Document of The World Bank

Report No: ICR00002946

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-46890)

ON A

LOAN

IN THE AMOUNT OF US$140 MILLION

TO THE

RUSSIAN FEDERATION

FOR A

CUSTOMS DEVELOPMENT PROJECT

December 24, 2013

Poverty Reduction and Economic Management Department Russia Country Department Europe and Central Asia Region

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CURRENCY EQUIVALENTS (Exchange Rate Effective November 30, 2013)

Currency Unit = Ruble

1.00 Ruble = US$ 0.0309 US$ 1.00 = 32.35250 Ruble

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS BEEPS EBRD-World Bank Business Environment & Enterprise Performance Survey CDP Customs Development Project CMEA Council for Mutual Economic Assistance CY Calendar Year DO Development Objective ETI Enabling Trade Index EU European Union FCS Federal Customs Service FY Fiscal Year GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product ICT Information and Communications Technologies IP Implementation Progress IT Information Technology KPI Key Performance Indicators LAN Local Area Network LPI Logistics Performance Index MOF Ministry of Finance MOJ Ministry of Justice NGO Nongovernmental Organization OECD Organization for Economic Co-operation and Development OGP Office of the General Prosecutor PAD Project Appraisal Document PDO Project Development Objective PIU Project Implementation Unit RF Russian Federation RMS Risk Management Software SCC State Customs Committee TF Trust Fund UAIS Unified Automated Information System USSR Union of Soviet Socialist Republics WCO World Customs Organization WTO World Trade Organization

Vice President: Laura Tuck Country Director: Michal Rutkowski Sector Manager: Adrian Fozzard Project Team Leader: Amitabha Mukherjee ICR Team Leader: Amitabha Mukherjee

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RUSSIAN FEDERATION Customs Development Project

ContentsData Sheet .......................................................................................................................... iv 

A. Basic Information ...................................................................................................... iv B. Key Dates .................................................................................................................. iv C. Ratings Summary ...................................................................................................... iv D. Sector and Theme Codes ........................................................................................... v E. Bank Staff ................................................................................................................... v F. Results Framework Analysis ...................................................................................... v G. Ratings of Project Performance in ISRs .................................................................. vii H. Restructuring (if any) .............................................................................................. viii I. Disbursement Profile ............................................................................................... viii 

1. Project Context, Development Objectives and Design ................................................... 1 2. Key Factors Affecting Implementation and Outcomes .................................................. 7 3. Assessment of Outcomes .............................................................................................. 15 4. Assessment of Risk to Development Outcome ............................................................. 23 5. Assessment of Bank and Borrower Performance ......................................................... 24 6. Lessons Learned............................................................................................................ 26 7. Comments on Issues Raised by Implementing Agency ................................................ 29 

Annex 1. Project Costs and Financing .......................................................................... 32 Annex 2. Outputs by Component ................................................................................. 33 Annex 3. Economic and Financial Analysis ................................................................. 43 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 55 Annex 5. Beneficiary Survey Results ........................................................................... 57 Annex 6. Stakeholder Workshop Report and Results ................................................... 60 Annex 7. Summary of Borrower's ICR ......................................................................... 61 Annex 8. Comments of Co-financiers and Other Partners/Stakeholders ...................... 63 Annex 9. List of Supporting Documents ...................................................................... 64 Annex 10. Summary of Appraisal Diagnostics and Project Activities ......................... 65 MAP .............................................................................................................................. 70 

Table 1. Russian Federation: Economic Context at Appraisal ------------------------------- 1 Table 2. Comparison of Outcomes – World Bank-Financed Customs Development/Trade Facilitation Projects: Russia and South-East Europe ------------------------------------------ 11 Table 3. Planned versus Actual Expenditures ------------------------------------------------- 12 Table 4. Customs revenues and enforced compliance (2006 and 2012) -------------------- 18 Table 5. Survey Results from Trading Community ------------------------------------------- 18 Table 6. Survey Results from Trading Community ------------------------------------------- 19 Table 7. Comparison of Bank and Borrower Ratings of the CDP -------------------------- 29 Table 8. Macroeconomic indicators – forecast vs. actual ------------------------------------ 30 

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Figure 1. Project Disbursement Profile ............................................................................ viii Figure 2. The Territorial Network of the Federal Customs Service ................................... 6 Figure 3. Average customs clearance time (vehicle checkpoints, project pilot zones, minutes)........................................................................................................................................... 22  Box 1. Customs Control and Clearance – Significance and Results ................................ 13 

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Data Sheet A. Basic Information

Country: Russian Federation Project Name: Customs Development Project (CDP)

Project ID: P072960 L/C/TF Number(s): IBRD-46890 ICR Date: 10/13/2013 ICR Type: Core ICR

Lending Instrument: SIL Borrower: RUSSIAN FEDERATION

Original Total Commitment:

USD 140.00M Disbursed Amount: USD 139.15M

Revised Amount: USD 140.00M Environmental Category: C Implementing Agency: Federal Customs Service (formerly State Customs Committee) Co-financiers and Other External Partners: None B. Key Dates

Process Date Process Original Date Revised / Actual Date(s) Concept Review: 05/14/2002 Effectiveness: 10/31/2003 10/31/2003 Appraisal: 09/26/2002 Restructuring(s): 06/29/2011 Approval: 04/22/2003 Mid-term Review: 11/15/2006 11/22/2006 Closing: 06/30/2009 06/30/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance: Satisfactory

Overall Borrower Performance: Satisfactory

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C.3 Quality at Entry and Implementation Performance IndicatorsImplementation Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA): Satisfactory

Problem Project at any time (Yes/No): Yes Quality of Supervision (QSA): None DO rating before Closing: Satisfactory D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 100 100

Theme Code (as % of total Bank financing) Administrative and civil service reform 24 24 International financial standards and systems 13 28 Legal institutions for a market economy 13 13 Tax policy and administration 25 10 Trade facilitation and market access 25 25 E. Bank Staff

Positions At ICR At Approval Vice President: Laura Tuck Johannes Linn Country Director: Michal Rutkowski Julian Schweitzer Sector Manager: Adrian Fozzard Helga Muller Project Team Leader: Amitabha Mukherjee Carlos Ferreira ICR Team Leader: Amitabha Mukherjee ICR Primary Author: Craig Neal F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project development objective is to reform and modernize the Russian Customs administration, with a view to: (a) promote internationally acceptable practices for processing of international trade flows by Customs, so as to further integrate the country into the world trading community, improve the investment climate and secure the benefits from foreign and domestic investments in the economy; and (b) increase taxpayer compliance with the Customs Code and ensure uniformity in its application, to support macro-economic stability and increase transparency, timely transfer of collected revenues to the Federal budget, and equity and predictability in customs operations.

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Revised Project Development Objectives (as approved by original approving authority) The Project Development Objective was not revised. (a) PDO Indicators

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Using the risk-based approach, reduce the number of import declarations selected for physical inspection at designated sites (Central Customs Office and Northwest Customs Office – nine posts)

30 percent Less than 10 percent n/a 4.8 percent

Using the risk-based approach, reduce the number of non-energy export declarations selected for physical inspection at designated sites

15 percent Less than 8 percent n/a 3.0 percent

Reduce the average customs clearance time at the border at designated sites

45 minutes 10 percent reduction n/a 18.3 minutes (60 percent reduction)

Reduce the average import clearance time, as measured by the time taken from the entry of a truck into the import clearance terminal to the release of goods from Customs control at designated sites

None Greater than 50 percent reduction

Dropped n/a

Reduce the average customs clearance time, as measured by the time taken between lodging of the customs declaration to the issue of the release note at designated sites

40 hours (five 8-hour

working days)

50 percent reduction n/a 6.6 hours (83 percent reduction)

Reduce the compliance gap measured by Value of the EU exports to Russia as reported by the EU) - (Value of imports from the EU recorded by SCC)]/ (Value of the EU exports to Russia as reported by the EU

40 percent 10 percent reduction n/a 16 percent (24 percent reduction)

Increase enforced compliance in the collection of taxes and duties, as measured by the ratio of additional revenues (revised assessments, interest and penalties) to total revenue collected by the SCC/FCS

0.77 percent Greater than 3 percent

(EU average)

n/a 0.19 percent

Improved perceptions of traders and other stakeholders regarding the quality of service, responsiveness to complaints, and integrity of customs administration as indicated by periodic surveys

None Improvement n/a 93 percent positive responses in 2012, up

from 70 percent in 2010

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(b) Intermediate Outcome Indicators

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Legal database of decisions related to Customs laws and regulations developed and staff trained in its use

No such database exists n/a

The FCS internal legal database has been created and is operational

Organizational structure of Customs HQ improved; functionally reorganized structure implemented in Customs posts and offices throughout the country

Customs HQ inadequately structured; Customs posts and offices yet to be reorganized

n/a

Completion of FCS HQ reorganization and implementation of functional structure across FCS posts and offices

A new Code of Ethics to complement the Customs Code is implemented

No Code of Ethics for Customs n/a

Code of Ethics developed, implemented and impact measurable

Improved policies and systems for recruitment, promotion, rotation, performance evaluation, discipline and professional development implemented

The policies are unreformed and there are plans to reform them as part of broader public administration and civil service reforms

n/a

Improved policies and systems envisaged by project have been implemented

Unified Automated Information System (UAIS) in place

No UAIS exists n/a

UAIS generates timely information for FCS operations and management decision-making

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP Actual Disbursements

(US$ millions) 1 06/30/2003 Satisfactory Satisfactory 0.00 2 12/03/2003 Satisfactory Satisfactory 0.00 3 03/15/2004 Satisfactory Satisfactory 1.00 4 05/17/2004 Satisfactory Satisfactory 1.00 5 12/29/2004 Satisfactory Satisfactory 8.99 6 06/21/2005 Satisfactory Satisfactory 13.01 7 01/18/2006 Satisfactory Satisfactory 21.61 8 01/11/2007 Satisfactory Satisfactory 41.73 9 10/29/2007 Satisfactory Moderately Satisfactory 48.74

10 12/05/2008 Moderately Unsatisfactory Moderately Unsatisfactory 69.30 11 06/15/2009 Satisfactory Satisfactory 75.16 12 02/17/2010 Satisfactory Satisfactory 86.81 13 11/21/2010 Satisfactory Satisfactory 95.49

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14 07/05/2011 Satisfactory Satisfactory 111.21 15 03/03/2012 Satisfactory Satisfactory 123.10 16 12/01/2012 Satisfactory Satisfactory 124.59 17 06/25/2013 Satisfactory Satisfactory 132.55

H. Restructuring (if any) In June 2009, the closing date of the loan was extended by two years, from June 30, 2009 to June 30, 2011. In June 2011, the closing date was again extended by two years, from June 30, 2011 to June 30, 2013, to enable completion of remaining activities, mainly major information systems contracts.

I. Disbursement Profile Figure 1. Project Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal 1. At appraisal (October 2002), the institutional, political and economic context in the Russian Federation (RF) was in flux, following the economic and political turbulence of the nineties: the country was barely a decade old. Moreover, the economy was only just recovering from the financial crisis of 1998 – in large measure on the back of a sharp rebound of international oil prices from the 1999 trough (as well as the generalized run-up in commodity prices).

Table 1. Russian Federation: Economic Context at Appraisal 92 93 94 95 96 97 98 99 00 01 02

Inflation percent (GDP deflator) 1490 888 307 144 46 15 19 72 38 16 15 GDP (constant 2005 US$ billion) 684 629 546 524 505 512 485 516 567 596 626 Exports (constant 2005 US$ billion) 106 108 122 136 141 141 143 159 174 182 201 Imports (constant 2005 US$ billion) 68 61 64 78 79 79 65 54 72 85 97

Source: World Development Indicators

2. In order to address the wide-ranging and profound challenges faced by Russia’s society and economy, improving the business environment and strengthening public sector management figured prominently in the Government’s Medium Term Program of Social and Economic Development for 2002-2004. These strategic goals were expressly echoed in the World Bank Group’s Country Assistance Strategy for 2003-2005. World Bank investment lending support for treasury, tax and customs administration derived from these agreed priorities. Reflecting their common border and the large volume of cross-border trade, the Finnish and Russian Governments were also engaged in substantial cooperation to modernize the RF customs processes and administration (among other tasks within the framework of the “Green Corridor” project implemented jointly with Finland and Sweden). Moreover, as it was then the only European Union (EU) member state that shared a common border with the Russian Federation, the Finnish Government also led the EU-RF dialog on customs and border control. The experience of the Finnish-Russian engagement in customs informed the CDP design, particularly in highlighting the most pressing problems to address. These engagements led to an agreement among the Finnish and Russian Governments and the World Bank to establish a US$0.7 million Bank-administered Trust Fund1 in 2004 to support the RF customs modernization. 3. Russia’s trade began to be substantially reoriented towards the OECD countries (from the CMEA countries and former Soviet republics). Russia also began to intensify its efforts to join the WTO. In this context, and as part of its strategy to support Russia’s initiatives to modernize its core public sector entities, the customs administration represented a promising engagement for the Bank.

1 Finnish Neighboring Area Trust Fund for Technical Assistance to Customs Development

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4. Despite the relative strengths of Russia’s customs administration, the reform agenda was formidable. This included the need to align the customs administration with accepted international norms, as expressed in the World Customs Organization’s (WCO) Kyoto Convention, World Trade Organization (WTO) Agreements, and various recommendations of the United Nations Trade Facilitation Working Party. The practices and culture of the customs administration needed to be reoriented – from that of a defensive, state control/national security organ to those of a trade-facilitating, responsive public service agency (including reducing compliance burdens and raising administrative integrity and transparency). 5. In addition to comprehensive institutional development, the reform agenda required a thorough revision of the legislative and regulatory framework for customs. At appraisal, parliamentary approval of a new Customs Code was anticipated in early 2003 (correctly, as the State Duma of the Federal Assembly of the Russian Federation adopted it on April 25, 2003). 6. Appraisal also anticipated WTO accession in 2003 (optimistically, as accession did not occur until August 22, 2012, largely due to protracted negotiations over tariff structures and non-tariff barriers not related to customs administration). Similarly, accession to the International Convention on the Simplification and Harmonization of Customs Procedures, including the 1999 amendments (the Kyoto Convention), was anticipated (also optimistically, as the act of accession only came into force on November 21, 2010). The RF was already engaged with the WCO, having joined July 8, 1991 (having a senior representative elected to the WCO’s governing body, the Council, in 2007). 7. Lastly, after the fiscal crisis of 1998, the Bank reformulated its strategic approach to the country support for Russia. One dimension was to place more emphasis on developing the institutional basis for effective macroeconomic stabilization, and within this effort to concentrate on effective implementation of reform efforts. The tax and customs administrations, on the revenue side, along with the Treasury system on the expenditure side, were the three key elements for strengthening government capacity for fiscal management. 8. Project identification and appraisal included diagnostic work on the performance of the customs legal framework, organization and management arrangements, operational practices, policy formulation, and consultative practices (summarized in Annex 10).

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 9. The development objective of the Russian Federation Customs Development Project was to reform and modernize the Russian customs administration, with a view to: Promote internationally acceptable practices for processing of international trade flows by

customs, so as to further integrate the country into the world trading community, improve the investment climate and secure the benefits from foreign and domestic investments in the economy; and

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Increase taxpayer compliance with the customs code and ensure uniformity in its application, to support macro-economic stability and increase transparency, timely transfer of collected revenues to the federal budget, and equity and predictability in customs operations.

10. Based on information available at project appraisal, baseline values were established and end-project targets agreed with the SCS. The Key Performance Indicators (KPIs) were:

i. Using the risk-based approach, reduce the number of import declarations and the number of

non-energy export declarations selected for physical inspection, at designated sites, to no more than 23 percent and 12 percent, respectively, by the end of 2006, and to no more than 10 percent and 8 percent, respectively, by the end of the project, from the current level of about 30 percent and 15 percent, respectively.

ii. Reduce the average customs clearance time at the border by 7 percent by the end of 2006

and by 10 percent by the end of the project, at designated sites. iii. Reduce the average import clearance time, as measured by the time taken from the entry of a

truck into the import clearance terminal to the release of goods from Customs control, by 25 percent by the end of 2006 and by 50 percent by the end of the project, at designated sites.

iv. Reduce the average customs clearance time, as measured by the time taken between lodging

of the customs declaration to the issue of the release note by 25 percent by the end of 2006 and by 50 percent by the end of the project, at designated sites.

v. Reduce by 5 percent the compliance gap measured by the following ratio by the end of 2006

and by 10 percent by the end of the project. [(Value of EU exports to Russia as reported by the EU) - (Value of imports from the EU

recorded by SCC)] / (Value of EU exports to Russia as reported by the EU) vi. Increase enforced compliance in the collection of taxes and duties, as measured by the ratio

of additional revenues (revised assessments, interest and penalties) to total revenue collected by the SCC, to 1.5 percent by the end of 2006 and to the EU average of 3 percent by the end of the project.

vii. Improve perceptions of traders and other stakeholders regarding the quality of service,

responsiveness to complaints, and integrity of customs administration as indicated by periodic surveys.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 11. The PDO remained unchanged. As anticipated in the Minutes of Negotiation and agreed during the November 2006 Mid Term Review, the methodology used to calculate KPI (i), (ii), and (iv) was changed to follow FCS methodologies, so as to help mainstream project monitoring and evaluation (M&E) activities. The average import clearance time KPI (iii) was agreed to be dropped from the formal project M&E scheme. This reflected the FCS view that the overall

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import clearance time was largely outside customs control, being dependent on the times taken for clearances to be obtained from the numerous governmental agencies with a border presence (at that time, customs did not have a coordinating role in border management as was subsequently granted).

1.4 Main Beneficiaries 12. The main direct beneficiaries are the Russian and international trade community – importers and exporters – through more efficient customs clearance and transit processes (i.e., faster processing and low compliance burdens) and reduced rent-seeking (i.e., fewer inspections, less official discretion and more transparency). 13. The indirect beneficiaries, more broadly, constitute the citizens and firms in the Russian Federation, who benefit from more stable and predictable revenue flows that contribute to the financing and delivery of public services, promote more efficient economic and financial management of public resources, stimulate productivity through an improved environment for domestic and international investment, and from a more competitive private sector and reduced informal economic activity. 14. Honest and compliant customs clients from Russia and its trading partners have benefited in several ways from the CDP, for example, through reduced compliance costs (and overall reduction of the earlier burden of uncertain formal and informal payments) and higher compliance rates. The project contributed to deterring evasion by increasing the burden of non-compliant customs clients, as evasion has become more costly and time-consuming. Improvements in customs procedural code contributed to improving the business climate by increasing the predictability of application of customs legislation and reducing inconsistencies between different laws and regulations, making it easier for customs clients to understand and apply customs legislation. Customs clients also benefited from improved customs client services, access to better information from the SCS/FSC, and reduction of time spent in queues to file customs documents. Clients’ rights were strengthened through more efficient and equitable appeals processes.

1.5 Original Components (as approved) 15. As appraised, the project contained ten components under four major headings: Customs Operations, Organizational Structure and Management, Information Technologies, Project Management. Annex 10 outlines the components and planned activities. The components (and appraised costs) were:

A. CUSTOMS OPERATIONS 1. Customs Control and Clearance – US$4.02 million 2. Trade Facilitation – US$9.59 million 3. Fiscal Policy – US$4.05 million 4. Improved Legal Framework for Customs Activities – US$5.44 million B. ORGANIZATIONAL STRUCTURE AND MANAGEMENT 5. Organizational Structure and Operational Management – US$10.23 million

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6. Financial Management – US$6.48 million 7. Human Resource Management and Training – US$7.27 million 8. Improving the Integrity of the Customs Service – US$2.49 million C. INFORMATION TECHNOLOGIES 9. Information Technology Development – this comprised the following subcomponents:

Develop and implement a modern ICT infrastructure platform – US$64.41 million Develop and pilot “Phase III” of the SCC’s Unified Automated Information System

(UAIS) – US$58.33 million Enhance SCC executive/strategic management of information systems – US$1.09

million Develop and implement mechanisms to strengthen the management of the application

software development/maintenance processes – US$0.26 million Develop mechanisms to strengthen ICT related human resource management –

US$2.41 million Develop and implement approaches to ensure the management of information

systems are consistent with Kyoto Convention norms – US$0.33 million Develop and implement a customs information database – US$6.40 million

D. PROJECT MANAGEMENT 10. Project Management – US$3.00 million

1.6 Revised Components 16. The component structure remained unchanged, and the subordinate activities also remained largely unchanged, with only limited adjustments in response to changes in the institutional context. These changes (and the affected components) included (a) the complete transfer of tariff policies to the Ministry of Finance (MOF) from the customs administration (Fiscal Policy Component), (b) changes in government-wide performance management and budgeting (Organizational Structure and Operational Management Component), and (c) the development of the Customs Union with Belarus and Kazakhstan (Unified Automated Information System Development Subcomponent).

1.7 Other Significant Changes 17. Two institutional developments impacted the implementation progress (negatively) and the development outcomes (positively). First, in May 2006, the SCC was transformed into the Federal Customs Service as part of a government-wide administrative reform. Unlike some other Services formed at the same time, this transformation elevated the status and stature of the FCS: it ceased reporting to the Ministry of Economic Development and Trade (as it then was) and began reporting directly to the Government. Second, the elevation of the status of the FCS was followed by the appointment of a new Head of the FCS in mid-2006. This was followed by changes in the FCS management team and thereafter by extensive personnel reassignments within the FCS through much of 2006. In addition, over the following few years, the FCS underwent an organizational restructuring – the resulting FCS network is depicted in Figure 2.

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Figure 2. The Territorial Network of the Federal Customs Service

18. These developments had three important implications: a. Integration and coordination of border management functions. The FCS was allocated a

progressively increasing coordination role in the post-2006 integration process of Russia’s border management functions. While the elevation in status played an important role in the FCS being able to coordinate almost two dozen RF agencies operating on the border, other factors were also at play (e.g., the technical competence of the FCS, its relatively greater international orientation compared to other governmental agencies, and its tradition of being open to work with other countries’ border management agencies). At the CDP-supported customs posts on the Russo-Finnish and Russo-Estonian borders, implementation of some CDP-supported process reforms was at times somewhat slow, since FCS officials had to spend higher-than-anticipated amounts of time in persuading and coordinating other agencies to streamline border management functions and processes.

b. Implementation of the Customs Union with Belarus and Kazakhstan. The FCS was effective in implementing the Customs Union with Belarus and Kazakhstan once the policy decision to implement the Union was taken. However, this came at a cost: during the last four years of CDP implementation, the FCS leadership and its key technical teams (e.g., on information and communications technology) became increasingly pre-occupied with the implementation of the Customs Union.

c. Dealing with legal and political challenges. Making the FCS directly accountable to the Government enabled it to deal with the challenge from the Office of the Prosecutor General (OPG) more effectively than the Federal Tax Service (FTS) – see Section 2.2 below.

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2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 19. Project Preparation – Identification to appraisal took eight months. Negotiations took place four months later. The relatively short twelve-month preparation cycle reflected (a) the importance attached to customs modernization and the CDP by the Government and the Bank, (b) SCC institutional ownership and capacity in developing project components and activities, (c) the technical expertise of the Bank team that worked in close collaboration with the SCC, and (d) the close involvement of other partners such as the Fiscal Affairs Department of the IMF, the WCO, and the Finland Customs. The background analysis summarized in the Project Appraisal Document captures the breadth of the analysis that was commensurate with the needs of institutional development in the customs administration, as well as the particulars of the RF context (e.g., the reforms associated with the transition to international norms and trade facilitation). The risks identified (and rated substantial or high) included a number of “political” or institutional “culture” risks. The anchor provided by international norms and practices (e.g., WTO, WCO Kyoto Convention, etc.) was expected to mitigate these risks. In retrospect, the identified risks were genuine but reasonably effectively mitigated. The PAD also identified (and rated substantial or high) several implementation risks related to information systems and ICT personnel. In retrospect, these risks were also correctly identified (which some CDP capacity-building activities helped to mitigate). The Bank team enjoyed an engaged, candid and efficient working relationship with SCC top management and technical staff that endured into implementation.

20. Project Design – Notwithstanding the project’s ambitious scope and timeline, the CDP design matched the RF customs’ institutional development priorities and needs well. Broadly speaking, institutional development initiatives sought to raise the performance (behavior) of units and individuals within the overall organization. The achievement of this goal depended on the successful implementation of an interlocking package of interventions, including changes in institutional culture. Not only was the package broad, but successful implementation of each invention was essential to the successful conclusion of the project and the reforms: regulatory delay could have frozen procedural reforms, for instance, delays in information systems support could have stalled operational and/or management reforms.

21. The CDP design touched on all relevant elements of the institutional development package (except for physical premises, which the SCC/FCS addressed within its investment and operational budget). The CDP emphasized the legal and regulatory elements. This reflected the importance of the transitioning to an outward-looking, trade-facilitating stance while aligning the organization with relevant international good practices. The CDP also emphasized information systems development. This reflected the importance of timeliness and integrity in administering customs transactions and in addressing the challenges of managing a large and complex organization spread across ten time zones.2

2 At the identification stage, a narrower and shorter-horizon information systems project was one of two alternatives tabled. For reasons noted above, this alternative was not adopted.

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22. Given the complex scope and the decade-long implementation period, the close alignment of the originally planned and actually undertaken activities is prima facie evidence of the appropriate balance struck by the original design – and an outcome beyond the norm in major institutional development projects. 23. Quality at Entry – A Quality at Entry Review was held on September 17, 2002. The Panel was broadly supportive of the proposed project and acknowledged its ambitious nature (noting the high rate of return on even a partially successful project). The Panel commended the use of the six-year implementation schedule as not creating unrealistic expectations. It endorsed the “holistic” approach to institutional reform (in particular it not being an-ICT limited project) and the interlinked nature of the project components. It also acknowledged that the strong client-Bank relationship offered a promising start and endorsed the internalized project management arrangements (i.e. no stand-alone project implementation unit as was – and continues to be – the norm in Bank-financed projects in the Russian Federation). The Panel also made suggestions for additional topics for the PAD. The key substantive concerns flagged included: (i) the risk that ICT activities would get ahead of the broader institutional development initiatives, (ii) the structure of internal incentives (including the remuneration and the internal distribution of rents) and the prospects for staff resistance to reforms, (iii) the importance of mobilizing the private sector to keep the pressure on continuing with institutional reforms, (iv) what would happen to staffing levels as a result of increased automation of business processes, (v) the need for effective anti-corruption/internal controls/disciplinary mechanisms, and (vi) the interplay between the project activities and compliance with obligations under WTO accession and the Kyoto Convention (including the tricky matter of valuation). Some of these concerns were addressed in the final project design, although most were risk areas more amenable to implementation dialog than ex ante activity design. The Panel also suggested that the performance indicators be sharpened: this was done.

2.2 Implementation 24. As noted above, the originally planned project components and activities remained unchanged over the course of the ten-year implementation period (2004-2013). The additional four years added to the original six-year timeline reflected a combination of the usual slippages in technical activities from the original (best case) project schedule – plus the loss of momentum in 2006-2007 due to the government-wide administrative reform which inter alia transformed the SCC into the FCS, the subsequent change in FCS top management in mid-2006, and the project stoppage for almost a year during 2006-2007 due to the challenge from the Office of the General Prosecutor (OGP) to the legal basis for applying Bank procurement guidelines (as opposed to national procurement legislation) to the CDP. 25. Following the mid-2006 changes in FCS top management and the subsequent significant changes to FCS middle management, the CDP management team took more than a year to arrive at a new equilibrium, and for project implementation to resume. Another unanticipated development in 2006 severely affected implementation and cast doubt at the time on the project’s continuation. In 2006, following a several-month long investigation of the CDP by the OGP, during which implementation and disbursements came to a halt, the OGP declared that as the CDP Loan Agreement had not been ratified by the Duma (legislature) it did not have the status of an international treaty, and so the FCS had erred in applying World Bank procurement

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processes to the CDP. The OGP argued that project procurement should have been undertaken in accordance with the Russian Federation procurement legislation, demanded immediate cessation of the application of World Bank procurement processes, and for immediate application of national procurement processes forthwith. As a result, project procurement remained suspended till almost mid-2007 – and disbursement resumed in full swing even later - until the Borrower’s authorities (the Prime Minister’s office, the Ministry of Finance, the then Ministry of Economic Development and Trade, the Ministry of Justice, the Ministry of Foreign Affairs, the OGP, the FCS, and other entities) reviewed the matter in detail, determined that all actions taken by the FCS to implement the project were indeed fully legal and that no violation of any laws had occurred. 26. The halt in procurement and disbursements caused a protracted delay in project implementation. Furthermore, this setback occurred at a sensitive point in the electoral cycle. The timely recovery of the forward momentum of the project following the year-and-a-half hiatus in project activities is to the credit of FCS management and technical teams, reflecting also the robustness of the original project design and its implementing arrangements. 27. Implementation was also affected by changes and a high degree of uncertainty in the customs procedures following the November 2009 accession to the Customs Union with Belarus and Kazakhstan (and consequent amendments to the Customs Code of the Customs Union throughout 2010-12). The pace of the development and technical features of the UAIS application software influenced the requirements for implementing the ICT infrastructure, which, in turn, influenced the ability to pilot and refine the UAIS software. 28. It is important to note the unique (for Russia) CDP implementation arrangements and their impact on project implementation. Unlike other Bank-financed projects in Russia which are managed and implemented by external stand-alone project implementation units (so-called ‘foundations’) regardless of the implementing or beneficiary agency, the CDP implementation arrangements were differently designed. There was no project implementation unit: the CDP was implemented directly by the FCS. The project team comprised experienced SCC/FCS staff organizationally located in the central Headquarters under the direction of the First Deputy Head of the FCS, supplemented by five experienced consultants on procurement, financial management, accounting, etc. To the SCC/FCS senior management’s great credit, the CDP team was managed in a disciplined fashion and allowed to focus on CDP implementation. Moreover – and equally critical – the SCC/FCS senior management was actively engaged in directing, supporting and empowering the project management team. Except possibly the 2006-2007 change in the project management team, the implementation arrangements for the CPD constituted a best-case scenario, reflected in the successful implementation of a complex and ambitious project. In addition, these arrangements were cost-effective (US$4.1 million during 2003-2013 for a loan of US$140 million) compared to other projects implemented in the Russian Federation. 29. Indeed, the FCS itself has assessed the non-PIU-centric implementation arrangements as “sustainable and effective”, pointing out that due to these arrangements “the Client and the Project Implementation Unit are rolled into one” and that as a result, “this structure has contributed to better integration of the Project in FCS operation, active participation of personnel

10

and senior management of FCS Headquarters in Project implementation management and promoted adoption of outputs of Project activities in FCS practice.”3 30. Outcomes Achieved – Key impacts included (a) a modernized legal and regulatory framework for customs operations, (b) the reorganization of the FCS structure and functions in line with international good practices, (c) streamlining and automation of FCS business processes (reflected in the attainment of the key project results indicators) impacting the entire FCS, and (d) greater openness of FCS management to seek user feedback on service quality, complaint handling and integrity (reflected in user surveys). 31. As the FCS ICR itself notes, “Comparison of outcomes of similar customs modernization projects financed by the World Bank in Russia and South-East European countries shows that the Russian Federation overcomes most of the reviewed countries by the customs clearance time at border checkpoints. In addition, the highest reduction (as compared to baseline values of indicators) of both share of declarations selected for physical inspection and customs clearance time before release of goods is achieved under the Customs Development Project of the Russian Federation” (see Table 2). 32. Furthermore, the FCS has noted in its ICR that “…Project outcomes have played a significant role in formulation and implementation of the state policy in the sphere of development of customs administration. The majority of Project arrangements and the Project development objective are relevant tasks in the achievement of objectives of the state policy in the customs administration sphere. All the basic Project outcomes are achieved; part of outcomes is implemented, disseminated throughout the entire system of the customs authorities (including dissemination by means of implementation of other public projects and programs) and is used in the FCS practice.”

3 ICR prepared by the FCS (available in the project files)

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Table 2. Comparison of Outcomes – World Bank-Financed Customs Development/Trade Facilitation Projects: Russia and South-East Europe4

Project Name

Average customs clearance time at designated vehicle

checkpoints, minutes

Average customs clearance time, as measured by the time taken between

lodging of the customs declaration to the issue of the release note, minutes

Share of declarations selected for physical inspection of goods at

import

Baseline Value

By end-project

Reduction (as

percent of Baseline Value)

Baseline Value

By end-project

Reduction (as percent of Baseline Value)

Baseline Value

By end-project

Reduction (as

percent of Baseline Value)

Russia CDP 30 18.3 39 2400 393.8 83.6 over 50 percent 4.8

percent 90.4

South-East Europe Trade and Transport Development Facilitation Project

Albania 73.75 23.5 68.1 240 64 73.3 90 percent 12,0

percent 86.7

Moldova 240 42.8 82.2 500 124 75.2 90 percent 48 percent 46.7

Macedonia 40 15.0 62.5 280 100 64.3 100 percent 34.5

percent 65.5

Croatia 61.7 17.3 72.0 240 145 39.6 60 percent 23.8

percent 60.3

4 Source: FCS (project completion reports, FCS data)

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33. Table 3 summarizes the planned versus actual expenditures by component/subcomponent. Variations between planned and actual expenditures are not very large for the first three components 5 . The variation in the last (project management) component was due to the extension of the closing date by four years.

Table 3. Planned versus Actual Expenditures

Component Planned Cost (US$ million) Actual Cost

(US$ million) Percent Change

CUSTOMS OPERATIONS 1. Customs Control and Clearance 4.0 12.6 212 2. Trade Facilitation 9.6 2.5 -74 3. Fiscal Policy 4.1 4.2 4 4. Improved Legal Framework for Customs Activities 5.4 4.3 -20 Subtotal 23.1 23.7 2.6 ORGANIZATIONAL STRUCTURE AND MANAGEMENT 5. Organizational Structure and Operational

Management 10.2 11.9 16

6. Financial Management 6.5 6.4 -1 7. Human Resource Management and Training 7.3 3.8 -48 8. Improving the Integrity of the Customs Service 2.5 2.6 3 Subtotal 26.5 24.6 -7 INFORMATION TECHNOLOGIES 9. Information Technology Development 64.4 60.4 -6 Unified Automated Information System (UAIS) 58.3 49.6 -15 Executive Management 1.1 0.8 -37 Management of Application Software Development 0.3 0.3 0 Strengthening IT Human Resources 2.4 2.7 13 Transparency & Compliance w/International

Standards 0.3 0.5 67

Customs Information Database 6.4 7.5 17 Subtotal 133.2 121.7 -9 PROJECT MANAGEMENT 10. Project Management 3.0 4.1 37 TOTAL IBRD LOAN 140.0 139.1 -0.6 TOTAL GOVERNMENT CONTRIBUTION 45.8 35.0 -25 TOTAL FOR THE PROJECT 185.8 174.1 -6 34. Within the first three components, significant positive variations in sub-component expenditures occurred in two cases:

a. Customs control and clearance (212 percent) – the increase arose from the need to work on this issue for longer than originally anticipated. This subcomponent achieved significant results (Box 1), not fully reflected in the project results indicators; and

b. Transparency and compliance with international standards (67 percent) – the key outputs were the preparation and dissemination of User Manuals for all operational information systems and ensuring compliance with international agreements on combating misconduct and offences by customs personnel (e.g., the 2003 Arusha Declaration). The FCS ICR has rated the sustainability of the results as high.

5 Given the complexity and scope of the CDP, Annex 2 summarizes the results of the CDP components/ activities and the in-depth 136-page FCS report of CDP results, outcomes, lessons learned, and sustainability.

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Box 1. Customs Control and Clearance – Significance and Results

This sub-component supported simplification of customs control and clearance policies and procedures. It included streamlining interactions among customs offices and between the FCS and other entities (e.g., by end-2012, the FCS had developed flow-sheets to streamline inter-departmental interactions with 25 federal authorities), developing general and special-purpose customs audit processes, user training of FCS staff, and developing an automated decision support system. Work under this sub-component was also linked with other FCS activities (e.g., a joint project with Finland and Sweden Customs on a “Green Corridor”, a “Kaliningrad Transit” project and 2012 FCS initiatives with Poland and Estonia). Currently, 49 border checkpoints implement the ‘green’ and ‘red’ corridor system. In addition, the FCS developed advance information procedures. Their impact is growing as evidenced by the following FCS data: (a) for goods imported by road, the clearance time has been reduced to about 53 minutes (a reduction of more than 30 minutes on average) while truck queue lengths have shortened although the number of trucks entering rose by 30 percent in 2012, (b) for goods transported by rail, more than 50,000 messages containing advance information were forwarded to the FCS, and (c) for goods transported by water, more than 7,000 messages were forwarded. Post-audit (also known as post-release control) was also introduced. More than 4,800 post-audits were carried out in 2012, resulting in additional assessments and penalties of RUR 5 billion (1.9 times that for the previous year) and initiation of 40 criminal cases. Ten electronic declaration centers (EDCs) were established in 2012 – these are specialized customs posts authorized to accept only electronic declarations. The creation of EDCs has encouraged importers to use e-declarations and enabled the FCS to process a rapidly growing volume of such declarations: 164,000 EDCs were cleared in 2012, compared to 54,000 the previous year. 35. Within the same components, there were major negative variations in the following: a. Trade facilitation (-74 percent) – part of the costs were met from the budget of the FCS b. Human resource management and training (-48 percent) - part of the costs were met from

the FCS own budget since some activities (e.g., automation of HRM processes and defining training needs) later became part of the overall public administration reforms implemented by the Russian Federation.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 36. M&E Design – The Key Performance Indicators (KPIs) associated with the PDO correctly focused on key dimensions of the institutional performance of customs administration (i.e., the efficiency and effectiveness of physical control procedures, the effectiveness of compliance management, the compliance burden, and the integrity and quality of services). They also correctly attempted to isolate the performance impacts due to the project interventions (i.e., by focusing selected KPIs on project-finance pilots). 37. The seven original indicators represent only a subset of the numerous dimensions of customs institutional performance. For example, they do not touch on the efficiency of resource management, legal/regulatory coherence, etc. Moreover, the methodology to quantify each KPI can, at best, serve only as a proxy for a series of broad dimensions of performance (e.g., timeliness as a measure of the compliance burden). Nevertheless, a KPI scheme must, in practice, provide a practical compromise: limited in number and expressly “indicative” in nature.

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38. In the case of this project, the cultural transformation sought included a shift away from an internally-focused “border defense” role and towards an outward-looking trade-facilitating public service. The KPI design reflected this goal. 39. M&E Implementation and Utilization – As a prominent fiscal actor and a transactions-intensive public service agency, the custom administration is relatively well disposed to, and well versed in, monitoring and analysis. The project-specific M&E indicators and monitoring processes helped the FCS modernize its management outlook. In particular, the KPI and subordinate outcomes indicator scheme was substantially integrated into the FCS’s permanent reporting/monitoring framework6. In addition, a number of the project-financed initiatives directly enhanced FCS information-gathering, information analysis, and communications capacities. These efforts contributed to the sustainability of the M&E arrangements and their utilization in the management of the FCS. The FCS has noted in its ICR (in the context of the project M&E arrangements using data from different quantitative and qualitative sources) that the CDP M&E approach “is an example of the comprehensive assessment of both the performance of the customs authorities at large and the outcomes of the Project and may be recommended for future use inter alia at implementation of the public Program “Foreign Economic Trade Development” and “road map” to improve customs administration”. 40. As noted above, shifting to SCC methodologies for KPI formulation was anticipated at Negotiations. This was meant to facilitate the mainstreaming of the CDP’s M&E activities into the SCC (FCS)’s routine M&E, which took place in the context of the project’s Mid-Term Review.

2.4 Safeguard and Fiduciary Compliance 41. The project triggered neither environmental nor social safeguards. Project financial management arrangements were satisfactory throughout the project life. Quarterly financial management reports (FMRs) were submitted on time and were acceptable to the Bank. Audits of the project financial statements were carried out on an annual basis. Clean audit reports were submitted on time. On several occasions, auditors noted that some equipment delivered to final beneficiaries was not in use during audit. The management response was that this had been caused by internal reorganization, and measures were taken to satisfactorily address these issues. 42. These findings give credit to the FCS management and project team and assume special relevance in the context of Bank-financed projects in the Russian Federation: the CDP remains the only World Bank-financed project in the Russian Federation implemented directly by an agency (the FCS in this case) and not by an external entity (normally one of several special-purpose ‘foundations’ in the Russian Federation which specialize in management and implementation of projects financed by international financial institutions) responsible for project procurement, financial management, accounting, disbursement, and compliance with Bank policies, guidelines and processes.

6 The FCS ICR refers in its ICR to the “adoption in FCS practice of a number of indicators used for assessment of the Project effectiveness. In particular, indicators characterizing the time spent for customs control at border checkpoints, the customs clearance time, the satisfaction of business community and public circles with FCS operation are used to assess the FCS effectiveness and performance.” It also states that the use of these indicators for assessing FCS performance is planned to be continued.

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43. Loan covenants remained in compliance throughout.

2.5 Post-completion Operation/Next Phase 44. The CDP (along with the larger contributions by the SCC/FCS operational and investment budgets, as well as other bilateral and multilateral cooperation programs) has provided resources to enhance the institutional development of the FCS – in pursuit of the key strategic goals of alignment with international norms and reduced compliance burdens (as well as the subordinate goals). The successful implementation of the CDP has notably strengthened the institutional platform of the FCS as well as its performance. Going forward, the upgraded institutional platform provides a basis for the FCS to pursue its strategic goals. The Detailed Plan for the Implementation of the Strategy of the Federal Customs Service of 2020 adopted in 2012 highlights nine broad areas of initiative: Customs Regulations (sixty-three sub-initiatives), Effective Implementation of the Fiscal Function (fifteen sub-initiatives), Customs Infrastructure (twenty-four sub-initiatives), Information Technical Support (sixty-five sub-initiatives), Law Enforcement and Anti-Corruption (fifty-four sub-initiatives), International Cooperation (twenty-four sub-initiatives), Institutional Development (twenty-one sub-initiatives), Strengthen Human Resources (twenty-five sub-initiatives), and Development of the Social Sphere (seventeen sub-initiatives). The nine broad initiatives in large measure continue the emphases of the CDP and a majority of the detailed sub-initiatives build directly on CDP project activities. Consequently, the preservation (and extension) of the gains from the CDP is highly likely (especially given the continued strategic, institutional and fiscal importance of customs). 45. In the near term, the Government and the FCS are focused on fully integrating the changes in the legal framework and procedures brought on by the Customs Union with Belarus and Kazakhstan7 (including, critically, enhancements to the UAIS). Presently, the authorities anticipate undertaking a review of the project experience and the FCS’s needs during 2015. The authorities have repeatedly expressed satisfaction with the engagement with the Bank/Bank team under the CDP. Keeping the dialog open and active with this key trade-facilitation agency would contribute to the Bank maintaining itself as an active partner in the economic and social development of the RF.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 46. As the Russian Federation continues to integrate with the global economy, via trade and cross-border investment, and as natural resource still account for a significant proportion of Federation’s public finances, FCS performance remains a significant determinant of economic growth and of the business environment. Moreover, as the sophistication of global trade increases and the global alternatives for trade and investment expand, improved FCS performance will also impact national competitiveness. The performance of the FCS, in turn, remains a matter of consolidating and advancing the program of institutional development embodied in the project. This is reflected in the RF’s current high-level strategic documents.

7 And – subsequently - other entrants.

16

47. The objectives, design, implementation and follow-up of the CDP remain highly relevant to the goals of the Government, as expressed in the Government’s Development Strategy 2020. In particular, the 2011 Update emphasized the “New economic growth model, ensuring macroeconomic and social stability and Strategies for better business climate and a more attractive investment potential in order to implement a sustainable growth model”. Furthermore, the CDP’s objectives, design, and implementation remain aligned with the World Bank Group-Russian Federation Country Partnership Strategy for the period 2012-2016, specifically the expressed goals: “(i) increase growth and diversification through better management of public finances, improved investment climate … , and (iv) improve governance and transparency through more accountability and better service standards in public administration, ...”

3.2 Achievement of Project Development Objectives 48. The Key Performance Indicators (revised) suggest a strong achievement of the PDO. Six KPIs substantially exceeded their targets (selectivity, timeliness, and compliance) while one (enforced compliance) substantially underperformed (a detailed explanation is provided later in this section). The user survey indicator showed an upward trend during 2010, 2011 and 2012. i.a Using the risk-based approach, reduce the number of import declarations selected for

physical inspection at designated sites (Central Customs Office and Northwest Customs Office – nine posts).

2003 2006 end of

project conclusion

Baseline 30

percent observed: 16.2

percent observed: 4.8 percent

target

17

iv. Reduce the average customs clearance time, as measured by the time taken between

lodging of the customs declaration to the issue of the release note at designated sites (Central Customs Office and Northwest Customs Office – nine posts).

2003 2006 end of

project conclusion

baseline 40 hours (five 8-

hour working days)

observed: 8 hours (80 percent reduction)

observed: 6.6 hours (83 percent

reduction)

target reduce by 25 percent

target reduced by 50 percent

substantially exceeded target

v. Reduce the compliance gap measured by Value of EU exports to Russia as reported by

the EU) - (Value of imports from the EU recorded by SCC)]/ (Value of EU exports to Russia as reported by the EU)

2003 2006 end of

project conclusion

baseline 40

percent observed: 33 percent

(7 percent reduction)

observed (2012):

16 percent (24 percent reduction)

target reduce by 5 percent

target reduced by 10 percent

substantially exceeded target

vi. Increase enforced compliance in the collection of taxes and duties, as measured by the

ratio of additional revenues (revised assessments, interest and penalties) to total revenue collected by the SCC/FCS

2003 2006 end of

project conclusion

baseline 0.77

percent observed 0.11

percent observed

(2012): 0.19 percent

target >1.5 percent

target >3 percent (EU average)

substantially underperformed target8

vii. Improve perceptions of traders and other stakeholders regarding the quality of service,

responsiveness to complaints, and integrity of customs administration as indicated by periodic surveys.

2003 2006 end of project conclusion

baseline none observed - observed

(2012): 93 percent positive, up from 70 percent in

2010 (see below)

target - target improvement met target 49. FCS explanation of reasons for under-performance of indicator on enforced compliance. The FCS has explained in detail the reasons for under-performance of this

8 Please see detailed explanation on next page.

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indicator, stating that the value of this indicator is the result of two factors that could operate in opposite directions. First, additional revenues to the federal budget from enforced compliance (from revised assessments, interest and penalties) significantly increased in absolute terms from 2006 to 2012 (RUR 3.2 billion in 2006, rising to RUR 12.21 billion in 2012 – see Table 4). However, the possibility of increases in the collection of fees and penalties was impeded by FCS policies and processes: as a consequence, revenue from fees and penalties increased only slightly (by RUR 0.1 billion in each case from 2006-2012). Second, total FCS revenue transferred to the federal budget saw high growth (from RUR 2.8 billion to RUR 6.5 billion from 2006-2012) and caused a decline in the value of this indicator (from 0.11 in 2006 to 0.19 in 2012). The FCS states that it would not be appropriate to assess the lack of achievement of this target negatively, since a low share of additional revenues from enforced compliance could be evidence of increased compliance which, according to the FCS, is supported by a substantial reduction of the gap in the assessment of the amount of foreign trade by the Central Bank of Russia (using the balance of payments methodology) and the FCS: this gap has been reduced six-fold over the project life – evidence, according to the FCS, of substantial improvement in compliance with customs legislation. Table 4. Customs revenues and enforced compliance (2006 and 2012)

Year Additional Revenues, billion Rubles Customs Revenues Transferred to Federal Budget, billion Rubles

Indicator percent (7=5/6)

Payments Fees Penalties Total

1. 2. 3. 4. 5. 6. 7. 2006 2.11 0.49 0.6 3.2 2,864.0 0.11 2012 10.8 0.7 0.71 12.21 6,486.66 0.19

50. In 2011, the FCS informed the Bank that the indicator and target value for enforced compliance did not reflect the approach of the FCS (and of the Ministry of Economic Development) in measuring the success of enforced compliance. The FCS focused on measures to improve the effectiveness of controls at customs operations to prevent build-up of customs arrears. In view of this approach, increased collections as a result of enforced compliance are seen by management as deterioration in performance. 51. Survey Results. In addition to the KPI-based assessment of project impact, the observations of interested parties suggest the CDP achieved notable positive impact. Surveys performed9 in 2006, 2008-9, 2010, 2011 and 2012 provide a nuanced picture of impressions by the trading community, other state agencies, and customs staff on a variety of topics. 52. The trading community reported generally positive or strongly positive impressions over time (1200 respondents – from a country-wide and a broad manufacturing and natural resource sample) - see Table 5. Table 5. Survey Results from Trading Community

Trading Community Question: “Response” (figures are percent of respondents) 2006 2008-9 2010 2011 2012 Overall impression of customs administration: “positive or rather [somewhat] positive”

70 82 93

Trends in customs performance: “for the better” 29 42 30 45 53

9 Conducted by the Russian Public Opinion Research Centre under a contract financed by the CDP.

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Trading Community Question: “Response” (figures are percent of respondents) 2006 2008-9 2010 2011 2012 Use of electronic declaration for cargo clearance: “yes” 18 25 67 87 Impact of electronic declaration on clearance processes: “makes it easier or makes it rather [somewhat] easier”

44 58 54 76 81

Software for customs documentation procedure: “convenient” 63 59 63 84 89 Modernization of customs information system simplifies clearance process: “to a major extent”

24 24 20 42 67

Modernization of customs information system improves transparency of custom administration: “to a significant extent”

15 22 18 36 49

53. Customs staff reported somewhat more mixed or muted positive impressions over time (180 respondents and 72 from the pilots) - Table 6. Table 6. Survey Results from Trading Community

Customs Staff Question: “Response” (figures are percent of respondents) 2006 2008-9 2010 2011 2012 Modernization of customs information system and electronic documents on cargo clearance: “makes it easier or makes it rather [somewhat] easier”

60 60 74 80 85

Training effectiveness: “Took training and it helped a lot ” 15 17 15 38 Available technological resources: “High” 26 34 24 28 45 Software for customs documentation procedure: “convenient” 23 27 25 24 30

54. A comparative analysis in 2011 of the trading community’s responses to developments in the pilot areas versus the overall customs administration indicate that pilot areas do not show advantages in speed of clearance, transparency or overall service quality. However, respondents within the pilot areas do indicate improvements in many areas / factors (including speed of clearance, transparency, service quality). The pilot areas do not constitute a “controlled experiment” in that some of the important innovations are system-wide (such as those in the legal/regulatory/organizational arrangements). Additionally, the modernization program remains a work-in-progress. So many of the innovations to be deployed in the pilot region first (notably the UAIS) were not yet in place or yet fully effective. This is consistent with the staff in the pilot areas assessing aspects of the modernization effort more positively than customs staff at large (suggesting perhaps that the effects of the modernization initiatives in the pilots had not yet fully worked through to impacts on the trading community). 55. The 2011 narrative/textual interviews of expert representatives from state authorities, professional associations, and NGOs (180 respondents and 72 from the pilots) indicate that: (a) the modernization program (international norms, information systems modernization, e-declarations, staff training, etc.) is seen as absolutely necessary, (b) the program is clearly a work-in-progress which is thus difficult to definitively assess at this point, (c) despite its ambitious scope, the program coverage/implementation is less comprehensive than it needs

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be to address observed deficiencies in customs, and (d) there are areas, such as information sharing, for which the FCS systems remain disappointing .

56. External Survey Results. As analyzed by the Bank team and summarized in a July 2011 Europe & Central Asia Region Knowledge Brief (Volume 41), information on customs performance from external data and surveys such as the Business Environment and Enterprise Performance Survey (BEEPS), the Logistics Performance Index (LPI), and the World Economic Forum Enabling Trade Index (ETI) appears to present a broadly consistent and relatively encouraging picture over the period 2005-2010. Problems with customs regulations trend down in the BEEPS and LPI data. LPI and ETI data indicate export clearance efficiency is higher than import clearance (associated with revenue collection and community protection processes), consistent with the internal data and the project-financed surveys. On transparency and corruption, the external surveys diverged somewhat, with BEEPS showing improvements and the LPI and ETI indicators showing higher or deteriorating reported incidences (respectively). The 2013 BEEPS data indicate a stalling of progress during 2010-2013. The number of documents and time for import and for export show improvement in only the ‘time to export’ data. Costs to import and to export are up sharply in 2013. The 2012 LPI results indicate that customs administration and cross-border trade environment generally lag the Europe and Central Asia (ECA) averages as well as Upper Middle Income country averages. In short, the CDP helped the RF move forward in terms of trade facilitation and international orientation. However, much work remains to sustain and further advance the reforms.

3.3 Efficiency 57. At appraisal, the economic benefits of the CDP were estimated for three streams of benefits to the trading community (projected for 2003-2019). These were: (1) speeding customs clearance “transportation effect”, (2) reduction in customs broker fees, and (3) lower customs fees. Expected benefit streams associated with foreign trade growth (and the contribution to national income growth), as well as the growth in transport and trade-related service sectors, were noted but not quantified due to methodological constraints (notably attribution). 58. The financial analysis integral to the cost-benefit model presented in the PAD reflects the fact that the subject of the CDP investments is a fiscal agency. Thus, the financial model includes the net impact on state revenues due to: changes in tariffs and fees structures (due to WTO and Kyoto Convention accession/alignment), as well as improvements in compliance to customs and VAT laws (i.e., reduction in black and grey market activities). 59. The estimation of Project costs and benefits and their net present value by each Project year is at Annex 3. The calculation covers the implementation and operating periods of the Project cycle. Taking into account the share of CDP financing within the total amount spent on modernization and operation of the Customs UAIS, the net present value of Project fiscal benefits is US$3.6 billion10, while the net present value of project economic benefits (net of budget benefits) is US$415.3 million. Taking into account the net present value of

10 Total amounts are provided for the period 2003-2020; the discount rate used is 0.1. The Net Present Value of project economic and financial benefits also includes non-separable useful effects from implementation of public-funded customs development programs in parallel with the CDP.

21

budget expenses for Project implementation, including co-financing costs, costs for payment of interests and Loan principal, and costs for operation of the Customs information system (US$91.8 million), the CDP has achieved a high level of economic and fiscal efficiency.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory (i.e., there were minor shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance). 60. The project was implemented through a decade of far-reaching institutional transformation at the federal level. The major changes have been mentioned in this ICR. CPD design was and remains highly relevant to the agency, sector, national and Bank-RF strategic frameworks. The KPIs and other indicators of impact are strongly positive. 61. Nevertheless, the improvements in customs administration cannot be fully ascribed to the CDP investments, as they are not the only contributing factors and the yet-to-be-fully operational UAIS limits the scope to isolate the impact in the pilot areas. Similarly, the efficiency of the investment is most likely high, but this too is impractical to disentangle from the broader customs modernization efforts (especially the legal and regulatory reform).

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 62. The project did not specifically target poverty impacts or social development, but the CDP-financed FCS modernization ultimately resulted in more efficient collection of customs revenues, which would benefit directly from improvements in compliance, predictability and transparency nurtured by the project. Indirectly, more efficient and stable collection of customs revenues was expected to lead to a stronger relationship between customs clients and the FCS (borne out through the consistent upward trend in user survey results), more confidence in government (the user survey results showed greater confidence and trust in the FCS on the part of customs clients), greater social inclusion (this was not explicitly measured), and increased equity and transparency (the positive findings from the user surveys tend to support the realization of this hypothesis). (b) Institutional Change/Strengthening 63. The CDP is essentially a pure institutional development project. Its successful implementation can be seen in the positive indicators of customs administration performance (e.g., the KPIs and survey results above). The positive prospects for the RF to sustain and extend the institutional developments arising from the CDP – assuming there are no unanticipated fiscal constraints or contingencies - are noted above in Section 2.5. In sum, the impact on institutional change and ongoing reform ambition is very high. (c) Other Unintended Outcomes and Impacts (positive or negative) 64. The project had several unintended positive outcomes and impacts. 65. First, the most salient positive unanticipated outcome was that most of the project results and outcomes across project components were implemented countrywide rather than

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just in the project regions, under budget funds made available by the Government. This is not only recognition that the project objective and outcomes were perceived as highly relevant by country authorities, but also that the project design was appropriate and relevant to the FCS. 66. Second, the implementation arrangements did not rely on a ‘stand-alone’ PIU – this proved to be effective in generating strong management and technical ownership, facilitating adoption of project results across the FCS and encouraging involvement of FCS management and staff in the CDP, besides being cost-efficient. 67. Third, the CDP’s ‘World Bank-financed project’ status (i) protected the project from budget cuts (e.g., during 2008-2010) when national resources were scarce, and (ii) provided the project with the flexibility to adapt project activities to unanticipated policy directions and other developments (e.g., implementation of the Customs Union). 68. Fourth, the CDP M&E framework and some of the key results indicators have been subsumed into the FCS performance assessment framework, significantly enhancing their system-wide impact. The availability of disaggregated performance information through the CDP encouraged the FCS management to ‘drill down’ and examine project results (see Figure 3) and – if positive – extend such interventions across the system. One example of this relates to the reduction of customs clearance times.

Figure 3. Average customs clearance time (vehicle checkpoints, project pilot zones, minutes)

69. The FCS ICR states that “A direct effect from implementation of Project activities on customs authorities’ performance indicators may be assessed for a number of activities. For instance, after construction of 4 inspection complexes in RF border checkpoints (Burachki, Brusnichnoye, Torfyanovka, Ubilinka - North-West Customs Directorate) in November 2007, a notable (70 percent) reduction of customs clearance time is observed in the respective

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vehicle checkpoints.” Thereafter, similar inspection complexes were constructed with budget funds in several other locations. 70. There was an unanticipated setback which detracted from the project’s otherwise positive progress and impact. In 2007, the Bank team was informed that following a several-month long investigation of the CDP (begun in 2006) by the OGP of the Russian Federation (during which implementation and disbursements came to a complete halt), the OGP declared that as the CDP Loan Agreement had not been ratified by the Duma (legislature) it did not have the status of an international treaty, and thus the FCS had no basis for applying World Bank procurement processes to the CDP. The OGP opined that project procurement should have been undertaken in accordance with Russian Federation procurement legislation, demanded immediate cessation of the application of World Bank procurement processes, and for immediate application of national procurement processers forthwith. 71. As a result of this development, project procurement and disbursements remained suspended till about mid-2007 until the Borrower’s authorities (the Prime Minister’s office, the Ministry of Finance, the then Ministry of Economic Development and Trade, the Ministry of Justice, the Ministry of Foreign Affairs, the FCS and other entities) with the Bank’s full and active support reviewed the matter in detail, determined that all actions taken by the FCS to implement the project were indeed fully legal and that no violation of any laws had occurred. 72. However, the halt in procurement and disbursements caused a protracted delay in project implementation. It took several months after the mid-2007 high-level discussions for project implementation to resume in full swing.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 73. See section 3.2 above for a summary of the beneficiary surveys.

4. Assessment of Risk to Development Outcome Rating: Moderate. 74. The risks to the sustainability of the development outcome from the CDP arise through a number of channels: (a) risks to the institutional coherence and strength of the FCS arising from political developments, (b) risks to the performance of the customs administration arising from negative developments in the broad political economy (e.g., reversal of progress in the rule of law and the integrity of public administration), (c) risks to adequate operational and investment resources needed by the FCS to maintain its staffing, skills, information systems, and other assets, and (d) risks to the technical operations of the FCS’s information systems and other specialized equipment. 75. Each of the above risk areas can be potentially quite disruptive to the performance of the customs administration and to sustaining the CDP investments. Nevertheless, the probability of these risks materializing is fairly modest (save possibly the risks to adequate operational and investment resources needed by the FCS – in the current situation of somewhat straitened state finances, future annual capital allocations for customs appear likely to be significantly reduced, as do outlays for operations and maintenance). In a straitened budgetary situation, Customs is a significant contributor to the state budget, but that has not

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helped it to remain insulated from budget cuts. Many of the technical measures introduced in the CDP (e.g., the UAIS, the revenue risk subsystem, etc.) increasingly limit the scope for the trading community to not comply with the legal norms governing trade. These probably militate against backsliding in the rule of law and/or social/political trends away from trader compliance. In sum, the risks are generally modest, with the possible exception of moderate risks associated with the FCS’s budget and its increasing dependence on modern ICT operations.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory (i.e., only minor shortcomings in identification/preparation/appraisal). 76. In retrospect, the background analytics and CDP design were well targeted to the needs of customs administration in the RF (reflecting among other things the strong working relationship with the WCO). Similarly the implementation arrangements – especially the reliance on project implementation by the agency itself - turned out to be strong. The risk assessments were generally on target and conservatively rated. The M&E arrangements and effort levels were relatively commendable. 77. The CDP design established a highly ambitious (no-slip) implementation timeline of six years. Recognizing that six years substantially pushed the limits of Bank management’s norms for project duration, the design could have benefited from a clearer, less ambitious assessment of the likely duration. 78. That said, the strong Bank team, strong cooperation with the IMF, technical support from the WCO, and strong working relations established with the then SCC leadership (within the relatively short eight-month preparation period) suggests something closer to a Highly Satisfactory rating. However, weaknesses in aligning the Bank’s lending instruments with the needs of complex institutional development projects induced the minor shortcomings noted above (as did the related project preparation processes and norms). (b) Quality of Supervision Rating: Satisfactory (i.e., only minor shortcomings in supervision) 79. Focus on development impact – The quality of the project design (including the impact-oriented KPIs) helped the Bank team maintain a focus on the project impact during supervision (i.e., not overwhelmed by the dialog on inputs, timing and procurement transactions). The (strong) project team also maintained the participation of substantive area experts (i.e., on trade facilitation and customs operations). This also helped keep the dialog focused on the impact of the project investments. 80. Supervision of fiduciary aspects – Notwithstanding the complexity of the project activities, procurement actions and financial management, no fiduciary problems emerged. Credit is due to the FCS project management team. However, the strong country-based

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fiduciary team helped keep this running smoothly by, among other things, maintaining good working relations with the FCS team. 81. Adequacy of supervision inputs and processes – The supervision budget and effort was substantial (225 staff weeks and 1.2 million USD) between FY03-FY14. Given the scope and complexity of the CDP, greater supervision resources would have allowed the team to strengthen technical supervision. The fact that a substantial part of the supervision effort was based in the country office – even if team leadership and customs area expertise were based outside of the RF - helped stretch the budget and maintain continuous engagement with the client. It is worth noting that during the 2006-7 hiatus in project activities, the Bank team organized a knowledge-sharing visit, at the request of the Head of the FCS, for key members of the new FCS management team. This appeared to have raised the comfort level of the new executive team with the CDP and the Bank and contributed to the subsequent renewal of project momentum. 82. Candor and quality of performance reporting – With the exception of the hiatus in 2006-7 (due to change of executive management and the OGP’s legal challenge to the CDP), project activities generally maintained acceptable forward momentum and remained closely aligned to the original project design. The time series of project ratings (Section G of the Data Sheet) reflected this overall picture. In particular, the Development Objective (DO) and Implementation Progress (IP) ratings were all “Satisfactory”, with the exception of the “Moderately Satisfactory” IP rating set in October 2007 and the “Moderately Unsatisfactory” ratings set for the DO and IP in May 2008. There was no reason to question the candor of the ratings. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Whereas the general success of the CDP must certainly be attributed to the SCC/FCS’s management and project management teams, the Bank’s performance in design and helping resolve implementation challenges as they arose was commendable and on balance Satisfactory. As noted above, the Bank’s contribution to quality at entry and the supervision were subject to only minor shortcomings.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory (i.e., there were only minor shortcomings). 83. In terms of budgetary support and FCS management continuity the Government was engaged and supportive. Similarly, the legislative agenda needed to support customs modernization was effectively managed, reflecting the Government’s support for customs modernization. The Governme