Uzbekistan - Health Project

Document of The World Bank Report No: 17213-UZ PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US $30.0 MILLION EQUIVALENT TO THE REPUBLIC OF UZBEKISTAN FOR A HEALTH PROJECT August 21, 1998 Health, Nutrition and Population Sector Human Development Sector Unit Europe and Central Asia Region  CURRENCY EQUIVALENTS Currency Unit = Sum I Sum US$0.010 US$1 = 102.3 Sum (as of August 24, 1998) AVERAGE EXCHANGE RATES Sum per US$ I (end of year) 1994 25.1 1995 35.5 1996 55.0 1997 79.7 FISCAL YEAR January 1- December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ARI - Acute Respiratory Infection MMR Maternal Mortality Rate CAS - Country Assistance Strategy NBF - Non Bank Financed CDD - Childhood Diarrheal Diseases NCB - National Competitive Bidding CPPR - Country Portfolio Performance NGO - Non Governmental Review Organization DALY - Disability Adjusted Life-Years NS - National Shopping DC - Direct Contracting O&M - Operation and Maintenance DPT Diphtheria, Pertussis, and Tetanus PHC - Primary Health Care FAPs The Russian Acronym for feldsher PHRD - Policy and Human Resources station Development FSU - Former Soviet Union PPF Pre-Project Facility GDP - Gross Domestic Product SA - Special Account GNP - Gross National Product SOE - Statement of Expenditures GOU - Government of the Republic of SBDs - Standard Bidding Documents Uzbekistan SL - Short List GP - General Practice STDs - Sexually Transmitted Diseases GPs - General Practitioners SUBs - Russian language Acronym for IBRD - International Bank for Reconstruction existing Rural Hospitals, and Development typically 30-60 beds [CB - International Competitive Bidding SVA - Russian language Acronym for IFC - International Finance old (existing) Rural Corporation Ambulatories IMR Infant Mortality Rate SVP - New Rural Outpatient Centers IS - International Shopping Constructed by the GOU KfW - Kreditanstalt fur Wiederaufbau ("Selsky Vrachebny Punkt") Khakimiat Oblast Administration TA - Technical Assistance LIBOR - London Interbank Offering Rate TOR - Terms of Reference MIS - Management Information UNICEF United Nations Systems Children's Fund MCH - Maternal and Child Health UNDP - United Nations Development MOF - Ministry of Finance Program MOH - Ministry of Health USAID - U.S. Agency for International MOMES Ministry of Macro-Economics Development and Statistics WHO - World Health Organization MOU Memorandum of Understanding Vice President: Mr. Johannes Linn. ECAVP Country Director: Mr. lshrat Husain. ECCOI Sector Director: Mr. Chris Lovelace. ECSHD Program and Task Team Leader: Mr. John C. Langenbrunner. ECSHD -  UZBEKISTAN HEALTH CONTENTS A. Project Development Objective ....................................................................1 1. Project Development Objective and Key Performance Indicators ...................................................I B. Strategic Context ................................................................... I 1. Sector-Related CAS Goal Supported by the Project .................................................................... I 2. Main Sector Issues and Government Strategy ................................................................... 2 3. Sector Issues to be Addressed by the Project and Strategic Choices ...............................................4 C. Project Description Summary ....................................................................6 1. Project Components ....................................................................6 2. Key Policy and Institutional Reforms Supported by the Project ................................8.....................8 3. Benefits and Target Population ....................................................................9 4. Institutional and Implementation Arrangements .................................................................... 9 D. Project Rationale ................................................................... I I I . Project Alternatives Considered and Reasons for Rejection ..........................................................I 1I 2. Major Related Projects Financed by the Bank and/or Other Development Agencies ................... 13 3. Lessons Learned and Reflected in Proposed Project Design ......................................................... 14 4. Indications of Borrower Commitment and Ownership ................................................................ 15 5. Value Added of Bank Support in this Project ................................................................ 16 E. Summary Project Analysis ...................................................................1 6 I . Economic ................................................................... 16 2. Financial ................................................................... 17 3. Technical ................................................................... 17 4. Institutional ................................................................... 18 5. Social ................................................................... 19 6. Environmental Assessment ................................................................... 21 7. Participatory Approach ................................................................... 21 F. Sustainability and Risks ................................................................... 21 1. Sustainability ................................................................ 21 2. Critical risks ................................................................ 22 3. Possible Controversial Aspects ................................................................ 24 G. Main Loan Conditions ................................................................... 24 1. Agreements Reached by Negotiation ................................................................ 24 2. Conditions of Effectiveness ................................................................ 25 3. Covenants ................................................................ 25  H. Readiness for Implementation ........................ 25 1. Compliance with Bank Policies ........................ 26 Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Table A. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table B. Summary of Proposed Procurement Arrangements Table C. Procurement Information Table D. Procurement Plan Table E. Allocation of Loan Proceeds Table F. Disbursement Schedule Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Project Supervision Plan Annex 11. Pilot Oblast Socio-Economic Analysis Annex 12. Country at a Glance Map: IBRD_29483 Project ID Number: UZ-PE-9125  UZBEKISTAN HEALTH Project Appraisal Document Europe and Central Asia Region Human Development Sector Unit Date: August 27. 1998 Task Team Leader: Mr. John C. Langenbrunner, ECSHD Country Director: Mr. Ishrat Husain, ECCOI Sector Director: Mr. Chris Lovelace, ECSHD Project ID: UZ-PE-9125 Sector: Health Program Objective Category: 1. EA (50 %); 2. PA (50 %) Lending Instrument: SIL Program of Targeted Intervention: [X] Yes [ ] No Project Financing Data [X ] Loan [ Credit [ Guarantee [ ] Other iSpecifyl For Loans: Amount (USSm): 30.0 Proposed terms: [ Multicurrency [XI Single currency, US Dollar Grace period (years): 5 [ Standard Variable I[ Fixed [XI LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: NA Financing plan (US$m): Source Local Foreign Total Government 37.9 1.8 39.7 IBRD 2.1 27.9 30.0 Total 40.0 29.7 69.7 Borrower: Government of the Republic Of Uzbekistan (GOU) Guarantor: Not Applicable Responsible agency: Ministry of Health (MOH) Estimated disbursements FY99 FY00 FY01 FY02 FY03 (Bank FY/US$M): Annual 3.0 8.3 8.5 5.5 4.7 Cumulative 3.0 11.3 19.8 25.3 30.0 Project implementation period: Four years Expected effectiveness date: December, 1998 Expected closing date: June, 2003 OSD PAD Form: July 30, 1997  A: Project Development Objective 1. Project development objective and key performance indlicators (see Annex 1): The Government of Uzbekistan and the Bank are collaborating in the implementation of a health care reform strategy in order to help improve the quality and the efficiency of health care services delivery. Improvements in quality and efficiency can lead to improvements in health status of the people of Uzbekistan. The project is focused on the residents of rural areas. The objectives can be met without increasing significantly the total cost to the Government of the health care it provides. The Bank would support the Government's reforms through the proposed Heallth project which would pilot reform models in three pilot or "leader" oblasts. These three oblasts, Ferghana (population: 2,458,400), Navoi (population: 769,000) and Syr Darya (population: 642,900) were selected by the Government, and chosen for their diversity in what is perceived by both parties as an initial round of investment in its restructuring program. The oblasts differ in size, economy, health conditions, health status, and population density, and provide a window on conditions prevailing elsewhere in Uzbekistan. The proposed Health project objectives are both regional and national in scope. At the oblast level the project would: (a) seek to improve the quality and cost effectiveness of primary health care, particularly in the rural areas where the great majority (approximately 70 percent) of the population lives; (b) develop a new cadre of medical personnel through short-term training programs for general practitioners and universal nurses, and in the longer-run by redefining medical education curricula; and (c) seek to fully strengthen the management and financing of primary health care services, in part through incentive restructuring and decentralization in both the financing and provision of health care. At the national level the project would build capacity in the Ministry of Health to evaluate and disseminate the results of the pilot country wide. Combined results from these three very different oblasts-which represent the diversity of conditions in Uzbekistan-can be expected to help guide the Government's effort to strengthen the primary health care services in the country as a whole. In order to achieve those objectives, the proposed project would have the following four components: (1) Strengthening Primary Health Care Services; (2) Training of General Practitioners and Universal Nurses; (3) Strengthening of Finance and Management; and (4) Project Management. 13: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by thte project (see Annex 1): CAS document number 14019-UZ, March 3, 1995 and 17376-UZ, February 17,1998. Country Background: Uzbekistan lies at the heart of Central Asia with a land mass of 447,400 km2, and with the region's largest population of nearly 23.4 mln people, over 70 percent of which are ethnic Uzbek. Since its independence in 1991, the Uzbek economy has been affected by ongoing economic problems related to transition from the former Soviet-planned economy, resulting in reduced household incomes and some disruption of the social support infrastructure, including funding for health services. The GDP per capita in 1996 was estimated at only US$ 1010. At the same time, Uzbekistan has experienced only a modest decline in GDP since 1991 compared to other countries in the FSU (Former Soviet Union) because of structural features of the economy which made it less vulnerable to disruption of intra-FSU trade (i.e., its natural resource wealth of gold, gas, and cotton), and the Government's continuing active role in the coordination of the economy. Uzbekistan's initial approaches to economic reform have been cautious despite the initiation of a stabilization and structural adjustment program in 1994. Many prices were officially liberalized and firms privatized, and the Government took steps in 1997 toward financial stabilization through the reduction in fiscal deficits and control of the growth of money and credit. Nevertheless, the Government has continued to exercise a substantial degree of management over production, investment, and prices through a variety of means. The liberalization of foreign and domestic trade was repeatedly delayed, and recently intensified restrictions on foreign exchange and trade. Recent measures to re-establish control on prices and distribution of basic foodstuffs reinforces an outlook of very slow economy-wide liberalization.  Page 2 CAS: To date, the Bank has committed US$ 327 min in lending to Uzbekistan. This includes a loan to improve the water supply, sanitation and health of the population of Karakalpakstan and Khorezm Oblasts which was identified as part of the Aral Sea Program and approved by the Bank in March, 1997. The Uzbekistan Water Supply, Sanitation and Health project includes a Sanitation, Health and Hygiene component (US$ 11.2 min) to support the Governments' efforts to improve the population's basic public health during the transition. The Health project would be the seventh Bank operation, and the first in the social sectors in Uzbekistan based on the CAS dated March 3, 1995. In October 1993, a mission presented the options for World Bank financial assistance, ranging across the areas of health, social protection and training. Subsequent discussions were intermittent, with the Government expressing a strong preference for only financing domestic production capacity of pharmaceuticals and vaccines. By late 1995, the focus of discussions began to shift with the Government's increasing interest in social support and improving service delivery. A national rural social infrastructure initiative was subsequently announced by the Government related to education, social assistance, and health service delivery. Bank-related work began in late 1995 to prepare a health loan to ensure the availability of a basic package of services to all citizens, to upgrade the rural health delivery system, and to assist in developing a reformed policy environment. The recently completed February 1998 CAS outlines four key challenges in the short to medium-term to support sustainable, broad-based development with poverty reduction. These are: (i) liberalizing the trade and exchange rate regimes and minimizing distortions in the financial sector; (ii) improving incentives for increased output and employment, particularly in agriculture; (iii) removing the inefficiencies in resource utilization in both the municipal services and rural infrastructure (including the social services); and (iv) addressing the environmental damage from mismanagement of natural resources. The challenges recognize the importance of a diversified mix of lending and non-lending assistance, as well as policy dialogue. The strategy emphasizes the use of pilot and demonstration approaches to address the relative risks of reform in some sectors. Specifically in health, the strategy aims to enhance the efficiency in the use of constrained resources, to improve the quality of services, to improve cost-effectiveness, and to target vulnerable groups. The strategy also recognizes the need for an urgent reorganization in health financing, and the importance of health education and promotion. The project objectives are linked directly to the strategy as outlined in the recently completed CAS. The FY99 Work Program Agreement is consistent with the objectives of the new CAS, and it supports a health sector strategy focused initially on piloting reforms in selected rural areas where the majority of the population resides. The primary objective is to improve the quality and efficiency of health care services through: (i) equipping of new rural outpatient medical centers; (ii) rationalization (closing) of existing duplicative or dilapidated facilities from feldsher stations to small rural hospitals; (iii) developing an upgraded medical professional class that refocuses care to cost-effective primary and outpatient care, and (iv) restructuring financial incentives for quality care and strengthening management through decentralization. These objectives would be achieved through gradual-pilot-demonstration-replication approaches for more cost-effective delivery of basic primary health services ("learning-by-doing"). Lessons from pilots can be used to strengthen already significant Government ownership, to replicate beneficial reforms, and to develop broader-based national programs to reform health care financing, organization of care, and service delivery. The Government continues to express interest in increasing domestic pharmaceutical production. In June, 1997, the IFC also financed an India-based pharmaceutical firm (US$ 4.0 min.) to establish new production capacity in Uzbekistan for the development of intravenous fluids and generic tablets (an estimated 300 mln per year). 2 Main sector issues and Government strategy: Main Issues: Multiple studies, including the Demographic and Health Survey in 1996, the Health and Health System Development Report, also prepared in 1996 jointly by the Government's MOH, WHO-Euro and UNDP, and the Government's PHRD-funded design and preparation contract report confirmed the findings of the Bank's identification and preparation missions in 1994-1996.  - Page 3 (i) Demographic Structure and Health Status: Life expectancy has been high at 70.2 years. Literacy rates, especially for women (more than 80 percent have at least six years of schooling), show good human development outcomes. However, health status in Uzbekistan has been marked by a "double-burden" of disease that includes a legacy of chronic non-infectious diseases (related to lifestyle and behaviors), as well as a more recent re-emergence of acute, infectious diseases. The health status of the population is affected by a wide range of risk factors, particularly high rates of fertility, inadequate supply of water and sanitation, smoking and alcohol abuse, and poor diet. The burden of disease and DALY (Disability Adjusted Life-Years) analysis prepared for the project using 1995 data showed relative percentage of life-years lost due to premature death from infectious diseases (36 percent) of which ARI (Acute Respiratory Infection) and CDD (Childhood Diarrheal Disease) were the leading causes; cerebrovascular disorders (24 percent); injuries-poisoning (12 percent); adult chronic (10 percent); malignant neoplasms (7 percent); and maternal/perinatal disorders (6 percent). High fertility rates (3.6 in 1997 versus 3.1 for other middle income countries), a high birth rate (25.8/1,000 in 1997) and a low total mortality (6.2/1,000 in 1996) over the past three decades have resulted in a high population growth rate, with 39.5 percent of the population under the age of 15 years. The structure and dynamics of the population in Uzbekistan has a profound impact on the quantity and nature of the burden of disease. Nearly 70 percent of the population live in rural areas, perhaps increasing the infant mortality rate (IMR), the maternal mortality rate (MMR), and the crude birth rate (CBR) in the aggregate as compared with other countries. The IMR (22.7/1,000) and MMR (29.5/1,000), though declining in recent years, are still high as compared to some other countries in the world with similar incomes. The demographic and health status assessment suggests the need for interventions such as health education and primary care, specifically targeted to safer motherhood, immunization, and management of the sick child, especially in rural areas. (ii) Inefficient Health Delivery System: Compared with other countries, middle-income or high income, the overall efficiency of the Uzbek system appears to be low. Uzbekistan's health care system mainly reflects the heritage of the Soviet model. It is comprehensive and extensive, and services are provided mainly free of charge by law. Resource allocation formulas across regions emphasized numbers of health inputs (facilities and personnel) by oblast rather than demographics/population, health status, or performance (health outcomes). Specific facility budgets continue to be based on the FSU-developed standards of 18 rigid categories of inputs; payment for services is not always linked with incentives for quality or efficiency. Not surprisingly, the health sector in Uzbekistan, as elsewhere in the FSU, is characterized by excessive numbers of doctors and hospitals. At the end of 1996 in the three pilot oblasts, numbers of beds varied from 10.0 to 11.5 per 1,000 population (versus 8.4 for OECD countries), despite a reduction in inpatient beds by 25 percent nationally since 1991. The physician/population ratio varied from 4.9 to 5.3 (compared with 2.5 physicians in OECD countries) per 1,000 population. The Ihigh numbers of resource inputs is exacerbated by the traditional Soviet emphasis on more expensive specialty-based, inpatient care relative to primary or cost-effective outpatient care. Only FSU countries and the United States are notable in the world community as having trained its majority of physicians as specialists and not as general practitioners. Hospital admission rates as a percent of the population (annualized) were 27.5 to 29.7 percent (compared to 16.2 for OECD); historically, narrowly specialized facilities such as TB and STD dispensaries kept hospital bed capacity narrowly partitioned, distorting both volume and composition of health services. While relative share of spending for hospital care has fallen in recent years, approximately 47.4 to 60 percent of total resources for health care are being spent on inpatient care in the three pilot oblasts (compared with 35-45 in most OECD countries). (iii) Ineffective/Low Quality Health Services:. Low quality is a problem at many points throughout the health care system, including poorly trained workforce (physicians and nurses), outdated clinical information and standards, shortages of essential equipment for diagnosis and treatment, an inadequate supply of drugs, and other requirements for provision of basic PHC (Primary Health Care). The professional status of primary care physicians is low, and their role in providing and coordinating care is unacceptably low. Therapists account for only about half of the total outpatient visits. Similarly, therapists are only marginally involved in referring their  Page 4 patients to the hospital-from 30.1 to 42.7 percent in the three pilot oblasts. Referrals by emergency and self- referrals amount to a strikingly high 23.5 to 29.0 percent in the three oblasts, attesting to generally poor coordination and lack of continuity of care. (iv) Declining Health Spending: The health sector is, like the rest of the economy, under unprecedented pressure to change its organization and financing. Local oblast-level budgets, allocated from the center, finance the bulk of health services, but have come under increasing pressure, reflecting more general fiscal constraints and the difficulties created by recent bouts of high inflation. The role of enterprises and collective farms has diminished relative to its traditional role of financing the construction and recurrent communal services of local health facilities, and thus has created further budget pressures. In recent years, the share of consolidated Government budgets going for health spending has declined from 10.7 percent to 9.27 percent in 1995. Because of drops in GDP and Government spending generally, the health sector has suffered from a severe decline in the real value of health spending. In 1995, real per capita spending was only 33 to 55 percent (depending upon source) of spending in 1991. The proportion of health spending as a share of GDP has actually increased slightly from 4.9 percent in 1992 to 5.5 percent in 1994, reflecting (in part) some diversification of its revenue base to direct consumer payments and use of private facilities. However, these figures of spending as a share of GDP also are relatively low by international standards (7-9 percent). Government Strategy: Uzbekistan appears to have chosen many of the appropriate clinical services priorities focused on primary care,' including prenatal and delivery care, vaccination, food supplementation, tuberculosis treatment, case management of ARI and diarrhea, and treatment of STDs. In 1991, the Minister of Health outlined a health care development concept which was further developed during 1992-1996 period, outlining the following priority areas for care: women and child health protection; infectious diseases and prophylactics; strengthening PHC; and environmental protection. The Government in early 1996 also announced a major social rural infrastructure initiative, which included the building of new rural outpatient centers, coupled with the rationalization of the old Soviet model of the feldsher stations (FAPs), small outpatient centers (SVAs), and small district hospitals of 30-60 beds (SUBs). However, while the essential clinical interventions may be stated priorities and new construction has been announced, underfunding, inefficiency, supply shortages, and poorly- trained providers of care will impact on actual delivery. The MOH also has been developing several laws, more of which have been recently enacted, including a longer-term health sector reform strategy (see section 3). 3. Sector issues to be addressed by the project and strategic choices: The design of the Health Project built upon the Government's State Program of the Health System Development, various studies conducted by WHO and UNDP, the Presidential rural social infrastructure initiative, and the PHRD-funded project design and preparation contract. Following the MOH/WHO/UNDP study, the proposed State Program reflects substantial efforts aimed to enhance efficiency in the use of constrained resources, to improve the quality of services, to improve cost- effectiveness, and to target the most vulnerable groups. The Program recognizes the need for urgent re- organization in health financing and revision of health financing principles, and the importance of health education and promotion. Specifically, the Program outlines a number of measures to reduce expenditures through an emphasis on out-patient services, reduction in administrative and managerial staff (0.4 percent), selective adoption of privatization (0.5 percent) especially in urban areas, and an increasing reliance on greater "off-budget" financing (0.8 percent) through employer-based funding and patient co-payments. The budget share for out-patient services is targeted to increase from 33.8 percent in 1994 to 40 percent in 1998. Resources saved are to be allocated to primary health care delivery, with the corresponding out-patient budget share increasing from 40 percent in 1996 to 50 percent in 1998. ' See the guidelines for a basic health package from the World Development Report of 1993  Page 5 Consistent with the Government's reform agenda, project preparation consultants have recommended the following areas for Bank financing in this sector: (i) strengthening rural primary care; (ii) training of General Practitioners, Universal Nurses and other health professionals; and (ii) financing and management reforms. The Health Project would address these recommendations in three oblasts in Uzbekistan, using the demonstration or pilot approach. The Project would, in addition finance the evaluation of this project and make recommendations for the replication of these reforms nationwide. This approach seems feasible in Uzbekistan, since it is a new borrower, this is the first project in this sector, and health reforms are complex and difficult. By continuing the policy dialogue with the country in this sector during the Health project implementation, other areas for Bank financing could be identified for a possible "Health 11" project. The Health 11 project has been repeatedly discussed at the initiative of both the MOH and the Cabinet of Ministers. This would make the health system in Uzbekistan sustainable during the long run. The Bank would continue to collaborate with WHO, UNDP and other health agencies to assist the Government in the evolving health sector reforms. In addition, the Bank would continue to seek partnerships with other donor groups such as (i) British Know How Fund (grant funding for GP training/TA); (ii) KfW (grant funding for equipment and supplies); and (iii) USAID (TA for management and financing reforms).  Page 6 C: Project Description Summary 1. Project Components (see Annex 2for detailed lescription and Annex 3for a letailed breakdown): Component Category Cost incl. % of Bank- % of Bank Contingencies Total financing Financing (US$M) (US$M) (1) Strengthening Primary Health Care Services in Physical/ 53.8 77% 18.6 62% Rural Areas: The Project would contribute to the Institutional establishment of a network of modem, better Building staffed, and better equipped "rural medical centers" ("SVPs" using the Russian acronym) in the three pilot oblasts. This would involve care needs for a basic package of services, SVP function and design, construction standards, identifying needed protocols, and distribution and delivery of equipment, supplies, and drugs. It would also involve strengthening of central rayon polyclinics (as the apex of the primary care service delivery system) with selected diagnostic and laboratory equipment. To support and strengthen the implementation of Government's plans to improve health services in the rural areas in a sustainable manner, the Project will provide: (i) basic diagnostic, therapeutic, and laboratory equipment for all SVPs developed under the four year program at an appropriate level, and also furnishings, (ii) medical supplies and laboratory reagents; (iii) laboratory and diagnostic equipment at central rayon polyclinics; (iv) vehicles (20) for areas where the terrain is rough; (v) packet radio communication system in selected locales; (vi) equipment, training and foreign and local technical assistance for health promotion; and, (vii) training, workshops and technical assistance for management and quality assurance programs and to enhance capacity for construction supervision. (2) Training of General Practitioners and Universal Policy/ 6.8 9% 5.5 18% Nurses: Health personnel training is a critical Institutional prerequisite for reforming and strengthening PHC Building/ and improving quality and efficiency of SVP Physical services. This component would develop: (i) a faculty department in a medical institute in Tashkent; (ii) a year-long training program for trainers and later for practicing physicians; and (iii) short-term onsite training programs for practicing physicians and nurses at SVPs. The onsite programs would be developed in collaboration with selected medical institutes each associated with one of the pilot oblasts. The component would also develop a longer term reform of Medical Education and include trainers, a new curriculum, and a training strategy for undergraduate and post graduate work related to General Practitioners (GPs). A focus would be placed on both: (i) primary care and (ii) public health areas of medicine. Other activities financed under the component would include: (i) a  Page 7 Component Category Cost incl. % of Bank- % of Bank Contingencies Total financing Financing (US$M) (US$M) new accreditation process of medical training institutions, and (ii) the introduction of certification and licensing of physicians. The Project would finance Civil Works (rehabilitation of training bases and SVPs' buildings, rehabilitation of two nursing schools); Goods (medical laboratory, computer, office equipment, furniture, training materials, emergency drugs and related consumables for training centers); and Services (technical assistance, teacher training and workshops, fellowships, scholarships, study tours). (3) Strengthening of Finance and Management: The Institutional 3.9 6% 2.8 9% project would improve incentives and efficiency, Building/ and help ensure the sustainability of the initiative, Physical/ and of the Government's rural health care reform Policy program. The component would be implemented in the following two phases: (a) pilot demonstrations in the three oblasts: This would involve developing and testing various financing and management/information systems in 16 pilot rayons. It would design and implement two new capitation payment schemes for SVPs and individual providers, train and place new practice consultants (managers), develop and implement new clinical and financial information systems, and develop associated facility rationalization strategies. New incentives at the local level would be coupled with greater flexibility and decentralization of authority to the local level. An improved incentive- based system for matching facility workloads and staffing patterns would also be developed. The Project would finance Civil Works (rehabilitation of computer centers); Goods (computer and office equipment and software for I (one) national, 3 (three) oblast and 9 (nine) rayon computer centers, and 3 (three) pilot SVPs); and Services (technical assistance and training for software development, pilots evaluation and dissemination; and seminars on new financing and information management systems). (b) pilot demonstration evaluation and roll-out: The pilot demonstrations in the three oblasts and the reforms would be evaluated, replicated and disseminated throughout the three oblasts. The Project would finance Goods (minor computer and office equipment for SVPs and zonal polyclinics); and Services (technical assistance and training for pilots evaluation and dissemination). The component also would develop annual  Page 8 Component Category Cost incl. % of Bank- % of Bank Contingencies Total financing Financing (US$My_ (US$M) rationalization plans for closing duplicative and underutilized facilities, to improve efficiency and sustainability of the initiative. Technical assistance would be financed to develop facility-specific annual plans. (4) Project Management: A Central Project Project 3.3 5% 1.1 4% Implementation Bureau and three oblast Project Manageme Implementation Bureaus would be established nt/lnstitutio within the MOH and oblast Health Departments, nal respectively, to carry out day-to-day project Building implementation, management co-ordination, and monitoring. The Project would finance staff salaries, office equipment, and up to 4 vehicles for CPIB and oblast PlBs. The component also includes funds allocated for Institutional 2.0 3% 2.0 7% preparation of a Health II project (TA, training and Building equipment to start up pilots under Health II); Total 69.8 100% 30.0 100% 2. Key policy and institutional reforms supported by the Project: A number of key policy and institutional reforms are supported by the Project; among these are: Decentralization of Decision-Making: New management structures, and new financing and provider payment systems, would create increased local management autonomy at the oblast, rayon and at the facility level. New bank accounts would be created for local facilities. Budgets would be provided for enrolled populations and funds can be used more flexibly and efficiently, subject to explicit performance standards for both providers and facilities. Upgrading of the Medical Profession: Both the relative mix of providers would change, as would the relative professional status of PHC and GP physicians. Second, medical institutes would change curricula and training funds would be provided for new faculty with world-class skills in medical care provision of primary and outpatient care. Third, institutional processes to assure improved quality and ongoing training of skills- through national accreditation and licensing processes-would be established. Incentive-Based Financing of Care: The flow of health care funds would change under the Project, to follow the patient and be provided for the services utilized and the outcomes gained, instead of only based on numbers of inputs. Incentive-based payment systems are increasingly recognized as perhaps the single most significant catalyst for behavioral change and improved technical efficiency and allocation efficiency in the health sector in middle and upper-income countries. Closure of Excessive and Redundant Facilities: The Project would include a policy process and institutionalization of a health facility rationalization strategy to close and consolidate unneeded and costly health facilities. Each of the oblasts have participated in initial workshops to model financial impacts, and have developed a rationalization strategy to assure closure of duplicative functions, and better assure long-run sustainability. Each year facility-specific plans will be developed in each oblast.  Page 9 3. Benefits and target population: Benefits: The main benefit, for up to 4 mln residents in the three pilot oblasts, would be: first, improvements in the delivery of critical basic services; and second, improved decisions of providers about health care through the creation of strengthened information and management structures and integrated with appropriate incentives. The Project should lead to fiscal savings and long-run sustainability flowing from more efficient and targeted use of resources for health care services, equipment, and pharmaceuticals. The Project also could lead to savings in direct costs to patients and families. The Social Assessment found that patients often bypass lower levels of care due to a lack of perceived effectiveness at these levels. Instead, patients go directly to central district hospitals, but often encounter demands for informal payments to providers and payments for supplies and pharmaceuticals provided. Indirect benefits would include improved information through new management and information systems, which should lead to better understanding of ongoing approaches to improve clinical protocols, manage patients, and manage resources efficiently. Other indirect benefits include reduced travel time for patients, improved social welfare and productivity of the citizenry. Target Population: The project would have an immediate impact on a population of 4 mln in three oblasts: Ferghana (2,584,400), Navoi (769,600) and Syr Darya (642,900). The project should have an especially beneficial impact on women and children, who can be expected to use the facilities more and to receive services with greater short-run impact on health status and health outcomes. In the longer run, the project as a learning pilot or demonstration program, can be expected to have an impact on the entire population of 23.4 mln through the evaluation, dissemination and replication activities. 4. Institutional and implementation arrangements: The Project would be implemented in three very diverse pilot or "leader" oblasts. It is critical to establish an appropriate structure for overall project coordination and management. The executing agency would be the Ministry of Healtlh, and the Project will be managed by the (CPIB) Central Project Implementation Bureau (which has been established within the national MOH and reports directly to the Minister) assisted by oblast Project Implementation Bureaus (PIB) in each pilot oblast (which have been set up within the health departments of local Khokimiats). Key staff of the CPIB and PlBs have been selected on a competitive basis and appointed by the MOH. The MOH has provided an office space for the CPIB. The PPF funds have been provided to cover costs of establishing an office before loan effectiveness. The CPIB has replaced the PIU which was established by GOU in 1996 to prepare the project, manage the work of the contractor, and liaise with the Bank. This PIU has done an outstanding job managing the Japanese grant and project preparation activities, however, it did not have sufficient capacity or the necessary specialists required for project implementation. To provide overall guidance and coordination for project preparation, the Government in 1995 established an Inter-Ministerial Task Force (Working Group) which included representatives of the Cabinet of Ministers, Ministry of Macroeconomics and Statistics, Ministry of Finance, Ministry of Health, and the Director of the PIU. In April 1998, the Task Force was discontinued and replaced by a new Steering Commission (SC), with similar membership of relevant Ministries plus stakeholders such as the Ministry of Justice and the National Medical Association. The SC is chaired by the Deputy Prime Minister, with Deputy Chair by the Minister of Health, and the SC will act as an advisory body for the Project. Project Management and Coordination: The CPIB's main responsibilities are to: (a) provide overall coordination and day-to-day management of all project activities; (b) assist oblast PIBs in project implementation in the oblasts and address any issues and problems that may arise, regarding unfamiliar Bank rules and procedures, jointly; (c) monitor overall project implementation, deadlines and resource utilization; (d) assume responsibility for procurement, disbursement, accounting and reporting tasks associated with the Project; and (e) liaise with MOH, MOMES, MOF, Cabinet of Ministers, World Bank and other agencies. In connection with its responsibilities, one of the first tasks of the CPIB will be to prepare a Project  Page 10 Implementation Manual (PIM) which will be based on the Contractor's report and the Project Implementation Plan prepared by the Bank team. The PIM will outline the project description, objectives, key implementation issues and strategies, role of the CPIB and oblast PlBs (and linkages between them and between various project beneficiaries), and summarize procedures for disbursement, project and special accounts, methods of procurement, procurement and implementation schedule, reporting requirements and schedule; and detailed terms of reference for each activity. It will contain sample forms of contracts and withdrawal applications. The adoption of a PIM acceptable to the Bank is a condition of effectiveness. Project Implementation: The Project will be implemented in four years. The Project will be executed by the MOH and local health authorities in Syr Darya, Navoi and Ferghana oblasts. The Ministry of Health would be responsible for the administration of all procurement financed from the loan proceeds. The Central Project Implementation Bureau would coordinate the work of the specialized agencies Uzmedexport (Procurement Agent) and Uzmedtekhnika (Consolidator and Distributor) and would communicate to the Bank on procurement matters and actions requiring Bank review. A Procurement Agent would carry out procurement of goods and services (as applicable), including arranging for the customs clearance; Consolidator/Distributor would be responsible for the distribution of the goods to the end users. The capacity of the Procurement Agent to undertake the tasks under the project has been appraised by the Bank team during the pre-appraisal and appraisal missions and found to be satisfactory. Training plan in the Bank procurement procedures for the Uzmedexport staff assigned to the Project has been prepared and is being implemented. Also, the CPIB is in the process of contracting for an external consultant experienced in project management and Bank procuremeni to assist the CPIB in preparation of SBDs and carrying out first ICBs. Loan funds will be made available to finance such types of TA. Agents' commission would be paid by the GOU as part of its contribution to the Project. Finance, Accounting and Auditing Arrangements: Prior to Loan effectiveness, the CPIB will hire an accountant/disbursement specialist who will be responsible for establishing an accounting and control system which will have the capability to record and retrieve all financial transactions associated with the Project in a timely manner and comply with internationally accepted standards. The financial management procedures and requirements to the accounting and control system have been explained to the CPIB staff during appraisal have been confirmed at negotiations. A condition of effectiveness is that the Government has in place a financial management system that comports to the new policies implemented by the Bank as of July 1. The CPIB budget includes funds for TA if the need in external assistance arises. The CPIB would maintain consolidated accounts for the Project and will ensure appropriate accounting of the funds provided under the loan. The CPIB would prepare quarterly financial reports, and ensure that audits of the financial statements and reports are submitted to the Bank on time. The project (or recurrent) accounts, including Special Account, will be audited in accordance with the Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank (March 1982) and the Financial Accounting, Reporting and Auditing Handbook, 1995. The audit report will be of such scope and details as the Bank may reasonably request, including a separate opinion, by an independent auditor, acceptable to the Bank, for SOEs against which disbursements have been made or are due to be made from the loan and SOEs which will be included in the audit reports accompanying the financial statements. The audited financial statements of the Special Account, project accounts, and SOEs of the preceding fiscal year, including a separate opinion by the auditor on disbursements made against certified statements of expenditures, will be sent to the Bank within six months of the end of the Governments fiscal year. The cost of the audit is an incremental cost to this Project and is included in the CPIB budget. Timely submission of audit reports will be a covenant of the Project. Reporting Arrangements: The Project will be implemented with reliance on annual work programs and budgets. The work programs will be submitted to the Bank by December 1 of each year ( though the Loan Agreement allows for more time if necessary in Year I due to timing of the Board date). It will include a summary of activities for each component and specific management/coordination activities such as procurement, Project Bureau's staff training, accounting, auditing to be undertaken by the CPIB during the year. Also, semi- annual progress reports covering all project components will be prepared by the CPIB and sent to the Bank within one month of the end of each semester. The reports will be prepared as per the mutually agreed format in  Page 11 the Project Implementation Manual and will be modified as necessary during project implementation. The first report will be issued before the first Bank supervision mission and include, inter-alia: (a) progress achieved against agreed implementation and disbursement schedules and key performance indicators, including number of contracts awarded and status of all contracts; (b) work programs and cost estimates for the coming six months; (c) status of compliance with covenants and major agreements under the project; (d) update on monitoring and evaluation indicators; (e) a description of issues and problem areas along with recommended corrective actions; (f) a description of progress in resolving previous problems and addressing earlier recommendations; and (g) status of the Special Account. The CPIB will set reporting guidelines and deadlines for the receipt of required information from the PlBs in order to prepare a consolidated report. The CPIB will be responsible for translation of all reports into English for submission to the Bank. Implementation Completion Report (ICR): The CPIB will prepare in conjunction with the Bank, an ICR upon completion of the Project and in any event not later than six months after final disbursement of the Loan proceeds. Included in the ICR will be an assessment on the execution and initial operation of the Project, costs and benefits derived or to be derived, the performance of the Borrower, the Bank and other agencies involved in the Project regarding their respective obligations and accomplishments, and including lessons learned. The ICR also will include plans for the future operation of the facilities which had been financed under the Project, including the indicators for monitoring and evaluating future operations. Project Monitoring and Evaluation: The Central Project Implementation Bureau would be responsible for setting up the Project financial management and monitoring system. Project monitoring and evaluation will be carried out in the following areas: (a) procurement and physical delivery of goods and services; (b) the physical implementation of project activities; (c) impact on service delivery; and (d) the financial management and control of the use of project funds. A systematic assessment will be carried out in the context of the Project Implementation Plan, Performance Monitoring Indicators, and the annual work programs. Project outcomes will be evaluated in terms of their impact on: (a) quality of services; (b) changes in clinical protocols and utilization patterns; (c) health status of the population in the pilot areas; and (d) changes in efficiency, both technical and allocative; (e) overall cost effectiveness, and (f) consumer and provider satisfaction with the reforms. After the first year of implementation, the first complete review of project activities will coincide with the Bank's supervision mission. At the mid-point of project implementation, a more fundamental assessment of overall as well as component-specific project design, implementation, feasibility, replicability and sustainability will be carried out. The first year and second year evaluations will utilize project funds for foreign and local experts. D: Project Rationale 1. Project alternatives considered and reasons for rejection: Development of the Pharmaceuticals Sector: Pharmaceutical development in Uzbekistan is one of the priorities of the GOU reform agenda. During project identification, the IEPS (September 1995) addressed the possibility of including a component that would strengthen the domestic pharmaceutical sector, in particular the domestic production and distribution of emergency and essential drugs. The TOR for project preparation included a feasibility study that would assess current and prospective pharmaceutical needs, as well as the adequacy of current financing and distribution mechanisms. The study found that public support of domestic pharmaceutical production was not cost-effective relative to competitive purchase of these items from international vendors. It further recommended that restructuring and possible privatization of pharmaceutical production and distribution was beyond the limited scope of the Health project, primarily aimed at strengthening PHC for the rural population. Instead, it recommended this be an area for private companies and investors financing, and not the purview of IBRD financing. Indeed, later IFC financing provided an India-based company with $US 4.0 (mln) for a new production capacity. In addition, serious doubts were raised about the Government's ability to assure the quality of the domestically produced medicines.  Page 12 Vaccine Production: As part of project preparation a formal feasibility study of planned investments in the domestic production of essential vaccines was performed. The key findings were: (i) existing production of vaccines does not satisfy minimum requirements of international Good Manufacturing Practice (GMP), as specified by WHO. A considerable amount of time would be required before local practices would meet these requirements; and (ii) investment in the local production of essential vaccines will not be cost-effective since the price of locally produced vaccines would be approximately twice as high as those purchased from international suppliers such as UNICEF. For example, to meet the annual requirements of the DPT vaccine alone, the GOU would have to pay an additional US$ 330,000 for locally produced vaccines. For these reasons, the Bank encouraged the Government that it should not finance local vaccine production in Uzbekistan, and hence it has not been included in the project design. The Health project, however, acknowledged the needs of the GOU for high quality imported pharmaceuticals and vaccines generally, and the project would finance training, workshops and technical assistance to strengthen the testing and quality control of pharmaceuticals. It provided consultant support and proposed that the Government finance civil works to provide new housing for a national testing and drug control laboratory, and the Bank would provide equipment and technical assistance to upgrade the capacity of the drug testing laboratories. These proposals were not accepted by the Government, however, due to recent policy changes which made drug-testing activities off-budget and self-sustaining, and thus not within the legal purview for Government borrowing. Pharmaceutical Delivery and Distribution System Reform: Technical assistance and training to assess and develop a drug and medical supplies delivery and distribution system was designed by the contractor and supported by the Bank staff. The new approach(es) proposed by the Bank would have been piloted as part of the demonstration programs in a number of rayons in the first two years of the project. The proposal would have developed more copayment schemes for all patients, but have provided greater subsidies for those patients requiring larger out-of-pocket purchases for pharmaceuticals. The pilots would have provided a greater supply of both emergency and essential pharmaceuticals on an outpatient basis. The proposal for essential pharmaceuticals was rejected by the Government because it was viewed as inequitable across rayons (pilot rayons would have, on average, greater access at less cost to patients and families), and also as susceptible to corruption and black market reselling of pharmaceuticals across rayon borders. The issue of emergency drugs has been addressed through a Cabinet of Ministers-level management plan for assuring adequate supplies and distribution of emergency drugs. The Health project will establish a pool of funds for these emergency drugs, however, to provide currency back-up in case funds are needed. Secondly, the pool might be useful for allowing the government to competitively bid for purchases of needed pharmaceuticals. This bid process will possibly lower the cost of pharmaceuticals relative to purchase from the national government-run monopoly supplier Dori Darmon. If these funds are not needed, these funds will be used for equipment. Regional Vs. National Project: This would be the first project in the social sectors in Uzbekistan, a country where the Bank has limited lending experience and the Government has taken a cautious approach with reforms. For these reasons a smaller ("pilot") project was preferred that could test new approaches, and would have a shorter preparation and implementation period than a national project. Experience from this project and continued policy dialogue with the GOU and other donors could be applied to the design of a second Health Project. Choice of Oblasts: The Bank staff originally requested 1-2 oblasts as pilot sites. However, the Government's response was to nominate three oblasts-Ferghana, Navoi and Syr Darya-as the Health project area to represent three different types of geographic, economic and demographic areas in Uzbekistan with very different prevalent health conditions. Both (i) a social assessment and (ii) an oblast- by-oblast socio-economic analysis (Annex 11) confirmed the diversity of conditions and recommends that findings in each oblast may be generalizable to those parts of the country that share its characteristics.  Page 13 2. Major related projects financed by the Bank andl/or otlher development agencies (completedl, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings _ (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Water Supply, Sanitation Effective on and Health Project October 7, 1997 IFC Intravenous fluids and Ongoing tableting (USS 4.0 mln) Other development agencies a) USAID Technical Assistance and Ongoing. Funds Training in Management were utilized for and Financing Reform the project- focusing primarily on related facility Ferghana, but including rationalization both Syr Darya and Navoi workshop in oblasts, to help prepare, December 1997 design and implement and in 1998 to financing and management develop the changes in conjunction capitation rate with the Health project. for Ferghana SVPs for implementation in 1999. b) British Know How Fund Technical Assistance and Committed Training in GP and Family $400,000 of Practice of medicine, support during focusing primarily in February Tashkent but may include Appraisal other areas as well, to help Mission, and prepare, design and competitive bid implement GP training and award to Health curricula changes in and Life conjunction with the Sciences Health project Partnership, Summer, 1998. c) UNFPA programs * Improvement of Ongoing Reproductive Health in Uzbekistan ("AVCS" International) * Development of Ongoing unified curriculum on family planning for training medical schools ("JHPIEGO") d) GTZ (Gesellschaft fur Technische Promotion of Ongoing Zusammenarbeit)/EPOS Reproductive Health in the Republic of Uzbekistan e) USAID/BASICS Rapid integrated health Ongoing facility assessment in ._________________ Ferghana oblast under the  Page 14 Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) USAID funded Central Asian Infection Disease Program 3. Lessons learned and reflected in the project design: The Bank has limited lending experience in Uzbekistan. So far there have been only five projects which are currently under implementation: the Institutional Building Technical Assistance Project ( or IB/TA) (Ln. 3560- UZ);.the Cotton Sub-Sector Improvement Project (Ln. 3894-UZ); the Pilot Water Supply Engineering Project (Ln. 4216-UZ); the Water Supply, Sanitation and Health project (Ln. 4090-UZ); and the Enterprise Institution Building Project, formally negotiated in May 1998. The current ratings for development objectives, implementation progress, and project management are satisfactory for the IB/TA loan, the Cotton Project, and the Pilot Water Supply Engineering project. Implementation of these projects was delayed considerably due to delays in setting up the project implementation unit, unfamiliarity with the requirements of internationally- financed projects, and the Government's pre-occupation with the transition process. The Pilot Water Supply Engineering Project was declared effective only after several months time for building local expertise in procurement and project management. Lessons highlighted in the Bank's Europe and Central Asia Region 1994 Annual Report on Portfolio Performance in Russia and Central Asia focus on: (a) the challenge of identifying a consistent counterpart team with sufficient authority to move the project forward; (b) the difficulty of coordination among key government agencies on critical issues; (c) the importance of setting up a project implementation/coordination unit early in the project cycle and the training of its staff in Bank procurement, disbursement and financial management procedures and requirements; and (d) the importance of involving local institutes in project design and preparation. The Health Project would be the Bank's first lending operation in the health sector in Uzbekistan. The Government has recently enacted a new visionary law on health sector reform which envisages a series of changes over the next 10 years related to diversification of revenues flowing into the sector, creation of health insurance, and expanded privatization of providers and distribution networks. Nevertheless, the start-up of Bank activities in Uzbekistan has been somewhat later than in the other FSU countries. Bank assistance to date has focused on policy dialogue, grant support in the design of a reform program, and institution building. It also has engaged in a long-standing dialogue on the prudence and relative cost-effectiveness of public investments related to pharmaceutical and vaccine production. Reviews of lessons learned from implementing its earliest health projects in ECA countries show that: a) health sector reform is a lengthy, politicized process requiring: (i) carefully sequenced changes; (ii) strong support to augment countries' overstretched institutional capacity for implementing reforms; and (iii) marketing of the reforms to lawmakers, the medical community, and the public; b) simple investments with simple implementation arrangements are more likely to succeed; c) shorter projects linked to smaller, more realistic sets of reforms are more likely to be effective. Project preparation in other sectors in Uzbekistan also indicates the need for straightforward project design and implementation mechanisms, given limited institutional capacity and weak financial systems. Achieving simplicity is difficult, however, given the necessity of oblast-level interventions in order to implement change in the health sector, and the array of largely interlinked issues that are involved in efforts to improve health sector performance-notably financing and management reforms, changes in clinical information and practice, and new standards in the quality of health services. The experiences gained and lessons learned have been incorporated into the proposed Health Project on an ongoing basis:  Page 15 * project design is relatively simple, focused on one level of outpatient care, though linked with the inpatient sector conceptually; * is designed as a pilot, limited to three oblasts; * reforms proposed build partnerships in the strategic areas already initiated by the Borrower. The Borrower has always perceived the project as the Government's own as a consequence; * a social assessment was completed with the participation of local institutes; * implementation period would be four years; * a national Task Force (Working Group) was established by the Government in early 1996 to provide leadership at the stage of project preparation. The Minister of Health was the Chairman of this Task Force and has been an effective counterpart with sufficient authority to make decisions about the project; * a Project Implementation Unit (PIU) was established (in early 1996) to manage the Country-Executed PHRD grant under the general guidance of the Task Force (Working Group). On behalf of the Government, the PIU shortlisted and procured consulting services for the project preparation study and coordinated the work of the selected contractor; * the Government requested a PPF in the amount of $750,000, which was approved by the Bank on November 20, 1997. 4. Indications of Borrower's commitment and ownership: * The Government is clearly committed to the project (see D.3. above); * The Government's State Program (recent legislation) for the reform of the health sector shows commitment to the sector; - Reforms in the sector have already been initiated in 1996, and by the year 2000 the GOU plans to close most FAPs, SVAs, and SUBs. Most of these would be replaced by the new type of institution called "Rural Medical Centers or "SVPs". Consolidation, rehabilitation and construction activities have already been initiated in the three pilot oblasts. By the end of calendar 1997, 110 SVPs are expected to be opened in these oblasts; a significant number of FAP and SVA facilities have already been closed as well; * During project preparation the national Task Force worked closely with the contractor to draft the medical, laboratory, drugs, and medical supplies lists to be financed by the proposed loan and required to equip the four different levels (types based on population served) of SVPs; 3 Most recently, the Bank and the Government worked closely during the Appraisal mission to develop agreements on a number of outstanding issues: * an outline of a strengthened system of control over building quality and functioning, including running water, toilet and waste water disposal; * a management plan for: (i) the control of emergency drugs at SVPs; and (ii) ensuring a constant supply of essential drugs by Dori Darmon for SVPs patients and their families; * an assessment of needs of FAPs in remote areas of Navoi oblast; * an action plan for health promotion and health education at the oblast level, including staffing needs, equipment, supplies and budget; * official approval of selected training sites, as well as design specifications and budget, to serve as a training base of the five medical schools participating in the General Practice training component; * revised study tours and technical assistance Terms of Reference; * drafting of the necessary legal framework to begin the pilot demonstrations through a proposed Cabinet of Ministers' resolution; * a rationalization strategy in each oblast to assure that the project will be financially sustainable after the completion of the Bank's financing program; * the national and oblast project management structure; * selection of candidates for the central and oblast Project Implementation Bureaus and Steering Commission; * process of setting-up Central (national) and Oblast Project Implementation Bureaus (i.e., provide office space and select components coordinators); * facilitated monitoring and baseline data collection; and,  Page 16 * selection of an audit firm for the PHRD grant. 5. Value added of Bank support in this project: Much of the original thinking and re-focus on primary care by the Government's leadership is attributed to Bank staff working with leaders in 1993 and 1994, with some evolutionary thinking since that time. It is apparent that the health reforms include multiple dimensions of change in the three pilot oblasts. In addition, the reforms embrace market-oriented principles and incentives. On both counts, the Government needs technical and financial assistance to carry these out successfully. The proposed Health Project will accomplish not only specific health objectives, but also will influence the general direction of the health reforms. The project would provide the opportunity to test most of the Bank's sector work recommendations, and eventually replicate them throughout the country. The Bank's project also has leveraged interest and support from other international donors who had been frustrated previously by lack of dialogue on reforms with the Uzbek leadership. The project effectively coalesces multi-party support and participation in the implementation of major health reforms. Participants include UNDP and WHO, as well as with bilaterals such as British Know How Fund (BKHF), and USAID. The project will help continue the Bank's presence and influence in the sector on issues of broad sector policy. The continued presence of the Bank in the country may also influence general policy, and contribute to accelerating the shift from a command to a market-oriented economy. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): - [I]Cost Effectiveness Analysis: [X] Other (Cost-Benefit Analysis) The primary finding illustrated in the summary table (Annex 4) is that there are tangible potential economic benefits to be gained from the project, and these are large enough to justify the loan on a cost-benefit basis. Discount rate for calculating the NPV was performed at 10 percent, based on the Bank's traditional approach of using a notional range of 10-12 percent opportunity cost for borrowing for capital. A sensitivity analysis was performed using an NPV of 4 percent; the results were the same in terms of direction, though relative amounts changed (from 26.3 to 33.3 min USD). A substantial portion of savings stem from savings that accrue to individuals and families outside the health sector, and potentially to the employer. The economic justification therefore lies to a large extent in the fact of: i) benefits going to patients and families and their employers; and ii) from a health care standpoint that the intervention is directed at shifting health care toward known, established cost-effective strategies for addressing an excessive burden of disease. An analysis of the savings accruing to the health sector points out that the project is reliant on three approaches to achieve sustainability in the long term. First, a substantial portion of funds will be saved through closures of additional, duplicative facilities-including hospitals for inefficient care or unnecessary care-and these can be shifted back to cover increased operating costs. This rationalization of facilities is a covenant of the loan program. At the same time, the table shows negative cash flows are expected in some years, in order to address increases in operating costs. It should be noted that costs and savings will be refined each year, and while the Government has developed a rationalization strategy already, a more aggressive rationalization strategy may be needed over the cycle of the project if financing gaps develop. This needs to be developed and negotiated as cost and savings estimates are refined each year and facility- specific plans are developed. Second, and concurrently, as a percentage of budget allocation, more of the budget needs to be directed at outpatient and primary care. This should be possible as referrals and admissions drop; bed capacity and decreases in personnel should follow in the inpatient sector. This is consistent with recent trends both in Uzbekistan and in other FSU countries. This allocational shift of budgetary resources will be a further covenant of the loan. Third, the Government will commit to maintaining current levels of spending (in real terms) for health over the course of the project. At the same  Page 17 time, the Government may be willing to commit greater relative shares of spending for health services in the future (based on income elasticities across similar countries), allowing the budgets to effectively cover more costs and so becoming more affordable to the Government. 2. Financial (see Annex 5): NPV=US$ -20.8 min The net financial (fiscal) impact of the project shows that over a twenty year period total additional discounted capital plus recurrent costs (at loan interest rate of 6.14%) amount to $136.8 mln. while estimated savings are $116.3 min., a net total of $20.8 mln. Total repayments (discounted) amount to $22.3 min The overall present value of net negative cash flow (net costs plus repayment) is $17.5 min. This amounts to $4.41 per person over 20 years, or $0.22 per year for each inhabitant of the three oblasts. Total negative cash flow over the life of the loan is $60.4 mln. This level of negative cash flow is minimal; even under a no growth scenario, the impact is less than 1% of the national health budget over a 20 year span. 3. Technical: The project is technically justified on the basis of the relative importance of the health problems it addresses, its use and reliance on cost-effective interventions and a strategy for sustainability, and the social value of project objectives and interventions. Addressing Health Indicators: The project design addresses the following important health problems: * An analysis of the premature loss of DALYs was performed, based on available mortality data, in order to ensure that the project design takes into account the major causes of, and most cost-effective means of reducing, premature deaths among the rural population. This analysis found that ARI, CDD, and untreated hypertension are the most prominent causes of premature death among Uzbekistan's rural population. * Nearly 70 percent of the population live in rural areas, perhaps increasing the IMR, the MMR, and the birth rate in the aggregate as compared with other countries. The IMR (22.7/1,000) and MMR (29.5/1,000), though declining in recent years due to government priority-setting, are still high as compared to other countries in the world with similar incomes. * A package of PHC services would be provided to all citizens through the SVP structure. Included in this package of services are essential individual clinical, promotive and preventive care, child health services, reproductive health care and provision of emergency care. The SVPs will be equipped and staffed to meet these needs. To round out their capacity to function effectively, each delivery point will have communication and transport capacity to allow rapid and appropriate referral to the rayon level facilities and permit the staff to conduct outreach activities. * Cost-Effectiveness and Sustainability: The SVPs that will be created will have better trained personnel, better equipment, more supplies and pharmaceuticals than current primary care facilities and therefore, will be able to provide a much greater amount and variety of higher-quality services. However, these SVPs will have significantly higher recurrent costs. The additional costs must be financed, or the activities to be financed by the project would not be sustainable in the longer-term. Additional funds can be expected for health care due to: (i) expected economic growth and the empirical trend of most countries willingness to increase spending for health care as a percentage of GDP as GDP grows; and; (ii) from improved efficiencies related to management and financing reforms. The extent of needed additional "savings" beyond this is unlikely, and will need to be captured through rationalization of existing expenditures in other parts of the health care system, through facility rationalization and other possible approaches. An estimate of the financing needs and gap was calculated for each of the three leader oblasts for the period 1996-2001 and rationalization plans developed that calls for closure of 703 facilities. * Reforms in Medical Education: A transformation of medical education and the training of health care personnel in Uzbekistan has been underway since 1992. Reforms to date have intended to reduce  Page 18 reliance on specialist and sub-specialist care and promote and strengthen the education and role of GPs. However, both international and local experts have concluded that changes to date have been inadequate, and will have a modest impact on medical practice. The goal of the GP/UN Training component of the project is to ensure that SVPs in the leader oblasts would be staffed with adequately trained GPs and universal nurses, and to develop trainers, not only for the purposes of the project but also to promote the development of teachers at medical schools who will lead the process of restructuring medical education in the country. * Social Value of the Project: Recent public opinion surveys conducted by the Bank (1997) and USAID (1997) identify food and the quality of health services as the two biggest social concerns in the country today. The project also is consistent with the stated priority areas for health care reform outlined by the Government: women and child health protection; infectious diseases and prophylactics; strengthening primary health care; and environmental protection. The proposed Health project would address most of these priority areas. From an analytic/empirical standpoint, the project addresses both the major morbidity and mortality issues identified in the project preparation's DALY analysis. Improved health will provide an improved base for the country's human development but also strengthen it's capacity for a strong and productive workforce. 4. Institutional: The Institutional Assessment focused on the interests of the Government and health sector personnel responsible for policy-making at national level, and on-the-ground project implementation issues in the pilot oblasts. The main findings of the institutional assessment are: * The government is characterized by a strong President who has held the post since the breakup of the Soviet Union. He works with a Parliament, the Olliy Majlis, which has several Mandatory Committees including a Committee on Labor and Social Protection of Population that covers health as well. The Cabinet of Ministers (the Chairman of which is the President) is responsible for the day-to-day work of the Government. The Prime Minister, with several sectoral Deputy Prime Ministers (among them there is one responsible for the social sector), oversee the health care system in general and in coordination with other state agencies (under other sectors) that provide medical services; - The Minister of Health, among other leading ministers, is a member of the central Government and the Chairman of the Ministry of Health Board. The Minister has five Deputy Ministers (one is the head of Tashkent city health department and has the status of the Deputy Minister) responsible for various sub- sectors within the health system: (i) curative services and preventive care; (ii) maternal and child health and family planning; (iii) medical educational establishments and science; (iv) sanitation and epidemiological issues; (v) new technologies and medical equipment, etc. The Minister and each of the Deputy Ministers supervise several central units; * The public sector health system structure absorbs over 90% of expenditures, with annual budget allocations from the center. From a bureaucratic and infrastructure standpoint, the system is vast. It comprises the MOH in Tashkent, the Ministry of Health of the Republic of Karakalpakstan, health care related management bodies of Karakalpakstan, health departments of oblasts and the city of Tashkent, and subdivisions of the above in towns and rayons. The public health sector system also comprises curative-and-preventive facilities and scientific-research institutes, educational institutions to train and retrain health and pharmaceutical personnel, pharmaceutical enterprises and organizations, sanitation- and-prevention facilities, forensic medical units, enterprises producing medicines and medical instruments/equipment as well as other enterprises, agencies and organizations under the public health care system administration that deal with health care delivery. The public sector health system also comprises clinics of research institutes, curative-and-preventive facilities and drug stores established by other ministries, departments, state enterprises, agencies and organizations. Curative-and-preventive facilities within the public health sector system, funded by the state budget, render their medical  Page 19 services to the public free of charge; * There are problems with the current system, similar to-other FSU countries in the region. For example: (i) there is a parallel functioning of medical establishments run by enterprises and private entities (mostly a vestige of Soviet times) that creates some overlap of responsibilities (a problem only in Navoi from the perspective of this project); and; (ii) most of the rural medical establishments are located in dilapidated or unfit premises. Of all FAPs, for example, 49% are located in buildings consisting of small spaces of 1-2 rooms; rural facilities often lack heat, sanitation facilities and running water. Supplies and equipment for diagnosis and treatment can be entirely absent; * The Ministry presents an organizational structure which is the outcome of a structure developed in the FSU era, but with certain modifications in the course of the years of independence. Still the country's highly centralized public administration system, with minimal delegation of authority, affects health services management. High level managerial positions are held by specialists who infrequently receive formal training in management of public administration (and which, in fact, did not exist in the Soviet era). The Ministry identifies priorities in health care, deals with allocation of financial and logistic resources for health care and medical science development. It sets state quality standards and costing normatives for health services for all health facilities, and issues licenses for medical and pharmaceutical practice, etc. In accordance with the Resolution of the Cabinet of Ministers, the Ministry has set up a Principal Department for quality control of medicine and medical equipment. The Department is responsible for maintaining quality control and certification of pharmaceutical production, medical equipment, and special food-stuff aimed at controlling the sale of medical items that do not meet standards. The objective over time is to shift gradually to the level of international standards. 3 At the provincial/oblast level there is a Chief Health Administrator (Head of Oblzdrav) in each oblast (12 total), Karakalpak Republic, and Tashkent city. The Administrator is responsible for the delivery and coordination of all public health services in their regions. S/he is reporting not only to the Minister of Health (on medical issues), but firstly to the Governor (Khokim) of province (oblast), especially on administrative and financial issues. The Head of Oblzdrav has three deputies with almost the same responsibilities as Deputy Ministers but at the oblast level. All the functions in the competence of local health system authorities are defined in the State Law "On Health Care of the Population". Under the supervision of oblast medical authorities there are district/rayon medical administrations led by the Chief Doctor of the Central Rayon Hospital. Currently, the pyramid of medical facilities has five layers, which under the Government's Program is going to be adjusted to a new system. * Project management and coordination: The CPIB would be oriented towards health policy, planning, evaluation, dissemination and replication of pilots' results and in a Health 11 Project. The division of responsibilities within the executing agency (i.e., procurement would be carried out by the specialized firm of the MOH) would allow the CPIB to become a coordinator for the Government's State Program of the Health System Development. 5. Social: A social assessment found that the Health project corresponds to priority concerns of the poor, rural populations. It identified areas of opportunity and/or risk to be addressed in project preparation. The assessment was implemented in two stages, by a team of local consultants with assistance from the Bank between March and June, 1997. The social assessment comprised focus group discussions, meetings with health personnel, a questionnaire survey of approximately 1000 households in three pilot provinces of Navoi, Syr Darya and Ferghana, and a workshop that reviewed and discussed findings. A second questionnaire was administered where the household had sought medical treatment for illness in the last 30 days. The key findings and recommendations of the social assessment are below:  Page 20 Findings Recommendations Health Knowledge . The intended health reforms confirm with the * Involve stakeholders, provide detailed information priorities, expectations, behavior and needs of the to all levels of the health system regarding the rural population. However the assessment revealed implementation of the reforms. a relatively low level of health knowledge among . Project should incorporate public health education the rural population, and a lack of information about initiatives. ongoing reforms. * Need to train and retrain doctors in areas of preventive care, and in their role as educators of their patients. Access and Links to Referral Care * Existing facilities are often geographically * Ensure access in Navoi by providing necessary inaccessible; the new facilities have improved digital, radio, and telephone communications and geographical access except perhaps in Navoi. transport equipment. * The new SVPs should have the improved links with external services, such as maternity and emergency, by telephones, ambulances and selective improvements to public transport. * Continuity of services provided by FAPs must be . Problems linked with closing of FAPs should be ensured in the field of maternal and child health. closely monitored. FAPs in remote areas, such as * Adequate pharmaceutical and medical supplies are Navoi, might remain open and equipped with Bank often not available at present in lower-level financing. facilities. . To the extent possible, ensure an adequate supply of * There is a risk that underfunded SVPs will be pharmaceuticals and medical supplies under the unable to provide a satisfactory level of service to reform program. compensate for the reduction in the number of . Allocate adequate budgets to the SVPs. Establish facilities, and that the reforms will simply reduce realistic expectations through training, public the net delivery of health services to rural areas. education and publicity campaigns. Emergency Services * Emergency services need to be rationalized, made * Emergency care capacity is severely impaired. more reliable, effective and responsive to emergencies. Decentralization and Local Flexibility * Current health planning system appears inflexible to * Decentralization and flexibility should be respond to regional variations. encouraged through management training and education of family physicians. Costs of Care . Direct cost of health care to households has . Rationalize the direct out-of-pocket cost structures increased dramatically, and often contribute to now faced by consumers, to improve incentives behavior by families to bypass lower level facilities related to utilization and quality. and go directly to district level hospitals. Costs are * Ensure targeting of subsidies and protect the safety directly borne through demand for informal net. payments (typically occurring at district-level * Discuss cost-sharing policies at national level, facilities), and for all outpatient pharmaceuticals, provide information about alternate ways of and costs are indirectly borne in terms of lost time financing of health services, and promote a debate and travel costs. so that all stakeholders can be involved in designing * Costs faced by consumers often provide a new, sustainable system. disincentives for early presentation of symptoms, and/or treatment using cost-effective approaches (e.g., pharmaceuticals are covered by the State for inpatient services only)  Page 21 Findings Recommendations Program Monitoring * Program monitoring and evaluation should focus a Project should include an adequate monitoring on: (a) health needs; (b) access to the poor; (c) program, to ensure that the quality of care improves develop vvays to reach out to the population to and that the benefits are understood and compensate for greater distances; (d) tracking appreciated. mother and child health; and (e) effectiveness of targeting. 6. Environmental assessment: Environmental Category [] A [ B [X] C No adverse environmental impacts are anticipated. Participating facilities would be required to certify that physical plant meets established federal safety standards before ordering equipment which is subject to such standards. 7. Participatory approachl: Primary beneficiaries and other affected groups are listed below; each of these groups have been consulted with during identification/preparation phase; collaboration has been fruitful with many of these groups: * Beneficiaries/community groups were consulted during project preparation through the Social Assessment, and would continue to be consulted during implementation, through the pilot program evaluation of users satisfaction; * Medical and Nursing Schools were actively consulted during preparation, and will collaborate in the development and implementation of the GP/UN training programs to be carried out under the project, as well as on the pilot program evaluation; * The Khokimiat of each of the three pilot oblasts was actively involved in project preparation discussions. The Khakims will continue to be actively involved in implementation through the Project Implementation Bureau structure; * A Donor Roundtable was held in late 1996 at the beginning of the PHRD-funded contract work on design and preparation; * NGOs were informed of project activities during preparation, including having copies of the contractor's draft reports. This information dissemination and dialogue will continue during implementation; * KfW had initially provided and maintained a commitment of grant funding of up to DM 22 mln for equipment, supplies and pharmaceuticals, subject to project approval by the Bank's Board. Consultation and collaboration have been routine through the course of the project. German government budgetary issues related to the Maastricht Treaty has forced Bonn to communicate to KfW Frankfurt to put grant funding on hold; * The MOH and USAID, with the Bank's understanding and informal approval, signed a Memorandum of Understanding in Fall 1997 for collaboration with TA/training in the preparation of the financing and management component of this project, which would continue during 1998 and into 1999 during implementation; * The project and BKHF have developed and agreed upon some common activities related with short-term GP training and longer-term curricula development. The BKHF will commit $400,000 in TA and training; * WHO, UNDP, UNICEF, and other UN agencies participated on mission teams and were actively consulted during project preparation, and this would be expected to continue during implementation.  Page 22 F: Sustainability and Risks 1. Sustainability: The proposed project aims to create replicable models for health care delivery of critical services, financing and cost recovery mechanisms, and effective management and information systems. The oblast level interventions will be pilot programs, with built-in monitoring to measure impact and potential replicability. Operating costs of care in the new rural medical centers will increase, and these costs will need to be offset with a multi- dimensional strategy including: (i) improved efficiency in the organization and provision of care. By focusing on the provision of the most cost-effective care, the project would improve the efficiency of the health system. New provider payment mechanisms would create ceilings, preventing cost-escalation and improving efficiency; (ii) re-allocation of distribution of expenditures from inpatient to outpatient (see conditionalities); (iii)increased commitment to spending for health care services as GDP grows, consistentwith the willingness for increasing expenditures documented in other middle and upper-income countries; (iv) facility rationalization strategy over the life of the project. The project would downsize and eliminate health facilities in the three leader oblasts, and the resulting savings would be channeled to improving quality of care. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): The main risk to project success is the lack of administrative and institutional capacity in the Government, and in the MOH generally. There are variations in capacity in the three oblasts. Ferghana is (by all measures) most capable; Syr Darya least capable. For example, there may be inadequate capacity at the national and oblast levels to implement the provider payment systems, and the management/information systems required for effective and timely implementation. This has been addressed to some extent through intensive collaboration with key counterparts on the part of the project team based in Tashkent (which includes the WHO-financed Public Health Adviser to the Minister of Health), PHRD technical assistance during project preparation, other donor collaboration (BKHF and USAID), and staff of the Resident Mission. Lack of experience with World Bank procedures and processes could be a relative problem. This risk has been alleviated through PHRD support and assistance during project preparation.  Page 23 Risk Risk Rating Risk Minimization Measure Project Outputs to Development Objective High Politically and financially unsustainable health Maintain health policy dialogue with reforms. the Government. Limited institutional and human resource capacity, Involve beneficiaries and stakeholders at the national and oblast levels. in project preparation, implementation and evaluation. Unwillingness to borrow for foreign technical assistance, as well as for training. Cooperate with other international agencies for grant support and to build institutional capacity to carry out health reforrns. Loan conditionality as appropriate. Project Components to Outputs High Pilots not replicable. Evaluation of pilots and technical/policy dialogue on sustainability and replication. Limited institutional and human resource capacity at Involve stakeholders in project national and oblast level. preparation and implementation. Lack of knowledge of incentive structures or Build institutional capacity of MOH mechanisms. and oblast leaders to carry out health project. Political difficulties in closing facilities for Build institutional capacity. Many sustainability purposes. existing facilities are already dilapidated and lack running water or electricity. Lack of knowledge of Bank procurement, Specialized training and TA will be competitive bid process, disbursement, accounting, provided to the Borrower to build a and auditing rules and other procedures. capacity and knowledge in this particular area of expertise. Overall Risk Rating High 3. Possible Controversial Aspects: The new primary care program will be successful only if needed pharmaceuticals are available for patients. The preparation phase saw the contractor develop a proposal to pilot which would restructure the distribution and management of essential and emergency pharmaceuticals at the local level. It included a new coverage and co- payment scheme, and assured adequate supplies of emergency and essential pharmaceuticals. The Government rejected this on the grounds of equity (more pharmaceuticals available in pilot areas relative to others) and as creating opportunities for corruption (re-selling of pharmaceuticals across oblast borders). The Bank has asked and received from the Government a counter proposal for procurement, management and distribution of emergency pharmaceuticals. The Government proposes to supply emergency pharmaceuticals through budgetary allocations to the state-run monopoly Dori Darmon. However, the Government may need to address issues related to appropriate funding levels, currency exchange policies for importation of pharmaceuticals over the life of the project, as well as operational management and distribution at the local level. The Bank, as a back-up, has created a contingency funding pool for emergency drugs that the Government can utilize as  Page 24 necessary. Otherwise, funds can be utilized for equipment. A second controversial aspect is closing of facilities for savings that can be utilized to cover increased recurrent costs of new and better-equipped facilities. Facility closure has been quite difficult politically in many OECD countries. At the same time, a number of former Soviet countries such as Russia, Kazakhstan, and Kyrgzstan have begun to close both beds and facilities. Russia has closed 10-20% of bed capacity in most regions. Kazakhstan has claimed closure of approximately'30% of its beds since 1990 (source: MOH). It also has closed within the last few years, a number of rural FAPs, SVAs and SUBs on its own initiative for budgetary reasons, and closed urban facilities under the Bank's Social Protection project. A second and related problem is closing down the appropriate facilities based both on clinical and economic rationale, a concern in most countries regardless of income levels. The project would include an analytic process, a policy process and then an institutionalization of a health facility rationalization strategy to close and consolidate unneeded and costly health facilities. Each of the oblasts have participated in initial workshops to model the financing gap and examine options based on sound criteria, and have developed a rationalization strategy to assure closure of duplicative functions, and better assure long-run sustainability. Each year facility-specific plans will be developed in each oblast. This will be a covenant of the project. G: Main Loan Conditions 1. Agreements Reached by Negotiation: * Tashkent Institute of Advanced Medical Education (Tash IAME) will establish and equip its new Department (or Faculty) of GP/Family Medicine responsible for development and coordination of all GP/FM training programs including training curriculum (by December 1998); * Each of five Medical Institutes (TashMI I, TashMI II, Tash PI, Andejan MI, Bukhara MI) and Tash IAME should organize, establish, reconstruct and equip its own standardized (outpatient) training unit/base for GP training, for use prior to the start of its respective training programs: TashIAME: 2 units, both by December 1998; TashMI I: 1 unit, by September 1998; TashPI: 2 units, will be later in 1998 or early 1999. (Others-TashMI II, AndejanMI, and BukharaMl will be expected only later, by May 1999; Samarkand MI plans will be finalized during the first Supervision Mission); * TashIAME also should have two affiliated, standardized "training SVPs" equal in principal to a SVP3, but equipped a bit differently (and now called SVP-4). (Training SVPs will be used only for "training of trainers" program.) Both training SVPs should be organized, reconstructed, and equipped (by end of September 1998); * Each oblast will develop detailed rationalization plans, including hospital rationalization plans, for the first year under the project. These plans will identify specific facilities to be closed and beds reduced (as part of the Annual Workplans and specific annual plans will be developed for each subsequent year of the project.); * The reconstructed building for Nursing School in Syr Darya (Gulistan) will be completed and opened (by end of 1998); * Mid-term review report furnished to the Bank on or about February 1, 2001, integrating the results of monitoring and evaluation findings of the project, with recommendations and needed refinements in achieving project objectives. 2. Conditions of Effectiveness: * The Central Project Implementation Bureau will adopt a Project Implementation Manual and implementation plan acceptable to the Bank; * Acceptable plan and adoption of incentive financing system for SVPs in model oblasts. The Cabinet of Ministers shall pass a resolution allowing the provider payment demonstrations to be implemented in the nine (9) pilot rayons in the three (3) leader oblasts; * The MOH has prepared, in conjunction with the model oblasts, and furnished to the Bank, a list of training sites to be rehabilitated under the second component of the project, together with an associated workplan  Page 25 and cost estimates: * The Borrower has in place a finanicial management svstem for the project. satisfactory to the Bank. 3. Covenants: * Maintain the Steering Commission until completion of the project, withi terms of reference satisfactory to the Bank. to be responsible for facilitating actions required for project implementation at the policy level: * Maintain the central and oblast PlBs througilouit the project implementation period with staffing. fiunds. facilities, and other resources in a manner satisfactory to the World Bank; * Report to the World Bank on an annual basis on the status of the key indicators listed in Annex 1: * Provide to the IBRD, within six months of the end of each Government fiscal year. with an audit report of such scope and details as the IBRD may reasonably request, including a separate opinion by an independent auditor acceptable to the IBRD, on disbursements against certified SOEs. The separate opinion should mention whether SOEs submitted during the fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawal applications; * Ministry of Finance assurance that: (i) the health budget as a share of the total budget (including oblast budget, rayon budgets and municipal budgets) shall be no less than during the year of 1997; and (ii) the actual health expenditures as a share of total expenditures shall be no less than the health budget as a share of the total budget for the respective year: and (iii) the relative share of expenditures for inpatient care shall be no more than 45 percent in the three pilot oblasts by December 31, 2001; * At the beginning of each project year, the annual work program for the Project, including the plan for rationalization of specific facilities in each oblast, should be provided to the Bank; * Maintain the requisite supply of 34 emergency drugs at each SVP in the three model oblasts. H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [x ] Not applicable. [ ] The procurement documents for the first year's activities are complete and ready for the start of project implementation. - Not Yet Due: these are expected to be completed by Effectiveness [x] The Project Imp'lementation Plan has been appraised and found to be realistic and of satisfactory quality. [ The following items are lacking. I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. ] The following exceptions to Bank policies are recommend for approval: Program Team Leader: Mr. John C. Langenbru ECSHD Sector Director: Mr. Chris Lovelace, ECSHD Country Director: Mr. lshrat Husain. ECCO0  Annex I - Page I Annex 1 Uzbekistan Health Project Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) The February, 1998 CAS aims * Health Statistics * Bank-Government * Political Stability to enhance the efficiency in the dialogue * Social and Economic use of constrained resources, to * Continuous Feedback on Conditions change as improve the quality of services, Project assumed to improve cost-effectiveness * Pilot Evaluations and to target vulnerable groups. The strategy also recognizes the need for urgent reorganization in health financing, and the importance of health education and promotion. Project Development Objective: * Health statistics * Inputs are timely provided Regional Objectives: * Attitudinal and behavioral (a) improve the quality and * Increase % of pregnant * Pilot Evaluation: change regarding cost-effectiveness of primary women attending in I" * Quality, cost- prevention and treatment health care services; trimester; effectiveness and * Providers improve their * Increase % of pregnant efficiency practice women receiving tetanus * Health status immunization; * Users and providers * Increase the % of users of satisfaction modem contraceptive; * Reduce the % of pregnant women with anemia; * Reduce the % of children under 5 years with nutritional disorder; * Increase the % of infants fully immunized; * Decrease referrals to (b) improved management and specialists as % of visits efficiency of delivery services; by 15%; * Increase utilization of services by 10%; * Improve quality of care; * Shift locus of care to primary/outpatient care; * Increased productivity at SVPs (visits/staff); * Decreases in admissions; (c) develop a new cadre of * Implementation of new professional providers training programs and (physicians and nurses) curriculum for GPs and focused on general practice UNs. and family medicine;  Annex 1-Page 2 Narrative Summary K3; -t;t t5t ey Performnance Indicators Monitoring and Evaluation Critical Assumptions National Objective: (a) build capacity in the MOH * Increase users and * Users and Providers to evaluate and disseminate the providers satisfaction; Satisfaction Study results of the pilot * Increase ability to apply countrywide. reforms in other oblasts. Outputs: * Upgraded facilities; * Between 266 and 320 SVP * Collection, recording and * Inputs are timely provided; * Upgraded and trained facilities upgraded; analysis of indicator data * Necessary political will; health staff; * Installation and use of lab at the oblast level in pilot * Institutional capacity to * GP training sites and and diagnostic equipment oblasts; apply results of pilot Nurse schools established; in 32 central rayon * Collection and comparison program in other oblasts. * New educational curricula polyclinics; in remaining oblasts for Medical Training * Access to drugs increases: nationally. Institutes; * 80% of emergency * Semi-Annual Work * Licensing and drugs available at all Program Reports. Accreditation times; * Bank Supervision Commissions established; * no expired stock Missions. * Decentralized legal among emergency structure adopted; drugs; * New financial incentive * Health staff trained structure adopted; * 200 practicing * Rationalization of existing physicians facilities; * 64 physician trainers * Pilot evaluation. * 320 universal nurses * new nurse educators; * Implementation of new medical education curricula at 5-6 training institutes; * Training programs and sites accredited; * Provider payment and MIS pilots conducted; * Adoption of new legal structures; * Adoption of new incentive system; * Adoption of MIS systems; * Parallel, duplicative facilities closed; * Pilot evaluation completed Project Components/Sub- * Inputs are timely provided; components: (see Annex 2 for * Knowledge about project description): competitive mechanisms; * Knowledge about Bank Strengthening Primary Care * $ 53.8 million procedures Services in Rural Area * TA hired; * Medical and Laboratory Equipment, Furniture, Emergency Drugs, Medical Supplies,  Annex 1- Page 3 Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Laboratory Reagents, and Vehicles Purchased/Installed in SVPs and Polyclinics; * TQI workshops conducted and training equipment installed; * Health Promotion media messages developed and broadcast; * Health promotion training conducted; * Radio Communication trainer trained and maintenance ability established; * Radio Communication Equipment installed. Training of General * US$ 6.8 million Practitioners and Universal * Faculty at TashIAME Nurses established; GP Training * Training Sites established; * TA hired; * # of teachers trained by * study tours * workshops; * # of GPs Trained by * 1 year program * short term courses * study tours; * Universal Nurse * Medical Equipment for Training New Nursing Schools purchased; * # of Computers installed in Nursing schools; * TA hired; * Nurse educators study tour; * # of nurses trained by short term courses; * Continuing Medical * TA hired; Education * number of training-of- trainers workshops; * number of training of practitioners courses; * Basic Medical Education * TA hired to develop Unified GP curriculum for undergraduate and postgraduate training; * Launching workshop; * Accreditation, * Establish Accreditation  Annex 1- Page 4 .a ie Summ: ary Key i0- 4 i i;lkPerfrmance Indicators Monitoring and Evaluation Critical Assumptions Certification, Licensing Committee; * Study tour. Strengthening of Finance and * US$ 3.9 million Management * TA hired; * # of practice consultants trained; * % of computer equipment installed; * % of workshops held; * % of study tours; * number of provider payment pilots completed (established, evaluated, disseminated and rolled out); * Annual Rationalization plans by oblast; * MIS Pilots completed (new data systems established, forms printed, evaluation and roll out). Project Management * $5 .3 million * establishment of I CPB * Bank Supervision Mission and 3 oblast PBs; * Semi-Annual reports * 9 staff hired for CPB and 3 * Annual audit reports for each PBs; * 2 staff trained in Bank procurement procedures; * Timely submission of Annual work programs and budgets.  Annex 2 - Page I Annex 2 Uzbekistan Health Project Project Description The Govemment of Uzbekistan and the Bank are collaborating in the implementation of a health care reform strategy in order to help improve the quality and the efficiency of health care services delivery. Improvements in quality and efficiency can lead to improvements in health status of the people of Uzbekistan. The project is focused on the residents of rural areas. The objectives can be met without increasing significantly the total cost to the Government of the health care it provides. The Bank would support a pilot project to test the Government's reforms through the proposed Health project in three pilot or "leader" oblasts. These three oblasts, Ferghana (population: 2,584,400), Navoi (population: 769,600) and Syr Darya (population: 642,900) were selected by the Government for their diversity in what is perceived as an initial round of investment in its restructuring program. The oblasts differ in size, economy, healtlh conditions, health status, and population density, and provide a window on conditions prevailing elsewhere in Uzbekistan. The Health Project would be the Bank's first lending operation in the health sector in Uzbekistan. The Government has recently enacted a new visionary law on health sector reform which envisages a series of changes over the next 10 years related to diversification of revenues flowing into the sector, creation of health insurance, and expanded privatization of providers and distribution networks. Nevertheless, the start-up of Bank activities in Uzbekistan has been somewhat later than in the other FSU countries. Bank assistance to date has focused on policy dialogue, grant support in the design of a reform program, and institution building. It also has engaged in a long-standing dialogue on the prudence and relative cost- effectiveness of public investments related to pharmaceutical and vaccine production. The proposed Health project objectives are both regional and national in scope. At the oblast level the project would specifically seek to: (a) improve the quality and cost effectiveness of primary health care, particularly in the rural areas where the great majority (approximately 70%) of the population live; (b) develop a new cadre of medical personnel through short-term training programs for general practitioners and universal nurses, and longer-run by redefining medical education curricula; and (c) fully strengthen the management and financing of primary health care services, in part through incentive restructuring and decentralization in both the financing and provision of health care. At the national level it would build capacity in the Ministry of Health to evaluate and disseminate the results of the pilot country wide. Combined results from these three very different oblasts which represent the diversity of conditions in Uzbekistan, are expected to help guide the Government's effort to strengthen the primary health care services in the country as a whole, and provide a baseline for more extended reforms nationally. In order to achieve those objectives, the proposed project would have the following four components: (1) Strengthening Primary Health Care Services; (2) Training of General Practitioners and Universal Nurses; (3) Strengthening of Finance and Management; and, (4) Project Management. A description follows: (1) Strengthening Primary Health Care Services: US$ 53.8 million (total cost of component): This component would build and equip new rural outpatient centers (SVPs), as well as consolidate, rehabilitate and upgrade some existing rural health facilities. (i) Construction, Consolidation, and Rehabilitation: Reforms in this area have been underway since 1996 when the Government announced its rural social infrastructure program. The Bank will not finance this subcomponent; however, the Bank has contributed by providing guidance and advice on SVP construction and design, and ensuring availability of functioning acceptable water and wastewater disposal systems. The existing Soviet delivery model of feldsher stations (FAPs), rural ambulatories (SVAs), and small (30-60 beds) rural  Annex 2- Page 2 hospitals (SUBs) would be either closed or converted into a new type of health facility, the Sel'skiy vrachebnye post or "Rural Medical Centers" (or SVPs). The size of these facilities depends on the population (catchment area) served, and these have been built and have been staffed initially according to standards adopted by the Government. These SVP facilities are three basic types and classified as SVPI, SVP2, and SVP3, accordingly. Each type serves a population of approximately 2,000, 2,000-4,500, and 4,500 to 6,000, respectively. A fourth type, SVP4, has been proposed to serve as both a service and training center but their development remains under consideration. While much of the existing service delivery plant in rural areas is beyond renovation, some have been salvageable. The Government is renovating and upgrading these facilities to meet the new requirements. The combination of renovated and new facilities is providing a sense of renewal in the health services in rural areas. In two of the three pilot oblasts, the social assessment found that 80% of the population will live within 1.5 km of the SVP. In Navoi oblast, with it's vast stretches of desert and mountainous areas, a smaller percentage lives within this radius. Some FAPs will be retained in Navoi, especially in the very remote areas as outreach posts. Steps will be undertaken by the project to upgrade these FAP facilities in keeping with the general policy of improving rural health services. By the year 2002, the Government expects to build or rehabilitate from 266 up to 320 facilities. The numbers below reflect maximum targets for new or rehabilitated centers: Closing/Transforming/Ne Syr Darya Navoi Ferghana Total [ w Construction l (in 10 rayons) l (in 8 rayons) (in 16 rayons) J (in 34 rayons) Number of FAPs closed 125 110 300 535 Number of FAPs equipped 32 93 0 125 Number of SVAs closed 68 4 92 164 Number of SVAs 62 0 0 62 transformed into SVPs Number of SUBs closed 0 4 0 4 Number of SUBs 0 0 0 0 transformed into SVPs Number of SVPs newly 49 30 54 133 constructed/equipped Number of new SVPs 65 16 44 125 (already constructed) l Total Number of Facilities 193 118 392 703 closed l l Total Number of SVPs 176 | 46 98 320 (ii) Upgrading of Services: This subcomponent would ensure that a basic package of health services will be provided through the SVPs. Included in this range of services are essential individual clinical, promotive and preventive care, child health services, reproductive health care and provision of emergency care. The SVPs will be equipped and staffed to meet these needs. To round out their capacity to function effectively, each delivery point will have communication, including packet radio in some locales and transport capacity to allow rapid and appropriate referral to the rayon level facilities and permit the staff to conduct outreach activities. The quality of services will be improved through a program designed to enhance performance and improve local management.  Annex 2- Page 3 Supplies of drugs in rural areas are inconsistent and insufficient to meet the total demand for medicines. The project would ensure a supply of emergency drugs and medical supplies for the different types of SVPs are always available. A quasi-independent (joint stock) Government monopoly is responsible for purchasing and distributing drugs throughout the country though it is possible to purchase drugs through private sources, including private pharmacies and the black market. Pharmaceuticals are covered by the Government only for inpatient care. However, there are between 12-44 categories (depending upon source used) of persons eligible to receive drugs free from the state, and these groups consume about 50 percent of available Government-procured drugs. Otherwise, persons must purchase drugs out-of-pocket using prescriptions. There are additional challenges. Other consumables are made available to health facilities through a well defined process, but availability has been constrained recently by finances. There also is an orderly process for maintaining transport and equipment, through, in the latter case, contracts with Medtekhnika, a quasi-independent organization which procures and distributes equipment for the health services, is the main channel for equipment repair. In some parts of the three oblasts, because of limited infrastructure and terrain, there are no telephones at health facilities and a heavier form of vehicle than that provided by the Government program is required for outreach and other activities. (iii)Health Promotion: Public information and education on health issues is limited although there is a vertical structure through the delivery system responsible to inform and promote healthy lifestyles. Concepts about such programs and ability to deliver them are extremely limited and there is considerable scope to improve the flow of knowledge and information to the public on health issues. With analysis showing much of the mortality associated with lifestyles, public education programs assume importance in any effort to improve the nation's health profile. A health education initiative through the SVP structure will re-inforce the increased emphasis toward primary care and support improvement of health status generally. To support and strengthen the implementation of Government's plans to improve health services in the rural areas in a sustainable manner, this subcomponent would finance: (i) basic diagnostic and therapeutic equipment for all SVPs developed under the four year program at an appropriate level, and also fumishings; (ii) diagnostic and laboratory equipment for central rayon polyclinics which serve as the referral apex of the primary care services network; (iii) medical supplies and laboratory reagents at SVPs and polyclinics; (iv) vehicles (20) for areas where the terrain is rough; (v) packet radio communication system in selected remote locales of Navoi and Syr Darya; (vi) equipment, a vehicle, training and foreign/local technical assistance for health education and promotion; and (vii) training, workshops and technical assistance for management and quality assurance programs and to enhance capacity for construction supervision. (2) Training of General Practitioners/Family Practitioners (GP/FP) and Universal Nurses: US$ 6.8 million (total cost of component): This component would ensure that SVPs in the three leader oblasts would be staffed with adequately trained and competent medical providers. The reforms in medical education and training stem from the Government's initiative in its new Act on National Education, which calls for western (OECD) models of (medical) education and training. These reforms would accelerate the introduction of GP and the strengthening of PHC throughout the Republic. Component activities include both approaches for short-term retraining of physicians and longer-term reforms in medical education for training new physicians: (i) Retraining of Existing Physicians: This would cover about 200 physicians already practicing in primary care settings in the three leader oblasts. A one-year intensive training program is  Annex 2- Page 4 the centerpiece activity for this subcomponent. The course would be organized by five Medical Institutes, including three Tashkent-based medical institutes: First Tashkent Medical Institute (TashMI I), Second Tashkent Medical Institute (TashMI II), and Tashkent Pediatric Institute (Tash P1). These institutes would train physicians from Syr Darya oblast. Similarly, Andizhan Medical Institute (An MI) would serve physicians from Ferghana oblast; Bukhara Medical Institute (Bu MI) would train physicians from Navoi oblast. A sixth institute in Samarkand also could begin in year 2 or 3 of the project to serve Navoi oblast. As a result, all SVP1s would be staffed with GPs, a significant number of SVP2s, and a number of SVP3s. Technical assistance would be required to develop the curriculum for a "training of trainers" and the I year training course (see below), some of which ($400,000) will be funded through a grant under the British Know How Fund. Study tours would be available for a limited number of practicing physicians. (ii) Continuing Medical Education of SVP Physicians in 3 leader oblasts: The Project would support a continuing medical education consisting of a series of short courses, organized by the Tashkent Institute of Advanced Medical Education (TashIAME). Each course would be approximately one-two weeks in length, and include such topics as essential public health, rational drug use, integrated management of the sick child, and tuberculosis control. (iii)Training of Trainers of Existing Physicians: Funding would be provided for a I-year program for 16 trainers for each year of the project (for a total of 64) from the associated Medical Institutes. In addition, the Tashkent Institute for Advanced Medical Education (Tash IAME) will establish a new Department (Faculty) of General Practice responsible for the development and coordination of the training curriculum, and will coordinate closely with two other institutes in Tashkent, Tash MI I and Tash PI. The Tash IAME will partner with Know How Fund (under grant assistance) initially and with an outside (foreign) Medical School for the duration of the project. Study tours would be included in the training of trainers program. These trainers would then return to their institutions to organize and- conduct the 1-year intensive retraining programs (above). The project would finance 3 foreign experts-of 1.5 months up to 3 months duration for individual assignments-to develop curricula in GP training and in public health, and to oversee the implementation of the training program. Foreign TA also would be used to formally evaluate this subcomponent after I year to see if the approach is meeting objectives. The short-term courses (above) would train 15 trainers initially using foreign TA; over 1,140 physicians would attend these short-term courses over the life of the project. (iv)Long-Term Reforms for Strengthening Medical Education: The jGP trainers also would be trained to lead the process of restructuring undergraduate and postgraduate medical education and training in Uzbekistan, by forming a core of planned new faculties of GP medicine in the medical schools which educate and train physicians for three leader oblasts. The new curriculum would be introduced in September 2000; a 3-year post-graduate residency training program also will be developed. The subcomponent would finance a national workshop, and would finance technical assistance which would be provided during the first and second year of project-to assist the Medical Institutes in developing and finalizing a "unified" curriculum for training the GP. (v) Development of Training Sites: Training sites would be developed during the first year of the project to support the training programs. Each of 5-6 training institution-Medical Institutes (Tash MI 1, Tash MI II, Tash PI, An MI, Bu MI and Samarkand MI) would establish and organize its own training site for GP training, and utilize existing polyclinics as well. The project would finance necessary renovations, equipment, and supplies. In addition, there will  Annex 2- Page 5 be designated training SVPs, or a "SVP-4" level. The TASH IAME will have will establish two affiliated training SVPs in a rural environment as part of the "training of trainers" program. Each oblast will establish one training SVP for the existing physician training program. (vi)Training of Universal Nurses: Nurses constitute the majority of the staff at SVPs. The component would finance study tours for leading nurse educators. The tours would introduce methods for preparing nurse trainers, and the role of nursing in general practice and primary care. The Republic Center for Nursing, Akhunbabayev, would develop two short-course training programs which would be implemented in the three leader oblasts during the Project: the WHO LEarning Materials On Nursing (LEMON) program; and a one-month course on general practice nursing. Each program would begin with "training of trainer" workshops in Tashkent using technical assistance. Subsequently, these trainers would organize and lead the training programs in the oblasts. Over the life of the project, at least one nurse from each SVP would complete each program. In Navoi and Syr Darya oblasts, a nurse training school would be upgraded and equipped to meet Government standards for training universal nurses. In Ferghana oblast, three nursing schools will be supplemented with computers for training. (vii) Accreditation, Certification and Licensing: The project would support the Ministry of Health to develop capacity through the establishment of a special commission for accreditation of alil medical training programs, training sites, and institutions in the Republic. To facilitate the commission's development, the Project would support study tours to observe other national models, foreign technical assistance, and equipment and materials. The project also would support establishing and strengthening the existing activity on Certification and Licensing of Physicians. These commissions would be established by the MOH in cooperation with a new, independent professional association, the National Association of Physicians. In summary, this component would finance Civil Works (rehabilitation of training bases, SVPs' buildings and nursing schools); Goods (training medical and laboratory equipment, medical fumiture, computers, office equipment and furniture, training materials, emergency drugs and related consumables for training centers); and Services (technical assistance and training for training of trainers courses-both for GPs and universal nurses, workshops, fellowships and scholarships, and study tours). (3) Strengthening of Finance and Management: US$ 3.9 million (total cost of component): The current health system suffers from both underfunding and inefficiency. It also is overcentralized in its decisionmaking process. The SVPs that will be created will have better trained personnel, better equipment, more supplies and pharmaceuticals than current primary care facilities. As such, these centers will be able to provide a greater amount and variety of higher-quality services. However, these SVPs would be considerable more expensive to operate, and the additional costs must be financed, or the activities to be financed by the project would not be sustainable. Since significant additional funding is unlikely even with sustained growth in GDP, it is critical to (i) improve the efficiency by which services are provided, and (ii) to rationalize duplicative parts of the existing health care system, so that necessary funds are "saved". (i) Rationalization: A computer-based impact and simulation model was created under the PHRD grant funds, and was used to estimate the financing needs and gaps. These estimates and current gaps were calculated for each of the three leader oblasts for the period 1996-2001. In December 1997, a 3 day workshop was held in Tashkent to (i) train local experts in use of the model, (ii) to explain the estimates and implications, and (iii) to develop a rationalization strategy for each of the three oblasts. Each oblast has developed a general plan for rationalization over the life of the project. Each oblast will then develop specific lists of facility closures at the beginning of each year of the project. The adoption of specific list of  Annex 2- Page 6 facility closures acceptable to the Bank for sustainability purposes will be a covenant of the loan. Follow up technical assistance would be financed on an annual basis to provide analytic support in carrying out this strategy over the life of the project. (ii) New Financing and Management Models: The project will also introduce changes in the way SVPs are currently managed and financed, to change incentives (and thus behavior) introduce management flexibility, information, and administrative capacity at SVPs. This objective will be to stimulate cost-effective changes in the mix and structure of the services provided, as measured by fewer hospital admissions, specialty referrals, and so on. This subcomponent would finance a new incentive-based payment system, an information management system, and management and other training in specific districts/health care facilities. The project will introduce these changes in two phases: (a) pilot demonstrations in selected rayons in the three oblasts: There will be 9 financing pilots and 7 management and information system (so-called "control") pilots. Ferghana pilot rayons will implement new models first (in 12-18 months) with support of technical assistance and training provided through a USAID grant. This will be followed by implementation of pilots in the other two leader oblasts within 6 months of implementation in Ferghana. A new legal status of pilot SVPs will be defined to allow local flexibility in use of funds relative to the current approaches that are set in Tashkent. The pilot program SVPs will establish a more autonomous status and will need to establish new procedures such as an individual bank account and flexibility in resource use including staffing mix. The financing pilots will actually test two models, both of which emphasize self-management of SVPs, but differ in the complexity and power of their financial incentives. One model will establish SVPs as independent juridical entities with their own bank accounts and a total budget detected by a "capitation" formula. The second model, which is more complex, presupposes the same basic organizational structure as in the first model, but assigns to SVPs responsibility for providing or financing the specialty referral services used by residents of the SVP catchment area. The second model introduces strong economic incentives to reduce physicians' referrals and patients' self-referrals for specialty care and, by extension, to improve the quality of services. In the first model, SVPs would begin operating as fully self-managed facilities, directedby the chief physician. A part-time "practice manager" would be trained and assigned to each SVP who would provide administrative support for accounting and information systems. SVPs in each pilot rayon would share a traveling practice manager who would specify in these small rural clinics. A primary objective would be flexibility of a "global budget" to SVPs. SVPs in the experimental rayons will not receive a budget divided by old line item "chapters". Instead, SVPs will receive an aggregated budget amount and then decide on their own how to allocate these limited funds. Each SVP also will exercise broad authority when choosing staffing patterns. The second model is similar to the "fund-holding" system for primary care used in Britain. SVPs will be given the same legal and administrative rights of self-management and a "per capita" global budget, as in the case of Model 1. In addition, however, a "modified fund- holding" system will be introduced, concerning the provision of specialist ambulatory care delivered by rayon polyclinics and hospitals. The fund-holding system will be operated centrally by the oblast health department. Additional features of this second model should be noted. First, the amount of financial reward-or risk-facing each SVP will be limited by application of a partial "risk corridor." In practice, a SVP will be allowed to keep at the end  Annex 2- Page 7 of each quarter any residual funds from its referral budget for that quarter, to which it will be entitled if needed referrals decline. At the same time, a SVP can lose no more than 5 percent of its regular budget in any quarter, in case the number of referrals is greater than expected. Second, in order to heighten the SVP's influence over the residents of its catchment area and to discourage self-referrals, a small administrative charge will be introduced, which will require self-referring patients at polyclinics, i.e. those patients who seek care without a referral from their SVP-to pay a small fee to cover the cost of the additional form that the polyclinic will have to complete for such patients. Polyclinics will be permitted to keep these funds. The patient still will have the right to by-pass the SVP, but now will have an economic incentive to go first to the SVP. Both experiments will require a significant amount of information in order to function successfully. A new computerized health management information system will be introduced, which will collect the necessary data. This system will consist of interlocking databases: population; patient-level encounters; and referrals to polyclinics and hospitals. The population database will collect information on the residents in each SVP's catchment area. It will include information on age, sex, employment, exemption status, and dispensarization status. The patient encounter database will collect detailed information on each patient encounter; these will include diagnosis, treatments, and referrals. Both databases together will provide detailed information needed for the adjustment of capitation rates, for monitoring the quality of care, and for measuring the staffs productivity. The new information system will be implemented by setting up a computer network in Tashkent, in each of the three oblast centers, and in all 16 participating rayons (including nine rayons where the pilot demonstrations will be established and seven "control" rayons). The oblast computer center will provide the data needed in order to administer the modified fund-holding experiments; the oblast and rayon computer centers will serve as training sites. This subcomponent would finance Civil Works (rehabilitation of computer centers); Goods (computer and office equipment and software for 1 (one) national, 3 (three) oblast and 9 (nine) rayon computer centers, and 3 (three) pilot SVPs); and Services (technical assistance and training for software development, pilots evaluation and dissemination; and seminars on new financing and information management system). (b) pilot demonstration evaluation and roll-out: The pilot demonstrations in the three oblasts and the reforms would be evaluated, replicated and disseminated throughout the three oblasts. The databases will collect information needed to evaluate the pilot projects and, in particular, to detect and measure significant changes in utilization and referrals that are due to the economic incentives introduced under each model. This subcomponent would finance Goods (minor computer and office equipment for SVPs and zonal polyclinics); and Services (technical assistance and training for pilots evaluation and dissemination). It would also finance some technical assistance and training; computers, software, training materials and operating and maintenance costs for the computer centers, and evaluation of the initial pilots in 16 rayons and two evaluation workshops to discuss results and refine the models for replication and roll-out. (4) Project Management (US$ 5.3 million): National project implementation unit (Central Project Implementation Bureau) and oblast implementation units (oblast Project Implementation Bureaus) has been established within the MOH and oblast Health Departments, respectively, to carry out day-to-day project implementation, management and monitoring.  Annex 2- Page 8 This component would finance CPIB and oblast Project Implementation Bureaus' staff salaries, technical assistance and training, training materials, cost of the Project audit, office equipment, computers, vehicles, furniture, and operating costs for the CPIB and three Oblast PIBs. The Government would finance a Procurement agent and a Consolidator/Distributor. The operating costs of the CPIB will be 100% financed out of the loan proceeds as they are, in fact, incremental costs to this project. The CPIB is created only for the duration of the project, therefore, there is no issue of sustainability. The Borrower will finance operating costs of the oblast PlBs. An additional US$ 2.0 million of loan funds have been allocated for preparation of a "Health 11" project (technical assistance and training), as discussed with the Government, and for procurement of equipment for pilot sites to initiate a "roll-out" to other oblasts.  Annex 3 - Page I Annex 3 Uzbekistan Health Project Estimated Project Costs Basis of Cost Estimates Project costs have been estimated in US dollars and local currency (Sum). The costs for Civil Works, Goods (medical, laboratory, office equipment, pharmaceuticals and reagents, furniture, vehicles and supplies) and Services, including local and overseas training, have been based on current prices and recent fees paid in similar projects financed by the Bank and other donor agencies in Uzbekistan and Former Soviet Union countries. Costs for foreign consulting and technical services have been estimated on the basis of the cost of fees, accommodation and subsistence in the Republic of Uzbekistan and include fees, overhead expenses, subsistence, transportation. and other miscellaneous fees. Cost estimates for civil works, local fees and salaries, local training and other operating costs have been based on current costs or costing standards provided by the Ministry of Finance, Ministry of Health and the Health Administrations of the Oblasts participating in the project which were found acceptable by Bank staff. Base cost estimates reflect prices in January 1998. Foreign Exchange Component The foreign exchange component was estimated as follows: (a) civil works, 0%; (b) medical and computer equipment; spare parts and supplies, 100%; (c) pharmaceuticals, 100%; (d) foreign consulting and technical services, outside of the country (including overseas) study tours and fellowships, 100%; (e) local consulting services and locally conducted training, including seminars and workshops 0%; (f) training materials - 60% and (g) incremental operating costs, 40%. The foreign exchange component is estimated at US$ 29.7 million including contingencies, or 43% of total project costs. Contingency Allowances Physical contingencies, representing about 7% of the total base cost of the project, were based on 15% for civil works and 10% for goods and services. Price contingencies represent about 8% of the base cost plus physical contingencies. Contingencies are expressed in US dollars with the following annual inflation rates: 1998, 3.0%; 1999, 2.5%; 2000, 2.3%; 2001, 2.5%; and 2002, 2.0%. Taxes and Customs Duties The proposed project is currently subject to taxes and duties at the rates in effect at the time of delivery of goods and/or services provided. Medical equipment, ambulances and drugs are currently exempt from Value Added Taxes (VAT) but subject to 5% import taxes. Other goods financed under the Project would be subject to customs duties and taxes as follows: 24.5% on civil works and goods (office and other equipment, vehicles and other supplies); 41% on local salaries including health and unemployment insurance and pension contribution; and 12% personal income tax on short term local consulting services. For foreign consultants local tax is not expected to be applicable. The current tax liability of the project (US$ 7.9 million) is based on the above described expectations. However, it is recognized that the current tax legislation may change. The CPIB would monitor changes, if any, in rates and collection procedures related to duties and taxes. The Borrowers would have full responsibility for financing all duties and taxes related to the project including any increase in project tax liabilities above the current estimated amount.  Annex 3 - Page 2 Table A: Estimatedl Project Costs Project Component Local Foreign Total ----------------------US $ million------- Primary Care 27.8 17.7 45.5 GP and UN Training 1.9 4.2 6.1 Financing and Management 1.3 2.3 3.6 Project Management 2.3 0.8 3.1 Preparation of Health 11 Project 0.0 2.0 2.0 Total Base Costs 33.3 27.0 60.3 Physical Contingencies 3.2 1.7 4.9 Price Contingencies 3.5 1.0 4.5 Total Project Cost 40.0 29.7 69.7 Detailed costs of Project Components are included in the Project Implementation Plan.  Annex 4 - Page I Annex 4 Uzbekistan Health Project Economic Analysis Summary (in US$ millions) Table 1. Economic Costs and Saivings of thle Health Project Additional Costs Economic Savings A .. i - I !I. ff ii i A 'X} . 3 1 4.130 3.700 3.700 0.ODO 0.000 o00 0.272 0.532 0.0 0.027 0.000 0.000 O.D 0.020 1.695 2.546 0.000 265 0302 oOO 2.S67 .109 .3.591 I 2.753 9.800 13.5 0.000 0.000 0.000 o.S44 1.063 0.000 0.032 0o.00 0.000 0o0o 0.033 3.390 5.062 0.091 5.130 0.603 376 9.540 -11.524 -21.324 3 3.220 L.OO 2L.600 0.000 0ooo 0.000 0.816 1.595 oo0o 0.03S 0.000 00O 0.000 0.040 5.084 7.573 0.1K 7.694 0.s05 3.716 12.503 -9.810 .17.910 4 2.920 5.900 27.500 D000 0.000 0.0 1.0L 2.126 O,000 0.045 0.000 0.000 0.000 0.047 6.779 20.085 0.1I8 10.260 1.206 3.716 15.370 4.264 -14.164 5 27.50 0.000 OO0 0.000 1.085 2.126 0.000 0.045 0.000 0.392 1.206 6.779 11.636 0.1I8 10.260 1.206 3.716 15.370 J.733 -3.733 6 26.215 1.619 1.285 2.974 1.OU 2.126 0.000 0.045 0.100 0.400 1.230 6.779 11.768 0.1U8 10.260 1.206 3.716 15.370 -3.601 -0.628 7 24.850 1.610 1.364 2.974 1.08 2.126 00 0.045 0.350 0.408 1.255 6.779 II.51 8O8U 10.260 1.206 3.716 15.370 -.3519 .545 8 23.403 3.526 3.448 2. 18 2.126 21.260 0.045 0.200 0.416 1.280 6.779 33.194 0.188 10.260 1.206 3.716 15.370 17.824 20.798 9 23.866 3.437 3.537 2.974 3.088 2.126 0.000 0.045 0.300 0.424 1.305 6.779 11.868 0.18U 10.260 1.206 3.716 35.370 -3.502 -0.528 1o 20.234 I343 3.631 2.974 1.08 2.126 0.000 0.045 0.000 0.433 1.332 6.779 11.803 0.188 10.260 1.206 3.716 15.370 J3.s67 -0.593 it 15.503 1.242 1.731 2.974 1.088 2.126 0.000 0.045 0.300 0.441 1.3U8 6.779 11.938 .388 10.260 1.206 3.716 15.370 -3.432 -0.458 12 16.665 1.136 3.838 2.974 1.ou 2.126 0.000 0.045 0.LSO 0.450 1.385 6.779 12.024 0.1o8 10.260 1.206 3.716 15.370 .3.346 0.372 13 14.715 3.023 1.951 2.974 1.08 2.126 0ooo 0.045 0.200 0.459 1.433 6.779 12.111 0.188 10.260 1.206 3.716 15.370 -3.259 -0.285 14 12.644 0.903 2.070 2.974 3.OU 2.126 0.000 0.045 0.100 0.468 1.441 6.779 12.048 0.188 10.260 1.206 3.716 15370 -3.322 -0.348 Is 10.447 0.776 2.197 2.974 L.OU 2.126 0ooo 0.045 0.000 0.478 1.470 6.779 11.986 0.151 10.260 1.206 3.716 I5370 -3.384 4.410 16 8L.S 0.641 2.332 2.974 1.ou 2.126 21.260 0.045 0.100 0.487 3.S50 6.779 33.385 0.181 10.260 1.206 3.716 15.370 18.015 20.989 17 sA39 0.498 2.476 2.974 L.o0 2.126 0.000 0.045 0.150 0.497 1.529 6.779 12.215 0.381 10.260 1.206 3.716 15.370 -3.155 -0.181 Is 3.011 0.346 2.628 2.974 1.068 2.126 0.000 0.045 0.200 0.507 I.560 6.779 12.306 0.388 10.260 1.206 3.716 15.370 -3.064 4.090 19 0223 0LIS 2.789 2.974 L.ou 2.126 0.000 0.045 0.300 0.517 1.591 6.779 32.247 0.1O 10.260 1.206 3.716 5.370 -3.123 -0.149 20 -2.738 0.014 2.960 2.974 1.088 2.126 0.000 0.045 0.000 0.528 1.623 6.779 12.189 0.181 10.260 1.206 3.716 15.370 -3.181 0.207 NPV(10%) 10.444 21.578 14.045 7.870 IS.372 14.545 0.351 0.540 2347 7.220 0.108 49.017 97370 1.349 74.186 8.722 28.258 112.514 -26.278 -33.812 Total 13.023 27.500 34369 30.238 44.607 20.137 39.331 42.520 0.862 1.650 7.307 22A79 0.140 125.412 259.837 3.474 189.809 22312 70.604 286.19 40.38 -U2.731  Annex 4- Page 2 Macro-Economic Context All indications point to a return in 1997 to positive economic growth. The GDP per capita in 1996 was estimated at only US$ 1010. At the same time, Uzbekistan has experienced only a modest decline in GDP since 1991 compared to other countries in the FSU because of structural features of the economy which made it less vulnerable to disruption of intra-FSU trade (i.e., its natural resource wealth of gold, gas, and cotton), and the Government's continuing active role in the coordination of the economy. The Government took steps in 1997 toward financial stabilization through the reduction in fiscal deficits and control of the growth of money and credit. Nevertheless, the Government has continued to exercise a substantial degree of control on production, investment, and prices through a variety of means. The liberalization of foreign and domestic trade was repeatedly delayed, and recently intensified restrictions on foreign exchange and trade. While the government has projected annual growth rates of 5.2 percent, lagging production in agriculture means a far lest robust growth. Table 2 makes the conservative assumption of an average annual real rate of growth of 2.7 percent, based on the recent CAS discussions. The projected budget for the Ministry of Health follows the experience of middle income countries generally with a positive income elasticity (1.1, based on World Bank estimates, 1997) for government health care spending. This again is a conservative projection since the Ministry projects a much higher increase in the proportion of the budget devoted to health (Ministry of Health, 1996). (The proportion of the budget devoted to health has remained stable hovering from around 9 to 1 I percent over the past 5 years.) The GOU's share of investment costs is more significant in future years, but these are both primarily outpatient facility construction expenses which are already programmed as additional funds outside the Ministry of Health and expenses for equipment,-supplies and pharmaceuticals which will require replacement more frequently. Table 2. Macro Economic Indicators _______________ t= _1 _g_ _ _ GDP Projections (Million Sum) r 923,122 948,046 973,643 999,932 1,026,930 Annual change in average real 1.22 1.03 1.03 1.03 exchange rate 1 _ (1997-1998) Health (MOH) Budget 22,273 * 25,101 28,289 31,882 35,931 * - reflects actual expenditures Scope of Work The economic analysis is limited to an exploration of the likely effect of the most important elements of the project relating to improvements in primary health services. The complexity of project benefits and means of valuation makes any attempt to quantify them in one standard unit, monetary or otherwise, extremely difficult and vulnerable to a wide confidence band. Estimates are hindered by a continuing divergence between official and unofficial (parallel market) exchange rates, and accounting practices that still diverge from Western practices (e.g., depreciation not included). Summary of Benefits and Costs The exchange rate used for all cost conversions was US$1 = 82.71 Uzbek sum (as of March 1998 when the analysis was performed). All local costs were converted into US dollars. Several exchange rates exist defacto in Uzbekistan. The official rate is 82.71 sum to US $1, while the unofficial rate is approximately double this level. In the absence of information from the IMF or elsewhere, the official rate is used in the analysis. The interest rate of the loan is estimated at 6.14 percent. Purchasing Power Parity The official exchange rate used to convert dollars to sum does not take into account differences in relative purchasing power of the local currency arising from much lower cost of non-tradable items. Some recurrent costs of the investment will be carried out locally where the cost is likely to be much lower than the dollar costs  Annex 4- Page 3 suggested. This is true of maintenance of health facilities and equipment. It is not probably true of equipment replacement much of which is still likely to be imported or paid for at international prices. Purchasing power parity estimates of GDP are not yet available for Uzbekistan. They are, however, available for some other FSU countries. Estimates for Azerbaijan and Kyrgyzstan which are the most similar of the countries for which estimates are available, suggest that GDP at PPP dollars is about 2.6 times GDP at market rates. However, most purchases financed under the project will use international procedures and will in all probability be foreign-based purchases with USD. Only civil works (the government's contribution) will be local as will operations and maintenance (O&M) costs. This ratio is used in the analysis to deflate the estimates of the cost of capital and cost of maintenance. Cost Calculations The project includes substantial civil works and equipment purchases, with a number of potential recurrent cost implications. These are: * maintenance of the new and rehabilitated buildings * maintenance of equipment and vehicles; * replacement of the equipment which will occur for most equipment during the paying off period of the loan; * maintenance of pharmaceuticals and supplies/reagents; * costs of training and general practitioners and nurses, and adding additional staff to larger SVP complexes; X costs for salaries of new SVP managers, and MIS systems; and, * costs of the salaries and equipment/supplies of the project implementation bureaus Several assumptions are used in calculation of costs. Buildings (and furniture which is included) will need to be replaced and it is assumed to be once every 20 years, using the contractor's architectural assessment (Government estimate is 30 years). Hence, no building replacement costs have been taken into account for this analysis. Depreciation costs are not included here as the Government has no mechanism currently for accounting or setting aside funds for replacement. Operation and maintenance (O&M) for buildings has been estimated by the Govemment at 5.75% of the capital value of the buildings per year; this analysis uses 10% based on an analysis and estimate of recurrent costs in 2 oblasts in Russia (Verniers, Health Reform Pilot Project). All facilities will be equipped by the end of year 4. Equipment costs will be substantial. Equipment recurrent costs include maintenance on purchased items. Overhead and maintenance equipment costs has been estimated at 10% of equipment investment costs per year (Government estimate is 4.5%), again using the experience of the Russia project analysis. Also included is the expected replacement costs of equipment during the period of the loan. Some equipment will require replacing after only a few years while other equipment will last throughout the period of the project. On average, the replacement rate is 8 years. These rates of replacement are incorporated into the calculations. These expenditures will impose substantial costs on the budget. Vehicles will be purchased under the project. The analysis assumes recurrent costs of 8% for vehicles, based on a local survey of professional drivers; on average the replacement rate is assumed at 5 years given the poor conditions of roads, especially in rural and mountainous areas. The estimates for transport costs for referral may be too low. The project will make services much more accessible, both through the quality of services and through improved communication. It is likely that ambulance call outs will increase with a consequent increase in depreciation and fuel costs. It is very difficult to anticipate the extent and impact of this effect. All facilities also will be equipped with emergency pharmaceuticals by the end of year 4. The first four year costs are derived based on actual cost estimates of needs based on rate of new SVP construction. It is further estimated that the need for pharmaceuticals will increase at the population growth rate of 2% per year from years 5 to 20. All facilities will be equipped with supplies and reagents by the end of year 4. The first four year costs are derived based on actual cost estimates of needs based on rate of new SVP construction. It is estimated  Annex 4- Page 4 that the need for reagents will increase at the population growth rate of 2% per year from years 5 to 20. The project envisages an increase in numbers of general practitioners and universal nurses during the life of the project. Training costs are subsumed under disbursement costs. It is assumed existing physicians and nursing staff are trained to function in new positions at these SVP outpatient centers. There will be additional auxiliary staff hired to staff new SVPs, for diagnostic and testing services and for support services. There is increased salary levels envisaged for the new newly-trained physician and nursing personnel. There will also be new computer specialists and data entry programmers for the Financing and Management component. It is estimated that salary costs will increase at about 1% per year. Additional personnel and incremental salary costs are subsumed under estimates of incremental recurrent costs for each type of facility (e.g., FAPs, SVPI, SVP2...), developed by the contractor using a facility survey of approximately 2,000 facilities in 1997 in the three oblasts. Project management staff, equipment, and office space will be added under the project and are included under Project Bureau Operating Costs. These estimates include salary and other recurrent costs for the project implementation period only. The economic analysis does not include $2.0 million in unallocated funds. These funds are assumed to be held in reserve, and to be utilized in Years 3 and 4 to prepare for Health 11 project in the remaining 9 oblasts in the country. The preparation would be based on mid-project review and evaluation. (Note: the Financial Analysis in Annex 5 does include this $2.0 million reserve.) Benefits a) Cost-Effective Indicators Available data support the contention that the project's primary care focus is a cost-effective strategy of addressing the nation's burden of disease. Table 2 summarizes the burden of disease (measured in DALYs) for 14 key medical conditions in Uzbekistan. These 14 conditions are among those targeted for expanded primary care capability in the SVPs and constitute close to half of the entire DALY burden. (Note that the morbidity portion of the tabulations depends on data which for Uzbekistan are not highly reliable, and probably underestimate the global burden of disease.) The rural primary care program effectively targets the largest sources of disease burden. Moreover, these conditions are amenable to well-established, cost-effective prevention activities and primary curative treatment. The last column in Table 3 summarizes the cost per DALY saved of primary care activities developed from reviews of empirical literature. The standard suggested by World Bank analysts (Jamison et al. 1993) is under $250 per DALY saved. There are interventions meeting this standard in every disease category, most are rated as under $50. Given a goal of reducing disease burden in Uzbekistan, the primary care strategy has been shown to be an effective way of stretching scarce health care budgets.  Annex 4- Page 5 Table 3. Cost-Effectiveness of Targeted Primary Care Condlitions Disease Category Uzbekistan (1995) Cost Effective Interventions Infectious Diseases Acute Respiratory Infections 35.4 Screening and referral for curative services between $20 and S50 per DALY; immunization for pertussis, influenza , and measles plus pneumococcal vaccine available. Costs per DALY are higher. Diarrheal Disease 8.9 rehydration therapy; education to improve weaning practices cost $30 per DALY Tuberculosis 2.1 Immunizations in high cost environments is $7 per DALY; targeted drug treatment in ambulatory settings of reasonable cost Hepatitis 1.7 Immunization is $25 to $50 per DALY depending upon prevalence and targeting Maternal and Perinatal Perinatal 6.5 Improving clinic outreach in prenatal services cost $30-250 per DALY Maternal 1.1 See Perinatal Chronic Conditions Nutrition/Endocrine 9.1 Treatment for iron deficiency and Vitamin A deficiency $13 and $9 per DALY Asthma 1.5 Specific study of cost per DALY not available, but numerous studies show cost-effective primary care with emphasis on patient education Diabetes 2.2 Oral hypoglycemic cost $25 per patient per year. Insulin therapy is $210 or $240 per DALY COPD 5.0 N/A, but smoking cessation programs achieve rates of $20 per DALY Cirrhosis 4.5 Cost of treating significant morbidity is high. Hepatitis B vaccine and alcoholism treatment very effective Cardio-vascular Ischemic Heart Disease 16.5 Screening and referral services of high risk cases for targeted population costs $150 per DALY Cerebrovascular 8.4 See Ischemic heart disease Although data to develop cost-effectiveness ratios using parameters specific to Uzbekistan are not available, all indications are that the operating cost of health facilities in Uzbekistan (as with the rest of Central Asia) are low. The project will reduce morbidity and mortality which, from a human capital point of view, will increase the economic value of people living in the area. The complexity of the project outcomes and difficulties in estimating economic values of lives gained and disease averted make it hard to place monetary values on project outcomes and even more difficult on project outputs. However, in the case of some diseases such as hepatitis and tuberculosis, investment also has public good properties as it limits the spread of these communicable diseases. In effect the investment reduces the negative externalities of disease contraction.  Annex 4- Page 6 b) Additional Benefits The project is designed to increase cost effectiveness and affordability of health care services, by following strategies which reduce costs and offer current and future benefits. These savings or benefits can be summarized in three areas- (i) Facility Closures and Consolidation The program is designed to minimize increases in operating cost by substituting more effective facilities for existing sites of care. It closes poorly used and scattered facilities and replaces them with SVPs that are more centrally located, better staffed and equipped, and better stocked with essential drugs. According to analysis of the results of a rural household survey conducted in the three pilot Oblasts, there were 2.5 visits to rural ambulatory facilities per 1,000 population per month. Allowing for a similar number of visits for preventive services and administrative reasons and the fact that most feldsher stations (FAPs) serve under 1,000 people, the survey results indicate that small stations have less than one visit a day. The facility consolidation strategy in the three participating Oblasts will include 703 existing village-level facilities that will cease current operation between 1996 and the year 2002 (535 feldsher posts, 164 polyclinics and 4 rural hospitals). Some of these facilities (62 SVAs) will be rehabilitated as SVPs, and a range of 204-258 SVPs will be newly reconstructed (a mid-point is assumed for the analysis here). An additional 32 central rayon polyclinics, as the apex of the primary care delivery system, will be equipped with selected laboratory and diagnostic equipment. There are two beneficial effects of this strategy. First, it holds down the investment cost of the project in upgrading rural primary care. A second effect of the consolidation and substitution strategy is to reduce the net operating costs of rural primary care. The savings from closures of out-of-date and under-used facilities will be needed to cover a substantial portion of the increased operating cost. A further effect is to reduce unit operating costs by increasing average facility utilization. Following the project's social assessment survey data above, the new middle size SVP's (SVP2) can expect to average 17 to 20 visits per day. Although this is still low, operating costs per visit will decline, particularly since a large share of costs are fixed. Because of the large number of feldsher stations, this consolidation strategy appears to have no significant effects on geographic access. Among 175 villages in the nine districts included in the health assessment survey, the average distance to the nearest feldsher station or other rural health facility was less than 0.8 kilometers. (Calculated as a weighted average from data in Table 2.2 in the Social Assessment). Analysis of the planned SVP service areas indicates that typically 80 percent or more of each SVP's service population lives within 1.5 kilometers, the replacement and consolidation strategy does not substantially add to private travel costs. (ii) Site of Care Substitution SVPs are designed to reduce the incidence of unnecessary referrals to hospitals and zonal polyclinics. Demonstrating the degree to which SVPs can do this successfully with financial incentives and self- management is a key objective of the financing and management pilot demonstrations and component generally. Since specialty care typically costs more than primary care, each visit retained at the local level will save budgetary costs of the Ministry of Health and to patients. Nevertheless, the complexity of the project make its impact on demand for health care difficult to predict. Some broad conclusions about likely impact are possible. Improved facilities should make services more attractive to users, especially at the local level. In particular better transport and communication with rural primary care facilities together with improved equipment and staff training is likely to increase demand for ambulatory primary services. Much of the project investment is aimed at increasing the use of these facilities and dealing with disease on an outpatient basis where possible. This will also be encouraged through the physician and  Annex 4- Page 7 nurse training. The impact on demand for inpatient care is far less clear. On the one hand, more disease will be treated by primary providers with reduced or no need for patient admission. At the same time improved primary care may identify more disease that will then be treated in hospital. Reported statistics on admissions per capita are extremely high by international standards. In these circumstances it seems reasonable to assume that admission rates will fall. A 5 percent assumption is used, which is a conservative estimate based on reported drops in admission of 7-27 percent in other parts of the FSU implementing new incentive systems for services. Average length of stay is not assumed to decrease at all for admissions. Studies in other FSU countries such as Russia and Kazakhstan suggest that many patients may be admitted, or have their stay in hospital prolonged, because of inadequate outpatient care. However, increased demand for care and newly-identified cases may offset shortened LOS with sicker patients being admitted for longer periods of inpatient care. The savings to MOH are based on a level of savings which can be generated by two scenarios-a 5 percent reduction in hospitalizations and a shift of 10 percent of the "self-referred" visits that are now bypassing local rural health facilities in favor of polyclinics and hospital-based ambulatories at the district level. Both these targets appear conservative by one-half to one-third, relative to evidence from other parts of the FSU which have identified high rates of unnecessary admissions and instituted new incentive structures (see, for example, Sheiman, 1995; Sherman and Goldin, 1995). Focus groups and anecdotal data indicate that a high proportion of visits bypassing village facilities is because of the lack of trained staff, and particularly the lack of pharmaceuticals and supplies. The potential savings from these two scenarios do not primarily accrue to the government budget. While reductions in hospitalizations will favorably effect operating costs, the savings may be over stated. Hospital operating budgets may not adjusted downward to account for attached ambulatory clinics, and to reflect only marginal (not average total cost) of admissions. The savings generated by increasing the share of ambulatory visits seen at the village level (instead of the zonal polyclinic) are far more modest than the prevention of hospitalizations. Indeed, since SVPs are designed to deliver an improved quality of care, there may be little if any cost savings to the Ministry of Health budget. Usable data on visits and costs by type of ambulatory facility is lacking. Higher ambulatory costs of improved primary care is not uncommon, and the evidence for substituting generalist practitioners for specialty clinics is mixed. Two recent literature reviews found a plurality of studies reporting minimal or negative economic impact of shifting care from generalists to specialists (Scott, 1996; Godber, 1997). (Note: estimated costs per admission and referral is calculated from 1995 data on budgeted non-capital expenditures for short term hospitals divided by the estimated number of admissions. Budget data from Haliun Dalantai, "Notes on Analysis of Health Expenditure in Uzbekistan" unpublished memorandum. May, 1997. For the three oblasts, these figures run 1,023, 941 and 1106 Uzbek Sum.) The larger savings come from the substantial out-of-pocket expenditures for transportation, and particularly for drugs and other treatment costs if a trip to the hospital or a trip to a zonal polyclinic can be avoided. The project's social assessment showed the out-of-pocket costs on average to be far less (2256 vs 934 sum) for local visits versus self-referral to the hospital. Patients' mothers also must stay with hospitalized young children. Valuing the time of rural workers is difficult, since while their average productivity is low and falling, their actual income received is substantially less than the value of production and from the value of time. The table uses a surrogate measure of the value of marginal productivity and does not differentiate between men and women. (iii) Personnel Savings It is hoped that the economic incentive restructuring in the pilot demonstrations will force cutbacks in staff or a more efficient mix of staff. Currently, the Government continues to rely on old Soviet-based input normatives for staffing of existing and newly-opened facilities. The project will include legal changes that will provide local flexibility for hiring and firing of staff, as well as changing the mix of inputs including personnel.  Annex 4- Page 8 Contractor estimates of personnel cutbacks were developed for each level of SVP facility, based on international comparisons of levels of productivity (e.g., visits per physician). Estimates showed that over the life of the project, decreases in levels and types of personnel can be expected to decrease personnel costs by about one- third. The analysis assumes that these personnel will not be re-absorbed elsewhere in the health sector. (iv) Long-Term Benefits The GOU's rural SVP program is nationwide, and it intends to learn from the experience of the three participating Oblasts to improve primary care elsewhere. The program thus has the major advantage of a providing a window for testing, learning, and for dissemination. The training component is a particularly good example of this. The funding includes investments for this project but will provide the first step for nationwide capacity to train primary care physicians. While in principle, investment in training depreciates over time, three-quarters of $4.8 million for component 2 of the project is devoted to build future training capacity. Table 4. Summary of Quantified Costs and Benefits Expectedfrom thte Project 1) Clinical 1) Reductions in Mortality and Morbidity, such as Improved Facilities (e.g., water, sanitation) infant mortality rate Improved Equipment,. Supplies, and Pharmaceuticals. reduction in rate of infant diseases maternal mortality rate 2) Human Development reduced incidence of diseases of pregnancy and puerperium Training of Medical Personnel reduction in disability and morbidity associated with other -- infectious diseases -- chronic diseases 3) Financial and Managerial 2) MOH Budget savings New Incentive Structures facility closures Management Strengthening reduced hospitalizations MIS systems reduced ambulatory referrals (to specialists) reduced personnel costs 3) Consumer Out-of-Pocket Savings pharmaceuticals transportation costs from fewer self-referrals 4) Productivity Savings economically-active patient days caregiver days saved value of days Alternative Strategies Is the SVP program the most cost-effective method of addressing the health problems of rural Uzbekistan? An obvious alternative approach to the construction of new rural health centers would be to upgrade and improve the existing nationwide infrastructure of both rural physician clinics as well as Feldsher and midwife posts and rural clinics. There is good reason to support the GOU's decision to construct new types of facilities. First, physically most of the existing FAP and SVA facilities have, after years of sub-standard maintenance, been deemed irreparable and substandard. According to a GOU survey, of only 9 percent of FAPs and SVAs were built as health facilities and only a handful of the poorly adapted village houses meet minimum construction standards. In addition over 70 percent lack a telephone, 69 percent lack running water, and 75 percent lack central gas heating. In sum, upgrading existing facilities to minimum physical standards would require major construction effort. Second, the current network of FAPs and SVAs are poorly equipped. Laboratories, patient transportation, packages of minimum equipment, and inventories of essential drugs are all desperately needed. Eliminating some of the number of rural locations under the consolidation strategy currently being carried out by the GOU  Annex 4 - Page 9 reduces the cost of equipment upgrades and improved inventories of drugs. Finally, the strategy of replacing FAP personnel (feldshers, or physician assistants) with physician staffs appears to be cost- effective. Since Uzbekistan has a general surplus stock of physicians that are underutilized, physicians can be substituted for midlevels at relatively lower cost than major training to upgrade the medical skills of feldshers. There are monthly salary differentials between a GP physician and a feldsher, but productivity will improve (ultimately decreasing the demand for providers overall), and health outcomes will improve. Impacts: Targeting of Rural Population and Low Income Communities The project will concentrate investment on new centers to be used by rural citizens of three oblasts. The project targets purely rural village communities who are known to have per capita incomes below the $1010 national average. Although published data is lacking, available information suggests that rural standards of living are low and falling. Nationwide, agricultural production has mirrored the general trends of falling production since 1990. The recent recovery of industrial production has not been accompanied by similar growth in agricultural output. Moreover, analysis by the economic policy unit in the U.S. Department of Agriculture shows that the rural-urban terms of trade has significantly eroded since 1990. The project thus addresses generally low income rural areas, and its three participating Oblasts represent a diversity of rural living standards, from the comparatively prosperous rural communities of the Ferghana valley, to the impoverished cattle raising, semi-nomadic settlements in the sparsely settle northern regions of Navoi Oblast. Productivity savings will improve real incomes and improve the relative value of the workforce for both govemment and industry. Training will support the improved capacity and professional status of the primary care practitioner. Specialists may be negatively affected as will the secondary (hospital) sector of health services. Technical assistance and training for provider payments and financial management should enable senior health staff to use resources in a more flexible way and give incentives for lowering admissions to the specialty clinics and hospital. This should have positive impacts on both efficiency and quality. The current system is characterized by excessive reliance on specialty and more expensive inpatient care. During the early years of the project, the impact will be weighted toward input and clinical process indicators more directly than changes in health status indicators which can be expected to change longer- term. All these indicators will be monitored over the life of the project. Summary The primary finding illustrated in the summary Table I is that there are tangible potential economic benefits to be gained from the project, and these are large enough to justify the loan on a cost-benefit basis. Discount rate for calculating the NPV was performed at 10%, based on the Bank's traditional approach of using a notional range of 10-12% opportunity cost for borrowing for capital. A sensitivity analysis was performed using an NPV of 4%; the results were the same in terms of direction, though relative amounts changed (from 26.3 to 33.3 million USD). A substantial portion of savings stem from savings that accrue to individuals and families outside the health sector, and potentially to the employer. The economic justification therefore lies to a large extent in the fact of i) benefits going to patients and families and their employers and ii) from a health care standpoint that the intervention is directed at shifting health care toward known, established cost-effective strategies for addressing an excessive burden of disease. An analysis of the savings accruing to the health sector points out that the project is reliant on three approaches to achieve sustainability long term. First, a substantial portion of funds will be saved through  Annex 4 - Page 10 closures of additional, duplicative facilities-including hospitals for inefficient care or unnecessary care-and these can be shifted back to cover increased operating costs. This rationalization of facilities is a covenant of the loan program. At the same time, the table (Table 1) shows negative cash flows are expected in some years to address increases in operating costs. It should be noted that costs and savings will be refined each year, and while the Government has developed a rationalization strategy already, a more aggressive rationalization strategy may be needed over the cycle of the project if financing gaps develop. This needs to be developed and negotiated as cost and savings estimates are refined each year and facility-specific plans are developed. Second, and concurrently, as a percentage of budget allocation, more of the budget needs to be directed at outpatient and primary care. This should be possible as referrals and admissions drop; bed capacity and decreases in personnel should follow in the inpatient sector. This is consistent with recent trends both in Uzbekistan and in other FSU countries. This allocational shift of budgetary resources will be a further covenant of the loan. Third, the Government will commit to maintaining current levels of spending (in real terms) for health over the course of the project. At the same time, the Government may be willing to commit greater relative shares of spending for health services in the future (based on income elasticities across similar countries), allowing the budgets to effectively cover more costs and so becoming more affordable to the government.  Annex 5 - Page I Annex 5 Uzbekistan Health Project Financial Analysis (in US$ nmilliorns) Table 1. Fi,(ancial Costs and Saviings of tile HealIth project Additional Costs Financial Savings E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2 2 i .* a~~~~~~~~~~~~~~~~~~~~~~~~~~~~J 1 10.739 3.700 3.700 O.OOo O.OOD o.000 0.272 0.000 0.532 O.OOo 0.027 0.0010 0.000 0.000 0.020 1.695 2.546 o.Doo 2.565 0.302 2.867 6.718 3.018 2 7.159 9.S00 U3.500 C.800 0.0oO 0.000 0.544 O.GW0 1LK3 o.GoO 0.032 o.ooO o.K00 O.ooO 0.033 3.390 5.062 0.091 5.130 0.603 5.824 -3.403 -131203 3 8371 9.300 22.800 0.000 O.Go3 O.OOo O.S16 0.000 1.595 0.090 0.038 G.Ooo o.ooO a.ooo 0.040 5.0S4 7.573 O.ISS 7.694 n.905 S.787 -2.143 -11.443 4 21920 7.100 29,900 0.000 O.OD0 0.000 1L0as O.OoO 2.126 O.oOC 0.045 0.000 o.K00 O.OoO 0.047 6.779 10.085 O.ISS 10.260 1.206 11.654 -5.748 -12.S48 5 29.900 O.OOo o.ooG O.K0 LOSS3 0.000 2.126 0.000 0.045 0.000 0.392 1.206 6.779 11.636 O.1SS 10.260 1.206 11.654 -0.017 -0.017 6 2S.615 1.U36 1.2as 3.121 1.088 0.000 2.126 O.ooo 0.04S 0.100 0.400 1.230 6.779 11.76$ O.ISS 10.260 1.206 11.654 o.11s 3.236 7 27.250 1.757 1.364 3.121 I.osS 0.000 2.126 O.Ooo0 0.045 0.1S0 0.408 1.255 6.779 11.asl o.1ss 10.260 1.206 11.654 0.197 331S 8 ~~~~~~~~~2S.03 1.673 1.449 3.121 1.0sS 0.000 2.126 21.260 0.04S 0.200 0,416 1.280 6.779 33.194 0.18s 10.260 1.206 11.654 21.540 24.662 9 ~~~~~~~~~24. 66 1.584 1.537 3.121 1.098 0.0010 2.126 O.oO0 0.045 0.100 0.424 1.305 6.779 11.86S 0.188 16.260 1.206 11.654 0.214 3.33S o0 22.634 1IA90 1.631 3.121 1.088 o.ooo 2.126 O.ooo 0.04s O.K00 0.433 1U32 6.779 11.SO3 O.188 10.260 1.206 11.654 0.149 3.270 11 20.903 1390 1.731 3.121 1.088 o.ooo 2.126 O.OoO 0.045 OJK0 0.441 135S 6.779 11.938 O.IS8 10.260 1-206 11.654 0.2S4 3.405 12 19.065 1.293 1.93S 3.121 1.0ss 0.0003 2.126 o.ooo 0.045 0.150 0.450 1.38S 6.779 12.024 0.188 10.260 1.206 11.654 0370 3.491 13 17.115 1.171 1.951 3.121 1.088 0.000 2.126 0.000 0.045 0120( 0.459 1.413 6.779 12.111 0.18S 10.260 1.206 11.654 0.457 3.578 14 15.044 1.051 2.070 3.121 LO88 O.GoO 2.126 O.ooo 0.045 0.100 0.468 1.441 6.779 12.048 o.1ss 10.260 1.206 11.654 0.394 1.515 Is 12.847 0.924 2.197 3.121 1.0SS O.oOG0 2.126 O.W00 0.045 O.OW0 0.478 1IA70 6.779 11.986 O.ISS 10.260 1.2K6 11.654 0.332 3AS45 16 10.S5i 0.789 2.332 3.121 1.088 0.000 2.126 21.260 0.045 0.100 0.4s7 I.500 6.779 33.385 O.1S8 10.2J; 1.206 11.654 21.731 24.ss3 17 8~~~~~~.039 0.646 2.476 3.121 1.0SS 0.000 2.126 o.oO0 0.045 0.150 0.497 1.529 6.779 12.215 O.ISS 10.260 1.206 11.654 0.561 3.6S2 la 5.411 0.494 2.628 3.121 1.eSs o.ooo 2.126 o.ooo 0.045 0.200 0.507 1.560 6.779 12.306 o.18s 10.260 1.206 11.654 0.652 3.773 19 2.623 0.332 2.789 3.121 I.osS o.ooO 2.126 O.OoO O.ws5 0.1oO 0.517 1.591 6.779 12.241 0.185 1G.260 1.206 11.654 0.s93 3.714 20 -0.338 0.161 2.960 3.121 1.08S O.Ooo 2.126 o.ooo 0.045 o.ooo 0.528 1.623 6.779 12.389 0.1ss 10.260 1.206 11.654 o.s3s 3.656 NPV(6.14%) 25.774 25.557 22.299 1O.864 0.000 21.220 21.393 0.476 0.806 3.513 10.980 0.119 67.663 136.862 1.86S 102.406 12.03S 116.312 20.767 17.se Totsl 29.1S9 29.9W 16.5S0 30.23S 46.817 20.137 o.Goo 39.331 42.520 O.862 1.650 71307 22.479 0.140 125.412 259.a37 3.474 189.8o 21 1.9 43.532 60.449 ., ,, , , .8 _ .* __. .  Annex 5 Page 2 Scope of Work and Methods The financial analysis examines the impact of the project upon the costs of providing health care in the three pilot oblasts. The financial analysis and fiscal impact is based on the investment and recurrent costs of all project sub-components over a twenty year period (5 year grace and 15 year pay-back period). Cost Conversions All local costs were converted into US dollars. Several exchange rates existdefacto in Uzbekistan. The official rate used was 82.71 sum to US $1 (March 1998 when the analysis was performed), while the unofficial rate has been approximately double this level. In the absence of information from the IMF or elsewhere, the official rate was used in the analysis. Purchasing Power Parity The official exchange rate used to convert dollars to sum does not take into account differences in relative purchasing power of the local currency arising from much lower cost of non-tradable items. Some recurrent costs of the investment will be carried out locally where the cost is likely to be much lower than the dollar costs suggested. This is true of maintenance of health facilities and equipment. It is not probably true of equipment replacement much of which is still likely to be imported or paid for at international prices. Purchasing power parity estimates of GDP could not be obtained for Uzbekistan. These are, however, available for some other FSU countries. Estimates for Azerbaijan and Kyrgyzstan which are the most similar of the countries for which estimates are available, suggest that GDP at PPP dollars is about 2.6 times GDP at market rates. However, most purchases financed under the project will use international procedures and will in all probability be foreign-based purchases with USD. Only civil works (the government's contribution) will be local as will facility operations and maintenance (O&M) costs. This ratio is used in the analysis to deflate the estimates of the cost of capital and of maintenance. Demandfor Health Services SVPs are designed to reduce the incidence of unnecessary referrals to hospitals and zonal polyclinics. Demonstrating the degree to which SVPs can do this successfully with financial incentives and self- management is a key objective of the financing and management pilot demonstrations and component generally. Since specialty care typically costs more than primary care, each visit retained at the local level will save budgetary costs of the Ministry of Health and to patients. Nevertheless, the complexity of the project make its impact on demand for health care difficult to predict. Some broad conclusions about likely impact are possible. Improved facilities should make services more attractive to users, especially at the local level. In particular better transport and communication with rural primary care facilities together with improved equipment and-staff training is likely to increase demand for ambulatory primary services. Much of the project investment is aimed at increasing the use of these facilities and dealing with disease on an outpatient basis where possible. This will also be encouraged through the physician and nurse training. The impact on demand for inpatient care is far less clear. On one hand more disease will be treated by primary providers with reduced or no need for patient admission. At the same time improved primary care may identify more disease that will then be treated in hospital. Reported statistics on admissions per capita are extremely high by international standards. In these circumstances it seems reasonable to assume that admission rates will fall. A 5 percent assumption is used, which is a conservative estimate based on reported drops in admission of 7-27 percent in other parts of the FSU implementing new  Annex 5 Page 3 incentive systems for services. Average length of stay is not assumed to decrease at all for admissions. Studies in other FSU countries such as Russia and Kazakhstan suggest that many patients may be admitted, or have their stay in hospital prolonged, because of inadequate outpatient care. However, increased demand for care and newly-identified cases may offset shortened LOS with sicker patients being admitted for longer periods of inpatient care. Analysis Cost Savings From the demand analysis, and given the low level of actual state spending, it is unlikely that the project will release much money directly through increases in the budget. In contrast to some projects, the Uzbekistan project addresses the problems at the primary care level rather than the costs of treating one or two diseases. The health budget is recognized to be low. For example, in 1997 the health budget is estimated at 22,273 million Uzbek sum, though the Government has announced a massive program of construction of new facilities. This should be assumed to be a one-shot support of health sector spending. Instead the budget will need to be used more effectively in the treatment of disease with a greater proportion being used to finance primary care. Some money will be released as a decreased admissions and decreased referrals to zonal polyclinics. Large savings can be released in the health sector when facilities, or parts of facilities, are actually closed. The Government's program of construction is designed to minimize increases in operating cost by substituting more effective facilities for existing sites of care. It closes poorly used and scattered facilities and replaces them with SVPs that are more centrally located, better staffed and equipped, and better stocked with essential drugs. The facility consolidation strategy in the three participating Oblasts will include 703 existing village-level facilities that will cease current operation between 1996 and the year 2002 (535 feldsher posts, 164 SVAs and 4 rural hospitals). At the same time, some of these facilities (62 SVAs) will be rehabilitated as SVPs, and a range of 204-258 SVPs will be newly reconstructed (a mid-point is assumed for the analysis here). An additional 32 central rayon polyclinics, as the apex of the primary care delivery system, will be equipped with selected laboratory and diagnostic equipment. There are savings from changes in the levels of personnel and the mix of personnel. The economic incentive restructuring in the pilot demonstrations will force cutbacks in staff or a more efficient mix of staff. Currently, the Government continues to rely on old Soviet-based input normatives for staffing of existing and newly-opened facilities. The project will include legal changes that will provide local flexibility for hiring and firing of staff, as well as changing the mix of inputs including personnel. Estimates of personnel cutbacks were developed for each level of SVP facility, based on international comparisons of levels of productivity (e.g., visits per physician). Estimates showed that over the life of the project, decreases in levels and types of personnel can be expected to decrease baseline personnel costs by about one-third. The analysis assumes that these personnel will not be re-absorbed elsewhere in the health sector. There also are savings from utilization. The savings to MOH are based on a level of savings which can be generated by two scenarios-a 5 percent reduction in hospitalizations and a shift of 10 percent of the "self-referred" visits that are now bypassing local rural health facilities in favor of polyclinics and hospital-based ambulatories at the district level. Both these targets appear conservative by one-half to one-third, relative to evidence from other parts of the FSU which have identified high rates of unnecessary admissions and instituted new incentive structures (see, for example, Sheiman, 1995; Sherman and Goldin, 1995). Focus groups and anecdotal data indicate that a high proportion of visits  Annex 5 Page 4 bypassing village facilities is because of the lack of trained staff, and particularly the lack of pharmaceuticals and supplies. The potential savings from these two scenarios do not primarily accrue to the government budget. While reductions in hospitalizations will favorably effect operating costs, the savings may be over stated. Hospital operating budgets may not adjusted downward to account for attached ambulatory clinics, and to reflect only marginal (not average total cost) of admissions. The savings generated by increasing the share of ambulatory visits seen at the village level (instead of the zonal polyclinic) are far more modest than the prevention of hospitalizations. Indeed, since SVPs are designed to deliver an improved quality of care, there may be little if any cost savings to the Ministry of Health budget. Usable data on visits and costs by type of ambulatory facility is lacking. Higher ambulatory costs of improved primary care is not uncommon, and the evidence for substituting generalist practitioners for specialty clinics is mixed. Two recent literature reviews found a plurality of studies reporting minimal or negative economic impact of shifting care from generalists to specialists (Scott, 1996; Godber, 1997). (Note: estimated costs per admission and referral is calculated from 1995 data on budgeted non-capital expenditures for short term hospitals divided by the estimated number of admissions. Budget data from Haliun Dalantai, "Notes on Analysis of Health Expenditure in Uzbekistan" unpublished memorandum. May, 1997. For the three oblasts, these figures run 1,023, 941 and 1106 Uzbek sum.) Recurrent Costs The projected civil works and equipment purchases have a number of potential recurrent cost implications. These are: