International finance corporation country partnership strategy

Annex 7: FYR Macedonia Country Financing Parameters

The country financing parameters for the former Yugoslav Republic of Macedonia set out below have been approved by the Regional Vice President, Europe and Central Asia, and are being posted on the Bank’s internal website.

The idea of a SAp as a tool of anchoring the countries from the Western Balkans towards the EU was born at the Zagreb Summit in November 2000, after the Feira Council of June 2000 that addressed the future of the Balkans countries is in Europe.²⁰ In Zagreb, the Western Balkan countries made a pledge to abide by the EU rules and conditionality, receiving in return the prospect for EU accession based on the Treaty of the European Union (TEU) and the Copenhagen criteria as well as on assistance program to promote and support this ambition.²¹ The countries of the Western Balkans also agreed that, when signed, the Stabilization and Association Agreements (SAAs) would be the principal means to begin preparing themselves for the demands that the prospect of accession to the EU entails.²² In addition, the countries agreed (once they meet the necessary rules and conditions) to receive financial assistance (CARDS). CARDS would focus on supporting necessary reforms and institution building to facilitate approximation with the EU. FYR Macedonia was the first of the countries of Western Balkans to sign the SAA in 2001.

Relations between the European Union and fYR Macedonia have evolved progressively over the years. On December 16, 2005, the European Council granted candidate country status to fYR Macedonia. The Council made this decision on the basis of the substantial progress made in completing the legislative framework related to the Ohrid Framework Agreement, as well as Macedonia's track record in implementing the Stabilization and Association Agreement. While no date to open actual negotiations is specified, the EU perspective is a very positive element in the reaching agreements across ethnic boundaries of the country, crucial against the backdrop of the Kosovo discussions.

On November 8, 2006 the European Commission (EC) published the first Progress Report of fYR Macedonia with regard to its preparation for EU membership, as part of the “Enlargement package” the EU prepares annually. The EC Progress Report outlines the progress fYR Macedonia made in adhering to the EU accession criteria (as outlined in the Analytical Report published by the EC on November 9, 2005 from October 1, 2005 until September 30, 2006. The Analytical report describes the situation in the country in relation to the EU accession criteria i.e. the progress fYR Macedonia made in adhering to this criteria.

Under Democracy and rule of law, the report describes the progress of the work of the parliament, government, judiciary and public administration, as well as the progress in the fight against corruption. A significant part is devoted to the electoral process, which is listed as one of the five key priorities for EU membership. The report states that changes in the electoral legislation were appropriate and enabled satisfactory elections, according to international standards. EC’s assessment is that the elections have passed in a generally peaceful atmosphere, with certain irregularities on the day of the elections. EC recommends putting maximum effort into adhering to international standards for the next elections. As for the post-election process and the formation of the new government, EC points at the need to decrease tensions between the ruling parties and the opposition, and especially the ethnic Albanian political parties (DUI-PDP). It is crucial for the economic stability that the government tries to reach consensus for the key reforms, especially for those related to the implementation of the Ohrid Framework Agreement and other areas that need two-thirds majority of votes in the Parliament (Badinter principle). It is also emphasized that the opposition should be constructive in its role. In order to achieve the desired political consensus, it is urgently needed that effective communication channels are established between the ruling parties and the opposition.

The report devotes special attention to judicial reforms. Establishing an independent and efficient judiciary is one of the five key priorities of the European partnership. The report positively assesses the 2005/2006 constitutional changes as pre-condition for establishment of independent judiciary, as well as adoption of laws related to the judiciary (Law on Courts, Law on Administrative Disputes, Misdemeanor Law, etc.). Certainly, the implementation of these laws will be the key. The EC stresses that fYR Macedonia makes significant progress in adopting the laws, but that the implementation often lags behind.

The Commission notes that there is a progress in public administration management through adoption of several laws from this area (e.g., the Law on access to information), as well as the further implementation of the Civil Service Law. Of special importance is the Law on Police (also one of the key criteria of the European partnership), but the delay in its adoption has made the decentralization of the police impossible. The EC pays special attention to the implementation of this law, and stresses that an increased cooperation between the ruling parties and the opposition is needed to achieve it. The increased authority given to the Public Attorney is commended, with a caveat that strengthened cooperation with the Ministry of Internal Affairs is needed. A negative assessment is given to the massive replacements in the public administration following the elections, since this practice conflicts with the aim to depoliticize the public administration.

The report clearly states that, although there is progress, corruption is still widely spread in the society. The few sentences and fines (in the customs, judiciary and Public Revenue Office) are insufficient to diminish the problem, which means that more effort is needed to strengthen the institutions, increase transparency and implement laws.

In the area of Human and minority rights, a positive assessment is given to the strengthened freedom of expression law, the abolishment of the obligatory detention (through changes in the criminal procedures), and to the strengthened internal controls at the Ministry of Internal Affairs. The situation regarding minority rights has also improved: the number of persons employed in the public administration who belong to the ethnic minorities and the number of minority university students has increased. However, the report states that little progress has been made with regard to solving issues related to the Roma community an that the efforts for implementation of the National Strategy for Roma need to be intensified.

European Commission positively assesses the active participation of fYR Macedonia with regard to Regional cooperation (CEFTA, Stability Pact, etc.). The progress report commends the government for its constructive role during the Kosovo talks, as well as the progress the country made in developing the relations with the neighbors.
Economic criteria
The two economic criteria for membership are: existence of functional market economy and capacity to compete at the EU market. In the year covered by the report, fYR Macedonia made a great stride towards functional market economy. There is a general consensus on the basics of the economic policy, the macroeconomic situation is stable, and there is a moderate GDP growth. Specific progress has been made with shortening the time needed to register a company by introducing one-stop-shop system (another key priority of the European partnership). The government has continued with the privatization of the remaining few state owned enterprises. Areas still impeding full functioning of the market economy relate to disfunctioning rule of law and lack of legal certainty, insufficient guarantee over the security of tenure and disparities in the labor market. The Commission has positively assessed the development of the financial sector (which is still lagging behind compared to other candidate countries), the high level of trade interaction with the Union and the increased flexibility of the labor market. Areas where the progress is stale are: the implementation of the bankruptcy law, low level of investments, slow resolution of court cases and inefficiency in solving the problem of the indirect state aid (i.e. some companies do not pay taxes and social contributions).

Capacity to take over membership commitments
This chapter of the Progress Report describes the progress in approximation of the national legislation towards the European one, acquis communautaire, which is divided into 33 chapters. The progress is followed through the approximation of legislation, but also through the implementation of laws and capacities of the institutions to fulfill their commitments. The progress on the 33 chapters over the reporting period has been uneven. Significant progress has been made in some areas, such as customs, public procurement, business legislation, while other, such as intellectual property, telecommunications and state aid are lagging behind. In some areas, such as the agriculture and environment, although a progress has been made, the country is still behind. It is therefore of special importance to give greater priority to these areas.

The analysis of the progress on certain chapters leads to a conclusion that fYR Macedonia’s institutional capacity is quite uneven; most progress has been achieved in areas with stronger institutional capacity. Another key conclusion of the report is that the progress is significant when it comes to adopting primary and secondary legislation, but that the implementation often lags behind. The European Commission believes that enhanced efforts should be put into increasing the implementation capacity.

The most important conclusion of the Progress Report is that the progress that fYR Macedonia made so far is insufficient for the EC to propose start of membership negotiations. The start of negotiations will depend on the reforms that are going to be implemented in the forthcoming period and consequently will be reviewed in the 2007 Progress Report, expected in November 2007.

Annex 9: Governance Activities in World Bank Program

Sectors	Governance Outcomes and Trends	WBG Program to Address Weaknesses
Transportation	- Poor governance structure with multiple government bodies that don’t communicate.	TTFSE II Project Preparation Steering Committee established to improve coordination
Customs/Border Crossings	- Potential for rent-seeking by border agency inspectors; Inefficient procedures hinder firms; - Border crossing times have fallen; Transparency has improved; Unofficial payments have declined dramatically.	Build on progress; further strengthening of transparency through EDI based trade and transport data harmonization and monitoring.
Roads	- Institutional weaknesses, including the lack of transparency in road management responsibilities, result in increasing backlog in road maintenance - Poor financial oversight of toll collections results in an estimated “leakage” of Euros 7 million per year.	Support strengthening of road sector management and priority programming. Modernization of toll collection system will reduce opportunities for fraud and corruption.
Railways	Institutional deficiencies constrain strengthening financial viability, productivity, and effectiveness of railway operations.	Railways Reform Project is working to establish separate accounting for its key functional areas and create appropriate regulatory and institutional environment for multiple operator market.
Business Licensing, Inspections, and Other Regulations	- Inefficient and non-transparent procedures, poor accountability and transparency of public institutions have resulted in significant barrier to business entry, operations and exit and considerable opportunity for rent-seeking; - The implementation of a “One-stop shop system” has significantly reduced opportunity for unofficial payments and discretionary and arbitrary decisions; - A “regulatory guillotine” is underway to eliminate those business regulations that are unnecessary or without a legal ground; the government has decided to introduce a regulatory impact assessment (RIA) system to ensure business friendly new regulations, a more transparent rule making process for new regulations, and increased accountability of relevant public sector entities; - Bankruptcy trustees had incentives to drag out cases.	Build on progress; further strengthening of transparency and monitoring; The BERIS and PDPL are supporting design and implementation of regulatory reform, including “regulatory guillotine” and RIA system as well as measures to improve business access to information and regulations; Supporting implementation of the new Bankruptcy Law in PDPL and Judicial Project. .
Banking Governance	- Poor accountability of bank management and boards, and opacity of the ownership structure of certain banks reduce the ability of the banking supervisor to oversee the banking sector, including implementation of rigorous board member fit and proper rules; - The enforcement toolkit does not provide the supervisor with adequate and clear authorities to address board members, take important remedial actions, impose financial penalties, or enforce accurate financial statement and corporate transparency; -The Banking Law and the NBRM law are being strengthened to – inter alia - better define and elevate the responsibility of bank boards and provide the supervisor with the necessary tools to harness market discipline as a key pillar in promoting and enforcing strong governance.	PDPL is supporting the gradual migration towards a more risk-based supervisory approach that would – inter alia - allow the NBRM to hold bank boards, controlling shareholders, and management increasingly responsible and accountable for the safe and sound operations of their banks. In close coordination with the IMF, the Bank has provided technical and policy advice for the upgrade of the legal framework for banking.
Insurance governance regulation	- There is practically no supervision of insurance companies. Poor governance structure of the existing regulator results in poor accountability and transparency of insurance companies, uncertainty about their financial solvency and, ultimately, weak protection of policyholders’ rights. - The government has recently decided to create an independent supervisory agency outside the Ministry of Finance	PDPL support for establishment and operations of an independent insurance supervisor and implementation of a plan to build supervisory capacity. The Bank has provided technical and policy advice for the upgrade of the legal, institutional and regulatory framework for insurance, including advice on governance arrangements for the new insurance supervisor.
Judicial System	- Inefficiency of the system creates incentives for corruption; Politicization in the selection and disciplining of judges.	Support major re-organization of the judiciary; strengthen administrative capacity.
Agriculture	Lack of transparency and predictability of policy hinders progress; rent-seeking in agricultural inspections.	Creating capacity to design and monitor policy; Improving reporting systems and administrative structure for agricultural inspectors.
Health	Poor governance structure in the Health Insurance Fund; Closed pharmaceutical market closely linked to political actors; Rampant conflicts of interest and poor financial controls; Unofficial payments for health care.	Restructure of HIF Board, change selection process and introduce Board training; Promote use of revised positive drug list, international competitive bidding; Introduce “four-eyes” principle, requiring both medical and economic input into key decisions; Introduce basic benefits package and address co-payment policy.
Education	- Policy making not guided by data on achievement - Reports of unofficial payments for admission to higher education	Strengthening the demand side for governance by supporting school governance structures that include parent participation; Supporting comprehensive student assessment and testing. Strengthening transparency of testing and admission to tertiary education.
Energy	Governance structure establishing separation of provision with regulation still emergent; result is poor payment discipline.	Policy based advice to strengthen payment discipline.
Land administration	Uncertainty of real property rights; Unofficial payments for official registrations or even to receive information are not unusual.	Projects in the real estate cadastre and in land administration to improve transparency in registration.
Municipal finance and management	Information on municipal performance (revenues and expenditures, including capital investments, and service delivery) not monitored by or for municipalities, contributing to lack of incentives for improved management, weak communications with constituents, lack of “downward accountability”.	Municipal Development (MD) project (FY09) to introduce good practices in performance monitoring on sustainable basis to promote better incentives and trust in local government, and permit benchmarking.
Communal services (municipal) enterprises (CSEs)	Unclear and conflicting institutional framework discourages commercial orientation of CSEs and removes possible incentives for PPP; lack of arm’s-length regulation permits political interference by municipalities.	MD project to support reforms in policy environment for CSEs to improve their incentives for commercialized management and clarify regulatory relationship with municipalities, including possibly through changes in legislative framework for potential PPP