PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE March 12 2014 Report No.: AB7539 Operation Name PALESTINIAN NATIONAL DEVELOPMENT PLAN – SIXTH DEVELOPMENT POLICY Region MIDDLE EAST AND NORTH AFRICA Country West Bank and Gaza Sector Central government administration (64%); Sub-national government administration (12%); Energy efficiency in Heat and Power (12%); Other social services (12%) Operation ID P147687 Lending Instrument Development Policy Lending Borrower(s) PALESTINE LIBERATION ORGANIZATION Implementing Agency PALESTINIAN AUTHORITY/MINISTRY OF FINANCE Date PID Prepared March 12, 2014 Estimated Date of Appraisal March 20, 2014 Estimated Date of Board May 20, 2014 Approval Corporate Review Decision Following the concept note review, the decision was taken to proceed with the preparation of the operation. Key development issues and rationale for Bank involvement The change in government that took place in June 2013 have taken some momentum from the reform process, but have also given rise to new reform initiatives. Furthermore, following an effort by the US Secretary of State, the peace process between Israel and Palestine resumed on July 29 2013, giving fresh hope for peace, stability, and prosperity in the region. The peace process is opening up a prospect of rapid economic growth, but comes at a time of a sharp growth slowdown. In parallel with the peace process, an ambitious investment plan called the Palestinian Economic Initiative has been prepared by the Office of the Quartet , promising a 50 percent increase in the Palestinian GDP over the medium term that could accompany a possible peace agreement. The PA is also finalizing its own National Development Plan 2014-2016 to replace the previous plan as the reform roadmap. In the meantime, the Palestinian Authority (PA) has been coping with the consequences of a sharp slowdown in economic growth, which is clearly increasing fiscal pressures and rendering structural reforms more difficult to achieve. It is worth noting as well that in 2012, donor fatigue started to take effect as aid received decreased by more than half in comparison to its peak in 2008. This in addition to the ongoing Israeli1 restrictions led growth rates to decline to 5.9 percent by the end of 2012. The economic situation further deteriorated in 2013 and latest estimates indicate that GDP growth dropped sharply to 1.5 percent in 2013. Given that population growth is estimated at around 3 percent, real per capita GDP has actually declined in 2013. 1 As envisaged in the 2012-2014 Interim Strategy Note, DPG VI is a key instrument aimed at supporting the PA’s strategic priorities, advancing the policy dialogue, and also providing essential financing for the PA’s budget. It is important to stress that the financial significance of this operation is not only in that it provides US$ 40 million in Bank financing, but that it directly leverages the support of other donors through the PRDP Trust Fund in the amount of roughly US$ 200 million per year. The operation also provides a positive signaling effect to other donors who provide assistance directly to the PA. Proposed Objective(s) The operation will focus on three specific policy areas. The development objectives the operation seeks to achieve in each of these policy areas are as follows: (1) reducing relative size of the PA’s fiscal deficit; (2) public procurement systems and strengthening budget management; (3) improving regulatory aspects of the business climate. The operation will directly contribute to Pillar 1 of the ISN, aimed at strengthening the institutions of a future state to efficiently manage public finances and ensure services to citizens, as well as Pillar 2, aimed at supporting the creation of an enabling environment for private sector-led growth. Preliminary Description The proposed DPG VI is a standalone operation aimed at supporting the Palestinian Authority (PA) in managing public finances under difficult circumstances. Specifically, the DPG will support the PA’s efforts in reducing the fiscal deficit and avoid the accumulation of arrears to the private sector, amid declining donor aid, and to reform and further strengthen public finance management and PFM systems. The DPG VI will provide support to the PA’s 2014 budget in the amount of US$40 million. While this is a standalone operation, it builds upon the reform progress of the previous DPGs, This operation continues the efforts of the previous five in strengthening the PA’s fiscal position and public finance management, but it also ventures into private sector development as a new policy area. The first two policy areas are aligned with the priorities indicated in the governance and institution section of the PA’s draft NDP 2014 -2016. . Furthermore, provided that reduction of poverty, improvement in living standards of the Palestinian people, and sustainable public finances necessitate private sector led growth, this operation has been designed to also support improvements in the business climate Poverty and Social Impacts and Environment Aspects Government actions supported under this operation are not expected to have any negative impact on poor and vulnerable groups in the West Bank and Gaza . For instance, measures aimed at improving tax revenue collection will not increase tax rates (a decrease is being considered) or increase the tax liability of the poor and vulnerable groups. They are aimed at improving the collection efficiency and reducing tax evasion by private enterprises and wealthier individuals.2 Measures aimed at containing government expenditures and improving their efficiency will not cut any benefits to the poor. No negative effects are expected as a result of the measure to limit hiring, as it entails that all vacancies created as a result of retirement, or other eventualities will be filled through new recruitments. Poverty and Social Impacts Over the medium-term, the reforms supported by this operation are expected to translate into augmented fiscal space for essential poverty-reducing programs and improved prospects for employment opportunities in the private sector. Measures aimed at increasing government revenues combined with measures to reduce inefficiencies in public expenditures will increase the fiscal space for essential poverty-reducing expenditure programs. Improved fiscal management is also an important requirement for economic growth and job creation. The measures supported by this operation to strengthen the public procurement process should reduce the procurement costs and thereby increase the fiscal space for essential public services; these reforms should also enhance business opportunities for more domestic companies and consequently support growth and employment of the private sector. This would have a positive poverty and social impact. Other PFM reforms supported by this operation are aimed at strengthening public finance management practices, which usually strengthen accountability of public officials, increase efficiency and efficacy of public expenditures, all of which are important determinants of economic growth and development. The prior actions in support of the business environment are important for promoting entrepreneurship and sustainable economic growth with significant positive implications for poverty reduction. Environment Aspects DPG VI will not have significant effects on the country's environment, forests and other natural resources. In the proposed operation, none of the tentative prior actions will have environmental impacts or risks. Tentative financing Source: ($m.) Borrower 0 Special Financing 40 Borrower/Recipient 0 IBRD 0 Others (specify) Total 40 2 Individuals with gross taxable annual income of less than NIS 50,000, which is significantly above the household poverty line (NIS 27,516) are within the 5 percent tax bracket and with allowances pay a maximum of NIS 1,000 of tax. Contact point World Bank Contact: Orhan Niksic Title: Senior Economist Tel: 5366+253 Fax: Email: oniksic@worldbank.org Location: Gaza, West Bank and Gaza (IBRD) Borrower Contact: Ms. Laila Sbaih Acting Director International Relations Department Ministry of Finance of the Palestinian Authority Ramallah, West Bank West Bank and Gaza Tel: (970-2) 240-0650 Fax: (970-2) 240-0595 mofirdg@palnet.com For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop