Document of The World Bank FOR OFFICIAL USE ONLY Report No: 32652 IMPLEMENTATION COMPLETION REPORT (TF-51355 IDA-37800) ON A CREDIT IN THE AMOUNT OF SDR 58.7 MILLION (US$80 MILLION EQUIVALENT) TO SERBIA AND MONTENEGRO FOR THE SECOND PRIVATE AND FINANCIAL SECTOR ADJUSTMENT CREDIT June 20, 2005 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 15, 2005) Currency Unit = Serbian Dinar (CSD) CSD 1 = US$ 0.016 US$ 1 = CSD 63.32 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS APML - Administration for the Prevention of Money Laundering BRA - Bank Restructuring Agency BSA - Business Services Agency DFID - Department for International Development ECA - Europe and Central Asia Region ICR - Implementation Completion Report IDA - International Development Association MOEP - Ministry of Economy and Privatization MOF - Ministry of Finance NBS - National Bank of Serbia PA - Privatization Agency PDPL - Programmatic Development Policy Loan PLC - Paris and London Club PFSAC - Private and Financial Sector Adjustment Credit PSD - Private Sector Development RS - Republic of Serbia SAM - Serbia and Montenegro SDP - Supervisory Development Plan SIDA - Swedish International Development Association SOE - Socially-Owned Enterprises TA - Technical Assistance TSS - Transitional Support Strategy TSSU - Transitional Support Strategy Update EAR - European Agency for Reconstruction USAID - United States Agency for International Development VB - Vojvodjanska Banka Vice President: Shigeo Katsu Country Director Orsalia Kalntzopoulos Sector Manager Gerardo Corrochano Task Team Leader/Task Manager: Itzhak Goldberg and Michael Edwards SERBIA AND MONTENEGRO SECOND PRIVATE AND FINANCIAL SECTOR ADJUSTMENT CREDIT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 10 6. Sustainability 11 7. Bank and Borrower Performance 12 8. Lessons Learned 14 9. Partner Comments 15 10. Additional Information 19 Annex 1. Key Performance Indicators/Log Frame Matrix 22 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 24 Annex 4. Bank Inputs 25 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 27 Annex 6. Ratings of Bank and Borrower Performance 28 Annex 7. List of Supporting Documents 29 Project ID: P074868 Project Name: PFSAC 2 Team Leader: Itzhak Goldberg TL Unit: ECSPF ICR Type: Core ICR Report Date: June 20, 2005 1. Project Data Name: PFSAC 2 L/C/TF Number: TF-51355; IDA-37800 Country/Department: SERBIA AND MONTENEGRO Region: Europe and Central Asia Region Sector/subsector: Banking (50%); General industry and trade sector (40%); Non-compulsory pensions, insurance and contractual savings (10%) Theme: State enterprise/bank restructuring and privatization (P); Regulation and competition policy (P); Legal institutions for a market economy (P); International financial architecture (S); Standards and financial reporting (S) KEY DATES Original Revised/Actual PCD: 01/09/2003 Effective: 06/26/2003 Appraisal: 04/03/2003 MTR: Approval: 06/10/2003 Closing: 12/31/2004 12/31/2004 Borrower/Implementing Agency: GOVERNMENT OF SAM/GOVERNMENT OF SAM Other Partners: STAFF Current At Appraisal Vice President: Shigeo Katsu Johannes Linn Country Director: Orsalia Kalantzopoulos Orzalia Kalantzopoulos Sector Manager: Fernando Montes-Negret Paul Siegelbaum Team Leader at ICR: Itzhak Goldberg (PSD) and Itzhak Goldberg (PSD) and Gerardo Michael Edwards (FSD) Corrochano (FSD) ICR Primary Author: Alexandra Drees-Gross; Alexander Pankov 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: HS HS Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The Second Private and Financial Sector Adjustment Credit (PFSAC II) supported the Government of Serbia and Montenegro (SAM) in the implementation of regulatory, institutional, and structural reforms seeking to significantly accelerate private sector-led growth through: (i) improving the business environment by means of comprehensive reform of enterprise entry, operation and exit; (ii) strengthening the financial system by privatizing and/or liquidating a number of key remaining majority state-owned banks and improving the regulatory environment under which banks and other financial intermediaries operate; and (iii) privatizing and restructuring socially-owned enterprises that crowd out private sector growth, hamper banking sector recovery, and incur significant fiscal and quasi-fiscal costs. The objectives were clear and realistic and, most importantly, fit in fully with structural reform measures outlined in the Government's medium-term Economic Recovery and Transition Program presented at the June 2001 Donors Conference. The program is described in more detail in the conference report Breaking With the Past: The Path to Stability and Growth issued in June 2001 by the World Bank (the Bank) and prepared in colloaboration with the European Commission and other international donors. The program is further detailed in the Bank's Transitional Support Strategy for Serbia and Montenegro adopted in June 2001 and updated in July 2002 and February 2004. The objectives represented a direct continuation of the structural reform and stabilization program that was supported by the Bank under the first PFSAC which was approved in May 2002. The objectives specifically reflected medium term priorities of the Government elaborated under PFSAC I. While the objectives were in many respects highly ambitious and broad, particularly for the enterprise and bank privatization components, they were appropriately tailored to the Government's capacity. The fact that the donor community, led by the Bank, supplemented the reform program with over US$ 50 million in technical assistance (TA) grants and loans made the PFSAC II goals more realistic and ultimately achievable. The reforms that were supported took place at a critical phase of the country's transition process and represented crucial next steps to deepen the reforms. The operation was high risk, particularly considering the political uncertainties surrounding SAM's future, but offered a potentially high reward ­ making a determinant contribution to the recovery of the country's economy and its capacity to develop and participate more fully in the international system. The operation's strategic relevance and attention to institutional aspects ­ essentially established through the first PFSAC ­ were very high and well developed. 3.2 Revised Objective: The development objective was not revised. 3.3 Original Components: Background and Context. Serbia began the transition to democracy and a market economy under very difficult economic and social conditions. These conditions resulted from nearly four decades of inefficient economic management and a decade of regional conflicts and international isolation that followed the break-up of socialist Yugoslavia in 1991. Despite these formidable odds, since early 2001 the Serbian authorities took impressive steps to address the legacy of the past. The Government has followed a two-pronged approach combining stabilization measures with decisive steps in an agenda of structural - 2 - reforms. Notwithstanding remaining political risks, sound macroeconomic policies have generally been successful in bringing down inflation, stabilizing the exchange rate, and in establishing macroeconomic stability. In parallel to stabilization efforts, the Serbian Government made significant, albeit incomplete, progress in the implementation of structural reform measures outlined in the medium-term Economic Recovery and Transition Program and the Bank's Transitional Support Strategy for SAM. More specifically, there has been considerable progress in opening the economy, restructuring the banking sector, privatization of socially-owned enterprises and adopting legislation in many areas aimed at harmonization with the European Union. The PFSAC II was designed to support structural reforms in banking and enterprise sectors, aiming to foster private sector growth and job creation, facilitated by a healthier and more developed financial system. The operation built on the impressive progress made under the first PFSAC by supporting the continuation of a wide-ranging privatization and restructuring program for state- and socially-owned enterprises and banks. Furthermore, the credit supported the Government's longer-term goal of creating a modern regulatory and institutional framework for private and financial sector development. Components. The policy reform conditionalities for the credit focused on the following four areas: Reform of Business Enabling Environment aimed to improve the regulatory and institutional framework for business entry through improving the registration system; to facilitate efficient operations of business through reforming Enterprise Law, building institutional capacity for regulatory reform, and improving enterprise access to finance; and reducing barriers to the efficient exit and redeployment of non-productive assets. Reform of Financial Sector Regulatory and Supervisory Framework sought to create a modern regime for financial sector operations through strengthening the supervision and regulation of the banking and insurance sectors, laying the foundation for the future implementation of a sustainable deposit insurance scheme, and creating adequate mechanisms to prevent money laundering activities. Banking Sector Reform sought to deepen and broaden the scope of financial intermediation through selling controlling stakes in most privatizable banks to reputable strategic investors, and liquidating all other majority state-owned banks. Enterprise Sector Reform sought to promote economic growth by putting the country's industrial assets to more productive use through divestiture of the vast and under-performing socially-owned enterprise sector to foreign and local investors using internationally accepted sales techniques. The project was designed as a two tranche operation, with the expectation that disbursement of the second tranche would take place approximately nine to 12 months after the first. The two tranche design was expected to allow the Bank to provide support in a timely manner, while at the same time, provide flexibility on the timetable for meeting the conditions for release of the second tranche. The design of both components was clearly linked to the objectives described above. The four project components reflected the highest priority sectoral issues agreed upon by the Bank and the Government and were fully consistent with the Bank's Transitional Support Strategy Update (TSSU) for SAM. The program was part of the ongoing Bank program with the authorities of Serbia to support enterprise sector reforms that foster private sector growth and job creation, facilitated by a healthier and more developed financial - 3 - system. The project drew heavily on the lessons and experience provided by the PFSAC I, which was rated rated "highly satisfactory" by OED for its overall outcome and achievement of its objectives. The successful implementation of policy objectives under PFSAC I provided a platform for the design of PFSAC II. The specific components and reform measures sought under PFSAC II were a direct continuation of the reform program begun under the first operation. 3.4 Revised Components: Project components were not revised during implementation. 3.5 Quality at Entry: Quality at entry is rated as highly satisfactory based on the (i) technical competence and incorporation of best practices in the private and financial sector development into the project; (ii) the strategic significance of the program and consistency with overall country priorities; and (iii) the tight focus and coherence of the program. The QAG quality at entry review also rated the project as highly satisfactory. The project was considered outstanding for building directly on the progress of first PFSAC, pursuing the same objectives to further closure and taking advantage of the institutional foundation laid by PFSAC I. According to the QAG panel, the operation's strategic relevance was also beyond question. The Bank financing was substantial yet fit into a much larger package of financial adjustment support from the IMF and other institutions. The approach and design of the operation were conceptually sound and rooted in the lessons of experience with similar issues in transition economies. The QAG panel asserted that although the operation was high risk, particularly considering the political uncertainties surrounding SAM's future, it offered a potentially high reward ­ the potential to make a significant contribution to the recovery of the SAM economy and its sustainable capacity to develop and participate more fully in the international system. In addition, QAG found that the project document was considered a model for its clarity, analysis, logical structure, and presentation of the right balance between macroeconomic and sector specific aspects. In hindsight, the QAG team concluded that the preparation may have included additional discussions of risk mitigating factors given the difficult political climate in SAM--although the actual components may not have changed as a result. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The achievement of the objectives and outputs in considered satisfactory. The PFSAC II largely achieved its main objective of supporting structural reforms in the private and enterprise sectors, and thereby fostering private sector-led growth and job creation. The operation contributed significantly to the country's overall economic stabilization program, by helping to establish an improved business environment, a better developed financial regulatory and supervisory system, and reduce state-ownership of the enterprise and banking sector. Despite a number of high risks, the assassination of the Prime Minister, and a full change in government midway through the project, PFSAC II assisted the Government in delivering solid and ambitious set of reforms. - 4 - These reforms represent a substantial achievement: the completion of the second phase of reforms in the key sectors served to lay the foundation for a market-based economy. The reforms have had immediate impact by providing a fiscal stimulus to the economy through privatizations of large state-owned enterprises, reducing the state's contingent liabilities, and strengthening the legal framework for private sector development through changes to the enterprise law, bankruptcy regime, and business registration system. In turn, these measures are considered to be highly likely to be sustainable, given a continued government commitment toward creating a market-based economy. Main achievements. Following are the selected main achievements of the PFSAC II: l Transfer from public to private hands the ownership and management of over 1,000 medium companies. Since 70 percent of each company was sold, in contrast to mass privatization, the management has had to move to the new owner. l FDI via Privatization: circa 50 large companies have been sold (70 percent stake) to strategic owners, mostly international, some with Bank assistance and other with the Government's own resources or other donors' help. l Entry of new companies has been streamlined through changes in the Law on Registration, which removed registration to a new business-friendly one-stop-shop agency, which will also house collateral and leasing registration. The number of SMEs went up in 2001-2003 by 6,000 and their employment by 59,000. The number of shops went up by 30,000 and their workers by 62,000. Together they employ in 2003 more than one million persons, around half of total labor force of 2,050,000. l Leasing has become a popular and important financial instrument to finance investment. l Launched the privatization process for state-owned banks. Jubanka sold and bids submitted for Continental and Novasadska. l Strengthened the institutional capabilities of the NBS from a relatively poor position to fulfill its responsibilities as regulator and supervisor. l Improved the BRA's abilities to maintain financial performance and governance of state-owned banks. l The legal framework around the insurance sector has been significantly strengthened. A summary of the progress with respect to the outcome benchmarks is also included as a table in Section 10 below. The project's achievements are linked to several factors. First, the project built upon the experience of the PFSAC and profited from the related package of technical assistance support that accompanied the credit. This package included the Private Sector Development Technical Assistance and Financial Sector Development Technical Assistance (PSD TA and FSD TA) Grants, the Privatization and Restructuring of Banks and Enterprises Project, and a Japanese PHRD Grant, all of which were ongoing at the time of project preparation. Because the project preparation team had been working so close with the authorities through those operations, there was an exceptional amount of continuity to the program, and the team had an excellent understanding of the specific institutional development needs of the related institutions. Second, the project placed a heavy emphasis on working closely with other donors to leverage maximum support for the given reforms. As a result of this effort, the Bank was effective in channeling resources into the critical areas. Third, the Bank team emphasized the provision of advice based on the most cutting edge international best practices, particularly related to privatization and enterprise reform. - 5 - Tranche disbursement. The reforms took longer to achieve than anticipated and resulted in a delay of four months in disbursing the second tranche of the loan. The implementation was delayed in latter 2003 through early 2004 primarily due to increased political uncertainty in the period preceding and immediately following presidential and parliamentary elections held in Serbia. Following its taking office in March 2004, the new government reaffirmed its commitment to the PFSAC II program objectives and made a considerable effort to complete the implementation of the program before the closing date of December 31, 2004. Notwithstanding the above-mentioned delay, the two tranche nature of the operation was a key element of the project's success. In particular, the reform program ran the risk of backsliding during the period of political instability after, and the second tranche release offered an incentive to continue with the reform program. In contrast to the first PFSAC which was a one tranche operation, the two tranches gave provided added flexibility which proved necessary in the second phase of a complex reform operation. Specifically, the second tranche provided an incentive for the Government to continue its reform program, even in the difficult period after the assassination of the prime minister and subsequent change of government. The tranche release conditions were very specific and closely monitored by the Bank, both on an ongoing basis with its field based staff and during frequent supervision missions. 4.2 Outputs by components: Following are the major achievements by component. A. Reform of Business Enabling Environment This component is rated as satisfactory. With the support of PFSAC II, the Government took important steps to improve the enabling environment for business through the enactment of new legislation on business registration, enterprises, and bankruptcy. These activities laid the groundwork for a more vibrant enterprise sector by reducing barriers to entry, operations, and exit of firms. Streamlining business registration and business services. In line with the PFSAC II conditionalities, the Serbian Parliament took a major step when it adopted in May 2004 a new business registration system that, once fully operational in late 2005, will be one of the most modern and streamlined in Europe. The new legislation aims to: (i) create a unified Serbian business register that includes all business activities covered under the current Enterprise Law and Law on Private Entrepreneurs; (ii) administer the new unified registry through an independent administrative agency; (iii) allow businesses to start activities immediately after registration; (iv) streamline data requirements for each class of business according to European Union benchmarks; (v) expand electronic registration and updating, and ensure easy electronic accessibility to the database; and, (vi) create a single unique identifying number for each enterprise that would serve all government needs. The newly established Business Services Agency (BSA) is in charge of administering the business registry. While, according to Bank's Doing Business database, the initial reforms reduced the average time needed for company registration from 70 to 40 days, the new system has further reduced this time to 18-20 days. Therefore, there has been significant progress regarding the outcome benchmark to "decrease in number of procedures and average time spent during each procedure." Strengthening enterprise law. The new enterprise law was enacted by the Serbian Parliament in November 2004. The new law is not only closer to the company laws of market economies, but also easier to use in business planning and in avoiding or settling disputes. It also contains a number of provisions designed to - 6 - meet the requirements of EU Company Law Directives. This will, in turn, improve the business environment for enterprises and help to attract investment. Support for adoption of the new enterprise law has also been further supported under the SAC II operation. The most important improvements in the new law can be summarized as follows: l The limited liability company provisions of the law are more flexible. The minimum capital requirement has been reduced from 5,000 to 500 Euros per member and there is no longer a requirement of capital maintenance. l The law introduces two types of joint stock companies, namely closed and open. It also has detailed provisions for merger, division, and conversion of a company from one form to another and imposes new disclosure requirements on companies and persons who control a company . l The law encourages good corporate governance. The law expands and clarifies a director's legal duty of care and duty of loyalty to the company, introduces the concept of "personal interest", simplifies the structure of the board, makes the establishment of a supervisory board optional and provides for directors to be elected only by the shareholders and to have only one-year terms. Improving the bankruptcy regime. The new Bankruptcy Law, adopted with support of the credit, also represents a major step toward establishing a more robust legal framework for the private sector. The Government enacted the new law on July 24, 2004, however, due in part to the government change, the adoption of the law has been delayed by almost a year. The law was prepared with support of the PSD TA Grant, in line with PFSAC II conditionalities. The provisions of the new law are fully consistent with EU practices and have been designed to minimize the impact of existing institutional deficiencies in the judiciary and the trustee community. In particular, the new law contains specific provisions designed to expedite the opening of bankruptcy proceedings, as well as a comprehensive section on reorganization of viable debtors. Under the new law, the Bankruptcy Supervisory Agency was established under the auspices of the Ministry of Economy and Privatization (MOEP) to license, supervise, and regulate bankruptcy trustees. The MOEP, with United States Agency for International Development (USAID) and Bank support, has developed a general trustee training course and a program to educate the judges on the concepts contained in the new law. Bylaws for the bankruptcy trustee profession also established a national standards for the profession, ethics guidelines, and an certification exam and requirements. The law also established a specialized Bankruptcy Unit at the Privatization Agency (PA) to act as the bankruptcy trustee for socially- or state-owned enterprises. In spite of the political reticence about bankruptcy, common in all post-socialist economies, the Government is now progressing on building the above-mentioned institutions and has recently announced the first three bankruptcy cases. However, the delays in the implementation of the bankruptcy regime have been significant and an operating bankruptcy regime, with an operational institutional capacity, is not yet in place. B. Reform of Financial Sector Regulatory and Supervisory Framework This component is rated as satisfactory. The PFSAC contributed substantially to the authorities' efforts to establish a modern framework for financial sector regulation and supervision. This included strengthening the supervision and regulation of the banking sector, laying out the foundation for implementation of a sustainable deposit insurance scheme, and creating adequate mechanisms to prevent money laundering activities. Strengthening banking supervision. In particular, the credit supported the design and implementation of the multi-year Supervisory Development Plan (SDP) which supported the overall development and - 7 - strengthening of banking supervision. With the exception of one of the nine agreed `measures', the National Bank of Serbia (NBS) achieved satisfactorily progress with respect to the following measures: (1) approval and communication to staff of a supervisory operating procedure; (2) approval of lines of delegated responsibility; (3) the NBS requirement that banks' boards receive, review, respond to, and sign reports of examination; (5) communication with bank boards and management; (6) approval of an examination manual; (7) adoption of bank rating system; (8) plans for a documentary database; and (9) the negotiation of two MOUs with foreign supervisory authorities. The most far reaching of the nine agreed SDP measures (number 4) requires that NBS' bank supervision conduct risk targeted supervisory activities in the highest risk institutions, as established in the NBS Supervisory Review Committee examination schedule. The NBS recently submitted a more robust analysis and support for its planned supervisory activities, which better correlates the banks to their identified risks. The Bank accepted the NBS's revised plan to rate and examine banks' according to risk, however, the revisions were put in place too late to gauge their effectiveness. It is important to recognize that while the vast majority of these agree measures were met, the SDP effectiveness has suffered due to the difficulties faced by the NBS in attracting and retaining qualified staff in its supervision department. Ongoing dialogue in the context of the proposed Programmatic Development Policy Loan (PDPL) for SAM is refocusing on this issue and taking a more critical view of institutional and human resources capacity building. Improving the anti-money laundering regime. As part of the reform program, the Ministry of Finance (MOF) has supported the development of a new anti-money laundering regime and the establishment of a fully resourced Financial Intelligence Unit, the Administration for the Prevention of Money Laundering (APML). This agency serves as the repository of information from banks, insurance companies and others regarding large cash and suspicious transactions. The APML in turn provides information to the appropriate Serbian and overseas authorities to assist in the prevention and detection of money laundering and terrorist financing activities. The APML was recently evaluated and accepted for membership by the Egmont Group, an international coalition dedicated to fostering the development of financial intelligence units and the exchange of information. Modernizing the legal and institutional framework for the insurance sector. As part of its efforts to broaden the financial services available, the Government enacted a new law on insurance. The new law became effective May 29, 2004. Major reforms include substantially increased sustained minimum capital requirements, restrictions on reinsurance options for local direct insurers, strong controls over intermediaries, and a requirement that life and non-life operations have separate licenses. Under the new insurance law, supervision of insurers has been transferred to the National Bank of Serbia (NBS) whilst regulation remains with the MOF. While efforts to date have focused on establishing appropriate by-laws, the supervisory capacity is still being strengthened and TA is being provided by the Bank in the context of the proposed PDPL. Introduction of International Accounting Standards for banks. With support of the credit, IAS (now "IFRS") for banks are required as of end-2003 and for insurance companies are required as of end-2004. The NBS is also realigning banks' chart of accounts to reflect new IAS reporting requirements. C. Banking Sector Reform This component is rated as satisfactory. This component helped to deepen and broaden the scope of financial intermediation through selling controlling stakes in majority state-owned banks. As a result of the bank privatizations and liquidations of insolvent banks supported by PFSAC II, as of February 2005, - 8 - foreign banks now control for the first time about 50 percent of total banking assets. This reflects growing confidence in the banking system overall, and the collaborative efforts of the NBS and the Government to encourage mergers and the sale of small, less well capitalized banks. Under PFSAC II guidance, the Bank Restructuring Agency (BRA), as agent for the Government, also engaged a reputable investment bank to act as its financial advisor to privatize three majority state-owned banks: JuBanka, Continental and Novosadska banks. JuBanka was offered for sale through open tender in May 2004 and sold to a strategic investor in January 2005. The Government is also currently collecting bids for Continental and Novosadska banks. The BRA appointed a privatization advisor for the sale of Niska Banka and the bank was offered for sale in January 2005. The Government also placed a restructuring advisor on-site and replaced the management team at Vojvodjanska Banka (VB) as part of its on-going efforts to strengthen governance and controls at this systemically important bank. Then, after extensive consultations, the BRA Council, led by the Minister of Finance, Minister of Economy and Privatization and NBS Governor, formally adopted the VB restructuring plan in April 2004. The bank has since met or exceeded the agreed restructuring targets. The Government is committed to the sale of VB, as the tender for the selection of a privatization advisor was launched in October 2004. A majority stake is to be offered for sale to a strategic investor via international tender in mid-2005. It is envisaged the bank's sale will be concluded prior to end-2005. D. Enterprise Sector Reform This component is rated as satisfactory. The component significantly contributed to economic growth by putting the country's industrial assets to more productive use through divestiture of the vast and under-performing socially-owned enterprise sector to foreign and local investors using internationally accepted sales techniques. In addition, the Government exceeded targets set forth for this component under the PFSAC II, and substantially strengthened the Privatization Agency during the project timeframe. Tender privatization. Despite a difficult political environment, with support of the credit, the Privatization Agency made good progress in the tender privatization of the remaining socially-owned enterprises (SOEs). Using technical assistance provided by the Bank and bilateral donors, the agency engaged expert privatization advisors for 54 SOEs by the start of the project. The enterprises were organized into twelve pools for privatization. By October 1, 2004, 23 enterprises had been successfully sold--exceeding the relevant PFSAC II condition. Tenders were still ongoing or planned for 14 more enterprises. Eleven enterprises are now undergoing restructuring prior to being offered for sale, and six more SOEs have been moved to auctions. Auction privatization. The Privatization Agency maintained the momentum in the auction privatization process as well and surpassed the targets envisioned in PFSAC II conditionality by the end of December 2003. Specifically, 595 enterprises were put for sale in auction between April 1 and December 31, 2003, and 463 of them were successfully sold. In 2004 the auction process slowed somewhat from the rapid pace of 2003, due largely to the declining number and quality of the companies available for auction. In 2004, 372 companies were offered or expected to be offered for sale, with 227 of them sold or expected to be sold. Restructuring and privatization of large SOEs. Using the technical assistance funding provided by the Bank and other donors, the Privatization Agency engaged teams of international and local advisors to lead the preparation and implementation of privatization through restructuring programs for about 30 companies. In particular, using the PSD TA grant, the agency engaged financial advisors to work on 12 - 9 - large SOEs in its portfolio. After initial delays due to the difficult Serbian legal and creditor environment, the agency adopted a strategy putting more emphasis on conditional sales (subject to debt restructuring after a conditional bid offer) and sales of assets and subsidiaries. As a result of this approach, a number of companies and/or parts thereof have been offered for tender or auction since the start of 2004, including three SOEs financed by the PSD TA grant. 4.3 Net Present Value/Economic rate of return: Not applicable. 4.4 Financial rate of return: Not applicable. 4.5 Institutional development impact: Institutional development impact is rated as substantial. PFSAC II in combination with the accompanying PSD TA project, FSD TA project, Privatization and Restructuring of Banks and Enterprises TA Credit, and PHRD Grant, helped to create and strengthen a number of agencies that play important roles in the supervision and regulation of the enterprise and financial sectors. In particular, the operation benefited the National Bank of Serbia (by strengthening is banking supervision functions), the Anti-Money Laundering Agency (which was established under the new law); the Bank Rehabilitation Agency, the Privatization Agency, the Agency for Licensing of Bankruptcy Trustees, and the SOE Bankruptcy Unit of the Privatization Agency. The project also supported the establishment of the Serbian Business Registration Agency, which is expected to play an important role in facilitating business entry in the future. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Two main factors affected the implementation of key structural reforms, as well as overall economic activity in Serbia: (i) Assassination of the Prime Minister and the subsequent change in government. A major factor affecting implementation of the project was the assassination of the Prime Minister Zoran Djindjic in March 2003. This event sharply disrupted the reform program, leading to a full government turnover late that year including an entirely new cabinet. The change also led to a prolonged period of inactivity in several areas, delaying for example the passage of important new legislation such as the Enterprise Law, Bankruptcy Law, Insurance Law and the Law on Business Registration, as well as the bank privatization program. (ii) Political instability. The implementation of the reform program supported by the PFSAC II was also delayed in later 2003 and early 2004 due to increased political uncertainty around the presidential and parliamentary elections. While the new government got back on track in a relatively short period of time following election, the highly charged political atmosphere made it more difficult to carry out tough reforms. The fact that the new government was not as familiar with and invested in the PFSAC II program to the same degree also made implementation more difficult. - 10 - 5.2 Factors generally subject to government control: Government commitment. The government that negotiated PFSAC II was highly committed to continuing the reform program and building upon the achievements launched under PFSAC. As mentioned above, however, the turnover in the government following the prime minister's assassination delayed project implementation slightly beyond the original date estimate for second tranche disbursement. This delay, however, ultimately did not derail the program. Rather, after taking office, the new government reaffirmed its commitment to the PFSAC II program objectives and completed the implementation of the program before the original closing date of December 31, 2004. 5.3 Factors generally subject to implementing agency control: The implementing arrangements for this project have proven very successful. The MOE and the Privatization Agency were responsible for the private sector development reforms, the NBS and the BRA were in charge of financial sector reforms. At the same time, the MOF coordinated the program and had a very limited role. In many respects the staffs of these institutions were instrumental in continuing to move the reforms forward at a time when the government was in political crisis. For example, according to a December 2003 supervision mission, even during the period of political turmoil, the Privatization Agency moved forward to fulfill two core conditions, offering for sale a number of state-owned enterprises in restructuring and auction programs and the core condition on divestiture of large SOEs in the tender privatization program. 5.4 Costs and financing: The credit was for SDR 58.7 million (US$80 million equivalent). The credit was disbursed in two equal tranches of SDR 29,350,000. There were no changes to the financing. The second tranche, which was originally planned to disburse around June 2004, was disbursed four months later on October 29, 2004. The primary reason for this delay is the change of government in February 2004 (discussed above in sections 5.1, 5.2 and 5.3). However, the delay was within the original forecasts and thus, no project extension was required. The project closed as planned in December 2004. In particular, the new authorities needed some additional time to advance a number of core conditions, such as prepare the offering the first three banks for sale, appoint the advisor for Niska bank's sale and adopt the restructuring plan for Vojvodjanska Bank. 6. Sustainability 6.1 Rationale for sustainability rating: The reforms brought about by the successful completion of PFSAC II have had a major impact on the overall strength of the financial and enterprise sectors. In the financial sector, the improvements to the legal and regulatory framework--including the strengthening of banking supervision, anti-money laundering reforms, and the modernization of the insurance sector legal framework--have created the building blocks for a sound and stable financial system. Bank privatizations have also increased the soundness of the - 11 - banking system by moving assets into private ownership, thereby helping to eliminate the distortions in lending practices. At the same time, enterprise sector reforms supported by the PFSAC II have helped to accelerate the government's program to begin to privatize and restructure the largest and most complex state-owned enterprises. PFSAC II provided guidance and support for both tender and auction privatizations based on international best practices. The results have significantly reduced state-ownership of the enterprise sectors and provided an important fiscal stimulus by reducing government transfers. The fact that PFSAC II tackled issues related to both sectors at the same time helped to solve some of the most difficult problems the Government faced in implementing its structural reform program. The interconnectedness of the banking and financial systems with the enterprise sector had been a major factor to plague the transition process in the country to date. In total, the policy measures supported by PFSAC reforms have significantly advanced the Government's structural reform agenda. The measures are expected to lead to a more vibrant private sector, and lay the foundation for long term growth and job creation. Given the level of government commitment required to carry them out and the irreversible nature of the privatization of banks and enterprises, the outcome is likely to be sustainable. 6.2 Transition arrangement to regular operations: While no special arrangements for transition to regular operations is necessary given that this was a structural adjustment operation, the institutions that have carried out the reforms (such as the BRA, the Privatization Agency, the Deposit Insurance Agency, etc) have integrated the reform strategies supported by the PFSAC II into their ongoing activities. Capacity of these agencies has also been supported heavily through the PSD TA and FSD TA and related grants of other donors including DFID, USAID, and SIDA. The Bank is continuing to support structural adjustment of the enterprise and banking sectors through the Programmatic Development Policy Loan which is currently under preparation and is expected to go to Board in FY06. The operation is specifically designed to sustain the momentum for reform in the enterprise and banking sectors that was launched under the first two PFSAC operations. As such, the proposed operation supports: (i) continued progress on restructuring and privatization of real and financial sector assets; (ii) restructuring and resolution of large loss-making state- and socially-owned enterprises; (iii) improved access to finance, particularly for the small and medium enterprise (SME) sector; (iv) energy sector restructuring; and (v) private participation in infrastructure, in particular strengthening the legal and institutional framework of the mining sector, which has a potential to contribute to significant foreign direct investments in Serbia. 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance in project identification and preparation was highly satisfactory. The PFSAC II provided guidance and support to the Government at a crucial stage in the reform process. The reforms carried out under the operation were essential to the goals of the Government as articulated in the Transitional Support Strategy. - 12 - As confirmed by QAG through the quality-at-entry review, the operation was exceptional for its strategic relevance and overall technical coherence. PFSAC II was a key element of the Bank and IMF financing to SAM and directly supported the structural reform measures outlined in the medium-term Economic Recovery and Transition Program. Bank performance was excellent in that preparation in severel respects. First, preparation was extremely timely and swift, allowing for an almost a seamless transition from the first PFSAC operation. Second, the project built directly on the successes of the first PFSAC operation--pursuing deeper reforms in the same key areas. Third, the PFSAC II conditionalities were at the center of an very robust and broad based policy dialogue with the Government. The policy dialogue also included a large package of technical assistance that helped the Government move forward to implement some of the most difficult reforms. The project design was also exemplary in that the conditionalities were highly specific, ambitious, but achievable. Based on the relationship that the Bank team had built with the government counterparts at the agency level, the Bank was able to create a set of conditionalities that were very timely and incorporated the latest legislative developments. The various privatization methods supported were based on a close analysis of international best practices and were well tailored to the Serbian context. 7.2 Supervision: Bank performance during supervision is rated as highly satisfactory. The project team was faced with the challenge of how to help sustain the momentum for reform even during a period of intense political crisis. During this period, the team continued to supervise the program closely with frequent missions and discussions not only with the highest level of government (including MOFE, the MOEP, the NBS), but also with the technical staff of the related agencies. In addition, the Bank maintained a core team of staff in the field to supervise the project, conduct monitoring, and provide substantial technical inputs on an ongoing basis. This was a highly effective strategy that allowed the Bank to tightly monitor conditionalities and as well as coordinate technical assistance with other donors. Both the MOE and the Bank's supervision team made extraordinary efforts during the critical six months between January and July 2004 to continue to work with the newly appointed management of the PA, which had adopted an opposing view of privatization. Only due to the efforts of the MOE staff and the Bank team, the program did not become completely derailed. The draft Law on Enterprises at that time also was prepared and made available to the public for commentary, in spite of pressures from opposition groups within and outside the government. The participatory process of preparing the Company Law and the dedication of the consultants of the MOE also deserve special commendation. 7.3 Overall Bank performance: Overall Bank performance is rated as highly satisfactory. Borrower 7.4 Preparation: Borrower performance during preparation is rated as highly satisfactory. The Government demonstrated - 13 - an exceptional level of commitment to its overall reform program. It demonstrated this through broad and active participation of the various agencies in preparation of the PFSAC II. Key counterparts were the MOF, MOEP, NBS, BRA, and PA. During preparation, there was a also high degree of cooperation between the Bank and government counterparts in identifying the specific conditionalities to be supported under the loan. In particular, the same agencies and staff members who carried out the policy reforms under the first PFSAC brought to bear their knowledge and experience in planning the second operation. This experience proved extremely valuable, as the individuals were familiar not only with the overall goals and priorities, but also the methodologies and approaches that would be key to implementation success in the various sectors. 7.5 Government implementation performance: Borrower implementation performance is rated as satisfactory. As explained above, Serbia faced enormous political upheaval in 2003 and 2004 that sharply disrupted the reform program and affected the country's overall economic situation. During this time, progress toward meeting PFSAC II conditionality slowed substantially. However, the new government, which took office in March 2004, reaffirmed ownership within a reasonable period of time and pushed ahead with the PFSAC II reform agenda in order to meet the conditionalities by end-October of that year. 7.6 Implementing Agency: Implementing agency performance is considered satisfactory. Although there was no single implementing agency, implementation of the conditionalities required active participation of a number of institutions as described above. The cooperation of staff from these agencies in carrying out the reform programs was a key element of the project success. In particular, the highly professional and efficient work of the PA and BRA staff and consultant ensured timely implementation of technically complex conditions on resolution of SOEs and banks, respectively. It is important to note here that these two key institutions benefited extensively from the TA provided by the Bank through PSD TA grant, FSD TA grants, and Privatization and Restructuring TA Credit, as well as support provided by EAR, DFID, USAID, and other donors. 7.7 Overall Borrower performance: Overall borrower performance is rated as satisfactory. 8. Lessons Learned l Importance of specific drawing lessons on privatization from other transition economies.The team paid special attention to drawing the right lessons from past experience with bank restructuring and parastatal reform in transition economies. In particular, it recognized the need for a clean and transparent privatization process and for tailoring the reform design to the specific features and economic culture of the country produced a hard-hitting and results-focused yet realistic reform program. The modalities of learning from others are not straightforward: in the design stage, PFSAC II benefited from studies such as Ten Years of Transition by Mitra and Selowsky and OED's Economies in Transition (May 2004) as well as from direct experiences of staff and consultants from countries such as Lithuania, Poland, Romania, and Croatia. In the implementation stage, the importance of practical - 14 - experience from other Eastern European countries is even more critical: the PFSAC applied this lesson by employing consultants who had direct experience in relevant transition economies. The supervision team utilized consultants who were former development officials in Eastern Europe, and thus knew the political economy of transition. The role of such consultants is different from the role of local consultants; while the latter know the local conditions better, they do not know the lessons from other experiences and are also subject to pressures in their own community. l Need for timely and substantial technical assistance. One of the main reasons that the PFSAC II was able to achieve its ambitious agenda was that it lined up a large amount of TA to support the Government in implementing its program. This included both Bank and donor financing. The TA made possible not only the privatizations specified under the conditionalities and the drafting of new laws, but also the critical institution building that is required to implement the changes and sustain the program in the long run. l Importance of donor coordination. The large number of donors that are active in the Serbia presents both opportunities and challenges for the authorities, who often have to coordinate with a large number of partners. In order to avoid duplication and also leverage support for the reforms outlined under PFSAC II, the project team maintained a robust dialogue with many of the other donors including SIDA, DFID, EAR, and USAID and had significant input into their TA programs. This led to well targeted and coordinated assistance that directly supported the fulfillment of conditionality and the related institution building. l Effectiveness of a PSD/FSD umbrella operation. Experience has shown that an integrated approach is necessary to carry out reforms in the financial and enterprise sectors. In Serbia, the interconnectedness of these two sectors was significant -- with the large banks having claims on the enterprise sector and making it difficult for the authorities to restructure or privatize the enterprises. The PFSAC II specifically took this interconnectedness into account by tackling complex problems in both sectors at the same time. l Establishing a legal framework is not enough: institutional capacity and enforcement are necessary. An effective legal and regulatory framework requires not only legislative reform, but also adequate implementation capacity. Since 2002, the Government has carried out many important legislative changes to strengthen the banking sector regulatory and supervisory framework and improve the business environment (such as facilitating business registration, deregulating foreign trade and investment, simplifying the tax regime, modernizing labor legislation). However, these measures proved insufficient without the institutional capacity for implementation and enforcement of the laws. Therefore, it is important that adjustment operations be paired with adequate TA to build local institutional capacity. 9. Partner Comments (a) Borrower/implementing agency: Following are comments received on the PFSAC II ICR from the Ministry of Finance, Ministry of Economy and National Bank of Serbia. In addition, the Government provided a number of comments and corrections that were incorporated into the text. - 15 - Comments from the Ministry of Finance, dated June 10, 2005 Thank you for the opportunity to comment on the Implementation Completion Report for the PFSAC. We believe that PFSAC 2 addressed the key challenges of Serbia's structural reform agenda in bank and enterprise sector including the privatization of state owned banks, continuation of a multi-track privatization program and further improvement of the regulatory framework for banking and enterprise sector and fully support the conclusions of the ICR about PFSAC II's key contribution to the completion of the second phase of reforms of the Serbian private and financial sector. The reforms supported under the PFSAC 2 have had substantial fiscal impact through privatizations of large socially-owned enterprises and state-owned banks and strengthening the legal framework for private sector development through changes to the enterprise law, bankruptcy regime, and business registration system. PFSAC 2 provided a critical support to the continuation of the government's financial sector reform agenda. Improvement made in the banking sector with support from the PFSAC 2 was extraordinary. PFSAC 2 supported the launch of the privatization process for state-owned banks (one bank was sold and bids were submitted for additional two) with inflow from first bank privatization (JuBanka) in excess of EUR 100 million. Upcoming enterprise and bank privatizations are expected to produce further significant revenues for the budget. Through the PFSAC 2 the Government took important steps to improve the enabling environment for business through the enactment of new legislation on business registration, enterprises, and bankruptcy. These activities laid the groundwork for a more vibrant enterprise sector by reducing barriers to entry, operations, and exit of firms. As a result there has been significant progress regarding several outcomes including the decrease in number of procedures and average time spent during each procedure and in the minimum capital requirement. In addition, the Government is now progressing on building the bankruptcy related institutions and has recently announced the first bankruptcy cases under the new framework. Finally we would like to add that he Bank timely deployed substantial resources through a technical assistance grant that helped the successful implementation of major components of the reform program supported by the PFSAC 2. This has made possible not only the privatizations specified under the conditionalities and the drafting of new laws, but also the critical institution building in number of areas (bankruptcy, business registration, bank supervision) that is required to implement the changes and sustain the program in the long run. Comments from the Ministry of Economy, dated June 10, 2005 Deputy Minister Zora Simovic We fully agree with the conclusions of this report about PFSAC II's key role in supporting the GoS's ambitious program of regulatory, institutional, and structural reforms seeking to significantly accelerate private sector-led growth. In particular, with continuous support from the World Bank both at the policy and technical level, this Ministry has made substantial progress in the two essential areas of transition reforms -- SOE privatization and business reform. From the beginning of 2002 until the end of December 2004, the PA, guided by the MOE, managed to privatize 1,138 companies, generating more than US$1.5 billion of revenue for the budget, almost US$1 - 16 - billion of new investment commitments and around US$400 million for social programs. From this number, 42 large SOEs have been sold through tender procedure, and some 1,050 through auction. The work on resolution of large, deeply insolvent industrial conglomerates has also begun, although the progress is slow due to imperfect legal environment and objectively difficult condition of this group of SOEs. On all tracks of privatization, targets set in PFSAC II program conditionality has been overachieved. At the same time, the project component related to the business enabling reforms laid the basis for sustainable private sector growth. The PFSAC II and accompanying grant provided by SIDA and managed by the World Bank brought major decrease in number of procedures and average time spent to register a business. In addition, the new Company law is providing more flexible and effective legal forms for enterprises. The new Bankruptcy Law , adopted with support of the credit, also represents a major step toward establishing a more robust legal framework for the private sector. Finally, the operation helped the creation of the robust and efficient regulatory regime for leasing operations, that led to tremendous increase in the volume of outstanding leases. Having the European integration as its ultimate goal, the GOS is committed to continuing and deepening the reform agenda initiated under the Project, and, in broader terms, under new program. In the context of PDPL program, we are currently working closely with the World Bank on a number of reform measures aiming at further divestiture of socially- and state-owned assets, strengthening the fiscal discipline and improving business environment. Comments of the National Bank of Serbia Item B: Reform of Financial Sector Regulatory and Supervisory Framework Banking Supervision Department, although reform of financial sector regulatory and supervisory framework was assessed by World Bank methodology as satisfactory, would like to emphasize that Second Private and Financial Sector Adjustment Credit (PFSAC 2) Implementation Completion Report (ICR) gives real and fair assessment in regard to level of reforms achieved in supervision of banks in Serbia. As far as the further development of financial sector regulation framework and procedure are concerned we would like to emphasize that the draft of Supervisory Development Plan from 2006 to 2009 is prepared for NBS Governor's and World Bank approval and this document addresses issues raised by PFSAC 2 Implementation Completion Report. Furthermore, National Bank of Serbia has initiated procedure for drafting new Banking Law, which would address following issues, raised by International Monetary Fund and World Bank experts: 1. Enforcement provisions - It should provide for a process of "prompt corrective action" that requires (but also protects) the NBS to act in certain circumstances. It should clearly allow enforcement actions to be taken on the basis of "unsafe and unsound banking practices" that threaten a bank's financial stability. 2. Corporate Governance - The new banking Law should provide authority to the NBS to address not only boards and executive management, but also significant shareholders. 3. Financial Statement Accuracy and Audit Committee - Consistent with the bank governance and Financial Statement Accuracy provisions, the new Banking Law should explicitly require each bank to have an Audit Committee, derived from members of the supervisory board, a majority of would be - 17 - independent board members. It should require an independent reporting line to the Supervisory Board. The Banking Law should explicitly assign to the Supervisory Board the responsibility of receiving an adequate audit. 4. External Audits ­ The new law should require external audit cooperation with the supervisor; auditor notification of issues that may or do threaten the viability of the bank as well as violations of law. 5. Risk Management: In order that boards and management operate their banks in a "prudent" manner (sound bank governance) and in accordance with the Law, a system of good risk management must be embedded in the bank(s). Boards and management should be charged with establishing sound risk management, including risk measurement and management systems for specific risks: credit, interest rate, liquidity, market, reputation, etc, and internal controls. The new Banking Law should assign responsibility for such and provide the NBS the authority to apply (and take actions on) requirements for sound risk management. 6. Licensing and Corporate Approvals: l Licensing: Requirements need further strengthening in areas of fit and proper tests. l Ongoing "license requirements", including ongoing "fit and proper": the requirements a bank must meet upon licensing should be enforced throughout its charter including: "fit and proper" significant shareholders, boards, management; transparent ownership and organizational structure, sound internal controls and risk management, etc. l Change in control: "Threshold" for acquisition of bank's shares should be granted beginning with 5% of ownership. l NBS approval for certain banking business activities: The NBS should have explicit authority to review and approve banking activities such as major investment activity, establishment / acquisition of subsidiaries, etc l Insider Transactions: The new Law should explicitly prohibit preferential treatment in any bank transactions, not just lending. 7. Consolidated supervision: With new Banking Law NBS should provide for the legal authority to supervise groups that include banks. 8. Legal Protection: NBS officials, employees and agents must be protected against lawsuits for actions taken in good faith in the course of their official duties. (b) Cofinanciers: (c) Other partners (NGOs/private sector): - 18 - 10. Additional Information Assessment of Outcome Benchmarks Outcome benchmarks Actual I. Reform of Business Environment Elimination of Decrease in number of procedures and · Entry of new companies has been streamlined barriers to business average time spent during each through changes in the Law on Registration. entry procedure. · According to World Bank's Doing Business database, the initial reforms reduced the average time needed for company registration from 70 to 40 days. The new system has further reduced nthis time to 18-20 days. Establishment of A robust and efficient regulatory · The new Bankruptcy Law, enacted the new the regulatory regime for leasing operations, leading law on July 24, 2004, represents a major step framework to an increase in the volume of toward establishing a more robust legal conducive for outstanding leases. framework for the private sector. Under the new development of law, the Bankruptcy Supervisory Agency was leasing operations established under the auspices of the Ministry of Economy and Privatization (MOEP) to license, supervise, and regulate bankruptcy trustees. · However, the delays in the implementation of the bankruptcy regime have been significant, as the law only began to be implemented in February 2005. An bankruptcy regime with an operational institutional capacity is not yet in place. Improvement of Fully functioning bankruptcy regime · Leasing has become a popular and important legal and as shown by the increase in the financial instrument to finance investment. institutional number of completed bankruptcy According to the leasing registry, there has been framework for procedures. a significant increase in the number of leases. bankruptcy II. Financial Sector Regulatory and Supervisory Framework Improve the Proper legal provisions ensuring · A number of important improvements to the existing banking adequate governance and banking regulation have been made, however, regulation independence of NBS. enforcement remains a key issue. A robust and efficient regulatory · The establishment of a robust and efficient regime for banking sector. regulatory regime is largely achieved. The key challenge going forward is to adopt a consistent and robust approach toward enforcement of the existing prudential regime. Introduce IAS for Serbian banking sector fully compliant · IAS (now "IFRS") for banks and insurance banks with IAS. companies are required as of end-2003. · The NBS is realigning banks' chart of accounts to reflect new IAS reporting requirements. Strengthening of A robust and efficient supervisory · Strengthened the institutional capabilities of - 19 - supervisory framework for banking sector. the NBS from a relatively poor position to fulfill capacity of the its responsibilities as regulator and supervisor. NBS. · However, development of an efficient supervisory framework remains a key challenge. · Additional TA is being provided by bilateral donors in broad alignment with the revised Supervisory Development Plan. Full Fully-functioning legal and · The Ministry of Finance has supported the implementation of institutional regime for preventing development of a new anti-money laundering Anti-Money money laundering activities. regime and the establishment of a fully Laundering resourced Financial Intelligence Unit, the Policies Administration for the Prevention of Money Laundering (APML). · The APML was recently assessed and accepted for membership by the Egmont Group, an international coalition dedicated to fostering the development of financial intelligence units and the exchange of information. · The APML provides information to the appropriate Serbian and overseas authorities to assist in the prevention and detection of money laundering and terrorist financing activities. Modernize legal A robust and efficient regulatory and · The legal framework around the insurance and institutional supervisory regime for insurance sector has been significantly strengthened with framework for sector the Government's enactment of the new law on insurance sector in insurance in May 2004. Serbia · Reforms have increased minimum capital requirements, highlighted the need to remove restrictions on reinsurance options for local direct insurers, established stronger controls over intermediaries, and introduced a new requirement that life and non-life operations have separate licenses. · Efforts to date have focused on establishing appropriate by-laws. However, supervisory capacity is still being strengthened, and TA is being provided by the Bank in the context of the proposed PDPL. III. Banking Sector Restructuring Banks in Inflow from privatization proceeds to · Inflow from first bank privatization (JuBanka) rehabilitation the budget of the Government of has brought revenues in excess of EUR 100 Serbia. million. Upcoming bank privatizations are expected to produce further significant revenues for the budget. PLC-affected banks Efficient and modernized · Foreign ownership of the banking sector under the private-sector led banking system, increased from 17 percent of total banking privatization with level of intermediation consistent system assets in June 2003 to 43 percent at program with comparable CEE countries. end-March 2005. IV. Enterprise Sector Reform Tender Total value of enterprise assets · A total of 81 companies were offered, and 43 Privatization privatized through tender. were sold via tender privatization with a book - 20 - value of EUR 628 million. Inflow from tender privatization · The inflow from tender privatization proceeds proceeds to the budget of the to the budget was EUR 826 million. In addition, Government of Serbia. the privatizations included EUR 706 million in investment commitments and EUR 272 million for social programs. Auction Total value of enterprise assets · A total of 1,132 companies with a book value Privatization privatized through auction. of EUR 619 million were sold via auctions. Inflow from auction privatization · The inflow from auction proceeds to the proceeds to the budget of the budget was EUR 457 million. In addition, the Government of Serbia. privatizations included EUR 130 million worth in investment commitments. Restructuring and Inflow from the privatization proceeds Privatization of to the budget of the Government of Large SOEs Serbia. - 21 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1End of project - 22 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Total Baseline Cost 0.00 0.00 Total Project Costs 0.00 Total Financing Required 0.00 0.00 Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. - 23 - Annex 3. Economic Costs and Benefits Not applicable in an adjustment operation. - 24 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 05/07/2002 6 FSD TASK TEAM LEADER (1); SR. PSD SPECIALIST (2); OPERATIONS OFFICER (2); LEAD FSD SPECIALIST (1); PSD CONSULTANT (1) 06/24/2002 8 PSD TASK TEAM LEADER (1); SR. PSD SPECIALIST (3); OPERATIONS OFFICER (1); PSD CONSULTANTS (2); FSD CONSULTANTS (1) 10/16/2002 14 FSD TASK TEAM LEADER (1); PSD TASK TEAM LEADER (1); SR. PSD SPECIALISTS (3); OPERATIONS OFFICER (2); FSD SPECIALISTS (4); SR. FINANCIAL ADVISOR (1); PSD CONSULTANTS (2) Appraisal/Negotiation 12/10/2002 2 FSD TASK TEAM LEADER (1); SR. FINANCIAL ADVISOR (1) 02/03/2003 6 FSD TASK TEAM LEADER (1); PSD TASK TEAM LEADER (1); SR. FINANCIAL ADVISOR (1) OPERATIONS OFFICER (1); LEAD FSD SPECIALIST (1); SR. PSD CONSULTANTS (1) Supervision 09/8/2003 9 SECTOR MANAGER (1); S S TASK TEAM LEADER (1); PRINC. FIN'L ADVISOR (1); LEAD FIN'L SPECIALIST (1); PROJECTS OFFICER (1); PROCUREMENT ANALYST (1); CONSULTANT (3) 03/29/2004 6 SECTOR MANAGER (1); S S TASK TEAM LEADER (1); PRINC. FIN'L ADVISOR (1); PROJECTS OFFICER (1); - 25 - CONSULTANT (2) 07/30/2004 PRINC. FIN'L ADVISOR (1); S S TASK TEAM LEADER (1) 09/23/2004 2 PRINC. FIN'L ADVISOR (1); S S TASK TEAM LEADER (1) ICR (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 577,222 Appraisal/Negotiation Supervision 237,666 ICR 60,000 Total 874,888 Note: The US$577,000 includes resources for Appraisal/Negotiation as well as Identification/Preparation. - 26 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 27 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 28 - Annex 7. List of Supporting Documents Background documents l Yugoslavia: Transitional Support Strategy, July 25, 2001, R2001-0049/2 l Yugoslavia Transitional Support Strategy Update l Federal Republic of Yugosalvia: Breaking with the Past. Report No 22267-YU, July 15, 2001 Project Appraisal Documents l Federal Republic of Yugosalvia Financial Sector Development Technical Assistance Grant l Federal Republic of Yugosalvia Private Sector Development Technical Assistance Grant l Second Private and Financial Sector Adjustment Credit. Report No 25855 - YU, May 14, 2003 Implementation Completion Reports l Implementation Completion Report, Private and Financial Sector Adjustment Credit. Report 27530, December 19, 2003 Project Documents l Aide Memories and Project Status Reports l Office Memorandum: Second Private and Financial Sector Adjustment Credit (PFSAC II): Full Compliance -- 2nd Tranche Release, October 26, 2004. - 29 - - 30 -