Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22457 IMPLEMENTATION COMPLETION REPORT (TF-261 17; FSLT-70070) ON A LOAN N THE AMOUNT OF US$40.41 MILLION TO THE REPUBLIC OF LATVIA FOR PSAL I 06/27/2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 27, 2000) Currency Unit = Lat US$ 1.00 = LT 0.63 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ATJ Anticorruption Unit CAS Country Assistance Strategy CPS Corruption Prevention Council El] European Union FIAS Foreign Investment Advisory Service GDP Gross Domestic Product IBRD intemational Bank for Reconstruction and Development IDF Institutional Development Fund IMF International Monetary Fund LPA Latvian Privatization Agency MoAg Ministry of Agriculture MoF Ministry of Finance MoJ Ministry of Justice PAC Public Accounts Committee PAYGO Pay as you go PFM Public Expenditure Management PER Public Expenditure Review PSAL Programmatic Structural Adjustment Review SAL Structural Adjustment Loan SAO State Audit Office SBA Special Drawing Right TA Technical Assistance Vice President: Johannes Linn Country Manager/Director: Michael Carter Sector Manager/Director: Pradeep Mitra Task Team Leader/Task Manager: Jos Verbeek FOR OFFICIAL USE ONLY LATVIA PSAL I CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 1 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 9 6. Sustainability 10 7. Bank and Borrower Performance 10 8. Lessons Learned 12 9. Partner Comments 12 10. Additional Information 22 Annex 1. Key Performance Indicators/Log Frame Matrix 23 Annex 2. Project Costs and Financing 25 Annex 3. Economic Costs and Benefits 26 Annex 4. Bank Inputs 27 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 29 Annex 6. Ratings of Bank and Borrower Performance 30 Annex 7. List of Supporting Documents 31 This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Pro ect ID: P066153 Project Name: PSAL I Team Leader: Jos Verbeek TL Unit: ECSPE ICR Tvpe: Core ICR Report Date: June 29, 2001 1. Project Data Name: PSAL I L/C/TFNNumber: TF-26117; FSLT-70070 Country/Department: LATVIA Region: Europe and Central Asia Region Sector/subsector: BB - Public Sector Management Adjustment KEY DATES Original Revised/Actual PCD: 11/11/1999 Effective: 03/22/2000 03/22/2000 Appraisal: 12/03/1999 MTR: Approval: 03/16/2000 Closing: 12/31/2000 12/31/2000 Borrower/lImplementing Agency: REPUBLIC OF LATVIA Other Partners: STAFF Current At Appraisal Vice President: Johannes Linn Johannes Linn Countiy Manager: Michael Carter Basil G. Kavalsky Sector Manager: Kyle Peters Kyle Peters Team Leader at ICR: Jos Verbeek ICR Primary Author: Farid Dhanji 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Suistainabilitv: L Institutional Development Impact: SU Bank Performance: S Borrower Peforniance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Latvia's transition to a market economy was well advanced by the time this operation was brought to the Board. Price liberalization, privatization of most state owned businesses, and the building of social safety nets were all accomplished by the mid- to late- nineties. Inflation was, on average, low and stable, growth was higher than most economies attempting similar transitions, and the twin deficits manageable - modest external current account deficits were substantially financed by flows of non-debt creating foreign direct investment. In 1995, progress appeared threatened by a severe banking crisis that was successfully contained and accompanied by sector restructuring. (The failure of Banka Baltija to a large extent was related to fraud and its inability to repay its G24 loans.) In 1998 the collapse of Russia's finances posed a similar threat, in part because of the disruption of trade flows, and in part because of the considerable Latvian bank holdings of Russian paper. In 1998 and 1999 the fiscal and current account deficits thus deteriorated sharply and growth slowed. The Latvian Government sought a Stand-By Arrangement with the IMF and complementary financing supporting structural reforms from the IBRD. PSAL I was then conceived as the first of three operations that would, incrementally and successively, support core structural reforms. The overall objective of this operation was to improve governance - by strengthening public accountability, improving the efficiency and effectiveness of public sector operations, and sharply raising the transparency of the Latvian State's interactions with the private sector including civil society. The President's Report distinguishes four different components of the operation: D nCorrecting macro-imbalances * Strengthening the credibility of the public sector * Improving the institutional capacity to deliver public services, and * Rationalizing a transparent relationship with the private sector It is also noted that the proposed PSAL's intentions are "to [help] put the economy back on a path of rapid and sustainable growth and poverty reduction." Fleshing out the four strategic components were numerous interventions including: (i) institution building through improving public expenditure management and human resource management; (ii) streamlining ministries, agencies and agency functions; (iii) continuing a comprehensive anti-corruption campaign, aimed not only at prevention but also judicial and legal reform; (iv) changing the scope and role of the public sector through completing five remaining "large" privatizations and (v) through strengthening supervision and regulation in financial and capital markets, as well as (vi) developing an adequate market structure and regulatory framework for the infrastructural sectors. Finally, as growing claims on the pensions system appeared to be one of the main factors contributing to the re-occurrence of macro-economic imbalances, special attention (vii) was provided to supporting reforms to the system. Assessment. The objectives of this project were certainly consistent with government objectives and supported a well focussed and justified medium-term effort largely to reform public administration. Latvia had previously been the recipient of adjustment lending, most recently a SAL, (approval December, 1996) as well as an Enterprise and Financial Sector Restructuring Project (approval September, 1994). This support coupled with the strong continuous support of the IMF, had led to an excellent macro-economic performance, as well as considerable first and second-tier -2 - structural reforms. The external shock of the Russian crisis dictated, in prudence, the provision of exceptional financing. The Government, supported by the Bank, appropriately used the occasion to further deepen the reforms. The operation was fully compliant with the CAS issued in April 1998. There it was noted that sustaining macro-economic and financial stability was key to the Bank's efforts in Latvia. Further, the third (of five) strategic thrusts for the Bank's work in Latvia was identified thus: "help Latvia reshape the state.'s role, improve public sector management, and reduce corruption." The relevant section went on to note that this was a priority for the Latvian Government as well as for the EU, a factor of increasing importance as, during this period, Latvia accelerated and deepened efforts to meet criteria for joining the Union. Objectives were, therefore, appropriate, germane and consistent with the Government's wishes and the agreed upon strategy. Design Three points deserve scrutiny. First, Latvia's PSAL was one of the first operations to use the Bank's programmatic adjustment loan instrument and this merits remark as to reason and consequence; second, the variety and complexity of areas tackled merit comment as to timing and realism; and, third, linked to a potential ex-ante concem, is a question concerning Government and Bank preparedness. The rationale for using the programmatic adjustment loan instrument (PSAL) is early referenced in the President's Report where it is noted that: (a) fast-disbursing assistance will meet Latvia's external financial needs; and (b) support will be provided to a medium-term reform program that" focuses on step-by step capacity building and institutional reforms" [para 2, page 7]. This is indeed entirely consistent with the relevant operational guideline which stipulates rapid-disbursing finance in support of reforms that "involve a continuous flow of incremental policy changes and institution building." The guideline further posits the reforms typically supported by PSALs are likely to be found in the public sector and aimed at improving public sector governance, expenditure management, and the efficiency of public resource allocation. This operation scores well in this regard. Finally, the Letter of Development Policy of the Governnent clearly delineates a medium-term strategy, and situates the first actions along a continuum of planned actions, many of which are expected to occur in the successor second and third operations. To be sure, early actions are more clearly, completely and numerously identified - but this is standard to technical and political decision-making in the face of widening uncertainties as time-horizons extend beyond the immediate. Overall, the judgement must be that the instrument was well chosen. Assessment of the remaining two issues are given in the section on "original components" below. 3.2 Revised Objective: N.A. 3.3 Original Components: -3 - The four main components noted earlier are considerably elaborated and multiplied in the PSAL Matrix as "Issues and Benchmarks" to measure progress. The usual trade-off in writing conditionality between simply specifying broad-band intention versus indulging in great specificity of detail is here settled towards detail. The specific mapping of actions/benchmarks from the more broadly defined area of reform interests is, nonetheless, compelling. Proposed actions are warranted as defining the content of reform, and justified by appeal to broader reform intent. Indeed, there appears considerable foresight in this operation, backed by a fairly comprehensive understanding of the theory and practice of administrative, civil-service and regulatory reform, and anti-corruption efforts. In the President's Report, PSAL II is slated for "early 2001." Given the plethora of actions and activities, requirements for multiple agency implementation and assumption of continuous concentrated and sustained political focus in PSAL I, the timing of this next operation does in retrospect appear somewhat ambitious. As is usual, however, there was, no doubt, an element of normative target-setting involved in establishing the Matrix. Even so, the latest timing for the second operation is now in the fall of 2001: albeit some of the sub-components have undergone revision (see below), overall the optimism expressed in the operation appears justifiable, especially placed in the context of average performance in other adjustment operations. Preparedness in this operation appears apposite to the realism of and proposed timetables for adjustment actions. The Bank has had a close and fruitful relationship with the many successive Latvian Governments and continuity in policy has characterized Latvian management in the last decade. A specialized and by now well experienced Ministry exists to deal with the IFIs and coordinates activities across other Ministries and Agencies. In addition, the previous SAL and complementary work that followed the SAL comprehensively laid the groundwork for this operation. Post SAL, the Bank supported public sector reform (through an IDF grant), improving the regulatory framework for financial markets, rationalizing public expenditures and strengthening the management of public finances (through ESW), and enhancing the regulatory environment for infrastructure (through an IDF grant). In addition FIAS undertook a review of regulations affecting investments in Latvia. With support from strategic compact funds the Bank assisted the Government with the development of a comprehensive anti-corruption agenda. Each of these components found its way into the PSAL. The Bank team, moreover, assisted the Government prepare draft implementation plans in the various areas of intervention. 3.4 Revised Components: N. A. 3.5 Quality at Entry: The Region early invited a Quality Enhancement Group to provide advice on the proposed operation. The most important recommendation was to transform the proposed operation from a SAL to a PSAL - a recommendation that was accepted. Other recommendations concerned strengthening of auditing and preparation of a medium- term expenditure framework; concrete actions to demonstrate the Government's seriousness in dealing with corruption; improvements to the regulatory framework; establishment of database on public employment; privatization of the -4 - shipping company and the power distribution system; implementation of the first tier of the pension reform; and, improvements to judicial functioning. All of these recommendations were accepted and incorporated in the PSAL document. 4. Achievement of Objective and Outputs 4.1 Outconze/achievenient of objective: As noted earlier, the objectives of the operation are classified into four broad categories: (i) returning to a macro-economic framework conducive to robust growth; (b) strengthening the credibility of the public sector; (iii) strengthening public sector institutional capacity; and, (iv) rationalizing the interaction between the public and private sectors. Accomplishment under each of these objectives is considered in turn. 4.2 Outputs by components: (i) Macro-Economic Management. The operation nominally gives high prominence to correcting the macro-imbalances that re-emerged after the Russian crisis. In fact, the job was largely left to the IMF's standby arrangement. Some 15 months after loan disbursement, Latvia's domestic investment had recovered sharply, as had national savings; growth too recovered to an estimated 6.6 percent p.a. in 2000 from about 1 percent the year before. The external current account deficit declined from a little less than 10 percent in 1999 to a still high 7 percent in 2000. The fiscal deficit at 3.2 percent in 2000, while declining, is still considered high in relation to the 1996-98 period, and in breach of the IMF program. After further discussion, the Government and the IMF have signed a successor Stand-by agreement, which was approved by the IMF executive board on April 20, 2001. Overall performance is thus considered satisfactory. The benchmarks for the pension reform have also been fulfilled. The Latvian Parliament has passed the legislation to adopt a second pillar, and the relevant Ministries have prepared implementation as required under the loan. Performance is also here considered satisfactory. (ii) Strengthening Public Sector Credibility. ii.i Anti-Corruption Advance in this sub-component has been halting and slow. The government has not fulfilled its agreement to establish a strong mechanism to monitor and report on corruption in the public sector. The Anti-Corruption Unit, after much delay, has developed a set of procedures to identify conflicts of interest. Part of the delay appears to be due to a shift in perspective in late November 2000, when a new diagnosis indicated that "state capture" was a more serious form of government corruption than the usual bribe-taking, selling of office and favors and the like. In addition, the politicians advanced the view that the manner of financing of political parties was seriously corrupt and required more immediate attention. As a result PSAL II is now focussing more intently on these anti-corruption issues, while revising the sub-component to assure a better fit with the latest research, political understanding, and need also for administrative rationalization of the effort. ii.ii. The Judicial reform components requiring greater transparency in the communications - 5 - between judges and litigants, random assignment of judges to cases and educating judges as to new laws, have all been initiated, but each task has proved more complicated in implementation than in conception. The Government has not acted quickly to electronically publish all judicial decisions. This is partly due to the fact that not all court buildings are wired for the higher volume of electronic traffic. The limitation is being addressed in continuing discussions and the sub-component is proceeding well to the next PSAL II phase. ii.iii The operation contained agreements to improve the legislative framework under which the public sector operates including adopting an Administrative Framework Law and a Law on Public Sector Agencies. The Law on Public Sector agencies has been adopted by parliament while the Administrative Framework Law is being integrated with a proposed Law on Executive Powers. This proposed Law combines the Administrative Framework Law with the existing Law on Cabinet of Ministers and a proposed Law on Public Entities. The principles of the Administrative Framework Law are to be kept intact while merged into the new law, which is currently being debated in Parliament. (iii) Strengthening the Public Sector's Institutional Capacity iii.i The Government agreed to prepare a program and an action plan to implement public administration reform. A blueprint for reform was prepared, thus partially fulfilling the condition, but unhappily did not contain any details or timetables on actions. As a result the required reporting to the Cabinet of changes in public sector management and performance has never happened. These conditions are being moved to PSAL II. iii.ii To deal with the problem that the functions and structures of Latvia's Ministries are appropriate neither to a market economy nor to operating in the EU, the PSAL required a close monitoring of the reorganization of the Ministry of Agriculture as well preparing the ground for full functional reviews of the Ministries of Economy and Justice. This was formally accomplished. iii.iii In the meantime, however, preliminary conclusion of work done for a Public Expenditure Review suggested that PSAL conditionality should be reformulated. In particular, it was noted that there was no central place for strategy and policy formulation inside the government; moreover, many agencies have overlapping and competing mandates; and, in addition, reform efforts aimed at functional streamlining need to be integrated with public expenditure reforms and policy formulation. This analysis is now being incorporated in PSAL II. The Government has already granted higher levels of responsibility and authority to the Chancellery in the areas of policy coordination and achieving strategic focus. The PSAL is now focussing on linking strategic and policy commitments to the priorities and budget allocations of Ministries. A number of pilots are proposed. Functional reviews are also being redesigned to merge in part with sector-oriented public expenditure reviews, and add also a policy evaluation component. The expected outcome of these new-style reviews is to identify functions and tasks that contribute to Government priorities, ensure funding, and provide monitoring and evaluation mechanisms. - 6 - The development of these reforms speaks well of the inherent flexibility of the PSAL instrument. Clearly, the world changes, and indicative conditions initially expressed for later components of the multi-year program have had to accommodate new knowledge, new understanding, and new political and economic factors. The team has responded well to this challenge. iii.iv PSAL I stipulated the adoption in principle by the Cabinet of the concept of a broad-banded and uniform pay-scale in the public sector. This was accomplished. In addition, a Law on the Civil Service was adopted by Parliament. Together these provide the basis for continued progress in civil service reform. The agreements for PSAL II now focus on implementation and aims to ensure that the Civil Service law and the pay reform regulations are mutually consistent and reinforcing. iii.v A number of stipulations in PSAL I pertained to improvement of public expenditure management. These included (a) improving the Law on Budget and Financial Management to bring the accounts of all entities financed by the budget into the Budget, and requiring state institutions to submit annual audited reports; (b) establishing a central register for the institutions under the management of Ministries; (c) the Legislature's role in improving financial transparency and accountability was to be enhanced by establishing a Public Account's Committee; (d) the State Audit Office was required to prepare a Plan to strengthen its performance, as well as submit a program of audits; audited accounts of a number of budget financed institutions were to be completed and the results provided to the Cabinet; (e) a number of Ministries are enjoined to adopt strategic audit pals for the next three years; (f) tentative steps towards establishing performance oriented budgeting were to be initiated; and, finally (g) the Cabinet is enjoined to discuss a draft fiscal strategy statement. By and large these requirements and agreements were fulfilled, without major deviations. The considerable detail in which these conditions are expressed, naturally speaks to the prior and more important engagement with and shared philosophy between the Government and the Bank, on such issues as strengthening expenditure management, upgrading audit capacities, recognizing Ministry and Agency accountability, and requiring Government and Parliament oversight on all public expenditures. There is little question but that this is just plain, hard program footwork, easily sidetracked and capable of losing focus. The challenges for PSAL II will be to sustain enthusiasm and secure advances, step-by-step. iii.vi The PSAL supported the implementation of a national means-tested social assistance benefit targeted at the very poorest households. After Cabinet adoption of a concept paper and implementation plan, a pilot program was initiated amongst a number of municipalities. The National Scheme will be implemented in the course of PSAL 11. (iv) Rationalizing the Interaction Between the Public and Private Sectors iv.i The PSAL required the advancing to sale of a number of large commercialized state firms to the private sector. Successful completion of this agreement would buttress the already impressive achievement of privatizing 95 percent of companies under Latvia's privatization program. As a number of the remaining firms were utilities, successful privatization entailed the establishment of -7 - appropriate regulatory regimes. The agreements have not been satisfactorily fulfilled. The Government was unable to proceed with the privatization of the energy utility, a clear breach of agreement. Strong Parliamentary and public opposition resulted in the company being removed from the privatization program and being placed on the list of strategic companies that are not to be privatized. This move does, nonetheless, allow for some restructuring to take place. In addition, privatization of the telecommunications company has been held up by a dispute with the strategic investor, a dispute that has landed for arbitration in Stockholm. The remaining three large privatizations have only slowly advanced. Nevertheless, the Government has made important improvements in the process through which it undertakes its large-scale privatizations. Reputable international investment Bankers/advisors are now involved not only during the sale of the assets but also during the due diligence process and the drafting of the privatization regulations. This has greatly improved the transparency and accountability of the process and reduced the opportunities for insider deals to take place. iv.ii In the course of the year (and with the support of the PSAL) a law was passed creating a Public Services Regulatory Council with a view to eventually transferring the statutory responsibilities for telecommunications, transport, energy, railways and the postal service to this Council. With the support of PSAL II, secondary regulation is being drafted, criteria established for appointing Commissioners, and a medium-term regulatory agenda is being developed. The Council is expected to begin work later this year. In both the energy and telecommunications sectors, PSAL II is pursuing increased competition while strengthening regulation, in light of the reversals or delays in privatization in these cases. Progress in this area can only be characterized as qualified. Flexibility has had to be exercised on both sides. iv.iii Latvia's financial crisis of 1995 resulted in a strengthened regulation for banking institutions. The PSAL I and successor operations have aimed for strengthening supervision of non-bank financial institutions especially in the light of the pension reform that will allow, by the year 2003, the second tier pension funds to be handled by private fund managers. A Law has been passed to create a unified financial supervision agency and actions to be pursued now concern the considerable detail of implementation. iv. iv. Prior to this operation evaluation of regulatory proposals was not well coordinated across the different actors within the Government of Latvia. No central entity (e.g. the Ministry of Finance or of Justice) have been able to properly vet regulatory proposals, coordinate and assure consistency across sectors, nor to perform rudimentary cost/effectiveness analysis. PSAL I aimed to rectify this and has been successful in establishing the appropriate procedures and institutional clearances. Implementation of these new procedures is prescribed for PSAL II. PSAL II also aims to further enhance the transparency and accountability of the regulatory process. 4.3 Net Present Value/Economic rate of return: N. A. 4.4 Financial rate of return: N. A. -8 - 4.5 Instituttional development impact: Institutional impact - seen here as changes in the rules and processes by and through which the public sector conducts its business - has been considerable. Indeed it pervades the various successful components of the operation. A few examples may be highlighted. The Cabinet, for instance, is now involved in establishing medium term budgetary targets, a unified budget is now prepared, and all state institutions will in future be audited; policy formulation and coordination has been strengthened; the regulatory framework for utilities has been reformed and strengthened, as has regulation of private financial funds; public sector employment and pay is codified under new principles; the judicial system is taking steps to improve imnpartiality. This list could be extended: it suffices to flag that future PSAL operations should consolidate, solidify and advance these improvements. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agencY: The PSAL built upon substantial preparatory efforts stemming from a prior SAL, an Enterprise and Financial Sector Restructuring Project, a Welfare Reform project and fairly intensive economic and sector work accompanied by considerable technical assistance to prepare sub-components. As a one-tranche operation, the critical question has always been whether reform momentum would be sustained by the government sufficient to warrant proceeding to the second and third operations. The delays in privatization have been flagged as a major disappointment in this operation. In one case, a serious and unanticipated public backlash arose against the proposed privatization of the Energy Company; in the case of the Telecommunications Company disputes over exclusivity terms led a strategic investor to seek international arbitration. It would not be appropriate in either of these cases to suggest the government should have acted differently to forestall breach of the PSAL agreements. Both the Government and the Bank have since made considerable efforts to re-channel the subject agreements to ensuring competition, rather than insisting upon early privatization. There is, of course, much merit to the suggestion that competition is the end that privatization ultimately seeks to secure. 5.2 Factors generally subject to governnment control: As noted earlier, this is a multifaceted operation, dealing broadly with numerous areas of public governance. To succeed requires a clear programmatic vision, resoluteness and attentiveness, and willingness to accommodate to changing circumstances without diluting objectives. There have been areas where more timely action and closer attention may have resulted in a better outcome. Chief among these, perhaps has been the anti-corruption drive where monitoring activities failed to be activated in a timely manner. In addition, given the central importance of public sector reform to this operation, the failure to produce an action-oriented strategy ("blueprint") for reforrn is to be lamented. Other areas, such as functional reformns in Ministries, have also suffered from delays, but explainable in terms of the refinement of concepts and subsequent recasting of agreements in the course of preparation of PSAL II - 9- 5.3 Factors generally subject to imiplementing agency control: The special unit established to coordinate work for the PSAL performed well. No special factors affecting implementation can be attributed to performance of its remit. 5.4 Costs andfinancing: N.A. 6. Sustainability 6.1 Rationale for sustainabilitv rating: Sustainability has been rated as "likely" for a number of reasons. The Government continues to implement its reform program, and has simultaneously engaged in a strong participatory effort with the Bank to develop PSAL II, taking into account the modifications enjoined by external circumstance as well as intemal delays. There is no indication that reform momentum has particularly slowed. Moreover, the Government's program carries enough support across the political spectrum to continue its implementation. It is fully agreed that PSAL II will also contain revised indicative agreements for PSAL III. Apart from a strong history of reform that speaks well for future progress, further incentive is being provided by the country's desire to join the European Union; like other candidate countries, much of its reform agenda is now both pulled and defined by EU harmonization requirements. For all these advantages it is also true that the kinds of public governance issues tackled in this series of operations are not easy to implement and monitor, nor is it easy to evaluate outcomes. Change will occur in small steps over a number of years, and benefits are rarely seen along short timetables. In this regard, the choice of a programmatic adjustment instrument has proven its wortih. The Bank has been able to show the necessary flexibility as there has never been any question but that the Government is committed to the program. Such redefinitions as have occurred have to a large extent been externally caused and appropriately accommodated. In an important sense this does indicate, at least in a country with a proven track-record and a long - term commitment, that Programmatic SALs add to sustainability, as they are less likely to incite potentially acrimonious exchanges over tranche releases. As noted earlier, the main delays in implementation have been in the anticorruption and privatization components. PSAL II is placing renewed emphasis on these areas. The issue of corrupt party financing is initially being tackled through a new Law being promulgated. The "conflict of interest" abuse will be better policed by improved legal definition as well as added institutional capacity. More broadly, anti-corruption institutional structures are being revamped and fortified. The privatization component has already been reformulated to incorporate the use of international investment advisers to ensure greater transparency and to ensure, with Latvian counterparts, high professional standards, thus inviting more confident domestic and international participation in sales. PSAL II will benchmark measured progress in this area. In the case of the canceled privatization of Latvenergo, the Government is re-focusing its strategy and reform - 10- program towards enhancing competition in the power sector. With respect to poverty reduction, the pilot of the proposed national means-tested social assistance benefit has been successful. The government has now prepared amendments to the social assistance law which will allow the benefit to be implemented nation wide. 6.2 Transition arrangement to regular operations: N.A. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance was satisfactory. The choices of the components of the project were appropriate and formulated in a highly-participative process with the governmnent of Latvia. The decision to change during preparation from a traditional Structural Adjustment Loan to a programmatic Structural Adjustment Loan was appropriate to the circumstances. The presence of the Bank office in Riga has greatly facilitated the preparation and supervision of the project. The local office support and follow-through was extremely helpful to the government of Latvia as well as to Bank staff based in Washington and staff in the World Bank office in Poland. 7.2 Supervision: The Bank was able to closely monitor progress under the PSAL program. The high professional capabilities of the staff in the resident mission permitted a continuous dialogue. Formal supervision missions, therefore, could focus on the difficult items of program and seek solutions with government counterparts. This greatly facilitated the effectiveness of the supervision missions. 7.3 Overall Bankperformance: Overall, the Bank's performance was satisfactory for all stages of the development and supervision. Borrower 7.4 Preparation: The authorities' performance was satisfactory. The Government appointed a counterpart team to interact with the Bank's team. Each Ministry and administrative body was represented on the counterpart team. This facilitated the policy dialogue, and also facilitated a clear understanding of responsibilities for individual policy actions of each ministry or administrative body. 7.5 Government implementation peiformance: - 11 - Again the borrower's performance was satisfactory. For the most part, reform goals were met and the Government of Latvia was helpful and cooperative. But as noted earlier, in some cases progress was halting or slow, as in the privatizations, the anti-corruption activities, and adopting an Institutional Framework Law. None of these are fatal to performance. As noted, where needed, remedial actions were instituted and progress towards PSAL II is satisfactory. 7.6 Implementing Agency: The Government's counterpart team greatly facilitated the policy dialogue as well as provided a locus for coordinating the activities of the numerous actors in this complex operation. 7.7 Overall Borrower performance: The performance of the Government of Latvia was satisfactory. 8. Lessons Learned As noted earlier, the kinds of public governance issues tackled in this series of operations are difficult to implement, nor is it easy to evaluate outcomes. Change may be expected to occur in small steps only over a number of years; benefits are rarely seen along short timetables; and formal achievement of "benchmarks" may mean little if not embodied in deep and lasting institutional changes. Even so some lessons are reasonably clear. The choice of a programmatic adjustment instrument has proven its worth. The instrument clearly allowed for a medium-term framework to be developed, with several phases of activity logically slated over several years. It is doubtful that this could have been as easily obtained if a traditional SAL had been adopted. Moreover, the Bank has been able to show the necessary flexibility as there has never been any question but that the Government is committed to the program. Such redefinitions as have occurred have to a large extent been externally caused. In an important sense this does indicate, at least in a country with a proven track-record and a long-term commitment, that PSALs confer an advantage, as they are less likely to incite potentially acrimonious exchanges over tranche releases. Moreover, the transformation of an overall vision into multiple "bite-sized" actions, has proven in Latvia a valuable stimulus to framing programs, and an equally valuable stimulus to achieving them. Close contact and participatory work between Latvian and Bank officials over the period following the SAL allowed for a fairly mature program to be available when the Russian crisis precipitated the need for exceptional finance. Continuity in the Bank Team has also been an important factor. The strong familiarity and near-continuous active and positive involvement by Bank staff was especially useful in dealing with complex problems, and highly valued by the Government. Momentum was, in part, sustained because the team that designed the PSAL stayed intact for the most part during implementation. Other factors usually implicated in success were also present, most pertinently stable government, - 12- public support and strong country ownership and commitment. 9. Partner Comments (a) Borrower/implementing agency: The following is the Government's Assessment of the PSAL. I. Background The first Programmatic Structural Adjustment Loan to the Republic of Latvia for US$ 40.41 million to support Governments structural reform program. The loan is Fixed Spread Loan denominated in US$ with a maturity of 17 years and a grace period of 5 years which came effective on March 22, 2000. The loan supported the continuation of the Government's ongoing economic reform program backed by the Bank's first Structural Adjustment Loan The Programmatic lending program during its first year was the starting point of the challenge for Latvia in continuation of the reforn program. This is the multi-year program that spells out capacity building and institutional reform. Therefore the first year's operation was very important to drive the institutional reforms in direction, which leads to achievement of the policy reforms in medium term. II. The main polcy reform issues addressed within the Programmatic Structural Adjustment Loan A. Returning to a Macroeconomic Framework Conducivefor Growth T'he Russian Crisis has put Latvia's economy temporarily off track as growth has declined, the fiscal deficit has widened and the current account situation worsened. This required a macro economic stabilization program that consists of measures to reduce imbalances in the economy in the short and medium term. In 2000 the Fiscal deficit was over 3 per cent, but the GDP growth was 6.6 per cent and current account deficit was reduced considerably in 2000. During the first year of the Programmatic Lending Program, the aim was to implement the pension reforn plans. So far Saeima has adopted legislation to create the second tier of the pension system, the Ministry of Finance has prepared acceptable implementation plan for second tier and Ministry of Welfare has prepared plan for reforming PAYGO pension system, including communication plan, technical analysis of reform options. B. Strengthening the Credibility of the Public Sector Public accountability and transparency were set as the key elements of ongoing reform strategy to ensure that institutions improve their efficiency in service delivery and strengthen citizen's trust in administration. To guide these necessary reforms in the public sector the Government adopted a strategy to address the specific problems of corruption. -13 - Anticorruption. To increase the credibility of the institutions the commitment was made to undertake policy and institutional reform to reduce corruption and increase transparency of the public sector. For this purpose in June of 1999, a permanent Executive Secretariat subordinate to the Corruption Prevention Council (CPC), was created. It was also recognized that the CPC required additional staff and resources to function properly. Therefore, an Executive Head of the Secretariat to the CPC was appointed and the secretariat with adequate staff positions and resources have been endowed. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > CPC Secretariat published on a quarterly basis the status of implementation of its Anticorruption Program; > CPC published on a annual basis a report on changes in corruption in the public sector; Condition to be fulfilled as part of PSAL II. Although CPC had started the preparatory work a satisfactory monitoring mechanism has yet to be established. However, the emphasis of the government has largely been focused on refining legal framework or creating new structures, which often has been at the expense of the existing ones. Conflict of Interest. Within State Revenue Service (SRS) an Anticorruption Unit (AU) is established, which is responsible for evaluating declarations of income and assets of public officials to identify cases of conflict of interest as well as illicit enrichment. The Government agreed to the judgment that the procedures used by the AU were not sufficiently developed to fulfill this important task. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > AU has developed the set of documents and procedures to effectively identify conflict of interest and cases of illicit enrichment, including: (i) adequate forms for declaration of income and assets; (ii) a draft manual and curriculum for training SRS staff in processing and assessment of declarations; (iii) a draft manual and curriculum for training of the public sector employees in situations of conflict of interest. > Annual declarations submitted by the President of the State, Prime Minister, Deputy Prime Ministers, ministers and parliamentary secretaries are published on an annual basis. - 14 - The AU was without a manager for the second part of 2000 and as such was not capable of undertaking its reform agenda. A new manager was appointed only in November 2000 and the agenda is getting back on track again. Judicial Reform. Judicial reform has been high on the government's agenda and the Cabinet of Ministers has mandated the Ministry of Justice to develop an action plan to consolidate the judiciary system. Despite efforts public opinion polls repeatedly rank our judicial institutions among the most corrupt and inefficient public institutions in the country. During the first year of the Programmatic Lending Program period the key results achieved in this area include: ) The Minister of Justice has issued an instruction to provide for greater transparency in communications between judges and litigants in criminal and civil cases; > Minister of Justice has issued an instruction mandating an element of randomization in assignment of judges to handle court cases where appropriate; a system for monitoring implementation of this procedure is designed. However, implementation of instruction is partial and no monitoring system for compliance is yet in place. It has been recognized that fulfillment of this task is more complicated than initially anticipated. > The Minister of Justice has issued an instruction, which requires all court decisions and rulings to be published with a system of cumulative indexing. The publications are stored electronically and are available to the public at low cost in those courts that are computerized. However, implementation of instruction is partial and court decisions are not yet published with a system of cumulative indexing. It has been recognized that fulfillment of this task is more complicated than initially anticipated. > The Minister of Justice has issued an instruction providing for (i) training of judges and prosecutors in new laws prior to their enactment; (ii) appropriate budget allocation to the Judicial Training Center to comply with the requirement referred to above. However, implementation of instruction is not implemented yet. It has been recognized that fulfillment of this task is more complicated than initially anticipated and allocation of appropriate resources has been problematic. Public Sector Agencies. During recent years Latvia has followed the example of many other countries and delegated the execution of policies to autonomous public sector agencies. The Government was aware that this was done in an ad-hoc manner and without having a clearly defined institutional framework of public administration or legislative framework for operations of the agencies, especially financial accountability, in place. During the first year of the Programmatic Lending Program period the key results achieved in this area include: - 15- )0- The Cabinet of Ministers has adopted concept for the Law On the Institutional Framework for Public Administration, which defines the kinds of public institutions within the public sector. > Law on the Institutional Framework for Public Administration has been submitted to Saeima. > Concept for the Law On Public Sector Agencies has been adopted by the Cabinet of Ministers, which defines: (i) types of agencies; (ii) regulations for the formation of agencies of various types; (iii) procedure for agency approval; (iv) procedure to ensure openness; (v) mechanisms for accounting mechanisms and financial control, including requirements for reports; (vi) adequate provisions for transitions; and (vii) state liability conditions. > Law on Public Sector Agencies has been adopted by Saeima in March 2001. > Cabinet of Ministers has adopted measure to impose a Moratorium on the creation on agencies till Saeima passes Law on Public Sector Agencies. The most important issue ahead is proper enforcement of the law on Public Sector Agencies. Openness of Information. To further enhance citizen's access to public information, regulation for implementation of the law on openness of information that stipulates more clearly the classification of information has been adopted in August 1999. As part of this exercise a system for monitoring implementation has also been developed. During the first year of the Programmatic Lending Program period the key results achieved in this area include that the Cabinet of Ministers has adopted implementing regulations for the Law on Openness of Information. The regulations stipulate: 9 institutional arrangements for ensuring easy access to public infornation, including publication of the procedures in the annual reports of state bodies; ) mechanisms for individuals to appeal denials of information; ) a system for monitoring the compliance of state bodies with the law. The implementation of this legal framework is the main issue, which is yet to be fulfilled. C. Strengthening the Public Sector Institutional Capacity Streamlining the structure of the public sector. The process of public administration reform was started because it was understood that the functions and structures of ministries did fully not meet the demands of a market economy. The Bureau of Public Administration Reform (currently Secretariat of MoPSR) commissioned the development of a methodology for functional and - 16 - structural reviews of each ministry. This methodology was successfully piloted in the Ministry of Agriculture. The Secretariat has been given the task to monitor the implementation of this action plan. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > The Secretariat of MoPSR has prepared a program (blueprint) with attached to it an action plan to implement public administration reform, however, the action plan was too general and concrete steps and tasks were not identified > The Secretariat of MoPSR has designed a mechanism to monitor and report to the Cabinet of Ministers and public on changes in public sector management performance, however, this mechanism required the implementation plan with clear monitoring indicators and that was not developed. > Secretariat of MoPSR is monitoring the implementation of the action plan of reorganization of the Ministry of Agriculture to ensure that the action plan meets the need to: (i) integrate into the EU; (ii) bring the Ministry into conformity with future laws on the Institutional Framework for Public Administration and on Public Sector Agencies; (iii) establish clear lines of accountability and reporting; and (iv) strengthen systems for measuring the substantive and financial performance of bodies managed by the ministry. > Secretariat of MoPSR has completed the interviews for the in depth functional review of the Ministry of Economy. > Secretariat of MoPSR has launched the in depth review of the functions of the Ministry of Justice. Incentives for recruitment and retention of staff Currently pay system in Latvian public service heavily depends on bonuses and management contracts. Therefore the Cabinet of Ministers has agreed to a broad-banded, transparent uniform pay scale, which rewards merit and minimizes discretionary and ad-hoc bonuses. This is a major step forward for not only improving the transparency of government but also for the proper functioning of it. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > Cabinet of Ministers has adopted the concept for a broad-banded, transparent uniform pay scale in the public sector, which rewards merit and minimizes discretionary and ad hoc bonuses and which includes: (i) job descriptions at a sufficient level of disaggregation; (ii) criteria to be used in defining pay for specific public sector wide jobs; (iii) levels of pay that are competitive with the private sector for basic professions and competitive with a medium term budget framework; (iv) census and methodology for a statistical database on pay, employment, and - 17- functions in the public sector to be used in planning and control of pay and staff development (see above); (v) compatibility with Civil Service development; and (vi) principles for transiting to the new system. '- Ministry of Finance has designed the methodology for a survey of the existing structure of pay, to be used to design the new pay system. :i>- The Cabinet of Ministers has submitted the Law on Civil Service to Saeima, which is harmonized with the reform of comprehensive public sector pay system and improving the system of incentives for public servants through: (i) performance reviews administered by superiors, (ii) performance of the servants in conformity with ethic principles. The law was adopted by Saeima in September 2000. Public expenditure management. The fiscal policies have been conservative and fiscal outcomes have generally been positive. The great strides have been achieved in improving treasury system over the years and fiscal discipline has and will be an important policy stance of the Government of Latvia. The issue that the budget is not comprehensive has been recognized. It has also been recognized that financial accountability is limited do to partial transparency of fiscal accounts, absence of pressure from the Legislative and citizens, weak internal controls and inadequate internal control. The budgets are separated from policies and performance. This also reflects that the yearly budget does not allow focus on policies that can lead to instability of policies and unclear resources for them. The budget process is open ended and is not associated to the outputs therefore the behavior of central agencies is peculiar and may lead to inefficiencies. To bring up these issues many efforts have been undertaken and great challenges are still to be achieved. During the first year of the Programmatic Lending Program period the key results achieved in this area include: Saeima has passed amendments to the Law on Budget and Financial Management (LBFM) bringing all accounts of the Budget Financed Institutions (BFI) into the Budget, introducing a requirement for state institutions to submit annual audited reports to the State Treasury as of 2001 and gives powers to the Ministry of Finance to require and define reports on the operations of all subordinate enterprises. > The State Audit Office (SAO) has recommended to Parliament to establish the functions of a Public Accounts Committee (PAC) '> The Cabinet has agreed to discuss (i) a draft fiscal strategy statement and (ii) medium-term rnacro/fiscal framework submitted by the Ministry of Finance. The fiscal strategy statement and medium-term macro/fiscal framework have been discussed in the Government in September 2000. > The Cabinet of Ministers decided that the Cabinet Regulation (#160) will be amended to respect the following principles: (i) all new policy proposals by line ministries to Cabinet must be accompanied by offsetting measures; and (ii) in order for the proposal to be submitted to Cabinet of Ministers, fiscal costs of these proposals and offsetting measures must be prepared by line rninistries for 3 years; (iii) and reviewed by MoF for technical accuracy of costs. The Cabinet regulation (#160) was not amended and the State Chancellery is preparing - 18 - for drafting new regulations. Local Government Finances. There is also a need to improve the accountability by local governments for their finances. To deal with this issue work to develop a proposal for an integrated financial accounting and reporting procedures for local governments has commenced. These procedures should allow for better access to information about local government budget execution as well as their cash and debt management. The local accountability has also been important and necessary for high performance of management of local governments and for successful decentralization. Social Assistance. There is general consensus among the Latvian Government, the UNDP and the World Bank that the system of distributing social assistance through local governments does not reach the poor in the proportions that it could and should. During the first year of the Programmatic Lending Program period Cabinet of Ministers has adopted concept paper with implementation plan, to implement a national means-tested social assistance benefit targeted at the very poorest households. D. Rationalizing the Interactions between the Public and Private Sector Privatization and Regulatory framework. The government was committed to ensure regulatory stability without intervention in those areas where the market forces are to bring the best results, so the government was committed to stick to fundamental principles by which it could guide the principles. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > The Cabinet of Ministers had submitted the Law On Public Services Regulators to the Saeima. The law was adopted by Saeima in October 2000. > The Ministry of Economy had established an inter-ministerial working group to prepare an action plan for the establishment of the multi-sectoral regulatory agency and to strengthen the regulatory regime in each sub-sector As regards the Privatization issue it was recognized that Latvia should use the best commercial practices to privatize successfully important state companies in order that market prices are obtained. During the first year of the Programmatic Lending Program period the key results achieved in this area include: > Cabinet of Ministers decided to use reputed international 'investment banks/advisors' for divestiture of Government ownership Lattelekom, Latvenergo (before its withdrawal from privatization), Ventspils Nafta, Latvijas Gaze and Latvian Shipping if necessary and as agreed with the World Bank. - 19 - > Ministry of Economy provided the World Bank with a plan for when and for what purpose to use international 'investment banks/advisors' and how these will be procured. Cabinet of Ministers decided to ensure that the Latvian Privatization Agency will use best commercial practice as agreed with the World Bank (1) to procure international 'investment banks/advisors' if necessary and as agreed with the Bank and (2) to privatize/divest its interest in the five enterprises. > Cabinet of Ministers approved funding for international 'investment banks/advisors' up to am amount of 3 million Lats for LPA in the expenditure plan of the Privatization Fund. The Government under the pressure from the public (the necessary signatures for conducting the referendum were gathered) and opposition decided to withdraw the Latvenergo from privatization process. So the Parliament made amendments in the Energy law in August 2000 stipulating that "Latvenergo" should remain state owned company. Therefore it was agreed that the Government was obliged to improve the competitiveness of the energy sector, among others, through a restructuring of Latvenergo, which addresses EU direcfive 96/92. The main challenges for the Telecommunications sector are the creation of a pro-competitive regulatory framework for the telecommunications sector that is consistent with the sector's rapidly changing technological and economic characteristics and privatization Governments remaining shares in the sector by using best commercial practices. During the first year of the Programmatic Lending Program period the Cabinet of ministers has submitted Telecommunications law to Saeima after amendments to the current draft to require an independent regulator to be established, and to allow the telecommunications regulator to be part of the Public Services Regulatory Council starting 2001. Law on Public Services Regulators adopted by Saeima in October 2000 regulates the establishment of Public Services Regulatory Council, which is responsible also for regulation of the telecommunications sector. Financial Sector Regulation. Good progress in strengthening banking supervision has been imade. The Government was fully aware that existing regulatory structure did not fully accommodate the growth of non-bank financial institutions. At the same time the steps were taken ito introduce a new law establishing an integrated financial regulatory body. It was also recognized that for this agency to be successful, the strengthening of the capacity to supervise the non-bank financial institutions was necessary, ensuring independency of the new agency and that the formation of it did not undermine the credibility of existing banking supervision. During the first year of the Programmatic Lending Program period the Cabinet of Ministers submitted the Law on Unified Financial Supervision Agency to Saeima. The law was adopted in June 2000. It is stipulated that the law comes into force in July 1, 2001. Work was initiated that had to be resulted in an action plan (i) for strengthening supervision of financial institutions like the pension funds, investment companies, leasing firms and the securities market; (ii) for the structure, organization, and operational arrangement for a unified regulatory agency; and (iii) that set out the change management program covering the arrangements of transition from the existing regulatory structure to the new unified regulatory agency, including development of -20 - communication strategy. Business regulation. The regulatory system contained many of the formal mechanisms that were essential for building an effective and transparent regulatory framework that can interact efficiently with the business community in Latvia. The difficulty with evaluating the regulatory proposals especially for consistency with existing laws and regulations as well as their budgetary impact was recognized. During the first year of the Programmatic Lending Program period: > Ministry of Justice completed a draft manual for drafting laws and regulations based on good legislative techniques. > The Ministry of Justice created a special unit to implement a unified system for drafting laws and regulations, with the capacity to train officials in other ministries in drafting techniques. > The Ministry of Justice created a comprehensive definition of "normative acts". > The Ministry of Finance prepared a draft manual for assessing the budgetary consequences of draft laws and regulations. > The School of Public Administration developed a training program in impact analysis. To improve the feedback from businesses and households with respect to regulation that effects them the Government was aware that it has to improve the ability of civil society to monitor this, we require regulatory bodies to adhere to clear but simple annual reporting requirements. Significant steps to improve business regulation based on FIAS recommendations to reduce the barriers to foreign as well as domestic investments have been undertaken. To improve the functioning of state bodies that enforce regulations such as inspectorates, actions have been taken to strengthen their capabilities in assessment of the impact of their regulatory enforcement actions, capabilities to monitor their actions and to improve the accountability of the state bodies that enforce regulation. The Secretariat of the MoPSR has prepared and the cabinet has adopted the new rules and procedures for inspections. To create ownership under its constituency, a coordination council for inspectorates with rotating presidency has been set up to help steer the implementation of this particular reforrn program. Regulatory coordination is an area, especially in construction, where improvements were required as to minimize delay and costs to the private sector. The Latvian Development Agency has played a pivotal role in this and has developed recommendations on management, use and design of transparent regulations, appeals, public participation, regulatory control over natural monopolies, infrastructure finance, and policy on historic structures and districts. III THE ROLE OF THE WORLD BANK During the implementation of the loan the performance of the World Bank was highly - 21 - satisfactory. The close cooperation and partnership developed with the World Bank staff and consultants enabled the Government and its ministers, higher management of ministries and other civil servants to obtain and use the Bank's expertise in different fields of the institutional reformns. In this period the Bank's opinion and very often professional advice in different areas of the reforms has been very helpful when taking the decisions on particular issues of the reform and also in raising the awareness of all involved parties including wider public about necessity of the institutional and policy reforms Latvia is undertaking. (1,) Cojinanciers: N.A. (c) Other partners (NGOs/private sector): N.A. 10. Additional Information None - 22 - Annex 1. Key Performance Indicators/Log Frame Matrix A. Returning to a macroeconomic framework conducive to robust growth A. I. Correcting the macro-imbalance that re-emerged after the Russia The economy recovered well after the implementation of the various crisis macro-economic measures introduced in the IMF Stand-by Arrangement. The fiscal deficit was not reduced as much as had been hoped, but this is being addressed in a new arrangement with the IMF. A.2. Ensuring financial viability of the pension reform The passage of legislation to introduce a second pillar is the first step to correct the emerging financial imbalances. Implementation of the reform is proceeding apace and will be further addressed in PSAL 11. B. Strengthening the credibility of the public sector B 1. Reducing risks and opportunities for corruption in govemsent The anti-corruption components of the operation were judged to be and thejudiciary marginally satisfactory. A full mechanism to monitor and report on corruption in the public sector has not been established. Some progress has been made in drafting manuals to train public sector employees conceming conflicts of interest and illicit enrichment. Judicial reform has advanced according to timetable. Judges are, for the most part, now randomly assigned to cases, and ex parte communications between judges and litigants are now fall under a specific instruction from the Minister of Justice. Court decisions and rulings are, more slowly, being published electronically. B2. Strengthen transparency and reporting of the ministries and The legislative framework under which the public sector operates bodies subordinated, supervised or managed by them has been improved through the adoption of a Law on Public Sector Agencies. An Administrative Framework Law has been folded into a proposed Law on Executive Powers, which has been submitted to Parliament for approval. C. Strengthening the public sector institutional capacity C. I. Streamline the structure of the public sector and increase its A blueprint for public sector reform was produced, unfortunately administrative efficiency and transparency without a fully specified action plan. Nonetheless, functional reviews of the Ministries of Economy and Justice have been initiated, and the plan for the reorganization of the Ministry of Agriculture is being implemented. C.2. Strengthen human resource management by improving The Cabinet of Ministers adopted the concept of a broad-banded, incentives for recruitment and retention of high quality staff transparent uniform pay scale in the public sector. A survey is to be conducted on existing pay, to be used to design a new pay system. C.3. Improving public expenditure management C.3.a. Develop transparent and unified public accounts All accounts of budget financed operations have been brought into the budget. C.3.b. Strengthen accountability for the use of resources All State-budgeted institutions are to supply annual audit statements. The proposals has been made to Parliament to form a Public Accounts Committee. C.3.c. Development of performance-oriented budgets in line A draft fiscal strategy document has now been elevated to Cabinet ministries for discussion,. The Cabinet will review all new policy proposals by line Ministries. Agreement has been reached with Ministries on conducting a broad public expenditure review. C.3.d. Development of a medium-term budget The Cabinet has agreed to disseminate and discuss a medium-term fiscal framework. C.3.e. Enhance local accountability Work has begun on developing integrated financial and reporting procedures for local govenmnents. C.4. improve targeting of social assistance as a means of preventing A pilot to implement and test the introduction of a social assistance negative consequences to households of poverty by implementing a benefit is proceeding well. The Cabinet has adopted an national social safety net providing income support to the lowest implementation plan to introduce a national benefit targeted at the income households very poorest households. D. Rationalizing the interaction between the public and the private sector D. I. Move most of the significant remaining commercial state firms Not fulfilled. The Govemment was unable to proceed with the to the private sector to promote open markets, restructuring and privatization of the energy and telecommunications utilities, nor industrial growth while fostering the development of stable with other "large" privatizations. However, reputed intemational govemance structures and adhering to fundamental principles for its banks and advisors have been brought into the process of assisting regulatory interventions in remaining privatizations. D.2. Energy sector: regulation and privatization Energy company has not been privatized. A Law has been passed to create a Public Services Regulatory Council which will incorporate energy sector regulation. - 23 - D.3. Telecommunications sector: regulation and privatization Telecommunications privatization in arbitration over dispute with putative buyer. A Telecommunications Law has been submitted to Parliament. The Telecommunications regulator will be part of the Public Services Regulatory Council. D.4. Achievement of a unifofm approach to supervision of finance A Law on a Unified Financial Supervision Agency has been and capital markets and strengthening of financial supervision system submitted to Parliament, and establishment ant implementation are with particular emphasis on non-bank financial institutions well advanced. D.5. Strengthen legal and regulatory process, to ensure more The Ministry of Justice has taken the lead in fostering best practice efficient regulation and reduce the costs to the public sector created in the drafting of laws across Ministries and agencies. The Ministry by abuse of regulatory powe of Finance is introducing systems to assess the budgetary costs of new policies. The School of Public Administration has developed suitable training material for Civil servants. -24 - Annex 2. Project Costs and Financing N. A. -25- Annex 3. Economic Costs and Benefits N. A. - 26 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation HQ 7 1 team leader, 1 macro S S economist, 3 public sector specialists, I privatization specialist, 1 regulatory specialist RM 6 1 human development specialist, S S I macro economist, 3 public sector specialists, I regulatory specialist Appraisal/Negotiation HQ 13 1 team leader/macro S S economist, 4 public sector specialists, I privatization specialist, 2 regulatory specialists, 2 financial sector specialists, I human development specialist, I energy specialist, I local government specialist RM 6 1 human development specialist, S S I macro economist, 3 public sector specialists, I regulatory specialist Supervision HQ 12 1 team leader/macro S S economist, 4 public sector specialists, I privatization specialist, 2 regulatory specialists, 2 financial sector specialists, I human development specialist, I energy specialist RM 5 1 human development specialist, S S I macro economist, 2 public sector specialists, I regulatory specialist ICR HQ I Lead Economist S S RM I Senior Economist S S Excludes particpation of consultants financed by trustfunds. (b) Staff: -27 - Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 200 $703 Appraisal/Negotiation (included above) (included above) Supervision 73 $244 ICR (included above) (included above) Total 273 $947 Excludes use of trustfunds - 28 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating L Macro policies O H *SUOM O N O NA O Sector Policies O H *SUOM O N O NA L Physical OH OSUOM ON *NA O Financial O H OSUOM O N * NA Li Institutional Development 0 H * SU O M O N 0 NA O Environmental O H OSUOM O N * NA Social O Poverty Reduction OH * SUOM O N O NA CJ Gender O H OSUOM O N O NA O Other (Please specify) O H OSUOM O N O NA O Private sector development 0 H O SU *M 0 N 0 NA Li Public sector management 0 H * SU O M 0 N 0 NA O Other (Please specify) O H OSUOM O N * NA -29 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating El Lending OHSOS OU OHU O Supervision OHS OS Ou OHU LI Overall OHS OS O u O HU 6.2 Borrower performance Rating LI Preparation OHS OS O U O HU FL Government implementation performance O HS O S 0 U 0 HU LI Implementation agency performance OHS OS 0 U O HU LI Overall OHS OS O U O HU - 30 - Annex 7. List of Supporting Documents 1. Presdent's Report on a Proposed Programmatic Structural Adjustment Loan to the Republic of Latvia. February 23, 2000. Report No. P 7352 LV 2. Supervision Report. October 2000 3. Panel Report. Quality Assurance Group. November 12, 1999 4. Borrowers Appraisal. June 26th, 2001. - 31 -