Malaysia - Year 2000 Technical Assistance Project

Document of The World Bank Report No: 18957-MA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO MALAYSIA FOR A YEAR 2000 TECHNICAL ASSISTANCE PROJECT February 16 th, 1999 EACSM Southeast Asia & Mongolia Country Unit East Asia and Pacific Regional Office CURRENCY EQUIVALENTS Currency Unit = Malaysian Ringgit MYR $ 3.8 = US $ 1 (January 1999) FISCAL YEAR January 1st - December 3 1st ABBREVIATIONS AND ACRONYMS Application A set of conputer prograns designed to perform repetitive procedures, (or system) usually on large amounts of data BNM Bank Negara Malaysia (Malaysia's Central Bank) CAS Country Assistance Strategy Contingency Plan In the context of the Year 2000 program, a plan for responding to the loss or degradation of essential services due to a Year 2000 problem in an automated system or equipment. It generally describcs the steps an entity would take to ensure the continuity of its core processes and business functions Embedded Systems Computer chips forming integral part of any electronic equipment using computer technology EPU Economic Planning Unit in the Prime Minister's Department GOM Government of Malaysia Interface A boundary across which two systems communicate IT Information Technology MAMPU Malaysian Administration Modernization Planning Unit in the Prime Minister's Department Millennium Unaffected by the change from 19xx to 20xx (also called Y2K Compliant) Compliant PAU Project Administration Unit Quality Assurance All the planned and systematic actions necessary to provide adequate confidence that a product or service will satisfy given requirement for quality Risk Assessment An activity performed to identify risks and estimate their probability and the impact of their occurrence TAL Technical Assistance Loan Testing The process of exercising a product to identify differences between expected and actual behavior Validation The process of evaluating a system or component during or at the end of the development process to determine whether it satisfies specified requirements Y2K The potential problems that might be encountered by computer hardware, software, etc. in processing year-date information for years beyond 2000; commonly called "The Year 2000 problem", "The Y2K Bug" or "The Millennium Bug" Y2K Compliant Unaffected by the change from d9xx to 2xx (also called Millennium Compliant) Vice President: Jean-Michel Severino Country Director: Ngozi N. Okonjo-weala Sector Director: Yoshihiko Sumi Task Teamn Leader: Chit Tharnithong Malaysia Year 2000 Technical Assistance Project CONTENTS A. Project Development Objective ............................................... 2 1. Project development objective and key performance indicators 2 B. Strategic Context ................................................. ........ 2 1. Sector-related CAS goal supported by the project 2 2. Main Sector Issues and Government Strategy 2 C. Project Description Summary ................................................. 6 1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 7 D. Project Rationale .......................................................... 9 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and/or other development agencies 10 3. Lessons learned and reflected in proposed project design 10 4. Indications of borrower commitment and ownership 10 5. Value added of Bank support in this project 11 E. Summary Project Analyses ..........1.......................................11 1. Economic 11 2. Financial 12 3. Technical 12 4. Institutional 13 5. Social 13 6. Environmental assessment 13 7. Participatory approach 13 F. Sustainability and Risks .................................................... 13 1. Sustainability 13 2. Critical risks 14 3. Possible controversial aspects 14 G. Main Loan Conditions ..................................................... 15 1. Effectiveness conditions 15 2. Other 15 H. Readiness for Implementation ................................................ 15 I. Compliance with Bank Policies ............................................... 15 Annexes Annex 1. Project Design Summary 16 Annex 2. Detailed Project Description 17 Annex 3. Estimated Project Costs 20 Annex 4. Cost-Effectiveness Analysis Summary 21 Annex 5. Financial Summary 22 Annex 6. Procurement, Financial Management and Disbursement Arrangements 23 Table A. Project Costs by Procurement Arrangements 29 Table Al. Consultant Selection Arrangements 30 Table B. Thresholds for Procurement Methods and Prior Review 31 Table C. Allocation of Loan Proceeds 31 Annex 7. Project Processing Budget and Schedule 32 Annex 8. Documents in Project File 33 Annex 9. Statement of Loans and Credits 34 Annex 10. Country at a Glance 36 Annex 11. Y2K Problem Definition 38 1 Malaysia YEAR 2000 Technical Assistance Project Project Appraisal Document East Asia and Pacific Region EACSM Date: February 16t", 1999 Task Team Leader/Task Manager: Chit Tharnthong Country Manager/Director: Ngozi N. Okonjo-Iweala Sector Manager/Director: Yoshihiko Sumi Project ID: 63501 Sector: Public Sector Management Program Objective Category: Economic Management Lending Instrument: S.I.L. Program of Targeted Intervention: [X I No Project Financing Data [X] Loan For Loans/Credits/Others: Amount (US$m/SDRm): $100 million Proposed terms: FIXED [X] Single currency, USD Grace period (years): 3 [X] Fixed Years to maturity: 15 Commitment fee: 0.75% Front-end fee: 1.0% Financing plan (US$m): Source Local Foreign Total Government 34.0 0.0 34.0 IBRD 62.0 38.0 100.0 Total 96.0 38.0 134.0 Front-end Fee: 1.0 Borrower: Malaysia Responsible agency: Malaysian Administration Modernization Planning Unit, Prime Minister's Department Estimated disbursements (Bank FY/US$M): 1999 2000 2001 Annual 40.0 40.0 20.0 Cumulative 40.0 80.0 100.0 Project implementation period: February 1999 - June 2001 Expected effectiveness date: March 15th, 1999 Expected closing date: December 31st, 2001 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): To assist the Government of Malaysia, in a rapidly narrowing window of opportunity, to a) contain and minimize the disruption in the country's social and economic infrastructure that would be caused by the failure of critical central, state and local government systems to process dates after December 31, 1999; b) coordinate Y2K efforts in key sectors, monitor closely the evolving overall national situation, and prepare measures to deal with possible disruptions. The key performance indicators would be (1) the estimated economic and social upheaval avoided; (2) the number of identified critical functions able to continue operations with minimum disruption through June 30, 2001 as a result of this proposed remediation project, and (3) the recovery intervals following critical post-millennium failures. B: Strategic Context 1. Country assistance Strategy (CAS) goal supported by the project CAS document number: 18812-MA Date of latest CAS discussion: March 11th, 1999 Largely due to its strong economic performance in the past, Malaysia had stopped borrowing from the Bank in 1993. It has since been hit by an unprecedented economic crisis that threatens to undermine many of the country's economic and social achievements and set back its human development agenda by several years. The CAS that is currently under discussion proposes to assist Malaysia in mitigating the social consequences of the crisis and prevent the erosion of gains in the social sectors. The base case program in the CAS envisages investment loans mainly in the social and related sectors. The CAS also envisages a robust program of policy advice and selective technical assistance to support the Government in managing the present economic crisis as well as tackling some underlying structural weaknesses in the economy. By tackling short-term crisis related issues, the Bank also proposes to assist Malaysia in meeting some of its medium-term development challenges, in particular to return to the growth path embodied in its Vision 2020. Under Vision 2020 Malaysia aims to promote itself as an open and export-oriented economy, based on high value-added and efficient manufacturing and services sectors with a strong emphasis on IT. Malaysia wishes to develop a knowledge economy and has already begun to develop a National IT agenda. The Y2K Technical Assistance Loan supports short-term CAS objectives insofar as it seeks to avert disruption of public sector services and the attendant repercussions in the economic and social fabric of the country. 2. Main Sector Issues and Government Strategy Technology and Malaysia's Future In 1997, Prime Minister Mahathir Mohamed articulated the ambitious Multimedia Super Corridor strategy, which would establish a high technology corridor, Cyber Jaya, in close proximity to the new seat of government (Putra Jaya), to serve as a global innovation test-bed for information technology. The area's infrastructure would be built to the highest specifications and would draw "best-of-class" technology companies from all over the world. Ultimately this test-bed would also play a significant role, 3 through the development of a number of important applications', in enabling Malaysia to attain its hoped- for industrialized country status, as articulated in its Vision 2020. More specifically, it is clear, upon examination of Malaysia's articulated vision, that Malaysia looks to the aggressive use of technology to help achieve its goals in two vital areas: improving its competitiveness and the quality of life of its citizen. Although set back by the recent financial crisis, Malaysia continues to push forward with its strategy of innovation and modernization. All but one of the identified applications are already under implementation. In addition, Malaysia has taken a number of other crucial steps to realize its technology vision, among which are some key legislations, for example, on digital signature, privacy, public key infrastructure, and more. Understanding Malaysia's technology vision of the future is important in setting the context of Malaysia's request for this technical assistance loan. Notwithstanding its customary technological prescience and relatively early Y2K initiative, Malaysia, like many other countries, has allowed other imperatives, not least the financial crisis of the last eighteen months, to distract it from its Y2K priorities. While much work has been done on Y2K remediation and many key sectors and agencies (power, telecom, state provident funds and others) have Y2K programs dating back to 1997 and even earlier, much more Y2K work remains. Y2K in the Public Sector The public sector in Malaysia is small in comparison to most countries. Many previous government monopolies have, by now, passed into private hands - rail, power, telecom, water and many others. One notable exception is in the area of healthcare, where a national network of some 130 hospitals remains government-controlled. Like these government-operated hospitals, with their collective dependence on embedded systems, the remaining public governance infrastructure, of over 700 agencies, is similarly dependent on various forms of technology, from information technology (networked information processing infrastructure, national databases, other hardware and software) to embedded systems (high security systems, air traffic control systems, communication and broadcasting systems and others). In the information area alone, each day, government infrastructure processes uncountable transactions, from the payment of benefits, to payment to public school teachers and other government workers, to revenue collection, to the dispatch of emergency services, to business licensing, to the servicing of national and local government debts, to government procurements, to the registration of ownership, to the updating of criminal records, and much more. Government exposure to Y2K problem far transcends simple information transactions. Many public safety, public health, national security, financial integrity transactions (such as clearing functions performed by the central banking authorities) are dependent on complex interactions between information as well as non-information technology systems. Although the government sector appears as only one sector among many identified critical sectors, it plays at minimum an important regulatory role for those other sectors. This regulatory and supervisory role will now be vital in ensuring that all key sectors guarantee the continuance of a critical level of service and general Y2K readiness. 'The identified applications are electronic government, smart schools, telemedicine, research and development, borderless marketing, and worldwide manufacturing web. 2 Multimedia Super Corridor, Arff and Goh. 4 Challenges The Government of Malaysia conservatively estimates that its depreciated technology capital stock is US $8 billion. It further estimates that the aggregate cost of total remediation to both public and private sectors would be in the neighborhood of US $3 billion. Another yardstick used by some Y2K professionals is 10 to 15 percent of undepreciated cumulative capital stock. The reason for this is that old legacy systems, while fully depreciated, have grown in value as a result of cumulative improvements made continuously over long periods. Although these yardsticks do not have proper scientific basis, Government's estimate is not out of line with international thinking that currently prevails. With this background, the challenges that the Malaysian government faces are many. Three principal challenges are listed below: 1. The need to preserve a high level of national and international confidence. Foreign business partners will want to be sure that business will continue to function as usual in Malaysia. On-time production, deliveries, payments, and other business activities will need to continue unhindered. Depositors and investors will want a guarantee that transaction recording, confidentiality, audit trails and other norms of the financial system will continue to maintain the highest levels of integrity. Public safety concerns will require that functions provided by the police, the military, emergency services, security systems in public facilities, continue uninterrupted. Confidence Level January 1, 2000 The Y2K Confidence A Actual Testing Subsystem Level InvetoryService Level D Inventory Assessment Identification Planning egin Remediation Be C A As the millennium approaches, Malaysia will need to show that it is ready. Projected optimism will be hollow unless accompanied by positive test results. Credibility is likely to be hard-earned. There is little choice but to launch an earnest and full program, as failure to show credible results could trigger widespread loss of confidence, a prospect hard to contemplate in post-crisis Malaysia. It is undisputed that the level of awareness in Malaysia is high. There is weekly television coverage, and even daily newspaper mastheads incorporate a Y2K countdown. However, awareness of the Y2K problem and solving it represent very different challenges. I EPU estimate 5 It would be irresponsible to discuss Y2K vulnerability without a sense of how efforts should be monitored and judged. Many business owners and high-level government officials underestimate the problem because there is a high level of awareness and ongoing remediation work within their organizations. However experience with technology projects confirms a well-known industry phenomenon called the 80- 20 problem. The problem refers to the fact that the first 80 percent is easy, and the last 20 infinitely more difficult, largely because of undiscovered flaws in the first 80 percent of work. The level of confidence in Y2K work therefore rises slowly, as the above graph shows, until satisfactory testing supports it. 2. The need to ensure essential public services. Public services provide and support the basic social, legal and economic environment that permit a society to function safely and predictably. Storm warnings provided by the meteorological service, environmental monitoring and regulation, apprehension for wrong doing, navigation signals that guide ships and airplanes are obvious examples of functions that are heavily dependent on technology. Less obvious is the national system of revenue collection, its distribution to provide essential general services or services targeted at the needy, and that all systems must be accompanied by sound financial control systems. The failure of public services in a country will greatly disrupt social and economic life within it. 3. Addressing private sector readiness and cross dependencies. Malaysia, like many other free market economies, does not fully control all sectors of activity. Its current fabric is a passive environment of economic incentives, business laws, internal articles of association of the firm, general due diligence requirements and arms-length regulation by regulatory authorities. In normal times, changes caused by economic incentives and other factors in that environment tend to be gradual, limited and predictable. But Y2K problems may cause large unexpected changes, not easily controlled by economic incentives or simple regulation. Established dependencies and indeed dependencies that have long since been taken for granted or have been forgotten about may crumble under the weight of the Y2K problem. How can those dependencies be mandated within the existing regulatory environment? For example, how can a chemical company be required to maintain production of a solvent that is critical to another crucial sector? How does a supermarket ensure that all its 7,000 product providers4 will be Y2K compliant (maintain production quality and on-time delivery)? Consider also how stock markets work. In order for a stock market to work, not only must the transactions systems work, but asset holders must also be able to make "informed" buy-sell-hold Real-Time Newswire decisions. Financial Reporting Systems decision making depends F on systems that aggregate Transaction INVESTMENT Analytical and transmit information Clearing Systems DECISION CYCLE Services from the stock market in real time to newswires to Asset Management analysts and traders, to Secure transaction messaging Systems Bloomberg asset managers and the general public who give or withdraw money from the asset managers. The failure of one component may produce unexpectedly large collateral damage, for example if investors ability to make investment decisions was diminished, stock market liquidity could simply dry up leading to volatility and instability. Based on Tesco Supermarkets (UK) number 6 Government Strategy and Sector Issues Coordinate Critical Functions and Contingency Planning. The government strategy is based on targeting the most important sectors and functions. The priority sectors are as follows: energy, telecommunications, banking and insurance, transportation, health, oil and gas, water supply, sewerage and government. While these sectors will be encouraged to undertake the most aggressive remediation efforts, contingency planning will also be mandated, in case technical solutions are not completed in time. Manage the Public Sector Effort. Efforts in the public sector are under the direct control of the central and state governments. Government wishes to ensure the readiness of the public sector, and these efforts are the primary beneficiary of this technical assistance loan. Many agencies have already begun Y2K remediation efforts, but altogether the government has identified 113 federal, state and local agencies (out of over 700 agencies) needing urgent but varying degrees of assistance from this loan. Many of these agencies form part of a geographically dispersed network that provides an essential national service to the entire country, while others are individual central or local agencies. Regulate for Readiness in Privatized Sectors. Because many critical sectors are privatized, government role is reduced to a regulatory one. In some sectors the regulators' mandate permit them to explicitly require Y2K compliance, while in other sectors sanctions can only be hinted at. Nevertheless, government seeks to use all means within its power to encourage full and complete readiness. For example, in the stock market the Kuala Lumpur Stock Exchange requires that, in addition to trading members, all listed members need to certify the state of their Y2K readiness. (All CEOs of publicly listed companies are required to sign a statement). While enforceability may be unclear these regulatory actions have had the effect of raising awareness and promoting accountability. Government wishes to strengthen these regulatory functions, primarily by intensifying supervision and contingency planning coordination efforts. Providing Help and Support. Mandating Y2K efforts is one means to promoting readiness. In many instances, the presence of a mandate is less helpful than knowing what to do. The lack of support is a major impediment to Y2K readiness in the private sector. To address this, the Government through the National Y2K Project Team manages a web site that provides and maintains information, directories of experts and consultants, best practices, links, and other helpful information. This function is critical to providing guidance to the national effort. In addition to the web site, government also holds seminars and workshops, promotes efforts through associations, and monitors the national situation so that emerging gaps can be addressed. C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The two primary components are (a) public sector Y2K efforts, managed by MAMPU (US$124.0 million) and (b) national coordination efforts, managed by the National Project 2000 Project Team (US$10.0 million) in the Ministry of Energy, Communications and Multimedia. 7 Component Category Cost Incl. % of Bank- % Of Contingencies Total financing Bank- US$A US$A financing A. Government sector Inst. Build./Other 124.0 92.5 92.0 68.6 B. Project Team & Inst. Build./Other 10.0 7.5 8.0 6.0 Coordination Total 134.0 100.0 100.0 74.6 Front end fee 1.0 The first component is intended to address the Y2K problems in the public sector. Many agencies have large computerized applications that are at risk, many of these applications have been developed by in- house staff. Consequently much of the remediation efforts around these applications will similarly be done in-house (in some instances external help will be sought). In contrast to computer applications, many at-risk items (goods such as networking hardware, operating systems, software, embedded systems) require the procurement of upgrades and in some cases outright replacement. Goods will therefore form the bulk of the intended expenditures under the first componen. The second component is intended to help government strengthen the national coordination efforts. As stated elsewhere this covers coordination of contingency planning, critical services with cross dependencies, national monitoring, dissemination efforts, public information management, legal planning, among others. This coordination and support function is seen as vitally important in Malaysia's largely privatized economy. 2. Key policy and institutional reforms supported by the project: This loan does not directly attempt to address long-term economic, sectoral or institutional problems and does not include conditionality linked to macro-economic policies. The institutional support under the project concentrates on strengthening the Government's Year 2000 Project Team. 3. Benefits and target population: The primary benefits would be the preservation of vital economic and social activities. Geographically the benefits would be widespread, as public services at the state and municipal levels are also being addressed under this project. The intended benefits will be estimated as part of the process of setting priorities for individual sub-projects and will include the gains (or prevention of losses) from each of the investments made in order to achieve compliance or to remedy the costs of not being compliant. 4. Institutional and implementation arrangements: The Project Director is the Director General of the Malaysian Administrative Modernization Planning Unit (MAMPU) in the Prime Ministers Department. MAMPU is directly responsible for the modernization of government. It is also the matrix head of all IT personnel in the federal government. Currently MAMPU has the implementation responsibility for Malaysia's new electronic government initiative. The Project Director is also a member of the National Y2K Steering Committee that oversees the work of the National Y2K Coordination Project Team, the body charged with the provision of leadership and overall coordination of the National Y2K effort. The Project Director will also chair the Approval Committee. MAMPU estimates that the correction of embedded systems, such as present in the hospital network, government communications, air traffic control systems, alone will require an amount of US$56 million. 8 The Approval Committee would Director General - MAMPU analyze and approve the substantive (Project Director) content of all agency proposals, their underlying strategies, technical plans and their merits for financial assistance. Its members Approval would be representative of major Committee ministries and individuals with records of established scientific, technological and/or related policymaking experience, with the committee structured so as to bring Government Sector National Y2K Project a balanced perspective to its Remediation - MAMPU Team decisions on allocation of loan resources. Its procedures and operating policies would emphasize T transparency, competition and PAU fairness, as well as the importance (Project Administration Unit) of establishing program norms at internationally acceptable levels of I quality. The National Y2K Project Team was created in May 1998 to coordinate the country's Y2K campaign. The Project Team has been extremely successful at raising awareness and working with regulators to promote Y2K efforts. This Project Team would be strengthened to enable it to carry out national remediation monitoring (sector by sector), benchmarking, verification (progress audit), national capacity and cost monitoring, development of national and sector level legal strategies, emergency planning and national knowledge sharing. The National Public Sector Y2K Coordinator in MAMPU would be the project's coordinator. This official would be assisted in his duties by a project administration unit (PAU). As coordinator for the Government Sector effort, MAMPU will, inter alia: - commission initial studies and activities, - prepare guidelines for diagnoses and reporting, - analyze the impact of non-remediation for selected agencies, - review implementation plans as submitted by agencies, - prepare recommendations for the financing decision to be made by the Approval Committee, - draft the proposed model agreement with agencies (spelling out their responsibilities, conditions and both parties' obligations); - ensure that the applications provide the requisite information, - sign the agreements with agencies selected for financing. MAMPU would be responsible for the preparation of the later stages of the project in accordance with IBRD norms. In the light of the broad scope of these responsibilities, the large number of participants and the urgent nature of the problem, the MAMPU and the National Y2K Project Team would receive up- front training in Y2K issues, management and planning, decision-making, conflict resolution, etc. Procurement, contracting and administrative support for the implementation of the subprojects would be carried out by the PAU. Recruitment of additional staffing of a temporary nature for the duration of the 9 project is currently underway. An operating manual satisfactory to the Bank, whose formal adoption is a Condition of Effectiveness, would govern all procedures and other aspects of the Project's activities. The main remediation component will be carried out by MAMPU. MAMPU will assist in identifying additional agencies and critical government services to be protected, in the development of technical plans and specifications thereof, in the making of strategic or tactical remediation choices, in the allocation of technical resources, in the development of suitable testing methodology and timeline. MAMPU's experience with government modernization, the government's strategic Electronic Government initiative and its existing (albeit limited) Y2K remediation program will enable it to begin implementation without delay. Its procurement procedures have been reviewed and limited on-the-job training on Bank guidelines should be sufficient. The PAU will manage the Special Account, prepare all requests for reimbursement from the Bank, produce quarterly project management reports (PMR) and keep all project records and accountd. Given the higher procurement thresholds proposed for Bank oversight, the anticipated complexity and volume of procurement activities and the nature of project outputs, quarterly technical and procedural audits by independent auditors satisfactory to the Bank will be carried out, to report on physical progress, procurement activities and operational procedures. These audits should include a reasonableness review of financial expenditures to ensure these are commensurate with progress. (i.e. Progress as measured by the audits should be consistent with results indicated in the quarterlyPMRs). These audit reports would be submitted to the Bank no later than 45 days after the end of each quarter in conjunction with the PMRs. Bank supervision will be carried out by the Bank's Task Team, which would review implementation of the project on a quarterly basis during the first year, and half-yearly thereafter. D: Project Rationale 1. Project alternatives considered and reasons for rejection: * Use existing agency funds. The use of existing agency funds has helped work to commence in many government agencies, particularly in agencies which have been relatively well-endowed with financial or IT resources. This, however, has not been the norm. It is notable that many agencies have not commenced their Y2K program because of lack of resources. The reliance on individual agency directed funds may, in addition, result in poor prioritization and coordination. The preferred approach at this point therefore focuses on integrated service-based efforts, which avoids skewness along organizational lines. The project calls for more coordinated planning, supervision and monitoring, and the coordinated development of national contingency plans * Direct project management by each agency. This was rejected in favor of central coordination due to the large number of agencies involved in implementation and because the repetitive nature of interventions (consulting, acquisition of equipment) favors strong central procurement processing. * Development of detailed remediation plans. Given the urgency of the problem and the time needed for remediation, a slow implementation start is not a realistic option. Moreover, the project approach has to be relatively exploratory given the considerable unknowns of the emerging situation, and therefore there is a limit on what would be gained by further study. Indeed, standard Y2K methodology requires that assessments be performed before planning 6 See Annex 6 10 detailed remediation strategies. Complete assessments are expensive and the intention is to finance these activities under this project. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): None. 3. Lessons learned and reflected in the project design: Because of the unique circumstances surrounding Y2K problems, there is no direct Bank experience to draw on or lessons to be reported specifically on Y2K. The Bank Team has therefore used lessons learnt in public sector management projects, in international best practices, and on the ground-breaking Argentina Y2K project, approved by the Board on December 17, 1998. Public sector management experiences indicate the crucial importance of strong and direct political support at the highest levels, to empower the coordination group. The need to cut across sectors and ministries also mandates the creation of a political approval committee to open doors and resolve conflicts. Experience also indicates that a fully staffed project administration unit should be in place during project preparation and that training should be completed before effectiveness. The Bank Team, individually and collectively, working with infoDev and other groups, has investigated external Y2K best practices at the sector and national level. In particular, the needs for business leadership and for the early preparation of contingency plans are two lessons of international experience applied to the design of this project. The emphasis put on learning from other countries through twinning, the use of international experts and information dissemination and knowledge sharing including the creation of a web-site with world-wide links are also inspired by international experience. The principal members of the Task Team have also been crucially involved in preparing the Argentina Y2K project as well as carrying out similar identification missions in other countries, and have benefited greatly from addressing the Y2K issue from different perspectives and in different contexts. Finally, the design of this project follows the lessons of successful "emergency" activities. The plan for managing the operation and for its close, independent surveillance by the Y2K Project Team should provide for sufficient flexibility to adjust to evolving circumstances. Also in line with "emergency" projects, decision-making authority and project implementation are highly centralized so as to improve coordination. The approach for monitoring and evaluation emphasizes adaptable action plans and work programs. 4. Indications of borrower commitment and ownership: The National Y2K Project Group was created in May 1998 and appears to have the strong support of the Prime Minister's Office. The Prime Minister himself has made numerous statements on the importance of the Y2K problem. The membership of the Steering Group shows high level support by other ministries as well as the private sector. Government has steadily increased its budget to deal with Y2K problems. Six months ago the indicated budget was MYR 30 million. This was then increased to MYR 130 million, and again recently to MYR 200 million'. The Government has also approved the use of a previously established fund for small and 7 US$ 7.8 million, US$ 34.2 million and US$52.6 million respectively 11 medium-scale enterprises for Y2K remediation purposes. These measures coupled with the fact that government has already commenced many Y2K remediation efforts indicate its commitment to and ownership of this initiative. 5. Value-added of Bank support in this project: The Bank's involvement should help the GOM ensure the technical and economic soundness of the proposed activities, particularly by assisting in the establishment of a strong central monitoring, national reporting, emergency planning, screening mechanism and review procedures and by assisting GOM to obtain best-practices assistance from countries who are further along the remediation route. Global experience and practices will be especially important in the development of National Contingency Plans. The Bank is also providing its experience in project management to help ensure that the Project Team and the PAU have and maintain adequate accounting, monitoring, management systems, technical review and auditing of these relatively widely dispersed activities. The Bank's involvement in this unprecedented problem also builds knowledge that can be shared with other developing countries as they begin to confront the problem themselves. E: Summary Project Analysis 1. Economic: Computers and technology have become a fundamental enabler of economic activity. While many of these systems stand alone, the functions and services that are supported by them have far-reaching effects. This phenomenon is especially true of many public sector systems. For example, the failure of the computerized property ownership registration system, for example, not only produces inconvenience but also vitally threatens activities such as credit extension, government revenue collection, all transactions involving property including the disposition of wills, and much more. Also by its nature, Y2K problem remediation expenditures represent an incremental cost to an activity and yet the problem, if unaddressed, can place the entire activity at risk. Y2K remediation, for the most part, cannot be avoided and its delay merely adds the prospect of consequential economic damage to cost inflation caused by tardiness. Y2K problems will prove more costly to fix after the fact. Ad hoc measures become costly to disentangle as solutions are implemented in a live environment. System failures could also lead to litigation over injury, service and production failures. Loss of confidence is also a serious threat. In the financial sector, conditions of extreme nervousness are likely to rule as the new millennium approaches. Transaction failures could easily lead to widespread disintermediation. Therefore, the issue is less a technology problem than that of a potential large-scale economic and social disruption. Project investments per se would be limited to the least cost alternative for "emergency" prevention and rehabilitation. No economic analysis (ERR) of project returns is possible until investments are known and analyzed. Also, no estimate of the "avoided damage" savings is considered to be necessary for the justification of the recommended project. Finally, no estimate is made of the potential benefits from upgrading of hardware and software, which will most likely increase productivity and spawn additional unanticipated benefits. 12 At the sub-project level the project's implementers should ensure that all allocations under this loan are demonstrably technically sound in accordance with agreed criteria, broadly based on: a. An assessment of the impact of the operation of their particular service or function on: * Public safety * Public health * Public security (economic and national security) * Preservation of law and order b. Consequential damages: major effects of non-Y2K compliance on these and/or: * Adequate supply and distribution of water, power, sewerage, transportation * Public administration services * Health and education services * Tax and other collections * Social program disbursements * Trade * Banking and other financial system operations * Others c. Collateral damages: effect of non-Y2K-compliance by one agency on other critical agencies' functions d. Estimate of the cost of consequential damages versus the cost of preventive remediation. 2. Financial The uncertainty of the Y2K issue and lack of information of the total technology capital stock precludes an accurate estimation of the costs of making all priority computer systems compliant and the final cost estimate at this point is open-ended. Many comparisons have been made between Y2K and military campaigns. In military campaigns, the goals are clear but the means to achieving the goals change and evolve depending on circumstances or information gained. Because of the uncertain nature of the work involved, the Government needs to be prepared to invest additional resources and/or ration what is available to the priority systems. Close monitoring of the program and the adoption of contingency plans will be a critical factor in ensuring that whatever resources are available are directed to the most critical systems. An accompanying flexibility to make such "course corrections" is key to the Government's success. 3. Technical: The basic technological questions are generally well understood and the solutionsper se do not present any technological challenge. As noted earlier, the problems are caused by the uncertainty on the extent of the problem, particularly in embedded systems, and the lack of historical documentation to diagnose old (a.k,a. legacy) systems. Another problem is the number of technically qualified and skilled staff or consultants to undertake the dramatic growth in the volume of work. Because of the likelihood that technical solutions will prove inadequate before the millennium deadline, non-technical solutions need to be pursued. These refer largely to contingency planning, and the key to its success is the involvement of the business owners. 13 4. Institutional: The National Y2K Project Team will be strengthened to enable it to carry out its across the board coordination role. The main executing agency, MAMPU, has experience in guiding and financing modernization projects, although not of this magnitude. It is in the process of enlarging its staffing resources by the temporary acquisition of 12-20 new positions, and through consultants financed through this project. The Project Administration Unit will reside in MAMPU's offices to provide immediate implementation response. Responsibility for the execution of each subproject will rest with the corresponding implementing agency; guidance will be provided by MAMPU using its own staff or consultants hired for this purpose. Malaysia has a relatively well developed information system industry, and has very good access to IT industries in neighboring countries, in particular Singapore and Hong Kong. 5. Social: The project is expected to have a positive net social impact. The burden of failure of government services may weigh disproportionately on economically disadvantaged groups. The destabilizing disruption avoided should spread broad benefits across geographical and socioeconomic boundaries. Government programs and services likely to be included in the project a priori would be selected on the basis of their contribution to social and economic welfare of a large population. The information dissemination campaign will be an important aspect of the project to keep the public abreast of the need for changes and to explain, in the case of new requirements, the impact that that may have on their eligibility for certain public services. 6. Environmental assessment: Environmental Category [ A []B [X] C The proposed project is expected to have no environmental impact. 7. Participatory approach [key stakeholders, how involved, and what they have influenced; if participatory approach not used, describe why not applicable]: a. Primary beneficiaries and other affected groups: The project relies on both a targeted and a demand-driven approach to identify eligible investments within the public sector. Requests or applications are submitted by the concerned entities, whose beneficiaries ultimately include those segments of the Malaysian population they serve. b. Other key stakeholders: In addition to Federal, State and Local governments, the private sector will be addressed through regulatory agencies and the national compliance verification activities carried out by the National Y2K Project Team, activities that by their nature are accompanied by a certain amount of transference of know-how. F: Sustainability and Risks 1. Sustainability: The replacement nature of the investments make them inherently irreversible, nor is increased operational cost applicable as an negative incentive to sustainability. No provisions have been made for government budgetary support beyond the implementation of the project's investment phase. Sustainability in this context should be viewed as the likelihood of subprojects to be continued until the desired goal is 14 attained. The nature of software remediation is such that a full 24%" of all projects are abandoned because of unexpected difficulty, changing priorities, loss of technical expertise or other reasons. While there are obvious risks with unexpected technical difficulty, most subprojects are likely to continue to completion, as the economic penalty for failure is great. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Risk Minimization Measure Agreed to Rating or Under Consideration Annex I, cell "from Outputs to Objective" Lack of ownership at the highest political level, Modest * Prime Minister himself has made numerous and among industry regulators statements on the Y2K problem. * Regulators have required regular progress reports, and sign off. This is likely to be supplemented by explicit penalties for non- compliance * Regular progress reports to Cabinet Shortage of qualified technicians available for Modest * Malaysia has a substantial information hire technology industry and good access to IT industries in neighboring countries, Higher wages due to developing shortage drain Substantial * Government must be prepared to take of information technology experts from the measures to keep critical experts Government Political pressure to favor certain agencies for Moderate * Creation of representative Approval prioritized remediation funding Committee Ineffective and wasteful strategies as the Moderate * Sharing of methodologies and lessons learnt millenium date rapidly approaches * Creation of national sharing networks moderated by Y2K Project Team. Estimated amount proves insufficient to deal Moderate * A 2nId emergency project can be quickly with the Y2K issue prepared. Annex 1, cell 'from Components to Outputs" * Weak PAU management and implementation Substantial * Hire high caliber consultants. capability * Hire with full program, not just immediate, needs in mind Inaccurate or tnreliable progress reports Substantial * Develop testing methodologies * Supplement with technical interviews Low agency capacity to implement subprojects Substantial * Ensure that the principal implementing agencies can provide or have access to additional technical assistance. Ineffective or inefficient allocation of resources Substantial * Clear procurement guidelines. * Audit and monitoring functions. * Representative Approval Committee. * Comprehensive operational manual Overall Risk Rating Substantial 3. Possible Controversial Aspects (Project Alert System): No significant issues are anticipated ' Gartner Group 15 G: Main Loan Conditions 1. Conditions (Appraisal, Effectiveness, Disbursement): * Negotiations: * Project Administration Unit staffed * Agreement on Terms of Reference for independent entities to perform quarterly technical and procedural audits * Notification of Bank which will hold Special Account together with names of proposed signatories Effectiveness: * Adoption of operating manual governing project activities satisfactory to the Bank 2. Other [classify according to covenant types used in the Legal Agreements.]: H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. [ 1 The procurement documents for the first year's activities are complete and ready for the start of project implementation. Will not be ready due to the nature of the project. [X ] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] The following items are lacking and are discussed under loan conditions (Section G): I: Compliance with Bank Policies [X] This project complies with all applicable Bank policies NoiN. o-weal Yos ihik Sumi ountry Director Sector nager Chit Tharnthong Task Team Leader 16 Annex 1 Project Design Summary Malaysia: Year 2000 Technical Assistance Project Narrative Summary Key Performance Monitoring and Critical Assumptions Indicators Evaluation Sector-related CAS Goal: Comparison of results to Broad and deep support, Protect and enhance similar and unassisted understanding and competitive capacity sectors in other countries ownership Project Development Objective: Amount of economic and PAU technical reports Effective implementation To assist the Government of social damage avoided and impact analyses mechanisms and operating Malaysia, in a rapidly Identified critical services Agency progress procedures put in place. narrowing window of able to continue operations reports and PAU opportunity, to with minimum disruption monitoring activity contain the disruption in the through June 30, 2001 update reports country's social and economic infrastructure that would be caused by the failure of critical central government systems to process dates after December 31, 1999, and To strengthen the capabilities of the National Y2K Taskforce to carry out national monitoring, verification, legislative planning, national contingency planning and knowledge sharing. Outputs: Critical systems in operation Compliance with PAU- PAU monitoring Outputs to Objective approved remediation and reports Available consulting test plans Subproject services Compliance with PAU- completion reports Available equipment and approved contingency! parts emergency plan Government retains informatics staff Project amount sufficient for critical remediation activities Project Components/Sub- Inputs: Components to Outputs components9: Quarterly progress PAU management and Project Team Activities US$10 million report, aggregating implementation Government sector (MAMPU) US$90 million PAU and agency capabilities are sufficient reports Funding decisions are efficient and transparent Market demand does not drive up service costs SSee Annex 2 for project description 17 Annex 2 Year 2000 Technical Assistance Project Project Description Project Component A: Government sector remediation (US$ 89 million) Agencies selected for financing will implement their remediation subprojects, assisted by MAMPU, financed from this Loan. Technical assistance would be provided by MAMPU to agencies on Y2K diagnostics, technical and impact analysis, preparing implementation plans, preparing terms of reference and supervision of consulting firms; preparing equipment specifications; and other activities. The activities for each agency are expected to be as follows: * Diagnosis * Technical Analysis * Impact Analysis * Allocation of Funds (Approval Committee) * Detailed analysis: identification of components, problems * Identification of remediation options and cost estimates * Evaluation and selection of option to use * Preparation of remediation plan, comprising activities, inputs, resources, testing plan, conversion plan, training plan, monitoring indicators and contingency plans. * Implementation of remediation plan aimed at non-Y2K-compliant systems, accomplished via one or more of the following: - Replacement of commonly-used systems by standardized software - Upgrade of the hardware/software platform infrastructure - Modification of existing systems - Quality assurance (verification of successful testing) - Implementation of contingency plans Subproject examples The majority of subprojects will be those that are applied for by individual agencies. Some examples of subprojects are: 1. Internal revenue agency. Technical elements included under this agency are likely to include the following: Consulting services: Assessment of systems at risk, contigency planning and managing vendor/manufacturers' responses. Mainframe-resident: Remediation and upgrade of operating system, transaction monitors, compilers and databases (including master files for individuals and corporations) Mid-level, server-resident: Remediation and upgrade of applications (both agency applications and commercial off the shelf products - COTS), include mid-level, server-resident application programs. PC-resident: Remediation of applications such as spreadsheets, informal databases, project management files, or other derived applications of COTS. Networking infrastructure: Upgrade and replacement of server, LAN, WAN equipment and software within and between regional, district and national offices. 18 2. Government-operated hospitals. Technical elements included under this agency are likely to include the following: Consulting services: Assessment of risk, contigency planning and managing vendor/manufacturers' responses. Biomedical equipment: Upgrade or replacement of embedded systems in defibrillators, dialysis machines, ICU ventilators, CT scanners, EKG equipment, ENT operating microscopes, flocytometer, electromyography, electrosurgical, ultrasound, apheresis, hematology testing equipment, and many others. Information Technology: Databases including master files (medical history, patients records, etc.), and derivative in-house applications. Networking infrastructure: Upgrade and replacement of server, LAN, WAN equipment and software within and between regional hospitals. Facilities: Building systems, such as elevators, emergency power generation, security systems, communications systems, including dispatching, paging, PABX, fax machines, and others. 3. Department of Civil Aviation. Technical elements included under this agency are likely to include the following: Consulting services: Inventory assessment, business continuity planning, managing vendor/manufacturers' responses, testing. Traffic control systems: Radars, instrument landing and navigation aids systems, flight systems, and more. IT and networking systems: Applications in Air Traffic Services Division, Airworthiness Division, Air Transport Division, Flight Safety Division and others. Facilities: Building systems, such as elevators, emergency power generation, communications systems, and others. Project Component B: National Y2K Project Team Activities - US$10 million Strengthening of the Project Team to enable it to properly coordinate National Y2K remediation activities; implementation of information dissemination, verification and other activities, as follows: Initial Activities (partly financed retroactively by the Loan) The National Y2K Project Team will be strengthened to enable it to quickly become a more effective project implementation unit; additional staff will be recruited and consultants hired; training will be provided in technical issues, project management and national progress monitoring, legal issues and contingency planning. Overseas visits are planned throughout project implementation to keep abreast of developments in other countries. The Project Administration Unit will receive training in Bank standards and guidelines, project accounting and reporting, and procurement. Knowledge Management and Dissemination The existing Y2K web site will be expanded with shared lessons, best practices, directories to other Y2K web sites and with the remediation plans and progress reports prepared by the Project Team and concerned entities. In addition, a telephone help-line will be set up, and a series of targeted seminars (with expert speakers) will be organized. A publicity campaign will be implemented throughout the length of the project to appraise stakeholders of development and assuage worries about possible negative impacts of non-remediation and stem potential loss of confidence. Verification Activities 19 The Project Team will carry out selective audits of critical sectors and entities, using consulting firm(s) hired to this purpose. Legal Framework Work in the regulatory legal framework may be necessary to ensure that regulatory powers are adequate to impose sanctions where needed, as well as to relax statutory requirement in the event of developing crisis to bring the situation under control. Liability issues need to be planned for at many levels, covering possible injury, failed financial transactions, and others. Contingency Planning The Project Team will be directly responsible for contingency planning at the national level, including relationships with other countries; coordination of sectoral contingency planning, and of ensuring that contingency planning at the entity levels are carried out. This last may require the provision of technical assistance, for which suitable experts would be hired. 20 Annex 3 Year 2000 Technical Assistance Project Estimated Project Costs Project Component Local Foreign Totai ----------------------- us $ million -- ----------- A. Government Sector Remediation 87.0 37.0 124.0 B. National Y2K Project Team Activities 9.0 1.0 10.0 Total 96.0 38.0 Total Project Cost Front-end Fee 1.0 21 Annex 4 Year 2000 Technical Assistance Project Cost Effectiveness Analysis Summary - Not Applicable - 22 Annex 5 Year 2000 Technical Assistance Project Financial Summary - Not Applicable - 23 Annex 6 Year 2000 Technical Assistance Project Procurement, Financial Management and Disbursement Arrangements Constraints and issues which limit the choice of procurement methods: 1. Upgrade and Replacement. It is important to note that although software "patches" are often issued after the release of many information technology products, the traditional approach to solving many information technology problems is to issue corrections through version upgrades. This replacement strategy is traditionally the preferred method in dealing with many information technology problems. Because of this, many procurement activities will be in the form of upgrades or replacement. 2. Timeliness. It is crucially important to ensure that a vendor or consultant is truly capable of performing the work required on time. This needs to take account of the fact that there could be unexpected work demands caused by the discovery of unexpected and new problems. 3. Experience plus Capacity. Although quality-based selection provides a measure of assistance in this regard, it is important to note that that ultimately the optimal choice of a consultant or vendor may hinge on the reconciled balance between the vendor's ability to deliver goods and/or perform services in a timely and high quality manner. 4. Compatibility. While compatibility is usually thought of in intra-system terms, interoperability between systems is equally important. Without interoperability, cooperation and interfacing between systems will fail. It is therefore important to note that the need to preserve interoperability can constrain solution procurement choices. 5. Mid-course Correction. Experience in the US, UK and other countries indicates that flexibility is key to solving Y2K problems. Major course corrections are often needed and Government needs to be afforded maximum flexibility. The required flexibility may take unexpected forms, and may significantly affect procurement choices. 6. Specialization. Vendor or consultant specialization cannot be confined broadly to a subject area. Within each area there are often sub-specializations. Judgment as to sub-specialization is key to making the right procurement choice. For example, it may be important to prefer a firm that is experienced in working with all of the following technical elements: (a) revenue systems, (b) vendor X's mainframe-resident database, (c) vendor Y's mainframe operating system, and (d) within a high performance (large volume plus high speed processing) environment. 7. Proprietary Systems (see Annex 2 for sample subprojects). A large number of items to be procured are proprietary in nature as they involve enhancements and upgrades to existing equipment. Below is a representative list that will be covered under this project: Mainframe-resident: Remediation and upgrade of operating system, transaction monitors, compilers and databases (including master files for individuals and corporations) Mid-level, server-resident: Remediation and upgrade of applications (both agency applications and commercial off the shelf products - COTS), include mid-level, server-resident application programs. PC-resident: Remediation of applications such as spreadsheets, informal databases, project management files, or other derived applications of COTS. Information Applications: Databases including master files (medical history, patient records, and others), and derivative in-house applications. Networking infrastructure: Upgrade and replacement of server, LAN, WAN equipment and software within and between regional, district and national offices. Broadcasting equipment: Upgrade or replacement of embedded systems in transmitters, translators, computer-controlled antennas, relay, receiving and recording equipment, editing systems, relay, other synchronization-dependent equipment, and others. Biomedical equipment: Upgrade or replacement of embedded systems in defibrillators, dialysis machines, ICU ventilators, CT scanners, EKG equipment, ENT operating microscopes, flocytometer, electromyography, electrosurgical, ultrasound, apheresis, hematology testing equipment, and many others. Facilities: Building systems, such as elevators, emergency power generation, security systems, surveillance systems, communications systems, including dispatching, paging, PABX, fax machines, and others. Air and shipping traffic control systems: Radar, instrument landing and navigation aids systems (including lighthouse systems), flight systems, and more. 8. Source Code Ownership. Malaysia, reflecting other best practices is moving towards commercial- off-the-shelf (COTS) software. However, a number of systems, turnkey as well as fragmentary systems, have been developed by firms and individuals who continue to own the source code. In essence, GOM has operated such software under license from these code owners. It would simply be impracticable to bring in another firm at this point to address Y2K remediation. Procurement The procurement of goods under the project will be conducted in accordance with the Bank's guidelines "Procurement under IBRD Loans and IDA Credits, January 1995, Revised January and August 1996, September 1997 and January 1999." The procurement of consultants will follow the Bank's guidelines, "Selection and Employment of Consultants by World Bank Borrowers dated January 1997, revised September 1997 and January 1999." Government shall also use counterpart funds to engage consultants experienced in World Bank projects to train the PAU in World Bank procurement rules and guidelines. Procurement methods (Table A) A general procurement notice will be made in the Development Business; all other advertisements will be done through the local press. The notice will request expressions of interest, which will be maintained by the PAU, and from which long- and short-lists of consulting firms will be prepared. For the procurement of a total amount of goods estimated at US$102 million: * International Competitive Bidding will be used for contracts estimated at US$500,000 or more up to an aggregate total of US$8 million. Qualifying domestic manufacturers will receive a margin of preference in bid evaluation of 15 percent or the import duty, whichever is less. 25 * Limited International Bidding will be used when a limited number of international suppliers is available, up to an aggregate total of US$16 million. * National Competitive Bidding, with practices acceptable to the Bank will be used for contracts estimated at less than US$500,000 and more than US$100,000 when goods are available locally at prices below the international market up to an aggregate of US$29 million. * Direct Contracting will be used when standardization of equipment or spare parts is required to ensure compatibility with existing equipment, up to an aggregate total of US$42 million. All direct contracting shall be done in consultation with the World Bank. * Shopping will be used for goods up to US$100,000, up to an aggregate total of US$7 million. Consultant services for a total of US$20 million will be obtained using the Bank's Standard Request for Proposals and Forms of Contract, as follows: * Many consulting assignments (other than individual consultants) are immediately required to initiate contingency planning for potential Y2K failures, to undertake studies to define the scope of the Y2K problem for affected systems, and to assist in the development of implementation plans. For these reasons, an aggregate amount up to US$15 million, will be procured through direct sourcing. * Individual consultants up to an aggregate amount of US$2 million will be procured in accordance with the procedure in Part V of the Consultant Guidelines. To ensure transparency, consultants being considered for a task will be asked to submit signed expressions of interest. * Non-specialized file and database update contracts and other services consisting mainly of repetitive, man-power intensive but quality-critical services up to an aggregate amount ofUS$3 million will be procured through will be procured through Quality Based Selection (QBS). All contracts over US$200,000 will be advertised in the national press (see above for Development Business requirement). Travel, supplies and other project operational expenses estimated to reach the equivalent of US$5 million will be procured through National Shopping. Salary bonuses, will be financed through counterpart funds, and are estimated to reach an estimated US$7 million. Prior Review 1. The PAU will be responsible for procurement under the project. During the assessment of thePAU's capacity to perform the procurement function, it was noted that this is a newly created Unit with very limited experience in carrying out procurement under Treasury Circular # 2 in general and under the Bank's Guidelines specifically. This will necessitate the recruitment of additional staffing on a temporary basis for the duration of the project. In view of the lack of preN4ious experience with the Bank's procurement guidelines, the PAU will engage a consultant / procurement agent to be responsible for the procurement process. Supervision of the procurement process will be provided by a series of initiatives: a. the Bank plans to engage a consultant, familiar with the Bank's procurement process, to be present in Malaysia for an extended period to oversee the procurement aspects of the current portfolio. b. the PAU will engage independent auditors, satisfactory to the Bank, to carry out quarterly audits of the procurement activities and report on the compliance with the Bank's guidelines. c. the TTL will conduct frequent supervision missions to monitor project implementation. 2. Although the PAU has not had prior experience with procurement under Bank financed projects, the various initiatives discussed above will serve to mitigate the risk of the PAU following procurement procedures which will be unacceptable to the Bank. Therefore, the following prior review scheme is considered sufficient to ensure compliance with the Bank's guidelines. 26 a. all contracts for goods and works subject to ICB and LIB procedures; b. the first five contracts each project year for goods and works using NCB procedures; c. all contracts of US $ 500,000 equivalent or more regardless of method of procurement; d. all consultant contracts estimated to cost US $100,000 or more with firms and US $50,000 or more with individuals; e. contracts not subject to prior review will be subject to ex-post review on a one in five sampling basis. Financial Management and Disbursements As part of project appraisal for the proposed Year 2000 Technical Assistance Project, a financial management assessment was carried out at the Malaysian Administrative Modernization Planning Unit, (MAMPU) which will implement the project. The objective of the financial management review was to determine whether the unit has in place an adequate financial management system as required by IBRD under OP/BP 10.02 and, based on the findings, to assess the readiness of the project to implement PMR based disbursements under LACI. The financial management assessment of MAMPU revealed a financial management system, based on a branch accounting system controlled by the Accountant General, (AG) which meets the requirements of OP/BP 10.02. In particular the following characteristics are present:- * Clear accounting instructions and standardized procedures and forms which facilitate accurate and timely data input and processing. * Strong internal controls which include rigorous segregation of duties in connection with clear instructions for authorization and approval of invoices, control over bank accounts and custody of assets. * A Government accounting system, understood by the accounting staff, which includes a requirement for annual budgeting and monitoring procedures as well as monthly reporting by all line ministries/budget centers. * An Independent National Audit Department headed by a professionally qualified Auditor General which employs staff who are adequately trained to carry out the audit function in accordance with internationally accepted auditing standards. Organization and staffing MAMPU is a department of the Prime Minister's Office. It is a budget center with its own Finance Department, (FD) based on the accounting system operated by the AG. A Project Administration Unit, (PAU) will be set up at MAMPU and will be staffed by the present MAMPU Assistant Director (Finance) (AD), together with another member of staff with appropriate accounting experience and procurement personnel. The PAU will be responsible for all project accounting matters including preparing and submitting quarterly PMR's and Withdrawal Applications to the Bank. In order to effectively "ring-fence" the project accounts a stand alone computer system, utilizing as a minimum spreadsheet software, will be used to record all project related transactions. MAMPU however has no World Bank project administration or accounting experience. MAMPU staff who will be involved in project administration have meet with accounting staff at the project implementing unit of the Ministry of Education, DPSD, who do have project administration and World Bank experience. The purpose of the session was for DPSD staff to explain how project accounting information is to be derived from the GOM accounting system. Additionally, the Bank will provide training in Special Account management and the procedures for completing Withdrawal Applications. 27 Funds Flow and Accounting Project administration for both the MAMPU component and the Y2K component will be handled by the PAU and one set of accounting records will be maintained for the project as a whole. Project accounts will be prepared from the same payment vouchers, which form the basis of input to the AG's central government accounting records. Authorization of payment vouchers will be carried out by the AD, data input will be handled by the nominated member of staff under the supervision of the AD and all payments will be made, in accordance with GOM custom, via the AG's office. As part of the annual budget process, on the basis of plans submitted to Treasury by MAMPU, GOM will allocate in advance to MAMPU annual counterpart funds required for project implementation. MAMPU will pre-finance as necessary, from this appropriation, eligible project expenses that cannot in the first instance, be wholly paid from the Special Account. MAMPU will then at regular intervals make a "refund" to itself from the Special Account, of an amount representing the Bank's share of eligible project expenditures in the preceding period. MAMPU will at no time have direct control over the disbursement of these counterpart funds but it will receive details from the AG's office of all such payments which have been made in order to enable it to complete data entry to the project accounting records. Reporting The AD will be responsible overall for the preparation and submission of quarterlyPMR's to the Bank. Project accounting information required to complete the financial reports of the PMR will be readily available from the PAU's accounting records. The output monitoring reports will consist of the quarterly technical reports to be produced by an independent IT auditor. These, in addition to reporting on project output in the preceding quarter will also provide an opinion as to whether the output in the period was commensurate with expenditures incurred in the period. The procurement personnel will be responsible for collating the information required to produce the procurement management reports. The AD will however be responsible for ensuring that all the information received from other sources is consistent with the financial information derived from the accounting records. The format of the PMR, discussed and agreed with the Project Coordinator and the AD, is included in the Project Implementation Plan. Prior to submission to the Bank, the completed PMR will be reviewed by the Project Director. The annual financial statements will comprise the year end Summary of Sources and Uses of Funds Statement, Report 1-A of the PMR, which will be prepared, in accordance with GOM accounting regulations, on a modified cash basis. Audit GOM has indicated that, as with ongoing projects, the Auditor General will be responsible for the annual audit of the project financial statements, the eligibility of expenses disbursed on the basis of the PMR and of transactions on the Special Account. The audited financial statements will be submitted to the Bank within six months of the end of the project's financial year. The audit will be conducted in accordance with internationally accepted auditing guidelines and under World Bank Terms of Reference. Special Account To facilitate the implementation of the project, a Special Account will be opened at a commercial bank acceptable to the Bank. The Special Account will be managed by the PAU. It is a condition of negotiations that the signatories, to the SA, from MOF/MAMPU are notified to the Bank. As GOM has not used SA facilities in the past, it is a condition of effectiveness that written procedures, prepared by the AG's office, are in place regarding the flow of information to the AG in respect of movements on the SA and withdrawal of the loan proceeds. Disbursements Withdrawal Applications will be completed by the AD and approved by the Project Director. Withdrawals will be made on the basis of quarterly PMR's. Two copies of the PMR together with the related Withdrawal Application form will be submitted to the Bank within 45 days of the end of the preceding quarter even if no further advance is required at that time. Documentation that authenticates the expenditures reported in the PMR will be retained at MAMPU for review by the auditor and Bank missions as indicated in the Loan Agreement. 28 Allocation of loan proceeds The loan will be disbursed over a period of 2.5 years. Disbursements will be made against eligible project expenditures for goods and services as shown in Table C. Status of GOM compliance with audit covenants in existing Bank-financed projectsAt the present time GOM has two ongoing Bank-financed projects - MY-PE-4312 Health Development Project and MY-PE- 4309 Polytechnic Development Project. The audited financial statements for the Polytechnic Development Project have, over the last few years been submitted late. In particular, the 1995 audited accounts were overdue by 15 months. Both projects are however currently in full compliance with the Bank's audit covenants, with the Health Development Project having submitted its most recent audited accounts well in advance of the due date. 29 Annex 6, Table A: Project Costs by Procurement Arrangements (in US$million equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB LIB NCB Other N.B.F 1. Goods Computer Equipment 8.0 16.0 29.0 49.0A/ 102.00 (8.0) (16.0) (25.0) (35.0) (84.0) 2. Services Consulting Firms 15.0 15.0 (10.0) (10.0) Individual Consultants 2.0 cI 2.0 (1.0) (1.0) Quality-based and 3.0 D/ 3.0 manpower-intensive services (2.0) (2.0) 3. Miscellaneous PAU Operational Expenses 5.0 F 5.0 (2.0) (2.0) Salary Bonuses 7.0 El 7.0 Total 8.0 16.0 29.0 74.0 7.0 134.0 (8.0) (16.0) (25.0) (50.0) (0.0) (99.0) Figures in parenthesis are the amounts to be financed by the Bank loan A/ Shopping and direct contracting B/ Direct contracting C/ Quality-based selection. A minimum of three signed letters of intent must be provided for each contract. D/ Quality-based (QBS) El Salary bonuses and other incentives to government staff for extra hours spent in upgrading an entities' systems F/ Office space, travel, supplies and other PAU operational expenses will be procured through shopping. 30 Annex 6, Table Al: Consultant Selection Arrangements (optional) (in US$ million equivalent) Selection Method Total Cost Consultant Services (including Expenditure Category contingencies) QCBS QBS SFB LCS CQ Other N.B.F. A. Firms 3.0 15.0 18.0 (2.0) (10.0) (12.0) B. Individuals 2.0 2.0 (1.0) (1.0) Total 3.0 17.0 20.0 (2.0) (11.0) (13.0) Notes: QCBS Quality- and Cost-Based Selection QBS Quality-based Selection SFB Selection under a Fixed Budget LCS Least-Cost Selection CQ Selection Based on Consultants' Qualifications Other Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan. 31 Annex 6, Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review / Estimated Total Value Subject to Prior Review US $ US $ millions 1. Goods Computer Equipment > 500,000 All methods inc. ICB All Computer Equipment < 500,000 NCB First five annually Computer Equipment LIB All Computer Equipment'o Direct Contracting All 2. Services Consulting Firmsu >100,000 Direct contracting All Consulting Firms >100,000 QBS All Individual Consultants >50,000 All Estimated value of contracts subject to prior review/consultation: 70.0 Annex 6, Table C: Allocation of Loan Proceeds Expenditure Category Amount Financing In US$ million Percentage Goods 84.0 100% foreign, 65% local ex-factory and 65% local purchase Services 13.0 100% PAU Supplies and Miscellaneous 2.0 65% Operational Expenses Total 99.0 Front-end Fee 1.0 to Prior consultation on the use of direct contracting Prior consultation on the use of direct contracting 32 Annex 7 Year 2000 Technical Assistance Project Project Processing Budget and Schedule A. Project Budget Planned Actual (At final PCD stage) US$95,000 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) 2 3 First Bank mission (identification) 10/24/1998 10/24/1998 Appraisal mission departure 11/24/1998 11/24/1998 Negotiations 12/19/1998 02/10/1998 Planned Date of Effectiveness 02/01/1999 (03/15/1999) Prepared by: Economic Planning Unit, Office of the Prime Minister Preparation assistance: Retroactive Financing Bank staff who worked on the project included: Name Speci Chit Tharnthong Informatics (Task Team Leader) Luis-Jos6 Mejia Public Sector Management (Team member) Ramesh Sivapathasundram Informatics (Team member) Hilary Kiell Procurement Specialist Omowunmi Ladipo Financial Management Specialist Mohamed Muhsin Peer Reviewer James Bond Peer Reviewer Khalid Siraj Peer Reviewer 33 Annex 8 Year 2000 Emergency Assistance Project Documents in the Project File* A. Project Implementation Plan B. Bank Staff Assessments N/A C. Other Operational Manual (after Effectiveness) Miscellaneous Y2K and support documentation *Including electronic files. 34 Annex 9 Statement of Loans and Credits Status of Bank Group Operations in Malaysia Operations Portfolio As of 15-Feb-99 Difference Between expected Original Amount in US$ Millions and actual Fiscal disbursements a/ Project ID Year Borrower Purpose IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Number of Closed Projects: 82 Active Projects MY-PE-4312 1994 GOVT OF MALAYSIA HEALTH 50.00 0.00 0.00 27.72 17.56 0.00 MY-PE-4309 1993 GOVT OF MALAYSIA POLYTECHNIC DEV 107.00 0.00 0.00 44.64 38.63 0.00 Total 157.00 0.00 0.00 72.36 56.19 0.00 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 84.65 2,907.84 2,992.49 of which has been repaid: 2.32 1,980.69 1,983.01 Total now held by IBRD and IDA: 154.68 927.14 1,081.82 Amount sold 0.00 153.40 153.40 Of which repaid : 0.00 153.40 153.40 Total Undisbursed : 72.36 0.00 72.36 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data is updated at the end of the first week of the month and is currently as of 31-Jan-99. 35 Malaysia STATEMENT OF IFC's Committed and Disbursed Portfolio As of 3 1-Dec-98 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1984 SEAVI MVB 0.00 .01 0.00 0.00 0.00 0.00 0.00 0.00 1990 21st Century 3.68 0.00 0.00 2.78 3.68 0.00 0.00 2.78 1991 SEAVI MVB II 0.00 .62 0.00 0.00 0.00 .62 0.00 0.00 1991 VIM MVB II 0.00 .02 0.00 0.00 0.00 .02 0.00 0.00 Total Portfolio: 3.68 .65 0.00 2.78 3.68 .64 0.00 2.78 Approvals Pending Commitment Loan Equity Quasi Partic 1998 TITAN VINYL 18.50 0.00 3.50 34.02 Total Pending Commitment: 18.50 0.00 3.50 34.02 36 Annex 10 Country at a Glance Malaysia at a glance 9/15/98 East Upper- POVERTY and SOCIAL Asia & middle- Malaysia Pacific income 1997 Popuaiar mia-year fmilijons. 21 0 1 752 571 GNP per c3pna (Alai merhod US%i 4 680 '0 4 520 GNP .4rias method USS bllions, 98 9 7- 2 584 Average annual growth. 1991 .97 Populat'on 1-- 13 I 1 5 Labor lorce 1 2 1 Gross Mostrecert estimate (latest year avadable 1991-971 Poverly 0? of popwucn - rial-on rai *re, 16 Urban Dcopulaion I "f total Poularon! 52 Life exoectancv ai uirm iyearsi ,: 6e C. Infant rnaliry per ! 000 lve birthv I I 20 Child nainutr.m,on jS or crfdren under 51 23 16 Access to safe water I% opopula.'on; 3. 79 lItiterac l% of oopulabon age S*- 17 1 15 Gross prmarf enrollmem 1. o scto,;ljge pcrJaDonI 1l5 iC,7 Male 9 l Female 9j 116 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1996 1997 Econamic rar GCP , US$ Slion- liz 2- C9 3 965 G,oss domestic invesiment,GDP 23 6 .6 u d 15 42 Elpors of goods and services'GDP 49 - 6 C 2: 4 Trade Gross dcmeslic sgvingsvGDP .3 2 16 .144 Gross rat,rna sao'ngs.GDP 29 25 33 i Current zcccuni oalanceiCDP 5 .-3 -5; -4 9 Interest pamens GDe P 1 4 7 . 1 6 Defmste TotaTdebuGDP 23 5 8 Z; 40 1 rcl'ioEwbl sev.cejeAporls *;9 1f Fre--er. value of debL'GDP Present value f deDtiexpors 44 d 1976-86 1987-97 1996 1997 1998-02 ,aerage annual oro,% Fn GDP E 2 6.3 8 6 F GNP Per capta 32 62 2 u Exports of goods and series ,; 145 7 - - STRUCTURE of the ECONOMY 1976 1986 1996 1997 Grow otput d em t (% of GDP) Agriculture 26.8 19.2 12.8 12.1 Industry 32.3 35.5 46.2 47.3 Manufacturing 17.7 18,5 34.3 35.7 Services 40.9 45.3 41.0 40.6 Private consumption 50.9 51.0 46.0 44.6 General government consumption 15.4 16.9 11.4 11.0 Imports of goods and services 39.6 50.2 91.0 92.8 (average annual growth) 1976-86 1987-97 1996 1997 Growth ras of'exports and mport (%) Agriculture 3.1 2.3 2.2 3.0 Industry 7.3 11.2 11.2 5.2 Manufacturing 7.3 13.6 12.2 12.5 Services 7.1 8.8 7.7 12.7 Private consumption 5.8 8.4 6.0 4.7 General government consumption 7.0 7.4 1.4 4.8 Gross domestic investment 8.5 17.0 5.8 12.9 Imports of goods and services 9.6 18.0 4.2 10.1 Gross national product 5.8 8.7 8.4 7.5 Note: 1997 data are preliminary estimates. 1/ Poverty estimate is from 1989. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 37 Malaysia PRICES and GOVERNMENT FINANCE Domestic price 1976 1986 1996 1997 (% change) Consumer prices 0.8 3,6 27 6 Implicit GDP deflator 12.7 -8.6 5.2 2.9 .,. Government finance (% of GDP, includes current grants) Current revenue .. 27.3 23.6 23.9 t. s . Current budget balance .. -0.8 6.1 7.4 Overall surplus/deficit GDPde01w1r2. TRADE (US$ millions) 1976 1986 1996 1997 EXPrt and Total exports (fob) .. 13,682 76,548 77,700 Fuel .. 2,092 2,867 Rubber .. 1,233 1,395 1,419 Manufactures .. 6,009 62,997 63,558 Total imports (cif) .. 10,816 78,425 78,530 Am co Food 1,210 3,066 Fuel and energy .. 1,319 3,874 .. Capital goods .. 4,873 47,580 .. Export price index (1995=100) .. 41 94 Import price index (1995=100) .. 33 89 Terms of trade (1995=100) .. 122 107 BALANCE of PAYMENTS (US$ millions) 1976 1986 1996 1997 currn countbe taoPratspY Exports of goods and services 5,691 15,637 91,387 92,463 Imports of goods and services 4,644 14,016 90,803 91,512 g a 2 sf 5 Resource balance 1,047 1,621 584 951 Net income -428 -1,781 -4,613 -4,451 Net current transfers -39 37 -1,129 Current account balance 580 -123 -5,158 -4,800 Financing items (net) 218 1,578 7,640 -1,200 Changes in net reserves -798 -1,455 -2,482 6,000 Memo: Reserves including gold (US$ millions) .. .. 27,700 21,700 Conversion rate (DEC, local/US$) 2.5 2.6 2.5 2.8 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (US$ millions) Co po n7t tot debt 1996 USS mm na Total debt outstanding and disbursed 2,713 21,880 39,777 IBRD 306 908 907 758 IDA 0 0 0 0 Total debt service 404 3,527 7,657 IBRD 37 182 231 183 IDA 0 0 0 0 Composition of net resource flows Official grants 6 88 7 Official creditors 118 -57 -777 Private creditors 310 317 3,243 Foreign direct investment 381 489 4,500 .. ? 4M Portfolio equity 0 0 4,353 World Bank program Commitments 104 319 0 0 E B,wn Disbursements 47 66 85 51 F . , F r- . Principal repayments 14 109 161 126 C ,. .w* Net flows 33 -43 -76 -75 Interest payments 23 73 70 57 Net transfers 10 -116 -146 -132 Development Economics 9115/98 38 Annex 11 Y2K Problem Definition (from http://www.mitre.org/research/y2k/docs/PROB.html) Two-Digit Year/Six-Digit Date Coding Use of two digits to represent the year is expected to be the most common cause of year 2000 failure. Applications that require the user to enter a date routinely present a two-digit field to the operator in an attempt to reduce the number of keystrokes needed to enter data. Failure to append the correct century to the value after input results in an inability to distinguish between 1900 and 2000. For the most part, this shortcoming was not an issue earlier in the century; however, as the year 2000 approaches, the capability to differentiate between dates in the twentieth century and dates in the twenty-first century will be a necessary requirement for a successful system. This is also referred as six-digit date coding, since two digits are often used for each of the month and day fields as well as the year field. Six-digit date coding is common in administrative information systems. Planning and scheduling systems, human resources systems, financial and billing systems, and many other programs use the convention. This coding method is typically used where the application is attempting to determine which of two dates is earlier in time, or if a certain deadline has passed. These tests are frequently coded with a single inequality statement used to compare the two six-digit dates. Calculating Leap Years Correctly The second complicating factor in the millennium problem is the leap year calculation. It is evident that many people are unaware of the rules for determining whether the current year is a leap year. In fact, one user wrote a Software Problem Report against the run-time library routines for an operating system complaining that the year 2000 was being incorrectly identified by it as a leap year. The year 2000 is a leap year. The three rules which the Gregorian calendar uses to determine leap year are as follows: * Years divisible by four are leap years, unless... * Years also divisible by 100 are not leap years, except... * Years divisible by 400 are leap years. Therefore, the year 2000 is a leap year according to rule number three. Hardcoding and Magic Numbers The third area of problems comes from hardcoded values in software routines such as "19" for the implied century and/or use of "99" and "00" as reserved values meaning "never delete this" or "this is a demonstration account," respectively (sometimes called "magic numbers") which limit the range of year values and may cause date comparisons to fail or pollute output values. Other magic number dates include: 9/9/99, 99/99/99, 1/1/1, 1/1/11, 6/9/69, 6/7/89, 1/23/45, 6/6/66, 7/7/77, 8/8/88, and 12/31/99. Limiting Date Range Size The fourth and final area of problems is platform limitations. Specifically, the internal date representations of COTS (commercial off-the-shelf) hardware and software components, software date data types which are stored as an increment over some base date, may roll over and fail due to the storage register filling up. This is the problem facing many Global Positioning Satellite receivers when their internal week counter rolls over its 10-bit counter on August 21, 1999. Additionally, not all PC BIOSs12 are Year 2000 compliant. Older PCs may require a BIOS upgrade (a process often called "flashing the BIOS" to existing hardware with the capability), or must be patched / manually set to operate properly for the Year 2000. 12 BIOS - basic input/output system, a set of routines that work with the computer hardware to support the transfer of information between elements of the system, such as memory, disks, and the monitor. Although critical to performance, the BIOS is invisible to computer users.