Uzbekistan - Institution Building - Technical Assistance Project

Docmenit of The World Bank FOR OFFICIAL USE ONLY Report N. P-6135-UZ MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BAMK OR RECONSTRUCTION AND DEVELOYMENT TO TUE E[ECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN ANDUNT EQUIVALENT TO US$21 MILLION TO THE REPUBLIC OF UZBEKISTAN FOR AN IsnTTioN BUIIDING/TECHNICAL ASSISTANCE PROJECT SEPTEMBER 9, 1993 MICROGRAPHICS Report No: P- 6135 UZ Type: PR This docment has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. REVUBLIC OF UZBEKISTAN INSTITUTION BUILING/TECHNICAL ASSISTANCE LOAN CURRENCY EQUIVALENTS Currency unit = ruble I ruble = 100 kopeks 1 SDR = US$ 1.36855 US$ 1 - SDR 0.7307 Exchange Rates" 1992 January 121 February 121 March 212 April 139 May 139 June 139 July 159 August 182 September 232 October 255 November 452 December 452 1993 January 600 February 715 March 778 April 878 May 1156 June 1141 " End of period selling rates Source: National Bank of Foreign Economic Activity of Uzbekistan WEIGHTS AND MEASURES Metric System GOVERNMENT FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY REPUBLIC OF UZBEKISTAN INSTITUTION BUILDING/TECHNICAL ASSISTANCE LOAN ABBREVIATIONS AND ACRONYMS BOP - Balance of Payments CBU - Central Bank of UzWitan CIS - Commonwealth of Independent States CSPMP - Committee on State Property Management and Privatization DCEEA - Department of the Coordination of External Economic Activity EC - European Community SES - State Employment Service FSU - Former Soviet Union GDP - Gross Domestic Product GNP - Gross National Product OU - Government of Uzbekistan SFSC - State Forecasting and Statistics Committee IBRD - International Bank for Reconstruction and Development IFC - International Finance Corporation IMF - International Monetary Fund MFER - Ministry of Foreign Economic Relations MOF - Ministry of Finance MOL - Ministry of Labor NMP - Net Material Product SOEs - State Owned Enterprises UNDP - United Nations Development Program UNEP - United Nations Environmental Program WPI - Wholesale Price Index This document has a restricted distribution and may be used by recipients only in the performance of their official dutes. Its contents may not otherwise be disclosed without World Bar'. aunrization. 'PUBLC OF UZBEKISTAN INsTTurON BUILDINGrECHNICAL ASSISTANCE LOAN Loan and Project SMnuMary Borrower: Republf: of Uzbelistan The Government of Uzbekistan Asont: US$21 million equivalent IMD 20 years, including a five year grace period, at the IBRD standard variable ilrest rate. Qeives: The proposed loan would finance institution building and terhnical assistance activities for: (i) privatization and public enterprise reforms, (ii) legal and regulatory framework, (iii) financial sector, (iv) social safety netlemployment, and (v) energy and telecoumimnications sectors. Local Foreign Total -US$ 000 equivalente Government 400 400 IBRD 470 20,530 21,000 EC 2,600 2,600 Japan - LM LM Total Base Cost 2 .g 2,g Econnf Rate of Retum: Not applicable Pvr CNot applicable Stff AUWs Re t: Not applicable Ma.: IBRD 23699 MEMORANDUM OF RECOMMENDATION OF THE PRESIDENT OF THE ITRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIE REPUBLIC OF UZBEKISTAN FOR AN INSTITUTION BUILDINGITECHNICAL ASSISTANCE PROJECT I. INTRODUCTION 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of Uzbekistan for the equivalent of US$21 million to help finance institution building and technical assistance activities. The loan would be at the IBRD standard variable interest rate repayable over 20 years, including a grace period of five years. 2. The Republic of Uzbekistan became a member of the IBRD on September 21, 1992, and joined the International Development Agency (IDA) on September 24, 1992. Two economic missions visited Uzbekistan in June and September 1992. An economic report entitled "Uzbekistan, An Agenda for Reform" (Report No. 11683-UZ) was distributed to the Executive Directors separately. The proposed project would be the first Bank operation in Uzbekistan. A. Background and Recent Performance 3. Background. Uzbekistan is situated along the ancient silk road between Europe and the Far East. With 21.7 million people, it is the most populous of the four Central Asian Republics. Part of the northern border between Kazakhstan and Uzbekistan includes the Aral Sea. Uzbekistan has a rich natural resource base and considerable potential for medium term development. Its annual gold production is approximately 65 tons, which accounted for about one third of the annual production of the former Soviet Union's (FSU). It is the third largest producer of natural gas in the FSU and is among the ten largest natural gas suppliers in the world. The country also has substantial reserves of coal, silver, and copper. Although current oil production levels are minor, they are likely to increase if the newly discovered fields in the Namangan and Ferghana regions are developed. 4. At present, however, the Uzbek economy reflects the economic structure left by 70 years of central planning. Production and trade have emphasized specialization in large-scale agriculture and mineral extraction and a small services sector. The country is the world's fourth largest producer and the third largest exporter of cotton. While agricultural production has increased rapidly in recent years, it has been due to expansion of irrigated areas, which has caused serious environmental problems by reducing the volume of water entering the Aral Sea. Agriculture accounted for about 40 percent of the net material product (NMP) in 1992. Uzbekistan also has a substantial industrial sector. It accounted for ?3 percent of NMP in 1992, with the processing of agriculture-based raw materials and machine and aircraft body building accounting for the largest shares of industrial activity. Uzbekistan has traditionally been a supplier of raw materials to Soviet industry, and its foreign trade has been mostly with other republics of the FSU. 5. Uzbekistan has a highly educated labqr force as a result of significant Union investment in the 1970s. Practical skill levels, particularly in agriculture and in some segments of industry, are high because relatively new technologies are used. It is expected that these factors could provide the basis for transforming the economy from a provider of raw materials to a producer of finished products with high -2- value added. In general, social indicators are comparable with those of lower-middle income countries, and the country has an extensive system of social protection. While the basic infrastructure is reasonably well developed, it is largely directed toward Russia at the expense of Uzbekistan's potential trade with non-FSU countries. 6. After Uzbekistan declared independence, the former communist party was renamed the People's Democratic Party (PDM) in October 1991. Mr. Islam Karimov, former First Secretary of the party, won the first multi-party elections in December 1991. President Karimov has expressed a desire to establish a market-oriented economy based on secular models of democratic rule. A new constitution establishing basic principles of civil rights and the division of powers among the executive, legislative, and judiciary branches of the Government was approved by Parliament on December 8, 1992. 7. Recent Developments. In 1992, Uzbekistan experienced a large fall in real output, about 10 percent, largely as a result of the break-up of the FSU, which caused a substantial terms-of-trade shock as well as loss of significant transfers from the former Union. The sharpest decline in output was in the construction subsector; industrial output decline was not as severe. Agriculture output declined by about 4 percent, despite favorable weather conditions. In the first half of 1993, GDP declined by 4 percent compared to the same period in 1992. 8. Uzbekistan's decision to stay in the ruble zone complicated macroeconomic management and fueled inflation. During 1992, retail prices rose 10-fold, wholesale prices 27-fold. Domestic prices were initially liberalized in January 1992, although some prices continued to be administered for social reasons, as f6ey were in most other FSU countries. The Government has, however, continuously reduced the number of items subject to price control. Domestic prices for energy were increased significantly in October 1992. The Government has moved to further liberalize prices, and it reduced consumer subsidies in July 1993. Currently only bread, flour, and some services such as public transport and utilities remain under price controls. 9. Meanwhile, in an effort to cushion the impact of recent economic events on the population, the Government increased wages and other social expenditures, resulting in a budget deficit of 11 percent of GDP in 1992, up from 5.5 percent in 1991. The Government financed the deficit through arrears with other republics, domestic borrowing, external borrowing through trade and food credits, and by using part of its gold reserves. Uzbekistan ran an interrepublic aade deficit of about $200 million and a foreign trade deficit of about $60 million in 1992. The current account deficit is estimated at about $370 million, or 17 percent of GDP. 10. Privatization and public enterprise reform started with the enactment of basic legislation in November 1991, which was further elaborated in May 1993. A Committee for State Property and Privatization (CSPMP) was established in February 1992. Almost all the housing stock in Tashkent has been privatized, and this effort is now being replicated in other cities. Since 1992, about 1,500 small and mediur-size enterprises have been privatized. A new program for 1993 and 1994 was announced in May 1993 (para. 19). The Government has also established a department within the Ministry of Finance, Uzgosfond, to manage and reform public enterprises in which the state would retain majority or minority holding. A limited amount of arable land has been distributed to farmers in the form of lifetime leases. The process of converting state farms into collective farms also started in 1992. 11. The Government has taken a number of preliminary steps to reform the legal system and to support private sector development. The new constitution and laws on property establish the legal -3- basis for property rights. Laws on enterprise and entrepreneurship provide the basic framework for private sector development, but they need to be clarified and further elaborated. The Government has indicated its willingness to revise such laws in order to eliminate inconsistencies and to clarify its approach to property rights. The Government has also started reducing the proportion of production that must be channelled into the state order system in 1992. Further measures to reduce the coverage of the state order system are being planned for the second halt of 1993 and 1994. 12. In August 1992, Uzbekistan moved to a unified exchange rate system. Trade policy is still evolving, and at present trade taxes and licensing depend on the commodity awd the direction of trade. Most exports to the PSU are taxed at 10 percent. For exports to the rest of the world, licensing requirements have been established for 70 product categories, with export taxes ranging between 2 and 40 percent. No duties are applied on FSU imports, but duties ranging from 2 to 40 percent are applied to 38 product categories from other countries. In May 1993, a new 35 percent tax on hard currency proceeds was introduced to generate additional revenues. 13. The Foreign Investment Law was passed in June 1991, and Uzbekistan attracted high interest in joint ventures. By the end of July 1993, some 900 such ventures were registered and several deals with large multinational companies were successfully completed. A nuwber of large multinational companies are strongly interested in developing the recently discovered oil reserves in Ferghana valley. The same companies also expressed interest in exploiting oil reserves in the Namangan field and in transporting oil and gas to new markets. A joint venture in telecor munications was recently signed with a Turkish firm to provide digital public telephone exchanges. 14. Financial sector reforms are also underway. Legislation for reform of the banking system was enacted in October 1991, followed by adoption of the statutes of the Central Bank of Uzbekistan (CBU) in March 1992. The Central Bank is still adjusting to its role in the new economic system and has been receiving technical assistance from the IMF to tha' ffect. It took control for managing the country's external reserves from the former foreign trade bank, in July 1993. The Law on Banks and Banking assigns an independent role to the Central Bank for maintaining the stability of the currency and for conducting monetary policy. The law also establishes conditions under which commercial banks can operate in Uzbekistan and specifies minmmum capital requirements. New regulations for prudential supervision are being developed and are expected to be adopted by 1994. 15. Apart from the privatization of small and medium-size enterprises and housing, conversion of some large state farms into agricultural cooperatives, and substantial increases in domestic energy prices, reforms have been limited. The Government is in the process of formulating new strategies for the agriculture, telecommunications, energy, and social sectors. B. Policies and Prospects 16. During the pre-Consultative Group meetings in Paris in December 1992, the Government declared its commitment to move to a market-based economy, at the same time indicating its preference for a more gradual and measured pace of adjustment than that followed in Russia and in some other new states in the region. Although the Government has not yet developed a comprehensive reform program, it did indicate its willingness during the July 1993 CEM discussions to formulate and implement at a more rapid pace a reform program that could be supported by the Bank and the Fund. The Government has stated that under such a program its objectives would be to: (a) achieve macroeconomic stabilization, (b) reverse the decline in output and improve productivity, (c) attain sustainable growth over the medium -4- term. and (d) design a social safety net to protect vulnerable groups. At the same time, the Government has begun to develop an active policy dialogue on siructural and sectoral measures required to transform the economy and on their links with stabilization efforts. At the invitation of the Government, an IMF team visited Tashkent in May 1993 for intial policy discussions for a program that could be supported by the Systemic Transformation Facility (STP). 17. While the Government has stated its willingness and commitment to reform, a major constraint to further elaboration and implementation of reforms in Uzbekistan is a lack of appropriate skills and inadequate institutional capacity. Although Government agencies and state enterprises have well trained staff, they lack basic expertise and experience in the design and implementation of systemic reforms, and they are unfamiliar with concepts and practices of economic management in a market economy. The Government recognizes these limitations and has identified five priority areas in which extensive institution building activities are required to prepare for design and implementation of structural and sectoral reforms: (a) improving policy formulation and implementation capacity for privatization and enterprise reforms; (b) establishing a sound legal and regulatory framework for reforms and private sector development; (c) deve' ping the basic financial infrastructure; (d) strengthening institutions that deal with social safety net and employment issues; and (e) initiating strategy development in key sectors such as energy and telecommunications. The following paragraphs briefly review these priority areas. 18. Privatisation and Enterprise Refarm. Although Uzbekistan has started privatizing state assets and reforming some public enterprises, CSPMP and Uzgosfond, the agencies responsible for implementing the process, lack the capacity to carry out their mandates effectively. CSPMP announced a program in May 1993 that aims to privatize 16,000 of the estimated 30,000 small and medium-size enterprises in trade, catering, and other service sectors. The program design needs substantial revision to accelerate the process and CSPMP does not have the institutional capacity to carry it out. Uzgosfond, a new agency, lacks staff skilled in corporate restructuring and financial management, areas of expertise that are necessary for enterprise reform. Therefore, in order to further develop and implement a privatization and enterprise reform strategy, both agencies need to be strengthened with an infusion of trained professionals. The staff in both organizations must be trained, to develop information databases and financial accounting and reporting systems to facilitate monitoring the performance of e -terprises. 19. Legal and Regulatory Framework. Despite the enactment of some basic laws, major gaps and inconsistencies pervade the legal framework governing commercial activities and privatiuation. The country's regulatory framework and poor institutional capacities hinder private sector development, delaying investment and the much needed supply response. At present the Legal Department of the Cabinet of Ministers is responsible for formulating and drafting all major legislative reform proposals, including proposals regarding private sector development and privatization. This department has a small team of lawyers who are not familiar with modern legal and regulatory issues, and there is a need for assistance in drafting legislation as well as critically reviewing the remaining constraints to private sector deve!opment. 20. Financial Infrastructure. The basic financial infrastructure, including institutions and the regulatory and policy framework, is undergoing fundamental restructuring. At present, financial institutions in Uzbekistan are not in a position to allocate resources efficiently or to assist in the transformation of the economy. The four large public banks and the Savings Bank that dominate the system need to reform their operating practices and need to be restructured. Because internationally accepted accounting and auditing standards are lacking, the financial status of these banks is not known in a meaningful way. The government must also deal with the problems of the inherited banking system, -5- including the stock of non-performing loans in the state banks and lack of arms-length relations with enterprises. The Central Bank is developing its capacity to supervise the banking system, but it still lacks the human resource, expertise, and equipment to do so. New financial laws, infrastructure, payments systems, accounting and auditing standards, prudential reguLtions, and operating practices are needed to develop an efficient financial system. 21. Social Safety Net/Employment. Uzbekistan has an extensive and complicated system of cash benefits and other social benefits, which absorb over a third of GDP. The State Forecasting and Statistics Committee (SFSC) has no effective means of monitoring its adequacy or cost-effectiveness in preventing poverty. The Ministry of Labor (MOL) has set up an employment service, but without more automation this service could be overwhelmed by the mechanics of handling rising numbers of unemployment benefit recipients. Once enterprise restructuring begins, the employment service will be increasingly unable to administer the payments adequately or give unemployed people effective help in finding out what jobs might be available. Given these conditions, the Government needs assistance to develop a system for redefining its poverty line and develop ways of better targeting social assistance, which in turn require the improvement of institutional capacities of the SFSC and the MOL. 22. Sector Strategies. The Government is in the process of formulating strategies for a number of sectors. While sectoral ministries and agencies have qualified personnel for dealing with technical matters, they do not have the institutional capacity to design and implement sector strategies. Most lack expertise in project appraisal and analysis and are in need of substantial technical assistance. 23. Prospects. Uzbekistan's rich resource base, its recently discovered oil potential, and its well- educated labor force could provide the basis for strong and sustained growth. As in other FSU countries, disruptions associated with major adjustment and restructuring efforts are likely to generate a temporary decline in output in the next several years. The depth, scope, and sequence of policy changes will determine the country's medium-term prospects. Preliminary estimates suggest that if sectoral and structural reforms are implemented, any further contraction in output could be arrested in 1995, and annual GDP growth of 3 to 4 percent could be attained in the second half of the 1990s. In the absence of reforms, the reallocation of capital and labor would be delayed and the economy is likely to stagnate. 24. The agriculture sector can be the leading source of growth in the short term. However, the performance of the sector will depend upon the implementation of reforms in the state order system, distribution network, and ownership of agricultural land. Like other economies in transition, Uzbekistan has a relatively undveloped service sector, and growth in this sector is likely to develop quickly. Because a deepening of structural reforms could lead to a further drop in industrial sector output, it is expected that industrial growth would not resume before 1995. 25. Cotton and gold provide a large share of export earnings. Export of natural gas to the neighbouring FSU countries is also expected to become a significant source of revenue as export prices reach world market levels. Uzbekistan's external financing requirements for 1993 are projected at about $500 million, of which $250 million is an estimated non-interest current account deficit. Over the 1994 - 1996 period, external financhg requirements are estimated in the range of $600 million - $700 million per year. Financing initially would be obtained from bilateral, multilateral sources as well as export and trade credits. Direct foreign investment is expected to reach around $200 million - $250 million by 1996. Financing from commercial banks and international capital markets is anticipated to develop in the medium to long term. 26. Uzbekistan signed an agreement with Russia in November 1992, relinquishing claims on former USSR assets in return for Russia's accepting responsibility for Uzbekistan's share of the former USSR's external debt. However, the country's creditworthiness in the medium and long term will depend on progress towards implementing a comprehensive reform program, on develownent of its natural gas potential, recently discovered oil fields, on the timely increase of various commodity exports as well as on external factors, such as the price of its raw material exports. 27. Uncertaiaties. The main risks and uncertainties facing Uzbekistan are related to the external environment and the ruble zone issue. Another importunt risk factor is domestic implementation capacity, which is discussed separately in the Droject Description section of this report (pa a. 47) since it may have a direct effect on the proposed n.iject. 28. Given its close economic integration with the rest of the FSU, particularly Russia, Uzbekistan will be exposed to adverse developments in those countries until substantial diversification of trade takcs place. In addition, many enterprises also remain integrated with suppliers and end users in other parts of tin FSU, implying that development of some sectors of the economy will be linked to the pace of economic recovery throughout the FSU. Exposure to commodity price risk could be a significant issue since Uzbekistan's exports are likely to be concentrated in cotton, gold, oil, and ;tatural gas in the short term and, possibly in the medium term. This will influence Uzbekistan's economy directly through its effect on export revenues and government tax revenues, as well as on enterprise net income, production, and consumption in general. 29. Uzbekistan has recently signed an agreement with Russia and four other FSU countries providing for the creation of a new ruble zone. However, the recent agreement is only a framework for the reconstitution of a ruble zone at some undefined date in the future. The creation of such a zone and the participation of each individual country is subject to bilateral agreements to be concluded in the futurr. In the interim period Uzbekistan is using the old Soviet rubles as its currency. Unless monetary stability is achieved within the new ruble zone, efforts to attain macroeconomic stabilization will be extremely difficult. However, the Government has completed technical preparations for the introduction of its own currency, should achieving monetary stability under the new arrangements prove impractical. E. World Bank's Activities 30. While the Bank now has a reasonable understanding of broad structural transformation issues facing the country, our knowledge of the economy and in particular the sectors remains limited. These can be strengthened by economic and sector work. It is expected that the preliminary CAS for Uzbekistan would be presented with tL Cotton Improvement Project early in the next fiscal year. The assistance program presented below aims to support Uzbekistan in its transition toward economic stabilization and a market-based economy through policy advice, economic and sector work, and lending. It is based on the assumption that the Government commitment to reform is maintained and that early measures toward stabilization and structural transformation of the economy ae implemented. 31. The Bank is planning to develop two to three project per year over fiscal 1994-96. The lending program is expected to focus on investment, institution building, and technical assistance projects. It is envisioned that through this type of lending the Bank would support reforming sectors even in the absence of a full macroeconomic stabilization reform. In addition, if the Government's ongoing policy discussions with the IMF result in an agreement on a program that could be supported by the STF, the -7- Bank would consider preparing a rehabilitation loan in fiscal year 1994 to finance critical imports and to support the Government's structural reform program. 32. A key aspect of the Bank's Initial assistance would be the development of the Government's institutional capacity, for which this proposed loan is designed. An enterprise and financial sector project is envisioned for fiscal year 1995, which would support the design of large enterprise restructuring, training in management techniques, strengthening private business services, and implementing restructuring plans for the sectoral banks. 33. Following this first loan, the Bank is preparing a Cotton Subsector Improvement Project. This project is expected to include substantial policy conditionalities to promote reforms in the cotton subsector; it will aim at increasing the efficiency of resource use and expanding exports through quality improvement in markets outside the FSU. In view of Uzbekistan's significant natural gas resources the Bank is considering to finance a project in the energy sector. This would contribute positively to the country's trade and balance of payments position and also complement the Government's efforts to attract foreign investment. 34. The Bank has initiated preliminary work on a project in the area of human resource development. Two options are under consideration, and one of them will be developed depending upon progress with reforms. The first concerns social protection, in which the Bank would help the Government develop instruments to target social assistance and to deal with poverty if enterprise restructuring begins. If this does not materialize, the Bank would consider a project in the health sector, aimed at increasing the efficiency of health delivery systems. For the outer years, the Bank is also considering an infrastructure and environment operation which would aim at improving the policy-making capacity of environmental agencies, environmental regulations, and infrastructure-related services. An irrigation rehabilitation project is also being considered to support the Government's reform efforts on efficient water use, in conjunction with the Bank's regional work on the Aral sea. An international conference was held on April 26, 1993 to discuss an Environmental Action Plan to be developed in fiscal year 1994 to address the Aral Sea issue and to help countries surrounding the Aral Sea develop their strategies within an overall framework'. 35. Economic and Sector Work. The Bank's economic and sector work on Uzoekistan will form the basis for policy advice and design of the lending program. The first CEM is being distributed separately which includes the Bank's initial economic assessment of the country's macroeconomic framework, structural and sectoral characteristics, and prospects and constraints for medium-term growth. It also contains a reform agenda for the transition to a market-based economy. Annual economic reports will be prepared to assess progress in economic reform and cover specific topics in depth, for example, in fiscal 1994, the report will focus on subsidies. A number of sectoral studies will be initiated, including reviews of the agriculture, human resources, energy, and infrastructure sectors, and an assessment of private sector development. These reviews will provide the framework for dialogues on policy issues and lending operations in specific secmrs. 36. Other Bank Group Activities. It is expected that Uzbekistan's formal membership to the International Finance Corporation (IFC) and to the Multilateral Investm it Guarantee Agency (MIGA) will become effective in the near future. The IFC has made several visits to Uzbekistan and has prepared I Organized by the Bank in collaboration with the UNDP and UNEP. - a preliminary strategy for its work in the country. The IFC intends to focus its assistance on privatization of state enterprises; development of financial institutions and stock and commodity exchanges; and financing of infrastructutc projects to support private sector enterprises. The IFC also intends to participate in equity investments and in attracting other foreign investors in mining, oil, gas, tourism, agribusiness, and manufacturing. Preliminary work has already been initiated in two areas: establishment of a leasing company and a cotton related project. MIGA has already received various applications to invest in the country from potential foreign investors seeking investment guarantees. R. THE PROTECT 37. Project Rationale and Objectives. The Bank's objectives under the proposed operation are twofold: (a) in the short term, to provide support to the government in formulating and elaborating reforms; and (b) in the medium term, to providt support for institutional building and domestic capacity to ensure that Uzbekistan has tae capability to implement and sustain reforms. By providing support to the development and implementation of key reforms in a timely manner, this first loan will contribute to the gathering momentum of overall reforms. Both the Government and the Bank view the technical assistance under this project as a substitute for skill shortages and inadequate local expertise during a limited period of time while local capacities are being developed. 38. Project Description. Based on the analysis and conclusions of the CEM and in agreement with the Government, the Institution Building/Technical Assistance Project would assist Uzbekistan in the following ways: A. Privatization and Enterpdse Reforms. Under this component, assistance will be provided to CSPMP and the Uzgosfond. It will include: (a) experts to advise both agencies in the strategy and -ethodology of privatization and public enterprise reform issues, including partner search, financial management, corporate governance, and information systems design on a long and short term basis; (b) equipment to establish a basic financial database on enterprises, to facilitate their monitoring, to expedite taking stock of the privatization process as it is implemented, and to facilitate communications between regional offices and the headquarters of the CSPMP and the Uzgosfond; (c) training and study tours; and (d) short term experts to develop a framework to deal with environmental liabilities. The European Community (EC) will provide parallel financing for this component. B. Legal and Regulatory Framework. This component will provide assistance to the Legal Department of the Cabinet of Ministers. It would include: (a) a long-term legal expert who would assist the Department in planning long-term strategy in economic reform and legal infrastructure issues; coordinating 'l legal technical assistance relating to economic reform; drafting new laws, decrees, upporting regulations, including petroleum legislation and environmental regulations; and reviewing the impact of laws and regulations on private sector development and privatization; (b) short-term experts providing specialized expertise in these areas when needed; and (c) training programs, such as seminars, lectures, fellowships, and other materials on legal issues in the transition to a market economy. -9- C. inantal Sector. The proposed assistance will include: (a) assistance to CBU for the initial phase of development of the payments system, including short term improvements in the form of equipment and consulting servicss. and financing of a feasibility study for the development of a new payments system over the medium term; (b) establishment of external debt monitoring and debt management departments, and providing training and equipment; (c) strengthening the banking supervisory function, particularly the off-site supervision capacity of CBU; (d) the introduction of modern accounting and auditing principles for the commercial banks; (e) undertaking diagnostic studies on the current financial status of the state banks; and (f) training for the CBU staff. D. Social Sqfety Net and Employ., ent Issues. This component of the proposed loan will finance technical assistance to: (a) the SFSC to redesign the existing family budget survey to make it a reliable basis for developing policy on income support and poverty alleviation, and to redefine the poverty line as well as training key staff of the SFSC; (b) the Ministry of Labor to develop its labor market policymaking capacity, and in enhancing the capacity of the employment service by training and by a major step toward full automation. This part of the project has been developed jointly with the EC, which will provide parallel financing. B. Sector Strategies and Studies. Under this component, assistance will be provided to two priority sectors identified by the Government. In the energy sector, advisors will be provided to Uzbekneftgas, the national petroleum concern, for petroleum acreage tendering negotiations. For the Telecommunications Ministry, advisors will be provided to strengthen policymaking capacity and to review and revise the sectoral rehabilitation plan. Japan is providing cofinancing for this component. 39. Past Bank Projects. While the Bank does not yet have project experience in Uzbekistan, it has had substantial experience with instiutional development operations in other countries. As reviews of past institution building and technical assistance loans suggest, projects are more effective when developed in the context of the government's institutional development objectives. This lesson has been an important factor in selecting areas that will receive assistance and in seeing that project objectives coincide with the government's objectives. Other lessons are the need for government commitment, ownership, and involvement in the specification of this particular program; agreement on project coordination; detailed terms of reference prior to the initiation of the program; and training and intensive supervision by the Bank once project implementation has begun. The design of this operation has taken these factors and lessons into account. 40. Project Administration. ProjeL. implementation will extend over a three year period. This loan will be managed in Uzbekistan by a Project Implementation Unit (PIU) located within the Department of the Coordination of External Economic Activity (DCEEA) of the Cabinet of Ministers. The PIU has been staffed with capable officials for this purpose, in conjunction with officials of the various beneficiary units. The PIU will coordinate project activities and supervise beneficiary agencies that will implement project components. The PIU will also be responsible for project accounting and auditing, disbursements, and procurement matters, and will provide the Bank with progress reports. Training of staff on procurement matters has been initiated with the assistance of Bank specialists and will continue during project implementation. The PIU staff will also be given training in disbursements before and during implementation. The Regional Mission in Tashkent will provide assistance to the PIU -10- throughout the implementation of the project. The administrative burden placed on the PIU staff will be minimized to the extent possible by packaging the operation into as few contracts as possible. In order to provide flexibility during project implementation, less than 10 percent of the proposed loan remains unallocated, as a contingency for additional studies or technical assistance if the need arises. 41. The beneficiary agencies will work closely with the PIU. They will be responsible tw the development of the terms of reference for consultants and specification of equipment to be procured under the project. Short lists will be developed jointly with the PIU and working groups created in each beneficiary agency to implement the project. Bids will also be jointly reviewed and selections will be endorsed by the PIU. Signing of contracts and taking possession of goods for transfer to the beneficiary agencies will be the responsibility of the PIU; this was confirmed during negotiations. 42. Since imports and procurement in the former Soviet Union were coordinated through Moscow, practically no procurement capacity exists in Uzbekistan. An international Procurement Advisor acceptable to the Bank would be hired to assist the PIU in managing procurement and training of Uzbek staff. For this purpose, US$300,000 has been allocated under the project. The PIU and the Procurer nt Advisor will ensure that procurement complies with Pank Guidelines. Contracts estimated to cost more than US$300,000 equivalent will be awarded through ICB, using the Bank's Standard Bidding Documents, modified to suit the requirements of individual packages. Contracts costing less than US$300,000 will be procured after international shopping, obtaining at least three quotations from different countries. Direct contracting up to US$250,000 per contract will be allowed. Although standard bidding documents will be used under the project, in order to ensure compliance with Bank Guidelines, all contracts (including bidding documents) procured through ICB, as well as the first two contracts procured through international shopping, will be subject to prior review by the Bank. Consultants will be selected in accordance with the Guidelines for the Use of Consultants by Bank Borrowers and by the Bank as executing agency. 43. Parallel financing for privatization and public enterprise reform programs and for social safety nets will be provided by the EC. Japan will provide cofinancing for assistance in the telecommunications sector. With the contributions of the EC, Japan, and the Government, the project will cost US$25 million equivalent. The proposed loan would finance 85 percent of the foreign exchange costs and 54 percent of local costs of the project . A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements are shown in Schedule B. A timetable for project implementation and supervision is given in Schedule C. Key project processing events are presented in Schedule D. The status of World Bank Group operations in Uzbekistan is given in Schedule E. Arrangements regarding accounting and auditing of the project as well as disbursements are discussed in Section C of the technical annex. Major contracts to be procured under and a program matrix, including training arrangements, are also provided in tables 1 and 2 of the technical annex. 44. Environmental Aspects. Because this project is not expected to have any significant negative environmental impacts, it has been placed in category C for the purposes of OD 4.01 on Environmental Assessment. However, recognizing the importance of environmental issues with respect to privatization, the operation would provide assistance to the Government on environmental laws and regulations, and on developing a strategy for settling environmental liability issues. 45. Actions Agreed. During negotiations the Government confirmed the scope of work to be financed from the proceeds of the proposed loan. The Government has also agreed upon and fully -11- established the PIU, which was a Board presentation condition. During negotiations the following have also been confirmed: (a) a financing plan, including parallel and cofinancing from other foreign multilateral and bilateral sources; (b) terms of reference for the principal consultants; (c) a timetable for key project implementation; (d) disbursement mechanisms; (e) issues related to short lists of consultants, (f) assurance that prior agreement with the Bank will be sought on the content of training programs and criteria for the selection of trainees. 46. Benefits and Risks. The proposed loan would help to alleviate constraints arising from lack of specific skills and institutions that are slowing the reform process in Uzbekistan. It will contribute significantly to enhancing the government's capacity to articulate and implement reforms, thereby strengthening the institutional framework for managing a market economy. It will also provide a vehicle for mobilizing and coordinating technical assistance and will contribute to maintaining the momentum of overall reform. 47. The main risks are related to the Government's commitment and the difficulties of implementation. There is presently strong evidence of commitment by counterparts who will implement the project at both the cabinet and agency levels. We will nurture their commitment by developing close working relationships and a consensus at the working level. The project might incur delays in implementation as a result of the overcentralized nature of decision making in the country, the Government's inexperience with managing technical assistance, and the limited absorptive capacity of implementing agencies. These risks will be minimized by placing advisors into the PIU, by obtaining assistance from the Bank's resident mission in Tashkent as the need arises, and by intensive supervision of the project. 48. Recommendation. I am satisfied that the proposed loan comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis Preston President by Ernest Stern Attachments Washington, D.C. September 9, 1993 -12- Schedule A Page 1 of 2 PROJECT COSTS (thousands of U.S. dollars) Components Local Poreign Total Foreign Costs as ComponentCost a Percentage of as a Percentage Total Cost of Total Cost 1. Privatisation and Enterprise Reforms a. Privatization 50 2,050 2,100 98 8.4 b. Enterprise Reform 70 1,830 1,900 96 7.6 2. Legal and Regulatory Framework a. Legal Reforms and Framework 20 480 500 96 2.0 b. Regulatory Framework 60 430 450 96 1.8 c. Commercial Laws 30 470 500 94 2.0 d. Petroleum Legislation 30 320 350 91 1.4 3. Fnanchl Sector a. Payments System 90 5,410 5,500 98 22.0 b. Bank Supervision 50 450 500 90 2.0 c. Diagnostic Studies 100 1,200 1,300 92 5.2 d. Accounting and Auditing 100 1,150 1,250 92 5.0 e. External Debt Management 20 230 250 92 1.0 4. Social Safety Net a. Poverty Monitoring and Survey 50 450 500 90 2.0 b. Policy Development 45 1,955 2,000 98 8.0 c. Employment Services 55 2,945 3,000 97 12.0 5. Sector Strategies and Studies 1. Energy a. Advisors for Petroleum Negotiations 70 530 600 88 2.4 2. Telecommunications a. Policy Development 20 380 400 95 1.6 b. Review of Network Modernization Plan 30 970 1,000 97 4.0 c. Institutional Restructuring Assistance 20 580 600 97 2.4 6. Project Implementation - 300 300 98 1.2 Total Base Cost 7 22.130 23.00 6 92.0 Price & Physical Contingencies - 2,000 2,000 100 8.0 TOTAL PROJECT COST 870 24&130 2 100.0 -13 Schedule A Page 2 of 2 FINANCING PLAN (thousands of U.S. dollars) Total IBR Finaocing Components Iocal Poreln Project as % of Government IBRD IBRD EC Japan IBRD Cost Cost 1. frivatisation and Enterprise Reforms a. Privatization 30 20 950 1,100 - 970 2,100 46 b. Enterprise Reform 30 40 1,830 - 1,870 1,900 98 2. Legal and Regulatory Framework a. Legal Advisory 10 10 480 - 490 500 98 b. Commercial Laws 10 10 430 - - 440 450 98 c. Special Laws 10 20 470 - - 490 500 98 d. Petroleum Legislation and Contracts 20 10 320 - - 330 350 94 3. Financial Sector a. Payments System 60 30 5,410 - - 5,440 5,500 99 b. Bank Supervision 20 30 450 - - 480 500 96 c. Diagnostic Studies 30 70 1,200 - - 1,270 1,300 99 d. Accounting and Auditing 30 70 1,150 - - 1,220 1,250 98 e. External Debt Management 10 10 230 - - 240 250 96 4. Social Safety Net a. Poverty Monitoring and Survey 25 25 450 - - 475 500 95 b. Policy Development 45 - 455 1,500 - 500 2,000 25 c. Employment Services 25 30 2,945 - - 2,975 3,000 99 S. Sector Strategies and Studies a. Energy (Petroleum Acreage Tendering) 20 50 530 - - 580 600 97 b. Telecom Policy Development 5 15 180 - 200 195 400 49 c. Review of Modernization Plan 10 20 430 - 500 450 1,000 45 d. Institutional Restructuring Assistance 10 10 280 - 300 290 600 48 6. Project Implementation - - 300 - 300 300 100 7. Price and Physical Contingencies - - 2,000 - - 2,000 2.000 100 TOTAL PROJECT FINANCING 40 470 20.530 2,.60 0 100 25,0 U -14- Schedule B Page 1 of 2 SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (thousands of US. dollars) Category ICB Other N.I.F. Total Computers, office 8,050 7002 80 8,830 equipment and supplies (8,050) (700) (8,750) Technical Assistance 9,850'4 3,320 13,170 (advisors, consultants and (9,850) (9,850) studies) Training and study tours 1,700' 600 2,300 (1,700) (1,700) Refinancing PPF 700 700 (700) (700) Subtotal 8,050 12,950 4,000 25,000 (8,050) (12,950) (21,000) Total 25,000 (21,000) Non-Bank financed (cofinancing, parallel finandg, government contribution). 2 Intenational Shopplg ($700,000). 3Consultan services to be procured in accordance with Bank guidelines. SIncludes direct contMcting for $100,000. -lS- ScduleC B Page 2 of 2 IBRD DISBURSENS (thousands of U.S. dollars) Category Amount Percentage of Expenditures tobe Snanced1 Consultant's services 9,750 100% of expenditures and training Computers, equipments and 8,550 100% of foreign expenditures, other goods 100% of local expenditures at ex-factory costs, and 75% of local expenditures for other items procured locally. Refinancing of Project 700 Amounts due to repy the principal. Preparation Advance Unallocated 2,000 Total 21,000 1/ All expenditures to be financed will be net of taxes. Estimated IBRD Disbursements, by Fiscal Year (thousands of U.S. dollars) 1994 1995 1996 1997 Annual 2,500 10,000 7,000 1,500 Cumulative 2,500 12,500 19,500 21,000 S-1he C Page 1 of 2 IMPLEMENTATION SCHEDULE Component Responsible Agency Timing Privatization Policy Development CSPMP Dec 1993 - May 1995 Computer System CSPMP Jan 1994 - Dec 1994 Enterprise Reform Policy Development Uzgosfond Feb 1994 - May 1995 Corporate Governance and Restructuring Uzgosfond May 1994 - Dec 1996 Computer System Uzgosfond Feb 1994 - Dec 1994 Legal and Regulatory Framework Legal Reforms Legal Dept of the Cabinet of Ministers Feb 1994 - Feb 1996 Regulatory Framework Legal Dept of the Cabinet of Ministers Mar 1994 - Dec 1996 Special Laws Legal Dept of the Cabinet of Ministers Mar 1994 - May 1995 Petroleum Legislation Legal Dept of the Cabinet of Ministers Mar 1994 - May 1995 and Uzbekneftgas Financial Sector Payments System CBU Feb 1994 - Dec 1996 Bank Supervision CBU Mar 1994 - May 1995 Diagnostic Studies CBU Mar 1994 - Mar 1995 Accounting and Auditing CBU, Ministry of Finance Mar 1994 - Mar 1995 External Debt CBU, Ministry of Finance Jan 1994 - Jan 1995 Social Safety Net/Employment Poverty Monitoring and Survey State Forecasting and Statistics Committee Feb 1994-Aug 1995 Employment Service Policy Ministry of Labor/Employment Services Mar 1994-May 1996 Computerization of Employment Services Ministry of Labor/Employment Services Aug 1994-Jun 1996 Sector Strategies and Studies Advisors for Petroleum Acreage Negotiations Uzbekneftgas Jan 1994 - Jun 1995 Telecommunications Policy Ministry of Telecom Feb 1994 - Jun 1995 Network Modernization Ministry of Telecom Mar 1994 - Jun 1995 Institutional Restructuring Ministry of Telecom Feb 1994 - Mar 1995 -17- Schedule C Page 2 of 2 SUPERVISION PLAN APPROXIMATE ACTIVITIES STAFF COMPOSITION STAFF DATES WEEKS 11/93 Project Launch Workshop Task Manager, S Procurement, and (Mission) disbursement specialist 11/93-02/94 Preparation of consultant and Task Manager, Procurement 8 equipment bid packages. and disbursement specialist 11/93-02/94 Selection of training program Task Manager, component 4 participants specialists 04/94-05/94 Review of work progress on all Task Manager, component 6 components. Finalize timetables specialists (Mission) for completion of all components. 08/94 Review of final audit reports. Task Manager, component 6 specialists. Final review of energy Energy specialist (petroleum) component. Final review of poverty Poverty specialist monitoring component. 10/94-11/94 Mid-term Review Task Manager, component 8 specialists (Mission) 1/95-2/95 Final review for privatization and Task Manager, component 6 enterprise reform, legal and specialists regulatory framework components 5/95-6/95 Final review of payments system Task Manager, Financial 6 Sector specialist, (Mission) Employment Services 9/95 Final review of telecoms Task Manager, Telecoms 6 component specialist 6/96 Final review of employment Task Manager, Employment 6 services component Services specialist 1/97 Final supervision and Task Manager, 10 disbursement and all final reports Disbursement specialist (Mission) Total 71 -18- Page 1 of 1 TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare: 12 months (b) Prepared by: Government with World Bank assistance (c) First IBRD mission: September 1992 (d) Pre-Appraisal: March - April 1993 (e) Appraisal: June 1993 (f) Negotiations: August 1993 (g) Scheduled Board Date: October 1993 (h) Planned date of effectiveness: November 1993 (i) List of relevant PCRs and PPARs: Not applicable The World Bank missions which visited Uzbekistan in September 1992, December 1992, and March 1993, assisted the Government in identification and preparation of the prj -t, and finally appraised it in June 1993. Mission members included: Messrs./Mmes. Denizer (Task I ManAger); Barlas (Counsel); Demirgue- Kunt, Ikramullah (Financial Sector); Gelb (Privatization); Peretz (Social Sectors); Alahdad (Energy); Cowie (Telecommunications); lbrabimi (External Debt); Duflot (Accounting); and Pinto (Procurement). Mr. Kadir T. Yarakoglu and Mr. Russell J. Cheetham are the managing Division Chief and Department Director, respectively, for the operation. -19- Schedde E Page 1 of I STATUS OF BANK GROUP OPERATIONS IN THE REPUBLIC OF UZBEKISTAN A. Statement of Bank Loans. As of August 31, 1993, Bank lending to Uzbekistan has not yet commenced. B. Statement of IFC Investments. As of August 31, 1993, Uzbekistan was not yet a member of IFC. -20- REPUBLIC OF UZBEKISTAN Instiutio Bildnft ecKhnica AssistaPoec Technical AMn A. Ptct 1. The institution building and technical assistance activities financed under this project would help the Government of Uzbekistan in five priority areas to support .. reform efforts: (a) privatization and enterprise reform; (b) legal and regulatory framework; (c) financial sector; (d) social safety net and employment; (e) sector strategies and studies. The project's overall administration would be the responsibility of the Project Implementation Unit, which is located in the External Assistance Management Unit of the Cabinet of Ministers. Implementation would spread over a three year period. The total project cost is US$25 million. I. PRIVATIZATION AND PUBLIC ENTERPRISE REFORMS (US$4,000,000) 2. The Law on Destatization and Privatization was enacted in November 1991, signalling the start of the process of transforming property rights. Further implementing regulations were passed in October 1992. The Law permits a wide range of options for transforming property relations and enterprises into collective, joint stock, or other types of firms. A Committee for State Property and Privatization (CSPMP) was set up in February 1992, under the Supreme Soviet and Cabinet of Ministers. CSPMP is the designated manager of state property entitled to evaluate and approve all applications for destatization and privatization of state property. It has a staff of about 500; a headquarters staff of 50 with 14 branches in the provinces and Tashkent city, as wed as representatives in smaller towns. The local branches of the CSPMP work with local governments and can approve applications for the privatization of smaller assets with book value below RS million. 3. The privatization process has been underway since the first quarter of 1992. About 1,500 small enterprises in trade, catering, and services Lave been privatized with many more being privatized as regional branches. A number of transport, communications, and construction firms have also been privatized. Most of these transactions took the form of selling enterprises to their workers. Almost all the public housing stock in Tashkent has been privatized through gift or sale to their existing tenants at depreciated book value, and this program is now being replicated in other cities. Public purchase and sale of housing is not yet permitted. Land remains the property of the state, but the area allocated to small family farms has more than tripled; in 1993 some 200 state farms are projected to be converted to private collectives. 4. In May 1993, the CSPMP announced a much larger program for privatizing urban housing, and for privatizing up to 10,000 small enterprises in trade and catering, 5,000 in other services, 246 medium sized firms in local industry, 22 in light industry, and more than 100 in the construction sector. This program continues with the privatization of smaller firms, emphasizing those serving -21- consumers, and gradually moves to firms produ-ing intermediate or capital goods. In November 1992 another institution, the Uzgosfond, was set up under the Ministry of Finance. It is to hold the State's remaining majority or minority shares in privatized enterprises, to restructure and prepare the ones it fully owns for eventual privatization by the CSPMP, to develop capital markets, and to manage revenues accruing to the State from privatization. At present, the Uzgosfond is represented on the boards of directors of 10 companies, although this number will rise dramatically in 1993 if privatization proceeds as planned. 5. While the Government has taken preliminary steps to privatize state assets and reform public enterprises, a major constraint to further elaboration and implementation of reforms in this area is lack of expertise and experience on the part of the CSPMP and Uzgosfond. Their staffs are not familiar with the concepts and methodologies of privatization, financial management, corporate control, restiucturing, and negotiations with foreign investors. These factors will be particularly important as the new privatization program gradually moves from employee buyouts toward a greater proportion of auctions and sales to outside investors, and as the privatization of larger firms begins. Both the CSPMP and Uzgosfond need substantial institutional strengthening. The proposed technical assistance aims to provide financing for capacity-building activities, complementing the assistance being provided by other donors, and is expected contribute to the acceleration of reforms. 6. Privatization: The proposed project will provide two long-term resident advisors for the CSPMP in the design and implementation of the new privatization program. They will help to define strategies and instruments to attain program targets. They are also expected to provide svpport for case- by-case privatization, partner aearch, and negotiation of deals with foreign investors. These advisors will be assisted by short term consultants, who will provide support on special transactions and sector specific issues. This component will be provided through a parallel financing arrangement with the EC. 7. Enterprise Reforms and Management: Assistance to the Uzgosfond will include two long- term resident advisors, as well as short-term consultants. Long-term advisors will provide assistance in developing a framework to reform and manage the public enterprises that the Uzgosfond owns in part or as a whole. In particular, long-term advisors will focus on corporate financial management, restructuring, and governance issues. They will be assisted by short-term consultants as the need arises. 8. Computers and Other Equipment: In order to implement and manage its privatization program more efficiently, the CSPMP needs computers and other office equipment in headquarters and its regional offices. Likewise, the Uzgosfond needs computers to develop a database to monitor the performance of enterprises for which it is responsible. Computers and office equipment will be provided on the basis of an agreement by both agencies to procure and install the same types of hardware and software to faciitate data exchanges. Furthermore, a joint systems design and programming effort would reduce the level of effort and time for developmental work. The institutions have also agreed to formulate a joint tender document and evaluate the proposals as a team. 9. In-Service Training and External Training and Study Tours: New privatization methods and effective utilization of computers being provided under the project require training of CSPMP and Uzgosfond staffs. The project will finance in-house training on issues such as enterprise valuation, launching of investment or mutual funds, performance contracting, and on using computers. The project will also provide funds for training and study tours abroad, particularly for large enterprise privatization. -22- I. LEGAL AND REGULATORY FRAMEWORK (US$1,800,000) 10. Although Uzbekistan has taken some steps and enacted some laws to support a market economy, major gaps and inconsistencies pervade the legal framework necessary for commercial activities, including privatization, to flourish. The lack of clear legal rules in many critical areas has emerged as a major constraint to economic development in the newly independent states of the former Soviet Union. To encourage a sound environment for commercial activities and private sector development, it is crucial that the legal framework provide clear and predictable rules concerning: (a) commercial law, including company law, contract law, banking laws, and the related rules governing settlement of commercial disputes; (b) property rights; (c) market entry and exit; and (d) trade, competition, and monopolistic practices. 11. The Government has been struggling to cope with the numerous economic and legal problems that transition to a market economy involves. At present, the Legal Department under the Cabinet of Ministers is formulating and drafting all major legislative reform proposals, including proposals regarding private sector development. This department has six lawyers and a number of legal assistants who do not have the expertise and experience in important issues necessary to establish the legal base for a market economy, such as property rights, contract law, and legal practices. The Legal Department needs support and assistance to be able to provide adequate legal advice on draft legislation, to ensure that new laws are internally consistent, and to provide appropriate changes if proposed laws are in conflict. In addition, this department needs assistance in drafting laws that require specific expertise, such as petroleum legislation. 12. General Leal Advice: Under this component a resident Legal Advisor will be provided for 12 to 18 months. The advisor will be responsible for helping to plan long-term strategy in economic reform as it relates to legal infrastructure. The advisor would also be expected to assist in drafting relevant laws and supporting regulations and decrees when needed. The Legal Advisor will be expected to be aware of and to coordinate legal technical assistance relating to economic reform, and thus will need to work closely with the interagency legal assistance group, Economic Reforms Group, and the Aid Coordination Unit. 13. Expert Advice: In view of the importance of the commercial law and other laws related to private sector development, the legal advisor would be assisted by specialists in specific areas such as bankruptcy, property rights, international trade, labor, and environmental concerns. 14. Petroleum Legislation: Considering the importance of petroleum for the development of Uzbekistan, this project will provide financing for the development of comprehensive petroleum legislation. It is expected that legal consultants with experience and expertise in this area would be recruited to prepare the law, including a petroleum taxation code and model contracts. 15. Training: The training programs will be implemented under the direction of the legal advisor with the assistance of the Legal Department of the Cabinet of Ministers. These training programs would focus on problems that legal professionals will encounter in the transition to a market economy, and will be addressed to an audience of judges, law professors, law students, other young lawyers within and outside government, and possibly Parliamentarians involved in the legal aspects of the economic reform program. The training would consist of seminars, lectures, and other materials provided by -23- outside legal experts. Although it is expected that the training would take place mostly within Uzbekistan, flexibility exists to send local legal professionals overseas for short-term internships. 16. Computers and Other Equipment: Finally, in order to work more efficiently, a limited amount of equipment and supplies will be needed, including: (a) computers and computer software for a legal database to be maintained by the Legal Department of the Cabinet of Ministers; (b) legal textbooks and comparative studies for training courses and seminars; (c) sample contracts, charters, and by-laws that can be used by lawyers in practical work; and (d) collections of international treaties and reviews of international commercial practice. 11l. FINANCIAL INFRASTRUCTURE (US$8,800,000) 17. Uzbekistan has few of the financial institutions, markets and instruments that characterize a Western financial system. In addition to the Central Bank, Uzbekistan has four specialized state banks and some 20 new commercial banks. The banKing system is highly concentrated with the four state banks which control more than 90 percent of credit. Two of the state banks, the Agro-Industrial Bank (Uzagroprombank) and the Industrial-Building Bank (Uzpromstroybank), are sectoral lending banks. They have been converted to joint-stock commercial banks with ownership shared by the government and other state-owned entities. There is a specialized state Savings Bank (Uzberbank) for household deposits. The National Bank for Foreign Economic Activity was established as a joint-stock commercial bank, having been transformed from the local branch of the So-iet foreign exchange bank (Vneshekonombank). It was recently converted into a state bank. Its function is to undertake international financial business on behalf of the government (export/import financing, foreign currency trading), and it currently holds the foreign currency reserves of the public sector. 18. Although the move to a two-tier banking system began in 1988, the Central Bank continues to act as a domestic financial intermediary. Lending decisions of the sectoral banks are based on pre-set priorities that are not necessarily consistent with market criteria. Lack of accounting standards make the financial status of these banks unknown in a meaningful way. The ownership structure of the new "commercial" banks is problematic. Many of these banks exist mainly to borrow from the savings bank and the interbank market and to provide financing to the enterprises that own them. Pressure from the government to continue to lend to non-viable enterprises, so as to ease the pain of adjustment, is strong. The risks of undermining the solvency of the banks and precipitating a collapse of the financial system is therefore high. 19. The Government has taken a number of steps to restructure the sector. Legislation for the reform of banking system was enacted in October 1991, followed by the adoption of the statute of the Central Bank in March 1992. The Central Bank is in the process of adjusting to its new role under the new economic system and has been receiving assistance in that effort from the IMF and the Turkish Central Bank. The Law on Banks and Banking assigns an independent role to the Central Bank to maintain the stability of the currency and to conduct monetary policy. The law also establishes conditions under which commercial banks can operate in Uzbekistan and specifies minimum capital requirements. New prudential supervision regulations are being developed and are expected to be adopted before 1994. 20. This technical assistance program will begin work on some key financial infrastructure building issues. The IMF will take primary responsibility for the technical assistance needed by the Central Bank of Uzbekistan. The World Bank financial sector support will complement the IMF's -24- assistance for the Central Bank and will focus mainly on building the infrastructure and skills necessary for the functioning of a modem bankin- system. 21. Payments System: Under the proposed project, the Central Bank would improve the operations of the current inefficient payments system in two phases. The first phase comprises short term and low cost refinements with immediate performance improvements, financed through the proposed loan. This short-term plan of action also includes a strategy study which would yield a blueprint for the development of a sophisticated payments system entailing substantial investments in computer goods and services. Under the proposed project, computers and communications equipment will be provided to link the regional clearing centers of the Central Bank. The project will also provide software and training. 22. Bank Supervision: The IMF and the Turkish Central Bank are already providing assistance to develop onsite supervision capacity of the Central Bank, which includes upgrading skills of examiners, policy advice, and harmonizing prudential regulations and examination practices internationally. However, there is also a need to develop the Central Bank's offsite supervision capability, which normally includes computerizing and maintaining basic bank data, to be able to quickly compile and analyze information, to identify problems, and to prioritized onsite surveillance efforts and staff training (examination skills, statistical analysis of computerized information). The proposed assistance will complement the IMF's assistance and will provide equipment, software, and basic staff training on the use of computerized supervision packages. 23. Diagnostic Studies and Strategic Planning: The Central Bank and the Government face difficult strategic policy questions on the framework for the financial sector during the transition from a planned to market economy. One area of immediate concern is the policy toward the four large state banks that inherited unreconciled accounts, weak loan portfolios, and operating procedures designed for a central allocation system, which are not appropriate for a market economy. In order to redress this situation and before rehabilitating any of these banks, the Government will need information on the implications and costs of the various options for restructuring them. 24. The technical assistance under this component represents the first step in that directLan. It will support work of the Central Bank with diagnostic studies on the four state banks, which would be followed at a later date with a further assistance program using the information obtained under this project. The objectives of the first phase are to develop a framework to control loan losses resulting from lending to enterprises, to downsize the banks to reflect those losses, and to develop plans to restructure these banks. The financial status of the state banks will be reviewed and preliminary recommendations will be presented. Another objective is to develop operating rules and performance standards for the state banks. A special action plan would be developed for the rehabilitation of the Savings Bank since that institution provides critical depository services for the general population. 25. Accounting and Auditing Standards: Significant work has been done throughout the FSU to develop accounting and auditing standards in harmony with internationally accepted standards. The UN is already in the process of developing a project to adapt this work for the enterprise sector in Uzbekistan. The proposed program would assist commercial banks in adapting accounting and auditing principles developed for the FSU countries under the leadership of the Central Bank. A resident advisor will be placed in the Central Bank for this purpose. The advisor will be the deputy head of the working group on accounting to be established by the Central Bank with the participation of commercial banks and the Ministry of Finance. He or she will be responsible for the development and implementation of accounting and auditing standards throughout the financial institutions. The advisor will be assisted by -25- short term consultants for work in specialized fields. This component will also provide a limited amount of equipment. 26. External Debt Management: Under a recent decree of the Cabinet of Ministers, the responsibility to authorize foreign borrowing, recording, and monitoring of all external debt related transactions was assigned to the Ministry of Finance (MOF). The Government has also ruled that while the MOF should formulate external debt policy and maintain all records on the Central Government borrowing, the CBU would bx responsible for monitoring and reporting on commercial banks, enterprises, and private sector debt. To this end, a debt office would be created in the Central Bank in addition to the one in the Ministry of Finance. The proposed program under this component will assist the Central Bank to establish this unit and will provide equipment, software, and training. 27. Training: In addition to the training activities to be provided jointly by the EC and EBRD for commercial bankers in Uzbekistan, there is a need for training the Central Bank staff on a range of issues, from monetary policy making to bank supervision. Under this type of assistance, the Central Bank staff will have financing for study tours abroad, participation in seminars, and secondments abroad. This assistance will be coordinated with the IMF. IV. POVERTY MONITORING/LABOR MARKET DEVELOPMENT (US$5,500,000) 28. Uzbekistan has an extensive and complicated sysiem of cash and other social benefits. Pensions and invalidity benefits are paid from a fund supported by a 27 percent payroll tax. Unemployment benefits and the cost of the Employment Service and its labor market activities such as training are financed by an additional 3 percent payroll tax. Levels of these benefits are related to the standard minimum wage, modified by previous earnings level and employment history. Other support, in particular food subsidies and family allowances for older children, are paid from the central budget. The total cost of this system of benefits and related provision amounts to more than a third of the GDP of Uzbekistan. This system is not sustainable and its overall cost needs to be reduced. This in turn implies that the available resources need to be better targeted to the poor, in particular by setting a well defined and reasonable poverty line. 29. Key to all these issues is the development of an effective system of poverty monitoring. This requires substantial improvements to the existing family expenditure survey, which appears to have a sample designed to include "typical" households and to exclude households likely to be particularly rich or particularly poor. In the short term some usable data may be produced by measures such as reweighing the data from the existing sample, but the sample needs to be redesigned as soon as possible. 30. Uzbekistan has begun to develop a labor market, and it has also begun to develop institutions to support that market. The Ministry of Labor (MOL) was set up in 1992, under the new Employment Law which came into force that year. It has responsibilities for policy and inspection of wages and working conditions, for policy on living standards and support for vulnerable groups, and for the State Employment Service. Its policy making capacity under the new economic system is limited and it needs substantial technical assistance. 31. The State Employment Service (SES) of the MOL is responsible for registering unemployed people and job seekers, collecting information on vacancies from employers, and making such information available to suitable unemployed people. While open unemployment is still low, it is -26- likely to rise substantially when structural change begins in the economy. The State Employment Service has 14 regional offices and 255 local offices. While it has been able to deal with low levels of unemployment in the past, without more automation it could be overwhelmed by the mechanics of handling rising numbers of unemployed people. The offices have very little office equipment such as facsimile machines and photocopiers. They are in process of installing some 200 computers which will enable a start to be made on automating the vacancy information system but not to allow automation of registration and other key work. The proposed project will provide assistance with poverty monitoring and surveying, policy development for labor markets, and computerization of the SES. 32. Poverty Monitoring and Survey: Under this subcomponent, assistance will be provided to the State Forecasting and Statistics Committee (SFSC). The project will help in redesigning the existing family expenditure survey and carrying through the proposed changes, and also in devising ways of making use of the existing data. It will also assist in defining a poverty line and in analyzing its implications for income support. Assistance will be in the form of both consultant time and fellowships to enable key staff of the State Committee for Forecasting and Statistics to observe practice with large social surveys abroad, and possibly for one or more of them to undertake a suitable short course on social survey design. The consultants will advise on the content of these fellowships and make the necessary arrangements with the outside organizations concerned. They will also advise on requirements for additional computer hardware and other equipment or supplies needed to carry out the proposed changes to the survey. 33. Labor Market Policy Development: This part of the project is being developed jointly with the EC and the Bank. It will be funded by the EC. Technical assistance will be provided to the Minister of Labor and the relevant Deputy Ministers to improve the Ministry's capacity to identify key issues and carry out strategic policy analysis across the whole range of its labor market responsibilities. The consultants will assist with the preparation of a strategy paper, organize local seminars, and advise on and arrange suitable study visits abroad. 34. Technical assistance will be provided to the State Employment Service to outline the main areas for labor market service development over the next few years, and to plan and fund appropriate arrangements (study visits, local workshops, distance-learning material), for a learning program for key policy and operational staff. Areas for study will include organization and management; labor market and management information; procedures for registration, vacancy finding, and vacancy filling; and arrangements for assisting workers involved in mass layoffs. Technical assistance will also be provided in applying the knowledge gained to the practical problems of Uzbekistan. In the case of local office procedures, this assistance will include the establishment of two or three local offices to serve as test beds or models for new approaches. 35. Computerization of Employment Services and other Equipment: Substantial progress on automation has already been made. Building on that, the assistance will include help in developing a design an outline plan and schedule for full automation. It will also help in producing a detailed plan and schedule for the next phase of automation, to be implemented with hardware funded under this project. The outline plan for full automation, and the detailed plan and schedule for the phase to be funded under this project, will need to be approved by the Bank before procurement of hardware under this project begins. The project will then provide computers for the initial stage of computerization of the State Employment Services. This subcomponent will be closely coordinated with the EC. -27- V. SECTOR STRATEGIES AND STUDIES (US$2,600,000) 36. The Government of Uzbekistan is in the process of formulating sector strategies, including investment plans and measures to reform sectors to facilitate the transformation of the economy. During the CEM missions the government informed the Bank that it identified agriculture, energy, and telecommunications as priority sectors. The agricultural sector has recently started to receive assistance from the EC and the EBRD. The Bank is also involved in that sector and is in the process of developing a Cotton Subsector Improvement Project. Two of the priority sectors, however, energy and telecommunications, have not been receiving assistance in sufficient amounts. In order to provide support for the Government in these sector,, sector subcomponents are proposed. These will assist agencies in the energy and telecommunications sectors to carry out policy reviews, provide support with sector- specific technical issues, identify and undertake project feasibility studies of sectoral investment for which the Government may seek financing from the Bank. Energy Sector 37. Advisors in Petroleum Negotiations: The Government has assigned a high priority to a successful tendering program for petroleum development as a means of attracting international private capital. Tender documents for some of the prospective areas are in preparation. The Government seeks technical assistance to ensure that not only will the tender documents and the tender process provide the appropriate incentives for the involvement of international private companies, but also that its own interests will be safeguarded during the process. For this purpose, advisors will be provided (a petroleum legal expert and a petroleum economist with commercial, technical and operational experience) to work directly with Uzbekneftegas (or the tendering authority designated by the Government) in negotiating petroleum production agreements. It is assumed that the preparation of tenders and other tendering arrangements will be carried out separately by the designated tendering authority. While the advice will focus primarily on the negotiations, to facilitate the process the consultants will need to review and advise on the preparation of the tenders and the tendering process. Telecommunications Sector 38. All countries of the former Soviet Union have inherited a telecommunications network organized centrally with international routing through Moscow and with a low priority for investment, leading to obsolete equipment that provides poor-quality service and coverage that is deteriorating further. Since recent economic difficulties and traditionally low tariffs have failed to generate enough revenue to maintain and extend the system, the rate of new line installation has dropped sharply. The Government has recognized that these shortcomings must be overcome if the telecommunications infrastructure is to make its essential contribution to a market-based economy. The network cannot be modernized without a substantial influx of foreign investment. The Government recognizes this investment need and wishes to address this issue as one of its top priorities. 39. The Government is faced with a challenge to restructure the sector in a way that will encourage service improvements while redefining its own role and responsibilities, providing scope for new service companies, upgrading existing facilities, and promoting responsiveness to customer requirements through restructured service companies with greater autonomy and a more commercial approach. These improvements will be essential to attract investment to the sector. -28- 40. The proposed technical assistance will tackle three main tasks: first, it will provide policy advice for the preferred role of the Ministry responsible for telecommunications, which will be to develop and publish a new sector policy and the steps and resources required for its implementation. The ultimate objective would be the separation of commercial and regulatory roles of the ministry. Second, it will provide assistance for institutional restructuring. It will aim at structuring the entities responsible for providing service so that appropriate integration and coordination takes place with responsibilities assigned at national and local levels and so that mechanisms are in place to ensure their realization in a cost effective manner. Third, it will provide support for assessing how the network can best be modernized including analyzing technical, financial, and human resource needs; clarifying customer demands; and determining how improvements can be funded. 41. In addition to consultancy proposals from small teams for each of the three sets of tasks listed in the first instance, it is intended to recruit a senior advisor to the Minister for one year who will provide direct advice, help coordinate the work of the three task groups, and provide linkage with the PIU controlling the overall technical assistance program. The recipient of this assistance will be the Ministry of Telecommunications. Japan will provide cofinancing for this component. B. PROJECT ADMINISTRATION AND IMPLEMENTATION 42. The Government has determined that administration of this first loan to Uzbekistan will be handled by a Project Implementation Unit (PIU), a section of the Department of the Coordination of External Economic Activity (DCEEA) of the Cabinet of Ministers. The PIU is a new unit, being staffed with capable officials for the purposes of coordinating and administering this first operation. During negotiations, it was agreed that the appointment of a Unit Chief would be a condition of Board presentation. This condition was subsequently fulfilled. The PIU will have four professional staff with responsibilities for procurement, disbursements, and accounting in addition to the chief of the unit. They will be assisted by a procurement advisor to be financed under the PPF. Training of PIU staff on procurement matters has already begun by World Bank staff and will continue during project implementation. The PIU staff will also be given training in disbursements before and during implementation. 43. Responsibilities of the PIU include the monitoring of the progress under the project, overall project implementation, coordination among various participating government agencies, procurement to ensure a consistent approach in the implementation of the project, the monitoring and control of the proposed use of Bank funds through commercial banks, the administration of the Special Account, overall auditing and auditing of project accounts, and preparation of the consolidated progress reports and the Project Completion Report. During project implementation the Bank's regional mission in Tashkent will provide support to the PIU in all these matters. The beneficiary agencies will work closely with the PIU. They will be responsible for the development of the terms of reference for consultants and specification of equipment to be procured under the project. Short lists will be developed jointly with the PIU and working groups created in each beneficiary agency to implement the project. Bids will also be jointly reviewed and selections will be endorsed by the PIU. Signing of contracts and receiving goods for transfer to the beneficiary agencies will be the responsibility of the PIU. These arrangements were agreed during appraisal and confirmed during negotiations. 44. Preparation of this operation has recognized the question of the Government's capacity to absorb the proposed assistance. The administrative burden placed on Government staff has been -29- minimized to the extent possible by packaging the World Bank operation into as few contracts as possible and attracting parallel financiers to help In administration of the programs. In areas of critical need but where no alternatives exist - for example, in the financial sector, privatization and enterprise reform, and legal reform components - the project proposes a small number of long-term experts to fill specific skill shortages. This type of assistance would last for a limited period and would include strengthening of institutional capacities as a primary objective. The existing infrastructure is adequate to host these long-term experts. Similarly, for assistance requ.rements in other areas, the individual and institutional structures are on balance sufficient to make use of short-term consultancies and results of planned studies. Particular attention will be paid to this issue during supervision. 45. To ensure effective project implementation, after loan approval the Bank will send a team including the task manager and procurement, disbursement and some of the component specialists, who will hold a project launch workshop to ensure that all counterparts fully understand proper procedures for implementation. This will include Bank approval of the terms of reference of studies and programs financed under the project, the criteria for selection of trainees, and the short list of consultants. The Bank will subsequently conduct a midterm review of all components, as well as interim reviews as needed. The Borrower and the Bank will jointly review the findings of the studies and the results of training programs. Since it is not possible to identify all essential assistance requirements of the country at this point, and it is likely that new needs will arise during the implementation period of this operation and to provide flexibility, less than 10 percent of the loan remains unallocated and will be used as the need arises. C. PROJECT COSTS. FINANCING. DISBURSEMENT. AND REPORTING AND AUDITING 46. Project Costs: The total project cost is estimated at US$25 million equivalent. Details of the cost estimates are included in Schedule A. 47. All estimated local costs have been converted to US dollars at an exchange rate of ruble 1000/US$1. All costs have been subjected to contingencies of 7.4 percent to cover both physical and price contingencies in line with the World Bank's present price projections. The estimates for studies, consultancy assignments, and training are based on typical current costs for such assignments. There would be a substantial involvement of internationally recruited consultants in all the project components. The project would provide for a limited amount of equipment. 48. Financing: Project costs and the financing plan are summarized in Schedule A. The foreign exchange cost requirements are estimated at US$24,1130,000 equivalent. The World Bank loan would finance about 85 percent of the foreign exchange costs. The rest of the foreign exchange costs would be met by the EC (11 percent), and Japan (4 percent). Local costs are estimated at US$870,000; 54 percent of this amount would be financed by the Bank. Financing for the rest of the local costs (46 percent) would be provided by the government. 49. Disbursements: Disbursements would be administered by the PIU. The proceeds of the World Bank loan would finance 100 percent of consultants' services, fellowships, training and translations; 100 percent of foreign expenditures for computers, equipment and materials, 100 percent of local expenditures (ex-factory) and 75 percent of local expenditures for other items procured locally. The loan proceeds would also refinance the Project Preparation Advance made by the Bank under PPF. Withdrawal applications would be fully documented, except for expenditures against contracts valued at -30- less than US$50,000 equivalent, which would be made on the basis of certified statements of expenditures detailing the individual transactions. The documentation to support these expenditures would be retained by the PIU for at least one year after receipt by the World Bank of the audit report for the year in which the last disbursement was made. This documentation would be made available for review by the auditors (see section below on "Reporting and Auditing") and the World Bank upon request. 50. The estimated disbursement schedule for the proposed loan is in Schedule B. The project is expected to be completed by April 1997, and the Closing Date would be October 31, 1997. 51. Speial Account: To facilitate project implementation, the Borrower would establish a special account in US dollars in a commercial bank on terms and conditions satisfactory to the Bank to cover the Bank's share of eligible expenditures. The authorized allocation of this account would be US$1,500,000 equivalent, representing about four months of average expenditures under the loan. At the request of the Borrower, and based on project needs, the Bank would make an initial deposit or deposits into the special account up to the amount of the authorized allocation. Applications for replenishment of the special account would be submitted monthly, or when one third of the amount deposited has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment allocations would follow the same procedure as described in the above section on "Disbursements." In addition, monthly bank statements of the special account, which have been reconciled by the Borrower, should accompany all replenishment requests. 52. Reporting and Auditing: During appraisal, assurances were obtained that the special account, all project accounts, and statements of expenditure would be audited at the end of each fiscal year by independent auditors acceptable to the Bank. Such audits would be carried out in accordance with international standards undertaken by auditors qualified for this task. Audit reports for the preceding calendar year would be made available to the Bank no later than by the end of June of each year. 53. To enable the project implementation unit to monitor progress of project implementation, it was agreed during appraisal that the PIU would furnish the Bank with a series of reports on a regular basis. These reports will include: (a) quarterly progress reports on implementation in a format and degree of detail acceptable to the Bank; (b) audited financial statements within six months after the close of each Uzbek fiscal year; and (c) records, financial statements, progress reports or other types of information that the World Bank may request from time to time. Based on information provided by the various beneficiary agencies, the project implementation unit will prepare its contribution to the Project Completion Report within six months of the Closing Date, covering all retated activities during project implementation. D. PROCUREMENT 54. Procurement will be the responsibility of the PIU. The project elements, their estimated costs, and the procurement arrangements to be financed by the World Bank are summarized in Schedule B. Details of procurement packages are presented in the attachment following this section. 55. Goods and Equipment: All equipment and materials to be financed from the World Bank loan would be procured in accordance with the World Bank Guidelines for Procurement and will consist of computer systems and peripherals, software systems, telecommunications, office equipment, and supplies. Contracts estimated to cost above US$300,000 equivalent will be awarded through International -31- Competitive Bidding (ICB) using the World Bank's sample bidding documents modified to suit the requirements of this package. Contracts estimated to cost less than US$300,000 equivalent will be procured through International Shopping, based on at least three quotations from three different countries, with total shopping not to exceed the ceiling of US$700,000. Direct contracting up to US$250,000 per contract will be allowed. Contracts estimated to cost less than US$50,000, up to an aggregate of US$300,000, may be procured through local shopping based on comparison of price quotations from at least three eligible local suppliers. 56. Consulting Services: Specialists for technical assistance, training, and studies to be financed from the proceeds of the loan would be recruited by the government from among individual consultants or consulting firms in accordance with World Bank Guidelines for the Use of Consultants. There will be approximately 25 assignments ranging between 6 and 24 months for a total cost of US$9,850,000. There will be one direct consulting contract for US$100,000. 57. The bidding packages, except those specifically mentioned for ex-post review, will require the prior approval of the Bank. The estimated aggregate amounts to be procured -nider "Other" are as follows: international shopping, US$700,000; direct contracting, 100,000; technical assistance (consultants' services), US$9,850,000. 58. Bank Review: Because of the centralization of procurement in the former Soviet Union, the knowledge of project implementation agencies in international commercial practices and the World Bank's procurement procedures is almost nonexistent. Therefore, all procurement activities under the project will be coordinated by the PIU, which will be assisted by procurement consultants. Although standard bidding documents will be used under the project, in order to ensure compliance with the Bank Guidelines for Procurement, all contracts awarded through ICB, as well as the first two contracts under International Shopping and Direct Contracting, will be subject to prior Bank review. The terms of reference for all consultant assignments and all contracts for consultants services valued above US$100,000 would be subject to Bank's prior review and approval. All other contracts will be subject to selective export review by the Bank. 59. Procurement Administration: Since this is the first Bank project in the country, PIU staff members would be given training in procurement through courses conducted by World Bank staff in headquarters. Consultants would b retained by the Borrower to provide assistance in preparing and evaluating bids. The PIU would be staffed with a management team competent to assist with routine procurement administration activities. For bid preparation and evaluation, the government will retain the services of a procurement specialist or consulting firm, to be financed from PPF funds. World Bank missions would be called upon to assist in reviewing procurement documentation as part of regular supervision activities. The Bank's regional mission in Tashkent will also provide assistance in this matter. 60. Procurement Monitoring: Data regarding procurement administration would be collected and recorded and will include: (a) prompt reporting of contract award information by the borrower; (b) comprehensive quarterly reports to the Bank by the Borrower; and (c) revised timing of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts. -32- Table 1: COST ESTIMATES BY MAJOR CONTRACT AND SCHEDULE OF CRITICAL PROCUREMENT STEPS (thousands of U.S. dollars) COMPONENT CONTRACT TYPE & BASE PROCUREMENT METHOD PRARE BID ISSUE ID I SIGN COW DOCUMENT INVITATION CONTRACT PRIVATIZATION AND ENTERPRISE REFORM Privatization Policy Consultamw/raining 400 Short list of six firms and selection based on technical merit Nov 5. 1993 Dec 5, 1993 Feb 25.1994 Enterprise Reforms Advisor ConsultantsiTraining 500 Short list of six firms and selection based on technical merit Nov 5. 1993 Dec 5, 1993 Feb 25, 1994 Computers and Equipment Goods 1,150 International Competitive Bidding (ICB) Dec 12.1993 Dec 10. 1993 Mar 4.1994 Financial Management Advisor Consultants/Taining 550 Short list of six firms and selection based on technical merit Nov 5, 1993 Dec 5, 1993 Feb 25, 1994 Training Training 300 Short list of six firms and selection based on tectmical merit Jan 3, 1994 Feb 7. 1994 Idar 11, 1994 Unallocated Consulting Consulting 400 Short list of six firms and selection based on technical merit March 1994 April 1994 May 1994 Unallocated Equipment Goods 300 International Shopping (1S) March 1994 April 1994 May 1994 LEGAL AND REGULATORY REFORM Legal Advisor Consultants/Training 350 Pre-qualify six firms and selection based on technical merit Dec 17, 1993 Jan 7, 1994 Mar 1, 1994 Equipment Goods 200 IS Jan 7, 1994 Jan 31, 1994 Feb 21. 1994 Commercial Advisor Consulting 350 Short list of six firms and selection based on technical merit Feb 4. 1994 Mar 4. 1994 Apr 15. 1994 Special Laws (short term) Consulting 250 Short list of six firms and selection based on technical merit Mar 4. 1994 Apr 6. 1994 May 9. 1993 Petroleum legislation and Contracts Consulting 300 Short list of six firms and selection based on technical merit Feb 4. 1994 Mar 4,1994 Apr 15. 1994 Training Training 350 Short list of six firms and selecdion based on technical merit Mar 4. 1994 Apr 1, 1994 May 6,1994 FINANCIAL INFRASTRUCTURE Payments System Feasibility Consulting 100 Short list of six firms and selection based on technical merit Nov 12. 1993 Dec 17. 1993 Feb 1, 1994 Systems Analysis for Payments System Consultants/Training 300 Short list of six firms and selection based on technical merit Dec 13, 1993 Jan 21, 1994 Mar 4,1994 Bank Supervision Consuldg/Training 200 Short list of six firms and selection based on technical merit Feb041, 1994 Mar 04. 1994 Apr 22, 1994 Computers for Payments System Goods 2,700 International Competitive Bidding (ICB) May 7, 1994 Jun 30, 1994 Sept 2, 1994 Communication Equipment Goods 800 ICB May 7. 1994 Jun 30, 1994 Sept 2. 1994 -33- COMPONENT CONTRACT TYPE & RAS PROCUREMENT METHOD PREPARE BID ISSUE BID SIGN COS E I DOCUMENT INVITATION CONTRACT Diagnostic Studies of Banks Consulting 1,300 Pre-qualify six firms and selection based on technical merit Dec 1, 1993 Jan 14,1994 Mar 7, 1994 and price competitiveness only Accounting and Auditing Consultants/Training 900 Pre-qualify six firms and selection based on technical merit Feb 4. 1994 Mar 11, 1994 May 6, 1994 and price competitiveness only Computers for Central Bank Goods 900 ICB External Debt Management Consultants/Training 50 Short list of six finns and selection based on technical merit Dec 10. 1993 Jan 14, 1994 Mar 1, 1994 Training Training 500 Short list of six firns and selection based on technical merit Nov 15, 1993 Dec 17, 1993 Feb 1, 1994 Unallocated Consulting Consulting 500 Short list of six firms and selection based on technical merit SOCIAL SAFETY NET/EMPLOYMENT Poverty Monitoring/Survey Consulting 100 Direct Contract Dec 17, 1993 Jan 14. 1994 Mar 4, 1994 Training Training 100 Short list of six finns and selection based on technical merit Dec 17,1993 Jan 14.1994 March 1994 Computers for Statistics Office Goods 200 IS Jan 3, 1994 Feb 1, 094 Mar 1, 1994 Equipment for Employment Services Goods 2500 ICB May 1. 1994 May 15, 1994 Sept 1. 1994 Policy Development Consulting 300 Short list of six firms and sewtion based on technical merit Nov 1. 1994 Jan 3, 1994 Feb 11. 1994 Training Tsauing 300 Short list of six firms and selection based on technical merit Nov 1, 1994 Jan 3, 1994 Feb 11, 1994 Unallocated Consulting Consulting 300 Short list of six firms and selection based on technical merit SECTOR STRATEGIES AND STUDIES Energy Advisors in Petroleum Negotiations Consulting 600 Short list of six firms and selection based on technical merit Nov 12.1993 Dec 17, 1993 Feb 1, 1994 Telecommunications Policy Development Consulting/Training 400 Short list of six firms and selection based on technical merit Jan 7, 1994 Feb 7, 1994 Mar 20, 1994 Institutional Restructuring Consulting 300 Short list of six firms and selectinn based on technical merit Mar 11. 1994 Apr 13, 1994 May 31, 1994 Telecom Network Modernization Assistance Consulting 300 Short list of six firms and selection based on technical merit Jan 7, 1994 Feb 7, 1994 Apr 15, 1994 PROJECT IMPLEMENTATION Procurement Consultant Consulting/Training 300 Short list of six firms and selection based on technical merit Nov 12, 1993 Dec 17. 1993 Feb 1, 1994 -34- Table 2: INSTITUTION BULDING/TECHNICAL ASSISTANCE PROJECT PROGRAM MATRIX Main Government Project Component Expected Result Objective Activities /Impact Responsible Agency TiMing PART ONE: RESOURCE MOBIZATION AND ECONOMIC MANAGEMENT . PRIVATIZATION AND PUBLIC ENTERPRISE REFORM Strengthen policy development and Provision of two long-term experts Revision and further elaboration of Committee for State Dec 1993 - Dec 1996 implementation capacity for for further elaborating the CSPMP's privatization Property Management privatization and public enterprise Government's privatization program, moving toward stronger and Privatization reform, develop a framework for program, including assistance with forms of privatization, and (CSPMP) enterprise reforms. implementation and foreign preparation of implementing partner search. guidelines. Specialist to work on special Enhancing the capacity of the CSPMP Dec 1993 - May 1995 transactions that require sector CSPMP for privatization of specific expertise as well as on enterprises requiring sectoral legal issues. expertise and legal aspects of privatization. Provision of two public enterprise Development of governance Uzgosfond Feb 1994 - Feb 1996 management specialists to develop mechanisms, performance targets, a framework for enterprise restructuring plans and timetable reforms. for enterprise management and reform, and preparing them for privatization. I _I Computers and office equipment Providing the basic data for the CSPMP Dec 1993 - Dec 1996 for the CSPMP and Uzgosfond CSPMP to manage, implement Uzgosfond HQ and some of their branches. and monitor the privatization program; and creation of a data base of public enterprises under Uzgosfond to monitor their performance. Training of CSPMP and Developing and maintani * - CSPMP Dec 1993 - Feb 1996 Uzgosfond staff in privatization skills necessary to sustain . Uzgosfond methodologies and techniques as complete the privatization well as enterprise management. enterprise reform process. -35- Main Government PrOject Component R sExpected Result r Objeedr eAcivtms cmpctResponsible Agency Timing R. LEGAL AND REGULATORY FRAMEWORK Support the design and articulation of Le :rm legal advisor to Review of laws and proposals for Legal Department of the Feb 1994 - Feb 1996 a strategy for a legislative and coor-nate legal reforms and to their revision. ensuring their Cabinet of Ministers regulatory reform, in particular the assist government in the consistency with reform development of the private market articulation of laws. adjectives, coordination of various economy. government agencies that are working on draft legislation, and provision of general legal advice to the Government. Legal expert with strong expertise Review of regulations and laws Legal Department of the Mar 1994 - Mar 1996 in corporate and commercial law. relating to private sector, Cabinet of the Ministers proposals to revise certain laws, simplification of business registration and licensing procedures, developing a legal framework to make state assets, such as office space, available to the private sector, provision of standard leases, assistance with contract laws. Short-term legal expects to work Development of bankruptcy and, Legal Department of the Mar 1994 - Dec 1996 on specific laws. competition laws and preparation Cabinet of the Ministers of list of monopoly enterprises and provision of support to the long term legal advisor(s). Advisors for Petroleum Legislation Development of a comprehensive Legal Department of the Mar !994 - Mar 1995 and Model Contracts. petroleum legislation to promote Cabinet of the Ministers the development of the sector and and Uzbekneftgas to attract foreign investment and to design model contracts. Training programs, seminars and Training for legal professionals in Legal Department of the Feb 1994 - Dec 1996 other materials. a range of areas covering Cabinet of the Ministers corporate law, bankruptcy law and regulatory framework legal structures in western countries. -36- Man Government Project Component Expected Result Objective Activities IImpact Responsible Agency Tiing Equipment Development of a legal database. Legal Department of the Feb 1994 Cabinet of the Ministers M. FINANCIAL SECTOR Support the modernization and Payments system feasibility study. Preparation of a payment system Central Bank of Feb 1994 - May 1994 institutional strengthening of the feasibility study to modernize the Uzbekistan (CBU) Uzbek financial system and thereby payments system covering the improve its ability to facilitate entire banking system. economy wide refirms. Equipment, software and Improve the present system by CBU Feb 1994 - Dec 1996 consulting for the initial linking the 14 branches of the improvements of the present Central Bank which would be payments system connected to a larger payments system to be installed at a later date. Consultants, equipment and Develop off site bank supervision CBU Mar 1994 - Mar 1995 consulting for banking capacity of the Central Bank. supervision. Expert assistance to assist The new accounting and auditing CBU Mar 1994 - Mar 1995 implementation of international standards will make banking of accounting and auditing standards information more transparent for commercial banks. facilitate CBU supervision and improve its policy making capacity. Undertake diagnostic and strategic Background information and CBU Mar 1994 - Mar 1995 policy studies for leading sectoral analysis for use by policy makers banks and the Saving Bank. in formulating financial sector strategy and to improve the management and restructuring of .__these banks. Consultants, equipment and Development of external debt CBU Jan 1994 - Jan 1995 software for external debt recording and nanagement management. capacity of the CBU. -37- Main Government Project Component Expected Result Objective Activities /Impact Responsible Agency Timing Training programs for CBU Strengthening policy making and CBU Dec 1993 - Dec 1996 managers, accountants, auditors institutional capacity of the CBU. and information technology , specialists. IV. SOCIAL SAFETY NET/EMPLOYMENT To develop a system for redefining Finance consulting services and Designing of a new family State Committee of Feb 1994 - Aug 1995 poverty line in order to better target equipment to redesign the family expenditure survey and Forecasting and Statistics social assistance, and improve expenditure survey. redefinition of poverty line. (SCFS) capacity to provide benefits and Undertake a survey on a new basis services. and assess needs to improve monitoring of living standards. Expert assistance to improve Assessment of the employment Ministry of Labor Feb 1994 - Feb 1996 policy making capacity of the situation in the country and (MOL) Ministry of Labor on employment development of strategies to deal issues. with expected increases in unemployment and improvement of procedures of labor offices. Computerization of labor offices. Design and implementation of a (MOL) Aug 1994 - Jun 1996 master plan for computerization of labor offices. Expert assistance to train SCFS Enhanced capacity for SCFs staff SCFs and MOL Feb 1994 - Jun 1996 staff with poverty monitoring and to target social assistance and targeting issues and to train MOL training, and MOL staff with labor staff. market issues and still matching. V. SECTOR STUDIES AND STRATEGIES To initiate policy making and sectoral Experts to assist Uzbeknefigas Development of a basic Uzbekneftgas Jan 1994 - Jun 1995 development capacity of the agencies with petroleum acreage tendering framework for tendering in energy and telecommunications negotiations. petroleum acreage and assisting sectors. during negotiations. Advisors to develop policy making A new sector policy which will Ministry of Feb 1994 - Jun 1995 capacity of the Ministry of outline a strategy for separation of Telecommunications. Telecoms. commercial and regulatory roles of the Ministry. i I -38- Main Government Project Component Expected Result Objective Activities /Impact Responsible Agency Thing Experts for institutional Restructuring the entities Ministry of Mar 1994 - Mar 1996 restructuring of the ministry. responsible for providing service Teleconnounications. to improve their operational efficiency and to reduce costs. Advisors to review the sectoral Review and revision of network Ministry of Feb 1994 - Mar 1995 rehabilitation plan. modernization plan, including Telecommunications. assessment of technical, financial, and human resource needs. IBRD 23699 Fw! ,.EDE=TION AER~ jA ~~! WNKAZAKI-ISTAN t atkøi MONGOUA Aral Sea KYRGYZS AN ISLAMIC REP KAZAKIH STAN OF IRAN TAMI ISTAN Muynak CHINA AFGHANISTAN PAKIS INDIA ukus KA KHSTAN Caspian Sea UZBEKISTAN I'chkuduk7 IIIILI1" Caspan Sa o KYRGYZSAN Urg i Chordari skoe 1 4(r Vodokhran ishche ashken U hkurgon r di an - I Ohai..Abad Aydekugori sh TUR KM EN I STA N Nefa ToMuob Bukhara Samdk nd Chardzhou ah De DsabT A J lK l S T A N OF IRAN TAJKcTA U Z B E K l S T A N Drurgan Termez * National Capital To MOzor-e Shorif o Selected Cities Railroads AFGHANISTAN INDIA Main Roads Rivers PAKISTAN International Boundaries MILES 0 100 200 ILOMoTERSo 100 200 APRIL 1993'