Document of THE WORLD BANK Report No. 26067 PROJECT PERFORMANCE ASSESSMENT REPORT RUSSIAN FEDERATION COAL SECTOR ADJUSTMENT LOAN (Loan No. 4058) SECOND COAL SECTOR ADJUSTMENT LOAN (Loan No. 4262) June4,2003 Country Evaluation and Regional Relations Operations Evaluation Department Currency Equivalents Currency Unit = Ruble (Rbl) Average Exchange Rates(RublesperUS$) Period Average 1992 = 0.196 1997 = 5.785 1993 = 0.933 1998 = 9.705 1994 = 2.205 1999 = 24.62 1995 = 4.562 2000 = 28.129 1996 = 5.126 Weights and Measures Metric System Government Fiscal Year World Bank Fiscal Year January l-December 31 July l-June 30 Abbreviations and Acronyms CAE CountryAssistanceEvaluation CAS Country Assistance Strategy CDP Community Development Programs ECA EuropeandCentralAsia EA EnvironmentalAssessment ES Evaluation Summary GDP Gross Domestic Product IAC Inter-Agency Commission IAP Implementation Assistance Project ICR Implementation Completion Report NGO Non-governmental Organizations OED Operations Evaluation Department PPAR Project PerformanceAssessmentReport SECAL Sector Adjustment Loan Director General, Operations Evaluation Mr. Gregory K. Ingram Acting Director, Operations Evaluation Department Mr. Nils Fostvedt Senior Manager, Country Evaluation and Regional Relations : Mr. R. Kyle Peters Task Manager Mr. Gianni Zanini PPAR Preparedby Mr. Richard Bemey, Consultant OED Mission: Enhancing development effectiveness through excellence and independence in evaluation. I About this Report The Operations Evaluation Department assesses the programs and activities of the World Bank for two purposes: first, to ensure the integrity of the Bank's self-evaluation process and to verify that the Bank's work is producing the expected results, and second, to help develop improved directions, policies, and procedures through the dissemination of lessons drawn from experience. As part of this work, OED annually assesses about 25 percent of the Bank's lending operations. In selecting operations for assessment, preference is given to those that are innovative, large, or complex; those that are relevant to upcoming studies or country evaluations; those for which Executive Directors or Bank management have requested assessments; and those that are likely to generate important lessons. The projects, topics, and analytical approaches selected for assessment support larger evaluation studies. A Project Performance Assessment Report (PPAR) is based on a review of the implementation Completion Report (a self-evaluation by the responsible Bank department) and fieldwork conducted by OED. To prepare PPARs, OED staff examine project files and other documents, interview operational staff, and in most cases visit the borrowing country for onsite discussions with project staff and beneficiaries. The PPAR thereby seeks to validate and augment the information provided in the ICR, as well as examine issues of special interest to broader OED studies. Each PPAR is subject to a peer review process and OED management approval. Once cleared internally, the PPAR is reviewed by the responsible Bank department and amended as necessary. The completed PPAR is then sent to the borrower for review; the borrowers' comments are attached to the document that is sent to the Bank's Board of Executive Directors. After an assessment report has been sent to the Board, it is disclosed to the public. About the OED Rating System The time-tested evaluation methods used by OED are suited to the broad range of the World Bank's work. The methods offer both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or sectoral approach. OED evaluators all apply the same basic method to arrive at their project ratings. Following is the definition and rating scale used for each evaluation criterion (more information is available on the OED website: http://worldbank,org/oed/eta-mainpage.html). Relevance of Objectives: The extent to which the project's objectives are consistent with the country's current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers, Operational Policies). Possible ratings: High, Substantial, Modest, Negligible. Efficacy: The extent to which the project's objectives were achieved, or expected to be achieved, taking into account their relative importance. Possible ratings: High, Substantial, Modest, Negligible. Efficiency; The extent to which the project achieved, or is expected to achieve, a return higher than the opportunity cost of capital and benefits at least cost compared to alternatives. Possible ratings: High, Substantial, Modest, Negligible. This rating is not generally applied to adjustment operations. Sustainability: The resilience to risk of net benefits flows over time. Possible ratings: Highly Likely, Likely, Unlikely, Highly Unlikely, Not Evaluable. hsfitutional Development Impact: The extent to which a project improves the ability of a country or region to make more efficient, equitable and sustainable use of its human, financial, and natural resources through: (a) better definition, stability, transparency, enforceability, and predictability of institutional arrangements and/or (b) better alignment of the mission and capacity of an organization with its mandate, which derives from these institutional arrangements. Institutional Development Impact includes both intended and unintended effects of a project. Possible ratings: High, Substantial, Modest, Negligible. Outcome: The extent to which the project's major relevant objectives were achieved, or are expected to be achieved, efficiently. Possible ratings: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Bank Performance: The extent to which services provided by the Bank ensured quality at entry and supported implementation through appropriate supervision (including ensuring adequate transition arrangements for regular operation of the project). Possible ratings: Highly Satisfactory, Satisfactory, Unsatisfactory, Highly Unsatisfactory. Borrower Performance: The extent to which the borrower assumed ownership and responsibility to ensure quality of preparation and implementation, and complied with covenants and agreements, towards the achievement of development objectives and sustainability. Possible ratings: Highly Satisfactory, Satisfactory, Unsatisfactory, Highly Unsatisfactory. Contents Preface ............................................................................................................................... i 111 ... Summary ......................................................................................................................... Ratings and Responsibilities ........................................................................................... V 1. Background ................................................................................................................ 1 2. Bank Assistanceto the Coal Sector.......................................................................... 3 The Bank's SectorAssistanceStrategy..................................................................3 The Coal SECALs .................................................................................................. 4 3. Assessmentof Development Effectiveness ..............................................................6 Relevance............................................................................................................... 6 Achievements.........................................................................................................7 ShortcomingsandUnresolvedChallenges .......................................................... 11 ImplementationIssues.......................................................................................... 14 Outcome,Institutional DevelopmentImpact, andSustainability ........................16 4. Attribution of the Results ....................................................................................... 17 5. Agenda for Future Assistance ................................................................................ 20 Coal Restructuringin Russia ............................................................................... 20 GeneralLessons................................................................................................... 20 Tables Table 3.1 The RussianCoal Industry: Workforce, Productionand Productivity, 1993-2001 ......................................................................... 7 Table 3.2 FederalSubsidiesto the RussianCoal Sector,1993-2001 .....................9 Table 3.3 Mine Closures........................................................................................... 9 Table 3.4 Privatization of the RussianCoal Industry ............................................ 10 Boxes Box 3.1 Improving TransparencyandAccountability of the Subsidy ManagementSystem......................................................... ...................... 8 Box 3.2 Explaining the Coal Sector'sSuccessfulPrivatization .....,................... 11 Annexes Annex A: Basic DataSheetfor Coal SECAL I ......................................................23 Annex B: Basic Data Sheetfor Coal SECAL II .....................................................25 Annex C: Key PerformanceIndicators/LogFrame Matrix ....................................27 This report was prepared by Gianni Zanini, Lead Evaluation Officer and TaskManager, OEDCR, drawing largely on the draft PPAR originally prepared by Richard Bemey in 2001. Mr. Zanini was also responsible for the work during 2001-02 on the RussiaCountry AssistanceEvaluation. Agnes SantosandRoziah Baba provided administrative support. Preface This is the ProjectPerformanceAssessmentReport(PPAR) for two policy-based, quick-disbursingBank loansto theRussianFederation:the Coal Sector Adjustment Loan (Coal SECAL 4 $500million; LoanNo. 4058) andthe Second Coal Sector Adjustment Loan (Coal SECAL II; $800; LoanNo. 4262). Coal SECAL I wasapprovedin June 1996,madeeffective in July 1996,and closedin December1997,asscheduled.It was fully disbursedin two tranches. Coal SECAL 11wasapprovedanddeclaredeffective in December1997andwas fully disbursed in seventranches.It closedin December2001after a cumulative extensionof the loan closing dateof two years. A companiontechnical assistanceloan,the Coal Sector Restructuring Implementation Assistance Project (Coal IAP; $25million; Loan No. 4059) was alsoapprovedin June1996,madeeffective in July 1996,andwill closein December2003after a cumulative extensionof its closing dateof threeyears. This PPAR is largelybasedon the preliminary draft PPAR preparedby Richard Bemey, OED consultant,which underpinnedthe assessmentof Bank assistanceto the coal sectorsummarizedin OED's Country AssistanceEvaluation (CAE, 2002). It also takesaccountof the ImplementationCompletion Report(ICR) preparedby the Europe and CentralAsia (ECA) Regional Office, which detailsthe projects' components, implementation,andachievementsandwhich containsthe commentsof the Government, a former governmentofficial responsiblefor coal sectorrestructuring,the Associationof Mining Cities, andRosugleprof(RussianIndependentCoal Employees' Union). Other relevantdocumentationincludesthe ICR review by OED andsubsequentcommentsby the Region,a deskreview by RogerBatstone(OEDST) of the projects' compliancewith the Bank's safeguardpolicy andsubsequentcommentsby theRegion,the President'sand Staff Appraisal Reportsfor thethreeprojects,the legal documents,project files, related economic andsectorwork, various CountryAssistanceStrategy(CAS) documents, discussionswith Bank staff, andvarious internal andexternalinputsreceivedin the context of the CAE. A CAE andCoal PPAR mission led by Gianni Zanini, andincluding among othersRichard Bemey (energyconsultant),LawrenceThompson(social protection consultant),andMarek Dabrowski (generalCAE consultant),visited Russiain February 2001 anddiscussedthe effectivenessof theBank's energyprojects(including thecoal projects)with governmentofficials, representativesof thecivil society,andotherdonors. The CAE backgroundevaluationpapersfor the energysectorby RichardBemey andthe joint CAE backgroundevaluationpaperby Yuri Bobylev, a LeadingResearcherat the Institute for the Economy in Transition, Moscow, who joined many of the mission meetings,andby JacekCukrowski, a SeniorEconomist at the Centerfor Social and Economic Research,Warsaw,providedadditional inputs to this PPAR. Copiesof the draft PPAR weresentto the Borrower for comment, No comments werereceived. . . . 111 Summary 1. Against thebackdropof Russia'seconomy-widetransitionto a marketeconomy, declining demandfor coal, largebudgetarysubsidies,andde facto mine closures,the objectivesof the Coal SectorAdjustlnentLoan (SECAL I; $500million; approvedin June 1996)andtheSecond Coal Sector Adjustment Loan (SECAL IZ; $800 million; approved in December1997)wereto assistRussiain reducingsubsidiesto the coal industry, improving its structureandmanagement,andaddressingthe social issuesassociatedwith coal mine closures. Major concernsincludedthe paymentof pastwages,severance paymentsanddisability benefitsto miners affectedby theclosures;the financingof active labormarket policies to mitigate the unemploymentproblemsin coal communities; and the assuranceof adequatefunding for rehabilitation andmaintenanceof the housingand social assets(e.g.schools,roads,utilities) previously ownedby the coal companies. 2. Goodresultswere achievedduringboth the preparationandimplementation periodsof Coal SECALs I and II. Statesubsidiesto the coal industry declinedfrom more thanonepercentof GDP in 1993to lessthanone-tenthof onepercenttoday. During the sameperiod,(i) the shareof subsidiesthat went to supportrestructuringof the industry, asopposedto meetingthe productioncostsof loss-makingmines,increasedfrom a negligible amountto 100percent;(ii) the coalmonopoly (Rosugol)was dismantledand replacedby a separationof policy, safety,environmental,subsidymanagement,and production responsibilities;(iii) privatization of the sectorwas initiated, with the shareof private companiesin total productionrising from virtually nil in 1993to over 80 percent of GDP in 2002;(iv) productivity in the sector,following theperiod of decline,almost doubled;and (v) systemswere developedfor channelingsubsidiesdirectly to beneficiariesin orderto mitigate thesocial impact of mine closuresandsector restructuring. 3. The Bank hada critical role in the consistentandfar-reachingrestructuringof the Russiancoal industry. But therewerealso someshortcomingsin outcomeandin Bank andBorrower performance,mainly relatedto inadequateattentionunderthis project to the issuesof divestedsocial assets,environmentalmitigation, safetyandhealththatmake up the unfinished reform agenda.Thus, the ESrating of satisfactoryfor outcomeof both projectsis confirmed, andthe performanceof both theBank andthe Borroweris rated satisfactoryratherthanhighly satisfactory. The rating of sustainability aslikely for both projects is also confirmed, andthat for institutional developmentimpact is raisedfrom substantialto high. 4. To assurethe economicviability of the new private coal industry andcompletethe mine closureprogram,it is important that the Governmenttacklethe unfinishedreform agenda,which may requirea longerperiodthanenvisagedof statesupportfor environmentalandsocial mitigation efforts. The Bank shouldcontinueits well designed supportfor reforms in the sector,but with enhancedattentionto the Government's subsidyallocationsandthe honoringof its commitments. 5. Generallessonsfrom theseloansthat areapplicableto similarly complex and politically contentioussectorreform programswith a high social impact include the IV importanceof(i) Governmentcommitment andpolitical will; (ii) effective stakeholder participation; (iii) a strengthenedsafetynet; (iv) adequateattentionto andfunding of the environmentalaspectsof enterpriseclosures;(v) realistic andflexible implementation schedules;and(vi) disbursementstied to concreteprogressin agreedreforms. GregoryK. Ingram Director-General OperationsEvaluation Ratingsand Responsibilities Performance Ratings ECA Region OED ICR EVM/ES PPAR Coal SECAL I Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Development Impact High Substantial High Borrower Performance Highly Satisfactory Highly Satisfactory Satisfactory Bank Performance Highly Satisfactory Highly Satisfactory Satisfactory Coal SECAL II Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Development Impact High Substantial High Borrower Performance Highly Satisfactory Highly Satisfactory Satisfactory Bank Performance Highly Satisfactory Highly Satisfactory Satisfactory Key Project Responsibilities Project Staff Appraisal Completion Coal SECAL I Task Manager David Craig Michael Haney Sector Manager Jonathan Brown Peter Thomson Country Manager Michael Carter Julian F. Schweitzer Coal SECAL II Task Manager Janet Koch Michael Haney Sector Manager David Craig Peter Thomson Country Manager Michael Carter Julian F. Schweitzer 1. Background' 1.1 At the startof the transition,Russiawas theworld's third largestcoal producer behindChina andthe United States.* As of 1994,its 199undergroundmines and68 surfacemines, all affiliated with Rosugol,the state-ownedcoalmonopoly, accountedfor about6 percentof world coal production. As with all primary energysources, governmentcontrolled coal priceswere substantiallybelow their economically appropriatelevels. The industry was subsidizedprimarily throughgovernmentgrants (non-repayable)for new investmentsandmajor maintenance.Coal consumptionbeganto decline in the late 1980s asmore convenientnaturalgasbeganto replaceit. This decline acceleratedasthe reformsof the early 199Os,including theelimination of the very large implicit subsidiesonrail freight, substantiallyincreasedthe price consumershadto pay for coal. However,in 1994,coal still accountedfor some 18percentof total energy supply in Russia. In someregionsit was much more important: in the Far Eastit suppliedmore thanhalf theregion's primary energyneeds. 1.2 The problemsof the sector,asoutlined in the Bank's first RussiaCountry Economic Memorandum in September1992,were similar to thosepreviously facedby Britain, Poland, andGermany. Eachhadbeenoperatedby a singlemonopoly with massivecross-subsidizationbetweenlow- andhigh-costmines. Laborsheddinghadbeen politically difficult andemploymenthadstayedat unrealistically high levels whenthe industry shouldhavebeencontractingin the faceof increasingcostsdueto depletionof themost economically recoverablecoal andof increasingcompetition from oil andgas. The full scaleof subsidiesto the industryhadbeenconcealedby mandatorypurchasesof coal by electricity generatorsandartificially low transportcosts. And attemptsto prevent explicit budgetsubsidiesfrom reachingunsustainablelevelshad simply shiftedthe balancetowardsoperatingsubsidies,leavingthe industry starvedof investmentfunds. 1.3 With declining demandandincreasingcosts,federalbudgetcoal subsidiesbegan to increaserapidly in the early 1990s. In 1993coal priceswere liberalized andallowed to respondto market forces. At the sametime, rail transportsubsidieswere eliminated putting more pressureon uneconomicmines. Coal subsidiescontinuedto increase, reachingjust over 1percentof Russia's GDP in 1993and 1994,with a devastatingimpact on theFederalGovernment'sbudget. Thereafter,the Governmentbeganto reduce subsidypayments,effectively starvingthe sectorfor funds. Driven by the lossof markets,the lossof governmentfunding,andfailure of many usersto paytheir bills, the retrenchmentprocesswas both ad-hocandchaotic. Reinvestmentin repairandrenewal becamesporadic. Many coal enterprisesstoppedproductionand/orwere unableto pay wagesfor months at atime, causingimmensesocial distressandpolitical tension. Coal miners took industrial action,including streetprotestsin regionalcapitalsandin Moscow. Otherworkerswho could no longerafford to work without wages,simply quit. Employment in Rosugol's coal workforce fell from 914,000in 1992to 819,100in 1994. ' For asummary of the overall transition challengesandachievementsin Russia,seeOED's Country AssistanceEvaluation: Gianni Zanini, "Assisting Russia'sTransition: An Unprecedented Challenge," Washington, D.C.: World Bank, 2002. ' Russiaremains the 6" largestproducer today after China, the U.S., India, Australia, and South Africa. 2 1.4 The sectorrestructuringprocessbeganin 1994with the establishmentof mining enterprisesasjoint stockcompanies. In 1995the Governmentissueda sectorpolicy papertitled "Basic Trends for Coal Restructuring,"which outlined a new strategyfor downsizing the industryandtransferringits social assets(housing,heatingandwater supplies,electricity, healthservices,schools,etc.)to municipal governments3 These serviceswereoften providedasan integralpart of the mining company'soperation, althoughmany of them hadbeenneglectedduring the recentperiodof scarcityof funds. In communities wheremines wereclosing, this transferplacedan additional severe burdenon municipal budgetsat a time when their tax basewas shrinking. 1.5 Thirty-sevenmines ceasedproductionin 1994-95 andclosureactivities were underwayat 64 others. By the endof 1996,coal subsidieshadbeenmore thanhalved as apercentof GDP but were still largeat aboutUS$2.0billion, largerin fact than the industry's total wagebill. They were nonethelessinsufficient for many mining companiesto keeptheir wagepaymentscurrent. Nor werethesesubsidiesbeing usedto effectively restructureanddownsizethe sector. Instead,nearlyhalf of the fundswere being allocatedfor "price support,"essentiallypaymentsto mining companiesto cover operatinglossesandnew investment,oftenin mines that hadno prospectof ever becomingfinancially viable. By supportinguneconomicmines, the subsidyprogramwas de factoblocking, ratherthan assisting,the restructuringprocess. But it was doing little to help the mineworkers:wagesin someregionswerestill threeto six monthsin arrears andminers wereinitiating seriouslaborstoppages. 1.6 At thetime of the approvalof Coal SECAL I (June1996),it was estimatedthat if competitive market forceswere allowed to function, a restructured,competitive, profitable industrywould produceaboutone-thirdlessthancurrentproductionwith about half the labor force. This was far lessof a retrenchmentthanhadbeenexperiencedin WesternEurope,whereupwardsof 75percentof the mines hadto be closedas uneconomicin Germanyandover 90 percentin the U.K. But the problemsassociated with mine closing werefar more severein Russia,wherethe restructuringwas to be implementedduring a periodwhen the entireeconomywas contracting,andmany other industrieswere alsoclosing down. 1.7 The challengefacing the Governmentwas to institute a programto close down a largenumberof mines anddownsizeothersover areasonableperiod of time andin a systematicandorderlymanner,so asto minimize the hardshipon displacedminers and their communities. To do so,the governmentneededto shift the useof federalsubsidies from underwriting operatingandinvestmentcostsof uneconomicmines to underwriting activities neededto facilitate the closureof theseuneconomicmines. The challenge facing the Bank was to help the Governmentestablisha systemthat would meetthese goals,particularly the goalsof protectingthedisplacedminers andtheir communities. 3 The policy of transfer of socialresourceswasbeing implemented for all industrial enterprises. 3 2. Bank Assistance to the Coal Sector The Bank's Sector Assistance Strategy 2.1 The Governmenthadpressedthe Bank to supportthe coal sectorfrom almost the beginningof the countrydialogue,andabout$50million from the Bank's first loanto Russiawas allocatedto the coal sector.4 The Bank undertooka detailedstudy of the coal sectorin 1993to determinewhat assistanceshouldbe givento the sector. Its draft report was issuedin November 1993anddiscussedwith the Governmentthe following month. In early 1994this work was augmentedwith a detailedanalysisof the likely impact of restructuringin all of Russia'smain coal basins. The report's findings werewidely distributed anddiscussedwithin theRussianGovernment,andpublishedasa Bank sector report entitledRestructuringthe Coal Industry; Putting PeopleFirst, (Report13187-RU, December1994). The Bank in this reporttook theposition thatthe inevitable employment reduction,with or without mine closures,neededto bemanagedin a socially responsiblemanner,within the contextof an adequatesocial safetynet. It arguedthat the processby which employmentreductionwashandledwould be crucial to the acceptance by mining communities of theoverall restructuringprogram. 2.2 The reportwasusedasthebasisfor a seriesof discussionswith andamongall the impactedgroupsabouthow the restructuringprocesswas to proceed. The Inter-Agency Coal Commission that the Governmentformedin 1994to establisha consistentpolicy towardsthe sectordiscussedwith the Bank the report's analysisandrecommendationsin May 1994andagain,afterinviting 25 Russianagenciesto submit written commentaries, in September1994. In mid-l 995, it issueda consensusdocument("Basic Trendsfor Coal Restructuring"), outlining thebasicelementsof a proposedlong-term strategyto transform the coal industry into a sustainableandcompetitive sector. This long process of stakeholderinvolvement led to arevisedRussiancoal sectorrestructuringpolicy, which was supportedfrom mid-1996 through2001by the two Coal SectorAdjustment Loans (SECALs) for a total of $1,300million, andthrough2002by acompanion technical assistanceloan, the Coal SectorRestructuringImplementationAssistance Project (LAP),for $25 million.5 2.3 The salient featureof this agreedrestructuringpolicy was to shift the focusof the coal subsidyprogram awayfrom financing wagepaymentsandinvestmentsin uneconomicmines, andtowardsthe closingof uneconomicmines andthe costsof a social safetynet programin a clear,transparent,andmonitorablemanner. This safetynet would include paymentof back wages,severanceanddisability claims, andsocial counselingandretraining needsof displacedandretiring miners. It was alsointendedto include investmentsin environmentalremediationandcleanup,repairof social infrastructure,andreplacementof housingunderminedby previousmining activities. 2.4 All affectedgroupsfelt theyhad somethingto gain from cooperatingwith the Bank in an industrythat was clearly going to haveto retrench,oneway or another. For the FederalGovernment,theagreedprogramprovideda socially acceptablepathfor a 4 This was the first Rehabilitation Loan (L3513 approved August 6, 1992). 5 The Bank also extended more recently (in FYOO)a Coal (and Forestry) sectorinvestment guarantee to encourage private lending to financially viable coal companies. 4 rapid decreasein subsidies.For theminers, therestructuringprogrameliminated the uncertaintyof working for a mine that wasunableto pay its wagebill, but continuedto operate,asit providedworkerswith a guaranteethat,if andwhen their mines wereto close,theywould receivethe benefitsof aredundancypaymentplus full backpay (which could oftenbe six or more monthssalary),plus somesupportfor finding alternative employment. For municipal governmentsthat hadbeengiven the responsibility for maintaining the socialassetsof all productiveenterprises,including thoseof the mining companies(housing,schools,hospitals,aswell aswater,electricity andtelephone supply),the programprovided assurancesthatthe FederalGovernmentwould actually make the agreedinfrastructuresupportpayments. Mining companyassetswere particularly burdensomeasthe industryretrenchmentandthe mine closings were eliminating the revenuebasethat hadsupportedthem. 2.5 For theuneconomiccoal companiesthat knew theywould haveto closebecause they weretoo high costto compete,theprogramofferedassurancesthat the Government would provide the fundsneededfor physically closing the mine pits anddischargingtheir responsibilitiesto their employees,in atimely andefficient manner. For the more efficient mines, it provideda framework underwhich they could privatize their productiveassets.And by establishinganavenuefor reducingthe clearly unsustainable total subsidyburdenon theFederalGovernment,it evenallowed themore politically powerful mining areas(e.g.Rostov) to hopethat their own subsidiescould continue. The loserswereRosugol,the centralizedmining monopoly, which would no longerhave authorityover individual mining companies,andtheregional(Oblast) governments, which had alsobenefitedin thepast from the control of the flow of subsidyfunds. Both were bypassedin thedesignandimplementationof therestructuringprogram. The Coal SECALs 2.6 The principal objectivesof SECAL I wereto: a Reducethe impact of the coal sectoron the federalbudgetby supportingthe decrease,andeventualelimination, of subsides; l Promotethe long-termsustainabilityof thecoal sectorthroughestablishmentof a competitive, commercial industry; l Supporta restructuringprogramto reducethe size of the industry to increase efficiency; and l Cushionthe impact of the restructuringon coal miners, their families, andaffected communities. 2.7 The specific objectivesfor Coal SECAL 2 wereto support: 0 Continuedreductionandimproved managementof coal subsidies,aiming at the eventualelimination of coal subsidies; Developmentof a strengthenedandmoretargetedsocial safetynet for affected workers,their families andcommunities; Separationof statemanagementfunctions andcommercial activities in the industry andimprovementof sectormanagement;and Establishmentof a more efficient andsustainableindustry,andpromotion of an acceleratedprivatization program. 5 2.8 The key elementsof the 1996reform programsupportedby the Bank with both loanswere asfollows: Subsidy fundswould be redirectedfrom the supportof operatinglossesand investmentstowardsrestructuring(employmentreduction,including mine closing) andrelatedsocialprograms; A transparentmechanismwould be establishedfor the allocation andmonitoring of all subsidies; New investmentwould rely moreon internal financing anddirect private investment; At least90 loss-makingmines,with a total direct workforce of 83,000people would be closed(increasedto 150in SECAL II); Non-coreactivities would be divested,resulting in a reductionin mining workforce of anadditional 175,000people; Community SupportandEmployment Programsin areaswherecoal-related unemploymentis expectedto behigh would be establishedto help provide transitional assistanceto createnew, unsubsidizedjobs; The industry would be restructuredto eventuallyconsistof independent, competingcoal companiesthat would be self-financingon a long-term basis (a privatization programwas specifically introducedin SECAL II); The Governmentwould transferthe responsibility for allocatingcoal subsides from Rosugol (thestate-ownedcoal sectorholding company)to an Inter-Agency Commission andannounceda monitoring andauditing systemto ensurethat subsidieswould be usedfor the designatedpurposes;and Eachcoal regionwasto submit a restructuringprogramto the Inter-AgencyCoal Commission. 6 3. Assessmentof Development Effectiveness Relevance 3.1 The focusof the first Coal SectorAdjustment Loan (SECAL I) was limited to the establishmentof a socially sustainablepolicy andinstitutional framework for restructuringthe industry. It hada strongpovertyreductionelement. Priority was given to the designof a socialsafetynet programfor miners who would be losing theirjobs. Theseindividuals were guaranteedto receiveall thebenefitsto which theywere legally entitled,including backpay, redundancyallowances,disability payments,counselingand other servicesto help in finding new employment. This was a major improvement over previousconditions,wheremany of themost inefficient mines hadreactedto cash shortagesby simply not paying their workersfor many months,andthenclosing down, leavingtheir miners andtheir communities stranded.The safetynetprogram also emphasizedtheneedto provide funding for the maintenanceof social infrastructure (housing,healthservices,education)that the municipal governmentswerereceiving from the closing mines. The Governmentwasnot at that time readyto undertakea commitment to a privatization program,althoughthis was its long term goal. Thus, the SECAL fosteredthe initial implementationof measuresto commercialize andde- monopolize thecoal industry. 3.2 SECAL II extendedthe objectivesof SECAL I by strengtheningthe implementation of thesafetynet programandaddinga substantialmining company privatization element. The sectorholding companyRosugol,which hadhad substantial authority to allocatesectorsubsidies,was to be disbanded,andthe individual mining companieswereto becometotally independent.The mine closureprogramwas strengthenedby an agreementcovering(i) the minimum numberof mines that would be closed;(ii) the percentageof the aggregatebudgetaryallocationsthat could beusedfor "non-essential"expenditures(directmine subsidiesandsectorinvestmentfunds) anda schedulefor increasingthepercentageof the subsidyfundsthat would beusedfor "priority" activities, including paymentof wagearrearsandredundancyandretirement benefits,costsassociatedwith closing mines, andnecessaryrehabilitation of social infrastructureof closedmines; and(iii) thepercentageof the industrythat would be privatized overthe following two years.6 3.3 The ultimate sectorgoalwas the elimination of all subsidiesandthe privatization of all minesthat hadnot beenclosed. The Governmentalsostrengthenedthe social safetynet programgiving theFederalTreasury,ratherthanthemining companies,the responsibility for distributing social paymentsdirectly to the approvedrecipients. In all theseareas,agreedoutcomesweredesignedto be clearly measurable.By focusingloan conditionalities on aggregateoutcomes,the micro level decisions(e.g.which mines to close,details of mine closureprograms,what investmentsto support,which mines to privatize) were left totally to the Government. 3.4 In termsof the Government'sfinancial objective of reducingandeventually eliminating coal subsidies,its economicobjectiveof redirectingthe existing subsidy 6 Forty-five percent of the industry's output was to come from privatized mines, asmeasuredby 1996 production levels, compared to lessthan 8 percent in 1994. 7 programto make it supportthe restructuringeffort, andits socialjustice objective of providing a safetynet for the displacedmine workers,theCoal SECALs were highly relevantto the needsof the sector. However,boththe restructuringprogramandthe Bank's projectsshortchanged,althoughtheydid not ignore,theneedsfor environmental assessmentsandremedialmeasures.Thus, overall relevanceis ratedassubstantial. Achievements 3.5 The programachievedits primary objectives,asat leastthreequartersof the industryhasbeenrestructuredandmost highly inefficient mines havebeenclosed,while the structureandoperationof the safetynet systemhasbeenimproved in ways thathave assuredpaymentof duebenefitsandhavemitigated social tensionswithin the affected populations. Sincethereis no disagreementamongthe lender,borrower,beneficiaries, externalobservers,andindependentevaluatorsasto the resultsof the sectorrestructuring programdescribedin greatdetail in the ECA Region'scompletion report,this PPAR only summarizesthem. 3.6 The production and employment datain table 3.1 showa profound transformationof theRussiancoal industryover the last decade.A largepartof the initial reduction of the sectorworkforce wasdueto the transferof the social assetsto local municipalities, but significant downsizingof the workforce directly engagedin coal productionalso took place. Output continuedto declinebetween1993and 1998(by about20 percent)andthen startedto recover,while laborproductivity improved significantly afterthe Government'sreform programbeganin 1994to levels higher than any attainedduring the Soviet period. Table 3.1. The Russian Coal Industry: Workforce, Production and Productivity, 1993-2001 Total Industry Workforce of which, coal Productivity (at year end; production workers Coal production (tons/production thousands) (thousands) (mln tons) worker/year) 1993 877.9 373.1 294.2 788.5 1994 819.1 342.6 260.6 760.7 1995 730.5 307.8 250.2 812.9 1996 630.6 274.3 254.9 929.3 1997 519.9 229.5 244.1 1,063.6 1998 416.9 193.3 232.2 1,201.2 1999 364.4 190.1 249.4 1,311.9 2000 340.4 182.1 257.9 1,416.3 2001 328.4 177.5 269.3 1,517.2 3.7 Sector and subsidy management wasradically improved. As a result of reforms in the earlypost-Sovietera,the line ministry that managedthe sectorwas disbandedandRosugolwas createdasthe successoragencywith amonopoly over all fundamentalpolicy, regulatory,andmanagementresponsibilitiesof the sector. In 1993, with the creationof the Inter-AgencyCommission for Socio-EconomicProblemsin the Coal-ProducingRegions(IAC), theGovernmentbeganthe long andcomplex processof separatingthe industry'scommercial functionsfrom governmentalresponsibilities, 8 3.8 Beginning in 1996,federalsubsidiesfor social assetsandjob-creation programs were disburseddirectly to coal regionsinsteadof throughthe coal industry(subsidiesto coal companiesfor all purposesrangingfrom investmentsto mine closurecontinuedto be managedby Rosugol). Most of the enterprisesproducingcoal andproviding servicesto the coal industry wereestablishedasjoint stockcompanies. In late 1997,the Governmentdecidedto liquidateRosugolandtransferredthe responsibility for theday- to-daymanagementof the sectorto the Ministry of Fuel andEnergy(later renamed Ministry of Energy)andfor the managementof statepropertyin the coal sectorto the Ministry of StateProperty. In responseto chargesof large-scalemisappropriationof the fundsdisbursedunderCoal SECAL I, the Governmentundertookanaudit which concludedthat about3 percent(about$60million) of the 1996coal subsidieshadeither beendisbursedto the wrong recipientsor usedfor thewrong purposes. Partly asa result of thesefindings, the Governmentwith the help of theBank introducedandsubsequently continuedto refine new strict controlsover the allocation anduseof statesupportfunds, so that what hadpreviously beenan opaque"subsidy managementsystem" becamea transparent,public systemwith important inter-ministerial checks-and-balances,most significantly throughthe IAC, the Ministry of Finance,andthe latter's FederalTreasury division. Box 3.1: Improving Transparency and Accountability of the Subsidy Management System The key features of the successful efforts to introduce transparency and accountability into the subsidy management system included: l the dissolution of the national coal company, Rosugol; l the transfer of all subsidy management functions to appropriate ministries; l the establishment of earmarked Treasury accounts for all subsidy categories and recipients; l the classification of subsidies into "priority" and "other," with annual agreed targets; l the setting, on a working level, of the absolute priority of social protection subsidies; l the establishment of mechanisms ensuring that individual entitlements go directly to individuals; and l the channeling of federal support for job-creation programs directly to local administrations. Three special audits were essential to identify shortcomings in the system and to provide the Government with the information it needed to continue to improve the system. Two Coal SECAL 2 "social" tranches were directly linked to satisfactory progress in implementing improvements to the subsidy management system. :Source: World Bank. 3.9 As shown in table 3.2,aggregatesubsidies werereducedrapidly. As a percentage of GDP the2001 level of subsidieswasone-fifteenthof the 1993level andone-seventh of the 1996level, when SECAL I was approved. It was also lessthanone-tenthof one percentof currentGDP. Moreover,the composition of subsidieswas changedeveryyear in favor of supportingthe restructuringandmine-closing process. Subsidiesto support loss-makingmines were eliminatedentirely by 2002. 9 Table3.2. FederalSubsidiesto theRussianCoal Sector,1993-2001 Total Subsidies TotalSubsidies % ofwhich Coal Subsidies million Rbs billion USD priority as % of (nominal) (nominal) subsidies (a) GDP 1993 1,794 1.76 1.05 1994 6,237 2.76 1.02 1995 11,453 2.51 0.72 1996 10,400 2.03 0.47 1997 6,469 1.12 29 0.25 1998 5,254 0.61 53 0.20 1999 10,000 0.40 67 0.22 2000 7,970 0.28 75 0.12 2001 6,295 0.22 80 0.07 (a) "Priority subsidies"are defined asthose for: (i) socialprotection (consisting of severance,wage arrears, free coal, and disability, the last of which was transferred to the Social InsuranceFund beginning in 2001, i.e. no longer funded through coal subsidies);(ii) physical aspectsofmine closure; (iii) community development programs Gob-creation etc.); and (iv) safety. This was aconcept introduced by theBank and included in Coal SECAL 2 conditionality. 3.10 At the endof 2001,mine closure works werebeing carriedout at 183loss- making mines that hadceasedproductionin theprecedingeight years. At 158of these mines, a first stageof critical undergroundclosureworks-those associatedwith substantivecIosureandotherurgentpriorities, suchastemporarymeasuresto prevent flooding at closedmines-was completedandall personnelwith the exceptionof the liquidation commissionshadbeenlaid-off andreceivedtheir separationentitlements, including all arrears.To put theseresultsin perspective,asrecentlyasend-1997the Governmentbelievedthat it would needto closesome 136mines. Todaythe estimated total number of mines that will haveto closeis about200. Thesefiguresandthosein table 3.3 describea mine closureprogramof unparalleledmagnitudein world mining history. In this regard,Russiahasachievedwith its mine closureprogramwhat no other country with a mining sectorhasachievedbefore,andhasdoneso in a very condensed time frame. Table 3.3. Heavily Loss-makingMines Having ... and completed substantive ceased production closure works 1993 0 0 1994 23 0 1995 50 0 1996 69 0 1997 101 42 1998 140 80 1999 153 140 2000 170 153 2001 183 158 3.11 The achievementsunderthedemonopolization, commercialization, and privatization component arestriking: startingfrom virtually nil in the early 199Os, 77 percentof the industry's outputwasin private handsby theclosing dateof SECAL II, that is, by end-2001(seetable 3.4) andit is estimatedthat this sharereachedabout 10 82 percentby the endof 2002. At the outsetof coal sectorrestructuring,thedominant viewpoints regardingprivatization wereskepticismby eventheir most ardentRussian proponentsandoutright oppositionon thepart of the influential industrial lobby. As recentlyasin 1996underSECAL I, the goal of reforming the industry'sownership structurewas still limited to completingthe corporatizationof the industry, establishing competitive coal companiescapableof self-financingon a long-termbasis,and transformingthemanagementstructureof coal sectorenterprisesusingthe gradualist approachof trust management(otherwiseknown asmanagementcontracts). Table 3.4. Privatization of the RussianCoal Industry % of year's coal production by private sector" 1993 under10 1994 under10 1995 under10 CoalSECAL 1 1996 under10 1997 under10 CoalSECAL 2 1998 22 1999 28 2000 47 2001 77 * Measured asproduction accounted for by companiesthat are private at year's end. 3.12 While it is still too earlyto draw robustconclusionsaboutthe impact of privatization, the presentownershipstructureof the coal industry indicatesthat competition is certainly higherthanin most othernaturalresourceindustriesin Russia. And the steadyincreasein labor productivity andabsenceof telling signsof enterprise troubleslike wageandotherarrearspoint to a positive impact of privatization on the economicandfinancial performanceof the coal sector. 3.13 The social safety net component of the coalrestructuringprogramcontributedto improved benefitsto, andreducedtensionwithin, the affectedpopulations. The absence sincemid-1998 of anymajor political demonstrations,which miners hadpreviously felt wereneededto receivefair treatment,hasbeena major achievement,consideringthe militant history of the workersin this sector. The overall systemof socialprotection benefitsfor coal workersandtheir families was much improved underthe SECALs, which includedinnovative institutional reformsthat assuredthat wage,severancepay, anddisability benefit paymentswere fully paid andreachedtheir intendedbeneficiaries. 3.14 The highly innovative andeffective monitoring systemof the socialimpact of the entirereform program-introduced during the preparationof Coal SECAL I-was instrumentalto documentandcorrectproblems in the size andtargetingof wageand social protectionpayments. For instance,the monitoring carriedout in 1996hadrevealed the existenceof seriousarrearsin severancepayments,ascompanymanagerspreferredto channeltheir limited resourcesto reducingwagearrearsto remaining activeminers. In response,the definition of social protectionwas broadenedunderSECAL II to include wage arrearsandseverancepaymentsfor redundantor retiring workers. By May 2000, the social impact monitoring provedthat the Governmenthadcomplied fully with the indicatorsagreedunderSECAL II for the releaseof the "social" tranche,asover 11 90 percentof redundantminers andentitled recipientsreportedtimely paymentof wage arrearsandseveranceanddisability benefits. 3.15 Finally, the loans' componentsupportingCommunity DevelopmentPrograms (CDP) helpedthe provision of pre-redundancyconsultingservicesto, andoccupational re-trainingof, laid-off workers; small businesssupport(funding for businesscenters, businessincubators,etc.);temporarypublic works; andjob-creationoutsidethe coal sector(19,115new,permanentjobs were createdunderthis component,at a costperjob that comparesfavorablywith similar programsin Russia). In a few cases,the CDP funds were alsousedto meet a smallpart of the demandfor voluntary relocationassistanceof non-viablecoal communities. Box 3.2: Explaining the Coal Sector's Successful Privatization Key factorsthatcontributedto thesuccessfulprivatizationof thesectorinclude: l A generalrecognitionof theflawsof thetrustmanagementapproachin theoverallpoor institutionalenvironmentof Russiain 1996-98; l Thesteadfastcommitmentby theGovernmentto privatizationof thecoalindustry; l Thedecisionby theGovernmentto begincompetitivedirectprivatizationby offeringfor salesomeof thecoalindustry'smostattractiveassets,surfaceminesin Siberia;asthese includedtheindustry'slargestproducers,theprivatizationof threecompanieswas sufficientto createacriticalmassof privateproducersandto changetheperceptionof theindustryandtherole of thestatein it; l Coal'sreputationasanundesirable,troubledindustry,whichprovidedanopportunityfor variousgroupswith rootsin thesectorandanunderstandingof its long-termpotentialto securecontrolof theassetsofferedfor sale,andhelpedestablishacompetitiveindustryin whichno singlegroupdominates; l Theproventrackrecordof theGovernment'sprogramof closureof heavilyloss-making minesandsignificantyearlyrealdecreasesin theallocationof subsidiesto thesector, whichwerereassuringfactorsto privateinvestorscontemplatingtheacquisitionof long- terminterestsin thecoalsector;and l Generally,oppositionto privatizationfromorganizedlaborwasnotanissuein the RussiancoalsectoroncetheGovernmenthadclearlydemonstratedits commitmentto reducingsubsidiesregardlessof theindustryownershipstructure,andprivateowners emergedasbetteremployersthanthepreviouslyState-ownedmines. Shortcomings and Unresolved Challenges 3.16 Notwithstandingthe successof the reform andrestructuringprogramto date, someimportant sectorproblemsremain unresolved. The restructuringprogram downplayedthe environmentalaspects,relied on aninadequateenvironmental assessment,andlackedan environmentalactionplan. The mine closureplansfor each individual mine containmany items of a long-termnaturethathaveto datereceived relatively little financing. According to the ICR, theseremainingliabilities pertain primarily to: (i) environmentaldamagemitigation works, suchaslandreclamation; (ii) social infrastructurerepairworks (repairto boilers, gaslines, communications,etc. that weredamagedin thecourseof the mine closureprocess);and(iii) assistancein relocation from housingthat hasbeendamagedasa result of mining. Otherserious environmentalproblems alsoremainunresolved(flooding andpoisoningof groundwater 12 from seepage),asdo health andsafetyproblemsrelatedto the mine closuresthat were inadequatelyaddressedin thepast. Becauseof theseremaining liabilities, the legal liquidation of the 64 closedmines that arelegal entitiesandwheresubstantiveclosure works havebeencompletedhasnot beenpossible. The Governmenthasinitiated bankruptcyproceedingsagainstthemines, but thereremainstheproblem of identifying a successorentity andan alternativesourceof financing for the works of critical importancein themine closureplansbeforethe courtswill acknowledgeanyclosed mines aslegally bankrupt,making it possibleto removethem from the nationalregisterof legal entities. 3.I7 Commentsby the Associationof Mining Cities on thecompletion report for the projectssupportthe aboveobservations:"The processof mine closurehashad an adverseimpact on mining cities. The latter includesfrequentsuddenmethaneoutbursts to the surfacewhich leadsto bums, poisoningandevendeathsof people;in many coal communities, significant worseningof quality of drinking water; absenceof any significant progressin land reclamation,etc. The abovecategoryhasreceived insignificant financing. The environmentalproblemsaffecting residentsof Russiancoal communities arenow amongthe most critical unresolvedproblemsrelatingto coal restructuring." Basically, themines havenot yetbeenclosedin anenvironmentallysound andsafemannera 3.18 The program'ssocial objectiveshavebeenalsoonly partially met. The social infrastructurethat waspassedto themunicipal governmentswas in anextremelypoor 7 The Region comments that "The PPAR does not adequately reflect the complexity of the subject and the systems that exist in Russia to deal with the implementation of these parts of the mine closure plans. The Coal SECALs never had as a goal the completion of all aspectsof the approved mine closure plans; it was recognized that more time and financing would be needed than could be made available by the Russian budget during the implementation of the Bank-supported project. Furthermore, there was a fundamental constraint that argued against the rapid implementation of the mine closure plans, namely, the realization that the mine closure plans had been inflated by local and regional authorities at the time of their preparation in the mid-1990s when such processeswere poorly controlled. The aggregate financing need for mine closure was significantly over-stated through the inclusion in the mine closure plans of: (i) items that were illegitimate because they had no relationship to the mine closure process, and (ii) items that were legitimate but for which the cost estimates were exaggerated. For these reasons the Bank team felt that it would have been irresponsible in view of the Bank's fiduciary obligations to urge rapid completion of all items in the mine closure plans. One of the major challenges in the implementation of the mine closure program was to reach consensus on the need to revise the mine closure plans with the goal of identifying legitimate costs to be financed by the budget; this is a long, arduous process that began towards the end of the implementation of Coal SECAL 2 and continues today. At the same time, it is important to stressthat budget financing for social inFrastructure repair and mitigation of environmental damage at closing mines has been made available every year since the inception of the mine closure program and in recent years these categories have received the largest share of the budget allocations devoted to the physical aspects of mine closure." However, OED notes that the ECA Region recognized in mid-2002 that "at the beginning of sector restructuring, one of the major challenges . . was to implement a massive program of closure of heavily loss-making mines in a socially and environmentally responsible fashion", that many aspectsof a long-term nature of this agenda "have to date received relatively little financing" and that both projects included a separate environmental management, technical assistance and training component "to strengthen the capacity needed for environmental management, including legal and financial aspects,to mitigate the adverse impacts of coal mines included in the restructuring program." As is clear from para. 3.I6 above, OED's criticism is not about the lack of completion of this complex process, but rather the inadequate early attention to it by both the Bank and the Government. If these problems had been adequately scoped out in the Environmental Assessment and if the review of the "illegitimate" and "exaggerated" expenses had been carried out at the beginning instead of at the end of implementation of SECAL II, then the Borrower's understanding of requirements would have been clear, and adequate provisions over a realistic timeframe could have been made, monitored, and evaluated, with more progress to show after eight years of implementation than at present. 13 state,including much of thetemporaryhousingbuilt for minersbarrack-styleduring the 1940sand1950swith plannedlifetimes of 15to 20 years.' Repairs,maintenance,and reconstructionareneededfor drinking waterfacilities, centralheatingfacilities, the electric power distribution facilities, roads,andtelephoneexchanges.The activities neededto correcttheseinfrastructureproblemsandthebasichousingneedsof displaced miners andtheir communities were supposedto be identified andcostedaspart of the mine closureplansapprovedandagreedto by the Governmentin themid-l 990s. At that time, however,when the control over the reform processwasweak, local authorities senseda goodopportunityto usethemine closureplansasa vehicle to extractadditional financing from the federalbudget. As a result,theclosureplanscontaineda largenumber of works that were either(i) legitimate but for which the budgetestimateswere unjustifiably high, or (ii) illegitimate, asmeasuredby the regulationsthat governthis process,asthey hadnothing to do with the remediationof damagecausedby mining or the mine closureprocess. 3.19 Despiteresistanceat many levels for obviousreasons,the Government commencedin 2001a review of the mine closureplans(with the help of consultants financedby Coal IAP) to determinethe legitimacy of the many thousandsof individual work projectsincluded in them. Sucha review hasalreadyresultedin the exclusionof a significant portion of the financing items thatwereincluded in the original mine closure plans,which in their presentform areout-of-date(andalsonot a crediblesourceof information on therelocationassistanceissue). Nevertheless,the fact remainsthat this review came latein the processandactualexpendituresfor somelegitimate social needs of the restructuringprogramsuchassocialinfrastructurerepairworks andrelocation from damagedor substandardhousinghavebeeninadequate(andmuch lower than allocatedsubsidiesin the federalbudget). Coal SECAL I provedineffective at dealing with thepressingproblemsof rehabilitation,maintenance,andoperationof divested social assetsto local governmentsthatwere underseverefiscal andorganizationalstress. In response,this componentwas de-emphasizedunderCoal SECAL II. 3.20 The coal restructuringprogramhasyet to find a sustainablepolicy solutionfor the freecoal benefit, althoughits coveragewasbettertargetedduring the implementationof Coal SECAL II. The 2002budgetprovidesmore funding, but the Government's commitment to supply freecoal to the families of miners from closedmines hascreateda long-term, largeunfundedliability, asit is a much heavierburdenthanoriginally anticipated,particularly in regionswherecoal is becoming scarcebecausemost of the local mines havebeenclosed. Freecoal,however,is an essentialelementin theminimal consumptionof mining families in the cold Russianwinters. Without it, or an equivalent benefit, the social safetynetwill havebeenbroken. 3.21 The coal sectorfacesaIsomuch thesameproblem of inheriteddebtand inadequatelydevelopedcapital marketsasdo othercapital-intensiveindustriesin Russia. Almost all mining companies,private andpublic, arefacedwith a seriousdebtoverhang problem, stemmingprimarily from the non-paymentof variousoff budgettaxes(payroll taxes,roadtaxes,etc).For closedmines with no sourceof revenueto pay the taxesdue, * The OED mission in February 2001 toured some extremely substandard homes in the Tula region's mining communities, where elder residents still lived as they had no other alternatives, given their lower than subsistence pensions and occasional and limited transfers from migrant relatives. 14 the heavypenaltieskeepthe closureprocessfrom reachingcompletion. For mines that continueto operate(both private andpublicly owned),theproblem is far more critical. The Governmentcould pressits "legitimate" claims at anytime and forcethe enterprise into bankruptcy,wherethey canbe renationalized,or sold to other,betterconnected parties. Of evenmore concernfor the long term viability of the industry,no commercial bankwould be willing to lend moneyto acompanywith sucha weakbalancesheet. In the last two years,Russiahasmadegreatstridestowardsresolvingthis economy-wide problem, by requiring thatprogramsof debtrestructuringbe agreedbetweenevery enterprisethat hasdebtsandthe Tax RevenueMinistry. The operatingcoal companies areparticipating in theseprograms. 3.22 New investmentis scarceasmost coal enterprisesarealreadycarryingtoo much debtandin anycaseaviable domesticcapital market is yet to be establishedwith the ability to provide medium andlong term loansto the sector. The Bank hasestablisheda guaranteefacility againstnon-commercialrisks to spurnew private investmentin the industry andthe IFC is looking at what it might do to amelioratethe situation. However, while someof the companiesarewilling to takeforeign funding, othershavefoundthat suchborrowing leavesthem with a seriousexchangerisk. Most of their coal is sold locally andis only marginally relatedto borderprices. A numberof coal companieswith foreign liabilities were badlyburnedby the 1998financial crisis, when their foreign denominateddebtsquadrupled(in ruble terms), while the ruble pricesof their output increasedby lessthan50 percent. It was clearly a mistake not cleaningup their balance sheetsbeforeprivatizing thesecompanies. Alternative meansof obtaining medium and long term financing requiredfor new investmentsremainto beidentified. Implementation Issues 3.23 Internal auditsby the Governmentandthe frequentsocial impact andmonitoring reportsunderthe SECALs identified somemajor holesin thereform process. Under SECAL I, the GovernmenthadbeenusingRosugol,the stateownedcoal sectorholding company,for distributing federalsubsidyfundsto the sector. It was found,however,that about3 percent of the subsidiesallocatedfor mine closureactivities (closing the mines, filling in mine-shaftentrances,tearingdown associatedbuildings, maintaining social infrastructurethat mining companieshadtransferredto themunicipal governments,and individual paymentsto displacedminers) hadeitherbeendisbursedto the wrong recipientsor hadbeenusedfor purposesotherthanthoseintended.' It wasbelievedthat most of thesemissing funds hadbeendivertedto uneconomicinvestmentsin loss-making coal mines, therebysubvertingthe main objective of theprogram. During preparationfor SECAL II, substantialchangesweremadein theprogram's institutional support arrangements,including an agreementthat Rosugol's responsibilitieswould be shifted to otherorganizationsandthat Rosugolwould be closed. 3.24 In the processof working on SECAL II, theBank alsohelpedthe Government formulate a new resolutionon StateFinancingMeasuresfor Coal SectorRestructuring 9 A seriesof articlesin the local and international pressclaimed misappropriation of funds disbursed under the Coal SECAL I, but this wasbased on a misunderstanding of the general budget support nature of untied proceeds of adjustment loans. As is standardpractice for such operations, the SECALs' funds were not tied for useas coal sector subsidiesor any other budget expenditures. 15 (Resolutionof the GovernmentNo. 1523of December1997,subsequentlyrevisedby No. 1026)that establishedthe categoriesof eligible financing activities andeligible categoriesof recipientsfor eachcategory. It includedclearly definedcategoriesof "priority" and"non-priority" subsidysupports. The Bank supportedboththe widening anddeepeningof the restructuringprocess:widening it to include a largeincreasein the numberof mines to be closedunderthe programanddeepeningit by addingan agreement to privatize companiesthatbecameprofitable afterthey hadbeenrestructured. Implementationof SECAL II was derailedby the financial crisis of August 1998. When it was renegotiatedandput backon track in early 1999,all the original conditionswere maintained,but disbursementswerespreadout over six additionaltranchesanda longer period of time. The programhasrequireda significant increasein supervision,with missions scheduledon a quarterlybasis. 3.25 The policy dialogueunderSECAL II focusedon Governmentcommitments to limit andto continueto decreasethe percentageof their subsidypaymentsfor "non- priority" activities (financing of operatingsubsidiesandmining investments). The agreed minutes of loannegotiationsincludeda minimum numberof mines that would be closed anda minimum percentageof the enterprisesthat would be privatized. Thesenumbers werechosenon the basisof information derivedfrom detailedmine by mine studiesthat the Ministry of Fuel andEnergyhadcommissioned. Thesearrangementsallowed the Bank to concentrateundersupervisionon the progressof the overall reform programand on assuringthat the"priority investments"(thoseusedto supportthe mine closure program)wereusedfor the agreedpurposes,while the Governmenttook all responsibility for the day-to-daydecisionsaboutwhat was to be donewith eachmine. 3.26 The Bank paid lessattentionto how thenon-priority subsidyfundswereused, including the allocationof subsidiesfor investment,aslong asthe aggregatestayedbelow the agreedlevels. It hadbeenalso agreedthat investmentswere to be for improving the operationof existing mines,not for the sinking of new mines,andthat they shouldhavea reasonablyshortimplementationperiod. However,despiteits needs(seebelow) the coal mining sectorhasneverbeenableto useall the fundsmadeavailable." 3.27 In addition to the quarterlysupervision,SECAL II includeda seriesof special auditsof the new subsidymanagementsystemandsubsidyflows andsocial impact monitoring studies,which beganin the summerof 1998. In addition,Bank staff undertookintensivereviews of the impact of the social investmentprogram(e.g.,during a six-weekperiod in the summerof 2000). This intensivesupervisioncycle was effective in helping the Governmentmeet its coal sectorcommitments. All of theseactivities provided a solid foundationfor fine-tuningthe programduring the courseof the implementationof SECAL II, for the currentpolicy dialogue,andfor preparatory activities for possiblefuture supportby theBank for completing necessaryenvironmental, safety,andsocial protectionactivities. Unfortunately,the changein Governmentin May 2000andthe lack of a Deputy Minister for Coal for manymonths in 2000and2001 delayedthe implementationof actionsthatthe Governmentneededto taketo meetthe lo In 1998,only Rb469 million out of Rb900 million were used up, in 1999about Rb800 million out of Rbl,OOOmillion allocated, and in 2000 only Rb132 million out of Rb911 million allocated. The primary reasonfor the inability of beneficiaries to usemore than 15percent of their allocation in 2000 was the difficulty in meeting the requirements of the new Budget Code,passedby the Duma in January2000. 16 goalsof SECAL II andto triggerdisbursementof the last two tranches." SinceSpring 2001,however,the Governmentbroughtthe programback on track, making sufficiently encouragingprogressto warranta one-yearextensionof the loan closing date(to December31,2001, with a cumulative extensionof the closing dateof two years)andto disbursethe final two tranches. Outcome, Institutional Development Impact, and Sustainability 3.28 The Bank's assistancehasmet its primary goals,more thanfully in the caseof sectormanagement,structure,production,employment,productivity, subsidiesand subsidymanagement,andto a significant degreewith respectto the closuresof heavily loss-makingmines andthe social safetynet. However,the programprovided inadequate treatmentof the environmentalchallengesandreapedcommensuratelymodest achievementsin this area. Thus,the overall outcomeof both loansis ratedas satisfactory. 3.29 The institutional developmentimpact of the reformssupportedby the Coal SECALs hasbeenhigh, reachingbeyondthe sectoritself. On the nationallevel, the institutional structureof oversight,management,ownership,consultations,andpolicy- making in the coal sectorhasbeencompletely andpermanentlytransformed. In supportingprogramsof federaltransfersto municipalities andlocally-managedjob creationprograms,the loanshavealsosupportedinstitutional developmentat the municipal level, which is apriority of the currentcomprehensivemedium-term reform programby the Government. And the experienceof managingandtracking coal sector subsidiesprovedvery valuablein the laterdevelopmentof aFederalTreasurysystemand the Government'sdeparturefrom thepracticeof usingcommercial banksto executethe budget. 3.30 Despitethe still formidable challenges,the sustainabilityof the achievementsof the coal sectorreforms is likely. The fundamentalnatureof the sectoralachievementsso far, including the emergenceof groupswithin andoutsidethe Governmentthat are stronglycommitted to preservingthem,the improved economy-widepolicy and institutional frameworkandperformance,andvariousrecentinitiatives by the Governmentjustify the expectationsthat thereforms will not only be sustainedbut also deepenedbeyondthe contoursof the original programsupportedby the Bank. " A $50 million tranche associatedwith the loan's socialconditions, anda $100 million tranche associated with the loan's privatization conditions. Both tranchesalso required further progressin deciding how to handle the remaining twenty to thirty heavily loss-makingmines that did not yet have restructuring programs. 17 4. Attribution of the Results 4.1 As is generallythecasein successfulprojects,the resultscanbe attributedto the contributions of all the affectedgroups. Of particular importancewere (i) the interestof the Governmentin reducingsubsidiesandmaintaining thepeacein a highly contentious industry; (ii) the interestof the municipalities to be assuredthatthe Government maintainedits commitment to its approvedallocationprogram;and(iii) the interestof the mining population in receiving their back wagesandmoving forwardwith their lives in asorderly andcontrolled a manneraswaspossibleduringthis period of retrenchment. 4.2 On the Bank side,the Coal SECALs weredesignedon thebasisof solid economic andsectoranalyticalwork, intensivepolicy dialoguewith key seniorpolicymakers,and broadconsultationswith stakeholders.They wisely offeredaparallel companion technical assistanceproject. And they could rely on a skilled andresponsiveteam,at both the staff andmanagementlevels. Furthermore,the Bank promotedaneffective supervisionenvironmentby designingandagreeingwith theGovernmentmonitorable andquantitativeobjectivesthat formedthe basisfor recurrentdiscussionsaboutproject progress. The Bank wisely focusedits attentionon theprogram'scritical elements,which included the numberof mines thatwere to be closed,the resultsof the mine closure program(numberof mines substantiallyclosed),andthe percentageof the industrythat hadbeenprivatized. It alsoreachedanagreementon the broadparametersof the restructuringprogram,includedconditions on theminimum budgetallocation(in percentageterms)to "priority subsidies"(thosethatmoved the restructuringprogram forward) andon the maximum allocationthat could go to "non-priority" activities (primarily operatingsubsidiesandinvestmentfunds). But it left the Governmentto work out the detailsof how it would achievethesegoals. The Governmentchosethemines to be closed,the investmentsto supportthemines that remainedopen,t2andthe mines that were to beprivatized, with the proviso thatthe social safety-netpaymentsthat wereto go directly to the miners would takepriority, andthatthesepaymentshadto be completed beforethe mines could be countedassubstantiallyclosed. 4.3 Both SECALs were designedwith anunderstandingthat many modifications would haveto be madeduring implementationto the agreedcomponents,andespecially to the social componentof the mine closureprogram. An independentpanelof experts was establishedto monitor the social impact of therestructuringprogramandidentify the neededadjustments. In addition,theparallel $25million Coal IAP provided financing for teamsof local and foreignconsultantsto conductmeetingsandfocusgroupdiscussions with stakeholders,businesspeopleandNGOs in thethreemajor coal basinsof Kuzbass, Rostov andTula during the courseof implementing the secondproject. The feedback from both of thesesourceshasbeencritical in providing assurancesthatthe programwas meeting its declaredobjectivesof supportingthe affectedpopulationsandin establishing a framework for decidingwhat refinementsin implementationprocedureswereneeded. 4.4 The choiceof lending instrument(atranchedsectoradjustmentloan) helpedboth sidesto pay continuousattentionto the critical policy issues. The projectprovided " Subject only to the stipulation that the investmentswere for improvements in operating mine pits, not for investments neededto open new mines. 18 generalbudgetarysupport,sotherewasno direct link betweenthe disbursementof Bank fundsto the Governmentandthe disbursementof the Government'sbudgetaryfundsthat wereusedto subsidizeactivities in thecoal sector. Nevertheless,the closesupervisionof therestructuringprogramby theProject ImplementationUnit, a non-profit organization fundedwith loanproceeds,andby numerousBank missions also led thepublic and especiallythe subsidyrecipientsto considertheGovernmentfundsasoriginating from, andcontrolledby, the Bank. 4.5 This perceptionwas effectively andappropriatelyexploitedby the Governmentto deflectpolitical heat,whenit hadto make politically unpopulardecisionsneededto keep therestructuringprogramon course,althoughthe Bank nevertried to control the specific allocation of the Government'ssubsidies. The Bank, however,includeda seriesof interim programauditsandevaluationsin theproject design,asit wantedto know how well the subsidyprogramwasmeetingits agreedobjectives. The resultsand recommendationsof theseauditsprovidedthe factualbasisfor subsequentdiscussions with the Governmenton adjustmentsto the institutional arrangementsduring theprojects' implementation. This dynamic processandthe continuousdialoguewith the Government on all substantiveissues,facilitated by almostquarterlysupervisionmissions,kept the project on track. 4.6 Where theBank staff did go into greatdetail was in the advicegiven on the formulation of ResolutionNo. 1523on Public Financefor Coal SectorRestructuring. This critical implementing regulationdefinedhow the subsidydisbursementsystemwas to be handledby theTreasuryanddetailedall the categoriesof disbursementandthe specific activities that would be includedin eachcategory,aswell asthe disbursement mechanism,andthe accountingandcontrol processto beused. Its languageallowed no ambiguity, andthe Treasuryfollowed it in spirit aswell asto the letter whendisbursing subsidies. 4.7 From theRussianside,thecommitment of key seniorpolicy makerswas critical. The Governmenthadalreadyworked on the designof the restructuringprogramwith the help from the British Know How Fund andhadalreadymadeconcreteprogressprior to Bank involvement. It alsoheld extensivestakeholders'consultationson thebasisof a draftproposalbeforefinalizing its plan. Equally critical wasthe technicalsupport provided by ReformUgol, the efficient ProjectImplementationUnit. ReformUgol had four operationalunits, a socialprogramunit, aneconomicprogramunit anda unit for interactionwith NGOs andthemedia, anda unit thatprovided technical supportfor the Government'sInteragencyCoal Commission (IAC). It wasresponsiblefor reviewing the coal subsidymanagementsystem,conductingthe specialauditsthat verified the expenditureeligibility undereachcategory,andconductingstudiesto monitor the social aspectsof therestructuringprogram. It was also activein reviewing theproposed improvementsto the legal andregulatoryactsgoverningthe institutional structureand operationof the sector. 4.8 It would be difficult to overemphasizethe importanceof the specialaudits. The first specialaudit, which was a condition of the secondtrancheof SECAL II, focusedon the eligibility of actualsubsidypayments. It wasbasedon detailedinformation on the use of budgetresourcesat the companylevel. The systemicweaknessesidentified in this audit led to thedrafting andissuanceby the Governmentof ResolutionNo. 1523, 19 mentionedabove. The secondspecialaudit was designedto verify the legality, accountabilityandtransparencyof the subsidyprocess,andto establishwhetherthe weaknessesidentified during the first audithadbeenrectified. This audit showedthat the newregulationshadgreatlyimproved the performanceof the subsidyprogram. ReformUgol alsomonitored the socialimplications of the labor sheddingprocessunder the restructuringprogram. A result of this studywasto refocusgovernmenteffortson employmentassistanceprogramsin mining communities. The result of all theseaudits andstudieswas that federalandregionalauthoritieswereprovidedwith solid, real time information on which to basetheir sectorpolicy decisions,thus greatlyenhancing effectivenessof the Bank-Governmentdialogue. 4.9 Reformugol was activein providing assessmentsof the value andappropriate initial price for the federallyownedsharesof severalof the mines that were subsequently fully privatized. It alsoimplementedmanagementandfinancial training programsfor coal enterprises.It reviewedthe substantialclosureprocessof a largenumberof mines, providing recommendationson ways to reducedelaysin this process,andhasundertaken environmentalauditsof closing mines in all threecoal regions,which haveled to an action plan to eliminate the negativeenvironmentalimpact of mine closing and improve the regulatoryframework for the environmentalprotectionprocess.All of theseactivities havegreatlyenhancedthe effectivenessof the projects. 4.10 Nevertheless,Bank performancefell shortof meetingthe spirit andthe letter of its own environmentalsafeguardsthat werevery relevantto theprocessof mine closure. The SECALs wereclassified as"B" for environmentalassessment(EA) purposes,a questionabledecisionthat allowed an inadequate,inaccurate,andoveroptimistic annexto the 1994Bank sectorreportto qualify asan environmentalassessment.Neither the Bank nor the Governmenthada clear understandingfrom the startof theprojectsthrough recentyearsasto what constitutednecessaryanddesirableenvironmentalmitigation measures.Bank staff in latersupervisionreportsmentionedthe importanceof these issues,but dueto lack of baselineinformation could not determinehow inadequatethe Government'slimited actionsandsubsidyallocationsfor environmentalmitigation were. Borrower performancefell shortalso in implementing anumberof socialprotection componentsthat hadbeenenvisagedandagreeduponwith the Bank at theoutset- namely, in the areaof divestedsocial assetsandsubstandardhousingin coal mining communities. 4.11 Basedon theprecedingassessment,this PPAR ratesboth Bank andBorrower performancein thetwo projectsassatisfactory,ratherthanhighly satisfactoryasin the ESs. Theseratings areconsistentwith the satisfactoryrating for outcomeof the projects by both theECA regionandOED. 20 5. Agenda for Future Assistance Coal Restructuring in Russia 5.1 Sinceend-2001,the coal industryhasentereda critical juncture with production subsidiesfor loss-makingmines eliminated andthe emergenceof anumber of profitable mining companiesmost of which havebeen,or areplanning to be,privatized andoperate in a competitive environment. The sectorcanprosperif a resolutionof the debtoverhang andof term financing problemsis found. 5.2 However,thereis a strongneedfor continuing sectorsupportby the Government focusedon the social infrastructureneedsof themunicipalities severelyaffectedby mine closures,elimination of environmentalhazardsthat directly affect local communities, provision of housingfor thosewho live in unsafebuilding previously ownedby mining companies,andjob creatingactivities. 5.3 The Government'scoal reform programwas effectively paralyzedbetween August 2000,when the inter-ministerial Coal Committee was disbandedandthe Deputy Minister for Coal was dismissedwithout replacement,andmid-2001. Sincelate 2001, however,the reform programhasbeenbroughtback on track andthe Bank is considering apossiblefollow-up operationto the SECALs, this time focusedon addressingthe negativeenvironmental,safety,andhealthconsequencesof mine closures(with a Coal Social andEnvironmental Mitigation Facility). Theseproblems alongwith thoserelated to the financing for new investmentwill requirecareful considerationand strongpolitical resolve. 5.4 The Bank's currentinsistenceon continuedsectorreform asa condition for future financial supportis appropriate.The Bank shouldcontinueto requireclear andagreed quantitativeguidepostsfor major goals,astheymake supervisionmuch more objective andeffective. However,closerattentionwill haveto be paid to issuesrelatedto the governmentfunding neededto meetits obligationsunderthe individual mine closure programs. There is still a needto look carefully at the details of the programs.Individual investmentactivities needto be consistentwith the sectorrestructuringobjectives.To achievethis consistency,investmentguidelinesneedto haveclearly definedquantitative economicefficiency criteria to ensurethat investmentfundsareeffectively used. In the absenceof thesecriteria the decisionmaking processlosesits transparency,allowing purely political considerationsto takeprecedence. General Lessons 5.5 The experienceof coal sectorrestructuringin Russiapoints to a few important lessonsof generalapplicability in the caseof complex andpolitically contentiousreform programswith a high social impact: l Governmentcommitment andpolitical will areindispensable. External financing in supportof coal restructuringin Russiaprovided apowerful incentive to staythe course,but the decisivefactor in securingsuccesswas the fundamental commitment of the Government. 21 l Effective stakeholderparticipationcan greatlyenhancerobustnessof the achievementsandlessenthe implementationandinformation burdensof the Governmentandthe Bank. A particularstrengthof the designand implementationof both Coal SECALs wasthe constantattentionto and involvement of the variousrestructuringstakeholders,beginningwith the analytical sectorwork by the Bank andthe Government'ssectorpolicy statement in the yearsprecedingthe operations. l A strengthenedsafetynet helpsgreatlyin gaining acceptanceof enterprise closuresamongworkers andtheir communities, evenin difficult andpolarized situations. l Adequateattentionandfunding shouldbe devotedup front to the environmental aspectsof enterpriseclosures(especiallyin the caseof mines) to minimize the problem of largeresidualliabilities that may hold up the liquidation of enterprises that havealreadyceasedoperations. l Finally, implementation schedulesshouldbe realistic andflexible, while disbursementsshouldbe tailored to concreteprogressin agreedreforms. The Coal SECAL II wasunderimplementation for four yearsinsteadof the originally plannedtwo years,with most of theprogressrecordedin the lasttwo years. Moreover, the 1999restructuringof theloan's original floating tranchesinto smaller, more manageabletrancheswas instrumentalin facilitating implementation of the agreedrestructuringactions. 23 Annex A BasicDataSheet COALSECTOR ADJUSTMENTLOAN 1 (LOAN 405%RU) Key Project Data (amounts in US.$million) Actual or current Actual as % of2 Appraisal estimate estimate appraisal estimate Total project costs 500.0 500.0 100 Loan amount 500.0 500.0 100 Cofmancing 0 0 Cancellation 0 0 Cumulative Estimated and Actual Disbursements (amounts in iJS$ million) FY96 Total Appraisal estimate(US$m) 500.0 500.0 Actual (US$m) 500.0 500.0 Actual as% of appraisal 100% 100% Date of final disbursement: December 24, 1996 Project Dates Original Actual Project Concept Document 0310411996 Appraisal 03101/1996 Approval 0612711996 0612711996 Effectiveness 0710211996 Closing date 1213111997 1213111997 Staff Inputs (staff weeks) Revised Actual StaKeof project cycle Weeks US% Weeks US$(`000) IdentificationPreparation 522,406.85 Appraisal/Negotiation Supervision 325,064.21 ICR Total 847,471.06 Annex A (continued) 24 Mission Data Performance Ratit@ Stage of Date No. of Development Implementation Project (month/year) Persons Specialty Objective Progress Cycle Preparation 07118l1995 5 Manager (1); TaskManager (1); Social Sector(1); SocialiEnviromnental(1); Subsidies,Fed. Budget (1) 10/02/1995 Manager (1); Task Manager (1); SocialSector(2); SociaVEnvironmental(2); Subsidies, Fed. Budget (1) 02108/1996 Manager (1); Task Manager (1) 03/l 8/1996 Task Manager (1); SocialSector (3); Social/Environmental (2); Subsidies, Fed. Budget (3) Appraisal/ 05/01/1996 Task Manager (1); SocialSector (3); Negotiation Social/Environmental (2); Subsidies, Fed. Budget (3) Supervision 07103/l 996 Implementation (1); Task Manager (1); S S Comm. Support (1); Social Sector(1) NGO Assessment(1); Social/ Environmental (1); Subsidies,Fed. Budget (1); Communication with the Government (1) 09/20/1996 Implementation (1); Task Manager (1); S Comm. Support (1); Social Sector(1) NGO Assessment(1); Social/ Environmental (1); Subsidies,Fed. Budget (1) 02109l1997 Implementation (1); Task Manager (1); S Comm. Support (1); Social Sector(1) NGO Assessment(1); Social/ Environmental (1); Subsidies,Fed. Budget (1) 0312011997 Implementation (1); Task Manager (1); Comm. Support (1); Social Sector(1) Social/Environmental (1); Subsidies, Fed. Budget (1) 0610811997 Implementation (1); Task Manager (1); Comm. Support (1); Social Sector(1) Socia!/Environmenta! (1); Subsidies, Fed. Budget (1) ICR 04/2612002 Team Leader a PerformanceRating S = Satisfactory U = Unsatisfactory Other Project Data Loan Title Purpose Year of Approval Status Precedina Overations Coal SectorRestructuring IAP 1996 Closed Followina Ouerations Coal SECAL 2 1997 Closed 25 Annex B BasicDataSheet COALSECTORADJUSTMENTLOAN 4262-RU) 2 (LOAN Key Project Data (amounts in US million) Actual or current Actual as % of Appraisal estimate estimate appraisal estimate Total project costs 800.0 800.0 100 Loan amount 800.0 800.0 100 Cofmancing 0 0 Cancellation 0 0 CumulativeEstimatedandActual Disbursements(amounts in US million) FY98 FY99 FYOO FYOI FY02 Appraisal estimate (US$m) 400 800 800 800 800 Actual (USSm) 400 400 650 650 800 Actual as% of appraisal 100% 50 % 81 % 81 % 100% Date of final disbursement: December 27,200l ProjectDates Original Actual Project Concept Document 09/15/1997 Appraisal 1l/10/1997 Approval 12/1811997 12/18/1997 Effectiveness 12/19/1997 Closing date 12/31/1999 12131/2001 Staff Inputs (staff weeks) Actual Stage of project cycle Weeks fJs$(looo) Identification/Preparation 269,088.49 AppraisaLNegotiation Supervision 1,173,307.92 ICR Total 1,442,396.41 Annex B (continued) 26 Mission Data Performance Rating" Stage of Date No. of Development Implementation Project Cycle (month/year) Persons Specialty Objective Progress Identification/ 0610811997 7 Implementation (1); Task Manager (1); Preparation Comm. Support (1); Social Sector,(2); Social/Environmental (1); Subsidies, Fed. Budget (1) 09122/1991 6 Implementation (1); Task Manager (1); Social Sector,(2); Social/ Environmental (1); Subsidies,Fed. Budget (1) Appraisal/ 1l/21/1997 7 Implementation (1); Task Manager (1); Negotiation Comm. Support (1); Social Sector,(2); Social/Environmental(1); Subsidies, Fed. Budget (1) Supervision 0713l/1998 I Program Team Leader (1); Client S U Relations (1); Subsidies,Fed. Budget (1); Social, Economic (1); Privatization (1); Social, Subsidies(2) 1211711998 7 ProgramTeam Leader (1); Client S U Relations (1); Social,Subsidies(1); Social (1); Privatization (1); Environmental (1); Implementation (1) 07/31/1999 5 Team Leader (1); Client Relations (1); S S Social (1); Implementation (1); Privatization (1) 0312312000 5 Team Leader ( 1); Client Relations (1); S S Social(1); Privatization (1); Implementation (1) 1l/l l/2000 5 Team Leader (1); Client Relations (1); S U Social(1); Implementation (1); Implementation (1) 0211512001 3 Program Team Leader (1); S S Government Relations (1); Implementation (1) 04/30/2001 4 Program Team Leader (1) ; Client S S Relations (1) ; Privatization (1) ; Implementation (1) 1l/05/2001 5 SectorManager (1) ; Team Leader (1) ; S S Client Relations (1) ; Privatization (1) ; Social (1) ICR 04126/2002 1 Team Leader N/A 1 a Performance S= Satisfactory U = Unsatisfactory Other Project Data Loan Title Purpose Year of Approval Status Preceding Operations Coal SectorRestructuring IAP 1996 Closed Coal SECAL I 1996 Closed Followinn ODerations Coal and Forestry SectorInvestment Guarantee Key Performance Indicators/Log Frame Matrix Coal SECAL 1 (Effective July - December 1996) Tranche: General Restructuring / Subsidy Management System and Subsidy Levels Social Safe* Net (social proiection Demonopolization/ Sector Management and social assets) Commercialization/ Privatization/Regulatory - Reform 1st Tranche Govt has approved and made public schedule of state support Govt has instructed Federal L4C has approved and made (Effectiveness)/ for 1996H2 - MET Employment Service to establish public a schedule for Board ($250m) capacity to deliver pre-redundancy demonopolization and IAC has clarified rules of use of investment subsidles as consultations by end-September 1996 commercialization of industry agreed - MET - MET in keeping with agreed parameters - MET IAC has confirmed that beginning 1996H2, state support for 1AC has approved and made public operating losses available only to companies having limited the indicators and arrangements for new recruitment to less than 1% of workforce -- ME1 social impact monitoring, as agreed - MET L4C has approved and made public the indicators and amangements for financial monitoring and auditing, as agreed ~ MET 2nd tranche Govt has established Govt's proposals for 1997 subsidies consistent with agreed 1996 subsidy disbursements for social Govt to appoint trust managers (%250m) institutional framework for parameters - MET assets and social protection in by end-1996 - WAIVED local development accordance with agreed schedule - 2 programs (LDPs) and Govt has demonstrated that no operating loss subsidles have WAIVED initiated LDP activities ~- been disbursed to coal mines having recruited employees in WAIVED excess of 1% of total workforce - SUBSTANTIALLY MET Govt has initiated operation of regional offices of Federal Govt has delivered to Bank financial impact monitoring Employment Service in areas of mine report for company recipients of subsidies in keeping with closure - MET agreed parameters - SUBSTANTIALLY MET Completion of social impact Govt has delivered to Bank audits on five coal companies that monitoring demonstrating compliance are main recipients of state support in keeping with agreed with agreed indicators - WAIVED parameters - SUBSTANTIALLY MET Source: World Bank. Note on conditions waived under Coal SECAL I: a waiver of the condition does not mean that no actions were completed under the condition. On the contrary, in most cases considerable steps were completed but timing constraints made completion by the Government impossible before the loan closing date. The large number of waivers is a function of a discrepancy between the short period of effectiveness of the operation (less than six months) and the objectively longer time frames required to complete certain actions. As conditions of the approval of the release of the second tranche under Coal SECAL I, the World Bank's Board of Executive Directors required that a progress report on outstanding conditions be presented to the Board in 1997, and stipulated that no further loans would be made to the sector until all existing commitments had been met; these conditions were complied with before the presentation to the Board of Coal SECAL 2 Coal SECAL 2 (Effective December 1997-December 2001) a+ Social Safety Subsidy Management Net (social DemonopoIization/ E System and Subsidy Mine Closure protection and Commercialization/ z Tranche: General Restructuring /Sector Management Levels Program social assets) PrivatizationlRegrtlatory Reform 0 1st Tranche Govt's Letter on Coal Sector Policy to Bank - Govt Resolution issued Minister of Fuel and Presidential Acting Minister of State Property has (Effectiveness) I MET to revise subsidy mgmt Energy has written to Decree and written to the Bank setting out the Board ($400171) system - MET Bank setting out the Govt Resolution Govt's proposed coal sector Issuance of Presidential Decree and Govt Govt's mine closure to transfer privatization for 1998 and early 1999 Resolution to restructure industry - MET MinFin Instruction program for I998 - responsibility -MET Letter on using MET for disability Dep Minister of Fuel and Energy for coal sector earmarked accounts for payments to Acting Minister of State Property has restructuring appointed - MET disbursement of coal Mine Closure Social Insurance written to the Bank setting out the subsidies beginning Guidelines approved Fund issued - Govt's intentions on the use of the Shareholders meeting to vote on liquidation of 1998 issued -MET by IAC - MET MET "golden share" in privatization of Rosugol and appoint Liq. Comm. - MET coal companies - MET Minister of Fuel and Tripartite Formal announcement of Kosugol liquidation Energy has written to Agreement for Minister of Fuel and Energy has published -- MET Bank setting out the 1997 Federal- written to Bank with assurances that Govt's proposed Regional he intends to take all legally available Ministerial Orders issued to create two closure allocation of state transfers for measures to enable Vostsibugol to be agencies in Min Fuel and Energy (physical and support for 1998 - MET divested social included in 1998 privatization social aspects); agency charters submitted for assets in program - MET registration; and directors appointed - MET Consultants mobilized to Kemerovo assist in development oblast has been Notification of results of 55% of and implementation of signed - MET shares in Kuzbassrazrezugol and subsidy mgmt system - Yuehnyi Kuzbass (previously MET announced) - MET Restructured Coal SECAL 2*: Presentation to Board Govt has written to Bank confirming overall At least minimum Minister of Fuel and MinFin has Govt Resolutions have been issued to of restructured loan objectives of Letter on Coal Sector Policy and cumulative amounts of Energy has written to completed and unreserve Federal shares and to sell (negotiated February attaching Govt's coal sector privatization priority subsidies have Bank confirming submitted to Federal shares in coal companies in 1999; conditions met by program for 1999 - MET been disbursed in substantive completion Bank dralt audit I999 program - MET July 1999) accordance with agreed of closure at 80 mines, reports of 1998 Min Fuel and Energy has conveyed to Bank targets - MET verified by independent Federal- Consultants have been mobilized to environmental action plan based on the findings consultant, and Regional carry out review of legislative and of environmental audit of closed mines - MET conveying mine transfers for regulatory framework - ME'1 closure program for social assets IAC has endorsed and made public the Govt's 1999-2001 including divested in coal reform program supported by amended loan 46 mines to be closed Kemerovo (including mine closure program, subsidy in 1999 - MET oblast MET allocation and privatization program) - MET * After the initial tranche, all tranches were "floating" by design. They are presented here in the order of their actual disbursement. Social Safe@ Subsidy Management Net (social Demonopolization/ System and Subsidy Mine Closure protection and Commercialization/ Tranche: General Restructuring /Sector Management Levels Program social assets) Privcrrizatiorc/Re~ulalory Reform 2nd Tranehe (1st Satisfactory progress in coal reform program as Disbursement of coal Substantive Social; $50171) outlined in Letter on Coal Sector Policy - MET subsidies in line with completion of closure agreed targets - MET works at I6 mines - MET 3rd Tranche (2nd Satisfactory progress in coal reform program as Disbursement of coal Substantive Completion of Social; $50m) outlined in Letter on Coal Sector Policy - MET subsidies in line with completion of closure social impact agreed targets - MET works at 26 mines - monitoring MET demonstrating Sattsfactory progress in compliance implementing with agreed improvements to indicators - subsidy management MET system required on basis of special audit of system - MET 4th Tranche (3rd Satisfactory progress in coal reform program as Disbursement of coal Substantive Social; $50m) outlined in Letter on Coal Sector Policy - MET subsidies in line with completion of closure s: agreed targets -- MET works at 36 mines - MET 5th Tranche (1st Satisfactory progress in coal reform program as Privatization; $1 OOm) outlined in Letter on Coal Sector Policy - MET 6th Tranche (2nd Satisfactory progress in coal reform program as Completion of privatization of Privatization; SlOOm) outlined in Letter on Coal Sector Policy - MET companies accounting for 45% of base year (I 996) production and Government has completed liquidation of announcement of additional 10% for Kosugol - MEI sale - MET AND EXCEEDED ;P Govt has provided IO Bank actton plan for privatization of remainder of z industry - MET 2 n Govt has completed review of 3 existing legislative and regulatory framework and prepared an action s g. plan to address the shortcomings identified in the review - Fi SUBSTANTIALLY MET & Social Safety Subsidjp Management Net > (social Demonopolization/ System and Subsidy Mine Closure protection and CommerciaIization/ E Tranche: General Restructuring /Sector Management Levels Program social assets) Privatization/Re~ulatory Reform E n 7th Tranche (4th Satisfactory progress in coal reform program as Disbursement of coal Substantive Completion of Social; $50m) outlined in Letter on Coal Sector Policy - MET subsidies in line with completion of closure social impact 3 agreed targets - MET works at 46 mines - monitoring s MET AND demonstrating 2. Completion of 2nd EXCEEDED compliance 2 phase of audit of with agreed subsidy management indicators - system demonstrating MET satisfactory results - MET Alice Galenson O:\FIN\GAL,ENSONWARs\PPAR Russla Coal Secals Report to GOK 4-2.doc April 3,2003 I:52 PM