Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. 23078 PROJECT PERFORMANCE ASSESSMENT REPORT BULGARIA REHABILITATION LOAN (Loan 4078-BUL) CRITICAL IMPORTS REHABILITATION LOAN (Loan 4157-BUL) FINANCIAL AND ENTERPRISE SECTOR ADJUSTMENT LOAN I (Loan 4239-BUL) FINANCIAL AND ENTERPRISE SECTOR ADJUSTMENT LOAN II (Loan 4521-BUL) October 30, 2001 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (as of June 1, 2001) Currency Unit = Bulgarian Lev (BGN) BLI =US$0.439 US$ = 2.274 BL New Bulgarian Lev replaced the Old Leva (BGL) on July 5, 1999 @ 1BGN=1,OOOBGL Fiscal Year = Calendar Year Abbreviations and Acronyms CAS Country Assistance Strategy CBA Currency Board Arrangement CEE Central and Eastern Europe CEM Country Economic Memorandum CEMA Council of Mutual Economic Assistance EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ESW Economic and Sector Work EU European Union FDI Foreign Direct Investment FESAL Financial Enterprise Structural Adjustment Loan HAS Foreign Investment Advisory Service FSU Former Soviet Union GDP Gross Domestic Product GOB Government of Bulgaria IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund M&E Monitoring and Evaluation MIGA Multilateral Investment Guarantee Agency NGO Nongovernmental Organizations OED Operations Evaluation Department of The World Bank PAL Programmatic Adjustment Loan PSA Private Sector Assessment PSD Private Sector Development QAG Quality Assurance Group SAL Structural Adjustment Loan SAR Staff Appraisal Report SME Small and Medium Enterprise TA Technical Assistance USAID United States Agency for International Development Director-General, Operations Evaluation: Mr. Robert Picciotto Director, Operations Evaluation Department: Mr. Gregory K. Ingram Manager, OEDCR: Mr. Ruben Lamdany Task Manager: Mr. Michael Lay Peer Reviewer: Ms. Poonam Gupta FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation October 30, 2001 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Assessment Reports on Bulgaria - Rehabilitation Loan (Loan 4078-BUL), Critical Imports Rehabilitation Loan (Loan 4157-BUL)), Financial and Enterprise Sector Adjustment Loan I (Loan 4239-BUL), and Financial and Enterprise Sector Adjustment Loan II (Loan 4521-BUL) Attached is the Project Performance Assessment Reports for Bulgaria for the Rehabilitation Loan (Loan 4078 for US$30 million), the Critical Imports Rehabilitation Loan (Loan 4157 for US$40 million), FESAL I (Loan 4239 for US$100 million, with cofinancing by the Export Import Bank of Japan for US$50 million, and FESAL II (Loan 4521 for Euro 95.59 million with cofinancing by the Japan Bank for International Cooperation US$50 million. The Rehabilitation Loan was approved on August 1, 1996 and closed on schedule on July 31, 1997. The CIRL was approved by the Board on May 8, 1997 and closed on schedule on June 30, 1998. FESAL I was approved by the Board on October 30, 1997, and closed on schedule on April 30, 1998. FESAL II was approved by the Board on December 2, 1999, and closed on schedule on March 31, 2000. Bulgaria's transition to a market economy began in 1989/90, but until 1997 was marred by stop and go policies. During this time, highly excessive banking sector financing of unreforming state-owned enterprises both inhibited reform and generated bouts of severe inflation. The Rehabilitation Loan, approved in 1996, supported an unsuccessful attempt to break the link between the SOEs and the banking sector. The CIRL, FESAL I and FESAL II, by contrast, were core components of wide-ranging reforms for the SOE and banking sectors which broke this link and played a key role in the fundamental transformation of the economy. At the same time, they played a key role in implementing the macroeconomic stabilization program by cutting off inflationary bad lending from state-owned banks to state-owned enterprises, which had also caused a steep decline in GDP. FESAL II also supported reforms in the energy sector, essential to the transformation of the economy because of Bulgaria's extremely high energy intensity and inefficiency. The IMF's EFF played an important role not only in stabilization but also in supporting implementation of structural reforms with its detailed conditionality and overlap with the FESALs. Under these projects, 32 percent of the assets of state-owned enterprises were privatized (so that 50 percent of SOE assets have been privatized by the end of FESAL II, representing 80 percent of the assets of SOEs other than public utilities), as were 5 large state-owned banks. Remaining SOEs were constrained from obtaining bad loans, and pricing and other reforms were introduced to improve their financial condition with a view towards moving to privatization in the future. The energy sector is now guided by a new regulatory agency and has been restructured to facilitate privatization of transmission and other facilities in the near future. Central bank supervision was strengthened. Impressive as these achievements are, FESAL II in particular would have had an even greater impact had there been less reliance on Management-Employee Buyouts (almost 1/3 of privatizations involved MEBOs) and if fewer privatization agreements contained constraints on post-privatization investment and employment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 2 arrangements (which were incorporated in 90 percent of such agreements). The FESAL I and II reforms could have been even more advantageously leveraged had the Bank been able to assist Bulgaria with Governance and related reforms which could have further facilitated the adoption of efficient market- based modalities by the newly privatized enterprises and banks. The PPAR rates the outcome of the Rehabilitation Loan as unsatisfactory, but rates the outcome of the CIRL and FESAL I as satisfactory. The outcome of FESAL II is rated as moderately satisfactory. These are all in accord with the ratings of the Evaluation Summaries. The PPAR rates sustainability of the Rehabilitation Loan as highly unlikely, compared to the Evaluation Summary rating of unlikely. The sustainability of the CIRL, FESAL I, and FESAL II is rated as likely. Institutional Development Impact of the Rehabilitation Loan is rated negligible, of CIRL, modest, of FESAL I, substantial, and of FESAL II, as modest, in accord with the Evaluation Summaries. Five OED lessons were confirmed by the experience of these projects. First, the difference that ownership and commitment to the program makes is dramatically demonstrated by the contrast between the unsuccessful Rehabilitation Loan, which was pursued in the absence of any realistic indication of government commitment, and the CIRL and FESAL I and II which were pursued in support of a fully credible government reform program. Proceeding with lending operations in circumstances such as those surrounding the Rehabilitation Loan does not benefit the country nor further Bank assistance objectives. Second, the Bank needs to pursue complementary reforms in a realistic and timely fashion. The absence of agreed programs covering a range of aspects such as governance and judicial reforms has circumscribed the achievements of the FESALs and limited the benefits they provided to the economy. Third, the Bank needs to pay close attention to the form of privatization and any constraints which may be imposed on privatized enterprises. It should seek to avoid a prevalence of MEBOs and post- privatization constraints on investment and employment which limit the benefits of privatization. Fourth, the Bank needs to pay attention to management continuity. Although FESAL I was successfully implemented, the fact that it had five task managers inevitably caused a loss of momentum in the reform effort and a loss of some credibility to the Bank. Finally, partnerships can play valuable roles, as in this case where the IMF's EFF helped provide an overall context and continuity for the reforms. Contents Ratings and Responsibilities ........................ ..................... i Preface...................................................... i 1. Introduction .................................................1 2 Objectives................................................3 3. Design ............................................ .......6 Quality at Entry...................................... 7 4. Implementation ............................................8 5. Outcome ................................................10 6. Institutional Development Impact..............................17 7. Sustainability ...................................... ...........18 8. What Has Happened to Growth .........................19 9. Bank Performance ................................. ........20 10. Borrower Performance............................... .......21 11. Main Findings............................................22 Tables 5.1 Long-Term Assets Privatized ......................................12 5.2 Inward Direct Investment ........................................16 8.1 Cumulative Change in GDP, 1989-2000 ..............................19 8.2 GDP Growth ..................................................20 Annexes A. Basic Data Sheets................ ....................... ......25 B. Key Indicators for Program Implementation - Action Matrix ..... .........33 Attachment 1. Letters from the Government......................................62 This report was prepared by Michael Lay (consultant). Betty Casely-Hayford and Tirsit Dinka provided administrative support.  Ratings And Responsibilities Rehabilitation Loan (Loan 4078-BUL) Performance Ratings ICR ES PPAR Outcome Unsatisfactory Unsatisfactory Unsatisfactory Sustainability Unlikely Unlikely Highly Unlikely Institutional Dev. Impact Negligible Negligible Negligible Bank Performance Satisfactory Satisfactory Unsatisfactory Borrower Performance Unsatisfactory Unsatisfactory Unsatisfactory Key Project Responsibilities At Entry At Exit Task Manager Eduardo Somensatto Eduardo Somensatto Division Chief Christiaan Poortman Christiann Poortman Department Director Kenneth Lay Kenneth Lay Critical Imports Rehabilitation Loan (Loan 4157-BUL) Performance Ratings ICR ES PPAR Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Dev. Impact Modest Modest Modest Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory Key Project Responsibilities At Entry At Exit Task Manager Neeta Sirur Neeta Sirur Division Chief Christiaan Poortman Christiaan Poortman Department Director Kenneth Lay Kenneth Lay ii Financial and Enterprise Sector Adjustment Loan I (Loan 4239-BUL) Performance Ratings ICR ES PPAR Outcome Satisfactory Satisfactory Satisfactory Sustainability Likely Likely Likely Institutional Dev. Impact Substantial Substantial Substantial Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory Key Project Responsibilities At Entry At Exit Task Manager Hans Moritz Hans Mortiz Division Chief Franco Batzella Franco Batzella Department Director Kenneth Lay Andrew Vorkink Financial and Enterprise Sector Adjustment Loan II (Loan 4521-BUL) Performance Ratings ICR ES PPAR Outcome Satisfactory Moderately Moderately Satisfactory Satisfactory Sustainability Highly Likely Likely Likely Institutional Dev. Impact Modest Modest Modest Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory Key Project Responsibilities At Entry At Exit Task Manager Albert Martinez Albert Martinez Division Chief Yasuo Izumi Yasuo Izumi Department Director Andrew Vorkink Andrew Vorkink 111 Preface This is a Performance Assessment Report (PAR) for four projects for Bulgaria. The Rehabilitation project was supported by a one-tranche adjustment loan (Loan 4078- BUL) approved by the Board of the World Bank for the total amount of US$30 million on August 1,1996 which became effective on October 11, 1996. The single tranche of the loan was fully disbursed on November 1, 1996 and the loan closed on schedule on July 31, 1997. The Critical Imports Rehabilitation Project was supported by a one-tranche adjustment loan (Loan 4157-BUL) for the total amount of US$40 million approved by the Board of the World Bank on May 8, 1997, and was made effective on August 12, 1997. It was fully disbursed on August 14, 1997, and closed on schedule on June 30, 1998. The Financial and Enterprise Sector Adjustment project was supported by a one- tranche loan (Loan 4239-BUL) for the total amount of US$100 million approved by the Board of the World Bank on October 30, 1997 and made effective on February 10, 1998, two months behind the original planned date. The loan was fully disbursed on March 3, 1998 and closed on schedule on April 30, 1998. The Financial and Enterprise Sector Adjustment Project II was supported by a one-tranche loan (Loan 4521-BUL) for the total amount of Euro 95.59 million on December 2, 1999, and became effective on December 15, 1999 on schedule. It was fully disbursed in December, 1999 and closed on schedule on March 31, 2000. This report is based on the Implementation Completion Report (ICR) by the Europe and Central Asia Regional Office of the World Bank issued on June 28, 1999, for RH, CIRL, and FESAL I, and FESAL II dated June 29, 2001, as well as the Report and Recommendation of the President of the World Bank dated July 15, 1996 for the RH, April 21, 1997 for the CIRL, October 6, 1997, for the FESAL, and November 3, 1999 for FESAL II, as well as on loan documents, project files, economic and sector work, discussions with Bank staff, and a mission to Bulgaria. The Operations Evaluation Department (OED) mission visited Bulgaria March 20 to March 30, 2001, as part of an OED country assistance evaluation, to discuss the effectiveness of the Bank's assistance with the Government of Bulgaria (GOB), various project implementation agencies, other donors, and other stakeholders. The full cooperation and assistance of all government officials visited are gratefully acknowledged. The draft PPAR was sent to the Borrower for comments. Comments received are attached as Attachment 1.  1. Introduction 1.1 OED selected these four lending operations to Bulgaria for assessment to provide an opportunity to review important aspects of Bulgaria's adjustment and reform program and to provide lessons for the Country Assistance Evaluation and for future support. The Rehabilitation Loan (RL) of US$30 million and the Critical Imports Rehabilitation Loan (CIRL) of US$40 million were quick disbursing operations to support the initial phases of the stabilization and reform program of the government. The RL was approved on August 1, 1996 and made effective on October 11, 1996, and the CIRL was approved on May 8, 1997 and made effective on August 12, 1997. The two Financial and Enterprise Sector Adjustment Loans (FESAL I and FESAL H) supported specific reforms in these sectors which were essential to both the stabilization and transformation of the economy. FESAL I was approved on October 30, 1997 and made effective on February 10, 1998. FESAL II was approved on December 2, 1999 and made effective on December 15, 1999. 1.2 Bulgaria's transformation from a socialist economy to a market economy began in 1989 under difficult circumstances. Bulgaria was more heavily dependent on Council of Mutual Economic Assistance (CMEA) markets than most other Eastern European countries, and in consequence, its markets more heavily distorted. Bulgaria's trade orientation and limited contact with market economies resulted in a population less exposed to the ideas and ways of thinking associated with markets which were so important in countries like Poland and Hungary in promoting domestic reforms. 1.3 Although many Bulgarians wanted a market economy, drawing on the same lessons which other Eastern European countries found compelling, political support for reform was fragmented. Bulgaria had traditionally seen Russia and the Soviet Union as an ally, dating back at least to Russia's key role in assisting Bulgaria in 1878 to attain independence from the 400 years of rule by the Ottoman Empire. Bulgaria was the only Eastern European country never occupied by Russian troops. This ambivalence led to a close balance between socialist and non-socialist parties which alternated in power through the 1990s, resulting in nine governments since 1989, with varying commitment to reform. 1.4 Sectoral constraints were also important, a number of which were in the energy sector. Energy prices were far below border prices, energy intensity extremely high, and 42 percent of energy was supplied by six nuclear power plants, four of which were unsafe. Bulgaria's external relations were complicated by its exceptionally high external debt, in excess of 150 percent of GDP. 1.5 As reform began in 1989/90, the economy declined. A phased liberalization was introduced in 1991. Price controls were relaxed but by no means eliminated, the exchange rate unified, subsidies reduced and fiscal reform introduced. But the reform government fell in less than a year. A new government in early 1992 tried to follow 2 through with reforms, but as wages fell and unemployment increased, that government fell, and a new government tried to press forward in December, 1992. 1.6 The Bank provided assistance to Bulgaria's reform program with a FY92 SAL. The SAL supported elimination of central planning, trade reforms such as progress towards elimination of quantitative restrictions and export taxes in the effort to expand trade with market economies, and a phased price liberalization. It also supported initial steps in reforms needed for private sector development by transforming SOEs into joint stock companies and for the banking sector by initiating a program of bank supervision at international standards. 1.7 The SAL was implemented over 3 years, with the second tranche released after a delay of 14 months. OED's assessment' rated the outcome of the SAL as satisfactory with likely sustainability and moderate institutional development impact. Despite this positive overall assessment, the audit report notes that "Implementation of the project did not go smoothly", ascribing shortfalls in the main to a changing and uncertain political environment. The audit went on to note that "there are two important areas, the SOEs and their privatization and the banking sector, where progress has been less satisfactory and which could undermine the recent stabilization progress and the potential supply response of all sectors of the economy...." However, some progress was made, including passage of a comprehensive privatization law, creation of a framework for mass privatization, and efforts by the Central Bank to improve supervision and the merger of a number of public sector banks with majority ownership assumed by a holding company. 1.8 Following the SAL, reform did not take hold in the enterprise and banking sectors. SOEs were financed to a large degree by increasing arrears and by borrowing from the state-owned banks, which in turn were refinanced by the Central Bank. In the process, assets were privatized while liabilities remained in the public sector. At the same time, the creation of a competitive banking sector got off on the wrong foot when the authorities allowed a large number of undercapitalized and ill-staffed private banks to operate. Meanwhile, the phased price liberalization fed inflationary expectations. In sum, transformation of the real sector stagnated, the money supply increased, and confidence in money eroded leading to decreased demand, all of which led to falling production and bouts of inflation. 1.9 The Bank tried to further the enterprise and banking reforms which were initiated with the SAL, and began work on identifying a FESAL with initial identification missions in 1992. But it was difficult to achieve progress, as a closely divided public resisted change. In response to concern over fiscal deficits which had averaged 15 percent of GDP from 1991-93, a new restrictive budget was formulated. However, without supporting monetary and other policies, excess demand spilled over into the balance of payments and the economy was financed by an increasing current account deficit, which in turn led to a foreign exchange crisis. 1 Report No. 16396, March 21, 1997. 3 1.10 The Bank also tried to assist Bulgaria's development with a number of investment projects, most of which were not successful, partly as a result of recurring macroeconomic and fiscal problems. The Bank did assist Bulgaria to address its external debt and foreign exchange crises as it supported Bulgaria in a commercial bank debt and debt service agreement in 1994 and a loan for US$125 million. About US$8.1 billion of commercial debt was restructured and commercial debt was reduced by about US$2.5 billion to US$6.5 billion. However, in the absence of a sustained reform program, Bulgaria could not capitalize on the achievements of the DDSR at the time. 1.11 A number of aspects of sectoral reform also languished, including those to address issues in the important energy sector. Improving performance in this sector was a SAL I objective, but conditionalities relating to energy prices and social safety net provisions were inappropriately specified and did not yield the desired adjustment, as they were formulated in the absence of sufficient analytical work. For example, energy prices did not reach even the intermediate goal of cost recovery and still less the long- term goal of long-run marginal cost pricing even though they were continually raised. 2. Objectives 2.1 As a result of all of these macroeconomic and sectoral shortfalls, confidence in the government evaporated, and the economy continued to deteriorate. The crisis which emerged in 1995 motivated Bulgarians to take reforms more seriously. But the road was by no means easy, and further setbacks remained in store. Nevertheless, efforts to reform the economy began in 1996 and led to the first of the four operations comprising this audit, all of which had a common theme of supporting the transformation of the economy by supporting financial sector and enterprise reforms where the SAL had left off. 2.2 Rehabilitation Loan. An emergency program of measures was launched in mid - 1996 to stabilize the economy and accelerate banking and enterprise reforms. The government's program included closure of two banks, placing an additional three in conservatorship, and introduction of an explicit partial deposit scheme.2 A bank restructuring program was introduced to (i) provide limited capitalization of the banks; (ii) restrict unsecured financing by the Bulgarian National Bank (BNB); (iii) provide arrangements to improve capital adequacy; and (iv) improve supervision and accounting practices. Enterprise reforms included (i) closure of some of the largest loss making enterprises; (ii) restructuring of potentially viable strategic enterprises; (iii) acceleration of privatization; and (iv) assistance for redeployment of redundant workers to alternative productive employment. 2.3 The Bank, the IMF, and other development partners assisted Bulgaria in these efforts. The Bank approved the RL to provide rapid financial support, and the loan helped finance some of the immediate costs of the reforms, the most important of which 2 However, the partial nature of the deposit scheme heightened the public's concern about the safety of deposits and so did not really address the issue. 4 was the fiscal burden of assisting workers being displaced in the enterprise restructuring and liquidation programs. The RL had not been proposed in the CAS date March 15, 1996, which instead had two scenarios, a full adjustment scenario and a non-reform scenario. The RL was developed quickly as the most support the Bank could offer to what was seen as an incomplete reform program. The IMF approved a new Stand-By Arrangement (SBA) in July, 1996. 2.4 In the event, the government's program failed as the emergency measures proved short-lived, and more fundamental enterprise reform measures were only partially and hesitantly implemented. Policy slippages prevented completion of the first review of the IMF's SBA, and no funds were withdrawn after those provided at the time of Board approval. This, in turn, further reduced confidence in the government's program. 2.5 The lack of sustained reform and resulting economic problems finally led to a full-blown economic crisis in 1996 in which real wages fell by 30 percent accompanied by shortages of bread, medicine, energy, and agricultural inputs. Additional hardships resulted from inappropriate use of price policy for wheat which exacerbated shortages. The population's hardships and discontent led to the resignation of the government and the dissolution of Parliament. An interim government came to power in February 1997 and was granted broad powers to address the crisis and to negotiate with the IFIs. 2.6 Critical Imports Rehabilitation Loan. The interim government responded quickly to the crisis. It addressed wheat shortages by liberalizing the wholesale price and arranging for emergency imports, and worked to alleviate shortages in energy and agriculture. The government also set the stage for more fundamental reforms on the basis of a new program designed with assistance from the World Bank and IMF. The program was based on macroeconomic stabilization, a renewed emphasis on quick and transparent privatization, liberalization of trade, rapid reduction of SOE losses, a reduced fiscal deficit with a restructured the budget and a smaller public sector, improved incentives for business and investment, rapid completion of the farm restitution program, improved targeting of the social safety net, and improved governance by a reduction in corruption. 2.7 These initial steps to address the economic crisis aided in generating substantial public sentiment supporting the transformation of the economy, and a reform government was elected in April 1997 with an absolute majority in Parliament and a commitment to implement an accelerated transformation. Building on the Interim Government's program, the new government determined that stabilization would underpin the transformation, and accepted the IMF's recommendation to institute a Currency Board Arrangement (CBA) as the key to stabilization. The hyperinflation of the previous months had finally eliminated the monetary overhang, completing the job that 7 years of phased price liberalization (albeit in the context of excessive lending by the BNB) had left undone. The CBA would keep inflation low by requiring 100 percent backing of the lev with foreign exchange reserves, thereby also ensuring full convertibility. Inflation dropped to one percent per month by the end of 1997, real wages recovered by 25 percent during the year, and foreign exchange reserves increased sharply to US $2.5 billion. 5 2.8 To provide support for the program, the IMF approved an SBA in April, 1997 and the Bank followed with the CIRL in May, 1997. The CIRL was essentially based on the program that the Bank had worked on since 1992 as a basis for a FESAL, which, in broad terms, encompassed isolating, liquidating, and privatizing SOEs and privatizing most of the large publicly-owned banks. Because the government was not yet ready to credibly commit to implementing an adjustment operation, the Bank developed the CIRL as a rehabilitation loan with less stringent conditionality. (Like the RH, the CIRL had also not been programmed in the 1996 CAS.) The CIRL was in effect funded by reallocating US$40 million of the US$140 million that the Bank had allocated for the FESAL, leaving US$100 million for the time when a FESAL (as a full adjustment loan) could be developed. 2.9 FESAL I. Building on the stabilization and transformation measures supported by the CIRL, the government followed with additional implementation of the adjustment program, building credibility which enabled the Bank to support the program with FESAL I, approved on October 30, 1997. The loan did not become effective until February, 1998, largely due to delays in the formalities of government loan processing. The key features of the reform program supported by FESAL I were isolation/liquidation of 64 large loss-making SOEs, privatization of small, medium, and large SOEs through a variety of programs,3 imposition of loss reduction and financial discipline measures on other SOEs, and privatization of public sector banks and the development of a sound banking system. 2.10 FESAL II was programmed in the April, 1998, CAS and was approved and made effective in December, 1999, to support further progress in these same areas, namely sale or initiation of liquidation or insolvency proceedings of SOEs, including those under the purview of the privatization agency and the line ministries, cessation of operations of SOEs under liquidation, sale of 6 large publicly-owned banks, and, additional to FESAL I sectoral coverage, reforms in the structure of the energy sector to be based on a new energy law. FESAL II was appraised and implemented in very close coordination with the IMF's EFF. By the time the Bank appraised FESAL II, however, a number of issues were identified which needed to be addressed in order for Bulgaria to pursue more vigorously private sector development, such as public sector management, government regulations, judicial reform, bankruptcy, collateral, the form of SOE privatizations, etc. These issues are addressed more fully below. The conditionalities in both the EFF and FESAL II were similar and covered all important issues including rationalizing energy prices and subsidies while providing a safety net for vulnerable groups; and creating an enabling institutional framework for restructuring and privatizing energy institutions. 3 Privatization was pursued on three levels. The largest loss-making SOEs were handled by the Privatization Agency (individually under PATA (privatization agents financed by donors), or in Pools by agents, or separately by the PA without assistance). Branch Ministries handled the privatizations of those enterprises which they managed. Finally, small-scale enterprises were privatized through a mass privatization program (CMP). 6 3. Design 3.1 All four of these operations were limited to one tranche to avoid the uneven implementation experience of the two-tranche SAL. In fact, FESAL I had originally been designed as a two tranche operation but was redesigned in response to the implementation problems of SAL and the inability of successive governments to implement reforms as had been agreed. This redesign corresponded to the reallocation of US$40 million for the CIRL. Detailed implementation programs were specified for both FESAL I and II. 3.2 Concerning FESAL I, the objective was to pursue further progress in the same areas addressed by CIRL. (A complete set of the CIRL's conditions and their status is given in annex 5-B.) In addition to supporting the macroeconomic framework, a number of actions were pursued to accelerate privatization, including: (a) further privatization, building on the 17.8 percent of total SOE long-term assets privatized by Board presentation, with the objective of supporting privatization of SOEs accounting for at least an additional 23 percent of SOE long term assets; (b) appointing privatization agents for an additional 27 SOEs in addition to privatization agents previously appointed for 3 large SOEs; (c) concerning the liquidation program, 59 of 64 SOEs slated for liquidation were either privatized or closed, with the objective of implementing legislative and regulatory measures to streamline and accelerate the process of bankruptcy and liquidation; (d) concerning the isolation program for non utilities which prevented these SOEs from borrowing from banks, financial recovery plans of all 41 SOES in this group (group B) were approved by Board presentation, with the objective of insuring that all such SOEs exit the isolation program; and (e) concerning the isolation program for utilities (group A) which also prevented these SOEs from borrowing from banks, measures taken by Board presentation to improve finances included raising tariffs for electricity, railways, telecommunications, district heating, natural gas, and lignite, with the objective of implementing costs reduction measures proposed in the financial recovery plans. A new banking law was introduced by Board presentation, and further objectives during implementation included enacting a new Deposit Insurance Law and establishing a sound deposit scheme. Banking supervision was improved and steps taken towards privatizing the 6 public sector banks (all of them except for the state savings bank). The Collateral Law was to be amended and a registry of collateral was to be introduced. A complete set of conditions and their status is given in Annex B. 3.3 FESAL II continued with further progress on essentially the same agenda, with the addition of restructuring the electricity sector. Conditionality concerning SOEs included the sale or initiation of liquidation or insolvency proceedings equivalent to at least 80 percent of the long term assets of the SOEs in the Privatization Advisors and Transactions Agents program, and sale or initiation or insolvency proceedings of SOEs equivalent to at least 30 percent of the long term assets of SOEs in the pool privatization program. Banking sector conditionality included completing the privatization of one publicly-owned bank and steps towards the privatization of four others. 3.4 Conditionality concerning the energy sector included: (a) passage of a Law on Energy and Energy Efficiency to provide for a competitive energy market and private 7 investment; (b) rationalization of policy, regulatory and process functions under three new bodies: State Agency of Energy and Energy Resources (SAEER); State Energy Regulatory Commission (SERC, and appointment of its commissioners); and State Energy Efficiency Agency (SEEA); (c) stabilization of the financial condition of Bulgargaz' (the gas import and distribution company) and separation of its supply, transmission, storage and distribution functions from an accounting point of view; (d) separation of loss-making coal mines and pits from profitable sections in preparation for privatization; (e) adoption of an Action Plan to commercialize potentially viable District Heating (DH) companies (phasing out producer subsidies over the next 4-5 years); (f) closing of nonviable DH companies, and increasing the role of municipalities in their governance; and (g) unbundling of the vertically integrated NEK into independent generation, transmission and distribution companies. A complete set of conditions and their status is given in Annex B. 3.5 The programs dovetailed very closely with the IMF's SBA and EFF. The SBA of April, 1997, contained as a review condition "adequate progress under FESAL (to ensure adequate financing of the program)". FESAL I conditions were repeated explicitly in the EFF and even amplified (so that the EFF included more detailed implementation guidelines than did FESAL I, such as removing preferences for Management Employee Buyouts (MEBOs) in the privatization process). The detailed specification of conditions was useful in supporting implementation, and, given Bulgaria's past problems in implementing reforms, was desirable. 3.6 While privatization processes could have been specified more precisely to avoid these problems, the overall scope of FESAL II was reasonable. However, the Bank recognized that a number of government reforms were necessary to promote private sector development. The expectation by the Bank when FESAL II was being formulated was that a number of these issues would be addressed in a parallel Government Modernization Loan. When this loan did not materialize (see section 5), an important component of the Bank's country assistance strategy could not be addressed, and the reforms needed in governance, judicial sector reform, and the like could not be pursued as had been expected. This reduced the relevance and efficacy of the Bank's assistance strategy and FESAL II, but such shortfalls should not be attributed to FESAL II. Quality at Entry 3.7 The Rehabilitation Loan is rated unsatisfactory for Quality at Entry because it lacked an adequate assessment of risk. A range of sustainability considerations were inadequately addressed, including resilience of design to shocks and provision of measures to minimize risks. The Bank proceeded with the loan despite the lack of readiness for implementation of the program. There was no strong "champion" agency for this kind of program, and a lack of political support for the reform measures which Bulgaria needed. Two fundamental flaws were the undiminished SOE/banking linkages and the lack of essential and credible central bank reforms, both of which should have signaled the likely failure of the program. The Bank was placed in the position of acceding to supporting the IMF, but the support provided by the Rehabilitation Loan did not benefit Bulgaria's reform. 8 3.8 CIRL, by contrast, was implemented with greater attention to risk and sustainability, as the Bank awaited more favorable conditions before proceeding. There was strong government ownership of the underlying program, which, based on a CBA, curtailed lenient lending to SOEs and severed SOE/banking linkages which had undermined previous reform efforts. The CIRL ranks high in readiness for implementation, including having a credible "champion" agency with firm support by a Deputy Prime Minister. The CIRL was also well grounded in ESW, was consistent (more than consistent, it was a centerpiece) with the Bank's country strategy. It rates a satisfactory rating for quality at entry. 3.9 FESAL I and II are both rated as having satisfactory quality at entry. Readiness for implementation, technical aspects, economic aspects, government ownership, development objectives, grounding in ESW, consistency with CAS and country strategy, all merit ratings of substantial to high. Partly offsetting these strengths were some weaknesses in institutional capacity analysis and some shortfalls on output and, especially, impact indicators (see below). FESAL I was rated by QAG as having satisfactory quality at entry. FESAL II was not rated by QAG at entry. However, FESAL II would have been a stronger project had it more clearly specified the details of the privatization process. In particular, it would have been useful to more firmly ensure that privatization processes brought in new management and ownership, rather than relying on buyouts by management and employees to any great extent. Another such issue relates to the post-privatization constraints placed on enterprises concerning employment and investment A third issue is the length of time it has taken to resolve bankruptcy and liquidation issues. These issues are discussed in more detail below. 4. Implementation 4.1 Rehabilitation Loan. Implementation was successful only in the narrow sense of helping offset the fiscal cost of severance payments for workers affected by SOE restructuring. The objectives of the loan, however, were much broader, including to support stabilization measures and lay the groundwork for the structural adjustment program. The stabilization effort collapsed, with the fiscal deficit increasing from 6.3 percent of GDP in 1995 to 12.6 percent in 1996, and the rate of change of the CPI increasing from 33 percent in 1995 to 311 percent in 1996 and 579 percent in 1997. Implementation of the structural adjustment program lagged badly. Although state enterprise reforms included filing court bankruptcy petitions for 40 of the 64 enterprises identified for closure, these were not effective in putting these enterprises out of business as bureaucratic and legal procedures tied up proceedings. In the banking sector, 2 banks were closed and 5 banks were placed in conservatorship, and higher capital adequacy ratios were introduced, but the core problem of excessive central bank refinancing was not addressed. 4.2 Critical Imports Rehabilitation Loan. Widespread public discontent over the hyperinflation and shortages resulting from the collapse of the program ineffectively supported by the Rehabilitation Loan had the salutary affect of mobilizing public support 9 for a new program. As this support gathered momentum, the new program introduced in mid 1997 had substantial public support. The CBA functioned as prescribed, and forced Bulgaria to follow a conservative monetary policy limiting money creation to changes in reserves. The fiscal deficit was reduced from 12.6 percent of GDP to 2.5 percent by strengthening revenue collection, raising the VAT threshold, and increasing penalties and interest on overdue tax liabilities. 4.3 As supported by the CIRL, and the SBA, the enterprise reform program was accelerated, including: (a) privatization, with 5 percent of state owned assets privatized through cash based programs and another 18 percent through voucher based programs; (b) liquidation, towards the objective of reducing upfront 28 percent of SOE sector losses in 1995 with the closing of 30 and privatization of 11 out of original list of 64 problem SOEs to be addressed; and (c) isolation, with the objective of reducing upfront 50 percent of SOE sector losses in 1995, isolated SOEs from the banking system and increased administered prices for water, coal, heating for industries, electricity, natural gas, and telecommunications to cover costs. A number of banking sector reforms complemented BNB reforms supported by the IMF, including placing 15 banks in conservatorship and filing for bankruptcy against these banks, and signing MOUs with 18 other banks which outlined targets for loan recovery and cost cutting measures. In agriculture, the sales price of wheat by state entities was increased to maintain a price of at least 85 percent of international prices CIF Sofia. A number of social sector reforms were pursued to raise and better target social assistance to children, and to augment temporary resources for social care institutions via a supplement from the EU. 4.4 FESAL I implementation was satisfactory. By mid-1999, about 35 percent of total SOE long-term assets had been privatized. International privatization agents for 31 selected SOEs were appointed by March 30, 1998. To further the liquidation program, SOEs accounting for at least 32 percent of losses in 1995 were effectively closed or privatized. Tariffs were increased for railways, electricity, telecommunications, and district heating, though further improvements were required. A number of banking sector reforms were supported by FESAL I (see paragraph 3.2 for a more complete listing); most notably, steps were taken towards privatizing the 6 public sector banks (all except for the state savings bank), although this progress was slower than expected. The Collateral Law was to be amended and a registry of collateral was to be introduced. 4.5 FESAL II continued with further progress on essentially the same agenda, with the addition of restructuring the electricity sector. By the end of 2000, 90 percent of the non-energy and non-infrastructure assets had been divested. However, MEBOs and post- privatization agreements constraining employment and investment decisions were prevalent. These and related issues are discussed in more detail in Section 5 below. Financial discipline was imposed on the remaining SOE sector through the isolation program. All 48 SOEs in the isolation program including the steel mill and the airline had exited: 32 were privatized, 13 were liquidated, and 3 were placed under bankruptcy proceedings. Reforming the banking sector proceeded apace as 5 out of 6 state-owned banks slated for privatization were privatized. Upgrading of banking supervision continued and the Banking Supervision Department began adopting the CAMELS bank rating system. The energy sector was substantially restructured as discussed under 10 Outcomes (section 5, below). This required considerable effort and expertise on the part of the Bank, and the IMF, as government was not united in its will to proceed with this reform. 4.6 The IMF's EFF of 1998 followed FESAL I but preceded FESAL II, and in any event incorporated many of the conditions found in both FESAL I and FESAL II. Because the Fund drew heavily on Bank expertise in designing and implementing the EFF, this overlap was quite beneficial. The government found it desirable to work in this way because the IMF's EFF brought with it large disbursements based on quarterly reviews, so that stepwise progress could be monitored and tied to disbursements. The IMF also had a strong centrally directed team which addressed a variety of issues at once with government counterparts, so that the key counterpart, a deputy prime minister, could quickly resolve any problems which arose in the course of implementation 4.7 The generally successful implementation of the CIRL and FESALs I and 11 was based on careful and detailed project preparation work with the government. The agenda of reforms supported by these operations had been a high priority for the Bank since the SAL, and a number of missions and related work by the Bank had carefully laid the groundwork for these operations. The operations also benefited from close collaboration with the IMF, and the umbrella of the IMF's SBA and EFF. The 1997 SBA provided the groundwork for the CIRL and helped preparation of FESAL I, while the EFF incorporated many conditions of both FESAL I and FESAL II. With its large financial impact and intensive quarterly implementation meetings with Bulgarians, backed in turn by the active participation of the IMF's top management, the IMF provided a great deal of the fabric within which reforms supported by these loans were actually implemented. 5. Outcome 5.1 The outcome of the Rehabilitation Loan was unsatisfactory because the government was not committed to the reforms it supported and did not proceed with SOE privatization, isolation, or liquidation, nor with adequate banking sector reform. The reforms supported by the Rehabilitation Loan were not implemented, and the program itself stalled. The only aspect of outcome which was satisfactory was the loan's rapid disbursement and the use of counterpart funds for packages for employees affected by enterprise sector restructuring which did take place. 5.2 The CIRL is rated as having a satisfactory outcome. The reforms that it supported were fully relevant, supporting the macroeconomic program driven by the Fund, and focusing on complementing the introduction of the CBA by privatizing, isolating, and/or liquidating the SOEs, thereby starting to follow through on the agenda first implemented with the SAL. In the banking sector, the CIRL helped to set the framework for privatizing publicly owned banks. Although the CIRL was clearly a supporting component of the IMF led program, it was highly efficient in that a relatively small amount of funding brought Bank support for the nascent reform program. 11 5.3 FESAL I achieved a satisfactory outcome, as almost all of its objectives were met, in terms of carrying forward the enterprise and banking reform previously outlined under the CIRL. Under FESAL I, the privatization framework was firmed up, and the government appointed privatization agents for several of the largest SOEs accounting for 10 percent of long-term SOE assets. It also set in train the privatization program for smaller SOEs accounting for 15 percent of long-term assets. To impose financial discipline in the SOE sector as privatization proceeded, 64 SOEs were placed under bankruptcy and liquidation procedures and another 71 SOEs were placed in isolation to shut down their access to the banking sector. Two banks were privatized and the process for privatizing another three was implemented. One shortfall in implementation concerned a future policy action to amend the Collateral Law and establish a registry of collateral which was a component of " the indicative plan for the next sixth months". Despite the implementation of this conditionality in the Fall of 2000, a number of bankers reported to OED in the Spring of 2001 that they still have no confidence in the collateral system and that this is an impediment to expanding banking activity, and is one of the reasons why bank credit to the private sector is still so low. While other examples of shortcomings are given below, FESAL I's substantial efficacy is clear in that it established the enterprise/banking sector reform agenda. It was also clearly efficient in so doing. 5.4 Privatization of the SOEs and state-owned banks was essential for several reasons. First, it broke the link which had caused the quasi-fiscal deficit and the money supply to increase so rapidly. Second, it set the stage for private sector development and continued growth. The paragraphs below detail some the achievements of FESAL II, following which is a discussion of some shortcomings of the reforms supported by FESAL II. 5.5 The key reform of SOE privatization was vigorously pursued, and 78 percent of all non-infrastructure assets had been divested by the end of 2000.4 (Divestiture of infrastructure assets is proposed to be a focus for a subsequent adjustment operation.) Taking infrastructure and non-infrastructure together, 51 percent of all assets have been divested. Tracking this successful outcome in terms of the conditionality of FESAL II, it is useful to refer to the three levels on which privatization was pursued. The largest loss- making SOEs, handled by the Privatization Agency individually under PATA (see paragraph 3.3), accounted for 51 percent of the value of sales. Branch Ministries handled the privatizations of those enterprises which they managed, and these accounted for 20 percent of the value of sales.5 Finally, small-scale enterprises were privatized through a mass privatization program (CMP) which accounted for 29 percent of the value of sales. 4 As quoted in IMF Fifth Review of EFF, March 9, 2001. This procedure created a conflict of interest, since Branch Ministries lacked incentive to privatize enterprises within their purview, which probably resulted in slower progress than could have been achieved in other circumstances. 12 More than 50 percent of the value of sales occurred from 1998 to 2000. Finally, residual shareS6 in most nonstrategic enterprises were sold or otherwise disposed of. Table 5.1: Long-Term Assets Privatized (billion leva at end 1995 valuation) 1993 1994 1995 1996 1997 1998 1999 2000 Total Total 2 9 6 24 107 26 98 26 298 PA 2 9 3 20 14 10 81 13 152 Line Ministries 0 1 3 3 8 16 17 12 61 CMP 0 0 0 0 85 0 0 0 85 5.6 Banking reforms specified under FESAL I and II have proceeded on target. All six of the state-owned banks targeted for divestiture have been sold to private banks. Supervision has been strengthened. In October, 2000, parliament approved amendments to the Commercial Code designed to simplify and accelerate bankruptcy procedures. Judges have been trained to some extent in bankruptcy procedures. A central credit registry accessible to all banks was made fully operational in March, 2001. These last items were specified in FESAL I as future reforms. A modem bankruptcy law was submitted to parliament in September, 2000, and passed a first reading in November. 5.7 Energy was the one important sector added in FESAL II. Reforms in this sector were built on pre-1997 achievements in the power sector (under the Energy Project) including laying initial control and information systems to enable the "unbundling" of NEK (National Electricity Company). FESAL II achievements in the energy sector include: (a) the Energy and Energy Efficiency Act was passed in 1999 providing for a competitive energy market and private investment; (b) the State Agency of Energy and Energy Resources (SAEER); State Energy Regulatory Commission (SERC); and State Energy Efficiency Agency (SEEA) were established; (c) the vertically integrated NEK was unbundled into independent generation, transmission and distribution companies; (d) the financial condition of Bulgargaz' was stabilized and its supply, transmission, storage and distribution functions were separated in terms of their accounts; (e) loss-making coal mines and pits were separated from profitable sections in preparation for privatization; and (f) an Action Plan was adopted to commercialize potentially viable District Heating (DH) companies (phasing out producer subsidies over the next 4-5 years), close down nonviable DH companies, and increase the role of municipalities in their governance. 5.8 The reforms, especially the privatization of SOEs and banks, achieved (in support of the CBA) a full break in the cycle of financing which has generated rapid growth of the money supply and inflation. Thus, from the macroeconomic/quasi-fiscal deficit/money supply perspective, the privatization component of FESAL II was fully relevant. 5.9 FESAL II did not explicitly address a number of emerging constraints to private sector development, such as judicial sector reform, which were clearly apparent at the time of appraisal. However, these were to be addressed in a separate Government 6 Enterprises were considered divested if government held less than 1/3 of the outstanding shares, so that the government could not block actions of the majority owners. Residual sales refers to the sale of government held assets of privatized enterprises. 13 7 Modernization investment loan, which, in the event, did not materialize despite a substantial amount of background work on judicial reform and other issues. With the failure of the Government Modernization operation to materialize (it had been proposed in the FY98 CAS as the US$20 million investment operation), important issues essential for successful private sector development were not addressed. However, this is more of an issue of country assistance strategy than an issue for FESAL I per se. 5.10 The efficacy of the SOE/bank privatization component of FESAL II for private sector development is more difficult to rate. The paragraphs below look at some drawbacks to the privatization process within the scope of FESAL II, and ask whether the reforms they supported comprised a fully satisfactory package designed to have a reasonably positive impact on the economy. 5.11 The implementation of the privatization program has led to an outcome which now limits more vigorous private sector development in three important ways: * Management and Employee Buyouts (MEBOs) were favored for a range of purchases, yet are not as likely as other privatization modes to bring injections of management and capital to restructure SOEs. MEBOs accounted for 119 of the large enterprises (and 23 percent of total assets) privatized, whereas sales to local investors comprised 86 deals for 26 percent of total assets, and 64 deals involving 42 percent of total assets involved foreign strategic investors. Another 7 percent of total assets were privatized through consortia of foreign investors and MEBOs, with 2 percent accounted for by consortia of local investors and MEBOs. FESAL II conditionality did not specifically address the MEBO issue (although the Task Manager did work with the government to reduce the preferences in favor of MEBOs). This despite the fact that the EFF had specific conditionality which, had it been more effectively implemented, would have severely curtailed MEBOs. The "Review of Privatization of Large Enterprises" (funded by WB PHRD Grant Privatization) found that nearly all MEBOs have retained their whole management team after privatization, which portends slow adjustment in the future. While MEBOs enabled the privatization process to occur more rapidly, and, were therefore a plus in terms of stabilization and reducing the capacity of the SOE sector to destabilize the economy, the Bulgarian economy will bear the burden of MEBOs in terms of slower growth and less efficient production for some time to come. * Ninety percent of PA deals included investment commitments and employment arrangements. This will further slow the restructuring and adjustment needed by many of the enterprises. * Despite the care taken by authorities to promote transparent sales, reports of a scandal late in 2000 led to a new director and management structure for the PA, and other reforms, so that auctions and tenders will now be more widely used and privatization 7 The decision to pursue this high priority agenda in the context of an investment loan rather than an adjustment operation is questionable in view of the well-known government reticence to borrow for investment from the Bank. 14 intermediaries will not be used as widely, despite the fact that privatization intermediaries are more likely to bring in substantial investments, including FDI. 5.12 Aside from these very specific aspects of the privatization process which limit the efficacy of FESAL II, there are a number of broader issues concerning governance and the environment for private sector development which have not yet been adequately addressed. These limit the relevance and efficacy of FESAL II, but are country assistance strategy issues rather than FESAL II issues per se. * Major additional efforts are needed to improve governance in Bulgaria according to various surveys as cited in IMF Staff Report (March, 2000). The Report cites an EBRD enterprise survey in which Bulgaria places 15th out of 20 transition economies in the impact of Law and Order on business. * There are concerns about corruption beyond those related to privatization noted above. Data cited in the IMF Staff Report of March, 2000 shows that Bulgaria ranks behind many other transition countries in this area. The 1999 Corruption Assessment Report published by Coalition 2000 highlights the inefficiency of the judicial system and stresses the need for judicial reform. 5.13 It should be noted, however, that the Bank has picked up on one of the issues which could have been addressed under the dropped Government Modernization Loan, namely, the issue of excessive business regulations. The Bank and the government have jointly pursued this issue with an extensive work program guided by the FESAL II Task Manager, even though at this juncture this is not supported by a lending operation. Substantial progress has been achieved in terms of evaluating and benchmarking existing regulations and devising a strategy for their reform. 5.14 There is also concern that banking sector reforms, while implemented according to FESAL (and IMF) conditionalities, were not fully relevant in terms of promoting private sector development, though they were clearly fully relevant to address the issue of excessive bank lending to SOEs and macroeconomic stability. Despite the privatization of 6 major state-owned banks (so that 80 of bank assets are now privately owned), the passage of a new law governing collateral and institution of a new central registry, and progress towards a new bankruptcy law, the actual behavior of the banking system has not changed as much as would have been desirable. The banks themselves have not begun to change staffing or operational procedures, nor develop new lines of business, and their outreach to the private sector is attenuated. Net foreign assets of the banking sector continue to expand much more rapidly than does lending to the private sector. These issues, outlined in the following paragraph, relate to wider issues of governance and judicial reform and the like, which need to be addressed at the level of country assistance strategy. 5.15 There are a number of reasons why the lack of attention to these issues limits the impact of FESAL II reforms on the banking sector: * The kind of judicial system needed for vigorous private sector development seems to be lacking. According to a survey among banks conducted by Koford and Tschogel 15 (1999) cited in the IMF Staff Report (March, 2000), nine out of ten respondents answered positively to the question "Do you have difficulties with court action?," and The World Bank (1999) "Bulgaria: Legal and Judicial Reform," highlights a variety of shortcomings such as understaffing, low salaries, potential corruption, insufficient training mechanisms, and overly complex legal procedures (as quoted in FIAS, 1999). Since law enforcement is weak, banks have difficulties in seizing collateral. It can often take many months before a creditor can physically assume possession of pledged property. Courts are generally overloaded, and enforcement by the executive is often slow (BIBA, Bulgarian International Business Association, 1999, White Paper). * Bulgaria ranks low in an international comparison of the prevalence of the "Rule of Law", according to a recent study cited in IMF Staff Report (March, 2000), which relates this finding to low levels of financial intermediation. This study, by Kaufmann, Kraay, and Zoido-Lobaton (1999) constructs an aggregate variable measuring the prevalence of the rule of law for 167 countries. According to this variable, Bulgaria ranks 81, below most transition economies showing higher financial intermediation. * Banks lack information about private business so that they cannot assess the situation of potential borrowers (IMF Staff Report, March 2000), and there are important asymmetries in the quality market information. * Bankruptcy and liquidation procedures remain fraught with ambiguity and uncertainty (IMFF Staff Report, March 2000). Processes can easily be delayed by debtors. The Commercial Code indicates no order of priority for payment of creditors. Bankruptcy procedures are controlled entirely by the Court, which results in slow procedures. Some of these issues are addressed by a recent amendment to the Commercial Code, but it remains to be seen how effective these will be. The Ministry of Justice maintains a list of trustees for bankruptcy cases, but training and supervision are inadequate, so that trustee practices vary widely and often lack required professionalism. * A number of technical issues need to be addressed which have the effect of raising the cost of funds to banks and increasing the spreads which market conditions warrant between deposit and lending rates. * Finally, Bulgaria introduced a new law in 1997 making it a criminal offense for a bank to lend without proper collateral. No one has been tried under this law, but it does have a somewhat chilling effect. 5.16 Looking at reform even more broadly, beyond the enterprise and financial sectors, Bulgaria rates lower than many countries of Eastern Europe, though better than many FSU countries. In an index of overall policy reform (see Transition after a Decade, Figure 2.4), Bulgaria moved from 1.0 in 1990 (where zero was an unreformed centrally planned economy) to 2.8 in 1998, where 4 represented a reformed market economy. For comparison, in 1998, Hungary was at 3.8, Poland 3.5, and Croatia, 3.0, while Bulgaria was in same group as Kyrgyz, Kazakhstan, FYR Macedonia, Georgia, Moldova, 16 Romania, and Armenia. Russia, Ukraine, Azerbaijan, Uzbekistan, Tajikistan, Belarus, and Turkmenistan were ranked significantly below Bulgaria. 5.17 A large number of these issues could have been addressed through the Government Modernization Project proposed in the FY98 CAS. However, the government declined to pursue this approach, because it preferred not to pursue investment loans, as well as for other reasons (see CAE, Bulgaria, 2001). It is not clear why the Bank chose not to suggest adjustment lending in parallel with FESAL II to begin to address these issues.8 5.18 The successful implementation of the IMF's EFF raises an additional question. With this backstopping by the IMF on the privatization agenda, the Bank had a certain degree of freedom to expand the reform in the areas complementary to privatization itself. The 1MF's EFF which preceded the FESAL H, specified many of the reforms subsequently supported by FESAL II. From this platform, the Bank could have had more flexibility to address governance, judicial reform, and related issues in a separate adjustment operation. 5.19 The question of efficacy is also related closely to the IMF's EFF. Since the IMF depended on the Bank for technical specification of the reforms and their technical implementation, FESAL II can be thought of as having substantial efficacy. But the fact remains that much of the implementation depended on the quarterly reviews held under the EFF, and it seems clear that the reforms would not have been implemented so effectively without the Fund's program. 5.20 One important benefit not highlighted by the FESAL documentation was the large FDI inflows which have benefited Bulgaria. FDI generated by the privatizations directly supported by the FESALs has reached US$200-300 million per year, which is a multiple of FESAL funding, and won't have to be repaid in contrast to the FESALs. FDI as a whole has reached US$800 million in each of 1999 and 2000, or between 4 and 5 percent of GDP. In per capita terms, Bulgaria in these years ranked ahead of all Eastern European countries besides the Czech Republic. The stock of FDI reached US$3,037 millions at the end of 2000. For comparison, Bulgaria's net foreign assets of the BNB and domestic banks at the end of 2000 was US$3,339 million. Table 5.2: Inward Direct Investment9 (in millions of US dollars) Year 1996 1997 1998 1999 2000 Privatization Purchases 36 340 214 227 366 Direct (non-privatization 73 152 290 249 389 purchases) Reinvested earnings 0 0 50 -21 58 Other changes in ownership by 0 13 -17 351 188 non-residentslo 8 An alternative strategy could have been to begin to address these issues, such as taking stock of government regulations, in FESAL II, although this could have been more problematic than a separate adjustment operation dedicated to these issues. Measured on a balance of payments basis. 17 5.21 Turning to the energy sector, a wide range of reforms have been implemented. There is, however, a very serious debate about how and whether to continue the reform and how to address the issue of providing incremental capacity. This latter is part of a broader issue concerning the overall public investment program. An adjustment loan would normally be based on an assessment of and agreement on an appropriate role for public investment at least in the sectors covered by the loan. However, the government has not yet pursued a serious public investment review to address energy needs for the future. Such a sectoral review would normally accompany adjustment lending in support of the sector. In the absence of an investment review, the government may end up spending (and borrowing) a substantial amount of money for new investment to meet needs which might be addressed much more efficiently as by enhancing existing capacity. Despite this shortcoming, however, the energy component of FESAL II is rated as relevant and satisfactory. 5.22 On the basis of this largely successful program, but with some noticeable shortcomings, particularly in the prevalence of less desirable MEBOs in privatization process, the longer than desirable time needed to dispose of cases of bankruptcy and liquidation, and the post privatization constraints of employment and investment for privatized SOEs, OED rates the outcome of FESAL II as moderately satisfactory. 6. Institutional Development Impact 6.1 Rehabilitation Loan. This loan is rated as having a negligible impact on institutional development. The reforms it supported which would have led to stabilization and private sector development were not successful and the program collapsed without achieving its objectives. 6.2 Critical Imports Rehabilitation Loan. The operation achieved modest institutional impact. It helped to move foreword the SOE reforms and banking sector reforms in a modest way, and helped with the stabilization effort although the CIRL clearly took a back seat to the IMF. 6.3 FESAL I and II. OED rates the FESAL I as having achieved substantial institutional development impact as the centerpiece of government's reform to a market economy. However, FESAL II had only a modest institutional impact. In each sector (SOEs, banking, energy), a substantial amount remains to be done before the new institutions have the desired impact on the economy. The reform of the Privatization Agency in 2000 in response to charges of corruption will mean slower progress on privatization in the future. The newly privatized banks operating in the absence of an adequate judicial and legal framework are not yet engaging vigorously in pursuing lending to the newly developing private sector. In the energy sector, the new system of pricing and regulatory arrangements remain to be tested. These are all areas in which ID objectives were met only to a limited extent and which need further development, not 1o Inter-company loans among subsidiaries and other related enterprises, IMF definition. 18 surprising given the scope of changes and the fact that the FESALs were both one tranche loans covering a fairly short space of time. 6.4 Other institutional development aspects of FESAL I were somewhat more successful and include expansion of the role of the Deposit Insurance Fund, the creation of a unit for supervising SOE liquidators, the strengthening of the Enterprise Monitoring Unit in the Ministry of Finance, and the upgrading of the Banking Supervision Department of the Bulgarian National Bank. 7. Sustainability 7.1 The Rehabilitation Loan clearly merits a sustainability rating of highly unlikely, since almost none of the reforms which were to be supported by the loan were actually implemented. 7.2 CIRL. Sustainability is rated as likely for the CIRL. The stabilization program it supported and the beginnings of the SOE and banking reforms did in fact take hold and lead to more concrete reforms which were implemented under FESAL I and FESAL II. 7.3 FESAL l and II. The issue of sustainability is more complex for FESAL I and FESAL II. The privatization and liquidation of the SOEs is very unlikely to be reversed, as is the privatization of the 6 publicly-owned banks. Therefore, from the macroeconomic stability/quasi-fiscal deficit perspective, the operations clearly merit a rating of likely sustainability. However, there are a number of complementary reforms which are needed for satisfactory private sector development, those which were to have been pursued under the Government Modernization Loan, which would have been helpful to more fully insure sustainability. In addition, the prevalence of MEBOs and the constraints imposed by post privatization employment and investment agreements could pose some risk to the sustainability of the operation. However, on balance, a rating of likely sustainability is warranted for both operations. 7.4 Concerning the energy sector reforms supported by FESAL II, it is somewhat early to judge the sustainability of the Bank's most important interventions since there are still many follow-up actions to be taken before the new institutional arrangements can deliver their mandate. To ensure that the current gains are consolidated, the process of reform needs to be pushed forward strongly. For instance, even though the enabling legal and institutional structure is mostly in place, the only element of competition envisaged in Bulgaria's electricity market in the foreseeable future is the bidding process for new capacity. The appropriate sequence and coverage of privatization needs to be pursued strongly. Another issue concerns the newly created State Agency for Energy and Energy Resources (SAEER), which is in a dominant position vis-A-vis the State Energy Regulation Commission (SERC). As things stand, SERC will have little say in tariff setting until January 2002, and may be handicapped by lack of sufficient financial independence and inability to attract well-qualified personnel. If there is undue delay in 19 making SERC more effective, there is a great danger that the new arrangement may continue to function defacto in the manner of the older institutions. 8. What Has Happened to Growth 8.1 Looking at the record, it seems apparent that the reforms reported by the FESALs have not yet had the desired impact. Of course, the reform is really only 4 years old, and many countries have required a longer time period to pursue and effectively implement a transformation. But it is also important to look at the overall record to understand Bulgaria's problems today and the issues it faces. 8.2 Bulgaria has suffered a greater decline in income than other countries in Eastern Europe, and a greater peak decline than all but one country (Table 8.1). Growth has been positive since 1998, so the GDP decline occurred before FESAL I and H were effective. However, it is worth noting that the 37 percent decline in GDP from 1989 through 1997 gave some scope for accelerated growth with the return of macroeconomic stability and the implementation of reforms. Table 8.1: Cumulative Change in GDP, 1989-2000 Country 1989-2000 Peak Decline since 198911 Albania -1 -40 Bulgaria -30 -37 Czech Republic -5 -15 Hungary 5 -18 Poland 34 -14 Romania -23 -25 Average (unweighted) -3 -25 8.3 Even though GDP growth has been solid since 1998, it has been modest, particularly in view of the precipitous declines of the previous years (Table 8.2). The record to date falls below GDP growth as projected in the 1998 CAS of 4 percent per year, and well below a growth rate needed for Bulgaria to achieve a level of development over time more consistent with its aspirations to join the EU. Even taking into account external factors such as war in neighboring countries, the sharp and sustained declines in income suffered by Bulgaria through the early and middle years of the decade would have appeared to offer an opportunity for a much stronger rebound in GDP. Further, much of the private sector growth shown in national income statistics simply reflects the privatization of assets. Thus, the somewhat disappointing overall growth rates for the economy as a whole. 11 Compares the GDP in the year of its lowest level since the beginning of the transition with the level of 1989. 20 Table 8.2: GDP Growth (percent)(at market prices) 1996 1997 1998 1999 2000 -10.1 -7.0 3.5 2.4 5.3 Source: WEO. 9. Bank Performance 9.1 Bank performance under the Rehabilitation Loan is rated as unsatisfactory, because the Bank proceeded with the operation in the absence of an adequate risk assessment and in the face of a high likelihood of failure. However, Bank performance under each of the following three loans is rated as satisfactory. It probably would have been difficult to achieve progress more quickly in the face of intermittent and sometimes limited support for the essential reforms supported by these operations. Having to work with a succession of governments from the inception of the FESAL I identification in 1992 through the Rehabilitation, Critical Imports and FESAL I and I loan by 2000 was a difficult challenge. Much of the technical work which the Bank did was of very high quality and could have formed a sound basis for much more rapid implementation of the reform program. 9.2 There was clearly room for some improvement in Bank performance beyond the project specific concerns mentioned above for the Rehabilitation Loan. Bank management changed frequently during this decade, with a total of 4 different departmental directors from 1992 to 2000. It would have been surprising if the Bank could have been a fully effective advocate for reform in the face of theses changes. 9.3 Looking beyond Bank Management to Task Management, FESAL I suffered from having 5 different task managers. This clearly created a confusing situation for counterparts which would have impinged on implementation. By contrast, FESAL II shows a marked improvement over FESAL I on this score, since there has been only one task manager and only one department director from appraisal through implementation and completion. 9.4 However, the one task manager for FESAL II has faced new challenges. The Bank's system of matrix management, whereby the Task Manager who is from a sector department needs to draw on staff from other sector departments, the COD, and various networks, has made project management quite challenging, both in terms of logistics as well as work programming priorities. Despite this, the Task Manager has opportunistically pursued tasks such as deregulation which are important in moving the agenda along as quickly as possible. 9.5 Added to this challenge has been the need to coordinate extremely closely with the IMF during this time, since the agenda of the IMF's EFF and the FESALs have overlapped so strongly. Indeed, during this time, it has sometimes been seen as more important that the technical inputs be available in Bulgaria to coincide with an IMF EFF 21 mission and its review of the EFF since the IMF has been effective in pursuing implementation of the program. 10. Borrower Performance 10.1 Borrower performance has clearly been more uneven. Concerning the Rehabilitation Loan, the government played a satisfactory role in preparation. The fact that only a very short amount of time was needed to prepare the loan (12 days) in response to the emergency financing needs of the time is remarkable, along with the completion of negotiations by fax. However, the government was not able to sustain the program supported by RH, and could not meet the objectives of the program. Therefore, borrower performance must be rated as unsatisfactory. 10.2 CIRL. Borrower performance is rated satisfactory in both preparation and implementation. However, the CIRL was a rehabilitation loan supporting the initial phases of a stabilization and reform program, so that standards for satisfactory performance are lower than they would have been for an adjustment loan. In addition, the CIRL was essentially support for an ongoing program already being supported by the IMF, and with implementation of key reform aspects of the program such as the CBA under the purview of the IMF, satisfactory borrower performance owes much to assistance from the IMF. 10.3 FESAL I. Preparation for FESAL I "formally" began in 1996, but in fact, preparation missions and discussions began in 1992/3 and extended in one form or another for some time. The origin of the CIRL was based on work done to prepare the FESAL I agenda from 1996, so that in April 1997, the CIRL could be appraised and negotiated in 10 days, which was also facilitated by basing CIRL funding on a reallocation of US$40 million from its original FESAL I allocation of US$140 million. However, in the context of sustained preparation from 1996, preparation was satisfactory. During implementation, the government addressed constraints as they became known so that even though the program to address SOEs was ambitious, government implementation has been satisfactory. It has created a Structural Reform Committee of the Council of Ministers to focus on implementation problems at the interministerial level and where necessary bring to bear the highest levels of government. Overall, borrower performance for FESAL I was satisfactory. 10.4 FESAL II as noted above basically carried forward the agenda of FESAL I, with the addition of energy sector reforms, and both preparation and implementation were satisfactory on the part of government, benefiting from the same kind of attention to implementation as did FESAL I. Government followed through on its commitments under FESAL II so that performance is rated as satisfactory. 22 11. Main Findings 11.1 To build support for reform the Bank needs to invest sufficiently in reaching broad segments of the population with lessons of development to promote a common understanding of needs of reform. A large proportion of the Bulgarian public has remained skeptical for much of this decade. The anti-reform forces may have been led by a smaller group of those who profited from a stalled reform process. But they were permitted to do so by a larger group of citizens who were not convinced of the merits of reform until the hyperinflation of 1996; some of them continue to remain skeptical. The Bank could have been more active in bringing to bear the lessons of neighboring countries and in showing that Bulgaria was only a special case in terms of its initial position and the hurdles to be cleared, and that in facing these difficult problems, the need was to move more quickly, not more slowly. 11.2 The Bank's country assistance strategy outlined in the FY98 CAS rightly identified a number of public sector management issues which are needed for private sector development. Judicial sector reform, governance issues, regulations, are all important aspects within the purview of the public sector of which the Bank needs to be aware and supportive of reforms. 11.3 In pursuing public sector reform, however, the Bank needs to be fully aware of the government's priorities and preferences. The decision to pursue Government Modernization as an investment operation (which in the event did not materialize) rather than a parallel adjustment operation appears to have delayed the reform effort by several years, so that the reforms needed to complement the reforms supported by FESAL II are slow to materialize. There was no reason why the Bank could not have supported Government Modernization with an adjustment loan which would almost certainly have been more acceptable to the government. 11.4 The Bank needs to carefully consider the implications for continuity and quality of dialogue as it rotates managers and staff. The five directors responsible for the Bank's operations in Bulgaria since the start of policy dialogue in 1990, and the four directors responsible for operations since the start of adjustment operations in 1992, appear to have been a costly rotation in terms of the Bank's credibility and continuity of message. With the messenger changing so frequently, it was difficult to get messages across with conviction, regardless of the quality of each individual dialogue. Similarly, having five task managers for FESAL I was costly to the Bank's effort to support Bulgaria's reforms. 11.5 In the case of Bulgaria, the agenda is already largely given by the goals Bulgaria needs to meet for accession to the EU. The Bank needs to work more closely with the EU to firm up this agenda and translate it into a work program. 11.6 The experience with the Rehabilitation Loan once again reinforces the lesson of not lending until a credible program is in place. In the case of Bulgaria of 1996, a corrupt central bank and the SOEs' heavy influence on the government for their own advantage should have led the Bank to withhold support even if the Fund was going ahead. 23 11.7 Partnerships need to be carefully fostered to ensure satisfactory outcomes. In the case of privatization, Bulgaria did not want to rely on Bank-financed TA and chose to utilize EU grant financing more actively. Yet, the outcome in terms of MEBOs and post- privatization employment and investment agreements is less satisfactory than it could have been. Closer work with the EU on this aspect of TA might have led to a more satisfactory result. 11.8 It is important to focus on the quality of privatization which will affect private sector development for the future. In the case of Bulgaria, the unfortunate prevalence of MEBOs will constrain private sector development, as will the post-privatization employment and investment constraints. A more vigorous approach on the part of the Bank would have been useful to limit MEBOs and employment and investment constraints which would have further facilitated private sector development in the future. s 25 Annex A Basic Data Sheet I. Rehabilitation Loan (Loan 4078-BUL) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 30 30 100 Loan amount 30 30 100 Estimated and Actual Disbursements (US$ millions) FY97 Appraisal estimate (US$m) 30 Actual (US$m) 30 Actual as % of appraisal 100% Date of final disbursement November 1, 1996 Project Dates Lending Cycle Actual Preparation 06/15/96 Appraisal 07/05/96 Negotiations 07/08/96 Board Presentation 08/01/96 Signing 08/02/96 Effectiveness 10/11/96 First Tranche Release 11/30/96 Loan Closing 07/31/97 Staff Inputs (staff weeks) Stage of Project Cycle Actual Weeks US$ (000) Appraisal 7.2 15.7 Negotiations through Board Approval 2.0 13.7 Supervision 5.4 35.8 Total 14.6 65.2 26 Mission Data Performance Rating Stage ofproject cycle Month/ No. of Days in Specializa Implem. Develop. Types of Year persons Field tion Status Objectives Problems Through Appraisal None Appraisal through Board None Supervision None Completion None Other Project Data Borrower/Executing Agency: Government of Bulgaria Operation Loan no. Amount (US$ million) Board Date Critical Imports 4157 40 05/08/1997 FESAL I 4239 100 10/30/1997 FESAL II 4521 100 12/02/1999 27 II. Critical Imports Rehabilitation Loan (Loan 4157-BUL) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 40 40 100 Loan amount 40 40 100 Cumulative Estimated and Actual Disbursements (US$ millions) FY98 Appraisal estimate (US$ m) 40 Actual (US$m) 40 Actual as % of appraisal 100% Date of final disbursement 08/14/97 Project Dates Lending Cycle Actual Appraisal 04/10/97 Negotiations 04/21/97 Board Presentation 05/08/97 Signing 07/10/97 Effectiveness 08/12/97 First Tranche Release 08/31/97 Loan Closing 06/30/98 Staff Inputs (st-aff weeks) Stage ofProject Cycle Actual Weeks US$ (000) Preparation to Appraisal 20.2 77.5 Appraisal 1.3 3.5 Negotiations through Board Approval 6.7 20.1 Supervision 5.1 129.8 Total 33.3 230.9 Mission Data Performance Rating Stage ofproject cycle Month/ No. of Days in Speciali Implem. Develop. Types of Year persons Field zation Status Objectives Problems Through Appraisal 7 Appraisal through Board 1 Supervision 2 Completion 28 Other Project Data Borrower/Executing Agency: Government of Bulgaria Operation Loan no. Amount Board date (US$ million) FESAL I 4239 100 10/30/1997 FESAL II 4521 100 12/02/1999 29 III. Financial and Enterprise Adjustment Loan I (Loan 4239-BUL) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 100 100 100 Loan amount 100 100 100 Cofinancing: 50 50 100 Cumulative Estimated and Actual Disbursements (US$ millions) FY98 Appraisal estimate (US$m) 100 Actual (US$m) 100 Actual as % of appraisal 100 Date of final disbursement 03/3/98 Project Dates Lending Cycle Actual Preparation 02/28/96 Appraisal 06/23/97 Negotiation 09/25/97 Board Presentation 10/30/97 Signing 11/14/97 Effectiveness 02/10/98 First Tranche Release 03/31/98 Loan Closing 04/30/98 Staff Inputs (staff weeks) Stage ofProject Cycle Actual FY 1997- 1999 Weeks US$ (000) Preparation to Appraisal 131.8 348.6 Appraisal 13.3 44.2 Negotiations through Board Approval 6.1 22.1 Supervision 32.3 108.8 Completion 1.7 6.4 Total 185.2* 530.1* *Note: Previous fiscal years staff weeks and financial information is not retrievable. 30 Mission Data Performance Rating Stage ofproject cycle Month! No. of Days in Speciali Implem. Develop. Types of Year persons Field zation Status Objectives Problems Through Appraisal 4/29 - 7/94 8 Appraisal through Board 10/96 1 Approval Supervision 3-4/98 2 Completion Other Project Data Borrower/Executing Agency: Government of Bulgaria Follow-on Operations Operation Loan no. Amount (US$ million) Board Date FESAL II 4521 100 12/02/1999 31 IV. Financial and Enterprise Sector Adjustment Loan II (Loan 4521- BUL) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Loan amount 100 100 100 Cumulative Estimated and Actual Disbursements (US$ millions) FY00 Appraisal estimate (US$m) 100 Actual (US$m) 100 Actual as % of appraisal 100 Date of final disbursement 12/16/99 Project Dates Lending Cycle Actual Appraisal 6/28/1999 Board Presentation 12/2/1999 Signing 12/3/1999 Effectiveness 12/10/1999 Loan Closing 3/31/2000 Staff Inputs (staff weeks) Stage of Project Cycle Actual Weeks US$ (000) Identification/Preparation 62 101 Appraisal/Negotiations 78 144 Supervision 19 15 ICR 1 5 Total 160 265 32 Mission Data Performance Rating Stage ofproject cycle Month! No. of Specialization' Implem. Developm. Year persons Status Objectives Identification/Preparation 3/98 4 2 Enterprise, Ifinance, leconomist 11/98 7 2 finance, 2 enterprise, 3 economists 4/99 4 1 enterprise, 1 finance, 2 economists Appraisal /Negotiation 6/99 4 1 enterprise, 1 finance, 2 economists 10/99 4 1 Task Manager, 1 lawyer, 1 disbursement officer, 1 loan officer Supervision 1/00 2 1 enterprise, 1 finance S S ICR 5/01 2 1 enterprise, 1 finance S S 1. Key to Performance Ratings: S= Satisfactory Other Project Data Borrower/Executing Agency: Government of Bulgaria Preceeding Operations Operation Loan no. Amount (US$ million) Board Date Rehabilitation Loan 4078 30 08/01/1996 Critical Imports 4157 40 05/08/1997 FESAL I 4239 100 10/30/1997 Key Indicators for Program Implementation Action Matrix A. REHABILITATION LOAN (P047057) OBJECTIVES MEASURES TAKEN FUTURE POLICY ACTIONS STATUS I. Macroeconomic Program A program of measures to stabilize Maintain a sustainable fiscal and Sustainable fiscal and external positions maintained the economy, arrest the decline in external positions. through 1997 and 1998. Re-establish confidence and confidence and accelerate the macroeconomic stability and process of reforms was introduced in promote economic growth and May 1996, after consultation with the private sector development. World Bank and the IMF. a) Fiscal Policy - Reduce budget deficit from Increased value added tax rate Enhance efficiency of tax system - Budget deficit increased from 6.3% of GDP in 1995 5.7% of GDP in 1995 to 3.1% from 18% to 22%. Doubled and tax and customs to 12.7% in 1996 before reducing to 2.5% in 1997. in 1997 and limit the excise taxes on wine and beer, and administrations by equalizing - Revenue collection fell in 1996 and in Ql-1997. borrowing requirements of the increased taxes on hard liquor and corporate income tax rates on all consolidated government tobacco by 50%. enterprises; reducing dividend budget. nReduced non-interest real taxes; and restricting tax expenditures in 1996 to 26.5% of preferences. GDP by limiting subsidies to -Lin-it non-interest expenditures in -Non-interest expenditures were limited to 24.9% of SOEs while allowing for 1997 to less than 28% of GDP, by GDP in 1996 and to 25.7% of GDP in 1997; increased social spending further reducing subsidies and subsidies were further reduced from 11.1% of GDP especially those associated with transfers while increasing social in 1995 to 0.8% in 1996 and 0.7% in 1997; social labor retrenchment policies expenditures, wages and expenditures were also reduced to 8.5% of GDP in maintenance and operations. 1997 from 10.8% in 1995 and 9. 1% in 1996. b) Pricing Policies - Adjust prices and tariffs in -Doubled electricity tariffs to the -Increase filrther and maintain -Further increases and adjustments of administered order to limit subsidies to equivalent of US3.3 cents/Kwh electricity tariffs at US3.5 prices to international levels continuously carried strategic enterprises and and increased fuel prices to reflect cents/Kwh. Continue to adjust out. maintain their financial international prices and exchange fuel prices on a monthly basis in viability, rate movements, line with international prices and most recent exchange rate movement. - Bdgt efci inrese fom6.3 o GP n 99 to 2.% n 196beor reucngto2.5 i 197 c) Monetary and Foreign Exchange Policies Restore confidence in the - Raised basic Central Bank - Linut growth of broad money to In late September 1996 the BNB tried domestic currency and lower interest rate to 108% (180% levels consistent with declining unsuccessfully to limit money supply growth and the rate of inflation. annualized). inflation targets in the context of restore confidence in the Lev and the banking - Restricted foreign exchange market determined floating sector by raising the base interest rate to 300 % intervention and allowed exchange rate. Use more (simple annual), putting nine ailing banks under exchange rate to depreciate by extensively open market conservatorship and providing support for viable close to 100% in the last two operations for monetary banks. Open market operations were extensively months. management. conducted but tured out insufficient to bring - Sharply lowered availability of money supply under control because of lack of refinancing to weak banks foreign financing, decline in real demand for money, induced by bank runs and lack of confidence in the Lev, and high inflationary expectations fueled by a huge budget financing gap filled by the BNB. Fixed exchange rate regime introduced in mid-1997 under a currency board arrangement (CBA), inflation reduced and confidence in the Lev and banks restored; open market operations discontinued prior to the CBA introduction; money supply growth brought in line with growth of demand for money; a limited lender of last resort facility introduced by the CBA that has not been used so far. Fgi State-Owned Enterprise Reforms and Privatization Strengthen financial discipline in SOEs and accelerate the process ofprivatization a) Liquidation Process Eliminate 25% of the losses of sFiled court bankruptcy petitions Complete bankruptcy petitions and Twenty-nine of the 64 enterprises have been state-owned enterprises by for 40 of the 64 enterprises the liquidation of the enterprises, privatized, the remainder are still under court liquidating (either through identified for closures. Trustees pursue privatization of remaining supervised bankruptcy and liquidation procedures. closure or privatization) 64 of appointed in each of the 64 assets, and assist workers in Reform of bankruptcy and liquidation framework is the worst performing SOEs. enterprises. process of retrenchment. being undertaken as part of FESAL II reforms. Laid-off workers under the liquidation program were entitled to severance pay equivalent to up to six times their average wage (COM Resolution No. 131 of 1996). Under COM Resolution No. 100 of April 1998 workers in enterprises in liquidation laid off after March 1, 1998 were entitled to a lump-sum payment of Lev 1 million. b) Isolation Process Isolate and restructure 70 - Identified key SOEs that will be - Have new legislation governing - The Isolation Program was legally established by large and potentially viable isolated through a government isolation restructuring process the "Law on Financial Rehabilitation of State- state-owned enterprises in process supervised reorganization. approved. Owned Enterprises", adopted on August 9, 1996, order to improve their - Drafted new legislation for the published in State Gazette #68/1996. profitability through process akin to bankruptcy - Finalize and implement individual - To this end, rehabilitation plans were prepared for significant downsizing, procedures. plans to downsize, eliminate non- all companies by mid 1997. Some of the plans were enforcement of financial - Sharply reduced credit to core businesses and reduce red, not of sufficiently high standard and have not been discipline, and management identified enterprises, fully implemented. accountability with a view of - Raised electricity tariffs and fuiel - Continue to adjust prices to - Electricity prices were adjusted several times. In eventual privatization or prices to improve financial maintain financial viability. 1998, the GOB reached an agreement with the IMF restoration of financial viability, on regular adjustments till the year 2001. This viability. - Established period for isolation to agreement has been complied with so far. Latest be no more than 24 hours. adjustment took place on 01/01/99. Next one is planned for 07/01/99. District heating prices do not ensure financial viability, and are being adjusted as per agreed with the IMF time schedule. Regular railway tariff increases have been implemented. - Liquidate identified SOEs that are -The Law on Financial Rehabilitation of State- not turned around or privatized Owned Enterprises was amended on December 29, within two years. 1998 to extend the isolation program till June 30, 1999. As per agreement with IMF, an exit strategy for each enterprise was developed, and the GOB is firmly committed to liquidate enterprises that have not been privatized by then. c) Privatization - Accelerate the process of Distributed vouchers to 2.8 - Expand the privatization program About 65% of total state-owned LT assets as privatization through an million citizens. to include SOEs accounting for measured at end 1995 are covered by the current expanded voucher "mass - Scheduled first auction for 50% of all SOE assets. Privatization Program. privatization" program. October 1996. - Enhance the mass privatization - By April 15, 1999 two majority stakes were offered Include 1000 companies with - Established new Stock and program by including majority for privatization under the "second" mass total capital of Lev 90 billion Securities Exchange Commission. private stake position in large privatization wave. in first wave of auctions. - Prospectuses approved for 60 enterprises. privatization funds that can own - Facilitate cash privatization by - Deferred payment schemes are available only to up to 34% of shares in any one extending a deferred payment management-employee buyers. company. scheme to all investors, selling enterprise to managers and workers on concessional terms. d) Labor Market Program - Alleviate social costs - Issued the decree governing the - Notify and pay severance to - As of 15 April 1999, 67,717 workers affected by associated with labor retrenchment program. projected 65,000 workers affected restructuring have been notified and received retrenchment under enterprise - Established national and rapid by the government program. severance pay. liquidation and isolation response teams in National - Use the unemployment and - Legislative changes with the enactment of the programs by providing support Employment Service agency to retraining fund and support from Unemployment Protection Act (1998), better to retrain and redirect laid-off deal with layoffs and provide other donors to provide labor funding and management of the unemployment and workers and extend severance retraining program. market information, employment retraining fund. No verifiable data exists as to the payments to those affected by -Established the program to and counseling, retraining, and small extent to which the workers affected by the downsizing. affect severance payments and enterprise development skills to government program used the services of the local magnitude of payments. workers dislocated by the reform unemployment offices. program. Il. Banking Sector Reform Reestablish the soundness of the Closed two banks. Adhere to programs outlined in - Memoranda of Understanding signed with all banking system through a Placed three banks in Memorandum of Understanding, recapitalized banks and with seven private banks program of closures, conservatorship. including prohibition of any new with negative capital adequacy positions in 1996; restructuring and improved asset Approved law and established lending by banks with negative five banks placed in conservatorship in May 1996, position, and to strengthen the new policies governing deposit networth. followed by another nine banks in September 1996; role ofsupervision and improve guarantees. licenses of banks in conservatorship revoked in accounting practices. 1997. Introduced limited program of Adhere to program requiring banks Higher capital adequacy requirements introduced bank recapitalization. to achieve specified capital for 1997 (8 %), 1998 (10%) and 1999 (12%) and - Restricted Central Bank adequacy positions under new met in 1997 and 1998. refinancing credits. accounting standards. - Signed Memorandum of Prohibit any bank without 4% Understanding with 18 banks to capital adequacy standard to pay be recapitalized or with negative dividends. net worth. Memoranda outline - Increase staff and training of - Intensive banking supervision department staff targets for bank operations supervisory agencies, training carried out in 1997 and 1998. including goals for loan recovery and cost cutting measures. Key Indicators for Project Implementation Action Matrix B. CRITICAL IMPORTS REHABILITATION LOAN (P050540) POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS I. Macroeconomic Program A program of measures Maintain sustainable fiscal and Sustainable fiscal and external positions Re-establish macroeconomic to stabilize the economy, arrest external positions maintained through 1997 and 1998. stability and restore economic the decline in confidence and growth. accelerate the process of reforms was agreed with the IMF in March 1997. a) Fiscal policy - Reduce Accelerate cash privatization. Budget deficit in 1997 reduced to 2.5 % of GDP budget deficit from 11% of down from 127%in 1996 and 6.3% in 1995. GDP in 1996 to 3.8% in 1997 Some progress in cash privatization achieved; - Strengthen revenue collection by Improvement of revenue collection achieved in and eliminate the need for establishing a large-taxpayers unit, 1997; a large tax-payers' unit established in Q2- central bank credit. raising VAT threshold, and increase Q4 1997; VAT raised from 18% to 22% in 1996; penalties and interest on overdue tax government penalties, fines, fees, patent and liabilities, charges expressed in the legislation in nominal terms increased in 1997 to reflect inflationaryW developments; strengthened collection of outstanding tax liabilities in 1997. - Control non-interest expenditure by Non-interest expenditures were limited to 24.9 % rationalizing programs and reducing of GDP in 1996 and to 25.7 % of GDP in 1997; public employment by 10 percent of subsidies were further reduced from 11.1 % of work force. GDP in 1995 to 0.8 % in 1996 and 0.7 % in 1997; social expenditures were also reduced to 8.5 % of GDP in 1997 from 10.8 % in 1995 and 9.1 % in 1996. Public sector employment reduced by 58,000 workers in 1997. b) Monetary & Exchange Rate Policies Restore confidence in the - Linked the determination of - Establish a currency board - Currency hoard arrangement (CBA) established domestic currency and lower basic Central Bank interest arrangement. in mid- 1997 the rate of inflation, rate to the market yields of TBills. - Eliminated unsecured POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS refinancing to weak banks. - Observed strict limits on the creation of net domestic assets. II Enterprise Reform Accelerate privatization and strengthen inancial discipline in SOEs. a) Privatization - Accelerate drastically the - Privatized 5 percent of the Privatize SOEs accounting for at - By nid-1999, about 35% of total state-owned LT privatization of SOEs to transfer state owned assets through least 40 percent of total SOE long assets were privatized. ownership, governance and cash-based programs and term assets (as of December 1995) by management responsibilities to another 18 percent through end 1997. private operators. This is the voucher based programs. overriding priority of the Offer for sale BTC. - Offers for the sale of BTC were collected by mid- program. - International privatization March, 1999. Negotiations with prospective agent appointed for the buyer(s) are underway. privatization of BTC. b) Liquidation - Reduce upfront 28 percent of - Closed 30 and privatized 11 - Close or privatize by mid- 1997 - Enterprises accounting for at least 32% of losses the SOE sector losses in 1995. out of the original list of 64 enterprises that contributed at least in 1995 have been effectively closed or SOEs. 28% of SOE losses in 1995. privatized. No information is available on the losses of enterprises beyond the list of 64 - Effective sale by end-1997 of at least - Completed. 50% of the long term assets of the closed enterprises. c) Isolation - Isolated the enterprises from - Approve and implement Financial - Rehabilitation plans were approved for all - Reduce upfront 50 percent of the banking system. Recovery Plans. companies by mid 1997. Some of the plans were the SOE sector losses in 1995. - Prepared Financial Recovery not of sufficiently high standard and have not Plans. been fully implemented. Some of the plans are - Increased administered prices being updated or redrafed. of water, coal, heating for - Privatize or liquidate all enterprises -The isolation program was extended till June 30, industries, electricity, natural which are not utilities or mines. 1999. As per agreement with IMF, an exit gas, liquid fuels, and strategy for each enterprise has been developed, telecommunications to cover and the GOB is firmly committed to liquidate costs. enterprises that have not been privatized by then. - Increased prices of household -Maintain revenues of the utilities Relative financial stability has been maintained - heating and transportation and (including budgeted subsidies) to tfrourh rice and tariff adustments (electrici POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS budgeted subsidies. cover at a minimum their operating district heating, railways) and budget subsidies and financial expenses. d) Financial Discipline - Restore financial discipline and - Require utilities to suspend service to - Utilities have adopted procedures for suspending ensure that utilities are enterprises in arrears. service to enterprises in arrears. These effectively collecting their procedures are to be further discussed in light of accounts receivable. the FESAL II agreements. III. Banking Sector Reforms Re-establish the soundness of the banking system through a program ofprivatizatlon and strengthening the role of regulation and supervision. a) Legal and regulatory framework - Strengthen the legal and Amend the Law on Banks and Credit The new Law on Banks and the Law on the BNB regulatory framework to Activity; Enact a Law on Bank passed in mid 1997; the Law on Banks and Credit facilitate privatization and Insolvency. Activities amended in May 1996 to make the promote sound banking Amend the Commercial Code, the establishment of conservatorship and bankruptcy practices. Tax Law and related laws/regulations procedures possible; it was accompanied by the to facilitate foreign investment in the establishment of a depositor protection scheme. banking sector. - Higher capital adequacy requirements introduced - Raise the requirement of capital for 1997 (8 %), 1998 (10%) and 1999 (12%) and adequacy to 12% and revise other met in 1997 and 1998. banking regulations to reflect - Banking regulations have been amended to reflect international standards. international standards. - Introduce international bank - IAS are currently under implementation;, accounting standards (AS) and - A new Deposit Insurance Law acceptable to the disclosure standards, and start Bank/IMF enacted in 1998. implementation. - Enact a new Deposit Insurance Law o_facceptable to the BankIMF. b) Banking supervision - Enhance BNB's authority and - Signed Memorandum of - Contract four residential international Residential international banking supervisors effectiveness in enforcing the Understanding with 18 banks banking supervisors and form joint contracted and joint on-site inspection teams legal and regulatory framework, which outlined targets for loan on-site inspection teams. formed in 1997-1998. recovery and cost cutting - Adopt a banking supervision program Banking supervision program acceptable to the measures. acceptable to the Bank/IMF and BankIMF adopted and currently under POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS - Placed 15 banks in initiate its implementation. implementation. conservatorship and filed for bankruptcy against these banks. c) Privatization of public sector banks (PSBs) - Improve the governance of the - Adopted a privatization Announce m international media The government's intention to privatize all PSBs PSBs by changing their strategy for BCC. the government's intention to or to enter into management contracts with ownership and/or control. - Appointed privatization privatize all PSBs or to enter into reputable banks announced in 1997-1998; an adviser to BCC. management contracts with reputable intensive search for strategic investors initiated. - Started due diligence review. banks. Initiate an intensive search for strategic investors. - Conclude by end-1997 four - Two PSBs privatized in 1997 and 1998; three transactions, of which at least two are more PSBs are currently in a process of privatizations. privatization. IVAgricultural Sector Liberalization Create a competitive market- based and export-oriented agriculture and food industry. - Increased the sale price of Eliminate the system of controls on - Price controls and price mark-ups cancelled as of wheat by state entities to $160 profit margins of agricultural and July 1, 1997 by a Decree of CoM No 269 from per ton, and maintain the price food products by end-May. 1997. at least 85% of international - Eliminate by end-May import quota - No duty free import quotas for cereals and cereal price CIF Sofia. and duties on cereals and cereal products are envisaged in the Customs Tariff for products. 1999. - Started using competitive - Eliminate all export bans by mid- - Export bans and export taxes were abolished mid- bidding procedures for the 1997 (no export tax to be 1997; the remaining export taxes on sunflower emergency government introduced), and sunflower products were cancelled by CoM purchases of wheat this spring. - Liberalize the sale prices of cereals Decree No 169, July 31, 1998 and other cereal products by mid- - Prices were liberalized by CoM Decree No 187 of 1997. August 13, 1998. As of July 1, 1999 a new Law - Remove non-tariff barriers against for Consumer Protection enters into force which import and export of fertilizers by cancels the old Law on Prices mid-1997. - Only the imports of chemicals is subject to licensing. - Abolish any direct or indirect - Abolished POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS subsidies to prices of wheat, wheat flour, bread and other cereal products by mid-1997. - Eliminate import and export - No registration and licensing are currently applied administrative constraints. according to CoM Decree No 271/98 on trade policy measures, related to exports and imports - Use open and transparent auctions for - A transparent and open procedure is applied - the sale of government-procured announcements in newspapers are published. supplies of cereals. - Submit a new law to Parliament in - Several measures were applied to facilitate land July to facilitate privatization of restitution process, all limitations on land lease state-owned land, revamp the were lifted (in terms of areas and duration of regulations for leasing, titling, and lease), decisions of the Land Commissions will occupation rights, and revise the ban have the legal power of notary deeds, foreign on foreign land ownership. legal entities registered in Bulgaria can own land. - Offer for sale all state mills and the All mills are in the process of privatization, 49 of 26 state trading companies by end- total 59 mills have been privatized covering 76 % 1997. of their assets, on average 55 % of the assets in agriculture are private by end March 1999. V Social Protection Reform Increase effectiveness, efficiency, transparency and sustainability ofesocialaprotection programs.ase),decisionsoft a) Social Assistance - Improve targeting of programs Revised benefit coefficients to - Establish a consolidated two-tier Two-tier MIGP established, based on new Social to provide adequate protection increase assistance to children MIGP (utility voucher and cash Assistance Act (1998), including energy support to vulnerable groups at in poor households supported benefit). program and consolidated benefit - both in cash. affordable cost. by the minimum income All benefits, payments and eligibility, is based on guarantee program (MIGP). an annually calculated Base Minimum Income Set up temporary utility (BMI). voucher program for poor - Set up matching fund scheme for -As of FY 1999 MIGP payments, except energy households and benefit levels MIGP. support progra, based on 5050 cost sharing raised since 3/97. between municipal and central government budgets. - Improve targeting of child A draft Family Support Law was submitted to allowances, medical support Parliament, that includes universal child benefits bprogramslandematemityassistance. and means tested birth ants and other one time POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS - Eliminate payment of untargeted benefits. Both testing and benefits are based on social assistance through insurance BMI. funds. - Provide sufficient quality of - Augmented temporary - Involve NGOs in services and - The Social Assistance Act (1998) provides for social care services. resources for social care recentralize financing for inter- licensing NGO social services. In 1999 Regional institutions via EU municipal institutions. Social Assassinate centers were created to supplement. supervise quality of services provided at municipal level and ensure adequate information flows to the central government. b) Severance Pay - Protect workers laid-off under - Introduced severance benefit - Extend program to cover budgetary - Budgetary sector employees receive severance structural reform program. scheme for laid-off SOE sector employees. benefits as per the Law on Unemployment workers. Security and Employment Incentives, adopted on December 16, 1997. c) Pensions - Increase fiscal transparency, Separated pension fund from - Establish one-month reserve fund for - One-month reserve funds has been established sustainability and targeting of budget. PAYG pension scheme. and is being maintained. the pension system. - Made legal provision for - Comply with legal provision for - Legal provisions have been complied with. transparent budget subsidy for budget subsidy to cover non- non-insurance expenses. insurance expenses. - Adopted program for - Cease financing of recreational - Financing of recreational facilities was improved payroll tax facilities, discontinued through the establishments of a administration and tracking of commercial affiliate of NSSL An action plan has individual records. been prepared and in being followed for the - Changed benefit formula to privatization of the affiliate's assets. require extended contribution - Enact new PAYG pension law to: - A comprehensive Pension Insurance Code is period for full pension. (a) eliminate most early-retirement under advanced preparation. Early drafts of the - Introduced employee categories legislation indicate compliance with the WB contribution. (b) phase in later pensionable age requirements, as defined in the Social Protection (c) introduce actuarially sound Adjustment Loan. Regulations eliminating most benefit formula early retirement categories were adopted in (d) establish targets for gradual reduction October 1998, with an implementation date of pension payroll taxes 01/01/2000. The target date for introduction of the new pension system is 01/01/2000. ( Prepare legislation for voluntary, - A draft Law on Supplementary Voluntary POLICY AREA MEASURES TAKEN FUTURE POLICY ACTIONS STATUS private pension and funded Pension Insurance has passed first reading in occupational schemes. Parliament and is awaiting second reading. d) Unemployment - Reduced unemployment fund - Further reduce payroll tax rate from - Unemployment payroll tax is reduced to 4% payroll tax from 7% to 5% 5% to 3%. (1998)., - Extend contribution period for - The contribution period for benefit eligibility has - Made adequate budgetary benefit eligibility, been extended from 6 months of employment allocation to clear arrears of within the last 12 calendar months, to 9 months of government to domestic - Change the benefit formula to reduce employment within the last 15 calendar months. pharmaceutical suppliers work disincentives. - Benefits formula has been changed to (1) take (approximately $20 million into account only the years worked. The former equivalent) and to ensure - Eliminate ineffective active labor formula included an index for age as well. adequate purchase of supplies programs and strengthenjob - Detailed analysis of the effectiveness of active in 1997 (at least $22 million information services, labor marker policies is almost complete. equivalent). Completion of the analysis and agreement on action plan is a SPAL second tranche condition. e) Supply of medicines Take all necessary administrative - Necessary steps were taken to ensure regular -Ensure adequate supplies in steps to ensure that medical supplies supply of medicines in 1997 within budgetary 4 1997 of medicines to hospitals are in fact provided to hospitals and constraints. In 1998 amendments to the and clinics. clinics. Pharmaceuticals Act were passed by Parliament and will become effective for outpatient care in January 2000. -In 1997 the unemployment payroll tax was reduced to 4.5 percent in accordance with SPAL Board presentation condition. As of 1 July the Government proposes to reduce it to 4.0 percent. Key Indicators for Program Implementation Action Matrix C. FESAL I (P049531) Objectives of Policy Measures Measures already taken Indicative plan for the next 6 Status months I. Macroeconomic Framework The main objectives of the Agreed macroeconomic framework in Maintain agreed macroeconomic The government was able to maintain the agreed Government's macroeconomic place. framework. macroeconomic framework program are to achieve stabilization and restore economic growth. II. Enterprise Sector Acceleration of Privatization SOEs, accounting for 17.8 percent of Privatize SOEs accounting for at By March 30, 1998, only an additional 5% of SOE assets Drastic acceleration of the total SOE long-term assets (as of least an additional 23 percent of were privatized. As of April 30, 1999, about 30% privatization of state-owned December 1995), have been privatized.2 total SOE long-term assets (as of (cumulative) of total state-owned LT assets were enterprises (SOEs). December 1995). privatized. However, with the expiration of the privatization contracts with privatization agents in 1999, large SOEs representing 20 percent of assets would be divested by end-1999. The SME privatization is expected to be almost complete by end-1999, representing an additional 15 percent of SOE assets. International privatization agents have Appoint international privatization By March 30, 1998, international privatization agents for been appointed to privatize three large agents for the 27 selected SOEs. 31 selected SOEs were appointed. As of April 30, 1999, SOEs already selected or to assist in there were privatization agents for about 90 SOEs. selling individual assets in cases where shares cannot be sold. A further group of 27 SOEs has been selected for privatization by such agents, including 11 SOEs from the isolation program. An international privatization agent has Implement the strategy for the sale Bids for 51% of BTC shares were received in March been appointed for the privatization of of BTC shares, designed by the 1999. Negotiations with the prospective buyer are To be counted as privatized, at least 67 percent of the shares of an enterprise must have been transferred to private owners. Objectives of Policy Measures Measures already taken Indicative plan for the next 6 Status months BTC, and a decision of the Council of privatization agent. underway. Ministers has been issued abolishing the 25 percent limit on the sale of BTC Offer for sale or for restitution all Portions of the residual shares were sold during the shares. residual shares from the first wave Centralized Public Auctions of January 25 - February 5, of the Mass Privatization Program. and March 3 - March 19, 1999. Liquidation Reduction of the 1995 level of 59 of the 64 SOEs slated for liquidation Take legislative and regulatory Amendments to the Bankruptcy Law, approved in June SOE losses by 28 percent. under Government Decision 480/96, measures to streamline and 1998, set the limit of two months for courts to decide on plus a further group of 86 loss-making accelerate the process of the bankruptcy petition and three months for the supreme SOEs, have been either privatized or bankruptcy and liquidation, while court to rule on appeals concerning such decisions. closed. (These enterprises employed protecting the rights of the Enterprises accounting for at least 32% of losses in 1995 26,000 workers and accounted for 28 creditors. have been effectively closed or privatized. percent of the SOE sector losses in 1995.) Isolation Propram (41 Group B enterprises) Reduction of the 1995 level of The Financial Recovery Plans (FRPs) of Ensure that all SOEs selected The Isolation Program was legally established by the SOE losses by 50 percent. all 41 Group B enterprises have been under Government Decision "Law on Financial Rehabilitation of State-Owned approved and are under implementation, 480/96 are in the process of exiting Enterprises", adopted on August 9, 1996. As of March and decisions have been taken on the isolation program, either 30, 1998, seven SOEs were privatized and one liquidated. whether these enterprises will be through liquidation or As of April 30, 1999, 17 SOEs have been privatized and liquidated or privatized. privatization. 13 are in liquidation/bankruptcy procedure. The 1996 Law on Financial Rehabilitation of State- Owned Enterprises was amended on December 29, 1998 to extend the isolation program till June 30, 1999. As per agreement with IMF, an exit strategy for the remaining 11 enterprise was developed, and the GOB is firmly committed to liquidate enterprises that have not been privatized by then. Isolation Proyram (30 Group A enterprises) Decisions have been taken and To implement the cost reduction Rehabilitation plans were approved for all companies by Revenues of the utilities and the implemented for all Group A enterprises measures proposed in the FRPs and mid 1997. Some of the plans were not of sufficiently mines (including budgeted on: (i) the level and adjustment meet the cost recovery targets. high standard and have not been fully implemented. subsidies) to cover, at a minimum, mechanisms for tariffs; (ii) the level of Some of the plans are being updated or redrafted now. At their operating and financial subsidies; and (iii) cost cutting the end of 1998, 28 Of 30 enterprises reported losses. expenses. measures. Electricity The average tariff has been increased to To adjust all tariffs, as necessary to Electricity prices were adjusted several times. In 1998, about US$0.035/kWh in October 1997 ensure continued compliance with the GOB reached an agreement with the IMF on regular and will be maintained at a cost covering FESAL conditions. adjustments till the year 2001. This agreement has been level by the application of a fuel complied with. Latest adjustment took place on adjustment formula agreed with the 01/01/99. Next one is planned for 07/01/99. Electricity World Bank under the Power Project. and rail tariffs were adequate but district heating tariffs remained well below the level required for cost recovery in 1997. Railways Passenger tariffs have been set, and will Regular railway tariff increases have been implemented. be adjusted, as required, to achieve recovery of at least 50 percent of operating and financial expenses before subsidies. Freight tariffs have been set, and will be adjusted as required, to achieve full cost recovery without subsidies. Telecommunications Tariffs have been set to achieve full cost recovery, and will be adjusted and rebalanced as required, to maintain an adequate level of investment and self- financing ratio. District Heating Industrial tariffs have been set, and will District heating prices do not ensure financial viability, be adjusted, as required, to achieve full and are being adjusted as agreed with the IMF. cost recovery plus an adequate margin to finance investments and working capital requirements without subsidies. Household tariffs have been set, and will be adjusted as required, to achieve cost recovery after subsidies. Isolation Program (30 Group A Natural Gas enterprises) (continued) Pending liberalization of the gas trade, Further liberalize the trade and the price of gas has been set, and will prices of gas, petroleum products, remain regulated, on the basis of the CIF and mining products. No entry price of gas delivered to Bulgaria, plus a barriers to firms. margin to cover transit costs and overheads of Bulgargas. Coal and lignite Domestic prices of coal and lignite have been raised close to world levels, and imports are freely allowed with a low tariff of up to 5 percent. Financial Discipline Restore financial discipline and The Council of Ministers has issued a Enforce the measures to restore Utilities have adopted procedures for suspending service ensure that utilities are effectively Decision requiring the utilities to financial discipline. Ensure that to enterprises in arrears. These procedures are to be collecting their accounts suspend service to, or to require advance the aggregate payment arrears in further discussed in light of the FESAL II agreements. receivable. payment from, enterprises with arrears the enterprise sector have not for more than 30 days. A monitoring increased by more than 10 percent system has been established that reports above their level of June 30, 1997. on the status of arrears on a weekly basis to allow the government to take action in a timely fashion in the most important cases. III. Banking Sector Adiustments to the Legal Framework Create a legal framework for the A new "Law on Banks" has been passed, Enact a new Deposit Insurance A new Deposit Insurance Law acceptable to the banking sector that is suitable for mainly to facilitate the resolution of Law, and establish a sound Deposit Bank/IMF was passed in April 1998 and became the introduction of the Currency insolvent banks, improve bank licensing Insurance Scheme. effective in January 1999. The law guarantees both BG Board Arrangement (CBA) and the procedures, strengthen accounting and Lev and foreign currency deposits at 95% for deposits up development of a safe and sound external auditing provisions, introduce to BG Lev 2 million, and at 80% for those above BG Lev banking sector. provisions on bankers' fiduciary duty 2 million but no more than BG Lev 5 million. A Deposit and conflicts of interest, rationalize Insurance Fund was set up in early 1999. penalties for regulatory non-compliance, and limit the coverage of the Law to Decide on whether a new SSB Law A Draft law on the Transformation of the SSB into a sole banks. will be enacted and/or the existing proprietor joint stock company became effective in April Law will be revoked, with SSB 1998. It provides for subjecting SSB to the Law on then subjected to the Law On Banks and for its transformation into a commercial bank. Banks. Clarify the future role of The SSB is currently in a process of restructuring and SSB, including the option of a transformation into a commercial bank. In August 1998 "narrow" bank. agreement was reached between the BNB and the SSB on restrictions on the SSB's activities until it has the capacity to conduct all normal commercial bank operations. A transition period was introduced that would last until May 2000; during that transition period all Lev deposits at the SSB will have a full government guarantee; by end of 1998 the SSB had to comply with all prudential regulations. A new "Law on the Bulgarian National Amend the Collateral Law and The Law on Registered Pledges has been passed, Bank" has been passed to adjust BNB to establish a registry of collateral, amendments to it have been suggested and are expected the needs of the CBA and to increase its to be approved by Parliament soon. The collateral independence and accountability. In registry is being modernized. particular, the new Law ensures the independent authority of the Deputy Governor responsible for banking supervision. Strengthening of Banking Supervision Develop a safe and sound banking Banking Supervision has been improved Ensure that at least five joint on- Intensive banking supervision department staff training system through enhancing BNB's by strengthening the independent site inspection teams are operating; carried out in 1997 and 1998. authority and effectiveness in authority of BNB's Supervision effective off-site surveillance are enforcing the legal and regulatory Department. The new Law on Banks functioning; and an acceptable Joint on-site inspection teams have been formed as framework. authorizes BNB to revoke licenses of training program is ongoing. needed and feasible, and training is being carried out by banks that violate the Law or the BNB international on-site experts. regulations, and obliges it to revoke licenses under clearly defined conditions. If a license is revoked, a conservator must be appointed, and BNB must file for liquidation of the bank or for bankruptcy proceedings. The revocation of a bank license cannot be appealed. BNB has recruited a resident Ensure that full implementation of Programming and implementation of banking supervision international banking regulation/ the banking supervision program is needs to be further strengthened. Banking supervision supervision expert with assistance from underway. program acceptable to the Bank/IMF adopted and the IMF and is recruiting two resident currently under implementation. international experts for off-site surveillance (EU-Phare) and two resident international experts plus short- term experts (USAID) for on-site examinations. BNB has adopted a Strategic Plan for Ensure that all banks are either in Higher capital adequacy requirements introduced for On-site Examinations which requires: compliance with revised banking 1997 (8 %), 1998 (10%) and 1999 (12%) and met in 1997 (i) the formation of joint on-site regulations, or that effective and 1998. The Banking Supervision Department inspection teams that will include the regulatory enforcement measures monitors banks' compliance with revised banking foreign examiners; (ii) improvement of have been taken, including regulations; in January '98 the license of a private bank the procedures for on-site inspections, withdrawal of bank licenses and was revoked; recapitalization of banks has been carried off-site analysis and early warning; (iii) filing for bankruptcy; that Bank out in the context of privatization. intensive training for bank supervisors; licenses have been revoked for all and (iv) preparation of an annual banks under conservatorship; and compliance report covering all banks. that recapitalization of banks will be carried out only in the context of k-n The 1996 accounts of all PSBs have a change in governance resulting been audited by international auditing from privatization or a firms and provided to the World Bank management contract. for review. Privatization of Public Sector Banks (PSBs) Ensure stabilization and growth of The Government has announced The governments intention to privatize all PSs or to the banking system through repeatedly its intention to privatize the enter into management contracts with reputable banks improving the governance of, and six PSBs (all PSBs other than SSB), or announced in 1997-1998; an intensive search for strategic the public's confidence in, the to enter into management contracts with investors initiated. PSBs by changing their ownership reputable private banks, and an intensive and/or management. search for strategic investors has been initiated. Resident international bank Conclude two transactions by end- Two PSBs privatized in 1997 and 1998; three more PSBs _privatization/restructuring consultants ,1997 and initiate the preparatory are currently in a process of privatization. have been contracted for BCC, with measures for the privatization of reputable investment banks to be the remaining four PSBs. contracted, as necessary, to assist in the privatization of selected PSBs. The shares of a PSB (United Bank of Bulgaria) have been sold to EBRD (35%, plus a 35% call option), Bulbank (35%) and Oppenheimer & Co. (30%), and an agreement with the new owners provides for an additional substantial capital injection. A Resolution Plan has been adopted for A management contract for Biochim Bank has been an insolvent bank (Biochim Bank), signed. It provides for the strengthening of the bank's which provides for the strengthening of management, restrictions on lending, enhanced the bank's management, restrictions on supervision and preparation for privatization. new lending, enhanced supervision, recapitalization, and initiation of bidding procedures for the bank's privatization or the conclusion of a management contract. The first steps of The Plan is under implementation. Key Indicators for Program Implementation Action Matrix D. FESAL II (P008317) Objectives Measures Taken Future Policy Actions Status Privatization 3or Liquidation of State Owned Enterprises * Sale4 or initiation of liquidation or * By March 31, 2000, completion of the * 85.2% completed (Only BTC insolvency proceedings of SOEs PATA program. left). equivalent to at least 80 percent of the long term assets of SOEs in the Privatization Advisors and Transaction Agents (PATA) Program. * Sale or initiation of liquidation or By March 31, 2000, completion of the Pool 55.5% completed, including insolvency proceedings of SOEs Privatization Program (covering all eight Arsenal & Trera, where the equivalent to at least 30 percent of the pools). state has kept the blocking stake, long term assets of SOEs in the Pool and 8 of the hydropower plants. Privatization Program. The procedure for the remaining HPPs was closed and await a new strategy. Incoms Telecom Holding, Bulgartabak Holding, and Balkancar Holding remain. * Sale or initiation of liquidation or By March 31, 2000, completion of the sale 95.9% completed. Data on insolvency proceedings of SOEs or initiation of liquidation or insolvency liquidation and insolvency has equivalent to at least 85 percent of the proceedings of all SOEs under the been requested but has not been long term assets of SOHs under the responsibility of the PA. received in full. responsibility of the PAs5 as of June 30, ________________________ 1999. An SOE is considered privatized when at least 67 percent of its equity is transferred to private owners. 4An SOE is considered sold when the privatization contract is signed and a down payment is paid. The SOEs under the responsibility of the PA are: (a) the SOEs privatized by the PA or placed under bankruptcy or liquidation upon recommendation of the PA; and (b) the SOEs which the PA has the mandate to privatize as of June 30, 1999 excluding the SOEs whose privatization mandate has been transferred by the PA to the line ministries in July 1999. The SOEs under the PATA and Pool programs are not included in the SOEs under the responsibility of the PA. Objectives Measures Taken Future Policy Actions Status * By March 31, 2000, completion of the sale * Out of 59 enterprises, 1 is in or initiation of liquidation or insolvency liquidation, 2 are in insolvency, proceedings of all SOEs whose privatization 22 have been sold, and 17 have mandate was transferred by the PA to the been transferred back to the PA. line ministries in July 1999. * Sale or initiation of liquidaio ner * Cessation of operation o f the sale * 84% completed (2,692 insolvency proceedings of small SOEs or initiation of liquidation or insolvency enterprises divested out of some equivalent to at least 80 percent of the proceedings of all small SOEs under the 3,086). long term assets of small SOEs under responsibility of the line ministries. the responsibility of the line ministries as of June 30, 1999. * Cessation of operations of SOEs under * Cessation of operations of all SOEs under * Ongoing process. liquidation as of June 30, 1999 with the liquidation within six months of the exception of two SOEs.' initiation of the liquidation proceedings. * Completion of sale to private owners of * By December 31, 2000, completion of sale Inomtnntreivd assets of at least 140 out of the 280 to private sector of assets of SOEs under SOEs under liquidation 8 as of June 30, liquidation as of June 30, 2000. 1999. U * Sale of residual share packages in at * By December 31, 2000, sale of the residual * 68% of the residual shares of least 50 percent of enterprises shares of the State in all enterprises enterprises privatized by end privatized as of June 30, 1999.9 privatized as of June 30, 2000. June 2000, and 70% of those privatized by end June 1999, have been sold. Ongoing process. 6 In computing the percentage performance, the base will exclude: (a) the large SOEs transferred in July 1999 by the PA to the line ministries; and (b) the small SOEs which have legal and restitution issues that prevent the finalization of the privatization process. These two SOEs will cease operations upon completion of their current production commitments, but not later than March 31, 2000. Defined as sale of at least 70 percent of assets of an enterprise. Residual shares are defined as State holdings net of those shares held due to restitution or legal proceedings or reserved for employees. Shares reserved for employees should be disposed of by June 30, 2000. Objectives Measures Taken Future Policy Actions Status * Starting January 2000, begin the process of * The process has started. privatization of SOEs, or components of Restructuring of the energy large SOEs, in the energy, transport and sector is underway, including infrastructure sectors. preparation for privatization of generation facilities and distribution companies (seven po,wer distribution companies, five thermal power plants and the nuclear power plant were legally separated from NEK in May/June, 2000 and have been spun off from NEK). The Bulgarian River and Sea Fleets, Hemus Air, and some plants in the railways have been slated for privatization. Two of the largest municipal water utilities are up for concession. In addition, assets under the ministries of defense and finance (the state insurance industry)are being sold. Imposition of Financial Discipline in the Enterprise Sector * Sale or initiation of liquidation or * By June 30, 2000, completion of sale of * Sale of assets of former insolvency proceedings of all Group B assets of all Group B SOEs under Group B SOEs under SOEs' ounder the Isolation Program". liquidation. liquidation is underway although not yet completed. 'o This includes Arsenal, where 65 percent of the equity shares were sold to the private sector. Because Arsenal is a defense related enterprise, the State will continue to hold a 35 percent share. 1 Group A and Group B SOEs refer to the SOEs under the Isolation Program which ended June 30, 1999. Objectives Measures Taken Future Policy Actions Status * Increase in tariffs of District Heating Implementation of programs for improving A Strategy for the development Companies (DHCs). efficiency, collection, restructuring and of DHCs along with an Action * Submission of long term plans for the privatization of DHCs agreed with the Plan for the period 2000-2005 DHCs, acceptable to the Bank. Bank. for restructuring of DHCs has been approved by Parliament as of August 23, 2000. DHCs closed the year 2000 with a net loss of BGN 30 million. Investors' interest has been demonstrated towards DHCs, however, no privatization procedure has been launched as of end-2000. * Sale or closure of eight plants of * By December 31, 1999, sale or closure of * Out of the 16 railway Bulgarian State Railways (BDZ). additional five plants of BDZ. subsidiaries, 15 have been sold, and one has been merged into a privatized subsidiary. LnI Ln Objectives Measures Taken Future Policy Actions Status * Submission of a restructuring plan for implementation of restructuring plan for 0 The Financial Recovery Plan BDZ acceptable to the Bank. BDZ. (FRP) has been approved by the Council of Ministers with Decision No 710 of November 17, 1999 for the period 1999- 2001. The FRP is under implementation but the targeted improvement of BDZ's financial performance has not materialized yet. The expected loss of BDZ for 2000 amounts to BGN 100 million. A plan for the reduction of BDZ loss has been developed, and awaits Ministry of Transport approval. 0 Submission of privatization or * By December 31, 2000, privatization of 0 An Action Plan for accelerated liquidation plans, acceptable to the viable coal mining SOEs and cessation of privatization of the coal output Bank, for seven collieries from the coal operations of nonviable mines, sub-sector for the period 2000 - mining companies and the briquette 2001 has been adopted with factory under Group A of the Isolation CoM Decision No. 356 of June Program. 19, 2000. All nonviable mines are under technical liquidation procedures. Large investor interest exists for the privatization of the viable mines. No increase in arrears to Bulgargaz 0 Continued implementation of the collection Collection policies of Bulgargaz from the level as of June 30, 1999. policies of Bulgargaz. have been largely followed with recurring periods of increased arrears. Objectives Measures Taken Future Policy Actions Status * Submission of a restructuring plan for * Implementation of Bulgargaz restructuring * Bulgargaz continues to Bulgargaz acceptable to the Bank. plan. implement the current restructuring and the Financial * By March 31, 2000, issuance of Recovery Plan on target. international tenders for private regional gas * Information memoranda for low- distribution companies. pressure regional gas- distribution companies are prepared for the future tenders. * No increase in the arrears to the Continued implementation of the collection 0 Collection policies of NEK have National Electricity Company (NEK) policies of NEK. been largely followed with from the level as of June 30, 1999. recurring periods of increased arrears. Following NEK's restructuring, the established 7 distribution companies have not registered arrears to NEK. However, the top 20 direct clients of high voltage have kept a steady level of overdue liabilities to NEK. * Second reading by Parliament of a Tax * Implementation of the Tax Procedure Code. * Implementation of The Tax Procedure Code acceptable to the Bank * By January 1, 2000, establishment of an Procedure Code is underway. which provides for improvements in Agency for Collection of State Claims to * The Agency for Collection of the ability to deal with enterprises in deal with the securing and collection of State Claims has been set up. arrears. arrears to the State. The Japanese government has provided grant financing to help set up a Unified revenue Agency. * Submission to Parliament of a Social Implementation of the Social Security Code. Implementation of the Social Security Code acceptable to the Bank Security Code is underway. which provides for improvements in the ability of the National Social Security Institute (NSSI) to deal with enterprises in arrears. Objectives Measures Taken Future Policy Actions Status * Creation by the Council of Ministers * Enforcement of selection and performance The unit in the Council of (COM) of a unit under the COM which standards for liquidators. Ministers has been revamped will set standards, train, select, remove, and is working on the selection and generally supervise liquidators of * Submission of quarterly reports on SOEs and performance standards of SOEs. under liquidation. liquidators. * Reports not submitted. * Submission to the Parliament of * Submission of quarterly reports on SOEs * Reports not submitted. amendments, acceptable to the Bank, to under insolvency proceedings. the Commercial Code that would result in faster, more efficient, and more transparent wind up or sale of SOEs through the court system. * Setting up of an inter-ministerial * By June 30, 2000, submission to Parliament * Parliament approved commission to analyze and recommend of amendments to the insolvency legislation amendments to the Commercial amendments to the current insolvency to reform court procedures and structure. Code in October 2000. legislation to reform the court insolvency procedures and structure. * Establishment of a system, acceptable * Submission to the Bank of quarterly reports * Establishment of Financial to the Bank, for monitoring financial on financial discipline. Discipline and Fiscal Risk discipline and fiscal risk in the Monitoring Unit with the enterprise sector. Ministry of Finance reporting quarterly to the Bank on 154 SOEs. Reforming the BankinOo System " Completion of the privatization transaction, including full payment, in the sale of Postbank. SSigning of the share purchase 0 By December 31, 1999, completion of the * 97.9% of Expressbank was sold agreement between BCC and Societe privatization transaction of Expressbank. to Societe Generale on Generale in the sale of Express-bank, November 30,1999. transaction,_includinga 10_percent_down payment. Objectives Measures Taken Future Policy Actions Status * Review of bid submissions from * By March 31, 2000, completion of the * 97.6% of Hebrosbank shares interested private buyers in the sale of privatization transaction of one more public were transferred to Regent Hebrosbank. sector bank. Pacific on March 29, 2000. * Issuance of Invitation to Bid in the sale * By June 30, 2000, completion of the * Share purchase agreement for of Bulbank. privatization transactions of two more the sale of 98% of Bulbank to public sector banks. UniCredito/Allianz was signed on July 7, 2000. * Approval of Information Memorandum * Tender procedure for Biochim is and start of the marketing process in under preparation for the third the sale of Biochim. time. * Implementation of MOU between the * Implementation of SSB privatization * A medium-term strategy for SSB State Savings Bank (SSB) and BNB. strategy starting January 2001. has been approved and is * Submission of medium term strategy currently under implementation. for SSB, acceptable to the Bank. Privatization plan has not yet been finalized. * Enforcement of all prudential * By March 31, 2000, adoption of a * The Regulation on consolidated regulations. regulation establishing consolidated supervision is under preparation. supervision. * Passage of amendments to Banking * By March 31, 2000, submission of a A draft Bank Bankruptcy Act Law dealing with existing insolvent legislative provisions to Parliament to has been prepared by the banks. enable the Deposit Insurance Fund to working group led by the administer newly closed banks. Deposit Insurance Fund and BNB, and has been submitted to Parliament. Objectives 7- Measures Taken Future Policy Actions Status * Start of the auction process which will * By December 31, 1999, complete the Tenders for eleven closed banks enable the Ministry of Finance to take takeover of the assets of eleven closed have been conducted. The over the assets of eleven closed banks. banks by the Ministry of Finance. Ministry of Finance is still in the process of taking over the assets (a couple have been transferred, and two banks, FPB and Economic Bank, have been acquired by private investors) * Monitoring by BNB of the lending * Beginning December 31, 1999, submission e Quarterly reports are being portfolio of the remaining public sector by BNB to the Bank of quarterly reports on submitted. banks, including the Central the lending portfolio of the remaining Cooperative Bank (CCB), the Business public sector banks, including the Central Promotion Bank, and the Municipality Cooperative Bank, Municipality Bank of Bank of Sofia,'12 and submission by Sofia and the Business Promotion Bank. BNB to the Bank of reports as of June 30 and September 30, 1999. * By June 30, 2000, reduction of the direct 0 Government share in CCB and indirect share of the government in the reduced to 32.77 percent equity of Central Cooperative Bank to 33 0 The government transferred percent or less. its 32.77 percent share in CCB to the Bank Consolidation Company on February 9, 2000 M No increase in the lending portfolio of n No increase in the lending portfolio of CCB CCB from the level of June 30, 1999, from the level of June 30, 1999, until CCB until CCB has met the capital adequacy has met the capital adequacy requirements requirements under the prudential under the prudential regulations issued by regulations issued by BNB. BNB. No increase in the equity of CCB No increase in the equity of CCB through Complied with. through the infusion of public the infusion of public resources. resources. 2 The Municipality Bank of Sofia is not considered a public sector bank due to the independence of the Sofia Municipality from the central Government. Nonetheless, the Municipality bank of Sofia is not a private sector bank and its loan portfolio is being closely monitored by the BNB. Objectives Measures Taken Future Policy Actions Status Restructurin2 the Energy Sector * Passage of Law on Energy and Energy * By March 31, 2000, adoption by the * All but one key regulations have Efficiency. Council of Ministers of all regulations been adopted, minor regulations envisaged in the Law on Energy and Energy remain to be adopted. The Efficiency. World Bank and other donors are providing technical assistance. * Establishment of a State Commission * Starting 2000, implementation of * The privatization component for Energy Regulation and appointment privatization of different components of the in the three year action plan is of commissioners. energy sector according to a plan agreed being delayed, as agreed with with the Bank. IMF/WB. * Increase in electricity prices. * By December 31, 1999, establishment of a Seven power distribution * Completion of accounting separation of electricity distribution companies. companies were legally generation, transmission, and separated from NEK and distribution functions of NEK. * By June 30, 2000, establishment of incorporated as separate entities generation and transmission companies. in early May 2000. * Complied with. Six generation and one transmission power * Continued implementation of three year companies were legally action plan for the restructuring of the separated and established in energy sector. early June 2000. The plan is being implemented according to schedule with the exception for the privatization component. 62 Attachment I Page 1 of 2 REPUBLIC OF BULGARIA MINISTRY OF ECONOMY Mr Ruben Lamdany ft - Manager Country Evaluation and Reional Relations Operations Evaluation Department The World Bank 1818 H Street Washington, DC 20433 USA fax: 001 202 522 3124 Re: Draft Project Performance Assessment Report Dear Mr Lamdany, The draft Project Performance Assessment Report of the Operations Evaluation Department (OED) assesses objectively the four operations of the World Bank in Bulgaria - the Rehabilitation Loan (Loan 4078-BUL). the Critical Imports Rehabilitation Loan (Loan 4175- BUL), the Financial and Enterprise Sector Adjustment Loan I (Loan 4239-BUL) and I (Loan 4521-BUL). The Government of Bulgaria shall take into consideration all recommendations of the OED when contracting new loans. The most urgent problems we shall address are the quality and the speeding-up of the large-scale privatisation as well the efficiency of the legal system, which impair the functioning of the private sector and the banking system. We hope that the improved dialogue between the World Bank and the European Union will result in the much desired for our country synergy effect. Yours sincerely, Nikolay Vassi Deputy Prime Minister and Minister of Economy 12 "Bamtenbcrg Streer Tel: (+359 2) 987 03 37 Sofia 1000, Bulgaria Fax: (+359 2) 987 19 33 63 Attachment 1 Page 2 of 2 REPUnLIC OF BULGARIA Mr. Ruben Lamdany Manager Country Evaluation and Regional Relations Operations Evaluation Department World Bank October 23, 2001 RE: BULGARIA: Rehabilitation Loan (Loan 4078-BUL); Critical Imports Rehabilitation Loan (Lan 457-BUL); FESAL I (Loan 4239-B UL); and FESAL II (Loan 4521-BUL) Drqft Project Performance Assessment Report Dear Sir, We would like to thank you for sending uti a copy u the Drafil Project Performance Assessment Report on the above operations. We appreciate your efforts to assist the Blulgarian Govemlment in improving the implementation of the projects supported by the World Bunk and are convinced that the use of the findings and lessons from past experience is the best way to eiihance effectiveness of the project cycle. Please be advised that as for the provided draft PPAR on the above luns selectively cvaluated by your Department we have no comments. We would be grateful to receive a copy of the final report which will be distributed to the Board of Executive Directors. Sincerely you s. Krassimr Kater Deputy Mihter of Finince 102. RakovakI St. orwremh board: (+339 2) 9859 2001.91502 w n Ia 1e . 1t1carth fax- (+3S9 2) 987 05 St M.VetvI nsta.overmacus.t