Document of The World Bank Group FOR OFFICIAL USE ONLY Report No. 73265-IQ INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF IRAQ FOR THE PERIOD FY13-FY16 November 13, 2012 MNC02 Country Management Unit Middle East and North Africa Region Strategy Unit Middle East and North Africa Region International Finance Corporation Multilateral Investment Guarantee Agency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The date of the last Interim Strategy Note was February 19, 2009 CURRENCY EQUIVALENTS US$1 = IQD 1250 (as of June 15, 2012) ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities JICA Japan International Cooperation Agency AFD Agence Francaise de Developpement JPOC Joint Portfolio Oversight Committee (French Development Agency) JSDF Japan Social Development Fund AIDS Acquired Immune Deficiency Syndrome KRG Kurdistan Regional Government BSA Board of Supreme Audit M&E Monitoring and Evaluation CAS Country Assistance Strategy Mbd Million barrels per day CDD Community Driven Development MENA Middle East and North Africa CPPR Country Portfolio Performance Review MDGs Millennium Development Goals CPS Country Partnership Strategy MIGA Multilateral Investment Guarantee Agency CSO Civil Society Organization MSMEs Micro, Small and Medium Enterprises DFI Development Fund for Iraq NBP National Board of Pensions DFID Department for International Development NDP National Development Plan EC European Commission PDS Public Distribution System EITI Extractive Industries Transparency Initiative PEFA Public Expenditure and Financial Accountability ESW Economic and Sector Work PER Public Expenditure Review EU European Union PFM Public Financial Management FMA Fiduciary Monitoring Agent PPP Public-Private Partnerships FY Fiscal Year PRS Poverty Reduction Strategy GCC Gulf Cooperation Council SABER System Approach for Better Education Results GDP Gross Domestic Product SBA Stand-by Arrangement GGFR Global Gas Flaring Reduction SIDA Swedish International Development Cooperation Agency GOI Government of Iraq SMEs Small and Medium Enterprises HIV Human Immune Deficiency Virus SOEs State-Owned Enterprises IBRD Int’l Bank for Reconstruction & Development SPBF State and Peace-Building Fund ICA Investment Climate Assessment SSN Social Safety Net ICT Information and Communication Technologies TA Technical Assistance IDA International Development Association UGSC University Governance Score Card IDPs Internally Displaced Persons UN United Nations IFC International Finance Corporation UNAMI United Nations Assistant Mission for Iraq IFMIS Integrated Financial Management Information System UNHCR United Nations High Commissioner for Refugees IMF International Monetary Fund WBG World Bank Group INES Iraq National Energy Strategy WfD Workforce Development ITF Iraq Trust Fund WDR World Development Report IBRD IFC MIGA Vice President Inger Andersen Dimitris Tsitsiragos Michel Wormser Director Ferid Belhaj Mouayed Makhlouf Ravi Vish Special Representative Marie-Hélène Bricknell Task Team Leader Janet Dooley Ziad Badr Persephone Economou ACKNOWLEDGEMENTS This Country Partnership Strategy (CPS) was prepared by a team led by Janet Dooley and previously Barbry Keller, under the guidance of Hedi Larbi, previous Country Director and Ferid Belhaj, current Country Director, and Marie-Hélène Bricknell, Special Representative for Iraq. Core team members include Pilar Maisterra, Mary Eunice Barroso, Kevin Carey, Sibel Kulaksiz, Ousman Jah, Sabah Moussa, May Ibrahim, and Anne Njuguna. Jorge Araujo, Anwar Aridi, Marian Saleh, Sana Al-Nimer, Arun Arya, Ibrahim Dajani, Fabrice Mosneron Dupin, Caroline Van Den Berg, Stephen Rimmer, Hooman Dabidian, Maged Hamed, Lianqin Wang, Ghassan Alkhoja, Sahar Nasr, Bertine Kamphius, Elisabeth Huybens, Alexandre Marc, Stephen Ndegwa, Simon Stolp, Carolyn Winter, Sarah Nedolast, Sebnem Akkaya, Veronique Kessler, Abdelmoula Ghzala, Abdulhamid Azad, Caroline Freund, Dale Lautenbach, Ferhat Esen, Gloria La Cava, Guenter Heidenhof, Husam Mohamed Beides, Jad Mazareh, Rajendra Singh, Jonathan Walters, Marc Jean Yves Lixi, Nikolai Soubbotin, Paul Prettitore, Victoria Gyllerup, Simon Bell, Suiko Yoshijima, Tara Vishwanath, Tamer Rabie, Tarig Mohamed Osman, Virginia Jackson, Shaymaa Hassan, and other country team members contributed to this strategy. For the IFC, the team includes: Ahmed Attiga, Ziad Badr, and Rapti Goonesekere. The MIGA team members are Persephone Economou and Paul Barbour. In addition, the team would like to thank the Government especially our counterparts in the Ministry of Finance, including Dr. Fadhil Othman, Deputy Minister of Finance, and Dr. Salah Hadithi for coordinating and hosting the CPS workshop with the Government, and KRG Ministry of Planning, as well as the representatives of the various line ministries, and the Iraq Executive Director’s office of the World Bank. In addition to the Iraqi authorities, the team thanks the various stakeholders, civil society organizations including NGOs, trade unions, think-tanks and media organizations, as well as international partners met throughout Iraq who gave their time, insights and valuable input to inform this strategy. FY13-16 COUNTRY PARTNERSHIP STRATEGY FOR IRAQ TABLE OF CONTENTS I. EXECUTIVE SUMMARY ..................................................................................................... i II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA ............................................. 1 Political and Security Developments ........................................................................................ 1 Social and Poverty Trends ........................................................................................................ 2 Economic and Governance Context.......................................................................................... 3 Iraq Medium-Term Prospects ................................................................................................... 4 Key Development Challenges................................................................................................... 7 Government Priorities ............................................................................................................. 14 III. BANK GROUP PARTNERSHIP STRATEGY ................................................................. 15 A. Lessons Learned from Previous Engagement and Stakeholder Feedback.............................. 15 B. Proposed World Bank Group Partnership Strategy ................................................................ 19 Result Area 1: Improving Governance ................................................................................... 22 Result Area 2: Supporting Economic Diversification for Broadly Shared Prosperity ........... 23 Result Area 3: Improving Social Inclusion and Reducing Poverty ........................................ 25 C. Implementing the FY13-16 Country Partnership Strategy ..................................................... 27 Financing of the Program........................................................................................................ 28 Fostering Stronger Partnerships .............................................................................................. 28 Strategic Communications ...................................................................................................... 29 IV. MANAGING RISKS ............................................................................................................ 29 TABLES: Table 1: Iraq Medium-Term Outlook……………………………….……………………………….…6 Table 2: Indicative Assistance Program…………………………….………………………………...21 FIGURES: Figure 1: Civilian Casualties, January 2003-January 2011…………………………………………….1 Figure 2: Selected Economic Indicators………………………………………………………………..5 Figure 3: Rule of Law Measures (Iraq vs. MENA Compared)…………………………………………8 Figure 4: Unemployment Rate by Gender and Other Indicators……………………………………….9 Figure 5: Leading Constraints to Firms Operating in Iraq…………………………………………….10 Figure 6: Literacy Rate of Segment of Population Aged 15-24 Years………………………………...13 Figure 7: Active Portfolio………………………………………………………………………...…..17 BOXES: Box 1: Portfolio and Supervision Arrangements……………………………………………………...16 Box 2: Observations from a Gender Review of the Iraq portfolio……………………………………18 ANNEXES: Country Specific Annexes: Annex 1: Iraq CPS Results Framework (FY13-16)…………………………………...………….....31 Annex 2: Key Ongoing Technical Assistance Supporting National Strategies……………………...36 Annex 3: Consultations Report………………………………………………………………...…....37 Annex 4: Iraq Matrix of Donor Interventions………………………………………...………..……40 Annex 5: Iraq’s Progress towards the MDGs………………………………………………….…….41 Standard CAS Annexes: Annex A2: Iraq at a Glance…………………………………………………………………….……43 Annex B2: Selected Indicators of Bank Portfolio Performance and Management…………….……46 Annex B5: Iraq Social Indicators……………………………………………………………….…...47 Annex B6: Iraq Key Economic Indicators…………………………………………………………..48 Annex B7: Key Exposure Indicators………………………………………….……………………..50 Annex B8: World Bank Portfolio……………………………….….……………….........................51 Annex B8: IFC Portfolio…………………………………………….………....……………………52 Annex B8: MIGA’s Outstanding Exposure……………………….………………………………...53 MAP IBRD 33422R………………………………………………………………………………….54 Country Partnership Strategy for Iraq 2013-2016 I. EXECUTIVE SUMMARY i. Iraq is at a crossroads. While past years saw a country in transition, with sectarian violence particularly from 2005-2008, and strong presence of foreign intervention, the situation in Iraq is changing, and Iraqi-led political processes are maturing. The last United States (US) troops withdrew in December 2011, marking the end of eight years of the US-led military presence in Iraq. The international donor community, which has been heavily involved in Iraq over the past years, is incrementally withdrawing or shifting from grant-based reconstruction efforts to loans and partnerships. Two elections have been held since 2003, providing for further maturity in national political processes. The latest elections were held in 2010, resulting in a delicately balanced governing coalition. The Government has been organizing itself to develop and agree on complex national compacts at a country and sectoral level: on sharing the country’s national resources through the proposed hydrocarbons law; and designing and implementing strategies in key areas such as energy, education, and pensions. Iraq has returned as an active member of the international community, forging long-term engagements with international organizations and re-connecting with the region at large, reflected, for example, by hosting the 2012 Arab Summit. ii. On the economic front, Iraq is a richly resource-endowed country; however this presents its own challenges. Oil production is projected to continue increasing to reach about six million barrels per day by end of this decade. However, oil dependence makes the country highly susceptible to oil price fluctuations, and the hydrocarbons sector does not provide enough jobs for Iraq’s large population. In addition, given institutional capacity limitations, Iraq faces great difficulties in effectively using the vast revenues generated by oil and in effectively delivering services to the population. While Iraq has achieved growth and reduced inflation in recent years, issues remain with medium-term budget planning and expenditure, corruption, inequality, political disruption, and other vulnerabilities which hold back its progress. Iraq is also attempting to recover from the setbacks of years of conflict and civil strife. Progress in achieving the Millennium Development Goals (MDGs) is slow, and there have been reversals on some indicators. The development challenge for Iraq is to build up its capacity to properly use its own substantial resources for the benefit of current and future generations and to diversify its economy away from over-reliance on oil. The challenge is also to move from a country-centric development agenda to a more open and competitive stance, including regional and broad international integration through trade, commerce and new technologies. iii. In 2010, the Government prepared the National Development Plan (NDP) 2010-2014, a medium-term development strategy aimed at providing a framework for the country's sustainable development. This strategy is complemented by a Poverty Reduction Strategy (PRS) done in January 2009, developed with World Bank support. The NDP's economic pillar aims to achieve Gross Domestic Product (GDP) growth of 9.4 percent per annum; to generate 3 to 4.5 million new jobs; to diversify the economy away from oil and into agriculture, industrial sectors, and tourism; and to create a stronger role for the private sector, both in terms of investment and job opportunities. The strategy aims to reduce poverty rates by 30 percent from 2007 levels by focusing on comprehensive rural development and providing basic services such as education and healthcare, particularly for vulnerable groups such as youth and women. The NDP focuses on environmentally- sensitive economic and social development using available natural resources in a sustainable way. It also aims to strengthen the role of local governments to bring service delivery and economic development closer to the people. The NDP is in the process of being updated to cover the period 2013-2017. i iv. This first World Bank Group Country Partnership Strategy (CPS) for Iraq aims to support Government efforts to implement the NDP, building on stakeholder feedback and lessons learned. It also reflects the Bank and IFC’s regional framework and strategy for the Middle East and North Africa (MENA) Region which has evolved to respond to the events of the Arab Spring and focuses on governance, sustainable private sector-led growth, job creation and economic and social inclusion. This CPS marks a turning point in the Bank’s engagement with Iraq. Following three interim strategy notes, this CPS moves away from transition to embrace a deeper and longer-term engagement with a view to informing important policy choices that will lay the foundation for Iraq’s future. The CPS is built on a thorough dialogue with the Government and stakeholders, including civil society, academia and the private sector. The Bank’s previous strategies focused on supporting Iraq’s reconstruction efforts, building capacity of state institutions and laying the foundation for long-term growth. The Bank’s program included significant analytical work, technical assistance and training, and investments across a range of sectors including infrastructure, health, education and social protection, as well as a Development Policy Loan supporting budget management, the financial sector and the social protection system. Project support was financed through about US$500 million from the multi-donor Iraq Trust Fund (ITF) and a one-time allocation of US$500 million from the International Development Association (IDA). The lessons learned from the Bank Group’s engagement over the past several years will inform this CPS, in particular the need to adapt to realities on the ground and the need for strong Government ownership. v. The Bank Group is shifting to a new modality of engagement with Iraq. The Bank’s nearly US$1 billion reconstruction and recovery portfolio will come to an end during the CPS period. The Bank Group’s new program will seek to help Iraq leverage its own vast public resources and build effective public and private institutions needed to create jobs and deliver services. The Bank will also start helping Iraq leverage its strategic regional positioning and human capital potential to build the tenets of its participation in and integration into its immediate region and beyond. This will require the Bank Group to bring knowledge and best practices to help find practical solutions and to move from a transaction-based engagement to strategic support for institutional development. Catalytic investments financed by the International Bank for Reconstruction and Development (IBRD), analytical and advisory activities (AAA), International Finance Corporation (IFC) advisory and investment engagement, guarantees from the Multilateral Investment Guarantee Agency (MIGA), and reimbursable services will form the backbone of this CPS. vi. To support the country’s efforts to build stronger government institutions and a more diversified economy that can deliver services to the population and create jobs, the CPS is structured to pivot around three axes: (i) Improving Governance; (ii) Supporting Economic Diversification for Broadly-Shared Prosperity; and (iii) Improving Social Inclusion and Reducing Poverty. The key focus areas which shaped existing programs (i.e. public financial management, strengthening institutions, private sector development, infrastructure, and service delivery) remain relevant in this context. Gender is an important cross-cutting theme. On governance, the Bank Group will seek to understand sector-wide governance challenges, and support improved fiscal management, public procurement, government auditing, and civil service performance; expanded demand-side accountability, particularly for beneficiaries of public services; setting and enforcing high standards for managing Bank resources; and building coalitions for addressing governance and anti-corruption challenges at the country level. Unleashing Iraq’s growth potential in the non-oil sector will involve efforts to improve the business environment; expand core infrastructure, especially in roads (with a view to deepening regional integration and increasing market size), water and electricity; enhance agricultural productivity, with a focus on food security; and strengthen public sector management and sub-national governance. In addition, the Bank Group will seek to help the Government improve the management of water resources and to address climate-change given Iraq’s high vulnerability. ii Reducing inequality and social exclusion will involve increasing the access of the poor—and in particular women—to basic education, health services and water and sanitation, and improving social safety nets. vii. A proposed program is outlined in the CPS to support this agenda. Analytical and advisory activities include, inter alia, follow-up work to a Public Expenditure Review and a Report on Oil Revenue Management for Economic Diversification, a Poverty and Gender Assessment, Agriculture Technical Assistance, a Gas Master System Study, and Financial Sector Dialogue. IBRD projects amounting to US$540 million have been identified starting in FY14 for five operations including Integrated Financial Management Information Systems; Governance; Trade and Transport Corridors; Irrigation and Water Resources and Water Supply and Sewerage. In addition, a program of Reimbursable Services is being developed. viii. Implementing the Program. Iraq’s realities call for a CPS that is flexible in design and implementation arrangements and adaptable to evolving circumstances. The Bank will adjust its program depending on opportunities and progress in the results areas. The indicative lending envelope is US$600-900 million during the CPS period. IFC will continue investing in the private sector with an indicative program of US$100-150 million per year (assuming continued improvement in the business environment), and will ramp up its advisory services in the country. MIGA will continue to support Iraq’s efforts to attract foreign private investors through the provision of political risk guarantees. The Bank Group will continue to work closely with other development partners in the context of the International Partners’ Forum, as well as with civil society, the media and other stakeholders. Strategic communications will seek to provide information to stakeholders and to provoke constructive and informed debate. ix. Managing Risks. There are several risks to the Bank Group’s program in Iraq, including a politically fluid situation, vested interests, regional instability, in-country violence and insecurity as well as economic volatility related to the fluctuation of oil prices. This CPS aims to be candid about identified risks and their impact - direct or indirect - on its implementation. The most important risk pertains to the political and security situations which remain fragile. Gaps in capacity or commitment of the Government to implement reform or reversal of policies, particularly near the next elections, may also undermine the success of the Bank’s program. Other risks include vulnerability to external shocks and terrorism. Project implementation risks include weaknesses in project and contract management, fiduciary and safeguards management. The Bank Group intends to be realistic in what it can accomplish and to adapt the program as needed. The Bank will continue to make policy recommendations and support prudent macroeconomic management by the Government, which is the key to providing the fiscal space for the Government to adjust appropriately to fiscal shocks when they occur and will continue to find ways to carry out supervision of the ongoing portfolio despite a difficult security environment. In the event that the operating environment deteriorates in Iraq, IFC will focus on portfolio management and engaging selectively through its advisory arm. iii II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA Political and Security Developments 1. After years of uncertainty, conflict and instability, the Iraqi state, while still fragile, has been consolidating. Following a gradual slow-down of violence and insecurity during the period 2006-08, parliamentary elections in 2010 resulted in a coalition government presided over by Nouri Al-Maliki of the Al-Dawa party (Shi’a) and including Ministers from the Al-Iraqiya (secular), the Saadrist (Shi’a), and the Kurdish blocs. However, sectarian and political divisions continue. More recently, tensions between the Al-Dawa party and Al-Iraqiya have threatened the stability of the governing coalition. Attempts to bring all parties to the table through a national conference have failed to materialize thus far, creating an atmosphere of political instability. In recent weeks there has been a lowering of tensions between the Kurds and the central authorities over the exploration of oil. This will hopefully open the way for negotiations to resume over a national oil law. At the same time, legislative processes in Iraq are maturing, and the delicately-balanced governing coalition has been organizing itself to develop and agree on country and sector level strategies. 2. Security has improved overall, but the situation is volatile. Iraq has made significant progress in improving security with violent incidents declining from a high of 2,700 per month in 2008 to 263 as of March 2012 (Figure 1). The US fully withdrew its troops in December 2011, and although the security situation is now greatly improved since the mid-2000s, incidents continue sporadically, especially around religious or political events with some large-scale attacks against security and civilian targets. Ramadan 2012 saw a spike in violence with over 400 Iraqis reported killed. The political situation remains volatile and unpredictable, affecting the Government’s ability to manage security and focus on development issues. At the same time, Iraq remains vulnerable to regional instability. The Syrian crisis, which is spilling over to Iraq as other neighboring countries, is adding to an already difficult situation. 3. Centralization of power and corruption threaten the legitimacy of the state. Iraq’s constitution calls for a federal state, but power is concentrated in Baghdad with oil wealth concentrated primarily in areas such as the Kurdistan Regional Government (KRG), Kirkuk, and Basra. Only KRG enjoys increased autonomy, prompting other regions, such as the Sunni Diyala and Salahaddin Provinces to also demand some level of autonomy and self-governing as stipulated by the Constitution. The breakdown of society during the Iraq war along sectarian and ethnic lines has further weakened Iraq’s unity. Governance challenges also threaten the legitimacy of the state. The three pillars of state oversight mandated by the constitution, the Commission of Integrity, the Board of Supreme Audit and the Council of Representatives, are hampered in delivering on their mandates and the judicial system is not yet able to prosecute corruption cases. Figure 1: Civilian Casualties, January 2003 – January 2011 1 40000 30000 20000 10000 0 1 Source: Iraqbodycount.org 1 4. Differences over distribution of power and coalition partners have dominated Iraqi politics, distracting attention from the immediate task of rebuilding the country and laying the ground for economic development. If these differences continue, political tensions are likely to rise until the next election, worsening economic management, delaying governance improvements impeding the delivery of services to the population, and potentially aggravating the fragile security situation. Social and Poverty Trends 5. Despite its vast oil wealth, Iraq’s standard of living has declined over the past 25 years. Gross domestic product (GDP) per person declined by a third between 1980 and 2006, from about US$3,000 to about US$2,000 as a result of conflict and war. Social trends have paralleled economic trends: for example, primary school enrollment, an area where Iraq traditionally led in the region, has declined over the past 25 years. 6. Poverty is widespread but shallow, particularly affecting vulnerable groups such as widows and the displaced. The 2010 Poverty Assessment showed that overall poverty is 23 percent. About 6.9 million Iraqis are classified as poor, half in rural areas and half in urban areas. Iraq’s poverty gap index (i.e. average distance from the poverty line) of 4.5 percent is also extremely low compared to most other countries. Iraq’s comparative absence of absolute poverty is largely a result of the impact of universal food rations under the Public Distribution System (PDS), but this does not capture the deterioration of livelihoods for ordinary Iraqis. The poor lack access to employment –– two-thirds work in the informal sector, most in non-wage agriculture (27 percent) or as employees in small unregulated enterprises (24 percent). The poor also suffer from shortages of housing and basic services – 89 percent live in crowded housing with very poor electricity service. Schools are in poor condition with low enrollment rates, especially for poor girls. 2 The country’s current national poverty target is to reduce poverty from 23 percent (2007) to 16 percent (2015). The poverty line will be revalidated by the 2012 household survey currently underway, which may affect the target. 7. Rapid population growth, urbanization and demographic transition will shape Iraq’s development prospects for the next decades. Years of war and sectarian strife have led to a rural to urban shift in Iraq as Internally Displaced Persons (IDPs) increasingly opt to stay in areas where they feel more secure. This has led to a growing expansion of the urban population which cities like Baghdad are ill-equipped to accommodate. The pressure on housing and basic services, including water and sanitation, is a growing social problem. The urban transport, water and sanitation infrastructure for Baghdad was planned for 600,000 inhabitants, but today Baghdad hosts a population of about five to six million. 8. Iraq has a very low employment rate (only 38 percent of adult Iraqis are employed), and women face particular challenges in terms of economic opportunities. The public sector employs 32 percent of all working Iraqi adults, and the job-creating capacity of the hydrocarbons sector is very limited. The female labor force participation rate is only about eleven percent. Female unemployment is at 20 percent versus male unemployment at 14 percent (2008). According to the 2007 Household Socio-Economic Survey (which formed the basis of the poverty assessment in the Poverty Reduction Strategy), the relatively few women who participate in the labor force are heavily concentrated either in public sector wage jobs, notably education (non-poor, educated, primarily urban women) or at the opposite end of the spectrum in non-wage agricultural jobs (poor, less-educated, mostly rural women). The situation of widows in Iraq is acute. There are between one to three million estimated 3 female-headed households in Iraq as a result of decades of war and violence. The Iraqi Government has 2 United Nations (UN)/Government of Iraq, The UN Millennium Development Goals (2010). 3 International Committee for the Red Cross 2 developed a social welfare program intended to help widows financially, but the allowance is deemed insufficient and many do not receive it. 9. In keeping with regional trends, youth unemployment is particularly high. Young people, aged 18–30, are Iraq’s largest demographic group but they have few economic opportunities. Youth unemployment remains high for both women and men: 30 percent for women and men aged 20-24 (2008), a significant increase from 1990 when youth unemployment was around 7 percent for both young men and women. Youth, particularly from rural areas, are trapped within communities where the quality of public education is poor, organized recreational opportunities are non-existent, and the unemployment rate for 16–25 year-olds exceeds 35 percent. Idleness and a lack of information and effective awareness campaigns for youth also add to their exclusion from political and economic opportunities. 10. Returnees and IDPs are a significantly marginalized group. As of September 2011, 1.3 4 million Iraqis were internally displaced. Many IDPs live in deplorable conditions and are deprived of essential assistance, with their need for humanitarian support increasing the longer their displacement continues. Within Iraq, there are now an additional 50,000 refugees from Syria with an estimated 500 streaming across the border—largely into northern Iraq—on a weekly basis. 5 Iraqi returnees face many challenges, including lack of security, livelihood prospects, and social services. Economic and Governance Context 11. Amid the challenging political and security environment, Iraq has achieved considerable progress toward macroeconomic stability since 2003. Due to sound monetary policy and increasing oil production, Iraq achieved single-digit inflation, economic growth resumed, and the fiscal and current account balances have strengthened (after deteriorating in the wake of the global financial crisis). Iraq’s debt-to-GDP ratio has been on a downward trajectory due to debt restructuring with the Paris Club and rapid GDP growth. The macro stabilization program has been supported by the International Monetary Fund (IMF) through a Stand-By Arrangement (SBA), while the World Bank’s Fiscal Sustainability Development Policy Loan, approved in February 2010, supported structural reforms in budget management, the social protection system and the financial sector. 12. Once macroeconomic stabilization was achieved, oil market conditions have become the dominant determinant of growth. The immediate aftermath of war saw a sharp decline in growth and a spike in inflation (Figure 2). Inflation was brought down to single digits through an exchange rate peg and a gradual improvement in the economy’s supply response. Crude oil production and exports have steadily increased in recent years, with production rising from less than two million barrels per day (mbd) in 2004 to an estimated 2.7 mbd in 2011; exports were about 2.1 mbd in 2011. At the same time, prices for Iraqi crude oil, after dipping in 2009 in the wake of the global financial crisis, increased to US$104 per barrel in 2011. 13. Budget surpluses have been underpinned by elevated oil prices, but the budget remains vulnerable to shocks. While the 2011 surplus was nearly eight percent of GDP, the authorities exceeded the spending bill target by paying salary increases mandated by Parliament and by spending more on social services, due primarily to international food price rises which impact the fiscal cost of the Public Distribution System (PDS) – Iraq’s virtually universal food price subsidy scheme. The IMF SBA has helped provide support to sound fiscal management. While viewed as precautionary by the Government, the SBA provides a framework of fiscal discipline for the Bank’s policy dialogue. The 2012 budget adopted by Parliament is broadly in line with IMF recommendations, and fiscal policy has 4 United Nations High Commissioner for Refugees (UNHCR) estimates 5 UNHCR, October 25, 2012 3 remained on track. Increasing off-budget domestic debt in 2010-2012 presents a potential vulnerability. 14. The heavy dependence on oil has two key implications for fiscal policy and institutions. First, it subjects revenue and therefore expenditure to volatility of international oil prices. Second, dependence on oil receipts (and negligible contribution of tax revenues) to fund the budget means that the authorities face little incentive to build strong budgetary institutions and transparency, due in part to limited demand for accountability to the population. Medium-term fiscal planning is rudimentary and lacks credibility with the public. Fiscal forecasting is made primarily on the basis of projected oil export volumes and prices rather than robust macroeconomic and fiscal analysis. 15. The overhang of Saddam-era debts has been reduced but not eliminated. In November 2004, the Paris Club countries agreed to reduce the country’s Paris Club debts by 80 percent in three phases provided Iraq met a specific set of conditions. Some Paris Club creditors also agreed to additional bilateral relief efforts beyond the 80 percent reduction. Iraq was able to abide by all of the Paris Club conditions, and in 2009, the successful conclusion of the IMF 2007-2009 SBA triggered the release of the final tranche of debt relief agreed by the Paris Club. A number of Iraq’s non-Paris Club creditors have also agreed to debt relief comparable to the Paris Club treatment. Iraq’s commercial debt was also successfully restructured with terms comparable to the ones offered by Paris Club creditors. Overall, the external debt to GDP ratio fell from 220 percent in 2006 to 107 percent of GDP in 2010 6. However, even with these significant relief efforts by a number of Iraq’s creditors, further negotiations are needed to determine how substantial non-Paris Club debts (notably to the Gulf Cooperation Council (GCC) countries) will be settled. Iraq’s Medium-Term Prospects 16. Iraq’s oil production and export revenues are projected to increase well into the medium term. Real GDP growth is projected to increase by ten percent in 2012 and 14.7 percent in 2013, even if the pace of global growth is low. Growth will be driven by expansion of crude oil production and exports and associated investment needs. However, non-oil sector growth is only about five percent per year, far below what would be expected for a reconstructing country. In 2011, oil sector revenues accounted for 70 percent of GDP, 91 percent of total revenues, and 99 percent of export revenues. This strong dependence of the economy on the oil sector is projected to persist. The lack of diversification also undermines Iraq’s ability to conduct medium-term fiscal policy since there is no non-oil tax base providing more predictable revenue flows. 17. The recurrent budget is dominated by a few major items related to security and basic services, while the capital budget suffers from chronic under-execution. For the recurrent budget, nearly 40 percent of employee compensation is on security and defense. Fuel subsidies, pensions, and the food distribution system account for much of recurrent non-wage spending; these policy instruments constitute an imperfect social safety net with significant inefficiencies. For the capital budget, the average execution rate is about 60 percent, and the failure to deliver key projects on time contributes to frustrations of the public and investors with the Government. 18. Improvements in fiscal stability and transparency have not been followed by the building of sound fiscal institutions. Besides the notable reduction in budget deficits in recent years (down from 22 percent of GDP in 2009), revenue transparency has improved. In this regard, the roles played by the Development Fund for Iraq (DFI) – now fully under Iraqi management – as well as the Extractive Industries Transparency Initiative (EITI) are important. However, the current fiscal policy framework falls short of the level needed, given Iraq’s circumstances. This pertains in particular to: (i) reducing the 6 IMF Second Review of SBA, March 2011 4 costs of oil revenue volatility by de-linking government spending from short-term fluctuations in oil export proceeds; (ii) safeguarding the quality of public spending through strengthened public expenditure management systems; and (iii) ensuring longer-term fiscal sustainability through provision for income- generating assets, whether real or financial. Figure 2: Selected Economic Indicators 19. Because of its large youth bulge and the need to provide employment for these young labor force entrants, Iraq cannot rely only on its oil wealth. Economic diversification will be essential for job creation. Because the energy sector is capital intensive, it is generating jobs in the magnitude of tens of thousands, whereas the country’s job creation needs run into the millions. Numerous analyses of private investment point to the need for regulatory reforms which will allow for increasing private sector involvement in sectors outside the oil industry, providing the vehicle for diversification and jobs. Agriculture and religious tourism are identified as potential sources of diversification. Neither sector could be a major national employment driver on its own, but they have tremendous growth potential and strong linkages with the service sector, where the bulk of the jobs lie for the Iraqis. On tourism, millions of attendees at the major pilgrimage sites in Karbala and Najaf are reported, and those arriving by land are not fully captured in the official statistics. Thus the total number of visitors is already in the millions, even with the current security situation. 20. Productivity-led growth would require a more skilled labor force. Although the country has a legacy as a center of education and culture, there is a significant problem of illiteracy especially among women. Iraq will have difficulty achieving momentum in productivity growth without quality education 5 and expansion in market size and for this, better global and regional integration is essential. The private sector needs to be seen as an integral player in Iraq's development. Investment opportunities are already present in the construction, banking, industry, agriculture, agribusiness and tourism sectors, and the private sector has the knowledge and incentives to take advantage of them if the right enablers are present. These opportunities will, if realized, provide substantial sources of job creation and diversified growth. Table 1: Iraq Medium-Term Outlook 21. Iraq’s difficult political legacy is likely to exacerbate the usual resource curse problems associated with oil and gas abundance. Since oil revenues are seen as collective property, in the 6 absence of well-defined distribution mechanisms, there will be a tendency for everyone to race to get “their share.� This process could easily degenerate into perceptions of unfairness aggravating existing tensions. Furthermore, despite all the emphasis on investment in recent budgets, Iraq faces the prospect of preference for investments that can be made regionally specific or in some sense associated, if not appropriated, by local interests. Conversely, the federal layer, especially non-security, could get squeezed. The political economy of the country points to the need for a distribution policy that favors job creation for all, equitable access to basic services in all regions, and fair and transparent social safety nets which target the most needy and vulnerable groups across community and political spectrum. 22. Under the baseline medium-term outlook, Iraq will have no significant budget or external financing needs (Table 1). This is because oil revenues will be adequate to ensure that the DFI can fund the budget, while foreign reserves will easily cover prospective external financing requirements. Gross foreign reserves are likely to reach US$84 billion in 2015, and DFI balances should also substantially increase. However, the baseline is subject to wide uncertainty. First, the baseline assumes oil export prices of around US$100 per barrel, but various factors point to a medium-term weakening of oil market prospects, including the emergence of shale gas and the impact of Iraq’s own increased crude oil supply on world prices. Second, fiscal space in the budget is limited, due to the role of politically sensitive items like salaries and subsidies coupled with pressing demands on the infrastructure side. Further, Iraq’s oil sector expansion plan involves substantial up-front fiscal commitments. Third, since oil revenues represent asset depletion, they should be integrated with other financing sources even if, in the aggregate, all spending needs could be financed from oil. Indeed, a financing mix would allow Iraq to mitigate the longer-term costs of its rush to increase oil production for cash flow reasons, such as gas flaring, water re-injection, and damage to oil reservoirs. The Bank has examined a number of scenarios with oil production, exports, and prices. The scenarios show that there are plausible conditions under which Iraq could experience fiscal and current account deficits (e.g. at US$80 per barrel) even with oil production of four mbd. As mentioned, Iraq can likely finance deficits from accumulated revenues, but the scenarios help to indicate the speed with which these fiscal buffers could be depleted under adverse external conditions. As inputs for a more stable fiscal situation, Iraq will need to adopt a fiscal policy that: (1) aligns with its implementation capacity; (2) respects the fundamental balancing of macro aggregates; (3) develops the extensive gas resources along with recovering flared gas; and (4) diversifies its economy. Key Development Challenges Governance 23. Iraq fares low in global governance benchmarking. Transparency International ranks Iraq at 175 out of 182 countries on its 2011 corruption index, a slight improvement over previous rankings. This ranking places Iraq just above countries like Somalia, North Korea, Afghanistan and Sudan. Beyond a history of war and sanctions, endemic corruption is one of the main factors contributing to state weakness. 24. Institutional capacity and governance weaknesses are at the root of many of Iraq’s development challenges. Corruption is widespread, transparency and accountability are weak, and the rule of law is poorly applied. Citizen engagement in oversight is weak. These weaknesses affect the delivery of public services; access is uneven for individuals and businesses as is the playing field for private sector provision. Implementation of the rule of law is also poor. Recent integrity indicators place Iraq among the weakest in a comparison of 50 diverse countries (Figure 3). Yet a number of public surveys show that the judiciary itself is seen as mostly non-sectarian and minimally corrupt compared to other public sector institutions. 25. The quality of public financial management (PFM) transactions and procedures has improved. Budget credibility (matching of outturns with projections) has shown some quantifiable 7 improvements, and reforms have resulted in the ability to track arrears. Comprehensiveness and transparency have improved through enhancements to fiscal reporting between national and sub-national governments. Budget execution systems show mixed results with relative improvements in procurement transactions offset by deteriorations in payroll controls. Accounting, recording and reporting systems now have stronger processes for reconciliation of accounts and in-year and annual reporting. External scrutiny and audit have improved due to more timely external audits. 26. Notwithstanding the above improvements, certain PFM practices worsened over the past few years, and procurement is an area of major weakness. Weak PFM practices include off-budget spending, worsening fiscal reporting, slow progress on Integrated Financial Management Information System (IFMIS) implementation, and poor investment budget execution rates. Low budget execution is largely attributed to poor planning and preparation of instruments and inadequate control over investment project related cash releases, leading to low level of utilization and large budget surpluses. Public procurement has also been a significant source of governance concerns and is burdened by outdated and contradictory rules. Some progress has been made on developing standard bidding documents, a national implementation manual and a training strategy. A new procurement law based on international best practices was drafted, but has not been adopted. In addition, occurrences of bribery and collusion among bidders in public contracting have put an immense strain on public finances. Going forward, improving the efficiency and effectiveness of public spending would entail continued focus on budget preparation and implementation, strengthening audit capacity, passing and implementing a new procurement law, and transparency in reporting public accounting. Figure 3: Rule of Law Measures (Iraq vs. Middle East and North Africa (MENA) Compared) 27. Building transparency and accountability in Iraq’s public sector will be critical to improving quality, efficiency and equity in public service delivery and limiting opportunities for corruption. A number of public episodes of corruption over the past few years illustrate the difficulties that elite capture presents in Iraq. Iraq also faces risks of money laundering. Ensuring a level playing field with equal access to public services for all citizens and firms as well as accountability measures such as freedom of information with a pro-active public disclosure policy would assist in combating these problems. Strengthening the state-citizen compact and improving government effectiveness will require developing avenues for the systematic involvement of civil society and private sector groups in the design and implementation of government programs. This will help to build consensus about important policy reforms and to focus attention on the issues and concerns raised by citizens. Private Sector Development and Growth 28. A vibrant private sector is critical to provide jobs for Iraq’s large population. Decades of state-driven economic policy have tightly bound Iraq’s economy to the needs of the State. Consequently, the private sector today has little role or presence, and incentives for its expansion are nearly absent. 8 Because of the State’s long-term dominance, credit systems and access to finance are severely limited. Iraq’s conflicts have generated problems such as a marked exodus of educated, skilled Iraqis, a sustained isolation from global networks of information and trade, and significant destruction and degradation of infrastructure. Job creation remains one of Iraq’s largest development challenges. International experience suggests that employment generation by a large public sector is unsustainable and that long-term job growth instead requires the development of an attractive investment climate and a predictable and low cost of doing business, so that a robust and productive private sector can generate employment and rising standards of living. Oil accounts for more than half of GDP but for less than one percent of total employment. 29. However, the private sector is poorly positioned to play its role as a creator of jobs. In addition to problems of security, it is plagued by lack of access to credit, high entry and exit barriers and a slow, ambiguous legal and regulatory system. Like households, businesses suffer from unreliable delivery of essential services, including telecommunications, transport, sewerage, water, and electricity. Although the potential for private sector engagement in post-conflict Iraq is significant, the country’s private sector is both under-developed and fragmented. Most private businesses in Iraq are very small and mainly operate in retail and trade, construction and transportation services, as well as in light industry in the textile, food, engineering, and chemical fields. The great majority of businesses are owned by sole proprietors, with most of the remainder being family partnerships 7. Many of the employees in small and medium enterprises (SMEs) are unskilled, short-term laborers. Iraq only possesses a handful of large, typically family-run multi-industry conglomerates, active in retail, domestic trade, telecommunications, and construction, but not in traded goods and services. 30. Iraq also suffers from particularly significant gender inequality in labor force participation, educational attainment and training. This suggests that Iraq can make better use of its human resources by more fully utilizing the talents and abilities of its female population. Only 13 percent of Iraqi women are in the labor force 8, far lower than virtually all of Iraq’s neighbors. Only seven percent of sampled firms from an enterprise survey data for the Bank’s Investment Climate Assessment (ICA) reported that a woman was one of its principal owners, lower than in any MENA countries to date. Similarly, Iraq has a very low rate of females in management when compared to other MENA countries. One percent of firms in Iraq have female managers, compared to Syria and Lebanon with 23 percent and 29 percent females in management, respectively. Figure 4: Unemployment Rate by Gender and Other Indicators9 7 UN/International Labour Organization (ILO) survey of firms 8 World Bank, Confronting Poverty in Iraq (2010) 9 UN Iraq Knowledge Network Labour Force Factsheet, December 2011 9 31. World Bank Group analysis has identified numerous constraints on private sector development, most notably quality of services, the legal framework, and the role of the state. The World Bank’s 2013 Doing Business Report ranks Iraq 165 out of 185 economies and Iraq ranks second to last among the 18 economies in the MENA region, significantly behind regional best performers on a global level such as Saudi Arabia (22), United Arab Emirates (26) and Qatar (40). Even its highest rankings by sub-component such as "Getting Electricity" (46) "Paying Taxes" (65) and "Dealing with Construction Permits" (84) are extremely poor, but the most severe constraints are indicated by rankings for “Resolving Insolvency� (185), “Trading Across Borders� (179) and “Starting a Business� (177). Constraints to private sector opportunities in the non-oil economy have also been identified through the ICA. The most critical constraints include lack of electricity supply, political instability and corruption. The ICA also reports that, in addition to political stability, reform of State-Owned Enterprises and reform of the poorly-performing banking sector are crucial to the well-being of the private sector. Figure 5: Leading Constraints to Firms Operating in Iraq Leading Constraints to Firms Operating In Iraq Electricity 72.5 Political instability 70.3 Corruption 67.6 Access to Financing (Ex: Collateral) 47.6 Practices of competitors in the informal … 47.1 Access to Land 44.7 theft,disorder and crimes 44.7 Tax Rates 42.4 Transportation 38.9 Business Licensing and Operating Permits 35.3 Regulatory Uncertainty 33.6 Tax Administration 32.7 Water 26.6 Inadequately educated workforce 25.8 Courts 20.1 Customs and Trade Regulations 18.9 Labor Regulations (Like Social Insurance) 15.5 Telecommunications 11.4 0 20 40 60 80 % of firms identifying constraint as "major" or "very severe" 32. The Government has placed a high priority on developing the private sector in its National Development Plan. Draft legislation currently before the Parliament covers labor law, competition policy and establishing institutions to support private sector development. However, the existing legal framework suffers from poor enforcement. In addition, there is ineffective coordination between ministries regulating the private sector, and between the Government and the private sector. Many ministries have limited capacity to implement reforms and there remains some resistance to cooperating with the private sector at the operational level. Despite these challenges, there is a significant potential for private sector-led growth, should the Government implement reforms for an improved business environment. Two examples of Doing Business areas on which the Government has illustrated commitment to reform are business registration and construction permits. As the construction sector is taking off in Iraq, the latter would generate benefits in terms of increasing economic activity and importantly, jobs. 33. The Government also recognizes the importance of improving the performance of the financial sector, including creating a level playing field for non-state banks, improving access to finance for micro, small, and medium enterprises (MSMEs), and improving financial sector regulation and governance. Iraq’s financial sector is underdeveloped and dominated by state-owned banks, weak private bank participation and limited access to finance by firms. The system is not aligned with international standards and governance structures are weak. In order to improve financial sector performance it will be important to accelerate the current reform program, including: clarifying the roles of state-owned banks; restructuring the two largest banks, Al-Rashid and Al-Rafidain; removing barriers 10 for private banks in doing business with the Government and state-owned banks; and adopting concrete measures to create a level-playing field between private and public banks. A better enabling environment would facilitate access to finance, including improving credit systems, contract enforcement, and bankruptcy regulations. 34. The telecommunications sector has provided some success stories, but its potential remains under-exploited. The liberalization of mobile telecom attracted several foreign entrants and generates one of the few significant sources of non-oil fiscal revenue. The fixed line backbone reaches all regions of the country, but is largely underutilized due to poor service quality and high tariffs. The telecom/Information and Communications Technologies (ICT) sector provides potential connectivity to Iraqi citizens, government departments (including provincial governments) and the private sector, using mobile telephones, Optical Fiber Cable, Microwave, and other fixed lines and wireless technologies. Combined with high-performing and affordable international telecom connectivity, the sector will directly contribute to improvements in the business and trade environment of the country. Broadband internet connectivity and ICT in general are key inputs for transformation across many sectors, and can help spur job creation, innovation and entrepreneurship, particularly among youth. With the large connectivity gaps that currently exist, such progress becomes much more arduous. 35. The agriculture sector, which employs many of the rural poor, is heavily distorted by food imports and agricultural subsidies and tariffs. Although a potential source of employment, particularly in rural areas, the sector suffers from low investment, poor productivity, and policy distortions. Currently around 20 percent of the population is employed in the agricultural sector which is mostly practiced on small farming units in a low input–low output system. Policies of price and production controls and marketing restrictions have contributed to the sector’s low productivity and growth rates. In addition, years of insufficient maintenance and funding have degraded agricultural services and physical infrastructure, particularly water resources and irrigation infrastructure. On the policy front, Iraq currently has a top-down, centralized planning approach rather than bottom-up, decentralized identification of programs and projects that would put farmers and private sector in the driver’s seat. Public Service Delivery and Social Protection 36. In addition to constraining private sector development, poor public service delivery is a major source of discontent for the Iraqi people. Electricity and water are severely undersupplied, with total renewable resources dropping rapidly as a result of increased demand (due to population growth) and declining supplies. Education quality is poor and schools are in need of repair and remain overcrowded despite operating multiple shifts. Health outcomes are relatively low and the social protection system is ineffective, especially for the most vulnerable. Iraq’s large oil revenues can be used to finance the needed investments in public and social services, but capacity and coordination constraints in Government are hampering these efforts. 37. Inadequate electricity is seen by Iraqis today as a top concern, impacting daily life. Despite some recent improvements, power supply continues to fall well below demand, with a national average of only eight hours per day in 2009. In addition, power shortages are estimated to cost the Iraqi economy around US$43 billion per year. Chronic power shortages mean that Iraq must rely on expensive alternative supply sources, costing an estimated US$6-8 billion per year. Iraq’s generation, transmission, and distribution systems are in significantly degraded condition and new power generation capacity is urgently needed to meet demand. Rural areas suffer more from electricity shortages than urban areas because they are less able to purchase generators. Although the Government is undertaking a major electricity generation investment program that expects to add about 10,000 megawatts (MW) of 11 new generation by 2015, this will increase the focus on weaknesses in Iraq’s transmission and distribution infrastructure. The challenges for development of Iraq’s energy sector are not only physical in nature; they are also financial, economic, legal and regulatory, and institutional. Electricity tariffs are currently low, even by regional standards, and only cover a fraction of production costs which are high due to excessive losses and expensive imports of fuel and electricity. More than 80 percent of electricity supply in Iraq is unbilled or uncollected. Low tariffs contribute to significant demand growth, only exacerbating the pressures on electricity infrastructure. However, it is widely recognized that to raise prices while supply is chronically unreliable would be socially and politically unacceptable. Increasing the rate of utilization of the large volumes of gas Iraq produces in association with oil - and stopping the flaring of gas - could fuel most of the power generation needed in the country for decades, and thereby help with the current power shortage. Gas can also provide a critical resource to the development of new industries (petrochemicals and heavy industries). However, Iraqi gas institutions need support to increase their capacity, set out and implement a strategy, and monitor the huge investments required to treat the gas and bring it to the plants. 38. While Iraq once had the most comprehensive transportation system in the region, its transport infrastructure has suffered from war damage, neglect and underinvestment. Rehabilitation of transport infrastructure is a national priority. If Iraq is to have the capacity to transport the high volumes of international freight required to reconstruct infrastructure, buildings, and services, and diversify from an oil-based economy, most of the existing transport infrastructure needs to be rehabilitated or reconstructed and expanded. The alleviation of some of the obstacles facing the private sector, including the deficiencies in infrastructure, will also provide much-needed job opportunities. 39. Poor water quality and sanitation are also serious concerns. The effectiveness of Government agencies to meet the day-to-day needs of water for domestic and agricultural use and the collection and treatment of wastewater has been greatly diminished, leading to serious environmental and health risks associated with contaminated water supplies and inappropriate handling of wastewater disposal. This has resulted in a deterioration of the performance of water services in the country, for example in the Baghdad metropolitan area where 78 percent of the population has problems with its water supply. In addition, the collection of wastewater is limited: only 35 percent of the urban population has access to the piped sewerage network. The lack of investment in irrigation water service delivery has had major impacts on agricultural productivity and rural employment. Iraq is now importing the bulk of its basic food needs. 40. The environment in Iraq is degraded, with a high economic cost. The World Bank estimated that the annual economic cost of environmental degradation in Iraq ranges from four to eight percent of GDP. Management and investment to address high levels of air and water pollution would improve performance of all relevant sectors (e.g. sanitation, oil, agriculture, etc.). In addition, Iraq is in the grip of a water crisis after recent years of severe drought, wiping out crops in some parts of the country and causing an unusually high number of sandstorms. In the absence of a water sharing agreement with Syria and Turkey, the level of water in the Tigris and the Euphrates has fallen by more than 60 percent over the past 20 years and water quality has deteriorated. Municipal and hazardous waste are found in every urban center and most villages in Iraq with poor or non-existent collection services. Large quantities of associated natural gas are being flared because gas treatment plants and the pipeline infrastructure to transport gas for domestic use or export are not functional. Finally, climate change is having a profound impact on Iraq as it grapples with its water supply and the encroaching desert. To combat these challenges, Iraq would benefit by adopting and implementing a national climate change mitigation and adaptation plan, and by taking advantage of international climate change initiatives. 41. Iraq’s education system is suffering from a history of under-funding, degradation of 12 infrastructure, and depletion of human resources. In 2003, approximately 80 percent of school buildings were in need of rehabilitation or major repair and twelve universities were seriously damaged.10 Reconstruction of the education system is underway, but major efforts are still needed to address the massive backlogs in school construction and maintenance, deficient human resource development, poor management at all levels, outdated curriculum and teaching methods, and poor policy and system development that accumulated over previous decades. Although teacher numbers are high, there are issues of utilization, specialization, and deployment, resulting in large class sizes, shortages in specific subject areas (particularly English, mathematics and sciences), and disparities among geographical areas. In addition, the quality of pre-service teacher training in colleges and in-service training is considered inadequate, with poor facilities, lack of sufficient human resources, modern teaching materials and methods, and limited teaching practice within teacher training courses. Overall, the education system suffers from poor quality and relevance, and graduates of the system lack the required skills to enter the labor market. There is a low education level in the adult population. Only eleven percent of Iraqis have at least a diploma, half the population has primary or intermediate education only, and 38 percent have no formal education. In addition, there are marked regional and urban/rural differences in literacy rates and in the quality of education provided as Figure 6 illustrates. These differences foster greater disparities in economic and social growth across Iraq which, in turn, may well increase regional inequalities and social fragmentation. The recently completed national education strategy aims to address these deficiencies. Figure 6: Literacy Rate of Segment of Population Aged 15-24 Years 42. Women in particular lack equal access to a quality education. There are fewer all-girl secondary schools (excluding KRG) as compared with all-boy schools (in 2008/09, 31 percent of secondary schools were for girls only, while 42 percent were for boys only). This is important not only because it prevents girls from joining the labor market, but also because it prevents the high social returns on education in terms of improving health indicators, lowering maternal and infant mortality rates, raising children’s nutritional and school participation rates. Illiteracy among Iraqi women (24 percent) is more than double that of Iraqi men (11 percent). Literacy tests indicate that illiteracy rates in rural areas are above 50 percent for women aged 15-24. The national gender target for the 2007 to 2016 period is to improve the ratio of girls’ to boys’ enrollment from 87 percent to 100 percent, in primary schools, from 72 percent to 86 percent in intermediate schools, and from 69 percent to 85 percent, in secondary schools. 43. The Iraqi health system has suffered from conflict and neglect. Prior to the 1980s, Iraq’s health system was considered the most advanced in the region. However, the system has been impacted by war and conflict resulting in serious weaknesses of the system’s ability to meet basic health needs. Over the past decade, there have been some signs of improvements in health outcomes, mostly attributed to improved access and utilization of maternal and child health service. Iraq’s progress to reach the MDG goal of reducing under-five mortality by two-thirds by 2015 as well as its progress towards 10 Iraq United Nations/World Bank Joint Needs Assessment – Education Sector, October 2003 13 attaining a three-fourth reduction in maternal mortality, another MDG goal, are deemed insufficient at this juncture, mainly as a result of weak governance and oversight, wide urban/rural disparities in access to quality care, and a shortage of facilities and qualified health professionals. Iraq spends about 3.3 percent of GDP on healthcare (US$137 per capita), relatively modest for its level of socioeconomic development. While about 75 percent of total health spending in Iraq is public, spending is highly skewed towards pharmaceuticals (37 percent) and administration (22 percent) pointing out the inherent inefficiencies in health expenditures. Going forward, a look at expenditure flows against services received at the facility level would be essential to get a complete picture of the sector’s performance and would help the Government devise appropriate policies to improve the quality of health services and efficiency of the sector. 44. Providing adequate social protection remains an important challenge, particularly for the most vulnerable, such as widows and IDPs. The Government has been introducing structural changes, while attempting to rationalize subsidies and transition from the universal food subsidy (Public Distribution System - PDS) to a better-targeted cash transfer program that can meet the needs of the poorest and most vulnerable. The cash-based Social Safety Net program administered by the Ministry of Labor and Social Affairs has expanded to cover nearly one million families but targeting remains inefficient. The pension law of 2007 presented significant improvements, and other major laws are underway, including the creation of mechanisms to provide portability of benefit entitlements across private and public pensions schemes so that workers are not penalized when moving from the public to the private sectors or vice versa. Government Priorities 45. In 2009, the Government prepared a medium-term development strategy, the Iraq National Development Plan (NDP) 2010-2014, which aims to build a market-based economy in Iraq. The strategy has nine main goals: (i) to achieve economic growth at 9.4 percent per year; (ii) to generate 3 to 4.5 million new jobs; (iii) to diversify the economy away from oil and into agriculture, industrial sectors (oil and gas, petrochemical industries, chemical fertilizers, cement, pharmaceutical industries), and tourism (recreational, religious, and cultural); (iv) to create a stronger role for the private sector, both in terms of investment and creating job opportunities; (v) to improve productivity and promote competition; (vi) to reduce poverty by 30 percent from 2007 levels by focusing on comprehensive rural development, job creation, and provision of basic services such as education and healthcare services, particularly for vulnerable groups such as youth and women; (vii) to establish a spatial development trend characterized by a fair distribution of infrastructure and public services; (viii) to focus on sustainable development that balances economic, social, and environmental considerations, thereby using available natural resources in a sustainable way; and (ix) to strengthen the role of local governments to take charge of local economic development and delivery of services to the people. 46. To achieve these objectives, the NDP proposes an investment program of 218 trillion Iraqi dinars, or US$186 billion over the plan period, of which US$100 billion would be funded by the federal budget and the remaining US$86 billion would be funded by the private sector. Sector priorities in the NDP include oil, electricity, agriculture, transportation and communication, and regional development. Higher priority is given to the oil (15 percent of total proposed investment) and electricity (10 percent of total proposed investment) sectors. Agriculture is seen as important from the perspective of economic diversification, food security, employment opportunities generation, and reducing poverty and migration to urban areas. The transportation and communications sectors are deemed critical in terms of enhancing connectivity with other sectors. Similarly, the NDP reserves 12.5 percent of its investments for the regional development program, and 17 percent of total Government investment (or higher depending on the next population census) to the KRG. Finally, the NDP allocates 22 percent of the Government 14 investment program to the social sectors. The NDP recognizes that investment alone is not sufficient and proposes complementary policy and institutional reforms, and mechanisms for monitoring and evaluation of the NDP. The NDP is in the process of being updated to cover the period 2013-17. 47. The Poverty Reduction Strategy (PRS), developed with the support of the Bank and adopted in January 2009, complements the NDP in its focus on poverty. Both strategies share a common goal of reducing poverty by 30 percent, from 23 percent in 2009 to 16 percent in 2014, through higher incomes and better health, education, social protection and housing services for the poor. In addition, the PRS sets out specific goals in terms of human development: (i) reduce the illiteracy rate by half (from 28 percent to 14 percent), and raise the net enrollment rate in primary education (from 75 percent to 98 percent), in intermediate education (from 21 percent to 50 percent), and in secondary education (from 23 percent to 40 percent); (ii) reduce the number of individuals covered by the food ration card and restrict coverage to those who are below the poverty line by 2014; and (iii) bridge the gender gap, including through higher women participation in the labor force, and higher ratios of girls to boys in literacy and primary and secondary education. III. BANK GROUP PARTNERSHIP STRATEGY A. Lessons Learned from Previous Engagement and Stakeholder Feedback 48. Despite an extremely challenging operating environment and security conditions, the Bank Group over the past three Interim Strategy Notes (ISNs) has achieved some successes, and has learned a number of lessons which will inform the present CPS. The need for realism, for leveraging the Government’s own vast resources, and for having strong government ownership and reform champions are the main lessons learned during the implementation of the last ISN series. 49. Following a long period of disengagement, the Bank made a decision to reengage in Iraq at the time of the Iraq Donor Conference in Madrid in 2003. The initial post-conflict reconstruction program, the bulk of which was designed in 2004-05, was wide-ranging and ambitious, with the Bank involved in nearly all sectors and optimism regarding expected improvements in the security and political situation in the country. There was strong pressure for the World Bank, as other donors, to respond very quickly to the reconstruction and recovery needs. Projects were thus prepared on a very rapid timetable with limited knowledge of the country context, sectors and the institutional environment. As a result, much of what normally would be accomplished during project preparation was left to be addressed during project implementation. When, contrary to expectations, the situation in Iraq deteriorated, the operating environment became untenable. The Bank tried to mitigate risks and adapt to the changing realities, but the complex political and authorizing environment were not conducive to such adaptation. Another feature of Iraq’s post-conflict environment was the exodus of the technical and professional cadre, and this had an impact on the Government’s ability to implement the program. Experience points to the need to be more alert to the changing circumstances, and to be more candid as to the political economy of conflict-affected situations and the limitations of donors’ intervention in such environments. Experience also shows that political considerations, while always important to bear in mind, need to be managed so as to avoid impossible mandates and the resulting failures. In view of the limited capacity of the Government, and with the bulk of the Bank’s current post-conflict lending assistance winding down, this CPS presents an opportunity to apply the lessons learned from the Bank Group’s past engagement and to deliver technical and financial support to maximize the effectiveness of Iraq’s own resources. 50. The Bank Group should be realistic about its role and potential for impact in a resource-rich country with a difficult operating environment. The size of the Bank-supported program is very small relative to the Iraqi budget. This fact, combined with a natural preoccupation with domestic political and security issues and a history of isolation from international best practice, resulted in 15 a lack of traction on the Government side. This situation would have required intensive, on-the-ground supervision and implementation support by World Bank task teams, but this approach was not possible due to the difficult security situation and the limited ability of Bank staff to work directly with counterparts on the ground. The use of the Bank’s agent on the ground, the Fiduciary Management Agent (FMA) (Box 1), was an innovative solution that offset the lack of access and provided a good level of fiduciary oversight. Over the past few years, the Bank was also able to increase its presence on the ground and bring the dialogue closer to the client. Although the Bank has accomplished a great deal under unusual circumstances, it remains to be seen whether the existing portfolio will have satisfactory outcomes considering the operating environment. If the security situation were to deteriorate again in a significant way, lessons learned indicate the need for an appropriate level of expectations on results and careful management decisions as to the degree of Bank Group engagement. Box 1: Portfolio and Supervision Arrangements Unconventional Supervision: Use of a Fiduciary Management Agent in Iraq Since 2004, the Bank has used a group of Iraqi engineers, financial management, and procurement professionals as a Fiduciary Management Agent (FMA) to assist in monitoring, supervision and capacity building for the investment portfolio, and in helping ensure compliance with Bank fiduciary standards and guidelines. Experience with the FMA has been positive, with the FMA acting as the Bank’s eyes and ears on the ground, particularly when some areas are inaccessible. The FMA visits sites, documents physical works and sends monthly reports on procurement and financial management. This is arguably a much broader scope of coverage than is carried out for most Bank projects around the world. The FMA contract is renewed annually and is subject to satisfactory performance as confirmed by annual evaluations, feedback from which is fed back into contract performance indicators. The FMA participates in all official Bank supervision missions, follows up regularly with the Project Management Teams on implementation of actions identified during supervision, and flags as necessary issues in project implementation worthy of management attention. The FMA arrangement is working well and the mechanism will continue to be used for as long as the security situation restricts Bank staff access to project sites across Iraq. Intensity of FMA services will decrease as most projects close in 2013; however this will still be an option for future IBRD projects. 51. One key challenge for IFC’s involvement in Iraq over the last few years has been to find the right local partners. The private sector is small and faces serious capacity issues. A key element in going forward will be to identify and support local investors who have the potential to grow, can embrace best practices in how to conduct their businesses, and are able to effectively work with IFC and other International Financial Institutions. 52. Against this background, the Bank Group will focus efforts on knowledge transfer and ensure that financial support leverages Iraq’s own resources while delivering needed technical assistance to enhance capacity of the Government and private sector institutions. Iraq now has considerable resources at its disposal, but its capacity to plan and implement development programs is still too weak. During CPS consultations, Government stakeholders indicated that transfer of knowledge, provision of advisory services and capacity building were considered high priorities for Bank assistance. 53. Going forward, the Bank will ensure that its interventions are responsive to client demand and receptivity to reform. In a number of areas, client engagement, capacity and ability to carry out reforms have been low. Based on experience, the Bank will focus on undertaking activities to which the Government is engaged and committed. 54. Lessons from the 2011 World Development Report (WDR) are also being applied in this CPS. For example, a Community Driven Development (CDD) approach has been piloted successfully in KRG, and work is underway to expand this program. The CPS also provides greater focus on gender, regional and cross-border initiatives, and a major focus on service delivery as a way to build up confidence in the effectiveness and credibility of the State. 16 Multi-stakeholder Consultations 55. A wide variety of stakeholders confirmed the need for support from the Bank in rebuilding the capacity of state institutions to lead policy reforms, implement the Government’s development programs and deliver services to the people. The Bank carried out several intensive consultation missions and met with a variety of stakeholders, including senior government officials, project management teams, donor representatives, and members of civil society in Baghdad, Erbil, Basra, Dohuk, Mosul and Al-Muthanna. Electronic media was also used to support the CPS consultation process and reach a wider audience. Consultations broadly confirmed the strategic thrust of the Bank's proposed approach, focusing primarily on supporting Iraq to plan and properly use its own financial resources, design and implement institutional reforms needed to spur economic diversification and create jobs, and increase its capacity for service delivery. Strengthened capacity of public institutions—both at the central and local government levels—was underscored by all stakeholders. Current World Bank Group Portfolio 56. Since 2004, the World Bank has supported Iraq’s reconstruction and development through a US$1 billion program. This includes US$500 million in Iraq Trust Fund (ITF) grants and an exceptional International Development Association (IDA) allocation of US$500 million in credits. The program has supported a number of areas, including infrastructure reconstruction in water, power, and roads, education and health, private sector development, telecoms, social protection, public financial management and reform of the two state-owned banks. In 2010, the IBRD financed a US$250 million Development Policy Loan which supported strengthening budget management and prioritization; reforming the financial sector; and improving the efficiency of the social protection system. 57. As of September 30, 2012, Iraq’s total active ITF and IDA portfolio of 25 projects amounted to US$860 million, with 54 percent disbursed. This included: 11 projects financed by ITF grants amounting to US$316 million (76 percent disbursed); five IDA investment lending operations amounting to US$508.5 million (39 percent disbursed); and three grants from Bank-administered trust funds (the State and Peace Building Fund (SPBF), the Japan Social Development Fund (JSDF), and the EITI Trust Fund). Iraq is also a member of the Global Gas Flaring Reduction initiative led by the Bank Group. Combined, the Water, Sanitation and Urban Development Sectors make up the largest share of the portfolio at 33 percent followed by Electricity/Energy, and Education at 21 percent and 19 percent, respectively (Figure 7). Figure 7: Active Portfolio Sectoral Distribution Private/ Finance Health Sector 0.1% 3% Education Water/ 19% Sanitation Urban 33% Rural Devt 3% Transport 16% Capacity Bldg/ Public Adm. Electricity/ 4% Energy 21% 17 58. A gender review of the Iraq portfolio was undertaken to inform this CPS. Much of the existing portfolio consists of reconstruction and recovery projects designed in 2004-2006 and set to close in the coming year or two. The portfolio focused on emergency reconstruction and recovery needs, and while certain activities did address gender directly, gender considerations were not mainstreamed in the design. Going forward, the gender review identified entry points for a greater focus on gender (Box 2). Box 2: Observations from a Gender Review of the Iraq Portfolio A review of the Iraq portfolio points to a number of areas where the Bank’s work has had a gender focus. The 2007 household survey, carried out under difficult and dangerous conditions, was the most comprehensive socio-economic survey ever undertaken in Iraq. It captured sex-disaggregated data, particularly for social and economic indicators. On the basis of this survey the Iraqi authorities developed an official poverty line and the first Poverty Reduction Strategy in 2010. A new household survey is expected to be completed by December 2012, following which the data will be compiled. This will provide updated sex-disaggregated data on which a Gender and Poverty Assessment to be done in FY14 will be based. The Bank is also providing TA to help Iraq reform its Public Distribution System with special efforts for household targeting tools to be sensitive to the gender of the household head and address vulnerabilities such as Internally Displaced Persons and widows. On education, the National Education Strategy includes a policy for increasing girls’ enrollment which will benefit from insights in the new household survey. The Emergency Health Project has a special focus on vulnerable groups, including pregnant women and children. Due to the low number of female healthcare professionals and social sensitivities of using healthcare facilities run by males, the project is expanding the number of women health volunteers and using mobile health clinics. While gender considerations were not necessarily integrated into the design of the Capacity Building 2 project, a series of workshops were held on Leadership Skills for Policy Reform for Iraqi Female Parliamentarians. The upcoming Water Sector Strategy could be a good entry point for looking at gender disaggregated data where it exists and gaining a better understanding of the different roles and needs of men and women with regard to water and sanitation services. In Private Sector Development (PSD), gender has been integrated into activities, including: measures to help the Regulatory Reform Unit identify and address gender issues when developing new policies; a more inclusive approach to consulting with NGOs; giving priority to women in the provision of microfinance loans; and to gender issues in dialogue and programs provided by Iraq business associations through the Private Sector Development Center. The ICA included diagnostics on women and gender issues. Sex-disaggregated data and analysis will be an important resource for informing PSD activities going forward, particularly in light of Iraq’s goal of increasing women’s share of non-agricultural waged work. Gender is also very relevant in the Youth Livelihood Project which includes promoting women’s participation in life/work skills training. Going forward, the forthcoming poverty and gender assessment will provide updated data to inform the Bank-supported projects in the pipeline. While the household survey will be key to providing gender disaggregated data along many important welfare dimensions, efforts will also be made to collect project-level data, particularly in areas where the survey data will fall short, such as infrastructure. Finally, the Bank will emphasize gender mainstreaming in its dialogue with the Government on the update of Iraq’s Poverty Reduction Strategy and the Government’s budget. 59. Portfolio performance has improved, but the implementation environment remains challenging. The security situation in Iraq has improved and the pace of project implementation has increased considerably since 2006. However, conditions on the ground continue to hamper mobility of Bank staff and Project Management Teams, consultants and contractors. Security conditions also discourage local and international contactors from bidding and substantially increase project costs. The Bank’s Fiduciary Monitoring Agent (see Box 1) continues to support the Bank’s project supervision efforts through physical verification and monitoring of procurement and financial management. Procedures and institutional capacity constraints in line ministries (e.g., unclear lines of authority, inefficient review, approval, and oversight procedures) further impede project implementation, delaying decision-making, reporting, and follow up. Contract management has also been a continuing problem in Iraq, often leading to work of inferior quality or protracted delays in contract implementation. A weak banking system poses challenges for disbursement. Five projects are currently in problem status. These projects benefit from heightened supervision (3-4 times per year) and continuous updates and discussions, including with the Joint Portfolio Oversight Committee (JPOC) co-chaired by the Prime Minister’s Advisory Board and the World Bank. 18 60. The Government and the Bank are working to strengthen portfolio performance. The JPOC meets quarterly, following an Action Plan updated at the June 2011 Country Portfolio Performance Review (CPPR). The CPPR focused on the need to enhance capacity building, monitoring and evaluation, incorporate projects into the national budget, and address challenges related to low disbursements and implementation of Designated Accounts and E-signatures. As most projects move towards closing by the end of 2013, the focus will be on ensuring that projects disburse existing funds and have strong monitoring and evaluation systems in place to assess progress towards meeting their development objectives. 61. IFC has a growing and diversified investment and advisory portfolio in Iraq. IFC's investments in Iraq have increased significantly over the last few years, with the portfolio growing from only US$10 million in FY05 to nearly US$300 million today. In late 2011, IFC established a field presence in Iraq for the first time by placing a full-time Senior Country Officer in Bagdad. IFC signed an Establishment Agreement with the Government of Iraq in October 2012 for an official Country Office in Bagdad (co-located with the Bank), and plans to increase its presence in the field during the CPS period. IFC’s investments have aimed to support the private sector and leverage regional investments, and will be complemented by a strong Advisory Services (AS) program during the planned CPS period. IFC’s portfolio is diverse, and investments have supported the establishment of the Erbil Rotana Hotel, a cement company, and the banking, telecommunications, and logistics and warehousing sectors (including through equity investments). Recent large investments include: (i) US$155 million in Zain Telecom; (ii) US$45 million in a transport and logistics company (Gulftainer); (iii) US$45 million in Lafarge Cement; and (iii) around US$35 million in the financial and hotel sectors. While IFC’s early investments in the cement sector were cancelled due to security and sponsor issues, the current portfolio is performing well and having an impact on the ground. As the political, policy and security environment shows further improvement, IFC anticipates strong demand for the financing of private investments in Iraq across a variety of real and financial sectors. In addition to its investment engagement, IFC has started to provide advisory support in the areas of investment climate, financial infrastructure strengthening, capacity building of the banking/MSME sector and bank risk management, selective SME management training (especially targeting women), and the promotion of public-private partnerships in collaboration with the World Bank. IFC advisory support in Iraq has tried to focus on gender aspects, especially through its access to finance and Business Edge programs. IFC has been active in training banking staff in modern banking practices, training events targeting Iraqi business women, and has made early efforts to specifically support private sector-led development of the local construction industry. IFC’s advisory work is supported by the US$38 million multi-donor Iraq Business Advisory Fund (IBAF) provided by the US, United Kingdom (UK), Spain, and Japan: US$10 million of this funding is earmarked for microfinance investments. MIGA has supported one investment in the manufacturing sector thus far. B. Proposed World Bank Group Partnership Strategy 62. The overarching objective of the World Bank Group engagement will be to support the country’s efforts to build stronger government institutions and a more diversified and regionally- integrated economy that can deliver services and create jobs. This objective is supported by three pillars which are aligned with the emphasis of the MENA Regional Framework on governance, sustainable private sector-led growth, job creation and inclusion. These are: (1) improving governance; (2) supporting economic diversification for broadly-shared prosperity; and (3) improving social inclusion and reducing poverty. IFC will contribute to the strategy through an integrated program of advisory and investment work to help diversify the economy away from the oil sector. This will be done by developing a favorable business and regulatory environment and fostering responsive institutions to strengthen job-creating, private sector-led growth in the non-oil sectors. MIGA will mainly contribute to Pillar 2. 19 63. The Bank is moving from Interim Strategy Notes to a Country Partnership Strategy. This shift responds to the Government’s request for a deeper and more substantial engagement and represents a longer-term Bank commitment. This is the first World Bank Group Country Partnership Strategy for Iraq with a fully integrated IBRD, IFC and MIGA program. The Bank Group aims to accompany the country through the CPS period, supporting the Government in making important policy choices that will set the stage for the country’s development. The four-year timeframe covered by the CPS will also allow planning within a longer time horizon, in keeping with the 2011 WDR recommendations for countries emerging from conflict. It will also serve as a bridge between a concessionally-financed reconstruction and recovery investment portfolio and a forward-looking, demand-driven program. 64. The World Bank Group’s program will emphasize knowledge transfer, using all the available instruments, including AAA, lending and reimbursable services. A key feature of the Bank’s support lies in bringing global knowledge and experience to the table and connecting Iraq with international practitioners. Exposure to other country experiences has proven to be very useful in Iraq’s case given that the country has emerged from war and isolation and has experienced an exodus of skilled civil servants. The Bank is committed to serving as a broker of knowledge and will bring to bear solutions for Iraq’s most pressing development challenges in the coming years. 65. A proposed program is outlined under the Pillars to support this agenda. Analytical and advisory activities include, inter alia, follow-up work to a Public Expenditure Review, a Report on Oil Revenue Management for Economic Diversification, a Poverty and Gender Assessment, Agriculture Technical Assistance, a Gas Master System Study, and Financial Sector Dialogue. IBRD projects amounting to US$540 million have been identified starting in FY14 for five projects, including: Integrated Financial Management Information Systems; Governance; Trade and Transport Corridors; Irrigation and Water Resources; and Water Supply and Sewerage. In addition, a program of Reimbursable Services is being developed. While the future program will be largely demand-driven, and IBRD lending will be pursued only in the presence of strong government ownership, there are areas which are seen to be high priorities for Bank engagement due to their integral role in the country’s development. These include governance, financial sector development, and gender. 66. Trust Funds play an important role in the Bank’s program in Iraq and are fully integrated into the Strategy. Most importantly, the US$532 million Iraq Trust Fund will close during the CPS period. The EITI Trust Fund is an important part of Pillar 1, while Pillar 2 benefits substantially from a US$13.2 Private Sector Development Trust Fund 11. Pillar 3 is supported by a successful State and Peace Building Fund Community Driven Development pilot in the KRG as well as JSDF grants. 67. The following table elaborates ongoing, planned, and potential support under the main pillars of engagement. 11 Supported by Swedish International Development Agency (SIDA), the US, and formerly by DFID. 20 Table 2: INDICATIVE ASSISTANCE PROGRAM I. Improving Governance II. Supporting Economic Diversification for Broadly Shared Prosperity III. Improving Social Inclusion and Reducing Poverty ONGOING ENGAGEMENT IDA IDA Emergency Road Rehabilitation 135.0 Third Emergency Education Project 100.0 Dokan & Derbandikhan Emergency Hydropower 40.0 Emergency Water Supply 109.5 Emergency Electricity Reconstruction 124.0 Total 299.0 Total 209.5 ITF 1/ ITF 1/ ITF 1/ Public Financial Management Reform 16.0 Banking Sector Reform 10.0 Emergency School Construction & Rehabilitation 60.0 Integrated National Energy Strategy 6.9 Emergency Baghdad Water Supply 65.0 EITI Emergency Community Infrast. Rehab. Additional Financing 25.5 Emergency Water Supply, Sanitation & Urban Reconst. 110.0 Extractive Industries Transparency Initiative 0.8 Emergency Electricity Reconstruction 6.0 Emergency Social Protection 8.0 Second Emergency Primary Health Care Assistance 1.2 Household Survey & Policies for Poverty Reduction 7.0 Total 16.8 Total 48.4 Total 251.2 IFC Investment Climate Regulatory Reform Intervention SPBF Advisory Services for Improving Financial Infrastructure & SME Consultative Service Delivery Program II 5.0 Investments in Telecom Sector ITF - TA Executed on Behalf of the GOI 1/ JSDF ITF - TA Executed on Behalf of the GOI 1/ Second Capacity Building (TA) 9.4 Youth Livelihoods Development in Southern Iraq 2.7 Pension Reform Implementation Support (TA) 5.8 Public Financial Management Reform (TA) 2.0 Rationalization of the Public Distribution System (TA) 2.6 Total 11.4 MDTF (DFID / SIDA) - TA Bank-Executed Education Sector Institutional Strengthening & Capacity Bldg (TA) 2.7 Private Sector Development (TA) 13.2 Household Survey & Policies for Poverty Reduction (TA) 5.1 Total 16.2 Regional Initiatives University Governance Scorecard (TA) System Approach for Better Education Results Workforce Development Diagnostic & Technical Assistance Diagnostic & Technical Assistance Country Economic Memorandum (ESW) (recently completed) Economic Complementarity & Deeper Regional Integration (ESW) Public Expenditure Review (ESW) (recently completed) Gas Pricing Study (TA) Establishment of Asset Valuation Unit in Ministry of Finance (TA) 2/ Total Ongoing 28.2 Total Ongoing 363.3 Total Ongoing 481.9 FY13-16 PROGRAM 3/ IBRD IBRD IBRD Integrated Financial Management Information systems (IFMIS) (FY14) 40.0 Trade & Transport Corridors (FY14) 200.0 Water Supply & Sewerage (Baghdad) (FY15) 100.0 Public Financial Management /Governance (FY15) 60.0 Irrigation Water Management/Water Resources Project (FY14) 140.0 Total 100.0 Total 340.0 Total 100.0 Diagnostic & Technical Assistance Diagnostic & Technical Assistance Diagnostic & Technical Assistance Public Expenditure Review II Follow-up (AAA) Country Economic Memorandum II Follow-up (AAA) Capacity Bldg. for Education, including Implementation of National Water Public Expenditure Review (ESW) Agriculture (AAA) Education Strategy (TA) Local Governance/Fiscal Decentralization (TA) Investment Climate Assessment Reform (TA) Social Protection Strategy (ESW) Public Sector Governance (TA) Telecoms (TA) Health System Strengthening (TA) KRG Procurement Reform (TA) Gas Master System Study (TA) Poverty Gender Assessment (ESW) Financial Management TA (Inspector Generals) Financial Sector Dialogue (TA) Reserves Asset Management Program (TA) (under identification) Water Sector Strategy (ESW) Public Financial Management (TA) Environment (AAA) IFC Public Credit Registry Development GRAND TOTAL Ongoing and Planned 128.2 GRAND TOTAL Ongoing and Planned 703.3 GRAND TOTAL Ongoing and Planned 581.9 Notes: Amounts in USD millions. A program of reimbursable services is at very early stages of discussions. 1/ The Iraq Trust Fund (ITF) will terminate on December 31, 2013. 2/ Funded by US State Department. 3/ These are the activities that have been defined at the time of CPS discussions with the Government. However, this CPS is intended to be a flexible framework and additional activities are expected to be added to the program upon Government demand and in line with the Strategy. 21 � Result Area 1: Improving Governance CPS Outcome Areas: 1. Improved transparency and efficiency of oil revenue management and public spending 2. Achievement of one or more features of the Governance Action Plan 68. Low institutional capacity hampers the optimal use of Iraq’s existing wealth of natural and financial resources. Building on the ongoing engagement in the management of public finances, the Bank will continue to support improvements in institutional capacity and governance through technical assistance to improve Government-wide systems and practices, public financial management, transparency in oil revenue management (particularly through the continuation of the ongoing EITI program), a joint training program with the IMF and World Bank Treasury Department on debt reporting and management, and focused attention on governance issues at the sector level. The Bank will also support the Government on institutional reforms and capacity building to strengthen the state’s oversight and control capabilities. The Central Bank of Iraq has expressed interest in participating in the World Bank Treasury Reserves Advisory Management Program which helps build capacity in central banks to manage reserves. 69. Sound fiscal and macroeconomic policy, including transparency of oil revenues, is critical for Iraq’s development. The Bank will help to put in place an analytical framework for informed decision-making on the allocation of its overall resource envelope. The 2012 reports on Economic Diversification for Oil Revenue Management and Public Expenditure Review (PER) provide a diagnostic base for developing a macro-fiscal framework to assist Iraqi policy makers in measuring petroleum financial flows and making informed spending and saving decisions consistent with the Government’s economic vision. This work is aimed at helping the Government address key issues in revenue management and spending efficiency and will be followed up by support on implementation. 70. The ongoing PFM Reform Project will deliver improved business processes in budget preparation, budget execution, and public procurement and capacity building of the Ministry of Finance Accounting Training Center so that it can conduct future training of Ministry of Finance staff in a sustainable manner. The project will also deliver and test a prototype for an Integrated Financial Management System (IFMIS) in three ministries and three governorate treasuries by June 2013. If tested successfully, the Government intends to ‘pilot’ the system in selected ministries and treasuries as the 'primary' system in 2014 and will ‘go live’ with the system in all ministries and treasuries in 2015. This will be supported through a new IBRD project of US$40 million in FY14. The PFM project includes a capacity building component for the Board of Supreme Audit (BSA) to strengthen Iraq’s accountability mechanisms. The Bank helped draft a consolidated Procurement Law and will continue to support procurement reform through the development of a single portal website for procurement notices and the development of sector bidding documents. 71. The Bank Group is engaged in a structured dialogue around transparency, accountability and participation and has worked with the Government to develop a draft Governance Action Plan. The Bank will support the implementation of the Governance Action Plan, including development of a law on Access to Information. Bank activities will stress the importance of citizen participation, including women, in the design and implementation of government programs. In areas where the Bank maintains sectoral dialogue with the Government, the Bank will support the Government in developing the practice of public consultations. The Bank will also look at social accountability measures in sectors where this might be feasible on a pilot basis. The Bank will also support the Government’s efforts on decentralization and local governance with the aim of facilitating a constructive and informed debate on decentralization policy in Iraq which fits its specific context and constitutional requirements. The Government has expressed its interest in an IBRD project in FY15 for the Budget Directorate on 22 Governance. 72. Other capacity building efforts that have shown traction and will be continued include working closely with the Government on strategy development, including the National Poverty Reduction Strategy, Integrated National Energy Strategy, Education Strategy, and pensions and social safety nets (see Annex 3). This includes bringing Iraqi officials to see examples of other country policies and practices and engaging in discussion with international practitioners. This approach has been successful and brings to bear the World Bank’s comparative advantage of sharing global knowledge and international practice to a country that has been isolated through decades of war. The Bank will support “on-the-job� training in terms of capacity building including, where appropriate, supporting a move from conventional construction contracts towards “Design-Build-Operate� / turnkey contracts to provide more Iraqi staff with the experience required to manage future investments, while also building capacity in the private sector. � Result Area 2: Supporting Economic Diversification for Broadly-Shared Prosperity CPS Outcome Areas: 1. Strengthened approaches to an improved business environment 2. Strengthened supervisory framework for financial intermediation and capacity of financial institutions 3. Strengthened infrastructure services 73. The Bank Group will support the Government’s efforts towards economic diversification. This will be done through policy advice and analysis in support of building an enabling environment for private sector development, reforming the financial sector, and encouraging public-private partnerships, Public-Private Dialogue and trade facilitation. While the diversification challenge cuts across numerous policy domains, enhancing the environment for private sector development is certainly at the core of the agenda. It is through the private sector, and not further increases in the size of the public sector, that new jobs will be created and broad-based economic development can be achieved. The Bank Group’s interventions will support efforts for bringing more women into the workforce. 74. The Investment Climate Assessment (ICA) identified several reform areas that should be undertaken to address the major concerns of firms in Iraq. Electricity is a top constraint. Other concerns include Access to Finance; Access to Land; Access to Labor and Gender Equality; Access to Infrastructure, including power supply, water, transport and trade; SOE Reform; Control of Corruption; and Informality. The Bank has identified policy reform recommendations and stands ready to assist in any of these areas. 75. Through the Private Sector Development Trust Fund, the Bank will continue to support the Government’s efforts to restructure the SOE sector and create a level playing field for private sector investment in productive activities. This includes support in identifying SOEs that are ready for reform, working to reform 180 SOEs, and strengthening the capacity of Ministries to lead reform efforts, for example in budget and business planning, labor restructuring and performance management. Additional Technical Assistance (TA) will support the establishment and operation of an SOE “Asset Valuation Unit� within the Ministry of Finance to improve oversight of SOE assets. The Bank will also support the establishment and operation of Regulatory Reform Units to provide oversight and improved quality control over business regulations. Gender aspects are integrated into the PSD Trust Fund taking into account the low female labor force participation rate (among the lowest in the region) and the concentration of women in the public sector. IFC will also support reforms in corporate governance and investment climate, including and jointly with the Bank’s follow up to the ICA, improving the construction permit process as one starting point where there is clear demand from the Government, and thus providing a platform for further reforms. Finally, the Bank will continue providing advisory support 23 for regulatory reform at the national and subnational levels, including for starting a business. 76. The World Bank and IFC advisory services will support the Government’s introduction of Public-Private Partnerships (PPPs) in Iraq. The Bank Group is currently supporting PPP legislation prepared by the United Nations Industrial Development Organization (UNIDO) and the rollout of PPP pilots and technical assistance to several ministries, including the Ministry of Electricity, Ministry of Industry and Minerals, and the Ministry of Construction and Housing. Such activities will be complemented where possible by the use of the Technical Advisory Facility of the Arab Financing Facility for Infrastructure. IFC is ready to engage in supporting the implementation of the PPP program in the electricity and transport sectors and will explore the associated financing opportunities in partnership with MIGA. The World Bank and IFC could also assist in the process of privatizing existing assets or introducing private sector management to non-infrastructure-related services. 77. MIGA will continue to support Iraq’s efforts to attract foreign private investors through the provision of political risk guarantees. Supporting investments in fragile and conflict-affected environments is one of MIGA’s global strategic pillars, and therefore Iraq is a focus country for MIGA engagement. Having already supported one manufacturing investment project, MIGA remains open to supporting investments into Iraq from all countries, including South-based and regional investors. Iraq's membership in MIGA is recent (2008) and MIGA’s activities in Iraq will further develop as demand for its services is expected to increase. MIGA’s program will be aligned with the broader WBG strategy and activities and focus on agribusiness, finance, services, telecommunications and infrastructure. Private investors have shown interest in partnering with MIGA for investments into Iraq and MIGA stands ready to support sustainable projects with a high development impact, including through its Small Investment Program. 78. Reforming the financial sector is at the heart of the economic diversification strategy for Iraq. The Bank supported the development and adoption of an action plan that includes improving access to finance for Micro, Small, and Medium Enterprises (SMEs) and modernizing financial sector regulation and governance. The Bank will continue to support the Government’s effort at reforming the state-owned banks – Al-Rashid and Al-Rafidain – and removing the barriers for private banks in doing business with the Government and state-owned banks. The Bank’s program will focus on helping the Government to create a better enabling environment to allow access to finance, including improving the credit systems, contract enforcement, and bankruptcy regulations. The Bank will also support the alignment of the system to international standards, as well as help in strengthening governance structures. The ongoing Banking Sector Reform project is supporting this work and helping build up the Central Bank of Iraq’s capacities in banking and financial sector supervision. IFC will provide a combination of advisory and investment support for regional and international investors in Iraq and promote reforms related to Access to Finance and investment climate, including improvements in financial infrastructure and support to private banks to expand credit to microfinance institutions and SMEs. The WBG’s efforts to improve access to finance for SMEs and regulatory reforms will be gender informed. For example, gender differences in ability to open a bank account, sign a contract, register a business, and manage property will be considered. IFC will provide training to SMEs, especially women entrepreneurs, through its Business Edge Program. 79. Trade reforms and regional integration will help economic diversification. The Bank will provide analysis and recommendations through analytical work, Economic Complementarity and Deeper Regional Integration: Iraq, Turkey and the Mashreq. This is in line with the WBG Trade Strategy which includes supporting diversification and improving trade facilitation and complementary policies that can improve competitiveness. Support for customs modernization and trade and transport facilitation are also important areas of support and a US$200 million Trade and Transport Facilitation IBRD Project is 24 under preparation. 80. The Bank will help Iraq improve the quality and delivery of its core infrastructure services through a combination of investments and institutional development. The Bank will seek to help Iraq prepare and implement strategic plans in the critical energy, transport, and water sectors, as well as building the necessary capacity to plan and implement its own investments. In the energy sector, this includes support for the Iraq National Energy Strategy (INES), as well as analytical work and technical assistance on policy, strategy, governance and institutional development in the power and gas sectors, including the upcoming Gas Master System study. Under existing programs, the Bank will continue its work on the rehabilitation of Dokan and Derbandikhan and the Hartha Power Plants. Regarding transport, the Government has asked the Bank Group for help with institutional reform and capacity building for transport infrastructure management, particularly in terms of transport access in relation to trade facilitation, and customs modernization. A transport sector master plan and strategy (including rail, road, air, and urban sectors) is under preparation, as well as identification of capacity building and technical assistance needs and an investment plan for the short, medium and long term. In telecommunications, the Bank will seek to build on its successful engagement in Iraq through the ITF PSD project. A follow-on technical assistance program is being explored, most likely as a reimbursable service. In particular, the Bank could support development of various mobile applications, organize seminars and workshops to share international best practice, bridge capacity and knowledge gaps on various policy and regulatory issues, and play the role of honest broker by bringing all public and private stakeholders together on one platform to advance the telecom. Gender-sensitive approaches to infrastructure programs will be pursued to enhance productivity, incomes, and provide more equitable access. 81. IFC is well-positioned to mobilize financing to a number of projects in these key sectors as well. IFC and MIGA will support South-South investments, particularly from existing clients interested in expansion to Iraq (e.g. from the GCC, Jordan, and Turkey). Mobilization of additional funding from financial institutions, similar to what was achieved for earlier successful efforts to finance Iraq’s telecommunications backbone, will remain a key feature of IFC’s strategy. 82. Sound management of natural resources and environmental protection are critical for Iraq to sustain its economic development agenda. This includes supporting the development and implementation of a comprehensive national environment and natural resources management action plan that prioritizes environmental issues in national planning and budget allocation. Priority areas include urban environment, rehabilitation of agricultural land, and water resources management. A new US$140 million Irrigation and Water Management/Water Resources Project is proposed for FY14: this project would build on the success of the existing Community Infrastructure Project and focus on the rehabilitation of irrigation systems, including efforts to rebuild local Iraqi water user associations. The Bank also stands ready to bring to bear its expertise to help the Government address climate change issues, given Iraq’s high vulnerability. The Global Gas Flaring Reduction (GGFR) Initiative has proposed US$1.4 million for Iraq GGFR work from 2013-15. A Gas Pricing Study will be undertaken as well as the Gas Master System Study which aims to propose an overall strategy and an implementation plan for the development of the gas industry. � Result Area 3: Improving Social Inclusion and Reducing Poverty CPS Outcome Areas: 1. Improved delivery of health, education, and water supply services 2. Strengthened capacity to develop, manage and monitor social protection reforms 83. The Bank Group will seek to help the Government develop its capacity to deliver efficient 25 services in health, education and social protection, while also improving targeting mechanisms to deliver support to the most vulnerable. Under existing programs, the Bank will support school construction and capacity building for teacher training and curriculum development. The Bank has also supported the development of the National Education Strategy. This work will try to provide a foundation for greater women’s participation in the labor force through education policy. In the coming years, Bank support could include: (i) capacity building for the implementation of the national education strategy by supporting the Government in developing an implementation plan and the design of priority programs; (ii) involving Iraq in global and regional initiatives, such as MENA Region’s Workforce Development (WfD) project under the System Approach for Better Education Results (SABER) and the University Governance Score Card (UGSC) 12; (iii) a policy note to take stock of the current situation regarding quality of education and skills development in Iraq using the newly available data from WfD, UGSC and other initiatives and incorporating the planned developments in the new education strategy 13; and (iv) skills development and readiness for the labor market. 84. In health, the Bank Group will focus on improvements in management capacity and efficiency of the sector, following on the recent recommendation for a Public Expenditure Review in the sector. In response to a request from the Minister of Health for assistance in the areas of building, expanding and operating emergency medical services and e-governance, the Bank will build on the recent experiences in establishing similar emergency medical services in Kurdistan through the Regional Health Emergency Response Project. The Bank will continue to work in close partnership with the World Health Organization which has been working closely with the Ministry of Health (MOH) to support the Iraq Public Sector Modernization Program. IFC, in turn, will work to identify viable investment opportunities in the health sector that enable existing health providers to grow and attract South-South investments in the health sector. 85. In the water supply sector, the Bank Group would continue helping the Government prepare the analytical base for sustainable delivery of water services across the country, including an institutional and regulatory framework for the water supply and wastewater sector. Under the existing portfolio, the Bank will continue to implement its programs of support for the rehabilitation of municipal water supplies, including in Baghdad. A new Water Supply and Sewerage (Baghdad) project for US$100 million is proposed for FY15. 86. Under the rubric of social protection, the Bank Group will continue its engagement in labor markets, poverty reduction, social safety nets, and pension reforms, building on the available data to allow for a deeper evidence-based dialogue on social protection reforms. The Bank could also support Iraq in implementing its National Employment Strategy. The successful Household Survey work and ensuing Poverty Reduction Strategy are being followed up by an update of the Household Survey. Technical work will be carried out to assess Iraq’s social subsidies and will make policy recommendations to move Iraq beyond the universal Public Distribution System to a differentiated model that continues to protect the poorest and most vulnerable. Additional policy development and implementation support could be provided on safety nets, such as conditional cash transfer programs to improve education and health outcomes among youth and women, and pensions, where significant capacity is being built at the National Board of Pensions (NBP) to help expand coverage beyond the current level of 20 percent of the population. Additionally, the Bank is supporting a community-driven development approach to basic service delivery in the KRG and could expand this work over the CPS 12 These initiatives will collect comprehensive data to provide diagnostic information on the system which can be used for further policy development and could lead to additional work to enhance employability of graduates and the relevance of the acquired knowledge and skills to the labor market. 13 The policy note would lay the foundation for targeted support in the important area of skills development and students’ readiness for the labor market. 26 period. 87. The CPS intends to help the Government reach its medium-term objective of providing opportunities for women’s empowerment with equity and justice. The Bank will carry out a Gender and Poverty Assessment in Iraq in FY14, informed by the Household Survey that will be completed by end of 2012. This work will aim to mainstream gender into the poverty work to provide a full and comprehensive assessment and will inform the development of a National Gender Strategy. The National Gender Strategy will focus on raising the status of women through the reform of economic and legal institutions to ensure equal rights and opportunities for men and women (family law, protection from violence, property ownership, employment, political rights and inheritance laws) with a view to reach the objective of achieving gender equity in power and resource distribution and to meet MDG targets by through continuing to promote women’s empowerment in productive economic sectors such as agriculture, water, and energy. The gender assessment will inform dialogue and technical support on social protection reform to improve targeting and outcomes. The gender assessment will also be used to inform policy dialogue more broadly. The Bank will continue to work with the Government to establish the evidence base regarding the effects of gender equality in poverty reduction operations, build the gender-mainstreaming capacity of its clients, and partner with other stakeholders on gender equality and women’s economic empowerment. C. Implementing the FY13-16 Country Partnership Strategy 88. Iraq’s complex political agenda, security challenges and global economic uncertainty imply that the Bank Group needs to be flexible, opportunistic, and ready to adapt to changing circumstances. This strategy is a living document that lays out priorities for Iraq today but will need to be periodically reviewed for relevance in light of changing circumstances. The Bank Group’s investment and analytical and advisory work programs will be reviewed with the Government through Country Program Reviews, and activities will be updated based on the Government’s emerging priorities and the quality of engagement with partner institutions. 89. The Bank will seek to ensure that IBRD financing for Iraq during the CPS period leverages Iraq’s own resources and has strong government ownership and reform champions. Iraq has considerable resources at its disposal for public investment, development and poverty reduction, but absorptive capacity remains low. The Bank’s main comparative advantage will be in providing the underlying analysis for policy development and providing technical assistance to help build institutional capacity. Available IBRD resources for Iraq are but a small fraction of Iraq’s annual investment budget (US$36.7 billion 14 in 2012). Thus, IBRD funding must be used strategically to leverage and provide an operating framework for the Government’s investment program and to provide knowledge transfer and good project practice. In addition, and in light of Iraq’s own resources, it is expected that more Bank support will be carried out on a reimbursable basis as done in other countries in the region and around the world. 90. Building on its global knowledge, the Bank will be offering a combination of lending and knowledge products to better meet the specific needs of Iraq. Knowledge can be delivered through the entire spectrum of Bank instruments, including IBRD lending, just-in-time policy notes, sectoral strategies, reimbursable services and economic and sector work to inform the policy decisions and design of development programs. 91. The portfolio will continue to be monitored closely, including by regular meetings of the JPOC and CPPRs. Project supervision will continue to be carried out intensively and increasingly in-country 14 Includes supplemental budget 27 when security permits. Future Bank project support will be designed to meet more robust criteria of readiness for implementation. Readiness criteria will be monitored in order to facilitate a quick start of project implementation, for example, the core implementation team being in place as well as prepared procurement plan and packages, and some contracts ready for signing. In order for the projects to begin in a timely manner, the Bank team will work with the Government to encourage timely project effectiveness. 92. IFC’s investment program is expected to remain on an upward trajectory assuming continued improvement in the domestic security/political environment and sustained investor confidence. With expanded field presence and business development efforts, investments during the CPS period will focus on exploring opportunities in sectors that generate employment opportunities (e.g., construction, manufacturing, tourism and services), as well as increased access to finance. IFC will continue to implement its regional South-South investment strategy by partnering with larger MENA and/or Gulf investors interested in venturing into the Iraqi market. Special attention will be given to focusing on lagging regions and reaching women with a view to improving the inclusion dimension of IFC’s program. The implementation of the IFC Advisory Service program foresees a phased approach: interventions will be segmented and phased over the life of the program to ensure proper relevance and alignment with the prevailing situation on the ground. The objectives of the Advisory Services program, in line with national priorities and in coordination with other donors, are to support Iraq’s economic development, create new investment and employment opportunities and stimulate private sector-led growth. Based on extensive consultations with the World Bank, donors, GOI and private sector stakeholders in Iraq, IFC will execute a targeted, multi-pronged private sector development advisory services program – in tandem with investments – with a focus on: (i) corporate governance; (ii) SME training though Business Edge; (iii) investment climate reforms (e.g. construction permits); (iv) implementation of PPPs and privatization support; (v) improvements in financial infrastructure and work with banks and microfinance institutions to increase access to finance to MSMEs; and (vi) supporting client- and sector- related sustainable business needs. Financing of the Program 93. The expected indicative lending envelope is US$600-900 million during the CPS period. Actual lending will depend on demand from the authorities based on Iraq’s development priorities, performance under the CPS, and IBRD lending capacity. The Bank is developing a reimbursable services program with Iraq: KRG has already indicated its intent to enter into a significant reimbursable services program with the Bank, details of which are currently being worked out. During the CPS period FY13-16, IFC plans to continue investing in the private sector with an indicative program of US$100-150 million in commitments per year assuming improvements in the security situation and an operating environment that is conducive to private sector expansion. Fostering Stronger Partnerships 94. While donor assistance played an important role in the country’s reconstruction and development process, some donors are winding down their development assistance programs in Iraq. The multi-donor Iraq Trust Fund provided an excellent vehicle for donor cooperation in post-war Iraq and is an example of good practice in terms of transparency and donor reporting. The Bank also engages in a mutually reinforcing dialogue with the authorities—together with the IMF—on issues of common interest. Over the last few years, the Government has improved its capacity to manage aid in line with the signing of the Paris Declaration on Aid Effectiveness in May 2008. This includes: the restructuring of relevant units in the Ministry of Planning in Baghdad and the KRG; training on project screening and appraisal, management, monitoring and evaluation; and modernization of information technology. These efforts have gone hand-in-hand with the establishment and improvement of a Donor 28 Assistance Database to capture planning, implementation, monitoring and evaluation of Iraq’s capital budget (domestic and external resources). 95. Improving the efficiency, effectiveness, and delivery of development cooperation remains a challenge. Ongoing security issues, together with the Government’s institutional capacity to lead on external aid, have impacted the achievements of reconstruction and development efforts. This was further exacerbated by certain assistance programs that were not well-coordinated among international agencies and local communities. These developments have made it particularly important for Iraq to develop strong and well-functioning institutions that can plan, allocate and oversee development resources in an effective, accountable and transparent manner. 96. The Bank has established strong partnerships with Iraq’s development partners and will continue to play a key role in the coordination among Government and development partners. The key donors, in terms of volume of financial transfers, are the US Agency for International Development (USAID), the Japanese Government, the World Bank, the European Union, and SIDA. The International Partners Forum (IPF), jointly chaired by the World Bank and the United Nations Assistance Mission in Iraq (UNAMI), meets monthly to discuss political and economic developments and to reach consensus for addressing them. In addition to these high-level fora, sector groups coordinate development partner support in specific areas on the Government’s program. The Bank also uses informal networking with key donor agencies as a means of coordinating its assistance program with other donors so as to ensure complementarity, and avoiding risks of overlap. Finally, during the CPS period the Bank will continue to lead / co-lead groups on public financial management, governance, and private sector development and provide support to the Prime Minister’s Advisory Council on aid coordination and effectiveness. 97. Iraq has a nascent but active CSO sector with over 200 registered CSOs. The most active CSOs are focused on governance, human rights, democracy, media, human development, women’s rights and the environment. A few CSOs are particularly vocal on budget issues, corruption and abuse of office, and the rights of displaced persons, widows and orphans. Only a small number of the CSOs in Iraq have been established with strong governance structures and have developed close partnerships with local and international institutions in their field of operations. The Bank will continue to engage CSO leaders in dialogue and consultations. Strategic Communications 98. A communication plan will be important for CPS implementation, both to provide information to stakeholders and to provoke public debate on development policy issues. To this end, many of the Bank’s projects and AAA work will support increased stakeholder feedback and involvement. Many policies (for example, in social and health sector reforms) would benefit from deeper transparency and public participation on how implementation will occur and how reforms will impact the lives of citizens. Therefore, the Bank will seek to scale up its communications on its own work, and assist the Government in doing so more broadly. This could, for example, include working with the Government and other partners to regularly host workshops and seminars around key policy issues for a wide audience, in addition to other fora, as well as making use of new interactive technologies that would allow a broader and more diversified reach. IV. MANAGING RISKS 99. The CPS will be implemented during a period of considerable risk and uncertainty. Political risks feature most prominently, and these impact security. The 2014 elections are an important milestone that could influence the ability of the Bank Group to deliver on the CPS program. Tension, 29 infighting, and conflict could become more pronounced as the election approaches, making reform increasingly difficult to accomplish. Under these circumstances, it is important for the Bank to focus on what is possible, help sustain momentum within the Government’s economic development program, and build support for reforms across all parts of the coalition government as well as with civil society and the private sector. Given the volatility of the political and security environment and the upcoming elections, the CPS will remain flexible and will strategically adapt its engagement to respond to the evolving situation on the ground. The CPS Progress Report provides a good opportunity to make adjustments to the strategy if necessary, and the timing of its delivery can also be adjusted to respond to country circumstances. In addition to these issues, and related to the political situation in the country, a lack of consultation and consensus within Government on policy reform may lead to fragmented and dissonant policy choices that that are not aligned with the Bank’s recommendations, and this could compromise the impact of the Bank’s strategy in Iraq. The Bank will continue to make policy recommendations and provide technical assistance and access to best practice and international experience in order to inform policy making to the greatest extent possible. However, these risks are difficult to fully mitigate, and it should be recognized that the Bank Group’s influence is limited. 100. With its largely oil-based economy, Iraq is vulnerable to oil price fluctuations. The global economic crisis is putting downward pressure on oil prices and this could impact the Government’s ability to finance its budget from oil revenues. While Iraq should not (and is unlikely to) abandon its efforts to integrate more fully into the global economy, prudent macroeconomic management will remain key to providing the fiscal space for the Government to adjust appropriately to external shocks when they occur. The Bank will seek to help the Government mitigate this risk, including through policy advice. 101. Another external shock that may impact Iraq is regional instability, including spillover from Syria which could jeopardize the whole region. Should regional instability spill over to Iraq, creating implementation difficulties for the Bank’s strategy, necessary adjustments to the program will be made and, if appropriate, the CPS Progress Report will be accelerated. Under such a scenario, IFC business development and ramping up of an IFC investment program would be difficult: IFC would focus on portfolio management and engaging through its advisory arm on a selective basis. 102. The Iraq program also remains subject to project management and fiduciary risks, including environmental and social safeguards aspects. In the current environment of political uncertainty and corruption, program-specific risks assume even greater prominence. In addition, the operating environment makes supervision challenging. To mitigate these risks, the Bank plans to continue providing training and to undertake risk-based supervision missions as possible to help build capacity and ensure that adequate controls are in place for financial transactions and accuracy in financial reporting, audit and disbursement. A fiduciary monitoring agent carries out fiduciary control and physical verification activities with reporting to the Bank, and a portfolio specialist has been hired in Baghdad; however, risks remain in the implementation of Bank-supported projects. To mitigate the safeguards risks, the Bank will provide training, close monitoring, and review the Environmental and Social Safeguards Assessment Framework. In the event that political or fiduciary risks seriously undermine the integrity of the portfolio, appropriate measures will be taken. 30 Annex 1: Iraq CPS Results Framework (FY13-FY16) CPS Results, Outcomes, and Indicators Milestones World Bank Group Program (Tentative) Results influenced by the WBG Program PILLAR 1: IMPROVING GOVERNANCE Government’s Key Objectives: 15 • Create fiscal discipline to strengthen efficiency; effectiveness and transparency in the use of public resources as well as aligning the budget with national priorities • Improve governance, in modernizing the public sector, strengthening transparency and accountability, and combating corruption Outcome Area 1.1: Improved transparency and efficiency of oil revenue management and public spending 1.1.1. Iraq conducting itself as an Extractive • Issuance of two annual EITI Reports by 2014 Completed Activities: Industries Transparency Initiative (EITI)-compliant • Medium-term Expenditure Framework (MTEF) • Report Country Economic Memorandum (CEM) country incorporating prudent oil price and production projections Phase I: Oil Revenue Management for Economic Baseline: 1 EITI report 16 Diversification Target: 4 EITI reports issued by 2016 and active • Public Expenditure Review participation of civil society in monthly IEITI Council meetings as evidenced by participation lists On-going Activities: and noted by Validator • Public Expenditure Reviews carried out in at least two key Extractive Industries Transparency Initiative Support sectors (expected to be Water and Health) (EITI); Public Financial Management Reform & TA 1.1.2. Implementation of sector Public • New budget instructions approved and guidelines ready by (ITF); Second Capacity Building TA (ITF); Household Expenditure Review (PER) recommendations mid-2013 Survey & Policies for Poverty Reduction & TA (ITF) focused on improved efficiency of public spending • Standard bidding documents finalized and used by the target Baseline: None ministries Planned Activities: Target: At least two key recommendations • Public procurement bulletin board (website) housed within Integrated Financial Management Information implemented Procurement Regulatory Agency established by 2013 Systems (IFMIS) (IBRD); Public Financial Management Reform/Governance (IBRD); Local 1.1.3. Alignment of budgetary allocations with the Governance/Fiscal Decentralization TA; Financial • Annual PRS monitoring reports with a focus on gender national Poverty Reduction Strategy (PRS) Management TA (Inspectors General); Poverty Gender indicators using Household Survey data Baseline: One poverty line item in yearly budget Assessment ESW; KRG Procurement Reform (TA); Target: Poverty mainstreamed in budget Public Financial Management (TA) planning beyond a line item Outcome Area 1.2: Achievement of one or more features of the Governance Action Plan 1.2.1. Governance Action Plan to achieve greater • Governance Action Plan approved by the Council of Ongoing Activities: transparency, accountability, participation and local Ministers Second Capacity Building TA (ITF) 15 The Government is in the process of updating its National Development Plan. 16 For year 2009, which reconciled about US$41b in revenue from oil and gas, validated in a timely manner. 31 CPS Results, Outcomes, and Indicators Milestones World Bank Group Program (Tentative) Results influenced by the WBG Program governance under implementation Baseline: Draft Governance Action Plan Planned Activities: prepared Public Financial Management Reform/Governance Target: Achievement of one or more key (IBRD); Public Sector Governance TA features of the Governance Action Plan, such as the Access to Information Law PILLAR 2: SUPPORTING ECONOMIC DIVERSIFICATION FOR BROADLY SHARED PROSPERITY Government’s Key Objectives: • Diversify the economy through increased participation by other sectors in GDP, particularly the production, agriculture and industrial sectors, as well as tourism • Enhance the private sector’s developmental role, the partnership between the private and public sectors, and promoting an environment that encourages investment • Lay the foundations for the rehabilitation of state-owned facilities • Strengthen Iraq’s geographical presence as a link between East and West, and meet the demand for transit cargo transport by building an efficient infrastructure • Meet residential and industrial electricity demand and ensure efficient and effective management of electricity sector investment and operations Outcome Area 2.1: Strengthened approaches to an improved business environment 17 2.1.1. Time taken to deal with construction • Reengineered (simplified) process of the Construction Completed Activities: permits Permitting in Baghdad, Basra and Erbil, and capacity • Report CEM Phase I: Oil Revenue Management for Baseline: 187 days (Doing Business 2013) building for the agencies involved Economic Diversification Target: To be determined as part of IFC’s Investment Climate Regulatory Reform • Business Planning and performance contracts for Directors IFC Ongoing Activities: intervention focused on construction permitting. General (DGs) of each SOE by 2014 Investment Climate Regulatory Reform Intervention • Establishment and operation of SOE Asset Valuation Unit 2.1.2. Strengthened capacity to restructure State within the Ministry of Finance by 2014 Ongoing Activities: Owned Enterprises (SOEs) 18 • Recommendations of KRG Regulatory Capacity Review, PSD Trust Fund with DFID, SIDA and US support Baseline: Time-bound Action Plan to including establishment of Regulatory Reform Unit within (including support for the implementation of PPPs, and implement strategy to reform SOEs KRG Ministry of Planning implemented by 2014 support for regulatory reform, including for Doing Target: Implementation of time-bound Action • Regulatory Capacity Review report for Basra Governorate Business areas, sector specific reforms and advising Plan on track by 2014 Government of Iraq on how to improve draft • Public-Private Dialogue (PPD) with focus on improving the legislation prepared by ministries; Regional ESW business enabling environment and gender issues Economic Complementarity and Deeper Regional Integration: Iraq, Turkey and Mashreq) 17 Outcome areas 2.2 and 2.3 on the financial sector and infrastructure as well as governance under Pillar 1, contribute to Outcome area 2.1 Strengthened approaches to an improved business environment. However, separate outcomes are included given the Bank Group’s support to these areas. 18 Ministry of Industry and Minerals 72 SOEs; Ministry of Housing and Construction 8 SOEs including one pilot PPP; Asset valuation Unit in Ministry of Finance 32 CPS Results, Outcomes, and Indicators Milestones World Bank Group Program (Tentative) Results influenced by the WBG Program Planned Activities: Trade and Transport Corridors (IBRD); Country Economic Memorandum II ESW; Investment Climate Assessment (ICA) Reform TA Outcome Area 2.2: Strengthened supervisory framework for financial intermediation and capacity of financial institutions Ongoing Activities: 2.2.1. Compliance by the Central Bank of Iraq • Completion of Phase 1 of the Banking Reform Strategy Banking Sector Reform (ITF); IFC Advisory Services with Basel Core Principles Action Plan for Improving Financial Infrastructure, microfinance & Baseline: No SME management training Target: Yes Planned Activities: 2.2.2 Public Credit Registry hosted by the Central • Development of a Public Credit Registry hosted by the Financial Sector Dialogue TA; Public Credit Registry Bank of Iraq functioning Central Bank of Iraq (IFC) Development (IFC) Baseline: Public Credit Registry does not exist Target: Yes (2016) Outcome Area 2.3: Strengthened infrastructure services 2.3.1. Improved clearance time of imports from • A Program to reduce trade and transport barriers along Iraq’s Ongoing Activities: and transit trade via Turkey at Ibrahim Khalil main trade corridors and major border crossing with Turkey Regional ESW Economic Complementarity and Baseline and target: To be defined during in place by end 2013 Deeper Regional Integration: Iraq, Turkey and project preparation of Trade and Transport Mashreq; Emergency Community Infrastructure Corridors (IBRD) Rehabilitation Additional Financing (ITF); Dokan & Derbandikhan Emergency Hydropower (IDA); 2.3.2. Number of beneficiaries from rehabilitated • 97,000 hectares of improved irrigated areas by mid 2013 up Emergency Electricity Reconstruction (IDA/ITF); Gas irrigation and drainage water services by mid-2013 from 70,000 hectares in 2008 Pricing Study TA; Integrated National Energy Strategy Baseline: 0 • 308,000 man-days employment created by 2013 up from TA; Emergency Road Rehabilitation (IDA) Target: 52,750 (2016) 111,400 (2011) in labor intensive works Planned Activities: Trade and Transport Corridors (IBRD); Irrigation 2.3.3. Electricity/Energy: Increased available • Iraq National Energy Strategy (INES) being implemented in Water Management/Water Resources (IBRD); Gas generation capacity (MW) in power plants the oil, gas and electricity sectors, and influencing Master System Study TA; Trade and Transport supported by WBG development of linked industries Corridors (IBRD) Baseline: 410 MW (2012) • Hartha Power Station Units 2 and 3 restored and Dokan and Target: 920 MW (2015) Derbandikhan hydropower plants rehabilitated by 2014 • Gas pricing and gas master system design studies completed (in support of INES recommendations) 33 CPS Results, Outcomes, and Indicators Milestones World Bank Group Program (Tentative) Results influenced by the WBG Program PILLAR 3: IMPROVING SOCIAL INCLUSION AND REDUCING POVERTY Government’s Key Objectives: • Reduce national poverty from 23 percent (2007) to 16 percent (2015) • Construct and rehabilitate intermediate and secondary schools in villages and poor neighborhood • Improve primary healthcare centers and accessibility by the poor and vulnerable • Improve the targeting and the efficiency of social safety nets Outcome Area 3.1: Improved delivery of health, education, and water supply services 3.1.1. Health: Percent pregnant women receiving: • 12 primary health care facilities refurbished and equipped by Ongoing Activities: (i) antenatal care at primary health care facilities in mid 2013 Second Emergency Primary Health Care Assistance Southern Iraqi Marshlands and Babil Governorate • Children age 0-5 years with health cards increase from (ITF); Third Emergency Education Project (IDA); Baseline: 69.8% (2012) 60.1% in 2012 to 95% in 2013 Emergency School Construction & Rehabilitation Target: 90% (2013) (ITF); Institutional Strengthening & Capacity Building for the Education Sector TA (ITF); Household Survey (ii) Iron Supplements & Policies for Poverty Reduction & TA (ITF); Youth Baseline: 26.1% (2012) Livelihoods Development in Southern Iraq (JSDF); Target: 50% (2013) Emergency Water Supply (IDA); Emergency Baghdad Water Supply (ITF); Emergency Water Supply, Sanitation & Urban Reconstruction (ITF) 3.1.2. Education: (i) Students benefiting from • Education Sector Strategy for education and higher Planned Activities: improved conditions of learning in new school education developed and launch by 2013 Health System Strengthening TA; Capacity Building buildings and classrooms • Trained curricula developers successfully produce for the Implementation of the National Education Baseline: 0 (2004) Curriculum Evaluation Manual and Curriculum Authoring Strategy TA; Water Supply & Sewerage (Baghdad) Target: 72,688 (2013) Manual by 2014 (IBRD); Water Sector Strategy (ESW) • Data collection completed and a report produced for the (ii) Number additional seats available, resulting University Governance Score Card by 2013 from newly built schools to reduce overcrowding • 20 master trainers and 120 trainers successfully trained (able Baseline: 0 to provide satisfactory training for teachers) by 2013 Target: 32,640 (2014) 3.1.3. Water: Number of people benefitting from • 10 rehabilitated water supply systems operational rehabilitated water supply systems under WBG supported program (number) Baseline: 0 (2005) Target: 815,000 (2013) 34 CPS Results, Outcomes, and Indicators Milestones World Bank Group Program (Tentative) Results influenced by the WBG Program Outcome Area 3.2: Strengthened capacity to develop, manage and monitor social protection reforms 3.2.1. Social Safety Net Reforms: Ineligible • Social Safety Net (SSN) Information System in place with a Ongoing Activities: households excluded based on use of the central central SSN Beneficiary Database by mid 2013 Emergency Social Protection (ITF); Pension Reform SSN Beneficiary Database • New targeting mechanisms and cash transfer methods in Implementation Support TA (ITF); Rationalization of Baseline: 0 (2011) place with better targeting of female-headed households (i.e., the Public Distribution System Reform TA (ITF); Target: 57,000 (2013) CCTs) in place (mid-2014) Consultative Service Delivery Program (Phase 2) • Pension administration information system designed by 2013 (SPBF) • Social Security System is merged with the State Pension Fund, in terms of policies and benefits and is administered by Planned Activities: the National Board of Pensions by mid 2013 Social Protection Strategy (ESW) • Agreed roadmap for reform of Public Distribution System (PDS) improved design and management of the PDS by 2014 3.2.2. Number of communities benefitting from • All Consultative Action Groups under CDD programs CDD programs supporting core service provision include 20% women and youth by 2014 Baseline: 25 communities (2012) Target: 100 communities (2014) 35 Annex 2: Key Ongoing Technical Assistance (TA) Supporting National Strategies TITLE DESCRIPTION Social Protection Technical Aims to strengthen the policy, management and administrative capacity in the Ministry of Labor and Social Affairs and the Assistance Ministry of Finance to develop, manage and monitor pension and social safety net reform programs. Extractive Industries Transparency Assist client in EITI implementation, develop/strengthen institutions, and facilitate knowledge exchange. Initiative (EITI) Technical Assistance Household Survey and Policies for Data collection and strengthen the ability of the Government of Iraq to make and implement informed policies regarding Poverty Reduction Project poverty reduction, job creation and improvement of safety nets. Second Capacity Building Technical Provide capacity building and training to help authorities introduce medium-term policies, focusing on economic and Assistance Project public sector management and social safety nets. Strengthen GOI technical and institutional capacity to implement the rationalization of the PDS. In the short and medium Public Distribution System (PDS) term, the aims are to support: (i) the implementation of the initial phases of the PDS reform, making sure that there is Technical Assistance Project coordination with the SSN, with special emphasis on targeting; (ii) the elaboration of the PDS public information campaign; and (iii) the design robust monitoring and evaluation systems. Public Financial Management (PFM) Aims to support the Ministry of Finance to develop a more effective accountable and transparent public financial Reform Technical Assistance Project management. Aims to support Iraq’s implementation of its Banking Reform Strategy and Action Plan, focusing on institutional, Banking Sector Reform Technical operational and financial restructuring of the 2 state-owned commercial banks, and strengthening of the regulatory Assistance Project supervisory functions of the Central Bank of Iraq. Aims to support (i) in the short-term, the GOI in implementing the provisions of the new Pension Law; (ii) in the Pension Reform Technical Assistance medium-term, the unification of the public and private pension schemes; and (iii) in the long-term, the development of Project (PRISTA) long-term old-age income strategy for Iraq. Integrated National Energy Strategy Aims to improve the ability of the Government to develop an energy strategy that is designed to increase the contribution of Technical Assistance Project the sector to sustainable development. (INESTA) Institutional Strengthening and Capacity Building for the Education Aims to support the Government’s effort to develop a sector strategy for education and higher education in Iraq. Sector Technical Assistance Project 36 Annex 3: Consultation Report 1. In preparation for the new Country Partnership Strategy (CPS) for Iraq, the World Bank held several consultations in-country as well as through electronic media via the World Bank website to discuss the proposed strategy and to obtain feedback from various stakeholders. The initial consultations were held in June 2011 in Baghdad led by the Special Representative. The World Bank met with stakeholder groups, including Government agencies, representatives of civil society, and donor organizations. The purpose of the meetings was to present the CPS preparation process, the overarching pillars of the Strategy based on the past three ISNs, and the current needs of Iraq as aligned with the National Development Plan (NDP), and to gain an understanding of the Government’s priorities and challenges. At these meetings, all stakeholders stressed the lack of skills following years of war and the need for continued capacity in all sectors. They also stressed the importance of security without which all efforts for rehabilitation and development will fail. All participants stressed the importance of transparency and accountability as the fundamental building block for recovery and growth. The extreme environmental degradation that Iraq has suffered following years of war was also highlighted in most meetings. 2. Formal consultations were later held in May 2012 in Baghdad led by the Country Director and the Special Representative. The World Bank met with a broad range of stakeholders from the highest levels of Government, including the Prime Minister, senior members of Cabinet, and Line Ministers, as well as representatives from civil society and non-governmental organizations, donors, local government, the media, and members of academia and private sector think tank organizations. During these meetings, the World Bank highlighted the strategic thrust of the proposed strategy for Iraq for the next four years, focusing primarily on providing the technical assistance Iraq needs to plan and properly use its own natural and financial resources, design and implement institutional reforms needed to spur economic diversification and create jobs, and increase its capacity for service delivery. The Government’s message was clear that the priority for work with the World Bank is less about access to financial resources but mainly about the need to increase its own absorptive capacity which has been severely degraded after decades of sanctions and conflict. Representatives of local governments, donors and civil society confirmed this view and stressed the need to accelerate priority services and promote private sector development in the non-oil sectors. 3. A CPS workshop with Government representatives was held in Baghdad in October 2012, as well as further consultation meetings with the private sector, private bankers, media, academics, think tanks, and chambers of commerce throughout the country. 4. The formal consultations also included field work led by the Special Representative in the Kurdistan Regional Government as well as the provinces of Al Basrah, Nineveh governorate, Dohuk, and Al Muthanna where the World Bank met with local governorate officials, civil society representatives and staff at three World Bank project sites. The project sites included the Um Qasr Al-Zubair dual carriageway rehabilitation project, a component of the Emergency Road Rehabilitation Project (IDA US$135 million); the Hartha Power Plant of the Emergency Electricity Rehabilitation Project (IDA US$124 million); and the Emergency Water Supply, Sanitation and Urban Reconstruction Project (ITF US$110 million). 5. In the city of Basrah, the largest city in Southern Iraq (population of 3 million) that produces much of Iraq’s oil wealth, stakeholders who were consulted (government officials and representatives of civil society) noted that oil does not produce jobs for ordinary people and that Iraq is having a hard time mobilizing oil money for restoring public services - particularly electricity and water. In addition, the poor environment due to sand, dust gas flaring, and pollution from burning oil wells is causing a health 37 crisis, including an alarmingly high rate of cancer among children. 6. From Basrah, the World Bank team travelled to Al-Muthanna via the Um Qasr Al-Zubair dual carriageway to Iraq’s poorest region where they witnessed first-hand the disastrous environmental impact of Saddam’s retaliatory policies on the marshlands. Drained marshes were evident on either side of the road. Al-Muthanna is the largest expanse of Iraq’s territory (20,000 sq. mi) but has a low population density (about 700,000 inhabitants) dispersed across a vast expanse of mostly desert land. Many of its inhabitants are Bedouin nomads: the provincial council mourns the difficulties of establishing population numbers to justify building schools and health clinics, though they admit that there is a critical shortage of both. Water is scarce, as are jobs. The province is one among a handful of Iraqi provinces that are facing a perplexing social problem. Women are leaving their husbands in droves and take up housekeeping with several children in tow but with limited ability to earn a living, given that educational attainment for girls counts among the lowest for Iraq. Across the region, there is high degree of poverty evidenced by the lack of school infrastructure, water shortages, poor health indicators and many street urchins wandering about. 7. Consultations were also held in Mosul, Nineveh Province. Stakeholders’ key priorities include: (i) support to agriculture, including drought resistant wheat seeds; (ii) health reforms; and (iii) remedying the lack of attention to local concerns by the central government. The Bank discussed the comparative advantage of the Bank in agriculture and put the focus on the agriculture ESW that is planned for FY15 rather than direct financial support to agriculture. The discussion also focused on sovereign versus sub-sovereign lending and the fact that Iraq’s Governorates do not meet the minimum criteria for sub-sovereign lending. It was agreed that the Governorate would raise their needs for financial support to these sectors to the level of the Ministry of Finance. 8. During these consultations, the Bank team discussed the proposed pillars of support, focusing on key priorities such as (i) strengthening Iraq’s economic management and fiduciary capacity; (ii) supporting private sector-led economic diversification and employment generation; and (iii) strengthening capacity to improve large-scale public service delivery. The Bank also discussed modalities of support with key government officials, including the balance of lending and non-lending, i.e., analytical work, technical assistance, and capacity building. 9. A consultation with the International Partners Forum was held on this CPS. All donors consulted on the draft CPS confirmed that the Bank Group’s proposed strategy is the right one and is broadly in line with their own strategy. There are working groups with donors on PFM, governance, water and agriculture, and partners meet on a regular basis and support each other's efforts in Iraq. Summary of Key Issues Discussed: 10. Iraq is a large oil-based economy with strong upside potential, but has extremely weak institutional capacity. All stakeholders stressed the erosion of skills following years of war and the need for reforms and continued capacity building in all sectors. Although security remains a problem, the economy is picking up as evidenced by strong macroeconomic indicators, increasing export capacity, new oil contracts, and a construction boom. As such, the country is benefitting from an increase in oil production, exports and oil prices. These, however, do not translate to job creation or improvements in the delivery of basic services, and the distribution of wealth and opportunity remains unequal. 11. Government officials broadly indicated that Iraq did not wish to borrow at high levels given their abundant resources. The Government also made clear that the priority for work with the World Bank is less about access to financial resources but mainly about the need to increase its own absorptive capacity which 38 has been severely degraded over the past two decades. Discussions with local level government representatives and civil society groups confirmed this view and stressed the need to accelerate the delivery of priority services, promote private sector development in non-oil sectors, and ensure inclusion. 12. Against this background, the discussions with stakeholders evolved around the three pillars of the CPS and the key messages are as follows: • Economic Management and Governance: All stakeholders echoed the need to combat corruption, establish transparency and build the foundation for long-term sustainable growth. There was a consensus among stakeholders on the urgent need for legal and regulatory reforms, a strong and stable financial sector, a robust governance framework, including a good procurement system, and strong auditing and oversight functions. Members of the Government as well as donors highlighted the urgent need for better governance in the financial sector, particularly moving forward on the reform of the two state-owned banks, Al-Rafidain and Al-Rasheed. • Job Creation and Inclusive Growth: Discussions centered on the critical need for economic diversification away from oil, creating the enabling environment for private sector development and job creation, moving from a central economy to a market economy. Employment, especially for youth and women, is considered one of the major concerns of stakeholders at all levels. Senior officials recognized that the large and fast-growing labor force and the absence of a dynamic private sector constitute serious impediments to addressing the critical issue of employment in Iraq. Many stakeholders went so far as to note that Iraq’s medium-term political and social stability will depend on how the issues of jobs and inclusion will be addressed. Some members of Government noted that Iraq is already working on developing upstream industries such as cement and petrochemicals, and is also looking at developing the agriculture sector, both to increase food security and to create rural employment. The World Bank responded that agriculture needed more analysis since it is not clear the extent to which it will generate employment and that it would require an integrated approach to water resources and land management, irrigation technology, financing and marketing and private sector participation. The Bank team recommended bringing in lessons of experience from other countries in this regard. The World Bank also noted Iraq’s tourism potential as a possibility for creating jobs which could be explored as part of the analytical work under the CPS. • Basic Services Delivery of Economic and Social Infrastructure: Stakeholders consulted emphasized that in order to improve the quality of life of Iraqis, the Government needs to urgently deliver basic services in the sectors of electricity, water, transport, education, primary health, and social protection while strengthening the capacity of Government institutions to adequately manage these sectors. As some donors and bilateral partners are in the process of phasing-out of Iraq, stakeholders requested World Bank support by identifying agents of change or champions in the Government to ensure that basic services are delivered. 39 Annex 4: Iraq Matrix of Donor Interventions Urban and Local Government Private Sector Development Governance/Transparency World Bank Administered Democratic Governance Environment & Climate Human Rights & Police Roads & Transport Water & Sanitation Poverty Alleviation Social Protection Iraq Trust Fund Donor Sector Humanitarian Agriculture Education Reforms Change Gender Energy Health Youth Australia X X X Belgium X X X Canada X X X X X Denmark X X X X EU / JUSTLEX X X X X X X X X X X X X Finland X France / AFD X X X X X X X Germany X X India X Italy X X X X X X X X X X X X Japan / JICA X X X X X X Korea X X X X Kuwait X Netherlands X X X X Norway X X X X X X Sweden X X X X X X X X X Turkey X UK / DFID X X X X X X USA / USAID X X X X X X X X X X World Bank X X X X X X X X X X X X X X X UN X X X X X X X X X X X X X X X X X World Bank Administered ITF X X X X X X X X Note: This is a snapshot based on the Bank's current knowledge of donor involvement in Iraq and will change over the course of the CPS period. 40 Annex 5: Iraq’s Progress towards the MDGs 1. Iraq has made progress towards achieving some of the MDGs including reducing hunger, promoting gender equality and reducing child mortality. However, there is still much work to be done in a number of crucial areas including increasing participation in primary education, reducing unemployment, and ensuring access to safe and reliable water and sanitation. The gap in access to essential services remains wide especially between rural and urban areas. 19 2. Iraq’s expected outlook to meet the MDGs is as follows (adapted from the World Bank’s “Global Monitoring Report 2011: Improving the odds of Achieving the MDGs� and the booklet “The MDGs in Iraq� published by the UN Country Team for Iraq): Iraq’s expected outlook to meet the MDGs Goal Status 1: Eradicate Far from target. The Government of Iraq is targeting a reduction in poverty levels extreme poverty to 16 percent by 2015 as part of its commitment to eradicate extreme poverty and and hunger hunger under MDG 1. Almost seven million Iraqis live in poverty (spending less than IQD77,000 per person per month, or US$2.20 per day), totaling 23 percent of the population. 2: Achieve Close to target. Following the drop in the net primary school enrolment ratio from universal 91 percent in 1990 to 89 percent in 2007, Iraq faces considerable challenges in its primary efforts to meet the 2015 target of 100 percent net primary enrolment. education 3: Promote Far from target. Iraq remains generally on course for achieving gender parity in gender equality primary education enrolment. However, the lowest enrolment rates are to be found and empower among girls in rural areas. Women’s share of wage employment outside agriculture women fell from 11 percent to 7 percent between 1990 and 2008. Just 13 percent of Iraqi women participate in the labor force and 24 percent are illiterate. Iraq is targeting a 50 percent share of non-agricultural waged work for women by 2015. 4: Reduce child Far from target. Iraq has made considerable progress in reducing mortality rates mortality among infants and children under the age of five. The proportion of children dying before reaching the age of five has fallen from 62 to 41 for every 1,000 live births. Moreover, growing numbers of Iraqi children suffer from stunting (25%) 0-5 years. However, some central governorates – particularly Salah al-Din (70 per 1,000 live births) are significantly worse off than the rest of Iraq. Of the countries in the region, only Yemen has a higher infant mortality rate. Iraq is aiming to reduce its infant mortality rate to 17 for every 1,000 live births by 2015. 5: Improve Far from target. The proportion of women dying in child birth (maternal mortality maternal health ratio) currently stands at 84 per 100,000 live births, placing Iraq in a group of 68 countries globally which account for 97 percent of all maternal and child deaths. Iraq is struggling to reduce the number of women dying in child birth (maternal mortality) to meet the target of 29 for every 100,000 live births. 6: Combat Close to target. The prevalence of HIV in Iraq is currently less than 0.1 percent of HIV/AIDS, the population. New incidences of tuberculosis (TB) rose from 2 to 12 for every malaria and 100,000 Iraqis per year between 2000 and 2006, pushing the country further away other diseases from the target of eradication by 2015. Southern and central governorates – particularly Qadissiya– experience the highest rates. Malaria is now almost 19 UN Inter-Agency Information and Analysis Unit 41 completely eliminated in Iraq with no indigenous cases reported in 2009 compared to over 39,000 cases in 1995. 7: Ensure Far from target. The proportion of households using an improved water source has environmental remained at around 80 percent since 1990. In rural areas, this figure is just 57 sustainability percent. Iraq faces considerable challenges in sanitation. 84 percent of the population uses an improved sanitation facility, like the public sewerage network or a septic tank. However, just 26 percent of the population is covered by the public sewage network, dropping to 2 percent in rural areas. While Iraq may meet the target of 96 percent of households using an improved sanitation facility, issues still remain over the lack of consistent water supplies, contamination of the water network due to damaged infrastructure and lack of wastewater treatment. An alarming 83 percent of Iraq’s wastewater is left untreated, contributing to the pollution of Iraq’s waterways and general environment 8: Global Close to target. Use of new technology has increased rapidly in Iraq since 2003, partnership for with 78% of the population using a mobile telephone as of 2007. Personal computer development ownership has risen to 12% while only 6% of Iraqis use the internet daily. 42 CAS Annex A2: Iraq at a Glance 43 44 45 CAS Annex B2: Selected Indicators of Bank Portfolio Performance and Management As of September 30, 2012 46 CAS Annex B5: Iraq Social Indicators Iraq Social Indicators Latest single year Same region/income group M. East & North Middle- 1980-85 1990-95 2005-10 Africa incom e POPULATION Total population, mid-year (millions) 16.3 21.6 32.0 382.8 4,970.8 Grow th rate (% annual average for period) 3.0 2.7 2.5 1.8 1.0 Urban population (% of population) 68.8 68.8 66.5 57.6 .. Total fertility rate (births per woman) 6.2 5.6 5.0 2.8 2.0 POVERTY (% of population) National headcount index .. .. 22.9 .. .. Urban headcount index .. .. 16.1 .. .. Rural headcount index .. .. 39.3 .. .. INCOME GNI per capita, Atlas method (current US$) .. .. 2,380 6,384 3,726 Consumer price index (2005=100) .. .. 171.0 129 135 INCOME/CONSUMPTION DISTRIBUTION Share of income or consumption Gini index .. .. 0.309 .. .. Income share held by low est 10% .. .. 4.0 .. .. Income share held by highest 10% .. .. 25.0 .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 3.0 5.0 6.0 Education (% of GNI) 4.1 .. 9.0 5.0 3.0 Net prim ary school enrollm ent rate (% of age group) Total 85 74 89 90 89 Male 90 78 94 92 90 Female 80 69 84 88 88 Access to an im proved w ater source (% of population) Total .. 80 79 89 90 Urban .. 97 91 95 96 Rural .. 44 56 81 84 Im m unization rate (% of children ages 12-23 months) Measles 70 80 73 89 86 DPT 86 74 65 90 85 Child malnutrition (% under 5 years) .. 10 7 12 .. Life expectancy at birth (years) Total 58 71 68 72 69 Male 49 69 65 71 67 Female 68 74 72 74 71 Mortality Infant (per 1,000 live births) 41 36 31 26 38 Under 5 (per 1,000) 53 45 39 31 51 Adult (15-59) Male (per 1,000 population) 207 157 281 152 202 Female (per 1,000 population) 191 101 125 95 136 Maternal (per 100,000 live births) .. 84 63 74 190 Births attended by skilled health staff (%) .. 54 80 83 71 CAS Annex B5. Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey. 47 CAS Annex B6: Key Economic Indicators Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 National accounts (as % of GDP) Gross domestic product a 100 100 100 100 100 100 100 100 100 100 Agriculture 5.8 4.9 3.8 4.4 5.0 .. .. .. .. .. Industry 56.5 54.4 56.5 42.5 44.9 .. .. .. .. .. Services 37.7 40.7 39.6 53.1 50.1 .. .. .. .. .. Total Consumption .. 66.0 49.4 91.5 75.4 63.2 71.2 67.7 64.4 63.5 Gross domestic fixed investment .. 17.7 33.4 27.2 28.3 24.3 24.5 27.1 27.7 28.1 Government investment .. 13.6 31.4 23.7 24.5 20.5 20.4 23.4 23.4 23.6 Private investment .. 4.1 2.0 3.5 3.8 3.8 4.1 3.7 4.3 4.5 Exports (GNFS)b .. .. .. .. .. .. .. .. .. .. Imports (GNFS) .. .. .. .. .. .. .. .. .. .. Gross domestic savings .. .. .. .. .. .. .. .. .. .. Gross national savings c .. 30.2 52.5 13.7 25.3 32.6 22.9 29.4 32.4 33.3 Memorandum items Gross domestic product .. 56,987 86,531 69,188 84,078 114,227 127,792 146,569 165,091 179,751 (US$ million at current prices) GDP per capita (US$) 1,926 2,845 2,215 2,624 3,478 3,799 4,260 4,695 5,006 Real annual growth rates Gross domestic product at market prices .. 1.5 9.5 2.9 3.0 8.9 10.2 14.7 12.0 9.3 Gross Domestic Income .. .. .. .. .. .. .. .. .. .. Real annual per capita growth rates Gross domestic product at market prices .. .. 47.7 -22.1 18.5 32.5 9.2 12.1 10.2 6.6 Total consumption .. .. .. .. .. .. .. .. .. .. Private consumption .. .. .. .. .. .. .. .. .. .. Balance of Payments (US$ millions) Exports (GNFS)b .. .. .. .. .. .. .. .. .. .. Merchandise FOB .. 37,835 62,013 38,428 50,240 77,877 87,145 101,254 117,447 129,805 Imports (GNFS)b .. .. .. .. .. .. .. .. .. .. Merchandise FOB .. 24,570 40,813 44,483 46,286 55,160 71,097 81,615 90,940 99,513 Resource balance .. 5,884 11,681 -14,349 -5,111 11,255 1,065 7,322 12,754 14,928 Net current transfers .. 1,234 4,899 5,053 2,593 -1,720 -3,070 -4,066 -4,976 -5,592 Current account balance .. 7,118 16,580 -9,296 -2,518 9,535 -2,005 3,256 7,778 9,336 Net private foreign direct investment .. 964 1,822 1,526 1,271 2,095 2,685 3,183 3,526 3,887 Long-term loans (net) .. .. .. .. .. .. .. .. .. .. Official .. .. .. .. .. .. .. .. .. .. Private .. .. .. .. .. .. .. .. .. .. Other capital (net, incl. errors & ommissions) .. 7,210 74 2,605 3,692 2,330 2,581 -908 -1,615 -1,384 Change in reserves d .. -11,872 -18,751 5,869 -6,295 -10,432 -7,373 -4,310 -4,780 -6,730 Memorandum items Resource balance (% of GDP) .. 10.3 13.5 -20.7 -6.1 9.9 0.8 5.0 7.7 13.7 Real annual growth rates Merchandise exports (FOB) .. .. .. .. .. .. .. .. .. .. Primary .. .. .. .. .. .. .. .. .. .. Manufactures .. .. .. .. .. .. .. .. .. .. Merchandise imports (CIF) .. .. .. .. .. .. .. .. .. .. 48 Iraq - Key Economic Indicators (Continued) Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Public finance (as % of GDP at market prices)e Current revenues .. 78.9 76.7 74.5 72.8 78.1 73.3 73.2 73.5 74.0 Current expenditures .. 55.0 55.7 74.8 57.2 50.0 57.2 51.3 46.6 45.9 Current account surplus (+) or deficit (-) .. .. .. .. .. .. .. .. .. .. Capital expenditure .. 13.6 31.4 23.7 24.5 20.5 20.4 23.4 23.4 23.6 Foreign financing .. .. .. .. .. .. .. .. .. .. Monetary indicators M2/GDP 31.9 37.7 33.8 60.5 63.6 53.5 .. .. .. .. Growth of M2 (%) 43.6 27.9 29.5 30.1 32.9 19.5 .. .. .. .. Private sector credit growth (%) .. 26.9 67.0 16.5 .. .. .. .. .. .. Total credit growth (%) .. 29.8 32.9 16.7 42.8 58.2 46.9 29.3 83.0 49.3 Price indices( YR80 =100) Merchandise export price index .. .. .. .. .. .. .. .. .. .. Merchandise import price index .. .. .. .. .. .. .. .. .. .. Merchandise terms of trade index .. .. .. .. .. .. .. .. .. .. Real exchange rate (US$/LCU)f .. .. .. .. .. .. .. .. .. .. Real interest rates .. .. .. .. .. .. .. .. .. .. Consumer price index (% change) .. .. 6.8 -4.4 3.3 6.0 7.0 6.0 4.5 4.0 GDP deflator (% change) 35.1 6.5 31.8 -30.1 25.2 29.4 2.4 -2.2 -0.3 0.7 a. GDP at current prices. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. 49 CAS Annex B7: Key Exposure Indicators 50 CAS Annex B8: World Bank Portfolio 51 CAS Annex B8: IFC Portfolio 52 CAS Annex B8: MIGA’s Outstanding Exposure (Gross Exposure, US$ million) As of end of fiscal year FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 through 2/29/12 Sectoral Distribution Finance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Infrastructure 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mining 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Oil & Gas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Agribusiness/Manufacturing/Services/Tourism 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 MIGA's Risk Profile Transfer Restriction 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 3.7 Expropriation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 3.7 War & Civil Disturbance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 3.7 Breach of Contract 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 MIGA's Gross Exposure in Country 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 3.7 % Share of MIGA's Gross Exposure 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% MIGA Net Exposure in Country 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 3.7 % Share of MIGA's Net Exposure 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 53 IBRD 33422R IRAQ SELECTED CITIES AND TOWNS MAIN ROADS GOVERNORATE CAPITALS RAILROADS NATIONAL CAPITAL GOVERNORATE BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES 40E 42E 44E 46E 48E TU R K EY To Urmia To Urmia - - Zakhu 0 50 100 150 Kilometers To - DAHUK - Al Qamishli Tig - 'Aqrah Dahuk 0 50 100 Miles r R. is Haji Ibrahim - - Rayat (3,600 m) - Mosul - Sinjar ARBIL - Arbil 36N Euphr ates - 36N R. To Dayr az Zawr N I N AW � As - - Sulaymaniyah ISLA MI C Al Hadr - - REPUBLI C - Kirkuk AS SULAYMANIYAH S YRIAN KIRKUK O F IRAN To Dayr A RAB az Zawr - Bayji Ja ba RE P. l - H - 'Anah - Tikrit SALAH AD am - - ri - - Al Qa'im DIN - - Samarra' n To Kermanshah 34N - Al Hadithah 34N - - Tharthar To Hims Lake - - - 'Akashat Ba'qubah - - - Ar Ramadi - DIYAL� Al Fallujah - - Habbaniyah BAGHDAD BAGHDAD - Lake AL ANBAR JORDAN Razzaza - WA S I T To Trebil S y r i a n Lake - Karbala - BABIL - Al Kut Tigr is R. Amman - Al Hillah KARBALA' - To Dezful D e s e r t - - - Al Hayy 32N Ad Diwaniyah 32N Nukhayb An Najaf - - - Al 'Amarah AL QADISIYAH - Eu phr MAYSAN ates R . - Ash Shatrah - As Samawah Al 'Uzayr To Ahvaz S AN NAJAF - - a DHI QAR h - - An Nasiriyah ra ' a l Al Basrah H ij - As Salman ar AL Az Zubayr ah Umm AL MUTHANN� BASRAH Qasr 30N 30N To Ad IRAQ Damman KUWA IT S A UDI A RA BIA This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 28N 40E 42E 44E 46E 48E APRIL 2012