Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1000 Project Name ENHANCEMENT OF BUSINESS ENVIRONMENT PROJ Region EUROPE AND CENTRAL ASIA Sector Other industry (45%);General industry and trade sector (35%);Central government administration (10%);General public administration sector (10%) Project ID P087811 Borrower(s) KYRGYZ REPUBLIC Implementing Agency to be determined Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [ ] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared June 29, 2004 Estimated Date of Appraisal Authorization February 1, 2005 Estimated Date of Board Approval July 5, 2005 1. Key development issues and rationale for Bank involvement The Kyrgyz Government has adopted a number of important policy reforms over the past several years to support the move to a market economy. However, despite these efforts and although the macroeconomic situation has improved since the turbulent time that followed the Russian financial crisis in the late 1990s, investment remains low and private sector growth inadequate. Private sector growth has only kept pace with GDP growth and remained at about 60% of GDP from 1997-2002. 1 Private sector development (PSD), a major engine of sustainable growth and hence poverty reduction, is recognized as a priority in the Government’s National Poverty Reduction Strategy (NPRS) (December 2002). Supporting private sector-led growth is also one of the key areas of the latest Country Assistance Strategy. 2 In line with this strategy, the Government has embarked on a challenging program to improve the business environment and attract private sector investment. Achievements to date include the passage of a number of laws and regulations, the development of a long-term strategy to design and implement national priorities for standards modernization based on market-oriented methods, and creation of a new Ministry of Economic Development, Industry and Trade (MEDIT). Notably, the steps needed for registration and the number of licenses required for doing business have been substantially reduced and, in early 2004, a Law on the Fundamentals of Technical Regulation was adopted. The role of the MEDIT is, inter alia, to support creation of a favorable investment climate and development of competition necessary for the functioning of a healthy market economy. The functions of Kyrgyzstandard (until very recently, the standards setting, inspection, regulatory body and accreditation body) have been rationalized. Policy-setting and regulatory oversight will be the responsibility of MEDIT. Kyrgyzstandard, renamed the National Institute of Standards and Metrology (NISM), is to become the national body on standardization, metrology and accreditation. A separate state-owned entity will be responsible for 1 EBRD Transition Report 2 Report No. 25708-KG, dated April 22, 2003 Page 2 testing and certification but these functions will eventually be transferred to the private sector. 3 In addition, the President declared 2004 the Year of Good Governance in an effort to reduce corruption and the heavy cost this imposes on business activity. An annual investment summit, initiated by the President and under the direction of the Prime Minister, is an important vehicle for enlisting support for the overall reform program from the donor community, the local business community and international investors. Each investment summit produces an investment matrix of key steps to be taken by the Government to address the major bottlenecks identified and monitor progress. 4 The steps taken to date are necessary but not sufficient. Much more needs to be done to effectively implement the above agenda and bring about the desired changes. Major issues, such as a heavy bureaucratic/regulatory burden; a weak institutional framework; lack of information/transparency; a cumbersome standards regime based on the inherited Soviet system (rather than market-oriented methods); and inadequate access to finance continue to hinder further development of the private sector. These weaknesses are manifested by excessive and unpredictable inspections, permit and licensing requirements and arbitrary decision-making. Overall, weaknesses in the regulatory regime have been flagged by investors as one of the most important factors hindering private sector growth. Several donors, including the Bank, have been supporting the Kyrgyz Republic in the area of private sector development. The Bank has been coordinating with the donors in developing an agenda for longer- term support to provide resources to help the authorities in their reform efforts. USAID is providing extensive institutional support for reducing administrative barriers and for preparing the regulatory reform program. ADB is providing assistance in the areas of corporate governance and prote ction of creditors’ rights. EU-TACIS and the Swiss are providing limited but complementary support in these areas. EBRD is providing trade financing through its Trade Facilitation Program. The proposed project would build on and complement ongoing activities by providing long-term funds for investment and TA needs, which are not available from other sources. In addition to the funding, the Bank would bring in its extensive experience and know-how in science and technology-type projects. Without this support, the impact of contributions to date would not lead to tangible results. The project has strong commitment from the Deputy Prime Minister, supported by the Ministry of Finance. Preparation and implementation of the Governance Sector Adjustment Credit and Governance Technical Assistance Credit (GSAC and GTAC) have added to our knowledge of impediments to private sector investment and growth, and appreciation of the difficulties in remedying them without extensive external assistance. Unsuccessful experience with some lines of credit has demonstrated that constraints other than financial resources are a major bottleneck. In addition, the Country Economic Memorandum (An Integrated Strategy for Growth and Trade) and the Investment Climate Assessment (under preparation) confirm the overriding importance of improving the business environment. 5 The design of the proposed operation will benefit from the lessons learned from these activities. 2. Proposed objective(s) The key objective is to improve the business environment in the Kyrgyz Republic and enhance competitiveness of the enterprise sector. The project’s expected outcomes would include: 3 Legislation on the change was passed in May 2004 4 Investment Matrix actions are consistent with the NPRS and each Matrix builds on the previous one. The focus to date has been on passage of legislation and regulations. 5 Recent assessments indicate that SMEs are taxed most heavily by the existing systems. Page 3 · Improvements in testing and metrology services; · Improvements in ISO certification for industry through implementation of technical regulation reform; · Reductions in administrative and bureaucratic hurdles that impose a cost on enterprises and the business sector overall through implementation of a regulatory impact analysis (RIA) system; · elimination or reduction of duplicative functions of inspection and regulatory agencies through restructuring and streamlining of activities; · improvements in transparency and reduction of uncertainty in the application of business regulations, through increasing accountability for introducing regulatory acts/legislation, thus reducing opportunities for arbitrary decision making, rent seeking and corruption. Primary beneficiaries of the project would be the business sector, especially small and medium enterprises (SMEs). The MEDIT and the NISM are also expected to be major beneficiaries. 3. Preliminary description The project activities have not yet been defined but the project is expected to provide technical assistance and investment resources to support the development and implementation of the Government’s agenda for improving the environment for investment and PSD in two areas: (i) Enhancing quality standards for improving the competitiveness of Kyrgyz businesses: helping to refine and implement the Government’s program to reform the technical regulation system (metrology, testing, standards, quality – MTSQ), through a multi-pronged approach to ensure consistency in implementation of the reforms. The project would support the development of the institutional structures needed to implement the Technical Regulation Law, and could include: assistance in developing the appropriate policies and procedures for accreditation, testing and certification; development of the newly structured NISM to help local producers meet national and international quality standards; and formulation and implementation of a strategy to privatize the certification and testing functions. In addition, it could include assistance in: establishing and maintaining a repository of international standards applicable to the Kyrgyz environment; improving sources for and dissemination of information on quality standards; and assessing the feasibility of developing a national metrology institute. Opportunities would also be explored for regional and multinational cooperation, such as accepting international accreditation and conformity assessment procedures, or supporting development of a regional arrangement for policies on standards, metrology and certification. (ii) Streamlining and enforcement of business regulations: supporting the institutionalization and roll out of a system to assess the impact of regulatory acts on the private sector. The use of RIA would provide the means to assess whether draft legislation is in compliance with existing legislation and whether it could have a negative impact on the economy. The same process could also be applied to existing legislation. An effective RIA system would rationalize procedures and contribute to reducing opportunities for arbitrary decision-making and rent seeking. The project could include capacity building for the establishment and operation of an oversight body that would be responsible for enforcement and monitoring of the program; training for regulators to implement the system; capacity building and training for various government institutions; outreach and dissemination activities; and establishment and implementation of a monitoring and evaluation system. Project administration and management support would also be provided. Page 4 Main institutions involved: Prime Minister ’s Office (PMO), MEDIT, Ministry of Justice, NISM. Possible Partnerships and Co-financing. The team is exploring opportunities for cofinancing, especially with USAID, as well as collaboration with local business organizations. 4. Tentative financing Source: ($m.) BORROWER/RECIPIENT tbd INTERNATIONAL DEVELOPMENT ASSOCIATION 5 Total tbd 5. Contact point Contact: Sylvie K. Bossoutrot Title: Operations Officer Tel: 745-7000 Email: sbossoutrot@worldbank.org Location: Moscow, Russian Federation (IBRD) or Rochelle Hilton tel: 202 473 2547 Email: rhilton2@worldbank.org Location: Washington DC, USA