Transcript Document 7279765

Western Balkans and Europe
2020 - Supporting Convergence
and Growth
Jane Armitage, Country Director
and Regional Coordinator for South East Europe
WORLD BANK
March 2011
Outline
 Post-crisis macroeconomic framework
 Structural reforms for smart, sustainable, and
inclusive growth
 Competitiveness
 Governance and rule of law
 Social sectors
 The World Bank’s engagement
2
Two years after the crisis started...
 The legacy of the crisis continues though economies are slowly
improving
 Growth collapsed but is recovering tentatively, especially through
growing export demand
 Private capital inflows fell sharply but very recently are beginning to
trend upwards and formerly unsustainable CADs have shrunk sharply
 Fiscal deficits spiked in most countries but have begun to moderate as a
result of a expenditure adjustments
 However, domestic demand remains weak and improvements in
employment and poverty reduction remain elusive
3
Growth rates declined sharply and GDP shrank in most
countries but there is now a gradual return to growth…
12
Albania
8
Bosnia and
Herzegovina
4
Kosovo
0
FYR
Macedonia
Montenegro
-4
Serbia
-8
2007
2008
2009
2010
2011
2012
4
The momentum of poverty reduction slowed
considerably…
Western Balkans $5 Poverty and Vulnerability Rates
36
35.2
$5 a day poverty rates
34
32.7
32
30.4
30.2
30
29.7
28
28.1
26
25.8
24
22
20
2006
2007
Base Scenario
2008
2009
2010
Crisis Scenario
5
Fiscal consolidation needed for macro sustainability, but…
Ageing populations and increased longevity putting
pressure on pension and health systems
Need for reformed social safety nets with improved
targeting to alleviate budgetary pressures and reduce
payroll tax disincentives for employment creation
Competitiveness requires greater access to higher
education and improved quality at all levels
Major infrastructure improvements needed in
environment of reduced private finance
6
I. Promoting Growth and
Competitiveness
7
The Region is improving ranking on “Doing
Business”, but key areas need attention…
 Most difficult areas are
construction licenses,
property registration
and contract
enforcement
 Reforms are not that
difficult: FYR
Macedonia climbed
from being 94th in 2006
to 38th in 2011
8
Lack of infrastructure is a major bottleneck for
businesses in the Western Balkans…
% of firms indicating transport is a major
obstacle to doing business
100
40
40
30
20
10
0
Source: Doing Business 2011
30
20
10
B i H
50
S E R B I A
50
FYR MACEDONIA
60
M O N T E N E G R O
60
MONTENEGRO
70
B i H
70
FYR MACEDONIA
80
S E R B I A
80
K O S O V O
90
A L B A N I A
90
Energy
K O S O V O
Transport
A L B A N I A
100
% of indicating electricity is a major
obstacle to doing business
0
9
Lack of infrastructure cont’d
Irrigation and Water Resources
 Western Balkan countries have strong potential for agricultural production which is unrealized
due largely to inadequate irrigation (most countries are net importers of food but could be net
exporters with adequate irrigation)
 Absence of River Basin Management Plans, inhibits balanced multi-purpose river use and
leads to controversy (e.g. hydropower vs agriculture)
 Major vulnerability to floods (e.g. Dec. 2010, 6 casualties) due to inadequate dike protection,
lack of maintenance, no integrated planning, poor cost recovery
 Going forward, climate change will continue to restrict areas that can produce rain- fed crops
Urban Water and Sanitation Services
 Although coverage is generally good in the Western Balkans, services are unreliable affecting
growth in key high-potential and water intensive industries such as tourism and food
processing
 Water and sanitation are generally publicly funded putting pressure on limited budgetary
resources in many instances
 Lack of adequate policy framework – low tariffs, weak collection rates and non-revenue water-inhibits private sector investment
10
Transport Infrastructure
Roads:
 Total road network in the SEE countries covers over 100,000 kms
 of which core network is 6,000km
 Road quality remains poor despite investments in the SEETO ‘Core
Network’
 All Western Balkan countries rank in the bottom half in a world economic forum
ranking of 139 countries
Rail:
 Western Balkan countries are in the bottom half of rankings for quality of
rail infrastructure among 116 countries
 Serbia, Bosnia and Herzegovina, and Albania are among the bottom quarter
Port and inland waterways :
 The inland water transport network in SEE has been neglected for far too
long
 nearly no expenditure on Sava or Tisa since 1990
11
Better transport infrastructure is critical for Economic
Development in the Western Balkans…

The small size of the Western Balkan countries, and their favorable location vis-à-vis
the EU market, underline the importance of trade facilitation for growth and poverty
reduction, but:
 Road infrastructure below European standards: raises costs of trade

Broader trade and logistics environment (transport services, border-crossings
etc.) is also weaker than in EU-10 region

Overall objective for transport sector development is to reduce ‘economic distance’
to the main markets

A reduction in economic distance requires:
 improved physical infrastructure
 improvements in the institutional framework
 improved logistics
 multi-modal development strategy
12
Improving Transport: Priorities for Action
 Address increasing demand for road transport through continued
development of the SEETO core regional road network
 Prioritize improved management of existing infrastructure through:
 better maintenance and establishment of professional management systems
 Focus on enhancing logistic chains and clearance procedures to reduce
delays to international transport
 Revitalize the rail network through:
 rehabilitation of track to return line speeds to design speed,
 rolling stock rehabilitation rather than major upgrade in speed,
 further institutional reform.
 Improve financing sustainability through:
 Efficiency improvements and increased cost recovery
 Effective partnership with the private sector
 Ensure environmental and social sustainability:
 Improve road safety
 Reducing disbenefits (air pollution, noise etc…) through appropriate pricing
 Include environmental social cost in determining mode choice
13
Energy use in the Western Balkans is massively
inefficient and investment needs are huge…
 SEE economies are characterized by high energy intensity and low
energy efficiency:
 Conventional power generation structure, import dependent, and emerging
severe shortages;
 National market generally dominated by one state owned generator and is
subject to high losses (commercial and technical)
 Regulated tariffs cover costs but are generally low and insufficient to cover
cost of new investments
 Energy generation is dirty, heavily dependant on petroleum and coal
 Meeting development and EU2020 goals will require
 Huge investments: 20-25 billion Euro over next 10 years
 Adoption of regional investment strategies
 Addition of new generation capacity and replacement of old plants
 Development of gas and renewable resources in conjunction with revamping
of tariffs structures
14
Energy (cont’d)
 Regional integration is critical for energy security but must overcome the
following challenge
 Lack of market price penetration to final consumers and no publicly available
and trusted “reference price” for electricity
 Close relationship between incumbent generator and incumbent supplier which
impedes open, competitive market
 Difference between regulated tariffs across countries are too low to allow market
based investments in generation
 Market participants, regulators, and authorities have little or no experience of
electricity market operation
 Perceived instability of energy policy constrains private involvement
 Strategic focus of Bank’s engagement in energy in the Western Balkans is
 Development of regional energy market (transmission, rehabilitation of
generation, dam-safety)
 Promotion of energy efficiency and renewable resources
 Improvement of energy supply and infrastructure (including new generation)
through PPP approaches
 Implementation of strategies for global and local environmental improvement
15
Western Balkan water and sanitation systems generate high
water and financial losses…
 Generally high water and sanitation coverage masks weaknesses
 aging infrastructure results in high physical losses
 outdated water pumps translate into high energy costs
 continuity of service dips as low as 8 hours per day in some countries
 wastewater treatment limited with negative externalities
 Lack of operations & maintenance management & budgeting:
 accelerated depreciation of assets
 service disruptions
 Utility financial performance is weak:
 high Non-Revenue Water & low collection rates
 overstaffing
 inability to attract private sector financing
 Private sector participation
 low tariffs make concessions non-viable
 political interference undermines pricing
 weak regulatory oversight and enforcement
16
Water and Sanitation Sector: Priorities for Action
 Update Water Sector Legislation and Regulations to align with EU Directives
 Harmonize National Water and Sanitation Sector Strategies with EU Policies
 Link water supply distribution to water resource management goals
 Promote energy efficiency and water demand management
 Initiate utility reform programs
 Consolidate utilities to achieve better economies of scale
 Institute utility performance contracts against realistic benchmarks
 Set performance standards for utilities
 Support utility staff training and certification programs
 Devise subsidy programs that better target the poor:
 Wind down subsidies to poor performing utilities (perverse incentives)
 Target subsidies to the poor through social assistance programs
 Improve data collection and information systems:
 Empower regulatory oversight agencies to enforce reporting of sector data
 Standardize indicators and performance measurement
 Mainstream third-party verification of disclosed data
17
Despite tremendous potential, agricultural
productivity is relatively low…
 Agriculture represents 9-20% of GDP
 Half the population (and most of the poor) lives in rural areas
 Agriculture has enormous potential: abundant land and lowcost labor, favorable climate, and proximity to EU Market
 Productivity is low: small farms, fragmented value chains,
poor logistics, inadequate infrastructure, and low skills
 Need for shift from subsistence
producers to commercial farms
 Align policies to access
EU agriculture funds
 Prepare for climate change
18
Irrigation – Essential tool to generate income and jobs…
 Agriculture is 12-25% of countries’ GDP and 20-50% of jobs -- given major unand under-employment it is critical to maintain agricultural employment
 Climatic conditions impose use of irrigation and drainage to produce marketable
valuable crops (vegetables, fruits, grapes, oil seed crops, etc.)
 Climate will become drier and warmer  limits rain-fed agriculture, expands need
for irrigation
 Investment needs in rural infrastructure amount to €5-6 billion.
 Most irrigation systems out of operation or vandalized, many drains not
maintained. Most countries now prioritize modern agriculture including irrigation and
drainage; plus bulk water supply (reservoirs, groundwater).
 World Bank focus in Agriculture/Rural Water:
 Institutional reform: (1) establish Water User Associations, (2) ensure market
access for agriculture products, (3) realistic water fee to be paid by farmers, (4)
partnership with local govt.
 O&M costs plus on-farm equipment to be paid by farmers, but “public good”
investment in main reservoir, pump, piping, for the moment from national budget
 Combine irrigation, drainage, water storage, in river basin management
19
Improving water use and mitigating impacts of climate change…
 Climate change has contributed to increasing frequency and severity of floods
throughout the Western Balkans
 Flood protection infrastructure is inadequate and poorly maintained
 Water management will be more critical over next 2 decades as Western Balkans
become subject to more intense but less frequent rainfall
 Households and businesses need protection from the high cost of flood damage
 Key emphases of World Bank strategy:
 Provision of affordable insurance against losses from flooding and other catastrophic
risks (Western Balkan Catastrophe Risk Insurance Fund)
 Early warning system, river flow forecasting, improve hydromet data system
 Localized emergency reconstruction and relief
 Better integrated planning of structural and non-structural measures, including
recreation of floodplains
 Securing the supply of bulk water, including dams and reservoirs bulk water canals,
pumping stations
 Support river basin management in line with EU Water Framework Directive,
including analysis of trade-offs between environment, hydropower, other uses
20
II Governance:
Governments are by and large gradually becoming more
efficient, effective and transparent
21
EU Accession is Driving Clear Governance
Improvements in the Western Balkans
 Western Balkans have made clear progress in key
governance indicators in recent years
 But still lag the EU10 and Turkey in terms of
governance quality
 Rule of law and control of corruption are the weakest
aspects of governance
 Qualifying for decentralized management of IPA
funds is a key driver of PFM reform
22
The rule of law has improved, but lags EU-10,
Croatia, and Turkey
WBI Rule of Law (percentile rank)
Rule of Law (WBI Indicators, 2009)
23
Corruption in Courts is Down…
BEEPS 2005-2008: % of firms saying that bribes in dealing with the courts are frequent
24
Progress in government effectiveness is slow and uneven
WBI Government Effectiveness (percentile rank) Government effectiveness WBI Indicators, 2009
25
The Western Balkans have seen a sharp drop in
bribe incidence, but still fare worse than the EU-10
BEEPS 2005-2008: The % of firms reporting that bribes are frequent
has dropped sharply
26
Public Financial Management and Procurement Systems
are improving gradually, but reforms still needed…
 PEFA assessments show that PFM systems are now
more efficient, effective, and accountable
 PFM reforms have improved budget planning,
allocation, implementation and review
 Procurement capacity is still weak and corruption is a
concern
 EU acquis and certification requirements for
decentralized management of IPA funds (PIFC
standards) are very strong incentives
27
III. Social Spending
Challenging Balancing Act: Improving
Social Protection, Education and Health w/tight budgets
Efficiency,
Cost Recovery,
Quality,
Coverage
Targeting
Social & Financial Sustainability
Increasing Needs:
•Increased poverty &
unemployment (crisis)
•Demographic changes
•Converging to EU standards
Fiscal constraints:
• Large fiscal deficits and
increasing public sector debt
(crisis)
•Social Sectors = large share of
public spending
•Growing pensions deficits
28
Pensions: Demographic => Fiscal Crisis
Aging
population
(Doubling by 2050)
+
Shrinking
Workforce
(Fewer contributors)
Population Structure in 2005
=
Population Structure in 2050
65+
22%
65+
12%
15-64
68%
Rising Pension
Deficits
0-14
20%
15-64
62%
0-14
16%
29
How Can Countries Prepare for the
Demographic Crisis?
 Raise retirement ages, particularly for women
 Reduce early retirement exemptions
 Index pensions to inflation only
 Start preparing for elderly
 without pension rights
30
Social Safety Nets:
Increasing Needs with Tighter Budgets
 Dual challenge
 Higher unemployment + poverty => increasing needs.
 Tighter budgets given fiscal situation
 Reform priorities: Focus limited spending on the most
“needy”
 Shift away from “rights-based” benefits that largely go
to the non-poor (e.g., war veterans benefits in BiH,
Croatia, Kosovo)
 Strengthen targeting (adopting means-testing)
 Eliminate filters which cause disincentives to work and
exclude working poor
31
Education Sector Challenges
 School rationalization: demographic shifts have
left too many schools, with too many staff
 Improve quality and increase participation in
international standard testing
 Increase access to poor and minorities (e.g.Roma)
 Skills mismatch with labor market needs
 For higher education: pursue sub-regional
approach to quality assurance, links to businesses,
compliance with Bologna Process, and cost
recovery
32
Health Sector Challenges and Reforms
 Challenges
 Cost pressures due to structural trends (e.g. technology,
pharmaceuticals)—plus high rate of exemptions exacerbate mismatch
between benefits and revenues
 Health Insurance Funds lack capacity to allocate resources efficiently
 Informal Out-of-Pocket expenditures are increasing (impact on poverty)
 Reform priorities: enhance efficiency and equity in a fiscally constrained
environment
 Define Benefits Package, using evidence-based decision making in
selecting interventions
 Link Payment to Performance
 Rationalize Infrastructure shifting resources to primary care
 Strengthen Institutional Capacity
 Tackle structural Cost Pressures (e.g. revising pharmaceutical pricing and
reimbursement policies)
33
World Bank Engagement
In Western Balkans
34
The World Bank Group is Active in the Region
 Over 20 years experience in the Western Balkans
 Total Lending 1995-2010 US$7.3 billion
 Pipeline of projects FY11-14 US$2.5 billion
 Our work reinforces and supports the EU accession
process
 Significant country presence and sectoral knowledge
35
World Bank Lending to Western Balkans
Total Lending 1995-2010 – US$ 7.3 billion
Does not include IFC lending
36
World Bank Lending to Western Balkans
Pipeline of projects – FY 11-14 (US$ 2.5 billion)
203
Energy/EE/Renewable
104.3
257
Transport
215.7
Environment & Water
Agriculture
94
Social Sector
245
Budget Support
1420
Business Environment
/Innovation
Does not include IFC lending
37
Analytical and Advisory Assistance (AAA)
 AAA , including non-lending technical assistance (NLTA), is central to World Bank
program;
 AAA services to Western Balkans average USD 3-5 million annually;
US$46 million provided since FY2000;
US$8,451
US$9,606
US$6,636
US$1,693
US$6,898
US$5,753
US$6,743
Albania
Bosnia and Herzegovina
Kosovo
FYR Macedonia
Montenegro
Serbia
Regional studies
38
Does not include IFC AAA
Country Specific and Regional AAA
Recently Completed and Underway
ALBANIA: Country Governance and Anticorruption, Accountability for Better Governance, Public
Expenditure and Financial Accountability, Social Protection TA, Country Economic Memorandum
(CEM)
BOSNIA AND HERZEGOVINA: Pension Technical Assistance, Report on the Observance of
Standards and Codes on Fiscal Transparency, Public Expenditure Review (PER)
KOSOVO: Country Economic Memorandum Follow up; Transport ; Comprehensive Water Sector
Assessment; Environment Policy Note, Transport Sector Review
FYR MACEDONIA: Comprehensive Water Sector Assessment, Higher Education, Green Growth and
Climate Change, Science/Technology TA, Labor TA, Energy Policy Note
MONTENEGRO: Public Expenditure and Institutional Review Follow up, Transport Sector Work,
Public-Private Partnerships for Electricity
SERBIA: Pension TA, Innovation Promotion, Capital Markets, CEM, Education, Policy Notes on
Growth
REGIONAL: REPARIS (The Road to Europe: Program of Accounting Reform and Institutional
Strengthening); Programmatic Financial Sector Development; Study on Science, R&D and Innovation;
Public Financial Management; Programmatic Poverty Assessment and Gender Monitoring; Labor
market, Education Skills and Social (MILES), Energy Efficiency and Renewables.
39