Document of The World Bank FOR OFFICIAL USE ONLY Report No. 61287-LV INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR THE SECOND SPECIAL DEVELOPMENT POLICY LOAN IN THE AMOUNT OF EURO 100 MILLION (US$142.08 MILLION EQUIVALENT) AS PART OF A PROPOSED LENDING PROGRAM OF TWO LOANS TO THE REPUBLIC OF LATVIA TO SUPPORT A SAFETY NET AND SOCIAL SECTOR REFORM PROGRAM April 28, 2011 Human Development Sector Management Unit Central Europe and the Baltic Countries Department Europe and Central Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. LATVIA CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2011) EUR 1:00: US$ 1.42: LVL 0.704 ABBREVIATIONS, ACRONYMS & TERMS AAA Analytic and Advisory IMF International Monetary Activities Fund CDS Credit Default Swap LRSA Last resort social assistance EBRD European Bank for programs Reconstruction and LVL Latvian Lats Development MOE Ministry of Economy EC European Commission MoES Ministry of Education and ECA Europe and Central Asia Science Region MOF Ministry of Finance ECB European Central Bank MOH Ministry of Health ESA European System of MOW Ministry of Welfare Accounts MRDLG Ministry of Regional ESF European Social Fund Development and Local ESSNS Emergency Social Safety Government Net Strategy NDC Notional Defined EU European Union Contribution, pay-as-you- EUR Euro go pension plan EU-SILC Survey of Incomes and OECD Organization for Economic Living Conditions Cooperation and GDP Gross Domestic Product Development GMI Guaranteed Minimum PER Public Expenditure Review Income means tested social PFM Public Finance assistance benefit Management GP General Practitioner PHC Primary Health Care HBS Household Budget Survey SEA State Employment Agency HICP Harmonized Index of SDPL Special Development Consumer Prices Policy Loan IBRD International Bank for SOE State Owned Enterprises Reconstruction and VAT Value Added Tax Development U.K. United Kingdom Vice President: Philippe H. Le Houerou Country Director: Peter Harrold Sector Director: Mamta Murthi Country Manager: Thomas Blatt Laursen Sector Manager: Jesko Hentschel Task Team Leader: Emily Sinnott ii FOR OFFICIAL USE ONLY REPUBLIC OF LATVIA SAFETY NET AND SOCIAL SECTOR REFORM PROGRAM SPECIAL DEVELOPMENT POLICY LOAN (SDPL) PROPOSED SECOND OPERATION IN A PROGRAM OF TWO SDPLS TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY ........................................................................... v  I. INTRODUCTION ......................................................................................................... 1  II. COUNTRY CONTEXT .............................................................................................. 2  2.1. RECENT ECONOMIC DEVELOPMENTS IN LATVIA ................................. 2  2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .............. 6  2.3. SOCIAL IMPACT OF THE CRISIS ................................................................ 12  2.4. SOCIAL SECTOR POLICY ISSUES ............................................................... 13  III. THE GOVERNMENT’S REFORM PROGRAM ................................................ 14  3.1. FISCAL CONSOLIDATION AND THE SOCIAL SECTORS ....................... 14  3.2. CONSULTATIONS .......................................................................................... 15  IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ............................ 16  4.1. LINK TO COUNTRY PARTNERSHIP STRATEGY ..................................... 16  4.2. RELATIONSHIP TO OTHER BANK OPERATIONS .................................... 16  4.3. COLLABORATION WITH THE EC AND IMF ............................................. 17  4.4. ANALYTICAL UNDERPINNINGS ................................................................ 17  V. THE PROPOSED SPECIAL DEVELOPMENT POLICY LOAN....................... 18  5.1. OPERATION DESCRIPTION.......................................................................... 18  5.2. POLICY AREAS ............................................................................................... 18  5.2(a) Overall Implementation of the Emergency Social Safety Net ................ 18  5.2(b) Social Protection ..................................................................................... 21  5.2(c) Health ...................................................................................................... 24  5.2(d) Education ................................................................................................ 27  VI. OPERATION IMPLEMENTATION..................................................................... 29  6.1. POVERTY AND SOCIAL IMPACT................................................................ 29  6.2. ENVIRONMENTAL ASPECTS ...................................................................... 30  6.3. IMPLEMENTATION MONITORING AND EVALUATION ........................ 30  6.4. FIDUCIARY ASPECTS ................................................................................... 31  6.4(a) Public Financial Management System and Budgetary Resources .......... 31  6.4(b) Foreign Exchange Environment ............................................................. 32  6.5. DISBURSEMENT, AUDITING AND PROCUREMENT............................... 32  VII. RISKS AND RISK MITIGATION ....................................................................... 33  ANNEX 1: LETTER OF DEVELOPMENT POLICY ............................................... 35  ANNEX 2: INDICATIVE TRIGGERS, PRIOR ACTIONS AND PROGRESS FOR SPDL2 .............................................................................................................................. 46  ANNEX 3: SOCIAL SECTOR DEVELOPMENTS AND POLICY ISSUES........... 53  ANNEX 4: POLICY ISSUES IN PUBLIC ADMINISTRATION.............................. 71  iii ANNEX 5: ACTION PLAN TO IMPLEMENT THE RECOMMENDATIONS OF THE STATE AUDIT OFFICE OF THE REPUBLIC OF LATVIA ON THE EMERGENCY SOCIAL SAFETY NET ...................................................................... 74  ANNEX 6: WORKPLACES WITH STIPEND PROGRAM ..................................... 83  ANNEX 7: POLICY MATRIX ...................................................................................... 86  ANNEX 8: MONITORING AND RESULTS FRAMEWORK .................................. 90  ANNEX 9: FUND RELATIONS NOTE ....................................................................... 99  ANNEX 10: LATVIA AT A GLANCE ....................................................................... 100  ANNEX 11: MAP OF LATVIA ................................................................................... 102  The proposed loan, the second in a program of two, was prepared by an IBRD team consisting of Anarkan Akerova (Counsel, LEGEM), Mohammed Ihsan Ajwad (Sr. Economist, ECSH4); Charles Griffin (Sr. Advisor, ECAVP); Joseph Paul Formoso (Senior Finance Officer, CTRFC), Nadezhda Lepeshko (Junior Professional Associate, ECSH4); Truman Packard (Lead Economist, ECSH4); Clelia Rontoyanni (Public Sector Specialist, ECSPS); Emily Sinnott (Task Team Leader, Senior Economist, ECSH4); Emilia Skrok (Senior Country Economist, ECSPE), and Asta Zviniene (Sr. Social Protection Specialist, ECSH3). Mehtabul Azam (Economist, ECSH4) and Basab Dasgupta (Consultant, ECSHD) provided key analytical input to the lending program. Johanne Angers (Senior Operations Officer, ECSH1); Carmen Laurente (Senior Program Assistant ECSHD); Valentina Martinovic (Executive Assistant, ECCU5); and Anahit Poghosyan (Office Manager, ECSHD) provided essential support to the task team. The team gratefully acknowledges the support and guidance of Peter Harrold (Country Director, ECCU5); Jesko Hentschel (Sector Manager, ECSH4), Satu Kahkonen (Sector Manager, ECSP2) and Sereen Juma (Senior Country Officer, ECCU5), and the reviewers of the Regional Operations Committee, who provided valuable comments. The team acknowledges and is grateful for the collaboration and inputs of the Latvian authorities. iv LOAN AND PROGRAM SUMMARY REPUBLIC OF LATVIA SAFETY NET AND SOCIAL SECTOR REFORM PROGRAM SECOND SPECIAL DEVELOPMENT POLICY LOAN Borrower Republic of Latvia Implementation Agency Ministry of Finance Financing IBRD Special Development Policy Loan (SDPL) Terms: Front end fee of 100 basis points; 8 year average maturity; 10 year final maturity; 5 year grace period; and interest rate equal to Libor + 200 basis points. Amount: EUR 100 Million (US$142.08 million equivalent) Operation Type Proposed second operation in a program of two single-tranche SDPLs Main Policy Areas Emergency Social Safety Net, and Education, Health and Social Protection Reforms Key Outcome 1. The Emergency Social Safety Net Strategy (ESSNS) has adequate Indicators budget financing in 2010 and 2011 (at 0.6% of GDP). 2. State co-financing of the Guaranteed Minimum Income (GMI) program introduced and maintained at 50% in 2010 and 2011. 3. Participants in the emergency public works program equaled on average 19,000 (16% of the unemployed not receiving unemployment benefits) and 16,500 (13% of the unemployed not receiving unemployment benefits) in 2010 and 2011, respectively. 4. Regular monitoring reports on the ESSNS implementation published by the government on the internet. 5. The independent Audit Report on ESSNS implementation is completed and published on the internet in October 2010, and the action plan of audit recommendations is put in place by October 2011. 6. The share of GPs with an extra public health nurse increased from 0% in 2009 to about 21% of GPs in 2010, and reaches 36% in 2011. 7. Pre-school attendance rates have been maintained over the crisis and equaled 94% of 5 year olds and 98% of 6 year olds at end-2010 and end-2011. 8. Share of children from closed schools receiving assistance for school transportation under the State-subsidized scheme reaches at least 77% in 2011 (it increased from 0% prior to May 2009 to 88% in 2010). Program Development The objectives of the program are: (i) to protect vulnerable groups with Objective(s) and emergency safety net support during the economic contraction; (ii) to Contribution to CAS mitigate the social costs of fiscal consolidation; and (iii) to ensure that structural reforms lay a foundation for sustainable improvements in the social sectors. The first loan in the series focused mainly on the first and second objectives given the need for an emergency response to the deep downturn Latvia suffered in the wake of the global crisis. While v concentrated on continuing support for the emergency social safety net measures through to end-2011, the proposed second operation will expand this focus to the third objective through support for the structural reform in the social sectors. This support is made through the ESSNS and seeks to protect the most vulnerable within an overall structural reform program aimed at high quality fiscal adjustment in the education and health sector. Latvia graduated from World Bank financing in 2007. The global financial crisis led to an exceptional request by the government of Latvia for renewed access to World Bank lending resources. The proposed operation is the final operation under the SDPL support program and would complete World Bank crisis lending activities in Latvia. There are two related World Bank operations: the Financial Sector Development Policy Loan approved on September 22, 2009 and First Safety Net and Social Sector Reform Development Policy Loan (SDPL 1) approved on March 4, 2010. The World Bank program is an integral part of the international rescue package of the IMF, EC, EBRD, Nordic countries, and other lenders. Risks and Risk Risks. Risks to the proposed operation are moderate to high. The risks are Mitigation related to the economy, political and social support for the ongoing fiscal adjustment program, and possible reversal of the social sector structural reform program supported by the World Bank’s SDPL loan series. Economic risks are moderate. Overall, the macroeconomic outlook has notably improved since the previous World Bank loan (SDPL 1) was approved and risks have diminished. Growth performed better than expected in 2010, as did the fiscal outturn. Political risks remain moderate to high, and relate to the challenge of maintaining the support of the governing coalition and society at large for the ongoing fiscal stabilization program. Despite the difficult economic conditions that the population has faced, social stability has endured. The government has reiterated its commitment to the structural reform program and implementation risks are moderate in 2011. Mitigation of Risks. The SDPL program will help to mitigate the economic and social risks of the stabilization program. The proposed SDPL 2 facilitates the fiscal reforms in the social sectors. The technical assistance program that has accompanied the SDPL program has supported the fiscal stabilization program. In supporting the implementation of the ESSNS, the SDPL program lowers the social costs inflicted by the rapid fiscal adjustment and sector structural reforms. In supporting the monitoring and making public the results of the ESSNS—including the use of country systems to audit, evaluate and feed into program re-design—the SDPL supports greater governance and accountability. Operation ID Number P121796 vi PROGRAM DOCUMENT Date: April 28, 2011 Lending Instrument: Development Policy Country: Republic of Latvia Lending Operation: Second Safety Net and Social Board Approval Date: May 26, 2011 Sector Reform Program Effectiveness Date: September 30, 2011 Operation ID: P121796 Closing Date: December 31, 2011 Team Leader: Emily Sinnott Sectors: General education sector (30%); Health Sector Manager/Director: Jesko S. (30%); Other social services (30%); General Hentschel public administration sector (10%) Country Director: Peter C. Harrold Themes: Education for all (30%); Health system performance (30%); Social safety nets (30%); Administrative and civil service reform (10%) Environmental screening category: C Special Development Policy Lending: [X] Yes [ ] No Crisis or Post-Conflict Situation (exception to [X] Yes [ ] No OP8.60): [X] Yes [ ] No Programmatic: [ ] Yes [X] No Deferred Drawdown Option: [ ] Yes [X] No Subnational Lending: Operation Financing Data [X] IBRD Loan [] IDA Credit [] Grant [] Other: Total Bank financing (US$m.): 142.08 Proposed terms: Fixed spread loan Tranche Release Information List binding conditions as stated in the Legal Agreement. Tranche 1 Description Amount Expected release date Single Withdrawal Tranche 142.08 12/31/2011 Condition 1 The Borrower, through the national and local government agencies, has been satisfactorily implementing the Emergency Social Safety Net Strategy as indicated by the maintenance of adequate budget financing in 2010 and 2011, and evidenced by regular performance monitoring reports submitted to the Cabinet of Ministers and publishing them on the web page of the Ministry of Welfare. Condition 2 The Borrower, through the Auditor General, has conducted on October 28, 2010 an independent audit of the Cabinet of Minister’s performance in implementing the Emergency Social Safety Net Strategy. Condition 3 The Borrower has enacted an amendment to the Law on the State Funded Pensions ("Grozîjumi Valsts fondçto pensiju likumâ" dated December 30, 2010 ("LV", 206 (4398), 30.12.2010)) which increased the contribution rate to the funded pension pillar to 6 percent of a worker's salary starting from January 1, 2013. Condition 4 The Borrower has allocated at least 50 percent of the cost of the guaranteed minimum income in the 2011 budget, with local governments funding the other 50 percent. vii Condition 5 The Borrower has strengthened primary health care services program in the 2010 and 2011 budget by expanding the additional public health nurse or physician’s assistant program to primary care practices and developing a family physician advisory telephone service. Condition 6 The Borrower, through the Cabinet of Minister’s Regulations # 1046, dated December 19, 2006, as amended, has implemented the measures to: (a) strengthen the exemption program for health payments by eliminating all out-of-pocket health payments for visits, tests, and pharmaceuticals for patients classified as "needy"; (b) provide a limited package of benefits for patients as their incomes exceed the "needy" line; and (c) provide outpatient psychiatric and home care for chronic diseases without cost to all population of Latvia. Condition 7 The Borrower has allocated in the 2011 budget adequate financing for pre-primary education/child development programs for children starting from the age of 5 years old. Condition 8 The Borrower has allocated in the 2011 budget adequate financing to cover the cost of transporting to replacement schools students whose schools have closed. Triggers National and local government agencies are satisfactorily implementing Emergency Social Safety Net Strategy (according to details in each section below), maintaining adequate financing in 2010 and 2011. The Borrower has submitted regular performance monitoring reports to the Cabinet of Ministers and published them on the web page of the Ministry of Regional Development and Local Government. An independent audit of the government's performance in implementing the Emergency Social Safety Net Strategy is being conducted. The contribution rate to the funded pension pillar has been raised to 6 percent of a worker's salary starting from January 1, 2012. In the 2011 budget, the Borrower has financed at least 50 percent of the cost of the Guaranteed Minimum Income from State funds, with local governments funding the other 50 percent. The Borrower has prepared an evaluation of how uniform standards of coverage, targeting, benefits, and financing of municipally-administered, mandatory social assistance programs are implemented across local governments, based in part on an evaluation of the experience under the Emergency Social Safety Net Strategy. The Borrower has incorporated improvements to the program suggested by its evaluation and has prepared a plan for further strengthening GP/PHC services in the 2011 budget. The Borrower has incorporated improvements to the exemption program, informed by an evaluation of its performance since October2009and fully funded the revised program for 2011. The Borrower has prepared a plan for shifting all medical care subsidies from a list of social exemptions to a means-tested system of exemptions. In 2011 budget, the Borrower has allocated adequate financing for pre-primary education/child development programs for children from the age of 5 years old. In the 2011 budget, the Borrower has allocated adequate financing to cover the cost of transporting students whose schools have closed to replacement schools. Does the operation depart from the CAS in content or other significant [ ]Yes [ ] No respects? Does the operation require any exceptions from Bank policies? [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Operation development objective The objective of the proposed Second Special Development Policy Loan (SDPL) is to support safety net and social sector reforms in Latvia. The proposed operation would be part of the viii Special Development Policy lending support given by the World Bank to the Republic of Latvia under the stabilization program of EUR7.5 billion agreed in December 2008 and provided by the European Commission (EC), the International Monetary Fund (IMF), the European Bank of Reconstruction and Development (EBRD), the World Bank, and bilaterally through support from Nordic and Central European countries. The stabilization program is designed to address severe macroeconomic and fiscal imbalances and financial vulnerabilities that grew worse in the wake of the global economic and financial crisis. The objectives of the program 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 structural reforms lay a foundation for medium-term improvements in the social sectors. The first loan focused mainly on the first and second objectives given the need for an emergency response to the deep downturn Latvia suffered in the wake of the global crisis. While concentrated on continuing support for the emergency social safety net measures through to end-2011, the proposed second operation will expand this focus to the third objective, seeking to support the structural reform program that the Latvian Government has put in place for the social sectors. ix IBRD PROGRAM DOCUMENT FOR THE SECOND SPECIAL DEVELOPMENT POLICY LOAN IN A PROGRAM OF TWO LOANS TO THE REPUBLIC OF LATVIA TO SUPPORT A SAFETY NET AND SOCIAL SECTOR REFORM PROGRAM I. INTRODUCTION 1. This operation is part of the special lending support by the World Bank for the Republic of Latvia. Under the stabilization program of EUR7.5 billion agreed in December 2008 and provided by the European Commission (EC), the International Monetary Fund (IMF), the European Bank of Reconstruction and Development (EBRD), and bilaterally through support from Nordic and Central European countries, the World Bank agreed to support Latvia’s stabilization program with EUR 400 million in funding. The stabilization program is designed to address severe macroeconomic and fiscal imbalances and financial vulnerabilities that worsened in the wake of the global economic and financial crisis. 2. This is the second operation in a program of two loans focused on Safety Net Support and Social Sector Reform; the first Special Development Policy Loan (SDPL 1) was fully disbursed on September 27, 2010. The objectives of the program 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 first loan focused on the first and second objectives given the need for an emergency response. While concentrated on continuing support for the emergency social safety net measures through to end-2011, the proposed operation expands the focus to the third objective. 3. The SDPL 2 supports actions related to protecting the most vulnerable within a reform program that underpins fiscal adjustment in the education and health sector. The government has embarked on a “funds follow the student” financing reform in the education sector to increase efficiency and education quality in light of the shrinking school-age population. The switch to this form of financing creates incentives to increase the low teacher- pupil ratio in Latvia and decrease school infrastructure. In the health sector, structural reforms delivering fiscal adjustment aim to improve administrate capacity and transparency, and to rationalize the provision of care. Primary health care services are being protected and reforms are aimed at substituting expensive inpatient services to the extent possible through increased use of outpatient surgery and alternatives to overnight hospital stays. The high inpatient costs are being tackled by reducing the number of hospital beds and making more effective use of co-payments to manage demand for services. The aim is not solely to increase efficiency, but to improve 1 health outcomes through better primary care. With the 2010 Public Expenditure Review (PER), the World Bank has also engaged with government on other important structural reforms, including increasing the retirement age for pensions, the development of training-based labor market programs and a move to a voucher scheme for training, and the formulation of a health sector strategy. 4. The government has made progress in implementing the SDPL program. In substance, Latvia is on track to meet nine out of the eleven triggers outlined in SDPL 1 for the second operation. Two of the triggers have been merged, so the loan now has eight prior actions. The explanation for the removal of one of the triggers on a social assistance evaluation report and another on health are given in Section 5.2, which describes the policy areas supported by the operation. Annex 2 gives a description of the status of each trigger for SDPL 2, compares them to the proposed prior actions and given a summary of progress under the proposed prior action. 5. Support for the reform program is not weakening despite the social costs it has entailed. The parliamentary election on October 2, 2010 indicated support for the government’s policy record, with the two-bloc coalition led by Prime Minister Dombrovskis maintaining power. Prime Minister Dombrovskis campaigned on the need for additional fiscal cuts for Latvia to meet the conditions of the stabilization program and achieve the Maastricht criteria by 2012 to join the Eurozone by 2014. The coalition Dombrovskis now heads won 58.6 percent of the vote. With technical input and financial support from the World Bank, the government put in place an Emergency Social Safety Net Strategy (ESSNS) to finance essential services and benefits delivered by national agencies and municipal governments on October 1, 2009, which extends to December 31, 2011. Certainly the safety net helped to offset the impact of the crisis on the most vulnerable households and contributed to reduced social pressures. While unemployment increased by more than ten percentage points, poverty only rose by a little more than two percentage points. The proposed SDPL 2 will contribute to further mitigating these social consequences. II. COUNTRY CONTEXT 2.1. RECENT ECONOMIC DEVELOPMENTS IN LATVIA 6. After the EU accession in 2004, the Latvian economy experienced rapid economic growth, helped by expansionary macroeconomic policies. Growth averaged 10.4 percent over 2004-2007. A domestic demand boom was facilitated by large real wage increases, pro-cyclical fiscal policy, capital inflows and rapid credit expansion. Labor shortages and out-migration to EU151 countries resulted in rapid nominal wage growth (about 80 percent on average from 2004 to 2007), which outstripped productivity growth. 7. The overheating pressures translated into large macroeconomic imbalances. The cyclically-adjusted deficit deteriorated from to 1.4 percent of GDP in 2003 to 6.2 percent in 20082, with public expenditures growing by 4 percent of GDP, or by more than 90 percent in real 1 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the U.K.. 2 The cyclically-adjusted deficit reported here is based on the methodology outlined in the European System of Accounts 1995 (ESA-95). 2 terms between 2003 and 2008. Consumer price inflation rose, increasing from 6 percent year-on- year in May 2004 to 18 percent in the first half of 2008, undermining the purchasing power of households. Competiveness deteriorated, with the unit labor cost-based real effective exchange rate (ULC-REER) appreciating by more than 50 percent between 2004 and the end of 2008. Driven by vibrant domestic demand, the external current account deficit widened from 9 percent in mid-2004 to almost 25 percent of GDP in mid-2007. Moreover, the external deficit was increasingly financed by institutional foreign borrowing, mainly parent bank funding, which drove external debt to 128 percent of GDP at the end of 2007. Latvia’s non-financial private sector debt rose rapidly and was a key source of vulnerability. Substantial inflows from Nordic parent banks fuelled rapid credit expansion, while investment contributed to a real estate bubble. 8. The combination of credit and housing bubbles, the global financial crisis, and acute banking pressures in Latvia contributed to a severe crisis in late 2008. Markets became concerned over the sustainability of the peg, and the likelihood that contingent financial sector liabilities had to be absorbed by the government. All three ratings agencies downgraded Latvia. Latvia’s Eurobond spread increased to around 600 basis points in the last quarter of 2008 from less than 100 basis points in the beginning of 2007. Latvia’s credit default swap (CDS) spreads skyrocketed, approaching 1,000 basis points. Liquidity demands from non-resident depositors aggravated these developments. With deposit withdrawals putting pressure on international reserves and the fiscal position deteriorating due to a steep drop in revenues and mounting banking costs, Latvia approached the IMF and EC for emergency financial support in November 2008.3 9. The Latvian government responded to the crisis with a reform program supported by the EC, international financial institutions, and bilateral donors. The program goals were to arrest the immediate liquidity crisis and to ensure long-term external stability, while maintaining the exchange rate peg through strong domestic policies. Its key elements included: (i) immediate measures to stem the loss of bank deposits and international reserves; (ii) steps to restore confidence in the banking system in the medium-term; (iii) fiscal measures to limit the substantial widening of the budget deficit, and to prepare for early fulfillment of the Maastricht criteria; and (iv) incomes policies, including the adjustment of nominal wages both in the public and private sector as well as structural reforms to rebuild competitiveness under the fixed exchange rate regime. 10. The core of the reform program requires a sizeable fiscal adjustment. Expenditure cuts dominated the adjustment at the outset of the program, contributing more than three-quarters of the consolidation (Box 1). Spending was cut by 14 percent of GDP during 2009-2010 as compared to projected fiscal outcomes prior to the program. As a result, the fiscal deficit declined to 6.5 percent of GDP in 2010, from 7.1 percent in 2009 (or in ESA95 terms to an estimated 7.7 percent of GDP from 9.7 percent). 3 The financial rescue package amounted to €7.5 billion, of which the IMF committed €1.7 billion, the EC €3.1 billion, the Nordic countries (Sweden, Denmark, Finland, and Norway) €1.8 billion, EBRD €0.1 billion, and the Czech Republic, Poland, and Estonia €0.4 billion. The Bank committed €400 million through DPL operations. The IMF operation was approved on December 23, 2008 and the EC operation on January 20, 2009. 3 Box 1. Composition of the Fiscal Adjustment during 2009-10 A comparison of the projected fiscal outcomes prior to the program and the actual fiscal outcomes suggest that fiscal adjustment measures reduced the fiscal deficit from 23.9 percent of GDP to 6.5 percent of GDP in 2010 (Table 1). Public expenditures contributed 14 percentage points of GDP of the consolidation. Tax policy changes redirected resources from consumption to production. Revenue-based adjustments, that brought about 3 percentage points of fiscal savings, relied on increases in indirect tax rates but also on the broadening of the tax base and simplification of the tax system. The personal income tax rate was increased by 1 percentage point to 26 percent (in net terms); the tax-free personal income tax allowance was cut from LVL 90 (EUR125) to LVL 35 (EUR50) per month; the VAT rate was increased from 18 to 21 percent and the reduced rate from 5 to 10 percent; and changes in the real estate tax were introduced. In addition, a diversion of second pillar pension contributions increased revenues by more than one percent of GDP. Figure 1. Fiscal outcomes compared to baseline projection at the beginning of the program Deficit baseline Deficit actual Baseline revenue Baseline expenditure Actual revenue Actual expediture 2008 2009 2010 60 0.0 55 ‐5.0 50 ‐10.0 45 ‐15.0 40 ‐20.0 35 ‐25.0 30 2008 2009 2010 ‐30.0 Source: IMF and World Bank staff calculations. Across-the-board spending cuts lowered expenditures, Spending cuts contributed the remaining 14 percent of GDP of the deficit reduction. The expenditure adjustment relied predominantly on cuts in subsidies (by 4.7 percent of GDP during 2009-2010) and the public sector wage bill (by about 4 percent of GDP in the same period). Wages of central government staff and teachers were reduced more than those of local governments and state-owned enterprises. A number of ministries, including defense, education, interior and agriculture, cut administrative costs by merging agencies. Investment spending fell by more than baseline projections. Interest spending was reduced by about 2 percent of GDP. Structural reforms in health and education buttressed these cuts. The exception was pensions, where expenditures increased as a share of GDP, partly due to the Constitutional Court decision of December 21, 2009 that reversed the initial pension cuts (which were 10 percent across-the-board and affected 70 percent for working pensioners). Adequate funding was ensured for the ESSNS. Table 1. Latvia Fiscal Aggregates: Baseline versus Actual Baseline Actual SBA First Review, August 2009 SBA Fourth Review, April 2011 2008 2009 2010 2008 2009 2010 Total revenue and grants 35.2 35.1 32.6 35.4 36.2 36.2 Direct Taxes 18.5 15.4 14.1 18.6 16.6 16.3 Indirect Taxes 10.7 10.5 10.1 10.7 10.3 10.4 Total expenditure 38.5 51.1 56.5 38.7 43.3 42.6 of which: Remuneration … 11.3 12.3 10.4 10.2 8.5 Subsidies and Grants 16.6 25.6 27.8 16.6 22.0 23.1 Social Support 8.5 14.2 15.9 8.6 12.6 13.7 Interest 0.4 1.8 4.2 0.4 1.2 1.4 Capital expenditure 4.5 4.8 5.1 4.6 3.3 3.1 Basic fiscal balance 2/ -3.3 -16 -23.9 -3.3 -7.1 -6.5 Source: IMF and World Bank staff calculations. 4 11. Latvia’s economy bottomed out in 2010. The economy recorded three consecutive periods of quarter-on-quarter growth in 2010. Real GDP growth was close to zero in 2010 (Table 2). A build-up of inventories and further expansion of exports was behind the growth rebound. Latvia’s exports have grown since mid-2010, outperforming a number of Central European Countries. Exports of goods and services increased by more than 19 percent year-on-year, more than imports, in 2010.4 Domestic demand remained relatively weak in the first half of 2010, but spillovers from export gains enhanced consumption and investment in the last two quarters of 2010. Therefore, the second half of 2010 saw some rebalancing of GDP growth towards domestic demand (Figure 2). Average real wages in 2010 contracted by 2 percent after a 7 percent decline registered in 2009, and the contraction in credit to the private sector eased, due to stabilization in funding from foreign-owned banks (Figure 3). 12. The economy has since stabilized and economic activity is picking up. The turnaround in domestic demand is visible in balance of payments dynamics. From a surplus of over 8 percent of GDP in 2009, the current account surplus narrowed to 3.6 percent of GDP last year. In addition, last quarter of 2010 saw Latvia post its first quarterly current count deficit since first quarter of 2008. Latvia’s 5-year CDS spread has fallen along with some others in the region, and is now well below 300 basis points. The interest rate on Latvian Eurobonds on the secondary market narrowed to below 200 basis points, from about 700 in April 2009. In parallel, the Treasury has succeeded in extending maturities in the domestic debt market. Greater confidence in the sustainability of the peg has led to significantly lowered local interest rates. Figure 2. Contribution to GDP Quarterly Figure 3. Employment and Real Wages, Growth by Component (in percentage points) 2005-2010 Consumption Fixed Investment Stocks Net exports Other GDP Employment (NSA, thousands) Real wages (NSA, real growth, yoy) 20 1200 25 15 1150 20 10 5 1100 15 0 1050 10 ‐5 1000 5 ‐10 ‐15 950 0 ‐20 900 ‐5 ‐25 ‐30 850 ‐10 ‐35 800 ‐15 2008 2009 2010 1Q 10 2Q 10 3Q 10 4Q 10 1Q 05 2Q 05 3Q 05 4Q 05 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 Source: Latvian Central Statistical Bureau; and World Source: Latvian Central Statistical Bureau; and Bank staff calculations. World Bank staff. 13. The improvement in competitiveness has, however, slowed down. After several quarters of decline, unit labor costs stabilized in 2010 as nominal wages bottomed out. The ULC- REER depreciated by about 10 percent between end 2007 and beginning of 2010, but remained almost unchanged through last three quarters (Figure 4). The Consumer Price Index-based real 4 The Bank of Latvia’s analysis shows that for many major trading partners, such as Germany, the U.K., Finland, Poland, Russia and Lithuania, Latvia’s market shares expanded in the second half of 2010. The key drivers of exports were wood and wood products (Latvia’s largest export category), metals and metal products (mainly iron and steel) as well as agricultural and food products. 5 exchange rate has also stabilized at about 10 percent below its peak at end-2008. Analysis of the competitive position of Latvia economy prepared last year gave mixed signals. While the equilibrium real exchange rate approach suggested a continuing competitiveness gap, macro- balance and external sustainability approaches produced a range from a -3 percent undervaluation to a significant competitiveness gap, depending on the size of the output gap and the natural rate of unemployment used.5 Figure 4. Latvia Price and Cost-based REER, 2000-2010 HICP‐based ULCE‐based 170 160 150 140 130 120 110 100 90 80 1Q 00 3Q 00 1Q 01 3Q 01 1Q 02 3Q 02 1Q 03 3Q 03 1Q 04 3Q 04 1Q 05 3Q 05 1Q 06 3Q 06 1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 Source: Central Bank of Latvia; and World Bank staff calculations. Notes: The figure shows the path of the Harmonized Index of Consumer Prices (HICP) versus the unit labor cost-based real exchange rate (ULC-REER) 14. Despite high unemployment rates, inflation has started picking up. Unemployment increased from 10.1 percent at end-2008 to a high of 20.7 percent in the third quarter of 2010 (and fell to 17.2 percent by the fourth quarter of 2010). The private sector adjusted more through job losses than wage cuts. Despite the ongoing recession in many EU countries, migration increased: one percent of Latvia’s population has left since end-2007. However, after a year-long deflationary episode driven by the collapse of domestic demand, annual inflation turned positive in September 2010 and reached 2.4 percent year-on-year in December 2010. Prices were pushed up mainly by supply-side factors, such as higher food and fuel prices, and an appreciation of the U.S. dollar, but the base effect was also important. While headline inflation has remained low, inflationary expectations have moved up quickly since August 2010. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 15. The economic recovery is projected to continue. Real GDP is projected to grow by 3.3 percent in 2011 and 4 percent per annum in 2012 and 2013 (Table 2). Domestic demand is expected to increase at a modest pace in 2011. Improved consumer confidence suggests that private consumption will increase despite increased taxes, and food and fuel price shocks. Investment is also projected to increase owing to improved corporate profitability even though access to credit remains difficult. The ongoing recovery in Latvia’s trading partners is expected 5 Caution should be exercised in interpreting these indicators, as they may be influenced by the large cyclical decline in imports rather than undervaluation. 6 to sustain export growth, although this will largely be offset by rising imports. As a result, unemployment is projected to decline. 16. Inflation is projected to increase further, but is set to remain in the low single digits. Prices will continue rising moderately, driven mostly by increases in global energy and food prices but also by the increase in the VAT rate. Inflation is expected to average around 3.2 percent in 2011, followed by a decline to around one percent in 2010. However, the persistent output gap, high unemployment and continued fiscal consolidation are expected to keep core inflation subdued. Based on current projections, the Maastricht inflation criterion (inflation of no more than 1.5 percent above the average inflation rate of the three European Union (EU) member states with the most stable price level) remains within reach. These projections are sensitive, however, to developments in food and energy markets. The authorities are considering a range of measures that could help contain inflation. 17. With the 2011 budget, Latvia is moving towards meeting medium-term fiscal targets. Parliament passed the 2011 budget on December 21, 2010, and a supplementary budget on April 13, 2011. These budgets include fiscal consolidation measures totaling around L350 million, although not all yield permanent savings. The fiscal deficit is expected to reach 4.8 percent in 2011—an improvement of half a percentage point since July 2010 (IMF Article IV Consultation). The ESA95 deficit is projected to fall below 4.5 percent of GDP in 2011, ensuring that the Maastricht criterion of a fiscal deficit below 3 percent of GDP in 2012 remains within reach. The 2011 budget (include the two supplemental budgets) contain measures for 2.6 percentage points of GDP: of which, 1.8 percentage points of GDP are for measures focused on increasing revenues. These include (i) increased VAT collection by raising both standard and reduced VAT rates, and decreasing the categories for which the reduced VAT regime applies; (ii) increased employee social security contributions; (iii) increased taxation of private vehicles and privately-used company cars; (iv) the imposition of a financial stability duty and a fee for non-bank companies providing consumer loan services; (v) a doubling of real estate taxes; and (vi) increased excise duties and reduced duty-free allowances on certain products. The budget also incorporates measures that may yield revenues in the short-term, but are unlikely to lead to a permanent reduction in the deficit. These include temporary increases in dividend payout ratios for many state-owned enterprises, and a diversion of second pillar pension contributions. Expenditure measures include (i) reduced staff and wage costs in the public administration; (ii) reduced appropriations relative to last year's level in a number of areas, including health spending, social programs, and defense spending; (iii) reduced subsidies for general education and financing for education innovation programs; and (iv) a cut in railway subsidies. In addition, the government has secured fiscal space for additional social safety net spending of up to half a percent of GDP if necessary. 18. Additional measures are needed in 2012 to reduce the deficit to below 3 percent of GDP. Provided the authorities contain the fiscal deficit to 4.5 percent of GDP in 2011, current estimates suggest that a further LVL150 to LVL180 million (1.1 to 1.3 percent of GDP) in additional net measures will be needed to achieve the necessary fiscal consolidation. To improve revenue collection, the authorities are working on proposals to reform property tax, to reallocate personal income taxes paid to local governments to the state budget, and to implement a comprehensive strategy to reduce the grey economy. On the expenditure side, reductions in the public sector wage bill and state subsidies are being considered. A menu of additional options for 7 fiscal consolidation will be prepared by mid-August 2011. The menu will include options for rationalizing the system of social benefits and improving the sustainability of the pension system. The government also plans to extend the temporary cap on benefit payments to high earners until 2014, which would otherwise expire at the end of 2012. Table 2. Latvia: Selected Economic Indicators, 2008–13 2008 2009 2010 2011 2012 2013 Projections (percentage change, unless otherwise indicated) National accounts Real GDP -4.2 -18.0 -0.3 3.3 4.0 4.0 Consumption -4.1 -21.5 -2.2 2.1 3.1 3.5 Private consumption -5.2 -24.1 -0.1 3.0 3.7 4.0 Public consumption 1.5 -9.2 -11.0 -2.0 0.0 1.0 Gross fixed capital formation -13.6 -37.3 -19.5 8.0 8.5 7.5 Exports of goods and services 2.0 -14.1 10.3 9.5 7.5 6.9 Imports of goods and services -11.2 -33.5 8.6 9.0 7.6 7.3 HICP inflation Period average 15.3 3.3 -1.2 3.2 1.8 1.7 End-period 10.4 -1.4 2.4 2.0 2.3 1.1 Labor market Unemployment rate (LFS ; period average, percent) 7.8 17.3 19.0 17.2 15.5 14.1 Employment (period average, percent change) 0.1 -11.4 -3.2 0.6 0.5 0.4 Real gross wages 4.4 -6.8 -2.3 -1.6 0.5 0.5 (percent of GDP) Consolidated general government Revenues 35.4 36.2 36.2 38.3 36.3 34.5 Expenditure 38.7 43.3 42.6 43.1 38.6 36.2 Basic Balance 1/ -3.3 -7.1 -6.5 -4.8 -2.3 -1.8 Balance inc. bank restructuring costs -7.5 -7.8 -7.9 -6.0 -2.3 -1.8 Gross debt 17.1 32.8 39.9 43.0 43.5 46.5 External sector Current account balance -13.1 8.6 3.6 1.7 0.5 -0.8 Trade balance -17.7 -7.1 -6.4 -6.3 -6.8 -7.2 Service balance 4.0 6.0 6.2 5.6 5.7 5.7 Exports of goods and services 41.8 43.2 52.9 50.1 51.4 … Imports of goods and services 55.5 44.2 53.4 50.8 52.4 … Income balance -1.6 6.3 0.2 -1.1 -1.6 -2.4 Current transfers balance 2.2 3.4 3.6 3.6 3.2 3.0 Gross external debt 128.7 156.3 163.2 145.4 135.1 129.9 Memorandum items: Gross official reserves (billions of eur 3.7 4.8 5.8 5.2 5.2 5.8 ESA balance 4/ -4.0 -9.7 -7.7 -5.3 -2.5 -2.5 Nominal GDP (billions of lats) 16.2 13.1 12.7 13.4 14.2 15.0 Sources : Latvian Authorities and IMF staff estimates. 1/ Includes second pillar pension contributions and privatization receipts, excludes bank restructuring costs. 2/ Current account deficit (+ indicates a surplus) 3/ Gross external debt minus gross external debt assets. 4/ ESA balance includes bank restructuring costs. 8 19. The external current account is projected to be in surplus during 2011-2012, moving to a small deficit thereafter. The current-account surplus will decline to 1.7 percent of GDP in 2011 and 0.5 percent in 2012. Increased risk appetite from foreign investors and rebounding domestic demand are expected to lead to a small deficit in the latter years of the forecast period. Export volumes have rebounded strongly, in line with the rapid recovery in external demand, but their growth is expected to slow down as the global recovery weakens. Despite weak private consumption and investment, increased demand for materials and components by export industries implies that imports will continue growing robustly. The income account is expected to return to deficit from 2011 onwards as corporate finances gradually improve. The balance for services and current transfers are projected to be in surplus. 20. External debt is expected to decline gradually. Current account surpluses, equity recapitalizations, deleveraging by banks and the output rebound are projected to put external debt on a declining path. Having increased sharply over the past two years, external debt is estimated to have peaked at 165 percent of GDP in 2010, and to decrease to just below 110 percent of GDP by 2016. The ratio of external debt to exports is projected to decline from a high of 362 percent in 2009 to about 200 percent by 2016. These projections, however, are sensitive to exchange rate and output shocks. They are less sensitive to shocks originating from higher interest rates or from a non-interest rate current account shock. 21. With financing seemingly ample, the authorities may not draw on the entire available international support. So far Latvia has received about EUR4.3 billion of the available EUR7.5 billion international financial support. Given Latvia’s stronger than anticipated fiscal and financial position6, the government has decided to draw down remaining resources on a case-by-case basis. Consistent with the medium-term debt strategy, the authorities intend to increase reliance on domestic financing, while working to lengthen the maturity structure of public debt to reduce the rollover risk. The government also plans to access international capital markets once conditions are favorable, to ensure that it is able to meet external repayment obligations. In order to limit macroeconomic volatility, the plan is to maintain a smooth domestic borrowing profile, while limiting the amount of overall borrowing to an amount consistent with continued debt sustainability. Parent banks have maintained their exposure to the financial sector. 22. Planned fiscal adjustment and the growth recovery are projected to reverse the recent sharp rise in public debt. Under the baseline macroeconomic scenario (as in Table 3), public debt will reach a peak of 50 percent of GDP in 2014, before going down to 42 percent of GDP in 2015. Overall, the sustainability of public debt is most dependent on the size of the primary deficit and the rate of output growth. A reduction in growth by a quarter of a standard deviation relative to the historical average could push the debt-to-GDP ratios up to 78 percent by 2016 (Figure 5). The same size of shock applied to primary fiscal balance would result in a debt increase to 62 percent by 2016 (Figure 6). The debt path is less sensitive to contingent liabilities, exchange rate or interest rate shocks. Thus, continued fiscal adjustment will be essential to 6 The international reserve position has improved. Gross international reserves have increased from EUR3.7 billion in 2008 to EUR5.9 billion (the ratio of gross reserves to banks’ short-term liabilities and amortization minus the current account surplus increased from 24 percent to 79 percent over the same period). 9 preserve fiscal sustainability, requiring further expenditure rationalization and—to insure against risks—a cautious use of budgetary reserves and readiness to take additional action if necessary. Figure 5. Growth shock (% per year) Figure 6. Primary balance shock and no policy scenario (% of GDP) 80 78 80 70 70 No policy change 62 Gro wth 60 sho ck 60 PB shock 48 50 Baseline 50 42 42 40 40 Baseline 30 30 20 Baseline: 4.0 20 Baseline: 0.7 Scen ario: -0.6 Scenario: -0.4 10 10 Historical: 4.1 Historical: -1.8 0 0 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 Source: IMF 23. A joint IMF-EC team reached agreement with the government on the Fourth Review of the ongoing international financial support program on April 15, 2011. Following discussions with the Latvian government, the EC-IMF reached agreement at staff level on the main elements of the Latvian government’s policy program. In their concluding statement, the IMF stated that the government’s policy agenda for 2011 sets the stage for meeting the conditions for euro adoption in January 2014 and for sustaining the economic recovery. The government and lenders have agreed on the main directions for 2012 budget consolidation measures, most of which will be carried out by reducing expenditures, combating shadow economy, increasing real-estate tax, making effective use of state subsidies, and ensuring the sustainability of the social insurance system. The government also resolves to carry out structural reforms in education and health care, and ensure the development of a social security strategy for 2012 and 2013. The IMF is also satisfied with the progress on financial system stabilization. The IMF Executive Board is scheduled to discuss the Fourth Review under the Stand-By Arrangement on May 25, 2011. 24. The macroeconomic policy framework is considered adequate for the proposed DPL. The macroeconomic policies implemented prior to and during the global crisis have helped to reduce macroeconomic imbalances. The government policies are supportive of sustained growth, keeping external imbalances in check and narrowing fiscal deficits over the medium- term. A fast recovery in key trading partners, a rebuilding of inventories and stepped-up utilization of EU funds helped economy to recover. However, downside risks could weaken Latvia’s macroeconomic performance. They include a weak recovery in the EU and contagion from sovereign debt concerns in some euro area countries in view of close banking linkages. A worsening in the external environment could slow down growth in Latvia, and possibly delay the fiscal consolidation. 10 Table 3. Public and external debt sustainability (In percent of GDP, unless otherwise indicated) PUBLIC SECTOR DEBT Debt- stabilizing Actual Projections primary 2009 2010 2011 2012 2013 2014 2015 2016 balance 1 Baseline: Public sector debt 32.8 39.9 43.0 43.5 46.5 49.7 45.0 42.4 -3.0 o/w foreign-currency denominated 25.6 32.6 35.2 35.4 38.1 41.3 36.8 34.6 2 Change in public sector debt 15.7 7.1 3.1 0.5 3.0 3.2 -4.7 -2.6 3 Identified debt-creating flows (4+7+10) 11.0 11.7 2.8 0.4 -0.3 -0.7 -0.7 -4.4 4 Primary deficit 5.9 5.1 3.3 0.3 -0.4 -1.1 -1.2 -1.2 5 Revenue and grants 36.2 36.2 38.3 36.3 34.5 33.6 32.9 32.1 6 Primary (noninterest) expenditure 42.1 41.2 41.6 36.6 34.0 32.4 31.7 30.9 7 Automatic debt dynamics 4.3 5.2 -1.7 0.1 0.2 0.4 0.5 -3.2 8 Contribution from interest rate/growth differential 5.2 2.3 -0.6 -0.2 -0.1 0.0 0.3 0.3 9 Contribution from exchange rate depreciation -0.9 2.9 -1.1 0.3 0.3 0.3 0.2 -3.5 10 Other identified debt-creating flows 0.8 1.4 1.1 0.0 0.0 0.0 0.0 0.0 11 Residual, including asset changes (2-3) 4.8 -4.6 0.3 0.1 3.3 4.0 -4.0 1.8 Public sector debt-to-revenue ratio 90.7 110.3 112.3 120.0 134.9 148.1 136.7 132.0 Scenario with key variables at their historical averages 43.0 43.1 46.4 50.2 45.8 43.8 -5.3 Scenario with no policy change (constant primary balance) in 2010-2016 43.0 46.6 53.3 61.0 61.0 61.8 -4.4 stabilizing EXTERNAL DEBT non- interest Actual Projections current 2009 2010 2011 2012 2013 2014 2015 2016 account 1 Baseline: External debt 156.3 165.2 145.4 135.1 129.9 125.6 116.1 109.2 -5.5 2 Change in external debt 26.7 8.9 -19.8 -10.3 -5.2 -4.3 -9.5 -7.0 3 Identified external debt-creating flows (4+8+9) 34.4 8.1 -18.3 -9.5 -7.9 -6.8 -6.8 -5.9 4 Current account deficit, excluding interest paymen -9.9 -4.2 -4.1 -2.6 -1.6 -0.8 -0.2 -0.2 5 Deficit in balance of goods and services 1.1 0.5 0.7 1.1 1.5 1.9 2.2 2.5 6 Exports 43.2 52.9 50.1 51.4 52.1 52.7 53.6 54.6 7 Imports 44.2 53.4 50.8 52.4 53.6 54.6 55.7 57.0 8 Net non-debt creating capital inflows (negative) 3.6 -1.5 -2.7 -2.6 -2.6 -2.6 -2.6 -2.7 9 Automatic debt dynamics 40.7 13.8 -11.4 -4.3 -3.7 -3.4 -4.0 -3.1 10 Contribution from nominal interest rate 1.3 0.9 2.4 2.1 2.5 2.5 2.4 2.4 11 Contribution from real GDP growth 30.2 0.6 -5.1 -5.5 -5.2 -5.0 -4.8 -4.4 12 Contribution from price and exchange rate chang 9.2 12.3 -8.8 -0.9 -1.0 -1.0 -1.5 -1.0 13 Residual, incl. change in gross foreign assets (2-3) -6.8 0.8 -8.1 -0.1 3.8 6.8 0.9 -2.5 External debt-to-exports ratio (in percent) 362.2 312.3 290.5 263.1 249.1 238.3 216.9 199.9 Scenario with key variables at their historical averages 145.4 136.4 131.1 126.0 117.3 110.6 -12.1 Sources: Latvian authorities and IMF staff estimates. 11 2.3. SOCIAL IMPACT OF THE CRISIS 25. The social consequences of the economic contraction in Latvia are deep and widespread. The World Bank team conducted a simulation analysis of the likely increase in unemployment and poverty due to the economic contraction (between 2008 and 2009)7 and updated these simulations for 2009 and 2010 to take into account newly-available data. The percentage of people in poverty is estimated to have increased from 18.9 to 21.3 due to the contraction in GDP (affecting mainly trade, hotels and restaurants, construction and manufacturing) and in employment (concentrated in the same sectors) during 2009 and 2010.8 9 The construction sector was particularly hard hit, with employment halving, contributing roughly one third of all job losses. The poverty gap, which measures the poverty deficit of the entire population, is also estimated to have increased, from 5.7 to 6.7 percent during the same period. 26. Unemployment almost tripled during the crisis. The labor market has been the most important channel through which the crisis generated adverse economic and social impacts for households. The rate of unemployment fluctuated around 7 percent on average over 2007-2008, according to Labor Force Survey data. With a high incidence of layoffs and little or no job creation, unemployment rose sharply starting in 2009 and reached a peak of 20.7 percent in the first quarter of 2010. Overall employment rates fell by about 15 percent between 2007 Q1 and 2010 Q1. 27. The lower-skilled segment of the labor force has suffered disproportionately from the deterioration in the labor market. The hardest hit groups have been workers with educational attainment that is equivalent to basic education or less, who experienced a 40 percent employment reduction between 2007 Q1 and 2010 Q1. Workers with educational attainment of general secondary school or less (but primary complete) also suffered a large drop in employment rates, falling by about 21 percent between 2007 Q1 and 2010 Q1. In contrast, workers with tertiary schooling experienced increased rates of employment between 2007 Q1 and 2010 Q1. 28. Nascent signs of recovery in the labor market are apparent, with employment starting to increase and the unemployment rate decreasing since 2010 Q1. At the same time, the overall activity rate has also increased. The quarterly unemployment rate has decreased to 17.2 percent in 2010 Q4 since its peak of 20.7 percent in 2010 Q1. Despite these improvements, the labor market recovery is slow, as is often the case with labor market rebounds after deep recessions. However, the employment rates of those workers with basic education or less are yet to show a significant improvement. Much of the improvement in employment conditions has benefited workers with higher educational qualifications. The latest data shows that there has not been a recovery in employment for the population with basic education or less. The likely explanation for this is that with high unemployment rates, employers have larger pools of 7 For detail about the simulation approach, see Ajwad, M.I., F. Haimovich and M. Azam (2009) “The Employment and Welfare Impact of the Financial Crisis in Latvia,” Mimeo, ECSHD, The World Bank, Washington, DC. 8 A household is in poverty if its total household income is below LVL 90 per capita, or approximately US$6 per person per day. In Latvia, this line is known as the “needy” line. 9 The at-risk-of-poverty rate (60 percent of the median household income)—used by the Central Bureau of Statistics in Latvia— decreased from 25.7 percent in 2008 to 21.4 percent in 2009. The at-risk-of-poverty rate could increase or decrease during a crisis depending on the impact on the median household’s income. However, the absolute poverty indicator generally increases during a crisis as household purchasing power decreases due to layoffs or wage reductions. 12 workers to choose from, and hence hire the more qualified workers. The impact of the recent increase in the minimum wage from LVL 180 to LVL 200 per month cannot yet be fully assessed. However, the rise in the minimum wage may cause demand for low skilled labor to fall. 2.4. SOCIAL SECTOR POLICY ISSUES 29. The program document for the SDPL 1 reviewed the structural issues in the social sectors as Latvia’s economic crisis came to a head in late 2008 and early 2009 (Report No. 51434-LV) as did the 2010 PER. During the boom years from roughly 2004 through 2008, Latvia was able to expand spending on health, education, and social protection without significantly expanding the percent of GDP spent on these sectors. Administrative expenses were also allowed to rise quickly. In health, for example, government expenditures rose from 3.3 percent of GDP in 2004 to 3.8 percent (a 16 percent larger share) in 2007, corresponding to a real spending increase of 59 percent. Education’s share fell slightly from 5.1 percent to 5.0 percent of GDP between 2004 and 2007, corresponding to a real increase in spending of 35 percent.10 30. In health, increased spending left the existing system in place and increased the complexity or intensity of care. Spending mushroomed on specialist and inpatient care, with little change in the volume of patients, raising the inflation-adjusted cost per inpatient episode in real terms by nearly 50 percent and specialist care and diagnostics per outpatient by almost 75 percent in just three years, over 2005-2008. In contrast, spending on primary care went up only by about 20 percent. Excess hospital capacity was not only left in place, much of it was rehabilitated. Between 2001 and 2008, hospital beds were reduced from 820 to 746 per 100,000 population, leaving this measure of hospital capacity 30 percent above Estonia's and 120 percent above the U.K.’s. The relatively high volume of hospital beds also reflects the underdevelopment of the system of long-term care. 31. In education, virtually no adjustment was made—either through the consolidation of schools or a reduction in the number of teachers—for the fast-diminishing population of school-age children after 2000. Enrollments in general education from grades 1 to 12 dropped by 95,874 to 263,944 (27 percent) from 2001 to 2008, while the number of teaching and nonteaching staff fell by only 437 to 33,605 (1 percent), and the number of schools fell by 82 to 992 (8 percent). As a result, by 2009 when the crisis arrived, there was scope for cost savings that might have little or no negative effect on outputs or outcomes in both the health and education sectors. 32. Despite high spending by the central government on costly untargeted family benefits and labor market programs, Latvia had only a few means-tested social assistance benefits targeted to households with low income when the economic crisis hit. Moreover, because identification of the poor and financing of assistance for them was a responsibility of localities, municipal governments had the power and the incentive to minimize spending when the crisis hit. As a consequence, when the unemployment rate started its swift rise to over 20 10 Health data come from the annual reports of the Health Payments Center. Education data come from Eurostat. “Chain-linked” GDP with the year 2000 as the base is from Latvia Central Bureau of Statistics. 13 percent in early 2009 and households faced with the income loss, Latvia found itself with a limited ability to offset the economic consequences for affected households. 33. In active labor market programs, the worker training and retraining program was characterized by direct provision and provider subsidization. Workers did not have the freedom to choose the training program to follow, nor were they free to choose the training provider for a given training program. As a result, training quality remained low as providers had little incentive to improve quality once they were accredited. However, the training programs were generally oversubscribed, most likely because of the stipends associated with the program. 34. Beginning in the mid-1990s, Latvia had put in place a pensions system designed to be fiscally sustainable over the long term. The system has public notional defined contribution (NDC) accounts complemented with private individual pension accumulation accounts. However, distortions had crept into the pension system’s expenditure side by the large increases in benefits that were made during the boom years. Between 2005 and 2009 the average pension for new retirees grew 69 percent. Two changes in pension policy encouraged a rapid and unsustainable rise in benefit spending: first, the expansion to all retirees of what was originally a targeted supplement to top up low pensions; and second, the introduction of generous benefit indexation to the growth of salaries as well as to price increases. During the crisis, the robustness of the system was further reduced by a government decision to divert a portion of second-pillar contributions to finance current payouts. 35. The World Bank has provided support to reform education, health, and social safety nets. The main purpose of this loan series is to support the establishment of an emergency safety net on October 1, 2009, and to assure adequate funding for it in the 2010 and 2011 budgets. At the same time, the Bank provided assistance to the social sector ministries to identify opportunities for structural reforms as part of their efforts to cut back spending in 2009, 2010, 2011, and 2012. This supported efforts to reduce the budget deficit to below a ceiling of 3 percent as Latvia aims to meet the Maastricht criteria. Information about reforms in each of the social sectors (education, health and social protection) and an assessment of government implementation in 2009 and 2010 is given in Annex 3. Annex 4 gives an account of the policy issues in public administration. III. THE GOVERNMENT’S REFORM PROGRAM 3.1. FISCAL CONSOLIDATION AND THE SOCIAL SECTORS 36. The government is committed to joining the Eurozone in 2014. This will involve continued fiscal austerity measures in the 2012 budget. The Cabinet of Ministers is committed to implementing fiscal consolidation through sound, structural reforms, including in the social sectors. The most important measures being undertaken in education are the introduction and continuing implementation of “funds follow the student” per-capita financing in the 2009/2010 and 2010/2011 academic years, and the planned consolidation of vocational schools under the management of municipal governments. In the health sector, the key reforms are a reduction in the number of hospital beds, more effective use of co-payments to manage demand for services, and reductions in excessive costs by shifting health care toward out-patient and hospital day-care 14 procedures. In social protection, the government has committed to improving the long-term financial sustainability of pensions and other forms of social insurance. 37. The government has sought to protect the poorest and those that have lost jobs by increasing social safety net spending. The government started implementation of the ESSNS on October 1, 2009. This ensures that critical social services are maintained and that the impact of the economic contraction on households is cushioned. The strategy 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 subsidize their pharmaceutical costs; (iv) improve access to and use of alternatives to inpatient treatment for the entire population with subsidies to the poor for these services; (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 growing number of unemployed who are not covered by unemployment insurance or other social support, the government has (viii) fortified the ESSNS by expanding and rapidly deploying labor-intensive emergency public-works programs. The government is committed to keeping the ESSNS in place until end-2011. Particular attention was paid to governance aspects of the ESSNS, through the special audit of the program that was undertaken (see paragraph 83 and Annex 5). Annex 1 contains the government’s Letter of Development Policy, which gives give more detail on policies supported by the operation. 3.2. CONSULTATIONS 38. The government has consulted with stakeholders affected by the fiscal consolidation and the structural reform program in the social sectors. Each line minister has held discussions with stakeholder groups. According to Latvian law, draft reform proposals have been published online, and social partners have been invited to participate in policy debates. The government has co-operated with its social partners to get input on the overall strategy and structural reform program. All ministries have published budget amendments on their web pages, as well as strategy documents, monthly/quarterly implementation statistics, details of consultations with non-governmental organizations and information on entitlements for social service users. The World Bank team has accompanied government consultations with non- government organizations (NGOs) representing constituents affected by the fiscal consolidation and structural reforms.11 Consultation discussions have been difficult, but frank. There is a growing understanding of the circumstances that lead to Latvia’s economic contraction. 39. To increase public information and transparency, the SDPL program includes key actions to publicize the activities and performance of the government. For the first operation 11 These include the Association of Heads Teachers of Latvian Education and Association of Pre-Schools Teachers, the Association of Local Governments, Association of International Research-based Pharmaceutical Manufacturers (AFA), the Chamber of Commerce and Industry, the Employers’ Confederation of Latvia (LDDK), the Hospital Owners Association, the Latvian Academy of Sciences, the patients organization SUSTENTO, the Trade Union of Education and Science Employees (LIZDA), and the Union of Medical Professionals, the Trade Union of Specialists of Health and Social Work. The list given here is not exhaustive: the Ministry of Health alone has consulted with eighty-nine NGOs. 15 in the program, a critical prior action was that the government publishes its ESSNS on the internet and in the local media. This action was intended to increase the level of public awareness of the measures the government is taking to lower the social costs of fiscal consolidation and the economic crisis. For the proposed second operation, the State Audit Office of the Republic of Latvia published their audit report of the implementation of structural reforms and the ESSNS, and the government published quarterly implementation reports for the SDPL program on the internet. The aim is to inform the large number of involved NGOs and citizens on the SDPL activities in order to inform discussions and to be in line with the general framework of dissemination and consultation that the government has promoted. IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM 4.1. LINK TO COUNTRY PARTNERSHIP STRATEGY 40. Latvia joined the World Bank in 1992, and graduated from Bank financing in 2007. As a borrowing member, it received analytical and advisory support and loans totaling US$416 million for 19 operations that have supported government actions to implement structural reforms, improve public finance management, modernize the welfare system and the health, education, and infrastructure sectors, and reduce pollution in the Baltic Sea. The last Country Assistance Strategy for 2002-2005 was launched during the period when Latvia’s overriding objective was to prepare for accession to the European Union—a goal which was achieved in May 2004. Upon graduating from Bank financing, Latvia became a donor to the International Development Agency (IDA) of the World Bank Group during the 15th replenishment of IDA. 41. The global financial crisis led to an exceptional request by the government of Latvia for renewed access to World Bank lending resources. The proposed operation is consistent with the Bank’s Articles of Agreement. Pursuant to Article III, Section 4 (ii), the Bank may make loans to any member country, subject to Board approval, if “[it] is satisfied that in the prevailing market conditions the borrower would be unable otherwise to obtain the loan under conditions which in the opinion of the Bank are reasonable for the borrower.” The crisis has exposed underlying macro-vulnerabilities, and the deep economic contraction that followed left Latvia with significant borrowing needs and constrained access to external financing on reasonable terms. The World Bank delivered exceptional support to Latvia through SDPL assistance comprising two parallel programs. To accompany this, a PER was conducted jointly with the IMF in 2007, and a follow-up PER was conducted as part of a Bank program of technical assistance in 2010. The proposed operation is the final operation under the SDPL support program and would complete World Bank crisis lending activities in Latvia. 4.2. RELATIONSHIP TO OTHER BANK OPERATIONS 42. Prior to graduating from World Bank borrowing, Latvia maintained an active series of projects with the Bank. The program draws from these investment, technical assistance, and adjustment operation activities as well as AAA. Structural reforms to social protection in the 1990s were supported with resources from the Latvia Welfare Reform Project, which closed with a highly satisfactory rating in 2003. The objective of the project was to support the development of a more efficient and effective social welfare system. The Latvia Health Reform Project—approved in 1998 and which closed in 2001 with a satisfactory 16 outcome—supported government implementation of a health services restructuring strategy. The Education Improvement Project helped to increase capacity within the Latvian education sector for continuous improvement of education outcomes by strengthening the management of both resource and inputs and the learning process. 43. As part of the current international program of support for Latvia, the Bank approved a Financial Sector Development Policy Loan on September 22, 2009 and a First Safety Net and Social Sector Reform Development Policy Loan (First Special Development Loan, SDPL 1) on March 4, 2010. The Financial Sector DPL, which disbursed on November 4, 2009, supports a financial sector reform program, including measures aimed to contain the financial sector crisis, and structural reforms aimed to enhance the resilience of the system to future potential shocks. The crisis management measures include measures to strengthen the banking sector’s solvency and liquidity, as well as measures to facilitate the renegotiations of corporate and mortgage debts with the objective to avoid the closure of viable firms and the foreclosure of residential properties wherever possible. The long-term structural reforms include strengthening banking sector regulation, including asset quality and capital adequacy regulation, strengthening prudential supervision, especially through the adoption of a Prompt Remedial Action Plan by the supervisory authority, and conducting a consumer protection review. 4.3. COLLABORATION WITH THE EC AND IMF 44. The Bank program is an integral part of the international rescue package of the IMF, EC, EBRD, Nordic countries, and other lenders. The total rescue package amounts to EUR 7.5 billion, of which the World Bank’s share is EUR 400 million. The Financial Sector loan was for EUR 200 million. The SDPL 1 operation in the Safety Net Support and Social Sector Reform program was for EUR 100 million. The proposed SDPL 2 would be for the final EUR100 million of World Bank support. The IMF operation was approved on December 23, 2008 and the EC operation on January 20, 2009. The World Bank team has collaborated very closely with the IMF and EC teams, and discussed complementarities and mutually-supportive measures. The IMF has completed its staff visit for the Fourth Review under the Stand-by Arrangement, and the IMF Executive Board meeting to discuss the Fourth Review is scheduled for May 25, 2011. 4.4. ANALYTICAL UNDERPINNINGS 45. As macroeconomic imbalances became apparent, the government asked the IMF and World Bank to conduct a PER in the summer of 2007. This assessment served as an analytical input for the government’s initial program, revisions to the 2009 budget, and formulation of the 2010 budget. It examined public investment and outcomes in the social sectors and public administration, and identified a number of critical structural reforms. In 2010, the World Bank updated the 2007 PER of the social sectors and public administration. The sector analytical background presented in this document draws on the 2010 PER. 46. The Latvia SDPL lending program has been accompanied by a technical assistance program covering social sector and public administration reform. The Bank has limited technical assistance resources, which are being deployed according to the following strategic priorities to provide the technical input needed (in order): (i) to design and implement their 17 ESSNS; (ii) to monitor and (where appropriate) evaluate the impact of ESSNS measures; and (iii) to evaluate the state of the public expenditure program in 2010 in light of the extraordinary adjustments that have taken place in 2009 and to assist the government in making strategic decisions as further adjustments will be required in 2011 and 2012. 47. The 2010 PER (completed in September 2010) examined options for fiscal consolidation and structural reforms in health, education, social protection and public administration. The results of the PER process were shared with the government during numerous visits to Latvia from March to December 2010, with the aim of informing the budget formulation process. This technical assistance investment forms the basis for the analysis of the main challenges facing the policy areas to be supported by the SDPL 2 operation. In addition to the 2010 PER, the World Bank has provided advisory support on the set-up of the impact evaluation program for the Workplaces with Stipend (WWS) program. V. THE PROPOSED SPECIAL DEVELOPMENT POLICY LOAN 5.1. OPERATION DESCRIPTION 48. The Safety Net and Social Sector Reform Program focuses on measures to mitigate the social cost of fiscal consolidation and to ensure a robust safety net for households affected by the crisis. This is the second (proposed operation) of a program of two loans focused on social safety net support and medium-term social sector expenditure reforms. The objectives of the program 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. Given the deep impact Latvia has suffered in the wake of the global crisis, and due to the emergency nature of this program, the first operation focused mainly on the first and second objectives. The proposed second operation will expand this focus to the third objective, seeking to support the structural reform program that the Latvian Government has put in place for the social sectors. The results for each of the components of the program are summarized in the following policy sectors, and the updated results and monitoring framework is given in Annex 8. 49. The government has made good progress in implementing the SDPL program. Latvia is on track to meet nine out of the eleven of the triggers for the second operation. Two of the triggers have been merged, so the loan now has eight prior actions. The explanation for the removal of one of the triggers on a social assistance evaluation report and another on health are given in the following section. Annex 2 gives a description of the status of each trigger for SDPL 2, compares them to the proposed prior actions and gives a summary of progress under the proposed prior action. The proposed SDPL 2 would support the expansion and deepening of these reforms in four areas: (i) Implementation of the Emergency Social Safety Net; (ii) Social Protection; (iii) Health; and (iv) Education, as described in the following sections. 5.2. POLICY AREAS 5.2(a) Overall Implementation of the Emergency Social Safety Net 50. Latvia developed its ESSNS between June and August 2009, and started implementing it on October 1, 2009. The Bank’s program supports the deployment of 18 emergency safety net measures to mitigate the impact on households of fiscal adjustment and the economic contraction. The first operation in the SDPL program supported the implementation of the ESSNS to ensure adequate emergency safety net financing for education and health services, and social protection programs. The proposed prior actions for the second SDPL focus on continued implementation, and adequate financing and monitoring of the ESSNS (see Box 2). Furthermore, the program is designed to increase public awareness, transparency and accountability of government measures in the social sectors. The ESSNS package of measures is expected to expire at the end of 2011. Box 2. Ensure adequate emergency safety net financing for education and health services, and social protection programs Actions taken prior to Board presentation of SDPL 1  The Borrower's Cabinet of Ministers approved an Emergency Social Safety Net Strategy (ESSNS) for the period from October 1, 2009 through December 31, 2011 on September 8, 2009 (Protocol No. 56, 78§).  The Borrower has published the Emergency Social Safety Net Strategy on the internet, and in local media on December 21, 2009.  The Borrower has provided adequate resources for and put in place a performance monitoring and impact evaluation plan, making use of existing monitoring mechanisms, administrative data, and surveys. Prior action for Board presentation of SDPL 2  The Borrower, through the national and local government agencies, has been satisfactorily implementing the Emergency Social Safety Net Strategy as indicated by the maintenance of adequate budget financing in 2010 and 2011, and evidenced by regular performance monitoring reports submitted to the Cabinet of Ministers and publishing them on the web page of the Ministry of Welfare.  The Borrower, through the Auditor General, has conducted on October 28, 2010 an independent audit of the Cabinet of Minister's performance in implementing the Emergency Social Safety Net Strategy. Outcome  Emergency safety net measures are deployed and remain in place through 2011.  Information on government’s implementation of ESSNS and structural reforms is independently assessed and publicly available.  The independent Audit Report on ESSNS implementation is completed and published on the internet in October 2010, and the action plan of audit recommendations is put in place by October 2011. Note: A supporting measure, which was not a prior action for presentation of the operation to the Executive Board is indicated by italics. 51. The first prior action for the SDPL 2 ensures adequate financing and monitoring of the ESSNS in 2010 and 2011. The two indicative triggers given for the SDPL 2 were: “(i) National and local government agencies are satisfactorily implementing the ESSNS, maintaining adequate financing in 2010 and 2011”; and “(ii) The Borrower has submitted regular performance monitoring reports on the ESSNS implementation to the Cabinet of Ministers and published them on the web page of the Ministry of Welfare”. These have been amalgamated into one prior action for the second loan “The National and local government agencies are satisfactorily implementing the ESSNS as indicated by the maintenance of adequate budget financing in 2010 and 2011, and evidence presented in regular performance monitoring reports submitted to the Cabinet of Ministers and published on the web page of the Ministry of Welfare.” 19 52. The ESSNS continued to be monitored on a quarterly basis and financed adequately in 2010.12 The budget for ESSNS actions supported by the World Bank was increased by 37 percent by a supplemental budget in 2010. The planned budget including the supplemental increase was LVL 81.3 million in 2010. By the end of 2010, LVL 79.1 million was spent, close to 97 percent of the planned amount (Table 4). The expenditure needs of the Workplaces with Stipend (WWS) program was higher than anticipated initially, while the demand for the resources allocated for pupil transportation was lower than expected. TABLE 4. STATE BUDGET FOR ESSNS MEASURES, 2010 AND 2011 (in millions of Lats, nominal) 2010 plan 2010 revised 2010 actual 2011 plan Total 59.2 81.3 79.1 75.8 GMI State co-financing 7.0 9.7 8.7 9.1 Housing benefit State co financing 2.8 3.5 3.0 3.1 Pre-primary and primary school curriculum improvement 0.6 0.2 0.2 0.9 Local government schools, teacher salaries for 5- and 6-year old education 12.3 12.3 12.3 12.3 Transporting students from closed to new schools 5.9 4.2 3.5 1.0 ESSNS health care measures 24.2 24.2 24.2 30.3 Workplaces with Stipend program 6.4 27.2 27.2 19.1 Memo item: Total ESSNS Spending (as a percentage of GDP) 0.4 0.6 0.6 0.6 Source: Ministry of Finance Note : Table includes all ESSNS measures supported by the World Bank 53. Budget resources allocated for the WWS program in 2011 have been supplemented by a reallocation of European Social Fund (ESF) resources, which brings the available resources to an acceptable level. The initial budget allocation for 2011 was not sufficient for the needs of the unemployed not covered by unemployment insurance, with the resources for the program in 2011 having fallen by 45 percent compared to 2010, representing a halving in the number of estimated participants. The EU’s ESF finances a large share of the program. The government requested a reallocation of LVL 5 million of ESF resources into the WWS program. The EC accepted the proposal in March 2011 and the Cabinet of Ministers approved the proposal on April 12, 2011. The additional funding brings the WWS funding to about LVL 19.1 million (compared to LVL 27.2 million in 2010). 54. The WWS budget for 2011 is somewhat lower than would be needed to maintain the same number of full-time equivalent places as in 2010. However, it is likely that the allocation may prove adequate if the labor market conditions for potential participants improve in 2011. The government plans to phase out the program by the end of 2011. This is consistent with the plan for the World Bank-supported ESSNS, which when set up was given an expiry date of end- 2011. As a first step toward winding down the WWS, the government intends to decrease the stipend from LVL 100 to LVL 80 per person per month from July 1, 2011. The reduction in the stipend is intended to lead to a narrower targeting of the program, meaning that poorer people will demand the program than those who would have demanded the program if the stipend was 12 Available at http://www.lm.gov.lv/text/1843. 20 LVL 100. Those that quality for the WWS stipend from July 1, 2011, will only participate until the end of 2011. The motivation for the stipend reduction is that as the economy recovers only very poor households should access the WWS program, and households with other options should take up employment opportunities as they arise. A risk is that if the employment situation does not improve for the affected groups in 2011, it may be necessary to increase the WWS resources to allow for more than the planned number of workplaces or to ensure that those queuing for the program have access to Guaranteed Minimum Income (GMI). 55. The second prior action supports the independent audit of the Emergency Safety Net, which government completed in October 2010. As part of the independent audit of the ESSNS, the Borrower has evaluated coverage and targeting performance of municipal authorities administering mandatory social assistance transfers; identified problems; and agreed to an action plan of corrective measures to reduce targeting errors. A report published by the State Auditor’s Office in October 2010 on the implementation of the ESSNS identified numerous targeting errors and inconsistencies, was particularly critical of the targeting systems in place, and identified important improvements for municipal social assistance offices and the Ministry of Welfare.13 In an action plan to rectify the weaknesses found in the system, the Ministry of Welfare—as the institution responsible for national policy and coordination of social assistance—and other involved government agencies have agreed to undertake twenty-four measures by October 2011 to strengthen compliance and the implementation of the ESSNS (see Annex 5 for the Action Plan for the Implementation of the State Audit Recommendations for the ESSN). The Action Plan measures are grouped around improving monitoring and compliance with the rules for beneficiaries of the seven ESSNS measures supported by the World Bank loan. The actions will serve not just to fortify the ESSNS, but also to improve nationally- and municipally-administered social programs. In particular, the action plan goes some way to meet problems of decentralized management of social assistance through clarifying qualifying criteria and improving controls. 5.2(b) Social Protection 56. In social protection, the proposed second operation would support actions to (i) re- instate the contribution rate for the second pillar pension system and (ii) secure State-level financing of the GMI benefit of at least 50 percent of the cost. 57. As a third prior action, the proposed operation would support a modified goal to restore the contribution rate for second pillar pensions to 6 percent by January 1, 2013 (Box 3). The government’s original target to restore pensions had been to effect the change on January 1, 2012. Given the continued fiscal difficulties, the government has decided to retain the 6-percent target, but moved the timetable for its attainment to January 1, 2013. The trigger in the SDPL 1 program was designed to reflect the policy commitment of the government to reinstate second pillar contributions to 6 percent. The prior action has been, consequently, altered to change the date from 2012 to 2013 due to fiscal pressures. The government passed the necessary changes to the Law on State-Funded Pensions (Amendments to the Law on State Funded Pensions (Grozījumi Valsts fondēto pensiju likumā ("LV", 206 (4398), 30.12.2010)) on 13 The independent audit report has been published on the internet and discussed publicly. The State Audit Report on the implementation of the ESSNS is publicly available at http://www.lrvk.gov.lv/ (including a summary in English at http://www.lrvk.gov.lv/upload/PB_soc_drosiba_28Oct2010_EN.pdf ). 21 December 20, 2010. The provision passed sets out that the 6-percent contribution rate to the funded tier will be effective on January 1, 2013. In April 2011 discussions, the government has re-iterated its commitment to the sustainability of the three pillars of the pension system and to restoring contributions to the second pillar to 6 percent of gross salaries by 2013, provided that the budgetary situation improves in line with forecasts. 58. As a fourth prior action, the government has ensured adequate funding of the GMI program in its 2011 budget to cover 50 percent of its cost from State (central government) resources. The government will continue to maintain the strengthened safety net for the poorest households by co-financing from the State budget the GMI and housing benefits in 2011. Both these programs were fully financed by local governments prior to the crisis. GMI and Housing benefits are the only mandatory poverty targeted last resort social assistance programs (LRSA) in Latvia and ensuring these programs have adequate financing while unemployment rates remain high is crucial to protect the most vulnerable households from the effects of the crisis. The targeting criteria for housing benefits is determined at the municipal level, but GMI is a top-up benefit provided to all households whose per capita income is lower than LVL40 per month per adult and LVL 45 per month per child. During the crisis, as municipality revenues fell and as demand for LRSA programs increased, municipalities began to ration new LRSA applications. The State government’s decision to co-finance LRSA spending, introduced in the ESSNS in 2009 (co-financing 50 percent of spending on GMI and 20 percent of spending on the housing benefit) helped to ensure adequate financing for these programs at the local government level. 59. The government has maintained the 2011 budget allocation for State co-financing of the GMI program at close to actual spending levels in 2010. The provision for co-financing of GMI has been made within the ESSNS budget (discussed in section 5.2 (a)). The latest data shows that while unemployment is on average slowly falling, there has not been a recovery in employment for the population with basic education or less. In addition, the number of people defined as needy and the number of GMI participants have been steadily increasing throughout 2010. Keeping state resources for the GMI program in 2011 at close to the levels of 2010 will contribute much to ensuring that local governments, especially those that cover poorer communities, have adequate resources to meet social assistance needs in 2011. 60. The government is making important changes to improve the performance of the GMI social assistance program based on the State Auditor’s report. The State Auditor report mentioned under 5.2(a) above led to an agreement between the Ministry of Welfare and other involved government agencies on an action plan to address the findings of the Report. These were: (i) some ineligible households were being enrolled into the GMI program because all the regulatory requirements were not being met; (ii) changes in welfare status were not always known because of a lack of coordination across institutions; and (iii) rules were not enforced uniformly, meaning that some types of households were held to a different standard than other households. An action plan has been agreed to remedy these weaknesses through compliance and control measures to be put in place by October 2011 (see Annex 5). 61. The SDPL 2 indicative trigger for the Borrower to carry out an evaluation of social assistance programs across municipalities is subsumed under the second prior action referred to above (audit of the ESSN). The indicative trigger was “The Borrower has prepared an evaluation of how uniform standards of coverage, targeting, benefits, and financing of 22 municipally administered, mandatory social assistance programs are implemented across governments, based in part on an evaluation of the experience under the ESSNS.” The indicative trigger has been dropped, because rather than one assessment, this activity is now viewed as a sequence of evaluations that need to be carried out building on the data collected and recommendations of each assessment. Two key evaluations are the audit report and the impact evaluation of the WWS program. Box 3. Social protection Actions taken prior to Board presentation of SDPL 1  The Borrower enacted an amendment to the Law “On Insurance in Case of Unemployment” effective as of July 1, 2009, which extends the pay-out period of unemployment benefits to 9 months, effective until December 31, 2011, which, inter alia, provides for a decrease in the eligibility requirement for unemployment benefits to 9 months of contributions in the previous 12 months.  The Borrower: (a) enacted an amendment to the Regulations of the Cabinet Ministers No. 1070 dated October 1, 2009 and No. 1489 dated December 1, 2009 to increase the Guaranteed Minimum Income (GMI) benefit amount to LVL 40 per adult and LVL 45 per child in a household; and (b) allocated financing in the 2010 budget of, at least, 50 percent of the cost of the GMI from state funds, with local governments funding the other 50 percent.  The Borrower introduced amendments to the Cabinet of Ministers Regulation No. 166, dated July 14, 2009 to provide temporary employment for the unemployed not covered by unemployment insurance effective as of August 8, 2009. Prior actions for Board presentation of SDPL 2  The Borrower has enacted an amendment to the Law on the State Funded Pensions which increased the contribution rate to the funded pension pillar to 6 percent of a worker's salary starting from January 1, 2013.  The Borrower has allocated at least 50 percent of the cost of the guaranteed minimum income in the 2011 budget, with local governments funding the other 50 percent. Outcomes  Percentage of unemployment benefit recipients whose benefits are extended by the reform to reach 22% in 2011.  Individual contributions to the funded pension pillar have risen from 2% in 2009 to 6% from January 1, 2013.  Municipalities have sufficient financial resources to make timely payment of GMI benefit to all eligible individuals.  Participants in the emergency public works program equaled on average 19,000 (16% of the unemployed not receiving unemployment benefits) and 16,500 (13% of the unemployed not receiving unemployment benefits) in 2010 and 2011, respectively. 62. Through technical assistance, the World Bank will continue to support the government’s efforts to evaluate the impact of the WWS program (see Annex 6). Bank teams have already assisted the government with advice on evaluation design, survey questionnaire formulation, and sampling strategy. The impact evaluation of the WWS is particularly important for Latvia because a culture of rigorous evaluation is nascent. In addition, given the importance and visibility of the WWS program in the government’s ESSNS, information and learning about the efficacy and efficiency of the program will be useful when planning future crisis responses in Latvia and elsewhere in the region. As part of the evaluation, a dataset of 3,000 households has been produced and is being analyzed by researchers at the University of Latvia. 23 63. The government is in the process of formulating a longer-term employment policy strategy. The longer-term vision for active labor market programs in Latvia is a demand-driven model of worker training and retraining. The shift to a demand-driven model entails a move from the training provider subsidization model to one that subsidizes eligible workers using vouchers. The voucher recipients would have the freedom to choose the training course and the provider. Over time, the emergency public works program would be phased out and a voucher-based worker training and retraining program would be established. This move is an important part of the government’s plan to shift away from a the crisis response of providing immediate income support, to the “steady state,” longer-term stance of building and sustaining the human capital to keep Latvia’s workforce productive and competitive. However, recognizing the need to help participants cover their costs during this transition, a LVL 70 a month stipend is included. 5.2(c) Health 64. The introduction of a safety net for health care by the Ministry of Health in 2009 was a policy departure; previously, there had been limited focus on health care access for the poor. Prior to 2009, the Ministry of Health managed an exemption list of 26 types of patients who paid zero or a reduced copayment when it was required. Expenditures for these exemptions were dominated by children under 18, patients being treated for mental illness, pregnant women, and cancer patients. Only two of the 26 groups qualified specifically on income grounds: “officially recognized poor people,” and “patients whose monthly pension is less than 60 Lats.” They were required to pay half the normal co-payments but accounted for only 2.4 percent of the total exemption subsidies provided by the Ministry of Health in 2008. After paying the 50 percent co-payment upfront, individuals could seek re-imbursement from municipalities. However, such assistance was not mandatory and fiscally-constrained municipalities had a budget motivation to limit assistance. 65. As a fifth prior action, the government has improved the coverage of health care co- payments for the needy (see Box 4). This measure replaces an indicative trigger that the Borrower develop a plan to target all health subsidies through the means-tested approach of the safety net program.14 The Ministry of Health has created Latvia’s first centrally-financed health care program targeted to low-income households.15 Improvements to the program in 2011 14 As an indicative trigger for SDPL 2, the Ministry of Health originally proposed to eliminate all 26 existing categories of exemptions and fold them into the means-tested safety net program. That proposal was rejected by the Cabinet of Ministers, however, and a decision was made to maintain existing exemptions, while expanding the exemption scheme to cover eligible needy patients. The replacement prior condition represents an improvement of the means-tested targeting program that simultaneously contributes to financial protection for vulnerable households and to the restructuring of the health care system to improve services for all Latvians, particularly by de- institutionalizing care for the chronically ill and patients with mental problems that are better managed on an outpatient basis. 15 The “needy” line was defined as those households with a per capita income of LVL 90 per month. It is administered—but not funded—by municipalities, which certify eligible families. Because of the nature of some of the new services that are covered, both hospitals and family doctors also have an incentive to make sure qualified patients are enrolled. To encourage a reduction in the use of inpatient care, the poor also became eligible for free overnight “hotel” stays in hospitals (in connection with health interventions that had previously been inpatient procedures), for home care in the case of the chronically ill, and for day care for the mentally ill. In this way the Ministry of Health intended to incentivize providers to adopt alternatives to inpatient stays by subsidizing these options completely for the poor. Under the program, if the individual meets the “needy” or “near-needy” criteria, no cash changes hands because the provider or pharmacy claims the co-payment directly from the Ministry of Health. 24 include the following. First, support to the needy for pharmaceutical co-payments was originally designed as a stop-loss measure, fully financing prescription drugs each quarter after the patient had incurred LVL12.5 in out-of-pocket costs. In February 2010, this requirement was dropped, and eligible households now have no out-of-pocket payment requirement. Second, the income limit for eligible households for the pharmaceutical benefit was raised from LVL90 to LVL120. Third, eligibility for zero co-payments for most services was also raised from LVL90 to LVL120, and households with per capita income between LVL120 and LVL150 received a 50 percent subsidy. In August 2010, the Ministry began financing the entire cost of services for these patients, not just the co-payment, as providers did not have adequate financing outside the safety net to deliver the services. Fourth, fees for home care and day care for mentally ill patients were eliminated for all the population of Latvia in August 2010. These four changes were initiated over the course of 2010 and continue in 2011 as part of the ESSNS. Box 4. Health Actions taken prior to Board presentation of SDPL 1  The Borrower provided for an additional public health nurse for approximately half of the general practitioners and primary health care providers in the emergency social safety net and financed it fully in the 2010 budget pursuant to the Cabinet of Ministers Regulation No. 1630 dated December 22, 2009.  The Borrower allocated in the 2010 budget funds for households with per-capita income less than half the minimum wage, at adequate levels, to finance: (a) an exemption from co-payments for general practitioner, outpatient, specialist, and inpatient services; (b) an exemption from pharmaceutical charges above LVL 50 per year per person; and (c) an exemption from the cost of overnight hotel stays in hospitals, home care for those with serious diseases and day-care centers for those with mental diseases. Prior actions for Board presentation of SDPL 2  The Borrower, through the Cabinet of Minister’s Regulations # 1046, dated December 19, 2006, as amended, has implemented the measures to: (a) strengthen the exemption program for health payments by eliminating all out-of-pocket health payments for visits, tests, and pharmaceuticals for patients classified as "needy"; (b) provide a limited package of benefits for patients as their incomes exceed the "needy" line; and (c) provide outpatient psychiatric and home care for chronic diseases without cost to all the population of Latvia.  The Borrower has strengthened primary health care services program in the 2010 and 2011 budget through a planned expansion of the additional public health nurse or physician’s assistant program to primary care practices and a family physician advisory telephone service. Outcomes  Increased hours and outreach services at the Primary Health Care level to compensate in part for reduced financing of specialist and hospital care.  People from households certified as needy are exempt from health service copayments; are receiving subsidized prescriptions; and retain access to critical health care services.  The share of GPs with an extra public health nurse increased from 0% in 2009 to about 21% of GPs in 2010, and is to reach 36% in 2011. 66. As a sixth prior action supported by SDPL 2, the Ministry of Health has prepared a plan for further strengthening primary health care service and general practitioners and has started to implement this plan. The government strengthened, initially, approximately 300 general and primary care practices by adding an additional public health nurse (with a possibility of reaching 500 practices by end-2011). The purpose of this intervention was to increase hours and outreach services at the primary care level. In implementation, the ministry added a poverty criterion to determine eligibility of practices for this supplement, so that the initial deployment 25 targeted poorer rural practices. Based on the positive initial experience with the intervention—an increase in patient visits by 30 percent in practices with the additional nurse—the Ministry of Health plans to deploy it to all primary care practices over the next several years. In addition, the Ministry of Health used safety net funds to begin developing a family physician advisory telephone service to connect patients to a doctor after hours and on weekends (when family doctor offices are closed), a low-cost method to extend access to primary care services 24 hours a day across the country. This service is aimed at the chronically ill and others who have an acute episode during off hours that otherwise might precipitate an emergency ambulance call or an emergency hospital visit. This service begins May 1, 2011. 67. The safety net implementation by the Ministry of Health in 2010 is judged to be in line with its commitments. While the Ministry of Health substantially overestimated the take-up of the program, month-by-month volumes increased in 2010 and it used the extra funds to make pro-poor adjustments to the program, such as dropping the deductible for covered pharmaceuticals, reducing the ratcheting effect of the single cut-off for eligibility (by adding income levels with reduced benefits), and making sure hospitals could finance services for the poor by fully covering the cost (not just the co-payment). As noted above, even with these expansions, funds were left that were used to encourage structural reforms to shift, where appropriate, inpatient care to day hospital settings, to outpatient settings for a larger share of mental services, and to home care for noncomplex longer term care. 68. The State Auditor’s review of the ESSNS concluded that there were several problems with implementation of the health portion of the program. First, because subsidies for co-payments and pharmaceuticals depend on certification of eligibility for the GMI allowance, the auditor concluded that these subsidies are put in jeopardy by the poor performance of the certification system (as explained in the social protection section below). Second, the initial implementation of the additional nurse or physician’s assistant program targets physicians with relatively more needy people on their rosters of registered patients. The auditor found that there was no systematic effort to match the entire patient list against a local welfare department’s list of eligible households. Instead, family doctors tended to justify their applications for an additional nurse by calculating just the proportion of patients eligible for safety net assistance who showed up at the office in a given time period. Third, the auditor found that compensation to hospitals for hotel costs of needy patients exceeded the cost of providing these services, that the services were poorly specified (2 of 44 hospitals only provide a bed, but 18 provide a bed, food, and medical supervision, for example), and that some hospitals charged private patients less for the same service than they charged the government for patients it covered. 69. The Ministry of Health is required to report by October 2011 how it has addressed these problems. It considers the first issue to be outside its control, but will work with the Ministry of Welfare and local governments to address it in the short term. On the second issue, the Ministry of Health will ask GPs to cross check their lists with the municipality and has the power to remove the subsidy for the second nurse if they do not cooperate. By expanding the program to all GPs though, this issue will ultimately become moot. On both issues, the Ministry of Health would invest more effort to solve the problem permanently if the safety net programs are continued beyond 2011. In that case, the first best solution from their standpoint would be a nationally automated certification system so they could match it to their payments center patient 26 data. A second best solution would be to work directly with local governments to improve certification for the health programs, which is less efficient, but the ministry already works with them regularly on other health matters. Therefore, the Ministry of Health is confident that it could overcome the problem. On the third issue, during the next six months the overnight stay hotel service will be reviewed and better defined, and the tariff will be modified to be in line with costs for the service. 5.2(d) Education 70. Latvia has met the indicative triggers in education (prior actions seven and eight in Box 5). In education, there are two indicative triggers for the safety net. First, the government agreed to maintain funding for 5- and 6-year old pre-school education. In the Ministry of Education and Science budget, some safety net funds were put aside for improving the curriculum and materials for pre-schools and primary schools. This activity is funded in 2011 at LVL 949,703. More importantly, the earmarked grant to local governments for pre-school education was LVL12.3 million in 2010 and remains the same in the 2011 budget. Enrollments in the program have steadily expanded, reaching 68,512 in 2008 and 71,057 in 2010, bucking the trend toward lower enrollments at all other levels of the system. This program is well institutionalized and will continue beyond the safety net. 71. The second program in the safety net is the provision of transportation to another school for children whose schools have been closed, if needed. The Ministry of Education and Science has established a benchmark that children will not have to spend more than 60 minutes being transported one way to school. However, the transportation program has been implemented by the Ministry of Regional Development and Local Government16, and two methods have been chosen. First, as part of the development of the ESSNS, the Cabinet of Ministers issued Order No 51 on August 4, 2009, which specified that beginning on May 29, 2009 and ending December 31, 2011, children enrolled in liquidated education and training institutions would be compensated 100 percent for travel to and from their homes to their new schools. The municipality was made responsible either to provide public transportation for these students or to buy tickets for them to use private transportation. The central government would compensate the municipalities for 90 percent of the cost up to LVL2.50 per school day per student. The forms and directions for reimbursement are on the State Regional Development Agency website.17 Prior to this, some local governments did provide funding for the transportation of students, but there was no particular program in place to ensure transportation costs were met for all children impacted by the closure of schools. 72. In addition, the Regional Development Agency prioritized those municipalities needing to transport students for the receipt of school buses. Eighty-eight municipalities were chosen to receive 209 school buses, of which 110 buses were financed under a project called “Implementation of local governments’ activities by ensuring transportation of school children and related support measures.” This project entailed a procurement process, which was begun in the fall of 2009, but the first buses were not delivered until September 29, 2010, a full 16 The Ministry of Regional Development and Local Government was incorporated in the Ministry of the Environment and a new institution—the Ministry of Environmental Protection and Regional Development—was established from January 1, 2011. 17 http://www.vraa.gov.lv/lv/merkdotacijas_pasvaldibam/skolenuparvadajumi/ 27 year after the safety net had been put in place. Fifty-nine municipalities were to receive 110 buses with total co-financing by Switzerland of LVL7.4 million under the Latvian-Swiss Cooperation Program. The procurement procedures were completed and bus purchase made by fifty-eight municipalities by the end of 2010. According to the Order No. 446 issued by the Cabinet of Ministers on July 30, 2010, and Order No. 539, on September 13, 2010, the remaining 99 schools buses were financed under the emergency social safety net. Most of these buses were purchased in 2010 and some will be acquired in 2011. Box 5. Education Actions taken prior to Board presentation of SDPL 1  The Borrower allocated funds in the 2010 budget for pre-primary education/child development programs for children starting 5 years of age.  The Borrower allocated in the 2010 budget funds to cover the cost of transportation of students whose schools have closed to replacement schools.  The Borrower added into the Regulation of the Cabinet of Ministers No. 740, dated August 24, 2004 social considerations, in addition to merit, to the awarding of state support to students in higher education by issuing a Regulation of the Cabinet of Ministers No.511 dated June 2, 2009. Prior actions for Board presentation of SDPL 2  The Borrower has allocated in the 2011 budget adequate financing for pre-primary education/child development programs for children starting from the age of 5 years old.  In the 2011 budget, the Borrower has allocated adequate financing to cover the cost of transporting students whose schools have closed to replacement schools. Outcomes  Enrollment of 5 and 6 year old children in free pre-primary programs is maintained at least at 94% for 5 year olds, and 98% for 6 year olds in 2011.  The Borrower has allocated in the 2011 budget adequate financing to cover the cost of transporting to replacement schools students whose schools have closed.  Share of children from closed schools receiving assistance for school transportation under the State- subsidized scheme reaches at least 77% in 2011 (it increased from 0% prior to May 2009 to 88% in 2010). 73. Thus, the government provided two options to municipalities to implement the program, and the Ministry of Environmental Protection and Regional Development has been tracking the affected students. In 2010, 76 percent of students from reorganized and closed municipality schools received transportation assistance (2023 out of 2657). The duration of the commute for the majority of students was within the 60 minute target each way, with only 0.5 percent of total number of students having to commute for over 60 minutes. The number of students who received transportation compensation particularly grew in the fourth quarter of 2010 and reached 2349 or 88 percent of the total number of affected students. So far for 2011, the percentage of affected students receiving compensation remains at 88 percent. The duration of the commute this year also has been kept within the target, with only 10-11 students having to make trips of longer than 60 minutes. At all levels, government made an effort to prevent children from dropping out of school and to offset transportation problems for them. The measures have been institutionalized and improved based on the experience of the first year, 28 along with the availability of additional transportation options ushered in by the new school buses.18 74. The SDPL 1 supported improving the targeting of state support to students in higher education. In this regard, an amendment to the Cabinet Regulation on Scholarships was passed on June 2, 2009 (No. 511), adding social considerations, in addition to merit, as a criterion for awarding state support to students in higher education. The result has been an increase in the proportion of students qualifying for state financial support for university based on social criteria, with the share increasing from 39 percent in 2009 to 60 percent at end-2010. However, a case has been initiated in the Constitutional Court of Latvia on the non-compliance of the June 2, 2009 Amendment (No. 511) with the constitution. This has the potential to reverse the reform. VI. OPERATION IMPLEMENTATION 6.1. POVERTY AND SOCIAL IMPACT 75. The policies supported by the SDPL program are expected to have a significant positive social impact, particularly by mitigating the adverse effects of the economic crisis for the poorer groups in society. The measures in the program have been designed to protect the funding of basic needs and services for low income households and to boost expenditure on programs targeted to people affected by the crisis. There follows a discussion of the likely impact of the measures supported by the program. 76. Increasing the eligibility threshold at which GMI is provided is expected to have a positive social impact. This reform has two impacts. First, it leads to higher coverage, and second, it results in larger transfers to poor households; in doing so, it lowers the poverty gap. In addition, the state co-financing of GMI allowed a substantial increase in the number of beneficiaries from 21 thousand in October 2009 to 75 thousand in February 2011 (covering 3.4 percent of the population). 77. Increasing the incomes of unemployed people either through augmented unemployment benefits or the provision of public works has positive poverty and social impacts. Unemployed people are disproportionately represented among the poor in Latvia. Improving their welfare without affecting incentives to seek regular work is crucial. In this regard, the government has taken two steps to raise the incomes of poorer households— increasing the unemployment benefit duration to 9 months and introducing the WWS public works program. Neither of the measures is likely to have a significant impact on incentives to rejoin the formal labor force when the labor market starts to recover, because the unemployment benefit top-up is low and because the public works stipend is lower than the minimum wage. 78. The health sector measures are intended to lower household financial vulnerability to the cost of treatment and to broaden access to health care. With more people in poverty and losing employment, medical care has become more difficult for people to privately finance. To mitigate these effects, the government is protecting financing for primary health care 18 See “Latvian Municipalities To Receive The First School Buses” at http://www.swiss- contribution.admin.ch/latvia/en/Home/News/News_Detail?itemID=195472 29 provision. Each person has a family doctor, and funding has been protected for this service. By adding funding for an additional public health nurse, the goal is to enhance the provision of primary care. It should be noted that while the health system is being re-oriented to strengthen primary care, needy households do continue to receive the care they require in health facilities free of charge. 79. The exemption of low-income households from health co-payments is intended to lower the burden of out-of-pocket payments substantially. Instead of having to pay first, and then apply for a partial refund from the municipal social assistance office, anyone in Latvia certified as needy is eligible to go to their family doctor and receive care free of charge, with the insurance system covering the co-payment. With referrals from their GP, other services are treated in the same way. In addition, pharmaceutical charges for covered drugs are financed fully once the patient has paid a small out of pocket. This measure is a complementary to the previous one—trying to get the needy households in particular to use their GPs. The measure is intended to eliminate variations across localities in assistance and create an incentive for the poor to seek care—exactly what is needed if the health system is to contribute to better outcomes. The impact of this measure was enhanced in 2010 when the Ministry of Health increased the needy threshold to cover a greater proportion of lower income earners. 80. The protection of financing for pre-primary education for 5- and 6-year old children that is supported by the SDPL program is likely to have long-term, positive social impacts. International evidence consistently shows that pre-school education performs a vital role in improving learning opportunities for children from low-income and poor households. Economic literature suggests that these programs have a strong impact on the later success of children in school. Local governments are charged with the provision of preschool education. Following the onset of the crisis, there was a risk that the poorer municipalities would not be able to continue financing these programs. Therefore, the World Bank supported the introduction of an earmarked subsidy from the state to protect the provisions of pre-school program education. In its absence, poorer localities would have had great difficulty in maintaining participation. Participation in pre-school programs has been maintained at the pre-crisis rate of 98 percent (for 6 year olds). Of total participants, 24.5 percent were from the lowest income quintile. 6.2. ENVIRONMENTAL ASPECTS 81. 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. Latvia’s environmental legislation and regulation is reinforced by EU environmental directives, including the EU’s guidelines on adoption of environmental assessments at the planning and programming level (June 2001) and the EU’s Environmental Liabilities Directive setting out liability for damage to properties and natural resources (April 2007). 6.3. IMPLEMENTATION MONITORING AND EVALUATION 82. In putting in place the ESSNS, procedures and adequate financing were incorporated to allow close monitoring of its implementation and evaluation of its impact. 30 On monitoring, the government regularly monitors around 35 indicators pertaining to the ESSNS and publishes the information on the internet.19 Baseline and updated data are provided by the respective specialized agencies for the pertinent functions and tracked according to the indicators and outcome measures as shown in the Monitoring and Results Framework (see Annex 8). 83. The State Audit Office of the Republic of Latvia (SAO) has evaluated the government’s performance in implementing the ESSNS supported by the proposed loan. The State Audit Office reports independently to Parliament and is a key institution for public sector accountability. The audit of the ESSNS has been has been disseminated by the State Audit Office, including being made publicly-available on the internet. The audit made extensive use of country databases and information to cross-check the implementation of the ESSNS at the national and municipal level against the stated policies and aims of the program. The audit came up with a number of recommendations for improving control and compliance for the implementation of the ESSNS strategy, and the relevant government agencies have agreed to an Action Plan to put in place these recommendations by October 2011 (see Annex 5 for the action plan). The audit and its use by the government represent an innovative use of country systems by the government of Latvia to monitor and evaluate a Bank-supported program, and to use the results to improve implementation and results. Given the complex nature of structural reforms and emergency assistance supported by the program of development policy lending, it would have been difficult for the Bank team to conduct such a comprehensive and thorough evaluation, and hence, the SDPL series has benefitted much from the institutional set-up for conducting audits of government programs in Latvia. 6.4. FIDUCIARY ASPECTS 6.4(a) Public Financial Management System and Budgetary Resources 84. The most recent World Bank diagnostic work are the 2007 and 2010 PERs, which focused on selected sectors of public expenditure. This analytical work was complemented for the purpose of this development policy loan with ongoing monitoring by the World Bank of Public Financial Management (PFM) reforms and previous diagnostic work conducted by other external organizations. 85. Overall, the Latvian PFM system is supported by a well-established legal and institutional framework. In recent years Latvia has introduced a series of PFM reforms and enhancements. The most significant reforms were the phased introduction of program and performance based budgeting, a medium term expenditure framework, capacity building at the State Audit Office, and implementation of the web based IT system supporting budget planning and execution, separate reporting on EU funded projects. These reforms have resulted in a stronger PFM system characterized by centralized cash management within a single treasury account structure, a web-based on line reporting system updated twice per month, timely submission of audited government financial statements and strong audit capacity at the State 19 The Ministry of Regional Development and Local Government had the initial responsibility for monitoring implementation of the ESSNS, and for submitting regular reports to the Cabinet of Ministers on progress. This responsibility shifted to the Ministry of Welfare following a restructuring of government ministries on January 1, 2011. 31 Audit Office (supported by private sector sworn auditors) involved in auditing the Bank of Latvia and local governments. 86. In spite of these accomplishments, there are still areas where further improvement is needed, especially in “on the ground" implementation of the most recent reforms. More efforts are required in: improvement of the budgetary framework allowing for counter-cyclical fiscal policies, proper implementation of medium-term planning and performance budgeting, adequate budgetary expenditures monitoring and enforcement also at the local government level, effective control over the state owned enterprises, better and more transparent tax administration, resolving deficiencies in accounting at the ministerial and local government level resulting in negative audit opinions, and stricter accountability framework for the sector ministries. 87. Based on the above status of PFM in Latvia, the fiduciary risk associated with the proposed program of operations is moderate. Nevertheless, some governance risks remain, and therefore the special role of the independent State Auditor is being maintained for this operation. 6.4(b) Foreign Exchange Environment 88. The Bank of Latvia is a member of the European System of Central Banks, and its legal independence is granted by the Law on the Bank of Latvia. The main objective of the Bank of Latvia is maintaining price stability in Latvia and the primary tasks include management of foreign currency and gold reserves. The Bank of Latvia acts also as advisor to the Parliament and the government with regard to the monetary policy, following ECB practice. The Bank of Latvia does not engage in any commercial activity, and its operations related to the execution of its tasks are mainly financed from income from the management of foreign currency and gold reserves. The Parliament has supervisory role over the Bank of Latvia. 89. The IMF completed a Safeguards Assessment of the Bank of Latvia in July 2009 and the World Bank reviewed external audit reports of the central bank. The Bank of Latvia financial management and operations are transparently disclosed and presented on its website. The Bank of Latvia’s annual financial statements are regularly audited by the audit commission, whose members are approved by the Auditor General of the Republic of Latvia, and the most recent audit reports, for 2007-09 have unqualified audit opinions. The IMF’s 2009 Safeguard Assessment concluded that the Bank of Latvia operates robust internal audit and control system. The recommendations included (i) establishing a formal arrangement between the Bank of Latvia and Treasury related to the Treasury’s reserves holding, managing and reporting, (ii) amending of the mandate of the Bank of Latvia audit committee, and (iii) improving the financial statement disclosures. The authorities have already started implementation of the IMF recommendations. 6.5. DISBURSEMENT, AUDITING AND PROCUREMENT 90. The proposed lending program will follow the World Bank’s disbursement procedures for development policy lending. Loan proceeds will be disbursed in one tranche to the foreign currency account at the Bank of Latvia. Disbursement will be made upon Borrower meeting prior actions and declaration of loan effectiveness and submission of a withdrawal application to the IBRD. At the request of the Ministry of Finance, the IBRD will deposit the proceeds of the loan into the deposit account at the Bank of Latvia which forms part of the 32 country’s official foreign exchange reserves. The Borrower shall ensure that upon the deposit of the Loan into said account, an equivalent amount is credited to the Single Treasury Account also kept in the Bank of Latvia and that is available to finance budgeted expenditures. Disbursements will not be linked to specific purchases, thus no procurement requirements will be necessary. The government shall maintain accounts and records with respect to the deposit of loan proceeds in the Bank of Latvia. If the loan proceeds are used for ineligible purposes as defined in the loan agreement, IBRD will require the Borrower to refund the amount directly to IBRD. 91. No additional fiduciary arrangements will be required beyond the role of the State Auditor. The Bank will not require an audit of the deposit account, but will require the government to provide a confirmation to the Bank in the form of an official letter from the Ministry of Finance on the amounts deposited in the foreign currency account and credited to the budget management system (Single Treasury Account) within 30 days of receiving the funds. As noted, the State Auditor will continue her special role in this second operation. VII. RISKS AND RISK MITIGATION 92. Risks to the program of lending are moderate to high. The risks are related to the economy, political support for the ongoing fiscal adjustment program, the negative social impact of the crisis, fiscal contraction, and continued high unemployment. Program risks include the possible adoption of a more gradual timetable for the restoration of second pillar pension contributions than that supported by the World Bank’s SDPL loan series. 93. Economic risks are moderate. Overall, the macroeconomic outlook has notably improved since the previous World Bank loan was approved and risks have diminished. Growth performance was better than expected in 2010, as was the fiscal outturn. An improvement in external conditions, particularly the fast recovery of key export partners was an important factor. The macroeconomic policies implemented prior to and during the global crisis have helped to reduce macroeconomic imbalances. The improved economic outlook and achievements of the government’s stabilization program have resulted in increased confidence in the exchange rate peg as evidenced by declining interest rates and a better outlook for sovereign credit ratings. But downside risks remain. These include a weaker than expected recovery in the EU and contagion from increased sovereign risk in some Eurozone countries. A worsening external environment could slow down growth in Latvia and possibly delay the ambitious fiscal consolidation plans. 94. Political risks are moderate to high. Political risks relate to the challenge of maintaining the support of the governing coalition and society at large for the ongoing fiscal stabilization program. The outcome of the parliamentary election on October 2, 2010—with the coalition now headed by Prime Minister Dombrovskis winning 58.6 percent of the vote—was an endorsement for the position of the Prime Minister who had campaigned on the need for additional fiscal cuts in order for the country to join the Eurozone by 2014. While these election results show some backing for the fiscal adjustment program, the 2011 budget consolidation discussions revealed tension within the governing coalition on identifying fiscal cuts to meet EC- IMF program targets. 95. Social risks are moderate. The severe economic contraction, high unemployment and large fiscal adjustment have entailed heavy social costs for Latvia. However, despite the difficult 33 economic conditions faced by the population, social stability has endured. The last large street protests occurred in January and February 2009. The lack of widespread protest and the results of the 2010 national election indicate a certain public acceptance of measures taken to stabilize the economy. The option for Latvians to migrate abroad—which was greatly facilitated by the accession to the EU in 2004—has provided an alternative opportunity for those facing unemployment or diminishing wages, and possibly reduced the social tension caused by the economic contraction. 96. The implementation risks for the program supported by the SDPL loan series are moderate for 2011. The performance of the government in implementing its ESSNS has been impressive, and the recommendations of the State Auditor will only improve it. It appears that budgetary provisions in 2011 are for the most part adequate, so risks associated with the ESSNS are expected to be minimal in 2011. With regard to the structural reform agenda, there has been much progress in the implementation of reforms by the Ministry of Health and Ministry of Education and Science. There is a risk that there may be a reversal of the structural reform program if fiscal pressures ease and political pressures for increasing schools/hospital infrastructure and staffing mount. On education, a court case has been initiated to challenge the constitutionality of the addition of social considerations to the criteria for awarding state support to students in higher education. This has the potential to reverse the reform supported by SDPL 1. Regarding pensions, the government has reiterated its commitment to preserving the sustainability of the three pillars of the pension system and to restoring contributions to the second pillar to 6 percent of gross salaries by 2013, provided that the budgetary situation improves in line with forecasts. There is, however, a risk that a more gradual restoration in the second pillar pension contributions may occur and that the 6 percent rate may not be put in place by 2013. 97. Overall, governance risks are moderate in Latvia. The government operates a highly transparent budget system and all government documents—including draft policies—are published on the web.20 Inevitably, corruption risks will remain, but are mitigated by the transparent budget process, the role and strength of the State Auditor, and its Anti-Corruption Bureau and supported by the SDPL 2. The government has already shown its willingness to take action even against political figures found to be involved in corruption. 98. The SDPL program will help to mitigate the economic and social risks of the stabilization program. The proposed SDPL 2 facilitates the fiscal reforms in the social sectors. The technical assistance program that has accompanied the SDPL program has supported the fiscal stabilization program. In supporting the implementation of the ESSNS, the SDPL program lowers the social costs inflicted by the rapid fiscal adjustment and sector structural reforms. In supporting the monitoring and making public the results of the ESSNS—including the use of country systems to audit, evaluate and feed into program re-design—the SDPL supports greater governance and accountability. 20 Latvia has an exceptionally high level of internet access at very high speed. 34 ANNEX 1: LETTER OF DEVELOPMENT POLICY 35 36 37 38 39 40 41 42 43 44 45 ANNEX 2: INDICATIVE TRIGGERS, PRIOR ACTIONS AND PROGRESS FOR SPDL2 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 I. Emergency Social Safety Net Ensure adequate National and local The Borrower, Complete. Financing emergency safety government agencies through the national for the safety net was net financing for are satisfactorily and local government adequate in 2010 and education and implementing agencies, has been based on a planned health services, and Emergency Social satisfactorily increase in ESF social protection Safety Net Strategy implementing the financing for the WWS programs to (according to details Emergency Social public works program, mitigate the impact in each section Safety Net Strategy as budget financing is of fiscal adjustment below), maintaining indicated by the assessed as acceptable and the economic adequate financing in maintenance of in 2011. Quarterly contraction on 2010 and 2011. adequate budget reports on households. financing in 2010 and implementation have The Borrower has 2011, and evidenced been prepared and made Monitor submitted regular by regular available on the performance of performance performance internet. national and local monitoring reports to monitoring reports government the Cabinet of submitted to the agencies in Ministers and Cabinet of Ministers implementing published them on the and publishing them ESSNS & increase web page of the on the web page of public awareness, Ministry of Regional the Ministry of transparency and Development and Welfare. accountability of Local Government. government measures in the social sectors. An independent audit The Borrower, Complete. The of the government’s through the Auditor independent audit of the performance in General, has government’s implementing the conducted on October performance in Emergency Social 28, 2010 an implementing the Safety Net Strategy is independent audit of Emergency Social being conducted. the Cabinet of Safety Net Strategy has Minister's been completed and an performance in action plan to implementing the implement the Emergency Social recommendations of the Safety Net Strategy audit put in place. 46 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 II. Social Protection W1. Ensure social The contribution rate The Borrower has The proposal is to insurance system is to the funded pension enacted an change the indicative responsive to pillar has been raised amendment to the trigger. The households needs to 6 percent of a Law on the State government has worker’s salary Funded Pensions committed to the 6 starting from January which increased the percent increase in 1, 2012. contribution rate to 2013, rather than in the funded pension 2012. This change in pillar to 6 percent of a policy is due to the worker's salary continued high fiscal starting from January pressures faced by the 1, 2013. country. Budget legislation was passed in December 2010 setting the date for the restoration of the contribution rate to 6 percent as January 1, 2013. W2. Strengthen In the 2011 budget, The Borrower has Complete. Financing is mandatory, the Borrower has allocated at least 50 adequate in the 2011 municipally financed at least 50 percent of the cost of budget. The administered, mean- percent of the cost of the guaranteed government kept the tested social the Guaranteed minimum income in budget for 2011 at assistance to Minimum Income the 2011 budget, with levels of the planned mitigate the impact from State funds, local governments budget resources in of the crisis on the with local funding the other 50 2010 (which was poorest households. governments funding percent. greater that the amount the other 50 percent. of resources actually [Removed] used). The Borrower has Objective covered prepared an under the audit report evaluation of how on the ESSN. To uniform standards of correct implementation coverage, targeting, errors (including benefits, and targeting) in the financing of administration of social municipally- assistance identified in administered, an independent audit of mandatory social the ESSN, the Borrower assistance programs is implementing an 47 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 are implemented action plan of corrective across local measures, which governments, based includes, amendments in part on an to regulations, and evaluation of the intensifying monitoring. experience under the In addition, a Emergency Social comprehensive impact Safety Net Strategy. evaluation of the WWS program is being undertaken. The results of this evaluation are due by mid-2011 and are to be used in the design of the permanent program to be put in place to replace the emergency program. The implementation of the action plan on the audit recommendations is to be assessment in October 2011, and will further inform the government on critical steps to strengthen municipally- administered social assistance programs. W3. Strengthen No further trigger Complete. The WWS active employment specified (SDPL 1 program was measures to respond had supported the successfully put in to increased WWS explicitly) place in 2009. At any demand for given time in 2010, assistance from there were about 19,000 unemployed people (or 16% of unemployed who do not get people who were not unemployment receiving insurance unemployment benefits) participants in the emergency public works program. In 2011, the program is expected to contract as 48 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 economic conditions improve and the program is wound down. In 2011, the aim is for 16,500 participants to be enrolled at any given time (13% of unemployed people who were not receiving unemployment benefits). The government is assessing options for a more permanent program to replace WWS in 2012. III. Health H1. Reduce the The Borrower has The Borrower has Complete. The risks associated incorporated strengthened primary Ministry of Health has with fiscal improvements to the health care services reviewed the program consolidation in the program suggested by program in the 2010 and found that adding a health sector by its evaluation and has and 2011 budget by nurse to GP practices strengthening prepared a plan for expanding the increases contacts with General further strengthening additional public the enrolled population Practitioner/Primary GP/PHC services in health nurse or by 30 percent. It added Health Care to the 2011 budget. physician’s assistant a telephone hotline to partially substitute program to primary supplement GP services for reduced access care practices and when practices are to specialist and developing a family closed to provide 24/7 hospital-based care. physician advisory assistance. The Ministry telephone service. of Health is extending these programs to all GPs and adding quality benchmarks for GP services. It has exceeded original expectations for the program. H2. Augment The Borrower has The Borrower has Complete. The financial protection incorporated implemented exemption program was from the cost of improvements to the measures to: (a) modified and expanded health care, and exemption program, strengthen the during 2010 as the maintain critical informed by an exemption program Ministry of Health 49 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 health services for evaluation of its for health payments observed take up. It needy households. performance since by eliminating all out- reduced the ratchets by October 2009 and of-pocket health adding income fully funded the payments for visits, eligibility points. It revised program for tests, and reduced the 2011. pharmaceuticals for pharmaceutical patients classified as deductible for GMI- "needy"; (b) provide a eligible households to limited package of zero. It has proposed to benefits for patients as make all health their incomes exceed exemptions means the "needy" line; and tested, but this proposal (c) provide outpatient has so far been rejected psychiatric and home by the Cabinet of care for chronic Ministers. diseases without cost to all the population of Latvia. The Borrower has prepared a plan for shifting all medical Dropped. The care subsidies from a government decided to list of social retain the system of exemptions to a exemptions and expand means-tested system the program to cover of exemptions. needy patients instead of cutting medical care subsidies for the general population to pay for the needy. IV. Education E1. Ensure access In 2011 budget, the The Borrower has Complete. As stated to pre-primary Borrower has allocated in the 2011 above, funding in 2011 education and child allocated adequate budget adequate is at the same level as development financing for pre- financing for pre- 2010, and enrollments programs is primary primary are increasing in maintained education/child education/child contrast to all other development development levels of the education programs for children programs for children system, where they are from the age of 5 starting from the age falling. years old. of 5 years old. 50 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 E2. Ensure access In the 2011 budget, The Borrower has Complete. This has of primary and the Borrower has allocated in the 2011 been done through a secondary school- allocated adequate budget adequate program to reimburse aged children to financing to cover the financing to cover the municipalities up to education facilities cost of transporting cost of transporting to LVL 2.50 per school is maintained students whose replacement schools day for children during schools have closed students whose needing transport implementation of to replacement schools have closed. assistance due to a the per-student schools. closed school and financing model through the purchase of school buses with the highest priority for municipalities with closed schools. The share of children from closed schools receiving assistance for school transportation under the State- subsidized scheme increased from 0% prior to May 2009 to 70% over October to December 2009 to 88% in 2010. This exceeds the target of 77% that had been set for 2011. E3. Improve equity No further trigger Complete. An of subsidies for specified (SDPL 1 Amendment to the higher education had supported the Cabinet Regulation on inclusion of social scholarships was passed considerations into on June 2, 2009 (No. the criteria used to 511), adding social award state support to considerations, in students in higher addition to merit, as a education) criterion for awarding state support to students in higher education. The percentage of students qualifying for state financial support 51 Component Indicative Triggers Prior Action SDPL 2 Status SDPL 2 for university based on social criteria increased from 39% in 2009 to 60% at end-2010. A case has been initiated in the Constitutional Court of Latvia on the non- compliance of the June 2, 2009 Amendment (No. 511) with the constitution. This has the potential to reverse the reform. 52 ANNEX 3: SOCIAL SECTOR DEVELOPMENTS AND POLICY ISSUES (a) Social Protection 1. The economic crisis exposed systemic problems with Latvia’s social welfare system that were addressed temporarily by the ESSNS. As explained below, the State-financed social welfare system is for the most part not targeted and provides low benefits to a broad base. The unemployment insurance system was designed for short bouts of unemployment and contains strong incentives to obtain another job. The only national entitlements that are means tested are the GMI and housing assistance. However, these targeted benefits are financed at the local level, where eligibility is also determined, albeit against national standards. 2. Transfers under Latvia’s Social Insurance system have been maintained to a large degree. After the decision to reduce pensions, which took effect July 1, 2009, was reversed by judicial decree, only limited pension measures of been enacted to reduce the high cost of pensions, as detailed below. The result is that other parts of the budget must bear the brunt of cuts, resulting in the extraordinary cuts in other programs, such as health, all levels of education, and science that are included in this document. In addition, the second pillar has been diverted to finance first pillar deficits, and increases in taxes are paid by active economic agents for the most part. Many of the benefits enjoyed by pensioners were added during the boom years just preceding the crisis, and these for the most part have been maintained despite the effort at internal depreciation in all other parts of the economy. The 2010 PER recommended a number of limited measures for pensions that would have generated enormous savings, but it remains a challenge for the government to implement any of them, particularly after the October 2010 election in which promises were made to limit cuts. The result, though, is a huge transfer of resources from the young to the old, from the sick to the old, and more generally from the economically active population to the retired. This is an unintended structural result of the economic crisis. 3. Latvia’s social welfare system provides benefits that can be categorized into three main groups: social insurance, state social benefits, and municipal social assistance (see Table A.3.1). Social insurance guarantees people who make contributions compensation for the loss of income in certain situations, such as when a person reaches retirement age, becomes unemployed or disabled, loses his or her main income provider, becomes sick, has an occupational accident or disease, or takes off from work for childbirth. People covered by social insurance—by virtue of paying contributions from their earnings—are entitled to the pensions, benefits and compensations to ensure they can sustain their consumption when they are unable to receive an income due to any of these circumstances. Social insurance is administered by the State Social Insurance Agency, which is part of the Ministry of Welfare. 4. State social benefits complement the state social insurance system and provide support in the form of cash payments to certain population groups in vulnerable situations, due to reduction or loss of income, such as: (i) people who are not covered by social insurance or whose insurance contribution record is not sufficient to receive social insurance benefits (state social maintenance benefit); and (ii) in statutory cases when income to cover additional household spending is needed but the state social insurance system does not envisage any 53 protection (e.g., the state family benefit, the child care benefit and the child birth benefit). State social benefits are financed entirely from the national budget, and like social insurance, are administered by national agencies of the Ministry of Welfare. These benefits have not been means tested in the past and have been treated as universal benefits. Table A.3.1 Structure of Benefits Paid by Latvia’s Social Welfare System Program Type of coverage Who are Responsible Source of finance eligible? administrative agency Social insurance Old age Contributing Ministry of Special Social Insurance Disability employees, Welfare’s State Budget (individual and Survivors employers and Social employer contributions & Unemployment self employed Insurance transfers from the general Sick Leave Agency budget) Maternity/Paternity Parental State social State social Individuals Ministry of State base budget (transfers benefits maintenance ineligible for SI Welfare’s State from the general budget to benefits for old age, benefits. Social the Ministry of Welfare) disability, and Insurance survivors All families with Agency children. Family allowances Disabled persons Disability allowances Social assistance Guaranteed Means tested to Municipal Municipal budgets minimum income households below governments (GMI) a per-person Housing benefit eligibility threshold based on income Lump-sum Individuals in an emergency benefit emergency situation who due to a natural disaster or unforeseen circumstances is not able to satisfy his or her basic needs 5. In addition, and to underpin nationally financed and administered programs, municipally-administered and financed social assistance programs are available to low income and needy households. The housing benefit and the GMI transfers are the principal targeted social assistance benefits administered and financed by municipalities, although by mandate of the national government. Local authorities also provide other social assistance benefits on a voluntary basis, as well as one-off, lump sum emergency benefits to residents who have suffered shocks. Most of these voluntary benefits and the emergency benefits are not income tested. 54 6. Spending on social insurance pensions makes up the largest share of social welfare spending in Latvia, which is a result of the rapidly ageing of the population. Social insurance programs in 2009 made up 83 percent of Latvia’s social welfare spending. Of these social insurance programs, pensions make up a 72 percent share.21 Spending on non-contributory transfers in Latvia has been comparable to that of its immediate EU neighbors. However, spending on “exclusion” benefits (which in Latvia mainly takes the form of the GMI benefit) was (prior to the crisis) 0.1 percent of GDP in 2007, making it—along with Estonia—the lowest in the EU.22 Crisis-response social programs 7. Most social welfare programs in Latvia are “universal” or put more precisely are “categorical”, which means that eligibility is based on household circumstances other than low income. This is an intentional social choice to extend the safety net beyond just those who are poor or vulnerable to poverty, and to pursue social objectives in addition to poverty relief and consumptions smoothing. There are social welfare programs that are explicitly designed to act as a buffer in case of job-loss and other shocks to income. First among these is unemployment insurance, which is part of the social insurance branch of the social welfare system, financed from the social insurance special budget. However, the low share of registered unemployed who are eligible for unemployment insurance indicates how this program left many Latvians who lost their jobs unprotected.23 The low levels of protection reflect eligibility criteria and pay-out periods that make it difficult for the program to act as a broad automatic stabilizer. To make up for this shortcoming, the government eased eligibility requirements and extended the benefit period of unemployment insurance in 2009. 8. Other social welfare instruments that helped households cope are the system’s “active” employment assistance programs (Figure A.3.1). Among these, programs designed to help workers augment their skills with training and which provide job search assistance are unlikely to be very useful in the wake of a massive demand shock when jobs disappear (although participants receive accompanying stipends which may have indeed been very important). For this reason, although spending on all forms of employment assistance increased to respond to higher demand from households, the government chose to expand more direct forms of assistance to the unemployed who do not have access to unemployment insurance in the form of public works, with the introduction of the WWS program in 2009. 9. The public works WWS has been rolled out across Latvia by the State Employment Agency (SEA) and its regional affiliates. The program is self-targeting to needy households, with low stipends relative to the binding minimum wage and a requirement for full-time, labor 21 72 percent represents the average pension spending for 2009 and 2010. There were pension underpayments in 2009 which were compensated in 2010 causing recent fluctuations in the pension share of the overall social insurance budget. 22 Although spending on housing benefits—which are typically, although not uniformly targeted across municipalities—was higher than in some of Latvia’s neighbor countries, this benefit did not become a part of mandatory targeted municipal social assistance until 2008. 23 Latvia is not alone in this regard. It is also the case in other countries in Central and Eastern Europe that the registered unemployed are not eligible for such benefits. 55 intensive work. Participants in the program must be registered as unemployed, cannot be receiving unemployment insurance benefits, and are selected on a first-come, first-served basis. The availability of WWS work places depends crucially on the performance of municipal authorities in creating work sites. The most recent data (from September 2010) indicate that work places are being created in the regions of Latvia with soaring unemployment and in regions where the demand for the program, measured by the length of the waiting list, is high. This reflects very favorably on the responsiveness of national and local authorities in deploying the new social welfare program quickly and where it is needed most. Figure A.3.1 Spending on Active Employment Assistance Programs millions Workplaces Annual Budget, millions LVL of Lats with stipends 70 70 Training 60 60 Total ALMP spending 50 50 Total ALMP spending from ESF Other 40 40 30 30 Lifelong learning (short) 20 20 10 10 Complex support for 0 0 vulnerable groups 2004 2005 2006 2007 2008 2009 2010 2008 2009 2010 Source: World Bank staff estimates using data from Ministry of Welfare. 10. The social assistance programs financed directly from municipal budgets can also be critical to how effectively households can cope with income shocks. Municipalities offer a wide array of social assistance benefits and services, in cash and in kind. Two programs are mandatory: the housing benefit targeted to low-income households (whose income per person is below LVL 150 or LVL 120 per month, depending on municipality, which can take the form of a cash payment, fuel for heating or actual housing), and the GMI which is targeted to the poorest households (presently, with household income less than LVL 40 per adult and LVL 45 per child per month). Although not mandated by national legislation, most municipalities also offer a lump-sum emergency benefit to households that seek assistance, regardless of household income. 11. An assessment of the responsiveness of municipally-administered and financed social assistance programs to household need is provided in the World Bank’s 2010 PER. Household need is proxied by the increase in unemployment between December 2008 and December 2009 in each locality. The 2010 PER examines the reaction of spending on municipal social assistance to changes in unemployment. The analysis raises concerns about the responsiveness of municipal social assistance programs to household needs in the wake of the crisis. Total spending on social assistance has clearly risen in most municipalities and republican cities. In many cases, spending more than tripled. Although there is some indication of a positive correlation between these increases and greater need, very little change is observed in several municipalities with a considerable rise in unemployment. 56 Evolution of Latvia’s public pension system 12. The structural reform of 1996 increased the fiscal sustainability of Latvia’s pay-as- you-go pension system by introducing notional defined contribution accounts (NDCs)24 which were later complemented by funded individual pension savings accounts in 2001. However, the macroeconomic boom of 2002-2007 resulted in an accelerated accumulation of pension liabilities as more generous indexation rules were introduced and additional benefit supplements were awarded. Subsequently, a steep decline in revenues during the recession of 2008-2009 resulted in the emergence of pension deficits. 13. The government has tried to reduce boom-time pension promises by reducing pension payments in year 2009, but this attempt had been overturn by the Constitutional Court and pension underpayments from 2009 were compensated in 2010. Going forward, pension benefits will remain frozen in 2011 and more conservative price indexation will be applied in the coming years. However, other pension promises made before the crisis are expected to be honored in full. Consequently, the projected future evolution of the deficits in the social insurance special budget, from which NDC system is administered, is expected to follow the path presented in Table A.3.2. Table A.3.2 Simulations of the Projected “Internally Subsidized Deficit” to Pensions25 2009 2015 2020 2030 2040 2050 2060 Pension deficit 1.3 2.1 1.6 1.7 1.3 0.8 -0.3 Source: Staff PROST projections 14. The performance of the pay-as-you-go NDC system will continue to be challenged by expected adverse demographic developments, which are summarized by marked increase in old age pensioner dependency rate26 (see Figure A.3.2). Given the inherent long term self-balancing feature of the NDC pension system, most of this demographic pressure will materialize in the form of substantially lower future replacement rates. 24 Benefits paid under a NDC retirement savings plan are calculated based on an affiliated worker’s accumulation of “notional” capital (the individually accounted accumulation of contributions to the plan) and a notional rate of return, which in Latvia’s case is tied to the growth of insured wage. At the time of retirement the “notional” capital is transformed into an annuity based on observed life expectancy of the pensioners. 25 While only 20 percent of wages is allocated to notional retirement accounts, around 22 percent of wage bill is transferred to State Special Budget for Old Age Pensions to meet current pension payment obligations. The 2 percent difference is subsidized from other social insurance programs. 26 The dependency rate is equal to a number of old age pensioners that have to be supported by 100 contributors. 57 Figure A.3.2 Simulated Projection of the Effective Dependency Rate (Number of old age pensioners per 100 contributors) Dependency rate 140 130 120 110 100 90 80 70 60 50 2010 2020 2030 2040 2050 2060 Source: World Bank Staff PROST projections using Ministry of Welfare assumptions Diversion and restoration of contributions into funded individual accounts 15. Meanwhile, contributions to funded individual pension accounts have steadily grown to 8 percentage points by the time the financial crisis hit in 2008. As a short-term crisis measure this revenue stream has been partially diverted to the pay-as-you-go NDC system and only a 2-percentage point contribution to the funded accounts retained. The government had initially planned to raise funded pillar contributions to 4 percent in year 2011 and to 6 percent in year 2012 where it was planned to remain afterwards. However, given the depth and duration of the crisis, this schedule has been shifted by one year into the future with the aim of moving from a 2 to 6 percent contribution rate in 2013. The postponement is expected to result in additional state social insurance pension budget revenues in the amount of LVL 44.9 million or 0.35 percent of GDP in 2011. Similar additional revenue will result in 2012. The NDC system deficits presented in Table A.3.2 take these latest plans into account. 16. The reduction of contributions to the funded pillar and subsequent postponement of contribution restoration schedule are raising some questions about the government’s commitment to the multi-pillar pension system structure. The reshuffling of revenue streams between the two mandatory pension system components has also reduced the fee base for the private pension fund managers. While most of these companies can survive such temporary changes, an extended period of diverted contributions could cause some fund managers to start leaving the market. This could reduce competition in fund management services, and would very likely increase account administration fees. For these reasons, it is important for the authorities to adhere to the planned path for restoring contributions to the funded pillar. The expected decline in future replacement rates from NDC pension component underscores the crucial role that the funded pillar is designed to play in delivering benefits for future pensioners. Retirement age increase 17. To address medium-term fiscal challenges and long-term downward pressure on replacement rates, the government has committed to increasing the retirement age from age 62 to age 65. Latvia plans to increase the retirement age starting in 2016. The retirement age will be increased by 6 months per year with the goal of reaching 65 for all individuals in 2021. The Ministry of Welfare has drafted the required amendment to the State Pensions Law for the 58 increase in the retirement age to 65 for both men and women. The government has to review and approve the law before it is sent for adoption to the Saeima. This is unlikely to take place in the first half of 2011. Although commitment to this long term reform is commendable, this measure is not expected to generate fiscal savings in the short run. However, the policy will contribute to medium-term fiscal sustainability (Figure A.3.3). 18. There are several sound reasons for the government not to increase the retirement age before 2016. The current early retirement option expires in 2011. Given the recent rush to early retirement and disability, this could mean very few new old age benefits are awarded in 2012-2013.27 This means that an increase of the retirement age before 2014 would not generate any significant savings and could be counterproductive in the immediately post-recessionary environment. Furthermore, the cohort turning 62 in 2014 will already have experienced a significant increase in the effective retirement age (70 percent of previous cohort will have retired early, while most representatives of this cohort will have to wait until 62), so it would be inequitable to increase their burden further. Figure A.3.3 Simulation of Projected Fiscal Savings from a Retirement Age Increase (Percentage of GDP) 3.0% effect on pension scheme effect on all social insurance 2.5% effect on consolidated gov. finances 2.0% pension deficit (subsidized by 2%) 1.5% 1.0% 0.5% 0.0% 2010 2020 2030 2040 2050 2060 -0.5% -1.0% Source: World Bank Staff PROST projections. Note: Simulations are based on the assumption that the reform is to start in 2016. 19. The expected savings from increasing the retirement age are presented in Figure A.3.3 and can be compared with the projected deficit (based on the assumption that reform is to start in 2016). Savings for the pension scheme from a retirement age increase are expected to climb to 1.5 percent of GDP by 2021 as the number of pensioners declines and the number of contributors rises. After this, annual savings start to decline as longer careers start to translate into higher pensions. However, it is reasonable to expect additional benefits from this measure to arise elsewhere: increasing the number of taxpayers could boost revenue not only with additional 27 It is expected that among the cohorts turning 62 in 2012 and 2013, around 70 percent will already be receiving either an old age or disability benefit. 59 contributions to the social insurance special budget as a whole, but also to the State budget through the increase in the wage income tax base. 20. Another important benefit from increasing the retirement age would arise in higher replacement rates both from the notional and funded pillars. The effect on notional replacement rates is presented in Figure A.3.4, which shows an increase of newly granted pension benefits of around 25 percent which will be badly needed in the future when the generosity of the notional pillar is expected to decrease dramatically. A similar positive impact of retirement age increase can be expected on the replacement rates from funded pillar, to which 6 percent of affiliates’ wages will be allocated from 2013. Figure A.3.4 Simulated Impact of Retirement Age Increase on Replacement Rates from the NDC Pillar 70% 60% 50% 40% 30% 20% 10% 0% 2010 2020 2030 2040 2050 2060 No ret. age increase with ret. age increase Source: World Bank staff PROST projections. (b) Health 21. From 2008 to 2010, real spending on health fell by 16 percent, and almost all of that occurred in 2009. In per capita terms, real spending dropped by 13 percent, less than the total drop because of declining population. As a percentage of GDP, government spending on health actually went up in 2009 and 2010, due to the sharp contraction in GDP. 22. During the economic crisis, the Ministry of Health prioritized emergency services, general practitioner services (each Latvian is enrolled with a primary care doctor), subsidized prescription medicaments, and services for children and mothers. With tight limits on overall funding, this strategy turned hospitals and inpatient care into a budgetary residual. Table A.3.3 shows that total spending from domestic funds on health fell from LVL 564 million in 2008 to LVL 462 million in 2010, or by 18 percent.28 This table is divided into two parts, the spending for medical services financed through the insurance system (Payments Center in the table) and the amount financed through the Ministry of Health administrative budget (Ministry of Health in the table). A further drop to LVL 443 million, 4 percent lower than in 28 For this period, we can safely ignore inflation. 60 2010, is anticipated in 2011.29 Our expectation is that actual spending in 2011 will meet or exceed the total for 2010 if the anticipated additional cuts in inpatient care do not materialize. Most of the cuts from 2008 to 2011 were in inpatient care, communicable disease programs, and administrative costs. The table clearly shows that the Ministry of Health made reductions across the board, but it protected its stated priorities: outpatient care, medicines, and emergency services. Table A.3.3 Latvia’s Government Health Spending (In millions of Lats, nominal, unless otherwise indicated) 2008 2009 2010 2011 Plan Change 2008- Change 2010- 2010 2011 Payments Center 462.8 378.6 381.3 363.0 -18% -5% Inpatient 241.8 181.8 154.7 127.9 -36% -17% Outpatient 138.1 119.1 118.2 123.8 -14% 5% Secondary Outpatient 89 71.5 72.9 79.7 -18% 9% General Practitioner Practices 42.7 41.7 45.2 38.3 6% -15% Dentistry 6.4 5.9 5.8 5.7 -9% -1% International Accounts - - 2.5 3.5 41% Medicines and Material 71.1 66.6 71.6 67.6 1% -6% Central Procurement of Medicines and Vaccines 4.8 5.5 6.8 6.4 43% -7% Social Safety Net - 0.4 24.2 30.3 25% Other 0.3 0.7 0.3 0.5 3% 79% Administrative Costs 6.8 4.6 3 3 -56% 2% Ministry of Health 100.9 82.1 80.7 80.2 -20% -1% Communicable Disease 24.1 19.7 14.5 15.1 -40% 4% Sports Medicine 1.1 0.8 0.6 0.7 -40% 6% Blood Supply 8.5 6.9 6.4 5.1 -24% -20% Emergency Medical Assistance 26.8 26.3 30.8 28.9 15% -6% Medical Education 24.6 16.5 16.5 16.2 -33% -2% Medical History Museum 1.1 0.8 0.4 0.5 -58% 2% Administrative, Regulatory, Internation 14.8 11.2 11.4 13.7 -23% 20% Total Health Spending from Budget (Ignoring European Union Funds) 563.7 460.7 462 443.3 -18% -4% Source : Ministry of Health Note: Emergency Medical Assistance was gradually moved to the Ministry of Health budget from the Payments Center over the period 2008 to 2010. For this table, the total amount is shown for all years under the Ministry of Health to maintain comparability. 23. To achieve the change in budget priorities, cuts were made in the number of hospitals contracted for inpatient services. For example, Riga Hospital #1, a 600-bed institution, was shifted from an inpatient contract to an outpatient contract on January 1, 2010, cutting its contract value by 70 percent. The hospital’s inpatients could be absorbed by other large hospitals in Riga. The hospital still maintains primary and secondary outpatient and diagnostic clinics, offers day surgery, and offers the whole range of services, including inpatient care, to private patients who pay out of pocket or via private insurance. Riga City finances social care beds at the hospital. 29 Additional taxes of about 7 million Lats must be paid out of this budget, so the net available budget is planned at about 441 million Lats for 2011. 61 Table A.3.4 Hospitals and Beds in Latvia Contracted 2008 2009 2010 Hospitals 78 72 39 Beds (end of the year) 17,001 15,121 * 12,929 Beds per 100,000 749 669 575 Source : Ministry of Health *Start of the year 24. The number of inpatient contracts fell over 2008-2010: Table A.3.4 shows the number of hospitals with inpatient contracts declining from 78 in 2008 to 39 in 2010. The number of contracted beds fell from 17,001 to an estimated 12,929 at the beginning of 2010. This reduction brings a key indicator, contracted beds per 100,000 population, down to 575 or almost at the European average. However, Latvia cannot support even this level of infrastructure with the allocations made for inpatient care in 2009, 2010, and planned for 2011. Therefore, it still has to make tough decisions about further reductions in inpatient capacity, even if it is a question of removing or altering contracts rather than really closing the excess infrastructure. In 2009 and 2010, additional resources were added to the budget at the end of the year to finance hospital arrears, and this may happen in 2011 unless inpatient infrastructure is cut further. 25. The number of primary care visits to General Practitioners (GP) has been stable for many years, but these probably need to increase, especially for men. Secondary outpatient specialist visits (for specialists, diagnostics, outpatient surgeries, and so on) fell from 3.22 million in 2008 to 2.93 million in 2009, but are estimated to rise to 3.18 million in 2010. They will likely continue to increase as medical care shifts out of hospitals. A huge drop in hospital inpatients has occurred, from 473.4 thousand in 2008, to 373.3 thousand in 2009, and to an expected 322.3 thousand in 2010, a drop of 32 percent in just two years. In the next few years the Ministry of Health expects them to stabilize at around 300 thousand. The Ministry of Health has been successful in shifting some inpatient stays to outpatient care, with day care or day surgery patients increasing from 26.3 thousand during the first 8 months of 2009 to 50.9 thousand for the same period in 2010. In prior years these were nil. The shift from inpatient to outpatient care will continue, which further reduces the need for inpatient infrastructure. The ministry has found that in removing a hospital’s inpatient contract, approximately 30 percent of the inpatient cases disappear, and 70 percent move to other hospitals, which is indicative of the level of inefficiency accommodated by the excess infrastructure. 26. The Ministry of Health has prepared and presented its medium-term strategy for strengthening the health sector. On November 4, 2010, the Ministry of Health presented its strategy for 2012 to 2014, which is to be considered and approved by the Cabinet of Ministers in 2011. It has been discussed by the State Secretaries and is currently undergoing a process of internal and external consultation managed by the Ministry of Health. This document proposes to continue the structural reforms begun in 2009, reducing the number of acute care hospital beds to 350 per 100,000 population, approximately the level of Denmark and well below the average for the EU. It would halve the number of acute care psychiatric beds. Lengths of stay would fall and occupancy rates would rise in the remaining hospitals. Underlying these goals is a program to further develop alternatives to inpatient care through an advanced secondary outpatient system 62 coupled with short-stay hospitals. In addition, an effort would be made to continue strengthening primary care by adding a second doctor to any practice having over 2000 patients registered. Also, the aim would be to reduce the proportion of primary doctors with such high patient loads so that they could see more of their patients, thereby encouraging primary care visits to rise. Two programs started under the emergency safety net—the additional nurse to extend the hours and outreach of family doctors, and the family physician advisory telephone service—continue to be implemented and developed. 27. Specific measures to implement the health strategy include interventions across the board to improve the quality and performance of primary care, emergency medical teams, emerging day hospital services, outpatient care for the mentally ill, and home care. The plan proposes new payment systems to improve providers’ financial incentives, further development and expansion of the pharmaceutical subsidy system, increased efficiency by rationalizing casualty wards of hospitals, and an effort to rationalize long term care by putting patients in social care beds rather than in medical care beds, and increasing the ratio of nurses to doctors in providing care. Table A.3.5 shows the indicators proposed by the ministry; our experience with the ministry in the past two years suggests that the extensive implementation program included with the strategy will be carried out as planned once the Cabinet of Ministers approves. Table A.3.5 Performance Indicators for the Ministry of Health Strategy 2009-2013 Indicator 2009 2011 2012 2013 Base Reduced acute care beds (per 100,000 population) 550 450 400 350 Reduced acute care psychiatric beds (per 100,000 population) 2678 2000 1700 1314 Reduced average length of stay, all hospitals (days) 8.5 7.5 7 6.5 Reduced average length of stay, acute care hospitals (days) 6.1 5.7 5.4 5.1 Increased bed-occupancy rate, all hospitals (%) 69 72 76 80 Increased bed-occupancy rate, acute care hospitals (%) 64 70 80 85 Increased outpatient visits to any doctor (average per year) 4.2 4.3 4.5 4.5 Increased coverage annually of registered patients by GP (%) 63 68 70 72 Increased outpatient visits to GP (average per year) 2.95 3 3.1 3.1 Increased home care visits (per 100 population) 3.7 7 7.5 8 Reduced number of hospitalizations (total) 373,131 -16% -0.40% -0.50% Increased day-hospital patients/surgeries (total) 41,227/12,610 78,000/28,000 80,000/30,000 82,000/33,000 Increased family doctor residencies (GPs as % of residents) 8 15 15 15 Reduce family practices with over 2,000 patients (% of total) 17 15 13 10 Source: Veselības aprūpes sistēmas attīstības plāns 2011-2013 gadam (Development of health care plan from 2011 to 2013), Ministry of Health. Available in Latvian online at: phoebe.vm.gov.lv/misc_db/web.nsf/.../Att_plans_2011-2013_97word.doc 28. Latvia continues to face many hurdles in the health sector, including a persistently low proportion of GDP spent on health relative to other countries in Europe, high out-of- pocket spending, shockingly poor adult health, and low satisfaction levels among the population. Its fundamental shift in expenditure priorities has the potential to make the health system more responsive to the health needs of the population. The proposal by the Ministry of 63 Health to continue its restructuring efforts over 2012-2014 will go a long way to improve the performance of primary and secondary outpatient care, while reducing the tendency to institutionalize patients in costly acute care and psychiatric hospital beds. Risks remain as it will take a long time to reform the incentives created by the existing payments system. Also, excess hospital infrastructure still exists and may come roaring back onto the budget after 2014. Also, the underlying problem of poor adult health has been extremely resistant to improvement so far. 29. Impressive strides have been made to improve overall efficiency and efficacy of the system, and the use of public funds for health care. When combined with the equity improvements made under the ESSNS, health policy makers in Latvia have created an opportunity out of a budget crisis to reset strategy, restructure the budget to fund core priorities, and force the service delivery system to adjust. Whether they succeed, whether health indicators respond positively, and whether the population increases its satisfaction with the system, remains to be seen. All such changes take a long time to observe. (c) Education 30. The response to the economic crisis in the education sector was to slash budgets, as shown in Table A.3.6. From 2008 to 2010, nominal State spending on education, science, and sports fell by 37 percent. Preschool30 and special education were cut the least, by 26 and 15 percent, respectively. General, vocational, and interest education31 were cut by almost a third, 29, 31, and 30 percent respectively.32 But the real cuts were reserved for higher education, science, and administration, which were reduced by 66, 60, and 67 percent, respectively. All of these cuts are large, but for science and higher education, they are extraordinary. For 2011, total education revenues from domestic sources remain essentially the same as in 2010, although there has been another round of cuts in science and administration. University spending rises by 2 percent, and vocational education gets a 19 percent boost. The details should not obscure the facts: few, if any, countries have experienced such large and sudden cuts in education spending: education expenditures were cut by a third overall and roughly two-thirds for higher education and science. 30 Pre-school education refers to 0-6 year olds. Mandatory pre-school refers to 5-6 year olds. The majority of children start pre-school at the age of 2 years. There are a few children that start pre-school before celebrating their first birthday. 31 Interest education is defined as the realization of the individual educational needs and desires of a person regardless of age and previously acquired education. These are non-compulsory theatre, dance, folk, art, environmental and technical interest classes. There are no entrance criteria for attendees and no license requirement for programs for education institutions. For private companies that are not education institutions, a license requirement is still in force. Teachers are paid by the state. See http://visc.gov.lv/intizglitiba/jomas/info.shtml. 32 It should be noted that EU funds offset some of the reductions between 2008 and 2011, but EU funds for the most part are previously planned investments in computers, equipment, renovations, and a revamping of vocational education (which causes a large jump in vocational spending above what is shown in the table for 2011 when the EU funds are allocated to specific areas of education). 64 Table A.3.6 Spending on Education, Science, and Sports, 2008-2011 (In millions of Lats, nominal, unless otherwise indicated) Change Change Summary of Spending on Education 2008 2009 2010 2011 2008-2010 2010-2011 General Education (1-12) 1/ 490 397 350 350 -29% 0% Preschool Education 2/ 116 106 86 85 -26% 0% Special Education 49 49 42 42 -15% 0% Vocational Education 3/ 66 52 46 55 -31% 19% Interest Education 68 53 48 48 -30% 0% Higher Education 127 54 43 45 -66% 2% Science 43 22 17 16 -60% -5% Sports 28 18 15 14 -47% -5% Administration and Shared Programs 76 92 25 22 -67% -11% European Union and Other Foreign 30 12 155 188 410% 22% Total Spending on Education (all Sources) 1,092 855 826 865 -24% 5% Total Domestic Spending on Education 1,062 843 671 677 -37% 1% Total Domestic Spending on Education Less Science and Sports 992 803 639 647 -36% 1% Source: Budget Documents, Ministry of Education and Science budget and Treasury’s Annual Reports on Local Note: 1/ Includes local government spending on special educational institutions because Treasury’s Annual Reports on Local Government Spending (TARLGS) do not account separately for general and special educational institutions. The earmarked subsidy for general education includes the subsidy for boarding schools providing general education. 2/ Includes local government spending on special preschools, because TARLGS does not account separately for preschool and special education. 3/ In 2011 Climate Change Finance Instrument (CCFI) funding is included and became the main reason for the increase in expenditure for vocational education 31. As a consequence, the core structural reform in the budget is reflected in the reallocation of spending away from universities, science, and administration to cushion the blows to general, vocational, preschool, special education, and interest education. General education in 2011 is expected to absorb 52 percent of a much smaller budget, up from 46 percent in 2008. Similarly, preschool, special, vocational, and interest education have risen as a proportion of spending. Higher education has fallen from 12 to 7 percent of spending, and science has dropped from 4 percent to 2 percent. Administration has dropped in the total from 7 percent in 2008 to 3 percent in 2011 (Table A.3.7). 65 Table A.3.7 Distribution of Education and Sports Spending (Domestic Budget only), 2008-2011 (In percent of domestic spending) 2008 2009 2010 2011 General Education (1-12) 1/ 46 47 52 52 Preschool Education 2/ 11 13 13 13 Special Education 5 6 6 6 Vocational Education 3/ 6 6 7 8 Interest Education 6 6 7 7 Higher Education 12 6 6 7 Science 4 3 3 2 Sports 3 2 2 2 Administration and Shared Programs 7 11 4 3 Total 100 100 100 100 Source: Budget Documents, Ministry of Education and Science budget and Treasury’s Annual Reports on Local Governments Consolidated Budget Execution. For 2010 and 2011 local government spending for each category calculated to correspond to the average spending structure during 2008 and 2009. Note: 1/ Includes local government spending on special educational institutions because Treasury’s Annual Reports on Local Government Spending (TARLGS) do not account separately for general and special educational institutions. The earmarked subsidy for general education includes the subsidy for boarding schools providing general education. 2/ Includes local government spending on special preschools, because TARLGS does not account separately for preschool and special education. 3/ In 2011 Climate Change Finance Instrument (CCFI) funding is included and became the main reason for the increase in expenditure for vocational education 32. In 2008, Latvia was spending less per student in higher education than in primary and secondary schools (see Table A.3.8). By 2011, the subsidy in higher education has dropped by almost half and is less than 40 percent of the per-student subsidy in vocational. Without doubt there are serious structural problems to address in higher education, including how to consolidate supported institutions so that State funding can be concentrated on fewer of them to improve quality and international competitiveness, how to further integrate science and university funding to encourage synergies and a stronger market focus for research and development, and how to modify student subsidy patterns to increase accessibility to higher education by poorer students. But a first priority must be to increase spending at this level both through fresh funds as they become available and by reconsidering priorities within overall education spending. In the coming years, the student population in higher education will experience an unprecedented decline, which will make it easier to improve per student subsidies, while still encouraging the system to adjust to the demographic change. 66 Table A.3.8 Estimated Spending Per Student, 2008-2011 (In Lats, nominal, unless otherwise indicated) Change from 2008 to 2011 2008 2009 2010 2011 (percent) General Education (1-12) 1,919 1,648 1,512 1,592 -17 Preschool Education 1,761 1,553 1,263 1,328 -25 Special Education 1/ 4,135 4,224 3,429 3,510 -15 Vocational Education 1,717 1,347 1,262 1,583 -8 Interest Education 828 640 860 796 -4 Higher Education 1,188 562 531 616 -48 Source: Estimates are based on enrollment data from the MoES and spending in previous tables. Adds medical education from MoH budget to Higher Education budget. Note : 2011 enrollments for special education, interest education and higher education based on actual. For other levels assumed to change by 5%. 1/ Includes students in special boarding schools, special sanatorium schools, special preschools education, and special schools without boarding. 33. In addition, the Ministry of Education and Science made a long-overdue structural reform in the financing of general primary and secondary education. For the 2010 school year, the basis for the State education grant to municipalities for teachers and support staff was shifted from inputs (the number of classes being taught in each school) to a formula based on the number of students in the jurisdiction with weights for types of students and whether the student is in a major city or the countryside. At the same time, the lowest starting salary for a workload of 21 hours was cut by from LVL340 to 245, or 28 percent. The minimum salary for a school director was cut from LVL612 per month to 447, or 27 percent. Although the change is calculated as a reduction in salaries, in fact when combined with the funding reform, it simply meant that localities would receive a smaller grant for teachers and support staff. Within this envelope, school directors and local officials had the option of choosing some combination of cutting teachers (and support staff), keeping them all and lowering their salaries, or supplementing salaries from local funds. The funding per student dropped approximately by half from September 2008 to September 2009. In January 2010, as previously agreed with the teachers union, an additional allocation of funds was made available for salaries, so the overall decline was about 33.5 percent in per-student funds.33 34. Comparing the result with the 2008 school year, in 2010, the number of students continued to decline to 216,307, a reduction of 10 percent in only two years (Table A.3.9). Overall, the reduction in educational staff from 2008 to 2010 exceeded this current decline in students, and the reduction in the number of schools and staff was concentrated at the primary level (-21 percent for schools and -25 percent for staff). The number of teachers declined less than overall staff, falling 11 percent between 2008 and 2010 (approximately matching the decrease in students). Teaching workloads, however, declined by 24 percent indicating that less work was available for each teacher employed. Therefore, many teachers were able to keep their 33 Mihails Hazans (2010), “Teacher Pay, Class Size, and Local Governments: Evidence from the Latvian Reform.” Institute for the Study of Labor, IZA DP No. 5291, October 2010, http://ftp.iza.org/dp5291.pdf. 67 jobs but with substantially reduced hours. Although this was a large one-time adjustment, there is much more that could be done given the 27 percent decline in general education students from 2001 to 2008. 35. A further adjustment in the 2011 school year would have been expected, given that local authorities had so little time to adjust to the change of incentives in 2010 and that the system has yet to adjust to the decline in student populations from 2001 to 2008. In fact, while enrollments continued to drop from 2010 to 2011, only 9 more primary and 7 secondary schools were closed. The number of educational staff, teachers, and workloads increased by 2 percent, 2 percent, and 15 percent, respectively. Hours were expanded for many teachers who were kept on board during the crisis in 2009 and 2010 with reduced workloads. Table A.3.9 Enrollments, Schools and Number of Teachers at the Start of the School Year, 2008-2011 Change 2008- Change 2010- 2008 2009 2010 2011 2010 2011 Students 250,941 236,223 226,034 216,307 -10% -4% Regular Schools 241,878 227,463 217,128 207,872 -10% -4% Special Schools 1/ 9,063 8,760 8,906 8,435 -2% -5% Schools 958 948 846 830 -12% -2% Primary 516 508 409 400 -21% -2% High School 379 377 374 367 -1% -2% Special Schools 2/ 63 63 63 63 0% 0% All Educational Staff 3/ 32,471 32,236 27,250 27,910 -16% 2% Primary 11,010 10,945 8,287 8,383 -25% 1% High School 18,666 18,473 16,469 16,948 -12% 3% Special Schools 2,795 2,818 2,494 2,579 -11% 3% Teachers Only 25,567 25,751 22,629 23,108 -11% 2% Teacher Workloads 4/ 31,960 32,331 24,210 27,884 -24% 15% Source: Ministry of Education and Science data. Note: 1/ Includes students from special education institutions only and excludes students from special preschool education and general education boarding schools. 2/ Special preschool education schools are not included. 3/ Includes directors, deputy directors, teachers (including day school, boarding, pre-school, special, and others), educational psychologists, speech therapists, librarians, social educators, teaching assistants, health sector staff, coaches, and other staff. 4/ Teacher holding a job in two schools simultaneously, e.g. music teacher, is counted twice. Teachers are paid by a formula based on workloads (21 academic hours per week), and typically manage more than a single workload. Thus, number of workloads reflects quantitatively teaching activity rather than number of actual teachers. Non-teaching workloads, e.g. librarians, included. 36. There has also been some catching up by education employees in terms of their hourly pay and total earnings. In 2008, average monthly earnings in public administration were LVL 700; in education, LVL 479 (32 percent lower). In 2010, earnings were LVL 515 and 395, respectively (23 percent lower in education)—a narrowing of the gap as all public sector salaries plunged. In 2008, the hourly cost of labor in public administration was LVL6.3; in 68 education, it was LVL 5.3 (16 percent lower). In 2010, it was LVL 4.7 and LVL 4.3, respectively (9 percent lower in education).34 37. A detailed analysis of municipal behavior in 2010 found that there were significant efficiency gains in response to the initial reforms: average class size went up by almost 5 percent, and the number of students per teaching workload increased by 13 percent. Smaller schools with fewer students per teacher and higher costs per student were more likely to be closed or merged. Lifting of restrictions on class size, numbers of administrative and support staff, and compensated hours allowed school directors more leeway in managing their budgets and schools, which they have used to introduce performance-based pay and to pay more to teachers in larger schools. 38. However, the per-student financing model extends only to the municipal government. Within localities it is clear that there were reallocations in 2010 from larger schools to subsidize smaller ones, and opportunities for cooperation across county lines will take more time to emerge. The adjustment seems to have been most severe in the nine largest cities, where classes were merged and workloads increased (the allocation formula provides 27.5 percent more per student outside of these nine cities) and in the smallest rural counties. Medium- sized cities, which have adequate scale and 27.5 percent more funding than the largest cities, reformed the least, in fact hardly at all.35 39. Going forward, the education system continues to struggle to develop strategic solutions to move the sector forward following the large budget cuts of the past three years. In general education, the system has stabilized in 2011 with spending either flat or showing small increases. There is still substantial potential to adjust to the shrinking of the student population, and given that the decline will continue, there is no option but to keep reducing primary and secondary education capacity. If overall spending on education remains constrained, a question is whether policy makers are comfortable to allow general education to take a larger share of a reduced overall expenditure effort, as it does now. If not, even more adjustment will be required. However, decisions on funding for general education are dispersed between local and central governments, with local governments owning the infrastructure. This adds complexity to policy making. The World Bank’s advice has been to expand per-student grants for education beyond just salaries to include the full average cost of a student, so that school directors and local authorities can shift money between salaries and other costs and a higher floor is put on subsidies between richer and poorer local governments. Some have argued that the per-student grant should follow the student all the way to the school so that local authorities cannot subsidize schools that are not economically viable. Finally, the World Bank recommended in the 2010 PER that the system of institutionalizing primary and secondary special needs students at high cost should be reviewed. While special education funding per student appears high at LVL3,510 per student (Table A.3.8), funding includes medical treatment costs and so is not comparable with the other per capita spending measures. However, the sector has been slow to adjust to 34 Data from the Central Statistics Bureau for occupied posts, average monthly wages and salaries of employees by kind of activity by quarter and hourly labor costs by kind of activity by quarter. Comparisons are for the third quarter of the year rather than the full year so we could include 2010, for which all four quarters are not yet available. 35 Mihails Hazans (2010). 69 declining student numbers. This spending category merits careful review, although of course it is a sensitive area. 40. For vocational education, the Ministry of Education and Science is making major investments and consolidating schools prior to turning over vocational education to municipalities. Of 26 vocational schools today, the ministry expects to end up with 9 regional centers for the next school year, beginning in the fall of 2011. Using EU funds, large investments are being made in schools and teacher training to increase the attractiveness of vocational education as an alternative to general education. Currently about 42 percent of eligible students are in vocational education, and the Ministry would like to move that up to 50 percent before turning the funding and the schools over to the municipalities in 2015. Funding at that point will be folded into the per-student grants. 41. Higher education is embarking on a major restructuring exercise. It was relatively simple for the government to cut funding for higher education because the institutions are autonomous and can raise other sources of funds, at least in theory. So funding was cut in the expectation that the institutions would at least partially replace it. A reform plan for higher education was approved by the Cabinet of Ministers in August 2010. It proposes to focus State subsidies on quality programs of adequate scale and to encourage institutions of higher learning to combine programs to improve efficiency. It would encourage universities to attract international students to Latvia and integrate offerings better with demands from the labor market and the needs of the economy. Currently all study programs are being evaluated to reduce overlap and to determine how future subsidies can be concentrated on those identified to be the highest quality. In the end, a reduced number of programs will qualify for State funding. In the past two years, a handful of institutions have been reorganized to become units of larger universities, but scope for more consolidation remains. In the short run, funding for students has been reduced most for liberal arts type degrees to emphasize those in the sciences. A major problem remains in becoming more export oriented, as the language of instruction remains Latvian by law. 42. Prospects for science funding remain dim. Although Latvia has committed itself to the Europe 2020 goal of achieving 3 percent of GDP for public and private research and development expenditures, it ranked near the bottom of R&D effort in Europe at 0.46 percent of GDP in 2009. Expanding this share will not be easy for either the public or private sector without the resumption of economic growth at a rapid pace. As in higher education, the strategy in science is to allocate funds to high priority fields (not to institutions) and within fields to fund proposals competitively. 70 ANNEX 4: POLICY ISSUES IN PUBLIC ADMINISTRATION 1. Reducing the wage bill was a key element of the fiscal adjustment through a combination of pay cuts and redundancies. Prior to the adjustment Latvia’s public sector seemed somewhat overstaffed relative to comparator countries and overpaid relative to the private sector. In 2008 Latvia’s wage bill peaked in nominal terms, making up 26.8 percent of public expenditure and 10.4 percent of GDP.36 Between 2008 and 2010 the wage bill was reduced by more than a third in nominal terms37 through a combination of redundancies and reduction of pay levels. By the end of 2010, it dropped to 8.7 percent of GDP and 20.6 percent of total public expenditure38, which are below the averages in the European and Central Asia (ECA) region. In 2010 average pay in the public administration was only slightly higher than the private sector average.39 As economic growth returned, public sector salaries and staffing began to recover slightly in mid-2010.40 According to the 2011 budget approved by Parliament in December 2010, the wage bill is due to grow in 2011 by 3 percent in nominal terms (after having being cut by 17 percent in 2010). This is partly due to increases in the minimum salary and a reversal of pay cuts for the judiciary, which was mandated by a decision of the Constitutional Court. 2. If further cuts occur, then it would be useful to have a thorough analysis of their likely impact on government functions. Despite the lack of a public employee register, which would have provided detailed data on the size and composition of public employment, the government targeted redundancies in a manner aimed at limiting the impact on policy functions and public services. This was done primarily by consolidating back office functions and merging agencies with related functions. Functional reviews conducted in 2010 have resulted in selective cuts to ministries’ budgets, including through the merger of the Ministry of Regional Development and the Ministry of Environment, as well as savings from the abolition and amalgamation of agencies. Between 2009 and 2011, the number of central budget organizations has been cut by 59 percent.41 However, only few of the reviews’ recommendations have so far been implemented with a modest fiscal impact. The implementation of more of the reviews’ recommendations could enable the government to make additional savings through the consolidation of subordinated agencies and further staff reductions in selected government 36 This calculation is based on IMF GFS methodology. According to Eurostat’s European System of Accounts GFS, the figure for 2008 was 12 percent of GDP, dropping to 11.9 percent in 2008 and to 8.8 percent in Q3 of 2010. 37 Budget execution data reported by the MoF show a reduction of 33.6 percent in the nominal wage bill between 2008 and 2010. 38 These percentages are calculated based on wage bill data reported by the Ministry of Finance (cash basis) and GDP data reported by the State Statistics Bureau. According to the Eurostat accounting method, the wage bill accounted for 8.8 percent of GDP in Q3 2010. 39 According to the Central Statistical Bureau, in the first three quarters of 2010 the average salary in the general government sector was 0.7 percent higher than in the private sector, compared to 17.4 percent higher in 2008. However, an alternative methodology used in labor market surveys commissioned by the Government, which compare remuneration for equivalent posts in public administration and the private sector, suggests that salaries for professional and managerial staff in the Government represent some 75-80 percent of pay in the private sector. 40 According to MoF data total wage bill expenditure in 2010 was LVL 1.112 billion, which was 15 percent higher than the budget appropriation; total budget over-execution in 2010 reached 10.6 percent. Staffing increased by 5 percent in the central Government and 2 percent in local government in the last two quarters of 2010. 41 The total number of central-level budget organizations was cut from 229 in early 2009 to 94 in early 2011. 71 bodies.42 In the medium term, a series of sectoral functional reviews could deliver further efficiency gains, especially if implementation results in increased automation and streamlining of work processes. 3. A public employee register and a further streamlining of the public sector salary system would contribute much to sustainable wage bill management in the future. As pay levels have already declined very substantially and workloads have increased as a result of staff cuts, public sector productivity is likely to have increased. In these conditions, further across-the- board pay cuts are not advisable, as they would risk eroding public administration capacity to a level that might be difficult to restore, once public finances recover. Further policy actions could focus on ensuring adequate staff retention and fiscal sustainability through longer-term staff and wage bill planning. Creating a comprehensive public employee register, which could ideally include local government staff, would be an essential step in this direction. As of 2011, municipalities have started report staffing levels to the Treasury, which will facilitate fiscal planning. 4. Further streamlining of the salary system would also be conducive to improved wage bill planning and increased transparency, though the reform might need to be gradual to moderate the fiscal impact of pay equalization. Indeed, the adjustment effort has prompted a streamlining of the public sector salary system, which has reduced previous pay differentials among government bodies. Judicial personnel have been brought into the public administration pay structure, while legally binding pay caps have been introduced for elected officials and local government personnel. However, the co-existence of salary bands within the salary steps of the current grid system continue to give rise to pay distortions among different ministries and agencies, complicating wage bill planning. The salary bands for ministries were narrowed (to up to 49 percent difference within the same salary step) in late 2010, but still remain wider among subordinated agencies. Further efforts to narrow the salary bands could be pursued in the future taking into account the available fiscal resources required for pay equalization. 5. The crisis exposed weaknesses in the oversight of state owned enterprises (SOEs), whose status and governance needs to be reviewed. Latvia has a significant number of legal entities with SOE status, engaged in a wide array of activities, not all of which relate clearly to the provision of public goods and services. SOEs are subordinated to different ministries and municipalities. As a result, responsibility for SOEs’ oversight has been fragmented, leaving the government without a clear picture of the benefits derived from its ownership of SOEs. Some of the SOEs perform core functions of government agencies (e.g. procurement, regulatory functions), with SOE status apparently intended to give them increased flexibility over their expenditure, notably salaries. Other SOEs, notably in the transport sector benefited from sizeable subsidies (e.g. Riga airport, Latvian Railways), as did numerous entities in the sports and culture sectors. Others are profitable but enjoy a monopoly status (e.g. Latvian Forests). The fiscal adjustment has affected loss-making SOEs through reduced subsidies and profitable ones through higher dividend payments to the budget. As of April 2010, SOEs in receipt of budget 42 The 2011 budget includes savings of LVL 3.7 million based on the functional reviews of ministries; however, these reviews had identified a maximum of LVL 41 million worth of savings, e.g. through further manpower reductions in the Ministries of Defense and Interior. 72 subsidies and those with monopoly status have been prohibited from paying bonuses to their staff. However, salaries of SOE staff have declined less (by some 11 percent on average in 2008- 2010 according to the Ministry of Finance) and remain substantially higher than those of government employees. The government has developed an inventory of SOEs and plans to prepare a strategy on SOE management based on the OECD principles for SOE governance.43 The strategy will review the appropriate legal status of each SOE (some of which could be transformed into government agencies or privatized) based on its activities and the government’s policy priorities. Reducing the government’s ownership stake in SOEs has the potential to raise revenues in the short term, but also to increase competition in the economy in the longer term. At the same time, defining the mandate of those SOEs providing public goods ought to result in clear norms and performance standards for allocating budget subsidies. Relevant policy actions and planned reforms are referred to in the Letter of Development Policy. 43 OECD, Guidelines on the Corporate Governance of State-Owned Enterprises, 2005 73 ANNEX 5: ACTION PLAN TO IMPLEMENT THE RECOMMENDATIONS OF THE STATE AUDIT OFFICE OF THE REPUBLIC OF LATVIA ON THE EMERGENCY SOCIAL SAFETY NET Unofficial Translation Response of audited entities management No Recommendations of State Audit Office Action Deadline Administration of the status of a needy family and the GMI allowance 1. To ensure that the status of needy family (person) Ministry of Welfare will continue to carry 01.10.2011. and the GMI benefit is granted in compliance out inspections of social benefits and the with regulatory requirements, Ministry of Welfare services provided by Social services of as an institution responsible for national policy municipalities, evaluating that benefits are and coordination of social assistance, in granted in accordance with regulatory cooperation with local governments should take enactments, improving methods of checks measures to strengthen and improve control and taking in account available resources for systems set for administration of status of needy such inspections. family (person) and GMI allowance. MRDLG as There will also be methodological seminars an institution, which is responsible for strategy for Social services about application of legal implementation supervision and monitoring to acts, including the amendments made. ensure assessment of the implementation and the We will continue to explain the current inclusion of the information in the report on the problem questions in granting social Strategy. assistance and changes in laws and regulations by methodological letters. In the scope of ESF project "Social services quality assessment methodology development, validation and implementation” we will develop self- assessment methodology for Social services. MRDLG will evaluate the implementation of recommendation on a quarterly basis according to monitoring reports of ministries, which includes a section on the monitoring and control progress of measure, and will include updated information in quarterly report handed to the Cabinet of Ministers. 2. Ministry of Welfare as an institution responsible Ministry of Welfare will continue to carry 01.10.2011. for national policy and coordination of social out inspections of social benefits and the assistance, in cooperation with local governments services provided by Social services of has to take actions to strengthen the control municipalities, evaluating that benefits are system of GMI administration to ensure that granted in accordance with law, improving cooperation obligations set in the agreement with methods of checks and taking in account person are fulfilled and the changes in social available resources for such inspections. situation of a person or a family are evaluated. There will also be methodological seminars MRDLG as an institution, which is responsible for social services about application of legal for strategy implementation supervision and acts, including the amendments made. monitoring to ensure assessment of the We will continue to explain the current implementation and the inclusion of the problem questions in granting social information in the report on the Strategy. assistance and changes in laws and regulations by methodological letters. In the scope of ESF project "Social services quality assessment methodology 74 Response of audited entities management No Recommendations of State Audit Office Action Deadline development, validation and implementation” we will develop self- assessment methodology for social services. In the scope of ESF project "Social services quality assessment methodology development, validation and implementation” we will develop self- assessment methodology for Social services. MRDLG will evaluate the implementation of recommendation on a quarterly basis according to monitoring reports of ministries, which includes a section on the monitoring and control progress of measure, and will include updated information in quarterly report handed to the Cabinet of Ministers. 3. To ensure that the GMI benefit is granted and Ministry of Welfare plans to make 01.10.2011. paid only to those who due to objective reasons amendments to the regulations of the do not to get enough income (income level is less Cabinet of Ministers governing the GMI than LVL 90 per person), we invite Ministry of benefit, clarifying and updating the rules, Welfare to consider necessity to make the including the conditions for the GMI amendments to the Law and the regulations of the termination if family’s (person's) social Cabinet of Ministers, determining that the GMI status has improved and the family’s payments are ended if the local social service (person’s) average income per family notes that the family’s (person's) social status has member is over the level set to gain the improved and the family’s (person’s) average status of needy family (person). income per family member is over the level set to MRDLG will evaluate the implementation of gain the status of needy family (person). recommendation on a quarterly basis MRDLG as an institution, which is responsible according to monitoring reports of for strategy implementation supervision and ministries, which includes a section on the monitoring to ensure assessment of the monitoring and control progress of measure, implementation and the inclusion of the and will include updated information in information in the report on the Strategy. quarterly report handed to the Cabinet of Ministers. 4. To ensure that the status of needy family (person) MOW plans to make amendments to the 01.10.2011. is granted only to families (persons) that meet the regulations of the Cabinet of Ministers criteria set in the regulations of Cabinet of governing family or single person's Ministers, including that they have property that recognition as needy, by clarifying and can be used only for basic needs and not for updating the rules on family property in economic activities, we invite Ministry of relation to basic needs. Welfare to consider the possibility to supplement MRDLG will evaluate the implementation of the regulations of the Cabinet of Ministers, recommendation on a quarterly basis determining that as the property shouldn’t be according to monitoring reports of considered one car, that is in persons possession ministries, which includes a section on the more than for 24 months and is used for family’s monitoring and control progress of measure, (person’s) basic needs. and will include updated information in MRDLG as an institution, which is responsible quarterly report handed to the Cabinet of for strategy implementation supervision and Ministers. monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. 5. To ensure that the assessment of a family (person) Ministry of Welfare plans to make 01.10.2011. status set in the regulations of the Cabinet of amendments to the regulations of the 75 Response of audited entities management No Recommendations of State Audit Office Action Deadline Ministers is complete and provides an uniform Cabinet of Ministers, by including and treatment to all families (persons) who require the clarifying the criteria for agricultural status of needy family (person), we invite techniques that can be owned by family Ministry of Welfare to consider a possibility to (person) who is applying for the status of make amendments to the regulations of the needy person. Cabinet of Ministers, determining agricultural MRDLG will evaluate the implementation of techniques and their types, quantities and date of recommendation on a quarterly basis purchase, that shouldn’t be regarded as property according to monitoring reports of assessing the accordance of family (person) with ministries, which includes a section on the criteria set to be certified as needy. monitoring and control progress of measure, MRDLG as an institution, which is responsible and will include updated information in for strategy implementation supervision and quarterly report handed to the Cabinet of monitoring to ensure assessment of the Ministers. implementation and the inclusion of the information in the report on the Strategy. 6. To ensure that the rules issued by local MRDLG will improve the procedures that 01.10.2011. government (municipality) are legal and do not are implied evaluating the lawfulness of the limit family’s (person’s) statutory rights to rules of local governments and determine the receive GMI benefit, MRDLG should improve actions for ex-post controls for rules that internal control procedures relating to the issued have come into force but MRDLG has given opinions about lawfulness of the rules of local negative opinion. governments and if it is necessary – to propose MRDLG will evaluate the need to make the amendments in the law regulation the order in appropriate amendments to the Law on which the rules issued by local government come Local Governments. into force. The measure “Workplaces with Stipend-funded work practice in municipalities” 7. To ensure that the State Employment Agency’s SEA will ensure that only persons who do (hereinafter – SEA) measure “Stipend-funded not receive unemployment benefit will be work practice in municipalities” is carried in involved in measure and continuously will accordance with the regulations of the Cabinet of monitor how this criterion is applied. Ministers, Ministry of Welfare should ensure that MRDLG will evaluate the implementation of SEA in the measure involves only those persons, recommendation on a quarterly basis who do not receive the unemployment benefit. according to monitoring reports of MRDLG as an institution, which is responsible ministries, which includes a section on the for strategy implementation supervision and monitoring and control progress of measure, monitoring to ensure assessment of the and will include updated information in implementation and the inclusion of the quarterly report handed to the Cabinet of information in the report on the Strategy. Ministers. 8. To ensure that the SEA measure is carried in SEA will evaluate the measure and 01.10.2011. accordance with the main goal of the measure, according to this evaluation Ministry of that is to involve only those persons who because Welfare will make the decision regarding the of unemployment need material means and have necessity to make changes in the no other possibility to gain income in other ways, implementation mechanism of the measure including possibility to receive unemployment and if necessary – will reevaluate the criteria benefit, we invite Ministry of Welfare to evaluate set to involve persons in the measure. the necessity to involve in the measure persons, MRDLG will evaluate the implementation of who can receive unemployment benefit, but has recommendation on a quarterly basis refused from it. according to monitoring reports of MRDLG as an institution, which is responsible ministries, which includes a section on the for strategy implementation supervision and monitoring and control progress of measure, monitoring to ensure assessment of the and will include updated information in implementation and the inclusion of the quarterly report handed to the Cabinet of information in the report on the Strategy. Ministers. 76 Response of audited entities management No Recommendations of State Audit Office Action Deadline 9. In order to ensure that the state budget resources SEA will carry out periodic inspections in 01.10.2011. are used efficiently and the measure is carried out the work practice places. in accordance with the main goal of the measure, MRDLG will evaluate the implementation of Ministry of Welfare should ensure that SEA and recommendation on a quarterly basis local governments (municipalities) strengthen according to monitoring reports of internal control procedures on how persons are ministries, which includes a section on the involved in the measure and creation of the work monitoring and control progress of measure, practicing places. and will include updated information in MRDLG as an institution, which is responsible quarterly report handed to the Cabinet of for strategy implementation supervision and Ministers. monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. 10. To ensure that for work practice places is SEA will improve the internal regulations of 01.10.2011. purchased only such equipment that is necessary the measure, determining the order in which and will be used for carrying out the duties, local governments (municipalities) are Ministry of Welfare should ensure, that SEA recording inventory that is purchased within improve their internal control procedures for the the measure. SEA will supplement the purchase and recording of inventory. contract signed with municipalities adding MRDLG as an institution, which is responsible the obligatory information that should be put for strategy implementation supervision and in the acts of acceptance (acts that certify monitoring to ensure assessment of the that the inventory is received from the implementation and the inclusion of the provider). information in the report on the Strategy. SEA will update the approved form of the inspection act (inspections carried by SEA in local governments (municipalities) – on the spot checks) and the methods used in the checks. MRDLG will evaluate the implementation of recommendation on a quarterly basis according to monitoring reports of ministries, which includes a section on the monitoring and control progress of measure, and will include updated information in quarterly report handed to the Cabinet of Ministers. Assurance of social entitlements to persons who have lost employment by extending the payment of unemployment benefits to nine months regardless of the length of person’s social insurance contribution period 11. In order to ensure uniform treatment of persons Ministry of Welfare will make the 01.10.2011. who are entitled to unemployment benefits, and amendments in the Law on Unemployment that the unemployment benefit corresponds to the Insurance. social insurance principles set in the law, we MRDLG will evaluate the implementation of invite Ministry of Welfare make amendments to recommendation on a quarterly basis the Law, stipulating that by 31 December 2011: according to monitoring reports of - to unemployed person with insurance ministries, which includes a section on the period from one to nine years (including) monitoring and control progress of measure, an unemployment benefit in the last five and will include updated information in quarterly report handed to the Cabinet of months is paid LVL 45 per month, but Ministers. not more than the benefit is paid in the previous two months, when it was 75% of the unemployment benefit (that was calculated in accordance with social 77 Response of audited entities management No Recommendations of State Audit Office Action Deadline contributions made); - to the unemployed person with insurance period from 10 to 19 years (including) unemployment benefit in last three months is paid LVL 45 per month, but not more than the benefit is paid in the previous two months, when it was 50% of the unemployment benefit (that was calculated in accordance with social contributions made). MRDLG as an institution, which is responsible for strategy implementation supervision and monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. Transportation of pupils whose schools have been closed as a result of the education reform 12. To ensure that the local governments Internal regulations of SRDA will be 01.10.2011. (municipalities) from the state budget receive improved, increasing on the spot checks in compensation only for such expenses that are the local governments (municipalities) to relevant to the transportation of pupils whose 10 % from the total number of reports schools have been closed as a result of the handed by local governments education reform and are in compliance with (municipalities) for reimbursement of supporting documents (receipts, invoices etc.), expenses. MRDLG should ensure that State Regional SRDA will improve the methodological Development Agency (hereinafter – SRDA) explanations given to local governments strengthen control procedures, thus ensuring that (municipalities) “Explanations on how to fill state budget funds are spent in accordance with report for expenses on transportation of regulatory enactments, as well as MRDLG should pupils whose schools have been closed as a evaluate actions performed and include the results result of the education reform”, clarifying of performed evaluation in the report on the how to fill information “number of students, Strategy. who has been transported in month” and “number of days when students were transported”. MRDLG will evaluate the implementation of recommendation on a quarterly basis according to monitoring reports of ministries, which includes a section on the monitoring and control progress of measure, and will include updated information in quarterly report handed to the Cabinet of Ministers. Social considerations (low family income, disability etc) awarding state support for higher education 13. To ensure a uniform approach to the students, Ministry of Education and Science will 01.10.2011. who has rights to receive scholarships according make the amendments in the regulations of to social criteria, we invite Ministry of Education the Cabinet of Ministers after there will be and Science (hereinafter – Ministry of Education sentence of the Constitutional Court. and Science) and institutions of higher education (At the moment some of the students has implement actions, that will ensure, that if there is handed claim to Constitutional Court, limited number of scholarships (number of stating that the order set in the regulatory students who correspond with the social criteria enactments stating that priority to receive 78 Response of audited entities management No Recommendations of State Audit Office Action Deadline and qualify with criteria set to receive the scholarships is to students who comply with scholarship is larger than number of available social criteria isn’t in accordance with scholarships) priority to receive the scholarship is Constitutions Article 91 and Article 112). to the students who meet the social criteria. MRDLG will evaluate the implementation of MRDLG as an institution, which is responsible recommendation and will inform work group for strategy implementation supervision and that is responsible for monitoring the monitoring to ensure assessment of the implementation of Strategy. implementation. 14. To ensure a uniform approach to the award of Ministry of Education and Science will 01.10.2011. scholarships and to avoid different treatment of make the amendments in the regulations of persons, who according to the regulations of the the Cabinet of Ministers after there will be Cabinet of Ministers are eligible for government- sentence of the Constitutional Court. funded scholarships because they comply with (At the moment some of the students has social criteria, we invite Ministry of Education handed claim to Constitutional Court, and Science to consider necessity to make stating that the order set in the regulatory amendments to the regulations of the Cabinet of enactments stating that priority to receive Ministers, clarifying the term “there are children scholarships is to students who comply with in the family of the student” (in some cases social criteria isn’t in accordance with higher education institutions consider, that Constitutions Article 91 and Article 112). person complies with the criteria, if there is at MRDLG will evaluate the implementation of least one child in the family, in other - the recommendation and will inform work group regulations of institution clarify, that only persons that is responsible for monitoring the with two or more children in family comply with implementation of Strategy. the criteria). MRDLG as an institution, which is responsible for strategy implementation supervision and monitoring to ensure assessment of the implementation. Deficiencies in the issue and registration of certifications to receive healthcare benefits 15. To simplify and ease the work of local If there will be necessity to make 01.10.2011. government’s Social services in certifying that amendments in the regulatory enactments, persons comply with the criteria set to receive Ministry of Health will ensure, that all of the allowances for receiving healthcare services, we regulations that is necessary to change will invite Ministry of Health to ensure, that if there is be reviewed at the same time. necessity to make amendments in one of the MRDLG will evaluate the implementation of regulatory enactments that stipulates health care recommendation on a quarterly basis organization and financing arrangements, according to monitoring reports of evaluate, if at the same time it is not necessary to ministries, which includes a section on the make amendments in other regulatory monitoring and control progress of measure, enactments. and will include updated information in MRDLG as an institution, which is responsible quarterly report handed to the Cabinet of for strategy implementation supervision and Ministers. monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. 16. To ensure that from the state budget resources Ministry of Health will inform the local 01.10.2011. allocated for implementation of Strategy are governments on changes in legislation and financed services only to those persons, whose will carry out explanatory work on income level comply with the limits set in the requirements set in the regulations. regulations of the Cabinet of Ministers (that is do MRDLG will evaluate the implementation of not exceed LVL 90, are in the scope from LVL 90 recommendation on a quarterly basis to LVL 120 or from LVL 90 to LVL 150), as well according to monitoring reports of as the notes issued by local governments ministries, which includes a section on the 79 Response of audited entities management No Recommendations of State Audit Office Action Deadline certifying, that person has the right to receive the monitoring and control progress of measure, allowance, are in accordance with regulatory and will include updated information in enactments, Ministry of Health should ensure, quarterly report handed to the Cabinet of that local governments strengthen internal control Ministers. procedures set for certifying the persons and issuing the notes. MRDLG as an institution, which is responsible for strategy implementation supervision and monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. 17. To simplify and ease the work of local Ministry of Health will make amendments to 01.10.2011. government’s Social service in certifying that the 19 December 2006 regulation of the persons comply with the criteria set to receive Cabinet of Ministers Nr.1046 “Health Care allowances for healthcare services and to avoid Organization and Financing” and clarify the risk of errors in the note (that certifies that person references set in the Annexes 42 and 43 to can receive allowance), we invite Ministry of paragraph 76 and 10.18., indicating a certain Health to evaluate the possibility of improving the level of income. approved form of note (form of note is approved MRDLG will evaluate the implementation of by the regulations of the Cabinet of Ministers). recommendation on a quarterly basis MRDLG as an institution, which is responsible according to monitoring reports of for strategy implementation supervision and ministries, which includes a section on the monitoring to ensure assessment of the monitoring and control progress of measure, implementation and the inclusion of the and will include updated information in information in the report on the Strategy. quarterly report handed to the Cabinet of Ministers. 18. To ensure that the state budget resources for Ministry of Health, in cooperation with local 01.10.2011. implementation of Strategy and number of authorities (municipalities) will assess the services necessary to grant are planned according local social service records of certificates to the number of persons who need these services issued and evaluate the necessity for single (Social service has assessed that person comply register, if allowances will be still in force with the criteria set to receive allowances for after the working period of Strategy. healthcare services), we invite Ministry of Health MRDLG will evaluate the implementation of and local governments (municipalities) to assess recommendation on a quarterly basis the possibility to establish uniform state register, according to monitoring reports of where will be accumulated information of all ministries, which includes a section on the persons who are certified to receive healthcare monitoring and control progress of measure, allowances and the periods in which they can and will include updated information in receive these allowances. quarterly report handed to the Cabinet of MRDLG as an institution, which is responsible Ministers. for strategy implementation supervision and monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. Adding a public health nurse to the general practitioner’s and other primary health care services 19. To ensure that the evaluation of general Ministry of Health will review the General 01.10.2011. practitioner (family doctor), who receives Practitioners evaluation procedure set in the additional funding for the other nurse or physician regulations of Cabinet of Ministers and will assistant (paramedic), is objective, we invite make the amendments to ensure, that general Ministry of Health to consider the necessity of practitioners are interested to increase the lists of needy persons, that general practitioner preventive examinations covering all has to draw to receive the funding (necessity of patients. 80 Response of audited entities management No Recommendations of State Audit Office Action Deadline such lists is set by the regulations of Cabinet of MRDLG will evaluate the implementation of Ministers) accordingly improving and reviewing recommendation on a quarterly basis the process that is set to assess the work of according to monitoring reports of general practitioner in order to receive additional ministries, which includes a section on the funding. monitoring and control progress of measure, MRDLG as an institution, which is responsible and will include updated information in for strategy implementation supervision and quarterly report handed to the Cabinet of monitoring to ensure assessment of the Ministers. implementation and the inclusion of the information in the report on the Strategy. Service “Accommodation expenses when receiving outpatient healthcare services, for needy persons and low-income persons and persons accompanying them” 20. To ensure that the content of the service is set in Ministry of Health will make surveys in 01.10.2011. accordance with the goal of the measure hospitals to ascertain their views on the need (overnight hotel stays in hospitals), we invite to include the nurturing expenses for patients Ministry of Health to evaluate if it is necessary to and accompanying persons. ensure nurturing for persons who receive this According to the results of surveys Ministry service (needy persons, low-income persons and of Health will make the decision. persons accompanying them). MRDLG will evaluate the implementation of MRDLG as an institution, which is responsible recommendation on a quarterly basis for strategy implementation supervision and according to monitoring reports of monitoring to ensure assessment of the ministries, which includes a section on the implementation and the inclusion of the monitoring and control progress of measure, information in the report on the Strategy. and will include updated information in quarterly report handed to the Cabinet of Ministers. 21. To ensure that the tariff of the service for needy Ministry of Health will make surveys in 01.10.2011. persons, low-income persons and persons hospitals to find out the actual costs of the accompanying them set in the regulations of services and according to the results of these Cabinet of Ministers comply with actual costs of surveys will make the decision about the service, we invite Ministry of Health to necessity to change the tariff. review it. MRDLG will evaluate the implementation of MRDLG as an institution, which is responsible recommendation on a quarterly basis for strategy implementation supervision and according to monitoring reports of monitoring to ensure assessment of the ministries, which includes a section on the implementation and the inclusion of the monitoring and control progress of measure, information in the report on the Strategy. and will include updated information in quarterly report handed to the Cabinet of Ministers. 22. To ensure a uniform approach to service delivery Ministry of health will make amendments to 01.10.2011. and the content of the service, Ministry of Health the 19 December 2006 regulations of the should ensure, that when granting state funded Cabinet of Ministers Nr.1046 "Health care service to needy persons, low-income persons and organization and financing arrangements" to persons accompanying them, uniform content of ensure equal content of the service. service is granted in all institutions (at the MRDLG will evaluate the implementation of moment there are differences in the content of the recommendation on a quarterly basis service granted “for the same price”). according to monitoring reports of MRDLG as an institution, which is responsible ministries, which includes a section on the for strategy implementation supervision and monitoring and control progress of measure, monitoring to ensure assessment of the and will include updated information in implementation and the inclusion of the quarterly report handed to the Cabinet of information in the report on the Strategy. Ministers. The concept of terminology used in regulations – “a person capable of work", "working age", "national pension recipient” 81 Response of audited entities management No Recommendations of State Audit Office Action Deadline granting status of needy person, GMI benefit as well as health care allowances 23. To ensure consistent use of terms in the Ministry of Welfare and Ministry of Health 01.10.2011. legislation governing the status of needy family will make the amendments in the regulatory (person) and the granting of the GMI as well as enactments to ensure that uniform terms are health service delivery, and their common used. understanding, we invite Ministry of Welfare and MRDLG will evaluate the implementation of Ministry of Health to examine usage of terms recommendation on a quarterly basis "working age", "a person capable of work", "the according to monitoring reports of state old age pension recipient", "pensioner" in ministries, which includes a section on the regulatory enactments and accordingly clarifying monitoring and control progress of measure, these terms. and will include updated information in MRDLG as an institution, which is responsible quarterly report handed to the Cabinet of for strategy implementation supervision and Ministers. monitoring to ensure assessment of the implementation and the inclusion of the information in the report on the Strategy. Control of the fulfillment of monitoring targets included in the information reports on the implementation of the Strategy 24. In order to ensure that the information in the Together with report on implementation 01.10.2011. reports corresponds with the actual situation and progress of the Strategy MRDLG will ask transparent calculation of indicators, we invite to from the ministries data used in calculation develop established control procedures, of indicators as well as methodology how determining that ministries who are responsible the indicator is calculated and will make the for measure together with report on evaluation of the received information. implementation progress of the Strategy submits to the MRDLG for evaluation data used in calculation of indicators as well as methodology how the indicator is calculated. Source: Latvia State Audit Office. Notes: Due to the consolidation of government ministries, the Ministry of Regional Development and Local Government of the Republic of Latvia has been incorporated in the Ministry of the Environment. Institutional Responsibility for the MRDLG measures in this action plan have been transferred to the Ministry of Welfare (MOW) except the measure concerning the transportation of children from closed schools, which is now the responsibility of the Ministry of Environmental Protection and Regional Development. Abbreviations used: GMI - guaranteed minimum income level Ministry of Education and Science - Ministry of Education and Science SEA - State Employment Agency MRDLG – Ministry of Regional Development and Local Government44 SRDA - State Regional Development Agency ESF - European Social Fund Strategy – Social Safety Net Strategy 44 The Ministry of Regional Development and Local Government was incorporated in the Ministry of the Environment and a new institution—the Ministry of Environmental Protection and Regional Development—was established from January 1, 2011. 82 ANNEX 6: WORKPLACES WITH STIPEND PROGRAM Description of Workplaces with Stipend program 1. In response to rapidly rising unemployment in the wake of an 18 percent real contraction in GDP, the Government of Latvia launched a public works program know as the WWS program in September 2009 as part of its ESSNS. The WWS program targets individuals who have lost their job but are not receiving unemployment insurance benefits. Workplace creation and work supervision is the responsibility of municipalities, but the Employment Affiliates (de- concentrated offices of the State Employment Agency) are tasked with ensuring that WWS rules are met by the municipalities. The central government finances the stipends, which account for more than 80 percent of the budget, and the materials needed, but administration and supervision overheads are borne by municipalities. 2. Participants are required to work full time (40 hours a week, 8 hours a day), are employed in labor-intensive tasks, and receive a monthly stipend of LVL 100, which is 80 percent of the legal net minimum wage. The relatively low stipend rate has been shown internationally to achieve “self targeting”, i.e. attracting low skilled unemployed people, which makes the programs more effective at reaching those who need the most support, and lowers the risk that constituencies will develop that push for the program to remain in place once crisis conditions have passed and privately created jobs are available. 3. Between September 2009 and October 2010, more than 6.6 million full time equivalent WWS days of participation were created and more than 72,000 unemployed people participated in the WWS program, albeit for varying time intervals. On average, WWS participants enroll in the program for about 4 months, which is 2 months less than the limit on how long a person can participate. Exit from the program occurs mostly because the participant breaks the rules (47 percent), but 16 percent of participants also exited the program because they found another job. 4. At any given time, there are between 14,000 and 22,000 work places available for WWS participants, with the higher number usually coinciding with the summer months when labor- intensive projects are easier to organize. Approximately half the WWS participants are women. Although there is variation in the efficiency with which workplaces are created by municipalities, WWS participants are generally more numerous in locales where there are more unemployed people on the waiting list. This reflects very favorably on the responsiveness of national and local authorities in deploying the new social welfare program quickly and where it is needed most. 5. Since the WWS program was launched, the program has been over-subscribed. More than 40,000 people are on the waiting list for the WWS program. The high demand for the program signals a weak labor market, but it also suggests that the stipend amount might be higher than it needs to be to serve as a last resort safety net, rather than an alternative form of employment. 6. Despite strong lobbying, the government was able to exclude state- and municipal-owned enterprises from benefiting from the WWS program. This was an important move, because 83 allowing WWS participants to work in these entities would have created strong budget incentives for these employers to dismiss workers to whom they pay the minimum wage. More recently, there have been requests by businesses for wage subsidies for their employees. Wage subsidies offer some short-term value to support labor demand, but often have been plagued by high deadweight costs if they postpone necessary industrial restructuring and withdrawing them can be politically unpopular. Wage subsidies also can result in job substitution rather than job creation. Planned evaluation of the Workplaces with Stipend program Objectives and Organization 7. The main objective of the impact evaluation of the Latvian Public Works Program (WWS) is to assess the effectiveness of the program, and to give clear policy recommendations for an expansion or contraction of the intervention under the ESSNS in Latvia. The evaluation will also provide evidence that will shape the design of crisis-response safety net programs at the international level. The impact evaluation of the WWS program will measure the impact of the temporary income support program on beneficiaries’ welfare and employability. 8. The three most prominent questions that will be asked vis-à-vis this impact evaluation are: (1) Did the WWS program act as a safety net, i.e. how many jobs were created for people at the lower end of the income/welfare distribution? (2) How did the WWS impact the welfare of program participants, i.e. what are the net income gains? (3) How is the presence of the program affecting labor markets in general? Evaluation Design/Identification Strategy  Propensity score matching, difference-in-difference, and instrumental variable design: This design employs a predicted probability of group membership based on observed predictors (similarities between individuals in the treatment and control groups). It would work from a matched sample of recent public works program graduates matched with individuals on the waiting list. The design then utilizes retrospective data that will be collected through the survey instrument to reconstruct baseline information on the currently-enrolled population. Finally, to control for endogeneity that may be occurring due to reasons individuals enter the program, an instrumental variable(s) will be identified.  Regression discontinuity design: This portion of the evaluation will compare the effects of the public works program to those of the standard unemployment insurance benefit. This design will exploit eligibility criteria used for program participant selection from the pool of equally eligible applicants: ineligible individuals, who are just barely ineligible for the program can be used as a control group. The cut off point for the RD design will be those individuals who either just barely qualify for the WWS or those who just barely qualify for unemployment. So, for example, excludability could be based on months worked immediately prior to unemployment. Using this methodology it is important to consider omitted variable bias to be sure that the change exhibited is attributable to the intervention. Timing and Funding 9. The survey field work was carried out from December 2010 to February 2011. Data cleaning took place over February 2011 to end-March 2011. The data was then provided to the 84 team responsible for carrying out the analysis of the data in end-March 2011. The draft evaluation is due to be available in May 2011. 10. The evaluation is funded using EU-provided ESF finances (approximately LVL 40,000) and is government executed, but the World Bank is providing technical assistance on a number of aspects. The World Bank has helped with the evaluation strategy, questionnaire design, sampling strategy, and identifying households to be interviewed. In addition, World Bank staff members have received the clean data set and intend to carry out some of the more rigorous impact evaluation work. 85 ANNEX 7: POLICY MATRIX (Program of two Special Development Policy Loans) Loan 1 Loan 2 Objective Prior Actions (bold) & Supporting Measures (Completed) Prior Actions (bold) Outcome Ensure adequate emergency The Borrower’s Cabinet of Ministers approved an Emergency Social The Borrower, through the national and local government agencies, has Emergency safety net safety net financing for Safety Net Strategy for the period from October 1, 2009 through been satisfactorily implementing the Emergency Social Safety Net measures are deployed education and health services, December 31, 2011 on September 8, 2009 (Protocol No. 56, 78§). Strategy as indicated by the maintenance of adequate budget financing and remain in place and social protection programs in 2010 and 2011, and evidenced by regular performance monitoring through 2011. to mitigate the impact of fiscal reports submitted to the Cabinet of Ministers and publishing them on adjustment and the economic 45 the web page of the Ministry of Welfare. Information on contraction on households. government’s implementation of ESSNS and structural reforms is independently assessed and publicly available. Monitor performance of national The Borrower has published the Emergency Social Safety Net Strategy The Borrower, through the Auditor General, has conducted on October The independent Audit and local government agencies on the internet, and in local media on December 21, 2009. 28, 2010 an independent audit of the Cabinet of Minister's performance Report on ESSNS in implementing ESSNS & in implementing the Emergency Social Safety Net Strategy.48 implementation is increase public awareness, The Borrower has provided adequate resources for and put in place a completed and transparency and accountability performance monitoring and impact evaluation plan, making use of existing published on the of government measures in the monitoring mechanisms, administrative data, and surveys.46 47 internet in October social sectors. 2010, and the action plan of audit recommendations is put in place by October 2011. 45 Quarterly (in 2010 and 2011) reports containing monitoring statistics for each element of the program will be submitted to the Cabinet of Ministers and posted on the Ministry of Welfare Website http://www.lm.gov.lv/. 46 The Government (each agency and level of government responsible for implementing ESSNS actions) will establish baseline of implementation performance indicators that will be regularly monitored by a working group established for this purpose and convened by the Ministry of Regional Development and Local Government. 47 The Government will add a specially designed module to its ongoing Labor Force Survey (LFS) for the duration of the ESSNS. 48 The independent audit report should be published on the internet and discussed publicly. Problems identified in the audit should be addressed with proposed actions in 2011 budget. 86 Social Protection Loan 1 Loan 2 Objective Prior Actions (bold) & Supporting Measures Prior Actions (bold) Outcome W1. Ensure social insurance The Borrower enacted an amendment to the Law “On Insurance in The Borrower has enacted an amendment to the Law on the State Percentage of system is responsive to Case of Unemployment” effective as of July 1, 2009, which extends the Funded Pensions which increased the contribution rate to the funded unemployment benefit households needs pay-out period of unemployment benefits to 9 months, effective until pension pillar to 6 percent of a worker's salary starting from January 1, recipients whose December 31, 2011, which, inter alia, provides for a decrease in the 2013. benefits are extended eligibility requirement for unemployment benefits to 9 months of by the reform equals contributions in the previous 12 months. 22% in 2011. Individual contributions to the funded pension pillar have risen from 2% in 2009 to 6% from January 1, 2013. W2. Strengthen mandatory, The Borrower: (a) enacted an amendment to the Regulations of the The Borrower has allocated at least 50 percent of the cost of the Municipalities have municipally administered, Cabinet Ministers No. 1070 dated October 1, 2009 and No. 1489 dated guaranteed minimum income in the 2011 budget, with local sufficient financial mean-tested social assistance to December 1, 2009 to increase the Guaranteed Minimum Income (GMI) governments funding the other 50 percent. resources to make mitigate the impact of the crisis benefit amount to LVL 40 per adult and LVL 45 per child in a timely payment of GMI on the poorest households. household; and (b) allocated financing in the 2010 budget of, at least, 50 benefit to all eligible percent of the cost of the GMI from state funds, with local governments individuals. funding the other 50 percent W3. Strengthen active The Borrower introduced amendments to the Cabinet of Ministers In 2011, on average employment measures to Regulation No. 166, dated July 14, 2009 to provide temporary 16,500 people will be respond to increased demand for employment for the unemployed not covered by unemployment enrolled in the assistance from unemployed insurance effective as of August 8, 2009 emergency public people who do not get works program. unemployment insurance Health Loan 1 Loan 2 Objective Prior Actions (bold) & Supporting Measures Prior Actions (bold) Outcome H1. Reduce the risks associated The Borrower provided for an additional public health nurse for Increased hours and with fiscal consolidation in the approximately half of the general practitioners and primary health care The Borrower has strengthened primary health care services program outreach services at the health sector by strengthening providers in the emergency social safety net and financed it fully in the in the 2010 and 2011 budget by expanding the additional public health Primary Health Care General Practitioner/Primary 2010 budget pursuant to the Cabinet of Ministers Regulation No. 1630 nurse or physician’s assistant program to primary care practices and level to compensate in Health Care to partially dated December 22, 2009. developing a family physician advisory telephone service. part for reduced substitute for reduced access to financing of specialist specialist and hospital-based and hospital care. care. The share of GPs with an extra public health nurse increased to 36% 87 Loan 1 Loan 2 Objective Prior Actions (bold) & Supporting Measures (Completed) Prior Actions (bold) Outcome in 2011 (from 0% in 2009). H2. Augment financial The Borrower allocated in the 2010 budget funds for households with The Borrower has implemented measures to: (a) strengthen the People from households protection from the cost of per-capita income less than half the minimum wage, at adequate levels, exemption program for health payments by eliminating all out-of- certified as needy are health care, and maintain critical to finance: (a) an exemption from co-payments for general practitioner, pocket health payments for visits, tests, and pharmaceuticals for exempt from health health services for needy outpatient, specialist, and inpatient services; (b) an exemption from patients classified as "needy"; (b) provide a limited package of benefits service co-payments; households. pharmaceutical charges above LVL 50 per year per person; and (c) an for patients as their incomes exceed the "needy" line; and (c) provide are receiving subsidized exemption from the cost of overnight hotel stays in hospitals, home care outpatient psychiatric and home care for chronic diseases without cost prescriptions; and retain for those with serious diseases and day-care centers for those with to all the population of Latvia. access to critical health mental diseases. care services. Education Loan 1 Loan 2 Objective Prior Actions & Supporting Measures Prior Actions (bold) Outcome E1. Ensure access to pre- The Borrower allocated funds in the 2010 budget for pre-primary The Borrower has allocated in the 2011 budget adequate financing for Enrollment of 5 and 6 primary education and child education/child development programs for children starting 5 years of pre-primary education/child development programs for children year old children in free development programs is age. starting from the age of 5 years old. pre-primary programs is maintained maintained at least at 94% for 5 year olds, and 98% for 6 year olds in 2011. E2. Ensure access of primary The Borrower allocated in the 2010 budget funds to cover the cost of The Borrower has allocated in the 2011 budget adequate financing to The time students spend and secondary school-aged transportation of students whose schools have closed to replacement cover the cost of transporting to replacement schools students whose travelling to and from children to education facilities is schools. schools have closed. primary and secondary maintained during school is kept within 60 implementation of the per- minutes (one way). student financing model Share of children from closed schools receiving assistance for school transportation under the State-subsidized scheme reaches at least 77% in 2011. 88 E3. Improve equity of subsidies The Borrower added into the Regulation of the Cabinet of Ministers Not less than 50% of for higher education No. 740, dated August 24, 2004 social considerations, in addition to state subsidies to cover merit, to the awarding of state support to students in higher education the stipends of students by issuing a Regulation of the Cabinet of Ministers No.511 dated June in higher education are 2, 2009.49 awarded to academically eligible students on the basis of poverty and social considerations in addition to merit in 2011. 49 Social considerations include low family income, disability or handicap, large number of siblings, etc.). For potential students of equal academic merit, social considerations will prevail. 89 ANNEX 8: MONITORING AND RESULTS FRAMEWORK MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result Percentage of persons - - - - - - - - - in the population 13.9% [HBS on 22.5% [HBS on whose household per (data source: 2009] [data 2010] capita income HBS 2008)50 source: (measured by the HBS HBS survey) qualifies them 9.9% (data 2009] as needy source: EU- SILC 2008) 17.5% [data source: EU- Identify target SILC groups for 2009] 1. Emergency Social Safety Net Percentage of persons - - - assistance living in households 38.6% 50% 35.1% 50% whose reported (data on (data (data on income qualify as (HBS 2009)53 from 2010)54 needy, that have been 2008)52 2009 certified as needy51 HBS) (data estimated by 54.7% (data Ministry of Welfare from 2008 45.2% based on HBS EU-SILC) (data indicator and from administrative data, 2009 with a year lag) EU- SILC) 50 Central Statistical Bureau produced data from HBS and EU-SILC surveys on special request of Ministry of Welfare using methodology which is close to the methodology used in the income assessment for granting needy persons status. The kinds of income which are not taken into account in granting needy persons status, were excluded from the income categories by the CBS according to this methodology. 51 The category “needy” is defined in the Regulation of Cabinet of Ministers No. 299, “Procedures by which a Family or Person Living Separately Shall be Recognized as Needy” (adopted on 3 March, 2010, in force from April 1, 2010), and amended by Regulation of Cabinet of Ministers No 1140 (adopted on 21 December, 2010). The definition is as follows: “A family (person) shall be recognized as needy, if the income per each family member during the last three months does not exceed 90 Lats and if: (1) it does not own monetary accumulations in credit institutions; (2) it does not own property excluding property, mentioned in these Regulations; (3) it has not entered into a maintenance contract; (4) it is not on full support of the State or local government; and (5) A person who is able to work and who does not work shall, prior to requesting the benefit, register with the State Employment Agency, except for the cases referred to in Law on Social Services and Social Assistance.” 52 In 2008, according to Household Budget Survey (HBS), 13.9% of the population lived in household whose per capita income (measured by the HBS survey) is equal to or less than half the minimum wage, equivalent to approximately 311.4 thousand people. According to the statistics of municipalities, 120.3 thousand people were certified as needy or 5.3% of population in 2008. 53 Agreed with the World Bank staff. 54 Agreed with the World Bank staff. 90 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result Improve General Number of GPs with Practitioner (GP) an extra public health and other nurse. There are 668 50057 Primary Health rural GPs in January 0 30056 289 - (target.) Care (PHC) 2010.55 services by adding a Public Health Nurse to Percentage of needy engage with and patients who are 2. visit patients; registered at GPs with ensure preventive an extra nurse that examinations for have had at least one clients; alert preventive contact 65%58 85%60 75%59 - patient and with a Public Health (target.) GP/PHC provider Nurse or GP for to emerging cancer screening, health issues; and physical exams, extend clinic vaccinations and hours. related health services. In 2010 and 2011 October- budgets, December financing for full Number of subsidized 3. 2009 under - 18419961 547641 - 42000062 exemption from out-patient visits. ESSN co-payments for 27909 GP, outpatient, 55 The initial target in SDPL 1 was set for rural GPs, but the program has been expanded to also provide an additional public health nurse to GPs in urban areas. Therefore, the indicator has been changed from “rural GPs” to “GPs.” 56 In compliance with Regulations of Cabinet of Ministers No.1046, one half of 668 GPs’ practices are allowed to employ the second nurse. As it takes time to study, to train and to sign an agreement with the nurses who are interested in engaging in primary care it is planned to have a gradual roll-out and hence only half of General Practitioners’ practices are to employ the second nurse in 2010. 57 The ratio of 2010 is increased by 60% on average, taking into account the number of medical persons who will retrain and the time needed for retraining. 58 The average coverage ratio of patients registered with GP. 59 The average coverage ratio of patients registered with GP increased by 10% is used for estimates, as it is planned that the second nurse will engage in the care of needy persons. 60 The ratio of 2010 is increased by 10%, because after engaging the second nurse in the primary care network the coverage of patients will increase. 61 Calculations are made based on actual Q4 2009 data and the projected increase in the number of needy persons (revised from SDPL 1 based on actual Q1 2010 data). The targets are based on the assumption that after decreasing the number of hospitalizations and the average length of stay, a certain number of home care services need to be provided. 62 According to the proposal of Ministry of Health to update expected results by the actual forecasts of the Ministry of Health. 91 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result specialist, and inpatient services October- for needy December Number of subsidized households. 2009 under - 1438063 23425 - 2268064 in-patient admissions. ESSN 2140 In 2010 and 2011 budgets, financing for full Number of patients exemption from receiving 100% October- pharmaceutical reimbursement of December 34080 65 21920 4. charges above medicinal products or 2009 under - - 2200066 LVL 50 per year medicines charges ESSN per person (LVL under the emergency 99 12.5 each social safety net. quarter), for needy households In 2010 and 2011 budgets, financing Number of hospitals’ October- sufficient to hotel patients December maintain 27200 67 7208 7200 68 5. receiving a subsidy 2009 under - - overnight hotel under the emergency ESSN stays in hospitals social safety net. 551 for patients from needy households. In 2010 and 2011 Number of subsidized October- budget, financing home care visits under December 6. - - sufficient to offer the emergency social 2009 under 82896 home care to safety net for needy ESSN 20000069 63 Calculations are based on Q4 2009 data, relating the quarter to the year and taking into account the projected increase in the number of needy persons. 64 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 65 New action (launched on October 2009), therefore Q4 2009 data not used to calculate targets. The probable number of needy persons to whom the expenses for medicinal products are reimbursed to the amount of 100%, was estimated taking into account the total number of patients receiving reimbursements for medicinal products and the projected increase in the number of needy persons. 66 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 67 New action (launched in October 2009), therefore Q4 2009 data not used to calculate targets. The targets were estimated based on the assumption that 50% of patients who received health care services in the reorganised hospitals, will use only out-patient services, thereby the overnight hotel stays in hospitals should to be reimbursed. 68 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 92 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result patients with persons with serious 115 200 000 70 serious diseases diseases. from needy households. In 2010 and 2011 Number of established 2 471 0 budget, financing day care centers. 272 required for day- care centers for 7. patients with mental diseases October- Number of needy from needy December patients receiving care households. 2009 under - 40073 823 40074 in mental day care ESSN centers. 21 90% 93% 93% Percentage of 5 year 89% In 2010 and 2011 (18799 (19425 (19013 old children attending (17707 of 90% 94% budgets, maintain of of of pre-primary child 19896) financing for pre- 20888) 20888) 20444) development.75 primary 8. education/child Percentage of 6 year 98% 98% 98% 98% development old children in pre- (19008 of (19473 (19473 98% 98% (20470 programs for 5 primary/starting 19396) of of of and 6 year olds. primary (from 19870) 19870) 20888) September 2010). 76 Financing in the Percentage of students October- 70% 76.6% 72% 88% 75% 77% 9. 2010 and 2011 receiving assistance December (1870 of (2160 of (2240 of (2400 of 69 New action (launched in October 2009), therefore Q4 2009 data were not used to calculate targets. The estimates are based on the assumption that after decreasing the number of hospitalisations and the average length of stay, a certain number of home care services need to be provided. 70 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 71 The planned decrease in the number of inpatient psychiatric beds is made possible by developing mental health care centres. The plan was for two community-based mental health care centres to be opened to serve a ceiling of 10% of patients with mental disorders, thereof in addition to the current two centres. This was due to take place along with the re-organisation or decrease in the number of inpatient psychiatric beds. 72 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 73 New action (launched on October, 2009), therefore Q4 2009 data not used to calculate targets. Estimates are made based on the number of patients receiving care in mental day-care centres. 74 The target ratio was revised in April 2011 based on the actual forecasts of the Ministry of Health. 75 The government intends to collect enrollment data for 2011 only in the fourth quarter following the beginning of the new school year. 76 The government intends to collect enrollment data for 2011 only in the fourth quarter following the beginning of the new school year. 93 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result budgets adequate for school 2009 under 2680) 2980) 2980) 3130) to cover costs of transportation in ESSN transporting municipalities where 70% (1870 students to schools have closed. of 2680) replacement Percentage of students October- schools required to travel more December than 60 minutes (one 1.0% 0.8% 2009 under 1.5% 1.2% way) to get to school, 0.6% 0.47% (22 of (20 of ESSN (28 of (25 of in municipalities 2980) 3130) 1.5% 2680) 2980) where schools have (28 of 2680) closed. Implement Percentage of students program to add qualifying for state social financial support considerations 39% 45% university based on 39% 45% 50% (low family (1379 of 52% (1620 of 60% 10. social considerations/ (1379 of (1620 of (1850 of income, 3549) 3600) criteria (proportion of 3549) 3600) 3700) disability, etc) to persons of total the award of state received state support for education grants). higher education. Temporary Percentage of newly- extension of pay- registered unemployed 74% (data 60% 42.2% 60% 50.1% 60% 44.3% 60% 41.1% 60% 60% 60% 60% out period of eligible for from 2009 (Mar) (Jun) (Sept) (Dec) unemployment unemployment Q1) 11. insurance insurance benefit benefits to 9 (administrative data of months, until the Ministry of January 1 2012, Welfare).77 and reduction in 77 The indicator represents the percentage of unemployed who otherwise would not have been eligible for unemployment insurance prior to the reform. By relaxing the eligibility criteria (via the lowering of the contribution period), the coverage is increased as more people became eligible for unemployment insurance benefit. 94 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result the months of Percentage of contribution to unemployment benefit 079 22% 26.0% 22% 31.4% 22% 29.9% 22% 25.7% 22% 22% 22% 22% become eligible receivers whose (Mar) (Jun) (Sept) (Dec) for coverage benefits are extended (from 12 in the by the reform previous 18, to 9 measure.78 in the previous 12) Percentage of 1.2% 2.3%81 2.2% 2.3% 2.5% 3.5% 2.8% 4.4%82 3.0% 4.4% 4.4% 4.4% 4.4% Raise coverage population receiving (2008)80 and increase the GMI (administrative payment period data of the Ministry of 2.78% of GMI, while Welfare and Central (2009) establishing Statistical Bureau of financial Latvia) 12. compensation to help local governments Percentage of needy 22.8% 30%84 31.6% 50%85 35.9% 50% 37.7% 50% 38.7% 50% 50% 50% 50% meet greater persons receiving GMI (2008)83 demand for the benefit (administrative benefit. data of the Ministry of 35.6% Welfare) (2009) 78 The reform extended the duration of unemployment benefits for those eligible from 4 to 6 months to 9 months at a rate of LVL45 per month (a quarter of gross minimum wage in 2010) for months 5-9, and for those eligible for 6 months, also at a rate of LVL45 for months 7-9. 79 Percentage of unemployment benefit receivers whose benefits are extended by the reform was 22% in Q4 2009. 80 According to the statistics of municipalities 27.4 thousand people received GMI benefit or 1.2% of the population of the previous year 81 The assumption is that there will be 54.0 thousand GMI recipients or 2.3% of the population (assuming that the number of population is not changed). 82 In 2010 Q4 and the next quarters the assumption is that there will be 100.0 thousand GMI recipients or 4.4% of the population (assuming that the number of population is not changed). 83 According to statistics of municipalities in 2008, 120.3 thousand people were certified as needy, and 27.4 thousand people received the GMI benefit. (27.4 /120.3 x100%= 22.8%). 84 The assumption is that 180.0 thousand people will be certified as needy and GMI benefit receivers will be 54.0 thousand people (180.0 /54.0 x100%=30%). 85 Assumption is that 200.0 thousand people will be certified as needy and GMI benefit receivers will be 100.0 thousand people (100.0/ 200.0 x100%=50%). 95 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result - - - - - Average length of 4.05 months 7.00 6.00 pay-out/period of (in 2008)86 months87 months receipt of GMI benefits, in months 4.54 months (estimated data of the (in 2009) Ministry of Welfare) Share of spending on 47.1% 50% 50.0% 50% 49.8% 50% 50.04 50% 49.97% 50% 50% 50% 50% GMI financed through (Q4 2009) % ESSNS co-financing mechanism, % (administrative data of the Ministry of Welfare).88 86 According to the statistics of municipalities, the average pay-out/period of GMI benefits is 4.05 months in 2008. It is calculated as the (number of participant-months) / number of participants. 87 As of October 2008, the restriction to receive the GMI benefit for only 9 months was canceled. The assumption is that due to the economic decline, the average length of the benefit pay-out period will increase, but once the economy starts to recover, the average pay-out period will decrease. 88 The target indicator is the share of State co-financing outlined in the relevant legislation. 96 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result 090 12.5% 19% 20% 12% 15% 17% 10% 10% Percentage of The indicator No. of 12.9% No. of 17.3% No. of 17.1% No. of 11.1% No. of No. of registered unemployed is calculated participa participa participa participa participa participa No. of No. of who are ineligible for comparing nts in the nts in the nts in the nts in the nts in the nts in the participa participa UI, but are the number measure measure measure measure measure measure nts in the nts in the participating in the of persons at the at the at the at the at the at the measure measure Workplaces with which are end of end of end of end of end of end of at the at the Stipend program (at involved in period period period period period period end of end of the end of period) – the measure 10000/ 23750/ 25600/ 15840/ 19500 / 22000/ period period data from the Ministry at the end of No. of No. of No. of No. of No. of No. of 12000/ 12000/ of Welfare. period to the unemplo unemplo unemplo unemplo unemplo unemplo No. of No. of Increase the number of yed who yed who yed who yed who yed who yed who unemplo unemplo absorptive unemployed are not are not are not are not are not are not yed who yed who capacity of active not receiving receiving receivin receivin receivin receivin receivin are not are not employment unemployme unemplo g g g g g receivin receivin measures in the nt benefit yment unemplo unemplo unemplo unemplo unemplo g g 13. benefit yment yment yment yment yment unemplo unemplo face of increased demand from 120000 benefit benefit benefit benefit benefit yment yment unemployed 125000 128000 132000 130000 130000 benefit benefit people without 120000 120000 coverage of UI. 89 Total duration of 092 2550000 96792.5 4200000 148033 6000000 20951 7200000 267493 9300000 1095000 1305000 1380000 participation in days days days 8 days days 0 days 0 days days “person months” in (total (total (total (total (total (total (total (total Workplaces with duration duration duration duration duration duration duration duration Stipend program91 of of of of of of of of participat participa participa participa participa participa participa participa ion) tion) tion) tion) tion) tion) tion) tion) 89 The planned values of the respective indicators have been revised in compliance with available financing according to the protocol No.20 53.§ of the meeting of Cabinet of Ministers on the additional state budget financing at the amount of 13 100 134 lats as well as Project Amendments No 8 on 25/10/2010 by which the 537 000 LVL and Project Amendments No 10 on 27/12/2010 by which the 54 184 LVL were allocated, and the decision of the Cabinet of Ministers of 12th April 2011 on allocating additional 4 922 924 lats to the WWS program. 90 Percentage of registered unemployed ineligible for unemployment insurance and participating in Workplaces with Stipend program was 17% in Q4 2009 (16476 unemployed were participating in the program at the end of period and the number of unemployed not receiving unemployment benefits was 98531 in Q4 2009).. 91 The database of the State Employment Agency captures the starting and finishing date of the period that a person participates in the WWS program. The period includes days that are free (like week-ends), days when a person is counted as a participant in the program but does not earn the stipend (e.g. because of unjustifiable absence) or days when participants have a justifiable paid or non-paid absence (according to the rules of the program). Therefore, to calculate the indicator—person months—the number of days (total duration of participation) is divided by 30 (the average number of days per month in a year including weekends etc.). Target: Starting from the first day of participation until December 31, the total duration of participation was 1363997 days (including weekends etc.), if divided by 30 the result is 45467. 92 The duration of participation in person months in Workplaces with Stipend program at the end of 2009 was 45467. 97 MONITORING AND RESULTS FRAMEWORK 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 Action Monitoring Indicator Baseline Result Actual Result Actual Result Actual Result Actual Result Result Result Result Number of created workplaces in Workplaces with 093 22183 22489 37456 37297 43425 43430 51460 51487 58679 71794 71794 71794 Stipend program (data of the Ministry of Welfare) – (cumulative data as of first participant starting to participate in the measure) 93 Number of created workplaces in Workplaces with Stipend program at the end of 2009 was 16830. 98 ANNEX 9: FUND RELATIONS NOTE The IMF has completed its staff visit for the Fourth Review under the Stand-by Arrangement on April 15, 2011, and the IMF Executive Board meeting to discuss the Fourth Review is scheduled for May 25, 2011. Based on the outcome of the staff visit, the IMF assessment letter is being prepared and will be circulated to the World Bank Executive Board in the second week of May 2011. 99 ANNEX 10: LATVIA AT A GLANCE 100 101 22°E 23°E 24°E 25°E 26°E LATVIA SELECTED CITIES AND TOWNS ESTONIA REPUBICAN CITIES LATVIA NATIONAL CAPITAL RIVERS To Nomme MAIN ROADS To To Viljandi RAILROADS Haademeeste 58°N MUNICIPALITY (NOVADI) BOUNDARIES Gulf of Ainazi Rujiena To Tartu INTERNATIONAL BOUNDARIES Kolka Riga Salacgriva Aloja Renceni Valka Mazirbe To Pskov 28°E Dunte Dundaga Roja Ape Baltic Pope Limbazi Valmiera Ventspils Smiltene Aluksne Sea Mersrags Liepa Ugali Piltene Talsi Saulkrasti Cesis RUSSIAN Vilaka Stende Engure Jaunpiebalga Gulbene FED. Balvi Sigulda 57°N Kandava Bolderaja Vangazi To 57°N Alsunga Kuldiga Ostrov Tukums Jurmala RIGA Malpils Ropazi Pavilosta Ergli Salaspils Gaizinkalns To Madona Krasnogorodskoye Ogre (312 m) Lubanas Karsava Aizpute Olaine Ezers Kalnciems Skrunda Broceni Baldone Da Lielvarde Barkava uga Jelgava va Saldus Plavinas Vecumnieku Skiveri Dobele Varaklani Liepaja Iecava Jaunjelgava Aizkraukle Ludza Grobina Atasiene Vilanu Rezeknes Auce Jekabpils Vainode Ezere Bene Priekule To Nica Eleja Skaistkaine Livani Raznas Zilupe Idritsa Bauska Ezers To Viesite Malta Daug Telsiai gava Preili To Rucava Siauliai To Nereta Panevezys Akniste To Aglona Birzai Dagda 56°N To 56°N Kretinga Subata Ilukste To Kraslava Rokiskis To LITHUANIA Daugavpils Piedruja Novopolotsk To Dusetos BELARUS 0 20 40 60 Kilometers To Dukstas IBRD 33432R This map was produced by the Map Design Unit of The World Bank. 0 20 40 Miles The boundaries, colors, denominations and any other information MAY 2011 shown on this map do not imply, on the part of The World Bank 21°E Group, any judgment on the legal status of any territory, or any 22°E 23°E 24°E 25°E 26°E endorsement or acceptance of such boundaries.