- Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 17925

IMPLEMENTATION COMPLETION REPORT

KYRGYZ REPUBLIC

AGRICULTURAL PRIVATIZATION AND ENTERPRISE ADJUSTMENT CREDIT

(Credit 2750-KG)

June 4, 1998

Country Unit 8Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EOUIVALENTS(as of December 1997)

Currency Unit = Som,1 Som = 100 Tiyin,US$1 = 17.6 Som

AVERAGE EXCHANGE RATESSom per US$1

Period Average End of Period1994 10.9 10.61995 10.8 11.21996 12.9 16.91997 17.2 17.5

WEIGHTS AND MEASURESMetric System

KYRGYZ REPUBLIC - FISCAL YEARJanuary 1 to December 31

ABBREVIATIONS AND ACRONYMS

APEAC - Agricultural Privatization and Enterprise Adjustment CreditDEBRA - Debt Resolution Agency

ERRA - Enterprise Reform and Resolution AgencyESAF - Enhanced Structural Adjustment Facility

FINSAC - Financial Sector Adjustment CreditFSU - Former Soviet UnionGDP - Gross Domestic Product

IBRD - Intemational Bank for Reconstruction and DevelopmentIDA - Intemational Development AssociationIMF - International Monetary Fund

KAFC - Kyrgyz Agricultural Finance CorporationKDA - Kyrgyz Dan Azyk (Bread Complex)KTA - Kyrgyz Tamak Ash (Agro-Processing Complex)

MAWR - Ministry of Agriculture, Food and Water ResourcesNBK - National Bank of Kyrgyzstan

PESAC - Privatization and Enterprise Sector Adjustment CreditPIA - Project Implementation AssessmentPIU - Project Implementation Unit

PSRMAC - Public Sector Resources Management Adjustment CreditSDR - Special Drawing Right

SWR - State Wheat ReserveSPF - State Property FundTA - Technical Assistance

TACIS - Technical Assistance for the Commonwealth of Independent States (EU)UCB - Unified Cash Benefit

USAID - United States Agency for International Development

Vice President: Johannes F. Linn, ECADirector: Kiyoshi Kodera, ECCO8

Responsible Staff: Peter Hansen, ECCO8Sarina Abdysheva, Consultant, ECCO8

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORT

KYRGYZ REPUBLIC

AGRICULTURAL PRIVATIZATION AND ENTERPRISE ADJUSTMENT CREDIT(Credit 2750-KG)

CONTENTS

Preface. i

Evaluation Summary....................................................

PART I. PROJECT IMPLEMENTATION ASSESSMENT ..................................................... 1I

A. Project Origin and Objectives ................................................. IB. Achievement of Objectives ................................................. 2C. Implementation Record and Major Factors Affecting the Project ............................................... 4D. Project Sustainability ................................................ 12E. IDA Performance ................................................ . 13F. Borrower Performance ................................................ 13G. Assessment of Outcome ................................................ 14H. Future Operations ................................................ . 141. Key Lessons Learned ................................................ 14

PART 11. STATISTICAL TABLES

Annexes:A. Borrower Contribution to the ICRB. IDA's Completion Mission's Aide Memoire

Map (IBRD 26822RI)

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

IMPLEMENTATION COMPLETION REPORT

KYRGYZ REPUBLIC

AGRICULTURAL PRIVATIZATION AND ENTERPRISE ADJUSTMENT CREDIT(Credit No. 2750-KG)

PREFACE

This is the Implementation Completion Report (ICR) for the Agricultural Privatization andEnterprise Adjustment Credit for the Kyrgyz Republic, for which an IDA credit in the amount of SDR28.6 million (approximately US$ 45 million equivalent) was appraised in March, 1995 and approved bythe Board on June 28, 1995. The Development Credit Agreement was signed on July 28, 1995, andbecame effective on October 26, 1995. The first tranche (SDR 14.3 million) was released in threedisbursements under the Bank's former disbursement procedures for adjustment operations: November 9,1995 (SDR 2.0 million), December 5, 1995 (SDR 8.0 million), and January 5, 1996 (SDR 4.3 million).The second tranche (SDR 14.3 million) was released in one lump sum on June 26, 1996 under newdisbursement procedures for adjustment operations. The project was closed on February 28, 1997. Theproject was cofinanced by the Government of the Netherlands (US$ 10 million equivalent) on a grantbasis. Technical Assistance in total amount of JPY 19,100,000 was provided by the Government ofJapan prior to the Credit approval to carry out an Operational Audit of the Kyrgyzpotrebsouyz(Cooperatives' Union) and prepare an Action Plan for its further demonopolization and privatization.

The ICR was prepared by the Country Unit for Kazakstan, Kyrgyzstan, and Turkmenistan(ECC08) of the Europe and Central Asia Regional Office. It was prepared by Sarina Abdysheva(Consultant) under direction of Peter Hansen (Principal Economist and Task Manager during supervisionof APEAC), and reviewed by Kiyoshi Kodera, Director, ECCO8. This ICR is based on the project files,discussions held with relevant state agencies of the Borrower involved in the project implementation andthe findings of IDA's Completion Mission in April 1997. The Borrower contributed to the preparation ofthe ICR by preparing its own project completion report which outlines the reforms implemented underthe project and provides an evaluation of the project's overall achievements (Annex A).

Extensive supervision was provided during the implementation of the Reform Programsupported by APEAC, as described in the Supervision Plan of the President's Report (Report No. P-6583-KG). Final Supervision of the project implementation took place during IDA's CompletionMission in April 1997 (Annex B).

After reviewing the draft ICR the Government provided its comments which were incorporatedinto the final report.

IMPLEMENTATION COMPLETION REPORT

KYRGYZ REPUBLIC

AGRICULTURAL PRIVATIZATION AND ENTERPRISE ADJUSTMENT CREDIT(Credit No. 2750-KG)

Evaluation Summary

Introduction

1. The Agricultural Privatization and Enterprise Adjustment Credit of SDR 28.6 million (US$ 45million equivalent) was approved on June 28, 1995 and declared effective on October 26, 1995. APEACwas designed to assist the Government in establishing an enabling environment for the agricultural sector-- the mainstay of the Kyrgyz economy -- through the development of land markets, thedemonopolization and privatization of agricultural conglomerates that dominated agricultural marketingand processing, and elimination of remaining price and trade distortions, as well as interference of thelocal governments in commercial decisions. At the same time, APEAC was to support the furtherprivatization and enterprise restructuring process started under the Privatization and Enterprise SectorAdjustment Credit (PESAC).

2. The project was the third in a series of policy based operations in support of the KyrgyzGovernment's overall stabilization and economic reform program, which aims to establish a marketoriented economy. Prior to APEAC, these reforms were supported by a Rehabilitation Credit (Cr. 2491-KG; FY93), PESAC (Cr. 2639-KG; FY94), and a three-year ESAF arrangement of the IMF (approved inJuly 1994). The Rehabilitation Credit and PESAC have been successfully completed, and ICRs havebeen prepared (Report Nos. 16630 and 16698, respectively). A fourth policy operation, the FinancialSector Adjustment Credit (FINSAC, Cr. 2890-KG) is expected to be completed shortly. The secondtranche of FINSAC was released in November 1997 and an ICR will be prepared in FY99. A fifth policyoperation, the Public Sector Resource Management Adjustment Credit (PSRMAC) was approved onApril 16, 1997 and is currently under implementation. Eight investment and technical assistanceoperations are also currently under implementation (Social Safety Net, Telecommunications, PrivateEnterprise Support, Health, Sheep Development, Power and District Heating, Rural Finance andFinancial Sector Technical Assistance).

Project Origin and Objectives

3. The Kyrgyz Republic experienced an unprecedented decline in output and real incomes from1991 to 1995 triggered by the breakdown of inter republican trade and payments arrangements in theFSU area, and in part by the collapse of central planning. As discussed in President's Report for APEAC(Report No. P-6583-KG; June, 1995), the Kyrgyz Republic was more affected than many of the otherrepublics owing to its dependence on imported oil and gas, geographical isolation and lack ofimmediately exploitable resources. Real GDP declined by 43% between 1991 and 1994 and inflationsoared, reaching four digit levels in 1992 and 1993. The industrial sector experienced the highest outputloss, at 60 percent, with capacity utilization as low as 30 percent in some subsectors. Althoughagricultural output declined by only 24 percent during this period, this was the continuation of a longerdownward trend in the sector, caused by decreasing productivity and deterioration of natural resources.

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The situation in this sector was exacerbated by unclear ownership rights on land, lack of inputs andcredits, distorted pricing policy and the lack of reliable marketing channels. While a private sector hademerged in small scale services and agriculture, the agricultural sector was dominated by statemonopolies, namely Kyrgyz Dan Azyk (Bread Complex), Kyrgyz Tamak Ash (Agro Processing),Kyrgyz Selkhozchimia (Fertilizers and Pesticides Supply), Kyrgyz Aiyl Komok (Input Supply), KyrgyzPotrebsouyz (Cooperatives Union) and others. The loss of markets following the breakdown of theSoviet system, continued price controls, compulsory marketing, export restrictions, existence of statemonopoly over input supply, and administrative interference of the state in farm management reducedfarm earnings and the ability of farms (mostly collective or state owned) to finance their operations fromtheir own resources. In early 1994, the Government renewed its reform effort in the agricultural sector,and issued a number of decrees to solidify the principles of private land use rights, thus setting the stagefor the establishment of more efficient private farm holdings. Nevertheless, a consolidated andcomprehensive agrarian reform program was not yet in place.

4. APEAC represented part of the International Development Association's (IDA) efforts, withstrong bilateral support, to respond rapidly and positively to the Government's goals of economicrecovery and transition from "plan to market". The program supported the Government's efforts inestablishing an enabling environment for economic recovery of the agricultural sector and focused on thefollowing key objectives: (i) helping to develop land markets as the basis for sound agrarian reform; (ii)demonopolization and privatization of the large state-owned conglomerates that dominated agriculturalmarketing and processing; (iii) elimination of the remaining price and trade distortions in agriculture;and (iv) elimination of the local governments' interference in commercial decisions. At the same time,APEAC aimed to reinforce the privatization and enterprise adjustment process started under the PESACreform program.

Implementation Experience and Results

5. The Government has made commendable progress in implementing the reforms supported by theAPEAC program. Overall implementation was satisfactory, and most of the development objectiveswere achieved, while the program's first objective (development of land markets), as discussed below,has only been partially achieved. Nevertheless, progress in achieving the program objectives wassufficient to warrant release of the second tranche of APEAC in June 1996. Since then, the Governmenthas continued to pursue the objectives and further progress has been achieved in a number of areas,including continued distribution of land use shares, continued privatization of the former Kyrgyz DanAzyk and Kyrgyz Tamak Ash agricultural conglomerates, reduction in the State's holding of wheatreserves to a limited amount, and continuation of the mass privatization program.

6. Development of Land Markets. Land and agrarian reforms in the Kyrgyz Republic werestarted in 1991. An essential part of these reforms was the transfer of agricultural land and assets fromstate ownership to private use rights and the establishment of more productive farms. The mainmechanism used was the distribution of land shares and farm assets and conversion of state farms intoprivate joint stock companies. From the Government's point of view, the agricultural reform programand the process of farm restructuring was well conceived. The main idea was to provide equal initialopportunities for all farmers and to allow the future size of farms to be regulated spontaneously byfarmers themselves. However, a simple transfer of land use rights to members and employees of stateand collective farms did not by itself create viable and competitive production units. Without buildinginstitutional capacity to complement farm restructuring, in particular, without establishing a proper landregistration system to record the trading of land use rights, creation of viable and competitive production

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units would not be possible. Several Presidential Decrees on land reform had provided broad guidelinesto proceed with agrarian reform, but they were not sufficiently detailed or comprehensive to promote asustainable program of land distribution and farm size adjustmen! in response to market forces.

7. To address this situation, APEAC focused on the legal and institutional framework necessary fordevelopment of land markets by consolidating the existing legislation and regulations. The objectiveswere to obtain a clarification of land use rights and the elimination of restrictions that would prevent theemergence of land markets. The first steps in this direction, which were carried out during APEACpreparation (see Table 5, Policy Matrix), included: (i) elimination of maximum private farm sizerequirements in various land categories; (ii) abolishing the power of rural committees to approve landtransactions; and (iii) ensuring the full marketability of shares inside or outside the enterprise in the caseof corporate farms. The second set of activities focused on longer term development of land reforms andwas done during project implementation. It was related to establishment of clear implementationprocedures for: (i) putting in place separate procedures for adjudication of disputes (under draft LandCode); (ii) issuing a standard land title or certificate; and (iii) vesting responsibility for land registrationin a single authority.

8. As part of APEAC, in November 3, 1995, a Presidential Decree (No. 297) extended land userights from 49 to 99 years and provided, upon expiration of this period, a priority right of lease extensionto leaseholders who actually work on their land. This Decree also eliminated the restrictions on themaximum size of land per household and reduced the minimum farm size requirements for commercialfarms to 5 ha. for irrigated land and 1 ha. for suburban fruit and vegetable growing. Third, thePresidential Decree also made land use rights legally transferable (for sale, lease, inheritance) andcollateralizable. Procedures for collateralization were specified in the Law on Pledge, which wasenacted in August 4, 1997, and in the draft Mortgage Law, which is currently under consideration byParliament.

9. These extensions of land use rights represented substantial progress in land reform. Prior torelease of the second tranche of APEAC, the Bank advised the Government to reinforce the aboveprovisions by introducing them into the draft Land Code to ensure the long term sustainability of the landreforms. The corresponding draft Land Code acceptable to IDA was submitted to the Parliament on May10, 1996. Since then the Land Code has passed through several readings in Parliament, but, despiteconsiderable public support, it has not yet been enacted due to the opposition of a group of Delegates,who oppose the concept of private ownership of land. They view the introduction of 99 year land userights into the Land Code as being inconsistent with Article 4 of the Kyrgyz Constitution (adopted 1993),which does not allow private ownership of land. Some deputies consider this amendment as equal to theintroduction of private ownership of land, since the proposed maturity of tenure exceeds a normal humanbeing's lifetime. A second reason for delay was the necessity for revision of other relevant legislation,i.e., the Civil Code Part II. As of April 1998, the draft Land Code was still being debated in Parliament.

10. As a result of these reforms, some "informal" trading of land is currently taking place. Also, thefirst land transactions through auctions conducted by the National Land Fund took place in Talas andChui Oblasts early 1998. However, local commercial banks and the newly established KAFC won'taccept land use rights as collateral. They accept other immovable and movable properties as collateral(e.g., apartments, cars), but not land use rights, especially for agricultural land. The main impedimentsto the collateralization of land use rights are the absence of a proper land registration system and doubtsover the legal enforceability of taking possession of land use rights that have been pledged as collateral.

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11. During the last two years, the Government has been implementing a pilot Land RegistrationProject supported by USAID in two oblasts. The project has accomplished the development of a uniqueproperty identification system, the creation of registration district and rural community maps and indexmaps, the compilation of data on ownership, and the creation of registration cards and folders. As thepilot project went on, due to involvement of a number of state agencies in the land reforms (i.e., Bureauof Technical Inventory (BTI) for urban and Center on Land and Agrarian Reforms (CLARs) for rurallands), it was critical to decide which agency would be the single agency responsible for landregistration. A Presidential Decree of November 25, 1996 entrusted the responsibility for registration ofland to the newly established State Land Agency. A subsequent Government's Resolution was issued onApril 2, 1997 on initiating state registration of land use rights. Several options were discussed betweenthe Bank and the Government for the determination of institutional responsibilities of the landregistration system. Finally, the Government decided to vest the authority for administering the stateregistry in the Ministry of Justice. This decision was incorporated in the draft Land Registration Act,which was also submitted to Parliament in May, 1996 but has not yet been enacted pending enactment ofthe Land Code and continued debate within Parliament over which agency should have authority overland registration system.

12. In sum, APEAC's objective of helping to develop land markets can be assessed as beingachieved. First, the immediate objective of removing restrictions on farm size and clarifying legal rightsthrough further Presidential Decrees (which are still in force) were achieved. Second, APEAC providedmomentum to the legislation aspects of land reforms by helping to get acceptable Land Code and LandRegistration Act into Parliament for debate. These included the concepts of 99 years leasehold, the legaltransferability of land use rights and a single agency to be responsible for all land registration, both urbanand rural. Third, on the ground, distribution of land shares continued at an impressive pace. Also, theUSAID funded pilot registration project was launched, which gives valuable experience for furtherdevelopment of land registration system.

13. The development of functioning land markets is likely to take several more years and willrequire several factors which were beyond the scope of APEAC, e.g., (i) clear indications that economictransactions in land have the full and permanent support of the state; (ii) a demonstrated channel forcreditors to take possession of land that has been pledged as collateral; (iii) a reduction in hightransactions costs (notary fees and transfer taxes) associated with the sale of land use rights; and (iv)establishment of a functioning land registration system. Nevertheless, the necessary groundwork hasbeen laid. APEAC did not specifically address these factors, and, in retrospect, the objective of"helping" to development of land markets may be viewed as somewhat simplistic and too ambitiousgiven the one-year timeframe of an adjustment operation. Indeed most of the remaining steps require amuch longer time frame, because they involve fundamental changes in society's mentality concerningland use and ownership, as well as institutional changes in the legal and administrative systems. APEACdid not define a set of important milestones for establishing functioning land markets. While APEACclearly advanced the development of land markets, there were no precise indicators of successestablished at the time of appraisal. In retrospect, it is clear that much remains to be done before landmarkets can evolve in to a fully functioning system that is consistent with the market economyaspirations of the Government and the Bank. Nevertheless, the necessary groundwork has been laid.

14. Creating a Competitive Environment for Agroenterprises. The reforms supported by thiscomponent of APEAC included creation of necessary conditions for establishment of competitiveenvironment for the emerging private sector, including abolishment of remaining price and tradedistortions, demonopolization of procurement, supply and processing markets in agriculture, andelimination of the local government's interference into activities of commercial entities. The

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Government undertook all conditions specified in this regard in the Development Credit Agreement.Prior to APEAC, in early 1994, the Government abolished "state orders", and replaced them with a newprocurement system of "state needs" to be implemented by voluntary supply contracts at negotiatedprices. In 1994 the Government also abolished a decree that imposed price controls on exportcommodities and a Price Commission that had been established to implement this Decree. TheGovernment also dismantled quantitative controls on exports. The Government abolished all remainingexport taxes on agricultural commodities in 1995 and early 1996. Now, there are now no export taxes orquantitative restrictions on any exports from the Kyrgyz Republic.

15. As part of the policy measures introduced under APEAC for maintaining an environment of freemarket prices for agricultural products, the Government committed to adopt a policy providingguidelines for the operation of the State Wheat Reserve. Such a policy was necessary to define the scopeof operations of the State Wheat Reserves in the emerging private grain market. The Government issueda Resolution No, 209 of May 10, 1996 along with a policy Concept Note. This Note set out a generalapproach to the development of a free and private market in the trade of grain. These guidelines limit thedomestic state procurement of wheat to 100,000 tons per year, of which 60% is emergency reserve. Theremaining 40% is for supply to remote areas until the private suppliers emerge. Implementation of thispolicy has been followed during the past two years and the grain trade is now basically in private hands.

16. One of the impediments to development of an enabling environment for functioning of theprivate sector was interference of the local governments in commercial decisions. Under APEAC, aPresidential Decree of March 1995 was issued expressly forbidding local government officials to dictatetheir own procurement prices, and delivery requirements, and to impose restrictions on trade acrossprovincial boundaries. However, these regulations are being sometimes ignored, and therefore, there arestill some cases of local governments' interference in commercial decisions.

17. Demonopolization and Reorganization of Agroenterprises and Rural Trade. Improvement in theefficiency of input and output markets was the identified priority in the agricultural sector. TheGovernment had begun dismantling the centralized trade and distribution system that agroindustrial andmarketing enterprises were subject to in the past. Nonetheless, the marketing and procurement ofagricultural products remained dominated by a few state-owned and / or controlled conglomerates.Moreover, procurement, distribution and most administrative services for enterprises have beenrecentralized at the holding company level. Although some of these enterprises had been either totally orpartially privatized, there was little change in their market behavior. Of particular importance wereKyrgyz Dan Azyk (the Bread and Grain Complex, comprising over one hundred units including retailbread shops; mini-bakeries; and large grain procurement, storage, and milling combines), Tamak Ash (aholding entity for 106 agroindustrial enterprises), and Potrebsouyz (Union of Consumer Cooperatives),which together controlled about 90 percent of all procurement of agricultural output and inputs in thecountry. These conglomerates were also the largest debtors to the banking sector and they continued toexert considerable pressure for increased access to financial resources.

18. Demonopolization of Kyrgyz Dan Azyk (Bread and Grain Complex) and Kyrgyz Tamak Ash(Agro and Food Processing) was an important component of APEAC. The process was initiated byPresidential Decrees in May 1995. By December 1995, all component enterprises were converted intoindependent joint stock companies and divested from the holding company. Privatization of KDAenterprises proceeded well. As a result, as of June 1997, out of total 44 enterprises, 28 were fullyprivatized, 6 remained with minority state shareholding and 8 remained majority state owned (including2 large milling and storage companies). As for privatization of KTA, as of June 1997, out of total 96JSCs, 74 were fully privatized, 6 remained with minority state shareholding and 16 with majority state

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shareholding. The residual state shares in all these enterprises were expected to be fully privatized by theend of 1997, but due to a temporary hold in the Privatization program, the remaining shares are nowexpected to be privatized in 1998.

19. Kyrgyz Potrebsouyz (Cooperatives). The highly centralized Union of Consumer Cooperatives(Potrebsouyz) was involved in a wide range of activities, including food production, construction,transportation, and retail businesses. While the primary cooperatives were in principle "private", theywere under the direct influence of the Government. These regional associations had control overpurchasing centers, wholesale units and transportation networks. The continued predominance ofPotrebsouyz in rural procurement and distribution was a fundamental impediment to the creation of acompetitive environment. This was mainly because Potrebsouyz structures had distinctive advantagesover independent, individual business establishments owing to their integrated marketing andprocurement system, negotiating power, and relatively easy access to capital.

20. Under APEAC, support was provided to lay the groundwork for establishing true market basedmember servicing cooperatives. A special study was initiated to review interlinkages andinterdependencies of Potrebsouyz, and the legal framework for cooperatives, with a view to designing arestructuring plan. The Study was funded by the Government of Japan through the PHRD Grant Fund.An operational audit of Potrebsouyz was completed by December 1995, which included RestructuringPlan. The Audit Report was submitted to the Government and was well received. The Governmentagreed to reorganization of the Potrebsouyz system. By its Resolution No. 5/1 of January 1996, theGovernment created a special Commission to consider the Restructuring Plan and initiate thereorganization process. Although the actual reorganization of the Potrebsouyz system was not fullycompleted, its monopolistic influence over procurement and distribution system in the country wassubstantially reduced as a result of liquidation of some regional cooperatives, sale of assets, and thecreation of a competitive environment, which has led to the emergence of private traders who arebeginning to serve the rural areas.

21. Privatization. Progress on privatization of state owned enterprises was satisfactory and met allthe development objectives. APEAC continued support to the mass privatization program for mediumand large scale enterprises for 1994-95 started under PESAC and supported development andimplementation of the second phase of the program for 1996-97. These programs were based on theprinciples of full divestiture. The Government implemented a divestiture strategy based on: (i) cashauctions for small enterprises; (ii) the sale of remaining state-owned shares in already privatizedenterprises through coupon and cash auctions; and (iii) the privatization of medium and large-scaleenterprises through the free distribution of 5 percent of their shares to their workers and managers, thesale of 25 percent of their shares in vouchers auctions, and up to 70 percent through cash auctions or, incertain cases, to investors selected on the basis of competing privatization proposals.

22. APEAC introduced two new elements to the program: the accelerated method of privatization,and an innovative oversight scheme. First, the SPF limited attempts to attract strategic investors to twooffers. If the second attempt was unsuccessful, the unsold shares were to be channeled to the couponand/or the cash auctions, as appropriate. Second, cash auctions were limited to two rounds of bidding,with the shares or property sold to the highest bidder on the second round, without reference to a floorprice. If no purchaser could be found to acquire the property offered for sale, SPF would attempt toattract a private manager through a leasing mechanism, or initiate liquidation procedures, as appropriate.By the end of 1995, a total of 836 enterprises or almost all of the 948 in the 1994-95 program had passedthrough coupon auction. Shares in the remaining enterprises had been offered for cash sale as part of theAPEAC program. By June 1996, 933 enterprises had been put through coupon auction -- some

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additional companies had been added to the program in 1996 -- and shares in 832 of these enterprises hadbeen offered for cash sale following their respective coupon auction. Cash sales lagged, however,because of selective reintroduction of a floor price, which was seen as a means to avoid the "give-away"of Government assets at prices significantly below historic book value. To accelerate the process, theGovernment reaffirmed its policy and authorized the SPF to conclude the sale of enterprises with thehighest bidder at the second round of cash auction at market based price without reference to a minimumfloor price.

23. The second part of the privatization program under APEAC was to set out the privatizationprogram for 1996-97. The Bank reviewed the draft program submitted by the SPF before its approval bythe Government in February, 1996 and confirmed that it included the same principles upon which the1994-95 program was based. The 1996-97 program planned for sale of all remaining medium and largescale enterprises, the privatization of which was not prohibited by law. The program included about 320enterprises and covered most remaining commercial enterprises in the country, including the majorutilities, mines (except gold), aviation and printing industries. Most companies were to be sold throughmass privatization procedures of coupon and cash auctions. Medium-term plans for privatizing thelarger enterprises, such as the energy, telecommunications and aviation companies, were drawn up toattract strategic investors, but only a limited percentage of shares in these companies were sold throughcoupon auction during 1996-97. As result of these programs, by February 1997, (i) all commerciallyviable small scale enterprises were fully privatized; (ii) of the approximately 1,300 medium and largescale enterprises included in the mass privatization program, 993 had gone through coupon auction; ofthese 804 were fully or majority privatized. The coupon program was completed in June 1997, and allenterprises, including the major utilities, have gone through coupon auction. Now, the only remainingstate shares are in major utilities and in about 320 larger enterprises. Privatization of these remainingshares is expected to occur in 1998-1999 under the following methods: (i) commercial tendering, (ii)cash auctions, (iii) sale of up to 30% of state shares through cash auctions and, if any remained, furthersale through any other methods of privatization, (iv) competitive proposals, (v) reserved for sale only byorder of the Government, (vi) reorganization and liquidation, and (vii) remained under management bySPF.

24. Enterprise Restructuring. APEAC also supported the continued enterprise restructuringprogram initiated under PESAC. Diagnostic study for all ERRA enterprises were completed byDecember 1995. Four enterprises left PESAC program without using program's resources, five havebeen or are under full liquidation, and the rest have been restructured and have been or are in the processof being sold to private owners as part of the "hiving off"/liquidation procedures of the formercompanies. The 19 restructured enterprises are back to in production with the benefit of working capitalloans provided under the ERRA program. Some enterprises are now marginally profitable, while theothers have not required further budget assistance.

25. Legal Reform. The Government has been undertaking significant efforts to adjust its legal andregulatory framework to the needs of a market economy. Substantial progress has been made towardsmodernizing Kyrgyz commercial laws to meet the demands of private investors. General legal reformwas launched under the Rehabilitation Credit. These included revised Civil Code Part 1, the Tax Code,Mining Code, a new Banking Law, Foreign Investments, and Bankruptcy legislation. APEAC supportedspecifically a National Procurement Law, Law on Pledge (Collateral), Land Code and ImmovableProperty Rights Registration Law. A Procurement Law, which established government-wide proceduresin line with international standards, was adopted in April 1997. Under this Law, the Government hasestablished an Independent Procurement Agency whose function is to implement and supervise theprocurement procedures enacted by the Procurement Law. Land Code and Immovable Property Rights

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Registration Law were submitted to the Parliament in May 1996, but not yet enacted. Consideration ofthese two pieces of legislation was delayed till now for several reasons described above in paragraph 9.

26. Disbursements. Audit and the Project's completion. The first tranche of the Credit totaling toSDR 14.3 million (US$ 22.5 million equivalent) was released partially on three different dates soon aftereffectiveness. The dates were November 9, 1995 (SDR 2,021,357.90), December 5, 1995 (SDR8,009,526.85), and January 5, 1996 (SDR 4,269,115.25). It was disbursed under the Bank's formerdisbursement procedures, which required supporting documentation, including import documentationand Statement of Expenditures. Release of the second tranche was originally envisaged 8 months afterBoard, but was delayed by about 3 months. The second tranche was released in one lump sum on June26, 1996 under new disbursement procedures for adjustment operations. The requirement for an audit ofthe APEAC funds was waived in February, 1997, in line with the new disbursement and auditprocedures for adjustment operations that were approved in 1996. The Project was officially closed inFebruary, 1997. The Government's Project Completion Report was received in March, 1997 and judgedthat all objectives of the APEAC program have been met (Attachment A). The IDA's ICR Mission tookplace in April 1997 (Aide Memoire, Attachment B).

Summary of Findings, Future Operations and Key Lessons Learned

27. Implementation of the reform program supported under APEAC helped to establish an enablingenvironment for recovery of the agricultural sector by supporting land reform, demonopolization of tradein agricultural inputs and outputs, elimination of trade and price distortions, and abolishment of theremaining export taxes on agricultural commodities. It also supported improved mechanisms for on-going privatization, enterprise reform and restructuring, and enhanced the policy, legal and regulatoryenvironment for private sector development. IDA recognized that the transition from a command to amarket oriented economy would take time, and a series of adjustment operations would be needed.These operations would not only support the transition process but also help to ease the macroeconomicand social consequences of the reforms by providing budgetary resources that eased the compression ofgovernment expenditures caused by declining GDP and tax revenues. The APEAC operation wastherefore followed by (i) a Financial Sector Adjustment Credit (FINSAC-FY96); and, (ii) a Public SectorResource Management Adjustment Credit (PSRMAC-FY97). A Social Sector Adjustment Credit(SOSAC) is currently under preparation with a target Board date in FY99. The reform programsupported under APEAC was overall successful, but there are nevertheless important lessons relevant tothe future developments in the Kyrgyz Republic as well as for the future projects to be supported by theBank.

28. Development of land markets was too ambitious an objective to be realized within 12-15months of the program implementation. It was unrealistic to expect that land markets could becreated during 15 months of program implementation. While APEAC helped further this process, manyessential developments are still required before the ultimate objective of functioning land markets will beobtained (para. 13). They involve fundamental changes in society's mentality concerning land use andownership, as well as institutional changes in the legal and administrative systems. Difficulties areillustrated by fact, that debates on which of the existing land agencies would be the "single authority" forland registration are still going on in Parliament. Full achievement of the development objective of"developing land markets" will only be possible once proper land registration system is established.Definitions of success could have been more clearly specified in the President's Report on APEAC.APEAC should have identified important milestones for the development of land markets and agreed onwhich would be attained under the program.

29. Resolution of debts of grain combinats should have been addressed during the programdesign before proceeding with their privatization. This would have facilitated privatization of themajor bread combinats. The Government's Letter of Development Policy said that the Governmentwould handle this issue, but in fact it did not. An important development in privatization of KDA'scombinats has been the repossession by the SPF of share blocks previously sold in eight of the DanAzyk bread combinats due to full or partial non-payment of installment payments by the purchasers,despite additional time that was given to make these payments. Repossessions have taken place duringthe first few months of the 1997. The reason for non-payment for shares by the investors appeared to bethe high level of debt that still burdens many of these combinats, which was the major concern ofinvestors. This debt made many of them highly illiquid and threatens their viability as on-goingenterprises. This issue was discussed with the Government during each supervision missions, but nodecisive measures were taken. In retrospect, the Bank should have required action to be taken by secondtranche. If the Working Group on APEAC had functioned, perhaps it could have dealt with this problem.In the event, this matter is being handled by the Debt Resolution Agency (DEBRA) created under thesuccessive adjustment operation program, FINSAC, as part of the banking sector reform.

30. Liberalization and privatization measures and elimination of legal impediments is notsufficient for the creation of a competitive environment for agrobusiness. Even after implementationof policy measures under APEAC, there are other major factors impeding the emergence of competitivemarkets in the agricultural sector. Emerging private agrobusiness enterprises are facing considerablecommercial risks and relatively high costs for goods and services (e.g., high interest rates) which weakentheir ability to participate and compete in markets. A large proportion of agroenterprises privatizedunder APEAC are hardly operating for several reasons, including: (i) lack of access to working capital topurchase raw materials and agricultural input; (ii) lack of access to term capital to finance renovation ofequipment and machinery, inventory, and receivables; (iii) lack of "know-how" and access to moderntechnologies; and (iv) lack of management skills due to the dominance of state agrobusiness enterprisesin the past. Weak financial markets and management skills have inhibited the capacity of the emergingprivate enterprises to respond effectively to the opportunities created by APEAC.

31. Adjustment programs can succeed even if not well coordinated by a Central WorkingGroup. but only if there is a strong working level commitment to individual components. SinceAPEAC contained reforms to be introduced in a number of areas in the sector and required involvementof the different agencies, a special interministerial high level Working Group was created under the chairof Vice Prime Minister on agrarian policy. The mandate of the WG was to consolidate the agrarianreforms, and coordinate and monitor implementation of the APEAC program. Unfortunately, there wereno signs that the Group functioned as a true steering group. To the Bank's knowledge there were nomeetings, no instructions, no progress reports, etc. The program nevertheless succeeded due to the factthat its basic components were run by agencies that were already deeply involved in the reform efforts(Ministry of Agriculture for land reform, SPF for privatization, and ERRA for enterprise restructuring).The areas that were not so covered, for instance, wheat reserve policy and removal of export taxes, fellbetween cracks, and the Bank had to make special efforts during supervision with individual units of theGovernment to get things moving.

32. Legal framework is necessary but not a sufficient condition to implement policy reforms.Institutional development, which is a much slower process than passing Presidential Decrees, is equallyimportant for making progress on the ground. For instance, the policy objective of helping to developland markets was not consistent with the time it will take to develop and implement a functioning landregistration system.

IMPLEMENTATION COMPLETION REPORT

KYRGYZ REPUBLICAGRICULTURAL PRIVATIZATION AND ENTERPRISE ADJUSTMENT CREDIT

(Credit 2750-KG)

PART I. PROJECT IMPLEMENTATION ASSESSMENT

1. The Agricultural Privatization and Enterprise Adjustment Credit of SDR 28.6 million (US$ 45million equivalent) was approved on June 28, 1995 and declared effective on October 26, 1995. Theproject was cofinanced by the Government of the Netherlands (US$ 10 million) on a grant basis.Technical Assistance in total amount of JPY 19,100,000 was provided by the Government of Japan priorto the Credit approval to carry out an Operational Audit of the Kyrgyzpotrebsouyz (Cooperatives'Union) and prepare an action plan for its further restructuring. Second tranche was released on June 26,1996. The project was closed on February 28, 1997.

A. Project Origin and ObJectives

2. Since its independence, the Kyrgyz Republic has been severely affected by adverse externaldevelopments. The Kyrgyz Republic experienced an unprecedented decline in output and real incomesfrom 1991 to 1994 triggered by the breakdown of inter-republican trade and payments arrangements inthe FSU area, and in part by the collapse of central planning. As discussed in President's Report forAPEAC (Report No. P-6583-KG; June, 1995), the Kyrgyz Republic was more affected than many of theother republics owing to its dependence on imported oil and gas, geographical isolation and lack ofimmediately exploitable resources. Real GDP declined by about 43% between 1991 and 1994 andinflation soared, reaching four digit levels in 1992 and 1993. The industrial sector experienced thehighest output loss, at 60 percent, with capacity utilization as low as 30 percent in some subsectors.Although agricultural output declined by only 24 percent during this period, this was the continuation ofa longer downward trend in the sector, caused by decreasing productivity and a deterioration of naturalresources. The situation in this sector was exacerbated by unclear ownership rights on land, lack ofinputs and credits, distorted pricing policy and the lack of reliable marketing channels. While a privatesector had emerged in small scale services and agriculture, agricultural sector was dominated by statemonopolies (namely Kyrgyz Dan Azyk (Bread Complex), Kyrgyz Tamak Ash (Agro Processing),Kyrgyz Selhozchemia (Fertilizers and Pesticides Supply), Kyrgyz Aiyl Komok (Input Supply), KyrgyzPotrebsouyz (Cooperatives' Union) and others). In early 1994, the Government renewed its reformeffort in the agricultural sector, and issued a number of decrees to solidify the principles of private rightsto land and setting the stage for the establishment of more efficient private farm holding. Nevertheless, aconsolidated and comprehensive agrarian reform program was not yet in place.

3. Agriculture is critical to the Kyrgyz economy. It provides basic sustenance to the population ofwhich about 65 percent live in the rural areas. Agriculture's contribution to GDP, which averagedaround 33 percent in the 1980s, has increased to over 40 percent in 1994 due to sharp decline inindustrial and service sector outputs. From 1990 through 1995, the Kyrgyz agriculture was on adownward trend of declining output and income, and worsening farm productivity. The loss of marketsfollowing the breakdown of the Soviet system; continued price controls; compulsory marketing exportrestrictions; existence of the state monopoly over input supply; and administrative interference of the

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state in farm management reduced farm earnings and the ability of farms (mostly collective or stateowned) to finance from their own resources.

4. The Kyrgyz Republic had moved rapidly towards design and implementation of a wide range ofsystematic reforms. One of the highest priorities was given to privatization of the state-ownedenterprises, as the economy was still dominated by large and inefficient SOEs which continue to claiman excessive share of economic and financial resources. Early in 1994, with support of the PESACprogram, the Government revised its original privatization strategy for 1994-95 privatization programwith emphasis on the free use of individual shareholding rights, auction of state-owned shares againstvouchers, and systematic use of competitive methods of privatization. However, many of privatizedenterprises continued to remain under the direct influence of sector ministries, holding companies andlocal authorities.

5. The APEAC Reformn Program therefore supported the Government's goals to establish anenabling environment for recovery of the agricultural sector and focused on the following key objectives:(i) helping to develop land markets as the basis for sound agrarian reform; (ii) demonopolization andprivatization of the large state-owned conglomerates that dominated agricultural marketing, processingand procurement; (iii) elimination of the remaining price and trade distortions in agriculture; and (iv)elimination of the local governments' interference in commercial decisions. At the same time, theAPEAC aimed to reinforce the privatization and enterprise adjustment process started under PESAC.

6. APEAC represented part of the International Development Association's (IDA) efforts, withstrong bilateral support, to respond rapidly and positively to the Government's goals of economicrecovery and transition from "plan to market". Since large number of the poor and the very poor residein rural areas, sound agricultural reforms were expected to contribute measurably to the reduction of thepoverty in the Kyrgyz Republic. The key element of the program was to support the Government'sefforts in developing land market as the core for the overall success of the economy. The reorganizationand privatization of major agricultural procurement agencies and supply enterprises were expected tofacilitate farmers' access to marketing channels, thereby providing them with the incentive to increaseproduction. These enterprise-level adjustment were to be complemented by policy and regulatoryreforms to remove policy-induced and regulatory barriers to enterprise efficiency, and help create apolicy environment in which private sector could emerge.

7. APEAC was fully consistent with the Country Assistance Strategy for FY95 and beyond, whichwas considered by the Board of Executive Directors concurrently with the proposed APEAC program inJune 28, 1995. The Bank has worked closely with the Government in developing a program of keystructural reforms in the agricultural and the enterprise sectors to help with the overall adjustmentprocess to a market economy and to facilitate supply response in the agricultural sector.

B. Achievement of Objectives

8. Overall progress under APEAC was satisfactory. All specific conditions were fully met and thesecond tranche was released on June 26, 1996, about three months later than expected (see PolicyMatrix: Table No. 5). Most of the development objectives were achieved, while the program's firstobjective (development of land markets), as discussed below, has only been partially achieved. TheGovernment's Project Completion Report was received in March, 1997 and judged that all objectives ofthe APEAC program have been met (Attachment A). The IDA's ICR Mission took place in April 1997(Aide Memoire, Attachment B).

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Progress on Stabilization

9. The Kyrgyz Government assumed full control over macroeconomic policies with theintroduction of the national currency, the Som, in May 1993, and embarked on a stabilization programsupported by a stand-by arrangement from the IMF and access and the Systemic Transformation Facility(STF). In May 1993, the IMF approver a three year ESAF arrangement in support of the Borrower'smedium-term stabilization and adjustment program, led by tight money and supported by a strongrevenue enhancing effort. During 1994, deposit and credit interest rates were liberalized, directed creditswere discontinued, refinance credit auctions were suspended, and domestic bank financing of the budgetdeficit was sharply curtailed. The Borrower has also established a foreign exchange auction market, afloating exchange rate, and a fully liberal exchange regime with no restrictions on current or capitalaccount transactions. A major liberalization of the trade regime has also occurred. Non-tariff barrierswere removed, and export taxes have been eliminated on all goods.

10. The last two years have witnessed a significant recovery in output. Following a cumulativedecline of about 50% during 1991-1995, real GDP increased by 5.6% in 1996 and by 10% in 1997. Therecovery started about three years following the adoption of stabilization policies. Most of the growthrecorded in 1996 was primarily attributed to agriculture, which benefited from favorable weatherconditions, a change in cropping patterns, and an expansion in cultivated areas. The bulk of GDP growthin 1997 has been from the start of production from the Kumtor gold mine. Private sector activity (mostlyin agriculture, services and trade) has grown rapidly over the past few years, and its share in GDP isestimated to have tripled to 35% during 1994-1997. However, a significant part of private sector activityis likely to have been missed by the official statistics (e.g., the EBRD estimates private sector activity at60 percent of GDP in 1997).

11. The tight monetary policy succeeded in bringing inflation down to around 3% per month in thesecond half of the 1994, from about 23% in the later part of the 1993. Since then, the economy hasfollowed a path of sustained stabilization. As a result, annual inflation rate has been brought down froman annual average of over 1000% in 1992 to around 17% in 1997. Tight monetary and credit policiesbolstered confidence in the Som, resulting in increased willingness by economic agents to hold highermoney balances. In March 1995, the Som became fully convertible following the Borrower'scompliance with the provisions of Article VII of the Articles of Agreement of the IMF. With the rapidtightening of money and credit, real interest rates became positive around 200% by end of 1994, andstabilized around 15% at present. With the sustained tightening of monetary and credit policies, the CPIrose by 10.9% during January - October, 1997, compared to 21.2% during the same period of 1996. Themonthly minimum wage was unchanged during November 1995 - June 1997, and was raised by 20% asof July, 1997. Average wage amounted to about US$38 per month in 1996, well below wages in theneighboring countries. In real terms, average wages fell by 3% in 1996, remaining at about 80% of their1992 level.

12. External trade has expanded rapidly. Exports increased by 56% and imports by 95% (in U.S.dollar terms) during 1994-96, resulting in a sizable expansion of the current account deficit. The surge inimports was dominated by the construction requirements of the foreign-financed Kumtor gold mine in1995-96. The current account deficit has fallen sharply in 1997 to a projected 11% of GDP with thecompletion of Kumtor construction and start of its gold exports. Exports are not subject to registrationrequirements, bans, or taxes (except for the VAT applied on the basis of the origin principle with themost CIS countries). Export licenses are required for very few items such as military arms and goods,explosive, nuclear materials, and narcotics (including those used in pharmaceuticals).

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Rationalizing the Social Safety Net

13. In an effort to strengthen the social safety net and make it more effective, the Governmentconsolidated the former family allowance, bread compensation, and other special payments into auniform cash benefit for families with income below the minimum wage (UCB). Three types of cashtransfers are now provided by the current social safety net: (i) social insurance, including pensions, short-term illness and unemployment; (ii) universal benefits, including military pensions and family benefitsand; (iii) means-tested benefits covering the very poor. The Ministry of Labor and Social Protection isthe key administrative unit for the social safety net and for making payments of social benefits. TheSocial Fund is the key administrative unit for collecting revenues and pension payments. The SocialFund has been in deficit since 1994. Revenue collections have consistently fallen short of estimatesgiven the financial disarray of state owned enterprises. Newly privatized enterprises has been weak.However, the Government has made strong effort and recent arrears on pensions and social benefitsarrears have been reduced to one month. A baseline household survey was undertaken in 1993. Twopoverty monitoring surveys have been undertaken since 1996 and two more are planned. The pastseveral years have also witnessed a deterioration in social indicators. The proportion of households inpoverty is estimated to have raised from 40 % in 1993 to almost 50% in 1996. Unemployment is high.The official unemployment rate fell from a peak of 4,4% to 3,2% in the year ending in August 1997,however, people seeking work without unemployment benefits are not included in the official statistics.

C. Implementation Record and Major Factors Affecting the Project

Consolidating Land and Agrarian Reforms

14. Development of Land Markets. Security of land use was fundamental to the success of agrarianreform. Its progress depended primarily on the Government's commitment to developing a policyenvironment which provides security of tenure to land users and facilitates the development of a landmarket. Fundamental to achieving these goals was the existence of legislation and procedures protectingthe security with which people hold land, as well as allowing the transferability of land use-rights(purchase, sale, mortgage, bequeathal, lease) and the documentation and registration of rights in land andother immovable property. The Government committed itself to the designing and implementation of aprogram through which private ownership of land would be allowed or individual producers wouldreceive long-term rights to use land, thereby establishing new and more responsive farm structures.

15. In February 1994, a Presidential Decree was issued allowing 49-year use rights for land, with anoption to renew. A subsequent Presidential Decree (November 1995) was issued stating the intention ofthe Government to submit to the Parliament the issue of introducing private land ownership toParliament and indicating that, in interim, the land reform will continue to operate under the regime ofland use rights. The new Decree extended the period of land-use rights from 49 to 99 years andprovided, upon expiration of this period, a priority right of lease extension to leaseholds who actuallywork on their land.

16. Under APEAC, these rights have been incorporated in the draft Land Code that was submitted tothe Parliament on May 10, 1996 (Government Resolution No. 207). Since then the Land Code haspassed through several readings in Parliament, but, despite considerable public support, it has not yetbeen enacted due to the opposition of a group of Delegates who oppose the concept of private ownershipof land. They view the introduction of 99 years land use rights into the Land Code as being inconsistentwith Article 4 of the Kyrgyz Constitution (adopted 1993), which does not allow private ownership ofland. Some deputies consider this amendment as equal to the introduction of private ownership of land,since the proposed maturity of tenure exceeds a normal human being's lifetime. A second reason for

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delay was necessity for revision of other relevant legislation, i.e., the Civil Code Part II, which providesfor individual rights to property ownership.

17. Given the significant progress made by the Borrower in respect to the land reforms, the Bankmanagement accepted the submission of the draft Land Code to Parliament as fulfillment of the secondtranche release condition for "automatic renewal of the right to use land after 49 years". The draft LandCode specified the grounds on which land-use rights may be terminated -- eminent domain, requisition(with compensation) in times of disaster or emergency, confiscation when the land in question isinvolved in a conviction for illegal activity, and non-use or poor use of the land over a period of threeyears (following warnings and subject to the right of appeal to a court). Policy elements will be in placeonce the Land Code and Land Registration Act are passed, but still need to establish a proper landregistration system (see para. 18). It is likely to take several more years before this developmentobjective of developing land markets is fully achieved.

18. The existing Presidential Decree also made land use rights legally transferable (for sale, lease,inheritance) and collateralizable. Procedures for collateralization are specified in the Law on Pledge,which was enacted by Parliament in May, 1997, and the draft Mortgage Law, which is currently underconsideration by Parliament. However, local commercial banks and the newly established KAFC won'taccept land use rights as collateral. They accept other immovable and movable properties as collateral(e.g., apartments, cars), but not actual land, especially agricultural land. The main impediments to thisfact are the absence of a proper land registration system and doubts over the legal enforceability are oftaking possession of land use rights that have been pledged as collateral.

19. Farm Restructuring. Presidential Decree of November 1995, eliminated the restrictions on themaximum size of land per household and reduced the minimum farm size requirements for commercialfarms to 5 ha. for irrigated land and I ha. for suburban fruit and vegetable growing. These remainingrestrictions were not included, however, in the draft Land Code that was submitted to the Parliament onMay 10, 1996. By July 1997, about 902,923 land use certificates were distributed, out of which 487,353to individuals and 415,570 to households.

20. Establishing a one step land registration system in each rayon. By the time APEAC started tooperate, a variety of land titles or certificates documenting land-use rights already existed. However,certificates documenting land use rights were issued by different agencies and recorded in a multiple stepprocess by their affiliates. These agencies included the Ministry of Agriculture (agricultural land), theBureau of Technical Inventory (land around private houses), the State Property Fund (land aroundprivatized enterprises), and the Head of the Local Administrations (land around buildings).

21. A draft Law on State Registration of Land and Immovable Property Rights was submitted to theParliament on May 10, 1996 (Government Resolution No. 208) and, similar to Land Code, the LandRegistration Act has not yet been approved to date due to continuos discussions of which agency will beresponsible for registration. The draft Registration Law establishes a unified registration system forimmovable property and provided for the registration of all legal documents which were issued by thevarious state agencies from the beginning of the land reforms to date. Once registered, the localRegistrars would be empowered to issue uniform certificates documenting the interests held in allimmovable properties, both rural and urban.

22. One of the issues of implementing the new Registration System was the complicated set ofactions required for land transactions, involving several institutions (the Rural Committees foragricultural land, the BTI for urban properties, and notaries for all transactions). To clarify these issues

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and lay the ground work for the full implementation of the provisions of the Immovable PropertyRegistration Law, the Government initiated a pilot immovable property registration project in tworayons, under which the administrative unit to oversee the project was established and Action Plan toachieve the above objectives was elaborated. Nationwide land registration under a unified registrationsystem would follow passage of the Registration Act and may be supported by a future IDA fundedproject on Land and Real Estate Registration, which is currently under preparation. The Land Code andthe Mortgage Law to be enacted soon will provide the necessary legal foundation for pledgingimmovable property. In a view of the significant progress achieved in drafting the Registration Law andthe planned launching of the pilot registration project, the Bank management accepted the submission ofthe draft Law to the Parliament as fulfillment of the above condition for release of the second tranche.

Creating a Competitive Environment for Agroenterprises

23. State Procurement. In early 1994, the Government abolished state orders for all goods, andreplaced them with a new procurement system of "state needs" to be implemented by voluntary supplycontracts at negotiated prices. Nonetheless, the method employed by the state agencies to procure fromemerging private traders lacked transparency, as no public advertisement and tendering process wasbeing used. The role of the public sector in procurement of goods was likely to continue, though at amuch reduced scope than in the past. Therefore, the rules of such procurement needed to be clearlyspelled out. The Bank provided technical assistance through an IDF grant for the design of competitiveprocurement procedures. Procurement Law was enacted in April 1997. The Government has establishedan independent procurement agency whose function is to implement and supervise the procurementprocedures enacted by the Procurement Law. The new Law provides the competitive procurementscheme and detailed implementation procedures in line with international standards.

24. Export Taxes. To demonstrate its continued commitment to price liberalization, in 1994 theGovernment abolished a Decree imposing price controls on export commodities and a PriceCommission. The Government also dismantled quantitative controls on exports. Nonetheless, thecountry's main export crops, wool, cotton, hides and skins, as well as silk cocoons were subject tospecific export taxes. Export taxes have been used as a means of subsidizing inefficient agroindustries(textile and leather), at the expense of farmers. The export taxes have depressed already low producerprices, especially for wool, thereby further reducing farmers' income. As one of the reform measuresintroduced under APEAC, the export taxes on wool, cotton, silk cocoons and hides and skins wereremoved progressively in 1995 and early 1996 (Government' Resolution No. 80 of February 27, 1996).There are now no export taxes or quantitative restrictions on any exports from the Kyrgyz Republic.

25. Price Policy. As part of the policy measures introduced under APEAC for maintaining anenvironment of free market prices for agricultural products, the Government committed to adopt a policyproviding guidelines for the operation of the State Wheat Reserve. The purpose of this policy was toindicate to farmers and the private sector the functions and scale of operation that the state will fulfill inthe wheat market. The Bank provided technical assistance to help the Government develop a policy,including detailed discussion with Government in July 1995 of the principles such policy should contain.The Government issued a Resolution No, 209 of May 10, 1996 along with a policy Concept Note, whichset out a general approach to the development of a free and private market in the trade of grain. Theseguidelines limit the activities of the State Wheat Reserve (SWR) to maintaining an emergency wheatreserve of 60,000 tons (about one month's national consumption) plus supplying remote rural areas withup to 40,000 tons of grain per annum until private traders are adequately supplying these areas. Inaccordance with the Concept Note, the SWR would also act as the Government's agent for receivingshipments of humanitarian aid. Storage of wheat reserves would be carried out on a contract basis with

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now-privatized grain mills. All transactions undertaken by the SWR would be at market prices.According to the new policy, the Government should publish information concerning the activities of theSWR on a quarterly basis. The Government has been publishing the information in local newspapers.According to the new policy, the Government will also seek to develop uniform financial instruments,such a system of warehouse receipts, to facilitate private trade in grain. Implementation of this policyhas been followed during the past two years and the grain trade is now basically in private hands.

26. Local Government's Commercial Interference. Local government administrations havetraditionally played a major role in economic and commercial decisions at the local level. This includedinterference in pricing, marketing and production decisions of farms, as well as industrial enterprises andthus it reduced the impact of liberalization measures taken at the national level. As one of the policymeasures supported under APEAC preparation, a Presidential Decree of March 1995 was issuedexpressly forbidding local government officials to dictate their own procurement prices, and deliveryrequirements, and to impose restrictions on trade across provincial boundaries. Certain subsequentactions were expected to be taken to ensure implementation of this Decree. One of them was that as partof the process of reorganization of the Ministry of Agriculture, the role and the terms of reference ofagricultural departments at the oblast and rayon levels will be redefined and limited to offeringinformation and advise to farmers, but not administering production or marketing. This activity isexpected to be supported under the upcoming IDA's Agricultural Support Services Project (ASSP)currently under preparation. Second, local administrations were expected to no longer be in charge ofallocating budgetary credit to individual farmers starting from the 1996 budget. In this regard, theGovernment was expected to take and implement a decision that budgetary credit will not be allocated tofarmers by the local government administrations, but through a rural credit scheme. The Rural FinanceProject (FY97), which currently under implementation supported creation of Kyrgyz AgriculturalFinance Corporation (KAFC) which is expected to play an important role as a rural credit institution inchanneling credit resources to individual farmers and enterprises on behalf of the Government.

Privatization

27. The privatization process was supported by three IDA's adjustment operations, notably PESAC(FY94), APEAC (FY95), and FINSAC (FY96). PESAC initiated and supported the program for massprivatization program for small and medium scale enterprises for 1994-95 years and enterpriserestructuring and was successfully completed on December 1995 (ICR No. 16698; June, 1997). APEACcontinued support to the mass privatization program for medium and large scale enterprises for 1994-95started under PESAC, supported preparation of the next state program for 1996-97, and continuedenterprise restructuring program also started under PESAC. APEAC introduced two new elements to theprogram: the accelerated method of privatization, and an innovative oversight scheme.

28. Under PESAC program. the Government implemented a divestiture strategy which based on: (i)cash auctions for small enterprises; (ii) the sale of state-owned shares in already privatized enterprisesthrough coupon and cash auctions; and (iii) the privatization of medium and large-scale enterprisesthrough the free distribution of 5 percent of their shares to their workers and managers, the sale of 25percent of their shares in vouchers auctions, and sale of up to 70 percent through cash auctions or toinvestors selected on the basis of competing privatization proposals. At the same time, theGovernment's Concept Note for Privatization also included a number of other methods, such as directnegotiations with foreign investors (for enterprises in certain sectors), or the direct sale of significantshareholding rights to suppliers and other enterprises in the same line of business. APEAC program wasintended to support the completion of the 1994-95 Privatization Program as well as the development andimplementation of the 1996-97 program. These programs continue to be based on the principles of fulldivestiture, through coupon and cash auctions, of all shares held by the state in medium and large scale

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enterprises, including the enterprises under the Dan Azyk and the Tamak Ash umbrella in the 1994-95Privatization Program.

29. To achieve its time bound targets for the privatization of medium and large-scale enterprises, theSPF adopted a revised procedures that accelerated the divestiture process. In this regard, the SPF limitedattempts to attract core investors to two offers, using different methods of sale. If the second attemptwas unsuccessful, the unsold share or property were to be channeled to the coupon and/or the cashauctions, as appropriate. The coupon auction mechanism used in the Kyrgyz Republic ensured disposalof all shares offered in one round. As for the cash auctions, they were limited to two rounds of bidding,with the shares or property sold to the highest bidder on the second round, without reference to a floorprice. If no purchaser can be found to acquire the property offered for sale, SPF would attempt to attracta private manager through a leasing mechanism, or initiate liquidation procedures, as appropriate. Theadoption of such a simple and general back-up approach applicable to all medium and large scaleenterprises was needed to accelerate divestiture of the largest possible number of enterprises. This wasexpected to prevent SPF from reverting to the transfer of shares to the managers/workers or to suppliersand associated enterprises in order to reach its privatization targets.

30. Oversight of state owned shares. By the time the APEAC started to operate, the SPF wasformally entrusted with the task of managing the state ownership interest in these enterprises but, so far,it was not able to exercise this responsibility effectively. This has been a particular problem for theagroenterprises, both agroindustry and agricultural marketing conglomerates. As a result, SPF delegatedits overall functions in some key sectors back to line ministries or to state holding companies such asTamak'ash and Kyrgyz Dan Azyk, thereby perpetuating the old patterns of control and intervention. Toovercome these problems and to put in place a lean and market based oversight mechanism, the SPFdeveloped an innovative approach based on the appointment of independent private financial andmanagement experts acting as fiduciaries on behalf of SPF, as owner. The SPF launched implementationof this approach in 1995 on a pilot basis in about 20 enterprises, including agroenterprises, with stateshareholding at 50 percent or more.

31. Progress on privatization. The 1994-1995 privatization program set a target of selling 855medium and large enterprises (over 100 employees) through a series of coupon and cash auctions ("massprivatization"). These included 100 percent state-owned enterprises and enterprises that had beenpartially privatized prior to the commencement of the coupon auction system (the coupon auctionprogram was begun in mid-1994 following the distribution to all Kyrgyz citizens of privatizationcoupons for use in purchasing shares in state-owned enterprises). By the end of 1995, a total of 836enterprises or almost all of the 855 in the 1994-95 program had passed through coupon auction. Sharesin the remaining enterprises had been offered for cash sales as part of APEAC. By June 1996, 933enterprises had been put through coupon auction -- some additional companies had been added to theprogram in 1996 -- and shares in 832 of these enterprises had been offered for cash sale following theirrespective coupon auction. Cash sales lagged, however, because of selective reintroduction of a floorprice, which was seen as a means to avoid the "give-away" of Government assets at prices significantlybelow historic book value. To accelerate the process, the Government reaffirmed its policy andauthorized the SPF to conclude the sale of enterprises with the highest bidder at the second round of cashauction at market based price without reference to a minimum floor price.

32. By its Resolution No. 82 of February 28, 1996, the Government set out the privatization programfor 1996 and 1997. The Bank reviewed the draft program submitted by the SPF before its approval andconfirmed that it included the same principles upon which the 1994-1995 program was based, and that itplanned for sale of all remaining medium and large scale enterprises, the privatization of which was notprohibited by law. The program included about 320 enterprises and covered almost all remaining

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commercial enterprises in the country, including the major utilities, mines (except gold), aviation andprinting industries. Most zompanies were to be sold through mass privatization procedures of couponand cash auctions. However, medium-term plans for privatizing the larger enterprises, such as theenergy, telecommunications and aviation companies, were drawn up to attract strategic investors, andonly a limited percentage of shares in these companies were to be sold through coupon auction during1996-97. By February 1997, (i) all commercially viable small scale enterprises were fully privatized; (ii)of the approximately 1,300 medium and large scale enterprises included in the mass privatizationprogram, 993 had gone through coupon auction; of these 804 were fully or majority privatized. Couponprogram finished in June 1997 -- all enterprises have gone through coupon auction. Now only remainingshares in major utilities and in about 320 larger enterprises. Privatization of these remaining shares isexpected to occur in 1998-1999 under the following methods: (i) commercial tendering, (ii) cashauctions, (iii) sale of up to 30% of state shares through cash auctions and, if any remained, further salethrough any other methods of privatization, (iv) competitive proposals, (v) reserved for sale only byorder of the Government, (vi) reorganization and liquidation, and (vii) remained under management bySPF.

33. Divestiture of the state shares. Of the 836 enterprises sold at coupon auction by the end of 1995,state shares were entirely divested in a total of 434 enterprises. State shares remaining after couponauction were typically sold divested through cash auctions or similar privatization methods. As a result,by the end of the 1995, there were a total of 456 enterprises with the state ownership, and 204 of themwere marked by majority state ownership. The persistence of state-owned shares in these enterprises wasprimarily due to a reluctance or inability to sell shares at a market-determined price. In 1995, the SPFintroduced cash sales procedures in which shares were required to be sold to the highest bidder in amaximum of two auction rounds. A lack of adherence to these rules, however, has often rendered themineffective. In particular, it was one of the reasons of the failure of the one of the first international shareauction program of SPF. In addition, in many cases, shares remain unsold due to (i) a lack of biddinginterest in particular enterprises; (ii) a general lack of cash among potential investors; and (iii) thelengthy and cumbersome nature of several of the privatization sale methods employed, such as thecompetitive bidding program. By June 1996, out of a total of 832 offered to cash sale, 578 enterpriseshave been fully divested with no remaining state ownership. Remaining state shares in the others weredivested quickly over the next few months. In addition, in order to ensure that state shares are fullydivested even in the event of a lack of demand for shares at any price, the Government adopted aResolution in May 1996 permitting that state shares remaining unsold after two cash auctions to beoffered for sale against coupons. The second coupon sale not only guaranteed the full privatization ofthese enterprises, but also increased the rate of coupon investment. The Bank noted that this action wasalready permitted by the existing legislation and encouraged its use in appropriate cases where the SPFbelieved demand for cash sales was low.

Demonopolization and Reorganization of Agroenterprises and Rural Trade

34. Development objectives have been fully achieved. Demonopolization of Kyrgyz Tamak Ash(agroprocessing) and Kyrgyz Dan Azyk (Bread Complex) was completed by December 1995, when allcomponent enterprises of the former two holdings companies were converted into independent jointstock companies. Privatization of both conglomerates was included into the general privatizationprogram for 1996-1997 years being implemented by the SPF. As of June 1996, the large majority ofthese enterprises were fully privatized (100 percent were transferred to private owners), including mostof the 13 major grain storage and milling combinats.

35. The former wheat and bread monopoly, Kyrgyz Dan Azyk (KDA). was formally dissolved bythe Presidential Decree No. 192 of May 25, 1995. By January 1996, all enterprise components of KDA

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were converted into individual joint stock companies and divested from the apex holding company.Also, all small mills and bakeries were offered for sale and fully privatized. Privatization of KDAenterprises proceeded well through June 1996 and, by date out of the total 44 medium and largeenterprises, 28 were fully privatized, including 6 remained with minority state shareholding and 8remained majority state owned (including 2 of large milling and storage companies). The remainingshares in all of these enterprises were expected to be fully privatized by the end of 1996. The progress ofdivestiture of the state shares is shown in the following table:

PROGRESS OF DIVESTITURE OF STATE 12/95 3/96 6/96 2/97*SHAREHOLDING IN KYRGYZ DAN AZYK

Enterprises with no residual state shareholding 20 27 28 29

Enterprises with minority state shareholding 7 6 6 7

Enterprises with majority state shareholding 15 9 8 6

* The SPF reported 44 enterprises in total in KDA's system; previously indicated was 42.

36. While there has been minimal additional privatization of Dan Azyk enterprises since June, 1996,an important development has been the repossession by the SPF of share blocks previously sold in eightof the Dan Azyk bread combinats due to full or partial non-payment of installment payments by thepurchasers, despite additional time that was given to make these payments. As the result, the SPFcontinues to hold a majority interest in three of the 16 large combinats (Karakol, Chui and Naryn) andminority share in another five combinats.

PROGRESS OF DIVESTITURE OF STATE 3/96 6/96 2/97SHAREHOLDING IN KYRGYZ DAN AZYKBREAD COMBINATS (after re-

possessions)

Residual state shares completely divested 5 6 8*

Residual state shares partially divested 8 7 8*

of which:

- State retains majority of shareholding 4 3 3

- State retains minority shareholding 4 4 5

* SPF reported 16 combinats against 13 previously indicated.

37. Repossessions have taken place during the first few months of the 1997. The reason for non-payment for shares by the investors appeared to be the high level of debt that still burdens many of thesecombinats, which was the major concern of investors. This debt made many of them highly illiquid andthreatens their viability as on-going enterprises. Some of this debt originated from the Government'sdirected credit policies prior to 1993 (for example orders to supply other state entities with grain, flour orbread without receiving payment). When these combinats were privatized, the sales price was reducedby the amount of the debt, but the methodology for valuing assets probably overstated their true

economic value and the sales price, although low in absolute terms, was still too high. In some cases, theassets of the combinats in.cluded debt from other enterprises (poultry farms, for example) that have sincegone out of business. In retrospect, resolution of this debt should have been included as part of theAPEAC program. This would have facilitated privatization of the major bread combinats and wouldhave increased the likelihood for their survival. This issue was discussed with the Government in anumber of cases, but no decisive measures were taken. Currently, resolution of this debt was deferred tothe Debt Recovery Agency (DEBRA) established under the successive adjustment operation program,FINSAC. During the latest supervision missions, the Bank urged the Government to examine again itsrole in creating this debt and absorb the share of debt that can be truly attributed to its previous policies.

38. The former agro-processing conglomerate, Kyrgyz Tamak-Ash (KTA). was formally dissolvedby the Presidential Decree No. 191 of May 25, 1995. By January 1996, all enterprises in KTA's systemwere converted into individual joint stock companies (JSCs) and divested from the holding company. Asof June 1996, 64 of the 96 JSCs were fully privatized, and the others were put through various stages ofcoupon and cash auctions. The residual state shares in all these enterprises were expected to be fullyprivatized by the end of 1996. The progress of divestiture of the state shares is shown in the followingtable.

PROGRESS OF DIVESTITURE OF STATE 12/95 3/96 6/96 2/97SHAREHOLDING IN KYRGYZ TAMAK'ASH

Enterprises with no residual state shareholding 36 57 64 74

Enterprises with minority state shareholding 34 19 13 6

Enterprises with majority state shareholding 26 20 19 16

39. The highly centralized Union of Consumer Cooperatives (KyrgyzPotrebsouyz) was involved ina wide range of activities, including food production, construction, transportation, and retail business andwas under direct influence of the Government, especially at the oblast level. These regional associationshad control over purchasing centers, wholesale units and transportation networks whose assets wereowned by the National Union. The continued predominance of Potrebsouyz in rural procurement anddistribution was a fundamental impediment to the creation of a competitive environment and new entry.This was mainly because Potrebsouyz cooperatives had distinctive advantages over independent,individual business establishments owing to their integrated marketing and procurement system,negotiating power, and relatively easy access to capital,

40. Under APEAC, support was provided to lay the groundwork for establishing true market basedmember servicing cooperatives. A special study was initiated to review interlinkages andinterdependencies of Potrebsouyz, and the legal framework for cooperatives, with a view to designing arestructuring plan. An OperationalAudit of Potrebsouyz was completed by December 1995, whichincluded Restructuring Plan. The Audit Report was submitted to the Government and was well received.The Government agreed to further restructuring of Potrebsouyz system and by its Resolution No. 511 ofJanuary 1996 created a special Commission to initiate reorganization process. However, reorganizationof the Potrebsouyz system was not completed by date. Although the process is likely to take additionaltime, its monopolistic influence over procurement and distribution system in the country wassubstantially reduced as a result of the program implementation ensuring a competitive environment foremerging private sector.

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41. 14 agro enterprises under the Ministry of Agriculture. By June 1997, 14 agriculturalenterprises which, according to the APEAC program, were to be transferred to the SPF for privatizationremained under the Ministry of Agriculture. At the beginning of the APEAC program implementation,all these enterprises were transferred to the SPF and 5 of 14 were fully privatized. However theseenterprises were not included into 1996-97 privatization program originally. The SPF then transferredthese enterprises back to the Ministry. It stated that the Ministry was authorized to privatizeagroenterprises in accordance with the Presidential Decree of February 22, 1994. The Ministry startedthe privatization process for these enterprises using different methods of privatization. Seven ofremaining 9 enterprises have gone through were privatized by date.

Enterprise Restructuring

42. State enterprise reform and restructuring was initiated under PESAC program. Under PESAC,the Government transferred 29 large loss making state owned enterprises to a temporary semi-autonomous agency, the Enterprise Reform and Resolution Agency (ERRA) (ICR for PESAC; ReportNo. 16698). The reason for focusing on large loss-making enterprises was that they comprised the bulkof the financial problems in the country. Support to the enterprise restructuring process was continuedunder APEAC. Viability assessment for all 28 ERRA enterprises was completed by December 1995.Decisions on their liquidation and/or restructuring were taken for all enterprises by the end of March1996. In the event, four companies exited the program without having received funds from ERRA, fiveenterprises were slated for full liquidation, and the rest for partial restructuring with liquidation ofunneeded assets. Liquidators were appointed for the five enterprises slated for full liquidation andcarried out the process under court supervision. The remaining enterprises were significantly downsizedand "hived-off' into new joint stock companies. Most of these restructured companies have beenprovided with the working capital loans, in accordance with ERRA's key operating principles, todemonstrate viability before being sold as part of the bankruptcy/liquidation process of the formerenterprise. The restructured enterprises were scheduled to be sold during the third quarter of 1996,which went through the agreed timetable, except for two companies which were working with IFC toimprove their operations and attract strategic investors. It was agreed that if investors were not foundwithin reasonable timeframe, these two companies will also be sold through competitive procedures.

Legal Reform

43. The Government has been undertaking significant efforts to adjust its legal and regulatoryframework to the needs of a market economy. Substantial progress has been made towards modernizingKyrgyz commercial laws to meet the demands of private investors. General legal reform was launchedunder the Rehabilitation Credit. These included revised Civil Code Part 1, the Tax Code, Mining Code, anew Banking Law, Foreign Investments, and Bankruptcy legislation. APEAC supported specifically aNational Procurement Law, Law on Pledge (Collateral), Land Code and Immovable Property RightsRegistration Law. A Procurement Law, which establishes government-wide procedures in line withinternational standards, was adopted in April, 1997. Under this Law, the Government has established anIndependent Procurement Agency whose function is to implement and supervise the procurementprocedures enacted by the Procurement Law. Land Code and Immovable Property Rights RegistrationLaw were submitted to the Parliament in May 1995, but not yet enacted. Consideration of these twopieces of legislation was delayed till now for several reasons described above in paragraph 16.

D. Project Sustainability

44. Prospects for the sustainability of reforms are strong. Since 1993, the Government's efforts ineconomic reforms were widely supported by the international donor community. The Government is

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strengthening its institutional capacity in order to meet ambitious requirements of transition to a marketbased system. A special body, the State Commission on Foreign Investments and Economic Assistance(GOSCOMINVEST), was created in 1993 to coordinate an external aid and identify a priority areaspotential for economic recovery. The Government elaborated economic reform program, sectoral policypapers, and the public investment program. The progress in implementation of the reform program wassubstantial and the results started to be felt. Last two years witnessed a positive real GDP growth gearedby the expanding private sector activity in the agricultural sector. The Government is committed todeepen the economic reforms and confident in maintaining a sustainable growth in the economy.Successor projects for enterprise, agricultural and financial sector adjustment are being implementedsatisfactorily, and the IMF has provided continuing support. However, much remains to be done instrengthening the institutional and regulatory basis, fiscal system, building the legal, administrative andinstitutional framework required by the dynamic market economy, and building or rehabilitating vitalphysical infrastructure. The Bank and other donors remain committed to assisting the Government inthese efforts.

E. IDA Performance

45. The performance of IDA was satisfactory. A number of policy matters were resolved during theproject preparatory process, including adoption of a number of Presidential Decrees on (i) elimination ofthe local governments' interference into commercial activities; (ii) elimination of the remaining exporttaxes; and (iii) demonopolization and restructuring of the main agricultural conglomerates. Projectsupervision was consistent and rigorous, with timely identification of the issues and their promptresolution. The follow-up adjustment operations of the Bank Group (FINSAC and PSRMAC) have beenprepared and delivered without delays, thus providing continuity in support to structural reforms,including privatization and enterprise restructuring. Also, follow-up IDA's investment operations inagricultural sector were prepared during implementation of the program, that provided continuation ofthe reforms initiated under APEAC (Rural Finance, Agricultural Support Services, Real EstateRegistration).

F. Borrower Performance

46. The Borrower's performance was satisfactory with a few shortcomings.- For the purposes of theproject management and monitoring reform progress under APEAC, the Government has established aWorking Group headed by the Deputy Prime Minister in charge of agrarian reforms. Other membersincluded Minister of Agriculture, high level representatives from the Committee on Economy, StateProperty Fund, the Ministry of Finance, GOSCOMINVEST, and the agricultural conglomerates to bereorganized and privatized under APEAC, as well as experts from the Prime-Minister's office.Unfortunately, there were no signs that the Group functioned as a true steering group and as a result therewere no meetings, no instructions, no progress reports, etc. The program nevertheless succeeded due tothe fact that its basic components were run by the Government Agencies that were already deeplyinvolved in the reform efforts (Ministry of Agriculture, SPF, and ERRA). The areas that were not socovered, for instance, wheat reserve policy, export taxes, fell between cracks, and the Bank had to makespecial efforts with individual units of the Government to get things moving. The Project ManagementUnit (PMU) established in the Ministry of Finance continued its functions for APEAC. PMU maintainedrecords of all transactions under the Credit and submitted requests for withdrawal of funds in a timelymanner.

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G. Assessment of Outcome

47. The project outcomes were satisfactory, as it achieved all its major objectives, initiatedconsolidated approach for implementation of agrarian reforms and created an enabling environment foremerging private sector in agriculture. The project initiated demonopolization of state conglomeratesdominating in agricultural sector, and their further privatization process, liquidation of the remainingprice and trade distortions in agriculture, and creation of legal basis for development of land market.

48. The development outcomes were significant. The reforms supported by APEAC helped to: (i)maintain an environment of free market prices for agricultural products during a critical period oftransition by further price liberalization, ending state orders, eliminating interference by local officials inpricing and trade of agricultural goods, and removing the remaining export taxes; (ii) reinforce the farmrestructuring and land share distribution efforts of the MAWR by preparing the legal underpinnings forthe eventual registration of land use rights, i.e., Land Code and a Land Registration Act; (iii) establish aclear policy concerning the future role of the state in the trade of wheat; (iv) demonopolize and, to date,nearly complete privatize Kyrgyz Dan Azyk (Bread Complex) and Tamak Ash (agro-processing)conglomerates; (v) continue the general privatization program by basic completion of the 1994-95program, and launching the 1996-97 program; and (vi) continue an enterprise restructuring program.

H. Future Operations

49. APEAC was followed by two successive adjustment operations: Financial Sector AdjustmentCredit (FINSAC - Cr. 2890-KG, SDR 31.2 million) approved in June, 1995; and Public Sector ResourceManagement Adjustment Credit (PSRMAC - Cr. 8521-KG; SDR 32 million) approved in April, 1997.The FINSAC operation is nearing completion, its second tranche was fully disbursed in November 1997.A Pension Reform Adjustment Credit (PRAC) is under preparation with target Board date in FY99. TheAPEAC was the first IDA's operation in the Kyrgyz Republic to support agricultural reforms. Most ofthe sector reforms supported under APEAC were continued under the successive IDA's investmentoperations, such as Rural Finance under implementation and Agricultural Support Services under its finalstage of preparation.

L. Key Lessons Learned

50. Development of land markets was too ambitious an objective to be realized within 12-15months of the program implementation. It was unrealistic to expect that land markets could becreated during 15 months of program implementation. While APEAC helped further this process, manyessential developments are still required before the ultimate objective of functioning land markets will beobtained (para. 13). They involve fundamental changes in society's mentality concerning land use andownership, as well as institutional changes in the legal and administrative systems. Difficulties areillustrated by fact, that debates on which of the existing land agencies would be the "single authority" forland registration are still going on in Parliament. Full achievement of the development objective of"developing land markets" will only be possible once proper land registration system is established.Definitions of success could have been more clearly specified in the President's Report on APEAC.APEAC should have identified important milestones for the development of land markets and agreed onwhich would be attained under the program.

51. Resolution of debts of grain combinats should have been addressed during the programdesign before proceeding with their privatization. This would have facilitated privatization of themajor bread combinats. The Government's Letter of Development Policy said that the Governmentwould handle this issue, but in fact it didn't. An important development in privatization of KDA's

- 15 -

combinats has been the repossession by the SPF of share blocks previously sold in eight of the DanAzyk bread combinats due to full or partial non-payment of installment payments by the purchasers,despite additional time that was given to make these payments. Repossessions have taken place duringthe first few months of the 1997. The reason for non-payment for shares by the investors appeared to bethe high level of debt that still burdens many of these combinats, which was the major concern ofinvestors. This debt made many of them highly illiquid and threatens their viability as on-goingenterprises. This issue was discussed with the Government during each supervision missions, but nodecisive measures were taken. In retrospect, the Bank should have required action to be taken by secondtranche. If the Working Group on APEAC had functioned, perhaps it could have dealt with this problem.In the event, this matter is being handled by the Debt Resolution Agency (DEBRA) created under thesuccessive adjustment operation program, FINSAC, as part of the banking sector reform.

52. Liberalization and privatization measures and elimination of legal impediments is notsufficient for the creation of a competitive environment for agrobusiness. Even after implementationof policy measures under APEAC, there are other major factors impeding the emergence of competitivemarkets in the agricultural sector. Emerging private agrobusiness enterprises are facing considerablecommercial risks and relatively high costs for goods and services (e.g., high interest rates) which weakentheir ability to participate and compete in markets. A large proportion of agroenterprises privatizedunder APEAC are hardly operating for several reasons, including: (i) lack of access to working capital topurchase raw materials and agricultural input; (ii) lack of access to term capital to finance renovation ofequipment and machinery, inventory, and receivables; (iii) lack of "know-how" and access to moderntechnologies; and (iv) lack of management skills due to the dominance of state agrobusiness enterprisesin the past. Weak financial markets and management skills have inhibited the capacity of the emergingprivate enterprises to respond effectively to the opportunities created by APEAC.

53. Adjustment programs can succeed even if not well coordinated by a Central WorkingGroup. but only if there is a strong working level commitment to individual components SinceAPEAC contained reforms to be introduced in a number of areas in the sector and required involvementof the different agencies, a special interministerial high level Working Group was created under the chairof Vice Prime Minister on agrarian policy. The mandate of the WG was to consolidate the agrarianreforms, and coordinate and monitor implementation of the APEAC program. Unfortunately, there wereno signs that the Group functioned as a true steering group. To the Bank's knowledge there were nomeetings, no instructions, no progress reports, etc. The program nevertheless succeeded due to the factthat its basic components were run by agencies that were already deeply involved in the reform efforts(Ministry of Agriculture for land reform, SPF for privatization, and ERRA for enterprise restructuring).The areas that were not so covered, for instance, wheat reserve policy and removal of export taxes, fellbetween cracks, and the Bank had to make special efforts during supervision with individual units of theGovernment to get things moving.

54. Legal framework is necessary but not a sufficient condition to implement policy reforms.Institutional development, which is a much slower process than passing Presidential Decrees, is equallyimportant for making progress on the ground. For instance, the policy objective of helping to developland markets was not consistent with the time it will take to develop and implement a functioning landregistration system.

PART H. STATISTICAL TABLES

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Features for Project ImplementationTable 6: *Key Indicators for Project OperationsTable 7: *Technical Assistance financed under the ProjectTable 8A: *Project CostsTable 8B: *Project FinancingTable 9: *Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: *Compliance with Operational Manual StatementsTable 12: Bank Resources: MissionsTable 13: Bank Resources: Staff Inputs

* Tables 6, 7, 8 and 9 are not included because they are not applicable to the AgriculturalPrivatization and Enterprise Adjustment Credit. Table 11 is not included because there havebeen no reported instances of non-compliance with Operational Manual Statements.

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negli-ible Not alica1k

4acro Policies E E El

Sector Policies El E El

Financial Objectives 5 E ElInstitutional Development l El [Physical Objectives E E E [X

Poverty Reduction El E E X

Gender Issues E E E I

Other Social Objectives x E El E

Environmental Objectives E E E I

Public Sector Management I3 l E E

Private Sector Development L3 l E EOther (specify) E E E E

B. Proiect Sustainability Lky Unlikely Uncertain

HfighlyC. Bank Performac satisfactory Satisfactorv Deficient

Identification E I El

Preparation Assistance El [El ElAppraisal El El

Supervision Ex

HighlyD. Borrower Performance satisfactory Satisfactor Deficient

Preparation a IxI Cl

Implementation . 1=1

Covenant Compliance 3 z C

Operation (if applicable) al [=1

Highly klighlE. Assessment of Outcome satisfactory Satisfactory Unsatisfactory unsatit

Policy EI [E al

Table 2: Related Bank Credits

Credit title Purpose Year of approval Status1. Rehabilitation Credit Umbrella operation to support the design FY93 completed 4/97, ICR

and implementation of the Govermment's Report No. 16630,policy thrust while more detailed May 30, 1997adjustment operations were prepared

2. Privatization and Support for enterprise restructuring and FY94 completed 6/95, ICREnterprise Sector the 1994-95 privatization program Report No. 16698,Adjustment Credit June 16, 1997(PESAC)

3. Financial Sector Bank and financial sector reform and FY96 2nd tranche was fullyAdjustment Credit continuation of 1996-97 privatization released in(FINSAC) program November, 1997

4. Public Sector Reform of budget formulation, FY97 approved 4/97, underResources Management implementation and its control, and implementation

(PSRMAC) intergovernmental fiscal affairs

5. Social Sector Reforms in pensions, social assistance FY99 under preparationAdjustment Credit and sectoral financing(SOSAC)

Table 3: Project Timetable

Steps in Project Cycle Date Planned Actual Date/Latest Estimate

Identification (Executive Project Summary) 07/94 07/94

Preparation 09/94 12/94

Appraisal 02/95 03/95

Negotiations 05/95 05/95

Board Presentation 06/95 05/95

Signing 07/95 07/95

Effectiveness 07/95 10/95

Release of First Tranche: 07/95

I installment 11/95

II installment 12/95

III installment 01/96

Release of Second Tranche 03/96 06/96

Project Completion 02/97 06/96

Loan Closing 02/97 02/97

Table 4: Loan/Credit Disbursements: Estimated, Actual and Cumulative(US$ million equivalent)

FY96

Appraisal estimate 45

Actual 41.815a

Actual as % of estimate 100

Date of final disbursement June 26, 1996

a Actual total amount of the credit is less than original amount due to appreciation of US Dollar against SDR.

Table 5: Key Features for Project ImplementationPolicy Matrix

Objectives Actions Introduced Implementation Timing

I. Consolidating Agrarian Reforms(i) Ensure secure access to land By the Presidential Decree, land use rights were Second Tranche

extended from 49 to 99 years; draft Land Code and beyondand draft Land Registration Act were submittedto the Parliament in May, 1995 and expected tobe enacted shortly; Law on Pledge allowing landto be used as collateral was enacted by theParliament in April, 1996

(ii) Create more efficient farm units The Government facilitated development of land Second Tranchethrough land reform and farm markets by: (a) eliminating maximum andrestructuring minimum size requirements in various land

categories; (b) issuing a uniform land usecertificates

Establishment of one-step land registry system in Will take severaleach rayon. more years (see

the main text fordescription)

The Borrower launched an extensive public Letter ofeducation compaign informing the public about Developmentthe status of laws and decrees concerning land Policyreform and their rights under them.

II. Create a More CompetitiveEnvironment for Agroenterprises

(i) Continue to establish competitive trade State orders and ceilings on marketing margins Prior to Boardand price regimes. were eliminated.

Law on State Procurement was submitted to the Second TrancheParliament; Remaining export taxes wereabolished.

Law on State Procurement was enacted. April, 1997

Export licensing requirements were abolished; Feb.-March, 1995Export taxes on wool, cotton, hides, skins andsilk cocoons were abolished; Decree onintroduction of a draft law with price controlswas repealed; Price Commission was abolished.

(ii) Reduce local governments' The Borrower issued Presidential Decree: (a) Feb.-March, 1995interference in commercial decision directing the Government to review and takemaking. necessary actions against unlawful creation of

holding companies by local governments; (b)ensuring strict enforcement of the proceduresestablished by the legislation of the KyrgyzRepublic; (c) forbidding local governments fromcontrolling procurement, distribution and pricingdecisions of privatized and corporatizedproductive enterprises.

The Borrower has taken a decision and is May-June, 1997implementing the Governmental decisions thatbudgetary credits will not be allocated to farmersby local government administrations, but througha rural credit scheme.

(iii) Improve efficiency and competition The Borrower has issued a Governmental March, 1995in agro-industry and rural trade by Resolution for the reorganization andeffecting institutional changes in privatization of the Kyrgyz Dan Azyk (Breadorganizations that dominate these sectors. Complex).

The Borrower completed privatization of mini- March-May, 1995bakeries through auctions and tenders, andoffered for sale large bread enterprises.

The Borrower has completed implementation of Second Tranchethe new Resolution on KDA, including offeringfor sale all factories and combinates slated forprivatization in the same Resolution.

The Borrower has issued a Governmental March, 1995Resolution for reorganization and privatization ofthe Kyrgyz Tamnak Ash (Processing Complex)and its enterprises.

The Borrower offered for sale state shares in at March-May, 1995least 5 Tamak Ash enterprises.

Completion of the implementation of the Second TrancheGovernmental Resolution on KTA, includingoffering for sale all the enterprises listed in theResolution.

Initiation of study to review interlinkages and April, 1996interdependencies of the Kyrgyz Potrebsouyz(Cooperatives' Union), and the legal frameworkfor cooperatives, with a view to designing aRestructuring Plan.

(iv) Reduce the role of the state wheat The Government has adopted a Concept Note Second Tranchemarkets. satisfactory to IDA establishing clear guidelines

for the management of the state wheat reserves,including maximum amount of wheat to bepurchased and kept in the State Wheat Reserve,namely 100,000 tons, of which 60,000 forstrategic reserve and 40,000 for supplying remoteareas.

III. Continuing the Momentum inPrivatization, Governance andEnterprise Restructuring

(i) Establish a larger private sector. The Government revised privatization methods to February, 1995include auction and competitive bidding, andlimit privileges of labor collectives. The StateProperty Fund has issued Resolution introducing

new methods in privatization.

The SPF has offered for sale: (i) all 100% state Second Trancheowned enterprises included in 1994-1995Privatization Program; (ii) state shares targetedfor coupon auctions in all enterprises alreadyprivatized; and (iii) all remaining state sharesslated for privatization in cash auctions.

Approval of 1996-1997 Privatization Program Second Tranchewith the same principles as in 1994-1995Program (with the addition of speedyprivatization method).

(ii) Impose financial discipline on Complete the viability assessment of the By May, 1995enterprises. remaining ERRA enterprises (3).

Start implementing liquidation or restructuring By May, 1995process for three enterprises.

The Board of ERRA has taken decisions Second Trancheregarding the restructuring or liquidation of atleast 10 enterprises in compliance with the agreedoperating principles of ERRA.

The Government has provided evidence Second Tranchedocument that restructuring and/or liquidationplans for ERRA enterprises have beenimplemented within the timeframe agreed in theoperating principles of ERRA.

The Government has submitted evidence Second Trancheacceptable to IDA, that at least 5 enterprises nolonger have access to funding from ERRA.

The Government completed all necessary actions January, 1996and completed the viability studies for allremaining ERRA enterprises.

The Government has completed the December, 1996implementation of the turnaround and/orliquidation plans of all ERRA enterprises.

Table 10: Status of Legal CovenantsKyrgyz Republic

Agricultural Privatization and Enterprise Adjustment Credit

Covenant Present Original Revised Description of Covenant CommentsAgreement Section Type Status Fulfillment Fulfillment

Date Date

Text Sch. 3 12 C 02/96 02/96 The Borrower has submitted to DoneReference: para. 1 Parliament a draft law for

competitive procurement ofgoods, works and services by theBorrower and its agencies.

Text Sch. 3 12 C 02/96 02/96 The Borrower has abolished all DoneReference: para. 2 remaining export taxes.

Text Sch. 3 12 C 01/96 01/96 The Borrower has implemented DoneReference: para. 3 all measures identified in Decree

No. 192 of May 25, 1995, andoffered for sale all breadcombines and factories under theKyrgyz Dan Azyk Holdingidentified for privatization in theAppendix to such Decree.

Text Sch. 3 12 C 05/96 05/96 The Borrower has adopted a DoneReference: para. 4 concept note, satisfactory to the

Association, establishingguidelines for State operations inthe wheat market.

Text Sch. 3 12 C 01/96 01/96 a) The Borrower has implemented DoneReference para. 5 all measures identified in Decree

No. 191 of May 25, 1995 relatingto Kyrgyz Tamak Ash Holding.b) The Borrower has offered forsale all state-owned shares inenterprises, formerly held byKyrgyz Tamak Ash.

Text Sch. 3 12 C 11/95 11/95 The Borrower has adopted DoneReference para. 6 legislation instituting automatic

renewal of the right to use landafter 49 years, clear and limitedgrounds for termninating such rightof land use and has clarified theprocedures for land to be used ascollateral, or, if the KyrgyzConstitution is amended to allowfor private ownership of land, theBorrower has established to thesatisfaction of the Association thatthe existing legislation allows thetransfer of land and that land canbe collateralized.

Text Sch. 3 12 C 11/96 11/96 The Borrower has provided for: Parts a) and b) are fullyReference para. 7 (a) the elimination of maximum met, and c) partially met.

and minimum farm size See main text forrequirements in various land description.categories; (b) the establishmentof a uniform land title orcertificate; and (c) theestablishment of streamlined landregistration procedures vestingresponsibility in a single authority.

Text Sch. 3 12 CP 01/96 01/96 The SPF has offered for sale: DoneReference para. 8 (a) all 100% state-owned

enterprises identified in the 1994-1995 privatization program;(b) state shares targeted forcoupon action in all enterprisesalready privatized, in accordancewith the principles of the Conceptof Denationalization andPrivatization of State andCommunal Property inKyrgyzstan for 1994-1995 (knownas the "Concept Note"); and (c) allremaining state shares, for cashauction, of the partially privatizedenterprises, in accordance with theprinciples of the "Concept Note".

Text Sch. 3 12 C 02/96 02/97 The Borrower has issued a decree DoneReference para. 9 setting forth a privatization

program, acceptable to theAssociation, for the years 1996-1997.

Text Sch. 3 12 C 12/95 12/95 ERRA has, on the basis of a DoneReference para. 10 completed viability assessment,

taken decisions regarding therestructuring or liquidation of atleast ten additional enterprises, incompliance with the operatingprinciples of ERRA, as approvedby the Association.

Text Sch. 3 12 C 06/96 06/96 The Borrower has provided DoneReference para. II evidence acceptable to the

Association that the restructuringor liquidation measures taken byERRA for any enterprise under itsauthority, for which liquidation orrestructuring decisions have beentaken, have been implementedwithin the time frame set forth inthe operating principles of ERRA,as approved by the Association.

Text Sch. 3 11 C 06/96 06/96 The Borrower has provided DoneReference para. 12 evidence acceptable to the

Association that at least fiveenterprises no longer have accessto funding from ERRA.

Covenant types: 12. = Sectoral or cross-sectoral policy/ Present Status:regulatory/institutional action

11. = Sectoral or cross-sectoral budgetary or other C = covenant complied withresource allocation CP = complied with partially

Table 12: Bank Resources: Missions

Performance RatingzStage of project cycle Month! No. of Days in Specialization' Implementation Development Types of

Year Persons Field status objectivesThrough appraisal 09/94 6 21 E, A, P, T, U

11/94 7 20 E,A,F

Appraisal through Board 03/95 8 14 E, L, P, U, Aapproval

Supervision 01/96 5 15 E,P,U,A,Q S S F,T

04/96 2 8 E,P S S F,T

06/96 2 8 E,P S S F,M

Completion 04/97 1 15 E, RX S S T

Total 32 101

I - Key to Specialized staff skills: 2 - Key to Performance Ratings:E = Economist/Macroeconomic S - SatisfactoryA = Agriculturist U - UnsatisfactoryL = LawyerF = Financial Sector SpecialistP = Private Sector Development Specialist 3 - Key to Types of ProblemsRX = Resident Mission Operations Officer F - FinancialT = Trade Sector Specialist T - TechnicalQ = Land Registration Specialist M - ManagerialU = Public Enterprise Specialist

Table 13: Bank Resources: Staff Inputs

Planned Revised Actual

Stage of project cycle Weeks US$ Weeks US$ Weeks US$

Preparation to appraisal* 74.5 280.4 74.5 280.4 74.5 280.4

Appraisal* 9.9 45.1 9.9 45.1 9.9 45.1

Negotiations through Board 7.1 13.4 7.1 13.4 7.1 13.4approval*

Supervision 67.5 243.8 66.1 178.1 63.2 178.0

Completion 16.0 57.7 7.2 27.1 2.2 12.2']

Total 175.0 640.4 164.8 544.1 156.9 529.1

* Planned and Revised data unavailable. Actual data used instead.1] As of end August, 1997.

Annex APage I of 5

GOVERNMENT OF THE KYRGYZ REPUBLIC

BISHKEK, THE HOUSE OF THE GOVERNMENT

Date March 24, 1997

19 - 585

To Mr. Michael Rathnam, Head of the World Bank Resident Mission in theKyrgyz Republic

Dear Mr. Rathnam,

The Government of the Kyrgyz Republic expresses through you the gratitude to theWorld Bank for assistance to the Kyrgyz Republic, as rendered during the period of transitiontowards market-based economy.

The Agricultural Privatization and Enterprise Adjustment Credit (APEAC)implementation is on a stage of completion. This project has played a certain role in promotingthe economic development of the Republic's national economy.

In view of the afore-mentioned we present to you the report of the KR Governmentreferring to the completion of APEAC Project.

Yours respectfully,

A. Jumagulov, Prime Minister

Annex APage 2 of 5

Bishkek, House of the Government

REPORTon completion of the project on privatization in agriculture and restructuring of

enterprises (APEAC), loan #2750-KG

In implementation of the terms of the agreement for the loan on privatization ofagriculture and restructuring of enterprises (APEAC) #2750-KG the Govemment of the KyrgyzRepublic has achieved considerable progress on the way to the market economy, carrying outfurther program of stabilization and system changes in a number of activities within theframework of the economic reform.

Despite of the hard economic situation we are firmly intended to continueimplementation of the agrarian reform on the basis of clear and strict policy principles.

The Government of the Kyrgyz Republic has undertaken a number of actions from thebeginning of the project implementation and has achieved considerable progress in the process ofimplementation of the reforms which are being supported within the framework of APEACprogram, hence, we believe, that all the terms of this agreement have been fulfilled.

Land COd

The Land Code of the Kyrgyz Republic, which was approved by the Resolution of theGovernment of the Kyrgyz Republic on May 10, 1996, #207, was submitted to the Parliament ofthe Kyrgyz Republic in May 1996. At present the draft Land Code is under the process of beingcleared and amended. More than half of the draft has been amended within the process of legalconsideration of its new wording. The following issues have been added for the first time orgained the new wording:

* land legal relations;* competence of governmental and managerial authorities in the sphere of regulation

of legal relations related to the land,* granting and leasing of lands;* protection and guarantee of the land users rights;* carrying out deals with the right to use land;* economical mechanism of land utilization;* temporary possession;* protection of lands;* state control over use and protection of lands.

It is supposed that the updated wording of the draft Land Code will be discussed thisMarch at the seminar of the Legislative Chamber of the Parliament of the Kyrgyz Republic withthe participation of the Agrarian Commission members, leaders of the republican land andagricultural authorities, after which the draft will be submitted to the Legislative Chamber of theKyrgyz Republic for consideration.

Annex APage 3 of 5

Law on Collatera

The Law on Collateral submitted tot he Parliament of the Kyrgyz Republic by thePresident of the Kyrgyz Republic in May 1996 in the form of the legislative initiative, iscurrently at the stage of consideration.

Policy of State Reserve of Grain

In order to establish major principles and lines in the operation of the state during thetransition to the free and private trade with grain, complying with the recommendations of theWorld Bank, the Resolution of the Government of the Kyrgyz Republic as of May 10, 1996assigned the Fund of State Reserves to restrict annual purchases of the grain to 100 thousand tonsof the needed for increase and maintaining of the reserved funds, which makes up one month ofthe national consumption in the amount of 60 thousand tons plus 40 thousand tons for supply toremote areas and hardly achieved high lands.

In order to provide reserves of bread resources the Resolution of the Government of theKyrgyz Republic as of July 10, 1996 #318 has established the price for purchase of wheat grainfrom agricultural producers amounting 2700 Som per one ton VAT inclusive. The informationon the purchase price and the volumes of purchases was communicated to the producers and tothe population through local authorities and mass media ("Vecherny Bishkek" newspaper as ofNovember 12, 1996 and November 15, 1996).

In order to provide the purchases of grain, Fund of State Reserves purchased only 20.3thousand tons of grain at the fixed price from the local producers.

The remnants of the grain in the Fund of state reserves as for January 1, 1997 made up92.2 thousand tons. There were no sales of wheat grain at the end of 1996 and beginning of1997, thus the issue of sales of grain was not published in mass media this year.

Mass Privatization

Offering of the remaining package of state shares included in the privatization program in1994-1995for sale

By the first of February 1997 shares of 815 joint stock companies were offered at 90open money auctions and 336 joint stock companies were offered at 49 closed auctions. Sharesof 4 joint stock companies were offered for sale at the exchange stock of the Kyrgyz Republic,shares of 2 joint stock companies were sold. Shares of 992 joint stock companies were sold at234 coupon actions. In 1996, 72 joint stock companies of 99 joint stock companies, on whichprivatization projects were to be considered, were sold. In total, 152 companies of 238 were soldon the basis of competition of competing and individual projects.

Annex APage 4 of 5

Kyrgz-TamakAsh

114 companies of Kyrgyz-Tamak-Ash system have been restructured. 82 joint stockcompanies were created, 59 of which do not have state share, 23 joint stock companies have thestate package of shares above 5%.

The reasons of remaining of the state share in 23 joint stock companies are as follows:

* one joint stock company is not included in PESAC program;* one joint stock company was submitted to the exchange stock of the Kyrgyz

Republic for sale through it;* two joint stock companies have gone bankrupt (liquidation procedure are being in

place currently);* ten joint stock companies were offered at the auctions and the competition, but were

not sold because there was no demand. Sale of the remaining state share willcontinue;

* one joint stock company (joint stock company Kyzyl-Kiya tobacco fermentingplant) was added to the State joint stock company "Kyrgyztamekisi"(Kyrgyztobacco), the remaining of the state share will be sold at the coupon actionthis May;

* search of investors is being made and individual projects are being worked out for 6entities;

* state package of shares of one project (state joint stock company "Kayindi-Kant")was passed to the managing department;

* one joint stock company (state joint stock company -- Bishkek meat and can plant)is producing meat and vegetable cans for the fund of state reserves.

Kgy-rganAAza k

92 companies of Kyrgyz-Dan-Azyk system were restructured. 44 joint stock companieswere created. The work is being done to eliminate the state share. In 27 joint stock companiesthe state share was sold fully, 2 joint stock companies have the state share less than 5%, 15-above 15%, of them 8 joint stock companies - less than 50%, 7 joint stock companies wereoffered at the auction and competition, but not sold, 3 joint stock companies (state joint stockcompany "Oshgulazyk", state joint stock company "Unaa-Nan" state joint stock company "Jalal-Abad Nan" were sold, but because of non payment the share was revoked, individual project arebeing worked out for 4 joint stock companies.

Individual projects of 16 bread complexes were considered and adopted, 8 of them wererevoked because of non payment.

State share was reduced in three corporations, selected for storage of the state reserve of grain.

In the companies, selected for storage of the state reserves of grain the remaining stateshare makes up:

* Kara-Suu bread complex - 42%;* Balykchi bread complex - 32.3%;* Frunze bread complex - 10%.

Annex APaae 5 of 5

Investors are being searched for Kara-Suu bread complex. Individual privatizationprojects have been adopted for Balykchi and Frunze bread complexes, but because of nonpayment the share were revoked, sale of state package shares will be continued.

Including of 14 companies of agricultural chemicals, repair stations, transport and watersupplying companies of the Ministry of Agriculture and Water Supply in the mass privatizationprogram.

5 of 14 companies have been privatized and passed through the coupon auction. One ofthe rest 9 companies was leased to the ministry of water supply with the following purchase, thesecond one was transformed into a limited company and their offering at the auctions is notpossible, because they are not joint stock companies.

In 1996 the decisions to sell 5% of the preserved of the state share of the property of 258joint stock companies were made.

Restructuring of enterprises

Kyrgyz Metallurgical complex, Mayli-Say "Kyrgyzelectroizoit" plant, Kant cementplant have been deleted from the list of PESAC companies and passed to the state property fund.

Kyrgyz metallurgical company and Kant cement plant have been transformed into statejoint stock companies. Investors are being searched for them, that requires quite a time. 14% ofthe state package of shares of Kant cement plant have been passed to manager department for 5years. Plant "Kyrgyzelectroizoit" is in the landslide zone and under the Resolution of theGovernment of the Kyrgyz Republic on 20 April 1996 # 163 shall be moved to another area, thatis why it was removed from the privatization program.

On the basis of the aforementioned the Government of the Kyrgyz Republic considersthat the timely assistance of the World Bank by means of the APEAC Project loan was a seriouspush in the development of the economy of the Kyrgyz Republic on the way to the newformation of a democratic state.

The Government of the Kyrgyz Republic hopes to have further fruitful cooperation withthe World Bank for the sake of achieving common aim of progress in the market economy.

A. JumagulovPrime Minister of the Kyrgyz Republic

Annex BPage I of 3

Agricultural Privatization and EnterpriseAdjustment Credit (APEAC)

Aide-Memoire on Implementation Completion Report

1. A World Bank mission comprising Mr. Peter Hansen and assisted by Mrs. SarinaAbdysheva visited Bishkek from April 10-25, 1997. The purpose of the mission was to discussthe Government's report on completion of the APEAC program that was submitted to the Bankon March 27, 1997, and to gather additional information for preparation of the Bank's ownimplementation completion report.

2. The mission met with the officials listed in the Attachment and held a wrap-up meetingwith the Deputy Minister of Finance on April 25, 1997. The views expressed in this Aide-memoire are subject to review and confirmation by the Bank's management in Washington.Subsequently, the Bank will prepare an Implementation Completion Report on APEAC and willsend it to the Government for comment. The Bank's final report will then be submitted to theBank's Board of Directors for information and review.

3. The mission agrees with the conclusion of the Government's report that the objectives ofthe APEAC program were largely achieved. Those objectives were:

i) to develop land markets as the basis for sound agrarian reform;ii) to demonopolize and privatize the large state-owned conglomerates that

dominated agricultural procurement and processing;iii) to eliminate the remaining price and trade distortions in agriculture, including

local government interference in commercial decisions; andiv) to further the privatization and enterprise restructuring process started under the

Public Enterprise Structural Adjustment Credit (PESAC).

4. Progress in achieving these objectives was sufficient to warrant release of the secondtranche of APEAC in June 1996. Since then, the Government has continued to pursue the aboveobjectives, and further progress has been achieved in a number of areas, including continueddistribution of land use shares (over 1.5 million have now been issued), continued privatizationof the former Kyrgyz Dan Azyk and Tamak'ash conglomerates (the state retains a majorityshareholding in less than 20 percent of these enterprises), reduction in the State's holding ofwheat reserves to under 100,000 tons (the agreed limit); and continuation of the generalprivatization program, which the Bank is now monitoring under the Financial Sector AdjustmentCredit (FINSAC).

5. There are nevertheless a few issues that the mission would like to call to the attention ofthe Government with the view to furthering the policy reforms supported under APEAC.

Annex BPage 2 of 3

Land Code and Land Registration Act

6. The Government sent draft legislation to Parliament in May 1996. Since then, there hasbeen much less progress in passing this legislation than there has been in implementing landreform. Additional land use shares have been distributed to farmers, preparations are underwayto distribute 50 percent of the land held by the National Land Fund, and a pilot land registrationproject is underway collecting relevant information for preparation of a land and immovableproperty registration system. Land transactions are not occurring, however, because people donot have a firm and clear juridical basis for doing so. Similarly, the pilot land registration projecthas not been able to test the registration of land use rights for lack of a juridical basis. In theseregards, the objectives of APEAC have not yet been fully met.

7. The delay in passing land legislation has been attributed by various officials to a desire toincorporate the results of the pilot project in the legislation, to a heavy legislative agenda inParliament, and to insufficient effort by the Government in following up on the draft legislationit submitted to Parliament. The Agrarian Committee of the Legislative Assembly of theParliament has recently begun to consider the Land Code, however.

8. Despite the delays in passing this legislation, it is important that the Government andthe Parliament give careful consideration to the basic thrust of the Land Code and take thetime to produce a sound final piece of legislation. The current draft of the Land Codeoveremphasizes the control of land use by the authorities and limits the ability of individuals tomake the best use of the land entrusted to them within the context of a free market economy.

9. It is also important that the Land Code be viewed as a key element for the entireeconomy. It is not just a law affecting the agricultural sector. As such, the participation ofthe authorities responsible for urban land use should be more closely involved in the finaldrafting of the Land Code. The preparation of the Land Code also needs to be carefullycoordinated with the draft Land Registration Act. A more detailed commentary on the draftLand Code was provided by the recent Bank mission for the Land Registration Project, and theviews of this mission should be taken into consideration before finalizing the legislation.

Privatization of Kyrgyz Dan Azyk

10. Privatization of KDA enterprises proceeded well through June 1996. Of 44 medium andlarge enterprises, 28 were fully privatized, 6 remained with minority state shareholding and 8remained majority state owned. Recently, however, the State Property Fund has repossessedshares in eight of the KDA bread kombinats due to non-payment for shares by the investors. Asa result, the SPF continues to hold a majority interest in three of the 16 large kombinats (Karakol,Chui and Naryn) and a minority share in another five kombinats.

11. The reason for non-payment for shares by the investors appears to be the high level ofdebt that still burdens many of these kombinats. This debt makes many of them highly illiquidand threatens their viability as on-going enterprises. Some of this debt originated from the

Annex BPage 3 of 3

Government's directed credit policies prior to 1993 (for example, orders to supply other stateentities with grain, flour or bread without receiving payment). When these kombinats wereprivatized, the sales price was reduced by the amount of the debt, but the methodology forvaluing assets probably overstated their true economic value and the sales price, although low inabsolute terms, was still too high. In some cases, the assets of the kombinats included debt fromother enterprises (poultry farms, for example) that have since gone out of business.

12. In retrospect, resolution of this debt should have been included as part of theAPEAC program. This would have facilitated privatization of the major bread kombinats andwould have increased the likelihood for their survival. Previous APEAC supervision missionshave discussed this problem, but resolution of this debt was deferred to the Debt RecoveryAgency (DEBRA) established under the FINSAC program. The mission urges theGovernment to examine again its role in creating this debt and to absorb the share of debtthat can be truly attributed to its previous policies.

Privatization of Agricultural Input Enterprises

13. The APEAC program did not focus on privatization of the enterprises in the formerSelkhoz Chemica (agro-chemicals) and Selkhoz Technica (farm machinery) conglomerates, sincemany of the enterprises in these conglomerates were privatized prior to 1995. The responsibilityfor privatizing the remaining enterprises in these conglomerates was then transferred to theMinistry of Food and Agriculture, but privatization did not occur during the past two yearsdespite reminders from previous APEAC supervision missions. During this time theGovernment continued to channel credits for fertilizer and farm machinery through the Ministryof Food and Agriculture, but not always with success. Delivery of fertilizers has been late and,in some cases, the validity of agro-chemicals expired.

14. Resolution No. 121 of March 4, 1997 transferred 12 state enterprises of the formerSelkhoz Technica to a new state joint stock leasing company "Aiyltechservice" which will act asan umbrella company for the enterprises under its control. This new SJSC is currently lookingfor investors and intends to convert itself into a private sector company when private investorsare found. The State Property Fund and the Ministry of Agriculture and Water Resourcesshould nevertheless proceed with privatization of the 12 enterprises that were transferredto Aiyltechservice. Privatization of these individual enterprises does not need to wait for astrategic investor to be found to invest in the umbrella company, Aiyltechservice. Also, the SPFand the MARW should move quickly to privatize any enterprises from the former SelkhozChemica that remain unprivatized and under their control.

Bishkek, April 24, 1997

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