B. Lessons Learned from the CAS Completion Report (CASCR)

Pillar 1: Foster Growth and Job Creation, Increase Living Standards for All

91. 
    The WBG will support the governments’ ambitious goals on accelerated growth and job creation through an integrated and multi faceted program. This will encompass both the demand for and the supply of labor in fYR Macedonia. Under this pillar, the WBG will aim to support government efforts to: (i) maintain macro economic stability, while ensuring proper integration of EU priorities into the budget; (ii) improve business environment, including regulatory reform and proper enforcement of contract and creditor rights; (iii) reduce the costs of capital; (iv) improve enterprise sector’s competitiveness, (v) improve agricultural competitiveness; (vi) establish a functioning land market and institutions; (vii) improve infrastructure for growth by strengthening the framework for public-private partnerships and invest selectively in energy and transport; (viii) remove rigidities in labor market regulations and reduce the labor tax wedge; (ix) develop a productive and appropriately skilled labor force; and (x) use cash transfer systems to encourage school enrollment and preventive health.
    

92. 
    Maintain macroeconomic stability and reduce government expenditures. Macroeconomic stability will remain critically dependent on pursuing reforms with particular emphasis on fiscal and external sustainability. The Bank will support measures to ensure this stability through continuation of the current DPL program and the design of a new series over the CPS period. A Public Expenditure Review assessing the fiscal impact of EU accession will help prioritize expenditures and rebalance current and capital expenditures. A Country Financial Assessment, currently underway, has identified a number of systemic problems in the public procurement system that will require concerted attention. Recommendations will focus on: (i) improvements to laws and sub-legislative instruments; (ii) practices and processes for tender preparation, bid evaluation, and contract supervision; (iii) complaints processing; and (iv) the composition and training of procurement officials within the ministries.
    

93. 
    Improve the business environment, including regulatory reform and proper enforcement of contract and creditor rights. During the entire CPS period, support to improving the business environment will continue through the ongoing Business Environment Reform and Institutional Strengthening (BERIS) project approved in FY05. The project supports the government’s efforts to stimulate economic growth based on increased domestic and foreign investment by strengthening public sector capacity to increase competitiveness of the business sector in an EU-oriented context. Regulatory reform is also an important part of the policy program supported by the ongoing three-year PDPL program, and the BERIS project provides resources to fund advisory services in this area.
    

94. 
    The Legal and Judicial Institution and Implementation Support project (LJIIS, FY06, which is described more fully under pillar II) will support efforts to better protect contract, creditor and property rights, crucial to enhance the environment for private sector investment in fYR Macedonia. By supporting activities aimed at improving efficiency and effectiveness of the judiciary in resolving (commercial) disputes and streamlining administration in some key commercial areas –bankruptcy and administrative disputes– the assistance should contribute to reducing the cost of doing business and facilitating the reallocation of resources to job-creating activities. To ease the burden on the courts, IFC Advisory Services (IFC AS) through its PEP SE facility has been working to support legislation reform through the ADR Mediation Program since 2004. Besides the changes in the legislation and training for the mediators, the IFC will establish a Pilot Mediation Center in cooperation with Skopje Primary courts.
    

95. 
    IFC AS will continue to work on the development of the recycling industry, focusing on financial, training and market needs of the companies, the improvement of corporate governance practices through their work with student population and helping Macedonian companies to meet international and EU technical requirements for export. Also, IFC AS is expected to include: (i) technical assistance on the “guillotine” review of the stock of business licensing and inspections regulations; and (ii) a regional project for value chain analyses for the agri-business, general manufacturing and services sectors starting with the agri-business.
    

96. 
    In addition, IFC will provide assistance on cleaning up the stock of licensing, inspections, and permit regulations as well as streamlining administrative procedures affecting businesses on the municipal level, including delivery of services through municipal one-stop shops. There will be direct links with MIGA’s investment outreach and investment promotion capacity building activities.
    

97. 
    Lowering the cost of capital and improving access to capital. On the policy side, the Bank will assist the government in the completion of the financial sector reform agenda, critical for the dynamic growth of the enterprise sector. In FY08, an update of the 2003 Financial Sector Assessment Program (FSAP) will assess progress made towards the completion of the financial sector reform agenda and inform the design of the new series of PDPLs to address remaining constraints to financial sector development. These policy loans are expected to continue to support policy measures associated with financial sector development, and strengthen the governance of financial institutions, including the insurance sector. To further improve access to capital, through the REPARIS program and a TF funded by the Dutch and Austrian governments, the Bank will continue to support the implementation of the country action plan on corporate financial reporting that will align fYR Macedonia’s regulatory with international standards and the relevant portions of the EU acquis communautaire. IFC will support the development of 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 and look for opportunities to facilitate banking sector consolidation through supporting mergers and acquisitions. MIGA will also support projects in the financial sector which are expected to result in improved access to finance.
    

98. 
    Improve enterprise sector’s competitiveness, encourage technological change and further promote a level playing field for investment. The Bank will enhance support –through its DPLs– to policies and measures for eliminating barriers to entry, operations and exit that limit growth opportunity of the business sector, and will also support the elimination of soft budget constraints as well as other measures to strengthen governance of public institutions. On the investment side, a new Competitiveness/Technological Change/Higher Education project (FY08) will further contribute to sustainable economic growth and job creation by fostering the adoption of new technology for production of higher quality goods, especially for the export market, improve the link between research and development and the private sector, encourage improvement of managerial skills in the private sector and develop skills able to match the business sector’s emerging needs (see also below under labor market). Competitiveness on sub-national level is part of IFC AS program, focused on better business regulation, simplification of administrative procedures, better service delivery, developing a system of rating the competitiveness of localities and private investment and value addition to firms.
    

99. 
    Improve competitiveness in agriculture. The EU accession agenda has magnified the importance of agriculture in fYR Macedonia’s overall policy agenda, since agriculture constitutes a significant part of the EU pre-accession requirements. The proposed operation will help create the infrastructure to use EU assistance to improve competitiveness through on-farm investments, and redirect government assistance toward investment rather than subsidies, in a manner consistent with the EU’s pre-accession requirements. The operation will strengthen the capacity of MAFWE to support the sector, building the institutions necessary to access and absorb pre-accession assistance, helping producers and agro-processors meet EU veterinary and phytosanitary standards, and improving access to irrigation. The operation will incorporate lessons learned from earlier Bank interventions in the agriculture and rural sector, especially from the Private Farmer project closed in 2003 and the Irrigation Rehabilitation and Restructuring Project (IRRP) closed in November 2006.
    

100. 
     The proposed operation benefits from the ongoing Real Estate Cadastre and Registration Project, which indirectly helps develop rural real estate markets by improving access to information and reducing transaction times. It will also benefit from the ongoing BERIS project which strengthens the capacity of the government to improve selected areas of the business environment in an EU-oriented context. Finally, the proposed operation will benefit from the proposed FY09 Feeder Roads project, as this will result in key public infrastructure investments that reduce transportation costs and thus improve the supply chain and farmer and processor competitiveness. On its part, IFC AS may work on value chain analyses for the agri-business, general manufacturing and services sectors. This program is part of regional value chain program, aiming to assess the competitiveness of BiH, fYR Macedonia, and Serbia in the context of CEFTA and the EU.
     

101. 
     Establish a functioning land market and institutions. The current Real Estate Cadastre and Registration Project (RECRP, begun in 2005) seeks to build an efficient and effective real estate cadastre and registration system, contributing to the development of efficient land and real estate markets. The project provides support to complete the systematic first registration (the real estate cadastre), improves overall transparency and accountability of the land administration system and helps to improve on-going registration services, reducing the time to register for sales transactions to one day by project completion. The project also assists in the development of government’s capacity to address the land policy issues necessary to achieve the broader project goals of improving tenure security and promoting the development of efficient land and property markets. The project will work together with the ongoing Legal and Judicial Implementation and Institutional Support Project (LJIIS, FY06) to provide joint training on property rights protection and the operation of the cadastre.
     

102. 
     The CPS could build on the RECRP –as well as on the Urban Development Project planned for FY09– by a Land Administration II Project, considered for FY10, which could focus on improving land use management for both urban and agricultural land, formalization of illegal construction, improved property valuation for market information and taxation purposes, and continuing improvements to service delivery. For proper enforcement it will also be crucial to ensure proper understanding for judges and court staff and improved cadastre relations with the judicial system. Should the project be confirmed in the CPRPR (FY09), it will be informed by the lessons learned during the RECRP, as well as by a land policy note (FY07) and by land issues identified under the planned urban development project and the Agriculture/EU accession Project.
     

103. 
     Improve infrastructure for growth by strengthening the framework for public-private partnerships and invest selectively in energy and transport. In energy, the WBG will continue to provide analytical and advisory support for the restructuring of the energy sector and improvement of its financial performance in order to sustain an affordable and efficient electricity supply necessary for economic growth. Through the Power System Improvement Project, closed in June 2005, the World Bank supported rehabilitation and increase efficiency of fYR Macedonia's six largest hydro plants. The World Bank’s on-going investment lending to the energy sector includes the Energy Community of South East Europe - APL3 fYR Macedonia Project (FY06) that aims to strengthen the transmission and dispatch capacity and improve efficiency of the power transmission company (MEPSO) to support its functioning in the context of the regional power market. Technical assistance is being provided through two trust fund grants to support the development of a framework for private sector participation in hydropower development. IFC will consider opportunities in financing mini-hydro power plants in sizable packages. Furthermore, the Sustainable Energy Project (FY07), funded by GEF, will assist in the development of a sustainable market for renewable energy sources and energy efficient technologies in fYR Macedonia through technical assistance and investment support.
     

104. 
     Going forward, the WBG will provide analytical and advisory support to the development of a strong and sustainable energy sector that can provide households and businesses with a secure, reliable, efficient and high-quality energy supply. The analytical base of these activities will be provided through support for the development of a National Energy Strategy (FY08) and continued dialogue and advisory support to the energy sector. In addition, 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.
     

105. 
     Informed by this analytical work, a planned Energy Project (FY09) will provide investment support for high-priority energy infrastructure project(s) aimed at improving the efficiency of existing assets and meeting the growth in energy demand. Such energy infrastructure project(s) could include rehabilitating and expanding existing hydro-electric generation plants, development of regionally high-priority electricity transmission interconnections, or investments in gas supply infrastructure. On its part, IFC through its advisory services, will work closely with the Bank and pursue investment opportunities in PPPs, including in the gas distribution sector.
     

106. 
     In transport, the proposed TTFSE II operation (FY07) will support the development of an efficient and effective transport system, reducing economic distance to markets. The project will promote electronic inter-agency and cross-border exchange of trade data, and strengthen the functioning of key transport corridors. The proposed activities are oriented towards compliance with the EU pre-accession requirements and reflect the commitments agreed in the MoU for the development of the core transport network between the European Commission and Western Balkan countries (Luxembourg, June 2004). The proposed operation benefits from the recently completed TTFSE project, which supported modernization of customs procedures and facilities, and from the ongoing Railways Reform project (FY05) which improves the financial viability, productivity and efficiency of railways operations, and paves the way for liberalization of railways services. Finally, it will benefit from and supplement the ongoing Business Environment Reform and Institution Strengthening project (FY05) which strengthens the capacity of the government to improve selected areas of the business environment in an EU-oriented context.
     

107. 
     The WBG will continue its analytical work in the transport sector, through a Transport Sector Study (early FY09) to be followed by a new transport project, most likely focused on feeder roads, providing better access from the farmgate/local markets to the main transport corridors (late FY09). This work will be informed by a regional study on feeder Roads. Underpinned by the joint policy note on concessions and public-private partnerships referred to above, IFC, jointly with the Bank and relevant authorities, will pursue opportunities to implement PPPs in the transport sectors through PEP SE Infrastructure (its advisory services) or direct financing of private sector projects.
     

108. 
     Remove rigidities in labor market regulations and reduce the labor tax wedge. Given the importance of this area for achieving CPS goals on growth and job creation, the World Bank Group plans to support reforms in this area primarily through future PDPL programs. Analytical support may be provided through the next CEM (FY08). A currently ongoing regional labor market study will also provide important input for reforms in this area.
     

109. 
     Develop a productive and appropriately skilled labor force. Education and skills development play a key role in ensuring a productive and appropriately skilled labor supply, crucial for fYR Macedonia successful integration into the European and global economies. The ongoing Education Modernization Project (FY04) will: (i) improve the teaching and learning environment in primary and secondary schools, so that graduation rates improve and graduates are better equipped for the next stage of their lives; (ii) enhance the transparency of and evidence base for decision making in the central government, by establishing an integrated education information management system and a student performance evaluation system, and by building the capacity of Ministry staff in strategic planning and financial management; and (iii) enable the public and other stakeholders to get information about the performance of the education system, through the results from the student assessment system and school evaluation process.
     

110. 
     Additional support will be provided by the proposed Competitiveness/Technological Change/Tertiary Education project (FY08) which –as far as education is concerned– would likely: (i) establish a quality assurance system in tertiary education under which public institutions are held more accountable for their use of public money and in which students and the public have information about the performance of different institutions; and (ii) improve the efficiency of spending on research and development to ensure it is used to tackle the identified priorities of the government in ways which leverage private sector investments. IFC may provide long term financing to reputable private education institutions with high quality standards and professional management.
     

Pillar 2: Public Service Delivery and Supporting Good Governance.

111. 
     The WBG’s partnership strategy with fYR Macedonia aims to build on the progress that fYR Macedonia has made in improving governance and reducing corruption, while deepening reforms in key sectors where governance weaknesses continue to undermine progress in the economic reforms necessary to strengthen the economy and create jobs. Improved transparency and accountability in service delivery is critical to meeting the government program on growth, fostering human capital, and meeting EU standards.
     

112. 
     Through the DPL program and selected sector work (PER, FY07, PER update, FY09, annual Programmatic Poverty Assessments, as well as through Country Fiduciary Assessments (FY07 and FY10), the Bank will continue to support the efficient and transparent use of public resources. An IDF to improve public accounting will help as well. Furthermore specific attention will be given to improve governance aspects in all sector interventions included in the strategy (please note Annex 9, summarizing governance issues and the WGB program). For this CPS, the WBG will support building of quality institutional capacity to improve the transparency and regulatory capacity of governmental structures in all areas included in the strategy.
     

113. 
     The WBG will support fYR Macedonia in its efforts to: (i) continue reducing the legal uncertainty and lack of confidence in the judicial system; (ii) apply proper public finance principles and governance standards at the municipal level, including to municipal public enterprises and utility companies; (iii) continue improving the use of public resources and performance monitoring in the provision of affordable and quality health services; and (iv) develop more targeted cash transfer systems and introduce incentives to encourage school enrollment and preventive health.
     

114. 
     Decrease the legal uncertainty and lack of confidence in the judicial system. Implementation and institution building support provided by the ongoing LJIIS Project (FY06) aims to increase accountability and transparency in the judicial sector and reduce overall corruption in fYR Macedonia. The Project supports the implementation of the new framework for judicial and court operations and improve efficiency and effectiveness of the judiciary in resolving (commercial) disputes and streamlining administration in some key commercial areas – bankruptcy and administrative disputes. LJIIS also aims to reduce political influence and improve the quality of the judiciary, by supporting the new Republic Judicial Council in implementing efficient processes for monitoring and evaluating judicial performance against high ethical standards and implement transparent procedures for judicial selection and disciplining judicial misconduct. Given the long term nature of addressing these issues, a follow-on of this project may be considered for FY10. A final decision on this will be taken during the CPSPR (FY09).
     

115. 
     Apply proper public finance principles and governance standards at the municipal level, including to municipal public enterprises and utility companies. The proposed Urban Development Project (FY09) aims to support fYR Macedonia by addressing needed improvements in the performance of urban economies and the quality of urban governance, through components addressing sustainable municipal financing, municipal service delivery, urban planning and/or land management. The World Bank’s Urban Policy Note (FY07) looks at a range of issues in how cities are being managed. The report focuses on the policy agenda in three areas. The first is municipal financial management, which is a core element of municipal performance and of local governance. The second area concerns the provision of communal services; there are many issues in the institutional framework for governance of the communal enterprises, and in investment selection, that will affect financial sustainability and quality of services over the medium term. Third, renewed attention is needed to the planning and management of urban land use, which is central to the efficiency and environmental quality of urban areas, and to the affordability of housing for the population and of real estate for businesses. The proposed project would provide financing for priority infrastructure investments in a set of municipalities and their communal services enterprises.
     

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