Docoumt of The World Bank FOR OFFICUAL USE ONLY Repet No. P-6345-BO NEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE RNTENATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 10.5 MILLION TO THE REPUBLIC OF BOLIVIA FOR A REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSISTANCE PROJECT JUNE 14, 1994 MI CROGRAPH I CS Report No: P- 6345 BO Type: MOP This document has a etricted ditibution and may be used by recpiens only in the performane of thdir ofridal duties. Its contents may not otewise be dilosed withost Word Bank autborization. CURRENCY AND EQUIVALENTS Currency Unit - Boliviano (.s) Exchange Rate Effective June i994 US$1.00 Bs 4.61 Bs 1.00 = US$0.22 GOVERNMENT OF BOLIVIA FISCAL YEAR January I to Decenmber 31 GLOSSARY OF ABBREVIATIONS AASANA - Administracion Autonoma de Servicios Auxiliares a la Navegacion Aerea (Airports Administration Company) CIF - Cost, Insurance and Freight CONARE - Comision Nacional Reguladora (National Regulatory Commission) EMV - Empresa Metalurgica Vinto (Vinto Smelting Company) ENDE - Empresa Nacional de Electricidad (National Electricity Company) ENFE - Empresa Nacional de Ferrocarrilles (National Railway Company) ENTEL - Empresa Nacional de Telecomunicaciones (National Telecom Company) ESAF - Enhanced Structural Adjustnent Facility FSAC - Financial Sector Adjustment Credit GDP - Gross Domestic Product ICB - International Competitive Bidding IDA - International Development Association IDB - Inter-American Development Bank IMF - International Monetary Fund LAB - Lloyd Aereo Boliviano (National Bolivian Airline) LCB - Local Competitive Bidding MIF - Multilateral Investment Fund PPF - Project Preparation Facility SDR - Special Drawing Rights TAB - Transportes Aereos Bolivianos TAM - Transportes Aereos Militares YPFB - Yacimientos Petroliferos Fiscales Bolivianos (Bolivian Petroleum Company) FOR OFFICIAL USE ONLY BOLIVIA REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSISTANCE PIROJECT Credit and Project Summary Borrower: Republic of Bolivia Beneficiary: Mimistry of Capitalization Amount: SDR 10.5 million (US$14.7 million equivalent) Terms and Standard IDA terms with an amortization period of 40 years, and a grace period Conditions: of 10 years LoSA Foreign Taw (US$ million equivalent) Flnandng Government 3.23 2.37 5.60 plan IDA 0.50 14.20 14.70 Other assistance - Government of France 0.00 0.70 0.70 - Multilateral Investment Fund (Technical Cooperation Facility-lDB) O1&2 Total Rate of Return: Not applicable Staff Appraisal Report: Not applicable Map: IBRD 20516 Tis document has a resticted distruion and may be used bs redpc m only In e _i thpr olicial dudes Its contensy not otrise be disclosd with ;tt W mid Bank n m MEMORANDUM AND RECOMMATION OF THE PRESIDENT OF THE IIDA TO THE EXECJTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOMIVIA FOR A REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSIANCE PROJECT 1. I submit for your approval the following report and recommendation on a proposed development credit to the Republic of Bolivia for SDR 10.5 million, the equivaent of US$14.7 million, on standard IDA terms with a maurity of 40 years to help finance a project for the establisbment of an appropriate legal and regulatory environment and the divestiture of key public enterprises. Cofiacing is being provided by the Multilateral Investment Fund (MI of the Technical Cooperation Facility of the Iter-American Development Bank) and by the Government of France. Coumtry Backgrunmd 2. Despite the achievements attained since the Bolivian Government first adopted an adjustment progr in 1985, two main factors explain the disappointing performance of the economy in ttracting private investment. First, public enterprises dominate key sectors of the economy that present strong growth potential-hydrocarbons, mining, telecommunications, electricity and transport. Second, Bolivia lacks an institutional framework to ensure private agents clarity, predictability and enforceability of the legal and regulatory principles governing their activities. 3. The new Government assumed office in August 1993 with the pledge to continue to reduce and rationalize the role of the state and to move the social agenda forward. The cnterpiece of the Government's Plan de Todos is a bold program of privatization of six major public enterprises through a process called capitalization. The plan includes the capitalizadon of YPFB (hydrocarbons); EN2L Oong distance telecommunications; ENDE (electricity generation ars transmission); ENFE (railways); LAB (airline) and EMV (smelter). The Capitalization Law, passed by Congress in March 1994, states that the Government will: (i) transfer up to 50% of the ownership of the new private enterprises derived from the selected public enterprises to strategic investors; CiH) require private investors not to buy existing assets, but rather to invest in the company itself, increasing the capital of the company by the purchase price and providing it with liquidity for new investments for expansion; and (iii) transfer the shares corresponding to the State's present share ownership to all adult Bolivians. These shares will not be given directly to Bolivians, but will be transferred to individual deferred distribution accouns to be managed by responsible fiduciary institutions. The law also specifies that investors andlor managers of the capitalized companies will sign a management contract with the corporation; after the expiration of this contract the strategic investor may purchase additional shares and thereby own more than 50% of the shares of the company. Ihis law also states that regulatory responsibility for the communications, power, hydrocarbons and transport sector will be vested at the national rather than the municipal level. 4. Prior to the capitalization of these enterprises, the Government intends to enact sector- specific laws and promulgate regulations to promote investment and a competitive, efficient environment in the sectors that have been dominated by these companies. Draft laws for the telecommunications, hydrocarbons, electricity and mining sectors are being prepared for -2 - submission to the next session of Congress beginning in August 1994. The Ministry of Capitalization was created in March 1994 to oversee the entire process of sectoral and regulatory reform as well as the actual capitalization of enterprises. 5. The draft National Regulatory Commission Law provides for the establishment of a regulatory agency (CONARE) for the comnunications, electricity, hydrocarbons and transport sectors. Although sectoral laws will elaborate CONARE7s specific powers in relation to each sector, this draft law includes rules on certain cross-sectoral issues, including transparency requirements, sanctions and anti-trust rules. Within CONARE, day-to-day regulatory activity and decision-making would be the responsibility of sector-specific Superintendents and their staff. To ensure that CONARE is adequately staffed and equipped, its funding would be derived from fees imposed on the regulated sectors. The Superintendents wo,ld be overseen by a three-person Commission, which will also consider appeals from Superintendents' decisions. The Government intends to establish this regulatory agency with functioning sectoral departmems by early 1995. Project Objectives 6. The project's objectives are to assist the Government in the planning, design and execution of its capitalization program and to ensure that the Government has at its disposal the varied and complex advice needed for such a program. At the same time, the project aims to design and establish the overall regulatory framework for the future development of key sectors and to ensure that the new regulatory institution begins operations in a satisfactory manner. Project Description 7. The proposed project will provide support to: (i) strengthen the capacity of the Ministry of Capitalization to conduct the sector reform and capitalization process for six sectors (hydrocarbons, electricity, telecommunications, railways, aviation, smelter/mining); (ii) help establisJ. the regulatory agency, CONARE; (iii) develop specific reform strategies, legislation and regulations for the reorganization of the telecommnunications sector and the subsequent capitalization of EN7EL; and Civ) develop a similar program for the aviation sector, which deals not only with the capitalization of LAB, but also the divestiture of the airports authority AASANA, and the two smaller state-owned airlines TAB and TAM. A full description of the proposed project, including the details, the state of preparation and a breakdown of the estimated cost of each of the four components, is presented in the Technical Annex to this Memorandum. 8. The project will complement other IDA-supported technical assistance operations under preparation to provide similar assistance to the hydrocarbons, electricity and financial sectors, and for judicial reform. At the same time, assistance to the railways sector and the mining sector wi1l be provided through ongoing operations-the Export Corridors Project and the Mining Sector Rehabilitation Project, respectively. These projects would support the achievement of policy measures being considered under the forthcoming Capitalization Program Adjustment Credit. The following paragraphs s'.mmarize the main features of each component. 9. Strengthening the Caacfty of the Ministry of CapitaliWion: The Ministry of Capitalization was established to coordinate and direct the capitalization process. Sector- specific working groups have been formed to perform the technical work needed for the -3- reform. At the same time, a Procurement Unit has been established within the Ministry of Capitalization to provide oversight and advisory services for the procurement of consultants and equipment to be financed under the various technical assistance operations now being prepared. Detailed procedures for managing the procurement process will be developed by the procurement staff, with the assistance of an internationally-recruited procurement specialist thoroughly familiar with World Bank procurement procedures. 10. A detailed program of technical assistance has been developed to support these activities. To enhance the capacity of the Ministry to carry out this work, the program would provide for: (i) legal and privatization advisors; (ii) specialized procurement advisors and equipment needed to establish the new Procurement Unit; and (iii) assistance and materials for a public information campaign to design and explain the capitalization progiv m and the distribution scheme. The total estimated cost of the program to strength.... u'.: N tistry of Capitalization as outlined above is US$7.56 million equivalent -f whicl. L KS<14 § I 6 million is being proposed for financing under the IDA Credit. The bal.. -.. would bt 'irianced through budgetary resources and from the MIF grant. 11. Regadoary Reform: The Government proposes to establish a National Regulatory Commission, CONARE, to regulate aspects of the electricity, hydrocarbons, communications and transport industries. Although CONARE's detailed jurisdiction in each sector will be determined by sectoral laws, it is expected to have three core functions: (i) assistance in administering and enforcing concession arrangements; (ii) administration of price regulation arangements; and (iii) enforcement of anti-trust norms. 12. Elements of the proposed program to assist regulatory reform include: (i) a long-term regulatory expert advisor; (ii) consultant studies on matters such as the organization and stafling of the agency, the development of key policies and procedures and the management of the agency's financial, personnel and other resources; (iii) training programs for CONARE staff on cross-sectoral regulatory matters; and (iv) twinning arrangements and other contacts with regulatory institutions in other countries. The total estimated project cost for this component is US$1.3 million equivalent of which US$1.1 million is being proposed for financing under the IDA credit. The balance wi1l be funded by the Government. 13. Tedeconununications: Elements of the proposed program to assist the reform and subsequent capitalization of the telecommunications sector include: (i) advisors to assist the sectoral reform process and the capitalization of ENTEL; (ii) training for the regulatory agency personnel; and (iii) specialized equipment for the regulatory agency including frequency monitoring equipment and computer hardware and software. The total estimated project cost for this component is US$9.8 million equivalent of which US$6.3 million is being proposed for financing under the IDA credit while the remainder will be financed by the Government. Only the retainer fee of the investment bank has been included as part of the IDA financing package; it has been assumed that the success fee would be financed from the proceeds of the capitalization. 14. The Aviaion Sector: Te proposed program to assist the aviation sector includes: C') sectoral reform and the development of an appropriate regulatory framework; (ii) the capitalization of LO; (iii) the privatization of some operations of the airports authority, AASANA; and (iv) the privatization or liquidation of TAM and TAB. The total estimated cost of this component is US$3.44 million equivalent of which US$1.92 million would be financed by -4 - the IDA credit. The Government of France intends provide FF S millIon (about US$700,000) in financing to examine the rationalization of the Bolivian airports system. Remaining costs would be covered by the Governmem. Project Costs 15. The total cost of the proposed technical assistance program is estimated at US$23.3 million equivalent as of May 1994, including the refinancing of US$1 million of a Project Preparation Facility (PPF) which was provided for this operation.' The proposed financing plan for the Project includes: (i) US$14.7 million (including the US$1 million Projec Preparation Facility reimbursement) which would be financed under the proposed IDA credit; (ii) US$3.0 million of cofinancing through an Inter-American Development Bank (AIF) grant for US$2,336,000 and a French Government grant for French Francs 5,000,000; and (iii) the balance of US$5.6 mDilion which will be financed by Govermment through budgetary allocations and (for the success fees related to the divestment of EN7EL and LAB) from the proceeds of the transactions themselves. Schedule A to this Memorandum is a detailed summary of the total project cost broken down by major components. Schedule A also shows the proposed financing plan and a schedule of estimated disbursements. Project Implementation 16. Responsibility for implementing the project lies directly with the Ministry of Capitalization, through its Secretariat of Capitalization. This Ministry's staff would receive substantial support through the technical assistance provided under this project and the other sectoral technical assistance operations which are planned. This support is already underway, financed in part by the PPF for this operation. Working groups have been established in each of the sectors to elaborate sector restructuring and enterprise capitalization plans as well as to implement fnancial sector reforms and design the share distribution scheme. The working groups also have tf': main technical responsibility for defining tasks, preparing terms of reference, and overseeing the work of consultants. All key terms of reference have been discussed with IDA and may be found in project files. The Government has assigned the President of each of the enterprises with spec;fic day-to-day responsibility for monitoring and maintaining the pace of capitalization. The sectoral Secretaries are responsible for leading the working groups on sectoral reform issues. Details of the key monitorable project activities, together with target dates, are contained in Schedule 1. 17. The Procurement Unit has been established to deal with the large number of consulting contracts to be financed through the project. This group is already receiving training and other support from Bank procurement specialists. This Ministry is also responsible for contracting the initial support needed to establish CONARE. These arrangements, which have been consolidated and strengthened since the appointment of the new Minister of Capitalization in April 1994, are already producing results and should ensure rapid and efficient implementation I/ A Project Preparation Facily of USS1.5 million was approved in August 1993. US$1 million of this faciLity was specifically ear-maked for technical ass_stn for regulatory reform and capitazation; the other US$0.5 million for judicial reform. It was subsequently decided to separate the judicial refonn activ; ies as a discrete projet and to allocate the PPF reimbursment responsibilities between the two operatons. The original PPP agreement was amended to refect this change. . - of this project and the capitalization and regulatory reform which it supports. The Ministry would provide office space and administrative support to the technical advisors. 18. The Technicat Annex describes the procurer-ent and disbursement arrangements for the proposed credit. As summarized in Schedule B, procurement would be according to normal Bank review procedures and disbursements would be made against 100% of the net-of-tax cost of loca and foreign consultants, 100% of training expenses, 100% of the CIF cost of imported goods and of the ex-factory cost of local goods and 85% of the cost of locally-procured goods. Retroactive financing for consulting activities and related equipment procured under Bank guidelines after May 1, 1994, is proposed, up to a limit of US$1.47 million, equivalent to !0% of the proposed amount of the credit. The Project is expected to be completed by end-1997. Ihe closing date is June 30. 1998. Project Sunabilty 19. Bolivia's capitalization program has the specific objective of: (i) restructuring the energy, telecommunications, mining and transport sectors; (ii) privatizing six major state-owned enterprises within these sectors; and (iii) setting up an agency to regulate the provision of public services within these sectors. The project is designed to support the Ministry of Capitalization to accomplish all three of these objectives. But at project completion, the Ministry of Capitalization will be disbanded. 20. The long-term success of this divestiture process depends greatly upon the establishment of an appropriate regulatory framework in these sectors. The sectoral laws and regulai.ons will be administered by the regulatory agency, CONARE, which will be self-financed through user charges as stated in the draft CON4RE law and specified in the draft sectoral reform laws. This independent funding source should help to attract and retain highly-qualified staff. CONARs multisectoral jurisdiction was designed to resist industry capture and increase the efficient use of scarce skilled human resources. To protect the independence of the agency, the Commissioners and Superintendents will have substantial security of tenure during five year staggered terms. In additicn, through the exercise of its independent jurisdiction, CONARE should build a constituency of support among consumers and industry and Government representatives. 21. The success of the divestiture program also will depend upon the professionalism and skill of those designing and implementing the program. This project is designed to help bring such expertise to the process. The six enterprises will be owned initially by the Bolivian people (whose shares will be in deferred distribution accounts managed by pension funds), and by strategic investors who will manage the companies through a management contact. These shares' value will be determined by trades on international and domestic markets. Lessons Leamed from Previous Bank/IDA Involvement 22. The design of the divestiture and regulatory reform program to be supported by this technical assistance credit reflects several lessons learned in Bolivia and elsewhere. Key lessons include the need for: (i) full commitment to the process at the highest Government levels; (ii) the introduction of policy and regulatory reforms to promote competition and protect consumer welfare prior to the privatization transaction; (iii) a limit on the scope and size of the technical assistance credit to ensure adequate supervision; (iv) the establishment of a -6- coordinaton mechanism wiffiin Government (the Ministry of Capitalization) to ensure consistency and coherence; and (v) an efficient Government procurement mechanism to ensure that the work gets done in a timely manner while conforming to IDA procedures. Rationale for Bank Involvement 23. The proposed project is consistent with the Bank's country assistance strategy discussed by the Board on February 8, 1994 as well as the Government's policy agenda, whica aime to reduce the role of the State in productive and infrastructure sectors while improving the delivery of socirl services through efficient social sector expenditures. This project, together with companion technical assistance operations would provide direct assistance to the Government's adjustment program to help establish an appropriate legal and regulatory environment and to divest key public enterprises. More global support for the Govermnent's program is proposed under a Capitalization Program Adjustment Credit now being appraised. This project was prepared according to the timetable shown in Schedule C. Schedule D of this Memorandum provides a Statement of Bank Loans and IDA Credits in Bolivia as of March 31, 1994. Agreed Actions 24. During negotiations, agreement w2s obtained on tha: - specific consulting tasks and equipment needs and financing plan of the Project (as described in the Technical Annex); * details of the MIF and French Government cofinancing packages. It was agreed that IDA financing would be restricted to those items for the strengthening of the Ministry of Capitalization and telecommunications sector reform that were not cofinanced by the MIF. In addition, it was agreed that if the cofinancing agreements with the Inter- American Development Bank (MW) and the French Government are not signed by the Government by March 31, 1995, the Association would be authorized to suspend disbursements unless suitable alternative sources of financing could be found. * project implementation timetable shown in Schedule 1. * principles of the Supreme Decree on procurement that transfers procurement authority to the Government. from procurernent agencies. The enactment of this decree is a condition of project effectiven"s. * principles of the CONARE law. The passage by Congress of the CONARE law is a condition of disbursements for CONARE staff training and twinning arrangements. This law is needed prior to the appointment of CONARE staff. * principles for restructuring the telecommunications sector. The passage by Congress of the Telecommunications Law is a condition of disbursements for training the staff and purchasing of equipment for the Superintendency of Telecommunications within CONARE. This law is required to define the specific regulatory responsibilities of this Superintendency. -7 - * principles for restructuring the aviation sector. * reporting requirements of the project. In addition to meeting all financial reporting requirements, a full progress report will be prepared and submitted to IDA every six months. This report will detail all project and related activities, report on progress in relation to agreed schedules, and identify any problems which may have been encountered and which could adversely affect the overall impact of the project. Environmental Aspects 25. Environmental category C. The TA credit has no direct environmental impact. However, an environmental audit will be performed on all appropriate public enterprises prior to the date of their capitalization and the Government intends to assume responsibility for all such environmental liabilities. New owners will be subject to all environmental laws and standards. Program Objective Categories 26. This project, by supporting policy reforms to promote investment, privatization and regulatory reforms as well as the institutional development of CONARE, will contribute to private sector development and improved public sector management. Project Benefits 27. The economic benefits of the technical assistance provided through this credit are expected to be substantial. Comprehensive reform and the development of an appropriate regulatory framework for the hydrocarbons, telecommunications, electricity and mining sectors will encourage private investment and technology transfer. The capitalization program in general should have an important impact on GDP growth. Ihese reforms are also expected to free up to 25-35% of the Government's annual investment budget to invest in human capital and basic infrastructure. The capitalization of the telecommunications and aviation sectors, specifically, is expected to attract several hundred millions of US dollars of new investment capital. Risks 28. The main risks faced by the project are delays in implementation due to a lack of adequate skilled staff within the working groups and the procurement agency. Addressing this risk is the specific objective of the proposed project. Additional efforts (such as in-Bank training of the staff of the procurement unit) are already underway. Another important risk is the political difficulty associated with securing Congressional passage of sectoral reform legislation and implementing the divestiture of key public enterprises. The public information campaign is included within the project as a mechanism to explain the reform program and distribution scheme to Bolivians and solicit their feedback. A final risk is the difficulty of establishing an independent, technically-proficient regulatory capacity within Bolivia. This project will only assist in the beginning stages of the process, but the passage of sector legislation and regulations as well as including independent sources of financing from the sectors for the regulatory agency should help to lessen these longer-term risks. -8- RECOMMNATION 29. 1 am satisfied that the ptoposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. I ewis T. Preston President Attacbments Washington D.C. June 14, 1994 BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSISrANCE PROJECT SCHIEDULE A - ESIIMATED PROJECT COS1S AND FINANCING PLAN AND DISBURSEMET SCHlEDULE (US$ equivalent) Table I - Estimated Total Project Cost Item Local Cost Foreign Cost' Total Reflwndrg of PPF 1,000,000 1,000,000 A. Mnrsuy of Capitalization 2,210,000 5,350,000 7,560,W00 B. Tedinical Assistance to CONARE 200,000 1,300,000 1,500,000 C. Teleommications Seaor 1,500,000 8,300,000 9,800,000 D. Avation Sector 320,000 3,120,000 3,440,000 Total 4,230,000 19,070,000 23,300,000 Table 2 - Projeaed Financing Plan Source of Finance Local Cost Foreign Costs Total Government of Bolivia 3,230,000 2,370,000 5,600,000 IDA 500,000 14,200,000 14,700,000 Otwer assistance - Gover,vnent of France 0 700,000 700,000 - Multilateral Invesment Fund 500,000 1,800,000 2,300,000 Total 4,230,000 19,070,000 23,300,000 Schedulk B Page of?2 BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSISrANCE PROJECT SCHEDULE B - SUMMARY OF PROCUREMENT AND DISBURSEMENT ARRANGEMENTS (US$ equivalent) Table I - Procurement Arrangements Procurenent JDA Financed Procurement a/ Non-lDA Category Financed Total ICB LCB Other procurement Consultans - - 13,500,000 4,300,000 17,800,000 serWie, training (10,200,000) (10,200,000) and reloed expenses Goods/Equipment 3,500,000 600,000 400,000 1,000,000 5,500,000 (3,500,000) (600,000) (400,000) - (4,500,000) Total 3,500,000 600,000 13,900,000 5,300,000 23,300,000 (3,500,000) (600,000) (10,600,000) (14,700,000) otes: Figures in parentheses indicate the amounts inan by IA t/ International Competitive Bidding, using standard Bank documents, will be used for the telecommunications regulatory equipment and for goods valued at greater than US$150,000 equivalent. Local Competitive Bidding (LCB) will be used for goods and production of advertising and collateral materials valued at more than US$25,000 and less than US$150,000 (not exceeding US$600,000 in the agregate), using standard bidding documents approved by IEA. "Other' IDA procurement includes procurement of consultants according to Bank guidelines, and for goods valued at less than US$25,000, and for printing and distrbution of advertising and collateral materials, through shopping procedures acceptable to the IDA (not exceeding US$400,000 in the aggregate). Prior review will be mandatory for al ICB and LCH procurement as well as for the first contract procured through shopping. Services procured by the borrower but not financed by IDA are the "success fees" of the investment bankers handling the transactions for EN7EL and L4B. bl Non-IDA financed procurement is for (i) procurement of consultant services according to cofuiancier's procedures; and (ii) locally-financed procurement under local procedures of consultants, equipment and equipment-related services. Table 2 - Disbursements Category Amount Percentage Consulant services 7,100,000 100% net of taxes Goods 3,600,000 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 85% for other items procured locally Public infornation 1,000,000 100% campaign Training and related 600,000 100% expenses Refunding PPF 1,000,000 Amounts due Unallocated 1,400,000 Total 14,700,000 Schedsle B Page 2 of 2 Table 3 - Projected Disbursement Schedulefor IDA Credit FY95 FY96 FY97 FY98 Annual 5,000,000 4,000,000 4,000,000 1,700,000 | Cumulative 5,000,000 9,000,000 13,000,000 14,700,000 BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNCAL ASSIVANCE PROJECT SCHEDULE C - TIMEIABLE OF KEY PROCESSING EVENTS (a) Time taken to prepare: Five months (b) Prepared by: Government of Bolivia with IDA staff (c) First IDA mission: December 1993 (d) Appraisal mission departure: April 1994 (e) Negotiations: May 1994 (f) Planned Effectiveness: August 1994 (g) List of relevant PCRs and Project Performance Audit Reports (PRARs): PPAR *Emergency Social Fund Program (Ln. 1587-1O); May 29, 1990 PCR *National Mineral Exploration Fund Project (Cr. 940-DO); Sept. 10, 1990 PCR *Urban Development Project (Ln. 1489-BO); July 8, 1992 PCR eVuelta Grande Gas Recycling Project (Cr. 1719-BO); August 12, 1993 BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSISTANCE PROJECT SCHEDULE D - STATUS OF BANK GROUP OPERATIONS IN BOLIVIA (US$ millions) Table I - Statement of Barnk Loans and MlA Credits as at March 31, 1994 Amount (less cancellation) LO/CR Fiscal Undis- Nwnber Year orrower Purpose Bank IDA bursed 16 loans, 26 credits closed 274.78 395.08 18090 1987 Bolivia Public Fimancial Mgt 11.50 0.07 18180 1987 Bolivia Power Sector Rehab 6.80 0.55 18420 1988 Bolivia La Paz Munic. Devt 15.00 2.03 19770 1989 Bolivia Econ Mgt Strergth 9.70 0.25 20120 1989 Bolivia Export Corridors 37.00 11.19 20130 1989 Bolivia Mining Sector 35.00 27.27 20920 1990 Bolivia Integrated Health Dev 20.00 12.07 21190 1990 Bolivia Eastern Lowlands 35.00 18.78 21270 1990 Bolivia Social Invest Fund 20.00 2.37 21340 1990 Bolivia Private Enterprise Dev 16.10 13.89 21870 1991 Bolivia Water Supply/Sewerage 35.00 24.71 22160 1991 Bolivia Technology Dev 21.00 13.63 22790 1991 Bolivia Public Financial Mgt 11.30 7.99 22980 1992 Bolivia Struct Adjust Cred 40.00 8.81 23220 1992 Bolivia Agr Exp Dev Prog 22.50 20.89 23950 1992 Bolivia Road Maintenance 80.00 80.47 24430 1993 Bolivia Environ TA Project 4.80 3.28 25310 1993 Bolivia Integrated Child Dev 50.70 50.56 22982 (S) 1993 Bolivia Struct Adjust Cred 11.12 0.13 25320 1993 Bolivia Social Invest. Fund II 40.00 39.97 22983 (S) 1994 Bolivia Structual Adjust. Cr. 9.37 9.52 25650 1994 Bolivia Municipal Development 42.00 42.51 Total of open operations 573.89 390.87 TOTAL 274.78 968.97 Of which repaid 195.4 16.62 Net held by Bank/IDA 79.74 952.35 Amount sold 0.05 Of which repaid 0.05 Total Undisbursed Tabk 2 - Statement of IFC Investments as of March 31, 1994 Loan Equity Total Total Gross Commitments 88.24 11.31 99.55 Less: cancellations, terminations, exchange adjustments, 19.94 0.89 20.83 repayments, write-offs and sales Total Commissions now held by IFC 68.29 10.42 78.72 Total Undisbursed IFC 2.39 3.40 5.80 BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNICAL ASSIWANCE PROJECT TECHNICAL ANNEX - THE PROJECT Section A: Detailed Project Description Strengthening the Ministry of Capitafization Background 1. To speed the process of sector reform and capitalization, and achieve the most advantageous results, the Bolivian Government is making extensive use of both internationally-recruited and domestic consultants and advisors in the preparation and implementation of its capitalization program. Much of this assistance is sector-specific, and has been funded through a variety of programs. Direct assistance to the Secretariat (now Ministry) of Capitalization has been financed through a variety of means including counterpart funds from the ongoing SAC, a Japanese grant facility which was obtained for the preparation of the Capitalization Project Adjustment Credit and a Project Preparation Facility for this present project. As the pace of work increases, and these sources of funds become depleted, additional funding must be put in place to provide essential assistance to the Ministry of Capitalization until the program is completed. Legal and Privatization Assistance 2. The Ministry of Capitalization requires the services of specialized experts to help implement the reform program. Key among these are: e Afidl-tlme commercial legal advisor who can review commercial aspects of laws under preparation but who could also provide input to the Ministry on such matters as legal procedures, consultant contracts, pre-qualification of potential investors, bidding conditions, legal audits, modifications to company by-laws, etc. * Short-term legal specialists who could provide specialized inputs both in drafting legislation and in commercial transactions undertake or overseen by the Ministry. * An internationally-recruited, full-time technical advisor, with solid, hands-on privatization experience. This advisor would act as a counterpart to the Secretary of Capitalization and would be available to advise on all aspects of the process in all sectors. * Short-term technical advisors, both internationally and locally recruited, for specialized assistance as required. Procurement Unit 3. The Government will shortly issue a Supreme Decree entitling the Ministry of Capitalization to directly engage in capitalization-related procurement of consultants and associated equipment, without having to use the services of the official procurement agents TwkAnnex - The Projd pop 2 8118 through which all Bolivian public procurement over Bs 200,000 is now channelled. To perform this function, the Ministry has established a Procurement Unit, staffed by fully- qualified local staff. It will be supported by foreign advisors as required, and equipped with the necessary office-technology and related equipment in order to effectively be able to carry out its work. Two staff members have received a week of familiarization training in Washington, and also attended World Bank procurement and disbursement seminars in La Paz. Key inputs to the Unit, which. would be financed under the proposed IDA Credit, inclulie: * A long-term internationally-recruited procurement advisor, who would initially be essentially full-time in Bolivia for a period of up to six months, and who would then be available to assist the Bolivian staff periodically and as required to implement procurement. The Advisor would be fluent in both Spanish and English, and would be fully-conversant with World Bank procurement procedures. * Special short-term internationally-recruited procurement consultants and advisors for key procurement areas. In some sectors, specialized knowledge will be required to prepare terms of reference and review proposals. Also, special advisors will provide valuable assistance when important, large contracts are negotiated. * An experienced accounting advisor to set up and train staff in the use of the complex accounting and reporting systems which will be required to maintain accurate records of the use of IDA resources from four different technical assistance credits (together with PPFs in some cases), going to about a dozen beneficiaries, and with approximately 60 consultant contracts as well as small equipment purchases. The accounting advisor would be available periodically and as required. * Locally-hired procurement and accounting specialists, including both a procurement manager and an accounting manager, together with two additional procurement officers and two additional accountants. * Offlce technology equipment and systems, including computers net-worked and with a linkage to the Bank's All-in-One svstem, to facilitate Bank procurement and disbursement communications, together with other office equipment including fax machines, photocopiers, etc. Public Information Campaign for Capitalization 4. Background: Successful capitalization in Bolivia will hinge in part upon effectively communicating both the costs of maintaining the status quo, and the benefits of reform. An effective communications strategy must incorporate this broad message as well as educate various target audiences about specific aspects of the program, allay unwarranted fears, and build support among stake-holders. 5. To achieve these objectives, the Government will retain a Public Relations Advisor to assist in identifying public perceptions of the capitalization program, and developing a communications strategy to effectively market the proposed program both domestically and abroad. This work will also include explaining the share distribution scheme TechnkcalAnnex Xre Projed Poge 3 of is to all Bolivians and particularly to those retirees who are immediately eligible to receive benefits. 6. Proposed Scope of Work: Ile Advisor wiii work directly for the Secretary of Capitalization under the auspices of the Minister of Capitalization. The assignment will be for a period of approximately two years. The proposed assistance consists of four basic components: (i) design, development and implementation of a communications strategy; (ii) design, production and dissemination of advertising and collateral materials; (iii) supporting research and development; and (iv) preparation for special events. 7. Conmucnations Strategy: The Advisor will be required to develop and implement a comprehensive communications strategy for the capitalization program, consisting of sectoral, national and international campaigns: * The secoral campaign, targeted especially at legislators and enterprise managers and employees, will aim at building congressional support for sector-specific legislation for the capitalization program. * The natonal campaign should serve to educate the public at large about the benefits of the program and aim at building brcad-based support among all stake-holders including constituents, tax-payers, enterprise managers and employees, trade unions and potential investors. * The international campaign will aim at marketing the Bolivian capitalization program to potential foreign investors. Here the Advisor will work closely with financial advisors and/or investment banks dealing with the individual enterprises. 8. Major anticipated outputs resulting from implementation of the communications strategy will include television and radio advertising, print advertising (domestic and international), qualitative research packages (focus group results), quantitative public opinion surveys, direct mail to key stake-holders and constituencies, seminars and educational events. 9. Advelsing and Colateral Materials: The Advisor will be directly responsible for budgeting, overseeing and coordinating the design, production and dissemination of advertising to support the communications strategy through various media, including television, radio and print. The Advisor will also be responsible for the design, production and dissemination of collateral materials such as posters, brochures and educational materials. 10. Research and Development: The Advisor will be responsible for developing and implementing a research and development program in order to accurately identify the knowledge and perceptions of the general public and major stakeholders regarding the capitalization program. This data will be analyzed to assess the effectiveness of the various programs implemented under the communications strategy, and will be used to tailor the communications effort to address and, where necessary, alter these perceptions. This work will include the collection of qualitative data through establishment of focus groups, and collection of quantitative data through public opinion surveys and other means. Techncak Annex - The Project Page 4 of 18 11. Spedal Events: The Advisor will also be respons,ble for organizing special events in order to educate major stakeholders about the capitalization program. Such events might include seminars for potential investors, seminars for members of Congress and other key political figures, seminars and training programs fbr key public officials, and seminars for employees of enterprises which are going to be capitalized. Cost Estimate 12. The total estimated cost of the program to strengthen the Ministry of Capitalization as outlined above is US$7.56 million equivalent, of which US$4.18 million is being proposed for financing under the IDA Credit. The balance would be financed through budgetary resources and from the MIF grant. Details of the estimate for individual components are contained in the following table: Table I - Estimated Cost of Strengthening the Ministry of Capitalization (US$) Item Total Cost Financed by Proposedfor Others IDA Credit Legal and Privatization Assistance - Legal Advisors 340,000 140,000 200,000 - Privatization Advsors 2,000,000 500,000 1,500,000 Procurement Unit - Procurement servces 800,000 200,000 600,000 - Office technology equipment 500,000 - 500,000 - Accounting 420,000 140,000 280,000 Public Information Campaign - Communications strategy 1,300,000 900,000 400,000 - Advertising 1,500,000 1,000,000 500,000 - Research and Development 400,000 300,000 100,000 - Special Events 300,000 200,000 100,000 Total 7,560,000 3,380,000 4,180,000 Technical Assistance to CONARE 13. The Government proposes to establish a National Regulatory Commission, CONARE, to regulate aspects of the electricity, hydrocarbons, communications and transport industries. Although CONARE's detailed jurisdiction for each sector will be determined by sectoral laws, it is expected to have three core fupctions: (i) assistance in administering and enforcing concession arrangements; (ii) administration of price regulation arrangements; and enforcement of anti-trust norms. Technical Annex - The Project Page S of 18 14. The draft regulatory entity law that would establish CONARE provides that the agency will comprise four sector-specific National Superintendents, overseen by a multi-sectoral Commission. Key elements of the proposed organization are that: * The National Superintendents will have responsibility for, respectively, electric energy, communications, hydrocarbons and transport. Their specific mandate within each sector will be determined by sectoral laws. The Superintendents and their staff will be responsible for day-to-day decision making and other regulatory activity in their respective sectors, performing tasks such as price regulation and supervision of compliance with concessions and sectoral laws. The Superintendents are named by Supreme Decree for five-year staggered terms, and are protected from arbitrary removal. * The three-person Commission will have responsibility for overseeing the work of the National Superintendents and hearing appeals from Superintendents' decisions. The multi-sectoral focus is intended to promote policy consistency across the sectors and to increase the agency's resistance to improper influence from industry and government. A central administration within CONARE should also permit economies in staffing and other resources. Members of the Commission are named by Supreme Decree and, like the Superintendents, have five-year staggered terms with protection from arbitrary removal. After a two year transitional period-when it will be funded from the budget-CONARE will be funded through industry levies and user charges. 15. The ultimate appellate body for decisions by the Commission is the Supreme Court. The Commission's decisions would be subject to review by the President and Minister before an appeal is available to the Supreme Court Proposed Technical Assistance Program 16. To realize its potential benefits to the Bolivian economy, the Capitalization Program requires the confidence of both investors and consumers. The establishment of credible, effective and efficient regulatory arrangements will play a key role in establishing and maintaining that confidence as well as in promoting the efficient development of the key infrastructure industries involved. Given Bolivia's extremely limited experience with independent regulatory agencies of the kind represented by CONARE, and its lack of any previous experience in matters such as anti-trust rules, considerable technical assistance will be required, covering the four main elements presented below: * A full-time, La Paz-based technical advisor assigned to CONARE for a period of about 20 months. During the early phase of the agency's establishment and operation it is anticipated that considerable ongoing and sometimes intensive support and guidance will be required by senior agency staff. An in-house technical advisor would meet this need and would also play a key role in ensuring that the elements of the technical assistance program were effectively targeted and managed. Experience in regulatory agencies would be essential, as would good management skills and communication skills in Spanish. Technial Annex - The Project Ptge 6 of 18 * Consultant sntdies and advice to support the establishment of appropriate organzational and administrative arrangements. Before recruitment below the level of Superintendent can proceed, a detailed organizational structure and staffing plan needs to be established, which would address, inter alia, the optimal allocation of staff between sectoral Superintendencies and one or more central departments. The agency wIll also require assistance in establishing appropriate )olicies and procedures governing the management of financial, personnel and other agency resources. Assistance of this kind could be coordinated by the La Paz-based technical advisor but would require support through studies and specialist advice provided by consultants. * Training programs in La Paz on cross-sectoral regulatory issues. The regulation of utility industries is a complex political, economic and technical task, in which agency personnel are likely to have very limited prior exposure let alone well-developed skills. The relevant Superintendent and his/her staff, and to a lesser extent the Commissioners, will require training on sector-specific issues, including the key economic, technical and other characteristics of each sector. Training of this kind is an essential part of the total assistance package, but is considered separately in relation to each sector under relevant sectoral operations. In addition to such sector-specific training, Commissioners, Superintendents and relevant staff will require training on cross-sectoral regulatory matters covering such subject matter as: (i) the role of regulators vis-a-vis other actors-the theory and practice of managing appropriate relationships with industry, executive and legislative branches of government, and consumers, etc; (ii) price regulation theory and administration-possibly comprising sub-units in financial analysis, determining the value of capital, procedures for undertaking tariff reviews, etc; (iii) managing concessions-generic issues associated with competitive bidding processes; managing compliance, etc; (iv) anti-trust law and policy-covering key elements of market and competition analysis, public benefit assessment; managing the enforcement process etc; (v) community relations-covering the role of consumers in the regulatory process; the theory and practice of public decision making; media relations etc; and (vi) administrative law for regulators-basic concepts of administrative justice and the appeals process viewed from a regulator's perspective. The provision of training would be coordinated by the La Paz-based technical advisor. Actual training would be conducted in La Paz with leading local or foreign experts. * Supportfor "twnning"programs with regulatory institutions in other countries. "Twinning" arrangements between CONARE and more experienced regulatory agencies provide a source of ongoing support which can be tapped as technical assistance, training or staff-development opportunities. A number of US regulatory institutions already engage in arrangements of this kind and might be persuaded to 'twin" with CONARE. It is possible that some of the more experienced Latin American agencies might also provide useful "twinning' partners. In either case, however, the twinning agency will lack its own financial resources for an activity of this kind. Financial support under this program would be targeted to travel and other out-of-pocket expenses incurred by both agencies. In addition to formal training activities in La Paz, Commissioners, Superintendents an4 senior CONARE personnel would benefit from informal visits with experienced regulatory agencies in the US, TechnkalAnnex - The Pojed Page 7 of 18 Europe and elsewhere in Latin America, augmented by informal contacts made through targeted overseas conferences. Cost Estimate 17. The total estimated cost of the program outlined above is US$1.5 million, of which US$1.3 million would be eligible for financing under the proposed IDA Credit. Details of the estinates for individual components are contained in the following table: Table 2 - Estimated C;ost of Technical Assistance to CONARE (US$) Item Total Cost Financed by Proposedfor Others IDA Credit Technical Adisor 400,000 0 400,000 Consldtant Studies 400,000 0 400,000 Trahinng 400,000 100,000 300,000 TAinning & Overseas Visits 300,000 100,000 200,000 Total 1,500,000 200,000 1,300,000 Telecommunications Sector Reform Background and Sector Strategy 18. Bolivia has one of the worst telecommun.cations systems in Latin America (see box). The Government has concluded that telecommunications service and penetration levels in Bolivia will not significantly improve without wide-ranging reforms in the regulation of the sector and the management of the long-distance and local companies. While ENL, the long distance public enterprise that is part of the capitalization plan, requires no new capital and little investment, the local service cooperatives require significant amounts of new capital and investment resources. Thus, the Government plans to bundle the long distance and local services together, and to attract private investment capital in the sector in order to provide better and more services to the population. The Government has agreed that this can best be achieved by stimulating fair and open competition for the pro-vision of telecommunications services among a group of private agents, working within a framework of effective government regulation. 19. The Government has committed itself to establish a new legal and regulatory framework for the telecommunications sector and to find a mechanism to recapitalize the entire sector prior to negotiations for the forthcoming IDA Capitalization Program Adjustment Credit. The strategy to capitalize the entire sector, which has been agreed to by IDA and the Government, would involve first transforming EM7EL into a mixed corporation (EN7EL ), comprised of the Government's shares as well as those purchased by ENL workers. Technial Annex - The ProJect Page 8 of 18 All telephone cooperatives would then be invited to join ENTEL SAM and thereby Telecommunlcations in Bolvia participate in the sector's capitalization. A Bolivia's telephone density is among the lowest in new corporation will then be formed by the the world, quality of service is poor, and long merger of ENIEL SAM and the distance tariffs rank among the highest. The cooperatives, called ENL EL SA. This structure of Bolivia's telecommunications sector is corporation will be capitalized by issuing unusual in that, while the long-distance and new shares to private investors, nhrough a international networks are owned and operated by a monopoly public enterprise, its local network is public bidding process. The strategic fragmented into 22 independent cooperatives. The partner will receive management control long distance company is inefficient and, in gcneral, over the corporation through a management the cooperatives' performance and financial cotract, and up to 50% of ENTEL SA prospects are bleak. The annual US$20L25 million shares. At the same time, the transfer payment from the long distance company to the Govemment are funds that should have been Government's shares will be transferred to reinvested to develop the local network. In addition all adult Bolivians and held in trust until to inadequate interconnection charges, the local pension funds are established to manage cooperatives' financial performance has suffered these accounts. since municipalities have not allowed local companies to charge tariffs needed to cover their 20. The Governmnt will sign aoperating expenses plus investmnent needs. To 20. The Government will sign a cmaintain and begi the expansion of Bolivia's concession contract with ENTEL SA with the telephone serice will require an investment of more following features: (i) ENTEL will be than US$600 million during the next decade, allowed exclusive rights for five years to concentrated almost entirely in the local service provide long distance and international basic network. voice services, in the whole territory of Bolivia; (ii) ENTEL will also be given the rights for exclusive provision of local service for five years in those areas where the former local telephone cooperatives have joined ENTEL; and (iii) ENTEL will be allowed to compete in the provision of local service in areas where the local telephone coops decide not to join with ENlEEiu order to improve the quantity and quality of services. The purpose of the transition period is to give ENMEL the opportunity to make necessary adjustments under the new structure, the new regulatory framework, and in view of its new obligations. ENTEL will have the obligation to offer telecommunications services to rural areas, including those that are now are being provided by ENTEL and another company, either directly or through their specialized subsidiaries. The levels of coverage, maintenance, quality of service and areas of operation will be specified in each concession agreement. 21. The Government intends to present a Telecommunications Law to Congress for passage with the following characteristics. It will: (i) delineate the specific responsibilities of the Superintendency of Telecommunications; (ii) define the principles for new tariff structures and interconnection charges to promote efficient development of the sector; and (iii) facilitate immediate private sector entry into most aspects of the telecommunications sector (eased private lines, cellular, data transmission and other value added services). The draft Law specifies that where there is no competition, tariffs will be regulated by the Superintendency using methods which incorporate an automatic adjustment formula. Initial tariffs during the transition period will be calculated based on the cost for each class of service, and considering a reasonable profit margin. Adjustments will be based on price cap methodology. The draft Law envisages obligatory interconnection of public telecommunications networks, in a way that will permit equal and nondiscriminatory interconnection. TeJhkal Am= - VW AVkd Page 9 f 18 Technical Assistance Requirements 22. The major requirements for telecommunications sector reform are: (i) specific consulting and investment banking assistance for the capitalization of EN7EL; and (ii) training and equipment needs of the Superintendency of Telecommunications within CONARE. 23. Caitization of ENTEL: A number of consultants and advisors with different types of expertise will be required to prepare for and successfully complete the capitalization process. The use of consultants will put an added pressure and responsibility on the Telecommunications Working Group to coordinate and supervise the consultants to get the best use and benefit of the advisory group. A general rule is that a few of the highest quality advisors is much better for the process than several consultants doing smaller independent projects. Following is a description of the key consultant requirements: * Financial Auditing, Accounting and Tax Advisors: This group of advisors should be limited to the largest international accounting and consulting firms. One of these firms will be contracted to prepare financil statements of the companies on the basis of Generally Accepted Auditing Principles in Bolivia and the United States. This work will include the subcontracting of an engineering firm to prepare an inventory and valuation of the fixed assets of the companies according to technical and accounting standards. Audits will be required for the year ended 1993 and a short period at a specified period of time Just prior to the capitalization. The auditing firm for ENIEL should be contracted as soon as possible while the auditing firm for the cooperatives (could be the same firm) should not be contracted until after the Telecommunications Law is passed. Key products related to this consultancy are: the audited financial statements, asset inventory and valuation and valor de libros. Terms of reference have been prepared for this work. * Financial Consultant: This advisor will be responsible for preparing a business plan for the companies to be capitalized based on a 10-year planning period. This business plan can be used as the basis for preparing the discounted cash flow valuation valor financiero. Preparation of the business plan for the entire sector will include the preparation of key inputs such as: tariff structure, new line expansion and line replacements, productivity improvements, debt service, taxation, etc. This effort wIll be completed based on a coordinated effort between the financial consultant, work groups within the companies, and independent experts in the areas of tariffs and network engineering. Qualified consultants in this category can include the 'Big Six' firms listed above and smaller 'boutique firms" who specialize in telecommunications valuations. Key )roducts include the 10-year business plan for the company or companies and the valor financiero. Terms of Reference have been prepared for this work. * International and Local Legal Advisors: This advisory group will be responsible for investigating all legal issues and providing recommendations. The Ministry of Capitalization has decided to match international legal advisors specialized in telecommunications transactions with local legal advisors. International advisors best qualified in this field are those that already bave experience in privatizations of telecommunications companies. The Government intends to contract legal advisors as TechilAmia - The Pojec PAe 19 of 18 soon as funding is available. Local independent legal advisors may be need to investigate specific issues such as the cooperative transformation and capitalization and other specific aspects related to preparation and presentation of the law to the Congress. Key products include the telecommunications law and regulations, concession contracts, buy/sell agreements, company statutes, etc. Terms of reference have been prepared for this work. 0 Investment Bankers: This advisory group is primarily responsible for the world-wide promotion, preparation of capitalization strategy, and final sale of the new shares to the pre-ualified bidders. This advisor can also be asked to prepare the valor financlero based on the business plans prepared by the financial consultants. Advisors in this include the most prestigious merchant banks with telecommunications privatization and merger and acquisitions experience. It is expected that the merchant bankers will not be contracted until after the financial consultants have prepared the business plans. 24. Establishment of the Telecommunications Superintendency: The main requirements for establishing the Telecommunications Superintendency within CONARE are for staff training, and for some computer equipment and speciaiized equipment for frequency monitoring. The specific technical assistance needs for this purpose are: * Training, in the: (i) economic and financial aspects of telecommunications regulation, including price-cap and other regulatory pricing mechanisms and the accounting and financial requirements of regulation; (ii) technical aspects of regulation, particularly those referring to frequency spectrum management and planning, localization and solving interference problems between stations; (iii) legal aspects of regulation, specifically those related to concession contract enforcement and monitoring, resolution of disputes between operators and between the regulatory entity and the Government, and resolution of complaints and disputes between consumers and operators; (iv) technical aspects of interconnection between operators, and quality of service assessment. Under the proposed training program, a twinning arrangement between the Bolivian Superintendency of Telecommunications and a foreign telecommunications regulatory agency will be established. Staff from the Superintendency of Telecommunications will go on short missions to the foreign agency to receive "on-the-job training. The program will also finance the sending of the Superintendency's staff to attend short seminars on telecommunications regulatory issues. * Equipmentfor the Regulatory Agency: Frequency monitoring and computer equipment wll be required for the Superintendency of Telecommunications. Frequency monitoring equipment is required to enable the regulator to enforce the spectrum regulations. For this purpose, the entity should be equipped with frequency monitoring equipment of national coverage. Three stations will, initially, cover the major centers of Bolivia, in La Paz, Santa Cruz and Cochabamba. Computer systems will be required to access a data base of frequencies as well as a data base of technical and financial data of the operators. Technice Anna - 77e PrJoect Page 11 of18 Cost Estimate 25. The total estimated cost of the program for telecommunications reform and the capitalization of EMEL as outlined above is US$9.8 million equivalent, of which US$6.3 million is being considered for financing under the proposed IDA Credit. Details of the estimate for individual components are contained in the following table: Table 3 - Estimated Cost of Telecommunications Reform and the Capitalization of ENEL (US$) Item Total Cost Financed by Proposedfor Others IDA Credit Capitalizing EMNEL - Legal Advisors 660,000 200,000 460,000 - Financial/Technical Advisors 1,360,000 300,000 1,060,000 - Other consultants 680,000 200,000 480,000 - Investment Bank 2,460,000 2,000,000 460,000 Regulatory Superintendency - Advsors 160,000 0 160,000 - Training 280,000 100,000 180,000 Regulatory Equipment - Frequency monitoring 3,500,000 500,000 3,000,000 - Computer hardware/software 700,000 200,000 500,000 Total 9,800,000 3,500,000 6,300,000 Aviation Sector Reform Background and Sector Strategy 26. The proper organization of the aviation sector is crucial for the development and integration of Bolivia, as well as for assuring the safety of air travelers. Bolivia's aviation sector is characterized by relatively high state intervention and lacks a ^lear and effective regulatory framework. This has translated into inefficiencies in the pro,vision of air traffic and airport-related services. As part of its reform agenda, the Goverument has already passed Supreme Decree 21060 which deregulated domestic air traffic tariffs. The impact of this ruling has already created stronger private competition in the maklcet. 27. The Government wishes to restructure the sector to promote private sector participation, make domestic and international air service more efficient and reduce government involvement when inappropriate. The three basic tenets of the reform program are dealing with the: (i) international and domestic airline sectors; (ii) airports sector; and (iii) adaptation of the institutional and regulatory framework. The Government proposes to capitalize LAB in a manner that fosters competition in the domestic airline sector. The TeckakelAnnea. The Projet Page 12 of 18 Government also wishes to develop a level playing field by eliminating implicit subsidies to individual airlines, particularly in the case of Transportes Aereos Milltares (TAM) and Transportes Aereos Bolivianos (TAB). Domestic routes to non-commercial destinations will be auctioned to the domestic airline that requires the lower compensation. The Government wil either convert TAM and TAB into commercial enterprises that function within the competitive market or they will discontinue commercial services and be integrated into the mSitary sector. 28. Concerning the airports sector, the Government intends to restructure AASANA, the airport services public enterprise, so that: (i) most of the airport-related activities, excluding air traffic control services, are transferred to the private sector; (ii) a redimensioned AASANA (most probably a new entity) will retain responsibility only for operating air traffic control services; (iii) airport administration is decentralized through the creation of regional airport authorities, with private sector and regional entities' involvement and; (iv) airport tariffs and rates are more comparable with those in neighboring countries. A Supreme Decree that reduces existing Bolivian airport tariffs and fees by 15% has been submitted for approval. 29. Concerning the institutional and regulatory framework of the aviation sector, the Governmaent intends to: (i) adapt the current aeronautical legislation to the new organization in the aviation sector, as well as to the new laws submitted or in preparation (e.g., the Capitalization Law, sector's regulatory law, etc.); (i) adjust the general aviation policy as well as the intemational aviation policy, to conform to the changes in the aviation sector; and lii) create the civil aviation authority (regulatory body) for aviation related matters. Technical Assistance Requirements 30. Technical assistance is required for (i) the capitalization of LAB; (ii) the restructuring and privatization of AASANA; (iii) the development of a suitable institutional and regulatory structure for the aviation sector; and (iv) the restructuring of the smaller domestic airline operations of TAB and TAM. 31. Capitalton of LAB will require the following inputs: * Specialized Consulting Firm, in order to carry out: (i) a technical audit and valuation of LAB, including market valuation of the assets related to the air transport operation such as aircraft (seven B-727, one A-310, one B-707 and two Fokkers), ground handling equipment, spare parts, etc, and a market valuation of LAB's routes in the period 1995-2000, including projected net operating profit of routes under different scenarios of load factor and fuel prices, taking into account existing competition. Market value of recent sales of airline routes (e.g., Delta and Pan Am, American Airlines and Pan Am, etc.), and comparative analysis with LAB; (ii) the preparation of a strategic plan (1995-2000) which would incorporate a "stand alone" strategic plan of the enterprise as if LAB were a private company, including a market strategy and its basic assumptions, a fleet renovation plan, projected passenger and cargo traffic figures and estimated operating income, operational costs (aircraft related, traffic related, aircraft property related and general administrative expenses), and financial projections; (iii) route synergy assessment based on proposed alliances with potential strategic partners, which would require identification of potential strategic partners for Technkat Annex - nhe Projed Page 13 of 18 LAB (based on present route structure plus LAB's unused traffic rights), and a quantification of the synergy between LAB and the potential strategic partners. Terms of reference have been prepared for this work. O An Investment Bank to design a capitalization plan, including (i) definition of pre- qualifications conditions, including required bidder's ownership structure in order for LAB to maintain flag carrier status, type and size of strategic airline partner required (e.g., number of RPK's per year, minimum average load factor, etc.), and financial requirements of the strategic airline partner; (ii) definition of the bidding conditions of the capital increase, including a proposed five year investment plan, a time period for exclusivity in the use of LAB's intemational traffic rights, rights and veto power of the Bolivian Government, and a capitalization methodology for LAB (i.e., special reference to the possibility of capitalizing aircraft related assets); (iii) determination of the base value of LAB's equity prior to the capitalization; design of an appropriate program for employee stock ownership participation; (iv) preparation of the Information Memorandum; and (v) execution of the capitalization plan, including preparation of a "road show", pre-qualification of potential investors, coordination of the arrangements for international public bidding, evaluation of bids and closing of transactions. 3 Corporate Lawers, to provide legal counseling to the capitalization process of LAB. These experts will prepare the necessary draft documents supporting the process, according to the existing legal framework in Bolivia, including: (i) assistance in pre- qualification of potential investors; fii) preparation of bidding conditions; (iii) evaluation of the existing regulatory/legal framework for LAB's operations as it may effect domestic markets (e.g.,routes designation, fares policy, airport tariff policies, etc.) and international market (e.g., Bilateral, Open Skies Agreements, etc.) and a description of LAB's traffic rights (use and unused); (iv) preparation of a legal audit; and (v) preparation of document changes in the by-laws and for the shareholder's assembly of LAB. * Financial Auditors, to develop the accounting audit of the financial statements of December 31, 1993 as well as for the financial statements of the selected transaction date (i.e., shareholders assembly). 32. Restructuring and pnivaliaon of AASANA will require: * A Specialized Consulting Flrmn to undertake a restructuring study of the airports in Bolivia according to the following guidelines: (i) division of the functions of AASANA into air navigation services (i.e., air traffic control, overflight services, communications, meteorology, approach and landing, etc.), and airport operations (i.e., aircraft-related services, passenger related services and administration of concessions); (ii) creation of a new Air Navigation Services institution under the supervision of the Civil Aviation Authority (i.e., Subsecretary of Aeronautics or similar) and with provision of services nationwide; (iii) creation and corporatization of regional airport authorities for the administration of the airport services; (iv) analysis of the financial system of airports in Bolivia and development of a new system according to the proposed National Airports structure (i.e., revenue and income TedilalAnnex - Hu Project page 14 of 18 allocation between the different participants - Civil Aviation Authority, Air Navigation Services, Airport Authority, etc.); and (v) the preparation of recommendations of privatization strategies for the different airports authorities (e.g., master concession, multiple concessions, private ownership, private build/ownloperate/transfer schemes, long term lease. etc.) * Corporate Lawyers to provide legal counseling to the restructuring and privatization process of AASANA. These advisors will prepare the necessary draft documents supporting the process, according to the existing Bolivian legal framework. * Investment Banks, for cases where the size of the airport operation is relatively important for investment purposes (i.e., Santa Cruz, La Paz and Cochabamba), design and execute the privatization program for the selected airport authority. In cases where the size of the airport is relatively less important the use of a financial advisor for the execution of the privatization strategy will be sufficient. * Financial auditors to develop the cost center financial statements for each participant prior to the restructuring of the National Airport System. 33. Development of an appropriate institonal and regulatoWry framework will require: 3 A Specialized Consulting Firmn or Advisor to: (i) prepare the analysis of the areas subject to reglataion (e.g., aviation and safety standards, price setting and competition, environmental standards, air traffic control, airport concessions, etc); (ii) develop the insutional framework of the sector, including specific definition of the role of the Direccion General de Aeronautica Civil, the centralized regulatory agency and any other institution affecting the process (e.g., Fondo Nacional de Aeronautica); (iii) complete the necessary preparatory work for the modernization of the regulaory authority of the aviation sector (institutional set-up, structure of the board, internal procedures, etc); review the current aeronatical legislation in Bolivia. These experts will prepare, if needed, new regulations to conform with the aviation sector's reform plan and assist the Government to prepare an appropriate proposal for Bolivia's International avation poltcy which would support this plan. 34. Restructuring of TAM and TAB will require: * A financial advisor, to develop a restructuring study of the air transport operations of TAM and TAB. The study will analyze two options: (i) the potential corporatization of passenger-related activities and further privatization of the enterprise and (ii) the discontinuation of commercial services and full integration into the military sector. The advisor will also assist the development of a system to auction non-commercial routes to the private airline that requires the lowest level of compensation. Cost Estimate 35. The estimated cost of the program outlined above is US$3.44 million of which US$1.92 million is proposed for financing under the proposed IDA Credit. Details of the estimates for individual components are contained in the following table: Technical Annex - The Projed Page 15 of 18 Table 4 - Estimated Cost of Technical Assistance to the Aviation Sector (US$) item Total Cost Financed by Proposedfor Others IDA Credit Capitalization of LAB - Project Manager 120,000 120,000 - Specialized consuldtingfirm 330,000 100,000 230,000 - Investment bank - Retainer 320,000 320,000 - Success Fee 500,000 500,000 - Cowporate Lawyers 100,000 100,000 - Financial Auditors 50,000 50,000 - Public relationsfirm 80,000 80,000 Restructuring & Privatization of AASANA - Specialized consulting firm 750,000 720,000 30,000 - Financial auditors 80,000 80,000 - Corporate lawyers 150,000 150,000 - Investment bank 440,000 440,000 - Public relationsfirm 70,000 70,000 Insional & Regulatory Framework - Specialized advsor 300,000 50,000 250,000 Restructuring of TAM & TAB - Financial advisor 150,000 20,000 130,000 Total 3,440,000 1,520,000 1,920,000 Classification of Technical Assistance 36. Technical assistance for this project includes the transfer and utilization of services, skills, knowledge and technology to: (i) carry out policy studies for sector reform and provide advice for the capitalization of key enterprises; (ii) support project preparation and implementation; and (iii) establish and enhance the institutional development of CONARE. The table below reflects the share of technical assistance resources that would be dedicated to these activities. Techaal Annex -e Projed Pge 16 of 18 Table 5 - Classification of Technical Assistance Cm thousands of US$) Item Policy Project ID Total Support Preparation Project Preparaton Facility 1,000 1,000 (1,000) (1,000) A. Ministry of Capitalkation 6,260 6,260 (3,180) (3,180) B. Technical Assistance to CONARE 300 1,200 1,500 (300) (1,000) (1,300) C. Telecommunications Sector 5,160 440 5,600 (2,460) (340) (2,800) D. Aviation Sector 3,140 300 3,440 (1,670) (250) (1,920) Total 14,860 1,000 1,940 17,800 (7,610) (1,000) (1,590) (10,200) Note: Figures and parentheses indicate amounts financed by IDA. Section B: Project Administration and Implementation Project Implementation 37. Responsibility for implementing the project lies directly with the Ministry of Capitalization which is headed by and staffed with highly competent professionals who would receive substantial support through the technical assistance provided under this project and the other sectoral technical assistance operations which are planned. This support is already underway, financed in part by the PPF which was provided for this operation. The Minister of Capitalization is an experienced professional with previous management experience in both the public and private sectors. Competent and professional working groups established in each of the sectors are elaborating sector restructuring and enterprise capitalization plans. The working groups are receiving significant assistance from foreign advisors with hands-on experience in restructuring and privatization in their respective fields. The Government has assigned the President of each of the enterprises with specific day-to-day responsibility for monitoring and maintaining the pace of capitalization. The sectoral Secretaries are responsible for leading the working groups on sectoral reform issues. A Legal Working Group, working in close conjunction with the Ministry of Justice, has been overseeing and TechnkeArnnex - The Projedt Page 17 of 18 coordinating the drafting of the necessary enabling legislation. A program has been developed for presenting this legislation to Congress in an orderly fashion once it reconvenes at the beginning of August. The Ministry has set-up a competent and fully-staffed procurement unit to deal with the large number of consulting contracts to be financed through the project and this group is already receiving training and other support from Bank procurement specialists. Tbis Ministry is also responsible for contracting the inital support needed to establish CONARE. 38. These arrangements, which have been consolidated and strengthened since the appointment of the new Minister of Capitalization in April 1994, are already producing results and should ensure rapid and efficient implementation of this project and the capitalization and regulatory reform which it supports. Procurement and Disbursement Procurement 39. Procurement will be according to World Bank guidelines, and subject to normal Bank review procedures. Consultant services would be procured according to the relevant Bank procedures. Bolivian procurement rules will be modified through a Supreme Decree to allow procurement of consultants related to the capitalization program to be handled by the Government rather than through procurement agencies. The Draft Procurement Decree establishes authorization levels for contract awards based on the size of the consulting contract. After the usual selection steps, and with close involvement of the individual sectoral working groups, recommendations for the granting of contracts for services will be made by a Procurement Unit, to be formally established by the decree. Such recommendations will be reviewed by IDA. For consultant contracts, terms of reference for most of the major activities to be financed under the proposed Credit have already been prepared by the Government and agreed to by IDA, and are available in the Project Files. The Bank's standard forms of consultant contract would be utilized, including a short-form letter for direct contracting of individual consultants for short-term assignments. 40. Goods to be procured under the credit include an estimated US$3.5 million in telecommunications regulatory equipment and computer equipment, an estimated US$0.5 million of computer and communications equipment in the Ministry of Capitalization, and an estimated US$0.5 million for the production of advertising and collateral materials. These will be procured as follows: (i) ICB for contracts valued at more than US$150,000, using Bank-issued standard bidding documents; (ii) Local Competitive Bidding (LCB) for contracts valued at more than US$25,000 and less than US$150,000 (not exceeding US$600,000 in the aggregate), using standard bidding documents approved by IDA; and (iii) for contracts valued at less than US$25,000, through shopping procedures acceptable to the IDA (not exceeding US$400,000 in the aggregate). Prior review will be mandatory for all ICB and LCB procurement as well as for the fist contract procured through shopping. Disbursements 41. Disbursements will be administered by the Procurement Unit in the Secretariat of Capitalization. A Special Account will be established within the Bolivian Central Bank for TedhskajAwer - Th Projecd PAe i8 of 18 the activities to be financed by this Credit. An initial deposit of US$1 million (equivalent to four months of estimated disbursements) would be made into this account. Statements of expenditure will be used for disbursements of up to US$25,000 equivalent in the case of goods. In all other cases, full documentation wil be required. As detailed in Schedule B attached to this Memorandum, disbursements would be made against 100% of the net-of-tax costs of local and foreign consultants; 100% of training expenses; 100% of the CIF cost of imported goods and of the ex-factory cost of local goods; and 85% of the cost of locally- procured goods. Also, 100% of the net of taxes costs associated with the public information campaign would be financed. Retroactive financing for consulting activities and related equipment procured under Bank guidelines after May 1, 1994, is proposed, up to a limit of US$1.47 million, equivalent to 10% of the proposed amount of the credit. The Project is expected to be completed by end-1997. The closing date is June 30, 1998. Records and Auditig 42. Records and auditing will be the responsibility of the Procurement Unit, which will establish separate accounts for each component and will monitor all expenditures financed by the project. The Bolivian Central Bank will maintain separate records and accounts for all transactions under the credit. Project accounts, the special account and statements of expenditures will be audited each year by auditors satisfactory to IDA within 120 days after the end of the fiscal year. In addition to this financial reporting, a full progress report will be prepared and submitted to IDA every six months. This report will detail all project and related activities, report on progress in relation to agreed schedules, and identify any problems which may have been encountered and which could adversely affect the overall impact of the project. These reporting requirements were confirmed during negotiations. BOLIVIA - REGULATORY REFORM AND CAPITALIZATION TECHNCAL ASSISTANCE PROJECT SCHEDULE ONE KEY PROJECT ACTIVITIES Mafn Objectives Project Component Expected Output 77ming Targets Mail Objectives I Activities O Strengthening the Legal and Sectoral reform laws Start: Second Quarter Capacity of the privatization and regulations in the 1994 Ministry of advisors hydrocarbons, Capitalization electricity, Completion: telecommunications, Reform laws mining and railways ^ompleted by first sectors and regulations quarter 1995. for the aviation sector. Draft financial sector Key regulations reform laws produced. completed by end- Capitalization of 6 1995 public enterprises and privatization of Capitalizations AASANA. completed by Second Quarter 1997 Establishment of Administration of all Start: Second Quarter procurement unit contracts to be 1994 awarded for sectoral reform and Completion: End capitalization 1997 Public Information Development of Start: Third Quarter Campaign sectoral, national and 1994 international campaigns End: Third Quarter 1996 Strengthening the Establishment of Full-time technical Start: Fourth Quarter Institutional CONARE advisor to help 1994 Capacity of the establish CONARE Regulatory Agency and provide on-site End: Fourth Quarter (CONARE) expertise 1995 Consultant Studies Organization and Start: Fourth Quarter staffing of CONARE, 1994 development of policy and personnel manuals End: Second Quarter ,_______________ .__ _ _ _ _ _ _ _ _ _ _ _ _ .__ _ _ 1995 Schedk One -ey Project Activiie Pge 2 of 5 Main Objectives Project Component Expected Output 7iming Targets Activities l Training Programs Staff to gain Start: Fourth Quarter for CONARE Staff familiarity with cross- 1994 sectoral issues such as the role of the End: Second Quarter regulator, concession 1996 management, anti-trust issues, community relations and l________________ administrative law. Twinning Contacts with Start: Fourth Quarter arrangements regulatory agencies in 1994 other countries End: Second Quarter 1996 Telecommunications |relecommunications Technical support to Start: Third Quarter Sector Reform Law help explain the law to 1994 the legislative branch End: Fourth Quarter 1994 Telecommunications Assistance in drafting Start: Third Quarter Regulations the regulations 1994 End: Third Quarter 1995 Training of Training to gain Start: Fourth Quarter CONARE familiarity in the 1994 telecommunications legal, economic, and superintendency financial aspects of End: Second Quarter staff regulation, frequency 1996 monitoring and management, interconnection issues, etc. [l Installation of Knowledge and proper Start: Second Quarter specialized use of equipment by 1995 equipment for the regulatory staff Telecommunications End: Fourth Quarter Superintendency 1995 Aviation Sector Preparation of Assistance in drafring Start: Second Quarter Reform regulations for the regulations 1994 aviation sector End: End-1994 Schedu One - key Projea AactJ Page 3 of S Main Objectives Project Component Expected Output 7iming Targets _Activities I Capitalization of Specialized consulting Start: Third Quarter LAB firm to prepare a 1994 technical audit and valuation & strategic End: First Quarter plan; financial 1995 auditors to audit company; investment bankers for transaction; corporate lawyers for the capitalization process Restructuring of Consulting firm to Start: Third Quarter AASANA implement 1994 restructuring study of the Bolivian airports End: Second Quarter system. Investment 1997 bankers, corporate lawyers and financial auditors to help with the privatization of airports. Restructuring of Financial advisor to Start: Fourth Quarter TAM & TAB analyze prospective 1994 operations and prepare a restructuring, End: Fourth Quarter privatization or 1995 l ________________ _________________ liquidation proposal ,-, Note: The Ministry of Capitalization is responsible for implementating all project components. * Q1 b I.) #'m - ~~~~ * S % *W4 0 Ii' - ~~~~ & i'm ~~ - - :4. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 * Is $"AV fix n ao .pmp., mCULATORY REFORM CAPITALZATION TECHICAL ASSISTANCE PROJECT 1994 1095 iS9B 1997 to "Sam __ _Duton -Qtt21Oqt3 IQtr4 -Qttuil-O2 1Ot31OVt4 QIt Il 0U210Qtr3 (WQ4 OVI1l-Oi-21Qtr3- 28 Telecommunatlezone Se8tor Refota 427d 3 29 lnformwaon Canpaign 60d : am 30 Draft Telecommunaonse RagAons 260d I 3 1 Trainingl Supsdatendeac Staf 390d * I IIIII1 1 1fl1111il 32 Installation of Equipment 1 30d 33 Aviation Sector Refotrm 818d 34 Preparatdon of Regulations 1 65d 3S Restructurina of AASANA 70 .g[r11Fr1Jfll 36 Resuctuidno of TAM & TAB 2BOd Protect Crtcals iiiiiia ProgreS SumUmat Dote: O14194 Noncticald bileoane O Rold Up O Page 2 IBRD 20518 B R A Z I t B L I V I A /,_ ,,^,i, I,i ~~~~~~~~~~~~~~~ROA^DS: _ \ / TF-y L__ s \ | '5 / i ~' @ Notional CapItol -t2' ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Deportotet Boundaries l=nTrernottanal dB8 tonaes HiTvo.Sllos , AlHplono / . / @ , X 's,;eS5nJoOqwin < Volleys ; g 5-Rnndn O clono <~9onu Lowlands PnE R U . 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