Document of
The World Bank
Report No.: 25915
PROJECT PERFORMANCE ASSESSMENT REPORT
RUSSIA
TAX ADMINISTRATION MODERNIZATION PROJECT
(LOAN 3853)
May 13, 2003
Sector and Thematic Evaluation Group
Operations Evaluation Department



Currency Equivalents (annual averages)
Cuwrency Unit = Roubles
1991                US$1.00              170
1992                US$1.00             420
19'3                US$1.00              1229
19"4                US$1.00              2200
1995                US$1.00              3861
Abbreviations and Acronyms
DC            Direct Contracting            NBF           Not Bank Financed
EC            European Community            OECD          Organization for Economic
DP(           Data Processing Center                      Cooperation and
EDI'          Electronic Data Processing                  Development
EU            European Union                OED           Operations Evaluation
FY            Fiscal Year                                 Department
GICr          Global Information and        PCG           Project Coordination Group
Communication                 PMU           Project Management Unit
Technology Department         PPAR          Project Performance
IBRF)         International Bank for                      Assessment Report
Reconstruction and            PPF           Project Preparation Facility
Development                    QAG          Quality Assurance Group
ICR           Implementation Completion     STI           State Tax Inspectorate
Report                         STS          State Tax Service
IMF           International Monetary        TAMP (I/II)   Tax Administration
Fund                                        Modernization Project
IS           International Shopping                       (first/second)
IT           Information Technology         TIN           Taxpayer Identification
LAN           Local Area Network                          Number
WAN           Wide Area Network             TICs          Training and Information
LIB           Limited International                       Center
Bidding                        VAT          Value Added Tax
LS            Local Shopping
LTU           Large Taxpayer Unit
MinTax        Ministry of Taxes and Fees
Fiscal Year
Gove.mrrienl:       January 1 - December 31
Director-General, Operations Evaluation            Mr. Gregory Ingram
Acting Dirzctor, Operations Evaluation Department  Mr. Nils Fostvedt
Manager, Sector and Thematic Evaluation            Mr. Alain Barbu
Task Mmaager                                       Mr. Nagy Hanna



The World Bank
Washington, D C 20433
USA
GREGORY K INGRAM
Director-General
Operations Evaluation
May 13,2003
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Performance Assessment Report on Russia Tax Administration
Modernization Project (Loan 3853)
This is the Project Performance Assessment Report for the Russia: Tax
Modernization Project for which an IBRD loan of US$ 17.3 million equivalent was
approved in March 9, 1995. The project closed on December 31, 2000, two years behind
schedule, with US$ 0.5 million cancelled.
The overall purpose of the project was to help develop and install an effective and
efficient system of tax administration. The project had two main objectives: (a) to pilot
reforms of the State Tax Service (STS) in two regions with about 110 local offices
through (i) reorganization of structures, (ii) introduction of new procedures, (iii)
automation of tax systems, and (iv) staff training; and (b) to assist in the institutional
development of tax administration by (i) building the capacity of the STS, (ii) preparing
for nationwide implementation of reforms in tax administration, and (iii) providing
support for project management.
OED rates the project's overall outcome as satisfactory, its sustainability as likely,
and its institutional development impact as substantial. Project objectives were complex
and demanding, given the limited institutional capacity and unfamiliarity of the client
with the Bank at that time, the fast changing environment of a transition economy, and
the comprehensive reforms and institutional changes involved. But the objectives were
highly relevant, the pilot approach was necessary, and implementation ultimately met and
exceeded the original objectives. Project design was significantly revised to incorporate
new ideas and learning from implementation, as would be expected for a pilot. Efficiency
suffered somewhat, but relevance and efficacy were high. While total project costs
remained the same, the restructuring of the technical assistance component agreed at the
midterm review yielded savings that were used for expanded training and equipment
purchases. Sustainability is rated likely (rather than highly likely) because of challenges
to continuous institutional learning, and because project outcomes were in part the results
of exceptional efforts by a few individuals rather than managerial systems that were
institutionalized, and thus the risks are significant when scaling up.



OED rates the Bank's overall performance as satisfactory, despite relatively poor
preparation and problems that almost led to cancellation, since this was a pilot project,
designed and implemented under very demanding circumstances. Supervision was
exernplary and the task team was flexible and open to learning. Similarly, OED rates
borrower performance as satisfactory since its highly satisfactory performance in the final
two and a half years of implementation more than compensated for the highly
unsatisfactory performance in initial implementation.
The main lessons leamed are particularly relevant to pilot projects and those
involving major computerization and organizational reforms, namely:
•  Ownership can be built from the bottom up. Ownership can be engendered by
demonstrating change from the bottom up, using regional pilots and judicious
sponsorship from the top. Large-scale top-down institutional reforms may not be
an option from the outset, particularly for large countries with diverse regions,
when headquarters are distant from client services and local problems, and when
there are strong vested interests in the status quo and fear of change.
*  Piloting is judicious when there is a need for integrating comprehensive and
complementary reforms on a scale where complexity and risks are manageable
and early results are necessary.
*  Strategic management, including sequencing of hardware and software and
organizational change activities are important in introducing large-scale
computerization. In particular, attention should be given to software development
prior to any substantial investment in hardware.
*  Bank procurement procedures should be adapted to deal with the relatively
unpredictable but critical process of customized software development.
*  Social marketing and image building are important activities to facilitate change
in client behavior and to scale up institutional reform efforts.
*  E-government programs should build on local experience with pilot
computerization and organizational change, and on and the technical platforms
and standards already established. The experience gained from the modernization
of focused institutions and strategic processes such as tax administration should
guide national strategies for diffusing information and communication
technologies on a broader scale.
Attachment



OED Mission: Enhancing development effectiveness through excellence and independence in evaluation.
About this Report
The Operations Evaluation Department assesses the programs and actvities of the World Bank for two
purposes first, to ensure the integrity of the Bank's self-evaluation process and to verify that the Bank's work is
producing the expected results, and second, to help develop improved directions, policies, and procedures through
the dissemination of lessons drawn from experience As part of this work, OED annually assesses about 25 percent of
the Bank's lending operations Assessments are conducted one to seven years after a project has closed In selectng
operations for assessment, preference is given to those that are innovative, large, or complex, those that are relevant
to upcoming country evaluations, those for which Executive Directors or Bank management have requested
assessments; and those that are likely to generate important lessons The projects, topics, and analytical approaches
selected for assessment support larger evaluation studies
A Project Performance Assessment Report (PPAR) is based on a review of the Implementation Completion
Report (a self-evaluation by the responsible Bank department) and fieldwork conducted by OED To prepare
PPARs, OED staff examine project files and other documents, interview operational staff, and in most cases visit
the borrowing country for onsite discussions with project staff and beneficiaries The PPAR thereby seeks to
validate and augment the information provided in the ICR, as well as examine issues of special interest to broader
OED studies
Each PPAR is subject to a peer review process and OED management approval Once cleared internally, the
PPAR is reviewed by the responsible Bank department and amended as necessary The completed PPAR is then
sent to the borrower for review, the borrowers' comments are incorporated into the document that is sent to the
Bank's Board When an assessment report is released to the Board, it is also widely distributed within the Bank
and to concerned authorities in member countries.
About the OED Rating System
The time-tested evaluation methods used by OED are suited to the broad range of the World Bank's work.
The methods offer both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or
sectoral approach OED evaluators all apply the same basic method to arrive at their project ratings Following is
the definition and rating scale used for each evaluation criterion (complete definitions and descriptions of factors
considered are available on the OED website http //wblnlO23 worldbank.org/oed/oeddoclib nsf!
232d43aeO9e87ac985256966007cc257/acaeb95358e99e578525698cO0519Oda?OpenDocument).
Relevance of Objectives: The extent to which the prolect's objectives are consistent with the country's
current development priorities and with current Bank country and sectoral assistance strategies and corporate
goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers,
Operational Policies) Possible ratings High, Substantial, Modest, Negligible
Efficacy: The extent to which the project's objectives were achieved, or expected to be achieved, taking into
account their relative importance. Possible ratings. High, Substantial, Modest, Negligible
Efficiency: The extent to which the project achieved, or is expected to achieve, a return higher than the
opportunity cost of capital and benefits at least cost compared to alternatives Possible ratlngs High, Substantial,
Modest, Negligible
Sustainability: The resilience to risk of net benefits flows over time Possible ratings Highly Likely, Likely,
Unlikely, Highly Unlikely, Not Evaluable
Institutional Development Impact: The extent to which a project improves the ability of a country or region
to make more efficient, equitable and sustainable use of its human, financial, and natural resources through. (a)
better definition, stability, transparency, enforceability, and predictability of institutional arrangements and/or (b)
better alignment of the mission and capacity of an organization with its mandate, which derives from these
institutional arrangements Institutional Development Impact includes both intended and unintended effects of a
project. Possible ratings High, Substantial, Modest, Negligible.
Outcome: The extent to which the project's major relevant objectives were achieved, or are expected to be
achieved, efficiently Possible ratings Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately
Unsatisfactory, Unsatisfactory, Highly Unsatisfactory
Bank Performance: The extent to which services provided by the Bank ensured quality at entry and
supported implementation through appropriate supervision (including ensuring adequate transition arrangements
for regular operation of the project) Possible ratings Highly Satisfactory, Satisfactory, Unsatisfactory, Highly
Unsatisfactory
Borrower Performance: The extent to which the borrower assumed ownership and responsibility to ensure
quality of preparation and implementation, and complied with covenants and agreements, toward the achievement
of development objectives and sustainability Possible ratings Highly Satisfactory, Satisfactory, Unsatisfactory,
Highly Unsatisfactory



Contents
Principal Ratings ..........................................v
Key Staff Responsible ..........................................v
Preface ..........................................                                 vii
Background ..........................................1
Project Design and Implementation             .......................................... 1
Piloting Tax Administration Reforms in Two Regions.    .........................................2
Institutional Development of Tax Administration .........................................2
Revised Components .........................................                      2
Outcomes ..........................................6
Piloting of Tax Administration Reforms in Two Regions ..... ............. ............ ... .......8
Preparation for nationwide implementation .................................      10
Costs and Financing ................................. 11
Ratings ..................................                                         12
Outcome: Relevance, Efficacy and Efficiency .......... ............. 1.......... ... .............. 12
Sustainability ................................                                  12
Institutional development impact.       ........................        ........ 13
Bank Performance ................................                                14
Borrower Performance ..... .......................1............... .6.......................... ... .......... .. 16
Lessons Learned ..................                                                 17
Annex A. Basic Data               ................. 21
This report was prepared by Nagy Hanna, who assessed the project in March 2002. The report was edited
by William Hurlbut. Helen Phillip provided administrative support.



v
Principal Ratings
ICR                     ES                     PPAR
Outcome                              Satisfactory            Satisfactory            Satisfactory
Sustainability                       Highly Likely             Likely                  Likely
Institutional Development Impact     Substantial             Substantial             Substantial
Bank Performance                     Satisfactory            Satisfactory            Satisfactory
Borrower Performance                 Satisfactory            Satisfactory            Satisfactory
Key Staff Responsible
Project                         Task Manager/Leader          Division Chiefl        Country Director
Sector Director
Appraisal                       Carlos D C Ferreira        Robert Liebenthal        Yukon Huang
Completion                      Richard Johanson             Pradeep Mitra       Julian F. Schweitzer



vii
Preface
This is a Project Performance Assessment Report (PPAR) for the Russian
Federation Tax Administration Modernization Project (Loan 3853) for which a Bank loan
in the amount of US$17.3 million equivalent was approved on March 9, 1995. The
project closed on December 31, 2000, two years behind schedule, with US$ 0.5 million
cancelled. An implementation Completion Report (ICR) was submitted on June 15, 2001.
This PPAR was prepared by the Operations Evaluation Department (OED) based
on the ICR, the Staff Appraisal Report, a review of Bank files, and extensive discussions
with Russian policymakers and implementing agencies, Bank staff, consultants, and
cofinanciers. The cooperation and assistance of all stakeholders and government officials
is gratefully acknowledged, as is the support of the staff of the World Bank Country
Office in Russia.
This PPAR complements and builds on an excellent and detailed ICR. It focuses
on lessons and future directions, since the project presents rich lessons of critical
relevance to country assistance strategy and for Bank involvement in scaling up the tax
administration modernization and other government services modernization programs.
The PPAR also gives special attention to the role and modality of pilot operations and the
institutional change issues involved in major computerization and business process
reengineering.
Following standard OED procedures, the draft PPAR was sent to the borrower for
comments, none were received.



Background
1.    The overall purpose of the Tax Administration Modernization Project (TAMP)
was to help develop and install an effective and efficient system of tax administration.
The project had two main objectives:
* to pilot reforms of the State Tax Service (STS) in two regions with about 1 10
local offices: through (i) reorganization of structures, (ii) introduction of new
procedures, (iii) automation of tax systems, and (iv) staff training;
* to assist in the institutional development of tax administration by: (i) building the
capacity of the STS, (ii) preparing for nationwide implementation of reforms in
tax administration, and (iii) providing support for project management.
2.    The project aimed to support the rapid reform of tax administration in response to
an unquestionably important requirement for fiscal stabilization and growth. The project
responded to an urgent requirement to improve tax administration in the context of major
fiscal imbalances. It was added to the lending program relatively late, and was prepared
and appraised in less than six months-a quick and appropriate response.
3.    TAMP achievements and limitations should be viewed in the context of overall
Bank assistance to Russia during the 1990s and the formidable obstacles that faced the
country's transition to a market economy. The project was designed during a time of
limited Bank knowledge of country conditions, where institutional constraints to project
implementation were not understood or amenable to easy solutions, when the risks of
large-scale Bank lending were high, and when there was little national consensus on the
pace and direction of socio-economic transformation. Although project performance
suffered from this overall environment until 1998, it turned around earlier than the rest of
the Bank's portfolio, and provided lessons and demonstration effects that should benefit
the scaling up of the tax modernization program and the overall implementation of e-
government and eRussia.
4.    Although envisaged as a computerization project, the Bank and the State Tax
Service (STS) and its successor the Ministry of Taxes and Fees (MinTax) learned that
this is essentially about complex institutional change, where issues of leadership,
organization, roles, skills and attitudes, are the most critical factors for improving
performance. Information technology was viewed progressively as a catalyst for holistic
change. The Bank and the Government moved ultimately, albeit belatedly, to put overdue
emphasis on training and institutional development.
Project Design and Implementation
5.    The TAMP consisted of the following two main components: piloting
administrative reforms in two regions and institutional development.



2
Piloting Tax Administration Reforms in Two Regions
6.    This component covered three elements:
* Piloting. Organization and Procedural Reform. The project sought to introduce a
finctional organization in STS local and regional offices and simplify procedures
by adopting a self-assessment system and instituting a system for audits. Taxpayer
education was to be instituted through dedicated staff and the organization of
seminars and a public information campaign.
* Automation. The project involved: (i) computerizing the tax processing of the
major taxes, specifically, the Value Added Tax (VAT) and profit tax; (ii)
simplifying tax forms to make them 'user-friendly'; (iii) acquisition and
installation of computer hardware for two regional offices and 110 local offices.
* Staff training. The project included the development and delivery of staff training
programs in taxpayer education, audit, tax collection and computerization.
Targets: 32,000 staff-days of training within Russia, and 220 senior tax officials
for study tours outside Russia.
Institutional Development of Tax Administration
7.    This component covered also three elements:
* Organizational development. The project included financing for studies and plans
as follows: preparation of a tax administration strategy, plan for reorganization of
STS headquarters, strategy and protocol for cooperation among key agencies
involved in taxation, taxpayer education strategy, a national audit plan, a national
training plan, and a review of the legal and regulatory framework.
* P'reparation for nationwide implementation. The project included an independent
review of reform implementation in the two regions, development of national
guidelines and standards on tax modernization, preparation of a national
automation strategy, a feasibility study on individual taxes and preparation for
eKpansion of piloted reforms to other regions.
* Project management unit support. Establishing and strengthening the expertise of
the Project Management Unit with a view that some of its functions, e.g.,
procurement, taxpayer education, Electronic Data Processing (EDP) development
and evaluation, would become permanent features of the STS.
Revised Components
8.    Several new project elements were added during project implementation:
* Two separate Data Processing Centers (DPCs) were included in the project, one
piloting enterprise taxes in Volgograd and one piloting personal income taxes in
Moscow. The idea for DPCs arose from the evaluation of the effectiveness of tax
administration in the two regions as financed by US Agency for International
Development (USAID). Some tax processes could be done on an inter-regional
basis, effectively consolidating processing into larger units, thereby achieving
economies of scale and greater efficiency.



3
*  Additional assistance was provided to the headquarters to install a corporate
network and Local Area Network (LAN). This corrected one of the weaknesses in
the original design, namely that the headquarters had no direct assistance and little
direct stake in the project
*  Automation support was provided for Large Taxpayer Units (LTU). The LTU was
a new concept proposed by the International Monetary Fund (IMF) to accelerate
revenue collection in the short run from the biggest taxpayers.
*  The processing of personal income taxes was added to the project through the
Moscow Data Processing Center (DPC).
*  The technical assistance program was reformulated and reduced. Several plans
and analyses were eliminated as no longer needed in the view of the STS; others
were added such as increased staff training.
9.    Modifications to project components reflected flexibility on the part of the Bank
to respond to new ideas and correct some of the deficiencies in the original design, and
are consistent with the concept and aim of a pilot project. The changes were not
considered to be a major restructuring of the project since the objectives and most of the
components remained the same. Although significant, the changes were seen as
reallocation to alternative means to accomplish the development objectives of the project.
Assessment of Design
10.   Identification of design weaknesses can be seen as a positive outcome of the pilot
approach that sought lessons from experience on a small scale in order to improve
interventions for nationwide implementation. Given the sense of urgency and limited
preparation time, and the Bank's unfamiliarity with Russia at the time, it is difficult to
judge whether a more rigorous design process would have averted or fully appreciated
the risks. A pilot approach was therefore essential. But such an approach should have also
conmmitted the Bank to provide adequate resources for timely supervision and learning,
and different formal modalities for reviewing and adapting than the Bank's standard ways
of doing business for projects. The MinTax and the Bank lacked a clear strategy to test or
pilot--it emerged later in implementation. There was little thinking about business logic
and information architecture prior to procurement, or about sequencing among hardware,
software, reorganization, training, and other elements of change.
11.   The Tax Administration Modernization Project (TAMP) was examined by the
Quality Assurance Group (QAG) in 1997/98. This review rated quality at entry as
"marginally satisfactory, but with an important caveat." (QAG, p. 9) "The project was an
urgent priority. It was added to the lending program at the last minute, prepared in less
than six months and at a very low cost (under $100,000). Project design as a pilot was
appropriate. The capacity building components (TA and training) were ambitious but
suited to needs" (QAG, Annex 6, p. 3) "why, then, was the quality at entry less than fully
satisfactory. The foundations of the project proved to be built on clay. The STS
leadership almost immediately turned hostile to outsider involvement. The project design
was based on an IMF-EU pilot operation under implementation at the time of appraisal



4
and not sufficiently well evaluated. It subsequently failed. In summary, the usual
predictors of project success -- borrower commitment, realistic project design and
instituticnal capacity -- were absent almost from the beginning". (QAG, Annex 6, p. 2)
12.   Greater ownership of the reforms would certainly have led to quicker solutions to
problems. The commitment of the central government to the project also overestimated:
STS senior management, under immense pressure for immediate increases in tax
revenues, then had little time for a project with deferred payoff. The concept of the
intended reforms under the project was not fully understood or appreciated initially by
top management in tax administration. Hence, low priority was accorded to the project
during, inlitial implementation.
Assessment of Implementation
13.   The project experienced a major turnaround, from being close to cancellation, to a
success story. The project took two years longer to implement than originally planned,
that is 5.5 years instead of 3.5 years, a time overrun of 57%. The project effectively was
under suspension for one year - disbursements virtually ceased in 1996. A tentative
agreement was reached with Russian authorities at the Bank-IMF Annual Meeting in
October 1996 to cancel the project, subject to a formal decision by The Interministerial
Commission. In the meantime project supervision was suspended. However, the
government decided in 1999 to resuscitate the project rather than cancel it and nominated
a better team to manage the project. Significant improvement came with the appointment
of the new tearn, which included experts from the private sector to strengthen and
improve project implementation.
14.   The project was initially plagued by procurement problems arising from
inadeqaate evaluation by the Bank of the prototype applications software in the Moscow
region on which the regional pilots would be based. The unexpected failure of the
prototype (finance by IMF-EU) required redesign of software, and revealed inadequacies
in the hardware that was procured ahead of the software. Procurement of equipment was
well advanced at the start of the project. Bidding documents and equipment specifications
were prepared early, bidding took place in late 1995, and the Bank gave its "no-
objection" to a major contract for equipment in 1996. However, award of the contract
was postponed pending: (a) completion of software, and (b) the STS securing resources
to finance import duties and taxes. The contract was only awarded in 1998 after the
project was restarted. By the time the project was reactivated the winning vendor no
longer manufactured the specified equipment. Following negotiations the vendor agreed
to provide its latest equipment, two generations younger than the original bid offer,
withoul cost increases. Development of software was so protracted, however, that the
equipment ended up being purchased before it was completed and tested. Full
implementation of the software revealed inadequacies in some of the hardware that will
have to be addressed as equipment is replaced and renewed.
15.   Several factors explain the slow pace of initial project implementation:
The Project Coordination Unit had little capacity and experience and low level of
authority. Day-to-day management of the project was not the responsibility of a



5
sufficiently senior official until 1998, when the Unit was strengthened and
integrated with the authority structure of the STS.
* The prototype applications software failed. This meant new software needed to be
developed, and caused a cascade of events that delayed implementation.
*  The STS was unable to find sufficient local funds to finance software
development by its subsidiary organization, GNIVTS, and the Bank could not
finance the work because of procurement rules (as GNIVTS was wholly owned
by the STS).
*  Hardware procurement was delayed, not only to allow software development to
catch up, but also because the STS could not find counterpart funds to pay for
import duties and taxes on the equipment until the project was restarted.
* Lack of funds was a reflection of the lack of understanding and therefore
commitment by senior STS management as to the overall goals, objectives and
strategies. This lack of support prevailed until appointment of the former Minister
of Finance as STS head in 1998.
* Top management was under severe pressure to raise tax revenue immediately, and
had little or no incentive to spend time and attention on a project that would
realize benefits only in the medium term.
16.   Problems experienced by the regions in the introduction of the new structures and
processes included the following: (1) apprehension on the part of staff in changing
working habits, (2) reluctance of tax inspectors to break personal relations with
taxpayers, and vice versa (as they have a personal interest), (3) trouble in standardizing
tax procedures under fast changing tax laws, (4) the inability of the structure of the
MinTax headquarters to support financially the functional organization of local tax
bodies, (5) lack of an independent network of specialists to advise taxpayer clients on tax
matters, (6) inadequate postal service, hindering contact-free filing of tax records, and (7)
lack of a uniform state policy on tax education and voluntary compliance. One of the
main problems was the lack of cooperation and interaction between project groups in
pilot regions and headquarters early during implementation.
17.   Several factors explain why the project turned around from 1999 onwards:
* Change in the enabling environment, appointment of new leaders--particularly of
a deputy minister who supported the reform, and demonstrated results at the local
level.
*  Continuity in Bank staff supervising the project, and increased Bank supervision
budget that permitted expansion of the supervision team.
* Attitudes and skills of the task team leader--building partnership, taking risks,
providing hands on advice, and pushing back the bureaucracy. The engagement of
the Russian Executive Director and of long term advisors were also contributing
factors.
* Inclusion of components that would benefit the STS headquarters directly
(corporate network) thereby giving them more of a stake in the project, and re-
instatement of the Moscow region where STS officials could see tangible results.



6
* Strategic technical assistance to the STS for the modernization program,
especially US assistance, which influenced top policy makers and provided new
ideas.
* Well-designed study tours that exposed Russian tax authorities to efficient tax
operations in other countries. This led to far better understanding of the new
practices being implemented, e.g. DPCs and taxpayer services.
Outconnes
18.   The TAMP was a significant step towards an effective and efficient national
system of tax administration. It developed key tax processes and applied them in pilot
regions A functional organization was installed in two pilot regions. This structure has
been standardized and adopted for national deployment. Software was developed for
processing, most all taxes. Appropriate hardware was acquired for automation of tax
processing. Staff was trained in the new processes. Between 1996 and 2000 the two pilot
regions made a breakthrough from almost nonexistent information services to a wide
range of services provided to taxpayers. Moreover, the tax administration prepared a
variety of technical strategies and programs for national implementation of tax reforms.
19.   The TAMP achieved virtually all its objectives, albeit in a longer time frame than
originally planned. The delays allowed new initiatives to be incorporated into the project,
including regional data processing centers and an increased array of taxes. Overall,
significant learning and capacity were generated for implementation of reforms in tax
administration on a wider scale.
20.   The TAMP has raised the level of tax discipline, as indicated by the following
quantitative indicators of improved tax compliance.
* T'he proportion of tax returns filed on time increased from an average of 50% to
75% between 1998 and 2000. The share of voluntarily submitted documents grew
by :18% over the same period.
* In Volgograd, the share of voluntary tax payments in total tax receipts has
increased steadily from 35% in 1996, to 45.2 % in 1999 and 60% in the first nine
moniths of 2000. Corresponding figures for Nizhny Novgorod were 49% in 1999
and 62% in 2000.
* The tax collection/GDP ratio of 'Volgograd was below the national average in
1997 (7.8% compared with 10.1%/o for the country as a whole). In 1999, it
eKceeded the national average for both federal and regional taxes (9.6 %
compared with 9% for the country as whole). Moreover, tax revenues as a share
of the regional budget increased from 11.3% to 14.7% over the samne period.
* In Nizhny Novgorod, tax collection from the largest 58 taxpayers increased by
150% between 1996 and 2000.
* Recovery of tax arrears improved markedly during the project. Between 1998 and
2000 arrears rate fell 90% in Nizhny Novgorod and 170% in Volgograd. In 1999
Nizlmy Novgorod collected 1.4 times more of the taxes in arrears than in 1998,
and Volgograd collected 2.2 times more tax arrears.



7
* In Moscow collections from personal income taxes more than doubled because,
for the first time, authorities were able to match information about salaries paid by
firms with individual taxpayers. In addition, experimentation is being done with
electronic filing.
21.   The project also achieved the following improvements in indicators of
administrative efficiency.
*  The average quarterly revenues per staff member grew by 157% between 1998
and 2000 in Volgograd, and by 78% over the same period in Nizhny Novgorod.
* The number of tax returns and other records being filed with errors declined two-
fold. The number of entry errors declined from 25% to 5%.
*  Processing efficiency increased by a factor of four, from 40 to 160 documents per
month per employee.
*  Document processing speeded up, with processing time for a typical tax document
being reduced on average from 15 minutes to 3 minutes.
*  The time to respond to inquiries by taxpayers was cut from 2 weeks to 1-4 days,
and 30% of the requests were served within 24 hours.
*  The average time between identification of tax violations and taking corrective
measures (issuance of collection letters) was reduced from 10 days to three days.
*  The time spent per taxpayer during the filing season was reduced nine fold.
*  Waiting time by taxpayers for service was shortened by 5 to 6 times.
22.   This was achieved without increased numbers of tax administration staff. The
number of employees responsible for data entry, processing and outputting decreased by
15% while the volume of processed data increased by a factor of three. The labor input
for preparation of statistical reports remained constant but the volume of such reports
doubled. About 30% of employees were relieved of monotonous and routine operations
to be engaged in functions requiring more skill. The share of routine operations decreased
by half.
23.   The project exceeded original expectations in several important areas. These
included:
*  Scaling up the reorganization to cover all local centers, starting July 1, 2001.
*  Expanding the numbers and types of taxes under automation.
*  Establishing of two Data Processing Centers, one to take advantage of economies
of scale.
*  Developing of Large Taxpayer Units (LTUs) in six regions to concentrate
resources and attention on the taxpayers that provide most of the revenue.
*  Developing a corporate network at STS headquarters and the basis for a wide area
network that can connect the whole country.
24.   The weakest performance pertained to organizational development at STS
headquarters and the completion of various studies and strategies. Four components
achieved their objectives only in part, including the reorganization of the headquarters,
preparation of a strategy on interagency cooperation, development of a national training



8
plan and review of the legal and regulatory framework. Some important results were
produced under each component, but not to the extent envisaged originally under the
project In retrospect, reorganization in headquarters was probably premature and had to
await finctional reorganization in the regions.
Piloting of Tax Administration Reforms in Two Regions
25.   Introducing a functional organization in STS offices. Functional organizational
structuies have been introduced in 107 local offices while 3 offices have been closed in
Nizhny Novgorod and Volgograd. Nizhny Novgorod also piloted the consolidation of
smaller ra:yon offices into four more viable inter-rayon offices. The organizational
structure of the Regional Offices in the two pilot regions broadly follows that of the local
offices. The functional organizational structure was evaluated by Georgia State
University in December 1998 and recommendations were made for further refinement.
26.   Adopting a self-assessment system. Self-assessment has been introduced in the
pilot regions. Tax returns are now prepared by taxpayers who also calculate taxes due.
Taxpayers have the option to file returns by mail. Taxpayer service units have been
establishecl to assist taxpayers where needed. But, achieving a fully functioning system of
self-assessment inevitably is a long-term proposition. Much more work needs to be done
on taxpayer and on developing third-party verification for the income of firms and
nonsalaiied individuals.
27.   ins,tituting a system for audits. In the large tax inspectorates of the pilot regions,
units have been established for the planning of tax audits. 'Guidelines for Tax
Compliance Activities' was developed. The new software used in the pilot regions has a
module to enable automated selection of cases for audit. Staff have been trained in basic
audit techniques by other donors, and by a local training firm using project funds. Still,
further improvements are needed.
28.   lntroducing various forms of taxpayer education. Extensive efforts were made by
both pilcot regions to educate taxpayers and develop a tax compliance culture. A taxpayer
association was created in Volgograd to advocate the rights of taxpayers.
29.   C'omnputerizing the processing of the VAT and profit tax. The project results went
much be yond tax processing for VAT and profits taxes and covered all types of enterprise
taxes, as well as a start on personal income taxes in all three regions. Moscow has
established a centralized processing center using personal income taxes and individual
numbers Inr this process, the project helped simplifying tax forms to make them 'user-
friendly' GSU provided assistance in developing new returns forms for VAT and
personal income tax. The forms can be readily adopted countrywide. The project
completed the acquisition and installation of computer hardware for two regional offices
and 110 local offices.
30.   Creating Data Processing Centers under the project, in Volgograd and Moscow
to achieve economies of scale in processing tax forms and information. These centers
enable the arms-length processing of taxes which is of fundamental importance to reduce
corruption, as it eliminates the contact between tax inspectors and the taxpayer. Also, a



9
corporate network was established successfully at MinTax headquarters to facilitate
communications among the various units in the tax administration. Six LTUs were
computerized to handle the taxes of significant enterprises.
31.   Developing and delivering staff training programs in taxpayer education, audit,
tax collection and computerization. This was achieved relatively late in the project.
Functional training started earlier with government funding, but data processing and
management training started later. Five computerized training classrooms were
established in the two pilot regions. The amount of persons days of training was virtually
the same as the original project target of 30,000. Both Nizhny Novgorod and Volgograd
established Training and Information Centers (TICs) as self-sufficient entities having the
status of unitary enterprises for conducting educational and publishing activities in new
tax processes and advanced management training. The Bank financed training provided
by a Russian firm in training managers, tax inspectors, and system administrators. In
addition, late in the project a 50 officials of MinTax headquarters and the pilot regions
undertook a total of six study tours to observe reform measures in practice, such as
consolidation of offices, centralized data processing and functional organizations.
Institutional Development of Tax Administration
32.   Institutional development was at the heart of this pilot, but was somewhat
eclipsed by the major focus on hardware acquisition and software development.
Institutional development covered strategy development organizational restructuring,
interagency cooperation, taxpayer education, and several studies. Three progressively
refined strategies have been prepared.
33.   Organizational development at tax administration headquarters was partly
achieved. The most significant organizational change during the project period was the
creation of a Tax Modernization Department that reports directly to the Minister. In
addition, the following units have also been created since 1995: Departmnent of
Information Policy, an auditing unit, taxpayer registration department, a unit for LTUs
and an office for human resource development. More subtle yet profound is the beginning
of a broader change in the organizational culture of the Ministry.
34.   Early in project implementation a reorganization plan was developed that called
for transition to a functional organization, mirroring the functional organization in the
two pilot districts. However, this could not be implemented during the life of TAMP and
was not officially adopted. Two problems impeded reorganization of the tax
administration headquarters. First, functional organizations. The other regions followed
traditional lines of organization. Therefore, the headquarters would have had two
conflicting organizational structures. However, now the MinTax has adopted a common
functional organizational structure and is applying it to all regions and tax inspectorates
as well as at headquarters. Second, a functional organization is likely to have substantial
staffing implications, and may require as many as three to four times the staff in
headquarters than at present. Based on staffing ratios between center and periphery in
other countries, functional organizations have about 2-3% of total staff at the center to
manage each function, monitor execution and prepare training, etc. In Russia at present
the headquarters has only 0.5% of the staff at headquarters (900 staff vs. about 150,000



10
emplcoyed in the regions). The increased staff at headquarters can be offset partly by
reduci ions in staff required in the regions under the functional organization. This could be
complemented by a policy of relocation and rotation between field offices and
headquarters.
35.   Tlis project also aimed to develop strategy and protocol for cooperation among
key agencies involved in taxation, partly achieved. Interagency cooperation in sharing of
data is vital for independent verification of self-assessed tax returns. Under this
component a formal strategy was never prepared, but progress was made nevertheless in
response to immediate needs. Progress occurred at two levels: (1) Guidelines for Tax
Compliance Activities were developed jointly by the MinTax, the Federal Tax Police and
the Ministry of Interior. (2) Formats for exchange of information have been agreed with
the State Statistics Commnittee, Treasury and Customs. At the regional level the two pilot
areas have made separate agreements to obtain information on local registrations (real
estate, automobiles). The 1999 Tax Code made the sharing of information between
agencies mandatory.
36.   Excellent taxpayer education strategies have been adopted by pilot regions
including formal training classes for taxpayers, consultation by phone or in person, in-
depth technical assistance for a fee, TV, newspaper and radio campaigns and educational
programs in school to teach young adults about taxpayer responsibilities.
37.   During implementation a new audit strategy was prepared and adopted. The IMF
provided I echnical assistance to review auditing and made recommendations for reforms
early in the project (1995). An information system was installed to identify taxpayers for
auditing, use of third party information including information from tax agents to identify
candidates for audits. Staff training in auditing was provided to help implement the
strategy.
38.   The highly positive outcomes of training (such as in facilitating change) have
convinced tax authorities that training is an essential ingredient in the introduction of new
business processes, and that it must be given early in implementation. Training was not a
common tradition in the government. But it is now a strong felt need in the MinTax, in
part to cope with rapid organizational and role changes. The project succeeded in creating
core-training programs for both technical personnel and managers, with corresponding
teaching materials. These can be used to introduce reforms in tax administration
throughout the country. A more comprehensive national plan and permanent training
programns is under development and will be implemented under a current EU/TACIS
project and the proposed Second Tax Administration Modernization Project (TAMP II).
Plans to use distance education are also underway. The MinTax created a directorate for
training and appointed a dynamic director. A systems approach to on-the job training and
management development is critical to sustain organizational change.
Preparation for nationwide implementation.
39.   A key output of the project was to prepare for nationwide implementation of the
reforms carried out in the pilot regions, thus spreading the administrative efficiency and
tax compliance gains to other regions. In December 1998 GSU evaluated the IT,



I1
application software and tax administration procedures in the project regions. The
software and related procedures were redefined and improved in accordance with
recommendations. The development of national guidelines and standards on tax
modernization was achieved. Initial work was financed by the United States Trade
Development Agency under the "re-engineering procedures." Hardware, software and
application systems have been developed and can be used under a second project. De
facto standards were established in the pilot regions and for LAN/WAN at headquarters.
40.   A national automation strategy was prepared early in the project, and has been
revised several times to take into account recent developments. It is being further
reviewed and refined as part of the preparation of the second project. Meantime, the
preparation of the third phase of the program is being developed at a much higher level of
detail than originally planned. It is being financed through grants (USTDA and a
Japanese PHRD grant).
41.   Project management and integration remain the major vulnerability in scaling up
the pilot reforms to nationwide implementation. The project aimed to establish and
strengthen the expertise of the Project Management Unit with a view that some of its
functions, e.g., procurement, taxpayer education, EDP development and evaluation,
would become permanent features of the STS. The original Project Coordinating Unit
(PCU) was a relatively weak organization. It could not attract highly qualified staff. At
the time the project was resuscitated in 1997 the STS considered the establishment of an
external PCU, but was prevented from doing this by legal issues and time required.
Instead it took a hybrid approach. An internal group within the STS was designated to
work with an external group of consultants (Project Coordination Group, PCG) on the
project. While not ideal, this arrangement strengthened the overall competence of the
PCU and allowed the completion of the project. PCU staff was also strengthened through
external study tours. Under the project considerable build-up of expertise occurred within
the STS in procurement, and in the technical capability of its subsidiary, GNIVTS. But
program management systems are not yet well developed.
42.   MinTax has been impressed enough with the results of the pilots (under TAMP I)
that it has already proceeded with preparing to scale up the program to cover the larger
federations, not awaiting TAMPII approval. Currently, a unified software is being
introduced to support the new functional organization in the other regions. The delay in
preparing TAMPII since TAMP I was completed has allowed more time for the MinTax
to digest the lessons learned and to attend to the necessary preparation of training, and
other soft investments needed to effectively absorb the next wave of technological
investment.
Costs and Financing
43.   A decision was taken about the time of re-evaluation of the project in 1997 to
shift most of the costs for external consultants to another donor willing and able to fund it
- the US government. The remaining allocation in the loan funds for technical assistance
was then used to finance assistance for the Project Coordinating Unit external training
and local training. Excluding the technical assistance (TA) provided by the US, project
costs remained approximately the same as originally planned. Savings were used to buy



12
equipmernt for components added to the project (particularly for the DPCs, Corporate
Network and LTUs) and to finance more local training than originally planned.
44.   The final disbursements (below) show that they closely corresponded to the
original plan.
Category                Original       Actual      Variation
Allocation   Expenditure     (%)
_______                        ~~~~~~($)    ()
Goods                                 13,900,000     14,800,000     +6.5%
Consultants' services including training and  1,800,000  2,000,000  +11.1%
fellowships
Refunding of Project Preparation Advance  500,000            0
(PPF)
Unallocated                             700,000              0      -100%
Total                                 16,800,000     16,800,000         0
Ratings
Outcome: Relevance, Efficacy and Efficiency
45.   Project objectives were central and remain highly relevant to resource
mobilization and economic management. Despite poor start, crises, and delays, the
project exceeded its original objectives, in terms of outcomes achieved: improved tax
compliance, increased administrative efficiency, and demonstration effects. The project
was efficiently prepared, but efficiency suffered during implementation. However, that
may be in the nature of pilots and learning processes. So, on balance, project outcome is
satisfactory.
Sustainability
46.   This assessment rates sustainability as likely. Government commitment for the
project, and for nationwide implementation of the project reforrms, has been strong over
the last twoi and a half years of the project and has been sustained since pilot
implementation completion, spanning the terms of four different Ministers. Management
capability has been built and demonstrated over the past two years within the STS and the
Project Coordination Unit. Provided these levels of commitment and competence are
maintained, the project benefits (higher productivity, higher tax collection, taxpayer time
saved) are l ikely to be sustained in the regions, and can be progressively extended
throughout the country. But vigilance in needed to sustain and scale up these reforms.
47.   A base has been established for nationwide implementation of key reforms in tax
administration. The MinTax's top leaders now "own" the project. The planned second
project, about to be launched, will extend the reforms to more regions with a view to
eventual national implementation. This would reinforce sustainability. A key factor in
sustaining project benefits and extending them to new regions is the emphasis on more
and better staff training. The tax administration organization has 150,000 staff and a



13
turnover of 8% p.a. This means that 12,000 new staff must be trained each year, as well
as training to update 18,000 existing staff. A major effort is required to develop standard
training programs, finance efficient forms of delivery, evaluate training impact, and make
further modifications to improve training progressively.
48.   The benefits of a functional organization, self-assessment and good automation
have already been demonstrated in the pilot regions. Continued support for equipment
upgrading, revising software and taxpayer education will be necessary in the two pilot
regions to maintain the benefits of the reforms, even while taking these reforms to
national scale. First, the functional organization has been standardized and is currently
being extended throughout the country. Second, as a bridge between the first and second
projects the Ministry has been introducing at its own expense reformed structures, new
business procedures (e.g. self-assessment) and new software in eight new regions during
2001-2002. Third, the second tax administration project will help deepen the reforms.
49.   Sustainability is rated likely rather than highly likely since there are many risks as
the pilot is expanded to the national level. Project outcomes were the results of
exceptional efforts by a few individuals rather than adequate managerial systems put in
place, and thus the risks of maintaining and scaling up these changes are significant.
Vigilance of policymakers and the Bank is critical to sustainability as these reforms are
taken to national scale, covering diverse and remote regions and vast geographic areas.
Suitable indicators have been developed under the project for monitoring the further
implementation of reforms in the regions. The areas in which more attention is needed
are further strengthening and integration of project management systems within the
MinTax, development of monitoring indicators for institutional development in the
MinTax development of more extensive taxpayer advisory services, communications
with and within the more remote regions, and massive reorientation and training.
50. A key benefit from a pilot project is learning, particularly institutional learning,
but the sustainability of such learning cannot be taken for granted here. The Bank is
pressed to move with speed to finance a much scaled up modernization project, and
therefore may not be inclined to probe deeper into the lessons to be learned and the
weaknesses that could be further revealed from the pilot. The MinTax is sensitive to
outside criticism and may view some of the remaining challenges or revealed weaknesses
as a major mistake to be hidden or a threat to the speed needed to get the Bank's
proposed follow up financing. But sensitivities that prevent further probing could abort
future learning and lead to longer term problems. It is therefore critical to create an
environment thatfacilitates continuous institutional learning in the face of major
computerization and continuous institutional change.
Institutional development impact
51.   The project is institutional development impact was substantial for the pilot
regions. The implementation of a functional organizational structure in the two pilot
regions had led to significant improvements in the functioning of the tax administration,
including:
* Elimination of duplication of functions between different organizational units.



14
* Tax inspectors have been relieved of routine work, enabling them to concentrate
on taxpayer services and tax compliance.
* T he new structure has separated taxpayer service activities from those involving
decisions on taxpayer liabilities, thus reducing the scope for corruption.
*  Professional skills have been strengthened by allowing staff to specialize in
specific functions.
*  The relationship between tax administration and the taxpayers has improved
through the creation of special units to deal with taxpayer service.
*  Waiting times for taxpayers have been reduced significantly, leading to reduction
in costs of compliance. Taxpayers previously had to endure multiple visits from
tax inspectors checking compliance with different taxes. Now a single visit is
made to verify all taxes at the same time.
* All operational units now use a single, integrated database, thereby enhancing
eificiency.
* An excellent set of monitoring indicators has been developed to track the
effectiveness and efficiency of the tax service in the two pilot regions.
52.   As a result of the experiences in the pilot regions the MinTax has developed
standard Drganizational structures for Local Tax Inspectorates and is formally shifting to
such structures in all the regions of the Russian Federation.
Bank Peiformance
53.   This PPAR agrees with the ICR rating that the Bank's overall performance,
judged by the quality of service that it provide, was satisfactory. The Bank's work in
developing the project needs to be placed in context. At the time of the project the Bank
did nol uiderstand Russian institutions very well, and vice versa. Originally Bank
involvement was dependent technically on the IMF which had resident experts working
in the STS, and had initiated a small prototype project on new tax processes in one tax
office in Moscow on which TAMP was to be based. Within the Bank, project preparation
was carried out with IMF experts providing the technical input, and with the human
development division providing the resources and guidance. Expertise in information
technology was added to the Bank's appraisal team.
54.   Project design proved appropriate for the most part. The design sought to build on
the local office prototype developed by the IMF/EU by reorganizing tax administration in
two full regions with a view to developing and testing procedures and processes for
nationwide implementation. The core components were and remain essential for reforms:
functional reorganization, development of new tax processes, automation, and staff
development. The basics of the project proved to be sound: a phased, pilot approach by
which adj astments could be made in project design based on lessons from experience in
implementation. But implementation issues were not adequately anticipated, and many
stakeholders were not consulted at design stage. For example, Information Technology
(IT) vendors could have been consulted during the process of preparing the strategy for
procurement, and this could have avoided some procurement problems.
55.   The level of risk analysis was inadequate, particularly given the radical changes
taking place in the external environment, the unfamiliar borrower, likely unforeseen



15
obstacles to reform, reluctance to finance TA with loan funds, etc. In retrospect, the Bank
and Fund were too optimistic about the time required to implement the far-ranging
changes intended under the project. Some of the components were overly ambitious,
particularly the range of technical assistance provided for the STS headquarters. STS
implementation capacity was over-estimated, as became evident in the slow pace of
implementation compared with the original schedule. Moreover, incentives were
misjudged, particularly senior management commitment for a project with payoff only in
the medium to long term. Relatively few direct incentives were provided to the STS
headquarters in the project; the bulk of the assistance being directed at the two regions.
56.   The level of institutional analysis of STS headquarters was inadequate, but this
was not standard Bank practice at the time. The requirements for institutional
development at STS headquarters were not well thought through. In particular, the
requirement that STS reorganize itself was, in retrospect, premature and must await the
full conversion to a functional organization in the regions. Institutional analysis would
have also indicated where to invest in facilitating reform--investing in champions at
Headquarters and the pilot regions.
57.   The QAG report rated the Bank's quality of supervision as "marginally
satisfactory, but improving. The Bank staff had to deal with almost overwhelming odds
given the very difficult implementation environment and the project design problems. To
its credit, the underlying problems were detected early and remedial actions proposed.
When the situation failed to improve, Bank management took the decision with the
Borrower to cancel the loan in October 1996. This would have been the first 'punitive'
cancellation in the Russia portfolio." (QAG, Annex 6, p. 2) The Bank's firm stand may
have played a part in prompting the government to take action in strengthening top
management at the STS. The Bank agreed nine months later to resuscitate the project
after new management had been appointed to the STS.
58.   The Bank was preoccupied with IT and procurement issues, and the focus on
institutional development objectives often suffered. In reformulating the project, the QAG
report expressed disappointment that an opportunity was lost in re-focusing the project on
ID issues "A more rigorous assessment of real progress on the ground in June 1997
before the project restart, coupled with a more explicit set of performance conditions,
might have reversed the project's inexorable drift from an ID to an IT project." (QAG,
Annex 6, p. 2). The Bank's supervision team paid special attention to the warnings in the
QAG, but IT remained the main focus. The slow and complex procurement process of the
Bank and pressing procurement problems inevitably took too much attention, at the
expense of ultimate objectives. The lack of adequate capacity to provide practical
procurement assistance by the Bank's local office did not help matters. However, the
Bank and the client progressively learned to give more attention to the institutional
development aspects.
59.   The allfamiliar common bias offunding agencies in favor of hardware and
procurement matters did reinforce a similar bias in Russia against investing in
intangibles such as training and management systems. Training should have started as
early as possible, to engender ownership, facilitate change and balance attention towards
investment in people, not just machines. Similarly, more attention should have been



16
given to software development, prior to any substantial investment of hardware. As the
Ministry proceeds to scale up the program under TAMP II, it will need to build its project
management capabilities to ensure integration, sequencing, and balancing among its
businesses, systems, and processes.
60.   This PPAR rates Bank supervision performance satisfactory, as the team provided
"hands on" advice, flexibility and willingness to adapt the pilot to new facts on the
ground. The Bank diligently supervised the project, generally carrying out field
supervision at least twice a year except for 1996 and 1997. The Bank's budget for
supervision did not allow for unscheduled travel to meet the new Ministers in the STS.
Given the frequent replacement of ministers, this could have been useful. The Bank
identified and raised implementation problems quickly. It took a proactive approach to
close the project when problems became intractable. Improvement in implementation
took place after, and most likely in response to, the Bank's strong stand on project
cancellation. The Bank also conducted a review of project quality at entry in 1997/8. The
Bank showed flexibility at project re-start in 1997 to correct most of the design problems,
to introduce new components and to reformulate others. In the end these efforts paid off.
The tax authorities were highly satisfied with the overseas and local training received,
and - in fact - atypically requested reallocation from the equipment category to training
at the end of the project.
61.   Many factors contributed to project turnaround: the renewed commitment and
efforts of the Russian tax authorities after 1997, the competence and ownership of the
regions involved, the high quality advice provided by the IMF and additional assistance
agreed with USAID/US Treasury. Long-term advisors who understood both the Bank and
Russian realities were also critical to bridge the gap between Bank requirements and local
understanding. But the continuity and determination of the Bank's task manager also
contributed to the positive results obtained. Openness to ideas from other sources of
assistance such as US Treasury also helped. The Bank supervision team received an
award for quality of supervision in FY 2001.
Borrower Performance
62.   The assessment agrees with the ICR in rating borrower performance satisfactory.
Its highly satisfactory performance in the final two and a half years of implementation
compensates for the highly unsatisfactory performance in initial implementation.
Regional performance was fully satisfactory throughout the project.
63.   The loan request submitted by the STS to the Bank and IMF was thorough and
competently prepared. But most of the preparation work was done by outside experts
with endorsement by the STS. The Borrower and STS management did not fully
understand or "own" the project at the design stage. Nor did they fuily comprehend the
ramifications of the reforms proposed. Outsiders essentially prepared the program. To be
fair, neither did the Bank fully appreciate the challenges of implementation of such
reforms.
64.   In retrospect, elimination of the Moscow region as one of the project's pilots, a
decision made by government late in project development, was unfortunate. It was made



17
to minimize the risks since the Moscow region aceounts for about 35% of national tax
revenues. This reduced substantially the possibility of close observation of results that
could have helped motivate STS management on implementation. However, this
deficiency was later addressed and the Moscow region was re-instated during project
reformulation in 1997.
65.   The government can be faulted for allowing the project to founder for so long
without solving its problems -- such as management indifference and chronic shortage of
funds. Ministry of Finance officials were preoccupied with other pressing matters, such
as raising immediate revenues. In addition, the Ministry of Finance never addressed
systematically the problem of counterpart funding shortages.
66.   The performance of the STS, and its successor the MinTax, were quite different
during the life of the project. Performance by the central authorities was clearly
unsatisfactory between 1995 and 1997. Top management largely ignored the project and
did not assign the project sufficient priority to solve its lack of counterpart funds.
However, from project "re-start" in 1997 to its conclusion in 2000, performance of the
implementing agency was stellar. The Deputy Minister in charge of modernization
brought in consultants from the private sector, re-assigned the software development
from the Federal GNIVTS to that in Nizhny Novgorod, and upgraded the staff of the
Project Coordinating Unit. The implementation moved relatively smoothly thereafter to
its highly successful conclusion.
67.   There was a noticeable difference between the degree of involvement at the
regional and the central level. In contrast with headquarters, commitment was always
strong in the two regions that received the bulk of the project assistance. Competence and
ownership of the project were uniformly high at the provincial level. The regions had a
greater understanding of the concrete problems at hand and requirements for system
development. Lack of staff with field operational experience at headquarters was one of
the weaknesses of the central project management, and of the STS bureaucracy more
generally.
68.   The performance of the implementing agency was not fully adequate in one area:
quarterly reporting and use of monitoring and evaluation indicators. Progress reports
were not forthcoming from the implementing agency until very late in the project. The
final report of the implementing agency, however, is exemplary and includes voluminous
data about performance of various aspects of the project. The use of monitoring and
evaluation should be regularized in any future project from the start.
Lessons Learned
69.   Conclusions and lessons are:
Ownership can be built from the bottom up. It can be engendered by
demonstrating change from the bottom up, using regional pilots and
judicious sponsorship from the top. Large-scale top-down institutional
reforms may not be an option from the outset, particularly for large countries
with diverse regions, when headquarters are distant from client services and



18
local problems, and when there are strong vested interests in the status quo and
fear of change. The project suffered neglect at the Headquarter of the Ministry
soon after approval, but the pilot regions maintained ownership and
commitment and demonstrated improvements at the front line. Ironically, a
weak central. project management unit at the start may have allowed the
regions to develop their own solutions without undue interference. The regions
were at the frontiers, faced with excessive workload and unsatisfied customers,
thus perhaps more prepared for change. Then, a reform-minded leadership did
help turn around the project on measures that were necessary to come from the
center. But as the pilots are now expected to be scaled up, it will become more
important to broaden such ownership beyond the new regions to be covered, to
include both headquarters and the general public. The project also
demonstrated that blueprint conditionality and the financing of a large volume
of TA and studies cannot substitute for ownership. Russia must be seen to
drive the change. Local change agents should be exposed to outside
perspectives and alternative models. Piloting change and engendering local
ownership through training, experience demonstration, study tours and support
to champions are essential.
Piloting is judicious when there is a need for integrating comprehensive
and complementary reforms on a scale where complexity and risks are
manageable and early results are necessary. In this case, it was critical to
carry out several complementary reforns that cover functional reorganization,
process changes, mission-oriented training, and substantial computerization.
C arrying out these complementary activities is necessary to realize the benefits
from investments in computerization. But doing so on a large scale from the
start would have involved unmanageable complexity and risks, and this could
have ended with a major failure. Piloting presents a dilemma since it still
requires the commitment of stakeholders at all levels, even while keeping
project scope End implementation focused on the pilot area or constituency.
Hlowever, piloting could be an effective instrument if it is designed for learning
from the start, that is, to test explicit hypotheses and strategies and to identify
risks and tradeoffs. Scaling up remains a challenge, but now a road map has
been established, skills built, mindset changed, and hopefully, the core project
management systems sufficiently developed.
* Pacing change and maintaining flexibility are critical to major
organizational change. A pilot implies a lack of a blueprint, of consensus on
mreans, and of certainty about the feasibility and pace of change. Therefore it
would misleading to prematurely judge early performance or to consider the
deviations that are likely to arise from learning and adaptation as failures. In
this case, the project was about to be cancelled in midcourse. Bank staff
continuity, flexibility, persistence, pro-activeness, and their partnership with
reform-minded local counterparts were critical to adapt and reshape the project.
Critical to such flexibility is the availability of adequate resources for
supervision and knowledge transfer. The pilot was prepared in record time in
response to an urgent need, so risk taking was inevitable. It also set ambitious



19
targets, in line with client aspirations. But time to develop software, build
management systems and change organizational behavior is often
underestimated. The project has stretched client capacity. But Bank and client
staff persisted with the project, with the objectives rather than a blueprint, and
TAMPI ultimately exceeded Bank expectations. An important byproduct of
this flexible yet persistent approach is that the client organization learned how
to learn and now accepts change as a continuous process.
Strategic management, including sequencing of hardware and software
and organizational change are important in introducing comprehensive
organizational development and large-scale computerization. It takes
strategy, time and sequencing to develop new management systems and
practices. But to the extent project progress is measured by disbursements, the
all too common bias to proceed with hardware ahead of less costly and more
difficult investments in intangibles will continue. Expertise in organizational
change, management systems, and human resource development will be even
more essential to the scaled up program. These managerial capabilities must be
embedded within the Ministry, not just the PIU. The Ministry is cognizant of
this lesson and for the second project it created a Modernization Department,
well staffed and technically capable. This modernization department will carry
out modernization of all regions, not only the ones under the project, thus
ensuring that the government would realize the benefits on a larger scale than
the Bank's financed program.
* Bank procurement procedures should be adapted to deal with the
relatively unpredictable but critical process of customized software
development. Tax systems often require more customized and complex
software than other government applications. Customization also entails more
concerted efforts to ensure system sustainability and IT staff support. In this
case, the Bank did not adequately evaluate the technical soundness of the
prototype that was developed with IMF/EU, despite the criticality of this
application software. As a result of delays in such software development, the
hardware was procured earlier, and had to be upgraded to match the new
demands. Thus the pilot indicates the need for better protocols to further adapt
and deploy the tax software in the follow up program. Moreover, Bank
procurement procedures prevented the Bank from financing software
development because it was carried out by a specialized company that serves
the Ministry--not an unusual practice that enable governments to recruit and
retain highly specialized skills and adapt such capabilities to government's
special business requirements. Under Bank rules, such companies are also
barred from competing with private companies if and when the government
opts for outsourcing such services through competitive bidding. Also, because
of the confidential nature of the software algorithms, Russia could not accept
open bidding for the software development effort. The Bank's team could not
reconcile Russia's concerns (and the criticality of software development to
project success) with the Bank's procurement requirements, which proved to
be rigid. It is therefore recommended that the Bank reviews its software



Lu
procurement procedures to meet both the objectives of efficiency and
responsiveness to clients' concern with confidentiality and emerging
specialized expertise.
* Social marketing and image building are important activities to facilitate
change in client behavior and to scale up institutional reform efforts.
Political will and public support must be nurtured. This is critical to
overcoming the massive bureaucratic resistance to change as similar
modernization is extended to other regions rather rapidly and as the support
systems at headquarters will have to change accordingly. During
implementation, the Ministry grew increasingly convinced that taxpayer
education and mass communication are good investments, and essential to
enhance compliance and institute self-reporting by taxpayers. Such activities
will need to be further developed, scaled up and sustained under TAMP II.
Similarly, the Bank and the Ministry need devote more attention to publicize
the success of the pilot, and the lessons learned. Attention to external relations
is particularly critical in Russia to improve the Bank's image and to encourage
further modernization of public sector institutions under the eRussia program.
* E-government programs should build on local experience with pilot
computerization and organizational change, and on and the technical
platforms and standards already established. The experience of TAMPI
indicates that line management ownership at the ministerial and local levels is
critical to government-wide modernization. It also point to the competencies,
technical and managerial, that will be critical to implementing eRussia, a high
priority national program to use information and communication technologies
to improve governance, modernize public services and enhance the
competitiveness of the whole economy. To realize the benefits of
computerization, substantial efforts are needed to change mindsets and ways of
doing business. Exposures to homegrown success and international best
practice are needed. It would be costly for each ministry to reinvent this
experience. The project also points to opportunities to adopt common standards
and databases, and to build a common communication infrastructure across
ministries. In doing so, lead roles and responsibilities for key ministries will
need to be defined. Since modernization of many strategic systems will be
necessary (and given the current low levels of computerization in Russia), and
these systems and platforms cut across ministries, it is the right time for the
Bank and government to worry about these issues. For example, a unified
national registration (or personal identification) system needs to be adopted by
all ministries and levels of governments. The MinTax has successfully
developed such a system, so it should not be re-invented by other ministries.
Even more important, a unified system would enable all ministries to share
data, and would help further cross-checking of all types of information for
consistency, reliability, transparency, and anti-corruption.



21                                       Annex A
Annex A. Basic Data
TAx ADMINSTRATION MODERNIZATION PROJECT (LOAN 3853)
Staff Inputs (staff weeks)
No Staff Weeks                          US$ ('000)
Identification/Preparation                  17.3                                 65 8
AppraisalVNegotiation                       11.1                                 25.4
Supervision                                167.8                                 580.4
ICR                                         2.2                                  31.6
Total                                      198.4                                 703.2
Mission Data
Date      No. of     Specializations represented          Performance rating
(month/year) persons                                  Implementation   Development
Progress         Objective
Identification/    08/23/1994-  7       Task Mgr, Country Economist, Sr
Preparation        08/3111994           Automation Specialist, Russian
Implemen. Expert, Operations Analyst,
Procurement Specialist, Tax Admin
Exp (IMF)
AppraisaVNegotiation 11/14/1994-  6     Task Manager, Sr. Automation
11/22/1994           Specialist, Russian Implem. Expert,
Implementation Specialist (2) Tax
Admin. Expert (IMF)
Supervision        3/13/1995-  6        Task Manager, Sr. Automation     S             S
3/23/1995            Specialist, Procurement Specialist,
Human Resource Expert, Tax Admin
Expert (IMF), Staff Assistant
Supervision        6/26/1995-  2        Sr. Automation Specialist, Human  U             S
6/30/1995            Resource Expert
Supervision        12/05/1995-  3       Task Manager, Sr. Automation     U              U
12/14/1995           Specialist, Human Resource Expert
Supervision        3/26/1996-  2        Sr. Automation Specialist, Human  U             U
4/5/1996             Resource Expert
Supervision        6/13/1997-  6        Task Manager and Senior Automation  S           S
6/23/1997            Specialist, Tax Admin Expert (Bank),
(2) Tax Admin. Expert (IMF),
Operations Analyst, Human Resource
Expect
Supervision        01/19/19998- 6       Task Manager and Senior Automation  S           S
01/30/1998           Specialist, Tax Admin. Expert (Bank),
Country Economist, Tax Admin Expert
(IMF), Operations Analyst, Research
Assistant (IMF)
Supervision        Mid-Term    7        Task Manager and Sr. Automation  U              S
Review               Specialist, Lead Specialist and
10/26/1998-          Advisor, Country Economist Tax
11/4/1998            Admin Expert (Bank), Operations
Analysts, Staff Assistant
Supervision        6/17/1999   2        Task Manager and Sr. Automation  S              S
Specialist, Country Economist
Supervision        11/01/1999-  6       Task Manager and SeniorAutomation  S            S
11/11/1999           Specialist, Lead Specialist and
Advisor, Tax Admin Expert (Bank),
Country Economist, Operations
Analyst, Staff Assistant
Supervision        6/5/2000-   3        Task Manager and Senior Automation  S           S
6/9/2000             Specialist, Country Economist,
Operations Analyst
Supervision        11/6/2000-  6        Task Manager and Sr. Automation  S              S
11/10/2000           Specialist, Lead Specialist and
Advisor,,Country Economist, Tax
Admin Expert (Bank), Operations
Analysts, Staff Assistant
Completion         TBD