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The World Bank

Report No. 19264 UG

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 9.6 MILLION(US$ 13.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF GOVERNMENT OF UGANDA

FORA

FINANCIAL MARKETS ASSISTANCE PROJECT

May 7, 1999

Private Sector Finance UnitCountry Department AFC04Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 1999)Currency Unit Uganda Shillings

1,550 US$ 100

FISCAL YEARJuly I -June 30

ABBREVIATIONS AND ACRONYMS

BSD Banking Supervision DepartmentBOU Bank of UgandaCAS Country Assistance StrategyCMA Capital Markets AuthorityFIMAP Financial Markets Assistance ProjectFSAC Financial Sector Adjustment CreditGAAP Generally Accepted Accounting PrinciplesGOU Govemment of UgandaIAS International Accounting StandardsICB International Competitive BiddingICR Implementation Completion ReportIQC Indefinite Quantity ContractIMF International Monetary FundLOI Letter of InvitationMoF Ministry of FinanceNBFI Non-bank Financial InstitutionsNCB National Competitive BiddingNPART Non-performing Assets Recovery TrustNSSF National Social Security FundPIU Project Implementing UnitPIP Project Implementing PlanPPF Project Preparation FacilitySAC Structural Adjustment CreditSOE Statement of ExpensesTA Technical AssistanceTOR Terms of ReferenceUCB Uganda Commercial BankUCBL Uganda Commercial Bank LimitedUDB Uganda Development BankUIB Uganda Institute of Bankers

Vice President: Callisto MadavoCountry Director: James AdamsSector Manager (Acting): Paul MurgatroydTask Team Leader: Mark Dorfman

REPUBLIC OF UGANDAFINANCIAL MARKETS ASSISTANCE PROJECT

CONTENTS

A. PROJECT DEVELOPMENTOBJECTIVES .......................................................................... 1

B. STRATEGIC CONTEXT ......................................................................... 2(i) Sector-Related country Assistance Strategy (CAS) ......................................................... 2(ii) Main Sector Issues and Government Strategy ............................................................... 2(iii) Sector Issues to be Addressed by the Project and Strategic Choices .................................... 4

a. Strengthening the Regulation, Supervision and Operations of Deposit-Taking Institutions ......... 4b. Restructuring and privatizing Uganda Commercial Bank Limited ....................................... 4c. Improving Monetary Management and Payment Systems ................................................ 5d. Developing Insurance and Contractual Savings Reform and Regulation ............................... 5

C. PROJECT DESCRIPTION 7SUMAARY.(i) Project Components (See Annexes 11 and III for detailed descriptions and cost breakdowns) ........ 7(ii) Key policy and Institutional Reforms to be Sought ........................................................ 10(iii) Benefits and Target Population ......................................................................... 10(iv) Institutional and Implementation Arrangements ........................................................... 10

D. PROJECT RATIONALE ......................................................................... 12(i) Project Alternatives Considered and Reasons for Rejection ............................................... 12(ii) Major related projects financed by IDA and/or other development agencies . . 12(iii) Lessons Learned and Reflected in Proposed Project Design .. 12(iv) Indications of Borrower Commitment and Ownership ......................... ........................... 13(v) Value Added of Bank Support in this Project ............................................................... 13

E. ISSUES REQUTIRING SPECIAL ATTENTION 13(i) Economic Assessment ......................................................................... 13(ii) Technical Assessment ......................................................................... 14(iii) Institutional Assessment ......................................................................... 14(iv) Financial Management Assessment ......................................................................... 14(v) Social Assessment ......................................................................... 15(vi) Environmental Assessment ......................................................................... 15(vii) Participatory Approach ......................................................................... 15

F. SUSTAINABILITY AND RISKS ......................................................................... 16(i) Sustainability ......................................................................... 16(ii) Critical Risks (reflecting assumptions in the fourth column of Annex 1) . . 16(iii) Possible Controversial Aspects ......................................................................... 16

G. MAIN LOAN CONDITIONS ......................................................................... 17Effectiveness Conditions ............... 7............... ... 17

2

H. READINESS FOR 17IMPLEMENTATION .............................................................................................

I. COMPLLINCE WITH BANK 17POLICIES .

ANNEXESAnnex I: Project Design Summary .17

Annex II: Project Description .18

Annex III: Estimated Project Costs .26

Annex IV: Economic Assessment .30

Annex V-A: Financial Summary. 3 1

Annex V-B: Financial Management Assessment.

Appendix I Terms of Reference - Financial Management Committee .38

Appendix 2 Terms of Reference - Project Accountant .41Appendix 3 Financial Management Manual (Indicative Sections for Inclusion) .42

Annex VI: Procurement and Disbursement Arrangements .42Table VI-A: Project Costs by Procurement Arrangements .42Table VI-B: Consultant Selection Arrangements .45Table VI-C: Thresholds for Procurement Methods and Prior Review .46

Table VI-D: Allocation of Credit Proposals .................................... ,.,.,,.47

Annex VII: Project Processing Timetable & Budget .48

Annex VIII: Documents in Project File .49

Annex IX: IDA Statements of Credits .50

Annex IX: IFC Statements of Credits .51

Ainex X: Country at a Glance .52

Annex X: Country at a Glance (cont'd) .53

Annex XI: Environmental Assessment, Social and Environmental .54

MAP

Republic of UgandaFinancial Markets Assistance Project

PROJECT APPRAISAL DOCUMENT

Africa RegionPrivate Sector and Finance

Date: May 5, 1999 Task Team Leader/Task Manager: Mark DorfinanCountry Director: James Adamns Acting Sector Manager: Paul MurgatroydProject ID: UG-PA-44213 Program Objective Category: Financial SectorSector: FinancialLending Instrument: Technical Assistance Credit Program of Targeted Intervention: Yes

Project Financing Data El Loan El Credit LE Guarantee L Other

For Loans/Credits/Others:

Amount: US$ 13.0 million/SDR 9.6 million on Standard IDA terms

Proposed Terms: MulticurrencyGrace period: 10 years

Years to maturity: 40 yearsCommitment fee: Standard IDA

Service charge: Standard IDAFinancing plan [US$m]Source: Local Foreign Total

Government: 0.21m 1.14m 1.35mIDA: 2.70m 10.30m 13.00m

Borrower: Republic of UgandaGuarantor: Not ApplicableResponsible agencies: Bank of Uganda (BOU), Ministry of Finance (MoF), Commissioner of Insurance, Capital

Markets Authority (CMA)Estimated Disbursements (Bank FY/US$ millions) FY99 FY00 FY01 FY02

Annual 2.4 4.6 4.0 2.0Cumulative 2.4 7.0 11.0 13.0

Project Implementation Period: 5 yearsExpected Effectiveness Date: September 30, 199 Expected Closing Date: June 30, 2003

A. Project Development Objectives

1. The objective of the Project is to improve the safety, soundness and performance of the financialsystem. This is in turned aimed at supporting broad-based private sector growth. It will be accomplishedby: (i) strengthening the regulation, supervision and operations of deposit-taking institutions; including theresolution and work-out of problem banks, (ii) restructuring and privatizing Uganda Commercial BankLimited, (iii) improving monetary management and payment systems; and (iv) developing insurance andcontractual savings institutions, as well as their oversight.

Uganda - Financial Markets Assistance Project Page 2Project Appraisal Document - Main Text May 7, 1999

B: Strategic Context

(i) Sector-Related Country Assistance Strategy (CAS)

CAS document number: No. 16540- UG

Date of latest discussion: May 20, 1997

2. The Financial Markets Assistance Project (FIMAP) is fully consistent with IDA's CAS forUganda whose objectives included developing a properly regulated and diversified financial sector. TheGovernment's strategy in this context is to complete the current reform agenda under the StructuralAdjustment Credit (SAC III), which includes finalizing the privatization of the Uganda Commercial Bank(UCB) and progress in recovery of non-performing loans being undertaken by the Non-performing AssetsRecovery Trust (NPART). In addition, the strategy calls for the strengthening of commercial bank and theNon-bank Financial Institutions (NBFI) supervision and improvement of the management of providentand pension funds and the insurance industry.

(ii) Main Sector Issues and Government Strategy

3. Introduction. The Govermment of Uganda (GOU) has taken measures to improve themobilization and allocation of financial resources and foster monetary deepening through liberalizedinterest rate policies and improved formulation and execution of monetary policy. Moreover, measureshave been taken to improve the regulatory framework for financial institutions, including the passage ofrevised legislation for deposit-taking institutions and insurance companies. Capacity-building measureshave been taken to develop oversight authorities, with previous IDA assistance.

4. The Government's strategy is to embark upon a second stage of financial sector reform, the firststage having been supported under the Financial Sector Adjustment Credit (FSAC) and SAC III. Tomaintain focus on the development of the financial sector, four issues would be targeted: (i) strengtheningthe regulation and supervision of deposit-taking institutions; (ii) restructuring and privatization of UgandaCommercial Bank Limited, (iii) improving monetary management and payment systems; and (iv)insurance and contractual savings reform and regulation.

5. Regulation, Supervision and Operations of Deposit-taking Institutions. The Government'sstrategy to strengthen the regulation and supervision of deposit-taking institutions was initiated with the1992 passage of a Bank of Uganda (BOU) Statute and a Financial Institutions Statute in 1993.Implementing regulations and guidelines were drafted and put into effect and staff of the BOU BankSupervision Department were trained. Off- and on-site supervision was strengthened through technicalassistance support under the FSAC, which closed on June 30, 1997. Finally, NPART expedited therecovery of loans under the UCB through various recovery mechanisms.

6. Although measures were taken to improve regulation and oversight, problems remain in thefinancial system. In spite of strengthening capacity at the Bank of Uganda (BOU), weaknesses remain inenforcement of prudential regulations. Further, the financial sector remains weak due to non-performingassets, inefficiencies in select institutions, non-compliance with lending concentration regulations, andsome under capitalization in deposit-taking institutions. Much remains to be done to strengthen thesupervision of commercial banks and other non-bank deposit-taking institutions. The number of bankexaminers (18) is still too small to adequately effect on-site examinations, of at least once per year,-foreach of the deposit-taking institutions. Existing staff need further training and new staff will need trainingas well. Further, the Financial Institutions Statute needs revision and amendments, particularly making anumber of prudential regulations (such as loan concentration and related party lending) more specific, aswell as to specify a greater array of BOU sanctions, short of intervention (such as the power to issue Cease


and Desist Orders). The Statute is vague with respect to the classifying and specific prudential regulationsfor non-bank deposit-taking institutions. Support is also needed for drafting additional implementingregulations and guidelines, on such issues as net foreign exchange exposure, loan classification andprovisioning. Finally, significant improvements are needed in enforcement of prudential regulations. Inparticular, institutions which have repeated non-compliance violations with reserve requirements or loanconcentration guidelines need to be sanctioned and, if necessary, intervened.

7. The GOU has issued a policy statement on the treatment of problem banks that addresses the needto secure the health of the financial system while limiting to the extent possible, the cost of such actions tothe Government budget or to BOU. The GOU and BOU are determined that future problems incommercial banks will be treated in a way that will: (i) provide for a healthy financial sector; (ii) takeimmediate action if and when necessary, when a problem is identified; and (iii) minimize the budgetarycosts of such future interventions. To reach these goals, the following policies either have been or will beadopted:

. A moratorium on the licensing of new banks (expect when special benefits are expected) has beenextended until 1999;

. The Government has submitted to Parliament an amendment to the Financial Institutions Statute toauthorize the BOU Governor, in consultation with the Minister of Finance, to update the minimumcapital requirements and GOU intends to reach, at a minimum, a doubling of the minimum capitalrequirement by end-1 999;

. BOU continues to strengthen its supervision and monitoring capacity. Special efforts will beundertaken to direct banks' external auditors to follow and to certify the audited banks' portfolioclassification, the adequacy of their provisioning for bad-debt, and the suspension of all interest inarrears; and

* A public declaration has been made stating that banks which do not meet BOU standards will beintervened and where a bank will be liquidated, the GOU and BOU commitment to depositors islimited to Ush. 3 million per depositor.

8. The Government's strategy has also included measures to instill and maintain credit disciplinethrough the active recovery of UCB loans through support of NPART. The Government has decided toextend the lifetime of NPART and extend its mandate to include loans from the Uganda DevelopmentBank (UDB). The Government places value on NPART's collection success, as it mitigates the budgetarycosts to Government, as well as providing a clear signal concerning the need to repay loans and meetfinancial and other obligations.

9. Monetary Management and Payment Systems. BOU monetary management has improvedwith the provision of assistance under the FSAC and from the IMF. First, to improve the BOU's creditmanagement policy, the terms by which commercial banks could use its discount window were revised in1995 and 1996. Banks can make use of a narrow automatic discount window, which accounts for only 5%of the commercial banks' reserve requirements. Banks' access to the window now has to be negotiatedwith the BOU and fully collateralized with eligible securities, preferably T-Bills.. Second, the local check-clearing was extended to eight centers outside Kampala. Inter-town clearing was introduced to sixcenters by the end of 1996. Finally, since 1994 the BOU has embarked on a comprehensive effort tostrengthen the management of its growing foreign exchange reserves which stands at about US$ 700million. This effort, structured as a three-phased program, has resulted in the introduction among otherthings, of a formal Reserves Management Policy Framework and the establishment of an external assetmanagement program.

Uganda -Financial Markets Assistance Project Page 4Project Appraisal Document -Main Text May 7, 1999

10. Insurance and Contractual Savings Reform and Regulation. Insurance and contractualsavings institutions which have the potential for savings mobilization and investment in the future of thecountry has attracted the attention of the Government. A high priority has been given to improving theenvironment conducive to the development of insurance and other contractual savings institutions. Non-life insurance is an important financial sector service, essential for economic growth in general and thedevelopment of the private sector in particular. A new Commissioner of Insurance has been hired and thenew insurance law has been enacted.

(iii) Sector Issues to be Addressed by the Project and Strategic Choices

a. Strengthening the Regulation, Supervision and Operations of Deposit-TakingInstitutions

11. Commercial Bank Supervision. Since 1993, the Government of Uganda has been implementingmeasures to strengthen the regulation and supervision of commercial banks, including the passage of anupdated Financial Institutions Statute and the training of bank examiners. A systematic training programof the Bank Supervision Department (BSD) bank examiners, consistent with a planned work program forthe period 1999-2002 and growth in the sophistication of off- and on-site examinations, will be developed.Hands-on training to BSD staff in, inter alia, loan evaluation and provisioning, evaluation of lendingconcentration, foreign exchange risk valuation, liquidity risk assessment, and contingent risk managementwill be provided.

12. Non-bank Deposit-taking Institutions. The Government and BOU began, in mid-1997, toundertake measures to strengthen the regulation and supervision of non-bank deposit-taking institutions.Legislation will be drafted to better define BOU roles and responsibilities in regulating non-bank deposit-taking institutions including merchant banks, building societies, leasing companies (which mobilizedeposits) and the Post Office Savings Bank. Subsequent to the passage of such legislation, hands-ontraining for examiners placed in the non-bank examination unit will be provided.

13. Assistance to the Non-Performing Assets Recovery Trust (NPART). Since 1995, the Governmenthas been engaged in an active recovery process of non-performing loans transferred from UCB forcollection by NPART. NPART has demonstrated strong performance amidst appreciable constraints andrecently had its tenure extended to mid-1999. As of December 31, 1998, NPART had collected aboutUsh. 15.3 billion (approximately US$11 million). The ratio of costs to loan collection has beenapproximately 13%. NPART will continue recovering UCB loans, as well as recovering loans underproposed legislation which would transfer all non-performing of loans UDB to NPART. It is expectedthat the process of loan recovery will enhance credit discipline, as well as expedite recovery of previouslynon-performing loans in these institutions.

14. Assistance to the Uganda Institute of Bankers (UIB). UIB's role in facilitating training programsfor staff of commercial banks has become increasingly important and reinforces prudential regulation andsupervision by the BOU. The training center, which will be capable of delivering courses on a cost-recovery basis, will be supported.

b. Restructuring and Privatizing Uganda Commercial Bank Limited

15. A previous attempt to privatize UCBL collapsed when the new owners engaged in extensivelending to related parties in relationship with the now-closed Greenland Bank. As a first step in theworkout of the bank, the project will finance a management contract with associated technical assistancesupport services to permit the restructuring of the bank's operations in preparation for re-privatization. Itis anticipated that there will be a need to make a significant number of staff reductions as part of this

Uganda - Financial Markets Assistance Project Page 5Project Appraisal Document -Main Text May 7, 1999

process and so the project has included a facility for financing those retrenchment costs. In addition,resources will be made available under the project to finance technical services and computers andassociated software specifically related to the new privatization process.

c. Improving Monetary Management and Payment Systems

16. Strengthening BOU Money Management. Significant measures have already been taken toimprove reserve and monetary management. Further measures, however, are needed to improve thetransmission mechanisms for monetary policy, including measures to support a secondary market forTreasury Bills. Support would be provided for operations and research advisors and short-term twinningarrangements will be sought. A reserves management component will enable BOU to enhance its internalreserves management operations at two key levels: (a) the introduction of effective investment systems tosupport the investment activity; and (b) the strengthening of internal portfolio management operations,skills and oversight policies

17. Strengthening Payment Systems. Identified improvements in payment systems could strengthenfinancial market efficiency and improve the effectiveness of monetary policy. A multi-stage program ofinvestments and training will be developed to reduce the processing time and the settlement risks forchecks in the Kampala and rural check-clearing systems. Further, measures are being developed toimprove other elements of the payments system including interbank clearance vehicles.

18. Strengthening Ministry of Finance Macro-economic Programming Capabilities. In an effort tofurther harmonize monetary and fiscal policy management, the MoF is strengthening the Macro PolicyDepartment which conducts financial programming, including fiscal and macro-economic projections.The Project would finance training and equipment to support the staff of the Macro-economic PolicyDepartment in the area of policy formulation, biased towards fiscal and monetary policy management. Inparticular, it will focus on short-term workshops, such as macro-economic policy, budgeting, financialprogramming and balance of payments. In addition, the Project would finance opportunities for officers toundertake study visits in countries where success in economic policy management has been achieved.

d. Developing Insurance and Contractual Savings Reform and Regulation

19. Assistance to the Commissioner of Insurance. The Government has taken measures to improvethe operation and regulation of the insurance sector through the recent passage of insurance legislation andthe establishment and staffing of an insurance commission. This Commission has been working toimprove the capital adequacy, solvency and efficiency of existing insurers, agents, brokers and adjusters inthe marketplace but has been limited by its own capacity and inadequate equipment. Continued support tostrengthen the capacity of the Commission, consistent with its institutional development plan, will beprovided.

20. Developing and Strengthening Pension Regulation. Pensions in Uganda have been dominated bymandatory contributions to the National Social Security Fund (NSSF), but also includes benefit programpension funds with the Civil Service and local Governments, and privately-managed pension funds basedon voluntary contributions. To date, oversight of the NSSF has been administered by the Ministry ofLabour. However, no formal oversight mechanism is in place for private, voluntary pension funds and nouniform minimum standards of performance, accountability and public recourse are applied to eitherpublic and private funds. A series of studies will be undertaken to review the status of the existing systemand the possibility of reforms to it. These include: (i) a financial and managerial review of the NSSF; (ii)a sector survey to determine the contribution requirements, benefit entitlements, age and incomedistribution of all pension fund members and beneficiaries, public and private, mandatory and voluntary;

Uganda - Financial MarketsAssistance Project Page 6Project Appraisal Document -Main Text May 7, 1999

(iii) a review of NSSF investment policy and procedures, including real estate investment; and (iv) thedrafting of legislation for a pensions oversight authority.

21. Assistance to Capital Markets Development. Although the Government has established a CapitalMarkets Authority (CMA) to oversee the Ugandan Stock Exchange, trading has been limited to a bondrecently issued by the East Africa Development Bank. Select public listing of positions in companiesbeing privatized is under consideration. This, as well as public offerings of privately held companies,could expand the volume of issues on the market necessary to reach a critical mass. The CMA willreceive support in developing regulations under the Capital Markets Act, as well as training in developingoversight procedures for the Authority.


C. Project Description Summary

(i) Project Components (See Annexes II and III for detailed descriptions and cost breakdowns)

Component Category Indicative % of Bank- % TotalCost Total financing Bank-(US$) (US$) financing

1.0 Strengthening the Regulation, Supervision and 3,200,000 22.3 2,680,000 20.6Operations of Deposit-taking Institutions:

1.1 Resolution & Restructuring of State Banks interim mgt.(a) UCB Resolution - The Project, under the PPF, 230,000 1.6 230,000 1.8provided support to UCB to finance amanagement contract of Louis Berger Associates,which began under FSAC. The handover to thenew ownership was completed in March 1998.

(b) Assistance to NPART. The Project, under a policy/credit 1,450,000 10.1 1,190,000 9.2PPF, financed an extension of the contract for disciplineconsultants operating NPART for the period toDecember 1997. The Project would finance anadditional extension from June to October 1999,when its legal constitution projected to end plusan additional year projected to be extended. Thiswill assist NPART to continue its process ofrecovering loans of UCB, as well as recoveringloans under proposed legislation which wouldtransfer select loans to NPART by UDB.

1.2 Assistance to the BOU Banking Supervision Institution 940,000 6.6 768,500 5.9Department (BSD) - Commercial Bank buildingSupervision. The Project would providesystematic training of BSD bank examiners,consistent with a planned work program for theperiod 1999-2002 and increased sophistication ofoff- and on-site examinations. Support would beprovided for: (i) in-house, hands-on training withthe support of external specialists; (ii) technicaladvisory services for resolution and work-out ofproblem banks, (iii) specialized courses in Africaand abroad for senior examiners; (iv) specialaudits to assist in improving on-site examinationquality (the first two audits were financed underthe PPF); and (v) support for the purchase oflaptop computers and other equipment andsoftware to improve the efficiency of on- and off-site examiners.


Component Category Indicative % of Bank- % ofCost (US$) Total financing Bank-

(US$) financing1.3 Assistance to the BOU Banking Supervision Policy 280,000 2.0 264,800 2.0

Department - Regulation of Non-bank Deposit-takingInstitutions. Under the PPF, the Project contracted anadvisor to assist in drafting amendments to theFinancial Institutions Statute to define the roles andresponsibilities of the BOU in regulating non-bankdeposit-taking institutions, including merchant banks,some large micro-finance institutions and the PostOffice Savings Bank. Subsequent to the passage ofsuch legislation, the Project would support aspecialized advisor to draft implementing regulationsand provide hands-on training to examiners placed inthe non-bank examination unit.

1.4 Assistance to the Uganda Institute of Bankers (UIB) Institution 298,000 2.1 227,000 1.7The Project would support upgrading a BOU facility buildingprovided to the UIB to establish a training facility, aswell as limiited funding for training courses to banks,on a cost-recovery basis.

2.0 Restructuring and privatization of Uganda 6,100,000 42.5 5,500,000 42.3Commercial Bank Limited

2.1 Assistance to UCBL for a management contract, due Institution 3,600,000 25.1 3,000,000 23.1diligence, a transactions advisor and other buildingrestructuring and privatization related services.

2.2 Severance Payments for redundant staff based on an Institution 2,500,000 17.4 2,500,000 19.2approved retrenchment policy. building

3.0 Improving Mon etary Management and Payment 1,775,000 12.4 1,576,000 12.1Systems:

3.1 Strengthening Macro-economic Programming in Institution 277,900 1.9 222,000 1.7MoF. The Project would provide financing for buildingtargeted training including: (i) short courses biasedtowards fiscal programmning and mechanisms tostrengthen employment generation andcompetitiveness; (ii) some study visits; and (c) somecomputer equipment.

3.2 Strengthening BOU Monetary Management (BOU Policy/ 1,344,800 9.4 1,304,000 10.0Research and Development Dept). The Project would Institutionsupport: (i) short-term twinning arrangements to buildingenable selected BOU Research Department staff towork with other central banks which have had positiveexperiences in confronting monetary policyconstraints similar to those found in Uganda; (ii)financing of equipment and extemal consultants toassist the BOU in developing suitable controls andoversight procedures for externally-managedportfolios; (iii) development of an in-house trainingprogram for monetary and foreign exchangemanagement and reducing market segmentation; and(iv) support to complete Integrated AccountingSystem. l


3|3 Strengthening Payment Systems. A multi-stage Institution 50,000 0.3 50,000 0.4prograim to strengthen payment systems has been buildingdesigned with support under the PPF and furthersupport for such program will be provided under theProject.

4.0 Developing Insurance and Contractual Savings 1,240,000 8.6 1,214,400 9.3Reform and Regulations:

4.1 Assistance to the Commissioner of Insurance. The Policy/ 370,000 2.6 344,000 2.6Project will fmance equipment and training to Institutionstrengthen the capacity of the Commission to effect buildingoversight and supervision of the insurance sector. Itwould also support the drafting of legislation andguidelines so as to effect a more preciseimplementation of the Insurance Law.

4.2 Developing Pension Systems and Oversight. The Policy/ 710,000 4.9 710,000 5.5Project would fmance a series of studies for InstitutionGovernment and the population at large to adequately buildingreview the status of the existing system, review policyoptions for changing or replacing existing institutionsand draft legislation for oversight, and developcapacity to effect such oversight. In particular, theProject would finance: (i) a financial audit of theNational Social Security Fund (NSSF); (ii) a sectorsurvey to determine the contribution requirements,benefit entitlements, age and income distribution of allpension fund members, public and private, mandatoryand voluntary; (iii) a review of real estate valuationsfor NSSF and the principal private pension funds witha view towards reviewing the impact of revisedinvestment guidelines; and (iv) the drafting oflegislation for an oversight authority for the pensionssector.

4.3 Assistance to Capital Markets Development. Policy/ 160,000 1.1 160,000 1.2Assistance would be provided under the Project to the InstitutionCMA in developing: (i) mechanisms for an investor buildingcompensation fund; (ii) accounting and fmancialstandards; and (iii) mechanisms for oversight ofcollective investment schemes. The Project wouldalso provide assistance for select secondments andattachments to broker/dealer institutions. Finally, theProject would provide some finacing for publiceducation and promotion campaigns.

5.0 Project Implementation:The Project will finance a Project Manager assigned to Project 680,000 4.7 680,000 5.2the BOU to provide administrative support in the manage-

____ implementation and coordination of the Project. ment6.0 Unallocated: 1,350,000 9.4 1,350,000 10.4

This includes two parts: (i) a reserve fund ofapproxinately US$1.1 million to finance additionaldue diligence, management contracts, audits andreceiverships as the need arises; and (ii) pricecontingencies.TOTAL PROJECT COST 14,350,000 100.0 13,000,000 100.0


(ii) Key Policy and Institutional Reforms to be Sought

22. Although no formal conditionally would be included in the Project, several policy reforms willbe critical for the process of financial sector reform proposed under the Project. These are:

* Drafting and enactment of amendments to the Financial Institutions Statute;* Drafting and issuance of implementing prudential regulations for financial institutions including

higher minimum capital requirements;* Drafting and enactment of amendments to the NPART Law enabling the addition of portfolios of

UDB to be recovered by NPART;. Drafting and enactment of legislation providing for operative guidelines and oversight of the

pension industry, including the NSSF; and+ Drafting and enactrnent of implementing regulations under the Capital Markets Statute.

(iii) Benefits and Target Population

23. The Project is expected to strengthen sector regulatory institutions thus reducing the risks todepositors' funds. Reinforcing the financial infrastructure and increasing competition will help improvedomestic resource mobilization and make financial intermediation more effective. By supportingNPART, a clear message will be sent to the population that obligations of financial contracts should berespected by all persons regardless of their economical or political standing. This should translate intolower financial intermediation costs which would ultimately be passed on to the private investor. Bysupporting the efforts of the Uganda Institute of Bankers (on a cost sharing/recovery basis), the standardsof professional bankers are expected to increase. The NSSF affects the population as a whole through: (i)its potential financial impact on the economy as its funds can be transferred into viable investments; and(ii) its impact on the labor market because of mandatory contributions.

(iv) Institutional and Implementation Arrangements

Implementation Period: Four years, September 1999 to September 2003Executing Agencies: BOU, MoF, UIB, Commissioner of Insurance and CMA

24. Project Execution and Coordination. Overall responsibility for the implementation andcoordination of the Project will be entrusted to an already existing (para. 41) Project Implementation Unit(PIU), under the purview of the BOU. The PIU will have the responsibility for ensuring policyconsistency across beneficiaries of the Project, coordinating implementation and ensuring adequatefinancial management (procurement, disbursement, accounting and audit) and general administration(monitoring the implementation plan and reporting). Each project component would be implemented by adesignated agency and responsible individual accountable for the execution of project activities and timelydelivery of outputs as defined and agreed under the Project Implementation Plan (PIP) which will befinalized and adopted prior to credit effectiveness.

25. The PIU would provide procurement support to each of the implementing agencies and liaiseclosely with the designated counterpart of each. The Project Manager would: (i) prepare and update theprocurement plan for the Project; (ii) monitor procurement; and (iii) assist the implementing agencies inthe preparation of bidding documents and advertisements for goods and works contracts, requests forproposals for consulting assignments, bid opening and evaluation. The Project Manager would alsoadvise the implementing agencies on procedural matters, and provide support as needed for theprocurement of goods and services, disbursement and other financial services.


26. Consultants, contractors and suppliers would be selected in accordance with Bank guidelines, onthe basis of proven experience. In line with the Bank's Africa Regional guidelines local consultants willbe used wherever possible. Where foreign consultants are used for lack of requisite local skills, specialattention will be given to promoting and strengthening local capacity through skills transfer. Eachbeneficiary would, therefore, appoint counterparts who would work closely with the advisor and makeadequate preparations before the arrival of the each advisor to ensure the effective utilization of his/herservices.

27. The GOU would open and maintain a Project account in Ugandan Shillings and a Special Accountin US dollars to be held in a commercial bank on terms and conditions satisfactory to IDA. It would makean initial deposit into the shilling account in an amount equivalent to US$ 100,000 to financeGovernment's contribution to the Project. Furthermore, it would deposit into the shilling account on amonthly basis, any amounts which will be required to the Project Account to the amount of US$200,000equivalent or such greater amount as may be required to meet expenditures for the Project until the end ofthe Project.

28. Accounting, Financial Reporting and Auditing Arrangements. Responsibility for accountsmanagement would be assigned to the Project Manager, under the auspices of the BOU. The ProjectManager would maintain accounting records (project activities, resources, expenditures and net position)in accordance with international accounting standards and practices. Financial management Guidelinesand a computerized accounting and assets management system has been prepared., maintained and is inuse. A local private accounting firm (or individual accountant), acceptable to IDA, would provide supportto the Project Manager on an "as needed" basis.

29. The Project Manager, with each implementing agency, would update procurement schedules andprovide reports on related activities to ensure compliance with IDA requirements. Agreement has beenreached with the Borrower on the standard processing procedures for procurement of works (renovations),goods and consultant services. During negotiations, agreement will be reached on the following points:

* All project accounts, the Special Account, and Statements of Expenditure (SOE) would be auditedat the end of each fiscal year (June) by an independent external auditor acceptable to IDA,consistent with International Auditing standards (IAS) and Generally Accepted AccountingPrinciples (GAAP);

* to provide IDA with an audit report for the fiscal year in question, certified by the auditors, no laterthan six months after the end of each fiscal year;

* to provide IDA with any other information regarding the Project's accotnts and audit it mayrequest from time to time; and

* IDA would be provided with the external audit of BOU and NPART.

30. Monitoring and Evaluation Arrangements. Quarterly progress reports, prepared on the basis ofthe project implementation plan (PIP) and the logical framework (Annex 1) would be provided by eachbeneficiary agency to IDA, through the PIU. Semi-annual Project reviews would be conducted jointly byIDA and GOU, with each implementing agency to review the performance of each component, includingthe status of procurement and disbursement. A joint IDA-GOU mid-term review would monitor theachievement of project objectives, overall project execution, key project activities, project implementationschedule, and supervision plans. It will also identify obstacles to the achievement of project objectivesand recommend remedial measures. Following Project completion, scheduled for December 2002,anImplementation Completion Report (ICR) would be prepared jointly by IDA and GOU.


D: Project Rationale

(i) Project Alternatives Considered and Reasons for Rejection

31. Capacity building operations are, by and large, technical assistance and training operations. Assuch, project alternatives are usually reflected in the scope of the project and the sequencing ofimplementation. The proposed Project is no exception. In deciding on the scope and the content of theProject, the Task Team has been guided by a few main criteria, namely the need to address high prioritycapacity building requirements, synergies between Project components, the contribution that IDA canmake in terms of substance and/or filling a financing gap, the role that Bank assistance plays vis-a-visother donors and whether Bank assistance completes rather than substitutes for other donor funding.

32. The initial scope of the proposed Project was focused on a hybrid operation of adjustment lendingwith technical assistance support. The Government of Uganda, after careful consideration, felt that itshould further develop reforms initiated under the FSAC and SAC III. In addition, after a detailed review,it was noted that SAC III did not have corresponding technical assistance which would enable a smoothand successful implementation. Most important, in order to ensure clear focus, a number of proposedinterventions were eliminated from the scope of the Project.

(ii) Major related projects financed by IDA and/or other development agencies

Sector issue Project Latest Form 590 Ratings(completed, ongoing and planned) IP DO

Bank-financedFinancial Sector Adjustment Credit (FSAC) S SStructural Adjustment Credit (SAC III) S SEnterprise Development Project S SEconomic and Financial Management Project S SInstitutional Capacity Building Project S SPrivate Sector Competitiveness Project S S

Other development agenciesUSAID Credit Information SystemGTZ Capital Markets Authority, Uganda Stock

Exchange, Payments Systems (BOU) and Microfinance Regulation

(iii) Lessons Learned and Reflected in Proposed Project Design

33. Institutional capacity building often takes more time to develop than originally estimated andtherefore more time should be allowed for consensus-building and learning from mistakes. In particularthe Project should have:

* Simplicity of design and quick response. The design of Project components was kept as simple aspossible and will be based on well targeted objectives; well defined actions with timetables forimplementation; and clear evaluation criteria with monitorable indicators. The scope and design ofthe program should be realistic and take into account the existing local conditions, includingavailability of skills. The design should allow for some flexibility to cater for the changingcondition in the country during implementation.

* Compatibility with both the political realities and institutional absorptive capacity of the

Uganda -Financial Markets Assistance Project Page 13Project Appraisal Document -Main Text May 7, 1999

Government agencies that are beneficiaries of the Project and a realistic assessment of theircapacity to implement the Project. Institution and capacity building is a time consuming task.Sufficient time, therefore, has been allowed for consensus-building and leaming from mistakes.Rather than create new structures, the Project will rely on strengthening existing structures andagencies that have a justified mission and work program.

Stakeholder involvement in the design and execution of the project; and local expertise.Experience has shown that local ownership of reform programs leads to more effective programsand ownership usually increases if there is local participation in program design. Whereverpossible, the procurement of goods and services, including Consultants, will encourage localparticipation.

(iv) Indications of Borrower Commitment and Ownership

34. The Government has requested continued IDA support of its ongoing effort;s in financial sectordevelopment. The Project would build upon those efforts already made by the FSAC which closed inJune 1997 and will support those reforms which will be undertaken under the SAC III of May 1997. TheGovernment has maintained a stable macro-economic framework and has adopted the Bank of UgandaStatute (1993), which established the Central Bank as the authority to formulate and implement monetarypolicy and the Financial Institutions Statute (1993) which has provided the basis for prudential bankingsupervision. Two commercial banks have been restructured and recapitalized and NE'ART has been giventhe authority through special legislation to collect on non-performing loans from UJCB. In September1998, the BOU intervened and closed three banks, and established clear prudential targets and monitoringfor a fourth institution found to have notable prudential deficiencies. Subsequently., two banks were re-opened and in April 1999 the fourth bank was closed down.

(v) Value Added of Bank Support in this Project

35. IDA offers both financial sector expertise and has played an important role in Uganda's financialmarket reform measures since 1993. IDA has already invested significant resources in support ofGovernment's efforts. For the reforms to be sustainable, institution building must be a systematic andcontinuing process.

E. Issues Requiring Special Attention

36. Issues warranting special attention are:

* enforcement of prudential regulations of financial institutions and sanctioning of non-compliance;* restructuring and workout of problem banks,* careful monitoring of several banks;* raising minimum capital requirements for commercial banks;* enforcement of prudential regulations for insurance companies; and* remedying noted financial management deficiencies in the NSSF and developing a broader strategy

for social security and pension reforms.

(i) Economic Assessment

37. It is virtually impossible to quantify the expected economic returns to a technical assistanceoperation of this nature. However, given the noted critical importance of efficient financial intermediationto growth and very low level of domestic savings in Uganda, it is expected that the economic benefits of


potentially increasing the level of savings and the efficiency of transforming such savings to productiveinvestment will far outweigh the financial costs.

38. Project costs are expected to be: (i) direct costs of US$ 13.0 million to be repaid to IDA (plusinterest over the life of the loan); (ii) direct costs by Government of US$ 1.35 million; and (iii) indirectcosts associated with further financial sector restructuring.

39. Project benefits are expected to be: (i) increased savings mobilized short-term through banks andnon-bank deposit-taking institutions and mobilized medium- and long-term through contractual savingsinstitutions; (ii) increased efficiency of intermediation in the banking sector as measured by reducedoperational costs and spreads; and (iii) increased solvency and efficiency of contractual savingsinstitutions including pension funds and insurance companies.

(ii) Technical Assessment

40. The Project is technically sound and consistent with the CAS agenda of developing a regulatedand diversified financial sector. The Project has been designed in such a way as to balance breadth andfocus. Support to multiple units has been grouped into the three project components. The followingfactors were taken into consideration in designing the specific technical interventions: (i) capacitybuilding should only exist in the context of a well-considered and articulated business plan, such that thesupport reinforces the objectives of capacity development of the individual unit. Further, monitoringindicators for the Project are consistent with the indicators of the units' customized development program;(ii) proposed training has tried to leverage the use of foreign experts coming to Uganda; (iii) overseastraining has been largely limited to secondments and attachments; and (iv) the technical specifications ofequipment to be procured seeks to provide flexibility for later upgrading so as to increase the period ofequipment use.

(iii) Institutional Assessment

41. Executing Agencies: The BOU will have overall responsibility for implementing the Project.The Project will be executed by a PIU located in the BOU, staffed with qualified personnel. Eachcounterpart agency will also be expected to have strong ownership for its program and have a designatedindividual responsible. Beneficiaries include: MoF, BOU, UCBL, Insurance Commission, CMA andUIB.

42. Project Management: The PIU will include staff who implemented the previous FSAC in closecooperation with IDA and are familiar with IDA procedures. This capacity will be reviewed throughoutthe tenure of the Project.

(iv) Financial Management Assessment

43. Overall responsibility for the financial management lies with the Project Implementation Unit inthe BOU. The framework within which the same responsibilities were discharged under the FSAC is stillin place and a review of its financial covenants indicate that they have been respected. The FIMAP sharescertain implementational aspects with FSAC and therefore the framework is still functional. Theaccounting system is computer based and runs on a DOS software called Money Program.

44. Based on the assessment of the above financial system by the Financial Management Specialist,the system and accompanying staff are capable of producing timely and accurate information required inthe production of financial reports to satisfy the requirements under BP 10.02. An accountant will be

Uganda -Financial Markets Assistance Project Page 15Project Appraisal Document-Main Text May 7, 1999

hired on an "as needed" basis and an auditor will be hired prior to Project effectiveness.

45. Within a year, following effectiveness, further assessment will carried out to detennine whetherthe Project could comply with the requirements for LACI type disbursements and reporting.

(v) Social Assessment

46. Although this Project does not entail interventions targeted at specific social groups, it can have adisproportionate impact on low income groups as follows: (i) small depositors in the- banking system canbe disproportionately at risk due to institutional insolvency or fraud because they are unable, underexisting conditions, to adequately discern the risk of the banks in which they have deposits. The hope isthat through improved supervision, small depositors can exert better choices in savings decisions and, inaddition, efficiency gains can result in improved service and coverage. Indeed, periodic illiquidity,particularly in remote branches has often left depositors without access to their fun,ds to date; (ii) NSSFreforms and oversight of private pension funds will have significant implications for the ability of lowincome retirees to maintain an income in retirement in a reasonable proportion to that during theirworklife; and (iii) poor regulation and supervision of insurance companies has, to date, resulted in lowincome groups disproportionately vulnerable to risks because they are unable to get adequate coverage,the company defrauds the customer of benefits entitled to, or inefficiency results in added costs or reducedcoverage or both.

(vi) Environmental Assessment

a. Environmental issues: noneb. Environmental category: [ A [] B [X1 Cc. JustificationlRationale for category rating: This is a technical assistance project for the financial

sector which will not have any direct or indirect environmental impact.d. Status of any other environmental studies: not applicablee. Resettlement: There are no resettlement issues from this project

(vii) Participatory Approach

a. Primary beneficiaries and other affected groups: BOU, UCBL, Commissioner of Insurance,CMA, UIB, MoF, financial institutions, insurance companies, brokerage houses, pension fundsand private businesses.

47. The following are primary beneficiaries receiving direct support from the Project and haveactively participating in the development of work programs, including project objectives, assistancerequirements, budgets, timetables and performance indicators.

. Bank of Uganda will be a primary beneficiary. Support will be received to strengthen theregulation and supervision of deposit-taking institutions.

* Uganda Commercial Bank Limited will benefit from comprehensive support for restructuringfollowing the collapse of the previous privatization effort, and for a re-privatization of the bank.

* The Commissioner of Insurance will receive direct support to improve the regulation andsupervision of the insurance sector.

. Capital Markets Authority will receive assistance to develop regulations under the CapitaMarkets Act, as well as training in developing oversight procedures for the Authority.

* UIB will be provided a refurbished training center (partially financed by the credit) by BOUwhich will enable them to have a focal point for the distribution financial sector information


and training programs.MoF has an overall interest to the development of financial sector as it interacts with fiscalmanagement (NPART collections, payments systems, etc.).

48. The following beneficiaries are indirectly affected through the actions of those institutions abovethrough regulation and supervision: commercial banks, other deposit-taking institutions, insurancecompanies, brokerage houses and private businesses. They were consulted to ascertain their ideas on therequirements of the sector for development.

b. Other key stakeholders: Most bilateral donors were consulted during project preparation,including the private sector/finance development donors group. USAID was consulted withrespect to its proposed funding of a credit information system. Moreover, GTZ was consultedwith respect to the funding of an expatriate who will work with the Uganda Stock Exchange.

F. Sustainability and Risks

(i) Sustainability

49. This Project supports a process that is aimed at achieving a sustainable result, namely a prudentand efficient financial system. Such sustainability will depend ultimately on the ability of regulators tooversee prudent risk-taking and institutionalize such a process, as well as sustainable macro-economicpolicies which can shield Uganda from severe economic turbulence.

(ii) Critical Risks (reflecting assumptions in the fourth column of Annex 1)

Risk Risk Rating Risk Minimization Measure

BOU strengthens supervisory capacity Moderate IMF PFP benchmarks and Project monitoringbut undertakes limited enforcement of indicators link new commitments to enforcement ofprudential regulations. regulations.

GOU does not remain committed to Maintain constructual dialogue. Bank advice onUCBL systematic resolution of problem bank continues to- restructing Low be implemented ak.a. closure of Greenland Bank,- privatization Moderate April 1, 1999.

High staff turmover in Regulatory Substantial BOU management encouraged not to rotate staff andAgencies. maintain competitive salanies.

Budget is insufficient to purchase Low Counterpart fuids will be deposited in advance.necessary equipment Annual disbursements are dependent upon the

submission of budgets and procurement plans.

Legislation for extension of NPART and Moderate Legislation will be going to Parliament this year.transferring UDB loans is not adopted

Overall Risk Rating Moderate

(iii) Possible Controversial Aspects

50. Two possible sources of controversy have been identified. The first is that rigorous application ofprudential regulations could adversely impact a number of financial institutions, including some with


vested interests. The second is that remedying deficiencies in the NSSF could lead to further publicdisappointment in light of exposed weaknesses. To address the first issue, the Project dialog has focusedon the tremendous economic costs and risks to average Ugandans of not adequately safeguardingdepositors' funds. The second issue will be addressed by ensuring that any social security and pensionreform program that will be considered will be selected on the basis of extensive assessment andwidespread public consultation.

G. Main Loan Conditions

Effectiveness Conditions

* Completion of the testing and installation of a Bank of Uganda Integrated Accounting System(IAS);

* Submission of a list of designated counterpart staff for the PIU, BOU, Insurance Commission,MoF, NPART, UIB and CMA;

* GOU will deposit the first tranche (September 1999 - March 2000) of the counterpart fundsequivalent to US$ 100,000;

+ Government formally adopts the Project Inplementation Plan;+ GOU will hire an auditor satisfactory to IDA.

H. Readiness for Implementation

51. GOU will have prepared the procurement documents for the first year's activities prior tonegotiations. In addition, GOU has prepared and will adopt the Project Implementation Plan as a Boardcondition.

1. Compliance with Bank Policies

52. This Project complies with all applicable Bank policies.

Task Team Leader: Mark Dorfinan

Acting Sector Manager: Paul Murgatroyd

Country Director: James W. Adams

Uganda - Financial Markets Assistance Project Page 18Project Appraisal Document - Annex I: Project Design Summary May 7, 1999

Annex I: Project Design Summary

Narrative Summary I Performance Indicators Monitoring & Assumptions/Supervision Risks

L. CAS Objectives:

Strengthen bank and NBFI * Privatization of UCB or Via SAC III and 0 Government remainssupervision and improve implementation of back-up FvIMAP committed to economic andmanagement (include. some plan; supervision fnancial reforms; andprivatization) of provident and + Collect at least Ush. 25 billion missions. 0 Continued political stabilitypension funds and the insurance of non-performing loans of facilitates legal enforcement.industry UCB; and

* Banks are supervised (on andoff-site) on a regular basis.

IL Project Development Objectives: Impact/Outcomes

Improve the soundness and + Off-site reporting and on-site * Bank of o Sound Government policiesperformance of the financial inspections provide evidence Uganda Off- continue;system of improved safety and site reporting 0 Macroeconomic situation

soundness of financial summaries; remains stable;institutions; and 0 BOU acts decisively to

. Bank of enforce prudential regulations* Sufficient financial institution Uganda on- and to intervene

profitability to result in site appropriately in problempositive real rates of return on examination institutions;equity after tax during the reports. 0 Deposit-taking institutionsimplementation period and take measures to improveincreases in rates of return fmnancial management safetyfrom 1999 to 2003. and soundness;

0 Insurance companies takemeasures to improve|fnancial management safetyand soundness;

0 Successful implementation ofother projects which eitherdirectly or indirectly impactthe financial sector (SAC IIIand IMF ESAF Programme).

Uganda - Financial Markets Assistance Project Page 19ProjectAppraisal Document -Annex I: Project Design Summary May 7, 1999

Annex I: Project Design Summary (Cont.)Monitoring &

I m. Project Outputs Measurements/Indicators Supervision Assumptions/_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ risks

1.0 Strengthening the Regulation, o (IOU remainsSupervision and Operations of committed to fmancialDeposit-taking Institutions: sector reform

1.2 BOU will have improved the * Evidence which suggests that all * BOU reports. o Staff turnover remainsinstitutional capacity of the incidents of lack of compliance low and budget remainsDepartment of Banking with prudential regulations sufficient to purchaseSupervision - commercial banks identified in on-site necessary equipment.

examinations are noted,remedial actions prescribed,actions are verified within 90days and, as necessary sanctionsare imposed by BOU.

l Institutions identified as * Supervision o ]3anks adhere tounsatisfactory according to mission reports; recommendations madeBOU off-site criteria will have and by Consultant.follow-up actions taken within * BOU supervision o BOU has skills to30 days. reports. implement effectively.

1.3 BOU will have improved the + Separate NBFI regulatory and * BOU Boardinstitutional capacity of the supervision unit is created by Resolution;Department of Banking June 1998 (done). * OrganizationalSupervision - NBFI chart;-

* Supervisionmission reports.

+ Amendments to the Financial * Copy of enactedInstitutions Statute defining the Legislationroles and responsibilities of theBOU in regulating non-bankdeposit-taking institutionsincluding fnance companies,merchant banks, the Post OfficeSavings Bank and BuildingSocieties have been drafted,enacted, assented to andimplemented by Sept. 1999.

* Implementation of regulations to * Copy of issuedprovide for the monitoring of Regulationsselect non-deposit takinginstitutions by July 2000.

* 60% of NBFIs will adhere to the * BOU reportsprudent regulations by Dec.2000.


Annex I: Project Design Summary (Cont.)Monitoring &

m. Project Outputs Measurements/Indicators Supervision Assumptions/risks

1.4 NPART will have collected * NPART will collect Ush 25 - Financial reportsnon-performing loans. billion as per conditions in

SAC III floating tranche.

1.5 Uganda Institute of Bankers * Institute has successfully * Training evaluationwill have been operational graduated 20 certified bankers * Financial statementswith a regular training in 1999 and 30 in 2000.program (done).

* Institute's profitability ratio(operating revenue/expenses)has become positive, at thesame time reducing the ratio ofsubsidy provided by thecommercial banks. ByMarch,2000

2. 0 Restructuring and Privatizing o Clean transaction;UCBL o Buyers meet

prudential2.1 UCBL will have been Positive and growing ROA Financial Statements/ requirements,

restructured and privatized BOU supervision including "Fit andSigned sales agreement and reports. Proper Test"'.successful transfer of ownership o Receipt of fullby March, 2000. amount of purchase

price; ando Installation of new

management, asapproved by BOU.

3.0 The Monetary Managementand Payment Systems will bestrengthened

3.1 Research & Development * Interest rate transmission. * BOU documentation o PoliticalDept. will have been 50% increase in secondary * Discussions with interferencestrengthened market trading in T-bills by BOU and MoF prevents adequate

Sept. 2000. monetary policy

3.2 Payments System will have * New payments system agreed * Discussions withbeen made more efficient by December 1999. fnancial institutions

New reserves management planimplemented by June 2000.

4.0 Development of Insurance * All insurance companies willand Contractual Savings meet minimal capitalReform and Regulations guidelines by December 1999

or be delicensed from writingnew business (done).

4.1 Insurance Regulation hasbeen strengthened

* Solvency margin guidelines * Issuance of o Noncompliancewill have been designed and guidelines; will be sanctionedimplemented by December, * Submission of2000. returns;

* Application of off-site

Uganda - Financial Markets Assistance Project Page 21Project Appraisal Document -Annex I: Project Design Summary May 7, 1999

and select on-siteevaluations; and

* Issuance of notices toinstitutions found inviolation.

* Financial reporting and - Issuance ofdisclosure guidelines will have guidelines;been designed and * Submission ofimplemented. retums;

* Application of off-siteand select on-siteevaluations; and

* Issuance of firststatistical bulletin.

4.2 Pension System histitutions * NSSF reform process: (a) in- * Final reportswill have been reformed, depth needs assessment will beremodeled system designed, completed by February 1999;and oversight established. (b) recommendations will be

discussed by Government byApril 1999; (c) action plan willbe developed by June 1999;and (d) work will begin byDecember 2000.

* NSSF will submit to BOU (or - Investment PlanMoF) an acceptable investmentpolicy and procedures by June1999.

4.3 Capital Markets Authority * Oversight procedures will be * Adopted legislation ¢ Securities arewil be operational in place by June 1999. available in the

marketplace to trade;and

I CMA has sufficientbudget to operate

Uganda - Financial Markets Assistance Project Page 22Project Appraisal Document-Annex I: Project Design Summary May 7, 1999

Annex I: Project Design Summary (Cont.)

IV. Project Components Inputs/ Means of Risks/Assumptions

Resources Verification

1.0 Strengthening Regulation, Supervision 3,200,000and Operations of Deposit-takingInstitutions

1. I Consultant services for UCB (PPF) 230,000 * Services 0 Procurement guidelines are metCompleted.

1.2 Consultant services for NPART 1,450,000 * Consultant o Don't collect loans and/or sell propertiescontracts -

reports,Supervisionreports

1.3 Consultant services for special audits 500,000 o BOU doesn't go out on audits0 BOU doesn't take action

1.4 Assistance to BSD 0 Turnover rate for trained staff is maintained ata minimum level

0 BOU enforces the regulations1.4.1 Training: Extemal 100,000 * Terms of o Training is appropriately designed and it can

Reference, be appliedCourseMaterials;Evaluations

1.4.2 Training: In-house 330,000 Terms of o Correct persons are trainedReference,CourseMaterials;Evaluations

1.4.2 Equipment 10,000 * Equipment O Equipment is fully utilized and properlyspecifications, maintainedprice quotations,receipts,physicalverification.

1.5 Assistance to NBFI Dept 0 Laws are properly drafted and on time

Uganda - Financial Markets Assistance Project Page 23Project Appraisal Document -Annex I: ProjectDesign Summary May 7, 1999


|IV. Project Components Inputs/ Means of RiskslAss umptionsResources Verification

1.5.1 Consultant services 260,000 * Consultantcontracts -reports,Supervisionreports

1.5.2 Equipment 20,000 * Equipmentspecifications,price quotations,receipts,physicalverification.

1.6 Equipment & Resources for UIB 300,000 * Equipmentspecifications,price quotations,receipts,physicalverification.

2. 0 Restructuring and Privatization of 6,100,000UCBL

2.1 Management Contract 1,920,000 Award of contract Government is willing to restructive and

l 2.2 Due Diligence 480,000 Compliance with privatize expeditiously.2.2l Due Diligence 480,000 prudential2.3 Transactions Advisor 1,200,000 regulations

2.4 Severance Payments 2,500,000 investor l

memorandum.Adoption andimplementation ofretrenchmentstrategy

3.0 Improving Monetary Mgmt & Payment 1,780,000Systems

3.1 Strengthening BOU monetarymanagement3.1.1 consultants 900,000 * Consultant

contracts -reports,Supervisionreports

3.1.2 training: attachments 100,000 * Terms ofReference,CourseMaterials;Evaluations

3.1.3 training: in-house 50,000 * Terms ofReference,CourseMaterials,Evaluations

3.1.4 Equipment and software 400,000 * Equipmentspecifications,price quotations,receipts,


physicalverification.

3.2 Strengthening MoF Macro-economicPolicy Dept

3.2.1 Training: study visits abroad 240,000 * Terms ofReference,CourseMaterials,Evaluations

3.2.2 Equipment 40,000 * Equipmentspecifications,price quotations,receipts,physicalverification

3.3 Payment Systems

3.3.1 Consultant* 50,000 * Consultant * BOUwillactonrecommendationscontracts - * Coordination with other donorsreports,Supervision

________________________________ ________reports _____________________

Uganda - Financial Markets Assistance Project Page 25Project Appraisal Document -Annex I: Project Design Summary May 7, 1999


|IV. Project ColoebInputs/ Means Of Risks/AssunmptionsResources Verification

3.3 Payment Systems

3.3.1 Consultant* 50,000 * Consultant O BOU will act on recommendationscontracts - reports, 0 Coordination with other donorsSupervisionreports

4.0 Developing Contractual Saving Reform& 1,240,000Regulation

4.1 Uganda Insurance Commission4.1.1 Goods 50,000 Equipment 0 Enforcement of prudential regulations according to

specifications, price strategyquotations, receipts,physical verification.

4.1.2 Training & Workshops 120,000 Terms of Reference,Course Materials,Evaluations

4.1.3 Consultants 200,000 Consultant contracts- reports,Supervision reports

4.2 CMA4.2.1 Consultants for Develop of rules, reg. & 70,000 Consultant contracts

olicies - reports,Supervision reports

4.2.2 Staff training & development 32,000 Terms of Reference,Course Materials,Evaluations

4.2.3 Workshops 58,000 Tenms of Reference,Course Materials

.3 NSSF4.3.1 Consultants for audits and 710,000 Consultant contractsstudies/legislation, etc. - reports,

Supervision reports

5.0 Project Management 680,000

5.1 Project Manager* 580,000 Quarterly reports * Manager is trained5.2. Asst Coordinator* 18,000 * GOU Administrative capacity will be sufficient to

undertake coordination and implementation5.3 Audits & Administration 82,000 Audit reports * Accounting system is n place and correctly

maintained.

6.0 Unaltocated 1,350,000 l

TOTAL 14,350,000 I

Uganda - Financial Markets Assistance Project Page 26Project Appraisal Document -Annex LI: Project Description May 7, 1999

Annex II: Project Description

Overview

1. The Project's development objective is to help Government improve the soundness, performanceand competitiveness of the financial system. More specifically, the Project would seek to support asecond stage of financial sector reform, the first stage having been supported under the FSAC and theStructural Adjustment Credit (SAC III). Such a stage entails the further elaboration of regulation ofdeposit-taking institutions, as well as strengthening oversight of insurance and contractual savingsinstitutions. This is then aimed at supporting broad-based private sector growth. To maintain focus onthe development of the financial sector, three issues would be targeted: (i) strengthening the regulation,supervision and operations of deposit-taking institutions; (ii) improving monetary management andpayment systems; and (iii) developing insurance and contractual savings institutions and their oversight.

Component 1 - Strengthening the Regulation, Supervision and Operations of Deposit-takingInstitutions: US$ 3.2 Million

2. UCB Resolution. The Project has, through a PPF, financed the management contract of LouisBerger Associates which operated UCB until its handover to the first private owners was completed inMarch 1998.

3. Commercial Bank Supervision. Since 1993, the Government of Uganda has been implementingmeasures to strengthen the regulation and supervision of commercial banks, including the passage of anupdated Financial Institutions Statute and the training of bank examiners. A systematic training programof BSD bank examiners, consistent with a planned work program for the period 1999-2002 and growth inthe sophistication of off- and on-site examinations has been developed and will be implemented under theProject. In particular, the Project would finance: (i) an advisor, to work with BSD staff on the work-outand resolution of problem banks in the financial sector; (ii) focused extemal training and twinningarrangements working with regulatory agencies in other countries; (iii) specialized bank examinationsconducted by extemal accounting finns, to support BOU in its supervision efforts, by conducting acustomized analysis of a few targeted banks; and (iv) the purchase of laptop computers, as well as otherselected equipment, to improve the efficiency of on-site examiners.

4. Non-bank Deposit-taking Institutions. The Government and BOU began, in mid-1997, toundertake measures to strengthen the regulation and supervision of non-bank deposit-taking institutions.Measures, initiated under the PPF have and will continue to support, an advisor to assist in the drafting oflegislation to define the roles and responsibilities of the BOU in regulating non-bank deposit-takinginstitutions, including merchant banks, some large micro-finance institutions and the Post Office SavingsBank. Subsequent to the passage of such legislation, the Project would support a specialized advisor todraft implementing regulations and provide hands-on training to examiners in the non-bank examinationunit. The Project would also finance a consultant to review regulations for the monitoring of select non-bank deposit-taking institutions.

5. Assistance to the Non-Performing Assets Recovery Trust (NPART). Since 1995, Government hasbeen engaged in an active recovery process of non-performing loans transferred from the UgandaCommercial Bank (UCB) for collection by NPART. As of December 31, 1998, NPART has collected15.3 billion Uganda shillings (approximately US$ 11 million). The ratio of costs to loan collection-hasbeen approximately 13%. The Project would finance a contract for consultants to operate NPART for a36-month period, January 1999 to December 2001. This will assist NPART to continue its process ofrecovering loans of UCB, as well as recovering loans under proposed legislation which would transfer

Uganda - Financial Markets Assistance Project Page 27Project Appraisal Document -Annex II: Project Description May 7, 1999

select loans to NPART by the Uganda Development Bank (UDB). It is expected that the process of loanrecovery would enhance credit discipline in the banking system as well as expedite recovery of previouslynon-performing loans in these three institutions.

6. Assistance to the Uganda Institute of Bankers (UIB). UIB's role in facilitating training programsfor staff of commercial banks has become increasingly important to reinforce prudential regulations andsupervision by the BOU. The Project would support the partial refurbishing of the training center, inaddition to some equipment and training materials.

Component 2- Restructuring and Privatization of UCBL: US$3.6 Million

7. Restructuring and Privatization of Uganda Commercial Bank Limited (UCBL). A previousattempt to privatize UCBL collapsed when the new owners engaged in extensive lending to related partiesin relationship with the now-closed Greenland Bank. As first step in the workout olfthe bank, the projectwill finance a management contract with associated technical assistance support services to permit therestructuring of the bank's operations in preparation for re-privatization. It is anticipated that there will bea need to make a significant number of redundancies as part of this process and so the project has includeda facility for financing those costs. In addition, resources will be made available under the project tofinance technical services in support of the new privatization process.

Component 3 - Improving Monetary Management and Payment Systems: US$ 1.5 Million

8. Strengthening BOU Monetary Management. Significant measures have already been taken toimprove reserve and monetary management. As a result of training and other capacity building effortsduring the past three years, BOU increased its capacity to manage liquidity and the impact of improvedmonetary control is emerging slowly. Deposit and lending rates are market-determined and interest ratespreads have narrowed slightly, a result of both banking sector reforms as well as the increasedcompetition in the sector. Further measures, however, are needed to improve the transmissionmechanisms for monetary policy. The Project provided financial support,under the PPF, for operationsand research advisors to furnish hands-on training in money management and development of techniquesnecessary to facilitate trading of treasury bills on the secondary market. The Project would also support acapital account resident advisor, as well as external advisory support on reserve management andcomputer equipment and software. Short-term twinning arrangements will also be sought.

9. Strengthening BOU Reserve Management. This subcomponent would enable BOU to enhance itsinternal reserves management operations at two key levels: (a) the introduction of effective investmentsystems to support the investment activity; and (b) the strengthening of intemal portfolio managementoperations, skills and oversight policies. In particular, the Project would finance: (i) investment systemsand software purchases; and (ii) advisory services which would be provided in four sequential phases to:

Module 1: Review the current status of intemal operations to determine areas of needed reformincluding: systems architecture (information requirements, processing requirements, and neededoperational controls and oversight), investment policy framework (risk control parameters, investmentstrategy, asset-liability management framework, investment benchmark structLre), and, professionalskills gap analysis (portfolio management, administrative, investment process).

Module 2: Design an integrative plan of action that addresses all aspects; of intemal reservesmanagement operations and proposes implementation timetables for: providing systems supportsolution recommendation and implementation plan, adjusting the investment policy framework totake into account asset-liability management and institutional risk profile issues (investment strategy.

Uganda -Financial Markets Assistance Project Page 28Project Appraisal Document - Annex IH: Project Description May 7, 1999

optimal investment benchmark design and implementation); and proposing a detailed training planstrategy to address skills gaps-identified above

Module 3: Set up a transparent process to identify, purchase and install an appropriate investmentsystem and software required for BOU's internal foreign exchange reserves management operationsincluding assistance in: (i) conducting investment systems/software request for proposals (design andanalysis), and recommending final selection, (ii) contract/purchase negotiations; and (iii) set up,systems testing and integration process of systems.

Module 4: Set up tailored training program in conjunction with external asset management programincluding: designing operations manuals to implement revised investment policy framework(investment guidelines, internal .organization structure, investment process documentation, riskcontrol guidelines, code of conduct, performance-reporting procedures). Design and assist inimplementation of internal investment benchmark. Execute and monitor 18-month training plan withexternal management program.

10. Strengthening Payment Systems. Identified improvements in payment systems could strengthenfinancial market efficiency and improve monetary policy effectiveness. A multi-stage program ofinvestments and training will be developed to reduce the processing time and the settlement risks forchecks in Kampala and rural check-clearing systems. Further, measures are being developed to improveother elements of the payments system including interbank clearance vehicles. The Project would supportinitial studies incorporating the views of market participants while actual hardware, software andperipherals would be borne by the BOU and surcharges to the market participants.

11. Strengthening Macro-economic Programming in MoF. In an effort to further harmonizemonetary and fiscal policy management, the Project would finance training and equipment to support thestaff of the Macro-economic Policy Department in the area of policy formulation, especially fiscal andmonetary policy management. In particular, it will focus on short-term workshops, such as macro-economic policy, budgeting, financial programming and balance of payments. In addition, the Projectwould finance opportunities for officers to undertake some study visits and some computer equipment.

Component 4 - Developing Insurance and Contractual Savings Reform and Regulation:US$ 1.2 Million

12. Assistance to the Commissioner of Insurance. The Government has taken measures to improvethe operation and regulation of the insurance sector through the recent passage of insurance legislation andthe establishment and staffing of an insurance commission. The Commissioner of Insurance has beenworking to improve the capital adequacy, solvency and efficiency of existing insurers, agents, brokers andadjusters in the marketplace but has been limited by its own capacity and limited .equipment. TheCommission has imposed and subsequently enforced, with the support of the MoF, new minimal capitalrequirements, which has resulted in the delicensing of about eight smaller insurance companies fromwriting new business. Continued support to strengthen the capacity of the Commission, consistent withthe Commission's institutional development plan, will be provided. In particular, the Project wouldprovide financial support for advisory services for: (i) regulatory issues; and (ii) development ofsupervision (on and off-site) procedures and manuals. Finally, the Project would provide financing forequipment and training to strengthen the Commission's capacity to improve compliance with capitaladequacy and solvency requirements and subsequently close insurance companies that do not comply withthe requirements of the law.

Uganda -Financial Markets Assistance Project Page 29Project Appraisal Document -Annex I: Project Description May 7, 1999

13. Developing and Strengthening Pension Operations and Oversight. Pensions i:n Uganda have beendominated by mandatory contributions to the National Social Security Fund (NSSF). There are alsobenefit program pension funds with the Civil Service and local Govemments, and privately-managedpension funds based on voluntary contributions. To date, oversight of the NSSF has been administered bythe Ministry of Labor. However, no formal oversight mechanisms are in place for private, voluntarypension funds and no uniform minimum standards of performance, accountability and public recourse areapplied to either public or private funds. The Project would finance a series of studies to assess the statusof the existing system and the need for reforms. These include: (i) a financial and managerial review ofNSSF; (ii) a sector survey to determine the contribution requirements, benefit entitlements, age andincome distribution of all pension fund members and beneficiaries, public and private, mandatory andvoluntary; (iii) a review of NSSF investment policy and procedures, including real estate investment; and(iv) the drafting of legislation for a pensions oversight authority.

14. Assistance to CapitalMarkets Development. Although the Govermment has established a CapitalMarkets Authority (CMA) to oversee the Uganda Stock Exchange, public listings to date have beenlimited to a bond issued by the East African Development Bank. Select public listing of positions incompanies being privatized is under consideration. This, as well as public offerings of privately-heldcompanies, could expand the volume of issues on the market necessary to reach a critical mass. TheProject would provide financial support to the CMA to develop rules, regulations and policies including:(i) fiscal environment and incentives; (ii) investor compensation fund; (iii) central depository system; (iv)accounting and financial reporting standards; and (v) collective investment schemes. The Project wouldalso provide financial support for staff training and development, as well as some promotion efforts.

Component 5 - Project Implementation: US$ 0.7 million

15. The Project will finance a Project Manager and qualified staff assigned to BOUto provideadministrative support in the implementation and coordination of the Project, which includes the annualaudits.

Component 6 - Unallocated: US$ 1.35 Million

16. Of the total amount for this component, approximately US$ 0.75 million will comprise a reservefund to finance additional due diligence, management contracts, audits and receiverships as the needarises. An additional US$ 0.6 million represents price contingencies for the components above.

Uganda - Financial Markets Assistance Project Page 30Project Appraisal Document -Annex III: Estimated Project Costs May 7, 1999

Annex III: Estimated Project Costs

Component 1 Local |Foreign | Total

a. Strengthening the regulation, supervision and 225,000 2,265,000 2,490,000operations of deposit-taking institutions

* Assistance to the BOU Banking Supervision 710,000 710,000Dept

* Assistance to BOU NBFI Supervision Dept. 190,000 190,000* Assistance to NPART 1,300,000 1,300,000* Assistance to UIB 225,000 65,000 290,000

b. Restructuring and Privatization of UCBL 2,500,000 3,600,000 6,100,000* Management Contract and Restructuring Support 3,600,000 3,600,000

* Severance Payments 2,500,000 2,500,000

c. Improving monetary management and pavment - 1,470,000 1,470,000systems

* Strengthen MoF Macro-economic Programming 280,000 280,000. Strengthen BOU Monetary Management 360,000 360,000

. Strengthen BOU Reserve Management 800,000 800,000* Strengthen Payment Systems 30,000 30,000

d. Developing insurance and contractual savings 1,210,000 1,210,000reform and regulation

* Assistance to the Commissioner of Insurance 370,000 370,000* Develop and Strengthen Pensions Systems and 710,000 710,000

Oversight* Assistance to Capital Markets Development 130,000 130,000

e. Project Management 50,000 630,000 680,000

f. PPFRefinancing 1,050,000 1,050,000

g. Unallocated 135,000 1,150,000 1,350,000

Total Project Costs 2,910,000! 11,440,000 14,350,000l

Uganda - Financial Markets Assistance Project Page 31Project Appraisal Document - Annex IV Economic Assessment May 7, 1999

Annex IV: Economic Assessment

1. The proposed operation is a technical assistance project which will provide the resources andcapacity to strengthen the operation and oversight of financial markets. Its aim is lthat by strengtheningthe regulatory framework, the breadth, depth and efficiency of financial intermediation will increase.Moreover, it is hoped that the riskness and solvency of many individual financial institutions will also beimproved during the period supported under the project.

Project Benefits

2. Project benefits are expected to be: (i) increased savings mobilized short-term through banks andnon-bank deposit-taking institutions and mobilized medium- and long-term through contractual savingsinstitutions; (ii) increased efficiency of intermediation in the banking sector as measured by operationalcosts and spreads; and (iii) increased solvency and efficiency of contractual savings institutions includingpension funds and insurance companies.

Project Costs

3. Project costs are expected to include: (i) direct costs of US$ 13.0 million to be repaid to IDA (plusinterest over the life of the loan); (ii) direct costs by Government of US$ 1.35 million; and (iii) indirectcosts associated with further financial sector restructuring.

Cost/Benefit Review

4. It is virtually impossible to quantify the expected economic returns to a technical assistanceoperation of this nature. However, given the noted critical importance of efficient financial interrnediationto growth and very low level of domestic savings in Uganda, it is expected that the economic benefits ofpotentially increasing the level of savings and the efficiency of transforming such savings to productiveinvestment will far outweigh the financial costs.

Uganda - Financial Markets Assistance Project Page 32Project Appraisal Document - Annex V: Financial Summary May 7, 1999

Annex V-A: Financial Summary(IJS$)

Implementation Period. 1 1998 l 1999 12000 [ 2001 l 2002 l Total

Project Costs (PPF)

Investment Costs 1,050,000 2,400,000 4,650,000 4,100,000 2,100,000 14,300,000Recurrent Costs 0 12,500 12,500 12,500 12,500 50,000

Total 1,050,000 2,412,500 4,662,500 4,112,500 2,112,500 14,350,000

Financing sources

IDA 1,050,000 2,100,000 4,200,000 3,750,000 1,900,000 13,000,000Govemnment 0 312,500 462,500 362,500 212,500 1,350,000

Total 1,050,000 2,412,500 4,662,500 4,112,500 2,112,500 14,350,000

Uganda - Financial Markets Assistance Project Page 33Project Appraisal Document -Annex V: Financial Summary May 7, 1999

Annex V-B: Financial Management Assessment

1. PROJECT OBJECTIVES

1.1 The objective of the Project is to assist the Uganda Government to improve the soundness,performance and competitiveness of the financial system through:

(i) strengthening the regulation, supervision and operations of deposit-taking institutions, includingthe resolution and work-out of problem banks;

(ii) restructuring and re-privatizing Uganda Commercial bank limited:(iii) improving monetary management and payment systems; and(iv) developing insurance and contractual savings institutions, as well as their oversight.

2. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS

2.1 The project will be implemented by its Project Implementation Unit (PIU) under the overallsupervision of the Governor of BOU. These are the arrangements that existed for thc, Financial SectorAdjustment Credit (FSAC), and it is intended that they will continue, subject to agreed changes.

2.2 The PIU is responsible for

(a) coordinating the implementation of the various components of the Project in accordance withsound financial management practices, including procurement, disbursement, accounting and auditing ofaccounts,

(b) monitoring the implementation of the Project and furnishing reports to MFP:ED and theAssociation on progress made in Project implementation

2.3 Each implementation agency will appoint a coordinator who shall be responsible for the executionof Project activities. A Project Manager, Mr. Sid Wootton heads the PIU. The roles of the ProjectManager are spelt out in his Terms of Reference. These include:

* Project management (coordinating project implementation, monitoring project beneficiaries, andinteracting with all personnel involved in the project)

* Procurement of goods and consultants* Disbursement of project funds in accordance with the Bank's guidelines* Budgetary planning and Financial Control* Reporting* Audit arrangements


3 CURRENT ACCOUNTING, FINANCIAL REPORTING AND AUDITINGARRANGEMENTS

3.1 The proposed PIU has experience in implementing projects financed by IDA, such as theFinancial Sector Adjustment Credit. The system which used to run the accounting records and books ofaccounts for that project is computer based and runs on a DOS software called Money Program. Thesystem is capable of producing information required in the production of financial reports required underthe LACI disbursement procedures.

3.2 Furthermore, a framework exists for contractors to report the progress on their contracts on amonthly basis. These contractors' reports are consolidated into one report on a monthly basis.

3.3 However, certain improvements are required to enable the project to provide, with reasonableassurance, accurate and timely information on the status of the Project (PMR) as required by theBank/IDA for PMR-based disbursements. Recommendations included in this report are intended to assistin achieving the necessary improvements that will render the Project's financial management systemsuitable for such disbursements.

4. IMPROVEMENTS TO THE ORGANISATION STRUCTURE

Financial Management Committee

4.1 A Financial Management Committee should be appointed to oversee the operations of theproject's financial management arrangements. This committee should be comprised of officials fromBOU and the Ministry of Finance, Planning and Economic Development. It should meet regularly toreview progress reports in respect of procurement, and financial and implementation aspects of theProject.

4.2 The committee should be appointed by 30 June 1999. Indicative terms of reference are attached.

Project Accountant

4.3 A Project Level Accountant with relevant practical experience (including proficiency in computerapplications as well as good communications skills) should be appointed by 30 June 1999 in order todirect and guide the financial management operations of the IDA Credit from the outset.

4.4 The Project Accountant should report directly to the Project Manager and work closely with theFinancial Management Committee.

4.5 Indicative terms of reference for the position are attached in Appendix 2.

Uganda - Financial Markets Assistance Project Page 35Project Appraisal Document - Annex V. Financial Summary May 7, 1999

5. ACCOUNTING SYSTEM

5.1 A Chart of Accounts should be developed to enable data to be captured and classified by budgetheads, project components, expenditure categories (summary and detailed), and disbursement categories.This should match closely with the classification of expenditures and sources of funds indicated in theproject agreements and documents (Project hnplementation Plan and Project Cost Tables). The Chart ofAccounts should be designed in such a way that it would ensure that data is captured in a manner thatwould facilitate financial reporting for the project to various stakeholders, including IDA and GOU. TheChart should be documented in the Financial Management Manual, which is considered further below.

6. FINANCIAL REPORTING

6.1 As stated in Appendix 1, the Financial Management Committee should determine:

* That the Chart of Accounts for the FIMAP is consistent with the format for reporting to IDA onoverall IDA funded expenditures.

* Format and content of Quarterly and Annual Financial Statements for the FIMAP., and* The selection and adoption of accounting policies and accounting standards.

6.2 Financial Statements and Annexes for the FIMAP should include:

a) A Statement of Sources and Uses of Funds showing funds from IDA and CounterpartFunds separately, a summary of expenditures analyzed under the main headings and by maincategory of expenditures (consistent with the Chart of Accounts), both for the current fiscalyear and accumulated to date.

b) A balance Sheet showing accumulated funds for the Project, bank balances as well as otherassets and liabilities of the Project, if any;

c) Notes in respect of significant accounting policies and accounting standards adopted bymanagement when preparing the accounts and any supplementary information orexplanations that may be deemed appropriate by management in order to enhance thepresentation of a "true andfair view."

d) Special Account Statement showing deposits and replenishments received, paymentssubstantiated by withdrawal applications, interest that may be earned on the account and thebalance at the end of the fiscal year;

e) A reconciliation between the amounts shown as "Received by the Project from IDA and thatshown as having been "Disbursed" by them;

f) Implementation Report, which would be a narrative summary of the imiplementationprogress for the project; and

g) Cashflow forecasts, upon which replenishments to the Special Account will be based.

6.3 Indicative formats of these statement should be developed in accordance with. IDA requirementsby 30 June 1999.


7. INTERNAL CONTROLS

7.1 Intemal controls for FIMAP should be comprised of policies and procedures adopted by projectmanagement to assist it in achieving its objectives of ensuring, as far as possible, the orderly and efficientconduct of its operations, including:

* Adherence to management policies, laws and regulations;* Safeguarding of assets;* Prevention and detection of fraud and error;* Promoting orderly, economic, efficient and effective operations;* Accuracy/completeness of records; timely preparation of financial information.

7.2 Specifically, systems of internal control for FIMAP should ensure that:

* Every transaction, that should have been entered, was recorded;* No unauthorized transactions were recorded;* Those transactions that were entered were analyzed and posted correctly;* Source programs, which control the operation of the accounting system (original entry and subsequent

analysis and postings), cannot be tampered with;* Unauthorized access is denied;- Assets of the entity are neither misappropriated nor used in an uneconomical or inefficient fashion;* Management policies (in budgets, long-range forecasts etc.) are complied with;= Deviations from plans are noted, investigated and timely responses made;= Financial information is communicated in the most effective way so that those entitled to it may

maximize their use of it; and- The financial statements show a true and fair view.

7.3 Internal control systems should be fully documented, and regularly updated, in FIMAP'sFinancial Management Manual.

8. PLANNING AND BUDGETING

8.1 Counterpart Funding is to be approved in line with the Government's budgetary process. This is alengthy consultative process and involves MOFPED and BOU.

8.2 The Financial Management Committee should have the ultimate responsibility for budgetpreparation for utilization of FIMAP. Funds in the forthcoming year with, as appropriate, the concurrenceof IDA.

8.3. The project accountant, in consultation with the Financial Management Committee, should beresponsible for preparing the Project's Total Quarterly/Annual Cash Flow Forecast.

8.4. As suggested in Appendix 1, members of the Financial Management Committee should reviewand approve Quarterly and Annual Project Financial Statements. They should also examine materialvariances between budget/actual figures- seeking remedial action, as appropriate, within an agreedtimeframe.

9. EXTERNAL AUDIT

9.1 The Auditor General is primarily responsible for the auditing of all government projects. Usually,


the audit is subcontracted to a firm of private auditors, with the final report being issued by the AuditorGeneral, based on the tests carried out by the subcontracted firm.

9.2 Arrangements for the external audit of the financial statements of the project should bedetermined and communicated to IDA. Any finns of auditors subcontracted to carry out the audit shouldmeet the IDA's requirements in terms of independence, qualifications and experience. Appropriate termsof reference for the external auditor must also be developed and agreed by 30 June 1999.

9.3 In addition to the audit reports, a separate Management Letter giving observations and comments,and providing recommendations for improvements of accounting records, systems, and controls andcompliance with financial covenants in the Agreements between the Government and IDA should beprovided.

10. FINANCIAL MANAGEMENT MANUAL

10.1 A Financial Management Manual should be prepared for the project. The financial managementmanual should comprehensively document the operation of the financial management system and wouldserve as a reference document for all project staff in operating the financial management system. Thefollowing aspects should be covered in the Financial Management Manual:

* Flow of funds* Financial and Accounting Policies for the Project* Accounting System (including centers for maintenance of accounting records, Chart of Accounts,

formats of books and records, accounting and financial procedures)* Budgeting System* Financial Forecasting System* Procurement and Contract Administration Monitoring System* Financial Reporting (including formats of reports, and linkages with Chart of Accounts)* Auditing arrangements* Human Resource Aspects

10.2 The preparation of this manual should be done by the appointed accounting system consultants.A draft copy should be submitted by the PIU for review by the IDA by 30 June 1999 and will be finalizedafter discussions with the World Bank.


Appendix 1: Terms of Reference - Financial Management Committee

Reporting to the Steering Committee, the following are indicative Terms of Reference for theFinancial Management Committee:

* Fully appraising all financial management aspects of the Project (in particular, Procurement andFinancial Reporting);

* Ensuring that accounting records, including bank accounts are kept up-to-date;* Ensuring that suitable systems of internal control are established and maintained (including fixed

assets, civil works, inventories management and distribution);* Ensuring that the Financial Management Manual is updated on a regular basis by the Project

Accountant;• Reviewing and approving Budgets/Cash Flow Projections;* Confirming Project compliance with the Government's Accounting reporting requirements;* Confirming: the format and content of Quarterly and Annual Project Financial Statements; the

adoption of accounting policies and accounting standards; the need to include any supplementarynotes to the Project's Financial Statements in order to enhance the presentation of a "true andfairview";

* Reviewing and approving Quarterly and Annual Project Financial Statements as well as examiningmaterial variances; seeking remedial action, as appropriate, within an agreed timeframe

* Ensuring compliance with operating procedures of IDA e.g. Procurement, Disbursements, SpecialAccounts, LACI, Special Commitments, etc.;

* Assessing reports received from internal/external auditors and following up any auditqueries/management letters;

* Being briefed by contractors on the financial management aspects of contracts, as well as evaluatingany difficulties being experienced e.g. comparing actual results with agreed performance indicators,physical existence, etc.;

* Being briefed by the officers in charge of the procurement on procurement issues, as well asevaluating any difficulties being experienced;

* Monitoring progress on Staff Development/Capacity Building;* Reviewing information technology issues, including the computerization of accounting records;* Monitoring the Project's performance against previously agreed Performance Indicators.


Appendix 2: Terms of Reference - Project Accountant

Reporting to the Project Manager, the following are indicative Terms of Refe:rence:

* Ensuring that all accounting records and bank accounts are up-to-date using Excel spreadsheets;* Preparing monthly Bank Reconciliations for all Bank Accounts on a timely basis;* Developing a Financial Management Manual within an agreed timeframe;* Establishing and enhancing systems of internal control (including procurement - .goods, works and

services, fixed assets, civil works, inventories management and distribution);* Preparing Cash Flow Forecasts;* Preparing Returns required for consolidation of BOU and MOFPED records in compliance with

Government accounting reporting requirements;* Preparing Quarterly and Annual financial Statements for the IDA Credit, as well as reporting to the

Financial Management committee on material variances in accordance with an agreed timetable;* Ensuring compliance with operating procedures of Government and the World Bank e.g.

Procurement, disbursements, special Accounts, LACI, special commitments etc;* Liaising with the internal/external auditors and following up any audit queries/management letters;* Monitoring, in conjunction with the Financial Management Committee, the financial management

aspects of the progress on contracts e.g. % of work done versus paid for etc.;* Staff Development/Capacity Building and briefing the Financial Management Committee on progress

being achieved;* In conjunction with the Financial Management Committee, monitoring performance against agreed

Financial Performance Indicators - these will need to be prepared in consultation with the FinancialManagement Committee.

Uganda - Financial Markets Assistance Project Page 40Project Appraisal Document -Annex V. Financial Summary May 7, 1999

Appendix 3: Financial Management Manual (Indicative Sections for Inclusion)

(Please note that this listing does not purport to be exhaustive):

- Institutional Arrangements - FIMAP Management Structure; Financial Management Committee:composition, terms of reference and reporting.

* Chart of Accounts, including Account Codings.* Basis of accounting adopted i.e. cash versus accruals.* Accounting systems - computerized and Manual Accounting system.* Planning and Budgeting, including Cash Flow Management* Procurement Procedures for Goods, works and Services.* Withdrawals/disbursements - compliance with requirements of IDA

* Banking Activities - operation of bank accounts; invoice approval and payment procedures (includingappropriate supporting documentation and Letters of credit); cheque signatories; monthly bankreconciliations, etc.

* Creditors Reconciliations and debtors Management (if appropriate).* Staff, Wages and salaries, including records maintained and payment procedures.• Fixed Assets Register, Inventories management and Distribution (e.g. textbooks).* Legal Covenants.* Financial Reporting to Stakeholders including: frequency of reporting, standard formats, accounting

standards, accounting policies and variance analysis.* Auditing - internal and external auditors.E Records Management/Filing systems* Etc., etc., etc.

Uganda - Financial Markets Assistance Project Page 41Project Appraisal Document - Annex V: Financial Summary May 7, 1999

FINANCIAL MARKETS ASSISTANCE PROJECT ACTION PLAN FOR. FINANCIALMANAGEMENT

Action Responsible Due By

1 Appointment of project accountant PIU 30 June 1999

2 Appointment of Financial Governor (BOU), PS 30 Juwe 1999Management Committee (MOFPED)

3 Submission of financial Project Manager 30 June 1999Management Manual documentingthe financial management,disbursement and project progressmonitoring procedures

4. Preparation of Financial Reporting IDA, Sid Wootton 30 June 1999formats

5. Appointment of, and Terms of OAG, PIU 30 June 1999Reference for External Auditors

Uganda - Financial Markets Assistance Project Page 42Project Appraisal Document - Annex VYI Project Processing Timetable and Budget May 7, 1999

Annex VI: Procurement and Disbursement Arrangements

1. All goods and services under the credit would be procured in accordance with IDA guidelines for goods,works and services (Guidelines: Procurement under IBRD loans and IDA credits, January 1995 and revised inJanuary and August 1996 and September 1997 (procurement guidelines) and Guidelines: Use of Consultants byWorld Bank Borrowers and by World Bank as Executing Agency, January 1997 and revised September 1997. Themanagement of procurement under the Project would be the responsibility of the Project Implementing Unit (PIU),in association with counterpart agencies.

Table VI-A: Project Costs by Procurement Arrangements

(US$)

Procurement Method[ ICB NCB Other N.B.F. Total

A. Goods & Equipment 400,000 180,000 580,000(360,000) (160,000) (520,000)

B. Civil Works 170,000 170,000(150,000) (150,000)

C. Consultant Services 7,840,000 7,840,000(6,980,000) (6,980,000)

D. Foreign Training 420,000 420,000(210,000) (210,000)

E. Local Training 610,000 610,000(610,000) (610,000)

F. Severance Payments 2,500,000 2,500,000(2,500,000) (2,500,000)

G. Project Management 680,000 680,000(680,000) (680,000)

H. Recurrent Costs 50,000 50,000(0) (0)

I. Unallocated 1,500,000 1,500,000(1,350,000) (1,350,000)

| TOTAiL 400,000 170,000 13,730,000 50,000 14,350,0001(360,000) (150,000) (12,490,000) (0) (13,000,000)

* Figures in parenthesis are the amounts to be financed by IDA.* ICB = International Competitive Bidding* NCB = National Competitive Bidding* N.B.F.= Not Bank financed* IDA financing will only fund goods and consultants' services procured under Bank guidelines.* "Goods" include purchase of equipment, related supplies and vehicles.* "Project Managemenf' include incremental operating costs incurred on account of project implementation, management and

supervision, including annual audits, office supplies, communication costs, travel allowance of project staff but excluding salaries of theborrower's civil servants.

(a) National/International Shopping procedures or IAPSO

Uganda - Financial Markets Assistance Project Page 43ProjectAppraisal Document - Annex VII: ProjectProcessing Timetable and Budget May 7, 1999

2. Procurement Capacity of the Project Implementation Unit (PIU). Each Project componentwould be implemented by a counterpart institution which would have primary responsibility for theexecution of its respective components of the Project. The PIU would provide procurement support. TheProject Manager, with the assistance of the MoF counterpart, would: (i) prepare and update theprocurement plan for the Project, (ii) monitor the procurement; and (iii) assist the c-unterpart institutionswith: (a) the preparation of bidding documents and advertisements for goods and works contracts andrequests for proposals for consulting assignments; and (b) bid opening and evaluation. The ProjectManager would also advise the counterpart institutions on procedural matters.

3. Procurement Plan. A draft General Procurement Notice (GPN) has been prepared for the Projectand will be finalized and published in Development Business after Board approvzl. It would show allexpected procurement contracts using ICB over US$ 200,000. A procurement plan would be prepared bythe Borrower, as a condition for effectiveness, which includes relevant information on all goods, worksand services contracts under the Project as well as the timing of each milestone in the procurementprocess. The procurement schedule would be updated every six months and submitted to IDA.

4. Civil Works. The Project provides US$ 170,000 for civil works which comprises the renovationof an existing building. The procurement would be undertaken using National Competitive Bidding(NCB) procedures. The Bank's Standard Bidding Documents -- Procurement of Works would be used forthe contracts.

5. Training. Training, totaling approximately US$ 950,000, within the country and abroadincluding workshops and twinning arrangements will be carried out on the basis of IDA approvedprograms which would identify the nature of training, personnel to be trained, the duration of training,institutions where training would be conducted, estimated cost of training, etc. Such programs would besubmitted to IDA for review and clearance on a quarterly basis.

6. Goods and Equipment. Goods and equipment under the IDA credit would be procured inaccordance with IDA guidelines for goods and works (and related services) using the IDA Guidelines:Procurement under IBRD loans and IDA credits, January 1995 and revised in September, 1997(procurement guidelines). To the extent possible and practicable, the procurement of goods would becombined into packages estimated to cost the equivalent of US$ 250,000 or more and would be procuredunder ICB procedures using IDA Standard Bidding Documents. Goods which comprise one vehicle,fumiture, PC's and office equipment, each contract not exceeding US$50,000 with a total aggregate valueof up to US$ 176,000 equivalent shall be procured using National/International Shopping procedureand/or through the Inter-Agency Procurement Services Office of the UNDP (IASPO) s.

7. Consultant Services. Selection and appointment of consultants for studies, advisory services,and support of project execution would be carried out in accordance with the Guidelines: Selection andEmployment of Consultants by World Bank Borrowers, January 1997, revised September 1997.Consultant services, such as advisory services for monetary management and development of insuranceand contractual savings reform (Refer to Table VI-B: Consultant Selection Arrangements), up to anaggregate of US$ 7,840,000 will be selected through competition among qualified short-listed firms basedon Quality and Cost Based Selection (QCBS) methodology by evaluation of the qluality of the proposalsbefore comparing the cost of the services to be provided. All consultancy assignments estimated to costthe equivalent of US$ 200,000 or more would be advertised in an intemational newspaper and inDevelopment Business (UNDB). In addition, the contracts may be advertised in a national newspaper or atechnical magazine seeking "expressions of interest". All consulting assignments in the range of US$100,000 to US$ 200,000 would be procured through QCBS using an internationally-based short-list. In

Uganda - Financial Markets Assistance Project Page 44Project Appraisal Document -Annex VY: Financial Summary May 7, 1999

the case of assignments estimated at US$ 100,000 or less the assignment maybe advertised nationally andthe shortlist may be made up entirely of national consultants provided that at least three qualified nationalfirms are available in the country and foreign consultants who wish to participate are not excluded fromconsideration. Consultant services for studies, up to an aggregate amount of US$ 725,000 equivalent(Refer to Table VI-B: Consultant Selection Arrangements), estimated to cost less than the equivalent ofUS$ 50,000 may be contracted by comparing the qualifications of consultants who have expressed aninterest in the job or who have been identified. Consultants for financial audits and services estimated tocost less than US$20,000 equivalent per contract, up to an aggregate of US$ 84,000 equivalent (Refer toTable VI-B: Consultant Selection Arrangements) will be selected through competition among qualifiedshort-listed firms based on the Least Cost Selection (LCS) method. The firm with the lowest price will beselected, provided its technical proposal received the minimum mark required.

Uganda - Financial Markets Assistance Project Page 45Project Appraisal Document-Annex VII: Project Processing Timetable and Budget May 7, 1999

Table VI-B: Consultant Selection Arrangements

(US$)

Consultant Services | Selection Method Total Cost

| QCBS LCS CQ

(a) Strengthening Regulation, Supervision and Operations of Deposit-taking Institutions 2,448,80

Louis Berger (UCB)* 230,000 230,000Labat Anderson (NPART)* 1,450,000 1,450,000Special Audits* 375,000 375,000Inspectors & Preparation of Manuals for NBFI Department 120,000 120,000

(BOU)Resident Advisor (legal/regulations & resolution & work-out)* 133,800 133,800Resident Advisor - NBFI Supervision 140,000 140,000

.(b) Restructuring and Privatization of UCBL 3,000,00Due Diligence 400,000 400,000Management Contract 1,600,000 1,600,000Transactions Advisor 1,000,000 1,000,000(c) Improving Monetary Management and Payment Systems 810,25

Operations Advisor 120,000 120,000Payments System Consultant 50,250 50,000Training Services (UIB) 20,000 20,000Capital Account Resident Advisor 120,000 120,000Extemal Advisory Services 400,000 400,000

IAS Support 100,000 100,000

(d) Developing Insurance and Contractual Savings Reform and Regulations 980,00

Advisory Services for Uganda Commissioner of Insurance "as 50,000 50,000needed"

Uganda Insurance Commission-Resident Advisor 60,000 60,000Uganda Insurance Commission-On & Off-site Tmg Manuals 40,000 40,000Industry Study 50,000 50,000CMA: Fiscal Enviromment Study 10,000 10,000CMA: Investor Compensation Fund Study 10,00 10,000CMA: Central Depository 10,000 10,000CMA: Accounting & Financing Rpt 10,000 10,000Collective hivestment Schemes 30,000 30,000NSSF: Financial Audit 60,000 60,000Pension Sector Survey 120,000 120,000Review of NSSF Investment Pol. 20,000 20,000Policy Formulation of Pension Sector 50,000 50,000Review of Pension & Soc. Sec. Leg. 60,000 60,000Develop. of Institutional Framework 200,000 200,000Implementation of Reg. Authority, Tmg Staff and Establish 200,000 200,000

Procedures.(e) Project Implementation 684,00

Project Manager* 582,000 582,000Project Assistant* 18,000 18,000Project Audits 84,000 84,000

TOTAL 7,118,800 84,06 7,923,05

* Financed (at least partially) under PPFQCBS: Quality and Cost-based SelectionCQ: Selectionbased on Consultant's Qualifications

Uganda - Financial Markets Assistance Project Page 46Project Appraisal Document - Annex VIL Project Processing Timetable and Budget May 7, 1999

8. Review by IDA. Individual contracts for goods and works estimated to cost US$ 100,000 ormore will be subject to prior review procedures of IDA of bidding documents including draft contractsand technical specifications prior to inviting bids and IDA review of bid evaluation prior to contractaward.

9. The Terms of Reference for all consulting assignments, irrespective of value, would be subject toIDA prior review. For consultant services in the following categories, IDA's prior review and approval ofterms of reference, short list(s), budgets, selection procedures and criteria, letters of invitation, evaluationreports and contracts will be required: (a) all contracts with firms estimated to cost US$ 100,000equivalent per contract or above; (b) all contracts with individuals estimated to costs US$ 50,000equivalent per contract or above; (c) single source selection of consulting firms or individual consultantsregardless of contract values; (d) assignments of a critical nature as reasonable determined by IDA; (e)amendments of contracts for the employment of firms or individuals raising the respective total contractvalue to US$ 100,000 or US$ 50,000 equivalent or above; (f) training abroad and in-country, workshopsand study tours, the program - containing the names of candidates, cost estimates, content of the courses,periods of training and institution selection.

10. Contracts which are not subject to prior review would be selectively reviewed by IDA duringproject implementation and would be governed by the procedures set forth in paragraph 4 of Appendix I tothe Guidelines.

Table VI-C: Thresholds for Procurement Methods and Prior Review(US$ equivalent)

Contracts Subject to Prior Review/Expenditure Contract value Procurement Method Estimated Total Value Subject toCategory (Threshold) Prior Review

Goods 100,000 or more ICB All50,000 - 100,000 NCB All<50,000 IS/NS/IAPSO Post-review

Civil Works <200,000 NCB All200,000 or more QCBS (International All

Consultants Advert)>100,000 - 200,000 QCBS (International All

Shortlist)50,000 - 100,000 QCBS (National Advert) All<50,000 CQ First two contracts to be prior-

reviewed. All others to be post-review.CQ - Selection Based on Consultant's QualificationsICB- International Competitive BiddingQCBS - Quality and Cost-based SelectionNCB - National Competitive BiddingIS - International ShoppingNS- National ShoppingNote: All sole source assignments would be subject to prior review.

All TORs for consulting assignments would be subject to prior review

Uganda - Financial Markets Assistance Project Page 47Project Appraisal Document -Annex V.: Financial Summary May 7, 1999

11. Use of Statements of Expenses (SOEs). Disbursements for all expenditures would be againstfull documentation except for contracts below the equivalent of US$ 100,000 equivalent each for works,goods and consulting firms and US$ 50,000 for consultant services (individuals), training and incrementaloperating costs for which disbursements would be based on Statements of Expenditures (SOEs).Supporting documentation for SOEs would be retained by the borrower at the PIU for review by IDAmissions and external auditors. All expenditures above the threshold indicated above will be eligible fordirect payment.

12. Special Accounts. To facilitate disbursements, a Special Account would be established andoperated at a commercial Bank under terms and conditions satisfactory to IDA. Upon credit effectiveness,a sum of US$ 400,000 to cover about four months' expenditures would be deposited by IDA into thisaccount. Further deposits by IDA would be made into this account against withdrawal applicationssupported by appropriate documents. The Borrower will be required to replenish the special account on amonthly basis or more often when the total disbursed amounts to one third of the initial deposit,whichever is soonest. Disbursement categories and the percentage financed are shown in Table D below.

Table VI-D: Allocation of Credit Proceeds

Disbursement Category 1 Amount Financing Percentage(US$)I

1. Civil Works 150,000 100% of foreign expenditure90% of local expenditures

2. Equipment, software and vehicles 520,000 100% of foreign expenditure90% of local expenditures

3. Consultant Services3a. NPART 1,300,000 80% of expenditures3b. UCBL 3,000,000 80% of expenditures3b. All Other Consultant Services 2,300,000 100% of expenditures

4. Training2a. Local Training 500,000 100% of expenditures2b. Overseas Training. 190,000 50% of expenditures2c. Twinning 140,000 100% of expenditures

5. Severance Payments 2,500,000 100% of expenditures6. PPF Refinancing 1,050,0007. Unallocated 1,350,000

TOTAL 13,000,000

Uganda - Financial Markets Assistance Project Page 48ProjectAppraisal Document - Annex VII: Project Processing Timetable and Budget May 7, 1999

Annex VII: Project Processing Timetable & Budget

A. Project Budget Planned Actual(US$000)

FY96LENP 119.7 119.7FY97 LENP 40.9 40.9FY98 LENP 88.3 110.8FY99 LENA 50.0 13.4FY99 LENN 20.0FY99 SUPV 40.0

B. Project Schedule [ Planned Actual

* Concept Review Meeting 03/10/98 03/19/98* Draft PID 03/15/98 03/24/98* Depart Preappraisal 03/23/98 04/11/98* PAD Decision Meeting 09/3/98 09/02/98* Authorize Appraisal/Negotiation 09/3/98 09/03/98# Update PID 08/24/98 08/24/98* Depart Appraisal 09/07/98 09/18/98* Invitation to Negotiate 03/17/99 03/17/99* Start Negotiations 05/03/99 05/03/99* Board Presentation 05/27/99* Est. Date of Effectiveness 09/01/99

Preparation assistance: PPF Nos. Q060-0 and Q060-1 totalling US$ 1,050,000.

Bank staff who worked on the Project:

Mark Dorfmnan Sr. Financial Specialist, AFTP1Sherri Archondo Financial Analyst, AFTP1Don Mclssac Principal Financial Specialist, FSDAberra Zerabruk Sr. Counsel, LEGAFPalithaWijesinghe Sr. Disbursement Officer, LOAAFHyacinth Brown Disbursement Officer, LOAAFJoseph Kizito Financial Management Specialist, AFMUGFrancesco Sarno Sr. Procurement Specialist, AFTS3Dan Mozes Principal Financial Specialist, FSD (Team/Member/QualityAssurance)Paul Murgatroyd Lead Specialist (Quality Assurance)Robert Blake Senior Economist, AFMUGAntony Thompson Financial Sector Specialist, AFTP1John Byamukama Economist, AFTP 1Irene Chacon Program Assistant, AFTP1Amy Champion Program Assistant, AFTP1Yeshi Dagne Task Team Assistant


Annex VIII: Documents in Project File

1. Project Inplementation Plan (in progress).

2. Procurement Plan (in progress).

3. Project Information Document.

4. Project Environmental Data Sheet.

5. Country Assistance Strategy for Uganda, Report No. 16540, April 30, 1996.

6. Mission Aide Memoire of August, 1997.

7. Mission Aide Memoire of January, 1998.

8. Mission Aide Memoire of May, 1998.

9. Uganda Financial Sector Study, Green Cover, 1995.

10. Draft Terms of Reference for:

, BSD Training Program; and

* NBFI Legal Consultant.

11. Financial Institutions Statute (1993).

12. Insurance Law.

Status of Bank Group Operations in UgandaOperations Portfolio

As of 03-May-99

Difference Betweenexpected

Original Amount in US5 Millions and actual u

Fiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Undisbursed orig Frm Rev'd

llumber of Closed Projects: 54

Active Projects .

UG-PE-2941 1999 GOVT. DF UGAIIDA ICB-PAI4SU 0.00 12.37 0.00 12.35 3.31 0.00

VG-PE-2972 1998 GOV EDUC SECTOR ADJ CRED 0.00 90.00 0.00 80.32 0.00 0.00 ClUG-PE-40551 1998 GOVERNMENT OF UGANDA NUTRIT.CHILC DEV 0.00 34.00 0.00 33.52 1.81 0.00 : UG-PE-49543 1998 REPUBLIC OF UGANDA ROAD SECT/IIIST.SUPP 0.00 30.00 0.00 28.40 9.74 0.00 a ::

UG-PE-57007 1998 GOVERNiMEllT OF UGANDA EL IIINO EMERG RD REP 0.00 27.60 0.00 26.B1 10.53 0. 00UG-PE-2987 1997 GOVT. OF UGANDA SAC 11 0. 00 125.00 0.00 79.08 81.17 0.00 . (7UG-PE-46836 1997 GOVT. OF UGANDA LAKE VICTORIA EIIV. 0.00 12.10 0.00 9.12 1.90 0.00

UG-PE-2978 1996 GOVERNMENT EN4VIRONMENT MANAGEMT 0.00 11.80 0.00 6.35 4.77 0.00UG-PE-35634 1996 GOU PRIV. SECTOPR COMPETI 0.00 12.30 0.00 7.58 3.89 0,00UG-PE-2971 1995 GOVERNMENT DISTRICT HEALTH 0. 00 45.00 0.00 24.16 5.27 0.00

UG-PE-2976 1995 GOVERNMENT INST. CAPACITY BLDG 0.00 36.40 0.00 15.61 10.53 0. 00

UG-PE-2923 1994 GOVT. TRANSP. REHAB. 0.00 75.00 0.00 38.81 34.35 0.00 OUG-PE-2957 1994 GOVERNMENT SMALL TOWNS WATER 0.00 42.30 0.00 23.25 15.64 0.00UG-PE-2963 1994 GOVERNMENT SEXUAL.TRANS.IN 0.00 50. 00 0.00 21 .79 13. 50 0.00

UG-PE-2977 1994 GOU COTTON SECTOR DEVELO 0.00 14.00 0.00 4;34 3.15 1.22UG-PE-2938 1993 GOVERNMENT AGRIC. RES & TRG. 0.00 25.04 0.00 2.85 -. 47 0.00UG-PE-2953 1993 GOVERNMENT PRIMARY EDUC. & TEAC 0.00 52.60 0.00 24.16 12.43 0.00 0

UG-PE-2975 1993 GOVERNMENT ECON & FINANCIAL MAN 0.00 29.00 0.00 .02 -3.05 0.00

UG-9E-296e 1992 GOVERNUMENT EHTERP.PISE DlEVELOPMENT 0.00 65.60 23.75 3.31 23.98 -2.08 (UG-PE-2929 1991 GOVERNMENT POWER III 0. 00 125.00 0.00 19.06 22.85 22.01IG-PE-2933 1991 GOVERNMENT URBAIN I 0.00 28.70 0.00 3.89 3.12 0.00 0

Tctal 0. 00 933.81 23.75 464.78 258.42 21.15

Active Projects Closed Projects TotalTctal Disbursed (IBRD and IDA): 435.97 1,740.09 2,176.06

of vihich has been repaid: 0.00 297.71 297.71Tctal no-i held by IBRD and IDA: 910.06 1,360.29 2,270.35

Amount sold 0.00 25.82 25.82Of which repaid : 0.00 25.82 25.82

Tctal Undisbursed : 464.78 2.74 467.52

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. 0

tNote:Disbursement data is updated at the end of the first week of the month and is currently as of 31-Mar-99. _5

Generated by the Operations Information System (OIS)

Uganda - Financial Markets Assistance Project Page 51Draft Project Appraisal Document - Annex X Country at a Glance May 7, 1999

UgandaSTATEMENT OF IFC's

Held and Disbursed PortfolioAs of 31-Mar-99

In Millions US Dollars

II Held -- DisbursedIFC -- IFC-

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Pantic

1983 Uganda Suga 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.001984/92 DFCU 0.00 .98 0.00 0.00 0.00 .98 0.00 0.001992 AEF Clovergem .84 0.00 0.00 0.00 .84 0.00 0.00 0.001993 AEF Nile Roses .16 0.00 0.00 0.00 .16 0.00 0.00 0.001993 AEFRwenzori .52 .19 0.00 0.00 .52 .19 0.00 0.001993 Jubilee 0.00 .10 0.00 0.00 0.00 .10 0.00 0.001994 AEF Polypack .40 0.00 0.00 0.00 .40 0.00 0.00 0.001994 AEF Skyblue .51 0.00 0.00 0.00 .51 0.00 0.00 0.001994 Celtel 2.15 .64 .80 0.00 2.15 .64 .80 0.001995 AEF Rainbow .79 0.00 0.00 0.00 .79 0.00 0.00 0.001995/96 Uganda Leasing 1.73 .33 0.00 0.00 1.]3 .33 0.00 0.001996 AEF Agro Mgmt .58 .40 0.00 0.00 .53 .40 0.00 0.001996 EAGW 6.50 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 Kasese Cobalt 16.00 3.60 0.00 0.00 13.92 3.20 0.00 0.001997 ABE Conrad Plaza 1.41 0.00 0.00 0.00 1.41 0.00 0.00 0.001997 AEF Kiwa Indust .25 0.00 0.00 0.00 .'25 0.00 0.00 0.001997 AEF Metro Hotel .42 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 AEF Kampala Flwr .50 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 AEF Exec. lnvnt 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.001998 AEF Mosa Court .80 0.00 0.00 0.00 .30 0.00 0.00 0.001998 AEF Skay Electro .22 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 AEF White Nile .30 0.00 0.00 0.00 .:30 0.00 0.00 0.001998 Tilda Rice 2.40 0.00 0.00 0.00 1.40 0.00 0.00 0.00

Total Portfolio: 43.48 6.24 .80 0.00 32.11 5.84 .80 0.00

Approvals Pending CommitmentLoan Equity Quasi Partic

1999 AEF GOMBA 1.40 0.00 0.00 0.001998 AEF RAM OIL 1.00 0.00 0.00 0.00

Total Pending Comunitment: 2.40 0.00 0.00 0.00

Uganda - Financial Mfarkets Assistance Project Page 52Draft Project Appraisal Document - Annex X. Country at a Glance May 7, 1999

Uganda at a glance 1113/99

Sub-POVERTY and SOCIAL Saharan Low-

Uganda Africa Income Development diamond'1997Population, mid-year (rnitlons) 203 614 2,048 Life expectancyGNP per capita (Alias method, US$) 330 500 350GNP (AtUas methor, USS billions) 6.7 309 722

Average annual growth, 1991-97

Population (%) 3.1 2.7 21Labor force (X1 2.7 2.6 2.3 GNP Gross

per -- iprimaryMost recent estimate itatest year available, 1991-97) capita enrollment

Poverty (% of population below natfonal poverty tine) 55Urban population (% of otal population) 13 32 28Life expectancy at birth (years) 42 52 59Infant mortality (per 1,000 Iv births) 99 90 78Child malnutrition (% of children under 5) 26 61 Access to safe waterAccess to safe water (% ofpopulaton) 34 44 71Illiteracy (% or population age 15+) 38 43 47Gross primary enrollment (% ofschool-age population) 73 74 92

Male 79 81 100 Low-incorme groupFemale 67 67 82

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1996 1997Economidc ratios*

GOP (US$ billions) 3.9 6.1 6.6Gross domestic investmentVGDP 6.3 8.4 16.0 15.3 TradeExports of goods and services/GDP 11.4 12.8 11.8 12.6Gross domestic savings/GDP 8.1 6.0 4.7 7.5Gross national savings/GDP 7.9 8.2 11.1 12.3

Current account balance/GDP 0.0 -8.2 -7.9 DInterest payments/GDP 0.6 0.6 0.6 Domestc InvestmentTotal debtUGOP 36.0 60.1 56:3 SavingsTotal debt service/exports 6.1 44.1 20.0 21.0Present value of debV/GDP 32.3Present value of debt/exports 264.5

Indebtedness1976-86 1987-97 1996 1997 1998-02

(average annual growth)GDP 1.9 7.0 9.3 5.4 7.0 UgandaGNP per capita -0.2 3.7 6.6 3.0 4.1 Low-incore groupExports of goods and services . 11.8 27.2 29.5 9.0

STRUCTURE of the ECONOMY1976 1986 1996 1997 Growth rates of output and Investment (°6)

(% of GOP)Apriculture 73.3 56.6 45.5 43.8 soIndustry 7.5 10.2 16.0 17.3 40 -

Manufacturing 6.1 6.4 7.8 8.2 20.

Services 19.2 33.2 38.5 38.9 o

Private consumption 85.0 85.1 82.6 .201 S 3 94 DS 9f 97General govemment consumption 9.0 10.2 9.9 Ga -GDPImports of goods and services 9.6 15.2 23.1 20.3

(average annual growth) 197646 1987-97 1996 1997 Growth rates of exports and imports (%f)

Agriculture -. 4.1 4.4 1.3 00Industry 11.0 18.1 14.5 40

Manufacturing 12.2 19.7 13.5Services 7.9 8.6 5.9 20

Private consumption 6_3 8_3 2_3 o _ , _,____General govemment consumption 6.1 8.4 7.0 94 96 go 97Gross domestic investment 7.0 10.0 -2.6 -20Imports of goods and services 6.3 13.0 2.0 Esports O* importsGross national product 1.8 7.1 9.8 6.0

Note: 1997 data are preliminary estimates.This table was produced from the Development Economics central database.- The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond vill

be incomplete.

Uganda - Financial Markets Assistance Project Page 53Draft ProjectAppraisal Document - Annex XI. Env.l Assessment, Social and Env. Analvses May 7, 1999

Uganda

PRICES and GOVERNMENT FINANCE

1976 1986 1996 1997 Inflation (%)Domestic prJces(% change) 0 IConsumer prices .. 148.1 6.9 5.5540Implicit GDP deflator .. 137.3 5.7 6.6 30

20Govemment finance to(% of GOP, includes current grants) oCurrent revenue .. 6.7 10.1 10.5 92 93 94 9f 96 97Current budget balance .. -1.6 1.2 0.9 GDP deflator O CPIOverall surplus/deficit .. 4.4 -5.9 -6.0

TRADE

(US$ millions) 1976 1986 1996 1997 Export and Import levels; (USS millions)

Total exports (fob) .. 379 590 671 1500Coffee .. 360 404 366Cotton .. .. 13 26Manufactures .. ... .

Total imports (cif) 380 1,218 1,246Food .. .. .. .. sW _

Fuel and energy .. 61 90 92Capital goods ..

91 92 93 54 99 96 97Export price index (1995=100) .. 49 75 67Import price index (1995=100) .. 82 107 107 M Exports *importsTerms of trade (1995=100) .. 60 71 63

BALANCE of PAYMENTS

(US$ millions) 1976 1986 1996 1997 Current account balanci, to GDP ratio (%)

Exports of goods and services 333 389 726 825 oImports of goods and services 285 446 1601 1,651Resource balance 48 -57 -875 -826

Net income -7 -44 -46 -17Net current transfers 2 101 421 322

Current account balance 43 0 -500 -521 -10

Financing items (net) 41 39 573 653Changes in net reserves -2 -39 -73 -132

Memo:

Reserves including gold (USS millions) .. 86 480 622Conversion rate (DEC, localUSS) 10.9 1,012.8 1,058.0

EXTERNAL DEBT and RESOURCE FLOWS1976 1986 1996 1997

(USS millions) CompositIon of total disbt. 1997 (USS millions)Total debt outstanding and disbursed 244 1,414 3,674 3,708

IBRD 3 43 0 0 G: 112IDA 42 370 1.849 1964 F: 76

Total debt service 20 172 150 182 E: 727IBRD 1 5 0 0IDA 0 4 21 22

Composition of net resource flows B: 1,954Official grants 5 82 338 .. 0: 445Official creditors 25 121 176 207Private creditors S 35 -7 -1Foreign direct investment ..Portfolio equity C:394

World Bank proqramCommilments 0 0 42 125 A. IBRD E- BilateralDisbursements 3 62 124 216 B. iDA D . Cther milltiateral F . PrivatePrincipal repayments 1 2 8 9 c . IMF G - Short.termNetlIowm 2 60 116 207 | I

Interest pavments 1 6 13 13Net transfers 2 54 103 194

World Bank 1113/99

Uganda - Financial Markets Assistance Project Page 54Draft ProjectAppraisal Document - Annex MI May 7, 1999

Annex XI: Environmental Assessment, Social and Environmental Analyses

As a "C" rated project, it is not expected that an environmental assessment would be warranted.

I , I I1 _ IBRD 25052R1

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FALLS

DEMOCRATIC a A FERRIESREPUBLIC p7>erellf --e X < v ux r sts ts : < A < ~~~~~~PRIMARY BITUMEN POADS

REPUBLIC PRMAY RAELROD

OF CONGO ) NEBBI.> -- PRIMARYGRAVELROADS

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-2 ., in P \ . NablIahk\ $ , 2°

a SELECTED TOWNS AND VILLAGES

-Adl Kwbarml \ OTI sr' f Ld :nI) b h hitpl DISTRICT CAPITALS

. NATIONAL CAPITAL

HOfMA,. j L - DISTRICT BOUNDARIES

kasargala ~ ~ ~ ~ ~ ~ ~ ~ ~ - ~ REGION BOUNDARIES

iNk-aaa Ed. aINTERNATIONAL BOUNDARIES

R b - .f .'iict araaa coin-ide ,th.Datio2tC,ta witha

K r pahnR dm P eai ar Iartah. p aKbara. Dh,,t*ict.

icBa~~~) < -. Poant / NabaaaMSE ir ORRKILOMETERS 0 50 I0 lt

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JUNE 1998

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