Croatia Presses Forward With Reforms, World Bank Approves Three Major Loans Contacts In Zagreb: Vanja Frajtic (+385-0)1 2357 297, vfrajtic@worldbank.org In Washington: Steven Jouy (+1-202) 473 4215, sjouy@worldbank.org WASHINGTON, May 30, 2007 – The World Bank today finalized the Croatia Country Assistance Strategy Progress Report (CAS PR), outlining the World Bank’s continuing support to the Government’s growth and reform strategy for successful EU accession, integration and convergence. The World Bank Board of Executive Directors also approved three new loans aiming at supporting the country’s progress towards European Union integration, improving water supply and wastewater collection, and restructuring and modernizing the Port of Rijeka. The three loans amount to a total of EUR285.3 million (USD378.84 million equivalent). The CAS PR is a document which assesses the relevance of the four-year Croatia Country Assistance Strategy (CAS), covering the period 2005-2008. The CAS PR looks at progress to date in the implementation of the work program detailed in the CAS, and adjusts the program as appropriate in light of changes in country circumstances and priorities. During the second half of the CAS period, the World Bank in Croatia will continue to support the Government’s growth and reform strategy for successful EU accession, integration and convergence through (i) macro economic stability; (ii) sustainable private sector-led growth; (iii) broad participation in growth; and (iv) sustainable natural resource management. During the next two years and pending any significant developments, the World Bank expects to provide USD612.8 million in financing to Croatia. In addition to the three loans, the World Bank expects to support the following additional projects by mid- 2008: a Revenue Administration Modernization Project, which is in the final stages of preparation, the Rijeka Gateway II Project, a Judicial Reform Project, a Sustainable Health Systems Project, an Agricultural Pollution Project, and the Neretva and Trebisnjica River Basin Management Project. The World Bank Board of Executive Directors today also approved a Programmatic Adjustment Loan (PAL) in the amount of EUR150 million (US$197.4 million equivalent). This is the second loan in a series of three proposed PALs. The loan aims at supporting the Croatian Government in implementing structural and institutional reforms to achieve economic growth and successful European Union integration—both strategic priorities of the Government. The loan will be disbursed in tranches of EUR100 million and EUR50 million. The smaller tranche is expected to be disbursed by end 2007. The reform program supported by the PAL focuses on: · Improving the investment climate through privatization of state-owned companies, improving financial discipline of public enterprises, reducing costs of doing business, and strengthening the judiciary; · Strengthening governance in public administration by rationalizing, depoliticizing and improving efficiency of public administration and public expenditure management; · Enhancing fiscal sustainability of sector programs by addressing health financing, rationalizing and improving targeting of social benefits, improving fiscal and social sustainability of the pension system, and improving fiscal sustainability of railways operations. Results Achieved So Far Under the PAL Program Since the start of the PAL program in mid-2004, the Government has made significant progress in the implementation of the reforms in the areas outlined. Some noteworthy improvements are: · State shares were sold or sterilized in over 841 companies, including agro-combinats and some large loss-makers in metal industry, reducing state involvement in the enterprise sector; · The court case backlog was reduced by 30 percent (from 1.64 to 1.15 million cases), and indicators of judicial performance show improvement, resulting in a more effective and accountable judiciary system; · The public sector wage bill was reduced by about one percentage point of GDP, the legislation governing the civil service was modernized, thus ensuring depoliticization and professionalization of the state; · The strategy for social benefit reform has been adopted. It aims at consolidating over 100 existing social benefits, strengthening their administration and increasing the share of funds allocated to means-tested benefits, helping the most disadvantaged members of society to receive better assistance; · The ratio between operational spending and revenues of the Croatian Railways was reduced by over 50 percentage points (from 243% at the end of 2004 to 190% at the end of 2006), thus allowing for a reduction of operating subsidies to railways by 0.7 percentage points of GDP. This has made the Croatian Railways operations more sustainable and less costly for the state. “The reforms supported by the overall PAL program have been ambitious and challenging. Their implementation has called and continues to call for commitment, coordination, and perseverance from many Government bodies,” said Anand Seth, World Bank Country Director for Croatia, Romania and Bulgaria. “I want to commend the Government of Croatia on its efforts to keep the implementation of these difficult reforms on track even during the election year. The benefits of reforms will be felt by all segments of society: the state, which will carry out its role more effectively and deliver services to the public; private businesses, which will operate in a more transparent and less costly environment; and the citizens as well as disadvantaged members of the society, who will receive better assistance and public sector services. At the same time, the reforms supported will assist Croatia in successfully integrating into the EU with a well-performing and dynamic economy.” The World Bank Board of Executive Directors further approved a loan for the Inland Waters Project in the amount of EUR100 million (USD133.41 million equivalent). It aims at supporting the Government’s efforts to improve water supply and wastewater collection and treatment services, as well as flood protection measures in municipalities in the inland part of Croatia. The project will directly benefit the local population by providing safe drinking water and collection and treatment of wastewater. Project activities will also ensure the safety of the population and property through the implementation of adequate flood protection measures. The project area will cover the Sava, Drava and Danube river basins. The proposed investments will help improve service standards in multiple small municipalities, and assist Croatia in meeting EU water directives and strengthening the institutions responsible for water management. The project should assist the Government to increase the public water supply to an additional 65,000 people while wastewater treatment will be extended to additional 31,000 people. “The Inland Waters Project will benefit the population by improving water and wastewater services in line with EU directives and enhancing flood protection measures in the Sava river basin. The project will also support institutional strengthening for utilities to operate efficiently and for Croatia to effectively meet EU directives and access EU funds. We look forward to working with the Government and the local authorities on this project so that the benefits of the improved services reach the population in a timely manner”, said Seth. The third approved operation by the World Bank Board of Executive Directors is the Additional Financing Loan to the Port of Rijeka Authority with the guarantee of Croatia for the Rijeka Gateway Project in the amount of EUR35.3 million (USD48.0 million equivalent). The Rijeka Gateway Project (USD156.5 million) was approved by the World Bank on July 8, 2003. The overall objective of the project was to increase Croatia’s trade competitiveness by improving the international transport chain through the Rijeka Gateway for both freight and passenger traffic, and by modernizing the port of Rijeka and road network connection and privatizing port operations. To date, the project has been performing well, keeping on track in meeting its objectives for all criteria. The additional financing in the amount of EUR35.3 million will be used in support of the Port Restructuring and Modernization component. More specifically, the loan will finance a revised method of construction for the Zagrebacko pier, a 300m long berth that will represent the beginning of the development of new berthing capacity in the western part of the port and establishment of a new container terminal. The method of construction had to be revised due to recent soil investigations which showed that a different engineering solution, including soil consolidation, had to be used in order to achieve the desired standards. The pier will also be strengthened to enable it to accommodate some of the largest container vessels in the North Adriatic Sea. The construction of the Zagrebacko pier is critical for the success of the port of Rijeka which needs additional capacity to accommodate the fast growth in container traffic which increased by 520 percent in four years. The additional financing will also support the Port Authority to prepare concession arrangements for the Zagrebacko pier. The PAL2 and the Inland Waters loan are Euro denominated fixed spread loans repayable in 15 years including a five-year grace period, while the Additional Financing Loan to the Port of Rijeka Authority with the guarantee of Croatia for the Rijeka Gateway Project is a Euro denominated loan with a maturity of 13 years including a 4 year grace period. Since Croatia joined the World Bank in 1993, the organization has been active in providing financial and technical assistance, policy advice and analytical services to Croatia. To date, the World Bank has approved 35 loans with a total value of USD2.18 billion, and it has approved 48 grants with a total value of USD51.5 million. All ongoing projects financed by the World Bank have satisfactory ratings. For more information about the World Bank's work in Croatia, visit http://www.worldbank.hr