Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 24841

IMPLEMENTATION COMPLETION REPORT(IF-N0230; IF-N023 1)

ON AN

INTERIM FUND CREDIT

IN THE AMOUNT OF SDR 91.1MILLION (US$ 125 MILLION EQUIVALENT

TO THE

REPUBLIC OF UGANDA

FOR A THIRD STRUCTURAL ADJUSTMENT CREDIT PROJECT

09/17/2002

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 15, 2002)

Currency Unit = Uganda Shilling (Ush.)At appraisal USh. 1,025 = US$ 1

US$ 1 = 1,720

FISCAL YEARJuly 1 June 30

ABBREVIATIONS AND ACRONYMS

AGOA African Growth Opportunity ActASAC Agricultural Sector Adjustment CreditBOU Bank of UgandaCA Country Assistance StrategyEAC East African CommunityEC European CommunityEDI Economic Development InstituteEFMPII Second Economic and Financial Management ProjectESAF Enhanced Structural Adjustment FacilityFMS Financial Management SystemFSAC Financial Sector Adjustment CreditHIPC Heavily Indebted Poor CountriesIDA International Development AssociationIMF International Monetary FundMOFED Ministry of Finance and Economic DevelopmentMTEF Medium Term Expenditure FrameworkNAFTA North American Free Trade AgreementNGO Non-Governmental OrganisationNPART Non-performing-assets-recovery-trustPAF Poverty Action FundPEAP Poverty Eradication Action PlanPER Public Expenditure ReviewPIP Public Investment ProjectsPMU Parastatal Monitoring UnitPRGF Poverty Reduction and Growth FacilityPRSC Poverty Reduction Strategy CreditPRSP Poverty Reduction Strategy PaperQAG Quality Assurance GroupSACII Third Structural Adjustment CreditSOE State owned enterprisesUCB Uganda Commercial BankUDB Uganda Development BankURA Uganda Revenue Administration

Vice President: Callisto MadavoCountry Director: Judy O'ConnorSector Manager: Frederick KilbyTask Team Leader: Robert Blake

UGANDASAC III

CONTENTS

1. Project Data2. Principal Performance Ratings3. Assessment of Development Objective and Design, and of Quality at Entry4. Achievement of Objective and Outputs5. Major Factors Affecting Implementation and Outcome6. Sustainability7. Bank and Borrower Performance8. Lessons Learned9. Partner Comments10. Additional InformationAnnex 1. Key Performance hidicators/Log Frame MatrixAnnex 2. Project Costs and FinancingAnnex 3. Economic Costs and BenefitsAnnex 4. Bank InputsAnnex 5. Ratings for Achievement of Objectives/Outputs of ComponentsAnnex 6. Ratings of Bank and Borrower PerformanceAnnex 7. List of Supporting Documents

Project ID: P002987 Project Name: SAC HI

Team Leader: Robert R. Blake TL Unit: AFMUG

ICR Type: Core ICR Report Date: September 18, 2002

1. Project Data

Name: SAC III L/C/TF Number: IF-N0230; IF-N0231

Country/Department: UGANDA Region: Africa Regional Office

Sector/subsector: Central government administration (48%); Banking(19%); Other domestic and international trade(12%); Sub-national government adrninistration(12%); General industry and trade sector (9%)

KEY DATESOriginal Revised/Actual

PCD: 03/05/1996 Effective: 09/04/1997

Appraisal: 10/04/1996 MTR:Approval: 06/06/1997 Closing: 12/31/2001

Borrower/Implementing Agency: GOVT. OF UGANDA/MINISTRY OF FINANCEOther Partners: SIDA (co-financing of SEK 50 million)

STAFF Current At Appraisal

Vice President: Callisto Madavo Callisto MadavoCouintry Manager: Judy O'Connor James W. Adams

Sector Manager: Fred Kilby Roger GraweTeam Leader at ICR: Robert R. Blake David YuravlivkerICR Primary Author: Christiane Kraus

2. Principal Performance Ratings

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

Outcome: S

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: NoThlere was noforinal assessment of the quality of entry; it is judged satisfactory.

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

3.1 Original Objective:The objective of SACIII was to support the Government of Uganda's efforts to reduce povertythrough macroeconomic stabilization and sustained economic growth. To this end, the Creditsupported specific measures to improve the tax system and public expenditure management,complete the trade reform agenda, alleviate the fiscal drain of the parastatal sector, and increase

financial sector efficiency.

The SACIII reform program was set in the context of Government's strategy, spelled out in the

Action Plan for Poverty Eradication, included in the Background of the Budget 1996/97.Subsequently, work on the strategy and specific actions in various sectors had continued towardsthe finalization of the Poverty Eradication Action Plan (PEAP) which was released later in 1997.The PEAP is a medium-term development plan that aims at reducing income poverty from 44

percent in 1997 to below 10 percent by 2017. Further goals were achievement of universalprimary education and primary health care, and safe water. The reform agenda supported by

SACIII was to contribute to the achievements of these objectives by (i) improving budgetaryprocesses to increase quality in public service delivery, (ii) reducing subsidies to parastatals toshift additional resources to poverty reducing expenditure, (iii) maintaining a stablemacroeconomic framework, improving tax administration, furthering trade liberalization, andimproving efficiency in the financial sector to stimulate growth, and increase government

revenues.

This translated into the following specific results that were expected from the SAC III reformprogram:

(i) maintenance of fiscal and macroeconomic stability, including reduction of the fiscal burdenof state-owned enterprises and the financial sector reform,(ii) reduction of anti-export bias in Govermnent policies and higher export growth,(iii) improved budgetary process and more efficient use of public resources,(iv) progress in decentralization and improved service delivery,(v) a shift in the public expenditure pattern to match the decentralized expenditureassignment, including a larger share for spending at the district level and on basic services withinsectors, consistent with the Government's poverty reduction strategy.

SACIII was presented to the Board in parallel with the Uganda CAS for FY97-99 which was alsobased on the PEAP reform priorities, laying out a strategy for continued cooperation with theGovernment, the IMF and the donor community to achieve sustained growth and povertyreduction in Uganda. The FY97-99 IDA program of poverty focused lending was accompanied bya focus on analytic work to inform a 'second generation' policy reform agenda to follow thecompletion of the standard market liberalizing reforms. Apart from SACIII, the CAS included

two additional policy based credits, one for the education sector.

Design: SAC III was designed as a four tranche operation, whose first tranche of US$ 45 millionwas to be disbursed upon effectiveness, and the second tranche of US$ 40 million wasprogrammed to be disbursed one year later, but not before a set of tranche release triggers was

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met; the third and fourth were floating tranches of US$ 20 million each, to be disbursed uponimplementation of key reform measures. The two fixed tranches were to provide predictablebudgetary support for Uganda's financial and macroeconomic program; the two floating trancheswere to flexibly support the implementation of complex reforms.

SAC III followed two economic recovery credits, and two structural adjustment credits toUganda since 1987. SACI and SACII addressed reforms to (i) to improve the economic incentiveand regulatory system (ii) improve the functioning of the custodian board, (iii) increase domesticrevenue, (iv) improve allocation of public expenditure, and (v) implement a civil service reform.

Success of the reform program pursued in the two SACs had been mixed - growth performancewas solid at 7 percent since 1985/86, and private investment had increased substantially from 8percent to 13 percent between 1987/88 and 1995/96. However, export growth lagged behindbecause of high rates of effective protection, an issue that was therefore addressed by SACIII.Supported by reform measures contained in the two SACs and an agricultural sector adjustmentcredit (ASAC), real incomes in cash crops had grown at an annual rate of 24 percent froml987until 1996. However, subsistence production had grown much slower with a growth rate belowGDP growth. To improve marketing opportunities for subsistence farmers, SACIII aimed atreducing industrial protection, and promoting trade expansion in agricultural products.Furthermore, public spending in agricultural extension and other rural social services was toincrease.Apart from the two SACs and the ASAC, a financial sector adjustment credit (FSAC) had beenextended to Uganda which addressed distortions in the financial sector, and supported preparingfor the privatization of Uganda Commercial Bank (UCB), the largest state owned commercialbank in Uganda. SACIII continued the reform program pursued under FSAC.

The agenda of SACIII was determined by Ugandan counterparts, and the Governmentparticipated extensively in the preparation of the credit. Broad ownership of the program had beenassured by a number of EDI supported seminars which were held by the Government forgovernment officials, parliamentarians, NGOs, the private sector, and donors to disseminate anddiscuss the adjustment program.

Risks: At the time of appraisal, the main risks for the operation were identified as political, and thecontinued security concerns in the North which could have necessitated an increase innon-development related expenditure. In view of this danger, the program had been designed withsufficient flexibility that would have allowed the Government to address national emergencies asthey could have arisen. A further factor that could have threatened to undermine the program wasthe weak institutional capacity to carry out the operation. To reduce this risk, World Bank hadfinanced an institutional capacity building project and the Second Economic and FinancialManagement Project (EFMPII), a technical assistance project to introduce a Fiscal ManagementSystem (FMS). Finally, Uganda was highly dependent on foreign aid inflows which might havedried up in case the Government efforts to implement its reform program were to weaken.However, Uganda had an excellent track record already established, and continued to pursue itsreformn program with impressive vigour.

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Co-financing: SIDA co-financed the credit with 50,000 SK. A SIDA representative participatedat the appraisal mission.

3.2 Revised Objective:No revisions.

3.3 Original Components:

(i) General conditions:As an umbrella to the specific SACIII reform program. Government commnitted tomaintaining a stable macroeconomic framework, and satisfactory implementation of itsoverall reform agenda. This was tantamount to satisfactory cooperation with the IMF andIDA throughout the program.

(ii) Revenue mobilization and improving the incentive system:

Revenue mobilization Uganda's tax revenue had increased from 7 percent to 9.5 percentbetween 1989/90 and 1995/96, but that was still low compared with the sub-Saharanaverage. The tax system was greatly distortive, with a high dependence on petroleum andother trade taxes which had been identified as a reasons for slow'export expansion.Income tax revenue of 1-1.5 percent of GDP, was low, but projected to increase withimproved tax administration. VAT which had replaced sales tax and a commercialtransaction levy, had risen to 32 percent by 1995/96 from 26 percent in 1991/92, but wasstill below the level considered optimal.Govermment intended to increase revenue mobilization during the SACIII program by onepercentage point per year through improving tax administration and expanding the taxbase.Tax administration: Uganda's tax administration system had received unfavorable reviewsfrom the private sector whereby the lack of an independent appeals system had beenpointed out as particularly problematic. To improve tax administration, the followingpriorities had been identified under the SACIII reform program: (i) clarification of the roleof the Uganda Revenue Administration (URA) Board, (ii) submitting draft legislation toParliament for the establishment of an independent mechanism for the resolution ofdisputes in tax assessments.Expanding the tax base: Tax exemptions had been pervasive in Uganda - in 1993/94foregone revenue had been estimated at USh 45 biliion. However, since then theGovernment had been successful in reigning in tax exemptions, and foregone revenue haddropped to USh 8-9 billion in 1995/96. Under the SACIII program, Governmentcommitted itself to not approving new discretionary taxes or duty exemptions throughoutthe program.

Improving the incentive regime: Although Uganda's external trade taxes had beensubstantially reduced since the late 1980s, and import taxes for most products were below40 percent, effective protection of industries producing for the domestic market was stillhigh at over 90 percent. Protection rates were widely dispersed between industries andfirms. To further export growth, Government intended to complete the following tradepolicy reform agenda under SACIII:

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Timetable for trade liberalizationFinancial Action DateYearFY97/98 Announce trade liberalization program FY97/98 budget

Reduce the minimum import duty to 20 percent July 1997Reduce the maximum rate of excise taxes to 10%, July 1997except for soft drinks, beer, and cigarettesAbolish all remaining non-tariff barriers (NTBs), March 1998except for cigarettesReplace NTBs by temporary import surcharges , to March 1998;be phased out gradually over three years three years from

thenFY98/99 Replace the import ban on cigarettes by a July 1998; two

temporary import surcharge, to be phased out years from thengradually over two yearsReduce the minimum import duty to 15 % July 1998Establish a minimum import duty in the range of July 19987-8%Abolish all excise taxes that apply differentially to July 1998imports and domestic goods, except for beer, softdrinks, cigarettes

FY99/00 Consolidate import duties applied to non-COMESAtrade into a low, single uniform rate

To complement these reforms, a simplified duty drawback system was to be implementedand export documentation to be streamlined.

ii) Improving the management and efficiency of public expenditure:In order to achieve poverty reduction goals, the Ugandan Government intended toimprove its management of public expenditure, and to improve the efficiency of resourceallocation. The SACIII reform program addressed five areas of public expendituremanagement:

Limiting supplementary budget provisions: In the years prior to SACIII, the Governmenthad reverted to budget supplementaries during budget execution, thereby undermining thebudget priorities and process, and creating uncertainty for implementing agencies. As partof the SACIII reform program, Government committed to gradually reduce the totalamount of supplementaries to below 3 percent.

Introducing an unified budgetarv process: Government's budget had been divided between(i) the recurrent budget of central government ministries and institutions, (ii) the budgetsof local governments, and (iii) the development budget. This three-way split had causedlack of transparency and outcome orientation. For the SACIII program, Government had

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committed to enhancing the role of the MTEF in order to replace the three-way split by aunified budgeting process with clear financing priorities. Furthermore, SAC III introducedan outcome orientation to the public expenditure program.

Strengthening the poverty focus of public spending: At the time of appraisal of SAC III,the Government was finalizing the PEAP which prioritized Government expenditure andpolicies with the objective to enable the poor to participate in and benefit from economicgrowth. Under SACIII, Government committed to (i) increasing recurrent budgetallocation in the priority sectors agriculture research and extension, primary health careand primary education, (ii) adequately budgeting for PIP projects, and (iii) ensuring thatthe allocated funds would be fully and timely released.

Expenditure management under decentralization: Uganda's Constitution from 1995 hadprovided for a shift in implementation responsibility from the central to districtgovernments, yet by 1997, this had not been reflected in a shift of budgetary allocations.As part of the SACIII reform program, pilot ministries (education, health, agriculture)were to work with districts to prepare output and outcome oriented budgets for priorityprograms, and to design rules for the operation of conditional grants. The resource shiftfrom central to district level governments was to begin in FY98/99. To maintain fiscaldiscipline at the district level, Government was to regulate borrowing by districts as partof the SACIII reform program.

Accountability and transparency. Results from an World Bank education and healthexpenditure tracking study (published in Ablo, E. & R. Reinikka (1998) 'Do BudgetsReally Matter? Evidence from Public Spending on Education and Health in Uganda',World Bank Discussion Paper 1926) had shown that resources from central ministries didnot reach primary education and health facilities. To address this problem, Governmenthad committed to implementing accountability mechanisms and increasing transparency aspart of its reform program under SACIII. Furthermore, Government was to design andimplement an Action Plan to improve the financial accountability mechanism for centraland local governments by FY97/98.

(iv) Reducing para-fiscal deficits of parastatals:Most Ugandan SOEs at the time of SACIII appraisal were inefficiently run, therebyconstraining the development of the private sector, and draining the budget with USh 208billion (nearly 5 percent of GDP) having gone to SOEs as direct or indirect subsidies in1994. Therefore, Government intended to (i) privatize 85 percent of all SOEs by the endof 1997, including parastatals in the power, telecom, water and transport sector, and (ii)impose strict financial controls on all SOEs to eliminate direct and indirect subsidies tocommercial SOEs and to phase out subsidies to non-commercial SOEs over a four-yearperiod. The SACIII reform program addressed the financial control aspect of Governmentstrategy, which was to be monitored by a Parastatal Monitoring Unit (PMU) within theMinistry of Finance.

(v) Fiscal cost of financial sector reform:

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Government and the Bank of Uganda (BoU) had initiated a comprehensive financial sectorreform in 1995. One of the specific reform steps had been to prepare Uganda CommercialBank (UCB) for privatization which included placing UCB's non-performing portfoliowith a specially created Non Performing Assets Recovery Trust (NPART). In December1996, the Memorandum of Offering for the sale of UCB had been issued, and at the timeof SACIII board approval, the notices of interest were being evaluated. Under the SACIIIreform program Government committed to the following course of action: If no privateinvestor acceptable to the Government and BoU was to be found, Government wouldpursue an alternative plan for restructuring UCB, involving a management contract with areputable international banking group for three years during which UCB staff and branchnetwork were to be reduced. At the end of the management contract period, UCB wouldbe offered again for sale.Furthermore, Government committed to support NPART's loan recovery activities until atleast Ush. 25 billion of the total portfolio of Ush. 65 billion non performing UCB loans -i.e. 38 percent- would have been recovered, thereby signaling to the public theGovernment's resolve to enforce repayment discipline.Government further envisaged financial sector reform measures including preparation andpublication of a policy paper on treatment of insolvent and weak banks, and addressingproblems of Uganda Development Bank (UDB), a publicly owned unprofitable bank.

3.4 Revised Components:No revisions.

3.5 Quality at Entry:SACIII was appraised in FY96/97, before quality assessment at the entry stage had become aninstitutional requirement.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The program successfully achieved its specific objectives and has maintained them after theclosing date (December 2001). For each policy objective a set of policy measures were definedand most outcomes have been satisfactory (see table 2).

Table 2: Policy Objectives, Actions, and OutcomesPolicy Objective Key Actions Taken OutcomesMaintain Since 1997, completion of Growth was solid, thoughmacroeconomic stability two ESAF/PRGF lower than expected, inflation

arrangements with the IMF; contained, foreign exchangecurrently negotiations for a cover sufficient. satisfactorynew 3-year PRGF program.

Expand the tax base and * Clarification of the role of Revenue remained stagnant atimprove tax URA board ust below 11 percent since 1997.administration * Establishing an independent marginally satisfactory

tax tribunal.Reduce Anti-Export Bias * Reduction of tariffs, and Growth of export revenue since

elimination of quantitative 1997 dcespite sharp reduction

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restrictions terms of trade in 1999 and 2000;* Implementation of new diversification of agriculturalefficient duty drawback system. exports (fish/fish products,

coffee, tobacco, cotton,horticulture); no sigtificantmanufacturing exports.satisfactory

Strengthen fiscal Limit supplementaries at 5 Budget allocation has becomemanagement percent in 1997/98, and 3 more predictable since 1997/98

percent thereafter, with when the MTEF was fullyexception of 1998/99 when implemented.satisfactorysupplementaries amounted to4.1 percent.

Adopt an Implement MTEF. Budget cycle performance hasoutcome-oriented improved over SACIIIbudgetary process implementation; budget

preparation, management, andexecution are efficient,transparent, and predictable.satisfactory

Enhance the anti-povert Increase share of poverty Service delivery of education,focus of the budget sensitive expenditure. health, water and sanitation,

and agricultural services hasimproved. satisfactory

Improve governance and Reduce backlog of accounts Improved service delivery ataccountability and audits local/district level. satisfactoryLimit para-fiscal Reduce direct and indirect Budgetary pressure from SOEsexpenditure subsidies to SOEs. has been reduced which helped

free up resources for povertytargeted spending. satisfactory

Enhance the soundness of Privatization of UCB; Privatization of UCB tookthe banking system preparation UDB for place only recently, so no

privatization. efficiency effects throughenhanced competition in thebanking sector yet. marginallysatisfactory

Enhance financial * NPART to recover Ush. Sounder banking sector sincediscipline and create 25 billion from UCB and Government developed - yetpolicy and regulatory UDB non-performing loan not fully implemented - aframework portfolio tougher policy vis-a-vis

* develop policy for problem banks. marginallyinsolvent and weak banks. satisfactory

The timetable spanned by SACIII was longer than anticipated, and longer than the 3 years that arethe norm for a structural adjustment operation. The originally programmed closing date had been

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June 30, 1999. However, an extension of the closing date had been sought because of a delayedcompletion of the midterm review of the IMFs second ESAF arrangement, and a delay in NPARTreaching its objective of collecting Ush. 25 billion. Furthermore, one of the policy measures towhich the Government had chosen as release trigger for one of the floating tranches provedimpractical in light of later developments. Therefore, the Credit Agreement was amended by areplacement reform measure.

Apart from the delay in disbursement of the last three tranches, the credit was disbursed asanticipated at the time of appraisal, apart from a supplemental interim Fund Credit of US$ 25million that had been added to SACIII in November 2000. Rationale for the additional balance ofpayment support was to help Uganda meet unforeseen financial requirements caused by a sharpnegative terms of trade shock in 1999 and 2000. Rising petroleum prices in combination withfalling coffee prices had led to a financing gap, and the IDA credit had been extended to ensuremacroeconomic stability, and the maintenance of programmed poverty reducing outlays.

4.2 Outputs by components:

(i) General conditions:

Macroeconomic performance: Uganda's macroeconomic performance over the SACIIIprogram has been characterized by relatively high growth rates - 5.7 percent in FY97/98,6.6 percent in FY98/99, 4.0 percent in FY99/00, 4.9 percent in FYOO/01, and 5.8 percentin FY01/02 - and macroeconomic stability. With this growth performance, Uganda missedits ambitious goal of achieving an average of 7 percent p.a. growth over the SACIIIperiods. However, against the background of a severe terms of trade deterioration in 1999and 2000, Uganda's growth performance is impressive. Inflation had been subdued (-0.2percent in FY97/98, 6.3 percent in FY98/99, 4.6 percent in FY99/00, 0.2 percent inFYOO/01, and 5.5 percent in FY01/02), and Uganda's external position comfortable withan average of 6 months over FY97/98 through FY01/02. Owing to its strongmacroeconomic and structural performance, Uganda was the first country to reach theHIPC completion point in 1998, and the enhanced HIPC completion point in 2000.Uganda had completed its first and negotiated its second ESAF arrangement shortlybefore SACIII Board Approval. The mid-term review of the second ESAF arrangementwas slightly delayed, and at the end of the program in 2000, the second ESAFarrangement was extended for another 9 months as a PRGF facility. Uganda if finalizingnegotiations for a second PRGF program at the end of FY01/02.

Satisfactory progress in implementing reform program: The implementation of Uganda'sreform program was satisfactory over the time spanned by SACIII. Significant progresswas registered in the areas of trade liberalization, decentralization, improved servicedelivery, and financial sector reform. Furthermore, a significant shift of resource allocationto poverty sensitive areas was achieved. Uganda also registered progress in reform areasnot covered by the SACIII program, notably privatization of commercial SOEs and sectorreforms to open utilities (telecommunication, power, water, transport) for private sectorparticipation, and a comprehensive civil service reform.

Rating: fully satisfactory

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Revenue mobilization and improving the incentive system:

The following table summarizes the reform measures taken under the SACIII program. Allbut one trade policy sub-condition were met, and the last condition had been modifiedowing to an inconsistency of the original condition with EAC provisions negotiated aftereffectiveness.

Policy Measures StatusSubmit draft legislation to Parliament for the Condition met for Boardestablishment of an independent tax appeals Presentationsystem.

Submit draft legislation to clarify the role of URA Condition met for SecondBoard and set appropriate safeguards. Tranche releaseAnnounce tariff reform plan and timetable. Condition met for

Effectiveness(i) Reduce minimum import duty to 20%; (ii) end Conditions (i) and (iii) metdifferential use of other taxes/rates for imports and for Second Tranche release;domestic goods; (iii) and abolish remaining NTBs waiver for (ii)(except tobacco).Implement new, more efficient duty drawback Condition met for Firstsystem (instead of as originally intended: Floating Tranche release"implement a low uniform duty rate on allnon-COMESA imports").

Revenue Mobilizatiorn To improve tax administration, the FY97/98 Finance Bill clarifiedthe role of the URA board and a new board had been appointed subsequently. In theFY98/99 Finance Bill, Government's capacity to introduce discretionary tax/dutyexemptions had been withdrawn. During SACIII implementation, the planned TaxTribunal was established in FYOO/O1. Yet despite the resulting expansion in the tax base,and the improvements in tax administration, tax revenue was disappointing with 10.3percent, 10.9 percent, 10,8 percent, and 10.6 percent of GDP between FY97/98 andFYOO/01; for FY01/02, an increase to 11.4 percent is expected. Government thus missedits goal of raising tax revenue by one percentage point per annum by a wide margin.There are several reasons for the lower than expected tax revenue: Revenue from thepetroleum tax decreased because (i) Government had reduced the tax, and (ii) the price forpetroleum increased and demand declined. Furthermore, despite improvements, taxadministration remains weak, and the structure of Uganda's economy remainspredominately rural with many economic activities not taxed. Finally there is a pervasiveculture of non-compliance regarding tax payments. Government is tackling these issues byreforming the URA to strengthen management structures, and building capacity, andchallenging governance issues more decisively.

Improving the incentive system: The Government reduced its maximum import tariff to 20percent in FY97/98, and to 15 percent in the FY98/99 Finance Bill. Apart from the 15

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percent maximum tariff, there was intermediate band with 7 percent, and a 0 percent ratefor capital goods irmports. Government had originally envisaged to limit the tariffs to twonon-zero rates, yet when the tariff reform was implemented, maintenance of the zero ratefor capital imports was seen as essential to boost investmentGovernment had committed to eliminating a 10 percent excise tax levied on importedproducts as a release condition for the second tranche. However, for several reasons thismeasures was no longer viable when the second tranche was to be released. The excise taxwas an important source of Govermment revenue, totaling 25 percent of total customsreceipt in FY97/98. Secondly, the 10 percent excise tax was for the most part applied toCOMESA imports, and an elimination would have reduced the tariff protection ofUgandan producers substantially. At the time of second tranche release, discussions wereunder way between the three EAC countries to abolish all tariffs between them. In view ofthese discussions, Government desired to not eliminate the excise tax before the end of thenegotiations, and therefore applied to have the condition waived. The waiver was granted.During EAC negotiations it also became apparent that the intended introduction of a lowuniform duty rate on all non-COMESA imports would not be consistent with future EACprovision. To avoid a possible conflict, the floating tranche condition was replaced withone that held Government to introduce an improved duty drawback system. In September2000, Government put in place an Automatic Duty Drawback system and a special dutydrawback division in the URA. Performance of the system and the division has beenimpressive, with swift processing and high capacity.With the trade policy measures taken as part of the SACIII reform program, theGovernment completed its trade liberalization agenda, complementing earlieraccomplishments regarding import liberalization, opening of export marketing forcompetition, and foreign exchange liberalization.Uganda's record in export performance over the past years shows that she is now reapingthe benefits from determined trade liberalization. Uganda's exports are no longerdominated by coffee which up to FY98/99 accounted for more than 50 percent of exportrevenue. After a steady decline in the share of coffee - partly fueled by the price decline -it slipped in FYO 1/02 to second place for the first time with 18 percent compared with fishand fish products which accounted for 19 percent of export revenue. Uganda's exports arestill predominantly agricultural, yet diversifying rapidly: tobacco now accounts for 8percent, tea for 6 percent, cotton and horticultural products for 4 percent each. The mostimportant non-agricultural exports are precious metals with 14 percent (possibly including- but not officially recorded - re-exports from precious metals originating in theDemocratic Republic of Congo). Export growth performance over the SACIIIimplementation period has been good: non-coffee export revenue grew at 19 percent p.a.since FY98/99. Coffee revenue fell owing to a price decline of 66 percent since FY98/99,but volumes increased moderately by 3 percent p.a.. Manufacturing exports, however, arestill virtually non-existent, despite Government's attempts to take advantage of AGOA(African Growth Opportunity Act).In the future, Uganda is well placed to realize growth potential in the regional marketwhere Ugandan meat, dairy products, and non-traditional agricultural products areparticularly competitive. Ongoing EAC discussions regarding the establishment of acustoms union are therefore important for the future performance of Ugandan exports.

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Rating: revenue mobilization: marginally unsatisfactory; improving the incentive system:fully satisfactory

(iii) Improving the management and efficiency of public expenditure:

The following table summarizes the reform measures taken under the SACIII program. Allconditions were met, except for the 3 percent limit on supplementaries which wasexceeded in FY98/99. A waiver had been sought and granted.

Policy Measures StatusLimit supplementaries to no more than 5% of Condition fulfilled forGovernment funded expenditures in FY96/97 and no FY97/98; waiver formore than 3% thereafter, except for national FY98/99 and Secondemergencies. Tranche release.

Adopt rules for conditional grants following Condition fulfilled forconstitutional criteria; establish monitoring programs; Board Presentation.and delink block grants from District personneestablishment positions.Regulate borrowing by Districts. Condition fulfilled for

Board Presentation.Implement integrated sector programming and Condition fulfilled forbudgeting exercise for three pilot sectors (Education Second Tranche release.Health and Agriculture) in conjunction with Districts.(i) Increase budgetary allocations for agriculture All Conditions fulfilledresearch and extension, primary health and primary for Second Trancheeducation at least at the rate of increase of nomina release.GDP; (ii) ensure adequate budgeting for PIP projectsand (iii) ensure that funds are fully released.Prepare timetable for auditing of local governments. Condition fulfilled for

Board Presentation.Commence implementation of action plan to improve Condition fulfilled forfinancial accounting and auditing for central and loca Second Tranche release.government.Timely publication and dissemination of; (i) district Condition fulfilled forbudgets and Local Government Public Accounts Second Tranche release.Committee Reports; and (ii) audits of district accountson completion.

Budgetary processes: Over the SACIII implementation period, Uganda's budgetaryprocess has improved considerably in preparation, management and execution with theresult of increased predictability, efficiency and outcome orientation of the budget. TheMTEF performed well, successfully containing aggregate spending, and translating PEAPpriorities into the corresponding strategic expendituwe allocations. The SACIII reformscontributed to this successful development in various ways. Limitation of supplementaries

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to 5 percent in 1997/98 and 3 percent thereafter as well as the adoption of rules forconditional grants helped to make the budget process more predictable; theimplementation of integrated sector programs increased efficiency, and linking expenditureto specific outcomes at the sector level advanced outcome orientation of the budget, asdid the implementation of monitoring and evaluation programs.

Poverty sensitive spending: A major shift of public expenditure towards social sectors(education, health, water and sanitation, roads and works, agriculture) occurred during theimplementation of SACIII. Identifiable expenditures for agricultural extension andresearch, primary health care and primary education increased from 30.7 percent inFY97/98 to 36.1 percent in FY2001/02. The bulk of poverty focused expenditure went tothe education budget to finance Government UPE (Universal Primary Education) drive.Spending for the health sector, however, did not improve over the period, neither didagricultural spending. However, both the roads and works, and the water and sanitationexpenditures increased substantially.During the SACIII implementation period, Government created within the MTEF aPoverty Action Fund (PAF) to ensure increased funding for poverty sensitive sectors. ThePAF is a virtual fund, aggregating across sectors expenditures for poverty reducingservices specified in the PEAP. Originally, it was set up to track funds earmarked for basicservices under the Heavily Indebted Poor Countries (HIPC) initiative. Expenditures thatcount for the PAF are protected from spending cuts, and expected to rise in accordancewith the PEAP.During the SACIII implementation period, Uganda also moved to integrated sectorprograms for implementation of its PEAP goals for education (since 1998), health (1999),rural development (2000), and water and sanitation (2001).The effect of increases in poverty focused spending and integrated sector programmingare apparent in the education sector, where Government's efforts towards UPE translateinto high enrollment rates, currently at 130 percent gross enrollment, and 89 percent netenrollment, and improved pupil-teacher and pupil-classroom ratios in primary schools. Inthe health sector, progress towards improving health outcomes remained mixed over theSACIII implementation period, with persistent high rates of infant and child mortality, yetprogress in halting BIV/AIDs infection rates. As regards access to safe water, coverage inrural and urban areas has improved.

Decentralization. accountability and auditing: Uganda's gradual decentralization ofexpenditure allocation to the district level was accompanied by changes and improvementsof fiduciary assurance structures, a number of which were supported by the SACIII reformprogram, notably the regulation for district level borrowing, the introduction of a FiscalManagement System, and improvements of financial accounting and auditing both at thelocal and the federal level. Recent expenditure tracking studies in health and educationindicate that more than 90 percent of publics funds reach the schools and health facilities,and are used for their intended purpose.To date, financial management, accounting and auditing systems are in place from thedistrict level upwards which required considerable capacity building much of which wassupported by EFMPII. For FY0O/01, the objective to have all district level accounts

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submitted, and audited is almost achieved, the backlog has been all but eliminated with allFY98/99 accounts audited, only 3 outstanding for FY99/00, and 92 percent of FYOO/Olaccounts submitted for auditing as of March, 2002. However, the success in FYOO/0 1 wasachieved with the help of additional resources that had been provided by the Ministry ofFinance and Economic Development, and the challenge for next year will be to show thatthe performance is sustainable.

Rating: fully satisfactory

(iv) Reducing para-fiscal deficits of parastatals:

The following table summarizes the reform measures taken under the SACIII program. Allconditions were met.

Policy Measures StatusSubmission of PMU report on financial Condition met for Board Presentation.flows to/from SOEs for 94/95.Achieve 20% reduction in overall Condition met for Second Tranchesubsidies to the SOE sector in 1996/97 release.compared with 1994/95 (excludingsubsidies to and from UCB and UDB).

The SACIII reform program to reduce subsidies to SOEs has been part of a wider reformprogram to divest SOEs, and reform the utility sectors to accommodate privateparticipation. This program is well advanced and successful. 77 percent of the SOEsprivatization transactions have been completed, and the remaining 23 percent includeGovernment shares in privatized enterprises that will be floated on the stock market in afollow-up transaction. As a result, subsidies to SOEs have been further reduced, and nowonly account for 50 percent of the FY94/95 level, with direct cash subsidies almost downto zero. In all utilities, private sector participation is sought, and already achieved in thetelecommunications sector. For the water, transport, and power sector, Government iscurrently putting in place the necessary reforms and regulatory changes to finish itsprivatization program over the next couple of years.

Rating: Fully satisfactory

(v) Fiscal cost of financial sector reform:

The following table sumrnmarizes the reform measures taken under the SACIII program. Allconditions were met, although it took NPART longer than originally expected to collectUsh 25 billion. As a result, the closing date of the credit needed to be extended severaltimes until the goal was reached in November 2001.

Policy Measures StatusComplete sale of UCB, or implement back-up plan Condition met for Second

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agreed with IDA. Tranche release.NPART to collect at least USh 25 billion in Condition met for Floatingnon-performing loans. Tranche release.Implement policy regarding UDB to stop losses and Condition met for Secondminimize budgetary costs in agreement with IDA. Tranche release.Finalize and publish a policy paper on future bank Condition met for Boardintervention agreed with BOU and acceptable to Presentation.IDA.

Privatization of UCB: A sales contract between UCB and Westmount, a Malaysiancompany with limited experience in the banking sector had been signed in October 1997.With the completion of the deal, UCB had been privatized in April 1998 and 49 percent ofthe shareholdings had been transferred to Westmount. However, after allegations offraudulent behaviour by Westmount were made, BOU intervened, removed themanagement appointed by Westmount, and the contract with Westmount was voided. ABOU supervisor was placed in UCB in December 1998, and the operation run by atemporary management team. Government subsequently sued Westmont formismanagement, and shares were retumed in full to the Government. Recently (February2002), 80 percent of UCB shares were in a second, successful attempt sold to StanbicBank. For 2 years, the new management has committed to keeping all essential branchesopen for business. After the merger of UCB with Stanbic Uganda will have beencompleted, the new operation will focus on improving its loan portfolio; Government willfloat its remaining shares.

As regards UDB, a new management team had been put in place in 1997 which hadprepared a business plan which specified that UDB was not to undertake new lendings,but rather would prepare itself for privatization. Currently, the Government together withthe IMF and the World Bank are drawing up a timetable to divest UDB.

NPART: NPART's collections were Ush 11.8 billion by Semptember 1997, Ush 13.5billion by April 1998, and Ush 15.3 billion by January 1999. This marked a significantshortfall against the target of Ush 25 billion which had been the agreed tranche releasecondition. There were several reasons for the slow recovery of assets: The most importantone is the legal situation where a creditor can appeal either at the NPART Tribunal, or inthe Ugandan High Court system. While the NPART tribunal has been set up to dealexclusively with NPART cases, and processes cases speedily, cases in the High Courtshave been delayed frequently. Furthermore, there was lack of coordination andcooperation between UCB and NPART staff regarding the recovery of non-performingloans. Finally, over time, the portfolio of debt to be recovered deteriorated, and it becamemore and more difficult to either sell the assets, or reach a settlement with the creditors.To meet the floating tranche release condition, Government extended the mandate ofNPART in 1999 until October 2001, and included UDB's non-performing assets of Ush.74.3 billion - of which 95 percent has been classified as loss - to its portfolio. Althoughtransfer of the relevant files from UDB to NPART was delayed, collection reached Ush26.7 billion by November 2001 by which the tranche release condition had finally been

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met. Thereafter, NPARTs mandate had been extended for another 4 year term to achieve a24 percent (Ush 33 billion) recovery rate by 2005. By April 2002, collection had reachedUsh 30 billion or 22 percent of the combined UCB and UDB non-performing assetsportfolio.

Over the SACIII implementation period, banking supervision by BoU has markedlyimproved. BoU has shown resolve to enforce the rules by closing three insolvent banks in98/99, and since then BoU's department for banking supervision has been strengthenedthrough capacity building and technical assistanice by the IMF. However, the policyregarding bank intervention which has been developed under the SACIII reform programhad not been fully implemented during the banking crisis. And while the banking sector isnow more solvent and sustainable compared with 1997, the objective set out in SACIII tomake it more efficient has not yet been achieved, largely on account of the delay inprivatizing UCB. In the last few months, however, lending margins have final began tocome down as a sign of increased efficiency of the banking sector.Next steps in the financial sector reform agenda will be liberalization of the insurancemarket for long term social security, and for short term household insurance products. Forthe short term insurance market, liberalization is likely to entail privatization of the stateowned National Insurance Corporation, while the National Social Security Fund isurlikely to be privatized; here liberalization is expected to translate into opening themarket for international competition.

Rating: marginally satisfactory

4.3 Net Present Value/Economic rate of return:Not applicable

4.4 Financial rate of return:Not applicable

4.5 Institutional development impact:The institutional development impact of SACIII is rated substantial, mostly because of theprogress Government has made in fully institutionalizing its budget preparation, management, andexecution. This process has been promoted by several Bank operations- the PER process, thecapacity building EFMPII and lately the PRSC process, and has shown very good results.Furthermore, the credit supported measures to strengthen the tax administration as a result ofwhich an independent Tax Tribunal was established. However, tax collection remainsdisappointing, and more institutional strengthening of URA and capacity building will benecessary to increase revenue to a satisfactory level.Finally, BoU's institutional capacity for banking supervision improved during the implementationperiod of SACIII, owing to capacity building efforts supported by the IMF.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:Terms of trade decline over the period of SACIII implementation precluded achievement of theenvisaged growth rate of 7 percent p.a.. Increase in oil price led to a reduction in demand, and

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thus to a lower than programmed revenue from the petroleum tax. This in turn contributed to thefailure of Government to achieve the envisaged increase in revenue mobilization. Reason forGovernment's failure to contain supplementaries in FY98/99 were security concerns thatnecessitated higher than programmed defense spending. The fact that the uniform tariff conditionneeded to be replaced because of clash with the result of EAC negotiations and the trancherelease condition was also outside of Government control. Finally, privatization of UCB was notaccomplished within SACIII implementation period because of problems with Westmont, the firstbuyer.

5.2 Factors generally subject to government control:

Government's failure to conclude the mid-term review of its second ESAF program delayed therelease of the second fixed tranche.As regards the disappointing revenue development, Government failed to devote more attentionand resources towards improving performance of URA. Its administrative structures, thoughimproved, are still deficient, and capacity inadequate. By addressing these problems in time, anincrease of domestic revenues would have been likely. Yet, high official development assistancereduced the incentive for the Government to increase revenues: Over the implementation periodof SACIII, financial inflows (official and private) have been high, averaging 15.4 percent between1995/96 and 2000/01; during this period, donors also shifted support from investment lending toprogrammatic lending which reduced the pressure on the Government to raise revenue to financebudgetary expenses.Government's decision to seek a waiver for its commitment to eliminate the 10 percent excise taxlevied on imported products was triggered by concerns for domestic revenue of which the tax wasan important contributor, and trade policy reasons, since the tax provided protection againstimport competition which was deemed necessary.NPARTs slow collection performance owing to which the closing date of the credit had to beextended repeatedly, could have been avoided if Government had clarified the legalresponsibilities. Giving exclusive responsibility to treat NPART cases to the dedicated NPARTpanel would have required a change in the constitution which Government was not willing toseek.

5.3 Factors generally subject to implementing agency control:

Not applicable

5.4 Costs andfinancing:Not applicable

6. Sustainability

6.1 Rationale for sustai;iability rating:

The sustainability of the reform program supported by SACIII is highly likely for several reasons.The majority of the reforms supported by SACIII are embedded in a wider reform program, andsupported by other Bank operations. Government's efforts to decentralize expenditureresponsibility is supported by the LGDP project. Limiting subsidies to parastatals is part of awider effort of privatization and sector reform for the teleconmmunications, power, water andtransport sectors, that has been carried forward during and after the implementation of SACIII.Financial sector reform moved slower than expected during the implementation of SACIII, mainly

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because of certain disruptions caused by a consolidation of the banking sector in 1998/99.However, Government continues to regard financial sector reform as a priority, and pursues itsagenda now as planned, and with technical assistance from the IMF. Improving the budgetprocess was key to the SACIII supported reform program, and the important steps taking duringthe implementation of the credit have since been complemented with further reform measuressupported by the PER process, and a reform program under Uganda's first PRSC in 2001.As the last structural adjustment operation SACIII supported Government in bringing to closure anumber of market liberalizing reforms, notably the trade policy agenda which is now completed.Privatization of SOEs and utility sector reform is very far advanced, and will be completed withinthe next year as well. Financial sector reform - arguably the most difficult market liberalizationreform - is progressing well, with Government attention shifting from banking sector reform tothe insurance markets now.The fact that SACIII's reform agenda also aimed at improving public service delivery, marks theshift of the Bank's attention and support for the second generation reform agenda for lastingpoverty reduction. By promoting reforms in areas such as decentralization, output orientedbudgeting and integrated sector programming and budgeting, SACIII links over to the PRSC erawhere Government's implementation of its poverty reduction strategy is supported by a series ofone tranche programmatic lending operations with focus on cross-cutting public sectormanagement issues and service delivery.

6.2 Transition arrangement to regular operations:

SACIII marked the last of four structural adjustment operations to Uganda in the 1990s. As laid out in theUganda CAS for FYOO/Ol - 03/04, the Bank's will in the future support Uganda's poverty reductionstrategy through budget support in form of a series of one-tranche PRSCs, capacity building programs, andselected infrastructure projects.

7. Bank and Borrower Performance

Bank7.1 Lending:

Preparing the operation, the Bank worked closely with Government to identify refonn steps todrive forward and complete growth stimulating liberalization agendas for trade policy, and thefinancial sector. Furthermore, the PEAP added issues relating to budgetary management andexecution, and strategic expenditure allocation to the SACIII program. Since the operationcontained reform measures in several areas not closely connected, preparation was complex. Tomaster the program's width, extensive preparatory analytical work on issues such as tax revenueand tax exemptions, trade policy, budgetary issues, and decentralization had been undertaken.Preparation of SACIII was done in a consultative manner, based on Government's povertyeradication strategy, and fully owned by Government.The only concern with the Bank's performance was that it did not pay close enough attention tothe details of ongoing EAC negotiations whose outcome eventually necessitated replacing on ofthe floating tranche release conditions.

7.2 Supervision:

For most of the program, supervision was done by the Country Operations Manager; for thesupervision of the financial sector reform component, a financial sector expert came for 3supervision missions. The presence of the Bank's Task Manager in the Country Office greatly

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added to the success of the program. Supervision turned into a continuous dialogue on

Government's evolving reform program, which was particular profitable for the public

expenditure component. In 1999, supervision of SACIII was reviewed by the Bank's Quality

Assurance Group. The assessment was excellent: supervision of SACIII was bankwide the only

structual adjustment operation supervision that received the highest QAG rating.

7.3 Overall Bank performance:

Satisfactory

Borrower7.4 Preparation:

Government fully engaged in the preparation of SACIII, and there was complete ownership of the

reform program. The Government team was led by MOFED and the BOU, but extensive

consultations were undertaken, to assure broad-based consensus on the program.All Government commitments under SACIII along its reform program were well designed, with

the NPART collection amount as only exception. To a large part, NPART's failure to collect on

non-performing assets was due to provisions of the legal system which should have been analyzed

more carefully to avoid the problems that eventually occurred.

7.5 Government implementation performance:

Government remained fully engaged during implementation. When it became apparent that one of

the floating tranche condition could not be met owing to results of ongoing EAC negotiations, the

Government team proved flexible in designing an alternative reform policy. Implementation was

enhanced by the fact that the main Government counterpart remained in his position during the

entire implementation period, thereby ensuring continuity in the dialogue.Government drove its reform agenda forward as planned in all areas, except for revenue

mobilization. Here, greater efforts to invest in tax collection and a firmer stance on governance

issues would most likely have yielded the intended increase in tax revenues.

7.6 Implementing Agency:

Not applicable

7. Overall Borrower performance:

Satisfactory

8. Lessons Learned

1 - Supervision of SACIII was done by the Country Operations Manager based in the Country

Office in Kampala which proved to be a very successful arrangement by facilitating a continuous

supervision, rather than periodic visits by headquarter staff. As a result, supervision of SACIII

provided a platform of dialogue for the reform areas. In many instances, the dialogue went beyond

the specific SACIII provisions to shape the future reform program in the different areas,

particularly public expenditure reform. Guided by the continuous dialogue, Government

successfully pursued a public expenditure management reform agenda that provided the

pre-conditions for future Bank support in form of PRSCs.

2 - The reform program subsumed under the SACIII was diverse, and broad-based. While a wide

variety of reform agendas was thus driven forward, management of the credit was complex, and

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evaluation of performance and outcomes challenging. The reason for the diverse agenda was thata number of market liberalization reform programs which were addressed in the credit werereaching completion with the SACIII measures (trade policy reform, privatization of parastatals).Therefore, SACIII also included measures addressing the emerging cross-cutting reform program,and service delivery issues thereby linking the last structural adjustment operation with the firstPRSC. An alternative approach could have been to provide the necessary balance of payments andbudget support using two operations - a more traditional structural adjustment one, and a onetranche 'pre-PRSP'.

3 - SACIII's trade reform program contained provisions that turned out to be inconsistent withEAC provisions that were negotiated later. As regional trade agreements progress towardsagenda's modeled after the EC or NAFTA, it trade policy reform programs need to remainflexible in order to not unnecessarily constrain negotiations, and to accommodate their outcomes.Thus, attention and care should be applied when trade policy reforms are included in Bankoperations for countries that are parties to regional trade agreements.

4 - During implementation of SACIII, it became apparent that the performance of NPART wasfar from satisfactory given the amount of loan recovery that had been agreed to under the SACIIIreform program. The main reason for this situation was the legal situation that slowed downNPARTs work. The fact that a change in Uganda's Constitution would have been necessary toremove legal obstacles for swift recovery of non-performing loans had not been foreseen at thetime of SACIII appraisal. With a more careful analysis of the role of NPART within the Ugandaninstitutional setting, its legal constraints the problems arising from slower than expected loanrecovery could have been avoided.

9. Partner Comments

(a) Borrower/implementing agency:Performance of SACIII Reform Prouram

As you may be aware, SACIII Reform Program's main objective was to establish long-term fiscalsustainability with a focus on a more efficient tax system and better management of publicexpenditures.

Efficiency in the tax system was to be achieved through the following measures:

(i) Expansion of the tax base;(ii) Improvement of tax administration; and(iii) Lowering of the level and dispersion of trade taxes to reduce anti-export bias in theeconomy.

In the same vein, improvement in Public Expenditure management consistent with the policy ofdecentralization was to be attained through the following measures:

(i) Reduction of the fiscal burden of state-owned enterprises;(ii) Resolving the fiscal impact of financial sector reforms within macroeconomic framework.

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Over the last 7 years, Government of Uganda has been able to register the following achievementsduring the implementation of SACIII:

(i) Expansion of tax Base

Government of Uganda has implemented a number of reforms with the objective of expanding thetax base and reducing tax induced distortions. The structure of sales and other indirect taxes wasreplaced by uniform Value Added Tax (VAT) system. Tax exemptions and preferential tax rateswhich characterized direct taxation were eliminated following the implementation of the 1997Income Tax Law. These reforms have relatively widened the tax base and introduced a moreuniform and equitable tax system. Consequently, the revenue to GDP ratio rose from 10.4 percentin FY1994/95 to about 12.4 percent in FY2001/02. Despite this improvement, the ratio remainsvery low by regional and international standards. In view of this, Government is putting emphasison improvement of tax administration as any increase in tax rates would risk beingcounterproductive.

(ii) Improvements of tax administration

In the past 5 years, Government's effort to raise tax revenue has been and will continue to befocused on improvement in tax administration. Recetntly, Government restructured topmanagement of Uganda Revenue Authority with the objective of improving its performance.Furthermore, the annual budget for Uganda Revenue Authority has been increased to facilitateand improve their capacity in revenue collection.

(iii) Lowering the level and dispersion of trade taxes to reduce anti-export bias.Over the last 8 years, Government has consistently implemented measures to rationalizetrade taxes and promote exports. The most outstanding include:

(a) Reducing a maximum import duty rate to 15 %;(b) Implementing a simple tariff structure with three bands of 0%, 7% and 15%;(c) Lifting of the ban hitherto applied on beer, soda, cigarettes and batteries; and(d) Consolidating the excise duty rates (import surcharges) into a single rate of 10% andlimiting it to a small category of imports. The excise duty on imports will be eliminated with theconclusion of the East African Customs Union Protocol.

On the expenditure side, Government of Uganda committed itself to implementing the followingpolicy measures:

(i) Reduction of the fiscal burden of state-owned enterprises.

Over the last 8 years, Government has markedly reduced the overall subsidies to publicenterprises form Ushs 208 billion in 1994 to Ushs 80 billion in FY2001/02.

(ii) Resolving the fiscal impact of financial sector reforms.

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Government continues to make improvements in the effectiveness of Monetary Policy formulationand strengthening of the role and capacity of Bank of Uganda in performaing its supervisory role.New Bank of Uganda staff were recruited and trained. As a result, the frequency of on-siteinspections of the weak banks was stepped up. Currently, all banks have now met the new capitaladequacy requirements, although some banks continue to face profitability problems. Thisfollowed the enforcement of the intervention policy by Bank of Uganda as stipulated in theSACIII loan agreement. The financial sector reforms undertaken a couple of years ago involvedclosure of some banks at a total cost to tax payers of over Ushs 100 billion.

This financial year, Parliament is to debate the financial Institutions Bill, 2002 and once enactedinto law, it will strengthen the prudential regulations governing banks and deposit takingnon-financial institutions.

(b) Cofinanciers:

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

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Policy Indicators Intermediate Outcome Actual/LatestIndicators Indicators Estimate

MacroeconomicPolicy:Decline in fiscal Inflation of 5% FY97/98:.5.6%deficit to GDP ratio FY98/99: 6.6%to 4.7% in FY98 Real GDP Growth FY99/00: 4.0%

of 7% in 1996-2000 FYOO/01: 4.9 %FY01/02: 5.8 %

Rise in revenue to Central governmentGDP ratio to 13% in savings of 2% ofFY98 GDPTrade Reforms:Reduction in average Reduction in Increase share of FY97/98: 6.9%and spread of tarif average and spread exports in GDP to FY98/99: 9.2%rates of Rate of Effective 13% in FY98 FY99/00: 7.8%

Protection by at FYOO/01: 7.8%least 1/3 in FY 98 FY01/02:7.6%relative to FY95

Revamping the imporl Increase share of FY97/98: 41%duty drawback scheme non-coffee exports FY98/99: 44%for export to 45% in FY98 FY99/00: 59%

(assuming a normal FYOO/01: 75%coffee year) FY01/02: 82%

Public Expenditure:Supplementaries/total Deviation between Adherence to public Donebudget: maximum o budget and releases expenditure5% in FY97 and 30/ declines to no more priorities set in thethereafter than 15% budgetSatisfactory spending During FY96-98 Improvement in: Infant mortality:on Strategic Areas textbooks supplied literacy levels, 1995: 81/1000(excluding defense) to schools increased primary enrollment 2000: 88/1000

by at least 20% and drop-outs, Primary grossinfant mortality enrollment rates:rates, productivity 1995: 122%in agriculture, 2000: 130%access to markets (source: DHS)

Literacy1996: 63%2000: 67%(source: WDI).

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Launching of Sector Improved public Service deliveryoutcome-oriented programming service delivery surveys under way.budgetary process in exercise measured by servicethree pilot ministries implemented delivery surveysDecentralization:Allowing increased Increase in local tax Improved public Service deliverytaxing power by local collection by 20% service delivery surveys under way.authorities from FY96 to FY98 measured by service

delivery surveysFinalizing design and Increase share of Higher share of Expenditureimplementing of public spending expenditure tracking surveys fortransfer systems to (non-statutory, reaching health and educationdistricts non-debt related) at beneficiaries as showed that 90

the district level to measured by percent of fundsat least 50% in expenditure tracking reach destination,FY98 in selected areas. i.e. primary schools

and health facilitiesPutting in place Timely Improved Backlog of accountssystems to improve dissemination of accountability and reduced: 100% ofinformation and information within transparency in FY98/99 accountsdissemination of government and to public sector. audited; all by 3central and local the civil society. audited forgovermnent accounts. FY99/00, more than

90% of FYOO/O1accounts submittedfor audit by March2002

State-OwnedEnterprises:Monitor financial 20% reduction in Reduction in fiscal FY97/98: -0.4%flows to/from subsidies by June deficit as above FY98/99: -1.2%Govermment and SOEs 1997 (from June FY99/00: -3.6%

1995) FYOO/Ol: -0.8%FYO1/02: -3.4%

Progress in 75% of privatizationprivatization transactions

completed.Financial Sector:Complete privatization Spread between Private investment FY97/98: 10.4%of UCB lending and savings increases to 15% of FY98/99: 12.6%

rates declines by at GDP in FY98 FY99/00: 13.3%least 1/3 FYOO/Ol: 12.1%

FYO1/02: 9.8%Produce Policy Paper doneComplete Increased Larger private FY97/98: 10.4%

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recapitalization of monetization of the savings in banking FYOO/O1: 11.7%BOU economy; M2/GDP system (commercial FYO1/02: 12.4%

to 11% in FY98 bank depositliabilities to

Central Bank residents as share offinances 100% of its nominal GDP at

I operating cost market prices)

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)Appraisal Actual/Latest: Percentage ofEstimate Estimate: -Appraisal

Project Cost By Component US$ million .,,US$ million: .

First fixed tranche 45.00 45.00 100Second fixed tranche 40.00 40.00 100First floating tranche 20.00 20.00 100Second floating tranche 20.00 20.00 100Supplemental Interim Fund Credit 25.00

Total Baseline Cost 125.00 150.00

Total Project Costs 125.00 150.00Total Financing Required 125.00 150.00

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Annex 3. Economic Costs and Benefits

not applicable

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationHQ 1 team leader/macro economist S SHQ 1 macro economist/trade S SHQ 3 economist/public sector S SHQ 1 economist/fiscal S SHQ 1 decentralization specialist S SHQ 1 privatization expert S SCO 1 trade expert S S

CO 2 public expenditure experts S SCO 1 fiscal expert S S

AppraisaUNegotiationHQ I team leader/macro economist S SHQ 1 macro economist/trade S SHQ 3 economist/public sector S SHQ 1 economist/fiscal S S

HQ I decentralization specialist S SHQ 1 privatization expert S SCO 1 trade expert S SCO 2 public expenditure experts S SCO I fiscal expert S S

SupervisionHQ I financial sector specialist S SCO 1 team leader/macro economist S S

ICRHQ I macro economist S SCO 1 team leader/macro economist S S

(b) Staff:

Stage of Project Cycle ActuallLatest Estimate

No. Staff weeks US$ ('000)Identification/Preparation 46 183Appraisal/Negotiation 58 231Supervision 43 393ICR 4 32Total 152 838

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

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

Macro policies O H *SUOM O N O NAL Sector Policies O H OSUOM O N * NAO Physical O H OSUOM O N * NA

3 Financial O H OSU*M O N O NA3 Institutional Development 0 H 0 SU * M 0 N 0 NA

L Environmental O H OSUOM O N * NA

SocialZ Poverty Reduction O H *SUOM O N O NAOi Gender O H OSUOM O N * NAL Other (Please specify) OH OSUOM ON * NA

O Private sector development O H OSUOM O N O NAZ Public sector management * H O SU O M 0 N 0 NAL Other (Please specify) OH OSUOM ON * NA

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Annex 6. Ratings of Bank and Borrower Performance

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

6.1 Bankperformance Rating

• Lending OHS OS OU OHUO Supervision OHS OS OU OHUN Overall OHS OS OU OHU

6.2 Borrower performance Rating

Z Preparation O HS * S O U O HUZ Government implementation performance 0 HS 0 S 0 U 0 HUOI Implementation agency performance O HS O S 0 U O HUZ Overall OHS OS OU 0 HU

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Annex 7. List of Supporting Documents

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IMAGING

Report No.: 24841I Type: ICR