PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE January 15, 2014 Report No.: AB7494 (The report # is automatically generated by IDU and should not be changed) Operation Name First Fiscal Effectiveness and Growth Development Policy Loan Region EUROPE AND CENTRAL ASIA Country Romania Sector Central government administration (70%);Capital markets (15%);Public administration- Industry and trade (15%) Operation ID P148957 Lending Instrument Development Policy Lending Borrower(s) MINISTRY OF PUBLIC FINANCE Ministry of Public Finance Romania Implementing Agency Ministry of Public Finance Romania Date PID Prepared January 15, 2014 Estimated Date of Appraisal March 20, 2014 Estimated Date of Board May 6, 2014 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Other Decision N/A Key development issues and rationale for Bank involvement The Key Development objective of the proposed DPL series is to support Romania’s goal of raising its growth potential by improving fiscal effectiveness and enhancing the functioning of key markets. This objective is central for the Government since, despite able macroeconomic management and ongoing reform efforts, recovery has been slow and the base for growth narrowed Proposed Objective(s) The proposed DPL series will more specifically aim at: (i) strengthening fiscal management and SOE performance; and (ii) improving the functioning of property, energy, and capital markets. Preliminary Description The proposed Fiscal Effectiveness and Growth Development Policy Loan (FEG- DPL) is the first of two DPLs to Romania. The FEG-DPL of €500 million (about US$700 million equivalent) supports measures to heighten Romania’s growth potential. After the 2008 global financial crisis, sound macroeconomic policies helped Romania restore stability and modest growth but its medium term growth prospects are compromised by constraints on productivity growth that are associated with the ineffectiveness of public interventions and the poor functioning of markets supporting private sector activities. The proposed loans support policy measures to strengthen fiscal effectiveness by improving public debt management, the quality of public spending, and SOE performance, as well as measures to improve the functioning of property, energy, and capital markets that are key to private sector operations. The loans, which build upon previous policy lending to Romania, are at the core of the proposed Country Partnership Strategy (CPS) for 2014–18. The Romanian government is working to increase the effectiveness of fiscal policy as part of the next stage of fiscal reforms. Although fiscal adjustment in recent years has been substantial, structural-fiscal reforms have advanced slowly, to the detriment of private economic activity, entrepreneurship, and investment. The government is therefore moving to accelerate second-generation fiscal reforms for improving the efficiency, delivery, and targeting of public programs. Better management of debt and other aspects of public finances would promote continued fiscal adjustment; more effective social spending would better target the poor. Though Romania’s private sector has developed substantially in recent years, key markets supporting it are not yet functioning efficiently. Because the rights to less than 15 percent of total estimated number of properties are registered in the Romanian cadastral electronic records, the functioning of both urban and rural property markets and collateral based credit markets is severely limited by the lack of reliable information. Also, in the stock market, capitalization of €8.5 billion, daily average turnover at €5.2 million, and listings for only 80 companies are all far below other new EU countries. This poses constraints for both corporate finance and credit recovery. In fact, stock market capitalization has declined in recent years despite growth of the economy, the activities of private pension funds, and recent issuance of shares by state-owned energy companies. Finally, incomplete liberalization of electricity and gas markets constrains energy efficiency, investments, and exports, and the enabling environment for businesses relying on electricity and gas supply. In response, in 2011 the government re- launched reforms to ensure compliance with EU energy standards and expects to fully liberalize nonresidential markets by the end of 2015. Poverty and Social Impacts (PSI) and Environmental Aspects The overall poverty, social, and gender impacts of the policy measures supported by the FEG-DPL are expected to be positive or neutral. While a large share of the DPL-supported policy measures are institutional and their effect on poverty and shared prosperity difficult to quantify, the PSI analysis that is to be completed by Appraisal plan to focus on the three areas expected to have the most direct effects on poverty and social prosperity: (1) The consolidation of social assistance programs under Pillar A, which is expected to protect the living standards of the poor, especially important given the government’s commitment to liberalize energy prices. (2) The liberalization of energy markets under Pillar B, which is expected to be neutral as it focuses only on non-residential consumers (3) The SOE reforms under Pillar A, which is expected to be neutral or slightly negative since some households in the bottom 40 percent could be employed by SOEs and might not be able to easily move to alternative employment. At the same time this measure has the potential to improve service delivery. While other policy actions under discussion might not have a direct impact on the bottom 40 percent of the population, the introduction of results-informed budgets and prioritization frameworks for public investments has the potential to improve service delivery particularly to this target group. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 700 Borrower/Recipient IBRD Others (specifiy) Total Contact point World Bank Contact: Pedro L. Rodriguez Title: Lead Economist Tel: (202) 473-1770 Fax: Email: Prodriguez1@worldbank.org Borrower Contact: Boni Cucu Title: General Director, International Financial Relations General Directorate Tel: +40 21 319 9854 Email: Boni.cucu@mfinante.ro For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop