The main objective of the project is to strengthen a core group of banks which will: "(i) Set higher banking standards and create a dynamic for enhancing the quality of banking activities in Russia; (ii) Create the basis for a private clearing system operating at the level of the Federation; and (iii) Qualify as on-lenders of World Bank and other international lines of credit." (World Bank, 1994b: 17) "The project will consist of four components: (i) a commercial banking component, consisting of institutional strengthening programs and systems modernization and automation programs for private commercial banks; (ii) a bank regulation and supervision component, consisting primarily of the development of on-site supervisory capabilities and the provision of legal assistance for the Central Bank of Russia; (iii) a bank accounting component, which will support the modernization of accounting standards and practices; and (iv) a Project Implementation Unit component." (World Bank, 1994b: 17) After a few brief remarks we will concentrate on the first component as it is 95 percent of the total project as well as most of the technical assistance. Both the second and third components (1 percent and 2 percent of the total project, respectively) will likely have widespread repercussions. While it could be argued that they are necessary for the success of the first component and thus should be included in the quantitative analysis, it could just as easily be argued that these components have benefits that extend far beyond those of increasing the likelihood of success of the first component. Given the difficulty of measuring these externalities, it may be better to omit the costs. The last component - the establishment of a Project Implementation Unit - should be included in the quantitative analysis of the first component, assuming such an effort is feasible.

The commercial bank component is divided about 1/3 for institutional strengthening technical assistance, mostly delivered by twinning, and 2/3 for systems modernization and automation. Note that the proceeds from the Bank and EBRD was on-lent to participating banks at a rate on average 2.5 percent above the Ministry of Finance's weighted cost of the two loans. While a good analysis of the qualitative lessons learned from past experience was used in project design, there was no attempt at any sort of quantitative analysis.<sup>3 8</sup> A quantitative analysis could have taken the fairly simple approach in estimating the expected return to the Ministry of Finance, which is ultimately liable for the loan. Based on past experience in other transition countries, it might have been possible to establish an expected default rate.

A preferable approach would have been to look at the expected return to the commercial banks themselves. Given that the institutions receiving the "secondary" loans are profit-making institutions, it could be argued that they would not accept such a loan unless its expected return was higher than the cost of the loan. However, about 19 percent of the total project is in the form 38 In the 40 loans that we reviewed, the section on lessons from past experience was one of the strongest in this project.

27