Tajikistan - Second Institution Building Technical Assistance Credit Project

Document of The World Bank Report No: 19074-TJ PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 5 MILLION (US$6.7 MILLION EQUIVALENT) TO THE REPUBLIC OF TAJIKISTAN FOR SECOND INSTITUTION BUILDING TECHNICAL ASSISTANCE CREDIT MAY 10, 1999 Poverty Reduction and Economic Management Unit Europe and Central Asia Region  CURRENCY EQUIVALENTS (Exchange Rate Effective February 1999) Currency Unit = Tajikistan Rubles (TR) US$1 = TR998 FISCAL YEAPR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BFP Budget Framework Paper CAS Country Assistance Strategy ECA Europe and Central Asia Region ESAF Enhanced Structural Adjustment Facility FSU Former Soviet Union GOT Government of Tajikistan ICB International Competitive Bidding IDA International Development Association IFAC International Federation of Accountants IMF International Monetary Fund IBTAI First Institution Building Technical Assistance IBTA2 Second Institution Building Technical Assistance IS International Shopping LACI Loan Administration Change Initiative M&E Monitoring and Evaluation MIS Management Information System MOF Ministry of Finance MTBF Medium-Term Budget Framework NCB National Competitive Bidding NGO Non-Governmental Organization NS National Shopping PAD Project Appraisal Document PARMU Public Administration Reform Management Unit PTFPAR Presidential Task Force on Public Administration Refonn PIM Project Implementation Manual PIP Project Implementation Plan PIU Project Implementation Unit PMR Project Management Report QCBS Quality and Cost Based Selection SACI First Structural Adjustment Credit SAC2 Second Structural Adjustment Credit SOE Statement of Expenditures SPC State Property Committee Vice President: Johannes Linn Country Director: Ishrat Husain Sector Director: Pradeep Mitra Task Manager: M.R. Ghasimi  Republic of Tajikistan Second Institution Building Technical Assistance Credit CONTENTS A. Project Development Objective .................................................................2 1. Project Development Objective and Key Performance Indicators ................................2 B. Strategic Context .................................................................2 1. Sector-related Country Assistance Strategy (CAS) goals supported by the project ......2 2. Main sector issues and Government strategy ................................................................2 3. Sector issues to be addressed by the project and strategic choices ................................4 C. Project Description Summary .................................................................5 1. Project components .................................................................5 2. Key policy and institutional reforms supported by the project .....................................6 3. Benefits and target population ...................... ...........................................6 4. Institutional and implementation arrangements ............................................................7 D. Project Rationale .................................................................8 1. Project alternatives considered and reasons for rejection ..............................................8 2. Major related projects financed by the Bank and/or other development agencies .........8 3. Lessons learned and reflected in the proposed project design .................. ....................8 4. Indications of borrower commitment and ownership . ...................................................9 5. Value added of Bank support in this project .................................................................9 E. Summary Project Analysis ................................................................ 10 1. Economic ................................................................ 10 2. Financial ................................................................ 10 3. Technical ................................................................ 11 4. Institutional Arrangement ................................................................ 11 5. Social ................................................................. 1 6. Environmental Assessment ................................................................ 11 7. Participatory Approach ................................................................ 12 F. Sustainability and Risks ................................................................ 12 1. Sustainability ................................................................ 12 2. Critical Risks ................................................................ 13 3. Possible Controversial Aspects ................................................................ 13 G. Main Loan Conditions ................................................................ 13 1. Board Conditions .......................................................... 13 2. Effectiveness Conditions .......................................................... 13  H. Readiness for Implementation ....................... 14 I. Compliance with Bank Policies ....................... 14 Annexes Annex 1. Project Design Summary Annex 2. Project Description Annex 3. Estimated Project Costs Annex 4. Cost-Effectiveness Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table B. Procurement Plan Table C. Procurement Information Table D. Allocation of Credit Proceeds Table E. Assessment of Project Implementation Unit's capacity to implement procurement for IBTA2 Credit Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Status of Bank Group Operations in Tajikistan Annex 9a. Statement of IFC's Committed and Disbursed Portfolio Annex 10. Financial Management Annex 11. Summary of Project Implementation Plan Annex 12. Tajikistan at a Glance Map IBRD 25721  Republic of Tajikistan Second Institution Building Technical Assistance Credit Project Appraisal Document Europe and Central Asia ECSPE Date: May 10, 1999 Team Leader: M.R.Ghasimi Country Director: Ishrat Husain Sector Director: Pradeep Mitra Project ID: TJ59755 Sector: Public Sector Management Lending Instrument: IDA Technical Assistance Credit Program Objective Category: Economic Management Poverty Targeted Intervention: [] Yes [X] No Project Financing Data [ ] Loan [X] Credit [] Grant [ Guarantee [ Other [Specify] For Loans/CreditslOthers: Amount (US$m/SDRm): (US$6.7 Million/SDR 5 Million) Proposed terms: [XI Multicurrency [ Single currency [ Standard Variable [ Fixed [ LIBOR- based Grace period (years): 10 years Years to maturity: 40 years Commitment fee: N/A Service charge: 0.75% Financing plan(US$ Million) Source Local Foreign Total Government 0.7 0.0 0.7 IDA 1.1 5.6 6.7 Others 0.0 0.0 0.0 Total: 1.8 5.6 7.4 Borrower: Republic of Tajikistan Guarantor: NA Responsible agency: Office of the President Estimated disbursements (Bank FY/US$M): FY 2000 2001 2002 2003 2004 Annual 0.7 2.0 2.3 0.9 0.8 Cumulative 0.7 2.7 5.0 5.9 6.7 Project implementation period: January 1, 1999 to June 30, 2004 Expected effectiveness date: July 1999 Expected closing date: June 30, 2004  Page 2 A. Project Development Objective 1. Project development objectives and key performance indicators: (see Annex 1) The objectives of the proposed Second Institution Building Technical Assistance (IBTA2) Credit are building and improving the country's institutional capacity to: (i) reform public administration; (ii) improve budget management systems; and (iii) privatize medium and large enterprises and develop the private sector. Achieving these objectives will require that the Government strengthen its public sector management capacities by: (i) reorganizing core ministries; (ii) further consolidating overlapping government agencies and ministry departments; (iii) strengthening strategic focus of budgeting process by introducing a medium- term budgetary framework; (iv) decreasing the number of deviations from budget allocation; (v) increasing the number of auctions and case by case privatization of medium and large-scale enterprises; and (vi) eliminating unnecessary regulations and steps for the establishment and operation of private businesses. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goals supported by the project: (see Annex 1) The proposed project supports CAS goals of strengthening public sector institutional capacity to: (i) reform the public sector; (ii) privatize state-owned enterprises; and (iii) develop the necessary legal and institutional framework to promote private sector activities. CAS document number: 18075-TJ Date of latest CAS discussion: 07/30/1998. 2. Main sector issues and Government strategy: After adopting its 1995 economic reform program and progressively restoring political stability following the June 1997 peace agreement, Tajikistan's Government has made considerable progress in achieving macroeconomic stability, implementing structural reforms and reorienting the State's role in the economy. The fiscal deficit has been reduced, inflation controlled and the necessary conditions for economic recovery and growth established. These initiatives led to 5.3 percent real GDP growth, the first increase in over six years, and an inflation rate of 2.7 percent in 1998. However, public administration organization and budget management systems still strongly reflect the former command economy. As the economic reform process deepens, Tajikistan needs to restructure its public administration to enable government ministries and agencies to better facilitate and stimulate economic activity and provide efficient and timely public services. In accordance with Government's public sector strategy, the proposed IBTA2 Credit will furnish consulting services, training and office technology to help the Govermment: (i) reform public administration; (ii) strengthen budget management systems; and (iii) support privatization and private sector development. The proposed Credit will be the primary vehicle for building the Government capacity to implement public sector reform, improve budget management systems, privatize medium and large-scale enterprises and promote private sector activities, which will be supported under the second Structural Adjustment Credit (SAC2) currently being prepared by the Government in close consultation with the World Bank. (i) Need to reform government structure and civil service management. Since independence, Tajikistan has made considerable progress toward establishing a market economy, and some functions formerly performed by the State have already been transferred to the private sector. Assistance provided by the first World Bank Institution Building Technical Assistance (IBTAI) Credit has played a crucial role in supporting this process. However, only limited progress has been made in reforming public administration structures and institutions. The functions of ministries and state institutions still overlap, and policy and programming roles remain poorly developed. In many cases, the outlook, organizational structure and staff deployment of ministries and local governments continue to reflect their former functions under the command economy and the relationship and division of responsibilities between central and local governments remains unclear. Public service employment is still governed by general legislation, with no separate regulations covering civil service standards and procedures.  Page 3 The Prime Minister's Office illustrates the need for public administration reform. An excessive number of organizations report to the Prime Minister's Office. As a result, responsibilities between ministries and organizations overlap considerably, creating additional staffing and administration demands and the need to refer even relatively minor decisions to the Prime Minister's Office. Consequently, responsibility for key sectors of the economy is dispersed among various ministries and no single body is in charge of policy development and program coordination within a sector. The concentrated authority and responsibility for government policy, coordination and program development in the Prime Minister's Office also undermines development of these functions in the line ministries. Unrealistically low public sector pay has adverse consequences for the operation and integrity of the civil service. Low morale and motivation undermines efficiency and discipline, since officials have to depend on supplementary employment or solicit payment from the public for services provided. It is difficult to recruit and retain qualified staff, particularly in areas for which there is a strong demand in the private sector (e.g., information technology, banking and finance). Overly compressed salary scales provide inadequate financial rewards for promotion and increased responsibility. The reward system and administrative structures are distorted as ministries resort to providing a range of non-monetary benefits to retain and motivate key staff. The Government recognizes these weaknesses and is taking a number of positive actions. The Law on State Service was approved by the Majles Oli in November 1998, and the Government plans to prepare anti- corruption legislation and reorganize the Office of the President in 1999. The Government is also committed to begin rationalizing ministries and state organizations in the transport and energy sectors in 2000, which is expected to help strengthen public administration structures. At present, however, there is no established institutional capacity to implement broad-based public administration reforn, and the Government has limited access to international experience and expertise in this area. (ii) Need to reform budget management systems. Under central planning, the budget was used to allocate financial resources according to the Plan. Budgeting practice in Tajikistan continues to reflect this role. It is characterized by the aggregation of expenditure requests, which are themselves based on historical operating norms. As a result, budgetary request levels often greatly exceed the available resource envelope. Cuts to budget requests made by the Ministry of Finance (MoF) and local government finance departments nullify much of the early budget preparation work by line ministries and agencies. The budget formulation process also contributes to an inefficient allocation of budgetary resources, since it provides little incentive to ministries to review and prioritize their expenditure programs. An inadequate budget classification system hinders analysis and monitoring of the public expenditure program. Local government budgeting procedures mirror those at the republican level. Against this background, the MoF has achieved some success in implementing aggregate budget and expenditure controls and reducing the budget deficit. It has established a Treasury function, introduced a new budget law and is receiving IMF technical assistance to establish a new functional and economic classification for the budget. The MoF is committed to implementing broader-based reforms of the budgetary system, which will involve introducing a medium-term budget framework, further developing the budget classification system, strengthening expenditure control, restructuring the inter-governmental financing system and updating budget legislation, regulations and manuals. (iii) Need to privatize medium and large-scale enterprises and develop a conducive business environment for private sector activities. Private sector development has a critical role to play in the Government's public sector strategy by allowing more efficient use of assets and redu-cing financial and administrative demands on the Government. Over the last two years, the Government has been implementing an accelerated privatization program, focusing mainly on small-scale enterprises. More than two-thirds of small-scale enterprises have been privatized, and incorporation and sale of medium and large- scale enterprises have been initiated. Technical assistance provided under the IBTAI Credit has been important in assisting the Government to design and implement its privatization program. Specifically, the IBTAI Credit has enabled the Government to establish a database of enterprises, change legislation and  Page 4 procedures to accelerate privatization, and organize and conduct auctions and public education. While this technical assistance is scheduled to conclude by end June 1999, the IBTA2 Credit will permit assistance to be provided to the critical phase of the privatization program until the end of 2000 to allow tangible progress on privatization of medium and large-scale enterprises. This will also provide an opportunity for the Government to strengthen its capacity to establish a conducive business environment for private sector activities. Currently, the private sector in Tajikistan must emerge and survive under an adverse and unpredictable regulatory environment which increases the costs of starting and operating private businesses and exposes private entrepreneurs to greater risk and uncertainty. These factors hinder the contributions that the private sector could make in generating employment opportunities and economic growth. The Government is committed to creating a more conducive business environment for private sector activities by reducing unnecessary regulations (both at the national and municipal levels), strengthening transparency in the application of regulations and simplifying procedural requirements for compliance. 3. Sector issues to be addressed by the project and strategic choices: The proposed Project seeks to help the Government implement its reform strategy through funding consultant services, training and office technology. Specifically, the proposed Project will help the Government: * Review its overall structure and organization and develop guidelines for reorganizing ministries. * Develop public sector pay and incentive strategy that rationalize pay and incentive systems in the public service. * Establish civil service management functions, including development of a database on civil service employees. * Strengthen the budgeting and expenditure control systems in the MoF Budget Department and introduce a new budget classification system. * Introduce a Medium-Term Budget Framework (MTBF) in the MoF Budget Department to allow ministries to plan their development expenditure programs over the medium term and facilitate greater linkage between sector policies, strategies and expenditure allocations. * Improve inter-governmental finance and strengthen budgetary planning and management systems in the MoF Budget Department and local governments. * Prepare and implement a comprehensive privatization program for medium and large-scale enterprises in the State Property Committee (SPC).