Mongolia - Economic Rehabilitation Credit Project

Document of The World Bank FOR OFICIAL USE ONLY Report No. 13762-MOG IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) DECEMBER 12, 1994 Country Operations Division China and Mongolia Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Tugriks $1.00 = Tug 40 (September 1991) $1.00 = Tug 150 (April 1993) Floating exchange rate: $1.00 = Tug 400 (May 1993) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CIS Commonwealth of Independent States CMEA Council for Mutual Economic Assistance DAF Delivered-at-frontier ERC Economic Rehabilitation Credit FTC Foreign Trade Corporation GDP Gross Domestic Product ICB International Competitive Bidding ICR Implementation Completion Report METS Economic Transition Support Credit MOF Ministry of Finance MTI Ministry of Trade and Industry PIC Petroleum Import Concern TAC Technical Assistance Credit  FOR OFFICIAL USE ONLY CONTENTS Preface ............................................. Evaluation Summary . ..................................... PART I: PROJECT EMPLEMENTATION ASSESSMENT A. Project Objectives . .................................. 1 B. Achievement of Project Objectives ......................... 3 C. Implementation Record and Major Factors Affecting the Project ... .... 5 D. Project Sustainability ................................. 6 E. IDA Performance ................................... 6 F. Borrower Performance ................................ 7 G. Assessment of Outcome ................................ 7 H. Future Operation .......... .......................... 8 I. Key Lessons Learned ................................. 8 PART II STATISTICAL TABLES .......................... 9 Table 1: Summary of Assessment .............. 9 Table 2: Related Bank Loans/Credits ............ 11 Table 3: Project Timetable ............. ................ 12 Table 4: Credit Disbursements: Cumulative Estimated and Actual .... 13 Table 5: Key Indicators for Project Implementation ...... ........ 14 Table 6: Key Indicators for Project Operation ..... .. .......... 14 Table 7: Studies Included in Project ........ .. ............. 15 Table 8a: Project Costs .............. ................. 16 Table 8b: Project Financing ............. ................ 16 Table 9: Economic Costs and Benefits ........ .. ............ 17 Table 10: Status of Legal Covenants ........ .. ............. 18 Table 11: Compliance with Operational Manual Statements .... ...... 19 Table 12: Bank Resources: Staff Inputs ....... .. ............ 20 Table 13: Bank Resources: Missions ........ .. ............. 21 This document has a restricted distribution and may be used by recipients only in the performance of their Xofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEX 1: Aide Memoire (July 27, 1994) ...................... 22 ANNEX 2: Project Review from the Borrower's Perspective .... ....... 26 1. Background .............................. 26 2. IDA Performance .......................... 26 3. Borrower's Performance ...................... 27 4. Relationship between IDA and the Borrower ... ....... 27 5. Description of Execution of Subprojects Financed from Credit Proceeds ....................... 28 6. Conclusions and Lessons Learned ................ 30 MAP: IBRD No. 26450  IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) PREFACE This is the Implementation Completion Report (ICR) for the Economic Rehabilitation Credit in Mongolia for which Credit 2320-MOG in the amount of $30 million/SDR 22.2 million was approved on December 19, 1991 and made effective on February 20, 1992. The credit was closed on June 30, 1994, twelve months beyond the date originally envisaged, June 30, 1993. Final disbursement took place on November 22, 1994. A balance of $139,637/SDR 99,740 was canceled. The ICR was prepared by Natasha Beschorner and Hongjoo Hahm, China and Mongolia Country Operations Division, East Asia and Pacific Region, and reviewed by Mr. Zafer Ecevit, Division Chief, and Mr. Yo Kimura, Project Advisor. The Borrower provided comments which are included as an annex to the ICR. Preparation of this ICR began during the Bank's final supervision/ completion mission on July 19-August 5, 1994. It is based on the Staff Appraisal Report, the Development Credit Agreement, Supervision Reports, correspondence between IDA and the Borrower, internal IDA memoranda and interviews with IDA and Borrower staff involved in project implementation. The Borrower contributed to the preparation of the ICR by commenting on the draft ICR, preparing an evaluation of the project's execution and implementation, and by contributing views reflected in the mission's aide-memoire.   - ii - IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) EVALUATION SUMMARY Project Objectives 1. In 1991, Mongolia experienced enormous supply shocks caused by a combination of internal and external factors. These included worsening terms of trade, disruption in the flow of essential imports from and collapse of traditional export markets in the former Soviet Union and members of the Council for Mutual Economic Assistance (CMEA), and the virtual termination of Soviet aid which had reached 30 percent of GDP during the 1980s. These external factors were responsible for a fall in real GDP of 9.9 percent for 1991. Against this background, the Economic Rehabilitation Credit (ERC), the first Bank Group operation in Mongolia, was designed primarily to finance critical imports for priority sectors of the economy, agriculture, energy (coal mining, petroleum products and power operation) and transport to maintain production in each sector during 1992 and the first six months of 1993. Through economywide effects, the project also aimed to help Mongolia sustain its overall production and employment level. A secondary objective was to familiarize Mongolian institutions with intemational procurement and financial procedures and thereby facilitate diversification of trade. Based on the severe constraints facing the Borrower at the time, the project's scope and timing were appropriate. The implementing agency was the Foreign Trade Department (now the Department of International Trade and Cooperation) in the Ministry of Trade and Industry (MTI) of Mongolia. 2. Special arrangements were made for procurement and disbursement. First, given Mongolia's high proportion (80 percent) of external trade with the Commonwealth of Independent States (CIS), it was agreed, on an exceptional basis, to disburse 25 percent of the Credit proceeds, up to $7 million, against goods and spare parts and equipment obtainable only from the CIS and former CMEA countries, under negotiated direct purchase contracts. The remaining project-financed goods and services would be procured through international competitive bidding (ICB) in accordance with IDA Procurement Guidelines. Second, in order to facilitate disbursements for purchasing directly contracted goods and supplies from the CIS, a $6 million Special Account facility was set up in Midland Bank, UK (see para. 14). Finally, the project required end-users of imported goods to purchase project-financed imports at the equivalent of delivered-at-frontier (DAF)  - 111 - cost in local currency (Tugriks) at the official rate of exchange. These counterpart funds were transferred directly into the government budget (see para. 3). 3. The emergency balance of payments assistance provided by the ERC was complementary to the IMF's Standby Facility and other donor assistance. The ERC was therefore part of a broad package of macroeconomic and institutional development support from the international donor community. The ERC did not include policy conditionalities; policy dialogue was maintained through IDA's continuing economic and sector work. Implementation Experience and Results 4. The ERC was carried out against a background of economic crisis. Nevertheless, it brought about positive results by supplying urgently needed inputs and contributed to the diversification of Mongolia's trade, therefore achieving its primary objectives. Maintaining the supply of critical inputs served to slow the decline in productivity and output in Mongolia's priority sectors, particularly in the case of coal mining (see para. 9). Moreover, the quality of inputs from nontraditional suppliers was considerably improved; this had an important demonstration effect in the sectors concerned. In addition, project implementation resulted in the development of a greatly improved import and procurement management system within MTI (see para. 10). 5. The original credit amount was SDR 22.2 million, equivalent to $30 million. Actual foreign exchange costs, at the time of project completion,were $31.4 million of which $30.17 million were spent on imported goods and $781,600 on consultancy services. Local costs totalled the equivalent of $8.8 million, including $ 7.8 million equivalent for customs duties and sales tax, and $1 million equivalent for internal transport and handling charges. Thus the total project cost was $40.2 million, compared with the original estimate of $37.95 million. The final disbursement was made on November 22, 1994, 17 months after the original closing date of June 30, 1993. The project proceeded on schedule throughout the early stages of the cycle, but procurement delays required extension of the closing date first to December 31, 1993 and finally to June 30, 1994. 6. The principal factors responsible for the delays were (a) problems in securing timely delivery of critical spare parts for agricultural and mining equipment, and bitumen for the transport sector, from direct contract CIS suppliers in the light of political and economic turmoil in the CIS (see para. 13); (b) misunderstandings between the Borrower and CIS suppliers and financial institutions over the concept and operation of the Special Account (see para. 14); and (c) delays in the sale and distribution of certain imports to end-users, attributable to successive devaluations of the Tugrik and to price distortions which affected the ability of end-users to purchase the imported goods at market prices. This in turn delayed the transfer of counterpart funds to the government budget (see para. 15). 7. A great deal of preparatory work was done, particularly on the development of a detailed procurement timetable, given IDA's limited experience in transactions with the CIS and the almost total lack of commercial links between Mongolia and non-CMEA  - iv - states. IDA staff continuity was maintained during preparation, appraisal and supervision. In view of the Borrower's limited experience with procurement procedures, a specialized procurement support and logistics advisor was appointed within MTI. This appointment was highly effective in ensuring adherence to the procurement plan and thereby facilitating rapid disbursement. When implementation delays occurred, IDA demonstrated flexibility both in agreeing to two extensions of the loan closing date and in doubling the original allocation to the Special Account, at the request of the Borrower, to ensure delivery of essential imports. Moreover, IDA did not insist on prompt compliance with the counterpart fund requirement when delays occurred in end-user distribution and counterpart fund transfers. This was considered the most pragmatic approach in the context of a difficult economic transition period, given the overriding objective of emergency assistance and the very real risks of further deterioration in the priority sectors (see para. 19). Cooperation between the Borrower and IDA was good. The quality of communication, particularly the provision of relevant documentation by the Borrower, was satisfactory. Some of the confusion arising over the operation of the Special Account might have been resolved had the Borrower counterparts and CIS suppliers sought clarification at an earlier stage on commitment procedures (see para. 14). Borrower compliance with credit covenants was satisfactory. 8. The project outcome is rated as satisfactory. The ERC achieved its primary objectives and contributed to the development of the various sectors concerned within the overall context of Mongolia's economic stabilization program. Summary of Findings, Future Operations and Key Lessons Learned 9. Four main lessons emerge from IDA's experience with the ERC. First, rapid disbursement is greatly facilitated by the development of a well-prepared procurement timetable and monitoring system and the appointment of procurement advisors prior to negotiations and Board preparation. Regular monitoring allowed schedule modifications to be made where necessary. Second, a project of this type can have valuable long-term benefits if attention is paid in design and implementation to developing the Borrower's institutional capacity. Third, emergency assistance of this nature is most effective when combined with donor coordination to address broader macroeconomic and sectoral concerns. Finally, the objectives of counterpart fund management and emergency assistance are difficult to reconcile in transitional economies where ability to pay is constrained by adjustment processes. In future operations it will be advisable to develop mechanisms for working more closely with end-users and explore the role of financial intermediaries and the private sector in this regard. These lessons have been incorporated into the follow-up Economic Transition Support Credit (METS) (2551-MOG). The METS focuses on the mining and transport sectors, but also places greater emphasis at the outset on policy issues, notably pricing/tariff reforms to improve cash flows for end-users and improved management of public expenditures using already allocated budgetary funds for financing counterpart funds. In addition, the petroleum study financed under the ERC is being used in the preparation of the FY96 Petroleum Transshipment Project.   IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) PROJECT IMPLEMENTATION ASSESSMENT A. PROJEcT OBJECMIVES 1. In 1991, Mongolia experienced enormous supply shocks caused by a combination of internal and external factors. These included: worsening terms of trade, disruption in the flow of essential imports from and collapse of traditional export markets in the countries of the former Soviet Union and members of the Council for Mutual Economic Assistance (CMEA), Mongolia's principal trading partners. The most severe external shock was the virtual termination of Soviet aid which had reached 30 percent of GDP during the 1980s. These factors resulted in a fall in real GDP of 9.9 percent for 1991, 7.6 percent in 1992 and 1.3 percent in 1993. Against this background, and following internal political reforms in the early 1990s, a newly elected coalition government had embarked on a three-year program of economic stabilization and transformation to a market economy in 1991. The principal objectives were private sector development and trade diversification and, ultimately, resumption of modest economic growth to ensure increases in output and improved medium-term living standards. To this end the government introduced significant price, financial sector and fiscal reforms beginning in 1991; at the same time a number of preliminary institutional, legal and regulatory changes were enacted in order to expand the scope of market transactions and private economic activities. 2. The Economic Rehabilitation Credit (ERC), the first Bank Group operation in Mongolia, was designed primarily to provide emergency financing for critical imports and thereby alleviate bottlenecks resulting from foreign exchange shortages in the agriculture, energy (coal mining, petroleum products and electric power generation) and transport sectors. These sectors had been declining continually over the previous 21 months because of the lack of sufficient foreign exchange to purchase spares and replacements. The project financed 100 percent of foreign exchange costs for the import of equipment, materials, spare parts, vehicles and other essential inputs. The ERC was considered a first step in the government's economic reform program to help rehabilitate, maintain and operate priority economic sectors; to check further serious deterioration in the country's economic infrastructure; and help ensure the country's output performance. The project aimed to increase and maintain capacity utilization and hence increase production in each sector during 1992 and the first six months of 1993 and, through economywide effects, help Mongolia sustain its overall production and employment levels.  - 2 - The sectors and items financed were selected on the basis of an overall assessment of critical import requirements, taking into account several qualitative criteria: (a) the economy's structural and sectoral priorities; (b) Mongolia's need to reduce its dependence on the Commonwealth of Independent States (CIS) for goods available elsewhere and thereby diversify its external trade; (c) the need for quick action in vulnerable sectors of the economy; and (d) transportational and logistical constraints. 3. A secondary objective was to enable Mongolian institutions to become familiar with international trade and procurement procedures. The project was designed to introduce procedures related to international competitive bidding and international financial transactions and thereby facilitate diversification of trade. Furthermore, in order to complement the government's program of distribution system reforms, the project required end-users of imported goods to purchase project-financed imports at the equivalent of delivered-at-frontier (DAF) cost in local currency (Tugriks) at the official rate of exchange plus customs duties and local handling charges. It was originally expected that these counterpart funds would be transferred via line ministries to the implementing agency, the Ministry of Trade and Industry and thence to the Ministry of Finance and directly into the budget. The objectives of establishing counterpart funds were to develop financial and fiscal discipline among end-users by increasing their exposure to market mechanisms; and to generate counterpart fund revenues for the government budget. 4. The objectives of emergency balance of payments assistance was clearly stated. The ERC was considered part of an immediate response by the international donor community to the country's short-term economic crisis. The quick disbursing and balance of payments type assistance complemented the IMF's Standby Facility and the cash and commodity assistance committed by other donors: the Asian Development Bank (ADB), Germany, Japan, Korea and the United States. The ERC therefore supported a broader package of macroeconomic and sectoral development, financial objectives and institutional capacity-building. It did not include policy conditionalities; policy dialogue was maintained through IDA's continuing economic and sector work. Based on the severe constraints facing the Borrower at the time, the project's scope and timing were appropriate. 5. The implementing agency in Mongolia was the Foreign Trade Department (now known as the Department of International Trade and Cooperation) in the Ministry of Trade and Industry (MTI). Its principal concerns were Mongolia's lack of experience with international procurement or banking practices and lack of familiarity with IDA procedures. Moreover, MTI had very limited experience in convertible currency trade with non-CMEA countries. Its other major concern was logistical and transport difficulties for the delivery of imports. Given Mongolia's high proportion (80 percent) of external trade with and technological dependence on the CIS, it was agreed, on an exceptional basis, to disburse 25 percent of Credit proceeds, up to $7 million, against goods and spare parts and equipment obtainable only from the CIS and the former CMEA countries, under negotiated direct purchase contracts. The remaining project-financed goods and services would be procured through international competitive bidding (ICB) in accordance with IDA Procurement Guidelines.  - 3 - 6. The project did not involve any unusual risks. It consisted of two components: (a) imports of equipment, materials, spare parts and other essential items; and (b) provision of consultant services to facilitate procurement. The main risks to the project were that procurement problems and transport bottlenecks would seriously delay or prevent delivery of the critical imports; these problems were compounded by difficulties experienced by suppliers in the CIS, owing to general political and economic turmoil in the region. These risks were anticipated, however, and mitigated by the development of a detailed procurement timetable prior to negotiations. In view of the Borrower's limited experience with procurement procedures, it was agreed to appoint a specialized procurement support and logistics advisor to be based in Mongolia and assist MTI in project implementation. B. ACIEVEMENT OF PROJECT OBJECTIVES 7. The ERC was carried out against a background of economic crisis. First, market reforms began to reveal the inefficiency of state enterprises and concomitant price distortions. Second, the abandonment of central planning left the administration with relatively undeveloped instruments of public management. Growth performance was hindered in the absence of rapid improvements in institutional or physical infrastructure. Finally, the Mongolian Tugrik was devalued three times during the implementation period (for official transactions: from $1 =Tug 40 in September 1991 to $1 =Tug 150 in April 1993 and to a floating exchange rate of $1 =Tug 400 in May 1993). 8. Macroeconomic and Sector Policy Improvements. The ERC was not designed to address policy issues but as emergency assistance to support a broader program of reforms. The ERC did facilitate diversification of Mongolia's trade. A recent assessment of Mongolia's direction of trade reveals increased diversification. In 1990, over 90 percent of Mongolia's imports and exports were intra-CMEA. In 1993, Mongolia conducted less than 60 percent of its trade with these countries. Trade links with China, Japan and Western Europe have increased substantially. Furthermore, Mongolia has begun to contract with traditional CMEA trading partners on convertible currency terms. Maintaining the supply of critical inputs served to slow the decline in productivity and output in Mongolia's priority sectors. Moreover, the quality of inputs, particularly from nontraditional suppliers, was considerably improved; this had an important demonstration effect in the sectors concerned. 9. Physical Objectives. In the agricultural sector, the ERC helped to provide the necessary funds and inputs for spare parts, fertilizers, veterinary medicines and other chemicals. All the imported fertilizers were used for growing potatoes and vegetables in the 1992 growing season, while the agricultural equipment was used for wheat production. In the electricity sector, the project provided spare and replacement parts, diesel generators and electric motors. The spare parts and equipment procured under the credit were part of a broader program of assistance from the donor community, including the USA, Japan, Germany and ADB. In the coal sector, pivotal for future economic growth, spare and replacement parts, dump trucks, bulldozers and explosives were supplied. The Nalaich, Sharyngol and Baganuur coal mines welcomed the opportunity to diversify their sources  - 4 - of key equipment. Although the level of coal production has yet to return to former levels, the critical decline in overburden removal was halted through the use of heavy earth- moving equipment procured under the project. Difficulties were identified in financing spare parts for the coal mine equipment, after consumption of the spares included with the original delivery. This issue has since been resolved under the Economic Transition Support Credit (2551-MOG) by the provision of consignment spare parts stocks. In the petroleum sector, the project financed and successfully delivered specialized lubricants for industry, agriculture, transport and mining. The end-users were pleased with the high quality of the lubricants (i.e., multi-viscosity characteristics, detergent properties, long life, high breakdown temperatures) compared with those which they had used previously. In the transport sector, the project helped to provide urgently needed tires and batteries for ambulances and buses particularly in the provinces (aimag), bitumen and spare parts for road maintenance equipment. The end-users for the tires and batteries were mainly small transport operators and farmers. Bitumen supplies were used primarily for urgently needed road maintenance both in Ulaanbaatar and on national highways. 10. Institutional Development. The ERC did not seek to address institutional development issues directly. IDA focused on strengthening institutional capacity for policy implementation through the parallel Technical Assistance Credit (2321-MOG) which became effective in March 1992. The project did, however, contribute substantially towards developing institutional capacity within MTI for international procurement procedures and practices. The creation of a project implementation unit within MTI with clearly defined responsibilities was the first step in developing this capacity. This resulted, ultimately in the creation of a greatly improved import management system and logistical capacity. 11. Counterpart Funds. The transfer of a substantial portion of counterpart funds from end-users to the Ministry of Finance (MOF), as agreed at the time of negotiations, was carried out by the time of project completion, according to the records made available to IDA. Yet these transfers were not adequately monitored or enforced. Some misconceptions arose and delays occurred in developing coordination between the relevant line ministries and MOF. It was originally envisaged that the line ministries would have sufficient budget allocations to ensure the transfer of local currency equivalents to cover the cost of imported items. However, the counterpart fund procedures were adversely affected by internal institutional reforms and by external factors, notably the devaluation of the Tugrik. 12. Studies. A series of policy-oriented studies were originally to be done under the ERC. These were (a) an energy assessment; (b) a coal production costs and pricing study; (c) a petroleum demand, supply and procurement study; (d) an agricultural pricing and marketing study; and (e) an analysis of the factors affecting reorientation of trade. It was agreed during implementation that these would be more relevant to the objectives of the Technical Assistance Credit (TAC) (2321-MOG). Only the petroleum study was carried out under the ERC.  -5- C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFEcTING THE PRojECr 13. Factors not subject to government control The final disbursement took place on November 22, 1994, 17 months after the original closing date of June 30, 1993. The principal factor delaying disbursement was the problem in securing timely delivery of critical spare parts for agricultural and mining equipment, and bitumen for the transport sector, from certain direct contract suppliers in the CIS. These delays required the Mongolian government to request two closing date extensions, the first to December 31, 1993 and the final extension to June 30, 1994. Most of these delays were beyond the control of MTI which took all reasonable steps to speed up deliveries, including drawing up new contracts with more responsive suppliers. In the case of bitumen, the contract with the original Russian supplier could not be completed because the supplier was unable to ship and receive materials in bulk or in liquid form during the winter months. This required MTI to find a new Ukrainian supplier at very short notice; the contract had to be completed in several stages owing to unavailability of suitable shipping containers. 14. In order to facilitate disbursements for purchasing imports from the CIS a $3 million Special Account facility was set up in the State Bank of Mongolia International (SBI). It was subsequently transferred to Midland Bank (UK) at the request of the Borrower. The Special Account was established to enable the purchase of goods directly contracted from the CIS (at that time, the Soviet Union was not a member of the Bank) and former CMEA countries. The government was unable to prefinance these goods from its own resources. The Special Account was designed to operate as a revolving fund from which the Borrower would submit replenishment applications when required. However, the suppliers concerned insisted on full payment and/or commitments through letters of credit before goods could be shipped. Moreover, neither IDA nor the Borrower had much expertise in financial transactions with the CIS. The concept of a revolving fund was not entirely clear to Mongolian and Russian banks which were unfamiliar with IDA procedures and processing letters of credit. After the Special Account was opened, $3 million were immediately committed through letters of credit, although it took up to six to nine months before the relevant shipments were made. Normal replenishment of the account was therefore not possible until after deliveries had been made and drawdown implemented against letters of credit. This led to delays in placing orders and anticipated deliveries. In the circumstances, IDA agreed to a supplementary $3 million replenishment of the Special Account in May 1992. This was also immediately committed. In sum, $6 million were fully committed by late 1992 owing to precommitment requirements of direct contract suppliers; disbursement took over a year to complete. The Special Account was thus never used as a revolving fund as originally envisaged. 15. Factors Subject to Govermnent Control. The principal problem of project implementation in-country was the sale and distribution of certain key imports to end-users. This can be attributable to (a) expectational lags- resulting from successive devaluations of the Tugrik and price differentials between the newly imported goods, which had to be purchased at market prices, and formerly subsidized imports from the former Soviet Union or CMEA countries; and (b) confusion over institutional responsibility. Price ceilings prevailed during the transitional phase in the economy, thus hindering the ability of end-  - 6 - users to purchase imported goods at market prices. Devaluation embattled negotiations with end-users further. Previously, line ministries had been responsible for import purchasing and distribution to end-users. Under the counterpart fund requirement, line ministries were to transfer counterpart funds to the Ministry of Finance. However some end-users did not feel an obligation to pay for the imported goods, on the assumption that this was the responsibility of line ministries as had historically been the case. In addition, the quasi-autonomous Foreign Trade Corporations (FTCs) within the relevant line ministries (Erchimpex, Nuursimpex, Autoimport, State Road Corporation, Agricultural Trade and Import Corporation and the Petroleum Import Corporation) responsible for receipt, sales and distribution of goods were in the process of being restructured. In some cases there was some confusion between the mandates of the FTCs and the emerging private sector. It was therefore very difficult for MTI to monitor and follow up on the distribution of goods; ultimately it was not practical for MTI to act as a financial intermediary between the line ministries and MOF. 16. Most distribution and sales difficulties occurred in the transport and agricultural sectors where the end-users were highly dispersed. End-users in the energy and mining sectors were relatively monolithic. In the transport sector, initial sales of tires, particularly for cars and dumpsters, were slow. In the agricultural sector, the level of sales of spare parts, equipment, veterinary medicine and fertilizers was initially very low because of price distortions. Moreover, formerly collective state farms were in the process of being privatized. The new smaller agricultural units had more limited financial ability and the issue of producer prices has not yet been resolved. It was reported during supervision that some agricultural and transport imports had been sold to the private sector, but this was believed to be minimal. In the mining sector, some end-users delayed payment, trying to negotiate deliveries on the basis of earlier exchange rates which caused delays in distribution. D. PRoJiEcT SusTALNABuirY 17. The issue of sustainability is marginally relevant to an emergency balance of payments credit of this type. However, the development of institutional capacity within MTI contributed substantially to facilitating implementation of subsequent operations. MTI acquired valuable experience in logistical planning, procurement procedures and commercial practices which greatly enhanced their ability to manage public sector imports. 18. It is anticipated that future import requirements will increasingly be met through the private sector, particularly in the case of petroleum, vehicle spare parts and agricultural inputs. A significant volume of imports are still donor-financed at this stage of Mongolia's economic transition. E. IDA PERFORMANCE 19. This was IDA's first project in Mongolia. A Country Economic Memorandum, Mongolia: Towards a Market Economy, was prepared in 1992 and provided a detailed analysis of the country's proposed economic reform program and  - 7 - development prospects. A great deal of preparatory work was done, particularly on the development of a detailed procurement timetable, given IDA's limited experience in transactions with the CIS and the almost total lack of commercial links between Mongolia and non-CMEA states. The appointment of a locally based procurement advisor, in collaboration with MTI, was highly effective in ensuring adherence to the procurement plan and thereby facilitating rapid disbursement. 20. The implementation of the ERC was supervised by frequent IDA missions. When procurement delays were experienced, IDA demonstrated flexibility both in agreeing to two extensions of the loan closing date and in doubling the original allocation to the Special Account at the request of the Borrower to ensure delivery of essential imports. Moreover, IDA did not insist on prompt compliance with the counterpart fund requirement when delays occurred in end-user distribution and counterpart fund transfers. IDA was compelled to make a strategic decision: either to insist on counterpart fund requirements, at the risk of spoilage of some of the critical imports such as fertilizers, or to place overriding emphasis on quick disbursement. The latter option was chosen. This was considered the most pragmatic approach in the context of a difficult economic transition period, given the fundamental objective of emergency assistance and the very real risks of further deterioration in the priority sectors. F. BoRRowER PERFORMANCE 21. The Government established a dedicated project implementation unit within the Foreign Trade Department (now Department of International Trade and Cooperation) of MTI to work with IDA in the preparation and implementation of the ERC. Cooperation between the Borrower and IDA was good, particularly during the development of the procurement plan. The performance of MTI has been very effective. MTI set up an import procurement management system to monitor shipments, contracts and arrivals of imports including those financed by other donors. Master Status sheets on imports and disbursements were diligently kept up to date by MTI and submitted on a regular basis as agreed. In addition MTI's project coordinator and key project staff remained in place until project completion. The quality of communication, particularly the provision of relevant data and documentation by the Borrower was therefore satisfactory. However, some of the confusion arising over the operation of the Special Account might have been resolved had the Borrower counterparts sought clarification at an earlier stage on how to address precommitment demands or operate a revolving fund. In general, delays in implementation were primarily attributable to external sources, and the Borrower performed well in difficult circumstances. 22. Borrower compliance with credit covenants was satisfactory. Nevertheless some delays occurred in compliance with section 2.06 conceming repayment of commission and service charges, requiring IDA to issue waming telexes in November 1992, December 1993 and June 1994.  - 8 - G. ASSESSMENT OF OUTCOME 23. The project outcome is rated as satisfactory. The ERC mitigated the decline in the growth rate, facilitated trade diversification and provided important institutional support, especially to MTI. As a result, it has made a significant contribution towards Mongolia's economic stabilization program and the transition to a market economy. H. FUTURE OPERATION 24. The ERC was designed as short-term emergency balance of payments assistance. There are no provisions for future operation. However, two follow-up operations have been launched which consolidate the ERC's achievements. The Mongolia Economic Transition Support Credit (2551-MOG) focuses on the mining and transport sectors, but also places greater emphasis at the outset on policy issues, notably pricing/ tariff reforms to improve cash flows for end-users and improved management of public expenditures using already allocated budgetary funds for financing counterpart funds. The recommendations of the petroleum study have been incorporated into the Petroleum Transshipment Project (FY96) which is currently under preparation. I. KEY LESSONS LEARNED 25. Four main lessons emerge from IDA's experience with the ERC. First, rapid disbursement is greatly facilitated by the development of a well-prepared procurement timetable and monitoring system and the appointment of procurement advisors prior to negotiations and Board preparation. Regular monitoring allowed schedule modifications to be made where necessary. Second, a project of this type can have valuable long-term benefits if attention is paid in design and implementation to developing institutional capacity. Third, emergency assistance of this nature is most effective when combined with donor coordination to address broader macroeconomic and sectoral concerns. Finally, the objectives of counterpart fund management and emergency assistance are difficult to reconcile in transitional economies where ability to pay is constrained by adjustment processes. In future operations, it will be advisable to develop mechanisms for working more closely with end-users and explore the role of financial intermediaries and the private sector in this regard.  - 9 - STATISTICAL TABLES Table 1: SUMMARY OF ASSESSMENTS Achievement of Objectives Not Substantial Partial Negligible applicable Macroeconomic policies X Sector policies x Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concerns X Other social objectives X Environmental objectives X Public sector management X Private sector development X Project Sustainability Likely Unlikely Uncertain x Bank Performance Highly satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X  - 10 - Borrower Performance Highly satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance X Assessment of Outcome Highly satisfactory Satisfactory Unsatisfactory Highly unsatisfactory x  - 11 - Table 2: RELATED BANK LoANs/CREDlTs Year of Loan/credit title Purpose approval Status Technical Assistance Credit (a) To help Mongolia develop institu- FY92 Lending 2321-MOG tional capacity for macroeconomic man- agement in a market economy; (b) to help define strategies for sectors/subsec- tors key to Mongolia's economic devel- opment. Economic Transition Support Credit (a) To finance critical imports and tech- FY94 Lending 2551-MOG nical assistance to maintain and develop the mining and transport sectors in Mongolia; (b) to help the ongoing eco- nomic stabilization and adjustment pro- gram and contribute to resumption of growth.  - 12 - Table 3: PROJEcr TIMETABLE Steps in project cycle Date planned Date actual/latest estimate Identification 07/29/91 07/29/91 Preparation 08/12/91 08/12/91 Appraisal 10/05/91 10/05/91 Negotiations 11/15/91 11/15/91 Board presentation 12/19/91 12/19/91 Signing 12/27/91 12/27/91 Effectiveness 01/20/92 02/20/92 Project Completion 12/30/93 09/15/94 Credit closing 06/30/93 06/30/94  - 13 - Table 4: CREDrr DISBuRSEmENTS: CUMULATIVE ESTIMATED AND Ac-ruAL FY92 FY93 FY94 FY95 Appraisal estimate 15.0 30.0 0 0 Actual 15.2 26.9 30.1 31.4 Actual as % of estimate 101.3 89.6 - - Date of final disbursement: 11/22/94  - 14 - Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION (Not Applicable) Table 6: KEY INDICATORS FOR PROJECT OPERATION (Not Applicable)  - 15 - Table 7: STUDIES INCLUDED IN PROJECT Purpose as defined at Status Impact of study Study appraisaUredefined Energy assess- To investigate the pricing, energy Carried out by ESMAP, Bank ment efficiency and environmental issues ESW which define the power system's long- term investment priorities. Coal pricing Coal production costs and pricing Carried out under METS study Petroleum prod- Demand, supply and procurement Carried out under ERC Transshipment facility ucts study to support development of at Zamyn-Uud identi- strategy to meet increasing demand fied. Project prepara- when economic growth resumes tion underway Agricultural Action program for privatization of Bank ESW pricing and mar- agricultural input supply and distribu- keting tion; agricultural product marketing. Reorientation of To examine access to foreign Dropped trade exchange and trade finance, customs inspection, valuation and duty coUec- tion procedures for imports, market reconnaissance, quality control and marketing arrangements for export promotion; how to make foreign trade organizations responsive to market conditions.  - 16 - Table 8a: PROJECT COSTS Item Appraisal estimate ($ M) Actual/latest ($ M) Local Foreign Total Local Foreign Total Electric power production 1.00 3.50 4.50 1.10 4.10 5.20 Coal mining 1.90 7.40 9.30 2.80 10.70 13.50 Transport 1.30 5.00 6.30 1.50 5.80 7.30 Agriculture 1.70 6.50 8.20 1.80 7.00 8.80 Petroleum products 0.55 2.00 2.55 0.60 2.50 3.20 Total critical imports 6.45 24.40 30.85 7.80 30.17 37.97 Consultant services - 0.30 0.30 0 0.78 0.78 Contingencies 1.50 5.30 6.80 1.00 0.45 1.45 Total 7.95 30.00 37.95 8,80 31.40 40.20 Table 8b: PRoJEcT FINANCING Source Appraisal estimate ($ M) Actual ($ M) Local Foreign Total Local Foreign Total IDA 0 30.0 30.0 0 31.40 31.40 Domestic contribution 7.95 0 7.95 8.8 0 8.8 Total 7 953 37.95 8.8 31.40 40.20  - 17 - Table 9: ECONOMIC COSTS AND BENEFTs (Not Applicable)  Table 10: STATUS OF LEGAL COVENANTS Agreement Section Covenant Present Original Revised Description of covenant Comments type status fulfillment fulfillment date date Develop- 2.03 5 NC 12/27/91 Closing date of June 30, 1993 Closing date extended to ment Credit stipulated December 31, 1993 then to June Agreement 30, 1994 because of procurement delays from CIS suppliers 2.06 5 CD 12/27/91 Semi-annual repayment of com- Repayment delays occurred in mitment and service charges on November 1992, December 1993 May 1 and November 1 and June 1994. Warning telexes issued by IDA. 3.03 5 C 12/27/91 Maintenance of key project staff Procurement Advisor still in place 00 including coordinator and procure- as of loan closing ment advisor 4.01 9 C 12/27/91 Maintenance of adequate records and accounts Schedule 4 3. 13/a CP 12/27/91 Special Account withdrawals Special and Credit Accounts used of DCA interchangeably owing to misun- derstandings over procedures with CIS suppliers and financial institu- tions /a Special Account Note: The selection of legal covenants was appropriate. The only problems which occurred concerned operation of the Special Account.  - 19 - Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS (Not Applicable)  - 20 - Table 12: BANK RESOuRcEs: STAFF INPUTS Stage of project cycle Planned Revised Actual Weeks $ Weeks $ Weeks $ Through appraisal 120.4 45.2 33.8 - 18.9 - Appraisal-board - - 9.8 9.5 15.6 - Board-effectiveness - - - - - Supervision 12.0 9.9 12.0 9.9 23.9 2.6 Completion - - 10.0 - 13.9 16.8 Total 132.4 55.1 65.6 19.4 72.3 19.4  Table 13: BANK RESOURCES: MISSIONS Stage of Number of Days Specialized staff Types project cycle Month/year persons in field skills represented Performance rating of problems Implementation Development status objectives Through appraisal 08/91 4 12 Economics, 1 10/91 5 10 Engineering/ Procurement Appraisal through Board approval I Board approval through effectiveness 1 Supervision 03/92 2 10 Economics, 1 NR 1/0 11/92 2 10 Engineering/ (Other= Special 04/93 2 6 Procurement Account Operation; Procurement) Completion 06/94 3 5 Economics, 1 NR Engineering/ Procurement  - 22 - ANNEX 1 IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) AIDE MEMOIRE July 27, 1994 1. An IDA mission, comprising Mr. Hongjoo Hahm (mission leader), Ms. Natasha Beschorner and Mr. J. Chanmugam, held meetings with representatives from the Ministries of Fuel, Energy, Geology and Mines; Agriculture; Infrastructure (Transport); and the Petroleum Import Concern to discuss the utilization of proceeds from the Economic Rehabilitation Credit (2320-MOG). The mission would like to thank the Ministry of Trade and Industry (MTI) for their assistance during this mission and in preparing the Implementation Completion Report (ICR). At all these meetings, staff from MTI (Ms. Narangua, Ms. Oyunchimeg, Mr. McKie and others) attended and participated in the discussions. The following is a summary of the principal findings and conclusions of the mission and has been discussed with the Ministry of Trade and Industry in its capacity as implementing agency. 2. The original credit amount was SDR 22.2 million, equivalent to $30 million at the time of IDA Board approval. The actual foreign exchange cost, at closing of the credit was $31.4 million of which $30.17 million were spent on imported goods and $781,600 on consultancy services. Custom duties on imported goods and sales tax amounted to $7.8 million equivalent, and the cost of intemal transport and handling amounted to $1.0 million equivalent, for a total of $8.8 million equivalent in local costs. Thus the total project cost was $40.2 million, compared with the original estimate of $37.95 million (as described in para. 3.1 in the Staff Appraisal Report). 3. The project progressed according to schedule at first, but delays in procurement of items contracted with suppliers in CIS countries necessitated extensions in the closing date by 12 months from the original closing date of June 30, 1993. These delays were largely due to the inexperience of traditional CIS suppliers in carrying out intemationally accepted procedures for financial transactions. Procurement using ICB procedures was undertaken expeditiously without any problem. In general, project implementation was satisfactory, providing valuable learning experience for all concerned. 4. The counterpart Tugrikfunds generated from the sale of imported goods to end-users were transferred to the Ministry of Finance (MOF). At the time of credit  - 23 - ANNEX 1 closing, a substantial portion of the counterpart funds were transferred, leaving a balance of $2.32 million still to be collected due to lack of sales. These sales are mostly to small agricultural and transport end-users, who, following the privatization of state farms and truck operations, lack the financial means to pay promptly. During the implementation period, the Tugrik was devalued from $1=Tug 40 to $1=Tug 150 to $1=Tug 400, making it more difficult for end-users to pay at market prices. 5. A total of $4.08 million was spent on procuring spare parts and equipment for the power sector, all by direct contracts from the CIS. The spare parts and equipment procured under the credit were part of a broader program of assistance from the donor community, including the USA, Japan, Germany and ADB. Except for a small amount of goods still in transit, all imports were sold to end-users by the responsible foreign trade corporation, ERCHIM IMPEX, who also collected the Tugrik counterpart funds for MOF. There were some problems and delays in collecting money from end-user power stations as electricity prices were highly subsidized and their customers were not paying in time. 6. A total of $10.7 million was used to import equipment and spares for the Nalaich, Sharyngol and Baganuur coal mines. All imported items were received and handed over to the mines by NUURS, the responsible foreign trade corporation. However, only a portion of the equivalent Tugrik counterpart funds has been paid to NUURS for transfer to MOF. The mines were not paid by their principal customers-the power generating units-and consequently the mines lacked the resources to pay the NUURS for the imported goods; $6.2 million was used for ICB procurement of dump trucks and bulldozers, while the balance was used for procurement by direct contracts from traditional Russian suppliers. The mines welcomed the opportunity to diversify their sources of procurement of key equipment. There was some apprehension about the adequacy of technical sales support provided by the supplier of dump trucks (Terex). 7. The lubricating oils imported under the ERC amounted to $2.5 million and were procured under ICB. All the contracted items were received, distributed and sold by the Petroleum Import Concern (PIC). The entire Tugrik equivalent counterpart funds were collected by PIC and handed over to MOF. The end-users were pleased with the high quality of the lubricants (i.e., multi-viscosity characteristics, detergent properties, long life, high breakdown temperatures) compared with the Russian oils they had used before. A petroleum logistics and supply study was commissioned by PIC under the ERC. The study, costing $373,000, provided engineering plans for a petroleum products transshipment facility at the Mongolia-China border. 8. The total amount of contracts for the transportation sector was $5.8 million, of which $800,000 was for tires and batteries and $5.0 million for roads. ICB procurement, amounting to $3.8 million was used to purchase tires and batteries, and $1.1 million for direct purchase of tires and batteries for specialized vehicles (e.g. trolley buses). AUTOIMPORT, the responsible foreign trade corporation, undertook the purchase, delivery and sales of the imported items. The end-users for the tires and batteries were mainly small transport operators and farmers. AUTOIMPORT was unable to sell about $1 million of tires as of closing, but expects to complete all sales by the end  - 24 - ANNEX 1 of the 1994 harvest season and transfer the Tugrik counterpart funds to MOF. The ERC experience with commodities such as tires and batteries suggests that such imports may best be left to commercial/business entities rather than state organizations like AUTOIMPORT. 9. Imports of bitumen and spares for road equipment for the road sector amounted to $860,000, all procured through direct contracts from traditional Russian suppliers. The procurement of bitumen posed significant problems due to the limited delivery season (April to September) and a lack of special heated rail wagons. Furthermore, due to problems with the supplier, a part of the original contract was cancelled, and a new contract was made with a different supplier; 7,500 tons of bitumen have been received and the final 2,500 tons are in transit for delivery by August. (One reason for the extension in the closing date referred to in para. 3 was due to the bitumen procurement problem.) All counterpart Tugrik funds for imported items have been received and transferred to MOF. 10. Imports to the agriculture sector amounted to $6.95 million, of which $4.68 million was procured through ICB. Among the ICB items procured were 10,000 tons of N, P and K fertilizers, and various quantities of herbicides, pesticides and veterinary medicines. The balance was used for direct contract purchases of spare parts for agricultural equipment from Russia and Poland. All the imported fertilizers were used for growing potatoes and vegetables in the 1992 growing season, while the agricultural equipment were used for wheat production. Almost all the directly contracted spare parts were sold promptly, but about $15,000 in agricultural equipment was not sold by closing date. It is expected to be sold by the end of the 1994 growing season. Of the $1.19 million in imported veterinary medicines, about $748,000 was sold by closing date. The high costs of the veterinary medicine for herdsmen have been prohibitive. In this regard, there is concern about the shelf life and potency of the stored veterinary medicine which were purchased in 1992. AGROIMPEX was the foreign trade corporation responsible for the delivery of goods and collection of sales proceeds. However, only a portion of the Tugrik counterpart funds from the agriculture sector have been collected and transferred to MOF. The end-users, predominantly small farmers and herdsmen, found it difficult to pay in full for the purchased items. The Government has allowed purchases by end-users at an exchange rate of $1 =Tug 200 to ensure delivery of the imported goods in time for the harvest season. 11. The Ministry of Trade and Industry fulfilled all its responsibilities under the ERC. The creation of a project implementation unit within MTI greatly contributed to the quick disbursement of the credit. Further, the ERC experience provided MTI with experience in logistical planning, procurement procedures and commercial practices that facilitated their ability to manage public sector imports. Ulaanbaatar July 27, 1994  - 25 - ANNEX 2 IMPLEMENTATION COMPLETION REPORT MONGOLIA ECONOMIC REHABILITATION CREDIT (2320-MOG) PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 1. BACKGROUND (a) Signature of Credit C 2320 MOG The Economic Rehabilitation Project - C 2320 MOG - was initiated at a time of extreme economic crisis following the collapse of the CMEA trading system and the break up of the USSR, and when Mongolia had effectively no foreign reserves. The agreement was signed on Dec 27, 1991 and became effective on 20 Feb., 1992. (b) Amount and Currency The credit C 2320 MOG was approved in the amount of SDR 22,200,000 equivalent to US $30,000,000. 2. IDA PERFORMANCE a. IDA performance during development & implementation of the project IDA recognized from the outset that there was a lack of knowledge and experience of dealing with international procurement and international banking procedures. Direct assistance was given in the preparation of specifications and bidding documents prior to the appointment of a specialist procurement adviser. In country training in the procedures and practices of IDA bidding procedures and disbursement regulations was given. b. Lessons learned (1) In any similar future project, the assembly and training of a procurement team should have first priority. It is not enough to "learn as you go along" especially where there is a language barrier.  - 26 - ANNEX 2 (2) That there are many instances where LIB procedures are more applicable than full ICB procedures, both with regard to speed and the ability to deal with principals rather than middlemen. (3) Provision should always be made for task specific training and experience in a developed economy. There is always difficulty in adjusting between changes of economic environment when only a mental imperative to change exists. 3. BORROWER's PERFORMANCE a. Project Implementation and objectives As there was harmony from the beginning between IDA and the Borrower, and the special case of direct contract supply from sole sources in the former USSR had been allowed for, the project went ahead smoothly. Virtually all contracts were let and funds committed during the first half of 1993. The single problem area was the procurement of bitumen. A major difficulty was the realization of counterpart funds during this period of economic trauma. It is fair to say that if the beneficiaries had the tugrik funds they would not have used the IDA methods at all but would have made direct contracts for their needs. Despite the difficulties created by this requirement the appropriate amounts (incorporating the various changes in exchange rates) were largely collected. Some sectors have stocks as yet unutilized - albeit mostly as a result of exchange fluctuations pushing the tugrik equivalent prices beyond the capability of the beneficiary to pay - but authority has been given to use, an exchange rate of 1:200 (current rate is 1:400) in order to get the goods into-use. The project has highlighted the role played in procurement and distribution by the Foreign Trade Corporation in the various sectors and consideration of their place is in hand vis a vis the role of the private sector. For example, the Petroleum Import Concern is now in a position to deal directly internationally and to consider commercial developments such as franchising some of the services now provided from its own resources. Further study of other FTC is in hand to enable policy to be developed. Although there was an original intention for the MTI to act as a collecting agency for counterpart funds, this was not in fact practicable as MTI would have had to warehouse and account for goods prior and subsequent to their uptake by the beneficiaries. Direct transaction between FTC beneficiary agencies and the MOF have in fact been the method of bringing the counterpart funds into the Treasury. 4. RELATIONSHIP between IDA and THE BORROWER Relationships were good. Both IDA and the Borrower maintained the same team throughout the project, and mutual understanding was highly developed. Negotiation  - 27 - ANNEX 2 was possible on any issue. The peculiar to Mongolia problems were very well understood and appreciated by IDA. Physical communications in the early stages were not good and this led sometimes to worries and confusion. The international courier service was inefficient- sometimes taking 25-30 days to deliver documents either way-and the telephone/telex lines were routed through the ancient Moscow exchange. Provision should always be made for what is now commonplace - satellite communication - which allows for instant resolution of problems. It appears that IDA can not work from facsimile transmissions of documents etc, although telex transmissions can be accepted. In view of the excessive cost and time of forwarding original documents provision should be made to work from facsimile documents, to be authenticated later during supervisory missions. 5. DESCRIPTION OF EXECUTION OF SUBPROJECTS FINANCED FROM CREDIT PROCEEDS a. Energy Sector As described earlier, provision was made for direct contracting to sole suppliers in the former USSR. This allowed speedy provision of parts and material. $3,500,000 were originally allocated to this subproject ($1,100,000 ICB $2,400,000 direct contract) $4,028,500 were eventually utilized. (It should be noted that the IDA financing was part of a sectoral financing and support plan from various donor agencies). b. Coal Mining Sector Where direct contracting was undertaken the only problems encountered were the unfamiliarity of the ex USSR banking system with the provisions of international banking. ICB procurement, unfortunately, resulted in dump trucks being provided which were different from the existing equipment (whose manufacturer tendered but was not competitive in price). Despite the apparent advantages of ICB, IDA procedures should allow more weight to be given to buyers preference. $7,400,000 were originally allocated to this sub project ($5,000,000 ICB $2,400,000 direct contract). $10,401,800 were eventually utilized. c. Transport Sector The support to this sector, which includes Roads, was in the main in the form of tyres (truck, bus, car and utility, dump truck) batteries; and Bitumen and spare parts for road maintenance equipment. The procurement of bitumen was the major  - 28 - ANNEX 2 headache, and it was largely because of delays in supply that extensions to the project life had to be requested. $5,000,000 were originally allocated to this sub project. ($3,500,000 ICB, $1,500,000 direct contract) $5,214,300 were ultimately utilized. d. Agriculture Sector The support to this section covered fertilizers, medicines for livestock agriculture equipment, spare parts, herbicides and pesticides. To some extent this was the least satisfactory element in that, because of the leap in exchange rates, the end-users initially were unable to purchase fertilizers, herbicides and pesticides. The issue was partially resolved by selling on credit, but even so this sector accounts for much of the unrealized counterpart funds. There was a clear lack of commercial awareness on the part of the FTC which was handling distribution of these inputs, but in fairness they have also been hampered by lack of budget allocations. Further study of the mechanics of distribution and sale (especially to small farmers) is required and will receive attention. $6,500,000 were originally allocated to this sub project. ($4,800,000 ICB $1,700,000 direct contract) $6,941,600 were ultimately utilized. e. Petroleum Sector Procurement and distribution for this sector was timely and efficient and ensured the continuing supply of lubricants for generating plants around the country. The organization concerned leamed a great deal about intemational trade in petroleum products and has recently undergone partial privatization. Storage and distribution are under current review with a view to allocating franchises or joint ventures $2,000,000 were originally allocated to this sub project ($2,000,000 ICB) $2,506,800 were ultimately utilized. f. Consultancy and Miscellaneous There were no problems in this area. $300,000 were originally allocated. $838,600 were ultimately utilized (amount includes provision of office equipment and communication equipment to provide for the needs of the procurement management unit of the MTI).  - 29 - ANNEX 2 6. CONCLUSIONS AND LESSONS LEARNED - The project objectives were satisfactorily achieved. - Considerable flexibility was shown by IDA with regard to problems of supply, disbursement and reallocation of funds under-utilized or accruing from exchange rate differentials. - The role of MTI can gradually change from being the national procurement agency to that of policy maker and coordinator of procurement for the public sector and source of international contacts and price levels etcetera. - The project has clarified the need to examine the future role of the FTCs. - The sensitivity to Mongolian needs and sensibility on the part of the IDA team enabled this project - the first of its kind in this country - to be a success.   x~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Au UKE ~fJ > - 4 ~~~~~~~~~~~RUSSIAN FEDERATION | U" I ULAANGOM :C \-. 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BOUNDARIES OCTOBER BR9a   - RUSSIAN FEDERATION * -- - '~ '"''C t _'' CHINA , ' XuoriGG; ~~~~~~~ ' ; ~~ L S - ; ~~~~~, <~~ > r g / ,. ' tt _ *OLGv ffi 6 a,, ' '' " : >-- ,' ~ <_~_/ 1 d. CHINA ( $BxE2 . LAS~ ,5 _ - . MONGOLIA / _ - 2)AO\ 25S ESS PA- Z-ADS A P.MA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~B ONDAAE, ADEtA7 CNl- 10CDAB C