• International Bank for Reconstruction and Development 87209 International Development Association International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-189 June4, 1997 Board Meeting of June 5,1997 Statement by Jean-Daniel Gerber Russia: CAS When we discussed the last CAS for Russia, this chair was rather critical about a large Bank involvement in Russia as long as no tangible signs to deal head-on with the challenges of transition could be detected. CAS We now applaud the clear determination of the new economic leaders in the Russian Government to accelerate reforms and support the Bank's intention to substantially increase its assistance. This is all the more justified as the Bank's portfolio performance in Russia improved substantially over the last months and a target of 80% satisfactory projects has been set. The CAS presented to the Board fits well the actual delicate situation in which the Russian economy finds itself. The lending matrix in Annex 1 indeed gives a complete picture of the World Bank country program which is geared to support structural reforms and help untie three Gordian knots: First, pension and wage arrears leading to disgruntled, antireform-minded citizens; second, unpaid utility bills and poor social infrastructure, leading to small cost recovery and further deterioration of social services; and third, complex and non-transparent tax legislation leading to deficient tax collection. Undoubtedly, the strong lending program proposed by Management will be instrumental in helping to master these difficulties. Adjustment Lending Management is proposing that 2/3 of the $ 4 - 6 billion lending program in the coming two years should be in the form of adjustment lending catapulting the Bank into the lead position of Russia's external lenders. As the CAS document points out, such an important adjustment program involves substantial risks. Taking into consideration the numerous uncertainties of political and economic nature and the meager track record, such a program may even been characterized as being too bold were it not for the Bank's duty to take calculated risks and the trust we have in the new economic team at the helm of the Government. 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. ··- -- ---- - - - --·-- ---·-r-- 2 But, for sure, the program does not allow for leniency. We would urge Management not to be soft on setting conditionality and to react rapidly and with determination if conditions are not met. For instance, a key issue is the ability of the Russian Government to quickly ensure sustainable fiscal balances which in turn would be most relevant for the successful implementation of SAL I. Should the Government not be able to fulfill this objective, implementation of the other adjustment loan would also be stalled, as well as several investment operations as shown in Figure 8 (p.l9) starting a downward spiral effect, thus jeopardizing the whole CAS. We noted that most of the conditions stated for the proposed SAL are governmental approval of action plans, presidential decrees and submissions of laws to the Duma. All these valuable intentions of the present Government have not yet passed the test of real implementation. We would also like to question the assertion that single tranche operations are probably the best approach to supporting a broad program of structural reforms (par. 98, SAL). A series of single tranche operations instead of one multiple tranche operation may lead to a Bank-sponsored gradualist approach to reforms where decision on the most difficult reforms are always postponed until tomorrow. Needless to say, such an approach would be detrimental. We welcome the preparation of a social sector adjustment loan (SECAL) which should help to mitigate the hardship of the traumatized population suddenly falling into poverty. The Board will have an opportunity to discuss this operation in FY98. We would however already at this stage urge Management to address with the Russian authorities the institutional issues crucial for a successful SECAL. We are particularly concerned about the weak institutional capacity of Russian municipalities to deal with social issues. The rapid decentralization of responsibilities and the privatization and restructuring process of enterprises abruptly transferred the social assets (housing, schools, hospitals) to unprepared municipalities which find themselves lacking both financial resources and know-how. Increasing the institutional capacities is a prerequisite for preventing the SECAL from perversely benefiting the rich instead of the poor. We also read with great interest the Progress Report on the Coal Sector Adjustment Loan and continue to strongly support the Bank's involvement in this difficult sector. Only through profound reforms will it be possible to successfully adjust the coal industry to the cold wind of competition. It is therefore with concern that we read that not all conditions waived at the time of second tranche release have been met and that even for some met conditions actions are not fully in compliance with agreed targets. We welcome the Russian Government's intention -- expressed during the EDs recent trip -- to take serious actions now through a detailed, time- bound action plan in order to comply with the agreed program and support Management's intention not to start with the preparation of the Bank's second coal adjustment loan as long as the conditions of the first loan are not fulfilled. Selectivity versus Comprehensiveness The CAS suggests that the Bank increase its financial assistance and non-lending services in many sectors and that in addition new sectors of activity be explored. This chair clearly gives The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). 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 the consent of the Executive Director concerned. 3 preference to a focused program instead of the Bank trying to be everywhere, thus losing sight of its priorities and comparative advantages. We would advocate that the Bank concentrate on sectors which are assuredly in the sphere of competence of the Government and where it shows strong ownership like in the housing, energy, and health care sectors. For instance, we doubt the time has come for a financial engagement in agriculture or railways. While we recognize the crucial importance of these sectors, the present stage of discussion within a discordant bureaucracy and between the Central Government, the Duma and Oblasts has not reached a point which would show plainly what kind of reforms Russia wants to pursue. We also think that the IMF is better placed than the Bank to advise the Russian Government on an adequate tax reform. Other Issues The gender issue is practically not a subject of discussion in the public at large in Russia or in the Government, despite the fact that women suffer most from the transition process. Their unemployment rate is high, the social services which they were the first to benefit from, the health of children and the educational opportunities are deteriorating. The Government seems aware of this situation, but remedial gender-specific action is not a priority. We would urge Staff to draw the attention of the Government to the changing role of women in society and show a proactive attitude when defining project content and beneficiaries. We have not much to add to IFC's activities in Russia. It is very present in this country and has an excellent reputation. We are told that IFC is dynamic, less bureaucratic and more rapid than other IFI. We commend IFC-Management and would strongly urge to replicate the IFC experience in the other countries in transition. What hinders IFC from replicating in other countries in transition what seems possible in Russia? Finally a point on the resident WB mission. The first experience of relocating competencies to the resident mission seems to be very positive. We also believe that procurement responsibilities should be transferred to resident missions whenever possible and when the necessary control mechanisms are satisfactory. In transferring procurement responsibilities to the resident mission the lengthy process of adjudication could be shortened and disbursement increased. The electronic version of the document is provided for convenience. (The official record is the version printed by the Corporate Secretariat). 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 the consent of the Executive Director concerned. - ---------~ ~ - ~ T--