Document of the World Bank Group FOR OFFICIAL USE ONLY Report Number: 88049-YF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT FOR THE REPUBLIC OF SERBIA FOR THE PERIOD FY12-FY15 July 30, 2014 South East Europe Country Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization. The date of the last Country Partnership Strategy was November 15, 2011 (Report No. 65379-YF) CURRENCY EQUIVALENTS Currency Unit = Dinar Dinar 1.00 = US$ 0.012 SDR 1.00 = Dinar 130.9 Fiscal Year: January 1 – December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IMF International Monetary Fund CAD Current Account Deficit NPLs Non-performing Loans CEM Country Economic Memorandum PDNA Post-Disaster Needs Assessment CPS Country Partnership Strategy PISA Program for International Student Assessment DIA Deposit Insurance Agency PSIA Poverty and Social Impact Analysis DILS Delivery of Improved Local Services PPP Purchasing power parity DPO Development Policy Operation SILC Survey of Income and Living Conditions EBRD European Bank for Reconstruction SNS Progressive Party [Serbian and Development acronym] EC European Commission SOEs State-Owned Enterprises EU European Union SPS Socialist Party FDI Foreign Direct Investment STEP Skills Toward Employment and Productivity FINSAC Financial Sector Advisory Services UN United Nations Center IFI International Financial Institution VAT Value-Added Tax IBRD IFC Vice President Laura Tuck Dimitris Tsitsiragos Country Director Ellen Goldstein Tomasz Telma Country Manager Tony Verheijen Per Kjellerhaug Regional Manager Thomas Lubeck Task Team Leaders Anthony Gaeta George Konda Nichola Dyer Tony Verheijen ii COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT REPUBLIC OF SERBIA TABLE OF CONTENTS I. Introduction ...................................................................................................................................... 1 II. Country Context ............................................................................................................................... 3 III. Continued Relevance of the CPS ..................................................................................................... 8 IV. Progress Toward Achieving CPS Outcomes ................................................................................. 10 V. Modifications to the Strategy ......................................................................................................... 12 VI. Risks............................................................................................................................................... 15 Annex 1: Revised CPS Results Matrix ....................................................................................................... 16 Annex 2: AAA Program and Contribution to CPS Pillars .......................................................................... 29 Annex 3: Key Economic & Program Indicators - Change from Last CPS ................................................. 35 Annex 4: Serbia at a Glance........................................................................................................................ 36 Annex 5: Bank Portfolio Performance and Management ........................................................................... 39 Annex 6: Proposed IBRD Base-Case Lending Program ............................................................................ 40 Annex 7: IFC Investment Operations Program........................................................................................... 41 Annex 8: Operations Portfolio (IBRD/IDA and Grants) ............................................................................ 42 Annex 9: IFC Committed and Outstanding Investment Portfolio .............................................................. 43 Annex 10: Map ........................................................................................................................................... 44 Table 1: SERBIA: Key Macroeconomic Indicators and Projections………………………………….4 Table 2: CPS Lending Program: Projected and Revised……………………………………………..14 iii I. Introduction 1. This Progress Report assesses implementation of, and outlines modifications to, the FY12-15 joint Bank-IFC Country Partnership Strategy (CPS) for the Republic of Serbia. It also provides initial details on the impact of the catastrophic flooding that occurred during the finalization of this report, and on the Bank’s response. 2. In mid-May 2014 continuous rainfall caused severe floods, affecting over 1.5 million people and some 39 municipalities. About 38,000 people were displaced. Villages and municipalities were cut off by blocked roads and suffered power outages and water shortages. Some key power plants were damaged. The agriculture and energy sectors are most affected. The government is working on a Post-Disaster Needs Assessment (PDNA) with the European Union (EU) and the United Nations (UN). In support of flood recovery, the Bank has offered: (i) grant support to the PDNA; (ii) restructuring of ongoing projects and redirecting funds to emergency recovery, in particular through the US$100 million Road Rehabilitation project; and (iii) an Emergency Recovery Loan. The floods will require a thorough re-assessment of the macro-fiscal situation. Their full impact will be considered in the context of the Systematic Country Diagnostic and incorporated into the new Country Partnership Framework being prepared in FY15. 3. The CPS was designed to mitigate the negative impact on Serbia of the deepening Eurozone crisis. With a longer-term objective of accelerating the EU accession process, the CPS focused on strengthening competitiveness and improving the efficiency and outcomes of the government’s social spending. The World Bank Group (WBG) also indicated it would remain engaged in support of environmental sustainability, the third component of the ECA and Europe 2020 strategies. The WBG adopted a coherent approach to strengthening Serbia’s competitiveness and restoring economic growth, with IFC (complemented by associated MIGA guarantees) focusing stepped-up support to the financial sector as well as agribusiness, infrastructure and clean energy. 4. Important economic, social and political changes have occurred in Serbia since the inception of the CPS in FY12. Average consumption and consumption of the bottom 40 percent both declined, at about the same rate. Economic recovery since the 2008 global and Eurozone crises proved slower and more painful than anticipated, with a double-dip recession in 2012 and a fledgling recovery in 2013. The lack of growth exacerbated high levels of unemployment and inactivity, and reversed earlier gains in poverty reduction. Complicated coalition politics and underlying economic conditions weakened fiscal discipline and the will to undertake needed structural reforms in the first two years of the CPS. Most recently, the emergency caused by the floods has diverted the government’s attention and energy to dealing with their impact and damage recovery. 5. Implementation under the ongoing CPS has been mixed, with significant delays in program delivery reflecting the government’s weak reform efforts in FY12-13. Through a turbulent political period, the Bank maintained strong analytic and advisory work in order to build support for eventual reforms. The initial portfolio also performed reasonably well, but only one of four planned new operations was delivered in the first two years of the CPS. Two planned development policy operations (DPOs) were stalled by shortcomings in the macroeconomic framework or derailment of an earlier IMF Stand-By Arrangement. In FY14, the Bank delivered two operations, a planned second health reform project and a results-based financial sector operation. IBRD lending under the CPS reached US$340 million by end-FY14 instead of FY13 as initially planned. Today the ongoing portfolio of six operations includes one rated unsatisfactory. The Bor 1 Regional Development Project has been restructured, and the government must now accelerate implementation. Progress toward CPS outcomes has been quite mixed, with only 12 out of 26 mid- term milestones achieved and another nine partially achieved (see Annex 1). 6. IFC has significantly increased its investment program in line with the strategy to provide countercyclical support to the financial sector and selectively finance private sector projects in the real sector. Total IFC investments during the CPS period reached US$590 million, complemented by parallel loans of US$72 million and by significant mobilization of MIGA guarantees for IFC clients of about US$550 million, the highest volume globally of IFC-MIGA joint activities. IFC’s own investments were evenly distributed between the financial, manufacturing and agribusiness sectors. The major portion of the IFC program was delivered in the first two years of the CPS period, tapering off in FY14 due to the continued sluggish performance of the economy and deleveraging in the financial sector. Investments in the infrastructure sector, where IFC prioritizes renewable energy, have been delayed due to the slower than expected pace of implementation of the required regulatory reforms. The envisaged privatization of IFC’s client banks with state participation has also been delayed due to challenging market conditions and changing government priorities. While the IFC portfolio in Serbia has remained profitable, its quality deteriorated as a result of weaker financial performance of some of the clients affected by the lower growth environment, coupled with persisting weaknesses in corporate governance and financial management. The level of non-performing loans (NPLs) has increased from nearly zero in FY12 to 10 percent in FY14, because of a single loan. Some of IFC’s agribusiness clients in Serbia are also struggling to meet their debt service obligations in a timely manner. 7. The two original CPS pillars remain relevant, and fundamentally interrelated. Serbia’s ability to compete will be more important as growth returns to the Eurozone, and given that poverty and unemployment have grown since the crisis while room for a robust fiscal response has deteriorated, getting more impact from each dinar of public spending will remain a core challenge. Actions within the second pillar will be enhanced to address cross-cutting public expenditure issues. No modification of the pillars has been proposed for the second half of the CPS period. 8. A renewed reform commitment by the government underpins a planned increase in lending in FY15. The original CPS outlined lending of US$340 million for FY12-13, and did not provide an indicative envelope for the second half of the CPS period. The lending approved in FY14—for strengthening the Deposit Insurance Agency (DIA) to help ensure continued financial sector stability, and for health sector reform to improve the quality of spending—directly advances the two CPS pillars. In FY15, the Bank will lend to Serbia commensurate with the extent of implementation of fiscal and structural reforms, our lending capacity, and demand from other borrowers. Early efforts will focus on flood recovery. With greater reform impetus from the government, it is expected that the country will move ahead with a long-awaited DPO for state- owned enterprise (SOE) reform. Also in support of the competitiveness pillar is a proposed operation for critical land and property issues that constrain investment. The second pillar will be supported through a proposed public expenditure and public employment operation. The WBG will continue to provide support to Serbia only in areas where: (i) government demand is high; (ii) a sound analytical basis exists; and (iii) the WBG has a comparative advantage to deliver desired outcomes. 2 II. Country Context 9. Serbia’s political environment has changed significantly since the CPS was presented to the Board. At the time, the country was governed by a Democratic-Socialist coalition. Elections in late 2012 brought a new coalition to power with a renewed impetus to reform, led by the Progressive Party (SNS), with the Socialist Party (SPS) as its main partner and headed by Prime Minister Dacic of the SPS. Several smaller parties joined as well, but some exited in July 2013 amid tensions within the coalition. A government reshuffle in August 2013 improved cohesion, but not sufficiently to drive through critical structural reforms required to address growing fiscal problems. Snap elections called in March 2014 allowed the SNS to consolidate power under the leadership of Prime Minister Vucic, with a stronger mandate and a platform promising difficult but necessary reforms. These may bring the CPS fully on track if implemented. 10. The consensus for EU membership remains. The outgoing government accelerated the EU accession preparation process, including engagement on critical issues such as justice sector reform and rule of law, resulting in the start of EU membership negotiations in January 2014. The negotiation process and the reforms to meet the obligations of EU membership will pose significant political and administrative challenges. Serbia faces a large, overdue structural reform agenda, encompassing transforming ownership in the economy, stimulating growth, reducing unemployment, strengthening the financial sector, improving the investment climate, and reducing the fiscal deficit. 11. Serbia has made strides in ‘normalizing’ relations with Kosovo. The Brussels Agreement reached in April 2013 established a framework for cooperation with Kosovo, culminating in the largely successful participation of ethnic Serbs in Kosovo elections, including in the North Kosovo municipalities, in November 2013. That constituted a remarkable achievement for the authorities on both sides, and paved the way for the launch of Serbia’s EU membership negotiations. Macroeconomic Developments 12. Serbia’s economy has remained sluggish since the global financial crisis, contracting by 3.5 percent in 2009 and after a timid recovery in 2010 and 2011 retreating by 1.5 percent in 2012 (Table 1). The 2012 double-dip recession was driven by spillovers of the Eurozone crisis, which dampened external demand; severe weather conditions (record low temperatures in the winter and a summer drought); and the closure of the largest exporter, US Steel. Growth in IT and communications services (10.3 percent) and financial services (4.4 percent) could not offset the declines in agriculture output (-17.1 percent), industry (-3.4 percent) and retail trade (-4.0 percent). 13. In 2013, real GDP is estimated to have grown by 2.5 percent. This performance has been supported by improved agricultural and energy production and a rise in industrial exports, especially from the large FIAT automotive company. Agriculture is estimated to have grown by more than 20 percent in 2013, energy production by 13.2 percent, and manufacturing by 5.5 percent. Prior to the floods, weak domestic demand and a relatively weak external environment, in particular in the Eurozone – which accounts for about 60 percent of Serbia’s total trade and 80 percent of foreign direct investment (FDI) and remittances – continued to hamper stronger economic recovery. 14. Macro projections in this report were prepared prior to the floods, and will be updated later in the year once the floods-related damage and loss assessment is completed and further information on the 2014 supplementary budget becomes available. The impact of the recent floods on future economic activity in Serbia is being assessed. The updated data will not be available 3 for incorporation into this Progress Report. Early estimates show that the floods will put downward pressure on economic activity in 2014 and further strain public finances. Preliminary information indicates that energy production, SOEs (utilities in particular), agriculture and mining are especially affected. Reconstruction efforts later in 2014 and in 2015 will partially counteract the negative effect on economic activity, provided adequate financing for reconstruction becomes available. A pickup in construction activities, investment and consumption (as lost items are gradually replaced) is expected. A supplemental budget is expected to be approved by September 2014, reflecting the impact of the floods as well as further policy measures particularly on the fiscal side. 15. The crisis has led to a steadily increasing and stubbornly high unemployment rate, currently about 20 percent. Youth unemployment, at 49 percent, is of particular concern. While the informal sector served as a buffer for low employment rates in the past, informal employment now also seems to be decreasing. Many young people are leaving the country in search of jobs. Table 1: SERBIA: Key Macroeconomic Indicators and Projections As percentage of GDP, unless otherwise indicated Projections 2010 2011 2012 2013e 2014 2015 2016 Real economy GDP real growth 1.0 1.6 -1.5 2.5 1.0 1.8 2.0 GDP in USD billion 37.0 43.7 38.5 43.5 44.8 47.0 49.1 Investments, percent GDP 17.2 20.1 21.3 19.3 20.5 21.3 21.7 Consumer price inflation (e-o-p) 10.2 7.1 12.2 2.2 5.5 5.0 4.5 Public sector (as percent of GDP) Revenues 42.5 40.6 42.1 40.6 39.5 38.9 38.3 Expenditure 47.5 45.8 49.8 46.5 46.7 44.0 41.5 o/w Capital expenditure 3.6 3.6 3.6 2.3 3.3 3.6 3.1 Fiscal Balance, after grants -5.0 -5.2 -7.7 -6.0 -7.1 -5.2 -3.2 Total public debt 44.5 47.2 59.9 63.6 67.7 68.3 68.2 External position CAD after grants (percent of -6.7 -9.1 -10.6 -5.0 -4.5 -4.0 -3.5 External debt (percent of GDP) 84.9 76.7 86.2 80.7 76.4 70.2 65.9 Reserves (US$ billion) 13.3 15.6 14.4 15.4 13.2 13.3 13.5 Source: Ministry of Finance, IMF, and World Bank staff. The macro projections for 2014-16 were prepared prior to the floods, and will be updated at a later date once the floods-related damage and loss assessment is completed and further information on the 2014 supplementary budget becomes available in September 2014. The authorities are currently preparing a supplementary budget which will, among other things, reflect the impact of the floods, introduce further policy considerations, and update the macroeconomic projections for 2014. 4 16. Inflation and the real exchange rate have been volatile. Since the adoption of inflation targeting in 2009, inflation has fluctuated between 3 and 15 percent, reaching 7.8 percent in 2013. Its volatility owes to: (i) a large pass-through from depreciation due to the exceptionally high Euroization; (ii) food price shocks from external protection of agricultural markets; and (iii) fiscal policy. At the end of 2013 restrictive monetary policy, lower food prices, and low aggregate demand had limited inflation to 2.2 percent, which is below the target band of 4.5 percent +/- 1.5 percent. The real effective exchange rate has also fluctuated: it appreciated between 2008 and 2010, depreciated in 2011, and has since appreciated continuously (by about 6.8 percent in 2013). 17. A current account adjustment is underway, supported by faster export growth. The current account deficit (CAD) is estimated to have fallen from 10.6 percent of GDP in 2012 to about 5 percent in 2013. In 2013, Serbia’s exports increased by over 25 percent, driven by strong auto and other exports, while imports grew by less than 5 percent. Most of the CAD has been financed by FDI and long-term borrowing. A declining CAD will result in a decreasing share of external debt in GDP, from around 81 percent currently to about 66 percent of GDP by 2016. 18. Serbia’s consolidated general government fiscal balance has deteriorated since the crisis. Revenues fell by about 2 percent of GDP over 2008-11 but in 2012 showed a modest recovery, returning to near pre-crisis levels mainly due to increases in the value-added tax (VAT) rate. Expenditures, however, have grown since the crisis, by approximately 5 percent of GDP. The result has been a deteriorating general government fiscal deficit from around 2.7 percent of GDP in 2008 to about 7.7 percent in 2012 and 6 percent in 2013. Several events contributed to the high fiscal deficits in 2012 and 2013: lower than projected revenues; structural factors associated with an expanding gray economy; the failure of state banks (Agrobanka and Development Bank of Vojvodina); arrears clearance for the Health Insurance Fund and Roads of Serbia; and called guarantees to SOEs. In July 2013, the government adopted a supplementary budget with additional revenue and expenditure measures which succeeded in reducing the fiscal deficit relative to 2012, but these were not sufficient to contain the fiscal deficit to the planned 2013 target of 3.5 percent. 19. Serbia’s public debt, including guarantees, has more than doubled since 2008, from 29 percent of GDP to 63.6 percent in 2013. Guarantees, issued principally to SOEs, jumped from 2.9 percent of GDP in 2008 to 8.9 percent at end-2013. In the same period, domestic public debt grew from 10 to 24.8 percent of GDP, while external public debt rose from 17 to 38.7 percent of GDP. 20. The government signaled in its economic program a commitment to address the fiscal imbalances and has put forward a fiscal consolidation program, with the goal of stabilizing and setting public debt on a downward trajectory over the medium term. The aim is to reduce the general government spending from 46.5 percent in 2013 to 41.5 percent of GDP by 2016, mostly through cutting recurrent spending. The revenue-to-GDP ratio is projected to decline slightly, reflecting the country’s difficult economic context. 21. The critical fiscal measures currently underpinning Government’s program on the revenue side are: (i) pay and grading reform starting with a temporary “solidarity tax” on public sector wages whereby higher tax rates are imposed for net wages above RSD 60,000 and further for those above RSD 100,000; raising the lower VAT rate from 8 percent to 10 percent; increasing the collection of excise duties (in particular on tobacco); abolishing tax relief and exemptions for corporate income tax; and combating the shadow economy. Measures on the expenditure side include: restrictive indexation of public sector wages and pensions; restriction of performance-based bonuses for public sector employees; reduction of subsidies through the national and local budgets; 5 additional funds for the Transition Fund; reduction of expenditure on goods and services through streamlined procurement; reduction of interest expenditure through refinancing of expensive public debt through softer bilateral loans; increase in expenditure for social welfare and family allowance. 22. Even as Government is putting forward a fiscal consolidation program, the fiscal deficit in 2014 is projected to be higher than in 2013 (at 7.1 percent of GDP). This is principally due to three one-off factors: allocation to finance redundancies of SOE employees; higher allocation and more realistic budgeting for activated guarantees; and an increase in bank recapitalization needs. The fiscal deficit is projected to be substantially lower in 2015 and 2016. Still, the proposed fiscal consolidation program faces significant downside risks, stemming from: lower than expected growth, in particular in the Eurozone; the difficulty of enforcing the policy of “no new guarantees to public enterprises and local governments” from mid-2014 onwards without reforms to public utilities such as the natural gas monopoly Srbijagas; a failure to reduce subsidies as envisaged; and uncertainty around whether fiscal measures aimed at combating the shadow economy and reducing interest payments through debt restructuring will be implemented fully. 23. Given these risks, additional expenditure reductions are needed to stabilize public debt and enhance the sustainability of the medium-term macro framework. Serbia did not use the opportunity to push difficult structural reforms during the global crisis, and now—with significant fiscal deterioration—the government acknowledges that these reforms can no longer be delayed and that reforms related to the restructuring of SOEs, banks, consolidation of public finances, including public administration reform and wage bill reduction, are all needed to provide the necessary fiscal savings and impetus for growth. It is working closely with its development partners (in particular, the IMF, World Bank, and EC) toward that goal. The supplemental budget is expected to reflect these considerations, including the government’s objective to reach agreement on a new IMF program. Social Developments 24. Poverty increased following the crisis. Poverty fell significantly before the global and Eurozone crises, from 14 percent in 2002 to just over 6 percent in 2008. The recoil was strong and quick. In 2010 poverty 1 stood at 9.2 percent and extreme poverty 2 at 1.3 percent 3. 25. The bottom 40 percent has been hit hard by the crisis. During 2007-2010 average household expenditure shrank for all in Serbia, but at a higher rate for the less well-off: the mean expenditure of the bottom 40 percent of Serbians declined at an annualized rate of nearly 1.8 percent, faster than the pace of decline of the country’s average mean expenditure (-1.3 percent). Moreover, among those in the bottom 40 percent, households have experienced larger average losses in consumption than average gains: - US$46 ppp per year as opposed to + US$10 ppp per year. In Serbia, being unemployed or inactive, being elderly, or belonging to a rural or large household increases the probability of being in the bottom 40 percent. 26. Boosting shared prosperity in Serbia hinges on job creation. Employment is the main and most sustainable mechanism to turn GDP growth into higher household income. Prior to 2009, job creation in Serbia outpaced losses. The pre-crisis economy, however, was buoyed by a growth model 1 Share of individuals whose adult equivalent household total expenditure is lower than RSD 280.9 per day. 2 Share of individuals whose per capita household expenditure is lower than US$2.50 ppp. 3 According to the latest available data (Household Budget Survey, 2010). 6 based on public sector borrowing and domestic-led consumption. Today, with fiscal space depleted, job creation will rely on increased competitiveness. Reform is vital, particularly public enterprise restructuring; addressing disincentives for employment (especially for low-wage, part-time workers) in the tax and social safety net system; and closing the skills gap. 27. The bottom 40 percent face poorer labor market outcomes than the rest of the population. Their labor market participation is low; the inactivity rate is 13 percent in the bottom two quintiles versus six percent in the top three. The share of working-age unemployed is twice that of the top 60 percent (26 compared to 13 percent), the highest differential anywhere in the Western Balkans. In sum, less well-off individuals seem to face disproportionately more barriers to employment. Potential disincentives to work arising from social protection systems might further curtail employment prospects for the less well-off. The structure of social contributions, for instance, disproportionately penalizes low-wage earners. Improving the efficiency and equity of education expenditures, including through shifting toward capitation-based education financing, will be critical in the medium- to long-term to ensure students have the skills demanded by employers. Box 1: Understanding and Addressing Gender Inequities Serbia has made significant progress on promoting gender equality in education and health, yet significant gaps persist in access to economic opportunities and agency, and among certain population groups. Most notably, gender disparities exist in labor markets, with low female labor force participation rates (18 percentage point gap in activity rates between men and women) and persistent gender wage gaps. This suggests the presence of barriers to employment for women, including limited access to child care. Inequalities in access to employment are exacerbated for ethnic minorities in Serbia. Moreover, gender inequalities in agency also exist in the country, with relatively fewer women than men participating in politics and in leadership positions in firms. The Bank is conducting various gender-related activities and analytical work to inform its engagement and contribute to filling knowledge gaps in Serbia. Serbia will benefit from Analytic and Advisory Activities (AAA) with important gender components, including analytical work on employment and job creation, and a recently completed qualitative survey identifying barriers to employment for men and women. Further, the four-year Trust Fund “Promoting Gender Equality in the Western Balkans,” with financial support from the Swiss Agency for Development and Cooperation, covers activities for Serbia. In this context, the Bank conducted country consultations in 2013 to ensure that the program reflects priorities and knowledge gaps in the country, and to carry out the activities in close coordination with local stakeholders. Several cross-sectoral activities are included under this Trust Fund for Serbia, specifically: a survey on child and elder care demand and supply; a compendium on gender-related interventions in the country aimed at better understanding which programs or activities have worked or not worked to address gender inequalities; a comprehensive skills survey (Skills Toward Employment and Productivity, or STEP) to understand whether there are gender gaps in skills that are limiting women’s employment; and capacity building for the Government and other stakeholders to tackle specific issues to open up economic opportunities for women. 28. The government has undertaken reforms to increase safety net coverage of the poor. One example is a new law on social assistance, improving targeting accuracy, coverage and benefit adequacy. Coverage of the last resort social assistance program now reaches 15 percent of the 7 poorest quintile, up from below 7 percent. The law aims also to improve coordination with noncash social assistance, such as social care and employment services, which are institutionally separated and poorly coordinated. Implementation challenges remain, including necessary by-laws and operational manuals. A recent note on labor activation 4 will help address the broader social safety net and activation agenda in Serbia. Key areas include introducing earnings disregards in social benefit design, stronger coordination between employment services and social welfare centers, and profiling social assistance beneficiaries to link them with targeted activation programs. III. Continued Relevance of the CPS 29. Recent economic, social and political changes in Serbia have reinforced the relevance of the original pillars for the remainder of the CPS period. The original CPS was designed against a backdrop of post-crisis recession with rising unemployment and poverty rates. Recovery of economic growth and fiscal sustainability were the dominant concerns, at a time of increased demand for public services, especially basic social services. A slower than expected recovery and a loss of fiscal discipline have since exacerbated many of these problems and enhanced the relevance of the original pillars and their unfinished reform agendas. Diagnostics such as the FY12 Country Economic Memorandum and the FY14 First Insights into Shared Prosperity in the Western Balkans led to an unambiguous conclusion that a focus on competitiveness, economic recovery and private sector job creation must remain the centerpiece of the Government and WBG strategy in Serbia. At the same time, the loss of fiscal discipline and rapid increase in public debt only heightened the urgency to rationalize social spending and improve public expenditure efficiency and effectiveness. Pillar 1: Strengthening Competitiveness 30. The Country Economic Memorandum (CEM) conducted in FY12 reconfirmed the primacy of competitiveness in tackling Serbia’s long-run growth constraints. The analysis demonstrated that Serbia’s pre-crisis model of growth, driven largely by domestic demand and reliance on excessive inflows of capital and credit, improved living standards but failed to produce sustained growth and job creation. Previously ample capital inflows dried up in the wake of the global financial crisis, and are unlikely to fuel further episodes of domestic demand expansion. The CEM argued that if Serbia is to achieve sustained growth and job creation over the medium to long term, it must shift to export-driven growth. That is a strategy that other small middle-income economies in Europe and globally have successfully embraced. To accomplish the rebalancing, reforms to support major gains in competitiveness and productivity will have central importance. 31. Serbia’s transition to a market economy remains incomplete and weak competitiveness remains a major obstacle to growth. Resolving the massive, unaffordable and highly inefficient SOE sector is vital to the country’s development and critical to both pillars of the CPS. With some 1,300 SOEs, in nearly every sector of the economy, private investment is crowded out and valuable labor, capital and land are poorly allocated. Public sector employment is as large as that in the formal private sector. In 2010, public enterprises had aggregate losses of some 3.5 percent of GDP, and the cost of supporting them exceeded 2.5 percent of GDP. The country is poorly integrated in regional and global markets. Goods exports represent only around 30 percent of GDP. Export relationships are fragile and productivity remains relatively low, in particular in key sectors like manufacturing. 4 World Bank (2014) “Activation and Smart Safety Nets in the Western Balkans: Toward an Integrated Approach”. 8 Doing Business indicators show a mediocre business climate, around the 50th percentile in the global rankings, with particular issues in property rights, construction permitting and contract enforcement. 32. The CPS identified the financial sector as a generally strong core element under the competitiveness pillar. IFC interventions, targeted to help Serbia maintain financial resilience, have proceeded as planned, with positive results. IFC supported client banks by providing short-term liquidity, capital injections, and long-term finance for on-lending to the agribusiness sector. Complementing these traditional instruments, IFC mobilized MIGA guarantees for the Serbian subsidiaries of Western European banks, helping them manage increased capital adequacy requirements and maintain presence. During the past two years, discrete but important vulnerabilities in the financial system emerged. Four small banks, including three in which the state had an ownership stake, have failed since 2012, due to poor oversight and governance that led to significant deteriorations in asset quality. Privatization of two IFC’s client banks also has been slower than anticipated. One is in process with completion expected end September 2014; with regard to the other, the privatization process is to restart in September, with privatization expected end-2017. 33. Analytic and advisory work drilled down on key constraints to competitiveness. In addition to the CEM, diagnostics during the first few years of the CPS helped to elucidate the constraints to competitiveness and growth, design appropriate reform programs and build public support for deeper reform. Analytics and technical assistance have been conducted in SOE reform, financial sector stability and development, justice sector reform, investment climate reform, real estate management and promotion of research and innovation (see Annex 2). These analyses reconfirm the relevance of the CPS pillar and have informed new lending in the FY14-15 period. 34. A focus on competitiveness is well-aligned with the WBG’s twin goals. Although the CPS preceded the articulation of the twin goals, the focus on competitiveness is central to eliminating poverty and promoting shared prosperity. Serbia is facing stagnant domestic demand, fiscal consolidation, and a likely reduction in public sector employment with already high unemployment. While real growth has been positive since 2010 (aside from 2012), available data indicate the bottom 40 percent have benefitted less from that limited growth. The first order of business must be to place the country on an accelerated and sustainable growth path with a higher level of job creation. Pillar 2: Improved Efficiency and Outcomes in Public Spending 35. A strong analytic base guided the original focus on efficiency and outcomes of social spending. The CPS outcomes under this pillar were: (i) Strengthened fiscal performance with sustained improvement in human development outcomes through more efficient, effective social spending; and (ii) More informed and effective policymaking to reduce poverty and increase social inclusion. The initial analytic foundations and evidence underpinning this pillar identified a lack of fiscal sustainability, poor efficiency in social services and weak outcomes in terms of health, education, old-age security and poverty alleviation for vulnerable groups. 36. Subsequent analytic work has reconfirmed the continued relevance of the pillar while expanding the scope of action to address cross-cutting public expenditure issues. Work undertaken during the CPS has deepened analysis on poverty, vulnerability and social spending. Key products include the: 2012 Country Economic Memorandum; Western Balkans Poverty Assessment; 2013 Survey of Income and Living Conditions (SILC); Western Balkans Programmatic Gender Monitoring; ongoing Poverty and Social Impact Analysis (PSIA); analysis on financing education options and learning outcome monitoring; country studies undertaken as part of regional analyses, 9 including Activation and Safety Nets, regional jobs technical assistance, and pensions; and various health sector work, including on enhancing efficiency of pharmaceutical spending. Overall, the picture is of continued high unemployment and inactivity rates combined with inadequate skills in the workforce and poor quality of education. Issues also include the quality of health and social assistance services, and critical gaps in terms of quality and coverage of services across the social sectors, particularly for vulnerable populations. Entitlement spending (especially pensions), subsidies and guarantees to SOEs, and a rising public sector wage bill are the main causes of the growing public spending—along with an ill-planned 2011 decision to decentralize revenues to municipal governments. The Bank undertook a two-phased Municipal Public Expenditure Review in FY13 and FY14 in order to help the government grapple with the implications of this decision. 37. Enhancing the efficiency and outcomes of public spending is critical to advancing the Bank’s twin goals. Although Pillar 2 was designed prior to the articulation of the twin goals, it is entirely aligned with them. In light of growing fiscal pressures in Serbia, more efficient and effective social spending–i.e. increased value for money–is indispensable to expanding social services in health, education and social protection. Improved service delivery can in turn enhance productivity and promote human capital and equality of opportunities, giving the bottom 40 percent of the population a chance to participate in the growth process over the long term. The enhancement of the effectiveness of social assistance is critical to protecting those who are extremely poor and highly vulnerable, even as the poor acquire the human capital needed to transition to work and employment. 38. While not a CPS pillar, environmental sustainability remains an important cross- cutting theme. The Bor Regional Development project constitutes the main direct Bank intervention in this area, while IFC has continued to promote resource efficiency and renewable energy. To this end, IFC InfraVentures Fund made its first investment in Serbia to support development of a 100MW wind power plant, but generally, introduction of greater private sector participation in infrastructure finance has been delayed. Environmental sustainability remained critical to other operations in the Bank portfolio, including the recently closed Agriculture and Irrigation projects. IV. Progress Toward Achieving CPS Outcomes 39. CPS implementation has been mixed, with significant delivery delays reflecting the government’s weak reform efforts in FY12-13. The initial portfolio performed reasonably well, but only one of four planned new operations was delivered in the first two years of the CPS. The two planned DPOs were stalled by shortcomings in the macroeconomic framework and derailment of an earlier IMF Stand-By Arrangement. In FY14, the Bank delivered two operations, a planned second health reform project and a results-based financial sector operation. As of end-June 2014, the Bank’s portfolio in Serbia includes six investment operations for total commitments of US$799 million. Three of the projects in the portfolio predate the current CPS, though one will close by September 2014. Two operations have performed poorly. The first is the Bor Regional Development Project, approved in mid-2007 and restructured in February 2014 to focus solely on mitigating the probability and impact of a catastrophic environmental accident. The second is the Corridor X Road Transport Project, which remained in problem status for over a year. It too was restructured, and was recently upgraded reflecting recent progress on the ground. Continued hands on implementation support will be provided to ensure that associated CPS outcomes are achieved. These portfolio performance problems, coupled with significant delays in lending delivery, resulted in mixed CPS implementation 10 with only 12 of 26 CPS milestones achieved at midterm, and another nine partially achieved. Details of progress to date and updated indicators are reflected in the revised Results Matrix (Annex 1). 40. The challenging macroeconomic environment, portfolio problems and delivery delays slowed progress toward CPS outcomes for Pillar 1. The original CPS identified 19 outcomes for Pillar 1. Of the 13 milestones in the revised Results Framework, four have been achieved, seven partially achieved and two not achieved. Envisaged policy lending was delayed, as explained above. Despite reform delays, progress was made in improving the legal and regulatory framework for SOEs and in developing a land cadaster and improving property registration. Good progress was made in expanding irrigation and flood control infrastructure to help boost agricultural yields and provide flood protection for a larger population. Outcomes were also achieved with respect to promoting innovation start-ups. Still, progress was less than expected for road infrastructure and safety, and particularly weak on resolution of loss-making SOEs. 41. As of May 2014, Serbia was IFC’s fourth largest exposure in ECA with a committed portfolio of about US$690 million, all of which disbursed, in 24 projects. Most of these investments were made during the CPS period when IFC committed US$590 million for its own account in 12 projects, or 70 percent more than IFC’s investments during the previous FY08-11 CPS and in line with the lower range of the investment volume envisaged for the whole CPS period. IFC’s own account investments have been complemented by mobilization from commercial banks in the amount of US$72 million, as well as MIGA guarantees facilitated by IFC for its clients in the amount of US$550 million. Significant focus has been placed on the financial sector, with investments in numerous banks. In the real sector, IFC’s investments were focused on the agribusiness and automotive sectors. While the general experience and results of this increased level of IFC investment activity in Serbia has been positive, several projects have suffered from the challenging macroeconomic environment or poor corporate and financial governance. 42. Good progress was made in enhancing the efficiency of health and social protection spending, with more limited progress on education and employment, under Pillar 2. Of the eight milestones included in the revised results framework, six have so far been achieved, one partially achieved and one not achieved. The First Serbia Health Project supported reforms initiating output- based payment methods and improving quality of service delivery in hospitals as well as introducing a new payment system to increase primary care efficiency and productivity. The Consolidated Collection and Pension Project helped reduce administrative costs associated with the pensions system as well as the reporting burden of employers. The Delivery of Improved Local Services (DILS) project contributed to substantial improvements in access, efficiency, and quality of local health and social protection services, but progress was only modest in rationalizing education spending and adopting an employment strategy. DILS also piloted social inclusion initiatives–such as Roma health facilitators and disability grants–that were subsequently mainstreamed into the budget. The Survey of Income and Living Conditions (SILC) survey was conducted and analyzed with delay. 43. Pillars 1 and 2 were complemented by continued supervision of a portfolio aimed at enhancing environmental sustainability. Of the three CPS outcomes identified for environmental sustainability, the two milestones related to energy efficiency of public buildings were achieved. The milestone associated with the poorly-performing Bor Regional Development Project was only partially met and has been revised substantially to reflect the restructuring of the project. 11 V. Modifications to the Strategy 44. No modification of the pillars has been proposed for the remainder of the CPS. Actions within the second pillar will be expanded beyond social spending to address cross-cutting public expenditure issues. IFC’s strategy remains the same as outlined in the original CPS. A renewed reform commitment by the government underpins a planned increase in IBRD lending in FY15. The original CPS outlined IBRD lending of US$340 million for FY12-13 and did not provide an indicative envelope for the second half of the CPS period. In FY15, Bank lending is expected to increase in line with Government’s deepening of the economic reform agenda; this will depend on IBRD’s lending capacity, country performance, and demand from other borrowers (see Table 2). Subject to client demand and opening of the infrastructure sector for private investments, IFC is planning investments in the range of US$200-250 million at its own account for the remainder of the CPS period, which could be complemented by mobilization from partners. The WBG will carry out a Systematic Country Diagnostic in FY15 to selectively identify priorities for support under a new Country Partnership Framework for FY16-20. Pillar 1: Strengthening Competitiveness 45. In the second half of the CPS period, the Bank is supporting strengthened competitiveness through a continued focus on financial sector stability, SOE reform and investment climate reforms related to property rights. A policy note, Strengthening Competitiveness to Accelerate Growth and Create Jobs, will be completed in early FY15. IFC will remain engaged in the financial sector, as well as focus on agriculture and agri-business exports, renewable energy projects (wind, biomass and small hydro) and private sector participation in infrastructure projects through public-private partnerships. 46. The vulnerabilities in the Serbian banking system that arose in the past two years caused significant concerns about potential for a larger crisis of confidence. Fortunately, actions taken by the DIA, the National Bank and the Ministry of Finance helped prevent such a crisis. IBRD has been providing advisory support through the Western Balkans Financial Sector Technical Assistance facility as well as through the Vienna-based Financial Sector Advisory Services Center (FINSAC) program. In FY14, IBRD channeled support for the financial sector through a results- based operation on Strengthening the DIA to ensure that this critical institution has the governance structures and financing to play fully its role in restoring confidence in the financial sector. In FY15, IFC will continue supporting the privatization of its two portfolio banks and possibly assist with the privatization of the biggest state insurer. IFC will stand ready to support resolution of NPLs and distressed assets if the regulatory framework is modified to remove the remaining legal impediments. In addition, IFC has been supporting improvements in the legal framework that would ultimately allow IFIs to engage in dinar lending. Complementary to these efforts and subject to required legal changes, IFC expects to issue dinar-denominated bonds in 2014 - 2015. 47. Ownership transformation in the economy remains an unfinished agenda that undermines competitiveness and growth. Establishing a legal process to free assets—especially land—from State hands will help stimulate private investment and, ultimately, job-creating economic activity. Serbia also needs to do a better job operating enterprises that will remain state owned. Unreliable and costly public services, particularly public utilities, not only have a disproportionate impact on the poor, but are an impediment to operating a business. For the past two years, the Bank has provided analytic and advisory services to build support for SOE reform. With a renewed 12 impetus from the incoming government, the Bank expects to move ahead in FY15 with the first in a programmatic DPO series aimed at improving governance, performance monitoring, and accountability of the sector while reducing the levels of direct and indirect state support. The DPOs address three policy areas, including resolution of ownership and reduction of state support for socially-owned enterprises; strengthening governance of the regulatory framework, and mitigating the social and employment impacts of the reform program. The authorities estimate that SOE restructuring could result in loss of up to 30,000 jobs. Many of these workers will have a difficult time finding new jobs—many are older and less than half have completed secondary education. As part of the DPO, the government has allocated resources for severance payments. For those workers who can be retrained and look for new jobs, the government will finance active labor market programs. In addition, the Bank will work with the EU to support development of a medium-term comprehensive jobs strategy for Serbia. While the Bank focuses on reform of state- and socially- owned enterprises, IFC will continue to focus on corporate governance improvements in the private sector through company-level interventions, developing local capacity in the delivery of corporate governance services, and raising awareness of the importance of corporate governance. Progress in this area will be essential to increasing private investments in the economy and putting private sector development in Serbia on a sustainable path after the state footprint in the economy is reduced. 48. Selective investment climate reforms—particularly related to property rights—are highest priority. Serbia’s competitiveness is severely undermined by weaknesses in land management and property rights. It ranks 102 out of 130 countries globally in the area of physical property rights 5, and 182 out of 189 countries with respect to construction permitting in the Bank’s Doing Business index. Under the Real Estate Cadastre and Registration Project, which established a cadastre and single system for real property registration, time to register transactions fell, cadastral offices were renovated, geodetic infrastructure built, and customer satisfaction increased. Despite these improvements, Serbia’s land and real estate management systems remain well below EU standards and continue to undermine private sector competitiveness and hurt the poor and more vulnerable groups, including war refugees, migrants, the elderly and women (despite a legal framework establishing gender equality before the law). The proposed FY15 Land and Real Estate Management project aims to improve the efficiency, transparency and reliability of Serbia’s real property management systems, and address security issues for vulnerable groups and women. 49. Serbia has a comparative advantage in agriculture, one of the largest potential sources of exports and job creation. More than 65 percent of its land area is used for agriculture (20 percentage points higher than the EU27 average), and agricultural production accounts for some 16 percent of GDP (2 percent for the EU 27) and nearly a quarter of exports. Moreover, about 55 percent of the population lives in rural areas, the majority of whom earn incomes placing them in the bottom 40 percent. Agriculture labor makes up about a quarter of the workforce, five times the EU27 average. Agriculture sector transformation will be pursued through regulatory improvements, investment promotion and development of infrastructure. IBRD will provide technical assistance for a dialogue on reforms. IFC is preparing a new regional advisory project to improve the productivity and competitiveness of the agribusiness sector in the Western Balkans, including in Serbia. IFC will continue to support the private sector to be more competitive by implementing better standards (e.g. food safety and corporate governance) and improving resource efficiency. 5 For details and updates, see International Property Rights Index, www.internationalpropertyrightsindex.org 13 Pillar 2: Improved Efficiency and Outcomes in Social Spending 50. Analytic and lending activities during the second half of the CPS period continue to focus on social spending and efficient services, while taking a broader approach to overall public expenditure management. Analysis and advice in FY15 will be provided through ongoing technical support, including on inclusive education and through the programmatic Western Balkans poverty assessment, gender monitoring and regional health systems support. Technical support on Mainstreaming Roma Inclusion will enhance Roma inclusion in Bank-supported activities, and possibly leverage sector budget support proposed by the EU. Complementary technical work is underway to help meet the needs of Roma youth, with a focus on girls, including a skills survey. Ongoing analytic work on activation and social safety nets will also continue to inform policy dialogue and lending. Finally, and in collaboration with the EU, the Bank will look broadly at public financial management, and complete the second phase of the Municipal Public Finance Review. Table 2: CPS Lending Program: Projected and Revised CPS Lending program (original in CPS) CPS Progress Report Lending Program (Actual) (est. US $ million) (est. US $ million) FY 12 FY12 Actual Public Expenditure DPO 100 Total FY12 100 Total FY12 FY13 FY13 Actual Private/Financial Sector (PFDPO) 1 100 Road Rehabilitation and Safety 100 Road Rehabilitation and Safety 100 Health Sector 40 Total FY13 240 Total FY13 100 FY14 FY14 Actual PFDPO 2 Health Sector Enhancement 40 Energy Efficiency Deposit Insurance Agency 200 Investment Operations* Total FY14 Total FY14 240 FY15 FY15 Proposed * PFDPO 3 State-owned Enterprises DPO 250 Possible project (tbd) Land and Real Estate Management 50 Public Expenditure and Public Employment Reform 50 Emergency Recovery Loan (amount TBC) 150 Total FY15 Total FY15 500 Total lending FY12-13 340 Proposed Total lending FY12-15 840 * Overall lending in FY15 will depend on IBRD lending capacity, country absorption, and demand from other borrowers. The allocation of lending between instruments is subject to revision depending on the outcome of the PDNA, the extent government will need to draw on the ERL for urgent reconstruction financing, and the adequacy of the macroeconomic policy framework. 51. The Bank built on earlier successes in health sector reform with a follow-on Second Serbia Health Project in FY14, one year later than planned. The government, with input from a 2009 Public Expenditure Review, has moved the health system toward better financial sustainability. Still, Serbia spends almost twice per capita on health care as comparable countries, with similar health outcomes. And coverage remains an issue for underserved populations, such as Roma and migrant workers, and for women, particularly in rural areas. The result is inadequate prevention and treatment of non-communicable disease and continued high out-of-pocket health spending, striking 14 hardest at the poor and bottom 40 percent. The FY14 Second Serbia Health Project is expected to improve coverage, increasing the incentives to provide standard gynecological and antenatal care, particularly in rural areas. It will also save money; the adoption of a new centralized system for the procurement of pharmaceuticals demonstrated savings of over US$33 million in 2014. 52. In FY15 the Bank will seek to support public expenditure management reforms through results-based financing. This support will assist the implementation of fiscal consolidation and structural reforms, including short and medium term measures to rationalize public wage policies, streamline the wage bill, and enhance the organization and delivery model of selected sectors. The government is also working on ways to strengthen revenue mobilization and reform tax policy to reduce fiscal pressure on labor. In addition to IBRD support, IFC is engaging with the government through advisory services on ‘ease of paying taxes’ within the broader Doing Business context, and simplification of tax procedures and transfer pricing through its regional tax project. 53. The Bank is preparing up to €200 million in emergency support for flood recovery. The exact amount will be determined once the PDNA and mobilization of donor financing are completed. VI. Risks 54. With a significant portion of FY15 lending proposed to support the high-reward SOE restructuring, a derailment of the reform process would severely affect the overall outcomes of the CPS. While financial turmoil from the Eurozone crisis posed the most immediate risk when the CPS was written, 2014 found Serbia having weathered the crisis but with its own financial and fiscal dynamics in stress, compounded by the mid-year floods. The possibility that reforms face vigorous opposition cannot be discounted. There is a risk to the Bank program in FY15, particularly to the proposed SOE DPO, should the macroeconomic framework not be adequate to support Development Policy Lending and the authorities not take adjustment measures to secure agreement on an IMF program. Should these risks materialize, the Bank would work with the government to advance strategic investment operations, including results-based financing to support defined public expenditure management outcomes consistent with the CPS pillars and twin goals. The Bank will also support the authorities in communicating benefits to the public in order to preserve political momentum for reforms, while IFC will continue to promote improvements in corporate governance at the firm and country level, and will stand ready to provide pre- and post-privatization support. 55. Portfolio implementation and management risks will remain. Bank-supported investment operations will continue to face implementation hurdles as a result of cumbersome political processes and weaknesses in capacity. Bank staff and management can continue to work to reduce this risk through close cooperation with project staff on the ground and through engagement in Belgrade and Washington. Indeed, the Ministry of Finance has shown renewed interest in assessing the strategic trade-offs of Bank and other partners’ investment lending, aligning all donor support with the new medium term framework, and taking a much more proactive position on non-performing projects. Portfolio risks for IFC will also remain prominent and will be addressed through active portfolio management by the regionally-based team. IFC will also work closely with its problematic clients to find mutually acceptable solutions to resolve existing under-performing loans. In addition, the WBG will continue to strengthen its communication with the EU, EBRD and other development partners to coordinate assistance and advice, and to sequence interventions in areas where we work jointly. This cooperation is well underway through annual meetings between the WBG and EC staff working on the Western Balkans and, increasingly, through the Western Balkans Investment Framework. 15 Annex 1: Revised CPS Results Matrix CPS Instruments and Original CPS Outcomes Revised and new CPS Outcomes Progress to date Partners Pillar I - Competitiveness Country Development Goals Infrastructure Irrigation Systems and Institutional Framework to Support Increased Agricultural Production Investment Climate Innovation Capacity Strengthened Fiscal Performance with Sustained Improvement in Human Development Outcomes Through More Efficient, Effective Social Spending More Informed and Effective Policymaking to reduce poverty and Increase Social Cohesion and Equality Strengthened Banking System Issues and Obstacles Missing links on the Serbian portion of Corridor X (one of the Pan-European Corridors of which Serbia is a key transit country); Road safety a concern. Dilapidated water sector impairs functionality of essential drainage and flood control infrastructure in Serbia. Strong Water User Laws needed; and stronger flood defense. The role of the state in the corporate sector remains pervasive, with fiscal implications in the form of direct and indirect subsidies and consequences for growth and competitiveness: Inadequate infrastructure and weak institutional and enforcement capacity in the judiciary erodes public and business confidence. The capacity for planning, budgeting, allocating, executing and controlling public funds needs strengthening. Corporate financial reporting has improved but lags behind EU practices. Low levels of insurance against natural disasters The current system and composition of R&D funding does not support Serbia’s agenda to modernize and enhance its competitiveness. Road Transport Increased transport efficiency and Revised CPS Outcome: Motorway network Partially Achieved: All four lots on the SPN: FY10 Corridor X improved traffic safety on the project expanded as a foundation for future E-75 were awarded in March 2012. The project (P108005) sections of Corridor X, between Nis and improvement in transport efficiency, as works started in May 2012 and completion Dimitrovgrad, and Grabovnica and indicated by: is expected by September 2015. Road AAA: Supporting Rail Donji Neradovac. Indicated by: construction on the three lots of E80 Policy Reform (EW) Revised Indicator: Number of km average 63% completed. Physical constructed on two motorways (E-75 and completion rates are currently 45% for E80): New financing since CPS: E75 and 68% for E-80. FY13 Roads rehabilitation Baseline (2009): 0 km and Safety Project Target (2016): 40.57 km 16 Reduction in road user costs for road Dropped Indicator: These results will not be TF: Supporting Rail Policy section Nis-Dimitrovgrad: achieved as envisioned as Corridor Reform (EW) construction has been delayed. These Baseline (2009): 1.31 outcomes will be addressed under next CPF. Target (2015): 1.00 The specific construction milestones remain and progress is well underway. Reduction in road user costs for road Dropped Indicator - As above section Grabovnica to Donji Neradovac: Baseline (2009): 1.07 Target (2015): 1.00 Reduction in the rate of road crash- Dropped Indicator - As above related deaths and serious injury on road section Nis Dimitrovgrad: Baseline (2009): 44.10% Target (2015): 39.70% Action plan for reform of PEPS Retained Milestone. Partially achieved: Action plan drafted adopted by 2015. and awaiting formal adoption by the government National Road Safety Strategy Milestone: Adoption of National Road Achieved: A Lead Agency has been developed and launched by 2015. Safety Strategy and implementation of Road established under the new Road Safety safety pilot projects. Law; and the National Road Safety Strategy, a road safety cost model and Baseline (2009): No strategy terms of reference for the accident Target (2015): Strategy adopted and four database have been prepared. Two road pilot projects implemented. Results safety pilot projects completed. indicator(s) in this area to be developed under next CPF. 17 Irrigation Improved agriculture sector Revised CPS Outcome: Improved SPN: FY06 Irrigation and resilience to drought indicated by agriculture sector resilience to floods and Drainage Project (P087964) flood protection schemes improved agricultural yields, as indicated by: strengthened for 550,000 ha and 1.8 IFC investments in the under-served million people along Danube, Sava, segments of the economy: Tisa and Tamis rivers. SME, agribusiness, energy Baseline (2006): n/a efficiency and renewable Target (2013): 550,000 ha and 1.8 energy, municipalities, and million people rural areas. Creation of new and/or rehabilitation Revised CPS Outcome Indicator: Number Partially Achieved: Activities on of existing irrigation schemes: of additional flood protection schemes: rehabilitating flood control and drainage rehabilitation infrastructure are completed Baseline (2006): 0 Baseline (2006): 0 new or rehabilitated on more than 40 schemes. Since the Target (2013): 10 schemes inception of the CPS, over 440,000 Target (2013): 42 flood protection schemes hectares country-wide have been protected covering 550,000 ha and 1.8 million people from floods, providing an increased level along Danube, Sava, Tisa and Tamis rivers. of protection to approximately 1.1 million people. Target number of schemes to be strengthened was scaled down due to the late adoption of the Water Law. The recent floods demonstrated that a critical gap remains. Improved capacity for increased Retained CPS Indicator: Improved capacity Achieved: The interventions under the agricultural yields for agricultural yields in areas covered by Project to improve drainage and irrigation Project: increased crop production up to 25%, Baseline (2006): 0% taking into account total effects of the Target (2013): 20% Baseline (2006): Wheat yield 3.5 tons/ha, yields increase and cost reductions. corn yield 2.2 tons/ha Target (2013): 20% increase in average yields Improved water resources Dropped CPS Outcome to consolidate the management and strengthened water number of outcomes and use more specific, resource management institutions measurable outcomes that are expected to be and policies. generated within the CPS timeframe. 18 State Owned Enterprise Reform Resolution of the majority of the Dropped CPS Outcome. The SOE DPL did Lending: SOE DPL Privatization Agency Portfolio. not materialize as planned in the original CPS. IFC: banking and insurance privatization; IFC: PPPs in Privatization/resolution of select large Dropped CPS Outcome. The SOE DPL did infrastructure; SOEs operating in contestable not materialize as planned in the original Support infrastructure markets CPS. projects at municipal level; IFC investments: (i) short- Improvement of corporate Retained CPS Outcome and Indicator. Milestone Achieved: The Parliament has term financing and trade governance model for SOEs, by Lending will be delivered late in CPS. adopted new PE Law, introducing products; (ii) mezzanine introducing rules for management objective rules for appointments, and equity investments; appointments, increasing improving governance structures, and (iii) SME funding support accountability and transparency of increasing transparency through various through financial their performance, to be implemented enhanced reporting requirements. intermediaries. by a dedicated and resourced unit within the government in charge of AAA: FY12 Country the state enterprise portfolio Economic Memorandum; AAA. Municipal Finance Improvement in efficiency of non- Dropped CPS Outcome. No instrument to Expenditure review, 2013, private enterprises via help achieve this outcome, and no indicator (P145374) benchmarking, PPPs, management to measure its achievement. contracts, better regulations, etc. IFC Advisory Services: investment climate; Managing the potential social impact Revised CPS Outcome: Potential social Partially Achieved: The Government has corporate governance. via social protection measures and impact of SOE reform managed via payment allocated sufficient resources in the budget active labor market measures to of allocated funds to redundant workers: to provide severance payments to support transactions. redundant workers. In the draft budget for 2014, RSD 18 billion have been allocated Baseline: RSD 0 in 2013 budget for severance packages, which could Target: RSD 18 billion in 2014 budget compensate about 20,000-25,000 redundant workers. 19 Judicial Performance Government accepts and adopts Dropped CPS Outcome to consolidate the TF: FY11 Justice Sector finalized legal aid law and Parliament number of outcomes and use more specific, Support passes the new law on legal aid. measurable outcomes that are expected to be generated within the CPS timeframe. TF: FY12-16 Justice Sector Support (MDTF) Improved efficiency and services of Retained CPS Outcome: Improved Partially Achieved: EC Progress Report AAA: FY11-14 Western the judiciary through supporting the efficiency and services of the judiciary found some progress in the judiciary. Balkans Public Financial Government’s justice sector reform through supporting the Government’s justice Functional review of the Serbian Judiciary Management & TF agenda and Serbia’s EU accession sector reform agenda and Serbia’s EU provides evidence base for opening of the supported projects process. accession process, as measured by: negotiations under the Chapter 23. Provided input to National Judicial AAA: FY11-14 Progress in negotiations under Chapter 23 Reform Strategy 2013-2018. Programmatic Western and 24 of the EU Accession Agenda Balkan Financial Sector TA Public Financial Management Improved public financial Dropped CPS Outcome. PEFA was carried AAA: Regular Economic management as measured by the out in 2009, prior to this CPS. Reports PEFA framework through increased AAA: FY12 Regional ratings in PEFA indicators, REPARIS associated advice and technical support. Strengthened supervision of the Dropped CPS Outcome to consolidate the financial sector focusing on non-bank number of outcomes and use more specific, financial institutions. measurable outcomes that are expected to be generated within the CPS timeframe. Strengthened transparency of Revised CPS Outcome. Legal framework in Partially Achieved: Two laws, namely corporate financial reporting in line place for strengthened transparency of Law on Accounting and Law on Auditing with EU standards. corporate financial reporting in line with EU were passed in July 2013, marking visible standards. progress in bringing the legislative and institutional environment in the area of corporate financial reporting closer to EU acquis communautaire. 20 Catastrophic Risk Insurance Reduced risk of damage from Revised CPS Outcome: Monetary impact of Not Achieved: Law supporting the SPN: SEE Catastrophic flooding to land, crops, property, floods reduced by the provision of functioning of the Europa Re was adopted Risk Insurance Fund infrastructure, and life loss from catastrophe insurance, as indicated by: in December 2013. Financial products of (P110910) flooding Europa Re are currently being reviewed by Increase in total coverage of firms and the NBS. Insurance policy will start to be individuals brought about by Europa Re. sold in next 4 months. Baseline: 2% Target: 15% Innovation Capacity Established institutional capacity to Retained CPS Outcome. Established Achieved: Established and fully New Financing: FY12 stimulate innovative activities in the institutional capacity to stimulate innovative operational Innovation Fund successfully Serbia Innovation Fund enterprise sector, indicated by: activities in the enterprise sector, indicated deployed pilot financial instruments (P126229); by: resulting in financing of the startups and companies. Serbia Innovation Fund made AAA: FY11-14 Western operational Piloted financial Revised Indicator 1. Additional funds raised Achieved: Total funds raised so far Balkans TA on Science, instruments for technological by Serbia Innovation Fund to support amount to: €35 million. R&/Innovation (TF); development and innovation in innovation: enterprises; and Research and Baseline 2011: €0 AAA: FY13Western development institutes engaged in Target 2014: €20 Million Balkans Study on technology transfer and Revised Indicator 2. Startups have been Achieved: 53 start-ups have been Employment and commercialization, and assisted in financed and new products and processes financed and 8 new products have been Innovation (TF); formulation of RDI reform policy. have been launched by beneficiary launched. enterprises. FY 12-FY 15 Innovation Baseline 2011: 0 startups financed and no (TF) new products Target 2014: 10 startups financed and 8 new products and processes Key Partners: EU Strengthened research and Dropped CPS Outcome to consolidate the Delegation innovation capacity through number of outcomes and use more specific, consensus building and stimulated measurable outcomes that are expected to be research cooperation at the regional generated within the CPS timeframe. level. Developed cooperation between R&D, higher education and business sectors. 21 Strengthened Banking Sector Enhanced financial and institutional Retained CPS Outcome: Enhanced financial Not Achieved. Effectiveness of Deposit New Lending: Deposit capacity in the Deposit Insurance and institutional capacity in the Deposit Insurance Strengthening IPF expected Insurance Strengthening system Insurance system, as measured by: end-July IPF (FY14) Revised Indicator 1: Cumulative inflows TA: FINSAC into the DIF IFC: Support for the Baseline: NA privatization of two state Target: US$150 mil owned banks (Cacanska banka and Komercijalna Revised Indicator 2: DIA performing its banka) legally mandated technical functions in any future bank failures in which DIF resources Key Partners: EBRD are utilized Baseline: NA Target: Yes Pillar II – Improved Efficiency and Outcomes in Social Spending National Priorities Strengthened fiscal performance More informed and effective policymaking to reduce poverty and increase social inclusion Issues and Obstacles Health spending is inefficient Pension reform agenda remains unfinished Public sector remains too large; input financing needs to be reformed. Poverty data needs to be more fully assessed Gender needs to be better mainstreamed 22 Health Spending Number of accredited PHCs Revised CPS Outcome: Accountability and Achieved: Accountability and quality: SPN: FY08 DILS Project (Ministry of Health) quality of public health spending improved, 39.62% of PHC have adopted clinical (P096823) Baseline (2008): 0% as measured by: pathways and 86 percent of PHCs use Target (2014): 25% fully operational health management AAA: Education TA, Phase Percent of PHCs adopting clinical pathways information system (HMIS) platform. 2 (P118286) Baseline: 0% of PHCs have adopted clinical pathways IFC: Investments and Target: 25% advisory in health PPPs. PHCs using fully operational health New Operation: Second management information system (HMIS) Serbia Health project: platform. Year One Results expected Baseline (2008): 0% change by end of CPS. Target (2014): 85% Number of Roma children vaccinated Revised CPS Outcome: Needs of vulnerable Achieved: Nearly 500 medical staff and through Roma health mediators groups being addressed by trained medical associates trained to recognize the needs supported by the project. staff and associates, as measured by: of vulnerable groups; 15 Roma health Baseline (2008): 0 mediators financed from the loan funds Target (2014: 18,795 resulting in 19,818 vaccinated children, Number of Roma children vaccinated over 2,500 registered with a primary through Roma health mediators: health care (PHC) physician, 600 pregnant Baseline (2008): 0 and new mothers receiving health checks, Target (2014): 18,795 and more than 1,200 women able to choose a gynecologist. In 2012, Government institutionalized Roma health mediators by funding their salaries from national budget 23 Disability Financing Improved framework established in Dropped CPS Outcome. Not measurable. SPN: FY08 DILS Project the Ministry of Labor and Social (P096823) Protection allowing equal access to and transparent utilization of State disability funds in addressing disabled people's needs. Baseline (2008): 20% Target (2014): 100% New CPS Outcome: Innovative services for Achieved: Internal operating procedures the disabled developed, piloted, and scaled of the Disability Fund of the Ministry of up across the country, as indicated by: Labor and Social Policy (MoLESP) have been reformed to enable funding of the results-oriented projects. Innovative Sign language interpretation services for the services have been developed, piloted, and deaf and escort services for the blind and scaled up across the country (sign people with impaired vision available language interpretation services for the Baseline: Not available deaf, and escort services for the blind and Target: Available across the country people with impaired vision) Pension Administration Effectiveness of administration Retained CPS Outcome (clarified): Achieved: Improvements in effectiveness SPN: FY08 DILS Project improved and indicated by Effectiveness of pension administration of administration indicated by (P096823) administrative costs/pension improved, as indicated by: administrative costs/pension expenditures achieved. Revised target of 1.5% SPN: FY05 Consolidated expenditures: Decline in administrative costs/pension achieved. The original 2005 baseline Collection and Pension Baseline (2005): 4% expenditures figure was revised from 4% to 2.2% (in Administration Reform Target (2012): 2.5% Baseline (2005): 2.2% 2005). Project (P090418) Target: 1.5% PEDPL Series (P108759 Progress in administrative Dropped CPS Outcome to consolidate the and P120399) consolidation of the 3PIOs: number of outcomes and use more specific, measurable outcomes that are expected to be Baseline (2005): 0% generated within the CPS timeframe. Target (2012): 100% 24 Reduce employers’ reporting burden, Dropped CPS Outcome to consolidate the measured by fewer reporting forms number of outcomes and use more specific, required: measurable outcomes that are expected to be generated within the CPS timeframe. Baseline (2005): 28 types of forms Target (2012): 17 types of forms Further pension reform measures to Revised CPS Outcome: Long-term Not Achieved: Spending on wages and improve long-term sustainability, sustainability, adequacy and transparency of pensions increased although indexation adequacy and transparency of the the pension system improved, as indicated formulas were implemented. Spending on pension system: by: pensions increased to 13.8 percent of GDP in 2013 (compared to 12.4 percent of GDP Baseline (2005): total pension Total pension expenditure to GDP ratio in 2008). Spending on public sector wages expenditure to GDP ratio 13.4% Baseline (2005): 13.4% increased as well – 11.2 percent of GDP in Target (2012): ratio of 12% 2013 compared to 11 percent in 2008. Target: 12% The primary instrument for Bank support in this area was the PEDPL series, of which the third was cancelled. Improve client service in the pension Dropped CPS Outcome to consolidate the system, measured by the average time number of outcomes and use more specific, required for resolution of one case: measurable outcomes that are expected to be generated within the CPS timeframe. Baseline (2005): 2 hours Target (2012): 1 hour Other Social Spending Gradual decline in spending on Dropped CPS Outcome to consolidate the PEDPL Series (P108759 teachers’ salaries (as percent of GDP) number of outcomes and use more specific, and P120399) as capitation formula for school measurable outcomes that are expected to be generated within the CPS timeframe. SPN FY08 DILS Project financing is implemented. Fiscal (P096823) policy improves as Fiscal Council reviews budget preparation. External auditing and debt Dropped CPS Outcome to consolidate the management improve. number of outcomes and use more specific, measurable outcomes that are expected to be generated within the CPS timeframe. 25 New CPS Outcome: Better-informed Partially Achieved: Fiscal Council is now decision-making on public expenditures, as established and operational. The State indicated by: Audit Institution (SAI) audits final accounts of the RoS continuously since Fiscal Council established and operational 2008. The SAI increased its capacity and Baseline: Fiscal Council not operational number of annual audits during the CPS Target: Fiscal Council operational and State period. Latest data relates to 2012 Audit Institution completes external audit of financial statements, for which the SAI final accounts for RoS and at least 10 other issued more than 60 audit reports, external audits including those of final accounts of the RoS, stand-alone financial statements of various ministries, local self-governments, State Owned Enterprises, the National Bank of Serbia etc. Central and local per capita funding Retained CPS Outcome. Achieved. Central and local per capita formulas in the education sector Baseline: No funding formulas funding formulas have been piloted in 15 tested (Ministry of Education and Target: Formulas tested and rolled out. municipalities Science) Poverty Analysis and Monitoring Topical policy notes based on micro- Dropped CPS Outcome: Not an outcome. AAA: economic data are produced. Western Balkans Programmatic Poverty The SILC survey is collected for the Revised CPS Outcome: Poverty analysis and Achieved: SILC Completed. First results Assessment first time and an analytical report is monitoring more closely aligned with EU published in December 2013; Bank is Western Balkans Smart produced. methodology, as indicated by: providing quality control. The next round Safety Nets and Activation starts in May 2014. FY12-13 Survey of Income Completion and publishing of the SILC survey. and Living Conditions (TF) Baseline: SILC survey results not published FY13-15 Poverty and Target: Published. Social Impact Analysis FY12-13 Regional PSIA section of PFDPO document Dropped CPS Outcome: Not an outcome. Monitoring and Evaluation addresses concerns about (TF) distributional impact of its actions. Western Balkans New projects prepared under CPS Dropped CPS Outcome: Not an outcome. Programmatic Gender mainstream gender in design and Monitoring monitoring. Western Balkans Jobs TA 26 Environmental Sustainability National Priorities Address urgent environmental legacy issues arising from mining sector restructuring in the Bor region Increase Energy Efficiency Issues and Obstacles The old and polluting copper mining complex has been extremely harmful to the environment, with legacies that continue to threaten the area. Serbia remains one of the most energy inefficient countries in ECA. Environmental Condition of Bor Region Address urgent environmental and Revised CPS Outcome. Urgent Partially Achieved: Design for the new SPN: FY08 Bor Regional social legacy issues arising from mining environmental legacy issues addressed, as collector completed. Contract for civil Development project sector restructuring and promote new indicated by: works awarded in January 2013. In mid- (P092999) sources of economic growth and job 2013, the closing date of the Bor project creation in the region. Indicated by: Revised Indicator: Reduction of was extended September 2015. In environmental risks related to the poor state extending, the Bank and the authorities and risk of possible failure of the Veliki agreed to significantly reduce the scope of Krivelj collector its activities, including: (1) cancellation of Baseline: collector at risk of collapse the environmental remediation activities Target: Works have been completed and and monitoring activities, other than those collector replaced related to the construction of Veliki Krivelj Collector bypass; and (2) discontinuation of the activities related to socio-economic component. Improved environmental conditions Dropped indicator: PDOs related to selected in the areas associated with past and environmental remediation activities as well present mining operations as social and job training activities. Improved capacity to monitor Dropped indicator: PDOs related to selected environmental conditions. environmental remediation activities as well as social and job training activities. Energy Efficiency Improve energy efficiency in public Retained CPS Outcome. Achieved SPN: FY04 Energy buildings to lower the heating bill and Efficiency Closed, April improve health and environment for Revised Indicator 1: Achieved: Savings from the energy 2013. (P075343) users. system rehabilitation are around US$2.5 27 Lower heating bills for public buildings: million per year. IFC: Advisory and financing energy efficiency Baseline: No savings and renewable energy Target: US$2.5 million per year saved Achieved: CO2 emissions reduction: 52% projects Revised Indicator 2: Project achieved targets in reducing Emissions targets achieved in four categories emissions in all four categories (SO2, (SO2, NOx, Ash and CO2): NOx, Ash, and CO2). Baseline: 0 emissions targets met Target: 28 Annex 2: AAA Program and Contribution to CPS Pillars Country Specific and Regional FY12-15 AAA Product Pillar Delivered Planned Description in FY11 CPS The focus of this report was on policy and institutional reforms necessary to increase Serbia’s export competitiveness in order to Country Economic Memorandum 1 FY12 X promote an export-led growth model over the short to medium term. The report identified sector where the growth potential is highest and discussed obstacles for their faster growth. Assisted the Client Ministry in addressing the challenges of increasing efficiency of education spending for better student performance (education finance and quality) in pre-university education. This TA Education TA (Phase 2) X 2 FY12 also included introduction of BOOST methodology to construct the public expenditure database, analyzing the available financial and education data and training officials in use of this database, ultimately helping better policy making in this sector. The Innovation Serbia TF includes a component that provides TA to Research and Development Institutes. Detailed assessment reports for FY 12-FY 15 Innovation (TF) X four R&D institutes have been completed and the Bank team will work 1 FY12-15 with these institutions on the implementation of their reform programs. The TF also includes TA to line ministry for developing new strategy for financing R&D. The Project aims to build capacity in the Serbian Statistical system to implement EU type survey of living standards. The main purpose is to Survey on Income and Living Conditions (TF) X 2 FY14-15 ensure sustainable monitoring and poverty and living conditions overall which is needed to facilitate the design and monitoring of policies aimed at fighting poverty and social inclusion. This activity aims to facilitate Serbia’s justice sector EU integration Justice Sector Support (MDTF) X process, establish a justice sector performance framework, and 1 FY12-16 strengthen aid coordination in Serbia’s justice sector. This is done through: (a) provision of the targeted short-term technical assistance and 29 AAA Product Pillar Delivered Planned Description in FY11 CPS analytic/policy support to the Serbian authorities for their key justice sector capacity-building and modernization needs and (b) facilitation of the communication between key stakeholders in Serbia’s judicial reform process. This activity provided just in time analysis of poverty; gender and Poverty and Social Impact Analysis X social impacts for a major WB operation under preparation at the time - 2 FY13-15 the Public Finance DPO, first in the series of 2 DPOs focused on public sector reforms in Serbia. The report informed the debate over structural changes in the assignment of revenues and expenditures to local governments and Municipal PFR1 X provided advice to the new Government, including recommendations of 1 FY13 reforms that could be undertaken by individual local governments and reforms in the overall framework in which municipal governments operate. The report (done as Phase 2 to the FY 13 Municipal PFR) will identify ways how local governments can increase efficiency and do more with Municipal PFR2 1 FY14 existing resources. The focus is on staffing of local governments, performance of local utility companies and public financial management. X Dropped Energy Strategy 1 FY14 Assisting the Serbian authorities in identifying policy and regulatory reforms needed to improve land and real estate management and strengthen institutional capacity in the land management sector. There were three separate policy notes as outputs of this TA: 1) on Serbia Real Estate Management TA 1 FY14 construction permits; 2) property rights, and 3) on property tax. The TA helped the Government of Serbia (GOS) to define priorities in terms of policy and regulatory reforms, clarify roles and responsibilities of different institutions, and identify the capacity building needs. Serbia Government Debt and Risk The project aims to contribute to Serbia’s sound macroeconomic and 1 FY11-FY17 Management TA fiscal management and reduce vulnerability to financial shocks through 30 AAA Product Pillar Delivered Planned Description in FY11 CPS strengthened debt management staff capacity and institutions, and deeper domestic debt markets. In 2011 and 2012 the TA provided support to preparation of the medium term debt management strategy and the corresponding internal annual borrowing plan and the resulting strategy documents have been published by the Client. A detailed report with recommendations regarding the internal organization of Public Debt Agency had also been prepared in December 2012 and, while it still remains to be implemented, the new Government has indicated that they would reorganize the unit based on recommendations provided. Support was also provided to establishment and implementation of a derivatives framework to manage the risks of the public debt portfolio. Additional activities are being discussed with the Government. The TA aims to strengthen capacities of the City of Belgrade administration which should enable the city government to improve its Belgrade Debt Management TA 1 FY14 debt management and help it develop programmatic multi-year fiscal framework. TA is delivered as a series of hands-on trainings and workshops. This Policy Note will identify the unfinished reform agenda and selected immediate and mid- to long-term incremental policy options Supporting Rail Policy Reform (EW) 1 FY14 that the Government could implement to successfully and gradually make the railway sector an efficient and competitive transport mode, in line with the EU policies. Country Fiduciary Assessment 2 FY14 Dropped The TA aims to upgrade capacities for macroeconomic modeling within the Serbian Ministry of Finance. This activity supports the installation and implementation of the new macro model: the Dynamic Stochastic Macro Modeling Support TA 2 FY14 General Equilibrium (DSGE) model. This new model will help the Ministry to improve its strategic documents (including the Fiscal Strategy) and to prepare better informed budgets. The proposed program will inform policy makers of the agriculture Agriculture Sector Dialogue TA FY15 sector constraints and of the impact of the earlier support measures in 31 AAA Product Pillar Delivered Planned Description in FY11 CPS Serbia and of similar measures elsewhere. It will provide private sector perspective of different government policy and budget support measures. The Bank team’s recommendations will recognize the need to conform to the broader macroeconomic considerations and be in line with the requirements of the EU accession. The proposed program aims to help the design of a quality assurance system for inclusive education, including the tools (instruments/mechanisms) for regular monitoring and evaluation of Serbia inclusive Education FY15 inclusive practices that will be used to: a) Support daily work of the education professionals at the school and municipal level, and b) Inform further inclusion-related policy design and implementation. Regional AAA The objective is to support candidate and potential candidate countries of Southeast Europe with the implementation of corporate financial Western Balkans REPARIS -Follow on EU reporting frameworks that are aligned with the EU acquis REPARIS (Road to Europe – Program of communautaire. This will contribute to an improved regulatory 1 FY13-17 X Accounting Reform and Institutional framework for innovative and high-potential enterprises in Southeast Strengthening) Europe in general, and specifically help stimulate the build-up of a supportive venture capital ecosystem for high-potential SMEs which in turn will create jobs and promote shared prosperity. Western Balkans TA Science, R&D and Technical Assistance aims to identify funding instruments for the Innovation [renamed: Western Balkans implementation of their R&D action plans. 1 FY12-FY14 X Regional Research & Development Strategy for Innovation] This programmatic facility aims to assist the Western Balkan countries in: (i) developing or improving institutional capacity of the regulatory Western Balkans Programmatic Financial entities for the oversight and mitigation of the key financial sector risks; 1 FY12-FY14 X (ii) supporting ad hoc requests for bank intervention or resolution Sector Development related TA or policy advice; and (iii) providing policy and intellectual leadership for implementation of strategic financial sector development goals in this region. The activities under the FY 14 TA facility focus on 32 AAA Product Pillar Delivered Planned Description in FY11 CPS the following areas: (i) vulnerabilities of Western Balkan Financial Sectors in the context of European economic fragility; (ii) compliance of the supervisory regimes with Basel III and EU accession requirements (including Capital Requirements Directive); and (iii) mechanisms for resolution of NPLs. Regional Monitoring and Evaluation (TF) A regional project designed to provide technical support to strengthen [renamed: Monitoring and Evaluation Capacity institutional capacity for monitoring and evaluation (M&E) of strategy 2 FY14 X Development for the Western Balkans and implementation in up to five sectors. Turkey] Explores design and implementation characteristics of safety nets, the labor market institutions, as well as tax and benefit systems, which are encouraging or discouraging of undertaking activation of beneficiaries and facilitating their transition from social benefits to work. It develops methodology and performs analysis of the profile of the current beneficiaries of social assistance and proposes a mix of activation measures that would be suitable for the identified vulnerabilities and Regional Smart Safety Nets 2 FY13-FY14 X employment impediments for the respective groups. It gives cross- country review of last-resort social assistance key program design parameters which influence the behavior of working-age able-bodied beneficiaries and their families with respect to making the transition from welfare to work. Third, it gives calculations of benefit phase-out and benefit withdrawal rates in the Western Balkan countries using the OECD tax-benefit calculator, proposing changes in benefit design and in policies that would promote activation. Proactively enhancing the inclusion of the gender dimension in the World Bank's engagement with the countries. The work aims at (i) Western Balkans Programmatic Gender incorporating gender in the CPS’ and CPSPRs; (ii) monitoring gender 2 FY13-FY15 X Monitoring inequalities; (iii) including gender in the portfolio; (iv) addressing knowledge gaps. 33 AAA Product Pillar Delivered Planned Description in FY11 CPS Provides: (i) regular monitoring of poverty, inequality and exclusion indicators; (ii) statistical support and strengthening capacity in areas Western Balkans Programmatic Poverty 2 FY13-FY15 X related to the measurement of poverty and exclusion; and (iii) Assessment addressing knowledge gaps on poverty and distributional issues, particularly as they relate to Bank supported reforms and projects. Promoting Employment through Skills Dropped (Serbia is participating in the Programmatic Western Balkans 1 FY13 X Development TA Jobs Challenges TA) Western Balkans Public Fin. Mgt/PEFA (TF) 1 FY13-FY15 X Dropped This programmatic ESW aims to establish the evidence base on setting priorities in health to make health systems in the Western Balkans more equitable and efficient, and control the development of their costs. The ESW products are expected to assist knowledge exchange and policy development on implementing and setting priorities in the Western Balkan countries. In particular, Component 3 of the Program will assess Western Balkans Regional Health AAA 2 FY13-FY16 X the equity and efficiency outcomes under current approaches of setting and implementing priorities in health care in Serbia (and a second Western Balkan country) to develop hypothetical patient journeys that demonstrate inequities and resulting inefficiencies in health care based on analyses of the treatment for a set of tracer conditions. The component will include a menu of core and optional diagnostics. The TA aims (i) to identify gaps and opportunities to enhance Roma inclusion in Bank supported activities; (ii) to raise awareness and create Mainstreaming Roma 1 FY14 a better understanding of the importance of Roma inclusion; and (iii) to eventually inform the way clients improve Roma inclusion in selected sectors/countries. Identifies the main labor market incentives, determines policy priorities Western Balkans Jobs Challenges 1 FY13-FY16 and discusses policies to improve labor market outcomes. 34 Annex 3: Key Economic & Program Indicators - Change from Last CPS Prepared for all CASs/Progress Reports, but included in Board version of Progress Reports Only Forecast in Last CAS Actual Current CAS Forecast a b b b c c c a Economy (CY) 2010 2011 2012 2013 2010 2011 2012 2013 2014b 2015b 2016b Growth rates (%) GDP 1.0 2.0 3.0 4.5 1.0 1.6 -1.5 2.5 1.0 1.5 2.5 Exports 17.3 26.7 11.3 14.5 17.2 20.1 -4.9 30.0 9.0 10.7 11.0 Imports 4.2 20.9 7.4 8.6 4.2 20.7 -4.7 8.6 4.1 7.1 7.6 Inflation (average, %) 6.3 7.1 3.4 3.4 6.2 11.1 7.3 7.8 4.0 4.5 4.0 National accounts (% GDP) Current account balance -7.4 -7.8 -8.6 -8.3 -6.7 -9.1 -10.6 -5.0 -4.5 -4.0 -3.5 Gross investment 23.0 25.1 25.2 24.0 17.2 20.1 21.3 19.3 20.5 21.3 21.7 Public finance (% GDP) Fiscal balance -4.7 -4.5 -3.9 -2.8 -5.0 -5.2 -7.7 -6.0 -7.1 -5.2 -3.2 Foreign financing 1.1 3.5 2.3 1.3 1.4 4.2 4.9 5.2 -4.6 -3.4 -2.1 International reserves (as months of imports) 9.7 8.9 7.6 7.0 10.0 10.5 9.2 9.0 7.8 7.3 6.9 a b b b a b b a a b Program (Bank’s FY) FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY14 FY15 FY16b Lending ($ million) 200 100 240 NA 500 0 100 240 240 500 IBRD total debt outstanding ($ 1,818 2,063 2,264 2,516 1,818 1,859 1,915 1,973 1,973 million)* *End of calendar year data a. Estimated year b. Projected year c. Actual outcome The macro projections for 2014-16 were prepared prior to the floods, and will be updated once the floods-related damage and loss assessment is completed and further information on the 2014 supplementary budget becomes available in September 2014. 35 Annex 4: Serbia at a Glance Serbia at a glance 3/13/14 Europe & Upper Key Development Indicators Central middle Serbia Asia income Age distribution, 2012 (2012) Male (..) Female (..) Population, mid-year (millions) 7.2 271 2,391 75-79 Surface area (thousand sq. km) 88 6,479 43,472 60-64 Population growth (%) -0.5 0.7 0.8 Urban population (% of total population) 57 60 61 45-49 30-34 GNI (Atlas method, US$ billions) 38.1 1,804 16,661 15-19 GNI per capita (Atlas method, US$) 5,280 6,664 6,969 GNI per capita (PPP, international $) 11,430 11,946 10,621 0-4 6 4 2 0 2 4 6 GDP growth (%) -1.7 1.8 5.0 percent of total population GDP per capita growth (%) -1.2 1.1 4.2 (most recent estimate, 2005–2012) Poverty headcount ratio at $1.25 a day (PPP, %) <2 1 8.4 Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) <2 2 19.5 Life expectancy at birth (years) 75 72 74 60 Infant mortality (per 1,000 live births) 6 19 16 Child malnutrition (% of children under 5) 2 2 3 50 40 Adult literacy, male (% of ages 15 and older) 99 99 96 30 Adult literacy, female (% of ages 15 and older) 97 97 91 Gross primary enrollment, male (% of age group) 93 101 111 20 Gross primary enrollment, female (% of age group) 93 100 110 10 0 Access to an improved water source (% of population) 99 95 93 1990 1995 2000 2012 Access to improved sanitation facilities (% of population) 97 94 74 Serbia Europ e & Central Asia Net Aid Flows 1980 1990 2000 2012 (US$ millions) Net ODA and official aid .. .. 1,134 1,090 Growth of GDP and GDP per capita (%) Top 3 donors (in 2012): European Union Institutions .. .. 471 885 20 Germany .. .. 99 53 10 United States .. .. 108 42 0 -10 Aid (% of GNI) .. .. 18.7 3.0 Aid per capita (US$) .. .. 151 151 -20 -30 Long-Term Economic Trends -40 95 05 Consumer prices (annual % change) .. .. 71.1 7.3 GDP implicit deflator (annual % change) .. .. 77.4 5.5 GDP GDP per capita Exchange rate (annual average, local per US$) .. .. 63.2 87.9 Terms of trade index (2000 = 100) .. .. 100 139 1980–90 1990–2000 2000–12 (average annual growth %) Population, mid-year (millions) 7.4 7.6 7.5 7.2 0.3 -0.1 -0.3 GDP (US$ millions) .. .. 6,083 37,489 .. -4.2 3.3 (% of GDP) Agriculture .. .. 19.9 9.0 .. .. 1.1 Industry .. .. 30.5 26.6 .. .. 2.0 Manufacturing .. .. 23.8 15.6 .. .. .. Services .. .. 49.6 64.3 .. .. 5.4 Household final consumption expenditure .. .. 88.3 70.8 .. .. 0.8 General gov't final consumption expenditure .. .. 19.6 18.9 .. .. 5.0 Gross capital formation .. .. 8.8 26.3 .. .. 16.0 Exports of goods and services .. .. 23.9 38.2 .. .. 9.6 Imports of goods and services .. .. 40.5 54.2 .. .. 7.9 Gross savings .. .. 13.3 18.7 Note: Figures in italics are for years other than those specified. .. indicates data are not available. Development Economics, Development Data Group (DECDG). 36 Serbia Balance of Payments and Trade 2000 2012 Governance indicators, 2000 and 2012 (US$ millions) Total merchandise exports (fob) 1,645 13,833 Voice and accountability Total merchandise imports (cif) 3,227 20,950 Net trade in goods and services -1,441 -7,128 Political stability Current account balance -153 -4,231 Regulatory quality as a % of GDP -2.5 -11.3 Rule of law Workers' remittances and compensation of employees (receipts) .. 2,763 Control of corruption Reserves, including gold 517 14,403 0.0 25.0 50.0 75.0 100.0 2012 Country's percentile rank (0-100) Central Government Finance higher values imply better ratings 2000 (% of GDP) Source: Worldw ide Governance Indicators (w w w .govindicators.org) Current revenue (including grants) 42.4 42.7 Tax revenue 34.4 36.9 Current expenditure 42.1 42.9 Technology and Infrastructure 2000 2012 Overall surplus/deficit -0.3 -4.3 Paved roads (% of total) 63.0 63.5 Highest marginal tax rate (%) Fixed line and mobile phone Individual 10 15 subscribers (per 100 people) .. 156 Corporate 20 10 High technology exports (% of manufactured exports) .. .. External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 11,573 34,438 Agricultural land (% of land area) .. 58 Total debt service 124 5,869 Forest area (% of land area) 28.1 31.6 Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of land area) 5.7 6.3 Total debt (% of GDP) 190.3 91.9 Freshwater resources per capita (cu. meters) .. 1,158 Total debt service (% of exports) 5.8 31.0 Freshwater withdrawal (% of internal resources) .. 49.0 Foreign direct investment (net inflows) 52 355 CO2 emissions per capita (mt) .. 6.3 Portfolio equity (net inflows) 0 -24 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 3.6 4.4 Composition of total external debt, 2012 Energy use per capita (kg of oil equivalent) 1,826 2,230 Short-term, IBRD, 1,915 1,018 IDA, 708 IMF, 2,517 World Bank Group portfolio 2000 2012 Other multi- lateral, 3,449 (US$ millions) IBRD Total debt outstanding and disbursed 1,097 1,915 Bilateral, 3,245 Disbursements 0 96 Private, 21,586 Principal repayments 0 74 Interest payments 0 49 US$ millions IDA Total debt outstanding and disbursed 0 708 Disbursements 0 20 Private Sector Development 2000 2012 Total debt service 0 20 Time required to start a business (days) – 12 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 7.7 Total disbursed and outstanding portfolio – 528 Time required to register property (days) – 11 of which IFC own account – 491 Disbursements for IFC own account – 229 Ranked as a major constraint to business 2000 2012 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account – 81 n.a. .. .. n.a. .. .. MIGA Gross exposure – – Stock market capitalization (% of GDP) 4.9 19.9 New guarantees – – Bank capital to asset ratio (%) 18.3 16.0 Note: Figures in italics are for years other than those specified. 3/13/14 .. indicates data are not available. – indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 37 Millennium Development Goals Serbia With selected targets to achieve b etween 1990 and 2015 (estimate closest to date shown, +/- 2 years) Serbia Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2012 Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. <2 <2 Poverty headcount ratio at national poverty line (% of population) .. .. 14.0 9.2 Share of income or consumption to the poorest qunitile (%) .. .. 8.0 8.4 Prevalence of malnutrition (% of children under 5) .. .. .. 1.6 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) .. .. .. 91 Primary completion rate (% of relevant age group) .. .. .. 93 Secondary school enrollment (gross, %) .. .. 91 92 Youth literacy rate (% of people ages 15-24) .. .. .. 99 Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) .. .. 101 101 Women employed in the nonagricultural sector (% of nonagricultural employment) .. 40 44 46 Proportion of seats held by women in national parliament (%) .. .. .. 33 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 28 20 13 7 Infant mortality rate (per 1,000 live births) 24 17 11 6 Measles immunization (proportion of one-year olds immunized, %) 82 86 89 87 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 23 25 12 12 Births attended by skilled health staff (% of total) .. .. 98 100 Contraceptive prevalence (% of women ages 15-49) .. .. 59 61 Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. .. .. Incidence of tuberculosis (per 100,000 people) .. .. .. 23 Tuberculosis case detection rate (%, all forms) .. .. .. 87 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 99 99 100 99 Access to improved sanitation facilities (% of population) 96 96 96 97 Forest area (% of land area) 26.4 .. 28.1 31.6 Terrestrial protected areas (% of land area) 5.5 5.4 5.7 6.3 CO2 emissions (metric tons per capita) .. .. .. 6.3 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 4.5 3.2 3.6 4.4 Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) .. .. .. 38.4 Mobile phone subscribers (per 100 people) .. .. .. 117.8 Internet users (per 100 people) .. .. .. 48.1 Households with a computer (%) .. .. .. 60.3 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 200 100 75 150 75 50 50 100 25 25 50 0 2000 2005 2010 0 0 1990 1995 2000 2012 2000 2005 2010 Primary net enrollm ent ratio Fixed + mob ile subscribers Ratio of girls to boys in prima ry & secondary Serbia Europ e & Central Asia education Internet users Note: Figures in italics are for years other than those specified. .. indicates data are not available. 3/13/14 Development Economics, Development Data Group (DECDG). 38 Annex 5: Bank Portfolio Performance and Management As Of Date 5/12/2014 Indicator 2011 2012 2013 2014 Portfolio Assessment Number of Projects Under Implementation a 12 8 5 6 Average Implementation Period (years) b 5.4 6.6 4.7 3.2 Percent of Problem Projects by Number a, c 8.3 12.5 60.0 16.7 Percent of Problem Projects by Amount a, c 2.3 5.8 73.2 3.2 Percent of Projects at Risk by Number a, d 8.3 12.5 60.0 16.7 Percent of Projects at Risk by Amount a, d 2.3 5.8 73.2 3.2 Disbursement Ratio (%) e 10.4 23.2 17.8 13.2 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 23 6 Proj Eval by OED by Amt (US$ millions) 733.2 239.2 % of OED Projects Rated U or HU by Number 4.3 16.7 % of OED Projects Rated U or HU by Amt 0.0 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 39 Annex 6: Proposed IBRD Base-Case Lending Program As of 06/19/2014 Fiscal year Proj ID US$(M) Strategic Rewards b (H/M/L) 2015 State-owned Enterprises DPO 250.0 Land and Real Estate Management 50.0 Public Expenditure and Public Employment 50.0 Reform Emergency Recovery Loan 150.0 Overall Result 500.0 40 Annex 7: IFC Investment Operations Program FY12 FY13 FY14* Total Original Commitments (US$ million) IFC Own Account and Participants 423 151 87 662 IFC Own Account 351 151 87 590 Original Commitments by sector (%), own account Agribusiness 20.3 59.3 0.0 27.3 Manufacturing 7.7 0.0 0.0 4.6 Finance 72.0 40.7 96.0 67.5 Energy 0.0 0.0 4.0 0.6 Total 100.0 100.0 100.0 100.0 Original Commitments by instrument (%), own account Loan 75.3 59.3 0.0 60.0 Guarantee 2.3 40.7 96.0 26.0 Quasi-Equity (Loan Type) 19.0 0.0 4.0 11.9 Straight Equity 3.4 0.0 0.0 2.1 Total 100.0 100.0 100.0 100.0 * As of end of May 2014 41 Annex 8: Operations Portfolio (IBRD/IDA and Grants) As Of Date 5/12/2014 Closed Projects 34 IBRD/IDA * Total Disbursed (Active) 165.66 of w hich has been repaid 4.25 Total Disbursed (Closed) 1,122.32 of w hich has been repaid 80.57 Total Disbursed (Active + Closed) 1,287.98 of w hich has been repaid 84.82 Total Undisbursed (Active) 619.72 Total Undisbursed (Closed) 3.54 Total Undisbursed (Active + Closed) 623.26 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementation Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd Objectives Progress P092999 BOR REG DEVT U U 2007 33 10 17.74938272 15.29465 33.229442 P108005 CORRIDOR X HIGHWAY PMS MS 2010 388 256.9362 -46.22056 -46.2206 P146248 Deposit Insurance Strength # # 2014 200 200 P096823 LOCAL SERVICES DELIVES MS 2008 46.4 7.486236 10.256423 8.003809 P127876 ROAD REHABILITATION A S MS 2013 100 100 3.3333333 P129539 Serbia Health Project # # 2014 40 40 Overall Result 807.4 10 17.74938272 619.7171 0.5986338 -38.2168 42 Annex 9: IFC Committed and Outstanding Investment Portfolio As of end of May 2014 Committed Disbursed Outstanding FY Approval Company Loan Equity Quasi Equity* GT/RM** Total own account Participants Loan Equity Quasi Equity* GT/RM** Total own account Participants 2006/ 08/ 12 Banca Intesa Beo - 57 - - 57 - - 57 - - 57 - 2011/ 12 Cacanska Banka 5 9 - - 14 - 5 9 - - 14 - Carnex 12 - - - 12 - 12 - - - 12 - 2011/12/13/14 Eurobank Serbia 31 - - 46 77 - 31 - - 46 77 - 2011 Farmakom M .B. 54 - - - 54 41 54 - - - 54 41 2013 Grand Prom 15 - - - 15 - 15 - - - 15 - 2014 IVICOM - - 4 - 4 - - - - - - - 1990 Jugobanka 0 - - - 0 0 0 - - - 0 0 2012 Komercijalna BG - - 68 - 68 - - - 68 - 68 - 2010 Kronospan SRB 23 - - - 23 - 23 - - - 23 - 2012/ 14 M K Doo 43 - - - 43 - 43 - - - 43 - 2012 PM C Automotive 27 - - - 27 - 27 - - - 27 - 2009 Porr Jagodina - - 2 - 2 - - - 2 - 2 - 2009 Porr Leskovac - - 2 - 2 - - - 2 - 2 - 2002/03/07/10 ProCredit Serbia 12 - - - 12 - 12 - - - 12 - 2008 ProCredit Lease 2 - - - 2 - 2 - - - 2 - 2010/ 12 SocGen Serbia 115 - - - 115 - 115 - - - 115 - 2005/ 12 Unicredit Bank 70 - - - 70 - 70 - - - 70 - 2013 Victoria Group 78 - - - 78 - 78 - - - 78 - 2012 Vino Zupa 17 - - - 17 - 17 - - - 17 - Total Portfolio 504 66 76 46 692 41 504 66 73 46 689 41 * Quasi Equity includes both loan and equity types. **GT/RM includes guarantees and risk management products 43 Annex 10: Map 44