Sri Lanka - Year 2000 Emergency Assistance Project

Report No. PID7254 Project Name Sri Lanka-Year 2000 Emergency Assistance... Project Region South Asia Region Sector Finance and Private Sector Development Project ID LKPE63472 Borrower Government of Sri Lanka Implementing Agency Ministry of Finance and Planning Contact: Mr. Faiz Mohideen, Director General External Resource Department, Ministry of Finance and Planning Address: Secretariat, Colombo 1, Sri Lanka Telephone: 94-1-434876 Fax: 94-1-447633 Date of this PID January 12, 1999 RVP Approval December 28, 1998 Board Date January 19, 1999 Sector Issues. The Y2K problem has attracted increasing attention worldwide as the passage into the new millennium approaches rapidly. The Y2K problem results from the fact that most business application software programs written over past 20-25 years use only two digits to specify the year, rather than four. The two-digit date code is automatically assigned to the 20th century: as "99" proceeds to "00" on January 1, 2000, the computer will incorrectly understand the date change as "1900", not "2000." These systems, unless changed or corrected, will cause failure in arithmetic, comparisons, sorting, and input/output to databases or files when manipulating date data. Almost all computer-based systems which represent the year as a two-digit number will be adversely affected by the arrival of the year 2000. In addition, the Y2K problem threatens to impact "embedded systems", electronic hardware systems - including everything from fax machines and elevators to telephone exchanges and power generators - that utilize date functions built into microprocessor controls. The bottom line is that, without proper attention, the consequences of the Y2K problem can be costly and disruptive. Project Objectives. To assist the Government of Sri Lanka (GOSL), on an urgent basis, in its efforts to prevent possible business disruption in the country's economic and financial sectors as a result of the Year 2000 (Y2K) problem. The project will focus on assisting the country's banking sector and selected critical government agencies to adopt and implement a well defined contingency-based strategic plan for Y2K compliance. Project Description. The proposed IDA credit would be in the amount of SDR 21.0 million (US$29.0 million equivalent). The proposed project has two main components:  I. Financial Sector Component - The total allocation for this component is US$21.0 million equivalent which will be utilized by the Central Bank of Sri Lanka (CBSL) as follows. I (a) - A Credit Component of US$20.0 million will be used for onlending, through CBSL, to the public banks, some private banks, and selected finance companies for their eligible Y2K related expenditures including the cost of consultants and equipment. These sub-loans will be provided to the banks at a rate similar to their cost of funds, that is the Average Weighted Deposit Rate (AWDR). This is the weighted average of interest paid to depositors by all commercial banks on interest bearing deposits, as calculated and issued monthly by CBSL. The applicable interest rate will be a rolling 6 months AWDR. The maturity of the sub-loans will not be more than 10 years inclusive of a grace period of two years. The sub-loans will finance up to 80 percent of the cost of the banks' Y2K remediation activities for the public banks and up to 60 percent for the private commercial banks and finance companies. The Central Bank will borrow the proceeds allocated for the credit component from the GOSL at the rate of AWDR minus one percent, with a maturity of 10 years inclusive of 2 years grace period. I (b) - A Technical Assistance (TA) Component of US$1.0 million for CBSL's Project Coordinating Unit to conduct its scaled-up Y2K monitoring and supervision of the banks. The project will facilitate the CBSL's regulatory enforcement by providing the banks with necessary technical and financial assistance. II. Government Agencies Component - The TA will finance the cost of required equipment and experts for various technical tasks, and short-term staff training programs in the concerned institutions. II (a) - Project Coordination - A US$0.5 million will be allocated for setting up a Project Coordinating Unit in the Ministry of Finance (MOF). This unit will closely monitor the concerned agencies and provide assistance in planning and implementation of their Y2K remediation activities. II (b) - Y2K Remediation Sub-projects - This component of US$7.5 million will, in part, finance the needs of Y2K activities in critical public sectors such as Inland Revenue Department, Sri Lanka Customs, Census and Statistics Department, the Sri Lanka Insurance Corporation, and other public administration agencies. Project Financing. Financing Plan Local Foreign Total (US$ million) (US$ million) GOSL 0.3 0.2 0.5 IDA 5.3 23.7 29.0 Sponsors 6.5 2.0 8.5 TOTAL PROJECT COST 12.1 25.9 38.0 -2-  Project Implementation. The Y2K project will be managed by the CBSL for the banking sector and by MOF for the public agencies. There will be two Project Coordinating Units (PCUs), one in each institution. PCU of the CBSL - A PCU, headed by an executive director of Central Bank, will be responsible for implementation of the project and for periodic monitoring of the Y2K remediation efforts in the banking sector. The Central Bank's bank supervision and information technology (IT) departments will share the responsibility of managing the Y2K activities. The PCU will consist of a team of Central Bank examiners or supervisors and information technology specialists. Two specialized committees will be established for evaluation, monitoring, and administration of the entire program for the banking sector. A Y2K Sub-Loan Evaluation Committee will be in charge of the technical evaluation of the sub-loan applications, including assessment of eligibility for the sub-loans. A Supervision Committee will be responsible for close monitoring and supervision of the banks' Y2K programs. Both committees should be staffed by people from the IT and banking supervision departments. This PCU will report to the Governor of CBSL and the World Bank on the status of Y2K project on monthly basis. PCU of the MOF. While each individual institution is responsible for its own Y2K program, the MOF needs to take the lead in ensuring that the critical businesses will be Y2K ready. A PCU will be created in the MOF headed by a senior officer and staffed by IT experts. This PCU should closely and regularly liaise with the Y2K coordinators from each institution and will be responsible for reviewing, assessing, and close monitoring the Y2K projects in the concerned agencies. It will report to the Deputy Secretary of the Treasury and the World Bank on monthly basis. Project Sustainability. In the context of Y2K projects, sustainability can be viewed as the business continuity of the institutions after the year 2000. In addition, the Y2K remediation and systems upgrading should be viewed as institutional development, the impact of which will lead to continued and improved business operations in the coming years. Lessons learned from previous Bank experience. No similar project has been financed by the World Bank Group from which lessons can be drawn. Lessons drawn from institutions that have already started on remediation efforts and from many reliable sources on Y2K issues, indicate that effective project management and adoption of a contingency-based remediation plan are key elements for successful Y2K compliance. The management of this project is based, to the extent possible, on international best practices. The project has focused objectives and scope, is demand-driven, and is an emergency assistance program. Other such emergency operations indicate that for managing and implementation of the project, there is a need for sufficient flexibility to react to unforeseen circumstances and for centralized decision- making, planning, and monitoring by high-level authorities. Poverty Category. Not Applicable Environmental Assessment. Category C - 3-  Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Shideh Hadian, TM Telephone (202) 458-2666 Fax: (202) 522-1775 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending January 15, 1999. - 4 -