Uzbekistan - Enterprise Institution Building Loan Project

Document of The World Bank Report No: 17665-UZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN TH[E AMOUNT OF US$28.0 MILLION EQUIVALENT TO THE REPUBLIC OF UZBEKISTAN FOR AN ENTERPRISE INSTITUTION BUILDING LOAN May 8, 1998 Private and Financial Sector Development ECCOI Country Department Europe and Central Asia Region  CURRENCY EQUIVALENTS Exchange rate on March 26, 1998 Currency Unit = sum I sum = US$ 0.0119 US$ I = 84.25 sum FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy COM - Cabinet of Ministers CCPB - Case-by-Case Privatization Bureau EBRD - European Bank for Reconstruction and Development EIBB - Enterprise Institution Building Bureau EIBL - Enterprise Institution Building Loan/Project FSU - Former Soviet Union GKI - State Property Committee GOU - Government of Uzbekistan IBRD - International Bank for Reconstruction and Development IDA - International Development Agency IFC - International Finance Corporation IMF - International Monetary Fund MOF - Ministry of Finance OTC - Over The Counter Market PIF - Privatization Investment Fund PIU - Project Implementation Unit PPS - Post-Privatization Support CSM - Center on Coordination of Functioning and Control of the Securities Market (Securities Center) Vice President: Johannes Linn Country Director: Ishrat Husain Sector Director: Lajos Bokros Sector Leader: Gerhard Pohl Team Leader: Itzhak Goldberg  PROJECT APPRAISAL DOCUMENT UZBEKISTAN ENTERPRISE INSTITUTION BUILDING LOAN Contents A. Project Development Objective .....................................................................I 1. Project Development Objective and Key Performance Indicators .............................................I B. Strategic Context .....................................................................I 1. Sector-Related CAS Goal Supported by the Project ..................................................................1 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 .....................................................................5 1. Project Components .....................................................................5 2. Key Policy an(I Institutional Reforms Supported by the Project ................................................6 3. Benefits and Target Population ....................................................................6 4. Institutional a nd Implementation Arrangements ..................................................................... 6 D. Project Rationale ......................................................................9 1. Project Alternatives Considered and Reasons for Rejection ................................ ......................9 2. Major Related Projects Financed by the Bank and/or Other Development Agencies ............. 10 3. Lessons Learned and Reflected in Proposed Project Design .......................... ......................... 10 4. Indicators of Borrower Commitment and Ownership .............................................................. 11 5. Value Added of Bank Support in this Project .................................................................... 11 E. Summary Project Analyses ........... .................. ..1..................................... 1 1. Economic .................................................................... 11 2. Financial .................................................................... 12 3. Technical .................................................................... 12 4. Institutional .................................................................... 12 5. Social ........ ............................................................ 13 6. Environmental Assessment .................................................................... 13 7. Participatory Approach .................................................................... 13 F. Sustainability and Risks ..................................................................... 14 1. Sustainability .................................................................... 14 2. Critical Risks .................................................................... 15 3. Possible Controversial Aspects .................................................................... 15  G. Main Loan Conditions ........................... 16 1. Conditions of Effectiveness ........................... 16 2. Positive Covenants ........................... 16 H. Readiness for Implementation ........................... 18 I. Compliance with Bank Policies ........................... 19 Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Annex 4. Cost-Effectiveness Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table Al. Consultant Selection Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance Map  UZBEKISTAN ENTERPRISE INSTITUTION BUILDING PROJECT Project Appraisal Document Europe and Central Asia Region ECCOl Date: May 6, 1998 Team Leader: ltzhak Goldberg Country Director: Ishrat Husain Sector Leader/Director: Gerhard Pohl/Lajos Bokros Project ID: UZ-PE-55159 Sector: PSD Program Objective Category: Lending Instrument: TA Program of Targeted Intervention: [] Yes [x ] No Project Financing Data [x] Loan [ ] Credit [] Guarantee [] Other [Specifyl For Loans/Credits/Others: Amount (US$m): 28.0 Proposed terms: [] Multicurrency [x] Single currency Grace period (years): 5 [] Standard Variable [ Fixed [X] LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: NA Financing plan (US$m): 28.0 Source Local Foreign Unalloc Total ated Government 1.8 17.9 19.7 Cofinanciers IBRD 2.3 23.1 2.6 28.0 IDA Total 4.1 41.0 2.6 47.7 Borrower: The Republic of Uzbekistan Guarantor: Not Applicable Responsible Agencies: Cabinet of Ministers (COM), State Property Committee (GKI), Ministry of Finance (MOF) Estimated disbursements (Bank FY/'US$): 1999 2000 2001 2002 2003 Annual 2.00 4.80 7.00 8.20 6.00 Cumulative 2.00 6.80 13.80 22.00 28.00 Project implementation period: 5 years Expected effectiveness date: June 1998 Closing date: December 2003  A: PROJECT DEVELO]PMENT OBJECTIVE 1. Project development objective and key performance indicators (see Annex 1): Project Development Objectives Key Performance Indicators Improve efficiency of privatized enterprises. Successful implementation of 30 of the enterprise restructuring plans by end of project. Support the Government's implementation of Case- Sale of seven large scale firms to strategic by-Case privatization to improve enterprise investors by end of project. efficiency, and attract foreign know-how and capital. Enhance effectiveness and widen public Increase in trade of shares on the stock exchange, participation in capital markets and protect improved mechanisms for trade of securities and shareholders. more secure shareholder rights. Strengthen the institutional capacity to facilitate Stronger local private entrepreneurs and more enterprise reform. foreign investment. B: STRATEGIC CONTEXT 1. Sector-Related Country Assistance Strategy (CAS) Goal Supported by the Project (see Annex 1): CAS document number: 17:376 UZ, discussed by the Board on February 19, 1998. The Government of Uzbekistan (GOU) has been following a gradualist approach to reform: although stabilization efforts have been relatively successful, liberalization of the trade and foreign currency regime has been slow and erratic. In Autumn 1996, partly as a reaction to a particularly poor harvest of cotton, its main export commodity, the GOU introduced multiple currency practices, foreign exchange rationing, and trade restrictions. These measures have resulted in the IMF stand-by program approved in December 1995 being declared off-track. The Enterprise Reform Loan, a policy-based loan of $180 million, focused on privatization, financial discipline and trade liberalization, was successfully negotiated in September 1996 but has been on hold since the IMF stand-by went off track in November 1996. The new CAS is designed to address the Government's concerns about the possible negative consequences of reforms by demonstrating the benefits and results of policy and institutional reforms in the context of pilot investment operations, and through continuing dialogue. The Bank believes that the success of pilot operations, backed by intensified dialogue and technical assistance to build the capacity for economic management, will demonstrate the benefits of reform and thereby provide a solid basis for replicating these reforms throughout the economy. However, recognizing the risks involved in this approach, the strategy has been designed with well-defined triggers to ensure links between Government performance and further Bank engagement. The planned strategy envisages three possible scenarios. The high case would include a new IMF program combined with a strong program of structural reform and liberalization supported by IBRD adjustment operations. A more likely outcome is an intermediate scenario in which the Government's continued reservations about liberalization of trade and payments would preclude an agreement with the  2 - IMF and/or lack of progress on structural reform fronts. Under this scenario, the Government would maintain at least a modicum of macroeconomic stability (i.e., inflation less than 40 percent per annum and a budget deficit of less than 3 percent), make substantial progress on selected sectoral and institutional development issues, maintain fully satisfactory implementation performance, and continue an active engagement on key structural reform issues. In this case, a series of pilot operations would provide the main vehicle for delivering assistance to the Government. These operations would demonstrate the benefits of the key structural reforms (i.e., agricultural restructuring and privatization), and support institutional development which would induce the Government to replicate these changes across the economy. The Enterprise Institution Building Loan (EIBL) is a key component of this scenario: utilizing the gradual and innovative approach to privatization through Privatization Investment Funds; initiating a new case-by-case privatization program for large strategic enterprises as the cornerstone for further industrial enterprise restructuring; and institutional building in the enterprise and financial sector Experience in other FSU countries has shown that rapid privatization and liberalization without prior institution building (i.e., legal framework, regulatory commissions, securities registration, transparent privatization mechanisms) may result in a public backlash against privatization. Therefore, we believe that supporting local private entrepreneurs, in particular PIFs, and attracting foreign and local investors by transparent methods is critical for strengthening the institutional capacity for liberalization and reform. 2. Main Sector Issues and Government Strategy: Privatization has proceeded slowly since the adoption of the Law on Privatization of November, 1991. Privatization of small scale enterprises was completed by 1995. The obstacles to enterprise restructuring have been: (i) The labor collectives, together with the management of the privatized enterprises, hold significant blocks of shares of most of the enterprises. As a result, the management culture and strategy in these enterprises has not changed; (ii) Former ministries that were transformed into Associations still control the strategy of enterprises; and (iii) The Government maintains a regime of dual exchange rates with restrictions on access to foreign currency, trade barriers, and restrictions on cash withdrawals from the banking system (the cash/non-cash regime). Privatization of medium-scale enterprises has been considerably improved with Resolution No. 220 of the Cabinet of Ministers (COM) "On Measures for Organization of the Activities of Investment Funds" of June 18, 1996. This Resolution provides the framework for the program of privatization through wholly private Privatization Investment Funds (PIFs) which issue shares and use the proceeds to purchase state shares in enterprises offered in auctions. Privatization of Medium-Scale Enterprises - The PIFs Program: To date more than 50 PIFs have been licensed and around 25 of them are active in purchasing enterprise shares and selling their shares to the public; some of them have turned out to be strong advocates of private entrepreneurship. This is a considerable success because one of the critical goals of the program was to attract a sufficient number of local private businessmen to invest in starting the business of investment management. The PIFs have so far sold their shares to more than 100,000 citizens. Surveys show that a large cross-section of the population has begun buying PIF shares as an investment for their savings. In 1997-mid 1998, 18 auctions were held in which shares in just below 200 enterprises were sold to PIFs. It should be noted that the PIFs are free to bid for shares in enterprises of their choosing and these enterprises were selected out of the best medium-scale enterprises in Uzbekistan. Approximately 50 enterprises were offered in 1997 but were not bought by PIFs.  - 3 - Recently, following the success of the initial phase of the PIFs program, amendments to Regulation 220 have been made. The most important changes are: (i) no individual shareholder in a PIF is allowed to hold more than 10 percent of its shares, and; (ii) the decline in offer prices in auctions of enterprise shares to PIFs will be limited to 50 percent of the "nominal" price, and no credit will be provided to PIFs when the sale is below the nominal price. These amendments were discussed at length during Project Appraisal. Point (i) was found to be acceptable; while negotiations regarding point (ii) have continued after Appraisal with the Government remaining unwilling to change its position. It was agreed at Negotiations that an acceptable version of Resolution No. 220, including an approved list of 200 enterprises whose shares can be sold to the PIFs, would be adopted by the COM as an Effectiveness Condition. Transparent Privatization of Large-Scale Enterprises: The PIFs Program focused on the privatization of medium scale enterprises. There have been a few cases of large-scale privatization but there has been no transparent program of large scale case-by-case privatization. Further progress in privatization of large enterprises is likely to require significant participation of foreign investors who can bring international market access, management skills, capital and technology. The transparency and competitiveness of such a process is critical for attracting foreign and local private investment. Some of the enterprises that will be privatized have public monopoly characteristics. These enterprises are typically subject to some form of regulatory control in other economies because they are the sole suppliers in a particular market or have other powers to earn a rate of return that is higher than in competitive markets. Until now such enterprises in Uzbekistan have operated under full state ownership and the regulation was determined directly by the price and production decisions of the state. Prior to a privatization sale bidders will want to know what form of regulation (if any) will be applied once the enterprise is in private hands. The state will receive a higher price if there is little regulation so that the enterprise is free to restrict supply and raise the price of its output. This, however, may not be in the public interest. If the government fails to provide information about the post privatization regulatory environment, no bids for the companies may be forthcoming or they may be lowered by the need to compensate for uncertainty. Therefore, the government will need to undertake some analysis of market conditions to make an informed judgment about the public need for regulation and to avoid loss of potentiEal sale value. Capital Markets and Shareholder Protection: The PIFs Program is closely connected to capital markets development: it both depends on the functioning of these markets and makes a major contribution to their development. The authorities are concerned about the possibility of large investors manipulating small investors as they buy up shares in the PIFs. Legitimate concerns about the rights of small investors are best addressed through the development of a transparent secondary market which must include rules on obligations to disclose major acquisitions, requirements for majority shareholders to offer to buy the shares of minority holders, as well as rules on insider trading. This is the approach used in other markets. It avoids putting restrictions on demand which would be detrimental to suppliers/owners, as lower demand will result in lower prices. It also avoids putting constraints on the concentration of ownership which may be seriously detrimental to corporate governance and enterprise restructuring. Secondary market trading is best promoted by ensuring that all relevant information on listed enterprises, securities market activity, and individual trades is made readily available to all market participants in a timely manner. This may require imposing reporting requirements as well as installing systems on the Stock Exchange which ensure that market participants have timely access to trading information. The objective of this technical assistance is to provide the authorities with advice on the regulation of securities markets commensurate with international practices. Issues to be addressed will include promotion of an active secondary market and the surveillance of secondary market trading.  - 4 - 3. Sector Issues to be Addressed by the Project and Strategic Choices: Post-Privatization Advisory Services to Enterprises Advisory services will focus on "defensive restructuring": re-orienting marketing strategy, improving accounting practices, cost monitoring and reduction, financial management including cash-flow management, human resource management, and legal and organizational structure. To ensure the impact of the privatization on restructuring and growth of enterprises, it is essential that the PIFs and enterprise managers be able to formulate and execute restructuring plans necessary to modify marketing strategies, reduce costs, meet quality standards, and attract investors. As a by-product of these activities, the capacity of the local consulting industry will be enhanced through collaboration with international consulting firms. We expect this outcome because the project will finance advisory services using pre-qualified local consultants and consortia of foreign and local consultants. The individual restructuring efforts will be supported by a broad outreach program consisting of workshops and various media presentations, designed to develop a better understanding of the restructuring process among PIFs, enterprises and consultants, and to promote collaboration between local and foreign consulting firms. During Appraisal, the Government raised its concern that advisory services which are not complemented by a credit line are ineffective and create false expectations. The Government argued that while the project would provide advisory services, enterprises may in fact require investment funds through credit lines. The Bank Team believes that, even in the absence of a supplementary credit line, advisory services can fulfill an important role because restructuring will be accomplished through reorganization, asset sales, and new marketing strategies which will not require major equity or credit investment. The experience of similar projects in Moldova and Lithuania supports this view. As a compromise, it was agreed with the Government that assistance will be focused towards privatized enterprises where improvement in profitability can be achieved within the constraints of existing equipment and technology, through management, organizational, accounting, financial, and marketing advisory services. Experience show that difficulties encountered in restructuring often include the opposition of entrenched management and labor collectives to downsizing, the lack of skills, the long time required for retraining, and the lack of finance. Given these constraints on restructuring, it is expected that only 30 of the 75 plans initiated under the project will be successfully completed. Privatizatioin of Large-Scale Enterprises To privatize the larger enterprises that need sales to strategic investors and/or share placements, there must be adequate information provided about the enterprises being offered for sale so that the process is open and clear. This means that, to the greatest extent possible, valuations must be made using acceptable, market based methods, financial information must be developed in a manner consistent with GAAP, and disclosures must be made in a way consistent with best commercial practices. In addition, sales offerings of companies must be adequately publicized and potential investors identified and approached directly. These prerequisites of a successful privatization effort indicate that the participation of foreign financial advisors is critical. Input from local advisors is also important for interpretation of existing laws, commercial practices and market and economic conditions. A collaborative approach that uses both local and foreign advisors will enhance local consulting capacity and help develop local-foreign partnerships.  Evidence from other countries strongly indicates that the use of reputable international financial advisors (preferably investment or merchant banks) through all stages of a company's privatization is critical in attracting high quality buyers. Such financial advisors are able to generate much more in sales proceeds than they require in fees and will provide the leadership for successful sales. Accordingly, under this project component, foreign financial advisors will be engaged for each privatization candidate to: (i) undertake a quick assessnnent of the privatization candidate's general privatization potential, do the privatization feasibility study phase (valuation and development of privatization options) and the privatization planning phase (method of sale, sales plan, timeline and communications); and (ii) undertake the privatization transaction or sale. Experience shows that in imany cases the authorities decide not to continue after phases one and two because the government is not satisfied with the valuation potential sale price, is not willing to modify the regulatory environment, or is not ready to accept the conditions of the foreign strategic buyers. Therefore, we assume that out of the 18 cases initiated, only seven will be sold during the five years that the project is in operation. Capital Market Development Secondary market trading is best promoted by ensuring that all relevant information on listed enterprises, securities market activity, and individual trades is made readily available to all market participants in a timely manner. This may require imposing reporting requirements as well as installing systems on the Stock Exchange which enable market participants to have timely access to trading information. As transparency is vital to promoting the secondary market, this component will include a review of the current systems for gathering and disseminating information on the: (a) listing and quoting of shares; (b) issuers (their activities, financial data, etc.); (c) security market information (turnover, prices, principal shareholders); and (d) trading in individual issues (prices, bids and offers). Proposals will be made for improvements, including associated costs and possible funding. Given the considerable investments already undertaken in development of the market infrastructure, emphasis will be placed on building on current facilities. C: PROJECT DESCRIPTION SUMMARY 1. Project Components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Category Cost Incl. % of Bank- % of Contingencies Total financing Bank- ___ (USS) financing Post Privatization Advisory consulting 15.5 32.5% 13.4 47.9% Services services goods 0.7 1.5% 0.1 0.4% Case-by-case Privatization consulting 25.4 53.2% 8.9 31.8% services goods 1.1 2.3% 0.6 2.1% Capital Markets consulting services 1.6 3.4% 1.6 5.7% goods 0.8 1.7% 0.8 2.9% Unallocated Balance 2.6 5.5% 2.6 9.3% Total 47.7 100.0% 28.0 100.0%  -6 - 2. Key Policy and Institutional Reforms Supported by the Project: * The post-privatization component will support enterprise reform by building institutional capacity for restructuring through a new Enterprise Institution Building Bureau (EIBB) that will provide a demonstration effect showing that restructuring can be done, and by developing the local consulting industry. * The case-by-case privatization component will build the capacity to privatize large and complicated enterprises transparently, introduce large foreign investment banks to the Uzbek business environment which may provide feedback to policy makers about necessary changes, and provide invaluable experience to local consultants who will work with the investment banks. * The capital markets development component will support the further development of the Securities Center, the Stock Exchange, and the National Depository. Four sub-components are: (a) securities market regulation and investor protection; (b) assistance in supporting secondary trade in securities; (c) technical upgrade of the national depository; and (d) training. 3. Benefits,and Target Population: Benefits * Faster growth and more efficient resource allocation through enterprise restructuring and transfer of know-how and capital by foreign and local investors. * Increased revenue from sales and more foreign direct investment through privatization. X Wider public participation in capital markets through the PIFs Program, and as a result, in the longer term, deeper and more liquid capital markets. Target Population * Shareholders will enjoy the benefits stemming from increased foreign investment, and the enhanced earnings and growth potential that more efficient production technology and increased investment will allow. They will also benefit from increased shareholder protection and improved capital markets. * Employees of privatized enterprises will benefit from working for financially stronger and more productive enterprises that can invest, grow, and offer better quality jobs. * Dornestic savers will have a richer choice of vehicles for saving and investing and, in the long run, will enjoy increased returns. * Local consultants will benefit directly from involvement in the project and from the opportunity to collaborate with foreign firms. 4. Institutional and Implementation Arrangements: Overall Project Structure. The project has three main components. Two new Bureaus, the Enterprise Institution Building Bureau (EIBB) and the Case-by-Case Privatization Bureau (CCPB) will be established as the implementing agencies for the post-privatization and privatization components respectively. The EIBB will also serve as the Project Implementation Unit (PIU) for the Capital Markets component. These Bureaus will be supervised and controlled by a Supervisory Board consisting of representatives of GKI, MOF, and the COM. The sustainability of these Bureaus is an important objective of the proposed loan as they are expected to continue their respective tasks well beyond the  -7 - closing date of the project. The Bureaus will act as PIUs for the EIBL and will be responsible for ensuring that contracts are formulated in a manner consistent with World Bank guidelines, for documenting project finances, and for providing information necessary for project reporting and supervision. Post-Privatization Support. The EIBB will be co-founded by the GKI and the MOF. It will be an autonomous, non-commercial, public organization. The EIBB will channel the funds provided under the EIBL in support of post-prilvatization restructuring advisory services, and it will act as the PIU for this specific component of the loan. Accordingly, a Project Implementation Agreement describing the role and authority of the EIBB should be signed between the MOF and the Bureau before it can start utilizing the funds borrowed by the GOU. The organizational structure of the EIBB will be as follows: Supervisory Board Director 2 Project Managers 4 Consultants Financial Manager Accountant One Support'Staff Legal Advisor Administration/Support Staff - Procurement Officer The Bureau will be staffed with local staff and will be assisted by one resident foreign advisor. The staff of the EIBB should be selected on the basis of high quality professional skills and hands-on experience in providing a general range of-business, management, and financial advisory services to small and medium sized enterprises. The Government shall provide a contribution in kind to the Bureau in the form of adequate premises. Required capital investment (office furniture, computer equipment, and vehicles) will be funded from the IBRD loan, according to a budget jointly agreed between the Government and the Bank. Case-by-Case Privatization. For the privatization component of the project, GKI will establish an independent CCPB and will appoint a Director, acceptable to the Bank, to head the Bureau. Accordingly, a Project Implementation Agreement describing the role and authority of the Bureau should be signed between the MOF and the Bureau before it can start utilizing the funds borrowed by the GOU. Through the CCPB, the Government will hire international investment bankers using open and competitive tenders consistent with the "World Bank Guidelines for the Use of Consultants". The criteria for selection of international investment bankers will be that the firm: (i) has been the lead advisor to Government in at least 10 successful case-by-case privatizations with receipts of at least USD 10 million each; and (ii) the reputation of the firm is of a high standard, as judged by the Bank. The terms of reference of the investment banker will cover three phases beginning with an initial quick review of the enterprise (phase 1). If the review is negative, the assignment will terminate and no more work will be billed. If the review is positive, the same investment banker will carry out a valuation and develop a privatization strategy (phase 2) and, finally, undertake to sell the company on behalf of the Government (phase 3). The Bank loan will be used to pay the fixed fees of the investment bankers and other experts, such as lawyers, industry specialists, and auditors, in phases I and 2. The fees for phase 3 will be paid from the proceeds of the sale.  - 8 - The organizational structure of the CCPB will be as follows: - Supervisory Board - Director - Senior Adivisor - Executives-privatization team leaders - Senior officers for privatization teams - Office/Financial Manager - Administration/support staff - Procurement Officer The Bureau will be staffed with local staff and will be assisted by one resident foreign advisor. The staff of the CCPB should be selected on the basis of high quality professional skills and business experience or training. The Govermrlent shall provide a contribution in kind to the Bureau in the form of adequate premises. Required capiital investment (office furniture, computer equipment and vehicles) will be funded from the IBRD loan, according to a budget jointly agreed between the Government and the Bank. The Government will also provide substantial funding from the sales receipts from privatization through the fees it will pay investment bankers and other professionals. The three-phase case-by-case privatization process will be monitored and reviewed by the Bank, as follows: * Phase 1: the report of the investment banker on the quick assessment; * Phase 2: the report of the investment banker on the valuation of the company, the options for sale and the recommended sales option; and * Phase 3: the sales process recommended by the investment bank and adopted by the Government; the criteria of selection for a winning tender as developed by the investment banker and adopted by the Government; and the evaluation of the tender offers with the Government's reasons for selection of a winning bidder. In the case of privatizations involving share placement, the sales plan and pricing scheme developed by the financial advisors will also be monitored and reviewed. Capital Market Development. This component of the project is designed to support the further development of the Securities Center, the Stock Exchange, and the National Depository. The principal counterparts to each sub-component will be: (a) The Securities Center with responsibility for regulation of securities markets, (b) The Stock Exchange and OTC market participants, (c) The National Depository, (d) The Securities Center as coordinator for training for all market participants. Project activities will include technical assistance and computer hardware and software which will be entirely funded from the IBRD loan according to a budget jointly agreed between the Government and the Bank. Contracting and reporting functions of this component of the project will be managed by the EIBB. In designing lprocurement arrangements for the assistance to be provided under this component, it will be desirable to avoid fragmentation. To ensure serious interest and professionalism from consultants in this area, foreign technical assistance will be presented as one contract for international tender.  -9- The Supervisory Board will be responsible for coordinating all activity under this component, and ensuring cooperation between the Bureaus and the consultants. The EIBB will be responsible for the day-to-day implementation of the component. This will involve engaging consultants to design a detailed strategic implementation plan which clearly identifies the needs (equipment and services) of the Center, the National Depository, and the Stock Exchange. The EIBB will seek the Bank's approval of the strategic implementation plan and solicit bids for a contract for the provision of the necessary equipment and services. Finance. Accounting and Auditing Arrangements. Finance, Accounting and Auditing Arrangements. The EIBB and CPCB will act as PIU's for the project and will maintain the project accounts. The MOF will appoint a financial manager who will prepare a financial management plan for the project. This plan will be reviewed by an independent auditor acceptable to the Bank. Prior to loan effectiveness the auditor will offer an opinion stating that financial management plan conforms with the Bank guidelines as expressed in OP 10.02 and BP 10.02. In the past, financial statements and audit reports for the Cotton Improvements Project were complied after a three month delay. However, the project accounts and audit reports for the Policy and Human Resources Development Fuind were submitted to the Bank on schedule and were satisfactory. GKI, the Government department sponsoring the EIBP, has been the executing agency for the Policy and Human Resources Development Fund. During negotiations, agreement was reached with the Government that the EIBB and the CBC will submit to the Bank each year audited project financial statements not later than six months from the end of the fiscal year. The audit will be undertaken in accordance with international standards on auditing and will be financed from the loan. Reporting Arrangements. Bi-annual progress reports will be prepared by the principle counterparts for each of the three project conmponents. The format of the reports will be mutually agreed upon prior to the first submission six months after project effectiveness. Implementation Completion Report. The PIUs will prepare in conjunction with the Bank an ICR upon completion of the Project and not later than six months after final distribution of the Loan proceeds. Included in the ICR will be an assessment of 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 in their respective obligations and accomplishments, and lessons learned. Project Monitoring and Evaluation. Project monitoring and evaluation will be carried out in the following areas: (a) procurements of goods and services; (b) financial management and use of project resources; and (c) progress towards project objectives. The evaluation will be made with reference to the key Performance Indicators (that were agreed at Negotiations), and project outcomes will be evaluated in terms of the progress on privatization, successful restructurings, and improvements to capital markets. D. PROJECT RATIONALE 1. Project Alternatives Cons idered and Reasons for Rejection: The main alternative to this project is to withhold assistance in the area of private sector development altogether pending further liberalization of the foreign currency and trade regime. The Team believes that this alternative should be rejected for the following reasons: Rejecting the project will jeopardize some of the significant advances already made in capital markets development through the PIFs Program. The Program is at a critical juncture and needs the  - 10- support that this loan will provide. Without this support, momentum will be lost and the confidence of the private sector (both domestic and foreign) in the permanence of the reforms and new institutions supporting privatization will be undermined. * Successful restructuring and revenue from case-by-case privatization with foreign participation will increase the support within the Government encouraging reform in other areas and will improve the financial strength, productivity, competitiveness, and investment levels of Uzbekistan's larger firms. * Supporting local private entrepreneurs, in particular PIFs, and attracting foreign investors by transparent privatization methods is critical for encouraging reform by strengthening the institutional capacity for liberalization and reform. 2. Major Related Projects Financed by the Bank and/or other Development Agencies (completed, ongoing, planned): Sector issue Project Latest Form 590 Ratings IP DO Advisory services Lithuania - Enterprise and HS S Financial Sector Project (PE8536) Post privatization restructuring Moldova - Private Sector HS HS Development I (PE 8561) Post privatization restructuring Moldova - Private Sector S S Development II (PE3581 1) Case-by-case privatization Bolivia - Capitalization Program S HS (BO-PE-6173) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons Learned and Reflected in the Project Design: * The establishment of a highly-qualified locally-staffed unit, with strong leadership, proved successful both in Lithuania and in Moldova. To build on some of this experience, the Director of the Lithuanian Advisory Services Group CONSULTA Ltd. has participated in the Appraisal and will help establishing the EIBB. * Bank staff with extensive experience in organizing and managing case-by-case privatization programs in government will help establish the CCPB. * The experience of other transition economies will be used as demonstration through visits to other ]FSU/EE countries, and use of consultants from these countries. * The Moldovan experience shows that non-investment restructuring should precede external financing and that typically, after restructuring, enterprises did not want external financing. However, ex ante, this message is least acceptable to enterprise managers and officials. Also, in Lithuania, although a credit line was available along with the advisory services, many enterprises used the advisory services without the credit.  4. Indicators of Borrower Commitment and Ownership: The GOU has shown its commitment to the PIFs program by implementing the program in spite of the fact that the Enterprise Reform Loan, under which it was designed, has been put on hold. The GOU has established the Securities Center under the leadership of First Deputy Chairman Abdukadirov in April 1996 and supported the development of the program ever since, notwithstanding disagreements with the Bank about same aspects of program implementation. The Center has become a focal point for capital markets development in Uzbekistan and has attracted significant support from TACIS and other donors. In a letter to Mr. Wolfensohn dated October 22, 1997 President Karimov expressed its support for the PIFs Program. COM Resolution "On implementing a program of cooperation with the IBRD" dated October 2, 1997 confirms the requested anmount (USD 28 million) and objectives of the project: support of privatized enterprises through PIFs, case by case privatization of large enterprises, improvement of the depository system and development of the stock exchange. 5. Value Added of Bank Siupport in this Project: The Bank has been deeply involved in the design and development of the PIFs program and is uniquely positioned to support the activities needed to ensure their continued success. Post-privatization support is critical to ensure that privatization in fact leads to increased efficiency of the enterprise sector and thereby to growth. The 'Bank has gained experience in the supporting similar efforts in other FSU countries such as Lithuania and Moldova. In case-by-case privatization, the Bank can bring significant value added to the privatization process. While investment bankers have the skills to value and sell companies, the management of the privatization process, including the management of needed investment bankers, falls to the Government. Through helping the GOlLJ establish the CCPB to undertake and manage the privatization process, helping staff it, and proviiding it and the Government with "hands-on" advice from Bank staff with significant experience in case-by-case privatization, the Bank will help ensure that the program is established and the Government equipped with the tools to undertake successful privatizations of large state-owned firms. E: SUMMARY PROJECT ANALYSIS (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): Cost-Benefit Analysis: (i) The potential benefit of restructuring is increased value of the enterprise or Higher Net Present Value (NPV) of its net cash flow. As NPV is hard to quantify, a switching value was completed as follows: $200,000 project will raise the sales of an enterprise by at least 15 percent, the project will break even (see appendix 4); (ii) An abundance of evidence indicates that there are factor- productivity and cost-efficiency gains from privatization in formerly socialist economies. Some case evidence also suggests that employment in privatized firms is more likely to climb following privatization, especially in firms manufacturing primarily for export and natural monopolies (like four of the companies selected for the case-by-case program). Cost Effectiveness Analysis: For case-by-case privatization, international experience shows that the use of reputable investment bankers increases privatization proceeds more than their cost. They have the market experience and contacts to enable them to accurately value and sell firms that will be sold, in part, to foreign investors. In fact, many investors are not interested in participating in the sales of significant companies that are undertaken by unqualified financial agents because of the risk that the sale will not be transparent and fair, or the offering memoranda will be defective.  - 12 - For capital markets development, improvements in supervision and transparency of trading and registration systems are considered best-practice to achieve shareholder protection, and to increase the contribution of capital markets to growth. 2. Financial (see Annex 5): Financial analysis of privatization or restructuring will differ from economic analysis as prices do not reflect border prices. In each privatization case, international investment banks will conduct a feasibility analysis based on international prices and evaluate the effect of the distortions on the project. In the restructuring projects, the EIBB will select enterprises which are less affected by price controls and currency restrictions (see appendix 4). At the project level, the design of the Bureaus must ensure sound financial management to facilitate implementation. During the first year of operation, the operating costs of the EIBB (salaries, office supplies) vvill be fully funded from the IBRD loan, according to a budget jointly agreed between the Government and the Bank. EIBB will recover from the beneficiary enterprises 25 percent of the total advisory services costs paid to the consultants. The proceeds collected from the contribution of the beneficiary enterprises will be used to cover the EIBB's operating costs. This financing arrangement will provicle a strong incentive to the EIBB to remain lean and efficient, and to ensure that it delivers services that the beneficiary enterprises will be willing to pay for because they find them to be of high professional quality and they demonstrably produce positive results. International experience, particularly experience from Hungary, Germany and Estonia, all of which had effective privatizations agencies that carried out transparent and rapid sales, suggests that attracting top- flight stafi' is key. To do this, the Bureau will be able to offer competitive salaries, that are not constrained by the government's civil service salary structure, and also the Bureau has some permanence. Fiscal Impact: In the long term, successful restructuring of the medium enterprises should contribute to budget revenues through increased taxes from increased profits. In the medium term, case-by-case privatization should increase the profitability of the large enterprises due to restructuring by the strategic buyer. In the short term, privatization proceeds, which we estimate to be, on average, USD $30 million per company sold, are an extra-budgetary revenue item which should decrease the need for extemal borrowing. In the medium term, these privatized enterprises will pay more taxes to government, increasing government revenues, and government will be free of potential future liabilities for any losses made by the firm. 3. Technical: The technical resources provided under this project consist of the hardware and software under the capital markets development component and amount to less than 5 percent of total project cost. These resources will be provided in tandem with the consulting services which are designed to improve capital market performance and which are the main thrust of that component. Technical requirements for hardware and software are being assessed by Danish consultants who reviewed the needs of the National Depository and the Stock Exchange. 4. Instituiional: Executing Agencies: Both the Privatization and t!-e Post-privatization components of this project involve activities that are new in nature and in scope. It was felt that existing agencies within the government would be constrained by regulations and historical practice to a degree which might compromise project effectiveness. It was, therefore, essential to establish autonomous, non-commercial,  - 13 - public agencies for project execution. These agencies are free of civil service hiring and salary regulations. They can be staffed with technically competent individuals. They will have the scope to contract with foreign and local consultants who have appropriate expertise, and will be able to operate without undue influence. There is an important institution building component to the project because the EIBB will last beyond the end of the project and it is appropriate for the purposes of sustainability and self-funding that the EIBB be established as an entity separate from existing governmental institutions. Since these are new institutions it is critical that their role, structure, and responsibilities be clearly defined. For that reason., staffing and supervision structures have been specified and the COM Resolution necessary to establish the Bureaus was signed as a condition of Negotiations. 5. Social: The PIFs program supports wider public participation in capital markets and its public relations campaign has a positive effect on the public awareness of market economics. Enterprise restructuring may require layoffs, however, the socially negative impact of layoffs is expected to be minor as the unemployment rate in Uzbekistan is still very low. 6. EnvironmentalAssessment: Environmental Category []A [ B [X] C Investment banks will be required to include, as part of their advisory work, environmental assessments where required. 7. Participatory Approach Preparation Implementation Operation IS/CON/COL IS/CON IS/CON Primary beneficiaries PIFs IS/CON IS/CON IS/CON/COL PIF enterprises IS/CON IS/CON IS/CON/COL PIF investors IS/CON IS IS GKI/MOF IS/CON/COL IS/CON/COL IS/CON/COL Securities Exchange IS/CON/COL IS/CON/COL IS/CON/COL Depository IS/CON/COL IS/CON/COL IS/CON/COL Other key stakeholders Enterprise managers IS/CON IS/CON IS/CON Enterprise workers IS IS IS Taxpayers IS IS IS Investors and savers IS IS IS Classify as IS (Information sharing), CON (Consultation), and/or COL (Collaboration) The design and regulation of the PIFs, the enabling legislation for them, the selection of firms to be made available for PIF investment, and the implementation of the PIF program were all accomplished as a result of extensive collaboration between the Bank, the Government, PIF fund founders, and PIF fund investors. The post privatization services offered to PIF enterprises under the EIBL will continue this process. The Technical Assistance provided to the PIF enterprises will be negotiated between the PIF enterprise and the EIBB. This process involves the explicit collaboration of the PIF enterprise management, the PIF funds (through their representation on the enterprise board), and the EIBB. Information sharing will involve PIF investors and enterprise workers. The GKI and the MOF will have a direct collaborative input via their participation in the Supervisory Board of the EIBB.  - 14 - The privatization component was designed through extensive collaboration between the Bank, GKI and MOF. The Government initially identified 18 potential privatization candidates. The Appraisal team visited 1:2 of these enterprises to evaluate their privatization potential. In the drafting of privatization assessments and the full privatization plans, the financial advisors will have a collaborative relationship with GKI and a consultative relationship with management. The impact on worker interests will be evaluated by the financial advisors as part of the process of determining the probable needs for, and impediments to, labor adjustment. Other key stakeholders include investors in general. Their interests include improved shareholder protection, under the Capital Markets component, as well as the development of the secondary market in securities, new disclosure requirements, the prevention of insider trading and similar initiatives, all of which, constitute a form of information sharing. Similarly, the privatization of large corporations will open new opportunities for investors and, to the extent the large foreign strategic investors participate, there will be improvements to corporate governance, management, and technical efficiency that will enhance returns to local investors. The privatization proceeds will have a direct impact on government revenues relieving pressure on taxpayers in general. F: SUSTAINABILITY AND RISKS 1. Suslainability: This project is designed to demonstrate the benefits of restructuring and case-by-case privatization to enterprise managers, GOU officials, and foreign and local investors. A few successful cases of restructuring following useful advisory services will help in convincing officials, PIFs, and enterprise managers in the utility of consulting services and the feasibility of restructuring. The EIBB will be designed to be a permanent institution providing advisory services on a commercial basis. The CCPB will provide the Government with institutional competence for case-by-case privatizations on an ongoing basis. Building the capacity of the local consulting industry will ensure that these cases are replicable in many other enterprises. The know-how and management skills acquired from foreign investors and advisors as part of case-by- case privatization will contribute to sustainability. Building the regulatory capacity through the establishment of the Commission for Securities Markets Supervision will provide for sustainable capital markets development.  - 15 - 2. Critical Risks (reflecting assumptions in the fourth column of Annex J): Risk Risk Rating Risk Minimization Measure (Annex 1, cell "from Outputs to Objective") 1. Non-sustainable Institution building M 1. Local staffing of the Bureaus will ensure continuity and skill acquisition 1.1 Post-Privatization: Acceptance of advisory M 1.1 Careful selection of enterprises; services and execution of restructuring plans. co-financing by enterprises. 1.2 Payment of 25 percent of cost of 1.2 The Bureau will pay consultants restructuring services by enterprises S and collect fees from enterprises 2.1 Transparency of case-by-case privatization H 2.1 Competitive selection of reputable investment banks; positive covenant not allowing share redistribution prior to sale 2.2 Retention of investment banks for the phase S 2.2 Loan covenant - IBRD withdraws 3 sale. if Banks are not retained 2.3 Interest of strategic investors M 2.3 Good privatization candidates - condition of Negotiations; reputable investment banks selected (Annex 1, cell "from Components to Outputs") 1.2 Capacity of local consulting industry M 1.2 The Bureau will conduct training, study tours, and have foreign advisors 2.1 Interest of investment banks S 2.1 Good privatization candidates are selected - fixed fees paid from loan and success fee from sale proceeds Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: Risk Type of Risk Rating Risk Minimization Measure Risk Commitment to liberalization G H Building institutional capacity will reduce the fears within the GOU of rapid "uncontrolled" reform; by strengthening the private sector the project bolsters the constituency for liberalization. Type of Risk - S (Social), E (Ecological), P (Pollution), G (Governance), M (Management capacity), 0 (Other) Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  - 16 - G: MAIN LOAN CONDITIONS 1. Conditions of Effectiveness a) The CoM will adopt a resolution, including a list of 200 enterprises whose shares can be sold to PIFs, acceptable to the Bank, amending its Resolution No. 220 of June 18, 1996. b) Project implementation agreements will be agreed and signed between the MOF and GKI and the CCPB and the EIBB. c) The MOF will appoint a financial manager who will prepare a financial management plan. 2. Positive Covenants: a) The Borrower will refrain from changing the share structure or selling or otherwise distributing the shares of the companies proposed for the case-by-case privatization program until the investment bank involved proposes a change in the structure or a sale as part of the privatization plan. b) The MOF and GKI will enter into project implementation arrangements, with the PIU through which the implementation of the Project shall be entrusted to the PIUs as follows: The post privatization restructuring activities and the activities of the capital market development components will be carried out by EIBB, and the case-by-case privatization activities will be carried out by the CCPB. The MOF and GKI will cause the Project Implementation Agencies to carry out their respective parts of the Project under the PIUs in accordance with an agreed Project Implementation Plan (PIP). c) The MOF and GKI will maintain EIBB and CCPB with an adequate number of qualified and experienced staff, acceptable to the Bank, and provide them with such funds, facilities, and other resources as may be required for the implementation of their respective parts of the Project. d) EIBB will select enterprises for providing assistance under the Project that have been designated by the Borrower for investment by PIFs, or based, inter alia, on the following criteria: * small and medium-sized enterprises which are majority owned or controlled by shareholders other than the Borrower or any person (including corporate entities) representing the interest of the Borrower or any entities majority owned or controlled by the Borrower; * enterprises with 30 percent of the shares that are either owned or controlled by outside shareholders; * enterprises that are willing to enter into an agreement with the EIBB to collaborate with consultants and pay a 25 percent share of the costs of their advisory services; * enterprises whose improvements in profitability can be achieved initially, within the constraints of existing equipment and technology, through management, organizational, accounting, financial and marketing improvements; * enterprises that are not subject to control by State Associations as regards their inputs and outputs (such as price control, restrictions on sales, dependence on monopoly state-owned supplier).  - 17- e) EIBB will also: * estimate the costs of advisory services of consultants for each case and have the same approved by the Bank; * enter into contracts, on behalf of the Borrower, with the beneficiary enterprises and consultants on terms and conditions aLgreed by the Bank, including the following: EIBB will be responsible for direct payment of 100 percent of the fees and expenses of the advisory services to the consultants selected for the assignrnent. EIBB will, unless otherwise agreed by the Supervisory Board, recover from the beneficiary enterprises 25 percent of the total advisory services costs paid to the consultants. The proceeds collected from the contribution of the beneficiary enterprises may be used to cover the EIBB's operating costs. If the proceeds collected from the beneficiary enterprises are not sufficient to cover the EIBB's operating costs, the MOF and GKI will provide the necessary funds to cover the remaining portion of the costs; * engage consultants to assist in designing a detailed, strategic implementation plan which clearly identifies the needs of the Securities Center, the National Depository, and the Stock Exchange, and a well-coordinated time plan for the provision of the required equipment and services to them; * seek the Bank's approval of the strategic implementation plan described above and solicit bids for a contract for complete equipment and services to be supplied under the Capital Markets component of the project. If it is found expedient by the Borrower and the Bank to execute a separate contract for computer hardware and software, the EIBB will take responsibility for ensuring that the provision of advisory and computer support services is closely coordinated with the procurement of equipment. f) The Supervisory Board, will act as coordinator and ensure cooperation among the Securities Center, the National Depository, and the Stock Exchange. g) CCPB will select large-scale enterprises for privatization under the Project in accordance with criteria agreed with the Bank. A list of six enterprises to be privatized in the first "wave" was agreed at Negotiations. Details on these enterprises can be found in Annexes 2 and 4. It was also agreed that the Borrower will provide an additional five new enterprises to privatize under the Case-by-Case component by the end of each year. h) CCPB will also: * engage a senior privatization advisor to assist in organizing the tenders and other related activities in the case-by-case transactions; as well as engage a senior legal advisor to assist in negotiating contracts (and providing other legal advice relating to the transactions) between the Borrower and investment banks selected for the case-by-case privatization transactions. * select an international investment bank on the basis of criteria agreed with the Bank, including the following: (1) the investment bank has been the lead advisor to various governments in at least five successful case-by-case privatizations with receipts of at least $25 million each; and (2) the reputation of the investment bank is of a high standard, as mutually agreed by the Bank and the Borrower;  - 18- * engage the investment bank, under terms of reference and on terms and conditions acceptable to the Bank, to undertake a three stage privatization process on behalf of the selected enterprises which includes the following. The contract with the chosen investment bank will cover all three phases, including the sale. (If, without just cause, the Borrower/CCPB chooses to terminate its contract with the investment banker and use other financial advisors not acceptable to the Bank, the Bank may suspend further disbursements under the case-by-case program financed by the EIBL. The Bank may also choose to have the fees paid to the investment bank under the loan reimbursed). * submit reports to the Bank in three phases that include, respectively, the report of the Investment Bank on its initial evaluation of the potential for privatization of the selected enterprises (Phase 1); the report of the investment bank on the valuation of the selected enterprises, the options for its sale, and the recommended sales option (Phase 2); and the sales process for the selected enterprises recommended by the investment bank and adopted by the Borrower, including the criteria for selection for a winning tender as developed by the Investment Bank and adopted by the Borrower/CCPB, the evaluation of the tender offers, and the Borrower's reasons for selection of a winning bidder (all Phase 3). * engage regulatory advisers, with the prior written consent of the Bank, in case selected enterprises are monopolies or in strategic sectors, to separately to examine and report on regulatory questions prior to a possible privatization sale. H. READINESS FOR IMPLEMENTATION The project design documents for the first year's activities are complete and ready for the start of project implementation. The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. The following items are lacking and are discussed under loan conditions (Section G): * The CoM will adopt a resolution, including a list of 200 enterprises whose shares can be sold to PIFs, acceptable to the Bank, amending its Resolution No. 220 of June 18, 1996 * The appointment of a financial manager to prepare a financial management plan * Detailed project implementation arrangements (PIAs) for the implementing agencies However, signiificant progress has already been made on these three items. Resolution No. 220 has already been substantially amended (a draft of these amendments were included in the annexes to the Negotiations minutes), and now needs to be approved by the COM. The Terms of Reference for the financial manager have already been developed and preliminary interviews have taken place in Tashkent. Detailed examples of project implementation agreements used in other countries in the region were provided to the Uzbek Delegation at Negotiations.  - 19- I. COMPLIANCE WITH BANK POLICIES [x] This project complies with all applicable Bank policies. Team Leader: Itzhak Goldberg Sector Leader: Gerhard Pohl Country Director: Ishrat Husaiin  -20 - Annex 1 Uzbekistan: Enterprise Institution Building Project Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions Sector-related CAS Goal: (Goal to Bank Mission) Enhanced private sector Stronger enterprise Country statistics Sustained commitment to development performance and macroeconomic stability profitability, and increased and process of private sector foreign investment development. Project Development (Objective to Goal) Objectives: 1. Improve efficiency of 1. Successful 1. Supervision mission privatized enterprises. implementation of 30 enterprise restructuring plans by end of project 2. Support the GOU's 2. Sale of 7 large scale firms 2.1 Reports of the Center implementation of case-by- to strategic investors by end 2.2 Reports of the financial case privatization to of project. advisors. improve enterprise efficiency, and attract foreign know-how and capital. 3. Enhance effectiveness 3. Increase in trade of shares 3. Reports from the and widen public on the stock exchange, Depository, the Center and participation in capital improved mechanisms for the stock exchange markets and protect trade of securities. shareholders 4. Strengthen the 4. Stronger local private institutional capacity to entrepreneurs and more facilitate enterprise reform. foreign investment. Outputs':. (Outputs to Objective) 1. Establishment of I. Completion of 30 1 . I Supervision missions 1. Sustainable Institutional sustainable EIBB and restructuring plans for client 1.2. PIU implementation building provision of restructuring enterprises in the 5 years of records 1.1 Acceptance of advisory plans the project. services and execution of restructuring plans. 2. Provision of viable 2. Completion of 13 1.2 Payment of 25% of cost privatization plans privatization plans and 2.1 Reports of the PIU of restructuring services by Government award of 2.2 Reports of the enterprises privatization contracts consultants according to PIP schedule. 2.1 Transparency of case- by-case privatization End-of-project statement of milestone reached through the implementation of each component (each output should correspond in number to its respective component).  -21 - 3. Provision of workable 3.1 Completion of systems 3.1 Reports of the 2.2 Continuation of plans for new systems and upgrading for securities consultants investment advisor role in procedures at the stock market by end of year 3. 3.2 Reports of the Center, Phase 3 privatization sale exchange the Center and the 3.2 Completion of 13 the Exchange and the 2.3 interest of strategic depository. candidate training sessions Depository investors abroad and 60 local candidate training sessions by the end of year 3. Components/Activities: Inpujts: (budget for each (Components to Outputs) activity) 1. Post-privatization 1.1. PIU reports 1.1 Capacity of local Advisory Services 1.2. PIU implementation consulting industry a) Establish and staff $3.3 million records EIBB b) Conduct procurement for $0.7 million Bureau c) Prepare restructuring plans $12.2 million 2. Case-by-case privatization a) Establish and staff CCPB 2.1. PIU reports 2.1 Adequate level of b) Conduct procurement $2.1 million 2.2. PIU implementation foreign investment advisor for CCPB records interest c) Conduct 18 initial $1.1 million privatization assessments $6.8 million d) Success fees for 7 privatization transactions $16.5 million 3. Capital Market Development a) Procurement of hardware and software 3.1 PIU reports b) Develop TORs and $0.8 million 3.2 PIU implementation contract technical records assistance $1.6 million c) .  - 22 - Annex 2 Uzbekistan: Enterprise Institution Building Project Project Description Component 1: Post Privatization Advisory Services - US$16.2 million (total cost of component) Objectives (i) to support and help accelerate the Governments reform efforts in the enterprise sector by providing advisory services aimed at improving the profitability and general operational, financial and managerial efficiency of enterprises with a significant shareholding by outside private owners; and (ii) to support and facilitate the development and growth of a highly qualified domestic consulting industry. Activities. The staff of the EIBB, supported by outside short-term consultants as needed, will carry out the initial diagnostic studies of enterprises that are candidates for receiving assistance under the project. The purpose of the diagnostic study is to identify and prioritize the enterprise's needs for the advisory services, and assess their receptivity to outside consulting advice. The diagnostic study will determine whether the efficiency of the enterprise can be improved without a significant capital investment. If this is not so, the EIBB will not pursue any further consulting assistance to this company. The duration of the diagnostic studLy will depend on the size and complexity of the enterprise and other factors. After carrying out the diagnostic study, the EIBB will prepare Terms of Reference (TORs) for the subsequent assistance, relating to the rehabilitation and restructuring of the enterprise, including the development of marketing strategy and quality management systems, provision of partner search, upgrade of products to international standards, and implementation of modern accounting, financial, and commercial management systems. All TORs for assistance funded under the IBRD loan will need to be approved by the World Bank. After the TORs are approved by the World Bank, the EIBB will conduct open and competitive tenders for the provision of advisory services by outside consultants. The consultants will be selected according to the procedures specified in the World Bank's "Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency". An Evaluation Committee will be formed to review the bids submitted by the consultants and select the winner. The Evaluation Committee should include representatives of the Supervisory Board, the EIBB, the beneficiary enterprises, and an independent observer. The result of the selection will be forwarded to the World Bank for review and no-objection. The Consultants will be required to deliver monthly interim reports to the Enterprise and the EIBB for the approval. The contract signed with the selected consultant will include a clause that links payments to the delivery of progress reports. In this way, the EIBB will control and monitor project preparation and implementation. The EIBB will be responsible for project monitoring, follow-up, fine tuning, and cancellations of contracts, if needed.  - 23 - The following eligibility criteria will be used for selecting enterprises that will receive advisory services financed under the loan: * small and medium-sized enterprises which are majority owned or controlled by shareholders other than the Borrower or any person (including corporate entities) representing the interest of the Borrower or any entities majority owned or controlled by the Borrower; * enterprises with at least 30 percent shareholding by outside private owners (i.e. PIFs), and where the EIBB receives a clear indication that these outside private owners will endeavor to stimulate the implementation of the recommendations for improvement of the profitability and efficiency of the enterprise by providing incentives to directors; * enterprise management's willingness to collaborate with the outside consultants and pay a 25 percent share of the costs of the advisory services; * enterprises where improvernents in profitability can be achieved, within the constraints of existing equipment and technology, through management, organizational, accounting, financial and marketing improvements; * enterprises that are not subject to control by the Associations as regards their inputs and outputs (such as price control, restrictions on sales, dependence on monopoly state-owned supplier). The initial list of recipient post-privatized enterprises should be approved by the Supervisory Board of the EIBB. Thereafter, the Supervisory Board might decide to conduct random checks on the enterprises selected by the EIBB for advisory services to ensure that they meet agreed criteria. The advisory service costs for each assignment will be estimated by the EIBB in the TORs and approved by the World Bank. The EIBE will pay the consultants from the funds made available under the IBRD loan. The EIBB will be responsible for direct payment of 100 percent of the fees and expenses of the advisory services to the Consultant selected for the assignment. The EIBB shall recover from the beneficiary enterprises and/or the outside owners (i.e. PlFs) 25 percent of the total advisory services costs paid to the Consultant. The proceeds collected from the contribution of the enterprises and/or outside owners shall be used to cover the EIBB's operating costs. The payments obligations of the EIBB to the Consultants and the payment obligations of the Beneficiary Enterprise to the EIBB will be stipulated, along with a scheclule of payments, in a Contract signed between the EIBB, the selected Consultants and the enterprise and/or outside owners before the start of the consulting assignment. Eligibility Criteria for Local Staff of the EIBB * University degree in micro-economics, business management or finance; * Three years of experience working in successful private enterprises (preferably new start-ups or a joint venture with a reputable foreign company), or in the consulting industry (preferably in association with Western consultants), or a recognized technical expert with hands-on practical experience in the type of assignments that the EIBB will be supervising and monitoring (marketing, organization, turnaround strategies and business planning, cost accounting, finance, project evaluation; * Completion of refresher course training (financial analysis, corporate finance, marketing, organizations and management, restructuring, privatization) on modern management theory, and practice of not less than three month duration in total, leading to the delivery of a certificate of success; * Computer skills.  -24 - Component 2: Case-by-case Privatization - US$26.5 million (total cost of component) Objective The objective of case-by-case privatization component is to support the efficient and transparent privatization of larger state enterprises. Activities To realize the objective of this component, an independent CCPB will be established by the GOU to manage case-by-case privatization. International investment bankers will be used as financial advisors and sales agents for each privatization. This will foster transparency on the sales process, will help insure successful sales, and obtain market value for firms sold. Specifically: * The CCPB will hire international investment bankers through open and competitive tenders using the "World Bank Guidelines for the Use of Consultants"; * The criteria for selection of international investment bankers would be that the firm: i) has been the lead advisor to Government in at least 10 successful case-by-case privatizations with receipts of at least USD 10 million each; and ii) the reputation of the firm is of a high standard, as judged by the Bank; * Each privatization exercise will be undertaken by the same investment bank. This will provide a strong incentive for the investment bank to prepare a workable privatization plan, as it will earn most of its fees from the sale transaction itself in the form of success fees (commission on sale). Each investment banker would engage and lead a consortium of advisors, (i.e., financial experts, auditors, lawyers, and other technical advisors as required to complete the sale transaction); and * As the Government is concerned that privatization advisors may either spend time (and run up their fees) on enterprises that cannot be sold or may produce privatization plans that are not realistic, the terms of reference of the investment banker will cover three phases, starting with an initial rapid review of the enterprise (phase 1). If the review is negative, the assignment will terminate and no more work will be billed. If the review is positive, the same investment banker will carry out a valuation and develop a privatization strategy (phase 2) and, finally, undertake to sell the company on behalf of the Government (phase 3). The Bank loan will be used to pay the fixed fees of the investment bankers in phase I and 2; the fees for phase 3 will be paid from commissions from the sale of the companies (success fees). A list of six enterprises was agreed at Negotiations for the first "wave" of privatizations. They are: Almalyk Mining, UzCabel (Power & Telecommunication Cables), Andizhan Cable, Okhangoron Cement, Kuvasai Cement, and Nishanpakhtatozlash. Bank staff have visited 12 of the 18 case-by-case privatization candidates identified by the Government and these included Almalyk Mining and Uzkabel. The Bank has also identified other companies among the 18 companies above as potential privatization candidates once the GoU has gained case-by-case privatization experience, including Tashkent Airport and Uzbek Airlines. IFC staff have identified Andizhan Cable as a potential candidate. The Bank is currently in the process of engaging technical specialists to examine in more detail Almalyk Mining, Uzkabel, and Andizhan Cable. It is the Bank's intention to engage experts to examine Nishanpakhtatozlash. Additionally, a minority foreign shareholder has expressed an interest in purchasing a control block of shares of one of the cement companies on the case-by-case list above. The Government will also identify a further five enterprises that could be candidates for case-by-case privatization at the end of each year of the program, using criteria to be developed jointly by the Borrower and the Bank. These enterprises will provide an additional inventory of possible privatization candidates as the case-by-case privatization program progresses.  - 25 - The Government will refrain from changing the share structure or selling or otherwise distributing the shares of the companies proposed for the case-by-case privatization program until the Government and the Bank have agreed that a company is not a promising candidate for this privatization program or, if it is included in the program, until the investment banker proposes a change in structure as part of the privatization plan. The three-phase case-by-case privatization process described above will be monitored and reviewed by the Bank, as follows: * Phase 1: the report of the investment banker; * Phase 2: the report of the investment banker on the valuation of the company, the options for sale and the recommended sales option; and * Phase 3: the sales process recommended by the investment bank and adopted by the Government, the criteria of selection for a winning tender as developed by the investment banker and adopted by the Government; and the evaluation of the tender offers and the Government's reasons for selection of a winning bidder. Eligibility criteria for local staff of the CCPB * University degree in micro-economics, business management, or finance; * Three years of experience working in successful private enterprises (preferably new start-ups or a joint venture with a reputable foreign company), or in the consulting industry (preferably in association with Western consultants), or a recognized technical expert with hands-on practical experience in the type of work that the Bureau will be doing; and e Completion of refresher course training (financial analysis, corporate finance, privatization) on modern management theory and practice of not less than three month duration in total, leading to the delivery of a certificate of success. Component 3: Capital Market Development - US$2.4 million (total cost of component) The capital markets development component is designed to support the further development of the Securities Center, the Stock E,xchange, and the National Depository. Four sub-components are identified below. These are: (a) securities market regulation and investor protection, (b) assistance in supporting secondary trade in securities, (c) technical upgrade of the national depository; and (d) training. The principal counterparts to each component will be: (a) The Securities Center with responsibility for regulation of securities markets; (b) The Stock Exchange and OTC market participants; (c) The National Depository; and (d) The Securities Center as coordinator for training for all market participants.  -26 - Securities Market Regulation and Investor Protection Background Legitimate concerns about the rights of small investors are best addressed through the development of a transparent secondary market and rules on obligations to disclose major acquisitions, requirements for majority shareholders to offer to buy the shares of minority holders, as well as rules on insider trading. This is the approach used in other markets. It avoids putting restrictions on demand which would be detrimental to suppliers/owners, as lower demand will result in lower prices. It also avoids putting constraints on the concentration of ownership which may be seriously detrimental to corporate governance and enterprise restructuring. Secondary market trading is best promoted by ensuring that all relevant information on listed enterprises, securities market activity and individual trades is made readily available to all market participants in a timely manner. This may require imposing reporting requirements as well as installing systems on the Stock Exchange which enable timely that market participants have timely access to trading information. Objectiv,es The objective of this technical assistance is to provide the authorities with advice on the regulation of securities markets commensurate with international practices. Issues to be addressed will include promotion of an active secondary market and the surveillance of secondary market trading. As transparency is vital to promoting the secondary market, this component will include a review of current systems for gathering and disseminating information on: (a) listing, quoting of shares; (b) issuers (their activities, financial data etc.); (c) security market information (turnover, prices, principal shareholders etc.); and (d) trading in individual issues (prices, bids and offers). Proposals will be made for improvements, including associated costs and possible funding. Given the considerable investments already undertaken in development of the market infrastructure, emphasis will be placed on building on current facilities. Resources will be devoted to training staff at the Securities Center in international best practices through on-the-job training, attendance of staff of the Securities Center in international seminars and/or twinning with other regulatory agencies. Outline of Work Consultants specializing in regulation of securities markets and stock market trading systems should work closely with the Securities Center, the Stock Exchange and the GKI on these issues. They should review current regulatory measures affecting trade on the secondary market, and propose changes which will prornote the development of a transparent secondary market. While seeking to promote secondary trading, these changes should also respect the authorities' concerns regarding shareholder protection. The consultants will devote considerable resources to training staff at the Securities Center in international best practices. This component will finance the attendance of staff of the Securities Center in international seminars and/or twinning with other regulatory agencies.  - 27 - Assistance to Support Secondary Trading of Shares Background and Objectives Currently secondary trading of shares is temporarily suspended. However, even before the suspension, only limited secondary trading took place and this is also likely to be the case after the suspension is lifted. Secondary trading is essential in order to allow investors to accumulate meaningful ownership stakes, thus providing them with the incentive to undertake corporate restructuring. Large investments have been made in the current infrastructure of the Stock Exchange, but this investment is currently considerably underutilized. The objective of this component is to study whether there are institutional or other impediments to trade of shares. Examples of such impediments could be unwillingness by certain owner-groups to exercise their authority as corporate governors, lack of transparency concerning enterprise activities and accounts, and lack of knowledge of the basics of corporate finance (such as the opportunities in corporate take-overs). Outline of Work This work will involve advise on issues concerning corporate finance with a view to revealing impediments to share trading (such as lack of information on corporate activities and earnings) and in order to encourage trading in corporate shares. Current trading mechanisms and systems will be reviewed with a view to identifying any impediments/bottlenecks to corporate governance/restructuring. Advice will also be given to support the development of automated trade in shares of unlisted corporations using -- as far as possible -- the infrastructure already developed by the National Depository and the Stock Exchange. Technical Upgrade of the National Depository Background The National Depository is an important part of the financial infrastructure in Uzbekistan and has a key role in the privatization process. The National Depository, where enterprise shares are registered in dematerialized form, is the major central registry for enterprise shares in Uzbekistan. Objectives and work plans * Linking securities transfer to cash transfer, delivery versus payment (DVP). This is an essential benchmark in securities settlement systems, as it eliminates principal risk which is the major risk in security settlement systems. The present system of blocking securities makes it impossible to do back-to-back trades where the same security is traded several times on the same day. It is envisaged that the National Depository be responsible for clearing of security trades while settlement of payments takes place at accounts administered at the Central Bank. * The focus of the Depository should be on risk management. Depositories need to be ultra-safe institutions. The objective must be to create a culture of risk consciousness/aversion. This will involve developing procedures whereby risks are revealed and are monitored, for example, through sign-off procedures, mandatory reviews of risks when introducing new services or products, and internal as well as external audits of systems and procedures.  -28 - * Legal issues related to securities settlement are extremely complex and include such topics as procedures resulting from the bankruptcy of market participants. Conditions for market participation and contracts need to be reviewed. * Establishing an electronic link between the National Depository with the Stock Exchange will reduce operational risk. * Delays in up to six months have been reported in settlement of transactions (compared to the usual international standard of three days). Systems should be introduced to ensure shorter settlement times, including introducing penalties for settlement delays. * The Depository's current high transaction fees inhibit share trading. The fee structure should be reviewed with a view to reducing the onus on secondary trading of shares. * Clarification regarding certain key features of the Law on the National Depository is advisable to support inter alia the segregation of investor accounts and the unequivocal supremacy of the registration of dematerialized ownership at the Depository. * Increased customer orientation through the establishment of user-groups and objectives for servicing customers, e.g. regarding computer up-time. As an important introductory phase of this component a complete review of the computer systems will be undertaken to explore the constraints and risks associated with alternative hardware and software solutions. Proposals on necessary acquisitions will be outlined based on the review of the computer systems. The proposals will describe the exact costs of the upgraded systems and outline how the acquisitions should be brought on line. Among the issues to be incorporated are: * supporting the improvement of the clearing and settlement systems of the National Depository; * introducing securities coding in conformity with international practices; * improving information on securities transactions and offers so as to improve market transparency on securities trading for all market participants; * providing the National Depository with a back-up, duplicating computer facilities and warranty facilities for its servers; Training In addition to the assistance outlined above, it is advisable that considerable resources be devoted to supporting the Securities Center, Stock Exchange, and Depository in fulfilling their functions in a growing and more complex financial market environment. The staff of these institutions will need further training in finance, risk management and in corporate and financial law. Only few resources have hitherto beein devoted to these areas.  -29 - It is envisaged that training arranged locally (by lawyers, consultants, and staff of the international audit firms in Tashkent) will be provided in corporate and financial law, risk management and finance. To supplement this the staff would be encouraged to participate in finance training abroad and participate in conferences on depository activities abroad. In addition, this component will finance English language training both locally (on the job), and longer periods of. intensive training abroad at English-speaking business schools. To the extent that work-shops on corporate and financial law, risk management and finance are arranged locally, this will encourage inter-institutional cross-fertilization and the formation of a network of local professionals/officials in these areas.  - 30 - Annex 3 Uzbekistan: Enterprise Institution Building Project Estimated Project Costs Project Component Government IBRD Total -----------------------US $ million-------------------- Post Privatization Advisory Service (Component 1) Technical Assistance 2.1 13.4 15.4 Equipment and Goods 0.6 0.1 0.7 Subtotal 2.7 13.5 16.2 Case by Case Privatization (Component 2) Technical Assistance 16.5 8.9 25.4 Equipment and Goods 0.5 0.6 1.1 Subtotal 17.0 9.5 26.5 Capital Market (Component 3) Technical Assistance ----- 1.6 1.6 Equipment and Goods ---- 0.8 0.8 Subtotal ---- 2.4 2.4 Unallocated ---- 2.6 2.6 Grand Total 19.7 28.0 47.7  - 31 - Annex 4 Uzbekistan: Enterprise Institution Building Project Cost Effectiveness Analysis Summary Case-by-Case Privatization of large enterprises: Regarding the large enterprises selected for case-by-case privatization, international investment banks will conduct a feasibility analysis and valuation based on international prices and evaluate the effect of Uzbekistan's currency and mrarket distortions on the potential for sale of the enterprise and its valuation. Four of the six enterprises selected as potential privatization candidates rely almost exclusively on local inputs and sell in international markets (Almalyk Mining, UzKabel, Andizhan Cable, and Nishanpakhtatozlash) and, hence, have the advantage of generating most of their revenues in hard currency and most of their costs in local currency. The two remaining enterprises, Okhangoron Cement and Kuvasai Cement, receive portions of their revenues in hard currency from exports in Central Asia. We have avoided choosing companies that buy and sell in local markets, for example, textile mills, because the local currency risk and the risk of government interference in pricing makes them uninteresting to foreign investors unless special concessions are offered. An abundance of evidence indicates that there are factor-productivity and cost-efficiency gains from privatization in formerly socialist economies. Some case evidence also suggests that employment in privatized firms is more likely to climb following privatization, especially in firms manufacturing primarily for export; as is the case in four of the companies selected for the case-by-case program. It is equally difficult to quantify the net social-welfare gains from higher productivity, more competitive products and services, and the other elements of a reformed public sector, but there is evidence that they will include: higher levels of domestic investment in the economy, fiscal benefits from a more viable tax base, greater public resources available for targeted subsidies (for poverty-reduction, unemployment, health care, education, and so on). For case-by-case privatization, international experience shows that the use of reputable investment bankers increases privatization proceeds more than their cost. They have the market experience and contacts to enable them to accurately value and sell firms that will be sold, in part, to foreign investors. In fact, many investors will not be interested in participating in sales of significant companies (or will not participate at market prices) that are undertaken by unqualified financial agents because of the risk the sale will not be transparent and fair or the offering memoranda will be defective or found wanting. Post-Privatization restructuring of medium enterprises: The potential benefit of restructuring is an increased value of the enterprise: the increase of the NPV of the enterprise's stream of cash flow following restructuring versus the NPV "without restructuring". As these cash flows are hard to quantify, we computed a switching value as follows: If an average $200,000 project will raise the sales of an enterprise by at least 15 percent, the project will break even: the annualized cost is $35,000 (i=12 percent; n=10). For example, in the bread sector in Uzbekistan the 1996 turnover was around 100,000,000 sum or about $1,000,000. The expected net margin (revenue minus costs minus overhead but before deducting depreciation and interest on capital) could be $200,000 at say 20 percent (net margin in bread). Thus, it would take an increase of 17.5 percent in the net margin (the annual cost of the restructuring $35,000/annual net margin $200,000) following the TA to justify the  - 32 - cost of advisory services. Is an increase of 17.5 percent due to restructuring probable? Careful enterprise selection should make this a realistic target. The selection which is based on the diagnostic study to be performed by the EIBB will identify the feasibility of restructuring without capital investment ("defensive restructuring") and the willingness of the management to take the steps necessary to implement the recommendations of the restructuring plan; e.g. market re-orientation, energy metering, production lay-out reconfiguration, quality control, labor layoffs or other input savings. As mentioned in Sections B and F in the PAD, a major risk of this project is that liberalization will be delayed and in the presence of the existing price distortions, enterprises lack the necessary signals to make proper decisions with regard to restructuring. In general, a manger cannot determine an optimal product mix or input combination if their prices are distorted by the exchange rate or trade regime. However, in this "pilot restructuring", the enterprises selected for this project will be relatively more free to make sound decisions: we will choose small to medium enterprises which do not belong to associations, produce products which are in high demand locally or are easily exportable to neighboring countries. Needless to say that economy-wide restructuring will be possible only when the trade regime is liberalized and the limited objective of this project is to build institutional capacity until the trade regime is liberalized.  -33 - Annex 5 Uzbekistan: Enterprise Institution Building Project Financial Summary Years Ending 2003 (Indicate currency, units and base year) (USD millions) Implementation Period Operational Period Project Costs 1999 2000 2001 2002 2003 Investment Costs Recurrent Costs 4.2 8.3 10.3 10.7 11.4 Total 4.2 8.3 10.3 10.7 11.4 0.8 annual Financing Sources (% of total nroiect costs) IBRD/IDA 4.0 4.8 4.8 5.3 6.3 Co-financiers Government Central Local User Fees/Beneficiaries 0.2 3.5 5.5 5.4 5.1 1.2 annual Others Others Others Others Others Total 4.2 8.3 10.3 10.7 11.4 0.8 annual Cost escalation 3 percent Capital Markets and Privatization comrponents complete after five years. US$0.8 million annual restructuring cost reflects five restructurings a year after fifth year.  - 34 - Annex 6 UZBEKISTAN: ENTERPRISE INSTITUTION BUILDING PROJECT Procurement and Disbursement Arrangements Procurem.ent Project Costs by Procurement Arrangements (Table Al) Consultant Selection Arrangements (Table A2) Thresholds for Procurement Method and Prior Review( Table B) Procurement Schedule for Year One of Project Implementation (Table C) Procurement Information (Table D) Disbursement Allocation of loan proceeds (Table E) Disbursement Schedule (Table F)  -35 - Procurement Arrangements Procurement of goods and consultant services to be financed under the loan will be procured in accordance with the Bank's Guidelines -- Procurement under IBRD Loans and IDA Credits dated January 1995 (revised January and August 1996, September 1997 amendment) and Guidelines - Selection and Employment of Consultants by World Bank Borrowers dated January 1997, September 1997 amendment). The procurement arrangements are summarized in Table A. The procurement schedule for the first year of the project is presented in Table C. The plans for subsequent years will be prepared six months in advance. Procurement would involve technical assistance and training (approximately 94 percent of total project costs), purchasing of goods (3 percent of total costs). The remainder of the loan will finance operating costs (3 percent of total project costs). All procurement under the proposed project will be carried out at central level by the PIU. The project will finance technical assistance for procurement and management support to the PIU. Procurement Responsibility The PIU will include two full-time procurement officers whose main responsibilities will be to prepare and: (a) submit to the Bank all procurement documents which require Bank's prior review; (b) carry out any procurement at central level; (c) prepare and submit to the Bank at the beginning of each calendar year a detailed procurement schedule. The appointment of the procurement officers will be done in consultation with the Bank. At project launch (July, 1998), the Bank will deliver a procurement workshop to present and explain procurement guidelines and commence preparing specific bidding documents. Notification of Business Opportunities A General Procurement Notice has been published in the April 30, 1998 issue of Development Business, and as appropriate, will be updated and published annually thereafter. For goods and consultants contracts of US$200,000 or more to be obtained by ICB for goods and by short-list procedure for consultants, individual bidding opportunities will also be advertised, in a major local newspaper thirty (30) days prior to availability of bidding documents and transmitted to potential bidders who expressed interest in bidding in response to the published General Procurement Notice. The local advertisement procedure will be repeated for all bidding packages utilizing ICB (at least 30 days in advance of availability of bidding documents). The local advertisements will be in the English language as well as in Uzbek at the option of the Borrower. For the preparation of short lists in the selection of consultants, GPN(s) will be publisheid soliciting expressions of interests. In addition, a specific notice in Development Business will be required for consultants contracts of US$200,000 or more. Procurement of Goods Goods (US$1.21 million) would consist of computer software/hardware and office equipment and supplies. To minimize the number of contracts and reduce unit costs, equipment and materials to be financed under the loan would be combined into large packages to the extent practicable. The procurement methods would be followed: (a) Internationail Competitive Bidding (ICB) procedures will be used for packages US$200,000 equivalent and above for an estimated total cost of US$1.14 million. (b) International and National Shopping (IS and NS) procedures will be followed for purchases estimated to cost an aggregate of US$0.07 million. IS and NS will be used for readily available off-the-shelf goods of standard specifications that are small in value. IS procedures will be used for goods valued at less than US$200,000, and NS procedures will  - 36 - be used for goods valued at less than US$50,000. It is expected that miscellaneous office equipment and supplies, non-proprietary spare parts and certain training materials/equipment will be procured using IS and NS procedures. IS procedures will require obtaining quotations from at least three suppliers from two different countries and for NS procedures, quotations from at least three local suppliers. Consulting Services Consultant assignments to be contracted are estimated at US$42.48 million of which US$23.88 million has been allocated for technical assistance and training which would be financed by the Bank 100 percent net of taxes.: As far as practicable, the contracts will be packaged to include a combination of related skills and services to increase the size and, therefore, the market interest in each contract and reduce the number of contracts to be administered. The Terms of Reference (TOR) for all assignments will be subject to Bank's prior review. As presented in Annex 6, Table A2 and Table C, consultancy services would be procured as follows: (i) For the Post-Privatization component, 75 contracts (estimated value US$12.18 million) for consultancy services would be procured following the "Consultants' Qualification " (CQ) method of selection(contract value less than US$100,000). Firms would be selected from a long-list of firms pre-qualified and approved by the Bank. For contract above US$100,000, the client would prepare a short-list of three firms out of the above mentioned long-list, and upon approval by the Bank, solicit proposals from these three firms using the QCBS method of selection. (ii) For the Case-by-Case Privatization component of the project, 18 contracts (estimated value US$23.33) would be awarded to Investment Banks who have qualifications in the sale of assets, issuance of financial instruments, and other corporate financial transactions, notably in the context of privatization operations, shall be selected under the "Quality - and Cost-Based Selection (QCBS)" method of procurement in accordance with Section 3.17 in the World Bank Procurement Guidelines. (iii) For the Capital Markets Development component of the project, two contracts ( estimated value US$1.61 million) would be awarded to consulting firms following the "Quality-Cost Based Selection (QCBS)" method of procurement. Since this activity would involve customized upgrading of computer hardware and software particularly developed for such activities, the consultant would be required to take the entire responsibility of preparing the appropriate bidding documents, including technical specification, evaluation of bids, contract negotiations, installation, test, train local personnel and operationalize the system. The cost of the procurement of the computer hardware/software would be outside of the consultancy contract and reimbursement would be made on a cost basis, after allowing for the services rendered by the consultants for its procurement services. (iv) Audit services will be procured under LCS procedures of the consultants' Guidelines. (v) Consultancy contracts (estimated value US$5.16 million) would be awarded to individual consultants who would be providing advisory services to the implementing agencies. The procurement method to be followed would be the "Individual Consultant (IC)" method of selection which would require the comparison of at least three CVs.  -37 - Preference for Domestically Manufactured Goods For contracts for goods to be awarded on the basis of ICB, the Borrower may, as set forth in the Loan Agreement, grant a margin of preference in the evaluation of bids up to 15 percent or the amount of applicable customs duties, whichever is lower, to qualified domestic manufacturers of goods in accordance with the World Bank Procurement Guidelines. Operating Costs. The two bureaus have been established as the implementing agencies for the project and as such the loan will finance their operating costs, mainly salaries of personnel, local travel, office rental (privately owned), utility services, equipment operation and maintenance, and office supplies based upon an annual budget acceptable to the Bank. The local personnel are being recruited following a short list selection and TOR agreed upon with the Bank. Level of salaries of the personnel will be agreed upon with the Bank. However, it is anticipated that the salary levels will be comparable to other implementing agencies of Bank-financed projects in Uzbekistan. Bank Review Prior review by the Bank will be exercised for the following procurement documents: * all ICB for goods and the first two International and National Shopping contracts; * all consulting services contracts with firms estimated at US$100,000 or more, and with individuals estimated at US$10,000 equivalent; * all extension of contracts with firms raising the contract value at US$100,000 or more equivalent; * all extension of contracts with individuals raising the contract value at US$10,000 or more; and * all requests for proposal lRFP) Country Procurement Assessment Report (CPAR) To date, a CPAR for Uzbekistan has not been prepared. However, a quick review was done under the Public Procurement Reform Initiative under a recently approved IDF grant which was expected to be implemented during 1997. In general, experience with competitive bidding procedures is limited and close supervision by the Bank and the consultants will be exercised. For this project, the Govemment will follow Bank procurement procedures as described above and as set forth in the Loan Agreement. Disbursements The proceeds of the loan (U[S$28.00 million) would be lent to Uzbekistan. The proceeds of the loan would be passed to theMinistry of Finance. The Borrower would bear the foreign exchange risk. The proposed loan would be disbursed over a period of five years up to June 30, 2003 (Annex 6 Tables E and F). The loan closing date (i.e., the final date for presentation of requests for approval or authorization to disburse on project components) would be December 31, 2003, six months after the completion date. The project completion date would be June 30,2003. The percent of expenditures for goods and equipment, and consulting services to be financed under the Loan is given in Annex 6, Tables A, B and C.  - 38 - Documentation: Statement of Expenditures - Disbursements would be made against Statement of Expenditures (SOE) for expenditures under contract costing less than US$200,000 equivalent for goods, $10,000 equivalent for services of individual consultants, and $100,000 equivalent for services of consulting firms and operating costs $50,000 equivalent for which detailed documents evidencing expenditures will be reviewed and kept by PIU and made available for the required audit as well as to Bank supervision missions. Special Account: To facilitate timely project implementation, the Borrower would establish, maintain and operate, under condition acceptable to the Bank, a Special Account in US dollars in a commercial bank. In this case, the Borrower has requested that two Special Accounts be opened (as there are two implementing agencies, namely the EIBB and the CCPB) in order to simplify the accounting and tracking of the withdrawals made by the two bureaus. The selection process and criteria for selection of the commercial bank would follow the World Bank standard selection procedures. During the early stage of the project, the initial allocation of the Special Accounts would be limited to US$100,000 for each bureau in each special account. However, when the aggregate disbursement under the Loan have reached the level of US$8 million the initial allocation may be increased up to the authorized allocation of US$500,000 by submitting the relevant Application for Withdrawal. Replenishment applications should be submitted at least every three months, and must include reconciled bank statements as well as other appropriate supporting documents. The minimum application size for payments directly from the Loan account will be 20 percent of the Special Account deposit. Financing Management. Accounting and Auditing: The Project Coordination Unit would be audited annually by auditors acceptable to the Bank. No later than six months after the end its fiscal year, the Project Coordination Unit would submit to the Bank copies of audit reports containing the author's opinion on (a) project account, including statements of expenditure and the Special Accounts. Retroactive Financing Retroactive Financing in the amount of USD $500,000 will be provided as of January 1, 1998 to finance the first transaction in the Case-by-Case privatization component. The primary justification is that it is vital not to lose the momentum and have the privatization delayed till the time of Loan Effectiveness as the GoU and the enterprise are currently ready to begin the process. Furthermore, the positive demonstration effect of the first large privatization in Uzbekistan will be invaluable for the success of the remainder of the privatizations under the Case-by-Case privatization component.  - 39 - Annex 6 Uzbekistani: Enterprise Institution Building Project Table Al: Project Costs by Procurement Arrangements (in US$ million equivalent) Expenditure Category P'rocurement Method Total Cost (including contingencies IC1B NCB Other N.B.F 1. Goods Computers & Equipment 1.14 0.07 1.21 (1.14) (0.07) (1.21) 2. Services TA Consultants 12.18 12.18 (12.18) (12.18) TA Investment Banks 23.33 23.33 (6.83) (6.83) TA Consultants & Training 1.61 1.61 (1.61) (1.61) Individual Consultants 4.20 4.20 (2.10) (2.10) 3. Incremental Operating Cost Buildings 1.11 1.11 Audits 0.20 0.20 (0.20) (0.20) TA consultant 0.96 0.96 (0.96) (0.96) Miscellaneous 0.30 0.30 (0 30) (0.30) ...... 'I N.% E ... ......... Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit Note: N.B.F. = Not Bank-financed. The procurement arrangement for the items listed under "Other" are detailed in Table B.  -40 - Annex 6 Table A2: Consultant Selection Arrangements (optional) (in US$ million equivalent) Selection Method Total Cost Consultant Services (including Expenditure Category . contingencies) ___ __ _ ___ _ _QCBS QBS IC LCS CQ Other N.B.F. A. Firms 27-90 0.20 9.22 37.32 B. Individuals 5.16 5.16 - ~ zaI 42.48 Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. =Not Bank-financed.  -41 - Annex 6 Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review/ Estimated Total Value (US$million) Subject to Prior Review 1. Goods 1.21 Computers & Contracts above Equipment US$200,000 ICB All ICB packages up to US$200,000 IS First two contracts up to US$50,000 NS First two contracts 2. Services 42.28 Consultant Services Firms (above QCBS Firms(above US$I 00,000) US$ I 00,000) Fiirms (less than CQ Firms (less than US$100,000) US$100,000) Individuals CV above US$10,000 Only Terms of Reference to be reviewed 3. Operating, Cost Audits 0.20 LCS Firns over Firms over US$100,000 US$100,000 Miscellaneous 0.30 Based on annual budget  - 42 - Annex 6 Uzuekis-aan Enterprise institution Building Project Table C: Procurement Schedule for Year One of Project Implementation US$million equivalent Description Type Number of Estimated Procurenent Date of Issuance of Subnission Signing Conpletion of packages Cost Metihod GPN Invitation Bids of Contract Contract A. Goods Computers & G 2 1.14 ICB 4/30/98 6/30-7/30/98 8/30-9/30/98 10/30-11/30/98 2/30/99-3/30/99 Equipment Office Equipment G 1 0.07 IS 4/30/98 6/30/98 8/17/98 10/15/98 12/30/98 B. Services TA Consultants TA/CS 10 1.50 CQ 4/30/98 7/30-9/30/98 9/30-11/30/98 12/30/98- 01/99 4/99-12/99 TA Invet. Banks TA/CS 3 1.05 QCBS 4/30/98 6/30/98-3/30/99 8/30/98-5/30/99 11/30/98-10/30/99 4/99-12/99 Individual Consult. TA/CS 3 expatriates 1.03 IC 4/30/98 6/30/98 8/30/98 12/30/98 12/30/99 24 nationals TA Consultants TA/CS 1 0.50 QCBS 4/30/98 9/30/98 12/30/98 3/30/99 12/2003 C Incremental Operating Costs Audits 0.20 LCS 4/30/98 4/30/98 5/30/98 6/30/98 12/2003 Miscellaneous 0.07 TOTAL 5.56 G = Goods; TA/CS = Technical Assistance/Consultant Services; TR = Training; ICB = international Competitive Bidding; IS = Intemational Shopping; CQ = consultants' qualifications; QCBS = Quality and Cost Based Services; IC Individual Consultants.  -43 - Annex 6 Uzbekistan: Enterprise Institution Building Project Table D: Procurement Information Section 1: Procurement Review Procurement of Goods ICB NCB Is NS Other Methods 1. Procurement method thresholds >US$200,000 <US$200,000 <US$50,000 2. Prior Review All First two First two Procurement of Consultant Services QBS QCBS FB Least Cost CQ Individual 1. Procurement method thresholds >US$100,000 <US$200,000 <US$100,000 <US$10,000 2. Prior Review US$100,000+ All TORs All TORs and contracts 3. Ex-post Review <US$100,000 <US$100,000 <US$100,000 <US$50,000 Section 2. Capacity of the Implementing Agency in Procurement and Technical Assistance requirements 1. PIU to recruit qualified procurement staff with prior experience in World Bank procurement procedures: PIU will have primary responsibility for overseeing implementation of procurement procedures. 2. Country Procurement Assessment Report or Country Procurement Strategy Paper status: Planned |3. Are the bidding documents for the procurement actions of the first year ready I by negotiations? No, draft bidding documents ready by effectivcness. Section 3. Training, Information and Development on Procurement 1. Estimated date of Project Launch 2. Estimated date of General 3. Indicate if contracts are subject to 4. Domestic Preference for Goods: Workshop: Procurement Notice publication: After mandatory SPN in Development Yes negotiations (April 30, 1998) Business: All consultants' contracts July 1998 above US$200,000 5. Retroactive financing: No 6. Advanced Procurement: No 7. Procurement Monitoring System: PIU to report procurement actions in quarterly progress reports. Section 4. Procurement Staffing 1. Indicate name of Procurement Staff as part of Project Team UNIT Ext. Seyoum Solomon ECSHD/ESCPF 32393 2. Explain briefly the Expected role of the Field Office in Procurement: Field Office staff to provide advisory support on procurement matters to PIU.  - 44 - Annex 6 Uzbekistan: Enterprise Institution Building Project Table E: Allocation of Loan Proceeds Expenditure Category Amount in Financing US$million Percentage Goods 100% of foreign (under Parts A and C of project) 0.97 expenditures, 100% (under Part B of project) 0.23 of local expenditures (ex-factory cost) and 80% of local expenditure for other items procured locally. CQnsultant Services & Training 100% (net of tax) (Parts A and C of project) 13.73 (Part B of the project) 8.93 Incremental Operating Costs 100% up to 12/31/99, 80% up to 12/31/2000; 60% up to 12/31/2001; and 40% thereafter (Parts A and C of project) 1.16 (Part B of project) 0.37 IJnallocated 2.61 Total 28.00  - 45 - Annex 6 Uzbiekistan: Enterprise Institution Building Project Table F: Disbursement Schedule (US $ million equivalent) FY 1999 Sept. 0.50 0.50 Dec. 0.50 1.00 March 0.50 1.50 June 0.50 2.00 FY2000 Sept. 1.20 3.20 Dec. 1.20 4.40 March 1.20 5.60 June 1.20 6.80 FY2001 Sept. 1.75 8.55 Dec. 1.75 10.30 March 1.75 12.05 June 1.75 13.80 FY2002 Sept. 2.05 15.85 Dec. 2.05 17.90 March 2.05 19.95 June 2.05 22.00 FY2003 Sept. 1.80 .23.80 Dec. 1.80 25.60 March 1.80 27.40 June 0.60 28.00  - 46 - Annex 7 Uzbekistan: Enterprise Institution Building Loan Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At final PCD stage) FY 1997 50 FY 1998 325 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) First Bank mission (identification) 6/24/1997 6/24/1997 Appraisal mission departure 11/10/1997 11/10/1997 Negotialtions 4/15/1998 4/15/1998 Planned Date of Effectiveness 7/1/1998 /__119 Preparecl by: GKI/WB Preparation assistance: PHRD, Danish TF, TACIS Bank staff who worked on the project included: Name Specialty Itzhak Goldberg Team Leader Bahtier Abdullaev Post Privatization Igor Artemiev Post Privatization Ronald Hood Trade/Fiscal Loup Brefort Privatization Michael Fuchs Capital Markets James Dick Welch Case-by-Case Privatization Seyoum Solomon Procurement Tariq Hassan Legal Subash Chandra Disbursement  -47 - Annex 8 Uzbekistan: Enterprise Institution Building Project Documents in the Project File A. Project Implementation P?lan. B. Bank Staff Assessments and Details on enterprise visits.  -48 - Annex 9 Statement of Loans and Credits Status of Bank Group Operations in Uzbekistan IBRD Loans and IDA Credits in the Operations Portfolio Original Amount in USS Millions Loan or Fiscal Project ID Credit No. Year Borrower Purpose iBRD IDA Canceltations Utidisb Number of Closed Loans/credirls: I Active Loans UZ-PE-9121 iBRD421tiO 1998 REPUBLIC OF UZBEKISTAN RURAL W.S. & SANITA. 75.00 0.00 0.00 UZ-PE44942 iBRD40900 1997 REPUBLIC OF UZBEKISTAN PILOT WATER SUPPLY 5.00 0.00 0.00 UZ-PE-9122 iBRD38940 1995 REP.OF UZBEKISTAN COTTON SUB-SEC IMPRV 66.00 0.00 0.00 UZ-PE-9123 IBRD36500 1994 REPUB. OF UZBEKISTAN INSTIT BLDG[rA 21.00 0.00 0.00 Total 167.00 0.00 0.00 Active Loans Closed Loans Ioa Total Disbursed (iBRD and IDA): 24.91 160.00 14.91 of which has been repaid: 0.00 0.00 0.00 Total now held by 0BRD and IDA: 167.00 160.00 327.00 Amount sold 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 142.09 0.00 142.09 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory, HU highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Note: a Disbursement data is updated at the end of the first week of the month.  - 49- Annex 10 Country at a Glance P:\UZBEKIST\PFSD\ENT-RESTF\L.ENN\UZBEKPAD.DOC  MASECTO