Document of The World Bank Report No. 14968-RU STAFF APPRAISAL REPORT RUSSIAN FEDERATION MEDICAL EQUIPMENT PROJECT NAY 16, 1996 Husan Resources Division Country Department III Europe and Central Asia Region CURRENCY EQUIVALENTS (as of April 9, 1996) Currency Unit = Ruble Rb 1 million = US$204.3 US$1 = Rb 4894 AVERAGE EXCHANGE RATES Rubles per US$ Period End of Year Average Period 1993 1,018 1,247 1994 2,212 3,550 1995 4,566 4,640 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CIP - Cost, Insurance, Place COMECON - Council for Mutual Economic Assistance CPAR - Country Procurement Assessment Report CPPR - Country Portfolio Performance Review DC - Direct Contracting DRG - Diagnostically Related Group EFF - Extended Fund Facility FSU - Former Soviet Union GDP - Gross Domestic Product GOSKOMSTAT - State Committee for Statistics GPN - General Procurement Notice IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding ICR - Implementation Completion Report IDF - Institutional Development Fund IS - International Shopping MCH - Maternal and Child Health MOF - Ministry of Finance MOHMI - Ministry of Health and Medical Industry NBF - Not Bank Financed NCB - National Competitive Bidding NHA - National Health Accounts NS - National Shopping OECD - Organization for Economic Cooperation and Development PPF - Project Preparation Facility PPIU - Project Preparation and Implementation Unit RPC - Russian Privatization Center SOE - Statement of Expense SCSES - State Committee on Sanitary and Epidemiological Surveillance TOR - Terms of Reference UN - United Nations USSR - Union of Soviet Socialist Republics RUSSIAN FEDERATION - FISCAL YEAR January 01 - December 31 RUSSIAN FEDERATION MEDICAL EQUIPMENT PROJECT STAFF APPRAISAL REPORT CONTENTS LOAN AND PROJECT SUMMARY ...................................... i I. INTRODUCTION ................................................ 1 A. Health Status ............................................ 2 B. Organization of Health Care ......................- 4 C. Health Financing .......................................... 6 D. Reforms ............................................... 8 E. Government's Objectives and Strategy ........................... 10 II. BANK STRATEGY AND LESSONS LEARNED FROM PREVIOUS BANK EXPERIENCE 11 A. Country Assistance Strategy for Russia ........................... 11 B. Health Sector Strategy ..................................... 11 C. Proposed Lending Program .................................. 12 D. Lessons Learned from Previous Bank Experience .................... 13 III. PROJECT OBJECTIVES AND DESCRIPTION ............................ 17 A. Project Objectives ......................................... 17 B. Project Development ...................................... 17 C. Project Design .......................................... 18 D. Project Description ....................................... 19 E. Environmental Aspects ..................................... 21 IV. PROJECT COSTS, FINANCING, PROCUREMENT AND DISBURSEMENTS ....... 23 A. Project Costs ........................................... 23 B. Project Financing ........................................ 24 C. Procurement ............................................ 25 D. Disbursements .......................................... 30 V. PROJECT STATUS, IMPLEMENTATION, EVALUATION AND SUPERVISION ..... 33 A. Status of Project Preparation ................................. 33 B. Project Implementation ..................................... 33 C. Reporting and Evaluation ................................... 34 D. World Bank Supervision .................................... 35 VI. PROJECT JUSTIFICATION AND RISKS ............................... 37 A. Project Justification ....................................... 37 B. Project Risks ........................................... 40 VII. AGREEMENTS AND RECOMMENDATION ............................ 43 A. Agreements Reached ...................................... 43 B. Recommendation ......................................... 44 This report is based on the findings of a pre-appraisal mission in May 1995 and an appraisal mission in August 1995. The project team was led by Elaine Patterson (Senior Operations Officer) through appraisal and Teresa Ho (Senior Health Economist) thereafter. The team included Antonio Ramos de Matos (Physician/Biomedical Engineer), Joe Scearce (Implementation Specialist), Rebecca Kalisher (Health Care Management Specialist), Denis Broun (Senior Health Specialist), Charles Fisher (National Health Accounts Specialist). George Schieber (Health Financing Specialist), Fredrick Golladay (Principal Human Resources Economist) and Kari Hurt (Project Assistant). Willy de Geyndt (ASTHR), Helen Saxenian (HDD) and Denis Broun (HDD) were peer reviewers. Robert Liebenthal and Yukon Huang are the managing Division Chief and Department Director, respectively, for the operation. ANNEXES Annex A: List of Participating Regions and Proposed Loan Allocations ............... 45 Annex B: Final Equipment List ........................................ 47 Annex C: National Health Accounts .............. I ...................... 51 Annex D: Detailed Cost Table ......................................... 59 Annex E: Detailed Disbursements Schedule ................................. 61 Annex F: Eligibility Criteria for Commercial Banks to Hold Special Accounts .... ....... 63 Annex G: Letter to Participating Regions from the Ministry of Finance ............... 65 Annex H: Regulation on the Project Preparation and Implementation Unit .............. 69 Annex I: Participating Oblast Commitments ................................ 73 Annex J: Project Implementation Plan .................................... 75 Annex K: Supervision Plan ........................................... 93 Annex L: Selected Documents Available in the Project File ....................... 95 MAP IBRD No. 27183 TABLES Table 1.1: Life Expectancy at Birth ....................................... 2 Table 1.2: Crude Birth and Death Rates (1987-1994) ............................ 3 Table 1.3: Comparative Data on the Availability and Use of Health Services ............. 6 Table 1.4: Allocation of Health Sector Resources in 1991 ......................... 7 Table 1.5: Allocation of Health Spending by Category in 1990 and 1993 ................ 8 Table 4.1: Summnary of Project Costs by Component ........................... 23 Table 4.2: Financing Plan ............................................ 24 Table 4.3: Summary of Proposed Procurement Arrangements ...................... 26 Table 4.4: Disbursement Categories and Percentages ........................... 30 RUSSIAN FEDERATION MEDICAL EQUIPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Russian Federation Implementing Agency: Medical Equipment Project Preparation and Implementation Unit (PPIU) Beneficiaries: Primary and secondary health care facilities in 34 selected oblasts Poverty Category: The project is not part of the Program of Targeted Interventions as its benefits are spread broadly among the population as a whole. However, the project would contribute to the preservation of universal access to basic social services which is an essential element in any safety net. Amount: US$270 million Terms: Payable in seventeen years, including five years of grace, at the standard interest rate for LIBOR-based US Dollar single currency loans Financial Benefits and Risks: The Government selected the single currency loan option in order to improve its overall liability management and reduce its risks. The US Dollar was chosen by the Government in order to match expected federal revenues. Selection of the LIBOR-based interest rate was justified primarily to preserve the standard country repayment terms of 17 years maturity in comparison to the shorter final maturity of a fixed rate single currency loan. The Government also stated that it did not have a significant amount of debt subject to fluctuating interest rates and would, therefore, be able to manage its risk. Commitment Fee: 0.75 % on undisbursed loan balances, beginning 60 days after signing, less any waiver Onlending Terms: Not applicable (intergovernmental transfer arrangement; no formal on-lending agreements) Financing Plan: See para. 4.7 Economic Rate of Return: The ERR for this operation is not quantifiable. See Chapter 6. Staff Appraisal Report: 14968 RU Map: IBRD No. 27183 Project ID Number: RUPA38571 Page ii Loan and Project Summary RUSSIAN FEDERATION BASIC DATA SHEET INDICATOR RUSSIA YEAR Country and Income Data Area (000 sq. lam) 17,075 1994 Population density (pop. per sq. km) 8.7 1994 GNP per capita (US$) 1910 1994 Population Indicators Population (millions) 148.2 1994 of which urban (percent) 73.1 1994 Population growth rate (percent) -0.1 1994 Population: 16-59yrs males, 16-54yrs females (percent) 56.6 1994 Crude birth rate (per 1,000 population) 9.5 1994 Crude death rate (per 1,000 population) 15.5 1994 Life expectancy at birth (years): Women 71.6 1994 Men 58.2 1994 Health Care Indicators Population per physician 222.0 1994 Population per nurse 155.5 1994 Hospital beds per 10,000 population 129.4 1994 Reproductive Health Share of women of childbearing age 34.9 1994 Total fertility rate (births per woman) 1.3 1994 Contraceptive prevalence (share of females 15-49) 22.8 1993 Infant mortality rate (per 1,000 births) 19.0 1994 Maternal mortality rate (per 100,000 live births) 52.0 1993 Health Financing Total health expenditures as percent of GDP (without extrabudgetary funds) 3.1 1994 (with extrabudgetary funds) 4.0 1994 Health expenditures as percent of government spending 7.9 1994 (without extrabudgetary funds) RUSSIAN FEDERATION MEDICAL EQUIPMENT PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.1 The Russian Federation is the world's largest country, encompassing 17,075,000 square kilometers. With a population of 148 million, it is also the sixth most populous. Living circumstances vary from compact industrial regions with established social infrastructure to production centers set in vast sparsely populated regions and agricultural areas in rural settings. There is great ethnic and cultural diversity. Ecological problems, varying only in source and severity, are present throughout the country. Shortcomings in Russia's health care system, combined with the effects of economic and social stresses, have caused serious deterioration in health status. This trend became apparent even before the dissolution of the USSR in 1991. 1.2 The Soviet health system was at one time considered a model for other countries to emulate. It was, and still is, characterized by universal and relatively equitable access to a comprehensive system of health care. In principle, the system emphasized primary and preventive care and was built around a network of primary health care centers comprising feldsher stations, women's consultations, polyclinics and ambulatories, accessible to the population throughout the vast territory of the Soviet Union. 1.3 Russia has inherited the Soviet health system, but, with the financial strains of the economic transition, the disparities between the theoretical design of the system and the way it works in practice become glaringly apparent. Despite artificially controlled prices of the various inputs, the system was becoming unaffordable even before the economic transition. Now, as prices of non-salary inputs have been liberalized and the responsibility for financing has been decentralized, resource constraints have become an even more important factor. Health care spending has become heavily skewed toward curative and in-patient care. Although salaries of medical personnel are low in comparison to other professions, salaries are given the first priority in allocating the limited resources available. It is clear that universal comprehensive health care cannot be provided by the system in its present configuration at the current levels of financing. However, even within the envelope of resources currently available, the relevance and quality of health care provided can be improved. 1.4 In order to strike a balance between the needs of the population for health care and the resources available, comprehensive reform of the Russian health care system will be required. As in other countries, the reforms will involve improving financial incentives to providers to raise quality and cost efficiency, restructuring health care delivery through both physical restructuring of facilities and implementation of effective clinical protocols, providing more services on an out-patient basis and reducing reliance on hospitalization. A shift in the balance between public and private sector involvement of both the financing and provision of health care is needed. This is an extensive agenda which will require many years to complete. The proposed project represents an initial step towards restructuring and rationalizing health care facilities in Russia. Page 2 Introduction A. HEALTH STATUS Life Expectancy 1.5 In certain respects, the health issues confronting the Russian population are similar to those found in other industrialized countries. Like other countries which have progressed through the epidemiological transition, the major health problems are related to chronic, non-infectious diseases. However, in sharp contrast with patterns in almost all developed and developing countries, the health status of the Russian population is worsening. This deterioration is perhaps most visibly reflected in the alarming trend in life expectancy. 1.6 From 1990 to 1993, life expectancy for men declined from 63.8 years to 58.9 years and for women from 74.3 years to 71.9 years. In 1993 alone, male life expectancy declined by three years and female life expectancy by two years. Such dramatic declines are unprecedented except in times of war or natural disaster. The trend continued downward in 1994 to 58.2 years for men and 71.6 for women. In the early 1950s, health status and life expectancy in Russia were roughly comparable to the rest of Europe. Until the mid-1960s, health gains equalled or exceeded the rest of Europe. However, from that point onward, life expectancy stagnated until the 1990s and then actually declined. The 13-year gap between male and female life expectancy, the largest anywhere in the world, is largely attributable to certain lifestyle choices, e.g., consumption of alcohol and tobacco. Men are two and a half times as likely as women to diz at an economically productive age. Table 1.1: Life Expectancy at Birth (in years) 1965 1980 1990 1991 1992 1993 1994 Men 64.3 61.5 63.9 63.5 62.0 58.9 58.2 Women 73.4 73.1 74.4 74.3 73.8 71.9 71.6 Adult Health 1.7 In 1993, the leading causes of death in Russia were cardiovascular disease (52 percent), trauma and poisoning (16 percent) and cancer (13 percent). Infectious diseases accounted for only about 1 percent of deaths. Over the past 30 years, mortality from infectious diseases has fallen steadily, while deaths from cardiovascular disease have nearly doubled. This pattern differs markedly from that in westem Europe, Japan and North America, where mortality rates from cardiovascular disease declined by 35 to 50 percent during the same period. More recently, there has also been a dramatic increase in deaths due to trauma and poisoning. In 1992, the single most significant cause of death in this category, responsible for 18 percent of such deaths, was suicide. Another 13 percent were murders and a further 10 percent were due to alcohol poisoning. This pattern strongly suggests inadequacies in the provision of mental health services, despite the fact that nearly 5 percent of the total population received some form of psychiatric care. 1.8 Both morbidity and mortality reflect distinct gender patterns. In 1992, for example, the incidence of cancer in men was 1.8 times as high as in women, with lung cancer accounting for 30 percent of all cases. The most common form of cancer in women, accounting for 17 percent of cases, Russian Federation: Medical Equipment Project Page 3 was breast cancer. At comparable ages, men are over twice as likely to die from cancer as women, three times as likely to die from respiratory diseases, and five times as likely to die from trauma and poisoning. Maternal and Children's Health 1.9 The declines in life expectancy also reflect a worsening in infant mortality. Infant mortality, which dropped from 22.0 per 1,000 live births in 1980 to 17.4 in 1990, rose to 19.9 in 1993, before declining to 19.0 in 1994. This rate is two to three times as high as in OECD countries. Maternal mortality, at 52 per 100,000 live births (1993), is five to ten times as high as in other industrialized countries. The main causes are complications from abortions, post-partum bleeding and toxemia. Although abortion is legal and is commonly used to control fertility, the recent imposition of social and medical criteria to abortions after the first trimester may lead women to seek illegal abortions, complications of which contribute greatly to the high rate of maternal mortality. Contraceptive prevalence is low. The official rate for modem methods was 22.8 percent in 1993. Although rates of over 40 percent have been reported, these include a high proportion, perhaps as much as half, of non- modem methods, e.g., rhythm, withdrawal. 1.10 The frequency of abortion also contributes to a high prevalence of anemia among women of childbearing age which eventually results in high rates of anemia among small children. A recent survey found the prevalence of anemia for children under age two at between 10 and 15 percent in major cities and at about 25 percent in the surrounding oblasts. Immunization rates ranging from 60 to 80 percent are fairly comparable to those in other industrialized countries. The availability of vaccines is not a major problem in Russia, as, in the past, Russia was the main source of vaccines for all of the USSR. Decreases in vaccine production have, however, adversely affected some of the other FSU republics, as vaccines are exported only after local demand is met. Children who survive to their first birthday are likely to reach adulthood, but then have a one in four chance of dying before age 60. Demographic Crisis 1.11 The convergence of increased mortality and declining birth rates since 1988 has led to what Russian health officials speak of as the "demographic crisis." In fact, this issue is highlighted as the most significant concern in the 1992 "State Report on the Status of Health of the Population in the Russian Federation" (1992 State Report). Table 1.2: Crude Birth and Death Rates (1987-1994) (per 1,000 population) [ 1987 1988 11989 1990 1991 1992 1993 1994 Crude Birth Rate 17.2 16.0 14.6 13.4 12.1 10.7 9.4 9.5 Crude Death Rate 10.5 10.7 10.7 11.2 11.4 12.2 14 5 15.5 Since 1992, the birth and death rates have interacted to produce a natural decrease in population. The effect on the age composition of the population has been a reduction in the population of productive age accompanied by an increasing proportion of pensioners. Page 4 Introduction Risk Factors 1.12 The main risk factors in terms of adult health are alcohol, tobacco and diet. Adult morbidity and mortality are also adversely affected by unhealthful and often dangerous working conditions. Among the republics of the Former Soviet Union (FSU), Russia is second only to Belarus in per capita consumption of alcohol. It is estimated that alcohol consumption in Russia rose by 30 percent during the period 1987 to 1992. Recent surveys indicate a dramatic increase (over 100 percent) in the quantity of alcohol consumed by male drinkers during the period September 1992 to December 1994, while alcohol consumption by female drinkers increased only slightly. 1.13 Smoking is very prevalent in Russia, with approximately 60 percent of adult men and 15 percent of adult women smoking. The difference in smokinig prevalence is also a major factor contributing to the gender patterns in morbidity and mortality. While male smoking trends have remained stable at fairly high levels, the prevalence of smoking among women, particularly young women, is increasing and will undoubtedly be reflected in health status in the future. 1.14 Household surveys reveal a marked change in diet between 1989 and 1992, including significant decreases in the consumption of fruits and vegetables, fish, meat and milk and dairy products, and sharp increases in the consumption of bread and potatoes. These changes were, in part, beneficial. Prior to 1989, fat consumption was 10 to 15 percent higher than the recommended levels, while by 1992 calories from fat represented 31 percent of daily caloric intake, although a high proportion still comes from animal fats. Undernutrition is not a significant problem; however, the prevalence of obesity is high, particularly among older women, and contributes to the high incidence of cardiovascular disease. 1.15 Although 77 percent of urban dwellers and 65 percent of rural dwellers are reported to have access to safe water supply, mechanical failures and intermittent shortages of water treatment chemicals may reduce the overall level to as low as 50 percent overall on a consistent basis. Industrial pollution is also a significant problem, leading to regional variations in respiratory diseases and various forms of cancer, although hard data linking causes and effects are not readily available. Similarly, high levels of radiation resulting from nuclear accidents require long-term epidemiological monitoring. B. ORGANIZATION OF HEALTH CARE 1.16 The decentralized Russian health care system as it now exists reflects both the positive and negative attributes of the highly centralized Soviet health system from which it evolved. On the positive side, access is universal and fairly equitable; the system is characterized by an extensive network of over 20,000 polyclinics; and costs have been contained. On the negative side, the system is not sufficiently funded to support the comprehensive service it attempts to provide'; relies too heavily on curative and inpatient care; lacks incentives to encourage efficiency; and neglects health promotion and recognition of the individual responsibility for adopting a healthy lifestyle. 1.17 The public health system in Russia, which provides access to the entire population, comprises 12,000 hospitals (including 4,700 community or district hospitals) and maternity homes, aggregating 2.8 million in-patient beds, 15,500 polyclinics and women's consultations, and 3,500 ambulatories. In addition, there are 48 medical academies, 117 research institutes and 34 major I At 4 percent of GDP, health spending in Russia is at approximately the level that would be expected for a middle-income country. However, it is substantially lower than in OECD countries, which are more appropriate health comparators for Russia. Russian Federation: Medical Equipment Project Page 5 diagnostic centers. In parallel, there are some 600 hospitals and 1,700 outpatient clinics operated under the auspices of the Ministries of Defense, Interior, and Railways and other ministries and agencies. In addition, large enterprises may also operate their own health care facilities for the benefit of their employees and (sometimes) families and possibly residents of the inmmediate community. The precise number of facilities in this latter group is not known. The latter two groups of facilities are sometimes referred to as the "parallel system." Although these are often superior to public facilities because they are better financed, in principle, they are redundant as their beneficiaries already have access to sinilar services through the public system. 1.18 The number and capacity of health care facilities is not only adequate, but probably excessive. However, quality is an entirely different matter. The 1992 State Report indicates that 23 percent of hospitals have no running water; 33 percent have no sewerage system; 60 percent do not have hot running water; 23 percent of buildings need major repairs; and 2 percent are considered unsafe. The state of equipment in health facilities is equally poor. Much of the equipment is run-down, out-of-date, or unusable for lack of spare parts. Most facilities make heroic efforts to maintain their equipment, often cannibalizing other pieces for spare parts. However, budget shortages for maintenance or new investment are chronic and these efforts eventually become futile. 1.19 Since 1992, provision and financing (see next section) of health care have been decentralized to the oblasts. At the oblast level, a typical health care system would comprise a central oblast hospital (a tertiary-level general hospital with perhaps 1,000 beds, usually the best equipped, staffed and financed facility in the oblast), several specialty hospitals, e.g., pediatric, emergency, psychiatric, tuberculosis, one or two maternity homes, several free-standing polyclinics, one of which m-night be attached to and serve as the outpatient department for the central oblast hospital. Each raion typically has a central raion hospital (200 to 300 beds) with attached polyclinic and possibly a maternity home, one or more district hospitals (25 to 50 beds), one or more ambulatories (small polyclinics) and numerous feldsher stations (primary health care facilities usually staffed by medical personnel known as feldshers, whose level of training falls between that of a nurse and a physician). 1.20 Although the vast majority of health services are provided by the public system at the oblast level and below and the parallel system, there is a thin layer of federally financed health facilities. Federal institutions are generally highly specialized health facilities, often associated with research institutes, and account for less than 2 percent of inpatient admissions and 1 percent of outpatients treated. Health promotion is the responsibility of the Ministry of Health and Medical Industry (MOHMI) and the recently (1991) split off State Comnmittee on Sanitary and Epidemiological Surveillance (SCSES). The latter has broad public health responsibilities in sanitatiorn, hygiene, epidemiology and some aspects of environmental protection. 1.21 The provision of health care in Russia is characterized by excessive reliance on curative and inpatient care. Although, in principle, the MOHMI is responsible for public health, including health promotion, the level of funding provided is not commensurate to the task (Table 1.4). Consequently, intervention occurs after a disease has been contracted and treatment often involves a protracted period of hospitalization. To some extent, medical practice is supply driven by and refites the availability of hospital beds and physicians. In recent years, there has been a gradual reduction in the number of hospital beds, and in 1992 the MOHMI reduced the intake of new students into medical academies by 27 percent. Given the large stock of physicians already in the system, it will take considerable time before this intervention has a significant impact on the total number of physicians. Page 6 Introduction Table 1.3: Comparative Data on the Availability and Use of Health Services Russia OECD Avg. U.S. l ___________________________________ (1993) (1991) (1990) Hospital Beds 12.2 8.4 4.7 (per 1,000 population) l Average Length of Stay 17.0 14.4 9.1 (days) Admission Rate 21.0 16.2 13.7 (% of population) Physicians 3.9t 2.5 2.2 (per 1,000 population) 'This statistic differs from the official GOSKOMSTAT source. For reasons of comparability, the figure is based on the U.S. definition of physician which does not contain categories included in the Russian definition, such as inactive physicians, dentists, sanitary-epidemiological physicians and physiotherapists. C. HEALTH FINANCING 1.22 Two of the most positive features of the Russian health care system-universal coverage and relatively equitable access-derive from the fact that the system is publicly funded. The major sources of health finance are oblast and raion budgets, territorial health insurance funds, federal budget, including federal programs implemented by the oblasts, enterprises, households and the Federal Mandatory Health Insurance Fund. 1.23 During the recent period of economic transition, the Goverrnent has made considerable efforts to protect social expenditures. While spending on education has declined slightly over the past three years, the level of health spending has been better preserved in real terms. Total health expenditures have risen from 2.2 percent of GDP in 1990 to 4.0 percent in 1994, but over a period when GDP fell by 50 percent and financing requirements have increased. Introduction of the earmarked payroll tax for health has been an important factor in maintaining the level of health financing, although the declining wage fund has made this financing vulnerable. 1.24 Until 1992, the sources of health financing were the federal budget, enterprises and de minimis household expenditures. Since then, the number and significance of other funding sources has expanded, making it difficult to assemble a comprehensive picture of health sector resources. In 1992, responsibility for health financing was decentralized to the oblasts. In 1993, a 3.6 percent payroll tax for compulsory health insurance was introduced; 1994 was the first full year of implementation. The earmarked payroll tax is collected by a territorial health insurance fund at the oblast level which retains 3.4 percent, and remits 0.2 percent to the Federal Mandatory Health Insurance Fund which is responsible for oversight and providing equalization payments to economically disadvantaged oblasts. 1.25 As enterprises are privatized, many of them are choosing to shed the responsibility for social services they provide. By 1994, enterprise spending on social services was estimated to have dropped to less than half the 1992 level. However, most of the parallel system of health facilities are Russian Federation: Medical Equipment Project Page 7 related to government agencies or ministries (e.g., Ministry of Railways) and are not affected by privatization. In any case, many of these facilities duplicate those provided by the public system and beneficiaries could be served by that system with only a marginal increase in costs. 1.26 The majority of household spending on health is for outpatient pharmaceuticals, which have always been predominantly a self-pay item. Inpatient pharmaceuticals, to the extent they are available, are provided to patients free of charge. Outpatient pharmaceuticals purchased under a prescription from a physician at a polyclinic or other outpatient facility, are at the patient's expense, except for certain categories of patients who receive free or subsidized pharmaceuticals. These include diabetics, epileptics, psychotics, veterans, pensioners and very young children. In the past, a high proportion of pharmaceuticals was manufactured in Russia and prices were subject to stringent controls. Imports, mainly from COMECON (Council for Mutual Economic Assistance) countries, were centrally purchased and were heavily subsidized by the federal budget. Hence, the cost of outpatient pharmaceuticals, even to those not entitled to direct subsidies, was quite low. As from January 1, 1994, all price controls on phannaceuticals have been removed. Most manufacturers have been privatized and private distributors and retail outlets have been allowed to enter the market. Because prices at the retail level now reflect market forces, prices are much higher than in the past, and affordability has become a significant issue, both for individual consumers and inpatient health care facilities. The 1992 State Report cites the inadequate supply of pharmaceuticals as a major problem for the health care system. Although availability has improved somewhat since then, affordability has become an even larger issue (para. 1.29). 1.27 Although the private practice of medicine is now permitted, relatively little is being spent on privately provided health care. The Russian Constitution adopted in December 1993 guarantees free health care to all citizens. Current legislation only imprecisely defines the basic package of care. However, certain non-essential services, such as cosmetic surgery and, in some places, dental services, are provided as "paid services." The combination of privately provided and "paid" publicly provided health services probably account for less an 5 percent of total health spending. 1.28 The allocation of health sector resources is heavily skewed toward hospitals and other inpatient facilities. The spending pattern reflects the health care system's emphasis on in-patent care as illustrated by the following breakdown of expenditures in 1991. Table 1.4: Allocation of Health Sector Resources In 1991 (percent) Public Health 3 Hospitals 69 Ambulatory clinics 10 Other facilities 12 Education/Research 2 Other 4 Total 100 Although current national level information is not available, reports from the oblast level indicate that the allocation for inpatient care has probably been maintained or even increased. Page 8 Introduction 1.29 Wages, pharmaceuticals, and food for in-patients are considered "protected" categories and cannot be reallocated for other purposes. Even so, since 1990, there has been a significant shift in the allocation of health spending by category. Table 1.5: Allocation of Health Spending by Category in 1990 and 1993 (percent) 1990 1993 Wages 47 27 Payroll Taxes 3 9 Utilities 11 13 Pharmaceuticals 10 9 Investments 15 23 of which: equipment 5 10 Other 14 19 Total 100 100 From 1960 through 1991, wages and payroll taxes accounted for 50 percent or more of total health expenditures. As noted above (Table 1.3), Russia has a very high proportion of physicians per capita. Even though the number of physicians is high, health care administrators are generally unwilling to lay off personnel. So, although the number of physicians remains essentially unchanged, salaries have continued to be controlled through a system of federal norms managed by the Ministry of Labor, and have not risen as rapidly as other costs which have been subject to market forces. In fact, a physician's salary at present is equivalent to about 70 percent of the wages earned by an industrial worker. Health care administrators fear, with just cause, that the relatively low remuneration of physicians will ultimately drive many good doctors out of the profession into other, more lucrative, employment. This is already happening with nurses. In 1993, only half of the graduates of nursing schools in Moscow actually took up employment as nurses. D. REFoRMS 1.30 Russia adopted a health insurance law, creating the framework for both mandatory and voluntary health insurance, in 1991. The mechanism for funding the mandatory health insurance system (a 3.6 percent payroll tax paid by employers) was established in December 1992. Actual implementation of the new funding mechanism did not get underway until late (September/October) 1993. 1.31 A major impetus behind the adoption of health insurance legislation was the recognition that the hiealth care system was under-funded, and the mandatory health insurance funds were intended to supplement budgetary allocations for health finance. A second objective was to separate responsibility for financing from the provision of health care to increase the efficiency of the system. There were great hopes on the part of its proponents that "insurance medicine," as it was called, would produce major improvements in Russian health care. Although the term insurance was used and the legislation called for the participation of private insurance companies, the system envisaged was, in essence, a social Russian Federation: Medical Equipment Project Page 9 insurance fund intended to maintain solidarity. Although private insurance companies were to intermediate between consumers and health care providers, they were to be not-for-profit firms and could not deny coverage based on differentiating risks. In actual fact, the results of the present system have been disappointing and many of the original proponents of mandatory health insurance in Russia are ready to declare the experiment a failure. 1.32 Such a conclusion is unjustifiably negative for a number of reasons. First, the health insurance legislation was unclear, and thus, allowed for wide variations in its implementation. It contains many internal inconsistencies and ambiguities, probably as a result of compromises among the different proponents who supported the adoption of different systems (German-like social insurance, Canadian-style consumer choice and Israeli-style managed care). Second, because implementation of the health insurance system coincided with a major economic decline and decentralization of health financing, instead of supplementing the level of resources for health, the earmarked payroll tax merely served to maintain the pre-reform level of health spending. However, in 1994, the mandatory health insurance funds accounted for 22 percent of health spending. Without them, it is entirely possible that health spending would have decreased by this amount. (During the transition period, real expenditures for education have declined by 15 percent.) Helping to maintain the level of health spending during the difficult period of economic transition has been a significant contribution. 1.33 In part because of the impossibility of literally implementing the health insurance legislation, mandatory health insurance is being implemented differently in various oblasts. In some cases, it has served to demonstrate the benefit of separating financing from the provision of health care. In others, the territorial health insurance funds function as a shadow oblast health department; financing and service provision are still directed by a single agency, but the authority is now vested in the territorial health insurance fund. Experiments with provider payment mechanisms have demonstrated that health care providers do respond rationally to payment incentives. A system of reimbursing in-patient care on the basis of "clinical statistical groups" (somewhat similar to diagnostically related groups or DRGs in the U.S.) has been developed and continues to be refined. However, development of appropriate mechanisms for reimbursing outpatient care lag behind and the new payment mechanisms sometimes leave the ambulatory facilities relatively more disadvantaged than they had been previously. 1.34 Because the impact of the health insurance system has been disappointing, the Government continues to seek new approaches to health financing, also aimed, in part, at reducing the reliance on public finance. In parallel with the health insurance reforms, legislation has been adopted which permits the private practice of medicine and privatization of distribution and sales of pharmaceuticals. Medical equipment maintenance has also been privatized. Although these are positive steps, the development of the market response has been constrained by lack of effective demand due to inadequate funding of the health system. Nonetheless, a basic framework is in place for gradually increasing the private provision of health services and greater private involvement in ancillary and support services. Despite limitations in the current system, comprehensive health care is provided to all citizens at a level of funding which is both affordable to the economy overall and is relatively efficient in terms of administrative costs. There are important opportunities for increasing the cost efficiency, quality and effectiveness of health care in Russia. These opportunities could be realized within the existing framework of a publicly funded system. It remains for the Government to evaluate the tradeoffs between public and private financing and to establish the parameters within which health sector reform in Russia can proceed. Page 10 Introduction E. GOVERNmENT'S OBJECTIVES AND STRATEGY 1.35 Inadequate financing of health care facilities (resulting in severe shortages of supplies and equipment) and reduction of domestic production capacity for pharmaceuticals and equipment are the concerns most frequently cited by sector officials. Therefore, it is not surprising that the major focus of health sector reforms to date has been in the area of finance. Another high priority of MOHMI is the need to reorient the health care system to one with a stronger emphasis and primary and preventive care. The objectives of the MOHMI and oblast health departments alike has been to provide an adequate basic package of health care services to the population within the envelope of resources available. 1.36 The Government is also committed to supporting decentralization of heath care financing and service delivery. This commitment has been expressed primarily through new health financing legislation, which attempted to mobilize additional resources for the health sector, decentralize decision making regarding resource allocation, and separate financing from provision of care. Still, appropriate incentives must be introduced to improve resource allocation (especially to reflect priority for primary care) by encouraging efficiency and quality of care. 1.37 While the Government's emphases are well placed and constitute necessary interventions in support of health reform, they are not sufficiently broad in scope to achieve the comprehensive, affordable level of care which the system aspires to provide. Health reform in Russia will require efforts in three major areas: (i) restructuring, modernizing and upgrading the health system so it offers the best possible service package within the available resource envelope; (ii) identifying a reliable and sustainable source of financing which will provide adequate resources to finance a basic package of services to the population; and (iii) inducing individuals to take greater responsibility for their own health. 1.38 Restructuring and modernizing the system will require major structural changes in the health care delivery system. Among the changes envisaged are: greater emphasis on public health and health promotion activities; rationalizing health care facilities, including eliminating a significant proportion of hospital beds and closing facilities which do not provide high quality care; decreasing the number of physicians, while upgrading medical training and reducing the excessive emphasis on specialization; increasing the role of nurses and medical technicians; and striving to deliver a much broader range of services through less costly out-patient facilities. While the introduction of the earmarked payroll tax provided emergency first aid in the area of health finance, reliance on an ill-defined system whose capacity to generate revenues is so closely tied to the overall state of the economy may not be the appropriate means of providing a sustainable source of financing which ensures continuous provision of essential health services. Finally, increasing individual responsibility for health can only be achieved through programs to educate the public of the impact of lifestyle choices on their health status. Although such programs currently exist, they have not been effective in influencing behavior and will undoubtedly need to undergo major redesign to achieve their objectives. Russian Federation: Medical Equipment Project Page 11 II. BANK STRATEGY AND LESSONS LEARNED ]FROM PREVIOUS BANK EXPERIENCE A. COuNTRY ASSISTANCE STRATEGY FOR RuSSIA 2.1 The Country Assistance Strategy (CAS) was discussed by the Board on June 6, 1995; a CAS Progress Report was discussed with the Board on March 28, 1996. Since the last CAS, the Bank has continued to operate under an Intermediate Case scenario, which remains broadly appropriate in the current environment. This scenario assumes that there will be continued progress in macroeconomic stabilization, as evidenced by the recent agreement with the IMF on the Extended Fund Facility (EFF) program. In this situation, the Bank would aim to provide around $1.2-1.5 billion annually in investment lending, including a 'core" program of relatively straightforward projects in infrastructure and the social sectors. In addition, the Bank would be willing to provide up to $1.5 billion annually in relatively fast- disbursing assistance if substantial progress was achieved on key structural reforms in specific areas of the economy, such as agriculture and the social sectors, that are critical to the long-term sustainability of the stabilization process. Over the past year, the Bank has been working with the Govermnent, both within the framework of the EFF negotiations and in separate discussions, to develop a consensus on specific programs of structural reforms that would allow these latter operations to move forward. In the meantime, the Bank has continued to prepare 6-7 priority investment projects as the basis for a sustained program of Bank support for the Russian economy over the medium term. 2.2 The proposed operation is fully consistent with the CAS described above. In particular, it would support two of the CAS's main objectives: (i) to moderate the impact of transition on socially vulnerable groups by maintaining social services and infrastructure while improving the efficiency of social expenditures; and (ii) to establish the Bank as a trusted and reliable development partner through the financing of high priority public sector investments and policy advice on key health sector issues. In terms of the specific sectoral objectives outlined in the CAS, this operation will help to rationalize investment in the health sector by giving priority to primary and secondary health care facilities. The proposed project also supports the Ministry of Health and Medical Industry's strategy of emphasizing primary and outpatient care. B. HEEALTH SECTOR STRATEGY Principles of Intervendion 2.3 Russia's current transition to a market economy may increase social strains even further, producing greater morbidity and mortality. Thus, the situation requires careful health interventions, not only to stem potential death and disease, but to reverse the recent adverse trends in health status. There is no one right formula or sequence for reform; nor is there a quick fix that will dramatically improve the health status of the population and reduce preventable deaths overnight. In spite of the rather grim picture of health care in Russia, the country is fortunate to have many strengths on which to build-notably, the almost universal access to care, a system of community-based polyclinics, and a large base of human resources. To help Russia to capitalize on these assets while reforming its economy and health care system, Bank interventions in the sector should be guided by the following three principles: Page 12 Bank Strategy and Lessons Learned From Previous Bank Experience a. Maintaining equitable access to services including coverage of the poor and vulnerable groups; b. Cost effectiveness and affordability; and c. Improving the quality of health care to ensure appropriateness, efficiency and effectiveness. Strategic Goals 2.4 It should be noted that, although these principles would appear to be just and rational, they have sparked debate worldwide, and have been difficult to achieve. Nevertheless, they remain goals to which many countries aspire. Thus, to help the Government achieve them, the Bank would support the following: a. Feasible reforms in health care financing, management and service delivery that seek to provide efficient, cost-effective, decentralized care; b. Primary care, which can result in fewer referrals to higher levels and better out- patient treatment for common health problems; c. The development of public health institutions and medical education that focus on health promotion and primary care (that involves expanding the discipline of family medicine); and d. Improved technology and facilities at the hospital level, in conjunction with downsizing the number of beds and facilities. 2.5 The Bank's work program for the health sector would aim to include rigorous sector analyses that can support well-focused policy advice along with lending that addresses the Government's primary concerns. Project design would need to reflect the implementation constraints imposed by administrative and Government structures and by the latter's lack of familiarity with Bank policies and guidelines. In addition, it would also need to reflect the fact that health care is provided and financed by regional governments whose needs must be addressed; and, it would try to support the MOHMI and other federal entities' attempts to define their roles and perform effectively in a decentralized system (as these structural changes add new layers of complexity). Further, it would attempt to address the issue of health care financing (in order to provide appropriate incentives and adequate resources), and the delivery of services, where outdated protocols and organizational structures impede efficient resource allocation. C. PROPOSED LENDING PROGRAM 2.6 Modernizing and upgrading the health system will require large amounts of investment in a system where know-how and technology are out of date and infrastructure is run-down from years of neglect. The focus of Bank support will be to help the various institutions and individuals involved in health sector reform (federal and local public authorities, health facilities, health workers and consumers) define and carry out their roles under the changing system. Bank input will consist of technical advice and investment financing. Russian Federation: Medical Equipment Project Page 13 2.7 In the context of stagnant and declining real resources for social services, the Bank is developing three projects that are designed to meet (i) the immediate needs for maintaining core services operating at adequate levels and (ii) longer term objectives of improving resource utilization (efficiency) and outcomes (effectiveness). In addition to the proposed Medical Equipment Project, there are two other projects in the lending program which either deal exclusively with or have a significant health component. 2.8 The proposed Health Reform Pilot Project would serve as a template for more comprehensive health sector reform in Kaluga and Tver oblasts. It would support improvements in health financing, including more rational use of available resources through appropriate incentives to providers. It would also address service delivery issues including clinical protocols and provision of care by appropriate level facilities (e.g., outpatient whenever possible). Because it will have a longer implementation period, it can support the development of new approaches to the organization and delivery of health services, including fundamental reorganization of the health care delivery system to emphasize ambulatory care. A particular focus of the project would be improving provider payment mechanisms to introduce incentives for more efficient provision of health services. 2.9 The Community Social Infrastructure Project supports construction-related investments in three sectors-health, education and water supply. A pilot project directed at Novosibirsk and Rostov oblasts, it aims to improve the allocation of public expenditures at the oblast level while supporting rehabilitation and upgrading of inadequate and deteriorating social infrastructure. The project would primarily finance deferred maintenance and restoration of service capacity of social sector institutions, such as schools, hospitals and polyclinics. 2.10 While all of the health-related projects in the Bank's lending pipeline have complementary objectives which target major issues in the sector, comprehenrive health reform in Russia, as in other industrialized countries, will undoubtedly be a long-term evolutionary process. D. LESSONS LEARNED FROM PREvIous BANK EXPERIENCE 2.11 The proposed Medical Equipment Project would be the Bank's first lending operation specifically aimed at the health sector of the Russian Federation. Many valuable lessons of experience-drawn from other Bank-assisted projects in Russia and from health projects in other countries-have been taken into consideration during project preparation and have been incorporated into its design. 2.12 Project performance in Russia is affected by the same issues as in other countries; in particular, insufficient Borrower ownership of projects and lack of implementation capacity have already impacted negatively on project implementation. In addition, as a relatively new Borrower, lack of familiarity with the Bank's procurement guidelines and loan processing procedures has also contributed to delays in project implementation. The first and second Country Portfolio Performance Reviews (CPPRs) for Russia in September 1994 and February 1995, respectively, made the following recommendations to address the implementation issues which have been specifically identified: a. Project design should be simple; b. An appropriate balance of local and international expertise should be used during project preparation; Page 14 Bank Strategy and Lessons Learned From Previous Bank Experience c. Agreement should be reached early with the Borrower on issues such as cost recovery and nearly all project conditionality should be satisfied by the time of negotiations; d. An implementation unit should be established early during the project preparation stage; e. The PPIU should be properly trained in Bank procedures and endowed with sufficient authority, staffing, and other resources to perform its responsibilities; f. External technical assistance should be provided in areas where the Borrower's experience is limited, e.g. procurement; and g. Implementation delays should be avoided by advancing--as much of the procurement process as possible to the project preparation stage. 2.13 The first Rehabilitation Loan (L35130) to Russia which financed US$118 million of pharmaceuticals, raw materials for pharmaceutical production, and spare parts for medical equipment, provided many practical lessons of experience relevant to the proposed project: a. Availability of counterpart funds and applicable taxes should be adequately appraised in order to minimize delays at the time of delivery; b. Procurement organized on the basis of positive "shopping lists" is both possible and efficient; c. Centrally organized procurement can produce substantial price discounts; and d. Records are generally well kept which allows for satisfactory inspection, forwarding and distribution of goods. 2.14 Experience with health projects in other countries underscore many of the above mentioned lessons. For example, the inadequate capacity of a Borrower to implement human resource development projects is often a factor in negative project performance. Additionally, the inability of the Borrower to provide the necessary counterpart funds is mentioned as a particular area of concem in human resource oriented projects. Bank experience with health projects has in general provided the following additional lessons applicable to the proposed project: a. Participatory project planning is crucial-equipment delivered to a facility should be based on the needs of that particular facility; b. End-users must be trained in the use and maintenance of equipment with which they are unfamiliar or the equipment risks being under-utilized; and c. Questions of sustainability and project risks should be adequately addressed-the capacity of the Government to mobilize resources to cover future costs should be realistically assessed. Russian Federation: Medical Equipment Project Page 15 2.15 In sum, the proposed project has benefitted from the previous experiences of Bank- assisted projects in Russia and elsewhere. All of the above lessons were taken into account during project preparation to facilitate timely and successful project implementation. The following chapters will illustrate how these lessons have been incorporated into the proposed project's design. Russian Federation: Medical Equipment Project Page 17 III. PROJECT OBJECTIVES AND DESCRIPTION A. PROJECT OBJECTIVES 3.1 The purpose of this project is to initiate structural reform of the health care system in Russia. Specifically, the proposed Medical Equipment Project is designed to: a. Increase the availability, range and quality of services provided by primary health care facilities and raion hospitals; b. Reorient service delivery toward more cost effective health care; c. Decentralize decision making for capital investments to the facility level; and d. Support policy development through the introduction of national health accounts. 3.2 Because of the large number of facilities which are potentially eligible to participate in the project (up to 700 hospitals and 10,000 polyclinics), the project proposes to monitor its impact on development objectives by collecting utilization data, on a sample basis, for equipment delivered to each of the participating oblasts and by establishing that all equipment has been delivered to and installed at the designated sites. B. PROJECT DEVELOPMENT 3.3 The proposed project has been developed in response to the Ministry of Finance's request for a quick-disbursing operation which would provide tied in-kind budgetary support to selected oblasts2 to supplement the usual mechanism of untied block grants. Until now the majority of federal budgetary support has been through the latter mechanism. Even in the cases of specific federal health programs (e.g., Children of Chernobyl), very often the use of funds is only loosely related to the program objectives and there is generally little, if any, monitoring of expenditures and outcomes. Therefore, this operation represents a significant step in terms of federal oblast fiscal relationships in that it would help to establish a precedent of tying federal budgetary support to well targeted, high priority programs. 3.4 As a preliminary step preceding comprehensive health reform, the proposed project would strengthen selected facilities-particularly, polyclinics and raion hospitals-whose role would need to be enhanced to increase efficiency in the provision of health care. Specifically, the equipment supplied would enable polyclinics to provide, on a less expensive outpatient basis, services currently offered only in hospitals. Similarly, equipping raion hospitals to provide a wider range of services will avoid unnecessary referrals to the central oblast hospitals and facilitate follow-up on patients' post-hospital care. The project would also strengthen the Federal Government's capacity to monitor health spending which is an essential step in rationalizing health expenditures. The proposed project can, therefore, be justified on the basis of its contribution in preparing for more comprehensive reform. 2 The Russian Federation comprises 89 oblasts, republics, krais and okrugs. The terms "oblast" and "region' are used interchangeably within this report to refer to them. Page 18 Project Objectives and Description C. PROJECT DESIGN 3.5 Project beneficiaries would be health care facilities in 34 oblasts selected by the Ministry of Finance (MOF) (see list in Annex A and IBRD Map No. 27183). In order to avoid the need for a protracted period of project preparation, targeted facilities would select from a carefully developed "positive" list of equipment which has been designed to provide basic and essential medical equipment which would be generally useful, even in the event of a major restructuring of the health care system in the future. 3.6 The strategy underlying project design is to provide inputs that would help meet immediate needs to support short-term actions aimed at improving the health status while, at the same time, positioning the targeted facilities to respond to future policy changes geared toward establishing a more efficient health care system. The targeted facilities include all outpatient facilities plus raion hospitals and maternity homes. The emphasis on outpatient facilities is intended to position the health care system to provide a larger proportion of services through ambulatory, rather than in-patient, facilities in the future. This is a trend which is already well established in other industrialized countries. The reason for including only raion hospitals and maternity homes as potential beneficiaries is to strengthen these secondary level facilities to be able to provide services which are now provided by higher level facilities. Oblast level hospitals (tertiary level facilities) have been excluded from participation, because, on the whole, they have, in the past, received a disproportionate share of investment funds. Specialized and district hospitals have been excluded because, in the event of a comprehensive program of rationalization of health care facilities, many of these institutions would likely be candidates for closure or redeployment to non-medical uses, such as elder housing. 3.7 One important feature of project design is the requirement that beneficiary facilities be required to place their own orders. The allocation of the loan to participating oblasts will be made by the MOF. Participating oblasts will, in turn, indicate the allocations available to participating facilities. Each participating facility will be provided with an order form which includes estimated delivered cost for each item and would have to select the highest priority medical equipment within its allocation. Although simple in principle, this concept is an important innovation in terms of the Russian health care system where, even following decentralization, these kinds of decisions are not usually made at the facility level. 3.8 The 34 participating oblasts were selected by the Ministry of Finance and include oblasts which would otherwise have been eligible for non-earmarked block grants from the federal government. The allocation of funds among participating oblasts was also determined by the Ministry of Finance. An analysis of the oblasts selected for participation indicates that they are fairly average overall in terms of levels of health spending, availability of health facilities and physicians and health status of the population. Within the parameters described above (para. 3.6), the oblast health department selected the facilities to participate in the project. Participating facilities will place their equipment orders within the allocation indicated by the oblast health department. The fact that resources provided under the project are finite and are not sufficient to meet all the needs of facilities eligible to participate substantially mitigates the risk of over-ordering by facilities. Facilities will be compelled to assess the tradeoffs and determine the most productive use of available resources. Russian Federation: Medical Equipment Project Page 19 D. PROJECT DESCRIPTION 3.9 The proposed project would have three components: (a) medical equipment; (b) national health accounts; and (c) project management. Medical Equipment (US$300. 0 million of total project costs) 3.10 The project would finance medical equipment, related supplies and training, furniture, spare parts and maintenance equipment to targeted health care facilities in 34 oblasts. The target facilities comprise primary (polyclinics, women's clinics and feldsher stations) and secondary (raion hospitals and maternity homes) health care facilities. Providing medical equipment to these facilities would increase the availability and range of health services they are able to provide and would contribute to providing more cost effective diagnosis and treatment. In the past, such facilities have been neglected in favor of more sophisticated facilities such as central oblast and specialized hospitals. This intervention would de facto redirect a significant part of the health sector investment budget to lower level, more cost effective providers. Health care facilities in participating oblasts would select equipment from an agreed list prepared to reflect the responsibilities and functions of the facilities (Annex B). As a condition of participation, project oblasts are required to ensure that beneficiary facilities participate directly in ordering equipment (para. 7.2 (a)). 3.11 The equipment list has been developed to allow beneficiary facilities to fill the gaps in medical equipment available in primary and secondary level health care facilities, including maintenance equipment and spare parts. The list was designed to enable the targeted facilities to meet the following clinical objectives: a. Primary level facilities should perform activities that represent the first contact between the population and the health care system. These activities include: i. Primary outpatient examination; ii. Screening of social pathologies; iii. Medical support for healthy children (including vaccination); iv. Prenatal medical support and care; v. Emergency care; vi. Chronic disease care (e.g., tuberculosis); vii. Education and community support; viii. Referral to higher level facilities; ix. Short hospitalization; and x. Basic diagnostics (small laboratory and basic radiological systems). b. Secondary level facilities' activities are complementary to those delivered by primary care facilities and include: i. Medical-surgical emergencies and acute care; ii. Deliveries; iii. Hospitalization of cases referred by primary facilities; iv. Laboratory; v. Radiology; vi. Medical support for cases referred by the primary level; vii. Surgery; and viii. Specialized diagnosis and treatment. Theoretically, only a relatively small number of cases should need to be referred to the tertiary level. Page 20 Project Objectives and Description 3.12 However, recognizing that the health care network in Russia suffers from excessive conipartmentalization, the list has also been designed to encourage a reorientation of the system, including clarifying the respective roles of primary and secondary level facilities. 3.13 In formulating the list of medical equipment which can be provided under the project, both the present situation in the Russian Federation in terms of epidemiology (mainly the morbidity and mortality structure) and the organization of the existing health care system were taken into consideration. The list of medical equipment to be provided under the project would enable health care facilities to deal more effectively in diagnosing and treating cardiovascular disease, trauma and cancer. The final list of medical equipment and related supplies reflects the advice of local practitioners and specialists in medical equipment, the relevant federal ministries, as well as that of foreign experts who have also had experience with the Russian health care system. 3.14 As mentioned above, the positive list is intended to address the highest priority health problems identified by analysis of epidemiological data. The major features of the morbidity and mortality structure in Russia were discussed in Chapter I. In particular, the following were considered in formulating the equipment list: a. High rates of ischemic heart diseases, cerebro-vascular diseases, cancer, and respiratory diseases. Equipment to be provided would support screening programs and simple treatment procedures to address these diseases. b. Trauma and poisoning is the second largest cause of death, and, as if affects mainly younger and middle aged men, it causes a large loss of potential years of life. Consequently, the equipment list includes items to strengthen emergency medical care. C. Maternal and child health constitute one of the most serious public health problems in the Russian Federation. This equipment list includes all the necessary means to strengthen a prenatal care program, including equipment for antenatal care, deliveries, postpartum care, neonatal care and vaccination (cold chain). 3.15 Because of regional differences, even similar facilities may have different needs in various parts of the Russian Federation. These variations mandate that the equipment list should comprehensively cover the morbidity/mortality structure, including the specific needs of certain regions or oblasts, within, of course, the functions defined above. 3.16 To help ensure that the equipment would be fully utilized, the proposed project would also finance necessary consumable supplies, and technical training in the operation and maintenance of the equipment. Training would be organized by suppliers for medical personnel at participating facilities. In addition, participating facilities would provide additional clinical training, if needed, in the use of the more complex equipment (para.7.2 (b)). The project would finance up to about one year's supply of consumables with the medical equipment provided. As a condition of participating in the project, however, oblast administrations were requested to ensure that adequate resources be made available so as to make full use of the equipment (para. 7.2 (c)). Russian Federation: Medical Equipment Project Page 21 Nadonal Health Accounts (US$3.0 million of total project costs) 3.17 With decentralization of the responsibility for health sector financing and the introduction of mandatory health insurance in 1993, tracking of health expenditures has become increasingly complicated. The lack of reliable data on sources and uses of health finance has been a major- impediment to the development of health sector policy during the economic transitioni. Accurate and timely information on health expenditures is important for many reasons. It is an essential element in providing the analytical framework that is needed to: effectively plan and manage health programs; deternine appropriate resource allocations both within the health sector and among health and other sectors; evaluate the causes of changes in health status; and facilitate comparisons with health care systems in other countries. During negotiations, overall agreement was reached on designing and implementing a system of national health accounts (para 7.3 (a)). Because of the nature of this task, which would cut across ministries and might eventually create the need for additional mandatory statistical reporting on the part of both public and private entities, it was required that a governmental decree endorsing this work be issued as a condition of negotiations. 3.18 The project would provide the necessary support to develop and implement a system of national health accounts (NHA) for Russia. This component would complement ongoing work financed under an IDF grant to improve the quality of national income and product accounts for Russia and implementation of this component will be done in conformity with efforts to improve account standards nationally under the Ministry of Finance. The approach that would be followed is to: develop a framework for national health accounts which is comparable to those used in other industrialized countries but which respects the existing statistical reporting conventions in Russia; inventory the sources of data that are currently available; arrange for existing data to be compiled into NRA format by a designated agency (most likely MOHM); identify gaps in available data and propose least cost methods for obtaining the required data (Annex C). The proposed project would include financing of consultant services for survey design and data collection, computer hardware and software to support this effort and study tours of NHA systems in OECD countries. Project Management (US$2.0 milon of total project costs) 3.19 A Project Preparation and Implementation Unit (PPI has been established as an agent of the Ministry of Finance to administer and manage the proposed project. The PPIU would continue in existence through project implementation to loan closing and would then be disbanded. The proposed project would finance the operating costs of the PPIU, including salaries of long-term consulting staff, office accommodation, supplies and equipment, utilities, staff travel and training, and consultant services. Although the PPIU would not continue as an ongoing institution after project completion, staff trained in procurement and project management would likely be absorbed into other institutions requiring these skldls and would continue to contribute to the successful implementation of the Government's investment program. E. ENVIRONMErAL AsPECS 3.20 This is a category "C" project. No adverse environmental impacts are anticipated. Participating facilities would be required to certify that physical plant meets established federal safety standards before ordering equipment, such as radiology eqipmlent, which is subject to such standards. Russian Federtion: Medical Equipment Project Page 23 IV. PROJECT COSTS, FINANCING, PROCUREMENT AND DISBURSEMENTS A. PROJICr CoSIS 4.1 The cost of the project is estimated at US$305.0 million equivalent including duties and taxes. The estimated local costs and foreign costs by components are shown in Table 4.1 below. Detailed cost estimates by type of expenditure are contained in Annex D. Table 4.1: Summary of Project Costs by Component US$ milions Local Foreign % Foreign % Total Costs Costs Total Costs Base Costs 1. Medical Equipment 66.2 220.0 286.2 77 98 2. National Health Accounts 1.3 1.6 2.9 56 1 3. Project Management 1.4 0.6 2.0 28 1 Total BASE COSTS (AUGUST 1995) 68.8 222.3 291.1 76 100 Physical Contingencies - - - - - Price Contingencies 1.4 4.5 5.9 76 2 Total PROJECT COSTS 70.2 226.8 297.0 76 102 Taxes and Duties 8.0 - 8.0 Total COSTS INCL. TAXES & DUTIES 78.2 226.8 305.0 BaiL of Cost Eslimates 4.2 Project costs have been estimated in US dollars because of the difficulty in forecasting inflation rates for local currency. Cost estimates for the medical and other equipment, spare parts and supplies have been derived from recent studies by local and foreign medical health specialists when developing the list of goods to be financed under this project. The goods to be financed are appropriate to the basic needs of the health care system as needed to accomplish the objectives of the project. The staff-month rates for both the foreign and local specialists are based on actual cost experience in several on-going Bank assisted projects in the Russian Federation. Foreign Costs Component 4.3 The foreign costs of each component was estimated as follows: (a) medical and computer equipment; spare parts and supplies, 80%; (b) studies and surveys-for studies with foreign participation, 90% and for those carried out by local consultants, 10%; and (c) PPIU operting expenses, 10%. The foreign costs component of US$226.8 million represents about 78% of total project costs, net of duties and taxes which reflects the nature of the project (i.e., a high percentage of goods to be procured utilizing ICB and LIB procedures). Page 24 Project Costs, Financing, Procurement and Disbursements Condngency AUlowances 4.4 Since project expenditures would be limited by the total allocation for the various components, no physical contingencies have been included. Price contingencies, representing an average of about two percent of the base cost of the project, have been included on both local and foreign costs, expressed in US dollars, since a high percentage of the funds are expected to be committed in the first year of implementation. Taxes and Duties 4.5 The proposed project would be suibject to taxes and duties at rates in effect at the time of delivery. Medical equipment is currently exempt from both customs duties and taxes. However, multiple use items (e.g. furniture and some supplies) would be subject to customs duties and taxes. Therefore, an average total tax rate of 3% has been used. For computer hardware and software, taxes of 21.5% has been applied to the total estimated cost and 5% customs duties for that portion expected to be imported. Regulations regarding taxes on consultants varies depending on, inter alia, the length of contract; therefore, taxes have not been identified and included in the cost estimate. 4.6 The current estimated tax liability of the project (US$8.0 million) is calculated based on the above described expectations. However, it is recognized that the current tax legislation may change. The PPIU would continue to monitor any changes in rates or collection procedures related to customs duties and VAT. The participating regions were informed that they would be responsible for financing all taxes (up to 20% of project costs or US$54 million). Therefore, the participating oblasts would be expected to finance any increase in project tax liabilities above the current estimated amount. B. PROJECT FINANCING 4.7 The proposed project is expected to have a total project cost of US$305.0 million (including taxes and duties of US$8.0 million), with a foreign cost component of US$226.8 million. The proposed Bank loan of $270 million would finance 100 percent of the foreign costs and 55 percent of local costs excluding taxes and duties. Participating regions would provide counterpart funds amounting to 45 percent of local costs (38 percent net of taxes) and 11 percent of total project costs (9 percent net of taxes). In order to participate in the project, regions would provide the expected counterpart funds and finance all applicable customs duties and taxes (para. 7.3 (d)). Loan funds would be made available by the Government to participating regions on a grant basis. The financing plan is shown in Table 4.2 below: Table 4.2: Financing Plan USS millions Project Costs Local Foreign Incl. Taxes and % of Total Costs Costs Duties Project Costs Governmentt 35.0 - 35.0 11 IBRD 43.2 226.8 270.0 89 Total PROJECT COSTS 78.2 226.8 305.0 100 Includes counterpart funds from all of the participating regions. Russian Federation: Medical Equipment Project Page 25 Counterpart Funds 4.8 Counterpart funds collected from the participating regions would be used to finance local expenses in the amount of US$27 million equivalent. It is expected that these expenses would be related to the local storage, transportation and insurance of equipment, the services of the Consolidation and Forwarding Agent, and locally manufactured equipment, spare parts and supplies. Recurent Cost Implications and Sustainability 4.9 The provision of replacement or additional medical equipment to health care facilities would result in an increase in depreciation (a non-cash expense) and, in some cases, would create the need for additional consumable items, such as X-ray film, reagents, etc. As indicated in the financing plan, participating oblasts are required to contribute about 10 percent of total project costs (plus applicable customs duties and taxes). The majority of this contribution would likely fall due in the first year of project implementation. Within this timeframe, the proposed project would finance about one year's supply of consumables to support utilization of the medical equipment provided. Following this, the participating oblasts would commit to providing sufficient resources to supply the required consumables (para 3.16). C. PROCUREMENT Summary of Procurement Procedures 4.10 The PPIU would be responsible for managing procurement under the proposed project. A Procurement Consultant would assist the PPIU in all aspects of the procurement process. Procurement of goods and services would be in accordance with the Bank's "Guidelines, Procurement under IBRD Loans and IDA Credits" dated January 1995 (revised January 1996) and "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" dated August 1981. Standard Bidding Documents (Goods) and Form of Contracts (Services) issued by the Bank would be used as appropriate for the goods and services to be procured. Goods would grouped in the most efficient manner possible and the proposed packaging would be reviewed by the Bank. The estimated procurement arrangements are presented in Table 4.3 and described below. Page 26 Project Costs, Financing, Procurement and Disbursements Table 4.3: Summary of Proposed Procurement Arrangements (US$ millions) Procurement Method ICB NCB Other NBF Total 1. Goods a. Medical Equipment 225.5 3.4 23.2" - 252.1 __________ _________ __________ _________ (211.5) (2.5) (19.5) (233.5) b. Spare Parts - -7.4e - 7.4 b. Spare Parts == (4.2) = (4.2) c. Supplies 21.1 1.9 - 23.0 (19.7) (1.6) (21.3) d. Computer Equipment 1.1 0.3" - 1.4 (1.0) (0.3) (1.3) 2. Consultant and Technical Services a. Procurement Consultant - 2.5w - 2.5 _________ ~~~~(2.5) __ _ _ _ (2.5) b. Consolidation and Forwarding Services - - 13.5C - 13.5 (2.0) (2.0) c. Surveys and Advisory Services - - 1.5)' - 1.5 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _(1.5) _ _ _ _ _(1.5) d. Study Tours - - 0.6' - 0.6 l ________________________________________ _ _______ (0.6) (0.6) 3. Administration / .Odl - 1.0 PPIU Operating Costs (1.0) (1.0) 4. Project Preparation Facility - - 2.0' - 2.0 l _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (2.0) (2.0) TOTAL PROJECT COSTS 247.7 3.4 53.9 305.0 TOTAL BANK FINANCED (232.2) (2.5) (35.3) (270.0) Figures in parentheses are representative amounts financed by the Loan. " It is estimated that US$47.8 million of goods would be procured using LIB (US$19.4 million), IS ($4.3 million) NS ($2.0 million), and DC (US$7.1 million) procedures. s Consultant services (US$4.6 million in addition to the US$1.5 million financed by the PPF) would be procured in accordance with World Bank Guidelines: Use of Consultants, 1981. C/ Technical services (US$13.5 million) to be provided by the Consolidation and Forwarding Agent would be procured in accordance with LIB procedures. dl Administration and operating costs of the PPIU valued at US$1.5 (in addition to US$0.5 financed by the PPF) would be procured according to Bank guidelines. " A PPF of US$2.0 million would finance initial services of Procurement Consultant ($1.5 million) procured in accordance with World Bank Gidelnes: Use of Consultants, 1981. The PPF would also finance US$0.5 million of initial PPIU operating expenses. Russian Federation: Medical Equipment Project Page 27 Procurement of Goods 4.11 Goods (US$283.9 million) consisting of medical and computer equipment, spare parts and supplies would be procured utilizing the following methods of procurement: a. International Competitive Bidding (ICB) procedures would be utilized for medical equipment, supplies and computer equipment estimated to cost US$247.7 million (87% of total goods) for contracts above US$300,000 equivalent each. It is estimated that there would be approximately 110 contracts with an average value of US$2.2 million awarded using ICB procurement procedures. b. Limited International Bidding (LIB) procedures would be used for purchases, estimated to cost an aggregate of US$19.4 million (7% of total goods). LIB would be used for specialized purchases such as endoscopic and ultrasonic medical equipment where few qualified suppliers are available. The Procurement Consultant would ensure that all qualified suppliers are invited to bid. It is estimated that there would be approximately 5 contracts with an average value of US$3.9 million awarded using LIEB procurement procedures. c. National Competitive Bidding (NCB) would be permitted for the procurement of specialized medical instrument sets and furniture with a contract value below US$300,000 because the local industry is very competitive in comparison to foreign suppliers. An aggregate limit of US$3.4 million (1 % of total goods) would be permitted utilizing NCB procedures acceptable to the Bank. It is estimated that there would be approximately 12 contracts with an average value of US$283,000 awarded using NCB procurement procedures. d. International and National Shopping (IS and NS) procedures would be used for readily available, off-the-shelf items of small value and standard specifications. It is expected that consumables, non-proprietary spare parts, minor medical equipment and the PPIU's computer equipment would be procured using ISINS procedures (2 % of total goods). IS procedures would be used for goods valued at less than US$300,000 up to an aggregate US$4.3 million. It is estimated that there would be approximately 40 contracts with an average value of US$215,000 awarded using IS procurement procedures. NS procedures would be used for such locally available goods valued at less than US$50,000 up to an aggregate of US$2.0 million. It is estimated that there would be approximately 45 contracts with an average value of US$45,000 awarded using NS procurement procedures. Three quotations would be required for each of the contract awards. Under IS procedures, the quotations would have to be from at least three suppliers from at least two eligible countries. e. Direct Contracting (DC) for procurement of spare parts, inter alia, where the required goods are proprietary and obtainable from only one source may be utilized with prior review by the Bank. This method would primarily be used after the first round of bidding for proprietary spare parts and proprietary consumable items. An upper limit of about US$7.1 million (3% of total goods) utilizing this procedure is anticipated. It is estimated that there would be Page 28 Project Costs, Financing, Procurement and Disbursements approximately 75 contracts with an average value of US$95,000 awarded using DC procurement procedures. f. Procurement from UN Agencies. Should it be determined that procurement of medical equipment and supplies could be carried out in a more efficient and effective way from UNICEF or other UN Agencies, then such procedure could be used, subject to prior review by the Bank. Notification of Business Opportunities 4.12 A General Procurement Notice was published in the January 31, 1996 issue of the UN publication "Development Business" and, as appropriate, would be updated and published annually thereafter. For goods to be obtained by ICB, individual bidding opportunities would be advertised prior to the availability of bidding documents and transmitted to potential bidders who expressed interest in bidding in response to the published General Procurement Notice. These advertisements would be in English. The specific notice for the first round ICB procurement was published in the April 26, 1996 issue of Izvestia and in the April 30, 1996 issue of the Financial Times. 4.13 In order to encourage the maximum possible competition in supplying medical equipment to be provided under the project, a business opportunities seminar was conducted in Moscow on December 8, 1995. The assistance of the Ministry of Health and Medical Industry was utilized during the preparation of the seminar to identify local manufacturers who might be interested in participating. In addition, the seminar was announced in the November 27, 1995 issue of the daily Moscow newspaper "Business World" so that any interested suppliers not directly contacted could also participate. Preference for Domestically Manufactured Goods 4.14 For contracts for goods to be awarded on the basis of ICB, the Borrower may, as set forth in the Loan Agreement, grant a margin of preference of 15 % or the amount of applicable customs duties, whichever is lower, to qualified domestic manufacturers of goods. For many of the items to be procured, it is envisaged that Russian suppliers will be competitive. Procurement of Consulting and Technical Services 4.15 Specialists and/or consulting firms (US$4.6 million in addition to US$1.5 financed by the PPF) would be hired on terms and conditions (including review of their qualifications), in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines for the Use of Consultants by the World Bank Borrowers and by the World Bank as Executing Agency" dated August 1981. The services of the Procurement Consultant (consisting of a joint venture between a foreign and national firm) have already been contracted following competitive procedures. The provision of these services, initially financed by the PPF, would continue during project implementation. Other consulting contracts valued above US$200,000 would be awarded to firms and/or individuals on the basis of competitive procedures using short-lists. Contracts below US$200,000 may be awarded to firms and/or individuals on the basis of competitive or direct contracting procedures in accordance with the Guidelines. 4.16 Technical services to be provided by the Consolidation and Forwarding Agent (US$13.5 million) would be obtained by LIB procedures. Work included, inter alia, would be provision of warehouse space in Russia, receipt and inspection of goods, insurance, consolidation and transport to end- Russian Federation: Medical Equipment Project Page 29 users. The Project Implementation Plan (Annex J) for further details on the duties and responsibilities of the Consolidation Agent. Trining 4.17 For local and overseas training and study tours financed under the project (US$0.6 million) the qualifications of candidates along with their course of study, proposed training institutions, and costs would be subject to prior review by the Bank. A training plan would be developed as part of the National Health Accounts component. Operatng Costs of the PPIU 4.18 All costs of maintaining the PPITJ (US$1.0 million including US$0.5 million financed by the PPF) would be eligible for financing under the loan, including salaries of long-term consultancy staff, travel, office rent and utilities, minor office equipment, etc. Operating costs of the PPIU would be expensed on the basis of on annual budget approved by the Bank and procured in accordance with Bank guidelines and the procedures agreed upon for goods and consulting services procured under the project. All expenditures are expected to cost less than US$50,000 each and would be subject to ex-post review. Project Preparaton Faciliy (PPF) 4.19 To advance project preparation, a PPF in the amount of US$1.0 million (Letter of Agreement No. 277-0 RU) approved by the Bank on August 2, 1995 and countersigned by the Government on September 6, 1995 has been used to finance the services of the Procurement Consultant. A supplemental PPF of US$1.0 million (Letter of Agreement No. 277-1 RU) was approved by the Bank on March 4, 1996 and countersigned by the Government on April 2, 1996 to finance the continued services of the Procurement Consultant, other consulting services, and operating expenses of the PPIU until Loan effectiveness. Review By Bank of Procurement Decisions 4.20 Prior review of bidding documents for goods, including review of evaluations and recommendations for award of contracts, would be carried out for all procurement utilizing ICB and LIB procedures; all recommendations and documentation for direct contracting woulld also be subject to prior review. To ensure compliance with the Bank's Procurement Guidelines, the first two tontracts to be awarded by National Competitive Bidding (NCB) and International Shopping (IS) procedures would be subject to prior Bank review. The list of goods to be procured and the standardized bidding documents for these transactions would also be subject to prior review. Contracts for consultant services would be subject to prior review for those contracts greater than US$50,000 for individuals and US$100,000 for firms except that TOR for all consulting services shall be reviewed on a prior review basis by the Bank. Accordingly, over 90 percent (by volume) of procurement transactions would be subject to prior review by the Bank. The documentation for all procurement transactions not subject to prior Bank review could be subject to ex-post review during the Bank's periodic project supervision missions. 4.21 After award, should any material modifications or waiver of the terms and conditions of a contract result in an increase above 15 % of the original price, the Bank would reserve the right of prior review of such modifications (included would be modifications in contracts for Consulting Services). Page 30 Project Costs, Financing, Procuremnent and Disbursements Procurement Monitoring and Reporting 4.22 The Procurement Consultant would be responsible for establishing and maintaining a computerized monitoring and reporting system acceptable to the PPIU and Bank that would, inter alia, provide an up-to-date inventory of goods procured, consolidated, and delivered to end-users. Status reports from this system would accompany the PPIU's regular project progress reports sent to the Bank. Country Procurement Assessment Report (CPAR) 4.23 A CPAR has not been prepared for the Russian Federation. A CPAR is scheduled to be undertaken and a report issued before the end of the current calendar year. For this proposed project, the Government would follow agreed procurement procedures (in accordance with Bank guidelines) as described above and as set forth in the Loan Agreement. D. DLSBURSEMENTS Schedule 4.24 The proposed loan would be disbursed over about three years which includes six months for the finalization of accounts and submission of withdrawal applications and other reports. The disbursement forecast (Annex E) is based on a detailed work program which is advanced due to the use of the PPF and which Bank staff consider realistic. The estimated project completion date is December 31, 1998 and the loan dosing date is June 30, 1999. Disbursement Percentages 4.25 The proceeds of the loan would be disbursed as shown below. Table 4.4: Disbursement Categories and Percentages Amount Description (US$ millions) Disbursements Percentage a. Goods 254.0 100% of foreign expenditures; 100% of local expenditures (ex-works); and 70% of expenditures of goods procured locally. b. Consolidation and Forwarding 2.0 100% of foreign expenditures Services c. Consultant Services and Training 6.0 100% (fellowships and study tours) d. PPIU Operating Costs 1.0 100% e. PPF Refinancing 2.0 Amount due according to Agreements No. 277-0 RU and No. 277-1 RU f. Unalocated 5.0 Total Loan Amount 270.0 Russian Federation: Medical Equipment Project Page 31 4.26 Disbursements would be fully documented except for (i) goods costing less than $300,000; (ii) technical and consultant services contracted with firms costing less than $100,000; and (iii) consulting services contract with individuals costing less than US$50,000; and (iv) PPIU operating expenses less than $50,000 where certified Statements of Expenditures (SOEs) would be used. Disbursement/procurement documents using SOE procedures would be retained by the PPIU and made available to Bank staff and to auditors. Special Account 4.27 To facilitate payments of small and medium size amrounts in foreign currency and all payments in local currency, the Ministry of Finance on behalf of the PPIU would open and maintain a Special Account in US dollars in a commercial bank acceptable to IBRD. The criteria are described in Annex F. The maximum authorized allocation of the Special Account would be US$1,500,000. The initial amount to be deposited at the beginning of disbursements would be US$500,000. This amount could be increased to the maximum authorized allocation once cumulative disbursements have reached US$2,500,000. The allocation to the Special Account would be replenished on the basis of satisfactory documentary evidence, to be provided to IBRD by the PPIU, of payments made from the account for goods and services required for the project. In addition, monthly bank statements of the Special Account, which have been reconciled by the PPIU, would accompany all replenishment applications. The minimum application size for payments made directly from the loan account or for the issuance of Special Commitment is 20% of the Special Account authorized allocation. Accounts and Auditing 4.28 In addition to the Special Account, the Ministry of Finance on behalf of the PPIU would establish and maintain a local currency Project Account. Each of the participating regions would directly deposit its share of the required counterpart funds (10 percent of the loan amount plus incurred taxes and duties) into the rouble project account following a timetable prepared to coincide with the equipment delivery. This schedule would be confirmed at the Project Launch workshop scheduled to occur directly after the bidding documents for the first round of procurement are issued and about 5 months before the first delivery of equipment. 4.29 The PPIU in coordination with MOF would be responsible for the appropriate accounting of funds provided under the loan and by the Borrower, would maintain consolidated accounts for the project and would prepare monthly financial reports, and would ensure that audits of the financial statements or reports are timely submitted to Bank. Accounting for all Special Account transactions and for all other project-related accounts would be maintained in accordance with international accounting standards. 4.30 Project accounts, including the Special Account, maintained by the PPIU would be audited annually in accordance with the Bank's 'Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank", dated March 1982 by auditors acceptable to the Bank. Audits would also be carried out, at the same time and for corresponding periods in accordance with the Bank's guidelines, for SOEs against which disbursements have been made or are due to be made from the loan and SOEs which would be included in the audit reports accompanying the financial statements. The audited financial statements for the Special Account, project accounts, and SOEs of the preceding fiscal year and the resulting audit report in such scope and detail as the Bank may reasonably request, including a separate opinion by the auditor on disbursements made against certified statements of expenditure, would be sent to the Bank within six months of the end of the Government's fiscal year. I Russian Federation: Medical Equipment Project Page 33 V. PROJECT STATUS, IMPLEMENTATION, EVALUATION AND SUPERVISION A. STATUS OF PROJECT PREPARATION 5.1 The project is in an advanced stage of preparation. As an early step, 37 oblasts were identified as eligible to participate in the project and notified of their tentative shares of the loan amount by the Ministry of Finance (Annex G). Three of oblasts decided not to participate in the project. As a consequence, the Loan amount was reduced from $300 to $270 million at negotiations. The Bank, MOHMI, and MOE have agreed upon the final positive list of equipment and supplies eligible for financing under the project as well as their detailed specifications. Orders for the first round of procurement have been submitted by the 34 participating oblasts amounting to more than $220 million of medical equipment and supplies. These orders have been consolidated and the draft bidding documents prepared by a Project Preparation and Implementation Unit (PPIU) which has been operational since early preparation financed by a Japanese Grant and by a Procurement Consultant appointed in December 1995 and financed by a PPF. The PPIU was formally established by MOF, MOHMI, and MOE prior to Loan negotiations. The PPIU convened a meeting of the selected oblasts in September 1995 to review in detail the terms and conditions of their participation in the project (Annex I) and to agree on a mechanism for the timely payment of counterpart fund contributions. Twenty-nine of the participating oblasts have provided MOF with letters confirming their intent to follow the conditions of participation; the five remaining letters are expected shortly. Receipt of the letter of commitment is a condition of procurement for each oblast. Therefore, the bidding documents-advertised in the April 26, 1996 issue of Izvestia and the April 30, 1996 issue of Financial Times-will be released following submission of the pending letters. It is expected that by the time of loan effectiveness, a significant proportion of the bidding packages would be issued and evaluated and the contracts would be ready for signature. B. PROJECT IMPLEMENTATION 5.2 The proposed project, to be implemented over a two and one-half year period, would be managed by the PPIU. Medical equipment to be provided under the project would be selected by the beneficiary health care facilities in the participating oblasts from an agreed list. As a condition of participation in the project, each of the participating regions are required to appoint a project coordinator to organize the region's medical equipment orders, monitor and report on project implementation and generally liaise with the PPIU (para. 7.2 (e)). The PPIU would be responsible for coordinating project activities with the participating oblasts and relevant federal ministries, managing procurement, signing contracts, authorizing disbursements, maintaining project accounts and complying with the reporting and auditing requirements detailed in the Loan Agreement. A condition of Board presentation was agreement of the MOF, MOE, and MOHMI on a Regulation (Annex H) which would establish the PPIU with acceptable authority and responsibilities (para. 7.4). This condition has been met. The authority of the PPIU to manage the project would be confirmed by the Government when it issues its internal decree on the implementation of the project following loan signature. 5.3 A Procurement Consultant (consisting of a joint venture between a foreign and local consulting firm) is assisting the PPIU to prepare bidding documents and would advertise specific bidding opportunities, distribute bidding documents, evaluate bids, recommend contract awards and supervise the work of the Consolidation and Forwarding Agent. A detailed work plan to this effect is included as an attachment to the Procurement Consultant's Inception Report. The Consolidation and Forwarding Agent Page 34 Project Status, Implementation, Evaluation and Supervision would be responsible for receiving and inspecting medical equipment, providing warehouse space and insurance and ensuring the delivery of the equipment to the final users. Further details on the roles and responsibilities of the PPIU, the Procurement Consultant and the Consolidation and Forwarding Agent are included in the project implementation plan presented in Annex J. 5.4 The Ministries of Economy and of Health and Medical Industry have reviewed and approved the positive list of medical equipment and supplies eligible for financing under the loan. MOE and MOHMI would also review and approve the detailed specifications of the equipment to ensure that the specifications meet applicable Russian standards and certification requirements. At negotiations, it was agreed that equipment and supplies meeting the agreed specifications and requiring certification would be reviewed by the authorized institutions on priority basis (para. 7.3 (b)). The certification process should not take longer than four months to complete. 5.5 The PPIU would also work in conjunction with an inter-agency Working Group-headed MOHMI and comprising representatives of the State Committee for Statistics (Goskomstat), MOF, Ministry of Economy, the Federal Mandatory Health Insurance Fund and the State Tax Service- established to coordinate the work on national health accounts. C. REPORTING AND EVALUATiON 5.6 As a condition of participation, the participating oblasts are required to report periodically on project implementation and equipment utilization (para. 7.2 (f)). The PPIU would submit monthly progress reports to the Bank. These reports would be submitted fifteen days after the end of each month following loan effectiveness. The format would be mutually agreed upon prior to the date of the first submission and would be modified as necessary during the implementation of the project. In addition to the monthly progress reports, an Implementation Completion Report (ICR) would be submitted to the Bank by the PPIU promptly after the completion of the project but in any event not later than six months after the loan closing date. Included in the ICR would be an assessment on the execution and initial operation of the project, its costs and benefits derived or to be derived, the performance of the Borrower and the Bank and other agencies involved regarding their respective obligations and accomplishments, and lesson learned. Project Monitoring 5.7 Because of the large number of facilities which are potentially eligible to participate in the project (up to 700 hospitals and 10,000 polyclinics), the project proposes to monitor its impact on development objectives by collecting utilization data, on a sample basis, for equipment delivered to each of the participating oblasts and by establishing that all equipment has been delivered to and installed at the designated sites. The sample utilization data would be transmitted from the selected beneficiary facilities to the designated oblast coordinator who in turn would collect and provide the information to the PPIU. The standard format for this report would be developed at the time of the project review shortly after the completion of the first round of procurement and when the delivery of equipment begins. At negotiations, the Government provided assurances that it would cause the participating oblasts to install and utilize the provided medical equipment at the intended facilities (para. 7.2 (g)). The terms of reference for the auditor engaged by the PPIU would include the responsibility to check, on a sample basis, that equipment is installed at its intended facility and is in proper working order. Project implementation would be monitored by tracking the volume of contracts awarded and signed, equipment delivered and loan disbursements. Russian Federation: Medical Equipment Project Page 35 D. WORLD BANK SUPERVISION 5.8 Because of the compressed timetable for project implementation, intensive supervision would be required, especially during the first year of implementation. Between 35 to 45 staff weeks and three missions would, on average, be required each fiscal year to supervise project implementation. Supervision missions would be staffed, as needed, by Bank staff and consultants knowledgeable in project management, contract monitoring, biomedical engineering, procurement, and national health accounts. Supervision requirements detailed in Annex K are based on the assumption that a strong, well staffed PPIU would be in place throughout project implementation. At negotiations, the Government confirmed that the PPIU would be adequately staffed and financed throughout the period of project implementation (para. 7.3 (c)). 5.9 Following completion of the first round of bidding, a comprehensive review of the project would be carried out to help the PPIU define the activities and timeframe required to complete project implementation and create a detailed plan for completing the remaining procurement. 5.10 The Moscow Resident Mission would provide day-to-day support on processing disbursement requests and other issues throughout the project implementation period. Russian Federation: Medical Equipment Project Page 37 VI. PROJECT JUSTIFICATION AND RISKS A. PRnoJCr JUSFCATION Framework 6.1 The proposed project is a component of the Bank's overall strategy for assisting the Russian Federation as set out in the Country Assistance Strategy (CAS) discussed by the Board on June 6, 19953. The project directly supports the priority objective described in the CAS to moderate the impact of the transition by, among other things, naintaining basic social services while improving the efficiency of public expenditures. By upgrading the stock of equipment in basic health facilities, it contributes directly to improving the quality of services in the beneficiary facilities. Purthermore, by redirecting investments to primary and secondary care facilities-a change unlikely to take place without the project, given historical patterns favoring highly-specialized inpatient facilities-it represents a first step in undertaking the broader reforms that would make the health system more sustainable and cost- effective in the long-run. 6.2 It is recognized that renewing the physical stock of basic facilities is only one measure of many required to achieve the broader reform objective of improving health carein Russia. In addition to this selective investment, the Russian health system would require, among other things: (i) introduction of new payment mechanisms that create incentives for more efficient behavior by providers; (ii) widespread retraining of providers to enable them to shift to more cost-effective and up-to-date clinical practices, assume greater responsibility for their professional decisions, and understand the new financing mechanisms that have been introduced under the ongoing health reform (see Chapter I, Sections D and E); (iii) strengthening of public health programs to promote healthy lifestyles and prevent the non- communicable diseases that constitute the largest components of the country's disease burden; and (iv) gradual elimination of excess capacity in inpatient facilities. Each element of the package could, individually, contribute to improving resource allocation and sustainability in the sector. However, the full benefits of reform would be attained only with well-coordinated, fully integrated introduction of all elements, a significantly more complex and long-term undertaking. 6.3 Although the above complementary measures are not a part of the project, the emerging health policy environment in Russia would encourage, or at least enable, participating oblasts to undertake them on their own initiative. Under the new Health Insurance Law, new performance-based provider payment mechanisms have been legalized countrywide and many oblasts are initiating experimnents with these payment systems, learning from experiments in the late 1980s in the oblasts of St. Petersburg, Kemerovo and Samara. The practice of Family Medicine was authorized in 1992, and medical academies in Moscow and St. Petersburg, among others, have started training Family Physicians, who will form the core of the new generation of primary care providers able to provide greatly expanded services at this level. A number of federal level institutes, including the Institute of Prevention and the Cardiology Institute, are helping oblasts introduce new approaches to preventive care, although these changes have so far focused more on preventive medicine as performed by caregivers in a health facility and less so on community-based promotion. These various interventions require substantially less investment financing than measures to upgrade and update the physical capital, and can generally be undertaken by oblasts, at least on a limited basis, using their own resources. 3A CAS Progress Report was discussed with the Board on March 28, 1996. Page 38 Project Status, Implementation, Evaluation and Supervision 6.4 When the present project was conceived, a strategic choice was made to focus the range of the interventions to investments in medical equipment, thus simplifying the project considerably. This would allow broader geographic coverage and generate quick, visible results, an important consideration for a first operation in a sector where full reform would take years, even decades to complete. 6.5 A second Bank operation for the health sector in Russia, the Health Reform Pilot Project which was appraised in January 1996, would apply a more integrated approach to health reform at the oblast level. That project involves a pilot experiment in two oblasts to: (i) test various forms of provider incentives that encourage cost effective and cost-conscious service delivery; (ii) restructure the delivery system with a strong emphasis on Family Physicians as primary care providers, and reduction in inpatient capacity; and (iii) introduce approaches to management of maternal and child health and cardiovascular disease that stress prevention and promotion. That project would also support national and regional training programs in Family Medicine through the Moscow Medical Academy and organize activities to monitor, evaluate and disseminate project results. In contrast with the present project, this more comprehensive-and complex-approach to health reform has the disadvantage of very limited geographic coverage and slower implementation. However, dissemination activities of the project are expected to help transfer the knowledge and experience gained to other oblasts. Future Bank interventions in the health sector in Russia will likely be a cross between the Health Reform Pilot Project and the present project, with the broader reform agenda of the former but with wider geographic coverage, using the methods for more flexible and quicker disbursement developed for the latter. 6.6 Beyond its contribution to health sector objectives, the project contributes to the macroeconomic objective of improving budget management practices. By introducing a simple mechanism for realizing federal transfers to oblasts in a manner that ties them to priority objectives in one sector, this project could pave the way for broader application of tied transfers, with an element of counterpart financing, that would replace the current practice of untied cash transfers to oblasts. These cash transfers are widely seen as an inefficient use of federal resources, and a lost opportunity to encourage oblasts to allocate public resources to national priorities in a wide range of sectors. Project Design Features 6.7 The project is an exceptionally simple, quick-disbursing investment operation that nevertheless retains features that ensure that: (i) selection of investments is consistent with priority sectoral objectives; (ii) oblasts and health facilities are actively involved in project implementation and finance; (iii) procurement is organized in such a way as to maximize economies of scale. 6.8 Selection of Investments. The project guarantees consistency with sectoral priorities through the use of a positive list of equipment to be purchased and by limiting access to project resources to specific types of facilities. In formulating the positive list, both the present situation in the Russian Federation in terms of epidemiology (mainly the morbidity and mortality structure) and the organization of the existing health care system were taken into consideration. The selected equipment would enable health care facilities to deal more effectively in diagnosing and treating cardiovascular disease, trauma and cancer, the highest priority health problems identified by analysis of epidemiological data. Equipment to be provided would support screening programs and simple treatment procedures to address these diseases. 6.9 By targeting the project to primary and selected secondary level facilities, support is being directed to the most cost effective institutions which have been disadvantaged by less resource allocation Russian Federation: Medical Equipment Project Page 39 in recent years.4 Federal, tertiary and highly specialized institutions have been excluded from the project because of: (i) the need for strengthening capacity for early health care interventions and out-patient services provided mainly in primary and secondary regional institutions; (ii) the greater share of capital expenditures historically provided to federal and tertiary care providers has left them better equipped relative to other levels; and (iii) they serve a smaller proportion of the population at relatively high costs. 6.10 Directing needed equipment to lower level facilities is expected to have additional benefits by reducing dependence on tertiary and specialized facilities, thereby allowing selective downsizing of these more expensive facilities and shifting capacity into services not currently offered or undersupplied. Indirectly this serves to improve the quality of health care throughout the system. 6.11 Cost effectiveness of the specific investments has been ensured by including on the equipment list only those items which are both high priority in terms of enabling the target facilities to meet their mandate for provision of services and the most cost effective in diagnosing and treating patients given the epidemiological profile in Russia. 6.12 Local Involvement. In keeping with the recent move to decentralized management of health services, the project introduces opportunities for local authorities to participate in implementation, while sharing responsibility for project financing. Although oblast-wide allocations out of project funds are determined at the federal level, the choice of participating facilities and their respective allocations are determined by oblast authorities, within the predetermined selection guidelines. Managers of selected facilities then make the choice as to how their respective allocations are used for specific items of equipment, chosen from the positive list for the entire project. In return, oblasts are expected to contribute 10 percent of base costs of the project and finance all taxes and duties due on the equipment, and ensure sufficient budgets for supplies needed to operate the equipment. 6.13 Organization of Procurement. Following decentralization of health services management, responsibility for procurement of medical equipment has been delegated to the individual facility. Under these arrangements, opportunities for pooling resources to gain price advantages on larger orders have been lost. The project introduces a mechanism for pooling resources for procurement which could be continued beyond the life of the project if it proves to generate important cost savings. 6.14 The introduction of standard international competitive bidding procedures is also an important innovation in Russia. Although the Bank's requirement to apply competitive procurement procedures met initially with strong resistance, MOHMI and other federal authorities now appear to recognize that the interests of the health care delivery system needs to be viewed separately from those of the medical industry. It is hoped that the infusion of considerable resources for the purchase of equipment as well as the experience of competing with international suppliers will benefit the national industry in the long run. Summary of Benefits 6.15 The most immediate impact of the project would be to increase the availability, range and quality of services provided by the participating primary health care facilities and raion hospitals. Over 1200 facilities in 34 oblasts with a total population of 63.1 million (43 percent of the Russian population) ' Certain secondary level institutions (eg. district hospitals) are also excluded because in some instance they are poorly staffed, provide low quality care and are not deemed priorities for new equipment. Many of these facilides will likely be closed or redeployed in the course of subsequent restructuring and rationalization. Page 40 Project Status, Implementation, Evaluation and Supervision would participate in the project. Moreover, the preponderance of primary and secondary facilities under the project are located in relatively remote areas, serving a population that has in general received less attention and poorer quality care. Hence, a further consequence of the project would be directing a greater share of health care resources to less well-serviced districts within oblasts, helping more vulnerable communities to gain access to quality care. Moving health care services down to primary and secondary institutions will also facilitate ease of access and reduce associated costs (transport, time, etc.), particularly for more remote towns and villages. 6.16 One of the project's more important benefits would be in creating the potential for more significant benefits in the medium and long term as changes introduced by the project are built upon to implement more comprehensive structural reforms. These longer term benefits of the project arise from both diversifying sources of diagnostic and treatment services and shifting provision from inpatient towards outpatient care. Major cost savings can be achieved if complementary steps are taken to reduce the number of hospital beds and close tertiary care facilities which have been maintained through a system excessively focussed on tertiary and specialized care.5 This project does not directly provide for such restructuring, but will serve to shift orientation of health delivery and create an environment more conducive to more systemic restructuring in five to ten years time. 6.17 As a further benefit the loan would also finance the creation of national health accounts. A system of national health accounts is considered essential both to administering a national health system and to effectively monitoring budget execution by national and regional authorities. It allows the Government to monitor health expenditures in a detailed and timely manner, providing valid data for the planning and management of he