ICRR 10547 Report Number : ICRR10547 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 03/28/2000 PROJ ID : P008569 OEDID: OEDID : L3166 Appraisal Actual Project Name : Industrial export US$M ) Project Costs (US$M) 260 75.9 development Country : Poland Loan /Credit (US$M) Loan/ US$M ) 260 75.9 Sector, Major Sect .: Financial Sector US$M ) Cofinancing (US$M) Development , Finance L/C Number : L3166 FY ) Board Approval (FY) 90 Partners involved : Closing Date 06/30/2000 Prepared by : Reviewed by : Group Manager : Group : Michael R. Lav Laurie Effron Ruben Lamdany OEDCR 2. Project Objectives and Components a. Objectives The main objectives of the project were to contribute to : (i) improving the convertible currency trade balance of Poland by increasing the volume, quality and value -added of industrial exports to convertible currency markets; (ii) improving the banking system, in particular by providing training in modern banking practice; (iii) preparing restructuring programs and identifying restructuring needs in industry; and (iv) supporting the development of the private sector. b. Components (i) investment in state-owned and private exporting industrial enterprises to which Bank funds would be channeled through selected participating banks, based on agreed eligibility criteria (seven subprojects had already been identified by Board presentation, with further investments to be selected and appraised by participating banks with the assistance of the National Bank and /or IBRD); and (ii) Technical assistance aimed at : (a) strengthening the banking system by enhancing capabilities of the banks and helping ongoing efforts to improve banking supervision; (b) supporting the restructuring of industry with studies of subsector restructuring strategies, support for the introduction of international accounting standards and auditing practices; and (c) supporting measures to stimulate the rapid development of new private enterprises and the privatization of existing public sector companies . c. Comments on Project Cost, Financing and Dates The loan was for $260 million, of which $245 million was allocated for investments in industrial enterprises (including US$141 million for pre-identified investments), and US$15 allocated for technical assistance . US$184.1 million was canceled, including $6 million which had been allocated to technical assistance and US$ 178.1million which had been allocated for investments. The loan was approved on February 6, 1990, made effective on May 8, 1990, and closed on June 30, 2000. 3. Achievement of Relevant Objectives : The loan failed to achieve most of its objectives . The funds made available to finance investment to promote exports were largely unutilized, because alternative financing was obtained by firms needing such investment . In addition, Poland's substantial devaluation made export quite profitable, and export earnings substantially exceeded projections. Technical assistance for the banking sector was also substantially underutilized as grant funding became available from bilateral donors for a range of activities, while Bank procurement rules precluded effective use of funding for purchase of automation investments . In a sense, this aspect of the loan was also a victim of the larger success of Poland's market transformation program . One of the loans successes was the technical assistance funding designed to support the development of subsector restructuring programs which was effectively utilized, and which played an important role in key sectors such as steel . 4. Significant Outcomes /Impacts : The project did assist in introducing project appraisal techniques to the banking sector and promoted modernization by fostering contact with Western banks and bank -related agencies such as the US Federal Reserve . It also assisted in developing industrial restructuring strategies, such as that for steel, which were very high priority in the country dialogue. Another impact, more difficult to quantify, was that the existence of the loan provided reassurance to the new economic team managing the transformation of Poland's markets, and to the public, at a time when there was great uncertainty in the expectations about the program . 5. Significant Shortcomings (including non -compliance with safeguard policies ): Seventy percent of the loan was canceled, and much of the intended technical assistance was never utilized . A more vigorous restructuring of the loan 3 or 4 years after Board approval, when funds were known to be disbursing very slowly, could have increased the value of the loan to Poland . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Partial Modest Sustainability : Unlikely Unlikely While the specific program supported by the loan merits unlikely sustainability, Poland's overall economic transformation program including the export orientation of much of its industrial sector is clearly sustainable. The confidence-building aspects of this loan in the early days of the reform should be noted. Bank Performance : Satisfactory Satisfactory The Bank's role in appraisal during the highly uncertain economic conditions at the end of the Communist era is satisfactory. However, supervision, including the re-allocation of funds to finance commercial bank automation was clearly unsatisfactory, and resulted in a very long life for this unsatisfactory project. Despite this weakness, Bank performance is rated, on balance, as satisfactory. Borrower Perf .: Satisfactory Satisfactory Borrower performance was satisfactory, although the emergence of superior forms of financing in unexpected quantities negated the value of the lending envisaged under the loan. Similarly, the emergence of grant technical assistance after the Loan was approved by the Board negated the value of much of the TA component of the loan. Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : (1) Successful macroecnomic management reduces the need for focused lines of credit . (2) With substantial economic transformations, it is difficult to estimate financing needs of enterprises . While the ICR suggests that a pilot project would have been appropriate to see if demand materialized, another view is that the support represented by this project and other funding made available by the Bank and bilateral donors played an important role in generating confidence in the economic transformation and thus played an important "stand-by" role. In this sense, Poland's market reforms and "Westernization" by-passed the loan. (3) In working with new borrowers, simplification of loan and sub-loan procedures is a top priority . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is quite satisfactory in its evaluation of the loan and its components . However, it could have looked more closely at the macroeconomic context within which the loan was extended, including the need at the time to generate confidence in the reform, and therefore, the utility of the "stand-by" aspects of the loan.