PROJECT PROCUREMENT STRATEGY FOR DEVELOPMENT 1. Project Overview Country: Serbia Full Project Name: Results Based State Owned Financial Institutions Reform Project Total Finance ($): US$50m Project Number: P156837 i. Project Description and Development Objectives: The proposed Serbia results based State Owned Financial Institutions (SOFI) Reform Project aims to improve the performance of those financial institutions that will remain under state ownership, implement the government`s strategy for state-owned banks, as well as to update NPL resolution strategy with specific focus on state-owned NPLs and to help in redefining development finance framework in Serbia. The project will have two components: 1) A results-based component that supports the reform of SOFIs based on the achievement of DLIs in line with the government’s reform program. DLIs are primarily focused on Banka Poštanska Štedionica (BPS), development of a new strategy on development finance, resolution of non-performing loans (NPLs) and other SOFI reform (US$35m); 2) A technical assistance and investment component that aims at strengthening institutional capacity and finances needed goods and services to support the achievement of DLIs (US$15 m). The TA component will finance activities that aim to: 1) Restructure the BPS; 2) Support the MoF in developing and implementing the strategies on NPL resolution and development finance; 3) Support the MoF in meeting its mandate to oversee and implement the reform strategy for SOFIs. Items 2 and 3 of the TA component involve only consulting services (both individuals and firms), while item 1 involves BPS goods (IT), consulting services and non-consulting services 2. Strategic Assessment of Country, Borrower and Marketplace a. Operational Context 1 The government is focused on reforming the role of the state in the financial sector with the support of the World Bank and other IFIs. As part of this effort, the Government of the Republic of Serbia has committed to improving the role of the state in the financial sector. There is significant commitment to completing these reforms at the highest levels of the government. We believe that the actions supported by the proposed loan will help to improve the efficiency of the financial sector in the country. b. Client Capability and PIU Assessment 1. The project will utilize the services from the Central Fiduciary Unit (CFU) within the MoF for procurement and financial management, and will be complemented by technical staff in the MoF responsible for the financial sector (MoFFS), who will assist in the technical aspects of project implementation. The MoFFS will be in charge of overseeing and executing all other project activities. Project implementation by MoFFS will rely on current resources in the unit (with lack of qualified staff being a serious issue, given that currently there are only two employed civil servants within this MoFFS – Banking unit) as well as additional consultants that will be recruited under the TA component of the project. The implementation arrangements will place an emphasis on strengthening the MoFFS’s capacity to oversee SOFIs through monitoring the DLIs and other aspects of the government’s SOFI strategy. 2. The CFU was established in October 2017 to initially implement fiduciary aspects of the World Bank Early Childhood Education (ECE) Project. It has three qualified staff selected under competitive basis: CFU Director, Procurement Specialist, and Financial Management Specialist. 3. However, since additional projects (Swiss TA Grant, Public Sector Accounting Reform TA, etc.) will soon be managed under the CFU, it would be highly important to hire in mid-2018 two additional specialists for both procurement and finance issues to ensure smooth and effective project implementation of SOFI and other projects within the helm of the CFU. c. Market analysis 4. It is expected that the majority of the contracts will be consulting services that will involve both individuals and firms. The majority of the individual consultants will be local hires, while the selection of consulting firms will be advertised internationally or locally, depending on the scope of assignment and the prescribed thresholds for high risk projects. There is a significant number of international firms that perform the services related to SOFIs, and thus it is expected that there will be strong interest from the business community for delivering these services. 5. For the IT procurement, there is a robust international market for core banking systems, and this contract will be advertised internationally. Procurement Risk Analysis 6. The overall coordination, management, implementation and oversight of procurement will be carried out by the CFU which was, as already mentioned, recently established. The initial procurement risk rating is high due to imminent staff capacity and coordination issues. 7. Procurement will be conducted in accordance with the World Bank’s Procurement Regulations for IPF Borrowers: Procurement in Investment Project Financing – Goods, Works, Non-Consulting and Consulting Services (July 2016). Based on these thresholds, the simplified procurement plan lists the 2 contracts to be financed, the selection/procurement method, estimated cost, review by the Bank, and implementation dates. 8. The prior review thresholds for high risk projects as provided in the ECA Regional Procurement Maximum Thresholds, effective January 2, 2014 (revised November 15, 2016) will apply: Goods, IT System and Non-Consulting Services – $1,500,000; Consulting Firms – $500,000; and Individual Consultants – $200,000. Direct Selection will be in accordance with paras. 6.8 to 6.10 for Goods, Works and Non-Consulting Services and paras. 7.13-7.15 for Consulting Services of the Procurement Regulations. 9. For the most part, the risks for selection of consulting services are low, since there is a robust market for the services required and they are not high value contracts. However, there is one high value contract related to the selection of a firm (discussed below) for the IT procurement for the core banking system. The firm will be selected using QCBS subject to prior review. 10. It was agreed that individual consultants currently employed under the Deposit Insurance Strengthening Project (DISP) will continue their engagement under the SOFI project through Direct Selection (DS) as they have been selected on a competitive basis and their work is relevant to the new project in meeting the DLIs. These individual consultants include the following: • Head of Legal (Aleksandar Vajagic) • Senior Legal Consultant (Bojan Resavac) • Legal Consultant (Ivona Kraktus) • Junior Legal Consultant (Jelena Malenovic) 11. It is important to note that there is no legal department nor even one lawyer in the MoFFS – Banking unit currently. Throughout the DISP duration these four consultants were engaged in this unit, dealing mostly with all legal requirements, different documents (laws, by-laws, regulations, conclusions, etc.) and working on solving legal issues and obstacles. Furthermore, this team had a significant input in creation of important documents including for example the Decree on the manner and condition regarding sale of shares in state-owned banks, updated State-owned bank strategy, etc. Coupled with an equally complex legal system in the RoS (courts included in many cases), these consultants have in many ways become vitally important, as they provided, in lots of cases, the only viable access to the legal system and continuous legal support to the MoFFS. 12. It is suggested (in the procurement plan table below) that two junior legal consultants should be engaged having in mind serious lack of people with legal knowledge and expertise currently in the MoFFS. By having this so called legal department, the level of quality of the documents that are prepared and issued by this Department should increase significantly. Engagement of additional junior legal consultant could help also in enhancing further the MoFFS capacities and therefore the overall improvement of the documents delivered by the MoFFS, • Head of CF Analyses (Milos Djordjevic) 13. In enabling the MoFFS to continue to smoothly monitor and oversee the performances of the state- owned banks in the future period it is crucial that the high-skilled CF team consisting of several analysts is in place. Since Mr. Djordjevic (coming from the private banking sector) was one of the first to join MoFFS during the DISP it would be beneficial that he continuous to work in the MoFFS during the SOFI Project. 14. In the procurement plan table below two CF analyst positions are listed as necessary. The idea is to have a separate CF team (similar to legal department), that should enable monitoring of the activities and performance of the state-owned banks. The CF analysts, shall, among other duties, perform financial 3 statements analysis, a review of the state-owned banks strategy, industry dynamics, and when appropriate use of projections. Since the RoS Government long-term goal is to divest from many state-owned banks it is highly important to have an experienced and well-qualified CF analysts team engaged throughout the SOFI Project. • Business Analyst (Luka Novakovic) 15. Same goes to Mr. Novakovic who spent a lot of time during the DISP working on not just overseeing the performances of the state-owned banks, but also in preparation of different analysis on the performances of Development Fund and AOFI. 16. In the procurement plan table below two Senior Business Analysts positions are listed as necessary. These consultants should, when engaged, provide strategic, analytic and project support to the solutions needed for different SOFIs in this Project. We would expect them to play a strong business role by reviewing and analyzing options for improving business solution capabilities to meet the evolving needs of the different state-owned banks and other SOFIs. Of course, it is difficult at this point to be certain whether two consultants would be needed in these positions, but we would suggest to leave these two spots for now, and if necessary changes to the procurement plan can be made at a later stage. • Senior Insurance Analyst (Srdjan Trajkovic) 17. Even though the focus of the SOFI Project is not on Dunav Insurance, given the current capacities in the MoFFS (having only one senior civil servant dealing with the insurance regulation overall), continuation of the engagement of Mr. Trajkovic (at the same time he is an actuary) with his specific in- depth knowledge in the field of insurance seems to be more than needed. This is also important having in mind potential privatization activities of Dunav in the upcoming period. 18. In the MoFFs there is currently a lot of activities going on under the capital market unit. It is envisioned that several legislative acts (including Capital Market Law, Investment Fund Law, etc.) shall be subject to changes and amendments in 2018 and the years to come. Given so, the amount of work that needs to be done in the next couple of years in this area requires significant knowledge and expertise that the MoFFS with the current capacities struggles to meet. The purpose of the engagement of two Senior Capital Market Analysts is to ensure that the MoFFS can prepare a sound legal framework with changes that will meet the requirements of the EU acquis and the best international practice but also at the same time to pay special attention on the local specifics and improvements that are needed in order to have a stronger, well- trusted capital market that is vital to the functioning of the Serbian economy. 19. Most of these consultants (engaged under the DISP) will continue their services with the MoF after the closing of the DISP and before the effectiveness of the SOFI. MoF will pay the consultants based on the MoF salary scale which is much lower than the remuneration in their contracts under DISP. The difference in their salary will be subject to retroactive financing once SOFI becomes effective. 20. IT procurement will involve contracts that are of significant value, and thus the corresponding risk will be higher. Preparation of the bidding documents, specifically the technical specifications and setting up the evaluation criteria, might prove to be challenging for the staff. The same could be said for the evaluation of bids. Although continuing reforms in the BPS will be taking place under this project, the Borrower has asked the Bank to include in the project IT and consulting services for the state-owned institution to ensure that procurement is done in a fair and transparent manner. To mitigate the risks, the TA component includes the selection of a consulting firm whose responsibilities will include developing the technical specifications for the RFB and providing advice on the overall process to ensure appropriate oversight from a firm with both technical and procurement experience with core banking systems. The 4 Bank’s Standard Procurement Documents (SPDs) will be used. The selection of this firm will be initiated as early as the first quarter of 2018 and to sign the contract on or before project effectiveness. The contract could potentially be under retroactive financing depending on the progress of the selection process which could take between 4-5 months from the time of publication of the Request for Expressions of Interest and depending on the efficiency of the Evaluation Committee in reviewing expressions of interest, shortlisting, and evaluating technical and financial proposals. 21. The Ministry of Finance established, in cooperation with the World Bank and IMF, the procurement process of external consultancy services for realization of complex analyses, reports and drafts in accordance with the ToR and with the goal of optimal realization of guidelines set in the BPS Government Conclusion. The main tasks performed by the selected (in May 2017) external Consultant (A.T. Kearney) were included in their report to support the implementation of the new strategy of the BPS. These are related to four major streams: 1. Performance of a detailed analysis of the current conditions and opportunities in the market segments for retail banking, entrepreneurs, micro-enterprises and small enterprises: 2. Performance of a detailed analysis of BPS’s current organization, positioning and strategies to promptly achieve the implementation of its new strategy, in accordance with the Government’s Conclusion; 3. Performance of a gap analysis with respect to BPS’s existing IT platform, inclusive of recommendations with respect to consolidation and optimization of the IT platform to support the bank’s new strategy going forward; and 4. Preparation of BPS’s business plan for the period 2018-20. 22. All of these tasks were completed by the selected consultant in the period May – November 2017. Furthermore, in November 2017, the BPS Board of Directors adopted the final A.T. Kearney report to support the implementation of the new strategy for the Bank. In the upcoming period (starting from 2018) particular focus should be paid on the future implementation of the report’s findings and recommendations. 23. Within Table 1. Procurement Plan, point 5. Consultant – Advisory Services Business Plan Implementation – the following activities are included: procurement, work out of NPLs, product development, sales training, risk management training, training for operational departments and staff compensation. Procurement Objectives 24. The procurement objective is to carry out and complete the procedures for all contracts in a timely, efficient, transparent manner with an emphasis on fit-for-purpose, quality and value for money. Recommended Procurement Arrangements for the Project 25. The details on each activity, their estimated cost and proposed procurement method are outlined in Table 1. Core Banking System for BPS (Development, Installation, and Maintenance) • Contract and Estimated Cost: EUR8.02 million • Procurement Approach: International 5 Attribute Selected Arrangement Justification Summary/Logic Specifications Performance This will involve the development of a tailored core banking system. Sustainability Requirements No Contract Type Performance-based or Provision of non-consulting services to lump-sum be paid on the basis of outputs. Supplier Relationship Collaborative In addition to the development of the core banking system, the relationship with the supplier will be long term due to installation and maintenance. Procurement Method Request for Proposals The Borrower’s business needs are (RFB) better met by allowing bidders to offer customized solutions or proposals. Market Approach Open International One-Stage BAFO Pre / Post Qualification Post Qualification Evaluation Selection Method TBD This will be elaborated in the RFB. Evaluation of Costs TBD This will be elaborated in the RFB. Domestic Preference No Rated Criteria Desired Preferred Arrangement for Low Value, Low Risk Activities Individual Consultants 26. Selection methods are open competition and direct selection. Under open competition, advertisement through REOIs shall include complete TOR. Individual consultants are selected from those that expressed interest in response to a REOI. For direct selection of individual consultants, due justifications under the circumstances specified in para. 7.39 of Section VII of the Regulations apply. Consulting Firms 27. The methods to be used for selection of consulting firms are those stated in Section VII. Approved Selection Methods for Consulting Services of the Regulations: QCBS, FBS, LCS, QBS and CQS. 6 Table 1. Initial Procurement Plan for SOFI Reform Project # Activity Category Estimated Source of Prior/ Procurement/ Overall Finance – Post Selection Method Cost Loan (EUR) (EUR) TA 1 – Restructuring Banka Postanska Stedionica AD Beograd 1 Core Banking System for BPS Non-Consulting Prior RFB 8,020,000 4,010,000 Services 2 IT Procurement and CS (Firm) Post CQS 240,600 240,600 Implementation Support 3 IT Hardware for Data Center Goods Prior RFB 1,604,000 802,000 and Branches/Offices 4 IT Procurement Support CS (IC) 24,060 24,060 Post Open Competition 5 Consultant - Advisory Services CS (Firm) Prior QCBS 1,523,800 1,523,800 Business Plan Implementation 6 TA 1 – BPS (points 1–5) – Total Costs 11,412,46 0 6,600,460 TA 2 – Strengthening Institutional Capacities to Support the Achievements of DLIs 1 Head of Legal CS (IC) 208,520 208,520 Prior Direct Selection 2 Senior Legal Consultant CS (IC) 176,440 176,440 Prior Direct Selection 3 Legal Consultant CS (IC) 168,420 168,420 Prior Direct Selection 4 Junior Legal Consultant CS (IC) 112,280 112,280 Prior Direct Selection 5 Junior Legal Consultant CS (IC) 112,280 112,280 Post Open Competition 6 Head of CF Analyses CS (IC) 208,520 208,520 Prior Direct Selection 7 Deputy Head of CF Analyses CS (IC) 192,480 192,480 Prior Open Competition 8 CF Analyst CS (IC) 144,360 144,360 Post Open Competition 9 CF Analyst CS (IC) 144,360 144,360 Post Open Competition 10 Junior CF Analyst CS (IC) 112,280 112,280 Post Open Competition 11 Senior Business Analyst 1 CS (IC) 176,440 176,440 Prior Open Competition 12 Senior Business Analyst 2 CS (IC) 176,440 176,440 Prior Open Competition 13 Business Analyst CS (IC) 144,360 144,360 Post Direct Selection 14 Junior Business Analyst CS (IC) 112,280 112,280 Post Open Competition 15 Senior Insurance Analyst CS (IC) 176,440 176,440 Prior Direct Selection 16 Junior Insurance Analyst CS (IC) 112,280 112,280 Post Open Competition 17 Senior Capital market Analyst CS (IC) 176,440 176,440 Prior Open Competition 18 Senior Capital market Analyst CS (IC) 176,440 176,440 Prior Open Competition 19 Strategic Adviser CS (IC) 208,520 208,520 Prior Open Competition 20 Int'l Adviser for restr. & privat. CS (IC) 288,720 288,720 Prior Open Competition 21 IT Adviser CS (IC) 120,300 120,300 Post Open Competition 22 Business Legal Adviser CS (IC) 120,300 120,300 Post Open Competition 7 23 Supervision & Control Adviser CS (IC) 120,300 120,300 Post Open Competition 24 CFU Staff CS (IC) 240,600 240,600 Prior Open Competition 25 Project Performance & FS audit CS (Firm) 56,140 56,140 Post LCS 26 Independent verification of CS (IC) Post Open Competition achievement of DLIs/DLRs 24,060 24,060 27 Support in developing strategy for CS (Firm) Prior QCBS resolving state-owned NPLs, its implementation and sale of state- owned assets 777,940 777,940 28 Support in creating strategy on CS (Firm) Post QCBS development finance 240,600 240,600 29 Support in divesting from SOFIs that CS (Firm) Prior QCBS will not be retained 376,940 376,940 30 Operating costs OC 24,060 24,060 Post N/A 31 TA 2 - Total Costs (points 1 – 30) 5,429,540 5,429,540 TOTAL COSTS (points 6 + 31) 16,842,000 12,030,000 8 PROCUREMENT Serbia : State Owned Financial Institutions Reform Project PLAN General Information Country: Serbia Banks Approval Date of the Original Procurement Plan: 2018-07-23 Revised Plan Date(s): (comma delineated, leave blank if none) 2018-07-23 Project ID: P156837 GPN Date: Project Name: State Owned Financial Institutions Reform Project Loan / Credit No: IBRD / 88320 Executing Agency(ies): Central Fiduciary Unit WORKS Activity Reference No. / Bid Evaluation Report Procurement Prequalification Estimated Actual Amount Process Draft Pre-qualification Prequalification Draft Bidding Document Specific Procurement Bidding Documents as Proposal Submission / Description Loan / Credit No. Component Review Type Method Market Approach and Recommendation Signed Contract Contract Completion Process (Y/N) Amount (US$) (US$) Status Documents Evaluation Report / Justification Notice / Invitation Issued Opening / Minutes for Award Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual GOODS Activity Reference No. / Bid Evaluation Report Procurement Prequalification Estimated Actual Amount Process Draft Pre-qualification Prequalification Draft Bidding Document Specific Procurement Bidding Documents as Proposal Submission / Description Loan / Credit No. Component Review Type Method Market Approach and Recommendation Signed Contract Contract Completion Process (Y/N) Amount (US$) (US$) Status Documents Evaluation Report / Justification Notice / Invitation Issued Opening / Minutes for Award Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual NON CONSULTING SERVICES Activity Reference No. / Bid Evaluation Report Procurement Prequalification Estimated Actual Amount Process Draft Pre-qualification Prequalification Draft Bidding Document Specific Procurement Bidding Documents as Proposal Submission / Description Loan / Credit No. Component Review Type Method Market Approach and Recommendation Signed Contract Contract Completion Process (Y/N) Amount (US$) (US$) Status Documents Evaluation Report / Justification Notice / Invitation Issued Opening / Minutes for Award Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual CONSULTING FIRMS Activity Reference No. / Combined Evaluation Contract Type Estimated Actual Amount Expression of Interest Short List and Draft Request for Proposals Opening of Technical Evaluation of Technical Description Loan / Credit No. Component Review Type Method Market Approach Process Status Terms of Reference Report and Draft Signed Contract Contract Completion Amount (US$) (US$) Notice Request for Proposals as Issued Proposals / Minutes Proposal Negotiated Contract Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual INDIVIDUAL CONSULTANTS Activity Reference No. / Invitation to Contract Type Estimated Actual Amount Draft Negotiated Description Loan / Credit No. Component Review Type Method Market Approach Process Status Terms of Reference Identified/Selected Signed Contract Contract Completion Amount (US$) (US$) Contract Consultant Planned Actual Planned Actual Planned Actual Planned Actual Planned Actual SER-SOFI-DS-CS-18-05 / Head Pending IBRD / 88320 Strengthen Institutional Capacity Prior Direct Selection Direct 120,510.00 0.00 2018-06-21 2018-06-21 2018-07-26 2020-06-15 of Credit-financial Analyses Implementation SER-SOFI-IC-CS-18-08 / Consultant for independent Individual Consultant Pending verification of achievement of IBRD / 88320 Strengthen Institutional Capacity Post Open 29,998.00 0.00 2018-07-06 2018-08-15 2018-08-22 2018-09-26 2019-07-31 Selection Implementation Disbursement Linked Indicators/Results Page 1