Turkmenistan - Institution Building - Technical Assistance Project

X,\,/ 7/ TAI Document of The World Bank Report No. 12959-1T STAFF APPRAISAL REPORT TURKEMSTAN INSTITUTION BUILDING/TECHNICAL ASSISTANCE PROJECT AUGUST 25, 1994 MICROGRAPHICS Report No: 12959 TM Type: SAR  TURKMENISTAN INSTITUTION BUILDING/TECHNICAL ASSISTANCE PROJECT Currency equivalents Currency unit = manat US$1- 10 manats Exchange Rates November 1993 2 manats August 1994 10 manats" Weights and Measures Metric System Govenmment Fiscal Year 1' In May 1994, a new comrnercial rate of 60 manats to the U.S. dollar was introduced, which was changed to 75 manats to the U.S. dollar on August 15, 1994. iii  January I - Decenber 31 TURKMEMSTAN INSTITUTION BUILDING/TECHNICAL ASSISTANCE PROJECT Abbreviations and Acronyms BSD Bank Supervision Deparment in CBT CC Cleing Center CIS Commonwealth of Independent States CIT Corporate Income Tax CBT Central Bank of Turkmenistan EBBRD European Bank for Reconstruction and Development EU European Union FSU Former Soviet Union IBRD Intemational Bank for Reconstruction and Development iBTA Institution Buildng/Tecinical Assistance Project ICB International Competitive Bidding IFC Itenational Finance Corporation IMF International Monetary Fund JV Joint Venture lVCU Joint Venture Coordination Unit LRU Legal Reform Unit MIGA Multilateral Ivestment Guantee Agency MOI Ministry of Infrasucture MOA Ministry of Agriculture MOEF Ministry of Economy and Finance MOo Ministry of Oil and Gas MOH- Ministry of Health MOSW Ministry of Social Welfare MOT Ministry of Transport NBF Non-Bank Funding OECD Organizaion for Economic Cooperation and Development PIU Project Implementation Unit PL Petroleum Law SOE State Owned Enterprises VAT Value Added Tax GOP Gross Domestic Product BOP Balance of Payments iv  TUR[MENISTAN INSTITUTION BUULDING/TECHNICAL ASSISTANCE PROJECT Table of Contents Loan and Project Summary . vi 1. Introduction 1. IH. Recent Developments .p m. Lessons of Experience . 2 IV. The Project. 3 A. Project Rationale and O bjectiv es. 3 B. Project Description .4 C. Project Costs and Finaning .15 D. Institutional Arrangements for Project Coordination and Implementation ... 17 B. Procrement.19 F. Disbursement .21 G. Project Accouting, Fnucial Peporting, and Auditing .22 H. Environmental Aspects .22 I. Benefits and Risks. 23 IV. Ageements and Recommendations ......... ................ 23 Amexes This report is based on the findings of the World Bank missions which visited Turkmenistan in November 1993 and March 1994 for the preparation and appraisal. Mission members included: Messrs./Mmes. Rashid (Task Manager); Matherova, Peloschek (Counsel); Honda, Mathov (Financial Sector); Sengupta (Privatization); Denizer, Runner (Social Sectors); Ansari, Hamso (Energy); and, Denizer, Tirmazi (Procument and Project Implementation). Mr. Kadir T. Yfrflkoglu and Mr. Russell J. Cheetbam are the managing Division Chief and Depatment Director, respectively, for the operation. v  TURtMNITAN INSTITTO.NAL BUILDINGfI'ECHNCAL ASSISTANCE PROJECT Table of Annexes Anmex I Privatietion and Private Sector Developmet ............ ........... 24 Annmex I Financial Sector .............................. 39 Anrex M Isttutonal Support a Development... 78 AnnexlV Social SeCtDr .95 AmnexV Energy Sector ........................................ 102 Amnex VI Loan Management and Pcurement . 110 Annex VI Cost Estimates by Major Contact and Schedule of Critical Prouement Steps . 118 Amex Vm Detailed Project Costs .121 Annex IX Detailed Financing Costs .122 Annex X IBRD Disbursemens .123 Annex X Summary of Technical Assistan Pogram .124 Anmex XII Implementation Plan 128 Annex XIII Supervision Plan .129 vi  TURKMENISTAN INSIITUTIONAL BUILDING/TECHNIGAL ASSISTANCE PROJECT Loan and Project Summary TurBmwenisn The Government of Turkmenistan US$25 million equivalent Tamns: 20 years, including 5 years of grace period, at the Bank's standard variable interest rate. 9becdfives: The objectives of the Loan are to: (i) provide assistance in the design and development of the Government's reform policies and programs; and (ii) help build the institutonal capacity and skldls base to carry out these reforms. The proposed Loan would finance the following components: A. Prvatzaon and Private Sector Development. Technical assistance under this component would: (i) contne development of the Governmet's privatzation program and assist in its implemention; and (ii) encourage compein, and assist in restructuring and improving govemnance of major public eneprises. D. Fancal Sector Modenioadon. This component would: (i) modenize the coutry's payments system; (ii) conmie developmnt of banking and reated legislation; (iii) modernize bank accounting and auditing; (iv) develop prna regulations; and (v) develop a program for traig for commercial and other banking staff on eentil financial skills. C. Sodal Sector. This component would: (i) finance a living standards measurement survey as a first step to developing social protection policies targeted to the most vulneable groups of society; and (ii) develop new policies for the design of a basic pension system to cover private sector employees and to improve management of the existng pension aministration system. D. EnerV Sector This component would: (i) strengthen joint-venture adminstraton and regulatory fimction in the Ministry of Oil and Gas; and (ii) provide training for the oil and gas sub-sector in technical and manageril vii  E. Instiional Sqpport and Development. This component would: Ci) support the itroducion of broadly based legal and regulatory reforms; (ii) develop the capacity for the economic and financial evaluation of public invesuen projects; and (iii) finance the feasibility studies for priority projects in infrstructre, inusy and agriculture. In addition, this loan would finance the establishment of a Project Implementation Unit (PIU) to support the Implementation of this Loan. Benefits *The Government currently has limited institutional capacity and the needed human resources skills to design and implement reforms, and formulate sector strategies in the energy sector. The proposed Loan would help aleviate the constrain arising from the lack of specific skills, as well as ensure the development of the required domestic capacity. It would also strengthen the isitutional framework for mobilizing and coordating techical assistance for implemening reforms. The main risks relate to: (i) changes in resolve and commitnent by the Govermment to the reform effort; (ii) limited aministaive capacity and lac of familiarity with Bank procement nd disbursement procedue, which could lead to delays; and, (iii) the Government's inexperience with manai technical assistance. The technical assistance components provided to critical inistries and agencies are aimed at assistng in the preparation of their respective reform programs, and reflect the Government's priorities. Close supervision dur impletation would assure that inefficiencies are addressed as needed. Procemet and disburement risks would be reduced through close attention to procurent and other implementation constraints during project supervision. QguofnanDg: Cofinancing is not envisaged. Extensive discussions have been held with other donors to ascertain their proposed and current technical assistance program for Turkmenistan to avoid possible overlap with the technical assistance proposed by the Bank. viii  Project Costs: Loa Foreign Total EForign as 9% of Totad -(US$ million equivalent) Privatization and Private Sector Development 0.30 1.80 2.10 86 Fanciial Sector 0.75 8.08 8.83 92 Institutional Support and Development 0.62 5.18 5.80 89 Social Safety Net 0.11 0.85 0.96 89 Energy Sector (Oil & Gas) 0.46 3.32 3.78 88 Project Imple on 0.15 0.80 0.95 84 Base Cost 2.39 19.63 22.02 89 Price and Physical Contingencies 0.18 3.40 3.58 95 Total Cost 2.57 90_43 9Q0 Foreign as E&m cingPlan Lol Foreign tal % of Toal IBRD 1.6 23.4 25.0 94 Govermment - -1. 2. 24 26.0 f Estimated IBRD Disbusements: FY95 FY96 PY97 FY98 -(US$ million equivalent)- Annual 5 7 7 6 Cumulive 5 12 19 25 Econmc Lte of Return: Not applicable. PovernJ Category: Not applicable. ME: IBRD No. 25096R1 ix  TUPRKENISTAN INSTITUTION BUILDING/TECHNICAL ASSISTANCE PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1. Turkmenistan is well-endowed with energy resources, primarily natual gas and oil, an is rich in other mineral resources. It is the fourth largest gas producer in the world. The economy, however, is sfill predominantly agricultural, and agriculture provides nearly half of the production, with industry providing only a fifth of the gross domestic product (GDP). Turkmeistau had a trade surplus in both hard currency and interrepublican trade. Exports are dominated by gas, oil and cotton. However, despite its national wealth, Turkmenistan is one of the least-developed republics with the highest infant mortality and lowest life expectancy. The decline in real GDP was about 5 percent in 1992, and 9 percent in 1993 . Natural gas production also fell about 30 percent in 1992, because of disruption of exports to Ukraine. The budget situation is likely to deteriorate in view of the hih subsidies and transfers to loss making enterprises and lower revenues from taxes on gas exports. The balance of payments (BOP) was in surplus in 1993, however, the outlook for 1994 is unclear and the BOP may go into deficit on a cash basis in view of the external risks such as paywment anrears for gas exports, investments to maintin production levels, and access to foreig markets. The Goverment is initiating economic reforms to develop Turkmnistan's potenal and stregthen the sustinability of the supply response in the economy. It has sought the Bank and IMP's support as it realizes that the country is unlikely to otherwise mobilize the foreign investment needed. I. RECET DEVELOPMENTS 2. The Government of Turkmenisn is in the process of developing a reform program to move to a market based economy. A number of important poLicy actions ara being tak. It has initiated price liberalizaton and plans to further reduce the number of goods subject to price conrol and to adjust substantially adinistered prices. The Govemment itoduced on November 1, 1993 its own currency - the manat - with an initial peg to the U.S. dollar of 2 manat to 1 dollar. On March 16, 1994, the exchange rate was revised to 10 manats to 1 U.S. dollar and in May 1994, the Central Bank inroduced a new commercal rate of 60 manats to the U.S. dollar, which was changed to 75 manats to the U.S. dollar on August 15, 1994. The issues of exchange rate mnagement and maures to foster monetay and fiscal discipline to stabilize the economy are beng disussed wit the IMP. The Government has also iniiated strucual reforms following the introduction of the new cuency. It has adopted a privatizon program and has introduced the enabling legislation to assist pri"atizadon. It also plans to improve corporate governance of public enerpise to be retained in the public sector by tightning fiancial control and suporting enterprise restmrturing. 3. Steps are also being taken for the reform of the financial system with the drafting of a new banking legislation, the emergence of new commercial banks, and strengthening the role of the cenral bank and the development of the pentia regulations for the supevision of the Banks. The reform of the legal framework is also being initiated to support private sector development.  -2- 4. The mediumn term economic prospects for Turknenistan depend to a significant degree on exports of oil and gas and the efficient performane of the agencies involved in their development and manageme. The Government is keen that these areas be also supported through this operation. 5. Turkmemstan has strong economic potential. It has plentiful energy and mineral resources, and scope for increing the productivity of agriculturl land. However, to develop this potential, carefid econic manageme and comprehensive reforms are essential. Efficient investment of financial resources obtained from the energy exports is central to its future development prospects. The progress on structual and systenuc reforms would provide the enterprises and individuals with appropriate institutiloal and market incentive structures to grow and invest, and strengthen the sustainability of the suply response in the economy. Additionally, decisive implemention of the reforms could further improve the prospects and pace of recovery, and reduce the vulnerability to potenti external risks. 6. Turkmenistan also faces major consaints m the development and implementation of the reform program in these areas. While the Government agencies and state enterprises have well trained staff, they are not fully familiar with the concepts and practices in a market economy. In view of these limitations on domestic capacity, the Government has indicated its interest in borrowing from the Bank to acquire essential expertise in the design of reforms. The Government regards technical assistance as the key istument to remove short term constraints (i.e., lack of specific skills ad expertise to manage the reforms and strngthen the local capabilities and institutions). Future Bank support would be provided in the form of investment loans in selected sectors. The Government's reform program and the Bank's activities in Turknenistan are discussed in the acompaning Memorandum and Recmmendation of the President. mL. LESSONS OF EXPERIENCE 7. Wile the Bank does not yet have project experence in Turkmenistan, it has had sustia exmerience with institution building operations in other countries, including counties of Cental Asia. 8. With proper planning and attention to other experiences, this type of loan has the potental to be fully successful. Reviews of past mutisectoral technical assistance loans with a focus on institution building suggest that such projects are most successful if they are developed in the context of the Government's own institutional development objectives, and with Government commitment and involvement in the specification of the program and project administration. The success of the project also depends on cal project preparation, including: (i) development of detailed terms of reference for expert assistance and training; (ii) provision of training prior to the initiation of the program; (iii) coordination with other donors/lenders; and, (iv) consideration of the absorptive capacity of the Government. Finally, successful technical assistance projects require intensive supervision of the operation by the Bank once implemetation has begun. 9. The design of the proposed operaton reflects the concern for learing from past experience. The proposed project has been developeC through cose colaboration with the Turkmenistan authorities, at the level of the Deputy Chairman of the Cabinet of Ministers (Deputy Head of Goverment), the Ministry of Economy and Finance, and concemed sectoral ministries and other agenies which will be involved in the implementation of the program. To support the project, a  -3- Project Implementation Unit (PMU) will be established with responsibilities for projet management, as well as providing support to project implementation, particularly with regard to procuremen, disbursement, and project accounting (see Amex Vll for additionwl information). In terms of project pration, detailed tetms of reference for proposed expert assistance have alreay been drafted and are anmexed to the draft Staff Appraisal Report. Furthermore, significant amounts of Bank resoutces will be devoted to project supervision. 10. This project is designed to improve the absorptive capacity of the Govermment, inter aia, through skills transfer: a significant anount of the resources will be devoted to training, not only through formal training programs and study tours, but also through on-thejob training provided by resident specialist who will closely work with their counterparts. 11. The proposed project is complex, covers several sectors, and will therefore involve a number of implemendng agencies. Project arrangements have been carefully designed so that the PIU opeate as a general coordinator and faciitator of project in'plementation, while the sectoral ministries and agencies are responsible for executing the components concernng their respective sectors. IV. THE PROJECT A. Project Raionale and Objectives 12. The Bank's overall strategy is to assist the Govermment in its trasition toward a market-based economy. A Country Economic Memorandum (CEM) dated May 31, 1994 has been issued. An energy sector review has also been prepared which sets out the sector's performance prospects and constaints, and its key conclusions were discussed with the Government in November 1993. The review specfies that while the short tem outlook for the sector is bright, the medium and long term potental is affected by a number of uncertaines conceming markets for natural gas, decline in energy production and the Govemment's budget constrains for investments to maintain production capacity. It identifies the weakness in capacity as a key factor to formulate appropriate strategies to address these constraints. 13. To help the Govemment attain its objectives, concrete assistnce of both a short and longer term nature is required, particularly in the high priority areas identified by the Govemen that will lead to overall reforms. The proposed loan would be the Bank's first to Turlstan. It is consistent with the Bank's proposed lending activities to assist the country, and by supportng a limited number of high priority areas it will help the Government ructu the economy. It will also ensure that the appropriate reform policies and the needed institutional franework for their effective implementation are developed soon. 14. The main objectives of the proposed loan, therefore, are to: (i) provide support to the Govemment in the policy fonulafion 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 instiution building and strengthen domestic capacity to ensure that Turkmenistan has the capability to implement and sustain reforms over the medium term.  B. ProJet Descripon 13. The proposed loan would finance technical assistance in key sectors of the economy where such support s urgendy required. A summary of the technical assistance progm is given in Table 1. 1. Privatlzaton and Private Sector Development (US$2,100,000) 16. Curently, little of Turkmenistan's economy is in private hands. Most private activity is in the service, agricultural and tading sectors. The regulatory environent needs to be liberalized and bariers to entry identified and removed to encourage investments by foreign or domestic investors. Further, performance of public enterprises will remain poor without reforms (privatization, restructuring and governance) in the enterprise sector. a. Privatlon and Prvate Sedor Development (US$1,150,000) 17. Privatization lies at the heart of economic transformation, a fact well recognized by the Govermnent of Turkmenistan. The Goverment is committed to a reform program of privatizatdon, enterpnse rstrring and private sector development. The Minsty of Economy and Finance (MOEF) is responsible for preparng and implementng a prvatization program which is to be phased over a period of time.  . o* 0 @ @ 0 Ut @ 0 b ( @0 W 0 tJ @ 0    *  * *  o ijI II j ii Ce 11 I4,0*@ - 2' C* ii1  * *  i1i III ml -  . U a I: