Chapter

11 Structural and Sectoral Policies and Their Sequencing

Author(s):
Jean Clément
Published Date:
February 2005
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Section I. Introduction

As described in Chapter 2, by late 2000 the Democratic Republic of the Congo (DRC) was facing a situation of widespread conflict and war, which was compounding the negative effects of a decades-long decline in output resulting from economic mismanagement, corruption, and civil strife.1 To reverse that trend, in early 2001 the new government decided to make a U-turn in its economic policies, including by redefining the role of the state from predator to facilitator of private sector–led activity. To achieve its goal, the government designed a well-thought-out road map of comprehensive and far-reaching structural reforms with the help of the International Monetary Fund and the World Bank; the former concentrated on macroeconomic structural measures and the latter on most other areas.2 The IMF supported the government’s measures through a staff-monitored program (SMP) that covered the period June 1, 2001–March 31, 2002 and, since July 2002, through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). World Bank support took the form of six credits/projects, as described in Sections III and IV.

In drawing up the road map, the authorities defined immediate measures to tackle the most egregious macroeconomic distortions, as well as the lack of accountability and poor governance. At the same time, they started to lay the foundation for a more stable and predictable business environment by defining the main building blocks of future structural reforms, including reform of the judiciary. Finally, they initiated preparations for sectoral reforms and infrastructural investment projects to alleviate major supply bottlenecks (see Box 11.1). These reforms and investments were to be extended across the nation, once reunification had been achieved. The road map was consistent with the poverty reduction strategy that was being drawn up at about the same time. This strategy, as formulated in the interim Poverty Reduction Strategy Paper (interim PRSP), distinguishes three, partly overlapping, phases: (1) a short-term stabilization phase (2001–02); (2) a medium-term reconstruction phase (2002–05); and (3) a development phase, which was expected to start in the course of 2005.

This chapter elaborates on the government’s considerations in drawing up the road map of structural reforms. Section II describes the up-front measures (March–May 2001) that were taken with a view to quickly stabilizing the macroeconomic situation through a mix of exchange rate, fiscal, and monetary policies, as well as other measures of a macroeconomic nature. Section III describes the measures that were taken in the short run (June 2001–March 2002), which were aimed at laying the foundation for sustainable economic growth and reconstruction through initiation of a process of administrative and institutional strengthening. These actions focused mainly on (1) the rebuilding of public institutions; (2) financial sector reform; (3) the filling of the legal void concerning the environment for private sector activity; (4) the promotion of good governance; (5) reform of the natural resources sector; and (6) capacity building. Section IV presents the measures that were taken during the first half of the reconstruction phase (April 2002–December 2003). In addition to deepening and complementing those mentioned in Section III, these measures included the launching of sectoral reforms and the rehabilitation of infrastructure. Finally, Section V comments on the first results of the structural reforms, the lessons that can be drawn, and the challenges for the future.

Section II. Up-Front Measures (March–May 2001)

Based on the findings of a joint IMF-World Bank mission of March 2001, and consistent with its road map, the government first formulated a short-term program, the enhanced interim economic program (programme intérimaire renforcée) or PIR. The PIR, which covered the period June 2001–March 2002, and which was formulated with the help of, and monitored by, IMF staff,3 consisted of a critical mass of bold and front-loaded macroeconomic measures aimed at breaking the vicious circle of currency depreciation and inflation that had been plaguing the country. These measures included the following: (1) a return to a normal budgetary process, with the centralization of all revenue and expenditure at the treasury; (2) a restrained budget policy, focusing on strict adherence to a monthly treasury cash plan, revenue mobilization, and expenditure control; (3) a prudent monetary policy, consistent with the objective of breaking hyperinflation and reinforced by the adoption of new statutes of the central bank that enshrine its independence; (4) the introduction of a floating exchange rate system and the unification of the exchange rate; (5) the elimination of price controls (except for electricity, water, and transportation); (6) the liberalization of oil imports; (7) the implementation of a transparent mechanism for the determination of petroleum prices; and (8) the abolition of the monopoly on diamond exports.4 Through their immediate and powerful effects, these measures contributed significantly to the stabilization of the macroeconomic situation in the second half of 2001 (see Section V and Chapter 2).

Section III. Measures Taken in the Short Run (June 2001–March 2002)

The PIR also sought to lay the foundation for sustainable economic growth and reconstruction by initiating the rebuilding of public institutions5 and the restructuring of the financial sector,6 with assistance from the IMF and World Bank. The latter’s activities took place in the context of the Emergency Early Recovery Project (EERP), which was drawn up in support of the PIR. In addition, the EERP contained a relatively limited set of structural reforms to start addressing the country’s other key short-term constraints: weak institutional, administrative, and implementation capacity (see Box 11.1).7 These reforms focused on removing obstacles to the functioning of the private sector and creating an environment conducive to its growth, including the promotion of good governance, as well as administrative and human capacity building. The latter implies the provision of substantial technical assistance to build program implementation and monitoring capacity, a necessary condition to secure external donor support. At the same time, because of its large potential to generate economic growth, a start was made with the reform of the natural resources sector (mining and forestry), and with preparations for the restructuring of public enterprises. The subsections below elaborate on the measures that were taken in the June 2001—March 2002 period.

Box 11.1.Structural and Sectoral Reforms and Their Sequencing

To address large-scale distortions and infrastructural disrepair resulting from decades-long economic mismanagement, corruption, civil strife and, since 1998, outright war, the government of the DRC has been preparing and implementing a wide range of structural and sectoral reform measures since early 2001. The preparation/implementation can be broken down into two phases, based on the time required to prepare/implement the measures, as well as their impact.

A. The Stabilization Phase (2001–02), which aimed at obtaining immediate results.

Measures taken up front (April–May 2001)

  • (1) introduction of a floating exchange rate system and unification of the exchange rate;

  • (2) elimination of price controls (except for electricity, water, and transportation);

  • (3) liberalization of oil imports and implementation of a transparent mechanism for the determination of petroleum prices; and

  • (4) abolition of the monopoly on diamond exports.

Measures taken during 2001–02

  • (5) removal of obstacles to the functioning of the private sector: drafting and adoption of a new investment code and a law creating commercial courts and abolishing military tribunals;

  • (6) drawing up and adoption of a new mining code, marking the start of the reform of the natural resources sector;

  • (7) capacity building, development of a transparent public procurement system, and creation of a framework for donor assistance and public investment planning;

  • (8) initiation of financial sector reform (Chapter 9); and

  • (9) strengthening of public sector management (Chapter 10).

The following measures were prepared for the reconstruction phase:

  • (10) on public enterprise reform, the conduct of preliminary audits of all public enterprises, publication of the results, and replacement of most of their chief executive officers;

  • (11) strengthening of implementation capacity through technical assistance and training in key ministries and utilities to prepare for sectoral reforms over the medium term;

  • (12) drawing up of the forestry code; and

  • (13) overall formulation of the three-year PEG.

B. The Reconstruction Phase (2002–05)

Building on A (5), a new Labor Code was approved by parliament in October 2002; a code of ethics for civil servants was enacted in November 2002; an Anti-Corruption Commission was established in August 2002; a Governance and Anticorruption Strategy and Action Plan was drawn up in late 2002; and a complete overhaul of the public procurement system was initiated in 2003.

Building on A (6)—(12), the following steps were taken:

  • start of public enterprise reform and, through effective functioning of the Steering Committee on the Reform of Public Enterprises, drawing up of restructuring plans for seven key enterprises, with, in some cases, actual restructuring to start in 2004;

  • continuation of reform of the natural resources sector: the new forestry code was adopted in June 2002; implementing decrees were issued concerning the mining registry, new mining regulations, and the Mining Title Validation Commission; the restructuring of GECAMINES was initiated; and audits to improve transparency in the diamond sector were being prepared;

  • initiation of sectoral reforms (agriculture, health, education, and community development);

  • continued restructuring of the financial sector; and

  • continued strengthening of public sector management and implementation of sectoral reform.

Structural conditionality. Many of the above-mentioned measures were deemed to be so important for the success of the PIR and PEG that they were made part of the conditionality of the programs supported by the IMF or the World Bank.

Enabling the Private Sector and Supporting Good Governance8

Issue

During the participatory consultations conducted to prepare the interim PRSP, the population strongly expressed its belief that poor governance and rampant corruption were among the foremost causes of the widespread poverty in the country. The rule of law was almost never respected in the application and enforcement of justice. For the private sector, mutually conflicting or unwise regulations inherited from the past hampered productive economic activity and provided a vehicle for corrupt practices.9 Economic recovery, particularly recovery leading to propoor growth, is especially difficult in such an environment.

Actions

To help the DRC move to a sound legal framework for legitimate investment, a new investment code was drawn up in line with international best practice and was approved by parliament and promulgated by the president in February 2002. The code provides a level playing field through transparent incentives for domestic and foreign investors alike and clarifies the rights and responsibilities of investors, regulatory agencies, regional governments, and the fiscal authorities.10

Also, an assessment was made of the legal framework, complementing activities financed by the European Union under the Justice Support Program that focused on rehabilitation of court buildings, and capacity building and awareness-raising activities concerning criminal law and the rule of law in general. In July 2001 parliament adopted a new law abolishing military tribunals and creating commercial courts that have the sole right to act as arbitrators in commercial disputes. Initial steps were taken to strengthen the judicial system with assistance from the European Union and bilateral donors.

Initiation of Reform of the Natural Resources Sector

Issue

The DRC contains vast forestry and mineral resources. As explained in Chapter 2, in the past these resources have been used to fuel a sad legacy of more than a century of exploitation and abuse of human rights, as well as the recent armed conflict in the Great Lakes region. The 60 million hectares of natural hardwood forest provide a source of revenue and a way of life for the country’s 35 million rural people. However, in 2001, production was only 1 percent of the sustainable annual harvest of 6–10 million cubic meters. If properly exploited, the sector could generate 60,000 jobs and annual gross revenue of about US$1 billion. Concerning minerals, annual production of diamonds fell from 26 million carats in 1988 to 16 million carats in 2000, while copper output fell from 475,000 metric tons to less than 25,000 metric tons. The public mining company, GECAMINES (Générale des Carrières et des Mines du Congo), was once the world’s largest producer of cobalt and a leading producer of copper, as well as the country’s largest foreign exchange earner. At the end of 2001, GECAMINES was bankrupt. However, private investors have been flocking to the DRC despite (or, in some instances, as documented in the press and by the UN Security Council, in response to) the distressed environment.11

Actions

A new mining code was drafted with World Bank assistance, which also included (1) discussing and disseminating the code; (2) training government officials in the implementation of the code; and (3) initiating the setting up of the mining registry (cadastre minier) to ensure the transparent allocation of mining rights. The mining code was published in April 2002. In the meantime, work was started to draw up a new forestry code.

Preparation for the Restructuring of Public Enterprises

Issue

Economic recovery is impeded by a dysfunctional public enterprise sector, comprising some 51 state-owned and 44 mixed enterprises. Through these enterprises, the state is the largest economic agent, and this situation has generated issues ranging from lack of good governance to gaps in the delivery of key social services. The legal structure governing state-owned enterprises is outdated and does not provide the necessary safeguards allowing for private sector investment.

Actions

To prepare for public enterprise reform (typically a long-term process), preliminary audits of all public enterprises were conducted in 2001 to identify major governance issues. The audit results were published in the local press, and most of the enterprises’ chief executives were replaced by temporary administrators. In addition, preparations were made to set up a steering committee for public enterprise reform (see subsection on public enterprise reform in Section IV).

Capacity Building

Issue

Years of mismanagement, conflict and war, and low public sector salaries had severely eroded administrative capacity. Although elaborate procedures and controls were prescribed in existing legislation and regulations, these were generally bypassed or, if followed (e.g., the preparation of the annual budget), they were virtually meaningless for lack of effective follow-up and adequate controls. Also, there were huge logistical bottlenecks owing to the collapse of infrastructure, in particular the transport network. Because of the lack of transparency in public affairs, donors were reluctant to provide nonhumanitarian assistance.

Actions

Three main actions have been taken. First, the implementing agency for the EERP, BCECO (Bureau Central de Coordination), was strengthened, especially its procurement procedures, to ensure a transparent and competitive bidding process for public contracts, which is key for securing donor assistance. Second, feasibility studies and final design and bidding documents for priority (mainly infrastructure) projects to be financed by donors other than the World Bank were completed. Third, implementation capacity in ministries and utilities responsible for health care, roads, urban development, community-driven development, electricity, and water was strengthened through the provision of technical assistance and training in preparation for sector reforms over the medium term (see subsection on sectoral reform in Section IV), as well as to develop a framework for donor coordination and commence work on public investment planning—two activities that go hand in hand.

Section IV. Structural and Sectoral Measures Taken in 2002–03 (First Half of the Reconstruction Phase)

Based on the successful implementation of the PIR (see Chapter 2), in June 2002 the Executive Board of the IMF approved an arrangement of SDR 580 million under its PRGF in support of the three-year (2002–05) Government Economic Program or PEG (Programme Economique du Gouvernement), which had been drawn up while the SMP was being implemented, and which largely coincides with the reconstruction phase of the interim PRSP (see Section I). Under the PEG, the structural reforms that had been initiated under the PIR were to be broadened and deepened and, after the formal completion of the peace and reunification process in August 2003 (see Chapter 2), extended across the entire nation. In addition, a wide range of sectoral reforms were to be implemented. In support of these structural and sectoral reforms, the World Bank Executive Board approved two credits/projects in June–July 2002, followed in the second half of 2003 by three more.12 Also, in December 2003, the African Development Bank approved an economic recovery and reunification support operation of about US$60 million.

During the reconstruction period, capacity building was to continue and to be extended to the reunified provinces, with technical assistance provided by the IMF, the World Bank, and, increasingly, other donors, following the successful implementation of the PIR and several donors’ meetings organized by the World Bank. Using essentially the same classification as in the previous section, the four subsections below elaborate on the measures that were taken during the first half of the reconstruction period.

Enabling the Private Sector, Improving Governance, and Fighting Corruption

Building on the progress made under the PIR, the government developed and started to implement a comprehensive strategy for further enabling the private sector, improving governance, and fighting corruption. The focus was on further strengthening the rule of law, the judiciary, and the legal and regulatory environment for private sector development and on fighting corruption in the public sector.

Actions to Date

Strengthening the rule of law and the judiciary and improving the legal and regulatory framework for private sector development

Building on its previous work in the legal area at the time of the PIR, the European Union initiated the preparation of a status report on the legal system. In the area of business law, the government started to prepare for joining the Organization for the Harmonization of Business Law in Africa or OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires). A status report on the taxation of enterprises was submitted to the government in January 2003 in preparation for the streamlining of the tax system to be implemented in 2004. In addition, the ANAPI, a one-stop window for investors, was established in December 2002, which, with World Bank assistance, launched a study on the administrative barriers (red tape) to private sector development. Audits of cross arrears between the government and the domestic private sector and between the government and public enterprises were completed in September 2003, and the conditions and timetable for the clearance of these arrears were to be established by the end of 2004.

To create a modern framework for labor relations, the government drew up, with World Bank and International Labor Organization assistance, a new labor code, which parliament approved in October 2002. Its main implementing decrees were to be adopted in 2004. To establish a forum for dialogue between the private sector and the government, a permanent body (le Cadre Permanent de Concertation Economique) was created.

Fighting corruption in the public sector

A multipronged strategy to address corruption in the public sector is being applied. First, a code of ethics and good conduct was enacted in November 2002 that applies to all civil servants regardless of their rank and nature of appointment. The code draws, among other things, on the model adopted by the Committee of Ministers to Member States of the Council of Europe on codes of conduct for public officials. A campaign to explain the code was launched in March 2003. The decree on the organization and operations of the code (Observatoire du Code Ethique et Professionnel) was published in April 2003, and it became operational in September 2003. On August 28, 2003, President Kabila submitted to parliament a written declaration of his wealth, and several members of the National Transitional Government have followed suit.

Second, in August 2002 the government established an Anticorruption Commission. The commission has a three-part mandate: (1) it is responsible for the investigation and prosecution of cases of corruption and related offenses; (2) it is the focal point for formulating recommendations and initiating measures to prevent corruption; and (3) it is responsible for designing and implementing a program of public awareness to help citizens combat corruption. In establishing the legal mandate of the commission, the government specified a full spectrum of corruption, criminal offenses of an economic nature, and other related offences that may be investigated and prosecuted by the commission.

Third, a Governance and Anticorruption Strategy and Action Plan was drawn up in late 2002, taking into account the conclusions of a workshop held in September of that year. Representatives of central and local government, civil society, and the private sector participated in the workshop. The action plan involves (1) creation of a legal, regulatory, and institutional framework for combating corruption; (2) reform of public institutions, including the civil service; (3) design and implementation of effective penalties for corruption; and (4) strengthening of effective partnerships among the public sector, civil society, and the international community. The action plan sets out clearly that leaders and managers in government are responsible and accountable for their actions. In the context of this action plan, a draft anticorruption law and a draft law on money laundering and the financing of transnational organized crime were to be submitted to parliament in the course of 2004. The same holds for the compendium of citizens’ rights and obligations.

Fourth, a complete overhaul of public procurement procedures was initiated in July 2003, comprising (1) updating and revising procurement legislation; (2) strengthening functional structures in decision making; (3) improving contract management; (4) improving the procurement information system; and (5) training personnel. The recommendations were expected to be available by the end of April 2004, on which basis a strategy will be developed to set up a modern regulatory and institutional framework for government procurement, along with an implementation timetable. In this context, the government is to establish a list of firms and individuals prohibited from being awarded contracts. Also, the government will make available to the public information about firms (including ownership) that are eligible for government contracts.

Fifth, audits will be used to detect corrupt practices and abuse of power in tax administration, expenditure management, and procurement. As a first step, after an 18-year interruption, the audits of the 2001 and 2002 budget executions by the General Accounting Office (Cour des Comptes) were completed in the fourth quarter of 2003 and presented to parliament in December 2003 and January 2004, respectively, for their subsequent publication in the Official Journal (Journal Officiel).

Reform of the Natural Resources Sector

The objective of government policy in the natural resources sector is to quickly rehabilitate and develop production in the country in an economically, environmentally, and socially sustainable way and to ensure that development of the natural resources sector contributes to growth, development, and poverty reduction rather than to the wealth of a privileged elite. Thus, building on the preparations and achievements under the PIR, the specific elements of the government’s strategy include (1) improving transparency and good governance in the management of mineral and forest resources; (2) increasing the participation of local communities in forest management and direct access to forest revenues; and (3) addressing the immediate constraints on the public mining company, GECAMINES.

Actions to Date

Forestry

Based on the preparatory work under the PIR, a new forestry code was drafted with World Bank assistance and approved by parliament in June 2002; most of its implementing regulations had been adopted by late 2002. Full implementation of the code, which incorporates international best practices, will ensure sustainable forestry. The code rationalizes taxation in the forestry sector by reducing the number of taxes (exceeding 60 in early 2002) and the number of authorized tax collection agencies (8 in early 2002), and it introduces market mechanisms and incentives to encourage high value-added industrialization, the equitable sharing of forestry revenues, and sustainable development. The code stipulates that 40 percent of fiscal revenues will flow directly to local communities, which will also be given the right to manage directly their own forests, thus supporting community dynamics and self-reliance of the poor—key elements of the interim PRSP. Logging concessions will be awarded through a transparent, market-based mechanism that discourages the speculative holding of property while encouraging private sector investment and exploitation, and that increases revenues accruing to government and local communities.

By April 2002, 143 concessions covering 23.4 million hectares (of 40 million hectares in 260 concessions under review) had been annulled by decree. By ministerial order, the 117 concessions that had been declared valid were published on May 24, 2003, and, also by interministerial order, the collection methods and accompanying policies for the area tax (taxe de superficie), which was increased from US$0.0014 to US$0.0625 per hectare (and to be raised further), were published in June 2003. The government was to publish a report on the actual collection of this tax in January 2004, and the concessions of delinquent taxpayers were to be revoked.

Mining

Revision of the legal and regulatory framework. In February 2001, the diamond sector had been liberalized. In 2003, the authorities put in place the procedures for certification of origin required to adhere to the Kimberley Accord on conflict diamonds. Recorded output and exports of diamonds have increased significantly since 2001. To further improve transparency in the sector, the government will, with external technical assistance, audit the diamond sector and it will contract an internationally reputable firm to audit the diamond mining company MIBA (Société Minière de Bakwanga).

Following publication of the new mining code in April 2002, the reform of the legal framework for the mining sector was completed in April 2003 with the publication of the decrees on the new mining regulations, the mining registry (cadastre minier), and the interministerial Mining Title Validation Commission. Although the new mining registry became operational in June 2003, additional strengthening is needed to bring its activities up to the level required by the new mining code.

GECAMINES will be completely restructured, a process that is complicated by the company’s “quasi-state” role in the provision of social services in much of the province of Katanga, the predominant economic and social impact of the firm in that province, and its multitude of joint venture agreements, logistics contracts, and supply agreements.

The cost of terminating employment of about 11,000 candidates for voluntary departure under the collective agreement with the unions of GECAMINES—about $120 million—would pose an impossible financial burden for the bankrupt company and would set a precedent for future restructuring programs for public sector enterprises that the government would not be able to afford. Accordingly, the government has decided to put in place a voluntary retirement program, outside the existing collective bargaining agreement, which would permit a rational restructuring of the mining sector. The option of obtaining immediate payment of salary arrears instead of protracted waiting for an uncertain outcome was chosen by about 10,500 workers. The cost of the program amounts to about US$48 million and is financed by the World Bank. The program was put in place in August 2003. Departures began immediately thereafter and were completed by early 2004.

The strategy for restructuring GECAMINES is being developed: the experts to examine GECAMINES’s partnership agreements with private companies are scheduled to begin their work in January 2004 and present their final reports by the end of June 2004. This should allow for the finalization of the GECAMINES restructuring strategy between July and September 2004 and its submission to parliament by the end of 2004, in the context of a law on the restructuring of GECAMINES. This law will define the action plan, as well as the implementing institution, and would authorize the sale or partnership holding of the company’s assets.

Public Enterprise Reform

Based on the diagnoses made at the time of the PIR, the government formulated the following objectives for public enterprise reform: (1) to ensure that basic services are provided on a sustainable and profitable basis, (2) to reduce fiscal pressure caused by public enterprise mismanagement, and (3) to help to attract employment-generating investments through the restoration of a business environment conducive to growth. Finally, available options for private sector participation, whether fully private or through public-private partnerships, management contract, or other arrangements, will be explored. Public enterprise reform will begin in those sectors that have a direct impact on the overall competitiveness of the economy, namely, electricity, transport, and communications. These sectors, in which the quality of the services rendered is far worse than in other sub-Saharan countries, are, with mining and forestry, key for promoting economic growth.

Actions to Date

The government has started the process of building ownership, through seminars and public awareness campaigns, of the need to reform state-owned enterprises.

Following preparations during the stabilization phase, the Steering Committee on the Reform of Public Enterprises or COPIREP (Comité de Pilotage de la Réforme des Enterprises Publiques) was put in place in August 2003. It reports to an interministerial committee and has an executive secretariat.13 COPIREP’s responsibilities are to (1) undertake audits of all public enterprises; (2) define selection criteria and select those enterprises that should remain in the state portfolio and those that should be transferred out; (3) revamp the legislation governing public enterprises and establishments; (4) establish the legal framework allowing for public enterprise reform; (5) establish divestiture strategies and procedures for those companies that the state intends to divest; (6) restructure those companies that will remain in the state portfolio; and (7) define and develop appropriate social safety nets for workers made redundant by the reforms.

Sectoral working groups have been created to identify reform options for each enterprise within each sector. The Executive Secretariat of COPIREP coordinates these groups.

Based on the initial results of a diagnostic study concerning accounting practices and the functioning and operations of public enterprises undertaken in early 2003, and in the context of the World Bank’s PSDCP, seven key enterprises in the transport, communications, and electricity sectors have been selected for restructuring: the national railways company (Société Nationale des Chemins de Fer du Congo); the urban transportation company (Citytrain); the air traffic control system (Régie des Voies Aériennes); Congo airlines (Lignes Aériennes Congolaises); the post and telecommunications company (Office Congolais des Postes et Télécommunications); the national petroleum company (COHYDRO); and the national electricity company (Société Nationale de l’Electricité).14

Detailed restructuring plans are to be completed in 2004, and, in some cases, actual restructuring would also start in that year.

Sectoral Reforms

The main vehicle for sectoral reform is the World Bank’s EMRRP. Its specific objectives are to help the DRC to (1) start rebuilding agricultural production and enhance food security; (2) rehabilitate and reconstruct critical infrastructure; (3) restore essential social services and build community infrastructure; and (4) strengthen the capacity of the government to formulate, implement, and manage medium- and long-term development programs.

The EMRRP is being implemented nationwide, but it initially emphasized the western part of the country, because preparations could only be made in that region. Its activities were drawn from a large, multisector program of rehabilitation and reconstruction prepared in September 2001 by the ministry of planning and reconstruction in consultation with various sector ministries (see Section III on capacity building). It comprises three main components: (1) rehabilitation and reconstruction of critical infrastructure (transport, water supply, electricity, and urban infrastructure); (2) agriculture, delivery of social services (education, health, and social protection), and community development; and (3) development of sector strategies for the medium and long term and strengthening of human and institutional capacities. The design of the EMRRP has been based on free-standing subprojects that fit within the overall program but are not integrally linked to other activities, so as to facilitate parallel financing arrangements. Over the medium term, the EMRRP projects will benefit the country through improved infrastructure, a strengthened legal and regulatory framework, and more stable and effective institutions—critical conditions for better governance.

The EMRRP’s main components, which by the end of 2003 were in various stages of execution, are described below.

Component A: rehabilitation and reconstruction of critical infrastructure

This component will finance the rehabilitation and reconstruction of critical transportation infrastructure, electricity services, water supplies, and urban infrastructure. The transportation subcomponent will finance activities to improve river, rail, and air transportation, including rehabilitation of ports, airports, and bridges, and the purchase of equipment for river navigation and aeronautical communications. The roads subcomponent will support rehabilitation or reconstruction of 1,200 kilometers of main roads and bridges, including Highway I (Route nationale), which links six provinces to the coastal ports. The electricity subcomponent will finance rehabilitation of the electricity supply networks serving major cities. The water supply subcomponent will support rehabilitation of waterworks in cities, including Kinshasa, Lubumbashi, Mbuji-Mayi, and Boma. The urban services and infrastructure subcomponent will provide support to enable selected urban centers to improve solid waste services, maintain and rehabilitate urban streets and drainage systems, and control erosion.

Component B: agriculture, delivery of social services, and community development

The agriculture subcomponent will finance rehabilitation of 5,000 kilometers of rural roads and access tracks; help establish an agricultural information system for farmers; strengthen the operations of producers’ organizations, nongovernmental organizations (NGOs), and key public service providers; and support the development of a policy framework that improves the investment climate for agriculture and forestry.

The social services and community development subcomponents will finance essential services in health, education, social protection, and community development. Improving and expanding health care services is the priority among the subsectors because of the extraordinary extent to which disease is affecting the well-being and productivity of the population. The strategy for these sectors is to select modest investments that have a relatively quick and high impact. Investments in community-selected projects provide a means for rehabilitating schools and health centers that both promote community ownership of facilities and inject cash into the local economy.

The health services part will assist the government to (1) develop and disseminate laws and regulations governing the health system; (2) reinforce public-private partnerships and community participation and reestablish health planning structures; (3) rehabilitate and equip health centers and other health facilities in 100 health zones; (4) increase the number of health care workers and upgrade their skills; (5) establish central medical purchasing and distribution offices to improve the availability of medicine and other essential medical supplies throughout the country; (6) strengthen programs to prevent and treat the DRC’s most serious diseases, including HIV/AIDS, malaria, tuberculosis, and sleeping sickness; and (7) provide health care services targeted to specific groups, notably mothers, children, orphans, and victims of war.

The education part will finance the rehabilitation of primary schools; the procurement of textbooks and other school supplies and equipment; and training courses for new as well as experienced teachers.

The social protection subcomponent will support pilot activities to test approaches for designing and executing programs to assist vulnerable people. Activities include informal and accelerated education for street children and programs to reintegrate child soldiers into society.

The community development subcomponent will finance small-scale projects to improve education, health, transportation, drinking water and sanitation services, energy supplies, environmental protection, and the delivery of basic social and economic services. The projects will be identified, prepared, and executed by the communities with the help of NGOs, to ensure that they reflect communities’ priorities and that the communities take responsibility for maintaining the infrastructure and services.

Component C: development of medium- and long-term sector development strategies, capacity building, and institutional reform

This component will finance preparation of the development strategies for the DRC’s most important sectors: agriculture, education, health, transportation (covering all modes), water and sanitation, electricity, and social protection. It will also cover costs of implementing sector and institutional reforms and of building human and institutional capacity. Finally, this component will finance the principal studies and preparatory activities for future investment programs.

Social sectors. A sectoral review of the health sector will be launched with assistance of the World Bank, with a view to preparing a comprehensive assessment as the starting point for developing the sectoral strategy by the end of 2004. Preparation of the social protection strategy will be the first stage in a program that by the end of 2004 is to set out (1) the government’s actions in the area of social protection; (2) the actions of the development partners in the area of social protection; and (3) the budget and sources of financing for these activities. For the education sector, an action plan for fulfillment of the criteria of the Education for All program was completed in October 2003, whereas the sectoral strategy is to be completed by the end of 2004.

For the agricultural sector, four subsector studies (palm oil, cotton, coffee, and cocoa), as well as a study on the regulatory and tax environment for agribusinesses, will be launched by the end of December 2004. The results of these studies will be used to prepare the rural development section of the PRSP.

Infrastructure sector. In early 2004, a legal and regulatory framework and a regulatory authority will be established for the electricity sector. A water code will be finalized in 2004, as well as a new energy code.

Section V. Structural and Sectoral Reform: Results So Far, Lessons, and Challenges for the Future

By the end of 2003, the DRC had been implementing policies aimed at turning the economy around for about two-and-a-half years. Overall, the real GDP growth of 3.5 percent in 2002 (positive for the first time in 13 years), and its acceleration to 5.6 percent in 2003, along with the continued deceleration in inflation, indicate that the Congolese authorities’ efforts in the areas of peace building, economic management, and structural reforms have succeeded in turning the economy around (see Chapter 2). It is difficult to determine the separate effects of these measures, especially because some of the reforms, namely public enterprise restructuring and sectoral reforms, have only just started. However, the available information indicates that structural reform did play a significant role in the turnaround of the economy. The PIR, in addition to quickly breaking the vicious circle of hyperinflation and currency depreciation, also produced significant results in structural areas. Major economic distortions were eliminated, notably via the unification of multiple exchange rates and the liberalization of the prices of goods, including the transparent and automatic mechanism for the prices of petroleum products. These actions translated into the overnight disappearance of long lines at gasoline stations, a virtual halt to smuggling, greater availability of public transportation, and an increased supply of foodstuffs because the improved transportation between consuming cities and the producing countryside led to price drops for some items.15

In addition, the business climate has significantly improved following the elimination of obstacles to the functioning of the private sector through the abolition of the diamond export monopoly;16 the adoption of the new investment, mining, and forestry codes; the replacement of exceptional military courts for business and economic affairs by commercial courts; the strengthening of the judiciary; and the development of an anticorruption strategy. These developments have significantly affected investment plans of the private sector (resident as well as nonresident): in the 12 months following its inception (December 2002), ANAPI (itself the result of structural reform) approved more than 100 private sector investment projects amounting to about US$2.3 billion.17 Although it will take time before these projects materialize, the surge in investment plans will contribute to future economic growth.

Now that the first results of the structural reforms can be determined, what conclusions and lessons can be drawn regarding the formulation and implementation of structural and sectoral reforms, and what are the challenges for the future?

The factors mentioned in Chapter 2 that determined the success of the government’s programs, among other things, ownership, the appropriate sequencing of measures, the early involvement of the Bretton Woods institutions, and the early sharing of results with the donor community, were also of key importance for the successful implementation of structural reforms. This applies especially to ownership, because structural reforms tend to affect vested interests, which makes their implementation politically difficult. In addition, because most structural reforms take time to prepare and implement, their proper sequencing—taking into account the realities of the country—is key for their effective implementation. On the basis of their early diagnosis of the situation, the government and the staffs of the IMF and World Bank were able to draw up programs that distinguished clearly between immediate priority measures aiming at removing bottlenecks and stabilizing the macroeconomic situation on the one hand, and measures to be taken over the short and medium term to effect fundamental change, on the other. This sequencing was critical in creating a link early on between macroeconomic and microeconomic reform through the creation of an overall framework conducive to private sector-led growth.

Thus, in practice, the liberalization of the diamond sector and the drafting of the investment and mining codes, and, somewhat later, the forestry code, have enhanced transparency through the creation of a level playing field for private operators, eliminated bottlenecks in the functioning of the private sector, and improved the business climate. These measures were followed by the issuing of implementation decrees to give “teeth” to the just-mentioned codes, plus a wide range of measures, including the adoption of legislation, to strengthen good governance and transparency in public affairs. The early removal of structural bottlenecks was key to the revival of economic growth.

Now that the investment, mining, and forestry codes are in place, their continued proper application, including in the reunified provinces, is required to achieve their goals: the equitable treatment of economic operators and the transparent and market-based exploitation of the country’s natural resources. Only then will the full confidence-building impact of these measures become apparent. This, together with the further nationwide strengthening of the judiciary, the adoption of anticorruption legislation, effective implementation of public enterprise restructuring (going well beyond the eight enterprises currently targeted to be restructured), continued financial and public sector reform (including civil service reform), and implementation of infrastructure investments and sectoral reforms supported by the World Bank and other donors, will contribute significantly to the increase in the DRC’s productive capacity and, together with the continued implementation of sound macroeconomic policies, ensure a firm foundation for propoor growth.

Bibliography

This chapter reflects on developments through the end of 2003.

Formally, the division of labor between the two institutions is set out in the Concordat.

Hence, the PIR is also referred to as the SMP.

The monopoly on diamond exports, created in early 2000, was abolished in February 2001, before the official start of the SMP. The abolition allowed purchasers and private trading posts to operate without restriction in mining areas.

Under the EERP, a grant of US$50 million was made available to finance, in addition to the preparation of the above-mentioned structural reform measures, the combating of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS), community development, and infrastructure rehabilitation, the latter almost exclusively concerning the road between Kinshasa and the seaport of Matadi. In addition, the grant served as a conduit for assistance from other donors, either through cofinancing or parallel financing.

Efforts to improve governance in the public sector are described in Chapter 10.

In the April 2003 International Country Risk Guide, the DRC ranked 136th out of 140 countries in terms of risk.

The code also provided for the setting up of a one-stop window (guichet unique) for investment application/registration. This step was realized in late 2002 with the creation of the National Investment Promotion Agency or ANAPI (Agence Nationale pour la Promotion des Investissements en République Démocratique du Congo).

Indeed, the new mining code provides for an evaluation of existing mining rights, with a view to annulling those that are illegal.

World Bank assistance was channeled through an Economic Recovery Credit of about US$450 million in support of further structural reform and, one month later, the Emergency Multisector Rehabilitation and Reconstruction Project (EMRRP) of about US$454 million and about US$1.3 billion in cofinancing, in support of, mainly, investment in infrastructure and sectoral reform. About a year later, on July 2, 2003, the Executive Board of the World Bank approved a loan of US$120 million for the Private Sector Development and Competitiveness Project (PSDCP) and, on September 11, 2003, a Post-Reunification Recovery Project of US$214 million (of which US$30 million is in grants). Both projects are in support of the ongoing structural and sector reforms. Further support from the World Bank (about US$178 million) was obtained in November 2003 in the context of the Southern African Power Market Program, mainly to upgrade the DRC’s power grid to enable it to export electricity to southern Africa.

Before the creation of COPIREP, the responsibility for public enterprises rested with the presidency. Pending the restructuring, public enterprises, or their assets, cannot be sold by the government or the enterprises themselves without COPIREP’s authorization.

The PSDCP also refers to the restructuring of GECAMINES, which in this chapter is discussed in the subsection on reform of the natural resources sector.

These macroeconomic structural reforms had an immediate and measurable impact, contrary to the effects of most other structural reforms.

Declared production and exports of diamonds increased from 16,000 carats in 2000 to 27,000 carats in 2003.

Recorded GDP amounted to about US$5.7 billion in 2003.

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