_ j. S 9D; -ke Dowment of

The World Bank

FOR OMCLAL uS ONLY

Report No. P-6150--E

IMEORANDUM AND RECOMNDATION

OF THE

PRESIDENT OF THE

INTERNATIOIAL DEVELOPMENT ASSOCIATION

TO TEE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 15.7 ILLION

TO THE

REPUBLIC OF KENYA

FOR A

MICRO AND SMALIS ENTERPRISE TRAINING AND TECHNOLOGY PROJECT

MARCH 3, 1994

MI CROGRAPHICS

Report No: P- 6150 KEType: MOP

This document has a estricted distribuon and may be ased by recipients only in the perfonmance ofteir official duties. lts contents may not othewise be disclosed without World Bank authorization.

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REPUBLIC OF KENYA

MICRO- AND SMALL ENTERPRISE TRAINING AND TECHNOLOGY PROJECT

CURRENCY EQUIV4LENTS

Currency Unit =Kenya Shilling (Ksh)US$ 1.00=Ksh 71.25 (August 25, 1993)Ksh l.00=US$ 0.014SDR 1.00=US$ 1.389 (December 15, 1993)

WEIGHTS AND MEASURES

Metric System

GOVERNMENT FISCkL YEAR

July 1 - June 30

ABBREVIATIONS AND ACRONYMS

ATU Applied Technology UnitCBS Central bureau of StatisticsCRT Center for Research and TechnologyDAT Directorate f.or Applied TechnologyDIT Directorate of Industrial TrainingDRD Directorate of Research and DevelopmentDIT Directorate of Technical TrainingFAD Finance and Accounts DepartmentFKE Federation of Kenyan EmployersIT Institute of Technologyrrc Industrial Trainig CenterJKA Jua Kali AssociationJKF Jua Kali FederationKIRDI Kenya Industrial Research Development InstituteKIBT Kenya Institute of Business TrainingKREP Kenya Rural Enterprise ProgramMRTT&T Ministry of Research, Technical Training & TechnologyNITC National Industrial Training CouncilNP National PolytechnicNYS National Youth ServicePDU Planning and Development UnitPSD Private Sector DevelopmentPSC Project Steering CommitteeTGU Training and Gender UnitTTI Technical Trainimg InstituteVET Vocational Education and TraniingYP Youth Polytechnic

FOR OMCL4L USE ONLY

REPUBLIC OF KENYA

MICRO- AND SMALL ENTERPRISE TRAINING AND TECHNOLOGY PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Republic of Kenya

Beneficiaries: The nain beneficiaries are micro- and smallenterprises/entrepreneurs, many of wvhom are in theinformal sector and/or poor urban workers

Executing Agencies: Ministry of Research, Technical Training and 1echnology(MRTT&T) and Jua Kali Federation and Associations

Amount: SDR 15.7 million (US$ 21.83 million)

Terms: Standard, with 40 years maturity

Onlending Terms: Not Applicable

Financial Plan (US$ million) GOK/JKA IDA To.al

A. Training Fund 0.9 12.6 13.5B. Technology & Infrastuctre 0.8 5.5 6.3C. Institutional Development 0.3 2.1 2.4D. Implementation 0.4 1.6 2.0

Total 2.4 21.8 24.2

Rate of Return: Not Applicable

Staff AppraisalReport: Report No. 12275-KE

Map IBRD No. 24134

This document hs a restricted distribution and may be used by recipients only in the performanceof their officil duties. Its contents may not otherwise be disclosed without World Rank authorization.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT TO THE REPUBLIC OF KENYA

FOR A MICRO-AND SMALL ENTERPRISE TRAININGAND TECHNOLOGY PROJECT

I submit for your approval the following report and recommendation on a proposeddevelopment credit to the Republic of Kenya for SDR 15.7 million, the equivalent of US$21.8million, on standard IDA terms with a maturity of 40 years to help finance a Micro- and Smallenterprise Training and Technology Project. The Government and Jua Kali Associations wouldfinance approximately 10 percent costs or about US$2.4 million.

PART I:

COUNTRY POLICIES AND BANK GROUP'S ASSISTANCE STRATEGY

A. BACKGROUIND AND RECENT ECONOMIC DEVELOPMENTS

Background

1. Kenya is a low-income country with a per capita income of $330 in 1992. Its populationgrowth rate in the period 1987-91 has averaged 3.4 percent, but the trend is a declining one withprovisional data suggesting that the rate may have fallen to 3 percent by 1992. About threequarters of the country's land area is classified as arid or semi-arid. The economy is heavilydependent on agricultuie, which employs about 80 percent of the labor force and contributes morethan one quarter of GDP. Coffee and tea account for about 43 percent of merchandise exports.The service sector, including tourism, accounts for about 50 percent of GDP, is an importantsource of employment and is Kenya's leading foreign exchange earner. The manufacturing sectoris relatively developed and diversified, contributes about 13 percent of GDP and employs close to8 percent of the labor force.

2. Independence Throueh the 1980s. Kenya's first decade after Independence in 1963 was oneof remarkable growth and structural change, with real GDP growing by more than 8 percentannually. GDP growth (at market prices) decelerated after the 1973 oil crisis, averaging 5.4perceuit during 1973-80. In addition to the effects of rising oil prices, this slowdown reflected theemergence of structural constraints. Agricultural growth slowed as the margin of untappedpotential narrowed but also because of inappropriate government policies such as extensive andinefficient public sector involvement in marketing. Industrial growth slowed' *cause the incentivestructure favored the domestic market over exports and led to an increasingly inward-lookingsector with declining opportunities for efficient import substitution. These factors wereexacerbated by the collapse of the East African Community.

3. Annual GDP growth (at market prices) slowed to 2.2 percent during 1980-85, a period ofstabilization problems which also included political uncertainty (an attempted coup in 1982) and asevere drought (1984). In the second half of the 1980s, economic growth recovered but, after asmall coffee boom in 1986, Kenya began to face renewed macroeconomic imbalances. During1986-87, the Goverunent began implementing a major stabilization and adjustment programsupported by the IMF through a stand-by arrangement and e SAF (later converted into an ESAF).Support from the Bank was provided through sector adjustment operations in agriculture (1986),

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industry (1988) and the financial sector (1989). However, stabilization efforts were uneven andproduced mxixed results.

4. [rhe Early 1990s. As part of IDA's continuing efforts to support policy reform in thecountry, three new sectoral adjustment operations were approved: the Export Development Project(EDP, in December 1990), an inte-grated package of policy reforms, investments, studies andtechnical assistance aimed at stimulating a supply response for non-traditionml exports; the SecondAgricultural Sector Adjustment Operation (ASAO II, in January 1991), which was intended tobroaden and deepen the policy reforms begun under the previous ASAO, including the eliminationof maize marketing controls; and the Education Sector Adjustment Credit (EDSAC, in September1991), which was aimed at reducing the rapid growth in public spending on education, expandingaccess to education at the primary ard secondary levels, enhancing and improving the quality andrelevance of education at all levels, and strengthening sector management. However, the Gulfcrisis and the deteriorating terms of trade weakened the balance of payments in late 1990 andearly 1991. Meanwhile, efforts to control the fiscal deficit and credit expansion in FY91 wereinadequate. Instead of falling, the budget deficit rose sharply to 7.1 percent of GDP in FY91.While the current account of the balance of payments improved in 1991, mostly because theGovernment canceled or postponed non-essential imports, the net domestic assets of the bankingsystem increased by 23.3 percent during the year (compared with a prngrammed increase of 10percent). Inflation increased from 15.7 percent in 1990 to 19.6 percent in 1991.

5. Concern with deteriorating macroeconomic policy performance, increasingly poorgovernance, and, in addition, in the case of bilateral donors, with lack of progress on politicalreforms, led the Consultative Group (CG) meeting in November 1991 to postpone making newaid pledges and to agree that there should be further consultations in about six months to reviewprogress in a number of areas. In December 1991, the IMF was unable to complete the mid-termreview of the third year of the ESAF because Kenya missed three of the four ESAF quantitativeperformance criteria. However, the Government agreed with the IMF in April 1992 on a ShadowProgram of actions necessary to re-establish a sound macroeconomic framework. The programset a fiscal deficit target of 3.5 percent for fiscal 1991/92 and 2 percent for 1992/93. Themonetary target was to restrain growth of the money supply to about 9 percent in 1992. On theexternal side, the program required the introduction of a foreign exchange retention scheme toimprove export incentives and placed limits on nonconcessional foreign borrowing.

6. IMF/IDA review missions in September 1992 and March 1993 found evidence ofsignificant violation of the monetary targets, but the fiscal objectives for 1991/92 were largelyachieved. Accordingly, with the macroeconomic program off track and a number of sector-specific conditions unfulfilled, IDA was unable to release the second tranches of its ongoing EDPand EDSAC adjustment operations. [Moreover, in October 1992, the Government reimposed aban on maize movement, thus reversing a previously implemented condition of ASAO II. IDAresponded to this reversal by first suspending the second tranche of ASAO II and then canceling itin December 1992 when the ban was not lifted.] Broad money growth was 34 percent in 1992,primarily because of abuse of the pre-shipment export financing scheme, and the provision by theCentral Bank of Kenya (CBK) of large overdrafts and rediscounts to some commercial banks.The excessive growth in monetary aggregates fuelled inflation which accelerated sharply fromabout 20 percent in 1991 to around 100 percent (on an annualized basis) during the second quarterof 1993. As a consequence, external reforms announced by the Govermnent in February 1993-measures such as 50 percent foreign exchange retention for traditional exports and services-proved unsustainable. The shilling depreciated very rapidly, widening the spread between theofficial rate and the interbank market rate. The March 9, 1993 devaluation of the official rate,from KSh 36 per US$ to KSh 45 per US$, proved inadequate to restrain the growing spread. Onthe fiscal side, election-related expenses and larger than anticipated export compensation payments

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threatened to swell the 1992/93 deficit (including grants) to well over the 2 percent of GDPtarget.

7. For a brief period in March 1993, the Government abolished export retention andcontemplated other policy reversals. However, recognition of the inadequacy of such ad hocmeasures and the ultimate necessity of a stabilization program led to an accommodation with IDAand the IMF in mid-April 1993. On the basis of the Government's willingness to take additionalactions, in close consultation with IDA and the Fund, as the evolving economic situation required,IDA released the second tranche of th,e EDP on May 7, 1993. In May 1993, the Governmentformally agreed to a new IMF monitored program covering the remainder of 1993. The programsought to quickly stabilize the economy, achieve fiscal and monetary compression, improve thefinancial performance of key strategic parastatals, eliminate most of the remaining price controls,increase the role of markets in determining maize prices and movement, and liberalize further thecurrent account of the balance of payments. The CBK then began to mop up excess liquiditythrough open market operations that raised drastically the weighted average nominal interest rateson T-bills. Meanwhile, statutory cash ratios for banks were increased in a number of steps,access to the rediscount wirndow was tightened, and commercial bank overdrafts with the CBKwere reduced. On the external front, two further devaluations of the Kenyan shilling took placeon April 20 and May 14, the first from KSh 45 per US$ to KSh 60 per US$, and the second toKSh 64 per US$, narrowing the interbank premium to about 10 percent. At the same time,export retention at a flat rate of 50 percent was reintroduced for all exporters and all importcontrols (other than a short negative list) were lifted.

Recent Econonic Developments - Since June 1993

8. Following release of the second tranche of EDP, the subsequent abolition of import licensesand the reintroduction of 50 percent foreign exchange retention, IDA was about to release thesecond tranche of EDSAC in early June 1993. However, it came to light that major irregularitiesin foreign exchange and interbank transactions were undermining the macroeconomic programand weakening discipline in the financial sector. After these irregularities were discussed with theGovernment in early August 1993, IDA communicated to the Government a list of correctiveactions necessary for tranche release.

9. Consistent with its commitment to take additional actions as the evolving economic situationrequired, the Government implemented additional measures intended to further tighten monetaryand financial sector policies: (i) the cash ratio for banks was raised in two further steps to 12percent; (ii) the Clearing House arrangements, which allowed commercial banks to run overdraftswith the CBK, were abolished. An institution which is unable to cover its obligations atsettlement now has to borrow from other commercial banks (up to a maximum of KSh 100million), and will be allowed back into the Clearing House only after the advance has beencleared in full; (iii) a series of illegal transactions between the CBK and four commercial banks,which were confirmed by special investigations, were reversed. Appropriate interest costs andpenalties were levied on the banks involved. The licenses of three of the four banks implicated hithe transactions were revoked. Separately, the license of another bank, which failed to meetprudential regulations, was also revoked; and (iv) the foreign assets position of CBK was auditedand measures were put in place to ensure more accurate accounting for foreign exchange. CBK'ssenior management, including the Governor, were replaced.

10. The Government has continued its attempts to strengthen and enforce prudential regulationsin order to prevent a recurrence of the strutural problems which led to monetarymismanagement. In particular: (i) it provided substantial equity injections to one of itscommercial banks in order to meet cash ratio, statutory capital adequacy and liquidityrequirements, and announced its intention to float its shares in this bank by June 1994, after

4

appropriate restructuring; (ii) another delinquent bank, which was under threat of losing itslicense, improved loan recoveries, received substantial equity injections from its shareholders andtook actions to improve loan securitization, thus bringing it into compliance with the Banking Actand prudential regulations. In addition, several directors of this institution were removed; (iii)special audits of selected financial institutions to deternine their financial condition andsoundness, with particular emphasis on portfolio quality, were completed and made available toIDA. These audits will form the basis for further remedial actions; and (iv) Section 53 of theBanking Act was amended to eliminate most of the discretionary exemptions from prudentialregulations and all exemptions not consistent with the amendment were revoked.

11. The tightening of monetary and financial sector policies helped to reverse the rapiddepreciation of the Kenya shilling: the market-determined interbank exchange rate appreciatedfrom around KSh 82 per US$ at end-June 1993 to about KSh 70 per US$ in late September 1993.This paved the way for the unification of the official and market exchange rates on October 17,1993; the official rate (of KSh 68 per US$ as end-1993) is now set at the p-evious day's averagemarket rate. Arrears on private trade credit were cleared while arrears on public and publicguaranteed debt tlgan to decline. The tighter monetary stance also contributed to the reductionin inflation from around 100 percent (annualized rate) in the second quarter of 1993 to 55 percentin the third quarter to around 15 percent in the fourth quarter. With this reduction in inflation,nominal short-term interest rates on Treasury bills have begun to decline but they remain positivein real tersn.

12. On the fiscal front, the crucial actions for EDSAC second tranche release were thesibstantial upward adjustment of the consumer price of maize to reduce the budgetary subsidy,and the issuance of circulars indicating that sanctions would be imposed on accounting officerswho are responsible for questionable procurement practices and unauthorized or extrabudgetaryexpenditures. Both conditions were met in September 1993. Earlier, the Budget announced inJune 1993 featured significant expenditure compression, rationalization of the tariff and VATstructures, and funding for downsizing the civil service, initially thiough voluntary earlyretirement. Budgetary projections that anticipated curbing the fiscal deficit to 4 percent e GDP(commitment basis, excluding grants) have, however, been undermined by: (a) additionaldomestic interest payments (equal to 2.7 percent of GDP) resulting from interest rates that havebeen kept at higher than projected levels for monetary policy purposes; (b) a higher than budgetedmaize subsidy; and (c) the fiscal costs of CBK's earlier failure to enforce financial sectordiscipline. In September 1993, the Government reached agreement with the IMF on additionalrevenue and expenditure measures to contain the deficit (excluding grants) to no more than 6.1percent of GDP in 1993/94, compared to 10.4 percent in 1992/93.

13. Other measures were taken inter alia to reduce the pressure on the fiscal deficit immediatelyand in the longer run. In October 1993, all restrictions were removed on the importation ofmaize and on the domestic movement of imported maize, thereby reducing the subsidy requiredby the National Cereals and Produce Board; and all restrictions on the movement of domesticallyproduced maize in loads of up to eighty-eight 90 kilogram bags were also removed. Then, in lateDecember, the Government announced full liberalization of the domestic maize market. Acomprehensive civil service reform program, involving the retrenchment of civil servants in lowergrades and provision of a safety net for these retrenched workers, was launched officially. TheGovernment also replaced the top management of the Kenya Posts and TelecommunicationsCorporation (KPTC) which is performing poorly and contributing to the fiscal deficit, andannounced its endorsement of the decision to separate the KPTC's postal and telecommunicationsactivities with a view to privatizing eventually the latter.

5

14. Owing to strong policy actions taken in the recent past, particularly the substantialtightening of the financial system, there are indications that economic stabilization is becomingeffective. Money supply growth, which had accelerated to an annualized rate of 35 percent and48 percent in January and April 1993, respectively, declined to 26 percent in December. Theaverage Treasury Bill rate has gradually declined from a high of more than 70 percent at end-July1993 to below 40 percent at end-December. During the last quarter of 1993, the rate of inflation(annualized) had declined to 15 percent. Meanwhile, the fully market-based official exchange rateremains stable.

15. These improvements in the policy environment facilitated the successful negotiation of aone-year ESAF arrangement with the IMF, which is cast in a three-year Folicy Framework Paper(PFP) for 1994-96 agreed in October 1993. The CG on Kenva also met on November 22 and 23,1993, and indicated new commitments for 1994 totalling $850 million, of which $170 million isin the form of quick-disbursing balance of payments support. Thse amounts, along with therefinancing of accumulated arrears (as of end-1993) that was approved by the Paris Club onJanuary 19, 1994, are largely sufficient to fund the residual external financing gap for 1994 asenvisioned under the ESAF arrangement. However, donors emphasized that the translation ofthese commitments inte disbursements depended on the timely and decisive implementation by theGovermnent of the economic reform agenda presented in the PFP.

B. EXTERNAL ENVIRONMENT

16. During 1991-93, Kenya accumulated arrears on its external debt service, for the first timein its history. The build up of arrears reflected both the impact of exogenous developments andthose that were, hi principle, more controllable. Among :he exogenous factors, irregular rainfallcontributed to poor harvests, and unsettled conditions in neighboring countries added to a refugeeburden both of which increased the food import requirement. Tourism earnings declined andfurther undermined Kenya's ability to service its debts in 1992 and the merchandise terms of tradedid not move to Kenya's advantage. However, the primary cause of the inability to serviceforeign debt during this period was inconsistent macroeconomic management which contributed toa steady buildup of inflationary pressure and eroded both donor and investor confidence in theeconomy. Poor governance and ineffective macroeconomic management contributed to thedecision of donors at the Novemnber 1991 CG meeting to postpone new aid pledges. Thesubsequent actions by the Bank to withhold release of tranche funds under a number of existingBOP support operations and the decision of the IMF to not disburse the final tranche of the ESAFalso reduced anticipated capital inflows in 1992 and 1993. Net private foreign direct investmentfell from $101 million to zero between 1990 and 1992, reflecting both declining confidence ineconomic management as well as concerns over growing political instability. By October 1993,external payments arrears had ballooned to almost $700 million.

17. Nevertheless, in the short period since the crisis of March 1993, the conditions for strongmedium term growth in Kenya have significantly improved. Sustained implementation ofstabilization policies over the past 7 months has sharply reduced runaway inflation. Importantsteps toward structural reform, particularly in the area of external trade, have begun to graduallyrestore confidence in Gevernment commitment to structural adjustment. By end-1993, foreignexchange reserves had recovered to comfortable levels. These developments confirm that evenunder adverse external circumstances, proper economic management can tap the natural resilienceof the Kenyan economy. The stage has been set for the export sector to lead the growth recoveryby the elimnination of all except a short list of import licenses and the introduction of a unified,market-determined exchange rate. In November 1993, donors indicated their financial support forthe steps already taken and the promise of a sustained reform program as outlined ia theGovernment's PFP. Finally, the problem of the stock of external debt service arrears has beenaddressed by a rescheduling with the Paris Club of creditors on terms which should not constrain

6

Kenya's ability to finance the imports necessary for growth in the next few years. Meanwhile,the Government is committed to strictly limiting the public sector's contraction or guarantee ofnew non-concessional external borrowing.

C. KENYA'S DEVELOPMENT OBJECTIVES AND POLICIES

18. The Government's long-term development strategy is articulated in Sessional Paper No. 1of 1986, Economic Management fior Renewed Growth, while its development objectives andpolicies in the near term are set out in its recently prepared Policy Framework Paper (PFP) for1994-1996. The Sessional Paper No. 1 emphasizes the need to create productive employmentopportunities for a labor force that is now expected to increase annually by almost 500,000entrants over the next six years. With the main sources of Kenya's existing malaise traced to theburden of declining efficiency in the public sector and to an inadequately supportive environmentfor efficient private-sector activity, the Govenunent's role increasingly is expected to be theprovision of an appropriate enabling enviromnent for private sector development rather than directparticipation in economic activity. In pursuit of its long-tenn overall goal of reducing poverty inKenya, the PFP outlines steps to be taken by the Government to substantially accelerate the paceof implementation of reforms aimed at: accelerating export-led economic growth and employmentcreation (the Government's recognition of the importance of promoting and developing thecountry's informal sector was subsequently outlined in a comprehensive policy framework set outin its Sessional Paper No. 2 of 192, Smal Enterprise and Jua KalH Development in Kenya),which is essential for any sustained reduction in poverty; improving access by ordinary Kenyansto basic education, training and health services; and, where Iiecessary, providing support to thoseunable to fend for themselves. Given overall constraints on resource availability, this will requirea commitment to reorienting expenditures to poverty-reducing interventions, rather than enlargingthe overall budget.

19. Macroeconomic Policy. The immediate objective of macroeconomic policy is stabilization,in particular, a rVpid deceleration in inflation (from an estimated anmnalized rate of almost 50percent in 1993 to below 10 percent per year over the medium term) and strengthening of theextemal payments position. Restrained monetary policy and a sound financial system will becritical if price stability and a sustainable external position are to be achieved and growth throughefficient mobilization and allocation of savings to be promoted. Monetary policy will aim atcontaining liquidity expansion at a pace consistent with targeted growth rates of GDP andinflation, and maintag positive real interest rates.

20. External Policies. Recovery and sustained economic growth in Kenya depends on strongexport growth, which will be supported by the recent liberalization of the exchange and tradesystem. Sound monetary and fiscal policies assisted by necessary interventions in the foreignexchange market should result in a stable exchange rate. The Government will seek to furtherliberalize trade and investment regulations. Increased economic integration with the PreferentialTrade Area (PTA) countries and enhanced export incentives will be achieved by actions that willaim to move Kenya's tariff structure towards the lowest prevailing structure in the region. Thestreamlining of Customs procedures is important for enhanced revenue collection and improvedtrade flows.

21. Buduetary Policies, A major objective of fiscal policy over the PFP period is to sharplyreduce the level of domestic borrowing for deficit financing and to make net repayments ondomestic debt, thereby freeing resources for private sector activity. A substantial tightening offiscal policy in 1993/94 is aimed at reducing the overall budget deficit (commitment basis,excluding grants) from 10.4 to 6.1 percent of GDP (to 2 percent by 1995/96). Fiscal policy willremain tight, with emphasis on restraint of recurrent expenditures and further revenueenhancement.

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22. Public Expenditure Policies. In order to spur growth, development expenditure andrecurrent non-wage operating and maintenance expenditure will increase as a share of GDP overthe PFP period. A detailed review of public expenditures is underway with the assistance of IDAand other donors. There will be significant progress over the PFP period, beginning with the1994/95 budget, in shifting allocation of budget resources towards the core functions ofGovernment: the maintenance of law and order and the administration of justice; the provision ofbroad-based basic education and health services; the provision of economic infrastructure; and theprotection of the environment.

23. Civil Service Reform. The Government is committed to the comprehensive reform(covering organization, financial and performance management, staffing levels, personnelmanagement, and pay and benefits) proposed in its rct,:ntly approved Civil Service ReformProgram and Action Plan. During the PFP period, 58,000 net civil service positions(approximately 22 percent of the present staffing level) will be eliminated; in addition, actionstowards monetization of benefits will be initiated and a code of ethics will be developed.

24. Public Enterprises Reform. The intention of Government is to achieve significant andirreversible public enterprise reform during the PFP period, with commercially viable operationof strategic public enterprises and substantial divestituie of Governmr-t equity interest in non-strategic enterprises (i.e., 190 of 207 to be brought to the point of -i.e or otherwise disposed) asthe immediate goals. Implementation of the new Corporate Governance system, expected to beapproved shortly, will, inter alia, formalize an arms-length, transparent, owner-managerrelationship between the Government and the management of strategic parastatals.

25. Agricultural Policies. In order for Kenya's agricultural sector to grow at its potential of 3-4 percent per annum, actions are needed in policy formulation and delivery of basic service, andto end the domination of the sector by public sector marketing and distribution organizations. Inthe long term, the private sector will be expected to aggressively expand output while the role ofthe Government will be largely confined to policy formulation and provision of infrastructure andresearch and extension services. Over the medium term, the major aim of agricultural policieswill be the speedy recovery of agricultural production covering food crops, major commodities,industrial raw materials, and export crops.

26. Environment. Rising population pressures, migration and rapid urbanization have increasedthe need for urgent actions to preserve and rehabilitate Kenya's fragile environment. In responseto Lhis challenge, the Gover.iment is preparing a comprehensive National Environmental ActionPlan (NEAP) by mid-1994. While recognizing the need to develop a comprehensive approach todeal with Kenya's environmental problems, the Government's immediate priorities and actionsfocus on forestry, wetlands, and and semi-arid lands (ASALs), the wildlife sector and theincorporation of environmental concerns into the public investment program (in particular,environmental impact assessments will be conducted for all energy projects).

27. Infrastructure and Transport. Inproved infrastructure is critical to attract and enlargeprivate domestic and foreign investment in Kenya. The Govermnent also recognizes thatinadequate maintenance over many years has had the effect of significantly reducing the quality ofinfrastructure in a number of subsectors. During the PFP pe'ad, the Government will undertakepolicies and actions essential to restoring the quality of its roads, water supply and transportservices (i.e., ports and railways).

28. Energy Development. The implementation of a sound policy framework and an appropriateinvestment program is critical to addressing the increasingly serious shortfalls in power supplycapacity. Policy reform and action in a number of areas need to accompany a five-yearinvestment program estimated at more than $1 billion: (i) reorganization of the power sector,

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inclusive of providing for private sector involvement through contracting out services and invitingbids for private investment in power development; (ii) adoption of appropriate electricity tariffs toallow Kenya Power and Lighting Company (KPLC) to operate as a commercially viable enterpriseas well as to sustain a financially viable investment program; and (iii) fill liberalization of theprocurement, marketing and pricing of crude oil and petroleum products.

29. Human Resources Develonment. Although survey statistics indicate that population growthrates may have peaked and entered a period of decline in Kenya, the population of Kenya willcontinue to increase relatively rapidly because of the large nunber of women entering theirchildbearing age. 'j o achieve an earlier population stabilization date, the Gevernment willcontinue to implement appropriate and sensitive population policies-this will include increasedemphasis on family planning service delivery, including greater reliance on non-gover.nmentalorganizations (NGOs) and the private sector that will result in broader coverage of the population.The principle of cost recovery has been accepted as essential for the sustainable provision ofGovernment health services. Continued efforts will be devoted to improving cost recovery whileincreasing enphasis on preventive/primary health care, ensuring that the poor are protected fromincreased user charges. To maximize the use of scarce budgetary resolirces, the effort to improvethe nutritional status of school-age children will concentrate on children in disadvantaged districts.Meanwhile, the HPV/AIDS epidemic is quickly assuming crisis proportions and sexuallytransmitted diseases (STDS) are on the increase; the need is for interventions that bring aboutbehavioral change and to develop a cost-effective means of managing care for HIV positive andAIDS patients.

30. To address the pressing issue of growing unemployment resulting from the increasednumbers of youth entering the labor market and the fallout arising from civil service andparastatal reform, a training and employment path focusing on enterprise-based training,particularly in the growing informal sector, is being pursued. On thd education front, theGovernment's objective during the PFP period will be to increase the access and quality ofeducation while continuing the process of controlling and rationalizing its own expenditures in thesector. To this end, expenditures will be reallocated from university to basic education. Ingeneral, the thrust of reforms to the funding arrangements and management of educationalinstitutions during the PFP period will seek to decentralize decision-making by graduallyenhancing the capacity, responsibility and accountability of local authorities and managementcouncils/boards/comnittees of educational institutions.

D. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY

Objectives

31. The Bank shares the vision of the Sessional Paper No. 1. Accordingly, IDA's countryassistance strategy focuses on poverty reduction through accelerated growth and employmentgeneradon. The strategy, in its essence, remains unchanged from that discussed by the Board onDecember 8, 1992. It has four main objectives: (a) encouraging the Government to provide andsustain a stable macroeconomic environment; (b) supporting changes in the incentive frameworkand infrastructure that would facilitate the development of an efficient and export-oriented privatesector; (c) significantly increasing the efficiency of the public sector, including the parastatals; and(d) addressing longer-term human resource issues and arresting the deterioration of Kenya'sfragile environment. IDA is pursuing these objectives through policy-based sector investmentlending, and economic and sector work (ESW) in priority areas.

32. Kenya's main development challenge remains one of employment creation and povertyreduction. Between now and the year 2000, the number of people entering the labor force eachyear will average almost 500,000 (reflecting a projected labor force growth rate of around 4.1

9

percent a year - over 6 percent in the urban areas). In order to create enough jobs to graduallyreduce unemployment in the urban areas and increase incomes in the rural areas by an average of1.5 percent per annum, the Kenyan economy needs to grow at an average annual rate of at least 7percent between now and the year 2000. These are ambitious but achievable targets, providedfar-reaching structural reforms are implemented decisively by the Government.

Priorities

33. The priority areas for IDA's country assistance, which are consistent with theGovernment's development objectives set forth in its recently prepared PFP, are: (a) improvingpublic sector *ffliciency, by containing fiscal expansion, improving the efficiency of publicspending, rationalizing public sector employment, and limiting the scope and size of the parastatalsector; (b) developing an export-oriented private sector to reduce dependence on foreigf;savings; and (c) strengthening the basis for eqitable and sustainable development, byaddressing human resource, employment and environmental issues.

34. Public Sector Adjustment Ureentlv Needed. Stabilization and accelerated growth requireinter alia significant improvements in the efficiency of current and development expenditures, ardparastatal reform. Improving the efficiency of current expenditures requires tackling the civilservice wage bill and the underlying structural factors which drive it-the complex organizationand functions of the central government, overstaffing and the deteriorating productivity of thecivil service. Over the medium and long term, comprehensive civil service refetr should aim toimprove organizational synergy, reduce vacancies at higher levels of the service, reverse wagecompression, and raise substantially expenditure on non-wage operations and maintenance(O&M). The Government has accepted the need for civil service reform, and in early 1992prepared a Civil Service Reform Program and Action Plan. In October 1993, the Governmentannounced the official launching of a comprehensive c!vil service reform program along the linesproposed in early 1992.

35. Other public expenditure issues also need to be tackled. At present, the Public InvestnentProgram (PIP) is not prioritized an the basis of economic analysis or a sectoral strategy, and oftenadequate provision is not made for counterpart funding and O&M. The challenge for theGovernment is to reintroduce elements of financial planning and discipline into the budgetaryprocess, including the formulation of the PIP. This will require adherence to agreed investmentpriorities and expenditure ceilings on the part of even the most politically powerful ministries, andbetter monitoring of state-owned enterprises to avoid the unplanned %qsumption by the CentralGovernment of parastatal debt obligations. IDA's ongoing Public Expenditue Review (PER)has the primary objective of assisting Government in its efforts to reassert fiscal control, and toimprove the composition and management of its expenditures. Being done collaboratively with agovernment counterpart team, an immediate aim is to generate practical recommendations for the1994/95 Annual Budget.

36. Without substandal progress on parastatal reform, the medium- and longer-term prognosisfor the Kenyan economy remains bleak. In 1991, the Government announced its intention tocarry out a comprehensive parastatal reform program. Under the program, public enterprisesdeemed to be vital to national seurity and those providing essential goods and services wereclassified as strategic; all other public enterprises were classified as non-strategic. "Strategic"enterprises are to be restructured with the objective of being made commercially viable, while"non-strategic" parastatals are to be privatized. Progress to date in privatizing "non-strateg.enterprises and restructuring "strategic" enterprises has been slow and needs to be acceleratr

37. Reducing the direct involvement of the Government in economic activity, reforming theparastatal sector, the civil service and public expenditure in general, limiting Government

10

discretion, streamlining licensing requirements, and eliminating foreign exchange controls willhelp to lessen corruption in Kenya. Other measures include the strict enforcement of agreedconditionality, careful supervision implementation and raising the stakes for back-tracking.

38. Actions Required to Promote Private Sector Development. IDA's recent economic andsector work, including Conmtry Economic Memoranda (1992 and 1993) and the Private SectorDevelopment Strategy (1992, in collaboration with the IFC), indicate that a growth-orientedstrategy, relying on a potentially strong private sector, would serve Kenya well. The PrivateSector Development Strategy has identified several constraints to private sector development andinvestment in Kenya. The main constraints include the destabilizing effects of macroeconomicimbalances, excessive public sector involvement in the market place, and uncertainty arising fromthe discretionary treatment of businesses by Government. These constraints ctit across all sectors.

39. Another major impediment to private sector development is the fact that although Kenya'sphysical infrastructure is relatively developed, it is inadequately maintained and inefficientlyoperated. This is particularly noticeable in the transport sector, where sections of the highwaysystem need complete rehabilitation, and at Mombasa port, where efficiency is low. It is alsoseen in the deteriorating physical infrastructure of Nairobi and other important commercialcenters, due to lack of resources and service delivery capac.ty. In energy, the problem is one ofinadequate investment which could become a binding constraint to natior' development if notundertaken quickly and in the context of a restructured subsector. The rustructuring shouldinclude the liberalization of petroleum prices and the economic pricing of electricity. Issuesrelated to cost recovery, the composition of expenditures, particularly inadequate allocations fornonwage O&M, and procedures for allocating budgetary resources, are common to mostsubsectors. Public sector, including parastatal, inefficiency is at the heart of many of theseproblems. Therefore, the careful restructuring of public expenditures and enhanced financialaccountability of strategic state er.nerprises are crucial.

40. Strengthened Management of Environmental Degradation and Population Pressures.Poverty and population pressures on limited land resources are the main contributors toenvironmental degradation in Kenya. Depletion of forests and woodlands is a major cause of soilerosion and land degradation, and lower water-holding capacity, a reduction of dry season waterresources, and the destruction of wildlife and natural habitats. Environmental problems areparticularly severe in the ASAL regions which are more susceptible to ecological damageresulting from population pressures. Human encroachment is also exacerbating conflicts withwildlife, particularly in dispersal areas around national parks where increased farming activitiesare cutting off wildlife's migratory routes, and access to dry season water and pasture.

41. The Government has prepared a Development Policy and an environmental action plan forthe ASAL areas. These will feed into the development of the Government's NEAP, which isexpected to be completed by end-FY94. The success and impact of both initiatives will dependentirely on strong Government commitment and the integral involvement of all affected ministries,agencies, governmental and non-goverunental organizations, and local resource user groups.

42. Evidence form the 1989 Kenya Demographic and Health Survey points to a marked drop inthe fertility rate-from 7.7 in 1984 to 6.7 in 1989, and suggests that the demographic transition isnow on the way. The preliminary results from the 1993 survey art consistent with thisconclusion. However, Kenya's population will continue to grow rapidly because there are stilllarge numbers of women entering their childbearing years. Sustaining current efforts atimproving access to family planning services and at increasing school enrollment for girls isessential.

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43. Attention to Human Resource Issues is Crucial. There is a natural kinship amongemployment creation, human resource development and poverty reduction. The employed andunemployed need not only health and nutrition, but also information and skills that will enablethem to support and benefit from accelerated economic growth through outward-oriented privatesector development. The Government is taking measures: to reduce the rate of growth of theeducation recurrent budget and introduce cost recovery at the university level; expand access toeducation and increase retention at the primary and secondary levels; enhance the quality andrelevance of education and training, and strengthen sector management and planning. But theseactions are only a beginning.

44. Ongoing efforts to improve the quality and relevance of primary, secondary and universityeducation should be broadened to include technical training. A further challenge now for theeducation strategy is to move beyond enforcing crude quantity controls from the center, andrestructure key sectoral institutions and policies to: (a) create incentives for more efficient servicedelivery in general; (b) shift public expenditure subsidies away from higher education and theexpansion of the teaching force, to improving access to quality basic education, especially in ruralareas; and (c) enhance public confidence in the educational effectiveness of time spent by childrenin school, thus reducing the growing demand by households for private tutors to compensate forshortcomings in the public school system.

45. The resurgence of old diseases such as malaria and the emergence and rapid spread ofAIDS require attention. Between 750,000 and one million Kenyans are now estimated to be HIV-positive and around 2,500 new AIDS cases are diagnosed annually. By mid-1991, about 10,000AIDS cases had been recorded. In addition, sexually transmitted diseases (STDs) are on the rise.The der- lopment of prevention programs for STDs, including AIDS, should take place as amatter of urgency. While the Government has mounted a concerted effort to increase publicawareness of AIDS, future interventions should seek to k ring about behavioral change.

46. Separately, the medium-term objectives of health sector reform should be to: shift resourcesfrom curative to efficient primary care; and clarify the respective roles of the private and publicsectors. Efforts to improve the orientation, access and quality of health care (and other socialserices) must come througn redirecting public expenditures and raising their efficiency.

47. The shift of emphasis from rapid expansion to quality and equity improvements must beaccompanied by a commensurate effort to build institutional capacity in the human resourcesectors. Sharper social targeting will impose new and more complex demands on Kenya'sinstitutional capacity for designing and implementing human resource policies and interventions.And although the Government has a relatively good capacity for designing and implementingsurveys, there is a need to improve the processing and analysis of data. A permanent capabilityshould also be developed to monitor the impact of policies on the most vulnerable groups inKenya and, through regular feedback, to inform policy design.

48. Tarszeted Interventions Needed for the Poor. The Government needs to supplement itsgrowth-oriented policies with clearly defined initiatives to reduce poverty. In this context,measures should be directed in part at increasing women's agricultural productivity and income.The migration of men to the cities leaves many wvtnen with sole responsibility for sustaining theirfamilies. These households are generally poorer than male-headed ones, and have less access toland, credit and extension services. Efforts are underway to identify ways of assisting women,reducing poverty among female-headed household, increasing agricultural productivity, andimproving nutrition. A primary focus is on reaching women throtigh agricultural extension.However, greater attention should be placed also on expanding secondary school places for girls,and improving community-based water supply schemes. Increases in women's incomes will alsohave a direct bearing on attempts to reduce the population growth rate. Promoting skills training,

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particularly in manufacturing, can also enhance opportunities for off-farm employment andincome enhancement. Findings and recormmendations emanating from IDA's ongoing PovertyAssessment are expected to support efforts aimed at identifying groups that are particularlyvulnerable to poverty, analyze their plight, and design and implement appropriate correctivemeasures.

Implemeoting the Country Assistace Strategy

49. At the time of the Board's December 1992 discussion of the country assistance strategy, theBank was withholding the second tranche releases of the ASAO II, EDP and EDSAC because ofthe Govermnent's poor macroeconomic management and failure to meet sector-specific conditions.Calling for a resumption of tranche disbursements only if the country's macroeconomicframework was back on track, the country assistance strategy specifically provided for a cutbackin the lending program by dropping adjustment lending and those investment projects whichwould not be viable in such an environment. Consistent with this strategy, IDA approved inFY93 only $62.7 million for three "core" projects (Parastatal Reform and Privatization TechnicalAssistance, Second Agricultural Sector Management, and Emergency Drought Recovery) and isexpected to commit only $21.8 million in FY94 (for the Micro- and Small Enterprise Trainingatnd Technology Project). [In addition to these project approvals, IDA Reflows of $52.1 millionand $42.2 million were approved in FY93 and FY94, respectively.]

50. Future Operational Program. Subsequent to the Board's December 1992 discussion, fiveshort-term markers were established as critical to stabilizing the country's economy anddemonstrating the Government's commitment to reform in light of its unsatisfactory pastperformance and policy back-tracking. These have now been met: (i) satisfactory implementationof the Fund-monitored program agreed in May 1993; (ii) satisfying the macro-economic andsector-specific conditions for release of the second tranches under the EDP and EDSAC; (iii)agreement on a PFP and ESAF; (iii) the convening of a successful CG Meeting for Kenya; and(v) the removal of maize movement controls. Now that the stabilization and reform programs arebeck on track, IDA would move back to a "base" lending program of $630 million in FY95-97,with the important exception that any adjustment lending would only be considered if satisfactoryperformance under the PFP is sustained through mid-1994. However, should the Governmentfalter in implementing the economic and reform agenda as set forth in the PFP or backtrack onpolicy actions initiated during the past year, IDA would revert to a "core" lending program of notmore than $100 million per year. Moreover, for the Bank to consider adjustment operations inthe future, the Government needs to make progress on agreed sectoral reforms across-the-board,demonstrating a strong commitment to much improved public sector management. Specifically,this entails: (a) progress ir. implementing a strong and transparent parastatal reform program; (b)commitment and initial steps toward a comprehensive civil service reform program; and (c)improvements in the efficiency of public expenditures, especially a well-prioritized PIP. TheGovernment also needs to demonstrate commitment to private sector development by adoptingmeasures which improve macroecononic management, and the regulatory and incentiveframework.

51. To improve Kenya's neglected infrastructure, the FY95-97 lending program includesinvestment projects for urban transport, highways, water supply and municipal infrastructure;education, agricultural research, nutrition and STDS/AIDS project proposals focus on addressinghuman resource development issues and/or targeting specific interventions for the most needy;anotl *r project addresses enviromnental degradation and improvement of the quality of life in thearid regions of Kenya; while an institutional development project would provide technicalassistance to the country's civil service reform effort. The translation of ongoing discussions inthe fields of energy, health and the environment into project investments depends upon progress

13

on the Kenyan side in completing ongoing preparatory work and/or resolving outstanding sector-related policies and issues.

52. Portfolio Implementation. As of December 31, 1993, the Bank Group had 26 projectsunder implementation in Kenya, in the amount (less cancellations) of $967.3 million [investmentprojects: $673.6 million; adjustment operations: $293.7 million], of which the undisbursedamount totaled $494.2 million (investment projects: $429.9 million; adjustment operations: $64.3million]. Forty-five loans and fifty-five credits have been fully disbursed in the amounts of$928.4 million and $1,070.7 million, respectively (or, 100 loans and credits totaling $1,999.1million).

53. In early 1993, the Eastern Africa Department undertook a "Special Portfolio Review" in aneffort to clean up the department's portfolio through orderly closure of projects/components thatwere no longer consistent with country and/or sector assistance strategies, to restructure others ifand where appropriate, and to identify any major implementation problems. One result of thiseffort has been a net reduction of active projects from 31 at the beginning of FY93 to 26currently; this number (after taking in consideration the addition of the Micro- and SmallEnterprise Training and Technology Project) is expected to be further reduced, with another four(and possibly six) being closed by the end of FY94. Through the use of action plans, closerproject monitoring and intensive supervision follow-up by Bank staff with the concernedimplementing agencies, there has been a significant improvement since end-FY93 in reducing thenumber of problem projects (i.e., "3" and "4"-rated): of the six active problem projects so ratedas of end-FY93, all have since been upgraded to "2". There currently is only one project rated"3" (and none rated "4').

54. Insufficient counterpart funding continues to delay timely implementation of projectcomponents, which is also reflected in low disbursement ratios. A specific goal of the ongoingPER is to rationalize the existing portfolio of government projects (including IDA operations) aswell as establish an improved system for future project selection and implementation. The PER isexpected to have an immediate impact in FY95 on resolving the counterpart funding problemwhich has continuously plagued the Kenyan portfolio. Project implementation has also beenhampered by procurement delays and weak project management. A major agenda item for theKenya Country Portfolio Performance Review (CPPR) scheduled for June in Nairobi is a reviewof all active projects, identifying and terminating in a timely manner, all nonpriority components.In the meantime, close coordination during the past year between staff from LOAAF and theNairobi Office with staff from the individual project implementing agencies, Ministry of Financeand CBK who are involved in the processing of disbursement applications has resulted in faster aswell as more frequent drawdowns from the Special Accounts and IDA Credits. To improveproject implementation, especially of new projects, IDA's dialogue with the Government willcenter on generic problems (e.g., those related to project management, procurement, auditing),and include efforts to reduce reliance on the public sector and increase private sector involvement.

55. Creditworthiness and Expos. At the end of 1992, IBRD and IDA held 10.3 and 22.2percent, respectively, of Kenya's stock of total debt outstanding and disbursed. If the FY95-97"base" lending program is realized starting FY95, by 1996 IBRD's share of total debt is expectedto fall to 4.4 percent and IDA's share to rise to 31.8 percent. Correspondingly, net transfersfrom IBRD would move from negative $158 million in 1992 to negative $112 million in 1996; therespective figures for IDA are positive $75 million and positive $186 million. The debt serviceratio for the preferred creditor category, which includes IBRD/IDA, the IMF, the AfricanDevelopment Bank and the European Investment Bank, was 14.4 percent in 1992, and is projectedto be 8.2 percent in 1996. IBRD and IDA's combined share in this debt service is expected toremain at about 55 percent. Kenya's debt service ratio is expected to fall from 27.2 percent

14

(representing debt service paid) in 1992 to 25.6 perceht in 1996. IDA will account for a slightlylower share of total commitments (including grants) to Kenya in 1996 (40 percent) than in 1992(44 percent). IDA lending will continue to be interdependent with assistance from other officialcreditors, particularly under the auspices of the SPA. At the same tine, the trend towards agreater share of bilateral grants and concessionary funds (as opposed to loans on commercialterms) in official development assistance to Kenya is expected to continue.

56. Apart from the ongoing dialogue between the Government and IDA, two other factorsimpact positively on the Bank Group's exposure and risks. One, no IBRD lending has takenplace since 1986, when the debt service ratio began to exceed 20 percent; instead, highlyconcessionary IDA credits have been used, and these have been supplemented by IDA reflows,which have helped to offset the debt service burden of previous IBRD 14oans. Two, the bulk ofadditional Bank Group lending to Kenya is based on the implementation of measures that willstrengthen growth and balance of payments viability.

57. IFC and MIGA Activities. To date, IFC has invested directly in 17 enterprises in theindustrial, financial and tourism sectors. IFC has also broadened its involvement with anotherfour enterprises in the private sector in Kenya through the African Enterprise Fund (AEF),established in its Nairobi office in 1989; the AEF allows IFC to make loan and equity investmentsin smaller projects than those through IFC's mainline business. Total commitments to dateexceed $160 million, and IFC's own-account portfolio (including undisbursed balances) is inexcess of $30 million. Recent approvals and investments currently being processed are expectedto add a fuirther $7 million in 1994. In addition, the African Project Development Facility, basedin Nairobi, continues to find a demand for its services in assisting entrepreneuiL to prepare projectproposals and obtain financing. IFC's Foreign Invesument Advisory Services (FIAS) is providingassistance to the Ministry of Finance and the Investment Promotion Center on investmentincentives.

58. With the positive economic measures taken in Kenya over the last year, IFC anticipates anincreased demand for its services in the next few years. In addition to further support for privatesector initiatives, this could also encompass the rehabilitation and privatization of some parastatalcompanies. Preliminary discussions concerning a possible advisory assignment for IFC in onesuch case have already begun.

59. Kenya has been a full member of MIGA since November 1988. Although threepreliminary applications have been registered, a necessary precondition for securing guarartees,no guarantees have been issued to date.

60. Cooperation with Other Institutions. Effective donor coordination will remain animportant element of the country assistance strategy. At the November 1991 CG, all participantsagreed that new commitments should only be made after the Government had demonstrated itscommitment to decisive action to correct macroeconomic imbalances; to rationalize publicenterprises and improve their financial discipline, accountability and transparency; to launch asubstantial civil service reform effort; to improve the efficiency of public expenditure as a vehiclefor providing basic economic and social infrastructure to the people of Kenya; and to provide anenvironment which is consistently supportive of private investment and initiative. Bilateral donorsalso wish to see progress on political reforms which would reinforce the benefits of economicstructural change. This position was reiterated in subsequently convened informal donor meetingsin July 1992, March 1993 and May 1993. The result of these meetings and regular consultationbetween donors, e.g., through monthly meetings of donor representatives in Nairobi, wasreflected in the consensus among donors at the November 1993 CG that while recent efforts ofthe Goverunent to reestablish an appropriate macroeconomic framework and initiate structuralreforms were warmly welcomed, the translation of new commitments in 1994 of around $850

15

million depended on progress in implemnenting the economic reform agenda outlined in the PFP aswell as strong positive steps in addressing governance and corruption issues. Donors will be keptinformed of progress through their regular monthly meetings in Nairobi, and through an informaldonors meeting which is tentatively scheduled in July 1994. The Bank and the IMF in particularhave worked closely together with the Kenyan authorities in getting the macro-economic programback on track and restarting the reform process.

E. AGENDA FOR BOARD CONSIDERATION

61. The experience of the past few years shows that the pace of reform in Kenya has beeninsufficient for the desired rate of economic growth, employment creation and poverty reduction.Kenya's economic development and the availability of external finance from both public andprivate sources depend critically on the Government's ability to move aggressively and decisivelyto create an enviroment that is conducive to private sector development. The constraining factoris Government commitment, not implementation capacity. Recent efforts by the Government toget the macroeconomic program back on track must now be followed by a track record ofsustained econonic performance and of demonstrated commitment, through actions, to implementfurther reform. The country assistance strategy focuses on the maintenance of a soundmacroeconomic framework, improved governance and economic management, and satisfactoryprogress in implementing an agreed reform agenda. Benchmarks on all these fronts have beendefined, on which progress can be evaluated and an appropriate level of IDA lending support canbe justified.

62. Clearly, there are a number of risks associated with this strategy. First, the extent of theGovermnent's continued commitment to the reform agenda set forth in the PFP is still to betested; furthermore, there always looms the possibility of reform back-tracking (as experienced inthe past) and/or a breakdown in the country dialogue. However, recent economic performanceand reform initiatives have been encouraging. Moreover, the proposed country strategy has built-in flexibility to deal with such developments, in that the Bank's lending program would bedownsized to "core" investments only. A second risk is that parastatal and civil service reformsinitially could make unemployment worse before it declines. The impact of such could beaddressed through appropriate phasing and safety nets (in which a number of donors haveexpressed an interest and willingness to help fund). Of course, the sooner the Governmentimplements growth-oriented reforms, the quicker the employment benefits are likely to accrue.Third, there is the risk of Kenya's access to quick-disbursing balance of payments support beingreduced, even if the required progress is made on economic and social reforms. Accordingly, thecountry assistance strategy has been designed to significantly reduce Kenya's dependence on suchfunds. A fourth risk is that envirownentally unsustainable economic development will proceedheadlong in the absence of a consensus on appropriate strategies to protect Kenya's diverseecosystems and natural resources for the benefit of current and future generations. This couldforeclose options for more appropriate and sustainable development, threaten long-term economicstability, lead to further degradation of the resource base, and increase the severity ofdesertification and droughts. The country assistance strategy seeks to forestall such occurrencesthrough the country dialogue, and by supporting efforts to alleviate population pressures anddevelop the ASAL areas as part of the core country assistance program.

63. The Board is invited to consider the benefits and risks associated with this countryassistance strategy.

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PART 11

THE PROJECT

Sector Background

64. The Kenyan economy now faces a formidable employment challenge as a result of sloweconomic growth cobmined with the rapid expansion of population. The economic growth, whichwas hailed as a success story in Sub-Saharan Africa for many years, was not sustained in the1980s, and more recently declined to below the population growth rate. The poor economicperformance in recent years is attributed mainly to policy failures rather than strucuralimpediments or lack of resources. Meanwhile, recent provisional data suggest that the populationof 24 million is growing at about 3 percent, still among the highest growth rates in the world.The total labor force is expected to grow at an average rate of about 4.1 percent per annumbetween 1991 to 2000 and over 6 percent in urban areas.

65. There is little doubt that if present trends continue, the economy will be unable to absorbthe estimated 500,000 new entrants per year to the labor market with a considerable backlog ofunemployed and underemployed workers. While most new entrants, who have longer years offormal education, would be aspiring to employment outside smallholder agriculture, especially inthe modem sector, it is clearly not possible. For example, if non-smallholding employment wereto grow at its trend growth rate, then the new jobs created would be able to absorb only about aquarter of new labor market entrants between 1992 and the year 2000. Given the sponge effect ofthe informal sector in employment, a large part of the labor force will inevitably end up fallingwithin the informal sector. The challenge therefore becomes not only to facilitate employment inthis sector but to create the conditions for graduation into the formal sector and ensure qualityjobs which are sustainable.

66. The above facts have serious implications for poverty. In urban areas, for example,unemployment increased to 23 percent in 1991 from 16 percent in 1986 and the average real wagetoday is only 45 percent of its level in 1980. Considering the persistent high dependency ratio,which is the highest in the world, this may imply that a larger proportion of the population livesat or below the poverty line.

67. To reduce unemployment and poverty, rapid growth of the economy is the most urgentneed. At the same time, adequate policies to harness population growth should be given a highpriority for a long term effect. Given the relatively low elasticity of employment to production inthe economy, Kenya must not only raise the growth rate of GDP but also adopt a labor intensivegrowth path. To achieve this goal, a comprehensive strategy should be pursued to promote largerlabor absorption in the private sector and to enhance the transition of the informal sector into theformal sector. This strategy is well reflected in Kenyan Government policy statements.

68. The Government recognizes the importance of the informal sector in employment creation,income distribution, and rural-urban balance as spelled out in several key sectoral policy papers.Sessional Paper No. 1 of 1986, Economic Management for Renewed Growth highlighted informaland small-scale enterprises as a primary vehicle for social and economic development. Theimportance of informal sector enterprises was further emphasized in the Sixth NationalDevelopment Plan. 1989-93 and Development and Employment in Kenya: A Strategy for theTransformation of the Economy (the "Ndegwa Report") prepared by the Presidential Committeeon Employment. Sessional Paper No. 2 of 1992, Small Enterprise and Jua Kali Development inKenya sets a comprehensive policy framework which would: (a) provide an enabling environmentthrough eliminating licensing, tax, and other regulatory restrictions on informal sector activities;

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(b) facilitate the transition of micro and small scale enterprises into medium size enterprises; (c)increase access to credit for the informal sector; and (d) improve access to information on marketand appropriate technologies. It recommended that the Government act as a catalyst andfacilitator to promote the informal sector, leaving a major role for private sect,or intervention.While these policies are basically sound, their implementation lags behind.

69. The informal sector is an ambiguous and comprehensive term embracing a wide range ofactivities by small and micro-enterprises. This heterogeneity raises a serious definitional question.While the informal sector can be distinguished by the avoidance of government regulations,illegality of activities, amount of assets, or energy use etc., using size of establishment measuredby number of employees as a criterion appears useful to identify the beneficiaries of the proposedproject. A working definition is therefore adopted to cover micro- and small enterprises definedas 1-19 and 20-49 employees, respectively. Further, the term "Jua Kali' is used colloquially torefer to enterprises specializing in the manufacture of products and providing productive services,rather than traders per se.

70. The 1993 CEM estimated that informal employment in 1991 comprised 598,513 workers in350,066 establishments. The informal sector constitutes 98 percent of all businesses in thecountry and contnbutes 37 percent of total urban employment, about 1.6 million in 1991. Theinformal sector recently has made a substantial contribution to the expansion of employment inKenya. Its employment grew at 14 percent per annum in the last three years as corapared to 2.3percent in the modem wage sector. Urban centers accounted for nearly two thirds of totalemployment, while Nairobi makes up 25 percent of all employment in the sector. About 60% ofinformal operators are involved in trade with the remainder divided equally betweenmanufacturing and other services. Manulfacturing, however, is the most pmmising sector in thecreation of stable employment considering its share of paid employees and its high employmentgrowth rate.

71. The informal sector is closely tied to other parts of the economy. For example, it providesthe rural and urban lower income groups with consumer goods and services. It also providesdomestic inputs and services used by medium and large-scale firms, besides being a customer formany goods produced in the modem sector. These two sectors are expected to have closerlinkages in the future through sub-contracting. Therefore, the growth of the informal sector willcontribute to the enhancement of the whole economy.

72. The recent Bank Private Sector Development Strategy (PSDS) report showed that theprivate sector, as a whole, suffers from the Government's policy failures -lack of macroeconomicdiscipline, poor and uneven enforcement of laws and excessive regulations. The informal swectorshares these obstacles, and is further constrained by: lack of worksite security and basicinfrastructure; limited access to formal credit; low skill levels, and inability to acquire informationon marketing and technology opportmities. These factors are again mutually reinforcing. Forexample, insecurity of worksites restricts access to credit, leads to local authorities' harassment,and creates disincentives for developing and investing in the worksites, thereby hamperingimprovements in technology and productivity.

73. In order to realize the potental for employment creation in the informal sector, theseobstacles should be addressed. Yet, the private sector alone may fail to provide the requiredservices related to skills training, technology advancement, and infrastructure provision due to thefollowing factors: insufficient information, the inability of small enterprises to provide trainingand to develop technology and infrastructure, economies of scale, etc.. Public sector interventionis therefore required and justified in these areas to correct market failures. To this end, theGovermnent intends to remove the obstacles identified above and to formulate and implement

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appropriate policies for the informal sector, and facilitate investments in related areas as part of acommitment to private sector development.

Project Objectives and Outcomes

74. As summarized in the Government's Letter of Sector Policy and Action Plan, theGovernment intends to pursue its long-term objectives concerning the informal sector as part ofthe private sector economy. Within this framework, the proposed project seeks to assist theGovernment in: (a) developing and implementing policies liberalizing the entrepreneurialenvironment and establishing a National Training Strategy; (b) providing access to skills trainingand appropriate technology for micro- and small enterprises and facilitating technologicalinnovation in the sector; and, (c) improving the operational and managerial capacity of institutionsand programs that support the sector's development. The project would use private sectorcontractors, trL.ning and research institutions, Jua Kali Federation/Associations and employers asthe primary agents to promote and implement the proposed project. Expected key outcomes byproject's end include: (i) training of some 60,000 informal sector ranufacturers; (ii) provision ofinfrastructure for about 4,000 entrepreneurs; (iii) exposure of some 80,000 Jua Kali to marketingand production technology information; and (iv) an improved enabling policy environment.

Project Description

75. Micro- and Small Enterprise Trining Fund (US$11.5 million) would enhance skillupgrading and technology development for mnicro- and small enterprises by providing incentives todiversify and improve public and private sector training capacity, including enterprise-basedtraining. About 50 percent of the entrepreneurs and employees in the micro- and small scalemanufacturing sector would benefit from the services provided under the Project Training Fund.By combining two approaches to funding training - a voucher progam and a contract trainingscheme -- the training system would be reoriented from a supply-driven to a demand-drivenapproach. The voucher program would place training vouchers directly in the hands of micro-and small entrepeneurs and operators, introducing consumer choice to purchase the training whichthey require from a range of public and private sector providers. The contract training schemewould encourage public and private training providers to compete on a matching grant basis forfinancing to improve the quality and r elevance of training which they offer to informal sectorclients.

76. Technology and Pilot Infrastructure Development (US$5.6 million) would (a) stimulateinformation exchange and innovation in product development through assistance to a technologyinformation clearing function, technology study tours, and marketing exhibitions; and a small pilotprogram of adaptive technology research grants, awarded on a competitive basis, to promote theindigenous capacity for the research, design, and commercialization of new products andproduction technologies for the informal sector. These programs would be implemented by theJua Kali Federation/Associations and other privately contracted organizations; and (b) supply JuaKalis with secure worksites and access to appropriate infrastructure, e.g. power, water, sanitation,refuse collection and roads. Development would take place on an experimental/pilot basis on sitesin Kisumu and Mombasa where land has already been secured for Jua Kali from local authorities.

77. Institutional Strengthening (US$2.1 million) would help develop a new partnershipbetween the public and private sector guaranteeing the full participation for Jua Kali entrepreneursand workers (as individuals and through their associations) in training and technology policy andprogram decisions and subsequent implementation - by establishing (a) a staff developmentprogram for MRTT&T (based upon an organizational review and staff redeployment plan) and JuaKali Federation/Associations; and (b) a policy analysis, monitoring and evaluation system to makethe training system more quality conscious, responsive to the needs of the export sector, and

19

financially sustainable. This sub-component would assist in the development of a long-termNational Training Strategy more responsive to productive sector training needs, based on (i) anassessment of the Industrial Training Levy scheme, (ii) an evaluation of the trade test andcertification system, and (iii) a policy review process for skills training. The National TrainingStrategy would be crucial for project sustainability and longer term sectoral development.

Project Financing

78. Total project cost is US$24.2 million, including US$1.7 for project implementation andUS$ 3.3 for contingencies. The IDA Credit of US$21.83 million (SDR 15.7 million) wouldcover about 90 percent of total project cost or 100 percent of the foreign exchange cost and 85percent of the local cost net of duties and taxes. The Government and Jua KaliFederation/Associations contribution of US$2.4 million equivalent would finance about 10 percentof the total project cost. About US$ 0.5 million equivalent, or 2 percent of total project cost,would be contributed by JKA and private individuals towards the construction (materials andlabor) of storage and distribution facilities at the Jua Kali development locations in Mombasa andKisumu. A breakdown of costs and the financing plan are shown in Schedule A. Amounts andmethods of procurement and disbursements, and the disbursements schedule, are shown inSchedule B. A timetable of key processing events and the status of Bank Group operations inKenya are given in Schedules C and D, respectively. More detailed information is provided inthe Staff Appraisal Report No. 12275-KE.

Project lmplementation

79. Organ_ation and Management. The institutional arrangements for implementing theproject are designed to strengthen and develop a government-private sector partnership betweenthe MRfT&T and the Jua Kali Federation/Associations, the chief executing agents for the project.In the early years of the project, while the staff and management capacity of these institutions isbeing developed through a comprehensive staff development program, the main project activities(training fund management, infrastructure and technological information program development,policy analysis, and program monitoring and evaluation) would be implemented with assistancefrom private sector consultant contract services.

80. The lead agency for the project would be the MRTT&T. Day to day project coordinationwould be the responsibility of the Directorate of Applied Technology (DAT), MRTT&T under thedirect management of the Permanent Secretary, MRTT&T (the chief accounting officer of theMinistry) and guided by a multi-sector (public and private) Project Steering Committee (PSC)chaired by the Permanent Secretary with representation from the Jua Kali Federation andAssociations. The Training Fund would primarily be managed by the Training and Gender Unit(TGU) of the Directorate of Applied Technology (DAT), MRTT&T. Tnis unit would coordinatethe voucher program brokering (match-making between trainees and skill-upgrading pr- i';ers)and sub-project appraisal of the contract training proposals from the public and privat seetorproviders with the assistance of training contract support services and the local Jua Kai.Associations. The Technology sub-component would also be implemented on a contract basis andmanaged by the Center for Research and Technology (CRT) and the Directorate of ResearchDevelopment (DRD). The pilot infrastructure component would be implemented by engineeringand management contract consultants under the management of the Applied Technology Unit(ATU-infrastructure and worksite).

81. The Planning and Development Unit (PDU), MRTT&T would oversee contractimplementation of the staff development (capacity building of the Ministry and Federation/Association) programs, manage the contractors undertaking the various policy studies (assessmentof the Training Levy Scheme and National Trade Testing Program) and National Training

20

Strategy development, performance monitoring of policy and program implementation, and theproject imnpact evaluation. This activity would include the development of a data base on theinformal sector coordinating with overlapping data bases from the National Economic Survey andthe Household Monitoring Program. At the grassroots enterprise level, the project activitieswould be implemented directly by the Jua Kali Federation/Associations with support from therelevant MRTT&T units (described above) and related private sector consultant contract services.It is envisaged that the Federation/Associations would be capable of implementing and sustainingthe training, technology and infrastructure programs upon cmpletion of the project. See Annex4 of the SAR for implemnentation organizational Charts of the key executing bodies, MRTT&Tand the Jua Kali Federation/Associations (national and district levels).

Project Sustnabiility

82. Long-term sustainability of the project investments, following project completion, should beenhanced by fostering an enabling policy environment and institutional development proposedunder the project. By removing or simplifying various barriers to entry, operation and exit, e.g.,registration, licensing, building standards, and other outdated business regulatory laws, informalsector growth is possible. The Vagrancy, Nuisance and Chiefs Authority Acts are already underreview by various Task Forces. Policies, which especially affect the broader economy has beenaddressed through the PFP (Policy Framework Paper) and may continue to be addressed in futureprivate sector reform and financial sector adjustment operations. As for the patent system, theIndustrial Property Act was already enacted in December, 1989 to make it more relevant to theJua Kali sector by introducing utility models, a type of "petty patents".

83. By focusing on the Jua Kali Associations and the MRTT&T, as well as management andplanning skills of entrepreneurs, one significant outcome would be enhancement of the capacity tosustain policy and project interventions. Cost recovery measures through an infrastructurerevolving fund managed by the Associations should contribute to sustainability of physicalinvestments. With the inclusion of partal cost recovery through training fees, a modernizedIndustrial Training Levy, and the development of a long-term National Training Strategy thefinancial sustainability of training investments would also be strengthened. Both policy analysiscapacity and the implementation of the Project Trainig Fund would facilitate projectsustainability and longer term sectoral development. For instance, the Project Training Fundwould develop financing mechanisms (i.e., a Jua Kali training fund) as well as experience andlessons to be incorporated in the modernization of the Industrial Training Levy scheme and thusenable project sustainability. This process is likely to involve consolidation and privatization oftraining, facilitating a larger role for the private sector and enterprises in skills training,especially regarding training facilities and cost sharing, and improving mechanisms linking theGovernment, industry and workers.

Lessons from Previous IDA Involvement and linkage with Sector Polcy

84. Since 1966, IDA's Kenya portfolio in Human Resources comprised six Education Projects,four of which involved expansion of vocational and technical education in the formal system.Informal sector training was never the main focus, although it derived some benefits from theseinvestments. The main focus of these investments was pre-employment training through theestablishment of new technical schools and institutes. Although vocational investments have beenhigh, they have not been part of a broader strategy to address such important issues as relevance,cost efficiency, self-financing and sustainability. This has resulted in a mismatch between trainingsupply and skill demand, especially by infonnal sector operators, underutilization of trainingcapacity and an overall weak financial position of the vocational education and technical training(VET) sector. Other countries also faced similar constraints in their training systems which hasled to the preparation of a new Bank VET policy paper and which calls for more training in the

21

private sector, measures to improve the responsiveness and efficiency of public training, and thedevelopment of a longer-term strategy for the evolution of the Government's role in training.These themes are taken up in the Bank's Country Economic Memorandum on IncreasingEmployment Growth in Kenya (1993) and are addressed under the proposed project. The CEMputs a particular emphasis on the capability and flexibility of the training system which canrespond to the skill needs of employers, including the informal sector workers. To this end, moreinvolvement of employers is suggested in determining the content and provision of training andshare in the costs. Its specific recommendations are completely aligned with this project.

85. IDA has provided two credits relevant to the proposed infrastructure component: NairobiSite and Service Project (Credit 543-KE) and Small-Scale Industry Project (Credit 750-KE).Implementation of the first Credit suffered from disputes over building and infrastructurestandards, i.e., too rigid by-laws which caused long delays. Cost recovery fell short of itsobjectives. The second Credit faced more severe problems. Kenya Industrial Estates failed toimplement the project due to the lack of appropriate staff. They failed to collect bad debts andestablish proper cooperation with its field operators. Thus, only 50% of the Credit was utilized;only one of the eight sites suggested for development was used, feas:ility studies on these sitesbeing rejected by the Bank. To ensure that the defects of the above mentioned Credits not berepeated, the proposed infrastructure component would be experimental in terms of the methoafor construction and ownership. It would be implemented on a pilot basis, ensuring propersupervision and evaluation. In addition, cost recovery measures through the infrastructurerevolving fund managed by the Associations with oversight from the MRTT&T should contributeto the sustainability of physical investments. Finally, evidence of steps towards amending theRegistration of Business Names Act, Trade Licensing Act, Local Government Adoptive By-Laws(building standards), and the Electric Power Act, as well as the Vagrancy, Nuisance, and Chief'sAuthority Acts, would be conditions of disbursement on the civil works and building materialsprocurement categories of the infrastructure component.

Rationale for IDA Involvement

86. The Bank's country assistance strategy for Kenya focuses on poverty reduction throughaccelerated growth and employment generation. This strategy would entail bolder implementationof an appropriate policy agenda given the prospects of large-scale unemployment and substantialincreases in the numbers of Kenyans living in absolute poverty. Within this Bank/lDAframework of poverty reduction, the current dialogue with the GOK also reinforces theGovermnent's plans to promote training and employment opportunities in the informal sector,especially for the poor and marginal segments of society. In tius context, the proposed projectresponds directly to the Ndegwa report recommendation for enhancing technology transfer andstrengthening skills upgrading in the informal sector as a means to improve the overall efficiencyand productivity of Jua Kali operations at the enterprise level. The "demand driven" approach,linking in-service/on-the-job training for existing entrepreneurs and apprentices more closely toemployment opportunities and improved productivity, is a central feature of the proposed project.This approach also corresponds to the new Bank Policy on Vocational and Technical Education.In fact, the proposed project would provide an early opportunity to implement this new policy.Last but not least, this project corresponds directly to the Bank's strategy for the Africa region,which emphasizes the dynamism and importance the informal sector plays in African economies.It aims at developing the informal sector by promoting access to technology related training andinstitutional support within the framework of a more favorable enabling policy environment.

22

Actions and Main Assurances

87. The Government fulfilled the following conditions prior to negotiations: (a) prepared aDraft Letter of Informal Sector Policy and Time-bound Action Plan to improve the enablingenvironment; (b) prepared a detailed Draft Project Implementation Plan and Procedures Manual,including specific organizational arrangements, actions (activities and procedures), responsibleagents and annual budget estimates, at least for the first year's implementation; (c) prepared draftterms of reference for external auditors for the FY 93 Training Levy Funds; (d) prepared terms ofreference for prospective implementation contracts; (e) prepared draft terms of reference for tradetest and individual levy studies and policy review process for skills training; and (f) presentedevidences of bonafide membership (registration list) in the Jua Klai Association, clear individualor Association ownership (copies of letter of allotment purchase receipt and leasehold title) ofsites (Kisumu and Mombasa) designated for infrastructure provision under the project. Asconditions of Board presentation: (a) the Letter of Informal Sector Policy(LISP) and Action Planhas been signed; (b) the Project Inplementation Plan and Procedures Manual has been agreedupon; (c) the external auditor for the Training Levy Funds has been advertized; and (d) drafttender documents for implementation contracts and a detailed procurement schedule has beenprepared.

88. The following assurances were obtained from the Government at negotiations: (a) anassessment of the National Industrial Training Levy system which now finances employee trainingthrough an enterprise wage-based taxation scheme, and the trade testing and certification systemwould be undertaken and a detailed Action Plan for modernizing these, including amendment ofrelevant acts, if necessary, would be completed by August 30, 1995. A policy review process forskills training and a draft National Training Strategy would be prepared by December 31, 1995;(b) an organizational review of MRTT&T and Jua Kali Federation would be completed byDecember 31, 1994. A subsequent staff redeployment and development required for successfulproject implementation would be submitted to IDA by June 30, 1995; (c) annual audits of specialaccount and SOEs as well as of two financial accounts for the infrastructure component byindependent auditors acceptable to IDA would be carried out. All audited accounts would bemade available to IDA within six months of the close of each fiscal year; (d) MRTT&T wouldprepare semi-annual progress reports and forward them to the Bank by April, 30 and October 31of each year; (e) MRTT&T would prepare an Implementation Completion Report (ICR) on theimplementation experience and project outcomes for submission to IDA not later than six monthsafter the closing date; (f) Beginning in 1994, MRTT&T would submit to the Bank, for review andcomment, no later than April 30 of each year, a statement of project achievements and actualexpenditures for the on-going year, and a work plan and proposed expenditure for the comingyear; and (g) MRTT&T would carry out with IDA and the Jua Kali Federation/Associations, atripartite Mid-Term review (based upon agreed policy and program performance indicators) in1998.

89. As conditions of credit effectiveness, the Government would have: (a) fully staffed therelevant MRTT&T implementing units required to assist in contract management; (b) obtainedCabinet authorization of the Project Training FUPd; and (c) employed external auditors andcompleted the FY 93 Training Levy Funds. It would provide the completed audited report withrecommended remedies of the PY 93 Training Levy Funds.

90. As a condition of disbursement on the civil works and building materials procurementcategories of the infrastructure component, the GOK would submit the following draft bills toParliament by July 1994 according to the LISP and Action Plan: the Registration of BusinessNames Act, the Trade Licensing Act, the Local Government Adoptive By-Laws (buildingstandards), and the Electric Power Act, as well as the Vagrancy, Nuisance, and Chief's AuthorityActs.

23

Environment Assessment

91. The proiect is classified as category C, with no adverse impact on the environment.

Program Objectives Categories

92. The project would increase government financing of the training sector through the reviewand reform of the pattern of resource mobilization and allocation. The project would makeprovision for increasing women's representation in manufacturing through skills training andtechnology development suitable for upgrading their enterprises or bringing them into the sector.MRTT&T would use private sector contractors, training and research institutions, Jua KaliFederation and Associations and employers as the primary agents to promote and implement thiproject. The enhancement of the informal sector should also have a positive effect on povertyreduction by reducing constraints to employment promotion and income enhancement in themicro- and small enterprise (informal) sector in Kenya.

Benefits

93. The project would assist the Government to initiate a process of development leading to:(a) improved skills and an expanded informal sector - including female-owned manufacturingenterprises - with increased employment opportunities and earnings through product qualityenhancement and diversification, secure worksite and improved infrastructitve for about 4,000 JuaKali entrepreneurs, better marketing and increased access to technology choice; (b) a down-sizedand more focused Ministry of Research, Technical Training, and Technology capable of policyanalysis, setting training standards, facilitating technical and managerial training and relatedtechnology information and innovation; (c) the progressive empowerment of Jua Kalientrepreneurs and artisans (about 400 Associations and 80,000 members) which would enhancetheir participation in the economic development process; and (d) gradual inclusion (graduation) ofthe informal sector into the modern sector by establishing a legal and contractual basis for itsunfettered development.

Risks

94. The possible risks relate to: (a) the ability of the Government to specify and implementtraining and private sector development policies to enable informal sector entrepreneurs to operatemore effectively; (b) administrative and over-sight capacity of MRTT&T and Jua KaliFederation/Associations, including decision-making about Training Fund allocation andmanagement; (c) beneficiary response exemplified by their willingness to avail vouchers and torecover user costs for training, technology information and infrastructure; and (d) the capacity tosustain policy and project interventions. To overcome these risks, the project would beconditioned on a policy letter and time-bound action plan ensuring key enabling policies for theJua Kali sector. Project Training Fund replenishments would be allocated on an annual basis,once agreed and acceptable levels of performance in administration, award allocation, andutilization criteria are met. A monitoring process (including annual and mid-term reviews) wouldfacilitate the implementation of this comprehensive training and technology development program,including critical changes in the legal, regulatory, and policy framework. A final impactevaluation is also financed under the project to draw broader lessons for future development ofthe sector.

24

Recommendation

95. I am satisfied that the proposed credit would comply with the Articles of Agreement of theAssociation and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

AttachmentsWashington, D.C.March 3, 1994

25

SCHEDULE APage 1 of 2

REPUBLIC OF KENYA

MICRO- AND SMALL ENTERPRISE TRAINING AND TECHNOLOGY PROJECT

Project Cost Suary CUSS milon)

Project Component & Sub-Component Foreign Local TotalFE Total

BaseCosts

1. Training Fund 2.2 9.3 11.5 19 55

Voucher System 1.2 4.9 6.1 1 29

Training Contract Scheme 1.0 4.4 5.4 19 26

H. Technology Delopuent and Pilot n_rasbwtr r 33_ 2.4 5.6 57 27

Technology Information and Innovation Program 1.6 1.2 2.8 57 13

Infrastructure Development 1.6 1.2 2.8 57 14

m. InttorAl DevelOpMent 1.4 0.7 2.1 67 10

Staff Development _.5 0.2 0.9 71 3

Policy Analysis, Monitoring and Evaluation 0.9 0.5 1.4 64 7

TV. ementat 0.7 1.0 1.7 41 8

MRTT&T and lua Kali Association 0.7 1.0 1.7 41 8

Baseline Costs 7.5 13.4 20.9 36 100.0

Physical Contngencies 0.3 0.7 1.0 30 5

Price Contingencies 0.8 1.5 2.3 35 11

Total Project Costs 8.6 15.6 24.2 36 116

* net of taxes and duties* Figures may not add up due to rounding.

26

SCHEDULE APage 2 of 2

Project F ng Pla by Category of Goods and Services(In US$ million)

ImT Govt./JKA IDA Total IDA %

INESTMENT _

A. Sites and Services 0.50 2,28 2.78 82

B. EquipmentVehicles 0.00 0.12 0.12 100Information Technology 0.00 0.07 0.07 100Machinery 0.00 0.13 0.13 100Equipment 0.00 0.05 0.05 100

C. TrainingVouchers (Management) 0.30 1.90 2.20 86Vouchers (Technical Skills) 0.30 3.70 4.00 92Training Contracts 0.30 5.10 5.40 94Foreign 0.00 0.22 0.22 100

D. Technical AssistanceForeign 0.00 0.74 0.74 100. Loca 0.20 2.41 2.61 92

E. Applied ResearchPublications 0.00 0.10 0.10 100

Research Overheads 0.10 0.30 0.40 75Honoraria 0.00 0.34 0.34 100

INCREM. OPERATING COSIS _

F. MaintenanceBuildings 0.01 0.02 0.03 67Equipment & Funiture 0.00 0.03 0.03 100Other 0.05 0.10 0.15 67

G. Materials and SuppliesOffice Supplies 0.09 0.09 0.18 50Materials Supplies 0.06 0.06 0.12 50

H. TravelForeign 0.00 0.38 0.38 100Local 0.05 0.00 0.05 0Per Diem 0.11 0.69 0.80 87

I. SalariesSalaries 0.03 0.00 0.03 0

Total Base Costs 2.10 18.83 20.93 90

Contingencies 0.30 3.00 3.30 90

Total Project Costs 2.40 21.83 24.23 90

27

SCHEDULE BPage 1 of 2

Summary of Procurement ArrangementsUS$o00o

(Amount of IDA rimuncing is in brackets)

Project Element Procurement Method Other NBF TotalICB LCB

I. workm

1.1 Construction 2.01 2.01(-) ~(2.01) - )(.1

2. Goods

2.1 Construction Materials 1.00 1.00l (1.00) (-) (_) (-).0() (1.0% I

2.2 Equipme 0.27 - 0.27(0.27) (-) (-) (-) (0.27)

2.3 Vehicles 0.13 0.13(0.13) 0 ) -)( .13)

3. Co. lt. ls

3.1 Training 13.71 - 13.71( ) ( ) ~~~(12.71 ( 1)(2.71

3.2 Technical Assistn 3.88 . 3.88) (_) ~~~~(3.15) - (3.15)

3.3 Sties & Research 0.81 0.81. ~~~~~~~~~~~~~~~~~(O .,61). ,. .t61

4. iscella_e

4.1 O&M. Vehicles, 0.24 0.24Equipmenlt, Buildings (-) (-) (0.1)-) (0.18)

4.2 Salaries, TrAvel & 1.66 1.66Per Diem (-) (-) (1.46) ( (1.46)

4.3 Mateials & Supplies 0.47 0.47(-4 (*) (0.27) (-) (0.27)

S. PPF - - (0.43) (0.43)

TOTAL 1.40 2.01 20.77 2_4.18(IA0) (2.01) (18.37) .- (I.

Note: Figures in p t are the reective amounts cd by ANBF - Not Bank Fianced

28

SCHEDULE BPage 2 of 2

Disbursement Categories and Perentages

Amount of CreditCategory Allocated % of Expenditures

US$ Million to be fianced

I. Civil Works/Construction 2.5 100% of foreign expenditureMaterials 82% of local expenditure

2. Equipment and 0.3 100% of foreign expenditureFumiture

3. Vehicles 0.1 100% of foreign expditue4. Technical Assistance 3.5 100% of fordign expenditure

90% of local expenditure5. Traiing and Studies 13.1 100% of foreign exediture

95% of local expenditure

6. Incremental Recurrent 1.9 100% of foreign expenditureExpenditures (salaries)

7. Project Preparation Facility 0.4 Amount due pursuant tosection 2.05 (c) of the

.___________ Credt Agreement

Total Credit Amount 21.8

Estimated Disbursement Schedule________ ____ ____(UJS million)____ _ Us$_Mull"

I DA F1scal Year 1994195 1995196 1996/97 1997/98 1998/99 1999/00 00101Amual 1.0 2.6 3.9 4.2 3.6- 3.6 2.9

Cumulative 1.0 3.6 7.5 11.7 15.3 18.9 21.8

29

SCHEDULE CPage I of 1

TIMETABLE OF KEY EVENTS

Time Taken to Prepare: 30 months

Task Manager: Nat J. CollettaTeam Members: Yang-Ro Yoon (Human Resources Economist)

Pat Walker (Implementation Specialist)Bettina Moll-Druecker (Training and Education Specialist)Stephano Migliorisi (PSD Specialist)Lem Miravalles (Monitoring and Evaluation Specialist)Charles Byrahuanga (Statistician/Economist)James Kamunge (Educator)

First IDA Mission: February 1991

Appraisal Mission: June 1993

Post-Appraisal Mission: October 1993

Negotiations: January 1994

Planned Date of Effectiveness: July 1994

Relevant PCRs: CR 1107-KECR 750-KE

Relevant PPARs: CR 93-KECR 185-KECR 797-KECR 543-KE

30

SCHEDULE ESTATUS OF BANK GROUP OPERATIONS IN KENYA Page I of 3

A. STATEMENT OF BANK LOANS AND IDA CREDffS(as of December 30 1993)

Forty-five (45) Loans and fifty five (55) credits fully disbur 928.41 1070.70Of whieh SECALs, SALs amd Program Loans/Credits: at

Cr.0990-0 1980 Struct. Adj. Credit 55.00Cr.127 6-0 1983 Struct. Adj. Credit II 70.00Cr.A021-0 1986 Agriculture Sector 40.00Cr.1717-0 1986 Agriculture Sector 20.00Cr.A036-0 1988 Industrial Sector Operation 10.00Cr. 1927-0 1988 Industrial Sector Operation 102.00Cr.1927-1 1988 Industrial Sector Operation 53.70Cr.2049-0 1989 Financial Sector Operation 120.00Cr.2049-1 1990 Financial Sector Operation 44.00Cr.2049-2 1991 Financl Sect. Oper. 67.30Ln.2190-0 1983 Structural Adj. Credit U 60.90

Cr.F0170 1984 Second Highway Sector 40.00 2.79Cr.16730 1986 Sixth Education 37.50 12.44

Cr.17580 1987 Animal Health Services 15.00 9.44Cr.18200 1987 Second Railway 28.00 4.84

Cr. 18490 1988 Nat. Agriculture Research 19.60 8.61Cr. 19040 1988 Population II 12.20 8.00Cr. 19730 1989 GeOthermal Development 40.70 9.21

Cr. 19740 1989 Rural Services Design 20.80 10.71

Cr.20580 1990 TA 5.00 4.15Cr.20600 1990 Third Nairobi Water Suppl. Proj 64.80 35.25

Cr.20620 1990 Coffee 1 46.80 28.37

Cr.21 110 1990 Population IV 35.00 31.14

Cr.21470 1990 TA-DFI Res/Exp. Prom 6.00 3.52

Cr.21970 b/ 1991 Export Development 100.00 2.32Cr.21980 1991 Forestry Development 19.90 16.39

Cr.21990 1991 Agr. Natl. Ext. n 24.90 19.18

Cr.22040 b/ 1991 Agric. Sector Adjust. 11 41.52 6.26

Cr.22950 b/ 1992 Education Sect. Adj. Cr. 100.00 50.44Cr.23090 1992 Universities 55.00 51.35Cr.23100 1992 Health Rehabilitation 31.00 26.18Cr.23330 1992 Mombasa Water 1I Eng. 43.20 38.76Cr.23340 1992 Wildlife Services Pr. 60.50 47.84Cr.22951 b/ 1993 Education Sector Adj. Cr. 52.14 5.30Cr.24400 1993 Parastatal Reform TA 23.32 22.24Cr.24450 1993 Agric. Sect. Mngt. 1 19.40 18.53Cr.24600 1993 Drought Recovery 20.00 17.66Ln.24090 1984 Second Highway Sector 5.00 3.31

Total 933.41 2032.98 23of which repaid 560.50 39.09

Total held by Bank & IDA 372.91 1993.89Amount sold 11.74

of which repaid 11.74Total undisbursed 494.23

a/ Approved after k- YSU bl SAL, SECAL or Program Loan/Credit

31 SCHEDULE D

Page 2 of 3

B. STATEMENT OF IFC INVESTMENTS IN KENYA(as of December 30, 1993)

1993 AEF-Future Hotel Restaurants & Hotels 0.50 0.00 0.501991 AEF-MALAA Agric. Wholesaule&Retail 0.53 0.16 0.691994 AEF-SAWA FLORA Agric. & Live-stock Products 0.32 0.16 0.481992 AEF-Wood Complex Mfg. of Wood & Cork Product 0.40 0.00 0.401982 Bambuti Cement Cement Lime & Plaster 4.43 0.00 4.431984, 1980 DFCK DFC, Mfg Pupi Paper & Paperboar 5.07 1.31 6.381982 DTK Merchant Banks 0.00 0.80 0.801986 EBP Restaurants and Hotcls 3.67 0.00 3.671982 IPS (K) Venture Capital Companies 0.00 0.55 0.551987, 1987, 1993 IPS (K)-ALLPACK Venture Capial Companies 0.00 2.36 2.361990 IPS(K)-FRIGOKEN 0.00 0.06 0.061991 IPS(K)-NOVASKINS 0.00 0.14 0.141989 IPS(K)-PREM FOOD 0.00 0.11 0.111989 IPS(K)-PREM REFR 0.00 0.14 0.141988, 1992 IPS(K)-UKULIMA 0.00 0.06 0.061981 KDFC Sm. & Med. Scale Enterpris S.00 0.00 S.001967,1968, 1973 Kenya Hot Restaurants and Hotels 5.16 0.72 5.88992 LIK 0.00 0.03 0.03

1984 Tanneries & Leather FinishIng 2.12 0.60 2.721986 Madhupaper Mfg. Pulp Paper & Paperboard 37.16 1.97 39.131986 Oil Crop Mfg. Vegetables & Animal Oil 9.65 2.14 11.791970, 1974, Pan African Mfg. Pulp Paper & Paperboard 40.74 6.27 47.011977, 1979,1981, 1988, 19901976, 1985 Rivatex Spinning, Weaving & Finshing 8.16 3.35 11.511977 SMSIE - KE Small & Med. Scale Enterprises 2.00 0.00 2.001983 TETRA PAK Mfg. Connrs & Boxes 2.17 0.37 2.541972 TPS (Kenya) Tourism Services 2.42 0.05 2.47

Total Gross Commitments 129.50 21.35 150.85Less: repayments, canellations,

exchangc adjustments, wrteoffs,terminations and sales 110.22 11.70 121.92

Total Commitments now held by IFC 19.28 9.65 28.93Total Undisbursed 0.72 0.78 1.50Totd Outstanding IFC 18.56 8.87 27.43

01-24-94ken2edl.wkl

32

SCHEDULE DPage 3 of 3

DISBURSEMENT ISSUES

1. The portfolio of disbursing projects for Kenya at the end of December 1993 comprisedone loan, one special facility and 25 credits for a total commitment of US$967.3 million, withUS$494.2 million undisbursed. This included 22 investment projects for a total of US$673.6million committed and US$429.9 million undisbursed. FY93 disbursements of US$70.6 millionon the investment portfolio improved over FY92's level of US$57.2 million, and comparedfavorably to the average over the last five years of US$63.7 million. This corresponds to adisbursement factor (ratio of disbursements to cumulative net undisbursed balance at the beginningof the fiscal year) of 13.8 percent for FY93.

2. The portfolio's modest disbursement perfornance is due in part to its relatively young agestructure (average of 4.3 years). However, as suggested by the increasing number of problemprojects (26 percent at the time of the FY93 ARRP), there are also other issues which haveundermined progress. These include: (a) inadequate budget and counterpart fund availability andrelease of funds already approved for project activities, particularly for operational expenses; (b)delays with procurement; (c) weakness in project management.

3. To overcome these problems the Department undertook a Special Portfolio review whichresulted in a reduction in the portfolio, elimination of non-performing projects and components,and restructuring of several projects. Counterpart funding is being tackled under a PublicExpenditure Review intended to rationalize the existing portfolio of Government projects.Additional measures include provision of assistance by the Resident Mission in overcomingbottlenecks with disbursements and procurement. A CPPR scheduled for mid-1994 will deepenthese actions.

33

SCHEDULE EAnnex 1

KENYASelected Indicators of Portfolio Perfonnance and Management

Indicator E_ . .24 I/

Portfolio PerformanceNo. of Projects under Implementation 31 32 31 26Average Implementation Period (years) 4.5 4.4 4.5 4.6

Percent of Projects Rated 3" or *4"Development Objectives 19 12 13 8 *OvMl Status 25 15 22 19 *

Average R ai&gsDevelopment Objectives 1.71 1.59 1.68 1.58Overall Status 2.00 2.06 2.16 2.08

Disbursement Rado (%) 2/ 19.0 16.5 13.8 8.6Memorandum Item: % Completed Projects Rated Unsatisfactory 44

Portfolio ManaeentSupervision Resources (total sws) 386.0 505.3 501.0 239.1Average Supervision sws/prcject 12.5 15.8 16.2 9.2

Supervision Resources by Location (in %)Percent Headquarters 79.2 68.3 59.6 63.1Percent Resident Mission 20.7 31.7 40.4 36.8

Supervision Resources by Rating Category(staffweeks/project)Projects rated 1 or 2 13.5 16.1 16.7 9.5Projects rated 3 or 4 9.5 14.6 14.4 7.8

Memorandum item: date of next CPPR 6/94

11 As of December 31, 1993.2/ Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio

at the beginning of the year: investment projects only.* Note: as of End-February 1994, only 1 of the 26 projects (or 4 percent) was rated "3" or "4".

34SCHEl,JLE EAnnex 2Page 1 of 2

KENYABank Group Fact Sheet

IBRD/IDA Lending Program, FY91 - 97

Past Current Planned

CateOorv FY91 FY92 FY93 FY94 FY9S-FY97

Commitments (US$m) 287.2 38.9 114.8 0 (300-6308

(of which IDA Reflows) (.) (49.2) (52.1) (42.2)

Sector (%)

Economic Mana ement 10

Public Sector Management 35 - - -

Poverty Reduction & Human Res. Dev. 30

Human Resources - 55 45 100

Private Sector Development 30

Industry and Fuiance 23 14 21 -

Environmentally Sustainable Dev. 30

Agriculture 42 18 34

Infrtucture - 13 -

TOTAL 100 100 100 100 100

Lending Instrument (%)

Adjustment 11 84 44 45 66

Specific Inv.Loans & Others __6§ 56 55 34 100

TOTAL 100 100 100 100 100

Disbursements (US$m) 247 123 168 113 P

Adjustment Credits 103 65 45 24

IDA Reflows 70 - 52 48

Specific Inv. Loans & Others 74 58 71 41

Principal Repayments (US$m) 92 93 96 49

Inerest Payments (US$m) 77 71 68 31 Y

i1 Includes IDA Reflows.Y' As of December 31, 1993.

35

SCHEDULE EAnnex 2Page 2 of 2

IFC PROGRAM, FY91-FY93

Category FY91 FY92 FY93

IFC Approvals (US$m) 0.83 0.44 0.55

Sector (%)

HotelsRestauants 7.0 91.0

Agribusiness 83.0 - 9.0

Capital Markets 17.0 2.0

tg- 91.0 -

Total 100.0 100.0 100.0

Investment (%)

Loans 64.0 91.0 91.0

Equity 36.0 9.0 9.0

Total 100.0 100.0 100.0

36

SCHEDULE EAnnex 3Page 1 o£ 2

Kenya: Priority Poverty Indicators

Mew SNd253,0 13S-0 S ,o

Uik Of jM YM n SAtha Lau- ble"f.firIndicaet d"te fat f(w _ u gwpPOVERTYUpper povaty line l.c.. .. .. .. .. ..Hedoit idx %ofp.. .. .. ...

Lowe~ povety line lol . .. .. .Head index %ofpp. .. ..

GNPpercaa USS 100 230 340 350 350 1.610

SHORT TERM INCOME INDICATORSUnskilledwbuww lcalr. .. .. ..lowUnkiDed nmtl waes * *- * 136Rur t ofurde ' .. .. ....

Cotauaer pice index 987-100 14 26 174Lower inoome * ...Food ' .. . 12.

Rural

SOCIAL INDICATORSPublka e se oda ewvicm %*fGDP .. .. ..

Pir2sy %atdalrppai 54 95 94 70 113 100Primary 69 103 96 76 122 106Fale * 40 87 92 60 106 98

MortalityInhrtmortlity am liwbil 112 92 67 104 70 40Under 5 mortalY *. .. 105 177 9 53

M en. % up _ 60 40 73 70DP* .. 72 35 81 74

Cblldmalnuine (undw-5)Lufe,opedanc 36Total yew 47 52 59 51 63 67FemalMsal awio 1.09 1.08 1.07 1.06 0.95 1.08

Tol fatiltyru birt SpawAm 8.0 81 6.5 6.4 3.7 3.5MoanalaitY ra 100.000 li b .. .. .. _...

Population growth rate Infant mortality rate Primary enrollment- (bo * c(Uw) b)lo

6+. 250 120' .

a 200 100

2 40 AO 20

_0 0 iid60s fmid 70o ins mid 609 mid 7Oa an mid 60s mid 70s nat

-lAYW inoxn

37

SCHEDULE EAnnex 3

Kenya: Resource Ad Expenditure Page 2 of 2

Megt S~!qVTnvemP Wisi. 13* . r _

UNt,of _ jwt d.- -Sdk' hugh.lad ieab3? -~~~~~~~twd (we) AJie ga. ematl'MA'4N SRESOURCESpoquladon (mve-9911) dwmkt ) 9.749 13.741 25.006 488S932 3.127.265 773.803.Age, dependency 9U ) aio 1.06 1.12 1.10 0.97 0.66 0.71Urb#an %o(pop. S.6 129 24.0 28.7 40.1 53.9PopualOatio rowth sm 3.2 3.7 3.4 3.0 1.9 1.7LVrbaa 6.0 7.1 5.1 5.0 5.2 3.1Labor fomr (15-64) tuiian 4 6 10 204 1,448 302ARrtcu% of labo fa 6 83 ..Snu * 5 6 ..falc 43 42 40 37 33 32female per 100 maiSUrban mtber .. .. ...Rur '

NATURAL RESOURCESAles thou. sq. kma580 Sa 580 23,066 38.828 23.990Density pop.pernqkm 17.0 24.0 40.0 20.0 77.0 31.0AgriculUtalanrt % of dream 70.2 70.1 71.1 51.0 47.4 41.8Change inm a 1cul a1 land data % 0.1 0.1 0.0 0.0 0.0 0.0AjieurA, land under i i % _ _. 5.5 13.7 12.6Forals and woodland ho L . km 28 26 24 6.651 9.19t 5.396DdeoeAZioa (net) dswa% 40.7 .0.S 48.SINCOMEHousehold ;imowShre oftop 20%of1bouadiltd %ofia 60..Share ofbo fba 4ofbmso%k * 9shae of bda2 2%ofbboa 3 _ _ .

LXPENDITUREFood %ofODP .. 28.3 27.4 _Stapls .. 12.2 11.3 Metfis. milkOak. ^M, _P 7.3 6.7 _C'eralhapots tkMiiMark@toin 117 86 ISS 7.138 36.00S 44.418Food aid in oeme * 2 62 2,677 6.669 4.047Food poduclnp- -pits 19794S-100 113 103 104 94 122 101Fold -kV 14.5 47.5 94.2ShareoflnGculbzremODP %oGP 32.4 30. 2;'.9 29.2 28.7

Housing %OCGDP .. 8.1 ..Avea houSehold Size p. pAM ld _ ,Ufban 5 - - -Ftx.dinvalemt: bouing %ofGDP .. 3.5 3.1

Fual Npowr %ofODP _ 1.7 1.7 _Enrgyoosusuption prapita kgofoleqsiv 110 15S 100 100 350 1,249Household with elicityUrean %ofbouseb ..Rural

Trauport and _ _nw m %ofGDP * - .. 5.6 3.6Ftxwd investmet tWNPOd 4,0111be.. 2.7 1.7 ..Total Mad lengt tho. km .. _ ..INVESTMENT IN HUMAN CAPITALHealtiAsce to bealti cae %ofPopq _ .. _.Population perpby p 13,22 7,900 10,133Population pernuse m1928 1077.Population perhospital bed t o S00 623 1.328 1,04S 509A to saier wow fpop 17.0 _ 36.7 70.6

i * _. 100.0 -oo o 74.3 79.3Rural '_ 4.0 _ 24.2 62.8Olv- hydyrnlioe thsspy(under-) %(cm s o 80 33 32EducatioGros enromen atioSecondary %ofdbo*l.epp4 4 13 23 18 44 56Female * 2 9 19 14 37Pupl4ea cher io:prmy pupils per e 34 33 31 39 39 25Pupil4escher utio: seoonday ' 19 25 17 .. 20PupiareadcingVsaide4 %of t .. 97 77 69 _Repeat rat: pimmy %oftetalamuild 5Illiterac %ofp*(Spls+) S1 _ 31 51 39Female %orftl (ap 1s+) _ - 42 62 52Newsaper civulation per Au.pop. 7 10 11 5 Source: World Bank tIn_uato Eooic Dqru Ap 1993

38SCHEDULE EAnnex 4

ENYA - KEY INDICATQS Page 1 of 3

.~~ Pret. .-.- -------- Attal-------------- +---------Projected-- ------+ ...... ;-........ +-i------------------------- - Prl -------------- -

Irdicator ll9 1990 1991 1992 1993 19P 1995 1996

NatiaL aomnCDP at osrrut mrket prices)

Grams dstic protAgricutitw 1/ 30.7 29.1 27.4 26.8

Iitryt 1/ 18.9 19.1 20.1 19.2

Services 1/ 50.4 51.7 52.5 54.0

Total cpor tian 82.7 80.9 0. 84.7 78.7 E0.5 79.3 ?B.7

Grs dmsstic itrwsmw 24.7 24.3 21.3 16.8 18.1 18.9 19.6 20.2

G avermwit 5.8 6.5 5.5 7.0 4.8 4.7 4.6 4.5

Private 18.9 17.8 15.8 9.8 13.3 14.2 15.0 15.7

E3qorts (GNFS) 23.1 26.2 27.4 26.8 29.6 30.6 31.4 31.7

Imprts (GMS) 30.4 31.4 2.7 28.4 26.3 30.1 30.4 30.7

Grss dmstic savirn 17.3 19.1 20.0 15.3 21.3 19.5 2D.? 21.3

Gros retiwut swvirgs 14.4 15.8 16.1 12.9 19.0 17.9 18.7 19.6

Grss d1ostic proct t2.6 8469.5 8M.8 8010.? 718.9 M9.8 836.5 9736.8(M at arret prices)

Gross rtiaut proict per 360.0 370.0 340.0 310.0capita M, AttalMI r

Real arnei grawth rates(2, caLculate fra 1987 prices)

Gross dmrstic prodat at 4.72 4.3 1.42 0.4X 0.23 3.02 5.02 5.3rurket prices

Gross dmestic i e 3.3X 3.2X 4.0X 2.1X -0.2 3.23 5.5X 5.3

Reat amat per cgpitagradth rates (%, catclated franssr prices)

Gross dmistic proict at 0.9 0.4 -2.2 -3.1 -3.4 -0.6 1.3 1.5nariket prices

Total cuiptiau 1.2 -1.2 0.0 3.1 -9.4 1.7 0.6 0.8

Private corsaptian 2.0 -2.6 -1.4 1.7 -4.0 1.6 -2.6 0.2

39SCHEDULE EAnnex 4

KE3A - MY IIDICATtS Page 2 of 3

4-.ktn -- t. -------- - Projct------4-..............-................... fret . ...... . . .....

Irdicaw 1969 1990 1991 19Q 1993 19w 1995 19M

9tarle of pWints

Eqs (ORS) 1913.9 1T.1 2Z50.3 2150.7 223.8 23.9 2W.7 3088.1

Irdwcise f.ob. 921.9 1000.6 A.4 94.1 1002.0 1106.9 185.0 159.6

Inparts 2OSS3. 2t59.1 2429.5 233.4 2313 2479.3 2712.6 2s61.6

tierdw6s f.ob. 2155.8 223.0 1977.7 18lZ 1755.1 2Z48.4 245.? 2751.0

Resoure blarw 614.2 -442.0 -179.2 -177.7 32.5 44.6 95. 103.5

Net *axrC trrwsfe 350.7 371.6 351.7 253 237.6 25.9 31.2 299.5cI,uhdir' official curret

Orit autt buti -SII4 -47.2 -2S.2 -115.0 33.8 7L1 1O6.8 109.5Caftw official atal grmts)

Not pri%i? foeipt dirwt 101.1 58.4 39.9 0.0 47.7 65.3 7.0 92.0it

Law-tenmn (not) 472.1 391.1 16$.0 27.1 12L8 45.0 47.6 84.2

Official 344.0 207.8 196.9 49.8 24.8 291.1 17L9 193.7

PriWtt 13.1 15.3 -32.9 -22.7 -152.0 -149.1 -131.3 -109.5

OUw caitat (not, incufirs 131.4 225.5 417.2 59%.9 -43.7 31.9 -161.5 -66.1wrxs d ania nas)

ow3 in r _ -109.3 -237.9 -357.8 -507.0 59.5 -307.3 -70.9 -219.6

Nmwwvm itm

Resoure eLm( of -7.4 -5.2 -2.2 -2.2 3.3 0.5 1.1 1.1CDP at arrt amurlt pric)

Reel anvl gra tes(1967 Pries)

Nmddse Ws (f.o.b) -3.0 10.2 -3.5 -1.9 6.2 6.2 6.2 6.2

NadwWi ilpots (c.i.f.) 2.4 16.6 -15.4 -3.6 -2.9 23.5 7.0 6.9

Puhfc ffI,w (2 ofIDP at arat Ihlgot priCm) 2V

Cwtra t ReMu & Ut 2S.9 A.8 25.6 2.4 .4 23.8 31.7 34.5

cllt rt rui Epmtws 30.6 31.2 2L4 32.6 7 27.2 27.2 26.7

&dpt Deficit (-)lrct. Wt 4.5 -6.6 -2.8 -9.2 -5.3 -3.3 -2.6 -2.2

Priny Deficit (-) or Suptts 5.8 5.6 3.5 3.1 2.3 1.1 0. 0.5

40 SCHEDULE EAnnex 4

IYA - MY INDICATM Page 3 of 3

- .A. - - -- Project-----.. Pret------------------ - --

lrdicat 159 1990 1991 1992 19 1991 15 199

I*/P (at ctrent nuaet prices) 28.2 29.7 31.5 37.4

Groah of Pe cX) 12.9 0.1 19.6 39.0

Prie sector ariit gruth/ 64.9 59.6 62.4 69.4total crst rowth CM)

Prices (1937 a 100)

Mrwdtse qan prio ilrai 93.7 97.2 99.3 95.9

NwdwusM inprt pice frd 100.8 91.7 93.7 92.4

lwdwise tern of trat rtisx 97.9 106.0 106.0 104.9

Resl edwu rate 8.3 8.0 79.9 8S.9CLSAW)

ReaLt frest tes 0.4 0.2 -2.8 -10.3

Coawnrprica irda 3/ 13.5 15.7 19.6 7.3(X grOAth rate)

GOP deflatwr X gwth rate) 84 9.4 11.4 16.3

U Perito of 0P at factr cmt.2 Historf a ffscat dfta is in fiscal ar bqrlmrs Juy 1 of yanr duo, projectia we in caladr _w

begfmrIngh 1993.3/ Averape aIlt Iairc Cawiur Price (reiseb IrxK emctuing ret.

41 SCHEDULE EAnnex 5

KE0ttA - I£Y EUOSM l\DICATS

........................ ............................................. ... ... _..... ....... .... ..... . ... _. ...

............. AMtl----- -4ES til --------- roect-.-....Irdicalr M19 1990 19WI 1992 1993 1994 1995 19K

.......................... ............................................................. ...........................................

Total dbt st"r aid 5697.8 6947.3 69;9.5 6366.0 6375.1 710.4 6L.6 62.5disbrd (00) (Ub

Net dia'shmnts CLu) 495.1 717.7 -10.8 -35.0 9.1 33.3 -119.8 -101.1

Total det semvice (1) 697.1 770.4 708.7 587.0 484.2 689.3 804.3 MS

Det wd dt savice frdicato

M1DAGS 295.3 311.6 310.0 295.1 278.5 280.8 248.1 2Z.3

lDi0P 68.6 2.0 5.1 71.5 2.6 86.1 78.1 70.7

DSm 36.1 34.6 31.4 27.2 21.2 27.3 3.6 3.6

cGemfuss /DO 35.1 34.4 38.8 42.7 48.1 49.0 55.6 62.5

&IDA espa frdicators (X)

I 1OA DS/pbtic Os 35.0 37.5 35.1 53.7 30.3 30.3 22.5 22.4

refered aeitor 0S/bic 61.7 58.5 50.2 73.8 46.6 42.3 35.0 37.4DS

IU&lM AOV 8.2 8.2 7.9 8.1 7.4 6.4 5.2 4.5

IiR fpafotfo ds 49.9 42.4 36.4 3t.8 25,S 2.5 16.0 12.0

IFC (US"Loas 0.0 0.0 0.5 0.4 0.5

Wty ar qfity 0.3 0.1 0.2 0.0 0.0

42

SCHEDULEANNEX 6Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN KENYA

STATEMENT OF BANK LOANS AND IDA CREDITS(as of December 31, 1993)

Disbursement Lag-(USS Million)- Relative to(Less Canellations) Apraisa1 Last ARPP Ratings

Fiscal Undis- Projection Developmenl OverallCredit No. Year Puroseank IDA bursed (5) Objectives Objectives

Forty-five (45) Loans and fifty-five 928.41 1070.70(55) credits fuUy disbursed.

Ln.24090 1984 Second Highway Sector 5.00 3.31 2.8SF 01700 1984 Second Highway Soctor 40.00 2.79 2.8 2 2Cr.16730 1986 Sixth Education 37.50 12.44 6.1 1 2Cr.17580 1987 Animl Health Services 15.00 9.44 56.7 3 3Cr.18200 1987 Second Railway 28.00 4.84 10.5 3 3Cr.18490 1988 Nat. Agriculture Reseach 19.60 8.61 41.5 2 2Cr.19040 1988 Population m 12.20 8.00 57.7 2 2Cr.19730 1989 Geothermal Development 40.70 9.21 13.4 2 2Cr.19740 1989 Rural Services Design 20.80 10.71 50.6 3 3Cr.20580 1990 TA 5.00 4.15 76.6 2 2Cr.20600 1990 Nairobi Water Suppl.111 64.80 35.25 51.7 3 3Cr.20620 1990 Coffee 11 46.80 28.37 (20.8) 2 2Cr.21110 1990 Population IV 35.00 31.14 55.1 2 2Cr.21470 1990 TA-DFI Res/Exp. Prom 6.00 3.52 58 4 2 2Cr.21970 1991 Export Development 100.00 2.32 76.0 2 2Cr.21980 1991 Forestry Development 19.90 16.39 (1.2) 2 3Cr.21990 1991 Agr. Nad. Ext. 11 24.90 19.18 26.1 2 2Cr.22040 1991 Agric. Sector Adjust. n 41.52 6.26 0.0 2 3Cr.22950 1992 Education Sect. Adj. Ct. 100.00 S0.44 46.9 2 2Cr.23090 I992 Universities 55.00 51.35 60.1 1 1Cr.23100 1992 Health Rebilitation 31.00 26.18 50.4 2 2Cr.23330 1992 Mombasa Water 11 Eng. 43.20 38.76 80.3 1 2Cr.23340 1992 Wildlifo Services Pr. 60.50 47.84 (99.7) 2 2Cr.22951 1993 Education Sector Adi- Cr. 52.14 5.30 46.9 2 2Cr.24400 1993 Parastatal Reform TA 23.32 22.24 100.0 2 2Cr.24450 1993 Agric. Sect. M ngt. I 19.40 18.53 100.0 2 2Cr.246WO 1993 Drought Recovery 20.00 17.66 0.0 1 1

Total 933.41 2032.98 494.23of which repaid 560.50 39.09

Total hold by Bank & IDA 372.91 1993.89Amount sold 11.74of which repaid 11.74

Total undisbursed 494.23

43

SCHEDUL6 EAnnex 6Page 2 of 2

STATEMENT OF IFC INVESTMENTS(as of December 30, 1993)

1993 AEF-Fuhtre Hotel Restaurants & Hotel 0.50 0.00 0.501991 AEF-MALAA Agric. Wholesale & Retail 0.53 0.16 0.691994 AEF-SAWA FLORA Agric. & Live-stok Products 0.32 0.16 0.481992 AEF-Wood Complex Mfg. of Wood & Cork Products 0.40 0.00 0.401982 Bamburi Cement Cement Lime & Plaster 4.43 0.00 4.431984, 1980 DFCK DFC, Mfg Pupl Paper & Paperboar 5.07 1.31 6.381982 DTK Merchant Banks 0.00 0.80 0.801986 EBP Restaurants and Hotes 3.67 0.00 3.671982 IfPS (K) Venture Capital Companies 0.00 0.55 0.551987, 1987, 1993 IPS (K)-ALLPACK Venture Capital Companies 0.00 2.36 2.361990 IPS(K)-FRIGOKEN 0.00 0.06 0.061991 IPS(K)-NOVASKINS 0.00 0.14 0.141989 IPS(K)-PREM FOOD 0.00 0.11 0.111989 IPS(K)-PREM REFR 0.00 0.14 0.141988, 1992 IPS(K)-UKULIMA 0.00 0.06 0.061981 KDFC Sm. & Med. Scale Enterpises S.00 0.00 5.001967,1968, 1973 Kenya Hotel Restaurants and Hotels 5.16 0.72 5.881992 LIK 0.00 0.03 0.031984 Tannries & Leather Finishing 2.12 0.60 2.721986 Madhupaper Mfg. Pulp Paper & Paperboard 37.16 1.97 39.131986 Ol Crop Mfg. Vegetables & Animal Oil 9.65 2.14 11.791970. 1974, Pan African Mfg. Pulp Paper & Paperabrd 40.74 6.27 47.011977, 1979,1981, 1988, 19901976. 1985 Rivatex Spinning. Weaving & Fnshng 8.16 3.35 II.S51977 SMSIE - KE SmaaU & Med. Scale Enterprises 2.00 0.00 2.001983 TETRA PAK Mfg. Containes & Boxes 2.17 0.37 2.541972 TPS (Kenya) Toursm Services 2.42 0.05 2.47

Total Gross Commitmes 129.50 21.35 150.85Lss: repayments, cancaKons,

exhange adjustmens, writeoffs.terminations and sales 110.22 11.70 121.92

Total Conunitments now held by IFC 19.28 9.65 28.93Total Undisbursed 0.72 0.78 I.S0Total Outanding IFC 18.56 8.87 27.43

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