Document ofThe World Bank

Report No: 25435-BF

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED DEVELOPMENT CREDIT

IN THE AMOUNT OF SDR 18.8 MILLION (US$25.2 MILLION EQUIVALENT)

AND DEVELOPMENT GRANT

IN THE AMOUNT OF SDR 4.1 MILLION (US$5.5 MILLION EQUIVALENT)

TO

BURKINA FASO

FOR A

COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

January 28, 2003

Private Sector UnitAfrica Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 2003)

Currency Unit = CFA franc (CFAF)CFAF 1 = US$0.0016585

US$1 = 603 FCFA

FISCAL YEARJanuaiy 1 - December 31

ABBREVIATIONS AND ACRONYMS

AFD Agence Fran,aise de DeveloppementAPEFEL-B Association des Exportateurs de Fruits et Legumes du Burkina (Fruit and Vegetable Exporters' Association)ARTEL Autorite de Reglementation des Tel&ommunications (Telecommunication Regulatory AuthorityASAC Agricultural Sector Adjustment CreditASAP Agricultural Sector Adjustment ProgramBDS Business Development ServicesBRVM Bourse Regionale des Valeurs Mobilieres (Regional Stock Exchange)CAS Country Assistance StrategyCBC Conseil Burkinabe des Chargeurs (National Shippers' Council)CCIA-BF Chambre de Commerce, d'Industrie et d'Artisanat du Burkina Faso (Chamber of Commerce, Industry and

Handicrafts)CFA Communaute Financiare Africaine (African Financial Community)CGU Centre des Guichets Uniques ("Single Window" Center)CNC Certzficat National de Conformite (national certificate of conformity)CNCC Commission Nationale de Concurrence et de la ConsommationCNPA Commission Nationale de Promotion de l'Artisanat (National Commission for Handicrafts Promotion)COB Conseil Oleagineux Burkinabe (Oilseeds Promotion Council)CPAR Country Procurement Assessment ReviewCPCE/SP Commission Permanente de Concertation Etat/Secteur Prive (Commission on State/Private Sector

Collaboration)DAC Direction de l'Aviation CivileDELGI Delgation General a lI'lnformatique (General Delegation of Informatics)DNM Direction Nationale de la MeteorologieDOS Document d'orientation strategique (Strategic Orientation Document)EAC Enhanced Adjustment CreditECOWAS Economic Community of West African StatesEMP Environmental Monitoring PlanEU European UnionFMS Financial Management SystemFNPA-B F&iration Nationale des Producteurs Agricoles du Burkina (National Federation of Farmers)FODEL Fonds pour le Developpement de l'Elevage (Livestock Development Fund)GDP Gross Domestic ProductGPN General Procurement NoticeGSM Global System for Mobile CommunicationsHIPC Highly Indebted Poor CountriesICB International Competitive BiddingICT Information and Communication TechnologiesIDA International Development AssociationISP Internet Service ProviderITU International Telecomnunication UnionLSC Least-Cost SelectionMEBF Maison de l'Entreprise du Burkina FasoMFI Microfinance InstitutionsMPT Ministry of Post and TelecommunicationsNBF Not-Bank FinancedNCB National Competitive Bidding

NGO Non-Governmental OrganizationNICT New Information and Communication TechlologiesOHADA Organisation pour l'harmonization du Droit des Affaires en Afrique (Organization for the Harmonization of

Business Law in Africa)ONAC Office National du Commerce Extirieur (National Foreign Trade Office)ONATEL Office National des Telecommunications (National Telecommunications Office)ONEA Office National de l'Eau et de l'Assainissement (National Water and Sanitation Office)OPA Organisation Professionnelle des Agriculteurs (Farmers' Professional Organization)PA/FMR Plan d'Action sur le Financement du Monde Rural (Action Plan for Rural Financing)PAPISE Plan d'Action et de Programme dI'nvestisse,nents du Secteur de l'Elevage (Action Plan and Investment

Program for the Livestock Sector)PCU Project Coordination UnitPIM Project Implementation ManualPMR Project Management ReviewPPF Project Preparation FacilityPRSP Poverty Reduction Strategy PaperPSO Plan strategique operationnel (Strategic Operational Plan)QCBS Quality and Cost Based SelectionRCCM Register of Commerce and Personal Property TransactionsRFP Request for ProposalsRTS Rural Telecommunication ServiceSAC Structural Adjustment CreditSAP Structural Adjustment ProgramSFB Selection under a Fixed BudgetSME Smnall and medium-size enterprisesSOE Statement of ExpendituresSONABEL Sociefe Nationale Burkinabe d'Electriciti (National Electric Company)SONABHY Societi Nationale Burkinabe d'Hydrocarbures (National Oil Company)SPN Specific Procurement NoticesTA Technical AssistanceTSAC Transportation Sector Adjustment CreditTSAP Transportation Sector Adjustment ProgramUEMOA Union Economique et Mongtaire des Etats de l'Afrique de l'Ouest (West African Economic and Monetary

Union)UNABOC Union Nationale des Bouchers et Charcutiers (National Union of Beef and Pork Butchers)UNACEB Union Nationale des Commercants et Exportateurs de Betail (National Union of Livestock Dealers and

Exporters)UNDB United Nations Development BusinessUNJPA-B Union Nationale des Jeunes Producteurs Agricoles du Burkina (National Union of Young Farmers)UNPC-B Union Nationale des Producteurs de Coton du Burkina (National Union of Cotton Producers)VAT Value Added TaxVSAT Very Small Aperture TerminalWTo World Trade Organization

Vice President: Callisto E. MadavoCountry Director: A. David Craig

Sector Manager: Demba BaTask Manager: Francois Nankobogo

BURKINA FASOCOMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 43. Sector issues to be addressed by the project and strategic choices 10

C. Project Description Summary

1. Project components 132. Key policy and institutional reforms supported by the project 163. Benefits and target population 164. Institutional and implementation arrangements 17

D. Project Rationale

1. Project alternatives considered and reasons for rejection 202. Major related projects financed by the Bank and other development agencies 213. Lessons learned and reflected in the project design 214. Indications of borrower commitment and ownership 225. Value added of Bank support in this project 23

E. Summary Project Analysis

1. Economic 232. Financial 243. Technical 244. Institutional 245. Environmental 256. Social 267. Safeguard Policies 27

F. Sustainability and Risks

1. Sustainability 272. Critical risks 28

3. Possible controversial aspects 30

G. Main Conditions

1. Effectiveness Condition 302. Other 30

H. Readiness for Implementation 31

I. Compliance with Bank Policies 31

Annexes

Annex 1: Project Design Summary 32Annex 2: Detailed Project Description 36Annex 3: Estimated Project Costs 51Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 53Annex 5: Financial Summary for Revenue-Eaming Project Entities, or Financial Summary 56Annex 6: Procurement and Disbursement Arrangements 57Annex 7: Project Processing Schedule 67Annex 8: Documents in the Project File 68Annex 9: Statement of Loans and Credits 69Annex 10: Country at a Glance 71Annex I 1: Privatization Program 73Annex 12: Letter of Development Policy for the Private Sector 77

MAP(S)IBRD 28673

BURKINA FASOCOMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

Project Appraisal Document

Africa Regional OfficeAFTPS

Date: January 28, 2003 Team Leader: Francois NankobogoSector Manager: Demba Ba Sector(s): Telecommunications (30%), Other industryCountry Director: A. David Craig (30%), Central government administration (20%), LawProject ID: P071443 and justice (20%)Lending Instrument: Technical Assistance Loan (TAL) lTheme(s): State enterprise/bank restructuring and

privatization (P), Regulation and competition policy (P),Small and medium enterprise support (P), Law reform (S)

[ Loan [X] Credit Pq Grant 1 ] Guarantee [ Other:

For Loans/Credits/Others:Amount (US$m): 30.70 (including a US$ 25.2 m Credit and US$ 5.5 m Grant)

Proposed Terms (IDA): Standard CreditGrace period (years): 10 Years to maturity: 40

n n_i _ n W..'f BORROWER/RECIPIENT 3.60 0.00 3.60IDA 7.30 17.90 25.20IDA GRANT FOR DEBT VULNERABLE 3.90 1.60 5.50Total: 14.80 19.50 34.30Borrower/Recipient: GOVERNMENT OF BURKINA FASOResponsible agency: GOVERNMENT OF BURKINA FASOMinistry of Commerce, Enterprise Promotion and HandicraftsAddress: Ouagadougou, Burkina FasoContact Person: Minister Benoit OuattaraTel: (226) 31 44 93 Fax: (226) 31 84 97 Email:

Other Agency(ies):Ministry of Teleconimunications, Ministry of Finance, Ministry of Justice, Ministry of Transport, PrivatizationCommittee, Maison de l'Entreprise du Burkina Faso.Contact Person: Mr. Nazaire Pare, Project CoordinatorTel: (226) 619900 Fax: (226) 31 84 97 Email: pnazaire@hotmail.com

Estimated Disbursements (Bank FYiUSSm):

Annual 0.59 4.51 6.00 7.00 6.60 6.00Cumulative 0.59 5.10 1.10 _ 18.10 24.70 130.70

Project implementation period: 5 yearsExpected effectiveness date: 06/30/2003 Expected closing date: 06/30/2008

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project objective is to assist Burkina Faso to improve the competitiveness of its economythrough privatization and utility reform, investment climate improvement and private sectorinstitutional development, and mitigation of constraints to small and medium enterprisedevelopment. To achieve these objectives, the project will provide support to: (i) roll back governmentinvolvement in the market's domain through privatization and actions to foster competition; (ii) carry oututility reform, particularly the telecommunications and energy sectors; and (iii) promote the developmentof a strong and competitive private sector by improving the business environment and reducing systemicrisk through the provision of effective business development services (BDS), and of microfinanceservices.to micro, small and medium enterprises (SMEs).

Importantly, the proposed project is designed to assist the Government in implementing its PovertyReduction Strategy. That strategy targets long-term private sector development objectives, including thelowering of input costs, the increasing of factor productivity, the encouraging of private initiative and thesupporting of income generating and job creating activities through SME development.

2. Key performance indicators: (see Annex 1)

Project impact will be measured by the set of performance indicators discussed below, which will bemonitored periodically throughout project implementation.

Outcome indicators

* Formal private sector contribution to GDP growth increased by at least 8 percentage points bythe end of the project. Effective divestiture of public enterprises through a competitive andtransparent process will contribute to the achievement of this target, as this should translate intoincreased private investments and output. The share of economic production coming from theprivate sector will increase as a result of effective implementation of privatization transactions. Ashift from public to private sector production-measured in terms of employment, value added ortotal production-should be predictable and measurable based on an action plan for enterprisesales agreed with the Government. Specific project performance indicators will include: i)divestiture completed in at least 15 public enterprises; ii) power sector regulatory bodyestablished and made operational; and iii) concession contracts concluded for thetelecommunications and electricity companies.

* Improved access to infrastructure services at affordable cost with (i) a teledensity increase from1.5 telephone lines per 100 people to 3 telephone lines per 100 people by the end of the project;(iii) provision of rural telecommunications services completed in at least 100 additional villages;(iii) an increase in access to electricityfrom 9 percent of households in 2002 to 14 percent by theend of the project; and (iv) reduction in unit cost of telecommunications and electricity. In thetelecommunications sector: (a) consumer access to telecommunications services should improveabout eight fold as a result of increased investments in both the fixed lines and cellular telephonenetworks triggered by the reforms supported by the project; (b) presently under-served or notserved cities, rural areas, and communities should enjoy increased service with the ruraltelephony; (c) prices should decline to levels comparable to those that prevail for similar servicesoffered in other countries; and (d) services offered to consumers through the introduction of newinformation and communication technologies should diversify in kind and capability as new

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telecommunications services (such as cellular, paging, internet, and data transmission services)emerge in a multi-provider environment. In the power sector, improved sector management andinvestment resulting from the privatization of the electricity company and the hydrocarbonscompany will allow an increase in access and quality of service.

- Number ofjobs created as a result of improved business environment ancd business developmentservices (including the matching grant facility). Specific metrics will include: (i) at least 2,000new jobs created in the private sector; (ii) legal framework in line with OHADA uniform acts(Organization for the Harmonization of Business Law in Africa); (iii) administrative barriers toinvestmnent reduced by 60 percent by the end of the project, with a close monitoring by theCompetitiveness Committee; (iv) 500 enterprises and associations using business developmentservices through the "Maison de l'Entreprise du Burkina Faso" (MEBF); and (v) 20 trainingcourses developed and used by the private sector. As the business environment improves, privateinvestment, including foreign direct investment, is expected to be redeployed to improve thecompetitiveness of industrial structures. Firms, and particularly small and medium enterprises,whose capabilities will be strengthened through the provision of business development services,will also develop among vertical and horizontal linkages, thus expanding positive externalities.More specialized business support service providers will develop as well.

* Improved capacity and performance in the microfinance industry .measured by: i) timely andeffective supervision of microfinance institutions; ii) increased financial intermediation thatleads to more loans for productive use for micro and SMEs in both urban and rural areas; andiii) percentage of non performing loans not to exceed 15 percent of the MFIs aggregateportfolio. Increased access to microfinance services for micro and SMEs is a key ingredient inthe development of a strong private sector. The project will help increase the capacity ofmicrofinance institutions to deliver such services.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 21285-BUR Date of latest CAS discussion: November 30, 2000

The proposed project supports the main objectives of both the CAS and the. Government's DevelopmentReform Program described in the Poverty Reduction Strategy Paper and discussed by the Board of theWorld Bank on June 27, 2000. The latest CAS was discussed by the Board on November 30, 2000.

The Government program aims at promoting faster, equity-based growth that is less susceptible toexternal shocks (such as a sudden drop in cotton or gold prices), and more robust than in the past becauseit is fueled by a broader, economic base. In the medium term, the .Government had aimed at achieving realGDP growth averaging 7 percent per year, inflation of less than 3 percent and GI)P per capita growth ofat least 3 percent per year. However, due to unfavorable climatic conditions (drought) in 2000 whichcaused a decline in cereals and cotton production, real GDP growth was only 2.2 percent. Recovery wasachieved in 2001 with a 5.6 percent growth rate. It was initially expected that the GDP growth,rate wouldbe about .5.7 percent in 2002, but due to the crisis in neighboring Cote d'Ivoire and its impact on BurkinaFaso's economy, the 2002 growth rates has been revised to 5%. The project will contribute materially tothe improvement of the overall economic performance, thus helping the Government achieve it objectivesof private sector-led high growth with poverty reduction. It will address some of the critical issueshampering increased growth, such as the limited access to infrastructure services at affordable tariffs,numerous bottlenecks in the business environment ancl a weak domestic private sector.

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Burkina Faso qualifies for IDA grant lending as it is among the poorest IDA-only countries that isparticularly vulnerable to longer-term debt sustainability problems. The strategy for the use of thesegrants in the Burkina Faso program is to apply them to those Bank activities which support the prioritiesof the PRSP and directly target the poor. This particular project was selected for grant financing becauseof the following:

(i) Private sector development is one of the key priorities of the PRSP. The specific objective of thePRSP in this area is to promote the private sector through lowering input costs, increasing factorproductivity, encouraging private initiative and supporting activities to generate income and createjobs, particularly in rural areas.

(ii) This project is a core element of the Bank's FYOI-03 CAS for Burkina Faso. The CAS identifiedprivate sector development as a key source of growth in Burkina Faso and proposed to assist theGovernment in this area through (i) improving the quality, access and cost of telecommunicationsand energy services; and (ii) promoting development of a strong indigenous private sector in BurkinaFaso through a streamlined business environment and well-targeted financing and non-financialservices to small and medium-sized enterprises.

(iii) The project has a strong pro-poor focus as it supports employment creation and micro-financedevelopment. This support will benefit the IDA grant financing of US$5.5 million. More specifically,the IDA grant financing will be applied to the components 2.2(b) "Matching Grant Facility" and 2.3"Micro-finance" (Annex 3).

(iv) The Government has expressed a particular interest in applying IDA grants to this project as itfurther underlines the project's importance and the Government's commitment to its developmentobjectives.

In FY03, Burkina Faso was allocated grants of US$31.9 million. It was decided to apply US$5.5 millionof the grants to the components of this project which are directly targeting poverty-reduction. This meansthat the project has a blend of IDA credit financing and IDA grant financing. The remainder of the FY03IDA grant allocation is being applied to the FY03 Burkina Faso Transport Sector Project for the ruralroads component.

2. Main sector issues and Government strategy:

Owing to a wide range of macroeconomic reforms implemented under a series of donor-supportedstructural adjustment programs, Burkina Faso's economy has been one of the best performing countries inWest Africa with a 5.7 percent growth rate per annum over the 1996-99 period. However, thevulnerability of the economy to adverse factors (e.g. drought) and external shocks such as an increase inoil prices, has been illustrated by the 2000-2001 growth rates which have been only 2.2 percent perannum, thus basing Burkina's growth prospects on a low starting point. Bukina's real GDP per capita isonly US$230. Moreover, 45 percent of the population live below the poverty line. In order to reduce theincidence of poverty, the Government is aiming to raise and sustain higher growth rates. Theachievement of this objective hinges on the ability of Burkina Faso to improve the supply response of theeconomy by rolling back government intervention, improving its overall business environment as well asthe quality of its infrastructure, and ensuring the maturation of its indigenous private sector whileattracting supplemental foreign direct investment.

Reforms implemented over the past five years include the following: (i) trade and price liberalization andtaxation; (ii) privatization (or liquidation) of 44 public enterprises; (iii) banking sector restructuring; (iv)

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establishment of a regulatory framework that progressively liberalizes the telecommunications sector;and (v) specific actions to support growth in mining and agriculture and livestock. Some of these reformshave been supported by Bank-financed projects, including a Private Sector Assistance Project (Cr. 2472)designed to improve the institutional environment for private activities which closed on June 30, 2000.

However, recent economic reforns have made only a small dent in the poverty situation of the country.According to the 1998 Household Survey, 45.3 percent of the population still lives below the officialpoverty line of US$0.35/person per day. This compares unfavorably with 44.5 percent in 1994. TheGovernment has carried out a number of studies to better analyze the challenges it is facing, including anin-depth analysis of the characteristics and determinants of poverty and a comprehensive study ofcompetitiveness and long-term sources of growth in Burkina Faso. The latter identified four majorconstraints to growth: (i) weak human resources, low labor productivity and high unemployment; (ii)weak infrastructure, high input costs; (iii) limited size of the formal sector; and (iv) weak institutionalcapacity. The Government has realized that accelerating economic growth is critical for povertyreduction. However, to achieve success, it will need to address the issues discussed above in a coherentand sustained way. The improvement of the distributional impact of economic growth was one of thekey criteria for the selection of the activities to be carried out under this project: improving rural accessto infrastructure services, promoting SME development and microfmance, improving access to judicialand legal services, and fostering competition through divestiture.

Government involvement in commercial activities through public enterprises (PE), and low accesscombined with high cost infrastructure services. The Government is still involved in 53 enterprises, ofwhich 11 are large-scale enterprises fully owned by the State. These are mainly involved in publicutilities. Eighteen are smaller enterprises that are fully or majority owned by the State and 24 are smallenterprises in which the state holds only a minority share. The PE sector supports 20,000 jobs.State-owned enterprises suffer from insufficient equity due to the limited fiscal capacity of the State tocontribute to investment needs. Management teams within the PE sector lack incentives to competeeffectively. The Government decided in June and Parliament endorsed in July 2001, to proceed, inaddition to the telecommunications incumbent ONATEL, with the privatization of 20 enterprises,including all utilities. This move paved the way for systematic structural reformns in all utilities sectorswhich will translate into reduced factor costs and increased access to service, twvo important aspects ofcompetitiveness and equity. At the same time, the Government signaled its intention to fully divest fromenterprises where it has minority shares.

With respect to infrastructure services, Burkina Faso still has, in spite of the efforts initiated by theGovernment, the highest unit costs of production in the entire Union Economique et Monetaire des Etatsde I'Afrique de l'Ouest (UEMOA) region. It also has underdeveloped infrastructure in most areas andpoor quality of services in those areas where infrastructure exists. These high factor costs translate intohigh transaction costs. They discourage foreign investment and the expansion of the private sector ingeneral. The situation by sub-sector is as follows:

(i) Telecommunications and Information Technologies: Despite the positive impact in the provision ofmobile services due to the liberalization measures taken by the government, the population still haslimited access to telecommunications services. The main issues are:

i. Digital divide between urban and rural communities. Rural and remote communities (where 80percent of the population live) have a telecommunication penetration ratio of less than 0.25 lines per1,000 people; whereas the overall country accessibility index (fixed and mobile) has improved to14.5 per 1,000 people in September 2001. The government is committed to bringing

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telecommunication services to the under-served population and is considering innovative approaches-that are in line with the smart subsidies models tested in Latin America or similar to the so calledoutput-based subsidies to overcome this problem.

ii. Weak policy-setting capacity. Up until 1998, the operations and regulatory functions as well asthe function of formulating sector policy were a shared responsibility between the government andONATEL, the state owned public telecommunications operator. With the implementation of thesector reform in 1998, a Ministry of Post and Telecommunications (MPT) was created to take overthe responsibility of setting the sector policies on post and telecommunications. The ministry'scapacity to formulate sector policies remains very weak. The scope of the Ministry's responsibilitiesexpanded recently since, on October 17, 2002, the Government decided, by decree number2002-447/PRES/PMIMPT, to transfer the responsibility of information and communicationstechnologies policy from the "Delegation Generale i l'Informratique" (DELGI) in the PrimeMinister's Office to the MPT.

iii. Weak regulatory capacity. Insufficient capacity in addition to its limited political independencehave prevented ARTEL from becoming an effective regulator. However, ARTEL's management hasso far succeeded in managing the sector transition from a monopoly structure towards a progressiveliberalized market. The government plans to accelerate the structural ownership change over ofONATEL and reinforce the technical capacity of ARTEL in order to address this issue and, as aresult, establish conditions for a level playing field, strengthen the predictability of the sectorregulatory framework and have a significant impact over the sector performance in the coming years.

iv. ONATEL's privatization. The Government has hired a team of international advisors to assistwith the privatization of ONATEL (using World Bank procedures). However, given the downturn ofthe international financial markets in general, and the financial crisis that is affecting thetelecommunication sector worldwide, the privatization of ONATEL could become unappealing if thegovernment does not move fast. The latest financial statements released by the company show arapidly degrading situation with a surge of unjustified investments. Further, the resources needed tofinance the expansion of ONATEL's cellular operation are simply beyond the government'scapabilities.

v. Exclusivity over basic telephone services. The existing regulatory framework provides anexclusivity period of five years to ONATEL on fixed basic telecommunications services, includingthe operation of satellite terrestrial terminals (VSAT) up to December 31, 2005. The exclusivity ismeant to help ONATEL adjust its operating costs during the transitory period and be prepared to facecompetition on all its market segments. Although such a wide protection could be justified, it alsocreates additional and costly distortions to the economy. Up until now, and due to this situation, theISP market remains totally controlled by ONATEL and leased lines tariffs remain abnormally high (a128 kbit/s is billed at US$1400 monthly compared to US$200 in developed countries). Modifying thescope of the exclusivity, for example by opening the VSAT segment to full competition, includingthe ability to convey voice telephony traffic prior to 2003, will provide positive stimuli for economicgrowth and for the competitiveness of Burkinabe enterprises transacting online.

(ii) Power Sector: The distribution network is inadequate (servicing only 9 percent of households) andpower prices are high compared with neighboring 'countries with similar GDP size and smallerpopulations. This is due to a number of factors, including the high cost of generation due to aninadequate power system planning and the poor performance of the "Societe Nationale Burkinabed'Electricite" (SONABEL), which is responsible for electricity production and distribution. Per capita

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consumption is 22kwh in Burkina Faso, compared with 100 kwh in Cameroon, 200 kwh in Senegal and270 kwh in Cote d'lvoire. The average tariff is higher than in neighboring countries, i.e. about 23 centsper kwh for industrial consumption and 21 cents per kwh for households, while these tariffs are at least50 percent lower even in Togo and Benin as shown in the table below:

Country Average Social LV Access Rate %household tariff Industry of Householdsuscents/kWh

Ghana 5.14 3.38 7.44 35CBte d'Ivoire 8.52 5.00 5.54 20Togo 10.68 10.55 10.95 12Benin 12.44 10.41 11.22 13Mali 17.95 14.84 18.12 11Burkina Faso 20.87 16.25 23.45 9Cf. average Europe 8.14 5.68 8.73 99.9

Source: CIE-EDF

The Government has decided to seek innovative solutions in the sector by calling for increased privateparticipation in both the electricity sector and the hydrocarbons sector. To achieve that objective,assistance will be provided under this project to the Government of Burkina Faso to set up appropriateregulatory arrangements and to open both the electricity company, SONABEL, and the hydrocarbonscompany, "Societe Nationale Burkinabe d'Hydrocarbures" (SONABHY), to private investors. Sectorinvestments will be addressed under a separate IDA-supported energy sector reform operation.

(lil) Transport: As a landlocked country, the efficiency of the transport system is critical for thedevelopment of its trading activities with neighboring countries and the rest of the world. The transportinfrastructure of Burkina consists of: (a) a low densily network of interurban roads (9,000 km of whichonly about 2,000 km are paved); (b) a 622 km single metric railway line connected to the Ivorian line; (c)a road freight station in Ouagadougou;. (d) two international airports (Ouagadougou andBobo-Dioulasso); and (e) about 7,000 km of rural roads and a vast network of rural paths. To improve theefficiency of its transport system, the Government has taken steps to liberalize and involve the privatesector in the provision of various services. Jointly with C6te d'lvoire, Burkina has succeeded inprivatizing the Abidjan-Ouagadougou-Kaya railway; even though political problems in CBte d'lvoire inlate 2002 have brought the operations of the operating company, SITARAIL, to a standstill. Sinceprivatization, the service quality and consequently the freight volume of the railway have increasedsignificantly. The Government is introducing private participation in urban transport and roadmaintenance, signed an open sky agreement with the United States of America on July 27, 2000, andcompleted the privatization of Air Burkina, the national air carrier, in February 2001. Moreover, BurkinaFaso has endorsed the Yamoussoukro decision; and its air safety and security arrnmgements are regularlyinspected by ICAO and FAA. It intends to further improve sector efficiency by pursuing air transportreform through airport concessionning and civil aviation modernization to the effect of improvinglinkages to international markets (e.g. non-traditional exports such as flowers, fruits and vegetables) andunlocking other potential areas such as tourism. Issues pertaining to physical investments and ruraltransport will be addressed under a specific Transport Sector project.

Deflcient business environment and lack of adequate business development services: As part of its

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structural adjustment measures deployed over the last decade, Burkina Faso has undertaken a sweepingchange of policy to liberalize and open its economy. In addition to ensuring macroeconomic, fiscal andmonetary stability, the focus was also put on liberalizing prices and trade. While some work was initiatedin several other areas pertaining to business environment, it is urgent that the work be pursued vigorouslyso as to accelerate private sector development with increased flows of trade and investment. The mainfocus of this project's assistance in this area will be the legal and regulatory environment and the removalof administrative barriers through the support to a competitiveness committee.

(i) Legal and regulatory framework: The Government has already carried out a major overhaul of itsbusiness laws by adopting new business laws under the OHADA treaty. However, it still needs to carryout a number of additional critical reforms to significantly improve the judicial system. In this context, itfaces a number of issues, including: (i) an insufficient number of judges and courts (for example, eventhough the judicial code covers courts in all of Burkina, most courts are concentrated in Ouagadougouand Bobo-Dioulasso, the two main cities); (ii) the lack of operating funds; (iii) the slowness of decisionmaking (e.g., long delays before judgments are rendered) and publication of decisions, partiallyattributable to insufficient equipment; (iv) weak accountability and impartiality among judges; and (v)the lack of knowledge of the general public (including business people) of their rights. As para-legalservices remain insufficient and capacity remains low, judiciary decisions frrequently remainun-executed. Some of them are never written. In its justice sector policy for 2000-2004, the Governmentoutlined its strategic options. These consist of: (i) strengthening the judiciary sector by carrying out theneeded institutional reforms, and (ii) providing infrastructure, equipment, and both human and financialresources needed by the judiciary system. Ability to enforce laws and regulations is an important aspectof the private sector enabling environment; and the project will provide assistance essentially oninstitutional reform (e.g. improving the operations of the commercial registry, strengthening the judiciaryinspection function, and setting up an arbitration court).

(ii) Private-Public sector dialogue on competitiveness issues: The focus on the competitiveness agendaallows Burkina Faso to pursue its accelerated growth agenda while also meeting the IDA-1 3 performancecriteria in the area of investment climate which requires that IDA countries demonstrate improvement inthe reduction of the number of days required to register a company and the cost of administrative barriersto investment. The Government has started to address some issues pertaining to business environment byreducing the formalities needed to register a business. To create a company in Burkina Faso, a smallentrepreneur currently has to fulfill numerous steps and pay fees of up to 20 percent of its capital beforeit can start business activities. FIAS has assisted the Government in simplifying and reducing the numberof registration procedures. Before the FIAS technical support, 15 administrative procedures wererequired to register a company. With the leadership of the Ministry of Commerce, the administrativeprocedures to set up a company were reduced to 8, and administrative requirements to operate as amerchant were reduced from 1I to 9. Moreover, six administrative procedures were simplified in termsof documentation required or the level of decision-making. Despite this progress, a recent survey on thecost of doing business in Burkina Faso shows that there is still a large number of issues that need to beaddressed in order to have an enhanced business-friendly environment. Moreover, other important issuessuch as those pertaining to administrative barriers to investment, to the improvement of the servicesprovided by the one-stop shop center (guichet unique) and other private sector-support organizations stillneed to be addressed. Effective implementation of the competitiveness agenda requires a strongpartnership among all economic players.In the context of this project, a Competitiveness Committee,composed of public and private sector representatives, was recently established to makerecommendations to the Govermment to monitor progress in this area. The objective is to reduce the costof doing business in Burkina Faso so as to attract private investment and enhance the overall economiccompetitiveness. With respect to taxation, the corporate tax has been reduced from 45 percent to 35

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percent in line with the sub-region standard. The Government recently undertook a study on marginaleffective tax rate in order to further reduce taxation levels and bring them in line with other UEMOAcountries' corporate tax, simplify the tax system to remove complex and cumbersome procedures andbroaden the tax base. The project will support, through the competitiveness committee, sustainedpublic-private dialogue on the issue of corporate taxation.

(iii) Need for private sector institutional support and efficient business development services: Asindicated in the table below, Burkina Faso's private sector consists mainly of merchants (43 percent ofthe number of enterprises and 42 percent of the total sector turnover). However, even though industryrepresents only 9 percent of the total number of registered companies, it supports the highest share ofemployment, tirnover and taxes paid.

Number of Number of 2000 turnover Taxes paid in 2000enterprises employees (CFAF billion) (CFAF billion)

Handicraft 371 739 1.22 0.027Commerce 846 9,023 259.00 4.64Industry 177 13,086 269.30 14.80Services 567 6,115 87.80 3.10

Source: Chambre de Commerce, d'Industrie et d'Agriculture du Burkina Faso (CCIA-BF), Fichier glectoral 2001

Overall, the Burkinabe private sector lacks international exposure and experience and has not yetacquired or mastered modem management methods and standards for their enterprises. As a result, inaddition to the improvement of the incentive system and the business environment, specific actions arerequired to broaden the enterprise base and build capacity within the business cornmunity. Unfortunately,in the past, there has not been coordination among donors which has led to a large number of donorinitiatives with low impact on the development of entrepreneurs. The level of technical and managerialcapability in the business community remains low and this constitutes an obstacle to new technologyadoption, worker productivity improvement and new product development. The donor communitytherefore agreed to carry out a joint assessment of the three main institutions providing direct support toentrepreneurs. This assessment was carried out in December 2000/January 2001 and, based on theresults, an agreement was reached among all stakeholders. This agreement dealt with: (i) the nature andthe content of assistance needed by the Burkinabe entrepreneurs and the way each donor would calibratethe related assistance; and (ii) the need to create the Maison de I'Entreprise du Burkina Faso (MEBF), aprivate sector-led structure which will play a coordinating role between the various donor supportprograms. Studies focussing on the implementation of the MEBF and assessment of the existinginstitutional support to the private sector were carried out during 2001 and both the by-laws and adetailed procedures manual were prepared in 2002. The MEBF will operate as a private sectorassociation. Through the MEBF, private sector capacity will be strengthened and business processesimproved. This will be achieved, inter alia, through the provision of matching grants for consultantservices and training. The MEBF was created in September 2002.

Access to financial services is a major constraint both for SMEs and farmers. The Government hascarried out a major reform of the banking sector, which is now healthy. However, this reform has not yetresulted in a significant increase in financial intermedliation, which remains shallow. Access to financialservices is quite limited (only 4 percent of the population has a bank account and about the sameproportion has access to microfinance services). Private sector savings are low, as is private sectorinvestment. In spite of some donors' involvement in the development of microfinance institutions, there isa lack of diversity of financial services, particularly services to satisfy the needs of SMEs, and of

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investment financing in general. Given the typology of the private sector in Burkina Faso, there is a needto work on several fronts, namely to: (i) further develop and structure the microfinance system; (ii)enhance capacity of MFIs; and (iii) identify new instruments and mechanisms to meet micro and SMEfinance needs.

3. Sector issues to be addressed by the project and strategic choices:

As the above discussion demonstrates, Burkina Faso needs to undertake a comprehensive package ofstructural reforms if it is to reach the level of growth that is required to actually reduce poverty in thecountry. The Government has realized this and has formulated a new sector vision and requested strongsupport from the donor community. To support its long term development vision, the Government hasalso developed a private sector development (PSD) strategy, approved by the Cabinet on July 14, 2000,and a letter of private sector development policies adopted by decree on November 13, 2002.

The Bank, for its part, carried out an analysis of the prerequisites for accelerated growth. Supported bythis analysis, several existing instruments, as well as several new operations are providing the supportingfoundation for the Govermment's accelerated growth agenda. The proposed project takes into account thelessons learned from the previous PSD operations. Therefore, its main features are as described below.

A. Need for improved competitiveness

The project will assist with the implementation of: (i) the privatization program that the Governmentadopted and Parliament endorsed in July 2001; (ii) telecommunications reform, including theprivatization of ONATEL, the strengthening of the regulatory agency, and the market introduction ofnew information and technology applications; (iii) set-up of a regulatory mechanism in the energy sectorand subsequent capacity building; (iv) privatization of the energy sector public enterprises, namelySONABEL and SONABHY; and (v) the privatization of the airport management and capacity buildingfor civil aviation. These actions are expected to improve competition, to foster broad-based private sectordevelopment, and to reduce the factor costs as well as the transaction costs.

Divestiture of Public Enterprises: The Government has realized that it must divest from productiveactivities in order to allow the private sector to make investments required to consolidate ongoingactivities and develop new ones. It has therefore carried out a strategic analysis of the residual Stateportfolio, including a number of public enterprises in the agriculture sector. Based on this analysis, theGovernment is preparing a divestiture program to be implemented with the support of this project. Keypolicy issues related to this privatization program and to market liberalization will be dealt with incoordination with the Poverty Reduction Support Credit (PRSC).

Telecommunication and Information Technology: As indicated above, the Government needs toaddress issues of low and uneven access to telecommunications services, capacity at the policy-settingand regulatory levels and high tariffs. These conditions contribute to preventing the majority of thepopulation from accessing basic telecom services, especially the poor in the rural areas. Under the PrivateSector Assistance Project (Cr. 2472), technical assistance was provided to support the Government inthe: (i) development of a sector strategy; (ii) adoption of a new regulatory framework that clearlydifferentiates the regulatory and policy setting functions, to be carried out by ARTEL (the newly createdtelecommunications regulatory authority) and MPT, respectively; and (iii) opening of the sector tocompetition through the issuance of two cellular licenses that have changed the sector structure. TheGovernment is currently committed to completing the reform agenda with the support of the proposedproject through: (i) privatization of the main operator (ONATEL); (ii) development of a specific strategyto provide services in rural areas; (iii) strengthening of MPT's policy-setting capacity and ARTEL's

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regulatory capacity; and (iv) supporting the development of information and communicationtechnologies.

Energy Sector Reform: In light of the high cost of energy and the high demand growth in Burkina Faso(e.g. about 7 percent per annum in Ouagadougou), Burkina Faso needs to engage important sectorreforms to address the issues. The high cost of energy is a hindrance to economic activity and animportant expenditure item for households. Burkina Faso has indicated its readiness to create conditionsfor private sector involvement in the energy sector. This will imply a decision on a sector structure whichwill foster competition, and the opening to private participation in both the electricity and thehydrocarbons sub-sectors through the privatization of SONABEL and SONABHY. In that context, a newregulatory framework 'will be defined, a regulatory body will be created and capacity will be created toensure that the sector operate as efficiently as possible. In parallel, investment effort will be deployed,with the support of an energy sector investment project co-financed by IDA, to promote interconnectionto cheaper sources of electricity in neighboring countries, namely Cote d'Ivoire and Ghana.

Air Transport: As indicated above, the Government is closing the privatization transaction involving itsnational carrier, Air Burkina. However, the Government is also committed to moving towards an "openskies" policy as reflected by the "open skies" agreement with the USA signed in July 2000. However, inorder to fully benefit from these new opportunities, the Government needs to: (i) update the CivilAeronautic Code and air transport regulations to make them compatible with international standards andalso with regional policies adopted by the Heads of State in Lome during the 2000 OAU Summit; (ii)strengthen the capacity of its national civil aviation and meteorology authority which resulted from therecent merger of the DAC (Civil Aviation Directorate) and DMN (National Meteorology Directorate);and (iii) proceed with the privatization of airport administration. The proposed operation would providesupport to realign the civil aviation authority so as to effectively play its role in carrying out itsregulatory functions and to foster the development of air transport services in Burkina Faso.

B. Support to Enterprise Development

This component is essential for accelerating the development of the private sector in Burkina Faso. Itrequires working in parallel on several interrelated actions. The project component will address thefollowing issues:

Improving the business environment: On the legal and regulatory reform front, the European Union'ssupport to the judiciary system is currently focused on citizen's rights (human rights, penal justice, etc.)at the national level and on OHADA at the regional level. The proposed project will provide focusedsupport for the reform and codification of business law and arbitration. With respect to the removal ofadministrative barriers and the removal of administrative overhead costs, the project will provide supportto the Government .so that it can simplify and streamline administrative barriers to investment, such asimproved land access and site development, and simplify and harmonize import/export processingprocedures.

Technical assistance to entrepreneurs through increased access to business development services:Developing simultaneously both demand for and supply of business support services for SMEs is criticalfor their sustained growth and competitiveness. Based on the lessons learned in several workshopsconducted with Burkinabe businessmen, several unmet business development needs appear to exist,including the need to: (i) better organize information provided to entrepreneurs and to structure morecomprehensively information about how to do business in Burkina; (ii) improve access to technicalassistance services and training; (iii) improve the quality and diversity of products; and (iv) ease access

to financing.

The concept of MEBF (entrepreneurship center) emerged during one of these national workshops ofOctober 1997. The entrepreneurship center is an information and orientation center for entrepreneurs. Itfacilitates the development of specialized business support providers both by: (i) identifying the needs ofentrepreneurs and even the service requirements that entrepreneurs would be willing to pay for; and (ii)providing capacity-building and enhanced skills to private providers of those services. In this way, an"external market" can be developed for specialized marketing, packaging, control systems and accountingservices that small scale firms may not be able to develop cost effectively within their own organizations.Most services that the MEBF will most likely render will be contracted out to private providers in orderto build up the local external business services market.

The MEBF would also serve as a place where entrepreneurs and entrepreneurs' associations could meetto exchange ideas. The previous project financed a feasibility study to define the center's activities, itsstructure, and financing. The new operation provides the resources to set up the center and providessupport for its first years of operation.

The proposed project would facilitate the transition from direct provision of services by donor-sponsoredagencies to the self-financing provision of services by local private suppliers. The process of developingboth supply and demand is empirical, involving learning while doing, testing, experimenting andultimately finding market clearing prices, services, etc. An in-depth assessment of three existing SMEsupport structures in Burkina Faso has helped to illuminate the problems of quality and sustainabilityfacing such agencies. From this work has emerged remedies for realigning their service designs andbusiness models to promote, rather than replace, private service providers. In order to stimulate SME'sdemand for competitiveness enhancement, technology upgrading and market repositioning, a matchinggrant scheme is being provided in this project. It will be implemented through the MEBF.

Several market failures cause Burkinabe firms to invest less in technology acquisition than iseconomically optimal. These failures are the economic justification for public support. They include: (i)the benefits of one firm's investment in technology acquisition can easily "spill over" to other firms thatcan gain substantial benefit without making a commensurate investment; (ii) firms in Burkina Fasotypically face high " start up" resource costs in the acquisition process because local technology transfer.mechanisms (consultants, technical experts, trainers and training institutions) are severelyunderdeveloped; (iii) a high level of uncertainty persists among Burkinabe firms about whether the highinitial investment in technology acquisition is justified by the expected benefits given the long distancefrom and unfamiliarity with the markets and the buyers; and (iv) it is difficult if not impossible to findoutside financing for "soft" investments in competitiveness capabilities.

The Burkina Faso matching grant fund is designed to address these market failures and counter them byproviding adequate incentives to firms to improve their competitiveness. The fund would allow businesspeople to decide what support services make best sense for them and allow them to select their ownservice providers. Financing of the support services will be on a cost-sharing basis. The objective of thiscost-sharing mechanism is to accelerate enterprise development by providing entrepreneurs access to abroad range of expert support services as rapidly as possible.

Furthermore, in order to foster competitiveness at the firm level, a special emphasis will be put on qualitymanagement of products and services. In the area of quality management, Burkina Faso has developedexpertise over the last several years through quality circles. More recently (July 2002), the "AssociationBurkinabe des Cercles de Qualite" (ABCRQ) changed gears to total quality management and became the

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"Association Burkinabe pour le Management de la Qualite" (ABMAQ), thus putting an emphasis on totalquality management. Training and advice on quality management would be provided to enterprises toimprove their productivity as well as their commercial performance. A process of certification tointernational standards would be engaged so as to improve competitiveness and access to internationalmarkets.

Development of microfinance services: The microfinance sector plays a crucial role in a strategy ofpoverty reduction and growth of the private sector. Currently 15 microfinance institutions operate in thecountry and mobilize about CFAF 12 billion in savings. These institutions lend about the same amountannually to their members. However, only about 5 percent of the population have access to such financialinstitutions and most rural citizens (the poorest part of the population) lack access to financial services.

A clear need exists for a microfinance strategy. This strategy will apply the following principles: (i)develop microfinance institutions that strictly adhere to best practice and apply strict fiduciary controls(e.g. eliminate initiatives that do not foster credit discipline and subsequently destroy credit culture); and,in the longer term, (ii) create an environment which will motivate and comfort commercial banks in thecountry to invest some of their liquidity through and with the microfinance sector. Several ongoingactivities deal with these issues. In particular, the national association of microfmance has recentlyprepared, in conjunction with the Government, the five principal donors and the Bank, a detailed actionplan for the development of rural financing (PAFMR). However, both the commercial banks and theparticipating NGOs need to find common ground concerning the problem of risk sharing. Accordingly,proposed support to microfinance under this component will focus on the resolution of the issues posedabove by improving supervision capacity of the n-icrofinance unit in the Ministry of Finance, andbuilding capacity within the microfinance industry through the sector Apex organization.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project has three components: (i) Privatization and Utility Reform; (ii) Enterprise Development; and(iii) Project Coordination.

. I l; .- . .-mf n

~~. (U8SM)~~~~ ~ - ~L(il.$W!" cinanan

I. Privatization and Utility Reform 15.90 46.4 15.48 50.4II. Enterprise Development 13.90 40.5 11.22 36.5III. Project Coordination 2.61 7.6 2.23 7.3IV. Contingencies 1.30 3.8 1.18 3.8V. PPF 0.59 1.7 0.59 1.9

Total Project Costs 34.30 100.0 30.70 100.0Total Financing Required 34.30 100.0 30.70 100.0

Privatization and utility reform component: US$ 15.48 million

Privatization-related activities under this component will support: (i) strengthening the PrivatizationCommission in the Ministry of Commerce mainly. through capacity building and consultant services.Consulting services will be recruited to undertake an impact evaluation of the privatization programcarried out to date, a review of the privatization procedures and the decision-making processes so as to

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streamline them; (ii) support for specific transactions, including ONATEL and SONABEL, which willrequire financial advisors as well as other technical expertise to develop specific strategies; and (iii) acommunication campaign which would likely be contracted out to specialized communicationconsultants. Coordination with the budgetary support instrument (the PRSC series) will be pursued toensure that key policy issues related to the privatization program and to market liberalization areaddressed properly and in a timely manner.

In order to help the Government manage its privatization program, and particularly the 21 enterprises forwhich an authorizing privatization law has been passed, the project will provide international advisors tothe Privatization Commission to ensure that complex transactions, particularly in the infrastructure sector(ONATEL and SONABEL), are handled efficiently. In addition, its core team will be strengthenedthrough training, particularly in the area of complex large divestiture transactions, and design of relatedregulatory reforms. A communication campaign will be carried out to build consensus on the reformprogram. Moreover, selected staff are expected to take training abroad and make study tours to successfulprivatization agencies for short-term on-the-job training.

Utility reform will cover the telecommunications and the air transport sectors. The project will help (i)complete the privatization of ONATEL, for which an investment bank was selected; (ii) strengthen thecapacity of ARTEL and MPT; (iii) develop and implement a rural telecommunications strategy andfunding mechanisms to improve access in rural areas; and (iv) support the development of ICT. In thearea of air transport, the project will contribute to strengthening the capacity of the national civil aviationagency in enhanced safety and security, and some advisory services for the concessioning of the twomain airports of Ouagadougou and Bobo-Dioulasso in coordination with the AFD (Agence Francaise deDeveloppement) which has taken the lead on the latter activity. More specifically, the project willprovide assistance to (i) update the Civil Aeronautic Code and air transport regulations to make themcompatible with international (e.g. ICAO) and regional policies (i.e. the Yamoussoukro Decision); (ii)strengthen the regulatory capacity of the national civil aviation authority; and, if needed, (iii) contributeto the privatization of the Ouagadougou and Bobo-Dioulasso airports.

Support to enterprise development component: US$ 11.22 million

The component pertaining to enterprise development support covers: (i) business environment,particularly the deepening of legal reform and removal of administrative barriers to investment; (ii)technical assistance to enterprises through the establishment of an entrepreneurship center, access tobusiness development services; and (iii) microfinance.

Business environment and legal reform

To assist Burkina Faso strengthen an enabling business environment, the project will support theimprovement of the legal and regulatory framework, and streamline the administrative procedures.

Legal and regulatory framework: The project will provide support for following activities: (i)improvement of the commercial legislative and regulatory framework through the provision of (a)technical assistance for the preparation of an action plan, notably for the harmonization of the OHADAand national laws, and (b) implementation of selective measures under the said action plan; (ii) capacitybuilding, through training for judges/magistrates, court administrators and other auxiliaries, to ensure thatthe OHADA law can be implemented, (iii) strengthening of commercial courts; (iv) assistance inestablishing and strengthening the institutional capacity of the Arbitration Center through the provisionof (a) technical assistance for the preparation of a procedure manual; (b) equipment (e. g. reference

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books, computer and software); (c) training for arbitrators and organization of seminars to promotepublic awareness; and (iv) support to a Documentation Center through the provision of technicalassistance, equipment and materials. An arbitration mechanism will be set up in order to reduce thenumber of commercial cases that are taken to courts. In addition, the project will help: (i) improve theoperations of the commercial registry through computerization; and (ii) strengthen the competitioncommission.

Investment Climate and Competitiveness Committee: The competitiveness and economic growthstudy carried out in 2000 concluded that, while previous adjustments have allowed the country to achievegood economic growth, it was necessary to develop and sustain a competitive strategy. Thecompetitiveness committee would be the body which would serve as a think-tank to that effect so that theGovernment could get appropriate input into its policy-making. The competitiveness committee wouldalso help develop a strong partnership between the private sector and the State, the role of the latter beingto support the private sector serving as the engine of growth. The project will help define and implementan action plan for developing policy proposals that would allow Burkina Faso to achieve and sustainaccelerated growth. Moreover, the focus would be put on strategies to streamline business regulationswith a view to reducing transaction costs, and increase firm-level productivity and competitiveness. In aneffort to alleviate red tape, assistance will be provided to Burkina Faso to assess the administrativebarriers to investment and eventually reduce them, in addition to what has been done in the area ofenterprise registration, based on FIAS assessment.

Institutional Support to the Ministry of Commerce, Enterprise Development and Handicrafts: ThisMinistry, which is the department in charge of implementing this program, has a key role of promotingthe private sector development agenda. In addition to its Studies department, it has also created, in early2002, a General Directorate in charge of Private Sector Development which will play a critical role inpolicy design and implementation. Other institutions such as the Privatization Committee and theChamber of Commerce also report to the Ministry of Commerce, which needs to have enough capacity toprovide the needed guidance in a liberalized economic environment. The project will assist the Ministryin strengthening its capacity through technical assistance to reposition itself, training of key staff, andequipment.

Institutional support to SMEs and non-financial business development services

This set of activities will be comprised of the assistance to setting up the Maison de 1entreprise duBurkina Faso, the provision of non-financial business development services to enterprises, notablythrough the matching grant, as well as institutional support to and capacity building for microfinance.

Maison de l'Enteprise du Burkina Faso (MEBF): In collaboration with other donors, the project will:(i) provide support to the envisaged entrepreneurship center to strengthen its organizational structure andmandate to provide non-financial services to SMEs, necessary feasibility studies, including technical andbusiness plans, business and financial management, training and effective mobilization of resources; (ii)establish and manage a matching grant scheme to provide financial support to SMEs for them tostrengthen their capabilities, thus their ability to create jobs; and (iii) provide technical assistance forcompetitiveness improvement.

Business development services (Matching grant scheme): Under this subcomponent two types of grantassistance would be provided: (i) cost sharing grants for furm level consultancies; and (ii) cost sharinggrants to develop and provide training services. Under the first scheme the project would provide partialfunding for a broad range of expert support services to Burkinabe firms and groups of firms to encourage

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productivity improvements. Under the second scheme, cost-sharing grants would be provided to qualifiedtrainers and training institutions to: (i) deliver existing training courses, developed locally or abroad, forwhich a local market has not yet developed; and (ii) develop new training courses for which a marketdemand can be demonstrated.

Microfinance: The microfinance component of the project will: (i) support the strengthening of thesupervisory agency for microfmance of the government; (ii) develop and implement a national policy andstrategy for the financing of the rural sector and for SME development; and (iii) provide technicalassistance to APIM-BF (MFI APEX organization). This sub-component, which is essential formicro-enterprise access to capital and for poverty reduction, will be covered by the IDA grant portion ofthe project financing.

Project Implementation: US$ 2.23 million

The credit will finance, incremental operating costs for the project units, consultant services and audits.Support will also be provided to other administrative entities involved in project implementation, i.e., theanchors in the Ministry of Justice, Ministry of Communication, and Privatization Committee.

2. Key policy and institutional reforms supported by the project:

Bank assistance would help the Government implement policy reforms in the areas of public enterprises,telecommunications, air transport (airport management and sector regulation), private sectordevelopment, and microfmance.

With the support of the proposed project, the Government will focus on its main roles of ensuring soundmacroeconomic management, and offering incentives for private sector investment and operations. Thiswill help Burkina Faso increase productivity, grow faster and reduce the number of years needed todouble its per capita income: a 2.5 percent increase in GDP growth rate would allow Burkina to doublethe per capita income in 15 years instead of 25 years at the current pace.

On the institutional side, the project will help strengthen the institutions in charge of privatization,develop the regulatory capacity of the telecommunications regulator and provide direct support toBurkinabe private entrepreneurs. The support to the microfmance sector is expected to improve thesector performance and to facilitate better access to finance for small businesses.

3. Benefits and target population:

Benefits

Divestiture: The Government's divestiture from most PEs involved in productive sectors, would helprevive economic activity through new investment by the private sector. Strengthening the capacity of theprivatization commission and its permanent secretariat would improve the quality of the transactions.Effective communication, which was lacking in the past, will help promote public acceptance of theprogram and will provide better information by reaching relevant investors. Experience with sometransactions has demonstrated that quality of preparation and information is critical for good competitionand high quality bids.

Telecommunications and Information Technology: Implementing the telecommunications reformwould help increase the affordability, volume and variety of services offered, thus releasing currentbottlenecks to the competitiveness of this sector. The rural strategy will help to improve access to ruralareas since experience has demonstrated that, unless there is a targeted approach, services tend to

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develop primarily in urban areas. Finally, the ICT reform will offer opportunities to small entrepreneursand will create an environment to diversify access to training opportunities.

Enterprise development: Entrepreneurs will have better access to critical information on businessopportunities. They will also have access to simplified administrative procedures. They will finallyreceive support to develop their technical skills and prepare better business plans for requesting resourcesfrom financial institutions.

Target population

* The Government would benefit from the proposed project through a reduction in the fiscalburden resulting from non-performing PEs and an increase in the tax base as the private sectorexpands;

* The private sector, including SMEs, would benefit from increased business opportunities,improved business enviromnent, reduced input and transaction costs, and increased linkages tomarkets through diversified and more efficient infrastructure; and

* Consumers, i.e., the public at large, including the rural population involved in micro-enterprisesand handicrafts, would benefit from increased access to better quality services, and fromemployment generation.

4. Institutional and implementation arrangements:

Implementation Period: The project will be implemented over a five-year period (2003-2008).

Executing Agency: Ministry of Commerce, Enterprise Promotion and Handicrafts

Experience with the recently-completed Private Sector Development Project has (lemonstrated that thereis a need to decentralize responsibilities and to simplify procedures in order to irnprove implementationand monitoring of activities. As a result, a small Project Coordination Unit in the Ministry of Commerce,Enterprise Promotion and Handicrafts, will be in charge of project management; and responsibility forthe technical content of each set of activities will be assumed by technical units in the relevant ministriesor agencies. The Project Coordination Unit will be responsible for the procurement, financialmanagement, and audit of the project except for the activities related to the direct support toentrepreneurs which will be the responsibility of MEBF. The private sector will be involved in theimplementation of the cornponent that relates directly to it through MEBF. The Government hasestablished a Competitiveness Committee which will play an advisory role in the implementation of theprogram. The Committee includes private sector representatives.

Implementing Agencies: The implementing agencies for the different subcomponents are listedbelow. These agencies, each of which has a coordinator for its activities, will carry out the day-to-dayimplementation of their respective subcomponents.

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Minister of CommerceEnterprise Promotion

& Handicrafts

Project Coordination Unit MEBF(Insttutional Support& Matching Grant)

Ministry of Commerce: Ministry of Finance1. Privatzaton Commission (Microfinance)

2 Competiaveness Committee

Ministry of Ministry of JustioeTeWcommunicatons _

Civil Aviabon Ministry of Energy(Transport)

(a) The Project Coordination Unit (PCU) will be responsible for overall project coordinationactivities and will handle all procurement and financial management matters except for activitiesunder the responsibility of the MEBF. It will also consolidate its accounts with those of MEBF indprepare the consolidated project reports to the Bank. A Project Implementation Manual describingthe implementation finctions of different institutions as well as the monitoring and evaluation,financial management and procurement arrangements has been prepared. The Manual will befinalized prior to financing effectiveness. The PCU will also serve as the Secretariat of theCompetitiveness Committee.

(b) The Ministry of Commerce, Enterprise Promotion and Handicrafts will be responsible for theprivatization sub-component through its Privatization Commission, and for the CompetitivenessCommittee's work program. With respect to the implementation of the privatization program, thePrivatization Commission will be responsible for the recruitment and the supervision of the technicalconsultants assisting the Government in the privatization of utilities and other enterprises slated forprivatization. The Privatization Commission will also implement the communication and publicawareness campaign for the privatization program. The Privatization Commission has a professionalstaff whose experience has been limited to relatively simple privatization transactions. While most ofthem have technical skills in finance, economics, business administration and legal matters, furthercapacity building is needed to be able to handle infrastructure regulatory reform programs and carryout complex infrastructure privatizations (e.g. ONATEL, SONABEL). Therefore, the PrivatizationCommittee will need advisory services from international experts.

(c) The Telecommunications Sector Regulatory Agency (ARTEL) and the Delegation ghnerdle 4l'informatique in the Prime Minister's office will be responsible for the telecommunications sectorreform program. The former will be in charge of implementing the universal access strategy, and thelatter will implement the ICT part of the reform program.

(d) The Ministry of Energy will be responsible for the energy sector reform and capacity building forsector regulation.

(e) The Directorate General of Civil Aviation and Meteorology will be responsible for the activitiesaimed at supporting the reform in the air transport sector, namely capacity building for sectorregulation.

(f) The Ministry of Justice will be responsible for the legal reform. An advisor to the Minister ofJustice, a university professor specialized in business law, has been appointed as coordinator. He has

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the oversight of the medium-term judiciary sector reform project.

(g) The Ministry of Finance (through the Microfinance Unit in the Treasury and Public AccountingDirectorate) will be responsible for the microfinance activities in coordination with the microfinanceAPEX organization, APIM-BF.

(h) The MEBF will be reponsible for the proposed activities to strengthen the private sectorassociation, and to foster the provision of business development services, particularly through thematching grant fund.

Project Monitoring and Evaluation: The program supports the development of monitoring andevaluation systems and processes. Relevant data collection, validation, analysis, and dissemination willbe the responsibility of the Project Coordination Unit. Monitoring and evaluation will be guided by: (a)the Letter of Private Sector Development Policy; (b) the project design summary; and (c) theimplementation plan in the Project Implementation Mamual. The Project Coordination Unit will submitprogress reports to IDA twice a year (by July 31 and January 31), giving the status of programimplementation.and outcomes as well as updated data on performance indicators for the project. Thereports will contain an analysis of past activities as related to the implementation plan andrecommendations on improving implementation effectiveness. Impact evalualion studies will beconducted to determine the impact of the program activities on the beneficiaries. An ImplementationCompletion Report will be prepared by the Government, through the implementation unit, covering itsevaluation of the program and a forward-looking operational plan.

Financial Management and Auditing: With the support of PPF resources, the Government, through theProject Coordination Unit, is in the process of hiring an accounting firm which will help set up anaccounting and financial management system. The institutional arrangements will be established over thenext few weeks and will be-assessed by a Bank Financial Management Specialist during appraisal. Thefinancial management assessment will determine whether the Project Coordination Unit and MEBF willhave reliable financial management systems in place before the actual start of the field activities. Theassessment will cover the financial management arrangements of: (i) institutional and operationalorganization of the Coordination Unit and the MEBF; (ii) human resources; (iii'l the Internal ControlSystems;' (iv) the Management Information Systems; and (v) the External Financial Auditing device. It isfully documented in Annex 6.

.. ..

Huiman Resources and Management information system: Financial and accounting staff will be hired forbothi the- PCU and the MEBF to allow proper execution of the project. Action will be taken so as toallow: (i) setting up a budget management system adequate to the Project's needs; (ii) installing anadministrative, financial and accounting management software adequate to the project implementationneeds; (iii) training in budget management and the use cif the software acquired.

Procurement: The findings and recommendations of a Country Procurement Assessment Review carriedout in March-November 1999 and published in November 2000, which served as the basis for the designof implementation arrangements for this project, highlighted the following recurrent issues in variousprojects: (i) insufficient monitoring of contracts; (ii) delays in payment for counterpart funds; (iii)insufficient planning, in procurement of goods, works and services; (iv) delays in submitting requireddocumentation for IDA review; and (v) lack of training in procurement for project staff. Theimpiementation of the PPF has proved the relevance of these issues in the context of this project. Theappraisal mission discussed with the authorities means of addressing procurement issues so thatprocesses can be accelerated. It has also helped set parameters for prior review limits and the frequencyof procurement supervision. Provisions for reinforcement of the procurement function in this project aredescribed in the Procurement Implementation Arrangements (Annex 6).

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D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Considerable discussions took place within the Bank to determine how support to the private sectordevelopment agenda would best be provided. The discussion covered both the lending instruments andthe complementarity of operations in the portfolio.

With respect to lending instruments, the following options were considered for IDA financing: a specificinvestment credit, a technical assistance credit, and budgetary support. IDA's Country AssistanceStrategy for Burkina Faso aims to combine investment projects with programmatic support to achievemore effective resource allocation and use of all funds allocated to the sector, not only IDA's. In light ofthe current phase of private sector development in Burkina Faso, it was felt that a stand-alone operationwas needed. and that it be a technical assistance credit to support the policy reform agenda. Such anapproach will allow financial, procurement, management, and monitoring and evaluation systems to beput in place, which will allow effective budgetary support in the future.

The possibility of having a competitiveness project that would cover the structural reforms in all utilitysectors was considered, in particular to cover the energy and telecommunications sectors. However, itwas felt that, due to the fact that the energy sector strategy was not as advanced as telecommunications, itwas better to proceed with two different operations; i.e. while the whole telecommunications sectoragenda and the energy sector reform issues (privatization and regulation) would be addressed under theCompetitiveness and Enterprise Development Project, investment in power network expansion wouldbe addressed by a stand-alone energy project, which is now under preparation.

Moreover, options about actions needed to boost competitiveness in rural areas were also discussed.Ongoing projects in this sector contribute to: (i) strengthening the capacity of producers and professionalorganizations; (ii) facilitating the small producers' access to services (credit, techniques, information,etc.); and (iii) the improvement and securization of agro-pastoral productions, the strengthening of thecapacities of the rural communities to manage their resources and formulate the demand for services andfor the provision of community/village-based infrastructure. It was decided that activities pertaining toagribusiness/livestock, including the provision of support to producer organizations to improve access toinputs, finance and market outlets, would be undertaken through the rural development portfolio,particularly the agricultural services project (PNDSA2).

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2. Major related projects financed by the Bank and/or other development agenlcies (completed,ongoing and planned).

.| Latest SupervisionSector ISSUe O roJect | (PSR) Ratings

S (Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)

Poverty Reduction Strategy Poverty Reduction SupportImplementation Credits (annual budget support)Energy Sector Reform Energy Sector Reform Credit

Water Supply Water Sector Credit (Cr.3476) S SRural Development Community Based Rural S S

Development P'roject (Cr.3436)PNDSA2

Private sector development Private Sector Assistance S U(Cr.2472)

Urban Sector Urban Environment Project S S(Cr.2728)

Other development agenciesEuropean Union Support to the MEBF

CIDA (Canadian) Support to "FondationEntreprendre" (CAPEO)

AFD (France) Support to the Chamber ofCommerce, Microfinance, andAir Transport

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

Implementation experience from the recently closed Private Sector Assistance Project (Cr. 2472-BUR)shows that technical assistance is not a substitute for weak government commitment. In the absence of ashared vision among all stakeholders on what a project is expected to achieve, little change can beexpected. The Bank has provided support to the Government to develop the new development strategybased on an in-depth analysis of the problems the economy is facing. This vision is now well articulatedin the PRSP submitted to the Board on June 27, 2000. The Government subsequently prepared a privatesector strategy that has been discussed with the private sector as well as a detailed program that wasapproved by the Cabinet meeting of July 14, 2000.

To ensure program ownership and to facilitate public-private partnership, it is important that the privatesector be involved in project preparation and execution. To that end, the Bank team has made sure thatvarious private sector bodies (e.g. Chamber of Conmmerce and Industry, Employers' Association,

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individual entrepreneurs, etc.) be involved in the preparation of the project at all stages fromidentification to project appraisal, including logical framework sessions. The private sector .wasparticularly involved throughout the MEBF design process; and it will be responsible for, theimplementation of support activities to the MEBF, including the matching grant facility.

Another lesson learned in previous Bank-supported operations is that the Government should, at an earlystage, develop a comprehensive policy framework that forms the basis for intervention of all donors inthe subsector. Responding to this lesson, the project is based on the Government's private sectordevelopment policy developed with the participation of various stakeholders in the sector. In addition tostakeholders consultations (e.g. MEBF), a communication strategy will be developed for the specific setof activities related to privatization.

To guide implementation and build momentum, reasonably detailed implementation arrangemehtscovering the first year need to be finalized before the project becomes effective. Responding to thatlesson, the Government is expected to finalize a detailed implementation manual before effectiveness;

Close donor coordination is also essential to develop synergies and increase the project's impactpotential. To this end, the Bank has been working closely with the other donors. A donor cons'ultationcommittee has been established with a view to facilitate information exchange, prograrn'coordination andefficient dialogue with other partners including the Government. During the definition of the project,several meetings took place with both the Government and the private sector in order to identifypriorities and the comparative advantages of the various donors. In that regard, it has been agreed that thejudiciary reforms would be handled by the European Union.

The design of the matching grant fund has benefited from the lessons learned and the best' practicesformulated during the first Africa regional conference of managers of matching grant funds, held inKenya in October 2000.

4. Indications of borrower and recipient commitment and ownership

The Borrower has demonstrated its commitment to the new reform program since it led the 2000competitiveness study, which has highlighted the main bottlenecks the country is facing. TheGovernment has articulated its own PRSP (June 2000), which was used as a basis of the November 2000CAS, and since then has been implementing this PRSP in a satisfactory manner.

As part of the PRSP, the Government has declared the private sector as the engine of gro'wth of theeconomy. The Government has subsequently adopted a new Private Sector Development Framework,based on a sector strategy endorsed by the Cabinet in 1999, which has served to articulate the variouscomponents of the proposed operation. More recently, the Government adopted a letter of private sectordevelopment policies spelling out the agenda in various areas to which this dperation provides acontribution. In the judiciary sector, a 10-year development plan was prepared and discussed in a nationalworkshop with a view to building consensus and mobilizing resources for its implementation. As. ademonstration of its commitment to the Program, the Government has already taken major policydecisions and begun their implementation in areas such as privatization and enterprise developmenit. Thenew phase of the privatization program was initiated through a law approved by the Parliament in July2001 and subsequently promulgated in August 2001. In order to facilitate MEBP future operations, theGovernment swiftly allocated a building which will be rehabilitated with the assistance of this project.

Conducting a privatization program is sensitive. In spite of unions' traditional tendency to opposeprivatization (e.g. labor unions demonstrated in August 2001 following the promulgation of theprivatization authorizing law), the Government confirmed its commitment. by proceeding with the

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program as endorsed by the Cabinet and the Parliament. A communication campaign will be carried out;and the Government is prepared to cover any retrenchment cost that may result from the implementationof the program.

Through the Ministry of Commerce, the Government sustained a dialogue with the donor community onthe private sector development program. It is in that context that the Competitiveness Committee andother aspects of the sector reform agenda were discussed.

S. Value added of Bank support in this project:

The Bank is a key member of the community of development partners (Cadre de Concertation desBailleurs de fonds) that has supported the design of a long-term strategy for the development of theprivate sector in Burkina. Joint missions were organized with various donors throughout the preparationprocess. For example, a joint assessment of the institutional support arrangements to small and mediumenterprises was made by consultants financed by the World Bank, the European Union, France andCanada. Each partner's role in the process was determined on the basis of their comparative advantageand agreed upon by the Government. The Bank has played a key role in the donor coordinationcommittee in order to discuss efficiency of allocation of resources and better coordination ofprogrammng activities. As a result, the last two missions were multi-donor missions, in particular withthe European Union and CIDA.

The Bank has the following specific advantages in addressing the issues at the center of the project:

* It has considerable international experience in telecommunications and energy sector reform andcan contribute to transferring the knowledge gained from within and outside the region. Underthe previous operation, the Bank provided substantial support which brought about concreteresults, such as the establishment of a new telecommunications sector regulatory framework,which included the adoption of new sector policy and legislation, and the award of two mobilelicenses. In addition, the Bank is well placed to assist the government in the promotion of privateprovision of rural telecommunications services given its experience in the support ofmarket-based capital subsidies in other parts of the world (e.g., Nepal).

* There is a large pool of specialized skills within the World Bank Group (including EFC andMIGA) which can be flexibly deployed according to needs. For example, the IFC's AfricanProject Development Facility (APDF) participated in the appraisal mission and will remaininvolved during the implementation phase. A partnership on SME development is also envisaged,as is the collaboration with MIGA on the investment promotion side.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):* Cost benefit NPV=US$19.8 million; ERR = 28.2 % (see Annex 4)

O Cost effectivenessO Other (specify)

A detailed discussion of the project economic analysis is provided in Annex 4. In view of some aspectsof the project's focus on technical assistance for institutional building, some estimated economic benefitsare of an indirect nature such as job creation resulting from forward and backward linkages of SMEswhich will be supported by the project. Even though hard to measure, these project extemalities areexpected to produce an impact which will be felt in the outer years of the project and beyond project

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completion.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)

Given the technical assistance nature of the project, there are no clear revenue streams that would allow astraightforward financial analysis to be carried out. However, it is assumed that the financial costs andbenefits are equated to economic costs and benefits. Activities pertaining to entrepreneurship (MEBF)and to delivery of business development services are unlikely to be self-financing. A 50 percent subsidywill be required and would be provided for BDS through a matching grant mechanism. It is suggestedthat the training tax be allocated to MEBF in order to sustain its services to the private sector.

Fiscal Impact:

The fiscal impact of the project is estimated at US$ 31.7 million representing: (i) tax revenues (corporatetaxes, taxes on incremental wages) on activities which will be developed as a result of the project; (ii)privatization proceeds; and (iii) savings on subsidies, particularly indirect, which will no longer beneeded to support the privatized companies.

3. Technical:The project will help attract private investment, bringing new technology and management know-how inenterprises that the State will divest. In particular, it is expected that technology will be improved in thetelecommunications sector, based on new trends in the sector and on market needs. The matching grantfacility will contribute to the improvement of managerial skills and technology in the private sector.

4. Institutional:The Government has recognized the importance of involving the private sector in the management of theproject, but there is still a need to ensure that the private sector is seriously involved in the proposedoperation. The private sector will play a key role in the Competitiveness Committee which has beencreated in the context of the project. This will help to ensure that needed reform measures be taken andimplemented.

4.1 Executing agencies:

Overall project implementation will be placed under a Project Coordination Unit in the Ministry ofCommerce, Enterprise Promotion and Handicrafts. The Coordination Unit will work closely with thevarious ministries involved in the project execution (as shown in the previous section) through appointedanchors. Activities aiming at providing direct support to enterprises will be executed by MEBF andinclude institutional support to this new private sector association and the matching grant facility.

4.2 Project management:

A project coordinator, who has the oversight of the project coordination unit and will be in charge ofoperational and financial management functions, was competitively selected by the Government. His keystaff, composed of a financial management specialist and procurement specialist, have beencompetitively selected and they are operational. The Project Coordination Unit will work closely withsmall technical units in charge of specialized activities, notably the privatization program and thematching grant scheme. The project coordinator will also provide technical support to theCompetitiveness Committee mentioned above and on which he will serve.

4.3 Procurement issues:

The procurement specialist who was recruited to join the PCU is very experienced as he had prior

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involvement in Bank-financed operations. His capacity will nevertheless be strengthened throughcontinuous training offered in-country, in the region and internationally so as to ensure full compliancewith Bank procedures in handling procurement issues. The procedure manual has provisions onprocurement matters.

4.4 Financial management issues:

A proper accounting system was established under the previous PSD operation. Building on thisadvantage, the project team will look closely into appropriate arrangements to ensure sound financialmanagement of the project. An advance under the PPF is being used to help design financial proceduresand set up the financial management system (equipment, staffing, training) in order to facilitate theproject's readiness for successful financial management reporting (FMR) requirements. An option hasbeen made to adopt TOMPRO/TOMATE as the software for financial management. A four-monthspecial account advance, subject to IDA's standard terras and conditions, will be opened in a commercialbank.

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

Consistent with the Safeguard policies of the World Bank, this project which involves a privatizationprogram, was classified category B. Therefore, an environmental pre-audit was carried out and the 17enterprises in the program were reviewed. They were ranked in three categories: those requiring furtherenvironmental assessment, those for which actions to be taken are already identified in the pre-audit, andthose without any environmental concerns. The project coordination unit's awareness of environmentalissues will be raised and maintained throughout the project cycle and the environmental guidelines wereprovided during appraisal. The environmental guidelines will be included in the final ProjectImplementation Manual.

5.2 What are the main features of the EMP and are they adequate?

An environmental pre-audit report was prepared and cleared before appraisal.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: 20 January 2002

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describemechanisms of consultation that were used and which groups were consulted?

The Consultant who carried out the work consulted with various stakeholders of the public enterprisesslated for privatization. In conjunction with the Privatization Commission, the project coordinator, whowas selected on a competitive basis, made sure that all relevant stakeholders were informed of the resultsof the environmental pre-audit. The report was made available to the public at the PrivatizationCommission's office, at the Ministry of Commerce, and at the World Bank Office in Burkina Faso.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

The environmental pre-audit has determined the scope of the action that is needed to that effect. Six PEs,with audit index factors of cumulative scores above 140, were considered high risk and would requirefull audits. Five enterprises for which the index is between 100-140, i.e. medium risk, were consideredfor partial audits. The rest of the privatization prograrn does not require any further environmental audit.During the appraisal mission, an estimate of the cost of the environmental audits to be made in the

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context of privatization was made and shared with the Government.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

In view of the characteristics of the public enterprises retained for the privatization program, no majorsocial issue is expected to arise. The largest company, ONATEL, is not overstaffed, and future businessdevelopment prospects are favorable for additional employment. However, the labor unions mray voiceconcerns about the risk of lay-offs. In case this materializes in some instances, it was agreed that theGovernment would address the issue of severance compensation and retrenchment of public enterpriseemployees from its budget, keeping in mind that such severance and compensation be equitable, fiscallyaffordable, and economically efficient. The Government of Burkina Faso has gained significantexperience with previous privatization operations. The national budget has always covered the costs, andthe same approach would be taken, in the context of the PRSC. No resettlement issues are expected toarise.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The preparation of this project has involved stakeholders and beneficiaries: the public enterprisesmanagers and employees, the business community, the relevant public sector institutions, the serviceproviders, as well as the public at large. The private sector has been involved in the definition of thevarious components which affect its activities directly. For example, during the May 2000 mission, aworkshop was organized with the private sector to discuss the concept of MEBF and its detailedimplications for them. With the competitiveness committee, this creates a framework to ensuresystematic consultations with the key stakeholders. Conceming the privatization program, it is proposedto develop a communication strategy to inform all stakeholders (private investors, employees and civilsociety) about the objectives of the program and the opportunities it creates for each group. Workinggroups were set up and involved in the preparation of the ICT strategy. Through its public informationefforts, the Govemment has taken an active approach to enlisting the support of the variousconstituencies. To that effect, workshops have been held and a communication strategy, developed by thePrivatization Committee, will be implemented throughout project implementation. Other publicinformation events such as media announcements and broadcasts in national television and radio todiscuss the privatization program with key stakeholder group and the general public will be organized.Private sector and labor union representatives will be involved throughout this process. The matchinggrant fund and the MEBF was designed in conjunction with a committee entirely composed ofrepresentatives of the local business community. More recently, the MEBF was formally created and aBoard team elected, in line with the association's bylaws. The new Board team will play an essential rolein recruiting the Coordinating Director of the MEBF. The committee will be asked to give regularprogress briefings to key Government officials and interest groups and in the process, is expected to takefull ownership of this component of the project.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

As explained under 6.2, all stakeholders are involved through workshops, the communication campaign,and, where relevant, working groups (e.g., ICT strategy design). A Competitiveness Committee was setup in September 2002 so as to ensure that Burkina Faso takes every opportunity to increase itscompetitive edge over the medium term.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The social dimensions of the privatization program will be taken care of by the privatization commission

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(communication) and the Ministry of Finance (eventual retrenchment package, if any). The projectincludes funding for hiring consultant services (e.g., communications' advisors) to handle issues that mayarise and implement the communication campaign in order to build consensus on the privatizationprocess.

6.5 How will the project monitor performance in tenns of social development outcomes?

Progress reports on the -implementation of the privatization program will be produced every semester.These reports will include feedback from concemned stakeholder groups on the effectiveness of theprogram. With respect to other aspects of the program, working groups sessions among relevantstakeholders will be held to allow participatory assessment of progress made and outstanding issues.

7. Safeguard Policies:7.1 Are any of the following safeguard policies triggered by the project?

; < .-4t!::SgFL- po l :,, . .-Triggered--I.i,

Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes (9 No

Natural Habitats (OP 4.04, BP 4.04, GP 4.04) ( ) Yes * No

Forestry (OP 4.36, GP 436) ( Yes * No

Pest Management (OP 4.09) () Yes * No

Cultural Property (OPN 11.03) ( Yes * No

Indigenous Peoples (OD 4.20) ( Yes * No

Involuntary Resettlement (OP/BP 4.12) (9 Yes * No

Safety of Dams (OP 4.37, BP 437) (9 Yes * No

Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) (L) es Y No

Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7,60)* 7 -Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

An Environmental and Social Data Sheet, which specifies the actions to be takcen to comply with theBank's safeguard policies, has been prepared and cleared with both the environmental and the socialsafeguards teams of the Africa Region. An environmental pre-audit was carried out, and disclosed to the

public in January 2002.

F. Sustainability and Risks

1. Sustainability:

The key factor of overall sustainability is that the Government has based its development agenda over themedium term on competitiveness issues, as reflected in the PRSP. Through the use of project resources,activities will be carried out over a number of years at the end of which full cost recovery is expected tomaterialize or the relevant actors--Government, private sector-will be able to sustain the effort bythemselves.

Privatization and Utility Reform: The implementation of the pnrvatization and utility reform program isexpected to have an enduring impact on the Burkinabe private sector. landscape. '[t will allow the private

sector to play a bigger role in the economy, thus improving the quality of service delivery while allowingthe State to focus on its traditional role. In order to succeed in this reform, the Government will need tomaintain its commitment to transparency of the privatization transactions and provide the requiredbudgetary support. In the area of utility reform particularly, the project will help reduce the cost ofinfrastructure services and increase access. For example, the implementation of rural telecommunications

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and ICT strategies will help bridge the digital divide and open new opportunities for Burkina Faso and itspeople.

Enterprise Development: The effort to improve business environment is expected to produce a lastingimpact on private sector development in Burkina Faso. Improved and enforced business law, an effectivearbitration mechanism, streamlined investment procedures, business-friendly tax system and effectivepublic-private sector dialogue will lead to increased private investment. Through MEBF, businessdevelopment services will be developed and structured. To that effect, other donors' assistance to theMEBF is expected to materialize in the near future (European Union's envisaged voucher scheme, andpossibly Canada) so as to further stimulate and upgrade management capabilities of the Burkinabeprivate sector. During appraisal, the feasibility of allocating a portion of the proceeds of the taxepatronale d'apprentissage to the functioning of MEBF and its programs was explored to the effect ofensuring sustained funding beyond donor support. The Government indicated that, without earmarkingsuch revenenues, they would continue financial support to the MEBF as needed. Enterprises are alsoexpected to improve their competitiveness through better quality management and use of cutting-edgeinformation technologies. The combination of the proposed actions should lead to considerablystrengthening the capacity of the private sector with the emergence of a new type of entrepreneur capableof identifying new opportunities and taking advantage of them.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk-Rating Risk Mitigation MeasureFrom Outputs to ObjectiveInsufficient response from the private S It is hoped that the TA program developed tosector strengthen the capacity of the domestic sector

will mitigate this risk.Macroeconomic instability M Sustained effort to reform the economy and

budgetary support to implement the PRSPshould help mitigate the risk.

External shocks H Burkina Faso is seeking to diversify itseconomy by developing non-traditionalactivities. The Bank is providing enhancedassistance to deal with the impacts of crisis inC6te d'Ivoire.

Lack of Government commitment to M Link critical activities with programrnmaticreform lending over the project time so as to keep the

momentum for reform.From Components to Outputs1. Privatization and Utility Reform: S In order to keep a focus on the PRSP broadInsufficient technical capacity to development agenda, the competitivenessimplement the program. committee will help the Government sustain its

quest for competitiveness. Responsibility forthe implementation of the program has beenassigned to a highly skilled committed teamhired on a competitive basis.

Lack of market response for the S An Investment Bank will be hired to assist theprivatization of the electricity company, privatization committee prepare theSONABEL privatization strategy and market the enterprise.Lack of operator/investor interest in the M ARTEL, with the assistance of internationalrural teleconmmunications service consultants, will encourage increased

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licensing. competition in the bidding process by adoptinga vigorous strategy to attract a wider pool ofqualified bidders. In addition to following theBank's ICB process, ARTEL will proactivelymarket this opportunity through advertisementsin international publications such as theFinancial Times, The Economist, technicalmagazines, possibly holding an investorsconference, and a clarifications meeting inOuagadougou. In the event that there is still alack of interest in the RTS license, ARTEL andthe Bank will review the scope of the pilot inorder to improve the attractiveness of the pilotto investors.

Capital subsidy exceeds available M ARTEL and the Bank will review the scope ofresources. the pilot in order to fit the available budget.RTS operator defaults on the license M The project will provide technical assistance to

ARTEL to monitor and certify that the RTSoperator is meeting its license roll-outrequirements and service obligations. Failure tomeet these obligations will result in thefollowing penalties: loss of eligibility for theRTS capital subsidy; forfeiture of theperformance guarantee; termination of thelicense; and imposition of fines for breach oflicense conditions pursuant to theTelecommunications law. In addition tomeeting its roll-out and service obligations, theRTS operator has to furnish a performanceguarantee in the minimum amount of 10percent of the proposed RTS capital subsidy, or$1 million. The performance guarantee will bevalid for five years, within which the licensedRTS operator is expected to completeinstallation, commissioning and roll-out of theRTS service in accordance with the licenseconditions. This performance guarantee will beforfeited in the event that the operator fails tomeet the roll-out obligations stipulated in thelicense and fails to irmplement a remedial planacceptable to ARTEI, in order to complete theroll-out obligations within the additional periodprovided for the remedial plan (except in theevent of force majeure as defined in thelicense).

2. Enterprise Development: M Project addresses directly the issue of lack ofInsufficient private sector capacity to capacity in the private sector. Through theimprove its firm-level competitiveness, "Maison de l'entreprise", the private sector willand low demand for business have easy access to business development

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development services services.Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

Privatization: While the Government and Parliament have already committed to a privatization program,issues may arise about the pace of implementation. This could result from a combination of politicalconsiderations (opposition political parties) and some influential groups' vested interests (e.g. Publicenterprises' employees, labor unions).

Enterprise Development: Even though the Government is in agreement with the principle of a matchinggrant scheme, an issue may arise from the fact that public funds are being used for non-reimbursablegrants to private enterprises. While the Government understands the justification of such a use ofresources, even the expected economic impact, it has expressed concems regarding reportingmechanisms. In order to be sure that the resources will be allocated in a transparent and efficient manner,a procedure manual has been prepared and adopted.

G. Main Loan Conditions

1. Effectiveness Condition

1. The Subsidiary Grant Agreement has been executed on behalf of the Borrower and MEBF.2. The Borrower has adopted the Project Implementation Manual, in form and substance

satisfactory to the Association.3. MEBF has appointed the MEBF PIU staff referred to in Paragraph 2(c) of the Schedule to the

Project Agreement.4. The Project Account has been opened and the initial deposit paid into the Project Account.5. The Borrower and MEBF have furnished to the Association a procurement plan for the carrying

out of Parts A, B 1, B3 and C, and Part B2, respectively, for the first twelve months following theEffective Date.

6. The Borrower and MEBF have established a financial management and accounting system forthe Project satisfactory to the Association.

7. The Borrower and MEBF have appointed the independent auditors referred to in Section 4.01 (b)of this Agreement, and in Section 4.01 (b) of the Project Agreement, respectively, under termsand conditions acceptable to the Association and in accordance with the provisions of Section IIof Schedule 3 to this Agreement.

8. The Borrower has adopted the rural telecommunications development strategy referred to in PartA(2)(d) of the Project set forth in Schedule 2 to this Agreement, satisfactory to the Association.

9. The Project Agreement has been duly authorized by MEBF, and is legally binding upon MEBFin accordance with its terms.

10. The Subsidiary Grant Agreement has been duly authorized by the Borrower and MEBF and islegally binding upon the Borrower and MEBF in accordance with its terms.

2. Other [classify according to covenant types used in the Legal Agreements.]

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H. Readiness for Implementation

Dg 1. a) The engineering design documents for the first year's activities are complete and ready for thestart of project implementation.

D 1. b) Not applicable.

D 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

[ 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

C] 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

L] 1. This project complies with all applicable Bank policies.D 2. The following exceptions to Bank policies are recommended for approval. The project complies

with all other applicable Bank policies.

ogo Demba Ba A. David Craig <_Team Leader Sector Manager Country Director

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Annex 1: Project Design SummaryBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

.L * '"' '-X '- -5 ' _

Sector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission)Achieve private sector-led Private investment to GDP National statistics Stable macro-economic andeconomic growth and reduce Job creation Annual economic reports political environment.poverty. Sustained commitment to

sound project implementation.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Improve the competitiveness Increased private investment Annual reports from Government's continuedof the economy through to GDP (bigger private sector privatization commission commitment to the divestitureprivate sector development share of productive and agenda.and mitigation of SME commercial activities).constraints.

Improved quality access and Annual PIU reports and ITU Private sector meets itscosts of telecommunications statistics investment and service qualityservices, including in rural obligations.areas: overall teledensityincreased from 1.5 line per100 inhabitants to 3 lines per100 people by project end.

Increase in value added and National statistics, surveys Private sector developmentemployment generated by the policy consistentlyprivate sector, notably implemented.beneficiary enterprises: 8points of percentage increasein the formal private sectorcontribution to GDP.

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:Component 1:Privatization and Utilityreform

PrivatizationDivestiture program At least 15 transactions Annual reports of the Investors interested incompleted. completed by project end. privatization commission participating under prevailing

Transfer of ownership conditions.agreements.

Communication campaign in Number of seminars to build Annual reports Cooperation of the tradeplace. consensus unions and of the public at

large.

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Civil aviation capacity Airport traffic growth rate Airport traffic statistics Government commitment tostrengthened. privatization and interest of

the private sector.TelecommunicationsONATEL privatized. Transaction completed by Privatization commission's Private operators' interest

mid-2003. report

Capacity of MPT and ARTEL Regulatory agency and Publication of the new Private operators meet theirstrengthened. Ministry staff trained for better operational procedures and of commitments.

technical and commercial annual sector report.performance.

Rural telecommunications Rural telecom strategy Bidding documents for pilot Universal telecom servicestrategy, including funding adopted and access to telecom rural projects. access fund operational.mechanisms, in place. services improved for rural Investors are interested in RTS

areas. licensing, and meet licenseroll-out obligations.

ICT development strategy in Adoption of policy/legislation Publication of the strategy and Government commitment toplace and implementation of by 2004. publication of the laws. implement ICT strategy.agreed priorities in thenational ICT strategy on: (i)legal and regulatoryframework, (ii) flagship ITprojects, and (iii) incubatorsimplemented.

Component II:Enterprise DevelopmentBusiness environment Number of magistrates trained Annual surveys and Annual Functional judiciary systemstreamlined --legal reform, red in business law. Reduced reports. and civil service.tape alleviation-, number of days needed to Cooperation of thecompetitiveness committee create an enterprise or to administration to become moreand Ministry of Commerce's initiate an investment. business friendly.capacity strengthened.

"Maison de l'entreprise" New procedures on MEBF are PIUs annual reports. Quality of businessoperational and business adopted. development servicesdevelopment services (BDS) Number of enterprises using providers.provided to SMEs. the "Maison de l'Entreprise".

Number of enterprisessupported to access BDSproviders.

Microfinance institutions Percentage of APIM-BF Annual reports of the Effective national associationstrengthened. members trained. implementation unit and MFIs. of microfinance institutions

(APIM-BF) and MFIssupervision unit.

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4NM ' ' 1, K.y - |'itaCoIIection S-tCate ' I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ __ __ __ ___ _ __ __ ___ __ __ __ £, 'tic a I s m ti ions

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)Privatization and Utility $15.5 millionReformPrivatization of PEs $7.7 millionTechnical assistance to Consultants hired for specific Project implementation plan Selection process is efficientprepare privatization strategies transactions and advisory and competitive.and to implement strategies. services provided in specific

fields by mid-2003International advisor recruitedby end-2003.

Legislation prepared and PIU reports. Timely decision-making byEnergy sector regulatory passed. the Government.agency established and Procedure manual preparedcapacity strengthened.

Information campaign Consultants are hired for Project implementation plan Selection process is efficientimplemented. implementation. and competitive.

Multimedia messages carriedout through various channels(radios/TV) each year.

Telecommunications $7.8 millionARTEL capacity building Training provided to key staff PITJ reports Ability of the staff to apply

knowledge to operationalwork.

Promotion of rural and remote Rural telephony rolled out in PIU reports Interest of the private sector toconmmunities access to the pilot site by mid-2004. get involved in ruraltelecommunications services. telephony.

MPT capacity building and Training for capacity PIU reports ICT development strategysupport to the development of strengthening of the policy endorsed and rolled out.ICT. unit.

Support to Enterprise $11.3 rmilliondevelopmentLegal and regulatory reform $1.4 millionEnabling business Action plan for legal reform Annual implementation plan Government is committed toenvironment and and red tape alleviation making changes andCompetitiveness Committee. defined. simplifications.

Competitiveness committeeoperational.

Institutional strengthening of $1 .1 million for consultant Annual implementation plan Ministry's swiftthe Ministry of Commerce, services, equipment, training implementation ofEnterprise Development and recommendationsHandicrafts.

Maison de I' Entreprise $1.1 million Annual implementation plan Selection process is efficient(MEBF) Key staff recruited and and competitive.

operational

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Matching Grant Facility $3.3 million Quarterly reports Effective demand expressedConsultant services and by beneficiaries.training provided.

Microfinance systems Resources for capacity APIM-BFand PIU annual APIM-BF and Cellule withinstrengthening building in rnicrofinance work plan the Ministry of Finance apply

provided. new skills and knowledge.

Project Coordination $2.3 millionProject implemented on Quarterly reports Cooperation of all executingschedule. agencies.

Compliance with fiduciary and Audits completed on time and No disruption of auditors/safeguards requirements. without qualification. consultants' work.

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Annex 2: Detailed Project DescriptionBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

By Component:

Project Component 1 - US$15.48 millionPrivatization and Utility Reform

1.1. Privatization

Context

In order to improve the management of its public sector and to refocus the role of the state, Burkina Fasohas carried out a privatization program over the last ten years which has covered 44 enterprises, of whichabout two thirds were privatized (some of which totally) and the remainder liquidated. In spite of theefforts to improve the effectiveness to the management of Public enterprises, performance has remainedlimited for most of them. In order to improve the competitiveness of the economy, the Government hasdecided to engage into a new phase of privatization.

Burkina Faso passed a law in July 2001 authorizing the privatization of 21 enterprises, of which 6 areminority shareholdings. Another law had been passed earlier to authorize the privatization of thetelecommunications company, l'Office National des Telecommunications (ONATEL). The privatizationof three enterprises on the list -Office national de 1'eau (ONEA), Societe nationale burkinabe d'electricite(SONABEL), and Societe nationale burkinabe d'hydrocarbures (SONABHY)- are supported by separateBank-financed operations.

Privatization program implementation

Privatization-related activities under this component will support: (i) the Privatization Commission in theMinistry of Commerce mainly through consultant services to streamline privatization procedures and thedecision-making process which are currently too long; (ii) specific transactions which will requirefinancial advisors as well as other technical expertise to develop specific strategies; and (iii)communication campaign to be likely contracted out to specialized communication consultants. Keypolicy issues related to this privatization program and to market liberalization will be dealt with incoordination with the "Poverty Reduction Support Credit" (PRSC).

Utility reform will cover both the telecommunication and the air transport sectors. The project will help(i) complete the privatization of ONATEL, for which an investment bank was selected; (ii) strengthenARTEL's and MPT's capacity; (iii) develop and implement a rural telecommunication strategy andfunding mechanisms to improve access in rural areas; and (iv) support the development of ICT. In thearea of air transport, the project will assist the GOB privatize the airport administration and strengthenthe capacity of the national civil aviation for enhanced safety and security.

In order to help the Government manage properly its privatization program, and particularly the 21enterprises for which an authorizing privatization law has been passed, the project will provideinternational advisors to the Privatization Commission to ensure that complex transactions are wellhandled. In addition, its core team will be strengthened through training, particularly in the area ofcomplex large divestiture transactions, and design of related regulatory reforms. Moreover, selected staffare expected to take training abroad and make study tours to successful privatization agencies for

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short-term on-the-job training.

The component will also provide assistance to the Govermment to reform its air transport sector, with afocus on capacity building for sector regulation by the "Direction Generale de 1'4viation Civile et de laMeteorlogie", while the concessioning of the two main airports (Ouagadougou and Bobo Dioulasso) isunder preparation with the assistance of the French Cooperation.

1.2. Telecommunication and Information Technologies

Technical assistance to the telecommunications sector was provided under the Private Sector AssistanceProject (Cr.2472), and it assisted the government with a new sector policy and law, which were adoptedand enacted by the government in 1998 (Law 058/98/An of December 1998). This new regulatoryframework clearly differentiates the regulatory and policy setting functions, and progressively liberalizesthe telecommunications sector. A limited exclusivity was given to ONATEL on the provision of basicfixed telephony services, and the market was liberalized on the provision of mobile comrnmunicationsservices.

In line with the provisions of the new regulatory framework, the government organized an internationaltender to award two GSM licenses to private operators in 2000, and appointed the board as well as theManaging Director of ARTEL, the sector regulatory body. The government also decided to proceed withthe privatization of ONATEL, the incumbent fixed telephony operator. The impact of liberalizationmeasures taken by the government has resulted in a tremendous change in the provision of mobileservices. As of February 2002, less than 18 months after the two GSM licenses were awarded, the threecellular providers connect around 86,000 subscribers compared to 20,000 before the liberalization.Competition between the three operators (Mobtel, CelTel, and Telecel) has resulted in sharp decrease ofprices, although regular complaints from consumers and private operators indicate that ARTEL (sectorregulator) has not been successful so far in establishing a level playing field.

The number of subscribers connected to the fixed network of ONATEL was estirnated at 58,000 in 2001,giving a fixed telephony teledensity of 0.5 percent. The majority of ONATE]L's subscribers are inOuagadougou and Bobo Dioulasso. Out of 8,000 rural localities registered in Burkina Faso, only 180have been connected to the public telecommunications network by ONATEL, and most of them are notindeed rural communities but administrative headquarters, whose population often exceeds 15,000.Despite the positive impact in the provision of mobile services due to the liberalization measures takenby the government, the population still has limited access to telecommunications services (only 5 fixedlines and 10 mobile lines per 1,000 people).

The proposed project will provide resources to support all the relevant efforts engaged in order to assistthe Government in completing the reform agenda, namely to: (a) privatize the main operator (ONATEL),(b) strengthen the capacity of the MPT and ARTEL to perform their missions, (c) develop a specificstrategy to provide services in rural areas, and (d) support the development of informnation andcommunication technologies.

(a) Privatization of ONA TEL. The government has engaged the privatization of ONATEL andalready hired a team of international advisors (led by PriceWaterHouse Coopers and including RotschildBank) with the Bank's assistance. The consortium started working in November 2001 and submittedvarious technical reports assessing their findings and recommendations in February 2002. The transactionstrategy is expected to be submitted by end-Decemlber, 2002, should be adopted by the government nolater than March 30, 2003. Taking into account the downturn of the international financial markets ingeneral, and the financial crisis that is affecting the telecommunications sector worldwide, the

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privatization of ONATEL could become unappealing if the government does not move fast. The latestfinancial statement released by the company shows a rapid degrading situation with a surge of unjustifiedinvestments. Further, the resources needed to finance the expansion of ONATEL's cellular operation aresimply beyond government's capability.

This sub component will provide additional resources needed to conclude the privatization transaction ofONATEL. More specifically, the ongoing transaction has been supported by resources provided by aJapanese grant (US$290,000) that has been used to cover the cost of the advisors working on theprivatization strategy. An additional US$85,000 was commnitted through the PPF to cover the remainingcosts up to the conclusion of the transaction, and US$70,000 is earmarked to finance additional studiesthat could be needed to ensure the success of the sale.

(b) Strengthen the regulatorv capacity of ARTEL. The technical assistance will be provided tostrengthen the capacity of ARTEL to effectively regulate the telecommunications sector, and will includethe organization of study tours and training for its staff.

ARTEL will be empowered to issue licenses, assign frequencies and regulate all telecommunicationslicensees and service providers. The technical support will also help ARTEL to perform all regulatoryfunctions consistent with its mission to promote the development of telecommunications in Burkina Faso,namely by promoting the establishment of a sound and competitive environment. This requires ARTELto be well structured with appropriately trained staff and to have in place up-to-date managementinformation systems to effectively fulfill its missions. In practice, the project will support thedevelopment and implementation of an institutional strengthening plan for ARTEL that will cover thefollowing areas:

(i) Priority regulatory issues. Provision of follow-up support to TRA through retained adviserson key regulatory issues (e.g., competition, interconnection, Internet service provision,convergence issues, quality of service, technical standards, further liberalization, consumerprotection, and other issues defined in the business plan) and procedures for the conduct ofARTEL's main activities such as dispute resolution, licensing, consultations, and gearings. Thefollowing activities have been agreed upon during appraisal:

* Review of the existing legislation and preparation of either amendments or new laws - thisactivity will enable Burkina Faso to modernize and update its regulatory framework in viewto establish a conducive business environment for private sector investment. Consultants willbe hired following IDA procurement guidelines to perform this activity.

* Preparation of a WTO offer on telecommunications services and provision of technicalassistance needed by government's officials to submit to WTO during the Doha round.

* Preparation of internal regulatory procedures with regard to control, concertation with publicoperators and sanctions.

* Draft reference document described in detail standard on activity based accounting to bedeveloped by public telecommunications operators providing service in Burkina Faso.

* Draft technical regulations and detailed procedures guiding the determination of tariffscontrol and price cap and provide ARTEL with an Excel toolkit to help implement tariffsregulations.

* Review and validate the interconnection catalogues submitted in 2002 by publictelecommunications operators - ONATEL, Telecel and Celtel.

(ii) Staff and training plan. Preparation and implementation of a human resource developmentplan for ARTEL through 2005, including identification of staffing requirements, training planwith the training needs of executives and staff, training institutions, study tours, and twining

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arrangements. The implementation of the training plan is estimated to cost about $75,000 overthe course of the project.

(iii) Financial and management information system. Finance the design, purchase andinstallation of a financial and a management information systems. Technical assistance in thedesign and implementation of an intranet for ARTEL, and of a system that integrates allmanagerial resources through the intranet.

(iv) Spectrum management and monitoring system. Procure spectrum control and managementequipment to ensure an effective and optimal use of spectrum resources within the context aliberalized telecommunications market. The identified activities for the provision of technicalassistance to ARTEL are:* Preparation of an optimal tariff structure for spectrum resources managed by ARTEL.* Review and finalization of the tender documents prepared by ARTEL to procure an

integrated spectrum management and control system.* Design and implementation of a small lab for the certification of terminals and equipment.* Purchase of spectrum management and control equipment.

(c) Promote rural and remote communities access to telecommunications services. A study financedby a Japanese grant provided a complete assessment of the prevailing situation on the connectivity ofrural or remote localities to telecommunication services in Burkina Faso. As mentioned above, only 180out of 8,000 rural localities have access to a telephone connection. Despite costly efforts engaged byONATEL during the last two decades, the connectivity situation of rural communities has not improved.The rural teledensity is estimated at 25 per 100,000 people, one of the lowest in the world. The study hasestimated the needs for telecommunication connections in rural communities within Burkina Faso. Theassessment has fully taken into account the positive move recently observed from GSM operators, whichare rolling out their networks to meet service obligations included in the license agreement. For analysispurposes, the country was divided into 13 homogeneous zones, and each zone may be eligible for alicense depending on the final decisions to be taken by the government.

Preliminary results provided by the study show a viable target of teledensity barely close to I telephonebooth per 1000 people. To achieve a rural teledensity of 4 booths per 1000 people will require US$ 74million in investments. The figure rises to US$ 104 million for a target of 7 per 1000. At the 4 per 1000target, the program is not viable and results in a negative US$ 2.5 million net present value (NPV).Consequently, there is a need for a seed capital from IDA that will complement resources levied from thesector's 2 percent rural development contribution (estimated to be around US$ 1 million per year withONATEL's contribution to the fund). So far, the Universal Service Fund has been credited with thecontributions of Celtel and Telecel for 2000 and 2001 reaching the amount of US$ 100,000. From 2002onwards, cellular operators are supposed to contribute up to 2 percent of their turnover to the Fund.Given the fact that ONATEL has proceeded with its rural connectivity program, which has a total amountestimated at US$2 million for 2000 through 2002, it is not clear whether or not ONATEL will pay itscontribution to the fund for the years of 2000 and 2001.

The IDA contribution is estimated at US$ 3 million in order to provide seed capital needed by theFund to launch the program. Disbursements of IDA resources will be conditioned to: (i) the adoptionof satisfactory legislation and regulation on the management and financing of the universal accessprogram, and (ii) the establishment of a Universal Access Fund board, which is independent and includesrepresentatives nominated by public operators and the civil society.

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The government of Burkina Faso recognizes that the provision of rural services in some areas might beassociated with less attractive financial returns. They will, therefore, use a market mechanism to financea capital subsidy for a private Rural Telecommunications Service (RTS) operator. Initially, the programwill be tested on a pilot zone to be identified and agreed with the government. It will then be scaled up tocover the remaining 12 zones that were not integrated in the pilot. In any case, the license will coverunserved localities with the aim to provide telecommunication services at a 5 Km walk for all citizensliving within the selected zone. After meeting the minimum roll-out obligation of two public access linesper locality, the RTS operator is allowed to expand services.

This approach is expected to meet government's objectives to significantly bridge the information gapthat is penalizing rural communities. In particular, the market mechanism (which will follow an ICBprocess in line with IDA procurement guidelines) for rural licensing will ensure the efficient allocation oflimited resources and should provide a benchmark to assess other operators' performance. It is alsoexpected to catalyze innovative and sustainable provision of rural service in a commercially viableregion. Based on the success of the licensing process, the government may decide to issue additionallicenses in other regions of Burkina Faso. In this regard, technical assistance will be provided under theproject to the following activities:

* Preparation of a sound and comprehensive business plan for the pilot project, as well as thetender package including all legal documentation.

* Design and implementation of a database on rural telecommunications projects to be used byARTEL.

* Technical assistance needed to successfully auction off the rural telecommunications licenseswill also be provided and will include organization of roadshows, packaging of the tenderdocuments, and advertisements.

* Specific training and study tours will be organized for ARTEL's staff working on the ruralprogram or for Universal Service Fund (USF) members.

Capital subsidy program and disbursements: The RTS capital subsidy will be paid according to thelicensing terms agreed at the time of the award. The key obligation by the RTS operator is the activationof a minimum of two public access lines in a number of unserved localities listed on the tenderdocuments. ARTEL will monitor and certify the compliance with network roll-out and serviceobligations. It is expected that the subsidy will be in two equal payments: the first payment will be madewhen service provision is initiated in the first 50 percent of the listed localities, and the second paymentwill be made when service provision is initiated in the remaining localities. For disbursement purposes,these will be direct payment requests submitted by the PCU according to the license contract terms.

(d) Support the development of ICT and strengthen the capacitv of MPT and DELGI. Although the

government has already engaged in significant efforts to promote the computerization of differentadministrative services and was one of the first governments in Africa to prepare and adopt a nationalinformation and communication technology strategy in 1999, there is a need to re-assess how the countrycan reap additional benefits by supporting an increase and effective use of ICT by the government, publicagencies and private sector. This requires that only one government office be in charge of all policyissues related to information and communications technology. Currently in Burkina, the ICT policyformulation and implementation functions are divided between the Ministry of Post andTelecommunication (MPT) and the General Delegation of Informatics (DELGI - Delegation Gen&rale aL'Informatique). Policy setting and implementation for post and telecommunication are a responsibilityof MPT, while DELGI is in charge of setting and implementing policy for all activities related toinformation technology (IT). The Bank has highlighted the need to merge all of the ICT related activitiesinto MPT, which could be renamed into Ministry of Post and Information Technologies (Ministere de la

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Poste et des Technologies de l'Information) to reflect this structural change. The old DELGI couldremain as the Information Technology Office, and provide technical support to government offices andagencies in their computerization, as well as e-govermment applications; however, the government hasnot considered this option.

The project will support MPT in the development of an institutional strengthening plan that will:(i) provide technical assistance on telecommunication policy formulation and imnplementation;

(ii) finance training and study tours on the impact of telecommunication liberalization and policy;(iii)provide institutional development assistance to the telecommunication and postal policy unit bystrengthening its technical capacity (e.g., procurement of computers, establishing a documentationcenter, etc.).

With resources of the Japanese grant and the PPF, technical assistance is being provided to DELGI tofinalize an ICT development strategy and an action plan, that covers IT related issues. The proposedproject will support the implementation of agreed priorities listed in the national ICT strategy on threedimensions:

(i) Reviewing the legal and regulatory framework to promote e-commerce and onlinetransactions in Burkina Faso, which includes:

* Institutional development support provided to DELGI to formulate and oversee ITpolicy.

* Technical assistance to review and draft new legislation and regulation on e-commerce.* Technical assistance to prepare a certification mechanism and policies with regard to the

award of payment agents authorizations.* Technical assistance to organization of a public tender to award payment agents

authorizations.* Study to review regulations pertaining to the possible outsourcing of government IT

activities.

(ii) Implementing flagship IT projects. The following areas would benefit from Bank support: (1)e-government pilot operations with spill over impact on the business environment will beidentified and implemented, and (2) special support to help SMEs do business online through aset of supportive measures, such as training, assessment of their communication needs, matchinggrants to support initiatives on e-business, etc. More specifically, the following activities havebeen agreed:

* Extend the ongoing initiative engaged by ONAC to post all relevant regulations orlegislation online in view to streamline the business environment.

* Conduct a comprehensive study ensuring an effective use of ICT by private firms toimprove their competitiveness.

* Information campaign and awareness raise on the benefits to be derived from ICTpervasive adoption and use.

* Support other relevant initiatives to be identified by the national stbategy.* Training and study tours.

A cabinet meeting held on February 20, 2002 announced the organization from February 28 to March 4,2002 of a national workshop to discuss final recommendations on the national ICT strategy. Theworkshop was attended by both private and public sector representatives.

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Project Component 2 - US$11.22 millionEnterprise Development

2.1. Business environment and legal reform

Competitiveness committee: The competitiveness and economic growth study carried out in 2000concluded that, while previous adjustments have allowed to achieve good economic growth, it wasnecessary to develop and sustain a competitive strategy. The competitive committee would the bodywhich would serve as a think-tank to that effect so that the Government get appropriate inputs in itspolicy-making. The competitiveness conmuittee would also help develop a strong partnership between theprivate sector and the State, the role of the later being to support the private sector serving as the engineof growth.

The project will help define and implement an action plan for developing policy proposals that wouldallow Burkina Faso to achieve and sustain accelerated growth. Moreover, the focus would be put onstrategies to streamline business regulations with a view to reducing transaction costs, and increasefirm-level productivity and competitiveness.

Red tape alleviation: Following the work done in the area of enterprise registration, further assistancewill be provided to Burkina Faso to assess the administrative barriers to investment and eventuallyreduce them.

Legal reform: The problems of the legal and judicial sector in Burkina Faso have been highlighted inseveral reports and studies The most important reports and studies are: (i) 1995 Audit of the Ministry ofJustice; (ii) 1998 Report of the National Forum on Justice; (iii) 1998 Study on Democracy in BurkinaFaso, drafted by IDEA (I 'Institut International pour la democratie et I 'assistance electorale); (iv) 1998Adama Dieng and Pierre Weiss study on the strategy for a reform of the judicial system in Burkina Faso,financed by the European Union (EU); and (v) the 2001 DIAGNOS study on the development of theprivate sector and the legal environment of Burkina Faso, again financed by the EU. Such studies andreports point out the institutional and organizational problems which the judicial system in Burkinafaces.Issues of ethics and independence of the justice system have been at the center of criticism againstthe judicial system.The result is a system with large case backlogs, lack of hierarchical control, a lowcapacity to enforce judgments and oral judgments which take months or years to be converted to writtenjudgments, thereby contributing to the lack of transparency of the legal system.

Government's legal reform program: Recognizing the critical importance of a modem justice systemfor the development of the Burkinabe economy, the Government of Burkina Faso has embarked on acomprehensive, five-year justice system reform Program (the Justice Reform Program) which aims,essentially, to improve the judicial system and the enforceability of laws, regulations and contractualobligations. This ambitious Program, estimated to cost 21,196,028,937 FCFA (about US$ 29,000,000)over the next five years, is an essential part of Burkina Faso's economic development plan. The justicesector budget allocation which was only 0.47 percent of the Burkinabe budget until 2002, was raised to Ipercent of the total budget in 2003.

The Government's Justice Reform Program focuses on three major goals:

(a) Reform of the iudicial sector ("Magistrature"): This goal involves the development of a moreindependent, competent and professional judicial system, through (i) the improvement and

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enlargement of the network of courts; (ii) the depolitization and the independence of all judicialpersonnel; (iii) promotion of appropriate ethical standards throughout the entire judicial system; and(iv) improvements in human resource capacities, including the training of judges, auxiliaries ofjustice and management personnel.

(b) Improvement of access to justice: To improve the access of justice, the Government plans todecentralize the court system so as to cover a larger part of its territory, as well as improveinformation and communication activities to inform the public about the justice system.

(c) Enhancement of the efficiency of the iustice system: To achieve an increase in the efficiency ofthe Justice system, the Government will: (i) reduce the backlog of cases, (ii) improve the quality ofthe judgments rendered; and (iii) increase the capacity to enforce judgments.

The Government will finance about 34.8 percent of the total cost of the program. The remainder of theprogram will be financed by other donors, i.e., France, UNDP, Belgium, Canada, the EU, AfricanDevelopment Bank, Denmark, Agence Intergouvernementale de la Francophonie and Switzerland. TheEU is leading the donor efforts with a total participation of US$ 19,840,439.

The Government has started the reform process by guaranteeing the independence of the judiciary andprohibiting the combination of judicial and political functions, and by drafting several draft laws, namelya draft law on the administrative treatment ofjudicial personnel, and a draft law on the Conseil Superieurde la Magistrature.

Legal and Judicial Reform and the improvement of the business environment: The World BankProject subcomponent on the judicial and legal business environment is a small, but important part of theGovernments' Justice Reform Program. The goal of this subcomponent is to improve the legal andjudicial frariiework in which entrepreneurs and investors operate. The current environment, though goodon paper, is a major constraint in the day-to-day life ol entrepreneurs. A strict enforcement of the lawsand regulations already on the books would lower the cost of doing business for entrepreneurs andincrease economic security.

This subcomponent will concentrate on seven distinct areas:

1. Training of iudges in the area of business and OHADA law. The initial training and thecontinued education of judges remains the best guaranty of an "Etat de Droit". Training gives the judgesa higher intellectual confidence and insulates the judges from improper outside influences. To combatthe fact that many judges still do not apply fully the OHADA Uniform Acts, this component will trainjudges in the areas of business and OHADA law. This subcomponent will provide continued education inthe area of arbitration, secured transactions, debt collection proceedings and measures of execution, andcontract law.

Harmonization of national law with OHADA Uniform Acts and support to the national OHADACommission ("Commission Nationale de l'OHADA" -CONAOHADA-). A study carried out in 2000 withthe support of the previous private sector assistance project has clearly identified which areas of OHADAlaw override the former local laws and which areas of business laws remain Burkinabe law. Thissubcomponent will finance the holding of seminars and publications to disseminate the findings of thestudy, and any other legislative measure necessary to fully implement the OHADA Uniform Acts.Moreover, the project will provide technical assistance to the Burkinabe OHADA. national committee,involving work equipment and capacity building.

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2. Legal Information at the "Maison de l'Entreprise"' An important need exists to improvecomprehensive and timely access to legal information by entrepreneurs. Currently, entrepreneurs rarelyuse the services of lawyers because of the cost involved and the mistrust and lack of knowledge of thejustice system. It is therefore essential to offer entrepreneurs high quality legal advice and information, inthe areas of choice of legal entity and the means of resolving conflict.

To this effect, this subcomponent will support access to legal services through the "Maison del'Entreprise", which will provide legal information to entrepreneurs through the use of radio programs,pamphlets and practical guides, as well services of a lawyer who will provide legal orientation/adviceonce a week to MEBF members.

3. Register of Commerce and Personal Propertv Transactions (RCCMJ. The RCCM is regulated bythe 1997 Uniform Act on General Commercial Law. It is responsible for collecting registration entriesfrom natural and legal persons, together with amendments relating to such entries. It also receivesregistrations connected with guarantees given by traders on moveable property together with retention oftitle clauses and leasing agreements. A national file, held in each OHADA member state, centralizes theinformation recorded at each RCCM. This information is then centralized by regional file, held by theOHADA Common Court of Justice and Arbitration. Even though the RCCM is in existence since 1999and that it has been the recipient of Bank financing under the previous private sector assistance project toconform the 1998 and 1999 enterprise registration entries with the new OHADA regulations, the registryoperations remain manual.The conversion of the manual filing system to an electronic filing system hasnot yet started.

This sub-component will finance: (i) continued education of the RCCM personnel (training in Europe forfour people in order to learn about the organization of registers of commerce); (ii) foreign consultant totrain the RCCM personnel; (iii) reorganization of the filing system; (iv) conversion of manual filingsystem to a system of electronic filing; (v) training of clerks of court (greffiers) and the organization andfunctioning of the RCCM; (vi) provision of filing equipment (filing cabinets and filing folders); and (vii)the interconnection between the RCCM, the Chamber of Commerce, the One-Stop Center ("GuichetUnique") and other relevant institutions such as the MEBF to facilitate access to information.

4. Arbitration. Arbitration is a mechanism for the settlement of commercial disputes, which ispotentially quicker, less costly and more reliable than recourse to the formal judicial system. In addition,the arbitral procedure also offers higher confidentiality and a higher enforcement rate of the arbitralaward. To the extent private arbitration of commercial disputes takes place, there is a welcome reductionin the caseload of the regular court system. Arbitration in Burkina Faso is governed by the OHADAUniform Act on Arbitration of March 11, 1999. The overall administration of the arbitral procedure ismanaged by the OHADA Common Court of Justice and Arbitration in Abidjan, Cote d'Ivoire. Until theenactment of the above mentioned uniform act, arbitration was not governed by any law in Burkinahowever, "ad hoc" arbitration has always been in existence and has been used by entrepreneurs.

This sub component will ensure the use of arbitration as an alternative means to resolve commercialdisputes outside the formal justice system. The activities to be financed consist of: (i) a study on theorganization of the Chambre d'Arbitrage, resulting in incorporation documents and internalreglementation; (ii) equipment for the Chambre d'Arbitrage which should be located on the premises ofthe MEBF; (iii) hiring of personnel; (iv) organization of training seminars geared at judges, lawyers, andin-house counsels; (v) organization of information campaigns geared at entrepreneurs; (vi) study trip toone of the countries where the Chambre d 'Arbitrage is already operational (e.g.Togo, Senegal, and Coted'Ivoire).

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5. Antitrust Commission (Commission Nationale de Concurrence et de la Consommation - CNCC).As far as the Antitrust Commission is concerned, this entity exists already and is operational. The CNCCpublished a first report in 1999. This report pointed out several deficiencies, preventing an effectiveantitrust policy. For instance only the government can file a case with the CNCC. In addition, the CNCCcan only give advise, it cannot render binding judgments.

This sub component will finance the revision of any legislation needed to render the CNCC an effectiveantitrust commission, following the examples in the United States and in Europe. Consumerorganizations, individuals, entrepreneurs, and the CNCC itself will be able to file an antitrust case withthe CNCC.

6. Labor Law. The current labor law is no longer adapted to the needs of the Burkinabe businesscommunity. Studies have shown that the labor code negatively impacts compEnies. For instance it isalmost impossible to fire an employee with an open-ended employment contract, absent paying thisemployee several years severance pay. As a result, companies prefer to hire workers on the basis of fixedterm contracts, or even employ workers without any contract at all. It is expected that either OHADA willenact a new uniform act on labor law in the near Future or the Government will pursue its domesticprogram of labor law modernization. The project, therefore, will finance (i) the organization of a largeconsultation process (government, trade unions, entrepreneurs, and the university) to study the proposedlabor law, and (ii) the dissemination of the new labor law.

2.2. Non-Financial Business Development Services

The design of the Burkina matching grant scheme draws from lessons learned from the first regionalconference of managers of matching grant schemes in the Africa region which was held in October 2000in Kenya. The purpose of the conference was to explore means of maximizing the impact of the schemesand define a series of best practices. One of the conference's main conclusions was that to achievemaximum impact in this type of program, it is imperative that appropriate criteria for selectingbeneficiaries be used and that the funds become more selective in determining which interventions tosupport. Until then, most schemes selected their beneficiaries on a first-come-first-serve basis with littleemphasis on selectivity beyond the application of a few basic eligibility ciiteria. Experience withsubsidized firm level consultancies has shown that they work best when directed at the more capablefirms within a developing economy. Hence, to qualify for subsidized firm-level consultancies, themanagement team of the Burkina scheme will focus on selecting beneficiaries that can demonstrate theplanning, technical and financial capacity required to make good use of outside consultancies. Firms thatdo not reach such an acceptable level in one or more of these three areas will not qualify for subsidizedconsultancies but instead, would first be directed to subsidized training courses. This is why the Burkinascheme has been designed with both a consultancy and a training component.

In addition to selecting the right type of firms, the management team should determine which proposedinterventions deserve subsidy support. To this effect, the scheme will apply the criteria of additionalityand spillover effects. Additionality is achieved only when a project is subsidized that would not findprivate funding. In other words, a project that without such a subsidy would not be implemented at thisspecific point in time or to such an extend. Spillover effects are achieved when the project producesdemonstration effects which could potentially benefit more than just the beneficiary firm. A rigorousapplication of these criteria will eliminate firms that because of their size or multinational contacts do notneed a subsidy to gain access to expertise.

When these schemes were first being designed, no effective methodology to measure their impact was

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available. The frequently used notion that every dollar of subsidy should produce a predeterminedmultiple of dollars of results is not based on scientific analysis and in practice, turns out to be difficult tomeasure and open to widely discretionary interpretation. In the absence of well defined evaluationcriteria, many schemes in practice were being evaluated primarily on their capability to disburse onschedule. By the time of the conference, the need for a more effective method of measuring the impact ofthese schemes was felt by task team leaders and fund managers alike. Taking its cue from theconference's conclusions, the Burkina scheme will insist that each beneficiary contract will includespecific output indicators (quality control manual completed, MIS system installed, etc.) and a number ofimpact indicators within the participating firm (increase in production, investment, sales, exports,employment etc.) to be measured and verified within a specified period of time. To complement thesystem a contract will be concluded with an independent outside firm that will conduct periodicperformance evaluations of the scheme comparing the indicators of each contract with the actual resultsachieved.

While some matching grant funds rely on the beneficiaries to identify their consultants, most attempt toassist their clients in identifying appropriate expertise either domestically or abroad. The need for thistype of assistance is particularly acute in isolated economies that have been cut off from world standardsof competitiveness and where as a result, the expertise required to improve enterprise competitiveness israre or non-existent. In practice however, many schemes have difficulty identifying and bringing ininternational expertise and in many cases, end up recycling the limited pool of locally available expertisewithout injecting a large dose of new expertise from abroad. The Burkina Fund will play an active role asan information broker and will establish linkages with existing local and international networks ofexpertise and other matching grant funds in the Africa region and elsewhere. Matching grant funds havehad excellent experience with retired executives and experts. With a view to facilitate access to thiscost-effective expertise, the Burkina Fund will conclude collaborative agreements with retired executiveservice corps around the world.

Description: The Burkina Fund would provide two types of grant assistance: (i) cost sharing grants forfirm level consultancies; and (ii) cost sharing grants to develop and provide training services. Under thefirst scheme the project would provide partial flnding for a broad range of expert support services toBurkinabe firms and groups of firms to encourage productivity improvements. The scheme would notdirectly provide these services but would act as a catalyst and intermediary between beneficiary firmsand associations and local and international suppliers of business services. It will finance improvedaccess to private support services (management, marketing, information and technical experts andconsulting firms) provided wherever possible by local providers to strengthen the local market for suchservices and, when needed, by international providers. It is expected that the scheme would providepartial financing to approximately 100 firms and associations and groups of firms for such activities asfeasibility studies, technical consultancies, participation in trade fairs, the design and implementation ofexport marketing campaigns and visits of strategic buyers. The objective of this support scheme is toaccelerate improvements in firm competitiveness by providing entrepreneurs access to as broad a rangeof expert support services as possible.

Eligible for support by the scheme would be majority private owned and operated enterprises, groups ofenterprises and business associations. To be eligible for matching grant funded consultancies, theenterprise would have to submit a competitiveness improvement plan analyzing the firm's strengths andweaknesses and defining a strategy how to improve its performance. Through this plan the firm wouldhave to demonstrate that it has the planning, technical and financial capacity required to make good useof outside services to boost its competitiveness. Specific support services that would be eligible for grantfinancing would include expert assistance in product development and quality improvement, installation

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of new technology and manufacturing methods, market research and prospecting trips abroad and visitsby strategic buyers to Burkina Faso. Specifically excluded from grant support would be the financing ofequipment, working capital and regular operating expenses.

Grants would be provided only on ex-post reimbursement basis but to avoid too serious a cash flowburden on the beneficiary firm, the overall program of support for the firm can be subdivided into smallerparts with reimbursements being made for each sub-part. There is no limitation on the number ofinterventions per beneficiary but the total amount of grant support per beneficiary firm would be cappedat US$ 70,000 equivalent. A straight 50/50 cost sharing formula would be applied to ensure that the grantrecipient has a substantial vested interest in the project's outcome. Apart from increasing the risk ofmoral hazard, there are strong indications that a higher subsidy rate would simply end up leading serviceproviders to increase their consultant rates. Total grant support provided under the project for firm levelconsultancies is estimated at US$ 2.5 million equivalent.

In addition, the Fund would make available cost sharing grants to qualified trainers and traininginstitutions to provide training services. The objective of this scheme is to accelerate the development ofa local market for business and technical training services. Under the scheme 50/50 cost sharing grantswould be provided to: (i) deliver existing training courses, developed locally or abroad, for which a localmarket has not yet developed, and (ii) develop new training courses for which a market demand can bedemonstrated. Training courses would target, inter alia, manufacturing businesses (including artisans),agro-processing, business services, tourism and export trading firms of manufactured products.Recipients would include existing training providers located both in Burkina Faso and abroad. Thebeneficiary training provider would be reimbursed fifty percent of the course delivery costs on a perparticipant basis for an existing course, or fifty percent of the cost of developing a new course. The totalamount of matching grants per beneficiary training provider would be capped at US$ 140,000 equivalent.Total grant support provided under the project for training services is estimated at US$ 2.5millionequivalent. The procedures for the assessment of requests for both consultant and training services areprovided in the MEBF procedure manual.

The Fund will establish and maintain a roster of qualified technical experts, consultants, consulting firms,trainers and training organizations, both domestic and foreign. This roster will be classified by categoryof service and updated regularly to include new service providers or exclude unsatisfactory ones.

Key operational aspects of the Burkina Fund would include: (i) management by a professionalmanagement team; (ii) complete operational independence from the Government; (iii) direct access to aspecial account to ensure efficient disbursement; and (iv) transparent decision making based on a detailedprocedures manual. The Fund will be managed by a small team of professionals recruited locally fromthe private sector and an international training expert who has substantial international experience indesigning and implementing business training programs and who will function on a part time basis. Theoperational independence of the Fund will be secured by a formal framework agreement between theorganization and the Government which stipulates that the Government does not get involved in thedecision making but retains the right to periodic ex-post audits. A properly designed disbursementmechanism is essential to the efficient administration of the scheme since it operates on reimbursementbasis, reimbursing beneficiaries for a portion of the costs that they have already incurred. To secureefficient disbursement the management of the Fund would have direct access to its own special accountwithout any requirement of a signature by a third outside party.

Another criterion for efficient management will be the time it takes for an application for funding to beanalyzed and decided upon. To avoid politicization of the process and lengthy delays, the decisionmaking will be kept within the Fund's management team. To alleviate fears of non transparent and

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arbitrary decision making, the team will be required to follow strictly circumscribed procedures, applyagreed upon selection criteria and submit the decisions for periodic ex-post review by the Government.

The Fund's operations would be governed by a detailed procedures manual. This manual will includedetailed step-by-step descriptions of such procedures as: (a) criteria for the selection of beneficiaries andactivities to be co-financed; (b) how to develop and maintain a roster of expert service providers; (c)procurement procedures which the beneficiary needs to follow to recruit the service provider; (d) how topre-qualify trainers and training organizations; (e) eligibility requirements for approval of a trainingcourse for grant support; and (f) the annual work planning methodology and monitoring and evaluationprocedures. The manual would include sample documents for application to the Fund, procurement of theservice provider, the contract between the Fund and the beneficiary and between the beneficiary and theservice provider, and evaluation formats.

A local consultant has been contracted to develop a draft framework agreement and procedures manual.The exact contents of the framework agreement and the procedures manual would be agreed upon duringproject negotiations and a formal adoption of the documents would be a condition of effectiveness.

Institutional Base: The institutional base for the Burkina Fund will be the Maison de l'Entrepreneur duBurkina Faso (MEBF). MEBF will be a private sector organization which will coordinate private sectorsupport programs of a variety of donors, principally the Bank, the European Commission, the CanadianAid Agency, APDF and the Cooperation francaise. It will offer the Burkinabe entrepreneur coordinatedaccess to a broad range of support programs. The basic operating principles of the MEBF have beenagreed upon by the Government, the participating donors and key representatives of the private sector.Lodging a variety of donor programs in one single structure will provide significant opportunities forcoordination and efficiency, particularly in the following areas:

(i) the decision making process for grant support;(ii) monitoring and evaluation of the individual programs as well as the functioning of thecoordinating structure;(iii)the conduct of periodic audits;(iv) the design and implementation of information and public awareness campaigns; and(v) nationwide coverage through permanent antenna's and contractual representatives.

It has been agreed that the MEBF would be managed by a Coordinating Director to be financed by theproject. This individual will be a Burkinabe national who will be recruited from the private sectorthrough an intemational and competitive process. To qualify the candidate will have to combine in depthknowledge of the Burkina business environment with a high degree of familiarity with internationalstandards of competitiveness. An international consultant firn was commissioned to develop the legaland organizational aspects of the MEBF. Further operational details as well as the procedures forcoordinating between the different donor programs will be defined by the local consultant who is undercontract to draft the operating procedures for the matching grant fund. Final agreement with theGovernment and the participating donors on these coordinating procedures would be a condition ofeffectiveness.

Stakeholder Involvement in Project Preparation: The matching grant fund and the MEBF would bedesigned in conjunction with a committee entirely composed of representatives of the local businesscommunity. This conmmittee will oversee the work of the consultant who has been contracted to draft theoperating procedures for the matching grant fund and the MEBF and will play an essential role inrecruiting the Coordinating Director of the MEBF. The committee will be asked to give regular progress

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briefings to key Government officials and interest groups and in the process, is expected to take fullownership of the project.

2.3. Microfinance

The Microfinance sector of the country is extremely fragmented, no overall statistical picture is available,neither is a common coherent strategy in place, nor are all initiatives coordinated and united in one mainassociation. Supervision and regulation of the sector are established, but lack of organization, funding,and motivation result in very few inspections by the supervisory entity. 1Further, their currentadministrative location must be reconsidered. The different programs of donors (bilateral & NGO) in theMFI sector keep the government reluctant to impose measures for harmnonization and further regulationof the sector. The sector remains "donor driven". However, past experiences have shown somedisappointing outcomes. Some banks have started to finance MFI, however they still remain veryreluctant and request collateral and guarantees. On the other hand, liquidity to fund the activity ofmicro-lending seems not to be the constraint, as long as the microfinance sector is not targeted to financemajor development projects.

In consideration of the above mentioned conclusions there are three financial sector components in theproject:

1. Support the supervisory agency of the government2. Development of a national policy and strategy for the financing of the rural sector and for SMEdevelopment3. Support to the MFI APEX organization (APIM-BF).

2.3.1. Support the supervisoy agency of the government

The project component should provide the necessary funding to enhance the institutional capacity of thesupervisory agency of the microfinance sector. While more inspectors need to be trained, the mandate ofthe agency should be enhanced to proactively promote and develop the sector. A sound understandingand the application of MFI principles, but also the definition of an overall strategy for the sector are thenecessary components of such a training.

Furthermore, it has been agreed with the Government that an institutional repositioning of themicrofinance supervision unit may be considered if it appeared that its current location within Tresearyand Public Accounting Directorate is not conducive to effectiveness and independence.The unit wouldeventually be relocated under the direct responsibility of the Minister of Finance.

2.3.2. National policv and strategy for the financing of the rural sector and for SME

In order to develop the MFI, which often are the only vehicle for financing the nrual and small businesssector, a national policy must be established that is endorsed and supported by adequate policymeasurements.

The Ministry of Agriculture, in collaboration with the French Development Agency (AFD) hasestablished the Plan for the Financing of the Rural Sector (PA-MFR). The Government has shownownership. The Secretary General of the Ministry of Finance is the President of the -PA-FMR and itsadministrative unit is located at the Ministry of Agriculture. and is motivated -for its implementation.However, after a longer period of stalled implementation, the plan was revised in Fall 2000 and should beimplemented in the near future. One challenge is still a rather moderate interest of other donors forsupport or even funding. Another problem concerns the fact, that most liquidity and business activity isactually in the urban and not rural sector. It seems, that financing of the rual sector must be combined

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with the financing of any SME business activity in order to diverse risk and enhance its business activity.The plan therefore needs to undergo further examination in order to finalize a national policy for thefinancing of the rural sector and for SME.

The Bank should actively provide support to the Government in form of technical assistance concerningthe development of this national policy and strategy. It is advisable to work closely with AFD in order tobuild on the existing and avoid re-inventing the wheel. The outcome of such technical assistance shouldbe presented and discussed at the pending national conference, which should reunited all MFI, the donorcommunity, and the concerned governmental agencies in order discuss and implement the strategy. TheBank could assume the role of coordinator for the sector.

2.3.3. Support to the MFI APEX organization (APIM-BF)

For the definition and implementation of a national policy and strategy for the MFI sector, but also for itssupervision, it is important that the Governmental entity disposes of a competent counterpart in the MFIsector.

The recent merger of two professional organizations of the microfinance sector in Burkina Faso,respectively APIDEC (Association Professionnelle des Institutions Decentralises d 'Epargne et de Credit)and ASIMIF (Association des Institutions de Microfinance du Burkina Faso), which was founded by theBelgian NGO AQUADEV, allowed the emergence of an apex organization for the microfinance industry,the "Association Professionnelle des Intervenants en Microfinance du Burkina Faso (APIM-BF)". Thisnew structure does not have sufficient funding for its operation.

As it is crucial for the development of the microfinance sector to have at least one main and competentcounterpart of the sector, the Bank should provide support for the development of APIM-BF, includingcapacity building.The objective should further be to have all officially certified MFI of the country asmembers of one professional organization. It should be examined, if membership can be renderedcompulsory for certification of a MFI.

Project Component 3 - USS 2.23 millionProject Management/Coordination

Under this component, the Project will finance the Project Coordination Unit and provide some supportto the executing agencies in various Ministries involved in this project.

The Project Coordination Unit (PCU) will be responsible for coordinating all activities under theprogram, in particular for (i) making resources available to to the various executing agencies involved inthe project within the established deadlines, (ii) providing procurment services in a timely andprofessional manner, and (iii) ensuring monthly coordination meetings and issuing quarterly reports andfinancial management reports. This component will finance all coordination-related activities,procurement, financial management and audits, as well as monitoring and evaluation activities.

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Annex 3: Estimated Project CostsBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

Project Cost by Component Local Foreign TotalUS $million US $million US $million

1. Privatization and Utility Reform 1.7 14.1 15.81.1 Privatization

(a) Support to the Privatization Commission 0.5 1.5 2.0(b) Support to specific transactions 0.2 1.6 1.8(c) Support to communication campaign 0.2 0.6 0.8(d) Support for regulation capacity building 0.1 0.7 0.8(national civil aviation)(e) Energy Sector Regulation 0.3 2.1 2.4

1.2 Telecommunication and Information Technologies(a) Strengthening of MPT and ARTEL's capacity 0.3 2.9 3.2(b) Development and implementation of a rural 0.1 3.5 3.6telecomrnunications strategy and fundingmechanism(c) Supporting the development of information and 0.1 1.2 1.3communication technologies

2. Support to Enterprise Development 9.8 3.8 13.62.1 Business Environment

(a) Legal and regulatory framework 1.4 0.2 1.6(b) Investment Climate/Competitiveness 0.4 1.0 1.4Comnrittee(c) Institutional Support to Ministry of Commerce 0.6 0.5 1.1

2.2 Enterprise Development Services(a) Entrepreneurship center ("Maison de 1.7 0.5 2.2I 'Entreprise du Burkina Faso") &(b) Matching Grant Facility 4.0 1.0 5.0

2.3 Microfinance 1.6 0.6 2.2

3. Project Coordination Unit and Audits 2.3 0.4 2.7

Total Baseline Cost 13.7 17.9 31.9Price Contigencies 0.7 0.9 1.6PPF _ 0 0 0.6

Total Project Costs 14.5 18.8 34.3Total IDA Financing Required _ 8.2 22.5 30.7

Project Cost by Category Local Foreign TotalUS $million US $million US $million

Goods 1.8 6.4 8.3Services 8.6 12.3 21.0Works 0.3 0.0 0.3Incremental Cost & Contingency 4.0 0.7 4.7

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I Total Project Costs | 14.7 | 19.6 | 34.3Total Financing required | 8.2 | 22.5 | 30.7

The IDA Grant part of the financing will be applied to category 2.2.(b) (matching grant facility), for anamount of $3.3 million, and to category 2.3. (microfinance) for an amount of $2.2 million.

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Annex 4: Cost Benefit Analysis SummaryBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

[For projects with benefits that are measured in monetary terms]

Benefits: 43.7 12.6 19.1US Smillion

Costs: 23.9 n/a n/aU D $m I Iilon__ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Net Benefits: 19.8 12.6 19.1U S Sm illion__ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

IRR: 28.2

Notes:* The discount rate used for the economnic analysis is 12 percent.* It is assumned that the financial costs and benefits are equated to econornic costs and benefits.

If the difference betwveen the present value of financial and economic flowvs is large and cannot be explained bytaxes and subsidies, a brief explanation of the difference is waimantedl, e.g. "The value of financial benefits is lessthan that of economic benefits because of controls on electricity tariffs."

Summary of Benefits and Costs:Base Case ResultsThe economic analysis of this type of technical assistanc:e project for private sector development presentsthe limits encountered in all similar projects: it is rather difficult to quantify' precisely the economicbenefits resulting from the indirect relationship between project interventions and the stream of benefits,and from the lagged effects of the project on the performance of the different sectors directly supported.Nevertheless, a cost-benefit analysis has been used to calculate the net present value (NPV) and theeconomic rate of return (ERR) in a "with" and "without" project framework.

The net present value of the overall project is estimnated at about US$ 19.8 million for a 12% discountrate, while its internal economic rate of return is estimated at 28.2%. Over the period of 12 years,including the project implementation period, more than 1600 new jobs are expected in the sectors wherepublic enterprises will be privatized with the assistance of this project; and an additional minimum of520 jobs are expected to be created in the matching -grant-supported SMEs throughout the lifetime ofthe project. Positive externalities generated by the project are also expected to translate in additional jobcreation in the consulting and professional training industry. The positive impact on the fiscal positionestimated at about US$ 31.7 million result from increased direct and indirect corporate taxes, taxes onincremental wages, privatization proceeds and savings Onl subsidies.

The cost-benefit analysis was primarily done for the following five sets of activities: (i) matchinggrant/consultancies; (ii) matching grant/training; (iii) institutional development, which includes thebusiness environment and legal reform, investment climate, support to the ministry of commerce and

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microfinance sub-components; (iv) privatization of ONATEL and SONABEL; and (v) other specificprivatization transactions. The ERR for each of the the sub-components presented in the table below ishigher than 12%, suggesting that the project is robust.

Table 1: Summary results by sub-component:

Matching Matching Institutional Privatization/ Privatization/ OverallGrantt Grant/ Development ONATEL, Specific Project

Consultancies Training SONABEL TransactionsNPV (US$ million) 5.31 1.84 0.55 5.41 4.98 19.81ERR 46.2% 24.8% 13.7% 23.7% 32.7% 28.2%

Main Assumptions:1. Stable macroeconomic environment as projected in the CAS with a 5 percent real GDP per

annum on average; and an inflation rate of 3% (PRSP target).2. The private sector, and particularly export firms, will have (a) access to improved skills and

technology for strategic, functional and technical information; (b) access to information onforeign markets; and (c) access to these foreign markets.

3. A minimum of 250 firms and 25 associations are expected to use the matching grant schemeeither for consulting services or training. The average grant will be US$ 10,000 for individualfirms and US$ 25,000 for associations, up to a maximum of US$ 70,000 per beneficiary. It isassumed that the support provided would increase the efficiency of the recipients and wouldyield an increase in economic outputs at a multiple of 10 times the amount of the supportprovided. The matching grant is not only expected to facilitate access to non-financial businessdevelopment services for SMEs and to improve the business consulting services, but also tostimulate job creation. The rate of job creation has been calculated using estimate of currentlabor productivity in the manufacturing sector.

4. In the base case, the increase in firms' output is discounted by 67 percent to take into account thesocial costs of other crucial resources in the economy that are diverted into the project from otheractivities not directly supported by the project.

5. In the privatized companies, it is assumed that job creation will start two years after completionof the divestiture transaction and will accelerate at an annual average rate of 3 percent. ForONATEL and SONABEL, most of the job creation will be realized during the implementation oftheir investment program. It has also been assumed that starting from the seventh year after thebeginning of the project, the percentage increase in total value added in the privatized companieswill be equal to the projected real GDP growth rate of 5 percent.

6. The average annual salary is assumed to increase in the privatized companies at a rate equal tothe target inflation rate of 3 percent.

Sensitivity analysis / Switching values of critical items:Four sensitivity tests were carried out by switching values of critical items: (a) the first test assumed a 75percent social cost of resources diverted into the project, the NPV was reduced to about US$ 12.8 millionand the ERR dropped to 22.9 percent; (b) the second test assumed a 50 percent social cost of resourcesdiverted into the project, the NPV increased to US$ 27.4 million while the ERR jumped to 35.6 percent;(c) the third assumed a higher increase in output for each firm from 10 to 15, the results showed a NPVof US$22.3 million and ERR of 32 percent; and (d) the fourth test assumed longer disbursement period,the NPV decreased to US$ 14.5 million while the ERR came down to 21.1 percent. Finally, it should b

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noted that, except in the case of elongated disbursement period, the fiscal impact remains positive in allsensitivity analyses performed. The overall results confirm the project soundness.

Table 2: Sensitivity Analysis Summary

Scenario Sensitivity Performed Cases Variable Amount NPV ERR FiscalImpact

$miilion % $million

Overall Project

Delayed Project Elongated (a) Base (a) Regular 19.8 28.2 31.7Implementation Disbursement period Disbursement

(b) Alternate 14.5 22.1 26.8(b) SlowDisbursement

Change in Diversion Percent reduction in (a) Base (a) 66% Reduction 19.8 28.2 31.7Assumption increase in Output

attributed to diversion (b) Altemate (b) 75% Reduction 12.8 22.9 30.1from other sources

(c) Altemate (c) 50% Reduction 27.4 35.6 33.8

Expected Change in Increase in expected (a) Base (a) 10 Times 19.8 28.2 31.7Output for each change in output forfirm each firm (b) Alternate (b) 15 Times 22.3 32.0 32.6

Benefits from the project: The main economic benefits and the monitoring tools are presented below:

Nature of benefits / Indicators Monitoring ToolsIncreased productivity and efficiency of privatized enterprises; reduction Declared dividend per annum; Reduced subsidiesof fiscal burden. transfers; Paymnent of taxes by firmsIncreased productivity and outputs in the matching grant--supported Base case / end of project output levelsSMEsJob creation in the SMEs sector and in privatized companies Number of employees at the beginning

end of projectImproved investment climate; reduction of costs of doing business (cost Periodic survey of cost of doing businessof administrative barriers, cost of infrastructure services, etc)

Main beneficiaries: The main beneficiaries of the project would be: (i) a minimum of 250 firms and25 associations with access to microfinance and non-financial business development services; (ii) thebusiness consulting sector with an improvement of availability and efficiency of business services; (iii)the private sector which will benefit from an improved investment climate; (iv) population in both urbanand rural areas with greater access to infrastructure services; and (v) the government with a reducedfiscal burden as well as more improved interface with the private sector.

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Annex 5: Financial SummaryBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

N/A.

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Annex 6: Procurement and Disbursement ArrangementsBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

Procurement

General

Decree No. 96-059/PRES/PM/MEF of March 7, 1996, the General Procurement Decree, sets out thebasic regulations governing the public procurement system in Burkina Faso. This Decree is supplementedby four ministerial orders (Arretes) of April 9, 1996 No. 029/MEF; 030/MEF; 031 /MEF and 032/MEF.Burkina Faso current procurement system is on the whole soundly configured, and do not conflict withIDA Guidelines, and allow IDA procedures to take precedence over any contrary provision in nationallaws and regulations. However, the system reveals a number of shortcomings including weaknesses andgaps in the legal and institutional system; and failure to follow procedures and to make the best use ofexisting mechanisms.

The Country Procurement Assessment Review (CPAR) carried out in March-November 1999 andpublished in November 2000 includes recommendations to: (i) create a procurement system based onefficiency, competition and transparency; and (ii) simplify procedures; train and provide accreditation toprocurement officials. The CPAR also recommended that the General Procurement Decree be overhauledas to reduce single-tender contracting, introduce flexibility for small contracts with SME, and combatcorruption.

Under PRSC2, the Government of Burkina Faso has taken actions aiming chiefly at (i) improving thesystem of public procurement, and (ii) amend the General Procurement Decree. However, most of therecommendations of the CPAR remain to be addressed in the context of the PRSC3.

Guidelines

Civil Works and Goods financed by IDA will be procured in accordance with Bank's Guidelines underIBRD Loans and IDA Credits (January 1995 revised in January and August 1996, September 1997, andJanuary 1999), and Bank Standard Bidding Documents, and Standard Evaluation Report will be used forICB. National Competitive Bidding (NCB) advertised locally will be carried ollt in accordance withBurkina Faso's procurement laws and regulations, acceptable to IDA, provided that: (i) bids areadvertised in national newspapers with wide circulation; (ii) the bid document clearly explains the bidevaluation, award criteria and bidder qualifications; (iii) bidders are given adequate response time toprepare and submit bids (four weeks minimum); (iv) technical and financial bids are publicly andsimultaneously opened; (v) bids are awarded to the lowest bidder; (vi) no eligible bidder is precludedfrom participation, regardless of nationality; (vii) no domestic preference are applicable to domesticmanufacturers or suppliers; (viii) prior to issuing the first call for bids, a draft standard bidding documentwill be submitted to and found acceptable by IDA.

The aggregate values for NCB and other non-ICB procurement methods for goods and works arelimitative and cannot be exceeded without the prior no-objection of the Bank. The projectimplementation unit will monitor such procurement in order to alert the Bank in a timely manner whensuch situation may occur.

Consultant Services contracts financed by IDA will be procured in accordance with the Bank'sGuidelines for the Selection of Consultants by World Bank Borrowers (January 1997 revised in

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September 1997, January 1999, and May 2002). The World Band's Standard Request for Proposal(SRFP), as developed by the Bank, will be used for requesting proposals and for selection andappointment of consultants. The Bank's Sample form of Evaluation Report will also be used for theSelection of Consultants. Simplified contracts will be used for short-term assignments, i.e. those notexceeding six months, carried out by firms or individual consultants.

Consultant recruitment under the matching grant scheme will follow commercial practices, on the basisof the procedures (which guarantees transparency without introducing cumbersome proceduresincompatible with a private sector organization) detailed in the manual of procedures. The manual ofprocedures will contain guidelines regarding the qualification of consultants, to ensure that they have nopart in the business for which they serve as consultants. Adoption of this manual is a condition ofeffectiveness.

Advertising

A General Procurement Notice (GPN) will be prepared and published, following Board approval in theUnited Nations Development Business (UNDB) listing all works, and goods contracts procured underICB, and large contracts for consultants services (above US$ 100.000), to obtain expressions of interestand draw up a roster of reliable firmns that will make the short list.

The related bidding documents will not be released and neither will the shortlist of consultants beprepared until eight weeks after the GPN has been published. The GPN will be updated annually forthose contracts still outstanding. A GPN will also be published in the national press for contracts to beawarded under NCB. Specific Procurement Notices (SPNs) for goods, and works will be advertisedlocally, and for large contracts (ICB), internationally. Sufficient time will be allowed to obtain the biddocuments.

Procurement Implementation Arrangements

The program involves two institutions including (a) the Project Coordination Unit, and (b) the Maison del'Entreprise du Burkina Faso. The Project Coordination Unit (PCU) coordinates program implementationclosely with line ministries involved in the project, namely, the Ministry of Telecommunications, theMinistry of Transport, the Ministry of Justice, the Ministry of Commerce, and the Ministry of Finance.

The project coordination unit will be responsible for overall procurement matters including planning,preparation of bidding documents; and contract management related to procurement of goods, works, andservices financed by IDA, except for (i) the Maison de l'Entreprise, and (ii) the recruitment, andsupervision of the technical consultants assisting the Borrower to privatize the utilities and otherenterprises slated for privatization.

The privatization committee is responsible for the implementation of the overall privatization program. Ithas a professional staff with experience in Bank procurement procedures.

The recently established Maison de l'Entreprise (MEBF) will be staffed with professionals who will berecruited on competitive basis, and subject to IDA approval. The MEBF will be responsible for (i) itsown operations, and (ii) the implementation of the Matching Grant's Component.

Procurement Capacity

A participative procurement capacity assessment of the executing agency was executed during the course

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of project preparation. Despite the fact that the recruitment of a qualified procuremnent specialist has beencompleted the PIU procurement unit still needs to be organized and established. Actions to be taken tofurther strengthen the PIU's procurement capacity to handle procurement include (i) acquisition ofelectronic equipment; (ii) development of a record keeping system; (iii) a training program for theprocurement specialist; (iv) a procurement section in the manual of procedures; and (v) a procurementplan. The procurement capacity assessment document is available in the project technical documents.

Procurement Plan

The Borrower has prepared a procurement plan for the first year, and an estimation for the subsequentyears, of the entire project except for the matching grant scheme (which is by nature demand driven) forwhich no procurement plan can be drawn up in advance. The detailed procurement plan, which will befinalized prior to effectiveness, will show step-by-step procedures for procurement, contract packages forgoods and consultants services, and the estimated costs for each package, procurement selection method,and the activities until completion of contract execution.

The procurement plan will be updated every semester and submitted to IDA for review and approval. Theprocurement plan will be part of the Project Implementation Manual (PIM). The PIM should solicit,among other things, the participation of all stakeholders, set out the procurement. plans, assess the localcounterpart fund requirements, specify responsibilities for commitment and implementations, andidentify the risks that need to be controlled.

Manual of Procedures for the Project

A draft Manual of Procedures for the Project has been prepared. It describes the administrative, financial,accounting procedures, and internal organization. It also includes: (i) procedures for calling for bids,selecting consultants and vendors, and awarding contracts; (ii) internal organization for supervision andquality control; (iii) eligibility criteria, and procurement procedures for the matching grant; and (iv)financial management, budgeting, accounting, and disbursement procedures. The draft MOP wasdiscussed during negotiations and a version acceptable to IDA will be a condition of effectiveness of thecredit.

The Govermnent has discussed with IDA: (a) a detailed draft procurement plan for the first year of theproject; (b) a draft version of the Project Implementation Procedures; and (c) a plan for training the staffinvolved in project implementation, particularly for the staff of the project coordination unit. Beforecredit effectiveness, agreement will be reached on the proper monitoring of the procurement as well asthe standard bidding documents to be used for NCB.

Manual of Procedures for Maison de i'Entreprise dLu Burkina Faso (MEBF)

The management of the MEBF will be based on detailed procedures stated in the manual of procedures tobe approved by IDA. This manual will include detailed procurement procedures following BankGuidelines to be applied for procurement of technical assistance contracts needed for MEBF operations.The Manual will also include procurement procedures to be applied to the Matching Grant Component.To reflect the fact that contracts under the Matching Grant Component will be concluded between privatesector beneficiaries and their service providers, these procedures will be based on commercial practicesacceptable to IDA.

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Procurement Methods (Table A)

The program elements by disbursement category, their estimated costs, and procurement methods aresummarized in Table A below. Thresholds for procurement methods and prior review are summarized inTable B.

Civil Works

Beside the rehabilitation of "la Maison de I'Entreprise" estimated at US$ 280,000 of which IDA willfinance about US$ 250,000, no other civil works are expected under this financing. Civil works contractsestimated at less than US$ 500,000 equivalent will be procured under National Competitive Bidding(NCB) procedures acceptable to IDA.

Contracts for Goods Supported by IDA (total contracts equivalent US$ 6.4 millions)

The goods to be financed under IDA credits will be grouped into packages of at least US$ 100.000equivalent to be procured through Intemational Competitive Bidding (ICB) in accordance with the WorldBank Guidelines. National Competitive Bidding (NCB) procedures will be used for procurement ofgoods involving contracts lower than US$ 100,000, but greater than US$ 30,000 up to an aggregate ofUS$ I million over the life of the project. Contracts below US$ 30,000 for small items includingequipment and office supplies will be procured through local/intemational shopping proceduresacceptable to IDA with a minimum of at least 3 price quotations, up to an aggregate amount not to exceedUS$ 200,000. The award would be made to the supplier with the lowest price quotation for the requiredgoods, provided the latter has the experience and resources to execute the contract successfully. Inaccordance with the provisions of paragraph 3.7 of the Guidelines and with the Association's prioragreement, direct contracting may be used for goods which could be procured as an extension of anexisting contract, or must be purchased from the original supplier to be compatible with existingequipment, or are of a propriety nature, or must be procured from a particular supplier as a condition of aperformance guarantee estimated to cost less than US$ 10,000 per contract, up to an agreement amountnot to exceed US$100,000.

Consultants services (total contracts equivalent US$ 16.9 millions)

The consulting services required will be mostly in the areas of studies, support of projectimplementation, capacity building, training, information dissemination, communication, monitoring andevaluation, financial management support, audits, and provision of advisory services to entrepreneurs.These contracts will be procured according to IDA guidelines "Selection and Employment of Consultantsby World Bank Borrowers" January 1997 revised in September 1997, January 1999, and May 2002.

To ensure that priority is given to the identification of suitable and qualified national consultants,short-list for contracts estimated to cost under US$100,000 or equivalent, may be comprised entirely ofnational consultants (in accordance with the provisions of para. 2.7 of the Consultant Guidelines),provided that a sufficient number of qualified firms (at least 3) are available at competitive costs.However, if foreign firms have expressed the interest, they will not be excluded from consideration. TheStandard Request for Proposals (RFP) as developed by the World Bank will be used for requestingproposals, and for selection and appointment of consulting firms. Simplified contracts may be used forshort-term assignment (less than 6 months).

In general, the selection of consultants will be based on competition among qualified short-listed firmsthrough Quality and Cost Based Selection (QCBS), by evaluating the quality of the proposals before

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combining quality and cost evaluation by weighing and adding the quality and cost scores. The PCU willwidely publicize expression of interest to get candidacy from consultants. Based on agreed upon criteria,the PIU will maintain and update a list of consultants which will be used to establish short-lists.

Other methods would also apply. Least-Cost Selection (LSC) in accordance with para. 3.1 and 3.6 of theConsultant Guidelines, will be used for audit and other contracts of a standard naLure costing less thanUS$100,000. Least-Cost Selection procedures imply that the firm with the lowest price will be selectedprovided its technical proposal received the minimum mark.

Selection based on consultant's qualifications (which consist in comparing at least 3 qualified firms)may be used for the selection of research institutes, training institutions, and for assignments that meetcriteria set out in para.3.7 of the guidelines, and costing less US$ 50,000.

Individual consultants. Services for tasks such as training, seminars, and small studies that can bedelivered by individuals and do not need team work or back up support services, will be procuredthrough comparison of qualifications (CVs) of at least three qualified individual consultants expressinginterest or approached directly, in accordance with section 5 of the Guidelines

Procurement Method for the Maison de l'Entreprise du Burkina Faso

Procurement under the Maison de l'Entreprise will be limited to recruitment of a small number oftechnical assistance contract including communication, M&E, and regional representatives of Maison del'Entreprise, and training of MEBF staff, and local business consultants. Procedures to be used willfollow Bank Guidelines and will be described in the manual of procedures for MEBF.

IDA Reviews (Table B)

IDA-financed contracts for goods and works above the threshold value of US$100,000 equivalent will besubject to IDA prior review procedures. Draft standard bidding document format for NCB will bereviewed and agreed upon with IDA. Prior IDA review will apply to contracts for recruitment ofconsulting firms and individual consultants estimated to cost US$100,000 equivalent or more, andUS$30,000 equivalent or more respectively. IDA review will also apply to the first three NCB contractsfor goods and to the first three contracts for consulting firms estimated to cost US$30,000 equivalent ormore, and to the first three contracts for individual consultants estimated to cost less than US$50,000equivalent. However, the exception to prior review will not apply to the Terms of Reference of suchcontracts regardless of value, to assignments of a critical nature (such as audits), or to amendments ofcontracts rising the contract value above the prior review threshold.

Post reviews

All contracts below the thresholds indicated under the preceding paragraph will be subject to postreviews. Once a year IDA supervision missions will conduct a post review of a sample of contracts notsubject to prior review. All documents related to contracts below the prior review thresholds will bemaintained by the project for such ex-post reviews or reviews by auditors.

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Frequency of Procurement Supervision Missions Proposed

Once every 6 months (includes special procurement supervision for post-review/audits). Post reviewswill apply to one contract out of four (4) not subject to prior review. Also the first three (3) NCBcontracts, the first three (3) contracts for consulting firms, and the first three contracts for individualconsultants will be subject to prior review. Documents related to procurement below the prior reviewthresholds will be maintained by the Government for ex-post reviews by auditors and IDA supervisionmissions.

Procurement ProcessStages Maximum number of weeksPreparation of bidding documents 4 (6 weeks large contracts)

Preparation of proposals by potential bidders 4 (6-10 for ICB)Evaluation of proposals 2 (4 for large contracts)Signing of contracts 2Payments 4

Procurement methods (Table A)

Costs by procurement arrangement needed for Table A below was estimated during appraisal based onthe procurement assessment carried out at that time; and further discussions with the Borrower took placeduring negotiations.

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

-dilure ,Cai - -; n * -. a- X -

Eperid~it 0e, a8t6gor~y x. : 'jt,B! 1IC Othtir;4_ BF.Ajt,C

1. Works 0.00 0.28 0.00 0.00 0.28(0.00) (0.25) (0.00) (0.00) (0.25)

2. Goods 4.70 1.00 0.70 0.00 6.40

(4.70) (0.80) (0.60) (0.00) (6.10)3. Services 0.00 0.00 16.86 0.00 16.86Consultants' services (0.00) (0.00) (15.25) (0.00) (15.25)4. Miscellaneous (PPF) 0.00 0.00 0.70 0.00 0.70

(0.00) (0.00) (0.59) (0.00) (0.59)5. Training, recurrent cost 0.00 0.00 8.74 0.00 8.74

(0.00) (0.00) (7.31) (0.00) (7.31)6. Contingencies 0.00 0.00 1.32 0.00 1.32

.______ _ (0.00) (0.00) (1.18) (0.00) (1.18)Total 4.70 1.28 28.32 0.00 34.30

(4.70) (1.05) (24.93) (0.00) (30.68)

"Figures in parenthesis are the amounts to be financed by the Bank CreditVGrant. All costs includecontingencies.

2t Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) matching grant facility to support privatebusinesses.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

or s 4;7 -. ~,- 'I E~A Ay .!.r F) '.:j~;.' -- S -iM~hi Ot 1 !.N&4§P Ttobs

A. Firms 8.96 0.00 0.00 0.55 0.50 4.35 0.00 14.36(8.50) (0.00) (0.00) (0.45) (0.40) (3.60) (0.00) (12.95)

B. Individuals 0.00 0.00 0.00 0.00 0.00 2.50 0.00 2.50(0.00) (0.00) (0.00) (0.00) (0.00) (2.30) (0.00) (2.30)

Total 8.96 0.00 0.00 0.55 0.50 6.85 0.00 16.86(8.50) (0.00) (0.00) (0.45) (0.40) (5.90) (0.00) (15.25)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines), CommercialPractices, etc.N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit/Grant.

Prior review thresholds (Table B)Below is the indicative set of thresholds:

Expenditure Category Contract Value Pr ocurement Contracts Subject toThreshold Method Prior Review(US$ thousands) (US$ millions)

1. Works >500,000 NCB 0.252. Goods >100,000 ICB 4.70

>30,000<100,000 NCB First three contracts<30,000 Shopping Post Review

3. ServicesA. Firms >100,000 QCBS All contracts of or more than

$100,000. (rORs; short list;udget; RFP; Contract;

Evaluation Reports)Audit <100,000 C All Contracts

B. Individuals >50,000 3 CVs All Contracts<50,000 3 CVs

5. Miscellaneous

Total value of contracts subject to prior review: $15.7 millions

Overall Procurement Risk Assessment: High

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Disbursement

Allocation of credit/grant proceeds (Table C)Table C: Allocation of Credit/Grant Proceeds

Expenditure Category Amount in US$million Financing Percentage1. Goods 6.10 100% of foreign expenditures and

80% of local expenditures2. Consultant Services 12.05 100% foreign and 80% local

(Standard DisbursementPercentage)

3. Matching Grant 3.00 100% of amounts disbursed4. Training and Workshops 4.70 100%

training5. Civil works 0.25 100% of foreign expenditures

and 90% of local expenditures6. Incemental Operating Costs 2.77 80%7. PPF Refinancing 0.59 Amounts due pursuant to

Section 2.02 (c) of theDevelopment Financing[Agreement.

8. Unallocated 1.49

Total Financing 30.70

The above financing include a grant element of US$ 5.5 million allocated as follows: US$ 3.3 million fora matching grant facility to support SME development so as to create jobs and generate incomes for thepoor; and US$ 2.2 million to support microfinance development, thus improve access to credit forartisans, micro, small and medium enterprises.

Use of statements of expenditures (SOEs):

Disbursements for all expenditures will be made against full documentation, except for items ofexpenditures for:

(a) contracts for consulting firms in an amount inferior to US$100,000 equivalent;(b) contracts for individual consultants in an amount inferior to US$50,000 equivalent;(c) contracts for works in an amount inferior to US$200,000 equivalent;(d) contract for goods in an amount inferior to US$100,000, training and operating costs, whichwould be claimed on the basis of Statement of Expenditures (SOEs).

All supporting documentation for SOEs would be retained at the PCU and readily accessible for reviewby periodic IDA supervision missions and external auditors.

Special account:To facilitate project implementation and reduce the volume of withdrawal applications, both the PCUand the MEBF will open four Special Accounts in FCFA in a commercial bank acceptable to IDA. ThePCU will manage Special Accounts A (for all Credit-financed activities) and B (Grant for microfinance).The MEBF will manage Scpecial Accounts C (Credit) and D (Grant for matching grant facility). Withrespect to the PCU, the authorized allocation will be FCFA 1,500,000,000 for Special Account A and

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FCFA 150,000,000 for Special Account B. For the ME,BF, the authorized amount for Special Account Cwill be 100,000,000, and FCFA 250,000,000 for Special Account D.

Upon credit effectiveness, IDA will deposit in the respective special accounts amounts representing fiftypercent of the authorized allocations. The remaining balance will be made available when the aggregateamount of withdrawals from the credit account plus the total amount of all outstanding specialcommitments entered into by the Association shall be equal or exceed the equivalent of $8 million forSpecial Account A and US$800,000 for Special Account B; and US$540,000 for Special Account C and$1.2 million for Special Account D respectively. The Special Account will be used for all paymentsinferior to twenty percent of the authorized allocation and replenishment applications will be submittedmonthly. Further deposits by IDA into the Special Accounts would be made against withdrawalapplications supported by appropriate documentation.

Counterpart Funds

Total counterpart funds are estimated at about USD 1.5 million equivalent, excluding the private sector'sshare of the matching grant. As a condition of financing effectiveness, it was agreed with theGovernment that they will open a project account and deposit an initial amount of US$280,000equivalent representing about one year of counterpart funds needs. Government counterpart fundsrequired for subsequent years to cover the share of costs not financed by IDA will be deposited in aproject account managed by the PCU on a quarterly basis.

Disbursement Mechanisms

All replenishment or reimbursement applications will be submitted monthly or when the Special Accountis reduced by one-third, whichever comes first. All replenishment or reimbursement applications will befully documented except for contracts under the prior review threshold. SOE documentation will beretained at the PIU for review by Bank staff and annual audits.

Accounting and Financial Reporting

The PCU will be responsible for financial management of the Project and will maintain the books andaccounts, except for the MEBF which will be responsible for its own accounting and financial reporting.The PCU will also be responsible for the production of the consolidated annual financial statements. Itwill work closely with the Maison de I'Entreprise which will operate its own special account. A localaccounting firm with experience in project financial management has been appointed to design acomputerized accounting and financial management system which will have to be operational beforeproject effectiveness. The system would be based on internationally acceptable accounting principlesagreed with the Bank. The firm will prepare the accompanying accounting manual, including a properchart of accounts, the various transaction cycles, the format, content and periodicity of the variousfinancial statements to be produced, the budgetary procedures and process (preparation, monitoring,variance analysis, etc.), and the relevant internal controls. The draft manual was submitted to the Bankfor review and comments were sent to the Borrower. The firm will be responsible for the initial trainingof the accounting and financial management staff of the PCU and the MEBF in the efficient operation ofthe system. The computerized financial management system will include the following: (i) a chart ofaccounts reflecting the activities and sources of project financing; and (ii) a custlomized format for thequarterly FMR with relevant monitoring indicators. It will also be responsible for the preparation of atraining program in financial management with an implementation timetable for the duration of theproject.

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An annual audit report of the two special accounts (including SOEs) prepared by independent auditorsacceptable to IDA, and in accordance with the Bank document "Financial Account Reporting andAuditing Handbook", January 1995 will be submitted to IDA no more than six months after completionof each fiscal year.

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Annex 7: Project Processing Schedule

BURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

Time taken to prepare the project (months)

First Bank mission (identification) 05/01/2000 05/01/2000

Appraisal mission departure 01/28/2002 02/11/2002

Negotiations 12/18/2002 0 1/07/2003

Planned Date of Effectiveness 06/30/2003

Prepared by:The project is being prepared by the Ministry of Commerce, Enterprise Development and Handicrafts ofBurkina Faso with the assistance from IDA.

Preparation assistance:Project Preparation Facility and PHRD Grant.

Bank staff who worked on the project included:Name Speciality

Francois Nankobogo Team Leader

Paul Noumba Um Telecomnmunications Specialist

Pascale Helene Dubois LawyerCharles Schlumberger Financial Sector Specialist

Korka Diallo Operations Officer

Siaka Coulibaly EconomistSheela Reddi Language Program Assistant

Hugues Agossou Financial Management Specialist

Renee Desclaux Disbursement Officer

Henri Aka Procurement SpecialistSiaka Bakayoko Financial Management Specialist

Celestin Bado Operations COfficer

Jan-Hendrik van Leeuwen ConsultantAmadou Dem Consultant

Neil Simon Gray Peer ReviewerWilliam Steel Peer ReviewerSerigne Omar Fye Environment Specialist

Suzanne Rayaisse Team AssistantEdeltraut Gilgan-Hunt Environment Specialist

Sylvie Traore Team Assistant

Herminia Martinez ConsultantEavan O'Halloran Operations Officer

Luc Lapointe Consultant

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Annex 8: Documents In the Project File*BURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

A. Project Implementation Plan

A draft PIP has been prepared under the responsibility of the Project Coordination Unit; and itsfinalization is a condition of effectiveness.

B. Bank Staff Assessments

1. Study on the State portfolio of public enterprises2. Study on the "Maison de lEntrepreneur du Burkina Faso"3. Study on institutional support arrangements to enterprises4. Study on rural telecommunications5. Study on Information Communication Technology6. Study on the microfinance sector: status and prospects7. Identification, Pre-appraisal, and Appraisal Mission Aide-Memoire8. Energy sector reform aide-m6moire, July-August 2002 mission9. Cost tables10. Environmental Pre-Audit

C. Other

The Government, through the Project Coordination Unit, has prepared an implementation proceduresmanual, and is setting up a financial management and accounting system.

Including electronic files

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Annex 9: Statement of Loans and Credits

BURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT02-Jan-2003

Dilen beween expectadand actual

Original Amount In US$ Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undlsb. Orilg Finn RedP076159 2003 SF Deveopmnt Leaning Center -UL 0.00 2.30 0.00 2.52 0.15 0.00P000309 2002 BASIC EDUCATION SECTOR PROJECT 0.00 32.60 0.00 31.57 40.55 0.00P071433 2002 HIV/AIDS Dsae Reponse Ptect 0.00 22.00 0.00 20.83 -2.10 0.00P035673 2001 COMMUNtTY-BASED RURAL DEVELOPMENT 0.00 66.70 0.00 64.36 -3.49 3.49P000306 2001 OUAGADOUGOU WATER SUPPLY PROJECT 0.00 70.00 0.00 6829 -4.37 0.00P050886 1999 BurWlna FaPRIVATE IRRIGATION 0.00 5.20 0.00 1.85 1.80 0.00P000296 1998 Bustdna Faso:AG SERVICES U 0.00 41.30 0.00 19.68 21.12 21.12P000283 1997 MINING CAPACITY BUL 0.00 21.40 0.00 7.21 9.04 1.01P000304 1997 POST-PRIMARY EDUCATION 0.00 26.00 0.00 8.04 10.26 10.30P000297 1995 URBAN ENV 0.00 37.00 0.00 26.94 7.49 7.43

Total 0.00 324.50 0.00 25126 39.34 36.37

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BURKINA FASOSTATEMENT OF IFC's

Held and Disbursed PortfolioJun 30 - 2002

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1997 Ecobank-Burkina 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.001998 SGBB 0.00 0.38 0.00 0.00 0.00 0.38 0.00 0.00

Total Portfolio: 0.00 0.63 0.00 0.00 0.00 0.63 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

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Annex 10: Country at a GlanceBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

Sub-POVERTY and SOCIAL Burkina Saharan Low-

Faso Africa Income Development diamond'2001Population. mid-year (millions) 11.6 674 2,511 Life expectancyGNI per capita (Atas method, USS) 210 470 430GNI (Atlas method, USS billions) 2.4 317 1,069

Average annual growth, 199541

Populaffon (IX) 2.4 2.5 1.9 GrossLabor force (%) 2.0 2.6 2.3 GNI I primary

perprmyMost recent estimate (latest year available, 1995-01) capita enrollment

Poverty (% of population below national poverty line)Urban population (% oftotalpopulation) 17 32 31Life expectancy at birth (years) 44 47 59Infant mortality (per 1,000 lIve births) 104 9i1 76Child malnutrition (% of children under 5) 34 .. .. Access to improved water sourceAccess to an improved water source (% of population) .. 55 76Illiteracy (% of population age 15+) 75 37 37Gross primary enrollment (9 ofschool-age population) 43 78 96 BurlnaFaso

Male 51 85 103 Low-income groupFemale 35 72 88

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1981 1991 2000 2001Economic ratlos

GDP (US$ billions) 1.6 2.8 2.2 2.3Gross domestic InvestmenVGDP .. 20.6 26.9 26.7Exports of goods and services/GDP 10.5 12.1 10.8 11.2 TradeGross domestic savingslGDP -6.8 6.1 7.7 10.2Gross naUonal savings/GDP .. 13.9 10.9 12.6

Current acoount balance/GDP .. -6.8 -16.1 -14.0 DmsiInterest payments/GDP 0.4 0.5 0.2 0.2 D omas InvestmentTotal debt/GDP 20.9 34.7 74.8 74.7 savingsTotal debt servicelexports 5.4 9.9 16.3 15.3Present value of debt/GDP .. .. 30.2Present value of debtlexports .. .. 211.4

Indebtedness1981-91 1991-01 2000 2001 200145

(average annual growth)GDP .. 5.1 2.2 5.7 5.4 Burldna FasoGDP per capita .. 2.6 -0.4 3.2 2.8 Low-income groupExports of goods and services 1.0 0.8 -9.8 8.9 7.8

STRUCTURE of the ECONOMY1981 1991 2000 2001 Growth f Invetn,,asnt and GDP

(% of GDP)Agriculture 34.7 34.7 34.5 37.1Industry 20.7 20.5 17.2 16.2 20

Manufacturing .. .. .. .. 10Services 44.5 44.8 48.3 46.7

Private consumption 96.3 79.3 77.3 75.0 se 07 se a9 00 01General govemment consumption 10.4 14.6 15.0 14.8 - GOI -GDPImports of goods and services 33.2 26.6 30.0 27.6 e

1981-91 199141 2000 2001 Growth of exports and Imports (%)(average annual growth)Agriculture 3.4 3.9 -3.8 12.7 soIndustry 3.4 6.1 4.2 0.1 40 A

Manufacturing 2.6 .. .. ..Services 4.1 5.3 7.0 3.0 2

Private consumptIon 2.8 4.4 -5.9 6.2 a 97 B 9aGeneral govemment consumption 4.2 0.1 2.5 2.5 .20Gross domestic investment .. 7.4 10.3 10.5 - Exports --. ImportsImports of goods and services 3.0 1.5 -12.6 0.9

Note: 2001 data are preliryinary estimates.The diamonds show tour key indicators in the rountry (in bold) compared wAth its Inoorrelroup average. If data are mising, the diamond wilt be inoomplete.

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Burkina Faso

PRICES and GOVERNMENT FINANCEg1981 1991 2000 2001 Inflation (%)

Domeosdc prices 2

(% change)Consumer prices 3.9 1.5 -0.3 4.9 Is

Impicit GDP deflator -5.0 0.6 3.5 10

Govemment flnance s(% of GOP, lndudes current grants) o

Current revenue .. 14.4 15.5 15.0 -s r 9 W St S0

Currentbudgetbalance .. 2.4 3.1 2.3 GDPdtflator * CFP

Overall surplus/defct .. -7.1 -11.7 -11.3

TRADE

(UJS$ rWgions)1981 1991 2000 2001 Export and Import levels (US$ mill.)

Total exports (fob) .. 269 206 230 rso

Cotton .. 104 102 131

LIvestock products .. 2g 45 44 Soo

Manufactures ..

Total imports (c) .. 490 519 510

Food .. 104 63 73 25

Fuel and energy .. 80 92 93Capltalgoods .. 111 173 158 o

95 go 97 98 99 500 S

Export prioe Index (1995=100) .. 49 96 100importprlceindex(1995=100) .. 57 126 126 MExports *l iports

Terms of trade (1995=100) .. 87 76 79

BALANCE of PAYMENTS

(U/S$ ,ridlions) 1981 1991 2000 2001 Current account balance to GDP (%)

Exports of goods and servioes 200 337 237 260 oImports of goods and services 534 743 660 643Resource balance -333 -406 -422 -383 -s

Net inoome .. -9 -20 -19

Net current transfers 120 226 90 75 nS '111111Current acoount balance .. -188 -352 -327 -15

Financing items (net) ,, 231 299 334Changes In net reserves .. -43 53 -7 -20

Afemo:

Reserves induding gold (US$ millions) .. 347 0 0Conversion rate (DEC, locaiIUS) 271.7 282.1 712.0 733.0

EXTERNAL DEBT and RESOURCE FLOWS1981 1991 2000 2001

(US$ millions) ComposIton of 2000 debt (USS mill.)

Total debt outstanding and disbursed 328 967 1,640 1,740

IBRD 0 0 0 0 F:3 G: 84

IDA 84 326 795 835 E: 3

Total debt service 20 46 51 48IBRD 0 0 0 0 ,

IDA 1 4 4 4B: 795

Composition of net resource fbowsOfficial grants .. .. .. D. 0: 483 7Offidal creditors 60 122 37Private creditors 1 -1 40 .

Foreign direct investment .. .. 23 8Portoli equlty 0 0 0 012

Worild Bank programCommitments 15 143 67 137 A - IBRD E - i8laterl

Disbursements 7 42 67 27 B -IDA D -Other multilateral F- Private

Principal repayments 0 2 7 161 C - IMF G -Short-teran

Net flows 7 41 60 -134Interest payments 1 2 5 5Net transfers 6 38 55 -139

Vevelopment tconomics V9ZNuz

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Additional Annex 11: Privatization ProgramBURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMEINT PROJECT

The main characteristics of the enterprises slated for privatization under the current project are discussedbelow.

A. Large public enterprises with majority state shareholding

For this set of enterprises, the Parliament recommended partial divestiture and the establishment of aregulatory framework.

ONATEL (Office national des telecommunications): ONATEL was established in 1987. As of end1999, i.e., before the decision to authorize its privatization, the company had about 53,000 customers, ofwhom about 5,000 people with a mobile phone. The company enjoyed a growth rate of customer base of12 percent per annum since 1995 for fixed lines. However, the demand for fixed lines remains unmet asthe customer base could be around 70,000 people. As for the cellular phone, the growth rate has been ashigh as 80 percent between 1996 and 1999. It is estimated that the introduction of pre-paid cards couldhave as many as 40,000 customers.

ONATEL's financial performance has been quite good over the last several years. The net profit grew by22 percent between 1995 and 1998. The tariffs are rather high, even though, in 2000, they were reducedto a great extent (inter-urban and cellular communications tariffs were reduced by 15 to 30 percent andintemational calls tariffs were reduced by 20 to 60 percent).

An investment bank has been hired to assist the government in the privatization of ONATEL which isscheduled to be completed by end 2003. In the meantime, it is worth mentioning that two private cellularoperators launched their activities in 2000, thus exerting competitive pressure on ONATEL.Interconnection arrangements were concluded in early 2001.

SONABEL (Societi Nationale d'Electricite du Burkina): SONABEL's activity encompasses electricitygeneration, transmission and distribution for the entire country. While a sector law passed in 1998 opensgeneration to competition, a legal monopoly is retained on transmission and distribution. With an equityof CFAF 48 billion and a manpower of about 1,500 employees, SONABEL has two main separatenetworks, located in Ouagadougou and Bobo-Dioulasso respectively, and a series of small networks insmaller cities. The installed capacity is about 111.5 MW, of which 80 MW of therrnal energy mainly forOuagadougou and Bobo-Dioulasso. Since a couple of years, the town of Bobo-Dioulasso insouth-western Burkina Faso is interconnected with CMte dIvoire which allows to cover that location'selectricity needs by imported and cheaper electricity generated by the independent power producerAZITO.

Access to electricity is as low as 9 percent since the number of subscribers was only 14 per 1000 peoplein 2000. In spite of subsidized fuel supplied by the State hydrocarbons company SONABHY,SONABEL's main challenges remain its poor quality of its thermic generation equipment, the high unitcost of electricity, and the rapidly growing urban population (about 6 percent. a year). Pending thematerialization of a West African Power Pool, medium term perspectives are that an interconnection linebetween Cote d'lvoire and Ouagadougou would be built over the next few years with the support of thedonor community.

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The Government has already taken the first steps towards the privatization of SONABEL by (i) initiatinga sector diagnosis study which will allow the determination of the future sector structure and theactivities open to competition, and (ii) carrying out SONABEL's audits Moreover, the needed sectorregulation arrangements are being analyzed with the Bank's assistance. It is expected that an InvestmentBank will be recruited to assist the Government in this important transaction.

SONABHY (Societi Nationale Burkinabe d'Hydrocarbures): The hydrocarbons company was createdin 1985 as a state monopoly to import, store and sell petroleum products in Burkina Faso. SONABHY'sbalance sheet reflects a CFAF 3 billion equity, even though its bylaws indicates that the company's equityis CFAF 1 billion. The company has about 220 employees, a number of whom are civil servants; and itoperates under the oversight of the Ministry of Commerce. Distribution companies such Shell, Mobil,Total, Elf and others depend on SONABHY as a single source of petroleum products supply. SONABHYbuys about one third of its products from the Ivorian refinery, the "Societe Ivoirienne de Rafinage" (SIR),and the remainder through international competitive bidding to avoid single source dependency. Pricesare set and adjusted by ministerial decisions.

A review carried out in 2000 concluded that SONABHY's financial situation is reasonably sound, and thecompany has a low debt level. However, the company is vulnerable to petroleum prices fluctuations,supply and transport problems as experienced recently with the civil unrest in the neighboring C6ted'Ivoire which interrupted the operation of Abidjan - Bobo-Dioulasso railway (SITARAIL), and thestorage capacity.

The Government has decided to involve the private sector in the whole range of hydrocarbons sectoroperations by opening up SONABHY's capital. In that context, an audit of the company's accounts isunderway; and, with the support of the Bank, an appropriate regulatory framework is being prepared. Anoption that needs to be looked into in order to ensure competition in the sector would be that the twoexisting storage facilities have separate ownership.

CBMP (Comptoir burkinabe des mftauxprecieux): In spite of the end of its monopoly in 1996, CBMPremains well established in the gold market. The company works with artisanal gold workers. The size ofthe gold sector in Burkina Faso is small as the country produces only about one ton of fine gold per year.The company, which sells more than 80 percent of its production to Englhard Clal in France, has verysmall profitability. CBMP is indebted vis-a-vis the social security (CNSS), and with its 1,000 workforce,it assumes some sort of public service because of the linkages to artisanal gold workers. The privatizationprocess will take into account those two dimensions.

BUMIGEB (Bureau des mines et de la geologie du Burkina): The company's activity consists ofgeological and mineral research, including the private sector. The net profits over the recent years havebeen positive, but insufficient in view of the size of the turnover and investments levels. The financialperformance of this company is dependant on the international price of gold.

CENATRIN (Centre national de traitement de l'information): The company's activity is focused oncomputerization plans, computer training, audit and advisory services in the same area. It is beingexpanded to other technology services, including internet services. As of end 1999, CENATRIN'sfinancial situation was satisfactory and its net profits were consistently positive even if the marginsremain small.

Hotel Indetpendance: This three-star hotel, owned by the State, was built in the 1960s and has 170rooms. However, competition in the sector has intensified since 1999 with the creation of a number of

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private hotels. The aging of the hotel is a cause of increase in repair expenditures. As reflected by the netprofits, the financial performance is satisfactory even if it fluctuates with the demand which depends onthe number of major events held in Ougadougou each year.

SEHS (Socie'te d'exploitation de l'Hotel Silmande): The Government controls 91 percent of the HotelSilmande's equity. The management is handled by the French group ACCOR. Competition in the sectorhas increased sharply in the recent years from private, smaller and more demanded hotels. However, theSilmande has the comparative advantage of the good quality of its facilities, including those forconferences. With about 186 employees, Hotel Silmande has high operating costs:, and has encounteredconsiderable losses over the last five years. This situation makes a recapitalization a necessity.

CCVA (Centre national de controle des vehicules automobiles): Created in 1986, CCVA carries out thetechnical controls on vehicles which are required by the law. It was created in order to improve thequality of the national vehicle fleet and thus the road safety. Technical controls are annual and mandatoryCCVA also offers training to garage-men, drivers and mechanics. In the area,of technical control, CCVAhas no competitor. Net profits of this company have remained in the range of 10 percent of the totalturnover for the last several years. The continued increase of the size of the vehicle fleet represents apotential for sustained good performance for this enterprise.

B. Small enterpises with maiority state shareholdin,J: total and immediate divestiture.

MEDIFA (Laboratoire des medicaments du Faso): Trhe State is the sole shareholder of this companywhich produces and sells pharmaceutical products. The customers are regional and national hospitals, aswell as pharmacies. Some exports are made to neighboring countries. In spite of competition of productsimported by the private sector and the government pharmaceutical wholesaler, MEDIFA has managed tosustain net profits representing two to five (2-5) percent of the turnover. However, its financial situationhas become fragile, and its limited creditworthiness hampers its ability to finance the investments thatwould be required by any diversification plan. Privatization is a good option to eventually recapitalize thecompany so that it can develop and sustain the competition.

ONBAH (Office national des barrages et d'amenagements hydroagricoles): ONBAH makes studiesand carries out civil works for dams. The customers are the Government and other development agencies.The company is faced with a major issue of aging equipment which hampers the ability to carry out civilworks in a timely manner. As a consequence, ONEBAH has increasing repair costs while having tocontract out some of its work. The company however benefits from equipment subsidies and taxsubsidies. It is expected that the privatization of this company will foster competition in the constructionsector.

ONPF (Office national des puits et forages):. Created in 1985, this company's business is theconstruction of wells. Competition in this area has resulted in a reduction of the drilling costs, whichtranslated in a decline of the company's profitability. Like ONBAH, ONPF also suffers from the agingequipment which hampers its operational activity and its financial performance.

CGP (Caisse gdndrale de perequation): Established in 1978 to help stabilize prices in Burkina Faso, thescope of activity of this company has been limited to rice since 1996, a conmmodity which is nowcompetitively marketed in Burkina Faso. De facto, the stabilization role of the CGP does not exist anylonger. Therefore, the CGP is just one player in the rice market. Under cornpetitive pressure, thecompany has accumulated considerable losses since 1997. The ultimate course of action for this companywill likely be its liquidation. The assets, including the storage facilities, could be sold to private

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operators. It is assumed that any issue pertaining to competition would fall under the responsibility of thecompetition comnuission.

SBF (Sociehf de briqueterie du Faso): 100 percent state-owned brick-making company. The nature ofthis activity is by essence for the private sector, particularly construction companies.

C. Enterprises with minority state shareholdine: Full and immediate divestiture.

SIFA (Societe Industrielle du Faso): This company, in which the State holds 20 percent of the capital,produces and sells bicycles, motorcycles and accessories. The financial data available between 1996-99show that the company is financially sound, with net profits averaging nine (9) percent of the turnoverduring that period. However, the company had important fiscal debts as of end 1999. The Governmenthad partially divested in 1993 and has now decided to withdraw completely.

GMB (Grands Moulins du Burkina): The Government holds 24.6 percentin this flour-milling companywhich was partially privatized in 1993. As of 1998, GBM was in a good financial situation. However,competition from a new flour-milling company (owned by one of its major customers) and from importshas intensified since then.

FASOPLAST: The activity of this company is to make and sell plastic products. The State's share isonly Seven (7) percent. The company has had sustained good results over the last several years: theaverage net profit from 1996-99 was six (6) percent of turnover. However, its debts' level is very high.FASOPLAST's vulnerability is mainly due to the fact that SOFITEX, a textile company, buys up to 60percent of the output. Whenever there is a downturn in cotton international prices, there is negativeimpact on both companies' performance.

Burkina & Shell: The company's activity is the commercialization of petroleum products; and theGovernment's share of capital is 25 percent. With a 36 percent market share, Burkina & Shell has the leadvis-a-vis its four competitors, i.e. Total, Elf, Mobil, and Tagui. The company is, however,under-capitalized and is faced with working capital issues. The company's fiscal debt is in the range ofFCFA I billion while the government's total obligations represent about one fourth of this debt.

ZAMA Publicitc: The state controls 25 percent of this marketing company. The enterprise was partiallyprivatized in 1993 when the Government sold 75 percent of its shares to a local private operator. Basedon data received as of 1998, the company's financial performance has been declining over time. Thecompany is technically bankrupt and, in compliance with the OHADA business law, shareholders neededeither to recapitalize or liquidate it.

SOSUCO: This company, in which the State still has a 15 percent shareholding, is located in Banfora,southern Burkina. Its activity consists in sugar production and commercialization. In view of the size ofthe demand, the company has an important growth potential. However, it is faced with two challenges:scarce water resources that limit the possibility of increasing production levels and competition from theneighboring Cote d'Ivoire. The company's financial performance is rather weak, with considerable lossesin 1998 and 1999.

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Additional Annex 12

Letter of Development Policy for Private Sector Development(approved by the Council of Ministers on July 31, 2002)

BURKINA FASO: COMPETITIVENESS & ENTERPRISE DEVELOPMENT PROJECT

The purpose of this Letter of Development Policy for the Private Sector is to present the reformprogram that the Government of Burkina Faso intends to carry out in support of the poverty reductionstrategy developed in the course of the year 2000. The Letter summarizes the current status of the privatesector and sets out the broad strategic themes for the coming years.

1. CURRENT STATUS

It should be recalled that Burkina Faso has been involved since 1991 in a vast economic reformprogram supported by the Bretton Woods institutions (the International Monetary Fund and the WorldBank) and by the international community as a whole. In this connection, it has implemented successivesectoral programs (such as the Agricultural Sector Adjustment Program and the Transport SectorAdjustment Program) with assistance from the IMF's Enhanced Structural Adjustment Facility and fromWorld Bank loans for structural adjustment (e.g., ESAC, SAC 1, SAC II and SAC HI) and sectoraladjustment (e.g., ASAC and TSAC), the goal being to lay the groundwork for a liberal market economyoperating on market principles and in which the private sector would be the main engine of growth.

In pursuit of this goal, significant measures and reforms have been approved and implemented.

I-a Reforms implemented:i. Creation, within the Ministry for Private Sector Promotion, of the General Directorate for PrivateSector Promotion, in order to better meet the expectations of economic operators, developmentpartners and the Government through improved coordination of all interventions dealing with theprivate sector;

ii. Implementation of the National Plan for Good Governance approved by the Government in 1998,followed by the creation of an Executive Secretariat for Good Governance and the introduction of amonitoring mechanism;

iii. Judiciary reform aimed at providing a more effective jurisprudence in touch with local realities,followed by the approval in April 2000 of an action plan for judicial reform, the development of aninvestment plan and a donors' Round Table in June 2001;

iv. The reform of institutions supporting the private sector, such as the National Office of ForeignTrade (Office National du Commerce Exterieur, ONAC), the National Shippers' Council (ConseilBurkinabe des Chargeurs, CBC) and Burkina's Chamber of Commerce, Industry and Handicrafts (Chambre de Commerce, d'Industrie et d'Artisanat du Burkina Faso, CCIA-BF). The private sector isnow well represented on the Boards of Directors of the first two organizations. Last December theCCIA-BF elected democratically the members of the Chamber of Consulates (Chambre Consulaire).

v. The reform of public and parastatal enterprises through the approval of nine (9) legally bindingtexts that authorize the State to withdraw, partially or totally, from forty-five (45) public enterprisesof various sizes and spheres of activity. Of the forty-five (45) enterprises slated for privatization,twenty-six (26) have actually been transferred, either partially or totally, to the private sector.

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Thirteen (13) have been liquidated or are in the process of liquidation, three (3) have been withdrawnfrom the program and the remaining four (4) are currently being privatized. Overall, the objectivesthat the Government was pursuing by means of this initial wave of privatizations have beenachieved.

vi. Restructuring of the banking system and adoption of an appropriate monetary policy, which havebrought order to the financial environment and helped develop the financial intermediation network;

vii. Reform of the agricultural sector, particularly through the redefinition of the State's role and theapproval of a Strategic Orientation Document (document d'orientation strategique, DOS), aStrategic Operational Plan (plan strategique operationnel, PSO) for agricultural sector development(i.e., plant production) and of an Action Plan and Investment Program for the Livestock Sector.

viii. Reform of the mining sector through the elimination of the monopoly on exploration and themarketing of mining products.

ix. Promotion of the private sector through the liberalization of the economyeconomic liberalization,the opening of new spheres of activity (e.g., telecommunications, energy, air transport, mining, etc.),improvement of the regulatory, legal and fiscal environment for business (e.g., simplification ofadministrative formalities and harmonization with OHADA regulations), the approval of anindustrial development strategy, and the adoption of a strategy for the development of traditionalhandicrafts. Regarding the tax regime applicable to businesses, adjustments have been made in orderto lighten the tax burden on the formal sector. A study of marginal effective tax rates has beencarried out and will make it possible to better identify the macroeconomic implications of a decreasein business taxes.

x. Implementation of measures to lower factor costs (e.g., telephone, electricity, water,transportation, etc.) The State, cognizant of the impact of such measures on the competitiveness ofthe economy, is endeavoring to set up regulatory agencies. Thus, in the area of telecommunications,it has set up the Telecommunications Regulatory Authority (Autorite de regulation destelecommunications, ARTEL) and reduced telecommunications service charges in May 2000 andDecember 2001. In the electricity sector, the interconnection with Cote d'Ivoire became a reality inAugust 2000 and actually went into effect in April 2001, and discussions have begun on theinterconnection with Ghana. Regulation of the water sector is being handled, for the time being, bythe Government. The fit between fees on the one hand, and the cost and profitability conditionsunder which enterprises are operating on the other, is monitored and adjusted on the basis of periodicstudies. The recent opening up of air space and the approval of a sectoral strategy that includesopening up urban transportation to competition will make it possible to liberalize these activities andimprove the efficiency of both subsectors. These reforms have produced appreciable results,particularly since the devaluation of the CFAF in January 1994.

Thus:

i. From the macroeconomic standpoint, the country has performed well over the past decade,achieving an average real growth rate of about 5 percent over the 1994-99 period, as compared toabout 3 percent over the 1980-93 period.

ii. In terms of budget management, budgetary receipts increased steadily over the 1996-99 period,whereas operating expenditures were held fairly well in check, which has helped to produce andmaintain positive budget balances since 1995 (e.g., CFAF 26.8 billion in 1996 and CFAF 57.23billion in 1999).

iii. Great gains in growth and macroeconomic stability, resulting from the introduction of adjustmentpolicies, are proof that Burkina can further accelerate GDP growth and improve the population's

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living conditions more rapidly.

I-b Recurrent weaknesses

Despite these encouraging trends, however, E3urkina's economy has many important weaknessesthat hamper overall competitiveness and impede accelerated growth and rapid poverty reduction. Themain weak points are the following:

i. The poor operational capabilities of enterprises which, due to a lack of professionalism, areunable to produce goods and services of a quality sufficient to improve their degree of participationin foreign trade. This feeds into a large structural imbalance in the balance of trade (-9.9% and-11.5% of GDP, respectively, in 1993 and 1998) and in the current account balance (9.7 - 9.4% ofGDP for those same years).

ii. The non-competitiveness of local products on the domestic market due to their quality/priceratio, which is a barrier to the promotion and sustainability of substitution industries.

iii. The limited size of the domestic market, in terns of population as well as income, whichhampers the creation and development of industrial units capable of achieving economies of scale.

iv. The weak performance of local enterprises, which has been exacerbated by the elimination ofcustoms tariffs and the introduction of the Commnon External Tariff (CET), and which prevents themfrom generating the resources they need to modernize and meet the demands of the market.

v. The low degree of private sector participation in the formal sector: two-thirds of formal sectoractivity takes place within the informal sector.

vi. The persistence of fraud, which poses serious problems for competition.

vii. High factor costs and weak price competitiveness, which limit the private sector's operationalcapabilities, both within the country and outside it.

viii.Difficult access to financing for enterprises due to the requirements of the financial sector.

ix. The low overall productivity of production factors: indeed, the contribution of these factors toeconomic growth is negligible.

In view of all these deficiencies, private sector promotion requires that the Government adopt aglobal and coherent strategy.

II. GOVERNMENT STRATEGY

Given the multidimensional nature of the issue of private sector development, the Governmenthas opted for an overall strategy that reconciles the requirements of structumal reform and those ofeconomic recovery, the goal being the competitiveness of enterprises.

Thus, the private sector development policy that it has defined is expressed in nine (9) strategicthemes that are based, in turn, upon ten (10) broid principles.

II.a Broad principles of economic policy

1. Refocusing of the State's role

2. Sustainable management of natural resources

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3. Promotion of a new partnership with donors

4. Promotion of good governance

5. Acknowledgment of regional disparities

6. Acknowledgment of gender issues

7. A commitment to the goal of regional integration

8. The development of more export-oriented enterprises, particularly for textiles, meat, hides andleathers, etc.

9. Development of labor-intensive economic activities

10. Strengthening of the capacities of enterprises through proper organization of the environment inwhich they operate.

These broad principles, which guide economic policy for the promotion of the private sector, arerooted in the quest for economic growth and for better income distribution in the interest of lastingsocietal stability.

The emergence, development and strengthening of a more broad-based middle class are importantelements in the strategy.

ILb Strategic themes

Theme 1: Improvement of the legal environment for business

Convinced that there cannot be any strong, rapid and high-quality economic growth unlessenterprises are competitive, the Government has decided to make the improvement of the legalenvironment for business its first strategic theme. The idea is to consolidate the accomplishments of thepast few years in terms of simplifying formalities, harmonizing legal texts with those of OHADA, andstreamlining the taxation system and labor code. The objectives of this strategic theme are:

i. to promote an environment that provides business incentives; andii. to boost the competitiveness of the economy and reduce factor costs.

The Government is aware that, in order to allow sustainable economic growth that benefits thepoorest, the appropriate strategy must make the economy more competitive by strengthening theoperational capabilities of enterprises, fostering internal liberalization, and opening up the economy tothe region and the world.

1.1 Market liberalization. Measures are being taken to strengthen this process by eliminatingmonopolies and duopolies and by privatizing public enterprises in order to create conditions conducive toprivate sector development. Market liberalization is essentially a matter of reforms undertaken toeliminate the monopoly on productive and competitive sectors. Liberalization has begun in the area oftelecommunications, and particularly mobile telecommunications, with the entry of two new operatorsinto the market. The imminent opening of the capital of ONATEL, SONABHY, SONABEL and ONEAto private operators will further liberalize the market.

At the regional level, the opening of the market will be progressively consolidated by the creationof the WAEMU zone in accordance with the provisions of the WAEMU and ECOWAS treaties on the

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right of settlement and the free movement of goods and people. In connection with the new program tosupport competitiveness, a Competitiveness Committee will be created for all parties active in the privatesector, including professional associations and economic interest groups.

1.2 Competition. The Government is convinced that competition must be organized in order tobe beneficial. For this reason, measures are implemented on a regular basis, in collaboration with theprivate sector and with the support of industrial units, to combat fraud and unfair competition. Along thesame lines, the Government has undertaken the revision of legal texts regulating the NationalCompetition and Consumption Commission (Commission Nationale de la Concurrence et de laConsommation) in order to give it the means to exercise its mandate effectively. In support of thisinitiative, and in order to enhance transparency in public procurement and free and equitable competitionamong all economic operators, an analytical report on procurement has been produced and approved.Subsequent steps include the revision of procedural laws that are in the process of being developed andcould go into effect by the end of this year.

1.3 Anti-corruption efforts. These efforts should also take on a new dimension with theintroduction of the Anti-Corruption Unit in December 2001. This unit, which will become operationalduring 2002, will surely be extremely helpful in bringing order to public sector management.

1.4 In order to reform Public Administration, measures have been initiated to streamline andsimplify administrative procedures. In this connection, concrete steps are being taken to reduce the timerequired for the issuance of national certificates of conformity (the certificat national de conformitW, orCNC) and, hence, for passage through customs. In addition, the "single window" center (Centre desGuichets Uniques, or CGU) was restructured and strengthened with the consolidation of the relevantservices in January 2001. This has reduced file processing times, thereby accelerating the relatedformalities.

Theme 2: Continuation of State disengagement

The privatization program, an important component of the Structural Adjustment Program (SAP)begun in 1991, will continue with the privatization of the remaining enterprises. An examination of theresidual portfolio has identified the enterprises in need of privatization as well as those that shouldremain as they are in order to help carry out the mandate of the civil service. This assessment resulted inthe approval in July 2001 of Law N° 015-2001/AN authorizing the total or partial privatization of 20enterprises, the major ones being ONEA, SONABEL and SONABHY.

The Government's strategy will be to implement this new privatization program beginning in2002, which, along with other measures already taken, will help reduce factor costs fortelecommunications, transportation, energy and water. In order to stimulate greater public interest inprivatization operations, the option of individual shareholding will be developed with the help of theregional financial market. Finally, an appropriate publicity plan will be implemented to accompany thisprogram, with a view to gamering public support for it.

Theme 3: Strengthening the capacities of enterprises

3.1 In order to improve mechanisms intended to support economic operators, the National Officefor Foreign Trade (Office National du Commerce Exterieur, ONAC) set up the 'Trade-Point' system in2001, thereby making it possible to collect data and disseminate it to requestors. This tool will beenhanced as the services provided are further broadened and developed. Along the same lines, the

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upcoming establishment of the business support center (Maison de l'Entreprise) will round out andreinforce the institutional mechanisms created to support the private sector.

3.2 In the area of training, the Government intends to:

- emphasize the training of workers (both blue-collar and white-collar) within enterprises;- introduce functional literacy operations targeting the heads of SMEs, master artisans, heads offarmers' organizations and handicrafts associations;- enhance and develop computer literacy among SMEs;- develop specialized technical training (e.g., in agribusiness);- ensure that heads of enterprises (SMEs) and master artisans, etc.., are trained in management,organization, cost calculation, preparation of cost estimates, planning and knowledge of theextemal market;- create a fund to support professional training for entrepreneurs; and- foster and encourage investment by professional organizations in adult literacy, professionaltraining, re-training and management.

3.3 In the area of information, the Government intends to:

- develop an information system covering the following areas relevant to the private sector:- regulatory, administrative and legislative procedures within WAEMU;- WTO provisions conceming the multilateral trade system;- development of markets in Africa, Europe, Eastern Europe, Asia and the Americas;- enhanced collaboration with the commercial attaches of the embassies in Burkina;- support for the collection, processing and dissemination of trade information; and- develop efficient information systems and set up a hub and information distribution site for

national and foreign private operators.

3.4 With regard to skilled labor, the Government intends to develop skills maintenance centersin all areas (electricity, computer operations, agricultural machinery, agribusiness, etc.).

3.5 In order to support management, the Government plans to:

- develop management centers to assist enterprises in organizing their accounts; and- create incentives for the use of local consulting firms.

3.6 In support of organized structures, the Government plans to:

- develop an active partnership with professional organizations in developed or emergingcountries with a view to strengthening the capabilities of the private sector;- provide support to consumers' organizations;- draw up and implement various modules designed to prepare economic operators to deal withforeign markets, particularly in terms of intemational competition, technology transfer, contracts,capital movements, etc.; and- support the participation of Burkina's private sector in trade fairs, specialized trade shows andtrade missions.

3.7 In the area ofproduct quality, the Government intends to:

- provide support for the establishment and strengthening of laboratories authorized to perform

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tests on local or imported products; and to support the creation of a regional laboratory for morecomplex analyses;- introduce regulations on quality standards, as a complement to the current initiatives; and- develop support structures to help set up quality control programs in enterprises and encourageadherence to intemational standards.

Theme 4: Development of institutions supporting the private sector

The development of supporting institutions is crucial to providing the private sector with all theassistance it needs in order to better integrate itself into the world economy. Therefore, the Governmentplants to continue its efforts to:

- improve the efficacy of private sector support structures by making them agencies whollydevoted to serving enterprise development, which involves ensuring that these structures aremanaged accordingly;- support the training of the employees of the supporting institutions;- determiine the best way to enhance the role of the Commission on State/Private SectorCooperation (Commission Permanente de Concertation Etat/Secteur Prive, CPCE/SP);- enhance the role of the National Handicrafts Promotion Commission (Commission Nationalede Promotion de l'Artisanat, CNPA);- enhance the means of intervention of structures responsible for trade promotion (e.g., CCIA,ONAC, embassies, etc.);- provide support for the development of export strategies;- create a technical innovation center in Bobo-Dioulasso for the production and processing offruits and vegetables;- privatize the management of the modem slaughterhouses in Ouagadougou and Bobo-Dioulasso;and- support administrative services dealing with the private sector (e.g., in the form of computerequipment, means of transport, etc.).

Theme 5:Development of the Potential Development of agricultural, agribusiness and livestocksectors

Since Burkina's economy is essentially based on the primary sector, the Govermnent intends tomake this sector an important focus of its development policy.

5.1 In order to develop specific production streams, the Government plans to:

- encourage all initiatives to promote the development of cotton;- promote the production of gum arabic;- support the development of village-based, semi-intensive or periurban poultry raising;- support the professional activity of private-sector veterinarians;- develop the livestock, meat and milk production streams;- develop production streams for the export of agricultural products (e.g., fruits and vegetables,cotton, oilseeds, etc.) by encouraging product processing;- support the installation of processing units for agricultural products (e.g., fruits and vegetables,cereals, etc.) and animal products (e.g., milk, hides and leathers, etc.);- pursue and finalize specifications for the introduction of private economic operators into thenew cotton zones; and- carry out a study of the conditions under which cotton cultivation can be developed in the new

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East and Center zones.

In addition to developing these specific production streams, the Government intends to continueits efforts to promote other production streams selected in connection with the Industrial DevelopmentStrategy.

5.2 In support of organized structures, the Government intends to:

- support initiatives to create professional organizations and to strengthen those that alreadyexist, such as:- the Fruit and Vegetable Exporters' Association (Association des Exportateurs de Fruits etLegumes, APEFEL-B);- the Oilseed Council (Conseil Oleagineux Burkinabe, COB);- the National Union of Cotton Producers (Union Nationale des Producteurs de Coton,UNPC-B);- the National Union of Livestock Dealers and Exporters (Union Nationale des Commercants etExportateurs de BMtail, UNACEB) and the National Union of Beef and Pork Butchers (UnionNationale des Bouchers et Charcutiers, UNABOC);- the National Federation of Agribusiness and Processing Industries (Federation Nationale desIndustries de l'Agroalimentaire et de Transformation du Burkina, FIAB)- boost the participation of the private sector and that of the farmers' organizations in themanagement of forest and hydraulic resources;- strengthen apex organizations, such as:- the National Federation of Farmers (Federation Nationale des Producteurs Agricoles duBurkina, FNPA-B);- the National Union of Young Farmers (Federation Nationale des Jeunes Producteurs Agricolesdu Burkina, UNJPA-B); and- create regional chambers of agriculture.

5.3 For the financing of activities, the Government plans to:

- foster private investment and particularly joint ventures in agricultural product processingunits; and- set up fund-sharing credits subject to strict eligibility criteria.

Theme 6: Financing of the private sector

Development of the private sector requires easy access to financing. The Government's strategytherefore aims to set up an appropriate mechanism based on the simplification of the financial system.

6.1 In the area ofmicrofinance, the policy aims to:

- deepen the reform of the financial sector in order to better meet the need of enterprises forintermediation and financing;- set up a guarantee fund;- develop decentralized financing systems; and- carry out studies and propose concrete interventions to foster a thorough understanding of themechanisms whereby debt is incurred.

6.2 In order to mobilize financing, the policy aims to:

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- develop long-term mechanisms for:- strengthening the financial capacity of leasing companies to finance productive investments bySMEs:- encouraging the establishment of mutual guarantee companies;- create an investment fund to be replenished thlrough public debt conversion;- implement the Rural Financing Action Plan (Plan d'Action pour le Financement du MondeRural, PA/FMR); and- encourage the establishment of a mechanism for interbank reinsurance.

6.3 Regarding thefinancial market, the policy aims to:

- improve competition in bank intermediation by facilitating the entry of new operators into theformal market;- weigh the establishment of a deposit insurance agency; and- encourage, in collaboration with banks, the introduction of Burkinabe enterprises into theregional stock exchange (Bourse Regionale des Valeurs Mobilieres, BRVM).

6.4 Tofinance production streams, the policy aims to:

- carry out a study to identify factors impeding the financing of livestock development activities(e.g., the development of private, small-scale raising of wildlife);- give actors in the production stream an incentive to create stock corporations (since most firmsare currently individual enterprises);- study mechanisms suited to the financing of firuit/vegetable and cotton production streams; and- get the Livestock Development Fund (Fonds de Developpement de l'Elevage, FODEL) up andrunning.

Theme 7: Development of infrastructure

7.1 Air transport. In order to ensure greater traffic fluidity, the air transport market, which hasbeen undergoing liberalization since 1993, will take another leap forward with the studies underway forprivatizing the management of the Bobo-Dioulasso and Ouagadougou airports.

The policy aims to:

- begin the process of privatizing the management of the airports of Ouagadougou andBobo-Dioulasso;- strengthen civil aviation capacity;- review existing agreements with a view to encouraging the development of chartered airtransport; and- encourage the exportation of products by air through the development of product storageinfrastructure.

7.2 Road transport. The Government is convinced that improved competitiveness and economicefficiency cannot be achieved without reducing the cost of the various links in the chain of national andintemational transport, while at the same time keeping the services rendered within acceptable time, cost,quality and safety parameters. Accordingly, in May 2000, the Government, with the participation of allactors in the sector, prepared a transport sector development strategy, as well as a program of priorityinvestments covering the next six years (i.e., 2002-2007). This strategy was subjected to a national review

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involving all development partners, who indicated their support regarding the choice of policies andpriority expenditures for the following purposes:

i. increasing the sector's contribution to the country's economic growth;

ii. enhancing the competitiveness of the national economy;

iii. reducing poverty while improving access to basic services in rural areas; and

iv. supporting decentralization while ensuring the necessary linkages between the chief towns ofthe new autonomous municipalities and deconcentrated departments.

On this basis, the Government's strategic choices for the road transport sector are the following:

i. consolidate and develop the country's road network, giving priority to regular maintenancefinanced with domestic resources, periodic maintenance of dirt roads and rehabilitation of theclassified road network with financial assistance from development partners;ii. develop rural transportation (i.e., infrastructure and services), with the participation of localcommunities and the private sector, in order to improve the population's access to basic services;iii. improve the regulatory environment and the conditions under which shippers operate (e.g.,taxation and import laws) in order to increase the quality and reliability of the supply of overlandtransport through the emergence of private, professional, efficient and competitive operators atthe national and subregional levels;iv. strengthen the sector's managerial capacity by providing the public sector with the humanresources capable of formulating, implementing and monitoring sectoral development policiesand providing the necessary support and assistance to the private sector. A strategy forprotecting the urban environment, enhancing road safety and developing urban transport will alsobe drawn up in order to improve the transportation situation for vulnerable populations in thecountry's main cities;v. enforce regional regulations pertaining to transportation occurring within the countries of thesubregion and obtain a commitment from the countries to eliminate roadblocks;vi. obtain better adherence to regulations through improved training of shippers;vii. draw up a road safety policy (including definition, action plan and financing) and implementit;viii. review the tax regime applicable to the transportation sector in order to provide for therenewal of the vehicle fleet and provide an incentive for the creation of new firms;ix. improve the managerial capacity of personnel responsible for the planning and monitoring ofnetwork maintenance;x. draw up a program of priority investment in road infrastructure and take the necessary stepsto ensure that this program is adhered to by all actors;xi. define and implement a policy for making production zones more accessible by ensuringregular road maintenance;xii. build roads giving access to sites of touristic interest in order to foster tourism development;andxiii. strengthen and diversify road infrastructure that serve the major economic centersalong the primary corridors.

7.3 Regarding water, the Government's policy aims to:

i. improve the institutional framework and develop a strategy for institutional development and aregulatory framework, including an appropriate public/private partnership;

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ii. continue to implement the policy on village and pastoral water supply by intensifyingrehabilitation activities, maintaining existing water points and creating new water points;iii. strengthen activities related to ensuring the reliability and permanence of water distribution inlarge urban centers, and integrate the specific water requirements of the industrial sector intoaction plans and investment programs;iv. review the policy on fee-setting for drinking water, taking availability of water resources intoaccount;v. expand interventions to rehabilitate existing perimeters, promote the development of the largeplains areas, and encourage the emergence of private cooperative structures; andvi. expand research and training efforts, establish regulations and standards adapted to nationalrealities, improve data processing methods, with a view to improving the management andprotection of water resources.

7.4 In the area of industry, the Government's policy aims to stimulate the creation of industrialzones and to enhance their viability.

7.5 In connection with postal and telecommunications services and New Information and

Communication Technologies (NICTs), the Government's policy aims to:

i. develop the capacities of the National Telecommunications Regulation Authority (AutoriteNationale de Regulation des Telecommunications, ARTEL);ii. complete the privatization of ONATEL;iii. maintain and enhance the quality of equipment, while pursuing the goal of reducing the costof telecommunications;iv. develop a specific strategy for expanding the Internet access infrastructure;v. ensure the development of universal service coverage and rural telephone service;vi. develop the Postal Office and improve postal services (e.g., boost the operational capacity ofsorting facilities by renovating plants, mechanizing operations and computerizing such activitiesas the tracking and location of letters and packages);vii. on the basis of a network of 70 post offices, implement a strategy to expand Internet access,including in semi-urban areas;viii. ensure postal access to all parts of the cotuntry, providing universal postal service that allowscustomers to send and receive messages and merchandise to or from any place in the country. Inthis connection, a State/SONAPOST performance contract setting out the conditions under whichsuch an operation would be feasible, will be considered;ix. enhance and expand the computerized data collection network by incorporating newinformation and communication technologies (NICTs);x. make NICTs accessible to the private sector by means of advantageous tax measures thatrespect community commitments.

7.6 In the area of energy and in the context of its poverty reduction strategy, the Governmentintends to make the private sector responsible for providing energy products to the population and plansto strengthen the private sector's capacity for energy sector regulation, policy formulation andmonitoring. The Government will carry out an in-depth reform of the sector over the 2001-2004 period,by means of the operational plan for the energy sector approved by the Council of Ministers onSeptember 19, 2001. SONABEL will be privatized and SONABHY's capital will be opened up to theprivate sector. A regulatory agency, in which consumers will be represented, will be set up for the sector.

In order to promote the development of rural electrification, the Government will create anappropriate incentive framework (legal, institutional, fiscal and technical). The Government's policy aims

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to:

- ensure equal treatment of all participants, with no undue advantage for any one among them,including SONABEL and its successor(s);- establish simplified regulatory procedures for small-scale operators in the field of ruralelectrification;- organize the functions of the actors, and define their roles, for the following activities:

i. planning, policy formulation and monitoring/evaluationii. issuance of licenses and pernitsiii. establishment of the regulatory frameworkiv. enforcement of regulationsv. project financingvi. conflict resolution

- enable operators (at the private or community level) to recover their costs fully under a feestructure adapted to the local environment;- set up a fee-sharing financing mechanism for rural electrification systems, accompanied by clearand transparent financing procedures that exclude operating subsidies;- review the fee-setting policy (including cross-subsidies, tax incentives, etc.);- formulate a specific strategy for electrification in rural areas and secondary centers;- continue to implement the policy on traditional and renewable energies;- ensure the provision of electricity at lower cost through the system of interconnections with othercountries;- give priority to lower-cost electricity supply solutions and adjust technical options in order toachieve them;- establish an agency to support and promote rural electrification initiatives.

Theme 8: Incentives for job creation and preservation

The Government is convinced that poverty alleviation requires, first and foremost, the reductionof unemployment and under-employment through job creation, which is a tool for redistributing revenuesgenerated by the economy. Accordingly, it plans to take the following measures:

8.1 In the area ofjob creation:

- encourage the use of labor-intensive techniques for the execution of public works;- encourage research and innovation in the area of labor-intensive technologies and those thatprimarily make use of local raw materials;- support self-employment initiatives.

To this end, and in the case of new jobs to be created, the State will, in the context of theAppropriations Law, consider social security mechanisms that would promote employment via a revisionof employers' contributions to social security funds.

8.2 In the area ofjob preservation:

- provide technical support, if possible, as well as various other advantages, to enterprises thathave developed a social safety net plan for persons subject to economically-motivated layoffs.

Theme 9: Development of the mining sector

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In connection with the extractive industries and its own poverty alleviation efforts, theGovernment intends to:

- improve the quality of information on mining resources (mining data networks);- set up a regulatory framework conducive to the development of extractive industries (e.g., a mapof mineral holdings to facilitate the management of mining titles);- introduce a standard mining agreement for mining companies, with advantageous tax provisionsfor mining investments in our country;- institute exemplary practices to ensure efficient extraction and development of industrially usefulminerals (creation of pilot mining centers, research and development project on industrially usefulminerals).

This Letter of Development Policy for the Private Sector is in conformity with the Government'scommitments vis-a-vis its development partners and the regional and international organizations ofwhich it is a member. The Government will therefore strive to strengthen related measures, as well asmeasures fostering regional and international solidarity, that focus on ensuring coherence and synergyamong national, regional and international policies to promote the private sector.

(Decree No. 2002-494/PRES/PM/MCPEA signed on November 13, 2002 by H.E. Blaise Compaore,President of Burkina Faso, H.E. Paramanga Ernest Yonli, Prime Minister, and Benoit Ouattara,Minister of Commerce, Enterprise Promotion & Handicrafts).

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