Tajikistan - Second Structural Adjustment Credit Project : release of the second tranche - full compliance

Republic of Tajikistan: SecondStructuralAdjustment Credit (IDA Credit3539-TJ) Release of the SecondTranche - Full Compliance I. BACKGROUND 1. The Second Structural Adjustment Credit (SAC2) was a core element o f the previous Country Assistance Strategy for Tajikistan, dated April 14, 1998. SAC2 supports an ambitious structural program as Tajikistan, the poorest CIS country, emerges from its post-conflict situation. Important objectives o f the supported reform program include: (i)to increase transparency and accountability o f the public sector; (ii)to improve effectiveness and efficiency of public resource use; (iii)to facilitate private sector growth and to broaden economic opportunities; and (iv) to reduce fiscal and quasi-fiscal drain created not least by soft budget constraints in the state sector. Correspondingly, the program focuses on four areas: (a) public sector management; (b) the budget process; (c) private sector development and privatization; and (d) utilities andpublic enterprise reform. The closing date o f SAC2 was extendedby a total o f 18 months, primarily to allow for the resolution o f outstanding issues regarding the largest public enterprise in the country, the aluminium smelter TADAZ, and the privatization strategy for mediumandlarge enterprises. These outstanding issues have now beenresolved. 11. RECENT ECONOMICDEVELOPMENTS 2. Tajikistan's economic recovery has continued with aggregate real growth o f close to 40 percent over the last 4 years, one o f the strongest growth performances in the region. Despite slower growth incotton and aluminum production, real GDP growth reached 10.2percent in2003, driven to some extent by demand associated with increased workers' remittances. The recent Poverty Update found that as are result o f rapid growth, poverty has declined significantly between 1999 and 2003 but remains high. Inflation continues to be a cause for concern at an annual rate o f 14 percent by end-2003. But quarterly data indicate that a recent monetary tightening i s succeeding incontrolling inflation. 3. The fiscal performance has continued to improve, with a surplus o f 0.9 percent o f GDP in 2003, excluding the foreign financed public investment program (PIP). This reflects expenditure discipline and hgher-than-projected tax revenues associated with higher-than-projected GDP growth. Tajikistan's extemal balance is also improving. The current account deficit shrank to 1.3 percent o f GDP in 2003 fkom 2.6 percent o f GDP in 2002. The trade deficit declined to US$ 83 million in 2003, compared to US$ 124 million in 2002. The total extemal debt stock stood at an estimated 73 percent o f GDP at the end o f 2003, down from 82 percent o f GDP in 2002. Currently, the Government i s in the process o f concluding a debt restructuring agreement with Russia. 4. The Joint Staff Assessment (JSA) o f the PRSP Progress Report for 2003 presented to the Boards o f the International Monetary Fund (IMF) and the International Development Association (IDA) highlights the good growth performance and significant poverty reduction. However, it also notes that the progress in structural reforms has been mixed. To ensure sustainability o f economic  growth, the JSA stresses the importance o f continued reform efforts to further strengthen governance, to accelerate structural reform and private sector development, and to prioritize expenditures to further improve the allocation o f scarce fiscal resources. 5. IMF Program: The IMF Board approved a request for a Three-Year Arrangement under the Poverty Reduction and Growth Facility on December 11, 2002, in a total amount equivalent to SDR 65 million. The IMF program is currently on track. So far, SDR 25.8 million has been released under this current program. The next IMF staffvisit i s planned for July/August 2004. 111. PROGRESSAGAINSTTRANCHE RELEASE CRITERIA 6. Pursuantto Section 2.02 (d) o fthe Development Credit Agreement (DCA) that was signed between the Republic o f Tajikistan and the International Development Association (IDA), dated July 9, 2001, conditions for the second tranche release require that the Association be satisfied: (a) with the progress acheved by the Borrower in the carrying out o f the Program; (b) with the macroeconomic policy framework o f the Borrower, measured on the basis o f agreed indicators; and (c) that actions described in Schedule 2 to the Development Credit Agreement have been taken. A. ProgressUnder the OverallProgram 7. Substantial progress has been made inthe implementation o f the Program as outlined inthe Letter o f Development Policy, the matrix o f overall reform actions under the Credit, and supplementary measures agreed during the supervision dialogue. While Tajihstan's daunting reform agenda will require a sustained reform effort over many more years, the progress that has been made to date with the overall reform program is deemed satisfactory for the disbursement o f the second tranche o f SAC2 by IDA. Inparticular, progress has been made inthe areas o f public sector management, the budget process, privatization and public sector development, and utility andpublic enterprise reform. 8. Public Sector Management: Substantial improvements were achieved in the area o f public sector management within the framework o f SAC2. The law "On the National Bank o f Tajikistan" has been amended with a provision prohibiting the issuance o f directed credits. In order to better control inspections o f private sector entities by state bodies, a Black Book mechanism was introduced that helps monitor the nature and frequency o f inspections. The laws "On State Financial Control" and "On Public Finance" have come into force inDecember 2002, thus creating the regulatory basis for the activities o f the State Financial Control Committee, the Supreme Audit Institution in Tajikistan. With the support o f the Institution Building and Technical Assistance 2 Project, functional reviews o f Government ministries were conducted which led to the partial or full restructuring o f the Ministries o f Health, Education, Agriculture and Telecommunications. The Ministryo f State Revenues and Duties was established inJanuary 2002 and started modernizing the Customs and the Tax Codes, which have been redrafted with technical assistance from the Asian Development Bank and U S A I D and are currently being 2  reviewed within the Government. Inparallel, an internal audit department has been set up within that Ministryinorder to increase accountability and to fight corruption. 9. Budget Process: There have been noticeable improvements o f the budget process under SAC2. Individual bank accounts o f Ministries have been closed by early 2002 and all transactions are now channeled through a single consolidated account at the Treasury. The law "On State Finances" enacted in December 2002 i s a well drafted and modern law on budget processes. However, the full implementation o f t h s law proved slow due to the limited capacity o f the Ministry o f Finance and line ministries, and the fragmented nature o f the budget preparation process. The Government developed its first medium-term budget fi-amework (MTBF) for 2002- 2004, which links policy, planning and budgeting decisions over the planning and resource management cycle. While this is an important first step, a full and effective integration o f the MTBFinto the budget process has yet to be achieved. A Budget Commission was set up, but met only twice and was later dissolved since its role had not been clearly defined. The Ministry o f Finance is currently preparing a second attempt to establish a Budget Commission as a high level forum for strategic prioritization o f the executive. The Public Investment Program (PIP) is now officially part o f the budget process, and counterpart funding is listed as a distinct expenditure item within the State Budget. However, the process linking MTBF, PIP and the State Budget will need to be improved further. 10. Private Sector Development and Privatization: Progress both on farm privatization and enterprise privatization has been made during the SAC2 period. To facilitate farm privatization, the Government adopted a resolution in late 2001 reducing the fee for issuance o f land use right certificates to US$ 6. There have been some reports that local officials add informal payment requests to this official fee, a practice that may not always be easy to control but that needs to be prosecuted vigorously. Inorder to improve the land-use rights procedure, the budget for the issuing agency has been raised significantly and new technical equipment has been acquired. To date, more than 21,000 land use certificates have been issued to individual farmers and Dehqon farms. The Tax Code was amended to pilot a single farm tax infour districts inAugust 2002. Manuals on reorganization and privatization o f collective and state farms have been published in the mass media and 556 out o f 700 state and collective farms havebeen restructured. The improvement in court access benefits businesses more widely as the court fee has been lowered to 2 percent of the claim value by Resolution o f the Government inearly 2002. Over 250 mediumandlarge enterprises have beenprivatized since SAC2 was signed. InNovember 2003, the Government adopted a comprehensive and time bound Strategic Plan for the Privatization o f Medium and Large Enterprises and the Restructuring o f Natural Monopolies and the Largest Enterprises for 2004-2007, covering almost 500 remaining state owned companies. New regulations on the auction and biddingprocess to implement this plan have been approved by the Government in early 2004. Improved bankruptcy and liquidation procedures are being developed that are also required for the implementation o f the new privatization strategy. A continued timely andsolid implementation o fthe privatizationplanwill be critical. 11. Utilities and Public Enterprise Reform: The key public utilities, TajikGas, TajikTelecom, and BarkiTajik (the electricity utility) have significantly improved collection rates and a large majority o f clients are current within 90 days sales equivalent on their payments under threat o f disconnection. In late 2001, the Government adopted a resolution requiring all budget entities to  adequately plan their utility expenditures and not to accumulate utility arrears. After initial delays, the most significant arrears problem, the electricity arrears o f the aluminium smelter TADAZ, the largest industrial enterprise inTajikistan consuming one third o f the country's domestic electricity output, has now been credibly addressed and a pattern o f timely payment o f electricity bills has been established. In 2002, the Prime Minister approved a time-bound action plan for TADAZ, incorporating measures for financial and operational restructuring, re-capitalization, and technical rehabilitation. In order to implement this action plan, the U K ' s Department for International Development has recently agreed to fund outside financial and technical advisors who are expected to take up their work over the next few months. An international independent audit o f TADAZ's 2002 financial statements has been recently completed andwas found to comply with international audit standards (IAS) after an earlier version o f the audit had been rejected. The I A S audit o f BarkiTajik is scheduled for September 2004 andwill be financed by the Asian Development Bank. An audit o f TajikGas is also hopedto be carried out later this year. B. Macroeconomicpolicyframework 12. As suggested in paragraphs 2-5 above, which includes an update on the status o f the IMF program, IDA considers that the current macroeconomic fiamework in Tajikistan is satisfactory. The proceeds o f the second tranche are part o f the 2004 budget endorsed by the IMF. The proceeds will provide budgetary support to help the government service external debt and finance its poverty reduction agenda. With the 2004 budget, spending on the key social services o f health and education continues to increase as a share o f total expenditure, and, a fortiori, as a share o f GDP. C. ProgressAgainst SpecificTrancheRelease Criteria !Schedule2 DCA, Section 1:The law on the FinancialControlOfficehasbeenenacted. Status - Compliance: Parliament has adopted the Law "On State Financial Control" on 17 April 2002 (#615) which defines the criteria, rates and rules o f conducting inspections o f enterprises' and organizations' activities. This Law came into force on December 2,2002 (#62). Remark: According to this law, the State Financial Committee is the supreme audit institution. As it stands, the State Financial Committee reports to the President only. This can give rise to conflicts o f interest as the President is the head o f the executive. As a next step, parliamentary involvement inthe oversight would be desirable, possibly through the establishment o f an additional audit institution that would supervise the work o f the State Financial Committee and would report to Parliament. I Schedule2 DCA, Section2: The Borrower has made satisfactoryprogress inimplementinga I reform program, including: (a) revision of the Customs Code in line with international standards: 4  Status - Compliance: While further efforts will berequired, progress inthe revisiono fthe customs code inline with international standardshas been satisfactory for the purpose o f SAC2. The current Customs Code was initially adopted inApril 1995 andwas amended inAugust 2001, In2003, anentirelynewcustoms codewas preparedto fully complywith international standards by a working group ofthe Ministryo f State Revenues andDuties.This draft is modeledonthe new Customs Code adoptedbythe RussianFederation in2003 and is currentlybeingreviewed by other Government Ministries. A preliminaryassessment by aWorld Bank consultant hasbeen prepared, recommending that the draft be revisedina number o f areas to assure full compliance with WTO andother best practice requirements.This assessment has been sharedwith ADB and USAIDwho intendto offer further assistance. IfParliament adopts the new customs code in 2004, it could become effective January 1,2005. (b) revision of customs procedures and regulations to increase transparency of custom transactions; Status - Compliance: The improvement o f transparency and efficiency o f the customs regimei s an ongoing effort that will needto be pursuedfurther. However, progress i s satisfactory for the purpose of SAC2 as witnessed, among others, by the following orders and regulations issuedby the Ministry o f State Revenues andDuties (MSRD)duringthe SAC2 period: Rules of procedure for periodic entering of goods, Order o f Customs Committee from December 18,2001, No. 160; Customs clearancefor empty means of transport and transportation devices, Order o f MSRDfrom February 7,2002 No 3N; Amendments to the technological interaction pattern between the customs authorities and Tajik Railways, Joint order of MSRDwith other relevant ministries from June, 22nd, 2002, No. 187/627/86/394; Simplified customs clearanceprocedures for humanitarian goods, Order o f MSRD from August 22nd,2002, No. 112; Amendment to theprocedurefor currency control in importing goods, revoking currenc control requirements for imports, Joint Order MSRD and NBT from September 15t , Y 2003 No. 85/0P, 219; Also, the following Resolutions o f the Government o f the Republic o f Tajikistan have been adopted: "On Customs Tariffs o fthe Republic o f Tajikistan" from October 25th, 2003, No. 450. "On the Procedure for the Passing o f Goods and Means o f Transport Imported by Individuals for Purposes Other Than Production or Whatever Income Generation Activities through the Customs Boundary o f the Republic o f Tajikistan'' October 25fh, 2003, No. 466. '(c) strengthening of the internal audit function of customs administration; 5  Status - Compliance: The improvement of the intemal audit function o f the customs regimei s an ongoing effort that will needto be pursuedfurther.However, the progress i s satisfactory for the purpose o f SAC2, as witnessedbythe following actions: 0 An intemal audit department has beenset up within the MSRD.Itwas established according to the Decree o f the President o f Tajikistan dated January 24, 2002, No. 745 and Resolutiono f the Government of the Republic o f Tajikistan dated February 12,2002, No. 48. 0 The Customs Committee under the Government o f the Republic o f Tajikistan has sent a letter (#02-03-11/718 o f 12/12/2001) to the structural units o f the customs authorities, instructing strict compliance with the rules o f keeping records in the "Inspection Register". 0 The MSRDhas approved the Single All-Republican Plan for the inspections of taxpayers, which i s currently beingexecuted to streamline inspections. I (d) the first phase of the modernizationof customsadministrationendingon May 31,2002. I Status - Compliance: The modemizationo f the customs administration i s an ongoing effort that will need to bepursuedfurther.However, the progress i s satisfactory for the purpose o f SAC2, . as witnessedby the following actions: Memorandum o f understanding "Program of trade support and customs cooperation" supported by ADB signed between the Ministryo f State Revenues and Duties and the MinistryofFinance. Order o f the MSDR "On introduction of amendments and changes into some regulatory acts of customs service with thepurpose of eliminating obstacles in external trade" dated August 22"d, 2002, No. 112. Currently, the Government actively pursues further reforms o f the customs administration with donor assistanceprovided by the ADB, the EU, and USAIDamong others. I Schedule 2 DCA, Section3: The Law on PublicFinancehas beenenacted. Status - Compliance: The Law on State Finances was adopted by Parliament on 28 June 2002 (#684), andwas enacted on December 2,2002, (#77). Schedule 2 DCA, Section 4: The Borrower has: (a) prepared the budget for FY2002 for Ministries of Agriculture, Education, Health and Telecommunications of the Borrower, basedon the MTEFplanningcircularsandprocessmanuals; Status - Compliance: The budget instructions for the 2002 budget were approved and circulated to all governmental agencies. Instructions requiredthe Ministries o f Agriculture, Education, Healthand Telecommunications to develop program budgets. The budget instructions for preparation o f the 2004 budgetwere sent to all budget organizations (June 30th,2003, No. 2(a)7/822) incorporatingPIP andKey Budget Organization budgeting. See action4(e) for further details. 6  (b) integratedthe PIPinto the mediumtermbudgetframework and the budgetfor FY2002: Status - Compliance: The PIP department was established at the Ministryo f Finance inApril 2002, which i s now incharge o f integrating the PIP into the budget process. The law "On State Budget for 2002" was adopted on December 25th,2001, No. 45 which includedthe PIP programs. BudgetFramework Papers for the 2002 and 2003 budgets, including the PIP, were developed. Remarks: The Budget Framework paperswere not officially considered by Government or Parliament. The Public Expenditure and InstitutionalReviewthat i s currently being preparedby Bank staff will give recommendations on how to further strengthen the MTBFprocess. (c) incorporatedloans and grants from internationalfinancial institutions and donors into the budgetaryprocess; Status - Compliance: The incorporation o f loans and grants from international financial institutions into the budgetary process i s required by Resolution o f the Government o f the Republic of Tajikistan (GOT), No. 498, dated December 31, 2002. This requirement has been met as loans and grants from international financial institutions and donors were incorporated into the budgetary process and reflected in the Laws On State Budget for 2002 (Dec. 25, 2001, No. 43,2003 (Dec. 2,2002, No. 91) and 2004 (Dec. 16,2003, #75). I(d) allocatedall countemart funds inthe budgetso that all exDenditure itemsare funded: I Status - Compliance: According to Resolutiono f GOT, December 31,2002 (#498), all counterpart funds are to be allocated inthe budget to assure the fundingo f all expenditure items. (e) continuedpreparationof the budgetfor FY2003 basedon the MTEFplanningcirculars and processmanuals, integratingthe PIP. Status - Compliance: The budget instructions for the 2003 budget were prepared on the basis o f the MTBF, integratingthe PIP, and circulated to all relevant governmental agencies. The MinistryofFinance has issuedbudget instructions for 2002,2003, and2004 incorporating components o f the MTBF. Ineach o f these years, agencies were askedto prepare their budgets for the budget year and make projections for the two subsequent years. Inaddition, in2002 the Ministries o fAgriculture, Education, Health, and Telecommunications were asked to prepare their budgetsusingaprogrambudget format. The instructions for 2003 and2004 require all Ministries to prepare their budgets inthe program budget format. The Budget Reform Project, supported by a component o f IDA'S Institution Buildingand Technical Assistance Project 2, drafted the instructions that the Ministryo f Finance issued. PIP projects were includedas a distinct item inthe budget materials submittedto the Government and Parliament for all o f these 7  years. Inaddition, the budget allocated counterpart hnds to finance the state share o f the PIP projects. Schedule2 DCA, Section5: The Borrower has: (a) transferredall the assets, frombanksto be closeddue to noncompliancewith the minimumcapitalrequirementsas set out in the Borrower's bankinglegislation,to ALCO; and Status - Compliance: While the Agency for Bank Liquidation and Credit Collection (ALCO) was operational, the NationalBank o f Tajikistan (NBT) has closed down 5 commercialbanks not complying with the minimum capital requirements.The assets o f these banks were transferred to ALCO. I (b) commencedliquidationof assetsof those closedbanks. Status - Compliance: The banks to be closed have either beenliquidated or merged and restructured as credit unions. Remark:Since 1997, 14 commercial banks havebeenclosed. In2003, the NBTrevokedthe license o f one commercialbanks, and imposed limitations on deposit collection on another. However, due to a misperception o f ALCO's responsibilities which gradually was becoming a bank itself, IDA and the IMFagreedto its liquidation. Its functions were transferred to the Bank Supervision Department o f the NBT. Schedule2 DCA, Section6: The Borrower has amendedits Tax Code so as to: (a) allow for full tax deductibility of loanloss provisions; Status - Compliance: The Tax Code has been modified inaccordancewith the condition through the amendments to the Tax Code dated May loth,2002, # 45 (item3 o f article 135 of the Tax code) adopted by Parliament. I (b) tax bankssolely on their fixed assets; and Status - Compliance: The Tax Code has beenmodified inaccordancewith the condition . through amendments to the Tax Code dated August 6th, 2001, # 34 (part 3, o fArt. 261 o f Tax code was deleted) and dated May loth, 2002 (part 3 o f Art. 261 introduced) adopted by Parliament. (c) preclude the tax authorities from arbitrary freezing of deposits and imposing fees and penaltieson client accountswithout court orders. through amendments to the Tax Code dated May loth,2002, # 45 (introduced item"k"o f Art. Status - Compliance: The Tax Code has been modified inaccordance with the condition 104) adopted by Parliament. Furthermore, the necessity o fproviding a taxpayer's identification numberwhenopening aback account was abolished for naturalpersons inthe amendmentsto the Tax Code inLaw o fthe Republic o fTajikistan No. 34, ofAugust 6th, 2001 (articles 47, 83, 104) adopted by Parliament. 8  Schedule 2 DCA, Section 7: The Borrower has amended its Law on Collateral in accordance with a methodology agreed with the Association so as to: (a) reduce the fee for transferring the ownership o f the collateral upon borrowers' default; and Status - Compliance: The law "On Collateral" provides that the fee schedule for transferring the ownership o f the collateral i s determinedby Government Resolution. The relevant Government Resolution has been amended (Resolution o f the Government #135, from March 31,2001), replacing the previous 20 percent fee for transferring the ownership o f the collateral upon borrower's default by a simplified schedule based on minimumwages and averaging no more than 3 percent o f the value o f the claim. 1 (b) unify the amount of fee for all types of collateral. Status - Compliance: The law "On Collateral" provides that the fee schedule for transferring the ownership o f the collateral is determined by Government Resolution. The fee was unified for all types o f collateral according to Resolution o f the Government #135, dated March 31,2001. Schedule 2 DCA, Section 8: The Borrower has ensured that: (a) the accounts payable and receivables o f Barki-Tajik, Tajiktelekom and Tajikgas are to be kept current within the 90 days sales equivalent and settled through cash mechanisms: Status - Compliance: After initial delays, the most significant arrears problem, the electricity arrears o f the aluminium smelter TADAZ, has now been credibly addressed. The large electricity arrears that were accumulatedby TADAZ since SAC2 become active in2001 were settled inlate 2003 and a record for staying current within 90 days o f sales equivalent through cash mechanisms has been established. The key public utilities, TajikGas, TajikTelecom, and BarkiTajik (the electricity utility) have significantly improved collection rates overall and, despite recent tariff increases, the large majority o f clients are current within 90 days sales equivalent on their payments under threat o f disconnection. Settlement occurs incash. Payment inkindhas notbeenreported to us bythe utilities concerned as amajorproblem. (b) utility services to the public, public enterprises, including TADAZ, and budgetary institutions, who are not current on their payments, are cut off; and Status - Compliance: Clients who are not current on their utilities are ultimately cut-off ifthe problem persists according to the intemal procedures o f the utilities concerned. Some o f these procedures avoid cut-off o f vital utilities during the winter period for social reasons. (c) resources for the budgetary institutions to pay for their utility bills has been allocated for its FY 2002 budget. Status - Compliance: In December 2001, the Government adopted a resolution requiring all budget entities to adequately plan their utility expenditures and not to accumulate utility arrears (#583, from Dec. 10, 2001). 9  Schedule 2 DCA, Section 9: The Borrower has: (a) installed functional computerized system for speedy public access to, and maintenance of the land use right records in its State Land Committeeboth at ravon and state level: and Status - Compliance: Computerized systems for accessing and maintaining land use records were installed both at the central and the rayon level o f the State Land Committee (SLC). At rayon level, all local offices o f the SLC were provided with basic equipment to maintain records and to provide public access. New geometric and positioning equipments, mapping technologies and a digital registration system were installed at state level for preparation o f digital maps, a coordinated system o f land registration and the issue of land use certificates. Staff at both rayon and state level are being trained to use the installed equipment. However, especially the training process needs to be scaled up and accelerated. I(b) reducedfees for registrationof landuse right certificateto the equivalent of $6. Status -Compliance: The Government has adopted a resolution inaccordance with the condition to fix the fee for issuance and registration o f landuse right certificates at the local currency equivalent o f US$ 6 (Resolution o f the Government dated 30th December, 2001, # 600). Schedule 2 DCA, Section 10: The Borrower has adopted a strategic plan for case-by-case Privatizationof Medium-andLarge-ScaleEnterprisesover a threeyear period. Status - Compliance: A time-bound strategic action plan for case by case privatization o f Medium and Large Scale enterprises was ado ted by the Government inthe form o f Resolution # 486 by the President o f the Republic, dated 7t November 2003. The plan envisages the R privatization o f 457 medium and large enterprises, and the restructuring o f more than 30 natural monopolies and other enterprises o f special interest by the end o f 2007. The Government has subsequently amended its regulatory framework for the implementation o f this strategic plan which strives to ensure transparency inthe privatization process through auctions and tenders, in Resolution # 98, dated March 1,2004. For each enterprise covered inthe plan, an intended year and method o f privatization is specified. Over the first three years o f the plan, by the end o f 2006,392 enterprises are to be privatized. Due to the well defined and ambitious targets duringthe first three years, we consider the condition has been met for the purpose o f SAC2. During2007, the fourth year o fthe plan, another 65 enterprises are to beprivatized andthe natural monopolies and enterprises o f strategic interest are to be restructured. Inview o f the comprehensive and ambitious nature o f the plan and the local capacity constraints, the four year time frame overall untilthe end o f2007 isjustifiable. 10  2 DCA, Section 11: The Borrower has: (a) appointed an acceptable audit firm the purpose of the audit of TADAZ in accordance with international accounting (IAN: Status - Compliance: The auditor PricewaterhouseCoopers Accountants N.V. was appointed to audit the 2002 financial statements o f TADAZ in accordance with IAS. I (b) completedthe IAS audit of TADAZ; and I Status - Compliance: The audit for the 2002 financial statement that was issued on 25thM a y 2004 by the above auditor was found to be acceptable and incompliance with IAS. This audit replaces an earlier version o f the audit that was issued on 5thNovember 2003 which hadnot been found to be acceptable. (c) issued a resolution adopting an action plan for TADAZ, setting forth the following: (i) financial restructuring and recapitalization; (ii) technical rehabilitation and operational restructuring; (iii) technical, managerial and market know-how through a contract with an international standard firm; and (iv) competitive selection procedures, approved by the Association, for the above-mentioned contract. Status - Compliance: In 2002, the Prime Minister approved a time-bound action plan for TADAZ in line with the requirements o f the DCA. The implementation o f this plan had been delayed during 2003. But the Government is currently moving ahead with the implementation o f the action plan by hiring an external advisory team for TADAZ, to be funded by the UK's development agency DFID, in order to prepare a strategy for the restructuring and possible privatization o f TADAZ. Schedule 2 DCA, Section 12: The Borrower has completed Privatization of 100 Medium- and Large-Scale Enterprises in addition to 280 Medium- and Large-Scale Enterprises already privatized. Status - Compliance: Since the signing o f the SAC2 Development Credit Agreement, over 250 Medium- and Large-Scale Enterprises have been privatized according to the records o f the State Property Committee. Schedule 2 DCA, Section 13: The Borrower has caused: (a) the rayon-level administrations to hold general body meetings in not less than 60 state and collective farms (SCFs) to resolve the distribution of the SCF's land to private individuals or group of individuals; 11  Status - Compliance: General body meetings have been conducted inall the required60 SCFs. As oftoday, 556 out of 700 state and collective farms were reorganized and the lands were redistributedto privateDehqon farms, and individual farmers. (b) its State Land Committee to issue the land use rights certificates to private individuals or groups of individuals in not less than 40 SCFs of the 60 SCFs mentioned above; and Status - Compliance: As a result o f the above mentioned 60 general meetings heldby SCFs, 40 farms have been reorganized, with 62 landuse certificates issued by the State Land Committee. A total of21,000 land-use certificates have beenissuedand distributedto privateindividual and DehqonFarms through-out the country. (c) an increase of 10% in the budget of the State Land Committee, covering the last 6 months o f FY2001, to enable the State Land Committee to undertake tasks mentioned in sub-paragraphs (a) and (b) above. Status - Compliance: The budget o f the State Land Committee has been increased incompliance with this condition. Between2001 and 2002, the budgetwas increased by 10.2%, between 2002 and 2003 by 12.8 %, and between 2003 and 2004 by 9.5%. Schedule 2 DCA, Section 14: The Law on Telecommunication has been enacted, and the commission on regulation for the telecommunication sector has been established. Status - Compliance: The Law "On Telecommunication" was adopted by the Parliament in resolution#603 on April 10,2002. The law was enacted on May 10,2002, # 56. A resolutionon the establishment oftelecom regulationhasbeenpreparedbythe Ministryof Communications andwas approved by the Government inDecember 2003 (Resolution o fthe Government #592, dated December 5,2003). Schedule 2 DCA, Section 15: The Borrower has consolidated the various bank accounts of Borrower's ministries under the Treasury Account. Status - Compliance: The bank accounts o f the Borrower's various Ministries have been consolidated under a single Treasury Account according to the Law "On Treasury" that was enacted by Parliament on May 12th,2001, andthe "Instruction OnAccounting And Reporting Procedures As To Execution O f State Budget InTreasury" that was approved by Order o f the MinistryofFinance on February 20,2002 (#33). The Treasury Manualhasbeenpreparedwith the IMF's assistance. IV. CONCLUSION 13. Inview ofthe overall performance andprogress withthe implementation ofthe program supported by the Credit, the satisfactory macroeconomic policy framework in the country, and 12  compliance with the specific tranche release conditions set out in Schedule 2 o f the Development Credit Agreement, the Association is informing the Borrower o f the availability o f the second tranche inthe amount o f SDR 19.7 million. Washington, D.C, June 11,2004 13