Documentof The World Bank FOROFFICIALUSEONLY ReportNo: 46353-AFR PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OF SDR 20.4 MILLIONS (US$32MILLIONEQUIVALENT) AND GRANT INTHE AMOUNT OF SDR 11.5 MILLION (US$18 MILLIONEQUIVALENT) TO THE CENTRALAFRICAN STATESBANK FORA CEMAC REGIONAL INSTITUTIONS SUPPORTPROJECT November 11,2008 FinanceandPrivateSectorDevelopment WesternandCentralAfrica Afiica Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS Exchange Rate Effective: September 30 2008 Currency Unit = C.F.A. Francs BEAC 449.655CFAF = US$1 1.57078 US$ = SDR 1 FISCALYEAR January1 - December31 ABBREVIATIONS AND ACRONYMS AfdB African Development Bank AFD Agence FranCaise de De'veloppement AMLEFT h t i - M o n e y LaunderinglCombatingthe Financing of Terrorism BDEAC Banque de De'veloppement des hats d 'Afrique Centrale (TheDevelopment BankofCentralAfrican States) BEAC Banque des Etats de 1'Afrique Centrale BOAD Development Bank o f West Africa CAS Country Assistance Strategy CEMAC Commission de la Communaute'Economique et Mone'taire de 1'Afrique Centrale (The Central African Economic andMonetary Community) CFA Coope'ration FinanciBre en Afrique Centrale UGRIF Unite' de Gestion de la Reforme des Institutions FinanciBres de la CEMAC (Reform Management Unit) CIMA Confe'rence Interafricaine des Marches d'Assurance CIPRES Confe'rence Interafricaine de la Pre'voyance Sociale COBAC Commission Bancaire de 1'Afrique Centrale COSUMAF Commission de Surveillance du March6 Financier de 1'Afrique Centrale DSX Douala Stock Exchange DTIS Diagnostic Trade IntegrationStudy EU European Union FIAS Foreign Investment Advisory Service FIUs Financial Intelligence Units FODEC Community Development Fund FSAP Financial Sector Assessment Report GABAC Groupe d 'action Contre le Blanchiment d 'Argent en Afrique Centrale GDP Gross Domestic Product GoF Government o f France IAS International Accounting Standards BRD International Bankfor ReconstructionandDevelopment ICB International Competitive Bidding IDA International Development Association IEG Independent Evaluation Group IMF International Monetary Fund I S N Interim Strategy Note M&E Monitoring and Evaluation FOROFFICIAL USE ONLY MFIs Microfinance Institutions MPC Monetary Policy Committee OHADA Organisationpour I'Harmonisation du Droit des Affaires (Organization for the Harmonization o f African Business Law) PCN Project Concept Note PID Project Implementation Document PIM Project ImplementationManual PPF Project Preparation Facility RIAS Regional Integration Assistance Strategy SBD Standard BiddingDocuments SIL Specific Investment Loan SME Small andMedium-size Enterprises SYSCOA Systime Comptable OuestAfricain TSA Treasury Single Account UGRIF Unit6 de Gestion de la R6forme des Institutions Financiires Vice President: Obiageli K.Ezekwesili Country Director: Mark D.Tomlinson Sector Director MarilouJane D.Uy Sector Manager: Iradj A. Alikhani Task TeamLeader: Andres D.Jaime This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. CENTRAL AFRICA CEMAC RegionalInstitutionsSupportProject CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. 1 A. Country and sector issues.................................................................................................... 1 B Rationalefor Bankinvolvement . ......................................................................................... 6 C. Higher level objectives to which the project contributes .................................................... 9 I1 . PROJECTDESCRIPTION ............................................................................................. 9 A. Lendinginstrument............................................................................................................. 9 B. Project development objective and key indicators.............................................................. 9 C. Project components. ............................................................................................................ 9 D Lessons learned andreflectedintheproject design.......................................................... . 14 E. Alternatives considered andreasons for rejection............................................................ 15 I11 . IMPLEMENTATION .................................................................................................... 15 A. Partnership arrangements .................................................................................................. 15 B. Institutional and implementation arrangements., .............................................................. 16 C. Monitoring and evaluation of outcomes/results., .............................................................. 17 D. Sustainability..................................................................................................................... . . 18 E. Critical risks andpossible controversial aspects.,............................................................. 19 F. Loadcredit conditions and covenants ............................................................................... 20 IV. APPRAISALSUMMARY ............................................................................................. 21 A. Economic and financial analyses...................................................................................... 21 B. Technical., ......................................................................................................................... 22 C. Fiduciary ........................................................................................................................... 22 D. Social................................................................................................................................. 24 E. Environment. ..................................................................................................................... 24 F. Safeguard policies............................................................................................................. 24 G. Policy Exceptions andReadiness...................................................................................... 24 Annex 1: RegionandSector Background ................................................................................. 25 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................35 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 36 Annex 4: DetailedProjectDescription ...................................................................................... 45 Annex 5: ProjectCosts............................................................................................................... 54 Annex 6: ImplementationArrangements ................................................................................. 55 Annex 7: FinancialManagementand DisbursementArrangements ..................................... 57 Annex 8: ProcurementArrangements ...................................................................................... 66 Annex 9: EconomicandFinancialAnalysis ............................................................................. 77 Annex 10: SafeguardPolicyIssues ............................................................................................ 78 Annex 11:ProjectPreparationandSupervision ..................................................................... 79 Annex 12: Documentsin the ProjectFile ................................................................................. 80 Annex 13: Statementof Loans and Credits .............................................................................. 81 Annex 14: Countryat a Glance ................................................................................................. 83 CENTRAL AFRICA CEMAC REGIONAL INSTITUTIONS SUPPORT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTFP I Date: November 10,2008 Team Leader: Andres D. Jaime Country Director: Mark D.Tomlinson Sectors: Generalfinance sector (100%) Sector ManagerDirector: Iradj A. Alikhani Themes: Other financial andprivate sector development(P);Infrastructure services for private sector development (S) Project ID: PO99833 Environmental screening category: Not Required LendingInstrument: SDecific Investment Loan For Loans/Credits/Others: Total Bank financing (uS$m.): 50.00 ProDosedterms: StandardIDA: Credit maturitv40 vears. with 10vears maceDeriod Source Local Foreign Total BORROWEIURECPIENT 22.0 7.6 29.6 International Development Association 5.0 45.0 50.0 (IDA) BilateralAgency 0.0 1.o 1.o 1.o 1.o Foreign Multilateral Institutions 0.0 Borrower: BEAC Yaounde Cameroon B.P 1917 Yaounde Cameroon Central Africa ResponsibleAgency: Banque des Etats de 1'Afrique Centrale PO Box 1917 Cameroon Tel: (237) 223-4030 Fax: (237) 223-8258 prspr@,beac. int Banque des Etats de 1'Afrique Centrale PO Box 1917 Cameroon Tel: (237) 223-4030 Fax: (237) 223-8258 prspr@,beac.int BEAC Yaounde Cameroon Tel: (237) . I Estimateddisbursements(Bank FY/US$m) 7Y 10 11 12 13 14 h u a l 5.00 10.00 25.00 40.00 50.00 hnulative 5.00 15.00 40.00 80.00 130.00 The project aims to strengfhen CentralAfrican regional institutions so that they can hlfjI their mandates to encourage an expanded, better governed regional market, and a more transparent, better regulated and more competitive financial system. This will facilitate the re- utilization of oil revenues for investment inCentral Africa. The project supportsprograms approved by the member governments designed to improve the efficiency o f regional institutions. This will be accomplished by strengthening regional institutions. Project outcome indicators are giveninAnnex 3 and include increases inthe percentage o f foreign reserves managed regionally by BEAC, growth o f investment inregionalprojects (primarily infrastructure investments), andincreases inthe percentage o fbanks meeting keyprudential norms. Project description [one-sentence summary of each component] Re$ PAD ILA., Technical Annex 4 The project will be financedby a Specific Investment Loan (SIL). The project will be financed with IDA financing inthe total amount o f SDR 31.9 million (US$50 million equivalent inthe form aCredit inthe amount ofSDR 20.4 million(US$32 million equivalent) andaGrant inthe amount ofSDR 11.5 million(US$ 18millionequivalent). This isthe most appropriate instrument to finance the advisory services, training and equipment, materials and supplies required insupport o f the reforms o f CEMAC institutions. Which safeguard policies are triggered, ifany? Re$ PAD I K F., TechnicalAnnex 10 None triggered Significant, non-standard conditions, if any, for: Re$ PAD III.F. Boardpresentation: None Loadcredit effectiveness: Prior to Effectiveness: (a) BEAC has adopted the Project Operations Manual inform and substance satisfactory to IDA (b) The Steering Committee, comprising o fthe Governor or Vice-governor o fBEAC as chair andthe head o f each o fthe other institutions participating inthe Project, hasbeen established. (c) The Monitoring Committee, comprising the Director General o fBEAC responsible for studies, finance, and international relations as chair and a representative from each o fthe other institutions participating inthe project, has been established. (d) The Project Coordinator has been appointed. (e) BEAC andBDEAC have signeda satisfactory agreement spelling out the obligations o f each institution under the project. Covenants applicable to project implementation: (a) BEAC to ensure that a financial management systemi s maintained for the project, audits are carried out, andFinancial Monitoring Reports are furnished to IDA inthe agreed formats andperiodicity. (b) A mid-termreview o fthe project will be carried out 24 months after Credit effectiveness and annual reviews will beconducted with IDA inthe first quarter o fthe year. (c) BDEAC accounts will be audited by BEAC's external auditors which are acceptable to IDAinaccordance with international accounting andauditing standards, andthe report sent to the Bank by June 30 o f each year. (d) BEAC will prepareand send to IDAnot later thanDecember 31 of each year, the annual work planand budget for the project for each subsequent year, except for the first year when it will send it no later than one month after effectiveness. (e) BEACwill prepare, and send to IDA on or about March 1o f each year, a report on the progress achieved o f the project duringthe precedingperiod and integrating the results o f the monitoring and evaluation activities, and review the report with IDA by May 1o f each year (f) BEACwill carry outjointly with IDAno later than 24 months afier effectiveness a midterm review to assess the status ofProject implementation, as measured against the agreed performance indicators. The review will include the results o fmonitoring and evaluation activities; and annual work plans and budgets; (g) BEACwill send to IDA three months before the mid-termreview a report on the progress of the project, and subsequently take the measures to ensure the efficient completion o fthe Project andthe achievement ofits objectives. I. STRATEGICCONTEXTANDRATIONALE A. Country andsector issues Backwound 1. The Central African Economic and Monetary Community (CEMAC) comprising Cameroon, the Central African Republic, Chad, the Republic o f Congo, Equatorial Guinea, and Gabon, is one o f the oldest regional blocs in Africa and has its roots in the colonial era when member countries other than Cameroon and Equatorial Guinea were organized as a federation with a common currency, the CFA (Coope'rationFinanciBre en Afrique Centrale). The region is the smallest o f African regional arrangements with a population o f about 31 million; countries are contiguous, but forests, few natural trade routes and poor infrastructure make communications difficult. The region i s well endowed with natural resources including petroleum infive o f the six countries (discovered inthe nineties inEquatorial Guinea and Chad). Cameroon and Gabon are the largest economies, accounting for some 64 percent o f regional GDP; some 47 percent o f the population lives in Cameroon. The countries rank low on the human development index (CAR 169; Chad 167; Republic o f Congo 144; Cameroon 141 and Gabon 122 out o f 177). The grouping i s diverse, including relatively prosperous coastal economies and two poorer landlocked countries: Chad and the Central African Republic; regional agreements have always recognizedthe importance o f integration to the development o f the land-locked countries. Petroleum dominates macroeconomic developments and the region i s vulnerable to external shocks because o f its high dependence on oil for fiscal revenues. Annex 1 o f this report includes additional information on regional issues andthe financial sector. 2. The increase inoil prices has made the management o f liquidity inthe financial system and intra-regional financial flows a central issue o f economic policy. Some countries in the region, notably Equatorial Guinea, are generating surpluses from petroleum exports part o f which could be reinvested to promote regional development. 3. The integration movement dates to independence in the early sixties when the region was organized as a loose monetary association; a customs union was established in 1964, but in fact, policies pursued in each o f the countries discouraged intra-regional trade. Inthe 1 9 8 0 the ~ ~ oil price collapse and macroeconomic imbalances led to a severe depression (per capita GDP fell by an annual average o f 3.7 percent in 1985-1993), which eventually led to a 50 percent devaluation in 1994 o f the CFA Franc and the adoption o f an economic reform program. Reforms included restructuring o f the regional customs union (renamed the Central African Economic Union) which together with the Central African Monetary Union became CEMAC under a treaty ratified in 1999. As a result of the reforms started in 1994, the region has a less distorted trade regime than most countries in sub-Saharan Africa. The reforms also helped develop the institutional infrastructure for the Community, and the exchanges led to a growing recognition among member countries o f the advantages o f integration both interms o f economic development and in their standing internationally and v i s - h i s their larger neighbors (principally Nigeria, given its recent growth, but also the Democratic Republic o f Congo). 4. The CEMAC policy agenda calls for integrationthrough financial sector integration; an expanded customs union; macroeconomic policy convergence and coordinated sector policies. 1 Progress has been made infinancial integration, which i s critical for expanded intraregionaltrade and the movement o f capital, including the petroleum surpluses, among countries. The CEMAC countries share (i)a Central Bank - BEAC (Banque des Etats de I'Afrique Centrale) the strongest regional institution, which formulates a common monetary policy and manages the CFA, which has a fixed parity with the Euro; (ii)a banking supervision commission - COBAC (Commission Bancaire de 1'Afrique Centrale) which i s charged with regulation and supervision o f financial institutions, including microfinance institutions, but excluding insurance companies and the postal service; COBAC is competently run, although short o f resources; and (iii) a Development Bank -BDEAC (Banque de De'veloppement des Etats d 'Afrique Centrale), which has been mandated to promote regional investments; after a difficult period in the eighties and nineties during which it stopped lending activities, BDEAC began a restructuring process in 2002 which has led to an improved performance. Regional institutions to regulate the financial market (COSUMAF, Commission de Surveillance du Marche' Financier de 1'Afrique Centrale) and to deal with money laundering (GABAC, Groupe d 'action Contre le Blanchiment d'Argent en Afrique Centrale) were established in 2003. The institutional architecture o f CEMAC was headed by an Executive Secretariat which was quite weak. In 2007, the Regional Council of Ministers approved institutional reforms with the objective o f strengthening regional institutions and inparticular BEAC and CEMAC. 5. The CEMAC members also share a common external tariff and business laws harmonized under the OHADA initiative (Organisation pour I'Harmonisation du Droit des Affaires), a common regulatory framework and supervisory agency for the insurance sector (CIMA-Confe'rence Interafricaine des Marche's d 'Assurance), common accounting standards (SYSCOA-SystBme Comptable Ouest Africain) and an institution aiming to unify pension systems (CIPRES-Conference Interafricaine de la Pre'voyance Sociale). OHADA, CIMA, SYSCOA and CIPRES include members from outside the CEMAC region. 6. A program to reform regional institutions to improve their effectiveness has been under discussion since 2005, and changes, which relate principally to BEAC and CEMAC, were approved by the Chiefs o f State in April 2007. The reforms were triggered both by the need to modernize the institutions and also to take into account the increased weight inthe region o f the economy o f Equatorial Guinea. The proposed project will provide support to enable regional institutions to perform their mandate. Integration and Sectoral Issues 7. Progress has been made in laying the groundwork for economic and particularly financial sector integration, with the establishment o f a common currency and a comprehensive institutional framework. Low intraregional trade i s the result o f inadequate infrastructure, and the absence o f historical trade links. However, financial integration could facilitate trade, and regional financial markets are not integrated, despite the common currency. The absence of policies to develop the regional inter-bankand debt markets and to increase the number o f banks operating across the region has impacted economic integration and trade. The main features o f the regional financial sector are summarized below and detailed inAnnex 1to this report. 2 8. A CEMAC Region Financial Sector Assessment prepared by the World Bank and the IMF in 2006 notes that the regional financial system is rudimentary, and access to financial services is among the lowest in the world. In 2005, there were only one million bank accounts and 780,000 customers o f microfinance institutions (MFI's), or penetration rates o f only 3 percent and 2.2 percent o f the population, respectively. Banks have tended to concentrate in the most profitable activities, a phenomenon which i s not unique to the CEMAC region, but which i s exacerbated by high operating costs o f banks inthe region resulting from low population density and the low income o fthe population. Lack o f financial data onpotentialborrowers and o f credit registries, and weaknesses inthe legal andjudicial environment discourage the expansion o f the customer base and lending to the private sector. Monetary policy has also not encouraged ' financial deepening: interest rate controls did not encourage banks to mobilize savings or take risks by expanding lending. Few institutions provide financial services to small and medium enterprises (SMEs). Adequate policies which encourage greater financial sector integration are likely to contribute to increased access to finance, and the financing o f transnational projects. The financial system consists o f one Central Bank, BEAC, 33 commercial banks; one development bank, 16 non-bank financial institutions, more than 1000 microfinance institutions most o f which are grouped in two large federationshetworks, and 36 very small insurance companies. 9. BEAC i s charged with monetary policy for the region, which it conducts inthe context o f a single currency and a fixed exchange rate against the Euro. The large fiscal surpluses generated by oil producing CEMAC countries, particularly Equatorial Guinea, has led to sharp increases indeposits incommercial banks which has brought to the forefront the need to develop a coherent monetary policy that addresses the liquidity issue. Liquidity management has been difficult because governments have been slow in centralizing their accounts in a Treasury Single Account in the Central Bank as i s common practice. BEAC i s moving towards a greater reliance on market-based instruments for the conduct o f monetary policy and public debt management. As a first step inpromoting a money market, governments are to treasury obligations which will help in liquidity management operations, and adjust the rate it uses for liquidity absorbing operations at least to the level o f the European Central Bank's policy rate. BEAC will need to strengthensystems to be able to effectively carry out its plannedmonetarypolicy objectives. The 2007 reforms aim to modernize and improve the governance o f BEAC and included: expansion o f the management team by incorporating three General Directors; the creation o f a Monetary Policy Committee with wide powers; and limitation o f the terms o f the General Directors. New Statutes were approved which reflect the changes. 10. BEAC has prepareda Strategic Plan which was approved by its Board in March 2008; the implementationo fthe planwill be supported bythe project. The Plan's objectives cover four strategic themes: improving the effectiveness of monetary policy; modernizing and improving BEAC's governance by revising and modernizing its policies and procedures; and enhancing BEAC's role inthe region. The Strategic Plan seeks to increase the effectiveness o f BEAC's core missions as well as strengthen support activities such as accounting and human resource management. 11. Banks dominate the financial sector and accounted for 87 percent of financial sector assets excluding the central bank in2005. At the time, 31 o f the 33 banks were privately owned, 3 and highly concentrated in four out o f the six countries, with banks in Cameroon and Gabon accounting for three-fourths o f total banking assets. Public sector participation in the assets o f banks declined from an average o f 24 percent o f capital in 2000 to 20 percent in 2005. The presence o f financial groups in several countries contributes to sector integration. Two foreign banks have each established a presence inthree CEMAC countries, and together represent about one-third of the sector. Three other banking groups are present in three or more countries. Regulations which make it possible for regional authorities to grant one license for banks to operate in all countries were approved in 2000 to facilitate cross-border activities o f banks. However, no application has been filed, due in part to the reluctance o f national authorities to allow new banks to compete with existing ones. The banking sector i s shallow, its sources o f fundingpoorly diversified, and lendingopportunities limited. Banks' total assets amount to only 16 percent o f GDP, and lending to the private sector to 7 percent (15 percent for sub-Saharan Africa). Volatility o f deposits has increased in some countries, and highly concentrated deposits consisting mostly o f demand or short-term deposits limit the supply o f long-tern financing. 12. Non-bank financial institutions represent only 6 percent o f financial assets and MFIs control less than 4 percent of deposits. The microfinance sector provides uneven access across the CEMAC region: it is well developed inCameroon, Congo, and Chad, moderately developed inthe CAR, and incipient inGabon and Equatorial Guinea. There are some 20 federations and networks, more than half o f them in Cameroon, which group the majority o f MFI's and seem to have generally sound management and good financial results but they are fragile, especially given their rapid growth. Inaddition, there are several hundred small microfinance institutions, very few o fwhich seem profitable. Links between banks andMFI's are emerging. 13. The Development Bank o f Central African States (BDEAC) remains the largest non- bank financial institution. BDEAC was established in December 1975 and started operations in January 1977 with the objective o f financing economic integration projects in the region and feasibility studies for regional projects. The Bank has an authorized capital o f CFA 81,450 million o f which 32.5 percent has been paid in. The Bank faced serious financial difficulties starting in the mid-eighties, principally because o f widespread defaults by BDEAC member countries as oil prices, government revenues and economic activity declined. Less than prudent lending practices also contributed to the portfolio problems. BDEAC suspended lending activities in 1992 and began a process o f consolidation which focused on loan recovery and staff reductions. 14. In 2002, the appointment o f a new president, and a growing demand for BDEAC services in the region led to a restructuring process which was carried out in 2003-2007. The restructuring plan sought to strengthen corporate governance, reduce political influence in decision-making bodies, and improve risk control mechanisms. New statutes were adopted in 2002 which allowed for an increased participation o f non-member countries inthe capital o f the Bank. The objectives o f the 2003-2007 plans were partially achieved. There has not been a reduction in the participation o f member governments, and these still hold more than 75 percent o f the shares, discouraging the entry o f new private shareholders. The objectives for resource mobilization were substantially met (80 percent o f the objective reached) although BDEAC was unable to increase lending as programmed (only 46.3 percent o f objective), to a large extent because the planned modernization o f operational procedures including the updating o f its 4 management systems moved slowly. Although the quality o f staff has improved, there i s still a significant mismatch o f skills, and BDEAC staff needs to be trained in modern banking techniques. 15. In spite o f its regional mandate, at the end o f May 2006, only about one third o f BDEAC's portfolio was inregional projects. The portfolio i s heavily concentrated in Cameroon and Chad with commitments inthese countries accounting for 65 percent o f total commitments net o f cancellations. 16. Regional authorities have designated BDEAC as a primary channel for financing integration, andthe administrator o f the Community Development Fund(FODEC). BDEAC has prepared a Strategic Plan which will be supported by the proposed project. The objective o f BDEAC's five-year program i s to modernize and strengthen the institution so that it can increase its role inpromoting economic development and regional integration. Specifically, the program will enable BDEAC to increase financing o f regional projects and recycling o f surplus oil revenues for investments in the region. The program will focus on strengthening governance, operations and financial management o f BDEAC. 17. Two independent and parallel securities exchanges are being developed in the region, despite potential legal and financial conflicts: Cameroon i s promoting the Douala Stock Exchange (DSX), and a regional securities exchange i s being established in Libreville following a decision o f the Conference o f Heads o f States. The Financial Sector Assessment recommended that the two exchanges be merged and responsibility for its supervision unified in order to improve their viability. Options for integration (at least partially as in cross listing) with other financial markets, particularly those in Western Africa or South Africa would need to be considered. COSUMAF, the Commission de Surveillance du March& Financier de 1'Afrique Centrale, was established in 2003 with the function o f regulating the market, and has begun preparation o f the regulations to govern the exchanges and has developed a Business Plan for the next five years. A small study designed to define the approach to consolidate the exchanges could be financed under the project. 18. The prudential framework for the banking system has been strengthened, but is not yet inline with requirements. Regulations on the minimumcapital adequacy ratio, large exposures, and internal controls were adopted in 2001 and a prudential framework for microfinance was introduced in 2002. COBAC, established in 1990, i s charged with preparing regulations applicable to all financial institutions except for the postal system and the insurance sector. It i s also charged with supervising these institutions. 19. Compliance with prudential norms i s low, although there has been some improvement in recent years. InNovember 2005, nearly one-fourth of the banks were in violation of the minimumcapital adequacy ratio, and nearly three-fourths didnot comply with the limitson large exposures. The COBAC Secretariat i s severely understaffed and this has resulted in delays in drafting implementing regulations for norms that have been passed; insufficient on-site inspections, and flaws in off-site supervision. COBAC has prepared a five-year institutional- strengthening plan to be financed under the project. COBAC's plan incorporates most o f the recommendations o f the Regional Financial Sector Assessment, and aims to increase the 5 institution's independence by reducing the role o f the finance ministries inthe licensing process, and ensuring a greater diversification of the COBAC's commissioners. The project includes an action plan to strengthenCOBAC's management and supervisory systems and staffing. 20. The regional framework for the insurance sector, adopted in 1995, represented an improvement over earlier norms, but there i s evidence that its application has not beenstrict. The causes for the weak application o f norms includes insufficient resources provided to the CIMA secretariat, the regulator, and political pressures on its staff (most o f them are on secondment from their national authorities), and loopholes in the regulatory framework. The CIMA secretariat has prepared a plan to increase staffing levels and the capacity o f the supervisors and to update the regulations. Support for the insurance sector i s expected to be provided by the government o f France. 21. The CEMAC regulations adopted in 2003 on a regional legal framework on h t i - Money Laundering and Combating the Financing o f Terrorism provide a good legal framework for these activities. The implementing regulations issued by COBAC for the banking sector i s a significant step forward, but the framework remains largely ignored outside o f the banking sector. The predominance o f cash-based transactions in the region makes it important to foster the implementation o f obligations outside o f the financial sector. GABAC was created in December 2000 to help implement the legislation; the proposed project will help make the institution operational. 22* The legal framework for credit i s governed by uniform OHADA legislation which i s relatively modern, but perceived as complicated and not always implemented. OHADA has also established an accounting framework for the regionwhich i s also expected to be revised. Support for OHADA, will be provided by the Foreign Investment Advisory Service (FIAS) o f the World Bank Group. 23. A regionalpayment systemproject under the aegis o fBEAC and financed by the World Bank was launched in 2003 to make the national and regional payment systems more effective and secure. The key features of the system are in place and a payment system Directorate responsible for the implementation and supervision o f the new system was created in BEAC as part o f its 2007 reorganization.. The proposed project would support activities designed to expand the system. 24. The proposed project will support strengthening o f key CEMAC institutions. Some institutions dealing with critical economic issues, such as the legal and accounting frameworks, which have a wider membership in the region, will be supported by FIAS and possibly other Bank operations, as well as other donors. Under the proposed project, CEMAC institutions assume part o f the financial and all the administration costs, and would not be suited to address issues affecting institutions with a broader membership. B. Rationalefor Bankinvolvement 25. A Bank assistance strategy for the CEMAC region was outlined in a Regional Integration Assistance Strategy (RIAS) o f January 2003 (Report No.25328). The strategy aimed 6 at strengthening the ongoing integration in the Community, and was based on the premise that regional integration and cooperation can reduce poverty by strengthening the links among the poorer landlocked countries and their more prosperous coastal neighbors, and more generally by helping to establish the basis for faster economic growth. Priority areas in regional integration were macroeconomic policies, trade policies, financial sector integration, and the business environment. A 2006 report which assessed the strategy, found that, on the whole, it remains relevant. The report noted that the large oil windfalls that have resulted from the increase in oil prices suggested that more emphasis needs to be placed on the management o f these resources andtheir use for generating growthwithin CEMAC. 26. A Regional Integration Strategy (MAS) for Sub-SaharanAfrica which confirms the key premises o f the 2003 document for Central Africa was submitted to the Executive Directors in March 2008 (Report No. 43022). The second pillar o f the Regional Strategy aims to strengthen institutional cooperation focusing, among others, on developing regional financial markets and related institutions, and establishes capacity development o f regional institutions as a cross- cutting objective. The project is an important vehicle for addressing these priorities and i s intended to have a catalytic effect on the economic and financial system o f Central Africa, among others, on the systemfor recycling o f oil revenues. 27. In addition to the regional strategy, the Country Assistance Strategies (CAS) for the CEMAC member countries recognizes the importance o f integration and the need to efficiently recycle oil revenues. The Cameroon CAS i s explicit in noting the importance o f improving transit corridors and other infrastructure investments. The Congo Interim Strategy Note stresses the role o fregional economic management while the Gabon CAS emphasizes the needfor Gabon to exercise its leadership and honor its commitments to the sub-region. The Chad CAS emphasizes trade and transport facilitation and focuses on a Diagnostic Trade Integration Study (DTIS) to identify obstacles to regional integration, while the Central African Republic Interim Strategy Note (ISN) advocates for a regional transport program. 28. The World Bank is also increasingly focusing on a regional approach to member countries' development. In the financial sector, the World Bank has financed the establishment o f a regional payments system, and supported a single approach to banking restructuring, microfinance regulation and the development o f capital markets. The World Bank intends to work closely with the International Monetary Fund (IMF) and other donors involved inregional integration, notably the European Union, the African Development Bank and the government of France, to ensure harmonization o f activities carried out under the project. The project draws on the CEMAC Region Financial Sector Assessment Report (FSAP) prepared by the IMF and the World Bank. It i s expected that donor partners such as the European Union, the African Development Bank and the government o f France will participate in financing activities associated with the project. Preparatory work on project institutions such as BDEAC i s being coordinated with donors working with those institutions. 29. Regional institutions, including BEAC, COBAC, BDEAC, COSUMAF, GABAC and the CEMAC Secretariat have expressed strong interest inWorld Bank assistance, particularly in the area o f technical support, as have the member countries. Bank assistance which can draw from experience elsewhere is viewed as especially important given the need to manage the 7 liquidityo fthe region. The Bankhas a long tradition o fproviding support to regional institutions in Africa and elsewhere, and in handling problems associated with temporary surpluses, including the oil boom o f the seventies and eighties; it will bring this experience to bear in the design and implementation o f the project. The Bank has supported the Development Bank o f West Africa (BOAD) and worked closely with the two Franc Zone African regional central banks for the last twenty years, including the provision o f IDA credits to BCEAO (the West African Central Bank), BEAC andBOAD. The proposed project, which would buildon the good experience o f the Bank with BEAC in the regional payments project, would be the first two possible operations insupport o f regional institutions and investment.The recent evolution inthe sub-regional assistance strategy points to a forthcoming operation to provide investment financing resources to BDEAC. This operation i s expected to follow the proposed project some 12-18 months later and/or once BDEAC has reached some initial milestones in its readiness to intermediate a line o f financing from the World Bank (e.g. upgrading o f project evaluation capacity). 30. Support to regional institutions will be based on strategic and business plans prepared for each institution, which were analyzed in the context o f the preparation o f the proposed project. Analysis conducted in connection with the preparation o f the project confirmed that BEAC i s a well organized institution, and able to carry out its obligations under the project. 31. The proposed Credit will be made to BEAC; no parallel guarantee by CEMAC members will be required. IDA'SArticles o f Agreement allow it to lend directly to a regional institution without a parallel government Guarantee, at its discretion. Assessments made o f BEAC conclude that it i s financially solid and has the capacity to borrow from IDA and i s the Borrower for the ongoing Regional Payments System Credit (Cr. 3704). BEAC will be responsible for overall implementation o f the project; and i s the logical choice as the borrower for this credit. Four o f the six countries are IDA eligible. The other two, Gabon and Equatorial Guinea are International Bank for Reconstruction and Development (IBRD) countries. It i s nevertheless proposed that Bank assistancebe under IDA terms, as: The IDA eligible countries account for 95 percent o f the CEMAC population. The assistanceprovided under the project is o f the nature o f a public good, benefiting the economy at large. The reforms envisaged will facilitate economic and trade relations in the sub-region and strengthen regional integration, and the benefits will be particularly important to the population in the poorer landlocked countries. Work envisaged under the project on microfinance will be particularly important in protecting the savings o f the poor, Because o f its nature, the proposed project mustbe implemented at the regional level. The Regional Payments Project approved by the Board in2002 is similar innature to the proposed project andconstitutes aprecedent for this operation. The two IBRD countries have higher GDP per capita because o f their oil production, buthave very highlevels o fpoverty 8 C. Higher levelobjectivesto which the projectcontributes 32. The project will promote economic, including financial, integration o f the economies o f the CEMAC region thus contributing to faster economic growth and poverty reduction. It will strengthen key regional institutions, thus enabling them to perform more effectively their role in promoting integration. In addition, through its support in strengthening financial sector policy making, developing financial instruments and improving BDEAC capacity, the project will promote a sounder, deeper and effective financial sector which will encourage the recycling of surplus oil revenues in the region and their investment in regional projects. Lastly, implementation o f the project will require close links among multiple regional and national officials and thus will act as a catalyst for closer cooperation among key actors inthe sub-region, a benefit that is already apparent inthe work on project preparation. 11. PROJECTDESCRIPTION A. Lendinginstrument 33. The project will be financed by a Specific Investment Loan (SIL). The project will be financed with IDA financing inthe total amount o f SDR 31.9 million (US$50 million equivalent inthe form a Credit inthe amount of SDR 20.4 million (US$32 million equivalent) anda Grant in the amount of SDR 11.5 million (US$ 18 million equivalent). This is the most appropriate instrument to finance the advisory services, training and equipment, materials and supplies required insupport o f the reforms o f CEMAC institutions. B. Projectdevelopmentobjectiveandkey indicators 34. The project aims to strengthen Central African regional institutions so that they can fulfill their mandates to encourage an expanded, better governed regional market, and a more transparent, better regulated and more competitive financial system. This will facilitate the re- utilization o f oil revenues for investment in Central Africa. The project supports programs approved by the member governments designed to improve the efficiency o f regional institutions. This will be accomplished by strengthening regional institutions. Project outcome indicators are given in Annex 3 and include increases in the percentage o f foreign reserves managed regionally by BEAC, growth o f investment in regional projects (primarily infrastructure investments), and increases in the percentage o f banks meeting key prudential norms. C. Projectcomponents 35. The Project supports programs designed to improve the effectiveness o f six regional institutions. The project components are summarized in the paragraphs that follow and detailed in Annex 4 to this Report. IDA will finance advisory services, training, equipment, software, hardware, materials and supplies required to carry out the activities described in each o f the components. The reforms envisaged as well as their analytical underpinning are based on the 9 CEMAC Regional Financial Sector Assessment (FSAP) carried out by the World Bank and the IMF in 2006. They also take into account follow-up work to the FSAP carried out by regional institutions, the World Bank and the IMF. Preparatory work for the BDEAC program was also financed by the African Development Bank (AfDB) and the Agence Francaise de Developpement (AFD) while preparatory work for the BEAC and COBAC components was financed by the Bank under an Advance under the Project Preparation Facility (PPF) approved in 2006. Component1-Strengtheningthe CentralBank-BEAC(IDA financingUS$14.5 million credit) 36. The project will support the implementationo fthe Strategic Plano f BEAC (Banque des Etats de l 'Afrique Centrale) approved in2008 andwhich covers four strategic themes: increasing the effectiveness of monetary policy; modernizing BEAC's operations; improving BEAC's governance and its policies and procedures; and enhancing BEAC's role in the region. The strategic plan aims to the effectiveness o f BEAC in carrying out its core missions, namely the definition and implementation of monetary policy and the management of foreign exchange reserves, and o f the payments system. It also seeks to strengthen support activities such as BEAC's training programs and telecommunicationshformation systems. The Strategic Plan i s in line with the recommendations of the Regional FSAP and will entail reforms both at headquarters inYaoundC and inBEAC offices in each o f the member countries. 37. The project will support actions to increase the effectiveness o f monetary policy by adapting it to address the system's current excess liquidity; improving the research hnction and statistical base and by putting in place new policy instruments (government paper) which will also help develop regional securities markets. Activities envisaged, include, among others (i) refining monetaryprogramming by updating the methodology and introducing it at the regional level; (ii) strengthening the statistical base for policy-making; and (iii) introducing government paper. In addition, work launched on a credit bureau (Centrale des Risques) and a system consolidating financial statements for key enterprises (Centrale des Bilans) will be completed. 38. The project will also support BEAC actions to improve reserve management,through measures to optimize the return on investments, and consolidate management o f monetary reserves and gold stocks. Activities include analytical work to determine an appropriate asset allocation o freserves and to expand the range o f investment instruments used. The establishment o f a specialized documentation center i s also envisaged. 39. Inaddition, the project will also support measuresto encourage the use ofthe regional paymentssystemto expand access to financial services via banks and microfinance institutions. Activities include study and implementation o fmeasures to: (i) simplify access to the system; (ii) encourage the use o f the systems by microfinance institutions; (iii)discourage paper-based transactions and encourage electronic means o f payment; and (iv) introduce a system to track "incidents" o fpayments. 40. The project will also support improvements in support activities, notably human resources management, telecommunicationshnformation systems development, and its external 10 relations function. Key elements include: (i)developing training and human resource development systems; (iv) improving telecommunications network and information systems, including definition o f an information master plan; and (vi) strengthening competencies in the departmentdunits dealing internal controls. Component2 -EncouragingRegionalInvestmentFinancing SubcomponentA: BDEAC(IDA financingUS$9 millioncredit) 41. The project aims to support BDEAC, (Banque de D&veloppement des Etats de 1'Afrique Centrale), implement its business plan for the next five years. BEAC has been designated by member governments as the main vehicle channel investment financing in the region and i s beingrestructured. The objective o f BDEAC's business plan is to modernize and strengthen the institution so that it better performs its fbnctions o f promoting economic development and regional integration. The program aims to improve governance, project evaluation and portfolio management; financial management; and support activities. The following will be carried out, among others: (i)strengthening policies, procedures and internal controls (lending, portfolio management, safeguards, financial auditing); (ii) strengthening project evaluation and portfolio management by implementing new policies and procedures and improving staff competencies; (iii)putting in place new policies on investments, asset-liability management; treasury operations; and risk assessment o f financial intermediaries; (iv) definition o f a strategy for resource mobilization; (v) establish guidelines for auditors in line with international practices; (vi) improving management tools and designing and implementinga medium-term information systems plan; and (vii) preparing and putting in place a comprehensive training program to upgrade staff skills. Subcomponent B: FeasibilityandPre-investmentStudy Fund(IDA financingUS$6 millioncredit) 42. Investments in regional projects, particularly infrastructure, are central to integration and growth in the CEMAC region, but have been slow to materialize, in part because o f their size, but also because o f the risk factors associated with the region which is still perceived as a "high risk hightransactions cost" area by the private sector in spite of substantial reforms over the past decade. The project would support a fund that will help finance feasibility and pre- investment studies. The fund would be managed by BDEAC; BDEAC does not have appropriate resources to finance the studies. The studies would be carried out at the request o f an investor operating in the region under a public-private partnership, a member government, a regional organization, or a local government inthe region. Ifprojects translate into BDEAC financing, the cost of the study would be refinanced under the BDEAC loan. Ifthis i s not the case, the portion of the cost o f the study financed by the credit would be absorbed by BDEAC. The feasibility work to be carried out under the project is a necessary prior step for the adequate implementation of a regional investment financing program. The proposed study fund i s not a line o f credit; the criteria under OperationalPolicy 8.30 do not apply. 11 Component3 ImprovingRegionalEconomic PolicyCoordination,FinancialSector - SupervisionandFinancialIntegrity 43. The project aims to strengthen institutions which focus on regional economic policy coordination, financial sector supervision and financial integrity.Activities are discussed below. Subcomponent A: CEMAC Commission (IDA financingUS$3 milliongrant). 44. The project aims to strengthen the CEMAC Commission (Commission de la Communautk Economique et Monktaire de I'Afrique Centrale) so that it i s able to fulfill its mandate. Specifically, the project will support activities that aim to facilitate policy convergence and trade and financing in the region; improve information to facilitate policy making and investment, and facilitate infrastructure development. The following activities will be carried out: The project will finance advisory services, materials, supplies, training and hardware to support the following activities: (i) harmonization o f procedures for the elaboration o f economic statistics; (ii) implementation o f an analytical tool to assess practices in transport corridors; (iii) establishment o f a data base for CEMAC ensuring cooperation with BEAC and BDEAC; (iv) implementation o f a training program to upgrade CEMAC Commission staff skills. 12 SubcomponentB: Supervisionof FinancialInstitutions(IDA financingUS$7 milliongrant) 45. The project aims to help strengthen COBAC (Commission Bancaire de 1'Afrique Centrale) so that it can perform its functions o f ensuring the stability o f banking and non- banking financial institutions and protecting depositors. COBAC has prepared an action plan which i s anchored on the recommendations o f the Regional FSAP. The project will focus on upgrading the regulatory framework and the supervision o f banks and microfinance institutions. The following activities will be carried out: (i)revision o f banking prudential regulations; (ii) upgrading the banking supervision system; (iii) improvements in the regulation, and designing and putting inplace a system for supervision of microfinance institutions; (iv) puttinginplace a management information system adapted to COBAC's requirements; (v) carrying out studies promoting banking sector integration and development; and (vi) implementing a staff training program. Preparatory work under this component, including the definition o f microfinance accounting was financed under the Project Preparation Facility. The IMF and the government o f France provided assistanceinthe initial organizationo f COBAC and staff training. Subcomponent C: Supervisionof FinancialMarkets(IDA financingUS$2 million grant) 46. COSUMAF (Commission de Surveillance du Marche Financier de 1'Afrique Centrale), the regulatory agency charged with supervision o f the financial market, has begunpreparation o f regulations to govern the exchanges and has developed an ambitious Business Plan covering the period 2007-2012. However, given the lack o f proven viability o f the two parallel markets, it i s not evident if the project should support the development o f COSUMAF under the current institutional framework. Therefore, it i s proposed that for the time being, IDA financing be limitedto a study on the feasibility of the financial market, targeting harmonization of the legal and regulatory frameworks and the technical interconnections between the existing exchanges. Additional IDA financing would be subject to agreement on the restructuring o f the markets, in accordance with the recommendations o f the study. Subcomponent D: FinancialIntegrity(IDA financingUS$2 grant) 47. The project will support GABAC (Groupe d'action Contre le Blanchiment d'Argent en Afrique Centrale) which has elaborated an action plan during project preparation. The project will support GABAC to cany out the following activities inits action plan: (i)regional public a information campaign on money laundering and financing o f terrorism to make stakeholders, including senior government officials, aware o f the policy issues, existing legislation and national requirements; (ii)updating as needed the legislation and regulations applicable to money launderingkombating financing o f terrorism; (iii) strengthening the regulatory framework by GABAC's General Secretary by, among others, establishing appropriate evaluation methodology and operational procedures, carrying out staff training, development o f information systems, and necessary communications facilities with national Anti-Money Laundering/Combating the Financing o f Terrorism (AMLKFT) authorities. 13 Component 4: Support for Project Implementation (IDA financing US$3 grant) 48. The project will support the regional coordination team in BEAC as well as technical assistanceas requiredfor project implementation. D. Lessons learned and reflected in the project design 49. Inpreparing the proposed project, the team has drawn on lessons learned from past experience with financial sector and regional projects, including the findings o f the 2007 assessment o f regional programs prepared by the Independent Evaluation Group (IEG), and the 2008 evaluation of the Payments System Project for the West African Central Bank (BCEAO). Lessons reflected inproject design are summarized below. 0 The need to have active participation of stakeholders, both in governments but also in civil society has been taken into account in project design. All agencies involved in the project have actively participated in its preparation and it is expected that the consultative and implementation arrangements developed during the project preparation as well as the key team members will be part o f the implementation team, taking into account the experience in regional projects that consultation during implementation i s key to success and continued buy-in. The project will help implement reforms which have been extensively discussed inthe region and have buy-inby national and regional authorities. A consultation process on new regulations exists in the region and will be applied for regulations developed inthe context o f the project. 0 In a multi-component project, coordination in implementing individual components is essential. Considerable effort has been devoted during preparation to build an organizational structure that addresses project requirements. The organizational structure provides for a platform to resolve conflicts among countries andproject institutions. 0 The scope o f the program matches the national and regional capacities. A strong project team which includes representatives from member institutions has worked on preparation and is expected to continue during implementation. National staff involved in regional integration issues (particularly financial) i s among the most competent inthe region which will help in project implementation The implementation arrangements have beenworked out in detail with all participating institutions and will be reflected in the project manual which is underpreparation. 0 Thorough analytical work i s required to ensure the soundness o f design. The FSAP, carried out by the Bank and the IMF in2006, provides the analytical underpinning for the design o f many aspects o f the project. The project also drew from other analytical work supported by the Bank and other donors such as the Audit o f CEMAC institutions financed under the Bank's Institutional Development Facility, and assessments o f BDEAC carried out bythe Bank and the AFD. 14 Reforms of institutions in general and financial sector reforms in particular take time, as they involve development o f competencies which are often not available locally. The project has beendesigned taking this into account; implementation i s expected to take five years. 0 The project components have been designed so that there is flexibility to deal with unexpected developments such as studies results, technology changes or higher costs, a lesson drawn from the West African Central Bank project. An annual review will permit a vehicle for discussion o f developments and to introduce changes if needed prior to the mid-term review. E. Alternatives consideredandreasonsfor rejection 50. Duringproject preparation, consideration was given to including a line o f credit or a guarantee facility to support regional investments and help catalyze oil revenues to investments. While this type o f financing is needed, it was decided that the investment component o f the project should be included as a separate operation which would follow the proposed operation. The timingwould be linked to the capacity o fBDEAC and the estimated financing requirements. Phasing the support for investment financing would allow time for the BDEAC strengthening program to advance, to develop the appropriate modalities to be applied in investment financing and for the necessary feasibility work o f infrastructure projects to be camed out. The feasibility studies are included in the proposed project. Also during preparation, participating institutions, including BEAC, requested the inclusion o f support to COSUMAF. Given the potential development o f two exchanges which would not be justified, the Bank determined that support for COSUMAF would be contingent on a decision to create a unified market. Consideration was also given to support other regional institutions such as OHADA which seeks to standardize commercial law, CIMA the insurance regulator, and for SYSCOA, dealing with regional accounting standards. The membership o f the institutions is broader than the CEMAC countries and it was determined that it would not be feasible to include support for them under the project even though their activities are critical to regional economic integration and the financial sector in particular. However, support to these institutions is expected to be provided by other institutions including FIAS,which will be assisting OHADA. 111. IMPLEMENTATION A. Partnershiparrangements 51. The project was designed and will be carried out in close collaboration with other donors involved in Central African integration issues. Specifically, the BDEAC business plan was discussed extensively indonor meetings organized over the past two years, and AFD and the African Development Bank are approving financing totaling US$2.0 million to the BDEAC program. Support for the CEMAC Commission will be closely coordinated with that o fthe EU. 15 B. Institutionalandimplementationarrangements 52. The project will be implemented over five years. The overriding principle guiding the institutional and implementation arrangements is to ensure that operational functions o f each implementinginstitution are strengthened. To this end, BEAC will have overall responsibility for project coordination and for the technical aspects o f project activities relating to BEAC while other institutions will be responsible for the technical aspects o f implementation o f their respective components. BEAC will also be responsible for the overall financial and administrative aspects o f the project, including disbursements and procurement for all institutions. The procurement and disbursement functions may be delegated to some institutions such as BDEAC which will need to develop competencies in these areas in order to carry out their institutional mandate. Project arrangements will be reviewed and adjusted as necessary during project implementation. Given the dynamic context o f the Central African reform program, the project has been designed to ensure flexibility in the support to be provided. A comprehensive mid-term review o f the project will be carried out 24 months after Credit effectiveness. During the mid-term review, an assessment will be made o f what institutional arrangements and activities are working well and which require modifications, and the needed adjustments will be introduced. In addition, annual reviews would be conducted by project participants inthe first quarter o f each year to coincide with the first BEAC Boardmeeting o fthe year. A work program for the year will be agreed at that meeting. 53. A Steering Committee (Comite' de Pilotage), chaired by the Governor or the Vice- Governor o f BEAC and consisting o f the heads o f all participating institutions will provide general policy guidance. A Project Monitoring Committee (Comite' de Suivi), chaired by the Director General o f BEAC responsible for studies, finance and international relations and consisting o f representatives o f all participating institutions will follow up on project activities. The Project Monitoring Committee will, among others, (i)approve annual work plans and procurement plans; (ii)review progress in project execution through, among others, project indicators and the conclusions o f financial and operational audits; (iii) maintain relations with donors which are participating in the project and (iv) discuss and present proposals to the Steering Committee on matters which affect the program. 54. BEAC has established a Financial Institutions Reform Management Unit (Unitk de Gestion de la Re'eforme des Institutions FinanciBres de la CEMAC -UGRIF) which i s charged with day-to-day coordination and administrative hctions o f project preparation and will be charged with the coordination and administrative functions during project implementation. UGRIF is under the responsibility o f the Director o f External Relations o f BEAC. UGRIF staff will include a financial management specialist, an accountant, a procurement specialist a monitoring and evaluation specialist and an informatics specialist. The Deputy Director o f the External Financial Relations Directorate has coordinated project activities during project preparation and i s expected to be appointed Project Coordinator prior to credit effectiveness. The process o f selection o f the financial management specialist and of the procurement specialists i s advanced. BEAC has implemented other World Bank projects. UGRIF staff will receive specialized training insuch areas as procurement and disbursements as required. 16 55. Each implementinginstitution will be charged with implementing its component. The activities will be carried out by the departments in each institution which have the functional responsibility for the task. To ensure quality, each institution will prepare the terms o f reference for consultants that will work on their components, including the required qualifications o f the consultants; the concerned institution will also prepare the technical specifications for the information systems and goods to be procured. For complex technical tasks, such as those associated with some of the information systems tasks, specialized consultants will be recruited to assist the agencies in preparing terms o f reference and specifications. One staff in each institution, normally the representative o f the institution in the Project Monitoring Committee, (Project Officer) will be responsible for coordinating the agency's project work and liaising with BEAC. 56. Some institutions, such as BDEAC, have had experience in successfully implementing investment programs, while others, such as GABAC are relatively young and have had limited experience. The project includes selective implementation support for agencies which require it. To ensure coordination, a management information system which links the different institutions and enables them to exchange data and information will be put in place and staff in each institution as well as inBEAC trained in its use. BEAC is linkedwith its country branches, and the project information system will complement this link. The capacity o f all implementing agencies will be strengthened. A Project Operations Manual, which will spell out implementation arrangements, has been prepared. The Manual will include a Project Implementation Plan. The plan will be updated yearly and includes, among others, guidelines on all periodic reporting, including procurement reporting, and monitoring arrangements. Details o f project implementation arrangements are given inAnnex 6. 57. BEAC would be the borrower for the IDA Credit and administer the IDA Grants. It would assume the financial obligations associated with IDA financing for activities insupport of BEAC and COBAC, and would borrow IDA resources required to support BDEAC. BDEAC will be responsible for reimbursing BEAC for the IDA funds used on its behalf. BEAC will charge a small fee to BDEAC for administering the funds destined to it. Financing for CEMAC, COSUMAF and GABAC will be on a grant basis. BEAC will administer the funds to support all project institutions. Subsidiary Agreements spelling out the obligations o f each institutionwill be signed between BEAC and COBAC, CEMAC, COSUMAF, and GABAC. The agreement with BDEAC will be a condition o f Credit effectiveness. Agreements with CEMAC, COBAC, COSUMAF and GABAC will be conditions for disbursement for the financing for those institutions. C. Monitoring and evaluation of outcomes/results 58. The Monitoring and Evaluation (M&E) system is based on the agreed Results Framework and monitoring arrangements (see Annex 3). UGRIF will have responsibility for coordinating M&E activities while data collection and monitoring will be the responsibility o f each implementing institution. The relevant departments o f each implementing institutionwill be responsible for data collection, management and reporting o f their respective component and subcomponents. 17 59. UGRIF will be charged with consolidating information and data received from each o f the agencies. The Project Officer in each executing agency will be responsible for consolidating information in hisher agency and sending it to UGRIF. Reporting will be done on a quarterly basis. The quarterly report (table) will include (i)the activity indicator; (ii)the status o f the indicator (say categories 1, 2, 3 with three being fully achieved). If an indicator i s not achieved (category l), the performance is "off-track" and there is a risk that the agreed target will not be attained. If this occurs, the agency Project Officer and the department concerned will prepare a plan with corrective actions to ensure that the agreed result is attained. BEAC will prepare a quarterlyactionplan which consolidates each agency planandnoting the persons responsible for taking the requiredactions. 60. As soon as the Financing Agreement is effective, all agency Project Officers will be trained in LPPMS inorder to integrate the project performance indicators into the M&E system. This will facilitate access to project execution data and will enable potential problems can be identified expeditiously. 61. The project performance reports will be sent to the BEAC Project Coordination Uniton a quarterly basis. It will consolidate the data ina concise M&E report which will be submitted to the Project Monitoring Committee for review and transmitted to the Project Steering Committee for information. The M&Ereports will assess achievements against the programmed indicators. 62. In addition to the M&E reports, each agency will be responsible for updating the Project ImplementationPlan (PIM), including the procurement every six months. D. Sustainability 63. The project supports an ambitious regional plandesigned to modernize the institutional framework o f CEMAC, as well as the implementation o f key reforms in the financial sector discussed in the context o f the Financial Sector Assessment Program prepared by the IMF and the World Bank. Thus, a high degree o f commitment is expected in the implementation of project activities. 64. The program is demand driven; project components have been designed following analysis o f needs in each o f the participating institutions, which have been actively involved in project preparation. The establishment o f an inter-institutional committee to coordinate preparation in September 2006 and an administrative unit in BEAC has facilitated the participatory process. The agencies involved in the project have all sought Bank assistance; COBAC and BDEAC, particularly, view Bank intervention as central to their success in assuming their expanded roles. The commitment o fparticipating institutions and the fact that the programs have beendesigned to increase the sustainability o f the participating institutions should helpensurethe sustainability o fthe project. 18 E. Critical risks and possible controversialaspects Risk RiskMitigation Measure Governmentsdo not M Governments have already approvedfar reaching changes to remain committed to improve regional institutions and the institutions' reform programs. institution strengthening. Politicalproblems make M Project focuses onregionalinstitutions, andmost activities couldbe work difJicult in a implemented even ifpolitical problems affect one country. Political member country. problems have not typically affected the day to day operations o f regional institutions unless the problems are inthe host country o f institutions with a single office. BEAC and BDEAC,the key institutions inthe project have put inplace continuity o f operations plans. Moreover, BEAC has offices ina number o f countries and BDEAC i s expected to open them in2009. Project involves M Procedures arebeingestablishedto ensure communicationthrough agencies located in six the BEAC internalsystems which will help ensure speedy countries making communications. Meetings o f senior staff will be scheduled to coordination difJicult coincide with other regional meetings. Project implementation L An institutionalstrengtheningprogramwill beputinplace to help suffers from lack of buildcompetencies inparticipatinginstitutions; targeted support institutional capacity. will also beprovided as needs arise. Moreover, BEAC(which has a solid track record inimplementing a Bank-financedproject) i s charged with project coordination and managing all procurement and financial matters, including disbursement for the project. Theproject team lach M The Chair ofthe Inter-Agency Steering Committeeis the Governor authority or Vice-Governor o f BEAC and the Committee consists o f the heads o f implementing institutions. The Committee will ensure that the project team, which i s ledby a senior staff member o f BEAC has the needed authority. Retainingskilled stafi M As part o fthe development plansbeingprepared; regional particularly in smaller institutions are placing emphasis on training, and are revising their institutions. incentive structure to ensure staffretention. Disagreement on M Theprojectwill only support COSUMAFifthere is is feasible to location of the regional merge the existing exchanges. stock market persists. Overall RiskRating M 19 F. Loadcredit conditions and covenants Prior to Efiectiveness: (a) BEAC has adopted the Project Operations Manual in form and substance satisfactory to IDA (b) The Steering Committee, comprising o fthe Governor or Vice-governor o fBEAC as chair and the head of each o f the other institutions participating in the Project, has been established. (c) The Monitoring Committee, comprising the Director General o f BEAC responsible for studies, finance, and international relations as chair and a representative from each o f the other institutions participating inthe project, has been established. (d) The Project Coordinator has been appointed. (e) BEAC and BDEAC have signed a satisfactory agreement spelling out the obligations o f each institution under the project. Disbursement Conditions: (a) Financing for the securities market besides the initial feasibility studywould be subject to the study being carried out in a manner satisfactory to the Association and the conclusions o f the study on the restructuring o f the financial markets have been approved by the Association. (b) Financing for the COBAC, CEMAC, COSUMAF and GABAC subcomponents will be subject to signature o f satisfactory agreements between BEAC and each o f the institutions spelling out the obligations o f each Implementing Institution under the project. 20 Other Covenants: (a) BEACto ensure that a financial management systemi s maintained for the project, audits are carried out, and Financial Monitoring Reports are hrnishedto IDA inthe agreed formats and periodicity. (b) A mid-termreview ofthe project will be carried out 24 months after Credit effectiveness and annual reviews will be conducted with IDA inthe first quarter o fthe year. (c) BDEAC accounts will be audited by BEAC's external auditors which are acceptable to IDA in accordance with international accounting and auditing standards, and the report sent to the Bankby June 30 o feach year. (d) BEAC will prepare and send to IDA not later than December 31 of each year, the annual work plan and budget for the project for each subsequent year, except for the first year when it will send it no later than one month after effectiveness. (e) BEAC will prepare, and send to IDA on or about March 1 of each year, a report on the progress achieved of the project during the preceding period and integrating the results of the monitoring and evaluationactivities, andreview the report with IDAby May 1of eachyear ( f ) BEAC will carry outjointly with IDA no later than 24 months after effectivenessa midtermreview to assess the status of Project implementation, as measured against the agreed performance indicators. The review will include the results of monitoring and evaluation activities; and annual work plans and budgets; (g) BEAC will send to IDA three months before the mid-term review a report on the progress of the project, and subsequently take the measures to ensure the efficient completion of the Project and the achievementof its objectives. IV. APPRAISAL SUMMARY A. Economic and financial analyses 65. The proposed project will help strengthen regional institutions which will contribute to facilitating regional integration and economic growth and help buildthe foundation for improved financial sector effectiveness. Through improved monetary and reserve policies, the project will expand and unify the economic space across countries which should help encourage investments and cross-border flows. Improved supervision will help create confidence in the banking sector and in a trdy common financial space across borders. Also, by introducing new financial instruments,the project will contribute to capturing an increased portion of regional savings for investment, particularly in much-needed infrastructure. Through reforms in key financial institutions and policies, the project aims to improve access to finance for the private sector, including low-income households. Also, actions taken in connection with the project will result 21 in a significant improvement of the finances of regional institutions, particularly those of BDEAC. 66. Support to BEAC and BDEAC is based on strategic and business plans prepared for these institutions. Analysis carried out inthe context o fproject preparationconfirmed that BEAC i s financially solid and i s able to carry out its obligations in the context o f the project. Analysis carried out inthe context o f preparation o f the project also confirmed that BDEAC i s financially solid and ina position to carry out its obligations under the project. B. Technical 67. The project design draws from relevant analytical work, including the Regional FSAF', and regional and country specific analysis. It incorporates lessons from other Bank Group capacity-building projects, including those contained in the review on the subject by the Independent Evaluation Group of the World Bank. A common problem with capacity building projects has been the absence o f a results framework with targets, baseline and monitorable indicators; the project addresses this through a detailed results framework with measurable targets and monitorable indicators. In addition, a monitoring and evaluation specialist and an informatics specialist are being recruited to ensure that communications, including project data i s gathered and disseminated among institutions and stakeholders. C. Fiduciary 68. BEAC will be responsible for the financial management and procurement under the project. BEAC has already successfully implementeda Bank-financed project and will be in a position to carry out its obligations under the proposed project. BEAC i s now responsible for the financial management and procurement for activities being carried out under a Project Preparation Facility approved for this project in2006. 69. A Procurement Specialist has carried out an assessment o f the procurement arrangements for the proposed project. A Financial Management Specialist has also carried out an assessment o f the financial management and accounting systems and made recommendations on steps to be taken in connection with the proposed project.. These recommendations are reflected inAnnexes 7 and 8. 70. Procurement would be carried out in accordance with the World Bank "Guidelines: Procurement under IBRDLoans and IDA Credits" dated M a y 2004 andrevisedinOctober 2006; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006, and the provisions stipulated inthe Development Credit Agreement. The general description of various items under different expenditure category is given in Annex 8. For each contract to be financed by the credit, the different procurement (goods and non-consulting services) methods or consultant selection methods, prequalification, estimated costs, prior review requirements, and time-frame has been agreed between the Recipient and the Bank Task Team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. To the extent practicable The Bank's Standard Bidding 22 Documents for goods and StandardRequests for Proposals for Proposals as well as all standard evaluation forms would beused throughout project implementation. 71. The fiduciary assessment concluded that the financial management (FM) arrangements inplace at BEAC meet the Bank's minimumrequirements under OP/BP 10.02 and are adequate to provide, with reasonable assurance, accurate and timely information on the status o f the Project as requiredby IDA. 72. The overall project risk is moderate from FMperspective given the existence o f sound administrative and financial systems within BEAC its proven track record in implementing Bank-financed projects. Furthermore BEAC i s enjoying an autonomous status as international organization with its own financial regulations thus it's not directly affected by the governance andpublic financial management environment o f its host country -Cameroon andother member countries. 73 9 The following FMarrangements will be to be put inplace for a smooth implementation o fthe project: The annual work plans and budgetswill be developed by UGRIFincollaboration with the implementinginstitutions then submitted to the approval o fthe project Steering Committee and IDA. 0 While BEAC institutional framework, administrative and financial regulations will apply to the project management, simplified Annex o f FMand Procurement procedures specific to the project will be developed and integrated into the Project ImplementationManual. 0 Un-audited Interim Financial Reports (IFRs) will be producedquarterly by the project Unit,together withthe auditedAnnual Financial Statements (AFS) requiredunderthe FinancingAgreement(s). BEAC internal audit department, so-called "Cellule de contrde interne", will include the project activities inits work program for reviews. The project will be audited by the external auditor o f BEAC that i s acceptable to IDA. The audit reports will be submitted to IDAwithin 6 months after the end o f each fiscal year, i.e. by June 30 o f the following year. BEAC audit committee will ensure the oversight o fthe audit performance and follow up the recommendations. The BEACERIS will establishwithin its ownbooks one (1) XAF-denominated Designated Account (DA) under the IDA Credit and Grant. IDA will make an initial advance disbursement from the proceeds o f the credit and/or grant by depositing into the BEACKRIS-operated DA. Report-based disbursements will be followed inthat actual expenditures will be reimbursed through submission o f Withdrawal Applications together with acceptable quarterlyIFRsas supporting documentation. The BEAC shall open within its own books and operate a Project Accounts (PA) that will form the primary source o f financing for project activities. Required counterpart contributions will be depositedinto the PA inline with the terms o fthe financing agreements. 23 74. The following disbursement Methods may be used under the financing: reimbursement, advance, direct payment, and special commitment. Retroactive financing up to an aggregate amount not to exceed US$4 million equivalent may be made for payments between September 15,2008 and the date o f signing. D. Social 75. A more efficient financial system will increase access to financial services by the poor. Such access i s essential to reduce their vulnerability. Project activities will not have any adverse social effects. E. Environment 76. The project finances techn,;al assistance, training and equipment, materials and supplies, the provision o f which does not have environmental effects. The project i s designated a Category C. F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [I X I NaturalHabitats (OP/BP 4.04) [I [ X I Pest Management (OP 4.09) [I [ X I Physical Cultural Resources (OPBP 4.1 1) [I [ X I Involuntary Resettlement (OPBP 4.12) [I [X I Indigenous Peoples (OPBP 4.10) [I [X I Forests (OP/BP 4.36) 1.1 [X I Safety o fDams (OP/BP 4.37) [I [X I Projects inDisputedAreas (OPBP 7.60)* [I [ X I Projects on International Waterways (OPBP 7.50) [I [ X I G. Policy Exceptions and Readiness 77. The project is ready for implementation and preparatory activities for implementation have been completed. The project does not present policy exceptions. * By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas 24 Annex 1:Regionand Sector Background' CENTRAL AFRICA: CEMACRegionalInstitutionsSupportProject 1. The CEMAC countries share a common currency, the Central African CFA Franc (CFA), which i s pegged to the Euro. In addition, the countries share: (i) a Central Bank - BEAC (Banque des Etats de 1'Afrique Centrale) the strongest regional institution, which formulates a common monetary policy, and manages the CFA; (ii)a banking supervision commission - COBAC (Commission Bancaire de 1'Afrique Centrale) which i s charged with regulation o f banksand other deposit-taking financial institutions, includingmicrofinance institutions; and (iii) a Development Bank -BDEAC (Banque de De'veloppement des Etats d 'Afrique Centrale), which has been mandated to promote regional investments; BDEAC is being restructured and has improved its performance following a difficult period inthe nineties. Regional institutions have also been established to regulate the regional securities market (COSUMAF) and combat money laundering (GABAC), both of recent creation. The CEMAC countries also share a common external tariff and business laws harmonized under the OHADA initiative (Organisation pour Z'Harmonisation du Droit des Affaaires), common Insurance Legislation, regulations and supervision (CIMA-Confe'rence Interafricaine des Marches d'Assurance). The institutional architecture o f CEMAC includes an Executive Secretariat which is relatively new andnot strong. 2. Financial markets in the region are not integrated, despite the common currency and comprehensive regional institutional setup. Low intraregional trade resulting partly from inadequate infrastructure limits financial integration. However, the lack o f regional inter-bank and debt markets; and the shortage o f banks operating across the region, in spite o f the introduction o f a framework that enables licensing o f regional banks, i s central to the slow integration o f financial markets. 3. Access to financial services i s also among the lowest in the world. In2005, there were only one million bank accounts and 780,000 customers o f MFI's, or penetration rates o f only 3 percent and 2.2 percent o f the population, respectively. Banks have tended to concentrate in the most profitable activities, a trend which i s not unique to the CEMAC region, but which is exacerbated by the high operating costs resulting from the low population density and the low income o f the population. Lack o f financial data on potential borrowers and availability o f credit registries, and weaknesses in the legal andjudicial environment discourage the expansion o f the customer base and lending to the private sector. Monetary policy has also not encouraged financial deepening: interest rate controls do not encourage banks to mobilize savings or take risks by expanding lending. Banks, in fact, tend to set highminimumbalances and management fees which discourage low-income individuals to open accounts. 4. Few institutions provide financial services to SMEs. Most o f the support SMEs receive i s in the form of capacity building and loan guarantees funded by development institutions or governments. Weak management and governance in SMEs, unreliable balance sheets, and the complexity o f procedures for recording and enforcing guarantees are the major obstacles to 1This Section is based onthe findings ofthe CEMAC Financial Sector Assessment. 25 increased financing. Inaddition, few financial institutions seem to have the technical capabilities to assess the risk o f SMEs and to design suitable financial services. 5. The financial system consists o f one Central Bank, BEAC, 33 commercial banks; one development bank, 16 non-bank financial institutions, more than 1000 microfinance institutions most o f which are grouped in two large federationshetworks and 36 very small insurance companies. The financial system i s dominated by commercial banks, as shown in the table below. Number Assets Percentage Percentage CFAF billion Assets GDP Banks 33 3,132 87 16 Private 31 3,020 84 15 government 2 112 3 1 Local 8 869 24 4 Foreim 23 2.151 60 11 Non-bankfinancial institutions* 17 215 6 1 MicrofinanceInstitutions 1,028 133 4 1 InsuranceCompanies 36 164 4 1 TotalFinancialSystem 3,644 100 18 BEAC and MonetarvPolicy 6. BEAC i s charged with monetary policy for the CEMAC region, which it conducts in the context o f a single currency and a fixed exchange rate against the Euro, free capital movement between countries in the region, but with capital controls with non-CEMAC countries. Since the late nineties, oil producing CEMAC countries have generated fiscal surpluses derived from the rising oil prices. This has ledto sharp increases commercial bank deposits as governments have been able to clear arrears and deposited surpluses in the banking system (an increase o f 25 percent in 2005). The resulting liquidity o f the banking system has brought to the forefront the need to develop a coherent monetary policy that addresses the liquidity issue and to strengthen monetary policy implementation. 7. The regional authorities approved changes inthe organization andmanagement o fBEAC inApril 2007. Inaddition, a new Governor was appointed and took office July 2007, and new Statutes were approved inSeptember 2007. The 2007 reforms aim to modernize and improve the governance o f BEAC and included expansion o f the management team from one to four General Directors; an increase in the number of Central Directorates; the creation o f a Monetary Policy Committee with broadpowers; and limitation o f the terms o f the General Directors. 26 8. BEAC formulates common monetary policy targets with the objective o f meeting the foreign exchange cover ratio established in the monetary cooperation agreement with France. However, liquidity management has remained largely country-based due to the lack o f integration o fthe money market. 9. The financial relations between the BEAC and CEMAC governments do not ensure a clear separation between money creation and budget financing. At the end o f 1999, member governments set the policy objective o f phasing out monetary financing ("avances statutaires") to governments and to develop Treasury bill markets, and a program to develop treasury bill markets i s expected to be implemented in 2009. Excess liquidity resulting from government deposits may have led to risky lendingby banks, and the instability o f government deposits has placedbankingsystems at risk. 10. To increase transparency and control over government budget execution, some countries are moving to a Treasury Single Account (TSA). Equatorial Guinea has adopted the principle o f a TSA, and a TSA has been operating in Cameroon since late 2005; the only accounts not inthe TSA are those o f autonomous agencies and those funded by donors. Commercial banks have pressuredgovernments to maintain accounts with them as a guarantee on their advances to them, andthetransition to a single treasury account hasbeenslow. 11. In addition to issues relating to government financing, BEAC has not been able to use monetary policy instruments effectively. While the regional monetary program allowed a coordination o f monetary and fiscal policy, BEAC did not use it to assess the volume o f liquidity to be absorbed, and there is no framework to assess the adequacy o f international reserves to deal with oil sector shocks. Inthe past, the lack o f transparency in monetary policy formulation and implementation and the recourse to administrative measures hampered money market development. Monetary policy instruments were used somewhat arbitrarily, at times without reference to clear rules, and transfers abroad were occasionally subject to prior authorizations which are not contemplated in the exchange regulations. The establishment of the Monetary Policy Committee and other reforms introduced in 2007 has contributed to eliminate past arbitrary practices. The BEAC plan calls for new tools to help with monetary programming andreservemanagement. 12. BEAC i s expected to move towards a greater reliance on market-based instruments for the conduct o f monetary policy and public debt management. As a first step in promoting a money market, to raise the rate at which it conducts its liquidity absorbing operations at least to the level o f the European Central Bank's policy rate. BEAC also proposes to develop a framework to determine the level o f international reserves and the level o f savings by the oil- producing states which will be sufficient to absorb oil related shocks. L13. The governance o f BEAC rests on the Board o f Directors (CA) and the Governor. The Board i s made up of 13 members appointed by CEMAC countries and France. Prior to the changes introduced in 2007, the role o f the governor was more important than the Statutes suggestedbecause the Board delegated the responsibility for the formulation and implementation of monetary policy to the governor and he exercised this function with limited consultation within BEAC. The new Statutes provide for a new organizational structure as well as major 27 change in its decision-making structure with the establishment o f a Monetary Policy Committee. The Committee is in charge o f defining the strategy and objectives in monetary policy and reserve management; and of the modalities for policy implementation. The committee includes 14 members, two from each member country and two from France. The first meeting o f the Committee took place in January 2008. The 2007 reforms also aim to improve the governance structure o f BEAC with the expansion o f the management team from one to four and the increase o f the Central Directorates. The changes introduced are in line with those recommended in the Financial Sector Assessment and should strengthen BEAC's credibility by increasing the collegiality in policymaking and clarifying the rules for application o f monetary policy instruments. The Monetary Policy Committee (MPC) will meet at least four times a year. The proposed project will support the BEAC reform program envisaged inits 2008 Strategic Plan. Structureof the FinancialSystem 14. At the end o f 2005, banks accounted for 87 percent of financial sector assets excluding the central bank. O f the 33 banks inthe region, 31 were privately owned, and they were highly concentrated in four out o f the six countries, with banks in Cameroon and Gabon accounting for three-fourths o f total banking assets. Non-bank financial institutions represent only 6 percent o f financial assets, andmicrofinance institutions (MFIs) control less than 4 percent o f deposits. The insurance sector i s barely developed, and insurance premiums represent less than 1 percent o f GDP. However, the number o f companies increased from 29 in2002 to 36 in2006, encouraged by the low capital requirements. Three-quarters o f the insurance companies are in Cameroon and Gabon. Pension benefits in the CEMAC area are provided by government managed institutions which hold limitedvolume of assets. There are no securities exchanges inoperation but two are beingestablished. The Banking;Sector 15. Financial groups play an important role in the banking sector, and the role o f the public sector has declined. The presence o f financial groups in several countries has contributed to the integration o f the financial sector. Two foreign banks have each established a presence in three CEMAC countries, and together represent about one-third o f the sector. Three other banking groups are present in three or more countries. The share o f bank capital held by governments declined from an average o f 24 percent in2002 to 20 percent in2005. With the exception o f the CAR and Chad, direct lending to governments i s limited, as are the holdings o f government securities, with the exception o f banks in Cameroon and Gabon. Two-thirds o f the banks, representing 60 percent of banking assets, have majority foreign ownership. The "agrkment unique" framework was instituted in 2000 to facilitate cross-border activities of banks in CEMAC, but no application has beeh filed, due to some extent to the reluctance o f national authorities to allow new banksto compete with existing ones. 16. The banking sector i s shallow, its sources o f funding poorly diversified, and lending opportunities limited. Banks' total assets amount to only 16 percent o f GDP, and lending to the private sector to 7 percent (15 percent for sub-Saharan Africa). The minimum deposit rate, at 4.25 percent in August 2006, was above market conditions, and this has been an obstacle to financial intermediation, particularly in a context o f excess liquidity. In effect, volatility o f 28 deposits has increased in some countries, and highly concentrated deposits consisting mostly of demand or short-term deposits limit the supply o f long-term financing. With the exception o f Gabon, where 10 percent o f deposits must be placed in govement securities, banks have few opportunities to invest in securities, and they serve a small number o f corporate clients. Inthat context, the maximum lending rate (15 percent) i s low, limits client diversification to SMEs and households, and leads the banks to boost profitability by increasing fees, a practice that discourages financial intermediation. 17. Despite continued improvement in economic conditions, the banking system remains vulnerable with pronounced variations among countries. As o f end 2005, the average capital adequacy ratio was 14.8 percent. Eight banks, representing 18 percent o f the system's assets, were under the 8 percent minimum, and five of these showed negative equity. Non performing loans account for 13.7 percent o f the portfolio, and COBAC efforts have led to improved provisioning, with an average provisioning rate o f 79 percent. Overall, the ratings by COBAC exhibit an increased number ofbanks favorably rated, but also a sharp increase inthe number o f negatively ratedbanks. Microfinance 18. The microfinance sector provides unevenaccess across the CEMAC region. The sector is well developed inCameroon, Congo, and Chad, moderately developed inthe CAR, and incipient in Gabon and Equatorial Guinea. The sector is concentrated around some 20 institutions (federations and networks), more than half o f them in Cameroon. These large MFI's seem to have generally sound management and good financial results but they are fragile, especially given their rapid growth. Besides the large institutions, there are several hundred small institutions, very few o f which seem profitable. Links between banks and MFI's are emerging, especially in Cameroon where a few banks have helped launch MFI's and are lending to them. However, some MFI's have difficulty opening bank accounts, as some banks view them as competitors or at-risk clients. Other than these links and sporadic refinancing o f MFI's, only a few banks are considering expanding their services to them. 29 BDEAC - The Development Bank 19. The Development Bank o f Central African States (BDEAC) was established inDecember 1975 and started operations inJanuary 1977 with the objective o f financing economic integration projects in the region and feasibility studies for regional projects. The Bank has an authorized capital o f CFA 81,450 million o f which 32.5 percent has been paid in. The Bank faced serious financial difficulties starting in the mid-eighties, principally because o f widespread defaults by member countries as oil prices, oil revenues and economic activity declined. Less than prudent lending practices also contributed to the portfolio problems. BDEAC suspended lending activities in 1992 andbegan a process o f consolidation which focused on loan recovery and staff reductions. In 2002, the appointment o f a new president, and a growing demand for BDEAC services inthe region led to a restructuring process carried out intwo phases in 2002-2007. The restructuring plans have sought to strengthen corporate governance, reduce the influence of governments in decision-making bodies, and improve risk control mechanisms. New statutes were adopted in 2002 which allowed for an increased participation o f nonmember countries in the capital ofthe Bank. 20. The regional authorities have designated the BDEAC as a primary instrument for financing integration, and BDEAC was designated as the administrator o f the Community Development Fund (FODEC) that will receive an annual allocation from tax and customs revenues. BDEAC also received a revolving line o f credit from BEAC, and has started mobilizing hnds fiom the market. 21. The objectives o f the 2005-07 plan were partially achieved. There has not been a reduction in the participation o f member governments despite the changes in the statutes and these still hold more than 75 percent o f the shares, discouraging the entry o f new private shareholders. The objectives for resource mobilization were substantially met (80 percent o f the objective reached), but BDEAC was unable to increase lending as programmed (46.3 percent o f objective), to a large extent because the planned modernization o f operational procedures including the updating o f its management systems moved slowly. While the quality o f staff has improved, there i s still a mismatch o f skills, and BDEAC staff needs to be trained in modem banking techniques. 22. Inspite o fits regionalmandate, at the endo fMay 2006 only about one thirdo fBDEAC's portfolio was inregional projects. The portfolio i s heavily concentrated in Cameroon and Chad with commitments in these countries accounting for 65 percent o f total commitments net o f cancellations. As o f May 2006, no loans had been made to Gabon or Equatorial Guinea. Oftotal commitments o f CFA 19 billion, CFA 6.6 billion or 34 percent o f commitments net o f cancellations had been disbursed. Portfolio management has improved, although and arrears are low. BDEAC proposes to continue managing its portfolio to ensure that arrears o f more than three months remain below 9 percent o fportfolio outstanding. Equityhas increased representing 70 percent o f total assets. Profitability i s affected by its low level o f lending and which i s reflected inhighliquidity and low returns on its liquid assets. 30 23. The corporate governance o f BDEAC i s expected to be strengthened hrther by, among other things, the establishment o f an independent and qualified Board o f Directors. The current business strategy o f providing co-financing with well-known lenders and refinancing o f national financial institutions (sound banks and MFIs) i s prudent during this transitional period. For private lending, BDEAC expects to raise resources from the market to avoid creating distortions andto ensure its long-term viability. 24. BDEAC has prepared a business plan for the next five years which will be supported by the project. The objective o f BDEAC's five-year program is to modernize and strengthen the institution so that it can increase its role in promoting economic development and regional integration. Specifically, the program will enable BDEAC to increase financing o f sound regional projects and capture o f surplus oil revenues for investments inthe region. The program will focus on strengthening governance, operations and financial management o f BDEAC (to be updated), Securities Exchanges 25. Two independent and parallel securities exchanges are currently being developed in the CEMAC region, despite potential legal and financial conflicts. Cameroon i s promoting the Douala Stock Exchange (DSX), and a regional securities exchange i s being established in Libreville following a decision o f the Conference o f Heads o f States. Two stocks are listed inthe DSX. The Libreville exchange has started operations. The Financial Sector Assessment recommended that the two exchanges be merged and responsibility for its supervision unified in order for the market to have a chance o f being viable. The parallel development o f two competing institutions raises a number o f legal questions, and the operation o fboth would not be viable considering the small size o f the market. Options for integration (at least partially as in cross listing) with other financial markets, particularly those in western Africa or South Africa should also be considered. The regional supervisory agency has been inoperation since 2005 and the regulatory framework is being finalized. For the time being, the support o f the proposed project to the securities exchanges will be limited to a study on the feasibility o f the financial market, targeting harmonization o f the legal and regulatory frameworks and the technical interconnections between the existing exchanges. Additional IDA financing would be subject to agreement on the restructuring o f the markets, in accordance with the recommendations o f the study. Regulation and Supervision of Financial Institutions and Financial Intepritv Banks and Microfinance Institutions 26. The prudential framework for the banking system has been strengthened but i s not yet in line with requirements. Regulations on the minimumcapital adequacy ratio, large exposures, and internal controls were adopted in 2001 and a prudential framework for microfinance was introduced in2002. However, the modalities for the calculation o f the capital adequacy ratio fall short o f the Basel Committee recommendations, and its minimum level (8 percent o f risk- weighted assets) does not reflect risk levels inthe CEMAC Region. The limit to large exposures (45 percent o f regulatory capital) is also not consistent with the Basel Committee's 31 recommended 25 percent, and it can be up to 90 percent for companies that COBAC recognizes as strategically important for the countries. Finally, full provisioning for non-performing loans i s only requiredafter three to four years, which i s too slow a pace. 27. Compliance with prudential norms i s low, although there has been some improvement in recent years. In November 2005, nearly one-fourth o f the banks were in violation o f the minimumcapital adequacy ratio, andnearlythree-fourths didnot comply with the limitson large exposures. In addition, COBAC's severe understaffing has resulted in delays in drafting implementing regulations for prudential norms that have been recently passed (accounting and prudential consolidation, operational thresholds beyond which strengthened controls are required o f auditors). COBAC's understaffing has also resulted in less frequent on-site inspections than desirable, and flaws inoff-site supervision. Finally, COBAC's ability to impose sanctions i s used too late, as evidenced by the long-lasting violations to critical norms (i.e., negative equity or large exposures amounting to several times a bank's capital). 28. COBAC, established in 1990, has a broad mandate, and i s charged with preparing regulations applicable to all institutions which carry out banking activities except for the postal system and the insurance sector. It i s also charged with supervising these institutions. COBAC's decision making body i s the Banking Commission, chaired by the Governor o f BEAC and consisting of representatives o f CEMAC member countries; these representatives remain staff o f their respective Ministries o f Finance. Day-to-day operations o f COBAC are the responsibility o f an Executive Secretariat which has had its offices in the BEAC headquarters in YaoundC, Cameroon, but which i s expected to move to its own facilities Libreville, Gabon. 29. COBAC's increasing functions are threatened by its lack o f resources; it has only four staff members to carry out off-site audits and 11 for on-site audits, while five experienced staff members have recently left the agency. The shortage o f staff to carry out its offsite function makes it difficult to analyze financial statements and detect problems early enough for remedial measures to be implemented. Examinations will need to focus increasingly on identifying or preventing prudential problems in financial institutions. COBAC's independence is in fact challenged by the role retained by the national authorities in the issuance or withdrawal o f bank licenses and the fact that most o f the commissioners in its Board have official positions in the national ministries. 30. COBAC has prepared an action plan to be implemented over the next five years with support under the project. The objective o f the COBAC program i s to strengthen the institution so that it can perform its function o f ensuring the stability o f banking and non-banking financial institutions andprotecting depositors. COBAC's planincorporates most o f the recommendations o f the CEMAC Region Financial Sector Assessment, and seeks to strengthen the institution's independence by reducing further the role o f the finance ministries inthe licensing process, and ensuring a greater diversification o f the COBAC's commissioners, and a substantial increase o f COBAC's staff, These changes will enable COBAC to enforce sanctions contemplated in existing regulations. An action plan to update regulations has also been prepared; the proposed reforms will bringbasic prudentialnorms more inline with international standards. 32 Insurance Sector 31. The regional framework for the supervision o f the insurance sector adopted in 1995 represented an improvement over earlier norms, but anecdotal evidence suggests that its effectiveness has deteriorated. In some cases, companies that are no longer viable have been allowed to continue in business, while in other cases the regional regulator approved the licensing o f a new company, but national authorities did not grant the license in response to pressure from competitors. The causes for the deterioration o f the supervisory framework include inadequate resources provided to the supervisor, political pressures on its staff (most o f them are on secondment from their national authorities), a lack o f clear delimitation o f responsibilities between the regional supervisor and the national insurance authorities, and loopholes in the regulatory framework that excludes key areas such as the supervision o f reinsurance and brokerage activities. There i s a planto increase staffing levels andthe capacity o fthe supervisors and to update the regulations, which should contribute to improving o f the regulatory institutions. Support for the insurance sector i s expected to be provided by the government o f France. Anti-Monev Laundering - GABAC 32. The CEMAC regulation adopted in 2003 on a regional legal framework on Anti-Money Laundering and Combating the Financing o f Terrorism provides a good legal framework for these activities, and the implementing regulation issued by COBAC for the banking sector i s a significant step forward. However, the framework still needs further amendments to be in line with standards, and the legislation remains largely ignored outside o f the banking sector. The predominance o f cash-based transactions in the region makes it all the more essential to foster the implementation o f obligations outside o f the financial sector. governments seem ready to place more emphasis on an effective anti-money laundering framework in terms o f good governance, the fight against corruption and the trafficking o f natural resources, so as to foster actions at the national level. 33. The unclear responsibilities between the regional agencies involved and the national authorities hamper the implementation o f the framework. GABAC, with headquarters in the Central African Republic, was created on December 2000 with the core missions o f fighting money laundering and criminal products, harmonizing national regulations; and working with African and international institutions dedicated to fighting money laundering. GABAC currently has three staff members and has not yet been assigned office space by the host government, as is the practice. In addition to GABAC, national Financial Intelligence Units (FIUs) are to be established and built up, and their independence guaranteed. These units would need to ensure the secure and confidential treatment o fthe informationmade available to them. 33 FinancialInfrastructure Lena1and Judicial Framework 34. The credit environment is governed by uniform OHADA legislation which is an improvement over earlier legislation, but which requires changes. The legislation is perceived as complicated and not always implemented. Weak governance, and limited training and specialization injudicial systems remain a major impediment to creditor rights' efficiency. Court proceedings are lengthy and unpredictable, and suffer from perceptions o f malpractice and corruption. These shortcomings are problematic in a context where legal systems rely heavily on the formal judicial systemto resolve disputes. The OHADA legislation is expected to be revised to take into account problems encountered in its application; support for this activity will be providedby FIAS. Accounting 35. OHADA has established an accounting framework for the region. The framework distinguishes levels o f requirements according to company size, but the thresholds have not been revised, thus placing a heavy burden on SMEs. For large companies, the standards do not conform to international norms and will need to be revised. In addition to the problems with accounting standards, there are no standards for auditing which raises serious concerns regarding the quality o f financial statement audits. It is expected that the International Auditing Standards will be adopted, which would not only address weaknesses inthe regulatory framework, but also contribute to improving the image o f the accounting professionby the business community. Payment systems 36. A regionalpayment systemreform project under the aegis o fBEAC and financed by the World Bank was launched in 2003 to make the national and regional payment systems more effective and secure. Implementation o f the program took longer than originally anticipated due to a lack o f experience, weak coordination, and some divergences with the banks regarding the interbank card system component o f the project. A payment system Directorate responsible for supervision o f the new system has now been established inBEAC, and will be supplemented by units in each country. Under the proposed project, activities to expand the system will be financed. 34 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject BankFinanced Project LatestSupervision(ISR) Ratings(Bank-Financed projectsonly) Bank-financed: Implementation Development Sector Progress Objective (W AFTTR - Transport (DO) CEMAC -Transport -Transit MU MS Facilitation Project (P079736) AFTFP - Finance Project -Regional BEAC - Payment System S S (P072881) - Credit 3704 Other Agencies The project complements two grants ofUS$l million eachinsupport of BDEAC's reform program recently approved by the AFD (France) and the shortly to be approved by the African DevelopmentBank. 35 Annex 3: ResultsFrameworkandMonitoring CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject ResultsFramework PDO Use ofProject OutcomeWormation The project aims to strengthen - Increase in percentage o f foreign Assess progress towards Central African regional institutions reserves managedregionally by achieving PDO and revise so that they can fulfill their BEAC (from 35% at the end of component strategies as mandates to encourage an expanded, 2007 to 50% at the end o f 2009). needed. Adjust indicators better governed regional market, and if neededonbasis ofat a more transparent, better regulated - Banks accounting for 80% o f sector mid-term review and more competitive financial assets complying with agreed system. This will facilitate the re- prudential norms by end o f project. utilization o f oil revenues for YR5 evaluate project investment inCentral Africa. The -Growth o f BDEACfinancing o f success; assess relative project supports programs approved regional projects (from CFA 8.2 effectiveness o f various bythe member governments billionin2007 to CFA 15 billion components to inform designed to improve the efficiency per year in2012) future regional policies and of regional institutions programs. IntermediateOutcomes IntermediateOutcome Use df Intermediate Indicators OutcomeMonitoring Component 1-BEAC Assess progress towards implementation and Result: StrengthenBEACto effectiveness o f project improve regional monetary policy; outcome measurements. develop public securities markets Adjust indicators as needed and facilitate payments inthe region on basis o f experience at mid-term review. -Improving Monetary Policy - Monetary programmingconducted YR 5 evaluate project at regional level by Y4. outcome - Developingpublic securities market - CentralBanWGovernment paper issued by Y3 (none issued now). -Improving payments - Cross-border electronic payments transactions inwholesale and retail systems (SYGMA and SYSTAC) cumulative increase o f 33% by Y 3 and 61% by Y5. Component 2- Encouraging RegionalInvestmentFinancing Results: (a) Strengthen B D E A C so -Growth o f financing by BDEAC for Assess BDEAC capacities that it can increase financing o f investment inregional projects, to expand lending and regional projects and intermediate primarily infrastructure recycle regional fhds, and surplus oil revenues; and (b) investments (from CFA 8.2 billion adjust technical support for increase readiness o fregional in2007 to CFA 15billionper year BDEACas needed 36 projects for financing. in2012). For (a) sub-resultsare: (i)Improving governance o f Revisedand applied policies, BDEAC. procedures and internal controls by Y3 (ii)Strengthening project evaluation All projects evaluated according to andportfolio management (enhance new policies by Y3. development impact and Improved portfolio performance, as profitability). measuredby increasedratio o f annual disbursements/commitments iii)Improvingfinancialmanagement inthe precedingyear from 43% (investment, resource mobilization in2001to 70% byY3 policies) and introduce Maintaining level o f NPL (arrears management information system o f more than 3 month as % of loans (enhance efficiency and outstanding) not to exceed 9% profitability) New MIS including accounting ystem substantially inplace by mid- :rm andgenerating financial reports Ilinewithinternationalstandards Y y 5 _____-_________________________________ .--_----_------------------------------- ................................. Sub-results (b): Strengthen COBAC Progress towards implementing Assess progress in (enhance supervision: strengthen plantowards compliance with compliance and adapt regulation; improve management Basle 11Core Principles (capital program and technical tools) so that it can contribute to adequacy; provisioning) with support as needed stability o fbanking andnon- norms adjusted as requiredto meet banking financial institutions and needs by end o f project. protect depositors. Updated accounting plan for banks -Improving regulation and inplace andusedbybanks byY3 supervision o fbanks Plan for application o f -Improving regulation and microfinance regulatory framework supervision o f microfinance and supervision systeminplace institutions and appliedby mid-termreview. 37 ..{ .r ee e i r P z e 00 b m 5P 1 a eeCbL -? .B -$00 F p s 3 W I I s m m I I In 3 0d 3 3 2 U 0 I s I I I I m d 1. The Monitoring and Evaluation (M&E) system i s based on the agreed Results Framework and monitoring arrangements (see Annex 3). UGRIF will have responsibility for coordinating M&E activities while data collection and monitoring will be the responsibility of each implementing institution. The relevant departments o f each implementing institution will be responsible for data collection, management and reporting o f their respective component and subcomponents. 2. UGRIF will be charged with consolidating information and data received from each o f the agencies. The Project Officer in each executing agency will be responsible for consolidating information in hisher agency and sending it to UGRIF. Reporting will be done on a quarterly basis. The quarterly report (table) will include (i) the activity indicator; (ii) status o f the the indicator (say categories 1, 2, 3 with three being fully achieved). If an indicator i s not achieved (category l), the performance is "off-track" and there is a risk that the agreed target will not be attained. Ifthis occurs, the agency Project Officer and the department concerned will prepare a plan with corrective actions to ensure that the agreed result i s attained. BEAC will prepare a quarterly action plan which consolidates each agency plan and noting the persons responsible for taking the required actions. 3. As soon as the Financing Agreement is effective, all agency Project Officers will be trained in LPPMS in order to integrate the project performance indicators into the M&E system. This will facilitate access to project execution data and will enable potential problems can be identifiedexpeditiously. 4. The project performance reports will be sent to the BEAC Project Coordination Unit on a quarterlybasis. It will consolidate the data in a concise M&E report which will be submitted to the Project Monitoring Committee for review and transmitted to the Project Steering Committee for information. The M&Ereports will assess achievements against the programmed indicators. 5. Inaddition to the M&Ereports, each agency will be responsible for updatingthe Project ImplementationPlan (PIM), including the procurement every six months. 44 Annex 4: DetailedProjectDescription CENTRAL AFRICA: CEMACRegionalInstitutionsSupportProject 1. The proposed project aims to strengthen Central African regional institutions so that they can fulfill their mandates to encourage an expanded, better governed regional market, and a more transparent, better regulated and more competitive financial system. This will facilitate the re- utilization o f oil revenues for investment in Central Africa. The project supports programs approved by the member governments designed to improve the efficiency o f regional institutions. The Chiefs o f State o f the CEMAC Region approved substantial changes for BEAC and the CEMAC Secretariat in April 2007, and approved reforms for BDEAC and COBAC earlier. The proposed project will provide support for all six Central African Regional Institutions. However, the focus o f the project will be on the BEAC, COBAC and BDEAC because o f their importance in addressing urgent challenges to the regional economy associated with the rise inoil prices, andthe CEMAC Secretariat, given its mandate inspearheading overall integration. The project also includes a preinvestment fund to prepare bankable regional projects ininfrastructure. The project components are describedbelow. COMPONENT 1-Strengtheningthe CentralBank-BEAC-BanquedesEtats de Z'Afrique CentraZe (IDA creditfinancingof US$14.5million) 2. The project will support the implementation o f the Strategic Plan o f BEAC approved by its Board in October 2007. The Plan's objectives cover four strategic themes: improving the effectiveness o f monetary policy; modernizing BEAC's operations; improving BEAC's governance and its policies and procedures; and enhancing BEAC's role in the region. The Strategic Plan seeks to increase the effectiveness o f BEAC's statutory missions as the regional central bank -- the definition and implementation o f monetary policy; managing foreign exchange reserves; and managing the regional payments system. The Plan also seeks to strengthen support functions such as BEAC's training program, and telecommunications requirements. The IDA Credit will finance advisory services, materials, supplies, equipment, software and hardware. The financing will assist BEAC help carry out priority activities among those discussed below. Monetary Policy 3. BEAC's objective is to increase the effectiveness o f monetary policy by adapting it to address the system's current excess liquidity; improving the research function and statistical base and by putting inplace new policy instruments (govemment/Central Bank paper) which will also helpdevelop regionalcapital markets. To this end, the project would support, among others: Policy formulation: Analytical work to refine monetary programming; and introduce monetary programming at the regional level (Studies Directorate); updating o f indicators to track developments in the economy. 45 0 Designing and puttinginplace information systemto manage monetary statistics (Studies Directorate). 0 (i)strengtheningthe theoretical underpinning ofmonetary policy by improving the information base, including establishing a data base for economic and financial data base for the CEMAC region and a documentation center; and (ii) carrying out indepth studies, setting up a program o f research seminars and research notes; and establishing guidelines for the harmonization o f statistical methods inthe region (Research Directorates). Policy implementation: (i) Introduce treasury/central bank paper; (ii) the system o f open market operations revise (iii)complete the work launched on a "Centrule des Risques" and a "Centrale des Bilans" (iv) establish mechanisms for the implementation o f Monetary Policy Committee recommendations; (v) carry out studies including use o f the inter-bank market, the development o f non-bank financial institutions (e.g. leasing); system to respond to systemic crisis and a forum on financial stability; credit and banking markets in the region; (Credit Directorate). Financial Operations. The objective i s to optimize the return on investments, consolidate the management o f monetary reserves and gold stocks, and improve the operations o f the trading room. Activities include 0 (i) Analytical work to determine an appropriate asset allocation o f reserves; expand the range o f investment instruments utilized; set fees for market operations with the member governments; encourage the repatriation o f foreign exchange proceeds; (ii) maintain emergency plan for continuity of operations; and (iii)establish a specialized documentation center; (iv) provide specialized training to relevant staff (Foreign Exchange Reserves Directorate). Payments Systems. The objective i s to increase the use o f payments systems and to this end, will carry out the functions spelled out below. 0 (i)definitionandimplementationofmeasurestosimplifyandstandardizeconditionsof access to the system (ii)define approaches to encourage the use o f the systems by microfinance institutions; (iii) measures to reduce the operating transaction costs design o fthe system. 0 Discourage paper-based transactions by defining and implementing measures that encourage automatic payments, credit, debit and pre-paid cards and other electronic means o fpayment. 0 Develop and put inplace a system to track "incidents o fpayments" Develop and put in place a system that ensures payment systems performance and continuity; create an extranet portal. (Payment Systems Directorate) External Relations. The objective i s to enhance the relations with member governments and with regionalhternational financial institutions. Key activities envisaged are below: 46 (i) andputinplaceasystemtomanagebalanceofpaymentsdataforCEMAC(ii) Design updating o f foreign exchange regulations and dissemination o f monetary and exchange regulations; (iii)identification o f areas requiring technical assistance from international institutions; (iv) seminars and papers disseminating policy in the region; (v) putting in place a plan for increased coordination with the Central Banks o f the Congo (DRC) and Sao Tome and Principe and with other regional programs andinstitutions. Information Systems and Technology. The objective i s to improve incommunications and the planning and management o f its information systems; activities planned include: 0 Upgrade the communications network o f BEAC, including the satellite (VSAT) and high speed (fiber optic) lines between its centers inthe six CEMAC countries. 0 Implement an EmergencyBusiness Operations Continuity Plan 0 Definition o f an information technology master plan which among others defines procedures and a mediumterm investment plan. Human Resources/Training. The objective i s to develop a personnel management and training system which increases staffproductivity and staff development. Activities envisaged include 0 Definition o f a human resource master plan including requirements, career streams and salary structure; recruitment policy that responds to institutional needs (Human Resource Directorate). 0 Preparing a multiyear training program including initial and follow-up training for all staff and specialized technical training and related activities, such as developing a database on staff training for the personnel. Preparatory work for the establishment o f a regional training center on bankindmonetary issues (Training Directorate). COMPONENT 2 -EncouragingRegionalInvestmentFinancing SubcomponentA: StrengtheningBDEAC(IDA creditfinancingof US$9.0 million) 4. The objective o f BDEAC's five-year strategic plan supported by the project is to modernize and strengthen the institution so that it better performs its fbnctions o f promoting economic development and regional integration. Specifically, the program will enable BDEAC to increase financing o f sound regional projects and recycling o f surplus oil revenues for investments in the region, particularly in infrastructure (transport, electricity, water supply, telecoms, etc.). The program will focus on strengthening governance, operations, particularly project evaluation and portfolio management, financial management and support fbnctions o f BDEAC as described below. The Credit will finance advisory services, materials, supplies, equipment, software and hardware to carry out key activities among those discussed below. Governance 47 5 The BDEAC program seeks to improve the governance by strengthening its decision- makingprocesses.To this end, the Bankproject would support the following activities: Revise the composition and powers o f the General Assembly. Introduce new guidelines for the operations o f the Board o f Directors so that it can make informed policy and investment decisions; this will include the creation o f working groups which would report to the fullBoard on specific issues. 0 Definition o f policies governing money laundering Definition o fpolicies governing social and environmental impact o fprojects. Project evaluation andportfolio management 6. As part o f its refom program, BDEAC plans to update operational policies and procedures. Specifically, the program calls for: Establishment o f clear procedures for loan processing. This includes definition o f the roles o f the departments involved. The procedures will separate the commercial and the analytical aspects o f loan processing; Development and adoption o f a standardized approach to the economic and financial analysis o fprojects; Development and adoption o f detailed portfolio management policies and procedures which focus on risk; Development o f a fixed calendar for the meetings o f the committees charged with operational decisions; Preparation o f an operations manual; Strengthening the capacity o fthe operations and legal staff. Financial management 7. The project will support strengthening o f policies and operations to improve financial management. Specifically, the program calls for: Definition o fpolicies on asset-liabilitymanagement; treasury operations; Definition o f a methodology for assessing risk o f banks (BDEAC is increasing its second-tier role); Definition o f regulations to govern investments; Definition o f a strategy for resource mobilization; Carrying out a feasibility study on a concessional lendingfacility; Definition o f guidelines for auditors to ensure that audits are in line with international practices. 48 Management Tools and Human ResourceDevelopment 8. The BDEAC proposes to improve its information systems based on an information systems master plan. BDEAC envisages: Information Technology: Implementationo f the information systems master plan Revision o f its accounting plan; Development o f a regional economic data base and an archival system for documentation; Development o f a web site Human Resource Management and Administration: Definition o f a humanresource management strategy including career streams; Implementationo f a short term training program to upgrade existing staff; Definition and startup o f a young professionals program; Development o f a code o f ethics; and Definition and implementation o f a training curriculum. Design and put inplaceperformance monitoring systems Improve Internal Controls Implementation o f training program indepartments dealing with internal controls. Subcomponent B: FeasibilityandPre-InvestmentStudy Fund(IDA creditfinancing of US$6.0 million) 9. Investment in regional projects, particularly infrastructure, is central to integration and growth in the CEMAC region. Regional investments have been slow to materialize, in part because o f their size, but also because o f the risk factors associated with the region. Despite substantial reforms over the past decade, including the liberalization o f infrastructure sectors, privatization o f public enterprises and development o f cross-border initiatives in transport, energy, telecom and water sectors, the region i s still perceived as a "high risk-high transactions cost" by the private sector. Although foreign direct investment did increase over the past decade, the negative perception persists in some countries and from the region's history o f mixed policy performance subject to setbacks or delayed implementation. Experience with regional projects elsewhere in Africa has shown that because o f risks, the feasibility o f investments has to be thoroughly studied and demonstrated for private investors to participate. 10. The project would support a fund that will finance feasibility andpre-investment studies. The fund would be managed by BDEAC who will appoint dedicated staff to this activity. The studies would be carried out at the request o f member governments, a regional organization, a 49 local government in the region or an investor operating in the region operating under a public- private partnership. If projects translate into BDEAC financing, the cost o f the preinvestment study would be refinanced under the BDEAC loan. If this i s not the case, the cost o f the study would be absorbed by BDEAC. The feasibility work to be carried out under the project is a necessary prior step for the adequate implementation o f a regional investment financing program. The maximum financing for any study will be the equivalent o f US$ 700,000. BDEAC will contribute a maximum o f 70 percent o f the cost o f the study. The mode o f operation of the fundwill be spelled out inGuidelines and inthe Project Operational Manual. COMPONENT 3 -ImprovingRegionalEconomicPolicyCoordination,FinancialSector SupervisionandFinancialIntegrity Sub-componentA: CEMAC-- Commissionde la communaute'Economique et Mone'taire de I'Afrique Centrale (IDA credit financingof US$3.0 million). 11. The project aims to strengthen the CEMAC Secretariat so that it is able to fulfill its mandate. Specifically the project will support activities that aim to facilitate policy convergence; and intra-regional trade; improve information to facilitate policy making, investment and infrastructure development. The project will finance advisory services, materials, supplies, training and hardware to: Harmonizationo fprocedures for the elaboration o f economic statistics and o f fiscal and customs reform with a view to reducing distortions Implementation o f an analytical tool to assess practices intransport corridors 0 Establishment o f a data base for CEMAC ensuring cooperation with BEAC and BDEAC which plan the development o f similar databases Implementation o f staff training to upgrade CEMAC staff, SubcomponentB: COBAC CommissionBancaire de I'Afrique Centrale (IDA grant - financingof US$7.0 million) 12. COBAC aims to strengthen its operations so that it can perform its function o f ensuring the stability o f banking and non-banking financial institutions and protecting depositors. To this end, this component will support (a) improvements in prudential regulations and banking supervision practices (b) improvements in the regulation and supervision o f microfinance and promotion o f other non-bank financial institutions; (c) providing the information technology and other management tools for COBAC operations; and (d) promoting banking sector integration and development. The project will provide advisory services, training to carry out key activities. Itwill also finance as requiredmaterials, supplies, computer hardware andsoftware. Regulation and supervision of the banking sector 13. The program envisages improvements in the regulatory framework and supervision function and the protection o f depositors. The program also aims to strengthen the corporate governance o fbanks. This will entail: 50 Preparation and implementation o f a plan for the adoption o fprudentialnorms spelled out inBASLE11. Updating o fmarket conduct rules for the banking sector and rules for monitoring and enforcement by supervision staff. Updating guidelines for on site andoff site supervision, to change the supervision system approach from one based on compliance to one based on risk management. Revisiono f accounting standards for banks for compliance with international norms (International Accounting Standards-IAS). Capacitybuildingincluding (i) training to strengthen the skills o fbank supervisors; (ii) internships inbankingcommissions to familiarize COBAC supervisors with supervisory processesinmore advanced bank supervisory agencies; (iii) participation of key senior staff inhigh-level international bankingsupervision conferences; (iv) training for regional stakeholders on key regulations (e.g. on the agreement unique). Analysis o f the feasibility o f a possible deposit guarantee fund for the region. Upgrade and expand the on-site and off-site supervision system. Regulation and supervision of micro$nance and other non-bank financial institutions 14. The project will provide support to increasing the knowledge base o f the microfinance sector; development o f the regulatory and supervisory framework for MFI's. In addition, the project will support increased knowledge o fnon-bank financial institutions. Define and put inplace an action plan for application o f microfinance regulations and the supervision o fmicrofinance institutions Builda databaseonmicrofinanceinstitutions and establish arating system; Design andimplement a credit bureau (centrale de risques) for MFI's; Publishand distribute the regulations and accounting planfor MFI'S; Carry out a study on a clearing and settlement system o f MFI transactions (chambre de compensation) at the national andor regional levels. Carry out studies and seminars on non-bank financial institutions, including on leasing, factoring, exchange bureaus and issues related to the transfer of cash services within CEMAC. Capacity building including (i) training supervisors in on site and o f f site supervision (ii) training o fMFI's on regulations. Design and put inplace supervision system for microfinance institutions. Management Infrastructure and Studies 15. The project will provide the information technology, management tools and communication/ dissemination instruments o f regulatory information in the region. To this end the project will finance advisory services, training, materials and supplies, and software and hardware for: 0 Preparation and implementationo f an information systems master plan; 51 e Development o f abankingsector database; e Development o f archivaVrecords systems; a Publication o f regional regulations and regional seminars to disseminate regulatory framework and compliancebest practices. 0 Design andput inplace performance monitoring systems 0 Studies to promote bankingsector development and integration Subcomponent C: COSUMAF-- Commission deSurveillance du Marche Financier de I'Afrique Centrale (IDA grant financingof US$2.0 million) 16. COSUMAF, the regulatory agency charged with supervision o f the regional financial market, has begun preparation o f regulations to govern the exchanges and has developed an ambitious Business Plan covering the period 2007-2012. However, given the lack o f proven viability o f the two parallel exchanges, it i s not evident if the project should support the development o f COSUMAF under the current institutional framework. Therefore, it i s proposed that for the time being, IDA financing be limited to a study on the feasibility o f the financial market, targeting harmonization o f the legal and regulatory frameworks and the technical interconnections between the existing exchanges. Additional IDA financing would be subject to agreement on the restructuring o f the markets, in accordance with the recommendations of the study. 17. The credit includes a US$lOO,OOO allocation to carry out the abovementioned study. In addition, US$1.9 million have been set aside under the project to cover advisory services and training needs to assist in the restructuring and development o f the regulatory/supervisory framework o f the market after there i s formal agreement on it. Subcomponent D: GABAC - Groupe-d'action Contrele Blanchiment d'Argent en Afrique Centrale (IDA grantfinancingof US$2.0 million) 18. The project will support the CEMAC governments intheir objective o fcombating money laundering and the financing o f terrorism in the region. The Regional Act No. 9/00/CEMAC- 086/CCE 02 o f December 2000 established GABAC, thereby making it a dedicated body of the Community. In addition, the CEMAC regulation adopted in 2003 on a regional legal framework on Anti-Money Laundering and Combating the Financing o f Terrorism provides a good legal framework for these activities. COBAC has issued implementing regulations to this legislation for the banking sector which represents a significant step forward. However, there is a need to improve the legal/regulatory framework, and, more importantly, there i s a need to make operational the legislation. To this end, GABAC also intends to complete the process o f being recognized as the FATF-style regional body for the CEMAC region, by accepting the core 40+9 FATF principles that the regional institutions adhere to. The project will provide consulting services training and equipment and supplies to finance the following activities: A regional public information campaign on money laundering and financing o f terrorism to make stakeholders, including senior government officials, aware o f the policy issues, existing legislation andnational requirements and the creation ofAML/CFT authorities 52 Updating as needed the national legislation and regulations applicable to money laundering and combat o f financing ofterrorism. Strengthening the regulatory framework to be used by GABAC, by among others establishing typologies o f Anti Money LaunderingKombating the Financing o f Terrorism ( M C F T ) in each member country. Carrying out staff training, development o f information systems, and necessary communications facilities with national AMLEFT authorities. COMPONENT 4 Supportfor ProjectImplementation(IDA creditfinancingof US$3 - million) 19. The institutional and implementation arrangements seek to ensure that the operational functions o f each participating institution are strengthened. Consequently, participating institutions will be responsible for the technical aspects o f implementation o f their respective components. BEAC will have overall responsibility for project coordination, as well as the overall financial and administrative aspects o f the project, including disbursements and procurement for all institutions. BEAC will also be responsible for the technical aspects o f project activities relating to BEAC. Project monitoring will be done at the institutional level and consolidated by BEAC. 20. The regional nature of the project requires a strong coordination team, both to deal with the procurement process and financial management o f the project as well as to ensure that outcomes and outputs are monitored consistently and that the analysis o f results is technically solid. The project coordination team will be financed under the project. The team will include a Project Coordinator, an Administrative Offcer/Accountant, and a Procurement Specialist, and a monitoring and evaluation specialist. The credit will also finance operating expenses of the unit. Whenever necessary, technical assistance will be provided to the participating institutions to assist inoverseeing the technical aspects o f their components and particularly on monitoring and evaluation o f results. Short term assistance will also be provided to the Project Coordination Team at BEAC on specific areas o fconcern. 53 Annex 5: ProjectCosts CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject Local Foreign Total Project Cost ByComponent and/or Activity us us us $million $million $million 1. Strengtheningthe Central Bank (BEAC) 8.1 30.5 38.6 2. EncouragingRegional Investment 20.4 Financing (a) BDEAC 3.3 7.1 10.4 (b) Pre-investmentFund 3.O 7.0 10.0 3. ImprovingRegional Coordination, 14.4 Supervision and Financial Integrity (a) CEMAC 1.o 2.0 3.0 (b) COBAC 3.2 4.2 7.4 (c) COSUMAF 1.o 1.o 2.0 (d) GABAC 1.o 1.o 2.0 4. Support for Project Implementation 2.1 1.8 3.9 Total Baseline Cost Contingencies 4.3 TotalProjectCosts 81.6 TotalFinancingRequired 52.0 54 Annex 6: ImplementationArrangements CENTRAL AFRICA: CEMAC RegionalInstitutionsSupport Project 1. The project will be implemented over five years. The overriding principle guiding the institutional and implementation arrangements i s to ensure that operational functions o f each participating institution are strengthened. To this end, BEAC will have overall responsibility for project coordination and for the technical aspects o f project activities relating to BEAC while project implementing institutions will be responsible for the technical aspects o f their respective components. BEAC will also be responsible for the overall financial and administrative aspects o f the project, including disbursements and procurement for all institutions. The procurement and disbursement functions may be delegated to some institutions such as BDEAC which will need to develop competencies in these areas in order to implement their institutional mandate. Project arrangements will be reviewed and adjusted as necessary duringproject implementation. A mid-termreview o f the project will be carried out 24 months after Credit effectiveness, and annual reviews would be conducted in the first quarter o f the year to coincide with the first BEAC Boardmeeting. 2. A Steering Committee (Comite' de Pilotage), chaired by the Governor or Vice-Governor o f BEAC and consisting o f the heads o f all implementing institutions will provide general policy guidance. A Project Monitoring Committee (Comite' de Suivi), chaired by the Director General of Studies Finance and International Relations o f BEAC, and consisting o f representatives o f all implementinginstitutions will follow up onproject activities. The ProjectMonitoring Committee will, among others, (i) approve annual work plans and procurement plans; (ii) progress in review project execution through, among others, project indicators and the conclusions o f financial and operational audits; (iii)maintain relations with donors which are participating in the project and (iv) discuss and present proposals to the Steering Committee (through the Vice-Governor) on matters which affect the program. An inter-agency committee met regularly during preparation o f the project. The Monitoring Committee and the Steering Committee will be formally established prior to Credit effectiveness. 3. BEAC has established a Financial Institutions Reform Management Unit (Unite' de Gestion de la Re'forme des Institutions FinanciBres de la CEMAC -UGRIF) which i s charged with day to day coordination and administrative functions o f project preparation and execution. UGRIF is attached to the Governor's office and is under the responsibility of the Director o f External Financial Relations o f BEAC. Staff will include a financial management specialist, an accountant, a procurement specialist a monitoring and evaluation specialist and an informatics specialist. The Deputy Director o f the External Financial Relations Directorate has coordinated project activities duringproject preparation and i s expected to be appointed Project Coordinator prior to credit effectiveness. The process o f selection o f the financial management specialist and o f the procurement specialists is underway. The process o f selection o f the monitoring and evaluation specialist and the informatics specialist i s being initiated. The accountant will be appointed from within BEAC. BEAC has implemented other Bank projects. UGRIF staff will receive specialized training insuch areas as procurement and disbursements as required. 4. The components will be implemented by the departments in each institution which have the functional responsibility for the activity. One staff in each implementing institution, 55 (normally the representative o f the institution in the Project Monitoring Committee) will be responsible for liaising with BEAC. 5. Some institutions, such as BDEAC, have had experience in successfully implementing investment programs, while others, such as GABAC are relatively young and have had limited experience. The project includes selected implementation support for agencies which require it. A draft o f the Project Operations Manual, which spells out implementation arrangements, is available. The final Project Operations Manual will be available prior to Credit effectiveness. 6. Relations between BEAC and each Implementing Institution are spelled out in a Subsidiary Agreement. The Subsidiary Agreement with BDEAC will be signed prior to Credit Effectiveness. The Subsidiary Agreement with each of the other Implementing Institutions will be signed before disbursements are made for the institution. The terms o f the agreement, include, the commitment to implement the technical aspects o f the institutions' component; arrangements for the transmittal o f information on the progress o f the component it i s charged with andinformationon other assistancethat the Implementing Institutionis receiving. 56 Annex 7: FinancialManagementand DisbursementArrangements CENTRAL AFRICA: CEMAC RegionalInstitutionsSupport Project Summaryofthe FinancialManagementAssessments 1. A World Bank financial management team visited the BEAC HQin YaoundC during June and September 2008 to conduct the FM Assessment o f BEAC which is the main implementing o fthis project. The objective o fthe FinancialManagement (FM) Assessments is to determine whether BEAC has acceptable financial management arrangements as required by the Bank's policies and procedures to implement the project. The assessmentswere conducted based on the Financial Management Practices Manual issued by the Financial Management Board on November 3, 2005. A summary o f the key points o f the assessments specific to BEAC and project FMarrangements are set out below. 2. The assessments concluded that the financial management arrangements in place at BEAC meet the Bank's minimumrequirements under OP/BP 10.02, and are adequate to provide, with reasonable assurance, accurate and timely information on the status o f the Project as requiredby IDA. 3. The overall project risk is moderate from FM perspective given the existence o f sound administrative and financial systems within BEAC its proven track record in implementing Bank-financedprojects. Furthermore BEAC is enjoying an autonomous status as international organization with its own financial regulations thus it's not directly affected by the governance andpublic financial management environment o fits host country -Cameroon andother member countries. 4. The following FMarrangements will be to be put inplace for a smooth implementation o fthe project: 0 The annual work plans andbudgetswill be developed by the Project Unit set upwithin BEAC incollaboration with the respective national stakeholders then submittedto the approval o f the project Steering Committee andIDA. 0 While BEAC institutional framework, administrative and financial regulations will apply to the project management, simplifiedAnnex o fFMandProcurement procedures specific to the project will be developed and integrated into the Project ImplementationManual. 0 Un-audited InterimFinancial Reports (IFRs) will be producedquarterly by the project Unit,together with the auditedAnnual FinancialStatements (AFS)requiredunderthe FinancingAgreement(s). 0 The project Unit (CRIS) will set up an accounting unit headedby a finances officer who will be supported by an accountingassistant as deem appropriate. 57 BEACinternal audit department, so-called "Cellule de controle interne",will include the project activities inits work program for reviews. The project will be audited by the external auditor o fBEACthat i s acceptable to IDA. The audit reports will be submitted to IDA within 6 months after the endof each fiscal year, say by June 30. BEAC audit committee will ensure the oversight of the audit performance and follow up the recommendations. 58 1. DetailedFMrisksidentifiedandmitigatingmeasures agreed upon BriefExplanation Riskmitigatingmeasures incorporatedintoproject design Ratin INHERENT RISKS Entity Level WL BEAChas sound institutional CRIS Team will be NO (BEAC may not structures capable o f reinforced with adequate have adequate capacity to run project Unit, so-called -- CRIS supporting the Project. A additional staff. theproject) i s already set up within BEAC for the preparation o f the project but will need to be strengthened. Project Level M/L Project design i s rather Fiduciary functions will be No (Complexity) I complex on account o f its centralized by BEAC HQ regional scope and only. Decentralization o f involvement o f multiple the fiduciary roles will be countries envisaged inthe 2ndphase after a conclusive assessment of the other implementing entities. CONTROL RISKS Budgeting M/L BEAChas financial Annual work program and No (Disciple in regulations including the Budget will be agreed and Budget management) budget preparation and monitored through the execution procedures. Yet the integrated financial specifics related to the project software; budgeting are to be put in Regular reporting including place. variance analysis will be submitted along with the IFRs . 59 BriefExplanation Riskmitigatingmeasures incorporatedintoproject design Accounting MIL BEAC i s implementing a new CRIS will set up an Yes (Reliability and integrated financial system - Accounting Unit connected delay in bookkeeping) Oracle-E-Business Suite to BEAC Oracle EBS (Oracle EBS). Though the network so as to record the accounting module i s effective project activities promptly for the whole BEAC, project and separately. As transactions are yet to be integrated software, the recorded on separate ledgers accounting module will be for ease reference and reduce linked to other modules to the risks o f delay in capture budgeted activities. bookkeeping. an CRIS will assign an accounting assistant and recruit a senior finance officer to handle the FM functions. Internal MIL Thistakes into BEAC BEAC institutional No Controls fiduciary and governance regulations, procedures and (Impact ofBEAC environment which also specialized controls services governance and internal controls impacts on the project will apply to the project. environment) implementation. Besides a project implementationmanual will be adopted including simplified FMprocedures specific to IDA requirements. FundsFlow MIL Multiple I A s located in For the sake o f No (Projectfunds different countries with simplification, project funds may be diverted into BEAC variable capacity. will be centralized and operations or managedby BEAC only. misused) One DA will be opened and managedby BEACKRIS in accordance with adequate procedures. 60 BriefExplanation Financial S/M Some delays and errors in No reporting financial reporting o f BEAC adequate accounting (Delay and operations may affect the policies and procedures to integrity/quality) project record on separate general ledger the project transactions on BEAC financial system from which the financial reporting will be generated on excel sheet. Format o f IFRhas been discussed and will be agreed during negotiations. Auditing S/M Auditingarrangements are yet KPMG-Cameroon i s the No (Audit reports to be put inplace current external auditor o f may not be acceptable and BEAC and has been captureproject conclusively evaluated as activities) acceptable to the Bank; hence his contract will be amended to include the audit o f the project on specific TOR not later than 4 months after effectiveness. OVERALL S/M CONTROL RISK OVERALL S/M RISK Risk rating: H=High; S = Substantial; M=Modest; and L= Low. The overall residual FMrisk is moderateprovided that the arrangements below derivedfrom the riskmitigatingmeasures are satisfactorilyimplementedinatimely manner. 2. Detailedfinancialmanagementarrangements Staffingarrangementsandcapacitybuilding 5. CRIS activities will be mainstreamed within BEAC institutional framework including its finance units which are decentralized to each operational department. As such, the project will set up its own Accounting Unit headed by a finance officer and an accounting assistant. The responsibility of this unit will be the mobilization o f project resources from IDA (what about other sources o f financing of the project?), bookkeeping, reporting and ensuring that the project financial requirements are complied with. They will be provided training and guidance on the specific of World Bank disbursement and FMprocedures as deem appropriate. 61 AccountingPoliciesandProcedures 6. BEACICRIS will be responsible for accounting for all project transactions and reporting, which will comply with the applicable international accounting standards and policies so-called "normes SEBC" for banking institutions. The Project Implementation Manual (PIM), to be developed, will include a section covering the project's financial management as an Annex to BEAC existingmanual o fprocedures. 7. The project FMwill be based on, and completely integrated with, the current institutional Financial Regulations and Accounting Instructions o f BEAC. This Annex will outline in detail the specifics o f the project FM arrangements including accounting, internal audits, chart o f accounts, funds flow, external audits, and quarterly financial reporting formats (interim financial reports - IFRs) and other financial statements, andjob responsibilities for staff handlingproject financial affairs Informationsystems 8. An integrated financial management system (IFMIS) so-called Oracle-E-Business Suite i s already functioning at the BEAC. An "Accounting Unit" will be set up from this system to serve as a management information system (MIS), through which CRIS's report on the use o f project funds would be captured. As BEAC financial system is not designed for project management purposes, CRIS's financial reports will be generated on Excel sheets with data extractedimported from the Accounting Unit system. This computerized system would in particular facilitate mainly record-keeping (general accounting), financial and budgetary management, fixed assets management, procurement management, and preparation o f quarterly IFRs as requiredbythe Bank. InternalcontrolsandinternalAuditing 9. BEAC has inplace sound internal audit arrangements to assist management inensuringthe continuing adequacy o f financial controls inconformity with the Central Bank governance requirements. This includes the institutional checks and balances built on its current organization chart and Internal Controls Departmentwhich i s incharge o f internal audit functions. It is agreed that CRIS will be subjected to regular internal audits which reports will be submittedto project Steering Committee, the Central Bank Audit Committee and World Bank supervisionmissions. DisbursementArrangements Flow of funds 10.DesignatedAccount -The BEACKRIS will establish within its own books one (1) XAF- denominated Designated Account (DA) under the IDA Credit and Grant. The DA will receive depositdtransfers from the IDA Credit and Grant Accounts. 62 11.Project Accounts -The BEAC shall open withinits ownbooks andoperate aProject Accounts (PA) that will form the primary source o f financing for project activities. Required counterpart contributions will be deposited into the PA inline with the terms o fthe financing agreements. 12. It i s agreed that BEACKRIS will be fully responsible for the management of the project accounts including signatories inaccordance with BEAC financial regulations. Funds flow arrangements for the project shall be as follows: (a) IDA will make an initial advance disbursement from the proceeds o f the credit and/or grant by depositing into the BEACKRIS-operated DA; (b) actual expenditure will bereimbursed through submissiono fWithdrawal Applications together with acceptable quarterly IFRs; (c) counterpart funds will be allocated through respective the centralbankbudgetary processes, and deposited into CRIS's Project Accounts inaccordance with requirements set forth inthe project agreements; and (d) BEACKRIS willberesponsible for direct payments and allpayments out o fthe DAs, including remittances to respective implementing entities. (e) Within each Partner State, BEAC may use its country facilityhetwork to ensure the payment andrecordingo f the transactions incurredby the local implementing entity based upon the approved annual work plan andbudget andinaccordance with BEAC financial regulations andprocedures. Disbursementmethods 13. The report-based disbursements will apply to the project. Requests for disbursement will be prepared by CRIS and submitted to IDA on the basis o f cash flow projections for eligible expenditures derived from approved work plans. The request for reimbursement will be supported by quarterly unaudited IFRswhich will include a six-month cash forecast. Upon Credit and Grant effectiveness, IDA will make advance disbursement inagreed proportions from the proceeds o fthe Credit and the Grant into the project DA to expedite project expenditures as evidenced inthe quarterly IFRs.The ceiling o fthe advance will be an amount equal to six months project expenditures as shown inthe cash forecast included in the application for withdrawal. Another acceptable method o fwithdrawing funds under this arrangementis the direct payment method, involving direct payments to suppliers for works, goods and services, uponthe borrower's request. Payments may also be made to a supplier's commercial bank for expenditures against pre-agreed special commitments. Direct payment amounts will be included inquarterly IFRs. 14. The World Bank Disbursement Letter will stipulate the minimumvalue for applications reimbursement, direct payment and special commitment, as well as detailed procedures to be complied with inorder to withdraw funds from IDA under the respective financing arrangements. 15. The flow o f funds from IDA and financing i s shown below. 63 World Bank Note: Detailed flow o f funds diagram will (IDA funds) be made available inthe Annex Financial Manual as deemed appropriate. I I * BEAC /CMS Designated Account (XAF) Project Remedies 16. Ifineligible expenditures arefoundto havebeenmadefromDAYBEACwillbeobligated to refundthe same. Ifthe DA remains inactive for more than six months, the Bankmay reduce the amount advanced. 17. The Bank will have the right to suspend disbursemento fthe funds ifsignificant terms o f financing agreements, including reporting requirements, are not complied with. FinancialReportingandMonitoring 18. InterimFinancialReports(IFR): Itis agreedthat BEACICRIS will prepare and submit to the World Bank an Interim Financial Report (IFR) not later than 45 days after the end o f each calendar quarter. The contents o f these reports should, at a minimum, include the following: set forth sources anduses o f funds byproject activity/component, andstatement o f actual and budget expenditures, bothcumulatively and for the periodcoveredby said report, showing separately funds provided under the IDA, other financiers and counterpart funding, and explains variances between the actual and planneduses o f such funds and the fundbalance supported by bank statements and reconciliations. Formats o f IFRsand annual financial statements will be prepared by BEAC/CRIS and agreed upon during the negotiations with the Bank. 64 19. ProjectFinancialStatements:At the,end o feach financial year, BEAC/CRIS will prepare financial statements for the project inaccordance with Generally Accepted Accounting Practice. These Financial Statements will comprise of: (a) a Balance Sheet, reflecting the assets, liabilities and fimding o f the project; (b) a Statement of Sources and Uses ofFunds/Cash Receipts and Payments, which recognizes all cash, receipts, cash payments and cashbalances; and separately identifies payments bythirdparties on behalfo fthe entities (ifany); (c) the Accounting Policies Adopted and Explanatory Notes, cross-referenced to the Balance Sheet, etc.; and(d) aManagement Assertion that project funds have beenexpended for the intended purposes as specified inthe relevant financing agreements. 20. Project financial statements shall beprepared inaccordance with: (i) InternationalPublic Sector Accounting Standards (PSAS) which inter alia includes the applicationo f the cashbasis o frecognition o f transactions; or (ii)InternationalFinancial Reporting Standards (IFRS) for entities applying the accrual basis o f accounting. Indicative formats o f financial statements will be agreedwithin six months following effectiveness. Externalaudit 21, BEAC has currently inplace sound audit arrangements that include an Audit Committee andtwo external auditors with internationalreputation. One out the two auditors hasbeen evaluated as Bank-accredited auditor inCameroon. Hence it i s proposed to amendits contract to include the specific TOR for the audit o fthe project (to be agreed at Negotiations). Audited Project Financial Statements will be submittedto the World Bank and Audit Committee by BEAC/CRIS within six months after the end o f the fiscal year. 22. The external audit will cover all financiers at all levels o fproject execution. The auditors will be requiredto express an opinion on the audited project financial statements incompliance with International Standards on Auditing. The auditors will provide: (i)unique audit opinion a on the project financial statements and (ii) a management letter containing the auditor's assessmentof the internal controls, accounting systemrelatingto the project and compliance with financial covenants inthe Project FinancingAgreements; and suggestions for improvement, which will be submittedto management for follow-up. 23. At the timeo fwriting this report, no audit report was overdue byBEAC to the IDA. SupervisionPlan 24. The supervision plan will be function o fthe project risks duringits implementation in accordance with the risk-based approach. As the overall residual risk is moderate, it i s proposed to conduct one supervision mission duringthe first fiscal year. Besides implementation support andFMoversight will be carried out before effectiveness andthereafter through the review of quarterlyIFRs and annual audited financial statements ofthe project. 65 Annex 8: ProcurementArrangements CENTRALAFRICA: CEMACRegionalInstitutionsSupportProject A. General 1. Procurement for this project would be carried out in accordance with the World Bank "Guidelines: Procurement under IBRDLoans and IDA Credits" dated May 2004 and revisedin October 2006; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004 and revised in October 2006, and the provisions stipulated in the Development Credit Agreement. The general description o f various items under different expenditure category i s described below. For each contract to be financed by the credit, the different procurement (goods and non-consulting services) methods or consultant selection methods, prequalification, estimated costs, prior review requirements, and time-frame would be agreed between the Recipient and the Bank Task Team in the Procurement Plan. The Procurement Plan will be updated at least annually or as requiredto reflect the actual project implementation needs and improvements in institutional capacity. To the extent practicable The Bank's Standard BiddingDocuments for goods and Standard Requests for Proposals for Proposals as well as all standard evaluation forms would be used throughout project implementation. Advancecontractingandretroactivefinancing 2. Inorder to accelerate programimplementation, the borrowerhas expressed its intention to proceed with the initial steps o f procurement before signing the related Financing Agreement. The procurement procedures, including advertising, will be done in accordance with the Bank's Guidelines inorder for the eventual contracts to be eligible for Bank financing, and the normal review process by the Bank will be followed in accordance with the Procurement and Consultant Guidelines. 3. The Borrower will undertake such advance contracting at its own risk, and any concurrence by the Bank with the procedures, documentation, or proposal for award does not commit the Bank to make a credit for the project. If the contract is signed, reimbursement by the Bank o f any payments made by the Borrower under the contract prior to credit signing is referred to as retroactive financing and is only permitted within the limit specified in the Disbursement Letter. Advertising 4. A comprehensive General Procurement Notice (GPN) will beprepared by the Borrower and published in the UnitedNations Development Business online (UNDB online) and in the Development Gateway Market (dmarket) following Board Approval, to announce major 66 consulting assignments and any ICB2. The GPN shall include all ICB for works and goods contracts and all large consulting contracts (Le., those estimated to cost US$200,000 or more). In addition, a specific procurement notice is required for all works and goods to be procured under ICB in dgMarket and UNDB online. Requests for expressions o f interest for consulting services expected to cost more than US$200,000 shall be advertised in UNDB online and in dgMarket. An Expression o f Interest (EOI) i s required in the national gazette or a national newspaper o f the CEMAC member countries or in a BEAC electronic portal o f free access for all consulting firm services regardless o f the contract amount. Inthe case o f NCB3, a specific procurement notice will be published in the national gazette or a national newspaper o f the CEMAC member countries or in a BEAC electronic portal o f free access. Contracts awards will also be publishedin UNDB and dgMarket, in accordance with the Bank's Procurement Guidelines (para. 2.60) and Consultants Guidelines (para. 2.28). ProcurementofWorks There will be no works under the project. Procurementof Goods 5. Goods procured under this project would include: hardware and software, communication equipment including VSAT, office equipments, etc... Goods estimated to cost more than US$250,000 will be procured through ICB. Goods estimated to cost more than US$50,000 but less than US$250,000 will be procured through NCB. The procurement will be done usingthe Bank's SBD for all ICB and BEAC's National SBD agreed with or satisfactory to the Bank. 6. Inthe absence ofBEAC's national standard biddingdocuments, the Bank SBD will be used for N C B, with appropriate modifications relating to provisions for "advertising and notification", "currencies o f bid and payment", "settlement o f disputes", deletion o f the domestic preference provision, etc. This should ensure that: (i) methods used to evaluate bids and award contracts are known to all bidders and not applied arbitrarily; (ii) bidders have all adequate response time (four weeks) to prepare and submit bids; (iii) bid evaluation andbidder qualification are clearly specified inbiddingdocuments; (iv) no preference margini s grantedto domestic manufacturers; (v) eligible firms are not excluded from participation; (vi) awards are made to the lowest evaluated bidder in accordance with pre-determined and transparent methods; (vii) bid evaluation reports clearly state the reasons for the rejection o f any non- responsive bid. 7. Procurement o f readily available off-the-shelf goods that cannot be grouped into bid packages o f US$50,000 or more may be procured through shopping in conformity with the clause 3.5 o f the procurement guidelines. Request of such quotation will include a clear description and quantity o f the goods, as well as requirements for delivery time and point o f delivery. The sample request for quotations attached to the manual o fprocedures will be used. ICB: International Competitive Bidding NCB:National Competitive Bidding 67 Procurementof non-consultingservices 8. Non-Consulting services under this project include maintenance o f the office electronic equipment and other services such as printing, and editing. Non-Consulting services are likely not to exceed the equivalent o f US$50,000 per contract. Procurement o f such services will be done using prudent shopping procedures in conformity with the clause 3.5 o f the procurement guidelines. Selectionof Consultants 9. Consulting services will be for the following activities: (i) technical assistance, (ii) technical and feasibility studies, (iii)financial audits, (iv) training, etc. These consulting services will be procured with the most appropriate method among the following which are allowed by Bank guidelines and included inthe approved procurement plan: Quality-and Cost- Based Selection (QCBS), Quality-Based Selection (QBS), Selection under a Fixed Budget (SFB), Least-Cost Selection (LCS). Selection Based on Consultants' Qualifications (CQ) will be used for assignments that shall not exceed US$lOO,OOO. Single Source selection shall also be used in accordance with the provisions o f paragraphs 3.9 to 3.13 of the Consultant Guidelines, with IDA'Sprior agreement. All Terms o f Reference will be subject to IDA prior review. 10. Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of CEMAC member countries consultants in accordance with the provisions o fparagraph 2.7 o fthe Consultant Guidelines. 11. Assignments in excess o f US$200,000, and specialized technical assistance assignments, must be procured on the basis o f international short-lists after appropriate advertisement inUNDB on line, DgMarket and inthe national gazette or a national newspaper o f CEMAC member countries or ina BEAC electronic portal o f free access. 12. Consultant for services meeting the requirements o f section V o f the consultant guidelines, will be selected, under the provisions for the Selection of Individual Consultants, through comparison o f qualifications among candidates expressing interest in the assignment or approached directly. OperationalCosts 13. With respect to services (computers maintenance, etc), the project will procure by service contracting for a definedperiod. Trainings,Workshops,Seminarsand Conferences 14. Training, workshops, seminars and conferences attendance and study tours will be carried out on the basis o f approved annual programs that will identify the general framework 68 of training and similar activities for the year, including the nature o f trainingstudy tours/workshops, the number o fparticipants, and cost estimates. B. Assessment of the borrower'scapacityto implementprocurement Procurementcapacity 15. The procurement capacity assessment conducted by IDA concerned BEAC as it was agreed between participating institutions inthe project that this institutionwill have the overall responsibility for project coordination and for the technical aspects o f project activities relating to BEAC,while participating institutions will be responsible for the technical aspects o f their respective components implementation. It is also understood that well after the beginning o f the project implementation, management delegation responsibility may be granted to BDEAC for its component implementation after due diligence i s conducted on BDEAC capacity assessment and the appropriate review and adjustment o fproject arrangements i s done. 16. Key issues and risks concerning procurement for implementation o f the project have been identified andused to prepare an action plan (see table o f schedule o f actions to be carried out below). The procurement capacity assessments o f the entity designated by the BEAC to assume the project day to day coordination and administrative function, which is the Financial Institutions Reform Management Unit (Unite' de Gestion de la Reforme des Institutions Financidres de la CEMAC-UGRIF) already established pointed to a weak capacity o f this unit. 17. The overall project risk for procurement is substantial because, among other factors, although the BEAC i s already implementing a Bank financed project, the entity in charge o f the present project management is basedon a completely new different unitwith new staff. 69 ..i rfee .C -k1 c c cc fa c cC E! a 4 P Y c 5a !$Y 8E 4El v, e, c 8F U U 8 e, i5- p" e, 0 9 Y 3 b Y Y 9 I 3 s0 0 e, R k Y 3 8r3 .-cd0 e, 3 3 E B 4 3 I 5 cd U E2 0 Y 2- 0 Procurementinstitutionalresponsibilityandimplementationarrangements 18. BEAC will be responsible for the overall financial and administrative aspects o f the project, including procurement for all participating institutions. BEAC has established a Financial Institutions Reform Management Unit (Unit& de Gestion de la Reforme des Institutions FinanciBres de la CEMAC-UGRIF) which is in charge o f day to day project coordination and administrative function from the project preparation to project implementation. This unit i s under the responsibility o f the Director o f the International Relations. A project coordinator, who is the Deputy Director o f the International Relations Directorate, i s already on board through the Governor decree No3YGW2008 dated May 7, 2008; and is coordinating project activities including project preparation. A manual o f accounting financial and administrative procedures as well as a project implementation manual will be drafted in order to outline the procurement arrangement and the relevant procedures applicable to the management o f the credit. 19. The assessment o f the project management unit (UGRJJ?) was conducted before appraisal (see above table o f the schedule o f actions to be carried out). BEAC has set up special procurement commissions through its Governor's decree but this decree needs to be amended as reflected in the above action table. A qualified procurement specialist with an acceptable knowledge o f the World Bank procurement procedures will be recruited on a competitive basis. This procurement specialist will be located at the UGRIF (BEAC) and will initially have the main responsibility for procurement activities conducted within the project. If later on some o f the procurement function i s delegated to other institutions such as BDEAC, the project arrangements, including procurement arrangements, will be reviewed and adjusted as necessary during project implementation. Inthis case, a capacity assessment alongside with an action plan would be elaborated by the Bank task team before this delegation could be effective, 20. Regarding the evaluation o f technical proposals for consulting services assignment, all the Sub-commissions shall evaluate proposals using a minimum o f three specialists in the sector. ProcurementPlan 21. At appraisal, the Borrower prepared a procurement plan for project implementation providing the basis for the procurement methods. This plan, covering the first 18 months o f project implementation, was discussed and agreed upon by the Borrower and the project team at negotiations. It will be available in the Project's database and a summary will be disclosed on the Bank's external website once the project i s approved by IDA Board o f Executive Directors. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvement in institutional capacity. 72 Publicationof ResultsandDebriefing: 22. Publication o f results of the biddingprocess i s required for all ICBs, LIBs and Direct Contracting. Publication should take place as soon as the no objection i s received, except for Direct Contracting which may be done quarterly and in a simplified format. Publication of results for NCB and Shopping should follow the requirements o f the procurement section of the project's manual o f procedures. The disclosure o f results i s also required for selection of consultants. All consultants competing for the assignment should be informed of the result o f the technical evaluation (number o f points that each firm received) before the opening of the financial proposals, and at the end o f the selection process the results should be published. The publication o f results in selection of consultants applies to all methods, however for CQS and SSS the publication may be done quarterly and in a simplified format. The publication may be done through Client Connection. Losing bidders/consultants shall be debriefed on the reasons why they were not awarded the contract ifthey request explanation. Fraud, CoercionandCorruption 23, The procuring entity as well as Bidders/Suppliers/Contractorsshall observe the highest standard of ethics during the procurement and execution o f contracts financed under the program in accordance with paragraphs 1.15 & 1.16 o f the Procurement Guidelines and paragraphs 1.25 & 1.26 o fthe Consultants Guidelines. C. Frequencyof ProcurementSupervision 24. The capacity assessment o f the implementing agencies has recommended supervision missions to visit the field at least twice a year to carry out post review o f procurement actions. 73 D. Detailsofthe ProcurementArrangements Goods, and Non Consulting Services (a) List of contract packages to be procured: 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procure Prequalifi Domestic Review Expected Comment/ No. (Description) cost ment cation Preference by Bank Bid- Completion (US$000 Method (yesho) (yesho) (Prior / Opening Date equivalent) Post) Date BEAC 1 Acquisition o f payment risk management system includingtechnical 6,493 ICB NO NO Prior April 2009 Dec 2010 assistance BDEAC 2 Acquisition of a videoconferencing system 250 ICB NO NO Prior Jan 2009 May 2009 3 Acquisition o f IT equipments for the establishment o f guidelines for Dec 2008 May 2009 auditors inline with 100 NCB NO NO Prior international practices COBAC 4 Acquisition of 111.1 NCB NO NO Prior Jan 2009 Feb 2009 didactic materials (b) ICB Contracts estimated to cost above US$250,000 for goods per contract, the first NCB contracts, all Direct Contracting will be subject to prior review bythe Bank, 74 2. ConsultingServices (a) List o f consulting assignments with selection methods and time schedule. 1 1 2 3 4 5 6 7 Ref. Descriptionof Assignment Estimated Selection Review Expected Comments/ No. cost Method byBank Proposals Completion (US%000 (Prior / Post) Submission Date equivalent)-r Date 1 Audit o fthe BEAC I 333 QCBS Prior economic analysis system I 2 Audit o f the BEAC II333 QCBS I Prior 3 Prior specifications for the implementation o f a statistical base for policy- + making 4 Implementationo f the 1,333 Prior May 2009 Dec 2009 statistical base for policy- making 5 Implementationo f an 1,922 Prior economic, monetary and financial database 6 Assistance on contracting for the implementation of 1,I89 QCBS Prior Dec 2008 Oct 2009 economic, monetary and financial database 7 Establishment o f a specialized documentation 67 Prior April 2009 July 2009 center 8 Capacity building for 1133 Prior April 2009 Oct 2009 BEACstaff on reserve management 9 Recruitment o f a consultant to elaborate the terms o f reference, carry out pre- requisitetraining, and 200 I C Prior Feb 2009 Dee 2009 t assistanceat the reception o f software on balance o f payments 10 Installation o f new software on balance o f payments, included installation, configuration, 2,222 QCBS 1Prior Dec 2009 Dec 2010 redeployment and training Translation o f the regulation and the chart o f accounts related to I C Post April 2009 Sept 2009 Translation o f the regulation and the chart o f accounts related to microfinance institutions in 30,000 I C Post April 2009 Sept 2009 Spanish 13 IITranslator for the translation of the regulation and the chart of accounts related to microfinance 30,000 IC Post April 2009 Sept 2009 institutions inArabic 14 Conception of aintegrated management software for 67 microfinance institutions QCBS Post Nov 2009 June 2010 15 Recruitment of a consultant for perfectingthe computer systems master plan 667 QCBS Prior Feb 2009 Oct 2010 BDEAC 16 Preparation of a computer systems master planfor 330 QCBS Prior Jan 2009 April 2009 BDEAC 17 Reformof the chart of accountsto take into account the principles of 150 QCBS Prior Feb 2009 June 2009 Basel and the norms of IAS-IFRS 25. (b) Consultancy services estimated to cost above US$lOO,OOO for firms andUS$50,000 for individuals per contract, and Single Source selection o f consultants (firms and individuals) will be subject to prior review by the Bank, as well as the first contract to be awarded in accordance with each selection method o f consulting firms and individual consultants regardless o f contract amount.. 26. (c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 76 Annex 9: EconomicandFinancialAnalysis CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject 1. The proposed project will help strengthen regional institutions which will contribute to facilitating regional integration and economic growth and help build the foundation for improved financial sector effectiveness. Through improved monetary and reserve policies, the project will expand and unify the economic space across countries which should help encourage investments and cross-border flows. Improved supervisionwill help create confidence inthe banking sector and in a truly common financial space across borders. Also, by introducing new financial instruments, the project will contribute to capturing an increased portion o f regional savings for investment, particularly in much-needed infrastructure. Through reforms in key financial institutions and policies, the project aims to improve access to finance for the private sector, including low-income households. Also, actions taken in connection with the project will result in a significant improvement of the finances of regional institutions, particularly those of BDEAC (to be completedat appraisal). 2. The proposed project will help strengthen regional institutions which will contribute to facilitating regional integration and economic growth andhelp buildthe foundation for improved financial sector effectiveness. Through improved monetary and reserve policies, the project will expand and unify the economic space across countries which should help encourage investments and cross-border flows. Improved supervision will help create confidence inthe bankingsector and in a truly common financial space across borders. Also, by introducing new financial instruments, the project will contribute to capturing an increased portion o f regional savings for investment, particularly in much-needed infrastructure. Also, actions taken in connection with the project will result in a significant improvement o f the finances o f regional institutions, particularly those o f BDEAC. 3. Through reforms in key financial institutions and policies, the project aims to improve access to finance for the private sector, including low-income households. The project will play an important role in increasing the availability o f investment capital and infrastructure to accelerate growth in the region. Numerous studies have demonstrated the negative affect o f inadequate infrastructure, particularly hightransportation costs, on Africa's competitiveness. 4. The project will assist instrengthening the financial performance o f BEAC and BDEAC. Improvements in the overall management o f the Central Bank and in the management o f its reserves should strengthen further BEAC's financial position. With the support o f the project, BDEAC will introduce further reforms in its financial management and install a modern information system which will enable it to implement more efficient policies and achieve better operational results. 77 Annex 10: Safeguard PolicyIssues CENTRAL AFRICA: CEMAC RegionalInstitutions Support Project No issues arise (Project is category C). 78 Annex 11: ProjectPreparationandSupervision CENTRALAFRICA: CEMAC RegionalInstitutionsSupportProject Planned Actual PCNreview 3/30/2006 6/12/2006 InitialPID to PIC 4/15/2006 12/18/2007 InitialISDS to PIC 4/15/2006 6/16/2008 Appraisal 9/15/2008 9/15/2008 Negotiations 10/14/2008 Board/RVP approval 12/04/2008 Planned date o f effectiveness 03/04/2009 Planneddate o fmid-ternreview 03/15/2011 Planned closing date 06/30/2014 Key institutions responsible for preparation o fthe project: BEAC Bank staff and consultants who worked on the project included: Name Title Unit Andres Jaime Sr. Financial Specialist (TTL) AFTFP Sameena Dost Sr. Counsel LEGAF Wolfgang Chadab Sr. Finance Officer LOAFC Faustin-Ange Koyasse Sr. Program Officer AFTP3 Nestor Coffi Senior Financial Management Specialist AFTFM Aissatou Diallo Finance Officer LOAFC KouamiMessan Procurement Specialistt AFTPC Fridolin Ondobo FinancialManagement Specialist AFTFM Aissatou Diallo Finance Officer HeleneNdjebet Yaka Operations Analyst A F M C M IvanRossignol Sector Leader AFTFP Herminia Martinez Consultant AFTFP Adja M.Dahourou Consultant AFMBF Irene Chacon Operations Analyst AFTFP Andrea Vasquez-Sanchez Sr. Program Assistant AFTFP John Pollner LeadFinancial Sector Specialist (peer reviewer) ECSPF Djibrilla Issa Sr. Financial Sector Specialist (peer reviewer) AFTFP Ann Rennie LeadFinancial Sector Specialist (peer reviewer) AFTFP Bank funds expended to date on project preparation: --- Bank resources: Trust h d s : Total: Estimated Approval and Supervisioncosts: -- Remaining costs to approval: Estimated annual supervision cost: 79 Annex 12: Documentsin the ProjectFile CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject BEAC. Statutsde laBanque des Etats de 1'Afrique Centrale. Septembre 2007 BEAC. Communique final de la 86me session ordinaire de la Conference des Chefs d'Etats de la CEMAC tenue aN'Djamenale 25 avril2007. BEAC. EsquisseduPlan Strategique d'Enterprise 2008-2010. Octobre 2007. BEAC. Plan Strategiqued'Enterprise PCriode2008-2010. Mars 2008. BEAC. DecisionNumber 59 of the Governor applying the Statutes andrelating to the government of the Bank. BEAC. Plan d'Action des Institutions Financieresde la CEMAC. Draft. Avril2007 BEAC. Organisation duProjet et Aspects Inter-institutionnels. Avril2007. BDEAC. Pland'Action de laBDEAC. Juin 2007 CEMAC. Plan d Action de la CEMAC. April 2007 COBAC. Pland'Action de la COBAC 2007-2017.. COSUMAF. Plan d'Action 2007-2012 de Dkveloppement duMarch6 Financier de 1'Afrique Centrale. Avril2007. GABAC. Projet duPlan d'Action de Renforcement des Capacites du GABAC. Avril2007. AFD. Missiond'evaluation des prioritks derenforcement organisationnelde laBDEAC. 2006. World Bank/IMF. CommunauteEconomique et MonCtaired'Afiique Centrale. Programme d'Evaluation du Secteur Financier. Aide-memoire (Revise). Juin 2006. IMF.Central African Economic andMonetary Community: Financial SystemStability Assessment, including reports on the observance of standards and codes on the following topics: Monetary and Financial Policy Transparency and Banking Supervision. August, 2006. 80 Annex 13: Statementof LoansandCredits CENTRAL AFRICA: CEMAC RegionalInstitutionsSupport Project Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd P103189 2007 3A-Africa Stockpiles1MMT GEF (FY07) 0.00 0.00 0.00 13.40 0.00 2.35 0.00 0.00 PO94103 2007 3A-TelecommunicationsAPL (FY07) 0.00 164.50 0.00 0.00 0.00 166.32 0.00 0.00 PO94084 2007 3A-W.Af Agric ProdPrgmAPL WAAPP 0.00 45.00 0.00 0.00 0.00 45.85 0.00 0.00 (FY07) PO94917 2006 3A-WAPP APL 1(CTB Phase2) Project 0.00 60.00 0.00 0.00 0.00 60.45 0.00 0.00 PO94916 2006 3A-WAPP APL 2 (OMVS Felou HEP) 0.00 75.00 0.00 0.00 0.00 75.36 0.00 0.00 PO93826 2006 3A-SRB M.Water Res. Dvpt. APL (FY06) 0.00 91.96 0.00 0.00 0.00 112.90 4.00 0.00 PO83751 2006 3A-West &Central Afr Air Tran TAL 0.00 11.97 0.00 0.00 0.00 32.51 -1.53 0.00 (FY06) PO79734 2006 3A-E Afr Trade & Transp Facil (FY06) 0.00 184.02 0.00 0.00 0.00 172.81 18.72 0.00 PO75776 2006 3A-W Africa Stockpiles 1GEF (FY06) 0.00 0.00 0.00 21.74 0.00 5.12 3.21 0.00 PO92473 2005 3A-Afr Emergency Locust Prj (FY05) 0.00 59.50 0.00 0.00 0.00 40.77 14.64 -3.21 PO70547 2005 3A-GEF Gmdwtr & Drght Mgmt TAL 0.00 0.00 0.00 7.00 0.00 6.35 1.56 0.00 (FY05) PO80413 2005 3A-HIV/AIDs Great Lakes h i t APL 0.00 0.00 0.00 0.00 0.00 15.83 3.14 0.00 (FY05) PO80406 2005 3A-ARCAN SIL (FY05) 0.00 0.00 0.00 0.00 0.00 5.03 0.91 0.00 PO75994 2005 3A-WAPP Phase 1APL 1 (FY05) 0.00 40.00 0.00 0.00 0.00 37.86 7.38 0.00 PO82613 2004 3A-Regional HNAIDS Treatment Prj 0.00 0.00 0.00 0.00 0.00 29.68 23.74 0.00 (FY04) PO74525 2004 3A-WAEMU CapitalMarkets Dev FIL 0.00 96.39 0.00 0.00 0.00 98.46 74.31 42.94 (FY04) PO74850 2004 3A-HIV/AIDS Abidjan Lagos Tmspt 0.00 0.00 0.00 0.00 0.00 2.07 0.63 0.00 (FY04) PO70256 2004 3A-GEFNiger RiverBasin (FY04) 0.00 0.00 0.00 13.00 0.00 4.04 4.05 0.00 PO69258 2004 3A-SouthemAfr Power MrktAPL 1 0.00 178.60 0.00 0.00 0.00 191.45 166.18 0.00 (FY04) PO64573 2004 3A-GEF Senegal RiverBasin(FY04) 0.00 0.00 0.00 5.26 0.00 2.84 4.56 0.00 PO72881 2003 3A-BEAC RegPayment System (FY03) 0.00 14.50 0.00 0.00 0.00 8.03 5.07 0.00 PO70252 2003 3A-GEF LakeChadBasin(FY03) 0.00 0.00 0.00 2.90 0.00 1.72 2.90 2.25 PO70073 2003 3A-GEFNile TransboundEnv Action 0.00 0.00 0.00 8.00 0.00 8.04 13.47 0.00 (FY03) PO63683 2001 3A-Trade Facil SIL (FYOI) 0.00 5.00 0.00 0.00 0.00 4.85 -0.31 0.54 Total: 0.00 1,026.44 0.00 71.30 0.00 1,130.69 346.63 42.52 81 CENTRAL AFRICA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1999 AIF 0.00 16.83 0.00 0.00 0.00 0.3 1 0.00 0.00 1999 AIF (Mgmt) 0.00 0.06 0.00 0.00 0.00 0.00 0.00 0.00 2003 AIFH 0.00 18.25 0.00 0.00 0.00 0.03 0.00 0.00 2005 Afren 0.00 0.84 0.00 0.00 0.00 0.80 0.00 0.00 2005 Africa Re 0.00 0.00 10.40 0.00 0.00 0.00 10.40 0.00 2002 Africap 0.00 1.48 0.00 0.00 0.00 1.06 0.00 0.00 2006 Cape I1 0.00 9.62 0.00 0.00 0.00 3.00 0.00 0.00 2005 Celtel 0.00 11.83 0.00 0.00 0.00 11.83 0.00 0.00 2005 LFI 0.00 2.02 0.00 0.00 0.00 0.27 0.00 0.00 2004 Olam 30.00 5.60 0.00 0.00 30.00 5.60 0.00 0.00 2002 Osprey 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2001 PAIP 0.00 27.27 0.00 0.00 0.00 8.62 0.00 0.00 2002 SABCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2006 SABCO 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 StandardBank GR 0.00 0.00 75.00 0.00 0.00 0.00 0.00 0.00 2004 Tullow 0.00 14.40 0.00 0.00 0.00 14.40 0.00 0.00 2006 Veolia Water AMI 44.62 31.87 0.00 0.00 0.00 0.00 0.00 0.00 Totalportfolio: 94.62 150.08 85.40 0.00 30.00 55.93 10.40 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2006 ARECO 0.00 0.02 0.00 0.00 2006 BraitN 0.00 0.03 0.00 0.00 2004 Buspartners 0.00 0.00 0.00 0.00 2003 African Lakes 0.00 0.01 0.00 0.00 2006 ccs 0.02 0.00 0.00 0.00 Total pendingcommitment: 0.02 0.06 0.00 0.00 82 Annex 14: Countryat a Glance CENTRAL AFRICA: CEMAC RegionalInstitutionsSupportProject CEMAC at a glance 10l3D8 Economicand Sub Key DevelopmentIndicators Monetsy Community Sahwn Low CentralAfrica Atka illcome Ane distribltion, 2007 12007) Mile Female Population,midyear (millions) 39.2 800 1,268 Surfacearea(thousandsq. km) 3,020 24,242 21,846 Powlation grovdh(%) 2.2 2.4 2.1 U h n popllation (%oftdal popllation) 47 36 32 GNi (Atlasmethod,US$billions) 48.6 762 749 GNi per capita (Atlas method, US$) 1,240 952 578 GNi per capita (PFP,intemationd$) 1,920 1,870 1,600 GDP ~ W r (%) n 4.0 8.2 8.5 GDP percapitag m h (%) 1.8 3.7 4.3 (most recentestimate, 20W2007) 7 Povertyheadcountratioat $126a&y(PFP,%) 50 Povertyheadcountratioat $2.00 a day(PPP. %) 72 U n d e ~mortalityrate(per1,000) l Lifeekpectancyatbirth (years) 50 60 57 Infant mortality(pw 1,000 livebirths) 101 94 85 Child mdnutrition(% ofchiidrenunder 5) 23 27 29 Adult literacy,male (%of ages 15 and older) 69 72 Adult literacy,bmale (% of ages 15and older) 50 50 Grossprimaryenrollment,mde (% of age group) 109 99 100 Grossprimaryenrollment,female (% of age g w p ) 90 88 89 Access to an improvedwabr source (%of population) 84 56 Ea Access to improvedsanibtionfaciiides (%of popllation) 34 31 39 1 OCEMAC OSub-Saharan Africa Net Aid Flows 1wo 1990 2000 2007 a (US$millions) Net OOA and madaid 566 1,412 851 2,414 SrwthofGDPandGDP per capita(%) Top3d m n (ifl2006): M (%ofGNO 4.3 6.6 3.4 6.5 Aid per capita (US$) 30 56 20 63 Long-Term Economic Trends i o 1 I Consumerpices(annua1% change) 8.4 0.2 0.8 5.0 GDP implicitdeflabr (annual%change) 16.3 2.0 5.3 2.0 +GDP -GDP percaplla Exchangerate (annualaverage, lmai per US$) - - - - Tmsoftradeindex(20W- 100) 110 100 130 188080 1900-2000 2000-07 (average annual growth %) Population,midyear (millions) 18.7 25.0 33.0 39.2 2.9 2.6 25 GDP (US$millions) 14,630 23,261 21,961 58,620 2.8 2.3 5.0 (% d GDP) AgriCUlbJre 25.3 21.9 20.2 16.9 2.0 4.7 industry 34.1 31.7 41.9 41.9 Manufacturing 7.9 11.6 12.9 11.1 4.7 1.5 services 40.6 48.4 37.9 41.3 2.0 1.0 Householdfira consumptionexpendibm 56.9 68.4 50.5 58.5 2.9 2.3 3.7 General gov'tfimi consumpionexpendihrre 11.9 13.4 9,7 9,3 4.2 0.8 24 Grosscapitalfamation 23.4 17.2 19.5 20.6 -13.6 1.9 9.8 Expatsofgoodsandservices 30.7 28.9 40.2 40.3 impctts of goods and services 32.6 25.9 27.9 26.6 Grosssavings 9.0 22.7 26.3 Nde: Figures initalicsarefayearsofherthanthosespecified. 2007dataarepreiiminary. ..indicatesdataarenotawilaMe 83 CEMAC Balanceof Paymentsand Trade 2000 2007 (US$ mi//ions) Sovernancalndicators,2000 and2007 Totd merchandiseexports(fob) Totd merchandiseimpwts (cif) Voice and mountability Net trade in goods and swices 3,605 9,734 PoIIUcd stability Wcfkers'remittanws and CmpensEtion of emplopes (receipts) 25 16 Regulatory quality Currentaccount balanw 1,590 2,612 Rule of lm as a %of GDP 7.2 4.5 Conbol ofcurupbon Reserves,includinggdd 0 25 50 75 100 Cenlral Governmentflnance m2007 Cwnby's prcentlle rank (0-100) 02000 hqhw YBIYBI imply @Iter ralngs (%of GDP) Current revenue(indudinggrants) jource bfma-nXmavM~~buia n Emk W Tax revem currentexpenditure Technolouy and Infrastructure 2000 2007 aerdl surpluskleficit Paved roads(%oftotd) 8.9 10.0 Highest marginaltax rate (%) Fixedlineand mobile phone Individual subscribers(per 1,WO people) 1 14 Capaate Hightechndogyexpork (% of manufacturedexports) 1.7 4.6 External Debt and ResourceFlows Environment (US$ millions) Totd debt wtstanding and disbursed 21,131 16,720 Agricultural land(%oflandarea) 27 27 Totd debt swice 997 848 Faestarea(%oflandarea) 34.8 Debtrelief (HIFC, MDRI) 4,216 687 Nationallyprotectedareas (%oflandarea) .. 11.3 Total debt (% ofGDP) 96.2 324 Freshwaterresources per capita (cu. meters) .. 22,417 Totd debt service (%of exports) 8.6 28 Freshwaterwithdrawal (%of intemd resources) 0.2 Foreigndired investnlent (net inRows) 506 3,301 C02 emissionsper caps (mt) 0.24 0.40 Portfolioequity (netinflows) 0 0 GDPper unitofenergy use (2005FPP$perkgofdlequivdent) 6.3 6.4 Conposltbn of total external debt, 2008 Energyuse percaplta(kg ofoil equivalent) (US$ mi//ions) IBRD Total debt outstandinganddisbursed 343 76 Disbursements 9 0 Prinapd repaynents 67 18 Interestpaynenb 28 5 Iusa mii~innE IDA Total debtoutstandingand disbursd 1,882 1,922 Disbursemenls 86 41 Private Sector Development 2000 2008 Total debt service 31 43 Time requiredto starta business (day) 60 IFC (fscal year) Ccsttostartabusiness(%ofGNIpercapita) 120.8 Total disbursed and outstading portfdm 68 204 Time reauiredto mister wo~ertv(daw) --- 69 ofwhia IFCownaccount 19 117 Disbursements for IFCown acwnt 3 28 Rankedasamajorwnstrdntto business 2000 2007 Pwtfdio sales, prepaynerts and (% of manaprssurveyedwho agreed) repaynentsfor IFCMaccount 12 26 n.a. n.a. MlGA Gross exposure 0 0 Stock malket capiglizatiin (% ofGDP) Bank capigi to asset ratio (%) Note: Figures in itdksarefor yearsofherthan those specified. 2006 data are preliminary. indicatesdataare not available. (DECDG) .. 10BQ8 -indicates observauon is notapplicable. Bdance of paynents items excludingexportsand impwts aresimplesums and may not recmile. Economicand MonetaryCommunityCentralAfrica(CEMAC)includes Cameroon,Central African Replblic, Chad, Congo, Rep., EquatoridGuinea, and Gabon. 84 Millennium Development Goals CEMAC Wthselected targetstoachieve between 1990and 2015 (estimate closestto date show,+/- 2years) Goal 1:halve the rates for extreme poverty and malnutrition 1995 2000 2007 Poverty headcount ratio at $1 25 e day(PPP. %of popllation) Poverty headcount ratio at nabonal powrtyline (% of populabon) Share ofincme orconsumpbontothe pccfestqunible (%) Prevalenceof malnutntion(% of childrenunder5) 22.8 Goal 1:ensurethat chlklren am abletocomplete prharyschooling Primaryschod enrdlment (net,%) 61 Primaryccmplebon rate (% of relevantage group) 43 40 50 Secondaryschool enrdlment (gross. %) 21 24 23 Youth literacyrate (%of pecpleages 15-24) Goal 3: elhlnate gender dsparRyin educationandempower women Ratioofgirls to boys in primaryand secondaryeducabon(%) 70 76 76 W m n employed inthe nmgnwlturalsector(% of nonagriculturalemployment) 19 Prwrtimof seats held bywmen in national parliament(%) 13 8 6 10 Goal4: reduceunder4 mortality bytwethlrds Under-5mortalityrab (per 1,ooO) 155 165 167 168 Infant mwtalityrate (per1,ooOlive blrhs) 95 99 100 101 Measles lmmunizabon(proportionof one-Far olds immunized. %) 56 41 40 52 Goal 5: reducematernal mortalityby three-fourths Maternalmortality ratio(modeledestimate,per 100,000 live Mrths) 1,120 Brths atbnded by skilled healthstaff (% of btal) 44 Conkacepbveprevalence(% of wmen ages 15-49) 21 16 Goal 6: halt and beginto rwerse the spread of HlVlAQS and other majordiseases Prevalenceof HIV(% of populationages 1549) 52 Incidenceof tuberculosis(per 100,ooO people) IC6 155 227 264 Tuberculosis casesdetected underDOTS (%) 16 41 81 Goal 7: halvethe propoltbn of peoplewithout sustalnableaccess to basic needs kcess to an irnprwedwater swrce (%of population) 49 57 64 kcess to Improvedsanitationfacilities (Oh ofpopulabon) 26 29 31 34 Forestarea (% of total landarea) 361 348 Nationallyprotectedareas(%oftotallandarea) 11.3 CO2 emisions (metnc tons per capta) 0 4 0 3 0 2 0.4 GDPperunitofenergyuse(mnstant2005PPP$ per kg ofal equivalent) 6 5 6 2 6 3 6.4 Goal 8: develop a gbbal partnershipf a development Telephonemainlines (per 100 people) 0.3 .. 0.5 .. 0.6 .. 0.6 Mobile phone subscrlben(per 100 people) 0.o 0.0 0.9 21.2 lntemet users (per 100 people) 0.o 0.0 0.2 1.6 Personal cmputers(per 100people) 0.3 0.8 'LIZ- Education Indicators (%) fieasks hmunlatlon(%of lyear okls) :T indicators(per 1,000 people) loo1 n 1 25 2000 2002 2004 2006 --O-Primry net erroiiment ratio (..) +Ratio of girls to toys In primary 8 OFixed + nobilesubscribers secondrry education OCEMAC OSubSaharanAfdca internetusers Nde: Figuresin italicsare fayearsoher than t h e specified. ..lndicabsdataare not available. (DECDG) 10/3/08 Ecomicand MonetaryCommunityCentralAfrica (CEMAC)includes Cameroon, Central Atican Republic. Chad, Congo, Rep., EquatorialGuinea, and Gabon. 85