Mongolia - Technical Assistance Project

-dooo -1~ /17C. Dacat Of The World Bay* FOR OFFICIAL USE ONLY U.wt NO. P-5680-Mr MEMORANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 3.7 MILLION (US$5 MILL1,-T EQUIVALENT) TO THE MONGOLIAN PEOPLE'S REPUBLIC FOR A TECHNICAL ASSISTANCE PROJECT NOVEMBER 22, 1991 TFI document has a restied dbitrbuti and may be used by repient only lo the perfonnane of. dther offical dute. Its contents may not odtrwise be diiemd widthu Wordd Bank authrization  CURRNYUIALET (As of September 30, 1991) Currency Unit - tugrik (T,) US$1.00 - Tg 40 Tg 1 - US$0.025 FISCS X January 1 to December 31 WEIGHTS AND MEASURES Metric Systsm ACRONYMS AND ABBREVIATIONS ADB - Asian Development Bank BOM - The Bank of Mongolia (the central bank) CMEA - Council for Mutual Economic Assistance GATT - General Agreement on Tariffs and Trade IDA - International Development Association IAMD - Institute of Administration and Management Development IMF - International Monetary Fund JGF - Japanese Grant Facility MOF - Ministry of Finance MOJ - Ministry of Justice MND - Ministry of National Development MPS - Material Product System NTI - Ministry of Trade and Industry NCC - National Computing Center OPS - (UNDP) Office of Project Services PIP - Public Investment Program SNA - (UN) System of National Accounts SSO - State Statistical Office UNCTAD - United Nations Conference on Trade and Development UNDP - United Nations Development Program UNIDO - United Nations Industrial Development Organization USSR - Union of Soviet Socialist Republics  FOR OFFICIAL USE ONLY MONGOLIA TECICAL ASSISTANCE PROJECT Credit and Project Summary Borgoner : ktongolian People's Republic Amount : SDR 3.7 million (US$5.0 million equivalent) Terms : Standard, with 40 year maturity IiUAUcing Plan Local Foreign Total -US$ million ------- Government .35 - ,35 IDA 5.00 5.00 Government of Japan - 1.20 1.20 UNDP - _2 .25 Total 31 .4 0 Economic Rate of Return: Not applicable Staff Appraisal Report : Not applicable IBRD 23405 This document has a restricted distribution and may be used by recipients only in the verforrian;. of their official duties. Its contents may not otherwise be disclosed without World Bank auuhorizi ion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMNFTr ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE MONGOLIAN PEOPLE'S REPUBLIC FOR A TECHNICAL ASSISTANCE PROJECT 1.. I 3ubmit for your approval the following memorandum and recommenda- tion on a proposed development credit to Mongolia for SDR 3.7 million, (equivalent of US$5.0 million), on standard IDA terms with a maturity of 40 years to help finance a technical assistance project. Additional grant financing of 170 million (US$1.2 million equivalent, is being provided by the Government of Japan and US$250,000 is being provided by the United Nations Development Program (UNDP). A map (IBRD 23405) is attached. 2. Mongolia joined the Bank Group (IBRD, IDA and IFC) on February 14, 1991. An economic mission visited Mongolia in June/July 1991 and its report "Mongolia-Towards a Market Economy" (Report No. 10108-MON) is being circulated separately to the Executive Directors. 3. Backgroun. Since the founding of the People's Republic in 1924, Mongolia's political structure and economic development have been shaped largely by its close relations with the USSR. This resulted in the country's transition from a peasant feudal agrarian society with strong religious and cultural traditions to a centrally-planned command economy. Owing partly to these circumstances and partly to its geography, Mongolia remained almost completely isolated from th_ international community for most of this period, although it became a member of the United Nations in 1961 and has participated in the activities of several specialized agencies since then including UNDP, the World Health Organization, the Food and Agriculture Organization, and the United Nations Fund for Population Activitios. In early 1990, the pace of political and economic reforms initiated during the second ha]f of the 1980s quickened dramatically, leading, after Mongolia's first multi-party elections in July 1990, to the formation of a reformist, coalition government that decided to "construct a market-oriented economy." 4. At the same time, the adverse impact of external factors on its economy is significantly influencing the dynamics of the reform process now underway in Mongolia. Per capita income, estimated at around $500 in 1990, may have fallen 20 percent as a result of these external shocks. The abrupt termination of new aid from, and drastically reduced trade with, the USSR and its former CMEA partners have reinforced the new government's intention to proceed with comprehensive economic reforms as quickly as possible. Although detailed plans are still being worked out, the authorities hope to introduce the principal measures over the next three years. These include the return of state livestock herds to individual groups, privatization of state-owned enterprises (SQEs) accounting for 70 percent of state assets with the partial sale or lease and, eventually, the promotion of private sector equity (includ- ing foreign joint ventures) participation in others. Laws to protect enter- prise ownership rights and their transfer are being drafted. More broadly, a phased program of price adjustments was introduced in January 1991; the  - 2 - governmental bureaucracy is being streamlined; tax reforms are under way; and financial sector reforms, including the separation of commercial and central banking functions, the introduction of independent bank supervision, and the use of indirect monetary policy instruments, are being formulated. 5. Stabilization, Adjustment and Reform. There is little doubt about the authorities' commitment to reform. Indeed, they seem determined to move ahead on all fronts at oJnce, although the imrediate actions required to stabi- .ize the economy suggest that a more measured pace would be more appropriate. Recent progress on some key components of the reform program, particuiarly the privatization of SOEs and other state assets, has been somewhat uneven. More attention will need to be paid to the sequencing of different reforms, their coherence and internal consistency, and measures to evaluate their effective- ness. An early priority is the need for further price reform and the deregu- lation of internal trade and markets to underpin the privatization process and to stimulate small-scale private enterprise and foreign investment. To develop the institutional framework for a market-based economy, Mongolia will need a cohort of administrators trained in the methods of indirect macroeco- nomic management, financial market development and the creation of an enabling legal framework. At the same time as promoting privatization, the government must also redefine its role and activities to bring them more in line with the needs of a market-based economy. While all production-oriented SOEs should be privatized at an early date, the government will need to ensure that remaining SOEs (e.g., public utilities) are managed efficiently under appropriate regulatory and pricing policies. The government's principal responsibility should be to maintain a stable macroeconomic environment conducive to growth for different economic agents, or. in which they can compete on an equal footing. Restrictions and regulations that distort resource allocation and private sector initiatives need to be removed. These include: subsidies, state orders, foreign exchange allocation, and remaining price controls. Free entry and exit of enterprises, anti-monopoly measures and consumer protection, and appropriate pricing policy for natural monopolies, also need to be considered. A social safety net that takes into account not only the short- term effects of adjustment, but also the pension, health and social welfare needs of a market economy needs to be further developed. 6. Rationale for IDA Involvement. During the Bank's first reconnais- sance mission to Mongolia in late 1990, the authorities requested technical advice and assistance from the World Bank Group. Easier and systematic access to the advice available in the international community at large, and develop- ment of staff capacity to use this information and experience would facilitate the formulation and implementation of its comprehensive reform plans. However, international concessional resources avai'able are limited. Existing UNDP funds are already largely committed for the next two years on activities agreed before 1990; the IMF will not be able to sustain its high initial level of staff effort in the medium-term; and, while ADB is planning to assist in investment planning and specific feasibility studies, IDA expects to play an important role in broader economic management support. In short, this would be the principal rationale for IDA involvement.  - 3 - 7. Second, Mongolia's absorptive capacity for, and interest in, external borrowing will depend on early and rap1c. steps to stabilize the economy and mobilize donor support for this effort and the subsequent medium- term adjustment procass. Mongolia must then develop investment projects that can be the focus of operational dialogue with IDA and other donors. Accord- ingly, the authorities indicated at a very early stage their interest in technical assistance for sector studies to support pre-investment project preparation. Given the limited total volume of concessional financial assistance that can be expected for a country with a population of two million people, and the many competing claims on the budget, prioritization of future investment projects is a necessity. A flexible source of funds for sector studies and project preparation activities would facilitate this prioritiza- tion process and meet an immediate mutual need of both Mongolia and its potential development partners. 8. Project Oblectives. The project would help Mongolia develop its institutional capacity for macroeconomic management In a market economy. It would also help define strategies for sectors/subsectors key to Mongolia's economic development and, as appropriate, demonstrate or confirm the feasibil- ity of selected public investments. 9. Project Descrigtion. The project has two components. The first, a program of advisory assistance, in-country and overseas training, and material support with an estimated cost of US$4,820,000, would concentrate on develog- ing Mongolia's institutional cARacity for macroeconomic, manasEgeme-nd reform. Assistance would be directed at the institutions with key roles to play in the transition: Ministry of Finance, including the Customs General Addinistra- tion; the Bank of Mongolia (the central bank); Ministry of National Develop- ment; Ministry of Trade and Industry; and Ministry of Justice. A small component would help the State Statistical Office provide basic statistics to these agencies. The second component, with a total cost of US$1,980,000, would finance strategic studies in selected sectors/subsectors key to the long-term development uf Mongolia's economy, and feasibility studies of key projects identified in light of these sector strateg.es. Preparation is well advanced on the first sector study whose priority requires that it be started in early 1992: mining and mineral development. Other sector studies have been identified, and would be agreed between the Government and IDA on a case by case basis. Major sector studies under consideration include: education, electric power, health and transport. IDA intends to follow closely the progress of a sector study on livestock to be carried out under a grant from Denmark. Every effort would be made to advance the work on these studies as * far as possible during the next 12-18 months for consideration at future donor meetings in Ulaanbaatar. The attached Technical Annex (and Schedule 1, Key Project Activities) describes the project's institutional context, detailed features and procurement, disbursement and management arrangements. The project cost and financing plan, procurement and disbursement arrangements and timetable for key project processing events are given in Schedules A, B and C. 10. Proiect Implementation. MOF would be the focal point in the Government to coordinate project activities. The Government has appointed a Project Coordinator and Assistant Coordinator both of whom are MOF staff. Five advisors would be provided to the main participating agencies, supported  - 4 - by appropriate and properly-timed short-term experts. The advisor to NOF -ould serve as lead advisor for the Project and coordinate the inputs of the ot'ner internationally-recruited staff. Because of the Government's inexperience with the ivplementation of technical assistance activities, considerable outside assistance would be required. Accordingly, the Government plans to contract with the IMF to organize the expert services for the NOF and BOM components. The Government plans to contract with UNDP's Office of Projer.t Services (OPS) to provide the other advisors and short-term experts on specialized topics. Specialized consulting firms, or as appropriate, individual internationally-recruits.d experts, would carry out the sector and feasibility studies. All consultants would be engaged according to IDA Guidelines. OPS would help the participating agencies with procurement of equipment in accordance witti IDA Procurement Guidelines, and organize local and overseas training on their behalf. The project is expected to be complet- ed by June 30, 1995, with a closing date of June 30, 1996. 11. Agreed Actions. A condition of effectiveness is the signing of the agreements with the IMF and UNDP/OPS. Preparation of these agreements is underway. The terms of reference for the advisors have been agreed and are available in the project file. The authorities would carry out the training for staff of the participating agencies and the studies according to an annual work plan agreed with IDA. The Government would maintain key project staff, including the Project Coordinator until the closing date. There would be a formal review of project progress and ths work program each year. 12. Benefits. The project would help the Government's efforts to reform the public sector and promote private sector development. The project has five major benefits. First, strengthening individual and agency capacity would develop mechanisms for management of the market economy and well- articulated procedures for economic coordination. Second, a core group of Mongolian staff would receive training in skills and work methods appropriate to the shift from a command economy. Third, new procedures would be introduced for public expenditure control, sector analysis and project appraisal, macroeconomic forecasting and analysis, monetary and credit policy and implementation, banking supervision, foreign investment, trade promotion, privatization and private sector development. This would help meet immediate needs for Mongolia's transition as well as start the longer-term institutional strengthening process and, through the sector and feasibility studies, establish the framework for Mongolia's development as a market-oriented economy. Fourth, this increase in local capacity would help build internal and international confidence in Mongolia's ability to manage the transition to a market economy. This should facilitate the mobilization and judicious use of further technical assistance and financial aid. Lastly, specific laws, regulations and procedures would be prepared, approved and implemented. 13. Risks. As one of the first Bank Group operaticns in a country undergoing substantial and rapid economic and political zransition, the project presents more risks than are usual in an IDA-assisted technical assistance project in Asia. First, the institutional context remains fluid. This risk would be mitigated by a formal review of the project's underlying design each year when the work program is discussed as part of the IDA supervision process. A second risk is the problems Mongolia's isolation and  - 5 - difficult living conditions may cause in finding, at a reasonable cost, international staff with the experience and outlook to be effective trainers/advisors. The plan to supplement a small core of long-term advisors, by short-term visitinig specialists in particular topics, is designed to mitigate this potential difficulty to some extent. A third risk is that the Project m'ght incur delays in implementation because of the G)vernment's inexperience with the management and administration of technical assistance. This risk would be mltigated through the assistance to be provided by the IMF and UNDP/OPS referred to in para. 13 above. Furthermore, intensive L"pervision of this Project by IDA is planned, especially during the first year of project implementaLion. 14. Recommendatio. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. November 22, 1991  -6- MONGOLIA TECRHITa ASS1ST1ANCE PROJEaT Estimated Costs and Financing Elan Estimated Costs Local Foreign Total .......... (US$'000) ----- Ministry of Finance 40 961 1,001 Customs Department - 250 250 iA Ministry of National Development 33 796 829 Bank of Mongcolia 38 876 914 Ministry of Trade and Industry 33 710 743 Ministry of Justice 13 305 318 State Statistical Office 100 200 300 Training 13 318 331 Equipment _ 134 Institutional Development 270 4,550 4,820 Studies 80 1.900 1.980 Total Project Costs / 350 6,450 6,800 rinancing Plan Government of Mongolia 350 - 350 IDA 5,000 5,000 Government of Japan 1,200 1,200 UNDP 250 250 Total 35 4.450 6.800 a In addition to amount provided for the Ministry of Finance above. b Project is exempt from taxes and duties.  7 . SCHEDULE b TEHNICAL ASSISTANCE PROJECT Procurement Methods and Disbursements Procurement Nethod Total Project Elemnt Other N.B.F. cost ~~~~~(US$ '000)-- .. _ . . . _ ................. . (u$.o o .. .. .. . . . . . . Advisory Services 1,575 1,450 /a 3,025 (1,50O)Ak (1,500) Training 1,085 1,085 (1,030)1k (1,000) Equipment 710 710 (600)j