Who is who in the EU?

1
Western Balkans and Europe 2020 - Supporting
Convergence and Growth Jane Armitage, Country
Director and Regional Coordinator for South East
Europe WORLD BANK March 2011
2
Outline

• Post-crisis macroeconomic framework
• Structural reforms for smart, sustainable, and
  inclusive growth
• Competitiveness
• Governance and rule of law
• Social sectors
• The World Banks engagement

3
Two years after the crisis started...

• The legacy of the crisis continues though
  economies are slowly improving
• Growth collapsed but is recovering tentatively,
  especially through growing export demand
• Private capital inflows fell sharply but very
  recently are beginning to trend upwards and
  formerly unsustainable CADs have shrunk sharply
• Fiscal deficits spiked in most countries but have
  begun to moderate as a result of a expenditure
  adjustments
• However, domestic demand remains weak and
  improvements in employment and poverty reduction
  remain elusive

4
Growth rates declined sharply and GDP shrank in
most countries but there is now a gradual return
to growth
5
The momentum of poverty reduction slowed
considerably
6

• Fiscal consolidation needed for macro
  sustainability, but
• Ageing populations and increased longevity
  putting pressure on pension and health systems
• Need for reformed social safety nets with
  improved targeting to alleviate budgetary
  pressures and reduce payroll tax disincentives
  for employment creation
• Competitiveness requires greater access to higher
  education and improved quality at all levels
• Major infrastructure improvements needed in
  environment of reduced private finance

7
I. Promoting Growth and Competitiveness
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The Region is improving ranking on Doing
Business, but key areas need attention

• Most difficult areas are construction licenses,
  property registration and contract enforcement
• Reforms are not that difficult FYR Macedonia
  climbed from being 94th in 2006 to 38th in 2011

9
Lack of infrastructure is a major bottleneck for
businesses in the Western Balkans

• of firms indicating transport is a major
  obstacle to doing business

of indicating electricity is a major obstacle
to doing business
Energy
MONTENEGRO
BiH
SERBIA
9
Source Doing Business 2011
10
Lack of infrastructure contd

• Irrigation and Water Resources
• Western Balkan countries have strong potential
  for agricultural production which is unrealized
  due largely to inadequate irrigation (most
  countries are net importers of food but could be
  net exporters with adequate irrigation)
• Absence of River Basin Management Plans, inhibits
  balanced multi-purpose river use and leads to
  controversy (e.g. hydropower vs agriculture)
• Major vulnerability to floods (e.g. Dec. 2010, 6
  casualties) due to inadequate dike protection,
  lack of maintenance, no integrated planning, poor
  cost recovery
• Going forward, climate change will continue to
  restrict areas that can produce rain- fed crops
• Urban Water and Sanitation Services
• Although coverage is generally good in the
  Western Balkans, services are unreliable
  affecting growth in key high-potential and water
  intensive industries such as tourism and food
  processing
• Water and sanitation are generally publicly
  funded putting pressure on limited budgetary
  resources in many instances
• Lack of adequate policy framework low tariffs,
  weak collection rates and non-revenue water--
  inhibits private sector investment

11
Transport Infrastructure

• Roads
• Total road network in the SEE countries covers
  over 100,000 kms
• of which core network is 6,000km
• Road quality remains poor despite investments in
  the SEETO Core Network
• All Western Balkan countries rank in the bottom
  half in a world economic forum ranking of 139
  countries
• Rail
• Western Balkan countries are in the bottom half
  of rankings for quality of rail infrastructure
  among 116 countries
• Serbia, Bosnia and Herzegovina, and Albania are
  among the bottom quarter
• Port and inland waterways
• The inland water transport network in SEE has
  been neglected for far too long
• nearly no expenditure on Sava or Tisa since 1990

12
Better transport infrastructure is critical for
Economic Development in the Western Balkans

• The small size of the Western Balkan countries,
  and their favorable location vis-à-vis the EU
  market, underline the importance of trade
  facilitation for growth and poverty reduction,
  but
• Road infrastructure below European standards
  raises costs of trade
• Broader trade and logistics environment
  (transport services, border-crossings etc.) is
  also weaker than in EU-10 region
• Overall objective for transport sector
  development is to reduce economic distance to
  the main markets
• A reduction in economic distance requires
• improved physical infrastructure
• improvements in the institutional framework
• improved logistics
• multi-modal development strategy

13
Improving Transport Priorities for Action

• Address increasing demand for road transport
  through continued development of the SEETO core
  regional road network
• Prioritize improved management of existing
  infrastructure through
• better maintenance and establishment of
  professional management systems
• Focus on enhancing logistic chains and clearance
  procedures to reduce delays to international
  transport
• Revitalize the rail network through
• rehabilitation of track to return line speeds
  to design speed,
• rolling stock rehabilitation rather than major
  upgrade in speed,
• further institutional reform.
• Improve financing sustainability through
• Efficiency improvements and increased cost
  recovery
• Effective partnership with the private sector

14
Energy use in the Western Balkans is massively
inefficient and investment needs are huge

• SEE economies are characterized by high energy
  intensity and low energy efficiency
• Conventional power generation structure, import
  dependent, and emerging severe shortages
• National market generally dominated by one state
  owned generator and is subject to high losses
  (commercial and technical)
• Regulated tariffs cover costs but are generally
  low and insufficient to cover cost of new
  investments
• Energy generation is dirty, heavily dependant on
  petroleum and coal
• Meeting development and EU2020 goals will require
  
• Huge investments 20-25 billion Euro over next 10
  years
• Adoption of regional investment strategies
• Addition of new generation capacity and
  replacement of old plants
• Development of gas and renewable resources in
  conjunction with revamping of tariffs structures

15
Energy (contd)

• Regional integration is critical for energy
  security but must overcome the following
  challenge
• Lack of market price penetration to final
  consumers and no publicly available and trusted
  reference price for electricity
• Close relationship between incumbent generator
  and incumbent supplier which impedes open,
  competitive market
• Difference between regulated tariffs across
  countries are too low to allow market based
  investments in generation
• Market participants, regulators, and authorities
  have little or no experience of electricity
  market operation
• Perceived instability of energy policy constrains
  private involvement
• Strategic focus of Banks engagement in energy in
  the Western Balkans is
• Development of regional energy market
  (transmission, rehabilitation of generation,
  dam-safety)
• Promotion of energy efficiency and renewable
  resources
• Improvement of energy supply and infrastructure
  (including new generation) through PPP approaches
• Implementation of strategies for global and local
  environmental improvement

16
Western Balkan water and sanitation systems
generate high water and financial losses

• Generally high water and sanitation coverage
  masks weaknesses
• aging infrastructure results in high physical
  losses
• outdated water pumps translate into high energy
  costs
• continuity of service dips as low as 8 hours per
  day in some countries
• wastewater treatment limited with negative
  externalities
• Lack of operations maintenance management
  budgeting
• accelerated depreciation of assets
• service disruptions
• Utility financial performance is weak
• high Non-Revenue Water low collection rates
  
• overstaffing
• inability to attract private sector financing

17
Water and Sanitation Sector Priorities for
Action

• Update Water Sector Legislation and Regulations
  to align with EU Directives
• Harmonize National Water and Sanitation Sector
  Strategies with EU Policies
• Link water supply distribution to water resource
  management goals
• Promote energy efficiency and water demand
  management
• Initiate utility reform programs
• Consolidate utilities to achieve better
  economies of scale
• Institute utility performance contracts
  against realistic benchmarks
• Set performance standards for utilities
• Support utility staff training and certification
  programs
• Devise subsidy programs that better target the
  poor
• Wind down subsidies to poor performing utilities
  (perverse incentives)
• Target subsidies to the poor through social
  assistance programs

18
Despite tremendous potential, agricultural
productivity is relatively low

• Agriculture represents 9-20 of GDP
• Half the population (and most of the poor) lives
  in rural areas
• Agriculture has enormous potential abundant land
  and low-cost labor, favorable climate, and
  proximity to EU Market
• Productivity is low small farms, fragmented
  value chains, poor logistics, inadequate
  infrastructure, and low skills
• Need for shift from subsistence
• producers to commercial farms
• Align policies to access
• EU agriculture funds
• Prepare for climate change

19
Irrigation Essential tool to generate income
and jobs

• Agriculture is 12-25 of countries GDP and
  20-50 of jobs -- given major un- and
  under-employment it is critical to maintain
  agricultural employment
• Climatic conditions impose use of irrigation and
  drainage to produce marketable valuable crops
  (vegetables, fruits, grapes, oil seed crops,
  etc.)
• Climate will become drier and warmer ? limits
  rain-fed agriculture, expands need for irrigation
• Investment needs in rural infrastructure amount
  to 5-6 billion.
• Most irrigation systems out of operation or
  vandalized, many drains not maintained. Most
  countries now prioritize modern agriculture
  including irrigation and drainage plus bulk
  water supply (reservoirs, groundwater).
• World Bank focus in Agriculture/Rural Water
• Institutional reform (1) establish Water User
  Associations, (2) ensure market access for
  agriculture products, (3) realistic water fee to
  be paid by farmers, (4) partnership with local
  govt.
• OM costs plus on-farm equipment to be paid by
  farmers, but public good investment in main
  reservoir, pump, piping, for the moment from
  national budget
• Combine irrigation, drainage, water storage, in
  river basin management

20
Improving water use and mitigating impacts of
climate change

• Climate change has contributed to increasing
  frequency and severity of floods throughout the
  Western Balkans
• Flood protection infrastructure is inadequate and
  poorly maintained
• Water management will be more critical over next
  2 decades as Western Balkans become subject to
  more intense but less frequent rainfall
• Households and businesses need protection from
  the high cost of flood damage
• Key emphases of World Bank strategy
• Provision of affordable insurance against losses
  from flooding and other catastrophic risks
  (Western Balkan Catastrophe Risk Insurance Fund)
  
• Early warning system, river flow forecasting,
  improve hydromet data system
• Localized emergency reconstruction and relief
• Better integrated planning of structural and
  non-structural measures, including
• recreation of floodplains
• Securing the supply of bulk water, including dams
  and reservoirs bulk water canals, pumping
  stations
• Support river basin management in line with EU
  Water Framework Directive, including analysis of
  trade-offs between environment, hydropower, other
  uses

21
II Governance Governments are by and large
gradually becoming more efficient, effective and
transparent
22
EU Accession is Driving Clear Governance
Improvements in the Western Balkans

• Western Balkans have made clear progress in key
  governance indicators in recent years
• But still lag the EU10 and Turkey in terms of
  governance quality
• Rule of law and control of corruption are the
  weakest aspects of governance
• Qualifying for decentralized management of IPA
  funds is a key driver of PFM reform

23
The rule of law has improved, but lags EU-10,
Croatia, and Turkey
WBI Rule of Law (percentile rank)

• Rule of Law (WBI Indicators, 2009)

24
Corruption in Courts is Down

• BEEPS 2005-2008 of firms saying that bribes in
  dealing with the courts are frequent

25
Progress in government effectiveness is slow
and uneven

• Government effectiveness WBI Indicators, 2009

WBI Government Effectiveness (percentile rank)
26
The Western Balkans have seen a sharp drop in
bribe incidence, but still fare worse than the
EU-10

• BEEPS 2005-2008 The of firms reporting that
  bribes are frequent has dropped sharply

27
Public Financial Management and Procurement
Systems are improving gradually, but reforms
still needed

• PEFA assessments show that PFM systems are now
  more efficient, effective, and accountable
• PFM reforms have improved budget planning,
  allocation, implementation and review
• Procurement capacity is still weak and corruption
  is a concern
• EU acquis and certification requirements for
  decentralized management of IPA funds (PIFC
  standards) are very strong incentives

28
III. Social Spending Challenging Balancing Act
ImprovingSocial Protection, Education and Health
w/tight budgets
Social Financial Sustainability
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Pensions Demographic gt Fiscal Crisis
Aging population (Doubling by 2050)
Shrinking Workforce (Fewer contributors)
Rising Pension Deficits

• Population Structure in 2005

• Population Structure in 2050

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How Can Countries Prepare for the Demographic
Crisis?

• Raise retirement ages, particularly for women
• Reduce early retirement exemptions
• Index pensions to inflation only
• Start preparing for elderly
• without pension rights

31
Social Safety Nets Increasing Needs with
Tighter Budgets

• Dual challenge
• Higher unemployment poverty gt increasing
  needs.
• Tighter budgets given fiscal situation
• Reform priorities Focus limited spending on the
  most needy
• Shift away from rights-based benefits that
  largely go to the non-poor (e.g., war veterans
  benefits in BiH, Croatia, Kosovo)
• Strengthen targeting (adopting means-testing)
• Eliminate filters which cause disincentives to
  work and exclude working poor

32
Education Sector Challenges

• School rationalization demographic shifts have
  left too many schools, with too many staff
• Improve quality and increase participation in
  international standard testing
• Increase access to poor and minorities (e.g.Roma)
• Skills mismatch with labor market needs
• For higher education pursue sub-regional
  approach to quality assurance, links to
  businesses, compliance with Bologna Process, and
  cost recovery

33
Health Sector Challenges and Reforms

• Challenges
• Cost pressures due to structural trends (e.g.
  technology, pharmaceuticals)plus high rate of
  exemptions exacerbate mismatch between benefits
  and revenues
• Health Insurance Funds lack capacity to allocate
  resources efficiently
• Informal Out-of-Pocket expenditures are
  increasing (impact on poverty)
• Reform priorities enhance efficiency and equity
  in a fiscally constrained environment
• Define Benefits Package, using evidence-based
  decision making in selecting interventions
• Link Payment to Performance
• Rationalize Infrastructure shifting resources to
  primary care
• Strengthen Institutional Capacity
• Tackle structural Cost Pressures (e.g. revising
  pharmaceutical pricing and reimbursement policies)

34

• World Bank Engagement
• In Western Balkans

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The World Bank Group is Active in the Region

• Over 20 years experience in the Western Balkans
• Total Lending 1995-2010 US7.3 billion
• Pipeline of projects FY11-14 US2.5 billion
• Our work reinforces and supports the EU accession
  process
• Significant country presence and sectoral
  knowledge

36
World Bank Lending to Western Balkans

• Total Lending 1995-2010 US 7.3 billion

Does not include IFC lending
37
World Bank Lending to Western Balkans

• Pipeline of projects FY 11-14 (US 2.5 billion)

Does not include IFC lending
38
Analytical and Advisory Assistance (AAA)

• AAA , including non-lending technical assistance
  (NLTA), is central to World Bank program
• AAA services to Western Balkans average USD 3-5
  million annually
• US46 million provided since FY2000

Does not include IFC AAA
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Country Specific and Regional AAARecently
Completed and Underway

• ALBANIA Country Governance and Anticorruption,
  Accountability for Better Governance, Public
  Expenditure and Financial Accountability, Social
  Protection TA, Country Economic Memorandum (CEM)
• BOSNIA AND HERZEGOVINA Pension Technical
  Assistance, Report on the Observance of Standards
  and Codes on Fiscal Transparency, Public
  Expenditure Review (PER)
• KOSOVO Country Economic Memorandum Follow up
  Transport Comprehensive Water Sector
  Assessment Environment Policy Note, Transport
  Sector Review
• FYR MACEDONIA Comprehensive Water Sector
  Assessment, Higher Education, Green Growth and
  Climate Change, Science/Technology TA, Labor TA,
  Energy Policy Note
• MONTENEGRO Public Expenditure and Institutional
  Review Follow up, Transport Sector Work,
  Public-Private Partnerships for Electricity
• SERBIA Pension TA, Innovation Promotion,
  Capital Markets, CEM, Education, Policy Notes on
  Growth
• REGIONAL REPARIS (The Road to Europe Program of
  Accounting Reform and Institutional
  Strengthening) Programmatic Financial Sector
  Development Study on Science, RD and
  Innovation Public Financial Management
  Programmatic Poverty Assessment and Gender
  Monitoring Labor market, Education Skills and
  Social (MILES), Energy Efficiency and Renewables.