PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE November 12, 2015 Report No.: 100930 Operation Name First Fiscal Consolidation, Sustainable Energy, and Competitiveness Programmatic Development Policy Financing Region Middle East and North Africa Country Arab Republic of Egypt Sector General energy sector (50%); Macro-Fiscal Management (30%); Trade and Competitiveness (20%) Operation ID P157704 Lending Instrument Development Policy Lending Borrower(s) Arab Republic of Egypt Implementing Agency Ministry of International Cooperation Date PID Prepared November 12, 2015 Estimated Date of Appraisal November 13, 2015 Estimated Date of Board December 17, 2015 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Country and Sector Background Egypt, the largest country in the MENA region with a population of 89 million, and the fourth largest economy with a GDP of US$320 billion in 2015, is at an inflexion point within a region laden with instability and conflict. The 2011 Arab Spring - generated by the long-standing weaknesses in public service delivery, incapacity of growth to produce positive social outcomes, and weak competition and transparency - ushered in a new era. However, the economic dividends of post-2011 have not fully materialized in Egypt, with economic growth picking up only in fiscal year 2015. Government has taken important initial steps in implementing key reforms that, if sustained, are likely to put the economy on a growth track and increase the chances that future growth will be more inclusive than in the past. Operation Objectives The proposed operation is built around three pillars, which are also the Program Development Objectives (PDOs) of the operation: (1) advance fiscal consolidation through higher revenue collection, greater moderation of the wage bill growth, and stronger debt management; (2) ensure sustainable energy supply through private sector engagement; and (3) enhance the business environment through investment laws, industrial license requirements as well as enhancing competition. Rationale for Bank involvement 1 The proposed operation builds on the analysis set out in Egypt Systematic Country Diagnostic and is also aligned with the new Egypt Country Partnership Framework (2015-2019), which along with the MENA strategy, seek to achieve the twin goals of eradicating extreme poverty and boosting shared prosperity in a sustainable manner. Although there are important risks, including from the macroeconomic and reform implementation perspectives, the proposed DPF series will play a key strategic role in deepening Bank support for Egypt’s much needed structural reforms. The Bank’s engagement will also provide global lessons and experience relevant for reform sequencing and implementation. Tentative financing Source (US$, millions) Borrower 0 International Bank for Reconstruction and Development 1,000 Total 1,000 Institutional and Implementation Arrangements The Ministry of International Cooperation will be the main coordinating agency for monitoring and evaluation among the five other participating ministries. The Prior Actions detailed in this operation are the prime responsibility of five ministries: Ministry of Finance; Ministry of Electricity and Renewable Energy; Ministry of Petroleum; Ministry of Industry and Ministry of Trade and Industry. The inter-ministerial working group created for the DPF will remain functional during the course of the three year Programmatic DPF framework where the Ministry of International Cooperation will be the coordinator with other ministries on monitoring of the results indicators, which are based on routinely published sector indicators. Technical Assistance will be provided to Ministry of International Cooperation for creation of a Management Information System to monitor quarterly data collection from all relevant ministries for monitoring of indicators and outcomes of the Programmatic Reforms. The program outcomes will be monitored through the measurement of the progress toward the achievement of results indicators included in the policy and results matrix. This measurement seeks to assess progress toward the implementation of the policy and institutional measures supported by the proposed DPF series and will be evaluated following the disbursement of the DPF1. The Ministry of International Cooperation will have the responsibility of presenting the information related to the reform implementation and progress made towards results on time and in a format satisfactory to the Bank. Communities and individuals who believe they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a Bank supported DPF may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or to the Bank’s Grievance Redress Service (GRS). Risks and Risk Mitigation The overall risk rating of this operation is high. The major risks that could have a substantial impact on the operation’s ability to achieve its development objective include: (a) macroeconomic challenges associated with high fiscal deficit and low levels of foreign exchange 2 reserves; (b) political and governance challenges; (c) challenges on sector strategies; and (d) weak institutional and implementation capacity. These risks, if materialized, could singularly or jointly impact the Government’s willingness and ability to implement the reforms or make the outcome of the development agenda less successful. However, the risk of not engaging outweighs the program risks: The region is experiencing an unprecedented turmoil with ongoing conflicts in Egypt’s neighborhood. Any risk for instability in Egypt has enormous implications for the region, Europe and the wider global community. Egypt has taken significant steps towards sustainable private sector led growth that is focused on job creation, and the World Bank Group has a unique opportunity to realign its relationship and facilitate the continued implementation of Egypt’s reform program over the medium term. Poverty and Social Impacts and Environment Aspects The GoE is undertaking a number of deep and structural reforms. The program of reforms supported by the DPF series are areas identified in the World Bank Group’s Systematic Country Diagnostic (SCD) as being important for poverty reduction and shared prosperity in Egypt. For instance, better governance in the power and gas sectors can help improve delivery of these services, potentially benefitting all customers. The poverty impact of the electricity tariff reform is marginal due to the lowest three domestic slabs having been exempt from tariff adjustment and electricity representing only 1.8 percent of household expenditures. Fiscal transparency measures such as citizen budgets can educate the public about the government’s activities and help build public support for difficult policy reforms provided there is a strong outreach to citizens to raise awareness about such measures. The GoE has committed to reallocating a share of the resources used for energy subsidies to human development sectors, and this can help households raise their welfare in the long term through better education and health outcomes. Overall, the realization of the long run benefits of these reforms depends on how well they are implemented and how the GoE manages the associated distributional and social consequences in the short term. The World Bank assessed whether specific country policies supported by the DPL are likely to have significant effects on the country’s environment, forests, and other natural resources. The assessment concluded that the proposed DPL operation is expected to result in overall positive effects on Egypt’s environment and natural resources. Pillar 2 of this proposed operation, which pertains to enhancing sustainable energy supply, comprises a number of policy interventions that are expected to bring about significant changes in the country’s energy profile, in particular an increase in fuel switching to natural gas in electricity generation and by the production sectors of Egypt. Other planned changes include the shift toward more renewables in the electricity generation mix. Furthermore, it is anticipated that the planned gradual increase in electricity tariffs will lead to lower consumption through rationalization and higher efficiency of use. These interventions will clearly result in environmental benefits that are to be realized through the decrease in greenhouse gas (GHG) emissions. Contact point World Bank Contact: Ashish Khanna Title: Lead Energy Specialist 3 Tel: +20-2 2574-1670/1516 Email: akhanna2@worldbank.org Location: Cairo, Egypt (IBRD) Contact: Ahmed Kouchouk Title: Senior Economist Tel: +20-2 2574-1670/1517 Email: akouchouk@worldbank.org Location: Cairo, Egypt (IBRD) Borrower Contact: Dr. Sahar Nasr Title: Minister of International Cooperation Email: snasr@moic.gov.eg 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 4