and Industry of Burundi (CCIB), of which industry, agriculturaland trade associations, are members. CCIB, a private non-profit organization, is now relativelyautonomous, as government's control has been significantly diminished.

1' Private SectorDevelopment in Agriculture: An Agricultural Sector Memorandum, July 1992.

3

A. The Public Agro-lndustries

1. Jrodudton

2.2 Public corporations typically have a turnover and capital investment ten or more times greaterthan their private counterparts. Many early public investments were planned for a market equivalenttwo or more times Burundi's total consumption. The largest public corporations, in terms of grossreceipts in 1990, are in the coffee, tea, cotton, sugar and rice sub-sectors. In coffee, there is theBurundi Coffee Compary (BCC), for export marketing, with FBu 9.1 billion of sales (making it thelargest PE in the country); and Office des Cultures Industrielles du Burundi (OCIBU), for coffeeprocessing, with FBu 7.25 billion. In tea, there is the Office du The du Burundi (OTB) with FBu1.4 midlion. In seed-cotton processing, there is the Compagnie de Gerance du Coton (COGERCOMwith FBu 1.1 billion, and in sugar production and procsssing, the Societ6 Sucriere du W.L v(SOSUMO), with FBu 845 million. In rice processing there is the Societe regionale dedeveloppement de l'Imbo (SRDI) with FBu 576 million). These companies are also the chief sourceof cash income for some 600,000 farmers growing coffee, tea, cotton or rice, or 60 percent of thetotal farming population.

2.3 OTB currently employs about 500 permanent staff and eight expatriates to manage four teafactories, financed by the EC and the European Investment Bank (EIB) and a fifth factory, CCCE-financed, which will start operations in 1992. Some 60,000 smallholder farmers provide on average60 percent of production. The remainder is produced by the tea estates. A feasibility study for anew factory, Remera, is currently financed by Belgium. COGERCO employs 200 permanent staffand two expatriates to run a ginning mill, operating at 40 percent capacity and financed by CCCE.The company provides direct agricultural services to some 20,000 smallholder farmers. COGERCOis also implementing a CCCE-fnanced cotton development project in the Mosso region. SOSUMOis the most capital-intensive public agro-industry, financed mainly by loans from AfricanDevelopment Bank (AfDB), Arab Bank for Economic Development in Africa (ABEDA) and the AbuDhabi fund, and has assets amounting to a book value of FBu 10,190 million (US$51 million). Itemploys 370 permanent local staff and 15 expatriates to run a sugar refinery, which currentlyproduces 14,000 tons of sugar. SRDI's main activity is the operation and maintenance of 3,350 haof irrigation schemes and supply of agricultural services to some 10,000 smallholders farmers. Inaddition, SRDI runs a rice mill, buys and processes 80 percent of the 12,000 tons of paddy marketedin 1991.

2. Status and Perfoiniance

2.4 These corporations generally display similar characteristics with regard to their status andper,formance. First, they lack managerial autonomy and face chronic political interference. Theirsalary structure is patterned after the civil service and bonuses are distributed according to theposition held rather than actual performance. One of the consequences of this system is overstaffingat the lower level of qualifications, combined with difficulties to attract and maintain qualifiedprofessionals. Second, they have received privileges that bas made it difficult for the private sectorto compete. They continue to receive preferential access to credit; enjoy tax exemptions, includingexonerations on agricultural inputs and, continue to receive substantial investment subsidies and insome instances operating subsidies. These are to be reduced progressively as part of SAC III. Third,with the help of foreign aid, they have received modern and technically efficient equipment; however,this frequently operates below capacity due to difficulties in obtaining inputs and/or in marketing theoutput. %jiven the high share of debt finance, these companies usually do not generate profits.Fourth, operational performance is generally weak. Lack of discipline in timing and collection of

4

the cotton crop, combined with a system of fixed (non-quality rJlated) prices, has been responsiblefor stagnating production and declining quality. Similarly in tea, low quality picking and poorlogistics in supplying tea plants and inputs, conibined with a system of fixed prices, has beenresporaible for a noticeable decline in tea quality. In coffee, until recently, higher prices from qualityimprovements in processing techniques (fully washed coffee) were not realized due to humid storageconditions.

2.5 Public Enterprise refonns already undertaken. So far, progress in Public Enterprise reformhas been disappointing. While there is full awareness in the country that public enterpriseperformance has been poor, the slow pace of reform reflects the strength of vested interests thatcurrently control PEs, anxiety over possible loss of employment and the need to avoid the emergenceof a small elite group of private owners and/or a pre-independence dominance by foreign investors.

2.6 Nevertheless, some progress has been made in the agro-industrial sector. The Coffee SectorProject has supported the government's efforts to progressively open up this important activity to theprivate sector. A coffee auction system has been introduced allowing private sector exporters tocompete with the BCC. Furthermore, a management contract with specific peiformance criteria hasbeen signed by SOSUMO with a private firm; SRDI has lost its rica marketing monopoly and nowcompetes with some 50 small private hullers; OTB will enter into a performance contract with theGovernment in 1992; and seven small companies in the agro-industrial field (a flour mill, a dairy andfour state farms) have ben privatized or liquidated.

B. Private Agribusiness

2.7 As a direct result of substantial progress made recently in simplifying the regulatoryframework, the number of privately held firms in agribusiness has increased markedly. Accordingto a 1991 survey carried out during project preparation, there are ncw 291 firms in the formal sectorand 279 firms in the informal sector active in this field (see Table below); nearly all of theseenterprises are less than five years old.

Table 1: Burundian Companies by Sector and Management Type

Agribusli.*ss

Garment TotalWood/Print Textile Resource- Commerce &

Management Type Agr/Fish/ Agro- paper Leather based Other TotalForestry I'idustry Laboratory Chemical Business Industries Businesses A!;

Public 17 16 1 3 4 41 50 91Puiblic 100X 15 7 1 1 2 26 32 58

Mixed ownership 2 9 0 2 2 15 18 33

PrivateFormal sector 73 80 35 22 81 291 677 968

Bujumbura 71 60 33 21 80 265 -- --Interior 2 20 2 1 1 26 -- --

PrivateInformal Sector - 129 - 50 100 279 2498 dmBujumbura -- 79 - 30 109 1668 l7

Interior -- 50 -- 20 100 170 83& 10100

All types 90 225 36 75 185 611 3225 3810

Source: SCEP, USAID formal and informal Sector Reports and mission uWdates and estimates.See Amex for detailed lists.

2.8 Typically, private agribusinesses are much smaller than parastatals: only 89 firms employmore than 10 employees or have an annual turnover larger than FBu 25 million (US$0.5 million).Also, they typically are engaged in areas where parastatals are not present, such as: quinineplantations; fishing; dairy farming; fruit and vegetable exports; vegetable oil extractions (cotton,groundnut, palm oil); leather anid furniture making.

2.9 Many of these firms have faced or are facing serious start-up difficulties. In the case of fruitand vegetable exports, for instance, the most important problems have been (a) lack of capital; (b)low marketing skills and insufficient knowledge of exports markets; (c) stiff competition with otherAfrican exporters who produce similar products for the same market during the same season; (d) high

transport costs due to high air-freight rates and infrequent flights; and (e) difficulties in contractingwith farmers to produce a steady flow of export-quality produce. In the case of furniture making,market expansion has been hampered by low quality standards due to inexperience and lack ofcraftsmanship. However, while several firms have ceased business, others are being created and thetrend is towards a steady expansion.

2.10 The private sector is represented and assis#'d by the Chamber of Commerce and Industriesof Burundi (CCIB). In the past, CCIB was govem- .nt dominated and focussed on a relatively smallsegment of tne business community, mainly the larger enterprises in the capital city. Since 1987,government influence has diminished. CCIB has expanded its activities and plays a more aggressiverole in representing the interest of the business community; it now has over 2,000 associate members.Two other institutions provide active support to the private sector: the Export Promotion Service(SAE) in the Ministry of Commerce and Industry, created in 1990 with EC support; and the Agencyfor Promoting Foreign Trade (APEE), created in 1991 and currently assisted by the USAID-financedBurundi Enterprise Support and Training Project (BEST). Pinally, numerous private voluntaryorganizations are being created in Burundi; they range from NGO induced groups to professionalfarmer organizations and export associations. The largest of these associations, I'Association pour

6

Ic developpement agro-pastoral (ADAP), represents a group of modern *Lrmers organized to promotemixed dairy farming in rural areas.

III. GOVJiRNMENT'S POLICY IN A3RICULTURE AND AGRIBUSINESS

A. Past Policies and Perfortance

3.1 As part of the government structural adjustment program, a new agricultural sector policywas designed in 1988. The new approach signaled a shift in the role of government from producerand processor (coffee, tea, cotton, suigar, rice and palm oil) to one e( regulator and promoter;emphasized the development of the private sector an4 cooperatives by Amplifying the regulatoryframework constraining them; and initiated a change in extension services from top-down andcoercive to voluntary and participatory. Finally, given the deteriorating environment and continuedhigh population growth rates, preparation of an Environmental Action Plan (EAP) was launched anda more active natural resources management policy designed.

3.2 Progress in implementing these policies has been gradual and uneven, but has neverthelessgiven modestly satisfactory results. In spite of having to cope with a decline in world market pricesof about 60 percent for coffee, its key export crop, economic growth has slightly exceeded populationgrowth in the past five years. This was mainly achieved by (a) sensible macro-economic policies,including a series of devaluations of the local currency, which largely shieW -d domestic producersfrom coffee price declines in nominal terms; (b) past investments in coffee processing which enabledthe country to improve the quality of its coffee exports and achieve relatively better export prices;and (c) good progress in simplifying the regulatory framework which, coupled with an improvingbusiness climate, led to ar. expansion of private sector activities in trade and processing.

3.3 Progress is also be;uag made in reorganizing agricultural services and developing actions toprotect the environment. Under the IDA-financed Agricultural Services Project (Cr. 2024-BU), theRegional Development Company (RDC) structure has been replaced by a decentralized extensionservice system; staffing has been streamlined and budget aliocations made more transparent. Also,the top-down approach to extension is changing. Under the Third Structural Adjustment Credit (SACH1D the government will extend the liberalization policy to the large number of smallholder farmersin rural areas. It will eliminate administrative practices that have regulated export crop cultivationand the use of inputs. An EAP is now being elaborated and will be the basis for a Natural ResourcesManagement project, which is now under preparation.

3.4 Progress, however, has been slow or unsatisfact.ory in two areas: in the reform andprivatization of public enterprise and in the broadening of priv3te sector activities in processing andexports. Progress in the two areas is closely linked. The private sector cannot compete in areaswhere public enterprises dominate the market, as it has been denied the tax and duty privileges, aswell as the preferential credit access and public sector subsidies which the PEs have enjoyed so far.

B. The New Policy

3.5 As a key feature of the third phase of its adjustment program, the government has decidedto accelerate both the PE reform program and the liberalization of private sector activities. Amongthe specific measures under SAC III and the Private Sector Development Project, the following areparticularly relevant for the agribusiness sector: (i) the introduction of an open general licensing

7

system and of a new foreign exchange system that balances the supply of, and demand for, foreignexchange; (ii) the complete revision of the commercial code and related business enterprises laws;(iii) progressive liberql1 zation of invisibles; (iv) liberalization of the labor code to promoteemployment generation through more flexible hiring and firing regulations; (v) simplification of air-transport regulations; (vi) reform of the tax cede and reduction in appropriate rates to encourageprivate investment; and (vii) completion of the tariff reform to reduce effective protection.

3.6 Given the current weight of the public sector in agribusiness, implementation of the privatesector development policy is directly linked to the privatization of public enterprises. Thegovernment which had initially decided to limit privatization of key agro-industries to managementonly is now committed to privatization uf ownership or leasing of assets. The government policy onagribusiness, which is detailed in a draft Letter of Agribusiness Development Policy and the annexedmatrix of reforms (Annex 1) signed by the Government. It includes the following measures: (i)action plan and timetable for privatization of OTB, COGERCO, SOSUMO and SRDI; (ii) promotionof private sector investment in subsectors that have been traditionally a public monopoly while placinga moratorium on new public investments (e.g. the tea sector and the extension of palm oil processingfacilities in Rumonge); (iii) allowing mixed-capital agro-industries to set producer prices and electtheir markets and control their extension system; and (iv) public investment in mixed-capital agro-industries will be strictly limited to what is necessary to maintain the current production level (para.6.2(b)).

3.7 The Government has formally adopted a privatization strategy with the objectives of: (i)improving the performance of enterprises through increased management efficiency; (ii) strengtheningmarket forces; and (iii) protecting farmers from de facto monopolies. The strategy attempts tobalance financial ana efficiency objectives with socio-political concerns by discouraging two extremesituations: on the one hand, excessive dispersion of ownership which could make an enterprisedifficult to manage, and on the other hand, pre-independence corporate arrangements with a foreignparent company accumulating profits by supplying expensive equipment, spare parts and technicalassistance to its local subsidiary.

3.8 According to the recently promulgated law on the Privatization of Public Eniterprises (August1991), the responsibility for overseeing the privatization process has been given to an InterministerialCommittee for Privatization (ICP), which is chaired by the Minister of Finance and composed ofmembers appointed by decree. The ICP's main role is to review privatization proposals and torecommend decisions to Govermnent. To accomplish its tasks the ICP is assisted by the PublicEnterprise Reform Office (Service Charge des Entreprises publiques-SCEP) which providesadministrative support. For each individual privatization proposal to be considered by the ICP, anad-hoc Technical Evaluation Commission (TEC) is appointed by the President of the Republic tocarry out the necessary studies and implement privatization. The TEC, in turn, may recruit outsideexpertise to assist in the preparation of the proposals.

3.9 The SCEP is being completely re,iructured to become a small, pluridisciplinary consultingfirm and the only civil service employee will be the Chief of the unit who will provide the bridgebetween the technical work to be done by the unit and the authorities. All other recruits will havefixed term contracts (one year renewable) with detailed terms of reference. The unit will consist ofinternational and local experts in the legal, auditing and financial analysis and management fields andwill be supported by a computer programmer. The staffing will be entirely contracted out througha competitive bidding process to a single international consulting firm to ensure that if there areproblems with performance of the team the firm will be committed to finding qualified replacements.

8

There will be three senior experts, a financial analyst, a management specialist and a legal specialistwho will ensure technical quality control over the other members of the unit.

3.10 These reforms provide the basis on which the proposed project has been built. With thedecisions for PE reform taken in principle, assistance is required to Implement the reforms forspecific public enterprises. Also, with the agreement on further liberalization of the regulatoryframework, care should be taken that the new opportunities are not exclusively seized by the fewlarger and well established private finns, but will be open to the broadest possible strata of society,including the micro-enterprises that have difficult access to credit and market information and thatwould not be reached by current private sector assistance.

IV. THE PROJECT

A. Project Objectives and Justification

4.1 The project is designed to accelerate a private sector supply-response to the government'smore liberal policies in the area of agro-processing, as described above. Its objectives are to increaseand diversify agricultural exports and induce greater efficiency in agricultural production, processingand marketing, by supporting the government's efforts to privatize publicly held agro-industries andby assisting small private entrepreneurs to establish themselves and develop agribusinesses. Theproject incorporates major findings of the agricultural sector memorandum. By providing technicaland financial support to private initiatives in agro-industries, a key growth sector in Burundi, it willhelp unleash entrepreneurial talents and develop an incipient private sector culture. The politicalsensitivity of privatization in a key sector where smallholder producers are involved and theconsequent need of the government to ensure that the process is transparent, justifies IDA'scoordinating role with respect to the necessary technical assistance.

4.2 The project will be innovative as it will provide new types of support services to small privateagribusinesses to help them overcome obstacles in their management capability. Grant funds that payhalf the cost of professional services for such purposes have been successfully introduced in India andIndonesia with Bank support. A similar exporter assistance scheme is currently being introduced inKenya under the ongoing Export Development Project. Matching funds were strongly recommendedby a 1990 PRE working paper titled How Support Services Can Expand Manufactured Exports. Theproject will complement services currently provided to medium-scale enterprises by IFC's AfricanProject Development Facility (APDF) by focussing on micro-enterprises. Project preparation alsoaddressed the issue of lack of capital financing for small firms through the feasibility study of a localinvestment company. The creation of the company is now underway in partnership with a NGO-sponsored international investraent company, the International Investment Development Company(SIDI).

B. rioect Desciptn

4.3 The project will include two components: the privatization of publicly held agro-industriesand assistance to small private entrepreneurs. The privatization component will focus on fourenterprises: OTB (tea production and processing); COGERCO (seed-cotton production and ginning);SOSUMO (sugar production and processing) and SRDI (rice production and processing) and willinclude the provision of: (i) consulting services in investment banking for preparation of privatizationand conclusion of leasing of assets and sale of shares; and (ii) training activities to prepare employees

9

for privatization. The assistance to private enterprises component will consist in the creation of anagribusiness development fund which will share up to half of the cost of marketing and productivityimprovement activities with eligible private entrepreneurs and their professional associations.

4.4 The project will be implemented over a five year period and is estimated to cost FBu 1,246million (US$6.2 million). A number of bilateral donors have expressed interest in promotingprivatization and in parallel-financing of a share of the project cost by providing technical assistanceto support privatization of public agro-industries and support to private initiative in agribusiness.IDA will coordinate project activities. Its share in the financing of project costs will be limited toUS$3.096 million or 49.7 percent of total (para. 4.37).

C. Detailed Features

1. Privatization of Publicly held Agro-Industries

(a) The Privatization Process

4.5 Under the privatization legal framework, the government has to choose between three basicprivatization approaches: (a) privatization of management through contracts in which privatecompanies are paid to manage public-owned assets; (b) privatization of management through leasingarrangements or concessions in which a private company pays the government for the use of publicowned assets; and (c) privatization of ownership of the company.

4.6 The Government is committed to withdraw progressively from the productive sectorr to makeroom for private investors in order to improve profitability through more effective management.Public agro-industries, however, present a specific challenge as they are dealing with and providingincome to ten of thousands of smallholder farmers. Therefore, the Government favors a progressiveand controlled transfer from public to private ownership consistent with on-going developmentprojects supporting the agro-industries targeted by the proposed project. The Government isconvinced that hasty decisions on those socially sensitive issues could stall or even derail the ongoingdemocratization of Burundi institations. As a result, management or performance contracts areconsidered as a first, although transitional, step toward other forms of privatization. For the publicagro-industries targeted by the project, performance or management contracts will be concluded in1992. SOSUMO management contract with a private foreign firm has been approved in March 1992;OTB performance contract is currently under review by the Government; and COGERCO's currentincentive system, which is based on actual performance, will be used as the basis for a formalperformance contract.

4.7 In the coffee sector, leasing of public assets is currently under experimentation for themanagement of coffee washing stations (SOGESTAL) and coffee hulling factories (SODECO). Someof the management companies already have majority private ownership and it is expected that theywill be fully privatized in the future. This mode of privatization will be considered, along withprivatization of ownership, during the preparation of privatization. In any case, industrial estates (teaand sugar) will be subject to long term leases.

4.8 For the divestiture of ownership the government favors a process which will promoteownership among domestic investors. The capital of the company may be shared among thefollowing partners: (i) a core investor who will be the largest shareholder and will manage thecompany; (ii) other private companies involved up-stream and down-stream in the sub-sector (ocal

10

suppliers, exporters, etc); and (iii) small shareholders (farmers, farmers' organizations, employees,private citizens). Selection of the core investor will be, normally, the first phase of the process andwill require changing the status of the company into a mixed capital company (SEM). The coreinvestor will bring to the company know-how and investments to increase local value-added. Criteriafor the selection of the core investor will include: (i) proposals on how to u?grade the quality andcareer opportunities of employees through the introduction of a transparent incentive system; (ii)proposals for organizing relations with producers; and (iii) an investment plan to develop value addedeither locally or abroad. The bidding documents will spell out obligations regarding the relationsbetween the company and smallholder farmers such as contractual arrangements on marketing,incentives and input supply and promotion of farmer organizations. The company will have fllcontrol over the organization of agricultural extension. It could contract with the public extensionservices or private operators or manage its own extension.

4.9 The second phase of the process will involve the offering of shares to local firms currentlydoing business with the enterprise being privatized. The third phase, sales of shares to theemployees, to the farmers and to the general public, will only be possible on a large scale once asecondary market for shares has been established. In this case it could be possible to implement thethree phases simultaneously.

4.10 The project will assist the government in the privatization of the most important agro-industries, except those in the coffee sector which are addressed by the on-going Coffee SectorProject (Cr. 2123-BU). The project will provide consulting services in investment banking to theinstitutions set out in the privatization law, including the ICP, SCEP and TEC. Given the importanceof socio-economic issues related to the relations of the companies with smallholder farmers, and thegovernment resolution to complete the preparatory work before the creation of TEC to speed upimplementation of privatization, the technical assistance will be delivered in two phases. The firstphase will be the preparation of privatization, which will design detailed proposals on theprivatization mechanism, including the proposed contractual covenants related to the future relationsof the company with smallholder farmers. This phase will be implemented by the technical ministriessupervising the targeted enterprises; the Ministry of Agriculture and Livestock (MOAL) for OTB,COGERCO and SRDI, and the Ministry of Commerce and Industry (MCI) for SOSUMO at therequest and under the authority of the iCP, and will be financed by the donors already involved inthe companies. The second phase will be the support to the TEC for the actual implementation ofprivatization (selection of the core investor, organization of public offering of shares). This assistancewill be financed by IDA.

(b) Privatization of OTB (Burundi Tea Company)

4.11 The privatization program was designed in close cooperation with OTB's management anddonors involved in the tea subsector (the EC, Belgium and CCCE). The objectives of the programare to break up the de facto monopoly of OTB in the sector and to maximize utilization of existingagricultural and industrial investments financed by the government with the support of donors,through better management of industrial tea estates; development of contractual relations withsmallholder farmers; reduction of processing costs; efficient management of the tea factories; andimproved marketing.

4.12 The first step of the program will be the implementation of a performance contract as partof the on-going EC-financed Medium-Term Tea Development Program. Key features of the systemare: (i) the introduction of compensation for tea pickers and OTB staff based on productivity andfinancial performance; (ii) creation of tea-growers associations to improve the organization of

it

harvesting and collection operations; (iii) rehabilitation or reconversion of tea plantations establishedin marginal areas; and (iv) elimination of subsidies for fertilizers.

4.13 The second step will be the privatization of the company. The method of privatization(management companies, core investor approach) will be decided upon in December 1993, aftercompletion of the preparation phase. The preparation of privatization will be guided by the followingconsiderations: (i) the creation of any new factory will be left to private initiative; (ii) the study willcompare privatization of OTB as a whole with privatization of each tea factory, to promotecompetition in the sector; (iii) the role of OTB's central service will be modified and possiblyrestricted to regulatory functions and quality control; (iv) criteria for the selection of the core investorwill include its ability to develop local value-added and capture new markets and to developcontractual relations with smallholder farmers; and (v) the study will address land tenure issues onindustrial plantations.

4.14 From a social point of view, privatization of OTB implies both opportunities and risks forsmall farmers and existing personnel as well. Smallholders in prime producing areas could earnsubstantially more by organizing production and marketing better if they were remuneratedaccordingly. On the other hand, those farmers in areas too distant from factories or on poor soilswould likely lose revenue since transportation costs may be too high. Privatization will notnecessarily imply a reduction in the number of jobs, but it will imply turnover based on competence.

4.15 The proposed project will finance 32 staff-weeks of international and local consultants for thepreparation phase. The launching of the recruitment procedure for the consultant's services for thepreparatory work for the privatization will be a condition of effectiveness (para. 6.3 (d)). In addition,the project will finance 33 staff weeks of consultants to support the TEC in the implementation ofprivatization. It was agreed during negotiations that the TEC will be established in March 1994 (para6.2 (a) (ii)), and at least 10 percent of the capital of OTB will be put on sale no later than November1994 (para. 6.2(a)(iii)).

(c) Privatization of COGERCO

4.16 COGERCO was one of the first public enterprises to possess an incentive system based ontechnical and financial performance for both local and expatriate personnel. This system will be usedas the basis for a formal performance contract to be signed between the company and Governmentin 1992, which will include the following measures: (i) introduction of a producer price based onquality; (ii) reduction of extension costs through the promotion of farmers' organizations; (iii) transferon a pilot basis of marketing, input distribution and credit recovery to farmers' organizations; (iv)implementation of a cost control system for each activity; (v) development of an incentive packagethat stimulates production and resolves ambiguities in land tenr.e practices for resettled lands; and(vi) restructuring of the company's accounts including a more realistic assessment of the value of itsassets and separate accounting for the rural development project in the Mosso province.

4.17 Project preparation identified the core investor system as the privatization method most likelyto balance the interests of the Burundian private sector with those of potential foreign partners. Thecapital of the company will be privatized in 1994. For technical and efficiency reasons, the companywill be privatized as a unit rather than separated between industrial and extension activities. Theentity to be privatized will include the ginning factories, commercial operations and the unit workingwith cotton producers in the central Imbo plain (responsible for extension, input supply, credit,farmers' organization). The company will eventually de. elop contractual arrangements for thedelivery of extension services by public or private extension institutions. Promoting cotton cultivation

12

in Mosso province, which is in its start-up phase, will not fall under the company mandate and willcontinue to be financed by the Mosso Cotton Development Project assisted by the CCCE. However,COGERCO will continue to implement the Mosso project through a management contract.

4.18 The project will finance 15 staff weeks of international and local consultants to assist thepreparation of privatization. It was agreed during negotiations that the terms of reference of theconsultants will include the design of specific measures to enable farmers to obtain freehold title onGovernment owned property (para. 6.2(e)). Launching of the recruitment procedure for theconsultants services for preparation will be condition of effectiveness (para. 6.3 (d)). The project willalso finance 15 staff-weeks of consultants services to assist the TEC in the implementation ofprivatization. It was agreed during negotiations that the TEC will be established by January 1994(para 6.2 (a) (ii)), and that at least 10 percent of COGERCO's capital will be offered to privateinvestors before August 1994 (para. 6.2 (a)(iii)).

(d) Privatization of SOSUMO

4.19 The company's production objectives for 1991 (14000 T of sugar) as agreed with theGovernment and the Bank were met with the help of Belgian-financed technical assistance. Thefactory operates at 70 percent of full capacity and the company's profitability is dependent on itscapacity to develop the local market, capture export markets and reduce its production costs. Thecompany, which has been saddled with a heavy debt resulting from highly inflated investment costsis currently operating on a sunk-cost basis. Return to full-cost operation will be possible only aftera re-evaluation of company assets and a corresponding reduction in its liabilities. Transfer of theoperation of the company from foreign technical advisors to local professionals has been impairedby the lack of financial incentives to attract and maintain qualified Burundian staff in the Mosso area,a remote part of the country. These issues were addressed during a donor's meeting (AfDB,Belgium, CCCE and IDA) held in February 1992, which reviewed the implementation of thecompany's action-plan and proposed a strategy for privatization. The first phase of this strategy, nowcompleted, is the transformation of the previous technical assistance contract into a one-yearmanagement contract. The management contract is financed in part by Belgian aid and includes anincentive system, for both expatriate and local personnel, based on specific performance targets. Theimplementation of the system is expected to increase the resale value of the company. In a secondphase (1993), the company will be transformed into a mixed capital company and the government hasdecided to start selling 10 percent of capital in 1993 (para. 6.2 (a)(ii)) out of the 70 percent whichwill be offered to private investors. The project will finance 15 staff-weeks of international and localconsultants for preparation of privatization. In addition, the project will finance 29 staff-weeks ofconsultants to assist the TEC in the implementation of privatization. Launching of the recruitmentprocedure for the consultant services and establishment of the TEC for SOSTTMO will be conditionsof effectiveness (para. 6.3(a)).

(e) Reorganization and Privatization of Imbo Reional Development Company (SRI)) (rice

4.20 The Imbo RDC will be reorganized along the same principles guiding the on-goingreorganization of the Buyenzi and Kirimiro RDCs: (i) separation of commercial and industrialactivities from agricultural support services activities; (ii) privatization of industrial and commercialactivities; and (iii) integration of public service functions into the civil service or delegation tofarmers' associations. The rice mill will be leased, possibly to farmers' organizations or auctionedoff in April 1994 (para. 6.2(a)(iv)). A contract for the management of the existing irrigation networkwill include the progressive transfer of its maintenance and operation to users' groups along themodel successfully experimented in 8 villages in the Imbo plain. The project will finance 15 staff

13

weeks of international and local consultants to reorganize the RDC and prepare the privatization ofthe rice mill and 9 staff weeks to assist the TEC. The launching of the recruitment procedure for theconsultant services will be a condition of effectiveness (para. 6.3(d)).

(f) Special Training Program

4.21 A qualified, motivated and streamlined staff will be an asset for companies underprivatization. During the transition period, a special training and information program (US$1.2million) will help foster a positive attitude among the employees of the companies and will keep toa minimum possible disruption in services to smallholder farmers. The project will finance seminarson management and on privatization, study trips in African countries involved in privatizationprograms and reconversion training packages for laid-off personnel. Reconversion training packageswill be managed by the Reconversion Program for Redundant Public Sector Employees establishedby the government under the Third Phase of the Structural Adjustment Program. The preparationof a detailed training and reconversion program acceptable to IDA will be a condition of disbursementfor this component (para. 6.4(a)).

2. Assistance to Private Entrepreneurs

Agribusiness Develooment Fund

4.22 Years of isolation have limited private enterprises' exposure to international businesspractices. Past policies restricting travel, limiting participation in the import-export trade and tightlycircumscribing foreign financial transactions resulted in little outside experience and contacts for localprivate entrepreneurs. They also suffer from poor information services (e.g. lack of priceinformation, inability to purchase from catalogs), and expensive telecommunications, airfares andfreight rates. Furthermore, management expertise is weak: product quality is poor, accountingsystems inadequate and cost analysis is rare. Existing support services projects are trying to addressthese shortcomings by providing advisory services on accounting, monitoring and technicaltroubleshooting. Being free of charge, these services are in limited supply and for this reason, notreadily accessible to small entrepreneurs. Some entrepreneurs have already taken the initiative to fillthis gap by recruiting at their own expense the national and international expertise they deemaDpropriate. The project's Agribusiness Development Fund will finance entrepreneurshipc,.velopment training seminars and a matching fund to finance management consulting, marketprospection, sales promotion and training activities on a cost sharing basis.

4.23 Entrepreneurship development seminars will seek to reinforce analytical skills throughparticipation and teamwork during which the entrepreneurs learn to analyze their strengths andweaknesses and to formulate a plan of action. The project will organize 10 two-week seminars withthe support of specialized consultants.

4.24 The objective of the 50:50 matching fund is to motivate and assist individual firms andprofessional associations or group of firms in the expansion of their business. The fund will financecommercial services, including travel, for private firms that invest in production, processing and/ortrade of L ith traditional and non-traditional agricultural exports and of import-substitution products.Only private firms will be eligible to apply. Advance approval will be subject to the presentation ofa development plan comprising: (i) a description of the target market, (ii) measures needed todevelop appropriate products or to adapt existing ones to it; and (iii) a marketing plan. Any activitywill be eligible, which would be expected to generate over a period of five years, incremental value-added of 10 times the value of the advance. Typical expenditure categories eligible for cost sharing

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will include: (i) product research and development; (ii) market analysis and prospection; (iii) sourcingand testing of equipment and inputs; (iv) on-the-job and short-term training; (v) organization of andtraining for product adaptation; (vi) studies to improve storage, packaging, containerization andtransportation; (vii) development of grading, standard definition, quality control; (viii) advertizingand promotion; (ix) studies and training on improved efficiency of production and collection,including contracts between exporters and smallholder farmers; (x) studies for acquisition of existingpublic assets, including preparation of loan requests, preparation of bid proposals for lease,lease/purchase management or purchase contracts; (xi) newsletters, trip reports prepared by localprofessional organizations, or their acquisition and circulation of professional journals and newsletterspublished abroad; (xii) development of improved (e.g. computerized) accounting; (xiii) visits to majorpotential clients; (xiv) establishment of overseas operations (co-funding of installation costs, notoperating costs). The following expenditure categories will be excluded: (i) capital and operatingcosts of a company or NGO, including equipment and vehicles (eligible companies could applyseparately for APEX or other loans for these items); and, (ii) membership drives for professionalorganizations.

4.25 The project will consciously seek out women entrepreneurs as clients and partners with theFund. To that effect, the FMA will establish and maintain a database of women-entrepreneurs whoshould receive priority in training. It will ensure that the target group reflects at least twice thenumber of women entrepreneurs, which is only 7 percent of the total at present. By year five of theproject the proportion of women beneficiaries should have increased to at least 15-20 percent of thetotal. Specific encouragement will also be given to those who, due to social barriers in the past, hadless opportunity for formal education and business participation.

4.26 To avoid the creation of a new institution, the fund will be managed by a Fund ManagementAgency (FMA), an existing Burundian commercial or financial agency selected by the Governmentand acceptable to IDA, which will: (i) identify potential clients; (ii) maintain a data bank with a listof available services, accredited providers and past clients; (iii) help the client enterprise to prepareexport or import substitution development plans; (iv) agree with the enterprise on a developmentprogram; (v) fund technical and consultants services and travel required to achieve the developmentobjectives of the enterprise; and (vi) implement the cost recovery mechanism. The FMA will beassisted, over the project period, by 6 staff-months of short term consultancy from a senior marketingexpert. The terms of reference of the consultant will contain provisions to transfer skills, know-howand responsibilities to his local counterpart. Operation of the fund will be supervised by a SteeringCommittee.

4.27 The project will finance: commercial services and training under the matching-fund; themanagement contract for the Fund; environment assessment studies; and the training seminars. Thematching-fund will finance up to 50 percent of actual expenses on commercial service fees and ontravel (ess than business class). Travel per diem will be reimbursed at a maximum of 25 percentof the UNDP per diem for the location visited. Cost-sharing of the first advance will be on a 50:50basis. It was agreed during negotiations that cost recovery will be applied on advances forcommercial services to individual firms (para 6.2 (g)). The amount of the advance will be repaidover a maximum period of five years, including a one year grace period. In addition progressivecost-recovery of the Fund's operating costs would be introduced in March 1994. The aggregateoutstanding amount commercial services financing to any recipient will not exceed the equivalent ofUS$50,000 (revolving fund). Cost recovery will not apply to expenses for professional training,organized locally, by professional associations. The aggregate amount of local training grants to anyassociation will not exceed US$50,000. Agreement on the Statement of Policies and OperatingProcedures of the fund, including annual review, annual audits and criteria for mid-term review of

15

the fund was reached at negotiations (para 6.2 (f)) (Annex 4). They will serve as the basis for thepreparation of the Fund Agreement between the Government and the Fund Management Agency(FMA). The recruitment of an independent agency for the management of the fund and actualext;cution of the Fund Agreement will be conditions of disbursement for th.is component (para. 6.5

(a)).

D. Organization and Management

4.28 Privatization of Public Enterprises. This component will be implemented by the institutionsidentified under the privatization law, including the ICP, SCEP, and TEC. Preparatory work forprivatization will be executed on behalf of ICP by the technical ministries supervising the enterpriseconcerned; MOAL for OTB, COGERCO and SRDI; and MCI for SOSUMO. The ministries willbe assisted by specialized consulting firms recruited by the Project Administrator, following IDAprocedures. Once the Government has decided on th, privatization mechanism proposed by theconsultants, the TECs wIll implement privatization with the assistance of experienced consulting firmsrecruited by SCEP in its quality of president of the TECs. Completion of the reorganization of SCEPwill be a condition of effectiveness (para. 6.3(c)).

4.29 Agribusiness Development Fund. To avoid the proliferation of institutions the Fund will bemanaged by an existing commercial or financial Burundian institution (the FMA) assisted by aninternational consultant (para. 4.26). The FMA, which will be selected by the PA and, acceptableto IDA, wil establish a small unit, dedicated to the management of the Fund (FMU), staffed witha qualified and experienced business development specialist and secretary/bookkeeper. . Operationof the Fund will be guided by a Fund agreement between the Government and the FMA which will,inter alia, include: (i) the terms and conditions on which FMA should award local training/grants andcommercial services financing; (ii) the responsibility of the FMA award; (iii) introduction of costrecovery mechanisms for operating costs by March 1994; (iv) resources which will be made availableto the FMA for the management of the Fund; (v) accounting and auditing procedures of the FMU.A Steering Committee composed of representatives of the technical ministries and of the privatesector will supervise the implementation of the Fund Agreement.

4.30 Proiect Administration. The project will be administered by a local consultant recruited forthe duration of the project, by and under the direct authority of the Minister of Agriculture andLivestock (MOAL) and assisted by a senior local accountant and a secretary. The consultant will actas the Project Administrator (PA) and will be responsible for procurement of goods and services,including the (i) recruitment of technical assistance to MOAL and MCI for the preparation ofprivatization process; (ii) monitoring of FMA as secretary of the Steering Committee (para. 4.29);(iii) consolidation of the project's accotints; and (iv) reporting and coordinating of PCR preparation.Terms of reference for the recruitment of the PA team have been agreed upon during negotiations(para. 6.2 (O)). The recruitment of the PA and his assistants, with qualifications, experience andterms of employment satisfactory to the Association will be a condition of credit effectiveness. (para.6.3 (b)).

E. Reporting and Monitoring

4.31 Reports on project implementation, summarizing progress achieved, difficulties encountered,and changes or adjustments made, will be submitted quarterly by the PA. Agreement on proceduresconcerning project reporting and monitoring were obtained at negotiations (para. 6.2 (i).

16

4.32 Supevsion. The supervision of thd proposed project is expected to be staff-intensive, giventhe lack of experience in Burundi with this kind of project. Supervision of the proposed project isexpected to absorb 20 sw in FY93, and 15 sw from FY94 to FY97 (Annex 5). The privatizationcomponent will, as often as possible, be supervised jointly with SAC III. The Project Administratorwill organize once a year a donors' meeting to ensure consistency between donor interventions insupport of the private sector. Agreement on the organization of such annual meetings was reachedat negotiations (para. 6.2 (j).

4.33 Mid-Term Review. Given the pilot nature of the project and in order to assess theeffectiveness of the implementation arrangements, a mid-term review of project progress andimplementation will be undertaken about eighteen months after credit effectiveness (March 1994).The review will associate the government and the donors involved in the parallel financing of theproject. It will review project progress with respect to: (i) implementation of the privatizationprogram; and (ii) activities and impact of the Agribusiness Development Fund. The privatizationprogram will be assessed against the targets of the policy matrix. The review of the AgribusinessDevelopment Fund will consider the following criteria : number of firms contacted; number ofapplications; amounts disbursed; number of professional organizations involved; number of womenentrepreneurs involved; the impact on incremental export or local value added; and performance ofthe cost recovery mechanism. The review will also assess the feasibility of transferring managementof the Fund to a professional organization funded by voluntary participation from the beneficiaries.Agreement was reached at negotiations on the terms of reference of the mid-term review (para.6.2(k)).

4.34 A Project Completion Report, the content and format of which will be agreed upon with IDA,will be submitted within six months after the closing date of September 30, 1998. The ProjectAdministrator will prepare this PCR in close cooperation with SCEP and the Agribitsiness Fund,which will also provide input to the PCR exercise.

F. Estimated Costs and Fina.ing..PLj

4.35 Total project cost has been estimated at FBu 1,246 million or US$6.2 million equivalent, ofwhich FBu 832 million or US$4.2 million equivalent (67 percent) will be in foreign exchange. Basecosts estimates reflect March 1992 prices. Taxes have been estimated at FBu 118 million or US$0.6million, about 9 percent of total project costs. Summaries of project costs and the financing plan aregiven in the tables below:

17

BURUNDIAgribusiness PROMOTION PROJECTTIbIa2: Summary of Project Cost 1L

Local Foreign Total Local Foreign Total Foreignas X ofTotal

fBU thousands USS thousands

Privatization PreparationOTS 3500 29200 32100 17 146 164 89COGERCO 1750 16800 18550 9 84 93 91SOS014 700 17950 18650 4 90 93 96SRDI 2100 16000 18100 10 80 90 88Training 40800 163200 204000 204 816 1,020 s0

Sub-Total 48850 243150 292000 244 1,216 1,460 83

Privatization ImplementationTEC OTO 5600 24350 29950 28 122 150 81TEC COGERCO 2100 15150 17250 11 76 86 88TEC SOSUMO 5600 19750 25350 28 99 127 78TEC SRDI 2100 6475 8575 11 32 43 76

Sub-Total 15400 65725 81125 77 329 406 81

Agribusiness Development FundMatching Fund 184500 296000 480500 923 1,48 2,402 62Training 20000 60000 80000 100 30u 400 75Management Unit 34515 60355 94870 173 302 474 64

Sub-Total 239015 416355 655370 1,195 2,082 3,277 64

Proj et Administratfon 59270 7380 66650 296 37 333 11

TOTAL Basetine Costs 362535 732610 1095145 1,813 3,663 5,476 67

Physical Contingencies 11965 37581 49546 60 188 248 75Price Contingencies 39516 62013 101529 198 310 508 61

TOTAL Project Cost 414016 832203 1246219 2,070 4,161 6.231 67of which taxes 118187 118187 590 590

]/ Totals may not ad up Ma to rounding.

4.36 Physical contingencies varying from 5 to 10 percent have been applied to selected categoriesto reflect uncertainties regarding detailed quantities and possible design modifications. Pricecontingencies have been calculated for local and foreign exchange costs on the basis of a projectedinflation rate of 4 percent a year.

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G. Project Financing

Table 3: Project Financing Plan(USS miltion)

IDA Pr!- GOB Bel- CCCE EC Total X ofvate giun Total

Assistance to 1.5 0.0 0.2 0.1 0.1 0.2 2.1 34privatization

Agribusiness 1.4 1.4 0.07 C.0 0.0 0.8 3.7 60Developmen. Fund

Project Administration 0.1 0.0 0.03 0.0 0.0 0.2 0.4 6

TOTAL 3.1 1.4 0.3 0.1 0.1 1.2 6.2 100

X 49.7 22.9 4.4 1.6 1.6 19.8 100.0

4.37 The proposed IDA credit to the government of US$3.096 million will finance 49.7 percentof total costs. Financing will include: vehicle and equipment, training, technical assistance to theTECs and for preparation of privatization of SRDI, 30 percent of total expenses eligible under thematching fund and part of incremental operating costs. The private sector will finance 50 percentof the matching fund, and will progressively support the incremental operating costs of the promotionfund. Financing of the technical assistance to preparation of privatization will be shared as follows:OTB by the EC; COGERCO by the CCCE and SOSUMO by Belgium. The EC will finance 20percent of the matching fund, technical assistance to the Agribusiness Development Fund and partof incremental operating costs. The Government will finance 4 percent of total costs which willcover part of training and incremental operating costs.

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H. Procurement

4.38 Procurement arrangements are summarized in the table below:

Table 4: Procurement Method

Project Etement ICe LCB Other N.B.F. TOTAL

1. Vehicles, Equipment .03 .03(.03) (.03)

2. Consultancies .7(a) .9(b) 1.6(.7) (.7)

3. Training grants and 2.7 2.7advances for commercial (.8) (.8)services

4. Training 1.6(c) 1.5(1.3) (1.3)

5. Incremental operating .4 .4costs (.3) (.3)

TOTAL .03 5.3 .9 6.2(.03) (3.1) (3.1)

Note: Figures in parentheses are the respective amounts financed by the credit.N.B.F.: Not Bank-Financed.

(a) Services should be procure. in accordance with World Bank Guidelines: Use of Consultantsby World Bank Borrowers and by th, World Bank as Executing Agency (Washington, D.C.,August 1981).

(b) Co-financed in parallel by Belgium, CCCE, and the EC.(c) Selective international and local competitive bidding.

4.39 Vehicles and computer hardware office equipment (US$0.03 million) will be procured throughLCB. Contracts for office supplies as well as spare parts for vehicles and computers, estimated tocost the equivalent of US$20,000 or less per contract may, up to an aggregate amount equivalent toUS$200,000 be procured under contract awarded on the basis of comparison of price quotationsobtained from at least three suppliers eligible under IDA guidelines.t Items or group of itemsestimated to cost the equivalent of US$2,000 or less per contract may, up to an aggregate amountequivalent to US$100,000, be procured off-the-shelf through direct contracting. The selection ofconsultants financed by IDA (technical assistance to privatization, US$0.6 million and environmentalstudies, US$0.1 million) will be in accordance with IDA guidelines. Terms of reference,qualifications, conditions of employment and contracts for consulting services will be subject to priorapproval by IDA. However, recruitment of cot sultants financed by Belgium, CCCE and the EC willbe in accordance with their respective proced ires. Technical assistance to privatization will begr.iuped into four contracts: (i) to TECs and SRDI (US$0.6 million), in accordance with IDAGuidelines; (ii) to OTB (US$0.2 million), in accordance with EC procedures; (iii) to COGERCO (0.1million) according to CCCE procedures; and (iv) to SOSUMO (US$0.1 million), in accordance withthe AGCD procedures. Procurement of cost-shared management services under the Agribusiness

I "Guidelines for the Procurement under IBRD Loans and IDA credits". May 1985.

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Promotion Fund will be done by the beneficiary Individual firms and professional organizations.Procurement for training related to the preparation of privatization (US$0.9 million) and to the Fund'sseminars (US$0.4 million) will be on the basis of selective international or local competitive basis.Prior IDA review will be required for all training programs and for each contract estimated at theequivalent of US$20,000 or more. Incremental operating costs for the Fund management unit(US$0.2 million) and the Project Administrator (US$0.1 million) will include: staff salaries andallowances, office supplies, office equipment maintenance, telecommunication services, vehicleoperation and maintenance, spare parts, equipment and office rental and staff travel.

4.40 A country procurement assessment mission conducted in 1986 found existing local proceduresgenerally acceptable, except for the preferential treatment of local bidders whe enjoy a 15 percentpreference margin. During negotiations of SAC III the government has agreed to reconsider thispolicy. A 15 percent margin of preference will be accepted under international bidding for domesticmanufacturers and contractors only. The methods and stages set forth in Appendix 2 of the Bank'sprocurement guidelines will be followed in the evaluation and comparison of bids.

I. Disbursemen

4.41 IDA disbursements by category are presented in Table 5. While project implementation isscheduled for five years, a 6-year disbursement period is retained in accordance with the regionaldisbursement profile for Burundi. Funds from the Credit account will begin to be disbursed in FY93and continue through FY99.

4.42 All disbursements will be fully documented except for individual expenditures and contractsbelow US$20,000 equivalent, which will be made against statements of expenditures (SOEs). Thedocumentation will be retained by the PA and will be made available for review by IDA supervisionmissions and independent auditors.

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Table 5: Disbursements

Amount of theCredit Allocated

Category (S x 1000) % of Expenditures to be Financed

Privatization(1) Vehicles and Equipment 24 100% of foreign expenditures and

80% of local expenditures

(2) Consultants services 496 100%

(3) Training 867 100% of foreign expenditures and80% of local

(4) Incrememtal operating 94 100% of foreign expenditures andcosts of PA 80% of local

Agribusiness Development Fund(5) Training grants 200 30%

(6) Advances for 530 30%commercial services

(7) Training 276 100% of foreign expenditures and80% of local

(8) Environmental Studies 100 100%

(9) Operating costs 129 I/

(10) Unallocated 380

TOTAL 3,096I/ Note: The following percentages apply as percentages to be financed for category 9 (icrementaloperating costs):a) 100% for the 24 calendar months following the Effective Date;b) 70% for the 24 calendar months following the period referred to in a) above;c) 30% for the 12 calendar months following the period referred to in b) above.

J. &'counts and Audits

4.43 Government will establish two special accounts in foreign exchange to help expeditedisbursements under terms and conditions acceptable to IDA. The first account will be managed bythe SCEP and will finance eligible expenses for the Privatization c-imponent. The second accountwill be managed by the Project Administrator and will finance eligible expenses for the AgribusinessPromotion Fund and the project administration. Upon credit effectiveness and receipt of withdrawalapplications, the Association will make advance deposits totalling US$0.3 million and US$0.2million, respectively. The special accounts will be replenished upon receipt and approval ofsatisfactory documented evidence of expenditures to be provided by the PA and the SCEP. Shouldany disbursements be made from the special accounts which are not acceptable to IDA, thegovernment will deposit the corresponding amount in the special account.

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4.44 Separate accounts will be kept for all expenditures under the project. SCEP will maintainthe accounts for the privatization component. The Fund Management Agency will maintain separateaccounts for the FMU. The Project Administrator will consolidate records and accounts for allprojects activities. Accounts will be kept in accordance with accepted accounting principles and willrecord all project expenditures, commitments, reimbursement and status of project funds.

4.45 All project accounts as well as the special accounts will be audited by independent auditorsacceptable to IDA. In addition, the accounts of the FMU and of th enterprises under privatizationwill be also audited: OTB, COGERCO, SOSUMO, SRDI. The auditors' terms of reference willprovide for a separate paragraph giving the auditor's opinion concerning the amounts withdrawn onthe basis of statements of expenditures. Audit reports will be submitted to IDA no later than sixmonths after the close of the financial year and IDA will be allowed to re-view all project accountsand records. Agreement on accounting and auditing arrangements were reached at negotiations.(para. 6.2 (1)).

K. Environmental Impact

4.46 Profit maximization objectives by private agro-industries are likely to induce the developmentof more efficient use of pesticides (cotton) and fertilizers (tea, cotton and sugar). This will have apositive effect on the environment and reduce pollution in Lake Tanganyika. Therefore, the projectwas assigned an Environment Assessment Category C. However, compliance with existingenvironmental regulations will be a condition of eligibility for services to private companies. Theintroduction of new technologies will be subject to environmental assessments fully financed by theproject.

V. BENEFITS JUSTIFICATION AND RISKS

A. Benefits

5.1 The project will address key constraints that have so far inhibited an adequate supply responseto the macro-economic reforms undertaken and will expand the private sector's involvement in tradeand processing of both traditional and non-traditional products. The assistance proposed above isdesigned to improve the capacity of private businesses to compete, particularly in the early stages ofdevelopment.

5.2 The privatization component will help to transfer to private ownership management and/orcompanies generating most of export earnings outside coffee and providing income to about 90,000rural families. Private management of agro-industries will contribute to increased exports in tea andcotton (30% and 40% respectively over current levels). For sugar it is expected that privatemanagement of SOSUMO will reduce production costs and lead to the capture of a larger share ofa growing local market. The current experience with tobacco shows that farmers are likely to benefitfrom competition among crops as the current administrative constraints will be removed.

5.3 The Agribusiness Development Fund component will encourage small enterprises to prepareand implement appropriate development plans by providing them with matching funds and technicalassistance in product development and market entry. The increases in production and services areexpected to be achieved through labor-intensive investments. Experience with similar funds in other

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countries (para. 4.2) shows that this objective is attainable. Over the duration of the project, 150firms are expected to benefit from financing of commercial services. Additional fiscal revenuegenerated by the increase in the value-added will amount to about 1.5 times the value of the grantover a five year period. The number of women beneficiaries is expected to reach 15 percent by theend of the project which is about twice their current participation. Previously disadvantaged socialgroups and rural entrepreneurs will also be encouraged.

B. Risks

5.4 Demand-driven support services are new in Burundi and disbursements on the AgribusinessDevelopment Fund are expected to be slow in the beginning and concentrated on the few export-oriented entrepreneurs. The implementation of the project component will depend on the successfulimplementation of the government financial policy supported by the Third SAC and the Private SectorDevelopment Project. For the privatization component, emergence of an active secondary capitalmarket will be critical to achieve the government social objective to offer equity capital of agro-industries to the public and employees. This component will also be dependent on SCEP'sperformance which has not been satisfactory in the past. The government is well aware of thesituation and has initiated a comprehensive restructuring of the unit (para. 3.9). External risksinclude setbacks in the government's policy on national unity that could delay privatization ofindustries. Any serious disruption will affect demand for the matching funds and new investments,and diminish returrz to them. These risks will be monitored during project supervision and throughthe mid-term review planned for March 1994. In any case the ongoing democratization of Burundiinstitutions is likely to slowdown Government's decision making process particularly on privatization.The timetable for privatization was extended during negotiations to address this issue.

VI. AGREEMENTS REACHED AND RECOMMENDATIONS

A. Agreements Reached

6.1 This operation is part of a package including the Third Structural Adjustment credit and thePrivate Sector Development project. Most of the policy conditions have been included in those twooperations. The following measures, identified as critical for the success of the proposed project andexpected to be in place prior to its negotiation, have beer. already enacted and implemented by thegovernment as part the SAC m and Private Sector Development (PSD) operations:

(a) Agricultural Sector (SAC LID

(i) price liberalization for exports crops and for inputs;

(ii) clarification of the land tenure code on pastures, irrigated land andswampy bottom lands;

(iii) liberalization of the use of Government-owned land and of the use ofinputs;

(iv) elimination of administrative practices that have regulated cultivationaf export crops.

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(b) Private Sector Development (PSD)

(v) simplification of regulations for enterprise creation and operation,and for import-export activities;

(vi) elimination of Central Bank role in the administration of proceduresfor import and export licensing of business firms and individuals infavor of increased delegation of responsibilities to commercial banks;elimination of prior accreditation of exporters and importers by theMinister of Commerce and Industry; elimination of compulsorydeposits by foreign importers.

(vii) liberalization of controls limiting the transfers overseas of businessearned dividends and of salaries of foreign workers in Burundi; andincreased foreign exchange allowances for business travel andtourism; and liberalized international transport and insurance;

(viii) elimination of Central Bank preferential rediscount rate of 6 percentand institution of a single rediscount rate of 10 percent;

(ix) elimination of the distinction in allocating credits between priorityand non-priority sectors, and between rediscountable and non-rediscountable credits.

B. Agreements reached at Negotiations

6.2 In addition, the following agreements were reached during negotiations.

(a) Scope and timetable for privatization

'i) private firms will be invited to invest in new tea factories (September1992)

(ii) establishment of the TEC by January 1994 for COGERCO, andMarch 1994 for OTB (para 4.15, 4.18);

(iii) privatization of at least 10 percent of the capital for SOSUMO(September 1993); COGERCO (August 1994); and OTB (November1994) (para. 4.15, 4.18, 4.19)

(iv) privatization of the SRDI rice mill in April 1994 (para. 4.20)

(b) public investment in mixed capital agro-industries will be strictly limited to what isnecessary to maintain the current production level (para. 3.6);

(c) private agro-industries will have full control over their extension systems (para. 3.6);

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(d) core investors will have special obligations towards smallholder farmers who are ina de facto monopsonistic situation controlled b> existing processing units (para.4.13);

(e) the preparation of privatization of COGERCO will include the design of measuresenabling farmers to obtain freehold title on government-owned land where they haveindefinite usufruct rights now (para. 4.18);

(f) agreement on the Statement of Policies and Operating Procedures of the Fund,including annual review, annual audit, and criteria for the Mid-Term Review (para.4.27);

(g) implementation of a cost-recovery mechanism on advances for commercial servicesto private firms and introduction of cost-recovery of the Fund operating costs byMarch 1994 (para 4.27);

(O) terms of reference for the Project Administration team (para. 4.30);

(i) procedures on project reporting and monitoring (para. 4.31);

(j) organization of annual meetings of donors (para. 4.32);

(k) terms of reference for the mid-term review to assess implementation progress,identify constraints, recommend corrective action and approve the action program forthe remainder of the project implementation period (para. 4.33); and

1) accounting and auditing (para. 4.45).

C. Conditions of Effectiveness

6.3 Conditions of effectiveness will include:

(a) establishment of the Technical Evaluation Commission for SOSUMO (para. 4.19);

(b) appointment of the Project Administrator and of the accountant who will assist theAdministrator with the consolidation of the Project accounts, both with qualificationsand experience acceptable to IDA (para. 4.30);

(c) completion of the reorganization of SCEP, including the appointment of a financialanalyst, a management specialist and a legal adviser; (para. 4.28);

(d) commencement of the recruitment procedure, (i.e. issue of the financing request andterms of reference) by the supervising ministries at the instruction of ICP, for theconsultants' services for the preparatory works for the privatization; (para. 4.15,4.18, 4.19, 4.20).

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D. Conditions of Disbursement

6.4 Training for privatization

(a) submission of a detailed training program acceptable to IDA (para. 4.21)

6.5 Agribusiness Development Fund

(a) recruitment of an independent firm for the administration of the Fund (para. 4.27);and

(b) execution of the Fund Agreement (para. 4.27)

6.6 Subject to the above agreements and conditions of effectiveness, the proposed project will besuitable for an IDA credit of SDR 2.3 million (US$3.096 million equivalent) to the Government ofBurundi on standard IDA terms with 40 years maturity.

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BURUNDIAGRIBUSINESS PROMOTION PROJECT

Agroindustrial sector policy statement

Introduction

This policy statement, dealing specifically with the agroindustrial sector, supplements thegeneral sectoral policy statement on private sector development issued by the Government on April 15,1992 within the framework of the Private Sector Development Project.

General principles

1. The Government has up until now been the principal investor in the agroindustrial sector,the only notable area of exception being tobacco production. Through the public enterprises, and aidedby donors, the Government has developed coffee production (smallholder plantations, two hulling factories)focusing in particular on fully-washed coffee (80 pulping stations); tea production (industrial andsmallholder plantations, five tea factories), upstream activities in the textile sub-sector (cotton ginning,spinning, weaving), the downstream side being mostly in private hands; sugar production (industrialplantations, refinery); rice production (irrigated smallholder fields, rice mill); and palm oil production(plantations, oil mill).

2. The gradual process of Government divestiture began within the framework of the secondstructural adjustment credit, with liberalization of the rice market and several privatization operations: theMuramvya flour mill, the central dairy, and three cattle ranches. Privatization of the coffee sub-sector issupported by a sectoral project jointly financed by the World Bank and the Caisse Centrale, and involvesprivatization of exports through a system of sales by public auction a