Objective I: Promoting the efficient management of public resources and tackling corruption

12. 
    During the CAS04, the government strengthened the management of public resources and the fight against corruption. The Bank’s focus on this pillar was in large part an outcome of the Country Financial Accountability Assessment that looked at the design and implementation of the public financial management framework and evaluated the framework’s ability to ensure the proper use of the country’s own resources and those provided by the Bank and other donors. In particular, it recommended reform in the five Extra-Budgetary Funds (EBFs), including the Health Insurance Fund, the Pension and Disability Insurance Fund, the Agriculture Fund, the Road Fund, and the Employment Fund.
    

13. 
    Program rating: Progress on public resource management and corruption is rated as Satisfactory. Outcomes have varied across the agenda.
    

14. 
    Outcome 1: Public expenditure management has improved, but much remains to be done. The Bank’s support of the public sector management reform program came in three successive policy lending instruments, including the Public Sector Management Adjustment Credit (PSMAC), followed by the Public Sector Management Adjustment Loan (PSMALII) and the First Programmatic Development Policy Loan (PDPL). The latter loan is part of a three-year PDPL program aiming at supporting the country’s structural reform program to promote economic growth and job creation through improving the investment climate and strengthening the governance and efficiency of the public sectors. This program will continue to serve as the centerpiece of the Country Partnership Strategy 2007-2010 (hereafter referred to as CPS07).
    

15. 
    As indicated before, a critical weakness identified in the CAS04 was the five EBFs, which together comprised some 40 percent of total government spending, and which operated outside of the central government budget and the treasury and with weak oversight and financial controls. The EBFs had been a major opportunity for corruption and misuse of public resources. Under the PSMAL II, four EBFs were brought under control and integrated into with the single treasury account, while the fifth one (the agricultural fund) was abolished. At the same time, the PSMAL II supported several reforms in the government budgeting process. Hard budget ceilings were approved for individual line ministries, the government improved budget execution, and the parliament enacted new laws on internal audit, public procurement and civil servants. In particular, the PSMAL II gave a strong focus to improving governance – especially in the health sector where international tendering of pharmaceuticals allowed the government to make savings of over $10 million per year. PDPL1 continued to support further reforms in the management and governance of the health sector and its financing, and addressed some key reforms in fiscal decentralization. At the same time, and in close collaboration with other donors active at the local level, the Community Development Project has helped train more than 200 municipal finance officers from 84 municipalities and local branches of the finance ministry in financial management, budgeting and accounting, in support of the government’s decentralization program.
    

16. 
    Outcome 2: The civil service and broader public sector employment structures have started their way on reform. In the CAS04, the uncontrolled growth of the public wage bill was found to be a major risk to fiscal sustainability in fYR Macedonia. In the context of the PSMAC, Parliament enacted a new Law on Civil Servants that included a uniform, rule-based and less compressed salary structure for all civil servants, uniform definitions of the types of positions in the civil service, competitive and transparent recruitment procedures, and establishment of an independent agency. After extensive consultations with the Bank, the IMF, and the government, actual implementation of the wage decompression provisions of this law were only enacted in April 2004, and its 24-month implementation schedule has just been concluded. The decompression followed a six-year period when civil servant pay was frozen. It is now serving as a catalyst for decompression in other areas of the public administration, including pay reform in education, the police and the judiciary, among others. PDPL1 then continued to support civil service reforms including further changes to the legislative framework and the development of comprehensive monitoring indicators and targets to ensure the sustained implementation of the reforms.
    

17. 
    Outcome 3: The government has moved on regarding inappropriate public sector interventions in business but needs more action on business environment. Most State and Socially Owned Enterprises were privatized during the mid-1990s but the effort still left some large SOEs to be restructured or liquidated at the beginning of the CAS04 period. The Second Financial and Enterprise Sector Adjustment Loan (FESAL), which closed late 2004, successfully supported the government’s efforts in selling off or liquidating about 100 of these remaining SOEs, focusing on the largest loss-makers with substantial arrears to the government. Commercial bank lending increased as a percentage of GDP from 12-13 percent for 1998-2002 to around 24 percent of GDP by end-2005, while deposits increased from the equivalent of an average of 22 percent of GDP during that time to 33 percent in 2005. State ownership of the banking sector declined from an average of about 15 percent of total assets for 2000-2002 to about 9 percent in 2005. Bank lending to the private sector increased from 14 to 21 percent of GDP from 2001 to 2005.
    

18. 
    Closures of SOEs caused a substantial increase in the number of unemployed. To tackle this, the government and the Bank developed and implemented the Social Support Project. The project facilitated labor restructuring through actions to reduce individual and community impacts of worker dislocation while providing severance payment for redundant workers. It carried out active labor programs for about 35,000 unemployed workers in 43 communities providing 14,000 new jobs, and improved the delivery of social benefits by strengthening the Ministry of Labor and Social Policy with equipment and training of staff.
    

19. 
    Public ownership is no longer a serious constraint to private sector performance in fYR Macedonia. In 2002, the government learned the lesson of the proper sequencing of privatization when the telecom privatization was carried out without a regulatory framework in place. The successful privatization of the Distribution part of ESM (the power utility company) in the spring of 2006 shows how the government’s strategy of putting in place the proper framework before privatization has paid off. With the ESM-Distribution privatization, the government now has the institutional, regulatory, and administrative framework that enables the electricity market to operate free from private market power and undue government interventions. To support this concept further, Business Environment Reform and Institutional Strengthening Project (BERIS) aims to help the government’s efforts to stimulate economic growth based on increased domestic and foreign investment by strengthening public sector capacity to improve selected areas of the business environment and increase competitiveness of the business sector. In particular, the BERIS will assist the government in implementing the European Partnership (EP) signed between the EC and the government in June 2004, by addressing many of the priority areas identified by the EP. The BERIS benefited from very close cooperation with USAID and EAR.
    

20. 
    The first pillar of the PDPL program focuses on improving the investment climate through supporting structural reforms in the judiciary, labor market, financial intermediation and corporate governance, as well as on the regulatory environment for the private sector.
    

21. 
    Outcome 4: Decentralization has proceeded with government commitment. Decentralization, which is an important element of the public sector reform pillar of the PDPL1, is a central tenet of the Ohrid Peace Agreement, which set out specific reforms and protections aimed at strengthening the rights of minority communities, especially ethnic Albanians, and mandates the phased decentralization of the responsibility of many government functions to the municipalities. In November 2004, a referendum aimed at blocking the country’s decentralization process was defeated at the polls. Because of its centrality to the Ohrid Agreement, decentralization has been supported by many donors and the Bank has worked carefully to ensure its support was complementary to those efforts, in particular in supporting fiscal decentralization.
    

22. 
    In ESW, the Bank’s Urban Policy Note in 2004 highlighted the challenges of urban development in the decentralization context. On the lending side, Bank support for decentralization took the form of three different but similar projects that all produced satisfactory outcomes. First, the Community Development Project piloted small-scale community based initiatives in selected demonstration communities under an integrated development framework designed to respond to priority social needs and facilitate the transition from conflict to peace. Second, an accompanying Child/Youth Development Learning and Innovation Loan helped develop 25 Youth Centers in fYR Macedonia that served as inter-ethnic community gathering points. And third, a Community Development and Culture Project Learning and Innovation Loan facilitated community-based socioeconomic development by leveraging fYR Macedonia’s cultural assets and raising awareness among municipal governments of the value of their heritage. In addition to these three projects, the Bank also supports decentralization through its Education Modernization Project, which provides required resources to the government to help implement the decentralization of education, and through the Irrigation Rehabilitation and Restructuring Project (closed in November 2006), which supported institutional reform to bring about a more bottom-up approach to stakeholder participation. PDPL1 included important policy measures to ensure proper fiscal decentralization arrangements to proceed with the first phase of the decentralization program.
    

23. 
    Outcome 5: Transportation has improved and operations have been made more efficient. The CAS04 indicated that improvements in the transport sector were essential for regional integration and growth, and restructuring was necessary for compliance with EU directives. In the past few years, fYR Macedonia has made strides in this effort by improving the efficiency of its road and railway systems, an objective that was supported through the Transport Sector Project, which closed in late 2004. Before CAS04, the project underwent a major reallocation of funds from the railway IT system to railway infrastructure and to expanding pilot road maintenance. The project helped expand a key motorway to the Trans-European Network motorway standard, extended a pilot maintenance project to cover 110 kilometers of road, and provided technical assistance and training for staff at the Fund for National and Regional Roads. And even though the railways-related component of the project was reduced because of difficulties, the procurement of necessary equipment for Macedonian Railways provided good results. As a result of several studies of fYR Macedonia’s railways, there is now a consensus and commitment about the restructuring of fYR Macedonia Railways for which the new railway law approved in January 2005 provides the legal framework. The implementation of the chosen restructuring model, including labor retrenchment, is the objective of the Railways Reform Project approved in September 2005. It aims to improve the financial viability, productivity, and effectiveness of railway operations, which in fYR Macedonia are one of the largest money losers among public sector enterprises. The railways project stands out in the region because it is the first of its kind to address structural reform in the railways sector. Lastly, the Trade and Transport Facilitation in Southeast Europe Project, which closed in December 2005, achieved substantial reductions in truck waiting times at border crossings and inland clearance terminals; improved capacity of small and medium transport operators and freight forwarders through training programs; modernized border crossing processing, and enhanced capacity of border crossings through upgrading of facilities. All these activities contributed to enhanced customs performance and there also exists anecdotal evidence of reduced “petty” corruption at border crossings, in line with the objective of tackling corruption.
    

24. 
    FYR Macedonia’s transition from a post-conflict country to an EU candidate has not been accompanied by a drop in the country’s high unemployment rate. The first major piece of ESW to examine this trend was the Country Economic Memorandum – Tackling Unemployment, released in September 2003. It argued that as the authorities strive to solidify peace and stability, accelerate remaining structural reforms, and move policies and institutions towards European norms, the problem of high unemployment cannot be ignored. Growth has been limited by low investment levels, and to remove this constraint, the study said the government should be focused on ways to improve education, create a supportive investment climate, and accelerate free trade as part of integration into European markets. Despite progress, fYR Macedonia has a long way to go in reducing corruption and improving the business environment for stronger private sector driven growth.
    

25. 
    For its part, the International Finance Corporation (IFC) had a committed portfolio in summer 2006 of US$27 million and its outstanding portfolio was US$26 million. During FY04-06, IFC didn’t commit any new investments in fYR Macedonia. Still, IFC provided through its Southern Europe Enterprise Development (SEED) an intensive technical assistance program, aimed at improving the business enabling environment and competitiveness of SMEs. As of July 1, 2005 SEED was succeeded by Private Enterprise Partnership Southeast Europe (PEP SE) which is providing technical assistance and advisory services to help strengthen the development of the private sector and infrastructure of the Southeast Europe countries. PEP SE is currently focused on five technical assistance and advisory services programs - alternative dispute resolution, recycling linkages project, corporate governance, international and EU standards, and advisory services.
    

26. 
    Meanwhile, the Bank’s Multilateral Investment Guarantee Agency (MIGA) undertook a series of short term technical assistance (TA) interventions since FY00, including support for the preparation of a new law for a Macedonian investment promotion agency and the establishment of the agency, MacInvest. After the establishment of MacInvest in the fall of 2004, the Austrian Development Agency (ADA) agreed to fund a longer term TA/capacity building project designed to operationalize the new agency and prepare for a larger, complementary European Agency for Reconstruction-funded TA program. The first phase of the project, implemented in FY05-06, provided the agency with a start-up strategy, a detailed analysis of the country’s competitiveness for foreign investment in several key sectors and training for its board and management. The second phase, focusing on further hands-on capacity building of the agency staff and the implementation of an investor tracking system, was implemented in FY06-07.
    

27. 
    FYR Macedonia is also one of the beneficiary countries under MIGA’s European Investor Outreach Program for the Western Balkans (EIOP). Under the donor-funded EIOP pilot initiative, launched in summer 2004, MIGA supports a number of countries in the Western Balkan region in proactive investor outreach in the agribusiness and auto component sectors, focusing on the European business community. During Phase 2 of the EIOP, being implemented in the FY07-09 period, the program is expected to work closely with the new government to increase investor outreach efforts across a number of sectors.
    

28. 
    Program rating: Progress on the jobs front and private sector driven growth is rated as Satisfactory given the challenges in fYR Macedonia but much more work needs to be done.
    

29. 
    Outcome 1: Improve the business climate to allow private sector-led growth. With most of the regional conflicts being resolved, structural impediments are a key constraint to growth and employment. The Bank’s Doing Business 2006 report and the series of BEEPS surveys highlights slow and costly enforcement of contracts, restrictive bankruptcy procedures, regulatory impediments and delays, and an inflexible labor market as particular concerns. FYR Macedonia, as with many countries in the region, also suffers from an opaque corporate governance structure. The government is committed to addressing these issues with Bank support through the First Programmatic Policy Development Loan (PDPL)-supported reform program, as well as capacity building and investments provided under the BERIS, the Real Estate and Land Registration Project, and the Legal and Judicial Implementation and Institutional Support Project approved in May, 2006. For its part, the TTFSE contributed to decreasing the economic distance to markets by reducing non-tariff barriers to trade. On a more longer-term footing, the country needs to upgrade the qualification of its labor force that significantly limits the growth prospects of the economy.
    

30. 
    Meanwhile, the CAS04 end-FY06 target of two private sector projects in infrastructure has been met. In the energy sector, hydro-plants were given under concession to a private operator, and the construction of the Skopje Combined Heath and Power Plant is planned as a PPP and the electricity distribution network was recently privatized. In telecommunications, both GSM service providers are private. However, delays in the establishment of the regulatory framework in various sectors have prevented more dynamic private sector entry in infrastructure.
    

31. 
    Outcome 2: The financial sector is more sound but problems remain. Before the CAS04 period, the government saw the need to reform the financial and enterprise sectors with the aim of speeding up private sector growth. The Bank supported that objective through the Second Financial and Enterprise Sector Adjustment Loan (FESAL), which helped provide the framework for faster private sector growth and job creation, supported by a healthier and more developed financial system. The project was designed and implemented in an environment of political turmoil and economic disruption caused by the Kosovo crisis of 1999. By the project’s end, fYR Macedonia had made substantial progress in enhancing the overall soundness of the financial system, particularly the banking sector. The largest of the loss-making enterprises that crowded out new private sector growth had been resolved while changes in the business environment have removed major obstacles for private sector entry and have contributed to strengthening of the creditors’ and shareholders’ rights. Still, a number of deficiencies and deep systemic problems in the judicial sector have undermined the success of the reforms in the financial and enterprise sectors.
    

32. 
    A key part of creating the right business environment is proper financial reporting. In 2005, fYR Macedonia began to take part in “The Road to Europe - Program of Accounting Reform and Institutional Strengthening”(REPARIS) - a regional program aimed at creating a transparent policy environment and effective institutional framework for corporate reporting within South Central and South East Europe. REPARIS, developed by the Bank in close cooperation with the OECD, the European Commission and other partners, aims to train senior civil servants, financial sector regulators and accounting and auditing bodies in emerging issues and new trends in both EU and global requirements impacting the regulation of accounting and auditing in participating countries/entities.
    

33. 
    Meanwhile, the Bank published a Report on the Observance of Standards and Codes (ROSC) Corporate Governance Country Assessment of fYR Macedonia in June 2005. It updated the 2001 corporate governance ROSC and assessed the corporate governance policy framework, as well as enforcement and compliance practices. The report found that fYR Macedonia is in the final stages of an intense period of corporate governance reform with recent reforms resulting in a framework that has improved compliance with many OECD principles. But the ROSC also recommended several changes, including overhauling the disclosure framework and completion of the corporate governance code. Also, a Financial Sector Assessment in November 2003 found that fYR Macedonia’s financial system was very small and that the development showed the marks of the country’s first decade of independence. Nonetheless, the soundness of the banking system has been improving in recent years. The last three years saw a solid expansion of the financial sector activities in the country. Though still relatively shallow in international and regional comparisons, the entry of the few foreign banks created modest competitive pressure resulting in a reduction in commercial banks’ interest rates. The weighted lending rates fell from close to 18 percent in late 2002 to around 11 percent at the beginning of 2006, while further cuts are expected if current economic trends continue.
    

34. 
    Outcome 3: Reform of the judicial system is a priority. The FESAL found that in order to achieve long-term dynamic private sector-led growth, a number of comprehensive reforms in the judicial sector, as well as more sophisticated reforms related to the investment climate, rule of law, and governance will be essential. The Bank supported the government’s efforts in this area first with a study on legal and judicial reform, which identified fYR Macedonia’s inefficient and ineffective system as a major constraint to the further development of a market economy, economic growth, and the expansion of the private and financial sectors. The study, Improving the Business Climate in fYR Macedonia: A Legal and Judicial Enforcement Assessment, released in June 2005, found that as a key component in fYR Macedonia’s investment climate, the ineffective legal and judicial system not only hinders the functioning of existing businesses, but it also creates obstacles to the definition and enforcement of creditor, contract and property rights. In May 2006, the Bank’s board approved the Legal and Judicial Implementation and Institutional Support Project to assist the government further in this area, which is in addition to key policy measures in judicial reform included in the PDPL. Its objective is to assist the Government of fYR Macedonia in enhancing government capacity and building institutions needed to systematically implement key laws and policies that are designed to improve the effectiveness and efficiency of the judicial system. Implementation of these laws and policies will help remove constraints on the legal and judicial system and improve the functioning of fYR Macedonia’s business environment.
    

35. 
    Meanwhile, the IFC has been working since 2004 to support legislation reform through the Alternative Dispute Resolution (ADR) Program in fYR Macedonia. Remarkable progress in enabling the environment for mediation introduction and implementation has been made. With the Ministry of Justice being main partner, the law on Mediation was passed, as well as a by-law on the Training Program for Mediators. In addition, training for 60 mediators, 60 lawyers and 15 judges have been delivered, several round tables and one ADR Conference for promotion of usage of mediation has been organized, and an extensive and far-reaching PR campaign has been undertaken.
    

36. 
    Outcome 4: Energy supplies are improving. The improvement of the performance of the energy sector is critical in improving and sustaining economic development in fYR Macedonia and the rest of South East Europe. The Bank supported the successful rehabilitation of the country’s six major hydropower plants, which represent about 28 percent of fYR Macedonia’s generating capacity, through the provision of equipment and technical assistance and the carrying out of works. This progress, which was supported by the Power System Improvement Project, was exceptional given the severe social problems in the area in which most of the hydropower plants are located due to an influx of Kosovar refugees following civil disturbances. More capacity and generation were achieved than forecast, with the actual additional capacity of 49 Mw exceeding the project target of 31 Mw. And the improved efficiency has increased the number of hours per year that the plants are in operation and reduced the number of unplanned outages.
    

37. 
    In July 2004, the Bank drafted proposals in the FYR Macedonia Energy Policy Paper, which examined fYR Macedonia’s progress in energy sector reform, particularly through the adoption of an Energy Law and establishment of an independent energy regulator. Now that the new energy law has been adopted in March 2006, a new medium term energy strategy will need to be drafted and the Bank has already been requested to assist under the CPS07. Meanwhile, a GEF energy efficiency project has been approved by the Board in December, 2006. In the area of renewable and environmentally friendly sources of energy, the government has implemented a GEF Mini-Hydro power project, which consists of five small hydropower plants, built on the water supply pipes of two towns. The concept is now being used and further developed by the government, which have identified additional 400 locations for construction of similar systems, attracting significant attention from private investors.
    

38. 
    At the same time, fYR Macedonia and other SEE countries have acknowledged that solutions to regional energy issues require regional solutions. In December 2003, fYR Macedonia joined the other countries in SEE in signing the “Athens Memorandum,” which committed the countries to a regional approach to energy and to integration into the European Community Internal Energy Market. The needs for investment in the energy sector are more than the public sector can provide so reforms are needed to bring in the private sector to develop capacity. FYR Macedonia’s successful privatization of the ESM utility in the spring of 2006 shows how the government has made strides in opening up the sector to private funds. In January 2006, the Bank reinforced fYR Macedonia’s reforms with the ECSEE Adaptable Program Loan that supports fYR Macedonia’s participation in the Energy Community of South East Europe (ECSEE), by assisting in implementing its program for power market liberalization and regional power market accession, and providing investment support and technical assistance to the transmission company. In this way, it supports the CAS04, which highlighted the need for power sector investment and institutional development to support greater integration in the regional power market and to enhance security of power supply.
    

39. 
    Outcome 5: The transport sector is crucial for successful regional integration. FYR Macedonia’s strategic location makes it a keystone for land transport between Turkey, Greece, Bulgaria and the rest of Europe. The CAS04 stressed that the efficient and effective operation of the roads and railways, as well as border crossings and the customs system, which link the Macedonian economy to the region, will become increasingly important to realizing the country’s growth potential. Since then, fYR Macedonia has improved the efficiency of its road and railway systems, an objective that was supported through the Transport Sector Project, which closed in late 2004. The implementation of the chosen restructuring model for the railways, including labor retrenchment, is the objective of the new Bank-financed Railways Reform Project approved in September 2005.
    

40. 
    On a regional level, fYR Macedonia takes part in the TTFSE, a regional program that aims to strengthen and modernize the customs administration and other border control agencies in the countries of the region, including Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Serbia and Montenegro, Romania and Moldova. The program, the result of a collaborative effort between the government, IDA, the EU, the US, and the Stability Pact, and some bilateral donors, seeks to reduce non-tariff costs to trade and transport, and to prevent smuggling and corruption at border crossings. Since the project became effective in 2001, fYR Macedonia has seen increases and exceeded its targets in the value of imports and revenue collected, significant reductions in truck border crossing waiting times, and enhanced transparency of customs transactions. These improvements came despite the interruption caused by the 2001 conflict that directly affected the transport, and consequently, trade activities in general. TTFSE1 closed on December 31, 2005, and preparation for a follow on project is underway.
    

41. 
    Outcome 6: Support to SMEs must continue. Through several different programs, the IFC has supported Small and Medium Enterprise (SME) development in fYR Macedonia. A three-year project funded by Austria is focused on the secondary material recycling industry in fYR Macedonia and other Western Balkan countries. The project, managed by IFC, is focused on the financial, training, consulting, and market needs of every segment of the scrap metal, paper, plastic and glass value-chains. The objective is to promote SMEs, increase the competitiveness of the recycling sector, and improve the lives of thousands of families who make their primary income by collecting scrap materials.
    

42. 
    Meanwhile, an IFC project funded by Switzerland aims to improve the internal corporate governance practices of Macedonian firms, thus making them more attractive to potential investors. On June 14, 2006, IFC assisted the Macedonian Stock Exchange to launch the newly drafted Corporate Governance Code which is expected to become effective at the beginning of 2007. IFC is also working with Macedonian companies in order to help them improve their corporate governance standards and plans to start working with banks as well. In addition, IFC will collaborate with universities to teach corporate governance to students, so that they can apply best standards in their future jobs. Also, an IFC project funded by Norway is focused on helping SMEs introduce EU and international standards. Macedonian companies are faced with challenges to meet international and EU technical requirements which must be satisfied if domestic products are to be exported to international and EU markets. In fYR Macedonia, where the economy is traditionally reliant on food production and related industries, IFC has implemented a comprehensive Hazard Analysis of Critical Control Points (HACCP) program. IFC has been working to help food-processing companies to implement HACCP and develop a local expertise able to undertake certification. An HACCP Information Center has been established at the Skopje Agricultural Faculty.
    

43. 
    Outcome 7: Rural development has been limited. One major issue in fYR Macedonia’s rural development is irrigation, which is essential to establish the country’s potential in agriculture. The Irrigation Rehabilitation and Restructuring Project supported improvements by rehabilitating three deteriorated irrigation schemes, enhancing the transparency and efficiency of the schemes by introducing participatory management, and reforming the country’s Water Management Organizations, to make them more financially sustainable. Although the Kosovo crisis of 1999 and the 2001 conflict in fYR Macedonia intervened to delay the project’s progress, and significant problems have been encountered during the last seven years, in 2004 the board approved a major restructuring of this project, and success is being achieved. The irrigation area in two project areas had surpassed pre-project level while it has achieved considerable improvement in the third area. Some 25,000 families are now benefiting from the irrigation schemes while 125 kilometers of primary canals have been repaired and 2,500 hectares of independent irrigation schemes have been rehabilitated. The reforms have delivered better quality irrigation services and a more efficient water distribution system. At the same time, the government has liquidated 12 Water Management Organizations (WMOs) and also eight other WMOs outside the project area to scale up the initiative taken under the project to the sector wide reform. This program received significant co-financing from the Dutch government.
    

44. 
    Outcome 8: Uncertainty over land title acts as a brake on the private sector. In 2003 a Foreign Investment Advisory Service (FIAS) study indicated that problems with the purchase of and construction on real estate were rated as the most significant administrative barrier to investment in fYR Macedonia. The Bank has started its assistance in this field through the Real Estate Cadastre and Registration Project, which aims to help build an efficient and effective real estate cadastre and registration system, contributing to the development of efficient land and real estate markets. An effective system is critical to fYR Macedonia’s goal of integration with the European Union. It is too early to assess the project but based on progress made so far, especially in the Kumanovo pilot, it is likely that the project will achieve its objectives. The project has been complemented by the activities of the Swedish, Dutch, Japanese and Norwegian governments, through a well developed coordination mechanism. Land policy issues are still pivotal to private sector development. Recently completed ESW in agriculture and urban development have identified issues and solutions for better land use management in fYR Macedonia. CPS07 will continue on this agenda as well.
    

45. 
    Outcome 9: Sustainable growth requires more effectively dealing with environmental challenges. FYR Macedonia faces significant environmental challenges, particularly in water resource management, issues that will get higher on the priority list once the country progresses on the EU accession process. The country has made progress in cooperating with Albania on conserving and protecting the natural resources and biodiversity of Lake Ohrid through a joint environmental management of the lake’s watershed. The cooperation was supported by the GEF’s Lake Ohrid Conservation Project, which sought to provide a transboundary, comprehensive approach to Lake Ohrid, combining restoration, conservation and protection of the lake with sustainable use of its natural resources. The approach was codified into a new transboundary treaty, “Agreement for the Protection and Sustainable Development of Lake Ohrid and its Watershed,” ratified by both countries in 2005. The project was the first GEF project of its kind in Southeastern Europe, and has been recognized internationally as a successful model of bilateral management of trans-boundary resources.
    

46. 
    The 2001 conflict disrupted the positive economic momentum that fYR Macedonia had enjoyed in the previous years. The effects of the conflict were felt on the country’s output, investment and export growth, while the budget and current account deficits remained high. Through the Ohrid Peace Agreement of 2001, the government set out specific reforms aimed at ensuring the rights of minority communities. Several years after Ohrid, fYR Macedonia is respected in the region for having come a long way since the days of conflict and for forging a multi-ethnic state that has progressed in reconciliation among its various groups. But to make the peace and cohesion last, fYR Macedonia must continue to implement the Ohrid principles and strive to promote reconciliation.
    

47. 
    Meanwhile, fYR Macedonia is one of the leading countries that participate in the Decade of Roma Inclusion 2005-2015, a multi-country initiative supported by the Bank and other partners. The Macedonian government has positively responded to the initiative and has formed an inter-sectoral Country Working Group, under the auspices of the Minister of Labor and Social Affairs and with active involvement of Roma NGOs. The Country Working Group has developed a Decade Action Plan, which outlines the actions to be taken in the priority areas of education, health, housing and employment.
    

48. 
    Program rating: Progress on reconciliation, building human capital and protecting the most vulnerable is rated as Satisfactory.
    

49. 
    Outcome 1: The maintenance of social cohesion is improving. Bank support for social cohesion and community development took the form of three different but similar projects that all produced satisfactory outcomes and all were supported by grants from the Dutch government. First, the Community Development Project aimed to foster reconciliation among the people, reduce social tensions, and build local social capital. The project has made progress toward that goal by piloting small-scale community based initiatives in selected demonstration communities under an integrated development framework designed to respond to priority social needs and facilitate the transition from conflict to peace. Activities under the project have gained momentum, with performance reflected in project outcomes in completed and ongoing community investments in poor, conflict-affected and vulnerable groups, and in local government training projects. In addition to 118 completed community investment/small infrastructure projects, a total of 80 Social Services Micro-projects projects were developed and implemented. At the same time, the project successfully completed the second phase of local government training focusing on social service delivery that included 20 courses with 193 participants. However, the project was reviewed by IEG and rated Moderately Unsatisfactory because the ICR has not provided enough evidence to demonstrate satisfactory achievement of the project's stated objective.
    

50. 
    Second, an accompanying Child/Youth Development Learning and Innovation Loan aimed to increase social cohesion through the social integration of adolescents and youth at risk (ages 15-24) from different socio-cultural backgrounds. In this, it helped the development of 25 Babylon Youth Centers in fYR Macedonia and attracting Albanian youth, who were initially under-represented in the centers. As of spring 2006, some 15,400 youth had benefited from the project’s centers. Meanwhile, several newly elected mayors from municipalities which are not yet covered by the project have requested technical assistance from the PMU to launch centers with their own funding, citing them as one of the few public spaces of inter-ethnic and inter-cultural integration in the country.
    

51. 
    Third, a Community Development and Culture Project Learning and Innovation Loan performed very well in facilitating community-based socioeconomic development by leveraging fYR Macedonia’s cultural assets. Handicraft projects are increasingly collaborating with private companies and tourism projects are expanding their promotion campaigns and international contacts, notably in the areas of rural and monastery tourism. The project has raised municipal government awareness of the value of their heritage with every project municipality having developed some form of information and promotion for its heritage. And local governments, NGOs, the Ministry of Culture and the Institute for Protection of Cultural Monuments are gaining experience and technical capacity through the project.
    

52. 
    Outcome 2: The quality and relevance of education needs to be improved. The Bank’s Education Modernization Project has reported that progress on improving the quality of education in fYR Macedonia has been moderately satisfactory, with all of the building blocks that are needed to achieve the Bank’s development objectives being now in place. In particular, overall progress against the objective of learning at targeted schools through strengthening school level planning and management is good. As of December 2006, some 93 targeted schools have used or are using grants to carry out self-evaluations and development plans while all other primary and secondary schools are scheduled to take part in the program. Technical assistance for teacher training has arrived and is now active on the ground. Progress, meanwhile, on improving equity and efficiency for a decentralized education system has been slower. The building of capacity of the municipalities was deliberately delayed to ensure proper linkages to other donor-funded activities. It should be noted that the project benefited from extensive support and cooperation from the Dutch bilateral development agency.
    

53. 
    Outcome 3: Health outcomes have improved. In April 2004, the ICR of the Bank’s Health Sector Transition Project found progress on financing of the health system had run into problems in the beginning but is now back on track. The project improved the health of the population by enhancing the quality of basic health services, with a 48 percent reduction in infant mortality (from 22.7 in 1995 to 11.8 in 2000); a 37 percent drop in maternal mortality, (from 21.8 in 1995 to 13.7 in 2000), and a 15 percent fall in tuberculosis incidence (from 40 in 1995 to 34.1 in 2001). It also supported an initial phase of policy reforms to increase cost effectiveness, fiscal sustainability and patient choice within the health system. The average length of stay in hospitals was decreased by 20 percent from 14.3 to 11.4 days, while the number of consultations per physician in outpatient care was increased by 18 percent.
    

54. 
    The second health project, the Health Sector Management Project, set out to address the issue of cost-containment while improving quality and access. Although the project is still under implementation, it has helped fYR Macedonia to achieve some key results, including increasing the amount of collected contributions by 5 percent, as well as the number of contributors. Some 15 guidelines have been developed, according to international standards, and distributed, and the average length of stay in hospitals has fallen by 15 percent.
    

55. 
    Outcome 4: The pension system has been reformed. Progress on the objective of improving the effectiveness and efficiency of the social protection system has been satisfactory. In particular, the Bank has supported the government’s efforts to build a sound and fiscally sustainable pension system through the Social Protection Implementation Project. Bank assistance helped the development of the legal foundations of the new system and assisted in creating the conditions for its successful introduction, including completion of the legal and administrative framework for successful operations of the second pillar, a viable plan for financing the transition, and introducing long-term government bonds for investment of second pillar funds. This support led up to the January 2006 launch of the country’s second pillar of its pension system, along with a new individual contribution collection system. Meanwhile, the Ministry of Finance issued a long-term government bond in November 2005, and made a budgetary allocation for financing the pension reform transition in the 2006 budget.
    

56. 
    Outcome 5: Measuring of Poverty is Improving. During the last three years, the State Statistics Office (SSO) made considerable progress in improved calculation and dissemination of poverty data. The data collection method was significantly improved, coverage of information was expanded to better understand non-income aspects of poverty (modules on access to health, education and social services were added to the HBS), regular poverty profile reports were expanded and are publicly available on the government’s website. The institutional capacity within the SSO for poverty monitoring is sound and not reliant on donor activities and there do not seem to be immediate challenges to continuing these activities though there is some concern that demands made by the EU accession process will reduce the SSO’s attention to this area. Earlier, the Bank teamed with the SSO of fYR Macedonia to produce the FYR Macedonia Poverty Assessment for 2002-2003 to improve understanding of the poverty situation in the country. Published in late 2005, the report provided a valuable opportunity and vehicle for estimating absolute poverty and more generally assessing living conditions of the population. It also identified some key remaining knowledge gaps in areas where a better understanding will be needed to provide further guidance on identifying policy actions to combat poverty in the country. During the course of the preparation of the report, the Bank team provided extensive assistance to the SSO staff on measurement of absolute poverty as well as a number of other social indicators (Laeken indicators etc.). The Bank team also prepared a 2004 update on the poverty numbers, with an emphasis on analyzing the poverty rates between Macedonians and other ethnic groups to get a better understanding of poverty challenges in relation to the Ohrid Peace Agreement. The Bank recently acquired micro-level datasets from the Labor Force Survey and will soon launch the preparation of a report investigating labor market developments, in particular trying to understand how high unemployment rates are maintained without a significant deterioration in living standards and poverty. Under the CPS07, it is foreseen that the Poverty Assessment will be updated annually on a more programmatic basis to provide more frequent data to inform the country program.
    

57. 
    Overall, the Bank’s performance is rated as Satisfactory. It is noteworthy that the CAS04 objectives and program were implemented according to the original design. This is in large part due to the government’s strategic decision to adhere to its commitments to international institutions such as the Bank in order for the benefits of reform to take root. The decentralization of the Bank’s portfolio and project management to the country office also contributed to this success by allowing for increased supervision effort and intensified sectoral policy dialogue with the government.
    

58. 
    In terms of lending, the Bank’s program in CAS04 was designed to support strong structural reform that would enable the achievement of the CAS outcomes in Tables 1, 2, and 3. The IBRD instruments were chosen in consideration of existing Bank support through the active portfolio (Annex A). The CAS04 outlined a highly selective program of investment and policy lending of up to US$165 million, complemented by a substantial body of diagnostic and fiduciary work. At the outset of the CAS04, fYR Macedonia was considered to be in the base case. But thanks to strong policy performance by the country, the program quickly moved into the strong reform/high case lending scenario for the entire CAS04 period, eventually committing slightly more than the full lending envelope of $165 million for the three-year period.
    

59. 
    The last Joint Portfolio Performance Review (JPPR), finalized in March 2005, showed that the portfolio is in good shape, due to the efforts of the government during the past few years. (See Box 1). The disbursement ratio in FY05 of over 30 percent indicates strong progress with current operations. There are no immediate problems in the portfolio, although strengthened supervision and guidance is required for reform projects in areas with large vested interests, such as the health project, new railways reform project and the new legal and judicial project. The JPPR showed that the Bank’s lending program and analytic work were well aligned with key CAS objectives. This has produced significant benefits from the ongoing portfolio, including support for major reforms and institutional development programs in a number of high priority sectors. Several factors can be identified as contributing to the success of the portfolio, including close linkages between policy and investment operations, linkages between high quality analytic work and key policy reforms, and effective donor coordination on key reform issues. The JPPR said that in order to maintain this good performance and learn from the ongoing operations, it is important for projects to pay closer attention to monitoring and evaluation systems.
    

60. 
    In terms of donor coordination, it should be understood that there are substantial and competing priorities for development assistance in fYR Macedonia. Accordingly, the Bank’s country program relied heavily on development partners to take the lead in some sectors, in particular those in which the SAA agenda and the complementary EU CARDS program were focused. Similarly, as many other donors started to provide substantial technical assistance and training to build capacity at the local level in support of the decentralization agenda that implemented the Ohrid Framework Agreement, the Bank focused its program on reforms at the central level. As anticipated, this approach resulted in a more concentrated program and further emphasized reliance on the Bank’s partners.
    

61. 
    Bank performance – Objective I – The Bank’s performance in supporting the promotion of the efficient management of public resources and tackling corruption is Satisfactory. Support of the public sector management reform program came from the Bank in the shape of the Public Sector Management Adjustment Loan (PSMALII) that supported five major areas of reform: budget formulation; budget execution; audit; procurement; and civil service. Its program also aimed at introducing these reforms in the health case sector in particular. The program built on the Public Sector Management Adjustment Credit (PSMAC) that had supported the initial stages of the reform strategy of the government in public sector management. And in September 2005, the Bank followed up the public sector reforms of the PSMAC and PSMAL II with the approval of the First Programmatic Development Policy Loan (PDPL1) to fYR Macedonia. While the PDPL program aims at supporting the country’s structural reform program to promote economic growth and job creation through improving the investment climate, and will continue to serve as the centerpiece of the CPS07, the second pillar continues to focus on further improving the governance and efficiency of the public sector, in particular in civil service reform, fiscal decentralization and the management of the health care sector.
    

62. 
    Finally, the policy reform program was further supported by two investment projects to help the implementation of the reform effort by financing technical assistance, training and IT requirements: (i) the Social Protection Implementation Project targeted the management and administration of pensions and social benefits, to ensure proper implementation of the new pension system, and to ensure social benefits are reaching the poor and those in need, and (ii) the Health Sector Management Project that provides support to implement the comprehensive reforms in the health sector as agreed under PSMALII and PDPL. Meanwhile, (iii) the Trade and Transport Facilitation in Southeast Europe (TTFSE) project provided support to implement customs administration institutional reforms and improvement of the Integrated Customs Information System (ICIS) to enhance efficiency and speed up border crossing processing.
    

63. 
    Bank performance – Objective II – The Bank’s performance in promoting job creation through sustainable private sector driven growth is Satisfactory. As outlined earlier, the Bank’s support for the business climate came in many forms in the CAS04 and many of the instruments are only now coming online in the latter phase of the CAS period. These include capacity building and investments provided under the Business Environment Reform and Institutional Strengthening Project (BERIS), the Real Estate and Land Registration Project, and the new legal and judicial investment loan. Also, the government is committed to addressing these issues with Bank support through the Programmatic Development Policy Loan (PDPL)-supported reform program. On a more longer-term footing, the country needs to upgrade the qualification of its labor force that significantly limits the growth prospects of the economy.
    

64. 
    Clearly, improving the business environment is an area where the Bank can do more in the CPS07 given the challenges that fYR Macedonia faces. In 2005, the EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) showed that while corruption remains an important problem in fYR Macedonia, things have modestly improved in some areas in the last three years. Still, progress seems stagnant. And the Bank’s Doing Business 2006 report said fYR Macedonia ranked 81st in the global ranking of 155 nations on key business regulations and reforms, roughly the same position it had held in previous years.
    

65. 
    Bank performance – Objective III – The Bank’s performance in supporting the promotion of reconciliation, building human capital, and protecting the most vulnerable is considered Satisfactory. The Kosovo crisis and the civil conflict of 2001 eroded social cohesion and elevated the importance of inter-ethnic relations in the ongoing political debate. The Bank contributed to the ongoing process of reconciliation through three similar and related projects – the Community Development Project, Child/Youth Development Learning and Innovation Loan, and the Community Development Culture Project Learning and Innovation Loan. Meanwhile, the objective of protecting the most vulnerable was greatly assisted through the government’s introduction of a new and fiscally sustainable pension system through the Social Protection Implementation Project. Also, a critical outcome of the CAS upon which the long-term reduction of poverty depends is improved capacity to understand and track the impacts of policy on poverty and progress towards achieving the MDGs. One way the Bank is helping is by building on the FYR Macedonia Poverty Assessment for 2002-2003 and adopting a more programmatic approach to analyzing poverty levels across the country’s range of ethnic groups and identifying where needs for support and intervention are greatest.
    

66. 
    Lastly, a reflection of the World Bank’s performance and reputation in fYR Macedonia can be seen in a Base Line Survey of 1,200 Macedonians of different ethnicities that was undertaken by the Bank’s Skopje country office. The survey found that 69% of those surveyed have a favorable opinion about the Bank. Most of the people have more trust in the WB than in the public sector, private sector or NGOs (51% trust the WB, 42% trust the private sector, 40% - public sector and 38% - NGOs).
    

67. 
    The shift in focus in the Bank’ program over the 2003-2006 CAS period from public sector reform to private sector development issues was timely and appropriate, and should continue. Between 2002 and 2006, fYR Macedonia regained strong macro discipline and transformed from a post-conflict country to an EU candidate. In response, the Bank shifted its program appropriately to deal more directly with economic growth constraints. This should continue in the next CPS.
    

68. 
    The Bank needs to increase its focus on fYR Macedonia’s integration with the EU. EU accession is a top priority for fYR Macedonia, and the Bank needs to assist the country in meeting the accession criteria and the EU acquis, including on building the institutional capacity to effectively implement EU regulations.
    

69. 
    The EU accession process has major implications on budget allocation and priorities. The Bank’s funding could serve as critical bridge financing to enable fYR Macedonia to access EU pre-accession funds. The new PER slated for delivery in FY07 should analyze and provide recommendations to the Macedonian government on the fiscal policy challenges the country faces in the run-up to EU accession.
    

70. 
    Stronger economic growth and job creation must be achieved. In order to maintain popular support for the reform agenda, there is a need for fYR Macedonia to show that its successful macro economic discipline and structural reform initiatives do translate into stronger growth, job creation and improvement of living standards for all.
    

71. 
    FYR Macedonia’s competitiveness needs attention and role of education reform needs to increase. If Macedonian companies are to compete in the regional and international markets, their competitiveness needs to improve. Such a stronger competitive edge also requires a better match between the quality of education in fYR Macedonia with the needs of the 21^st Century and the knowledge economy.
    

72. 
    The multi year Policy Development Program has served the Bank’s program well. The ongoing three-year PDPL program helped in shift of policy priorities, has been well connected to a number of investment projects, and helped secure continuity and predictability in the reform program. It even helped in the transition period following the recent government change, as the already agreed upon PDPL policy framework and related conditionality, played an instrumental role in the continuation of specific reform efforts.
    

73. 
    Decentralization is critical to ensuring the peace and reforms. Decentralization is a key part of the implementation of the Ohrid Peace Agreement. Key for its success will be that local communities are able to fully take part in the country’s development. The challenge for the CPS07 is to calibrate the Bank’s interventions carefully, through sector work and lending, to assist in urban development, including in the provision of public services at the municipal level. This will require close cooperation with many other donors already active at the local level, often better placed to finance and implement resource intensive community-based activities.
    

To date, IFC has invested US$93 million in fYR Macedonia. As of December 2006, IFC’s committed portfolio was US$26.1 million and its outstanding portfolio was US$25.2 million. In the past, IFC financing include credit lines to Komercijalna Banka and Stopanska Banka and ProCredit Bank, two loans to a textiles company, Teteks, a loan to a pharmaceuticals company, Alkaloid, as well as financing a pre-privatization investment in Macedonian Telecommunications (now privatized).

During FY04-06, IFC was active in Advisory Services (IFC AS) operations. These operations have been in line with the priorities outlined in the CAS, focusing mainly on the SME sector and covering the areas of business enabling environment, access to finance, and value addition to firms (see Box 1). During the last two years, both the size and duration of IFC AS operations have increased to help strengthen the development of the private sector including in the infrastructure sector. Also, IFC has moved towards a more integrated approach combining FIAS’s activities with PEP SE activities (IFC’s advisory services facility operating in Southeast Europe). These advisory services have included the following:

• 
  Review of the administrative barriers to investment. This included a self-assessment exercise that was led by the Ministry of Economy and participation of the private sectors.
  

• 
  Survey of the administrative and regulatory costs reflected in the Doing Business 2005 report. The main economic obstacles for business operation and growth included economic and regulatory policy uncertainty, monopoly position and unfair competition, inadequate conflict resolution, and regulatory burden.
  

• 
  Administrative barriers implementation including: business registration reform; inputs on the Company Law; and preparation of the foundation for systemic regulatory reform to help reduce the cost and risk of doing business in fYR Macedonia.
  
• 
  Collaboration with the World Bank in designing the regulatory reform component of the Business Environment Reform and Institutional Strengthening project.
  

During FY04-06, IFC made no direct investments in fYR Macedonia. The absence of IFC investment projects in the CAS period was the outcome of several unsuccessful attempts to generate investment business in the country. FYR Macedonia's business climate was not conducive to private investment, as reflected in the country's low Doing Business indicators, and particularly deterred FDI. At the same time, the mass privatization model that fYR Macedonia followed resulted in either widely dispersed ownership, where new owners adopted a rent-seeking mentality, lacked coherent development strategies, and in any case did not have funds to undertake investment projects, or in the control of privatized enterprises by interest groups of dubious reputation, that IFC could not do business with due to governance concerns. As a result, the opportunities in the real sector that IFC explored were ultimately dropped.

Similarly, IFC's attempts to approach the government with several infrastructure project concepts did not meet with the government's interest or support. Considering that IFC had already made investments in fYR Macedonia's two most prominent local banks prior to the CAS period, there was little opportunity to do more in the banking sector. IFC attempted to pursue a leasing project but it did not come to fruition.

However, IFC invested in four regional projects supporting countries in Southern Europe region, including in fYR Macedonia:

• 
  European Fund for Southeast Europe (EFSE), a collective debt investment vehicle that channels long-term resources for on-lending to micro-and-small businesses through banks, specialized microfinance institutions, and viable microfinance non-profit organizations;
  
• 
  Poteza Adriatic, a private equity fund that invests in equity and equity-related investments, through majority or significant minority stakes;
  
• 
  7L Capital, a private equity fund that makes equity and equity-related investments in companies, including in small and medium enterprises;
  
• 
  Mercator, a leading Slovenian retailer with operations in South Eastern Europe including in fYR Macedonia, which is expanding its hypermarket stores and supermarkets network.
  

IFC intends to focus on pillar 1 of the CPS enhancing fYR Macedonia’s competitiveness as a location for investment by:

• 
  Improving the business environment – reducing the costs and risks of doing business;
  
• 
  Enhancing competitiveness in strategic sectors of the economy and deepening the pool of domestic and foreign investors.
  

According to 2006 Doing Business Report, fYR Macedonia’s overall “ease of doing business” ranking places it in the second tier of countries, number 92, significantly lagging behind Romania, Bulgaria, Serbia, and Montenegro in the region. With the exception of access to credit (ranking of 48), the rankings for all other indicators range from 72 to 127 with the poorest performance in customs, licensing, property registration and business exit. The World Economic Forum Competitiveness rankings also place fYR Macedonia in the bottom of the second tier worldwide and within South East Europe.

• 
  Alternative Dispute Resolution (ADR) - mediation, as an alternative to formal court resolution of commercial disputes. Since 2004, IFC has been working to support legislation reform through the ADR Mediation Program in fYR Macedonia. Since then, a remarkable progress in enabling the environment for mediation introduction and implementation has been made. With the Ministry of Justice being main partner, the law on Mediation was passed, as well as a by-law on the Training Program for Mediators. In addition, trainings for 60 mediators, 60 lawyers and 15 judges have been delivered, several round tables and one ADR Conference for promotion of usage of mediation has been organized, and extensive and far-reaching PR campaign has been undertaken. The next steps include establishment of a Pilot Mediation Center in cooperation with Skopje Primary courts, expansion of the public awareness campaign and continuation of the trainings for mediation practitioners and beneficiaries.
  
• 
  Recycling Linkages Project - development of the secondary material recycling industry in fYR Macedonia and the other countries in the Western Balkans. The project, managed by IFC, and focused on the financial, training, consulting, and market needs of every segment of the scrap metal, paper, plastic and glass value-chains. The objective is to promote Small and Medium Enterprise (SME) development in fYR Macedonia, increase the competitiveness of the recycling sector, and improve the lives of thousands of families who make their primary income by collecting scrap materials.
  
• 
  Corporate Governance - improve the internal corporate governance practices of the Macedonian firms, thus making them more attractive to potential investors. On June 14, 2006, IFC assisted the Macedonian Stock Exchange to launch the newly drafted Corporate Governance Code which is expected to become effective at the beginning of 2007. IFC is also working with Macedonian companies in order to help them improve their corporate governance standards and plans to start working with banks as well. In addition, IFC will collaborate with universities to teach corporate governance to students, so that they can apply best standards in their future jobs.
  
• 
  International and EU Standards - help Macedonian companies to meet international and EU technical requirements, which must be satisfied if domestic products are to be exported to international and EU markets. IFC has implemented a comprehensive Hazard Analysis of Critical Control Points (HACCP) program and has been working to help food-processing companies to implement HACCP and develop a local expertise able to undertake certification. HACCP Information Center has been established at the Skopje Agricultural Faculty.
  
• 
  Regulatory Reform - provide technical assistance on the guillotine review of the stock of business licensing and inspections regulations.
  
• 
  Industry competitiveness - value chain analyses for the agri-business, general manufacturing and services sectors starting with the agri-business. The goal of the regional value chain will be to assess the competitiveness of Bosnia and Herzegovina, fYR Macedonia, and Serbia in the context of CEFTA and the European Union, make recommendations for cross-cutting policy and regulatory reforms to enhance the competitiveness of the sector, and support firm-level technical assistance as well as investment activities of IFC and MIGA.
  
• 
  Sub-national Competitiveness - an integrated FIAS/PEP-SE program. The main elements of this project include:
  

• 
  Better business regulation - focused on cleaning up the stock of licensing, inspections, and permit regulations as well as all administrative procedures affecting businesses on the municipal level.
  
• 
  Simplification - in addition to reviewing the quality of regulations, the project will address specific administrative procedures for streamlining and simplification.
  
• 
  Better service delivery - providing assistance in improving the quality of services provided to business. The primary mechanism for delivering services will be municipal one-stop shops. There will be a direct link with MIGA’s investment outreach and investment promotion capacity building on the sub-national level.
  
• 
  Competitiveness indices – developing a system of rating the competitiveness of localities. This will draw on the experience of Peru, Romania and Vietnam where similar programs have been successfully implemented.
  
• 
  Private investment and value addition to firms. This module will focus on capturing synergies with PEP-SE value addition to firms programs (e.g., standards, linkages) and MIGA programs to generate investment deals by identifying potential investors and providing information on specific localities.
  

In the real sector, infrastructure, agribusiness, construction/real estate, retail and mining remain the top priority sectors for IFC. IFC is also well prepared to provide advice to the Macedonian government in its efforts to attract high quality FDIs in the privatization process of strategic sectors.

• 
  IFC, jointly with the Bank and relevant authorities, will pursue opportunities to implement PPPs in the infrastructure sectors through PEP-SE Infrastructure or direct financing of private sector projects. IFC and the Bank will start preparing (in FY08) a joint policy note on concessions and public-private partnerships (PPPs) to help improve the environment for mobilizing private sector investments in infrastructure. Implementation of key recommendations of this analytical work would attract more private interest to invest in fYR’s Macedonia’s energy sector, and would enhance opportunities for IFC’s sequential involvement in helping structure and mobilize financing for pioneering infrastructure projects.
  
• 
  Working closely with the Bank, IFC will pursue investment opportunities in implementing PPPs in the gas distribution sector, depending on government’s progress with the privatization of the sector. However, opportunities in this sector remain limited given the outstanding issues on the ownership of the transmission pipe, small project scale (very few large towns justify such investments) and poor gas transmission infrastructure in the south. In addition, IFC will consider opportunities in financing mini- hydros in sizable packages.
  
• 
  In the Advisory Services, IFC will target a few things:
  

• 
  Skopje municipality: Through its PEP-SE Infrastructure, IFC has already identified opportunities to advise local government for structuring PPP for a concession for water and waste water services. Water and waste water sector needs significant restructuring (very high debt, overdue payables, etc, particularly for waste water). IFC can replicate its experience in other countries and more recently in Belgrade water project. However, the local government does not seem ready to move ahead in that direction.
  
• 
  Transportation sector: (i) Skopje airport privatization: IFC has offered to the Macedonian government the privatization advisory services of PEP SE Infrastructure for the Privatization of Skopje Airport; (ii) In close coordination with the Bank IFC has been involved in discussions on structuring PPP for corridor 8 and corridor 10.
  

• 
  SME and micro-enterprises is a significant segment of commercial activity and one of the largest contributions to employment in fYR Macedonia. Micro and small enterprises (MSEs) are estimated to account for around 90% of the total number of active enterprises in fYR Macedonia. Demand for micro-finance is driven by increasing self-employment and insufficient MSEs lending activity by local commercial banks. In the past, IFC has invested in ProCredit Bank, Skopje, representing a 19% ownership stake. IFC intends to continue supporting local banks with loans for on-lending to SMEs. In addition, IFC will directly support a few selected SME companies, which will help invert the tendency on credit risk perception without undermining but rather supporting a more disciplined lending culture in the banking sector.
  
• 
  IFC will work with regional private companies outside of fYR Macedonia to encourage their investments in fYR Macedonia. IFC expects to play an active role providing comfort to interested regional players coming from Turkey, Slovenia, Serbia, Bulgaria and Croatia as well as to international investors.
  
• 
  IFC will explore on capturing synergies with its PEP-SE value addition to firms programs (e.g., standards, linkages) to generate investment deals by identifying potential investors and providing information on specific localities.
  
• 
  Corporate Governance: IFC’s advisory services through PEP-SE has been working on the Corporate Governance code for listed companies on Macedonian Stock Exchange albeit small, in-company Corporate Governance consulting for SMEs, and public awareness campaign and capacity building to strengthen capacity of the business leaders, shareholders, regulators and other stakeholders on corporate governance issues.
  

• 
  In the education sector IFC’s strategy is to help strengthening private sector institutions with a strong track record of providing quality education. By providing long term financing, IFC would intend to demonstrate to other private education institutions and to the private sector in general, that capital is available for reputable institutions with high quality standards and professional management.
  

• 
  IFC will provide funding and TA to develop new products in the financial sector such as energy efficiency and support the development of housing, factoring and leasing. IFC will continue to support commercial banks and micro-lending institutions with a focus on SMEs. IFC will also look for opportunities to facilitate banking sector consolidation through supporting the merger and acquisitions of the creditworthy institutions.
  

Statement of Committed and Outstanding Portfolio