CURRENCY EQUIVALENTS SDR 1.00=US$1.48 US$ 1-00= FC 373 December31,2003 FISCAL YEAR January 1to December31 ABBREVIATIONS AND ACRONYMS AAA Advisory andAnalytical Activities ACS Administrative and Core Support BP Bank Procedure CAS Country Assistance Strategy CFAA Country FinancialAccountability Assessment CPAR Country Procurement Assessment Report DSA Debt Sustainability Analysis EMRRP Emergency Multisector Rehabilitation and Reconstruction Program FY Fiscal Year GDP Gross Domestic Product HIPC Highly-Indebted Poor Countries IDF InstitutionalDevelopment Fund IGR Institutional andGovernanceReview IMF International Monetary Fund I-PRSP InterimPoverty Reduction Strategy Paper JSA Joint Staff Assessment MDG MillenniumDevelopment Goal MDRP Multi-country Demobilization and Reintegration Program MONUC UnitedNations Observation Mission inCongo NGO Non-governmental organization OP Operational Policy PCF Post-Conflict Fund PER Public ExpenditureReview PRGF Poverty Reduction and GrowthFacility PRSP Poverty Reduction Strategy Paper SMP Staff Monitored Program UN UnitedNations UNDP UnitedNations Development Program TSS Transitional Support Strategy Vice President: Callisto Madavo Country Director: Emmanuel Mbi Task Team: Xavier Devictor (Team Leader) EmilieMushobekwa, Stephanie Abdulin TABLE CONTENTSOF FOROFFICIAL USEONLY EXECUTIVE SUMMARY INTRODUCTION ............................................................................................................................... 1 1 BACKGROUND . . ................................................................................................... A. Background.................................................................................................................... AND CONTEXT 2 2 B Recentmilitary and political developments................................................................... . 3 .Militarydevelopments ........................................................................................... 3 - Political developments ............................................................................................... 4 - Prospects.................................................................................................................... 4 C. Recenteconomic developments..................................................................................... 5 .Theimpactofthe conjli - The economicprogram ................. .Thedebtissue............................................................................................................. 8 - Prospects.................................................................................................................... 9 D. The persisting social crisis............................................................................................. 9 E. DRC at a crossroads..................................................................................................... 12 11 IMPLEMENTATIONOF THE 2001 TRANSITIONAL . SUPPORT STRATEGY ............................... 13 A. The 2001 TSS..................................................................................................................... 13 B. Overall assessment and results....................................................................... 13 C Detailed implementation status .......................................................................................... . 13 D. Lessons learned.................................................................................................................. 16 111 THEROADAHEAD . ................................................................................................................. A. A transformedenvironment and the needto adjust......!..................................................... 18 18 18 C. The Poverty Reduction Strategy Paper Process.................................................................. B. DRC's strategic objective for the coming period ............................................................... 19 D. The key challenges ahead................................................................................................... 20 - Social stability and security...................... --- Social High andshared economic growth........... Governance and capacity ........................................................................................ 22 development .............................................................................. 24 Iv.AA BANKSTRATEGY ............................................................................ 26 . Operationalcontext ............................................................................................................ FOR FY04 AND FY05 26 B. Objective and strategic elements of the TSS ...................................................................... 26 C Expected results, and monitoring and evaluation............................................................... . 27 D. Donor coordination and selectivity .................................................................................... 27 E. Instrumentsfor Bank Group assistance.............................................................................. 28 --- Managing the existingportfol Providing advisory services a -- Engaging Launching new operations....... ..................................................................... 30 the entire Ban Mobilizing and coordin F. Risk management and exit str - Risk management .................... .................. .......................... 32 - Exit strategy .................... ...................... 34 This document has a restricteddistribution and may be used by recipients only in the performance of their official duties Its contents may not be otherwise disclosed lwithout World Bank authorization . . I ANNEXES Annex 1: Overall Review o f Proposed Activities and Strategic Objectives ..........35 Annex 2: Proposed Performance Indicators ........................................................... 36 Annex 3: Status o f Performance Indicatorsfor 2001 TSS ..................................... 38 Annex 4: Status o f Operations Approved since 2001 ............................................ 40 Annex 5: 41 DRC at a glance...................................................................................... Ongoing and Planned Support by Key Bilateral Donors........................ Annex 6: 43 Annex 7: Map o f DRC ........................................................................................... 45 EXECUTIVE SUMMARY 1. This Transitional Support Strategy (TSS) aims to define a road mapfor Bank support to the Democratic Republic of the Congo (DRC)for 2004 -2006. Itwas designedthrough an extensive consultationprocess with a broad variety of stakeholders (Government, private sector, civil society, donors) and builds on recent analytical work by DEC and experience, inAfrica and elsewhere, indealing with post-conflict countries. Background 2. Since 2001, DRC has made considerableprogress towards peace, reconciliation, and economic and social recovery. This followed a dreadful decade o f instability and conflict, which caused considerable suffering for the 58 million Congolese -o f which 3.3 million died during the last round o f war - and wrought havoc throughout Central Africa (withseven of DRC's nineneighbors experiencing violent conflict over the decade). On thepolitical /military front: (i) has been restored throughout most o f security the country -and eruptions o f violence are contained to some districts only, and gradually receding; (ii) Government of national unity (composed o fthe former a Government, the armed opposition movements, and civil society) was appointed on June 30,2003, for a 24- to 30-month period leading to elections - and i s functioning well; and (iii) couiztiy has been re-unified after years o f division (re- the establishment o f communications, resumption of trade, re-unification o f institutions). On the economicfront: (i)solid and ambitious economicprogram, supported by a the BrettonWoods Institutions, has beenimplementedsatisfactorily since April 2001 -onboththemacro-stabilizationandstructuralreformssides; (ii) hasreached DRC its HIPCDecision Point (although debt still remains a threat to the recovery process); and (iii)economic growth returned in 2002 and accelerated in 2003 after ten years of contraction- inpart due to a strong private sector response. On the social side, the crisis remains acute, with widespread hunger throughout the country, a collapse o f social services delivery, an erosion o f social capital, and the accelerating spread o f the HIV/AIDS epidemic. The chances for DRC to achieve the MillenniumDevelopment Goals (MDGs) by 2015 are seriously compromised. Theseachievements, while important stepsforward, are only the beginning of a process -and need to be consolidated. DRC stands at a crossroads, with very high stakes, not only for the country but for the entire sub-region. Implementationof the 2001 TransitionalSupport Stratem 4. The2001 TSSaimed to contribute to the transition topeace and stability in both DRC and the sub-region by helping the Government to: (i) meet basic and urgent needs; (ii) effectivepublicinstitutionsandpolicies; (iii) rebuild revitalize economic activity; and (iv) rebuildimplementation capacity. The TSS aimed to promote "early wins" to builda track record for the then new Government, and helprestore confidence. 5. Overall, implementation has been very successful. Bank support during the 2001 TSS period has beencredited to have made a critical contribution to the political and economic stabilizationo fthe country -and all performance indicators have been reached or exceeded. Key activities / milestones included: (i) clearance o f Bank arrears (July 2002); (ii) re-opening o f the Kinshasa Country Office (late 2001); (iii)provision o f substantial, hands-onpolicy advice (throughout the period); (iv) approval o f five new projects (since July 2001) -and their satisfactory implementation; (v) re-engagement o f IFC and re-initiation o f the dialogue with MIGA; and (vi) preparation and organization o f a number o f donor meetings (inJuly 2001, December 2001, May 2002, December 2002, and December 2003) and substantial efforts to ensure sound donor coordination. The proposed Bank Strategy for FY04 - FY05 6. Theproposed objectiveof the TSSis to support the recovery and transition process,that i s to help consolidate the transition and restore the foundations for effective poverty alleviation efforts. This will be undertaken inclose coordination with other donors, with a view to maximizing synergies (withexpected total disbursementsby donors at about $1 billion in2004 and again in2005). 7. The TSSstrategic elements arefour-fold: 0 Security and social stability -with a focus on demobilization and reintegration o f former combatants; 0 High and shared growth -through both advisory services and investment operations, with a focus on: (i) economic management, (ii) infrastructure reconstruction and management, (iii) private sector development, (iv) natural resource management, and (v) rural development; 0 Governance and institutional strengthening -through both advisory services and adjustment operations, with a focus on: (i) institutions reunificatioddecentralization; (ii) institutional strengthening; (iii) judicial reform; and (iv) transparency. 0 Social development-through both advisory services and investment operations, with a focus on: (i) HIV/AIDS; (ii) (iii) health; education; (iv) water supply; (v) improvements inliving conditions inurban centers; and (vi) social protection. 8. The TSSproposes afive-fold agenda: (i) managingthe existing portfolio; (ii) providing advisory services; (iii) launching new lending operations; (iv) engaging the entire Bank Group; and (v) mobilizing and coordinating donors. Suggested issues for discussion Are the proposedobjective o fthe strategy and its strategic elements an adequate response to recent developments inDRC, inlight o f recent research and experience in other post-conflict countries ? A r e the proposed focus o f Bank activities and the effort made at being selective adequate, within the context o f a broad international effort ? 0 Do Executive Directors support the proposed continued role o f the Bank to help mobilize and coordinate donors, inclose coordination with other key actors ? INTRODUCTION 1. support to theDemocratic Republic of the Congo (DRC)for 2004 -2006. It follows an This Transitional SupportStrategy (TSS) aims to define a road mapfor Bank earlier TSS, whichwas discussed by the Board on July 31,2001 (for the period 2001 - 2003), and which provided a strategic framework for the resumption o f Bank assistance after almost a decade o f suspension. It outlines a proposed program for continued Bank support -to build on the substantial progress made by DRC over the last three years towards peace, political reconciliation, and economic recovery - and to help consolidate and deepen these achievements, withinthe context o f the Poverty Reduction Strategy Paper (PRSP) process. It was prepared withinthe context o f OP/BP2.30 on "Development Cooperation and Conflict" - with a view to movingtowards a formal Country Assistance Strategy (CAS) as soon as conditions allow. 2. The new TSSwas designed through an extensiveconsultationprocess with a broad variety of stakeholders. Intensive consultations were heldwith the Government (includinga full-day retreat betweenthe Bank and 21 ministers incharge o f economic, social, and security matters on October 29, 2003), private sector and civil society (through formal consultations both inKinshasa and inouter provinces), and other donors (inparticular througha Bank-ledmulti-donor mission whichvisitedDRC inNovember 2003, and a formal Consultative Group meetinginDecember 2003). The outcome o f these discussions provided a useful guide for the selection o f priorities for Bank assistance over the coming period. 3. Thepreparation of the new TSSis also takingplace against the backdrop of the Bank's growing experienceinpost-conflict countries. Particular attention was paidto Bank research and experience inother countries, with regardto the type o f support neededto support stabilization and recovery. The proposed strategic directions reflect recent analytical work by DEC (inparticular Breaking the Conflict Trap),as well as general orientations and best practices from the Africa Region and elsewhere (in particular Post-conflict recovery in Africa: An agendafor theAfrica Region). 4. The document is organizedasfollows. Part Ipresents a summary of recent developmentsinDRC. Part I1takes stock o fthe implementation o fthe 2001 TSS, discussing progress to date and highlighting some of the key lessons learned along the way. Part I11outlines a strategic agenda for the years to come as it emerges from consultations with Congolese stakeholders. Part IV proposes a strategy for Bank support and a new assistance program for the coming period. 1 I.BACKGROUND CONTEXTAND A. Background 5. The decade of political instability and conflictfrom which DRC is gradually emerging has been dreadful. After about eighty years o f colonial rule, several conflicts inthe immediate post-independence period, anda longperiod o fcorruption and mismanagement under President Mobutu Sese Seko, DRC, whichis the second largest country inSub- SaharanAfrica Gmph1:-per capila (see Box l), the 1990s in a state o f quasi-collapse. entered That decade was marked by successive episodes o f 380 increasing violence: looting by the armed forces in 1991 and again in 1993, a first conflict in 1997 (which caused the fall o f President Mobutu and his replacement by President Laurent-DCsirC Kabila), and a second conflict between 1998 and 2003 (see Box 2) during which a reported 3.3 million people died, and many more hadtheir lives dislocated. The 1950 1997 2032 level o f devastation caused by these conflicts i s extreme, as illustrated by the collapse of per capita income, which, at $96 (29 cents per day) in2002, is only a fraction o f its 1960 level (see Graph 1). Box 1: Key data Surface: 2.3 million square kilometers (equal to two thirds of the European Union) Population: 58 million Conflict-related deaths (since 1997): 3.3 million GDP (2002): US$5.5 billion Life expectancy:45 years GDPper capita (2002): US$96 Infant mortality: 128 per thousand Growth (2003): 5 percent (est.) Literacy: 64 percent Inflation (2003): 4.5 percent Share of population below $l/day: 75 percent 6. Since 2001, and the appointment of President Joseph Kabila, there has been considerableprogress on allfronts -towardspeace, reconciliation, and economic and social recovery. Most observers have beensurprised and encouraged by both the pace and the scope o f recent achievements, ina context o f relatively limitedinternational support. Looking ahead, they are optimistic despite the many ups and downs that can be expected ina process which may remain difficult for some years. Box 2: Key actors in the conflict (besides theD R C Government) Foreign countries - fighting with the Government (Angola, Chad, Namibia, and Zimbabwe) or against the Government (Burundi, Rwanda, Uganda). Armed opposition movements -Rassemblement Congolais pour la De'mocratie-Goma (RCD- Goma), inthe East; Mozcvement de Libe'ration du Congo (MLC), in the North; break-away RCD factions, inthe Northeast; Congolesemilitias (e.g., Mayi-Mayi) inthe East andNortheast; Foreign rebels, from Burundi, Rwanda, and Uganda in the East. 2 1 B. Recentmilitarv and politicaldevelopments Military developments 7. Over the last threeyears, decisiveprogress has been made towardspeace and security, within the context of a series o f agreements mediated by the international community and key bilaterals (see Box 3). Large-scale military activity has ceased since early 2001. Foreign forces withdrew throughout 2002. The UNpeacekeeping force (MONUC) has deployed about 10,800 troops throughout the country. The pace of progress has accelerated since June 2003, and key early steps have been taken to unify and integrate the Government's and rebel armed forces into a restructured (and downsized) national military, as well as to disarm, demobilize, and reintegrate former combatants. Box 3: Key political and military agreements Ceasefre Agreement, signed in Lusaka on July 7, 1999, by all key actors inthe conflict. This Agreement underlines the needto restorethe DRC's sovereignty and territorial integrity and to ensure that all Congolese enjoy the same rights and protection under the law. It calls inter alia for: (i)a complete ceasefire, (ii)the deployment of a UNpeacekeepingforce, the Mission d'Observation des Nations Unies au Congo (MONUC), (iii)the disarmament of militias and armed groups, (iv) the withdrawal of all foreign forces from the DRC, and (v) the opening of an "inter-Congolese dialogue", between the Government, rebel groups, unarmed political opposition, and civil society, to lead to "a new political dispensation and national reconciliation". Bilateral agreements between theDRC Government and the Governmentsof Rwandaand Uganda,signed respectively on July 30,2002 inPretoria and on September 6,2002 inLuanda. These agreementsprovided a framework for the disarmament, demobilization, repatriation, resettlement and reintegration of foreign armed groups and for the orderly withdrawal of all foreign troops present in DRC at the time of signing. Agreements reached within the context of the inter-Congolese dialogue: e 36 resolutions adopted in Sun City inMarch and April 2002, including key economic resolutions (endorsement of the program of economic reforms supported by the Bretton Woods Institutions and ofthe InterimPoverty Reduction Strategy Paper); 0 GlobalandAll-Inclusive Agreement on the Transitionin DRC, signed on December 17, 2002 inPretoria, which defines the objectives, principles, and institutions(including the sharing of key Government positions) for a 24- to 30-monthtransition period leading up to elections; e TransitionalConstitution; 0 Memorandum on military andsecurity issues, signed on March 6,2003, inPretoria, which defined the framework for the formation of national, integrated, and restructured armed forces, includingthe unification ofthe General Staffs of the main armed forces. 0 FinalAct of the inter-Congolese dialogue,signed on April 2, 2003, inSunCity, by which all participants formally endorsedthe package of agreements reached during the dialogue. 3 8. Today, most of the country is atpeace, with sufficient securityfor economic activities to resume at both a local level and on a country-wide scale. Violence subsists insome trouble spots -most notably inthe Ituridistrict (where a EuropeanUnionforce intervened inmid- 2003 to put an end to an explosion o f brutality), and inparts o fthe eastern Kivuprovinces (wherethere are reports o f widespread rape, looting, armed robberies, and arbitrary executions by armedbands and foreign fighters) -but most observers report positive trends even inthese areas. Politicaldevelopments 9. Decisiveprogress has also been made towardspolitical reconciliation, within the context ofthe inter-Congolese dialogue. Over 360 delegates representing the Government, the armed opposition, the unarmed opposition, and civil society met betweenOctober 2001 and April 2003, with the support o fkey bilaterals (most notably South Africa) and facilitators from the UNand the African Union. This process resulted inthe adoption ofa series o fimportant agreements, leadingto the establishment ofa Government o f national unity and transitional institutions (including a National Assembly and a Senate) - as well as to the confirmation and/or nomination o f key civil servants, with a view to ensuringa balanced sharing ofpositions among all political forces. 10. A Government of national unity was appointedon June 30,2003,for a 24- to 30-month period leading to elections, and President Kabila was confirmed inhis functions. The Government consists o f four vice-presidents (from the former Government, the two main armed opposition groups, and the unarmed opposition), 36 ministersand 25 vice-ministers, representing all key political factions. International observers and key bilaterals underlinethe remarkable sense o f cohesiveness o f the new Government and welcome its commitment to pursuing political reforms and to rapidly obtaining results, inthe form o f living conditions improvements for the Congolese. 11. Political progress has been accompanied by the actual reunification of the country, which had long beendivided along frontlines - including the re-establishment o f communications between long-divided parts o f the country (facilitating family reunions as well as economic activities), the re-opening o f commercial traffic on the Congo river (between Kinshasa and Kisangani) inAugust 2003, the re-unification o f key technical institutions (already effective for the road agency, underway for the fiscal agencies and the utilities, etc.), andthe harmonizationofexchange rates across the country. Prospects 12. Recent developments are encouraging but the situation remainsfragile. While a major reversal o f the achievements o fthe last years seems unlikely, the challenges ahead are daunting for peace and reconciliation to be consolidated- including: the disarmament, demobilization, and reintegration o f former combatants; the restoration o f public authority, rule o f law, and security throughout the country, including inremote areas; a successful management o f the period o f political transition leading to elections (ina country where physical communications are likely to remain a challenge for the 4 foreseeable future); and the re-definition o f relations betweenthe central and local levels o f Government. C. Recent economic developments The impact of the conflict 13. The decade of recurring conflicts has had devastating effects on Congo's economy (see Box 4). War and civil disturbance, compounded by the legacy o f a long period o f economic mismanagement, have taken a heavy toll o n the country. Infrastructure has suffered considerable damage, inparticular due to the interruption o f maintenance (most of the road network i s n o longer passable; entire provinces do not have access to energy or clean water). Institutions are in shambles. Many people have lost their assets -whether buildings, livestock, or tools. Investment has come to a halt. Public debt has dramatically increased, while public finance management has deteriorated. The vast majority of the population survive on informal economic activities, mainly carried out by women. Box 4: The transformation of the Congolese economy Prior to the conflict, the Congolese economy was dominated by a broad range competitive, foreign-dominatedexport activities,developed around the country's extraordinary natural resources (mining, agriculture, forestry, energy). This had resulted ina relatively high level o f urbanization - and it co-existed with traditional agriculture and informal activities which provided incomes to a large part o f the population. The economy has been transformed by the decade of instability and conflicts: 0 Changesin the structure of the economy. The traditional export activities have almost come to a halt (at about 5 percent o f GDP). The share o f agriculture has substantially increased (from about 30 percent o f GDP inthe 1980s to 54 percent in2001). The share o f services has declined (from about 45 percent o f GDP inthe 1980s to 28 percent in 2001) but remains substantial. 0 "Dollarization". Ina context o f limited supply o f "Congolese francs", the dollar is widely used as the reference currency unit, and as reserve o f value. This is particularly acute inthe Eastern part o f the country, where the money supply was insufficient duringthe conflict. In some Northern areas, the CFA Franc, o f neighboring Central African Republic is preferred. 0 Collapseof theformalprivate sector. Many enterprises have lost assets, staff, and commercial networks. The low level of Congoleses' purchasingpower, the deterioration o f transport infrastructure, and the absence o f financial intermediation are amongthe main obstacles for the restart o f many companies. Today the economy is based on survival/subsistence activities: 0 I n urban areas, informal activities-which account for about 80 percent of all activities. This includes mostly small-scale trade, services, and daily labor. 0 I n rural areas, subsistence agriculture -by smallholders, with relatively little commercialization(due to the poor state of rural infrastructure). 5 The economic program 14. Since April 2001, the Government has implemented a solid and ambitious program of economic reforms, supported by the Bretton WoodsInstitutions. This program has beensupported by the IMF through a Staff Monitored Program (SMP), between June 2001 and April 2002, and access to the Poverty Reduction and Growth Facility (PRGF) for the period July 2002 to July 2005. It has been supported by the Bank through an Emergency Early Recovery Project (financed through an IDA grant and approved inJuly 2001) and an Economic Recovery Credit (approved inJune 2002) as well as substantial analytical work andpolicy advice. Overall, implementation has been consistently satisfactory throughout the period. 15. Thisprogram aims both to spur economicgrowth and to tackle some of the deep-rooted structural issues which have hamperedDRC's economic development in thepast. Indeed, the challenge o f recovery is also a challenge o f transition: even prior to the conflict, DRC's successive Governments hadnot beenable to translate the country's immensepotential into actual improvements ofliving conditions for the population. The formal economy has beenlargely disrupted, andhence transformed, by years o f conflict - and the challenge i s not to reconstruct the earlier system, but to take advantage o f the war-time changes to re-buildthe economy on a more solid and sustainable basis. 16. The results of thisprogram in terms of macro-economic stability are significant, even though they need to be further consolidated. Hyper-inflation was broken by the end o f 2001, and inflation i s now decelerating even more quickly than envisaged (at about 4.5 percent for 2003, about half the program target). Exchange rate stability has been maintained since the Government floated the Congolese franc inApril 2001. Fiscal revenues have increased from about 5.9 percent o f GDP in2001 to about 8.3 percent o f GDP in2003 - and expenditures have been brought back under control (withoperations on a cash basis). 17. Parallel efforts have been made on the structural side, with significant achievements ina broadrange of areas (see Box 5). Reforms have been aimed at correcting major deficiencies -to spur growth through private sector activity, and to start tackling key transparency and efficiency issues inthe management o f natural and public resources. 18. Theseactions have elicited a strongprivate sector response. About $2.4 billion innew investments underconsiderationhave beenregistered bythe Governmentsince early 2003 (private capital flows to sub-Saharan Africa in2002 totaled about $12 billion) -inabroadrangeofsectors(e.g., services,agro-business, constructions, naturalresource exploitation). Flagship operations include a $94 millioncellular phone project by a Britishcompany, Vodaphone, a phased$600 millioninvestmentproject by Congo Korea Telecom to install a telecom backbone inthe country, or the launch of a three-year program to increase offshore oil production by a Chevron-Texaco-led consortium. 6 Box 5: Key structural reforms since 2001 Economicgovernance: 0 Promulgation in May 2002 o f a law granting independence to the Central Bank; 0 Establishment (and good functioning) o f an inter-ministerialcommittee for economic reforms; 0 Oversight and coordination o f economic and financial issues, and o f social and cultural affairs by two o f the Vice-presidents inJune 2003. Public expendituremanagement: 0 Implementation o f new procedures (designed with Bank support) to reinstate the full expenditure chain; 0 Completion and transmission to Parliament o f the audit o f 2001budget execution; 0 Completion of the audit o f 2002 budget execution (to be soon transmitted to Parliament). Transparency: 0 Adoption o f an anti-corruption strategy, following a workshop organized with support by both the Bank and Transparency International in September 2002; 0 Effective functioning o f an Observatory o f Professional Ethics Code since September 2003; 0 Declaration o f the President's personal wealth to Parliament inAugust 2003. Civil service reform: 0 Launch o f a civil service census (with support by the Bank and Belgium); 0 Initiation o f an audit o f the wage payment system (with support by France); 0 Finalization o f a retirement program (with Bank assistance). Financial sector reform: 0 Completion o f audits o f the Central Bank and the nine main commercial banks; 0 Launch o f the restructuringo f three viable banks with a weak financial situation; 0 Launch o f the liquidation process for three non-viable financial institutions; 0 Issuance o f new prudential regulations reflecting international practices inJuly 2003. Public enterprisereform: 0 Completion o f governance audits for most o f the 114 Government-controlled large enterprises (and replacement o f most managers as a result); 0 Completion o f operational and functional audits by independent auditors for about 20 major companies which have a commercial activity; 0 Setting up o f a Steering Committee for public enterprise reform (COPIREP) in October 2002; 0 Launch o f restructuring o f key companies (e.g., the largest state-owned miningcompany, GCcamines, with a voluntary departure program for 10,000 employees already completed). Private investment: 0 Promulgationo f a new investment code (prepared with Bank support) reflecting international best practices in February 2002; 0 Establishment o f a national investment promotion agency (ANAPI) in February 2003; 0 Launch o f reforms o f business environment, arbitration, legal settlements, and tax regime. Mining andforestry sectors: 0 Promulgationo f new miningand forestry codes (prepared with Bank support) reflecting international best practices in July 2002 and September 2002 respectively; 0 Preparation of an updated miningcadastre; 0 Review o f concessions awarded to date in both sectors (with 143 forestry concessions, representing 25.5 million hectares, already canceled). 7 19. As a result, economic growth returned in 2002 after ten years o f contraction, and i s accelerating (see Graph 2). Growth has been mainly pulledby the resumption o f economic activity which followed the re-establishment o f security and the reunification of the country (a pattern typical of post-conflict countries), an increase inagricultural production, the booming o f selected services, and the comeback of the construction industry-reflecting the beginning o fthe transformation o fthe economy away from the traditional miningand export sectors. Graph 2: GDP growthsince 1990 (in percent) II O -5 -10 The debt issue interruption. In September 2002 the Paris Club granted Box 6: Triggersfor HIPC CompletionPoint significant bilateral debt relief, and inJuly 2003 DRC reached 1. Completion o f a full Poverty Reduction Strategy Paper its HIpC Decision Point -with (PRSP) and its implementation for one year; a total relief estimated at $6.3 2. Continuedperformance interms o f macro-economic billion inNet Present Value stability; (Npv)terms(for a stock 3. Effective use o f budgetary savings resultingfrom HIPC- of external debt outstanding related debt service relieffor poverty-related programs; estimated at $7.9 billion in 4. Improvements in public expenditure management; NPV termsand $loa7 5. Enhanced service delivery and governance in priority in sectors (health, education, rural development, and nominal terms at end-2002). infrastructure); The Boards of the Bank and 6. Adoption o f satisfactory sectoral strategies and related the IMF agreed on a floating implementationplans for health, education, and rural Completion Point, (see triggers development; and inBox 6), which could be 7. Improvementsinpublic debt management. reached in2006. 8 21. Despiteaccess to HIPC, however,the debt issue remains Box 7: Thepersisting debt threat a major threat toDRC's recovery (see Box 7). Inthe Externalpublic debt. Because of the nature o f DRC's debt short-term, debt reliefis critical (and its large bilateral component), access to HIPC has provided only partial relief - and significant amounts o f to free up resources for peace further assistance may be needed: it would take about $220 and development. However, million over the 2004-2007 period to reduce the debt-to- although reaching the Decision GDP ratio to 30 percent, about $390 million to reduce it to Point made it possible to address 25 percent, and about $550 million to reduce it to 20 part o fthe country's debt percent. overhang, the resumption o f debt service, even at a reduced level, Externalprivate debt. This debt amounts to about $900 million, and poses a threat on DRC's credit worthiness and i s imposing a heavy toll on fiscal access to private capital. Discussions with the London resources: external debt service Club are ongoing, but even with a very significant discount i s expected to represent between rate it will be difficult for DRC to face its obligations. 32 and 40 percent o f Government revenuesbetween Internal debt. DRC has accrued a very large internal debt, 2003 and 2007, before starting to estimated between $500 and $600 million, which is a major sharply decline to less than 5 obstacle to the resumption o f activity by key groups. percent after 2010. Audits and negotiations are ongoing-but the amounts are such that substantial external assistance will be needed. Prospects I I 22. Overall, the situation remainsfragile: assuming a 5.3percent economicgrowth on average,it will take until 2060for the country to reach the level of GDPper capita it had in 1960. Assuming a 4 percent growth only (and a 2.7 percent population growth), it would take 200 years! While substantial progress has beenmade over the last period, the challenges remain daunting and have to be faced ina context o f limitedfiscal resources and compromised administrative capacity. The new Government has re-affirmed its commitment to implementing the economic program - but attention needs to be paid to maintaining the pace of reforms, inparticular duringthe period of political transition, and to tackling some o fthe key issues associated with the country's reunification (including the reunification of fiscal systems andthe effective implementationo freforms throughout the country). D. T h e persisting social crisis 23. Progresstowardspeace and recovery are takingplace within the context of an acutesocial crisis,which constitutes a major risk for the country's recovery. While political progress, economic reforms, and the return of growth have produced visible results inKinshasa and other places (for example inKisangani, where the re-openingo f the Congo Riverhas resulted inthe halving ofkey commodity prices betweenJanuary and October 2003), the social situation remains appalling: 9 e Hunger remains widespreadthroughout the country. Although detailed data on the humanitarian crisis are missing, rough estimates are known-but their sheer magnitude makes it sometimes difficult to grasp their significance interms o f humansuffering: according to specialized UNagencies, 16millionpeoplehave critical food needs, and the vast majority o fthe population consume less than two thirds o fthe daily calories needed to maintain good health. e A large number of Congolesecommunitieshave beenforced into autarky, due to the collapse of the transport system and the widespread insecurity which prevailed insome provinces. These communities, with no access to markets for purchasing supplies and inputsor selling their produce, and no access to public services, are among the poorest. Communities living inremote areas are often completely isolated - and their living conditions are appalling. e The conflict has caused "developmentin reverse" in the social sectors. Educational and medical structures have been ransacked or not maintained. Many staff have left these sectors, or eventhe country, andthose who stayed have often not been paid for years. Supplies are missing inthe absence o f financial resources. As a result, social services are no longer delivered inlarge parts o fthe country, and even inlarge cities the situation i s appalling. Despite admirable efforts by social sectors staff, only 30 percent o f the population has access to basic medical care, while both school attendance and the quality of education have dropped. e The decadeof conflict and crisis has had a devastatingimpact on social capital -breakingupfamiliesandothersolidaritynetworks. Large-scaledisplacements, violence and human rights abuses, as well as impoverishment have caused tremendous psychological suffering and a deterioration o f the social fabric. As a result, traditional safety nets are no longer functioning effectively, and social networks which are key for economic recovery have also been severely disrupted. e TheHIV/AIDS epidemic is spreading. Large-scale population movements, the collapse o f the public health system, the presence of foreign troops from countries with highHIV prevalence, and sexual violence duringthe conflicts are seenas the major causes for this accelerated spread o f HIV/AIDS. e A number ofpeople areparticularly vulnerable as a result of conflict: 3.5 millionpeople are internally displaced and live indreadful conditions. Although detailed data are missing, specialized agencies report a large number of victims o f sexual violence and a growing number o f orphans and street children. 24. The crisis, however, is affecting variousgroups of Congolesein a different manner, reflecting the combination of a number of factors: (i)people living in traditionally poorer provinces or areas (e.g., Maniema) tend to be more affected than those living inregions with more economic potential (e.g., miningresources inKatanga, transit activity inBas-Congo); (ii) people living inthe provinces most affected by the 10 conflict (inthe East andNortheast) are often more affected, due to the legacy o f years o f violence and the continued insecurity insome areas; (iii) ina givenprovince, people livinginareas which are difficult to access, whether rural or urban, tend to be significantly more affectedthan those living inconnected areas; and (iv) ina given community, women and isolated persons tend to be disproportionately affected. 25. I n this context, the chancesfor DRC to achieve the Millennium Development Goals (MDGs) by 2015 are seriously compromised. While detailed statistical information i s lacking, available indicators point to a serious deterioration inliving conditions since 1990 (see Box 8): DRC's HumanDevelopment Index declined by more than 10percent inthe last ten years - and DRC ranks 167out o f 175 rated countries. The country i s not likely to achieve the MDGtargets by 2015, with the possible exception o f target 4 (gender equality ineducation), target 7 (HIV/AIDS), and target 9 (environmental sustainability). MillenniumDevelopment Goal 1990 Target Status Remark TargetI: Halve, between 1990 and 2015, the nla nla 75% - proportion of people whose income is less than one dollar a day. Target2: Halve, between 1990and 2015, the - nla nla 28% 1990 level believed to proportion of people who suffer from hunger. be low. Target3; Ensurethat, by 2015, children 48% 100% nla Believedto be everywhere, boys and girls alike, will be able substantially to complete a full course of primary schooling. deteriorated. Target4: Eliminate gender disparity in 1.35 1.00 d a Boys/ girls ratio. primary and secondary education, by 2005, and to all levels of education no later than 2015. Target5; Reduceby two thirds, between 1990 207 69 205 Per 1,000 and-20 15, the under-five mortality rate Target6: Reduce by three quarters, between 870 218 nla Per100,000 live births 1990 and 2015, the maternal mortality ratio. Target 7: Have halted by 2015 and begun to - <4% - 7.5% - reversethe spread o f HIVIAIDS Target8; Have halted by 2015 and begunto n/a nla nla Malaria believed to be reverse the incidence of malaria and other very widespread. major diseases Target9: Integrate the principles of Non-quantitative. Substantial progressthrough sustainable development into country policies adoption of the new forestry code. and programs and reversethe losses of environmental resources. Target IO: Halve, by 2015, the proportion of 36 18 70 Base level in 1980. people without sustainableaccess to safe drinking water 11 E. DRC at a crossroads 26. Overall, the window of opportunity identified in the 2001 TSShas considerably broadened. Still, the recent achievements, while important steps forward, are only the beginningo f a process -the progress o f whichwill depend, first, on the continued efforts by the Congolese themselves and, second, onthe level and timeliness o f support that the international community will be willing to provide. 27. DRC has movedfrom thefirst of threepartly overlappingphases identified in the 2001 TSSto the second one. While such distinctions betweenphases are necessarily rough, they are usefulinhelping to conceptualize the way ahead. The first phase, political and economic stabilization, corresponded roughly to the 2001 TSS period and i s now largely completed. The second phase, recovery, during which the basis (infrastructure, institutions, and policy) for poverty reduction inDRC would be rebuilt,i s expected to roughly correspond to the new TSS. The thirdphase, development, will start once the country has normalized. 28. DRC hence stands at a crossroads-and the stakes are high. Determined action i s needed inthe coming years to consolidate and further expand recent progress- or the country could fall into a "conflict trap": DEC research shows that about half o f the countries emerging from conflict fall back into violence within five years. Inview of the size and potential o fthe country, success i s critical, not only for the 58 million Congolese, which have gone throughterrifying ordeals over the last decade, but also for the entire sub-region(seven out o fDRC's nineneighbors have beendirectly involved in the DRC conflict or have experienced a major conflict over the last decade), andmore broadly for Africa to make decisive progress towards the MillenniumDevelopment Goals. 12 11. IMPLEMENTATIONOFTHE 2001 TRANSITIONALSUPPORT STRATEGY A. The 2001 TSS 29. The 2001 TSSaimed to contribute to the transition topeace and stability in both DRC and the sub-region and to support the Government inits efforts to: (i) basic meet and urgentneeds; (ii) rebuild effective public institutions and policies; (iii) revitalize economic activity; and (iv) rebuild implementation capacity. The TSS aimed to promote "early wins" to build a track record for the then new Government, and to restore confidence among Congolese, donors, and private investors. 30. Assistance was expected to be threefold: (i) financial support; (ii) and policy technical advice (inclose coordination with the IMF and others); and (iii) aid coordination. Within this context, the TSS made a distinction betweentwo periods: 0 Prior to arrears clearance -with priorities including: (i) implementation o f special, grant-funded activities; (ii) normalization o f relations with multilateral creditors; (iii) preparationo f a comprehensive post-normalization program; and (iv) establishment of an initial track recordto facilitate early access to HIPC. 0 After arrears clearance -with priorities including: (i) provision o f substantial financial support; (ii) expanded and deepened policy dialogue; (iii) provision o f debt reliefthrough accessto HIPC; and (iv) opening o f an office inKinshasa. B. Overall assessment and results 31. Overall, Bank support during the 2001 TSSperiod has been credited to have made a critical contribution to thepolitical and economic stabilization of the country - by the highestGovernmental authorities, the UNSpecial Representative o fthe Secretary General, donors, and civil society. A relationship o f trust has been developed with the Government and key stakeholders (including private sector and civil society), which has beeninstrumental indefiningand implementing the program o f economic reforms currently underway and insupporting the overall recovery effort. 32. Allperformance indicators set in the 2001 TSSto monitor progress and outcomes have been reached or exceeded (see Annex 2): implementation of the 2001 TSS has indeedbeen largely successful. C. Detailed implementation status 33. Arrears to the Bank (about $338million) were cleared in July 2002, with bridge financing from Belgium and France, within the context o f a Bank-financed Economic Recovery Credit. 13 34. TheD R C Country Office was re-opened in Kinshasa in late 2001. This office i s now largely staffed (withfour headquarters staff, four professional national and regional staff, two staff seconded by bilateral donors, seven ACS national staff, and five support personnel) and equipped. The office has played a critical role infostering the Bank's dialogue with the Congolese authorities and insupporting rapid, effective, and transparent implementation. It has taken the lead, together with the UnitedNations Development Program (UNDP), in settingup and managing donor coordination mechanismsinthe field. It has engaged ina systematic outreach effort toward the private sector andNGOs, which has facilitated the building o f a strong constituency for reforms. 35. Substantialpolicy advice wasprovided to Congoleseauthorities, withinthe context of a dialogue which has included parliamentarians, business organizations, labor unions, faith-based groups, and civil society. The main areas o f focus have included: 0 Overall economicpolicy: cooperation with the IMF has been very close, with Bank staff focusing on a Public ExpenditureReview(whose early results informed the 2003 and 2004 budgets); 0 Support to access to HIPC inclose cooperation with the IMF, Bank support included hands-on policy advice, as well as preparationo f a Debt Sustainability Analysis (DSA) and of a Joint Staff Assessment (JSA) o f the InterimPoverty ReductionStrategy Paper (I-PRSP). 0 Governance andfiduciary issues:a Country Procurement Assessment Review (CPAR) and an Institutional Governance Review(IGR) have been launched; support has also been provided, together with Transparency International, to help the Governmentdesign and implement its anti-corruption strategy; 0 Private sector recovery: hands-on policy advice ledto the adoption o f the new investment,mining, and forestry codes, as well as to the establishment of an investmentpromotion agency, a steering committee for public enterprises reform, and a regulatory agency inthe telecommunications sector; a sector study on public enterprise reform i s beingfinalized; and 0 Social sectors: a Health Country Status Report and an Education Country Status Report have beenlaunchedto enhance the knowledge base inthese critical areas; a Risk and Vulnerability Analysis i s being completed. 36. Five new projects were approved (see Annex 3 below), inline with the strategy outlined inthe TSS. This includes four operations identified inthe TSS (an Emergency EarlyRecovery Project, an Economic Recovery Credit, an Emergency Multi-sector Rehabilitation and Reconstruction Project, and a Private Sector Development and Competitiveness Project) and one operation (the Emergency Economic and Social Reunification Support Project) which was not included butwas judged necessary to help stabilize the situation and respondto rapidpolitical developments. 14 37. Additionaljinancial support wasprovided, through: (i) regional projects and initiatives, including a SouthernAfrica Power Pool Project (approved inNovember 2003) and a number of special operations, within the context of the Multi-Country Demobilization and Reintegration Program (MDRP); (ii) a Bank-managed trust fund (the Emergency Stabilization and Recovery Project, financedby Belgium, Canada, the EuropeanCommission, and the Netherlands); and (iii) grants (four from the Post small Conflict Fundand three from the Institutional Development Fund). 38. Implementation is overall satisfactory. All projects are rated Box 9: Non-traditional ways of working satisfactory on both for implementation implementation and development objectives ratings. Procurement Multi-sectoral approach -includingmulti-sectoral and financial managementsystems projects, and multi-sectoralteams for economic have beenput inplace which dialogue. ensure an effective and transparent Risk management, not avoidance-throughthe use of available financial introductionof risk identification, early warning resources. Early results (notably andrapidresponses mechanismto prevent from the Emergency Early slippages and implementationissues. Recovery Project and the Involvementof support staff in implementation- Economic Recovery Credit) have to help counterparts inthe field, beyond traditional beenimpressive andhave roles. translated into notable Hands-on implementationsupport -with improvements inliving conditions substantial assistance inthe early stages of inKinshasa(inparticular through implementationand close follow up of activities. the rehabilitation of the city's major supply road). This was Decentralization - strong involvement of country facilitated by the intensive use of office staff in implementation. non-traditional ways of working Regular,full-day retreats with Government-to (see Box 9). review implementationanddiscuss critical issues. 39. The 2001 TSSperiod also saw the re-engagement of IFC and re-initiation of the dialogue with MIGA. IFC has approvedtwo operations (for atotal of $26 million), althoughthis re-engagement seems to remain somewhat constrained by staff availability to prepareinvestments. Following ahigh-level mission inMarch2003, it i s hopedthat IFC involvement will substantially expand inthe coming period. MIGA launched a high- level mission to DRC, which explored possibilities for re-engagement, but no guarantee has beenissuedto date (a $3 million operation i s under consideration). 40. Finally, the Bank played a key role in mobilizing, and coordinating with, other donors,including: (i) preparation and organization of donor information meetings the aimed at building a consensuswithinthe international community on the need and opportunity to support DRC's recovery (inJuly 2001, December 2001, and May 2002), and consultative group meetings aimed at mobilizingresources (inDecember 2002 and December2003); (ii)decisive contribution to the establishment of donor coordination a 15 mechanisms inthe field (which are co-chaired by the Bank and UNDP); and (iii) the leadership o f multi-donor missions inthe outer provinces. 42. The Bank's re-engagement was accompanied by a similar effort by others - donors (with total disbursementsincreasing from $210 million to about $720 million between2000 and 2003), creditors (who consented to an exceptional level o f debt relief beyond Naples terms), and private investors. D. Lessons learned 41. A number of lessons have been learned along the way, which are important for future Bank and donor support to DRC and are consistent with lessons learned inother post-conflict countries (see Box lo),including: e First, aid can make a difference in a difficult conflict-resolution process -by providing the means for DRC to seize windows o f opportunity as they open and by contributing to economic and social stabilization at criticaljunctures. e Second,focus on a set of realistic and specific objectives. The realism and specificity o f the objectives set out inthe 2001 TSS, and the measurability o f the corresponding progress and outcomes indicators, were critical inensuringthat Bankefforts remainfocused andinfollowing up implementationprogress. 0 Third, three key ingredients of success are: an intense dialogue with the authorities, exceptional level offinancial assistance, and hands-on policy advice. Bank-Government dialogue has been key inlaunching the reform agenda. Exceptional levels o f financial support have provennecessary to face the challenges associated with post-conflict recovery -and have yielded disproportionate returns. Hands-onpolicy advice has been essential inhelping Congolese authorities define and implement in-deptheconomic reforms. e Fourth,focus on implementation, Experience shows that substantial assistance can be implemented inDRC. Indeed, capacity constraints can be overcome with an appropriate designo f implementation arrangements, hands-on support to implementation, and a dose o fpragmatism and flexibility. There are now tested and effective implementation mechanisms inplace (for large infrastructure, community projects, and institutional strengthening) - and a strong commitment by the Government to use them, including for Government-funded activities. e Fifth, work with others. Resultswere achieved through a close coordination with other actors: (i) the UN,to ensure a proper synchronization o f political and with economic stabilization efforts; (ii) with the IMF, on economic issues; (iii)with selected bilaterals, who played a champion role and helped mobilize others. 16 Sixth, build a strong team of staff and supporters. A strong team o f staff willing and able to face up to the challenges o f re-engagement ina very difficult context and a considerable level o f support by senior management are key elements of success. Box 10: Lessons of post-conflict assistanceprograms Over the last years, several lessons have emerged for Bank assistance to post-conflict recovery, including: Exceptional levels offinancial assistanceare neededfor a longperiod. DEC research, analytical work inthe Africa region, and experience inpost-conflict countries shows that an exceptional level o f financial support is necessary for about ten years to face the challenges associated with post-conflict recovery. Aid is key toprevent thefall-back in conflict. About halfo fthe countries emerging from conflict return to violence within five years. Aid focused on growth and improved governance can make a critical difference. Risks need to be managed, not avoided. Working in a post-conflict country is often a high- risk,high-gain endeavor. Effective assistance topost-conflict countriesrequires an overhaul of standardapproaches (e.g., nature, pace, and sequencing o f reforms), and not only specific programs (e.g., for war- affected groups). Success ispossible-as evidenced inAfrica by the cases o fMozambique and Uganda. 17 111. THEROAD AHEAD A. A transformed environmentand the needto adiust 42. Recent developments bode wellfor the sustainable return of political stability and economic growth. They also illustrate the role aid can play inthe early phase o f post-conflict recovery. The commitment to continued reforms, which has been reaffirmed and already demonstrated by the new Government, suggests that it will be possible to build on earlier success inthe coming period. 43. Experience in other countries, however, shows that the level and nature of post- conflict assistance (including both objectives and instruments) has to be continuously adjusted to reflect and accompany changes in thepolitical environment. There have beeninstances where external assistance, while initially very successful, has eventually failed to deliver the type o f support neededfor medium-term recovery - inpart because the initial strategy has beenadhered to for too long and becausethe necessary shifts have not taken place intime. Inthis context, the new TSS needs not only to build on past successes, but also to tailor the proposed assistance to the new conditions inDRC, including: e The new political context,following the appointment of the national unity Government, which i s creating a new environment -with newrisks (e.g., possible lack o f focus on economic issues towards the end o f the transition period, as elections near) and new opportunities (e.g., a drive for rapid results by all parties which will seek votes); and 0 The reunification of the country, after years of division; this results ina doubling o f the territory (and population) where Bank assistance can be provided, including remote and politically-fragile areas; the reunification also raises significant challenges from an institutional perspective, inparticular with regardto the redefinition o f relations betweenthe central Government and the provinces. B. DRC'sstrategic objectivefor the coming period 44. Looking ahead, the key challengefor D R C in the next twoyears is hence to manage the transitionperiod, in order to consolidatepeace and lay the groundfor development. Research and experience inother countries shows that the returno f economic growth and improvements inservices delivery can go a long way inthis direction. Particular attention should be paid to avoiding repeating the mistakes o f the past, inparticular by tackling the current sources o f instability (see Box 11). 18 Box 11: Causesof conflicts and sources of instability The original causes ofpolitical instability and conflicts, in the early 1990s, are complex and multi-fold. Most observers, however, cite the interplay of three key factors as havingbeen particularly devastating: (i)mismanagement of public revenues, compounded by widespread corruption; (ii)deteriorating delivery o f social services; and (iii)foreign interest inDRC's resources, regional instability, and neighboringcountries' ambitions as the support DRC enjoyed during the Cold War was waning. The ethnic dimension is not seen as having played a major role (about 300 ethnic groups live inCongo, none representing more than a few percent of the population). The dynamicsof the conflicts have transformed thepolitical and social context. Some of the original causes of the conflict are no longer major threats to stability (e.g., the regional environment is no longer one of descent into chaos, but one of gradual stabilization; political participation is improved). Other factors have emerged, however, which could cause major instability, such as the impoverishment of large segments of the population or the creation of militias and armed groups. The challenge is hence tofocus on the current causes of instability rather than on the original causes of conflicts -while still paying attention to ensuring that these original causes do not re-emerge and that the underlying issues are effectively addressed. C. The PRSPprocess 45. ThePRSPprocess is expected to be instrumental in articulating DRC's development challenges. An InterimPRSP has been preparedthrough an extensive consultative process and the JSA was discussed by the Boards o f the World Bank and IMFinJune 2002. Itis centered aroundthree mainthemes:(i) restoration and consolidation o f peace and sustainable good governance; (ii) macroeconomic stabilization and pro-poor growth; and (iii) community dynamics (community-led development initiatives). Preparationo f a full PRSP i s underway, through an extensive consultation process, with support from the Bank and other donors. The Government has formulated an action plan, budget, and timetable to that effect, and the full PRSP i s expected to be completed by early 2006. 46. Donors have encouragedthe Governmentto drawfrom the I-PRSP apriority list of operationsto be implementedduringpreparation of the PRSP. This list, which is expected to be presented at a Donor Conference in Spring2004, and could amount to up to $7 billion for a three- to four-year period, will provide the framework for donor support and coordination inthe coming period. Drawing from the I-PRSP and inview o f the recent developments, it is expected to include four key strategic elements: (i) social stability and security; (ii) economic growth; (iii) shared governance and institutional strengthening;and (iv) social development. 19 D. The key challenges ahead Social stability and security 47. Restoring and consolidatingthesecurity situation throughout the country,and inparticular in areas that have been most affected by the conflict, is apre-requisite for DRC's recovery to be successful. There i s a broad consensus that the insecurity still prevailing in some areas i s caused by the continued activity o f bands o f unpaid military or former militias -with a total number o f fighters and former fighters inDRC estimated at up to 320,000. The challenge i s hence three-fold: a Pursue the efforts aimed at unifying and restructuringDRC's armedforces, which have already been launched. This includes inparticular the integration o f some o f the former rebels (following a screening process) inthe armedforces, and a substantial downsizing o f these forces (possibly by up to half) inthe short-term. Italso requires follow-up programs aimedat increasingthe armed forces' professionalism and accountability. a Implement a smooth disarmament,demobilization, and reintegration (DDR) program, to provide those former combatants who have not been incorporatedin the restructuredarmed forces or who have been affectedby the downsizing effort (as well as foreign rebels operating from the DRC territory) with sustainable alternative opportunities. Support i s expected to be channeled through the Multi- country Demobilization and ReintegrationProgram (MDRP). a Ensure regular and adequatepayment of members of the restructured and downsizedarmedforces, ina context still marked by memories o f the mutinies and looting episodes o fthe early 1990s. This i s closely linkedto the success of fiscal mobilization efforts (withinthe current budget envelope, amounts allocated for such payments are minimal, at about $12 per soldier per month), as well as with the availability o fbudgetary support from donors. 48. I nparallel, substantial efforts will be needed toprepare and manage the electionsprocess,which is foreseen inthe agreements reached during the inter- Congolese dialogue. Although this i s not an area inwhich the Bank will be involved, it i s a key element o f the recovery process - and will require substantial assistance from bilateral donors (with a total cost estimated to date at about $200 million). High and shared economic growth 49. Research and experiencehighlight the importance of economicgrowth inpost- conflict situations:faster growth empirically reduces the risk o f renewedturmoil both in the short-term and cumulatively inthe longer term by raising the level o fincome. Such growth, however, needs to be broadly shared within the population bothto play a stabilizing role and to contribute to improving living conditions. 20 50. The key challengefor DRC is to ensure that economicgrowth is both , sustainable and broadly shared. Ina country as richly endowed as DRC, it is no surprise that the returno f peace and progress towards macro-economic stability rapidly result in renewedeconomic growth. But the economic history o fthe country over the past decades suggests that growth does not necessarily translate into enhanced living conditions for the majority o f people. It also suggests that the past focus on natural resources and extractive industries (rather than, say, agriculture and services) might have contributed to the mismanagement o f the economy. The objective i s therefore to go beyond growth -towards shared growth (see Box 12). Box 12: Key sources of growth in the recovery and transition period 0 "Post-conflict rebound", i.e. the resumptionof economic activity as a result of improved security, re-openedtransport and communications links, andenhanced confidence (leadingto increasedconsumptionand investment by households); 0 Increased agriculturalproduction, as part of this rebound, in particular as accessto markets i s restored; 0 Private investment (including foreign investment) in the servicesand natural resources sectors, as a continuation of an existing trend; and e Externally-financed reconstruction projects, inparticular for construction andtrade. I 5 1. This will require action in a number of areas-and there i s a broad consensus among all stakeholders around a five-fold agenda: a Consolidatemacro-economic stability,fiscal mobilization, andpublic expendituremanagement-within the context o f the economic program supported by the Bretton Woods Institutions. This i s expected to be a multi-year effort, requiring both difficult political decisions and external support (budget support, institutional strengthening, and targeted analytical work). a Reconstruct key large infrastructure which underpineconomic activity (in particular inthe transport and power sectors) - and improve their operation and maintenance systems. This will require sizable external financial support as well as some institutional strengthening -with a particular view to the regional dimension o f this endeavor. a Continue to improve the business environment. Building on recent achievements, a series o f new reforms need to be undertaken, while the recently- adopted ones need to be implemented throughout the country. External support will be needed through a mix o fbudget support, institutional strengthening, and targeted analytical work, as well as direct support to private sector (e.g., by IFC or MIGA). a Continue to improve natural resources management. Efforts will aim to ensure a proper and country-wide implementation o fthe new miningand forestry codes, 21 with a view to improving bothtransparency inallocating miningandforestry rights and management o fthe revenues generated inthese sectors. This is expected to require external assistanceinthe form o f policy advice and analytical work, as well as targeted capacity strengthening. 0 Revitalize agriculture, to remedy decades o f neglect and conflict-induced destruction. To ensure highand sustainable growth inthis sector, the deep-rooted constraints to growth (e.g., regulatory issues, rural credit, agricultural productivity) need to be removed. But this i s a complex and lengthy process - and, inview o fthe ongoing social crisis, visible results are needed early on to stabilize the situation and create an environment for eventual reforms. Inthe short-term, efforts will hence focus on opportunities for quick-wins (while also laying the ground for medium-termreforms) - which will require both financial assistance and analytical work. Governance and capacity 52. There is a consensus in D R C that economic recovery andpolitical stabilization both require the rebuilding and transformation of the State, to deal with boththe legacy o f the 1980s and the impact o f conflict. Key actors inthe inter-Congolese dialogue, as well as private sector and civil society stakeholders, share a vision o f a market-based economy inwhich the State would withdraw from productive sectors, and work in coalition with non-governmental networks to deliver social services. Experience o f the past years shows that the situation has reached such a point that powerful constituencies all have to gain from reforms. 53. The challenge is to rebuild key institutions, in a country where the twin issues of governance and capacity are at the core of the development challenges. Historical causes o f institutional weaknesses - including difficulties o f access, the very small number of academically-trained Congolese at the time of independence, andthe long period o f mismanagement and corruption -have beencompoundedby the decade o f instability and conflict, which has left most institutions in shambles, inparticular at the provincial and local levels. 54. To that effect, thefirst andforemost challenge is to ensure the adequate and regularpayment of civil servants: unless this issue i s tackled, all other governance and institutional strengthening efforts are unlikely to succeed. Indeed, civil service salaries are out o f proportionwith the cost o f living: qualified staff (e.g., doctors, magistrates) are commonly paid about $30 a month (i.e. $1a day, which i s the definition o f extreme poverty), and there are substantial payment arrears, o f up to five years, ina number o f areas. This makes it very difficult for qualified civil servants to make a living without developing alternative, possibly unethical, sources o f income. 55. Substantial efforts, by both the Government and donors, are needed. Key priorities for the short term include: (i)pursuingfiscal mobilization efforts: despitethe efforts o f the last years, revenues remain insufficient to meet the basic needs o f the 22 country; and (ii) improving the payroll system, to eliminate "ghost workers" and strengthenthe payment chain. Substantial external assistance, inthe form o f budget assistance, i s however needed for this process to succeed. 56. As the salary issue gets tackled, the Government has dejined afour-fold agenda of actionfor improved governance -which will require external assistance inthe form o f advisory services and capacity strengthening,equipment, and building repairs: e Redefine the relationship between the central and local levels of Government (including issues such as sharing o f responsibilities, sharing o f capacities, fiscal centralization and retro-cessions). Ina complex political context, a pragmatic, sector-by-sector approach centered around the notion o f improved service delivery (and reflecting both the actual capacities existing at each level and the lessons learned over the years o f division) i s needed, with possible quick-wins in the short-term (inparticular on fiscal issues). Build and strengthen skills within a restructuredpublic sector, at both the national andprovincial levels. Needs are very substantial and include training, equipment, andbuildingrepairs, as well as support to organization and management. A case-by-case, institution-by-institutionapproach needs to be developed bothto address immediate needs and to prepare for the medium-term. Restore afunctioning judiciary to ensure the rule of law -and inparticular to put an endto the culture of impunityamong armed groups, to improve the security o f people and goods, to ensure the respect o f property rights and contracts, and thereby to create an environment conducive to private sector activity. Inthis context, stakeholders underline the needto strengthenthe judiciary's integrity and professionalism - as well as to carry out in-depth structural reforms throughout thejudiciary. Implement the Government's anti-corruption strategy - on which President Kabila and a number o f Government membershave placed a heavy emphasis. A very substantial increase incivil servant salaries, although not sufficient to resolve the problem ofcorruption, is an indispensable element ofany comprehensive program o f action inthis area. 57. Particular efforts are needed to restore afunctioning statistical system. While the informationavailable to date is adequate to prepare emergency projects aimed at meetingthe most critical needs, there is a need to gradually rebuildstatistical capacity and collect systematic data throughout the country, so as to enhance the knowledge base andput inplace the analytical basis which can underpin future efforts. The collapse o f the pre-1990s systemprovides an opportunity to rebuildthis institutionona sound footing -but particular efforts will be needed to ensure proper donor coordination, preferably by developing a multi-year, multi-donor program. 23 Social development 58. Urgent measures are needed to rapidly improve social conditions - and prevent a further deterioration o f social indicators, which would take the country further away from eventually reaching the MillenniumDevelopment Goals. 59. The key challenge is to overcome implementation issues in order to meet urgent needs while laying the groundfor medium-term development actions. Ina country where each o fthe elevenprovinces is about the size o f a mediumAfrican country, and which has major access and capacity problems, reaching out beyond the capital and the main cities requires the development o f creative implementationmechanisms. This can buildon the historically well-developed networks o f non-governmental service providers (mainly faith-based groups and public enterprises) - as well as on innovative implementation arrangements (such as a delegation o f responsibilities to regional-level implementation agencies). 60. Priorities are six-fold: 0 Curbing the spread of the HIV/AIDS epidemic,which is a threat to medium-term recovery and political stability. Inthe 1980s, DRC was at the forefront of the fight against the epidemic -butthe decade o f instability and conflict has put a halt to this effort, with dramatic consequences for many Congolese. 0 Rehabilitating the health sector; which has suffered considerable damage during the conflict -with a view to bothimprove access to health services and implement public health programs throughout the country. This will require both puttinginplace an adequate financing system(which will have to be substantially supported by donors) and tackling a number o f urgentrehabilitation issues. 0 Revitalizing the education sector: DRC is one o fthe "Education For All" fast- track countries, and needs to tackle both access and quality issues. Education's allocation inthe national budget, however, has never been above 1percent, (compared with an average o f 14percent for Sub-Saharan Africa), and substantial efforts will be needed. Ina context o f rapid population growth, parallel actions will needto be taken bothto prevent a further deterioration o f literacy rates (primary education) and to develop the skills that are required for economic recovery -with a particular focus on restoring secondary education, expanding professional education, and reforming higher education. 0 Improving water supply -to help reduce the impact o fpreventable waterborne diseases, which are among the main killers inDRC. About half o f DRC's 93 established water supply stations do not function, and leaks inthe distribution network are common, which contributes to the declining yields o f the network. The objective is not only to rehabilitate, but also to upgrade and extend piped drinkingwater supplies, ina context o frapid populationand urban growth. 24 0 Improving living conditions in urban areas. Over a third o f DRC's population lives ina relatively large number o f urban centers - and urbanization has been accelerated by conflict, while infrastructurehas not kept up. A particular challenge i s to restore drainage to prevent landslides (caused by erosion resulting from extensive rainfalls), which have devastated key cities over the last years (including, but not limitedto, Kinshasa), taking a number o f lives and damaging essential infrastructure and to restore delivery o f utilities services; and 0 Helping the neediest -through a strategy that reinforces the role o f families and communities inprotectingvulnerable people and avoids institutionalization. Key target groups include: street children, child soldiers, child prostitutes, children employed in other physically or psychologically abusive conditions (such as in artisanal diamond mines), and orphaned children who are heads o f families, as well as disabled and elderly persons without family support, people suffering from HIV/AIDS and other major diseases, and their surviving families. 25 Iv. A BANKSTRATEGY FOR FY04 - FY05 A. Operational context 61. Bank assistance to DRCshould continue to beprovided within the context of OP/BP2.30 on "Development Cooperation and Conflict" - inview o f the continued need for exceptional support to consolidate recent progress, and face the challenges associated with the ongoing recovery and transition process. Criteria for the preparation o f a TSS are met: (i) conflict has diminishedsufficiently for Bank staff to be able travel to active the area for the purpose of identifyingand supervisingBank-supportedactivities, and for the country to prepare and carry out any such activities effectively and achieve their objectives; (ii) i s reasonable expectation o f continued stability or o f a sustainable there formal cease-fire; (iii)there i s an effective counterpart for the Bank; and (iv) there i s evidence o f strong international cooperation and the potential for a well-defined role for the Bank. Pre-requisites for the preparationof a formal Country Assistance Strategy (including, but not limitedto, the completion o f a full Poverty Reduction Strategy Paper), however, are not inplace yet. 62. The new TSSproposes an assistanceprogramfor 2004 -2006, which will roughly cover theperiod of political transition. Preparation and discussion o fthis TSS, which was originally planned for July 2003, was postponed inorder to allow for effective consultations with the new transition Government (which was appointed on June 30, 2003), as well as with the private sector and civil society stakeholders inthe reunified provinces. At the end o f the TSS period, staff will reviewthe situation (both social stability and implementation o f economic reforms) as well as the status o f preparation of a full PRSP, with a view to moving to a formal CAS as soon as conditions are right. In the event of delays, the Country Team would explore options such as extending this TSS. B. Obiective and strategic elements of the TSS 63. Theproposed objectiveof the TSSis to support the recovery and transition process,that i s to help consolidate the peace and reconciliation process and to restore the foundations (including demobilization and reintegration, physical infrastructure, policies, institutions, and social services) on which effective poverty alleviation efforts can be successfully undertaken. 64. Thespecificstrategic elements of the TSSare those identified in the Government's recoveryprogram: Support to security and social stability -with a focus on demobilization and reintegrationo f former combatants, within the Multi-country Demobilization and Reintegration Program (MDRP)framework; 26 Support to high and shared growth -through both advisory services and investmentoperations, with a focus on: (i) economic management, (ii) infrastructure reconstruction and management, (iii) private sector development, (iv) natural resource management, and(v) rural development; Support to governance and institutional strengthening-through both advisory services and adjustment operations, with a focus on: (i) reunification and decentralization o f institutions; (ii)targeted institutional strengthening;(iii) judicial reform; and (iv) transparency. Support to social development-through both advisory services and investment operations, with a focus on: (i) HIV/AIDS; (ii) (iii) health; education; (iv) water supply; (v) improvements inliving conditions inurban centers; and (vi) social protection. C. Expected results, and monitoring and evaluation 65. The TSSproposesto assessperformance against a set of indicators aimed at measuringthe outcome of Bank support (see Annex 1). Indicators were selected on the basis o f several criteria, including: simplicity, measurability, and monitorability evenin the absenceofdetailed statistics. 66. Progress against these indicators will be assessed on an ongoing basis,through regular consultations with the Government, key Congolese stakeholders, and donors (so as to integrate a variety o fperspectives). Progress achieved through Bank intervention will be measured against all criteria on an annual basis -to ensure that Bankprograms are managed for results and focused on making a measurable difference on the ground. D. Donor coordination and selectivitv 67. Efforts made during the 2001 TSSperiod to mobilize and coordinate donors havepaid off. While detailed data are somewhat difficult to compare and aggregate, information received at the December 2003 Consultative Group meeting (see Box 13) suggests that donors have taken steps both to increase their commitments and to accelerate implementation. Disbursementsare expected to reach $961 million in2004 and $1,076 million in2005. 68. Donor resources are used in support of a very broad variety of activities throughoutthe country -from infrastructure repairs to community development, from support to food security to institutional strengthening. They are provided by over 23 donors, including bilaterals, UNagencies, and multilaterals, and have been channeled through a broad variety o f entities - Governmnent bodies, UNagencies, private firms, andNGOs. 27 69. Within this context, attention waspaid to ensuring the complementarity of proposed Bank activities with other donors'programs. The Bank being a large financier may needto be involved ina broad range o f sectors, but it still needs to focus and target its support to maximize impact o f limitedresources. The synergy between the proposed Bank program and donor activities was discussed with key donors during TSS consultations - and it i s expected to be maintained throughout the period o f TSS implementation through close coordination inthe field. Selectivity criteria have been agreed upon with Congolese stakeholders and other donors: (i) on those activities focus which promise to have the largest pay-off with regard to supporting the recovery and transition process; (ii) focus on areas inwhich the Bank has a comparative advantage vis- a-vis other donors currently involved inDRC, including areas inwhich the Bank i s already active; and (iii) on areas which are complementary to other activities focus planned or underway -by other donors or local stakeholders. Box 13: Key messages of theDecember 17-18,2003 ConsultativeGroup Meeting The December 2003 Consultative Group meeting, which was held inParis, ended with three key messages: e A message of congratulationsfor the Governmentfor the political and economic achievements of the last period; e A message of encouragementto the Government,to consolidate reforms and properly manage the political transition; and 0 A message of urgency to all donors to step up their support to make it possible to tackle the twin challenges of recovery and transition ina context o f acute social crisis. 70. Attention was alsopaid to ensuring that Bank activities will continue to contribute to increasing DRC's absorption capacity for external assistance, inparticular by settingup adequate mechanisms for transparent and effective implementation o f externally-financed activities. This i s o f particular importance as substantial additional resources are expected to be made available by donors inthe coming period. E. Instruments for Bank Group assistance 71. The TSSproposes afive-fold agenda: (i) managing the existingportfolio; (ii) providing advisory services and developing a knowledge base; (iii) launching new lendingoperations; (iv) engaging the entire Bank Group; and (v) mobilizing and coordinating donors. Managingthe existing portfolio 72. Despite theportfolio beingyoung, commitments and disbursementshave already been substantial. Implementation to date i s proceeding well, and particular efforts will be made inthe coming years to maintain this level of performance. This will be the first priority for boththe Government and the country team, particularly since 28 existing projects are the ones that are most likely to translate into actual results onthe ground over the TSS and the political transition period. 73. Thisfocus will translate into continuing to implementandfurther expand the current implementationsupport strategy,including: Ensuring relatively high budget allocations for implementation support (commensurate with the size and complexity o f the country); Strengthening the country office, inparticular to increase its reach out o f Kinshasa and facilitate its involvement inthe outer provinces; Continuing to develop innovativeapproachestoportfolio management, including strong involvement o f ACS staff inhands-on implementation support and decentralizationo f selected responsibilitiesto the field; and Reviewing on a regular basis, andpossibly adjusting, implementation mechanisms for ongoing projects, as may be necessary (inparticular to prepare for an eventual transfer o f responsibilitiesfrom the ad hoc institutions created over the last two years to sectoral ministriesand other relevant technical entities). Providing advisory services and developing a knowledgebase 74. Non-lending services are a critical component of Bank support. Efforts will aim to ensure that the proposed analytical work can be easily and effectively translated into practical, specific policy measures which can be implemented inthe short- and medium- term. The TSS proposes to focus on: (i) advisory services and hands-on support for implementation o fthe ongoing program o f economic reforms; (ii) analytical work to strengthenthe knowledge base (including key core diagnosis tasks) andprepare for new lendingoperations; (iii) sectoral work to support the PRSP process; and (iv) preparatory analytical work on external debt, for DRC to become eligible to the IDA facility supporting the buy-back o f London Club debt. 75. This work will bepartlyjinanced through ongoing operations-inparticular through the Emergency Multi-sector Rehabilitationand Reconstruction Project (for infrastructure and social sectors), the Private Sector Development and Competitiveness Project (for issues related to private sector development, mining sector, andjudiciary reform), and the Emergency Economic and Social Reunification Support Project (for support to PRSP, forestry reforms, and other key economic reforms). This will help ensure that non-lending activities best meet the Government's needs - and mitigate Bank administrative budget constraints (which are strict for a country the size o f DRC). 76. Co-financingfrom other donors will also continue to be sought. A sizable portion o f the analytical work supported by the Bank to date has been undertaken inclose conjunction with bilateral donors -by ensuringthe sharing o f sub-tasks among 29 financiers, through targetedco-financing by key bilaterals, or through Trust Funds managed by the Bank. Such arrangements are expected to continue inthe coming period. 77. Analytical and Advisory Activities (AAA)financed through Bank administrative budget will hencefocus on a limited set of targeted interventions -to complement project-financed or co-financed activities (see table below). Fiscal Proposed Program Remark Year FY04 Public Expenditure Review (PER) I (comDIetion1 I Drovincial governments Focus on fiscal relations between central and I Country Procurement Assessment Support procurement reform. Report (CPAR) Education Country Status Report Support PRSP process / prepare project. Public Enterprises Reform Study Support to an expanded EMRRP Support PRSP process / prepare project. Vulnerability study Support PRSP process / prepare project. FY05 I1Financial Sector Assessment IIsupport financial sector reform. _ _ Program (FSAP) Country Financial Accountability Support reform o f financial management in the Assessment (CFAA) public sector. Institutional Governance Review Focus on service delivery Preparatory work for London Club - I buy-back Health Country Status Report Support PRSP process / prepare project. Agriculture sector review Support PRSP process / prepare project. FY06 Poverty Assessment Support PRSP process / core diagnosis. Country Economic Memorandum Core diagnosis. Launchingnew lendingoperations 78. To help DRC addresspriority issues associated with the transition and recovery process, a substantial program offinancial assistance isproposed. The table below indicates estimated needs for each operation (project amounts may need to be adjusted in line with the evolution o f the financial envelope available overall). New projects are expected to be complemented by small grants under the Post Conflict Fund(PCF) and the InstitutionalDevelopment Fund (IDF). 79. These operations are expected to center around several objectives:(i) support reconstruction, rehabilitation, and recovery inkey sectors through a series o f sectoral and multi-sectoral projects; (ii) support activities aimed at stabilizing the social situation (witha focus on conflict-affected groups); (iii) economic reforms, and in support particular priority structural reforms identified as triggers for HIPC Completion Point, through balance o f payments support operations (within the context o f the overall implementation o f the Government's economic program); and (iv) support the revival o f economic activity, through interventions insupport o f private sector and agriculture. These projects are expected to be implementedthroughout the country, with a focus on ensuring a sound distribution o f benefits across all provinces. 30 80. The new operations are expected to be designedin a manner that responds to the specific circumstances of a post-conflict situation. They will be prepared under OP/BP 8.50 on emergency assistance where appropriate. Inview o f boththe extent o f the ongoing fiscal mobilization effort andthe needto ensure rapid implementation, the Government will not be requiredto provide counterpart funds for any o f the operations included inthe TSS (as with projects under the 2001 TSS). 81. These operations will befinanced through an exceptional,post-conflict IDA allocation, as well as through grants under IDA 13 (under the post-conflict, debt distressed, and HIV/AIDScategories, and on the basis of an allocation reflecting post- conflict performance). This i s consistent with the debt sustainability scenarios presented inthe HIPC paper (which foresaw aprojectedtotal amount ofpossible Bank lending at these levels, with no grant element). The post-conflict allocation i s expected to decrease after the fourth year (following IDA allocations procedures), i.e. after the end o fthis TSS. Fiscal ProposedProgram Remark US$ Year million* FY04 EmergencyEconomic and Social Multi-sector operationapproved in 214 Reunification Support Project Sept. 2003 SouthernAfrica Power Pool Project Regional operationapproved in ~~ No;. 2003 HIV/AIDS Project Carry over from the 2001 TSS. To 100 be financedthrough a grant. Post-reunification Economic Recovery Presentedto the Boardtogether 200 *Totalamountfor FY06 will be adjusted on the basis ofIDA allocations. Engagingthe entire Bank Group 82. There is substantial interest in theprivate sectorfor re-engagement in DRC, andfor support by IFC and MIGA -as expressed duringthe well-attended business forums which followed the 2002 and 2003 meetings of the Consultative Group. Efforts will be redoubledto ensure an adequate involvement ofboth IFC and MIGA. 31 Mobilizing and coordinating donors 83, Finally, the Bank will continue its efforts to mobilize and coordinate support by other donors. The TSS proposes that the Bank continues to play a strong role inthis area, through: (i) organizing and chairing annual meetingso fthe Consultative Group; (ii) assisting indefining multi-donor programs; (iii) continuing to play an active or leading role, as may be the case, incoordination mechanisms set inthe field; and (iv) supporting the Government's efforts to gradually take the leadinthe coordination effort. F. Riskmanagement and exit stratew Riskmanagement 84. Engagement in a post-conflict context is a high-risk, high-gain enterprise. The situation inDRC remains difficult - but the riskso f engagement have to be balanced with the risks of inaction, which are considerable. Research and experience show that external assistance can play a key role inpromoting the type o f reforms neededfor consolidating economic growth and political normalization. The approach suggested here consists o f adopting a pro-active risk management strategy rather than a risk avoidance approach - to identify key factors o f risks and designways to minimize their potential impact. 85. I n this context, six key,program-level risks already identified 0 Regional instability and threats to thepeaceprocess. Most observers assess the risk ofrenewed,large-scale conflict as low (short o fa dramatic event which would overturn past political progress). Still, wars and civil conflicts have engulfed a large part o f Central Africa over the last decade, including seven o f DRC's nine neighbors. DRC's recovery cannot happen inisolation and requires the stabilization o fthe entire sub-region -and major events inthe region or a further deterioration ofthe security situation insome areas could eventually affect the recovery and transition process. The TSS aims specifically to support efforts to consolidate stability, andhence reduce the odds for renewed conflict inDRC. These actions are expected to be complemented by parallel programs inother countries inthe region with a view to promoting an overall returnto stability. The situation inDRC itselfwill be closely monitored (inconjunction with the UNand key bilaterals), so as to adjust the program to the political circumstances (and possibly scale down ifneeded). 0 Localized insecurity. With the country largely at peace, insecurity could persist insome parts o fthe country, making it impossibleto implement meaningful development activities inthese areas. Support under the TSS i s expected to help stabilize the situation insuch areas (e.g., by supporting the demobilization, and reintegration process). Incase this 32 risk would materialize, TSS implementation will go ahead inthe rest ofthe country, as i s currently done inother African and non-African countries. Risks associatedwith theprocess of political transition. These risks include: major dysfunctioning within the coalition Government, possible interferences from political campaigning with the reform agenda (particularly towards the end o f the period) and political paralysis inthe pre-election period (with decision- makers focusing on the political process and/or engaging inpopulist strategies). To manage this risk, the situation will be closely monitored incoordinationwith key bilaterals, so as to react early. It is worth noting, however, that these risksare associated with significant opportunities: (i) to date, Government officials have reacted to the pre-election pressure by trying to accelerate the implementation o f projects and reforms, so as to demonstrate to voters their capacity to get results on the ground; and (ii) current political framework is extremelyinclusive, so that the all political forces inDRC have a stake inthe success o f the ongoing transition process and are represented inthe making o f key decisions. Difficulties on the reform path. Reform efforts to date have beenimpressive and the Government has restated its commitment to maintainthe pace. Still, ina post- conflict environment, such efforts are difficult -with a severe social crisis, active anti-reform constituencies in some areas, and a complex decision-making process (particularly as elections near). Inthis context, performance could deteriorate and reforms be delayed or not consistently implemented. To manage this risk, the Bank will work inclose coordination with IMF, UN agencies, and key bilaterals to closely monitor implementation o f economic reforms, so as to rapidly identify and respond to slippages inimplementation. This will include an intense policy dialogue, as well as frequent consultations with the private sector and civil society inDRC. The response will be based on an assessment o f whether the TSS can be successfully implemented. Practical steps will include revisions o f specific activities' implementation schedules, revision o f plannedinterventions, and possibly partial suspension o f activities. Compromisedadministrative capacity. After a decade o f conflict and instability, implementation capacity remains limited, whether for Government-initiated policy reforms or for Bank-fundedprojects. This i s compounded by the low level o f civil servant salaries. It could become a critical obstacle to the effective implementation o f the reform program and support o f projects. The TSS aims to address this issue by working towards strengthened administrative capacity. With regard to Bank-supported operations, experience to date shows that difficulties can be overcome ifimplementation mechanisms are appropriately designed and best use i s made o f the lessons learned. 33 Corruption. Ina country suffering from a history o f widespread corruption, the influxof donor assistanceraises risksof diversion or misuse of funds. Particular attention has been paid and will continue to be paid to transparency issues during project implementation (inparticular procurement and financial management). Inparallel, work on corruption issues, public expenditure management, and financial management should help the Government gradually tackle this issue, which will take years to resolve. 86. To monitor these risks on a systematic basis, an early warning system has been put in place, which will helprecognize and address slippages early on. This systemwill be based on: (i) assessmento f security developments, both inthe region and inDRC, an on the basis o f information provided by the UNand key bilaterals; (ii) an assessment o f the political developments inDRC, also on the basis o f information provided by the UN and key bilaterals; (iii) assessment o f the implementation o f the economic program an supported by the Bretton Woods Institutions, inclose coordination with the IMF; (iv) progress towards the HIPC completion point; and (v) implementationperformance o f ongoing projects (with a particular focus on transparency and timeliness o f actions). Exit strategy 87. Theproposed contingency responseto apossible deterioration of thepolitical and security situation is an incremental and targetedscaling down. Inview o f DRC's recent history, the risks o f renewed conflict or major policy slippages cannot be excluded. Experience shows, however, that while the security o f staff needs to be preserved, suspending operations over a long period o f time and closing an office makes it difficult to provide the type o f rapid support which i s needed whenthe situation improves. While the resumption o f a full-scale and lengthy war could lead the Bank to consider withdrawing from DRC, the primary response to a deterioration o f the security or political situation will consist inscaling down activities, rather than withdrawing. 88. TheBank will work in close coordination with MONUC, UNagencies, and key bilaterals to monitor political and security developments,so as to rapidly respondto unfolding events. The response will be based on a dual assessment - o f staff security and of the probability for the TSS to be successfully implemented. Practical steps will include revision o f specific activities' implementation schedules, revision o f planned interventions, and possibly partial suspension o f activities. The TSS proposes specific strategies for two key scenarios o f negative security developments: Localized eruptions of violence or insecurity in rural areas (similar to the events which have affected the district o f Iturithroughout 2003). Implementationo fthe TSS would continue, with a suspension o f activities inaffected areas. Renewed conflict, affecting the security situation in Kinshasa. This could result inatemporary relocation o fnon-critical staffand apossible scaling-down and/or refocusing o f Bank-funded activities. 34 ANNEX1:OVERALLREVIEWOFPROPOSEDACTIVITIES AND STRATEGICOBJECTIVES Anti-corruption m:CombinedCPAR and CFAA (FY05) Publicexpenditure m:PER(FY05) management support to HIV/AIDS Implementation:EERP social Lending:HIV/AIDS project(FY04) development Health m:Health Implementation:EMRRP Country Status Report(FY05) Lending:Healthproject(FY05) Education m:EducationCountry Implementation:EMRRP Status Report (FY04) Lending:EducationProject(FY05) Water m:ExpandedEMRRP Implementation:EMRRP, EESRSP (FY04) Lending:Publicutilitiesproject (FY06) Urbanliving Implementation:EESRSP conditions Lending:EmergencyLiving ConditionsImprovements Project (FY05) Social protection Implementation:EMRRP, EESRSP U: Vulnerability study (FY04) Lending:Emergency Social ActionProgram(FY05) 35 ANNEX2: PROPOSEDPERFORMANCE INDICATORS (based on standard IDA Post-Conflict Performance Indicators) Strategic element Performanceindicators (after two years of implementation) Security and social Effective functioning o f the transition institutions, evidenced by sustained capacity stability to implement economic reforms and investment projects. Satisfactory implementationo f reconciliation-related resolutions adopted at the Inter-Congolese dialogue, evidenced through assessment by United Nations and key bilaterals. Continued adequate security throughout the country for sustained economic activity, evidenced through country-wide economic growth. Effective integrationo f key former rebel groups into regular forces, including integration o f general staff. Adoption of, and satisfactory progress in implementing, a national demobilization and reintegrationprogram. Highand shared Satisfactory implementationo fthe economic program supported by the Bank and economic growth IMF. Satisfactory progress towards HIPC Completion Point triggers related to Public ExpenditureManagement. Continued improvement in business environment, evidenced by sustained high- level o f investors' interest. Satisfactory progress towards settling the internal debt issues (including completion o f audits and reconciliation, and agreement on payment schedule). Continued progress towards State-owned enterprises reform, including satisfactory completion o f the ongoing Gecamines restructuring. Continued improvement in natural resources management, evidenced through continuedeffective implementationo f adopted reforms (in particular mining law and forestry law). Satisfactory implementation o f Bank-financed rehabilitation projects, evidenced by progress towards their individual development objectives. Governance and Adoption and satisfactory implementation o f a sound budget framework for regular capacity payment o f salaries within existing budget constraints. Satisfactory progress towards HIPC Completion Point triggers related to governance. Satisfactory progress in implementingthe Government's anti-corruption strategy, evidenced through timely implementation o f planned activities. Satisfactory implementation o f a departure program for civil servants who have reached retirement age. 36 Social ~~~ Satisfactory progress towards HIPC Completion Point triggers relatedto social development sectors. Satisfactory progress inimplementingthe Government's HIV/AIDSstrategy, evidenced by timely implementation of planned activities. Satisfactory implementationof Bank-financed social development projects, evidenced by progress towards their individual development objectives. 37 ANNEX3: STATUSOFPERFORMANCEINDICATORS FOR2001TSS A. Political stabilization and peace Items Progress indicators Output/outcome indicators Status Security Cease-fires maintained MONUC positioned on Done. among Lusaka fronts signatories Inter-Congolese Facilitator acceptable to Facilitator in Place (Done, Done. dialogue and open all sides chosen Feb.2001) Government of participation inpublic Liberalization o f Decree signed (Done, national unity in life political parties May2001 place. Dialogue under Reports from facilitator facilitator inprogress Satisfactory conclusionto dialogue (extends beyond - . TSS period) DDRprogram DDRplan preparedfor DDRplan implementation Done. child an vulnerable inprogress for child and Special operations for soldiers vulnerable soldiers DDRo f special Establishment o f DDR Examination o f other groups underway (for experiences by all groups a total o f $26 million). (e.g. conferences where all Regular meetings o f participate) MDRP partners. Discussions held among all parties for DDR program. RePorts from M O N U C B. Economic reform and recovery Items Progress indicators Output/outcome indicators Status Maintenance o f N o traffic backups Traffic on Kinshasa-Matadi Done. essential market exceeding 50 vehicles road not interrupted by linkages due to road washouts more than 24 hours in rainy season. Clearance o f arrears Agreement on payments Arrears cleared Done (July 2002). on external debt schedule and on arrears clearance mechanism Timely payments to Bank Steps to HIPC Preparation o f I-PRSP I-PRSP to Bank and Fund Done (July 2002). framework Boards Preparation o f HIPC documents Management o f Satisfactory progress in Targets met as verified by Done. inflation, exchange implementing o f reform mission review Satisfactory rate and adequacy of program performance under the budget Remain on track on IMF PRGF. SMP benchmarks 38 Introduction of a 1Assistance solicited and Adoption of Code Code adopted modern Investment received from FIAS for Investment under terms of (February 2002) Code preparation code by local and foreign $2.4 billion in investors investment underway or under consideration. Public enterprise Preparation of action Begin implementation Done. reform plan for reform specific elements under COPIREP established action plan (to be defined (October 2002). Gecamines restructuring underway. Management and Degree of coordination Coordination of assistance Yearly donor meetings sustainability of the of policies and actions programs (Consultative Group); development with the international Donor meetings multi-donor missions; program community (UN,Bank, adoption of a common donors) framework for I investments. C. Governance, public sector managementand institutions Items Progress indicators Output/outcome indicators Status Transparency and Public Expenditure Recommendations of final Done. accountability in Review (PER) PER report (FY03) Audits of public public expenditure preparation Satisfactory audit reports enterprises completed. PER progress reports Evidence of publication Anti-corruption Independent inspections (e.g. newspapers, Official strategy prepared with and audits of donor- Journal) World Bank I financed activities Transparency Publication of public International support procurement of goods adopted. and services over us$loo,ooo New mining code Preparatory work Promulgation of mining Done (July 2002) underway as evidenced code Mining cadastre by consultative for a Establishment of mining launched. Beginning steps to cadastre resolve conflicts over mining claims Independenceof New Central Banking Promulgationof Law Done (May 2002) Central Bank Law 39 ANNEX4: STATUSOF OPERATIONSAPPROVED SINCE2001 Project US$ 0bjective Approval I Disbursed Rating mil. Effectiveness end CY03 IP DO I - -- Emergency 50 Rehabilitate key road between July 2001/ 100 % S S Early Recovery Kinshasa and the sea. Dec. 2001 Project Fundcommunity initiatives; Support HIVIAIDS programs; - Provide institutional support Economic 450 Help DRC with foreign June 2002 / 100 Yo S S Recovery Credit exchange immediately after July 2002 arrears clearance and support reforms (incl. in miningand forestry sectors) Emergency 454 Rehabilitate key infrastructure July 2002 / 8 % S S Multi-sector and social services delivery. Nov. 2002 Rehabilitation& Reconstruction Project - -- Private Sector 120 Help improve the business July 2003 I 14 % S S Development environment; Dec. 2003 and Support restructuring o f key Competitiveness public companies; Project Join the Africa Trade Insurance Agency (ATI). :spondto rap idevelopments Emergency 214 Support economic and social Sept. 2003 / Economic and reunificationthrough balance Dec. 2003 Social o f payment support, Reunification institutional strengthening, Support Project infrastructure repairs, and community-driven development. -- Southern Africa 178 Support rehabilitation o f DRC Nov.2003 I I 0 % nla n/a T Power Pool power grid ($177 million) to nla Project facilitate regional integration o f the power networks and exDorts to Southern Africa. Multi-country 26 Support reintegration o f Demobilization targeted groups o f ex-fighters and through a series o f programs. Reintegration Program (special projects) (*) Rating: IP Implementation PerformanceRating; DO = Development Objectives Rating = 40 ANNEX5: ONGOING AND PLANNED SUPPORT BY KEYBILATERALDONORS Belgium 324,462 Netherlands 165,675 Basic health needs 133,659 Support to political process 702 Education and training 37,305 Contribution to UNICEF 2,739 Agriculture and food security 21,462 Contribution to OCHA 4,592 Basic infrastructure 29,654 Contribution to PAM 8,078 Civil society 27,860 Contribution to other UN agencies 8,483 Multisectoral program 74,521 Demobilization and reintegration 141,081 Canada 72,902 South Africa 6,347 Promotion of peace & democracy 7,636 Institutional support 3,526 Community health project 3,855 Support to political process 2,820 Financial services for women 3,855 General development projects 5,906 Spain 6,196 Micro-Project 3,007 Technical cooperation 2,478 Cooperation 1,388 General 3,717 Food aid 2,159 Humanitarian assistance 7,096 Sweden 33,025 Institutional strengthening 3,004 New Contribution 9,750 Civil Society 2,540 General Contribution 6,886 French-Canadian Project 3,469 Contribution to NGOs 3,314 Action for peace 3,855 Humanitarian assistance 6,367 Urgent Funds 7,710 Social support 5817 Demobilization and reintegration 11,795 Health 891 Health 2,775 Displaced and vulnerable people 2,852 Switzerland 26,324 Emergency program to Kivu 6,200 China 79,302 Cooperation through NGO 13,762 Postal center China - Congo commercial center 3,001 Refugees program 3,545 3,523 HIV/AIDS 2,817 Construction 36,867 Material 2,174 United Kingdom 146,025 Telecomunication 9,664 Demobilization and reintegration 28,598 Nutrition 604 General contribution 1,767 General assistance 15,221 Support to NGOs 109,306 Health 8,248 Support to UN agencies 6,355 France 34,317 us 338,907 Urban development 6,355 Office of transition initiatives 8,011 Social fund 2,542 Governance 4,000 Food aid 5,084 Support to political process 5,400 Support to NGOs 8,262 Human rights 6,030 Technical cooperation 6,991 Civil society support 2,750 General 5,084 Basic education 2,290 Assistance to refugees 11,990 41 Germany 41,274 Medecine for SANRU 2,500 Support of NGOs 2,730 Humanitarian assistance 4,686 National Parc of Kahuzi-Biega 4,550 Support to refugees 3,578 Fight against AIDS 6,760 Immunization 21,163 Fight against poverty 2,599 Emergency aid 4,597 Demobilization and reintegration 2,925 Humanitarian aid logistics 8,272 Food aid 5,849 Food security 11,641 Economic assistance 4,223 Health 8,515 Environment 4,812 Basic health 5,479 Health 4,549 Other humanitarian projects 24,729 Social 2,277 Training 8,research 3,873 HIV/AIDS prevention 11,305 Italy 35,123 Basic health in Kasai 8,300 Social 12,576 Basic rural health 25,000 Health 3,363 Help to street children 3,060 Humanitarian assistance 5,059 Production of Casava bread 3,000 Nutrition 14,125 Urgent food assistance 112,634 Other food assistance 6,000 Japan 35,589 Social support 15,180 Food aid for refugees 8,467 Health 10,377 Support to refugees 15,746 Nutrition 4,547 Immunization days 7,275 Social 2,556 Education 370 Health 1,097 Agriculture 78 42 ANNEX6: DRC AT A GLANCE Sub POVERTY anJ SOCIAL Saliarali drrlca 5K8 E-88 b3 450 ... 50 m 2 9 24 2 Q 25 93 45 48 125 IC6 45 58 38 37 47 80 49 EG! 44 83 1982 20u1 2032 1 8 2 5 2 5 7 Ecarxlrnic rerim" 5 &9 51 7 1 l a 7 178 18 4 &I a2 4 0 EO 1 2 5 9 I -108 -24 0 3 00 1357 2198 58 1 7 1"204 B1 I a301 ZbCQ 2002436 ' -2 a 50 -4 6 U2 20 BO iYS.2 1992 2001 2032 301 4RU Sh3 333 267 184 1R8 1 B B 1 4 4 4 8 59 3 0 432 348 2.19 2 4 % 43 1982 1992 20Qi 2032 36 7 44 was 1m2 3649 31 5 495 374 1 23 3 5 9 VT u n m or 112 -0 8 ufi -GtlPildWw '-0-CFi 1FJm 1992 2901 2M2 1248 %lo 4m i1113 s 7 3% im 1u3 1?3 123 ru? 130 956 63 43 GR3 1982 19Q 2001 2032 1BW D 1,w 1383 1,015 1 100 1433 Ew 1 B G -246 73 62 iae 3 1 -d2T -7DI -413 m 151 .El 2x3 278 4 -522 am -126 -223 i . 33.2 867 137 159 1 -11 b . 22 N U 0 346 5 1982 1992 2001 2M2 5,078 10,9TZ 11" 8211 73 E1 B1 D 214 1,lEc.l 1,151 1 531 222 77 18 B13 I 24 10 0 132 13 0 321 76 109 1N 121 59 a 1BT 17 5 0 0 -2 -1 32 0 0 0 141 0 &3l SI e0l 0 410 w8 14 u 21E 64 0 194 8 15 0 137 P 31 0 57 44 ANNEX7: MAP DRC OF 45 MAP SECTION