Document o f The World Bank

Report No: 27979

FOR OFFICIAL USE ONLY

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED IDA CREDIT

IN THE AMOUNT OF SDR 127.3 MILLION (US$250.0 MILLION EQUIVALENT)

TO THE

PEOPLE’S REPUBLIC OF BANGLADESH

FOR AN

ENTERPRISE GROWTH AND BANK MODERNIZATION PROJECT

May 11,2004

Finance and Private Sector Development South Asia Regional Office

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank Authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 10,2004)

ADP BASIC BB BCIC BDS BEPZA BJMC BMET BOGMC BO1 BPC BPDB BRAC BSCIC BSEC B T M C BTTB CAS ccc CFAA CPAR CSM DESA DFID DSC EPZ FD FSAP GDP GOB I C A IFC IMF KNM LO1 M&E MFA MOF

Currency Unit = Bangladesh Taka BDT59.23 = US$1

US$ = SDR0.6837

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS Annual Development Program Bangladesh Small Industries and Commerce Bank Limited Bangladesh Bank (the central bank o f Bangladesh) Bangladesh Chemical Industries Corporation Business Development Services Bangladesh Export Processing Zone Authority Bangladesh Jute Mills Corporation Bureau o f Manpower and Training Bangladesh Oil, Gas, and Mineral Corporation Board o f Investment Bangladesh Petroleum Corporation Bangladesh Power Development Board Bangladesh Rural Advancement Committee Bangladesh Small and Cottage Industries Corporation Bangladesh Steel and Engineering Corporation Bangladesh Textile Mills Corporation Bangladesh Telegraph and Telephone Board Country Assistance Strategy Chittagong Chemical Complex Country Financial Accountability Assessment Country Procurement Assessment Report Chittagong Steel Mills Dhaka Electric Supply Authority Department for International Development (United Kingdom) Development Support Credit Export Processing Zone Finance Division Financial Sector Assessment Program Gross Domestic Product Government o f Bangladesh Investment Climate Assessment International Finance Corporation International Monetary Fund Khulna Newsprint Mills Letter o f Intent Monitoring and Evaluation Multi-fiber Agreement Ministry o f Finance

FOR OFFICIAL USE ONLY

MOL MOU M S M E NCB NGO NIMA NPL PC P C U PKSF P M O PRGF RMG SEC SEDF S I D A SOE TA U S A I D VRS

Ministry o f Law, Justice, and Parliamentary Affairs Memorandum o f Understanding Micro, Small, and Medium Scale Enterprises Nationalized Commercial Banks N o n Government Organization Net Interest Margin to Net Assets N o n Performing Loans Privatization Commission Project Coordination Unit Pal l i Karma-Sahayak Foundation (Micro Finance Foundation) Prime Minister’s Office Poverty Reduction and Growth Facil ity Ready Made Garments Securities and Exchange Commission South Asia Enterprise Development Facil ity Swedish International Development Assistance State Owned Enterprise Technical Assistance United States Agency for International Development Voluntary Retirement Scheme

Vice President: Praful C. Pate1

Sector Director: Task Team Leaders:

Country Director: Christine I. Wall ich Joseph D e l M a r Pernia Simon C. Bell, Shamsuddin Ahmad, G.M. Khurshid A lam

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

BANGLADESH Enterprise Growth and Bank Modernization

CONTENTS

Page

. ................................................................. A STRATEGIC CONTEXT AND RATIONALE 1 1 . 2 . 3 .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 8

Higher level objectives to which the project contributes .................................................... 9

PROJECT DESCNPTION ............................................................................................... 10 B . ........................................................................................................... 1 . Lending instrument 10

Program objective and Phases .......................................................................................... 10 Project development objective and key indicators ............................................................ 10

Project components ........................................................................................................... 12 Lessons learned and reflected in the project design .......................................................... 14

6 . Alternatives considered and reasons for rejection 15

C . IMPLEMENTATION ........................................................................................................ 15 Partnership arrangements .................................................................................................. 15

2 . Institutional and implementation arrangements 16

4 . Sustalnablhty ..................................................................................................................... 17 5 . Critical risks and possible controversial aspects 17

Loadcredit conditions and covenants ............................................................................... 18

2 . 3 . 4 . 5 .

............................................................

I . ................................................................ ................................................................ 3 . Monitoring and evaluation o f outcomes/results 16

* . .

............................................................... 6 .

D . APPRAISAL SUMMARY ................................................................................................. 18 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and financial analyses ...................................................................................... 18 Technical ........................................................................................................................... 18

Fiduciary ........................................................................................................................... 19

Social ................................................................................................................................. 20 Environment ...................................................................................................................... 21 Safeguard policies ............................................................................................................. 21 Policy Exceptions and Readiness ...................................................................................... 22

Annex 1: Country and Sector o r Program Background ......................................................... 23

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 23

Annex 3: Results Framework and Monitoring ........................................................................ 38

Annex 4: Detailed Project Description ...................................................................................... 44

Annex 5: Project Costs ............................................................................................................... 58

Annex 6: Implementation Arrangements ................................................................................. 59

Annex 7: Financial Management and Disbursement Arrangements ..................................... 61

Annex 8: Procurement ................................................................................................................ 67

Annex 9: Economic and Financial Analysis ............................................................................ -76

Annex 10: Safeguard Policy Issues ............................................................................................ 78

Annex 11: Project Preparation and Supervision ..................................................................... 87

Annex 12: Statement of Loans and Credits .............................................................................. 89

Annex 13: Country at a Glance ................................................................................................. 91 Map ( 24206R1) .......................................................................................... 92

BANGLADESH

(DFID) Total:

ENTERPRISE GROWTH AND BANK MODERNIZATION

3 18.39 70.00 388.39

PROJECT APPRAISAL DOCUMENT

;Y

SOUTH ASIA

2005 2006 2007 2008 2009

SASFP

h u a l 3umulative

Date: May 12,2004 Country Director: Christine I. Wallich Sector ManagedDirector: Joseph Del Mar Pernia industry (25%)

Team Leader: Simon C. Bell Sectors: Other industry (25Yo);Banking (25%);General finance sector (25%);Agro-

Themes: State enterprise/bank restructuring and privatization (P) Environmental screening category: Partial Assessment

Project ID: PO81969

60.00 60.00 60.00 60.00 10.00 60.00 120.00 180.00 240.00 250.00

Lending Instrument: Specific Investment Loan Safeguard screening category: Limited impact Project Financing Data -

[ ]Loan [XI Credit [ ]Grant [ ]Guarantee [ ]Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 250.00 Proposed terms: 40 years with 10 years grace period

Borrower: People's Republic o f Bangladesh Responsible Agency: Finance Division, Ministry o f Finance, Government o f Bangladesh Contact Person: Secretary, Finance Division, Bhaban 7, Room 23 8, Bangladesh Secretariat, Dhaka Tel: (88-02) 716-0406 Fax: (88-02) 716-2785 email: fsoff@bdmail.net

000

[ ]Yes [XINO Does the project depart from the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any pol icy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The objectives o f the project are to trigger (a) employment generation through private sector enterprise growth and modernization o f the banking system, and (b) urgently needed reforms within the State Owned Enterprises (SOEs) and the Nationalized Commercial Banks (NCBs) -- as part o f a wider reform o f rol l ing back state ownership and control within the Bangladesh economy. Project description [one-sentence summary of each component] Re$ P A D B.3.a, Technical Annex 4 (a) Enterprise Growth with an emphasis on SME development - in terms o f support for the development o f the small enterprise sector by addressing the constraints that inhibit access to finance by this sector o f entrepreneurs. (b) Rehbishment o f some Strategically Determined Remaining Assets o f Loss Making SOEs - in particular at the Adamjee Jute M i l l s (Dhaka); the Chittagong Steel M i l l s (Chittagong); and, the Chittagong Chemicals Complex (Chittagong). (c) Institutional Strengthening - for the Privatization Commission, the Board o f Investment, the

Bangladesh Export Processing Zones Authority, and Bangladesh Small and Cottage Industries Corporation (BSCIC). (d) Support for Voluntary Retirement Schemes in SOEs which are being closed down and/or

privatized - covering retirements by up to 93,000 staff. (e) Retraining and Counselling Services for Retrenched Staff o f SOEs. ( f ) Resolution o f the Problems in the Nationalized Commercial Banks (NCBs) in terms o f bringing in an expert Management Team for Agrani Bank; a Privatization Advisor for Rupali Bank; and Management Experts into Janata and Sonali Banks. (g) Public Awareness, Monitoring & Evaluation, and Tracking - to assist the Government o f

Bangladesh sell the program within the country, to ensure adequate M&E and to ensure that important social indicators are adequately tracked by the Government and the World Bank. Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 Environmental Assessment (OP/BP/GP 4.01) Significant, non-standard conditions, if any, ’for: Re$ PAD C. 7 Board presentation: Request for 28 percent retroactive financing -- above the institutional norms o f 10 percent. Loadcredit effectiveness: none Covenants applicable to project implementation: none

[XIYes [ ] N o [XIYes [ ] N o [ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Country Background: Bangladesh continues its fight against poverty by maintaining a satisfactory overall macroeconomic framework that has steadily improved over the past decade - with only a moderate setback following the floods o f 1998. Annual real GDP growth has averaged 5 percent since FY95. The Central government deficit has remained within a range o f 4 to 5 percent of GDP (3.5 percent on 6/30/03) although the overall fiscal deficit, including consolidated SOE losses, i s slightly higher. These deficit levels appear to be sustainable given that GDP is growing at 5 percent. Inflation, which has averaged around 6 percent a year since FY95, fe l l to under 5.2 percent in FY03.

Although Bangladesh’s macroeconomic fundamentals look sound, vulnerabilities exist. Inflation has picked up owing mainly to higher import prices. Also starting from 2005 the lifting o f MFA quotas i s expected to pose significant r isks to the economic outlook o f the country. The IMF forecast that the country’s trade balance wil l deteriorate f rom a negative $3.6 bi l l ion in 2004/05 to a negative $7.7 bi l l ion in 2006/07 in the post-MFA era without pol icy adjustment. The rise in non-performing loans continues in the public sector banks, mainly due to the failure o f the NCBs to deal decisively with this issue - even though private banks have managed to reverse the trend.

Financial Sector Background. Ever since the f i rst structural changes were implemented in the financial sector in the early nineties based on the recommendations o f the GOB-initiated National Commission o n Money, Banking and Credit, and supported by IDA’S Financial Sector Adjustment Credit, the government has maintained financial sector reforms as a priori ty in i t s economic reform program. Therefore, in spite o f serious political opposition and resistance from vested interests, i t has continued to implement measures, albeit at a slow pace, to bring about dynamism and efficiency in the banking sector in Bangladesh. Such measures included:

the relaxation o f the nationalization pol icy in the early eighties upon realization o f the importance o f the private sector for growth and development; privatization o f two NCBs - Pubali Bank and Uttara Bank - in 1983 and 1984 respectively. The four remaining NCBs are: Sonali Bank; Agrani Bank; Janata Bank; and, Rupali Bank; approval of banking licenses to groups of new private banks in 1983, 1995, 1999, and 2001 in order to generate competition and increase efficiency in the sector; formation of a Bank Reforms Committee in 1986 and again in 2001 , to suggest measures to improve the soundness and efficiency o f the banking sector. The Committee has recommended, among others, several measures for restructuring the NCBs;

0 introduction o f stricter prudential regulations relating to capital adequacy requirements, loan classification and provisioning guidelines, and single/group exposure limits. Increase in the capital adequacy ratio from 8 percent o f risk-weighted assets to 9 percent with effect from June 2003; improvement in the legal framework for debt recovery through the enactment o f the Financial Loan Courts Act in 1990, and the Bankruptcy Act in 1998, and bringing in amendments to these laws from time to time to make them more effective;

0

0 improvement in the legal framework for the banking sector by amending the Banking Companies Act o f 1991, the Bangladesh Bank’s (Nationalization) Order o f 1972, the Bank Deposit Insurance Ordinance o f 1984, the Negotiable Instruments Act o f 1881, and the Bangladesh Bank Order o f 1972; a request to the Bank and the Fund to carry out an assessment o f the financial sector under FSAP. The FSAP report was published in April 2003. enhancement o f the efficiency and effectiveness o f Bangladesh Bank through an IDA- assisted Central Bank Strengthening project in June 2003, with special focus o n greater autonomy, complete automation o f its operations, and enhanced bank supervision skills.

0

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The strengthening o f Bangladesh Bank i s viewed by the incumbent Governor, who took office in November 2001, as a pre-requisite for ensuring a sound, efficient and competitive banking sector. Some o f the actions that have been taken by BB since then include: removal o f errant private bank directors and issuing fit and proper tests for appointing new bank directors and Managing Directors; imposition o f penalties o n private banks that do not comply with prudential regulations; strict monitoring o f the operations o f “Weak Banks”, Le., banks with a C A M E L rating o f 4; enhancement o f the accounting disclosure requirements by banks in l ine with international standards; and, assistance to NCBs in rationalizing their branch network. Moreover, the Finance Division (FD) has set up a Working Group headed by a Deputy Governor and including members from the FD, Ministry o f Law (MOL) and Planning Divisions to oversee and monitor the N C B reforms in the face o f their continuing losses. Such losses have prompted the Government to seek IDA support for the restructuring o f the NCBs with the ultimate objective o f reducing public sector ownership o f the financial sector assets.

The government has taken measures to contain losses in the NCBs, curb the flows o f new bad loans and strengthen management o f NCBs. All the NCBs were required in 2003 to enter into a Memorandum o f Understanding with the Bangladesh Bank under which net new lending by the NCBs has been l imited to 5 percent o f their net loan portfolios at the end o f FY03 and must be directed only to credit worthy borrowers. Each bank has developed interim business plans that include time bound processes with interim milestones for achieving full compliance with al l prudential regulations. Good progress has been made with respect to performance under the M O U s and so the government plans to extend them into 2004. The new MOUs are expected to contain explicit targets for cash recoveries for the 20 largest defaulters o f each NCB. Special audits o f each o f the four NCBs started in September 2003 have been completed. The special audits provide the government with the information needed to formulate resolution plans for each bank by November 2004. Significant efforts have been made in strengthening management o f NCBs. Final approval has been given for the appointment o f a sales advisor for Rupali bank, and the process i s on course to bring this bank to the point o f divestment by end-2004. Work

2

goes forward to put in place a new management team within Agrani, and management advisors in Sonali and Janata, though the timing for the latter has been delayed by the need to re-tender the contract for Janata.

SOE Sector Background: One o f the legacies that have continued since Bangladesh’s independence i s the nationalization o f the industrial and financial sectors. However, the result o f such sweeping nationalization has not been good, and the SOE’s have proven to be costly for the entire economy and their performance has been consistently poor, contributing less than 1 percent o f GDP in FY2000. Consolidated data on state enterprises reveal that their financial performance, until the recent closures and VRS program, had worsened, leading them to make increasing demands on scarce budgetary resources. Net SOE losses averaged $160 mi l l ion (Tk 9 billion) annually during FY91-02, reaching a record level o f U S $ 440 mi l l ion (Tk 25 billion) in FYO1.

SOE losses have diverted resources away from spending on social sectors. The average gross losses o f SOEs have been equivalent to almost half of the budgetary resources available annually for Bangladesh’s annual development plan (ADP). The conclusion i s inescapable: poor SOE performance has become an unsustainable economic and financial burden for Bangladesh - and reform o f the sector must be aggressively tackled. The present Government i s keen to reduce the state ownership o f banking and manufacturing sector assets. In line with this changed policy, the Government closed down the largest jute mill in the world - the loss-making Adamjee Jute Mills Ltd. - and laid o f f its 25,700 workers, a move that has been widely hailed by al l including the Chambers o f Commerce and Industry. The success o f Adamjee closure and its beneficial impact o n the fiscal budget has created a momentum which has prompted the Government to sell 19 SOEs since November 2001, close down another 28 loss-making SOE over 2002-2003, and retrench about 42,000 workers. This program wil l continue with the help o f the financial and technical support proposed under this project.

However, the pace of SOE reform has slowed recently, due in part to strong resistance from vested interests and in part to difficulties in resolving the problems o f bad loans in these SOEs, owed mainly to NCBs.

State of Small Enterprise development. While Bangladesh has a wel l developed micro finance and (developing) micro enterprise industry - small and medium scale enterprises (SMEs) are not wel l covered by financial services and business development services (BDS). This is an important area for support as this i s an employment generating class o f businesses which can assist the Government in achieving i t s more immediate employment and growth objectives. The Bangladesh Investment Climate Assessment (ICA) and a recent survey o n micro, small, and medium enterprises (MSMEs) undertaken by DFID shows that access to finance i s a major constraint faced by this sector. The survey showed that 35 percent o f MSMEs received credit from informal source and 35 percent from formal sources. The remaining 30% coming from one’s own savings. The informal sources include family loan and money lenders. According to the survey, there are about six mi l l ion MSMEs employing about 31 m i l l i on workers. The weak banking support for MSMEs i s an important issue that needs to

The Government, as part of i t s overall reform strategy, has hemorrhage by privatizing, liquidating, and restructuring

be addressed.

taken steps to reduce the fiscal SOEs and by commencing a

3

comprehensive reform program within the NCBs. To help counteract the negative impact o f the closure o f large SOE’s, the Government has been making efforts to increase employment through development o f the SME sector. These actions are critical for private sector development, a comerstone o f the country’s poverty reduction strategy.

Key issues that constrain achievement of desired results in the sector:

Privatization. Ini t ial moves toward disinvestment were made in the early 1980s, followed by additional privatization efforts in the early 1990s. However, the results were discouraging and at one point the whole privatization process was stopped. Although 22 manufacturing enterprises were fully or majority divested between 1993 and 2001 - this privatization o f a few small manufacturing units did not have a significant impact on the fiscal and economic front. AAer the present Government came to power in October 2001, it amended the privatization pol icy in an effort to make the Privatization Commission (PC) more dynamic. The PC has since been trying to sell o f f enterprises on its l ist through a tendering process and has started to advertise these enterprises for sale without their long-term liabilities. Despite these efforts, progress remains slow as the response to tenders for selling outdated, inefficient and unprofitable enterprises have been poor. To address the problem ,in selling such enterprises as a going concem, the Government has taken a decision, in the interim, to close down these SOEs in advance o f privatization, and lay o f f the workers in order to stem the losses arising f rom on-going recurrent operation and reallocate resources to more productive private uses. T o enhance the climate for investment, the government has enacted in February a law for establishing an Independent Anti- Corruption Commission (IACC). The Bank is assisting the government in developing an anti- corruption strategy. I t i s hoped that adoption o f an action plan to make the I A C C functional and effective will contribute to the improvement in the investment climate.

Negative Impact from Perception of Job loss and De-industrialization resulting from Closures. Given the poor response to i t s privatization effort, the Govemment decided to take more visible and bolder steps to close down some o f the bigger and more dif f icult loss making manufacturing SOEs and retiring o f f workers through a Voluntary Separation Scheme (VRS). Whi le the VRS compensates the retiring worker, the closure o f the SOEs has resulted in substantial j ob losses within a short period o f time. The economy already has a major unemployment/underemployment problem and retirements under the VRS are seen as adding to this in a particularly negative manner. T o sustain the reform program, it i s important to help generate employment over the short to medium term.

Growth of Smaller SMEs. Faster employment growth could best take place by scaling up the growth o f the SMEs and also converting some o f the closed assets o f the SOEs into private enterprises that meet present day market demand. This wil l also require both strategic and policy input as wel l as some expenditures. However, smaller SMEs lack both access to finance and to business development services (BDS). This i s a market failure which i s primarily due to: (i) the preference o f banks to deal with larger clients; (ii) the incentives to invest bank liquidity in high yielding Govemment securities; (iii) the stringent collateral requirements for bank credit; and, (iv) the perceived r isks associated with lending to the small enterprise sector. As such, i t

4

requires a new banking approach whereby banks are ready to assume such r isks and adopt operating procedures conducive to such lending. In Bangladesh, there are some financial institutions that are ready to lend to this group o f enterprises. Whi le those institutions are making some efforts to assist, their expansion i s constrained by a lack o f adequate financial and B D S services to support this sub-group o f borrowers.

The Nationalized Commercial Banks (NCBs). The poor state o f the NCBs and their negative impact on the financial sector as a whole has caused the Government to push for reforms in these institutions. This wil l commence with the privatization o f one o f the NCBs (Rupali) and bringing about changes in the management structures o f the other three. The political economy o f moving forward with banking reform will, nonetheless, remain an important challenge for the policy makers in Government. The recently concluded special audits o f the NCBs reveal serious problems for al l the NCBs including: (i) high levels o f N P L s due to imprudent lending; inadequate loan monitoring and follow-up, and poor governance; (ii) large and growing capital shortfalls; and, (iii) operational inefficiencies stemming from excessive manpower, extensive and loss-making branch networks, and low levels o f computerization.

Sector issues to be addressed by the project and strategic choices:

Key policy and institutional reforms supported by the project. This project wil l support the Government’s pol icy o f reducing, and eliminating over time, i t s ownership o f assets in the real and financial sectors o f the economy. Such a policy, which wil l ultimately help in reducing the fiscal deficit through reduction and elimination o f losses, wil l also foster private sector development and growth through more productive use o f SOE assets. I t wil l also lead to changes in the Government’s pol icy o n privatization and closure o f SOEs, ensuring a proper safety net for Retired employees, and the pol icy on NCBs. The institutional reforms supported under the project relate to the strengthening o f the Privatization Commission, the Board o f Investment, and the Bangladesh Export Processing Zones Authority, which are al l involved in the actual implementation o f the new policy.

These wil l be achieved through the following instruments:

Privatization and Closures. There i s broad-based support for the GOB to urgently downsize i t s SOE sector, through privatization and closure o f loss-making units. After the present Government came to power in October 2001, i t amended the privatization pol icy in an effort to make the Privatization Commission (PC) more dynamic. The PC has since been trying to sell o f f enterprises on i t s list through a tendering process and has started to advertise these enterprises for sale without their long-term liabilities - financial and human. In order to remove various bottlenecks, the Government i s now reviewing a new regulation proposed by the PC - a salient feature o f which i s a provision for liquidation when repeated bidding does not result in a satisfactory response. I t is imperative for the authorities to draw up a set o f binding rules and procedures on the winding up (liquidation) o f SOEs to ensure appropriate best practices are followed by al l engaged in the winding up process. Technical assistance need to be provided to enable the authorities to draw up the rules and procedures.

5

Given the poor response to its privatization effort, the Government has also decided to take more visible and bolder steps to close down some o f the bigger and more dif f icult loss making SOEs and retire o f f workers under i t s VRS program. The Government initiated this move by closing the emotionally and politically charged Adamjee Jute Mills o f BJMC. The closure was preceded by a transparent and efficient pay-off to workers under a wel l established and accepted VRS program. Closures and worker lay offs have now become a cornerstone o f the GOB’S efforts to reform the SOE sector. However, this requires additional worker support in the form o f retrenchment counseling and retraining.

Voluntary Separation Scheme (VRS). GOB has put in place a transparent and effective VRS for labor downsizing. I t involves payment o f existing entitlements in respect o f pensions and gratuities. The average VRS payment per worker i s about $4,000 - and, by including al l pension and provident fund benefits. The VRS is a one-time payment, after which the workers wil l have no more entitlements f i om the enterprise or the Government. Once the workers receive the VRS they cease al l connections with the enterprises and the position stands abolished. The package is widely accepted and the overall response has been positive. The practice o f directly depositing compensation payments into workers’ bank accounts has also alleviated the scope for corruption in the distribution o f compensation. It is estimated that it takes only three years to repay the costs o f these VRS schemes - when measured against the on-going losses which are incurred by keeping these SOE’s operational. By June 30, 2003, the government had provided a VRS package to 42,000 workers and closed down 28 SOE’s.

The next round of closures and privatization. The Government has an Action Plan for privatization and closure o f a further 95 enterprises over 2003 to 2008. The number o f workers involved in these companies i s estimated at around 93,000. The GOB has been pro-active in developing a wel l enunciated Privatization Policy, a Privatization Strategy, and a precise Action Plan for the way forward. On this basis, there is a strong case for World Bank financing o f the h t u r e VRS costs o f the next tranche o f 95 SOE’s slated for privatizatiodclosure over a period o f five years. However, this must be undertaken in ways that are achievable within the context o f Bangladesh’s political-economic situation in particular, managing any negative fall-out that large-scale retrenchment may have on the overall reform agenda.

Retraining and Counseling o f Retired Workers. To overcome negative impacts f rom VRS, i t i s important to have retraining and counseling for the retired workers, so that they can adjust themselves in a more productive environment. T o help with this process it i s important

, undertake social tracking o f the workers. DFID has already commenced a program o f tracking workers that have taken VRS packages to find out how they have been impacted by the loss o f their jobs, the use o f the VRS package that was paid to them, whether they have been able to find alternative employment, and whether the family (including children) have been unduly adversely impacted by the retrenchment exercise. This wil l continue and will help provide additional guidance on how retired workers can be better fitted for a “post-SOE” life.

Government efforts to convert closed SOEs into alternative productive uses. For many years, prime sites such as Chittagong Steel Mills (with over 200 acres) and Adamjee Jute M i l l s (3 10 acres) just outside of Dhaka town have remained idle, while the lack o f adequate industrial land in these critical locations has impeded further development. Quickly re-establishing key

6

assets such as these for productive purposes i s key in helping the Government meet its objectives o f increased growth and employment creation. The Government has now decided to convert Chittagong Steel Mills (CSM) into an Export Processing Zone (EPZ) and has handed this facility over to the Bangladesh Export Processing Zone Authority (BEPZA). BEPZA will require assistance to demolish the mill and deal with environmental issues at the site, in preparation for the development o f an EPZ. A recent similar decision with respect to Bangladesh Small and Cottage Industries Corporation (BSCIC) and the land at Adamjee Jute M i l l s has also been made by the Government.

Enterprise Growth (with an emphasis on SME Development). To sustain the reform program, it i s important to take steps that wil l help generate employment over the short to medium term - to help counteract the unemployment resulting f rom the structural shift o f productive resources from inefficient SOEs to more efficient and productive SMEs. This could best take place through scaling up growth in the SME sector. Their support and growth wil l require different types o f banks that would be ready to assume different risks and which have operating procedures conducive to such lending. In Bangladesh such financial institutions exist - which are ready to lend to these enterprises. Besides three such active institutions: B R A C Bank, BASIC Bank, and MIDAS financing, there are other banks who are also showing interest in this sector. This market wil l have to be supported so that more o f these enterprises can access funding from the formal financial institutions.

Institutional Strengthening for privatization and growth acceleration. Sustained growth wil l require strengthening o f the public institutions which support industrial development, investment, and privatization. In this respect, there i s a need to provide institutional support and capacity building for the Privatization Commission (PC), the Board o f Investment (BOI), the BEPZA, and the BSCIC.

NCB Reforms. In 2001, the Government started to address problems in the financial sector by appointing a Bank Reforms Committee, which recently presented i t s recommendations. The appointment o f a new central bank Governor in November 2001, also provided some reform impetus. The f i rst reform priori ty was to strengthen the central bank’s oversight o f the banking system and grant i t autonomy over monetary and exchange rate policies supported by the Central Bank Strengthening Project. Accordingly, the Bangladesh Bank Order 1972, was amended in March 2003. The Banking Companies Act 1991, and the Bangladesh Banks (Nationalization) Order 1972, have also been amended by removing some o f the provisions that kept the NCBs outside the purview o f the central bank. The Money Laundering Prevention Ac t (2002) has been enacted to check illegal financial transactions and the f i rs t circulars to support its implementation have been issued. A program to address the problems facing NCBs has been initiated through the engagement o f reputable local firms to audit the four NCBs, based o n international auditing and accounting standards. They have completed their special audits which reported a heavy NPL burden (totaling 43 percent of the NCBs loan portfolio), and a continued sharp deterioration o f N P L s and loss in the capital base (with capital shortfalls totaling 6 percent o f GDP) since the last special audits in 1996. N e w lending by NCBs have been restricted through the signing o f MOUs that have tightened prudential l imits on individual loan exposure and bank-by-bank limits on net lending to stop the hemorrhage. There appears to have been no breach o f performance targets under the MOUs. 157 unprofitable branches of NCBs have already been closed by mid-2004.

7

Moreover, the Government has given its approval for the appointment o f a Financial Advisor to privatize one o f the four NCBs (Rupali Bank, which accounts for 6 percent o f total banking system assets). The government has also agreed to seek management support for Sonali Bank and Janata Bank. For Agrani Bank, the contract for its new management team has been finalized. Over the next two years, the Government intends to deepen financial sector reforms further by overhauling the laws that directly affect the banking system.

2. Rationale for Bank involvement

The proposed operation supports the Government’s program o f reducing i t s involvement in the real and financial sectors o f the economy. The Government’s initiative was primarily prompted by i t s plan to stem continuing losses in the state-owned sectors after realizing the beneficial impact o f Adamjee closure on the fiscal budget. The ease with which the Adamjee closure was handled by the Government encouraged i t to expand the program quickly to keep the momentum going. However, to forestall the possibility o f a slowdown in implementation due to a lack o f fiscal resources, IDA support is justified for financing: (i) technical know-how on refurbishment and conversion of physical assets to more productive uses; (ii) expertise to counter public perception o f unemployment and de-industrialization; and, (iii) resources to restructure and privatize the NCBs.

This project i s the second phase o f a larger SOE reform effort that was init ial ly supported under the 2003 Development Support Credit (DSC). Assuming on-going Government commitment to the reforms, a third phase of SOE reforms would be supported under DSC 11. Under al l three operations, a total o f over 100 manufacturing enterprises would be removed from the public sector and over 100,000 workers retired under VRS schemes. I t is therefore based upon a medium-term program of institution building and institutional reform - whose sustainability will be supported by accompanying specific investments.

The project elements are in l ine with the analytical work undertaken o n Bangladesh’s SOE and financial sectors. The enterprise growth component o f the project wil l address the constraining factor o f access to finance for the “missing middle” -- those between micro enterprises and the larger o f the MSMEs. This need i s reflected in the Investment Climate Assessment (ICA) as wel l as in DFID’s survey on MSMEs. The 2002 Bank/Fund FSAP also highlighted the embryonic state o f the non-bank financial system, which amounts to less than 6 percent o f GDP, and the deficient legal and institutional framework that hinder the system’s development. This operation wil l be addressing some o f the issues raised in those analytical exercises - while support i s also being provided through the Central Bank Strengthening Project. The operation also supports CAS outcomes on private sector development.

The Government agrees that fundamental reforms are necessary in the state enterprise sector. I t has expressed its commitment to a program o f closures and privatization and views this as a central element o f its broader economic reform agenda. The Cabinet has approved a revised

8

Privatization Policy Paper clarifying the Government’s objectives and approach to privatization, and i s currently revising and updating the regulations’.

A main lesson from previous Bank assisted projects i s that implementation progress i s generally faster when project components have been fully developed prior to project approval. The severance support i s based upon an agreed formula which has been tested in the market and found acceptable to the workers, the unions, and Government. With the VRS schemes an on- going and accepted feature o f the Government’s reform program, this component has been “fully developed”. Similarly, with the placement o f several o f the banking teams in the four NCBs, this component i s also largely in place and ready for financing.

Value added o f Bank support in this project: The World Bank has considerable worldwide experience in privatizing SOEs, and has a growing experience (in Pakistan, Sr i Lanka, Nepal) with management teams undertaking restructuring work in troubled state-owned banks. I t can therefore bring a considerable body o f knowledge and experience to this process. As worker payouts have proved to be a big stumbling block to previous privatizations and liquidations, in combination with the fiscal constraints o f the Government o f Bangladesh, the World Bank can bring much needed fiscal support to this costly (but high payoff) process. The World Bank also has experience with counseling and retraining schemes for retired workers which can be applied in Bangladesh. On the SME component other donors such as DFID, IFC (through the South Asia Enterprise Development Facility - SEDF), and USAID have been actively consulted. Recently, the Asian Development Bank (ADB) has also commenced preparation o f an SME focused project. Whereas other donors deal with the entire range o f micro, small and medium scale enterprises, under this intervention, it i s envisaged that IDA will focus particularly on the “small” or the “missing-middle” o f the MSME sector.

3. H i g h e r level objectives to which the project contributes

This project contributes to the higher level objective o f reducing poverty through reducing and ultimately stopping the hemorrhaging o f fiscal resources through the privatization or closure o f most o f the Government’s loss making financial and non-financial public enterprises. This will permit scarce resources to be diverted instead to expanding public services in education, health, and infrastructure.

The operation supports CAS outcomes on private sector development. The CAS Progress Report (discussed on June 9, 2003, document number IDA/R2003-0114 [IFC/R2003-01041) acknowledges the Government’s considerable reforms in the SOE sector and efforts to reduce public participation in manufacturing, SOE losses, and reliance on ADP financing. It notes that efforts to advance this agenda have already been assisted by the Bank through the Development Support Credit (DSC o f June 19, 2003). It explicitly identifies the current project as the next

’ Borrower commitment to SOE reforms i s evidenced by the closure and retirement o f 26,000 jute mill workers (12 percent o f the total SOE workforce, and accounting for about 10 percent o f annual SOE losses) in the Adamjee Jute Mills in June 2002 - where this large and politically sensitive industry was closed with virtually no resistance from the workers, the unions, or the general public. In the case o f N C B reforms commitment has been evidenced by the early selection o f a management team for Agrani Bank and a Privatization Advisor for Rupali Bank.

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reform in the SOE and N C B sectors and states that further Wor ld Bank support will be provided as the Government continues its efforts to withdraw from the manufacturing sector.

Similarly, the CAS Progress Report notes the need for urgent reform in the Nationalized Commercial Banks and explicitly supports the engagement o f the Government in dialogue on reforms to reduce operating costs within these banks through restructuring, reconstituting N C B boards and the use of management contracts for eventual privatization. These elements o f SOE and N C B reform, as outlined in the CAS Progress Report, are supported under this operation.

Lastly, and possibly most importantly, the project seeks to ensure a more efficient reallocation o f national resources - both public and private - to ensure faster economic growth, with positive poverty alleviation implications for all. The withdrawal o f the government from institutions such as Adamjee Jute Mills has already resulted in increased profitability within the industry and an increase in the absolute level o f jute exports from Bangladesh. An improved investment climate in which the Government withdraws back to a role as a facilitator rather than as an active operator and permits the private sector to make their own decisions about appropriate risk and reward structures in a less distorted economic environment i s anticipated to have hrther long term beneficial impacts in terms o f increased private sector investment and enhanced growth,

B. PROJECT DESCRIPTION

1. Lending instrument

The project will be supported through an IDA Investment Credit. All financing operations to Bangladesh are carried out on IDA terms. An Investment Credit was chosen to compliment the on-going pol icy o f SOE closure and liquidation as it has become clear that the Government requires additional support in dealing with post-retrenchment issues for VRS workers; as the government required additional support in converting closed SOE assets into alternative productive uses; the public institutions involved in privatization and the business environment needed strengthening; and, as the real sector/SOE reform required support f rom an inter-linked program o f banking sector reform to help achieve the higher level objectives o f increased private investment and faster economic growth. These elements wil l be supported through TA and investment under the proposed operation in combination with on-going VRS assistance.

2. Program objective and phases

This project continues the restructuring support o f financial and non-financial state-owned enterprises commenced by the June 2003 Development Supported Credit. The current project represents the second phase o f reform - buttressed by necessary TA and investment support. The third and final phase of SOE reform wil l be provided under the Second Development Support Credit. In addition, a follow-on project i s likely to be required specifically in the financial sector to assist with implementation o f the Resolution Plans for the NCBs developed under this project.

3. Project development objective and key indicators

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Project development objective: The objectives o f the project are: (i) to trigger employment generation through private sector enterprise growth and urgently needed reforms within the State Owned Enterprises (S0Es)- as part o f a wider reform o f rol l ing back state ownership and control within the economy; and (ii) to help Bangladesh implement its banking sector reform program aimed at achieving a competitive private banking system by a staged withdrawal through corporatization leading to divestment o f a substantial shareholding in Rupali, Agrani, and Janata, and to divestment o f a minority shareholding in Sonali. The Enterprise growth component would focus o n containing future losses within the SOEs sector by privatization or closure o f some o f the loss-making manufacturing SOEs, turning into productive uses the abandoned assets o f the SOEs that have been closed and now lying idle, and providing finance to the missing middle between micro enterprises and medium-sized enterprises. The Bank Modernization component would commence the resolution process within the four NCBs to pave the way for eventual divestment.

Key performance indicators:

a

a

a

0

0

a

a

a

a a

a a

a

a

a

a

About 1,500 additional small enterprises receive financing from participating financial institutionshanks; Chittagong Steel M i l l s (CSM) handed over to BEPZA in Year 1 and refurbished and converted to an EPZ by the end o f Year 3; Adamjee Jute M i l l s premises converted to an industrial park by the end o f Year 4; Khulna Newsprint Mill and the Chittagong Chemical Complex refurbished and converted to industrial park by the end o f Year 5; About 80,000 workers retired with a VRS package (of which 45,000 workers financed under this Credit) by the end o f Year 5; SOE losses for the 95 manufacturing SOEs reduced on average by 10% annually; Around 20 percent o f workers retrained or counseled obtain alternative employment within 12 months and a further 20 percent within 18 months - after receiving retraining/counseling services; PC privatizedliquidates an average o f 10 SOEs per year over the l i fe o f the project; BO1 and BEPZA facilitates US$40 million per annum additional FDI; A new external management team hired by mid-2004, to manage Agrani Bank; Management experts for key positions in place at Sonali Bank and Janata Bank by end 2004. Rupali Bank brought to the point o f divestment by end-2004; Agrani Bank corporatized and by end-2005 brought to the point o f divestment where i t wil l hold out promise for potential strategic partner to bid for substantial shareholding with management control; Janata Bank corporatized and by end-2006 brought to the point o f divestment where i t will hold out promise for potential strategic partner to bid for substantial shareholding with management control; Sonali Bank corporatized and brought to the point where a minority shareholding can be divested over the medium term; and, Newspapers and media report fairly and unbiasely about the SOEs and N C B reforms in Bangladesh.

1

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The overall objective is to create more employment than what has been lost through the closure o f enterprises. A strong likelihood, or actual, achievement o f any twelve o f these sixteen indicators would justify a ‘highly satisfactory’ development objectives rating, while full or partial achievement equivalent to two-thirds o f the total would be used as the threshold for a ‘fully satisfactory’ rating.

4. Project components

The proposed project has seven categories in three main components namely: (i) enterprise growth component; (ii) a longer term program o f adjustment in support o f sustained economic growth; and, (iii) a program o f banking reform.

By Component (details in Annex 4):

Enterprise Growth Support Component

(a) Small Enterprise Development. This component seeks to support the development o f the small enterprise sector by addressing the constrains that hinder access to finance by this sector o f entrepreneurs. There are clearly other constraints to small enterprise development including the legal framework, availability o f skilled manpower, access to uninterrupted power and business development services. However, this project focuses on what one recent survey identifies as the top constraint - access to finance - while providing linkages to other Government and donor interventions that address the other impediments to small enterprise development. Having reviewed various options, that included setting up a credit guarantee fund and integrating a credit line within the micro-finance wholesaler PKSF, i t was decided during the project preparation stage that i t would be preferable to establish a Small Enterprise Fund (SEF) at the Bangladesh Bank. The SEF would be a refinancing facility where funds will be on-lent to SME- focused banks to help scale up their small enterprise portfolio. Financial institutions interested to avail o f this facility include BRAC Bank, BASIC bank, MIDAS Financing, Prime Bank and Dhaka Bank and specifically the smaller end o f their small enterprise portfolio.

(b) Refurbishment of Some Strategic Remaining Assets of Loss Making SOE’s. The inefficient and frequently resource wasting SOEs need to be substituted by private enterprises that invest efficiently, generate productive employment opportunities, and thus become an important engine for growth within the economy. Moving quickly to convert some o f these key closed assets into productive uses is crucial if the Government is to meet its objectives o f increased investment and employment creation over the short to medium term. This category wil l cover the init ial refurbishment costs associated with a select sub-set o f these idle assets. Two prominent sites - Adamjee Jute Mills (over 300 acres) and Chittagong Steel M i l l s (over 200 acres) have already been identified. In addition, two other sites have been proposed for support - including the Chittagong Chemical Complex‘ and Khulna Newsprint Mill.

(c) Institutional Strengthening. Equally important to the growth agenda will be the role o f the public enabling institutions which encourage investment in Bangladesh (both domestic and foreign); the role of the privatizing authority; and, the export processing zones. T o this end, the

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project supports a small amount o f capacity building within the PC, the BOI, the BEPZA, and the BSCIC.

The Longer Term Program of Adjustment in Support o f Sustained Economic Growth.

(d) Support to Voluntary Retirement Schemes. This component o f the proposed operation i s designed to continue the assistance initiated under the Wor ld Bank’s Development Support Credit (DSC) which supported much o f the first tranche o f 28 SOE closures in 2001-02. I t i s designed to cover the VRS costs to the Government o f a second tranche o f about 95 enterprises slated for closure/privatization over the period 2002-03 to 2007-08. The proposed project wil l cover the retrenchment costs o f workers. The Bank’s support wi l l be supplemented by about $88 mi l l ion (GBP50.0 million) in DFID co-financing in support o f this project - o f which the VRS part wil l be about $ 75 mi l l ion equivalent.

(e) Retraining and Counseling Services for Retired Staff of SOEs. Providing adequate counseling and re-training support to retired workers are also important social priorities under the project. A social safety program, that includes retraining and counseling, wil l be funded out of the DFID part project funding for which $10 million has been earmarked. This Safety-net Program, which wil l be implemented by B R A C under direct funding from DFID, but wil l be subject to supervision o f the Project Coordination Unit (PCU) in the FD. To ensure that the retraining schemes and counseling services have the desired impact, the proposed project intends to apply innovative methods to support transitioning these workers into alternative jobs or self employment.

A Program of Banking Reform

( f ) Resolution of the Problems of the Nationalized Commercial Banks (NCB’s). Reforms in the NCBs have been identified by both Government studies and the FSAP as being particularly urgent. The proposed project i s designed to support the government’s ini t ial reforms envisaged in these Nationalized Commercial Banks. These include: the privatization o f Rupali Bank; hiring an extemal management team at Agrani Bank to contain losses; and, the introduction o f management experts at Sonali and Janata Banks to improve operational performance. This category wil l finance a Management Team in Agrani Bank; a Sales Advisor for Rupali Bank; and, management experts for Sonali and Janata Banks. It will further provide technical advisory support to the jo int MOF/BB Working Group, established in July 2003, to monitor the restructuring process including the preparation o f resolution strategies and resolution plans for the four banks. The “end-game” for Rupali, Agrani, and Janata is a fundamental change in their existing governance arrangements through the implementation o f the Resolution Plans - and their divestment in full or part over the medium term. In the case o f Sonali, the “end-game” i s to bring i t to the point where a minority shareholding can be divested over the medium-term. To contain the financial hemorrhaging, measures wil l be taken to shield i t from abuse by vested interests. These measures include restricting Sonali’s commercial lending operations, redirecting i t s lending activities to treasury and inter-bank transactions, bringing in new private management, and revamping the board o f directors.

Additional Support

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(g) Public Awareness, Monitoring, Evaluation, and Tracking. The Government will need to develop an improved information campaign to convince the public o f the overall benefits o f i t s ongoing reform efforts. In addition, this component o f the project wil l support monitoring and evaluation o f the costs and benefits o f the reform agenda - including the already commenced, social tracking exercise, the impact o f the retraining and counseling component, so as to be able to adjust and adapt the program appropriately in response to overall indications o f the program’s direction. Undertaking social tracking important social priorities under the project. DFID, which has already undertaken exit surveys o f retired workers from two Jute Mills, wil l continue to fund tracking survey in future under this project. The monitoring, evaluation, and tracking wil l be coordinated by the Project Coordinating Unit (PCU) in the FD.

Indicative DFID Component Costs YO o f financing

(US$M) Total (US$M) Enterprise Growth 20.00 4.2 0.00 Refurbishment o f Assets o f Loss 30.00 6.3 0.00

Yo of Bank- Yo of DFID financing Bank-

financing (U S$M) financing 0.0 10.00 4.0 0.0 20.00 8.0

M a k i n g SOEs Inst i tut ional Strengthening 5 .OO 1.1 0.00 0.0 4.00 1.6 Support for Voluntary Retirement 372.00 77.5 75.00 85.2 180.00 72.0

5. Lessons learned and reflected in the project design:

The fol lowing lessons learned from previous projects have been reflected in the project design:

a) Sustainable banking sector reforms require that the autonomy and technical capability o f the central bank be enhanced. Under the Central Bank Strengthening Project (CBSP), steps are being taken to enhance the capacity and skills o f central bank staff.

b) Sequencing is important for the success o f reforms. The CBSP became effective in September 2003, and continues to be a high priori ty in the banking reform program.

c) Legal framework reforms are critical to ensure successful implementation. Legal support under the CBSP has helped to enhance the authority o f Bangladesh Bank and to extend i t s oversight over the NCBs.

d) Forcing reforms from outside i s not sustainable. The SOE reform and the N C B resolution must be driven from within and be championed by the Finance Minister, the Finance Secretary and the Governor o f Bangladesh Bank, along with their trusted staff.

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e) Re-capitalizing commercial banks without fundamental reforms in ownership and governance structures is unlikely to be sustainable. No recapitalization is envisaged under this project as this would only take place at the point o f an acceptable change in governance arrangements within the banks (privatization or liquidation).

f ) Project components that are pre-designed and are already under implementation have a greater chance o f success. Except for the SME component, a l l other components have been completely pre-designed and implementation has commenced.

g) Lessons from the retraining program under the Jute Sector Adjustment Credit are helping in the design o f the retraining and counseling component.

6. Alternatives considered and reasons for rejection

There are two altemative design options that were considered by the project team. The f i rst option was a single-tranche adjustment operation. A second option was to undertake the banking sector reform as a separate operation - and to only include the SOE reform and growth components as part o f the proposed project.

I t was decided to move forward with an investment, rather than an adjustment operation as this permitted the project to incorporate other important support elements into the overall program (outside o f the VRS payouts) in a mutually interlinked and reinforcing manner. These included funding for retraining and counseling which was considered important given the potential adverse social consequences that could flow from such significant retrenchments; a component to assist in converting the assets of the closed SOEs into alternative productive purposes so as to help support the overall growth agenda in Bangladesh. Also an investment program was better suited to assist in the requisite institutional support necessary in the PC, BOI, and BEPZA - as wel l as for the commencement of the reform process within the NCBs.

Another design option, considered but rejected by the team, was to leave the N C B component out o f the project and only move ahead with the SOE component. Under this scenario, the N C B reform agenda would have been developed within the context o f a separate operation. The team decided that there were four important reasons for incorporating the first phase o f the financial reform program into the current operation: (a) the SOE reform funding i s the more substantial financial component o f the operation and hence could assist in leveraging the “more politically difficult” N C B reform agenda; (b) once the init ial phases o f N C B reform have been initiated, this would provide a stronger rationale for developing a separate N C B reform project; and, (c) immediate assistance was required to place the Management Teams and a sales advisor in the banks - and the current operation was well advanced.

C. IMPLEMENTATION

1. Partnership arrangements

The Bank has been and will continue to work closely with the Intemational Monetary Fund and DFID in the implementation o f the various components o f the project. DFID will also be a co-

15

financier (GBP50.0 million) o f the proposed operation. Out o f this amount DFID would make available the equivalent o f $10 million to pay for the costs o f providing counseling and re- training support to retired workers under the project. Close liaison has also taken place with USAID, the ADB, and SEDF on the M S M E growth component o f the project.

2. Institutional and implementation arrangements

The Project will be managed and supervised by the Finance Divis ion (FD) o f the Ministry o f Finance. However, the TA components relevant to PC, BOI, and BEPZA will be executed by those agencies - albeit under the general oversight o f the Finance Division. For the refurbishment component there wil l be a division o f work between the FD, Ministry o f Jute, Ministry of Industry, BEPZA, and other GOB Ministriedagencies that have a stake in this work. The N C B reforms wil l be jo int ly supervised by BB and the FD. The credit l ine for enterprise growth wil l be routed from BB through private banks and financial institutions which are in the business o f SME lending and which are OP 8.30 compliant.

Financial management. Under a Project Coordinator, the Project Coordination Unit (PCU) in the Finance Divis ion wil l guide, supervise and monitor al l issues affecting financial management o f the project. The Project Coordinator o f the P C U will have access to the Special Account for payment o f IDA eligible expenditures. The respective implementing agencies wil l be responsible for approval o f bills/invoices against eligible expenditures and submit the same to the P C U for payment o f IDA’S share o f such expenditures. The PCU will be responsible for maintenance o f books o f accounts and also prepare withdrawal applications for submission to IDA.

Procurement. The P C U in MOF will also coordinate a l l procurement activities and wil l provide technical support to the implementing agencies responsible for procurement activities. Implementing agencies wil l include: the Ministry o f Finance, Ministry o f Industry/ Jute, Bangladesh Bank, the Privatization Commission, the Board o f Investment, and the Bangladesh Export Processing Zone Authority.

3. Monitoring and evaluation of outcomes/results

The Project Coordination Unit (PCU) wil l set up an effective monitoring and evaluation (M&E) system to track implementation progress under the project. The M&E system wil l be designed to monitor the achievement o f outcomes in the short-, medium- and long-term. It will also help to close the feedback loop in order to internalize lessons leamt into future projects. Over the short- term, the M&E will allow the P C U to monitor the performance o f the consultants working in the four NCBs and track their progress in achieving the key indicators and performance benchmarks. Similarly, the M&E will track the SOE privatization and closures, retrenchment o f staff, as the extent o f j ob creation under the SME component, number o f enterprises set up in the refurbished sites, and the impact o f the retraining and counseling o n the retired workers. Over the medium- term, the M&E component will track the movement o f interest rates, the number o f new jobs created, and new productive assets/facilities generated. Over the long-term, the M&E system will monitor the beneficial impact o f improved financial intermediation and the better allocation o f resources within the economy - with respect to longer term growth trends,

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4. Sustain ability

Risk F r o m Outputs to Objective Macro economic instability.

Pace o f SOE privatization slows.

The government is committed to SOE reform as demonstrated by the bold steps that i t has already taken with respect to closing down several large, high profile SOEs. I t is also committed to the N C B reform under the IMF’s Poverty Reduction and Growth Facility (PRGF) and has spelt out its financial policies and structural reform program in its Memorandum o f Economic and Financial Policies. There is every reason to believe that i t will continue to support the SOE privatization program and the N C B reform agenda - as these have largely been internalized as Government o f Bangladesh policies. As the country moves closer to the next election (expected in three years time) the commitment to bo ld reform may lessen. Nonetheless, once SOEs have been privatized i t wil l not be possible to resuscitate them as public sector entities - hence this represents very little risk once the point o f closure has been reached. There i s now broad based support for privatization o f SOEs and closure o f those making larges losses. As most SOEs have been loss making and as they are burdened with huge liabilities the Government’s closure program has outpaced privatization. For sustainability reasons i t wi l l be important to bring these two processes more into line so as to ensure that a political backlash is not created as SOEs close - but no alternative productive activity rises up to take their place. That is one reason why the project also focuses on growth creation so that new employment can result f rom profitable private sector investment - so as to counter the huge j o b losses emanating from the closed SOEs.

Risk Rating Risk Mitigation Measure

S Continued dialogue and donor support for policies which promote macroeconomic stability. VRS funds wil l not disburse unless SOEs are M

5. Critical risks and possible controversial aspects

Government baulks at taking concrete and difficult steps toward true financial reform. Pace o f closure o f SOEs slows

Sufficient rapid movement must be made between now and prior to the next round o f elections in Bangladesh - as this i s l ikely to slow down the momentum for reform, at least temporarily.

H World Bank wil l work closely with the Fund to ensure maximum leverage

Restructuring o f the enterprises with partial S because o f the election cycle. From Components to Outputs Sustainability o f the retrenchment

I I I closedhrivatized and excess labor i s retired. I

retrenchment can continue during the period.

In most cases o f SOE closure - ALL workers are N component arising from adverse selection.

being laid o f f under the VRS - so the issue o f adverse selection does not arise.

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Sustainability o f the retrenchment M component arising from overpayment.

Overall Risk Rating S

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or L o w Risk)

The payments are calculated on the basis o f standard benefits that the Govemmeltlt has been using for several years. Payments are made directly into employee bank accounts.

6. Loadcredit conditions and covenants

None.

D. APPRAISAL S U M M A R Y

1. Economic and financial analyses

The VRS is being justified as an investment project that is expected to produce a stream o f cost savings for the Government o f Bangladesh. As such, the economic justification o f the investment i s highly sensitive to: (a) the economic l i fe o f the investment, i.e. how many years o f cost savings are counted, and, (b) the “residual value” o f the investment which conceptually would be the price that the private investor would pay for the enterprises for having closed it prior to privatization. The high losses o f these institutions are also frequently higher than the value o f the goods which they are producing. With a demonstrated pay o f f o f about three years in the first round o f SOE closures (i.e. reduced losses o f SOE functioning against the cost o f the Voluntary Retirement Scheme) the VRS schemes, which comprise the bulk o f the project, have a very rapid repayment period and therefore represent an excellent financial rate o f return. The financial rate o f return o f the VRS program has been calculated to be 36%. The closure o f some SOEs - such as the Adamjee Jute Mill - has also had the unexpected beneficial effect o f reducing levels o f excess capacity in the industry, thereby assisting the commercial viability (and profitability) o f the remaining industry participants.

The other main components o f the project are either technical assistance or training,

2. Technical

Designing a wel l functioning retraining package for retired staff o f the SOEs has represented a technical challenge - in this the team has drawn upon the extensive experience o f the World Bank from i t s central anchor units. Technical issues related to the rehabilitation, re-fitting, dismantling o f o ld assets from the SOE privatization process are also being addressed by the project team conforming to the needs o f the client and also with technical soundness, taking into account international standards.

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3. Fiduciary

Procurement issues: Rules and Guidelines: All IDA financed local procurement o f goods, works, and services (for which the shortlist entirely comprised o f national consultants) wil l fol low the Government’s new procurement regulations (works- < US$5 million, goods- US$500,000, and consultants’ services- < US$200,000). Procurement o f goods using international competitive bidding (ICB) will fol low the Bank’s Procurement Guidelines. Consulting services and training obtained through international advertisement (dgMarket/UNDB online) wil l fol low Consultants ’ Guidelines.

Procurement Plan: The Procurement Plan for goods and works, and Selection Plan for services has been prepared covering the init ial 18 months o f the project. Some packages for works and services are not yet identified and wil l be included during implementation o f the project. Use o f the methods defined in the Plan is mandatory. Procurement o f goods and works and selection o f a l l consultants wil l be undertaken in accordance with the Plan agreed with IDA.

Procurement Responsibility. The Finance Division o f the Ministry o f Finance (MOF) wil l manage and supervise the project. A Project Coordination Unit (PCU) in the MOF, headed a Project Coordinator, will coordinate, monitor, and supervise al l procurement activities and wil l provide technical support to the implementing agencies responsible for procurement activities. Implementing agencies are: MOF, Ministry o f Industry (MOI), Ministry o f June (MOJ), Bangladesh Bank (BB), Privatization Commission (PC), Board o f Investment (BOI), and Bangladesh Export Processing Zone Authority (BEPZA). The P C U will be assisted by a team o f consultants included in i t a procurement expert for the entire project period.

Prior Review Thresholds: Goods and Works: During the initial 18 months of the project, IDA will carry out prior review of the following contracts: al l contracts estimated to cost US$500,000 equivalent or more and the first one contract regardless o f the value and method (each for goods and works). Consultants Services: IDA’S prior review will be required for consultants’ services contracts estimated to cost US$lOO,OOO equivalent or more for f i r m s and US$50,000 equivalent or more for individuals. All single-source contracts will be subject to prior agreement by IDA. After 18 months, the above thresholds wil l be revieweddefinedredefined in the revised procurement plan, if necessary.

Procurement Environment & Reform Actions: The Country Procurement Assessment Report (CPAR) identified inadequate public procurement practices as major impediment affecting project implementation in Bangladesh. Fol lowing the CPAR recommendations, the Government with IDA’S support is implementing the Public Procurement Reform Project (PPRP). As part o f the reform, Government established a Central Procurement Technical Unit (CPTU) with adequate staffing funded from own resources, issued Public Procurement Regulations 2003 in October 2003 and Implementation Procedures in March 2004, and prepared standard bidding documents that are at the approval stage. Concurrently, to build procurement management capacity, i t developed a critical mass o f 16 local procurement trainers and started training in October 2003 of about 1,600 public/ private sector staff to be conducted in phases over the next

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two years. All these actions are contributing positively in changinghmproving the procurement environment.

Procurement Capacitv Assessment: At the project level, most procurements wil l be handled by MOF and BB, with the remaining by PC, BOI, BEPZA, etc. MOF/BB has experience o f implementing Bank-financed project. Other implementing agencies for this project have l i m i t e d inadequate experience in implementing Bank-financed projects and are not immune to the problems in the operating environment. The P C U in the MOF, with the assistance o f procurement consultant, will provide total technical support for procurement activities by al l above agencies. This wil l work as an intemal control mechanism to ensure the quality o f procurement activities. However, since al l local procurement wil l follow the new regulations o f the government, which has just started to be practiced by the above agencies, there are substantial risks associated with procurement.

ImDvoving Procurement Manucement: Advance procurement actions for four key consultancy packages have almost been completed by the borrower. As regards procurement management, to mitigate procurement-associated risks, strengthen procurement management capacity/ accountability, arrangements have been made/agreed with the borrower (details in Annex-8).

Financial Management Issues. A Financial Management capacity assessment o f the implementing ministry to manage the project with adequate coordination with other implementing agencies was carried out during project appraisal. The assessment included reviewing the adequacy o f (i) project accounting, reporting, monitoring and intemal controls; (ii) fund f low arrangements from IDA to the Government o f Bangladesh and thence to other executing ministries, agencies and institutions; (iii) staffing; and, (iv) internal and extemal audit arrangements. An agreed action plan has been prepared to address weaknesses identified as part of the FM assessment. The Country Financial Accountability Assessment (CFAA) included a number o f findings and recommendations o n State Owned Enterprise and Nationalized Commercial Banks which have been taken into account while appraising the project.

4. Social

An assessment was carried out to understand the social underpinnings and incentives for strengthening reform measures as wel l as to identify needs and priorities o f the different stakeholders, especially vulnerable groups. This analysis assisted in developing Guidelines and Principles for responding to the concems o f workers and staff who wil l receive the VRS package and formulating mechanisms which would address: (i) issues o f social inclusion, poverty and vulnerability; (ii) the mitigation o f risks for potentially vulnerable groups; (iii) the design of comprehensive counseling, retraining, and j o b placement schemes - and access to MFI/self employment programs; and, (iv) developing mechanisms for transparent social tracking systems to monitor the progress o f workers accessing the VRS package.

Exit Surveys and monthly Evaluation Surveys were conducted o n workers in two jute mills by a research institution to gauge the impact of the VRS o n the retired workers. The findings provide a r ich data base on the needs and envisaged future income generating activities o f the workers after they leave these enterprises. Support programs for affected workers are being designed,

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based o n the findings o f the Exit Survey, which include counseling and retraining and links with employment and self employment using the micro-finance services o f the large network o f existing MFIs in Bangladesh. The training program will also be open for eligible children o f affected workers, so that impacted families are able to retain a similar quality o f life. The counseling is specifically designed to ensure that affected workers are made aware o f what i s happening and are informed about options that are available to them. A social tracking program has been developed by the research organization to monitor the progress o f the workers who have received the VRS and counseling/retraining/job placement assistance.

5. Environment

The project wil l provide support to strengthen the Government’s capacity to manage its program o f privatization o f State-Owned Enterprises (SOEs). As part o f this support, the project will assist the Government in the development and implementation o f a set o f principles and procedures to manage the environmental liabilities associated with the past operation o f these facilities and the future use o f these sites. In addition, the project wil l help address some o f the factors constraining the growth of Small and Medium Enterprises (SMEs), and in doing so will help ensure that the development of this sector i s consistent with national environmental requirements and relevant World Bank guidelines. The assistance to be provided for improved environmental management in the Project i s described in more detail in Annex 10.

During preparation o f the project, the report “Bangladesh Privatization Program: Policies and Procedures for Environmental Liabi l i ty and Compliance Assessment” was completed and its recommendations were accepted by the Government. In particular, i t was agreed that (i) the PC wil l adopt the environmental policies and procedures specified in the report, and (ii) BEPZA wil l contract an environmental audit o f the Chittagong Steel M i l l s site based o n the Terms o f Reference included in the report (which will serve as a model for further environmental audits under the privatization program), as well as a less detailed environmental examination o f the Adamjee site.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 1 1.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60) Projects o n International Waterways (OP/BP/GP 7.50)

[X 1 [XI [XI [XI

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7. Policy Exceptions and Readiness

(a) Exceptions. An exception to normal Bank Policy that has been agreed for the current project i s the application o f 28 percent retroactive financing - above the normal 10 percent generally applied. This has been discussed and agreed with the World Bank Management. This exception i s necessary to meet the VRS costs which are currently being incurred in advance o f project approval - so as to continue the momentum generated by the Government in closing/privatizing SOEs.

(b) Readiness. The requirement for larger than normal amounts o f retroactive financing supports the fact that the project already has an inbuilt momentum which the Bank can easily support. The VRS in the SOEs are being implemented as enterprises are closed. The selection o f the management team for Agrani Bank and Financial Advisors for Rupali Bank have also been approved by the Government and the contracts are being negotiated. These consultants are expected to be on board wel l before Credit Effectiveness. Consequently, the project is ready and init ial disbursements are expected to be high to cover the progress in implementation made in advance o f Board approval.

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Annex 1 : Country and Sector or Program Background

BANGLADESH: Enterprise Growth & Bank Modernization

Country and sector issues

Country Background: Bangladesh continues i t s fight against poverty by maintaining a satisfactory overall macroeconomic framework that has steadily improved over the past decade - with only a moderate setback following the floods o f 1998. Annual real GDP growth has averaged 5 percent since FY95 despite the floods. Central government deficits remained within a range o f 4 to 5 percent o f GDP (3.5 percent on 6/30/03) although the overall fiscal deficit, including consolidated SOE losses, i s slightly higher. These levels appear to be sustainable given that GDP is growing at 5 percent. Inflation, which has averaged around 6 percent a year since FY95, f e l l to under 5.2 percent in FY03. The current account situation on the balance o f payments has also been stable and within 1-2 percent o f GDP (0.4 percent o n 6/30/03), indicating that there are no pressures on the current account. Foreign exchange reserves have been stable but l o w - $2.1 b i l l ion in June 2003 or 2.6 months’ imports - suggesting that pressure is also not substantial on the capital account. The external debt situation also looks comfortable with the outstanding stock o f debt at 33 percent o f GDP, as o f June 2003. Debt service as a ratio o f foreign exchange earnings (exports o f goods and services plus remittances) is 6.5 percent and falling, placing Bangladesh amongst the more moderately indebted countries, based on World Bank standards.

Although Bangladesh’s macroeconomic fundamentals look sound, vulnerabilities exist. One weak link is the rising central government debt, due largely to non-performing loans and failed SOEs, which (including potential bank recapitalization) i s projected by the IMF to rise from under 50 percent today to 60 percent by 2005/6. The rise in non-performing loans continues in the public sector banks, mainly due to the failure o f NCBs to deal decisively with this serious issue, although private banks have managed to reverse the trend. A second weakness originates from public guarantees o f supplier credits and FDI. For instance, while current external liabilities appear within affordable limits o f the economy’s foreign exchange earnings capacity (thanks to a dynamic export sector), public guarantees o f financially weak parastatals (such as the Power Board) have resulted in growing foreign obligations and government contingent liabilities that are in real danger o f being called.

Financial Sector Background.

The banking sector in Bangladesh i s dominated by the four Nationalized Commercial Banks (NCBs) that hold almost half (48 percent) of total system deposits. Af ter independence from Pakistan in 1971, al l financial institutions, other than the foreign bank branches, were nationalized along with major industrial concems. The domestic commercial banks were amalgamated into six NCBs through the enactment o f the Bangladesh Banks (Nationalization) Order, 1972. In the early 1980s, the government began relaxing the nationalization pol icy upon realizing the importance o f the private sector for growth.

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Ever since the first structural changes were implemented in the financial sector in the early nineties based on the recommendations of the GOB-initiated National Commission on Money, Banking and Credit, and supported by IDA’S Financial Sector Adjustment Credit, the government has maintained financial sector reforms as a priority in its economic reform program. Therefore, in spite of serious political opposition and resistance from vested interests it has continued to implement measures, albeit at a slow pace, to bring about dynamism and efficiency in the banking sector in Bangladesh. Such measures included:

0 the relaxation o f the nationalization pol icy in the early eighties upon realization o f the importance o f the private sector for growth and development;

0 privatization o f two NCBs - Pubali Bank and Uttara Bank - in 1983 and 1984 respectively. The four remaining NCBs are: Sonali Bank; Agrani Bank; Janata Bank; and Rupali Bank; approval o f banking licenses to groups o f new private banks in 1983, 1995, 1999, and 2001in order to generate competition and increase efficiency in the sector; resulting in a total o f thirty private commercial banks, along with eleven foreign bank branches - in addition to the four NCBs and five specialized development banks, operating in Bangladesh today; formation o f a Bank Reforms Committee in 1986 and again in 2001, to suggest measures to improve the soundness and efficiency o f the banking sector. The Committee has recommended, among others, several measures for restructuring the NCBs; introduction o f stricter prudential regulations relating to capital adequacy requirements, loan classification and provisioning guidelines, and single/group exposure limits. Increase in the capital adequacy ratio from 8 percent o f risk-weighted assets to 9 percent with effect from June 2003; improvement in the legal framework for debt recovery through the enactment o f the Financial Loan Courts Act in 1990, and the Bankruptcy Ac t in 1998, and bringing in amendments to these laws from time to time to make them more effective; improvement in the legal framework for the banking sector by amending the Banking Companies Act o f 1991, the Bangladesh Banks (Nationalization) Order o f 1972, the Bank Deposit Insurance Ordinance o f 1984, the Negotiable Instruments Act o f 1881, and the Bangladesh Bank Order o f 1972; a request to the Bank and the Fund to carry out an assessment o f the financial sector under FSAP. The FSAP report was published in April 2003; and, enhancement of the efficiency and effectiveness o f Bangladesh Bank though an IDA- assisted Central Bank Strengthening project in June 2003, with special focus o n greater autonomy, complete automation of its operations, and enhanced bank supervision skills.

0

0

0

e

0

0

e

The four NCBs are: Sonali Bank, Agrani Bank, Janata Bank, and Rupali Bank Limited. Although created to meet the financing needs o f the country, the NCBs were obliged to comply with priority sector lending objectives and social obligations imposed by the Government. This led them to diverge from their core commercial banking functions and they have evolved into institutions with a strong developmenthervice-orientation - but they lack a commercial focus and have inadequate corporate governance.

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These NCBs continue to be poorly managed, technically backward, saddled with stifling labor practices and social responsibilities, and continued political interference. They are al l insolvent with a capital shortfall o f Tk 82.8 bi l l ion (US1.45 billion) and an estimated capital shortfall relative to C A R o f Tk 152.4 billion (US2.67 billion) based on a special audit o f their accounts undertaken by independent auditors in early 2004 (funded under the Central Bank Strengthening Project). This capital shortfall amounts to 6 percent o f GDP. Their non-performing loans (NPLs) average 44 percent and range from 37.4 percent in the case o f Janata Bank to 50.8 percent in the case o f Rupali Bank. The NCBs have a very l ow net interest margin to net assets (NIMA) ratio as their cost o f funds i s relatively high. They operate through an extensive branch network o f more than 3,500 branches and have an excessively large labor force numbering more than 60,000 employees. Their misallocation o f savings and operating inefficiencies tend to slow economic development, and the continued growth o f their losses poses problems for the sustainability o f public debt. Although their market share o f banking system assets has fallen f rom more than 60 percent in 1994, to around 47 percent in 2003, they continue to dominate and distort the money, securities, and credit markets in which they operate. Their profitability and asset quality is worse than that of the private commercial banks and their capital shortfall has almost doubled since 1996.

The government has taken measures to contain losses in the NCBs, curb the flows o f new bad loans and strengthen management o f NCBs. All the NCBs were required in 2003 to enter into a Memorandum o f Understanding with the Bangladesh Bank under which net new lending by the NCBs has been limited to 5 percent o f their net loan portfolios at the end o f FY03 and must be directed only to credit worthy borrowers. Each bank has developed interim business plans that include time bound processes with interim milestones for achieving full compliance with al l prudential regulations. Good progress has been made with respect to performance under the MOUs and so the government plans to extend them into 2004. The new M O U s are expected to contain explicit targets for cash recoveries for the 20 largest defaulters o f each NCB. Special audits o f each o f the four NCBs started in September 2003 have been completed. The special audits provide the government with the information needed to formulate resolution plans for each bank by November 2004. Significant efforts have been made in strengthening management o f NCBs. Final approval has been given for the appointment o f a sales advisor for Rupali bank, and the process i s on course to bring this bank to the point o f divestment by end-2004. Work goes forward to put in place a new management team within Agrani, and management advisors in Sonali and Janata, though the timing for the latter has been delayed by the need to re-tender the contract for Janata.

The strengthening o f Bangladesh Bank is viewed by the incumbent Governor, who took office in November 2001, as a pre-requisite for ensuring a sound, efficient and competitive banking sector. Some of the actions that have been taken by BB since then include: removal o f errant private bank directors and issuing fit and proper tests for appointing new bank directors and Managing Directors; imposition o f penalties o n private banks that do not comply with prudential regulations; strict monitoring of the operations o f “Weak Banks”, Le., banks with a C A M E L rating o f 4; enhancement of the accounting disclosure requirements by banks in l ine with intemational standards; and assistance to NCBs in rationalizing their branch network. Moreover, the Finance Division (FD) has set up a Working Group headed by a Deputy Governor and including members from the FD, Ministry of L a w (MOL) and Planning Divisions to oversee and

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monitor the N C B reforms in the face o f their continuing losses. Such losses have prompted the Government to seek IDA support for the restructuring o f the NCBs with the ultimate objective o f reducing public sector ownership o f the financial sector assets.

The Financial Sector Assessment Program (FSAP), jo int ly conducted by the World Bank and the International Monetary Fund in October 2002, also exposed the embryonic state o f the rest o f the financial system (which amounted to less than 6 percent o f GDP at the end o f 2001), and the deficient legal and institutional framework that hinder the system’s growth and development. Governance practices in the small Dhaka and Chittagong stock exchanges are extremely weak. The current provisions in the Securities Act, however, are not sufficient to induce compliance, and lack o f manpower, training, and computerization render the Securities and Exchange Commission (SEC) ineffective. The insurance sector in Bangladesh i s also underdeveloped with insurance penetration (premiums as a percent o f GDP) at about 0.49 percent in 2000, compared to 2.32 percent in India and 0.64 percent in Pakistan. Private insurance companies dominate. The sector’s development i s hampered by the absence o f technically qualified insurance staff and adequate investment opportunities. In addition, the supervision o f the sector i s feeble falling under the purview o f the Ministry o f Commerce, which is poorly equipped to understand solvency r isks o f insurance companies. The secondary market for government debt i s also in the process o f being developed.

SOE Sector Background: One o f the legacies that have continued since Bangladesh’s independence i s the nationalization o f the industrial and financial sectors. However, the result o f such sweeping nationalization has not been good. The SOE sector in Bangladesh consists of: (i) 41 public sector corporations and boards, having 200 subsidiary enterprises in a wide range o f sectors (manufacturing, energy, ports, shipping, aviation, urban water supply & sewerage, urban development, agriculture, water resources and trading); (ii) two government departments involved in commercial activities, namely Bangladesh Telegraph and Telephone Board (BTTB) and Bangladesh Railways; and, (iii) eight public financial institutions, including four nationalized commercial banks (NCBs) and four development finance institutions. In FY2000, SOE assets amounted to $16 bi l l ion (Tk906 billion) or 32 percent o f GDP and SOE investments were equivalent to 7 percent o f gross domestic investment. Approximately 256,000 workers are employed in the sector as a whole - although nine major SOEs (in manufacturing and energy) employ 74 percent o f the work force and account for 76 percent o f total SOE assets. These include Bangladesh Jute M i l l s Corporation (BJMC), Bangladesh Textile M i l l s Corporation (BTMC), Bangladesh Steel and Engineering Corporation (BSEC), Bangladesh Chemical Industries Corporation (BCIC), Bangladesh Power Development Board (BPD), Dhaka Electric Supply Authority (DESA), Bangladesh Petroleum Corporation (BPC), and Bangladesh Oil, Gas, and Mineral Corporation (BOGMC).

SOE employment has been costly for the entire economy and its performance has been consistently poor, contributing less than 1 percent o f GDP in FY2000. Consolidated data on state enterprises reveal that their financial performance has worsened in recent years, leading them to make increasing demands on scarce budgetary resources. Until the recent closure (in 2003) o f some major SOEs and the concomitant retrenchment o f about 57,000 workers, there had been about 256,000 SOE workers, who accounted for about 20 percent o f public sector employment, but only 6 percent o f the total manufacturing work force and less than 1 percent o f

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total formal sector employment. Net SOE losses averaged $160 mi l l ion (Tk 9 billion) annually over FY91-02, reaching a record level o f US$ 440 million (Tk 25 billion) in FYO1. The average loss per employee o f SOEs has been high compared to their average wage - reaching 201 percent in FYO1. The average loss per employee has risen noticeably, to over $1,754 (Tk 100,000) annually yet, ironically, many o f these SOEs continue to operate in order to protect jobs.

SOE losses have further diverted resources away from spending on social sectors. The average gross losses o f SOEs have been equivalent to almost ha l f o f the budgetary resources available annually for Bangladesh’s annual development plan (ADP). The conclusion is inescapable: poor SOE performance has become an unsustainable economic and financial burden for Bangladesh - and reform of the sector must be aggressively tackled. The present Government is keen to reduce the state ownership o f banking and manufacturing sector assets. In l ine with this changed policy, the Government closed down the largest jute mill in the world - the loss-making Adamjee Jute Mills Ltd. - and laid o f f i t s 25,700 workers, a move that has been widely hailed by al l including the Chambers of Commerce and Industry. The success o f Adamjee closure and its beneficial impact on the fiscal budget has created a momentum which has prompted the Government to sell 19 SOEs since November 2001, close down another 28 loss-making SOE over 2002-2003, and retrench about 42,000 workers. This program i s expected to continue for the with the help of the financial and technical support proposed under this project. Since the Government started i t s SOE reform program in 2002 losses in manufacturing SOEs, as depicted in the Table below has been coming down.

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Net Profit and Loss of State Owned Enterprises (In USD Million)

Source: Monitoring Cell, Finance Division

Status o f Small Enterprises. While Bangladesh has an extremely well developed micro finance and (developing) micro enterprise industry - small and medium scale enterprises are not wel l covered by financial and business development services (BDS). This i s an important area for support as this is an employment generating class o f businesses which can assist the Government in achieving i t s more immediate employment and growth objectives. A recent survey on micro, small, and medium enterprises (MSMEs) sponsored by DFID, USAID, Swiss ADC, and SIDA shows that finance is a major constraint faced by this sector. The survey showed that 35 percent o f MSMEs received credit from informal source and 35 percent f rom formal sources. The formal sources are mainly NGOs while the informal sources include family loan and money lenders. According to the survey there are about six million MSMEs employing about 31 million. The MSMEs identified through the survey have a maximum employment size o f 100. The near total absence of formal lending to the MSME sector i s an important issue that needs to be addressed.

Sector-related Country Assistance Strategy (CAS) goal supported by the project: The CAS Progress Report praises the Government’s reforms in the SOE sector and efforts to reduce public

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participation in manufacturing, SOE losses, and reliance o n ADP financing. I t highlights the March 2002 approval by the Cabinet o f the new Privatization Policy - which the Bank reviewed - and which clarifies the Government’s objectives and approach to privatization. I t further points out that an Industrial Policy, to reinforce the privatization process, i s also under discussion. I t notes that efforts to advance this agenda have already been assisted by the Bank through the Development Support Credit (DSC o f June 19, 2003). I t explicitly recognizes this proposed SOE/NCB project and states that further World Bank support will be provided as the Government continues i t s efforts to withdraw fkom the manufacturing sector and to restructure the entire SOE sector.

Similarly, the CAS Progress Report notes the need for urgent reform in the Nationalized Commercial Banks and explicitly supports the engagement o f the Government in dialogue on reforms to reduce operating costs within these banks through restructuring, reconstituting N C B boards and the use o f management contracts for eventual privatization. These elements o f SOE and N C B reform, as outlined in the CAS Progress Report, wi l l be supported under this operation.

The Government as part o f i t s strategy has been taking steps to reduce the fiscal hemorrhage by closinglprivatizinglrestructuring o f the SOEs and bringing reforms in the financial sector through restructured NCBs. The Government has also been making efforts to increase employment opportunities through development o f the SME sector. All these interlinked actions are critical for private sector development, a cornerstone o f the country’s poverty reduction strategy.

Key Issues that Constrain achievement of desired results in the sector.

Privatization. In i t ia l moves toward disinvestment were made in the early 1980s, followed by additional privatization efforts in the early 1990s. However, the results were discouraging and at one point the whole privatization process was stopped. Between 1993 and 2001, some 22 manufacturing enterprises were fully or majority divested for a total value (sale proceeds and long-term liabilities) of $41 mi l l ion (Tk 2.35 billion), equivalent to less than 0.1 percent o f current SOE asset values. Privatization o f a few small manufacturing units did not have any significant impact o n the fiscal and economic front. Most importantly, i t did not serve to effectively signal government commitment to fundamental change and reform. Problems and losses in SOEs continued to mount requiring even more visible action from the Government,

Fortunately, there i s a growing consensus among different stakeholders that Bangladesh can no longer maintain this approach to privatization. There i s also broad based support for the GOB to urgently downsize its SOE sector, including the closure o f loss making units. After the present Government came to power in October 2001, it amended the privatization pol icy in an effort to dynamize the Privatization Commission (PC). The PC has since tried to se l l o f f enterprises on i t s l i s t through a tendering process and has started to advertise them for sale without their long- term liabilities.

Despite these efforts, progress remains slow and the results are limited. Since November 2001 the PC has finalized the sale, including approval o f the Government, o f 19 SOEs for a total price (including long-term liabilities) o f about $30.6 mi l l ion (Tk 1.81 billion). O f these 13 enterprises have now been handed over to new buyers; and a Letter o f Intent (LOI) for sale has been issued

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to buyers o f 06 other SOEs (2 jute, 3 textile, a sugar mill). In addition, over this period, the Government’s shares in 4 other enterprises are being sold through the Stock Exchange. Lastly, there are 4 enterprises whose privatization process has been completed but handing over i s not possible because o f litigation in the courts.

Given the poor response to i t s privatization effort, the Government has also decided to take more visible and bolder steps to close down some o f the bigger and more difficult loss making manufacturing SOEs and retiring o f f workers through i t s VRS program. The Government initiated this move by deciding to close the emotionally and politically charged Adamjee Jute M i l l s o f BJMC. The closure was preceded by a transparent and efficient pay-off to about 26,000 workers. This was followed by the closure o f 28 additional loss making SOEs over 2002-2003 and 57,000 workers were retired under a VRS program. Between 2004-2008 about 45,000 more workers are expected to be retired. This process has now become a comerstone o f GOB’S efforts to reform the SOE sector. The successful closure o f those state owned enterprises has been made possible because o f awareness raising with the general public and by making sure that the workers receive their VRS payments through a transparent mechanism based on an agreed formula. However, this needs to be further cushioned with counseling and retraining programs.

Negative Impact from Perception of Job loss and De-industrialization resulting from Closures. Given the poor response to i t s privatization effort, the Government has also decided to take more visible and bolder steps to close down some o f the bigger and more difficult loss making manufacturing SOEs and retiring o f f workers through its Voluntary Separation Scheme (VRS) program. Whi le the VRS compensates the retiring worker, the closure o f the SOEs has, however, resulted in substantial j ob losses within a short period o f time. Whi le this will have a positive macroeconomic impact, i t i s creating a short term negative impact because o f the high visibility of these j o b losses. The economy already has a major unemployment/ underemployment problem and the retirements under the VRS are seen as adding to this. Whi le the SOE and the banking sector reforms should help in generating growth and employment in the economy over the long run this wil l happen with a lag. T o sustain the reform program it will be important to take steps that wi l l help generate employment over the short to medium term. This could best take place through scaling up growth in the small and medium enterprise sector and by also converting some o f the closed assets into private enterprises that meet present day market demand. In some cases, the conversion o f these assets into altemative productive purposes requires both strategic and pol icy input as well as some expenditures (for example, the dismantling o f the Chittagong Steel Mill to make room for alternative facilities). This is important considering that the end game i s to create productive assets out o f loss making state owned enterprises.

Growth of Smaller end of SMEs. This end o f SMEs are perceived as risky by the banks and hence they lack both access to finance - a swell as to business development services (BDS). Support for this sector wil l require different banks that would be ready to assume such risks and have operating procedures conducive to such lending. In Bangladesh there are few financial institutions that are ready to lend to this group o f enterprises. While those institutions are making some efforts to assist this group, their expansion i s constrained by a lack o f adequate financial and BDS services to support this sub-group o f borrowers. Three such institutions,

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B R A C Bank, B A S I C Bank, and M I D A S financing, have been identified. This market wil l have to scale up so that more o f these enterprises come to the formal financial institutions.

The Nationalized Commercial Banks (NCBs). The NCBs have a very l o w net interest margin to net assets ("A) as their cost o f funds i s relatively high. They operate through an extensive branch network o f more than 3,500 branches and have an excessively large labor force numbering more than 60,000. All NCBs offer non-banking services such as collection o f utility bills and distribution o f government transfer payments, while Sonali Bank (the largest), also offers check clearing services to other banks. At present, al l four NCBs are reasonably liquid. Their implici t deposit guarantee resulting from government ownership makes their deposit base fairly stable. Their management, constrained excessively by their highly unionized labor force, i s o f poor quality - with managing directors having short tenures, making them even less effective than they otherwise could be.

Sector issues to be addressed by the project and strategic choices:

K e y policy and institutional reforms supported by the project.

k Reducing losses in the public sector through privatization, restructuring, and closure o f SOEs so as to stem the hemorrhaging o f public money within the economy.

> Fostering PSD and growth through more productive use o f SOE assets and support for SMEs.

> Ensuring a proper safety net for retired employees. k Commitment to ongoing reforms within the NCBs through an init ial restructuring plan,

including bringing in the services o f professional bankers in various fields to assist the banks in developing and introducing a modem banking culture, with an ultimate goal o f privatization.

These wil l be achieved through the fol lowing instruments:

Privatization and Closure. Fortunately, there i s a growing consensus among different stakeholders that Bangladesh can no longer maintain this approach to privatization. There i s also broad based support for the GOB to urgently downsize i t s SOE sector, including the closure o f loss making units. After the present Government came to power in October 2001, i t amended the privatization pol icy in an effort to dynamize the Privatization Commission (PC). The PC has since been trying to sell off enterprises on its l ist through a tendering process and has started to advertise these enterprises for sale without their long-tenn liabilities. In order to bring more dynamism to the privatization process and also to remove various bottlenecks the Government i s now reviewing a new regulation proposed by the PC. A salient feature o f this draft regulation is the provision for liquidation when repeated bidding does not result in an adequate supply response. I t i s imperative for the authorities to draw up a set o f binding rules and procedures on the winding up (liquidation) of SOEs to ensure appropriate best practices are followed by al l engaged in the winding up process. Technical assistance need to be provided to enable the authorities to draw up the rules and procedures.

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Voluntary Separation (based o n established entitlements in respect about

Scheme (VRS). GOB has put in place a transparent and effective VRS guidelines) for labor downsizing. I t involves payment o f existing o f pensions and gratuities. The average VRS payment per worker i s

$ 4,000 - and, by including al l pension and provident fund benefits. The VRS i s an one time payment, after which the workers wil l have no more entitlements from the enterprise or the Government. Once the workers receive the VRS they cease al l connections with the enterprises and the position stands abolished.

VRS payments have been made in various sectors, including jute, textiles, engineering and railways. The package is widely accepted and the overall response has been positive, with more workers coming forward than originally targeted in some instances. The recent practice o f directly depositing compensation payments into the workers’ bank accounts appears to have alleviated the scope for corruption in the distribution o f compensation. I t i s estimated that it takes only three years to repay the costs o f these VRS schemes - when measured against the on going losses which are incurred by keeping these SOE’s operational. By June 30, 2003, the government had provided a VRS package to 57,283 workers in the SOE sector.

The next round of closures/privatization. The Government has an Action Plan for privatization‘closurelrestructuring o f a further 95 enterprises over 2003 to 2008. The annual losses incurred by these enterprises i s also considerable. The number o f workers involved in these companies i s estimated at around 93,000. The GOB has been pro-active in developing a Privatization Policy, a Privatization Strategy, and a precise Act ion Plan for the way forward. On this basis there i s a strong case for World Bank financing future VRS costs o f the next tranche o f 95 SOE’s slated for privatization over the next four years. The Government anticipates that the retrenchment costs for these 93,000 workers will be approximately $372 mil l ion,

However, these retrenchments must be undertaken in ways that take into consideration the political-economy o f Bangladesh - in particular managing any negative fall-out that large-scale retrenchment may have on the overall reform agenda. One way of addressing it i s to close the big loss makers quickly and then close the remaining SOEs in a manner and pace that would not generate a backlash and jeopardize the entire reform agenda - while at the same time minimizing losses in the SOEs. The Government has already taken a first step in this direction by closing the biggest loss makers (Adamjee and the Paper Mills), during the first year.

Retraining and Counseling o f Retired Workers. The project will support a social tracking study o f workers who have already been retired to find out how they have been impacted by the loss o f their jobs, the use of the VRS package that was paid to them, whether they have been able to find alternative employment, and whether the family (including children) have been unduly adversely impacted by the retrenchment exercise. I t i s l ikely to provide additional guidance on how retired workers can be better fitted for a “post-SOE” life. This work will be undertaken in close partnership with DFID, who has already undertaken an exit survey o f retired workers from two Jute Mills. Although retraining schemes and counseling services have frequently not had the desired impact, the proposed project intends to apply innovative methods to support transitioning these workers into alternative jobs or self employment. Several institutions are already involved in providing counselingkraining services in Bangladesh. These include the Bureau o f Manpower and Training (BMET), MIDAS, BRAC, and DCCI. These, and other institutions, have relevant

32

experience and could be involved in delivering such services. O f these B R A C has already undertaken a retraining and counseling program for retired workers in the Ready Made Garment sector.

Conversion of Closed Factories into Productive Assets. A further issue is the question o f the transformation o f assets left over from liquidatiodclosure into some alternative productive use. The two most visible cases include the 310 acre facility at Adamjee Jute Mills which is wel l served by road, rail, port and other facilities in an area close to Dhaka where the demand for industrial land i s particularly pressing. The second example i s the Chittagong Steel Mill (with over 200 acres) where the demand for serviced industrial land i s even greater. Other large sites also exist. The Govemment is actively considering private participation in developing these as productive assets. In some cases, the conversion o f these assets into alternative productive purposes requires both strategic and pol icy input as wel l as some expenditures (for example, the dismantling o f the Chittagong Steel Mill to make room for alternative facilities). This i s an area where the project wil l provide assistance. This is important considering that the end game i s to convert the poorly used assets o f loss making state owned enterprises into productive assets.

Government efforts to convert closed SOEs into productive assets through refurbishment of some strategically determined remaining assets of loss making SOE’s. One o f the biggest contributions to the growth agenda over the short to medium term wil l emanate from the revitalization o f some of the key assets which have been liquidated by the Government’s closure policy. Quickly re-establishing these, frequently high value, assets for future investment and business development would contribute positively to the overall growth agenda. For six years the land at Chittagong Steel Mills (200 acres) has remained unutilized; and the 310 acres o f prime land at Adamjee Jute M i l l s has now been idle for close to 18 months. Four key sites have been targeted for support under the proposed operation - Adamjee Jute Mills, Chittagong Steel Mi l l s , the Chittagong Chemical Complex, and the Khulna Newsprint Mill.

Quickly re-establishing key assets such as these for productive purposes i s key in helping the Government meet i t s objectives o f increased growth and employment creation. The Government has now decided to convert Chittagong Steel M i l l s (CSM) into an Export Processing Zone (EPZ) and has handed this facility over to the Bangladesh Export Processing Zone Authority (BEPZA). BEPZA will require assistance to demolish the mill and deal with environmental issues at the site - in preparation for the development o f an EPZ. A recent similar decision with respect to Bangladesh Small and Cottage Industries Corporation (BSCIC) and the land at Adamjee Jute M i l l s has also been made by the Govemment. There is, as yet, no firm decision on the Chittagong Chemical Complex, (CCC), though BCIC has proposed to use the vacant land for an industrial park. BCIC has also proposed that about 200 acres o f land o f the Khulna Newsprint M i l l s (KNM) be used to create an industrial park for SMEs. The location o f KNM adjacent to Khulna city with good road and river connections, and a power supply would make i t a good candidate for an industrial park.

Institutional Strengthening for privatization and growth acceleration. Faster and effective privatization will help accelerate growth through the more efficient allocation o f resources within the economy. This wil l be assisted by the strengthening o f the public institutions which support industrial development, investment, and privatization. In this respect, there i s a need to provide

33

institutional support and capacity building for the Privatization Commission (PC), the Board o f Investment (BOI), the Bangladesh Export Processing Zone Authority (BEPZA), and the Bangladesh Small and Cottage Industries Corporation (BSCIC). Despite considerable (albeit variable) progress within these institutions additional support wil l assist in strengthening their capacities to push forward faster on the overall reform agenda.

NCB Reforms. The Government that took office in 2000 started to address problems in the financial sector by appointing a Bank Reforms Committee, which recently presented i t s recommendations. The appointment o f a new central bank Governor in November 2001, also provided some reform impetus. The first reform priority was to strengthen the central bank’s oversight o f the banking system and grant i t autonomy over monetary and exchange rate policies. Accordingly, the Bangladesh Bank Order 1972, was amended in March 2003. The Banking Companies Act 1991 , and the Bangladesh Banks (Nationalization) Order 1972, have also been amended by removing some o f the provisions that kept the NCBs and SDBs outside the purview o f the central bank. The Bangladesh Bank has been receiving technical assistance from the IMF, the U.S. Treasury, and IDA to strengthen i t s capacity. IDA’S Central Bank Strengthening Project, supports the reorganization and modernization o f the central bank; automation o f al l its core functions; improvement o f i t s human resource base through a staff rationalization program and establishment of new compensation programs for retained and new staff; and, an intensification o f training, especially in the area o f banking supervision, research, accounting and auditing.

Capital adequacy requirements for banks have been raised from 8 to 9 percent o n a risk-weighted basis. Minimum capital requirements have also been increased from Tk.200 mi l l ion ($3 million) to Tkl bi l l ion ($17 million). Dividend declaration by banks in excess o f 20 percent i s only being allowed if an equivalent amount is set aside for reserves. The Government has abolished four National Savings Certificate schemes that paid disproportionately high rates o f interest, at a huge cost to the treasury, and impinged on the ability o f financial institutions to issue long-term liabilities attractive to the general public. The Government has also restricted access to remaining schemes to private individuals. The Money Laundering Prevention Act (2002) has been enacted to check illegal financial transactions and the first circulars to support i t s implementation have been issued. Some revisions, however, will be necessary to ensure that al l financial institutions are brought within the purview o f the Act.

A program to address the problems facing NCBs has been initiated through the engagement o f reputable local f i r m s to audit the four NCBs, based o n international auditing and accounting standards. They have completed their special audits which reported a heavy NPL burden (totaling 43 percent of the NCBs loan portfolio), and a continued sharp deterioration o f N P L s and loss in the capital base (with capital shortfalls totaling 6 percent o f GDP) since the last special audits in 1996. N e w lending by NCBs have been restricted through the signing o f MOUs that have tightened prudential l imits on individual loan exposure and bank-by-bank limits on net lending to stop the hemorrhage. There appears to have been no breach o f performance targets under the MOUs. 157 unprofitable branches of NCBs have already been closed by mid-2004. Moreover, the Government has given its approval for the appointment o f a Financial Advisor to privatize one o f the four NCBs (Rupali Bank, which accounts for 6 percent o f total banking system assets). The government has also agreed to seek management support for Sonali Bank and Janata Bank. For Agrani Bank, the contract for its new management team has been finalized.

34

Over the next two years, the Government intends to deepen financial sector reforms further by overhauling the laws that directly affect the banking system.

35

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BANGLADESH: Enterprise Growth & Bank Modernization

Sector Issue

Bank-financed

Export diversification away from ready made garments

The operations that have been supported by the Bank in the sector relevant to the proposed EG&BM project are listed below.

Latest Supervision

(Bank-financed projects only)

Implementation Development Progress (IP) Objective

Project (PSR) Ratings

(DO) Bangladesh Export S S Diversification Project

Deepening the financial sector (BDXDP) Financial Institutions S S

Micro-enterprise lending Weak legal environment

Development Project

Micro finance Project

Judicial Capacity Building Proiect

Second Poverty Alleviation S S

Bangladesh Legal and S S

Poor financial sector governance High fiscal costs o f SOEs

U S A I D I JOBS

Central Bank Strengthening S S

Development Support Credit S S Project

I Proposed SME project. ADB PDO Ratings: H S (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

~

Other development agencies DFID

DSC I has paved the way for reducing the high fiscal costs arising from the loss making SOEs, and this wil l continue to be supported by the proposed EG&BM project, as the Government moves further away from being an owner and operator of manufacturing SOEs. In designing the project ct lessons learnt from the cancelled bank financed Jute Sector Adjustment Credit (JSAC) were taking into account. This is also the backdrop of the IMF’s PRGF for Bangladesh. The PRGF also has triggers for SOE closures as wel l as reforms in the NCBs. The proposed EG&BM will be financing the costs o f these reforms which are complementary to the IMF triggers and also been endorsed by DFID who are co-financing the project. The N C B reforms under the proposed EG&BM project have been preceded by the Bank financed Central bank Strengthening Project to help improve financial govemance. A key objective o f the proposed

Support for the closure o f two Jute M i l l s

36

EG&BM project is helping growth o f SMEs. The focus here wil l be the so-called “missing middle” - those enterprises whose size falls between micro and small. While in micro- enterprises the Bank has an intervention through its Micro-Credit I1 program and the SEDF o f IFC as we l l as other bilateral donors have interventions for SMEs, there is not any known program for the “missing middle” o f MSMEs. In preparing the project discussions were held with JOBS o f USAID, SEDF, and DFID to learn from their experience especially in the area o f business development services.

The project has technical assistance components. Technical assistance projects tend to have l imited impact and are difficult to implement in Bangladesh. Consequently, the proposed operation has only l imited TA components and only where there i s demonstrated commitment to implement the reform agenda. This was a further reason for building some o f the Management Team TA for the Nationalized Commercial Banks into the current project rather than developing i t as a separate operation where i t i s likely to have formed the bulk of the support (and therefore been extremely high risk).

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Annex 3: Results Framework and Monitoring BANGLADESH: Enterprise Growth & Bank Modernization

Results Framework

PDO Employment generation through private sector enterprise growth and modernization o f the banking system

Trigger urgently needed reforms within the State Owned Enterprises (SOEs) and the Nationalized Commercial Banks (NCBs) -- as part of a wider re form o f ro l l ing back state ownership and control within the Bangladeshi economy.

Intermediate Results One per Component

Component One: Enterprise Growth. Small enterprises growth facilitated

and increased numbers come to the formal f inancial sector for financing.

Component Two: Refurbishment of Remaining Assets o f Loss Making SOEs. Buildings and other redundant physical structures dismantled in 4 SOEs and the land made available for sale to (or use by) the private sector for productive activities, which in turn would trigger growth;

Component Three: Institutional Strengthening o f the Export Processing Zone Authority (BEPZA), the Board of Investment (BOI), the Privatization Commission (PC); Privatizatiodliquidation program accelerates through PC, and more private sector investment facilitated by BO1 and BEPZA.

Outcome Indicators Healthy and growing private sector generating more employment;

Government moves mostly out o f the manufacturing sector;

An efficient f inancial sector under substantial private ownership.

Results Indicators for Each Component

Component One:

About 1,500 additional small enterprises receive financing f r o m participating financial institutionshanks.

Component Two :

Chittagong Steel M i l l s (CSM) handed over to BEPZA in Year 1 and refbrbished and converted to E P Z by the end o f Year 3.

premises converted to an industrial park by the end o f Year 4.

and the Chittagong Chemical Complex refurbished and converted for productive uses by the end o f Year 5.

0 Adamjee Jute M i l l s

0 Khulna Newsprint Mill

Component Three: P C privatizestliquidates an average o f 10 SOEs per year over the l i f e o f the project.

BO1 and BEPZA facilitates $40.0 m i l l i o n per annum additional FDI .

Use of Outcome Information Improved business environment.

Improved Government focus o n its core fimctions.

Financial sector responds to market needs efficiently.

Component One:

Impact o n employment generation f rom the additional small enterprises.

Component Two:

Impact o n setting up o f n e w private enterprises, creating fresh employment in the refurbished sites .

Component Three: Eff iciency increase in PC.

Increased FDI flows.

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Component Four: Support for Voluntary Retirement Schemes

VRS given retired workers as SOEs are privatizedclosed partially closedliquidated.

Losses reduced in manufacturing SOEs.

Retraining and Counseling for Retired Staff of SOEs

Based on demand retired workers takmg the VRS package get retrainingicounseling services for themselves or their children so that alternative employment becomes available. Component Six: Implementation of a Resolution Plan for the Nationalized Commercial Banks (NCBs)

N C B reforms initiated through the implementation o f the Resolution Plans.

Component Four:

About 80,000 workers retired with a VRS package (of which 45,000 workers financed under this Credit) by the end o f Year 5.

SOE losses for the 95 manufacturing SOEs reduced on average by 10% annually.

Component Five:

Around 20 percent o f workers retrained or counseled obtain alternative employment within 12 months and a further 20 % within 18 months - after receiving retrainingicounseling services.

Component Six:

0 Financial Advisor appointed and Rupali Bank brought to the point o f divestment by end-2004; 0 A new external management team hired by mid- 2004, to manage Agrani Bank; 0 Management experts for key positions in place at Sonali Bank and Janata Bank by end- 2004; 0 Agrani Bank corporatized and by end-2005 brought to the point o f divestment where i t w i l l hold out promise for potential strategic partner to bid for substantial shareholding with management control; 0 Janata Bank corporatized and by end-2006 brought to the point o f divestment where it w i l l hold out promise for potential strategic partner to bid for substantial shareholding with management control;. 0 Sonali Bank corporatized

Component Four:

Evaluate reduction o f losses allows more prudent allocation o f fiscal resources,

Component Five:

Evaluate impact o f the social safety net in place.

Component Six:

Impact on the financial sector in responding to market needs more efficiently.

39

Component Seven: Public Awareness, Monitoring & Evaluation, and Tracking. Strong public support for SOE and N C B reforms;

40

and brought to the point where minority shareholding can be divested over the medium-term;

Component Seven: Component Seven:

Newspapers and media report fairly and unbiasedly about the SOE and NCB reform process in Bangladesh.

Impact on public perception about reforms helping i t become more positive wi th increased expression o f support.

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Annex 4: Detailed Project Description BANGLADESH: Enterprise Growth & Bank Modernization

The project has seven sub-components - within three broad areas o f support for Enterprise Growth and Bank Modernization. These include: (a) an Enterprise Growth Support component; (b) a longer term program o f adjustment in support o f sustained economic growth; and (c) a program o f banking reform. The objectives o f the project are: (i) to trigger employment generation through private sector enterprise growth and urgently needed reforms within the State Owned Enterprises (S0Es)- as part o f a wider reform o f rol l ing back state ownership and control within the economy; and, (ii) to help Bangladesh implement i t s banking sector reform program aimed at achieving a competitive private banking system by a staged withdrawal through corporatization leading to divestment o f a substantial shareholding in Rupali, Agrani, and Janata, and to divestment of a minority shareholding in Sonali. The Enterprise growth component would focus o n containing future losses within the SOEs sector by privatization or closure o f some o f the loss-making manufacturing SOEs, turning into productive uses the abandoned assets o f the SOEs that have been closed and now lying idle, and providing finance to the missing middle between micro enterprises and medium-sized enterprises. The Bank Modernization component would commence the resolution process within the four NCBs to pave the way for eventual divestment.

Project Component 1 - US$lO.OO million

(a) Small Enterprise Development. The closure o f the SOEs is resulting in substantial j ob loss within a short period o f time. While this wil l have salutatory macroeconomic impact, i t is creating a negative impact because o f the high visibility o f this factor. The economy already has a huge unemployment/underemployment and the retirements under VRS is being perceived to be adding to that number and also being projected by some as de-industrialization. In order to sustain the reform program i t wil l be also important to take steps that wil l help employment generation in the short to medium run. This wil l require scaling up o f growth in the small and medium enterprise sector, especially the smaller end o f the small enterprises.

Access to finance has been identified as one o f the key constraints for the development o f the Small and Medium Enterprise (SME) sector in Bangladesh. This has been borne out by numerous studies, including a recent Investment Climate Assessment that showed how small firms are at a disadvantage compared to larger ones in terms o f obtaining finance both for new investments as well as for working capital needs. Another recent nationwide survey o f over 50,000 micro, small and medium enterprises found that “. . .responding to open-ended questions about current problems and problems when starting, proprietors cited financial constraints most frequently”. However, while the relationship between ease o f access to finance and firm size i s a common theme in many countries, Bangladesh faces a somewhat uncommon phenomenon where micro-business, namely those financed through micro-finance, face less o f a credit crunch than the SME sector. Hence the ‘SME’ sector and particularly the small enterprise sector i s known as the ‘missing middle’ in terms o f access to finance.

44

This sub-component o f the project seeks to support the development o f the small enterprise sector by addressing the constraints that inhibit access to finance by this sector o f entrepreneurs. There are clearly other constraints to small enterprise development including the legal framework, availability o f skilled manpower, access to uninterrupted power and business development services. However, this sub-component focuses o n the important issue o f access to finance while providing linkages to other Government and donor interventions that address the other constraints to small enterprise development.

While it is difficult to precisely quantify the extent o f unmet demand for small enterprise loans, there i s a significant body o f evidence that many viable small entrepreneurs, particularly those below Tk. 5 million, cannot obtain the amount o f credit that they require from the formal financial sector. This market failure i s primarily due to (i) the preference o f banks to deal with larger clients; (ii) the incentives to invest bank liquidity in high yielding Government securities; (iii) the stringent collateral requirements for bank credit; and, (iv) the perceived risks associated with lending to the small enterprise sector.

During the project preparation process, i t was found that there are financial institutions that are willing to adapt standard banking practices to address these market failures. However, some o f these financial institutions have a limited depositor base and altemative sources o f funding (e.g. loans from Nationalized Commercial Banks) are at rates which make this staff-intensive l ine o f business unprofitable or only marginally profitable. That said, there i s clearly a mismatch in the financial sector whereby there are certain banks that have excess liquidity and others who are liquidity-constrained to the extent that viable projects in the small enterprise sector do not get financed. A parallel way o f addressing the problem o f surplus liquidity i s through a ‘demonstration effect’ whereby banks who are able to use altemative collateral arrangements and overcome the perceived riskiness o f lending to the small enterprise sector become trend-setters to the rest o f the industry. Another method i s to set up some sort o f credit guarantee scheme to create incentives for banks who are particularly concerned about the r i sks o f lending to small enterprises. The medium term solution to the problem o f excess liquidity also rests in the further development o f inter-bank money markets.

IDA explored the need to have an explicit Business Development Services (BDS) component in the project but rejected the idea. One of the main reasons was that the financial institutions that are involved in small enterprise lending, and wil l be involved in this project, have pre-existing arrangements for the provision of BDS. B R A C Bank, for instance, has partnered with the U S A I D funded JOBS program for the provision o f certain B D S services, while basic business plan development i s largely left to B R A C Bank’s own f ield staff who are trained to provide this advice. MIDAS Financing Ltd taps the resources o f its sister concem, MIDAS, which has been involved in providing B D S for over a decade. Dhaka Bank i s partnering with Small Enterprise Development Fund (SEDF) to provide B D S services for its small enterprise program. Financial institutions that wil l be part of this project and who would l ike to make arrangements for business development services for the enterprises that they finance will contact SEDF who wil l direct them to the relevant expertise.

Various options were weighed which could stimulate small enterprise lending as part o f a larger EGBM project. Having reviewed various options, that included setting up a credit guarantee

45

fund and integrating a credit l ine within the micro-finance wholesaler PKSF, i t was alternatively decided to pool IDA resources with an existing credit l ine available at the Bangladesh Bank. There were several factors behind this decision (i) the existing Agricultural Credit Window at the Bangladesh Bank has around Tk.1.41 bi l l ion undisbursed funds that can be made available for small enterprise lending by amending certain eligibility criteria (see below); (ii) PKSF are not interested to move into small enterprise lending at this stage but would be prepared to provide other support to this project (see below); and, (iii) market participants felt that a line o f credit at the Bangladesh Bank refinancing rate would create sufficient incentives to expand lending in this sector and a guarantee fund would be an unnecessary additional cushion that financial institutions would not require.

The basic operating principles o f the new Small Enterprise Fund will be:

The remaining fund lef t within the Agricultural Credit Window (Tk.l.OO bi l l ion or $17 mi l l ion approximately) wil l be pooled with $10 mi l l ion IDA resources. Hence, the new Small Enterprise Fund (SEF) will have around $27 mil l ion in total. The SEF will re-finance loans made by financial institutions (commercial banks and non-bank financial institutions) to clients who borrow up to Tk.5 million. Financial institutions who avail o f this facility must have at least 90% loan recovery rate for their end-year portfolio below Tk.5 million. The interest rate charged by the Bangladesh Bank to financial institutions will be at the Bangladesh Bank refinancing rate. There will be no restriction o n the final interest rate charged by the financial institutions to the final borrower. The SEF wil l have no restriction o n the sector that loans are used for, there wi l l be no distinction between term loans and working capital loans and finally there will be no restriction o n the geographical location o f business that i s being financed. The only major restriction is as stipulated in point (ii) and (iii) above i.e. an upper ceiling o f Tk.5 mi l l ion to cater for the “missing middle” o f entrepreneurs and loan recovery rate o f 90%. The SEF will be administered on a reimbursement basis by the Bangladesh Bank, based upon disbursement and recovery statements provided by the financial institutions. Each financial institution wil l have to present a realistic projected fund requirement over a six month period so that the SEF managers have a realistic idea of future fund disbursements. The Bangladesh Bank will set a guaranteed processing time for each loan disbursement once a completed application for funds i s received from the financial institution. The SEF will be publicized widely during i t s launch and periodically afterwards in order to ensure awareness o f this facility amongst financial institutions.

46

Comparative Analysis of SME Operation (up to December 2003)

Financi Repaymen Total no. Amount Number Amount Average Rate Intere Human Classifi al t Period o f Disbursed of Loans Disbursed Loan of st Resour ed Instituti LoanILea (Total) up to Tk. (up to Tk. Size Reco Rate ce Loan on sel 50Lac 50Lac) (upto very

Working Tk.50 Capital Lac)

BASIC 3-5Yrs 41 8 Tk.6252.5 254 407.235 Tk.1.603 90% 11% 510 Tk.390 Million Million Million Million

(4.23 %) BRAC 18Months 5,335 Tk.2221.47 5,335 Tk.2221.47 Tk.0.4173 99% 18%- 312 Tk. Bank (Average) Million Million Million 24% (CRO) 17.64

38 Million (Head (0.79%) Office)

MIDAS SED: 8 Yrs 1,766 Tk.1041.88 2,909 Tk.1011.7 Tk.0.3477 97% 16% 82 Tk. 10.7 Financi MIDI: 2-4 Million Million Million (Co (p.a.) (Total) Million ng Ltd. Yrs mbin 39 (2%)

e 4 (Credit Dept.)

Dhaka 1-5 Yrs Tk.12886.7 292 Tk.312.7' Tk.1.07 98% 13% 556 Tk. Bank Avg. 3 Yrs Million Million Million ( inch (Total) 296.62

ding 22 Million fees) (Credit (2.32%)

Dept.) Prime 5 Yrs Tk.16492.2 1146 Tk.1103.42 Tk. 100 12%- 700 Tk.326. Bank (Term) 2 Million 0.9628 % 14% (Total) 53 Limited 1 Yr (WC) Million Million 112 Million

(Credit (1.98%) Dept.)

' Outstanding Amount

Cost o f

Fun d

6%

7.5%

12.5 %

7.5%

7.2%

Project Component 2 - US$20.00 million

(b) Refurbishment of some strategically determined Remaining Assets of Loss Making SOE's. In order to curtail further hemorrhaging, the Government has closed SOEs that are not feasible for privatization in their present state or where they lacked potential buyers. Two prominent examples include the Adamjee Jute Mills (over 300 acres) and Chittagong Steel Mills (over 200 acres). These SOEs are located in prime industrial sites with necessary facilities (access, electricity, water, telephones) and have the potential to be transformed into alternative industrial sites or export processing zones. The biggest contribution to the growth agenda over the short to medium term will emanate from the revitalization o f such assets which have been de facto liquidated by the Government's closure policy. Re-establishing these, frequently high value, assets for f i ture investment and business development is extremely urgent. For many years (almost 7 years), the land at Chittagong Steel Mills has remain unutilized; and the land at Adamjee has now sat idle for close to 18 months. Mov ing quickly to re-establish key assets such as these for productive uses wil l be crucially important in meeting the Government's objectives o f increased investment and employment creation.

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This sub-component wil l support the government in developing plans for altemative use o f these facilities - including some renovation, some up-gradation o f facilities, and some dismantling o f obsolete equipment to make them attractive for possible private sector investment. Init ial ly four such key sites have been identified for support under this operation - Adamjee Jute Mills, Chittagong Steel Mills, the Khulna Newsprint Mills (KNM), and the Chittagong Chemical Complex - and will permit sufficient flexibility within the project to possible include one or more additional sites. The particular focus o f IDA concern i s the large Adamjee Jute M i l l s (AJM) establishment and the Chittagong Steel Mills (CSM) - both closed, and slated to become Export Processing Zoneshdustrial Parks. Under the project, some init ial refurbishment work will be undertaken to move these prime sites to rapid production as quickly as possible - so as to counter the “closure and lay o f f ’ theme that predominates in the VRS support component o f the project. The current plan i s for the project to assist in demolishing the steel mill at Chittagong and to level the buildings and fill in the ponds at Adamjee and also demolish buildings so that the EPZ and Industrial Estate can be developed.

The Government has already handed over the Chittagong Steel Mills (CSM) to BEPZA from the Bangladesh Steel and Engineering Corporation (BSEC) to convert i t into an export processing zone. Quick development o f Chittagong Steel M i l l s into an EPZ - so that tangible results can be seen soon - is considered crucial. The close proximity to the existing BEPZA site in Chittagong as we l l as the urgent need for more industrial land in the ci ty - make the conversion o f the Steel Mill (220 acres) into an extension o f the existing Chittagong BEPZA site (400 acres) - a natural, and important, development. There is a lot o f interest in the new Chittagong site and the General Manager o f the existing EPZ already has indications o f foreign investor interest in setting up industry on 78 acres which is already in the process o f being cleared. The un-cleared portion of the site at C S M consists o f a large vacant housing area and the steel mill itself. An engineering team wil l be contracted to determine the most economic way o f removing the huge steel mill structures from the site.

.

With respect to the Adamjee Jute Mills, a recent Government directive has resulted in around 25 percent o f the mill machinery being removed from the premises. In addition, the BJMC is taking steps to auction o f f the remaining machines that cannot be used by other BJMC mills. This process is being accelerated so that the structures at Adamjee can also be removeddemolished quickly. The Government has decided that the Bangladesh Small and Cottage Industries Corporation (BSCIC), under the Ministry o f Industry, will convert Adamj ee land into industrial park and sell industrial plots to the private sector. I t may be mentioned that BSCIC has for long established industrial estates in the country.

The Ministry o f Industry, through the BCIC, owns the Chittagong Chemicals Complex (CCC) which i s another site that could be developed at Chittagong. This site was closed in 1997. CCC had been in the list of companies to be privatized, but was later withdrawn from the l i s t since i t did not receive any acceptable offer. The B C I C has n o w drawn up a program to convert about ha l f o f the available vacant land into an industrial park. I t is also proposed that private participation be involved to help develop and manage the CCC facilities.

I t has also been proposed that the 200 acres o f land o f the Khulna Newsprint M i l l s (KNM) also be used for an industrial park for SMEs in the Khulna region. The location o f KNM adjacent to

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Khulna Ci ty with good road and river connection, and also the availability o f a power supply make i t a good candidate for establishing such a park. The Khulna Newsprint M i l l s i s now on the privatization l is t but i t may be difficult to find an acceptable buyer. B C I C feels that converting it into an industrial park for SME use would be a feasible option. This will also have the beneficial effect o f addressing the perception o f de-industrialization which followed the closure o f a substantial number o f SOEs in the (highly politically sensitive) region.

Project Component 3 - US$4.00 million

(c) Institutional Strengthening. Equally important to the growth agenda wi l l be the role o f the institutions which encourage investment in Bangladesh (both domestic and foreign); the role o f the privatizing authority; and that o f the export processing zone authority. To this end, the project wil l provide TA support to the Bangladesh Export Processing Zones Authority (BEPZA), the Board o f Investment (BOI).and the Privatization Commission (PC).

Bangladesh Export Processing Zone Authority (BEPZA). As part o f the overall objective to support stronger private sector growth in alternative activities, this TA component would provide institutional support to the Bangladesh Export Processing Zones Authority for accelerating investment promotion in Bangladesh. The TA for BEPZA includes:

Investment Promotion Seminars for prospective investors o f different countries through arrangement o f seminars, workshops, and meetings with investors through the Embassies / High Commissions o f Bangladesh and also different Chambers & Trade bodies in respective countries.

Training & Familiarization Tour of BEPZA Officials to familiarize the Senior Officials o f BEPZA with other E P Z d FTZs/ SEZs o f other countries that face global changes in the field o f Trade and Investment. This is required to strengthen and upgrade the capacity o f the BEPZA officials and to boost the activities o f the Authority.

ICT Program would support the development o f an integrated management information system in BEPZA to provide faster services to existing and prospective investors and other stakeholders. The program also includes the development o f a web-based network to the various arms of BEPZA within Bangladesh as wel l as to facilities outside o f the country, automate BEPZA and its enterprises, strengthen environment management capabilities, support for the power system, computerized ID card system, and so on.

Employment of Counselors in order to facilitate and upgrade sound labor management relationships within the EPZs o f BEPZA.

Bangladesh Small and Cottage Industries Corporation (BSCIC). There will be limited technical assistance support, including support for limited autamtion activity t o help BSCIC implement the setting up o f the industrial parks.

Board of Investment (BOI). A s the prime facilitator o f private investment - both foreign and local - BO1 has taken a lead role in attracting new investment into Bangladesh. Over the last 12 (twelve) months, the BO1 personnel have undertaken a series of training programs, capacity

49

building exercises and modernization. Results o f these activities are evident from qualitative changes in service delivery, up-to-date publications, and original research. A new professional organizational structure was approved at a Board Meeting, presided over by the Prime Minister, on January 23, 2003. The Management o f the Bo1 is in the process o f establishing a knowledgeable, professional and client-targeted institution - including the development o f systems that will permit E-Approval o f investment applications.

The fol lowing are the main areas where Technical Assistance wil l be provided to the BO1 to assist i t in transfonning i t se l f into a model institution o f effective e-governance.

Capacity development to support the personnel o f the Bo1 to adapt to the new structure, a comprehensive and systematic training on computer literacy, investment functions and procedures. This includes: (i) developing specific training modules for both on-the-job and off-the-job training, and (ii) funding executive development programs.

This capacity development component wil l include: (i) Training o n Automation Applications. TAA is the basic ski l l development training for employees using the automated system. It will familiarize staff with the new system. Basic computer literacy, f i le management in an automated environment, database usage and applications, and so on - are the sub-components o f TAT; (ii) Functional Training/Workshop (FT/W): FT/W is specific j o b related training that enables employees to understand key responsibilities and accountabilities, internal and external interaction patterns, reporting structures, and so o n - targeted to effective delivery o f the full range o f Bo1 services. This training would also include behavioral and attitudinal sub-components; and, (iii) Study Tours (ST): Study tours provide opportunities to experience professional practices in other successful Investment Promotion Agencies. This will also enable employees to build their confidence and motivation.

Physical Infrastructure for business process automation. Under the proposed process automation strategy of BOI, the whole office i s planned to be brought under a LAN to provide quicker client service through a central database. This requires: (i) LAN Setup including a Server; (ii) About 75 PCs, sufficient LAN printers and other equipment; (iii) specialized database software development.

Physical infrastructure i s the basic prerequisite to any process automation. This includes network servers, computers, printers, scanner, related accessories, presentation equipment, photocopier, required software and maintenance.

Supporting the Mid-term Strategic Promotional Program 2003-2006. A strategic investment promotion program for the BO1 covering activities in image building, investment generation and investor servicing drawing on experience with these activities to date and relevant international best practice among Investment Promotion Agencies (IPAs) has been developed. The TA project will co-sponsor some o f those promotional programs such as the: (i) publication of an Investment Handbook, Sector Guides and a Newsletter; (ii) investment seminars, symposia and conferences; (iii) pol icy research, sectoral studies and implementation and monitoring surveys.

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In addition, the BO1 will be undertaking research work; publishing a business law handbook; organizing investment promotion seminars in some selected overseas cities; and undertaking surveys o f the foreign and local investment registered projects. Other assistance includes purchasing reference books and joumals.

Privatization Commission. Governments have attempted to address the problems o f the SOE sector over the past two decades. Init ial moves toward disinvestment were made in the early 1980s, followed by additional privatization efforts in the early 1990s. However, the results have been discouraging and at one point the entire privatization process stopped. Between 1993 and 2001, only 22 manufacturing enterprises were fully or majority divested for a total value (sale proceeds and long-term liabilities) o f U S $ 41 mi l l ion (Tk 2.35 billion), equivalent to less than 0.1 percent o f current SOE asset values. The privatization o f only a few small manufacturing units did not have much impact on either the fiscal or the economic front. Most importantly, i t did not serve to effectively signal government commitment to fundamental change and reform. Problems and losses in SOEs continued to mount requiring even more visible action from the Government.

Fortunately, there is a growing consensus among different stakeholders that Bangladesh can no longer maintain i t s usual approach to privatization. There i s also broad-based support for the GOB to urgently and significantly downsize its SOE sector, including the closure o f loss making units. After the present Government came to power in October 2001, i t amended the privatization pol icy in an effort to make the Privatization Commission (PC) more dynamic. The PC has since been trying to se l l o f f the enterprises in its l i s t through a tendering process. In spite o f the pol icy changes and efforts by the PC, the process o f privatization has been slow and the demand for the enterprises has not been encouraging. To overcome these problems the Government again amended its pol icy and began to advertise the sale o f the enterprises without their long-term liabilities.

Despite this effort, progress remains slow - as even without their long term liabilities, these enterprises have not attracted much interest. Over the period, since November 2001, the PC has finalized the sale 19 SOEs for a total price (including long-term liabilities) o f about $30.6 mil l ion. Of these, 13 enterprises have been handed over to new buyers, and a Letter o f Intent for sale has been issued to buyers o f the other 6 SOEs. In addition, over this period Government shares in 4 other enterprises have been sold through the Stock Exchange. I t i s worth noting that there are 4 enterprises whose privatization has been completed but hand over i s not possible because o f litigation in the courts.

Several factors account for the slow pace o f asset transfer. The first is the lack o f clear rules and regulations. While the Privatization Act (2000) and the Privatization Policy (2001) provide the overall framework for privatization, a number o f pol icy and procedural issues have arisen during implementation which have led to confusion and uncertainty. The main ones among these are the lack o f clarity about the treatment o f long-term liabilities, the modalities for asset disposition (privatization, liquidation, winding up), and the roles and responsibilities o f different institutions (l ine ministries, Corporations, PC). Quick resolution o f these issues are urgently needed to move the process forward. In order to bring more dynamism to the privatization process and also to remove the bottlenecks that i s slowing down the pace o f privatization the -Government is now reviewing a new set of regulation proposed by the PC. A salient feature o f this draft

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regulation is the provision for liquidation when repeated bidding does not result in adequate responses. A second factor i s the lack o f an action plan and timetable for implementation o f the privatization program over the next three years based on a more detailed classification o f enterprises in the portfolio (those to be privatized, liquidated, and wound up) and identification of priorities. While, to some extent, the process remains an evolving one based o n prevailing circumstances, the development o f such an action plan would facilitate planning and ensure that the process i s not ad hoc - with resources being used inefficiently. Third, the limited capacity o f the PC is a major contributory factor to slow implementation. Strengthening o f PC’s capacity i s needed to move privatization forward.

This sub-component would support capacity building o f the Privatization Commission, particularly in the areas o f asset valuation, appraisal, monitoring and evaluation o f SOEs planned for privatization, through training, services o f external consultants, provision o f office equipment and facilities.

Liquidation of State Owned Enterprises

There i s no specific law that deals exclusively with liquidation o f companies, public or private. The Companies Act, 1994, which deals with al l aspects o f companies from formation to winding up (liquidation), generally governs the winding up o f companies incorporated under the Act. The winding up o f a company can be done by the Court, voluntarily or under the supervision o f the Court. In practice, winding up takes place under the supervision o f the Company Bench o f the High Court Division o f the Supreme Court. In the case o f banks, the Banking Companies Act, 199, chapter 7 governs the proceedings. The winding up o f the banking companies takes place under the supervision o f the High Court Division.

None o f the aforementioned provisions are applicable to state owned banks (SOBS) or state owned enterprises (SOEs). The Bangladesh Banks (Nationalization) Order, 1972, (section 27) states that nationalized banks shall not be wound up save by an order o f the Government. The Bangladesh Industrial Enterprises (Nationalization) Order, 1972, section 23 also states that and a nationalized SOE may be wound up by an order o f the Government. There is nothing in the current law that provides for the rules and procedures for the winding up o f SOEs. Also, there i s no designated Ministry which wil l be carrying out the task o f winding up the SOE’s This may result in different rules and procedures being applied and may also result in legal challenges if inconsistent rules are applied.

Thus, i t is imperative for the authorities to draw up a set o f binding rules and procedures on the winding up o f SOEs to ensure appropriate best practices are followed by a l l engaged in the winding up process. The rules and procedures, would provide for amongst other things,

0 the agency/Ministry to be in charge o f winding up. 0 collection, preservation and disposition o f a l l property belonging to the SOE,

including property obtained after the commencement o f the winding up. 0 immediate steps that can be taken to preserve and protect the SOE’s assets and

business. 0 a flexible and transparent system for disposing o f assets efficiently and at maximum

values.

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0

0

0

0

0

0

the sale free and clear o f security interests, charges or other encumbrances, subject to preserving the priority o f interests in the proceeds from the assets disposed. the interference with contractual obligations that are not fully performed to the extent necessary to achieve the objectives o f the winding up process. the avoidance or cancellation o f pre-winding fraudulent and preferential transactions completed when the enterprise was insolvent or that resulted in i t s insolvency. the rights and priorities o f creditors established prior to winding up and priority o f secured creditors. the period within which the proceeds ought to be made to creditors. imposition o f stay on proceeding by creditors.

The rules need to be gazetted and wil l serve as a binding rule on al l parties carrying out the winding up. Technical assistance need wil l be provided under the project to enable the Government to draw up the rules and procedures.

Project Component 4 - US$180.00 million (plus $75.0 million from DFID)

The Longer Term Program of Adjustment in Support of Sustained Economic Growth. While i t i s anticipated that the above elements o f the project will have important short to medium term repercussions on the key objectives o f investment and employment generation, considerable resources st i l l remain tied up in the highly inefficient State Owned Enterprises. Unleashing the full capacity o f Bangladesh’s economic potential wi l l also involve taking important, but painful longer term steps, with respect to these inefficient institutions - so that resources can be more productively and efficiently used to the benefit o f the entire economy. This will require closure and retirement o f workers on a very large scale. However, this must be done in the context o f the political economy prevailing in Bangladesh. The Government has already taken the first step by closing the biggest loss makers in the f i rst year. Going forward, it has a full program o f 95 proposed SOE closures, impacting 93,000 workers.

(d) Support to Voluntary Retirement Schemes. This component o f the proposed operation is designed to continue the assistance initiated under the Wor ld Bank’s Development Support Credit (DSC) which supported much o f the f i rst tranche o f 28 SOE closures in 2001-02. This component is designed to cover the remaining VRS costs to the Government o f the 95 enterprises slated for closure/restructuring over the period 2003 to 2008. By June 30, 2003, the government had provided a VRS package to 42,000 workers and closed down 28 SOE’s (including 25,718 in Adamjee Jute Mills- a reduction o f about 17 percent - at a cost o f US$130.0 million. The Government, over the period 2003 to 2008, has an Action Plan for privatization and closure o f a further 95 enterprises identified for privatization or closure at an approximate cost o f US$370 million. The number o f workers involved in these companies i s estimated at around 93,000. The GOB has been pro-active in developing a well enunciated Privatization Policy, a Privatization Strategy, and a precise Act ion Plan for the way forward. On this basis there is a strong case for World Bank financing o f the future VRS costs o f the next tranche o f 95 SOE’s slated for privatizatiodclosure over a period o f five years. However, this must be undertaken in ways that are achievable within the context o f Bangladesh’s political- economic situation - in particular managing any negative fall-out that large-scale retrenchment may have on the overall reform agenda.

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GOB has put in place a transparent and effective VRS for labor downsizing. I t involves payment of existing entitlements in respect o f pensions and gratuities. The average VRS payment per worker is about $4,000 - and, by including al l pension and provident fund benefits. The VRS i s a one-time payment, after which the workers will have no more entitlements from the enterprise or the Government. Once the workers receive the VRS they cease al l connections with the enterprises and the position stands abolished. The package is widely accepted and the overall response has been positive. The practice o f directly depositing compensation payments into workers’ bank accounts has also alleviated the scope for corruption in the distribution o f compensation. I t i s estimated that i t takes only three years to repay the costs o f these VRS schemes - when measured against the on-going losses which are incurred by keeping these SOE’s operational.

There has been some change in the pace o f SOE closures in the light o f evolving political realities in Bangladesh. The Government i s moving more towards downsizing SOEs in preparation for their full closure immediately after the next election. This i s being driven by political circumstances in Bangladesh in the lead up to the next election. Government officials indicate that the immediate impact o f this effort will be a substantial reduction in the fiscal drain to Government - and that it wil l also pave the way for full closure o f these significantly down sized institutions in the period immediately after the elections. They also point to the fact that positions are abolished once a worker has been retired from an enterprise; a freeze on hiring o f new staff which has led to virtually no new recruitment in SOEs over the past decade; and the requirement for an elaborate approval process which mandates clearances from the Ministry o f Establishments, and Finance for any new hiring. IDA has seen this commitment supported by an excellent track record of politically difficult SOE closures and retrenchments to date.

The Wor ld Bank’s contribution to this process, in conjunction with an anticipated $88 mi l l ion in DFID co-financing to support this component o f the project, i s expected to cover a little over 70 percent o f the VRS costs o f this Government reform effort over the next three years. Given the fact that the VRS program i s already on-going, the operation incorporates an appropriate amount o f retroactive financing to reimburse the Government for costs incurred under this scheme since the beginning o f July 2003.

Project Component 5 - $0.0 from the World Bank ($10 million financed by DFID)

(e) Retraining and Counseling Services for Retired Staff of SOEs. DFID fund this component. As a supplement to the VRS, the project wil l support a counseling and training program to further mitigate the social impact o f retrenchment and help these workers become productively employed elsewhere in the economy. Providing adequate counseling and re- training support to retired workers are also important social priorities. The design o f this component follows certain principles: (i) the program wil l be demand-driven with the decision to seek counseling and training lef t to the worker; (ii) surveys and assessments wil l provide a good understanding o f both the profile and needs o f retired workers as we l l as o f the counselinghraining infrastructure that is in place; (iii) the program wil l be as decentralized and localized as possible so that workers’ needs in various regions o f Bangladesh are met; (iv) the program wil l rely on existing training programs and institutions rather than on creating new ones;

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(v) effective counseling or advisory services that link workers with the right training and redeployment programs wil l be employed; and (vi) the counseling efforts wi l l also aim to provide limited follow-up services in terms o f access to credit and business development service.

I t has been agreed that the government wi l l provide a safety net program to workers receiving the VRS, and undertake social tracking to monitor the socio-economic condition o f workers taking early retirement. A social safety program, that includes retraining and counseling, wil l be funded out o f the DFID part project funding for which $10 mi l l ion has been earmarked. This Safety-net Program, which will be implemented by B R A C under direct finding from DFID. The safety net program wil l be quarterly reviewed under the supervision o f the P C U in the FD. A review Committee will be formed for this purpose. B R A C wil l provided quarterly progress report to the meeting, and DFID will provide necessary resources to P C U for this task.

The Safety Net program i s divided in two parts - (a) Social Assistance and (b) a Social Protection Program. Social Assistance would be funded under the EG&BM project and beneficiaries wil l be linked (as per their demand) with social protection programs o f different NGOs and other similar support organizations. The Social Assistance program would include the following four activities and will be implemented by competent organizations, with proven track-records o f satisfied beneficiaries and capacity to deliver the services required. The Government wil l inform the Steering Committee at least 2 weeks before factory closure and/or downsizing workers, so that social assistance can be provided before the workers are dispersed. The four activities are (a) an exit survey and establishment o f data base, (b) counseling on future economic opportunities such as investments, sk i l l development training and linkages with employment and micro-finance institutions, (c) skill development training, and (d) management and monitoring o f the overall safety net program. Workers willing to take training wil l be provided with a voucher for taking training from a certified institute, but they have to pay part o f the training cost. At the end o f training, if he/she wants to set up trade, credit would be provided for purchase o f equipments, or establishment o f trade.

The Social Protection program will include the existing program o f NGOs and other organizations, which will be made available to a l l members o f the family o f workers receiving the VRS - the worker, his spouse and eligible children. This will include: (i) retraining; (ii) micro-creditjleasing; (iii) children’s education; (iv) an adolescent program; and (v) health services.

The coordinating agency wil l contract an experienced research institute to conduct regular (six monthly) Social Tracking o f the workers receiving the VRS. A representative sample o f 10 percent o f the workers wil l be selected equally from the fol lowing groups (a) recipients of the safety net program and (b) non-recipients (a control group). Tracking survey would include both quantitative and qualitative questions.

Project Component 6 - US34.00 million

( f ) Resolution of the Problems of the Nationalized Commercial Banks (NCB’s). K e y to reform in the real sectors o f the economy i s reforms in the banking sector. With a heavy dominance o f state owned banks and with the four NCBs comprising more than 40 percent o f the banking system, a considerable amount o f the financial systems’ assets are not wel l allocated

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within the economy. This i s demonstrated by the very high levels o f non-performing assets in these banks. Improving the efficiency and efficacy o f the intermediation function in the banks i s critical to increased investment and stronger growth within the economy. This component o f the operation i s designed to commence the process o f bank modernization - with an emphasis on in i t ia l reforms in the four Nationalized Commercial Banks.

The init ial reforms decided by the Government includes: the privatization o f Rupali Bank Ltd.; hiring an external management team at Agrani Bank to implement the eventual resolution; management experts at Sonali and Janata Bank to assist these banks in implementing resolution plans based o n the resolution strategy agreed with the Government; and provision o f technical advisory services, logistical support, office equipment and running expenses o f the revamped Joint MOF/BB/NCB Working Group to assist the Borrower in formulating the resolution strategy for the NCBs - and oversee i t s implementation. Consequently, this component o f the operation wil l finance a Management Team in Agrani Bank. I t wil l further finance the position o f the Financial Advisor in Rupali Bank that has been tasked with its privatization. The special audit that has just been finalized has shown the true financial condition o f this bank - and this will be the basis for a due diligence by an investment bank to prepare it for privatization. Finally, i t wil l also provide financial support for the Government’s plan to place banking experts in Janata and Sonali Banks and to strengthen the technical capacity o f the jo int MOF/BB Working group. The project wil l support a l l these technical assistance requirements in each o f these four NCBs. The “end-game” with respect to al l four institutions is a fundamental change in the NCBs’ existing governance arrangements through the implementation o f the Resolution Plans.

Project Component 7 - US$2.00 million from World Bank (and $3.0 million from DFID)

(g) Public Awareness, Monitoring and Evaluation, and Tracking. The last component o f the project covers awareness raising, measurement and evaluation o f the reform process, and various tracking envisaged under the reform effort.

The Government wil l need to develop an improved information campaign to convince the public o f the overall benefits of i t s ongoing reform efforts. In order to deal with the negative public perception o f privatization and to generate wider support for the privatizatiodclosurel liquidation process a public awareness campaign is critically required. The general public in Bangladesh wil l need to be brought more firmly “on board” in support o f the reform process, if the overall agenda i s to be successful. The Government will need to develop an improved information campaign to convince the public o f the overall benefits o f the envisaged reform efforts. Through this component the public would be informed o f the objectives, strategy, process, and positive impact o f privatization. This component would support much stronger efforts at public outreach in this regard.

There i s also a need to monitor and evaluate the reform agenda supported by this project and funds will be dedicated to this important purpose to ensure that the project is meeting i ts stated aims. This component o f the project wil l support monitoring and evaluation o f the costs and benefits o f the reform agenda - including the, already commenced, social tracking exercise, the impact o f the retraining and counseling component, so as to be able to adjust and adapt the

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program appropriately in response to overall indications o f the program’s direction. DFID, which has already undertaken exit surveys o f Retired workers from two Jute Mills, will continue to fund tracking survey in future under this project. The Social Tracking program wil l be coordinated and the tracking study contracted out by the PCU. The PCU may involve competent government agency working in this area (the Labor Directorate), experienced NGOs, certified training institutions and research organizations, with proven track-records and capacity to deliver the services required. The scope of the study wil l be determined in consultation with the IDA. DFID funds wil l be available to hire consultants for developing the TOR for the study. Government wil l establish a mechanism through which continuous feedback can be provided from the Social Tracking Program to the Safety Ne t program so that services are more client focused and able to serve emerging needs. I t will also establish a Steering Committee which wil l provide oversight for implementation o f the safety net program.

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Annex 5: Project Costs BANGLADESH: Enterprise Growth & Bank Modernization

Total us

$mil l ion

Local Foreign Foreign us us us

$mil l ion $mil l ion $mil l ion (GOB) (IDA) (DFW

Project Cost By Component and/or Activi ty

Enterprise Growth 8.50 8.50 0.00 17.00 Refurbishment o f Remaining Assets o f 1.70 17.00 0.0 18.70 Loss making SOEs Institutional Strengthening 0.85 3.40 0.00 4.25 Support for Voluntary Retirement Schemes 118.35 153.00 65.00 336.35 Tracking, Retraining and Counseling 0.00 0.00 8.10 8.10 Service for Retired Staff o f SOEs Program for Banking Reform 5.10 28.90 0.00 34.00 Public Awareness, Monitoring and 0.00 1.70 1.70 3.40 Evaluation

Total Baseline Cost Physical Contingencies

134.50 212.50 74.80 421.80 5 .OO 25.00 8.80 38.80

Price Contingencies 2.50 12.50 4.40 19.40 Total Project Costs' 142.00 250.00 88.00 480.00

Interest during construction Front-end Fee

Total Financing Required

'Identifiable taxes and duties are US$m ----, and the total project cost, net o f taxes, i s US$m ---. Therefore, the share o f project cost net o f taxes i s -%.

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Annex 6: Implementation Arrangements BANGLADESH: Enterprise Growth & Bank Modernization

The institutional arrangements for project design and implementation have been established. Under a Project Coordinator, a Project Coordination Unit (PCU) in the Finance Divis ion o f the Ministry o f Finance wil l guide, supervise, coordinate and monitor al l major activities, including al l major issues affecting financial management o f the project under the project. More specifically the Finance Division wil l be directly responsible for implementing the VRS program and the retraining and counseling support services and wil l do so in coordination with the PC and the concerned Ministries whose enterprises are being privatized or closed/liquidated. The Privatization Commission (PC) wil l continue with its mandate to privatize SOEs. The enterprise growth component wil l also be coordinated by Finance Division and will be implemented in conjunction with Bangladesh Bank. The TA for strengthening the PC, BOI, and BEPZA will be implemented directly by each o f those institutions. The restructuring o f the Nationalized Commercial Banks wil l be led by the Ministry o f Finance in consultation with Bangladesh Bank -the central bank.

The Project Coordinator o f the P C U wil l have access to the Special Account for payment o f IDA eligible expenditures. The respective implementing agency wil l be responsible for approval o f bills/invoices against the eligible expenditures and submit the same to the P C U for payment o f IDA’S share o f such expenditures. The P C U wil l be responsible for maintenance o f books o f accounts and also prepare withdrawal applications for submission to IDA.

The P C U wil l also coordinate al l procurement activities and wil l provide technical support to the implementing agencies responsible for procurement activities. Implementing agencies wil l include: the Ministry of Finance, Ministry o f Industry/Jute, Bangladesh Bank, the Privatization Commission, the Board of Investment, and the Bangladesh Export Processing Zone Authority.

The credit l ine for enterprise growth will be l imited and will be routed through banks and financial institutions which are in the business o f SME lending. The Wor ld Bank’s OP 8.30 has been complied with. As these businesses are perceived to be risky by the banks - they lack both access to finance and to BDS. Three financial institutions have been identified satisfying the criteria - B R A C Bank, BASIC Bank, and M I D A S financing. Funds wil l be routed through the Bangladesh Bank to these appraised institutions.

Executing Agencies

The overall project wil l be executed and managed by the Finance Divis ion o f the Ministry o f Finance, while the specific TA support for the PC, BOI, and BEPZA wil l be executed by those agencies. There wil l be a division o f labor between the Ministry o f Finance, Ministry o f Jute, Ministry o f Textiles, Ministry o f Industry, the Privatization Commission (PC), and BO1 and BEPZA.

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Monitoring and evaluation of outcomesh-esults

The P C U wil l establish an effective monitoring and evaluation (M&E) system to track implementation progress under the project. The M&E system will be designed to monitor the achievement o f outcomes in the short-, medium- and long-term. I t wil l also help to close the feedback loop in order to internalize lessons learnt into future projects. In the short-term, the M&E will allow the P C U to monitor the performance o f the consultants working in the four NCBs and track their progress in achieving the key indicators and Performance benchmarks. Similarly, the M&E wil l track the SOE privatization and closures, retrenchment o f staff, as wel l as the extent o f j ob creation under the SME component. Over the medium-term, the M&E component wil l track the movement o f interest rates, the number o f new jobs created, and new productive assets/facilities generated. Over the long-term, the M&E system will monitor the beneficial impact o f improved financial intermediation and the better allocation o f resources.

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Annex 7: Financial Management and Disbursement Arrangements BANGLADESH: Enterprise Growth & Bank Modernization

Executive Summary and Conclusion:

The project financial management arrangement wi l l mostly fol low government procedures. The MOF, the implementing agency for the project, has sufficient exposure to Bank’s FM requirements. Additional staff in the P C U wil l help in addressing the existing weaknesses in the project FM arrangements. The govemment’s financial rules and regulations, accounting, reporting and auditing wil l be applicable for the project together with intensive supervision and monitoring to ensure compliance throughout project implementation.

The project may not experience implementation hurdles in terms o f counterpart funding, delays in procurement, staffing changes and appropriate coordination with other agencies due to i t s unique implementation arrangements with MOF and in view o f high government commitment to achieve project objectives.

Summary of the Project:

e The U S $250 mi l l ion Credit i s designed to reduce losses in the public sector, foster private sector development and growth, ensure a safety net for Retired employees and support ongoing reforms within the NCBs. The project activities are grouped under seven broad components. Details o f the components and their sub-components are described in annex 4 o f the PAD.

Country Issues

(1) The Country Financial Accountability Assessment (CFAA) o f the Bank, which was endorsed by GOB , indicated that the weak corporate governance, excessive interference by concerned ministries, weak planning and budgeting, and lack o f reward and punishment scheme have marked the public financial management and departmental enterprises (SOEs). The C F A A has also indicated poor supervision, reporting, and auditing practices in the Nationalized Commercial Banks (NCBs) and recommended their improvement. The Public Expenditure Review recommended fiscal sustainability by urgently implementing SOE reform by overhauling the pol icy environment in which they operate and embarking upon a aggressive program of closures and privatization. The proposed project supports refurbishment of some strategic assets o f loss making SOEs, institutional strengthening o f strategically important departments and government agencies to improve corporate governance and on-going reforms in the NCBs. The on-going Central Bank Strengthening Project has included components to address the inadequacies in the banking supervision, reporting, and auditing practices in Bangladesh Bank. The proposed project wil l further complement the reforms by restructuring the NCBs.

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Risk Analysis:

0 From the financial management perspective, there i s l ow r isk affecting the project. This is because a large portion ($180.0 million) o f the credit proceeds would be utilized to meet the Voluntary Retirement costs o f 93,000 workers in 95 enterprises slated for closure or restructuring over the next five years. The Government already has pol icy and procedures in place to make VRS payments and these wil l be applied to the project. There i s a risk that large financial transactions may not be handled appropriately leading to delay and irregularities in project implementation. This is due to involvement o f various implementing agencies and their inadequate exposure to procurement activities. This has been addressed by delegating responsibility to the Project Coordination Unit (PCU) to coordinate al l procurement activities and provide technical support to various implementing agencies for ensuring speedy procurement and effective use o f resources. This arrangement wil l mitigate potential r isks mainly related to procurement o f consultant services which involves a major portion o f Credit proceeds after VRS. The Government may not make counterpart funding available timely. This would cause severe problems for a project o f this nature which aims at reform and growth within a stipulated timeframe. This risk i s viewed as insignificant as project implementation rests with MOF which will directly implement and monitor project implementation and which wil l make annual budgetary allocation and funding directly to PCU without routing through other ministries.

0

Strengths and Weaknesses:

0 Strengthens: The project wil l have the following strengths in the area o f financial management (i) The MOF being the lead ministry in developing and implementing financial management polices and procedures for donors assisted projects is wel l versed with Bank’s financial management requirements; (ii) GOB’S counterpart funds will be available on time as P C U i s placed in the MOF which wil l make funds available to the project directly; (iv) The high level commitment o f the prime minister’s office (PMO). MOF and Bangladesh Bank (BB) in implementing various components would contribute to the addressing of any potential weaknesses during project implementation.

Weakness and resolution: 0 There i s need for appropriate and timely coordination between P C U and various agencies

responsible for implementing the seven project components. This is necessary to ensure timely flow o f funds to various agencies, to facilitate monitoring o f funding status and to account for financial information from multiple spending agencies and to make periodic claims to the GOB and the Bank. The weaknesses wil l be addressed through establishing an effective monitoring and evaluation system in the P C U duly linked to financial management arrangements o f the project. There i s a need for appropriately designated staff in each implementing agency to keep track with project expenditures, send funding requests to P C U and address audit issues. I t has been agreed that these staff will be identified and wil l be in place by June 30,2004.

0

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Implementation Arrangements:

The Finance division o f the M O F wil l be responsible for overall implementation, coordination and supervision o f various project component activities which wil l be implemented by different agencies such as Board o f Investment (BOI), Privatization Commission (PC), Bangladesh Export Processing Zones Authority (BEPZA) and Bangladesh Bank (BB). Under a Project Coordinator (PC), a Project Coordination Unit (PCU) wil l oversee project activities and coordinate with the concerned implementing agencies. The PC wil l be assisted by two finance staff, one procurement staff and two deputy project coordinators.

Funds Flow: For utilization o f IDA’S share o f eligible expenditures, MOF will open a Special Deposit Account under terms and conditions acceptable to IDA. The PC, and in hidher absence deputy project coordinator wil l be the authorized persons for issuing checks, making payment request to MOF for counterpart funds and withdrawal o f funds from IDA credit. There will be at least two authorized signatories for withdrawal o f funds from IDA credit.

For the part o f the TA program to be executed by BOI, PC, and BEPZA, P C U wil l advance funds to these agencies on the basis o f funds requirements received from the agencies. The implementing agencies wil l submit a monthly statement o f accounts to P C U o n the uses o f advance.. P C U wil l reimburse them within 14 days o f receiving SOEs and wil l account for the actual expenditure in the monthly accounts.

For the part o f project component implemented by BB and MOF, PCU will pay directly to vendors, consultants or third parties against contractual agreements and approved bi l ls submitted by the BB, MOF. Transaction based disbursement procedures wil l be applicable for withdrawal o f funds from the Credit. Project funds will be used in accordance with GOB’S existing procedures outlined in the Project Accounting Manual.

Co-financing: The Bank under an agreed MOU will manage grants provided by DFID. The grant will be utilized to support VRS payment, and Retraining and Counseling Services.

Accounting and Internal Controls:

The accounting policies and procedures o f the project wil l be governed by the existing Project Accounting Manual o f the Ministry o f Finance. All project related transactions i.e. a l l sources (IDA and GOB) wil l be accounted for separately in the P C U fol lowing double- entry bookkeeping principles and on cash basis. The key project accounting functions wil l be: (i) Budget preparation and monitoring; (ii) Payments for eligible project expenditure; (iii) Maintenance o f books and bank accounts; (iv) Cash f low and working capital management (v) Financial Reporting to GOB, World Bank and other stakeholders; (vi) Preparation o f Withdrawal Applications to claim funds

0

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from the Bank and (vii) Assist internal and external auditors and ensure appropriate fo l low up action. The accounts wil l be maintained on a manual basis init ial ly which is adequate to keep track of proj ect financial transactions. The MOF has been using computerized system for recording and reporting o f financial transactions o f development project. The use o f the computerized system and time frame for i t s application in the project wil l be at MOF’s discretion. The government’s existing financial power, authority and payment responsibility outlined in the project Accounting Manual and General Financial rules will be followed. There i s no need for enhancement o f the authority or limit and these are adequate for the project. In view o f payment to numerous agencies, P C U will develop payment processing t ime (service standards) in consultation with implementing agencies so that delays in receiving and payment request can be avoided.

0

0

0

Financial Reporting and Monitoring:

0 P C U will be responsible for consolidating financial transactions, maintaining supporting papers and preparing timely consolidated Financial Statements o n a monthly basis.

0 MOF has standard reporting formats for projects. These will be used for the project. The Financial Reporting Formats ( FMRs) wil l include Financial Statements (Sources and Uses of Funds, Uses o f funds by project activity, Special Account statement). FMRs have been discussed and agreed with the Government during Negotiations. In addition, P C U would submit Output monitoring reports (proj ects/Units) and Procurement Monitoring Reports (goods, works and consultant) to monitor physical and procurement progress. P C U would submit Financial Monitoring Reports (FMRs) together with quarterly progress report to IDA within 45 days o f the end o f each quarter.

Staffing :

0 There wil l not be any separate finance unit in the PCU. MOF has adequate and experienced staff having previous experience in IDA projects. Two such senior staff will be designated in the P C U to work o n full time basis for the project. These staff will be in place once the Credit becomes effective. In order to ensure proper coordination with other implementing agencies and t imely processing, accounting and reporting, i t has been agreed that PC, BB, BO1 and BEPZA would designate one o f their staff to be solely responsible for project specific financial management activities. I t has been agreed that these staff wil l have necessary training or exposure to project FM requirements and will be the focal points for FM related issues. P C U wil l provide such training. If these staff are transferred, the agencies wil l ensure placement o f new staff well.ahead o f the transfer so that FM activities continue without interruption.

0

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External Audit:

Implementing Agency MOF

0 The annual financial statements o f this project would be audited by the Comptroller and Auditor General (C&AG) and would be submitted to the Bank within six months o f the end o f each fiscal year.

Audit Auditors Project Financial Statements C & AG

The fol lowing audit reports would be monitored in the Audit Report Compliance system

Expenditure Category Works

Goods

Amount in U S $ Million Financing Percentage 23.60 80.00

9.00 80.00

Disbursement

~~

Consultant Services including Training

Sub-Loans VRS payment

Allocation of Credit proceeds (Table C)

27.00 80.00

180.00 100.00 10.00 80.00

Disbursement under proposed Credit wil l be made as indicated in Table C y which indicates the percentage o f financing for different categories o f expenditure o f the project. I t i s expected that IDA funds would be disbursed over a period o f five years. The fiscal year disbursement estimate is provided on page 2 o f the PAD. The Closing Date o f the Credit i s November 30,2009..

Operating Cost Total

0.40 80.00 250.00

Use of Statement of Expenditures (SOEs)

IDA will require full documentation for al l prior review contracts which exceed the equivalent of: (a) U S $500,000 for works; (b) U S $300,000 for goods; and, (c) U S $100,000 for service contracts with firms; and (c) U S $50,000 for individuals. Expenditures below the above threshold and al l expenditures under Operating Costs and training would be claimed o n SOEs. During the initial supervision by IDA, the mission will closely review the SOE claims to ensure that the funds are utilized for the intended purposes. Any deviations noticed during such reviews would be noted for remedy and improvements.

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Special Account:

Actions Two staff recruited from accounts and audit cadre in P C U Designated staff in key executing agencies

For utilization o f IDA and DFID’s share o f project expenditures, MOF will open and maintain a Convertible Taka Special Account (CONTASA) under terms and conditions acceptable to IDA. The authorized allocation to the Special Deposit Account wil l be l imited to 3-4 months estimated expenditures o f IDA and DFID’s share o f the proposed project. The authorized allocation o f the special accaunt will be l imited to U S $16 million. At the start o f the project, the initial deposit wil l be l imited to US$lO mi l l ion equivalent. The remaining amount o f US$6 mi l l ion equivalent o f the authorized allocation may be withdrawn once the total withdrawal f rom the Credit reaches SDR 0 million. P C U o f M O F wil l be responsible for preparation and submission o f withdrawal applications to IDA.

Responsibility Completion date MOF July 15,2004

M O F June 30,2004

PPF : PPF equivalent to US$500,000 i s granted for the project to finance certain expenditures required for the preparation o f the project. The advance i s granted on the terms and conditions set forth in the Letter o f the Agreement.

Action Plan:

Supervision Plan:

The initial supervision focus wil l be on the progress o f implementation o f agreed actions, and facilitating training o n Disbursement and Financial Management arrangements.

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Annex 8: Procurement Arrangements BANGLADESH: Enterprise Growth & Bank Modernization

General:

1. The total value o f the project is US$480 million, o f which IDA Credit wil l finance US$250 mil l ion and DFID grant US$ 88 million (equivalent GBP 50 million). Total procurement o f US$88 mil l ion (IDA - US$75 million, DFID - US$13 million) under the project wil l largely involve procurement o f consultants’ services for refurbishment o f abandoned assets o f loss making state-owned enterprises, disinvestments o f nationalized commercial banks, strengthening institutions, counseling and public awareness through NGOs. In addition, some c iv i l works relating to refurbishing o f abandoned assets and bank automation equipment and other small valued office equipment wi l l be procured under the project.

2. Rules and Guidelines: All IDA financed local procurement o f goods, works (works: <US$5,000,000; goods: <US$500,000), and services (consultant services: f i r m s - <US$200,000 and individual consultants - <US$50,000)for which the shortlist wi l l entirely be comprised o f national consultants wil l fol low the national procurement rules (The Public Procurement Regulations 2003), acceptable to IDA. Procurement o f goods and works using international competitive bidding (ICB) wil l follow procedures outlined in the Bank’s “Guidelines for Procurement under IBRD Loans and IDA Credits ” (current edition). Consulting services and training obtained through international advertisement wil l be procured in accordance with the Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” (current edition).

3. Procurement Responsibility. The Finance Divis ion o f the Ministry o f Finance (MOF) wil l manage and supervise the project. A Project Coordination Unit (PCU) in the MOF, headed a Project Coordinator, will coordinate, monitor, and supervise al l procurement activities and will provide technical support to the implementing agencies responsible for procurement activities. The implementing agencies are: MOF, Ministry o f Industries (MOI), Ministry o f June (MOJ), Bangladesh Bank (BB), Privatization Commission (PC), Board o f Investment (BOI), and Bangladesh Export Processing Zones Authority (BEPZA). The P C U wil l be assisted by a team o f consultants including a procurement expert for the entire project period.

Works (US$ 29.50 million):

4. Contracts for c iv i l works will largely involve refurbishing some strategically determined assets o f loss-making state owned enterprises, mainly by dismantlinghemoving the existing structures and preparing the assets for future investment and business development. This, however, wil l not include any new construction work. Four such sites init ial ly selected for support under the operation are: Chittagong Steel Mills, Adamjee Jute Mills, Chittagong Chemical Complex, and Khulna Newsprint Mi l ls . The project wi l l have some f lexibi l i ty to include additional sites as the project implementation progresses. Besides refurbishments, there may be some other small works contracts.

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5. Because o f the nature o f dismantlingh-efurbishing works o f the assets, c iv i l works contracts are expected to be labor-intensive, scattered across the country, and are unlikely to lend itself to the formation o f packages large enough to attract large contractors equipped with adequate construction plant. All c iv i l works contracts are expected to be implemented following national competitive bidding procedures under the new regulations o f the Government, with some very small contracts through soliciting quotations.

(i) National Competitive Bidding (NCB): Civ i l works contracts estimated to cost less than US$ 5,000,000 equivalent per contract may be procured using NCB. This includes contracts for refurbishing state-owned assets.

(ii) National Shopping (NS): Works o f very small contracts relating to dismantling demolishing works at various sites may be procured through shopping procedures by soliciting at least three quotations, in packages with an estimated value less than US$30,000 equivalent per contract.

Goods (US$11.50 million)

6. Procurement o f goods involves office equipment, computers, vehicles, and bank/ financial institution automation facilities. Most goods contracts wil l be o f small value except for the automation equipment or similar facilities, and such procurement are unlikely to attract foreign bidders. Except for a couple o f contracts, most goods wil l be procured using NCB, followed by national shopping for very small valued contracts with provisions o f direct contracting for a few contracts.

(i) International Competitive Bidding (ICB): Goods and equipment contracts estimated to cost US$SOO,OOO equivalent or more per contract wil l be procured using ICB. These are l ikely to include office automation facilities and similar contract packages.

(ii) per contract may be procured using NCB. computer, audio-visual equipment, vehicles, etc.

NCB: Goods and equipment contracts estimated to cost less than US$SOO,OOO equivalent This includes contracts for office equipment,

(iii) International / National Shopping (ISXVS): Goods o f very small contracts or individual purchases o f off-the-shelf items may be procured, through prudent shopping procedures, in packages with an estimated value less than US$30,000 equivalent per contract.

(iv) Direct Contracting (DC) : equivalent may be procured fol lowing DC. communication sets, books, journals, etc.

Goods with individual contract cost less than US$2,000 This includes computer software/accessories,

Consultants’ Services (including NGOs) and Training (US$47 million)

7. This credit wi l l finance consultants’ services valued at about US$46 million and training for about US$1 million. Major consultancy assignments relate to institutional strengthening through financial advisory/management services for banking reform (four contracts), small and medium enterprise business development, nationalized commercial bank automation, public

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awareness, retaining and counseling, monitoring/evaluation and tracking implementation. O f the total consultancy, DFID will finance US$13 million for the fol lowing specific activities: retraining and counseling for Retired staff, public awareness, monitoring and evaluation, and tracking. .Some o f the components are demand based and wil l be identified during implementation o f the project.

(i) Quality- and Cost- Based Selection (QCBS): Consulting services through f i rms estimated to cost US$SOO,OOO equivalent or more per contract wil l be procured following QCBS. Major assignments include bank reform consultancies in four packages (Rupali Bank, Sonali Bank, Janata Bank, and Agrani Bank), commercial bank automation, monitoring/evaluation and tracking implementation, etc..

(ii) Quality- and Cost- Based Selection (QCBS)/Fixed Budget Selection (FBS): Services through f i rms estimated to cost less than US$500,000 equivalent per contract may be procured fol lowing either QCBS or FBS. Contracts may include: enterprise business development, public awareness, counseling services, etc.

(iii) Fixed-Budget Selection (FBS)/Least-Cost Selection (LCS) : Services through f i r m s estimated to cost less than US$lOO,OOO equivalent per contract may be procured following FBS or LCS .

(iv) Single-Source Selection (SSS): Specific consultants’ services through firms, satisfying Consultants’ Guidelines (paragraph 3.8 to 3.1 1) and with estimated cost less than US$75,000 equivalent per contract, may be procured following SSS. Contracts may include: retaining and counseling services by specific institutions, for instance, Bureau o f Manpower, M I D A S , BRAC, DCCI, etc.

(v) Individual Consultants (IC): Services for assignments for which teams o f personnel are not required and the experience and qualifications o f the individual are the paramount requirement wil l be procured through individuals in accordance with Section V o f the Consultants Guidelines for international consultants and in accordance with national rules for local consultants. Individuals wil l be selected o n the basis o f their qualifications for the assignment.

8. In addition, there will be a safety net program comprising social assistance and social protection program, mainly to be implemented by NGOs or other similar support organizations, with proven track-record o f satisfied beneficiaries and capacity to deliver the services required. Such services for contracts worth less than US$75,000 equivalent per contract may be procured following single-source selection method, with Bank’s prior agreement.

Provision for training is included.

Support to Voluntary Retirement Schemes- VRS (US$372 million)

9. The project wil l continue assistance initiated under the Wor ld Bank’s Development Support Credit which supported much o f the first tranche o f 28 SOE closures in 2001-2002.

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This project wi l l cover the remaining VRS costs o f 95 enterprises, with about 95,000 employees, slated for closure/restructuring up to 2008-2009.

Sub-Loans for Enterprise Growth (US20 million):

10. This will support the development o f the small enterprise sector by addressing the constraints that inhibit access to finance by small entrepreneurs. By establishing a Small Enterprise Fund (SEF) at the Bangladesh Bank, a refinancing facility wil l be created to on-lend funds to SME focused banks and financial institutions to help scale up their small enterprise portfolio. Currently identified institutions are B R A C Bank, BASIC Bank, Prime Bank, Dhaka Bank, M I D A S Financing and Fidelity Assets & Securities Company.

Incremental Operating Costs (US0.5 million)

1 1. Incremental operating expenses relating to Board o f Investment and Privatization Commission wi l l be financed by IDA on a declining basis. This includes: incremental costs for operation and maintenance o f vehicles, office utilities, supplies, stationeries, etc.

Procurement and Selection Planning

12. The iirclft Procurement Plan for goods and works, and Selection Plan for services has been prepared. Since some of the project elements are being finalized, the Plan covers the init ial 18 months o f the project and may be updated as needed (at least annually) covering the next 18 months o f project implementation. The use o f the methods defined in the Plan i s mandatory. Prior to issuance of any invitation for bids for procurement o f goods and works and selection o f services, the proposed Plan shall be furnished to IDA for its review and approval, in accordance with the provisions o f paragraph 1 o f Appendix 1 to the respective Guidelines. Procurement o f goods and works and selection of al l consultants wil l be undertaken in accordance with the Plan approved by IDA.

Use of Standard Documents

13. For I C B procurement o f goods and works, the use o f IDA’s Standard Bidding Documents (SBD) i s mandatory. For N C B procurement, the borrower wil l use the Government’s Standard Bidding Documents acceptable to IDA. For selection o f international consulting firms, the Bank’s Standard Request for Proposals (RFP) including standard contract form wil l be used; for selecting local consultants, the Government’s procedure laid out in the new procurement regulations wil l apply including its documentation. Depending on the type o f procurement, the Bank’s or Government’s Standard BidProposal Evaluation Form will be followed for submission o f evaluation reports.

Prior Review Thresholds

14. Goods and Works: During the init ial 18 months o f the project, IDA will carry out prior review o f the following contracts: a l l contracts estimated to cost US$500,000 equivalent or more, and the first one contract, each for goods and works, for procurement under N C B

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regardless o f the value. redefined in the revised procurement plan, if necessary.

After 18 months, the above thresholds wil l be revieweddefined

15. Consultants Services: IDA’s prior review wil l be required for consultants’ services contracts estimated to cost US$lOO,OOO equivalent or more for firms and US$50,000 equivalent or more for individuals. All single-source contracts wil l be subject to prior agreement by IDA.

Post Review

16. For compliance with the Bank’s procurement procedures, IDA will carry out sample post review o f contracts that are below i ts prior review threshold. Also, in accordance with the requirement o f the new regulations, the implementing agencies are required to carry out sample post review o f contracts by independent auditors. Such review (ex-post and procurement audit) o f contracts below the threshold wil l constitute a sample o f about 20 percent o f the contracts.

Review of Procurement Performance

17. IDA, on a continuous basis, wil l monitor procurement activities as per the requirements of the Bank’s procedures and the Government’s new regulations. As part o f the project’s planned mid-term review and at the time o f updating the 18 months procurement plan, an assessment o f procurement performance will also be carried out. Based o n the assessment and in consultation with the government, IDA may revise the prior review threshold including the procurement and selection methods.

Reporting

18. specific formats agreed with GOB.

The project wil l prepare quarterly Procurement Monitoring Reports (PROCMOR) as per

Procurement Management Capacity

19. Procurement Environment: The Country Procurement Assessment Report (CPAR), broadly accepted by the Government in February 2001 identified inadequate public procurement practices as major impediment affecting project implementation in Bangladesh. T o carry out procurement reform, fol lowing the CPAR recommendations, the Government with IDA’s support is implementing a Public Procurement Reform Project (PPRP). International Training Center o f the ILO, Turin, i s assisting the Government in carrying out the reform.

20. Procurement Reform Actions: As part o f the reform under PPRP, the Government has established a Central Procurement Technical Unit (CPTU) with adequate staffing funded from i t s own resources, issued Public Procurement Regulations 2003, and Implementation Procedures in March 2004, and prepared standard bidding documentdde-layering o f procurement approval process and revised delegation o f financial powers that are at the final stage o f approval. The new regulations are based o n the U N C I T R A L Model and take into account the multilateral development bank’s principles o f harmonization o f requirements for local procurement in borrowing countries. Notable features include: (i) non-discrimination o f bidders; (ii) effective

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and wide advertising o f procurement opportunities; (iii) public opening o f bids in one place; (iv) pre-disclosure o f al l relevant information including transparent and clear bid evaluation and contract award procedures; (v) clear accountability for decision making; (vi) procurement audit (review) for determining compliance with regulations; (vii) sanctions for fraudulent and corrupt practices; and (viii) review mechanism for handling bidders’ protests.

2 1. Concurrently, in order to build procurement management capacity, a critical mass o f 16 local trainers have been developed and training o f about 1,600 public/private sector staff in phases over the next two years has started in October 2003. All these actions are contributing positively in changing/improving the procurement environment.

22. Capacity Review and Risk Assessment: At the project level, most procurement wil l be handled by MOF and BB, with the remainder by PC, BOI, BEPZA, etc. Procurement capacity review has been carried out with a view to determine the adequacy o f procurement systems in place, assess the risks that may negatively affect ability o f the agency to carry out the procurement process and develop an action plan to be implemented as part o f the program to address the deficiencies. The assessment includes organizational aspects, skills o f staff, and applicability o f national procurement rules at the agency level.

23. MOF/BB has experience in implementing Bank-financed projects and is currently implementing one with the support o f an individual procurement consultant. The scale o f procurement in those projects is not large and their procurement performance i s relatively satisfactory. In particular, BB has recently demonstrated good professional commitment both in terms o f skill and timeliness o f actions. Other implementing agencies for this project have limitedhnadequate experience in implementing Bank-financed projects and are not immune to the problems in the operating environment. The P C U in the MOF, with the assistance o f the procurement consultant, will provide total technical support for procurement activities by al l the above agencies. This wil l work as an internal control mechanism to ensure the quality o f procurement activities under the project. However, since al l local procurement wil l fol low the new regulations o f the government, which has just started to be practiced by the above agencies, there are substantial risks associated with procurement.

24. Strengthening Capacity & Advance Procurement Actions: Given the time constraint and the requirement for fast track processing o f the project, MOF/BB has taken steps for advance procurement o f four key consultancy packages in a way such that contract negotiation i s underway for one contract (Agrani Bank), award made for another (Rupali Bank), and combined evaluation completed for the other two (Sonali Bank and Janata Bank). As regards procurement management, to mitigate procurement-associated risks and strengthen procurement management capacity/accountability, the fol lowing arrangements have been made/agreed to:

a. MOF made a procurement consultant available to assist the working group in procurement planning and advance procurement actions for MOF/BB;

b. To deal with procurement matters, MOF, in accordance with the provisions o f the new regulations, formed a five-member working group (with two members f rom outside MOF) headed by a Deputy Govemor o f BB;

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c. MOF will hire a full-time procurement specialist in P C U for the entire project period, once the project becomes effective, to provide technical assistance concerning al l procurement matters o f the implementing agencies;

d. Each implementing agency, by project negotiation, wil l identify and designate at least one procurement person who wil l deal with procurement matters o f the respective agency for the entire project period; and

e. MOF and other implementing agencies, in a timely manner, wil l nominate their procurement staff to undertake procurement training under PPRP arranged by the Central Procurement Technical Unit (CPTU), IMED.

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Table A: Project Costs by Procurement Arrangements (US$ mi l l ion equivalent)

- 1. Works 25.00 4.50 29.50

(20.00) (3.60) (23.60) 2. Goods 10.0 1 .oo 0.50 11.50

(8.00) (0.70) (0.30) (9.00) 3. Consultants' Services 34.00 13 .OO 47.00 & Training

(27.00) (27.00) 4. V R S 297.00 75.00 372.00

(1 80.00) (1 80.00) 5. Sub-Loan 20.00 20.00

(10.00) (10.00) 4. Incremental 0.50 0.50 Operating Cost (0.40) (0.40)

Total 10.00 26.00 356.00 88.00 480.00 (8.00) (20.70) (221.30) (250.00)

Procurement Method Expenditure Category ~ ICB , NCB , 1 TotalCost

' , Other' N.B.F.~

'Figures in parentheses are the amounts to b e financed by the Credit. All costs include contingencies.

21ncludes c i v i l works and goods to be procured through national shopping, direct contracting, consulting services, training, technical assistance services, voluntary retirement scheme, incremental operating costs, and re-lending project funds to financial institutions.

N.B.F. : N o t Bank Financed (Department for Intemational Development, DFID-financed)

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Table B: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value (Threshold) Procurement Method Contracts Subject to P r io r Review Category

Works >= US$5,000,000 I C B Prior review

<US$5,000,000 N C B Prior review- al l contracts valued US$500,000 or more and first one contract regardless o f value Y

Goods >=US$500,000 I C B Prior review <US$500,000 N C B First one contract irrespective o f

I value Services >= 500,000 QCBS Prior review

>= US$lOO,OOO but < US$500,000 QCBS/ FBS Prior review < us$loo,ooo FBS/ LCS Post review >= us$50,000 IC- Qualifications, Prior review

references

references < US$50,000 IC- Qualifications, Post review

Selective contracts <= US$75,000 SSS- single source Prior agreement

Overall Procurement Risk Assessment

Overall procurement risk i s substantial, and mitigation measures are described in Paragraphs 19-24.

Frequency of procurement supervision missions proposed: One in every six months. Besides, as part o f the fiduciary control, Bank staff as deemed appropriate will carry out post review o f contracts. (see Para. 16)

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Annex 9: Economic and Financial Analysis BANGLADESH: Enterprise Growth & Bank Modernization

Program

Annual

Financial and economic analysis: The financial viability o f the project i s based on the comparison between the costs and benefits that are derived from the cash flows o f the planned labor retrenchment program under the project. The financial cost comprises the VRS cost that are to be expensed to labors as retirement package scheduled for retrenchment. This would cost Taka 23.1 1 bi l l ion for retrenchment o f the scheduled 93,194 workers across 95 industries over 5 years. The items that were incorporated into the calculation o f the VRS cost include Leave Preparatory to Retirement (LPR) Benefits, Leave Encashment Benefits and worker Gratuity including Golden Handshake. As per consultation with the Monitoring Cell, Ministry o f Finance the basic salary (average) i s Taka 3200. The LPR Benefits have been calculated as 9 months basic salary equivalent and the Leave Encashment Benefits were one year’s basic pay equivalent. The Golden Handshake component o f the payment has been calculated as additional 13% o f the total gratuity amount that would normally accrue to the worker.

Cost Saving VRS Cost Average Employment Cost per (Tk.B) (Tk.B) Payback (Number) Employee

Period (Years)

8.52 23.1 1 2.71 93.194 248.000

The financial benefit would be derived through annual cost savings o f the labors over years that would normally accrue to them hadn’t they been Retired under the VRS program. The annual workers and staff cost incorporates wage cost, salaries and other allowances. This amounts to Taka 8.52 bi l l ion for stipulated workers scheduled for retrenchment.

SOE No. o f workers Annual Cost Total VRS Cost Savings (Taka)

The Payback for the VRS program shows that i t i s less than three years. Therefore it wil l require less than three years for the project to recover the original investment. This analysis i s based o n the premise that the workers are benefited by the VRS package only and does not avail any other facilities even after their retirement from the respective SOEs. Consequently, the average redundancy cost for the program amounts to Taka 248,000 (about $4000) per employee.

Bangladesh Jute Mills

Bangladesh Textiles M i l l s Corp.

Costs and Benefits Stream

(Taka) 55,019 5,032,521,907 13,644,712,000

7,094 648,879,667 1,759,3 12,000 Corp. Bangladesh Forest Industries Corporation Bangladesh Chemical Industries Corporation Bangladesh Steel Engineering Corp.

834 76,284,979 206,832,000

4,752 434,659,738 1,178,496,000

3,183 29 1,145,190 789,384,000

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Board

Total

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Annex 10: Safeguard Policy Issues B A N G L A D E S H : Enterprise G r o w t h & Bank Modernizat ion

SOCIAL ASSESSMENT, SCOPE OF SAFETY NET AND SOCIAL TRACKING

A social assessment was carried out to gain operationally relevant understanding o f the social underpinnings and needs o f workers receiving VRS, and develop safety net programs and tracking system for monitoring their progress. This annex lays out the findings o f the social assessment and the scope o f safety net and tracking program.

A. Social Assessment

Objectives: Different activities were carried out for the social assessment o f this project. The objective o f social assessment was to gain operationally relevant understanding o f the social underpinnings and incentives determining behavior o f various actors, especially different government agencies - ministries o f finance, labor, privatization board, workers and staff o f SoE and corporations and N C B and leaders o f their unions. Initially, a stakeholder analysis was conducted to identify key stakeholder groups, especially the different interest groups and their interest regarding reform initiatives o f this project. Meetings were organized with different groups separately to identify their needs and concerns and to develop the program. The overall goal o f this participatory process was to ensure inclusion o f representatives o f stakeholder groups in the reform initiative and to achieve this goal, the social assessment identified needs and priorities o f the different groups; and developed activities, This analysis assisted in developing Guidelines and Principles for responding to the concerns o f workers receiving the VRS package and developing mechanisms which would ensure: (i) issues o f social inclusion, poverty and vulnerability, (ii) mitigate risks to potentially vulnerable segments o f the population; (iii) appropriate design of comprehensive counseling, retraining, j o b placement and access to MFU self employment program; and, (iv) developing mechanisms for a transparent social tracking system to monitor the progress o f workers accessing the VRS package.

Methodology: The methodology used was a combination o f quantitative and qualitative techniques, such as exit and bi-annual surveys o f Retired workers, Focus Group Discussions (FGD), workshops, in-depth interviews and dialogues between different interest groups. The survey was funded by DFID and carried out by the Centre for Development Research and Policy Advocacy (CDRPA) o f Dhaka University, and i t i s envisaged that they wil l also carry out the social tracking for the project.

Consultations and findings: The exit survey was conducted on socio-economic background and needs o f workers who would be taking early retirement from the public sector. These workers and staff were f rom two Jute Mills - one in Dhaka district and another in Faridpur. The findings o f the Exi t Survey reveal that over 60% o f the workers are over 40 years o f age, over 50% are semi-illiterate and they have no s k i l l development training, except whatever they learnt o n the job. Though most workers own land and houses, the size o f holdings are quite small and would not accrue substantial income. Most o f the household members o f workers are

78

dependents and a majority have school going children. The number o f earning members i s negligible. There is virtually none in the family to whom the families can fal l back for financial support. The workers did not receive any advice or assistance from the mill authorities or trade unions on how to use the retirement package. The retired workers would find i t difficult to access economic opportunities unless they receive marketable training and linkage with opportunities .

A majority o f workers would l ike to receive marketable skill development training, with linkages to income earning opportunities and they are willing to share the cost. They would also l ike to receive investment counseling. With respect to training, a majority chose entrepreneurship development, off-farm services, trading etc. Workers below 40 years o f age generally wanted to become migrant workers abroad.

The Centre for Development Research and Policy Advocacy (CDRPA) i s conducting monthly follow up studies on 300 Retired workers, to assess the current situation o f the workers, types o f investment undertaken with the VRS package, benefits received from the investment and constraints faced by the workers. The finding o f the follow up survey provides information which wil l be useful in developing the retraining package and Social Tracking mechanism.

The findings o f the fol low up survey indicate that although the workers did not receive any investment counseling or retraining, a majority o f them were able to invest their retirement package profitably. A majority invested in grocery shops (64%), small trading (30%) and savings certificate and the average init ial investment was Tk 45,000, and the average monthly income was Tk 2,400. About 60% were able to set up business with their own funds and 30 received financial assistance from relatives and friends - no one received financial or other assistance from NGOs or MFI. Members o f 9% households were able to go abroad as migrant labor. Among the workers, 55% were trying to get another j ob and 14% were able to get jobs through relatives and friends within three months. Around 3% were taking training for improving skills and paying over Tk 2,000 for this.

A social tracking module is being established in the monitoring unit o f the Ministry o f Finance based o n information from these surveys. Government, with assistance from BRAC, has developed a comprehensive safety net program for workers receiving the VRS which includes financial counseling, s k i l l development training, j ob placement and linkages with micro-finance institutions for self-employment. The experience from the IDA assisted Jute Restructuring projects indicate that free training provision does not work. In this safety net program, Retired workers wil l not be paid any allowance for training, rather they have to bear part o f the cost o f training. I t i s envisaged that vouchers wil l be introduced for training which can be redeemed from designated training institutes (that have been assessed and found satisfactory). Fol low up surveys indicate that genuinely interested people, who plan to utilize training, contribute towards the cost o f training. To ensure better self-targeting for such assistance, to reduce costs and extend coverage as far as possible, the trainees should not be given any compensation, rather they should be asked to bear a part o f the cost. B R A C wil l identify standard training institutes (government, private sector and NGOs) which would be able to undertake needs based training. These institutions need to undertake a market survey to identify marketable skills, o n which

79

workers could be trained. Furthermore, the skill development program would be open to the eligible sons and daughters o f the retired workers.

B. Scope of W o r k : Safety Net and Social Tracking Programs

Background: It was agreed that government would provide a safety net program to workers receiving the VRS, and undertake a Social Tracking program to monitor the socioeconomic condition o f workers taking early retirement. The Safety Net and Social Tracking program would be coordinated by a competent government agency working in this area (e.g. Department o f Labor or the Privatization Commission) and implemented by experienced NGOs, certified training institutions and research organizations, with proven track-records and capacity to deliver the services required. Government would establish a mechanism through which a continuous feedback would be given from Social Tracking Program to Safety Net program so that safety net services can become more client focused and able to serve their emerging needs. The Department o f Labor or the Privatization Commission could ideally coordinate both the Safety Net and Social Tracking program. A steering committee could be establish in the Department o f Labor/ Privatization Commission consisting o f officials f rom other ministries, academics, World Bank and DFID for guiding the Safety Net and Social Tracking Programs.

1. Safety Net program

The Safety Net program is divided in two parts - (a) Social Assistance and (b) Social Protection Program. Social Assistance would be funded under this EGBM project and beneficiaries would be linked with social protection programs o f different NGOs and other organizations.

a. Social Assistance Program

This program would include the following four activities and would be implemented by competent organizations, with proven track-records o f satisfied beneficiaries and capacity to deliver the services required. Government wil l inform the Steering Committee at the Ministry o f LaborPrivatization Commission, Wor ld Bank, DFID and safety net implementing organization at least 2 weeks before factory closure and/or downsizing o f workers, so that data base on Retired workers can be developed and information on social assistance can be provided before the workers are dispersed. The activities are:

i. Exit survey o f a l l worker receiving VRS and establishment o f their data base: A team from the implementing organization wi l l go to the factory two weeks before closing or downsizing and provide the fol lowing services: (a) Rapport building with al l workers, factory management and trade unions; (b) Exi t survey o f al l worker, who are receiving Voluntary Retirement Scheme (VRS). The questionnaire for the exit survey would be finalized after discussion with the government project office, steering committee (safety net and tracking), WB and DFID. This questionnaire would be simple and include questions o n socio- economic information o n the workers, their families, permanent address etc., (c)

80

establish a data base on al l workers receiving the VRS. I t would be best if each worker could be identified by a unique number. Counseling workers receiving the VRS on future economic opportunities such as investment, s k i l l development training and linkages with employment and micro-finance institutions; Skill development training: Workers or their eligible children willing to take training would be given a voucher for training from certified institutes. Workers will have to pay part o f the training cost. Good technical training based on a market survey would be offered to the workers. This training could be linked with either j ob placement or access to micro-finance and micro-enterprise services. At the end o f training, if he/she wants to set up trade, credit could be provided by the social protection program for purchase o f equipments. Training could be provided by either the implementing agency or other certified institutes /agencies through a sub-contracting arrangement. Establishing education fund and health insurance: An education fund will be established for assisting higher education o f children o f Retired workers. Health insurance scheme wil l be established for the families o f workers. Management o f social assistance and monitoring o f the overall safety net program.

ii.

iii.

iv.

v.

b. Social Protection Program

This Social Protection program would include the existing program o f NGOs and other organizations, which could be made available to al l members o f the family o f workers receiving the VRS -the worker, his spouse and eligible children.

1. The program could include, depending o n workers demands, (a) retraining, (b) micro-credit/leasing, (c) children's education, (d) adolescent program, and (e) health services. The existing Social Protection program o f NGOs would be enhanced, based o n the Phase I and I1 studies conducted by DFID, lessons learnt from retraining o f RMG workers, skill development training, micro-finance, hardcore poor, non- formal education, health, adolescent programs. Also, informatiodlessons from other technical training institutes, trade centers and training cell o f Ministry o f Labor (for potential migrant workers) could be used as resource.

.. 11.

2. Social Tracking program

An experienced research institute would be contracted for regular Social Tracking o f workers receiving VRS. For close monitoring, feedback and possible changes in the Safety Net program, init ial ly the Tracking survey would be conducted every three months, and later six monthly assessment can be conducted.

1. A sample o f 10% o f workers will be selected equally f rom the fol lowing two groups (a) recipients o f safety net program and (b) non-recipients (control). Specific measures would be taken so as to capture a representative sample such as

81

geographic distribution, age, skill mix, asset accumulation, and so on, as much as possible. Tracking survey would include both quantitative and qualitative questions. As government wil l be downsizing workers and/or closing factories over the next few years, the population o f workers receiving the VRS wil l increase. The sample wil l include new entrants o f the safety net program, to capture the progress o f workers and impact o f safety net over the years. DFID has already conducted two studies o n Retired workers o f two ju te mills. The questionnaire would be developed based on the lessons learnt from these two studies.

.. 11. 111. ...

iv.

82

Safeguard Policy Issues: Environmental Management

The Enterprise Growth and Bank Modernization Project (the Project) wil l provide support to strengthen the capacity o f the Government o f Bangladesh (the Govemment) to manage i t s program o f privatization o f State-Owned Enterprises (SOEs). As part o f this support, the Project wil l assist the Government in the development and implementation o f a set o f principles and procedures to manage the environmental liabilities associated with the past operation o f these facilities and the future use o f these sites. In addition, the Project wil l help address some o f the factors constraining the growth o f Small and Medium Enterprises (SMEs), and in doing so will help ensure that the development o f this sector is consistent with national environmental requirements and relevant World Bank guidelines. The assistance to be provided for improved environmental management in the Project i s described in more detail below.

1. Institutional Strengthening.

The Government has initiated a comprehensive and ambitious program o f closure and privatization o f SOEs, which i s being led by the Privatization Commission (PC). To support this program, the project will support capacity building o f the PC, which wil l include strengthening the capacity o f the PC to address the environmental liabilities associated with the sale o f SOEs and their assets.

About 98 enterprises have been identified for closure or restructuring, covering a wide range o f sectors o f production and a variety o f potential environmental risks. To meet these concerns a set o f principles and procedures for the management o f environmental liabilities has been agreed with the PC, as described below.

a. Principles and Procedures for Sale of Site

I t i s anticipated that many SOEs wil l be closed and their assets liquidated, including the sale o f land. In such cases, environmental reviews and audits will be conducted in advance o f sales to identify and assess any environmental liabilities, particularly any contamination o f soil or water (including both surface and groundwater). A two stage procedure wil l be followed, in which an init ial review o f records, interviews, and a visual inspection wil l be used to determine whether a more detailed site audit i s required.

When a detailed site audit is deemed necessary, this wil l be contracted externally by the PC, and wil l include the collection and laboratory analysis o f soil and water samples. The audit will identify any remedial actions required to ensure that the site meets national environmental quality standards for the area’s intended use, and the audit results wi l l include estimates of the cost and time necessary to undertake these measures. Audit reports wil l be submitted for approval by the PC, and for review by the Department o f Environment (DOE) and the Wor ld Bank.

In submitting a bid to purchase a site for which remediation measures are required, the purchaser wil l also submit a time-bound Environmental Management Plan (EMP), with associated costs, for the implementation o f these measures. The EMP o f the preferred bid wil l be submitted for

83

review by the DOE and the World Bank, and will be agreed at the time o f sale by the PC and the purchaser. On completion o f the measures agreed in the EMP, the purchaser wil l submit a completion report to the PC, DOE and World Bank.

The sales documents for the site wil l indicate that:

0 The results o f the site audit establish the record o f historical contamination. Any further contamination that may be identified at the site in the future will become the liability o f the purchaser; Failure o f the purchaser to implement the EMP according to the agreed timetable will lead to the purchaser assuming l iabi l i ty for contamination identified in the audit record.

0

When the in i t ia l review and visual inspection o f a site indicates that no site audit i s necessary, the sales documents wil l establish that any contamination identified at the site in the future wil l become the l iabi l i ty o f the purchaser.

b. Principles and Procedures for Sale of Going Concern

In some cases SOEs may be sold as going concerns. In these circumstances, when the init ial review o f the facility indicates that an environmental audit i s required, the audit will also assess the compliance o f the operation with national environmental legislation, The audit report, in addition to identifying contamination and establishing remediation requirements as described above for the sale of sites, wil l also l i s t failures o f environmental compliance in the current operation, and will provide an estimate o f the time necessary to rectify these failures.

Audit reports for going concerns wil l be submitted for approval by the PC, and for review by the Department o f Environment (DOE) and the Wor ld Bank. In reviewing the audit report, the PC will seek confirmation f rom the DOE that the proposed timeframe for achieving environmental compliance is acceptable, and that during this period the facility wil l not be subject to sanction for the identified instances o f non-compliance.

In addition to covering remediation requirements, the EMP submitted by a purchaser interested in a going concern wil l include a plan to achieve environmental compliance within the timeframe approved by the DOE, with estimates o f associated costs. The EMP o f the preferred bid wil l be submitted for review by the DOE and the World Bank, and will be agreed at the time o f sale by the PC and the purchaser. On completion o f the remediation and compliance measures agreed in the EMP, the purchaser wil l submit a completion report to the PC, DOE and Wor ld Bank.

In addition to the clauses specified above for the sale o f sites, the sales documents for going concerns wil l also indicate that:

0 During the agreed timeframe for achieving compliance, the DOE has agreed that the facility will not be subject to sanction for instances o f environmental non-compliance identified in the audit report;

84

Any further non-compliance, either o f a form not identified in the audit report or beyond the agreed timeframe for achieving compliance, may be subject to sanction according to national legislation.

When the init ial review and visual inspection o f a site indicates that no site audit i s necessary, the sales documents wil l establish that (i) any contamination identified at the site in the future wil l become the l iabi l i ty o f the purchaser, and (ii) any environmental non-compliance may be subject to sanction under national legislation.

C. Technical Assistance

To strengthen the capacity o f the PC to implement the policies and procedures for management of environmental liabilities, the Project will support the provision o f technical assistance. To guide the environmental due diligence process, the PC will contract an environmental consultant whose tasks wil l include:

Init ial review o f sites and facilities being prepared for sale, including review o f records, interviews and visual inspections. The purpose o f the review wil l be to determine whether the potential environmental risks are significant enough to warrant a detailed environmental audit; Preparation o f Terms o f Reference for environmental audits, incorporating site-specific details into a template to be agreed with the Wor ld Bank; Review o f audit reports, and provision o f reports for comment by the DOE and World Bank; Liaison with the DOE as required to seek approval o f timeframes for achievement o f compliance with environmental legislation, as may be recommended in audit reports o f facilities to be sold as going concerns; Review o f EMPs and compliance plans submitted by potential purchasers to confirm adequacy in the light o f audit reports; Review o f environmental l iabi l i ty clauses in sales documents; Review o f remediation and compliance completion reports as submitted by purchasers, and provision of such reports to the DOE and Wor ld Bank for comment.

The Project wil l also provide resources to enable the PC to contract environmental audits for those sites and facilities considered to warrant detailed environmental investigation.

2. Refurbishment o f Strategic Assets

The Government intends to convert a number o f closed SOEs that are not suitable for privatization in their present state into more potentially productive assets. As part o f this process, the Government wil l undertake some refurbishment of sites, including renovation, upgradation o f facilities, and dismantling of obsolete equipment, to make the site more attractive for possible private sector investment. In such cases, an init ial review, and if required a detailed site audit, wi l l be conducted as described above for the sale o f sites. In addition, any remediation work identified as being necessary through the site audit will be undertaken as part o f the refurbishment contracted by the Government, for which Project resources may be applied.

85

The first such refurbishment wi l l be the rehabilitation o f the Chittagong Steel M i l l s (CSM) site, which covers over 200 acres. As part o f Project preparation, Terms o f Reference have been developed for the detailed environmental audit o f this site to ascertain the extent o f any residual environmental risks posed by the disposal or storage o n site o f any hazardous or toxic materials. The audit wil l also provide recommendations for the management o f these r isks through remediation or containment, with an estimate o f the costs involved. The purpose o f the audit and any subsequent remediation or containment activities wil l be to (i) render the site safe for i t s proposed use under redevelopment; (ii) minimize risks to potentially affected communities and the environment; and, (iii) ensure compliance with national legislation and World Bank policies. The Terms o f Reference for this site audit wi l l provide a template for the future contracting o f such audits by the PC.

3. Enterprise Growth

A component o f the Project wil l help address some o f the factors constraining SME growth. This component will include a small credit l ine to SME-focused banks to promote the scaling-up o f their S M E portfolio, and support for SME business development services. As part o f this assistance, the Project wi l l support the provision o f training to participating institutions to help ensure that the growth o f the SME sector i s consistent with national environmental requirements and relevant Wor ld Bank guidelines.

86

Annex 11: Project Preparation and Supervision BANGLADESH: Enterprise Growth & Bank Modernization

Planned Actual PCN review 0711 4/03

Initial ISDS to PIC 09/03/03 Initial PID to PIC 07/24/03

Quality Enhancement Review 12/04/03 ROCIOC Review 1211 5/03 Appraisal 0111 8/04 Negotiations 05/02/04 BoardRVP approval 06/08/04 Planned date o f effectiveness 06130104 Planned date o f mid-term review 1213 1 106 Planned closing date 11/30/09

Key institutions responsible for preparation of the project: Finance Division, Ministry o f Finance, Bangladesh Bank Board o f Investment Bangladesh Export Processing Zones Authority Privatization Commission

Bank staff and consultants who worked on the project included: Name Title Unit Simon C. Bell Sector Manager (Task Leader) SASFP G. M. Khurshid Alam Shamsuddin Ahmad Ki at chai S ophas tienphong Hassan Zaman Suraiya Zannath Zafi-ul Islam Mohammad Sayeed Sunita Kikeri Nilufar Ahmad Paul J. Martin Arif Ahamed Kishor Uprety Nagavalli Annamalai Bridget Rosalind Rosario SAKMAHye Other Agencies Chanpen Puckahtikom Md. Reazul I s l a m

Sr Private Sector Dev. Spec. (Co-Task Leader) Sr Financial Sector Specialist (Co-Task Leader) Sr Financial Sector Specialist Sr. Economist Sr Financial Management. Specialist Sr. Procurement Specialist Disbursement Officer Advisor Sr. Social Scientists Sr. Environmental Specialist Research Assistant Sr. Counsel Lead Counsel Office Administrator Program Assistant

Asst Director, Asia Pacific Division Sr. Economic Advisor

SASFP SASFP SASFP SASFP SARFM SARPS SARFM CICDR SASES SASES SASFP LEGMS LEGPS SASFP SASFP

IMF DFID

87

Bank funds expended to date on project preparation: 1. Bank resources : 252,000 (approximately) 2. Trust funds : nil 3. Total : 252,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval : 30,000 (approximately) 2. Estimated annual supervision cost : 100,000

88

Annex 12: Statement of Loans and Credits BANGLADESH: Enterprise Growth & Bank Modernization

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Proiect ID F Y Purpose IBRD I D A SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO74966 PO53578 PO62916 PO71435 PO8 1849 PO44876

PO75016 PO74040 PO74731

PO7 1794 PO50752 PO57833

PO59143 PO69933 PO44810

PO4481 1 PO50751 PO49587

PO09468 PO41887 PO37294

PO09524 PO50745

PO49790 PO44789

PO37857

2004 2003 2003

2003 2003 2002 2002 2002 2002 2002 2001 2001 200 1 2001 2001

2000 2000 2000 2000 1999 1999 1999 1999 1999

1998 1998

Primary Education Dev Program I1 Social Investment Program Project Central Bank Strengthening Project Rural Transport Improvement Project BD: Telecommunications Technical Assist.

Female Secondary School Assis. I1 Public Procurement Reform Project

Renewable Energy Development Financial Services for the Poorest Rural Elect. Renewable Energy Dev.

Post-Literacy & Continuing Education Ai r Quality Management Project Microfinance I1 HIV/AIDS Prevention Legal & Judicial Capacity Building Financial Institutions Development

National Nutrition Program Aquatic Biodiversity Conservation

Fourth Fisheries Municipal Services Third Road Rehabilitation & Maintenance

Dhaka Urban Transport Arsenic Mitigation Water Supply Export Diversification BD Private Sector Infrastructure Dev Health and Population Program

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

150.00 18.24 37.00

190.00 9.12

120.90 4.50

0.00 5.00

190.98

53.30 4.71

151.00 40.00 30.60

46.90 92.00 0.00

28.00 138.60 273.00 177.00 32.40

32.00 235.00

250.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00

8.20 0.00

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 5.00

5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00 21.98

0.04

0.00 24.02

1.25

8.25 0.00 0.00

64.89

4.35 0.00 0.00

0.78

155.77 18.44

37.40 196.42

9.87

99.04 3.13

8.30 4.64

202.72 44.55

3.53 3 1.04 18.08 27.61 10.68 55.97

2.08

12.06 93.83

106.88 49.07

17.73 0.48

150.14 57.39

0.00 1.75

16.98 -1.47 -0.10

14.79 1.08

0.91 1.42

78.95 10.12 3.58

-1.30 27.52 11.89 24.12 58.88 4.82

18.93 29.71

94.95 112.70

20.04 0.86

148.68 59.39

0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

-2.13 0.00

0.00 0.45 0.00 0.00 2.36 2.43

2.93 0.00

22.06 33.74

0.00 0.00

0.00 0.00

Total: 0.00 2,310.25 0.00 18.20 125.56 1,416.85 739.20 61.84

89

Bangladesh Statement of IFC's Held and Disbursed Portfolio

Qn U S Dollars Millions) As o f 03/22/2004

Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 DBH 2.33 0.65 0.00 0.00 2.33 0.65 0.00 0.00 199 1 Dynamic Textile 1998 Grameen Phone 1985/95 IDLC 1980198 IPDC 1998/99 Khulna 2000 Lafarge Surma 1998 Lafarge Surma 2003 RAK Ceramics 1997/2000 Scancem

1.86 0.00 0.00 1.48 8.33 0.09 0.00 0.00 0.00 0.15 0.00 0.00 6.88 0.00 0.00 0.00

14.74 0.00 0.00 17.99 0.00 0.00 0.00 15.00

35.00 10.00 0.00 0.00 12.00 0.00 0.00 0.00 9.29 0.00 0.00 0.00

Total Portfolio: 90.43 10.89 0.00 34.47

Approvals Pending Commitment Loan Equity Quasi Partic

1998 Khulna Swap 0.00 3.30 0.00 0.00

1.86 8.33 0.00 6.88

14.74 0.00 0.00

12.00 9.29

55.43

0.00 0.00 0.09 0.00 0.15 0.00

0 0.00 0.00 0.00 0.00 0.00

10.00 0.00 0.00 0.00 0.00 0.00

10.89 0.00

1.48 0.00 0.00 0.00

17.99 0.00 0.00 0.00 0.00

19.47

2000 USPCL 0.00 3.00 4.00 0.00 2001 Dhaka Westin 8.75 0.00 0.00 0.00 2001 BRACBank 0.00 3.00 0.00 0.00 2004 Grameen Phone 30.00 0.00 0.00 0.00

Total Pending Commitment 38.75 9.30 4.00 0.00

90

Annex 13: Country at a Glance BANGLADESH: Enterprise Growth & Bank Modernization

4.5 4.5 4.5 5.0

Bangladesh at a glance 8/29/03

-GDI -GDP

POVERTY and SOCIAL Bangladesh

2002 Population, mid-year (millionsj GNI per capita (Atlas method, US$J GNI (Atlas method, US$ billions)

Average annual growth, 1996-02

Population (%J Labor force (%J

Most recent estimate (latest year available, 1996.02) Poverty (% of population below national poveltv IIneJ Urban population (% of total population) Life expectancyat birth Ivearsi Infant mortality (per 1,000 live bidhsJ Child malnutrition (% of children under5j Access to an improved water source (% ofpopulatlonj Illiteracy (% of population aae 15+) Gross primary enrollment I% of school-age popu1at;onJ

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982

GDP (US$ billionsl 18.1 Gross domestic investmentiGDP 17.8 Exports of gwds and services/GDP 5.2 Gross domestic savings/GDP 12.5 Gross national savings/GDP 17.9

Current account baiance/GDP 4 . 9 Interest payments/GDP 0.3 Total debVGDP 27.9 Total debt serviceiexports 17.7 Present value of debtiGDP Present value of debtiexports

1982-92 1992-02

GDP 3.8 5.0 GDP per capita 1.3 3.2 Exports of goods and services 6 4 12.0

(average annual growth)

135.7 380

51.1

1.7 2.8

34 26 62 52 48 97 59

100 100 101

1992

31.7 17.3 7.6

13.9 19.3

-0.4 0.5

42.8 18.2

2001

5.3 3.5

14.9

South Asia

1,401 460 640

1.8 2.3

28 63 71

84 44 97

108 E9

2001

47.0 23.1 15.4 18.0 22.4

-1.7 0.3

32.4 7.3

20.7 105.4

2002

4.4 2.6

-2.3

Low- income

2,495 430

1,072

1.9 2.3

30 59 81

78 37 95

103 87

2002

47.8 23.1 14.3 18.2 23.4

0.5 0 3

35.8 7.7

2002-06

Development dlamond'

Life expectancy

I T GNI Gross

capita nrollment per primary

Access to improved water source

Low-income grouD

Economic ratios'

Trade

T

Indebtedness

-Bangladesh Low-income group

STRUCTURE of the ECONOMY

(% of GDPJ Agnculture Industry

Services

Pnvate consumption General government consumption Imports of goods and services

Manufacturing I 31.2 29.4 24.1 22.7 " 21.1 22.5 25.9 26.4 10 13.7 13.9 15.8 15.9 47.7 48.1 50.0 50.9

(average annual growth) Agnculture 2 2 3 4 Industry E O 7 1

Manufactunng 5 8 6 6 Services 3 7 4 8

Pnvate consumption 3 0 3 7 General government consumption 2 7 4 5

E 3 9 6 Gross domestic investment Imports of goods and services

Note 2002 data are preliminary estimates * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomolete.

91

Bangladesh

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deRcit

TRADE

(US$ millions) Total exports (fob)

Raw jute Leather and leather products Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (7995=100j import price index /7995=100J Terms of trade (1995=100j

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, loca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ miNionsj Total debt outstanding and disbursed

iBRD i DA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows interest payments Net transfers

1982

9.7

-9.6

1982

1982

840 2,759

-1,919

-97 1,121

-895

387 508

20.0

1982

5,054 55

1,270

220 3 9

759 739 21 7 0

571 188

0 188 12

175

1992

4.5 3.0

8.3 1.9

-4.5

1992

1,986 106 139

1,593 3,526

265 168

1,289

86 107 81

1992

2,468 3,932

-1,464

-89 1,435

-118

635 -517

1,600 37.7

I992

13,561 60

4,534

552 7

52

357 623 -1 9

4 6

353 323 24

300 35

264

2001

1.6 1.6

9.0 1.4

-5.0

2001

6,476 67

254 5,766 9,363

380 846

2,400

112 129 87

2001

7,235 10,103 -2,868

-264 2,316

-816

490 326

1,307 54.0

2001

15.216 17

6,439

671 7

143

287 419 230 174

0

296 312 99

213 50

163

2002

1.9 3.2

10.1 2.1

-4.6

2002

5,929 61

207 5,367 7,697

437 723

2,617

115 106 108

2002

6,794 9,061

-2,267

-319 2,826

240

35 -275

1,583 57.4

2002

17,010 13

7,063

722 7

156

410 220 85 65 -6

479 30 1 112 190 51

138

Inflation (%) 1

97 98 99 0.3 01 1 -GDPdeflator *CPI

Export and import levels (US$ mill.)

own-

98 97 98 99 00 01 02

Exports Imports

Current account balance to GDP (%)

' T

:omposition of ZOO2 debt (US$ mill.)

G:494 A: ,3 F: 565

\ - IBRD E - Bilateral \ - IDA D - Other rrmltilaterai F - Private ; - IMF G - Short-term

Development Economics 8/29/03

92

MAP SECTION