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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PREM 4 Africa Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (IDA H-0690 TF TF-52827) ON A CREDIT IN THE AMOUNT OF US$70 MILLION TO THE REPUBLIC OF MALI FOR A THIRD STRUCTURAL ADJUSTMENT CREDIT (SAC III) June 30, 2004 Report No: MLI This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 1, 2004) Currency Unit = CFA FRANC CFAF 720 (November 2001) = US$ 1.00 US$ 1.00 = CFA 535 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BCEAO CAS CFAF CMDT DCA EU HIPC HUICOMA ICR IDA IMF IPRSP LDP LSDP MEF MRSC MTEF OHVN PASAOP PR PRGF PRSC PRSP SAC III TA WAEMU Banque Centrale des Etats de l Afrique de l Ouest Country Assistance Strategy CFA Franc Compagnie Malienne pour Développement des Textiles Development Credit Agreement European Union Heavily Indebted Poor Countries Huilerie Cotonnière du Mali Implementation Completion Report International Development Association International Monetary Fund Interim Poverty Reduction Strategy Paper Letter of Development Policy Letter of Sector Development Policy Ministry of Economy and Finance Mission de Restructuration pour le Secteur Coton Medium-Term Expenditure Framework Office de la Haute Vallée du Niger Agricultural and Producer Organizations Project President s Report Poverty Reduction and Growth Facility Poverty Reduction Support Credit Poverty Reduction Strategy Paper Third Structural Adjustment Credit Technical Assistance West Africa Economic and Monetary Union Vice President: Country Director Sector Manager Task Team Leader Callisto E. Madavo A. David Craig Robert R. Blake Christina A. Wood

3 MALI ML - SAC III CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 8 5. Major Factors Affecting Implementation and Outcome Sustainability Bank and Borrower Performance Lessons Learned Partner Comments Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents

4 Project ID: P Team Leader: Christina A. Wood Project Name: ML - SAC III TL Unit: AFTP4 ICR Type: Core ICR Report Date: June 30, Project Data Name: ML - SAC III L/C/TF Number: IDA-35820; H-0690; TF-50895; TF Country/Department: MALI Region: Africa Regional Office Sector/subsector: Central government administration (58%); Crops (26%); Health (8%); General education sector (8%) Theme: Public expenditure, financial management and procurement (P); Other accountability/anti-corruption (S); Other financial and private sector development (S); Administrative and civil service reform (S) KEY DATES Original Revised/Actual PCD: 08/16/2001 Effective: 12/21/ /03/2002 Appraisal: 09/17/2001 MTR: Approval: 12/11/2001 Closing: 06/30/ /30/2004 Borrower/Implementing Agency: GOVERNMENT OF MALI/MINISTRY OF ECONOMY AND FINANCE Other Partners: Multilateral: IMF Bilateral: Netherlands, France STAFF Current At Appraisal Vice President: Callisto E. Madavo Callisto E. Madavo Country Director: A. David Craig A. David Craig Sector Manager: Robert R. Blake & Mary Emmanuel Akpa & Joseph Baah-Dwomoh Barton-Dock Team Leader at ICR: Christina A. Wood ICR Primary Author: Karen Hendrixson 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: Sustainability: Institutional Development Impact: Bank Performance: Borrower Performance: S L N S S QAG (if available) Quality at Entry: S Project at Risk at Any Time: No ICR S Under ICR Preparation guidelines, rating of Institutional Development Impact is not being implemented at this time.

5 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Third Structural Adjustment Credit (SAC III) supported two ongoing sets of actions that were critical to Mali s poverty reduction strategy: (i) reforms to restructure the cotton sector to enhance efficiency and restore economic growth; and (ii) reforms in public expenditure management to improve the efficiency and transparency of budgetary operations and enable more effective poverty reduction. This three-tranche credit of SDR 55 million (US$70 million equivalent) was designed to provide much-needed balance of payments support to enable the government to close the financing gap caused by a recent crisis in the cotton sector, while maintaining momentum in implementing these reforms and avoiding cuts in social expenditures. The credit was approved on December 11, 2001, and became effective on January 3, 2002, following ratification of the Development Credit Agreement (DCA) by Mali s National Assembly. While the cotton sector crisis was the immediate context for SAC III, the credit s broader context was Mali s dual economic and political transition dating from the early 1990s. Since that time, the country had undergone a steadily improving socio-economic performance, as characterized by a transition to pluralist democracy ( ); establishment of peace in the North following a period of rebellion (1994); and effective implementation of sound macro-economic, structural, and institutional reforms following the 1994 devaluation of the CFA-franc which had created the foundations of a market-led economy. In reflection of these reforms, average annual GDP growth from was 4.5 percent, enabling per capita GDP to rise annually by just under 2 percent. In preparation for regional economic integration under the West African Economic and Monetary Union (WAEMU), Mali also implemented comprehensive tax reform (1999) and adopted a common external tariff, lowering import duties (2000). Mali s noteworthy progress in achieving macro-economic stability and implementing structural and social policy reforms was signaled in September 2000, when the country reached the completion point under the original HIPC Initiative and the decision point under the enhanced HIPC Initiative. Despite these advances, Mali at the time of SAC III remained one of the poorest countries in the world, with limited resources; heavy export concentration (cotton, gold, and livestock accounted for approximately 91 percent of exports in 2002) and an accordingly high vulnerability to exogenous shocks; weak administrative structure and poor infrastructure; land-locked status; susceptibility to periodic drought; and high rates of poverty (estimated at 63.8 percent in the 2001 household survey). In light of these weaknesses, SAC III was tightly focused on supporting on-going reforms in just two areas recovery and restructuring of the cotton sector, the most important economic sector, and strengthening public expenditure management while providing balance-of-payments support to the government. These objectives were clear and realistic, and by focusing on reforms in these areas, the SAC III targeted the reforms most critical to Mali s poverty reduction program, and was therefore highly responsive to the country s circumstances and development priorities. SAC III s tight focus also reduced the complexity of the operation by limiting the number of components, the project s geographic dispersion, and the number of primary institutions involved (primarily the Treasury, Budget Office, and Section des Comptes the external audit agency for the public expenditure measures, and the Mission de Restructuration pour le Secteur Coton MRSC, for the cotton sector). 3.2 Revised Objective: Program objectives remained unchanged. 3.3 Original Components: As outlined in the Letter of Development Policy (LDP), SAC III supported three components: satisfactory macro-economic performance; the cotton sector recovery and restructuring program; and a program of public expenditure reforms. These components are discussed below

6 Macro-Economic Performance: SAC III provided balance of payments support to the Malian government. As with all structural adjustment operations, SAC III required satisfactory macro-economic performance, although there were no tranche conditions linked to specific macro-economic outcomes. The first tranche of SDR 19.6 million (US$25 million equivalent), disbursed upon effectiveness, covered approximately one third of Mali s balance of payments shortfall for the FY2001 fiscal year, with the remainder covered by the IMF and bilateral donors. Cotton Sector Recovery and Restructuring Program. This component was aimed at restoring the cotton sector the country s main source of economic growth and income generation to a sustainable path of growth and making it more competitive following a crisis in production in 2000 (see Box 1). This crisis had the largest impact on farmers in rural areas, and by focusing on reforms in the cotton sector, the credit directly supported Mali s poverty reduction goals.[1] As outlined in the President s Report, the cotton sector recovery program consisted of a short-term action plan designed to: address the sector s most urgent problems; rapidly restore output and farmers incomes during the crop season; and prevent the social and other consequences that would result from the sector s further deterioration. The measures to be adopted under this short-term plan would prepare the stage for a more comprehensive and longer-term reform of the cotton sector to a competitive, market-driven sector structure, to be undertaken in the period, following completion of SAC III. Notably, the government s short-term and longer-term cotton sector policies were developed using extensive consultation with cotton farmers (see Box 1). The short-term action plan supported by SAC III had the following elements: (i) an emergency financial rescue plan for the cotton parastatal, the Compagnie Malienne pour le Développement des Textiles (CMDT) that covered the company s cash deficit and the projected operational loss for the season; (ii) audits of the CMDT accounts and completion of studies to define the longer-term liberalization program; (iii) preparation of the first package of liberalization measures, including privatization of the Huilerie Cotonnière du Mali (HUICOMA), the cottonseed oil subsidiary of the CMDT, and the ginning mills and other assets belonging to the CMDT in the OHVN/Kita zone; and (iv) restructuring of the CMDT to refocus its operations on core activities (cotton ginning and product marketing), while divesting its collection and marketing activities. This last element would require the sale of non-core assets, sub-contracting non-core services to the private sector and/or farmer organizations, and preparation of a social plan to meet the costs of staff downsizing. Implementation of these measures would set the stage for the second stage of the reform program, following SAC III, during which the CMDT would be broken up into several separate entities and privatized. Public Expenditure Reforms for Poverty Reduction. This component sought to improve the linkage between government expenditures and national poverty reduction objectives, and promote the efficient and effective use of public resources, particularly in regard to poverty reduction. Building on reforms implemented under the Bank s Economic Management Credit (Cr. No. 2894), SAC III focused on three areas: improving budget preparation; improving budget execution; and strengthening monitoring, transparency, and accountability. Improving the Budget Preparation Process: As outlined in the LDP, the government s strategy was to improve budget preparation by applying harmonized regional procedures, in accordance with WAEMU public finance rules and regulations; better integrate the three national budgets (the annual current budget, an investment budget, and a program budget); and improve the classification of expenditure items to ensure conformity with development objectives and poverty reduction actions. Specifically, the government planned to prepare and approve a nomenclature text used for the local administrations (the Collectivités locales) that was compatible with the national accounting nomenclature (Nomenclature comptable de l état), thereby improving expenditure consolidation and enabling the more effective tracking of expenditures. In order to better link the budget process to development objectives, the government planned to fully develop a medium-term expenditure framework (MTEF), compatible with the macro-economic framework, that integrated education and health expenditures. This would be followed by the preparation of a MTEF that integrated the expenditures of other priority sectors, as defined in the government s forthcoming (in May 2002) Poverty Reduction Strategy Paper (PRSP)

7 Box 1. Mali s Cotton Sector Crisis Following devaluation of the CFA in 1994, Mali experienced a rapid growth of cotton production and exports, but beginning in 1998 Mali s economic performance was undermined by the weak performance of the cotton sector. The sector s impressive growth from shielded the sector s monopolistic inefficiencies, in particular, the increasingly poor performance of the cotton parastatal company the Compagnie Malienne pour le Développement des Textiles (CMDT), which had high internal costs and inadequate governance and financial control mechanisms. When prices for cotton lint declined sharply in 1998, the CMDT proved unable to respond effectively to the shock and began generating operating losses. As the government covered these losses by transfers from the budget to the parastatal, this crisis threatened to undermine Mali s satisfactory fiscal and economic performance resulting from the reforms undertaken in the 1990s. While the government responded effectively to this crisis in early 2000 including prosecuting the CMDT CEO for corruption, freezing investments and controlling costs, and launching internal audits the CMDT s financial difficulties led it to announce a purchase price in May 2000 of only 160 CFAF/kg, versus a 200 CFAF/kg price in neighboring countries. The subsequent farmers boycott resulted in nearly a 50 percent fall in production, increased losses at the CMDT, and a significant drop in rural family incomes. In response, the government and the CMDT began a process of extensive consultation with cotton stakeholders. The CMDT negotiated an agreement with farmers in 2001, laying out the obligations of the government and the CMDT vis-à-vis cotton farmers; unfortunately, it came too late for the 2000/01 season, and in August 2000 the government requested an adjustment operation. In February 2001, a specialized unit was created in the Prime Minister s Office to oversee cotton sector restructuring (Mission de Restructuration pour le Secteur Coton -- MRSC) utilizing regular consultation with farmers. Finally, the government s short-term and long-term reform programs were developed through a national forum (Etats généraux du cotton), held with stakeholders in April In particular, this program reflected farmers preference for a gradual approach to the reform program to enable capacity building of farmers organizations to manage functions such as input supply, credit, and eventually ginning. Improving Budget Execution: Budget execution was to be improved by addressing the most pressing weaknesses that affected the poverty reduction program. First, expenditure functions would be strengthened through the development of formalized procedures and preparation of a procedural manual, in order to reduce expenditure processing times. Second, the flow of information between the treasury, budget, and financial control departments of the Ministry of Economy and Finance would be strengthened through the development and implementation of a software program that would interconnect departments within the Ministry, thereby raising the efficiency of information flows and record keeping. Strengthening Monitoring, Transparency, and Accountability: To improve governance and transparency in the management of public finances under SAC III, the government planned to strengthen government control and inspection services; reduce the processing time of the monthly Consolidated Treasury Balance statement to a maximum for 45 days; and strengthen the capabilities of the Section des comptes of the Supreme Court to facilitate more timely audits of budget reports. Linkage of Component Design to Objectives: Design of the Credit s components was clearly linked to the general objectives described in Section 3.1 above. By restoring the health of the cotton sector, the credit in the short-term would reduce the CMDT s financial drain on the budget, restore farmers confidence in the government; and boost cotton production, thereby raising rural incomes; SAC III would also set the stage for further reforms to increase the sector s competitiveness in the longer-run. The public sector management reforms would enable the increased efficiency and effectiveness of expenditure management, enabling the better tracking and more efficient allocation of poverty-related expenditures, and therefore would contribute to the government s poverty reduction goals. The operation explicitly incorporated the lessons from the previous SAC I and SAC II. These lessons were (i) government commitment should be strong and sustained; (ii) the institutional and implementation capacity required to implement the reforms should be programmed over a sufficiently long period; and (iii) upfront conditionalities prior to tranche release are appropriate for an adjustment - 4 -

8 operation. These lessons were incorporated in the following manner: (i) as noted above, government ownership of the reforms was strong; (ii) targeted support to cotton farmers was provided under a separate credit the Agricultural Services and Producer Organization Project (PASAOP, Cr MLI), reflecting past experience that a separate targeted operation was a better instrument for institutional development than a TA component accompanying a SAC; and (iii) an array of measures were completed by the government prior to project negotiations and disbursement of the first tranche.[2] 3.4 Revised Components: The DCA was amended one time, subject to the board s non-objection in December 2002, in order to transfer the two partially completed second tranche conditions bringing to the point-of-sale the oil seed company, HUICOMA, and the CMDT cotton ginneries in the OHVN/Kita zone -- to the third tranche. This amendment meant that the divestiture targets of the third tranche no longer applied.[3] The amendment decision was based on the fact that the other tranche release conditions had been satisfied and the government s performance on the public expenditure reforms was fully satisfactory, and broadly satisfactory with the exception of the two sales, which were underway on the cotton sector reforms.[4] Moreover, changing external circumstances necessitated tranche release to assist the government to cope with the growing budgetary impact of the Côte d Ivoire crisis (which closed the road to Abidjan, the transit point for percent of Mali s trade). Although the government had reduced expenditures (except for those relating to poverty reduction) to reflect the shortfall in revenues, a financing gap of US$61 million equivalent remained. Disbursement of the second tranche of US$20 million, in conjunction with additional funding from the international community, would enable the government to close this gap. The crisis in the Côte d Ivoire, as well as depressed cotton prices, increased the uncertainty of the Malian cotton sector investment climate. The decision to amend the DCA and move these sales to the third tranche, rather than seek a waiver of these conditions, was based on (i) the Bank s assessment that the point-of-sale targets would be met, and probably no later than June 2003, the credit closing date; and (2) that point-of-sale as a final tranche actually reflected best practice in the Bank, particularly in light of the uncertain investment climate. This confidence in meeting the point-of-sale targets was broadly validated in that the targets were ultimately met; however, they were not satisfied until August 2003, following an extension at the request of the Malian authorities -- of the original closing date to December 30, 2003 to give them sufficient time to complete these actions. The decision to make point-of-sale, rather than divestiture, a final tranche conditionality was also preferable because while the government could be held responsible for reaching this stage, it had little control over the final step; in fact, neither of these transactions proceeded beyond the point-of-sale stage. As such, the amendment of the DCA was not a sign of a softening of the Bank s terms, but rather a sign of Bank flexibility to avoid penalizing the country for performing ably under the impact of dual exogenous shocks. The closing date was extended for a second time to June 30, 2004 after a supplemental grant was approved; this extension was necessary to keep SAC III active during the supplemental grant implementation period (the supplemental grant is discussed further in Section 5.4 below). 3.5 Quality at Entry: Quality at entry is rated satisfactory, based on (i) the credit s consistency with Bank and government priorities, as well as the ongoing program with the Fund supported by the Poverty Reduction and Growth Facility (PRGF); (ii) quality of the design; (iii) mitigative measures to safeguard against any negative economic and social impacts, and to strengthen financial accountability: and (iv) the credit s largely successful anticipation of risk. Each of these is discussed below. Consistency with Bank and Government Priorities: The credit was directly supportive of the Government s priorities, broadly consistent with the CAS objectives, and closely linked to the IMF s lending program. The credit directly reflected the government s priorities and development strategy as set forth in the LDP, and was mutually designed by both the Bank and the Borrower. Government ownership of the reforms was very high, particularly in the cotton sector, as signified by its - 5 -

9 consensus-building with sector stakeholders. SAC III was also compatible with Mali s Interim Poverty Reduction Strategy Paper (I-PRSP), submitted to the IMF and Bank Boards in mid-2000, notably with the I-PRSP s goals of growth and income generation; human development; and good governance. As set forth in the President s Report (PR), the credit s design clearly articulated the linkage between macro-economic performance, public sector expenditure reform, and the government s poverty reduction goals. The credit directly built upon two previous adjustment operations, which successfully supported reforms in the macro-economic incentive system and public resource management, as well as measures to improve competitiveness. SAC III was also broadly compatible with the Bank s assistance strategy to Mali, as set out in the FY98 CAS (for FY99-01).[5] This strategy, which was closely linked to the government s development agenda, had a strong poverty focus with two strategic priorities: (i) stable economic growth; and (ii) sustainable human development. As the CAS preceded Mali s cotton sector crisis, it did not anticipate the need for reforms to the sector; nevertheless, reforms to stabilize and increase the efficiency of this sector would clearly contribute to stable economic growth, in light of this sector s importance to the Malian economy. Similarly, SAC III s focus on improving public expenditure management in order to increase the efficiency of public service provision, particularly in health and education, clearly contributed to sustainable human development, and was also consistent with the CAS focus on enhancing the allocation and efficiency of public expenditure while protecting social spending. In addition, the public expenditure management reforms to be implemented under the Credit were both a continuation of an ongoing reform program supported by the Bank under previous successive operations, and explicitly reflected international best practice in public expenditure reform.[6] Finally, SAC III was highly consistent with the Fund s ongoing (commencing in August 1999) three-year PRGF-supported program in Mali, which focused on the fiscal aspects of public expenditure management (efficient use of HIPC and other resources) and restoring cotton sector viability (measures impacting on government transfers to the sector). Structural measures under the PRGF program in these sectors were coordinated between the Bank and the Fund, and the cotton reform program and sector strategy were also developed through joint technical discussions between the two institutions and the government in May-June Quality of the Design. The quality of the credit s design was highly satisfactory. An adjustment credit was appropriately selected as the mechanism for addressing Mali s financing gap arising from the crisis in the cotton sector. Although processing the operation as a PRSC lending instrument was considered, an adjustment credit was ultimately selected (by pre-appraisal in September 2001) because its quicker processing time would enable the client to more rapidly access the balance of payments support urgently needed by the country. The credit s narrow focus on just two components reflected the Bank s reform experience in Mali under the previous CAS ( ); namely, that reforms of a cross-cutting nature (e.g., capacity building), and with sensitive political connotations, required to time to mature, to become accepted, and to be carefully implemented. Lessons from cotton sector reform programs in other countries were also incorporated into the credit design; specifically, the need to focus credit design on achieving the necessary steps for implementation success, rather than achieving a full liberalization date; and the importance of strengthening farmer organizations to facilitate their participation in the new competitive environment. It was correctly recognized that an adjustment operation was not an adequate instrument for monitoring such micro operations as empowering cotton farmer organizations; as discussed above, these were instead addressed through a targeted cotton component in a complementary operation, PASAOP, which was submitted to the board at the same time. A matrix and timetable of policy outcomes was set forth in the PR, but the Credit was not linked to specific quantitative targets. As noted, release of both the second and third tranches was linked to the completion of specific reform actions. Tranche conditions listed in the DCA were cross-referenced with specific paragraphs in the LDP, reflecting the close mutuality of purpose between the credit and the government s program

10 Consistency with Bank Safeguards: Consistency with Bank safeguard policies is typically not an issue for an adjustment loan. Nonetheless, several specific measures were undertaken to address the Credit s potential environmental and social impacts, and to address financial accountability issues. Although as an adjustment operation, an EA for SAC III was not applicable,[7] and an assessment of the environmental impact of the cotton recovery program judged the environmental impact as likely to be minimal (because no major expansion of cultivated area was expected), several mitigative measures (regarding fertilizer and pesticide use) were nonetheless incorporated into the PASAOP loan design. Action plans to mitigate any environmental impact from the HUICOMA and OHVN area privatizations were also incorporated into the privatization documents for those entities. To address the likely personnel layoffs stemming from the reform and restructuring of the CMDT, the government committed to preparing a Social Action Plan to fund the anticipated layoffs and facilitate the transition of those losing their jobs. This plan was subsequently implemented. Financial assessment and accountability issues were to be addressed through the Bank s ongoing dialogue on the implementation of measures to improve accountability, including completion of a Country Financial Accountability Assessment (CFAA) in FY02-03 and a Country Procurement Assessment Report (CPAR) in FY04, which identified key policy measures needed to strengthen financial management. Additional measures included the creation and staffing of a General Auditor position in 2003, and strengthening of the Accounts Section of the Supreme Court in preparation for its transition into a Court of Accounts in Assessment of Risk: The President s Report identified three potential risks to the operation. These were: (i) weak institutional capacity could delay implementation; (ii) preparation for the 2002 elections could detract from the reform focus; and (iii) the persistence of a deterioration in the terms of trade beyond 2001 could delay the cotton sector s return to financial viability. Several measures were introduced to mitigate the risk posed by weak institutional capacity. These included the provision of technical assistance to assist the government with preparation studies for the cotton reform program, and almost daily interaction with the government to provide advice and assist the program to move forward. In addition, other donors were also providing technical assistance to facilitate progress on the public expenditure program, and capacity constraints did not significantly impede implementation of these reforms. The credit failed to note, however the potential risk that donor assistance to the MRSC the small unit which was the key implementing agency for the cotton sector reforms might not be provided as pledged. In fact, at one point, the future of the MRSC was at risk because there was no secure funding for the agency. Ultimately, the agency s inability to cope with all the demands placed on it was a significant contributing factor to the delays encountered in the cotton sector reform implementation, although overall, the agency was instrumental in implementing and monitoring progress under SAC III. The risk to the reforms posed by the preparation for the election was successfully addressed through careful sequencing of the cotton restructuring program. Preparatory studies (e.g., a social plan for the CMDT downsizing, plans for spinning off CMDT s non-core activities) were undertaken in the period prior to the election, while more politically sensitive actions, such as the HUICOMA privatization, were deferred to the post-election period. This risk was not an issue for the public expenditure management reforms, which by their nature were not sensitive to the electoral cycle. The final risk that of persistently adverse terms of trade for cotton was to be addressed in 2002 in the context of the development of a long-term financial recovery plan for the sector. Given the unanticipated and precipitous drop in the international cotton price below the cost of production (as a result of cotton subsidies in developed countries), it was not really possible to devise a long-term plan capable of addressing such artificially low prices; instead, efforts focused on short-term efforts to cut losses while maintaining the price stability necessary for a recovery in cotton production. Subsequently, however, a three-year financial plan was developed. One risk that was not considered, but which had substantial impact on Mali s macro-economic performance in , was that a political crisis in Côte d Ivoire could deny Mali access to the port of Abidjan. While this event did occur and with substantially deleterious effects on the Malian economy - 7 -

11 its occurrence, duration, and the severity of its impact on the region were not truly foreseeable at the time of credit design. [1] Although quantitative data were lacking at the time of the Credit s design (as more up-to-date information on poverty incidence would not become available until early 2002, following completion of the 2001 poverty assessment survey) qualitative data indicated that poverty reduction among the poor, including cotton producers, had suffered a setback as a result of the crisis in the cotton sector. [2] In the cotton sector, these were: (i) submission of an independent financial report containing CMDT s projected operational account and cash-flow for the 2001/02 cropping season; assessing the effectiveness of implementation of cost-saving measures by the company during the season; and identifying additional cost-saving measures that could be realized in the short-term, as well as a set of indicators to monitor implementation of those measures. In the area of public expenditure management, these were submission of: (i) the monthly consolidated Treasury balance statement for the period ending June 30, 2001; detailed consolidated budget statement of expenditures by functional Ministry (rather than by budget chapter); and a detailed budget statement of expenditures of HIPC resources; (ii) documentation showing links between the 2002 current and investment budgets; (iii) a synthesis document showing the distribution of the 2002 budget allocation by function; and (iv) a document identifying all budget lines (in addition to the HIPC expenditure lines) that were attributable to the government s overall poverty alleviation program. [3] SAC III was originally designed and endorsed by the ROC as a US$50 million, two-tranche operation. In this design, bringing these assets to point-of-sale was a final tranche conditionality. Falling world cotton prices and the generally worsened terms of trade in the aftermath of the September 2001 attacks, however, as well as an explicit request from the client, led to an increase in the credit amount to US$70 million. This larger amount was incorporated into the program by adding a third tranche requiring, for the cotton sector, the divestiture of government ownership of these assets. The point-of-sale requirement then became a second tranche conditionality. [4] The second tranche conditions that were satisfied were: maintenance of a satisfactory macro-economic framework; adoption of the nomenclature for the Collectivités Locales; and completion of the monthly Consolidated Treasure Balance Statement within the requisite 45-day processing period. [5] The previous CAS period was extended because the PRSP on which the new CAS would be based would not be available until Moreover, given the certainty of the change of government following the legislative and Presidential elections scheduled for mid-2002 (since the President had reached the tem limit), preparation of the new CAS prior to the elections would have undermined government by-in of the CAS. [6] Best practices in terms of having the following four characteristics: prioritization, transparency, credibility, and incorporation of incentives and sanctions. [7] As the operation was subject to OD 8.60 and not to OP Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: This credit is rated satisfactory as it achieved all its objectives, albeit with some delays in the cotton sector. This outcome is noteworthy, given that SAC III was implemented in the context of unfavorable rainfall in late 2002, which lowered cereals and cotton output; a continued depression of cotton prices, owing to heavily subsidized global production which caused international cotton prices to reach their lowest levels since ;[8] and the substantial economic impact of the Côte d Ivoire crisis (see Box 2 below). 4.2 Outputs by components: The Credit s outcome in terms of each component is discussed below. Macro-Economic Performance: This component is rated satisfactory. After falling to 3.5 percent in 2001, real GDP growth rose to 9.7 percent in 2002,[9] as cotton production recovered from depressed levels and gold output reached a new high. Owing to the impact of the Côte d Ivoire crisis and stagnant cotton prices, however, GDP growth fell to -0.4 percent in 2003, but macro-economic performance was maintained within targets in 2002 and 2003 under the Mali s PRGF-supported arrangement with the Fund. Average annual inflation which was projected in the PR to fall to 2-3 percent, remained high (for Mali) in 2002, at 4.9 percent (compared to 5.2 in 2001) before falling to less than one percent in The fiscal deficit was contained in accordance with the convergence obligations under the WAEMU - 8 -

12 regional integration agreement. Revenue generation was also significant, with revenues reaching more than 17 percent of GDP, well above the sub-saharan average. Box 2: Macro-Economic Impact of the Cote d Ivoire Crisis Beginning in September 2002, civil strife in Côte d Ivoire resulted in the closure of the Bamako-Abidjan road. Prior to this crisis percent of Mali s trade passed through Abidjan. The resultant cost of diverting trade to other ports in the region (equivalent to a 40 percent cost premium for cotton exports alone), and the collapse of livestock exports to Mali s primary market (amounting to a loss of US$12 million in 2002), had a substantial negative macro-economic impact. As a consequence, real GDP growth was reduced by an estimated 0.5 percent in both 2002 and 2003, owing to lower growth in trade, construction, and public works. In the external sector, the resultant delay in the shipment of cotton exports lowered GDP by the equivalent of 1.2 percent of GDP in As a result of the collapse in cotton and livestock exports, the current account deficit (excluding official transfers) widened from a minus 5.8 percent of GDP in 2002 (using the old national accounts methodology) to an estimated minus 10.3 percent in Fiscally, there was an estimated shortfall of tax revenue of 1 percent of GDP in 2002 (primarily from lower import duty receipts and domestic value-added tax payments). Additional fiscal impacts in 2003 came from tax exemptions granted to assist enterprises harmed by the crisis and a delay in increasing the special tax on petroleum. Finally, additional negative economic repercussions resulted from the return of over 40,000 Malians from Cote d Ivoire and a collapse in workers remittances, which fell by 30 percent between 2001 and While the road officially reopened in May 2003, traffic was slow to recover owing to security concerns and security fees imposed on each truck journey. Mali s sound macro-economic policies enabled the country to reach the completion points under the original and the enhanced HIPC Initiative in September 2000 and March 2003, respectively; the country s PRSP was also approved by the Bank and Fund boards in March The debt relief provided under the Enhanced HIPC Initiative enabled the debt sustainability ratio to drop to an acceptable level. In accordance with the SAC III s objectives, cuts in social sector expenditures critical to poverty reduction were not only avoided, but these expenditures rose steadily during the credit period, from CFAF 80 billion in 2002 and CFAF 102 billion in 2003, to a proposed CFAF billion in Cotton Sector Recovery and Restructuring Program. As noted above, this component consisted of a narrowly focused, short-term action plan designed to address the sector s most urgent problems, rapidly restore output and farmers incomes, and prevent the social and other consequences that would result from the sector s further deterioration. Implementation of this plan would then set the stage for the implementation of a more comprehensive reform program, to be implemented beginning in 2003, following SAC III completion. In light of the fact that these objectives were met, this component is rated satisfactory. The following aspects of the short-term plan were successfully introduced: Important progress was made in terms of improving the CMDT s management, reducing its cost structure, and narrowing its focus on core activities. A plan for downsizing the CMDT was implemented, albeit with a six-month delay as a result of discussions to determine the size of the compensation package. Implementation of the downsizing plan led to the transfer of the company s public service missions to the government in January 2003, and a reduction in workforce by 26 percent (i.e., 596 layoffs) in June The CMDT s agricultural extension services and a portion of its trucking services were also divested in that year. As a consequence of these actions, the CMDT s credibility with the banking sector has been restored In addition, the government adopted in July 2002 a market-based mechanism that set the producer price for seed cotton based on movements in international cotton fiber prices, as well as taking into account sub-regional producer prices. This mechanism was partly used in the 2001/02 crop year, following consultation with producer organizations. Notably, the price for the 2001/02 season, which was 10 percent less than that of the previous year, was announced prior to the elections, indicating the strength of the government s commitment to the reform program. As projected in the SAC III PR, cotton production which had dropped to 243,000 tons in 2000/01 rebounded in the 2001/02 crop season, reaching 571,000 tons, and accordingly raising the income of Mali s 3.3 million cotton farmers, the second poorest socioeconomic group in Mali, accounting for 30% of the population

13 Two other key areas of the short-term reform package, relating to the privatization of the cottonseed oil company, HUICOMA, and the offer for sale of the CMDT assets in the OHVN/Kita zone, were less successful. While both companies satisfied the point-of-sale conditions required for tranche release, these were satisfied only after considerable delay; more importantly, neither company was ultimately privatized.[10] The bidding process for both entities was subject to delays owing to a number of factors, [11] including: (i) in the case of HUICOMA, there was an initial delay caused by technical discussions between the Bank and the MRSC in August/September 2002 regarding the method of sale, and a subsequent decision to conduct additional studies on the best method; (ii) institutional weaknesses of the MRSC, in terms of limited staff resources to develop and implement the bidding process; (iii) time needed by both the MRSC and the Bank to review technical bids and for the Bank to provide (for HUICOMA) a no objection at each stage of the process;[12] and (iv) in the case of HUICOMA, several requests for extension by the bidder. Finally, the unfavorable market environment due to the Côte d Ivoire crisis and depressed cotton prices had an overall negative impact on the privatization process. As discussed in Section 3.4, delays in meeting the point-of-sale conditions for these entities led to an amendment of the cotton conditionalities and an extension of the credit closure date by six months to end-december While clearly much of this delay and subsequent amendment was due to exogenous factors, it is clear in retrospect that the proposed four-month timetable for reaching the point-of-sale for each entity was clearly too ambitious, particularly given the institutional weaknesses of the MRSC (discussed below) and the difficulties encountered in a number of other public enterprise divestitures in Mali.[13] Moreover, while exogenous factors no doubt affected investor interest in HUICOMA, the privatization format was sub-optimal. In an attempt to create greater government ownership of the sale, the Bank acquiesced to two decisions by the government: (i) at the time of credit negotiations, to sell HUICOMA in the form of shares, rather than through the sale of company assets, which would be more compatible with the longer-term strategy for the subsequent break-up of the CMDT; and (ii) a decision not to use an investment advisor to facilitate the sale -- consequently, there was no professional intermediary to overcome differences between the authorities and the buyer during negotiations to move the sale forward. This approach likely affected the number of companies submitting bids and impeded completion of the sale to the one bidder that met the selection criteria, and as a consequence contributed to the failure to move this entity out of government hands.[14] While the outcome of these privatizations is disappointing, these assets represent only a very small portion of the value-added in the sector; in addition, failure to privatize these assets did not pose a setback to SAC III s overall objective of restoring cotton sector growth. A more disappointing outcome is the government s failure to fully adopt and commit to a plan to privatize the CMDT within the time frame envisioned under SAC III, namely, by 2002, setting the stage for implementation of comprehensive reforms beginning in In accordance with the credit s short-term action plan, a study on sector liberalization options was completed. Following consultation with producers and other stakeholders, the MRSC proposed that the government privatize the CMDT through the creation of three to four privately owned cotton companies (identified as option 2 in the study), with the assistance of an investment advisor, and to fully liberalize the sector over 3-4 years. Furthermore, the authorities agreed to the action of adopting option 2 set forth in the Aide-Mémoire of the February 2003 mission. Subsequently, however, this consensus broke down as the authorities decided to sell the CMDT as a single entity (option 1), against the advice of the Bank, other development partners and the MRSC, before re-coalescing again in June 2003 on the original approach, and subsequently commencing discussions to engage the IFC as an investment advisor. Judged from the perspective of SAC III implementation performance which required only the development of a detailed study on the options for full liberalization of the sector this is a satisfactory outcome. Judged from a broader developmental perspective, however, the delay from this reversal resulted in a loss of six months in moving towards the longer-term reforms to be undertaken after SAC III. Moreover, the subsequent 7 to 8 months spent negotiating the terms of reference for the IFC as an investment advisor has not only resulted in additional delay, but has sent a less than positive signal to

14 the private sector and international community regarding the government s intent and commitment. As a consequence of these delays, comprehensive reform of the cotton sector has been delayed. In addition, implementation of the new price-setting mechanism, which was partially introduced in the 2002/03 season, has not been completed, owing to government s misunderstanding of the mechanism; consequently, there is a lingering risk that the government budget might again have to cover CMDT deficits should cotton prices again fall precipitously, therefore casting doubt on the sustainability of this operation (discussed in Section 6 below). Public Expenditure Reforms for Poverty Reduction. This component is rated highly satisfactory. All the planned reforms were fully implemented on schedule. These reforms were ambitious in scope, particularly in light of: (i) the time inherent to changing procedures and practices; and (ii) Mali s weak implementation and institutional capacity. Moreover, the successful implementation of these reforms is notable from a poverty alleviation perspective; in light of the fact that government revenue in the short-term is unlikely to undergo rapid growth, improved expenditure management will be critical to achieving the country s poverty reduction goals. The following measures were implemented: Improving the Budget Preparation Process: The budget preparation process was improved, moving towards a system that will be capable of solidly linking public resource allocations to the poverty reduction objectives in the country s development programs. Beginning with the 2003 budget, the authorities introduced three-year budget allocations for all sectors, compatible with the macro-economic framework, and prepared MTEFs for health and education, to be followed by MTEFs for rural development and public works/transport sectors. These MTEFs will enable improved intra-sectoral prioritization of expenditures in accordance with poverty reduction objectives. A new budget classification system, which uses a budget nomenclature for the local level that is compatible with the national nomenclature, was also implemented, thereby enabling budget consolidation across all government levels and allowing better poverty-oriented monitoring. This is particularly significant in light of the fact that an increasing share of social expenditures is being managed at the local level. Improving Budget Execution: The efficiency and effectiveness of public expenditure execution was improved under SAC III. The technical and functional specifications for integrating the computer systems of the treasury, budget, and financial control departments was completed, and development and testing of the system commenced as scheduled in January The new system was successfully implemented in early 2004, making it possible to monitor the different phases of public expenditure from a unified database accessible to the budget, financial control and treasury departments of the Ministry of Economy and Finance, thereby improving budget management, facilitating record keeping and controls, and improving information flows between these departments. In addition, the procedures manual for expenditure functions was completed, endorsed, and is currently in use. Strengthening Monitoring, Transparency, and Accountability: Financial transparency and managerial accountability in the use of budget resources were improved. Internal and financial audit functions were strengthened through increased budgetary allocations to the key units between 2001 and 2003 and through an increase in the number of inspection staff. Additional resources were made available in Similarly, budget transparency and accountability was improved by strengthening of the capabilities of the General Accounts Office (the Section des Comptes) of the Supreme Court.[15] Finally, in addition to preparing monthly treasury balance statements, the government now also prepares and distributes a quarterly note on the country s economic and financial conditions. Notably, these measures complement other Bank-supported measures to improve public expenditure management.[16] 4.3 Net Present Value/Economic rate of return: Not applicable. 4.4 Financial rate of return: Not applicable. 4.5 Institutional development impact: