Document of The World Bank Report No: 55213-RU RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE CAPITAL MARKET DEVELOPMENT PROJECT LOAN (No. 4029-RU) 05/30/1996 TO THE RUSSIAN FEDERATION JUNE 28, 2010 RUSSIAN FEDERATION -- CAPITAL MARKET DEVELOPMENT PROJECT P042622 (LOAN 4029) Restructuring Memo 1. The closing date for the Russian Federation, Capital Market Development Project, (Loan No 4029), P042622, will be extended from June 30, 2010 until November 1, 2010. 2. The Project implementation is satisfactory, and the Project objectives continue to be achievable. The Project has provided key backing to laying the foundations of Russia's ambitious reform agenda (which includes as a key component the development of Moscow into an international financial center) by providing critical support to the institutional, legal and regulatory foundation underpinning the Russian capital markets throughout all of its stages of development - from infancy to high performing emerging market status. The Project has helped strengthen the regulatory framework, the market infrastructure and the supervisory agency, Federal Financial Markets Service (FFMS), and has been an important vehicle for the Ministry of Finance (MoF) in their broader financial sector policy work. Further, the Project has been instrumental in laying the foundation for the establishment of the planned Financial Agency for management of the country's financial assets and national debt ("Russian Financial Agency"). During this process, the MoF and the FFMS have ensured the quality of implementation toward the achievement of the project objectives. 3. While all the other project activities will be completed by June 30, the extension is necessary mainly to finalize two ongoing core system assignments for the successful completion of the market infrastructure and capacity building of the FFMS under the Project. These two assignments include: (i) the full regional roll-out of an electronic work-flow system in all 12 territorial offices and 34 territorial units of the Federal Financial Markets Service (FFMS) designed to ensure automated interaction within each of the territorial offices and their territorial units and between the FFMS and its territorial offices, and to replace manual procedures under Part A (Regulatory Infrastructure); and (ii) implementation of the software component for the complex financial market monitoring system adapted to the Russian regulatory and market environment and the needs of the FFMS under Part B (Market Architecture); as well as (iii) a small support contract for a Senior IT Advisor supervising the implementation/installation of the above systems. In addition, the extension is necessary for the completion of (iv) two small ongoing contracts for the "Russian Financial Agency" under Part C (Debt Tracking System) and (v) the necessary Loan procedural support through the Foundation for Enterprise Restructuring and Financial Institutions Development (FER)1 under Part D (Project Administration). 4. The two core assignments - the nationwide roll-out of the automated workflow system and the automated market monitoring system (together with (iii)) - represent core parts of the capital market regulatory infrastructure and capacity that is essential for the FFMS to fulfill its present duties and to build upon to support the future growth of the 1 Operations management, administration, payments, closure functions, etc. presently provided by FER. 2 market. The completion of these two assignments is also important vis-a-vis Russia's financial center agenda, as they are at the core of the market infrastructure and FFMS's institutional capacity to supervise and monitor the market. Both assignments have progressed according to implementation plans, but have encountered unanticipated challenges that would require a limited amount of extended time to make the systems fully operative (overall 4 months). This is not uncommon in complex system implementation processes, and ­ in fact ­ FFMS has commendably kept these extensive assignments on schedule, even under very tight time frames. Interrupting these activities at this crucial stage would result in serious delays in the modernization of the FFMS and its capacity to perform its core mandatory functions. Should the proposed extension not be approved, these assignments would need to be re-tendered in accordance with the public procurement law of the Russian Federation (law # FZ-94) which would not allow the continuation of existing contracts as these were not awarded under the premises of the national legislation. A time-consuming new bidding process would need to be launched possibly resulting in a different contractor which could in turn disrupt the successful completion of the installation and would undermine the efforts made under the project and affect negatively the achievement of the Project objectives. 5. Regarding the detailed reasons for the delays experienced under (i), we note that the FFMS headquarter components have been installed and are in operations and that the regional roll-out of the electronic work-flow has progressed on schedule as planned. All territorial systems have been system-tested with standard simulated data, and the required data-migration has been implemented. However, the distinct work-flow procedural differences that exist between regions ­ each territorial office has local specific procedures ­ have had a larger than anticipated impact on both the adaptation of the territorial offices systems and their connection to headquarter's systems. To that extent, post data-migration live operational testing of the systems would need to be extended to fully operationalize the nationwide automated workflow system with the quality level required. The extension needed for completion of the necessary live-data testing is two months beyond the current closing date. Without properly executed live-data operational testing, the FFMS would not be able to rely on the system and would thus need to maintain manual parallel procedures. 6. Regarding the reasons for the delays experienced under (ii), while suitable and easily adaptable market monitoring systems were deemed to be available `off-the-shelf', the launch of the component was delayed. While purchase of the license, adaptation of the monitoring component and knowledge transfer from the provider to FFMS are proceeding on schedule, a crucial factor, that could not have been anticipated in the context of drafting specifications for the assignment, is the precise data-content and format of the data-feeds from the market places. All four stock exchanges signed preliminary agreements to provide the necessary data-feed in the required format, and had already started preparing for provision of the feed. However, the data-feed content and format requirements of the selected system (for which a license was acquired) proved to be more challenging than anticipated to the stock exchanges. They will thus need more time (4-month extension beyond the current closing date) to adapt their feeds to the detailed specifications. 7. As relates to the MoF's request for extension of the two small contracts in support of the development of the new Russian Financial Agency, it should be noted that the sessions of the 2010 St. Petersburg International Economic Forum on Sovereign Wealth 3 Funds (SWFs) and management of sovereign debt brought to bear the significant shifts caused by the global economic crisis on the extent, type and risks of sovereign borrowing and of investments by SWFs. Globally, the new investment profiles of SWFs have shifted dramatically over the past year, as have the global sovereign borrowing patterns. Both these recent developments justify additional prudential consideration of the legal and organizational aspects of the Russian Financial Agency's activities, as well as more detailed analysis of best international practices of SWFs' and debt agencies' functions. To that extent, the MoF is also requesting a 2-month extension of these two contracts beyond the current closing date. 8. This will be CMDP's 6th and final extension. All ongoing activities will be completed in full by the new proposed closing date while the Loan proceeds will have been disbursed almost in full2. A time-bound action plan for deliverables has been prepared to monitor the completion of these last contracts by the new closing date. 9. There are no overdue audits either for the project, or for the implementing entity. The audit for calendar year 2009 is completed; the reports will be submitted to the Bank by the due date of June 30, 2010. Overall, project financial management arrangements continue to be satisfactory to the Bank. 2 The loan has been practically almost fully committed. The value of Bank financing of contract commitments amounts to 96% (or $52.82 million) of the loan ($54.91 million). Of this amount, the value of Bank financing under the ongoing contracts that would be completed during the extended period is 3% of the loan or $1.77 million. Disbursements amount to 93% (or $50.91 million) of the loan and are expected to increase to 96% by the extended closing date. There is an uncommitted amount of $2.09 million because one contract is being cancelled. Because the closing date was to expire, no new activities were planned. The cancellation will be done upon the closing date. 4 5