Page 1 PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB6362 (The report # is automatically generated by IDU and should not be changed) Operation Name Latvia Second Safety Net and Social Sector Reform Program Region EUROPE AND CENTRAL ASIA Country Latvia Sector General education sector (30%); Health (30%); Other social services (30%); General public administration sector (10%) Operation ID P121796 Lending Instrument Development Policy Lending Borrower(s) REPUBLIC OF LATVIA Implementing Agency MINISTRY OF FINANCE Ministry of Finance 1 Smilsu Street Riga Latvia LV-1919 Tel: (371-6) 708-3886 Fax: (371-6) 708-3898 Date PID Prepared February 14, 2011 Estimated Date of Appraisal Estimated Date of Board Approval May 24, 2011 Concept Review Decision Following the concept review, the decision was taken to proceed with the preparation of the operation. I. Key development issues and rationale for Bank involvement The size and speed of fiscal adjustment and structural reforms required to fulfill the Maastricht criteria entail heavy social costs . In the face of a sharp collapse in output brought on by the end of the externally-financed domestic demand boom, Latvia opted for a stabilization program that aimed at maintaining its currency peg to the euro, while embarking on an internal devaluation involving an unprecedented fiscal and nominal wage adjustment, supported by financial and structural reforms. The Latvian Government’s aim is to exit the stabilization program with Euro adoption by reaching the Maastricht criteria in 2012. The size of the fiscal adjustment required to accomplish this (from 6.5 percent in 2010 to under 3 percent in 2012) would be difficult even in the non-recession environment. This greatly increases the risk of adverse impact on households. At the same time, the recent economic performance has been better than expected, and Latvia has returned to positive growth in the third quarter of 2010 for the first time since the onset of the economic downturn. Yet, unemployment rates are falling very slowly and remain high at 18 percent. Moreover, there appears to be a large disparity in employment opportunities depending on education levels, pointing to a possible problem of structural unemployment for the poorer socioeconomic groups coming out of the crisis. Page 2 The global financial crisis led to an exceptional request by the government of Latvia for renewed access to World Bank lending resources . The World Bank has provided assistance to Latvia through two parallel programs, one supporting reforms to strengthen the financial sector (EUR 200 million, fully disbursed on November 4, 2009), and the other providing support for an emergency safety net and social sector reform (EUR 100 million, fully disbursed on September 27, 2010). The Special Development Policy Loan (SDPL2) would be the second and final operation in a programmatic series of loans to support safety net and social sector reforms in Latvia to mitigate the impact of fiscal consolidation. II. Proposed Objective(s) The SDPL2 continues support of the Safety Net and Social Sector Reform Program . The objectives of the operation are: (i) to protect vulnerable groups with emergency safety net support during the economic contraction; (ii) to mitigate the social costs of fiscal consolidation; and (iii) to ensure that structural reforms lay a foundation for medium-term improvements in the social sectors. The government is committed to implementing fiscal consolidation through sound, structural reforms. The most important measures that the government began to take in 2009 include: (i) in the education sector, the introduction of “ funds follow the student” per-capita financing in the 2009 academic year; (ii) in the health sector, a reduction in the number of hospital beds with the aim of shifting the health care toward out-patient and hospital day care, and a more effective use of copayments to control demand for services. Additionally, reforms have been passed that will increase the efficiency of social protection by eliminating overlapping benefits and improving the long-term financial sustainability of old-age pensions and other forms of social insurance. III. Preliminary Description The World Bank support program focuses on measures designed to mitigate the social impact of fiscal consolidation, and the implementation of the government’s Emergency Social Sector Net Strategy (ESSNS) . The strategy came into legal effect on October 1, 2009 and finances and coordinates the efforts of national and local government agencies to: (i) maintain pre-primary education and child development programs for 5 and 6 year old children; (ii) cover the costs of transporting students from communities where schools have closed to their new places of instruction; (iii) exempt needy households from health service co-payments; and (iv) subsidize their pharmaceutical costs; (v) sustain and improve general practitioner (GP) and primary health care (PHC) services and access; (vi) increase the coverage and pay-out period of unemployment insurance; and (vii) increase the coverage and amount of targeted social assistance benefits administered by local governments. For the unemployed who are not covered by unemployment insurance or other social support, the government has (viii) fortified the safety net by rapidly deploying a labor-intensive emergency public works program. Page 3 IV. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The policies supported by the SDPL 2 have been designed to protect the funding of basic needs and services for low income segments of the population and to boost expenditure on programs targeted to people affected by the crisis. Based on simulations that examined the poverty and social impacts the proposed measures, World Bank staff concludes that the components of the ESSNS will mitigate the impacts of the crisis for poor and vulnerable people and that no adverse distributional impacts are likely. Social Protection : Increasing the eligibility threshold at which GMI is provided is intended to increase coverage and raise transfers to poor households. This is expected to lower the poverty impact of the crisis. Further, increasing incomes of unemployed people either through augmented unemployment benefits or the provision of public works is expected to contribute to the reduction in aggregate poverty without having significant impact on incentives to rejoin the formal labor force (because the unemployment benefit top-up is low and because the public works stipend is lower than the minimum wage). Education : Measures included in the ESSNS are also likely to have a longer-term, positive social impact, particularly the protection of financing for pre-primary education for 5 and 6 year old children. The government’s decision in 2005 to make preschool education free and mandatory for five-and-six-year-old children was a positive development in terms of long-term learning outcomes. The program has had a fairly strong effect in equalizing preschool attendance across income groups. Health : The health sector measures included in the ESSNS are aimed at substantially lowering household financial vulnerability due to the cost of medical treatment, and encourage a widening of access to health care. By adding funding in the ESSNS package for an additional public health nurse, the government seeks to ameliorate the risk that health outcome will suffer following the closure of hospital beds and medical facilities, and demonstrate a commitment to the part of the health system that people will use regularly. Further, needy households are exempt from co- payments, which lowers the burden of out-of-pocket payments substantially. The measure is likely to eliminate variations across localities in assistance and creates an incentive for the poor to seek care. Finally, needy households continue to receive the care they need in health facilities, free of charge. The policy shift away from institutional care to home and day care for patients who suffer physical and mental disabilities directly benefits one of the poorest segments of the population. This element of the ESSNS allows the Ministry of Health to target new services to needy clients and to assure that the severely constrained resources for inpatient care are available for people who really need to be treated on an inpatient basis. Environment Aspects The specific policies supported by the proposed development policy loan are not likely to have significant effects on Latvia’s environment, forests, and other natural resources. Unanticipated and unintended risks of adverse effects to the environment and natural resources are likely to be minor. Latvia has adequate environmental controls in place. V. Tentative financing {Automatically pulled from AUS} Page 4 Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 135.95 Borrower/Recipient IBRD Others (specify) Total 135.95 VI. Contact point World Bank Contact: Emily Sinnott Title: Senior Economist Tel: (202) 458-4960 Email: esinnott@worldbank.org Borrower Contact: Agnese Timefejeva Title: Deputy Director, International Financial Policy Department, Ministry of Finance, Latvia Tel: (371-6) 708-3886 Fax: (371-6) 708-3898 Email: Agnese.Timefejeva@fm.gov.lv VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 548-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop