Turkmenistan - Institution Building Technical Assistance Loan Project

Document of The World Bank Report No: 30854 IMPLEMENTATION COMPLETION REPORT (CPL-37910 SCL-3791A PPFB-P2310) ON A CREDIT IN THE AMOUNT OF US$25 MILLION TO THE GOVERNMENT OF TURKMENISTAN FOR An Institution Building Technical Assistance Loan December 1, 2004  CURRENCY EQUIVALENTS (Exchange Rate Effective October 2004) Currency Unit = Manat 5,200 TM = US$ 1.00 US Official US$ 1 Parallel = 22,000 WEIGHTS AND MEASURES METRIC SYSTEM FISCAL YEAR TURKMENISTAN FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CIS Commonwealth of Independent States EU European Union FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GOT Government of Turkmenistan GDP Gross Domestic Product IAS International Accounting Standards IBTA Institution Building Technical Assistance Loan IDA International Development Association IMF International Monetary Fund QAG Quality Assurance Group SAL Structural Adjustment Loan SME Small and Medium Enterprises SOE State-Owned Enterprise TA Technical AssistanceState-Owned Enterprise USAID United States Agency for International Development Vice President: Shigeo Katsu (ECAVP) Country Director Dennis De Tray (ECC07) Sector Director Cheryl Gray (ECSPE) Sector Manager Helga Muller Task Team Leader/Task Manager Dominique de Roquefeuil  TURKMENISTAN Institution BuildingTechnical Assistance Credit CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 7 5. Major Factors Affecting Implementation and Outcome 13 6. Sustainability 15 7. Bank and Borrower Performance 16 8. Lessons Learned 18 9. Partner Comments 19 10. Additional Information 20 Annex 1. Key Performance Indicators/Log Frame Matrix 21 Annex 2. Project Costs and Financing 22 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 28 Annex 7. List of Supporting Documents 29  Project ID: P034092 Project Name: Technical Assistance Team Leader: Dominique de Roquefeuil TL Unit: ECSPE ICR Type: Core ICR Report Date: December 1, 2004 1. Project Data Name: Technical Assistance L/C/TF Number: CPL-37910; SCL-3791A; PPFB-P2310 Country/Department: TURKMENISTAN Region: Europe and Central Asia Region Sector/subsector: Central government administration (48%); Payment systems, securities clearance and settlement (32%); Oil and gas (9%); Banking (6%); Law and justice (5%) Theme: Regulation and competition policy (P); State enterprise/bank restructuring and privatization (P); Social analysis and monitoring (P); Administrative and civil service reform (P); Legal institutions for a market economy (P) KEY DATES Original Revised/Actual PCD: 10/04/1993 Effective: 07/20/1995 Appraisal: 03/01/1994 MTR: Approval: 09/15/1994 Closing: 06/30/1998 12/31/2003 Borrower/Implementing Agency: REPUBLIC OF TURKMENISTAN/MINISTRY OF FINANCE Other Partners: STAFF Current At Appraisal Vice President: Shigeo Katsu Wilfried Thalwitz Country Director: Dennis de Tray Russell J. Cheetham Sector Manager: Cheryl W. Gray Kadir T. Yurukoglu (Division Chief) Team Leader at ICR: Dominique de Roquefeuil Pervaiz Rashid ICR Primary Author: Richard J. Carroll 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HU Sustainability: HUN Institutional Development Impact: N Bank Performance: U Borrower Performance: HU QAG (if available) ICR Quality at Entry: U Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background Turkmenistan is the fourth largest of the former Soviet Union (FSU) countries, with a land area of half a million square kilometers. Despite its expansiveness, its population is only 4.5 million. Turkmenistan is landlocked and 90 percent of its land area is covered by the Kara Kum desert. Still, Turkmenistan has a rich endowment of natural resources, most notably natural gas and oil, and is one of the world's top producers of natural gas. At the time of the launch of IBTA, as well as today, Turkmenistan was mainly an agricultural country, with cotton accounting for half of production. Turkmenistan had weak social indicators with the highest infant mortality and the lowest life expectancy in the FSU. Though its economic decline after the fall of the Soviet Union was substantial, it was not as severe as in other FSU countries, largely attributable to its energy endowment, but also to the fact that Turkmenistan put off making the reforms needed for the transition to a market economy. Turkmenistan became independent on October 27, 1991 and a member of the World Bank on September 22, 1992. A Country Economic Memorandum (CEM) was issued (May 31, 1994), after which the Institution Building Technical Assistance (IBTA) Loan was launched, the first Bank lending operation in Turkmenistan. There was no IMF operation prior to the IBTA or during IBTA implementation. Prior to the IBTA, the Government took a few tentative steps to move toward a market economy with some price liberalization, land reforms and establishment of its own currency, the Manat. The Manat was originally pegged to the dollar, but was then devalued rapidly during November 1993 to August 1994 when the Manat declined from 2 per dollar to 75 per dollar. There was no Bank-supported adjustment operation associated with the IBTA. Objective The overall objective of the IBTA was to assist Turkmenistan in its transition to a market economy. Specifically, the IBTA was intended to "(i) provide support to the Government in the policy formulation process by helping to overcome the critical human resource gap that is slowing the preparation of a reform program and to develop policy options for implementing and managing reforms including strategies for removing energy sector constraints; and (ii) provide support for institution building and strengthen domestic capacity to ensure that Turkmenistan has the capability to implement and sustain reforms over the medium term." A priority for Turkmenistan following the breakup of the Soviet Union was to create modern institutions of economic management to replace those of a centrally planned economy. The transition would require capacity in privatization of public assets, public finance, financial management, legal, social and energy sectors. The IBTA was designed to support the Government in these areas. - 2 -  IBTA objectives were based on the economic and institution building priorities identified in the CEM, which were of a general nature, typical of first operation TA projects in FSU countries. This general approach was more effective in some FSU countries (e.g., Kyrgyzstan and Kazakhstan), than in others (e.g., Tajikistan). Although the Government had signed off on these objectives, it eventually became clear that it was not committed to taking the steps needed to achieve them. There was no CAS until 1997 and the Bank/Borrower dialog, though active, was relatively limited compared with that of other countries in the region. As with the other FSU countries, the Government had had only limited dealings with the Bank (aside from cooperation on the CEM) at the time of project design and no experience in managing a market economy. The $25 million IBTA was approved as the first Bank project in Turkmenistan under these uncertain conditions. A major education effort was thus an implicit objective of this multi-component institutional development project. The meta goals also were to develop the new Bank/Borrower relationship and, possibly prepare a rehabilitation loan. The achievement of these objectives are evaluated in Section 4.1. 3.2 Revised Objective: The overall objectives as stated above were never officially changed. However, with the cancellation, at the Government's request, of 60 percent ($15 million) of the project financing in 1999 after the Bank's investigation into fraud and corruption allegations, both the Bank and the Government understood that these objectives were no longer fully attainable. In 2000, after misprocurement had been declared and the issues were resolved, the project's objectives were revisited and the project reactivated. With the support of USAID consultants (see Section 3.3), a more focused, less policy-intensive project was designed. It was hoped that this simplification would open a small window of engagement in an area that the Government could support. The 2000 decision was also taken in light of the fact that the Bank could not make new loans because of a negative pledge clause violation (see Section 5.2). Because of these changes, the IBTA could no longer be viewed as a fund for building capacity across institutions for the Government's reform program as there was no reform program. There was essentially only one major component left in the project after 1999, which was the modernization of the treasury system through technical assistance and hardware. There were also smaller activities on pensions, living standards measurement (LSMS- see Section 4.2) and the census. Table 1 provides a timeline of events leading up to and following the disbursement suspension. - 3 -  Table 1: Timeline of Events for the Turkmenistan IBTA Date Event 9/15/1994 Board Approval Mid-1995 IAD review of "kickbacks" on IBTA procurements charge and confirmation thereof (including complicity of a procurement agent who was a computer company associate). 7/20/1995 IBTA Effectiveness, 10 months after Board approval. 7/25/1997 Former IBTA PIU staff sends letter reporting details of misprocurement (by PIU) and misallocation of funds. 8/1997 IAD reopens investigation and pursues allegations of fraud and corruption in the IBTA. 3/1998 Portfolio Review mission lends further credibility to allegations, and disbursements on entire Turkmen portfolio (also including the Urban Transport and Water Supply and Sanitation projects) are suspended. 3/28/1998 Official Suspension Announcement to the Government. 6/30/1998 Original Closing Date. Bank defers decision on closing the project until investigation is complete. 3/1999 Investigation confirms PIU head's complicity in the allegations. The Bank declares misprocurement on three contracts totaling $4.38 million. 3/1999 Government refunds $1,869,125.84 of funds disbursed for misprocured contracts, and replaces PIU directors of all Bank-supported projects. 4/1999 Investigation formally ends and the Bank permanently debars four firms and one individual from future participation in Bank financed contracts. 6/1999 Bank cancels $15 million of the $25 million IBTA at Government request. 8/1999 Bank lifts country-wide suspension on disbursements 11/1999 Government submits refocused IBTA plan to the Bank focusing on treasury modernization, with the assistance of USAID consultants. 12/29/1999 Government requests re-activation of IBTA with reinstatement of cancelled funds and extension to December 31, 2001. Misprocured amounts and remainder of contracts affected by misprocurement are cancelled ($4.38 million). See section 5.4. 6/30/2000 Retroactive extension of the closing date of the IBTA agreed, with MD approval. Bank re-activates the IBTA and restores $9.2 million of the cancelled portion of the IBTA and defines future activities. Remaining component focuses on improving transparency and efficiency of government treasury through computerization. USAID to assist. 12/2001 International consultant in place. Second extension granted to December 31, 2002. 12/2002 Procurement package awarded to lowest bidder. Third extension granted to December 31, 2003. 12/31/2003 The Bank does not grant fourth extension request. Actual Project Closing Date. Sources: Project files, staff interviews. After the procurement improprieties were resolved (see Section 3.5), the suspension of loan disbursements was lifted and most remaining components cancelled, the project focus was on improving the transparency and efficiency of government budgeting through computerization (see April 2000 Project Status Report). With the assistance of USAID, the Government formulated a broad budget modernization agenda and the closing date of the IBTA was extended (initially to December 31, 2001). The Government proposed the amount to be reinstated ($9.2 million) needed to finance activities relevant to the new agenda. Ultimately, the agenda was never fully implemented and the Government used only $5.1 million (55 percent) of the reinstated amount. - 4 -  3.3 Original Components: The components of the IBTA followed a design similar to those in most other Bank-funded TA projects in the newly independent FSU countries. The components and subcomponents of the IBTA were as follows (IBRD allocations in millions in parentheses): 1. Privatization and Private Sector Development ($2.1) Privatization and Private Sector Development ($1.15) Enterprise Reform and Training ($0.95) 2. Financial Sector Reform ($8.83) Banking Supervision and Prudential Regulations (($0.42) Bank Accounting and Auditing Reform ($0.26) Training of Commercial Bank Personnel ($1.35) Payments System ($6.8) 3. Institutional Support and Development ($5.8) Public Investment Project Analysis ($2.44) Legal Reform Component for Private Sector Development ($0.96) Sector Strategies and Feasibility Studies ($2.4) 4. Social Safety Net ($0.96) Living Standards Measurement ($0.39) Pension Administration ($0.57) 5. Energy Sector ($3.76) Institutional Strengthening of Joint Venture Coordination Unit ($1.88) Training ($1.9) 6. Project Implementation ($0.95) In addition, there was a large allocation for price and physical contingencies of $3.58 million (15 percent of total base costs), which gave additional flexibility to the IBTA to fund new activities as needs evolved. This feature was common to TA projects in other FSU countries. There was additional flexibility as the subcomponents were generally defined. The GOT was to contribute an additional $1 million equivalent bringing the total project amount to $26.0 million. Based on the analytical effort of the first CEM, the Bank identified, with Government agreement, the priority areas for TA for a transition to a market economy. As all FSU countries had been part of the highly centralized, socialist regime, it seemed logical that all countries with a similar - 5 -  Soviet background would require the development of essentially the same types of institutions, with some adjustments for the structure of the economy, such as energy resources. As wide differences in country experience has shown, however, the one-size-fits-all approach was not appropriate in some cases, including Turkmenistan (see Section 3.5). 3.4 Revised Components: Following the cancellation of 60 percent of the loan and the completion of the investigation, the Bank cancelled another $4.38 million on account of misprocurement, further reducing the project to $5.51 million. In August 1999, the 15-month suspension of disbursements was lifted, and the IBTA was reactivated. The reactivation also restored $9.2 million for use under the IBTA, previously cancelled to avoid incurring commitment fees. The reactivation defined the following project activities, which were to be completed within one year: