Document of The World Bank Report No: ICR00001882 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD 7651-YF, IBRD 7825-YF) ON A PROGRAMMATIC PRIVATE AND FINANCIAL DEVELOPMENT POLICY LOANS IN THE AMOUNTS OF 1. US$50 MILLION EQUIVALENT 2. US$100 MILLION EQUIVALENT TO THE REPUBLIC OF SERBIA June 17, 2011 Private and Financial Sectors Development Unit (ECSPF) South East Europe Country Unit (ECCU4) Europe and Central Asia (ECA) CURRENCY EQUIVALENTS (Exchange Rate Effective June 16, 2011) Currency Unit =Serbian Dinar (RSD) RSD 1.00 = US$ 0.01 US$ 1.00 = RSD 67.417 FISCAL YEAR 1 January – 31 December ABBREVIATIONS AND ACRONYMS BEEPs Business Environment and Enterprise MoJ Ministry of Justice Performance Survey CAR Capital Adequacy Ratio MoP Material Support to Families CPS Country Partnership Strategy MoU Memorandum of Understanding DDOR DDOR Insurance Company MTPL Motor Third Party Liability DIA Deposit Insurance Agency NBS National Bank of Serbia DIF Deposit Insurance Fund NPL Non-performing loans DIS Deposit Insurance Scheme PA Privatization Agency DPL Development Policy Loan PDMA Public Debt Management Authority EBRD European Bank for Reconstruction and PDO Program Development Objectives Development EPS Elektroprivreda Srbije (Electric Power PEDPL Public Expenditure Development Policy Company of Serbia) Law EU European Union PFDPLs Programmatic Private and Financial Sector Development Policy Loans FDI foreign direct investments PFSAC Private and Financial Sector Adjustment Credit FSSP Financial Sector Support Program PFSPBG Private and Financial Sector Policy Based Guarantee GoS Government of Serbia PPFDPC Programmatic Private and Financial Development Policy Credit ICS Implementation Completion and Results PR Privatization Registry Report IDF Institutional Development Fund RIA Regulatory Impact Assessment ISR Implementation Status and Results RoS Republic of Serbia Report JSC Joint Stock Company SAA Stabilization and Association Agreement LLCs Limited Liability Companies SAI State Audit Institution LOLR Lender of Last Resort SBRA Serbia Business Registers Agency M&E Monitoring and Evaluation SIDA Swedish International Development Agency MOERD Ministry of Economy and Regional SOB state-owned banks Development MoF Ministry of Finance SOEs socially owned enterprises Vice President: Philippe H. Le Houreou Country Director: Jane Armitage Sector Manager: Lalit Raina Task Team Leader: Irina Astrakhan ICR Team Leader: Gordana Popovikj Friedman REPUBLIC OF SERBIA PROGRAMMATIC PRIVATE AND FINANCIAL DEVELOPMENT POLICY LOANS CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design ........................................................ 1  2. Key Factors Affecting Implementation and Outcomes .......................................................... 4  3. Assessment of Outcomes ........................................................................................................ 8  4. Assessment of Risk to Development Outcome ..................................................................... 22  5. Assessment of Bank and Borrower Performance ................................................................. 23  6. Lessons Learned.................................................................................................................... 24  Annex 1. Bank Lending and Implementation Support/Supervision Processes......................... 26  Annex 2. Beneficiary Survey Results ....................................................................................... 28  Annex 3. Stakeholder Workshop Report and Results ............................................................... 29  Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ................................. 30  Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ................................... 31  Annex 6. List of Supporting Documents ................................................................................. 32  A. Basic Information Program 1 Second Programmatic Country Serbia Program Name Private Financial Sector Development Program ID P096711 L/C/TF Number(s) IBRD-76510 ICR Date 06/24/2011 ICR Type Core ICR REPUBLIC OF Lending Instrument DPL Borrower SERBIA Original Total USD 50.0M Disbursed Amount USD 48.8M Commitment Implementing Agencies The Ministry of Finance Cofinanciers and Other External Partners Program 2 Programmatic Private Country Serbia Program Name Financial Development Policy Loan 2 Program ID P115958 L/C/TF Number(s) IBRD-78250 ICR Date 06/24/2011 ICR Type Core ICR REPUBLIC OF Lending Instrument DPL Borrower SERBIA Original Total USD 100.0M Disbursed Amount USD 99.7M Commitment Implementing Agencies The Ministry of Finance Cofinanciers and Other External Partners B. Key Dates Second Programmatic Private Financial Sector Development - P096711 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/09/2006 Effectiveness: 06/24/2009 06/24/2009 Appraisal: 09/25/2008 Restructuring(s): Approval: 03/05/2009 Mid-term Review: Closing: 03/31/2010 03/31/2010 i Programmatic Private Financial Development Policy Loan 2 - P115958 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/26/2009 Effectiveness: 01/15/2010 01/15/2010 Appraisal: 07/06/2009 Restructuring(s): Approval: 11/17/2009 Mid-term Review: Closing: 12/31/2010 12/31/2010 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Moderate Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators Second Programmatic Private Financial Sector Development - P096711 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status ii Programmatic Private Financial Development Policy Loan 2 - P115958 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status D. Sector and Theme Codes Second Programmatic Private Financial Sector Development - P096711 Original Actual Sector Code (as % of total Bank financing) Banking 13 13 Central government administration 12 12 General industry and trade sector 63 63 Non-compulsory pensions and insurance 12 12 Theme Code (as % of total Bank financing) Public expenditure, financial management and 12 12 procurement Regulation and competition policy 25 25 State-owned enterprise restructuring and privatization 63 63 Programmatic Private Financial Development Policy Loan 2 - P115958 Original Actual Sector Code (as % of total Bank financing) Capital markets 10 10 Central government administration 20 20 General energy sector 10 10 General finance sector 30 30 General industry and trade sector 30 30 Theme Code (as % of total Bank financing) Other financial and private sector development 33 33 Regulation and competition policy 33 33 State-owned enterprise restructuring and privatization 34 34 iii E. Bank Staff Second Programmatic Private Financial Sector Development - P096711 Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Jane Armitage Jane Armitage Sector Manager: Lalit Raina Lalit Raina Task Team Leader: Irina Astrakhan Irina Astrakhan ICR Team Leader: Gordana Popovikj Friedman ICR Primary Author: Gordana Popovikj Friedman Second Programmatic Private Financial Sector Development - P096711 Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Jane Armitage Jane Armitage Sector Manager: Lalit Raina Lalit Raina Task Team Leader: Irina Astrakhan Irina Astrakhan ICR Team Leader: Gordana Popovikj Friedman ICR Primary Author: Gordana Popovikj Friedman F. Results Framework Analysis Program Development Objectives (from Program Document) The PFDPL series was designed to support the Government of Serbia (GoS) structural reform program through improvements in the business environment, continued reform in the enterprise sector and public utilities and building a more efficient and stable financial sector. Revised Program Development Objectives (as approved by original approving authority) N/A (a) PDO Indicator(s) iv Second Programmatic Private Financial Sector Development - P096711 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Reduced regulatory compliance costs of business measured by BEEPs (9.6% of Indicator 1 : management time in 2005), ICS and other enterprise surveys. Value (quantitative or 9.6% Qualitative) Date achieved 12/31/2005 BEEPS 2008 indicates that compliance costs were 14% of management time, Comments however based on a larger sample size than in BEEPS 2005. BEEPS 2008 (incl. % (published in 2010) is the latest survey and no information is available for the achievement) relevant period after 2008. Unique business identification number is introduced and assigned to all Indicator 2 : businesses by end 2010. Unique business Unique business Value identification identification (quantitative or None number to all number to all Qualitative) businesses. businesses. Date achieved 12/30/2005 12/31/2010 12/31/2010 Comments (incl. % 100% achievement. achievement) Increase of private sector share in GDP from 55% (end 2005) to above 60% by Indicator 3 : the end of the program in 2010, increase in priva te sector share in empl. from 58% (end 2005) to 65% by the end of program in 2010. private sector private sector share Value private sector share share above 60% of 60% in GDP and (quantitative or 55% in GDP and 58% in GDP and 65% 56% in Qualitative) in employment in employment employment. Date achieved 12/30/2005 12/31/2010 12/31/2010 Comments 50% of achievement. However, if informal employment is to be considered in (incl. % the private sector share in employment, the targ et of 65% is to be likely achievement) achieved. The Government of Serbia's ownership stake in the banking sector and its Indicator 4 : holdings in financial assets reduced from 24% i n 2005 to 15% in 2008, and expected to go below 10% in 2010. Value 24% of GoS ownership 15% in 2008 and (quantitative or in the banking sector below 10% in 15% Qualitative) and its holdings 2010. Date achieved 12/30/2005 12/31/2010 12/31/2010 Comments (incl. % Level of achievement 50%. achievement) v Programmatic Private Financial Development Policy Loan 2 - P115958 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years CAR of the banking system is maintained at the level of at least 12% and the Indicator 1 : required recapitalizations are conducted using t ransparent criteria allowing the use of public funds only where there is no private sector alternative. CAR 20.1% in the entire banking Value sector and three (quantitative or banks were Qualitative) recapitalized using transparent methods. Date achieved 12/31/2010 Comments (incl. % Target achieved and exceeded. achievement) Legal and implementation framework for crisis preparedness fully operational Indicator 2 : and banking sector resilience to shocks strength ened. Legal and regulatory framework for Value crisis preparedness (quantitative or fully operational Qualitative) and banking sector resilience strengthened. Date achieved 12/31/2010 Comments (incl. % 100% achievement. achievement) (b) Intermediate Outcome Indicator(s) vi Second Programmatic Private Financial Sector Development - P096711 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years State share in insurance sector decreased from 63.4% in insurance Indicator 1 : premium written in 2006 to 35% in 2010. Value (quantitative or 63.4% 35% below 35% Qualitative) Date achieved 12/29/2006 12/31/2010 12/31/2010 Comments 100% achieved. (incl. % achievement) Programmatic Private Financial Development Policy Loan 2 - P115958 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years A bank diagnostic and triage exercise is completed for the entire Indicator 1 : banking sector in Serbia and all banks. Value Bank diagnostic and (quantitative or triage exercise was Qualitative) completed. Date achieved 12/31/2010 Comments 100% achievement. the bank diagnostic and triage exercise is now (incl. % achievement) regularly conducted every six months. G. Ratings of Program Performance in ISRs Second Programmatic Private Financial Sector Development - P096711 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 03/24/2010 Satisfactory Satisfactory 48.67 H. Restructuring (if any) vii 1. Program Context, Development Objectives and Design The Programmatic Private and Financial Sector Development Policy Loans (PFDPLs) to the Republic of Serbia were a series of two operations during the period 2009-2010, totaling EUR 105.7 million (US$150 equivalent) of World Bank funding. The PFDPL series was designed to support the Government of Serbia (GoS) structural reform program through improvements in the business environment, continued reform in the enterprise sector and public utilities and building a more efficient and stable financial sector. The PFDPL series was originally envisaged to include three operations, however, the plan for a Third PFDPL was changed to allow for the use of a Policy Based Guarantee in the amount of EUR 300 million, upon request from the Government of Serbia. As a policy based guarantee is not a Development Policy Loan (DPL) option under current Bank policies, the PFDPL series had to be terminated after PFDPL 2, and PFDPL 3 was transformed into a stand-alone Policy Based Guarantee operation, with the same policy matrix as the originally envisaged PFDPL 3. 1.1 Context at Appraisal Serbia began its transition to a market economy late and under difficult circumstances. The 1990s was a lost decade for Serbia. Its economy was devastated by regional conflicts, international sanctions, and trade shocks following the break-up of the former Yugoslavia in 1991. These effects were compounded by delayed transition and poor economic management. By 2000 recorded GDP had fallen to below one-half of its 1989 level, while other central and eastern European countries had made significant progress on the transition path. In January 2001, the new Government launched an ambitious reform program for a rapid transition to a more market oriented economy, normalization of relations with foreign creditors, and integration with regional, EU and world markets. Fiscal balance was achieved in 2004, as structural reforms began to have impact and expenditure commitments were reduced, and a surplus of 0.8 percent of GDP was achieved in 2005. The Serbian economy grew rapidly during the first decade of the century and until 2008, fuelled by capital inflows, exports and domestic demand, and supported by the economic reforms mentioned above. GDP growth averaged 5.4 percent per year during 2001-08, with exports growing at an average annual rate of around 30 percent, albeit from a low base. Output rose in real terms by nearly 50 percent between 2000 and 2008, as the corporate sector started to post profits and the banking sector restructured. About 80 percent of growth was attributed to non- tradable sectors (financial, telecoms, retail). Strong economic growth was, however, accompanied by a widening external current account deficit, rapid credit growth, increasing private sector debt and non-performing loans in the period immediately preceding the financial crisis. Imports grew faster than exports and the trade deficit reached 22.8 percent of GDP in 2008. The external current account deficit increased from 8.7 percent in 2005 to 18.3 percent in 2008, driven by a widening private sector savings-investment imbalance (about 90 percent of the deficit in 2008). The contraction of global demand and 1 spending largely impacted the real sector and the competitive position of private sector companies. The economy also faced the remnants of the previous systems in the forms of cumbersome, business-unfriendly regulations with legislation not compatible with the European Union, slow public administration and large number of “socially-owned” enterprises in the portfolio of the Privatization Agency (PA). The business regulatory environment, a key factor for sustainable and stable private sector growth and job creation, needed improvement to facilitate firm entry and growth and approximation to the business regulations of the European Union. The Government started a comprehensive reform program in business entry, adoption of key elements of business legislation, enhancement of access to finance and introduction of Regulatory Impact Assessment (RIA) in the legislative process. The new Government in 2008-2009 demonstrated commitment to deepen the reforms and further enhance the business climate in the country, by streamlining the business registration procedures, improving the legal framework for corporate governance, commencing the implementation of a comprehensive regulatory review called “regulatory guillotine”, institutionalizing RIA and strengthening its role, simplifying the process of issuance of construction permits and strengthening the framework for enforcement of contracts. For the remaining socially owned enterprises (SOEs), the GoS developed a program to strengthen financial discipline, as instrumental for facilitating the restructuring, privatization and/or bankruptcy of remaining of SOEs. In the energy sector, for integration into the regional and pan-European oil, power and gas markets and ensuring energy security, the Government introduced sector reforms including modernization of the energy infrastructure, restructuring, cost-effective tariffs and private sector participation. In the financial sector, substantial reforms were undertaken to deal with the state ownership in the banking and insurance sectors, develop the capital markets, improve the legal framework for supervision and introduce measures to insure stability in the sector during and following the financial crisis. The banking sector faced the global financial crisis in a healthy situation, with high liquidity and capital buffers due to conservative policies by National Bank of Serbia (NBS). However, the magnitude of the international crisis revealed some challenges. A fast withdrawal of over 15% of deposits by depositors took place amid false media reports and rumors in late 2008. The GoS adopted then a set of measures for crisis preparedness. The measures aimed at maintaining consumer confidence and stability in the banking sector and included the launching of a financial sector support program (FSSP) under the auspices of the “Vienna initiative (with 10 foreign banks and their home supervisors) and with support from the IMF”. In addition, a comprehensive program for restructuring and consolidation of state-owned banks, strengthening of the insurance supervision and development of capital markets legal framework (Securities Law and Law on Business Entities). 2 The economy picked up in 2010, despite the fact that it was severely hit by the global crisis. Strong exports and the adoption of timely and appropriate measures were key in re-establishing macroeconomic stability. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The objective of Programmatic Private and Financial DPL series is to support the Government of Serbia reform actions in three policy areas: (i) enhancing business environment to encourage new business and attract foreign direct investments (FDI); (ii) strengthening financial discipline by enhancing hard budget constraints in the enterprise sector through continued reform of SOEs and restructuring of public utilities; and (iii) building a more efficient and stable financial sector through continuing the divestment of state ownership in the banking and insurance sectors, strengthening prudential supervision of banking and encouraging development of the capital markets. 1.3 Revised PDO and Key Indicators, and Reasons/Justification There were no revisions of the PDOs. 1.4 Original Policy Areas Supported by the Program (as approved): The objective of the PFDPL series was supposed to be achieved through supporting reforms carried out by the GoS in three pillars of policy areas under the three consequent operations: Pillar I: Enhancing business environment  Further simplification of business entry through implementation of a single agency approach to business registration;  Improving the legal framework for strengthening corporate governance and facilitating business entry and operations;  Streamlining regulations of business operations and reducing business compliance costs;  Improving legal and institutional framework for competition;  Improving effectiveness of contract enforcement. Pillar II: Strengthening financial discipline  Improving financial discipline in the socially-owned enterprise (SOE) sector;  Privatization, restructuring and bankruptcy of socially-owned enterprises;  Continuing reforms in the energy sector. Pillar III: Building a more efficient and stable financial sector  Privatization and divestment of state-owned banks (SOB) and financial assets (non- performing loans (NPLs), insurance companies, equities, etc.);  Enhancing crisis preparedness and market confidence;  Strengthening insurance sector regulation and resolution regime;  Enhancing prudential supervision of the banking sector; and  Strengthening capital markets regulatory and supervisory regime. 3 1.5 Revised Policy Areas N/A 1.6 Other significant changes The PFDPL series was initially envisaged to consist of a series of three regular development policy loans to support the structural reform agenda of the Government of Serbia. However, as the international crisis hit Serbia, it was necessary to adjust the scope and refocus the design of the operations to include measures aimed at maintaining stability in the banking sector. Furthermore, on request from the GoS, the PFDPL series was terminated after the completion of the Second PFDPL operation, whereas the planned Third PFDPL in the series was transformed into a [stand-alone] Private and Financial Sector Policy Based Guarantee (PFSPBG) in the amount of up to 300 million EUR (not exceeding an equivalent of 400 million USD). The cancelation of the third PFDPL was deemed consistent with the overall support to the original objectives of the PFDPL. The PFSPBG followed up on the implementation of the reforms supported by the PFDPL1 and PFDPL2. Use of the policy based guarantee allowed Serbia to benefit from access to the international capital markets at lower costs and longer maturities, driven by the need to match the country’s debt portfolio management and reduced funding costs. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance Table 1 shows the disbursement dates of PFDPL 1-2. The total amount of Bank financing was US$150 million equivalent. Each of the two operations was a single tranche loan. Table 1: PFDPL 1-2 Amounts (US$ million) and Release Dates Tranche # Amount Expected Actual Release Release Release Date Date PFDPL-1 48.8 04/30/2009 06/24/2009 Regular PFDPL-2 99.7 11/30/2009 01/26/2010 Regular Table 2: Prior Actions for PFDPL PRIVATE AND FINANCIAL DEVELOPMENT POLICY LOAN (PFDPL) Prior actions from Program Document Status Pillar 1: Enhancing business environment The GoS will adopt the Principles of consolidating business registration Completed procedures related to issuance of tax, pension and social security identification numbers in the Serbia Business Registers Agency (SBRA). Strategy for implementation of comprehensive regulatory review (regulatory Completed guillotine) is approved by the GoS. 4 Pillar 2: Strengthening financial discipline GoS will offer for sale, or initiate the search for a strategic partner for the core Completed assets of two largest recipients of state subsidies. The amendments to the Privatization Law are enacted, setting end-December Completed 2008 as the deadline for launching privatization of SOEs. Starting on September 1, 2007, the PA will: (i) offer for sale no less than [40] Completed SOEs and sell at least [15] through its tender program; (ii) offer for sale through auctions no less than [350] socially-owned enterprises, and sell at least 40% of them; (iii) offer for sale no less than [7] SOEs from the list of companies under restructuring, or significant parts thereof, and sell at least [4] SOEs from the same list. The budget allocation for SAI as a separate line item in the Budget of the Completed Republic of Serbia has been adopted by the Parliament. Pillar 3: Building a more efficient and stable financial system Strategy for banks and insurance companies with Republic of Serbia (RoS) Completed ownership is finalized and approved by GoS. GoS has transferred funds for initial capitalization of Deposit Insurance Scheme Completed (DIS). SECOND PRIVATE AND FINANCIAL DEVELOPMENT POLICY LOAN (PFDPL2) Pillar 1: Enhancing business environment The new Competition Law is approved by GoS and submitted to Parliament for Completed adoption. Pillar 2: Strengthening financial discipline The Law on State Aid is approved by GoS and submitted to Parliament for Completed adoption. The new Bankruptcy Law is approved by GoS and submitted to Parliament for Completed adoption. The sale of shares of socially owned enterprises in the Privatization Registry (PR) Completed shall be conducted in accordance with the procedures established by the Ministry of Economy and Regional Development (MOERD). Pillar 3: Building a more efficient and stable financial system A diagnostic process is launched, including approval of: (i) satisfactory Completed methodology; and (ii) decision tree that takes into account capital, earnings and liquidity. A liquidity framework is adopted, including: (i) approval of rules regulating Completed lender of last resort function and other liquidity lending; and (ii) legal authority to permit GoS to guarantee LOLR financing from NBS to solvent banks. Strategy for banks with RoS ownership is approved by GoS, including the Completed decision on merger of RoS majority owned banks or other alternatives outlining a proposed timeline. Motor Third Party Liability (MTPL) Law is approved by GoS and submitted to Completed Parliament for adoption. 5 2.2 Major Factors Affecting Implementation Government Priorities and Commitment: The GoS put private sector development at the center of its strategy to promote growth and income convergence of European level. To increase the private sector contribution to growth, the GoS implemented a series of policy measures to increase productivity and investment, upgrading the physical infrastructure and its quality, improving the business environment, privatizing non-private enterprises, and promoting financial sector policies and FDI promotion. In fact, the core of GoS’s growth agenda was composed of improvements in the business environment, financial discipline/divestment of non-private enterprises and financial sector development. Although, by the second PFDPL, emphasis was placed on the financial sector in order to reduce macroeconomic/financial risks and prepare the country to better cope with a global financial crisis. The Government has expressed commitment to deepen the reforms in the following areas which the PFDPL (1 and 2) supported: Further enhance the business climate in the country, by streamlining the business registration procedures, improving the legal framework for corporate governance, implementing a comprehensive regulatory review called “regulatory guillotine”, by simplifying the process of issuance of construction permits and strengthening the framework for enforcement of contracts; In relation to the remaining socially owned enterprises (SOEs), the GoS facilitated the restructuring, privatization and/or bankruptcy of remaining of SOEs, by enacting amendments to the Privatization Law, continuing with the privatization/resolution of SoEs and enacting the new Law on Bankruptcy Further, in response to the global financial crisis, the Government adopted a set of measures aimed at strengthening crisis preparedness by maintaining consumer confidence and stability in the banking sector and by launching a financial sector support program (FSSP) under the auspices of the “Vienna initiative” (with 10 foreign banks and their home supervisors) and with support from the IMF. In addition, a comprehensive program for restructuring and consolidation of state-owned banks, strengthening of the insurance supervision and development of capital markets legal framework (Securities Law and the Company Law). EU Accession: A major factor affecting implementation was Serbia’s desire to accede to the EU. Around such desire, major forces seemed to have coalesced. EU accession has come to be perceived as the key driver of Serbia’s economic reforms, and to some extent as a source of stability in a region with a history of political instability. The objective of EU accession was particularly influential in the number of Laws which were developed with the PFDPL support as well as of other laws and by-laws, which complied with EU requirements. In April 2008 the Government Serbia signed a Stabilization and Association Agreement (SAA) and in December 2009, submitted its application for EU membership. In February 2010, the Interim Agreement on Trade and Trade-related issues between Serbia and the EU (part of the SAA) entered into force. The importance of EU accession in the commitment of Serbia to the key reforms supported by the PFDPL (and other World Bank operations) could not be underestimated. History of successful cooperation in policy reforms with the World Bank: The reforms supported by the PFDPL series built upon (and continued) previous budget support policy 6 operations financed by the World Bank which the GoS implemented with a good degree of success since the early 2000s. The operations included the Programmatic Private and Financial Development Policy Credit (PPFDPC-1) and a successful series of two consecutive Private and Financial Sector Adjustment Credits (PFSACs). The PFSAC-I focused on initial reform measures in five areas: (i) banking sector reform, (ii) reform of socially owned enterprises; (iii) bank asset and enterprise workouts; and (iv) financial sector regulatory and supervisory framework. The PFDPL is, to a large extent, a continuation of the PFSAC. The Serbian institutions designing and implementing the reforms developed a fluid and constructive cooperation with the World Bank teams. Global financial crisis: The global financial crisis severely affected Serbia and impacted also the focus of the PFDPL program. First, the pace of SOE privatization slowed down considerably due to lack of interested FDI. Moreover a number of already signed privatization contracts had to be cancelled due to lack of investments by the buyers. As a result, the PFDPL program with respect to SOEs focused more on the introduction of a new, more efficient bankruptcy framework for all companies, including SOEs. Secondly the program supported by the PFDPL had also to be modified to take into account the impact of the global crisis on the banking sector. This meant that the financial sector pillar had to include a new focus on bank diagnostics, crisis preparedness and bank resolution. Collaboration and coordination with the IMF and Other Donors: Reforms in Serbia were supported by the World Bank and other key international development partners in a collaborated and coordinated approach. The Bank maintained close working relations with the IMF and other donors (such as EAR, SIDA, USAID, DFID) assisting the GoS for the purposes of harmonizing policy reforms, seeking synergies among the respective operations and avoiding overlaps. The international support has been substantial and required intensive coordination. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: At the Government level, the Ministry of Finance was responsible for the overall implementation of the proposed operation and for reporting process and coordinating actions among other concerned ministries and agencies. At the same time, the Bank has been monitoring actions and reviewing progress of the implementation of the proposed operation, as well as the subsequent actions of the GoS program by using [the short term] reform benchmarks and the overall program outcomes outlined in the Policy Matrix. The results achieved by the development policy loan series was documented in the respective appraisals, aide memoires, Government and EU progress reports and from intensive communications/interviews with the key counterparts. A good set of indicators and benchmarks was initially developed to monitor the achievement of results. The (only) ISR so far produced did not include existing information on progress as all outcome targets were established for the end of year 2010. This lack of formal reporting seemed associated with the fast turn of events, particularly the acceleration of the Second PFDPLs on request from the Government in the context of global financial crisis (within a period of six months from the delivery to the Board of the First PFDPL). 2.4 Expected Next Phase/Follow-up Operation: On request by the Government of Serbia, in the aftermath of the global economic crisis, the PFDPL series (1-2) was followed by a Private and Financial Sector Policy Based Guarantee, 7 instead of a Third PFDPL as originally planned. The PFPBG advanced the reforms in the business environment, enterprise sector and financial sector envisioned by the PFDPL series, while helping the Government of Serbia to borrow at more favorable terms from the international capital markets. A World Bank Trust Fund funded by the Swedish International Development Agency (SIDA) supported the regulatory reform process. Going forward, a World Bank’s Institutional Development Fund (IDF) grant will support the creation of a permanent government body in charge of regulatory reform and regulatory impact assessment. A second IDF grant is assisting the GoS with pilot incorporation of Serbian Post (which owns Postal Bank and Telekom), a process which should enhance corporate governance. Under the Capital Markets Development technical assistance, assistance has been provided to the Public Debt Management Authority (PDMA) to identify key issues in the area of government securities market development, provide support in initiating their resolution, and strengthen the PDMA’s technical capacity. Finally assistance in upgrading the crisis framework for the financial sector, and in particular on strengthening the DIA and bank resolution framework, has been provided under the regional World Bank funded Western Balkans Facility. As we can see, the PFDPL is clearly inserted in a longer term strategy to contribute to Serbia’s reforms. The GoS remains committed to completing the substantial reform program implemented thus far in private and financial sector areas. While, the GoS has made considerable progress in the business environment, privatization/restructuring/bankruptcy of non-private enterprises, and in financial sector development, the reform agenda has not yet been completed. In the short term, the GoS is committed to advancing the businesses environment reforms into further improving construction permits and completing the implementation of the regulations of business activities recommendation. As far as privatization and restructuring is concerned, the GoS plans to proceed with the incorporation of Railways and Post, two large state owned enterprises, and with the privatization of Telekom. Finally regarding the financial sector, the GoS plans to divest its minority stakes in banks and privatize the last state owned insurance company, Dunav. On the regulatory front, the NBS is planning implementation of Basel 2 by the end of 2011. The current four-year Country Partnership Strategy covers the period FY08-FY11, so that Serbia and the World Bank will soon reassess priorities and cooperation for the next CPS period. However, it is certain that support to the EU agenda and deepening of the reforms will be the essence of the Strategy. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives of the PFDPL were consistent with major challenges for the economy and reflected in the first priority area of the Serbia Country Partnership Strategy 2008-2011: “Dynamic Private Sector Led Growth to Ensure Incomes Converge with Europe.” The PFDPL series addressed a set of objectives outlined under this priority area: (i) further improving the business environment, particularly cumbersome licensing and permit arrangements; (ii) strengthening the financial sector intermediation; (iii) completing divestiture of socially-owned 8 enterprises; (iv) strengthening enforcement of bankruptcy and other mechanisms to ensure the assets of insolvent socially-owned enterprises unable to be sold can be freed up for productive use; (v) continuing the process o f privatizing and restructuring of large state-owned enterprises; and (vi) strengthening the competitiveness of the enterprise sector. 3.2 Achievement of Program Development Objectives The OVERALL PFDPL PROGRAM OBJECTIVES were to:  Improve the business environment so as to facilitate start-ups and stimulate new investments, thus economic growth and job creation;  Minimize fiscal outlays through substantially reducing direct and indirect subsidies, complete the privatization of socially-owned enterprises, and further restructure state enterprises and public utilities; and,  Improve efficiency, governance and divestiture of the government’s holdings in the banking and insurance sectors, strengthen crisis preparedness and sector resilience, and improve the regulatory and supervisory regimes so as to reduce vulnerabilities. Key reforms supported by PFDPL 1 and 2: PFDPL 1:  Establishment of a one-stop shop for business registration, e-registration and introduction of a unique business registration number.  Adoption of a GoS strategy on implementation of a comprehensive review of regulations of business activities.  Enactment of amendments to the Privatization Law that set a time limit for the completion of the process.  Continuation of privatization of SOEs (as a result some 300 socially owned enterprises were sold).  Capitalization of the DIF.  Privatization of DDOR. PFDPL2:  Adoption of the Law on Protection of Competition, Law on Bankruptcy, Law on State Aid.  Sale of residual shares held in the Privatization Registry.  Diagnostic assessment of all the banks in the system.  Adoption by the NBS of a liquidity framework.  Strategy of consolidation of state owned banks.  Adoption of Law on Mandatory Traffic Insurance (related to motor third party liability). All core and non-core benchmarks under PFDPL 1 and PFDPL 2 were implemented and the expected outcomes of the program have been largely accomplished, particularly in Pillar I (Enhancing Business Environment) and Pillar III (Building a More Efficient and Stable Financial System). While several reforms in Pillar II (Strengthening Financial Discipline of SOEs) were implemented, some expected outcomes particularly in the energy sector and related to 9 privatization of state –owned enterprises have not been achieved partly due to longer-term processes and because of the market conditions during and following the global economic crisis. Summing up, 27 Outcomes indicators had been identified, out of which:  17 expected outcomes were Achieved, or 63% of the total number of outcomes.  5 were Not Achieved, or 18 %.  3 were Partially Achieved, or 11 % .  For 2 objectives, the information was insufficient to form a judgment. It should be stressed that the outcome indicators were designed for a series of three development policy loans, but the third loan was cancelled due to the GoS desire to avail of a policy based guarantee instead. Table 3: Status of achievement of outcomes Pillar I: Enhancing Business Environment Policy Area Outcome Status of Comments Outcome 1.1. Further 1. Reduction of the business registration time from 23 Achieved simplification of days in 2006 to 5 days in 2010 business entry through 2. Unique business identification number is introduced Achieved implementation of a and assigned to all businesses in 2010 single agency approach 1.2. Improving legal 3. Enhanced legal framework for improvement of Achieved framework for corporate governance and attraction of foreign and strengthening corporate domestic investments governance and facilitating business 4. The Doing Business Investor Protection Index Not Achieved operations increased from 5.3 in 2007 to exceed the OECD average of 6.0 in 2010 1.3. Streamlining 5. Priorities for the regulatory reform established, Achieved regulations of business mechanisms for their implementation defined, activities and reducing transparency of the legislative process increased. business compliance 6. Reduced regulatory compliance costs of business No information costs measured by BEEPs (9.6% of management time in available for the 2005), ICS and other enterprise surveys. relevant period 1.4 Simplifying the 7. Procedures for obtaining planning and construction Partially process of obtaining permits simplified, related compliance costs Achieved construction permits reduced: duration decreased from 204 days in 2006 by at least 25% in 2010, and compliance cost reduced from 3,300 (% of income per capita) in 2006 by at least 50% in 2010 1.5. Improving legal and 8. Improved competition framework creating level Achieved institutional framework playing field for business and conducive for foreign for competition investments 1.6. Improving 9. Improved enforcement of contracts: duration of Not Achieved effectiveness of enforcement procedures reduced from 635 days in contracts enforcement 2008 to approximate to the regional average of 425 days Pillar II: Strengthening Financial Discipline 10 2.1. Improve financial 10. Expected Outcome: Substantial reduction in the Not Achieved discipline in the SOE direct and indirect MOE subsidies to the SOE sector sector over the duration of the program. 2.2. Privatization, 11. Increase in private sector share: in GDP from 55% Partially At least first Restructuring and (end 2005) to above 60% by the end of the program achieved part (50%) on Bankruptcy of Socially- in 2010 (EBRD data), and in employment from share of GDP Owned and State-Owned 58% (end 2005) to 65% by the end of the program is achieved; the Enterprises in 2010 (IMF data). second part does not have sufficient data. If informal economy is counted, it is likely achieved. 2.3. Energy sector 12. Increase in private investments in power generation Not achieved Implementation reform assets (In 2007: no private investments in energy in progress, sector) deadline for bids for private participation was extended. 13. Full competition in petroleum products or Achieved Interpretation Government commitment made to a date for full that meant non- competition extension of the ban of import on petroleum products. 14. Power and gas tariffs have increased from covering Not Achieved about 80%percent of costs in 2006 to 100 percent in 2010 15. EPS and Serbiagas have improved financially and Insufficient are on a path to eliminating fiscal and quasi-fiscal information deficits 16. EPS is operationally more efficient and has been Achieved restructured to facilitate private sector participation in the power sector Pillar III: Building a more efficient and stable financial sector 3.1. Strengthening crisis 17. CAR of the banking system is maintained at the Achieved preparedness, including level of at least 12% and the required development of liquidity recapitalizations are conducted using transparent framework, capital criteria allowing the use of public funds only where adequacy assessment, there is no private sector alternative (no special bank resolution rights given to minority shareholders) framework 18. Legal and implementation framework for crisis Achieved enhancement, and preparedness fully operational and banking sector Deposit Insurance resilience to shocks strengthened payout functions 19. Increased efficiency of bank resolution system Achieved strengthening 20. Deposit insurance scheme that fulfills the following Achieved conditions: (i) fast payout and (ii) availability of extra funding if needed 3.2. Restructuring and 21. Banks with majority RoS ownership fully Achieved divestment of state- capitalized (CAR 12%) owned banks and 22. The Government of Serbia’s ownership stake in the Achieved financial assets banking sector and its holdings in financial assets has been reduced from 24% in 2005 to 15% by 2010. 11 3.3. Strengthening 23. A new MTPL regime has been introduced to Achieved insurance sector resolve existing legitimate claimants and put new regulation and resolution MTPL regime on fiscally secure basis going regime forward 24. Resolution of failed insurers complies with EU Achieved insurer wind up requirements as featured in new law amendments 25. Decrease of the state share in insurance sector - Achieved from 67% in insurance premium written in 2006 to 35% in 2010 3.4. Strengthening 26. Adequate regulatory framework facilitates more Achieved capital markets rapid capital market development regulatory and 27. Reference point/benchmark for issuance of Not achieved supervisory regime municipal, corporate and infrastructure bonds provided The status of the individual expected outcomes is as follows: Pillar I: Enhance Business Environment Policy area 1.1. Further simplification of the business entry through implementation of single agency approach for business registration. Outcome: Reduction of the business registration time from 23 days in 2006 to 5 days in 2010. Status: Achieved and exceeded. The GoS transformed the SBRA into a one-stop-shop for business registration. The one-stop- shop system for registering a company has been in place since May 2009. The number of steps to register a business was reduced from 11 to 8. It now takes on average 5 instead of 23 days to register a business. According to the EU Progress Report 2010 for Serbia, the number of registered companies stood at 113,000 in May 2010, up from 106,000 in April 2009. Approximately 225,000 entrepreneurs were registered with the Serbian Business Registry Agency, i.e. around 5,000 more than a year earlier. The Agency has also further extended the number of registers, including the Registry for Financial Statements. A single form is now used to register new workers to the Pension Fund or the Health Fund. This reform represents a considerable reduction in business compliance costs resulting in annual savings of approximately EUR 15 million, calculated according to the standard cost model. Outcome: Unique business identification number is introduced and assigned to all businesses in 2010. Status: Achieved. Phase 2 of the one-stop shop reforms, introduced a unique business identification number for all purposes. The SBRA implemented this reform by (i) establishing cooperation with all relevant institutions; (ii) commissioning feasibility study and technical needs assessment for establishing interconnection of all relevant public databases; and (iii) commencing unification of registration procedures for entrepreneurs on a pilot basis. Policy area 1.2: Improving legal framework for strengthening corporate governance and facilitating business operations 12 Outcome: Enhanced legal framework for improvement of corporate governance and attraction of foreign and domestic investments. Status: Achieved. To strengthen corporate governance and facilitate business operation, a new Law on Business Entities was approved by the Parliament. The new law, in compliance with new EU directives, includes provisions to: (i) harmonize presently conflicting provisions of the Law on Business Entities and the Law on Securities Market; (ii) regulate entrepreneurs (at the same time the existing Law on Private Entrepreneurs will be abolished); (iii) regulate existing business associations (i.e. Association of Banks), which have been omitted in the existing Law on Business Entities; (iv) regulate the establishment, operations and closure of branch offices of foreign legal entities, and (v) define the duties and responsibilities of management and improve corporate governance by allowing the option of choosing between one- or two-tier corporate governance system for Limited Liability Companies (LLCs) and JSCs. Reforms under (ii) alone should lead to a reduction in administrative costs for businesses estimated in approximately EUR 6 million per year. Outcome: The Doing Business Investor Protection Index increased from 5.3 in 2007 to exceed the OECD average of 6.0 in 2010. This outcome has not been achieved yet, however good progress has been made in that direction. The Strength of Investor Protection Index, as measures by Doing Business, has remained 5.3 throughout the reform period until 2010. It is not clear whether the type of reforms which were implemented largely driven by the EU agenda were related to the range of the measurement of the strength of investor protection index. This complex index is the average of the extent of disclosure index, the extent of director liability index and the ease of shareholder suits index, as measured by the Doing Business. The new Law on Business Entities was adopted on May 24th 2011. It includes improvements in the area of investor protection and corporate governance in line with the EU directives, which should help with achieving the outcome by the end of 2011. Policy Area 1.3: Streamlining regulations of business activities and reducing business compliance costs. Outcome: Priorities for the regulatory reform established, mechanisms for their implementation defined, transparency of the legislative process increased. Status: Achieved. The GoS introduced a Regulatory Impact Analysis (RIA) requirement in the legislative process in 2004 to improve the quality of new regulations. The implementation of the RIA will ensure that new regulations (i.e. the legislative flow) are based on a clear rationale and adequate analysis of costs and benefits. To reduce compliance costs of existing business regulations (legislative stock), a comprehensive regulatory review was completed in accordance with the Government Strategy adopted under the PFDPL1. The regulatory review was initiated in early 2009 and consisted of four phases: inventory, analysis, recommendations, and implementation. As a result of the inventory, 2,000 laws and regulations were identified as impacting economic activity. The Council for Regulatory Reform also formed ten working groups chaired by a representative of the private sector to further analyze the 2,000 laws and regulations and recommend simplification 13 actions. It is estimated that the measures already adopted at recommendations of the review resulted in annual cost savings to businesses of around EUR 50.8 million. The work on regulatory amendments continues. If all recommendations of the review are adopted, the savings for the business are estimated at EUR 200 million. Outcome: Reduced regulatory compliance costs of business measured by BEEPs (9.6% of management time in 2005), ICS and other enterprise surveys. Status: No information available for the relevant period. Information on the savings measured by management time is not available for the relevant period. The latest BEEPS was conducted in 2008. BEEPS 2008 indicates that 12% of management time in all firms was spent in dealing with public officials or public services, an increase from 10% in 2005. However, impact in monetary terms was assessed using standard cost model as EUR 50.8 million and is expected to reach EUR 200 mil once all recommendations of the legal review are implemented. Policy area 1.4: Simplify the process of obtaining construction permits. Outcome: Procedures for obtaining planning and construction permits simplified, related compliance costs reduced: duration decreased from 204 days in 2006 by at least 25% in 2010, and compliance cost reduced from 3,300 (% of income per capita) in 2006 by at least 50% in 2010. Status: Partially achieved. In July 2009 Serbia adopted a new Law on Spatial Planning and Construction. This Law formally reduced the time and costs associated with obtaining construction permits by setting deadlines for municipalities to prepare and adopt urban plans and general regulation plans and by eliminating certain redundant steps in the process. However, the legal amendments have not translated into better results in Doing Business. Serbia dropped by two places in 2010 as compared to the position in 2009. Furthermore, according to Doing Business 2011 (measuring indicators as of June 1, 2010), now it takes longer (279 days as opposed to 205 days in 2005) to obtain a construction permit, despite the reduction of one step in the process. There has been a significant improvement in the reduction of the cost of obtaining a construction permit from 4,209 percent of income per capita in 2005 to 1,821 percent in 2010. The EU Progress Report 2010 for Serbia also notes that the process of obtaining construction permits remains to be a long and difficult for businesses. One reason for this may be the fact that the reforms are not yet effectively implemented at the local level. Policy Area 1.5: Improving legal and institutional framework for competition. Outcome: Improved competition framework creating level playing field for business and conducive for foreign investments. Status: Achieved. This was a legal-institutional outcome. In the summer of 2009, the GoS enacted a new Law on Protection of Competition which overcame the deficiencies of the previous Law of 2005. In addition, GoS adopted eight new regulations required to implement the new Law on Protection of Competition. These regulations had been originally included in PFDPL 3. The new Law on 14 Protection of Competition addressed all major business concerns, removed the disincentives to foreign direct investment, strengthened the independences of the Commission for Protection of Competition and is fully in line with EU standards. Policy Area 6: Improving effectiveness of contracts enforcement. Outcome: Improved enforcement of contracts: duration of enforcement procedures reduced from 635 days in 2008 to approximate to the regional average of 425 days. Status: Not achieved (as of June 2010). Enforcement mechanisms remain a stumbling block for business operations. According to the Doing Business 2011 indicators on enforcing contracts, Serbia ranks 94th in the world, with 635 days necessary for enforcement. Therefore, there is no indication of improvement. To speed up enforcement processes, a new Law on Enforcement and Security was recently adopted by the Parliament. The new Law will enhance the enforcement of court decisions as well as enforcement based on authentic documents, such as contracts and invoices. To this end, the Law introduced the concept of professional enforcement officers (i.e. private bailiffs) licensed and supervised by the Ministry of Justice. On the basis of the new legislation, it is expected that Serbia will improve its ranking in enforcing contracts in Doing Business 2012 (to be issued in the fall of 2011). Pillar II: Strengthening Financial Discipline Policy area 2.1: Improving financial discipline in the SOE sector. Outcome: Substantial reduction in the direct and indirect MOE subsidies to the SOE sector over the duration of the program. Status: Not achieved. Most non-private enterprises benefit from both direct and indirect subsidies. Despite restructuring and privatization, the direct subsidies in the period 2008-2010 remained at the same level, around 0.8 percent of GDP. FY10 direct subsidies to the sector amounted to approximately EUR 241.1 million (0.8 percent of GDP), compared to EUR 287.4 million (0.86 percent of GDP in 2008). Under the PFDPLs series, the subsidies were measured in Serbian Dinars. Initial decrease was observed in 2009 compared to 2008, in absolute terms as well as in % of GDP. However, the global economic crisis caused the need for introduction of additional subsidies to all enterprises, including SOEs. Moreover the GDP contracted, thus leading to an increase in the ration. The indirect subsidies are in the form of non-payment or partial payment of taxes; arrears to state-owned utilities (e.g. EPS), arrears on pension, social security, and unemployment contributions. No data is available on indirect subsidies, but based on a 2004 assessment of sixty socially-owned enterprises, they are estimated to be more than three times the size of direct subsidies. Consequently, this is an area that would demand additional work in the future, particularly as the impact of the global crisis subsides. Policy area 2.2: Privatization, Restructuring and Bankruptcy of Socially- Owned and State- Owned Enterprises. 15 Outcome: Increase in private sector share: in GDP from 55% (end 2005) to above 60% by the end of the program in 2010 (EBRD data), and in employment from 58% (end 2005) to 65% by the end of the program in 2010 (IMF data). Status: Partially achieved. According to EBRD Transition Report 2010, the private sector share in GDP was estimated at 60% in mid 2010, whereas the share of private sector in formal employment was estimated at 56%1. Progress in selling socially owned companies was limited, while the number of revoked privatization deals increased. Finalization of the process of privatization and/or liquidation of socially and state-owned enterprises remains one of the key priorities of the European partnership for Serbia. Amendments to the Privatization Law were enacted setting end-December 2008 as the deadline for launching privatization of SOEs. As of September 2007 the Privatization Agency (i) offered for sale over 40 SOEs and sold over 15 through its tender program; (ii) offered for sale through auctions more than 350 socially-owned enterprises, and sold over 40% of them; offered for sale 7 SOEs from the list of companies under restructuring and sold over 4 of the companies of this list. By the end of 2009, the total number of companies privatized through tenders and auctions, since the start of the process in 2002, had risen to over 2,300. However, the least attractive companies remained unsold. Privatization of the socially owned companies in 2009 slowed down due to the global crisis. This affected some of the larger companies which were in restructuring. As for smaller SOEs, bankruptcy procedures became a priority in the context of the crisis. A new Bankruptcy Law with a number of advanced provisions in line with the EU directives was adopted. Process of bankruptcy of some 9,500 entities with blocked accounts for over three years was completed and they were erased from the business register. At the same time, however, the number of annulled privatizations— due to non-compliance with the contracted obligations — rose to almost one quarter of the firms initially scheduled for privatization. Policy areas 2.3: Energy sector reform Outcome: Increase in private investments in power generation assets (In 2007: no private investments in energy sector). Status: Not achieved, but positive conditions created. The conditions for entry of private investors (for steam power plants Kolubara B and Nikola Tesla (TENT B3) were created and a tender for strategic partners was launched by the Elektroprivreda Srbije (EPS, electric power company of Serbia) and GoS. However, the evaluation and selection process is still ongoing due to extension of deadlines on request from the investors. Total value of the project is estimated at over 2 billion Euro. 1 Staff calculations based on Employment Developments 2008-2010 data (Labor Force Survey, Statistics Office, Serbia). The private sector share excludes informal employment and employment in the socially-owned enterprise sector. 16 Outcome: Full competition in petroleum products or Government commitment made to a date for full competition. Status: Achieved. The government formally removed the barriers for import of oil derivatives, thus liberalizing the market. Only one particular type of fuel of lower quality still enjoys excise tax that is lower than on any other fuel, The Government has committed to the European Commission to resolve the issue in May 2011. Outcome: Power and gas tariffs have increased from covering about 80percent of costs in 2006 to 100 percent in 2010. Status: Not achieved. Further efforts are needed for market opening in power and gas which would go together with a consistent (market oriented) pricing policy. Despite 2 tariff adjustments in 2010 and 2011, tariffs are still under cost recovery levels. Outcome: EPS and Serbiagas have improved financially and are on a path to eliminating fiscal and quasi-fiscal deficits. Status: Insufficient information. The available information is not sufficient to assess this outcome. Outcome: EPS is operationally more efficient and has been restructured to facilitate private sector participation in the power sector. Status: Achieved. The EU Progress Report 2010 notes that EPS, Serbia’s electricity transmission system operator, has, to a large extent, become financially sustainable. While EPS remains in state ownership it has launched a tender for private sector investor partner in two new power plants. Pillar III: Building a more efficient and stable financial sector Policy area 3.1: Strengthening crisis preparedness, including development of liquidity framework, capital adequacy assessment, bank resolution framework enhancement, and Deposit Insurance payout functions strengthening. Outcome: CAR of the banking system is maintained at the level of at least 12% and the required recapitalizations are conducted using transparent criteria allowing the use of public funds only where there is no private sector alternative (no special rights given to minority shareholders). Status: Achieved. The Serbian banking sector is well-capitalized, with average capital adequacy ratio of 20.1 percent. At the end of 2010, only 6 out of total of 33 banks had a capital adequacy ratio under 15 percent. To ensure that the system was well capitalized to withstand the shock of the crisis, a bank diagnostic and triage exercise was implemented. In December 2009, the NBS completed the stress testing for the entire banking sector (i.e., 34 banks). As a result, Metals Banka was recapitalized by the Province of Vojvodina, while Komercijalna Banka, a state owned bank with EBRD minority ownership, raised more equity from existing and new shareholders, including the 17 IFC. Further, Credy Bank was recapitalized by Nova KBM from Slovenia. The NBS repeats the stress testing exercise every six months. Outcome: Legal and implementation framework for crisis preparedness fully operational and banking sector resilience to shocks strengthened. Status: Achieved. As a response to the global financial crisis, GoS adopted a set of measures aimed at maintaining consumer confidence and stability in the banking sector. In particular, by amending relevant laws (Law on Deposit Insurance, Law on Deposit Insurance Agency, Law on Bankruptcy and Liquidation of Banks and Insurance Companies) and adopting specific decisions the GoS has: (i) increased the level of insured deposits from EUR 3,000 to EUR 50,000 per deposit and extended the coverage to small and medium enterprises and entrepreneurs; (ii) empowered the Deposit Insurance Agency (DIA) to purchase the shares of any bank endangering financial stability, at the request of GoS and NBS; (iii) ensured that, in case of a bank liquidation, the depositors are treated as priority creditors and are to be compensated from the liquidation proceed; and (iv) signed a Memorandum of Understanding with the NBS and DIA committing to increased coordination and sharing of information and creating a financial stability committee. Finally, the NBS has also adopted a Decision on Temporary Measures for preserving Financial Stability in the Republic of Serbia specifying prudential rules to limit the effect of the crisis on the banking sector. Outcome: Increased efficiency of bank resolution system. Status: Achieved. The existing bank resolution framework was overhauled in order to deal with problem banks in a more effective and less costly manner. The previous bank resolution framework included only liquidation and bankruptcy as resolution tools. Under the new framework, purchase and assumption and bridge bank on a closed bank basis have been added, as well as financial assistance for these tools on a least cost basis. Finally, to ensure that the DIA has access to emergency funding for bank resolution/payout, the implicit government guarantee included in the existing DIA and the Law on Deposit Insurance Fund (DIF) has been made explicit with the approval of 2011 budget law. RSD 110 million (approximately EUR 1 million) have been allocated to cover the commitment fee for a EUR 100 million stand-by credit line from commercial banks to the DIA for contingency purposes. By doing so the implicit GoS’s guarantee to the DIA was made explicit. Outcome: Deposit insurance scheme that fulfills the following conditions: (i) fast payout and (ii) availability of extra funding if needed. Status: Achieved. The deposit insurance fund has been strengthened. The fund increased in size to around EUR 140 million at Q3 2010 as a result of an initial capitalization by the GoS and raising of premium. In line with best practices, the DIF current size is adequate to cover the failure of a mid-size bank. The capacity of the fund to deal with large payouts has been strengthened by developing payout procedures, introducing a payout software, adopting a Memorandum of Understanding (MoU) on information sharing between the DIA and the NBS. Amendments to the legal framework to specifically provide for extraordinary funding and equate the depositors of banks in liquidation with those of banks in bankruptcy have also been approved. 18 Policy area 3.2: Restructuring and divestment of state-owned banks and financial assets. Outcome: Banks with majority RoS ownership fully capitalized (CAR 12%). Status: Achieved. To ensure that the banking sector is well capitalized a bank diagnostic and a triage exercise is regularly conducted for the entire banking sector in Serbia. So far three banks have been recapitalized. Outcome: The Government of Serbia’s ownership stake in the banking sector and its holdings in financial assets has been reduced from 24% in 2005 to 15% by 2010. Status: Achieved. The GoS has continued the divestment program for state owned banks. To consolidate the state- owned banking sector and reduce likely capital injections, the GoS adopted a strategy in May 2009, which called for the reduction of majority state owned banks from four to two over the next two years. Of the four majority state owned banks, Credy Banka was sold to a foreign group, Postanska and Privedna Pancevo were merged, and Srpska Banka will remain as is. As a result the number of majority state owned banks has decreased from 4 to 2. Policy area 3.3: Strengthening insurance sector regulation and resolution regime. Outcome: A new motor third party liability (MTPL) regime has been introduced to resolve existing legitimate claimants and put new MTPL regime on fiscally secure basis going forward. Status: Achieved. The regulatory framework in the insurance sector has also been enhanced. The Law on Mandatory Traffic Insurance which introduced the MTPL insurance, satisfactory to the Bank, was enacted. Prior to this, the motor third party liability segment, the main class of non-life insurance business, was not sufficiently regulated. Outcome: Resolution of failed insurers complies with EU insurer wind up requirements as featured in new law amendments. Status: Achieved. Run-off MTPL liabilities of bankrupt insurers were assessed and an action plan to fund the liabilities was developed. Outcome: Decrease of the state share in insurance sector - from 67% in insurance premium written in 2006 to 35% in 2010. Status: Achieved. In Serbia, the insurance market was dominated by state owned insurers DDOR and Dunav. After privatization of DDOR under the PFDPL 1, by 2010, Dunav accounted for 28 percent of the market that is below the 35% targeted. Dunav is considered to introduce market distortions in view or its effective power. The GoS is committed to commencing privatization of Dunav. 19 Policy area 3.4: Strengthening capital markets regulatory and supervisory regime. Outcome: Adequate regulatory framework facilitates more rapid capital market development. Status: Achieved. The Parliament has adopted a new Law on Securities Market, which was harmonized with the Law on Business Entities and aligned with relevant EU Directives. Outcome: Reference point/benchmark for issuance of municipal, corporate and infrastructure bonds provided. Status: Not achieved. No municipal or infrastructure bonds have been issued. To promote capital market development, and under the PFSPBG, the GoS has gradually extended the maturities of T-bills from 3 months to up to 2 years. To increase domestic savings mobilization, the GoS is committed to developing capital markets. The establishment of a yield curve is essential in this respect. ================================================================== 3.3 Justification of Overall Outcome Rating Rating: Satisfactory The objectives of this operation have been highly relevant to the strategic priorities of the country. Priority actions were well selected and contributed to the operation’s outcomes. All prior actions for PFDPL1 and PFDPL2 were completed. This operation assisted Serbia to cope with the global crisis, while supporting longer term measures to strengthen the financial sector and improve the business environment. Areas where least progress was achieved pertain to the privatization and/or improvement in the financial situation of SOEs. Slower progress in this area has to be attributed to impact of the global economic crisis, which led to the cancellation of many privatization contracts already awarded and no response to new tenders organized after the crisis struck. As a result the PFDPL2 placed a bigger emphasis in the adoption of a legal framework that would facilitate the bankruptcy of companies, including SOEs. The results of the PFDPL, summarized above, suggest that a great deal of the expected outcomes had been achieved (63% of the outcomes, concentrated in measures to improve the financial sector and, to a lesser extent, business environment). If Pillar III is given a weight of 50% in the rating, business environment a 30% and SOE reforms 20%, the PFDPL achieved about 70% of the intended outcomes. In almost all aspects of this operation, the country has moved in the right direction notwithstanding that the cancellation of the PFDPL3 and the global crisis meant that the achievement of expected outcomes may have to wait in some cases, particularly in relation to SOEs. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 20 There were no measured poverty impacts specifically related to this operation. Poverty and unemployment have increased in Serbia since the onset of the crisis. There had been a significant poverty reduction between 2006 and 2008 when the share of households in poverty declined from 8.8 to 6.1 percent (equivalent to more than 230,000 people being lifted out of poverty). In 2009 the poverty rate rose again to 6.9 percent. Similarly, according to labor force survey data, the unemployment rate which had decreased to 14.9 percent as of April 2008, reached 18.8 percent in October 2009 and it as estimated to exceed 19 percent recently. There are no recent data on poverty but until higher growth rates are achieved, let’s say over 5 percent per year, poverty and unemployment are likely to increase. A thorough impact assessment of enterprise reforms was done by the World Bank PREM team; this clearly showed that the proposed privatization and bankruptcy measures did not affect employees negatively, but rather ensured their fair payment from the bankruptcy proceeds. The GoS provides social assistance, including cash benefits and services, to poor households, in addition to special purpose social programs. The main social assistance benefits are: (i) material Support to Families (MOP in its Serbian acronym) for families whose income is lower than the guaranteed “social security level”, and (ii) child allowances - cash transfers to poor households with children, including the families of redundant workers. Targeting under the programs is being strengthened by policies supported by Pillar 3 of the parallel PEDPL series. (b) Institutional Change/Strengthening The PFDPL introduced some changes in the institutional framework and strengthened a number of existing institutions. Given the long-term nature of institution building, the full institutional benefits of the PFDPL reforms are expected in the medium to longer-term. Among the key institutions strengthened by the PFDPL, the following could be highlighted: Serbian Business Registers Agency (SBRA) - one-stop shop for business and employment registration, e-registration and coordination with social insurance funds. SBRA hosts more than 20 type of business registries, in total. Ministry of Economy and Regional Development— regulatory review and regulatory impact assessment functions established National Bank of Serbia and Ministry of Finance – crisis preparedness framework and development of bank resolution system Deposit Insurance Fund – payout functions strengthened. Serbian institutions developed a large body of new legislation in compliance with the European Union which has improved the business environment and functioning of the financial system. This has been associated with the streamlining and elimination of redundant, inefficient regulations. (c) Other Unintended Outcomes and Impacts 21 The global economic crisis negatively impacted the process of privatization of the socially owned enterprises and the search for strategic private partners in the energy sector, as discussed earlier in the analysis of the outcome status. Therefore, the program with respect to SOEs was shifted to the introduction of more efficient regimes for bankruptcy and contract enforcement. Moreover, to support the banking sector at a time of stress, new emphasis on crisis preparedness was added. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A 4. Assessment of Risk to Development Outcome Ratings: Modest Reforms already introduced, as well as those that must be introduced in the near future, have been widely accepted in Serbia. In fact, there is a strong commitment to reforms as a path to access the EU. Such commitment seems to percolate the whole political and societal spectrum. Risks to the sustainability of reforms are therefore modest, particularly now that some economic growth is taking place. The donor community continues to support this process. The degree of coordination among donors is substantive and contributes to ameliorate risks. Several ongoing projects complement the PFDPL and contribute to its sustainability. These include an Institutional Development Fund (IDF) grant for capacity building of newly established RIA Unit of the Government of Serbia, IDF grant for public enterprises corporatization. New IMF program is being negotiated and expected to be in place shortly. The main risks which have been identified relate to the macroeconomic situation in Serbia. Macroeconomic risks remain substantial. Serbia went into the financial crisis with a high (balance of payments) current account deficit, aggravated by rapid foreign currency credit growth and large cross-border borrowing of domestic enterprises. Specific risks include:  The global economic outlook remains uncertain. Furthermore, potential fallout from weaknesses and risks in eurozone economies could have a significant impact on Serbia; Greece in particular has been the second largest investor in Serbia since the beginning of the transition. A New IMF program is being negotiated.  Serbia faces considerable balance of payments financing needs over the next few years. Risks are mitigated by Serbia’s pursuit of a robust agenda of policy reform, and by the size of the multilateral support package.  Vulnerabilities of the banking sector remain in the context of substantially reduced profitability and stable but high NPLs (17.1 percent2). Key mitigating factor is the very high capitalization and liquidity of the system. As of March 2011, the aggregate CAR was 20.4 percent and the banking system’s liquid assets covered 36.9 percent of short term liabilities. An increase in the rate of NPLs could pose a risk to the solvency of the system. 2 Status as of end March 2011, quoted by NBS. 22 Mitigation of overall risks is ensured by GoS’s long term commitment to reforms. Serbia has a good record of continuous reforms and commitment to EU accession. Such a record creates solid environment for cooperation and confidence with the donor community and allows stakeholders to focus more intensively on results. 5. Assessment of Bank and Borrower Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The Bank followed good practices in building the program on the findings of AAA activities and lessons learned in other transition economies. Moreover complimentary grants and investment operations supported the implementation of the PFDPL program. Finally donor coordination was ensured throughout. The result was a program design that was consistent with the national development strategy and focused on EU accession priorities, bes practices in crisis preparedness and on sound business environment. (b) Quality of Supervision Ratings: Satisfactory The Bank devised an effective approach to work with counterparts and with other donors in their respective pillars of the reform program. The Bank cooperated closely and effectively with the MOF, which was the coordinator of activities on the client’s side, maintained close cooperation with the MOERD and NBS . Supervision was also enhanced by the continuity of the Bank team, particularly the task manager who did not change throughout almost the entire PFDPL series. The Bank Team collaborated effectively with the EC, SIDA and USAID and effectively used the SIDA Trust Fund. The Bank assisted through a number of challenging reforms with persistence and delivering high level support in all policy areas, particularly in the areas of business regulatory environment (Pillar I) and the financial sector (Pillar III). By all indications, the counterparts in the Government of Serbia were very satisfied with the technical support and systematic approach to reforms provided by the Bank Team. The Bank provided regular reports on the progress towards achieving reforms benchmarks. The system of outcome indicators was developed in accordance with the requirements that existed at the time of the series design and was focused on final outcome indicators that were supposed to be achieved via three DPL loans by the end of the 2010. The on-going monitoring was based on a set of reform benchmarks (not only the core ones) which served as intermediary results indicators. (c) Justification of Rating for Overall Bank Performance The overall performance is rated Satisfactory since the Bank performance in Ensuring Quality at Entry and the most relevant aspects of supervision were satisfactory. 23 5.2 Borrower Performance (a) Government Performance Ratings: Satisfactory The Government developed the institutional and regulatory framework in place to improve the public sector governance, the business regulatory environment and the financial sector stability. The readiness and openness for reforms was evident all the time and the cooperation with the Bank Team was very strong. They completed all prior actions and met most of the non-core benchmarks, readily shared information with the Bank team and continue to implement reforms. Serbia has been very proactive. For example in making sure that the financial sector was given strong emphasis in view of the crisis circumstances and by requesting the replacement of the PFDPL3 for a new guarantee operation to enhance financial leverage of the Bank resources. The Government showed strong commitment to the consultation process (i.e. consultation with stakeholders on important legislative amendments, now a mandatory requirement, broad involvement of business community in the regulatory review process). (b) Implementing Agency or Agencies Performance Ratings: Satisfactory In general the implementing agencies performed well. Most agencies followed through on the program reforms and handled well the challenge of preparing substantial amounts of new legislation. The Ministry of Economy and Regional Development performed well in leading work on privatization and bankruptcy, preparation and implementation of the regulatory guillotine, reviewing a substantial amount of legislation, and establishing new practices such as the regulatory impact assessment. Both the PFDPL and the EU accession agenda played a critical role in driving the pace of the reforms. In implementing agreed upon measures, the professionalism and dedication of the Government Team proved to be determinant factors. (c) Justification of Rating for Overall Borrower Performance Ratings: Satisfactory The performance of the Government and implementing agencies were both satisfactory, therefore the overall rating is satisfactory. 6. Lessons Learned Three important lessons were learned during the implementation of this operation:  It is important to maintain flexibility of the DPL series to adapt to current realities/priorities and to respond to economic crisis by focusing on the important sectors. As the operation was implemented and the global crisis enfolded, it was necessary to enhance the focus on the strengthening the financial 24 sector and business environment to be able to withstand the shocks of the crisis. This adjustment was in response to the unexpected economic realities and it proved to be effective.  Good coordination with other partners acquires increased importance in time of crisis. The cooperation among international agencies (i.e. WB, IMF) and with other donors, in particular the EU, was decisive since large amounts of assistance have been necessary. This cooperation was underscored by the central role played by the Government of Serbia through the Ministry of Finance.  The program supported by the PFDPL series has also benefitted from Bank engagement in banking sector restructuring in Serbia and Bank’s previous experience in financial crises. The Bank work and experience in the financial sector was of particular importance. It allowed adapting quickly acquired tools to the country’s reality. In the PFDPL, the financial sector pillar addressed banking/financial issues by supporting aspects of crisis management in which the Bank has traditionally had a comparative advantage. Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies (b) Cofinanciers (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) 25 Annex 1. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members P096711 - Second Programmatic Private Financial Sector Development Responsibility/ Names Title Unit Specialty Lending Irina Astrakhan Country Program Coordinator AFCZA Itzhak Goldberg Consultant ECSPF Bjorn Hamso Sr Energy Econ. SASDE Rodney Lester Consultant MNSED Alexander Pankov Sr Private Sector Development EASFP Anna Sukiasyan Resource Management Officer CFRPA Supervision Tijen Arin Sr Environmental Econ. ECSS3 Dominique Bichara Special Rep. to The United Nat EXTUN Nicholay Chistyakov Senior Finance Officer CTRFC Aurora Ferrari Sr Private Sector Development ECSF1 Itzhak Goldberg Consultant ECSPF Eugene N. Gurenko Lead Financial Sector Speciali GCMNB Bjorn Hamso Sr Energy Econ. SASDE Ardo H. Hansson Lead Economist EASPR Ronald D. Hood Lead Economist ECSP2 Arvo Kuddo Senior Labor Economist HDNSP Alexander Pankov Sr Private Sector Development EASFP John Daniel Pollner Lead Financial Officer ECSF2 Andrej Popovic Private Sector Development Spe ECSF1 Lazar Sestovic Economist ECSP2 P096711 - Second Programmatic Private Financial Sector Development Responsibility/ Names Title Unit Specialty Lending Irina Astrakhan Country Program Coordinator AFCZA Dominique Bichara Special Rep. to The United Nat EXTUN Rinku Chandra Senior Strategy and Operations ECAVP Nicholay Chistyakov Senior Finance Officer CTRFC Aurora Ferrari Sr Private Sector Development ECSF1 Itzhak Goldberg Consultant ECSPF Eugene N. Gurenko Lead Financial Sector Speciali GCMNB Bjorn Hamso Sr Energy Econ. SASDE 26 Lewis Raymond Hawke Sr Financial Management Specia ECSO3 Arvo Kuddo Senior Labor Economist HDNSP Smita Kuriakose Economist AFTFE Sanja Madzarevic-Sujster Sr Country Economist ECSP2 Andrej Popovic Private Sector Development Spe ECSF1 Lazar Sestovic Economist ECSP2 Marina Wes Lead Economist ECSP2 Supervision (b) Staff Time and Cost P115958 - Programmatic Private Financial Development Policy Loan 2 Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY06 245.32 FY07 146.23 FY08 279.16 Total: 670.71 Supervision FY09 140.75 FY10 0.00 FY11 6.29 Total: 147.04 27 Annex 2. Beneficiary Survey Results N/A 28 Annex 3. Stakeholder Workshop Report and Results N/A 29 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR 30 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders N/A 31 Annex 6. List of Supporting Documents  Program Document, Second Programmatic Private and Financial Sector Development Policy Loan (PFDPL), February 2009.  Program Document, Programmatic Private and Financial Sector Development Policy Loan Two (PFDPL2), October 2009.  Implementation Status Report (ISR), PFDPL2, March 2010.  Serbia Country Partnership Strategy for FY08-FY11.  Program Document, Private and Financial Sector Policy Based Guarantee (PFPBG), January 2011.  Aide Memoire, PFDPL Pre-Appraisal Mission – Deferred Drawdown Option, December 2007  Aide Memoire, PFDPL2 Appraisal Mission, July 2009  Aide Memoire, Insurance Sector Technical Assistance Mission, March 2009  Aide Memoire, Capital Markets Technical Assistance Mission, April 2009  Aide Memoire, PFDPL2, May 2009  Evidence of Second Programmatic Private and Financial Development Policy Loan Core Conditions Realization of PFDPL, Memo from Ministry of Finance of Serbia, July 2009  IBRD Results Brief, Private and Financial Sector Policy Based Guarantee Briefing  Serbia - Enterprise Surveys, available at: http://www.enterprisesurveys.org/ExploreEconomies/?economyid=206&year=2009  BEEPS At-A-Glance 2008 Serbia available at:  http://siteresources.worldbank.org/INTECAREGTOPANTCOR/Resources/704589- 1267561320871/Serbia_2010.pdf  Doing Business, Serbia, available at:  http://doingbusiness.org/data/exploreeconomies/serbia  Serbia 2010 Progress Report, European Commission, available at: http://ec.europa.eu/enlargement/pdf/key_documents/2010/package/sr_rapport_2010_en.pdf  EBRD Transition Report 2010: Recovery and Reform: Serbia Country Assessment, available at http://www.ebrd.com/pages/research/publications/flagships/transition/serbia.shtml  Zakon za zaduzivanje kod Societe Generale uz garanciju Svetske Banke, Official Gazette 478/11  Interviews and consultations:  Ms. Irina Astrakhan, Task Team Leader, PFDPL1-2  Ms. Aurora Ferrari, Private Sector Development Specialist, PFDPL Team Member, ECSPF  Mr. Andrej Popovic, Private Sector Development Specialist, PFDPL Team Member, ECSPF, WB Belgrade office  Mr. Arturo Salvador Rivera, Lead Energy Specialist and PFDPL Team Member, ECSS2  Council for Regulatory Reform, Belgrade  Serbian Business Registers Agency, Belgrade  National Bank of Serbia  Privatization Agency of Serbia, Bankruptcy Unit  European Commission, Belgrade  European Bank for Reconstruction and Development, Belgrade  Websites:  Ministry of Economy and Regional Development: www.merr.gov.rs  Ministry of Finance: www.mfin.gov.rs  National Bank of Serbia: www.nbs.rs  Privatization Agency: www.priv.rs  Council for Regulatory Reforms: www.srp.gov.rs  Elektroprivreda Srbije http://www.eps.rs/  Parliament of Serbia http://www.parlament.gov.rs/ 32