the world bank sector services: the project provided technical assistance to support the financial...

Document of The World Bank

Report No: 32455

IMPLEMENTATION COMPLETION REPORT(PPFB-P3610 SCL-44910)

ON A

LOAN

IN THE AMOUNT OF US$ 25 MILLION

TO

ROMANIA

FOR A

PRIVATE SECTOR INSTITUTION BUILDING PROJECT (PIBL)

April 25, 2005

Finance & Private Sector Development (ECSPF)Europe & Central Asia Region (ECA

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 25, 2005)

Currency Unit = Romanian Leu (ROL) ROL 10,000 = US$ 0.358

US$ 1 = ROL 27,900

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMS

AVAB - Asset Resolution AgencyARIS - Romanian Agency for Foreign InvestmentBA - Banca AgricolaBCR - Banca Commercial RomaniaCAS - Country Assistance StrategyCDF - Comprehensive Development FrameworkCEC - Romania Savings BankEBRD - European Bank for Reconstruction and DevelopmentEU - European UnionFESAL - Financial and Enterprise Sector Adjustment LoanGOR - Government of RomaniaIAS - International Accounting StandardsICR - Implementation Completion ReportIFC - International Finance CorporationMCIT - Ministry of Communications and Information TechnologyMOF - Ministry of FinanceMOPF - Ministry of Public FinanceNBR - National Bank of RomaniaPIBL - Private Sector Institution Building LoanPMU - Project Management UnitPPIBL - Private and Public Sector Institution Building LoanPSAL - Private Sector Adjustment LoanQAG - Quality Assurance GroupRICOP - Enterprise Restructuring and Employment Conversion ProgramROL - Romanian LeuSME - Small and Medium EnterprisesSOE - State-owned enterprisesTA - Technical AssistanceWTO - World Trade Organization

Vice President: Shigeo KatsuCountry Director Anand K. SethSector Manager Khaled F. Sherif

Task Team Leader/Task Manager: Tatiana Segal

ROMANIAPIBL

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 96. Sustainability 107. Bank and Borrower Performance 108. Lessons Learned 119. Partner Comments 1210. Additional Information 12Annex 1. Key Performance Indicators/Log Frame Matrix 13Annex 2. Project Costs and Financing 14Annex 3. Economic Costs and Benefits 16Annex 4. Bank Inputs 17Annex 5. Ratings for Achievement of Objectives/Outputs of Components 19Annex 6. Ratings of Bank and Borrower Performance 20Annex 7. List of Supporting Documents 21

Project ID: P039251 Project Name: PIBLTeam Leader: Tatiana Segal TL Unit: ECSPFICR Type: Core ICR Report Date: June 8, 2005

1. Project DataName: PIBL L/C/TF Number: PPFB-P3610; SCL-44910

Country/Department: ROMANIA Region: Europe and Central Asia Region

Sector/subsector: Central government administration (74%); Banking (16%); Capital markets (5%); Law and justice (5%)

Theme: State enterprise/bank restructuring and privatization (P); Regulation and competition policy (P); Standards and financial reporting (P); Legal institutions for a market economy (P)

KEY DATES Original Revised/ActualPCD: 10.03.1999 Effective: 15.10.1999 17.10.1999

Appraisal: 15.04.1999 MTR: 31.12.2000 27.07.2001Approval: 10.06.1999 Closing: 30.06.2002 28.02.2005

Borrower/Implementing Agency: GOVERNMENT OF ROMANIA/PROJECT MANAGEMENT UNIT; GOVERNMENT OF ROMANIA/MINISTRY OF FINANCE

Other Partners:

STAFF Current At AppraisalVice President: Shigeo Katsu Johannes LinnCountry Director: Anand K. Seth Andrew VorkinkSector Director: Fernando Montes-Negret Lajos BokrosTeam Leader at ICR: Tatiana Segal Hiran HeratICR Primary Author: Tatiana Segal; Hiran Herat

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The objective of the Private Sector Institution Building Loan (PIBL) was to enhance the private sector's role in the economy through the transfer of state-owned assets, placing state-owned banks on a sound financial footing and the creating an enabling environment conducive to private sector growth and development. These objectives were derived from the policy reforms agreed upon with the Government under the Private Sector Adjustment Loan (PSAL). In that framework, the PIBL was conceived to provide technical assistance to implement the conditionalities of the PSAL.

Background

Faced by major macroeconomic dislocations in the country, a Financial and Enterprise Sector Adjustment Loan (FESAL) was launched in 1992 to remove structural impediments to growth. Its objectives included: (i) accelerating the state-owned enterprise (SOE) privatization process; (ii) enforcing hard budget constraints on SOEs; (iii) strengthening the supervisory and enforcement capacity of the National Bank of Romania (NBR); (iv) requiring banks to establish loan-loss provisions; (v) phasing-in the collateralization of NBR refinancing and (vi) helping with capital market development through the opening of the Bucharest Stock Exchange. The privatization process of large state-owned enterprises and loss-makers never gained sufficient momentum, despite numerous efforts and programs. Part of this was due to the lack of needed institutional and technical capacity for successful reforms to be implemented, although much of the reason was rooted in Romania's fractious and unsettled political landscape.

A new Government came to power in late 1996 and asked the Bank to revise the program supported by the FESAL, to accelerate the pace of reform. The revised program, agreed with the Bank in February 1997, was more ambitious than the original one. However, both in the enterprise and financial sectors, privatization did not accelerate significantly due to major delays resulting from changes in the legal and normative framework. The Bank and the Government then agreed to let the FESAL elapse on April 30, 1998 and the last tranch of US $100 million was not disbursed.

Subsequently, the Government realized that the success of reforms lay on three major issues: privatization of banks, enterprises and utilities; elimination of non-viable loss-making firms; and the development of a sound financial system. These issues were not that clear in 1992 when the FESAL was designed. One of the objectives of the PSAL program was to provide US$300 million in balance of payments support to facilitate and accelerate the restructuring, privatization and liquidation (where needed) of a group of firms and banks. These actions were designed to ultimately enhance the private sector’s role in the economy and to put public finances on a more sustainable path.

In the financial sector, the program was geared towards the restructuring and privatization of the remaining state-owned banks, namely Banca Agricola, Banca Commercial Romana and a sunset provision for Bancorex. Such actions involved the establishment of an Asset Resolution Agency (ARA), for recovery as well as disposition of non-performing assets of banks, new laws and regulations that provided a more conducive environment for market-based banking, and enhancement of the supervisory function in the NBR, in support of safety, soundness and stability in the financial sector. These actions were expected to strengthen the intermediation capacity of the banking sector in support of private sector development and growth. Moreover, the PSAL put the onus on the Government to take bold moves in the direction of broader judicial capacity and NBR supervisory capacity for enforcement of legal and regulatory

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requirements, and to transform the banking sector definitively to one that was commercial in orientation and market-based in incentives. These reforms were considered necessary for the financial sector to be effective, and for macroeconomic stability to be restored.

The new package was to replace the lapsed FESAL. The package consisted of two operations – a Private Sector Adjustment Loan (PSAL) for financial and enterprise sector adjustment and a Technical Assistance Loan (PIBL) to support the implementation of policy reforms under the PSAL. Both operations were presented to the board simultaneously in June,1999. The PIBL operation was proposed to run for three years to allow sufficient time for privatization transactions and institutional and regulatory measures to be carried out.

3.2 Revised Objective:

Project objectives were not revised.

3.3 Original Components:

The project had three main components. Funding was also provided to establish a Project Management Unit (PMU) to assist in administration.

Privatization Services: Under this component, the project provided technical assistance to support large SOE divestiture, through case-by-case privatizations, workouts and liquidations and privatizations through pools. The assistance was to cover: (i) the fixed fee component for investment banks to undertake four large company privatizations; (ii) the fixed fee component for investment banks to undertake a further five large company privatizations; (iii) the fixed fee component for workout firms and liquidators to undertake workouts and liquidations of five large companies; (iv) the fixed fee component for investment banks to undertake pool privatizations of fifty large firms and (five separate pools of ten firms each).

Financial Sector Services: The project provided technical assistance to support the financial sector to select advisory services for bank restructuring, establishment and operation of the Asset Resolution Agency, including management twining services, contract asset management services and to provide infrastructure support for the establishment of a secondary market for Government securities.

Business Environment: The project provided technical assistance for the improvement of the business environment, to support the accounting and audit professional development (training) to operate under the new accounting and audit laws; for long term institutional capacity building in the bankruptcy courts; for advisory services for tax reform; for a study on the impact of the tax laws on the business environment; for a study focusing on the key areas impeding business development; for a study for regulatory and structural assessment in network industries; and, to manage the establishment of a computerized registry for secured interests.

Project Management Unit: A PMU was established to coordinate and implement the project.

3.4 Revised Components:Based on the successful implementation of the reform program under the PSAL, (as a result of the technical assistance provided under the PIBL) the Government requested and the Bank agreed to provide technical assistance for several other activities (related to the reform program, not included in the original program). As a result, in

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March 2000, the Loan Agreement was amended to include technical assistance to the: (i) Ministry of Public Finance to strengthen treasury operations and payment systems; (ii) Ministry of Justice for a public awareness campaign for the law on secured interest; (iii) Ministry of Labor to mitigate the social impact of closure and restructuring of enterprises; and (iv) Prime Minister’s Office for the establishment of a Romania Gateway Internet site and to carry out a Comprehensive Development Framework for regions affected by closure and restructuring of enterprises (Jiu Valley).

3.5 Quality at Entry:No QAE was carried out on the project. However, the QAG carried out a Quality of Supervision Assessment in September 2004. The project received a satisfactory (“2”) rating. The QAG report noted that: (i) The supervision of this project, which overlapped heavily with that of PSAL, was focused on the actual delivery of TA while the assessment of the impact of the specific actions/reforms was done under PSAL. Given the nature of the operation, this approach was considered sensible; (ii) The project supervision was comprehensive and intensive. Apart from adequate field trips, the task team maintained constant touch with borrower and PMU through emails and video-conferencing; and (iii) The project’s satisfactory implementation benefited significantly from the high degree of borrower’s ownership of the program (the PSAL as well as PIBL) and the task team managed this relationship very effectively.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:One of the major factors in the failure of past adjustment operations in Romania was that the programs were too comprehensive and the Government did not have the capacity to implement these programs. The PIBL was conceived to make resources available to procure the required expertise and to build capacity where it was needed. The PIBL was not a stand-alone project, but a technical assistance project to support the implementation of policy reforms under the PSAL.

The PSAL program included 51 conditions and a number of benchmarks. Government of Romania (GOR) achieved or exceeded all agreed benchmarks, in most cases ahead of schedule. Major reforms were introduced in a timely manner, with the two-tranche operation fully disbursed in less than one year from loan effectiveness.

The operation has made a significant contribution to the realization of strategic CAS objectives relating to private sector development. Under the operation a large number of loss making SOEs and banks were privatized or liquidated/closed considerably reducing the drain on the budget. In addition, the transfer of ownership and management of a large number of enterprises to the private sector, the strengthening of the financial sector, various concrete measures taken to improve the business environment, and some sector-specific reforms should foster private sector development.

Details of the major achievements can be found in the Implementation Completion Report (ICR) of the PSAL (Report 210760, dated October 12, 2000) and are briefly described below.

The timely TA provided under the PIBL, enabled the Government to procure the expertise that was required to meet the benchmarks/conditionalities under the PSAL. Even after the successful completion of the PSAL, the GOR continued the utilization of the remaining funds under the PIBL with the assistance of the Bank, to carry out further reforms in the enterprise, financial and social sectors (affected by restructuring). Because of the successful implementation structure that was established under the PIBL, several donor agencies expressed interest in providing grant funds for some of the activities. The Bank and the GOR worked closely with the donor agencies, in utilizing grant funds to replace Loan funds for selected

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activities. The GOR, with the Bank’s approval, used the savings to initiate new activities that supplemented reforms already underway. The overall assessment is that the outcome was satisfactory.

4.2 Outputs by components:

Privatization Services:

Overall, priorities in enterprise reforms under the PSAL were geared to strengthening financial discipline in the state enterprise sector, liquidating nonviable loss-making enterprises, privatizing most remaining state enterprises and cutting overall losses and subsidies in the state enterprise sector by 22 percent. These objectives were all met and this component can be rated as satisfactory. Under this component, technical assistance was provided to support large SOE privatization and/or liquidation. Given the nature of the activities involved, a complex procurement process was required for the selection of consultants. Following, Bank approved procurement procedures, nineteen investment banks were hired for this purpose. Details of the major activities are as follows:

(i) Privatization of three large firms (TAROM, ALRO/ALPROM and SIDEX). The contract for consulting services for the privatization of TAROM (Romanian Airlines) was completed. However, during the implementation of the privatization strategy, no viable proposals were received. As a result, and following a consulting services contract subsequently signed with Lufthansa (paid by TAROM out of its own sources), a restructuring plan for TAROM was prepared and is now under implementation. ALRO/ALPROM (Romania's largest Aluminum plant) was privatized in 2001. For SIDEX (steel production), there were concerns about the transparency of the privatization process, and these were expressed to GOR by the Bank. As a result, SIDEX was removed from the PSAL privatization list (in agreement with the Bank) and the GOR decided to use its own funds for its privatization and US$1.1 million (which was allocated to hire an investment bank for SIDEX) was cancelled from the PIBL Loan. SIDEX was eventually privatized in 2001, using GOR resources.

(ii) Case by case workout/liquidation of five large firms (Siderugica, Roman SA, Nitramonia, Clujana SA and IUG Craiova). The selected investment banks assisted the Government in preserving those parts of the companies that could be sold as a going concern and liquidate the balance of the companies’ assets. All the companies were privatized and/or assets sold.

(iii) Case by case privatization of five additional large firms (Antibiotice, Electroputere, Hidromecanica, Tractorul and Romvag SA). The PIBL financed investment banks to prepare privatization strategies and to attract investors to provide state-owned commercial companies with strong, commercially oriented owners that could provide good management, provide modern technology, investments, environmental and social protection as well as access to capital markets. Based on the privatization strategies presented by the consultants, four of the five firms were privatized. Electroputere was restructured and offered for privatization but no buyer has been found so far.

(iv) Five pools of ten companies each were privatized and or liquidated using investment banks.

Of the original 64 companies that were to be privatized/liquidated under the PIBL, 63 companies were privatized or liquidated and only Electroputere is yet to be privatized. In addition to the above, under the PSAL ll program, the Government requested technical assistance under the PIBL for the privatization of 10 companies in 3 pools and the restructuring of 10 companies in 4 pools. The Bank agreed to this request. Subsequently, 7 companies were privatized using PIBL funds, the rest were

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privatized using the resources of the State Ownership Fund.

Financial Services:

In the financial sector, the main efforts focused on bank privatization and restructuring, introduction of a legal and institutional framework for asset resolution and the development of the capital markets. Performance in all areas was considered satisfactory. Bancorex was decertified in 1999 with the withdrawal of its license, shutting down the major funnel for loss-making and fraudulent activities in the Romanian economy and Banca Agricola (BA) was privatized. A due diligence of the Banca Commercial Romana (BCR) was carried out and a privatization advisor appointed. An Asset Resolution Agency (AVAB) was established to take over non-performning assets of the banks that were to be closed or liquidated. It should be noted that, although PIBL funds were allocated for the privatization of Bancorex and BA, the final privatization was carried out by using grant funds provided by the EU PHARE program, with the agreement of the Bank. Several activities were also undertaken to develop the capital markets, by strengthening the securities and exchange commission and the securities market. Major activities funded by the PIBL were as follows:

(i) The establishment of the Asset Resolution Agency to deal with the non-performing assets of the state banking sector, including the provision of management twining services and contract asset management services;

(ii) Preparation of a due diligence report on the portfolio of Banca Commercial Romania (BCR), and the appointment of a privatization advisor. The EBRD and IFC acquired 25%+2 shares of BCR in 2004. BCR is expected to be fully privatized in 2006, as part of the on-going PAL program;

(iii) Review of the existing regulatory and supervisory framework for the financial sector and identifying improvements necessary for strengthening of the consolidated supervision by the CNVM. The recommendations are being implemented under a Dutch Trust Fund;

(iv) TA was also provided to examine the financial positions and the legality of the activities of the investment funds and the banking system’ exposures to them. All these activities were completed and recommendations implemented.

(v) A twining arrangement was provided to the management of the Romania Savings Bank (CEC) for supporting their restructuring process. The decision to privatize CEC has been taken and a privatization adviser has been hired under an on-going Dutch Trust Fund. With the privatization of BCR and CEC, state ownership in the banking sector will cease to exist.

(vi) With regard to the development of a Government securities market, the Government developed an action plan for the establishment of a computerized clearing and settlement system for government securities, including the option to offer at least four different maturities. The system was financed under the PIBL.

Business Environment:

Priorities in this area were to strengthen the legal framework for secured transactions, to improve the tax code, to modernize accounting standards and to launch a study to determine ways to reduce administrative obstacle to private sector growth. These objectives were achieved and performance in all areas considered satisfactory.

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(i) Regarding security interest in personal property, the law was adopted, implementing regulations were approved, a registry for personal property was established and software application were introduced for the electronic archives by end December 1999. Implementation of Phase I of the Electronic Archive for Secured Interest and the implement of the new Law on Secured Interests in Personal Property were completed. A public awareness campaign to assist the Ministry of Justice in designing and overseeing the Law on Secured Interests in Personal Property was also financed under the PIBL.

(ii) A study was carried out on tax legislation and its recommendations implemented (e.g.withdrawal of profit tax exemptions for exporters from the corporate tax base). The overall tax legislation is now more consistent with WTO and EU norms and is more acceptable to the Bank and the IMF.

(iii) With respect to accounting standards and audit reforms, MOF issued an ordinance to bring accounting standards in line with IAS, and acceptable by-laws were adopted by the Audit Chamber. Training was provided to the accounting industry to perform the tasks required under the accounting and audit legal framework.

(iv) In assessing the administrative obstacles to private sector growth, FIAS conducted a comprehensive assessment and provided a large number of recommendations encompassing regulatory reforms, company and tax registration, foreign exchange, property rights, standardization, employment, customs and international trade. The GOR approved the recommended action plan and this will serve as the basis for future operations in support of a viable, private sector oriented economy. The Romanian Agency for Foreign Investment (ARIS), a one-stop shop for foreign investments was established in 2002. Funding was provided under the loan for purchase of IT equipment and communications connections for this agency.

In other areas related to the improvement of the Business Environment, the law on bankruptcy was amended and a commission was established for reforms.

The following components were introduced as a result of a revision carried out in March 2000 (see Revised Components).

Institutional Strengthening for MOPF:

Funding was provided to the Ministry of Public Finance (MOPF) to establish a modern payment system at the MOPF. In this context, a system for connecting the state treasury to the electronic inter-bank payment system (TRANSFOND) was procured under the project. The IT infrastructure of the MoPF was also up-graded for the Centralized Real-Time Public Accounting Ledger – Phase 1 and 11; and for the migration from a Client Server Distributed Oracle Database Architecture to Web Oriented Centralized Database Architecture. All of these activities were successfully completed.

Social Cost of Mitigating Restructuring:

Two main activities were conducted under this component:

Several studies were completed, including the review of small business development and a lsocial assessment study and survey to mitigate the social cost of restructuring. Based on these materials, the implementation of a public awareness campaign for redundant workers was

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launched in February 2003.

Public Awareness Campaign for Pension Reforms: A communication campaign (audio, video land print media) was launched in 2003 to provide information to the population on the operations of the pension system with regards to the rights and liabilities of all the participants. The campaign was split into two parts respectively, one for the public pillar and one for the private pillar. The components of the public pillar have been implemented and the activities under the private pillar have started with the voluntary occupational pension scheme.

In addition, the PIBL funded a separate project management unit to administer unemployment payments under an Enterprise Restructuring and Employment Conversion Program (RICOP). The funding for this program was provided as a grant by the European Commission to aid workers laid-off as a result of restructuring and privatization of SOEs and mines. This component was successfully implemented.

Romania Gateway:

The procurement process for the Romania Gateway was completed and a firm selected. However, the financial bid was far above the budget allocated and the Ministry of Communications and Information Technology (MCIT) decided not to go ahead with the activity as originally envisaged. MCIT requested for the approval of a revision of the TORs to reflect a turnkey approach. Given the lack of time to implement the program under the PIBL, the MCIT requested that this activity be financed under the proposed Knowledge Economy Project and the Bank agreed to this proposal.

Comprehensive Development Framework (CDF):

Under this component, TA was provided to carry out a survey of business opportunities in Jiu Valley (an area badly affected by the closure of several coal mines) and to strengthen the newly established Jiu Valley Association, including procurement of IT and video-conference systems to facilitate communications to remote locations. Consulting firms were hired to carry out: (i) a survey of the households and business in Jiu Valley; and (ii) design and equip an information system for the collection of local taxes for six towns. Both activities were completed. Based on the survey, the Bank is preparing a new project to help the SME sector in Jiu Valley.

4.3 Net Present Value/Economic rate of return:Not applicable.

4.4 Financial rate of return:Not applicable.

4.5 Institutional development impact:The project had significant institutional impact. In the financial sector, an Asset Resolution Agency was established to deal with non-performing bank assets and assistance was provided to the CNVM (capital market regulator) to strengthen its institutional capacity. In the enterprise sector, assistance was provided to the State Ownership Fund to strengthen its institutional capacity to privatize a large number of SOEs. To improve the Business Environment, an Electronic Archive for Secured Interest to register personal property was established and the Romanian Agency for Foreign Investment was created to have a one-stop shop for foreign investors. The treasury operations system at the MOPF was strengthened to connect to the electronic inter-bank payment system to meet real time payment

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standards.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

There were several instances, especially in the privatization of SOEs, when the Government did not get any response or offers (TAROM, Tractorul, Roman and Electroputere). The Government in consultation with the Bank had to resort to other alternatives to deal with these enterprises (see outputs by components).

5.2 Factors generally subject to government control:Given that the PIBL was conceived to support an ambitious PSAL program, with several components and complex procurement activities, the Government should be commended for its management and implementation of this loan. The Governments determination to implement reforms and its willingness to utilize loan funds to procure technical assistance, combined with assistance from the Bank and other donor agencies, led to a successful completion of the PSAL program. In addition, based on the lessons learned from the implementation of the PSAL program, the Government worked closely with the Bank to utilize remaining funds under the PIBL to carry out other reform activities in pursuit of improving both the financial and the business sectors.

5.3 Factors generally subject to implementing agency control:

The project was implemented by a PMU established initially in the Ministry of Transport and later transferred to the MOPF. Given the complex nature of the project and the number of line ministries and institutions participating, the PMU should be commended for the excellent coordination and administration of the whole program. The actual implementation of the various components were handled by the relevant line ministries or the participating institutions, while the administrative functions were carried out by the PMU. The PMU was staffed with competent people and the project was managed very effectively. In all, seventeen investment banks were hired to privatize or liquidated enterprises. These were complex procurement activities, which were carried out by the PMU. Where problems were encountered, the PMU worked closely with the Bank team to resolve the issues. Financial management, audit and progress reports were submitted on a timely basis and procurement activities were carried out following Bank guidelines. Throughout the project, the PMU was in close contact with the Bank team and kept the Bank informed of all on-going activities on a timely basis.

5.4 Costs and financing:Out of the original loan amount of $25 million, $1.1 million was cancelled. This was due to the fact, that the Bank has some concerns about the transparency of the privatization of SIDEX. The Bank’s concerns were expressed to the GOR. The GOR requested from the Bank that they would prefer to privatize SIDEX using their own resources, as a result the Bank agreed to the cancellation of $1.1 million that was originally allocated for the privatization of SIDEX. The remaining funds were fully disbursed. The financial management aspect of the project was satisfactory through out the life of the project, with all audit reports submitted on time and with unqualified opinions.

6. Sustainability

6.1 Rationale for sustainability rating:The PIBL was conceived to help implement the conditionalities under the PSAL program. The success of the PSAL could be measured against the objectives mapped out within the PSAL framework, as well as in establishing the preconditions for sustained efforts at meaningful structural reforms. The sustainability of

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this approach is highly likely, given the fact that the Government requested and the Bank agreed to follow up the reform process with the PSAL 11 program and the Private and Public Sector Institution Building Loan (PPIBL) to help implement the identified activities, following the success achieved under the PIBL. The borrower’s and stockholders' ownership of the project, which remained exceptionally strong throughout, were closely monitored by the team. The project's main objectives (technical assistance, training and capacity building) received proper attention from the team. In a strict sense there is no operational phase for this type of TA but the activities supported by the project are likely to continue to perform well after project completion.

6.2 Transition arrangement to regular operations:Based on the success of the PIBL, the Government requested and the Bank approved a second technical assistance loan (PPIBL) in support of the PSAL 11 program and the PAL program. The PPIBL was approved in 2001.

7. Bank and Borrower Performance

Bank7.1 Lending:

The Bank’s overall performance in the identification, preparation and appraisal of the project was satisfactory and negotiations were done in a cooperative and constructive manner. The project corresponded correctly to the country priorities as identified in the CAS.

7.2 Supervision:

Project supervision was satisfactory. Supervision missions were carried out regularly and included the involvement of bank experts and the local staff who constantly monitored the project activities. The QAG assessment stated that the Bank team deserved considerable credit for skillfully supervising this complex TA project.

7.3 Overall Bank performance:

The overall Bank performance was Satisfactory. The Bank was responsive to GOR requests throughout project implementation, and demonstrated flexibility and understanding in the use of PIBL resources. As a result of the infrastructure that was in place to implement the agreed policy matrix, several donor agencies expressed interest in participating in the program during the life of the project. The Bank in consultation with the Government, agreed to fund activities using donor grant funds, which freed up some Loan funds (e.g. closure of Bancorex, privatization of Banca Agricola, etc). The Government requested from the Bank to use these savings to fund other activities, under the overall umbrella of the reform program, to which the Bank agreed. As a result, the Bank amended the Loan Agreement (to include new activities and participants, in line with the on-going reforms agreed with the Bank) and the closing date of the Loan several times in order for the Borrower to utilize the remaining funds to further enhance the reform program. The Legal and Disbursement Departments also provided timely advise and close support.

Borrower7.4 Preparation:The Borrower worked closely with the Bank throughout project preparation and negotiations and the

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performance was satisfactory.

7.5 Government implementation performance:The close collaboration demonstrated by the Borrower with the Bank during implementation was a primary factor in the overall success of the PIBL. Another important factor leading to the successful implementation of this project was the willingness of the Government to utilize loan funds to procure technical expertise lacking in-country.

7.6 Implementing Agency:The performance of the PMU was excellent throughout project implementation. Its administrative capacity, coupled with close supervision and monitoring of the progress made under each component, was exemplary. From a procurement point, this was a very complex project, requiring the selection of over seventeen investment banks and some complex hardware and software systems. These activities were handled very efficiently by the PMU. Problems were encountered along the way, but were resolved quickly by working closely with the Bank team.

7.7 Overall Borrower performance:Satisfactory.

8. Lessons Learned

It was recognized that substantive coordination would be required in a project of this complexity, lto ensure that conditionalities agreed under the PSAL would be met on time. This involved coordination across several line ministries and other participating organizations. This type of coordination was possible only by pro-active participation and guidance from officials at the highest levels who were part of the Government’s overall reform effort and were entrusted with implementing the Government’s reform program. Given a sustained high degree of borrower’s ownership of, and commitment to, the program, even a very complex and ambitious program can be implemented successfully

A true assessment of the supervision quality of a TA project that supports an adjustment operation lcannot be done as a stand-alone project; the entire program (the TA as well as the adjustment operation) should be assessed as one activity.

Flexibility in design of components. The Bank and the Borrower worked closely to be flexible on lthe design and approaches to implement best practice solutions. During the implementation phase, where donor grant funding was available, the Borrower in consultation with the Bank, opted to use grant financing. The savings that accrued as a result of such donor intervention, was used by the Borrower (in consultation with the Bank) to fund new activities, that further enhanced the reform program.

A well-functioning PMU, staffed with competent and committed people, trained and fairly lremunerated is essential for a successful implementation of a multi-component and complex project such as the PIBL. As a result of the efficient implementation arrangements that was in place for the PIBL, the Bank and the Government were able to attract substantial donor financing.

Continuity of project staff. The Bank team that prepared this project, supervised it through to lcompletion. This continuity also contributed to the success of the project.

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Complex TA projects tend to disburse slowly. Overall, the project’s assumptions were realistic, but the time frame assumed (three years) for the implementation was short. A complex project like this requires a longer period for implementation.

9. Partner Comments

(a) Borrower/implementing agency:Partner comments

Background

In the context of Romania’s transition to a free market economy a high priority was to enhance the private’s role in the economy through the transfer of state owned assets to private companies and the creation of an enabling environment conducive to private sector growth and development. To promote private sector, the Bank has granted a couple of loans, one to support the balance of payments (Private Sector Adjustment Loan – PSAL – of USD 300 million) and the second to support the technical assistance required for developing and implementing options for sector restructuring and improvement of business environment (Private Sector Institution Building Loan – PIBL - of USD 25 million). Out of the USD 25 million, the amount of USD 1.1 million has been cancelled - the amount was initially allocated for the privatization of Sidex. The Government contribution for financing of the project was estimated at USD 8 million in ROL equivalent, for covering the local taxes (VAT, income tax, customs and other local duties).

During the implementation process some amendments have been made in order to improve the efficiency of the outcomes and due to new reforms to carry out the conditions of PSAL program. Some new components have been included in the project and two reallocations of the funds have been made between categories and components of the project.

Project objective and Components

All the required technical assistance financed out of PIBL has the major objective to assure the macro-economic stability of the Government and to improve structural reforms in state-owned enterprises and banking sector, restoring the confidence of the foreign investors in the Romanian private sector development. The technical assistance was provided to facilitate the reforms proposed by the Government for the following components of the project, namely privatization of state owned enterprises, financial sector services, institutional capacity strengthening, developing of a sound business environment and of a sound financial sector and capital markets.

I Privatization

Under this component nineteen (19) contracts have been concluded with the international privatization advisors/investment banking for the privatization, restructuring or liquidation of 63 large industrial state-owned enterprises included in PSAL I program and for supplementary twenty (20) companies included in PSAL II program. As a result of implementation of these contracts, in the enterprises sector a significant progress has been made. The program was fully completed and the enterprises were privatized, liquidated or soled by assets, in many cases after

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two or three times re-launching the process, due to the lack of interest of the investors or social sensitive issues to be solved. Analyzing the impact of restructuring process, a social assessment study was carried out to mitigate the social cost of restructuring and a public awareness campaign for redundant workers was launched. The efforts for mitigation of the social costs have been supported by EU through the RICOP Program.

Even that no significant sale transactions were carried out, the property of assets was changed and a reduction in the public sector deficit associated with the above mentioned state-owned companies has been indicated.

I. Financial sector and capital markets

The main achievement of the project in the financial sector was reducing the drain on the economy from the banking sector through shutting down of Bancorex and privatization of Banca Agricola, even that no significant funds have been spent from the loan for these two activities. Attention was focused on setting up of the Asset Resolution Agency (ARA) to deal with huge portfolio of non-performing loans of the state-owned banks. Under the PIBL funds started the restructuring process of CEC with technical assistance in implementation of operational work plan and strategy in preparing the bank for privatization.For development of capital markets technical assistance was provided for strengthening the National Securities Commission by reviewing and assessment of the existing framework, identifying needs for structural and regulatory improvements for the consolidated supervision in establishing a new legal and regulatory framework for the capital market (reviewing the law on securities regulation, recommendations for their legal status, providing solutions to the problems experienced with the existing legal framework. Special attention must be allowed to this sector in the future.

II. Business environment

This component was aimed to improve the business environment through support for implementing the new accounting and audit laws; institutional capacity building in the bankruptcy courts and implementation of the new bankruptcy regulations; advisory services on tax reform; a study on the impact of the tax laws on the business environment; a study of the key areas impending business development; a study of the regulatory and structural assessment in network industries and the establishment of a computerized registry for secured interests, structural and regulatory assessment of electricity, transportation, oil & gas and utilities sectors. In addition, out of PIBL have been financed consultancy services for reviewing the Labor Code, assistance in removing the administrative barriers to investment and for strengthening of functional capacity of the Agency for Foreign Investment (ARIS) advisory on macro-economy and acquisition of IT equipment for the electronic archive secured interest. A Public Awareness Campaign for Pension Reforms provided information on pension system reform and it covered two pillars: public and private. New developments on private pension and significant improvements must be achieved in judicial reform, one of the most sensitive sectors for which special attention will be provided by the Government.

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III. Institutional capacity strengthening

Under this component the major outcomes were (i) the connection of the state treasury of Ministry of Public Finance to TransFond, (ii) developing of the centralized real-time public accounting ledger, (iii) improvement of the general treasury management through the migration from a Client/Server distributed Oracle database architecture to web oriented centralized database architecture and (iv) the establishment of an electronic system for tax collection in Jiu Valley and procurement of IT goods to facilitate the communication with remote locations. A project management unit (PMU) has been established for dealing with all procurement and disbursement procedure and also for monitoring the PSAL conditionalities.

Implementation experience and objectives achievement

The PSAL and PIBL have been designed, prepared and implemented in a package, both of them having as prime objective improving macro-economic stability and promotion of structural reforms to enhance the private sector’s role in the economy. The result was a very good one all the objectives have been achieved and the project was successfully implemented. There were several reasons for their good results.

First, the Government was fully committed to implement the reform program and decisive steps were taken to achieve the goal. The Government designated a very dynamic member of the Cabinet to push the reforms, to ensure that the process is managed by professionals. A project management unit (PMU) has been established, well staffed with professionals selected under the Bank procedures, well motivated and paid out of PIBL, demonstrating commitment and stability. The staff operated very efficiently, having full support of the Cabinet.

Second, the conditionalities of PSAL program were well designed and appropriate, with reasonable dead-lines and the Bank staff demonstrated very much flexibility in program implementation. This flexibility led to a reduction in the costs of the project and all component of technical assistance have been financed out of PIBL and other activities included in the PSAL II have been financed out of this Loan too.

Third, due to the continuity of the project staff and the PMU staff a good cooperation has been established within the PMU and the Bank team. The same Bank team that was appointed at appraisal of the project was involved with the project implementation through to its completion. Through the Bank supervision missions the best practice solutions were implemented in performing the procurement and disbursement procedures. A good support to the project was given by the beneficiaries of the Loan who established the groups of experts fully dedicated to the project activities (PIU) working in close cooperation with PMU experts.

The main lesson learned out of implementation of this project is related to the role of the Government in preparing and implementation of the project. When the Government is fully committed and provides real support to the team of experts in charge with project management the success is guaranteed. For an efficient implementation of the project there are some important aspects to be learned and applied:

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- Keeping the stability of the staff involved in the management of the project, starting with its preparation and continuing with its full implementation; - Assuring the transfer of knowledge from consultants to the key officials who are involved in decision making and dissemination of knowledge at all levels; - Close cooperation at all stages of the project between the Borrower and the Bank.

(b) Cofinanciers:n/a

(c) Other partners (NGOs/private sector):n/a

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Promote structural reform and Private Sector development.

Provided TA to achieve the conditionalities agreed under the PSAL for structural reforms and PS development.

Provided TA to achieve the conditionalities agreed under the PSAL for structural reforms and PS development.

Enhance the private sector's role in the economy through the transfer of state-owned assets and the creation of an enabling environment conducive toprivate sector growth anddevelopment.

SOEs and state banks targeted under the program, privatized or liquidated. Reforms implemented to improve business environment.

SOEs and state banks targeted under the program, privatized or liquidated. Reforms implemented to improve business environment.

Output Indicators:

Indicator/Matrix

Projected in last PSR1


Restructure and recapitalize Banca Agricola. Banca Agricola Privatized. Banca Agricola Privatized.

Recapitalize and restructure Banca Commerciala.Romania.

Completed. BCR to be privatized in 2006. Completed. BCR to be privatized in 2006.

Liquidate Bancorex. Bancorex liquidated. Bancorex liquidated.

Establishment of Asset Resolution Agency (ARA).

ARA established. ARA established.

Development of primary and secondary markets in government securities.

Completed. Completed.

Case-by-case privatization of four large SOEs.


Case-by-case privatization of five additional large SOEs.


Work-out / liquidation of five additional SOEs. Completed. Completed.

Pool Privatization of SOF held companies. Completed. Completed.

Provide necessary training for accountants and auditors to implement new international accounting standards.


Reform direct taxes to provide more equitable and efficient taxation and to improve the administration of, and compliance with, the direct tax system.


Introduce a more effective and efficient system of bankruptcy and liquidation to help restructure the private sector and deal with non-performing enterprises.


Develop a strategy for addressing the major regulatory structural and regulatory issues, and provide foundation for a future technical assistance program in the regulatory arena.


Business Environment Study. Completed. Completed.

Establish a registry for secured interests. Completed. Completed.1 End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate


Percentage of Appraisal

Component US$ million US$ millionPrivatization Services** 13.60 10.80 0.79Financial Sector Services 10.60 2.40 0.23Improvement in Business Environment 5.80 3.60 0.62Project Management Unit 2.00 2.60 1.3Unallocated 1.00 0.00 0Social Mitigation of Enterprise Restructuring/Institutional Development

0.00 10.30

Total Baseline Cost 33.00 29.70Total Project Costs 33.00 29.70

Total Financing Required 33.00 29.70

**Note: US$1.1 million allocated for Privatization Services was canceled.

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.18 0.00 0.18(0.00) (0.00) (0.18) (0.00) (0.18)

2. Goods 8.68 0.00 1.73 0.00 10.41(7.04) (0.00) (1.69) (0.00) (8.73)

3. Services 0.00 0.00 13.80 0.00 13.80(0.00) (0.00) (11.34) (0.00) (11.34)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

6. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

Total 8.68 0.00 15.70 0.00 24.38(7.04) (0.00) (13.21) (0.00) (20.25)

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1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent)

Component Appraisal Estimate Actual/Latest EstimatePercentage of Appraisal

Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.Privatization Services 10.80 2.80 8.80 2.00 81.5 71.4Financial Sector Services 7.90 2.70 1.90 0.50 24.1 18.5Improvement in Business Environment

4.40 1.40 2.90 0.70 65.9 50.0

Project Management Unit 0.90 1.10 1.90 0.70 211.1 63.6Unallocated 1.00 0.00 0.00 0.00 0.0 0.0Social Mitigation of Enterprise Restructuring/ Institutional Development

0.00 0.00 8.40 1.90 0.0 0.0

TOTAL 25.00 8.00 23.90 5.80 95.6 72.5

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Annex 3. Economic Costs and Benefits

Not applicable.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation03/02/1998 6 TASK MANAGER (1)

SECTOR DIRECTOR (1)SENIOR FINANCIAL SP (1)RESIDENT MISSION STAFF (3)

S S

Appraisal/Negotiation04/12/1999 6 PROGRAM TEAM

LEADER (1)PROJECT OFFICER (1)LEGAL OFFICER (1)OPERATIONS ANALYST (1)PRIVATE SECTOR DEVELOPMENT SP (1)PROCUREMENT SP (1)

S S

Supervision10/21/1999 2 FMS (1); PTL (1)

2 S S10/21/1999 4 TASK MANAGER (1);

PROGRAM TEAM LEADER (1); PROCUREMENT OFFICER (1); PSD SPECIALIST (1)

S S

06/14/2002 3 TASK MANAGER (1); FSD SPECIALIST (1); PSD SPECIALIST (1)

S S

11/22/2002 2 TASK MANAGER/FMS (1); PROCUREMENT OFFICER (1)

S S

04/09/2003 2 TASK MANAGER (1); FSD SPECIALOIST (1)

S S

11/11/2003 2 TASK MANAGER (1); PROJECT OFFICER (1)

S S

05/24/2004 1 CONSULTANT (1) S S10/18/2004 2 CONSULTANT (1);

PROCUREMENT SPECIALIST (1)

S S

ICR

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(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 193,737Appraisal/Negotiation 290,606Supervision 443,824ICR 30,000Total 958,167

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

Staff Appraisal Report, Technical Annex No. T-6987-HU

Bank Missions. Back-to-Office Reports and Aide-Memoires from 1999-2004

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