Document ofThe World Bank

Report No: 23263-RO

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$ 18.60 MILLION

TO THE

REPUBLIC OF ROMANIA

FOR

PRIVATE AND PUBLIC SECTOR INSTITUTION BUILDING LOAN

April 15, 2002

Private and Financial Sector DevelopmentEurope and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective)

Currency Unit = Lei1000 Lei = US$0.319US$1.00 = 31,300 Lei

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMSAPAPS - Authority for Privatization and Management of State OwnershipBCR - Romanian Commercial BankBDR - Romanian Bank for DevelopmentBSE - Bucharest Stock ExchangeCOA - Court of AccountsCAS - Country Assistance StrategyCEC Bank - Savings BankCNVM - National Securities CommissionCO - Certificate of OwnershipEFSAL - Enterprise and Financial Sector Adjustment LoanEU - European UnionGDP - Gross Domestic ProductGOR - Govermment of RomaniaICB - International Competitive BiddingIS - Intemational ShoppingISC - Insurance Supervision CommissionLAS - International Accounting StandardsIGRSAL - Institutional and Governance Reform Structural Adjustment LoanMoPF - Ministry of Public FinanceMOCIT - Ministry of Communication and Information TechnologyMOJ - Ministry of JusticeMOPA - Ministry of Public AdministrationNBR - National Bank of RomaniaNS - National ShoppingPIBL - Private Sector Institution Building LoanPSAL - Private Sector Adjustment LoanPSD - Private Sector DevelopmentSOEs - State-Owned EnterprisesSOF - State Ownership FundSSDP - Social Sector Development ProjectTA - Technical AssistanceVAT - Value Added Tax

Vice President: b Johannes LinnCountry Manager/Director: Andrew Vorkink

Sector Manager/Director: Khaled Sherif/Paul SiegelbaumTask Team Leader/Task Manager: Hiran Herat

ROMANIAPRIVATE AND PUBLIC SECTOR INSTITUTION BUILDING LOAN

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 23. Sector issues to be addressed by the project and strategic choices 4

C. Project Description Summary

1. Project components 72. Key policy and institutional reforms supported by the project 93. Benefits and target population 94. Institutional and implementation arrangements 10

D. Project Rationale

1. Project alternatives considered and reasons for rejection 112. Major related projects financed by the Bank and other development agencies 113. Lessons learned and reflected in the project design 124. Indications of borrower commitment and ownership 135. Value added of Bank support in this project 13

E. Summary Project Analysis

1. Economic 132. Financial 133. Technical 134. Institutional 145. Environmental 156. Social 157. Safeguard Policies 16

F. Sustainability and Risks

1. Sustainability 162. Critical risks 173. Possible controversial aspects 18

G. Main Loan Conditions

1. Effectiveness Condition 182. Other 18

H. Readiness for Implementation 18

I. Compliance with Bank Policies 19

Annexes

Annex 1: Project Design Summary 20Annex 2: Detailed Project Description 24Annex 3: Estimated Project Costs 29Annex 4: Financial Summary 31Annex 5: Financial Summary 32Annex 6: Procurement and Disbursement Arrangements 33Annex 7: Project Processing Schedule 43Annex 8: Documents in the Project File 44Annex 9: Statement of Loans and Credits 45Annex 10: Country at a Glance 47Annex 11: Financial Management Assessment Report 48

MAP(S)

ROMANIA

Private and Public Sector Institution Building Loan

Project Appraisal Document

Europe and Central Asia RegionECSPF

Date: December 20, 2001 Team Leader: Hiran HeratCountry Manager/Director: Andrew N. Vorkink Sector Manager: Khaled SherifProject ID: P069679 Sector(s): BI - Institutional Development, BP -

Privatization, BY - Other Public Sector Management, FY -Other Finance

Lending Instrument: Technical Assistance Loan (TAL) Theme(s):Poverty Targeted Intervention: N

°Project Financing DataPX] Loan [ ] Credit I ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:Amount (US$m): 18.60

Borrower Rationale for Choice of Loan Terms Available on File: O Yes

Proposed Terms (IBRD): Variable-Spread Currency Loan (VSL)Grace period (years): 5 Years to maturity: 17

Front end fee (FEF) on Bank loan: 1.00%Financing Plan (US$m): Source Local Foreign TotalBORROWER 3.74 0.00 3.74IBRD 0.00 18.60 18.60Total: 3.74 18.60 22.34

Borrower:Responsible agency:Ministry of Public FinanceAddress: Minister of Public FinanceContact Person: Ms. Nicoleta BalaTel: Fax: 40-1-312-4284 Email: nbala@ctif.mfmante.ro

Estimated Disbursements (Bank FY/US$m):FY 2002 2003 2004 2005 .

Annual 3.59 7.27 5.71 2.03Cumulative 3.59 10.86 16.57 18.60

Project implementation period: June 1, 2002 - December 31, 2004Expected effectiveness date: 06/01/2002 Expected closing date: 06/30/2005

OMs PADr Ft.~ R h MM

A. Project Development Objective

1. Project development objective: (see Annex 1)

The goal of the proposed Private and Public Sector Institution Building Loan (PPIBL) is to provide therequired technical assistance to implement the policy measures which will be supported by the SecondPrivate Sector Adjustment Loan (PSAL II) and to lay the ground for the reforms that will be implementedunder the proposed Programmatic Adjustment Loan (PAL), formerly Institutional and Governance ReformStructural Adjustment Loan (IGRSAL). The PPIBL is a follow-on operation that will continue to provide theneeded technical assistance that began under the first Private Sector Institution Building Loan (PIBL) ofwhich its entire amount is almost fully committed. The PPIBL is a natural continuation of the PIBL. ThePPIBL will provide a small amount of funding to complete few remaining private sector actions whiletargeting the majority of the project resources to energy and public sector reforms. In this sense, the PPIBLwill aim to achieve the following objectives: (i) a competitive financial sector predicated on therestructuring and privatization of state-owned banks, development of securities markets, and improvementsin legal, regulatory and institutional support structures; (ii) enhancement of the private sector's role in theeconomy through the privatization of state-owned assets; (iii) a more efficient and service-oriented energysector based on needed restructuring and privatization of key industries, introduction of a sound regulatoryframework, reduction in arrears, and clarification of new tariff schemes to achieve cost recovery; (iv) acompetitive private sector based on the creation of an environment conducive to private sector growth anddevelopment; (v) a more responsive, transparent and accountable public sector; and (vi) adoption of criticalmeasures to provide social protection during the adjustment period and to establish effective povertyreduction mechanisms. Success will be indicated by a reduction in the public sector deficit (associated withloss-making state enterprises and utilities), better performing banks under more competitive conditions, theincrease in volume and profitability of private sector economic activity, and more efficient delivery of publicsector services.

2. Key performance indicators: (see Annex 1)

Key performance indicators for measuring the project's success in meeting objectives are state divestiturefrom enterprise and financial sector assets, sound functioning of institutional support structures for market-based growth, and more stable fiscal revenues combined with declining budget deficits, increased efficiencyin the energy sector, including reduction of inter-enterprise arrears, and key milestones in improving publicsector responsiveness, transparency and accountability are agreed, monitored and publicized.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: Date of latest CAS discussion: CAS dated May 22, 2001

The CAS identified several key areas for Romania's reform program including enterprise privatization,reform of the banking and financial sector, restructuring and deregulation of the energy sector, fiscaldecentralization, improved public sector services and poverty reduction. The current operation supportsseveral of these: private sector development (including comprehensive financial sector reform and energysector reform), strengthening of institutional capacity and governance, efficient delivery of public sectorservices and poverty reduction measures.

2. Main sector issues and Government strategy:

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The evolution of the Romanian economy after the collapse of the communist system has beenextremely uneven. Different from most transition economies, Romania showed positive economicgrowth after a mere two years of dislocation. While the initial dislocation translated into negativegrowth in 1991 and 1992, Romania showed positive growth in the following years, peaking at 7.1percent in 1995. However, negative growth retumed in 1997-99, demonstrating that the interimyears of growth represented only a temporary recovery that was artificial and unsustainable due tocontinued budgetary and quasi-fiscal subsidies. The economic program for 1999 yielded favorableresults in terms of extemal adjustment and financial stability, thereby creating the conditions forpositive real GDP growth and lower inflation in 2000. Positive real GDP growth was 1.5 percentin 2000, marking the first time Romania experienced real growth since 1996. While the growthrate was low, the trend is favorable, and partly reflects success achieved under the earlier PSAL Iprogram. Particular cause for optimism is found in the emergence of export industries that aredemonstrating competitiveness in intemational markets. However, fiscal deficits remainproblematic, approximately 4.3 percent of GDP in 2000 excluding privatization receipts, and thesocial costs of adjustment remain high due to weak administrative capacity and ineffectivetargeting of poverty reduction measures.

While Romania's balance of payments improved due to PSAL I, a restoration of IMF financing,and renewed extemal financing from the capital markets in late 1999, eased the balance ofpayments burden. Romania continues to experience financial sector and balance of paymentsweaknesses. These are rooted in the long transition to a genuinely market-based economy, longstanding political divisions that have slowed reforms, and the disruption trade in theBalkan/Danube region related to earlier sanctions against Yugoslavia and the recent crisis inKosovo. Notwithstanding improvements and favorable trends, financial sector weaknesses arereflected in some of the monetary statistics, which generally translate into low levels of financialintermediation, underdeveloped capital markets, and inadequate levels of public confidence forsustained growth. The year-on-year CPI was 40 percent at end 2000, compared to 54.8 percent atend 1999. This translated into an even more favorable decline in NBR interest rates, from 66.2percent at end 1999 to 40.3 percent at end 2000. Broad money growth increased 35.2 percent, itslowest rate of aggregate growth since the transition began, while real domestic credit declined 9.8percent the second consecutive year in which real credit has declined. The average interest ratecharged for loans to non-bank clients declined in 2000 to average 53.5 percent after increasing in1999 to an average 65.9 percent. Several factors are expected to restore lending to thenongovemmental sector including (i) the sustained reduction of interest rates to 20-25% by yearend, (ii) a decline in the fiscal deficit to 3.1% in 2001, and (iii) progress with structural reform inthe financial and real sectors.

Romania made important strides in 1999 to re-establish credibility and accountability with theintemational community-both donor as well as private sector. That effort received a boost fromthe Bank-GOR PSAL /PIBL programs. PPIBL and its attendant support for successfulimplementation of PSAL II proposes to sustain the momentum established by PSAL I, and to easethe burden of ambitious restructuring and privatization by increasing the amount of funding inconjunction with broader reforms in the state-owned sector and public administration.

The Romanian economy continues to be exposed to structural vulnerability. The areas of

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exposure include (i) continued state ownership in the banking and enterprise sectors; (ii)increasing use of the energy sector as a quasi-fiscal vehicle for cross-subsidization and softlending to non-restructured and noncompetitive enterprises; (iii) a cumbersome businessenvironment that deters investment, modernization, and expansion of the fiscal base; and (iv)problematic public sector institutions, which contribute to a non-responsive and poorlyaccountable public administration, with significant administrative corruption and unattractivebusiness environment. PPIBL aims to provide the necessary technical assistance to GOR toresolve these structural deficiencies. Such progress would make it more difficult for GOR toreturn to policies that have delayed the transition process. Such progress would also accelerateRomania's entry to the European Union.

3. Sector issues to be addressed by the project and strategic choices:

(a) Banking Sector Privatization and Financial Sector Development

Financial sector reform is still under way. GOR liquidated the most troubled bank inRomania-Bancorex. Banca Agricola has been sold to Raiffeisen Zentralbank Ostereich AG(Raiffeisen) and the Romanian American Enterprise Fund (RAEF). Assuming continuingGovernment commitment, prospects for the privatization of Romania's largest bank by end-2002are good. These two privatizations alone will sustain momentum towards a prime-rated bankingsystem, and leave only two smaller banks in state hands-CEC and EXIM. These banks willundergo restructuring programs leading to their privatization and restructuring. New and morecomprehensive legislation has been introduced to improve the efficiency of banks and the capitaland equity markets, simplify and speed up the privatization of banks, develop the banking andcapital market infrastructure, and strengthen banking sector supervision. However, laws andregulations are not sufficient. GOR strategy and PSAL II are geared toward developing a safe,sound and stable banking system combined with the steady development of properly regulatedcapital/money markets and non-bank financial institutions. PPIBL will supply needed technicalassistance to help make these developments come to fruition.

(b) Enterprise and Utilides Sector Privatization

For years, Romania's economy has been burdened by continued state ownership in the enterprisesector. This has perpetuated an ineffective incentive structure that has undermined economiccompetitiveness and been a drain on growth. Such structural weaknesses go right to the core ofRomania's macroeconomic weaknesses throughout the 1990s and even into the current phase,resulting in (i) payment arrears to utilities, other commercial creditors, and the budget; (ii) bankinsolvency due to the unpaid debts of loss-making, state-owned companies; (iii) high fiscal andquasi-fiscal costs of supporting loss-makers; (iv) inefficiency at large industrial enterprises; and (v)inadequate levels of new direct investment and new owners. These problems have not onlyundermiined performance, but also distorted the market, preventing private sector competitionform providing the kinds of economic benefits that are essential to recovery and growth. PSAL IIintends to build on progress initiated under PSAL I in adverting these weaknesses and putting theenterprise sector on track to recovery and competitiveness. Reform efforts include continued

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privatization, restructuring and workouts through varied means to close out privatization of thestate enterprise sector by the end of PSAL II. Where state enterprises remain, it is expected thesewill be few in number and represent energy/power-related companies that generally function asnatural monopolies throughout the globe (i.e., transmission grids). To ensure proper managementand consumer protection, sound regulatory structures are to be put in place. At the same time, toensure private sector competition, the reform program envisages the exit of the government fromownership in most enterprises, measures to establish prices that allow for cost recovery,reinvestment and sustained services, and a general incentive framework that promotes investmentand competition. GOR strategy and PSAL II aim to transform the enterprise sector so that viablecompanies can compete, resource allocation stirnulates higher levels of sustainable economicgrowth, and employment generation restores public confidence and fiscal soundness.

GOR also intends to address the power, oil and gas sectors to reduce cross-subsidization by gasand electricity distributors and other energy suppliers to weak state enterprises. Non-payments,particularly by SOEs, are a chronic problem in the energy sector. In the past, the provision ofenergy subsidies has been selective and non-transparent, often benefiting inefficient andenvironmentally unsound state enterprises at the expense of more competitive, energy-efficiententerprises. More recently as lending from the banking sector has diminished, energy companieshave been used to subsidize selected companies. Such cross-subsidization has slowed therestructuring, distorted the competitive environment, and perpetuated problems associated withpower generation and service delivery. Environmental conditions have also worsened as a resultof foregone efforts to more properly allocate energy resources based on market mechanisms. Inthe quest for cost recovery and modemization, including needed re-investment, GOR also intendsto continue efforts to reduce household tariff subsidization.

PPIBL will provide technical assistance and support for these reforms both in the enterprise andutilities sectors. This support will include the financing of investment advisers to accelerateprivatization.

(c) Business Environment

Improving the business environment was one of the key components of PSAL I and is animportant component in PSAL 11. Continued weaknesses remain with regard to the investmentclimate and tax incentives, administrative barriers, shareholder protection, the usefulness offinancial information generated by the accounting and audit process, and bankruptcy/liquidation.GOR also needs to build on progress with regard to (i) investment legislation and related taxincentives; (ii) administrative barriers in the form of licensing, inspection, and general regulation;(iii) implementation of accounting and audit standards; (iv) bankruptcy and liquidation; and (v)facilitate the development and implement new e-legislations to enable business transactions totake place over the electronic media.

In its efforts to improve the business environment, GOR has faced many of the same structuralproblems that have weakened performance in the financial and state enterprise sectors.Discriminatory tax provisions have deterred investment and not led to a dynamic enterprisesector. Administrative barriers have slowed formation of new business, reduced direct investment

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and given small-scale businesses incentives to avoid taxes. Barriers have been erected to preventlabor mobility, to prevent the appointment of needed managers for larger enterprises withpotential links to international markets, and to extract informal taxes on firms seeking permits.The lack of transparency and disclosure has exposed minority shareholders to dilution withoutrecourse and undermined corporate governance has failed to provide potential investors withneeded information in making decisions. Informational weaknesses have also undermined thequality of internal information available to managers and boards for strategic planning purposes.Administrative weaknesses and high level of corruption in the customs, tax collection and otherareas of government and undermined efforts to achieve competitiveness at the firm level. GORstrategy and PSAL II are geared to putting into place the incentives needed to strengthen thebusiness environment for enhanced investment and sustainable growth. PPIBL will supply theneeded technical assistance to achieve this objective.

(d) Institutional and Governance ReformPublic sector institutions in Romania exhibit a number of problematic characteristics, thatcontribute to a non-responsive and poorly accountable public administration and manifestthemselves in administrative corruption and an unattractive business environment. In parallel, theconstantly changing legal framework undermines the capacity of public entities to efficientlyimplement policies and deliver public goods and services within their mandates and makes itdifficult for private firms to operate successfully within Romania. Accordingly, the PPIBL willsupport activities aimed at making the legal and judicial systems more predictable and reliable.Non-responsiveness of public entities, weak accountability of the public administration andsignificant levels of administrative corruption also reflect weak budget management institutions,both centrally and within line ministries, as well as at different levels of government, including atthe decentralized level.

Accordingly, the PPIBL program include resources to strengthen public expenditure managementinstitutions and capacities - centrally, within key line ministries, and at the local level. Theseinclude both budget formulation reforms (improving the program budget innovations alreadylaunched by the Government, decentralization financing arrangements, review of health financingissues), as well as budget execution strengthening (cash management, government accounting,internal audit, external audit, as well as decentralization financing and health financing). It alsoprograms resources to help the Government to re-engineer certain administrative processes andpractices to increase the transparency, responsiveness and accountability of the publicadministration to citizens. Included in this is assistance to help the Government to launch certaine-government and e-administration initiatives.

(e) Social Protection and Poverty Reduction

Previous efforts at reform of the banking and enterprise sector have been partly undermined byweaknesses in the civil service sector, the inability of the public sector to provide adequate socialprotection to offset the costs of adjustment, and implementation of poverty reduction programs.Major issues and problems that have faced GOR in its efforts to improve the delivery of publicservices have included a weak fiscal base, bloated head count, excess centralization, weakinformation, and poor pay. These problems have undermined the effectiveness of the civil service,

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provided incentives for corruption and favoritism, and generally led to poor service delivery.However, in the last few years, there has been growing recognition of the urgency of thissituation. Thus, GOR strategy and PSAL II are geared to strengthening public sector capacity toprovide social assistance, introduce and implement effective poverty reduction measures, and toput in place a revised pension scheme that will offer people instruments by which they can savefor the long term. No funding has been provided under PPIBL, as support to these objectives areincluded from the Bank under ESPP and SSD, and other donors are in the process of makingdecisions about their possible support.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project has five main components and utilizes the established project management unit(PMU) from PIBL (and PSAL I) to implement the program. The PMU will coordinate andimplement the project in support of the reform strategy developed by the Borrower in conjunctionwith the Bank.

a. Financial Sector Restructuring and Privatization Support:

Technical assistance to the financial sector would cover the following: (i) restructuring CEC inpreparation for privatization; (ii) developing the capital markets by strengthening legislation,regulatory capacity and infrastructure, including revised mechanisms for more active use of themarket for Government securities; (iii) strengthening the capital markets regulatory agencies(CNVM); and (iv) strengthening insurance supervision as Romania develops life insurance and abroader array of non-life products.

b. Privatization Support for Enterprises:

The privatization and liquidation of most large state enterprises is the responsibility of APAPS(formnerly the State Ownership Fund), which holds the Government's shares in the remaining1,444 companies. Under this component, technical assistance will be provided to support GOR inprivatizing the ten largest state investments in private firms in which the Government holds 20percent or more by disposing of at least 50 percent of its ownership stakes in each of theseenterprises. The size of the joint venture will be measured in terms of profitability over the lastthree years (or less if necessary).

C. Privatization Support for the Energy Sector:

Under this component, technical assistance will be provided to support the divestiture of keyenterprises in the oil, gas, and electricity/power sectors, including majority or strategic sales undermarket conditions. Thus, PPIBL will help GOR to provide a legal and regulatory framework forprivate competition in the energy sector (namely network industries), to increase prices andreduce arrears in the oil and gas sectors, and to initiate efforts in other energy sectors to ensure

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that the growing problem of cross-subsidization and arrears is contained and brought undercontrol. Divestiture will include the use of investment bankers as privatization advisors toaccelerate the process of liberalization and reform.

d. Support for an Improved Business Environment:

Under this component support for an improved business environment is intended to promotedevelopment of an environment conducive to investment and business growth. Assistance willcover: (i) training of judges and court personnel; (ii) procurement of equipment for thecommercial divisions of courts; (iii) reftrbishing works to be perforned with the commercialdivisions of courts; (iv) improving the business environment in Jiu Valley at the municipality level,which has been adversely effected by the mining closures. Advisory services and equipment willbe provided to the region for removing administrative barriers, improving local publicadministrations services, and marketing of the region; (v) and a public awareness campaign onimprovement of the business climate.

e. Institutional and Governance Reform

Under this component, technical assistance will be provided to strengthen: (i) public expendituremanagement; (ii) external audit; (iii) e-government; (iv) public administration; (v) rule of law; and(vi) health administration. This technical assistance is designed to help in the design and initialstages of implementation of the Government's institutional and governance reform agenda. Theoverarching objectives of that agenda are to create a more responsive, transparent andaccountable public sector.

£ Project Management Unit:

A PMU was established to implement PIBL. This PMU will implement PPIBL. The PMUoperational costs are been financed under PIBL. Funds to cover one year of operational costs forthe PMU are included under PPIBL.

I , . Indicative Bank- % ofComponent Sector Costs % of financing Bank-

(USSM) Total (US$M) financingFinancial Sector Restructuring and Institutional 4.35 19.5 3.68 19.8Privatization Support DevelopmentPrivatization Support for Enterprises Institutional 0.66 3.0 0.55 3.0

DevelopmentPrivatization Support for the Energy Institutional 2.50 11.2 2.09 11.2Sector DevelopmentSupport for an Improved Business Institutional 1.96 8.8 1.66 8.9Environment DevelopmentInstitutional and Governance Reform Institutional 12.44 55.7 10.40 55.9

DevelopmentProject Management Unit Institutional 0.24 1.1 0.22 1.2

_________________________Development _____

Total Project Costs

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22.15 99.1 18.60 100.0Front-end fee 0.19 0.9 0.00 0.0

Total Financing Required 22.34 100.0 18.60 100.0

2. Key policy and institutional reforms supported by the project:

The proposed PPIBL technical assistance loan seeks to provide GOR with the expertise tosuccessfully implement the PSAL II adjustment program and the proposed ProgrammaticAdjustment Loan (PAL), formerly Institutional and Govemance Reform Structural AdjustmentLoan (IGRSAL). These programs would build on and complement the reforms alreadyundertaken by the Government since 1990 and supported by the World Bank StructuralAdjustment Loan, the FESAL operation, and PSAL I. The PSAL II and the proposed PAL aimto sustain these reforms and to bring to closure many of the outstanding problems that festeredthrough the 1990s as a result of political opposition and administrative capacity limitations. In thefinancial sector, reforms include: (i) the exit of the public sector from banking via therestructuring and privatization of the remaining state-owned banks; (ii) strengthening bankingsector and capital market infrastructure via an improved legal and regulatory structure, fasterlarge-value payments, implementation of intemational standards for accounting and auditing, anda sounder deposit insurance system; (iii) broadening and deepening the capital markets, withparticular focus on the govermment securities market; and (iv) strengthening insurance supervisioncapacity. Reforms in the enterprise and utilities sector include: (i) accelerating state-ownedenterprise (SOE) privatization across a wide spectrum of sectors (i.e., power, public industry); (ii)enforcing hard budget constraints on remaining SOEs through the closure of big loss-makers (i.e.,mines); and (iii) implementing an action plan to stimulate private sector development andstreamline the business environment developed during PSAL I. In addition to an improvedbusiness environment and increased private sector ownership and management in the real andfinancial sectors, the proposed PAL aims to support institutional and govemance reforms requiredto create a more accountable, transparent and responsive public sector, including support forbetter public sector expenditure management, a more stable legal framework and moreresponsive, accountable and transparent public administration. Finally, PSAL II aims to supportmeaningful introduction of social protection and poverty reduction measures, including incomeassistance, pre-layoff services and pension reform.

3. Benefits and target population:

Implementation of structural reforms in the enterprise and financial sectors under this operationwill enhance Romania's prospects for growth and will reinforce the sustainability of itsmacroeconomic stabilization. Institutional and governance reforms will benefit the private sector,by helping to create a more predictable legal environment and more enforceable legal rights.These reforms will also benefit citizens more generally by streamlining administrative proceduresand helping to make the public administration more transparent, accountable and responsive.

The target population will be the state-owned banks and the enterprise sector at large, which willultimately benefit from an improved business environment. The target population includes existingprivate enterprises that have found it difficult to operate freely and to obtain needed debt andequity financing. The target population also includes those likely to be released from employment

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as a result of restructuring. Social assistance, training, and more sustainable long-term financingof public (i.e., child benefit, unemployment fund, social security) and private (i.e., pension)schemes are intended to mitigate these effects. The target population will also be the generalpublic at large, who will benefit from more efficient and transparent public sector services.

4. Institutional and implementation arrangements:

Project Implementation

The Ministry of Public Finance's (MOPF) International Financial Department is the maincounterpart for the project. The overall coordination of the project, including the administrativefunctions, financial management, procurement and monitoring will be executed by the ProjectManagement Unit (PMU), anchored within the Ministry of Public Finance and established underthe PIBL. This PMU will continue to be headed by the current Minister of Public Finance (ProjectDirector). The Minister will have overall responsibility for the project and continue to report tothe Prime Minister. He will be assisted by a Project Administrator who will oversee theday-to-day operations of the project. A Project Steering Committee (PSC) has been establishedwith participants from all project entities. The PSC, under the guidance of the PMU director, willensure that all project objectives and targets as specified in the PIP are on track and achieved.

Technical expertise on a short-term basis will be provided to the Project Administrator as andwhen required. PPIBL has built in long-term expertise to assist the PMU with needed tasksregarding the main components of the project. This has been done in recognition of the expressedneeds of the PMU. Specifically, long-term experts are expected to assist the PMU in all key areasof reform-enterprise, utilities and bank privatizations; improving the business environment; andsocial protection. The PMU Project Administrator is well versed in the Bank procurement,disbursements, and contracting procedures and will continue to be assisted by two procurementspecialists, a disbursement specialist, and an accountant. All PMU specialists are experienced inthe Bank procedures.

Project Financial Management System and Audit

To maintain project accounts and produce reports in accordance with standards acceptable to theBank, a FMS was established at the PMU for the PIBL . This system has been modified toaccommodate project accounts under the PPIBL. In accordance with OP/BP 10.02, aBank-accredited financial management specialist reviewed the proposed financial managementsystem in July 2001. Based on this assessment, it was found that the PMU satisfies the Bank'sminimum financial management requirements. However, the PMU has agreed to take thefollowing actions to improve its financial management processes.

* By September 30, 2002 the PMU is to appoint an independent auditing firm, acceptable to theBank, for the audit of the project financial statements.

* By September 30, 2002, the PMU will prepare financial monitoring reports.

Financial Reporting.The PMU will ensure the preparation and distribution of consolidated periodic progress reports to

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the relevant government and other participating institutions, including the World Bank, to reflect:(i) the sources and uses of funds by project categories and components; (ii) project progressreporting, and (iii) procurement activities. In this context, the PMU will prepare quarterlyFinancial Monitoring Reports (FMRs), which would be submitted to the Bank within 45 days ofthe end of each quarter. The first quarterly FMRs will be submitted at the end of the third quarterof 2002. The FMRs format were discussed during appraisal and agreed at negotiations.

Audit Arrangements. The PMU would be subject to an independent, external audit, in accordancewith international standards on auditing, on an annual basis. This audit would be carried out by anindependent auditor acceptable to the World Bank, and the audit report would be sent to theBank within six months of the end of the fiscal year. The audit of the project accounts for PIBLwas carried out by Arthur Andersen, and a unqualified opinion was issued. During negotiations,agreement was reached with the PMU to retain the same audit firm or an audit firm acceptable tothe Bank for the audit of PPIBL project accounts. The PMU will provide the Bank (within sixmonths of the end of each Government fiscal year) with an audit report of such scope and detailas the Bank may reasonably request, including a separate opinion by the independent auditor ondisbursements against certified SOEs, and the special account.

Disbursements. Disbursements from the Loan will be made based on traditional disbursementmethods (i.e., from the Special Account with reimbursements made based on Statements ofExpenditures (SOEs) and full documentation, and direct payments from the Loan Account). ThePMU has good experience of such disbursement procedures from implementing the Bank financedPIBL. The proceeds of the World Bank loan will be allocated in accordance with Table C, Annex6. To facilitate timely project implementation, the PMU will establish, maintain and operate, aspecial account under terms and conditions acceptable to the Bank.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Two alternative methods of privatization were considered and rejected.

* The use of local sales agents was considered for case-by-case privatization and poolprivatization. This was not considered viable because local investment banks and liquidators haveonly limited experience and do not have access to international investors.

* The use of advisors instead of sales agents was considered impractical given theexperience with such advisors by the SOF (now APAPS). The contracts executed forcase-by-case privatizations with seven investment banks were, in effect, advisory contracts. Thisapproach hampered the effective use of investment bank expertise by not bringing them into thefinal negotiation process.

Under the current environment, engaging investment banks, liquidation experts, and work-outfirms as sales agents, while using Bank procurement procedures, is the most practical proposal.This method, which will protect the privatization process from bureaucratic micro-managementand political control, should accelerate the pace of privatization significantly.

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

: | . -- ~ : Latest SupervislonSectorlssue | Project (PSR) Ratirgs

._________________________________ I .__________________________ (Bank-flnanced projects only)Implementation Development

Bank-financed Progress (IP) ObjecUve (DO)

Privatization of SOEs and Banks, Private Sector Institution S Simprovement of business environment Building Loan (PIBL)

Privatization of SOEs and Banks, PSAL IIimprovement of business environmentand strengthening social protection

Energy Sector Reforms Petroleum Sector RehabilitationProject

Social Sector Reforms Social Sector DevelopmentFund Project

Public Sector Reforms Programmatic Adjustment Loan(PAL), ), formerly Institutionaland Govemance ReformStructural Adjustrnent Loan(IGRSAL)

Other development agenciesIP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

Within the Bank, sector experience of the bank and experience with Technical Assistanceprojects, indicates that projects with a great deal of technical assistance should: (i) have the activesupport of ministry and government officials to ensure proper and timely decision-making oncrucial issues; (ii) have a well-defined procurement plan, including terms of reference forconsultants, and studies drafted and agreed on with the borrower prior to Board; (iii) have a PMUwith well-qualified and competent staff who are properly compensated for their work; (iv) thePMU staff should have access to the Project Director, in order to make swift decisions and notdelay project implementation; and (iv) have a PMU that can access needed outside expertise tofacilitate matters of contracting, to provide greater precision in defining the needs of consultants(through TORs), and to offer constructive assessments on the quality of responses whenproposals are made on privatization, restructuring and other contracts relevant to implementationof PSAL II.

Based on these lessons, PPIBL will focus on five specific areas for which governmentcommitment and financing have been secured. A procurement plan, including TORs forconsultants and studies, will be drafted and agreed on with the borrower. A PMU has beenestablished and is operating with qualified and competent staff who are paid in accordance with

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market rates. During negotiations, agreement has been reached with the Minister of PublicFinance to submit a letter to the Bank, by December 31, 2001, indicating that in his absence, aSecretary of State will have authority to make decisions on his behalf as Project Director (Thisletter has been received by the Bank). The Bank project team will closely superviseimplementation and procurement activities under the project.

4. Indications of borrower commitment and ownership:

The Government has requested support to implement the proposed PSAL II program. PPIBL willprovide the technical assistance required to implement the conditions under the PSAL II program.Government commitment has been demonstrated by closely working with the Bank team toprepare the project, including close association in arriving at key objectives in the policy matrixand agreeing to a time line to achieve objectives.

5. Value added of Bank support in this project:

The Bank has extensive experience and knowledge of financial sector restructuring, enterprise andutilities privatization, the business environment, social assistance reform, and public sectorinstitutional reform. Thus, the Bank is in a unique position to furnish practical advice on bankrestructuring, enterprise and utilities privatization, the design of economic incentives, and socialassistance and poverty reform. The Bank can also draw on its international network ofconsultants and advisors to bring the latest best practices to Romania to strengthen the capacity ofRomanian institutions. The World Bank will also assist in implementing the project throughhands-on supervision and sharing knowledge of Bank procurement methods with Romaniancounterparts.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)O Cost effectiveness* Other (specify)N?A

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)Fiscal Impact

The losses incurred by the state-owned banks and enterprises have a substantial cost to theGovernment's budget. Furthermore, poor financial control and accountability and limited lendingcapacity have prevented the development of a sound banking sector. The proposed project willsupport the Government's efforts to: (a) resolve financial issues relating to the state-owned banksand enterprises; (b) strengthen the financial sector and encourage private banking; (c) promotefinancial intermediation; and (d) build the foundation for increased private sector development. Itis, therefore, expected to assist the Government in reducing the insolvency in the financial sectorand curtailing the losses of state-owned banks, thereby minimizing exposure to potential further

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fiscal costs.

Fiscal Impact:

3. Technical:Successful financial/enterprise sector reforms require high-quality advice and expertise in anumber of areas. These technical skills are weak in the banking and enterprise sectors. The projectwill ensure that the GOR has access to the necessary expertise, through top level advisors andconsultants to facilitate the achievement of its reform objective in a timely manner. An importantelement of the project will be for the experts hired to train and transfer these skills tocounterparts, for example in banking supervision and accounting, particularly in the area ofon-site examinations, treasury operations, public debt management and in judicial reforms.

4. Institutional:

4.1 Executing agencies:

Ministry of Public Finance

4.2 Project management:

The overall coordination including administrative functions (financial management, procurementand monitoring) of the project, will rest with the Project Management Unit. The PMU wasestablished in the Ministry of Public Finance for the implementation of PIBL. The PMU staffwere hired on a competitive basis and are compensated accordingly. Sustaining, a core group ofqualified and well compensated experts will be crucial for the smooth implementation of theproject.

4.3 Procurement issues:

The procurement methods adopted, especially in case of the privatization components, have beenestablished with the objective of instilling transparency and efficiency into the system. Strictadherence to these procedures will be crucial for smooth implementation. The project teams willprepare terms of reference for consulting services, training, feasibility studies, banks, and salesagents. The PMU staff will assist members of the Bid Evaluation Committee to evaluateproposals received for these services and to process the contract awards. A project team will beestablished at all participating entities.

4.4 Financial management issues:

The first Country Financial Accountability Assessment (CFAA) for Romania will be carried outduring FY03. Based on country experience the two main generic risks. The first risk is theliquidity problem associated with banks. The banking system in Romania is still perceived aspotentially sensitive to liquidity problems. Despite a certain degree of restructuring and"cleaning" of the banking sector, the systemic risk is still perceived as significant. The second riskis the fraud and corruption. Concerns have been raised with regard to fraud, waste and abuse ofdonor funds in the region. Perceived corruption as reported in the press is principally in the area

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of procurement. To mitigate these concerns the following actions will be taken. First, the specialaccount for this project will be opened in the same bank that holds the special account for thePIBL. No problems were encountered in the operation of the special account under PIBL.Second, the PMU established for the implementation of PIBL will also implement PPIBL. ThePMU has in place adequate internal procedures to mitigate potential fraud and corruption. PIBLis being implemented successfully with out any major problems. The audit of the project accountsunder PIBL received a clean opinion.

5. Environmental: Environmental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

In accordance with the Bank's Operational Directive on Environmental Assessment (OD 4.01Annex E), the proposed project has been placed in Category "C" and does not require anenvironmental assessment.

5.2 What are the main features of the EMP and are they adequate?

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

Not Applicable

6.2 Participatory Approach: How are key stakeholders participating in the project?

Primary beneficiaries and other affected groups:

The APAPS, as representative of government ownership in state-owned banks and enterprises, isthe primary beneficiary. Representatives of APAPS have participated closely in the design of theproposed PSAL II and PPIBL.

Other key stakeholders:

The Ministry for Public Finance, the Ministry of Justice, the Ministry of Industry and Resources,the Ministry of Development and Prognosis, the Ministry of Public Administration, the Ministry ofCommunication and Information Technology and the business community are beneficiaries and

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have been involved in the design of PSAL II and PPIBL.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

Not Applicable

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

Not Applicable

6.5 How will the project monitor performance in terms of social development outcomes?

Not Applicable

7. Safeguard Policies:7.1 Do any orthe following safeguard policies apply to the project?

Policy- ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes 0 NoCultural Property (OPN 11.03) 0 Yes 0 NoIndigenous Peoples (OD 4.20) 0 Yes * NoInvoluntary Resettlement (OP/BP 4.12) 0 Yes 0 NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes 0 NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The PPIBL is a technical assistance project that strongly complements the PSALII. It was agreedat the review meeting that the appropriate environmental rating for such a TA project is a "C". Itis to be expected, however, that, as it will support activities under PSALII where theenvironmental safeguards are relevant, it will also provide TA, where appropriate, to ensure thatany projects supported by the financial institutions meet the national environmental standards.

F. Sustainability and Risks

1. Sustainability:

This Technical Assistance Loan supports reforms that will enhance Romania's long-termprospects for economic growth and development; provide underlying support to workersdisplaced by restructuring; and promote development of conditions that would accelerateRomania's preparation for formal entry into the European Union and other organizations.

To help Romania achieve sustainable growth, the Bank has proposed a separate private sectoradjustment loan (PSAL II) of $300 million. This loan is to provide balance-of-payments supportto GOR as it undergoes necessary but costly restructuring of its enterprise and financial sectors,

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introduces needed public sector reforms, and demonstrates greater capacity for social assistanceand poverty reduction. PPIBL financing would support seven broad areas of activity: (i)restructuring and privatizing remaining state-owned banks; (ii) strengthening banking andinsurance sector regulation and supervision; (iii) assisting in the development of securitiesmarkets, with specific focus on government securities; (iv) strengthening overall financial sectorinfrastructure; (v) privatizing and divesting remaining large state-owned enterprises, including inthe power sectors; (vi) privatizing and divesting remaining small- and medium-sized state-ownedenterprises; (vii) improving the business environment, and (viii) development of institutional andgovemance reform.

In addition to broad macroeconomic benefits, all of these actions would promote development ofa market-based economy with stronger governance, management, transparency, and participationthat should result in sustainable economic growth. In addition, these reforms will be supported bya programmatic adjustment loan for institutional and governance reform.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveContinuing commitment of government to S - Continued dialogue with the Government andthe banking, private and energy sector other local stakeholders on the benefits ofrestructuring, including institutional and sectoral reforms.govemance reforms - Adequate budget provisions for sustained

privatization of banks;- Support from the IMF Stand-by Program.

From Components to OutputsThe Government will not follow through S - Associated PSAL conditionality and IMFon its agreement with the Bank and the Stand-by Agreement will support the pace ofIMF to withdraw banking licenses, reforms.privatize key state owned enterprises,reform the energy sector, remove businessbarriers and implement institutional andgovernance reformsTimely recruitment and contract with S - Some contracts have already been awardedinvestment bank and sales agents will not under the PSAL I and PIBL, but for newoccur contracts, the early agreement on terms of

reference and subsequent appointment of foreignexperts and advisors can help maintainmomentum in the Government's agenda andreduce the risk of delays.

Sustain qualified and competent staff in M - Qualified staff have been hired, who arethe PMU, who have access to the Director properly compensated. During negotiations,for smooth implementation of the project agreement has been reached with the Borrower

to submit a letter to the Bank, by December 3 1,2001, indicating that, in the absence of the

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Minister of Finance, a Secretary of State willhave authority to make decisions on his behalfas Project Director (This letter has beenreceived by the Bank).

Overall Risk Rating 5

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

N/A

G. Main LoanConditions

1. Effectiveness Condition

(i) The Borrower will advise the Bank of its ratification of the Loan Agreement.

2. Other [classify according to covenant types used in the Legal Agreements.]

(i) A Mid Term Review to be conducted by June 30, 2003, based on satisfactory TORs.

(ii) Throughout the implementation of the Project, the Borrower shall maintain, in a manner andunder terms of reference satisfactory to the Bank, a PSC headed by the Project Coordinator andcomposed of a representative each of APAPS, the Ministry of Public Finance, the Ministry ofJustice, the Ministry of Industry and Resources, the Ministry of Public Administration, theMinistry of Communication and Information Technology and the Ministry of Development andPrognosis. The PSC shall be responsible for overseeing Project implementation.

(iii) The Borrower shall ensure that the studies to be conducted under Part C.2 of the Projectshall include an assessment of the appropriate mechanisms for screening environmentally sensitiveprojects

(iv) The PMU to maintain satisfactory Financial Management Systems including records andaccounts, and prepare financial statements in accordance with accounting standards satisfactoryto the Bank and annual project accounts and institutional audits to be provided to the Bankwithin six months of each year (the audit to be carried out by independent auditors in accordancewith intemational accounting standards, and TORs satisfactory to the Bank).

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(v) The Borrower to maintain the PMU with satisfactory functions, staffing and otherresources.

(vi) PMU to implement the project in accordance with the Project Implementation Plan.

(vii) PMU and the Borrower to monitor project performance in accordance with thesatisfactory monitoring indicator framework.

H. Readiness for Implementation

0 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

Z 1. b) Not applicable.

O 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

l2 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

0 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Hiran Hierat Khaled Sherif Andrew N. Vorkink\Team Leader Sector Manager Country Manager/Director

Annex 1: Project Design Summary

ROMANIA: Private and Public Sector Institution Building Loan

Key Performance Data Collection StrategyHierarchy of Objectives Indicators - Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Promote structural reform and Reduction in budget deficit Privatization targets and An improved private sectorprivate sector development and increase in investment budget deficit targets environment will successftully

induce greater investment

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Enhance the private sector's State Divestiture from Privatization schedules Availability of domestic androle in the economy through enterprise and financial sector Passage of laws international capital andthe transfer of state-owned assets and rationalization of Implementation of standards entrepreneurial skillsassets and the creation of an economic frameworkenabling environmentconducive to private sectorgrowth and development

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:FINANCIAL SERVICES 1. Bank Twining Services Reports of PMU Continuing commitment of1. CEC Bank Reports of consultants government

2. CNVM I.Refurbishment of the Report of PMU Continuing commitment ofCNVM building. Report of consultants government

2.Equipment and systems forthe CNVM3. Strengthening theinstitutional capacity ofCNVM

3. Bucharest Stock Exchange 1. Draft regulations for the Report of PMU Continuing commitment ofBSE. Report of consultants government2. Training for BSE staff3. Public AwarenessCampaign Design andimplementation

4. Insurance Supervision 1. Institutional strengthening Report of PMU Continuing commitment ofCommission of the Insurance Supervision Report of consultants government

Commission2. Technical assistance for theinsurance sector

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PRIVATIZATIONSERVICES

1. Develop a privatization PMU reports Continuing commitment ofI.SOEs. strategy for the electricity Consultant Reports government to privatization of

generation sector SOEs

2. Review taxation system for2. ANRG oil and gas sector

3. Training for ANFG staff

4. Review framework for3. Gas Distribution. network industries

5. Strengthening the4. Electricity Distribution regulatory capacity of ANRG.

BUSINESS ENVIRONMENT

1. Administrative Barriers 1. Review of the existing legal PMU Progress Reports Full participation of relevantframework for e-business Consultants reports ministries and continued

Business environment government commitment.2. Bankruptcy Procedures. 2. Improve court monitoring system

infrastructure

3. Public AwarenessCampaign

4. Improve businessenvironment of Jui Valley

INSTITUTIONAL ANDGOVERNANCE REFORM

I. Public Expenditure 1. Strengthen the cash PMU Reports Continuing commitment ofManagement management capacities of the Reports of consultants Government

Treasury

2. Improve the program- andresults-oriented budgetformulation reforms alreadyunderway

3. Ensure better coordinationand accountability forforeign-financed activities

4. Strengthen public sector

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accounting capacities

5. Strengthen internal auditAddress certain risks posed bythe ongoing decentralization PMU Reports Continuing commitment ofprocess. Reports of consultants Government

2. External audit 6. Strengthen external audit PMU ReportsReports of consultants

3.E-government 7. Take initial steps forestablishing a SMART-card PMU Reports Continuing commitment ofsystem for use within the Reports of consultants Governmentpublic administration.

4. Public administration 8. Take initial steps forestablishing an integratedinformation system fordocuments management for PMU Reports Continuing commitment ofuse throughout Romania's Reports of consultants Governmentpublic administration.

5. Rule of law 9. Take initial steps to ensurea more stable legal frameworkand more predictable and fair PMU Reports Continuing commitment ofenforcement of legal rights. Reports of consultants Government

6. Health administration 10. Take initial steps toensure more accountable, PMU Reports Continuing commitment ofeffective and fiscally prudent Reports of consultants Governmentuse of public financialresources devoted to theprovision of health care inRomania.

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Key Performance Data Collection StrategyHierarchy of Objectives Indicators Critical Assumptions

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Financial Sector US$ 4.35 PMU Reports and PMRs Full participation of relevantRestructuring and ministries and continuedPrivatization Support government commitment

2. Privatization Support for US$ 0.66Enterprises

3. Privatization Support for US$ 2.50the Energy Sector

4. Support for Improved US$ 1.96Business Environment

5. Institutional andGovernance Reform US$ 12.44

6. PMU Operating Costs US$ 0.24

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Annex 2: Detailed Project DescriptionROMANIA: Private and Public Sector Institution Building Loan

By Component:

Project Component I - US$4.35 million

Component 1: Financial Sector Restructuring andPrivatization Support

In the financial sector, the key objective is to end public sector banking.

CEC: To to provide CEC with technical assistance to engage bank restructuring and privatizationadvisor(s) under a twining arrangement, and commence the restructuring of the CEC Bank inpreparation for its privatization within 60 days of First Tranche Release.

Capital and Equity Market Development: To strengthen the regulatory powers, span of authority,financial independence, staff and institutional capacity of the National Securities Commission(CNVM) to support, supervise, and provide oversight of the capital and equity markets, inconsistence with EU acquis and directives; and to support the institutional strengthening of theBucharest Stock Exchange in participation in the secondary market for Government securities.

Insurance Sector: To assist in strengthening the institutional and building capacity of theInsurance Supervision Commission (ISC) to supervise and provide regulatory oversight of theinsurance sector, in conjunction with the duties, responsibilities, and span of authority of the ISC.

Project Component 2 - US$0.66 million

Component 2: Privatization Support Enterprises

The privatization and liquidation of most large state-owned enterprises is the responsibility ofAPAPS (formerly the State Ownership Fund), which holds the govermnent's shares in theremaining 1,444 companies in this category. Under this component, technical assistance will beprovided to support GOR in privatizing the ten largest state investments in private finns in whichthe Government holds 20 percent or more by disposing of at least 50 percent of its ownershipstakes in each of these enterprises. The size of the joint venture will be measured in terms ofprofitability over the last three years (or less if necessary).

Project Component 3 - US$ 2.50 million

Component 3: Privatization Support for the Energy Sector

Efforts to promote energy sector reforms are geared to reducing the use of the energysector-mainly the gas and electricity sectors-as sources of quasi-fiscal credit for uncompetitiveSOEs at the expense of more competitive (and often restructured) enterprises that are forced tooperate under distorted conditions. GOR plans to achieve this objective by introducing majorreform of the gas and oil sector.

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Gas Sector: PPIBL will assist GOR in strengthening the regulatory capacity of ANRG, trainingfor ANRG staff and examining the gas production Technical tax regime.

Electricity Sector: PPIBL will provide technical assistance to GOR to develop a privatizationstrategy for the electricity generation sector.

Project Component 4 - US$1.96 million

Component 4: Improvement in the BusinessEnvironment

Technical assistance to improve the business environment will include:

(i) strengthening e-business, including e-commerce, e-government to the Ministry ofInformation Technology;The Govermment is committed to improve the e-business in Romania. The e-signature hasbeen already passed as well as the law on e-commerce. However, the legislative andinstitutional framework governing this field needs further development. In this sense technicalassistance is necessary to ensure the successful implementation.

(ii) training of commercial court judges and personnel;The training program is aimed at helping the trainees to better understand the legislation thatinfluences bankruptcy proceedings for both corporate and bank insolvency and other piecesof ancillary legislation. It also offers the trainees an overview of the economic/commercialand international operations, which are relevant for the bankruptcy cases. In addition, thetraining program is supposed to bestow a businesses type of reasoning upon the participantswhen deciding over various commercial alternatives to be pursued in order to attain certainoutcome.

(iii) improve court infrastructure;The Ministry of Justice will allocate the funds to renovate a few commercial divisions of thelocal courts (tribunals). This aims to improve the interior working environment.

(iv) development of a public relations campaign for the improvement of the businessenvironment; and (v) implementation of the public awarenesscampaign; The Government has launched a campaign to improve communications with thebusiness community on the ongoing business environment reforms. PPIBL will support thetask force that has already been established on this matter to develop and implement thiscommunication strategy.

(v) improvement of the business environment, and provision of equipment the Jiului Valley.Based on the CDF consultation, the local communities located in Jiului Valley haveformulated a long term strategy for a sustainable development. This draft strategy is beingdiscussed by the Inter Ministerial Committee which has been set up by the Prime Minister forthis purpose. The funds located in PPIBL will finance the technical assistance for improving

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the local capacity to implement the drafted strategy, and further its development. Theimprovement of the business environment will be achieved by involving also the local privatesector and civil society into this process.

Project Component 5 - US$12.44 million

Component 5: Institutional and Governance Reform

Under this component, technical assistance will be provided to strengthen: (i) public expendituremanagement (MoPF); (ii) extemal audit (CoA); (iii) e-government (MoCIT); (iv) publicadministration (MoPA); (v) rule of law (MoJ); and (vi) health administration. This technicalassistance is designed to help in the design and initial stage of implementation of theGovernment's institutional and govemance reform agenda. The overarching objectives of thatagenda are to create a more responsive, transparent and accountable public sector.

Public expenditure management: Technical assistance within this subcomponent will address sixdistinct aspects of Romania's public expenditure management systems and practices: (i) cashmanagement within the Treasury system; (ii) budget formulation; (iii) foreign financingcoordination; (iv) govemment accounting; (v) intemal audit; and (vi) decentralization. Technicalassistance for cash management will provide advice for handling transactions (e.g., build clearinghouse within MoPF vs. contract with private banking sector, using TRANSFOND), as well as onrevising the legal framework of governing treasury functions. In addition, training in cashmanagement will be provided to Treasury Department staff. Technical assistance for budgetformulation will provide training to major budget institutions on how to prioritize their activitiesand budget proposals and how to define programs for the purpose of program budgeting and howto build capacity to monitor performance in achieving program objectives. Technical assistancefor foreign financing coordination will assist the Ministry of Finance in implementing legislationfor improving coordination of foreign financing by assisting MoPF staff in exploring options suchas establishing a central unit for coordinating foreign financing within MoPF, ensuring thataccounting improvements capture foreign financing, or requiring MoPF to sign-off for anyforeign-financed project. In addition, a study tour to Hungary will serve to expose key MoPFstaff to that system for coordinating public debt. Government accounting will be improved byproviding Technical assistance to help the MoPF to develop accrual accounting capacities,accounting regulations and procedures, and program accounting capacities. Internal audit will beimproved by developing and installing software and hardware for monitoring and providingsearch capacities for legal instruments goveming intemal audit and a data base on intemal auditsand their findings. This work will be undertaken in order to be consistent with the Ministry's"Policy Paper on Public Intemal Financial Control" (October 5, 2001). Technical assistance willhelp the Govemment to address decentralization risks by advising the Govemment onamendments to the Law on Local Public Finance, strengthening institutional capacities of localauthorities on a pilot basis, in order to improve their accountability and providing advice to theGovemment on implementation of the equalization fommula.

External audit: Technical assistance for extemal audit will provide training and information

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technology to complement a comprehensive program of Technical assistance to the Court ofAccounts, which is already in place and being financed by the EC and DFID. Training will bebuilt around training of trainers in order to ensure of this technical assistance. It will focus onfinancial and performance auditing for CoA staff working at the local level (in the 28 Judets notalready provided such training under the existing twining arrangement), auditing of privatizationprocesses, program budget auditing, and fraud, corruption and Technical assistance evasionauditing. In addition, information technology (hardware and software) will be developed andinstalled to support financial and performance auditing.

E-government: The Government is mounting a comprehensive strategy for developing variouse-government applications, such as e-procurement, a unified portal for access to governmentweb-sites, development of various national on-line registries, as well as development ofSMART-card access to government functions and services. These applications aim to make publicadministration functions and public service provision more accessible and transparent, as well asmore accountable thereby reducing incentives and opportunities for administrative corruption andcontributing to a more attractive business environment. As part of this effort, technical assistanceunder PPIBL will assist the Ministry of Communication and Information Technology to advanceone or more of these efforts. At a minimum, this technical assistance will assist the MoCIT toundertake a feasibility study and prepare functional requirements for the SMART-card system.

Public administration: Consistent with the Government's e-government strategy, an importantelement of its public administration reform strategy is to introduce information technology-baseddocument systems. Accordingly, the PPIBL will finance a feasibility study for development of anintegrated information system for document management for use throughout Romania's publicadministration.

Rule of law: A recent diagnostic of Romania's legal and judicial systems, as well as systematicsurvey data, reveal that the most deleterious aspects of those systems are the endemic instabilityof Romania's legal framework and the extent to which the interpretation of regulations ispredictable information about regulations is easy to obtain and administrative recourse isavailable. Accordingly, technical assistance for the rule of law will support key elements of theGovermment's strategy for addressing corruption, the National Program for Prevention ofCorruption: National Action Plan Against Corruption (Bucharest: 2001). This strategy was theresult of a participative policy deliberation process undertaken by the Government of Romaniaand builds on insights provided by Diagnostic Surveys of Corruption in Romania: First Results(The World Bank: August 15, 2000), particularly those elements related to ensuring a more stablelegal framework and better enforcement of legal rights.

Health administration: The Government faces an important challenge to provide health care tocitizens. Accordingly, technical assistance for health administration will help the Govemment todesign a strategy and action plan for addressing these challenges, as well as to launchimplementation of the proposed strategy and action plan.

Project Component 6 - US$0.24 million

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Project Management Unit (PMU)

The PMU will carry out the following tasks: monitoring project expenditures and costs (local andforeign), process loan disbursement applications and track disbursements of the loan andgovernment funds; maintain project records and accounts; preparing physical and financialforecasts of future activities required to implement the components and for inclusion in budgetaryproposals for the succeeding implementation year. One year of operating costs of the PMU willbe financed under PPIBL. Currently, the PMU staff is been paid under PIBL and will continueuntil PIBL closure.

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Annex 3: Estimated Project CostsROMANIA: Private and Public Sector Institution Building Loan

Project Cost by Component Local USS Foreign US$ Total USSmillion million million

Financial Sector Restructurng and 1.84 2.15 3.99Privatization Support

Privatization Support for Enterprises 0.10 0.50 0.60

Privatization Support for the 0.46 1.80 2.26Energy Sector

Support for an Improved Business 0.86 0.94 1.80Environment

Institutional and Governance 1.80 9.45 11.25Reform

Front End Fee 0.19 0.00 0.19

PMU Operating Cost 0.24 0.00 0.24

Total baseline cost 5.47 14.84 20.31

Price Contingencies 0.17 0.84 1.01

Physical Contingencies 0.17 0.85 1.02

Total Contingencies 0.34 1.69 2.03

Total Project Cost 5.81 16.53 22.34

Total Financing Required 5.81 16.53 22.34

Project Cost by Category

Goods 0.93 4.90 5.83

Civil Works 0.09 0.45 0.54

Services Training and Audit 2.16 11.35 13.51

Incremental Operating Cost 0.04 0.20 0.24

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Front End Fee 0.19 0.00 0.19

Unallocated 0.34 1.70 2.04

Total Project Costs 3.74 18.60 22.34

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Annex 4Financial SummaryROMANIA: Private and Public Sector Institution Building Loan

Not Applicable

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Annex 5: Financial SummaryROMANIA: Private and Public Sector Institution Building Loan

Project Cost Year 1 Year 2 Year 3 TOTAL

Investment Costs 8.73 8.71 4.66 22.10

Recurrent Costs 0.00 0.07 0.17 0.24

Total 8.73 8.78 4.83 22.34

Financing Year 1 Year 2 Year 3 TOTAL

IBRD 7.18 7.37 4.06 18.60

Govemment 1.56 1.41 0.77 3.74

Total 8.73 8.80 4.83 22.34

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Annex 6: Procurement and Disbursement ArrangementsROMANIA: Private and Public Sector Institution Building Loan

Procurement

Procurement and Disbursement Arrangements

Procurement of Goods and Works (Table A)

Goods and works will be procured in accordance with the provisions of the Guidelines forProcurement under IBRD loans and IDA credits published by the Bank in January 1995, andrevised in January and August 1996, September 1997, and January 1999 (including amendmentsas of loan-signing date). When applicable, the appropriate Standard and Sample BiddingDocuments issued by the Bank will be used with minimum changes acceptable to the Bank. Forprocurement under ICB, domestic suppliers will be given a margin of preference in accordancewith procurement guidelines.

International Competitive Bidding: ICB procedures for goods will be used for contractsestimated to cost US$ 100,000 equivalent or more.

National Competitive Bidding: Works estimated to cost less than US$ 400,000 equivalent percontract up to an aggregated amount not to exceed 590,000 equivalent will be procured undercontracts awarded in accordance with the provisions of paragraphs 3.3 and 3.4 of theGuidelines.

International Shopping (IS): Contracts for supplies readily available off-the-shelf orcommodities of standard specification estimated to cost less than US$100,000 and up to anaggregate not to exceed US $260,000, may be procured under IS procedures by obtainingcompetitive price quotations from at least three suppliers in two different countries.

National Shopping (NS): Contracts for supplies minor sundry items estimated to cost lessthan US$ 50,000 per contract up to an aggregated amount not to exceed US$ 130,000equivalent, may be procured under NS procedures by obtaining competitive price quotationsfrom at least three suppliers.

Procurement of Services (Table A.1.)

Contracts for consultant services will be awarded in accordance with the provisions of theGuidelines for the Selection and Employment of Consultants by World Bank Borrowers publishedby the Bank in January 1997, revised in September 1997 and January 1999 (includingamendments as of loan-signing date). The services financed under the loan include (i) financialsector services, (ii) privatization services, (iii) energy sector reform and privatization, (iv)improvements in business environment, (v) public sector reform, and (vi) continued operation ofthe project management unit. Selection of consulting company will be based on the Standard

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Request for Proposal issued by the Bank.

The following method of selection will be followed:

Quality and Cost Based Selection (QCBS): Since the jobs for the consultancies to supportprivatization, financial, business services and public sector reform are specialized in nature, theQCBS method will be used for contracting services. For purposes of procuring services forprivatization activities, the modified evaluation formula approved by the Bank shall apply.

Selection Based on Consultant's Qualification (SBCQ):Services for Technical Assistance forcontracts under US$ 100,000 may be procured in accordance with the provision ofparagraphs 3.1 and 3.7 of Section 3 of the Consultants Guidelines up to an aggregatedamount of US$ 0.88 million.

Selection Based on Fixed Budget (SBFB): Public awareness campaign under contracts lessthan USD 400,000 will be implemented in accordance with paragraph 3.5 of Section III of theConsultants Guidelines up to an aggregated amount of US$ 0.68 million.

Selection of Individual consultant (SIC): Individual consultants for selected studies,regulations, and other components for an aggregate amount of US$ 0.77 million will beselected on the basis of their qualifications for the assignment in accordance with Section 5 ofthe Consultants Guidelines.

Single Source Selection: Services for audit of the project account as a continuation ofprevious work carried out by the firm may, with the Bank's prior agreement, be procured inaccordance with the provisions of paragraphs 3.8 through 3.11 of Section 3 of the ConsultantGuidelines.

Training: Training shall be procured on the basis of quotes obtained directly from trainingproviders in accordance with the procedure agreed upon the Bank

Bank Review

The PMU will use the current Bank Standard Bidding Documents (SBD) for procurement ofgoods and services financed by the Bank, and Standard Bid Evaluation Form for Procurement ofGoods for the evaluation of bids procured through ICB. For selection of consultants, BankPublished Standard Request for Proposal (RFP) will be used. For preparation of consultants'proposals evaluation report, the Bank standard evaluation form will be used. The Bank's priorreview of procurement actions are given in Table B.

All other procurement documents and procedures would be subject to the Bank's ex-post review.About 20 percent of such contracts would be reviewed on a random basis during supervisionmissions. In such cases, the agencies would provide for review of the relevant documentation(invitation to bid/request for proposals, instructions to bidders, conditions of contract, etc.)leading up to the culmination of the bidding process, minutes of bid opening, bid evaluation

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report, recommendations, and copies of the bid proposals. The outcome of the ex-post reviewwould be communicated by the Bank to the agencies. The PMU would keep a complete andup-to-date record of all procurement documentation and relevant correspondence in its files.

Table A. Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure

Category ICB NCB Other' N.S. I.S. N.B.F. Total Cost1. Works 0.00 0.59 0.00 0.00 0.00 0.00 0.59

(0.00) (0.49) (0.00) (0.00) (0.00) (0.00) (0.49)2. Goods 6.05 0.00 0.00 0.13 0.26 0.00 6.44

(5.06) (0.00) (0.00) (0. I 1) (0.22) (0.00) (5.39)3. Services 0.00 0.00 14.87 0.00 0.00 0.00 14.87

(0.00) (0.00) (12.50) (0.00) (0.00) (0.00) (12.50)4. Operating Cost 0.00 0.00 0.26 0.00 0.00 0.00 0.26

(0.00) (0.00) (0.22) (0.00) (0.00) (0.00) (0.22)Total Project 6.05 0.59 15.13 0.13 0.26 0.00 22.16

(5.06) (0.49) (12.72) (0.11) (0.22) (0.00) (18.60)

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.

2/ Includes goods to be procured through consulting services, services of contracted staff of the projectmanagement office, training, technical assistance services, and incremental operating costs related tomanaging the project, excluding front end fees.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selection MethodSelectio

Consultant Services nExpenditure Category QCBS SBCQ FBS IC SS Other N.B.F. Total

cost'A. Firms 10.89 0.88 0.68 0.00 0.26 0.00 0.00 12.45

(9.16) (0.74) (0.57) (0.22) (10.41)

B. Individuals 0.00 0.00 0.00 0.77 0.00 0.00 0.00 0.77

(0.65) (0.65)C. Training 0.00 0.00 0.00 0.00 0.00 1.39 0.00 1.39

I I I 1 (1.16) (1.16)Total Project 10.89 0.88 0.68 0.77 0.26 1.39 0.00 14.87

(9.16) (0.74) (0.57) (0.65) (0.22) (1.16) (12.50)

1\ Including contingencies, excludes front end fees.

Note:QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionIC = Selection of Individual ConsultantsSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionSBCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),

Commercial Practices, etc.SS - Sole Source SelectionN.B.F. = Not Bank-financed

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Table B: Thresholds for Procurement Methods

Section 1: Procurement Review

Goods and ICB NCB IS NS Small Works Other Percentage of loanWorks methods amount subject to

prior review

Procurement >--US$100,000 <US$ 400,000 <US$100,000 <50,000 80%thresholds: (US$ 590,000) (US$260,000) (US$130,000

individual and (US$) )aggregate

Prior Review All First two First two First two I l

Consulants QCBS LCS SBCQ Fixed Individuals SingleBudget Source

Selection

Procurement N/A <US$ 1 00,000 <= US$ N/Athresholds: (US$880,000) 400,000 (US$770,000 (US$ 260,000)

individual and (US$aggregate 680,000)

Prior Review: >US$ 100,000 All TOR and >US$ All TOR and All 90%Contracts 100,000 Short Lists

and Contracts>US$ 50,000

Ex-post Review: j Ex-post Review will be done during supervision mission of those documents that are not prior reviewed.

Section 2. Capacity of the Imnlementinv A2encv in Procurement and Technical AssistanceRequirements

4. Brief The PMU staff constitutes of two Procurement Officers and a Procurement Assistant. The Procurement Officersstatement have extensive experience in Bank's procurement procedures. The Procurement Assistant is experienced in

foreign trade and public procurement. Various consultants appointed at project sites will prepare the technicalspecifications, and TORs for consulting services.

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5. Country Procurement Assessment Report or 6. Are the bidding documents for the procurement actions of the first year readyCountry Procurement Strategy Paper status: Under by negotiations Yespreparation

Section 3. Trainina, Information and Develonment on Procurement

7. Estimated date of Project 8. Estimated 9. Indicate if contracts are 10. Domestic 11. Domestic Preference for Works,Launch Workshop date of subject to mandatory SPN in Preference for if applicable

publication of Development Business GoodsGeneralProcurementNotice No

April 2002 Yes Yes.January 2002 1 I

12. Retroactive financing. No. 13. Advanced procurement No

14. Explain briefly the Procurement Monitoring System and Information System: The PIU is being equipped with the necessarycomputers and software to enable it to monitor and record procurement implementation. All procurement requests will beaddressed to the procurement staff working in the PIU. Quarterly progress reports will be sent to the Bank to update procurementimplementation progress.

Section 4. Procurement Staffing

15. Indicate name ofProcurement Staff as part of the Project Team responsiblefor the procurement in the project:

Eszter Kovacs

16. Explain briefly the expected role of the Field Office in Procurement:

NOTE: ER =Evaluation Report; RFP = Request for Proposal; WBP=World Bank Procurement.

Procurement methods (Table A)

Prior review thresholds (Table B)Please see the attached file with the Procurement Schedule

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Disbursement

Allocation of loan proceeds (Table C)

Expenditure Category Amount In USS million Financing Percentage1 .Goods 4.90 100% of foreign expenditures, 100% of

local expenditures (ex-factory cost) and80% of local expenditures for other items

procured locally.2. Civil Works 0.45 80%3. Consultants' services (including audit, 11.35 100%workshops and training)4. Incremental Operating Costs 0.2 100%4. Unallocated 1.70

Total 18.60

The allocation of loan proceeds is given in Table C, which also indicates the financing for thevarious categories of expenses. The project will be executed over a period of three years whenthe loan amount of US$ 18.60 million would be disbursed. The proposed closing date for theproject would be June 30, 2005. Disbursement is expected to be based on traditional disbursementprocedures. Disbursement procedures are required to be consistent with Bank requirements infinancial management and reporting systems, the key elements of which are outlined in theHandbookfor Financial Management System. A time-bound action plan was agreed with theBorrower whereby the PMU would produce financial monitoring reports acceptable to the Bankby no later than September 30, 2002.

Use of statements of expenditures (SOEs):

Disbursements would be made against Statements of Expenditure for (i) goods and works undercontracts costing US$100,000 equivalent each, except in respect to the first two contracts to beawarded pursuant to part C2 of Section 1 of Schedule 4 to the Loan Agreement; (ii) incrementaloperating costs; and (iii) services under contracts costing less than US$100,000 equivalent eachfor employment of consulting firms, and under contracts costing less than US$ 50,000 each forthe employment of individual consultants, under such terms and conditions as the Bank shallspecify by notice to the Borrower. Detailed documents outlining these expenditures would bereviewed and retained by the PMU and made available for the required audit as well as to theBank supervision missions. Disbursements against goods and services exceeding the above limitswould be made against full documentation. Disbursement and procurement documents using SOEprocedures would be retained by the PMU for a period of at least two years after disbursementand made available to Bank staff and external auditors.

Special account:The PMU will open and maintain a Special Account with an acceptable commercial bank inRomania on terms and conditions acceptable to the Bank. The PMU will manage the SA; theauthorized allocation of it would be US$350,000. At the start of the project, the initial deposit

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will be limited to US$200,000. The initial allocation may be increased up to the authorizedallocation once aggregate disbursements of US$ 4,000,000 are reached by submitting the relevantwithdrawal applications.Withdrawal applications for replenishments of the SA should be sent tothe Bank on a monthly basis, or when the balance of the SA is equal to about half of the initialdeposit or the authorized allocation, whichever comes first. The SA would be audited annually byindependent auditors, and the audit report would be submitted to the Bank for review andapproval within six months of the end of the fiscal year.

Financial Management Assessment - Please refer to Attachment 11.

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-41 -

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Annex 7: Project Processing ScheduleROMANIA: Private and Public Sector Institution Building Loan

Project Schedule Planned ActualTime taken to prepare the project (months) 10

First Bank mission (identification) 02/01/2001 02/28/2001

Appraisal mission departure 11/15/2001 10/29/2001Negotiations 11/19/2001 12/12/2001

Planned Date of Effectiveness 04/01/2002 04/01/2002

Prepared by:

Preparation assistance:

Bank staff who worked on the project included:

Name SpecialityKhaled Sherif Acting Sector Manager, Lead Country EconomistRodrigo Chaves Romania PTL, Lead Financial EconomnistHiran Herat Project TTL, Sr. Financial Analyst/FMSRamnin Shojai Sr. Private Sector Development SpecialistMarcelo Bueno ConsultantGary Reid Sr. Public Sector Management SpecialistJames Dick Welch ConsultantIrena Tchoukleva ConsultantVaradarajan Atur Sr. Financial AnalystArabela Negulescu Sr. Operations OfficerDoina Visa Operations OfficerSorin Teodoru ConsultantNadia Sirghi ConsultantEszter Kovacs Procurement OfficerWilliam Porter Lead Oil and Gas SpecialistIrna Kichigina Sr. CounselElly Gudmundsdottir Counsel

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Annex 8: Documents in the Project File*

ROMANIA: Private and Public Sector Institution Building Loan

A. Project Implementation Plan

B. Bank Staff Assessments

B. 1. Procurement AssessmentB.2. Financial Management Systems Assessment

C. Other

C. 1. Financial Management Questionnaire

*Including electronic files

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Annex 9: Statement of Loans and CreditsROMANIA: Private and Public Sector Institution Building Loan

Difference between expectedand actual

Original Amount In USS Millions disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Frm Rev d

P008777 1994 Petroleum Sector Rehabiltation 175.60 0.00 0.00 71.50 71.50 -52.90

P008784 1994 Educaton Reform 50.00 0.00 0.00 9.00 9.00 9.00

P008776 1995 Employment & Social Protection 55.40 0.00 0.00 29.60 29.60 0.00

P008794 1996 Power Sector Rehabilitabon 110.00 0.00 33.50 58.70 92.20 83.80

P036013 1996 Railway Sector Rehabilitaton 120.00 0.00 0.00 31.80 31.80 0.00

P008793 1997 Higher Educaton 50.00 0.00 0.00 15.60 15.60 1.60

P039250 1997 Second Roads 150.00 0.00 0.00 22.90 -14.60 0.00

P044614 1998 Schools Rehabilitaton 70.00 0.00 0.00 40.80 33.30 -5.20

P034213 1998 General Cadastre and Land Registration 25.50 0.00 0.00 23.00 13.00 0.00

P008788 1998 Telecommunicabons 30.00 0.00 7.00 15.40 21.80 10.30

P055495 1998 Child Welfare Reform 5.00 0.00 0.00 2.40 2.20 0.00

P058284 1999 Cultural HerItage 5.00 0.00 0.00 4.20 4.00 0.10

P039251 1999 Private Sector Institution Building 25.00 000 1.10 14.00 9.10 0.00

P056337 2000 Mine CAosure 6 Social Mitgation 44.50 0.00 0.00 41.30 23.80 0.00

P043882 2000 Agrculture Support Services 11.00 0.00 0.00 10.40 1.80 0.00

P065041 2000 Trade & Transport Fadlitaton In SEE EUR 17.10 0.00 0.00 15.20 -1.90 0.00

P008797 2000 Health Sector Reform 40.00 0.00 0.00 26.20 5.00 0.00

P056891 2001 Rural Finance (APL 1) 80.00 0.00 0.00 80.00 2.40 0.00

P008783 2001 Social Sector Development 50.00 0.00 0.00 50.00 9.60 0.00

P044176 1999 Biodivemsity (GEF) 0.00 5.50 0.00 3.70 2.20 0.00

P068808 2002 Social Development Fund 2 20.00 0.00 0.00 20.00 0.00 0.00

Total: 1134.10 5.50 41.60 585.70 361.40 46.70

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ROMANIASTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1993 Alcatel 5.97 0.00 0.70 0.00 5.97 0.00 0.70 0.001999 Ambro 7.40 0.00 0.00 0.00 4.76 0.00 0.00 0.001998/02 Banc Post 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.002001 Banca Romaneasca 5.92 0.00 0.00 0.00 5.12 0.00 0.00 0.001998 Bilstein Compa 1.35 0.00 0.00 1.35 1.35 0.00 0.00 1.351996 Danube Fund 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.001998 Demir Romania 2.86 2.55 0.00 0.00 2.86 2.55 0.00 0.001997 Efes Brewery 5.92 0.00 0.00 4.00 5.92 0.00 0.00 4.001998 FCR Fund 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.001998 Garanta 0.00 0.60 0.00 0.00 0.00 0.30 0.00 0.001998 Small Bus. Loan 5.00 0.03 0.00 0.00 5.00 0.03 0.00 0.002001 ICME 13.21 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 Krupp Compa 5.26 0.00 0.00 2.26 4.16 0.00 0.00 1.781997/00 Mobil Rom 38.14 0.00 10.00 146.86 38.14 0.00 10.00 146.861997 Rambox 1.09 0.00 2.00 0.00 1.09 0.00 2.00 0.001994/98/01 Romlease 5.64 1.02 0.00 0.00 2.64 1.02 0.00 0.00

Total Portfolio: 97.76 16.20 22.70 154.47 77.01 15.90 22.70 153.99

Approvals Pending Comnmitment

FY Approval Company Loan Equity Quasi Partic

2001 Kronospan Rom 30.20 0.00 0.00 45.73

Total Pending Commitment: 30.20 0.00 0.00 45.73

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Annex 10: Country at a GlanceROMANIA: Private and Public Sector Institution Building Loan

Europe & Lower-POVERTY and SOCIAL Central middle-

Romanla Asia Income Development dimond'2000Population. mid-year (millions) 22.4 475 2,046 Life expectancyGNI per capita (Atlas method. US$) 1.670 2.010 1,140GNI (Atlas method. US$ billions) 37.4 956 2.327

Average annual growth, 1994-00

Population (%) -0.2 0.1 1.0Labor force (X) 1.2 0.6 1.3 GNI 7 Gross

per -. primaryMost recent eastimate (latest year available, 1994-00) capita , enrollment

Povertv (% of Population below national Dovertv line) 41Urban population (% of total population) 56 67 42Life expectancv at birth (years) 70 69 69Infant mortalltv (per 1,000 live births) 19 21 32Child malnutrition (% of children under 5) .. .. 11 Access to improved water sourceAccess to an improved water source (% of population) 58 90 80Illiteracy (% of population age 15+) 2 3 15Gross primary enrollment (%of school-aqe population) 96 100 114 Romania

Male 96 101 116 Lower-middle-income groupFemale 95 99 114

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratlos,

GDP (USS billions) .. 38.3 35.2 36.7

Gross domestic investment/GDP 39.8 30.2 17.2 19.4 TradeExports of aoods and serviceslGDP 35.3 16.7 29.0 34.1Gross domestic savings/GDP 35.0 20.8 12.8 13.6Gross national savinas/GDP .. 21.5 13.5 15.1

Current account balance/GDP .. -4.7 -3.7 3.7 Domestic InvestmentInterest pavments/GDP .. 0.0 1.4 1.4 saingsTotal debt/GDP .. 3.0 26.6 29.3Total debt service/exports 12.6 0.4 31.3 15.7Present value of debt/GDP .. .. 22.7 27.4Present value of debt/exports .. .. 79.5 80.7

Indebtedness1980-90 1990-00 1999 2000 2000-04

(averaqe annual growth)GDP 0.5 -0.7 -2.3 1.6 4.0 - RomaniaGDP per caoita 0.1 -0.4 -2.1 1.8 4.3 Lower-middle-income groupExports of goods and services .. 8.5 10.8 23.9

STRUCTURE of the ECONOMY1980 1990 1999 2000 Growth of Investment and GDP (%)

(% of GDP) 20Agriculture .. 20.3 15.0 12.8Industry .. 50.0 35.9 36.3 10

Manufacturing .. .. 26.7 27.0Services .. 29.8 49.1 50.9 o

Private consumption 59.9 65.9 74.4 73.9 -10

General government consumption 5.0 13.3 12.7 12.5 GDI 11OGDPImports of goods and services 40.1 26.2 33.4 39.9

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(averaae annual qrowth)

Agriculture .. -0.6 3.4 -15.9 40 -

Industrv .. -0.8 -1.6 6.2 30Manufacturinq .. -2.8 -7.1 6.2 20

Services .. -0.5 -4.6 6.7 10t

Private consumption .. 1.2 -3.6 1.4General government consumption .. 1.1 -9.4 4.2 10 95 96 97 98 89 00Gross domestic investment .. -5.2 -5.3 10.9 Exports -*mportsImports of goods and services .. 6.4 -1.1 29.1

Note: 2000 data are preliminary estimates.

The diamonds show four key indicators in the countrv (in bold) compared with its income-aroup average. If data are missing, the diamond willbe incomplete.

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Romania

PRICES and GOVERNMENT FINANCE1980 1990 1999 2000 Inflation (%)

Domestfc prices(% change) 20Consumer prices .. 5.1 45.8 45.7 5so

ImplicR GDP deflator 0.6 13.7 48.7 45.3 loo.

Government finance s0 -(% of GDP, includes current grants) 0Current revenue .. 39.5 32.1 31.4 9s 9a 97 98 99

Current budget balance .. 8.5 0.0 -0.6 GDP deflator eCPIOveral surplus/deficit .. 1.0 -3.7 -4.0

TRADE1980 1990 1999 2000 Export and Import levels (USS mill.)

(US$ millions)

Total exports (fob) .. 5.770 8,487 10.367 15000Textiles .. 944 1,310 1.658Metals .. 1,136 502 822 10.0* *Manufactures .. 3,428 5,697 6,984 .009

Total imports (Cf) 9,202 10,557 13,055Food .. 1,211 795 932 5.000Fuel and energy .. 3,896 1,251 1,830Capital goods .. 1,958 2,903 3,767 o

94 es 96 97 98 99 00Export price Index (1995=100) .. 97 98 105Import price index (1995=100) .. 105 101 107 *Exports *ImportsTerms of trade (1995=100) .. 93 97 98

BALANCE of PAYMENTS

(US$ millions) 1980 1990 1999 2000 Current account balance to GOP (%)

Exports of goods and services 12,087 4,295 9,870 12,133Imports of goods and services 13,730 6,065 11,381 14,071Resource balance -1,643 -1,770 -1,511 -1,938 .2

Net income -777 -140 -411 -285 -4Net current transfers 0 107 626 860

Current account balance -2,420 -1.803 -1,296 -1,363

Financing Items (net) 2,174 157 1,469 2,291 -sChanges in net reserves 247 1,646 -173 -928 l1o

Memo:Reserves including gold (USS millions) .. 877 2,493 3,397Conversion rate (DEC. loca//US$) .. 22.4 15,332.8 21,708.7

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) ComposItIon of 2000 debt (USS mill.)Total debt outstanding and disbursed 9,762 1,140 9,367 10.740

IBRD 806 0 1,662 1,898IDA 0 0 0 0 G:1,C81 A:1,888

Total debt service 1.529 18 3,138 1.953IBRD 81 0 170 195 c:453IDA 0 0 0 0

Composition of net resource flows D: 1,094Ofricial grants 0 3 .. ._Official creditors 613 19 14 467Private creditors 1,360 4 -327 1,068 \772Foreign direct investment .. .. 1,025 1,009 F: 5.442Portfolio equity 0 0 -715 110

World Bank programCommitments 240 0 380 68 A - IBRD E -aitateralDisbursements 239 0 315 384 B-IDA D- Other multlateral F -PrivatePrincipal repayments 22 0 83 91 C -IMF G -Short-termNet fows 217 0 233 293Interest payments 59 0 88 104Nettransfers 158 0 145 189

Development Economics 9/10/01

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Additional Annex 11: Financial Management Assessment ReportROMANIA: Private and Public Sector Institution Building Loan

1. Executive Summary and Conclusion

A review of the Financial Management arrangements for the project was undertaken in July 2001 todetermine whether the financial management arrangements within PMU are acceptable to the Bank. It isconcluded that the PMU currently satisfies the Bank's minimum financial management requirements.The financial management arrangements for the PMU are considered capable of satisfactorily recording alltransactions and balances, supporting the preparation of regular and reliable financial statements, and aresubject to auditing arrangements acceptable to the Bank. A summary of financial management assessmentand conclusions are as follows:

Financial Management Assessment Rating Comments1. Implementing Entity (PMU) Satisfactory PMU is successfully implementing the

Bank financed PIBL project2. Funds Flow Satisfactory Same funds flow as existing project3. Staffing Satisfactory Experienced project management and

financial team4. Accounting Policies and Satisfactory Good financial manuals and policies.Procedures Tested under PIBL.5. Intemal Audit Satisfactory Internal Audit carried out by the Court of

Accounts (for PIBL).6. External Audit Satisfactory The project will be audited by the same

audit firm, that has audited the PIBL andissued a clean opinion.

7. Reporting and Monitoring Satisfactory PMU prepares reliable PMRs8. Information Systems Satisfactory Using accounting system developed by

Arthur Anderson, which is used byseveral projects in Romania.

Overall Financlal Management SatisfactoryRating

Detailed financial management assessment questionnaires are included in the project files.

2. Project Description Summary

The objectives of the proposed Private Sector Institution Building Loan II (PIBLII) are to enhance theprivate and public sector's role in the economy through the transfer of state-owned assets, the finalrestructuring and privatization of state-owned banks, the creation of an environment conducive to privatesector growth and development, and prudent rationalization and contraction of public administration with afocus on professionalization and improved service delivery. Success will be indicated by a reduction in thepublic sector deficit (associated with loss-making state enterprises), better performing banks, the increasein volume and profitability of private sector economic activity, and more stable fiscal accounts.

3. Country Financial Issues

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The first Country Financial Accountability Assessment (CFAA) for Romania will be carried out duringFY03. A summary of the main country generic risks is given below. The banking system in Romania is stillperceived as potentially sensitive to liquidity problems. Despite a certain degree of restructuring and"cleaning" of the banking sector, the systemic risk is still perceived as significant, as some commercialbanks are regarded as not very safe. The main problems reside in asset quality, bad-loans percentage,relatively high foreign currency exposure, etc. It is perceived that by opening the Special and Sub-SpecialAccounts at a big Romanian commercial bank, acceptable to the World Bank, the banking risk is kept at anacceptable moderate level.

During the recent past some concems have been raised concerning fraud, waste and abuse of donor funds inthe region. Perceived corruption as reported in the press is principally in the area of procurement. Theserisk are expected to be mitigated by "ring-fencing" of the project through the establishment of the projectmanagement unit and project implementation units and teams within the beneficiaries' entities, segregationof duties within the units, requiring beneficiaries' representatives to certify the works done, goods deliveredand services rendered before payments are made to the suppliers. Including proper supervision from theWorld Bank's teams and an independent yearly audit of project funds by a reputable audit firm, acceptableto the Bank..

At the project level, based on the experience gained from PIBL 1, no major issues are foreseen. Theexisting PMU is well versed in Bank procedures and a FM system acceptable to the Bank is in place. Thissystem is been modified to accommodate the project accounts for PPIBL. The auditors (Arthur Andersen)for PIBL I has issued a clean opinion on the project accounts for 1999 and 2000.

4. Financial Management System Assessment

4.1 Project Management and Coordination

The Ministry of Public Finance's (MOPF) Intemational Financial Department is the main counterpart forthe project. The overall coordination of the project, including the administrative functions (financialmanagement, procurement, monitoring) will be executed by the Project Management Unit (PMU), whichhas been established in the Ministry of Public Finance for the implementation of the PIBL 1. This PMU isand will continue to be headed by the current Minister of Public Finance. The Minister will have overallresponsibility for the project and continue to report to the Prime Minister. He will be assisted by a ProjectAdministrator who will oversee the day-to-day operations of the project. A Project Steering Committee(PSC) has been established with participants from all project entities. The PSC, under the guidance of thePMU director, will ensure that all project objectives and targets as specified in the PIP are on track andachieved. Technical expertise on a short-term basis will be provided to the Project Administrator as andwhen required. PPIBL has built in long-term expertise to assist the PMU with needed tasks regarding themain components of the project. This has been done in recognition of the expressed needs of the PMU.Specifically, long-term experts are expected to assist the PMU in all key areas of reform-enterprise,utilities and bank privatizations; improving the business environment; and social protection..

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4.2 Staffing of the Accounting/Finance Function

The PMU has a Director, three procurement officers, a financial manager and a disbursement officer.. TheFinance Manager is familiar with financial and accounting systems as well as with Bank requirements. Shewould be responsible for all aspects of the financial management and accounting, including maintainingbooks of accounts, reporting day-to-day transactions. The Disbursement officer will be in charge of thespecial account and preparation of SOEs and replenishment of the SA. All PMU specialist are experiencedin World Bank procedures.

4.3 Accounting and Internal Controls

A project financial management system exists at the PMU, which was established to keep accounts forPIBL 1.. This system has been modified to also accommodate the accounts for PPIBL. An accountingprocedures manual was developed for PIBL 1 and this document has been modified to incorporate activitiesrelated to PPIBL. The manuals describing the internal controls, including adequate authorization andsegregation of duties, control checklist, regular reconciliation, etc. There is proper segregation of dutiesbetween the finance manager, disbursement officer and the Director. The PMU has extensive experiencegained from implementing the PIBL . It has established key internal control mechanisms on the applicationand use of funds. All necessary steps has been taken to ensure that the project complies with the relevantBank policies (OP/BP 10.02). The PMU staff are well versed in Bank requirements and procedures.

4.4 Computerized Accounting Systems

The PMU is responsible for overall project financial management and accounting for the project. Duringthe implementation of the PIBL, the PMU implemented computerized accounting system that complies withinternational accounting standards and meets the FMR-based requirements. The additional license, boughtby the PMU during the financial management assessment for PPIBL, complies with the local accountingreporting requirements, especially the chart of accounts and also meet the needs of the Bank. Theaccounting system meets the minimum reporting requirement of the Bank and is capable of producingFMRs.

4.5 Audited Financial Statements and Management LettersThe PMU will recruit independent auditors under terms of reference acceptable to the Bank. AuditedProject Financial Statements will be submitted to the Bank with the audit report six months after end ofeach year audited. Cost of the audit will be financed through IBRD Loan. During Negotiations, it wasagreed that the PMU will retain the services of the same audit firm (Arthur Andersen) or a firm acceptableto the Bank, to audit the PPIBL accounts.

4.6 Financial ManualInternal controls were reviewed and found acceptable under PIBL I. Operational procedures and guidelinesfor project financial management are documented in a Financial Management and Operational Manual,encompassing all levels of project management and administration. The Manual includes financialmanagement and staffing, identification of accounting and auditing standards and procedures used for theproject, project reporting and monitoring, procedures for cash and asset management and format of projectmanagement reports. All payments from the PMU is subject to review by the internal controller of theMOPF.

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4.7 Conclusion

It is concluded that the PMU has a financial management system which will meet the Bank's minimumfinancial management requirements because:* The PMU has implemented acceptable computerized accounting system;* The PMU has a financial manual describing the accounting policies and procedures, internalcontrols, delegation of responsibilities;* The PMU has an accountant and a disbursement officer acceptable to the Bank; and* The PMU has proved experience in implementing a Bank financed project

5. Financial Flows

The Ministry of Public Finance will be the borrower, on behalf of the Government. A special account willbe opened in a commercial bank acceptable to the Bank. All contracts will be concluded by the PMU, whowill operate the SA and make all payments with respect to all the components. Counterpart funds would bepaid from the budget allocation from the MOPF.

6. Financial Management Reports

The PMU will maintain accounts of the Project and will ensure appropriate accounting of the fundsprovided. It has been agreed that the PMU will be responsible for designing appropriate financialmonitoring reports (FMRs) and preparing FMRs on a quarterly basis. The FMRs include:* Project Sources and Uses of Funds;* Uses of Funds by Project Activity;* Special Account Statement Plus Local Bank Account Statement;* Project Progress Report; and* Procurement monitoring Report

7. Financial Risk Analysis

From a financial management perspective, the proposed PPIBL is considered a moderate-risk project. Asummary of the consolidated risk assessment for the project is as follows:

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Risk AssessmentH S M N Comments

[list specific country, entity, and projectinherent risks]Romania X Overall corruption is high and

governance is inadequate.Project Management Unit X The PMU has been established for

the operation of the PIBL I and will___ _ __ be implementing the PPIBL.

Project X The TA project complements theadjustment operation agreed with theBank. In order to meet theconditionalities of the adjustmentoperation, the TA is required.

Overall Inherent Risk X The project is implemented by thePMU and not a government agency,as a result the project is ring-fenced.

=___________ _ The overall risks are moderate.

1. Implementing Entity X PMU has been established and wellversed in Bank procedures

2. Funds Flow X Based on the experience gainedunder PIBL 1, no problems are seen.

3. Staffing X Qualified and experienced staff arealready on board and are wellcompensated for their efforts.

4. Accounting Policies and Procedures X Based on experience gained underPIBL I no problems are foreseen.

5. Internal Audit X Internal audit is carried out by theCourt of Accounts. The audit of the

__________________ _ PIBL was found satisfactory.6. External Audit X Based on experience of PIBL, no

problems are foreseen7. Reporting and Monitoring X Based on experience of PIBL , no

.problems are foreseen8. Information Systems X = No problems

Overall Control Risk _ X

H - High S - Substantial M - Moderate N - Negligible or Low

FM Report for PAD for PSCP - New Format

12/31/01

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8. Disbursements

Disbursements would be made against Statements of Expenditure for (i) goods under contracts costing$100,000 equivalent each, except in respect to the first two contracts to be awarded pursuant to part C2 ofSection I of Schedule 4 to the Loan Agreement; (ii) incremental operating costs; and (iii) services undercontracts costing less than $100,000 equivalent each for employment of consulting firms, and undercontracts costing less than $50,000 each for the employment of individual consultants, under such termsand conditions as the Bank shall specify by notice to the Borrower. Detailed documents outlining theseexpenditures would be reviewed and retained by the PMU and made available for the required audit as wellas to the Bank supervision missions. Disbursements against goods and services exceeding the above limitswould be made against normal documentation. Disbursement and procurement documents using SOEprocedures would be retained by the PMU for a period of at least two years after disbursement, and madeavailable to Bank staff and extemal auditors.

9. Special account:

The PMU will open and maintain a Special Account with an acceptable commercial bank in Romania onterms and conditions acceptable to the Bank. The PMU will manage the SA; the authorized allocation of itwould be US$350,000. At the start of the project, the initial deposit will be limited to US$200,000.Withdrawal applications for replenishments of the SA should be sent to the Bank on a monthly basis, orwhen the balance of the SA is equal to about half of the initial deposit or the authorized allocation,whichever comes first. The SA would be audited annually by independent auditors, and the audit reportwould be submitted to the Bank for review and approval within six months of the end of the fiscal year.

10. Agreed Action Plan for the PMI

It is concluded that the PMU currently satisfies the Bank's minimum financial management requirements.There is however, the following actions that the PMU have agreed to take to improve its financialmanagement process.

Action Deadline

1. Appoint an auditor to audit the project accounts. 09/30/2002

2. Prepare FMRs 09/30/2002

11. Financial Covenants

The following are the covenants relating to financial matters:* The Government will complete the agreed financial action plan for strengthening the projectfinancial management systems by September 30, 2002.* The Govemment will cause the PMU to have its records, accounts and financial statements auditedeach year, commencing with the accounts for the year ending December 31, 2002.

12. Supervision Plan

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The reports of the progress of the project implementation will be monitored in detail during supervisionmissions. FMRs will be reviewed on a regular basis and the results or issues followed up during thesupervision missions. Financial audit reports of the project and PMU will be reviewed and issues identifiedand followed up. The FMS would monitor the agreed action plan to ensure appropriate actions have beenimplemented by PMU.

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