Document of The World Bank Public Disclosure Authorized Report No: 25550-RU Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$161.10 MILLION TO THE RUSSIAN FEDERATION Public Disclosure Authorized FOR A ST. PETERSBURG ECONOMIC DEVELOPMENT PROJECT April 15, 2003 Infrastructure and Energy Sector Unit Russia Country Unit Public Disclosure Authorized Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 15, 2003) Currency Unit = Ruble (RUB) RUB 1 = US$0.03 US$1 = RUB 31.18 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CFAA - Country Financial Accountability Assessment CIF - Cultural Investment Facility DFID - Department for Intemational Development (UK) EBRD - European Bank for Reconstruction and Development ECA - Eastern Europe and Central Asia Region ECSIE - ECA Infrastructure and Energy Services Department EIB - European Investment Bank EMP - Environmental Management Plan FMR - Financial Management Report GDP - Gross Domestic Product GRP - Gross Regional Product GTZ - German Technical Assistance FIAS - Foreign Investment Advisory Services FISP - St. Petersburg Foundation for Investments GOSKOMSTAT - Federal Committee for Statistics GOSSTROI - Federal Committee for Construction and Communal Services ICR - Implementation Completion Report IFI - International Financial Institution KEPP - St Petersburg Committee of Economic Development. Industrial Policy, and Trade KGA - St. Petersburg Committee of Urban Planning and Architecture KF - St. Petersburg Committee of Finances KUGI - St. Petersburg Committee of Property Management KZRtZ - St. Petersburg Comnmittee of Land Resources and Land Development MNR - Federal Ministry of Natural Resources NDEP - Northem Dimension Environment Partnership NIB - Nordic Investment Bank NGO - Non-Governmental Organization PIU - Project Implementing Agency SAL - Structural Adjustment Loan SME - Small and Medium Enterprise SUE - State Unitary Enterprise SPB-EDL - St. Petersburg Economic Development Loan TACIS - Technical Assistance to CIS Countries (EU) USAID - US Agency for International Development Vice President: Johannes F. Linn, ECAVP Country Director: Julian F. Schweitzer, ECCUI Sector Director: Hossein Razavi, ECSIE Sector Manager: Sumter Lee Travers, ECSIE Task Team Leaders: Richard L. Clifford, ECCUI Jean-Jacques Soulacroup, ECSE RUSSIAN FEDERATION ST. PETERSBURG ECONOMIC DEVELOPMENT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 3 2. Key performance indicators 4 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 6 2. Main sector issues and Government strategy 7 3. Sector issues to be addressed by the project and strategic choices 16 C. Project Description Summary 1. Project components 19 2. Key policy and institutional reforms supported by the project 23 3. Benefits and target population 23 4. Institutional and implementation arrangements 24 D. Project Rationale 1. Project altematives considered and reasons for rejection 25 2. Major related projects financed by the Bank and/or other development agencies 26 3. Lessons learned and reflected in the project design 29 4. Indications of borrower commnitment and ownership 31 5. Value added of Bank support in this project 31 E. Summary Project Analysis 1. Economic 31 2. Financial 32 3. Technical 33 4. Institutional 34 5. Environmental 36 6. Social 37 7. Safeguard Policies 40 F. Sustainability and Risks 1. Sustainability 40 2. Critical risks 41 3. Possible controversial aspects 42 G. Main Loan Conditions 1. Effectiveness Condition 43 2. Other 43 H. Readiness for Implementation 44 I. Compliance with Bank Policies 44 Annexes Annex 1: Project Design Summary 45 Annex 2: Detailed Project Description 48 (A) Adjustment Component 48 (B) Matrix of Core Policy Actions 60 (C) Investment Component 65 Annex 3: Estimated Project Costs 72 Annex 4: Economic Analysis 73 Annex 5: Financial Summary 75 Annex 6: (A) Procurement Arrangements 76 (B) Financial Management and Disbursement Arrangements 84 Annex 7: Project Processing Schedule 91 Annex 8: Documents in the Project File 92 Annex 9: Statement of Loans and Credits 93 Annex 10: Country at a Glance 96 Annex 11: Country Context and Macro-Economic Situation 98 MAP(S) IBRD 27188R RUSSIAN FEDERATION ST. PETERSBURG ECONOMIC DEVELOPMENT PROJECT Project Appraisal Document Europe and Central Asia Region ECCUI Date: April 15, 2003 Team Leader: Richard L. Clifford Sector Manager: Sumter Lee Travers Sector(s): General industry and trade sector (30%), Other Country Director: Julian F.Schweitzer social services (30%), Housing finance and real estate Project ID: P069063 markets (20%), Sub-national govemment administration Lending Instrument: Structural Adjustment (20%) Loan /Hybrid Theme(s): Municipal governance and institution building (P), Municipal finance (P), Legal institutions for a market economy (P) P6iect:FifiaifciiWDtifDt~.T. 4 *;2-~ rPr oe Fnn -. C. n . 8. Dt_.. .........................*',-,~~ -**-;,owx.-,,'r,, [X] Loan [ ] Credit [] Grant [ Guarantee [ Other: For LoanslCredits/Others: Loan Currency: United States Dollar Amount (US$m): 161.10 Borrower Rationale for Choice of Loan Terms Available on File: RX Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 17 Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds Financing. Source ore BORROWER 51.84 26.86 78.70 IBRD 140.33 20.77 161.10 Total: 192.17 47.63 239.80 Borrower: GOV. OF RUSSIAN FEDERATION Responsible agency: MINISTRY OF FINANCE Address: 9 Ilyinka ul., Moscow 103097, RUSSIA Contact Person: Mr. Alexander Pavlov Tel: (7-095) 913-4406 Fax: (7-095) 9134531 Email: Other Agency(ies): Ministry of Culture Address: 7 Kitaygorodsky Proyezd, Moscow 103097, RUSSIA Contact Person: Mr. Mikhail Svidkoy, Minister Tel: (7-095) 925-0608 Fax: (7-095) 925-9158 Email: City of St. Petersburg Address: Smolny Palace, St. Petersburg 193060, RUSSIA Contact Person: Mr. Vladimir A. Yakovlev, Governor Mr. A. Vakhmistrov, Vice-Governor for Construction Tel: (7-812) 319-9030 Fax: (7-812) 310-0002 Email: Estimated Disbursements ( Bank FY/US$m): >j *+tio4.si2005 7 " ' ;2005 , -- ~-Q07 200 2w209. Annual 56.04 76.88 36.29 30.45 22.93 17.22 Cumulative 56.04 132.92 169.21 199.66 222.59 239.81 Project implementation period: 6 years (2 years on adjustment component) Expected effectiveness date: 09/30/2003 Expected closing date: 08/31/2009 -2- A. Project Development Objective 1. Project development objective: (see Annex 1) Background: The break-up of the Soviet Union in 1991 and the transition from ceritral planning to market economy in Russia was difficult. Continuing infusion of financial resources into unprofitable State enterprises and economic management indiscipline created high rates of inflation and increasingly unsustainable fiscal imbalances. This led to the crisis of August 1998 when Russia defaulted on its domestic and foreign debt obligations. Since 1999, however, the macro-economic turnaround has been significant. Real GDP increased by about 3 percent in 1999, about 8 percent in 2000, 5 percent in 2001, and reached about 4 percent in 2002. Inflation declined from about 86 percent in 1999 to about 19 percent in 2001, and dropped to 15 percent in 2002. However, this recovery was driven, in addition to the steep depreciation of the Ruble, essentially by the rise in prices for exports of natural resources and, in particular, oil and gas. Excessive dependence on natural resource exports leaves the economy vulnerable to external shocks and greater diversification of economic activities will be indispensable for sustaining growth in the medium and longer term. Of critical importance will be the expansion of a more broad-based private sector and an increase in the role of small and medium enterprises whose contribution to GDP still remains below the levels of other more advanced ECA countries, (see Annex 11 for a detailed presentation of the macroeconomic context and recent economic developments). The Federal Government has put in place an impressive program of reforms (Medium Term Program of Social and Economic Developmentfor 2002-04, 'The Medium Term Program') to reduce poverty levels, achieve economic modernization, develop financial intermediation, improve fiscal efficiency, and reduce regional economic disparities. Improving the climate for private sector development is one of the key objectives of the Federal Government's Medium Term Program and the implementation of a comprehensive set of deregulation measures aimed at removing administrative barriers to entry and reducing costs of doing business in Russia is under way. Achievements and failures of the Federal Government are echoed in Russia's 89 Regions (Subjects of the Federation), which control a substantial share of the economy. Aggregate fiscal revenue of the sub-national sector is currently roughly equal to that of the Federal Government and the volume of sub-national public sector investment about three times that of the latter. However, regional economic growth over the past decade has been uneven giving way to growing inequality in terms of per capita income, investments, and social indicators. Persisting weakness in the financial sector has inhibited the emergence of an effectively operating system of financial intermediation that could provide the basis for stronger business development. Although a series of