world bank document...task team leader: hermanus johannes marc schrijver, fatima eshimbekova ......

The World BankKG Financial Sector Development Project (P125689)

REPORT NO.: RES31752

RESTRUCTURING PAPERON A

PROPOSED PROJECT RESTRUCTURING

OF

KG FINANCIAL SECTOR DEVELOPMENT PROJECT

APPROVED ON MARCH 8, 2012

TO

KYRGYZ REPUBLIC

FINANCE, COMPETITIVENESS AND INNOVATIONEUROPE AND CENTRAL ASIA

Regional Vice President: Cyril E Muller Country Director: Lilia Burunciuc

Senior Global Practice Director: Ceyla Pazarbasioglu-DutzPractice Manager/Manager: Marialisa Motta

Task Team Leader: Hermanus Johannes Marc Schrijver, Fatima Eshimbekova

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ABBREVIATIONS AND ACRONYMS

BETF Bank-Executed Trust FundCCRO Central Collateral Registration OfficeDPA Deposit Protection AgencyFSDP Financial Sector Development ProjectGOKR Government of the Kyrgyz RepublicIDA International Development AssociationIPF Investment Project FinancingKPO Kyrgyz Post OfficeMFO Micro Finance OrganizationsMS Moderate SatisfactoryMU Moderate UnsatisfactoryNBKR National Bank of the Kyrgyz RepublicPDO Project Development ObjectivePCU Project Coordination UnitSDR Special Drawing RightSECO Swiss State Secretariat for Economic AffairsTA Technical AssistanceTF Trust Fund


BASIC DATA

Product Information

Project ID Financing Instrument

P125689 Investment Project Financing

Original EA Category Current EA Category

Not Required (C) Not Required (C)

Approval Date Current Closing Date

08-Mar-2012 30-Jun-2018

Organizations

Borrower Responsible Agency

Kyrgyz Republic Ministry of Finance,Kyrgyz Post Office,National Bank of the Kyrgyz Republic,Ministry of Justice

Project Development Objective (PDO)

Original PDO

Project Development Objectives are to: (i) enhance financial sector stability, and (ii) increase access to financial services.OPS_TABLE_PDO_CURRENTPDOSummary Status of Financing

Ln/Cr/Tf Approval Signing Effectiveness ClosingNet

Commitment Disbursed Undisbursed

IDA-50670 08-Mar-2012 11-Jul-2013 25-Dec-2013 30-Jun-2018 4.03 .12 3.49

IDA-H7600 08-Mar-2012 11-Jul-2013 25-Dec-2013 30-Jun-2018 4.92 2.71 2.01

Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)?No


I. PROJECT BACKGROUND, STATUS, AND RATIONAL FOR RESTRUCTURING

1. Project Background:

The Kyrgyz Republic Financial Sector Development Project (FSD Project), approved March 8, 2012, comprises US$8.85 million IDA allocation (USD 3.93 credit; USD 4.92 grant). The Project Development Objective (PDO) is to 1) enhance financial sector stability; and 2) increase access to financial services. The scope of the FSDP consists of the following four components:

- Component 1: Strengthening the legal, regulatory, and supervisory framework for banks, MFOs, and credit unions, implemented by the National Bank of the Kyrgyz Republic, NBKR - SDR 980K; US$1.5M

- Component 2: Enhancing financial services via Kyrgyz Post Office (KPO) network, implemented by KPO - SDR 3.75M; US$5.55M

- Component 3: Modernizing the secured transactions and debt resolution regime, implemented by the Central Collateral Registration Office, CCRO - SDR 650K; US$1M

- Component 4: Project coordination and monitoring – SDR 520K; US$780K

The FSD Project is supported by a Bank-executed Trust Fund (BETF) fully financed in parallel for USD 5.4 million by the Swiss State Secretariat for Economic Affairs (SECO). The first phase of this support started August 14, 2013 with the approval of a US$1 million Bank-executed (BE) grant and an additional USD 2 million on December 10, 2014. The first phase closed December 31, 2017 with USD 2.2 million disbursed funds and USD 800,000 remaining funds; the second phase, with a new BE grant in the amount of US$3.2 million started on January 1, 2018 and has a closing date of December 31, 2021. The project development objective of the SECO project is to enhance financial sector stability by strengthening the regulatory and supervisory framework (both prudential and market conduct) of financial institutions (e.g. banks, credit unions, and micro finance organizations), including the capacity of NBKR (National Bank of Kyrgyz Republic) as a financial sector regulator; and the capacity of the Deposit Protection Agency (DPA) as financial safety net participant. With this objective, the SECO BE grants complement the interventions of the IDA investment project.

The FSDP initially consisted of five components and for an initial total IDA allocation of US$13 million, that became effective on 25 December 2013, 18 months following approval. Before effectiveness was declared, the Project underwent a first (level-1) restructuring, approved on May 8, 2013, to drop one component (Supporting Aiyl Bank for deposit mobilization and privatization) and (partially) cancel the respective IDA credit and grant allocations, in response to parliamentarians’ concerns related to the concept of Aiyl Bank’s privatization as stipulated in the said component. The same restructuring also extended the Project closing date by one year from June 30, 2017 to June 30, 2018, and adjusted the results framework accordingly, paving the way for ratification and effectiveness.

2. Project Status

The Project has been in actual problem status since April 2017, due to “Moderately Unsatisfactory” (MU) ratings for both “Implementation Progress” and “Achievement of Development Objective”. This was the result of MU Implementation Progress of Components (1) and (2). Component (3) and (4) are rated Satisfactory. Further, the project is flagged for high undisbursed balance (disbursement rate of 34%), more than five years into implementation. Given the recent implementation progress, the Project will be upgraded, and an Implementation Supervision Report (ISR) will be filed to record the upgrade.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwiOq_O84vbaAhXKdd8KHQZzAJ0QFggoMAA&url=https%3A%2F%2Fwww.seco.admin.ch%2Fseco%2Fen%2Fhome.html&usg=AOvVaw2kfXLZ1OCyOh2zpWtsNNAR


The main bottleneck for project implementation was the completion of the two key procurement processes for both, Component (1) and (2), due to technical (procurement-related) mistakes, requiring re-bidding, coupled with constraint capacity of the Project Coordination Unit. The procurement issues have been resolved, in the meantime, and the status of the project is as follows:

Component 1 (implementing agency NBKR) – disbursement rate is 7%- Activity (v) is key under this component and involves the procurement and implementation of an Informational-

Analytical System for the supervisory department of NBKR. The funds in this component are exclusively allocated to this activity and are tied together in a USD 2.4 million procurement package (with US$1 million co-financing from NBKR). On June 20, 2017 the Bank declared ‘misprocurement without cancellation’ of this procurement package, because the Client refused to award a contract to a legitimate bidder arising from a competitive process. Consequently, this activity will be dropped and the remaining funds of SDR 908,930.38 will be maintained in the Project and be reallocated between component 1(iv), 2 and 3. The latter (saving the funds for the Project) was decided, because the Kyrgyz Republic has a serious budget deficit, and therefore would not be able to give the Project the financial support it currently needs.

- Activities (i)(ii)(iii) regarding the strengthening of the legal, regulatory and supervisory framework for banks, micro finance organizations and credit unions, for which the initial project design included the possibility of implementation under the Project, are meanwhile covered by the SECO BETF grant complementing the FSDP (see above). These activities consequently need to be removed from the Finance Agreement (FA) to address potential violation of Bank Policy 14.40 which states that “The Bank does not execute activities financed by trust funds that co-finance projects which also receive IBRD loans or IDA credits or grants.”. There were no funds allocated to these activities. These activities are financed in parallel by the BETF.

- Activity (iv) regarding the revision of human resources of policies and procedures has not yet been launched.

Component 2 (implementing agency KPO) - disbursement rate is 22%- Activity (iii) is key under this component and involves the procurement of an IT system that will enable the KPO

to connect the post offices in the rural area with financial institutions (e.g. banks, remittance organizations). The Bank communicated on June 22, 2018 that it has ‘no objection’ to KPO awarding the contract to the supplier of the IT system including both software and hardware. Give the importance of this activity the Bank put a condition in the Amendment to the Legal Agreement that the contract with the auditor should be signed in three month (September 30, 2018). Give the importance of this activity the Bank put a condition in the Amendment to the Legal Agreement that the contract with supplier of the IT system should be signed within three month (September 30, 2018).

- Activity (i) includes financial audit of the financial statement of KPO. The contract for the audit assignment could have been awarded according to the Bank despite the fact that the bid (USD 195,000) was higher than estimated in the budget (USD 120,000). However, the KPO didn’t want to award the contract because it was not acceptable according to local procurement legislation. In agreement with the Bank’s procurement specialist it was decided to accept the position of KPO and allow KPO to first increase the estimated budget in the procurement plan and then conduct a fast track retender (of approximately six weeks). Give the importance of this activity the Bank put a condition in the Amendment to the Legal Agreement that the contract with the auditor should be signed within three month (September 30, 2018).

- Activities (i) and (ii) involving the capacity building efforts in the area of financial management and financial services are on track and the funds are being utilized according to the procurement plan.

Component 3 (implementing agency CCRO) - disbursement rate is 79%- This component comprises the following activities: i) improve the legal and regulatory framework for secured

lending and debt resolution; ii) the development of an online system of registration for collateral; and iii) the


increase of awareness and provide training to public stakeholders. The activities are on track and the funds are being utilized according to the procurement plan.

Component 4 (project implementation) - disbursement rate is 74%- The component consists of the staffing and capacity building of the Project Coordination Unit. The funds are

being utilized according to the procurement plan.

Annex 1 includes a description of the status of the different activities as formulated in the finance agreement.

The Government of the Kyrgyz Republic (GOKR) has requested on December 22, 2017 an extension of the project closing date by two years, to be able to complete the related project activities. This would extend the cumulated project implementation period to 36 months. This Borrower’s Request was repeated by letter of June 20, 2018. In the period in between the two letter it has become clear how the project should be restructured after the declaration of ‘misprocurement without cancellation’ of component 1 (iv) and the conclusion that component 2 is back on track (KPO met the condition to award the contract for the IT system). On June 27 the GOKR detailed their request for reallocation of funds namely to allocate the funds in the project as following: component 1 (part 1) SDR 230,000, component 2 (part 2) SDR 1,780,000, component 3 (part 3) SDR 750,000, and component 4 (part 4 and 5) SDR 520,000.

In light of the above status of the project, the Bank accepted the request of the Borrower to extend the closing date by two years. In addition, component 1 activities (i)(ii)(iii) and (v) will be removed from the Finance Agreement. The Ministry of Finance will be notified of this extension, related reallocation, and removal of component 1 activity (i)(ii)(iii). Note that the Ministry of Finance was already informed of removal of component 1 (v) as result of ‘misprocurement without cancellation’.

The following activities will be closely monitored to measure progress under the remaining components and the Bank will emphasize to the counterparts that an unsatisfactory implementation might trigger activation of Bank’s remedies since the success of the project (in particular on component 2) will very much depend on these actions.

Measure/Action Timeline to be met1 Contract for assignment to audit KPO signed by KPO and auditor (World Bank will

receive a copy of the signed contract in a week after signing) No later than September 30, 2018

2 Contract to supply of IT system signed by KPO and Supplier (World Bank will receive a copy of the signed contract in a week after signing)

No later than September 30, 2018

3. Status Procurement and Financial Management

Both the Procurement progress and the Financial Management are satisfactory. There are no outstanding audits.

4. Rationale for restructuring

It is expected that the restructuring, including an extension by two years, and the reallocation of remaining funds, will make it possible to achieve the PDO that was agreed with the Kyrgyz Republic and approved by the Board on March 8, 2012, namely: i) enhance financial sector stability; and ii) increase access to financial services.


The PDO ‘enhance financial sector stability’ is related to component 1. In the extended implementation period the NBKR will revise and review the human resource policies and procedures (activity iv) to further improve staff capacity. Note that while activities (i)(ii)(iii) related to the strengthening of the legal, regulatory and supervisory framework will be removed from component 1), because of violation of Bank Policy 14.40 (as explained above), these activities will be conducted under the BETF (funded through a parallel finance) to support the PDO.

The PDO ‘increase access to financial services’ is related to component 2 and 3. In the extended implementation period under component 2 KPO will implement the IT-system that is essential for the distribution of basic financial services. It is expected that it will result in significant improvement in quality, timeliness, reliability, cost-efficiency, and profitability of the delivery of financial services. The new IT will link up 360 KPO’s post offices to a central hub to expand services across the post office network; and under component 3 CCRO will finish the second phase of reform that will enable credit providers to provide loans secured by movable collateral.

II. DESCRIPTION OF PROPOSED CHANGES

The following changes are proposed:

1. Change in Results Framework:

Component 1 - The target and target date of the project development objective indicator - Legal, regulatory, and supervisory framework following international good practice to enhance stability is developed, adopted, and implemented - is revised because activities (i) review and revise bank legislation and regulation, (ii) strengthen regulation on risk management, (iii) improve supervisory approach, and (v) procurement and implementation of IT system are removed. The only activity that is left is activity (iv) review and revision of human resources policies and procedures. Therefor the target changed from 12 to 2 only reflecting revisions in human resource policies and procedures to be finished by June 30, 2020. Further, the interim indicators related to activity (i) review and revise bank legislation and regulation, (ii) strengthen regulation on risk management, (iii) improve supervisory approach, and (v) procurement and implementation of IT system are also removed, namely: 1) adoption of modern supervision methods; 2) upgraded ICT system; and 3) contingency planning and crisis management framework. The only intermediate indicators that is left is ‘Improved staff capacity’, measured in terms of number of years of staff experience in supervision departments (existing indicator). Only the target changed to June 30, 2020.

Component 2 - The only change of both the project development indicator and the intermediate indicators is the new target date of June 30, 2020. Note that two intermediate indicators (number of financial transactions going through KPO, and the percentage of revenues from non-government financial transactions of total revenues from financial transactions), show an actual decrease compared to the baseline. This is caused by increased digital substitution in urban areas and KPO’s relatively weak capacity in rural areas. Successful pilots offering financial services in the rural area indicate that that a quick rebound and growth is feasible in the rural area, and that the target can be achieved.

Component 3 – The baseline, the target and the target date of the project development indicator are revised. The original baseline in 2011 was set at 36.000 registrations with a target of 20% growth. This was in a time that registration of collateral was mandatory by Law. Registration back then took place through collateral registration offices. The amount of registrations in 2017 was 10,947 of which 9,547 ‘physical’ registrations and 1,354 ‘on-line’ registrations. In the first 5 months of 2018 there were 1,400 on-line registrations. Based on this data it is determined that it is more reasonable to measure the amount of on-line registrations and set the target for June 30, 2020 at


5.000 on-line registrations annually (growth of approximately 250%). Further, the target of two intermediate indicators is changed, namely: 1) amended legal framework for moveable collateral and debt resolution regimes (from one to two amendments); and 2) issued regulations for the well-functioning of the collateral registry (from two to four issued regulations). This is because it has been observed that a second phase of legal and regulatory reforms is needed to achieve the project development objective.

2. Change in Components and Cost: Component 1 activities (i) (ii) (iii) and (v) will be removed from the Project after June 30, 2018 (see explanation below). The remaining funds of SDR 908,930.38 (that is the original allocated amount of SDR 980,000 minus the disbursed amount of SDR 71,069.62) that were fully allocated to activity (v) will be reallocated as following: component 1 – activity (iv) will receive SDR 158,930.38, component 2 will receive SDR 650,000 and component 3 will receive SDR 100,000 as confirmed by the Ministry of Finance by Letter of June 27, 2018.

See table below which reflects the revised allocation compared to the original finance agreement of July 11, 2013.

Original Revised per July 1, 2018

CategoryAmount of Credit

(5067-KG) allocated (expressed in SDR)

Amount of Grant (H-760) allocated

(expressed in SDR)

Amount of Credit (5067-KG) allocated (expressed in SDR)

Amount of Grant (H-760) allocated

(expressed in SDR)

Change (expressed in

SDR)

1) Goods, non-consulting services, consultants' services, and Training under Component 1 of the Project.

980,000 230,000 Losing 750,000


2,620,000 1,130,000 2,620,000 1,780,000 Receiving 650,000


650,000 750,000 Receiving 100,000


390,000 390,000

5) Incremental Operating Costs under Component 4 of the Project.

130,000 130,000

total 2,620,000 3,280,000 2,620,000 3,280,000

See detailed explanation per component below.


Component 1 (part 1) – Strengthening legal, regulatory and supervisory framework for banks, micro finance organizations and credit unions.The funds in this component (SDR 980,000), are exclusively allocated to activity (v), the procurement and implementation of an Informational-Analytical System for the supervisory department of NBKR, tied together in a procurement package valuing US$2.4 million (with US$1 million co-financing from NBKR). On June 15, 2017 the Bank declared this package ‘misprocurement without cancellation’, because the Client refused to award a contract to a legitimate bidder arising from a competitive process. The remaining funds of SDR 908,930.38 will be reallocated between component 2 and 3.

Activities (i)(ii)(iii) will be removed from the Finance Agreement, to address potential violation of Bank Policy 14.40 which states that “The Bank does not execute activities financed by trust funds that co-finance projects which also receive IBRD loans or IDA credits or grants.”. There were no funds allocated to these activities under the IPF. These activities are funded by the parallel finance under the Bank-executed Trust Fund.

Activity (iv) will be extended and will receive SDR 158,930.38 to finance the review and revision of human resource policies and procedures.

Component 2 (part 2) Enhancing financial services via KPOs networkThis component will receive additional funds of SDR 650,000 from component 1. In the proposed extension period, this component will address the same activities as they were envisioned in the original Project Appraisal Document in the following manner:

(i) Further strengthening financial management – SDR 275,000

a. Assistance is needed to complete the implementation of centralized core financial management functions with the actual usage of the new IT, and its Financial Management application. This support is needed in the customizing and parametrization of the FMA, the pilot phase, and its data exchange with the retail applications. In particular and in the short-term assistance needs to focus on the centralization of the treasury function, for cash and liquidity management. The implementation of the FMA needs to be accompanied by guidance in implementation of the cost allocation methodology, the internal transfer pricing system and the subsequent calculation of profitability per business line, product, business partner and region. This will provide KPO and its stakeholders with more relevant management accounting insight. In addition, IT support is needed for inventory management, and especially in an efficient centralization of the procurement function of KPO in using the Financial Management Application and to update payroll accounting.

b. The two IFRS financial statements have been prepared manually. For usage of the new IT and its Financial Management Application technical support should be provided to prepare the 2018 and 2019 financial statements. The response to and follow up to the Management Letter of the external, independent audit needs further assistance. Moreover, an audit of the financial statements of 2018 would imply that KPO has three subsequent years of audited financial statements. This will increase transparency of KPO and improve its conditions to do business with the private and financial sector.

c. The Improvements describe above will improve KPO’s corporate governance and compliance with financial regulation.


(ii) Expansion of financial Services – SDR 225,000

The capacity building in (commercial) management of financial services entails three tasks:

a. Staff training and institutional improvements to manage financial servicesA Business Unit needs to be established for KPO’s main line of business, with capacity in e.g. product development, sales of service contracts to banks, insurers, credit organizations and other business partners, advertising via mass media and social networks, and pricing as well as management of the sales and services in the post offices. More than 1,200 staff need to be trained, including tellers, post office managers, specialist staff, back office staff and head office staff in charge of marketing. Most likely a program involving both training of trainers and implementation of an e-learning system will be effective and be an incentive to improved labor morale and career perspective.

b. Branding of KPO’s Financial Services In direct connection with (a), KPO needs assistance in strengthening its brand as a solid, trusted provider of access to basic financial service operations. In terms of planning, branding, and communications campaigns it needs to build capacity while it implements the first pilot with new technologies in post offices.

c. Strategic partnership building The contracts recently prepared for agency services to Financial Institution can be considered as first steps and instrumental to build credibility and interest from the private and financial sector. In order to ensure a continued process of a sustainable transformation of KPO in delivering a broader range of competitive financial services KPO will benefit from transaction advisory to arrange a strategic, long-term partnership with one or more Financial Institutions that are committed to invest in expanding access to financial services via the post offices. The enabling conditions to arrange such partnership(s) should be favorable once KPO progresses in the nationwide roll out of the new technology, adds new services, operates in compliance with the financial sector regulations, has a capable management structure for Financial Services, 3 years of audited financial statements and adequate insights in the economics of further business growth in financial services delivery.

(iii) Business Process Modernization – SDR 150,000

a. Strengthening KPO’s capacity in project implementation management and quality assurance. Application of project management methodology is new for an organization as KPO. It will establish its own project management structure and will benefit from guidance in acting as an effective and responsive counterpart of the IT supplier. Moreover, the project in terms of size, complexity and organizational impact is unique for KPO. In this respect KPO needs guidance in assuring that it effectively does (a) implement reengineering of its processes resulting in organizational change and (b) achieve operational excellence with proper quality assurance.

b. Completing the IT architectureThe implementation of the selected IT is complex and very comprehensive. Yet, the agreement concluded also defines several lots of equipment that KPO will need to procure on its own. In addition, two parts need to be added, i.e. a small customer call center for up to 10 staff to make KPO reachable for customer queries, and a vehicle fleet management solution to enhance efficiency in cash logistics. The funds left can be used to procure hardware solution for more post offices.


Component 3 (part 3) Modernizing the secured transactions and debt resolution regimeActivity (i)(ii)(iii) will be extended by 2 years, with an allocation of SDR 100,000 from component 1. In the proposed extension period, this component will address the following activities:

i) Improve legal and regulatory framework for movable collateral

The legal and regulatory framework need to be amended to allow registration of all encumbrances (not only pledges). This includes transfer or retention of titles, taxes, and leases. It is currently very difficult for lenders to know if collateral is already encumbered in order for them to accept such asset as collateral. The collateral registry needs to hire a legal consultant to prepare such amendments.

ii) On-line registration

There is a need to link the collateral registry on-line platform with other asset registrations (e.g. vehicles). The collateral registry needs to hire an IT consultant to realize such a link.

iii) Increase awareness The collateral registry will continue its campaign targeting their stakeholders e.g. banks, micro finance institutions, the NBKR and the general public to make them aware of the existence of the on-line collateral registry platform. In particular, financial institutions need to change their lending policy and procedures to make it possible to accept movable assets as collateral. This is important because the registration of movable collateral is voluntary.

Component 4 (part 4 and 5) Project coordination and monitoring - no changeCurrently there is US$ 191K left which is considered to be sufficient to finance the coming 2 years.

3. Change in loan closing date: It is proposed to extend the loan closing date (for components 1 (iv) 2, 3, and 4) by 2 years from June 30, 2018 to June 30, 2020. The extension will allow the project activities, specifically, under Component 1 (iv), 2, 3, and 4 to be fully completed.

4. Re-allocation between Disbursement categories: The remaining funds of SDR 908,930.38 related to category “Goods, non-consulting services, consultants' services, and Training under Part I of the Project” will be re-allocated to other categories. See details under 2, above.

5. Change in Disbursement estimates: The disbursement of fiscal year 2019 and 2020 (after restructuring) is estimated as following:

year FY2013* FY2014* FY2015* FY2016* FY2017* FY2018* FY2019 FY2020 Total

disbursement 0 $450K $298K $468K $943K $669K $3.4M $2.6M $8.85M

*actual disbursement

The estimated disbursement is based on the payment schedule of the procured IT system (hardware and software) and an even intensity of capacity building during the extension.

6. Change in Implementation Schedule: The implementation schedule will be extended with 2 years.


I. SUMMARY OF CHANGES

Changed Not Changed

Change in Results Framework ✔

Change in Components and Cost ✔

Change in Loan Closing Date(s) ✔

Reallocation between Disbursement Categories ✔

Change in Disbursement Estimates ✔

Change in Implementation Schedule ✔

Change in Implementing Agency ✔

Change in DDO Status ✔

Change in Project's Development Objectives ✔

Cancellations Proposed ✔

Change in Disbursements Arrangements ✔

Change in Overall Risk Rating ✔

Change in Safeguard Policies Triggered ✔

Change of EA category ✔

Change in Legal Covenants ✔

Change in Institutional Arrangements ✔

Change in Financial Management ✔

Change in Procurement ✔

Other Change(s) ✔

Change in Economic and Financial Analysis ✔

Change in Technical Analysis ✔

Change in Social Analysis ✔

Change in Environmental Analysis ✔

IV. DETAILED CHANGE(S)

OPS_DETAILEDCHANGES_RESULTS_TABLE

RESULTS FRAMEWORK

Project Development Objective Indicators PDO_IND_TABLE


Legal, regulatory, and supervisory framework following international good practice to enhance stability is developed, adopted, and implementedUnit of Measure: NumberIndicator Type: Custom

Baseline Actual (Current) End Target Action

Value 0.00 0.00 2.00 Revised

Date 01-Dec-2011 11-Jan-2018 30-Jun-2020

Number of new annual registrations in the secured transactions registry, using moveable assets as collateral (alone or in combination with immoveable collateral)Unit of Measure: NumberIndicator Type: Custom


Value 2754.00 3008.00 8000.00 Revised

Date 31-Dec-2017 25-Jun-2018 30-Jun-2020

Number of financial services transactions going through KPO (e.g. payment transactions, remittances, bank transaction)Unit of Measure: NumberIndicator Type: Custom


Value 10000000.00 8200000.00 17000000.00 Revised

Date 08-Mar-2012 31-Dec-2017 30-Jun-2020

Intermediate IndicatorsIO_IND_TABLE

Improved staff capacity, measured in terms of number of years of staff experience in supervision departmentsUnit of Measure: NumberIndicator Type: Custom


Value 2.00 2.00 4.50 No Change

Date 15-Jan-2012 11-Jan-2018 30-Jun-2018

Adoption of modern supervision methodsUnit of Measure: TextIndicator Type: Custom



ValueSupervisory framework lacking modern supervision methods

The NBKR is well advanced in the implementation of the new risk based supervisory approach. Eighty percent of the banking sector are now supervised according to the new methodology. Though the NBKR is still in the learning phase.

Implementation of Pillar 2 and 3 of Basel II

Marked for Deletion

Date 15-Jan-2012 11-Jan-2018 30-Jun-2018

Upgraded ICT systemUnit of Measure: TextIndicator Type: Custom


Value No

The NBKR is in the process of evaluating the three bids for the development and implementation of the Information Analytical System..

No incident of supervisory setback for want of IT support.

Marked for Deletion

Date 15-Jan-2012 11-Jan-2018 30-Jun-2018

Contingency planning and crisis management frameworkUnit of Measure: TextIndicator Type: Custom

Baseline Actual (Current) End Target ActionValue No In the course of 2017 a

new banking law was adopted. Although there are still some weaknesses in this banking law (e.g. court can overturn decision of supervisor to withdraw bank license) it allows strengthening of the regulatory and operational framework

No systemic crisis that was not adequately addressed in time.

Marked for Deletion


that is key for crisis preparedness and contingency planning.

Date 15-Jan-2012 11-Jan-2018 30-Jun-2018

Number of ICT-equipped Post Offices (with installed, operational front office cash terminals) connected to the central hubUnit of Measure: NumberIndicator Type: Custom



Date 01-Jan-2012 11-Jan-2018 30-Jun-2020

Revenues from non-government financial services transactions (payment, remittances, bank) as a share of total KPO revenues from financial services (including also pension pay out and social allowancesUnit of Measure: PercentageIndicator Type: Custom



Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Improved quality, reliability and cost-efficiency of small value payments operations, measured in terms of same day Straight Through Processing as a share of total transactions to&from bank accountsUnit of Measure: TextIndicator Type: Custom


Value 0% 0% >30% Revised

Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Enhanced transparent financial performanceUnit of Measure: TextIndicator Type: Custom

Baseline Actual (Current) End Target ActionValue No KPO set-up the IFRS

financial statements of 2016 , and launched on October 26, 2017 the tender to procure the independent auditor.

Annual audited statements

Revised


Evaluation of the bidding process is shortly expected.

Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Introduction of performance measurement, in terms of accounting reports with separated profitability and risk analysis for financial services and postal servicesUnit of Measure: TextIndicator Type: Custom


Value 0

KPO recently started with support of the FM consultant to pilot an ERP.

Monthly financial reports Revised

Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Number of cashiers, tellers, postmasters and other operational staff completed NBKR training to operate financial services at KPOUnit of Measure: NumberIndicator Type: Custom


Value 0.00 0.00 1200.00 Revised

Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Enhanced competitive outreach for last mile delivery of remittances, measured in terms of market share of KPO in total remittancesUnit of Measure: PercentageIndicator Type: Custom



Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

Amended legal framework for moveable collateral and debt resolution regimesUnit of Measure: NumberIndicator Type: Custom



Date 15-Jan-2012 18-Apr-2017 30-Jun-2020


Issued regulations for the well-functioning of the collateral registryUnit of Measure: NumberIndicator Type: Custom



Date 08-Mar-2012 30-Jun-2017 30-Jun-2020

Online system for registering collateral is operational and connected to other assets registrations (for example (registration of vehicle registration)Unit of Measure: TextIndicator Type: Custom


Value No online system Online registration system is operational.

On-line registration system is operational and at least connected to another asset registration system (for example system of vehicle registration)

Revised

Date 15-Jan-2012 18-Apr-2017 30-Jun-2020

Number of dissemination and capacity-building and training events heldUnit of Measure: NumberIndicator Type: Custom



Date 15-Jan-2012 30-Jun-2018 30-Jun-2020

Increase in lending based on new registration of security interests in the registry, using moveable assets as collateralUnit of Measure: TextIndicator Type: Custom


Value To be determined before the end of 2018.To be determined before the end of 2018

To be determined before the end of 2018 after determination of the baseline.

Revised


Date 08-Mar-2012 30-Jun-2018 30-Jun-2020

Increase in the debt recovery rate for creditorsUnit of Measure: TextIndicator Type: Custom


Value zero zero30 cents on the dollar of 4% of insolvent companies

Revised

Date 15-Jan-2012 11-Jan-2018 30-Jun-2020

OPS_DETAILEDCHANGES_COMPONENTS_TABLE

COMPONENTS

Current Component Name

Current Cost

(US$M)Action Proposed Component Name

Proposed Cost (US$M)

Strengthening the legal, regulatory, and supervisory framework for banks, MFOs, and credit unions

1.50 Revised Strengthen Institutional capacity of the NBKR 0.33

Enhancing financial services via KPOs network 5.55 Revised

Enhancing financial services via KPOs network 6.60

Modernizing the secured transactions and debt resolution regime

1.00 RevisedModernizing the secured transactions and debt resolution regime

1.12

Project coordination and monitoring 0.80 No Change

Project coordination and monitoring 0.80

TOTAL 8.85 8.85

OPS_DETAILEDCHANGES_LOANCLOSING_TABLE

LOAN CLOSING DATE(S)

Ln/Cr/Tf StatusOriginal Closing

Revised Closing(s)

Proposed Closing

Proposed Deadline for Withdrawal

Applications

IDA-50670 Effective 30-Jun-2017 30-Jun-2018 30-Jun-2020 30-Oct-2020

IDA-H7600 Effective 30-Jun-2017 30-Jun-2018 30-Jun-2020 30-Oct-2020

OPS_DETAILEDCHANGES_REALLOCATION _TABLE

REALLOCATION BETWEEN DISBURSEMENT CATEGORIES


Current Allocation Actuals + Committed Proposed Allocation Financing %(Type Total)

Current Proposed

IDA-H7600-001 | Currency: XDR

iLap Category Sequence No: 1 Current Expenditure Category: GO, Non CS, CS, TR under part 1

980,000.00 71,069.62 230,000.00 100.00 100.00


1,130,000.00 813,594.62 1,780,000.00 100.00 100.00


650,000.00 516,693.93 750,000.00 100.00 100.00


390,000.00 313,330.92 390,000.00 100.00 100.00

iLap Category Sequence No: 5 Current Expenditure Category: IOC under part 4

130,000.00 70,078.98 130,000.00 100.00 100.00

Total 3,280,000.00 1,784,768.07 3,280,000.00

OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE

DISBURSEMENT ESTIMATES

Change in Disbursement EstimatesYes

Year Current Proposed

2012 0.00 0.00

2013 0.00 0.00

2014 500,000.00 450,000.00

2015 2,000,000.00 300,000.00


2016 2,000,000.00 467,000.00

2017 2,500,000.00 875,000.00

2018 1,850,000.00 1,425,000.00

2019 0.00 3,000,000.00

2020 0.00 1,883,000.00

Note to Task Teams: End of system generated content, document is editable from here.

ANNEX 1 – Detailed overview of status project

Component 1: Strengthening the legal, regulatory, and supervisory framework for banks, MFOs, and credit unions, implemented by the Central Bank of the Kyrgyz Republic, NBKR (US$1.5M, thereof USD 100K disbursed as of 03/31/18).

i. Assist in the review and revision of the laws relevant to the regulation and supervision of banks, MFOs, and credit unions, as well as cooperation and coordination with international financial sector regulators and supervisors.

Status: Not executed under the Project, since covered by SECO TF grant (see above).

ii. Strengthen regulations on risk management; develop new regulations on key areas such as electronic banking, business continuity planning, outsourcing, new products and related risks, implementation of key aspects of the Basel 11 and Basel Ill recommendations of the Basel Committee on Banking Supervision, consolidated supervision, and risk-focused supervision; and introduce or revise internal guidelines on all relevant areas.


iii. Improve the supervisory methods, processes and capacity in specific areas of offsite and on-site supervision and promote application of advanced ICT to support supervisory effectiveness.


iv. Review and revise human resources policies and procedures. Assist the NBKR to review and revise its human resources policies to improve supervisory staff efficiency, including aspects relating to recruitment, staff mobility, training and higher education, compensation, career progression and staff retention.

Status: Not executed so far given that Client considered it a more downstream priority, and there are no funds allocated to this activity, and it is also not covered by SECO TF grant.

v. Strengthen the ICT infrastructure for off-site and on-site supervision.

Status: This activity involves the procurement and implementation of an Informational-Analytical System for the supervisory department of NBKR, tied together in a procurement package valuing US$2.4 million (with US$1 million co-financing from NBKR). On June 15, 2017 the Bank declared this package ‘misprocurement without cancellation’ because the Client refused to award a contract to a legitimate bidder arising from a competitive process.


There have been two unsuccessful tenders for this activity. The last tender resulted in three bids. However, the validation of these bids turned out to be controversial, triggering a complicated communication back and forth between the PIU/NBKR and the Bank team. The first bid was accepted by the NBKR but not by the WB because bid security was not in the name of the joint venture which was considered a major deviation and resulted in the conclusion of the WB that this bid was non-responsive. The second bid was not accepted by the NBKR because there was a technical deviation regarding an IT security certificate, and also because the price of this bid was USD 0.5 million higher than the first bid which was not acceptable for the NBKR. However, the WB didn’t accept the position of the NBKR and considered the technical deviation as minor (because the issue could be solved during the negotiations); the price difference was according to the WB not applicable, because the first bid was considered as non-responsive and the second bid was within the estimated budget. The WB therefore concluded that the NBKR should award the contract to the second bidder. This was not accepted by the NBKR. The third bid was commercially non-responsive (outside the estimated budget) to be even considered. This stalemate resulted in the conclusion of the WB to declare ‘misprocurement without cancellation’. This means the funds cannot be used for this activity and will be removed from the project, but the remaining funds will be reallocated within the project. The rational for this was as following. First, the NBKR will bear the consequences of ‘misprocurement’ and lost SDR 909,000 (approximately USD 1,4 million) of funds for the procurement of the IAS. However, because the Kyrgyz Republic has a serious budget deficit, and therefore would not be able to give the Project the financial support it currently needs, it was decided that the funds will be reallocated within the Project.

Component 2: Enhancing financial services via Kyrgyz Post Office (KPO) network, implemented by KPO (US$5.55M, thereof USD 1.1 million is disbursed as of 03/31/18)

i. Strengthening Financial Management: Strengthen the financial management capacity of KPO as part of its on-going corporate reform, including: (a) strengthening core financial management systems; (b) supporting the preparation of International Financial Reporting Standards financial statements and external audits; and (c) amending the legal and regulatory framework for KPO to provide financial services and comply with financial sector regulations.

Status: TA has made substantial progress in strengthening KPO’s capacity in financial management. The support was provided from March 2016 and has addressed all three main clusters, as planned, i.e., (i) Core financial management systems; (ii) preparation of IFRS financial statements and external audits; and (iii) Legal and regulatory framework for KPO.

As part of this cluster, the general ledger system was upgraded including the design of an adjusted detailed chart of accounts with applicable costing types, classes and cost centers. This chart lays the fundament for proper financial management, but actual usage and impact depend on implementation of the accounting system. To that end the review, specification, and selection of software for an upgraded general ledger system, including automated online data entry of post office teller transactions at up to 360 computerized positions (for accounting, reporting, and tax reporting) was completed recently, while with available technology small scale piloting was implemented. In particular, the setup with hands-on guidance and implementation of a pilot for the treasury function for liquidity and cash management, including reporting, control, cash flow projections have progressed. Also, the design and implementation of an operational risk management function has taken place including training of staff. Moreover, the first step in design and implementation of an asset management function was completed with centralized inventory book of all buildings, vehicles, equipment, and inventory. Also, payroll accounting was improved and implemented for the more than 4,000 staff and ready to be fully automated when the new IT is implemented. Most importantly, the planning, budgeting, and control function was strengthened. For the years 2017 and 2018 a budgeting system was designed and applied at headquarters and for the main regional centers and used for budget


vs. reality reporting and keeping track of the financial performance. Staff were trained in this respect. In general, the basics for financial management have been substantially improved. Once IT is implemented including a financial management application more practical progress in strengthening can be achieved.

KPO’s financial statements in accordance with IFRS were prepared for the years ending 2016 and 2017, as well as the balance sheet as per December 31st, 2015.The financial statements consolidate the accounts of the main regional centers. In this context also, the internal audit was strengthened through the provision of training, and sample audit exercises. An external audit firm is expected to prepare an independent opinion on the Financial Statements for 2016 and 2017. The Management Letter is expected to provide valuable insights to KPO’s management for further improving its financial reporting.

An assessment was made of the requirements of NBKR for the different licenses and its compliance. In view of the evolution of NBKR’s regulatory framework, in particular through issuance of regulations for payment agencies and agency banking it was concluded that KPO will not require in the short term a specific license. It needs to comply with requirements for agents and with operation standards and reporting as required under the agreements concluded with Financial Institutions. This is in particular the case for the new agreements prepared with banks and a Money Transfer Operator.

ii. Expansion of Financial Services: Support a progressive expansion of the range and scope of financial services delivered via KPO, including (a) capacity building for financial services management and (b) piloting of new, improved or expanded financial services.

Status: (a) Capacity building for financial services management has started to broaden and deepen KPO’s role as agent of licensed Financial Institutions. The support provided since June 2017 has addressed several outstanding challenges of KPO. (b) Pilots were set up in three different rural locations to start introducing an expanded range of financial services. The pilots include agency banking, agency services for cashless payments and agency services for remittances. The pilots included training and support in localized advertising. Results were reported as positive and encouraged KPO to initiate an expansion in the immediate neighborhood of the pilot zones.

First steps have been taken in the setup of a business unit responsible for marketing management and business development. Dedicated hands-on coaching and training was provided. Nationwide market and opinion research was conducted in 2015. The results were used to prepare a Business Plan for the Financial Services which was drafted in the summer of 2017 and through an iterative process adjusted and accepted. New agency contracts for payments and remittance services were prepared after a competitive selection of interested Financial Institutions.

iii. Business Process Modernization: Support the reengineering of a paper-based business process for bulk flows of small value financial transactions, including: (a) design of the ICT architecture and detailed ICT technical specifications; (b) installation of ICT components; and (c) other activities such as the preparation of a manual with corporate standards and guidelines for the design of the retail space of the post offices, a help desk for post offices, and implementation of a pilot in secure and efficient cash logistics with small secure compact cars.

Status: KPO is now ready to award the contract to the supplier of the IT system, including front office application, back office application, financial management application, and hardware (e.g. Point of Sale Terminals, personal computers, and data processing center), and start the implementation of the business process modernization. Installation lead by the selected IT supplier will start in a small pilot zone and then roll out nationwide.

Component 3: Modernizing the secured transactions and debt resolution regime, implemented by the Central Collateral Registration Office, CCRO (US$1M, thereof USD 753,000 is disbursed as of March 31, 2018)

i. Improve the legal and regulatory framework for secured lending and debt resolution.


Status: Based on project support, the Law "On amendments to some legislative acts of the Kyrgyz Republic (the Law of the Kyrgyz Republic "On Pledge", the Civil Code of the Kyrgyz Republic, the Code of Administrative Liability)" № 117 was adopted on July 15, 2016, and entered into force on January 27, 2017. This amendment to the existing legal and regulatory framework (allowing only registration of movable collateral through seven regional offices), enabled online registration of movable collateral. In addition, there were bylaws prepared including the regulation on procedure for on-line registration and the regulation for single state registration.

ii. Develop an online system of registration for collateral, including preparing the registry's specifications, procuring hardware, software, and related services for the proper functioning of the registry, and staffing, housing and equipping the registry.

Status: The collateral registry on-line platform was launched January 27, 2017. So far there has been 10,947 registrations of movable collateral in 2017 and 3,008 registrations in the first five months of 2018. Whereas the number of online registration of movable collaterals in 2017 was only 1,400 (out of 10,947 in total), it reached already 1354 in the first five months of 2018. These online registrations are coming from 44 entities (28 micro finance organizations, 15 banks, and 1 individual) that signed a contract together with the collateral registry to make use of the on-line registration of movable collateral. At the start of the project as a baseline for new registrations, the total number of 36,000 new registrations in 2011 was used as a benchmark. This number has not been reached since, partly because the registration went from mandatory to voluntary registration in 2016, and partly because of lack of awareness under the stakeholders.

iii. Increase awareness and provide training to public stakeholders on compliance with the new laws and regulations, on the use of the online registration system, and on asset-based lending techniques.

Status: The collateral registry was started in the second quarter of 2018 with an awareness campaign, promoted by a round table with representatives of financial institutions, but also with television spots. The collateral registry is planning to organize much more campaigns to create awareness among key stakeholders.

Component 4: Project coordination and monitoring (US$780K of which US$ 563K is disbursed or committed as of March 31, 2018)

i. Finance the Project management function performed by the PCU, including incremental operating costs, training related to project management, audits, and periodic monitoring and evaluation.

world bank document...task team leader: hermanus johannes marc schrijver, fatima eshimbekova ......

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