Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15650 IMPLEMENTATION COMPLETION REPORT LITHUANIA REHABILITATION LOAN (LN.3524-LT) MAY 24, 1996 Country Operations Division I Country Department IV Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (As of March 1996) Currency Unit = Lita US$ 1.00 = 4 Litas Lita 1 = US$ 0.25 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS CPI Consumer Price Index EFF Extended Fund Facility EFSAP Enterprise and Financial Sector Assistance Project FSUB Former Soviet Union and Baltic Republics GDP Gross Domestic Product ICR Implementation Completion Report IDF Institutional Development Fund IMF International Monetary Fund JEXIM Export Import Bank of Japan MERP Memorandum of Economic Reform Policies OECD Organization for Economic Cooperation & Development PER Public Expenditure Review PIP Public Investment Program PIU Project Implementation Unit PRL Power Rehabilitation Loan PSD Private Sector Development SAL Structural Adjustment Loan SBA Stand-by Arrangement SSNP Social Safety Net Project VAT Value Added Tax FOR OFFICIAL USE ONLY CONTENTS PREFACE ............. EVALUATION SUMMARY ........................................... ii PROJECT IMPLEMENTATION ASSESSMENT ............................... 1 A. Project Objectives ........................................... 1 B. Achievement of Project Objectives ................................. 2 C. Implementation Record and Major Factors Affecting the Project .............. 5 D. Project Sustainability ........................................ 12 E. Bank Performance .......................................... 12 F. Borrower Performance ....................................... 13 G. Assessment of Outcome ........... ............................ 14 H. Future of this Operation and Future Operations ........................ 14 I. Key Lessons Learned ........................................ 14 TEXT TABLE 1. Goods Imported Under the Rehabilitation Loan .................... 4 TEXT TABLE 2. Lithuania's Economic Development since Independence .............. 4 TEXT BOX 1. Who were the Purchasing Agencies? ............................. 9 STATISTICAL TABLES ............................................. 17 Table 1: Summary of Assessments .18 Table 2: Bank Loans/Credits .19 Table 3: Project Timetable .19 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual .20 Table 5: Key Indicators for Project Implementation .20 Table 6: Key Indicators for Project Operation .20 Table 7: Studies Included in the Project .20 Table 8A: Project Costs ................. 21 Table 8B: Project Financing .................................... 21 Table 9: Economic Costs and Benefits .............................. 21 Table 10: Status of Legal Covenants ................................ 22 Table 11: Compliance with Operational Manual Statements .................. 23 Table 12: Bank Resources: Staff Inputs .............................. 23 Table 13: Bank Resources: Missions ................................ 23 ANNEXES ANNEX A. Policy Implementation Under the Rehabilitation Loan ANNEX B. On-lending Arrangements to Purchasing Agencies ANNEX C. Project Review from the Borrower's Perspective MAP IBRD No. 26177 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. IMPLEMENTATION COMPLETION REPORT LITHUANIA REHABILITATION LOAN (Ln. 3524-LT) PREFACE This is the Implementation Completion Report (ICR) for the Rehabilitation Loan in Lithuania. The loan of US$60 million equivalent was approved on October 22, 1992 and made effective on November 5, 1992. The loan closed on December 31, 1995, 18 months--and two extensions--after the original closing date of June 30, 1994. Total disbursements amounted to US$59.0 million equivalent and the remaining US$1.0 million was cancelled. The last disbursement took place on February 7, 1996. In conjunction with this loan, the Export Import Bank of Japan provided its own Rehabilitation Loan in the amount of US$45.0 million equivalent which was administered by the World Bank. In addition, the Government of Sweden provided cofinancing in the amount of $0.25 million for technical assistance for project implementation. The ICR was prepared in the Country Operations Division for Belarus, Estonia, Latvia and Lithuania of the Europe and Central Asia Region by Ms. Barbara Lee. The ICR was reviewed by Mr. James Harrison, Country Operations Division Chief (EC4C1), and Ms. Judy O'Connor, Principal Operations Officer (EC4DR). Cofinanciers were invited to join the completion mission, asked for input to this report during its preparation, and also provided with a draft of the report for their review. Preparation of this ICR began during the Bank's completion mission in February 1996. The report is based on: input from the Bank's country team and counterpart agencies on progress in policy reforms; discussions held with Borrower staff involved in project implementation; interviews with purchasing agencies; input from the original task manager and procurement advisors; and material from the project file. Borrower staff participated in all meetings of the completion mission and contributed to the ICR by preparing an evaluation of the project, included in Annex C. A final draft of this report was also sent to Borrower staff for their review. IMPLEMENTATION COMPLETION REPORT LITHUANIA REHABILITATION LOAN (Ln. 3524-LT) EVALUATION SUMMARY Introduction 1. The Rehabilitation Loan of US$60 million equivalent was the first World Bank Loan to Lithuania. Following the re-establishment of Lithuania's independence in 1990, the Lithuanian economy underwent a fundamental transformation and a sharp decline in output. By early 1992, Lithuania was experiencing critical shortages of basic consumption commodities and key raw materials and production inputs which were caused by the severe disruption of relations with traditional trading partners in the Former Soviet Union and Baltic republics (FSUB). Against this background of economic crisis, the Rehabilitation Loan was identified in January 1992 during the first World Bank mission to the country and was designed to provide critically needed import financing to mitigate further declines in output while a comprehensive economic adjustment and reform program was being introduced. 2. The loan was prepared in conjunction with an International Monetary Fund (IMF) Stand-by Arrangement (SBA), and was a part of the response by the international community to Lithuania's pressing short term import needs and its demonstrated commitment to economic reform. While the IMF SBA focussed on stabilization measures, the Bank concentrated on supporting the development and implementation of a program of structural reforms agreed to in a Memorandum of Economic Reform Policies (MERP). Although the loan contained no conditionality, this program laid out a framework for reforms to begin the lengthy process of restructuring the economy; the program established targets and indicators to monitor progress. A grant from the Government of Sweden, through its BITS program, provided financing for implementation technical assistance. A $45 million equivalent Rehabilitation Loan from the Export Import Bank of Japan (JEXIM) was signed on June 22, 1993 as Japan's contribution within the G-24 financial package. The Bank also administered the JEXIM loan, the objectives and implementation conditions of which are comparable to those of the Bank loan. Project Objectives 3. The main objectives of the program supported by this loan to Lithuania were to: (i) assist the Government in the design and implementation of its structural reform program as outlined in the MERP; and (ii) help maintain and increase capacity utilization and output in key sectors during the six to twelve months following loan effectiveness. The loan was designed to finance: (i) essential imports in key sectors, such as health, agriculture, and energy (US$45 million), with tentative equal allocations; and (ii) production inputs by individual enterprises imported through normal commercial channels (US$15 million). The loan was later amended--largely because hard currency ceased to be in short supply--to reallocate the funds for the commercial channel toward the purchase of essential imports. iii 4. Project objectives were broad and ambitious, particularly given that during project preparation and implementation, dynamic changes were taking place in Lithuania creating uncertainties beyond the control of the Government or the Bank. In retrospect, one can now see two ways in which the objectives could have been better framed: (i) the schedule and deadlines set were overly optimistic, and (ii) there could have been greater realism about what structural policies could be supported by the loan. First, it was particularly difficult at that early stage to determine how long it would take to implement the loan, that is, how long it would take to identify and procure critically needed imports given the constantly changing needs of the country and the constantly changing resources provided by external sources. In retrospect, the amount of time originally envisioned for the procurement of critical imports (6-12 months) and thus for the length of the loan (original closing date June 1994) was too abbreviated. In addition, the reforms identified under the MERP were to be undertaken during the time frame for loan implementation. By definition, they were measures which were first steps toward longer term goals. But even as first steps, the dated indicators specified in the MERP to monitor specific stabilization and structural measures were too optimistic and in retrospect perhaps even unnecessary. Second, it should have been more clearly stated in the objectives that the loan would only support initial reform measures during the early stages of transition. It should also have been emphasized that assisting the Government with the design of the reform program and securing implementation assistance was the Bank's value-added at that time. But, despite these points, the Loan--and particularly the MERP--did provide a good tool to initiate and deepen policy dialogue with the Government, and to identify economic and sectoral priorities for policy change and investment which then became the backbone for the Bank's future assistance strategy. The loan did, also, produce some very positive benefits which in hindsight could have been incorporated as project objectives, such as the impressive expansion of procurement methods and other transfers of skills and knowledge. Implementation Experience and Results 5. Despite the flaws in loan design, the loan was successful in achieving the objectives stated above, and has had a sustainable impact on the borrower as described below. However, the pace of both reforms and imports under the loan was slower than originally anticipated. The loan was extended twice; thus not all of the imports financed under the loan arrived during the short-term emergency (6-12 months) period originally envisioned, even though they were well-identified critical imports. Nevertheless, some 72% of the imports (in value) were delivered in the first year of the loan (1993), 3% the following year (1994), and 22% in the final year (1995). 6. Overall policy performance, as indicated by measures outlined in the MERP, was very good, aithough somewhat slower than targeted largely due to overly optimistic dates (see para. 8-19 and Annex A). The major factors affecting policy performance were: continual Government commitment to reform, despite changes in administrations; the swift and extensive support to the Government to assist in the reform effort, particularly from grant-funded technical assistance; and extensive policy dialogue with the Bank through loan supervision, economic and sector work and preparation of subsequent loans. Lithuania has made impressive strides since independence. Inflation has dropped from 1020% in 1992 to 32% in 1995. And GDP, which fell by more than half after independence, grew about 3% in 1995. Like many countries in transition, however, Lithuania has a mixed track record of completing some of the fundamental structural reforms, such as cost recovery pricing of energy, elimination of agricultural subsidies and adequate oversight of the commercial banking sector. This is leading to a second generation of transition issues (for instance, bank insolvency), despite the many achievements to date. iv 7. The loan also helped maintain capacity utilization and was likely one of many factors which contributed to the recovery of output in the economy. While the impact of the loan and the imports it has financed is difficult to assess in quantitative terms, the loan did provide inputs to keep some essential services running during a very difficult transition period when health supplies were nearly exhausted, dwellings and workplaces were cold, and there was a lack of raw materials for (among other sectors) food production. To some extent, maintaining these essential services probably helped moderate dissatisfaction among the population, enabling the Government to maintain the reform momentum. Finally, the Rehabilitation Loan provided the first opportunity for most of the purchasing agencies involved to engage in competitive bidding and to purchase goods from diverse suppliers. Every one of the purchasing agencies (with the exception of the gas company, which is forced to rely on sole source procurement from its traditional supplier) has now changed its procurement practices to include competitive tendering, and many of the relationships developed with new suppliers are being preserved. Factors affecting the success of the import component included the dedication of the PIU management and staff; the presence throughout the loan of procurement advisors funded by Sweden; training provided to PIU staff and others involved in procurement; and substantial supervision by the Bank. 8. The loan has made several sustainable contributions to the Lithuanian economy in the areas of economic reform, capacity utilization and transfer of knowledge. First, economic reform is now deeply rooted in Lithuania, and the multitude of steps taken to date indicate that the process is irreversible. The loan contributed to this by providing a framework for initial reform steps and a mechanism for furthering Bank assistance and complementary support from the international community. Second, some of the imports financed by the loan did assist various productive entities to survive the initial critical years of transition when raw materials and other supplies were disrupted due to embargoes, lack of payments systems and other institutional or systemic breakdowns. To some extent, this helped to prevent a deterioration of capital assets; many of these entities are now producing profitably, but possibly would have been forced to shut down during the critical first years. It also contributed to the provision of some essential services which helped stave off a collapse of ancillary activities. However, many of the imports were intended for immediate consumption and therefore were not envisioned to have a sustainable impact. Finally, the transfer of knowledge and skills was substantial and has clearly been sustained. This transfer encompassed a wide range of areas: economic reform policies, competitive tendering methods, modem computer packages, letters of credit, employment of consultants, etc. 9. Both the Government and the Bank devoted considerable efforts and resources to the implementation of this loan. The dialogue on economic reform was open, extensive and fruitful. These resources were complemented with grant support from the Government of Sweden which greatly facilitated implementation of the imports component. In addition, the financing by the JEXIM Bank contributed to address pending import needs and improved the prospects of sustaining the economy's supply response. All these factors contributed to the satisfactory outcome of the loan. Summary of Key Lessons Learned 10. The Rehabilitation Loan was prepared under unique circumstances which do not lend themselves to replication; it is now closed, final disbursements have been made, imports have been consumed, and the Project Implementation Unit (PIU) will wind up its activities for the loan. The loan was designed as an emergency response to a new borrower and a newly established country entering the transition process. It was a mixture of traditional Bank instruments (i.e, a critical imports loan with a quasi-positive list supporting extensive policy reform without conditionality) which is not likely to be utilized again. It was followed by extensive support from the international community which (combined with successful v stabilization efforts) eliminated the need for further balance of payments/policy-based support from the Bank for several subsequent years (although such a need has recently emerged). And perhaps most importantly, the borrower remained committed to the reform process during the entire preparation and implementation period. Despite these unique circumstances, there are some lessons from this loan, as indicated below. i) Development objectives need to be precise, realistic and monitorable: Any loan supporting a policy program should explicitly incorporate measures to foster government commitment and ensure that there is an active policy dialogue. This was achieved quite well under the Rehabilitation Loan. Any such loan should also contain precise development objectives in order to clarify what the loan per se supports and what will be supported by parallel or subsequent activities. This was less clear in the Rehabilitation Loan, particularly regarding the policy component. All development objectives should be clearly monitorable. In the case of the Rehabilitation Loan, it was virtually impossible to quantify ex-post how well the objective of "maintaining or increasing capacity utilization" was achieved. Knowledge and skills transfer were important benefits of this loan. They could have been included in the loan objectives. ii) The appointment of advisors to the PIU, to provide overall project management support and expertise on procurement and disbursement, is critical to the success of any operation involving new borrowers. In this case, the advisors performed an important function of training and knowledge transfer to both PIU staff and a broader set of local counterparts, which contributed to the sustainable impact of the loan. The role of the advisors also evolved and eventually decreased over time, resulting in a change in the skills mix of the advisors; due to this experience, the Borrower was encouraged by the Bank to develop the capacity to manage the consultants. (iii) Active coordination within the international community is necessary to deliver the technical support to assist the Government to achieve policy targets. The structural program outlined in the MERP provided a useful framework to which the international community could anchor its support at this early stage when the needs of the country were not yet well understood. (iv) While flexibility was an important factor, it is necessary that key concepts are well understood by all parties to eliminate later misunderstandings. For this loan, clearer parameters - defining what critical imports were appropriate for financing under this loan--could have reduced the time spent on discussion with the Government during implementation about investment items they wished to import. Similarly, onlending and repayment arrangements should have been highlighted as an important element for the efficient and rational use of loan funds; a stipulation that draft repayment agreements be in place prior to the development of bidding documents for each import would also have saved considerable time. vi (v) Higher than average preparation and supervision resources are needed when working with new borrowers, with loans that include policy components, and with loans that provide flexibility regarding the list of goods to be imported. Supervision costs for this loan were high, however, the benefits reaped were substantial: the import list was revised continually to respond to government priorities (which was particularly useful after the change in government in 1993), sectoral dialogue was developed, and considerable knowledge transfer occurred. (vi) The Bank has an ambiguous policy on used equipment; developing a clear and consistent approach may be useful for future operations. Used equipment would be an appropriate solution to meet some of the needs of transition economies. However, in the proposed used bus procurement to be financed under this loan, the Bank's excessive restrictions (such as the age of the equipment to be purchased, service guarantees and training by suppliers, nationality diversification of suppliers, etc. made it virtually impossible to find willing suppliers. IMPLEMENTATION COMPLETION REPORT LITHUANIA REHABILITATION LOAN (Ln. 3524-LT) PROJECT IMPLEMENTATION ASSESSMENT A. Project Objectives 1. Lithuania re-established its independence in March 1990, and joined the World Bank in July 1992. Bank dialogue with the Government started during the first economic mission in January 1992. At that time, Lithuania was in the midst of fundamental political and economic transformation, and was suffering from severe trade disruptions due to the break-up of the FSUB. These trade disruptions were already manifesting themselves in widespread shortages of raw materials for manufacturing and agricultural activities, heating for dwellings and workplaces, and spare parts and goods for public infrastructure and social services. As a consequence, there was a sharp decline in output. Efforts to normalize trade relations with traditional trade partners met with limited success. By early 1992, some initial steps to begin the transformation of the Lithuanian economy to a market based system had been taken, and the Government recognized the need for stronger stabilization measures as well as broadening and deepening of structural reforms. However, financial and technical support was needed to implement such an ambitious reform program. A response from the international community was urgently needed to mitigate the shortages and to provide a framework for stabilization efforts and structural reforms. 2. Following extensive discussions within the Bank, the Rehabilitation Loan concept was developed as the most appropriate initial form of support by the Bank to FSUB countries which were crippled by trade disruptions but showing clear evidence of commitment to reform. Preparation of a set of such loans was launched starting with the Russian Federation and the three Baltic countries. The Loan was prepared in close association with the IMF's first Stand-by Arrangement (SBA) to Lithuania for about SDR57 million, which focussed on price reform, incomes policy, fiscal policy, currency reform and monetary policy and trade. The Bank concentrated on supporting the design and implementation of initial steps of a structural reform program included in the Memorandum of Economic Reform Policies (MERP), which laid out a framework for the medium term restructuring of the Lithuanian economy and established targets and indicators to monitor progress. Given the urgency of the need for import financing, and the established commitment of the Government to proceed with policy reform, the loan did not contain specific policy conditionality to govern the release of funds. Project conditions were limited to a general commitment by the Government to implement the policy measures included in the MERP, to establish and maintain a project implementation unit, and to undertake procurement and disbursement in a fashion consistent with Bank procedures. 3. The main objectives of the program supported by this loan to Lithuania were to: (i) assist the Government in the design and implementation of its structural reform program as outlined in the MERP; and (ii) help maintain and increase capacity utilization and output in key sectors during the six to twelve months following loan effectiveness. To achieve these objectives, the loan of US$60 million was designed, and was reinforced with funds provided through associated financing from the JEXIM Bank 2 for additional imports (US$45 million equivalent) and the Government of Sweden for technical assistance ($250,000). The loan was designed to finance: (i) essential imports in key sectors, such as health, agriculture, and energy (US$45 million), with tentative equal allocations; and (ii) production inputs by individual enterprises imported through normal commercial channels (US$15 million). The Government and the Bank agreed on the following parameters to determine the composition of imports to be financed under the loan: (i) the standard negative list of goods would not be financed under either component; (ii) an essential list of imports in the areas of health, agriculture and energy was drawn up, however, other imports not on this positive list could be considered subject to prior review by the Bank; and (iii) purchases of petroleum products, if added to the original positive list, would not exceed one-third of the loan. 4. Project objectives were broad and ambitious, particularly given that during project preparation and implementation, dynamic changes were taking place in Lithuania creating uncertainties beyond the control of the Government or the Bank. In retrospect, one can now see two ways in which the objectives could have been better framed: (i) the schedule and deadlines set were overly optimistic, and (ii) there could have been greater realism about what structural policies could be supported by the loan. First, it was particularly difficult at that early stage to determine how long it would take to implement the loan, that is, how long it would take to identify and procure critically needed imports given the constantly changing needs of the country and the constantly changing resources provided by external sources. In retrospect, the amount of time originally envisioned for the procurement of critical imports (6-12 months) and thus for the length of the loan (original closing date June 1994) was too abbreviated. In addition, the reforms identified under the MERP were to be undertaken during the time frame for loan implementation. By definition, they were measures which were first steps toward longer term goals. But even as first steps, the dated indicators specified in the MERP to monitor specific stabilization and structural measures were too optimistic and in retrospect perhaps even unnecessary. Second, it should have been more clearly stated in the objectives that the loan would only support initial reform measures during the early stages of transition. It should also have been emphasized that assisting the Government with the design of the reform program and securing implementation assistance was the Bank's value-added at that time. But, despite these points, the Loan--and particularly the MERP--did provide a good tool to initiate and deepen policy dialogue with the Government, and to identify economic and sectoral priorities for policy change and investment which then became the backbone for the Bank's future assistance strategy. The loan did, also, produce some very positive benefits which in hindsight could have been incorporated as project objectives, such as the impressive expansion of procurement methods and other transfers of skills and knowledge. B. Achievement of Project Objectives 5. Overall. Despite the flaws in loan design, the loan was successful in achieving the objectives stated above, although the design was altered somewhat (primarily by cancelling the commercial channel and removing the ceiling on energy imports') during the implementation phase. The objectives of the loan--namely supporting the design and implementation of reform measures and stemming declines in 'The loan was amended on July 15, 1993 to incorporate these changes. The commercial channel was cancelled due to changing circumstances inthecountry: the earliershortage of hard currency available to individualsand legalentities waseliminated overthe periodwhen Lithuania introduced its own currencies (first, a temporary currency--the Talonas--and later the Lita). The energy ceiling was lifted when it became apparent that disruptions in energy supplies, primarily natural gas, were one of the major reasons for the decline in production and service delivery in the economy. 3 productive capacity, and the added benefits of expanding procurement methods and diversifying imports-- were achieved and have had a sustainable impact on the borrower. However, the pace of both reforms and imports was slower than originally anticipated. The loan was extended twice; thus not all of the imports financed under the loan arrived during the short-term emergency (6-12 months) period originally envisioned, even though they were well-identified critical imports. Nevertheless, as seen in Table 1, some 72% of the deliveries (in value) was delivered in the first year of the loan (1993), 3% the following year (1994), and 22% in the final year (1995). 6. Support for Economic Reform. The MERP outlined the Government's commitment to undertake fundamental market-oriented policy reforms. It was formulated and endorsed by the Government after extensive dialogue with the Bank. The MERP, and the monitoring of it during loan supervision, proved to be an excellent instrument to deepen the dialogue on structural reforms with the Government. It provided a framework - through the policy matrix, accompanying terms of reference for technical assistance, and dialogue with the Government and donors - to which the international community could anchor its technical assistance programs. It also provided an avenue for the Bank to begin to develop future operations in various sectors where more extensive outside assistance (both financial and technical) was needed. Overall policy performance under the loan has been very good (see paras. 8-19 below and Annex A for details), although somewhat slower than originally anticipated. Lithuania is considered one of the more successful reformers in the FSUB. Growth has been restored to positive levels, inflation has dropped to single-digit monthly levels, and there has been a continuous shift toward trade with the West (see Table 2). Like many countries in transition, however, Lithuania has a mixed track record of completing some of the fundamental structural reforms, such as cost recovery pricing of energy, elimination of agricultural subsidies and adequate oversight of the commercial banking sector. This is leading to a second generation of transition issues (for instance, bank insolvency), despite the many achievements to date. 7. Maintenance of Capacity Utilization and Output. The loan helped maintain capacity utilization and was likely one of many factors which contributed to the recovery of output in the economy. Lithuania was heavily dependent on trade with the FSUB which accounted for about 90 percent of its total trade before 1991. The collapse of trade relations within the FSUB was a major cause of disruptions in the productive sectors and for real GDP to decline by over 50 percent during the initial period following Independence. This decline was halted during 1994, and growth turned solidly positive (3% increase in GDP) in 1995. While the impact of the loan and the imports it has financed is difficult to assess in quantitative terms, the loan did provide inputs to keep some essential services running during a very difficult transition period when health supplies were nearly exhausted, dwellings and workplaces were cold, and there was a lack of raw materials for (among other sectors) food production. To some extent, maintaining these essential services probably helped moderate dissatisfaction among the population, enabling the Government to maintain the reform momentum. For example, the import of natural gas during two successive winters brought relief to households, where only a limited amount of heating and hot water were available, and to industries which relied on gas for production. Similarly, water treatment chemicals kept the boilers in power plants operating. The provision of pharmaceuticals and various products, such as veterinary medicines and pesticides for the agricultural sector, sent a lifeline when traditional channels for imports were disrupted. The indirect and initially unforeseen benefits of increasing knowledge of competitive procurement and exposure to new suppliers and products has been invaluable. The Rehabilitation Loan provided the first opportunity for most of the purchasing agencies involved to engage in competitive bidding and to purchase goods from diverse suppliers. Every one of the purchasing agencies (with the exception of the gas company, which is forced to rely on sole source procurement from its traditional supplier) has now changed its procurement practices to include competitive tendering, and many of the relationships developed with new suppliers are being preserved. 4 Table 1: Goods Imported Under the Rehabilitation Loan #OF % OF OF SUPPLIER IMPORTED ITMMS DELIVERY DATES LOAN CONTRACTS COUNTRIES HEALTH Pharmaceutica]s UNICEF Pharmaceuticals Bid 1 January 93 - June 94 2% 1 I Pharmaceuticals Bid 2 June - December 93 4% 25 15 Pharmaceuticals Bid 3 June - December 94 3% 22 13 Pharmaceuticals Bid 4 October 94 - July 95 1% 6 6 Dental Equipment May 95 - June 95 3% 2 2 Medical Equipment November 95 - December 95 2% 10 4 TOTAL HEALTH 15% ENERGY Natural Gas I August 93 - November 93 25% 1 1 Natural Gas 2 June 95 15% 1 1 Water Treatment Chem. for Elec. Plant August 93 - December 93 2% 2 2 Industrial Lubricants August 93 - December 93 7% 9 5 TOTAL ENERGY 49% TRANSPORT Bus Spare Parts December 94 - March 95 2% 4 3 TOTAL TRANSPORT 2% AGRICULTURE Veterinary July 93 - August 93 2% 11 7 Agro-Chemicals July 93 - August 93 4% 7 5 Diesel Fuel I for farmers May 93 - July 93 10% 2 2 Diesel Fuel 2 for farmers July 93 - February 94 16% 4 3 TOTAL AGRICULTURE 32% PUBLIC ADMINISTRATION Computers December 95 <1% I I TOTAL PUBLIC ADMINISTRATION <1% TOTAL 100% 108 21 (of which three are FSUB) Table 2: Lithuania's Economic Development since Independence 1992 1993 1994 1995 GDP Growth -37% -16% +1% +3% Annual Inflation 1020% 410% 69% 32% Fiscal Deficit " 0.5% -5.5% -5.2% -4.9% Export 31.8% 86.1% 55.1% 45.8% Import1' 22.8% 94.3% 61.1% 50.7% I/As a share of GDP. 5 C. Implementation Record and Major Factors Affecting the Project Implementation of the Economic Reform Program 8. Overall. The Rehabilitation Loan supported an economic reform program outlined in a "Memorandum on Economic Reform Policies" (MERP) signed by the Prime Minister. The program comprised market-oriented policy measures in ten areas: price reform, incomes policy, fiscal policy, currency reform and monetary policy, international economic relations, enterprise reform, competition policy and legal and institutional framework for commercial activity, commercial banking system reforms, social protection and the social safety net, and economic management. The program in the first five areas focused on macroeconomic stabilization, was designed by the authorities in close collaboration with the IMF, and was supervised primarily by the IMF. The program in the last five areas focused on structural reforms, was designed by the authorities in close collaboration with the Bank, and was supervised primarily by the World Bank. 9. Overall policy performance under the Rehabilitation Loan was highly satisfactory, and the vast majority of specific measures foreseen in the MERP have been adopted. The major factors affecting policy performance were: (a) continual Government commitment to reform, despite changes in administrations, (b) the swift and extensive support to the Government to assist in the reform effort, particularly from grant-funded technical assistance, including in those areas identified during loan design, and (c) extensive policy dialogue with the Bank through loan supervision, economic and sector work and preparation of subsequent loans. Stabilization reforms have on the whole been implemented faster and more comprehensively than structural reforms. This is largely because structural reforms generally require the development of detailed legislation, public education and consensus building, establishment of institutional capacity, and sometimes physical investments, all of which tend to be considerably more complex and time consuming than stabilization measures. In addition, the IMF's close monitoring of key measures with tranched releases of funds contingent on the outcome of regular policy performance reviews may have contributed to the relatively fast adoption of stabilization measures. With hindsight, the original MERP target dates for several structural reform measures were therefore overly ambitious and optimistic. 10. Stabilization Measures. By the time the Rehabilitation Loan was approved, Lithuania had already deregulated prices in most areas. As foreseen in the MERP, remaining price controls on food products were eliminated on schedule by the beginning of 1993 (mark-up controls remained in place until end March 1995). With the exception of energy pricing, government price controls or regulation have since then been limited to goods and services where they are temporarily or in some cases even permanently justifiable on natural monopoly, public good, or social grounds, such as liquor, utilities, communications, or public transportation. The MERP schedule for raising electricity, gas, and heat prices and phasing out associated subsidies during 1993 turned out to be unrealistic. Progress has been made, and especially electricity prices have risen towards cost and international levels. While there continues to be widespread non-payment of energy bills, collection rates are improving, particularly during the sumnmer season. Following the Rehabilitation Loan, relevant policy conditionality has been included in the Bank's Power Rehabilitation Loan (approved in May 1994) and proposed SAL, and the IMF's EFF program (approved October 1994). 11. Inflation (albeit still high by Organization for Economic Cooperation & Development (OECD) standards) was brought under control through a heterodox stabilization program including stringent fiscal and incomes policies and tight monetary policies. Strict expenditure and cash management kept the general government's financial budget balanced through 1993 and limited the financial deficit to only 1.4% of GDP in 1994. The overall fiscal deficit, including net lending to enterprises, also stayed within 6 IMF targets (3% of GDP in 1993 and 4% of GDP in 1994). Broad structural tax reforms were undertaken early on after independence, and additional reforms such as the introduction of the VAT were undertaken with only modest delays. A market in Government securities has been established as envisioned in the MERP; the market is thin but growing. While fiscal pressures were strictly controlled and not a significant source of inflation, monetary contraction was initially less consistent. For example, real interest rates turned positive only in spring 1993, and substantial credit flows continued being directed to non-viable enterprises and ad-hoc import financing during much of 1993. This was the main reason for continuing high inflation in both 1992 and 1993, when the Consumer Price Index (CPI) was 1,020% and 410% respectively. It was also a major factor for introducing Lithuania's national currency which occurred in two stages, first making the temporary currency coupons (talonas) sole legal tender in October 1992, then introducing the litas in May/June 1993. Finally, the initial difficulties with removing the Bank of Lithuania - and central and commercial bank credit - from political influence coupled with Estonia's positive experience with a currency board system, led the Lithuanian authorities to introduce a currency board system in April 1994, tying the lita to the US dollar. Following an initial reduction in inflation through monetary and fiscal tightening prior to the litas introduction, the establishment of a currency board has contributed greatly to the consolidation of monetary and overall macroeconomic stability. With fixed nominal exchange rates, domestic inflation is expected to continue declining, although it will likely remain in excess of the levels of western trade partners in the medium term, which will gradually appreciate the real effective exchange rate. This process is already well underway: inflation was 69% in 1994 and about 32% in 1995. 12. Trade liberalization has proceeded on schedule or ahead of schedule and by now far exceeds the targets included in the MERP. Essentially all export and all quantitative import restrictions have been eliminated, and import tariffs are gradually being reduced and made more uniform. A schedule for further import tariff reductions is being implemented under the IMF's EFF program. The major remaining concerns are agriculture import tariffs, which are addressed under the EFF, and the Bank's proposed SAL. 13. Enterprise Reform. Enterprise reform and private sector development in Lithuania have been models of reform in some respects but lagged behind in others. Privatization started early, proceeded rapidly for two years before slowing down, and has been successful in transferring the majority of assets out of the public sector into private hands. Virtually all housing and all small businesses have now been privatized through a voucher program and are now fully privately owned. By contrast, the privatization program for the larger enterprises through share subscriptions proceeded less quickly than expected and slowed down over time. However, as of early 1996, about two thirds of such enterprises had been privatized with vouchers. State assets have also been privatized outside the voucher privatization program through management and employee buyouts, the "best business plan" method, direct cash sales by founding ministries or municipalities, or new share issues to purchasers. The beginning of the planned second stage of privatization, entirely for cash, has been postponed several times but is now to begin implementation in mid-1996. The Government's commitment in the MERP to remove most restrictions on the sale and resale of land has been primarily met; there are presently no restrictions on sales to domestic individuals and the remaining major hurdle of land sales to foreigners is presently being debated by Parliament. Further efforts in this area are needed in order to facilitate the establishment of a functioning land market, which will be critical for the consolidation of agricultural land ownership and the restructuring of agricultural companies and to allow the effective use of land as collateral for borrowing. 14. Many key policy measures to establish a basis for improving state enterprise management were successfully adopted and implemented as foreseen under the MERP. These include enterprise corporatization (i.e., primarily the conversion into stock companies and the establishment of management 7 and supervisory boards), the development of new international accounting standards, the phasing out of direct budgetary financial transfers to ailing enterprises, the monitoring and reduction of inter-enterprise arrears, and the preparation of studies assessing sector and enterprise restructuring needs. These measures have provided enterprises with important incentives for restructuring operations and strengthening management, however, this is necessarily a long and complex process and will remain a challenge for some time, particularly with enterprises in key infrastructure branches. Tax arrears and directed credit through the banking system continue to be a problem, and have contributed to the present difficulties in the banking sector. These issues will be addressed under the proposed SAL. Restructuring needs of both pre- and post-privatized enterprises are also being actively supported under the Enterprise and Financial Sector Assistance Project (EFSAP). 15. Competition Policy and Legal and Institutional Framework for Commercial Activities. The authorities have successfully followed a two-pronged approach to promote domestic competition. First, the adoption of a Competition Law and Regulations and the set-up and gradual strengthening of a Competition Agency through technical assistance (which have proceeded as foreseen in the MERP) allow the Government to pursue anti-monopoly cases. Second, large monopolistic enterprises have been broken up on a case-by-case basis. This latter process has been focused almost exclusively on splitting enterprises into components and selling off components or movable assets in preparation of planned privatization or as part-liquidation. Rarely, if ever, have enterprises been broken up for purely competitive reasons. While debatable in individual cases, this policy has been sound as an overall strategy, given Lithuania's small size and its overall liberal trade policies that allow effective import competition. 16. The development of new private sector activity has been somewhat slower in Lithuanian than in its neighboring Baltic countries Estonia and Latvia, but has begun to catch up. This is in part because macroeconomic stabilization took longer in Lithuania. In part it is also due to somewhat slower progress with creating/reforming the legal and institutional framework for commercial activity. In crucial areas such as bankruptcy, collateral, and foreign investment legislation and procedures, initial improvements were adopted along the lines of the MERP, but their scope and quality was limited, requiring a second round of amendments to laws or new laws that have only been adopted recently or are now under preparation. Furthermore, the implementation of bankruptcy and other legislation is somewhat slower than expected, because of the complexities of developing appropriate procedures and judicial infrastructure, and because original target dates were too ambitious. In addition, the privatization process was formally open to foreign participation, but contrary to the spirit of the MERP, this was in practice discouraged, with the majority of enterprises being purchased by enterprise and government insiders, often on preferential terms. This has limited new foreign entry, which otherwise could have contributed significantly more to new private sector development (PSD), as it has in Estonia, for example. The PSD environment was assessed, and recommendations for improvements provided, under a recent PSD study, and bankruptcy and other legislative improvements are being supported in conjunction with the EFSAP. 17. Strengthening the Commercial Banking System. Restructuring of the financial sector has been progressing slowly and unevenly and only recently gained some momentum. This applies to all three policy areas covered by the MERP: banking legislation and prudential regulation and supervision; accounting, auditing, and payment systems; and bank restructuring. Off-site and on-site supervision systems were put into place on schedule, but had several shortcomings. Off-site supervision systems were not completely compliant with International Accounting Standards (although the training programs were very successful) and on-site inspections have still not been undertaken at the largest banks. Supervision has remained uneven, which was a contributing factor to the failure of several commercial banks in late 1995. Substantially improved bank accounting and auditing standards have been adopted recently, but they still fall short of international standards in a few key respects. International audits are now being 8 conducted by most of the larger banks, but they are not legally binding and do not trigger regulatory action by the Bank of Lithuania, enabling the central bank for the time being to allow essentially insolvent institutions to keep operating. Much of the substantial, though delayed, progress so far (including the adoption of the new banking laws, on-site and off-site banking supervision, and new accounting and auditing standards on an accrual instead of cash basis and requiring provisioning) has been made in conjunction with the Bank's EFSAP and the IMF's EFF program. The adoption of full international accounting and auditing standards and the necessary restructuring of the three dominant majority state- owned banks, which were foreseen in the MERP for early 1993, have been the subject of a continued and recently intensifying policy dialogue with the authorities. This issue will be addressed further in the proposed SAL. 18. Social Prolection and the Social Safety Net. The authorities are genuinely committed to the development of a comprehensive social protection program. They have made good overall progress in the three major policy areas listed in the MERP (unemployment, pensions, and social assistance benefits) and successfully adopted and implemented the various specific policy measures in all three of them. In most cases, measures have been adopted somewhat behind the schedule mapped out in the original MERP, but as a rule delays have been within acceptable limits and for understandable reasons, such as a change of Government or Minister. Unemployment benefits were modified to become essentially flat- rate, by relating benefits to length of employment only rather than level of income. Eligibility criteria were also modified in the case of both unemployment and pension benefits to target benefits better to the most disadvantaged and vulnerable groups of the population. Preparation for a new pension law began in 1993, and the new law was adopted in mid 1994. It improves substantially upon the old law, although costing of the options has not yet been undertaken. The relatively slow increase in mens' and womens' retirement age may prove financially unsustainable for the budget over the medium term and may require amendments to the law. A streamlined social assistance benefits system was also put in place during 1994, reducing the number of individual benefits, eliminating all but those for maternal care and children and one means-tested benefit. Furthermore, the levels of all cash benefits are defined in terms of the "minimum level of living", which functions as a poverty line benchmark. Improvements in pension policy capability and implementation, and support to local social service offices is being provided under the proposed Social Safety Net project and the proposed SAL. 19. Economic Management. The Government has made efforts to strengthen its capacity to collect, compile, analyze, and report economic statistics. Progress has especially been made with price, fiscal, and monetary statistics. Trade data have also improved since they have been moved to a customs basis, and an ongoing comprehensive household survey is expected to improve the quality of social statistics substantially. Furthermore, the bulk of macroeconomic statistics is now prepared and provided in a timely fashion. Significant problems remain and further efforts are needed, however, to improve national accounts and balance of payments statistics. A grant from the Bank's Institutional Development Fund (IDF) has been mobilized to assist the authorities with these improvements. External debt recording, reporting, and management has improved very substantially and exceeds expectations, in part due to effective technical assistance organized by the Bank and funded with resources from the Swedish Consultancy Trust Fund. Lithuania has also been quite successful in improving public investment management--initially supported by a Public Expenditure Review and a Bank-organized donor meeting-- and a first 3-year rolling public investment program (PIP) was been prepared in 1993-94 for the period 1995-97. The delay in completing the first PIP by one budget cycle compared to the original MERP target date is understandable and appears justified, given the magnitude of required efforts for this entirely new undertaking and the overall adequate quality of the final product. 9 Implementation of the Imports Component 20. Overall. Implementation performance of the imports component was generally satisfactory. Most of the goods were imported in a timely fashion, have been fully consumed by the ultimate end-users, and repayments (where expected) have proceeded on schedule. The delays in procurement that did exist were primarily caused by four factors: the inexperience of Project Implementation Unit (PIU) and purchasing agencies' staff with competitive bidding procedures and international transactions; turnover in PIU staff; gaps in the country's decision-making process to identify critical goods which could be imported quickly; and in one case constraints imposed by the Bank. These issues were all resolved over time due to the high quality and extensive dialogue between the Bank and the Borrower. Disbursement went relatively smoothly, however, some problems were encountered with local commercial banks, requiring significant interventions from the PIU and also from the Bank. Factors affecting the success of the import component included the dedication of the PIU management and staff; the presence throughout the Box 1: Who were the purchasing loan of procurement advisors funded by Sweden; agencies? training provided to PIU staff and others involved Purchases under the loan were undertaken by nine in procurement; and substantial supervision by the purchasing agencies and two ministries. Three Bank. typical agencies were Farmacija (pharmaceuticals), Agrokenija (agrochemicals), and Autotransportas 21. Procurement of Imported Goods. (bus spare parts). In all cases, these agencies Procurement was a joint undertaking between the were state-owned entities responsible for importing Project Implementation Unit (PIU) and the 100% of the specific good to Lithuania from purchasing agencies (see Box 1). The PIU suppliers primarily within the FSUB. The consisted of a manager, two procurement staff, one Rehabilitation Loan was their first encounter with disbursement staff and a half time resident international competitive bidding. All three procurement advisor financed with Swedish agencies professed to having improved their cofinancing. The purchasing agencies were those procurement skills due to their experience with agencies or sections of Ministries traditionally this loan. "We now purchase from over 100 responsible for procurement and trading. Nine suppliers; through competitive bidding we have purchasing agencies and two ministries were active learned a lot about competitive prices' purcasln ageclesand wo mlstns wee aclve (Farmacija). "The final consumers are happy and purchasers under this loan. In general, the PIU carust Thepruct,swhicre pre worty and s ~~~can trust the product-> which are price worthy and was responsible for all dealings with the Bank and of high quality. We now rely primarily on these for orchestrating the bidding process, while the new supply relations" (Agrokemiia). "Previously purchasing agency was responsible for finalizing we purchased exclusively from one supplier. The technical specifications, participating in bid competitive bidding process taught us who are the evaluations, receiving and distributing the goods, reliable suppliers and we will continue to use this and dealing with suppliers. Despite the form of procurement in order to get the best inexperience of both the PIU and the purchasing price" (Autotransportas). There does not seem to agencies, close to three quarters of the loan was be any evidence indicating that new private under contract by the end of the first year. The purchasing agencies were crowded out of the major difficulty during this period was formulating market due to the funding received by these the technical specifications for the various goods established agencies. Many of the agencies claim according to western standards These problems that new private firms have taken over some 50% of the market; and many of the formerly state- were resolved through extensive dialogue with and owned agencies are now themselves fly or training of the purchasing agencies; in most cases partially privatized. the purchasing agencies received technical assistance organized by the procurement consultant often involving twinning with similar agencies in Sweden. In the initial months of loan implementation, this inexperience did have repercussions: some 10 agricultural inputs were purchased too late to be used for the planting season (instead they were stored and used the following year); and a few products--being from non FSUB suppliers--were not perfectly compatible with the intended uses or were priced too high for resale, and a small portion of these remain unsold. These were all unfortunate but understandable parts of the learning process for the PIU and the purchasing agencies. 22. Turnover in PIU staff also led to some delays in the project. The dramatic contrast of 1993, when 72% of the loan was contracted, and 1994, when only 3 % of the loan was contracted, bears witness to this. During 1994, all experienced PIU staff left to the private sector and the resident advisor relocated. New staff were hired, but did not receive extensive training by the more experienced staff prior to their departure. In addition, there was a paucity of staff present during most of the summer months, and the loan came to a virtual standstill. This problem was resolved during the latter half of 1994, and by early 1995, the final bidding documents had been sent out and nearly all of the contracts had been finalized. 23. The purchases made during the first year were emergency items selected centrally by the Ministry of Finance in conjunction with sector ministries during loan appraisal. After the first year, the Government began receiving considerable foreign assistance and took steps to develop a structure to determine priorities for the use of these funds, including the remainder of the Rehabilitation Loan (some $15-20 million). At this time, the preference of the Government was to utilize borrowed funds only for investment goods, and frequently for end-users who were already, or were intended to be, in the private sector. Thus, there was a request to use some $9 million of the Rehabilitation Loan for the purchase of automation/communications equipment (automatic teller machines, SWIFT connections and such) for private commercial banks, $3 million for medical and dental equipment for private doctors and dentists, and later, $9 million for buses. Simultaneously, there was a request to use the entire JEXIM Rehabilitation Loan for the purchase of machinery and other equipment for manufacturing firms and some small businesses, many of which were already in the private sector. The Bank attempted to balance flexibility toward the changing needs of the country with an adherence to the original project objectives to finance urgently needed imports. After lengthy discussions, the Government, the Bank (and the JEXIM in the case of the parallel funding) agreed that commercial sources of funding should be sought for some of these investments, and that the Rehabilitation Loans should be utilized for more critical, and quickly purchasable imports, as originally envisioned under the loan. Equipment for commercial banks and manufacturing firms were discarded from the list; buses and medical/dental equipment, however, remained on the priority list. 24. The two instances (medical and dental equipment) where the Bank reluctantly agreed to finance the purchase of equipment for private end-users were predictably difficult cases with remarkably happy endings. In late 1993, the Government requested to use $3 million for the purchase of medical and dental equipment for private doctors and dentists. This purchase was not suited for the quick disbursing, emergency types of imports envisioned under the loan. There was also the problem of importing a non- homogenous good to groups for private purchasers, all with divergent preferences. The medical equipment was to be purchased by six private clinics. In order to save fees to intermediaries, the clinics chose not to utilize the services of a purchasing agent. The Bank provided technical assistance for development of technical specifications, and over one year later the bid evaluations were complete and contracts were to be signed. However, the private clinics could not, at that time, provide guarantees required by the Government for loans; rather than cancelling the contracts, the Government instead opted to have the Ministry of Health take over the purchase of the identified equipment for public hospitals in dire need of new equipment, using budgetary resources. The equipment was delivered some two years after the initial request was made. The dental equipment also took two years to procure. Rather than attempting to purchase the equipment themselves, the dental association lined up a private purchasing 11 agent, which orchestrated the procurement and undertook contractual arrangements with each of the 120 dentists which purchased the equipment. Despite large complications in organizing these bids, the ultimate end-users have expressed their satisfaction. 25. The attempted purchase of used equipment under this loan exemplifies the Bank's ambiguous stand on such procurement and resulted in a set-back in Bank relations with the relevant sector ministry. The Government requested the use of some $10 million to purchase buses for urban transport, since the existing fleet was old and rapidly deteriorating and there were abundant service disruptions which were particularly problematic during the cold winter months. Due to the lack of progress on key sectoral policy issues (decentralization of urban transport services to municipalities, service expenditures and revenues), the Bank felt it could not finance new buses, but could assist in financing some fleet renewal through the purchase of spare parts for existing buses and used buses. The spare parts were contracted and delivered in record time. The used bus purchase, on the other hand, suffered months of delays due to changes in Bank direction on the purchase of used equipment. In the end, although the purchase was allowed, so many restrictions were imposed by the Bank (such as the age of the equipment to be purchased, service guarantees and training by suppliers, nationality diversification of suppliers, etc.) that when the bidding documents were sent to selected suppliers they simply could not meet all the requirements. This caused at least a one year delay in the utilization of a large part of the loan. The funds were later used to purchase natural gas. 26. Disbursement. Overall disbursement performance was satisfactory. This performance was contingent upon three factors: adequate office technology, timely training, and a knowledgeable banking community. Initial problems were encountered due a lack of basic office equipment and knowledge of fundamental skills such as completing letters of credit. To ease these start-up problems, a part time Swedish consultant worked with PIU staff on disbursement matters, and PIU staff attended a seminar on disbursements procedures. PIU staff gained familiarization quickly and requested that financing for the disbursement consultant be diverted to other uses. PIU staff indicated that the timing of training was critical: if provided before the operation was underway then the training was too theoretical. They indicated that rather than seminar attendance, it would be most useful to have a Bank staff work with the PIU for a brief period early on when some initial contract payments needed to be made. 27. By far the largest hurdle to smooth disbursement operations was the initial lack of knowledge of basic banking practices within the country and within the countries of some of Lithuania's major trading partners. Since about one-half of the contracts were paid through letters of credit with special commitments, the inability of the local banks to perform these functions necessitated considerable interventions by the Bank, the PIU and the suppliers, and sometimes led to delays in subsequent deliveries. In addition to this initial lack of skills, many of the banks utilized during the loan had not adopted commercial practices; frequently they did not review contracts to ensure that the terms had been fulfilled prior to notification that funds should be released. In the case of a large procurement of heavy fuel oil funded under the JEXIM loan2, this lead to the release of funds - despite the Bank's objection that suppliers had not fulfilled the terms of the contract - which then necessitated early repayment by the Government and cancellation of the contract. Finally, a special account was opened with Svenska Handelsbanken to finance primarily smaller contracts; even though the amount of payments flowing through the special account only amounted to $1.8 million, some 50% of the contracts had some portion of the payment covered through the special account. 2This case involved a special commitment by the Bank, which is an irrevocable commitment for the Bank to release funds based on the approval of the supplier's commercial bank. In this case, neither the commercial bank nor the purchaser flagged that the supplier had not fulfilled the terms of the contract, and the funds were released by the Bank. 12 28. Onlending and Repayment Arrangements. The loan originally envisioned the financing of two types of imports: those which would be financed by the budget and passed on without charge to the final end-users (eg., some pharmaceuticals and medical equipment), and those with commercial use for which the end user would repay the Ministry of Finance over time. The bulk of the imports fell into the latter category, requiring the Ministry of Finance to develop numerous onlending agreements with purchasing agencies, and in some cases with the end-users themselves. The Bank did not foresee the need for such arrangements during appraisal, and thus an inconsistent philosophy on these repayment arrangements developed. Originally, it was thought that the Ministry of Finance could at its discretion decide what should be repayed and how. Later it was decided that the Bank should monitor all repayments. During one period the IMF agreed with the Ministry of Finance that all reflows to the Ministry should be sterilized so as to reduce inflationary pressures, which led the Ministry of Finance to develop onlending arrangements which simply passed on the Bank terms (i.e, 17 year maturity, 5 year grace and World Bank interest). Once the sterilization restriction was eased, and ministry officials became more aware of different repayment options, repayment terms suited to each type of import and end-user were developed. There were occasional delays in the finalization of onlending agreements3, but, to date, all repayment agreements have been honored (see Annex B). D. Project Sustainability 29. The loan has made several sustainable contributions to the Lithuanian economy in the areas of economic reform, capacity utilization and transfer of knowledge. First, economic reform is now deeply rooted in Lithuania, and the multitude of steps taken to date indicate that the process is irreversible. The loan contributed to this by providing a framework for initial reform steps and a mechanism for furthering Bank assistance and complementary support from the international community. Second, some of the imports financed by the loan did assist various productive entities to survive the initial critical years of transition when raw materials and other supplies were disrupted due to embargoes, lack of payments systems and other institutional or systemic breakdowns. To some extent, this helped to prevent a deterioration of capital assets; many of these entities are now producing profitably, but possibly would have been forced to shut down during the critical first years. It also contributed to the provision of some essential services which helped stave off a collapse of ancillary activities. However, many of the imports were intended for immnediate consumption and therefore were not envisioned to have a sustainable impact. Finally, the transfer of knowledge and skills was substantial and has clearly been sustained. This transfer encompassed a wide range of areas: economic reform policies, competitive tendering methods, modern computer packages, letters of credit, employment of consultants, etc. E. Bank Performance 30. Preparation. The Bank quickly mobilized resources to assist this new country soon after the re- establishment of independence. The project was identified during the first Bank economic mission to Lithuania in January 1992 (prior to Lithuania becoming an IBRD member in July 1992), while the country was just beginning to embark on its economic and political transformation. The project was substantially appraised during a March 1992 mission, negotiated in August 1992 and presented to the Executive Directors in October 1992. The Bank recognized the risks involved in the operation, and linked the loan to the IMF SBA--working in close collaboration with the IMF--and also assisted the 3In one case, that of medical equipment to private clinics, onlending arrangements were not finalized until after the bid evaluation had taken place. As noted earlier, the clinics could not meet the requirements and the equipment was instead purchased by the Government. The problem could have been avoided had onlending armngements been discussed at an earlier stage. 13 Government in identifying technical assistance required for the reform program and the import component. Throughout the preparation process, intensive discussions were held on the targets included in the MERP and the content of the import list. Institutional arrangements for implementation were put into place well in advance of loan effectiveness, in order to begin procurement at the earliest possible opportunity. 31. The Rehabilitation Loan was seen as a preferable instrument as a first form of assistance during this early stage of reform. A Structural Adjustment Loan was considered, but this option was discarded. It was reasoned that a Rehabilitation Loan would, instead, provide the import financing that was critically needed and would support and prod the reform effort in a more flexible manner. Several factors motivated this choice: the urgency of delivering the imported inputs; the fact that the implementation record at the time was not sufficiently robust to support a tranched operation with very specific and tight conditionality; and, on the other hand, the country's apparent commitment to reform which justified financial support for critical imports. 32. Implementation. Overall Bank performance during implementation was satisfactory. The Bank devoted higher than average supervision resources to loan implementation as one would expect with a new Borrower. The discussion on the MERP was extensive and the MERP targets were continuously reviewed. The Bank developed a matrix of dated policy actions, monitored developments, and provided concrete advice to ensure that the reform program remained on track. At the request of the Government, the Bank provided issue-oriented, informal advice on specific and immediate issues confronting the authorities during the transition process. This advice was highly regarded in Lithuania. The Bank engaged in dialogue with other donors on the design and implementation of technical assistance to support the reform program. The interest of the international community quickly extended to cofinancing the Bank's subsequent lending operations. The Bank broadened and deepened the advice and dialogue with the Government through economic and sector work, other non-lending services and preparation of new lending operations that specifically targeted issues and sectors important to the strengthening the reform program. 33. The import component also required special efforts by the Bank, since the Borrower was unfamiliar with many forms of international transactions and Bank requirements. In the Loan Agreement, disbursements were stipulated to be made against imported goods of an emergency nature required during the execution of the MERP. Although a list of goods was included in the agreement, additional items were needed to exhaust the loan. The Bank attempted to be flexible toward these new requests for use of the loan while adhering to project objectives. In addition, reviewing the technical specifications, bid evaluations and final contracts, assisting the Borrower with various issues related to procurement and disbursement, and discussing and reviewing repayment arrangements, reporting requirements, audits, projects accounts consumed a considerable amount of resources. F. Borrower Performance 34. The Borrower's performance was fully satisfactory during project preparation and implementation. The Government was very active in the design of the reform program and engaged in a healthy dialogue with the Bank during implementation. The Government maintained an overall commitment to the reform process despite domestic pressures to ease the impact of transition. There was also good performance by the PIU on the import component, despite the intermittent problems of staff turnover and gaps in decision-making regarding priority imports, as indicated above. Because of Lithuania's unfamiliarity with Bank procedures, the limited experience with international transactions, and the initial hesitation to borrow for imports, the Government relied on Bank support and worked closely with Bank staff to clarify 14 sector priorities, to identify imports, and to work out necessary arrangements for loan implementation. PIU staff learned quickly from the foreign advisors and over time, the PIU was able to handle nearly all transactions with only limited interaction with the Bank and external advisors, and also to pass on this knowledge to other actors in both public and private sectors. Finally, the Borrower fulfilled all of its requirements regarding record keeping, reporting and auditing despite some delays. G. Assessment of Outcome 35. Project outcome is rated fully satisfactory; it has achieved its major objectives and development results. The Bank's intervention was timely and effective given the need for quick action in a new and changing environment, and the Bank provided adequate support during preparation and implementation. The Borrower carried out a comprehensive reform effort and a reasonably successful imports program. Adherence to the reform program, which was outlined in the MERP and which the Rehabilitation Loan aimed to support, enabled Lithuania to return to growth relatively quickly as compared to experiences in other transition economies. The Rehabilitation Loan has also facilitated Lithuania's diversification of trade in a small number of important sectors. H. Future of this Operation and Future Operations 36. The Rehabilitation Loan was designed as a form of short term balance of payments assistance. The loan is now closed, final disbursements have been made, imports have been consumed, and the PIU will wind up its activities for the loan. The PIU's disbursement officer will continue to serve World Bank and other loans, other PIU staff will be absorbed into the Ministry of Finance's debt management unit (and will consult other PIUs on procurement matters as needed) and repayments to the Ministry of Finance for imports purchased with funds from this loan will be monitored by the accounting department. 37. During the three years following loan approval, there was no need for any additional balance of payments finance; IMF and G-24 financing was more than ample to satisfy Lithuania's needs. During this period, the Bank concentrated on investment operations and some credit lines to support the Government in its efforts to continue the economic transformation towards a market system and bring about sustained growth in output and living standards. Interactions with the Government on the MERP under the Rehabilitation Loan's import component has led to a deeper sectoral dialogue and to the preparation of initial investment operations. Five investment loans have been approved since the Rehabilitation Loan: Power Rehabilitation Project (US$26.4 million equivalent); Klaipeda Environment Project (US$7 million equivalent); Enterprise and Financial Sector Assistance Loan (US$25 million); and Siauliai Environment Project (US$6.2 million equivalent); and Private Agriculture Development Project (US$30 million). Operations in the energy/environment, housing and social safety net areas are in an advanced stage of preparation. In recent months, due largely to the fiscal pressures bought on by several commercial bank insolvencies, a SAL has been requested by, and is being discussed with, the Government. The Bank does not envision any future lending with instruments similar to the Rehabilitation Loan. I. Key Lessons Learned 38. The Rehabilitation Loan was prepared under unique circumstances which do not lend themselves to replication; it is now closed, final disbursements have been made, imports have been consumed, and the Project Implementation Unijt (P1lX) wllX wind up its activities for the loan. The loan was designed as 15 an emergency response to a new borrower and a newly established country entering the transition process. It was a mixture of traditional Bank instruments (i.e, a critical imports loan with a quasi-positive list supporting extensive policy reform without conditionality) which is not likely to be utilized again. It was followed by extensive support from the international community which (combined with successful stabilization efforts) eliminated the need for further balance of payments/policy-based support from the Bank for several subsequent years (although such a need has recently emerged). And perhaps most importantly, the borrower remained committed to the reform process during the entire preparation and implementation period. Despite these unique circumstances, there are some lessons from this loan, as indicated below. i) Development objectives need to be precise, realistic and monitorable: Any loan supporting a policy program should explicitly incorporate measures to foster government commitment and ensure that there is an active policy dialogue. This was achieved quite well under the Rehabilitation Loan. Any such loan should also contain precise development objectives in order to clarify what the loan per se supports and what will be supported by parallel or subsequent activities. This was less clear in the Rehabilitation Loan, particularly regarding the policy component. All development objectives should be clearly monitorable. In the case of the Rehabilitation Loan, it was virtually impossible to quantify ex-post how well the objective of "maintaining or increasing capacity utilization" was achieved. Knowledge and skills transfer were important benefits of this loan. They could have been included in the loan objectives. ii) The appointment of advisors to the PIU, to provide overall project management support and expertise on procurement and disbursement, is critical to the success of any operation involving new borrowers. In this case, the advisors performed an important function of training and knowledge transfer to both PIU staff and a broader set of local counterparts, which contributed to the sustainable impact of the loan. The role of the advisors also evolved and eventually decreased over time, resulting in a change in the skills mix of the advisors; due to this experience, the Borrower was encouraged by the Bank to develop the capacity to manage the consultants. (iii) Active coordination within the international community is necessary to deliver the technical support to assist the Government to achieve policy targets. The structural program outlined in the MERP provided a useful framework to which the international community could anchor its support at this early stage when the needs of the country were not yet well understood. (iv) While flexibility was an important factor, it is necessary that key concepts are well understood by all parties to eliminate later misunderstandings. For this loan, clearer parameters - defining what critical imports were appropriate for financing under this loan--could have reduced the time spent on discussion with the Government during implementation about investment items they wished to import. Similarly, onlending and repayment arrangements should have been highlighted as an important element for the efficient and rational use of loan funds; a stipulation that draft repayment agreements be in place prior to the development of bidding documents for each import would also have saved considerable time. 16 (v) Higher than average preparation and supervision resources are needed when working with new borrowers, with loans that include policy components, and with loans that provide flexibility regarding the list of goods to be imported. Supervision costs for this loan were high, however, the benefits reaped were substantial: the import list was revised continually to respond to government priorities (which was particularly useful after the change in government in 1993), sectoral dialogue was developed, and considerable knowledge transfer occurred. (vi) The Bank has an ambiguous policy on used equipment; developing a clear and consistent approach may be useful for future operations. Used equipment would be an appropriate solution to meet some of the needs of transition economies. However, in the proposed used bus procurement to be financed under this loan, the Bank's excessive restrictions (such as the age of the equipment to be purchased, service guarantees and training by suppliers, nationality diversification of suppliers, etc. made it virtually impossible to find willing suppliers. 17 STATISTICAL TABLES Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in the Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions 18 Table 1: Summary of Assessments A. Achievement of objectives* Substantial Partial Negligible Not Applicable Macro policies 0 El 0 0 Sector policies 0 El l Financial objectives 0 E E a Institutional development 0 El l Physical objectives 0 E E E Poverty reduction El E C 0 Gender issues E El E l Other social objectives EE E 0 Environmental objectives El E 0 Public sector management 0 E El Private sector development a E E 0 Other (specify) E E E 0 B. Project sustainabiiity Likely Unlikely Uncertain 0 0 0lE C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification El 0 El Preparation assistance I 0 E Appraisal E El Supervision l 0 E D. Borrower performance Highly Satisfactory Satisfactory Deficient Preparation El 0 El Implementation El VI 0 Covenant compliance 0 El Operation (if applicable) a E a E. Assessment of outcome Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory E 0 El El * Some of the objectives were identified in the MERP. Other objectives not originally envisaged (such as improvements in public procurement and thus public sector management) were indirectly achieved through loan implementation. 19 Table 2: Bank Loans/Credits Loan/Credit Title Purpose Year of Approval Status Preceding Operaions None Following Operations 1. Power Rehabilitation Energy Efficiency FY94 Under implementation 2. Klaipeda Environment Environmental Improvements FY95 Under implementation 3. Enterprise/Finance Enterprise and Financial Sector FY95 Under implementation Development 4. Siauliai Environment Environmental Improvements FY96 Under implementation 5. Agriculture Development & Private Agriculture FY96 Under Implementation Table 3: Project Timetable Steps in Project Cycle Date planned Date actual/ latest estimate Identification (Executive Project Summary) 3/92 3/92 Preparation 4/92 3/92 Appraisal 4/92 3/92 Post Appraisal 6/92 6/92 Negotiations 7/92 8/31/92 Letter of development policy (if applicable)/ 8/92 9/92 MERP Board presentation 9/29/92 10/22/92 Signing 10/23/92 Effectiveness 10/92 11/5/92 Project completion/loan closing* 6/30/94 12/31/95 * A 4-month grace period was granted to finalize disbursement. 20 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ million) FY93 FY94 FY95 FY96 Appraisal estimate 35 60 60 60 Actual 6.9 45.87 57.24 59.0 Actual as % of estimate 20% 76% 95% 95% Date of final disbursement 02/07/96 Table 5: Key Indicators for Project Implementation - not applicable - Table 6: Key Indicators for Project Operation - not applicable - Table 7: Studies Included in the Project - not applicable - 21 Table 8A: Project Costs Appraisal estimate Actual (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. Import 60 60 59.0 59.0 2. TA 0 0 0 0 Total 60 60 59.0 59.0 Table 8B: Project Financing Appraisal estimate Actual (US$ million) (US$ million) Source Local Foreign Total Local Foreign Total costs costs costs costs 1. IBRD/IDA 60 59.0 59.0 2. Cofinancing Institutions* Total 60 59.0 59.0 * Parallel financing by JEXIM Bank ($45M), and the Government of Sweden ($0.25M). Table 9: Economic Costs and Benefits - not applicable - 22 Table 10: Status of Legal Covenants Covenant Origin Revised Agreement Section Type Status al Fulfillment Description of Covenant Fulfill Date ment Date Loan 3.01 (a) 9 C - - Borrower and Bank to exchange views on progress of MERP. Loan 3.01 (b) 9 C - - Borrower shall furnish Bank with a report prior to exchange of views as the Bank shall request. Loan 3.02 10 C - - Procurement of goods shall be governed by schedule 3 of this Loan Agreement. Loan 3.03 5 C - - Borrower shall establish and maintain PIU within MoF to oversee disbursement and procurement. The Borrower shall provide funds for operation of PIU and employment of consultants where needed. Loan 3.04 (a) I C - _ The Borrower shall maintain adequate accounts and records consistent with sound accounting practices related to the loan. Loan 3.04 (b)(i) I CD - _ The Borrower shall have the records and accounts audited each fiscal year in accordance with auditing principles, by independent auditor acceptable to the Bank. Loan 3.04 (b)(ii) I CD - - The Borrower shall furnish to the Bank no later than six months of FY a certified copy of audit report. Loan 3.04 (b)(iii) I C - - The Borrower shall furnish to the Bank other information on accounts, records and audit as the Bank shall request. Loan 3.04 (c)(i) I C - - For SOEs/SAs the Borrower shall maintain accounts and records reflecting expenditures. Loan 3.04 (c)(ii) I NYD - - For SOEs and SAs the Borrower shall retain for a period of at least one year after the last audit report, all documents for such expenditures Loan 3.04 (c)(iii) I C - _ The Borrower shall enable the Bank to examine such SOE/SA records. Loan 3.04 (c)(iv) 1 CD - - The Borrower shall ensure that SOE/SA records and accounts are included in annual audits with separate auditors' opinions. Covenant type: Present Status I= Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring CD = complied with after delay generation from beneficiaries 10 = Project implementation not covered by CP = complied with partially 3 = Flow and utilization of project funds categories 1-9 NC = not complied with 4 Counterpart funding II - Remedies NYD = Not yet due 5 = Management aspects of the project or 12 = Sectoral or cross-sectoral budgetary or executing agency other resource allocation 6 = Environmental covenants 13 -Other 7 = Involuntary resettlement 23 Table 11: Compliance with Operational Manual Statements Statement Number and Describe and comment on lack of compliance Title None Table 12: Bank Resources: Staff Inputs ($ '000) Planned Actual Stage of project cycle Weeks US$ Weeks US$ Preparation to appraisal NA NA NA NA Appraisal NA NA 33.7 87.6 Negotiations through Board NA NA 11.3 29.6 approval Supervision 43 108.6 72.9 189.6 Completion 17 44 2.3 9.5 NA = data not available. Table 13: Bank Resources: Missions Performance Rating 2 No. of Days in IIm * DeI nt Types of Stage of project cycle Month/Year Persons Field Specialization ' mstatus Dbeectpies Problems Through appraisal 3/92 10 12 E, 0 6/92 7 14 E, O Appraisal through Board - - - - Approval Supervision 1/93 2 9 0 1 1 6/93 5 11 E, O 2 2 M 10/93 2 E, 0 2 2 M 4/94 1 5 E, 0 2 2 M 6/94 1 E, 0 2 2 M 6/95 2 E, 0 Completion 2/96 3 10 E,0 1 1 1 - Specialization 2 - Performance Rating 3 - Types of Problems E = Economist 1 = Minor problems F = Financial 0 = Other* 2 = Moderate Problems T = Technical 3 = Major Problems M = Managerial * Other includes country officer, operations analyst, sector specialist, procurement and disbursement specialists. Many of the specialists visited the country in combination with other missions. ANNEX A LITHUANIA POLICY IMPLEMENTATION UNDER THE REHABILITATION LOAN An economic reform program covering initial steps in four major structural areas--enterprise reform, competition policies, financial sector reform, and the social safety net--was articulated by the Government during the preparation of the project and finalized in the form of a Memorandum on Economic Reform Policies (MERP) signed by the Prime Minister on September 28, 1992. At the request of Bank management, the MERP indicated specific targets and dates by which those targets should be achieved. Disbursements of the Rehabilitation Loan were not corntingent upon achievement of the reform objectives outlined in the MERP; instead the MERP was envisaged as a tool to assist the Government to articulate a comprehensive reform program (and the underlying technical assistance needs which was implemented largely with grant financing by the donor community) and to monitor its implementation. Stabilization actions under the MERP were monitored by the IMF under the SBA, and the structural reforms were initially monitored in conjunction with the supervision of the Rehabilitation Loan. However, over time sectoral policy dialogue and a pipeline of Bank projects and non-lending services was developed with individual ministries/agencies, and supervision of individual targets were folded into the burgeoning assistance program (dovetailing with the expiration of many of the original target dates). Follow-up projects and sector work in the ensuing years which have continued to support these measures include: a Power Rehabilitation Loan (PRL); an Enterprise and Financial Sector Assistance Project (EFSAP); a proposed Social Safety Net Project (SSNP); a proposed Structural Adjustment Loan (SAL); a Private Sector Development (PSD) Study; a Public Expenditure Review (PER) and follow-on donors' meeting, and grants funded through the IDF and CTF programs. The international community as a whole, together with the Bank, has been very active in supporting this reform package. The matrix attached indicates the status of the individual areas of reform during the initial phase of supervision, and again at the time of loan closing. As indicated in the matrix below, seventeen of the areas identified in the MERP received a rating of satisfactory at the time of loan closing; eleven are still under implementation in conjunction with Bank support. Attachment STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/931 Status as of 6/931 Status as of 2/962 Enterprise Reform | Privatization 1. Remove most After Formally not yet relevant: Partial Compliance: Satisfactory: No restrictions on sale and introduction Some restrictions lifted Legislation has been passed restrictions remaining on resale of land. of new although new currency not to accelerate land restitution sales to domestic currency. yet introduced. But plan to and privatization. Litas not individuals. Legislation slow down agricultural introduced as of mission presently under review by restitution and privatization departure. Parliament to allow to complete only by 1997. foreigners to purchase land. 2. Complete privatization End-1992 Partial compliance: Partial Compliance: List Satisfactory: Program program for small Around 80% of enterprises, of enterprises originally complete. Virtually all enterprises. but number of objects envisioned under the small small businesses in private increasing through break-up privatization program has hands. of large enterprises. expanded. Progress continues, although the expanded program not yet complete. 3. Initiate program of End- 1992 Good compliance: New Full Compliance demonstration privatization privatization methods using techniques other than include (i) "best business vouchers/auctions. plan;" (ii) management and employee buyouts; and (iii) public tender (including foreign); acceleration possible and desirable. Status during implementation was assessed during supervision missions 3/93 and 6/93. 2 Status as of loan closing is indicated as satisfactory or ongoing, with areas of Bank assistance to ongoing activities identified where appropriate. 2 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 * State 1. Examine present End- 1992 Full Compliance: System Full Compliance Enterprise organizational structure of Supervisory Boards now Management and improve performance. in place and use of outside directors is being encouraged. 2. Introduce new Regulations Partial Compliance: Partial Compliance: Little Ongoing: Legal framework accounting standards. by end-1992, Accounting Law in place; progress since 3/93; some in place but implementation introduction consistent regulations still TA being targeted to this needs strengthening. by end-1993. missing. area. Country Financial and Auditing Review to be undertaken in FY97. 3. Restrain financial flows Continuously Full Compliance: Full Compliance to ailing enterprises. Government states that there are no flows of budgetary funds to ailing enterprises. 4. Monitor and then Early 1993 Partial, not yet fully Partial Compliance: Little Ongoing: Inter-enterprise restrain domestic and inter- adequate compliance: progress since 3/93; some arrears have been eliminated republic inter-enterprise Monthly statistics on arrears TA being targeted to this for all but public arrears. now available; inter-state area. infrastructure enterprises, arrears are being contained; primarily energy. but domestic arrears are Performance improvements growing. in bill collection by the electricity company supported under the PRL. 5. Initiate studies of Early 1993 Satisfactory compliance: Full Compliance restructuring needs of Government has initiated Additional enterprise level selected subsectors and some studies and resources studies being undertaken large enterprises. are in agreed PHARE with technical assistance program for further work. developed under the auspices of the EFSAP. 3 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 Competition Policies Break-up of 1. Break-up large Continuous Slow, partial compliance: Partial Compliance: Satisfactory: Enterprises existing anti- enterprises to improve Focus is essentially only on Limited progress ongoing. for privatization increased competitive competition and to prepare break-up and sale of assets from 3800 to 6500, largely structures for privatization. of enterprises that are to be due to breaking up. privatized or non-viable; vertical integration in food processing industry in the course of privatization goes in the wrong direction. 2. Develop institutional After passage Partial Compliance: Price Partial Compliance: The Ongoing: Agency has capacity to implement of law and Competition Committee Competition Agency needs received significant Competition Law. and Council defined in law strengthening (in mandate technical assistance from the is in operation, but and institutional capacity). international community and resources remain small and Some TA has been is becoming increasingly exact mandate and de facto received. active. powers are somewhat vague. • Promote new Continue to (a) break up Continuous Satisfactory compliance: Full Compliance private sector large enterprises; (b) Commitment to private activities contract out public sector appears on the whole services; (c) disseminate unwavering, and gradual information. Drogress is evident. * Improve Take action on FIAS April 1993 Formaly not yet relevant, Partial Compliance: Ongoing: Revised FT law environment for recommendations. but overall satisfactory Progress ongoing. and Investment Agency in foreign compliance: Privatization place. Foreign investment is investment through sales to foreign picking up. PSD Study investors now begin to be provided further assistance actively pursued; progress to Govt. IFC has one in other areas continues. completed and two pending investments. 4 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 Improve legal 1. Adopt bankruptcy Mid-1993 Partial Compliance: Partial Compliance: Some Ongoing: Legal framework and regulations and develop Bankruptcy regulations have bankruptcies have occurred complete but bankruptcy institutional juridical infrastructure. been drafted, but further and TA has been recruited procedures not complete; framework for adjustments needed; for legal assistance to some bankruptcies initiated. commercial capacity to implement improve regulations. EFSAP supporting reforms. activities bankruptcy proceedings remains inadequate, even though Government is acting directly to liquidate some non-viable enterprises. Partial Compliance: Satisfactory: Although 2. Modify all major laws Continuous Situation not clear: Progress ongoing. some gaps remain in the governing transactions Actions ongoing, but area of cadastre and (property transfers and remain unfocused. collateral, commercial-legal sales, credit, collateral, framework largely in place. etc.). Comprehensive assessment under PSD study. Flnancial Sector Reform . Banking Law 1. Put in place report October 1992 Generaly Satisfactory Full Compliance Ongoing: Supervision not and Prudential system for off-site banking Compliance: Put in place carried out adequately (for Regulation and supervision and monitoring reporting system and began instance, off-site inspection Supervision bank credit. receiving reports, though not compliant with not comprehensively; International Accounting inadequate enforcement. Standards) and has contributed to present problems in the banking sector. Central Bank needs stronger leadership and greater independence. 5 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 Financial Sector 2. Put in place First half of Just beginning, partial Partial Compliance: Pilot Ongoing: Supported by Reform (Cont'd..) institutional arrangements 1993 compliance: Development on-site inspection'has been training undertaken by and training programs for of plans and responsibilities conducted; must be made USAID, ongoing dialogue on-site banking just about to start. more systematic. with authorities, and by IMF supervision. EFF and proposed Bank SAL. Onsite inspections have been undertaken in several smaller banks, but remains inadequate. Accounting, 1. Introduce regulations January 1993 Uneven, partially delayed Insufficient Compliance: Satisfactory: Payment Auditing, and for new accounting, compliance: New plan of No regulations in place, systems are no longer a Payments auditing, and payment accounts for BoL adopted; only voluntary hindrance; regulations System systems, and implement payment system delays implementation. TA being (albeit in need of new plan of accounts for addressed through couriers, targeted. improvements) and BoL Bank of Lithuania. otherwise judged as less plan of accounts are in critical; delays in adopting place. adequate accounting and auditing standards. 2. Put in place First half of Deadline not passed, but institutional arrangements 1993 delayed; compliance likely: Partial Compliance: Ongoing: Twinning and enroll staff in training Depends on prior/parallel Progress is being made and arrangement for several programs for implementing regulatory and banking TA will be targeted to these commercial banks supported new accounting, auditing supervision measures. areas. by EFSAP and others. and payment systems. * Banking Sector Develop coherent plan and Beginning of Insufricient/delayed Partial Compliance: Some Ongoing: Recent banking Restructuring timetable for financial 1993 compliance: No person or privatization ongoing in state- crisis has made restructuring of the body has been assigned owned banks and TA received restructuring needs banking system, in responsibility, and so far, assessing the overall imminent. Policy and particular the three large no systematic analysis has restructuring. Govemment eventual financial support state banks. taken place, neither have needs to establish an inter- provided by ongoing plans been developed. min isteatas prce dialogue with authorities ________________ ______________________ ______________________________________te __stucturng _prcess_ and proposed SAL. 6 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 Social Safety Net Establish priorities and January 1993 Partial Compliance: Partial Compliance: Work Ongoing: Supported by * Overall Design develop plan for medium- Analysis has started and is ongoing. letter of development policy and Financing term design and financing proposals are developed, in conjunction with Social of Social Safety of the social safety net but so far insufficient Safety Net Project and Net system under alternative coordination with Ministry proposed SAL. scenarios. of Finance. * Unemployment 1. Prepare proposal for December Partial compliance: Full Compliance: Benefits and simplified (possibly flat- 1992 Modified system has lower Simplified benefits system, Employment rate) benefit system with expenditures, but is still too based on minimum wage, Programs modified eligibility complex, not yet flat-rate has been implemented. criteria. (proposal is being developed), and eligibility is too wide. Early 1993 Satisfactory compliance: Full Compliance: Funds 2. Secure retraining & Retraining funds now have been earmarked for other active labor market earmarked, but still retraining. policies from crowding out financed from payroll taxes through a specified level of like unemployment benefits. financing. * Pension Prepare medium-term Early 1993 Partial compliance: New Partial Compliance: Ongoing: New law adopted Benefits pension reform plan based pension reform plans exist Revised draft pension law to in 1994, effective January on full costing of options and include e.g. raising be submitted to Parliament; 1995. Retirement age has under alternative economic retirement age, etc. TA has been received. been raised. and demographic Implementation to be scenarios. supported by Social Safety Net Project and proposed SAL. 7 STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3/93 Status as of 6/93 Status as of 2/96 Economic Management * Statistical 1. Prepare and propose to As soon as InsuMcient/delayed Insufficient Compliance. Satisfactory: Legal System adopt statistic law. possible compliance: no statistics framework complete. law has been prepared or proposed yet. 2. Strengthen statistics Continuous Partial, generally Full Compliance: Significant improvements staffing and training satisfactory compliance: Improvements are ongoing. already, further support to throughout Government improvements are ongoing; be provided by IDF grant to and introduced modern more training and Department of Statistics. data collection and analysis introduction of sampling methods. methods needed; balance of payments data are a particular weak spot. . External Debt 1. Centralization of November Full compliance. Full Compliance. Recording and official grant and loan 1992 Management capital inflows through Ministry of Finance. 2. Put in place system for November Delayed compliance: Partial Compliance: Satisfactory: Debt monitoring, recording and 1992 reporting began with TA Capacity of debt reporting management system under reporting debt flows and mission in late March 1993; unit must be strengthened. implementation, supported stocks of Government and some components, such as by Consultant Trust Fund, public enterprises. clear arrangements for state managed by Bank. guarantees, still missing. STATUS OF THE POLICY ACTIONS UNDER THE MEMORANDUM OF ECONOMIC REFORM POLICIES Reform Area Objective Target Date Status as of 3193 Status as of 6193 Status as of 2/96 Public 1. Establish mechanism Early 1993 Partial and insufficient Partial Compliance: First Satisfactory: Supported by Investment for setting investment compliance: most projects assessment has been done; work in the PER and Program priorities, choosing project still chosen and evaluated TA has been recruited. subsequent Bank sponsored evaluation criteria, and ad hoc; insufficient central donors' conference. appraising projects. integrating function and Ministry of Finance involvement; instead too much central involvement in project proposal and design. 2. Prepare first rolling 3- Mid-1993 Not yet relevant, but Partial Compliance: PIP Satisfactory: First two year public investment probably delayed work has begun; TA has PIPs have been delivered. program. compliance: preparations been received. have not yet begun. LITHUANIA REHABILITATION LOAN On-Lending Arrangements to Purchasing Agencies Purchasing Agency Date of US$ Amount First Duration End User Agreement Interest Rate Repayment ll Sub-loan Agreements Farmacija 614/95 6,000,000 World Bank rate 15/2/97 11.5 years Pharmacies/Hospitals Veterinary 30/12/93 1,370,742 World Bank rate 15/2/97 13.5 years Farms Agrochemija 26/7/93 2,337,803 World Bank rate 15/2/97 15 years Farmers/Agrobusinesses TENA/LSPS 31/8/93 1,472,762 World Bank rate 15/2/97 13.5 years TENA/LSPS Lietuvos Dujos/Gas 15/9/93 24,000,000 World Bank rate 15/2/97 15.5 years LSPS/Houses/lndustry Lietuvos Kuras/Lubricants 20/7/93 4,274,023 World Bank rate 15/2/97 13 years. Industry/Railroads SK Impex 11/5/94 1,844,428 World Bank Rate + .Spct 15/2/97 5 years Private Dentists Lietuvos Kuras/Diesel 4/3/93 15,900,000 8.5% Farmers/Agrobusinesses Passed on Free of Charge Autotransportas None 996,337 Municipal bus comps. Ministry of Health None 1,058,240 Hospitals Ministry of Finance None 48,630 Ministry of Finance I/ All initial repayments were scheduled to become due one month before the first principal repayment due by MoF to the World Bank. m:ithusnAdh itmbab.sjs ANNEX C IMPLEMENTATION COMPLETION REPORT THE WORLD BANK REHABILITATION LOAN NO. 3524-LT REPUBLIC OF LITHUANIA PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE Page 1 IMPLEMENTATION COMPImON REPORT IBRD REHLBILJATION LOAN NO 3524 LT REPUBLIC OF LITHUANIA "Project Review from the Borrower's Perspective" PROJECT OBJECTIVES Loan Amount: USD 60 million Date of Signing: October 23, 1992 Date of Effectiveness: November 5, 1992 Original Closing Date: June 30,1994 The objectives of the loan were: a) to assist the Goverrnent in the design and imnplementation of its adjustennt and structural reform program, and b) to help maintain or increase capacity utilization in key sectors such as agriculture, health and energy during the next 6 to 12 months. lithuania urgently required basic imports to prevent further deterioration of the existin capital stock, to maintain essential services such as power, heating, transport and health services and to generate a supply response to thc ncw set of incentives in key productive sectors like agriculture. SUMMARY BACKGROUND If not formally, the PIU office was in practice established in the Ministry of Finance (MOF) in early August 1992 with the arrival of the Procuremcnt Adviser and the necessary office equipment provided through grant funding from the Swedish Government. Hifab International (Hifab) had been selected to provide procurement ser- vices. The technical services contract between MOF and Hifab had bcen s igned in early July 1992. The first Deputy Coordinator assigned by the MOP to work in the PIU left in September 1992 for further training abroad and was subsequently recruited by a private bank in Vilnius. Thc second Deputy Coordinator was recruited from another Ministry but left the PIU in February 1993 for work in the private sector. The third Deputy Coordinator was recruited from within the PIU and remained until March 1994 whcn she was recruited for work in the private sector. The fourth Depuy Coordinator was also recruited from within the PIU andchas since remained with the Project. One PIU staff mcmber was recruited in early 1993 and assigned responsibility for disbursement matters. The Disbursement Officer has remained with the Project until now. Despitc the initial replacements for the Deputy Coordinator poaition, a good measure of continuity in the staffing of the PIU has been maintained. Hifab's procurement support was initially established on a half-time basis. The first Procurement Adviser remained with the Project until end February 1994 when he left for Page 2 another asinment elsewhere. The successor remained with the Projoct until end August 1994 when lt was aereed that continued support would bc provided on a "from time to time" basis only. Hifab's procurement support to the PIU by means of work in Vilnius was essentially discontinued in carly 1995 but has continued by means of support over fax and phone on an "ad hoc" basis until now. REL4TIONS BETWEEN THE PIU AND THE PURChASERS The major functions of the PIU have been (i) the overall responsibility for communications with the World Bank, (ii) the management of loan funds and (iii) the organization of procurcment and disbursement for the various bid packages identified for financing under the loan. These tasks involved regular contacts with concerned staff from the purchaser organizations for purposcs of planning the bidding process, preparing technical specifications, drafting bid documents for the Bank's prior review, distributing the bid documents, organizing the public opening of bids, carrying out evaluation and comparison of bids, the preparation and presentation of evaluation reports for the Bank, the notification of contract awards, the finalization of contracts, the opcning of documen- tary credits, the preparation of disburscment applications to the Bank as well as the issue of paymcnt instructions to thc (commercial) bank holding the Special account. Naturally, these tasks were carried out in close collaboration with tie various purchasers being the beneficiaries of the loan. Obviously, the responsibility for the preparation of technical specifications as well as the technical examinations of the bids remained with the purchasers. Nevertheless, it appeared in mid 1993 that the division of work between the PIU and the purchasers had to bc revised since the PIUl had become overburdened; it had in fact become a centcr for intense activity but also a bottleneck. In the beginning, most purchasers didn't have telefax communications. Nor did they have much in the way of language capabilities suitable for communicating with suppliers from western parts of Europe. The PIU most often had to assume responsibility for conmmunications between the purchasers and the suppliers. These communications covered a range of issues, some of which could only be addressed by the purchascrs and others which concerned the purchasers and the PIU. In the lattcr category fell, of course, questions concerning payments, I/Cs etc. It should be kept in mind that the range of activities of the MOF involving the PIU staff as well as other staff working in the PItJ office had expanded considerably during the fint year of Project implementationi. Given the fact that the office equipment (incl. telefax and telephones) available to the PIU at this time was very limited, the same very soon proved to be inadequate for the increasing levol of activitice. It became necemary_to encourage thc purchaser to communicate directly with their suppliers and vice versa. Tie purchasers werc requested to take a more active rolc in condusion of contracts, the opening of docu- mentary credits etc. so that they would be better informed and, accordingly, in a better position to respond to supplier inquiries immediately and directly. Informal and improvised on-the-job training was provided. A more formal training exercise was conducted at the end of 1993. Improvements were noticeable as we all gradually learnt from experience. REL4ATIONS BTWEN THE PWAND THE WORLD BANK In general, the relations betwecn the PIU and the Bank have been very good. We have found the Bank staff being very supportive and understanding of our working situation and of our problems. The replacement of the first Task Manager in June 1993 meant no loss of continuity since the successor was an original mcmber of the team and very well informed of all relevant issues. Page 3 There may have been a few instances of friction between individual members on both sides but those have been due to differences caused by pressure for time and the fact that, for PIU staff, Project duties normally compete with other regular duties of the MOF. On a personal as well as a professional basis, we have enjoyed working with our Bank colleagues. PROCUREUENT ISSUES The predominant procurement procedurc has been, in compliance with the loan agreement, international competitive bidding (ICB). This is a formalized, rather cumbersome and time-consuming procedurc required by the Bank, partly in the interest of achieving a competitive suppl- situation, partly due to its interest in assuring ac- countability and transparcncy in the procurement process. Six months is not uncommon from the date of advertisemcnt of the bid opportunity to the date of arrival of the first shipments of, say, pharmaceuticals. Complete delivery of the urgently needed UNICEF basic drugs took well over a ycar. It was possible to obtain the first deliveries of diesel fuel within three months duc to (a) the Banks prompt review of bid documents and evaluation reports and its aement to shoten the period of advertisement and (b) the fact that certain suppliers had quantities available for immediate delivcry and in fact did deliver before having obtained documentary credits. Limited International Bidding (ICB) and International Shopping (ISH) procedures were followed latcr in the Project when the amounts involved so permitted, given that the identities of a sufficient number of capable suppliers werc known. Obviously, knowledge of major supplicrs and market conditions was very limited in thc beginning of the Project. Even if ICB had nt. I becn required under the provisions of the loan agreement, advertisement would have been necessary anyway. Later procurement actions for second-hand buses and medical and dental equipment for use by private practitioners became, in the first instance, a total failure and for the others ess successful. In the case of dental equipment, after two years, the work by the agent, SK Impex, was accomplished but the company still has some goods in stock. In the case of medical eqwipment, thc procurement was actually taken over the Ministry of Health and the equipment was allocated to state hospitals. These actions reflcct an incompatibility between the Banks traditional approach to public procurement, guided as it is by mcasurable criteria, and the more subjective assessments guiding the actions by private or semi-private investors. Very considerable efforts on the part of the PIU and the purchasers concerned went imto the preparations of technical specifications and bidding procedures; cfforts which in hindsight must be deemed clearly unjustifiablc in view of the amounts involved at the time required. DISBURSEMENT ISSUES The initial work on opening of documentary credits became a learning experience for the banks involved as wcll as for the PIU. None of the Lithuanian banks approached had much in the way of prior experience in this regard. The quality of scrvice demonstrated by the first bank selected for this task, the State Commercial Bank, turned out to be unacceptable and the PIU decided to move its business to another bank, the Vilniaus Bankas. The lenpth of time required for the issue of the Bank's Special Conmitmnent Procedures was initially seriously underestimated. Experience soon showed that it took four to five weeks from the dispatch (by couricr service) of the application to the arrival at the beneficiary's bank of the Bank's Special Commitmcnt. Having gained this experience, we were subsequently in a better position to give more prccise advicc on this point to the Page 4 sup,pliers and their bank, thus being able to remove a source of considerable concem and activity from the agendas of purchasers as well as suppliers. TRAINING The Project has, in several respects, been an excellent vehicle for training. The Bank provided training in procurement proccdures in Riga, Latvia, in late 1992 in which two PIU staff participated and in Minsk Byelorussia, in May, 1993 in which another PIU staff member participated. An opportunity for training in disbursement procedures was offered in Warsaw, Poland, for one PIU staff member in mid 1993. The PIU began early on to provide "on-the-job-training' to purchaser staff, explaining the stcps and concepts involved in ICB procuremcnt. A two day seminar was arranged by the PIU in collaboration with Farmari,ja in Januay 1993 for continued training in contract terrns, delivery and payment conditionrs, Incoterms concepts, basic conmercial bankdng terms and procedures to be followed in connection with thc opening of documentary credits. In October, 1995 the PIU organiized the training seminar in the Ministry of Finance for prospective beneficiaries of other on-going World Bank loans like the Ministry of Social Security, the Ministry of Urbanistics, etc. LESSONS LEARNED Collaboration with the World Bank was fruitfull and valuable both for the PTU staff and the purchascrs. For sevcral purchascs, the procedures and approaches adopted in the ICB bidding process provided an opportunity to organize their business activities in the similar nianner. One conclusion is fairly obvious at this stage: if the loan had been used exclusively in accordance with its original objectives; for procurement of commoditics (diesel fuel and natural gas) and other standard products likc pharmaccuticals and spare parts, the Project would have been accomplishecd within its original time framc (mid 1994). Due to the requests for financing from thc beneficiaries concened, supported by thc State Loan Commission (a body crcated in late 1993), the Bank departed from its traditional approach. It agreed to finance the procurement of used buses and medical and dental equipment for use in the privatc sector. These procurement actions proved to be quite complicated and time-consuming. As we know now, implementation was extended considerably. Besides perhaps unnecessarily helping to prolong the implementation of the Project, the State Loan Commission did not havc a noticeable effect on the administration of loan funds. BAndr,l Bilkis U Deputy Coordinator IBRD 26177 To S.Id.,J ToRiga L A T V I A NicakTo Rigo KILOMETERS -k Mazeiki N 0 10 20 .0 .0 00 lipGpoef 18 --_ - /} Akmene J oniskis Aka0\ 20 30n1 Boltic i - 4 l / \1 Birzoi,J MILES 30 Sea ,"PoPlo ; Pondelys I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i To _Drng;g,a>LWpilsrFil KLAIPEDAk ; .R/ gts L6§ilule 0 niai \ //J X \ fJ ,eg BELARUS 4- 4480ilu. 4e N ras N Taur_a4ii}ss\40 ~> KuriuL- Jurborkos \ /XUmgt^J Lagoon { Jon \ v^, F E D E R A T I O N Elak- J renea°> n-onoy _________________________________ To K- d- Prien_i_ _ / MO ampol ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~*NATIONAL CAPITAL | URBAN AREAS ELEVATIONS IN METERS: =SELECTEDt- CItIES S>WEDEN~ Sea FED 300 SWEDEN ~ ~ ~ ~ ~ - TRUNK ROADS ~' LATVIA' 50 J To S-a.oIki "vrnimAIN ROADS L 0 LIThUANIA~~~~~~~~~~~~~~~~~~~~~~~~~~~~RALOD ->'~ HUo' 1 < e POL N d -* INTERNATIONAL BOUNDARIES POLANDP LAN | POLAND BLARUS | /BE LA RU S 0) _____________________________________________________________________~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~GUS Al9 IMAGING Eieport No: 15650 Type: ICR