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Document of

The World Bank

Report No. 14331-GUB

STAFF APPRAISAL REPORT

REPUBLIC OF GUINEA-BISSAU

TRANSPORT AND URBAN INFRASTRUCTURE PROJECT

NAY 31, 1995

Infrastructure Operations DivisionWestern Africa DepartmentAfrica Region

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CURRENCY EOUIVALENTS

Currency Unit = Guinean Peso / US$1=PG16,168(As of March 1, 1995)

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

ADB African Development BankAFRICATIP Association of African AGETIP AgenciesAGEOPPE Agencia Guineense de Execusao de Obras de Interesse Publico e Promo,co de Emprago

(Guinean Executing Agency for Public Works and Employment Creation)AGETIP Agence dExecution de Travaux dTnteret Public

(Public Works Executing Agency)BCGB Banco Central da Guind-Bissau

(Central Bank of Guinea-Bissau)DNMIP Direq,ao National de Marinha e Portos

(National Directorate of the Navy and Ports)DICOL Empresa de ImportaQao e DistribuQao de Combustiveis Liquidos

(Petroleum Products Import and Distribution Company)ESAF Enhanced Structural Adjustment FacilityESW Economic and Sector WorkEU European UnionGDP Gross Domestic ProductGUIIPORT Bissau Port AuthorityICB International Competitive BiddingICOR Incremental Capital Output RatioIEC Information, Education, CommunicationINEC Instituto Nacional de Estatistica e Censo

(National Statistics and Census Institute)IRP Infrastructure Rehabilitation ProgramJAPG Junta Aut6noma dos Portos de Guine-Bissau

(Maritime Port services)MOPW Ministry of Public WorksMES Ministerio do Equipamento Social

(Ministry of Social Equipment)NCB National Competitive BiddingPFP Policy Framework PaperPIP Public Investment ProgramPPF Project Preparation FacilityRODOFLUVIAL Empresa Pfiblica de Transportes Rodoviarios e Fluviais

(Road and River Transport Public Company)SAC Structural Adjustmnent CreditSILO DIATA Urban Bus CompanySIP Sector Investment ProgramSME Small and Medium-Sized EnterprisesSSA Sub-Saharan AfricaTAGB Transporte aero da Guine-Bissau

(Airline of Guinea-Bissau)TRANSTER Urban Bus Company (successor to SILO DIATA)UGAB Unidade de Gestao e Apoio ao Balan,o de Pagamentos

(Balance of Payment Management Unit)UGREP Unitade de Gestao e Reforma das Empresas Publicas

(Management Unit for the Reform of Public Enterprises)

FISCAL YEARJanuary I - December 31



TABLE OF CONTENTS

1. INTRODUCTION .......................................... 1

H. COUNTRY AND SECTORAL CONTEXT .......................................... 1

A. OVERVIEW .......................................... 1B. ECONOMIC PERFORMANCE .......................................... 2C. ECONOMIC AND SOCIAL INFRASTRUCTURE .......................................... 3D. IDA's INVOLVEMENT AND LESSONS LEARNED .......................................... 7E. RATIONALE FOR IDA INVOLVEMENT .......................................... 8

ILL THE PROJECT .......................................... 10

A. OBJECTIVES .......................................... 10B. PROJECT DESCRIPTION ...................... 1.................... 1C. COSTS ANDFINANCING .......................................... 16

IV. IMPLEMENTATION .......................................... 17

A. PREPARATION AND READINESS .......................................... 17B. IMPLEMENTATION AND MANAGEMENT RESPONSIBILITIES .......................................... 17C. PROCUREMENT .......................................... 19D. DISBURSEMENTS ........................................................................................................................... 21E. ACCOUNTING AND AUDITING ................................. 22F. MONITORING/EVALUATION AND REPORTING ................................. 226. ENVIRONMENTAL IMPACT ................................. : 23H. POVERTY CATEGORY ................................. 23

V. BENEFITS AND RISKS ................................. 23

A. BENEFITS ......................................................................................................................................................... 23B. RISKS ........ 24

VI. AGREEMENTS REACHED AND RECOMMENDATION ................................................. 25

This report was prepared'as a joint effort by a team including Messrs. Bemard Abeille (AF5DR) and Leslie Pean (AF51N) whowere the Task Managers, Mr. Matar Fall, Ms. Isabelle Denervaud (AF51N); Mr. Pierre Morin (AF5IE); Messrs. Mario Antao(Consultant, Economist), Lamine Ben Barka (Consultant, Highway Engineer), Seydou Idani (Consultant, EconomistVAGETIPSpecialist) and Lubomir Ficinski-Dunin (Consultant, Architect); Messrs. Birger Fredriksen and Marcelo Andrade, and Mrs.Jennifer Edwards (AF5CO). Messrs. Jean-Louis Sarbib and Mr. Alberto Harth are the Departnent Director and the managingDivision Chief, respectively, for the operation. Peer reviewers include Mr. Ephim Shluger (EDINU) and Mr. Jean-MarieLantran (AF5IN) and the Lead Advisor is Mr. Hasan Tuluy (AF5CO). Mrs. JoAnne Nickerson (Program Assistant) providedresearch and editorial support. Mrs. Fanny Barrett was responsible for the Costab, and Mines. Caroline Moisson and BarbaraMachado provided technical support.

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TABLE OF CONTENTS (CONT'D)

ANNEXES

1. Key Economic Indicators2. Social Indicators3. Basic Sector Data4. Status of Bank Group Operations in Guinea-Bissau and Portfolio Status5. Sector-specific Policy Matrix6. Letter of Sector Development Policy7. Key Performance Indicators8. Inventory of Transport and Urban Infrastructure Programs

8A. Roads and Ports Infrastructure Component8B. Urban Infrastructure Component

9. Institutional Setup of AGEOPPE (The procedures manual is available as a self-contained documentin the project file.)

10. Eligibility Criteria for the Selection of Subprojects11. Detailed Project Cost Tables12. Summary of Consulting Services13. Procurement Arrangements (Schedule, Thresholds, and List of Contracts)14. Supervision Plan15. Disbursement Schedule

MAP IBRD 27003

TABLES

Table I Project Cost EstimatesTable 2 Summary of Procurement ArrangementsTable 3 Disbursements

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CREDIT AND PROJECT SUMMARY

Borrower: Republic of Guinea-Bissau

Implementing Agencies: Ministry of Social Equipment (MES) and the Guinean Executing Agency forPublic Works and Employment Creation (AGEOPPE)

Beneficiaries: Ministry of Social Equipment, Ministry of Natural Resources, Ministries ofHealth and Education, Municipalities, Communities, Enterprises andProfessionals in the construction industry

Poverty: Program of Targeted Interventions

Amount: SDR 14.0 million (US$22.0 million equivalent)

Terms: Standard IDA terms, with 40 years maturity

Map: IBRD 26867

Project Objectives: The long-term development objectives are to assist the Government inimplementing its sector development program for the period 1996-2000 whichaims: (a) to enhance the efficiency of country-wide transport and transit,particularly for the movement of agricultural products; (b) to improve livingconditions in urban areas; (c) to generate employment; and (d) to improve thelabor skills and competitiveness of local construction, road maintenance andtransport enterprises. The project objectives are: (a) to improve themanagement of public sector resources devoted to economic and urban socialinfrastructure; (b) to rehabilitate transport and urban infrastructure; and (c) toefficiently execute works by private small- and medium-sized enterprises bydelegating contract management to an AGETIP-type agency.

Project Description: To achieve these objectives, the project would support development andimplementation of a sector-specific policy framework and three investmentcomponents. The policy agenda is designed: (a) to increase sector resourcemobilization and efficiency of resource use; (b) to further strengthen theinstitutional environment and disengage the Government from publicenterprises in the transport sector; (c) to improve the management of roadrehabilitation and maintenance; (d) to promote the use of the private sector;and (e) to increase the efficiency and competitiveness of the contracting ofworks. The three investment components include a time slice of:

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A Transport Infrastructure Rehabilitation Program (US$14.7 million or49% of total base costs) consisting of: (a) a rehabilitation and maintenanceprogram to consolidate the priority network of roads, by providing for: (i)rehabilitation of about 150 km of roads; (ii) periodic maintenance of about 90km of roads; and (iii) regular maintenance of the priority network of roads(about 1,042 km out of the 3,436 km network); and (b) improvement of twoports, by providing for the rehabilitation of the maritime port of Bubaque inthe archipelago and at the tidal estuary port of Cacheu including quays andberthing structures and low cost storage facilities.

An Urban Infrastructure Rehabilitation Program (US$10.5 million or 35%of total base costs) including water/sanitation, street paving and drainage andsmall social infrastructure. The project will provide: (a) in Bissau for: (i)rehabilitation of the primary network of the water distribution system; (ii)rehabilitation and construction of critical earth and concrete drainage; and(iii) implementation of a pilot solid waste collection and disposal program;and (b) in Bissau and seven secondary market towns (Bafata, Bissora, Buba,Canchungo, Catio, Farim and Gabu) for: (i) street improvements, paving anddrainage; and (ii) rehabilitation and construction of small economic and socialinfrastructure such as primary schools, basic health centers, neighborhoodmarkets, slaughter houses and small terminals for inter-city transport.

A Capacity Building Program (US$4.1 million or 13% of total base costs)aiming at: (a) strengthening capacity in policy-making, sector management,planning and regulation through: (i) local in-service training sessions andshort-term training in "Highway Design Maintenance" for MES staff; (ii)consulting services; (iii) studies and preparation of a future sector investmentprojects; (iv) remodeling of existing facilities in the MES complex; and (v)purchase of office equipment including computers, supplies and vehicles forthe three departments of MES; (b) strengthening the capacity of contractors,engineers and architects having won contracts through the project; and (c)increasing community participation.

The use of an AGETIP-type contract management agency will address thelack of competition in construction, inefficient procurement and paymentdelays, and will create employment in urban areas through labor-intensivetechniques.

Benefits: Improved sector spending patterns and strengthened investment managementare expected to ensure maintenance of economic infrastructure. The projectwill have direct social, health-related, economic, fiscal and participatorybenefits. Social benefits include job creation for unskilled workers throughthe use of labor-intensive techniques; 20% to 30% of the value of the workscontracts will go toward wages resulting in at least 6,000 person-years ofemployment. Health-related benefits include improved health and sanitaryconditions resulting from the provision of potable water and improveddrainage in poor neighborhoods. Economic benefits include lower transportcosts through the reduction of vehicle operating costs by 40% to 45%;

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improved access to agricultural areas, which, following project completion,will no longer be cut off during the rainy season; economic returns (with anaverage of 38%) from priority infrastructure rehabilitation operations; andincreased private sector participation in infrastructure rehabilitation andmaintenance. Fiscal benefits include improved sector resource mobilizationand efficiency, thus enhancing the sustainability of future investments. Finallythe participation of municipalities, communities and the private sector wouldbe a major change for Guinea-Bissau since it will ensure ownership and thussustainability of investment.

Risks: There are three main risks which include counterpart funding, political andinstitutional arrangements and cofinancing.

Regarding counterpart funds, the new Government may encounter difficultiesmaking its payments. To address this risk, the Government decided to use theRoad Fund resources for the provision of counterpart fund. To assist theGovernment, a study on the Road Fund's administration will be undertakenand a plan of action will be established to ensure the Road Fund'sindependence, autonomy and management.

On the political and institutional side, the risk is the politically sensitivereform measures, particularly for the privatization of public companies, andreluctance of ministries, agencies, and local governments to delegate themanagement of works contracting to the AGETIP-type agency. This has beenthe case with other projects with a policy framework and with other AGETIP-type projects at the start. Five features of the proposed project seek to addressthis risk: (i) most of the more difficult reforms will be completed or initiatedprior to project effectiveness; (ii) the proposed project emphasizes improvingliving conditions of the most vulnerable and focuses on employment creationthrough labor-intensive works; (iii) a presentation of the AGETIP-typeagency was made in public and was well received by key decision-makers; and(iv) a pilot works program will also be implemented before projecteffectiveness to demonstrate the efficiency of contracting and payments; and

Cofinancing is expected to be confirmed before credit effectiveness. Stronginterest has been demonstrated by donors such as The Netherlands,Switzerland and Japan. However, to address any risk of any shortfall incofinancing, the project components have been sliced to allow for the watersub-component to be implemented once cofinancing is made available.Furthermore, the phased, time-slice approach to small works would allowIDA's contribution to be front loaded. The experience in other AGETIP-typeoperations has been that many donors cnthusiastically buy in after the initialdemonstration phase.

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Project Cost Summary(US$ million net of taxes and duties)

Project Components Local. Foreign. Total % of Base:_:_:_:___ :: Costs

A. Transport Infrastructure Rehabilitation Program 3.3 11.4 14.7 49%1. Rehabilitation of roads 1.3 5.9 7.2 24%2. Periodic road maintenance 0.3 2.4 2.7 9%3. Routine road maintenance 1.1 1.8 2.9 10%4. Ports (Bubague and Cacheu) 0.6 1.3 1.9 6%

B. Urban Infrastructure Rehabilitation Program 2.8 7.7 10.5 35%1. Water/sanitation 1.4 2.7 4.1 14%2. Street paving and drainage 0.9 4.0 4.9 16%3. Social infrastructure 0.5 1.0 1.5 5%C. Capacity Building Program 1.6 2.5 4.1 13%1. Sector Management + studies 0.5 1.0 1.5 4%2. Support to contractors/ professionals /communities 0.4 0.2 0.6 2%3. AGEOPPE 0.7 1.3 2.0 7%

D. Refinancing of PPFs I and lI 0.4 0.5 0.9 3%Total Base Costs 8.1 22.1 30.2 100%

Physical Contingencies 0.3 0.9 1.2 4%Price Contingencies 1.0 1.1 2.1 7%

Total Project Costs 9.4 24.1 33.5 111%

Financine Plan(U-S$ million)

: : 7 7 7 77 7 tTotal Project CostIDA 22.0 66%Government 2.5 7%Other donors 9.0 27%Total Cost 33.5 100%

Estimated IDA Disbursement Schedule(US$ million)

IFY96 FY97 FY98 FYqq9 FY00Period . 5.0 6.0 5.0 5.0 1.0Cumulative 5.0 11.0 16.0 21.0 22.0



STAFF APPRAISAL REPORT

I. INTRODUCTION

1.1 The Government of Guinea-Bissau has requested IDA's assistance in financing a time-slice of itsdevelopment program for economic and social infrastructure. The proposed project's principal objectivesare to assist Guinea-Bissau in enhancing the efficiency of country-wide road and river transport and transit,particularly for the movement of agricultural products, and in improving social infrastructure in urbanareas. The development objectives include creating new employment in urban areas through labor-intensiveworks.

1.2 The proposed project builds on, and is an extension of, the sector development programimplemented under the ongoing successful Infrastructure Rehabilitation Project (Cr. 2074-GW, US$23.6million, FY90) and the contract management model of AGETIP-type agency under implementation inseveral West African countries. The policy measures and associated investment program were developedthrough dialogue with the Government and stakeholders, based on pre-investment studies financed under aPPF, which led to the preparation of a draft Letter of Sector Development Policy (Annex 6) and relatedinvestment components.

II. COUNTRY AND SECTORAL CONTEXT

A. Overview

2.1 Situated on the West African coast, Guinea-Bissau is a small country both in terms of land masswith 36,125km2, which includes some 30 islands forming the Bijagos archipelago, and in terms ofpopulation, with an estimated one million inhabitants. It is one of the poorest countries in the world with aper capita income of roughly US$220 (1992 dollars). Other social indicators reflect a dismal picture ofpervasive poverty. They include a life expectancy of 39 years at birth, the lowest in the world; an under-five mortality rate of 236 per 1000 live births (40% higher than the Sub-Saharan African (SSA) average);a fertility rate of about six; and an adult illiteracy rate of 64%. About 80% of the population lives in ruralareas, most making a living from subsistence fanming. The agriculture sector accounts for almost 45% ofGDP producing mainly export crops, 80% of which are cashews.

2.2 Politically and economically speaking, Guinea-Bissau is in the midst of a radical transition. After20 years of single party rule, Guinea-Bissau came under the rule of a democratically elected government inthe fall of 1994, for the first time since independence in 1974. On the economic side, progress towardsbuilding a market-based economy has shown promise in recent years, although much remains to be done todismantle a well entrenched command economy.

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B. Economic Performance

2.3 After false starts in the mid-1980s, the Government launched a far-reaching macro-economicreform program in 1987, supported by the first Structural Adjustment Credit (Cr. 1798-GUB/A-26-GUB)approved in May 1987, and the Second Structural Adjustment Credit (Cr. 2019-GUB) approved in May1989. These Credits have supported a wide range of economic policy reforms which have notablyincreased the role of market forces in the economy. They have helped stabilize the economy throughappropriate fiscal, monetary, and exchange rate policies; introduced price, trade, and financial reforms; andimproved public sector management. Their ultimate objective was to increase the competitiveness of theeconomy and lay the foundation for the sustained longer-term growth without which raising the standard ofliving and reducing poverty would be impossible.

2.4 Up until late 1992, the implementation of these two SACs was uneven, with policy slippagescharacterizing the early 1990s. Since late 1992, however, the Government has shown renewed commitmentto adjustment which continued into the first half of 1994, allowing the release of the much delayed thirdtranche of SAC II in July 1993, and the preparation of a third Policy Framework Paper (PFP) for 1994-97.The PFP forms the basis for a three-year ESAF arrangement, approved in January 1995, with the IMF.

2.5 Progress was made toward restoring macro-economic equilibria during the period 1987-1993.The fiscal deficit, excluding official transfers, has declined from 33% to 28% of GDP, primarily due tosignificant restraint in government expenditures. This helped to check broad money expansion (annualgrowth down from 138% to 41%) and inflation (from 87% to 48%). The ratio of external currentaccounts to GDP fell from about 35% to 28%. Moreover, the Guinea-Bissau peso depreciated significantlyvis-�-vis the US dollar, thereby reducing the spread between the official and parallel exchange market ratesto 3.7% at the end of 1993. The debt burden, however, remains extremely high, with the debt service ratio(before rescheduling) at almost 195% at the end of 1993. Despite the distractions linked to thepreparations for the country's first multi-party elections, preliminary data indicate that progress onstabilization was maintained during most of 1994 allowing inflation to decline further to about 15%; theexchange rate was unified earlier in the year. However late in 1994, there were slippages in policyimplementation in the fiscal and monetary areas.

2.6 Market forces are playing a greater role in determining economic outcomes, and key bottlenecksto private sector participation in the economy have been removed. Prices have been liberalized, exceptthose for petroleum products and public utilities which are adjusted periodically to reflect changes in costs.Trade distortions have been virtually eliminated with state monopolies abolished and import restrictionslimited to a negative list of goods for security and health. Banking has been overhauled with the separationof the central, commercial, and development banking functions of the former National Bank. Privatelyowned banks have started to operate. Export taxes have been reduced. Agriculture has been the mostresponsive sector to policy reforms and is the main engine of growth, with production rising at an annualaverage of 5.7% during the period 1987-93.

2.7 Notwithstanding the above progress, public sector management continues to be weak. In 1993,tax revenues represented only 5% of GDP and total current revenues represented only about 10.4% of GDP(the latter is only about one-half the average for Sub-S aharan African countries). Government spending isstill excessive, (slightly above one-third of GDP in 1993), and not well targeted. The public investmentprogram (24% of GDP) is excessively large, given the country's weak absorptive capacity. It is inefficientas reflected in an average Incremental Capital Output Ratio (ICOR) of about 9 for 1991-93. It needs to bebrought in line with the country's overall development strategy, and requires more rigorous economicjustification. Budget comprehensiveness and transparency require that the public investment program

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(PIP), autonomous funds, and donor assistance be consolidated. Current government spending patterns,analyzed in a recent Public Expenditure Review, indicate that the social sectors and infrastructuremaintenance continue to be underfunded and poorly managed, contributing to poor social indicators and adeterioration in the quality of services provided to the population. Domestic savings have been consistentlynegative over most of the period from 1987 to 1992, ranging between 6% and 18% of GDP, but showingsome improvement in 1993. Budget consolidation has not been achieved. Of a total of 46 publicenterprises (PEs), only five have been privatized, two have been liquidated, and eight put under privatemanagement.

2.8 The Government is currently planning the divestiture of nine of the remaining 31 PEs. It hasinitiated the bidding process leading to the privatization of four PEs. Also, recommendations to liquidateTAGB and SILO DIATA and to privatize RODOFLUVIAL will be submitted to the Council of Ministersshortly. On civil service reform, progress has been negligible with the ratio of public servants still at 12.5per 1,000 inhabitants. Finally, the regulatory and incentive framework for private sector developmentneeds to be improved further, namely in the areas of land tenure and the financing of small and medium-sized enterprises (SMEs). These issues will be addressed through refomns agreed upon in the context of the1994-97 PFP.

2.9 External Financing Requirements. The Government's adjustment effort will require substantialextemal assistance over the next four years. For the 1994-97 period, total requirements for extemalfinancing, including arrears, are projected to be approximately US$941 million. Exports of goods and non-factor services are expected to be on the order of US$223 million for the same period, while netdisbursements from existing and expected new projects, food aid commitments and the use of IMFresources, could account for US$232 million. This would imply a financing gap, before rescheduling, ofapproximately US$486 million over the period. This gap will be financed by a combination of debt relief,additional quick-disbursing assistance from IDA, and SPA-related cofinancing and coordinated financing.Debt relief consisting of eliminating arrears by the end of 1994, the rescheduling of pre-cutoff debtamounts due in the period 1995-97 and at remaining current with the country's debt service due onmultilaterals, official bilateral debt and short-term debt, is estimated at approximately US$321 millionleaving a residual gap of some US$165 million for the four years 1994-97.

C. Economic and Social Infrastructure

1. Background

2.10 Constraints in the management of social and economic infrastructure are particularly evident,even though significant resources have been invested in rehabilitation and modernization (on average about45% of total PIP during the period 1990-93). Basic infrastructure remains inadequate due largely toinefficient public resource management, institutional weaknesses, and a lack of transparency andcompetitiveness in the contracting of works. As a result, important and productive parts of the country areisolated during the rainy season, and transport costs are very high. Furthermore, only about 25% of thepopulation has access to safe water (well below the African average of 41%), and only 21 % have access tosanitation. Water-bome diseases are common, especially during the rainy season, due to almost non-existent drainage and solid waste collection. Endemic diseases, such as malaria and diarrhea, account formore than 90% of the demand on the health system. Social infrastructure such as health and educationfacilities are not adequately rehabilitated or maintained.

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2.11 Guinea-Bissau is a low-lying country, drained by seven major rivers, fed by a network oftributaries. Several modes of transportation are employed to move goods and passengers, the mostimportant being over-land transport employing a network of roads and ferry crossings, followed by riverand sea transport. Air transport is less important with one intemational airport and 17 domestic landingstrips of which five are operational. There are no railroads, nor are any foreseen.

2.12 Road haulage is the most frequently used mode of transportation both for goods and passengers.In 1995, the number of vehicles was 5,241, including 3,898 private cars, 902 heavy vehicles (30% buses,64% trucks and 6% tractors) and 441 motorcycles. Road haulage is entirely run by private companiessince the transport parastatal firm, RODOFLUVIAL, could not continue loss-making in this activity. Theroad network, currently estimated at 3,436 km, is composed of 734 km (or 21 %) of paved roads and 307km (or 9%) of laterite gravel, with the remainder 2,395 km (or 70%) being dirt roads. Paved roads aregenerally composed of a laterite base and a double surface dressing which, if maintained, would besufficient for the current road traffic level -- about 150 vehicles per day on much of the road network. Thisnetwork represents a density of about 95 km per 1,000 km2 which is well above the regional average of 20km/ 1,000 km2. While this would normally be considered largely adequate, if well maintained, toaccommodate the country's needs, the existing network needs urgent repair and does not cover economicallyimportant agricultural areas which still lack reliable access, particularly in the south.

2.13 Port and river infrastructure consist of a new deep water port in Bissau which handles most of theinternational shipping, plus 17 small river/coastal or estuary ports (seven of which are active). The presentcapacity of ports is generally considered sufficient for the projected volume of traffic over the next decade.Rehabilitation of ferryboat services is underway with the financing of a European Union program.However, present publicly operated ferry services (comprising six major river crossing points) areinefficient in delivering quality services and maintaining their equipment. Similarly, maritime and rivertransportation run by RODOFLUVIAL cannot play its potentially significant role due to infrequent, unsafeand poorly managed services. Since the publicly run company, JAPG, was dissolved, Bissau harbor hasbeen rented out for 25 years to a private company, GUIPORT; while the harbor moved from a non-operational situation to a reasonable degree of efficiency, it could be more competitive if charges oncontainers and merchandise were adjusted to better reflect the market. The shipping company, GUINE-MAR, was abolished and there is now a significant number of private operators.

2.14 At present, one fifth of the population lives in urban centers. About 60% of the urban populationis concentrated in Bissau, the capital city, with the remainder living in 34 centers of 20,000 or less. Onlyabout 10% of the urban population in Bissau has access to safe drinking water by means of householdconnections, and another 10% have access to public standpipes free of charge. For the remainder (80%),water supplies are unreliable, unsafe or distant. They obtain their water from traditional dug wells whichtap superficial water tables exposed to contamination from poorly designed latrines. Less than a third ofthe urban dwellers have access to basic sanitation services. Because Bissau is very low-lying, streets andsidewalks are routinely subjected to flooding during the rains. In addition, existing infrastructure networksprovide unreliable service, are poorly maintained, and may soon deteriorate beyond repair. Manycommunity facilities, such as health centers, schools, markets and slaughter-houses do not meet minimumhygienic and structural safety standards.

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2.15 Several agencies are responsible for managing economic and social infrastructure. The Ministryof Territorial Administration is responsible for local administration. The Ministry of Public Works and theMinistry of Transport and Communications were recently merged into the Ministry of Social Equipment(MES). This new ministry is responsible for roads, housing, building codes, urban issues, airports, civilaviation, ports and maritime transport and transit. The Road Fund was created in 1984 under the Ministryof Public Works to collect road user charges. Tolls and licenses collected by the Road Fund are usedexclusively for funding road works and maintenance. The Road Fund has a separate bank accountcontrolled by the admrinistrative body set up specially to manage the funds. The Ministry of Financecollects urban property taxes, and the Ministry of Plan and International Cooperation manages the overallPublic Investment Program (PIP). Natural Resources is responsible for managing water and providingenergy to all urban centers. Education is responsible for building primary schools, and Health for basichealth centers. Solid waste collection and disposal in Bissau is theoretically the responsibility of themumcipality.

2. Main Issues

2.16 Transport and transit bottlenecks. Agriculture is the backbone of the country's economy. Sinceundertaking structural adjustment, policy reforms have been enacted to establish a more favorable incentiveframework in the agriculture sector. In particular, inappropriate pricing and marketing policies have beenremoved. While the sector has responded well to the new incentive framework, the medium-and long-termperformance will depend on the reliability and cost of economic infrastructure: road and river transportand transit. While the potential for competitive production of cashews, fruits, vegetables, rice, and timberexists, the current state of the road network, its lack of maintenance, and the unreliable maritime and rivertransportation do not allow the supply-side gains to materialize, especially in the southern part of thecountry. Vehicle Operating Costs (VOC) are excessively high; better road conditions would reduce themby 40-45%. Moreover, the heavy rainy season has a considerable impact on the country's geographicintegration and transportation costs which fluctuate between US$0.11 and US$0.23 per t/km. Roadnetwork improvements, including feeder roads, along with timely river transport services, are critical toincrease the competitiveness of exports as well as import substitutes.

2.17 Deteriorating urban living conditions. A combination of rapid urban population growth, atabout 4.3% per year, and persistent lack of maintenance of most infrastructure has resulted in a furtherdeterioration of living conditions in urban centers. Today, in spite of the ongoing efforts supported bydonors, about 60-70% of urban residents do not have access to minimal sanitation infrastructure (para.2.14). This results in endemic diseases and cholera outbreaks which affect productivity and constitute 90%of demand on the health care system. The erosion of basic urban infrastructure has further exacerbated theplight of the most vulnerable. Government has been unable to cope with the demand and to developsustainable solutions to reverse the continued deterioration of living conditions in urban areas, particularlyin Bissau. The existing education and health infrastructure is not only poorly maintained but alsoinsufficient to meet the growing demand. The primary school enrollment ratio is declining and, at 52%, iswell below the SSA average. The under five mortality rate is about 40% higher than the SSA average. Inparallel, the central government is unable financially to meet these needs. Thus the capacity ofmunicipalities, neighborhood and user associations to collect user charges is critical to secure minimumfunding or participation for the maintenance of existing urban infrastructure.

2.18 Weak institutional environment. The infrastructure sector has lacked a well-defined developmentpolicy with clearly established objectives, responsibilities and resource mobilization. The institutionalframework inherited from the past was complex and fragile. Policy formulation and project managementneed strengthening. Different government departments tend to plan and make decisions with little reference

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either to each other or to a central policy. This is most evident in the areas of public works, transport andcommunications, which play a major role in infrastructure. Until recently these areas were managed bytwo different ministries (para. 2.15). Although the recent decision to merge two ministries into the MESwill improve coordination, the new Ministry still needs to proceed with further restructuring of departmentsand definition of responsibilities. Skilled personnel are scarce in the public sector. Under the on-goingInfrastructure Rehabilitation Project (Cr.2074-GUB), some progress has been made in developing a broadsector policy and project implementation through the provision of technical assistance, but sectormanagement capacity remains weak. In the past, the tendency has been to allocate scarce resources to newcapital investment and to neglect routine maintenance, particularly road infrastructure.

3. Main Constraints

2.19 Insufficient and poorly maintained infrastructure. Only 20% of the required funding has beenallocated to periodic and routine road maintenance. This contributes not only to increasing inaccessibilityto different parts of the country, particularly the south, but also leads to increased vehicle operating costs(para 2.16). Given the Government's limited capacity to maintain infrastructure, there is an urgent need toincrease revenues from users, and to involve local, small and medium-sized enterprises (SMEs) for routinemaintenance and repair of existing infrastructure. In urban areas, water supply, urban drainage, andsanitation do not meet the country's growing needs. Bissau is supplied by nine tubewells which draw froma deep water table, with an estimated potential output of 15,000 m3 per day. This would be sufficient,however, the output is limited by the total storage capacity of 2,000 m3 which is far from adequate. Thedistribution network consists in large part of small-diameter asbestos cement pipes, and its obsoletecondition causes losses of the order of 50%. The water distribution network is not correctly structured andin some areas the water pressure is inadequate. Streets and sidewalks in Bissau are routinely subjected toflooding during the rains, because storm drains need replacing or regular dredging. Outside Bissau, there islittle basic infrastructure and the lack of any institution to manage the water supply must be resolved priorto initiate major projects in the area of water distribution. Community facilities like schools, basic healthcenters, markets, slaughter-houses and small parks require urgent rehabilitation and maintenance to arrestrapid deterioration.

2.20 Institutional bottlenecks. Government continues to be involved in commercial activities andcompanies (such as river transportation with RODOFLUVIAL, road maintenance with brigades, air trafficwith TAGB, and ferry services run by the Road Fund) which could be better handled by the private sector.Low domestic resource mobilization, particularly from road users, imposes severe constraints ongovernment spending, making more efficient allocation to priority needs all the more essential. Chronicunderfunding of infrastructure maintenance is further aggravated by insufficient cost recovery practices.The Road Fund, set up to finance road maintenance through user contributions has administrativecapability, but road user charges actually collected represent only 30% of potential revenues of about$600,000. This is essentially due to low rates of user charges (for example, private gasoline powered carspay $9 a year and diesel powered trucks $22 a year), and low coverage of charges. On the administrativeside, the Road Fund needs to be strengthened so that it is a separate legal entity governed by specific legalprovisions, managed by a board required to publish regular reports.

2.21 Inefficiency and lack of competitiveness in contracting. Guinea-Bissau's private sector has thecapacity to execute a range of public works between US$20,000-500,000 equivalent per contract. Besides25 contracting firms in the formal sector, about 100 tradesmen in the informal sector execute smallcontracts or act as subcontractors for formal enterprises. Only the largest three to five entrepreneurs haveaccess to the public works market, while the situation is more difficult for SMEs. First, they are affectedby the cumbersome administration of bid presentation and security requirements. Second, they are

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handicapped by technical deficiencies such as work site planning, invoicing and stock and cash flowmanagement. These deficiencies are compounded by Government's cumbersome administrativeprocedures: it takes about a year to enter into a contract from initiation of the procurement process tocontract signature. Problems are exacerbated by extensive payment delays to enterprises.

4. Government's Infrastructure Strategy

2.22 The main objectives of the emerging sector strategy of the new Government are broadly toremove the main sector constraints discussed above in order to provide services which would enhance thecompetitiveness of the economy and improve living conditions of the population. The main principles ofsector development policy (Annex 6) to attain these objectives are: (i) maintenance and rehabilitation wouldreceive priority over new investments; (ii) labor-intensive techniques would be encouraged over capital-intensive ones; (iii) privatization of industrial and commercial activities. In cases where that would not befeasible, public-private partnerships might be considered provided that the private partner is put in chargeand given full responsibility for managing the business company; (iv) Government would focus its attentionon developing capacity in policy-making and sector regulation; (v) suitable pricing criteria linked withstrengthened cost recovery mechanisms from users would be established; and (vi) donor coordination wouldbe improved to ensure all investments fall within the overall sector policy and strategy. Concerningmaintenance of urban infrastructure, the Government's emerging strategy relies on the following principles:(a) responsibility to secure minimum funding will be defined among municipalities, communities, usergroups, government and non-governmental organizations; (b) management will be enhanced at four levels:(i) planning and monitoring of maintenance by the General Directorate for Housing and Urban Planning;(ii) initiatives by municipalities; (iii) implementation of works by the private sector or communmty groups;and (iv) quality control of works by private firms and municipal technicians; (c)financing will be collectedon a fee-for-service basis collected by municipalities and associations; and (d) ownership amongneighborhood facility users will be developed by involving their representatives in cost-recovery decisions.

D. IDA's Involvement and Lessons Learned

2.23 IDA has supported the infrastructure sector in Guinea-Bissau with five operations: (i) in 1979,the first Roads project (US$9 million); (ii) in 1984, a second Roads project (IDA/EEC US$8 million); andthe Port of Bissau project (US$16 million); (iv) in 1989, a Social and Infrastructure Relief project (US$5million) with performance rated as highly satisfactory and fully disbursed in December 1994 ahead ofschedule; and (v) in 1990, an Infrastructure Rehabilitation project (US$23.6 million) with performancerated satisfactory and with only US$0.3 million undisbursed as of May 1, 1995.

2.24 Over the past ten years, these projects have: (a) rehabilitated the Bissau wharf and foursecondary river ports; (b) upgraded half of the existing roads (paved and gravel) to a satisfactory or goodcondition; (c) initiated labor-intensive, employment-generating community pilot works to rehabilitate citystreets, sidewalks, culverts, water supply and sanitation systems; (d) improved community services,including about 270 classrooms, four high schools, three regional health centers, and four health clinics;and (e) set up sites and services operation for about 200 low-income households. In addition to theseinvestrnents, the projects have laid the ground for improving the institutional framework, building capacity,advancing divestiture of commercial enterprises and liberalizing transport.

2.25 Project implementation has been improving and five lessons can be drawn, including the need: (i)to focus on a limited number of strategic objectives; (ii) to continue institutional reforms, particularly in theprivatization of industrial and commercial enterprises and in the development of public/private partnerships,and build local capacity to promote and regulate sustained sector development; (iii) to rely less on ambitious

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cofinancimg targets which may not materialize, thus necessitating project restructuring or the reallocation offunds to complete components; (iv) to ensure that actions to provide expected domestic financing are takenso that sufficient and timely counterpart funds are made available; and (v) to streamline procurement,contracting and payment procedures which impede the participation of local SMEs.

2.26 Other lessons applicable to the proposed operation are drawn from the evolving experience ofAGETIP-type projects in Western Africa. Those projects are based on the creation of a commercial non-governmental organization set up to carry out contract management services for the implementation ofwell-selected, economic public works and services program using labor-intensive techniques -- which hasproved very efficient in providing employment and subsistence to unskilled workers and, at the same time,achieving durable economic benefits. At the beginning of 1995, there were 11 projects completed or underimplementation (two in Senegal and one each in Mali, Mauritania, Burkina Faso, Niger, The Gambia,Benin, Togo, Chad, and Madagascar). The lessons from the first Senegal Public Works and EmploymentProject (Cr.2075-SE), incorporated into the design of the Senegal II operation (Cr.2369-SE), show theimportance of: (a) adequate dissemination and community participation for maintaining completed works;(b) strong coordination of all actors through the preparation of a detailed annual work program; (c) anagreed, detailed Procedures Manual to ensure effective and transparent implementation; (d) a regular,standardized and reliable computerized management system for project reporting and monitoring; (e) astrong covenant linking the review of subproject batches to the actual disbursement of counterpart funding;and (g) application of commercial management methods and private sector staffing.

2.27 On the macro-economic side, SACs I & II have played a major role in helping the authorities tocarry out important reforms, and the reforms contemplated under these two operations have beenimplemented, albeit with some delays. However, the adjustment process is far from complete. Furtheractions are required in public resource management, domestic resource mobilization, public enterprisereform, and legal and regulatory reforms. In designing the policy reform program, experience shows theneed to be selective given the weak institutional capacity and low skills available.

E. Rationale for IDA Involvement

1. Bank Group Assistance Strategy

2.28 A Country Assistance Strategy for Guinea-Bissau was presented to the Board together with theSocial Sectors Project (Cr.2465-GUB) in February 1993 before the new multi-party government wasinstalled. The thrust of the strategy is to support policies and expenditure patterns that promote efficientand sustainable growth, while improving the provision of social services. The strategy focuses on: (i)sound public sector management, particularly in public expenditure management and resource mobilization,public enterprise reform and institutional building; (ii) privatization, to remove distortions to private sectordevelopment, along with financial sector reform, and more efficient provision of infrastructure services;(iii) poverty reduction and human resource development; and (iv) environmental protection.

2.29 The proposed project is the immediate next step in implementing this strategy. Getting the newGovernment to develop the degree of ownership needed for their success will take time, as new institutionsre-tested and new political alignments take place. In the meantime, it is important to preserve the macro-economic and project implementation gains so far achieved. In this operation the Bank would addressissues in resource mobilization and public expenditure management and allocation to relieve constraints ineconomic and social infrastructure. On the expenditure side, the recently completed Public ExpenditureReview has led to a number of recommendations for improving public investment programming and public

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