world bank - document of implementation ......document of the world bank for official use only...

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: ICR00001697

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-39170 TF-54660)

ON AN IDA CREDIT

IN THE AMOUNT OF SDR 127.3 MILLION (US$250 MILLION EQUIVALENT)

TO THE

PEOPLE’S REPUBLIC OF BANGLADESH

FOR AN

ENTERPRISE GROWTH AND BANK MODERNIZATION

June 23, 2011 Finance and Private Sector Development South Asia Region The World Bank

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 2011)

Currency Unit = Bangladeshi Taka Tk 1.00 = US$0.014 US$1.00 = Tk 72.90

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AJM/AEPZ Adamjee Jute Mills/Adamjee Export Processing Zone BEPZA Bangladesh Export Processing Zones Authority BSCIC Bangladesh Small and Cottage Industries Corporation BOI Board of Investment CAS Country Assistance Strategy CSM Chittagong Steel Mills DSC Development Support Credit EPZ Export Processing Zone FSAP Financial Sector Assessment Program GOB Government of Bangladesh I-PRSP Interim Poverty Reduction Strategy Paper KEPZ Karnaphuli Export Processing Zone MDG Millennium Development Goal MSME Medium, small, and micro enterprise MTR Mid-term review NCB Nationalized Commercial Bank PC Privatization Commission PCU Project Coordination Unit PFI Participating financial institution PRSP Poverty Reduction Strategy Paper SEF Small Enterprise Fund SCB State-owned Commercial Bank SOE State-owned enterprise VRS Voluntary retirement scheme

Vice President: Isabel Guerrero Country Director: Ellen A. Goldstein Sector Manager: Ivan Rossignol Project Team Leader: G. M. Khurshid Alam ICR Team Leader: Dhruba Purkayastha Primary Authors: Shah Nur Quayyum

Aneeka Rahman

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THE PEOPLE’S REPUBLIC OF BANGLADESH Enterprise Growth and Bank Modernization

CONTENTS

A. Basic Information ...................................................................................................................... iii B. Key Dates .................................................................................................................................. iii C. Ratings Summary ...................................................................................................................... iii D. Sector and Theme Codes ........................................................................................................... iv

E. Bank Staff .................................................................................................................................. iv

F. Results Framework Analysis ...................................................................................................... v

G. Ratings of Project Performance in ISRs ................................................................................... ix

H. Restructuring (if any) ................................................................................................................ ix

I. Disbursement Profile ................................................................................................................. ix

1. Project Context, Development Objectives and Design ............................................................1 2. Key Factors Affecting Implementation and Outcomes ...........................................................7 3. Assessment of Outcomes .......................................................................................................10 4. Assessment of Risk to Development Outcome ......................................................................14 5. Assessment of Bank and Borrower Performance ..................................................................15 6. Lessons Learned ....................................................................................................................17 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......................18 Annex 1. Project Costs and Financing .......................................................................................19 Annex 2. Outputs by Component .............................................................................................20 Annex 3. Economic and Financial Analysis ..............................................................................26 Annex 4. Bank Lending and Implementation Support/Supervision Processes .........................27 Annex 5. Beneficiary Survey Results (not required) .................................................................29 Annex 6. Stakeholder Workshop Report and Results ( not required) .......................................30 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................................31 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................................35 Annex 9. List of Supporting Documents ...................................................................................36

MAP

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A. Basic Information

Country: Bangladesh Project Name: Enterprise Growth & Bank Modernization

Project ID: P081969 L/C/TF Number(s): IDA-39170,TF-54660 ICR Date: 06/29/2011 ICR Type: Core ICR

Lending Instrument: SIL Borrower: BANGLADESH MINISTRY OF FINANCE

Original Total Commitment:

XDR 172.3M Disbursed Amount: XDR 152.1M

Revised Amount: XDR 152.1M Environmental Category: B Implementing Agencies: Finance Division Cofinanciers and Other External Partners: UK-funded DFID B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 07/14/2003 Effectiveness: 07/19/2004 07/19/2004 Appraisal: 01/18/2004 Restructuring(s): Approval: 06/08/2004 Mid-term Review: 07/25/2008 06/07/2009 Closing: 11/30/2009 12/31/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Unsatisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Unsatisfactory Government: Moderately Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance:

Moderately Unsatisfactory

Overall Borrower Performance: Moderately Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments (if

any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Banking 14 14 Central government administration 41 41 Compulsory pension and unemployment insurance 36 36 Housing finance and real estate markets 4 4 Other industry 5 5

Theme Code (as % of total Bank financing) Export development and competitiveness 17 17 Other financial and private sector development 17 17 Public expenditure, financial management and procurement 16 16 Small and medium enterprise support 17 17 State enterprise/bank restructuring and privatization 33 33 E. Bank Staff

Positions At ICR At Approval Vice President: Isabel M. Guerrero Praful C. Patel Country Director: Ellen A. Goldstein Christine I. Wallich Sector Manager: Ivan Rossignol Joseph Del Mar Pernia Project Team Leader: Dhruba Purkayastha G. M. Khurshid Alam ICR Team Leader: Dhruba Purkayastha ICR Primary Author: Shah Nur Quayyum Aneeka Rahman

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F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) PDO 1: Trigger employment generation through private sector enterprise growth and reforms in SOE by containing future losses through privatization or closure of some loss-making SOEs, productive uses of abandoned assets and improving access to finance for the "missing middle" of MSMEs. PDO 2: Help create a competitive private sector banking system by staged withdrawal of government in state-owned banks through corporatization, leading to substantial divestment of government shareholding in Rupali Bank, Agrani Bank and Janata Bank, and divestment of minority shareholding in Sonali Bank. Revised Project Development Objectives (as approved by original approving authority) The development objectives and key indicators were not revised. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Employment through private sector growth

Value quantitative or Qualitative)

Pre-finance MSMEs: 26,431 EPZs: 0

No formal targets were set N/A

Employment generated through SEF: 30,704 EPZs: 32,418 (direct)

Date achieved 06/30/2004 12/30/2010 12/30/2010 12/30/2010

Comments (incl. % achievement)

Increase in employment was envisaged to happen through incremental activity in EPZs and incremental employment has been measured in MSMEs. Source: Bangladesh Bank Performance Monitoring Report (December 2010) and BEPZA Statistics (March 2011)

Indicator 2 : Reduction in total SOE losses for the Government Value quantitative or Qualitative)

Total SOE Loss: US$99 million

No formal targets were set N/A Total SOE Profit:

US$351 million

Date achieved 06/30/2004 12/30/2010 12/30/2010 12/30/2010


Losses of commercial SOEs, particularly Petroleum Corporation and Chemical Industries Corporation, account for a large share of SOE losses and remain vulnerable to external price shocks of oil and fertilizer. Source: Monitoring Cell, Ministry of Finance

Indicator 3 : Improved efficiency of banking system (and reduced share of state owned banks )

Value quantitative or Qualitative)

Performance indicators of SCBs: 1. NPLs: 29% 2. Capital Adequacy (adjusted capital to risk-weighted assets): -0.84%

No formal targets were set N/A

Data for 2010 indicates improvements as follows: 1.NPLs : 12 % 2. Capital Adequacy:

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3. Share of SCBs in lending: 43%

8.92% 3. Share of SCBs in lending : 33%

Date achieved 06/30/2004 12/30/2010 12/30/2010 12/30/2010 Comments (incl. % achievement)

Bangladesh Bank monitored and reported data regularly, including monitoring of individual banks during the project implementation period.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target

Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Small Enterprise Fund Value (quantitative or Qualitative)

N/A 1,500 small enterprises receive financing from PFIs

N/A 2,773 MSMEs were financed under the SEF


The SEF, managed by BB, refinanced loans given by PFIs to MSMEs and the number indicates all new and existing MSMEs financed.

Indicator 2 : Refurbishment of some strategic remaining assets of loss-making SOEs

Value (quantitative or Qualitative)

Chittagong Steel Mill closed and the land was idle

Chittagong Steel Mill handed over to BEPZA and converted to EPZ

N/A

CSM converted to KEPZ in 2007 with 282 plots created. Investment generated: US$123 million


Indicator 3 : Refurbishment of some strategic remaining assets of loss-making SOEs


Adamjee Jute Mill closed and the land was idle

Adamjee Jute Mill converted to EPZ N/A

AJM converted to AEPZ in 2006 with 307 plots created. Investment generated: US$120 million


Indicator 4 : Refurbishment of some strategic remaining assets of loss-making SOEs Value Khulna Newsprint Mill and KNM and CCC N/A KNM and CCC were

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(quantitative or Qualitative)

Chittagong Chemical Complex closed but still within the state-owned corporation

refurbished and converted to industrial parks

dropped from EGBM funding because of reasons explained later


Indicator 5 : Institutional Strengthening (BEPZA, BOI, BSCIC and PC)


FDI: US$284 million

BEPZA and BOI facilitate US$40 million additional FDI per annum. PC privatizes/liquidates 10 SOEs per year.

N/A

Cumulative FDI up to FY2009: US$961 million - an average of US$134 per year. PC privatized 30 enterprises until 2008, after which no privatization was undertaken.

Date achieved 06/30/2004 12/30/2010 12/30/2010 12/30/2010


While FDI numbers have shown good growth, the same cannot be essentially attributed to this project alone, but was a result of a variety of other factors, including favorable economic conditions and collective institutional efforts.

Indicator 6 : Retraining and Counseling Services


N/A

20 percent of workers retrained or counseled to obtain alternative employment within 12 months and a further 20 percent within 18 months.

N/A

Overall, 46,000 retrenched SOE staff were counseled and 22,000 of them were provided retraining between 2005 and 2009.


Data obtained from DFID Completion Report, but it is difficult to establish timeframe within which this was done and whether these retrenched SOE employees were from the set of people who were funded under this project.

Indicator 7 : Support to Voluntary Retirement Scheme


No VRS programmes initiated before EGBM

45,000 workers retired with EGBM-supported VRS package.

N/A

57,400 retired workers received VRS payments under EGBM.


SOE VRS was co-financed by UK-DFID and the number indicated is the total for the program. It may be noted that the DSC series also supported reduction of SOE manpower and use of VRS.

Indicator 8 : Government moves out of manufacturing sector Value (quantitative

Manufacturing SOEs (loss): US$61 million

SOE losses for the 95 manufacturing

Target values were not

Manufacturing SOEs (loss): US$75 million

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or Qualitative) SOEs reduced on average by 10 percent annually.

revised


Refer to table/chart in Annex 2

Indicator 9 : Implementation of Resolution Plan for Nationalized Commercial Banks


Rupali Bank was National Commercial Bank in government

Rupali Bank brought to the point of divestment by end-2004.

Target Values were not revised

Privatization/ Sell- off efforts for Rupali Bank failed.


Not applicable

Indicator 10 : Implementation of Resolution Plan for Nationalized Commercial Banks


The state owned commercial banks were not corporatized at the start the project and were not under direct BB regulation either.

Agrani, and Janata Banks corporatized and brought to the point of divestment by end-2005./06. Sonali Bank was to be brought to the point where minority divestment could be done.

Project targets were revised from starting of a divestment process to that of providing private sector management for corporatized state owned banks

Performance based management contracts were entered for all three banks and were monitored during the project implementation.


Indicator 11 : Public Awareness, Monitoring and Evaluation and Tracking


N/A

Newspapers and media public fair and unbiased reports about SOE and NCB reforms in Bangladesh.

N/A

Inadequate public communication programs were carried out and there was no structured system for this project component.


In effect, this component was not executed during the course of the project.

ix

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP Actual Disbursements

(USD millions) 1 09/16/2004 Satisfactory Satisfactory 70.85 2 05/02/2005 Satisfactory Satisfactory 92.20 3 12/01/2005 Satisfactory Satisfactory 104.10 4 06/05/2006 Satisfactory Satisfactory 110.40 5 12/28/2006 Satisfactory Satisfactory 112.75 6 06/25/2007 Satisfactory Satisfactory 114.58 7 12/18/2007 Satisfactory Satisfactory 114.58 8 06/26/2008 Satisfactory Satisfactory 188.58 9 12/23/2008 Satisfactory Moderately Satisfactory 194.29

10 06/19/2009 Satisfactory Moderately Satisfactory 194.29 11 12/23/2009 Moderately Satisfactory Satisfactory 194.99 12 06/18/2010 Moderately Satisfactory Moderately Satisfactory 198.43

H. Restructuring (if any) Not Applicable

I. Disbursement Profile

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1. Project Context, Development Objectives and Design 1.1 Context at Appraisal The country context at appraisal was broadly characterized by an average 5 percent gross growth in gross domestic product (GDP), moderate inflation at 6 percent, and a fiscal deficit level at around 5 percent. Although macroeconomic fundamentals appeared stable, there were vulnerabilities of possible trade imbalance, high level of banking nonperforming loans (NPLs), and unsustainable losses in state-owned enterprises (SOEs). In the financial sector, reforms had been initiated through the Banking Reforms Committee. These included a number of measures related to prudential guidelines, supervision by the Bangladesh Bank, and a legal framework for debt recovery, in addition to restructuring, corporatization, and finally privatization of Nationalized Commercial Banks (NCBs). Among the manufacturing SOEs, a legacy in Bangladesh since independence, there were mounting losses, reducing fiscal space for other desirable social sector spending. This situation led to establishment of the Privatization Commission (PC), mandated with the task of carrying out SOE reforms by way of closure and divestiture of respective units; the closure of Adamjee Jute Mills paved the way forward for other SOEs. The Bank’s Country Assistance Strategy (CAS) FY01-03 was geared toward programmatic lending in support of reforms and selected investment operations and technical assistance in line with the priorities of the country’s poverty reduction strategy (I-PRSP and subsequent PRSP). One of the key thrusts of the Government’s strategy was the emphasis on the pivotal role of the private sector as an engine of growth. The International Monetary Fund (IMF) at the same time undertook its Poverty Reduction and Growth Facility (PRGF), which addressed common areas of concern, such as reduction in SOE losses and privatization of NCBs. The Bank launched the Development Support Credit (DSC) series, comprising four constituent credits totaling US$900 million, together with supplemental and additional financing of a further US$175 million, which supported wide-ranging reforms in institutions of economic management and governance, including banking sector reforms and reduction of losses from SOE operations. Both the Government’s strategy and the CAS recognized the key role of the private sector in real and financial sectors and the need for reforms directed toward reducing the Government’s role in state-owned manufacturing enterprises and banking. The Enterprise Growth and Bank Modernization (EGBM) project became effective in July 2004, at a time when the SOE reform issue (including reforms in the financial sector) was the most prominent. The EGBM project was designed to support the following:

• The Government’s policy of reducing and eliminating, over time, its ownership of assets in the real and financial sector of the economy, which would help in reducing fiscal deficit through reduction of SOE losses

• Private-sector-led growth through productive use of SOE assets and promotion of the medium, small, and microenterprise (MSME) sector by improving access to finance

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The development objectives of this project were (i) to trigger employment generation through private sector enterprise growth and reforms in SOE by containing future losses through privatization or closure of some loss-making SOEs, productive uses of abandoned assets, and improvements in access to finance for the “missing middle” of MSMEs, and (ii) to help create a competitive private sector banking system by staged withdrawal of the Government from state-owned banks through corporatization, leading to

2

substantial divestment of major government shareholding in Rupali Bank, Agrani Bank, and Janata Bank and divestment of minority shareholding in Sonali Bank. The performance indicators for the assessment of the PDOs were as follows:

• About 1,500 additional small enterprises received financing from participating financial institutions.

• Chittagong Steel Mills handed over to BEPZA and refurbished and converted to an Export Processing Zone (EPZ).

• Adamjee Jute Mills converted to an industrial park.

• Khulna Newsprint Mill and Chittagong Chemical Complex refurbished and converted to industrial parks.

• Around 20 percent of workers retrained or counseled to obtain alternative employment within 12 months and a further 20 percent within 18 months.

• About 80,000 workers retired with a voluntary retirement scheme (VRS) package (of which 45,000 workers financed under EGBM).

• SOE losses for the 95 manufacturing SOEs reduced on average by 10 percent annually.

• PC privatizes/liquidates an average of 10 SOEs per year.

• A new external management team hired by mid-2004 to manage Agrani Bank.

• Management experts for key positions in place at Sonali Bank and Janata Bank by end-2004.

• Rupali Bank brought to the point of divestment by end-2004.

• Agrani Bank corporatized and by end-2005 brought to the point o f divestment , at which time it will hold promise for potential strategic partner(s) to bid for substantial shareholding with management control.

• Janata Bank corporatized and by end-2006 brought to the point of divestment, at which time it will hold promise for potential strategic partner(s) to bid for substantial shareholding with management control.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, with Reasons and Justification The Project Development Objective was not revised. 1.4 Main Beneficiaries The main beneficiaries of the EGBM project are selected public institutions and banks, which in turn lend to private SME entrepreneurs. The EGBM project contributed to building capacity and institutional strengthening at a number of state institutions and banks, including the Board of Investment (BOI), PC, the Bangladesh Export Processing Zones Authority (BEPZA), and the four NCBs. In addition, the Small Enterprise Development component of the project provided for a line of credit to private sector MSMEs. The project also directly benefited retiring workers of SOEs, in the form of severance packages, and both retired and retiring workers from SOEs received counseling and retraining for alternative employment.

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1.5 Original Components (as approved) The project had seven categories in three main themes: (1) enterprise growth, (2) a longer-term program of adjustment in support of sustained economic growth, and (3) a banking reform program. The following is the list of project components and their costs with financing arrangements. 1.5.1 Enterprise Growth

1. Small enterprise development (US$10 million): The Small Enterprise Fund (SEF) was set up as a

refinancing facility for participating financial institutions (PFIs), such as BRAC Bank, BASIC Bank, Midas Financing, Dhaka Bank, and Prime Bank, for on-lending to the MSME sector as working capital and term loans.

2. Refurbishment of some strategic remaining assets of loss-making SOEs (US$20 million): This component was provided to cover initial planning and refurbishment costs for utilization of unproductive assets, mainly land, following closure of two SOEs (Adamjee Jute Mills and Chittagong Steel Mills). The tasks undertaken under this component focused on making these assets attractive for private sector investment and possible conversion to export-processing zones or industrial parks. In addition, two other sites had been proposed for support, including the Chittagong Chemical Complex and Khulna Newsprint Mill.

3. Institutional Strengthening (US$4 million): This component was directed toward capacity building of industrial development institutions such as Privatization Commission, the Board of Investment, the Bangladesh Export Processing Zones Authority, and the Bangladesh Small and Cottage Industries Corporation (BSCIC). Capacity building of these institutions has been directed toward carrying out divestiture and privatization of SOEs, investment promotion seminars, training and familiarization tours for BEPZA officials, development and implementation of Information and Communication Technology (ICT) programs within the institutions, and providing support to strategic investment promotion programs.

1.5.2 Longer-term Program of Adjustment in Support of Sustained Economic Growth

4. Support to voluntary retirement schemes (US$180 million + US$75 million DFID funding):

This component of the proposed operation was designed to continue the assistance initiated under the DSC, which supported much of the first tranche of 28 SOE closures in 2001–2002. It was designed to cover the VRS costs to the Government of a second tranche of about 95 enterprises slated for closure/privatization over the period 2002–2003 and 2007–2008. The Bank’s support was supplemented by about US$88 million (GBP 50 million) through DFID co-financing in support of this project, of which the VRS expenses accounted about US$75 million.

5. Retraining and counseling services for retired SOE staff (US$10 million DFID funding): This component of the EGBM project was provided through DFID funding and was directed toward providing adequate counseling and re-training support to retired workers.

1.5.3 Banking Reform Program

6. Reforming Nationalized Commercial Banks (US$34 million): Reforms in the NCBs had been

identified by both Government studies and the Financial Sector Assessment Program (FSAP) as being particularly urgent. The project was designed to support the Government’s initial reforms envisaged in these NCBs. These included

• privatization of Rupali Bank, • hiring of an external management team at Agrani Bank to contain losses, and • engagement of banking and management experts at Sonali and Janata Banks in order to

improve operational performance of these banks.

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7. Public Awareness, monitoring and evaluation (M&E), and tracking (US$2 million + US$3

million DFID funding): This component covered awareness raising, M&E of the reform process, and media tracking envisaged under the reform effort focused on dealing with the negative perceptions and adverse public opinion on privatization. In addition, this component also provided for M&E on the Government’s reform agenda supported through this project.

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The component-wise linkages to performance indicators are given in the table 1. Table 1. Project Components and Their Indicators Summarized

Component Performance Indicators 1. Enterprise Growth

1,500 small enterprises receive financing from PFIs Chittagong Steel Mills handed over to BEPZA and converted to EPZ. Adamjee Jute Mills converted to EPZ. Khulna Newsprint Mill and Chittagong Chemical Complex refurbished and converted to industrial parks. BOI and BEPZA facilitate US$40 million additional Foreign Direct Investment (FDI) per annum. PC privatizes/liquidates 10 SOEs per year. SOE losses for the 95 manufacturing SOEs reduced on average by 10 percent annually. 45,000 workers retired with EGBM-supported VRS package. 20 percent of workers retrained or counseled to obtain alternative employment within 12 months and a further 20 percent within 18 months. • A new external management team hired by mid-2004, to manage

Agrani Bank. • Management experts for key positions in place at Sonali Bank and

Janata Bank by end 2004. • Rupali Bank brought to the point of divestment by end-2004. • Agrani Bank corporatized and by end-2005 brought to the point of

divestment where it will hold out promise for potential strategic partner to bid for substantial shareholding with management control.

• Janata Bank corporatized and by end-2006 brought to the point of divestment where it will hold out promise for potential strategic partner to bid for substantial shareholding with management control.

Newspapers and media publish fair and unbiased reports about SOE and NCB reforms in Bangladesh.

2. Refurbishment of Assets

of Loss-Making SOEs

3. Institutional Strengthening

4. Support for Voluntary

Retirement Schemes 5. Retraining and

Counseling for Retired Staff

6. Program for Banking Reform

7. Public Awareness, Monitoring, Evaluation, and Tracking

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1.6 Revised Components The components were not revised 1.7 Other Significant Changes

• Project extension: following a request from the Government: the EGBM project was extended for a period of one year, from November 2009 until December 2010, to compensate for initial delays and the Institutional Strengthening component. The latter was originally designed to close in June 2009, but was extended till the end of the EGBM project.

• Bank modernization: The original scope of this component was limited to providing support to the Government to (i) hire a sales advisor for Rupali Bank Limited; (ii) hire management advisory teams (through consultants) for Sonali, Janata, and Agrani Banks; and (iii) set up a minimum information technology (IT) platform for the automation of Sonali, Janata, and Agrani Banks. After completion of the advisory activities at the NCBs, however, and as it become clear that privatization of these banks would not go forward, the project supported a new form of restructuring, involving the hiring of key top managers from the private sector with time-bound restructuring terms of reference (TOR) and specific responsibilities to achieve quantifiable targets to show reform results. After Sonali, Janata, and Agrani Banks were transformed into corporate entities, they were included as new implementing agencies of the project.

• Refurbishment of some strategic remaining assets of loss-making SOEs: Two additional SOEs had been identified for support under EGBM—Chittagong Chemicals Complex (CCC) and Khulna Newsprint Mills (KNM). The Government later dropped the refurbishment program for KNM due to lack of investor interest in that location. There was slow implementation progress on CCC, and the site also suffered from scarcity of reliable water supply. Given the halting implementation and approaching project closing date, the team decided to drop CCC from EGBM financing in 2008.

• Retraining and counseling: The project had provisions for the Ministry of Labor to undertake some retraining of retiring workers opting for VRS. This did not move well, in spite of all the efforts by the project coordination unit (PCU). As BRAC (an NGO originally known as Bangladesh Rehabilitation Assistance Committee) was already carrying out retraining and counseling activities with encouraging results, it was decided that retraining through Ministry of Labor be dropped and this component was transferred to BRAC.

• VRS component supported by DFID to the extent of $75 million: DFID withdrew support after payment of approximately $25 million as it had other development priorities and as DFID’s target number of retirees given VRS had been reached.

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2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design, and Quality at Entry Rating: Moderately Unsatisfactory The PDOs were established directly in response to the needs of the country during the project period and as agreed upon through cross-consultation with various stakeholders, including IMF and UK-DFID. Government ownership for the program to be supported by EGBM was high. The quality at entry was assessed by the Quality Assessment of Lending Portfolio (QALP) process was Moderately Satisfactory. However, on closer review, project design could have been improved on:

• In hindsight, and looking at the success factors for privatization projects supported by the Bank, the scope of the project was too wide in spite of the high ownership from Government. Such a wide scope resulted in a series of design options that lend to slower implementation and lower coordination. As soon as government ownership dwindled, implementation significantly slowed.

• The number of implementing agencies led to difficulties in the implementation of procurement processes and in financial management, which often led to delays in implementation and flow of funds. (There were 7 implementing agencies initially, rising to 10 during implementation.) This was expressed both by the client and task team members.

• While the underlying theme of the project appeared to be SOE reforms (including the banking sector), the project became distinctly divided into two parts that were quite unrelated. The PCU owned the banking portion of the EGBM project, while some of the Enterprise Growth elements such as the Communication/Public Awareness Component got neglected .

• While the result framework was fairly well defined in terms of targets, the linkages between some enterprise growth project components and desired outcomes was weak: for example, support to privatization targets and SOE loss reduction were not explicit in the project components except for providing institutional strengthening to the Privatization Commission. The desired intermediate outcomes of SOE loss reduction and privatization of units did find mention in the DSC series, which was a concurrent operation with the EGBM project and possibly helped in the process.

• The QALP review noted a low level of integration of environmental safeguards in the EGBM project design in terms of ensuring compliance with environmental standards when land was made available through the EPZs. In addition, the QALP noted that the SEF had not incorporated the screening of subprojects for possible adverse environmental impacts.

Major risks indentified at preparation, which were assessed as Substantial, included s slowing of the pace of privatization and a lack of political will in implementing banking reforms. These clearly manifested themselves during implementation and would have an impact on sustainability of development outcomes going forward.

2.2 Implementation Rating: Moderately Satisfactory The implementation progress of the EGBM project, as evidenced through mid-term reviews (MTRs), Implementation Status Reports (ISRs) and QALP, was generally rated as Moderately Satisfactory. The project was flagged for disbursement delays toward the end in 2010. The significant changes in implementation arrangements and components have been described in section 1.7.

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Some of the salient issues captured during the implementation support reviews are as follows:

• The slow-down of the SOE reform process led to the dropping of KNM and CCC units from being converted to EPZs, and the slow off-take of VRS resulted in nonutilization of about $22million as indicated in the ISR (June 2010). The VRS component continued with retirees from other SOEs, some of whom were not from the original set of 95 SOEs.

• The 2007 MTR noted some issues with the Social Safety Net component. It faced initial problems in implementation and could not be administered by the Ministry of Labour (MoL), and the portion allocated to MoL was added to the component being administered by BRAC. Subsequently, there were problems in identifying and targeting of the displaced SOE employees, which ultimately led to under utilization of the allocated funds.

• The 2007 MTR noted the change in possible direction on banking sector reforms supported by the EGBM project from divestment to corporatization and use of management contracts, but under government ownership.

• Subsequent ICRs noted progress on the performance of State-Owned Commercial Banks (SCBs) in terms of agreed performance indicators, and the same was evident during the ICR process. The Government has decided to continue the management contract model even beyond the EGBM project. Some governance-related issues are still unattended by the authorities in the SCBs, such as fit and proper criteria for selection of board members.

• The automation program supported all the SCBs to develop and adopt an IT investment plan, and the initial phase of the plan was implemented under EGBMP. Given the size of the SCBs (in terms of number of branches, business processes, and manpower), the support under EGBMP could only provide partial solutions of online banking to a limited number of bank branches, and the banks will now need to continue the reform process for automation, funding the cost from their own resources/budgets.

2.3 M&E Design, Implementation, and Utilization The project design had built-in a system of effective M&E, to be set up in the PCU to monitor the achievement of outcomes in the short and medium terms, including performance of consultants; progress of privatization, VRS, job creation, and MSME financing; and social safety tracking through DFID support. Although the PCU closely monitored the achievement of some project outcomes, it did not set up the envisioned M&E system, which could have been used very effectively for project management. Finally the Public Awareness and Communication component designed did not get implemented during the project. 2.4 Safeguard and Fiduciary Compliance 2.4.1 Financial Management Financial management processes were found to be generally satisfactory throughout the project. Quarterly financial reporting through Financial Monitoring Reports (FMRs) was adequate and for the most part timely during the project, although at the time of writing in May 2011 the Bank has still not received consolidated quarterly reports from MoF for the final quarter, January–March 2011. There are no pending audit reports in the project, which has been audited by the Foreign Aided Project Audit Directorate (FAPAD) of C&AG as external auditor. All material audit observations as identified by the Bank have been resolved. Initially the project was hampered by a lack of coordination between the PCU and the implementing agencies, with some incidences of delay in adjustment of advances and inadequate

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documentation leading to delay in release of payment to vendors. These issues were subsequently solved by improving coordination between PCU and implementing agencies through the strengthening monthly reporting arrangements, timely settlement of advances by agencies, and faster payment to third parties. 2.4.2 Procurement The project design had built-in procurement guidelines and arrangements for all components of the project, and implementation was satisfactory. Over the implementation period of six-and-a-half years, the project was subject to post-procurement review by the Bank on an annual basis. No irregularity of serious nature was found in procurement activities during the Bank’s reviews. However, some of procurement entities had limited procurement experience in Bank-financed projects, and the risks associated with this inexperience were considered substantial. BSCIC, BOI, and PC are yet to develop adequate procurement management capacity for handling large scale procurements. On the other hand, all the agencies completed most of the contracts within the original project closing period despite the fact that they had considerable weakness in contract management capacity. Procurement oversight during implementation was adequate considering the number of implementing agencies, and the implementation support missions have reported satisfactory procurement oversight. The procurement postreview report from the MTR states that documentation and compliance has been generally satisfactory. 2.4.3 Social and Environment Safeguards The project design had incorporated good consideration of social aspects of this intervention, and implementation of proposed social safeguards was generally satisfactory. There were no social safeguard issues identified during implementation support missions. Social protection measures included counseling, retraining, job placement, and credit support, including the creation of a social tracking system. The operation also considered opportunities for partnership with civil society organizations like BRAC. During implementation of the project the Social Safety Net component could not be implemented through the MoL, but BRAC was effectively used to administer the programs. However, greater supervision effort could have addressed some of the remaining elements, such as public awareness and social accountability. The EGBM project did, however, present some limitations on environmental safeguard issues, both in design and implementation. These issues were also highlighted by the various implementation support missions, including the QALP. The project proposed technical assistance through environmental consultancy to BEPZA and PC for strengthening their capacity to address environmental liabilities associated with sale of SOEs, and in construction of EPZs. On the SEF component there were no specific attempts made to mainstream environmental safeguards by the SMEs using SEF refinance. Environmental aspects also received little attention during supervision, and no environmental impact assessment (EIA) was carried out for implications that could have arisen from the refurbishment of SOE assets. During the ICR mission the subject was discussed, and BEPZA has agreed to carry out the EIA and then implement required safeguards for the EPZs. 2.5 Postcompletion Operation/Next Phase 2.5.1 Access to Finance for MSMEs (Small Enterprise Fund) The World Bank support to the SEF has enabled MSME lending to take off in Bangladesh. Improved access to finance continues to be on the priority list of Bangladesh Bank and the participating financial institutions, and SME lending has grown considerably. Most private banks have also opened a window for SME financing, and regular meetings are held between the Government and financial institutions to ensure flow of credit to SMEs. It may also be noted that the Asian Development Bank (ADB) and the

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Japan International Cooperation Agency (JICA) have also started their support to MSME lending through the SEF window. Discussions held during the ICR mission revealed the need for support to financial market infrastructure, including a credit rating, collateral registry, credit guarantees, and other risk-sharing mechanisms to improve the flow of credit to the MSME sector. 2.5.2 Economic Zones Continuing on the private-sector-led growth agenda, the Government has moved to a new regime of economic zones, built on the success of EPZs, as well as the reality of tight budgets, where public funds can no longer support BEPZA as the developer of EPZs. The Government has enacted the Economic Zones Act, based on the application of private participation and commercial principles coupled with environmentally and socially compliant industrialization. This new regime, supported by the recently approved Private Sector Development Support Project1

and other donors including IFC and UK-DFID, will allow the Government to develop and pilot an approach that is less reliant on government fiscal subsidies, while leveraging comparative advantages and private sector capability where possible.

2.5.3 Institutional strengthening for Private Sector Development One of the most successful initiatives under the institutional component has been the use of counselors to facilitate and upgrade sound labor management relationships within the EPZs. IFC’s advisory facility, the Bangladesh Investment Climate Fund (BICF), has continued the funding of the EPZ counselors and expanded their role to cover comprehensive workplace monitoring and compliance, and will continue to work in establishing the long-term sustainability of this critical function. IFC-BICF is also continuing to support BEPZA’s automation and environmental management capacities, as well as assisting both BEPZA and the Board of Investment in investment promotion responsibilities.

2.5.4 Banking Reforms The Government has expressed its desire for an extension of the program to reinforce the improvements achieved in the operations of the SCBs attained through the EGBM project. The agenda of restructuring the NCBs has moved forward, although at a pace slower than originally envisaged because of the political difficulties of reform. While significant gains in operational parameters of SCBs in terms of NPL reduction, and net interest margins, have been attained in the three NCBs, it is important to hold onto these gains by way of continuing monitoring of these banks, which could be done through some oversight mechanism by the Bangladesh Bank.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design, and Implementation The development rationale behind the project remained relevant throughout implementation and continues to be relevant. The CAS Progress Report2

1 World Bank, “Project Appraisal Document: Private Sector Development Support Project,” Report no: 53729-BD, Washington, DC, 2011.

praised the Government’s reforms in the SOE sector and efforts to reduce public participation in manufacturing, SOE losses, and reliance on budget financing. The CAS explicitly recognized EGBM and stated that further World Bank support would be provided as the Government continued its efforts to withdraw from the manufacturing sector and to restructure the entire SOE sector. Similarly, the report noted the need for urgent reform in the NCBs and explicitly

2 World Bank, “CAS Progress Report,” Washington, DC, 2003.

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supported the engagement of the Government in dialogue on reforms to reduce operating costs within these banks through restructuring, reconstituting NCB boards, and using management contracts for eventual privatization. Presently, the project objectives remain relevant to the country’s strategic priorities. The second PRSP3 calls for putting Bangladesh “into a trajectory of high-performing growth” by taking advantage of its low-cost labor for faster expansion of labor-intensive manufacturing activities, as well as paying closer attention to investment climate reforms to spur increased domestic and foreign investment. Similarly, the current CAS4

also supports the Government’s ambitions by contributing to accelerated, sustainable, and inclusive growth through increasing transformative investments and enhancing the business environment. Finally, the recent CAS 2011–2014 states that increasing transformative investment and enhancing business environment under the pillar of accelerated growth are expected to lead to an improved environment for private sector investment, reaffirming the relevance of the EGBM project in the current context.

3.2 Achievement of Project Development Objectives 3.2.1 Project Development Objective 1: Trigger employment generation through private sector enterprise growth and reforms in SOE by containing future losses through privatization or closure of some loss-making SOEs, productive uses of abandoned assets, and improving access to finance for the “missing middle” of MSMEs. The project has been successful in its development objective of employment generation through private sector enterprise growth. The SEF, in particular, not only surpassed its target objectives but has also provided a demonstration effect, and its success has led to replication, with further similar schemes being set up in Bangladesh Bank, and has also drawn other donors like the African Development Bank (ADB) and JICA to its fold. To date, the SEF has financed up to 2,773 enterprises and generated incremental employment of approximately 5,000 people. The refurbishment of Adamjee Jute Mills and Chittagong Steel Mills is commendable, not only in the positive impact it has created, but also in the potential in the immediate future for demonstrating an export-led industrial growth through private investors with better regulatory compliance. In a short span of time, new firms started operations, exporting from both Adamjee and Karnaphuli EPZs. BEPZA has created a total of 589 industrial plots in the two zones, of which 472 have already been allotted to 196 foreign and domestic investors, and five four-storey factory buildings have been leased to investors. The two EPZs account for cumulative investment of US$210 million, employing 90,000 local workers, with exports accounting for over $500 million.5

The presence of AEPZ and KEPZ has also resulted in growth and expansion of various logistical services in the surrounding area, including banking, trucking, and food-supply, and it is estimated that when both zones are fully operational, they will be accountable for employment generation of up to 120,000 people within and outside the EPZs.

Although the SOE privatization program was only partially implemented, hard budget constraints became a reality, and SOEs came to terms with the idea that they will not have the support of the MoF in meeting their wage bills. Consequently, there was rationalization of personnel and scaling down of wage bills in all SOEs. The privatization initiative lost traction early on in the project and came to a complete halt with the new government that came in to power in January 2009. It needs to be noted that the project components intended to lead to reduction in SOE losses and privatization were just the Institutional

3 Government of Bangladesh, “National Strategy for Accelerated Poverty Reduction II, FY2009–2011.” 4 World Bank, “Country Assistance Strategy FY2011–2014,” Washington, DC. 5 BEPZA, “Completion Report,” April 2011

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Strengthening components that helped these institutions develop their information systems, hardware, and human capacity and obtain relevant international exposures, but they were not linked directly to attaining the outcomes given in the results framework for SOE losses or number of units privatized. Hence, the attribution of these results to the implementation of this project seems fairly weak. The same linkage issue is also weak for the growth in FDI attained by BOI. As to retraining and counseling, these initially faced challenges in locating retrenched workers due to their vastly dispersed positions physically. Nonetheless, BRAC still managed to reach out to a total of 46,689 families, whose retrenched working members received counseling as their first participatory activity, and training was provided to 22,214 workers and family members. Furthermore, 13,147 workers and family members received microcredit, and 15,423 children of retrenched workers received education stipends. Although most participants were initially eager to find new jobs, an unfriendly job market and reluctance on the workers’ part to engage in new skill development meant that this program was not able to generate employment in large numbers. Ultimately, the Job Information Bank registered 2,819 individuals and generated employment for 1,309 workers.6

3.2.2 Project Development Objective 2: Help create a competitive private sector banking system by staged withdrawal of government in state-owned banks through corporatization, leading to substantial divestment of government shareholding in Rupali Bank, Agrani Bank, and Janata Bank and divestment of minority shareholding in Sonali Bank. Though the National Commercial Banks could not be taken forward on the path of privatization by the EGBM project, the revised arrangements to use performance-based management contracts were fairly successful in improving operational performance. In addition, the NCBs were corporatized and brought under the Banking Companies Act regulated by Bangladesh Bank. The objective in the Bank Modernization component was to improve governance and efficiency of the public sector banks through the restructuring of NCBs. The initial design of providing support to privatization of all four NCBs never received the Government’s nod, and in the end, the project settled for privatization of the smallest NCB—Rupali Bank—which was also not achieved due lack of adequate private sector interest and differences in valuation. Although the State-Owned Commercial Banks (SCBs) remain weaker than private banks, their performance has improved under corporatization and due to the reform program that is based on incentives and goals monitored by Bangladesh Bank. At an overall level for the SCBs, the project period has seen the following achievements with respect to wider financial sector goals and operational performance of SCBs:

• The total NPLs of the state-owned banks has come down from about 25 percent in 2004 to around 12 percent in 2010.

• The share of incremental bank deposit and credit from state-owned banks showed a downward trend, which can also be read as growth in market share of private sector banks. In overall terms, the share of state-owned banks in lending declined from 43 percent in 2004 to 33 percent in 2007, and the share in deposit declined from 50 percent in 2004 to 30 percent in 2010.

• Progress on capital shortfall (relative to capital adequacy requirements) is not very clear from the data obtained and shows varying levels—which could be due to changes in provisioning and risk weight classifications. Data obtained from Bangladesh Bank shows a progress on capital

6 BRAC, “Social Protection Package for Retrenched State-Owned Enterprise Workers: A Quick Review.”

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adequacy (measured by percent of risk weighted assets) from 4.1 percent in 2004 and -0.84 percent in 2005 to 8.92 percent in 2010.

• Overall performance of SCBs showed some operational improvements in NPL ratios and debt recoveries of NPLs in cash. All three SCBs have significantly reduced their NPL ratio as a percentage of loan portfolio. As a result, the actual NPLs have dropped by 21.5 percent for Sonali bank, 23.9 percent for Janata bank, and 19.8 percent for Agrani bank in 2008.

Refer to annex 2 for additional data and information on results. 3.3 Efficiency The PAD had outlined an economic analysis based on VRS expenditures and benefits thereof, and this was based on comparison between costs and benefits that are derived from cash flows of a planned labor severance program. The Economic and Financial Analysis section in PAD had undertaken a very limited financial analysis view of a payback in less than three years without taking into consideration the economic and/or social costs and benefits of such an operation. With the VRS component exceeding the planned numbers, the estimated payback period has been met. However, since the project included serious social costs of retrenchment and was supplemented by increased employment through creation and expansion of new private sector enterprises, an overall economic internal rate of return (EIRR) could have been attempted at the design stage. Limitations in standards and data for a social cost-benefit analysis on conversion factors do not allow for such analysis at this stage. It may also be noted that structured procurement systems followed by the implementation agencies such as BEPZA resulted in small savings from budgeted costs, and to that extent the investment component was cost-efficient. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The project achieved its objective of enterprise growth measured by way of increased private sector investment and employment satisfactorily, and the objectives remain relevant in the present socio-economic context of Bangladesh. However, the EGBM project did not manage to drive SOE reforms in Bangladesh, and there was no significant reduction in the involvement of the Government or in its ownership of SOEs. Limited fiscal gains were achieved by containing SOE losses, which were brought about primarily by the VRS component. It may also be noted that the privatization agenda did not go forward as envisaged in the project, which was due to a number of factors, such as lack of political will in the existing and changed governments, and that the project design had not built in adequate support for such an ambitious and politically sensitive program. On the Banking Reform component, the project did well to redesign the component around improving the performance of state owned banks under state ownership by use of management contracts, and instead of outright privatization. In overall terms, the EGBM project had six components of which three components led to satisfactory outcomes. 3.5 Overarching Themes, Other Outcomes, and Impacts 3.5.1 Poverty Impacts, Gender Aspects, and Social Development BEPZA’s conversion of the two closed SOEs into successfully running EPZs has provided jobs for over 23,000 people directly, and it is estimated that they will provide employment for up to 120,000 people both directly and indirectly, once they are fully operational. Furthermore, women represent around 65 percent of workers in zones, suggesting that zones have been useful in creating economic participation for women in Bangladesh. An assessment of BRAC’s implementation of its Social Protection Package for Retrenched SOE Workers (the Kallyan project) shows that project participants experienced significant positive impacts on asset holding, including livestock, poultry, and land. There is also evidence of

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increased engagement in business activity as the primary occupation of participating retrenched workers. It was also found that per capita income of participant households increased, and the income share from day labor was lower compared to that of nonparticipant households, indicating that participating households’ dependency on day-labor had fallen significantly. Furthermore, the project played a positive role for educating girls of participating households, with higher female enrolment rates, compared to non-participating households. 3.5.2 Institutional Change/Strengthening The Institutional Strengthening components of the project were directed toward capacity building of BEPZA, BOI, and PC, which have key roles to pay in encouraging private investment and growth. The EGBM project successfully completed the following institutional strengthening elements:

• Basic IT infrastructure for MIS has been set up for the EPZs managed by BEPZA.

• Professional counselors for providing advice on regulatory compliance and labor-related issues have been recruited and trained.

• BEPZA is in process of developing an environmental plan for the EPZs.

• A number of investment promotion seminars have been carried out for investors from various countries, and training and study tours have been undertaken by BEPZA.

• BOI Service Tracking system and BOI Information Management System have been set up on a network and are fully operational.

• Investor handbooks and other promotional literature have been developed by BOI.

• BSCIC has also benefited by the project in terms of ICT systems development and automation of information and work flow processes.

• While the Privatization Commission developed a comprehensive privatization program and the project provided some assistance by way of consultants for valuation, tendering processes, and hardware and information systems, the privatization program got derailed for lack of government commitment during the early stages of the EGBM project.

3.5.3 Other Unintended Outcomes and Impacts (positive or negative) The Bank has taken a lot of criticism for supporting the closure of state-owned jute and textile mills under the DSC program. Although golden handshakes were given out through IDA credit, because alternative employment was not available for most retrenched workers, these retrenchment programs remained highly unpopular (even though the project had built in retraining components), giving vent to populist opinion that the Bank was creating poverty rather than reducing it.

4. Assessment of Risk to Development Outcome Rating: Significant The major risks to sustainability of the outcomes achieved under the EGBM project are as follows: Privatization and SOE losses: The SOE privatization program seems to have been abandoned by the Government, and there is no other initiative that would improve the governance and operations of SOEs,

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and more specifically the manufacturing SOEs. In addition, there have been pay increases given to SOE employees. The Privatization Commission has also lost its initial momentum, and in the past few years no SOEs have been handed over to the PC for either closure or divestment. Going forward, it would be difficult to hold the limited gains on SOE losses achieved from this project. Banking reforms: The NCBs remain under government ownership, though now corporatized under the Banking Companies Act, and the operational performance gains attained are at a risk of getting derailed in the absence of a strong institutional monitoring mechanism, even if the management contracting continues beyond the EGBM project. The World Bank support to SEF has enabled MSME lending to take off in Bangladesh.

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance 5.1.1 Bank Performance in Ensuring Quality at Entry Rating: Moderately Unsatisfactory As noted earlier, the project had weaknesses in design in terms of linkage of Institutional Support components and the desired results in overall terms. Weaknesses included the following:

• The overarching objective of the project was centered on the SOE privatization initiative, including that of government banks. The project components were inadequate in terms of attaining such politically sensitive objectives as activities that would lead up to privatization of SOEs ( including banks).

• Targeted reduction in SOE losses were solely based on retrenchment of SOE employees.

• Earlier reviews (QALP) have also noted lack of proper integration of environmental safeguards in the EPZ and SEF components.

Strengths included the following:

• The specific investment components such as VRS and EPZs, were well designed and directed toward attaining the limited objectives of increasing private sector investment and employment.

• The project design included social safety and communication components to address the after effects of a privatization program

5.1.2 Quality of Supervision Rating: Moderately Satisfactory Bank supervision has been rated satisfactory. The project was really slow to take off, and some mid-course corrections had to be made in some components of the project. The Bank team was proactive and worked in coordination with the many implementing agencies, particularly BEPZA and the state-owned banks, which enabled the project to move forward following a slow start. The political environment was not very conducive for such a large and transformative reform program during a major part of the implementation period. The Bank team was appreciated by most implementing agencies during the ICR

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process, and the implementing agencies were found to be very motivated and were actively supportive of World Bank’s involvement, particularly in the BEPZA Export Processing Zones and the performance monitoring done on the SCBs. On the fiduciary front, procurement arrangements were robust and managed well with no exceptions during the course of the project. Financial management systems were satisfactory with no major audit or reporting concerns. 5.1.3 Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory The overall Bank performance has been rated as moderately satisfactory for this project as the overarching objective of SOE reform was only partially attained, in part because the project was executed through very difficult times of varying client commitment and political changes. The Government and implementing agencies were satisfied with the performance of task team and were appreciative of the strong supervision provided by the Bank. The task team did well to recognize the futility of pursuing a divestment agenda for NCBs and changed its approach to management contracts and was able to drive some of the desired results. The VRS component, however, did not disburse fully both because of slow execution and change in policy direction with regard to SOEs. In addition, the Bank provided good support to the number of implementing agencies on fiduciary aspects and there were no major issues in either procurement or financial management during the course of the project. Finally, in spite of the difficult political circumstances that prevailed during the period, the Bank team managed to complete the project with limited extension. 5.2 Borrower Performance 5.2.1 Government Performance Rating: Moderately Satisfactory The Government started with strong commitment to reforms through privatization of manufacturing and banking sector SOEs when the EGBM project was designed. However, support to the privatization program gradually weakened as the project progressed and was subsequently abandoned. This period also saw political changes, including a transient caretaker government, which also weakened commitment to the privatization program. Under these circumstances the overall project coordination unit under the MoF did well to execute some of the major elements of the project, such as the VRS and refurbishment of the EPZs through BEPZA and the SEF through Bangladesh Bank. The overall commitment and strong supervision provided by the PCU enabled completion of the EGBM project without major delays, and over 90 percent of the planned expenditure was completed. 5.2.2 Implementing Agency or Agencies Performance Implementing Agencies Rating: Satisfactory There were a number of implementing agencies in the project, and the number increased during the project, with all the three NCBs becoming classified as implementing agencies midway through the project. Table 2 provides an assessment of their performance resulting discussions held during the implementation mission. The assessment was based on a broad judgment of capacity, the extent of involvement of senior personnel in the project, completion of project components, and achievement of outcomes. Table 2. The Performance of Implementing Agencies Implementing Agency Rating BEPZA Satisfactory BOI Satisfactory

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MOF Satisfactory PC Moderately Satisfactory BSCIC Moderately Satisfactory Janata, Sonali and Agrani Banks Satisfactory. 5.2.3 Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory. Based on the above described assessment, overall borrower performance has been rated as Moderately Satisfactory.

6. Lessons Learned 1. There is a need to be cognizant of political situation and its propensity to change in Bangladesh

for planning Bank interventions: A major factor to be taken into account while crafting the reform agenda and its implementation format is the antagonistic and highly confrontational relationship between the two major political parties. It is felt that this antagonism prevents Bangladesh from reaching its full potential as a functioning democracy. Shrill political differences often manifest in violent clashes and preclude any sort of debate or political consensus on reforms from emerging. As a result, reform measures, rather than gaining momentum, have tended to be opportunistic and sporadic.

2. SOE reforms could also be handled without outright privatization: It important to recognize that SOEs reforms need to be handled carefully, and to an extent they can be accomplished without completely doing away with government ownership. As demonstrated in the case of state-owned banks, it may be useful to recognize that similar corporatization moves for other SOEs coupled with better corporate governance structures can help in making the SOEs more commercially oriented and incorporate elements of market discipline without a complete change in ownership. Small and progressive divestment in capital markets with the state remaining the majority shareholder could be an alternative to outright divestiture.

3. Reforms in state-owned banks require strong and continued oversight by the regulator in order to retain the gains achieved: The SCBs (as NCBs are now called) are showing operational performance improvements but would need substantial capacity building and possible shoring up of their capital bases before they can access capital markets for equity. It may be better to address banking SOEs through a separate engagement in the future rather than in tandem with manufacturing SOEs, as the issues are quite different and have different implications for the financial sector of the economy.

4. It may have been better to have fewer mutually reinforcing components: The project had a large number of disjoint components with many implementing agencies, which made implementation difficult and lacked an overarching common direction. In addition, the period of implementation was too long for making an SOE reform program effective. VRS programs need to be supplemented by more effective social safety nets and stronger public awareness and communication campaigns.

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7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 7.1 Borrower/Implementing Agencies The borrower and implementing agencies were in general satisfied with the performance of the Bank during implementation of this project. The major comments provided by the borrower and implementing agencies that can help in future projects are as follows:

• Implementing agencies that were involved in physical infrastructure investment components, such as BEPZA, were of the view that the process of flow of funds after the actual contracts have been awarded required a number of levels of scrutiny, which could have been avoided. This issue has been addressed for subsequent projects like PSDSP.

• The implementing agencies appreciated Bank supervision in enabling project implementation, particularly during periods of political uncertainty.

• The MoF suggested that the project could have incorporated some additional capacity within the implementing agencies, particularly for review of consulting reports given on the state-owned banks.

• The Government felt that the number of implementing agencies was large for the Project Coordination Unit to manage effectively.

7.2 Cofinanciers DFID was the only cofinancier for the EGBM project, and DFID contributed to the Social Safety Net component of the project. DFID expressed the view that privatization programs need to be supplemented by a strong communication component that addresses concerns of the public at large. 7.3 Other partners and stakeholders There were no views obtained from any other stakeholder on this project.

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Annex 1. Project Costs and Financing Table A1.1 Project Cost by Component (in US$ millions equivalent)

Components Appraisal Estimate (US$ millions)

Actual/Latest Estimate

(US$ millions)

Percentage of Appraisal

Enterprise Growth 0.00 10.00 Refurbishment of Assets of Loss-making SOEs 0.00 20.00

Institutional Strengthening 0.00 4.00 Support for Voluntary Retirement Schemes 0.00 180.00

Program for Banking Reform 0.00 34.00 Public Awareness, Monitoring, Evaluation, and Tracking 0.00 2.00

Total Baseline Cost 0.00 250.00 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project Costs 0.00 250.00 Front-end fee PPF 0.00 0.00 .00 Front-end fee IBRD 0.00 0.00 .00 Total Financing Required 0.00 250.00 Table A1.2. Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(US$ millions)

Actual/Latest Estimate

(US$ millions)

Percentage of Appraisal

Borrower 50.00 0.00 .00 UK: British Department for International Development (DFID) 88.39 0.00 .00

International Development Association (IDA) 250.00 0.00 .00

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Annex 2. Outputs by Component

Table A2.1 provides a description of all component-wise outputs produced under the EGBM project. Figure 1 and figure 2, which follow the table, provide supporting data on achievement of results on SOE losses. Table A2.1. EGBM Outputs by Component Component Output Enterprise Growth Component Small Enterprise Fund 38 participating financial institutions (18 banks and 20 NBFIs)

Amount refinanced to PFIs: US$39 million Total number of enterprises financed: 2,773 (of which 1,246 were new enterprises) New employment generation: 4,273

Refurbishment of some strategic remaining assets of loss-making SOEs Adamjee Jute Mills The idle land of Adamjee Jute Mills was handed over to BEPZA and renovated into Adamjee Export

Processing Zone. The zone now comprises 307 industrial plots. Investment: US$120 million Employment: 14,995 Exports: US$301 million

Chittagong Steel Mills Chittagong Steel Mills was renovated into Karnaphuli Export Processing Zone, with 282 plots. Investment: US$123 million Employment: 17,423 Exports: US$194 million

Institutional strengthening BEPZA BEPZA was fully automated, including integrated MIS and a Web-based network.

Investment promotion seminars were held globally and promotional video campaigns in various languages were produced. Training was given on HR management; industrial relations management for mid-level management; toxic and hazardous waste management; IT application in management; management of organizational change; organizational financial planning and cost control, and IT application in management.

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Study tours were taken to familiarize senior officials with other international EPZs/FTZs/SEZs, including those in Japan, South Korea, Hong Kong SAR, China, Indonesia, Malaysia, China, Sri Lanka, Vietnam, and the Philippines. 60 counselors were recruited and trained to improve compliance-related issues. This has greatly improved labor relations among all stakeholders in the EPZs.

Board of Investment Board of Investment introduced phased e-governance, with an automated comprehensive information management system and database containing micro- and macrolevel economic data, and an online service tracking system. The BOI Service Tracking (BOST) allows 24-hour online tracking, with time-bound service processing, and also provides dynamic Web-based database support. The BOI Information Management System (BIMS) comprises MIS on local investment, FDI, and joint venture investments; industrial, financial and technical assistance; utility services; macroeconomic and other industrial data; visitors’ information; IRC information; foreign credit; law, policies, and agreements related to investment; work permit management; HRD; budget; and library and inventory. BOI has also developed a comprehensive database covering all the companies registered with BOI. This has been a major development given BOI lacked any systematic background information on entry, exit and growth of its approved investments. The newly developed database covers over 13,000 registered companies and comprises details on their investment, annual turnover, employment, working capital, and operational management. This database has also been designed to be compatible with BIMS, thereby allowing all new companies registering with BOI to automatically be listed in the overall company database. The database will serve an effective purpose for future survey work as well as generating a myriad of practical data at-a-glance. As part of investment promotion activities, promotional materials were prepared, including CDs and investment handbooks, and exposure tours were conducted both domestically and internationally.

Bangladesh Small and Cottage Industries Corporation

Automation: BSCIC operationalized LAN and WAN networking throughout its head office and regional offices, which will allow data to be entered directly from the field. BSCIC has also developed and installed software for the Accounts and Finance, MIS, and Personnel divisions. A computer-aided design (CAD) system has been introduced to the Design Centre and Civil Engineering Division, allowing the designers and engineers to design and plan with accuracy. Following the introduction of AutoCAD, the Design Centre has also been operating as an HR development centre, with three-month courses (consisting of 20 to 25 people) for the public in twelve areas, including pottery, screen-printing, etc.

Privatization Commission Computers, software, and LAN network were set up. However, PC had very limited success with privatization, which they mainly attribute to three reasons: (i) lack of clean entitlement of the sites—some are still pending at court; (ii) lack of government appetite to provide PC with new SOEs and cooperation in regard to resolving the issues with the ones in current list; and (iii) inability to attract

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experts to take on board to monitor and accelerate the process of privatization.

Longer-term Program of Adjustment in Support of Sustained Economic Growth Support to Voluntary Retirement Schemes 57,400 workers from various loss-making SOEs were provided VRS.

(See Figures 1 and 2) Retraining and counseling services for retired SOE staff The Social Protection Package for Retrenched SOE Workers—BRAC Kallyan Project—had the primary

objective of enhancing targeted retrenched workers’ social and economic capabilities and to provide health, education, and employment support for their families. It specifically targeted families of formerly enlisted retrenched workers and unlisted casual workers who lost their jobs since 2001 from the closure of state-owned enterprises. Outputs were as follows: Counseling provided to 46,689 retrenched workers and their families Training provided to 22,214 workers Credit provided to 13,147 workers/families Child education stipend provided to 15,423 children, of which 6,942 were girls Job Information Bank registered 2,809 prospective employees and generated employment for 1,139 workers

Banking Reform Program Resolution of the problems of the Nationalized Commercial Banks SCBs

Outcome Indicators: Move toward a market-based financial sector resulting in a more viable and efficient system of financial intermediation. Measurable indicators Reduced share of NCBs in banking sector assets: The share of incremental bank deposit and credit from state-owned banks showed a downward trend, which can also be read as growth in market share of private sector banks. In overall terms the share of state-owned banks in lending declined from 43% in 2004 to 33% in 2010, and the share in deposit declined from 50% in 2004 to 30% in 2010.

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Lower percent of NPLs: The total NPLs of the state-owned banks has come down from about 25% in 2004 to around 12% in 2010. Improving capital adequacy: Progress on capital shortfall (relative to capital adequacy requirements) is not very clear from the data obtained and shows varying levels, which could be due to changes in provisioning and risk-weight classifications. Data obtained from Bangladesh Bank shows progress on capital adequacy (measured by % of risk-weighted assets) from 4.1% in 2004 and -0.84% in 2005 to 8.92% in 2010. Higher profitability of banking: Return on equity of the private banks stood at 16.7 percent in 2007 and at percent, while in 2002 the indicator was 11.6 percent.

Agrani Bank • Management advisors (consultants) were hired and delivered a restructuring plan for eight core

areas of banking. • The bank was corporatized. • Managing director/CEO was hired from the private sector with specific terms of reference and a

specific fixed tenure. • Satisfactory progress was made in reducing the NPLs and operating costs. • Recapitalization plan created, and the bank will offer an initial public offering to divest minority

interest (up to 45%) in due course.

Janata Bank Sonali Bank

• Management consultants were hired and delivered a restructuring plan for eight core areas of banking.

• The bank was corporatized. • Managing director/CEO and four general managers were hired from the private sector with

specific terms of reference and a specific fixed tenure. • Made satisfactory progress in reducing the NPLs and operating costs.

• Management consultants were hired and delivered a restructuring plan for eight core areas of banking.

• The bank was corporatized. • Managing director/CEO and four general managers were hired from the private sector with

specific terms of reference and a specific fixed tenure.

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Rupali Bank

• Made satisfactory progress in reducing the NPLs and operating costs. • Have recapitalization plan. This will be the only bank that will have 100% government

shareholding.

• Sales advisor was appointed and the bank was brought to the point of sale. • The consulting firm—sales advisor—completed all its tasks including due diligence of the bank,

giving the Government privatization options, preparing the information memorandum (IM) for prospective buyers, setting up the data room for the buyers, organizing road shows for the sale, and acting as technical support for evaluating the offers. The road show was also funded under the EGBMP.

• The Government on its part had tried to complete the sales process by finalizing the deal with the winning bidder but finally the deal did not come through, and so the Government decided to scrap it.

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Figure 1. Reduction of SOE Losses (US$ millions): Manufacturing Sector and All SOEs

Figure 2: Reduction in SOE Manpower During the Project Period

-800.00

-600.00

-400.00

-200.00

0.00

200.00

400.00

600.00

800.00

2004 2005 2006 2007 2008 2009 2010

Total SOE Profit/Loss Manufacturing SOE Profit/Loss

0

20,000

40,000

60,000

80,000

100,000

2004 2005 2006 2007 2008 2009 2010

Manufacturing SOE Manpower

26

Annex 3. Economic and Financial Analysis (including assumptions in the analysis)

Detailed economic and financial analysis was not carried out.

27

Annex 4. Bank Lending and Implementation Support/Supervision Processes

Table A4.1 Task Team Members

Names Title Unit Responsibility/ Specialty

Lending Simon C. Bell Sector Manager SASFP G.M. Khurshid Alam Sr. Private Sector Dev. Specialist SASFP Co-TTL Shamsuddin Ahmad Sr. Financial Sector Specialist SASFP Co-TTL Kiatchai Sophastienphong Sr. Financial Sector Specialist SASFP Hassan Zaman Sr. Economist SASFP Suraiya Zannath Sr, Financial Management Specialist SARFM Zafrul Islam Sr. Procurement Specialist SARPS Mohammad Sayeed Disbursement Officer SARFM Sunita Kikeri Advisor CICDR Nilufar Ahmad Sr. Social Scientist SASES Paul J. Martin Sr. Environmental Specialist SASES Arif Ahamed Research Assistant SASFP Kishor Uprety Sr. Counsel LEGMS Nagavalli Annamalai Lead Counsel LEGPS Bridget Rosalind Rosario Office Administrator SASFP SAK Md. Abdul Hye Program Assistant SASFP Other Agencies Chanpen Puckahtikom Asst. Director, Asia-Pacific Division IMF Md. Reazul Islam Sr. Economic Advisor DFID

Supervision/ICR G.M. Khurshid Alam Sr. Private Sector Dev. Specialist SASFP Shamsuddin Ahmad Sr. Financial Sector Specialist SASFP Dhruba Purkayastha Sr. Private Sector Dev. Specialist SASFP ICR TTL Kiatchai Sophastienphong Sr. Financial Sector Specialist SASFP Nagavalli Annamalai Lead Counsel LEGPS Nilufar Ahmad Sr. Gender Specialist SDV Zafrul Islam Sr. Procurement Specialist SARPS Tanvir Hossain Procurement Specialist SARPS Suraiya Zannath Sr. Financial Management Specialist SARFM Md. Mahbubur Rahman Financial Management Specialist SARFM Shakil Ahmed Ferdausi Environmental Specialist SASDI Sadruddin Muhammad Salman Operations Analyst SASFP Shah Nur Quayyum Operations Analyst SASFP Aneeka Rahman Operations Analyst SASFP Bridget Rosalind Rosario Program Assistant SASFP

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SAK Md. Abdul Hye Sr. Program Assistant AFCTZ Table A4.2 Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks US$ Thousands (including travel and consultant costs)

Lending FY03 48.67 FY04 273.47 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 322.14 Supervision/ICR

FY03 0.00 FY04 0.00 FY05 119.39 FY06 110.79 FY07 128.31 FY08 89.37

Total: 447.86

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Annex 5. Beneficiary Survey Results (not required) (if any)

No beneficiary surveys were carried.

30

Annex 6. Stakeholder Workshop Report and Results ( not required) (if any)

Not carried out.

31

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

35

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders7

UK-DFID co-financed US$88.39 million specifically for the VRS and Social Safety Net component of this project. As mentioned earlier, DFID withdrew support for the VRS component after payment of approximately $25 million, as it had other development priorities and as its target number of retirees given VRS had been reached. BRAC continued to support the Social Safety Net component via direct grant funding, although there was initially some slow disbursement. It was very challenging to reach all the workers as they were scattered around the country following the closure of the SOEs. Nonetheless, BRAC made impressive efforts to track the workers as far as possible. The presence of BRAC offices around the country was of huge assistance. At the end of the project, the main risk is sustainability of the various reforms initiated. Most important, the initiative of privatization or reform of SOEs needs to continue to mitigate government losses, which are still very high. Though it was expected that reforms of SOEs would continue at a higher pace during the regime of the caretaker government, this was not evident. After 2007, privatization and/or reforms in SOEs slowed down. The situation has not changed since the democratic government came into power in early 2009. Also, there is risk in terms of the sustainability of the safety net program. The children of many of the retrenched workers are not yet in a position to earn for the family and may have to stop their education if they do not continue to receive the stipend provided. However, after closing the current project, the safety net programs will come to an end unless BRAC mainstreams the activities into its operations, as suggested to BRAC at the beginning of 2011. Although there was a lack of coordination among Government agencies, and between the Government and donors, all the stakeholders remained committed to the project, which allowed it to deliver results. The lack of coordination may be ascribed to the initial project design, by which the VRS component and Social Safety Net components were to be implemented in parallel rather than in an integrated fashion. Future project designs should re-consider this element to allow improved coordination and thereby an even more effective project.

It would also be useful if social tracking of the workers taking VRS could be conducted. This would help provide additional guidance on how retired workers can be better fitted for a "post-SOE" life. Thus it could provide input for the Government's strategy for a

retrenchment exercise in future. The review team would therefore encourage BRAC and the Government to disseminate/promote methods and results of this project widely within

the country.

7 UK-DFID, “EGBM Project Completion Review Report.” London: 2009.

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Annex 9. List of Supporting Documents BEPZA, Completion Report. April 2011. BRAC, “Social Protection Package for Retrenched State-Owned Enterprise Workers: A Quick Review.” EGBM Project Coordination Unit. Finance Division. Implementation Status Report of EGBM Project (IDA Credit 3917-BD). 2011 Government of Bangladesh, A National Strategy for Economic Growth, Poverty Reduction and Social Development: FY2002-2006. Government of Bangladesh, National Strategy for Accelerated Poverty Reduction II: FY2009–2011. UK-DFID, EGBM Project Completion Review Report. 2009. World Bank, CAS Progress Report. 2003. World Bank, Country Assistance Strategy, FY11–14. World Bank, “Enterprise Growth and Bank Modernization Project Appraisal Document,” Report No: 27979. May 2004.