Document of The World Bank FOR OFFICIAL USEONLY ReportNo. 44938-RW THE INTERNATIONAL DEVELOPMENT ASSOCIATION THE INTERNATIONAL FINANCE CORPORATION AND THE MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY ASSISTANCESTRATEGY FOR THEREPUBLIC OF RWANDA FOR THE PERIODFY09-FY12 August 7,2008 EasternAfrica CountryCluster2 (AFCE2) Africa Region The InternationalFinanceCorporation Sub-SaharanAfrica Department The MultilateralInvestmentGuaranteeAgency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. LAST INTERIM SEPTEMBER 7,2006(REPORT 35331-RW) STRATEGY NOTE: No. CURRENCYEQUIVALENTS (Exchange Rate Effective June 11,2008) Currency Unit= Rwanda Francs (Rwf) US$l.OO = 538.050 Rwf FISCAL YEAR July 1-June 30 ABBREVIATIONSAND ACRONYMS AAA Analytical andAdvisory Activities AfDB AfricanDevelopmentBank AIDS Acquired ImmuneDeficiencySyndrome BADEA Arab Bank for EconomicDevelopmentinAfrica BCR Banque Commercialedu Rwanda BNR BanqueNationale du Rwanda BRD BanqueRwandaisede Developpement BSHG BudgetSupportHarmonizationGroup CAS Country Assistance Strategy CEDP Competitivenessand EnterpriseDevelopmentProject CEM Country Economic Memorandum CEPEX Central PublicInvestmentand ExternalFinanceBureau COMESA CommonMarketfor Easternand SouthernAfrica CPAF CommonPerformanceAssessment Framework cso Civil Society Organization DfID UKDepartmentfor InternationalDevelopment DHS DemographicandHealth Survey DPCG DevelopmentPartnersCoordination Group DPL DevelopmentPolicy Lending DRC Democratic Republic of Congo EAC East AfricanCommunity EC EuropeanCommission EDPRS Economic Developmentand PovertyReductionStrategy EFA FTI EducationFor All FastTrack Initiative ESMID Efficient SecuritiesMarkets InstitutionalDevelopment ESW Economicand Sector Work FDI ForeignDirectInvestment FDLR ForcesDemocratiquesde LiberationduRwanda FY FiscalYear GAVI GlobalAlliance for Vaccines and Immunization GDP Gross Domestic Product GFDRR Global Facility for DisasterReductionand Recovery GFRP GlobalFoodCrisis ResponseProgram GNI Gross NationalIncome GoR Governmentof Rwanda HIPC HeavilyIndebtedPoor Countries (Initiative) HIV HumanImmunodeficiency Virus HRIG HealthResultsInnovationGrant ICA InvestmentClimate Assessment ICR ImplementationCompletionReport IDA InternationalDevelopmentAssociation FOROFFICIAL USE ONLY IEG IndependentEvaluationGroup IFC InternationalFinanceCorporation IFDC InternationalFertilizerDevelopmentCentre IMF InternationalMonetary Fund ISN InterimStrategyNote MDGs Millennium Development Goals MDRI MultilateralDebtReliefInitiative M&E Monitoring and Evaluation MIGA MultilateralInvestmentGuarantee Agency MINALOC Ministry of Local Government MINECOFIN Ministry of FinanceandEconomicPlanning NBR NationalBankof Rwanda NGO Non-GovernmentalOrganization NISR NationalInstituteofStatistics of Rwanda ODA Official DevelopmentAssistance PCPI Post-ConflictPerformanceIndicator PEFA Public Expenditureand FinancialAccountability PFM PublicFinancialManagement PRSG Poverty Reduction StrategyGrant PRSP Poverty ReductionStrategyPaper PSCBP Public Sector Capacity BuildingProject PSI3 PrivateSectorDevelopment RAP RwandaAid Policy RDRP RwandaDemobilizationand ReintegrationProgram RIEPA RwandaInvestmentPromotionAgency ROSC Reportonthe Observanceof Standards andCodes RPPA RwandaPublic ProcurementAuthority RSSP RuralSector SupportProgram RWF RwandaFrancs RURA RwandaUtilities RegulatoryAgency SDR SpecialDrawingRights SLM SustainableLandManagement SME SmallandMediumEnterprise SWAP Sector-WideApproach SOE State-OwnedEnterprise TA Technical Assistance UN UnitedNations UNDP UnitedNationsDevelopmentProgram W P Vision 2020 UmurengeProgram IDA IFC MIGA Vice President ObiageliKatrynEzekwesili Thieny Tanoh James Bond(Acting) CountryDirector C. SanjiviRajasingham(Acting) Jean PhilippeProsper Frank J. Lysy Task Team Leader Victoria Kwakwa DanKasirye Thomas A. Vis The core team for this CAS includedAlema Siddiky, Amadou Dem, DanKasiyire, DiegoMartin, Dimitrie Mukanyiligira,Erik Fernstrom, Jennifer Asego, Johannes Widmann, KeneEzemenari, Louis de Merode, Lewis Murara, LoraineRonchi, Mark Williams, Peter Isabirye, RemaBalasundaram, Stefanie Teggemann,Thomas Vis, Verdon Staines, Victoria Gyllerupand Victoria Kwakwa.Substantiveinputs were also receivedfrom Diep NguyenVan Houtte, EdithKikoni, Frode Davenger, PapaThiam, Peter Osei, and other countryteam members. - 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. COUNTRYASSISTANCE STRATEGY FOR THE REPUBLICOFRWANDA TABLE OF CONTENTS EXECUTIVESUMMARY ........................................................................................................................... i IINTRODUCTION.................................................................................................................................... 1 . I1 COUNTRY CONTEXT . .......................................................................................................................... 1 A Politicsand Governance . ...................................................................................................................... 1 B. The Economy....................................................................................................................................... 2 C. Progresstoward the MillenniumDevelopment Goals......................................................................... 4 I11 RWANDA'S MAINDEVELOPMENTCHALLENGESAND OPPORTUNITIES............................ . 6 A. Transforming the Economyto SustainRapid andInclusiveGrowth .................................................. 6 B DevelopingHumanCapital . ............................................................................................................... 10 C. Buildingan Effective State................................................................................................................ 11 D PromotingPeaceand SocialCohesion.............................................................................................. . 12 IV. RWANDA'S LONGTERMVISIONAND MEDIUMTERMPRIORITIES.................................... 13 A. Vision 2020 andEDPRS ................................................................................................................... 13 B. Economic Outlookover the CAS Period ........................................................................................... 14 V WORLD BANK GROUPASSISTANCESTRATEGY . ....................................................................... 17 A Lessons from Implementingthe Last CAS . ........................................................................................ 17 B. The Current WorldBank GroupProgram ......................................................................................... 17 C The Programof Support FY09-12..................................................................................................... . 18 D. ScalingUp Support to Rwanda......................................................................................................... 30 E Partnerships . ........................................................................................................................................ 30 F ResultsMonitoringandManagement . ................................................................................................ 31 VI MANAGING RISKS . ............................................................................................................................ 32 Table 1:Growthand share of GDP............................................................................................................... 3 Table 2: Progresstowardthe MDGs............................................................................................................. 4 Table 3: Key Macroeconomic Indicators.................................................................................................... 15 Table 4: FinancingPlan2008-11(US$million) ......................................................................................... 16 Table 5: Strategic Themes and Outcomes................................................................................................... 19 Table 6: ProposedIDA FinancingFY09-12............................................................................................... 21 Table 7: Economic and Sector Work actual (FY08) andproposed(FYO9-12)........................................... 22 Annexes: Annex 1: ResultsFramework for the RwandaCAS FY09-FY12............................................................... 33 Annex 2: Selectivityofthe CAS Program.................................................................................................. 40 Annex 3: Rwanda's Joint GovernanceAssessment.................................................................................... 41 Annex 4: Capacity BuildingFilter .............................................................................................................. 43 Annex 5: Rwanda-JointIMF and World Bank Debt SustainabilityAnalysis (December 2007)................48 Annex 6: Rwanda'sAid EnvironmentandDonor Coordination................................................................. 53 Annex 7: Mappingof Rwanda's Development Partners............................................................................. 57 Annex 8: Summary Findingsfrom IndependentEvaluations ..................................................................... 58 Annex 9: PortfolioFiduciaryManagement................................................................................................. 59 Annex 10: MainRecommendationsfrom June 2008 Country PortfolioPerformanceReview(CPPR) .....61 Annex 11:FY03-08CAS CompletionReport............................................................................................ 62 Annex 12: RwandaCountry Statistical Information................................................................................... 88 Annex 13: Rwandaat a glance.................................................................................................................... 89 Annex 14: Key Social Indicators................................................................................................................. 91 Annex 15: KeyEconomic Indicators.......................................................................................................... 92 Annex 16: KeyExposure Indicators........................................................................................................... 94 Annex 17: SelectedIndicatorsofBank Portfolio PerformanceandManagement...................................... 95 Annex 18: IDA Program Summary............................................................................................................. 96 Annex 19: SummaryofNonlendingServices............................................................................................. 97 Annex 20: IDA Operations Portfolio .......................................................................................................... 98 Annex 21:IFCPortfolio.............................................................................................................................. 99 Map ofRwandaNo.IBRD33471 EXECUTIVE SUMMARY 1. Rwanda has made remarkable progress since the 1994 genocide and civil war. Peace and political stability have been re-established, reconciliation efforts are continuing, and democratic institutions and processes are being strengthened. Poverty and social indicators have also improved. Given the considerable ground lost during the genocide and civil war Rwanda i s still behind comparators in the region on key economic and social indicators. Rwanda's key challenge going forward is to leverage its recent progress for a much higher development path that will put the country's long term economicand social aspirationswithin reach. ii. ThespectaculargrowtheffectsofRwanda'spost-conflictreconstructionappearstobefully exhausted and growth has now slowed. Much higher growth rates are needed to significantly reduce poverty and move towards the objective o f middle income status. This requires transformation o f the economy in the following ways: (i)higher productivity and commercial orientation o f agriculture; (ii) broad access to key infrastructure at a much lower cost; (iii)a modem and dynamic private sector able to lead growth; (iv) diversified base o f economic activities; and (v) full integration into Eastern and Southern Africa. iii. Significantinvestmentin developinghumancapitalis neededto fully harnessRwanda's most important asset-its population-for development. The challenges are: (i)a severe deficit of labor market skills due in part to the absence o f an integrated policy for post-basic education-this deficit is evident in the much higher than average wages for skilled personnel in Rwanda than in other parts o f the region; (ii)low quality o f education following rapid progress in expanding access particularly at the primary level; (iii)child and maternal mortality rates amongst the highest on the continent due to physical, geographic, and financial barriers to accessing high-quality services and to behavioral and cultural factors; and (iv) addressing the needs o f the different populations o f vulnerable groups. iv. Strengthening public institutions including several that have been created within the last decade is critical for achieving more rapid development progress. Core public sector functions require strengthening, particularly at the decentralized level and support is needed for civil society to emerge as a more effective development actor, able to hold government accountable. v. Rwanda's longterm development vision articulated in the Rwanda Vision 2020 document is to become a lower middle income economy (US$900 per capita) operating as a knowledge-based service hub by 2020. Within this long term vision the Economic Development and Poverty Reduction Strategy (EDPRS) assigns the highest priority to accelerating growth to create employment and generate exports. The strategy is framed around three strategic flagship programs: Flagshipone (Growth) targets economy wide improvements inproductivity. Its goal is to transform Rwanda's economy from subsistence agriculture towards increased commercial agriculture, as well as manufacturing and services. Flagshiptwo (Vision 2020 Umurenge) focuses on ensuring growth is shared by creating economic opportunities for the poorest Rwandans. It has three components: (i)public works; (ii)credit packages; and (iii)direct supports. Flagship three (Governance) seeks to strengthen political and economic governance, and build institutions and capacity o f the state. It envisages a wide range o f reforms to strengthen public sector institutions and capacity and also includes aspects needed to create an attractive business environment including strengthening commercial justice systems, regulatory and administrative frameworks, and promoting principles o f good corporate governance. vi. The World Bank Group Country Assistance Strategy (CAS) for Rwanda for FY09-12 has been jointly prepared by IDA, the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA) in an effort to draw greater synergies from our work and 1 catalyze highervolumes of private resources to support Rwanda's development. It is closely aligned with the EDPRS and seeks stronger impact through greater selectivity in line with Government of Rwanda's (GoR) preferences for engagement with the Bank and enhanced harmonization with other donors. No new financing from the International Development Association (IDA) is envisaged for PrimaryEducation, HIV/AIDS, UrbanManagement, Water and Sanitation, andCivil Service Reform. vii. The CAS is framed around two strategic themes: 0 Promote economic transformation and growth. The primary objective of the CAS is to help Rwanda make progress in activating new drivers of growth that can be sustained over time. The substantial part of the financial envelope over the period will therefore support the EDPRS flagship on growth and focus on four key outcomes: (i)raisingagricultural productionin a sustainable way; (ii) improving access to and quality of key economic infrastructure services; (iii)improving the environment for private sector development; and (iv) strengthening management of public resources at central and locallevels. Reduce social vulnerability. A secondary objective is to ensure that the most vulnerable Rwandans also benefitfrom growth and to help Rwandamake further progress in building a more stable society. Building on progress to date in reform and development of delivery of basic services, a smaller program will involve support to the Flagship Vision 2020 Umurenge (village) initiative; reducing vulnerability of Rwandan children and mothers to high rates of mortality; and promoting peace and social cohesion through demobilization and reintegration. It will seek to contribute to mitigating health and social risks-to vulnerable groups andto social cohesion inRwanda. viii. These themes will be supported through a series of Poverty Reduction Strategy Grants (PRSG) and select investment lending in the indicative total amount of SDR 344 million (about US561 equivalent) during FY09-12. Actual allocationsduring the CAS period will be determined on an annual basis and will depend on: (i) IDA resources available; (ii) total Rwanda's performance rating relative to that of other IDA borrowers; (iii)financing terms (credits or grants); and (iv) number of IDA- eligible countries. Analytical and advisory activities (AAA) will be used strategically to complement financial support. ix. Harmonization with other development playerswill be enhanced under the CAS. This will be done throughmechanisms such as the recently agreed Common PerformanceAssessment Framework which provides an opportunity for the Bank to harmonize its Budget Support Program and dialogue with those of other budget support donors; through the preparation of Sector-Wide Approach (SWAps) particularly in the sectors where the Bank is a lead donor -here we can play an even stronger role in facilitating harmonization and alignment of other donors in the sectors; and through specific initiative such as the enhanced harmonizationand collaborationbetween the World Bank, the AfDB and the EC, particularlyinthe area of Budget Support, Public FinancialManagementandInfrastructure. We will also seek greater collaborationwith non traditional stakeholders and potential financers as well as various philanthropicorganizations that are increasinglyactive inRwanda. x. The overall outlook for Rwanda is positive. But there are nonetheless risks that could derail the implementation of the CAS or limit its impact. These include: (i)weak implementation capacity particularly at the decentralized levels; (ii)regional neighborhoodrisks includingthe threat of conflict and political instability in the region; the country's landlocked location which could negatively affect trade, export and private sector growth; and risks from migratory diseases that could impact Rwanda; (iii)exogenous shocks given the limited diversification of the economy; and (iv) potential instabilityrelated to parliamentaryelections in 2008 and presidentialelections in 2010. These risks can be reduced through measures such as mainstreaming support to capacity building; greater emphasis on regionaltransport; and strong support to Vision 2020 implementation.Foodprices in Rwandahave risen steadily over the past two years and could be exacerbated by any declines in agricultural productivity. Support to sustainably raisingdomestic agriculturalproductivityremains critical for containingthis risk. 11 COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OF RWANDA I.INTRODUCTION 1. Almost a decade and a half after the devastating genocide and civil war, Rwanda has made remarkable progress in rebuilding its politics, economy and society, implementing bold reforms. The World Bank has supportedthis progress through two assistance strategiesand one interim strategy. 2. The first Country Assistance Strategy (CAS) was presented to Executive Directors in March 1998 to support Rwanda's transition effort from war to peace. In December 2002, Bank Executive Directors discussed a second CAS supporting implementation of Rwanda's first Poverty Reduction Strategy Paper (PRSP) with a focus on laying the foundations for growth and sustainable human development. 3. An Interim Strategy Note (ISN) discussed by the Board in August 2006 extended the second CAS while the Government completed preparation of its second PRSP-the Economic Development and Poverty Reduction Strategy (EDPRS)-allowing this new CAS to be directly aligned with the EDPRS. 4. This CAS, based on Rwanda's EDPRS, will build on the foundation laid in previous strategies and support a strong push on Rwanda's growth agenda. It provides the framework for World Bank Group (IDA, IFC and MIGA) support to Rwanda for the period 2009-2012. Guiding principles for engagement include: alignment with the EDPRS, selectivity for greater impact, government's preferencesfor engagement with the Bank, and enhanced harmonization with other donors. 11. COUNTRY CONTEXT A. Politics and Governance 5. Since the 1994 genocide, politics and governance in Rwanda have been shaped by two key objectives: (i)ending the recurring cycle of ethnic based political violence that has characterized post-independence history; and (ii) reducing the role and control of the central government in decision making and development action. To achieve these objectives, Rwanda has sought to create a more inclusive form of governance based on one national identity and using political arrangements, processes and institutions that are largely homegrown, rooted in Rwandan culture and traditions. The Constitution provides for political power sharing between the main political parties and extra effort is made by the authorities to seek consensus and avoid divisions. The President cannot appoint more than 50 percent of cabinet members from hidher party and the speaker of the parliament has to come from the minority party. The Constitution also provides for strong political participation of women allocating them at least 30 percent of positions in all higher level institutions. Women currently hold 49 percent of parliamentary seats and 36 percentof cabinet positions. 6. In parallel, a bold decentralization program is underway. This aims to provide equitable, efficient, and effective pro-poor service delivery, while promoting local development in an environment of good governance. It seeks to foster citizens' participation and empowerment as well as transparency and (upward/downward) accountability. In the last two years, resource transfers to districts have risen significantly in line with regulations for fiscal decentralization. Several institutions for democratic governance are also being strengthened or created from scratch and avenues are being provided for greater participation of citizens in governance. 1 7. So far, Rwanda's approach to promoting inclusive and stable politics and governance appears to be working. The country is at peace and among the most stable on the continent. Parliamentary elections in October 2008 and Presidential elections scheduled for 2010 provide further opportunity to deepen Rwanda's process o f democratization. Sustained success will depend on willingness to monitor results, draw lessons and political commitment to refine the model on the basis o f this evidence. 8. Rwanda's progress in building internal security and political stability is also vulnerable to continued political instability in Eastern DRC. On November 9, 2007 the Governments o f DRC and Rwanda signed a communique in Nairobi pledging to work together more closely to achieve peace and stability in Eastern DRC. In January 2008, the Government of DRC signed a peace accord with over 20 militia groups operating in the country. Both the United Nations (UN) and the Government o f the DRC now appear ready to address more forcefully the issue o f the remaining Rwandan rebel troops o f the Forces De`mocratiques de Liberation du Rwanda (FDLR) operating out o f the DRC. UN Security Council resolution 1804, adopted on March 13, 2008, exhorts the FDLR and all Rwandan armed groups to lay down their weapons and peacefully return to Rwanda. Effective implementation o f these agreements and statements will greatly enhance prospects for lasting peace inEastern DRC, thus creating a key condition for lastingpolitical peace and security for Rwanda. B. The Economy MacroeconomicManagementand Debt Sustainability 9. Rwanda has continued to perform well under its program with the IMF. Inflation was brought down to 6.6 percent by end 2007 from 12 percent at end 2006. Nevertheless core inflation (excluding food and energy) has been rising. Growth in domestic revenue receipts due to overall growth, tax collection efficiency improvements, and recovery o f arrears has allowed expansion in government spending (over 30 percent between 2005 and 2007) with limited widening o f the fiscal deficit. In fact deficit levels have tended to be lower than program targets. 10. With considerable fiscal expansion and limited instrumentsfor monetary policy, monetary management has become an increasing challenge over the past two years. The National Bank o f Rwanda (NBR) carried out large sterilization operations in the face o frapid fiscal expansion inthe second half o f 2007. Reserve money targets were met but at the expense o f much broader money levels (about 30 percent higher than programmed)' as well as higher stock o f domestic debt. These trends from the second half o f 2007 continued in early 2008. Further strengthening o f the coordination between fiscal and monetary policy i s needed. 11. Higher than expected private transfers and mineral exports have helped keep Rwanda's externalaccount deficit in check inthe face of reductionin agricultural export receipts and growing imports. The current account deficit (excluding grants) in2007 was 16 percent of GDP, lower than what was projected in the program. International reserves have also exceeded program targets reflecting higher-than-programmed disbursements o f external grants and loans. Rwanda has gradually introduced more flexibility in the exchange rate regime using a managed float. The Rwandan franc has remained broadly stable against the U.S. dollar and thus depreciated against other major world currencies in line with the U.S. dollar. The nominal effective exchange rate depreciated by 6 percent year-on-year at end 2007, while the real effective exchange rate depreciated by 4 percent. 'Sterilizationoperations kept end-monthreserve money within the targets, but average intra-month reservemoneyexceededthe end-month targets. 2 12. Participation in the HIPC and the MultilateralDebt ReliefInitiative(MDRI) has reduced Rwanda'sexternaldebt to a sustainablelevel(17 percentof GDP) althoughthe external debt burdenincreased faster than programmedin 2007.2 Inline with agreementsreachedwith the MF, the Government is following policiesto ensurethat the external debt burden continues to be sustainable. Externaldebts are limitedto loanswith minimumof 50 percent grant elementandvolumes are beingkept consistent with debt sustainabilityanalysis3.A comprehensive debt strategy is expectedto be completed by end 2008. Rwandahas also built externalreservesequivalent to closeto 6 monthsof imports. 13. As a highly aid dependent economy, a key macroeconomic management issue is avoiding the potential adverse macroeconomic effects of high aid flows. A recent study4concluded that the rapidaid increase since 2003 has caused a number of macro-economic management problems, including some real exchange rate appreciation and problems in accommodating higher Government expenditure without causing inflation or squeezing private sector credit growth. The report recommended that allowance be made for the possibility of moderate exchange rate appreciation, indicatingthat this is not likely to cause significant damage to export prospects, especially if it permits investments that address infrastructure and other supply side bottlenecks. Growth and Real Sector Performance 14. Rwanda's US$3.3 billion economygrew 5.5 percentin real terms in 2006 and an estimated 6 percent in 2007. Onthe supply side this goodperformancehas been drivenbythe services and industry sectors which grew at an average of 7.8 percent and 8.6 percentannually, respectively. In contrast, agriculturehas performed poorly, growingonly 1.1percent in2006 and contractingby almost 2 percent in2007 driven by a 50 percentfall incoffee productiondue to effect of poor rains on mature coffee bushes. On the demandside, this rapidgrowthis explained by expansion in private sector consumption. Investmentandtrade havealso grown rapidlybut are muchsmaller shares of GDP andthus smaller drivers o f growth. A recentrevisionto the nationalaccounts suggeststhat GDP grew 7.3 percent and 7.9 percent in2006 and2007 respectively. The Bank is reviewingthe details ofthis revision. Table 1: Growth and share of GDP Average Annual Growth Share of GDP 1996-2000 2001-2006 1996-2000 2001-2006 GDP 10.8 6.4 100 100 Agriculture 9.5 4.8 37.7 36.4 Industry 7.5 8.1 15.1 14.2 Services 11.7 7.4 41.9 43.8 15. Rwanda has grown more strongly than the averageeconomy in Africa in the last five years. But there are important reasons for concern about recent growth performance. First, growth has slowed considerably from the 10.8 percent average achieved in the immediate aftermath of the genocide (see Table 1). Second, with populationgrowth of about 2.7 percent annually, Rwanda is facing a growth deficit. The economy needs to grow at least 8 percent annually to make a significant dent on poverty. Finally, the decline in agriculture, which employs 80 percent of Rwandans, also raises concern about the poverty impact of growth. ~ _ _ _ _ _ _ _ _ ~ ~~~~ 'Disbursements of the externaldebt (excluding IMF) totaled about US$89 million, about US$26 million higher than projected. In addition, in2007, Rwanda receivedonly about halfof the previously expected HIPC debt reliefon debt service from creditors that still provide relief on flow basis. The depreciation ofthe U.S. dollar against other major currencies contributed to the 'increaseloans in the stock of externaldebt at end-2007, and its net presentvalue exceededthe indicativetarget under the program. Other with lower levels of concessionalitye.g. recent loanto finance the Nyaborongo Hydro Power Project require a waiver under the program with the IMF. Foster Mick and Peter Heller July 2007: Managingthe risks associated with aid increases inRwanda. 3 C. Progress toward the Millennium Development Goals Overall Progress 16. Rwanda is on track to achieve MDG 2 on universal primary education; MDG 3 on gender equality; and MDG 6 on HN/AIDS and malaria. Net primary enrollment is currently 95 percent, with 97 percent enrollment o f girls (see Table 2). However, low completion rates and poor quality o f basic education show that there are still major challenges to meeting MDG 2. The 2005 Demographic and Health Survey (DHS) estimates the HN prevalence rate at about 3 percent with female infection rates (3.6 percent) substantially higher than those o f males (2.3 percent). These figures are not strictly comparable to earlier ones, but there is evidence that infection rates have declined, particularly in urban areas. The number o f cases treated has increased dramatically and Rwanda is one of the very few countries in Africa likely to reach universal treatment. Recognizing that regional challenges o f the epidemic, including migration patterns might hamper this progress, the GoR is complementing national level efforts with participation in regional HIV/AIDS initiative^.^ Rwanda is also on track to achieve the targeted reduction in malaria incidence, the Abuja objective o f 60 percent coverage by bed nets and 60 percent prophylactic treatment o f women and children. Table 2: Progress toward the MDGs MDGs M D G Current Status Attainment Targets by 2015 2015 1. Eradicate extreme poverty and hunger Povertyheadcount (below national poverty line) 30.2% 56.9% Not likely Prevalenceof malnutrition (children under five) 15% 18% Not likely 2. Achieve universalprimary education Net primary enrollment 100% 95% Attainable 3. Eliminate gender disparity Womenparticipation inparliament 50% 48.8% Attainable 4. Reduce child mortality Under-5mortality (per 1,000) 50 103 Attainable6 5. Reduce maternal mortality Maternalmortality (per 100,000) 286 750 Not likely 6. Haltheverse AIDS, malaria and other diseases HIV prevalence 5.1% 3yo Attainable Use of bednets (children under five) 90% 65% Attainable 7. Ensureenvironmentalsustainability Access to improved water source 82% 71% Attainable Source: Government of Rwanda EDPRS,Mini DHS 2008. 17. In contrast, the EDPRS acknowledges that MDG 1 on poverty and hunger, and MDGs 4 and 5 on child and maternal mortality respectively are unlikely to be achieved without a considerably scaled-up effort. Between 2000/01 and 2005/06, poverty fell from 60.5 percent to 57 percent. A much faster reduction i s needed to reach the MDG target o f 30 percent. Poverty remains pervasive in Rwanda (see Table 2). Malnutrition rates in children under five have been declining from about 24 percent in2000 to 18 percent today, but faster progress is needed. Infant mortality dropped from 107 per 1,000 in 2000 to 86 in 2005 and maternal mortality decreased from 1,07 1 per 100,000 to 750 over the same period. Results o f the 2008 mini DHS suggest that Rwanda is now on track to achieve MDG 4 with a drop inunder-five mortality to 103 per 1,000. The percentage o f assisted deliveries increased from Such as the Great Lakes Initiative onAIDS (GLIA)- a regional AIDS programtargetingrefugees, IDPs, and mobile populations. Participatingcountries are Rwanda,Burundi,DRC, Kenya, Tanzania, and Uganda. GLIA is headquarteredin Kigali. Basedon 2008 mini-DHSresults. 4 39 to 52 in 2005-08. Poverty and Inequality 18. According to the 2005/2006 household survey, 56 percent of Rwandans live below the national income poverty line. The average poor Rwandan's consumption is about RwF 150 a day (about US$0.27), only 2 percent higher than in the 2000/1 household survey. Thirty seven percent of Rwandans live inextreme poverty and cannot affordthe minimum food requirements of 2,100 kcal a day. The poverty gap, defined as the aggregate household income shortfall below the poverty line is estimated at 19 percent comparedwith 21 percent in 2000/01. Inequality is high by international including African standards. The Gini coefficient increasedfrom 0.47 to 0.5 1betweenthe two household surveys. 19. Poverty is largely a rural-and agricultural-phenomenon with rural poverty at 67 percent. Poverty is extremely high-91 percent-in families whose main source of income is agricultural wage labor. Poverty levels remain higher in families with smaller landholdings and in female-headed households. Poverty also appears to be positively correlated with population density. These factors suggest that reducing population growth, raising agricultural productivity and incomes, and diversifying sources of livelihood away from agriculture are key factors for reducing poverty. More effort is also neededto ensure that women participate fully in growth. 20. There is significantregionaldisparity in poverty. Between 2000/01 and 2005/06, poverty fell strongest in the Eastern Province from 61.8 percent to 50.4 percent. In the Southern Province, which is now the poorest part of the country, poverty increased from 65.8 percent to 67.3 percent. Only minor progress was achieved in the Northern and Western provinces and the City of Kigali. The reduction in the east can be attributed to greater agricultural growth in that province, due to a combination of factors: (i)largerlandholdings;(ii) greater soil fertility; and (iii)greater use offertilizer. 21. The modest decline in poverty coupled with population growth of about 2.7 percent means the absolute number of poor people increased from 4.8 million to about 5.3 million between 2000/01 and 2005/06. With growth averaging 6.4 percent between the two household surveys, poverty elasticity of growth is low-about -0.4 percent. The relatively small movement in the poverty headcounthowever masks larger declines inthe poverty gap. Further analysis of the poverty data suggests that dependingon assumptions about changes in income distribution, per capita growth requirements to halve poverty by 2015 are in the range of 3.5 to 5 percent annually. If population growth remains at current levels, this would mean overall growth of 6.2 percent to 7.7 percent annually. 22. An estimated 52 percent of households are food insecure or vulnerable? Food insecurity exists all over the country but tends to be concentrated in the Western and Southern provinces. It i s also highest amongst female-headed households, agricultural laborers and those with "marginal livelihoods" including those dependent on social transfers. The agricultural sector contributes significantly to national food security, as more than 90 percent of all food consumed is domestically produced. Food grain prices in Rwanda have risen over the last two years, although relative to many countries in sub Saharan Africa, the rise has been somewhat muted due to a high level of domestic production. This predominance of domestic production implies that productivity gains in agriculture have an enormous potential to protect from further increases in food prices. Correspondingly, a fall in productivity poses a serious threat to Rwanda`s food security. This is particularly true as the food import gap is set to grow-at a time of high global food prices-if there is no increasein agricultural productivity. NISRand World FoodProgram2006: ComprehensiveFoodSecurity and VulnerabilityAnalysis. 5 Child and Maternal Mortality 23. Despite the tremendous progress Rwanda has made on maternal and child mortality, rates are still amongst the highest in Africa. Infant and under-five mortality are only now at their 1992 levels. Further progress on maternal and child mortality rates depend on reforms across various sectors. High mortality rates in children are linked to several factors including poor access to safe water, high fertility, low birth-spacing, and low nutritional status. Accomplishing MDG 4 will require health education and both cultural and behavioral change, through strengthening of community health programs, and of programs for nutrition, sanitation, and water. Major factors in Rwanda's high maternal mortality are poor geographical access to health facilities and cultural factors which result in limited use of pre natal services and a low level o f assisteddeliveries. Inthe last five years the Government has introduced several new policies inthe health sector includingincreasedfinancing, decentralization of health services delivery; implementation of performance based financing, scaling up of mutuelles health insurance and of malaria control programs and improvements in human resources policies. These measures seem to be yielding fruit in improving health outcomes. III.RWANDA'SMAINDEVELOPMENTCHALLENGESANDOPPORTUNITIES 24. The enormity of Rwanda's development challengeis summarized in the assessment of MDG achievability in Table 2 above. To address this challenge, Rwanda needs to make progress in four critical areas: (i)Economic Transformation; (ii) Human Capital and Skills; (iii) Effectiveness ofthe State; and (iv) Peace and Social Cohesion. A. Transformingthe Economy to Sustain Rapid and InclusiveGrowth 25. Rwanda appears to have fully exhausted the growth effects of its post-conflict reconstruction and growth has slowed. The underlying constraints to the economy's competitiveness needto be addressed, thus activating new drivers to sustain rapid and inclusive growth, raise incomes and reduce income poverty. This requires transformation of the economy in the following interrelated dimensions: (i)productivity of agriculture; (ii) access to and cost of economic infrastructure; (iii) private sector development including development of skills and competencies of the workforce; (iv) diversificationo f economic activities; and (v) integration into Eastern and Southern Africa. ProductivityofAgriculture 26. Agriculture accounts for 37 percent of GDP and has powerful backward and forward linkagesthrough related productiveactivities and through rising rural incomes. But productivity in the sector is low, with yields of several key crops lagging behind other countries, even in sub-Saharan Africa. Key constraining features include a binding land constraint which rules out extensification; poor water management; small average land holdings (0.3 ha); low capacity from the district to the national levels; and limited commercial orientation due to poor access to output and financial markets. All this takes place in the context of a potentially fertile, but challenging, physical environment. Steep terrains and the highest population density in sub-SaharanAfrica make good land husbandry a strict necessity and an environmental prerogative. 27. Rwanda's growth challenges can, to a great degree, be met by improvementsin agricultural productivity. Recent analytical work' indicates that improvements in sector productivity could deliver growth of about 6 percent annually through 2015, which could fuel average annual GDP growth at about the same rate due to the presence of important multiplier effects. Agriculture is an important `engine of growth' for Rwanda, not only because of its large impact on GDP inthe short and medium-run, but also 8World Bank 2007 PromotingPro-Poor Agricultural Growth in Rwanda: Challenges and Opportunities.AgriculturalPolicy Note (IBRD: Washington DC). 6 because o f its contribution to the transformation o f the economy in the long-run. With over 80 percent of Rwandans working in agriculture, raising agricultural incomes i s critical for overall growth in output and employment. Increased agricultural productivity raises rural incomes, stimulates demand for goods and services in other sectors and allows resources to transfer from agriculture to other sectors. This is critical for Rwanda's economic transformation process. Access and Cost of Infrastructure 28. Access to infrastructureis limited and costs are prohibitive. Inthe energy sector, generation capacity is severely constrained at 55 MW and despite the high density of population, only 4.5 percent o f households (90,000 customers) have access to electricity. Rwanda has in recent years (2004-2006), suffered from acute electricity supply shortage and severe load shedding. The Government responded by renting additional diesel generation capacity at high cost by increasing tariffs by over 100 percent to about US$ 0.2UkWh. The current tariff levels, compared to US$O.lO-O.l2/kWh in the rest o fthe region, and the poor quality o f supply severely limit the competitiveness o f Rwandan businesses. The supply situation has improved in the last two years due to additional thermal generation and better than average rainfall, but the country remains vulnerable to hydrological risk and supply disruptions as demonstrated duringthe Kenyapost-election violence early in2008. 29. The pace of power sector reform has increased since 2006 but there is considerable distance to go. New Electricity and Gas Laws, that clearly identify the role o f the private sector and the Rwanda Utilities Regulatory Agency (RUM), have been submitted to parliament. The restructuring o f Electrogaz, the electricity and water parastatal, and the strengthening o f the independent regulator aims to position the sector for growth and increase domestic and foreign direct investment in power generation. 30. Transport costs are as high as US$165/ton/kmcompared to average of US$95/ton/km in the region and represent about 40 percent of import and export values. Rwanda is highly dependent on road transport and its road network o f 14,000 km, spread over barely 27,000 square km o f national territory, is among the densest in sub-Saharan Africa. The mountainous terrain coupled with excessive rain fall and severe erosion, is particularly severe on the network, and significantly raises maintenance cost which is twice higher than that o f most sub-Saharan countries. Available datag indicate that 23 percent o f Rwanda's asphalted network in 2005 was in good condition, while barely 5 percent and 2 percent o f the secondary and communal networks respectively were in good condition. As high as 85 percent o fthe 1,100 kmpaved network requires heavy rehabilitationor periodic maintenance, and most o f the secondary and communal roads have not been maintained for over a decade. Being a landlocked country, Rwanda is also dependent on its neighbors, especially Kenya and Tanzania, for access to seaports and increased trade opportunities. The Government's plan o f making Rwanda a trade and services hub will require development o f strong transport links with Rwanda's regional neighbors. 3 1. ICT services in Rwanda are costly but improving. Teledensity remains low at approximately 7 percent, compared to the average for sub-Saharan Africa o f 19 percent" and subscribers are concentrated in the urban areas. The primary reason for this poor sector performance, in addition to limitedenergy resources, has been lack of network coverage and the highprice o f calls resultingfrom the absence o f effective competition in the market, Government has recently taken some steps towards rectifying this through: (i)adopting a licensing regime which allows the mobile operator to provide fixed services and the fixed operator to provide mobile services; (ii)issuing a third license; and (iii) commissioning a study to reconsider the sector market structure. These initiatives have led to acceleration in network investment by both operators and a 35 percent reduction in MTN's call charges. ~ Conductedwith the help ofthe EuropeanCommission (EC), the World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF). loSource: ITUTrends and market statistics for Africa 2007. 7 The next major challenge will be to bring down further the cost o f ICT services, increase the availability o f broadband and ensure that they are available throughout the country. Investment in infrastructure in areas outside o f the major urban areas is needed to provide these services. There has also been considerable progress in using technology to improve government efficiency and effectiveness. In addition to providing computing capabilities in district offices, government is embarking on an ambitious campaign for electronic service delivery. Developmentof the Private Sector 32. A modern private sector is beginning to slowly emerge in Rwanda but its role in economic activity is still very limited. Private sector investment i s only 12 percent o f GDP compared to 14.4 percent in the region. FDIflows are on the rise but currently represent only 2 percent o f GDP compared to 3.9 percent and 3.4 percent in Uganda and Tanzania respectively. The formal private manufacturing sector remains small, fragmented, dominated by small firms supplying to the local market. Only 14 percent o f firms in manufacturing engage in any exporting and o f those that do only 20 percent o f their output is exported. Furthermore the private sector in Rwanda is still overwhelmingly informal. A recent business operators' census conducted by the Rwandan Private Sector Federation identified about 73,000 operators. Individual enterprises account for about 96 percent o f businesses; formally registered businesses account for less than 1 percent and cooperatives close to 3 percent. Close to 90 percent o f operations are micro enterprise employing between 1-4 staff. Less than 0.5 percent o f enterprises employ more than 50 employees. Total employment by these enterprises is about 198,000, only 13 percent o f who have secondary or higher level education. 33. I n addition to infrastructure, the emergence of a modern private sector in Rwanda is constrained by high regulatory cost burden, weak access to finance, and by a severe labor market skills deficit. Progress has been made recently to improve the business environment and reduce the regulatory cost burden Rwanda is still ranked 150 out o f 178 countries in the 2008 Doing Business report. The key areas o f poor performance include trading across borders (rank 166); protectinginvestors (rank 165); access to finance (rank 158); registering property (rank 137); and dealing with licenses(rank 124). The ongoing Investment Climate Assessment (ICA) confirms these as the factors that most constrain businesses. Incontrast the ICA finds that Rwanda compares very favorably to comparators in the area o f governance when examined from the enterprise perspective. Rwanda has the smallest percentage o f firms identifying corruption as a major constraint in a sample o f countries." And Rwanda has the second lowest percentage o f firms (after South Africa) indicating that they expected to pay informal payments to public officials to get things done or give gifts to secure Government contracts.I2 34. While the performance of the financial sector has improved considerably as a result of ongoing reforms, both the DoingBusinessReport and the ICA show that access to finance remains a major issue. The sector has been opened up to private including foreign participation and the regulatory framework i s being strengthened. Banks are now profitable after years o f significant losses. Bank loans are also growing but remain insufficient to finance private investment needs. Credit to private sector was only 11.7 percent o f GDP between 2000 and 2005 which is low even by lower income country or by African standards. Interest rates do not appear to be exorbitant, but firms perceive the cost o f finance to be an obstacle to business growth. These are symptomatic o f the limited depth o f the financial system, low domestic savings rates, and lack o f adequate access to international financial markets. Small and micro businesses face even more severe constraints to access finance, particularly for agricultural activities. This in turn, is due to a combination o f factors, including inappropriate loan products, restrictive collateral requirements, perceptions o f high risk in lending to the rural clientele, and 11Sample includesall countries inthe EAC, DRC, SouthAfiica, Vietnam, India, China and Thailand. Rwanda ICA ongoing. 8 insufficient legal, institutional and financial infrastructure inthe field o f rural and agricultural finance. 35. Rwanda faces a severe labor market skills deficit. In the 2006 manufacturing survey, 40 percent o f firms reported the lack o f skilled labor to be a major constraint for them. By comparison only 24 percent o f firms in Tanzania and 30 percent o f firms in Uganda identified skills as a major or severe constraint. The survey also showed that 44 percent o f industrial workers did not complete primary education compared to 1 percent in Tanzania and 4 percent in Uganda. The severe shortage o f skilled labor is reflected in much higher than average wages for skilled personnel in Rwanda. Average monthly wage o f a skilled production worker is estimated at US$236 in Rwanda compared to US$59 in Burundi, U S 6 7 in Uganda, US$71 in Tanzania, and US$119.56 in Kenya13(see below). Diversificationof the Economy 36. The structure of Rwanda's economy has been changing slowly since the late 1990s. During 2001-2006, services contributed 44 percent to GDP compared to 37 percent for agriculture. Industry contributes about 14 percent. Tourism has grown rapidly since its re-launch in 2002. However, Rwanda continues to rely on traditional subsistence agriculture and mineral commoditie~'~which are subject to fierce international competition and price instability. There has been limited diversification into manufactured goods and traded services, or into adding value to primary products. Tea and coffee accounted for over half o f export revenues over the last five years. Rwanda also depends heavily on imports, in particular fuel imports. 37. This structure and limited diversification makes the economy vulnerable to domestic and external shocks including climate change. Continued high dependence on traditional rain-fed agriculture and the country's geography makes it highly vulnerable to climatic changes. In this context, vulnerability to periodic natural disasters, mainly in the form o f droughts and floods is a long term concern. It is estimated that during 1974-2007, about 4 million Rwandans were affected by droughts and 2 million by floods. For a largely agrarian economy, the impact o f such natural disasters on economic growth is significant. Reducing dependence on rain-fed agriculture and addressing the twin issues o f disaster risk management and climate change is a key challenge. The limited diversification o f exports and the narrow export base also leave the economy vulnerable to shocks in global prices o f primary commodities and to external debt crises. After five years o f rapid export growth (averaging 12 percent annually), exports constitute only 10 percent o f GDP). Heavy dependence on imports including fuel imports and its location about 2,000 km from the coast make Rwanda hostage to international oil price trends and to instability in coastal countries such as Kenya. The transformation agenda should create a robust base o f economic activity that strengthens the resilience o f the economy. RegionalIntegration 38. Faster and morecomprehensiveregionalintegrationcan helpRwanda overcomesome of its economic constraints (landlocked location, limited naturalresources and small size of its economy). Indeed successful integration is critical for realizing Rwanda's vision of becoming a regional service and trade hub as stated in the EDPRS. To realize this vision, Rwanda needs to speed up efforts to make the business environment more attractive for regional investment and trade; lower domestic costs of production so domestic firms can compete on the regional market; and strengthen its participation in regional infrastructure investment and services initiatives including efforts to strengthen the functioning o f cross-border transit systems, power pools and regional skills development programs. l32009 ICA Survey. 14Industrialmineralssuch as wolfram, tin, coltan and cassiterite. 9 39. Fuller integration into Eastern and Southern Africa will facilitate the process of transformationand vice-versa, as acknowledged by Rwanda's EDPRS. Rwanda's membership inthe Common Market for Eastern and Southern Africa (COMESA) and recent new membership in the Eastern Africa Community (EAC) will help facilitate this process. Rwanda's support for regional integration is fully in line with the World Bank's new Africa Regional Integration Assistance Strategy (RIAS).I5 Participating in regional integration programs will also have the added benefit o f increasing Rwanda's accessto IDA funds.I6 B. DevelopingHuman Capital Educationand Skills 40. While significant progress has been made in expanding access to primary education" with the introduction of fee-free primary education in 2003, quality has suffered significantly with the access shock. Several proxy indicators for quality at the primary level e.g. teacher-pupil ratio (about 1to 74), completion and drop out rates and text-book pupil ratios are poor. A more refined understanding o f learning achievement is needed to guide future interventions and the focus needs to shift from the number o fteachers deployed to their professional performance. 41. Rwanda does not yet havethe skills base requiredto realize its vision of a knowledgebased economy. Less than two-thirds o f the population completes some primary education, and only 3.5 percent and 0.4 percent complete secondary or higher education respectively. The GoR's self evaluation o f the PRSPl shows that about 170,000 young people start working life each year without sufficient qualifications and therefore have only a limited chance to integrate successfully into economic activity. 42. The absence of an integrated policy for post-basic education which offers students knowledge and a range of skills to enable their successfulparticipation in the labor market is a key factor in Rwanda's skills deficit. Currently most post-basic education programs both general and technical appear not to be aligned to labor market needs. A multipronged approach that balances access, quality and relevance o f the different parts o f the post-basic education system is needed to develop the skills required for strong private sector led growth in Rwanda. Health, Nutritionand Population 43. Rwanda faces similar health, nutrition and population challenges as other countries in Africa notwithstandingits recent progress in expanding access to health services and controlling malaria. One is to reduce further the high rates o f preventable deaths and morbidity associated with conditions like malaria, diarrheal diseases, HIV/AIDS, tuberculosis, parasitic infections, and micronutrient deficiencies. Maternal and child malnutrition remains a significant challenge, with vulnerability to household food insecurity accentuated in the context o f rising food prices. Another challenge i s to reduce physical, geographic, and financial barriers to accessing high-quality services. In part, this entails: (i)building or renovating health facilities; (ii)raising the overall supply o f trained health care providers; (iii)achieving a geographic distribution of providers that is more equitable; (iv) enhancing performance-based financing mechanisms, reinforcing the autonomy o f health services, and expanding the coverage o f affordable health insurance; (v) ensuring that the poorest households are enabled to participate in these arrangements; (vi) promoting good household health practices; and (vii) improving nutrition. IsEndorsedby the World BankBoard on April 8,2008. I6Countryprogramscontributeone-thirdofthe neededIDA funds for regionalprograms andthe regionalIDA pot contributes two-thirds. I7Significant improvementsin equity were also achievedat the primary levelincluding access by orphans, aparticularlylarge anddisadvantagedgroup in Rwanda. 10 44. Population growth remains an important threat to poverty reduction. Rwanda has the highest population density inthe region, presentinga challenge to economic growth as well as threatening social cohesion. Even under an optimistic scenario, Rwanda's population is expected to grow from around 9.5 million in 2008 to 13.3 million by 2020, while density per square-km could increase from 350 to at least 500. There has been dramatic progress in the past few years in raising the use o f modem contraceptives from 8 percent in 2005-06 to 27 percent in 2008, but further increases are needed to have any significant impact on population growth. Vulnerable Groups 45. Rwanda's genocidelegacy includes large numbers of vulnerable groups-widows, orphans, disabled persons as well as people with psychologicaltrauma and social strains. A strong system of social protection is needed to cater for these groups and ensure that they participate in growth. Given the country's pervasive poverty, there are at least three constraints that must be confronted intryingto design social protection mechanisms: (i)fiscal constraint, given the limited scope for redistributive social protection measures; (ii)administrative constraints, as the capacity to implement programs i s limited; and (iii)informationconstraintsthathinderdifferentiation ofextremelypoor,marginallypoor, andnon-poor households so that assistance can be targeted accordingly. Moreover, both geographic and inter-personal distributions o f risks may be difficult to capture operationally to facilitate appropriate social protection interventions. Because 80 percent o f employment and 37 percent o f GDP flow from small-scale agriculture, weather-related and crop-price fluctuations dominate agricultural outcomes (incomes) and hence living standards. C. Buildingan EffectiveState 46. Rebuilding the Rwandan state into one that is more capable o f delivering public goods and services, providing an enabling environment for growth and development and ensuring peace and security i s one key component o f the country's post-conflict reconstruction. There are at least three dimensions o f this challenge: (i)the capacity o f state institutions; (ii)control o f corruption; and (iii)the voice and capacity o f civil society to hold the state accountable. State Institutionsand Capacity 47. Rwanda emerged from the civil war and genocide with a drastically reduced stock of human capital and government institutions were similarly severely undermined or destroyed. While economic growth rebounded quite quickly, the human and institutional damage is taking much longer to repair. Most ministries are still relatively young. As a result, a number o f systems, processes and procedures have not been fully put inplace and some core functions need to be better defined. 48. In addition, some of Rwanda's civil service reforms could prove to be counterproductive. The drastic reduction in public sector staffing has limited the number o f people available to supervise, analyze and implement as well as to learn. A recent study" also suggests that the adoption o f uniform organizational charts for its central ministries coupled with a grade structure that is too flat seems to be "uneconomic and inefficient". While the Government has put in place a large number o f agencies as part o f its outsourcing strategy, moving implementation away from central ministries, the relationship between ministries and agencies remains undefined. This has generated overlapping mandates, weak supervision and management o f agencies by their ministries. Similar problems exist with the rapid implementation o f decentralization; ministerial staff are often not sufficiently aware o f the division o f labor between sub- national levels and the center and how to effectively supervise activities at the sub-national level. OxfordPolicyManagement, 2007: FunctionalReviewsand InstitutionalAudits of Six Public SectorInstitutionsto Assess the Impactof OngoingPublic Sector Reforms, FinalReport. 11 49. Rwanda's first Public Expenditure and Financial Accountability (PEFA) Assessment was completed in 2007. It shows that while in some areas the public financial managementsystem performs strongly in several other areas considerable strengthening is needed. Rwanda scored better than comparable Southern and Western African countries and better than countries in the East African Community on several aspects. Challenges are nevertheless considerable. The main areas o f difficulty include accounting recording and reporting, and external scrutiny and audit. Reportingat decentralized levels, is particularlyweak and a key area of risk as increasingresources are decentralizedto districtsand lower down. A fully functional integrated financial management system is yet to be put in place. Procurement reforms are considerably advanced: a sound legal framework has been put in place and the Rwanda Public Procurement Authority (RPPA) created to regulate and oversee public procurement. A comprehensive procurement training plan has been adopted and is being implemented. But more challenges remain to be addressed includingadequately funding and staffing the RPPA to become fully operational, training a critical mass of public sector staff in procurement procedures, preparing procurement manuals for contractingentitiesandwidely disseminating the provisions of the procurement law and regulationsto the public. A Code of Ethicsfor participantsandprovisionfor disclosure for those in decision making positions is also being prepared (Annex 9 provides a more detailed discussion of fiduciarymanagement). Control of Corruption 50. Rwanda is widely recognized for low levels of corruption compared to the region and the rest of sub-Saharan Afri~a.'~ Strongpolitical commitment to the fight against corruption is evident in vigorous prosecution of corruption cases and tough measures against proven cases. Within the past five years, several government officials in leadership positions, a significant number of persons in the judiciary and local government employees have been dismissed. The Ombudsman Office effectively coordinates the annual exercise of assets declaration by public officials and other staff involved in the management of public funds. Together with the Ofice of the Auditor General, they expose corrupt behaviors and make recommendations for action by the Prosecutor General. Following the new Constitution in 2003, the judicial sector was reformedto give independence to the Prosecution Office. Consequently, this office with the help of other institutions like the National Police is able to independently and systematicallyprosecuteall cases ofmisappropriationof public funds. Rwanda's good standing is also confirmed by its 2007 CPIA scores on dimensions such as Quality of Budgetary and FinancialManagement (4.0), and Transparency, Accountability and Corruption in the Public Sector (3.5; comparedto the IDA Borrowers' averageof 2.9). Voice and Capacityof Civil Society 5 1. The number of civil society organizations(CSOs) in Rwanda has grown rapidly since 2000. Currently, there are an estimated 37,688 CSOs in the country with close to 90 percent in the form of community based organizations. CSOs are distributed across the country fairly uniformly and form the basis of an emergingcivil society. These organizations largely confinethemselves to philanthropicwork and small income generating activities. Very few engage in any meaningfulway in policy discourse or engage in political debate. Progress is needed on two fronts: (i) to strengthen the environment for CSO engagement with the state including access to informationon government policiesand programs; and (ii) to strengthenthe capacity o fCSOsto engage inpolicy formulationprocesses. D. PromotingPeaceand Social Cohesion 52. The challenge of building lasting social cohesion is daunting given Rwanda's history. A fundamental part of Government efforts in this regard is to downplay ethnic differences and create one 2005 RwandaAfrican Peer Review Mechanismstates "globally anddomestically, Rwandais perceived as havinga low level of corruption". 12 Rwandan national identity." It has also worked hard to complete the process o f dispensingjustice in genocide cases. Under the system o f traditional courts known as the Gacaca, about 1.2 million cases have been tried, with the process expected to be concluded by the end of 2008. Over 18,000 prisoners have been released. While this system does not meet all the requirements o f a modemjudicial system, it enjoys the broad approval o f the population. In addition it would appear a sensiblekhe only option available given the weak state o f the formal judicial system, the overcrowding o f the prisons and the lengthoftime it would take to bringall cases to trial inthe formaljustice system. 53. Traditional mechanisms such as the "umuganda", the "ilorero", the "ubunzf'21etc. are being used to help communities rebuild and create social capital. The program to reintegrate ex- combatants is also proceeding well. There are nevertheless concerns about killings o f genocide survivors by perpetrators who had been released and the persistencehesurgence o fwhat the Government has termed "genocide ideology". In addition, more needs to be done to address some o f the psychological and psychosomatic effects o f the genocide. More time is needed to measure the success o f current efforts, particularly since important changes in mindset are needed across the society. Political willingness to critically examine the functioning o f these mechanisms in order to assess remaining challenges is critical. Government and civil society groups will need to partner closely on this. N. RWANDA'S LONGTERMVISIONANDMEDIUMTERMPRIORITIES A. Vision 2020 and EDPRS 54. Rwanda's long term development vision is articulated in the Rwanda Vision 2020 document. The vision sees Rwanda as a lower middle income economy (US$900 per capita) operating as a knowledge-based service hub by 2020. It seeks to achieve this in an equitable way and as a strong and united nation. The vision is built around six pillars: (i)good governance and a capable state; (ii) human resource development and a knowledge-based economy; (iii)a private sector-led economy; (iv) infrastructure development; (v) productive and market-oriented agriculture; and (vi) regional and international economic integration. It also emphasizes the importance o f progress on four cross-cutting issues: (i)gender equality; (ii) natural resources; (iii)the environment; and (iv) science, technology and ICT. The Vision 2020 objectives are fully in line with the MDGs but more ambitious. 55. The Economic Development and Poverty Reduction Strategy (EDPRS), Rwanda's second generation PRSP, provides the medium-term framework for achieving the country's long term development aspirations. It articulates the country's priorities for 2008-2012. While the first PRSP focused on managing a transitional period o f rehabilitation and reconstruction, the EDPRS focuses strongly on growth. Among its key targets are: (i)growth o f about 8 percent annually; and (ii)reduction in poverty to 46 percent. The strategy also makes the case for consolidating and extending the decentralization o f public spending accompanied by robust accountability mechanisms at the decentralized levels, and for regional and international economic integration. The EDPRS seeks collaboration with Rwanda's regional neighbors in the development o f economic infrastructure and high- level skills inthe services, health and education sectors. The EDPRS priorities are articulated through three flagship programs: Sustainable Growth for Jobs and Exports; Vision 2020 Umurenge; and Governance. 56. Flagshipone (growth) supports policy and investmentinterventionsto: (i)develop skills and capacity for productive employment; (ii)improve economic infrastructure especially transport, 2oUnlike inthe pre-genocide period, reference is no longer made to ethnic origin in individual identification documents and not used as the basis for access to key social services. 21Umuganda refersto residents of neighborhoodscomingtogether once amonth for communalwork to clean and beautify their neighborhoods; ;ubunzi refers to traditional mediators; while the itorero refersto atraditional leadership training school. 13 power and communications; (iii)promote science, technology and innovation; and (iv) strengthen the financial sector. The highest priority is given to improving infrastructure. Another priority is transfer and adaptation o f technology to local needs, especially in agriculture. This flagship is expected to raise productivity across all sectors o f the economy. Its goal is to transform Rwanda's economy from subsistence agriculture towards an increase in commercial agriculture, as well as manufacturing and services. 57. Flagshiptwo (Vision 2020 Umurenge)focuses on ensuring shared growth and on creationof opportunitiesfor the poorest Rwandans. It has three components (public works, credit packages, and direct supports) that involve four complementary elements: (i)agricultural productivity improvement for households with land; (ii) publicly funded, socially productive, labor-intensive employment for landless Rwandans without job opportunities; (iii) social assistance for landless people incapable o f work; and (iv) improved access to credit for inputpurchases or micro-enterprise development by members o f households assisted through elements (ixiii). 58. Flagship three (Governance) seeks to strengthen political governance, economic governance, and build institutionsand capacity of the state. Emphasis is given to maintaining peace and security, promoting peace and reconciliation amongst Rwandans, reforming the justice system to uphold human rights and the rule o f law, and empowering citizens to participate in their own social, political and economic development. It envisages a wide range o f reforms to strengthen public sector institutions and capacity including further decentralization, enhancing accountability at all levels o f government, strengthening public financial management and increasing the predictability and transparency o f policy-making. The other elements o f the flagship i s improvement in the " soft infrastructure" needed to create an attractive business environment specific elements o f which are strengthening commercialjustice systems, business and land registration reforms, regulatory frameworks and business licensing and promoting principles o f good corporate governance. 59. In addition to these three flagships, the EDPRS also seeks to consolidate gains achieved under the PRSP Iin health, water and basic education. In health the objectives are to maximize preventive health measures and build capacity to extend quality basic health services to the majority o f Rwandans. Inparallel, the EDPRS envisages a significant drop in population growth through increased access to and use o f family planning methods. The EDPRS aims to ensure sustainable and integrated water resources management and development for multipurpose use including increased access to safe water and sanitation services. Having achieved significant growth in enrollment, the focus is now turned to improving quality o f nine year basic education and to raising completion rates. B. Economic Outlookover the CASPeriod 60. The external environment has become less favorable, posing increasingchallenges for most economies in Africa includingRwanda. The global economy is slowing down, commodity prices have generally risen with oil prices reaching record-high levels, and global financial markets are unsettled. However, if Rwanda i s able to strongly implement its proposed reform and investment program articulated in the EDPRS, the adverse effects o f the external environment on growth and other macroeconomic balances could be mitigated. 61. Other factors will help mitigate adverse growth effects. From a broader perspective, the gradual broadening o f the commodity price boom from oil to metals has helped Rwanda offset the adverse effects o f higher oil prices through higher prices on its net commodity exports. In the last few years, minerals, metals and chemicals have become predominant in Rwanda's export mix. These favorable non-oil commodity related terms o f trade have contributed to growth in export revenues. In addition, like most African countries with nascent financial markets, Rwanda has so far shown and is 14 expected to continue showing limited reaction to continuing turbulence in global financial markets. Therefore, the risk o f a reversal o f portfolio flows, which would reduce external financing and hurt growth in countries that are heavily reliant on financial markets, is insignificant inRwanda. 62. Rwanda's economic outlook over the CAS period can therefore be expected to remain favourable if GoR implements successfully the medium-term policy agenda as outlined in the EDPRS. This would counter the apparent downward trend in growth, raising annual growth from the average o f 4.8 percent during 2003-07 to about 6 percent over the period 2009-11. This assumes the slow-down inthe global economy persists, and is therefore a lower bound estimated projection o f growth. Preliminary data for first half o f 2008 show that growth across services and industry has remained buoyant. Agriculture i s also experiencing a recovery due to recent successful intensification efforts. 63. Assuming an incremental capital output ratio of around 4, based on historical trends, the projectedannual GDP growth of 6 percentwould be achieved through increasedpublic and private sector investment, including measures to modernize agriculture and address infrastructure bottlenecks. Reflecting the strong emphasis that GoR is placing on public infrastructure investment, overall investment rates are projected to rise fairly steadily from about 20 percent o f GDP in 2006, to about 24 percent o f GDP by the end o f the CAS period (see Table 3). Public investment will increase from 9.8 percent in 2008 to close to 11 percent o f GDP by the end o f the CAS period With the private sector's engagement in the social sectors and also in infrastructure expected to be strengthened, private investmentwould also trend upward gradually beginning 2008, to about 13.4 percent o f GDP per year, in the medium-term. The higher investment levels would also be complemented by other less capital intensive investment to operationalize the recently completed skills, science and technology strategy. Table 3: Key MacroeconomicIndicators 2006 2007 2008 2009 2010 2011 Real GDP growth(%) 5.5 6.0 6.0 5.6 5.5 5.7 Gross investment(% of GDP) 20.3 22.5 23.0 23.1 23.3 23.5 of which primte 12.8 12.8 13.2 13.2 13.2 13.4 Inflation (CPI, %, period average) 8.8 9.1 10.0 8.0 8.0 8.0 Fiscal balance (% of GDP, after grants) -0.4 -0.4 -1.2 -4.0 -4.3 -4.0 Current account balance (%of GDP, incl. off. transf.) -7.3 -4.8 -9.5 -12.7 -11.8 -11.8 Gross resems (months of importsof goods and services) 5.6 5.6 4.8 4.8 4.7 4.7 Externaldebt (% of GDP) 16.7 16.4 5.6 19.1 22.5 24.8 Source: IMF and Bank staff estimates. 64. Higher rates of GDP growth as projected(in the range of 6 percent):' would in turn, allow for a strong recovery in private consumption, raising per capita consumptionto about US$435 by 2011, up from US320 in 2007. The strong growth performance would also have significant impact on employment prospects. The greatest gains for Rwandans would likely come from the strong growth in construction and the service sector coupled with increased public spending on infrastructure projects, includingon rehabilitation and maintenance. 65. I n linewith the need for increased investment to accelerate and sustain growth, government capital spending would increase strongly over the medium term, causing the overall fiscal balance to remain in deficit. The deficit (including grants) would widen to about 4 percent o f GDP by 2011, up sharply from under 1.5 percent in 2007. Part o f this increase would be due to higher investment, but the projections also reflect the possibility of continued highworld price level o f imports to Rwanda. 22 Growth is expected from agriculture stemming from increased use of inputs, including fertilizer, industry, including construction and servicesectorswith linksto the constructionphaseofprojects, includingtransportation. 15 66. The external current account deficit would also widen considerablyfrom about 5 percent of GDP (including grants) in 2007, to about 12 percent of GDP (including grants) by 2011. Strong import growth stemming from higher capital imports associated with the expanding public investment program, is expected to outpace moderate expansion in exports, led by receipts from traditional exports (particularly coffee), and tourism, keeping the current account in deficit. Successful implementation o f the export promotion strategy, coupled with investments and policy reforms to reduce the cost o f doing business should over time promote increased exports, opportunities for economically efficient import substituting activities and foreign direct investment. This will be critical for stemming the widening current account deficit. Foreign exchange reserve accumulation would continue, albeit more slowly than in recent years. External financing requirements would amount to about US$3billion over 2008-2011, and expected to be fully financed largely from grants, concessional loans, and private capital inflows, includingforeign direct investment. Table 4: FinancingPlan2008-11 (US$ million) 2006 2007 2008 2009 2010 2011 2008-11 Actual Estimated Projected Financing requirements(incl. IMF) 546 427 816 813 794 809 3232 Current account deficit (excl. off. transfers) 457 530 798 827 818 845 3289 Long-term amortization (excl. IMF) 22 8 7 8 8 9 32 Change inofficial reserves (increase -) -34 -113 17 -22 -33 -45 -84 Change inother foreign liabilities (increase +) 24 1 -6 0 0 0 -6 IMFrepayments 77 0 0 0 0 0 0 Change in arrears (decrease -) 0 0 0 0 0 0 0 Financingsource 546 428 816 689 694 725 2924 Private flows -1096 -118 62 73 67 88 290 FDI 31 82 83 96 125 145 449 Otherprivate financing flows (net) -1127 -20 1 -21 -23 -58 -56 -159 Public sector 1638 543 752 616 627 637 2632 Official transfers 247 363 448 313 307 318 1386 Official capital grants 173 92 226 54 57 62 399 Debt forgiveness 1150 0 0 0 0 0 0 Long-term disbursements excl. IMF 68 88 78 249 263 257 847 ofwhichIDA 35 59 74 118 133 125 450 IMFpurchases 4 3 2 0 0 0 2 Financing gap 0 0 0 124 100 84 308 Source: IMF and Bank staffestimates 67. Consistent with the medium-term policy objective of maintaining macroeconomic stability, the BNR is expected to contain inflationary pressures arising from fiscal expansion and scaled-up external assistance. Inflation is estimated to reach around 10 percent at the end o f the year.23 However, with strong implementation o f monetary policy, this could decline from the current level to about 8 percent per annum during2009-12. 23 These estimatesreflect the recenttrends ininflation and are thereforehigher thanthe estimates inthe fourth review ofthe PRGF which was approvedby the IMF ExecutiveDirectors inJune 2008. The upcoming PRGF review mission will re-examine the inflation projections. 16 V. WORLD BANK GROUPASSISTANCESTRATEGY A. Lessonsfrom Implementingthe Last CAS 68. The recent CAS Completion Report (CASCR) concluded that performance under the last CAS was satisfactory. Rwandamade substantial progress in the area of structural reformparticularly in public finance management, the financial sector, business environment, and ICT. The Bank's support to basic services in health, education, HIV/AIDS, water and sanitation has delivered considerable results on the ground. Inaddition the Bank's assistance in the community driven development program to build capacity at the local level has been impressive. However, progress has been slow in: (i)improving agriculture productivity and growth; (ii) restructuringkey state enterprise in tea, telecom and energy sectors; and (iii)buildinginstitutionalcapacity inthe public sector. Furthermore, improvingcapacity and services in urban infrastructurehas been slower than anticipated. The Bank strategy will incorporate the following key lessons learnedfrom the implementation ofthe previous CAS and ISN: e The introductionof budget support operationsunder the PRSGseriesprovided an importantforum for policy dialogue and significantly improved donor harmonization and strengthened cross sectoral linkages. The Bank needs to work closelywith other donors in fosteringharmonizationand alignment agenda. Comparative advantage and selectivity need to be key criteria in the future strategy where the Bankcan provideleadershipduringthe implementationofEDPRS. e Future programs need to be appropriately designed to reflect local capacity constraints and be more results-focused Support should be provided to design and sequence reforms in line with capacity constraints to achieve the best outcomes. The CAS objectives andoutcomes shouldfocus on results that are achievable during the CAS period given the capacity constraint and IDA resource envelope. e Thefuture program should have a strong resultsframework. The absence of a results-basedCAS framework at the project design level limited the reliability of the Monitoring & Evaluation(M&E) system. B. The Current World BankGroupProgram 69. The IDA portfolioin Rwanda consists of 11active projects and the PRSG (general budget support) operation with a total (gross) commitment of about US$363 million. Approximately US$115 million remains to be disbursed. Annex 20 provides an overview of the current portfolio. In addition to the annual PRSG, there are major investment lending operations in agriculture, capacity building, HIV/AIDS, urban development,, electricity and transport. Rwanda is also participatingin three regional projects.24Since FY04, much of the support has been providedto social sectors and for public administration, accounting for about 40 percent and 35 percent of new commitments (excluding budget support), respectively. Inthe last few years, the portfolio has performed well and deliveredstrong results in areas such as generalbudget support, ruralwater andHIV/AIDs. There are no problemprojects. 70. The InternationalFinanceCorporation's (WC) ongoing operations in Rwanda focus on: (i) improvingthe investment climate; (ii)building the capacity of SMEs as well as micro enterprises; and (iii)proactively supporting development of projects with high impact in the financial, tourism, agribusiness, and infrastructure sectors. The ongoing investment program includes: (i)expansion of Intraspeed SA Rwanda Ltd (ISARL), a freight and forwarding company operating in the Great Lakes Region of Eastern Africa; (ii) privatizationfinancing of two leadinghotels privatizedby GoR; (iii) post- processing of a risk-sharing facility with the Banque Rwandaise de De`veloppement (BRD)to finance 24The includethe HIV/AIDS Great LakesInitiative; the EastAfricaTrade andTransportFacilitation;andthe Africa Trade FacilitationProject. 17 private schools in Rwanda; (iv) trade finance facility to the Bunque Commerciule du Rwanda (BCR) BCR and exploringprovidingAMSME to local banks; (v) IFC has commencedwork on a housing finance and technical assistance program in collaborationwith GoR; (vii) IFC trust funds have supported the pilot plant of Lake Kivu methane gas now close to operational; and (viii) IFC recently approved up to US$4 millionto invest inthe development of a gas methanepower project in Rwanda. 71. IFC has been providing advice on privatization and entrepreneurship initiatives including advising GoR on the privatization of Rwanda Air. IFC's Private Enterprise Partnership for Africa (PEP- Africa) is currently implementingtwo technicalassistance programs, the RwandaLeasingProgram(UP) and the Rwanda Entrepreneurship Development Program (REDP), both designed to support SMEs. REDP will enhance entrepreneurship, support the growth and competitiveness of the S M E Sector and improve the business environment. The program design and funding arrangements have been finalized. IFC hasjust completeda GenderEntrepreneurshipMarketsstudy. 72. MIGA is increasinglyengaging in Rwanda. Its first guarantee, signed in April 2008, secured an investment in the microfinancesector, further to recent increase in the minimum capitalrequirements. MIGA is currentlyunderwritingtwo further investments inthe financial sector that are likely to be signed inthe secondquarter ofFY 09. These investments reflect an increasedwillingnessby foreign investorsto engageinRwandawith the support of aWorld Bank Group guarantee. C. The Program of SupportFYO9-12 73. The CAS seeks primarily to contribute to the EDPRS objective of significantly raising growth and creatingjobs. A secondary objective is to consolidate specific elements of Rwanda's recent social progress by tackling selected aspects of social vulnerability. The strategy seeks to use the World Bank Group (WBG) resources more selectively for greater impact and respects Government preferences for WBG support in strategic growth sectors. The CAS is also about new ways of working that will enhance the effectivenessof WBG assistance. 74. The CAS is framed around two strategicthemes and five CAS outcomes (see Table 5): CAS strategic theme one: Promote economic transformationand growth. The primary objective of the CAS is to help Rwanda make progress on activating new drivers of growth that can be sustained over time. The substantial part of the financial envelope over the period will therefore support the EDPRS Flagshipon Growth and focus on four key outcomes: (i)agriculturalproduction; (ii) andqualityofinfrastructureservices;(iii) sectordevelopment;and(iv)capacityto access private managepublicresources. CAS strategic theme two: Reduce social vulnerability. A secondary objective is to ensure that the most vulnerable Rwandans also benefit from growth and to help Rwanda make further progress in buildinga more stable society. A smaller program will support the FlagshipVision 2020 Umurenge initiative; help Rwanda get on track on child and maternal mortality goals; and promote peace and social cohesionthroughdemobilizationandreintegration. 75. Given Rwanda's capacity challenge, the new program will seek to mainstreamassistance to capacity across all interventions. This will be done through applying a Capacity Building Filter (see paras 117-119andAnnex 4). 18 Table 5: StrategicThemes and Outcomes CAS Strategic Theme 1 PromotingRwanda'sEconomicTransformation for Sustained CAS Strategic Theme 2 Growth Decrease SocialVulnerability CAS Outcome2.1: Significant healthandsocial risks-to resources-at centra strengthened Guiding Principlesof Bank Support 76. Alignment with the EDPRS. The CAS supports implementation of Rwanda's four year medium-term development framework. The results framework is directly aligned with development outcomes derived from the EDPRS. The support program has been discussed with government, donors, privatesector, andcivil society duringCAS consultations inFebruary, April andJune 2008. 77. Selectivity for greater impact. The CAS focuses Bank engagement on targeted EDPRS areas, primarily growth and selected social areas. It supports mainly progress on MDGs 1 on poverty and hunger; as well as MDG 4 on child mortality; and MDG 5 on maternalmortality. This selectivity is based on GoR's preferences for Rwanda's engagement with the Bank. The GoR exercises a strong lead in donor coordinationand has begunto work with donorson a clearer division of labour by identifyingareas o f individualdonor comparative advantage. In this context GoR has requested the Bank to give priority to the areas targeted under the CAS. This focus is also justified since these goals pose the greatest challengefor Rwandaandare areas inwhich limitedWBG resourcescan addmostvalue. 78. The new program will significantly reduceareas where the WBG provides financial support to Rwanda. Specific areas where no new IDA financing is envisaged include: (i)primary education; (ii) water and sanitation; (iii) HIV/AlDS; (iv) urban management/development; and(v) public service reform. In primary education, the Government intends to make greater use of the Education for all Fast Track Initiative (EFA FTI) as well as additional support from bilateral donors including new entrants into the sector(e.g. Canada). Similarlythe support to HIV/AIDS will continue largelythroughthe GlobalFundto fight Aids, Tuberculosis and Malaria as well as through the United StatesPresident'sEmergencyPlan for AIDS Relief(PEPFAR). The AfDB will continue to lead donor support for water and sanitation and the move towards a SWAP could help catalyze additional donor resources. Anticipated support from the Chinese Government for road investments in Kigali and Belgian support to general urban management issues in Kigali will carry forward some elements of the urban development agenda while some of the policyreformelementswill betaken on inthe PRSGseries. As regardspublic service reforms, the World Bank and the United Kingdom's Department for InternationalDevelopment (DflD) are working with Governmentto prioritizethe implementationof critical system wide reformswhich will create conditions for further public service capacity strengtheningthroughthe CapacityBuildingFilter. 79. Financial support is also more targeted within the areas of intervention. For example support to social protection is targeted to public works and direct assistance and the health program focuses on community health targeting child and maternal health risks. This shift in the strategy will become more evident as several ongoing operations come to an end. Annex 2 explains inmoredetailthe enhanced selectivity in the new program and Annexes 6 and 7 provide more details on Rwanda's aid 19 environment and amappingof donor areas of responsibility. 80. Alongside selectivity in our financial assistance, the strategy recognizes the Bank's considerable comparative advantage in analytical and advisory activities and aims at providing enough flexibility to respond to Government demand for such support even in areas where the Bankmay not be providingfinancial assistance. This primarily includes areaswhere: (i) the institution as a whole has considerable experience; (ii)no other donors are providing such support; and (iii) our support would leadto clear policy and/or implementationoutcomes. A key example is in basic education where althoughnew IDA financing is not envisaged, the Bank will continue to bethe administrator of the EFA FTI Catalytic Fund grant and will remain engaged in policy dialogue with government on basic education objectives. In this regard, the Bank will provide key analytical inputs for the continuing evolutionof the government's basic education strategy as well as the evaluationof the impact of different teacher recruitmentand incentivepolices. 81. Donor Harmonization. The CAS actively seeks synergies with other donors and strives for increaseddonor harmonization. A mappingof donors' activitiesinvarious sectors is provided(Annex 6). IDA Resources 82. IDA availability. The CAS covers the period FYOPFY12, which includes the IDA15 replenishment period (FY09-11) and the first year of IDA16. The indicative resource envelope for Rwanda under IDA15 is larger on a per annum basis than resources available for similar performance during IDA14, due mainly to the larger size of the IDA15 envelope.25 The indicative total resource allocation during IDA15 is SDR255.9 million (US$417 million comprising a firm allocation of SDR81.8 million for FY09 and an indicative amount of SDR174 million during FY10- FYI1. The indicative amount for FY12 is SDR88.2 million (US$144 million), but the actual amount will depend on available resources during IDA16. Therefore for the entire CAS period (FY09-FY12) the indicativeIDA allocation totals SDR344 million (US$561million equivalent). Actual allocations during the CAS period will be determined on an annual basis and will depend on: (i)total IDA resources available; (ii)Rwanda's performance ratingrelativeto that of other IDA borrowers; (iii)financing terms (credits or grants); and (iv) number of IDA-eligible countries. 83. The Government has expressed an interest in being reclassified from a red light to a yellow light country to enable access to greater IDA allocations as well to other sources of concessional financing.*' The most recent Debt SustainabilityAnalysis (see Annex 5) suggeststhat Rwandais still at a highrisk of debt distress, which does not support a change inRwanda's debt sustainabilityclassification at this time. However, for selected high return investments, borrowingon concessional terms including terms less favorable than in the program with the IMF could still be consistent with external debt sustainability. This has recently been demonstrated for the Nyabarongo Hydropower project which is partly financed through a concessionalloan of US$ 97.7 million(40 percent concessionality comparedto 50 percent required in the program with the IMF)28.The project should improve Rwanda's external position,by reducingdependence onthermal energy generatedfrom expensive importedfossil fuel. "EstimatesforIDA15(andfirstyearofIDA16)arebasedonRwanda'sperformanceinFY08,percapitaincome,population andthe size ofthe IDA15 replenishment. 26Basedon an exchange rate of SDR=US$I.63 on July 31,2008. The actualdollar amounts will depend onthe exchangerate at thetime ofcommitments. "ConcessionalfinancingfromsourcessuchasJapanrequireRwandatobeclassifiedaseligibleforamixtureofgrantsand '*IMF concessionalIDA credits. FourthReviewUnderthe Three-YesrArrangement Underthe PRGF, May 30,2008. 20 CAS Instruments 84. In linewith Rwanda's aid policy and the country's good performance,the Bankwill further increase the use of development policy lending (DPL). The ongoing annual PRSG (budget support) will remain the main DPL instrument. The Government is strongly committed to the EDPRS reform program that underpins the PRSG and the budget is well aligned with the EDPRS. What is needed to ensure full success is strengthened capacity to design reforms and programs, to implement them effectively, to monitortheir impact and feed results into further policy and programrefinements. Greater attention will be givento building this capacity. Inaddition to implementationof the Capacity Building filter, the ongoing Public Sector Capacity Building Project and the Decentralizationand Community Development Project will support capacity needs at central and decentralized levels respectively. The program will also continue to use the Japanese funded PHRD facility to finance some of the capacity neededfor PRSGimplementation. The Bankwill continueto use the opportunityprovidedbythe regular Joint Budget Reviews betweenGovernment and budget support donors to ensurethat the budget remains strongly aligned to the EDPRS objectives. Investmentlendingwill be used less than in the past and primarily for delivering large infrastructure including regional programs in addition to areas where IDA financing will helpto leverage additional resources. Table 6: Pro Fiscal Year 2009 ElectricityAccess Roll-Out 2010 2011 IDA 15 Total 418 2012 PRSG VI11 70 Additional FinancingForAgriculture 30 Energy Supplement 30 Skills Development 10 Total 140 1/ This will levera :an additional $4 million from the Norweeian HealthResultsInnovation Grant. 2/ Regionalprojec leverageat leasttwice us muchas the naGonal IDA contributionfor Rwandaspecific activities inthe program ~ . - 3/ Envisagesthat Healthand Social ProtectionDPL will be mergedwith PRSG ifconditions are right. 4/ Will includesome peri-urbanroads. 85. Analytical and Advisory Activities (AAA) and Technical Assistance (TA) services will be used more strategically to complement financial operations. In particular these pieces will seek to respondmore to demand and provide real time advice and support to Government. The CAS will seek balance between this demand driven approach and the need to also be strategic and selective in the 21 broader AAA and TA servicesto be effective. FiscalYear Analytical and Advisory Activities (non-lending) 2008 Social Protection Study HumanResourcesfor Health TA RwandaHealthStudy Youth and Gender in Post-ConflictStudy Accountingand Auditing ROSC Multi-year AgriculturePolicy TA (FYOS-FY12) 2009 PublicExpenditureManagement(Multi-year) (FY09-FY11) InvestmentClimate Assessment EducationPolicyAnalysis (Multi-year) (FY09-FY11) Regional Agriculture Research TA 2010 SustainableLandManagement(TerrAfrica) Procurementand FinancialManagementAssessment 2011 CountryEconomicMemorandum 2012 TBD New Ways ofDoingBusiness 86. The CAS incorporates new ways of doing business that should enhance WBG effectiveness and impact. The first is to increase use of country systems. This should strengthen Rwandan ownership of our support as well as help build capacity within Government to manage development programs. Strong emphasiswill therefore be placed on working with Government to create the conditions for greater use of country systems through ongoing support to procurement and PFM reforms while also recognizing the importance of early pilots to create initial success and draw lessons to guide scaling up. A key element of the strategy will be to commence the initial assessments o f the country systems in procurement as defined and explained in the Board approved paper on the Use of Country Procurement Systems in Bank-Supported Operations: Proposed Piloting Program with a view to implementing the proposed Rwanda pilot on use o f national systems for procurement in a selected project. Work is also ongoing to strengthen the capacity of the Auditor General's Office to gradually take over the external audit function on all Bank financed operations. 87. Given the Government's preference for budget support, the CAS will accommodate increasing use of our TA and M A servicesto help Governmentdesign and refine specific Rwandan programsand initiatives that could be funded through the national budget rather than for the preparation of specific stand alone Bank financed operations. This new way of working will mean that AAA and TA services may not necessarily support stand alone Bank funded operation. 88. The CAS will use Trust Fund resources more aggressively to strengthen partnerships and complement IDA resources for impact. In addition to existing Trust Funds, new Funds that will be tapped include the Norwegian Health Results Innovation Facility; Statistics for Results Initiative; the Joint Governance Partnership Facility between the World Bank, DfID, and the Netherlands and the Global Facility for Disaster Reduction and Recovery (GFDRR). These new facilities will contribute to funding of operations as well as to AAA and TA programs. 89. The CAS will reduce proliferation of activities and seek appropriate consolidation of tasks to allow better funding of individual operations both at preparation and supervision stages. This will require continued effort to work effectively across sectoral silos and recognition of individual contributions to team tasks. 22 Strategic Theme One: PromotingRwanda'sEconomicTransformation for Sustained Growth 90. Under the first strategic theme, the CAS will focus on the following four EDPRS outcome areas: (i)raising agricultural production in a sustainable way; (ii)improving access to and quality of key economic infrastructure services; (iii) improving the environment for private sector development; and (iv) strengthening government capacity at central and local level to manage public resources. Synergies within the WBG, with other donors, ongoing and new IDA lending and regional projects will be key to achieving these outcome areas. All of these outcome areas are closely interrelated and mutually reinforcing. The program is designed and will be implemented to take advantage o f these synergies. CAS Outcome1.I:Agriculturalproduction -particularly of food crops-sustainably raised9 91. Support for raising agricultural production will target investments in a few focused and complementaryareas. Given Rwanda's context, emphasis will be put on sustainable approaches. The Second Rural Sector Support Project (RSSP 2) which was approved at the end o f FY08 is a key instrument for addressing this agenda. This four-year second phase APL will continue directly from the first phase focusing on irrigation and sustainable landmanagement (SLM). Itwill expand irrigated area in cultivated marshlands and increase the use o f S L M practices on associated hillsides to accelerate the pace o f agricultural intensification. Further support to the sustainable land management agenda will be provided through the proposed Land Management, Water Harvesting and Hillside Irrigation (LWH) Project which has been designed by GoR. The LWH is a comprehensive land-husbandry, water- harvesting and hillside-irrigation initiative for commercialized and professional agriculture. The Bank i s providing technical assistance to help refine certain elements o f the project design, helping Government address safeguard issues, and helping to leverage other donor resources through its own financing. The ongoing Integrated Management o f Critical Ecosystems project will promote the sustainable use and management o f Rwanda's critical ecosystems, particularly marshlands. The proposed Lake Victoria Basin Environmental Management project (FY10) will bring a regional dimension to the SLM agenda. The Bank will take advantage o fthe multi-partner platform provided by TerrAfrica to carry out analytical work to support GoR in developing a programmatic investment framework for SLM. Finally, Rwanda will participate in several multi-donor trust funds providing technical assistance to regional initiatives in agriculture research?' 92. For greater impact, the support to agricultural production will be complemented by interventionsto promote increasingcommercialization of agriculture. The ongoing RSSP2 already focuses on improving the marketing and intensification capacity o f producer groups. The planned LWH project (FY10) emphasizes horticultural development that uses commercial-value fruit species. It will build farmer capacity and establish model organized farming communities who .canfunction as effective and efficient market actors. Access to agricultural and rural finance will be expanded through the design and implementation o f innovative savings and loans products that enable rural actors to avail themselves of productivity-enhancing technologies, and emerging value-chain opportunities, and through reform of the Agriculture Guarantee Fund. This program which will be supported through either the PRSG series or as part of the LWHoperation. It will benefit from collaboration with the IFC's (urban-oriented) leasing program and leverage donor partner diagnostic activities on rural finance particularly that o f the country- wide DflD-sponsored FinScope financial access survey. The planned Rural Roads project (FY10) will promote commercialization o f agriculture by increasing access to markets and improving the delivery o f 29Respondingto the challengesin agricultureinRwanda, the interventionsinthis areawill strengthen agriculturalproductivity. However giventhe challengesassociatedwith accurately measuringproductivity,the outcome and is framed interms of agriculturalproduction. 30 Includingthe AU-NEPADComprehensiveAfricanAgricultureDevelopmentProgram(CAADP),the Forumfor Agricultural ResearchinAfrica (FARA) andthe Associationfor StrengtheningAgriculturalResearchinEasternand CentralM i c a (ASARECA). 23 extension services. Similarly the Energy Access Roll-Out Program (FY09; see below) will target key agricultural regions that are currently off the national grid and therefore provide opportunities for adding value to agricultural produce. Depending on progress in implementation o f these operations, additional resources will be provided for the agriculture sector in FY12. The Bank administered Nile Basin Trust Fund will finance a Regional Agricultural Trade and Productivity Project to provide technical assistance for capacity building in boosting regional agricultural export trade. 93. I n the context of the current global food price crisis the Bank will step up its support for the Government'sfood price response program. It has accessed financing from the Global Food Crisis Response Program (GFRP) to support the purchase and distribution o f improved inputs for food crops, particularly fertilizer, a critical part o f the Government's intensification strategy. The Bank has worked closely with the International Fertilizer Development Centre (IFDC) to provide technical assistance to Government to design a fertilizer distribution system that builds capacity o f private sector to participate more actively inthis sector. This will contribute to the sustainability o f input provision beyond the crisis. 94. As lead donor in agriculture and co-chair of the Rural Sector Cluster, the World Bank has an increasingly important role in the area of technical assistance and policy advice. The Bank is currently the Government's first port o f call for technical review and assistance on a much broader range o f issues impacting the sector, from rural finance to supporting the development o f a SWAP with other donors.31 The decentralization o f a sector specialist to the Country Office has reinforced our ability to provide technical assistance, which i s being explicitly recognized as a product line over the CAS period. CAS Outcome 1.2:Improved accessto and quality of key economic infrastructure services 95. The CAS will step-up support to improving access to and quality of economic infrastructure. This is one area where the WBG needs to and can indeed explore and harness greater synergies. Stronger collaboration will also help provide a basis for stronger private sector investment in the infrastructure sectors. 96. I n energy an important focus will be put on assisting the Governmentto develop electricity generation based on domestic methane gas from Lake Kivu. This resource offers the potential to replace the existing thermal generation based on imported petroleum products with low cost bulk power supply based on domestic gas. IFC is in discussions with Government on possible participation in two consortia with private sector partners to build Methane Gas Power plants in sizes up to 100 MW. IDA is preparing a partial risk guarantee to hedge the off-taker risk and thus facilitate private sector participation. Inaddition, IDA is providing technical assistance through the ongoingUrgent Electricity Rehabilitation (UER) project to support the Government in trying to ensure a fair and equitable deal for Rwandan electricity consumers. The proposed Rusumo Falls Hydropower regional project will complement the methane gas-based generation and assist in developing additional regional hydro capacity. In addition, the UER project will be expanded through a GEF grant inearly FY09 to remove market barriers to energy efficiency and renewable energy development. 97. IDA will also provide financing for rehabilitating and expanding Rwanda's national transmission and distribution networks. The Electricity Access Roll-Out project (FY09) will underpin the national access program and ensure that the increased power generation capacity (total estimated at about 155 MW from 55 MW by 2012) will be efficiently delivered to the consumer. Inthe EDPRS, the GoR has targeted a tripling o f access by 2012 to about 15 percent o f households and at least 50 percent o f identified public institutions in health, education and local administration. This will also include rural consumers and those consumers who may be o f f the national grid. IDA'Sinvestments in generation and ''AfDB, Belgium, EU, IFAD, Japan,Netherlands,UK-DFID, USAID. 24 transmission strengthening will be closely coordinated with the AfDB regional program to expand ' regional transmission links which could allow Rwanda to export possible surplus power to neighboring countries and integrate in a future East African Power Pool. MIGA would, in principle, be willing to consider offering guarantees to eligible energy generation projects during the CAS period, and in particularprojects supported in the privatesector by IPPs (independent power producers). Dependingon implementation progress and availability of IDA resources, additionalfinancing will be made available for the sector in FY12. 98. As the lead donor in energy and the co-chair of the energy sector cluster, the Bank will continue to support major reforms through ongoing policy dialogue and technical assistance. IDA will continue to support reform of the energy sector through the policy dialogue under both the PRSG series and investment lending operations. This agenda includes further strengthening of technical and financial efficiency of the power utility, Electrogaz, as well as capacity strengtheningofthe newly created utility regulator, RURA. One focus of the dialogue will be on making progress on an energy sector SWApfocused on access expansion-which is expected to be in place before the end of calendar year 2008. As part o f the access program, IDA is facilitating twining between Electrogaz and the Tunisian Utility STEG to enable Rwanda to benefit from the Tunisian experience in planning and executing a national access program. 99. In transport, the focus will be on effective implementationof the ongoing Transport Sector Development Project (TSDP) and ongoing and planned regional projects. The TSDP which is co- funded by an IDA grant, an Africa Catalytic Growth Fund (ACGF) grant and the GoR through its Road Maintenance Fund, contributes to improvingthe quality of key internationaland domestic road corridors as part o f a wider strategy to improve regionalconnectivity. Additional resources will be required over the CAS period to fund cost increases on the project from inflationary effects of recent events in Kenya and also from some changes in the road design. The ongoing urban infrastructureand city management aims to increase access to priority urban infrastructurein Kigali and two secondary cities (Ruhengeri and Butare). Ongoing regional projects include the East Africa Trade and Transport Facilitation project. Rwanda will also participate in the East Africa Road Network project (FYlO), which will link road networks in Kenya, Tanzania, Uganda, Rwanda, Burundi, Ethiopia and potentially Southern Sudan. Financing for rural roads will complement support to improved productivity in agriculture and rural development (see above). These investments will be implemented using approaches that create employment, particularlyfor unemployedyouth. 100. The Bank will work with other donors in the sector such as the EU and the AfDB and within the WBG to explore synergies. IDA and IFC will work jointly and closely with the AfDB and other Governments in the region to explore the feasibility of a regional railways project that will link Tanzania, Burundi and Rwanda. Achievement of this railway will facilitate Rwanda's integrationin the region, reduce its transport costs significantlyand be an importantbuildingblock in its effortsto become a regional trade and services hub. MIGA is willing to consider supporting such regional integration projects that would either benefit from a more regional approach (e.g. COMESA) and/or through direct privateinvestments in a specificsection ofthe rail link. 101. Support to the ICT sector will focus on strengthening the enabling environment, and improving both domestic and international connectivity to lower the barrier for investment by operators to extend broadband access geographic coverage. This support will be provided primarily throughthe ongoing E-RwandaProjectfor eGovernment applications and services andthroughRwanda's participation in the second phase of the Regional ICT Project (RCIP) planned for early FY09. IDA'S support will complement the US$40 million investment being pledged by the Government for the ICT sector as well as the current efforts ledby RURA underthe UniversalService Fundinitiative. 25 CAS Outcome1.3:Improved environmentfor private sector development 102. Support to improve the environment for private sector development will target skills including entrepreneurial skills, the business regulatory environment, and the financial sector. IDA, IFC (including FIAS) and MIGA will seek additional opportunities to further strengthen our ongoingjoint work inthese areas. 103. A highlight of the program will be an initiative to promote entrepreneurial skills while promotinginvestments through catalytic interventions. The driving premise is that the private sector engages in entrepreneurship when the project development risks are clearer, which leads to the design of more robust risk mitigation, and in turn to enhanced investment in commercialventures. Correlatively, the set-up of an IDA-funded Project Development Fund (PDF) will help identify credible investment opportunities grounded on prospects of products and market development. The PDF will catalyze entrepreneurshipby highlighting direct investment opportunitiesfor the private sector. It will finance the sequence ofall activitiesrequiredto develop bankablebusinessplans for specific investmentsandoperate on a demand-drivenbasis. 104. The integration of IDA, IFC and MIGA instruments and interventionswill be critical to ensure the impact of a PDF. It can be expectedthat IFCwould, first, play acatalytic role as an investor, andthat its participationin private enterprises inadditionto public-private-partnerships(PPP) would help leverage more private investors as well as local banks. Second, to ensure the sustainability of newly created enterprises, technical assistance under the IFC's Private EnterprisePartnership (PEP) for Africa could be leveraged to consolidate enterprise development. In the same way, newly created enterprises could also access matchinggrants to finance costs incurredby recourse to external service providersfor products and markets development and/or for other enterprise development activities. Incases where the Government will need to support enterprise development through PPP, the Government's interventions would be supportedby a relevantPPP Frameworkwhich will be basedon clear government entry and exit scenarios andcode of conduct. 105. The program will also focus on the development of a Minimum Integrated Trade Expansion Platform (MITEP) financed through PRSG VI to foster trade in Rwanda. MITEP will support enterprise development through sustainable development of new products and new markets. It will build a permanent "soft" infrastructure to: (i)help investors identify direct resource transformation opportunities. (ii)help enterprises comply with quality requirement and other standards in order to adapt and develop products that will overcome technicalbarriers to trade (TBT); (iii)support the expansion of the market of specialized business development services which will aim at building and accessing the skills sets required for the private sector to effectively identify and develop trade opportunities; (iv) rationalizeand integrate the overall delivery of mezzo level policy advocacy and enterprisekrade support services. To support the economic transformation, MITEP, combined with the PDF, will be designed to target sectorswith growth potential(includingagriculture).Muchofthis support will be providedthrough a TA programto support program designwith implementationthrough the GoR budget. 106. Beyond entrepreneurial skills, the Bank will increasingly focus on skills development to meet the needs of the labor market (see above). This will consist of a two-prong approach. First, building on the findings of the recent AAA on STI, the Bank will work with Government to design a small program to build skills and capacity in the private sector to bring Science and Technology innovations to different areas of economic activity. Second, we will promote a broad strategic perspective to address short, medium and long-term skills-formationby adoptinga systemic approachto post-basic education, with a comprehensive view of general secondary, TVET and higher education. This will take into account the transversal skills set needed to be able to adapt to the changing demands of sophisticated labor markets and consequently the blurring between the three parts of the post-basic 26 education system. This integrativeapproach also implies that focusing on solely one part of the system (such as TVET) without the overall strategy being in place could eventuallycreate limitations for further human capital development. Support for preparation of this strategy will be provided through the Education Policy Analysis. The strategy is expected to be completed in FY 2010 and a skills development project is expected to follow in FY 2012. The Bank will also continue to administer the EducationFor All Fast-Track Initiative CatalyticFundgrant (see below). 107. Investment climate reforms remain a priority in the proposed program. IDA and IFC/FIAS are collaboratingthrough the IDA Competitiveness and Enterprise Development Project (CEDP) and the recently approved IFC Rwanda Investment Climate Reform Advisory Project, particularly on commercial law reform, capacity building activities of Rwanda Investment Promotion Agency (RIEPA), promoting public-private dialogue and supporting the Government's Doing Business reform action plan. This work is underpinnedby strong analytical input including the Doing Business Surveys. An Investment ClimateAssessmentwill be completed inearly FY09 andthe Bank is workingwith other donors andthe Government on a Joint GovernanceAssessment which includes a section on the Business Environment andon Corporate Governance(see Annex 3). 108. Strengthening and deepening the financial sector will feature prominently in the support program. On the side of IDA, additional financing to the CEDP approved in April 2008 supports implementation of the key elements of Rwanda's FinancialSector Development Plan (payment system, microfinance, accounting and auditing standards). A second phase of the ongoingprogram of technical assistance focusing on the insurance industryand the payment system (throughthe FIRST initiative) will be implemented.IFCwill continue implementationof ajoint IDNIFC LeasingProgram, which is helping firms overcome financing constraintsto acquiringkey productiveassets. IFC is also currently providing support to the NationalBank of Rwanda(BNR) to strengthen its public credit registry's capacity to fulfill its supervisory functions andprepare the legal framework requiredto develop creditreportingin Rwanda. IFC will provide advisory services for securities market and institutional capacity building through its Efficient Securities Markets Institutional Development (ESMID) program being implemented as a regional program covering Rwanda, Kenya, Uganda and Tanzania. MIGA is currently underwriting guarantees for two privateinvestments inthe financialsector worth approximately $1Smillion. ' CAS Outcome1.4:Management of public resourcesat central and local levels strengthened 109. In Rwanda's resource constrained environment, effective use of public resources is even more critical for achievement of Rwanda's growth and indeed the broader development agenda. Particular attention will therefore be paid to strengthening PFM. This will be aligned to the Government's recently completed PFM Strategy and Action Plan and focus on a range of PFM functions-budgeting, accounting and auditing, procurement, reporting and external oversight. Increasing emphasis will be given to building PFM capacity at decentralized levels to ensure that the growing public resources being channeled to this level are used efficiently. As part of the PER work support will be provided for piloting PEFAs at the district level and a second national level PEFA in 2010. The Bank will continue to support GoR in policy development for Rwanda's intergovernmental fiscal transfer system and reporting and help further clarify responsibilitiesfor service delivery, human resourceandfinancial managementbetweenthe differentlevels of Government. 110. The PFMsupport will be provided primarily through the ongoing Multi Donor Trust Fund for PFM Reforms, supported by DfID and the EC, through the PFM component of the Public Sector Capacity Building Project and the PRSG series. The ongoing multiyear PER will also be an important vehicle for support. After completion of the activities supported through these instruments, if additionalfinancingneeds emerge that requirecontinued financing, resources could be re-allocatedfrom the PRSGenvelope. 27 111. I t is critical that the significant scale up of public investments envisaged in the EDPRS is well justified, prepared and implemented to deliver the desired results. The Bank will provide technical assistance and advisory services to help GoR complete and implement its Public Investment Policy which seeks to strengthen the efficiency and impact of public investments. Key elements of this work include developing criteria for selecting between different public investment options, building capacity for project appraisal (technical, economic and financial) and putting in place institutional arrangements for proper project preparation, selection and monitoring. In addition support will be providedfor preparing and implementinga framework to guide PPPs. The multi-yearPublicExpenditure Review programwill be the maininstrument for providingthis support. 112. The ongoing Public Sector Capacity Building Project (PSCBP) will continue support for further refinements to and implementationof Rwanda's Civil Service Reform. Particular attention will be paidto core systems32readjustingstaffinglevels and ministerialstructures in line with functional responsibilities, clarifying mandates and governance arrangements between ministries and associated agencies and commissions as well as sub national structures. In additionto support providedby DfID,the Bank will focus on helpingthe GoR develop a retention and pay policy and conductinga review of the various training institutions currently providing continued professional training for civil servants with a view to consolidatingtraining supply into a single civil service college. Strategic Theme Two: ReducingSocialVulnerability 113. Under the second strategic theme, the CAS will support selected elements of the Government's program inthe areas of socialprotection(with a focus child and maternalhealth), and demobilizationand reintegration. CAS Outcome2.1: Significant Health and Social Risks-to vulnerablegroups and to social cohesion in Rwanda-are mitigated 114. Building on Rwanda's major health sector reforms in recent years support in this outcome area will focus on: (i)Strengthening the community health, nutrition and family planning agenda; (ii) consolidatingand institutionalizingprocesses of autonomous decision-makingand local management in health services delivery via performance-based budgeting and financing; and (iii) strengthening the reform agenda in relationto human resources for health. IDA support will specifically aim at achieving progress on the challengingMDGs 4 and 5 and will leverage funding from the NorwegianHealthResults Innovation Grant (HRIG). TA and AAA will support evaluation and further refinement of the GoR's micro health insurance system. The Bank will also continue to play a role inthe harmonizationagenda in the health sector includingparticipation in the SWAPand contributeto the discussion of fiscal space for the health sector includinganalysis ofthe appropriatefundingfor the sector. 115. The Bank will support the Government in pilotingtwo VUF' program elements, the public- works employment program and the "direct supports" program. Support will also include help in refining the design, strengtheningimplementation, and monitoring and assessing both impact and initial experience during the pilots. The Bank will work with the Ministry of Local Government (MINALOC) to plan how these VUP initiatives could evolve with suitable design modifications as needed fiom evaluation results and the experience gained into effective national core programs of public-works employment and poverty-basedsocialassistance that are structuredto be administrativelysimple, fiscally sustainable, compatible with limited informationrequirements, andrelativelyfree of adverse impacts such as distortions in labor markets or significant sources of inequity. The Bank will support the policies 32Includingmanagement information, strategic planning, monitoringand evaluation and performancemanagement systems. 28 required for the success of the ongoinghealthreformand VUP elements initially througha programmatic DPLseries, which will be mergedwith the PRSG series within the CAS period. 116. Continued support will be provided to the still critical demobilization and reintegration agenda. The ongoing support to Rwanda's demobilization and reintegration effort under the Multi-Country Demobilizationand ReintegrationProgram (MDRF') Trust Fund closes in December 2008. The Government of Rwanda has recently proposed a third, three-year phase of the Rwanda Demobilization and Reintegration Program (RDRP) that would aim to consolidate the past phase's achievements. IDA will therefore support a follow operation to finance this next phase which has four areas of activity: (i)maintaining capacity to demobilize and provide reintegration assistance to an estimated 5,500 combatants of Rwandesearmed groups who may returnto Rwanda; (ii)demobilizingand provide reintegration assistance to a further 4,000 soldiers of the Rwanda Defense Force; (iii)providing specialized medical and socio-economic reintegration assistance to disabled ex-combatants, and (iv) mainstreaming provision of a number of follow-up reintegrationactivities. IDA resources will leverage additional resourcesfrom other donors33who providedsupport duringthe first phase. MainstreamingSupportto Capacity Building 117. The Capacity Building Filter (CaB)34will help build public sector capacity and strengthen the participation of civil society in development. It is envisaged that the ongoingPSCBP and support by other donors will help address the key system-wide issues that constrain capacity development and broader public sector effectiveness.Past experience has shownthat, while support througha single project plus the PRSG series has been useful, the impact of capacity building measures would be enhanced by mainstreamingsuch support acrossthe entire program. This will be done throughthe implementation of a capacity buildingfilter across all our interventions -financial and AAA. For the public sector, projects, budget support and AAA will seek to ensure skills transfer to Rwandans, strengthen the organizations they work with and provide adequate policy frameworks and incentives that sustain and encourage reforms. Capacity constraints will be addressed at individual, organizational and institutional levels to buildskills, organizations and institutions. 118. Each Bank operation will seek to strengthen its implementinginstitutions,to make sure that these institutions are fully equipped to implement projects in a coordinated way that is aligned with its core mandate. This includes the phasing out of Project ImplementationUnits as well as workingtowards using country systems for Bank operations, consistent with Paris Declarationprinciples. On the demand side of reform, the Bank's engagementwill allocate time and resourcesto allow for adequate information, consultation and participation of civil society and other stakeholders in project design, implementation and evaluation as well as in the productionof AAA. Concretely, the implementationof the filter will be achieved through: (i) Reviewingexisting projects and strengthening their attentionto capacity building. For all new operations, an annex will be includedinthe ProjectAppraisalDocument on how the filter is to be applied in the specific case; (ii)AAA and technical assistance will focus on areas outlined which will also be checked at review meetings of AAA. Financing will be sought from the Governance Partnership Facility between the World Bank, DflD, and the Netherlands, for implementation of the Capacity BuildingFilter. 33Belgium, Canada, Germany, the Netherlands, Sweden, Switzerlandandthe United Kingdom. 34The filter draws on existing experience of integrating capacity and governance issues into CASs such as inthe Lao CAS 2005 (focus on capacity building); Albania CAS 2006 (applied governance filter focusing on PFM, CSR, decentralizationand citizen participation); MaliCAS 2008 (developeda capacity development approach for key sectors). 29 D. ScalingUp Supportto Rwanda 119. There are compelling arguments for scaling up support to Rwanda. The first is need. Rwanda is still a longway from achieving several of the MDGs and in the absence o f a much scaled up effort, only limited progress is likely to be made. Poverty is pervasive and severe and growth needs to become more robust, inclusiveand sustainable over time. Rwanda's financing needs, particularly in the infrastructuresectors which are critical for growth remain significant. There is also ample evidence that Rwandacan absorbadditionalresourcesparticularlyinthese sectors. 120. I n the face of this significantneed and financing constraint, Rwanda has a leadership that is committedto achieving ambitiousdevelopment goals and Rwandais a good performer. The country's low levelof corruption also minimizesrisks that IDA resourceswill be misused. The EDPRS presents a good basis for the Bank group to scale up its assistance. The CAS envisages a scaled up program of support through a richer menu of financing options that should allow the Bank Group to seize the opportunityto contributeto significant development impact inRwanda. 121. Rwanda's readiness to become eligible for a mix of IDA credits and grants will be assessed through regular DSAs. The mid term review during FY10 will provide an opportunity to review the classification if the debt vulnerability indicators improve significantly. This would allow a larger IDA envelope as well as enhanceRwanda's possibilityto borrow from other concessional sources. 122. Beyond an expanded IDA envelope, Rwanda has expressed interest in taking advantage of IBRDproducts for IDA only countries. Inparticularas appropriate, Rwandawill apply to be considered for financing of specificenclave projects under IBRDterms. This will be done in carefulconsideration of debt sustainability. These would ideally be for financing projects with some private sector involvement which meet other conditionsfor this program. 123. IDA, IFC and MIGA will also work together more collaboratively to help leverage private financing for Rwanda's development program. MIGA plans to engage more strongly to facilitate private sector investments. IDA resourceswill also beusedmore strategicallyto leverageresourcesfrom additional sources including non traditional sources. Finally Rwanda's participation in regional operationswill also leverageadditionalresources beyondits national/countryIDA envelope. E. Partnerships 124. The CAS will seek greater collaborationwith other donors in various areas notably on the private sector development agenda and in the energy sector with the AfDB, on the PFM and Financial Sector Agenda with the IMF under ongoing IMF/World Bank special initiatives, with the EC on Transport and increasingly agriculture, and with UK DfID on Social Protection. In our role as lead donors in three sectors we will help establish stronger frameworks for donor alignment and harmonization. Inagricultureand inenergy the Bank is leadingthe preparation of SWAps and is also co- chairing with Government the process of preparation of a Joint Donor/Government Governance Assessment which will inspire ajoint Governance framework and work plan. The Bank will also play a stronger role to attract additional financing from other donors includingthrough use of silent partnership arrangementswhere other donors might support different sectors through the Bank. The Bank will work with EC andthe AFDB to achieve greater harmonizationof our budget support and PFM assistance. The recently agreed Common Performance Assessment Framework (CPAF) provides an opportunity for the Bank to harmonize our budget support program and conditionalities with the larger group of budget support donors. 125. The CAS also envisagesstronger partnershipswith non-traditional partners such as China, India and philanthropic organizations such as the Bill and Melinda Gates Foundation. There is 30 growing economic collaboration between China and India. The Bank is exploring possibility of joint support with China to a major agricultureproject focused on Land Management, Water Harvestingand Hillside Irrigation. Several philanthropic institutions have increasing interest in Rwanda and the Bank will seek ways to collaboratewith them onvarious initiatives. 126. The WBG will facilitate learning and knowledge sharing between more successful economies in the South and Rwanda. Inadditionto the twinning arrangement betweenthe Electrogaz and the Tunisian Power Utility that the Bank is facilitating, Rwanda participated in the recent China Africa Experience Sharing Seminar in Beijing, and a study tour of Rwandanofficials to learn the lessons from successful efforts on targeted poverty programs is beingplanned. Other activities will be arranged inresponseto demandand as opportunities arise. F. ResultsMonitoring andManagement 127. Given the results focus of the CAS, strong emphasis is placed on the results monitoringand managementframework. The results focus will be implementedat three levels: (i)ut the national level through support to the development of an effective EDPRS results management system; (ii)ut the Bank portfolio level through the establishment of a solid CAS results framework and results monitoringsystem; and(iii) ut theproject level throughstrengthenedresults managementof individualBankoperations. 128. The Bank, and other donors are currently supporting the Government to put in place the appropriatetools and processesto ensure that an effective results managementsystem is in place to track the achievement of the ambitious EDPRS objectives. Results and Policy Matrices linking EDPRS results measurements and policy actions for all key sectors have been developed. An EDPRS Monitoring Unit responsiblefor producingthe annual EDPRS progress reports has been established inMINECOFIN and M&E officers in all Sector Ministriesare beingrecruitedto support the collection of relevant EDPRS sectoral progress data. In order to have reliable data the National Institute of Statistics is also being integrated in the EDPRS M&E system. Capacity gaps have been identified in both areas M&E and Statistics and are beingaddressedthrougha combinationof training and exchange of experiences as part of an M&E Community of Practicethat is beingcreated. 129. The upcomingNational StatisticalDevelopmentStrategy (NSDS; 2008-11) is an opportunity to strengthen monitoring capacity in Rwanda. This strategy will align statistical production with EDPRS and sector monitoring requirements, and will support the enhancement of capacity in a country already slightly above the IDA average. Capacity assessments have been completed in all districts and are beingundertaken in line ministries. Donor support is generally coordinated through a basket funding arrangement managedby UNDP, with participationfrom the EC and DfID,with commitments for US$20 million of the estimated US$39 million required to implement the NSDS. To address the shortfall, the country team intends to apply for funds through the new "Statistics for Results" facility, which is currently being set up by the Bank with funding from major bilateral donors. The Bank is currently providing support through a Trust Fund for Statistical Capacity Building in the area of national accounting, survey design and analysis for poverty monitoring,andknowledge exchange. 130. To strengthen the national system and avoid duplication of efforts, the CAS Results Framework is aligned to the EDPRS M&Eframework by linkingwhere possiblethe indicators, the data sources and the M&E systemsof the Bank operations to the ones of the Government. The CAS Results Framework presented in Annex 1 is focused on a set of EDPRS objectives that the Bank is expected to be able to demonstrably influence over the CAS period. The CAS outcomes have been formulated bearing in mind that results during this CAS period will come mainly from existing operations, and the quicker-disbursing interventions included in the CAS. Measurable indicators and milestones have been identifiedand regular results-focused portfolio reviews will be carried out to asses 31 whether progress is being made toward CAS outcomes and whether the Bank i s successfully contributing to the achievement o f the EDPRS objectives. A detailed CAS M&E Plan will be prepared outlining responsibilities, detailed indicator definitions and data sources. 131. All new operations will be designed with a focus on clearly defined outcomes, solid results measurements and effective M&E arrangements. Although new projects will more systematically incorporate results management elements, most projects under implementation require actions to improve monitoring and evaluation. Data collection and reporting on outcomes needs to be improved across the portfolio and an effort to strengthen project level M&E is underway. Project teams will also need to focus on supporting sectoral ministries in developing sustainable M&E systems which would in turn help project data collection and reporting. VI. MANAGING RISKS 132. Weak implementation capacity is a key risk. Lack o f capacity was a major constraint to successful implementation o f the first PRSP and has also been a challenge on past Bank strategies. Risks are particularly pronounced at decentralized levels. Recognizing the complexity o f the issue, the CAS will use different avenues to mitigate this risk: (i)a cross-cutting approach to addressing core capacity issues, such as public sector management, through ongoing support as well as applying a capacity building filter across all our operations; (ii)support to capacity building at decentralized levels through the ongoing Decentralization and Capacity Building project; (iii)ongoing support to PFM reforms including preparation o f local level PEFAs which will help assess specific areas o f weaknesses at decentralized levels. 133. Regional "neighborhood" risks. Political instability and the threat o f conflict are real possibilities in neighboring countries such as Kenya, Eastern Congo, and the Great Lakes Region. The Bank's continued work on demobilization and reintegration issues in the region, including in Rwanda could contribute to mitigating this risk. The Bank will also closely monitor developments on this front and proactively make changes to the program as needed in consultation with Government. In addition, given Rwanda's landlocked nature, inadequate prioritization o f regional transport links by neighboring countries could negatively affect trade, export and private sector growth. The spread of migratory diseases including HIV/AIDS and TB remains a risk in the region and Rwanda is participating in the Bank supported Great Lakes Initiative on HIV/AIDS. In general, the strong focus on regional projects in the CAS is trying to mitigate these risks and support effective economic integration with an impact on regional stability. 134. Risks from exogenous shocks. Current high fuel costs, inflation and continued rise in food prices could affect CAS implementation. Given that 90 percent o f the food consumed is domestically produced, the strong focus on improved agriculture productivity will help enhance food security. The Bank will also work closely with the IMF to help Government design and implement fiscal relief measures that do not jeopardize the macro-economic framework. The Bank will continue to support macroeconomic policy stance including a healthy cushion o f external reserves. We will help risks from natural disaster through planned support from the Global Facility for Disaster Reduction and Recovery (GFDRR)to help Government Mainstream Disaster RiskReductioninnational programs. 135. Political and endogenous risks. The presidential and legislative elections o f 2010 could pose a risk ifaccompanied by violence and social unrest. This risk is currently considered low. We believe that the strong macro/fiscal program in place together with the government commitment to reforms will prevent any policy reversals going forward. Our programs are also firmly aligned with Vision 2020 implementation. The ongoing support to the electoral process by other donors should help build the capacity o fthe electoral commission to supervise free and fair elections and further reduce this risk. 32 . . . I I I I d m E EM a e Y i e . . . . 4 . I I l l I I W I I I I . I I 1 I I I I 1 I I I . . 4 . -2. 00 m . . I I I E a eEM Y i a Annex 3: Rwanda's Joint GovernanceAssessment. 1. In early 2007, the Government of Rwanda and development partners initiated ajoint assessment o f Governance in Rwanda. Inthe past, such assessmentswere done separately by individual agencies and development partners including the World Bank, the EC, DfID, the Netherlands, the African Development Bank and USAID. The fundamental objectives o f this initiative are to: (i)develop a common (government and donors) understanding o f governance issues in Rwanda; (ii) reduce transaction costs by consolidating different donor governance assessment activities; and (iii)provide an objective, evidence-based assessmentthat reflects Rwanda's specific governance history and its current context and realities. The Assessment will also form the basis for identifying areas in the Government's Governance program that need greater attention, and for harmonizing governance interventions. It will provide a framework for regular monitoring o f governance progress in Rwanda. 2. A Steering Committee (SC) with membership o f key ambassadors, heads o f development agencies, relevant Government Ministers (Local Government, Finance, Justice, Public Service, Information), the Presidency, the Private Sector Federation and CSO representatives, and jointly chaired by the Ministry o f Local Government and the World Bank was set up to lead the process. The SC was supported by a Joint Technical Committee. Among others, the SC sought to ensure that the Assessment would bejointly owned by Government and donors, and conducted with a high degree of professionalism and independence which would lend international credibility to the findings and recommendations. An international firm-The Policy Practice-was recruited through an open competitive process to carry out the Assessment. 3. Incarrying out the Assessment, the following research methods were used: 0 Review o f existing governance literature and indicators on Rwanda; Interviews o f around 200 respondents in Government, civil society and the private Sector; Stakeholder workshop for over 100participants in January 2008 inKigali; 0 Discussion o f draft indicator Framework at the Government and Development Partners' retreat in March 2008; Consultations with district government in 5 districts; 0 Regular meetings with the Steering Committee and technical Committee to discuss progress, earlier drafts and next steps. 4. The Assessment has recently been completed. It concludes that Rwanda has made impressive progress in governance since the 1994 genocide (especially in areas such as peace and security, national reconciliation, transitional justice, institutions o f accountability, public financial management, the fight against corruption and decentralization) and identifies remaining challenges in `Ruling Justly', strengthening `Government Effectiveness', and improving the `Investment Climate and Corporate Governance'. There are three broad tasks that are highlightedfor greatest attention: Institutions needto be further strengthened and rules-based governance more rigorously enforced; Vertical accountability between government and citizens needs to be strengthened, in particular by enabling constructive state-society engagement around participatory processes such as budgeting, planning and monitoring; and Transparency and access to reliable information are essential to nearly all aspects o f good governance. 5. Recognizing both the scale of the challenges, and Rwanda's experience so far that a good deal can in practice be achieved; the Assessment suggests that the approach to strengthening governance needs to be ambitious. It also recognizes there are many linkages between different areas o f governance, such 41 that progress in any one area is influenced by progress in others. Given resources limitations, the prioritizationand sequencingof interventionswill be essential. The reportwill be disseminatedwidely by Government and donors following discussion andapprovalby Cabinet after the summer recess. 6. The SC has agreed that donors will review their governance programs to ensure alignment with the recommendations of the Assessment. Under the newly established EDPRS Results Monitoring Framework, the coordination ofthe implementationand monitoringofthe findings ofthe Assessment will be taken forward by the EDPRS Governance ImplementationWorking Group (IWG) which is jointly chairedby the Ministry ofLocalGovernment andtheUNDP.It is expectedthat the GovernanceIWGwill agree soon a timeline for the nextAssessment. 42 Annex 4: CapacityBuilding Filter Weak CapacityUnraveled 1. Weak capacity slowed down implementationof Rwanda's first PovertyReduction Strategy. Past experience o f building capacity revealed that "weak capacity" in the Rwandan context can be disaggregated into a number o f component parts. On government effectiveness, weak capacity can be traced back to low skills levels, weak core processes and oversight and organizational structures insufficiently aligned with ministerial functions. In addition, civil society engagement and voice can be strengthened, supporting the government in its existing efforts. 2. Rwanda emerged from the war and genocide with a drastically reduced stock of human capital. Governmentinstitutionswere similarlyseverely underminedor destroyed. While economic growth rebounded quite quickly, the human and institutional damage is taking much longer to repair. As part of the institutional rebuilding process, most ministries are still relatively young - as a result, a number o f systems, processes and procedures have not been fully put in place and some core functions need to be better defined. 3. In addition, some of Rwanda's civil service reforms have proven to be counterproductive. The drastic reduction in public sector staffing has limited the number o f people available to supervise, analyze, and implement as well as to learn. The adoption o f uniform organizational charts for its central ministries coupled with a grade structure that is too flat proves to be "uneconomic and inefficient" (Oxford Policy Management 2007).38 Also, some of the reforms remain unfinished. While the Government has put in place a large number o f agencies as part o f its outsourcing strategy in an effort to move implementation away from central ministries, the relationship between ministries and agencies remains undefined, leading to overlapping mandates, weak supervision and management o f agencies by their parent ministries. Similar problems exist with the rapid implementation o f decentralization- ministerial staff are often not sufficiently aware o f the division o f labor between sub-national levels and the center and how to effectively supervise activities at the sub-national level. 4. Rwanda's first Public Expenditureand Accountability Assessment was completed in 2007. It shows that while in some areas the public financial management system performs strongly, in several other areas considerable strengthening is needed. The main areas o f difficulty include accounting recording and reporting, and external scrutiny and audit. Reporting at decentralized levels, i s particularly weak and a key area o f risk in Rwanda's decentralization process as increasing resources are decentralized to districts and lower down. A fully functional integrated financial management system is yet to be put in place. Procurement reforms are underway. A sound legal framework has been put in place and new institutional arrangements for the public procurement function are being created. 5. All these weaknesses combined considerably impact the speed o f implementation o f reforms and service delivery invirtually all sectors. Government Response 6. Cognizant o f the importance o f building capacity, the GoR developed the Multi Sector Capacity BuildingProgram, spanning public, privateand civil society sectors, launched in2004. It also established a government agency charged with operationalizing the MSCBP and coordination o f capacity buildingin the country, the Human Resources and Institutional Capacity Development Agency (HIDA). The '*Oxford Policy Management, 2007. Functional Reviewsand InstitutionalAudits of Six Public Sector Institutionsto Assess the Impact o f Ongoing Public Sector reforms, Final Report. 43 MSCBP follows a comprehensive approach to capacity building: strengthening individual skills, improving the functioning of organizations and developing or improving the institutional framework conducive to capacity and good governance. The World Bank financed Public Sector Capacity Building Project(PSCBP), effectivesince March2005, supports the public sector arm ofthe MSCBP. It addresses civil service reforms, PFM, strengthens local training institutions and parliament, improves ICT use within ministries, supports the development of a national M&E system and provides custom-made support to priority ministries under the former PRSP, now Economic Development and Poverty Reduction Strategy (EDPRS). In addition, Rwanda is putting in place mechanisms to attract skilled Rwandans living abroad throughprograms suchas "Transfer of Knowledgethrough Expatriate Nationals (TOKTEN) andMigrationfor Development inAfrica (MIDA). CAS approach 7. Past experience in building capacity through the MSCBP and PSCBP has shown that complex issues such as capacity building and governance can only be partially taken on by a single-project approach. A comprehensive and cross-cuttingapproach is needed. The CAS therefore follows a two- pronged approach of addressing core issues such as public sector management (notably PFM and CSR) and developing a policy framework for skills buildingthrough concrete interventions(suchas the existing PSCBP, a new project on skills development and Economic and Sector Work) and a capacity-building CaB) filter to mainstream such cross-cuttingconcerns into the Bank's operations, analytical activities and budget support. The Capacity Building(CaB) Filter 8. Capacity includes building capable states and engaged societies - both are critical to achieving development results.39Effective states means that the government is capable of delivering public goods and services, of providingan enablingenvironment for growth and development and ensuring peace and security. Engaged societies play an important role as they participate in public decision-making, contributeto provisionof public goods and services and hold authorities accountable. Both elements are also criticalbuildingblocksofthe Bank's GovernanceandAnticorruption Strategy. 9. The CaB filter4'will thus includemeasuresto help buildpublic sector capacity and strengthen the participation o f civil society in development. The filter is a tool to mainstream these goals into Bank operations and analyticalwork. It seeks to help sector interventions to address capacity and governance challenges through their operations, analytic and advisory activities (AAA) and budget support and to ensure that all Bank activities contribute to the same goal. It intends to aid the declaration of the Governance and Anticorruption Implementation Plan for the Africa Region that "governance is everybody's business". The CB focus will be further developed duringCAS implementationand secured inaWorl Bank strategy for capacity building inRwanda.41 39 Thiswas the mainconclusionfromtheReport of the WorldBank TaskForce on Capacity Development inAfLica: BuildingEffectiveStates-Forging EngagedSocieties. 40 The filter draws onexistingexperienceofintegratingcapacityandgovernanceissues into CAS suchas inthe Lao CAS2005 (focusoncapacity building); Albania CAS2006 (appliedgovernancefilter focusingonPFM, CSR, decentralizationandcitizenparticipation); MaliCAS2008 (developed a capacitydevelopment approachfor key sectors). 4 1The strategymight includea check list for projectsthat allows task teams to ascertainwhether they are paying sufficientattentionto capacityandgovernance issues intheir operations. 44 StrengtheningPublic Sector Capacity 10. Capacity constraintswill be addressedat individual,organizationaland institutionallevelsto buildskills, organizations and institutions. Individual capacitythrough skills building: Fivemeasuresare suggestedto encourage skills buildingthroughBank operations: 1. Staffing in line with needs. Current staffing levels leave central ministrieswith an insufficient number of people in place to carry out day to day work let alone identify, analyze, define, disseminate and implement vitally important reforms. In some areas, ministries are in a low capacity trap where even external technical assistance is underutilized due to a lack of supervision, working with and learningfrom experts. Inaddition, the low staffing levels mean that there is little scope for newcomers or young professionals to learn on the job. During the CAS period, a careful review of staffing levels in line with functions will be completed, identifying additional staffing needs after taking into consideration efficiency gains through introductionof more efficient systems andthe completionof decentralizationreforms. 2. Addressing incentives for performance. To ensure optimal utilization of existing human capital, improved human resource management is key as well as an overhaul of the pay and retentionstrategy. Other donors, notably DfID, are engaged in a full roll-out of a performance managementsystem, an important complementary measure. 3. Developing schemes to attract qualified Rwandans onto public sector jobs and train/coach/mentor young talented Rwandans (Rwandan ExpertiseScheme). This would include holistic learningthroughtwinningand institutionalpartnerships. 4. More effective use of technical assistance. Outside experts recruited under World Bank projects should carry a dual function of deliveringtheir reports, analysis and other output but also to transfer knowledge and skills. Including in the TOR of experts the requirement to train counterparts, teach best practice and work closelywith them while deliveringthe product will be important ingredients to ensure that skills transfer is taking place and reliance on foreign experts i s reduced over time. Agreeing with Government counterparts that key staff will be made available to work with consultants is another step in ensuring that transfer of knowledge can occur. 5. Support Local Training Institutions in all sectors or engagement. Existing training institutions in Rwanda are under-equipped, -staffed and often poorly managed. Supporting their capacity through training of trainers and/or institutional partnerships with training institutions in the region or beyond will be an important contribution to ensuring that training needs can be cateredto sustainably in-country. Buildingorganizational capacity: 11. Core functions across the public sector are in need of strengthening. These include PFM, HR management, strategic planning, ICT, monitoringand evaluation etc. Eachone ofthese will be supported through a variety of projects such as the PSCBP, eRwanda, RCIP, etc. In addition, the Bankwill continue to engage ministries, through MIFOTRA to adapt organizational structures to functional needs, moving away fromthe rigid four unit structure. 45 Going further, each Bank operation will seek to strengthen its implementing institutions such as the Rwanda Environment Agency and the ministries for agriculture, communications, infrastructureetc., to make sure that these institutions are fully equipped to implement projects in a coordinated way that is aligned with its core mandate. This includes the phasing out of Project ImplementationUnits as well as working towards usingcountry systems for Bank operations. 12. Finally, support to specific institutionswill continue such as parliament,the ministry of finance, the Auditor General's Office etc. StrengtheningInstitutionalcapacity 13. Each reform requires the establishment of the policy or enabling framework and rules of the game. While each sector will attend to ensuring that the legal framework is sound, for the area of capacity building in particular, the CAS foresees the development of a post-basic education policy framework. Strengtheningcivil society engagement and the localprivate sector 14. Unleashing the potential of civil society and the local private sector are important parts of governance reforms, and capacity building. The Bank will work to strengthen external oversight mechanisms, such as through the media and civil society, as powerful tools to engage society, the ultimate beneficiary of public sector reforms, constructively in the national reform process. There are numerous examples of social accountability tools, such as citizens' guides to government services, complaint mechanisms, civil society consultations and participation, citizens' report cards etc. which could be employed. 15. Rwanda's civil society is still young but plays an increasingly important role in facilitating the development of the country. The World Bank can play an important role in supporting this trend by engagingmore actively with Civil Society Organizations(CSOs) throughconsultation and participation in the production of its AAA as well as throughout project preparation and the use of CSOs in project monitoringand evaluation. Also, local CSOs can and shouldbe usedmoreproactivelyas researchersand consultingbodies inthe preparationofAAA and delivery of services. 16. In addition, the Bank plays an important role in providing access to information on its own operations and AAA to stakeholders and society at large. Sufficient funds should be budgetedto allow for consultations and dissemination of AA products. Each project will ensure that information is provided on objectives and results, also working with government counterparts in ensuring that informationreaches vital stakeholders. Similarly, the Bank will continue to strengthen outreachto CSOs by parliament. 17. Inadditionto support to privatesector development, the Bank will use local consultants and firms more proactively such as in AAA as well as in project preparation and supervision. Systematically teaming up internationalconsultants with local experts is an important step to buildingthe capacity ofthe localconsultingindustry. How to integrateand apply the CaB Filter in the Bank's work 18. The Bank's Governance and Anti-Corruption (GAC) Strategy as well as the GAC ImplementationPlan for the Africa Region highlight that governance is everyone's business. The same 46 holdstrue for capacity building. Consequently, governanceand CB will become a focal area for all TTLs. Concretely, mainstreamingofthe CaB Filter will be achievedthrough the following means: In our operations: Review existing projects and strengthen their attention to CB. For all new projects, include an annex in the Project Appraisal Document on how the filter is applied in the project, to be discussedduringeach reviewmeeting. Inour analytic work: AAA andtechnical assistancewill focus on areas outlinedinthe CaB Filter, also to be checked at each reviewmeeting of AAA. 0 Through budget support: triggers may include key policy decisions and benchmarks that would support capacity building and governance, addressingskills, institutional structures and processes as well as voice, participationand civil society engagement. 19. To this end, project preparation teams will be encouragedto include a governance and capacity buildingspecialist to help identify ways in which the filter can be adopted to the particularproject. The Bank will recruit a governance specialist based in the Country Office to support projectteams. The same person would develop the CaB Filter in more detail, collate and share experience of projects to build a knowledge base and draw on experience of other countries in mainstreaming governance, and capacity buildingconcerns intothe Bank's portfolio. 47 Annex 5: Rwanda-Joint IMF and World Bank Debt SustainabilityAnalysis (December 2007)42 Summary 1. The result of the debt sustainability analysis indicatesthat Rwanda is at high risk of debt di~tress.4~ Despite reduced risk o f near-term debt distress, owing to debt relief initiatives in the recent past, exogenous shocks to exports or imprudent borrowing on nonconcessional terms could cause a rapid deterioration in the medium-term outlook. The alternative scenarios and stress tests indicate that debt indicators are highly sensitive to less concessional financing and lower growth, particularly in exports. The DSA suggests that investment and structural reforms should focus on enhancing private-sector led growth and protecting Rwanda against shocks. 2. I n the baseline, Rwanda's projected external debt burden trajectory breaches one critical indicative policy-dependent threshold (the NPV of debt-to-exports ratio), and returns to a downward path thereafter.44Alternative scenarios indicate that shocks to the small export base would substantially worsen Rwanda's NPV o f external debt-to-exports ratio and debt dynamics would deteriorate sharply if external financing were delivered on less favorable terms. These scenarios highlight the importance o f export promotion and greater reliance on grant financing to set Rwanda on a sustainable debt path. Stress tests based on historical averages o f key macroeconomic variables also indicate an increased risk o f debt distress. 3. The macroeconomic assumptions under the baseline scenario are as follows. On the real economy front, real GDP growth is expected to stabilize at about 6 percent for the projection period (2007-2027) as growth enhancing sectoral strategies -improving agricultural productivity strategy and the export promotion strategy- take effect and investment in human capital starts to pay off. The projected increase in real GDP is also contingent on continuous macroeconomic stability and projected investments in infrastructure (driven by the needs to advance more rapidly toward the MDGs and address Rwanda's severe infrastructure gap). On the external sector front, exports are assumed to grow at a rate o f 12 percent, while imports are projected to increase by 6 percent over the period 2007-27 mostly driven by capital goods imports. 4. With moderate domestic financing and repayment of pre genocide debt, Rwanda's public debt burden (including domestic debt) is expected to stabilize over the long term. This trend would partly offset the increase in external debt, so that the NPV o f total public debt-to-GDP ratio would increase from 15 percent in 2007 and stabilize at about 20 percent in the long term. Both growth-related stress tests and no-reform scenarios, where the revenue GDP ratio remains unchanged imply a substantial worsening in all debt indicators. This underscores the importance o f selecting and investing only in infrastructure projects with a high rate o f return, undertaking structural reforms to set the stage for robust private sector growth and improving the revenue effort in order to reduce long-term aid dependence and attain debt sustainability. 42Preparedby the IMFand World Bank staff in collaboration with the Rwandan authorities. 43A country is considered at high risk of debt distress ifthe baseline scenario indicates aprotractedbreach of debt or debt-service thresholds, but the country does currently not face any payment difficulties. 44The relevantthresholds are (i)40 percent NPV debt to GDP ratio; (ii)150 percent NF'V debt to export ratio; (iii)250 percent NPV debt to revenue; (iv) 30 percentdebt service to revenue ratio; and (v) 20 percent debt service to exports. 48 5. Reforms are already underway to reduce the cost of doing business, deepen the financial sector and undertake key infrastructure investments. Rwanda is also developing an energy sector strategy to systematically address its energy constraints in a sustainable manner. In addition, government i s elaborating a strategy to develop vocational education and training, and ensure that the education system is producing the types of graduates that are most needed for employment and growth. These efforts, together with measures to promote exports, should not only raise overall growth, but also help improve the business and investment climate, and facilitate a strengthening and diversification of the export base. At the same time, the authorities are committed to reformsto improve expenditure and debt managementand raisethe revenue-to-GDP ratiofor an eventual exit from donor flows. 49 Figure 1. Rwanda:Indicatorsof Public andPublicly GuaranteedExternalDebt Under Alternative Scenarios, 2007-2027 Debt Accumulation NPV of debt-to-GDP ratio 3 45 Threshold 40 II I I II IIIII I 3 35 - Most extreme shock 2 30 - 25 - 2 20 - 1 15 - I O - 1 5 - 0 0 4 2007 2012 2017 2022 2027 2007 2012 2017 2022 2027 NPV of debt-to-exportsratio NPV of debt-to-revenueratio 300 300 I Threshold 250 2 5 0 - - II I III IIII m 200 Baseline. 200 - Most extreme shock Threshold 150 100 50 Historicalscenario 0 0 4 2007 2012 2017 2022 2027 2007 2012 2017 2022 2027 Debt-service-to-exportsratio - Debt-service-to-revenueratio - - 25 , 35 Threshold .. - 3 0 1 -Threshold I I I II II I 2 0 1 - IIII II III 25 - - l5 1 20 Most extreme shock 15 - lo - Most extremeshock 5 - 0 4 I 0 1 2007 2012 2017 2022 2027 2007 2012 2017 2022 2027 Source: Staffprojectionsand simulations. 50 Table 2. Rwanda:SensitivityAnalysis for Key Indicatorsof Public Debt 2007-2027 Projections 2007 2008 2009 2010 2011 2012 2017 2027 NPV olDcbl-to-CDP Ratio Baseline I 5 16 16 16 I7 17 21 20 A. Alternative scenarior A I . Real GDP growth and primary balanceare at historicalaverages I 5 I 5 12 8 6 4 -6 -17 Az Revenue is unchangedfrom 2007 15 16 17 17 18 19 30 63 A3 Permanentlylower GDP growth I/ I 5 17 17 I8 20 22 38 98 B. Bound tests 81 Real GDP growth is at historicalaverage minusone standarddeviations in 2008-2009 15 17 18 19 20 21 30 41 82 Primary balance is at historicalaverage minusone standarddeviationsin 2008-2009 I 5 17 16 16 16 17 20 19 B3. CombinationofBI-B2 usingone half standard deviationshocks I 5 17 14 14 I5 16 20 20 84. One-time 30 percentrealdepreciationin 2008 I 5 18 17 16 16 16 18 17 BS. I O percentofGDP increasein other debt-creatingflows in 2008 15 26 26 27 27 28 33 36 NPV of Debt-to-Revenue Ratio 21 Baseline 60 60 68 72 71 75 95 90 A. Alternative scenarior A I Real GDP growth and primary balanceare at historicalaverages 60 58 52 38 26 17 -30 -85 A 2 Revenue is unchangedfrom 2007 60 60 71 77 79 87 147 339 A3 Permanentlylower GDP growth I/ 60 61 71 79 82 91 163 406 B. Bound testa B I Real GDP growth is at historicalaverage minus one standarddeviationsin 2008-2009 60 62 74 82 84 91 132 I80 B2 Primary balance is at historicalaverage minus one standarddeviations in 2008-2009 60 65 67 71 70 73 92 85 B3 CombinationofBI-BZ using one half standard deviation shocks 60 62 60 64 64 68 89 88 B4. One-time 30 percentrtai depreciationin 2008 60 68 71 70 66 68 80 76 BS I O percentof GDP increasein other debt-creatingflows in 2008 60 97 1 1 1 117 116 122 I50 160 Debt Service-to-Revenue Ratio 21 Baseline 5 4 5 4 4 3 3 5 A. Alternative rcenarior A I . Real GDP growth and primary balanceare at historicalaverages 5 4 4 2 0 -2 -9 -14 A 2 Revenue is unchangedfrom 2007 5 4 4 4 4 4 8 31 A3 Permanentlylower GDP growth I1 5 4 4 4 4 4 9 39 B. Bound tests B I. Real GDP growth is at historicalaverage minus one standarddeviationsin 2008-2009 5 4 5 4 4 5 7 1 5 B2 Primary balance is at historicalaverage minus one standarddeviations in 2008-2009 5 4 5 4 3 3 3 4 83 CombinationofBI-B2 usingone half standard deviation shocks 5 4 4 3 2 2 2 4 84. One-time 30 percent real depreciationin 2008 5 4 4 4 3 3 3 6 BS. I O percentofGDP increasein other debwreating flows in 2008 5 4 9 9 9 9 1 0 1 3 Sources Country authorities;and Fund staff estimatesand projections. 11 Assumes that real GDP growth is at baseline minus one standarddeviationdivided by the square root of20 (i,e.. the lengthofthe projectionperiod). 2/ Revenuesare defined inclusiveofgrants. 52 Annex 6: Rwanda's Aid Environment and Donor Coordination4' 1. Rwanda receives support from about thirty (30) donors, the largest beingthe USA, World Bank, UK, EC, and the AfDB. Support is delivered through three main aid instruments: (a) general budget support (GBS); (b) sector budget support (SBS); and (c) project-basedfunding. An increasinglevel of aid is beingchanneledthrough general and sector budget support in line with the Government's Aid Policy. Rwanda Aid Policy 2. The RwandaAid Policy (RAP), adopted by the Cabinet on July 26, 2006 and endorsed in a "Joint Donors' Statement of Intent" on November 23, 2006 clarifies the Government's objectives in terms of mobilization and management of Official Development Assistance (ODA). It seeks to improve the management o f aid through better coordination and harmonization of ODA as called for by the Paris Declarationon Aid Effectiveness. The RAP identifiesthe six most urgent problems that limit efficiency and effectiveness of aid and weaken prospects for the scaling-up of aid over the short and medium term as: 0 Weak capacity and inability of the Government to "attract and retain highly qualified and skilled staff." 0 Excessiveand fragmented conditionalitywhich "may result in problemsof predictability interms of the volume, quality, and timing of aid." 0 High transaction costs because "donors continue to place significant demands on government in terms of time, reporting needs, and use o f their other resources through numerous missions and meetings." 0 Incomplete reporting of ODA, including that provided by NGOs, because of unwillingness or inability of donors to meet the government's requests for information, but also possibly because of the Government's tendency "in some areas to place unstructured demands on Development Partners(DPs) for information." 0 Lack of alignment with government priorities and systems because of weak strategies in some sectors as a result of their low capacity in planning, leadingto situations where "too frequently donors continue to promote their own, often political, objectives at the expense of government ownership. Much of assistanceremains off planand off budget;" large vertical funds sometimes create sector distortions; and technical assistance is "in some instances perceived to undermine local capacities rather than improvingthem." 0 Low volume of external assistance on concessional terms when there is a need to maintain external debt sustainability, while at the same time undertakingin large investments to meet long- term (Vision2020) objectives. 3. The RAP aims to address these urgent problems giving paramount importance to country ownership; preference for un-earmarkedbudget support but recognizesthat all donors may not be able to providetheir assistance under suchmodality(shortofthis, the Government "prefers sector budget support followed by stand alone projects, which in any event should be recorded on-budget and consistent with the nationalplan"); and a number of other measures.Key challengesto its implementationhave included limitedcommitment by donors and capacity constraints. Trend in Aid Flows 4. Rwandahas hadsubstantial scaling up of aid flows. In2006, total ODA was US$602.7million or 26.5 percent of GDP. Like much of Sub Saharan Africa, Rwanda is highly aid dependent. In line with the RAP, Development Partnersare increasingly providingfunds through budget support mechanisms. In 45This Annex draws extensivelyfrom BaelhadjMerghoubandJane.Kirby-ZakiApril 2008. RwandaCountry ConsultationReportLinkingGlobalPrograms andother Aid Modalitiesto Country Strategies and Systems. 53 2006,26 percent of external grants in the form of budget support with an estimated increaseto 30 percent in 2007. Currently, the World Bank and the United Kingdom are the largest budget support donors46 Increases in budget support are set to continue with more Development Partners committing to budget support, eager to meet the 2010 Paris Declaration on Aid Effectiveness targets related to the use of program-basedapproaches. 5. Rwanda also receives substantial funds for implementation of global programs, such as the GlobalAlliance for Vaccines and Immunization(GAVI), the Global Fundto fight Aids, Tuberculosisand Malaria, United States President'sEmergency Plan for AIDS Relief(PEPFAR), and the Education for all Fast Track Initiative (EFA-FTI). Smaller initiatives funded by private philanthropic actors like the ClintonFoundation, are also growing. Coordination Mechanisms 6. Key coordination groups, includingthe Development Partners Coordination Group (DPCG), the Budget Support HarmonizationGroup (BSHG), and Sector and cross-Sector Clusters have been formed for the Government and Development Partners to interact. These groups have been involved in preparatory consultations and joint monitoring of the two Poverty Reduction Strategies Rwanda has preparedto date. Table 1 below provides a summary ofthese coordinationmechanisms. 7. With the completion of the EDPRS, new institutional arrangements have been put in place for monitoring implementation of the strategy. Eight new Implementation Working Groups (IWGs) reflectingthe priority thematic areas of the EDPRS will serve as the forum to coordinate betweensectors, and between government and development partners, to discuss policy issues andmonitor implementation. Each IWG will comprise stakeholders from related sector groups. SWGs will continue to exist with their role of updatingsector strategies in line with their logicalframeworks and thereafter conduct annual Joint Sector Reviews. Thesewill feed into the work of the respectiveIWGs. 8. Through establishing country-led development and enacting policies that promote alignment and harmonizationof aid, Rwandahas madeprogress inownership, harmonizationand alignment ofaidto the budget. Ownership has been strengthenedthrough the country planning and developing its development strategy (PRSP andthe EDPRS) andthe Aid Policy which outlines its own principlesfor cooperation and planning, managing and monitoringaid. A Development Assistance Database (DAD) was establishedto serve as interface for data collection, analysis and dissemination of information pertaining to external finance. 9. Harmonization efforts have helped move assistance gradually, to GBS and SBS financing modalities and promoted SWAps in several sectors with Annual Sector Work Programs. It has also helped development ofjoint capacity building programs supported by special pooled funds. Alignment has been advanced under GBS and SBS financing modalities(42 percent of aid in 2005) through support provided for capacity building in critical areas of fiduciary, government effectiveness, etc. Significant challenges include; (i)diversifyingsources and modalitiesof financingdevelopment in terms particularly of Rwanda's ability to attract more donors to provide support through Program Based Approaches includingGBS and SBS (66 percent by 2010), and increase the amount of ODA to be "on plan" and "on budget" (80 percent by 2010; (ii)increasing the predictability of funding through front-loading disbursements under GBS and SBS; and (iii)avoidinga pluralist approach concerningdetermination of conditionalityunder the GBS. 10. Most of the persisting challenges that need to be addressed relate to "managing for results" Le. developingand implementinga streamlined monitoring and evaluation and audit system; and movingto mutual accountability with an independent evaluation system. Yet, even here efforts have been made through the recently concluded Common PerformanceAssessment Framework (CPAF) and the Donors' PerformanceAssessmentFramework(DPAF) -to be finalizedin September 2008. 46Budget support donors include: African DevelopmentBank, Belgium,Germany, EuropeanCommission, Netherlands,Sweden, UnitedKingdom, andthe World Bank. 54 Table 1: Rwanda's Donor Coordination Mechanisms Mechanism Frequency of Members Objectives Meetings DevelopmentPartner Everytwo GOR Secretary Forum for dialogue in the Coordination Group months. Generals. coordination of aidto Rwanda. (DPCG) AnnualDPCG Heads ofbilateral Harmonization of donor Retreat. and multilateral programs,projects, and budget Co-chairedby the Secretary Annual donor agencies. support. General of MINECOFIN Development Civil society and Monitor and assist authorities in and the UNRCAJNDP Partners private sector the implementationofthe Resident Representative Meeting. representatives. EDPRS. Fosteralignmentofpartner's interventionswith Government sector strategic and actionplans. Review progress made on Paris Declaration on Aid Effectiveness. Commitmentsunder Partnership Budget Support Four times per Technicalworking Framework for Harmonizationand Harmonization Group year. group ofthe DPCG. Alignment of Budget support: Macroeconomicstability andthe establishmentof an economic environmentconduciveto growth and employment generation. Comprehensiveand effective public financial management. Strongpolicy formulation informed by M&E. Dependingon Cluster and Sector Lineministries Formulation ofmandatesand Group. Working Groups4' Government strategies for each cluster (cross- agencies cutting) and sector. Chairedby the Secretary MINECOFIN General of a line ministry Donors and co- chaired by a lead Other stakeholders donor invited at discretionofthe chair. Aid Effectiveness 11. As noted above, such good practices are moving forward, but progress is uneven depending on planning and management capacities in government at central and at local levels. Donors are also slow in adapting their policies and procedures to the national system. The policies and procedures governing implementation o f programs and projects financed under GBS, SBS or project support are not always consistent. Seemingly and paradoxically, financing, procurement and audit arrangements acceptable to some donors under GBS may not be so for their financing under sector or project approaches. This difference o f policy treatment between financing modalities is explainable by perceived or real fiduciary risks incurred by dealing with different partner ministries, agencies or others at the national and local levels. 41The EDPRSmentions 12 Cluster Working Groupswith 21 Sub-cluster or Sector Working Groups. 55 Monitoring of the Paris Declaration 12. Rwanda participates in the OECD DAC exercise on Monitoring the Paris Declaration. The OECD D A C in its survey on Monitoring the Paris Declaration stated that the Rwandan government and its donors are ushering the aid effectiveness agenda forward, although there i s still some way to go to meeting the Paris Declaration targets for 2010. The implementation o f the Rwanda Aid Policy continues to provide a focus for these efforts. Key challenges and priority actions are summarized below. Table 2: Rwanda Status on Paris Indicators DIMENSION 2007 CHALLENGES PRIORITY ACTIONS Ownership Strong Capacityconstraintsat local Strengthen links andplans at level local level Alignment Moderate Limitedusedof national Step up donor use of public systems, low reportingof aid in financial managementsystems; budget improve data on aid commitments and disbursement Harmonization Moderate Relianceon stand-alone project Develop sector-wide approaches aid inmost sectors inall sectors Managing for Moderate Capacityconstraintsin some line Implement new national Results ministries monitoring and evaluation framework Mutual Low-Moderate Lack of formal mutual Finalize mutual accountability Accountability accountability mechanism mechanismfocused on Rwandan priorities 56 Annex 7: Mapping of Rwanda's DevelopmentPartners Table 1: Multilateral Organizations Lead Donor Active/Silent Partner 48LeadDonor/Co-chairrotates bi-annually. 57 Annex 8: SummaryFindingsfrom IndependentEvaluations 1. Independent Evaluation Group (IEG) conducted a Country Assistance Evaluation (CAE) in 2004. Key recommendations includethat future IDA assistance focus on reducingpovertyand inequality, using the Millennium DevelopmentGoals as an organizingframework. This implies a greater focus on increasing agricultural productivity, diversifying production, and transforming agricultural output into higher value-addedproducts. Inaddition, improvingthe quality of education and human capital, reducing populationgrowth, increasingexports as a percentage of GDP, and enhancing the enabling environment for privatesector development were recommendedas priority areas. Additionally, the CAE recommended that the focus of assistance to the utilities sector be on delivery of the most basic services to the population. Privatization,per se, should not prevail as an objective over reducingpoverty and increasing access to fundamental services like water and electricity. 2. Although Rwandawas not explicitly classifiedas a low income countryunder stress, many o fthe recommendations for those countries are applicable. Increased analytical and advisory services are critical to help enhance development effectiveness. Drawing lessons from the experiences of other countries which underwent profoundsocial and economic dislocationwould be helpfulto country teams. The review further recommends that project design be kept simple and adequate IDA resources be allocatedto ensureclose project supervision. It also statedthat IDA shouldcontinue to closely coordinate its efforts with other donors, with the objective of becoming more selective in its interventions. IEG evaluations of ICRs carried out during this period indicatethat the objectives of programs in a country with limited capacity should be realistically limited to what can be accomplished. Reform agendas neededto be kept simple, focused on priority areas, and consistent with countrycapacity. 3. The Quality Assurance Group (QAG) assessments of the portfolio recommendedthat the teams put greater effort into integration of environment in Bank supervision, and enhanced monitoring and evaluation of the impacts of Bank projects and programs. Task teams needed to carry out mid term reviews of projects, taking into account lessons learned, when preparingadditionalfinancing operations. Additionally, it recommendedthat when working in countrieswith weak implementationcapacity, special attention neededto be paidto past portfolio implementation performance when designing new operations, so it could tailor project design to individual country capacity, and ensure implementationcapacity of units, and work to advance procurement documentation prior to Boardapproval. 58 Annex 9: Portfolio Fiduciary Management 1. Fiduciary performance of the portfolio has overall been satisfactory. Post Procurement and Independent Procurement Reviews conducted in FY07 and FYO8 respectively, rated portfolio procurement processes as being overall satisfactory during the last two years. Procurement processes were judged to be transparent with more information available, quality of procurement documents was found to be good, and a number of procurement staff have been recruited. The assessment noted the significant improvements made since the previous Post Procurement ReviewIIndependent Procurement Review conducted in October 2005.49 Due to this relatively good performance, prior review thresholds were raised (particularly) for new projects. For RSSP 11, thresholds were raised from US$200,000 to US$5 million, and from US$l50,000 to US$500,000 for works and goods respectively, and thresholds were doubled for the ongoing Urban Infrastructure and City Management project, Transport Sector Development project and the East Africa Trade and Transport Facilitation project. Procurement management challenges on the portfolio include managerial and technical issues at different levels, lack of procurement staff in one project, weak staff capacity, and generally result from weaknesses in some elementsofthe systems and processesrather than from deliberate effortsto misusepublic resources 2. Audit reports have been largely received on time. In FY08, 2 audit reports (EFTI and E- Rwanda) were received late partly due to delays in the office of the Auditor General which carried out these audits and in the case of the EFTI, partly due as well to lack of clarity on how the audit would be carried out since the operation had been treated as a Specific Investment Operation rather than as Development Policy Lending Operation. Audits have generally not been qualified. A few audit reports havenot met Bank standardsand overallthere is roomto improvequality. 3 . Fiduciary management of the portfolio is closely linked with the quality of broader public fiduciary management in Rwanda. Rwanda's first Public Expenditure and Financial Accountability (PEFA) Assessment which was completed in 2007 gives a sense of where Rwanda stands on fiduciary management. The report shows that while in some areasthe public financial managementsystem perform strongly, in several other areas considerable strengthening is still needed. Rwanda scored better than comparable Southern and Western African countries and better than countries in the East African Community on several aspects. 4. The main areas of difficulty include (timely) accounting recording and reporting, and external scrutiny and audit. Reporting at decentralized levels, is particularly weak and a key area of risk as increasingresourcesare decentralizedto district levelsand lower down. The process of putting in place a fully functional integratedfinancial management system is ongoingand has not reachedthe stage where it can reliably support the achievement of critical PFM objectives. Other areas of remainingPFM weakness include: budget credibility; quality of sectoral planning and resource allocation decisions; comprehensiveness and transparency of budgets; management o f emerging fiscal risks; budget execution controls, includingpayroll, accounting, recordingas well as external scrutinyand audit. 5. As regards procurement,the government has adopted a number of measures to address the fiduciary risks to the portfolio and to broader public sector fiduciary management. Rwandahas been implementing PFM reforms since 2003. Key institutions for PFM including the Office of the Accountant General, the Office of the Chief Internal Auditor, have been set up. An Organic Budget Law (OBL) and accompanying financial instructions have been adopted and an MTEF is being implemented. ~ 49 Misprocurementwas declared in two projects -Human ResourceDevelopment Project (US$2,029,261) and Competitiveness and Enterprise DevelopmentProject (US$120,045)- in 2005. The misprocurementsrelatedto slicing of contractsto avoid IDA prior review, failure to issue tenders through ICB, wrong shoppingprocedures and single source selection criteria. In both circumstances,the Bank cancelled the amounts. 59 The Treasury Management Committee has been created and the first set of consolidated financial statements for the public sector was preparedfor the year 2006 while those for the year 2007 are awaiting audit. Significant results have also been achieved in procurement performance: (i) a sound legal and regulatory framework has been put in place; (ii) standard bidding documents have been adopted; (iii) institutions and processes4omplying with international standards-have been adopted; and (iv) the Rwanda Public Procurement Authority (RPPA) to regulate and oversee public procurement has been established. A detailed capacity building plan has been prepared and is being implemented through the School of Finance and Banking in collaborationwith external training institutions. But more challenges remain to be addressed includingadequately funding and staffingthe RPPA to become fully operational, training a critical mass of public sector staff in procurement procedures, preparingprocurement manuals for contractingentitiesand widely disseminating the provisionsofthe procurement law and regulations to the public. A Code of Ethics for participantsand provisionfor disclosure for those in decision making positionsis also beingprepared. 6. The Government is about to complete a comprehensive PFM reform strategy based on the findings of the PEFA and other studies in close consultation with development partners. The recommendations of the recently completed Report on the Observance of Standards and Codes (ROSC) Accountingand Auditing also suggestedthat Government focus on a few key areas includingdeveloping the Instituteof Certified Public Accountants of Rwanda under a twinning arrangement with a developed professional body; support curriculumreform, training of trainers; delivery of trainingprograms on IFRS and ISA; and preparation and dissemination of learning materials on IFRS and JSA. The PFM reform strategy will provide a basis for World Bank support to the core elements of PFM strengthening in the CAS period. Support for implementationof the recommendationsof the ROSC are beingtaken forward in the context of the PSCBP, the Multidonor Trust Fund for PFM reform and the support to the financial sector. 7. Rwanda has been selected as a potential pilot country for the use of the national procurementsystem. The essence of use of Countrysystem is that insteadof usingthe Bank'sguidelines and safeguards, the country's own system would be used when it is judged to be able to deliver the equivalent results to the use of the Bank's system. In Rwanda's case a good part of legislative and regulatoryframework is already in place, but more needs to be done to deepen reforms. A World Bank mission reassessed the OECD/DAC benchmark assessment done in 2007, 56% of the foundations of the system are now in place, compared to 41% found earlier in 2007. During the next mission (planned for Sept OS) a series of compliance and performance indicators (17) have been proposed. The assessment will cover the periodJune 07-MarchOS. 8. Successful implementation of the Rwanda Country Pilot for use of national procurement systems will be a key objective during the CAS period. The approach will have the following elements: (i)increase support for implementation of ongoing reforms in order to address remainingsources of risk; (ii)support the implementationof the procurement capacity building program; (iii)regularlyassessprogress;and(iv)seizeearlyopportunitiestoscaleupwhereappropriate. 60 Annex 10: Main Recommendations from June 2008 Country Portfolio Performance Review (CPPR) Theme Recommendations Implementation CEPEX to accept project quarterlyand annualreports in the same format as that provided Arrangements ....to the Bank. Secretary Generals are the Accounting Officers and responsiblefor approvals IncreasinglystreamlinePIUs into line ministries. PIUs shoulduse their budgets to train staff in appropriate areas in addition to recruiting people with the requisiteskills on the outset. Projectteams (particularly Coordinators) to ensure that their teams andor beneficiariesare fully aware of all information neededbefore submissionofrequests for no objectionsto avoid delays indisbursements. CEPEX to continue advocatingbetter pay and facilitation to avoid high staffturnover. Procurement Organize sectors by key actors : Government,Donors ,Privatesector, civil society; avail sector action plans; consolidatebeneficiaries actionplan; avail 12 months consolidated procurementplan. 1 Procurement budget shouldbe accompanied by procurementplan Disseminatenew Procurementlaw and standardbidding documents to stakeholders. . Coordinatetraining efforts by PIUs and finance training for some beneficiaries. Organize consultationswith stakeholders about MIS application/ design. results ... Carry out a quick needs assessment of specific capacity building needsto customizethe capacitybuilding plan. Include in depth analysis of M&E issues inthe Aide Memoire. Involve, more actively, the M&Eofficers ofthe projects in supervisionmissions. Make closer follow up ofthe M&E recommendationso fthe supervisionmission Aide Memoires. Financial Establishmentofceilings for PIUs over which Line Ministry has to take action. Management ... Entry level of projectsto ministries for any approvals shouldbe the Secretary General. To provide technical guidance on managingsingle treasury accounts (CEPEX). 1 Harmonizationofthe reporting format with stakeholders, basically donors. . Projectsto readily share funds flow statementswith MINECOFINto ease monitoring of I budget executionfor externally financedprojects. Use governmentbudget templatesprovided by MINECOFINfor budgetreporting 61 Annex 11:FY03-08CAS CompletionReport Dateof CAS: November21,2002 Dateof ISN: August 16,2006 PeriodCoveredby CAS CompletionReport: FY03-08 CAS CompletionReportPreparedby: Alema Siddiky and RemaN.Balasundaram I. Introduction 1. This report presents an assessment of the Country Assistance Strategy (CAS) for the Republic of Rwandafor FY03-05 and the Interim Strategy Note (ISN) for FY06-08. Therefore, this CAS Completion Report (CAS CR) and any reference to the "CAS period" cover FY03-08. 2. The purposeof this report is to assess the Bank's contribution to key development resultsin Rwanda and to present a set of lessons for future Bank assistance. Specifically, this CASCR: (i) presents Rwanda's long term development goals and highlightsthe country's progress toward those goals; (ii)evaluates the Bank's contributionto country goals by achieving CAS outcome; (iii)highlightsthe performance o f the Bank's portfolio during CAS implementation; and (iv) draws lessons for the new CAS. The report is based on various reference document^'^ and discussions with the Country Team. Furthermore, it draws from Independent Evaluation Group (IEG) and Quality Assurance Group (QAG) evaluations o f Bank performance. 3. Overallprogressduring the CAS period(FYO3-08) is ratedsatisfactory. This overall rating i s based on the sub-ratings for each CAS theme (see section IV for detailed explanation for each rating): Revitalizationo f the rural economy (moderately satisfactory). Private sector development and employment creation (satisfactory). Human and social development (satisfactory). 0 Public financial management and governance (moderately satisfactory). 11.Rwanda's LongTermDevelopmentGoals 4. The Government of Rwanda's (GoR) overall long-term development goals are outlined in its Vision 2020.5' Vision 2020 i s aligned with the MillenniumDevelopment Goals (MDGs) and serves as a basis for GoR's policies, strategies, and actions aimed at fighting poverty. It sets out the country's long term development strategy and articulates ambitious targets by 2020 for increasing GDP per capita to US$900 (from US$230); reducing the number o f poor people to 25 percent o f the population (from 60 percent); increasing life expectancy to 65 years (from 49 years) and increasing literacy to 90 percent of the population (from 48 percent). In 2006, the Government prepared the Vision-2020 UmurengeProgram (VUP), a pro-poor growth and export strategy which targets poverty reducing interventions at the grassroots levels. 5. Rwanda's first Poverty Reduction Strategy Paper (PRSP) provided the medium-term (2002-2006) operational framework for poverty reduction and growth. The PRSP was endorsed by the Board of the Bank and the Fund on August 12, 2002. The PRSP identified the private sector as the main engine o f growth, with the transformation o f agriculture and the rural economy as the leading sources o f growth. The PRSP identified six priority action areas: (i)rural development and agriculture transformation; (ii)human development; (iii)economic infrastructure; (iv) good governance; (v) private ProjectAppraisal Documents, ImplementationStatus and ResultsReports,Supervisionreports(Aide Memoires, Back to Office Reports),ESW, etc. 5' Vision 2020 was prepared in 2000. 62 sector development, and (vi) institutional capacity building. The Government has recently completed its second PRSP, now called the Economic Development and Poverty Reduction Strategy (EDPRS). The EDPRS refocuses Rwanda's priority on growth and human development with an emphasis on decentralization and greater role for the private sector. 6. Annual PRSP Progress Reports (APRs)were prepared by the Government in 2003, 2004, 2005, and 2006. The APRs documented progress towards achieving the PRSP objectives particularly in terms o f establishing the required institutional and legal frameworks, e.g., trade liberalization, privatization, public financial management and decentralization o f government functions. The Joint Staff Advisory Notes (JSANs) by the Bank and the IMF commended the Government on the overall progress in implementing PRSP priorities and rated progress as satisfactory. 7. Rwanda has been able to maintain macroeconomic stability and the growth rate averaged 5.1 percent during 2002-06.52 This growth rate, however, remained below the PRSP target o f 6.5 percent. The average per capita growth rate has been low at 3 percent during 2002-2006, due to high population growth, and low and variable growth in the agriculture and manufacturing sector. The agriculture sector grew at an average o f 4.6 percent (lower than the targeted 5.3 percent). The average annual inflation rate increased from 2 percent in 2002 to 9.4 percent in 2007, due to high food and energy prices arising from low food availability and energy shortages. 8. There was no substantial reductionin poverty over the last few years. Total income poverty declined only marginally from 60.4 percent to 56.9 percent. Rural poverty declined from 66 to 62 percent, and poverty inKigali and other urban areas declined by 3 and 5 percent, respectively. Poverty in Kigali now stands at 20 percent. Major causes o f poverty and inequality are the low level o f agriculture productivity (lack o f land, poor soil condition, and unfavorable weather conditions), high population growth and limited progress in production for the market. Lack o f proper use o f modern agriculture input also slowed down productivity and kept yields significantly below their potential. 111. CAS Strategic Objectives 9. The FY03-06 CAS and the FY06-08 ISN were aligned with the priorities outlined in the Government's PRSP. The CAS focused on four broad themes: i)revitalization o f agriculture and the rural economy; ii) private sector development and employment creation; iii) human and social development; and iv) improvement in the effectiveness o f public actions and governance. The strategic elements o f the ISN focused on: i)strengthening the drivers o f growth; ii)enhancing health, education and social protection; and iii)state building and governance. For the purpose o f this CAS CR, it is necessary to consolidate the CAS and ISN into one assessment framework and four CAS thematic areas (see Table 1). 10. Neither the CAS nor the ISN were "results-based". However, the CAS included 25 CAS monitoring indicators and was aligned with the PRSP Policy Matrix. Based on these CAS indicators, as well as the monitoring frameworks that were established under the series o f PRSGs, a set o f CAS outcomes have been derived for the purpose o f this report. This "retrofitted" CAS results framework is included in Annex 1and progress made interms o f achieving these CAS outcomes are described below. 52The growth rates for 2007 & 2008 are estimatedat 6 percent. 63 Table 1: CASCR EvaluationFrame ork FY03 CAS Themellndicators FY 06 ISNThemellndicators FY 08 CAS EvaluationFramework Theme 1: Revitalization of Agriculture and Strengthening the Drivers of 1. Revitalizationof the rural economy Rural Economy Growth Outcome I,1: Agriculture productivityand Growth of agriculture value added Growthof agriculture value rural incomeraised. Adoption of the LandLaw added. Privatizationof tea & coffee processingplants Percentof asphalted roadnetwork Outcome 1.2:RuralSocial and Economic Proportionof rural and urban householdwith in good condition Services Improved. accessto cleanwater Theme 2:Private Sector Developmentand Strengthening the Drivers of 2. Private sector development & Employment Creation Growth employment creation Divestiture ofthe governmentholding inthe Private investmentas ashare of Outcome2.1: Efficiency of financial bankingsector GDP institutionsimproved. RatioofNon-performingloansto total loans in Domesticcredit to privatesector the bankingsystem. (%of GDP) Outcome2.2: Environment for the private Privatizationof the telephonesystem and the Financialdeepening (M2/GDP) sector improved and competitiveness private managementofthe Total trade as ashare of GDP enhanced. electricity/water/utility Exports as a share of GDP Privatizationof tea factories Outcome2.3: Key state enterprisereformed. Energy sector strategydeveloped and implemented Outcome2.4: Efficiency of infrastructure services improved. Theme 3: Human and Social Development Enhancing Health, Educationand 3. Human and socialdevelopment Rateof HIV/AIDS infection Social Protection Outcome3.1:Expandeducationaccess and Adoption of a strategyfor Educationfor All and Primary school gross enrollment improve quality use of SWAP Primary schoolnet enrollment Netprimary school enrollment Primary completion rate Outcome3.2: Performanceof the health Transition rateto secondaryeducation Ratioof girls to boys in primary care system and services improved. Femaleenrolled in tertiary education(YO) school. Infantmortality rate (per 1000births) Pupil-teacherratio inprimary Outcome3.3: Strengthenpreventionand Maternalmortality (per 1000births) education treatment of HIV/AIDs amongvulnerable Contraceptive prevalencerate Transitionrate to secondary groups. Access of the poor to health education Adopt strategy for Educationfor Outcome3.4: Ex-combatantsdemobilized all and use SWAP and successfullyreintegratedinto civil DPT3 coverageof children society. Infant mortalityrate (per 1,000 births) Contraceptiveprevalencerate Use of bednets. Use of assisteddeliveries Enrollmentin mutelles Prevalence of HIV Populationwith access to improvedwater source Theme 4: Improvement in the effectivenessof Capable Statesand Governance 4. Improving public financial the public actions and governance ImprovePEFA indicators management and economic governance Adoption of the Organic BudgetLaw and the Improve capacityto plan and Outcome4.1: PublicFinanceand ProcurementCode implementpolicies and programs. ExpenditureManagementStrengthened. Adoption of and progress inthe implementation Procurement,public financial of the Planto improve financialaccountability managementand accountability Outcome4.2: Transparency, Efficiency and Preparations of regular account of government Accountabilityof Public Sector Improved. financialoperations. IV. CAS Outcomes CAS Theme 1: Revitalizationof the RuralEconomy 11. The Bank supported Rwanda's effort to renew the rural economy with a focus on implementing measures to improve agriculture productivity, and to improve access to infrastructure and basic rural economic and social services. Table 2 summarizesthe progress in key indicators. 64 Key CAS Monitoring Indicators FY03-08 Progress Growth of Agriculture Value Added. Agriculture value added (in YOo f GDP) declinedfrom 8.3% (2002) to 4.5% (2007). Adoption of the LandLaw. Achieved in2005. Proportionof rural and urban householdwith Increasedfrom 48% (2003) to 71% (2007). access to clean water. Percentof asphalted road in good condition. Increasedfrom 23% (2002) to 40% 2006. 12. Progress under the first CAS theme is rated as moderatelysatisfactory. Progress was made in terms of strengthening institutional, technical and legal frameworks for improvement in agriculture productivity and rural income. Achievements in increasing rural water supply and sanitation have been impressive. The Bank's intervention has been relevant in improving the overall social and economic services in rural areas. Progress towards improving agriculture service delivery was initially slow, due to weak implementation capacity, but the Bank adjusted to this situation through strengthening institutional capacity. 13. Agriculture productivity and growth should continue to be the medium term focus of the future Bank's strategy. Important measures include increasingthe use o f inputs, like water management and harvesting, improving access to fertilizer, seeds and to rural micro finance. Rural farm and non-farm development should continue be a focus o f the Bank's support. Future operations need to focus on improvingrural infrastructure. Outcome 1.1: Agriculture Productivityand RuralIncomes raised 14. This CAS outcome focused on shiftingfrom a subsistence-based to a market-oriented agricultural system by improving productivity, exports, agriculture service delivery and structural reforms to improve rural incomes. 15. Improvements to the institutional arrangements for the agricultural sector. The Bank through a series o f Poverty Reduction Support CreditdGrants (PRSC/G I-III), Institutional Reform Credit (IRC) and the Rural Sector Support Project (RSSP I) supported the Government in undertaking key reforms and investmentsto improve management o f the agricultural sector. In 2004, the Government formulated a National Agricultural Policy, which was operationalized in 2005 with the launching o f the Strategic Plan for Agricultural Transformation (PSTA). In addition to the PSTA, the Rwanda Agriculture Development Authority and the Rwanda Animal and Resources Development Authority were created. A sector MTEF for agriculture was developed in 2005, and aligned with the sector strategic plan and its outcomes. Since 2006, there have been earmarked transfers to districts for sector priorities such as extension services, erosion control, rural infrastructure, hillside irrigation and food security. On the producer level, the RSSP1 strengthened institutional arrangements by providing training to over 5,000 farmers associations. 16. Key marshlands and hillsides rehabilitatedor developed and extension services provided to farmers. Under the first phase o f the RsSP~'~more than 3,018 ha o f marshlands have been rehabilitated and developed for irrigation and 10,089 ha o f surrounding hillsides have been rehabilitated or protected to prevent land degradation and soil erosion. Improved cropping technologies have been provided and beneficiaries trained and encouraged to plant, manage and monitor seedlings. As a result, there's been an increase in rice yield o f over 100 percent (moving from 3MT/ha to 6.1 MT/ha). These investments in 53TheRSSP IAPL (AdaptableProgramLoan) series is seekingto raise the productivityand expand the employmentof resources that the rural poor own or dependon by providingthe requiredtechnology, infrastructure, support services, and institutional capacity. 65 combination with the institutional support of producer organizations and training o f 5,000 lead farmers has laid the ground for productivity-raisinginterventionsin subsequent phases (RSSP2). ''The program initially lacked adequate implementation capacity in the project unit and procurement capacities and suffered from an overly ambitious, dense and complex project design. However, following a project restructuringin 2005, the project outcome startedto improve. 17. The Bank's Agriculture Policy Note and the Country Economic Memorandum (CEM) contributedto policy reforms by identifying key constraintsto agriculture productivityand growth. The CEM highlightedthe need for an increase in agriculture productivity as a pre-requisitefor meeting the growth target in the EDPRS over the medium-term. Recommendationsfrom both studies have also formed the basisfor RSSP2 and shapedthe policy dialogue underthe PRSC/G series. 18. Adoption of a Land Law guaranteeing tenurial security. The acute scarcity of land is by far the most critical constraint facing rural households in Rwanda. The Bank's Institutional Reform Credit (IRC) supported a land policy and law guaranteeing tenurial security and potentially permitting the development of a land market. The new land law also enables women's land inheritance, ownership rightsand resultedin an improveduse of land. Outcome 1.2: Rural Social and EconomicServicesImproved 19. This outcome focused on improving rural infrastructure services particularly in water and sanitation, and access to rural markets and services. 20. Improved water supply and sanitation services in rural areas. Achievements underthe RuraZ Water Supply and Sanitation (RWSS) Project have been impressive: i)408,000 people in 16 rural communities; and ii) about, 65,000 school children in 105 schools gained access to improved water supply and sanitationservices. At the nationallevelabout 600,000 people gained access to potable water (compared with only 60,000 in 2002) and water consumption increased from 5 liters per day in 2001 to 10.7 liters per day in 2008. The PRSC/G series supported the Government's overall reform program in the sector, specifically the highly successful public-privatepartnerships (PPP) of rural water services on the decentralized level. PPP currently manage over 25 percent of the rural water supply and sanitation systems are managedcomparedto 1percent 2004. Overall, access to water increasedfrom 44 percent in 2003 to 71 percent in 2007 settingRwandaon the pathto meet the water MDG. 21. Improved access to market and social services. RSSP I supportedthe constructionof 22 rural markets, 12 km of feeder roads, 19 small bridges, 52 stores, 9 milk collectioncenters and 20 grain drying floors. In addition, 3 agriculture research centers and 3 farmers' service centers have been completed. District schools, health centers, bridges, and local roads were rehabilitatedas part of 141 sub projects facilitated through the Decentralization and Community Development Project (DCDP). A total 14 districts benefited from this project, which supported implementation of Government's "one cow per family" policy. DCDP provided over 440 cows to different provinces (based on poverty levels), constructed shelters and initiated a parallelprogramof soil erosioncontrol. CAS Theme 2: Private Sector Development& EmploymentCreation 22. Duringthe CAS periodthe Bank supported Rwanda's policy and institutionalreforms in addition to investments in infrastructure to develop an efficient private sector that generates employment and enhancedproductivity. '`RSSP 2 is expected to be discussed at the BoardonJune 24. 66 Key CAS Monitoring Indicators FY03-OS Progress Divestitureofthe government holding in the banking sector 3 commercialbank privatized RatioofNon-performing loans to total loans inthe banking Declined from 40% (2002) to 22% (2006) system Privatizationo fthe telephone system (Rwandatel) and the Rwandatelprivatized in 2005. The privatemanagementof electricity/water utility (Electrogaz). Governmentboughtback and sold it again in2007. Electrogazwas placedunder management contract in2003, which was terminatedin2006. Privatizationoftea and coffee processingplants 4 tea factories havebeen sold. Exportsas share o f GDP Increasedfrom 8.3% (2002) to 10.3% (2007) Privateinvestmentas a share of GDP Increasedfrom 11.8%(2002) to 12.8%(2008) Total trade as a share of GDP Increasedfrom 34.3% (2002) to 37% (2007) 23. Achievements under this theme are rated satisfactory. Rwanda made considerable progress in improving the financial sector and modernizing the legal and regulatory framework for commercial and financial transactions. In addition, the banking sector was privatized and regulation and supervision was strengthened. A regulatory framework for microfinance was also created. Most o f the policy measures for financial sector reform outlined inthe CAS and PRSPwere implemented. 24. The business environment improved and key enterprises were reformed, restructured or privatized. The privatization program is almost complete except for Rwandair, Banque de Kigali and few tea factories, which are expected to be privatized in the near future. In addition, a number o f institutional and strategic reforms were developed in some sectors (e.g. coffee, tea etc.) to improve investment and export promotion. The exports in major traditional cash crop (tea, coffee) increased significantly but further export diversification is warranted. Main obstacles to further progress in this area include: lack o f strategic focus, poor coordination among the Government sectors and lack o f capacity to design and implement trade development program and reforms. The new CAS needs to focus on complementing key policy reforms with adequate investment in future Bank operations. 25. Progress has been made in improving short term electricity shortages, access to water in urban areas and improving information technology services. However, much remains to be done in terms o f district and city management capacity and urban upgrading. It is too early in the implementation phase to measure overall impact o f urban services through the Bank's intervention. The Bank's future strategy needs to focus on long term sustainability o f infrastructure services particularly with respect to increased access to electricity. Outcome 2.1: Efficiencyof financial institutionsimproved 26. The objective of the above outcome is to strengthenthe financial institutionsin Rwanda and make them more efficient. Key milestones under this outcome included: divestiture o f Government's holdings in the bankingsector and ratio o f non-performing loans to total loans. 27. Performance of major financial institutions improved. The Bank provided support through the InstitutionReform Credit (IRC) and Competitiveness and Enterprise Development Project (CEDP) to the strengthening o fthe banking sector. Progress in improving the financial sector is commendable: (i)the Banque Nationale du Rwanda (BNR) and Banque Commerciale du Rwanda (BCR) successfully implemented measures to reduce costs, recover defaulted loans and enhance efficiency; (ii)the rate o f non-performing loans declined from 31 percent in 2003 to 22 percent in 2006; and (iii)BCR and the Banque ContinentaleAfiicaine au Rwanda (BACAR), were successfully privatized in 2005 and sold to foreign strategic investors, improving the soundness and competitiveness o fthe banking sector. 67 28. The performance of banks and the Union des Banques Populaires du Rwanda (UBPR) has improved. In 2002, BCR, BACAR and UBPR accumulated a combined loss amounting to about US$20 million. In 2006, the three banks became profitable with a combined profit (before tax) o f about US$8 million. From 2002 to 2006, total loans from these three banks increased by 30 percent compared to 16 percent for other banks. During the same period, total assets increased by 28 percent compared to 19 percent for the other banks. UBPR, which represents a very significant portion o f the microfinance sector, was recapitalized and restructured in 2003 through the Bank's CEDP. UBPR i s now profitable, and with some 500,000 members and assets o f approximately US$80 million, the largest financial institution in Rwanda in terms of market penetration, and the third largest in terms o f assets. Progress was also made toward the transformation o f UBPR into a commercial bank, which i s expected to lead to greater access to financial services for a larger number o f UBPR account holders. 29. Institutional and Regulatory Framework Strengthened. The Bank also supported: i) strengthening o f banking sector regulation; ii)creation of a regulatory framework for microfinance; and iii)establishinganew independentregulator for the insurance industry. Ajoint Bank-FundFinancial Sector Assessment Program (FSAP) was prepared during 2005 identifying a number o f areas for reforms.55 and facilitated the preparation o f the financial sector strategy to strengthen: i)microfinance intermediation, supervision and regulation; and ii)as well as the microfinance policy and regulatory framework. In addition, the Bank assisted the Government to obtain financing from the FIRST Initiative to develop a detailed Financial Sector Development Plan (FSDP), which was completed in May 2007 and has been endorsed by the Government and other stakeholders. In order to strengthen the capacity o f financial institutions, a School o f Finance and Banking was established. The implementation of theFSDP is now being supported by the CEDP. Outcome 2.2: The environment for the private sector improvedand competitiveness enhanced 30. This outcome concentrated on streamlining the business environment and improving exports in major cash crops to enhance investment 3 1. Investment Climate Improved. With support from the CEDP, PRSC/G I-111and a Regional Trade Facilitation project, the Government made considerable progress in improving the business environment. Some major achievements are: (i)14 commercial laws were improved and harmonized; (ii) the Investment Code was revised to align with the Tax Code; (iii)four commercial courts have been created; and (iv) judicial procedures were simplified by streamlining appeals and imposing time limits speeding up contract enforcement. The resulting time and cost saved by businesses have been substantial and it has also led to more businesses usingthe court system. Progress has also been made in reducing the time required to establish a business and improving the overall legal framework and contract enforcement. Doing Business 2008 reported that it took 16 days to open a business inRwanda down from 40 in 2003. To further improve this performance, the IFC investment climate reform advisory project recently started to provide technical assistance on business licenses/permits and trade regulations. The Investment Climate Assessment (ICA) in 2006 covered 340 firms and a range o f industries. The preliminary findings and recommendations of the ICA regarding the perceived major business constraints (poor infrastructure, access to finance, taxation and business regulations) is being used to guide the new CAS and subsequent operations. 55The FSAP recommendations included: i)enhancingthe CentralBank of Rwanda's (BNR) autonomy and supervisory powers; ii)upgradingaccounting,auditing,creditinformationandpaymentsystems; iii)strengtheningthelegalandregulatoryframework for the non-bankfinancial sector; iv) developing more active money and foreign exchange markets; and v) modernizingthe judicial framework. 68 32. Exports and investment promotion. The Bank supported strengthening of the Rwanda Investment and Export Promotion Agency (RJEPA) to assist potential investors and deliver required approvals, certificates and work permits for new investment projects. A time-bound and monitor-able Export Promotion Strategy and Action Plan were developed based on the result o f the Diagnostic Trade Integration Study (DTIS). As follow-up to the study, an area close to Kigali Airport is currently being designated as an export processing zone. A law was passed in 2003 to define the role o f OCIR-tea and OCIR-cafe (former commodity marketing boards for tea and coffee), to improve the capacity o f small holders and facilitate their access to inputs. Overall, exports as a share o f GDP increased from 8.3 percent to 10 percent between 2002 and 2007. Private investment as a share o f GDP increased from 11.8 percent to 12.8 percent between 2002 and 2008. 33. Exportsof the key commoditiescoffee and tea increased. The Bank supported implementation o f the Fully Washed Coffee Strategy helped to increase the volume and production o f fully washed coffee and the number o f coffee washing stations increased from 11 in 2002 to 84 in 2006. As a result, coffee exports increased from US$15 million in 2003 to US$35.7 million in 2007. The average price paid to coffee producers increased from RwF60 per kilogram to RwFl10 per kilogram during 2003-2005. Tea production increased steadily from 13 million kilograms in 2004 to 16.6 million kilograms in 2006 and receipts from tea exports increased from US$22 million in 2003 to US$32 million in 2007, despite slow progress experienced in the privatization o f tea factories due to difficulties in attracting both foreign and domestic investors. The Bank assisted the Government to restructure the remaining tea factories. In addition, the Bank supported capacity building activities for farmers and tea cooperatives to empower them and enhancethe quality o ftea produced. Outcome2.3: Efficiencyof infrastructure services(energy, urban, transport, water) improved 34. This outcome sought to improve the quality o f energy (electricity, telecom) and water services, improving access to urban services by strengthening urban institutions and rehabilitatingand maintaining major roads. 35. Reduced electricity supply shortages. The Bank responded to severe electricity supply shortages in 2004 (due to depleted hydroelectric reservoirs, lack o f investment in new generation, a dilapidated network and sharp increase in demand) and supported implementation o f Government's emergency action plan through the Urgent Electricity and Rehabilitation Project (UER). The UER project initially experienced delays in the main generation investments as well as the rehabilitation o f the electricity network. In addition, limited capacity created challenges in project implementation for which the Bank soon provided direct technical support. Furthermore, policy dialogue within the PRSG facilitated to provision o f extra funding to increase electricity generation capacity. The Government also responded quickly to initiate progress on Lake Kivu methane gas development. A 35MW power plant from Lake Kivu is being prepared with support from the Bank and IFC. The Bank is supporting the Government in arranging a Sector Wide Approach (SWAP) which will improve the electricity coverage from current 4.5 percent to 15-16 percent by 2012. 36. The performance of the utility companies improved. The PRSG/C dialogue also contributed to the establishment o f the Rwanda Utilities Regulatory Agency (RURA) as a multi sectoral regulatory agency to oversee private investments in water, electricity and telecommunications. Although RURA is fully operational its capacity to function effectively and independently remains weak. The structure o f telecommunications licenses was reformed in 2006 to increase competition and in September 2005 the state-owned operator Rwandatel was sold to a private investor. However, the Government was not satisfied with the low level of investment and poor performance o f the company and decided to buy back the company in July 2007. The Government sold again 80 percent o f the company to foreign investors 69 for US$lOO million (five times higher than the first privatization) in November 2007. The new investors are expected to bring additional investmentso f more than US$200 million. 37. Improvements in the electricity and water utility. In 2003, Electrogaz (electricity and water) was placed under a five year management contract to restructure the company prior to partial or full privatization. The Bank advised the Government to improve the efficiency o f the company and to mitigate the 2004 power shortage. Tensions o f dealing with the shortage eventually led to the Government terminating the management contract and transition to a Rwandan management team in 2006. Electrogaz has now embarked on critical reforms to improve its performance and has recently made some strides in its financial performance. The CEDP project helped purchase the equipment and software to improve EZectrogaz quality and services. The number o f connections for water and electricity increased from 28,150 and 48,581 in 2001 to 47,276 and 86,537, respectively, in 2007. 38. Improved quality and access to urban services. The Bank's primary support through the Urban Infiastructure and Development Project facilitated the improvement o f infrastructure and urban services in Kigali and two secondary cities. Since the effectiveness o f the project in June 2006, all priority city-wide and district level investment programs are under execution and ready to be handed over to the beneficiary local governments in Kigali and Ruhengeri (reaching about 150,000 people). Slum upgrading and low income land development areas pilot projects are being implemented but more slowly due to the novelty o f the approach and weak capacity o f local governments. The project aims to strengthen local authorities through training programs and to improve municipal and urban management. The PRSC/G series supported the Government's adoption o f a water policy and law, and developed guidelines for district level contracting o f private water supply and sanitation operators. In addition, donor coordination and sector expenditures improved over the CAS period resulting in improving the effectiveness o f strategy development and financing in this sector. The PRSG helpedthe Government to move from a project to a sector wide approach and from a centralized to a decentralized one with districts fully in charge. The Government successfully implemented district water supply projects directly financed from the national budget. This contributed to the increase in water access (from 48 percent in 2003 to 71 percent in 2007) mentioned above. 39. Progress has been made in Information Communication Technology (ICT). The Bank financed PRSG series, along with the Public Sector Capacity Building Project (PSCBP) and eRwanda project have helped implement Government's National Information and Communication Infrastructure (NICI) plan. E-ICT has provided training to 994 people in various computer skills. In addition, through "computers in school initiatives" 1,138 laptop and 2000 computers have been deployed to primary and secondary school respectively. About 1,000 teachers have been trained in basic computer literacy and have been deployed to 120 primary schools. Furthermore, a number o f urban and rural schools including 40 schools in Kigali city now have internet access. In addition, the PSCBP provides training to civil servants and parliamentarians. 40. Improved access and reduced transport costs. The recent Transport Sector Development Project supports rehabilitation o f key infrastructure, employment generation in rural areas, improving road maintenance, and restoring sector capacity. The project is still in an early phase, but already helped to set transport targets for the new EDPRS and address policy weaknesses that had been identified in Bank assessments. The DTIS notes that infrastructure costs (particularly transport costs) lower returns to farmers and pose a substantial constraint to trade and export. The policy dialogue through the PRSC/G series helped the Government to adopt a transport policy framework. The framework aligns transport objectives and processes with the macroeconomic agenda in addition to monitoring sector performance with regards to reduced transport costs and transit times. 70 CAS Theme 3: Human and SocialDevelopment 41. The Bank's strategy focused on improving service delivery in education, health, HIV/AIDS and demobilization and reintegration o f ex-combatants. 42. Progress under this theme is rated as satisfactory. In education, there has been significant progress toward the CAS outcome o f improved access to education but quality remains a challenge and improvements in this area will require more time. The education system at primary level needs to be better aligned with future labor skills and a long term policy to professionalize teaching needs to be developed. This would include improving teacher qualifications and strengthening capitation grants with a focus on results. 43. Access to health care facilities and health management improved. Roll-out o f health insurance schemes (mutuelles)and performance based contracting improved access to health services for the poorest. As a result, infant and under-five mortality rates declined substantially in the last few years, puttingRwanda on a path to potentially reach the MDG target. Despite this progress, challenges remain to reduce physical, geographic and financial barriers to accessing high quality services. The Bank needs to continue to work toward improving reduction in mortality and morbidity rates, and support the Government in sustaining and expanding affordable health care facilities. For the future strategy it would be beneficial to put into place better mechanisms to monitor the impact on the ground. 44. The Bank contributed significantly to improved prevention and treatment of HIV/AIDs. The Bank's intervention successfully combined information about HIV/AIDS, reproductive health, and life skills with income generating activities. It helped to establish solidarity mechanisms bringing vulnerable people (mostly children and women) together and design their own solutions. The M A P project complements PRSC/G activities to create synergies between different instruments for most effective Bank support. The current H N prevalence rate o f about 3 percent is unfortunately difficult to compare with earlier figures, but there is evidence that infections declined. 45. There's been satisfactory progress in re-integrating and demobilizing ex-combatants. The Bank's support contributed to consolidate peace in the Great Lakes region and foster reconciliation within Rwanda inthe long term. Outcome3.1: Expand education access and improve quality 46. This outcome focused on expanding education access and services. Key CAS MonitoringIndicators FY03-OSProgress Net primary schoolenrollment. Increasedfrom 73.3% (2002) to 95% (2007). Transitionrate to secondary education. Increasedfrom 42% (2002) to 54% (2007). Femaleenrollment intertiary education. Increasedfrom 28% (2002) to 39% (2007). Pupil-teacherratio in primary education. Increasedfrom 58:l (2002) to 71:1% (2007). Primary completionrates. Increasedfrom 29.6% (2002) to 52% (2007). 47. Access to basiceducationimprovedbut quality remainsan issue. Under the Human Resource Development Project (HRDP) and PRSC/G (I-111), the Bank provided technical and financial support for rehabilitation and construction o f schools; training teachers and development o f capitation grants for primary schools, creation o f sector MTEF and provision o fDistrict Education Funds to promote access to the vulnerable segments o f the population. Access and completion numbers improved (see Table 5), but the latter in addition to other quality indicators (e.g. transition rates to secondary education) still warrant 71 further efforts. in addition, the number of teachers did not increase in parallel with a rapid expansion in primary education enrollment. However, the proportion o f qualified teachers increased from 63 to 87 percent between 2001 and 2006. Limitations the recruitment and training of new teachers is hampered by capacity constraints at national and local levels. 48. Improved education sector policy framework. The Bank supported the adoption of an Organic Education Law (2003) and an Education Sector Strategic Plan (ESSP), which delivered a number o f significant policy changes. The introduction o f free compulsory primary education has helped widen the access to education. Capitation grants (transfer per student) increased dramatically from RwF300 per student in 2004 to RwF 5,300 (about US$lO) per student in 2007. The provision o f capitation grants directly to schools improved their purchasing power, which-combined with the decentralization o f the recurrent budget from 41 percent in 2006 to 51 percent in 2007-facilitated community involvement and accountability in service delivery. The Government completed a Long Term Strategy and Financing Framework (LTSFF) for the next ten years (2006-2015), which donors endorsed. In 2006, Rwanda qualified for support under the Educationfor All-Fast Track Initiative (EFA-FTI). 49. The Bank prepared a Country Status Report for Education (CSR) to provide a better understandingof the education system in Rwanda. The report was used as an analytical background for the preparation o f PRSG 1. The study also benefited Government and development partners as a useful tool in discussing Rwanda's vision for the education sector and implementing government policies. Outcome 3.2: Performanceof the healthcaresystem and services improved 50. Bank support concentrated on enhancing the quality o f health facilities (through a contractual approach)56and expansion o f drug and rnutuelles insurance coverage. Key CAS MonitoringIndicators FY03-OSProgress Utilization of insecticidetreated nets. Increasedfrom 4% (2005) to 70% (2007). Assisted deliveries at birth. Increasedfrom 29% (2000) to 39% in (2005) to 52% (2008). Immunization Coverage. Increasedfrom 83% (2001) to 98% (2007). Under-5 mortality (per 1,000 births). Decreasedfrom 198 (2001) to 103 (2008). Infant mortality (per 1,000 births). Decreasedfrom 107 (2001) to 86 (2005). Maternal mortality (per 100,000). Decreasedfiom 810 (2001) to 750 (2005). Contraceptiveprevalencerate. Increasedfrom 7.9% (2000) to 27% (2008). 51. Health services improved through performance-based contracts. The Bank supported the health sector through its technical support and policy dialogue under the PRSUG series. The Bank also prepared an analytical report called Health and Poverty in Rwanda with recommendations that influenced the key reform measures taken under the PRSUG. The PRSC/G operations played a vital role in strengthening the overall health system in Rwanda through a performance-based contractual approach which was piloted in several districts in 2005 and scaled up nationally in 2006. This community health scheme transferred around US$0.50 per capita directly to municipalities to engage community institutions, NGOs, associations of health promoters, and private operators in the delivery o f essential services. In 2006, the Government signed contracts with 30 municipalities and in 2007, the contractual approach was further expanded to all district hospitals. Community health insurance coverage increased from 7 percent o fthe population in 2000 to 75 percent in 2007. 56Contractualhealthapproaches are community healthschemes with a focus on performanceof service providers. 72 52. Increased affordability of health services. The PRSGs promoted reforms to strengthen the community health insurance system (mutuelles), which enables access to health services at affordable costs. MutuelIes have been piloted over the last five years and the coverage o f their coverage increased from 27 percent o f the population in 2004 to 70 percent in 2007. Government transferred funds to cover premiums for the poorest increased from US$l per capita in 2002 to US$8 in 2006. The Government is currently in the process o f creating district pooled funds and fund for reinsurance. Outcome3.3: Strengthen preventionand treatment of HIV/AIDS amongvulnerable groups 53. Bank support focused on strengthening the full range o f preventive measures for people living with HIViAIDS and on improving capacities at all levels to manage a national response. 54. HIV/AIDS services and treatment expanded. The Bank supported Rwanda's HIV/ALDS initiative through the HIV/!IDS Multi-Sector Project (MP), which led to the following results: (i) voluntary counseling and testing provided to about half a million people; (ii)12 million condoms distributed; (iii)5,000 patients placed on life saving anti-retroviral therapy; (iv) financial assistance for school fees provided to about 27,000 orphans and vulnerable children; (v) access to community health insurance schemes subsidized for over 52,000 households; and (vi) 100,000 individuals participated in income generating activities. The capacity to diagnose, treat and follow up on AIDS patients has been established at 12 district hospitals and a health center. The MAP program is currently being decentralized to an additional 18 health centers and additional financing o f US$lO million was approved by the Board in February 8,2007.'' 55. The performance based contracting resulted in rapid expansion of HN services and stimulated innovations in service delivery (e.g., outreach activities to expand HN testing, promotion couple testing). The MAP project was reviewed by the Quality Assurance Group (QAG) which found the Bank's performance fully satisfactory and commended the team for the speedy preparation and the high quality o f the work. Strategic relevance, timeliness, policy and institutional aspects and implementation arrangements, and Bank inputs and processes were rated Highly Satisfactory. The QAG review also highlighted the need for more intensive supervision o f the environmental aspects and for better documentation o f the gender and social dimension o f the project. Outcome3.4: Ex-combatantsdemobilizedand successfully re-integrated into civil society. 56. The overall objective o f this outcome is to demobilize ex-combatants and support their transition to civilian life, help them reintegrate socially and economically and facilitate the reallocation of government expenditures from security to social and economic sectors. 57. Ex-combatants demobilized and successfully re-integrated into civil society. Through the Rwanda Emergency Demobilization and Integration (RLIRP) project, the Bank supported reintegration o f 20,039 former soldiers from the armed forces and 6,423 former militias (with the goal being 16,000) and support their transition to civilian life. The project beneficiaries have already started reintegrating into community networks, local economies, and social protection mechanisms. 57The additional financing will fill an unanticipatedfinancing gap and consolidatethe gains from the initial investments, focusing on interventionswith the most significant impact inHIV/AIDS prevention, treatment and care. 73 CAS Theme 4: Improving the effectiveness of public financial management and economic governance 58. The Bank strategy concentrated on improving economic governance and transparency, particularly through institutional and regulatory reforms to strengthen capacity in public financial managementand procurement includingat decentralized levels. Key CAS MonitoringIndicators FY03-08 Progress Adoption ofthe OrganicBudget Law andthe ProcurementCode. Submittedin2005. Adoption of andprogress inthe implementationofthe Planto Procurementcode submittedto parliamentin improvefinancialaccountability. 2006. Preparations ofregularaccount of governmentfinancialoperations. FinancialSector DevelopmentPlan(FSDP) comdetedin2007. 59. The progress under the CAS theme is rated as moderatelysatisfactory. Public financial and expenditure management in Rwanda improved during the last four years. Despite Rwanda's weak institutional capacity the planned reforms envisaged under the CAS period have been implemented. In particular, the Bank supported operations helped to improve its budget planning and operations and strengthened the PFM system. Some accomplishments have been made in terms of improving service delivery in local government and bringing in results, capital improvement in rehabilitatingschools, new health centers etc. Citizen's voice and accountabilitywas strengthenedthrough adoption o f citizenreport cards and community score cards. However, progress in buildingcapacities within public institutionshas been slow. Infuture efforts are neededto improvecoordination, building capacity among sectors, central and local governmentsto improvethe overallPFMprocess. Outcome 4.1: Public Financeand ExpenditureManagementStrengthened 60. This outcome focused on improving public finance and expenditure management through more transparent budget formulation, execution and reporting. It sought to strengthen the linkages between strategic planning, the MediumTerm ExpenditureFramework(MTEF) andthe national budget. 61. An improved budget process. The PRSC/G series supported the 2006 Organic Budget law to support more accurate identificationof capital investmentandrecurrentexpenditures and better alignment of budget spending with policy priorities. A Joint Monitoring System was introduced in 2003 with a computerizedfinancial software package. The system of zero balanceaccount is operationaland now all Government budget agencies are using zero balance sub accounts. All sector ministries and districts adopted MTEFS, which helpedto improve budget predictability,budget preparation, implementationand monitoring. Except for the district level, where MTEF's are not yet aligned with available resources. The 2003 PER highlighted the problem of late expenditure release and pointed to difficulties in budget preparation. 0 62. Public Financial Management Reform Agenda Implemented. The Bank supported implementationof the the public financial management reform agenda through the Institutional Reform Credit (IRC), the PRSC/G series andthe Public Sector CapacityBuilding Project (PSCBP) and important analytical work such as the Public Expenditure Review. This agenda includes a range of interventions including (i)the adoption of the Organic Budget Law (2006); (ii) the appointment of the Government Chief InternalAuditor and Accountant General; (iii)adoption of the SMARTGOV budget system; and (iv) establishment of the Treasury Management Committee. Despite implementingkey reforms in the PFM area capacity in public accounting remained a key challenge during the CAS period. Rwanda continues to experience a shortage of qualified professionals to meet the needs in public financial 74 management and procurement. The Bank along with other donors repeatedly highlights the need to strengthen Government's leadership and coordination in PFM reforms in order to accelerate implementationof PFM reforms. To provide additional support to the reformprogram, the development partners established a Multi Donor Trust Fund for PFM Reform. A Public Expenditure and Financial Accountability Assessment (PEFA) was carried out and the GoR will use its findings to update the PFM actionplan. 63. Procurement reform agenda implemented, albeit with some delays. The PRSG series supported reforms in the procurement system and the Country Procurement Issue Paper identified the weaknesses in the procurement system and prepared an action plan for the Government. A new procurement code was introduced in 2005 and a new National Tender Board (NTB) introduced the principles of good practice in the public procurement system. However, in general implementation of procurement reforms have been slow. This has been attributed to a lack of strong leadership of the procurement reform agenda, the lack of coordination o f all ministries in charge of implementation, and the absence of a comprehensive action plan. PSCBP provided local and internationalexperts to work to improve the procurementcode, which was gazettedinApril 2007. 64. Training provided to professionals in PFM and Procurement. The Government, in close collaboration with the Bank and DfID prepared and adopted an action plan to improve financial accountability based on the FinancialAccountability Review and Action Plan (FARAP) in 2003 which identifiedlack of human resource capacity inaccounting and auditingas a major constraint. Through the PSCBP a Multi-Donor Trust Fund was established to provide technical assistance and skills building in line with the PFMaction plan. The PSCBP providedtrainingon drugs and health supplies and supported preparation of a longterm procurement strategy and action plan. Outcome 4.2: Transparency,Efficiencyand Accountabilityof the Public Sector Improved 65. This outcome focused on strengthening the capacity of the public sector in a transparent, accountable and efficient way, and enhancement of citizens' voice to provide good governance and service provision. 66. Improved accountability towards citizens. Government institutions were strengthened after successful adoption of a new constitutionin 2003. The judiciary was separated from the executive and legislative and the Office of the Prosecutor General and Office of Ombudsman were created. The PRSC/G series supported citizens report and community score cards (CSCs) for education and health in 2006 aimed at: (i)improving the dialogue between frontline service providers and users; (ii) promoting individuals and communities ownership of evaluation outcomes; and (iii)and broadening citizen understandingof policies,strategies and implementation processes. 67. Public sector reforms implemented. The Public Sector Capacity Building Project (PSCBP) focusedon improvingthe efficiency, transparency and accountabilityofthe public sector. Initial progress was slow, but key activities picked up during FY07. The Human Resource and Institutional Capacity Development Agency (HIDA) was established as a coordinatingagency inNovember2004 and a Multi- Sector Capacity Building Program was launched in October 2005. HIDA has now recruited qualified staff and is fully operational. Implementationof public sector reforms has progressedwith a functional review of six core ministries and a comparative pay study. The Bank provided support to sector ministries but progress has been slow due to lack of overall strategic engagement by ministries. The project further facilitated skills audit of public, private and civil societies which will culminate in the development of a national skills development policy. The coordination mechanism of public sector reforms remains weak and the Bank through its policy dialogue encouraged the Government to improve the functioningcoordinationmechanismacross government, 75 68. Service delivery decentralizedfrom central ministriesto district and sector level. The Bank supported Decentralization and Community Development Project (DCDP) facilitated the capacity development o f local governments. The project tripled its geographic coverage since effectiveness and established a Sector Wide Approach (SWAP)for decentralization. When the TerritorialReform Program in early 2006 consolidatedRwanda's districtsfrom 106to 30, it playeda key role in financingorientation programs in all 30 district offices. All districts have created five-year development plans and 100 percent o f the participating districts have completed training in basic financial management, procurement and M&E. Rwanda's service delivery has been decentralized and the size of the central administrationhas been reduced from 2,000 staff to 500 in 2006. The Bank has been successful in strengthening, empowering and improving accountability of local governments to communities through community development initiative and income generatingactivitiesfor the poor. V. Bank Performance 69. The CAS was implemented under the base case scenario in the range of US$250-$317 million, including about US$lOO million in IDA grants. During FY03-06, 8 out of 7 operations plannedunder the base case scenarios were delivered. The second phase of Rural Sector Support Project (RSSP Il)was not delivered as planned instead the Urgent Electricity and Rehabilitation Project (US25 million) was approved. In addition, under the ISN strategy, four more projects were delivered during FY07with a total amount ofUS$71 million. 70. The Bank successfully shifted its choice of instruments during the CAS period toward increased budget support. The Bank has respondedflexibly in assisting the Government's development needs and moved increasingly towards budget support. As discussed above, the implementation of the PRSC/G series has been successful with achievements far exceeding expectations. Bank internally it succeeded in creating an effective multi-sector team and externally it built foundations for increased donor harmonizationand strengthened cross-sectoral linkages. In addition, investment lending through demand-driven projects like the Rural Sector Support Project (RTSP), and the Rural Water Supply and Sanitation Project (RWSP) playedan important role especially with respect to capacity constraints at the local level. The Bank also showed flexibility andthe in case of the Urgent Electricity and Power Project facilitatedBoard approval within only six months to successfully address the emergency power shortage situation. 71. The Bank has delivered more analyticalwork than planned initially but dissemination has been limited. Annex 2 shows the broad range of AAA undertaken by the Bank. This increase in AAA was consistent with the IEG CAE 2004 recommendations that called for more AAA to enhance development effectiveness. However, the Bank's work was not always properly aligned with the operations or sequenced properly. For example, the Country Economic Memorandum (CEM) was only delivered towards the end and-as originally planned-at the beginningof the CAS period. The CEM was delayed due to various activities needed to support the move toward budget support. Furthermore, since many analyticproducts are informalto respondto shiftinggovernment needs, it is difficult to get an accurate evaluation of actual number of AAA and their impact. However, as the above assessment tried to show, the Bank's analyticalwork is influentialin framing policy dialogue in Rwanda. Going forward, analytical work should be utilized more effectivelyto broadenthe development dialogue with government and development partners. Quality of the Portfolio: 72. The overallimplementationof the portfolioduring the CAS period has been satisfactory (11 projects) with only one project (Public Sector Capacity Building) rated as moderately satisfactory. 76 Among the regional projects affecting Rwanda two projects have been rated as moderately satisfactory while one project has been rated as satisfactory. However, Rwanda's portfolio performance58improved from 4 (out o f 6) percent problems at risk in 2003 to 2.5 percent at risk in 2004. There was one problem project (Rural Sector Support Project) and one project at risk due to several flags (Emergency Demobilization and Reintegration Project). 73. Rwanda's portfolio improved significantly. The portfolio quality was evaluated in December 2004 and since then considerable focus was given on implementation and improvement o f the quality o f the portfolio. Several components o f the problem projects were re-designed, which led removal o f several risk flags. Each project has a country record flag except e-Rwanda and Urgent Electricity and Rehabilitation (UER) project with currently two flags (effectiveness delay and M&E respectively). On the overall program, Rwanda's portfolio has been stable duringthe CAS period in "realism, "pro-acti~ity~~ (both at 100 percent) and disbursement ratio (10.8 percent compared to 5.4 percent Africa average). This reflects accelerated implementation o f projects especially at decentralized levels. The progress i s due to an improved staffing strategy o f PIUs, close monitoring from the government and the Bank team. 'able 7: Rwanda Portfolio Performance FY03-08a/ # of Projects 9 10 10 11 12 12 NetCommitmentAmount ($ mil) 296.8 311.8 276.1 291.8 315 334.6 Disbursement Ratio (%) 13.7 13.1 24.5 13.7 10.8 46.8 IDA Disbursement ($ mil) in FY 71.1 47.8 138 32.6 14.1 133.9 # o f ProblemProject 0 2 1 1 0 0 % of ProblemProject 0 22 10 9 0 0 % ofProject at Risk 0 1 0 1 0 0 Commitment at Risk ($ mil) 0 68 48 35 0 0 % ofcommitment at risk 0 21.8 17.4 12 0 0 Pro-activity Index % 100 d a 50 100 100 d a RealismIndex% 100 d a 100 100 100 d a a/ Some ofthese ratios may be different from those reportedin Annex 15 due to differences in database extrac time. 74. The Quality Assurance Group carried out five QEAs (quality at entry assessments) of projects in Rwanda.59The findings indicate that in the more recent projects between 2005 and 2007, exemplary collaboration between external donors, in the private sector led to good outcomes. Additionally, superior country knowledge o f tasks teams and task managers for preparation and implementation o f projects, excellent team work o f various Bank units, and strong borrower commitment, demand-driven design and donor coordination contributed to good results in the projects. The QAG panels recommended that the teams put more effort into integration o f environment into Bank supervision, enhanced monitoring and evaluation o f the impacts o f Bank projects, taking into consideration o f weak implementation capacity when designing new operations, tailor project design to individual country capacity, ensure implementation units have minimum staff, and advance procurement documentation prior to Board approval. 58 Portfolio performance is based on the percent ofprojects inthe portfolio considered"at risk". 59 QAG carriedout an assessment of the RwandaNational Water ResourceManagementProject, in its Dropped Lending Review2008). The Rwandaproject receivedarating of MSinvalue for money, and an S rating for Quality of Process. 77 Table 8: QEA Reviews under CAS Period Date Assessment Overall Approved Date Rating QEA RwandaInstitutional ReformCredit 12/03/2002 07/01/2003 3 RwandaPublic Sector Capacity Building TAL (FY05) 07/08/2004 03/30/2005 2 3A-Telecommunications APL (FY07) 03/29/2007 08/21/2007 2 RW eRwanda TAL (FY07) 09/07/2006 06/22/2007 2 RW Multisector HIV/AIDS-AdditionalFin. (FY07) 02/01/2007 04118/2007 2 75. The quality of procurementand capacity remained one of the major challenges for project implementation during the CAS period. This was due to: (i)lack o f understanding o f the Bank's procurement process ; (ii)limited capacity o f staff in charge o f procurement; (iii)absence o f general consensus that procurement i s a necessary tool for successful project implementation; and (iv) weak commitment to improve the overall quality o f procurement practices. A 2006 Country Portfolio Performance Review (CPPR) conducted jointly with the Government recommended that for the long run the Bank needs to continue building capacity at the technical level and also at the decision makers level. In addition to procurement issues, difficult administrative procedures and processes resulted in slow project implementation. This includes delays in appointing key staff, protracted consultant recruitment and weak financial management capacity. To ensure sustainable improvement o f the portfolio performance, a multi-dimensional strategy needs to be agreed on and implemented by the government itself as well as government institutions and various entities with the financial and technical assistance from the Bank. 76. The capacity for monitoring and evaluation (M&E) at the project level has been weak. Most o f the projects lacked good design o f M&E and did not have effective functioning M&E systems in place either. This made tracking o f project results and measuring impact difficult. In some cases indicators at the project level did not match CAS indicators which tended to be focused on outputs rather than on outcomes. The future CAS needs to address these during the preparation and implementation o f future lending. 77. IEG evaluations of IC&: During the CAS period IEG evaluated two ICRs, The Rwanda Institutional Reform Credit (IRC) and an Agricultural and Rural Market Development (LE). The IRC received a Moderately Satisfactory Rating from IEG on outcome, and the LIL received a Satisfactory rating. For lessons learned IEG stated that the objectives (of the IRC) in a post conflict country with extremely limited human capacity should be realistically limited to what can be accomplished. Reform agendas should be kept simple, focused on priority areas, and consistent with country capacity. In the Agriculture LIL, IEG stated that the project showed that in a country like Rwanda it i s possible to develop a viable, privately operated and sustainable input supply system, under the right set o f policies, incentives and institutional mechanisms. Aid Coordinationand Harmonization 78. The Bank worked effectively with its development partners. Rwanda is one o f the pilot countries for budget support harmonization initiated during the Strategic Partnership o f Africa (SPA) meeting in 2002. In 2003, the Government and budget support donors (AfDB, DfID, EU, SIDA and the Bank) signed the Partnership Framework for Harmonization and Alignment o f Budget Support and 78 PRSG-I was the first budget support operation prepared under this framework. This framework has improveddonor coordination, decreasedoverlap andreducedtransaction costs for the Government. 79. On harmonization, the Bank supported PRSG facilitated the development of a calendar to align future donor reviews and support with the government's PRSP and BudgetCycle. Donors and the Government worked in partnershipwith the Government on the development of sector strategies and MTEF which served as a basis towards SWAP. Bi-annual budget execution review and joint public financial managementreview is institutionalized. A Joint sector review which informs the joint budget review was established in 2002. The education and health sectors have been active, and the agriculture and water sector made tremendous progress over 2005 and 2006. The Bank also supported joint analytical work. The FinancialAccountabilityand Review Action Plan (FARAP) was jointly completed by DfiD and the World Bank. The Bank used its comparative advantage in the areas of procurement reform and prepared the Country Procurement Issue Paper (CPIP) which all the donors endorsed and shared the final results. The World Bank is represented in 12 of the 15 sectors in Rwanda. The World Bank is the largest multilateraldonor in Rwanda, and plays an important role inthe Development Partner Group. The launch of the EDPRS has forced the Bank to play a more enhanced and significant role in additional sectors. Currently the Bank co chairs the Rural Development Cluster, the Energy Sector WorkingGroup, and the GovernanceWorkingGroup. The Role of IFC 80. The role of IFC during the CAS periodwas limited, but has been increasingly growingover the last few months. IFC providedtechnical assistance in collaborationwith the Bank's Competitiveness and Enterprise Development Project (CEDP) through the Rwanda Investment Climate Reform advisory project particularlyon commercial law reform, capacity building activities of REIPA, promoting public- private dialogue and supporting the government's Doing Business (DB) reform action plan. In addition IFC also providedtechnicalassistance in collaborationwith the CEDP project inthe area'of privatization, small and medium enterprises (SMEs) and the financial and industrial sectors. LFCjointly with the PSD department of the Bank and the Development Marketplace has supported the design and implementation of a businessplancompetitionin Rwanda, through a collaborativeeffort with the private sector federation and the Rwanda Development Bank. IFC is working closely with IDA in exploring the possibility of participation and investment in: (i) Lake Kivu Methane Gas Project; (ii)an expansion of Intraspeed SA RwandaLtd (ISARL), a freight and forwardingcompany operating in the Great Lakes Region of Eastern Africa (US$5 million); (iii)financing to potential investors that may be interested in buying hotels; and (v) the privatizationof RwandaAir. However, IFC's role in the private sector over the last few months has increasedsubstantially. IFC has provideda portionof its earningto IDA andthis is beingprovidedto Rwandafor policy-based support to privatesector-ledeconomic growth, drivenby agriculture, promotion of exports, financial sector deepening, andexpandeddelivery of public services by the private sector. The Role ofMIGA 81. MIGA's effort in Rwanda has complemented the Bank Group's strategy of accelerating private sector-led growth in the country. During the CAS period, MIGA undertook an assessment to assist Rwanda in creating a national investment and trade promotioncapability in consultationwith the Bank's departmentandrecommendationswere made inRwandaInvestment Authority. This ledto establishment of RwandaInvestment andExportPromotionAgency (RIEPA). VI. LessonsLearned 82. Rwandahas continuedto develop rapidly.Despite many development challenges remainthat can be addressedinthe new CAS. As the Bank considershow it can help the country inthe next four years it 79 should consider following key lessons going forward: 83. The Bank needsto adopt a realistic and results oriented approach. While the Bank's strategy was aligned with the PRSP, some o f the targets were overly ambitious and not realistic. The future strategy should focus on results and monitoring o f outcomes that are feasible based on country condition and availability o f IDA resources. The Bank's program needs to become more effective and more focused through selectivity, better alignment with country policies and institutions and stronger collaboration with government and other donors on analytical work. The PRSG instrument seems to be well-suited to achieve these objectives. 84. Project Designneeds to be better aligned on the ground. Capacity buildingefforts needto be coupled with efforts that address broader institutional reforms and better coordination among sectors to underpin successful implementation o f capacity building programs on the ground. Institutional assessments should pay greater attention to identifying the means to increase the capacity o f central and local government. Future Bank operations need to explore various means o f working in partnership with Project Implementation Units (PIU) to strengthen capacity on the ground. The Bank needs to work in a multi-sector environment to build capacity in order to improve the performance of the public sector more efficiently. 85. Implementation and pace of reform need to be sequenced or aligned. The experience during the CAS period shows that Government's commitment to reform contributed positively to CAS outcomes, demonstrating that progress can be made under low capacity. However, implementation of reforms in some sectors was either too quick or slower than expected. This had a mixed impact on effectiveness o f the overall program. Therefore, the next CAS should focus on reforms that are realistic which the Bank can influence and the Government can deliver. The urgency with which the reforms should take place needs to reflect more closely the reality on the ground. 86. The Bank needs to continue to work closely with development partners in fostering the harmonization and alignment agenda. Duringthe CAS period, the Bank made significant progress in donor harmonization through budget support operations, joint budget and sector reviews and joint analytical work. Thus, the Bank should foster collaborative assistance, both at the country level and in the sectors and improve the division o f labor among development partners. Comparative advantage and selectivity need to be a key criterion in the future strategy. The Bank will need to provide leadership in key areas with the implementation o fthe EDPRS and in coordination and alignment as a whole. 80 0 . . 0 . . VY E * 0E . . . . . . O D e . . . . . . . . ~ v; 0 0 r4 .-F . . . . 0 . 0 . . . 0 0 0 0 I e . e e I * CAS CR Annex 2: PlannedLending and Actual Deliveries(FYO3-08) 86 AgricultureSector ExpenditureReview Actual (FY07) AgriculturePolicyNote Transport Sector Expenditure Review Actual (FY04) Transport Country Framework I RuralEnergy Dropped 87 Annex 12: Rwanda Country StatisticalInformation ' I Indicator A\ailahility ----------82 I 79 i I,egnl/Strrtrgic k'ramea ork Statistical 1 . a ~ i Loi organique no01/2005 du 14/02/2005portant organisationdes activitks statistiquesdu ~ j Rwanda; Loi no09/2005 du 14/07/2005portant crkationde I'lnstitut National de la Statistiquedu Rwanda 1 RwandaNationallnstituteof -- StatisticsStrategic Plan(2007-2011) !.._-I_ SSDS/Statistiral Alastrr t'laii -.-__.-_-_-___I __-____ ....... /SSI)S StHtIlS T-., I s being formulated and will be finalized in October2008 1 National _______ __ __ ....... --_1__ Statistical Practice arcoiints nietliodology FA='-- __l_l__-_.___..l__.__..---...- - .. _-I______ [.\.atiooal accouiits basc ycar to be changedto 2006 soon) i ~ ~ ~~~~ Balrncr of paymriits manual in use jBPM5 i l