Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 104182-YF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EURO 69 MILLION (US $75 MILLION EQUIVALENT) TO THE REPUBLIC OF SERBIA FOR A MODERNIZATION AND OPTIMIZATION OF PUBLIC ADMINISTRATION PROGRAM March 28, 2016 Governance Global Practice Europe and Central Asia Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.           CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 29, 2016) RSD 113.44=US$ 1 US$ 1= €0.918 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AC Anti-Corruption ACA Anti-Corruption Commission ACG Anti-Corruption Guidelines ACS Anti-Corruption Strategy APML Administration for the Prevention Money Laundering BES Budget Execution System COA Chart of Accounts CTA Consolidated Treasury Account DfiD U.K. Department for International Development CAS Country Assessment Strategy CHU Central Harmonization Unit CPF Country Partnership Framework CPS Country Partnership Strategy CTAS Consolidated Treasury Account System DBB Direct Budget Beneficiaries DLI Disbursement Linked Indicator ESSA Environment and Social Safeguards Assessment EU European Union F&C Fraud and Corruption FM Financial Management FMC Financial Management and Control FMIS Financial Management Information System GDP Gross Domestic Product GoS Government of Serbia GRS Grievance Redress Service HRM Human Resources Management IA Internal Audit IBB Indirect Budget Beneficiary ICT Information and Communication Technology IFC International Finance Corporation IMF International Monetary Fund INT Institutional Integrity Vice-Presidency IPSAS International Public Sector Accounting Standards ii         M&E Monitoring and Evaluation MoF Ministry of Finance MPALSG Ministry of Public Administration and Local Self-Government MTEF Medium Term Expenditure Framework NES National Employment Service OECD Organization for Economic Cooperation and Development PAP Public Administration Principles PAR Public Administration Reform PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFMRP Public Financial Management Reform Program PforR Program-for-Results PIFC Public Internal Financial Control PPDS Public Procurement Development Strategy PPL Public Procurement Law PPO Public Procurement Office PPS Public Policy Secretariat RC Republic Commission RINO Registry of Settlements of Pecuniary Commitments (Rokovi Izmirenja Novcanih Obaveza) SAI State Audit Institution SMS Social Management System SOE State owned Enterprise TA Treasury Administration TF Trust Fund TML Treasury Main Ledger TSA Treasury Single Account USAID United States Agency for International Development UZZPRO Administration for Joint Services of the Republic Bodies (Uprava Za Zajednicke Poslove Repulickih Organa) WB World Bank Regional Vice President: Cyril E. Muller Global Practice Vice President: Jan Walliser Senior Global Practice Director: Deborah L. Wetzel Country Director: Ellen A. Goldstein Practice Manager: Adrian Fozzard Task Team Leader(s): Raymond Muhula/Srdjan Svircev iii         REPUBLIC OF SERBIA MODERNIZATION AND OPTIMIZATION OF PUBLIC ADMINISTRATION PROGRAM Table of Contents Page I.  STRATEGIC CONTEXT ...................................................................................................... 1  A.  Country Context.............................................................................................................1  B.  Sectoral and Institutional Context .................................................................................2  C.  Country Partnership Framework and Rationale for Use of Instrument .........................5  II.  PROGRAM DESCRIPTION ................................................................................................. 7  A.  Government Program.....................................................................................................7  B.  Program Development Objective and Key Results .......................................................7  C.  Program Scope ...............................................................................................................8  D.  Disbursement Linked Indicators ....................................................................................9  E.  Key Capacity Building and Systems Strengthening Activities ...................................10  III. PROGRAM IMPLEMENTATION .................................................................................... 10  A.  Institutional and Implementation Arrangements .........................................................10  B.  Results Monitoring and Evaluation .............................................................................11  C.  Disbursement Arrangements .......................................................................................11  IV. ASSESSMENT SUMMARY ................................................................................................ 13  A.  Technical......................................................................................................................13  B.  Fiduciary ......................................................................................................................14  C.  Environmental and Social Effects ...............................................................................16  D.  Risk Assessment ..........................................................................................................18  E.  Program Action Plan....................................................................................................19  Annex 1: Detailed Program Description ....................................................................................... 20  Annex 2: Results Framework........................................................................................................ 29  Annex 3: Disbursement Linked Indicators ................................................................................... 34  Annex 4: Summary Technical Assessment.................................................................................. 45  Annex 5: Summary Program Fiduciary Assessment .................................................................... 74  iv         Annex 6: Summary Environmental and Social Assessment ........................................................ 92  Annex 7: Systemic Operations Risk Rating Tool (SORT) ........................................................... 98  Annex 8: Program Action Plan ..................................................................................................... 99  Annex 9: Implementation Support Plan ..................................................................................... 103    List of Tables Table 1: Program Financing.......................................................................................................................... 9 Table 2: Disbursement-Linked Indicators (DLIs) Verification Protocol .................................................... 12 Table 3: Program Expenditure Framework (US$ Million) ......................................................................... 21 Table 4: Disbursement-Linked Indicator Matrix ........................................................................................ 34 Table 5: DLI Verification Protocol ............................................................................................................. 36 Table 6: World Bank Disbursement Table ............................................................................................... 41 Table 7: Summary of 2015 PEFA Assessment Ratings ............................................................................. 54 Table 8: Lessons Applied During Program Design ................................................................................... 60 Table 9: Program Expenditure Framework (US$) ..................................................................................... 62 Table 10: Structure of Program Expenditure (Percent)............................................................................... 62 Table 11: Structure of Program Financing .................................................................................................. 63 Table 12: Program Expenditure Framework By Institution (USD) ............................................................ 63 Table 13: PAR Strategy Institutional and Coordination Arrangements...................................................... 64 Table 14: Summary Economic Analysis (USD) ........................................................................................ 66 Table 15: Result Area 1, Scenario 1(USD) Wage bill reduces by 1% ....................................................... 67 Table 16: Result Area 1, Scenario 2 (USD) Wage Bill Reduced By 3 % .................................................. 67 Table 17: Economic Analysis Result Area 2 (USD) .................................................................................. 68 Table 18: Economic Analysis Result Area 3 (USD) .................................................................................. 70 Table 19: Summary of Technical Risks And Mitigation Measures ........................................................... 73 Table 20: Summary of Key Fiduciary Risks and Mitigation Measures ...................................................... 80 Table 21: Fiduciary Risks and Action Plan ................................................................................................ 89 Table 22: International Donor’s Support to Public Administration Reforms ........................................... 105     v         PAD DATA SHEET SERBIA Modernization and Optimization of Public Administration Program (P155172) PROGRAM APPRAISAL DOCUMENT Europe and Central Asia Governance Global Practice Report No. 104182-YF Basic Information Date: March 28, 2016 Sectors: Gen. public administration (100%) Country Director: Ellen A. Goldstein Themes: Human Resource Management; Public Financial Management; Procurement Practice Manager/Senior Global Practice Director: Management Adrian Fozzard/ Deborah L. Wetzel Program ID: P155172 Team Leaders: Raymond Muhula/Srdjan Svircev Program Implementation Period: Start Sep. 1, 2016 End Date: October 30, 2019 Expected Financing Effectiveness Date: Date: Sep. 1, 2016 Expected Financing Closing Date: February 29, 2020 Program Financing Data (US$ Million) [ X] Loan [ ] Grant [ ] Other [ ] Credit Total Program Cost: 242 Total Bank Financing: 75 Total Co-financing: - Financing Gap: - Financing Source Amount BORROWER/RECIPIENT 167.0 IBRD 75.0 Total 242.0     vi         . Borrower: Republic of Serbia Responsible Agency: Ministry of Finance Contact: Mr. Dusan Vujovic Title: Minister Telephone No.: +381-11-3613245 Email: Dusan.Vujovic@mof.gov.rs Responsible Agency: Ministry of Public Administration and Local Self-Government Contact: Ms. Kori Udovicki Title: Minister Telephone No.:+381-11-3617-717 Email: Kudovicki@mduls.gov.rs Expected Disbursements (in USD Million) Fiscal Year 2017 2018 2019 2020 Annual 29.75 20.00 20.25 5.00 Cumulative 29.75 49.75 70.00 75.00 . Program Development Objective(s): To improve efficiency in public sector employment and finances. Compliance Policy Does the program depart from the CAS in content or in other Yes [ ] No [X] significant respects? . Does the program require any waivers of Bank policies applicable to Yes [ ] No [X] Program-for-Results operations? Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the program meet the Regional criteria for readiness for Yes [X] No [ ] implementation? Overall Risk Rating: HIGH Legal Covenants Name Recurrent Due Date Frequency Social Safeguards Date of Effectiveness Recurrent The Borrower shall ensure that the Program is carried out in accordance with the ESSA, in a manner acceptable to the Bank. The Borrower shall not assign, amend, abrogate, or waive the ESSA, or any provisions thereof, without prior approval of the Bank.     vii         Team Composition Bank Staff Name Title Specialization Unit Raymond Muhula Sr. Public Sector Specialist TTL GGO15 Srdjan Svircev Public Sector Specialist Co- TTL GGO15 Anders Jensen Sr. Monitoring and Evaluation M&E GENDR Specialist Aleksandar Crnomarkovic Sr. Financial Management Financial Management GGO21 Specialist Kashmira Daruwalla Sr. Procurement Specialist Procurement GGO03 Jose Janeiro Sr. Finance Officer Disbursement WFALA Ignacio Jauregui Sr. Counsel Counsel LEGLE Jelena Lukic Social Development Specialist Social Safeguards GSURR Rustam Arstanov Environmental Specialist Environmental Safeguards GSU03 Hannah Kim Young Professional Economist GGODR Hermina Vukovic Program Assistant Program Assistant ECCUY8 Kornel Drazilov Program Assistant Program Assistant ECCUY8 Non-Bank Staff Name Title City William Dillinger Consultant Washington, DC Nihad Nikas Consultant Belgrade Helene Pfeil Consultant Vienna Milos Markovic Consultant Belgrade viii   I. STRATEGIC CONTEXT  A. Country Context 1. The Republic of Serbia is an upper middle income country with a Gross National Income per capita of US$ 5,820 and a population of approximately seven million. Serbia emerged from political realignments that followed the breakup of the former Yugoslavia in 1991. A political union with Montenegro lasted until 2006 when each country became a sovereign state, following a referendum in favor of Montenegro’s independence. During the final years of the union and the first few years of the new Serbian state (2001-2008), real Gross Domestic Product (GDP) averaged 5 percent annually and poverty headcount declined from 14 percent in 2002 to 7 percent in 2007. However, the establishment of an independent Serbian state marked the beginning of a period of political uncertainty characterized by weak and fragmented political coalitions. Lack of political consensus hindered efforts to focus on critical economic and public sector reforms. 2. In recent years, Serbia has faced significant economic challenges. Since 2008, economic growth has stalled, reversing the progress made in earlier years. Average real growth dropped to zero and fiscal deficits averaged 6 percent of GDP between 2009 and 2014. As a result, Serbia’s public debt more than doubled from 34 percent of GDP in 2008 to 71 percent at the end of 2014. Subsidies and guarantees to public utilities, high levels of public sector employment, inefficient human resource management and weaknesses in financial management have all contributed to Serbia’s fiscal challenges. With the economy in recession, the vulnerable poverty rate increased from 6 percent in 2008 to 9 percent in 2010, the latest year for which comparable data are available. Unemployment increased and by 2012 had reached a high of 24 percent. 3. In 2014 the Government of Serbia adopted an ambitious fiscal consolidation and structural reform program. The program is supported by a 36-month Standby Arrangement with the International Monetary Fund (IMF), approved in 2014. In the short term, the program focuses on the control of aggregate wage and pension expenditures, improvements in tax administration, and reductions in subsidies to state owned enterprises. The Government has also begun to address longer term structural problems in the administration of the public sector, focusing on public sector employment and restructuring to create opportunities for efficiency. As a result of these measures, total nominal government expenditures declined by 1.7 percent as a result of major savings from wage and pension reforms (down by 11.4 and 3.5percent, respectively) in 2014. The general government deficit over the first nine months of 2015 was 1.3 percent of full-year GDP, down from 3.9 percent in the same period of 2014. At the same time, the economy is starting to recover. Serbia moved out of recession in Q2 2015 with growth at 1 percent and is expected to grow by 2 percent in Q3. 4. Although the Government remains committed to implementation of initiated reforms, there are significant risks to the macroeconomic framework. These risks include: slower-than-expected economic recovery in the European Union (EU); adverse shocks to capital inflows, relating to the normalization of US interest rates or negative spillovers from other emerging economies; a deterioration of the financial situation of foreign parent banks, and implementation of the fiscal consolidation program. To mitigate these risks, the Government is working closely with the IMF and Bank to ensure that key fiscal reforms in public administration, SOEs and public utilities stay on track and generate the required fiscal savings. 1          B. Sectoral and Institutional Context 5. The Government of Serbia has launched an ambitious program of public sector reforms that seek to enhance efficiency in the public sector. The Government’s overall framework for reforming public sector administration is set out in a (PAR Strategy adopted in 2014. Together with the Action Plan for the Implementation of the Public Sector Reform Strategy (2015-2017), adopted in 2015, the strategy sets out the immediate priorities of the Government of Serbia with respect to key reforms in the public administration. Both the PAR Strategy and Action Plan cover five major areas of reform: improvement of the organization and functioning of the public administration systems; strengthening of human resource management; improvement of public finance and public procurement management; increased transparency and enhancement of ethical standards and strengthening the Government’s supervision capacities. The PAR Strategy complements and incorporates elements of other strategic planning instruments, notably the Procurement Strategy (2014), the Public Financial Management Reform Program (2015) and the Action Plan for Open Government Partnership (2014). The Bank’s engagement supports these reforms in the core systems of human resource management, public financial management and public procurement. These reforms are addressed in turn below with a focus on human resource management, in many respects the most challenging part of the reform agenda. 6. Serbia faces significant challenges in human resource management and related expenditure in the context of shrinking fiscal space. Serbia’s public sector wage bill increased from 9 percent of GDP in 2002 peaking at approximately 11 percent in 2008. Across- the-board staffing reductions and hiring freezes have helped contain the wage bill at an average of 11 percent of GDP from 2009 to 2014. In recent years, the Government has scaled down the formula tying wage adjustments to inflation; imposed a solidarity tax (in effect, a wage cut) on public employees earning more than 60,000 dinars and imposed a ceiling on individual public salaries. More recently, the Government imposed an additional across the board 10 percent pay cut (as of November 2014) and modified the budget law to suspend wage indexation altogether in years in which the share of general Government salaries (excluding severance pay) is expected to exceed 7 percent of GDP. The Government has also taken measures to reduce the number of staff, imposing a hiring freeze and a cap on replacements (for each 5 employees who leave, only 1 may be replaced) and sought to reduce overall Government operational costs by 5 percent each year for three successive years. 7. In order to make further progress in containing the overall wage bill growth, the Government will need to undertake fundamental reforms in the human resource management system. There is evidence of overstaffing in the health, judiciary, and police and to some extent, education sectors. There are also underlying problems in the structure of compensation. At present, the pay and grading system includes 2,200 job titles, 71 different elements of remuneration, 5 different base salaries, 900 different job coefficients, 19 laws and a plethora of by-laws that regulate salary levels. Compensation rates are above market levels in low skilled positions and below market levels for high level positions. The complex and arbitrary nature of the compensation system undermines staff morale and renders the system vulnerable to ad hoc pressure from public sector unions. 8. Deficiencies in the human resource information systems have undermined the ability of the Government to control employment numbers. Recent efforts by the Government have led to the establishment of the first comprehensive registry of public 2         employees since 2003. The current registry however, has several shortcomings. Data on the total number of employees is inaccurate because participation by individual ministries is voluntary. The lack of strong information systems at the sector level to monitor staffing and employment data has undermined the ability of the Government to control the wage-bill in various sectors: the Ministry of Education, for instance, does not have accurate data on the number of teachers. There is no mechanism to link the various systems operating at the sector level ministries with the large public administration payroll systems to monitor staff numbers, increase in staff compliment over time, and total employment cost. This makes it difficult for the Government to control staffing and wage bill management across the public sector. While the new Law on Registry of all Employees, Elected, Nominated and Appointed and Engaged Persons within Public Funds Beneficiaries is helpful, effective implementation requires a comprehensive Human Resource Management Information System both at the sector level and at the central level. 9. The Government intends to revise the regulatory framework for public sector employment to enable further reforms. The National Assembly has passed the Law on Ceilings on the Number of Employees; Law on Registry of all Employees, Elected, Nominated and Appointed and Engaged Persons within Public Funds Beneficiaries and the Law on Public Sector Employees Salary System. Together, these laws and their associated by-laws will strengthen the legal and policy framework for managing the wage-bill and employment practices across the public sector. 10. The Government will restructure the pay and grading system based on a comprehensive job evaluation and grading exercise. The new structure will cover all public service employees including those in education, health, social protection, culture, tourism, and sport (local Government, police, defense, and members of parliament, judiciary, and state agencies will have their own pay scheme). Under the proposal, all positions will be graded according to common criteria. Pay scales will be established for each grade, reflecting current market conditions and the Government’s fiscal constraints. Once this process is completed, new regulations governing the new pay and grading will be issued and the new pay system will be implemented. 11. Finally, the Government intends to rationalize staffing levels in a structured manner. To begin this process, the Government is strengthening its registry of public employment by making it mandatory rather than voluntary and linking it to the payroll system to ensure that staff who are not recorded in the registry are not paid. At the same time, the Government will launch a targeted staff reduction program. This right-sizing program seeks to improve the organization of the public sector, assign competencies among tiers of Government and organize work processes within institutions. Ministries are expected to simplify administrative procedures, eliminate redundant tasks and eliminate or restructure departments with duplicate functions, thereby reducing the need for staff. To implement staffing reductions, the Government has begun undertaking specific reviews of staffing needs in particular sectors and agencies. Following consultations with stakeholders, a retrenchment plan will be prepared and submitted to the cabinet. This will then be implemented through a combination of attrition, reassignments and dismissals. The Government will offer severance payments to staff occupying positions that are found to be redundant. These positions will then be eliminated. 12. While the Government has made progress in strengthening public financial management, the 2015 Public Expenditure and Financial Accountability (PEFA) assessment identified important weaknesses in the control framework and its coverage. 3         The PEFA assessment period 2011-2013 was dominated by the aftermath of the global economic recession which affected macro-fiscal performances and posed particular challenges for public financial management. Notwithstanding these challenges, the PEFA assessment observed improvements in relation to the previous assessment in 2010 in the legislative framework for the budget process, budget classification, multi-year fiscal planning, procurement and external audit. The assessment also noted significant weaknesses in the composition of expenditure out-turn compared with originally approved budget, expenditure arrears, oversight of fiscal risk, predictability in the availability of funds, application of public sector accounting standards and legislative scrutiny of annual budget law and final accounts. Building on the PEFA Assessment, the Ministry of Finance (MOF) has prepared a Public Financial Management Reform Program, aligned with the broader Public Administration Reforms, which sets priority actions in the short, medium and long term. 13. The immediate priority of the Government’s PFM reforms is to strengthen expenditure control and prevent the accumulation of expenditure arrears. Accumulation of expenditure arrears emerged as a significant problem during the economic crisis. In June 2013, the Financial Management Information System (FMIS) system reported arrears amounting to RSD 84,942 million (US$ 1,003 million) equivalent to six percent of total expenditures in that year. During 2013 the Government negotiated payment plans and conversion to public debt, reducing outstanding payment arrears to RSD 8.26 billion (about US$ 74 million). Action was also taken to curb accumulation of arrears, including a Law on Deadlines for Payments in Commercial Transactions which mandates a timetable for the payment of arrears and fines for Government officials who fail to pay on time. An electronic Registry of Settlements of Pecuniary Commitments (RINO) was established to monitor arrears. The RINO data indicates that payment arrears amounted to RSD 9 billion RSD (US$79 million) at the year-end 2015. However, RINO data should be interpreted with caution because the data submitted by budget beneficiaries is still not verified. 14. Further reforms seek to address the systemic problems that have weakened expenditure controls and allow arrears to accumulate. The Government intends to strengthen the MoF budget department, increasing its staff’s ability to prepare realistic forward estimates of revenues and expenditures, monitor budget execution and improve cash planning. Budget entities will be required to submit quarterly reports on arrears and strengthen internal controls over contractual commitments to ensure comprehensive reporting. The MoF will also systematically roll out the FMIS to cover Indirect Budget Beneficiaries (IBB) who are responsible for the bulk of the stock of expenditure arrears. Courts will be integrated into the FMIS by January 1, 2016; prisons and cultural institutions by January 2017, and social welfare centers by January 2018. This will leave only education institutions outside the FMIS in the beginning of 2018. Integrating these institutions into the FMIS will take more time, due to their large number. 15. The Public Procurement Law of 2013 and its amendment in 2015 have significantly strengthened the legal framework for public procurement in Serbia. The PPL provides for the decentralization of procurement activity to budget entities whilst streamlining procedures, creating a single register of bidders and reducing the scope for the arbitrary rejection of bids. It ensures transparency in the public procurement processes and requires the publication of a wide range of procurement related information through a Public Procurement Portal. The PPL also sets out the competences of the two core agencies responsible for public procurement systems. 4         The PPO participates in the drafting of procurement regulations, manages the Public Procurement Portal, prepares reports on public procurements, and provides technical assistance to contracting authorities and bidders. The Republic Commission for the Protection of Rights in Public Procurement Procedures (RC) is an autonomous and independent body of the Republic of Serbia which provides for grievance redress and tackles fraud and corruption in public procurement. The Commission reports directly to Parliament. 16. While a robust legal framework for public procurement is in place, capacity constraints have undermined implementation. The PPO currently lacks the capacity to fully discharge its functions and RC lacks the capacity to handle appeals in a timely manner. Procurement is largely decentralized with about 4,900 registered contracting authorities, of which about 166 are central government entities. Contracting authorities are often unfamiliar with procurement procedures. This has caused delays – it now takes about 120 days to complete a procurement procedure – and has also led to the purchase of inferior goods and services, as tenders are inadequately specified and contracts are awarded solely on the basis of price. 17. To address these problems, the Government’s Procurement Reform Strategy of 2013 identifies priority reforms in three areas: capacity building; process improvements; and performance measurement. The procurement capacity building program has sought to ensure that individual contracting authorities have adequately qualified procurement staff by implementing a large scale training and certification process for public procurement officers. The Government will extend its capacity building to encompass potential bidders in public procurement. Improvements in procurement processes seek to gradually expand the use of centralized public procurement at the central and local levels through framework contracts. This will lower costs through bulk purchasing. Special attention will be paid to minimizing the adverse impact of centralized procurement on small and medium-sized enterprises. PPO will prepare model tender dossiers and reach out to Contracting Authorities to bring more awareness. Finally, the Government intends to develop a systematic approach for measuring procurement performance to inform ongoing policy reforms and its operational support. C. Country Partnership Framework and Rationale for Use of Instrument 18. The proposed World Bank support to Serbia’s Action Plan for the Implementation of Public Administration Reform is aligned with the key themes of the Country Partnership Framework (CPF) for the period FY2016-20.1 The CPF states that systemic constraints in public sector management have to be addressed as a prerequisite for successful implementation of the Government’s broader reform agenda. The proposed Program is linked to the first of the CPF’s two focus areas, namely: Economic Governance and the Role of the State, specifically, its objective 1b: More Effective Public Administration & Service Delivery. 19. The Program advances the World Bank’s twin goals. Serbia’s Bottom 40 rely heavily on social transfers. Improvements in the efficiency of government spending will create fiscal space for social benefits to the Bottom 40. Improvements in human resource management,                                                                1 World Bank Group (2015). Republic of Serbia: Country Partnership Framework, 2016-2020 (Report No. 100464-YF) discussed by the Executive Directors on June 23, 2015. 5         public expenditure management and public procurement will help public agencies better serve citizens including the poor. 20. The Program is timely, building on the Government’s strong reform momentum and broad support from the international community. In January 2014, the 1st Intergovernmental Conference signaled the formal start of Serbia's EU accession negotiations. This has provided added impetus for reform, with the Government announcing the goal of fulfilling EU membership criteria by 2019. Negotiations opened in December 2015 with Chapter 32 on “Financial Control”, addressing some of the public financial management issues supported by this Program. Public Administration Reforms also features prominently in the structural reforms supported by the IMF under its Stand-By Arrangement. The IMF successfully completed the third review in December 2015, stressing the need for the Government to implement the next phase of public sector rightsizing and reforms in public expenditure and human resource management. The Bank has earned the confidence of the Government and these development partners as a leader in managing both the analytical and operational aspects supporting these public sector reforms. 21. The Program complements other Bank work currently underway and under preparation. The Program is informed by recent Bank analysis, notably the Public Finance Review (PFR), the PEFA assessment and the Systematic Country Diagnostic (SCD). The SCD identified Governance as one of the key priority areas. The PFR made a strong case for reforming the wage and general HR management system in the public sector. The PEFA assessment on the other hand highlighted weaknesses related to commitment control and management of arrears. The Program complements the efficiency goals of the Public Expenditure and Utilities (PEPU) Development Policy Operation currently under preparation. The PEPU operation dedicates one of its three pillars to activities related to reforms of human resource management and financial management. It is expected that some of the policy related actions proposed by the DPO would be realized from the implementation of activities supported by this Program. The Program is expected to advance the longer term objectives of the Competitiveness and Jobs Project through its focus on improved human resource management and retraining of those public servants that leave the public sector. 22. The Program also complements the Sector Budget Support operation currently under preparation by the EU. The EU operation will support: an horizontal functional review of the public administration to improve allocation of human and financial resources; strengthening the policy making process in Government; establishment of modern HR management system for the civil service (amendment on Law on Civil Services and establishment of programs for career development in priority areas of work); strengthening program budgeting in selected ministries and improvements in financial control, internal audit and macro-economic forecasting; strengthening of the inspection supervision system to reduce administrative burden to citizens and businesses; and the development of national legal and institutional framework to ensure participation of public and Civil Society in law making. The EU operation is expected to become effective in early 2016. 23. The selection of the Program for Results instrument reinforces the performance orientation of the Government’s program. The approach is intended to provide incentives for a joined-up approach in tackling the systemic institutional deficiencies that have traditionally undermined efficient use of public resources. The Program for Results instrument will facilitate a strategic focus on the specific results that the Government aims to achieve; strengthen the 6         Government’s implementation systems without creating parallel systems and additional requirements; sharply focus on results that are measurable over a specific duration; and build a strong Government ownership for the reform agenda. The Program for Results is supported by a number of parallel Bank-executed operations which will provide advisory services, analytical support and capacity building to help the authorities implement reforms. These include: Right Sizing and Restructuring Technical Assistance financed by the EU; Public Procurement Technical Assistance financed by DfID; and the Public Investment Management Technical Assistance financed by the Russian Federation. The teams of technical assistance operations are integrated with the team supporting preparation and implementation of the Program for Results operation to ensure effective coordination. II. PROGRAM DESCRIPTION A. Government Program 24. The Public Administration Reform (PAR) Strategy was launched in 2014 as the overarching roadmap for supporting public sector reform in Serbia. The PAR Strategy is supported by the Action Plan for the Implementation of PAR Strategy (the “program”) launched in 2015 and to be implemented until 2018. The overall objective of the 2014 PAR Strategy is to improve the ability of the public sector to deliver high quality services to citizens and business entities as well as significantly contribute to the economic stability and increase of the living standards. 25. The Action Plan operationalizes the PAR Strategy and provides a framework for measuring and monitoring the results. Its five main objectives (result areas) are aligned with the key areas of the PAR Strategy namely: Improvement of organizational and functional Public Administration subsystems; Introduction of harmonized public service system relying on merits and improvement of HR management; Enhancement of public finance and public procurement management; Increase in legal security and improvement of the business environment and the quality of public services provision; and an Increase in citizen participation, transparency; and Improvement in ethical standards in the performance of public administration activities. 26. The Action Plan will be financed through a government expenditure framework covering US$ 242 million. These activities range from broad based policy oriented interventions, including the passage of critical legislation to support capacity building, and investments strengthening of HR and financial management systems in public administration. B. Program Development Objective and Key Results 27. The Program Development Objective (PDO) is to improve efficiency in public sector employment and finances. In this context, efficiency is the reduction in the cost of doing government business. This will be achieved by addressing systemic weaknesses in the allocation of employees and their remuneration, streamlining and rationalizing public procurement and strengthening controls over public expenditure. 28. Progress towards the achievement of the objective will be measured using the following outcome indicators: PDO Indicator 1: Share of public administration employees assigned to new pay grades as per the Law on Public Sector Employees Salary System (percentage); 7         PDO Indicator 2: Total number of public administration employees at or under annual ceiling prescribed by the Law on the Ceiling on Number of Employees (Yes/No); PDO Indicator 3: Share of redundant public administration employees receiving redundancy payments pursuant to provisions of Law on Ceiling on the Number of Employees, Civil Servants Law and Labor Law (percentage); PDO Indicator 4: Share of public procurement contracts, within the category of public authorities, over RSD 5 million in value, signed in a Fiscal Year of the Borrower, in 90 days or less, between the date of Issuance of Bidding Documents and signing of the Public Procurement Contract (percentage); PDO Indicator 5: Value of Public Procurement Contracts awarded through Framework Agreements (RSD); PDO Indicator 6: Percentage of commitments in budget execution system entered within the required deadline per the Law on Deadlines for Payments in Commercial Transactions. C. Program Scope 29. The proposed Modernization and Optimization of Public Administration Program (the “Program”) supports the implementation of two out of the five objectives of the Action Plan for Implementation of Public Administration Strategy (Government’s program). These are respectively: establishment of a public service system based on merits and promotions of human resource management, and improvement of public finances and public procurement management. This selective approach is deliberate. The three key areas of the Program are not only the focus of the Government’s Action Plan, but are also directly linked with the immediate concerns of the Government’s fiscal consolidation agenda being supported by the IMF. The Program enhances synergy with operations financed by other development partners, notably the EU’s Sector Budget Support. It also reflects the key areas where there has been sustained engagement by the Bank through operational and knowledge products. 30. The Program will support implementation of the Action Plan in the period 2016 to 2018. The Government expenditure program is estimated at US$242 million (69 percent). The World Bank’s Program will provide financing of up to US$ 75 million (31 percent). Other development partners are providing parallel financing to support the Government’s program. The largest of these is the European Union (EU), with a Sector Budget Support of EUR 80 million. 31. Program expenditures have been estimated on the basis of the expenditure plans of the implementing institutions as presented in the Government of Serbia’s three-year Fiscal Framework. These institutions are: Ministry of Public Administration and Local Self- Government (MPALSG), Treasury Administration and PPO. Program expenditures include only the budget programs as reflected in the State Budget and those functions and activities that are directly related to the achievement of the Program’s PDO and implementation of the Program activities. Program Expenditures include capital, operational and salary costs under these budget programs and severance costs related to the layoff of the public employees across the public sector. The Program is structured in three key result areas.   32. Result Area 1: Improved Human Resource Management. The Program will support the development of a system for managing staffing levels and monitoring the wage-bill. Key 8         activities include: establishment of a system of wages in the public administration; creation of a training program for managers in State Administration; preparation of a consolidated list of job positions in all parts of the public administration; creation of a training program for employees in human resources units in State Administration Bodies; development and management of the registry of employees in the public sector; implementation of ceilings on the maximum number of staff, selective downsizing and preparation and implementation of an affordable, market-based pay and grading system in the public administration; and preparation and adoption of bylaws for the enforcement of the Law on Public Sector Employees Salary System. The MPALSG will be the lead agency responsible for the implementation of Result Area 1. 33. Result Area 2: Improved Financial Management. The Program will support efforts to strengthen expenditure controls and supervision of the Government’s financial management system. This will include expansion of the FMIS to include IBBs. The Program will support the Government’s plans to: improve financial and budget information, commitment control and arrears; establish a centralized payroll system; and improve business process automation. The Treasury Administration will be the lead agency responsible for implementation of Result Area 2. 34. Result Area 3: Improved Procurement Management. The Program will help strengthen the public procurement system. Key activities include: strengthening the technical capacity of officers involved in public procurement process within contracting authorities; preparation of procurement tools and manuals; development of a systematic approach to measure the performance of the public procurement system; development and implementation of Framework Agreements; preparation and determination of the Bill on Amendments to the Law on Public Procurement; improvement of the training level of certified public procurement officials; adoption of the value for money methodology and guidelines for implementation of the “Life cycle product cost” concept; and further developing the use of information and communication technology (ICT) (e-Government) to enhance efficiency in procurement. The PPO will be the lead agency responsible for implementation of Result Area 3. Table 1: Program Financing  Source of Financing US$ million % Government 167 69 IBRD 75 31 Other Development Partners - - Total Program Financing 242 100 D. Disbursement Linked Indicators 35. Eight DLIs will be monitored throughout the duration of the Program. The DLIs will be used to measure the achievement of agreed targets and will be the basis for disbursement of Program funds. The DLIs will be monitored as part of the overall Program results monitoring arrangements by the PPS. The PPS is established under the Law on Ministries and reports to the Prime Minister. To ensure independence of the verification process, the PPS will seek the assistance of a third party, contracted to support the verification process on terms of reference acceptable to the Bank. Third party contracting will be financed by the State Budget.   9         E. Key Capacity Building and Systems Strengthening Activities 36. Priority areas for capacity building and skills transfer have been identified in the Government’s Action Plan. These include the following: training of human resource officers across the Government on the requirements of the law on the maximum number of employees, new grading and pay system and the requirements of the new wage bill law; technical assistance and training to strengthen the capacity of IBB to operate in FMIS; technical assistance and contractual services to support the connection of IBBs to the FMIS; technical assistance and training to strengthen public administration reform and Program monitoring and evaluation; training and certification of Procurement Specialists and relevant public officials on the application of Framework Agreements; training of prosecutors and judges in public procurement law to equip them to handle procurement related irregularities; technical assistance and advisory services to support introduction of e-Procurement systems. 37. Capacity building activities will be financed through parallel grants and technical assistance under the EU-financed Sector Budget Support. ECA PFM TF-financed Bank- executed grants currently provide technical assistance in the areas of Wage Bill Management and Public Investment Management. The DfID-financed grant has been secured to provide technical assistance to procurement reforms. An EU TF for Rightsizing and Restructuring has been established to finance technical assistance for core public administration reforms, roll-out in priority sectors and to support change management. Complementing this support from the Bank, the EU has allocated approximately €10 million as part of its Sector Budget Support operation for technical assistance. A significant part of this funding will be used to support capacity building initiatives identified in the Government’s PAR Strategy and Action Plan. Other development partners provide support to capacity building in the areas addressed by the Program, notably OECD SIGMA which is actively engaged in the development of the monitoring and evaluation capacity for the overall Public Administration Reforms. The World Bank works with the MPALSG to ensure coordination across the various development partners and capacity building initiatives. III. PROGRAM IMPLEMENTATION A. Institutional and Implementation Arrangements 38. The Program will adopt the institutional coordination arrangement of the PAR Strategy. The PAR Strategy outlines four levels of management. The PAR Council, chaired by the Prime Minister, sets policy and coordinates public administration reforms. The Board of State Secretaries, comprising senior civil servants from all Ministries, supports the PAR Council. An Inter-Ministerial Working Group comprising representatives of ministries is tasked with technical and operational coordination of PAR implementation, including the development of strategies and Action Plans, adoption of reports on the implementation. Issues that cannot be resolved by the Working Group are submitted to the Board of State Secretaries. 39. The MPALSG is the lead implementing agency. The MPALSG oversees the day-to- day management of the Program, including the coordination of results monitoring and reporting in collaboration with other participating agencies. Additionally, the MPALSG, Treasury Administration and PPO are directly responsible for implementation of each of the result areas. The Public Policy Secretariat (PPS) will be responsible for coordinating data collection, verification of results and reporting on Program performance. Procurement and Financial 10         Management will be undertaken by individual agencies based on Serbian country systems. The SAI will be responsible for auditing the Program financing. B. Results Monitoring and Evaluation 40. The Monitoring and Evaluation (M&E) arrangements outlined in the PAR action plan are considered adequate and meet the requirements for monitoring the Program for Results operation. The PAR matrix is result-oriented, using indicators that seek to measure progress against Public Administration Principles (PAP) of the European administrative space. This approach links the PAR Strategy to the process of Serbia's accession to the EU and helps reduce the time and cost of monitoring of the PAR. OECD SIGMA will prepare PAP indicators based on the data submitted by Serbia. The monitoring process is managed and coordinated by MPALSG with implementing ministries providing information within their area of responsibility. 41. For the purposes of Program monitoring, the Government and World Bank have agreed on a Results Framework that comprises six Program Development Objectives and nine Intermediate Results Indicators. The Results Framework defines the indicators and the institutional arrangements for data collection. All but two of the indicators – both Intermediate Results Indicators – are reported on annual basis. The Results Framework is aligned with the monitoring framework for PAR. MPALSG has the overall responsibility and coordinating role in M&E for the PAR and the Program. MPALSG and Bank implementation support missions will undertake periodic tests of implementing Ministries’ M&E arrangements to verify that adequate systems are in place to generate the information needed for Program reporting. 42. Eight DLIs will be used to measure the achievement of agreed targets and will be the basis for disbursement of Program funds. The DLIs will be monitored as part of the overall Program results monitoring arrangements by the PPS. PPS is established under the Law on Ministries and reports to the Prime Minister. To ensure independence of the verification process, the PPS will contract a third party to support the verification process. C. Disbursement Arrangements 43. Disbursement of Program funds will be based on the achievement of annual targets for the eight Program DLIs and after validation by the PPS. The DLIs have been selected to reflect specific areas of result that coincide with key Government priorities under the Action Plan for the Implementation of Public Administration Strategy and the broader goals of the fiscal consolidation program. The eight DLIs and Program disbursements are linked to the three results areas as follows: Improved Human Resource Management - US$51 million; Improved Financial Management – US$12 million; and Improved Procurement Management – US$12 million. The Program Validation Protocol includes the definition of the DLI, the date source and procedures for measurement of scalable indicators. MPALSG will present evidence of achievement of the DLI to the PPS by January 31 of each year for periods covering January 1- December 31 of the previous year. Validation of results will be based on the verification protocol shown in Table 1 below. All material regarding validation and verification will be presented to the World Bank by MPALSG. Disbursements will be made in line with the result of the validation using the designated protocols and the Program Financing Agreement. 11         TABLE 2: DISBURSEMENT-LINKED INDICATORS (DLIS) VERIFICATION PROTOCOL DLI Verification Protocol Procedure DLI #1: Percentage of Public Review by the PPS with third party on assignment of public Administration Employee Positions administration employees’ positions to new job grades using a assigned to pay grades as per the consolidated list of public administration employees’ positions to pay Law on Public Sector Employees grades as per the Law on Public Sector Employees Salary System. Salary System. Calculation: number of public administration employee positions assigned to job grades as per the new pay and grading structure/ number of new and consolidated public administration employee positions x100 DLI #2: Percentage of Public Sample-based survey (exact survey design to be determined) by the PPS Administration Employees assigned with third party, of public administration employees’ personal action to new pay grades as per the Law on notices ( or relevant employment records) against the new pay grades Public Sector Employees Salary System. DLI#3: Total number of Public PPS with third party Administration Employees at or Calculation: comparison of the total number of employees as per under annual ceiling prescribed by payroll against number of staff as determined by the annual ceiling. the Law on Ceilings on the Number of Employees DLI#4: Percentage of Redundant PPS with third party review of relevant documents of severance Public Administration Employees packages, list of eligible public administration employees per the Law on receiving Redundancy Payments Ceiling on Number of Employees and count of public administration pursuant to provisions of Labor employees receiving redundancy payments Law, Law on Ceiling on the Calculation: Number of Redundant Public Administration Employees Number of Employees, Civil receiving Redundancy Payments/Number of eligible Redundant Public Servants Law and Labor Law. Administration Employees receiving Redundancy Payments x100 DLI#5: Percentage of Public PPS with third party on a sample-basis to verify functionality of the Procurement Contracts within the procurement tracking system Public Procurement Portal in respect of category of Public Authorities over capturing duration of procurement RSD 5M in value, signed in a fiscal Calculation: Number of Public Procurement Contracts within the year of the Borrower, in 90 days or category of Public Authorities over RSD 5M in value, signed in a fiscal less between the date of Issuance of year of the Borrower, in 90 days or less between the date of Issuance of Bidding Documents and the date of Bidding Documents and the date of signing of the Public Procurement signing of the Public Procurement Contracts/ total number of public procurement contracts over 5M RSD Contracts. in value signed in the fiscal year x100 DLI#6: Value of Public Contracts PPS with third party to estimate the total value of public procurement awarded through Framework framework agreements in a given year Agreements (in RSD) DLI#7: Number of IBB included in Review by the PPS, with third party, of FMIS standard and customized the FMIS. reports and audit trails to verify the number of IBB integrated into the FMIS DLI#8: Percentage of commitments Review by the PPS, with third party, of reported data from FMIS on in budget execution system entered payments and reporting of commitments. within the required deadline per the Calculation: commitments in budget execution system entered within Law on Deadlines for Payments in the required deadline/ all commitments in budget execution system x100 Commercial Transactions (%) 12         IV. ASSESSMENT SUMMARY A. Technical 44. The Program’s focus on human resource management, public financial management and public procurement reflects the Government’s priorities as laid out in its PAR Strategy and Action Plan. The reforms are strategically linked to the Government’s fiscal consolidation agenda, the accompanying Stand-by arrangement with the International Monetary Fund and the Government’s preparations for EU accession. The Action Plan identifies specific, measurable results to be achieved for the PAR Strategy’s objectives in each of its five priority areas and so provides the basis for results-based monitoring of the proposed Program (see additional details in Annex 4). Serbia's country-specific circumstances have been taken into account in the selection of Program activities. The sequencing chosen follows a “basics first” principle, supporting the authorities’ efforts to put in place essential elements of its core management systems. 45. The Program draws on recent analytical work by the Bank, OECD (SIGMA) and the Government. This includes a Public Expenditure and Financial Accountability Assessment (PEFA) and a Public Finance Review, both completed in 2015. Additional analytical work has been undertaken in the context of the Bank-executed Wage Bill Management grant and the Strategic Country Diagnostic. SIGMA products, notably the work on ‘Priorities” (May 2014) and “Assessment” (April 2014), have provided further insights into the challenges facing the Serbian public administration system and the directions for reform. Alongside the analytical work by development partners, MPALSG has prepared a significant body of analytical work that has helped identify the challenges and potential directions for public administration reform. 46. The governance structure of the Program adopts the arrangements put in place for the PAR Strategy and facilitates collaboration among key stakeholders, connecting the political and the technical levels. The PAR Council ensures that political leadership will play a role in setting strategic direction and coordination, energizing the reform momentum and linking the Program with activities under the PAR Action plan. The MPALSG is a new institution established in 2014. However, the Ministry is well placed as the key implementing agency, not only because of the relevance of its mandate to the Program, but also due to the strong leadership in the ministry in implementing the Action Plan. The Ministry and the World Bank have developed a close working relationship through ongoing technical assistance activities. The involvement of Collegium of State Secretaries provides an important link between the political and the technical stakeholders represented by the MPALSG and the Inter-ministerial Working Groups. The SAI will play an oversight role both in terms of performance audits and in ensuring that Program funds are used for the intended purposes. 47. The Program Expenditure Framework is defined within the framework of the Government’s budget. The Program will finance the implementation of a subset of activities related to strengthening of human resource management, treasury functions and procurement. The Program expenditure required to achieve these objectives in the three year period is estimated at US$ 242 million. This covers the costs of core institutions implementing the Program: the MPALSG; Treasury Administration and the PPO. Program expenditures are limited to those units within these institutions that are directly responsible for implementation of the Program and the operational functions addressed by the Program. About 75 percent of Program expenditures comprise severance payments; Operational costs account for 10 percent; 13         Salaries account for 12 percent and capital expenditures account for 3 percent. The Program is already reflected in the Government’s budget for FY16 and forward estimates for FY2017 and FY2018 included in the Fiscal Strategy. 48. The Program has a robust plan for monitoring and evaluation that is based on M&E framework that Government uses to monitor and report on the implementation of the Action Plan. While M&E capacity across Government is limited, working with SIGMA, the Government has made progress in strengthening capacity and developing an appropriate set of indicators. The lead Government agency for each result area will be responsible for collecting relevant data and reporting to the MPALSG through the PPS. The Secretariat will monitor and report on the progress of DLI directly to the World Bank. The Secretariat is a relatively new entity and is staffed by a small but dedicated team of professionals. During implementation, the Government has committed to strengthen implementing agencies’ M&E capacity by hiring additional staff and training a core set of officials to undertake M&E related tasks. A third party will also assist the PPS in the verification of the DLIs. 49. Economic analysis confirms that the Program will generate positive returns. The expected net impact realized through the efficiency gains expected from the process of modernizing Serbia’s public administration is valued at a range between US$8 million and US$15 million which is the sum of estimated net benefits arising from Program implementation. The analysis assumes an exchange rate of RSD 107 per USD, a 12 percent discount rate and a very short time horizon of four years, from 2016-2018. B. Fiduciary 50. The fiduciary assessment indicates that there are adequate arrangements in place to safeguard Program finances. The Program will rely on country systems for budgeting, execution of the budget, accounting and financial reporting, procurement, internal controls, and flow of funds and external audit. The Program fiduciary assessment is presented in Annex 5. 51. Program funds will be disbursed based on achieved DLIs. There will be advances of the loan funds up to 25 percent of the loan amount. The Government will provide evidence of and document achievement of DLIs at year end of each year (2016-2018), and based on verification of the achieved DLIs by the Bank following the verification protocol, the advances will be converted to disbursements freeing up space to next advance up to 25 percent of the loan amount. Some DLIs achievement and disbursement will be scalable as per the level of achievement assessed by the Task Team based on the verification protocol. The Bank will verify that the level of disbursed funds based on achieved DLIs does not exceed the level of total Program expenditures incurred over the implementation period. In case that disbursed funds exceed the level of incurred program expenditures, the excess amount will need to be reimbursed to the Bank. Loan funds will be disbursed to a government account held at the National Bank of Serbia/Consolidated Treasury Account, and will be accounted for in the budget management information system as income. 52. The financial management assessment undertaken during Program preparation verified that these systems are sufficient to use of Program funds reliably. The assessment covered the Government’s public financial management system for budget preparation, budget and execution and control over the use of funds. It then focused on the specific entities to which Program expenditures relate, namely MPALSG which accounts for about 75 percent of total program expenditures and the Treasury Administration which accounts for about 20 percent. 14         The PPO, the SAI, NES, PPS and Human Resource Management Service combined account for about 5 percent of total financing and so were not subject to separate assessments. Key findings of this assessment are:  Planning and budgeting capacity in MPALSG, TA and other program implementing entities is adequate. However, the overall budget process does need to be strengthened given the frequency of supplemental budgets and poor compliance with the budget calendar.  Accounting systems can track and report actual Program expenditures against a comprehensive organizational, functional, program, economic and source-of-funds classification. All of the Program implementing entities have sufficient capacity in accounting and financial reporting. The Program entities apply cash based International Public Sector Accounting Standards within the limits imposed by national by-laws and prepare quarterly reports on budget execution (except for the first quarter) that will be used as financial reports for monitoring Program expenditures. The SAI has confirmed that financial reporting is in line with the national accounting framework.  Information Systems are managed by the Treasury Administration (TA) through a centralized transaction processing system which captures all transactions in a Treasury Main Ledger (TML). The system is assessed to be reliable.  Budget execution remains within appropriations and all of the Program entities prepare budget execution plans each month for the coming quarter on rolling basis, based on which the TA determines their respective monthly payment quotas. The system does need to be strengthened control at the level of commitments in order to avoid accumulation of arrears and liquidity risks in relation to Program expenditures. v  Internal controls provide a satisfactory control framework. While the implementation of financial management and control (FMC) as defined by PIFC is still in its early stages, there is long standing system of written internal controls and procedures within all implementing entities which are properly applied in practice. Internal audit units are functional in Program implementation entities. The Program will not directly rely on internal audit work in verifying the use of funds but will consult findings of internal audit when assessing fiduciary arrangements during implementation.  Financial statements are prepared by implementing entities using their accounting records and auxiliary ledgers, after reconciling such information with the Treasury Main Ledger. Annual financial statements (final account) are compiled by the Treasury based on such inputs and data in the TML.  Audit of the final account for the previous year is delivered by the SAI by the end of the year following the audited period. The SAI issued modified qualified opinion on the final account for 2014. The SAI audit of the final account will be considered as the audit of the Program. The Bank has agreed with the SAI that the audit report will include an explanatory note which will detail program expenditures specifically. The SAI is assessed to have sufficient capacity to produce reliable audit providing sufficient assurance about the use of program funds. 53. The procurement assessment undertaken concluded that the procurement system is sufficient to ensure reliable use of Program funds but that the fiduciary risks are 15         substantial. The Serbian Public Procurement Law (PPL) effective as of April 1, 2013, amended in August 2015 defines the procurement environment. The procurement system legislation, rules and procedures are clearly established and easily accessible to the public. Responsibility for conducting procurement is largely decentralized to budget holding entities. Bidding procedures are advertised through the Public Procurement Portal. The Law has the objectives of ensuring efficiency and effectiveness, competition and transparency and preventing corruption and other abuses in the public procurement process. Larger works and goods are procured on behalf of most entities by centralized government procurement body, the Administration for Joint Services of the Republic Bodies (UZZPRO). Framework Agreements, signed by UZZPRO, are used for procurement of common goods. Each of the Program implementing entities has an administrative and finance unit with one or more certified Procurement Officers who undertake procurement of services and minor procurement for goods and works. Modification of contracts are not common. Advance Payment Guarantees and Performance Guarantees are mandatory. The Republic Commission for Protection of Rights in Public Procurement Procedures, an autonomous and independent body, is responsible for protection of parties and grievance redress in public procurement. 54. An assessment of the legal and institutional framework for anti-corruption concluded that the risk of corruption is high. However, the institutional and legal framework for tackling corruption is progressively improving and existing Government commitment to address corruption is high. The World Bank’s Guidelines on Preventing and Combating Fraud and Corruption in Program for Results Financing will apply to the Program. If required, the Bank will have access to any information related to contracts under said Program (including those held by third parties/contractors) and the Bank would jointly with the government conduct a review to determine the existence or fraud and corruption within the Program. The Borrower’s commitment to follow the Guidelines is included in the Minutes of Negotiations. C. Environmental and Social Effects 55. An Environment and Social Systems Assessment (ESSA) was carried in September 2015 in consultation with the MPALSG. Formal consultations with key stakeholders on draft ESSA were held in November 2015. The assessment draws on interviews with key stakeholders supplemented with a desk review of the various laws and regulations. The final ESSA was disclosed March 9, 2016. Additionally, a covenant on carrying out the Program in accordance with the ESSA is included in the Loan Agreement (schedule 2, I.A.2). See Annex 6 for detailed summary of the assessment. 56. The ESSA determined that the Program poses no major environmental risks but identified social risks related to potential retrenchment of the public sector employees. The Program will support policy measures that seek to improve efficiency in human resources management. These measures are expected to include reductions in staffing numbers and retrenchment. The numbers of affected employees will be determined during program implementation. The Government has communicated on multiple occasions in media that cost reductions and staffing cuts in the public sector are necessary as a part of fiscal consolidation measures, arguing that these measures will create an enabling environment for investments and job creation in the long run. 57. The ESSA concludes that adequate arrangements are in place to deal with the social impacts arising from the Program. Serbia has a relatively well developed policy and legal 16         framework on labor relations and retrenchment, along with an institutional system which is generally adequate. The Ministry of Labor and NES have acquired solid experience and the skills needed to manage large retrenchment during the privatization of state owned enterprises, which occurred over the past fifteen years. The NES, as an implementer of the employment policy, has specific programs targeting support for retrenched workers, women and vulnerable groups. 58. The Government has included specific measures to mitigate any adverse effects associated with retrenchment in the Action Plan. The Bank will collaborate with the authorities during the implementation phase and will provide support necessary to implement the actions recommended by the ESSA. The Government has agreed to undertake the following measures related to mitigating social risks to affected people:  Ensure that MPALSG has staff assigned to coordinate, monitor and report on the rightsizing process and its effects;  Improve consultations with workers and unions;  Ensure that the criteria for selection of those employees who will be categorized as redundant are based on the principles of transparency, non-discrimination, applied consistently and with employees having adequate appeals procedures;  Employers in the public sector will prepare retrenchment plans;  Work closely with NES to develop an action plan for supporting employees who have been separated, including training plans;  Ensure documentation of the profiles of those retrenched in terms of age, education and disability profile.  Prepare active employment measures for retrenched women;  Monitor severance payment disbursement and status of retrenched workers. 59. Communities and individuals who believe that they are adversely affected as a result of a Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the existing program grievance redress mechanism or the World Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of World Bank non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s corporate GRS, please visit www.worldbank.org/grs. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 60. Serbia’s legal framework or the prohibition of discrimination and anti- discriminatory policy is aligned with the EU conventions and harmonised with the three key EU Directives. These are: Council Directive 2000/43/EC implementing the principle of equal treatment between persons irrespective of racial or ethnic origin; Council Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation; as well as Directive 2006/54/EC on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation. Serbia has a Law on the Prohibition of Discrimination and has adopted the National Anti- 17         Discrimination Strategy. In 2015, the Action Plan for the implementation of this strategy, supporting measures in a number of sectors of society, was adopted. 61. A National Strategy for Improving Gender Equality 2016-2020 is currently in preparation. An official report on gender equality in Serbia (Men and Women in Serbia), published by the Statistical Office of the Republic of Serbia in 2014, recorded a number of discrepancies in male and female participation in the labour market: activity rate of women aged 25 to 54 years is 14 percent lower than the employment rate of men of the same age. The public administration system in Serbia has more women than men. However, women account for only five percent of the Serbian Government; less that 30 percent of Members of Parliament and around 25 percent of State Secretaries. At the Local Government level, women comprise only five percent of municipal presidents, and 29 percent of the membership of municipal councils and assemblies. This is in contrast to other segments of the public sector where women constitute the majority of employees: in education (72 percent), health and social work (80 percent), women represent a significant majority of employees. Women are likely to be the most affected by the proposed reduction in public sector employment. 62. The Social Systems Assessment Program Action Plan proposes actions to reduce the burden of reforms on women. This includes measures which reinforce protections of women in instances of retrenchment provided by the national legislation, such as protection of women on maternity leave, women headed households and mothers of children under the age of two. The criteria for selection of employees to be made redundant must be based on the principle of non- discrimination. The retrenchment plans and requests for redundancy (severance) payment will include segregated information according to gender in order monitor and identify possible adverse gender impacts. When identified, these impacts and remedial measures will be reviewed by the MPALSG and adjustments made in the retrenchment program where appropriate. D. Risk Assessment 63. Overall Program risk is rated as High after mitigation measures. Country risk is rated as high. Continued uncertainty in the macro-economic environment or the emergence of external (and internal) shocks could affect the Government’s commitment to Program objectives and Program performance. A number of the reforms are politically challenging, particularly those related to rightsizing and pay reform. Country risk is mitigated by the alignment of the Program with the Government’s reform agenda and the Government’s commitments with external partners, notably the IMF’s Standby Facility and the EU accession process. Stakeholder risk has been rated substantial. Program implementation requires the collaboration of Government agencies and will require a strong coordination mechanism. Adequate coordination arrangements have been put in place, with leadership from the higher levels of Government. Technical risks are also rated medium. The Program supports ongoing Government activities that have been subject to adequate analysis and detailed planning. There is adequate capacity to support implementation of most activities across the Government, those areas requiring external expertise and capacity building have been identified in the Action Plan (see Technical Assessment). Fiduciary risk has been rated Substantial because the Program will rely on the Government system and there are deficiencies particularly in regards to commitment control. These deficiencies are addressed by actions to be taken under the Program. Social risk is rated Substantial because of the impact of retrenchment of public sector employees associated with human resources component of the Program. While there has been broad based support for reforms to date and no organized labor action, there is a risk that employees will oppose staffing 18         reductions through industrial action. The Government has engaged in a dialogue with the trade unions on how to implement reforms and address their concerns. Specific mitigation measures have been recommended following the ESSA and these have been adopted in the Government’s Action Plan. E. Program Action Plan 64. The Program Action program lays out the actions required to deliver the Program Development Objective. The proposed actions are reflect the findings of the technical, fiduciary and social systems assessment carried out in the course of preparation. These include actions in support of particular reforms including: strengthening the M&E capacity of the MPALSG to monitor Program implementation; capacity building in various ministries to be able to implement the requirements of the various policies related to pay and grading; and improving the capacity of the PPO and officials in Budget entities to implement new procedures. Others include action to strengthen the implementation of social management system to mitigate the impact of severance. A detailed Action Plan is presented in Annex 8.   19         ANNEX 1: DETAILED PROGRAM DESCRIPTION I. PRODGRAM DEVELOPMENT OBJECTIVE 1. The Program Development Objective is to improve efficiency in public sector employment and finances. Achievement of this objective will be assessed on the basis of six PDO indicators: PDO Indicator 1: Share of public administration employees assigned to new pay grades as per the Law on Public Sector Employees Salary System (percent); PDO Indicator 2: Total number of public administration employees at or under annual ceiling prescribed by the Law on Ceilings on the Number of Employees (Yes/No); PDO Indicator 3: Share of redundant public administration employees receiving redundancy payments pursuant to provisions of, Law on Ceiling on the Number of Employees, Civil Servants Law and Labor Law (percent); PDO Indicator 4: Share of public procurement contracts within the category of public authorities over 5M RSD in value, signed in a Fiscal year of the Borrower, in 90 days or less, between the date of Issuance of Bidding Documents and the date of signing of the Public Procurement Contracts (percent); PDO Indicator 5: Value of Public Procurement Contracts awarded through Framework Agreements (RSD); PDO Indicator 6: Percentage of commitments in budget execution system entered within the required deadline per the Law on Deadlines for Payments in Commercial Transactions (percent). II. PROGRAM SCOPE 2. The proposed Program for Results on Modernization and Optimization of Public Administration (the “Program”) supports the implementation of two out of the five objectives of the Action Plan for Implementation of Public Administration Strategy (Government’s “program”). These are: Objective 2 establishing a harmonized public service system on merits and improvement of HR management; and Objective 3 Improving public financial management and public procurement. This selective approach is deliberate. The Program focuses on the Government’s on-going efforts to improve the management of its resources by reforming its system for management of human resources, finances and procurement. It addresses the immediate concerns of the Government’s fiscal consolidation agenda. It complements operations financed by other development partners, notably the European Union. It concentrates on those reform priorities where there has been sustained engagement between the Government and World Bank through operational and knowledge products. 3. The Program will support implementation of the Action Plan in the period 2016 to 2018 which encompasses a number of fundamental reforms. The reforms supported by the Program in the area of human resource management include: implementation of legislative reforms that will simplify and standardize the pay and grading system; setting up of a comprehensive system for establishment control through a registry of personnel; implementation of a right-sizing program including severance of staff; and implementation of a comprehensive 20         job evaluation program. Reforms supported by the Program in the area of public expenditure management focus improvements in budget execution through the introduction of systematic commitment controls. Reforms supported by the Program in the area of public procurement include measures to reduce delays in the procurement process and expand the use of Framework Agreements. These measures are expected to increase efficiency by reducing the cost of Government operations. 4. The Program Expenditure Framework estimates total Program costs at approximately $242 million for Government FY2016 through FY2018. Program expenditures have been estimated on the basis of the expenditure plans of the implementing institutions as presented in the Government of Serbia’s three-year Fiscal Framework defined in the annual budget for 2016 and the Fiscal Strategy 2016-2018. These institutions are: MPALSG (77.9 percent of program costs), Treasury Administration (19.6 percent) and PPO, PPS, Human Resource Management Service, SAI and NES (2.1 percent). Program expenditures include only the budget programs as reflected in the State Budget and those functions and activities that are directly related to the achievement of the Program PDO and implementation of the Program activities. Program Expenditures include capital, operational and salary costs under these budget programs and severance costs related to the layoff of the public employees across the public sector. The Program Expenditure Framework by result area is presented in Table 3. TABLE 3: PROGRAM EXPENDITURE FRAMEWORK (US$ MILLION) 2016 2017 2018 Total Result Area / Expenditure expenditure expenditure Expenditure Expenditure 1: Human Resource Management 64,280,603 63,955,473 63,955,473 192,191,548 Capital cost 126,447 126,447 126,447 379,341 Operational cost 2,213,380 1,954,531 1,954,531 6,122,443 Salaries 1,458,750 1,392,468 1,392,468 4,243,686 Severance 60,482,026 60,482,026 60,482,026 181,446,079 2: Public Financial Management 16,061,081 16,071,608 16,071,608 48,204,297 Capital cost 2,203,029 2,203,029 2,203,029 6,609,087 Operational cost 6,010,430 6,015,485 6,015,485 18,041,400 Salaries 7,847,622 7,853,094 7,853,094 23,553,811 Severance 0 0 0 0 3: Public Procurement Management 413,423 407,418 407,418 1,228,260 Capital cost 33,841 33,841 33,841 101,523 Operational cost 122,303 118,055 118,055 358,414 Salaries 257,279 255,522 255,522 768,323 Severance 0 0 0 0 TOTAL 80,755,107 80,434,499 80,434,499 241,624,106 TOTAL without severance 26,314,125 25,897,981 25,897,981 78,110,087    III. PROGRAM ACTIVITIES 5. Program activities are divided into three result areas. These results areas are: Improved Human Resource Management; Improved Financial Management; and Improved Public Procurement Management. Under each results area the Bank and the Government have identified key activities that are required to deliver the Program Development Objective and Intermediate Results Indicators. The Government has prepared a Program Action Plan which 21         lays out dated milestones for specific activities and serves as a guide to Program implementation and Program implementation monitoring (see Annex 8). 6. Result Area 1: Improved Human Resource Management. The Program will support the Government’s program to develop a system for managing its staff and monitoring the wage- bill. Key activities include: establishment of a transparent and fair systems of wages in public administration; preparation of a consolidated list of job positions in all parts of the public administration; creation a training program for employees in human resources units in State Administration Bodies; development and management of a registry of all employees in the public sector; implementation of ceilings on the maximum number of staff, selective downsizing and preparation; monitoring of implementation of the new wages system and measurement of financial effects; preparation and adoption of bylaws for enforcement of laws (regulations on compensations of costs and other income) and implementation of an affordable, market-based based pay and grading system in the public administration. Four DLIs have been selected to track the achievement of results in this Results Area. Result Area 1 – Strategic Relevance of DLIs DLI Description Strategic Relevance Percentage of Public Public administration employee positions These two DLIs support improvements Administration are positions in all ministries, public in efficiency through a simpler and Employee Positions services, public agencies and local self- straightforward pay and grading assigned to pay grades government (Art. 1 paragraph 3 of Law structure that will contribute to a as per the Law on Public on Public Sector Employees Salary reduction in the wage bill (other things Sector Employees System) excluding police officers, the being equal). A chaotic system of wage Salary System (DLI1) military, and state owned enterprises. coefficients, bonuses, and allowances ‘Share’ is defined as the percent of those has resulted in inequitable and arbitrary positions that have been assigned to pay compensation across the public sector. grades according to the new pay and The government is developing a new grading structure. grading system based on job Percentage of Public Public administration employees are evaluations. A set of coefficients will Administration staff with open-ended contracts in all determine the salaries of each of the new Employees assigned to ministries, public services, public grades. These DLIs support the new pay grades as per agencies and local self-government (Art. completion of the grading process and the Law on Public 1 paragraph 3 of Law on Public Sector move to the next critical steps of Sector Employees Employees Salary System) excluding actually placing government employees Salary System (DLI2) police officers, the military, and state in the relevant grades and paying them owned enterprises. according to those grades. Total number of Public ‘Total number of employees’ are The government has recently passed the Administration defined as number of open ended Law on Ceilings on the Number of Employees at or under employees in ministries, public agencies Employees. The law requires the annual ceiling and local-self-governments subject to government to set a maximum number prescribed by the Law the Law on Ceilings on the Number of of staff allowed for each entity. This on Ceilings on the Employees that receive remuneration as DLI will incentivize adherence to the Number of Employees of June 30th of current year. Annual established maximum staffing levels. (DLI3) ceiling means prescribed number of government employees as defined in the Law on the Ceilings on the Number of Employees. Percentage of Redundant public administration The DLI supports the government’s Redundant Public employees is defined as those occupying need for efficiency in public sector Administration redundant positions; targeted employment and finances with dismissal Employees receiving downsizing is defined as dismissal of eligible employees and payment of Redundancy Payments (other than for cause) according to the severance and reduction in wage bill. 22         pursuant to provisions provisions of the Civil Service Law and Excessive staffing in certain sectors and of Law on Ceilings on the Labor Code. Staff will be considered occupations inflate wage bill. the Number of dismissed if he/she has accepted the Employees, Civil severance package (rather than seeking Servants Law, and employment elsewhere in the public Labor Law. (DLI4) sector) and the position has been abolished. 7. Result Area 2: Improved Financial Management. The Program will support measures to strengthen budget execution monitoring and control. This includes measures to expand the coverage of the FMIS to cover IBB, strengthen budget execution and avoid the accumulation of arrears through systematic commitment control and improvements in monitoring of budget execution. The Program will also support the expansion and technological upgrading of capacity for more efficient Treasury operations, establishment of a centralized payroll system and improvements in business process automation. Two Disbursements Linked Indicators have been selected to track the achievement of results associated with this Results Area. Result Area 2 – Strategic Relevance of DLIs DLI Description Strategic Relevance Number of IBB The DLI measures the number of The DLI relates to improved efficiency included in the FMIS legislative bodies and public institutions in the public sector through improved (DLI7) founded by the Republic of Serbia coverage of the FMIS. Treasury is and/or local governments and which unable to effectively monitor and obtain financing through the national control expenditures of IBBs that are not budget that are connected to the FMIS integrated in the FMIS. The government and use the system for the entry and intends to extend coverage of the FMIS retrieval of financial data. to 526 IBBs by 2018. Percentage of The DLI measures the share of executed The DLI measures improvements in the commitments in the payments in the FMIS (BES) for which coverage of expenditure commitment BES entered within the commitments were entered into the controls. This is expected to result in required deadline system by respective beneficiaries in line assumed commitments by budget according to the Law with the RINO law and bylaws, no more beneficiaries being duly reported and on Deadlines for than three days after the commitment has posted against available cash Payments in been assumed (contract signed, invoice allocations. Treasury will be able to Commercial received). track the value of outstanding Transactions (DLI8) commitments across the government for the purposes of cash planning. Budget entities will be prevented from assuming commitments when they have insufficient cash/budget allocations. This will enable the treasury and budget entities to prevent the accumulation of expenditure arrears and adopt more efficient cash management practices. 8. Result Area 3: Improved Procurement Management: The Program will support: training of offices involved in public procurement within contracting authorities; development and implementation of Framework Agreements for contracting authorities; preparation by PPO of procurement tools and manuals for contracting authorities and economic operators; development of a systematic approach to measure the performance of the public procurement system; preparation of a draft new Law on Public Procurement; introduction of higher level training for certified public procurement officials; and enhanced use of information and communication technology (ICT) (e-Government) to enhance efficiency in procurement. 23         Result Area 3 – DLI strategic relevance DLI Description Strategic Relevance Percentage of Public This DLI measures the value of public The DLIs measure operational efficiency Procurement Contracts procurement over RSD 5 million and economy in public procurement with within the category of (approximately US$45,000) that takes 90 regard to time needed to complete public authorities over days or less to complete from the time procurement (operational efficiency) and 5,000,000 RSD in bidding documents are issued to the time the increased use of Framework value, signed in a fiscal the contract is signed. Agreements (economy). year of the Borrower, in The procurement process is currently 90 days or less between encumbered by weak capacity and limited the date of Issuance of understanding of public procurement Bidding Documents procedures. Delays are also caused by the and the date of signing slow appeals process which causes of the Public stoppages in the procurement process. Procurement Contracts. Increased use of Framework Agreements (DLI5) will lead to reduced transaction costs and Value of public This DLI measures the prevalence of reduction in costs of procured goods and procurement contracts usage of Framework Agreements which services. Capacity building and awarded through allow for prior determination of pricing streamlining of procurement procedures Framework Agreements structures to be followed during the is also expected to accelerate procurement (DLI6) agreed period and thus reducing the processing times and improve opportunities for individual bids on the procurement outcomes. same item by different contracting authorities. IV. MONITORING AND EVALUATION 9. The Monitoring and Evaluation (M&E) arrangements outlined in the PAR action plan are considered adequate and meet the requirements for monitoring the Program. The PAR matrix is result-oriented, using indicators that seek to measure progress against the Public Administration Principles of the European administrative space. This approach links the PAR Strategy to the process of Serbia's accession to the EU. OECD SIGMA will prepare PAP indicators based on the data submitted by Serbia. Indicator ‘passports’ have been produced. These are similar in the format and content to the commonly used indicator reference sheets that define the indicator, sources of data, arrangements for data collection and management. The monitoring process is managed and coordinated by MPALSG. Implementing Ministries provide information to MPALSG in their area of responsibility. Implementing Ministries’ capacity in M&E is often weak, with poor data management and limited use of data in managerial and policy decision making. OECD SIGMA will provide technical assistance to support the overall PAR monitoring arrangements. Additional support to the M&E framework will be provided through the EU-financed RETF Rightsizing and Restructuring Technical Assistance. 10. For the purposes of Program monitoring, the Government and World Bank have agreed on a Results Framework that comprises six Program Development Objectives and nine Intermediate Results Indicators. The Results Framework defines the indicators, their unit of measurement, baselines, annual targets, data sources, the methodology for calculation of annual progress against the indicators, the frequency of data collection and the institutional responsibility for data collection and reporting. The Intermediate Results Indicators monitor progress in implementation of actions that are essential to the achievement of the PDOs. All but two of the indicators – both Intermediate Results Indicators – are reported on annual basis. MPALSG has the overall responsibility and coordinating role in M&E for the PAR and the Program. Implementing ministries will provide monitoring reports. MPALSG will undertake 24         quality control and follow-up as necessary. While indicators are reported on an annual basis, MPALSG and Bank implementation support missions will undertake periodic tests of implementing Ministries’ M&E arrangements to verify that adequate systems are in place to generate the information needed for Program reporting. 11. All of PDO indicators and two of the Intermediate Results Indicators have been designated as DLI. The DLIs will be used to measure the achievement of agreed targets (Annex 2) and will be the basis for disbursing Program funds. Eight DLIs will be monitored throughout the duration of the Program. The use of DLIs as the basis for disbursement is intended to reinforce the emphasis that the Government is places on the achievement of Program results. The DLIs will be monitored as part of the overall Program results monitoring arrangements. In addition, DLIs will be subject to third party validation. 12. The PPS will be responsible for verification of the DLIs. The PPS will contract a third party to validate the results of the verification to ensure independence. Third parties will also be contracted at the Government’s expense to undertake verification where this involves handling massive data loads and/or handling sensitive data, such as data from personnel files, and also to build necessary capacity in, for instance, quality of IT operated data handling. Validation and verification will follow on agreed protocols. MPALSG will present evidence of achievement of the DLI to the PPS by January 31 each year for periods covering January 1- December 31 of the previous year. Verification of results will be based on the verification protocol shown in table 3 below. All material regarding verification will be presented to the World Bank by MPALSG. V. IMPLEMENTATION AND COORDINATION ARRANGEMENTS 13. The PAR Strategy establishes the institutional framework for PAR implementation at a policy and operational level. Effective coordination is critical to the successful implementation of strategy. The strategy entails functional reorganization across Government and the implementation of Government-wide changes in human resource, financial and procurement management systems. The PAR institutional framework comprises four key entities:  Public Administration Reform (PAR) Council chaired by the Prime-Minister is responsible for overall strategic direction and coordination of public administration reforms.  The Collegium of State Secretaries supports the PAR Council, proposing the PAR Council’s agenda and following up on the implementation of PAR Council resolutions. The Board brings together the leading civil servants of all Ministries. The Board is chaired by the State Secretary of MPALSG and meets at least quarterly.  An Inter-Ministerial Working Group is tasked with technical and operational coordination of PAR implementation. The Working Group comprises representatives from all ministries, chaired by the State Secretary of MPALSG, and meets at least once a month. Specific responsibilities of the Working Group include: development of strategies and Action Plans; review of projects and normative activities; defining the internal relations and coordination of public administration bodies; adopting reports on the implementation and evaluation of results achieved by the PAR Strategy; presenting decisions that cannot be resolved by the Working Group to the Board of State Secretaries. 25          The MPALSG oversees and supports implementation of the PAR at an operational level. MPALSG is responsible for PAR monitoring and reporting. MPALSG is also responsible for the implementation of reforms in core human resource management functions. 14. The MPALSG will coordinate the overall implementation of the Program. Other institutions will manage the implementation of activities related to their mandates and competences. Thus, the MPALSG will be responsible for Result Area 1: Improved Human Resource Management); the Treasury Administration for Result Area 2: Improved Financial Management), and PPO for Result Area 3: Improved Procurement Management). 15. The Program will also be supported by a range of other institutions that are independent of the MPALSG. The PPS will be responsible for coordinating data collection, verification and reporting on Program performance. The SAI will be responsible for auditing of Program finances. The NES will be responsible for supporting separated employees to ensure availability of associated benefits and training, while the Human Resource Management Service (HRMS) will support the management of an internal job market supporting the placement of unassigned civil servants, ensure proper implementation of HR plans, and maintain the registry on civil servants and employees in public administration bodies. While all these supporting institutions are independent of the MPALSG, the Collegium of State Secretaries and the PAR Council chaired by the Prime Minister, provides adequate leverage to ensure compliance of these institutions with their responsibility to support Program implementation VI. FIDUCIARY 16. Program funds will be disbursed based on the achievement of DLIs. There will be advances of the loan funds up to 25 percent of the loan amount. The Government will provide evidence of and document achievement of DLIs at year end of each year (2016-2018), and based on verification of the achieved DLIs by the Bank following the verification protocol, the advances will be converted to disbursements freeing up space to next advance up to 25 percent of the loan amount. Disbursements will be scalable depending on the level of achievement of each DLI as assessed by the Task Team based on the validation protocol. The Bank will verify that the level of disbursed funds based on achieved DLIs does not exceed the level of total Program expenditures incurred over the implementation period. In case that disbursed funds exceed the level of incurred program expenditures, the excess amount will need to be reimbursed to the Bank. Loan funds will be disbursed to a government account held at the National Bank of Serbia/Consolidated Treasury Account, and will be accounted for as income. 17. The Bank will rely on existing country systems for implementation of the fiduciary aspects of the Program. The financial management and procurement assessments undertaken during Program preparation verified that these systems are sufficient to use of Program funds reliably. The Program fiduciary assessment is presented in Annex 5. 18. Responsibility for budget planning and execution is largely decentralized to Program implementing agencies. Planning and budgeting capacity in MPALSG, TA and other program implementing entities is adequate. Accounting systems can track and report actual Program expenditures against a comprehensive organizational, functional, program, economic and source-of-funds classification. The SAI confirms that Program implementing entities’ financial reporting is in line with the national accounting framework. Quarterly reports on budget execution (except for the first quarter) will be used as financial reports for monitoring Program 26         expenditures. All of the Program entities prepare budget execution plans each month for the coming quarter on rolling basis, based on which the TA determines their respective monthly payment quotas. Internal controls provide a satisfactory control framework and internal audit units are functional in Program implementation entities. The Program will not directly rely on internal audit work in verifying the use of funds but will consult findings of internal audit when assessing fiduciary arrangements during implementation. Program implementing entities prepare financial statements using their accounting records and auxiliary ledgers, after reconciling such information with the Treasury Main Ledger. 19. Responsibility for conducting procurement is also largely decentralized. Each of the Program implementing entities has an administrative and finance unit with one or more certified Procurement Officers who undertake procurement of services and minor procurement for goods and works. Larger works and goods are procured on behalf of most entities by centralized government procurement body, the UZZPRO. Framework Agreements, signed by UZZPRO, are used for procurement of common goods. Advance Payment Guarantees and Performance Guarantees are mandatory. The Republic Commission for Protection of Rights in Public Procurement Procedures, an autonomous and independent body, is responsible for protection of the parties and grievance redress in public procurement. 20. The Program audit will be undertaken by the SAI. As a part of financial and compliance audits, apart from accuracy of financial statements and compliance with laws and regulations, SAI will also examine the financial management and control systems, internal control systems and internal audit. The audit of the final account for the previous year is delivered by the SAI by the end of the year following the audited period. The SAI audit of the final account will be considered as the audit of the Program. The Bank has agreed with the SAI that the audit report will include an explanatory note which will detail program expenditures specifically. The SAI is assessed to have sufficient capacity to produce reliable audit providing sufficient assurance about the use of Program funds. 21. The World Bank’s Guidelines on Preventing and Combating Fraud and Corruption in Program for Results Financing will apply to the Program. If required, the Bank will have access to any information related to contracts under the Program (including those held by third parties/contractors) and the Bank will jointly with the government conduct a review to determine the existence or fraud and corruption within the Program. The Borrower’s commitment to follow the Guidelines will be confirmed in the Minutes of Negotiation. VII. ENVIRONMENTAL AND SOCIAL ASPECTS 22. The Environmental and Social Systems Assessment highlights risks arising from the Government’s retrenchment program supported by the Program. PDO indicators 2 and 3 support the design and implementation of the Government of Serbia’s rightsizing policies and retrenchment of personnel. MPALSG will be responsible for monitoring social impacts of the program and overseeing mitigation measures in conjunction with the Ministry of Health, and the Ministry of Labor, Employment, Veteran and Social Affairs. The ESSA identifies specific measures to be taken by the Program to mitigate any adverse effects associated with retrenchment (See Annex 6). These activities are reflected in the Program Action Plan:  Ensure that MPALSG has staff assigned to coordinate, monitor and report on the rightsizing process and its effects; 27          Improve consultations with workers and workers organizations;  Ensure that the criteria for selection of those employees who will be chosen as redundant are based on the principle of transparency, non-discrimination, applied consistently and have adequate appeals procedures;  Employers in the public sector will prepare retrenchment plans;  Work closely with NES to develop an action plan for supporting employees who have been separated, including training plans;  Ensure documentation of the profiles of those retrenched in terms of age, education, gender, and disability profile.  Prepare active employment measures for retrenched women;  Monitor severance payment disbursement and status of retrenched workers. 23. The Program Action Plan proposes actions to reduce the burden of reforms on women. This includes measures to reinforce protections of women in instances of retrenchment provided by the national legislation, such as protection of women on maternity leave, women headed households and mothers of children under the age of two. The criteria for selection of employees to be made redundant must be based on the principle of non-discrimination. The retrenchment plans and requests for redundancy (severance) payment will include segregated information according to gender in order monitor and identify possible adverse gender impacts. When identified, these impacts and remedial measures will be reviewed by the MPALSG and adjustments make in the retrenchment program where appropriate 24. Communities and individuals who believe that they are adversely affected as a result of a Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the existing program grievance redress mechanism or the World Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of World Bank non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s corporate GRS, please visit www.worldbank.org/grs. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.        28   ANNEX 2: RESULTS FRAMEWORK   Program Development Objective (PDO): To improve efficiency in public sector employment and finances Target Values Responsibility PDO Level Results Data Source/ DLI Unit Baseline YR1 YR2 YR3 Frequency for Data Remarks2 Indicators Methodology Collection PDO Indicator 1: % 0 0 70 70 Annual Sample-based PPS DLI#2 Share of public survey (exact administration survey design to employees assigned to be determined) of new pay grades as per public the Law on Public administration Sector Employees employees pay Salary System slips against the new pay grades PDO Indicator 2: Yes/No No Yes Yes Yes Annual Calculation: PPS DLI#3 Total number of public Total number of administration employees as per employees at or under payroll compared annual ceiling to Total number of prescribed by the Law staff as on Ceilings on the determined by the Number of Employees annual ceiling PDO Indicator 3: % 0 100 100 100 Annual Review and count PPS DL#4 Share of redundant of relevant public administration documents of employees receiving severance redundancy payments packages for pursuant to provisions eligible public of Law on Ceilings on administration the Number of employees Employees, Civil Calculation: public                                                                2 If not stated otherwise, the DLIs are for all three years of implementation. 29          Program Development Objective (PDO): To improve efficiency in public sector employment and finances Target Values Responsibility PDO Level Results Data Source/ DLI Unit Baseline YR1 YR2 YR3 Frequency for Data Remarks2 Indicators Methodology Collection Servants Law, and administration Labor Law employees receiving redundancy payments/eligible public administration employees per Labor Law, Law on Ceilings on the Number of Employees, and Civil Servants Law PDO Indicator 4: % 62 65 68 71 Annual Public PPS DLI#5 Share of public procurement procurement contracts portal. within the category of Calculation: public authorities over public 5,000,000 RSD in procurement value, signed in a contracts within Fiscal Year of the the category of Borrower, in 90 days Public Authorities or less between the over RSD 5 date of Issuance of million in value, Bidding Documents signed in the fiscal and the date of signing year in a duration of the Public of 90 days or less Procurement Contracts between date of issuance of bidding documents and signing of the public procurement 30         Program Development Objective (PDO): To improve efficiency in public sector employment and finances Target Values Responsibility PDO Level Results Data Source/ DLI Unit Baseline YR1 YR2 YR3 Frequency for Data Remarks2 Indicators Methodology Collection contracts/ All procurement contracts over RSD 5 million in value signed in the fiscal year. PDO Indicator 5: RSD 26.6 29.3 32.2 35.4 Annual Estimate of total PPS DLI#6 Value of Public billion billion billion billion value of public Procurement Contracts procurement awarded through framework Framework agreements in a Agreements (in RSD) given year based on PPO’s public procurement database. PDO Indicator 6: % 60 70 80 90 Annual Calculation: PPS DLI#8 Percentage of Value of commitments in commitments budget execution entered in FMIS system entered within within deadline the required deadline prescribed by per the Law on legislation/ Value Deadlines for of total Payments in commitments Commercial entered in FMIS x Transactions 100 Result Area 1: Improved HRM Intermediate Results Yes/No No Yes Yes Yes Annual Calculation: PPS Indicator 1.1: At least Number of public 70% of public administration administration employee employee positions positions assigned assigned to pay grades to job grades / according to the Law Total number of on Public Sector public 31         Program Development Objective (PDO): To improve efficiency in public sector employment and finances Target Values Responsibility PDO Level Results Data Source/ DLI Unit Baseline YR1 YR2 YR3 Frequency for Data Remarks2 Indicators Methodology Collection Employees Salary administration System employee positions x 100 Intermediate Results % 0 0 60 70 Annual Calculation: MPALSG Indicator 1.2: Share Division of of public assigned public administration administration employees assigned to employees by new pay grades as per total number of the Law on Public public Sector Employees administration Salary System. employees x 100. Intermediate Results Yes/No No No No Yes Annual Sample review of MPALSG – Indicator 1.3: personal data, Employee Registry interview of functional according to individuals, and defined criteria in the review of Law on Registry of all customized and Employees, Elected, routine reports Nominated and and HR Appointed and transaction Engaged Persons documentation within Public Funds and audit trail Beneficiaries Intermediate Results % 0 0 30 60 Biannual Calculation: MPALSG – Indicator 1.4: Share Number of re- of public graded public administration administration employees paid employees paid according to new pay according to new grades as per the Law grades / All public on Public Sector administration Employees Salary employees in System. payroll x 100 32         Program Development Objective (PDO): To improve efficiency in public sector employment and finances Target Values Responsibility PDO Level Results Data Source/ DLI Unit Baseline YR1 YR2 YR3 Frequency for Data Remarks2 Indicators Methodology Collection Intermediate Results Number 0 5 10 17 Biannual Review and count MPALSG – Indicator 1.5: of retrenchment Ministries with plans retrenchment plans, identifying redundant positions Result Area 2: Improved FM Intermediate Results Number 0 247 317 526 Annual Review of FMIS PPS Indicator 2.1: IBB reports included in the FMIS Intermediate Results Number 25 35 45 50 Annual Review of budget PPS – Indicator 2.2: inspection reports Budget inspections conducted Result Area 3: Improved Procurement Management Intermediate Results Number 3,300 3,600 4,000 4,400 Annual PPO’s Annual PPO – Indicator 3.1: Public Report/Collection procurement contracts through PPO’s awarded through database of framework agreements concluded for all contracting contracts authorities Intermediate Results Number 1,810 2,000 2,200 2,400 Annual PPOs Annual PPO Indicator 3.2: Public Report /Database procurement officers of procurement certified officers certified     33         ANNEX 3: DISBURSEMENT LINKED INDICATORS TABLE 4: DISBURSEMENT-LINKED INDICATOR MATRIX Indicative Timeline for DLI Total Achievement As % of Total Financing DLI Financing Allocated to Baseline Amount 2016 2017 2018 DLI (€) DLI1: Percentage of Public Administration Employee Positions assigned to pay grades as per the Law on 16 0 - 70 – Public Sector Employees Salary System. 11,040,000 DLI2: Percentage of Public Administration Employees assigned to new pay grades as per the 11,040,000 16 0 0 80 90 Law on Public Sector Employees Salary System. DLI3: Total number of Public Administration Per 2016 Per 2017 Per 2018 Employees at or under annual ceiling prescribed by 5,520,000 8 0 ceiling ceiling ceiling the Law on Ceilings on the Number of Employees DLI4: Percentage of Redundant Public Administration Employees receiving Redundancy Payments pursuant to provisions of Law on Ceilings 13,627,500 19.75 0 100 100 100 on the Number of Employees, Civil Servants Law, and Labor Law. DLI5: Percentage of Public Procurement Contracts within the category of public authorities over 5,000,000 RSD in value, signed in a Fiscal Year of 5,520,000 8 62 65 68 71 the Borrower, in 90 days or less between the date of Issuance of Bidding Documents and the date of signing of the Public Procurement Contracts. DLI6: Value of Public Procurement Contracts 26.6 29.3 32.2 35.4 5,520,000 8 awarded through Framework Agreements (in RSD) billion billion billion billion DLI7: Number of IBB included in the FMIS. 5,520,000 8 0 247 317 526 DLI8: Percentage of commitments in budget execution system entered within the required deadline 11,040,000 16 60 70 80 90 34         Indicative Timeline for DLI Total Achievement As % of Total Financing DLI Financing Allocated to Baseline Amount 2016 2017 2018 DLI (€) per the Law on Deadlines for Payments in Commercial Transactions (%) Front end fees 172,500 0.25 - - - Total Financing Allocated 69,000,000     35         TABLE 5: DLI VERIFICATION PROTOCOL Draft Protocol to Evaluate Compliance of the DLI and Scalable Remarks DLI Definition Data/Result Verification (Yes/No) Data Source Procedure DLI1: Public administration employees No  Consolidated list of  Review by the PPS on DLI for year 1 (70) Percentage of positions— positions in all public assignment of public Assessment date: June Public ministries, public services, public administration administration employee 30, 2017 Administration agencies and local self- employee positions positions to new job grades using Employee government (Art. 1 paragraph 3  New pay and a consolidated list of public Intermediate Results Positions of Law on Public Sector grading structure administration employee Indicator 1.1 assigned to pay Employees Salary System)  Report with positions to pay grades according grades as per the excluding police officers, the assignment of to the Law on Public Sector Law on Public military, and state owned public Employees Salary System. Sector enterprises. administration  Calculation: Number of public Employees employees positions administration employee Salary System. Assigned to job grades according to new pay grades positions assigned to job grades to the new pay and grading according to the new pay and structure— assigned to the grading structure / number of appropriate grade as determined new and consolidated public by the job evaluation and re- administration employee grading process by the MPALSG positions x 100 DLI2: Public Administration Yes  Sample of public  Sample-based survey (exact DLI for year 2 (80%), Percentage of Employees—staff on open-ended administration survey design to be determined), and year 3 (90%). Public contracts in in all ministries, employees’ personal by the PPS, of public Administration public services, public agencies action notice or administration employees’ Assessment dates: Employees and local self-government (Art. 1 other relevant personal action notices against December 31, 2017, assigned to new paragraph 3 of Law on Public employment record the new pay grades and 2018 pay grades as per Sector Employees Salary System) ( per Law on  Calculation: number public the Law on excluding police officers, the Protection of administration employees PDO Indicator 1 Public Sector military, and state owned Personal Data) assigned to new pay grades Employees enterprises.  New pay grades ( according to the Law on Public Salary System. from the Law on Sector Employees Salary Public Sector System/number of all public Wages) administration employees in the  Employee Registry registry of public employees *100 DLI3: Total Total number of employees— No  Annual ceiling  Review by the PPS Calculation: DLI for year 1 (Per number of Public number of open ended employees prescribing the total Total number of employees 2016 ceiling), year 2 Administration in ministries or agencies and local number of public according to payroll and/ registry (Per 2017 ceiling), 36         Draft Protocol to Evaluate Compliance of the DLI and Scalable Remarks DLI Definition Data/Result Verification (Yes/No) Data Source Procedure Employees at or government subject to the Law on administration of employees compared to and year 3 (Per 2018 under annual Ceilings on the Number of employees, authorized number of staff as ceiling) ceiling Employees receiving consistent with the determined by the annual ceiling prescribed by the remuneration as of September 1, Law on Ceilings on Assessment dates: Law on Ceilings of current year. Part-time the Number of December 31, 2016, on the Number of employment will be converted to Employees 2017, and 2018 Employees full-time equivalents.  Total number of employees as on the PDO Indicator 2 Annual ceiling—prescribed payroll number of public administration employees as defined by the Law on Ceilings on the Number of Employees. DLI4: Redundant—employee will be Not The Decree on the PPS review of relevant documents DLI for year 2 (100%) Percentage of considered redundant if s/he has scalable Ceiling on Maximum of severance packages and count of and year 3 (100%) Redundant accepted the severance package for the Number of Employees public administration employees Public (rather than seeking employment first 99%; List of eligible receiving redundancy payments Assessment dates: Administration elsewhere in public sector). thereafter, employees December 31, 2017 Employees scalable. Calculation: Number of redundant and 2018 receiving List of employees public administration employees Redundancy receiving redundancy receiving redundancy PDO Indicator 3 Payments payment payments/Number of employees pursuant to eligible for redundancy payments provisions of per the provisions of the Labor Law Law on Ceilings and Law on Ceilings on the Number on the Number of of Employees *100 Employees, Civil Servants Law, and Labor Law. DLI5: Public procurement contracts— Yes PPO Portal on number DLI for year 1 (65 %); Percentage of written agreements in which of contracts over RSD  PPS review on a sample basis to year 2 (68 %); and Public contracting authorities as 5 million in value verify functionality of the year 3 (71%) Procurement purchaser agree to acquire goods, awarded in a fiscal procurement tracking system Contracts within works, or services from a seller in year and time between public procurement portal in Assessment dates: the category of exchange for payment and that issuance of bidding respect of capturing duration of December 31, 2016, public authorities specifies each party’s obligations documents and award procurement 2017, and 2018 over 5,000,000 in relation to the transaction, for of contract 37         Draft Protocol to Evaluate Compliance of the DLI and Scalable Remarks DLI Definition Data/Result Verification (Yes/No) Data Source Procedure RSD in value, example, business provisions,  Calculation: Number of public PDO Indicator 4 signed in a Fiscal price, payment information, and procurement contracts within the Year of the other legal terms and conditions category of Public Authorities Borrower, in 90 applicable to the transaction. over RSD 5 million in value, days or less awarded in the fiscal year within between the date Issuance of bidding documents— a duration of 90 days or less of Issuance of the bidding documents are posted between the date of issuance of Bidding on the public procurement portal. bidding documents and the date Documents and Tender or bidding documents are of signing of the public the date of defined under article 61 of the procurement contracts / Total signing of the PPL according to type of number of public procurements Public procedure and the subject of contracts within the category of Procurement public procurement. Date of Public Authorities in the fiscal Contracts. announcement of tender year * 100 (%) documentation on the public procurement portal will be the starting date for calculation of the duration of procedure. Award of contracts—the contracts are signed between the contracting authority and the selected economic operator. Notice on concluded public contract is announced on the public procurement portal, and it will be calculated as the ending date of duration of procedure. DLI6: Value of Framework Agreements— Yes PPO database (in PPS to estimate the total value of DLI for year 1 (RSD Public contractual arrangements with a portal) of quarterly public procurement Framework 29.3 billion); year 2 Procurement supplier establishing pricing reports submitted by Agreements in a given year (RSD 32.2 billion); Contracts structures without necessarily contracting authorities and year 3 (RSD 35.4 awarded through fixing an actual price but rather a on procurement Calculation: PPO to provide data billion) Framework mechanism that will be applied contracts. from its Annual Report. Agreements (in for pricing particular Assessment dates: RSD) requirements during the period of December 31, 2016, the Framework Agreement 2017, and 2018 38         Draft Protocol to Evaluate Compliance of the DLI and Scalable Remarks DLI Definition Data/Result Verification (Yes/No) Data Source Procedure PDO Indicator 5 DLI7: Number IBBs—defined in the Republic of Yes  PPS review of the list of IBBs DLI for year 1 (247);  FMIS standard and of Indirect Serbia Law on Budget Systems as  Review by the PPS of the FMIS year 2 (317); and year Budget legislative bodies, public customized reports 3 (526) standard and customized reports Beneficiaries institutions founded by the  Audit trail of the and audit trails to verify the included in the Republic, and/or local FMIS Assessment dates: number of IBBs integrated in the FMIS. governments and subordinate to  Register of FMIS December 31, 2016, their respective bodies and beneficiaries of 2017, and 2018 organizations of the republic public funds Intermediate Result and/or local governments in Indicator 2.1 administrative and budgetary sense. Included in FMIS—integrated in BES operated through the FMIS via a module and direct access to the system by staff of the respective institutions to enter commitment, request for payments, and so on, to enable improved monitoring and control over budget execution by IBBs DLI8: Commitments—assumed Yes FMIS standard and Review by the PPS of reported data DLI for year 1 (70%); Percentage of liabilities by budget beneficiaries tailored reports from the FMIS on payments and DLI for year 2 (80%); commitments in for which the funds are reporting of commitments DLI for year 3 (90%) budget execution committed in the FMIS against Audit trail of the FMIS system entered respective beneficiary’s budget Calculation: Amount (in RSD) of Assessment dates: within the appropriation. commitments in BES entered within December 31, 2016, required deadline the required deadline per the 2017, and 2018 per the Law on BES—as defined in rulebook on legislation on Deadlines for Deadlines for the system of budget execution, Payments in Commercial PDO Indicator 6 Payments in that is, a system operated by the Transactions/ Total amount of Commercial TA through the FMIS application, commitments (in RSD) entered in Transactions (%) which covers all budget BES during the review period *100. expenditures incurred by entities included in the system. 39         Draft Protocol to Evaluate Compliance of the DLI and Scalable Remarks DLI Definition Data/Result Verification (Yes/No) Data Source Procedure RINO by-law (to Law on Deadlines of Payments in Commercial Transactions)— Rulebook on supervision of implementation of the RINO Law (October 2015) prescribes that budget beneficiaries are obliged to report commitments within three days after those have been assumed.         40         TABLE 6: WORLD BANK DISBURSEMENT TABLE Disbursement Linked Result Category Scalability Formula (including Disbursement Linked Indicator Disbursement Linked Result Amount of the (as applicable) as applicable) (as applicable) Loan Allocated (expressed in EUR) (1) DLI #1: Percentage of Public DLR#1; from baseline 0 to at least DLR#1: EUR11,040,000 Not scalable. Administration Employee Positions assigned to 70% by 06/30/2017: pay grades as per the Law on Public Sector EUR11,040,000 Employees Salary System. (2) DLI #2: Percentage of Public DLR#2: from baseline 0 to up to DLR#2: EUR11,040,000 DLR#2: Scalable: Administration Employees assigned to new pay 90% by 12/31/2018: EUR122,667 per each 1% of grades as per the Law on Public Sector EUR11,040,000 Public Administration Employees Salary System. Employees assigned to new pay grades as per the Law on Public Sector Employees Salary System (3) DLI#3: Total number of Public DLR#3.1: Total number of Public DLR#3 EUR5,520,000 Not scalable. Administration Employees at or under annual Administration Employees not to ceiling prescribed by the Law on Ceilings on exceed the maximum prescribed by the Number of Employees the Law on Ceilings on the Number of Employees for calendar year 2016: EUR1,840,000 DLR#3.2: Total number of Public Administration Employees not to exceed the maximum prescribed by the Law on Ceilings on the Number of Employees for calendar year 2017: EUR1,840,000 DLR#3.3: Total number of Public Administration Employees not to exceed the maximum prescribed by 41         Disbursement Linked Result Category Scalability Formula (including Disbursement Linked Indicator Disbursement Linked Result Amount of the (as applicable) as applicable) (as applicable) Loan Allocated (expressed in EUR) the Law on Ceilings on the Number of Employees for calendar year 2018: EUR1,840,000 (4) DLI#4: Percentage of Redundant Public DLR#4.1: 100% for calendar year DLR#4 Not scalable for the first 99% Administration Employees receiving 2017: EUR6,813,750 EUR13,627,500 in each calendar year 2017 Redundancy Payments pursuant to provisions and 2018 of Law on Ceilings on the Number of DLR#4.2: 100% for calendar year Employees, Civil Servants Law, and Labor 2018: EUR6,813,750 Scalable for the next 1% in Law. each calendar year 2017 and 2018: Amount equal to EUR 136,275 / 1% of number of Redundant Public Administration Employees, on a per capita basis. (5) DLI#5: Percentage of Public Procurement DLR#5.1: from baseline 62% to DLR#5: EUR5,520,000 DLR#5.1: Scalable: Contracts within the category of public 65% until 12/31/2016: EUR613,333 per percentage authorities over 5,000,000 RSD in value, EUR1,840,000 point increase, up to and signed in a Fiscal Year of the Borrower, in 90 including 65%. days or less between the date of Issuance of DLR#5.2: from baseline of result as Bidding Documents and the date of signing of of 12/31/2016 to 68% until DLR#5.2: Scalable: Amount the Public Procurement Contracts. 12/31/2017: EUR1,840,000 per percentage point increase, up to and including 68%, DLR#5.3: from baseline of result as equal to: (total percentage of 12/31/2017 to 71% until point increase) / (balance of 12/31/2018: EUR1,840,000 EUR5,520,000 – amount paid under DLR# 5.1) DLR#5.3: Scalable: Amount per percentage point increase, 42         Disbursement Linked Result Category Scalability Formula (including Disbursement Linked Indicator Disbursement Linked Result Amount of the (as applicable) as applicable) (as applicable) Loan Allocated (expressed in EUR) up to and including 71%, equal to: (total percentage point increase) / (balance of EUR5,520,000) – (amount paid under DLR#5.1 + amount paid under DLR#5.2) (6) DLI#6: Value of Public Procurement DLR#6: from baseline RSD 26.6 DLR#6: EUR5,520,000 DLR#6: Scalable. EUR78,521 Contracts awarded through Framework billion up to RSD 96.9 billion until per each 1 billion RSD. Agreements (in RSD) 12/31/2018 (7) DLI#7: Number of Indirect Budget DLR#7: from baseline 0 up to 526 DLR#7: EUR5,520,000 DLR#7: Scalable. EUR10,494 Beneficiaries included in the FMIS. until 12/31/2018 per each Indirect Budget Beneficiary. (8) DLI#8: Percentage of commitments in DLR#8: from baseline [60%] up to DLR#8: EUR11,040,000 DLR#8: Scalable budget execution system entered within the 90% by 12/31/2018 EUR368,000 per percentage required deadline per the Law on Deadlines for point increase. Payments in Commercial Transactions (%) (9) Front-end Fee to be paid pursuant to Not applicable EUR172,500 Not applicable Section 2.03 of this Agreement in accordance with Section 2.07(b) of the General Conditions TOTAL AMOUNT 69,000,000         43         44   ANNEX 4: SUMMARY TECHNICAL ASSESSMENT I. GOVERNMENT STRATEGY 1. The Government of Serbia has a demonstrated a sustained commitment to public sector reform. The implementation of the PAR Strateg adopted in 2004, together with two actions plans covering the periods 2004-2008 and 2009-2012, focused on setting up a legal framework for further development of the public administration system. The new PAR Strategy, adopted in 2014, extends the scope of the previous Strategy and sets a more comprehensive strategic framework for the PAR. An Action Plan was adopted in March 2015. This lays out the schedule for the implementation of the PAR Strategy in the period 2015–2017. The Action Plan sets results to be achieved in regards to the specific objectives contained in the 2014 PAR Strategy and provides a basis for results-based monitoring. Motivations for the reforms are threefold: first as a developmental agenda; second as a requirement of European Accession; and third, and most immediately, as means to address structural fiscal deficits. 2. The goal of the PAR Strategy and Action Plan is “to ensure further enhancement of the public administration operations in line with the principles of European Administrative Space”.3 The PAR Strategy seeks to develop a public administration system that will deliver “high quality services for citizens and businesses, and the public administration in Serbia that will significantly contribute to economic stability and improved living standard of citizens.”4 The Action Plan is structured around five key objectives: Objective 1: Improving organizational and functional sub-systems of the Public Administration - organizational and functional restructuring of authorities, organizations and other bodies discharging Public Administration operations, enhancement of decentralization and de-concentration of PA activities, improvement of strategic planning system and coordination of public policies as well as development of e-Government; Objective 2: Establishing a harmonized public service system on merits and improvement of HR management - setting an aligned system of employment and salaries for public administration employees and further development of human resource management system in the public administration; Objective 3: Improving public financial management and public procurement - improvement of budget planning and preparation process, strengthening of management and control of revenues and internal audit, but also the public procurement system; Objective 4: Increasing legal security and improving business environment and quality of Public services - improvement of regulatory processes and administrative procedures and reform of the inspection control; Objective 5: Increasing citizen participation, transparency, promotion of ethical standards and responsibility in the performance of public administration - enabling better conditions for participation of interested public in Public Administration activities,                                                                3 These principles include: Reliability and Predictability and/or legal certainty; Openness and Transparency of the administrative system and promotion of the participation of citizens and social entities in the work of the PA; Accountability of PA bodies; and Efficiency and Effectiveness. 4 Republic of Serbia (2014). PAR Strategy in the Republic of Serbia, Belgrade: MPALSG, p.10 45          strengthening ethical values among Public Administration employees and suppressing corruption.  3. Governance and institutional capacity are among the most important constraints to economic growth in Serbia. Systemic issues include: weak policy coordination and limited reform implementation capacity; inefficient decision making processes that slow implementation and undermine accountability; an overly complex organization of the central state administration, including overlapping and duplicative institutions and functions; the ineffective organization of service delivery structures, both in social services or in providing services to businesses and investors; weak human resource management systems, an opaque wage system; inefficient state owned enterprises; a burdensome and ineffective regulatory framework; and low levels of trust in institutions. Public sector reforms seek to address these systemic issues, transforming Serbia's public administration from a rule-based, rigid and inefficient system into a system that is agile, service-oriented and affordable. 4. Public sector reform is a requirement for Serbia’s accession to the European Union. The PAR Strategy seeks to align the public administration with the principles of European Administrative Space: reliability, predictability and legal dependency; openness and transparency and promotion of the participation of citizens and social entities in the decision making processes; accountability; and efficiency and effectiveness. Negotiations with the EU opened in December 2015 with Chapter 32 (financial control). The accession process will address other Chapters that touch on key elements of the PAR agenda: 17 (budgetary framework); 5 (public procurement), 23 (external audit). 5. Public sector reform has assumed particular urgency in the context of Serbia’s economic crisis. Serbia experienced significant fiscal challenges as a result of the global economic crisis. In an environment of structural deficits, high public debt and high spending on public sector wages, efficiency savings from public sector reform; reduction in the number of employees and improvements in public financial management and procurement systems are integral part of fiscal consolidation strategy. 6. The Program focuses on three elements of the broader PAR Strategy that support these development, EU accession and fiscal consolidation goals. These are: aligning the high number of public sector employees with service delivery requirements and rationalizing public sector wages; strengthening systems of financial control to deal with the issue of arrears; and strengthening procurement systems to improve efficiency and value for money. The three selected result areas of the Program for Results operation reflect the strategic priorities of the Government’s program for public sector reform. The strategic relevance and technical viability of each of these results areas is assessed below. II. TECHNICAL SOUNDNESS 7. The activities covered by the Program are technically sound and relevant. They have been selected to target specific areas of public management with potential for multiplier effects. They reflect the key areas that that have been highlighted by recent analytical work by the World Bank, the IMF and the EU among others as important areas for reform of the public sector. The World Bank’s 2015 Strategic Country Diagnostic (SCD) pointed out that institutional weaknesses, inefficient human resources, and political interference were among the most important constraints to reform in Serbia. The PAR Action Plan was prepared by civil servants 46         supported by a team of experts from OECD SIGMA. The PAR Strategy and Action have specific objectives and indicators for measuring the achievement of results in each of the five areas. Each result area has a sequenced Action Plan of specific activities that will contribute to the achievement of the key results. 8. The Program draws on the PAR Strategy and Action Plan in three Result Areas focusing on the binding constraints to efficiency in the public sector in the management of human resources, public finances and procurement. The sector context, the rationale for the selection of each of the Result Areas, the problems to be addressed and the reforms supported by the Program are discussed below. Result Area 1: Improved Human Resource Management 9. Reduction of the public sector wage bill expenditures features prominently in the Government of Serbia’s macro-economic program. Serbia’s wage bill at 12.6 percent of GDP, prior to a wage cut in 2014, was about two percentage points higher than the average of the EU28 (10.7 percent) and the new EU member states (10.3 percent) and considerably higher than in some immediate neighbors such as Bulgaria (8.5 percent) and Romania (7.8 percent). The 2014 wage cut reduced Serbia’s wage bill by about one percent of GDP but the wage bill is still above the regional average.5 10. Staffing levels are comparable to EU member states and neighbors, but there is evidence overstaffing in certain parts of the Serbian public sector - health, judiciary, and police and to some extent, education. As of December 2014, the Serbian public sector employed 500,538 staff under permanent and fixed-term contracts. This is equivalent to about seven staff per thousand population; roughly the same as the average of the immediate neighbors (Bulgaria, Romania and Croatia) and slightly below the average of the EU 28 (7.2) and the new member states (7.3). A recent Government report6 found 7,040 excess non-medical staff working in Government-financed health care institutions. In the education sector, the ratio of teaching staff per thousand population is ten percent higher than the average for the other European countries and the sharp decline in the school age population over the last two decades has resulted in classes with extremely low pupil: teacher ratios, particularly in rural areas. A 2009 study by the World Bank7 found that consolidating under-enrolled classes by shifting students to other classes in the same school (and grade) could reduce staffing needs by ten percent. Consolidating under-enrolled classes by shifting students to other schools within the same municipality could reduce cost staffing needs by another 25 percent. 11. The higher-than-average wage bill is largely the result of relatively high levels of compensation. The average salary in the Serbian public sector is about 1.83 times Serbia’s per- capita GDP. The equivalent figure for the EU 28 is 1.49; for the new member states, 1.37 and for the immediate neighbors 1.51. Aggregate data hides wide variation within the Serbian public                                                                5 Sources: Serbia: MoF, Financial Plans of Social Security Organizations, MPALSG staff estimates and projections; other countries: Eurostat. See: MPALSG (2015). A Modern State-Lower A Rational State: How Many, How and What For? Belgrade: MPALSG (Working Paper). 6 MPALSG ( 2015). A Modern State-Lower A Rational State: How Many, How and What For? Belgrade: MPALSG (Working Paper): MPALSG (Working Paper). 7 World Bank. 2009. Serbia: Doing More with Less 47         sector. The pay and grading system includes 2,200 job titles, 71 different elements of remuneration, 5 different base salaries, 900 different job coefficients, 19 laws and a plethora of by-laws that regulate salary levels. Compensation rates are above market levels in low skilled positions and below market levels for high level positions (IPSOS, 2015). The complex and arbitrary nature of the compensation system undermines staff morale and renders the system vulnerable to pressure from public sector unions. 12. The Result Area focuses on the Government’s efforts to resolve these two problems: the alignment of staffing levels with the requirements for service delivery; and putting in place a fair, competitive and affordable remuneration system across the public sector. The institutional context and Government reform proposals in each of these areas are reviewed in turn below. Public Sector Employment 13. Deficiencies in information systems have undermined the ability of the Government to control employment numbers and manage human resources. Following the passage of the Law on Registry in 2014, the Government has created the first comprehensive registry of public employees since 2003. However, data on the total number of employees is still inaccurate because participation by individual ministries is voluntary and because their information systems are deficient: the Ministry of Education, for instance, does not have accurate data on the number of teachers. The Government is unable to link the various systems operating at the sector level ministries with the large public administration payroll systems to monitor staff numbers, increase in staff compliment over time and total employment cost. This makes it difficult for the Government to control staffing and wage bill management across the public sector. 14. The acts of systematization setting out the number of positions permitted for each agency are not an effective means of controlling personnel numbers. Acts of systematization are not immutable: they can be revised when new ministries are created or when the functions of existing ministries are expanded. A 2008 Governmental reorganization, for example, created many such opportunities, by expanding the number of ministries to 24 and reassigning the functions of five ministries which had been abolished. Moreover, acts of systematization are routinely ignored or revised following annual budget negotiations. 15. Nor do the Personnel Plans submitted as part of the annual budget process actually control personnel numbers. The Personnel Plan sets out the number of positions it would like to have funded (existing and new) along with the title, grade, and estimated salary for each position. In principle, the MOF evaluates each plan to see if it is justified given overall budget constraints and Government priorities. In practice, the Personnel Plans are not always contested. The Budget Law requires that a consolidated Personnel Plan be enacted within 30 days of the adoption of the annual budget and that its salary estimates correspond to the amount allocated in the budget. However, the Personnel Plan is often notional, the staffing profile is used only to calculate the wage bill of each budget user and do not reflect the actual numbers of staff receiving salaries. Ministries provide Treasury’s payroll department with its payroll information and the payroll department makes transfers to staff whether or not their position is included in the Personnel Plan. 16. As part of the PAR Strategy, the Government has adopted a number of measures aimed at controlling and rationalizing staffing numbers. In August 2015, Parliament enacted a law requiring ceilings on the maximum number of public employees. This law applies to all 48         ministries and agencies (excluding the Ministries of Defense and Interior and the Judiciary) and is to remain in effect through 2018. Ceilings are to be adjusted annually based on the recommendations of the MPALSG and the MOF. The law also applies to local Governments where permanent ceilings are to be based on the population of each jurisdiction. The Government also to strengthen the registry of public employees by linking the registry to payroll. Once the link is in place, employees will not be paid unless they are registered. The Government hopes that, through this mechanism, it will not only obtain more accurate information on staffing levels but will also be able to identify ghost employees. 17. The Government is undertaking functional reviews to help determine appropriate employment levels for key sectors. The functional reviews seek to eliminate redundant functions, streamline organizations to focus on service delivery and align staffing levels with service delivery requirements. Preliminary data suggests that there are opportunities for substantial staff reductions in certain sectors and occupations. The functional reviews will be supported through a parallel EU-financed TF for Rightsizing 18. Functional reviews will inform the preparation of retrenchment plans. The Retrenchment Plan will lay out: a) the rationale for determining the redundancy of employees; b) the employment profile of the entity; c) the criteria for selecting employees for retrenchment; d) the number of redundant employees, their qualifications and job positions, age, and length of employment (years) covered by the employment insurance benefits, providing gender segregated information, number of persons with disabilities, by location and from ethnic minorities; e) measures taken to find alternative employment such as transfer to other jobs, transfer to other employer, training, part-time work, but not less than 50% of the full time and other measures; f) the resources needed to address the socio-economic status of the redundant employees; g) the employment termination deadline. 19. Staffing reductions will be implemented through a combination of attrition, reassignments and redundancy. Redundancy will be subject to compensation as defined by Serbian legislation which provides for severance payments equal to one-third of monthly salary for each year of service. Redundancy will be offered only to staff in positions that are determined to be redundant. The positions that are vacated will be closed to avoid rehiring. Public Sector Remuneration 20. The current structure of wages is the product of ad hoc wage adjustments granted to particular sectors over the last fifteen years. Equal work is not equally rewarded. Compensation in some sectors is above market rates, in other sectors below. A system of wage coefficients leaves the Government vulnerable to wage pressures from public sector unions. 21. A civil service reform program in 2005 sought to rationalize the salary structure. The reform eliminated salary anomalies within the civil service, so that similar positions in different ministries would have similar levels of compensation and adjusted overall salaries to better reflect private sector comparators. The reform required the reclassification of all civil service positions into what are now 13 grades (five managerial grades and eight executive 49         grades) each defined by a specific scope of responsibilities. The resulting pay law for civil servants (enacted in May 2006) increased civil service pay by an average of 41.2 percent, with increases in all but the lowest grades. 22. However, the salary structure remains extremely complex with wide differentials across the public sector. Serbia has two employment regimes: one for civil servants (covering most administrative, financial, and managerial positions) and one for public service employees, covering most front-line service providers (including teachers and health workers). Both civil servants and public service employees are paid on the basis of fixed wage scales. The regulations governing each group (and various subgroups within them) lay out coefficients for each position. These are then multiplied by a base salary figure, expressed in dinars and periodically adjusted by the Government, to determine the wage of each individual. At present, the pay and grading system includes 2,200 job titles, 71 different elements of remuneration, 5 different base salaries, 900 different job coefficients, 19 laws and a plethora of by-laws that regulate salary levels.8 The resulting pay differentials across the public sector violate the principle of equal pay for equal work. 23. There is also evidence of systematic overcompensation in some occupations and under-compensation in others. A recent World-Bank-supported study provides an opportunity to compare public and private sector wages in Serbia. The study, drawing on the 2014 Labor Force Survey, found that 75 percent of employees in the state sector earn more than the median of all employed persons in Serbia, compared to only 46 percent of private sector employees.9 However, public sector positions tend to be dominated by white collar occupations requiring more education and technical skills—and therefore commanding higher salaries--than those in the private sector. To control for this, the study compares public and private sector wages in specific occupations. The study shows that security guards, health care professionals, and chief executives in the public sector appear to be overcompensated. This is even after the ten percent cut in wages that went into effect in November 2014. Teachers are paid roughly the same in the private and public sectors. But other occupations—including science and engineering professionals and administrative managers – are underpaid in the public sector. Pay for ICT professionals is particularly uncompetitive at 25 percent less than counterparts in the private sector. As a result, the public sector as difficulties attracting and retaining staff with the critical skills. 24. The Government is undertaking a comprehensive job evaluation and pay grading exercise covering all civil servants and public service employees including those in education, health, social protection, culture, tourism, and sports. (Local Governments, police, defense, and members of parliament, judiciary, and state agencies will have their own pay scheme). Positions are evaluated based on the following criteria: scope of responsibility for resources, work organization, and staff management; extent of decision making authority;                                                                8 Data applies to the public service employees. SOEs are not included, they have their own bylaws which regulate salary structure. 9 The state sector includes all public sector employees except those in state owned enterprises. The study also examines wages in a subset of public employees--those in the ‘administration’ sector--and found a similar result. Note that the relevant chart in the report appears to be mislabeled, as it reports that 46 percent of private sector employees earn more than the median wage of private sector employees. By definition, the figure should be 50 percent. 50         complexity of duties and requirements for creative thinking; requirements for knowledge, skills and experience; and extent, level, and purpose of contacts with people inside and outside the organization. Positions will then be grouped into 13 pay groups representing all the jobs level from senior management to basic support functions. A set of wage coefficients for each grade will then be devised, with appropriate differences between grades, to provide an incentive for staff to seek jobs at high grade levels as and when vacancies arise. As a final step prior to implementation, each ministry will amend its systematization act to reflect the new grades. 25. The scope for changes in the salary structure will be constrained by an overall cap on the aggregate wage bill. While it would be desirable to set coefficients and base salary on the basis of comparable private sector positions, private sector comparability is not be affordable in the current fiscal environment. Under the provisions of the draft law, coefficients will be set such that the aggregate wage bill does not increase. As a result, the new grading system is expected to result in wage reductions for some positions and wage increases for others. In implementing the new system, existing staff will be partially ‘grandfathered’. Staff who are currently receiving a salary that is higher than their position would receive under the new pay and grading system will continue to receive their current salaries but will not receive any of the semi-annual increases. Staff who are currently receiving a salary that is lower than their position would receive pay rises over a number of years until reaching the new levels. 26. To initiate the reform, Parliament approved the Law on Public Sector Employees Salary System in February 2016. The Law sets out the principles of the grading system and the timetable for implementation of the reform. Under the terms of the Law, the grading exercise is to be completed for all affected Ministries within 90 days of the enactment of the Law. Coefficients for each grade are to be determined within six months of the enactment of the Law. Program Results Chain 27. DLI #1 and DLI #2 support the Government’s efforts to restructure the remuneration system through the classification of employee positions under the new job catalogue and according to new pay grades. In the first year of the program, funds would be disbursed against the substantial completion of the re-grading exercise. To allow for the possibility that grading may take longer than anticipated, DLI 1 provides for disbursement once 70 percent of public administration employee positions have been assigned to grades using the new pay and grading structure. Disbursements against DLI 2 are scalable relative to the proportion of public sector employees under the new job catalogue and grading system. Activities and outputs leading to the achievement of the DLIs and supported by the Program include: evaluation of positions and publication of the position catalog; matching of the positions to the grading structure; and revision of the payroll records so that staff can be paid according to the new grading structure. 51         Result Chain for Result Area 1: Improved Human Resource Management Medium-term Short-term outcome outcomes and Activities Outputs indicators indicators Evaluate positions Catalog of all job positions Percentage of public prepared administration employee positions assigned to pay grades as per the Law on Public Sector Employees Percentrage of public Match positions to new administration Salary System (DLI#1) grades employees assigned to new pay grades as per Share of public administration the Law on Public employees assigned to new Sector Employees Revise systematization grades   acts to reflect new grades Salary System (DLI#2)  Revised payroll records Share of public reflecting new wage structure administration employees paid according to new grades Prepare the bylaws for the Total number of public Approved By-Laws Employee Registry administration enforcement of the Law functional according to employees at or under on the Ceiling on Public defined criteria in the Law on annual ceiling Sector Employees Registry of all Employees, prescribed by the Law Elected, Nominated and on Ceilings on the Determine current number Registration of all public Appointed and Engaged Number of Employees of employees subject to employees in the Registry Persons within Public Funds (DLI3)  the Law on the Ceiling on completed by all relevant Beneficiaries  Public Sector Employees agencies   Redundant public Ministries prepare administration retrenchment plans, Retrenchment plans prepared Ministries with retrenchment employees receiving identifying redundant plans, identifying redundant redundancy payments positions positions pursuant to the provisions of Labor Law, Law on Ceilings Eligible staff declared on Number of redundant Employees, and Civil Servants Law (DLI4) POA DLI RF  28. DLI# 3 and DLI# 4 support the Government’s efforts to contain public sector employment and align staffing levels with the needs of service delivery. DLI 3 will disburse if the total number of public administration employees is at or under annual ceiling prescribed by the Law on the Ceiling on Number of Employees. DLI 4 is scalable relative to the number of redundant public administration employees receiving redundancy payments in a given year. The 52         use of redundancy as the relevant indicator seeks to support efforts to ensure that those retrenched receive the benefit packages provided under the law. Activities and outputs leading to the achievement of the DLIs and supported by the Program include: finalization and approval of the bylaws implementing the Law on the Ceiling for Public Sector Employees; completion of the registration of public employees in the Registry; and preparation and implementation of retrenchment plans by the responsible Ministries. Result Area 2: Improved Financial Management 29. While the Government has made progress in strengthening public financial management, the 2015 PEFA assessment identified important weaknesses in the control framework and its coverage. Table 7 presents a summary of the assessment performance scores. The assessment period 2011-2013 was dominated by the aftermath of the global economic recession which affected macro-fiscal performances and posed particular challenges for public financial management. Notwithstanding these challenges, the PEFA assessment observed improvements in relation to the previous assessment in 2010 in the legislative framework for the budget process, budget classification, multi-year fiscal planning, procurement and external audit. The assessment noted significant weaknesses in the composition of expenditure out-turn compared with originally approved budget, expenditure arrears, oversight of fiscal risk, and effectiveness of tax collection, predictability in the availability of funds, application of public sector accounting standards and legislative scrutiny of annual budget law and final accounts. 30. Building on the PEFA Assessment, the MOF is in the process of preparing a Public Financial Management Reform Program (PFMRP). The PFMRP is aligned with the broader PAR Strategy and sets priority actions in the short, medium and long term. Implementation of the PFMRP is led by the MOF with support from Serbia’s international partners, including the IMF, the Bank and the EU. The Bank, in the context of the EU-financed TF Right Sizing and Restructuring Project, will support the preparation of a functional review of the MOF that will seek to align organizational structure with its mandate and the requirements of the PER strategy. Other Bank support includes an ECA PFM TF-financed grant for technical assistance on Public Investment Management and technical assistance in preparation to support further development of the FMIS. 31. The Program is expected to addresses the immediate priorities of the Government’s PFM reforms: strengthening expenditure control and preventing the accumulation of payment arrears. Accumulation of expenditure arrears emerged as a significant problem during the economic crisis. In June 2013, the FMIS system reported arrears amounting to RSD 84,942 million (USD 1,003 million) equivalent to six percent of total expenditures in that year. During 2013 the Government negotiated payment plans and conversion RSD 8.26 billion of arrears into public debt.     53         TABLE 7: SUMMARY OF 2015 PEFA ASSESSMENT RATINGS   A B AND B+ C AND C+ D AND D+   Comprehensiven Predictability in Accounting Budget Policy based External scrutiny ess and control in budget reporting and Donor Practices credibility budgeting and audit transparency execution review Aggregate Classification of Orderliness and Transparency of Timeliness and Scope, nature, and Predictability of expenditures out- the Budget participation in taxpayers regularity of follow-up of direct budget turn compared to the annual budget obligations and accounts external audit support original approved process liabilities reconciliation budget Composition of Comprehensivene Multi-year Effectiveness of Availability of Legislative Financial expenditure out- ss of information perspective in measures for information on scrutiny of the information turn compared to included in budget fiscal planning, taxpayers resources received annual budget law provided by original approved documentation expenditure policy registration and by service donors budget and budgeting tax assessment delivery units Aggregate Extent of Effectiveness in Quality and Legislative Proportion of aid revenue out-turn unreported collection of tax timeliness of in- scrutiny of that is managed by compared to Government payments year budget external audit use of national original approved operations controls reports procedures budget Stock and Transparency of Predictability in Quality and monitoring of inter- the availability of timeliness of expenditure Governmental funds for annual financial payment arrears fiscal relations commitment of statements expenditures Oversight of Recording and aggregated fiscal management of risks from other cash balances, public sector debt, and entities guarantees Public access to Effectiveness of key fiscal payroll controls information Competition, value for money and controls in procurement Effectiveness of internal controls for non-salary expenditures Effectiveness of internal audit   32. The accumulation of arrears is a consequence of shortcomings in expenditure planning and cash management. Forecasts of macroeconomic parameters used as the basis of the Budget and MTEF are often inaccurate, over-estimating GDP growth and therefore overestimating resource availability. In 2014, for example, actual budget revenues were 6.3 percent lower than originally planned. At the start of each quarter, budget entities provide Treasury with an estimate of the cash required to execute their budget in the upcoming period. The Treasury reconciles estimates with cash forecasts and establishes quotas for each budget entity. These are revised every month on rolling basis. Budget entities do not manage expenditures within these centrally mandated limits. Budget entities often enter into multi- annual commitments that exceed the limits set by the outer years of the MTEF. Within year, 54         budget entities generally respect the limits set by budget appropriations. But, there is insufficient monitoring and control over recording of commitments in the FMIS by budget beneficiaries. Entities may assume liability without recording it into the FMIS, thus leading to liabilities in excess of budget appropriations and accumulation of arrears. 33. Expenditure control is hindered by the lack of effective commitment controls and incomplete institutional coverage of the FMIS. Budget execution is controlled through a treasury single account using a centralized transaction processing system running on SAP platform. All direct budget beneficiaries enter payment requests directly in the FMIS. Treasury then executes the payment within the budget beneficiaries’ payment quota. However, the system is cash based and budget entities can enter into commitments that are not processed in the system until payments fall due. Furthermore, IBBs, such as such as courts, prisons, and schools are not covered by the FMIS. Although the Treasury processes their payment requests, the absence of IBBs from FMIS means that execution of their budget is not monitored timely. Data on spending by IBBs becomes available only at the end of each year, when each IBB is required to submit the information to its respective direct budget beneficiary. 34. The Government has strengthened controls by setting deadlines for the payment of arrears and improving reporting. The 2013 Law on Deadlines for Payments in Commercial Transactions mandates a timetable for the payment of arrears and fines for debtors (including Government officials) who fail to pay arrears on time. The law originally applied only to arrears owed to commercial entities. More recently (July 2015), the law has been amended to apply to debts owed by public entities to other public entities. At the same time, the Government has taken steps to improve the quality of information on commitments. In 2013 it established an electronic Registry of Settlements of Pecuniary Commitments (RINO) that covered transactions between the public sector and the commercial sector. Beginning 2016 the system was expanded to cover transactions between public sector entities in line with amendments to the law on Deadlines for Payments in Commercial Transactions. Budget entities must now register commitments within three days after assuming the commitment. RINO data indicates that payment arrears amounted to RSD 9 billion RSD (USD79 million) at the year-end 2015. However, RINO data should be interpreted with caution because the data submitted by budget beneficiaries is still not verified. 35. Further reforms seek to support improvements in expenditure planning, enforcement and strengthening of commitment controls and extension of the FMIS to indirect budget entities. The Government intends strengthen the MoF Budget Department, increasing its staff’s ability to prepare and coordinate the budget preparation, monitor budget execution and improve cash planning. Budget entities will be required to submit quarterly reports on arrears and strengthen internal controls over contractual commitments to ensure comprehensive reporting. The MoF will also systematically roll out the FMIS to IBB. Courts will be integrated into the FMIS by January 1, 2016; prisons and cultural institutions by January 2017, and social welfare centers by January 2018. This would leave only education institutions outside the FMIS by the beginning of 2018. Integrating these institutions into the FMIS will take more time, due to their large number.   55         Results Chain 36. The Program supports these reforms through two DLIs, one supporting the extension of the FMIS to indirect budget entities the other supporting the implementation of systematic commitment reporting. DLI 7 disburses against the number of IBB included in the FMIS, with targets based on the Government’s planned extension of the system by sector. DLI 8 disburses against the share of commitments entered in FMIS within deadlines prescribed by legislation. The results chain includes activities and outputs related to measures taken by the MOF Budget Department to produce more realistic annual budgets, efforts by the Treasury to better assess the reliability of estimated cash needs by individual budget beneficiaries and to better allocate monthly quotas among them, as well as efforts to improve the commitment controls in place, quality of data on commitments and ability of budget entities and the MOF to enforce legislation governing the payment of arrears. This is expected to include the development of ex-ante controls of commitments by budget entities. Result Chain for Result Area 2: Improved Financial Management Short-term Medium-term Activities Outputs outcome outcomes and indicators indicators Extend coverage of FMIS Inclusion of IBB into Number of IBB Improved coverage of system to IBB the FMIS system included inFMIS IBB in FMIS completed (DLI#7)  Provide sufficient ICT equipment, training and oversight to IBB to operate in the FMIS Share of commitments in budget execution system entered within the required deadline per the Law on Establishing a system to System to approve Controls over annual and Deadlines for Payments approve, record, and records and monitor multi-annual contractual in Commercial monitor multi annual multi annual contractual commitments improved Transactions (DLI 8) contractual commitments commitment established (DLI#8)    Budget Beneficiaries Establish a system for Comprehensive data on submitting quarterly data reporting and monitoring arrears   on arrears  arrears RF DLI POA Result Area 3: Improved Procurement Management 37. The Public Procurement Law of 2013 significantly strengthened the legal framework for public in Serbia bringing it into line with the EU acquis. The PPL provides for the decentralization of procurement activity to budget entities whilst streamlining procedures, 56         creating a single register of bidders and reducing the scope for arbitrarily rejection of bids. It ensures transparency in the public procurement processes and requires the publication of a wide range of procurement related information through a Public Procurement Portal. The PPL regulates centralized public procurement and provides for framework agreements for the consolidation of purchases of commonly used items across Government. A 2015 amendment to the PPL further strengthened the legal framework by, amongst others, providing for the use of social criteria and consideration of life cycle costs as elements in the evaluation bids. 38. The PPL also sets out the competences of the two core agencies responsible for public procurement systems: the PPO and the Commission for the Protection of Rights in Public Procurement Procedures (RC). PPO oversees the implementation of the PPL, participates in the drafting of procurement regulations, manages the Public Procurement Portal, prepares reports on public procurements, and provides technical assistance to contracting authorities and bidders. The Republic Commission for the Protection of Rights in Public Procurement Procedures is an autonomous and independent body of the Republic of Serbia which provides for grievance redress and tackles fraud and corruption in public procurement. The Commission reports directly to Parliament. 39. While a robust legal framework for public procurement is in place, capacity constraints have undermined implementation. The PPO currently lacks adequate human and financial resources to discharge its duties. The RC lacks sufficient capacity to handle appeals in a timely manner. Procurement is largely decentralized with about 4,900 registered contracting authorities, of which about 166 are central government entities. Individual contracting authorities are insufficiently familiar with procurement procedures. This has caused delays – it now takes about 120 days to complete a procurement procedure – and has also led to the purchase of inferior goods and services, as tenders are inadequately specified and contracts are awarded solely on the basis of price. 40. To address these problems, the Government is pursuing a threefold strategy: capacity building; process improvements through centralization; and systematic procurement performance measurement. The Summary Fiduciary Assessment presented in Annex 5 provides further information on the legal and institutional framework for public procurement and its performance. The Government reform agenda is reviewed below. 41. The procurement capacity building program has sought to ensure that individual contracting authorities have adequately qualified procurement staff by implementing a large scale training and certification process for public procurement officers. The PPL requires every contracting authority whose estimated planned public procurement in a given year exceeds the limit set by the PPL (currently RSD 25 million/US$ 225,000) to provide for the post of a public procurement officer in its staffing profile. Between 2010 and 2013, a total of 1,810 public procurement officers at the central and local levels were certified. Further training and certification is required and to this end, the Government intends to expand the basic training and certification process. It also intends to introduce a higher level of certification for public procurement officers who would acquire more complex and broader knowledge, including EU procurement practices. Specialized training will also be provided, targeting specific areas such as energy or health, or specific issues that are of common interest such as procurement of insurance services and medicines. The Government also intends to establish a public procurement website for public procurement officers which will disseminate information on the practical application of the PPL and other regulations in the field of public procurement. It will a code of ethics in 57         public procurement. The Government will also support professional associations in public procurement in their efforts to increase professionalism and ethical standards in the field. 42. The Government will extend its capacity building to encompass potential bidders in public procurement. Training and workshops will be provided to potential bidders in order to encourage their participation in public procurement procedures and enable them to protect their rights. The need for such training is highest in small and medium-sized enterprises, which often lack sufficient knowledge and information, thus effectively missing on the opportunities for participation in public procurement procedures. This training will be provided in cooperation with the Serbian Chamber of Commerce and regional chambers of commerce. 43. Improvements in procurement processes seek to gradually expand the use of centralized public procurement at the central and local levels. This reform is intended to lower costs through bulk purchasing and maximize the use of scarce professional talent and experience, particularly in more complex procurement. The organization in charge of centralized public procurement for the purposes of national authorities and organizations is the UZZPRO. In addition, centralized procurements of certain medicines and medical supplies are conducted by the Republic Health Insurance Fund. Centralization will be implemented gradually in the coming years. Market research will be undertaken to address the risk that centralized procurement will favor large-scale suppliers, thereby restricting competition. Special attention will be paid to minimizing the adverse impact of centralized procurement on small and medium-sized enterprises. Centralized procurement will be used in those cases where there are clear advantages over decentralized procurement by budget entities. The centralized procurement bodies will be provided with adequate human resources, technical and IT capacities and office space to enable them to successfully conduct procurements on behalf of other contracting authorities. 44. In the course of strengthening centralized procurement, the Government intends to expand the use of framework agreements. These are agreements with suppliers that set out the terms and conditions under which specific purchases can be made throughout the term of the agreement. In principle, framework agreements can increase the efficiency of public procurement by reducing the time and effort required to undertake repeated procurements every year. Although framework agreements are permitted by the 2013 public procurement law (the 2015 amendments make specific provisions for them) they are little used. According to the quarterly reports on contracts signed by contracting authorities, only 142 framework agreements were signed in the first year of the new procurement law. In order to promote use of framework agreements in the coming years, the PPO will prepare models of tender dossiers with models of framework agreements for the supplies for which the use of these instruments is most appropriate. The PPO will also reach out to Contracting Authorities to bring more awareness/benefits of the use of Framework Agreements. 45. Finally, the Government intends to develop a systematic approach for measuring procurement performance. This is critical for identifying problems in the procurement process and correcting them. The approach is expected to be based on a performance indicators manual that will be developed and electronic data furnished by the e-procurement portal. The results will be published in quarterly performance reports by the PPO. 58         Results Chain 46. The Program supports progress in procurement reform through two DLIs. DLI 5 supports improvements in the operational efficiency of procurement by providing for scalable disbursements in proportion to the share of public procurement over RSD five million in value awarded in the preceding financial year with duration of 90 days or less between issuance of bidding documents and award of contracts. DLI 6 supports improvements in operational efficiency and economy through the centralization of public procurement, providing for scalable disbursements in proportion to the value of procurement contracts awarded through framework agreements. This is intended to capture the combined impact of increasing staff capacity and streamlining procurement processes. Activities and outputs leading to the achievement of the DLIs and supported by the Program include: training and certification of procurement officials; development and application of a methodology for measuring procurement performance; preparation and publication of Model Framework Agreements and their application in procurement across Government. Result Chain for Result Area 3: Improved Public Procurement Prepare models of Framework Agreement for Model Framework appropriate types of Agreements prepared Procurement contracts supplies awarded through Value of procurement framework agreements contracts awarded for all contracting through Framework Framework Agreement authorities   Agreements (DLI#6)  available on the public procurement portal   Training of public Training of public Public procurement Share of public procurement officers in procurement specialist specialists certified in procurement contracts procurement practices completed public procurement within the category of procedures  Public Authorities over 5M RSD in value, signed in the borrower’s fiscal year in 90 days or less Develop a systematic between date of Methodology for measuring method for measuring issuance of bidding procurement performance procurement performance documents and signing of public procurement contracts (DLI5)  RF POA DLI  59         III. LESSONS FROM EXPERIENCE 47. Program design has been informed by the Bank’s experience in public sector reforms both in Serbia and elsewhere. Experience has shown consistently that client leadership and broad participation in Program design is critical for ownership and commitment and builds capacity to support implementation.10 MPALSG has taken a leadership role in the preparation of the Program, working closely with the implementing agencies for each of the Results Areas to define the Results Framework and supporting Action Plan. Experience has shown that public sector reforms tend to deliver results over the medium to long-term. Consequently, Bank support should be anchored in a long-term reform agenda and “problem solving engagement”11 that offers some assurance of continuity in implementation. Previous rounds of public sector reform in Serbia have not been followed-up systematically after changes in Government. In this case, the prospects for continuity have been strengthened by embedding the Program in the Government’s PAR Strategy which supports the Government’s longer-term goal of EU accession. Experience has shown that public sector reform operations should be ambitious but realistic: fundamental changes in organizational culture cannot be delivered in the short term but incremental progress can be made by creating appropriate incentives and building institutional capacity to deliver, thus matching the design with the capacity of the borrower and implementing agency without “outpacing the client”12. The Program is focused on incremental improvements in key human resource, financial and procurement management systems that can be delivered within the Program period. The Program builds on on-going series Government program rather launching new directions in reform. Additional lessons from the design of this Program area outlined in Table 8 below. TABLE 8: LESSONS APPLIED DURING PROGRAM DESIGN Issue Lesson Learned Application in Program Design Supporting Program areas to be Program design has been informed by diagnostic and analytical design with supported should be driven work developed by both the Government, the Bank, academics rigorous by rigorous analysis to and other development partners. These include: Country Strategic analytics ensure proper basis for Diagnostic; Country Partnership Strategy; Public Finance Review; inclusion OECD-SIGMA assessments, among others. The issues addressed have been prominently discussed in these analytical review, and raised as the most strategic areas of engagement in the short to medium term. Establishing Design and Program In order to sharpen the focus of the Program and appropriate target a selection Boundaries should be the incentive structures to the relevant program areas, the design criterion for driven by specific criteria. developed a core set of checklist that covered the following inclusion elements: demonstration of Government commitment to reform in that areas; coverage of the same area by other development partners and opportunities for collaboration; availability of a strong analytical basis for inclusion; relevance to Government’s reform program.                                                                10 Independent Evaluation Group (2008). Public Sector Reform: What Works and Why? Washington, DC. The World Bank. 11 World Bank (2013), Program for Results Two Year Review: Concept Note, p.1. World Bank. 12 World Bank (2013). Implementation Completion Report. Performance Results and Accountability Project (P092898). Washington DC: The World Bank, p. 36. 60         Issue Lesson Learned Application in Program Design Ensuring The motivation for reform The Program emerged from a continuing relationship the senior Program is always difficult to management of MPASLG and MoF in the context of ongoing ownership determine, especially in technical assistance and policy dialogue. Discussions have focused context with multiple on the Government’s assessment of the critical areas for reform stakeholders. It is and those areas where there the Government believed it would be important to understand the able to make progress in implementation. Discussions have driving force behind the encompassed a wide group of stakeholders including PAR Council reform agenda and link it , the Collegium of State Secretaries and senior officials from to a wider Government Ministries across government. strategy beyond the key “champions”. Consultation with key stakeholders at all levels is critical for building broad ownership. Focus on a Selecting a few areas of The Program on is designed to reflect this lesson. Rather than few areas of emphasis allows for better support an elaborate reform agenda described in the Action Plan, impact and targeting of results. The the Program is selective: focusing on a limited number of reforms ‘go big’ instrument allows for the that lie at the heart of state capacity: human resource management, design of a Program financial management and procurement. around an entire Government program. Yet, in public sector reform programs, the challenge often lies in the inbuilt resistance and inertia to change. Institutional transformation takes time, because it depends on changing the behavior of a large number of actors. IV. PROGRAM EXPENDITURE FRAMEWORK 48. Program expenditures have been estimated on the basis of the expenditure plans of the implementing institutions as presented in the Government of Serbia’s three-year Fiscal Strategy. The key implementing institutions are: MPALSG, Treasury Administration and PPO. The expenditure framework considers the relevant expenditures of other institutions relevant for Program implementation: NES; SAI; PPS; and Human Resources Management Service. Program expenditures include only the budget programs as reflected in the State Budget and those functions and activities that are directly related to the achievement of the Program’s PDO and implementation of the Program activities. Program Expenditures include capital, operational and salary costs under these budget programs and severance costs related to the layoff of the public employees across the public sector. The Program Expenditure Framework by Result Area is presented in Table 9. 49. Approximately 75 percent of Program expenditure is allocated to the severance costs of public sector employees. Expenditures related to Result Area 1 implemented by the MPALSG amount to 79.5 percent of the total Program expenditures, with Result Area 2 implemented by the Treasury Administration amounting to 19.9 percent and Result Area 3 implementation by the PPO 61         just 0.6 percent of total Program expenditure. The structure of expenditure by type of expenditure is presented in Table 10. Operational cost estimated at the level of 10 percent of the total Program expenditure, comprise maintenance, material, travel expenses, contractual services. Capital costs amounting to 3 percent of total expenditures are mostly IT related. Salaries constitute approximately 12 percent of total Program expenditure. This includes the presentation of the specific projects/activities undertaken within the scope of the Program and associated expenditure (Table 12). TABLE 9: PROGRAM EXPENDITURE FRAMEWORK (US$) 2016 2017 2018 Total 1: Human Resource Management 64,280,603 63,955,473 63,955,473 192,191,549 Capital cost 126,447 126,447 126,447 379,341 Operational cost 2,213,380 1,954,531 1,954,531 6,122,443 Salaries 1,458,750 1,392,468 1,392,468 4,243,686 Severance 60,482,026 60,482,026 60,482,026 181,446,079 2: Public Financial Management 16,061,081 16,071,608 16,071,608 48,204,297 Capital cost 2,203,029 2,203,029 2,203,029 6,609,087 Operational cost 6,010,430 6,015,485 6,015,485 18,041,400 Salaries 7,847,622 7,853,094 7,853,094 23,553,811 Severance 0 0 0 0 3: Public Procurement Management 413,423 407,418 407,418 1,228,259 Capital cost 33,841 33,841 33,841 101,523 Operational cost 122,303 118,055 118,055 358,414 Salaries 257,279 255,522 255,522 768,323 Severance 0 0 0 0 TOTAL 80,755,107 80,434,499 80,434,499 241,624,105 TOTAL without severance 26,314,125 25,897,981 25,897,981 78,110,087 TABLE 10: STRUCTURE OF PROGRAM EXPENDITURE (PERCENT) Expenditure 2016 2017 2018 TOTAL Capital cost 2.93 2.94 2.94 2.93 Operational cost 10.34 10.06 10.06 10.15 Salaries 11.84 11.81 11.81 11.82 Severance 74.90 75.19 75.19 75.09 50. IBRD financing covers approximately one third of the Program costs. The remainder of the Program financing will be provided by the Government. The Government will receive parallel financing in support of its broader PAR Strategy which encompasses the reforms and actions supported by the Program. Parallel financing includes a EU €80 million Sector Budget Support currently under preparation and scheduled for approval in early 2016. Additional support may also be provided by other development partners including SIDA, Norway and GIZ. The structure of financing is presented in Table 11.     62         TABLE 11: STRUCTURE OF PROGRAM FINANCING Source US$ % Government 166,624,106 69 IBRD 75,000,000 31 TOTAL 241,624,106 100 51. The Government of Serbia public financial management system will be used to execute and report on Program expenditures. The fiduciary assessment presented in Annex 5 concludes that these systems are adequate to ensure appropriate use of Program funds and safeguard Program assets. Fiduciary risk after mitigation measures is rated as substantial. The fiduciary assessment identifies the mitigation measures that will be undertaken under the Program. Table 11 overleaf presents the structure of Program expenditure by Result Area and Institution. Expenditures will be monitored at least at the 3rd level of economic classification and the process will encompass expenditures realized from other codes constituting the budgets of relevant institutions. The following budget codes will be monitored: 411 thru 416, 421 thru 426, 451, 462, 463, 482, 483, 485, 511, 512 and 515. 52. Risks to the Program Expenditure Framework are considered modest, even if the macro-economic situation deteriorates. The reforms supported by the Program figure prominently on the Government of Serbia’s policy agenda. The Program is aligned with the key fiscal consolidation measures that the Government of Serbia has committed to undertake under the Stand-by Arrangement with the IMF and supports the longer-term agenda of EU accession. After an extended period of stagnation, the Serbian economy seems to be recovering. After recording a decline in GDP of 1.8 percent in 2014, real GDP projections for the current year remain between 0 and 0.5 percent increasing to 1.5 percent in 2016 and continuing modest growth thereafter. Fiscal performance has also improved over this period, with the fiscal deficit shrinking to 4.1 percent of GDP in 2015 – largely due improvements in revenues – down from 6.7 percent of GDP in 2014. Further improvements in macro-economic and fiscal performance depend, in part, on the successful implementation of the Program. Should economic performance deteriorate, the reforms supported by the Program will continue to be relevant to stabilization efforts. TABLE 12: PROGRAM EXPENDITURE FRAMEWORK BY INSTITUTION (USD)  Result Area / Expenditure 2016 2017 2018 Total 1: Human Resource Management 64,280,603 63,955,473 63,955,473 192,191,549 MPALSG 62,945,711 62,662,418 62,662,418 188,270,546 Secretariat for Public Policy 20,364 19,406 19,406 59,176 Human Resources Management Service 47,812 46,653 46,653 141,119 National Employment Service 850,820 829,255 829,255 2,509,330 2: Public Financial Management 16,061,081 16,071,608 16,071,608 48,204,297 Treasury Administration 16,061,081 16,071,608 16,071,608 48,204,297 3: Public Procurement Management 413,423 407,418 407,418 1,228,2659 Public Procurement Office 413,423 407,418 407,418 1,228,260 TOTAL 80,755,107 80,434,499 80,434,499 241,624,105 63         V. PROGRAM INSTITUTIONAL AND COORDINATION ARRANGEMENTS 53. The Program will use the institutional and coordination arrangements established for to support implementation of the PAR Strategy. Table 13 provides an overview of these arrangements, comprising: the PAR Council chaired by the Prime-Minister responsible for overall strategic direction and coordination of public administration reforms; the Collegium of State Secretaries which brings together the leading civil servants of all Ministries and supports the PAR Council; and the MPALSG oversees and supports implementation of the PAR at an operational level. The Collegium of State Secretaries has proved to be a very effective mechanism for coordination of PAR activities in the line ministries, especially in the first phase of the optimization program when the Government identified units had to undertake rightsizing and the retrenchment of personnel in 2015. By its nature, the PAR Council has met less frequently: most of the critical implementation issues have been addressed by the State Secretaries. However, the PAR Council is expected to take a more active role in the reforms as the pace of implementation picks up in 2016. The most recent meeting of the PAR Council in December 2015 discussed several ongoing reforms in the public sector, including this PforR Program. 54. The MPALSG is the key implementing agency for the Program. The PPS will be responsible for coordinating other implementing agencies, including the collection and reporting of data, and their verification. The existing capacities in the MPALSG are sufficient for implementation of the Program. Further capacity development activities will be undertaken in monitoring and evaluation and in the management of the reform process. With support from the Serbia Rightsizing and Restructuring Project, managed by the World Bank and funded by the EU, the MPALSG will create a Change Management Support Unit which will work with the line ministries to facilitate implementation of the PAR Strategy and Action Plan and the Government Program for Optimization. 55. Each of the Program Result Areas is implemented by a lead institution: the MPASLG, Treasury Administration and the PPO. In order to ensure sufficient stakeholder support for the Program across these institutions, consultations have been held to discuss the broader framing of the Program, the Results Framework and DLIs. The Program will use of country systems and so no Program-specific implementation arrangements are required at the level of the implementing agencies. While there are capacity challenges in the institutions responsible for implementation, it is expected that ongoing Technical Assistance provided by partners will strengthen the ability of the various institutions to deliver their mandate, including on activities covered by this Program. The EU, for instance, has allocated EUR 10 million for targeted technical assistance to strengthen implementation of the PAR. The EU Program is expected to be effective in second half of 2016 (See Annex 10 for ongoing donor support). TABLE 13: PAR STRATEGY INSTITUTIONAL AND COORDINATION ARRANGEMENTS Level one: Ministry responsible for the public administration affairs will continue to perform operational duties and tasks and the coordination of the PAR process. To ensure a successful accomplishment of these tasks and ensure the sustainability of this process, it is necessary to ensure appropriate capacities, primarily by building capacities of internal organizational unit (Department) of the Ministry of Justice and State Administration (succeeded by the MPALSG under whose auspices are the PA activities involving the PA system, organization and work of the Ministry, special organizations, public agencies and public services, by including under the job classification, the organizational units that would be responsible for the coordination of activities related to the PAR Strategy. In addition to 64         this, the PA bodies must appoint a person who will be tasked with monitoring, reporting and evaluating the implementation of PAR Strategy. Level Two: Inter-ministerial project group is tasked with performing the expert coordination and monitoring of PAR Strategy implementation. The duties of this Project Group primarily involve the professional coordination and drafting reports on the implementation of the PAR Strategy. This mechanism will ensure an active involvement of all the relevant state authorities in the process of the public administration reform. Specific tasks of the Inter-ministerial Project Group are: participation in creating the strategies and Action Plans in the PAR process; including of all projects and normative activities into the PAR Strategy (as part of the regular audits of this Strategy, that is, during the process of drafting the new PAR Strategy); recommendation of including certain activities in the Annual Plan of the Government (in cooperation with the Ministry responsible for the public administration affairs); aligning of other national strategic documents with the PAR Strategy (in cooperation with the General Secretariat of the Government); discussing of starting points and draft regulations whereby bodies and organizations and other authorities are incorporated within the PA system (before they are presented to PA bodies for providing their opinion); defining competencies in discharging of PA duties, defining the status of employees, including the internal relations and coordination of PA bodies and organizations; adopting reports on the implementation and evaluation of results achieved by the PAR Strategy (that is, by the appropriate Action Plan based on the findings of the organizational unit within the Ministry responsible for the public administration affairs); presenting decisions that could not be agreed about by the inter-ministerial Project Group, to the Collegium of State Secretaries for discussion and adoption; participating in the evaluation of the PAR Strategy implementation results (each member representing the scope of activities of their body). The members of the Inter-Ministerial Project Group will be the secretaries of the Ministries. The Inter-ministerial Project Group will meet regularly, once in a month, and/or more frequently, were required (at the proposal of the Ministry responsible for the public administration affairs). Level Three: represents the Collegium of State Secretaries, as the first level of political coordination of the PAR process. The Board discusses the issues relevant for the PAR. This particularly refers to the issues about which no agreement is reached at the level of experts. Regular sessions of this body are predominantly convened to review the reports about the PAR Strategy implementation, and/or the Action Plan. The Collegium of State Secretaries proposes issues to be discussed at the sessions of the PAR Council. The members of the Collegium of State Secretaries will be the state secretaries of all Ministries, Deputy General Secretary of the Government; Deputy Director of SEIO, Deputy Director of the Legislation Secretariat. The Board will meet quarterly, and/or more often, where necessary (at the proposal of the Ministry responsible for the public administration affairs, and/or at the proposal of the Inter-ministerial Project Group). The Chair of the Board will be the State Secretary of the Ministry responsible for the public administration affairs. The Vice-Chair will be the State Secretary of the Ministry responsible for financial affairs (or alternatively, the Deputy General Secretary of the Government). Level four: the PAR Council has been established by the Decision on forming the Council for the Public Administration Reform, as the central strategic body of the Government, responsible for the public administration reform, tasked with defining the proposals for the strategic development of PA in the Republic of Serbia, initiating and proposing the measures and actions related to the public administration reform to the Government, discussing and adopting Reports on achieved objectives in connection with the PAR, promoting and monitoring the progress of the PAR Strategy implementation, particularly from the perspective of the incorporation of the principles and objectives of the PAR into the sectorial development strategies and measures form the plans, and discussing and providing of preliminary opinion to the Government, about development strategies, draft laws and other legal documents related to the organization and work of the Government, PA bodies and in particular those proposing the incorporation of new state authorities, organizations, services or bodies of the Government. 65         In the former period this Council discussed the issues as provided by its delegated tasks, while in the future, from the date of the adoption of the PAR Strategy it is expected to take over the strategic role of coordinating and managing the reform processes within the public administration. Source: Republic of Serbia (2014). Action Plan for the Implementation of Public Administration Reform Strategy. Belgrade: MPALSG, p.65. VI. ECONOMIC ANALYSIS 56. The expected net impact realized through expected efficiency gains from the process of modernizing Serbia’s public administration is valued at a range between US$8 million and US$15 million. This represents the sum of estimated net benefits arising from program implementation. The summary of the cost and benefits associated with each of the result areas of the Program are presented in the table below, while the corresponding subsections contain details on the methodology applied to generate these estimates. The analysis assumes an exchange rate of 107 RSD per USD and a 12 percent discount rate. It also assumes a time horizon of three years, from 2016-2018, consistent with the Program’s time frame.   TABLE 14: SUMMARY ECONOMIC ANALYSIS (USD) 2016 2017 2018 Total costs 61,213,026 79,203,026 79,203,026 219,619,078 Result area 1: Improved Human Resource benefits (low) 42,349,286 84,275,078 125,781,613 252,405,977 Management Benefits (high) 124,481,233 245,228,029 362,352,422 732,061,684 Result area 2: Improved costs 1,039,423 433,418 433,418 1,906,259 Financial Management benefits 58,572,285 58,572,285 58,572,285 194,158,788 Result area 3: Improved costs 16,233,081 16,123,608 16,123,608 48,480,297 Procurement Management benefits 68,523,332 54,018,659 45,315,855 167,857,846 Total Costs 78,485,530 95,760,052 95,760,052 270,005,634 Total Benefits (low) 200,613,482 230,317,389 260,987,185 691,918,056 Total Benefits (high) 282,745,429 391,270,340 497,557,994 1,171,573,763 NET BENEFITS (low) 90,959,373 101,105,970 133,909,701 325,975,043 NET BENEFITS (high) 173,091,320 262,058,921 370,480,510 805,630,750 Net Present Value (NPV) at 12% (low) 7,656,086 Net Present Value (NPV) at 12% (high) 15,033,992 Result Area 1: Improved Human Resource Management 57. The net present value under this results area is estimated to range between a net cost of US$1 million and a net benefit of US$5 million as a result of controlling staffing and reducing the wage bill. The analysis assumes two policy scenarios: one where the wage bill is reduced by 1% and another where the wage bill is reduced by 3%. The net costs under this results area are expected to be US$220 million, whether the wage bill is reduced by 1% or 3%. This 66         TABLE 15: RESULT AREA 1, SCENARIO 1(USD) WAGE BILL REDUCES BY 1% Costs 2016 2017 2018 Total Severance payments of redundant staff (5,000 60,482,026 60,482,026 60,482,026 181,446,078 people per year) IBRD interest @ 0.65% 110,500 110,500 110,500 331,500 Front-end and commitment fee @ 0.5% 255,000 255,000 Financing costs (0.65% interest + 0.5% fee) 365,500 110,500 110,500 586,500 Unemployment benefits ($300 x 12 months x 5,000 people) 18,000,000 18,000,000 36,000,000 Job training and job search ($100 x 5,000 people) 500,000 500,000 1,000,000 Costs Subtotal 61,213,026 79,203,026 79,203,026 219,619,078 Benefits 2016 2017 2018 Total Wage bill reduction savings 42,349,286 84,275,078 125,781,613 252,405,977 General Government total wage bill (BAU) 4,234,928,551 4,234,928,551 4,234,928,551 Annual wage bill reduction 1% 1% 1% General Government total wage bill (after reduction) 4,192,579,266 4,150,653,473 4,109,146,938 3,940,173,289 Benefits Subtotal 42,349,286 84,275,078 125,781,613 252,405,977 Net Benefits -18,863,740 5,072,052 46,578,587 32,786,899 Contingency (10%) -1,886,374 507,205 4,657,859 3,278,690 Inflation (2%) -377,275 101,441 931,572 655,738 Net Benefits -16,600,092 4,463,406 40,989,156 28,852,471 Net Present Value (NPV) at 12% -1,231,863 TABLE 16: RESULT AREA 1, SCENARIO 2 (USD) WAGE BILL REDUCED BY 3 %   Costs 2016 2017 2018 Total Severance payments of redundant staff (5,000 60,482,026 60,482,026 60,482,026 181,446,078 people per year) IBRD interest @ 0.65% 110,500 110,500 110,500 331,500 Front-end and commitment fee @ 0.5% 255,000 255,000 Financing costs (0.65% interest + 0.5% fee) 365,500 110,500 110,500 586,500 Unemployment benefits ($300 x 12 months x 18,000,000 18,000,000 36,000,000 5,000 people) Job training and job search ($100 x 5,000 500,000 500,000 1,000,000 people) Costs Subtotal 61,213,026 79,203,026 79,203,026 219,619,078 Benefits 2016 2017 2018 Total Wage bill reduction savings 124,481,233 245,228,029 362,352,422 732,061,684 General Government total wage bill (BAU) 4,149,374,439 4,149,374,439 4,149,374,439 Annual wage bill reduction 3% 3% 3% General Government total wage bill (after 4,024,893,206 3,904,146,410 3,787,022,018 3,292,831,522 reduction) Benefits Subtotal 124,481,233 245,228,029 362,352,422 732,061,684 Net Benefits 63,268,207 166,025,003 283,149,396 512,442,606 Contingency (10%) 6,326,821 16,602,500 28,314,940 51,244,261 Inflation (2%) 1,265,364 3,320,500 5,662,988 10,248,852 Net Benefits 55,676,022 146,102,003 249,171,468 450,949,493 Net Present Value (NPV) at 12% 5,260,694 includes financial costs (interest payments, fees) as well as socio-economic costs (unemployment benefits and assistance in job training and job searching for retrenched staff). The opportunity cost of staff time spent on reforms was not counted separately because they program financing covers salaries of staff who will be working on these reforms full-time. As such, we assume that staff are 67         not making a trade-off between their regular tasks and these reforms. The net benefits under this results area are expected to be US$252 million if the wage bill is reduced by 1% and US$732 million if the wage bill is reduced by 3%. This includes savings in the general Government wage bill. To estimate the size of the agreed reductions, we assume that the wage bill from 2016 to 2018 would remain at the 2015 end-of-year level. The 2015 wage bill is assumed to be 1% (or 3%) lower than the reported general Government wage bill from 2014 which is US$4.1 billion. Assuming that the wage bill decreases by 1% (or 3%) year-to-year in 2016-2018, the cumulative value of the reductions for the entire period will then range between US$252 million and US$732 million. Result Area 2: Improved Financial Management 58. The net present value under this results area is estimated to be US$4 million as a result of efficiency gains from the increased use of FMIS and savings from reducing Government expenditure arrears. The net costs under this results area are estimated at US$48 million. This includes financial costs such as interests, fees, as well as foreign exchange premium for FMIS hardware and software to be purchased. The opportunity cost of staff time spent under the implementation of these reforms was not counted separately because they program financing covers salaries of staff who will be working on these reforms full-time. As such, we assume that staff are not making a trade-off between their regular tasks and these reforms. The net benefits under this result area are estimated to be US$168 million. This includes savings from higher operational efficiency. As more users enrol in FMIS, financial department staff (direct budget beneficiaries) are expected to spend less time liaising and coordinating with those currently not using FMIS in schools and prisons (IBB). Most of the gains under this result area – such as those coming from a reduction in arrears and increased efficiency in cash management through improved commitment controls – are not measurable in monetary terms since they do not bring any tangible benefit, but instead enhance reputation and financial credibility of the Government. Therefore, we quantify the benefits from extending FMIS coverage to include IBB as a proxy. TABLE 17: ECONOMIC ANALYSIS RESULT AREA 2 (USD) Costs 2016 2017 2018 Total Staff time spent on FMIS training 7,847,622 7,853,094 7,853,094 23,553,810 Current repair and maintenance of FMIS equipment 8,213,459 8,218,514 8,218,514 24,650,487 Financing costs (0.65% interest + 0.5% fee) 86,000 26,000 26,000 138,000 Costs Subtotal 16,233,081 16,123,608 16,123,608 48,480,297 Benefits Arrears (total value of unsettled commitments) 90,654,206 54,392,523 32,635,514 Annual arrears reduction (40% per year) 40% 40% 40% Expenditure arrears after reduction 54,392,523 32,635,514 19,581,308 Savings from arrears reduction 36,261,682 21,757,009 13,054,206 71,072,897 Time savings of FM Staff (25% reduction) 32,261,650 32,261,650 32,261,650 96,784,949 No. of employees in financial departments (FTE) 19,400 19,400 19,400 average gross annual wage of FD employees 6,652 6,652 6,652 % reduction in time spent 25% 25% 25% Benefits Subtotal 68,523,332 54,018,659 45,315,855 167,857,846 Net Benefits 52,290,251 37,895,051 29,192,247 119,377,549 Contingency (10%) 5,229,025 3,789,505 2,919,225 11,937,755 Inflation (2%) 1,045,805 757,901 583,845 2,387,551 Net Benefits 46,015,421 33,347,645 25,689,178 105,052,243 Net Present Value (NPV) at 12%    3,748,664 68         59. To estimate the magnitude of potential efficiency gains from extending FMIS to IBB, we estimate the number of staff working in financial departments. Since the number of staff working in financial departments of IBB is not readily available, we estimate it by multiplying the total of 484,98913 employees working in public sector institutions not covered by the FMIS by the 4 percent estimated share of employees working in financial departments taken from the database compiled through functional review of public administration institutions currently prepared by the WB. The estimate of average annual salary is performed using the data from the registry of public sector employees. The average annual gross salary of financial department staff is US$6,652. The assumed total reduction in working hours spent by financial department employees is 3percent which results in annual savings of approximately US$3.9 million. 60. The benefits also include savings from reducing the Government expenditure arrears. Arrears, as defined by the total value of unsettled commitments, are expected to be reduced by 40 percent each year. If these reductions are achieved, then the potential savings fare estimated at US$71 million. Result Area 3: Improved Procurement Management 61. The net present value under this results area is estimated to be US$4 million as a result of reduced prices of commonly procured goods using Framework Agreements and time savings for procurement staff, vendors and bidders. The Program will support training of officers involved in the procurement process in order to increase the share of public administration procurement over 5 million RSD completed from 120 days to 90 days, which is equivalent to a 25 percent decrease. The net costs under this results area are estimated to be US$2 million. These include financial costs such as interests and fees. The opportunity cost of staff time spent under the implementation of these reforms was not counted separately because program financing covers salaries of staff who will be working on these reforms full-time. As such, we assume that staff are not making a trade-off between their regular tasks and these reforms. The benefits under this results area are estimated to be US$194 million. This is estimated through savings on reduced prices as a result of commonly procured goods through Framework Agreements, public sector procurement staff salaries, and vendor salaries. 62. Using Framework Agreements to purchase common goods in bulk can lead to savings of at least US$28 million. To estimate the savings from price reductions as a result of framework agreements, we looked at bulk order of drugs. Until recently Serbia had a system in which each hospital, primary health centre and pharmacy procured drugs individually. Rather than competing on price, suppliers competed on the amount of “rebates” they offered to the hospital or pharmacy, which were often a third of the purchase price. Once Framework Agreements were used to procure a third of the drugs used in the Serbian health care system, the prices achieved through this process were on average 27 percent lower than before. 63. The analysis calculates the amount of salaries saved as a result of a 25% decrease in processing time of procurement that is categorized as large. According to the PPO annual                                                                13 This number represents the difference between the total of 500,538 employees working in the public sector and an estimate of 15,549 employees working in institutions covered by the FMIS (based on the dataset from the horizontal functional analysis of the central Government compiled by the WB) 69         report in 2014 there was comparable number of large and small procurement transactions in public sector. There were 30,897 large procurement procedures and another 28,624 small ones initiated, out which 26,046 and 25,328 were successful within the large and small category, respectively. Assuming that procurement staff dedicates 80% of their time to procurement tasks, and that it takes three times as many working hours to process a large versus small procurement, it follows that procurement employees are spending 60% of their time processing large procurement. This translates into 15% working hours saved under this result area. 64. The analysis uses proxies to estimate the number of public procurement staff and their salaries. To determine the number of public procurement staff, the percentage of full time equivalent (FTE) staff working on procurement are calculated form a functional review of public administration institutions currently underway. Part of this review assesses the allocation of employees to different functions identified within the portfolio of institutions, which enables us to determine the share of employees working on public procurement related tasks (1.3 percent). The 1.3% coefficient was taken from the sample and multiplied by the total number of staff in the Serbian public sector (500,538), to get the total of 6,500 as a proxy. To determine the average annual salary, the analysis used the average of the salaries from the staff working in procurement ($6,305). This generates a result of approximately $24.6 million in savings from efficient procurements. TABLE 18: ECONOMIC ANALYSIS RESULT AREA 3 (USD) Cost 2016 2017 2018 Total Procurement staff time 413,423 407,418 407,418 1,228,259 IBRD interest @ 0.65% 26,000 26,000 26,000 78,000 Front-end and commitment fee @ 0.5% 600,000 600,000 Costs Subtotal 1,039,423 433,418 433,418 1,906,259 Benefits 2016 2017 2018 Total Savings reduced price procurements of pharmaceuticals using Framework Agreements 27,000,000 27,000,000 27,000,000 81,000,000 (2014 actuals) Time savings for vendors and bidders (15% 27,572,285 27,572,285 27,572,285 82,716,854 reduction using minimum wage estimates) Time savings for PP staff (15% reduction) 6,147,311 6,147,311 6,147,311 18,441,934 volume of large PP transactions 2,780,490,691 2,891,710,319 3,007,378,732 assumed annual increase in volume 4% 4% 4% number of large PP transactions 28,472 28,472 28,472 number of PP employees (FTE, estimate) 6,500 6,500 6,500 average gross annual wage of PP employees 6,305 6,305 6,305 % reduction in large procurement processing 15% 15% 15% Benefits Subtotal 58,572,285 58,572,285 58,572,285 194,158,788 Net Benefits 57,532,862 58,138,867 58,138,867 192,252,529 Contingency (10%) 5,753,286 5,813,887 5,813,887 17,381,060 Inflation (2%) 1,150,657 1,162,777 1,162,777 3,476,212 Net Benefits 50,628,918 51,162,203 51,162,203 171,395,258 Net Present Value (NPV) at 12% 4,220,554 65. The estimated benefits can also be expressed in terms of the number of employees that could potentially be reduced as a result of achieving higher efficiency of public procurement processing under the program. For example, a reduction in the total working hours by 15%, the estimated annual savings is US$6.1 million, which can pay the salaries of 975 staff per year. The benefits could also be expressed in terms of the number of additional 70         procurement transactions that could be handled. For example, a reduction in large procurement processing time by 25%, this translates to 6,500 full time procurement staff handling 4,271 more transactions per year. 66. Savings on vendor staff salaries represent a potential benefit estimated at US$206 million. If processing time is reduced by 25percent, this would also save salaries of vendors who would now be spending less time and labor preparing and submitting bids. To estimate this, the analysis assumes that there will be a minimum of 2 bidders per transaction and multiply this by the number of transactions (28,472). For vendor staff salaries, the analysis annualizes the minimum wage. All of these components are multiplied by 15 percent in order to quantify the value of the time saved on the vendor side as a result of more efficient procurement processes. VII. EVALUATION OF TECHNICAL RISKS 67. The technical risks to Program implementation are Substantial. Three risks and their mitigation measures are highlighted here: coordination across Government; institutional capacity; and policy continuity. This section also addresses the risk of backtracking on the retrenchment of public employees after the Program period. Table 13 provides a summary of technical risks and mitigation measures. The Program risk matrix is presented in Annex 7. 68. The principle risk arises from the need for close coordination and collaboration across the whole of Government for effective implementation of the Program. All of the reforms under the Program tighten central controls over human resources, public finances and public procurement at the expense of budget entities. While these reforms will generate efficiency gains, the gains will come at the expense of agency level management discretion. Consequently, some management resistance to reforms should be anticipated. The large number of institutions involved in the implementation of these reforms is likely to pose a challenge whether or not there is management resistance. At the very least, there is a risk that the central agencies managing reforms – MPASLG, MoF Treasury and PDO – will not be able to follow-up on implementation and tackle implementation problems in a timely manner. The Government has put in place a structure for coordination of the PAR Strategy that allows issues to be addressed at a technical level in an Inter-Ministerial Working Group and then escalated to senior civil servants and ultimately to the political leadership. These arrangements should provide an adequate basis for coordination. Technical assistance provided by the EU in support of a parallel Sector Budget Support operation will provide help strengthen MPASLG capacity to manage its coordination function. Technical assistance provided under an EU-financed RETF under the Bank’s Rightsizing and Restructuring Project will support the implementation of a communication strategy aimed at mobilizing support for the reforms both within and outside of Government. 69. Limited capacity in the key implementing institutions also poses a substantial risk to Program implementation. MPASLG is a new institution. Senior management has considerable experience in the implementation of complex public administration reforms but middle management and technical grades do not. Staff are already stretched managing routine functions and have limited time to dedicate to the monitoring and analytical demands of the Program, let alone the massive tasks of job evaluation and grading. The MOF and PPO are also stretched their existing managing routine functions. Implementation of the Program will not significantly change the workload for the MOF, though the Action Plan does require improvements in budget 71         preparation and monitoring. The Fiduciary Assessment has recommended increases in the staffing of the Budget Department, which is particularly stretched during peak times of the budget calendar. The proposed centralization of procurement under the Program through the use of Framework Contracts will significantly increase the PPO’s work load. The Program also entails significant increases in workload for the policy units and administrative departments of Ministries across Government for the preparation of functional reviews, retrenchment plans, implementing of job evaluation and grading as well as improvements in budget preparation, budget monitoring and in procurement management. The Program will provide support to these functions across Government through training. Additional support will be provided through parallel technical assistance operations, which includes funding for advisory services across the reform agenda, contractual services to support labor intensive job classification and regarding and training programs. Technical assistance provided by the EU in support of a parallel Sector Budget Support operation will provide support for human resource management and financial management reforms across Government. The EU-financed RETF under the Bank’s Rightsizing and Restructuring Project will support the implementation of functional reviews and rightsizing in key sectors. A DfID-financed technical assistance project will provide support to Public Procurement reforms. 70. Changes in Government may lead to changes in policy priorities and commitment to the Program. Elections will take place during Program implementation, possibly as early as 2016. Any change in Government poses the risk of changes in priorities. This is particularly true of politically challenging reforms such as those involving large scale retrenchment of public sector employees. The sequencing of important measures might be influenced by political calculation or activities simply dropped. This risk is mitigated by the commitments made to international institutions regarding the implementation of the Program as part of the broader PAR Strategy, notably commitments to the IMF under the Stand-by Arrangement through to 2018, and in the context of the longer-term process of accession to the EU. 71. There is a risk that the Government may backtrack on efforts to right size the administration by rehiring large numbers of staff after the Program period. This risk has materialized in other countries, undermining the rationale for the Bank intervention in civil service reform. Serbia’s own experience over the last fifteen years demonstrates how Governments can lose control of staffing numbers and public employment can increase to unsustainable levels very quickly. It is not possible to entirely eliminate this risk. However, the Program has learned from the Bank’s experience and includes a number of features that are intended to strengthen controls and hinder excessive growth of public employment in the future: first, the Law on the Maximum Number of Employees effectively caps the number of positions for each institution; second, staffing information will be consolidated in a single registry which is directly linked to payroll so as to facilitate monitoring and control; and third, the implementation of retrenchment plans will reflected in the registry through the closure of positions where staff are transferred or made redundant. 72         TABLE 19: SUMMARY OF TECHNICAL RISKS AND MITIGATION MEASURES Issue Description Mitigation Limited capacity Weak implementation capacity may Bank support during implementation. for jeopardize progress towards the Parallel Bank-executed technical implementation achievement results. Introduction of new assistance, complemented by support from activities to support achievement of results EU, OECD SIGMA and the IMF. The might require additional personnel with Joint Government- Donor Working Group specific kinds of expertise in implementing on Public Administration Reform agencies and across Government. convened by the Minister of MPALSG helps to coordinate support to reforms. Weak The Program requires the coordination of The Program is encompassed in the coordination reforms across the implementing agencies, coordination arrangements for the PAR across the key particularly as regards links between human Strategy. This provides adequate implementing resource management and procurement and arrangements for coordination at an agencies and measures taken to strengthen expenditure operational and a technical level, with a across the whole- control. Reforms will then need to be rolled means of escalating issues to the PAR of-Government out to the whole of Government. This will Council chaired by the Prime Minister if require a high level of coordination and necessary. collaboration between the Ministries and central agencies implementing the Program. Political Policy priorities and the level of The Government has entered into commitment to commitment to the Program may change. commitments regarding the reforms This risk is particularly acute given that implementation of the Program as part of there will be elections in the Program period the broader PAR Strategy, in the context and because the Program entails politically of the IMF Stand-by Arrangement through challenging reforms, notably large-scale to 2018, and the longer-term process of retrenchment of public employees. accession to the EU           73         ANNEX 5: SUMMARY PROGRAM FIDUCIARY ASSESSMENT 1. The fiduciary assessment argues that Serbia’s financial management and procurement systems are adequate to ensure appropriate use of Program funds and safeguard Program assets: fiduciary risk after mitigation measures is rated as substantial. The fiduciary assessment examined Government-wide systems and the capacity of the three implementing entities that will be responsible for implementing most of Program activities and account for 99 percent of Program Expenditures: the MPALSG; Treasury Administration and the PPO. The summary fiduciary assessment addresses financial management, procurement and anti- corruption risks and risks mitigation measures in turn. FINANCIAL MANAGEMENT Planning and Budgeting 2. Planning and budgeting capacity in Program implementing entities is assessed to be sufficient. MPALSG, TA and other involved entities prepare financial and medium-term plans. Staff qualified and with substantial experience in budget preparation process are in charge of these tasks. They adhere to the provisions of the Budget System Law and prescribed budget calendar, sequence of steps and content of budget documentation. Program expenditures are included in financial plans of program implementing entities and the annual budget law for 2016, as well as in medium-term expenditure ceilings for 2017 and 2018. 3. The BSL requires the preparation of three-year medium term expenditure framework (MTEF). The MTEF is revised every year and included in a Fiscal Strategy Report. But the forecasts of macroeconomic parameters that are the basis for preparing the MTEF are often inaccurate, over-estimating GDP growth and overestimating resource availability. Moreover, MTEF projections for the outer years are not taken seriously by budget entities. According to the Government’s PFM Strategy, the MTEF and projections for the two years following the budget year are not ‘considered and observed.’ Estimates and ceilings are not taken as the starting point in preparation of following years’ budgets. 4. The Budget System Law provides for an orderly budget process, though deadlines have not always been met and the capacity for budget analysis is limited. While the submission of the budget proposal to the National Assembly has been timely in 2013 and 2014, submission of the budget proposal for 2015 was delayed and limited the time available for legislative review, though Budgets have consistently been adopted by the Parliament before the current year end. The MoF Budget Department has to negotiate with a large number of budget entities – 54 entities in 2014 – overwhelming the Department’s limited capacity. MoF instructions for the preparation of the draft annual budget do not reflect the priority areas for financing indicated by the budget entities. Budget negotiations are also hampered by lack of a clear separation between costs of the existing and new policies in the budget requests. Government has introduced a new by-law (April 2015) to improve the assessment the impact of new policies but it is too early to assess its results. Further improvements in the budget processing will require strengthening the staffing and capacity of the MoF Budget Department. 5. The Budget provides adequate detail on proposed expenditures and, at an aggregate level at least, is a reasonable guide to actual outturns. The Rulebook on Standard Classification Framework and Chart of Accounts for the Budgetary System adopted in 2009 includes administrative, functional and economical classifications that are consistent with 74         Government Financial Statistics (GFS) 2001. Non-financial performance targets have been included in the Budget for the first time in 2015, following the transition to program budgeting format aimed at ensuring greater transparency and higher degree of accountability for results. Approved appropriations can be altered, but the rules are clear and limit individual changes of appropriations to 5 percent according the Budget System Law. Over the period 2011, 2012 and 2013 actual expenditure deviated more than 10 per cent of initially budgeted expenditures once, in 2011 when the actual expenditure was 12 percent less than the budgeted amount. This was largely due a Government re-organizational structure which hindered budget implementation. 6. Program implementing entities have submitted their financial plans to the MOF timely and in line with the budget calendar over the past three years. Their track record for timeliness in submission by the Government of the annual budget proposal and its approval by the National Assembly is overall solid. The Program implementing entities have included Program Expenditures in their financial plans and these have been reflected in the budget law for 2016 and medium-term expenditure ceilings for 2017 and 2018. This includes provision for severance payments, which accounts for around 80 percent of estimated Program cost. Transparency   7. The availability of budget and budget execution documentation to the public is assessed as partial overall. Documentation that must be submitted to the National Assembly for review and approval of the annual Budget is specified in the Budget System Law. The principal documents, annual budget and year-end financial statements, are readily available to public. Non-financial performance targets have been included in the Budget for the first time in 2015, following the transition to program budgeting format aimed at ensuring greater transparency and higher degree of accountability for results. With the exception of monthly Public Finance Bulletin, which presents aggregate expenditure figures, availability of in-year budget execution reports to the public is partial. Monthly Public Finance Bulletin is published on the web site of the MoF, but other official in-year budget execution reports are only available upon request from the relevant institutions (MoF, Government and National Assembly). Implementing entities prepare quarterly budget execution reports which include Program expenditures. Although foreseen as a measure in the Anti-Corruption Strategy, Budget Inspection Annual Report is not yet published by the MoF. Financial statements are published as the proposal of the Law on the Final Account submitted by the Government to the NA for approval. All external audit reports are widely accessible through the web site of the SAI and are published without delay. Accounting and Financial Reporting 8. The accounting system has adequate capacity to track and report actual Program expenditures against a comprehensive budget classification system. Budget control and monitoring are managed by the Treasury Administration (TA) through a centralized transaction processing system and captured in the Treasury Main Ledger (TML). TML, running on SAP platform, captures all revenue and expenditure transactions with relevant coding structures which follows the organizational, functional, program, economic and source-of-funds classification. The accounting arrangements facilitate detailed analysis. All the entities involved in the Program use the standard Government classifications and their transactions are captured in the TML. The TML system is assessed to be reliable. Budget beneficiaries, maintain additional accounting records and auxiliary ledgers which they reconcile with TML in the course of preparation of their budget execution reports. Accounting and financial reporting in the entities involved in the 75         Program is of acceptable level. These institutions employ qualified and experienced staff working accounting and financial reporting. There are written accounting policies and procedures which are applied in practice. They maintain the prescribed accounting records and submit the statutory in-year budget execution reports and annual financial statements. 9. Government’s accounting and financial reporting is performed on cash basis, which meets the Bank’s requirements for Program financial reporting. Under the Decree on Application of International Public Sector Accounting Standards (IPSAS), the officially prescribed accounting standards for Direct (DBBs) and Indirect Budget Beneficiaries (IBBs), users of funds of mandatory social insurance organizations, and budgetary funds of the Republic as of 2010 are the cash-based IPSAS. All Program implementing entities are subject to this regulation. By-laws issued by the MoF prescribe specific accounting policies and reporting templates and, consequently, IPSAS implementation continues to be indirect, applied within the limits imposed by the national framework. 10. Program expenditures will be reported through quarterly reports on budget execution prepared by implementing entities. All DBBs prepare and deliver budget execution reports to the Treasury within twenty days from the end the quarter (except for the first quarter) on the level of categories of expenditure in line with the Chart of Accounts (CoA). These budget execution reports will be considered as financial reports used for monitoring the Program expenditures. MoF produces reports on budget execution in the course of the budget year which are submitted to the Government and the National Assembly fifteen days after the end of the second and third quarters. No such report is generated for the first quarter. These reports are aggregated on the highest level of economic classification and thus comparable to aggregate figures contained in the annual budget. MPALSG and other assessed entities deliver prescribed reports in line with legislation with no exception and the reports are assessed to be reliable. In- year budget execution reports are prepared and submitted in one of the forms included also in the final account, namely Budget Execution Report (Form 5), which ensures consistency between in- year reports and the final account. 11. Annual financial statements are prepared by the Treasury Administration (TA) and made available for audit in June within six months from the end of the relevant period. Implementing entities prepare annual financial statements using their accounting records, auxiliary ledgers and reports from their respective indirect beneficiaries, after reconciling such information with the Treasury Main Ledger (TML), by the end of March in the following year. The Treasury consolidates and based on such inputs and data in the TML prepares the Government’s annual financial statements (final account). Annual financial statements are submitted to the MoF who submits them for audit by the SAI in June. The deadline for submission is fixed in the BSL and is consistently observed, with a minor slippage of several days in 2013 and 2014. The format of the Final Account is comparable to that of the approved Budget and shows the budget allocation, executed budget figures and the differences between the two. The final account subject to the audit includes following financial statements: Balance Sheet, Revenue and Expenditure Statement, Statement of Capital Expenditures and Receipts, Cash Flow Statement, Budget Execution Report. 12. The quality of financial statements is assessed to be adequate as it pertains to budget execution, revenues and expenditures, providing reliable information about Program expenditures. Program expenditures are integral part of Government’s annual financial statements (final account). Quality and reliability of Balance Sheet items is somewhat 76         questionable as cash basis accounting and information system impede maintaining quality financial information for accrual based financial items, however prevailing local regulation prescribes preparation of a Balance Sheet based on a chart of accounts aligned with that of the corporate sector. The Final Account of the Budget of the Republic received a qualified opinion from the SAI for FY 2013 as regards financial statements and the treatment of financial and non- financial assets in the Balance Sheet. Treasury Management and Flow of Funds 13. The Consolidated Treasury Account System (CTAS) has comprehensive coverage and functions efficiently, hence it will be relied upon for expenditure payments under the Program. CTAS is the consolidated treasury single account of the Republic of Serbia and local Government treasuries for Serbian dinars (RSD). It is managed by the Treasury Administration. CTAS includes all relevant cash resources of the Government and captures cash flows related to Government revenue and expenditure. It is used for execution of payments between beneficiaries of budget funds, beneficiaries of Mandatory Social Security Insurance Organizations and other beneficiaries of public funds included in the CTAS, from one side, and entities not included in the CTAS, on the other side, accounting for interbank payments. All entities involved in the Program are operating within the RSD CTAS. Foreign currency funds have not yet been integrated within the CTA, so foreign currency transactions are consolidated in Treasury reports only in certain intervals. Integration of these funds within the CTA is one of the next steps in the Government’s reform and it is expected to be implemented by 2016. 14. Annual budget execution for direct budget beneficiaries (DBB), including Program implementing entities, is orderly. The budget is executed through the Budget Execution System (BES), an FMIS application, which is managed by the Treasury Administration. As of 2015, BES covers the direct budget beneficiaries but not the IBB. Implementation of earlier plans to extend the coverage to IBB has been successively postponed. All the entities involved in the Program are categorized as DBBs and are subject to Treasury-administered controls integrated in the BES. 15. Ex-ante commitment controls are exercised by the implementing entities and subsequently channeled through the TA in the commitment and payment approval stages. The decision and responsibility (ex-ante controls) for assuming commitments rests with the management of individual budget beneficiaries, including Program implementing entities. Commitments created by Program implementing entities must conform to the appropriation approved for such purpose in the budget year. BES has rigorous application controls that prevent any payments that would exceed the determined quotas or overall annual budget appropriations. In practice, it is possible for the budget beneficiaries to assume commitments within the budget appropriation but not be able to execute them against the subsequently set lower monthly quotas. In such cases, the budget beneficiary may apply to the TA for a change of the quota. Legislation requires the TA to decide upon such request guided by a projection of budget revenue and income, budget execution of a budget beneficiary in the previous period and by the appraisal of financial planning performance. If the increase of the quota is not approved, this could potentially lead to payment arrears. While the accumulation of arrears is a significant problem in Serbia, the risk for the Program is assessed as low because the Program implementing entities have no reported arrears. 77         16. Cash management practices exercised by the TA are sound. Cash liquidity is managed by the TA. TA prepares a cash flow forecast for the fiscal year and updates it monthly on the basis of actual cash inflows and outflows. In practice, cash planning is on a month-to- month basis, where the DBB estimate monthly cash requirements through plans for budget execution and the TA approves their “quota”, i.e. ceiling, by the 15th of the preceding month. Program implementing entities submit such quarterly plans for budget execution each month on rolling basis. 17. Program funds will be disbursed based on the achievement of DLIs. The Program provides for advances of the loan funds up to 25% of the loan amount. The Government will provide evidence and documentation on the achievement of DLIs at the end of each year. The Bank will determine Program funding in line with the validation protocols for each DLI, the advances will then be converted into disbursements freeing up space to next advance up to 25% of the loan amount. The DLIs achievement and disbursement will be scalable according to the level of achievement assessed by the task team based on the verification protocol. It will be monitored that the level of disbursed funds based on achieved DLIs does not exceed the level of total Program expenditures incurred over the implementation period. In the case that disbursed funds exceed the level of incurred Program expenditures, the excess amount will need to be reimbursed to the Bank. Loan funds will be disbursed to a government account held at the National Bank of Serbia or Consolidated Treasury Account, and will be accounted for in the budget management information system as income. Internal Controls and Internal Audit 18. Internal controls provide a satisfactory control framework for the Program. There is long standing traditional system of written internal controls and procedures within all implementing entities. This system provides a sound framework and covers key controls, such as: authorized signatories for transactions and approvals; segregation of duties; accounting checks and controls; all operations cycles covered by appropriate internal acts. There are written internal acts and rulebooks which describe procedures and controls applied for all relevant cycles of transactions. The control system is complied with in practice and is assessed to be adequate. 19. Implementation of Financial Management and Control (FMC) as defined by PIFC is still in its early stages. There is a legal framework for a functional public internal financial control (PIFC) system including financial management and control (FMC) and internal audit (IA). However, recent assessments of public administration conclude that, despite extensive training on FMC concepts, the objectives and benefits of a fully operational FMC system are still poorly understood across the public sector. MoF will need to provide guidance on implementation of managerial accountability in practice to support the ongoing transition from input- to result-based management of resources. The FMC framework still lacks some of the requirements for a modernized sound system of public internal controls such as: setting of objectives; formalized risk assessment procedures; establishment of relevant and cost-effective internal controls to provide reasonable assurance; delegation of responsibilities and authority; documentation and audit trails. 20. The assessment showed that key internal controls are instituted and applied within Program implementing entities. These include: appropriate authorizations and approvals of all purchases, relevant documentation, transactions of payments; segregation of duties so that different persons are responsible for different phases of a transaction; reconciliations between 78         accounting records and TML; filing of original documentation to support all project transactions. In addition to the above, the Treasury Administration exercises the following controls for execution of the budget: no payments are processed if exceeding annual budget appropriations (hard control in the FMIS); no payments are processed if they exceed monthly payment quotas (hard control in the FMIS); only authorized personnel of users of public funds can access FMIS; only authorized signatories approve requests for payment; and appropriate supporting documentation for payments is required before authorization. 21. Internal audit unit has been established and made functional in the Program implementing entities but requires substantial institutional, methodological and capacity development. IA reports are considered an internal enactment of the respective institution and are not normally distributed outside of the institution, except to the SAI upon request. In the recent years, issues have been reported with respect to independence of internal auditors. It has likewise been noted that quality assurance of their work needs further attention. Implementation and follow up of recommendations of internal audit is limited and needs improvement. On a positive note, a substantial number of Internal Audit Departments (IADs) follow strategic/annual risk-based audit plan. Many of the practicing public sector internal auditors are trained and certified under a program designed and implemented by Central Harmonization Unit (CHU) of the MoF, involving in-class and practical on-the-job training. All Program implementing entities have established internal audit function, which is operational but in a need of further capacity strengthening. Internal audit units consist typically of several people and conduct audits in line with annual audit plans which they prepare. MPALSG and TA have only one employee in their internal audit departments. The Program will not rely on findings of internal audit as an instituted and agreed measure of confirming appropriate fiduciary arrangements for the program during implementation, but it will consult reports of internal audits for entities involved in the Program as an additional source of information. Program Audit 22. SAI audit of Government’s annual financial statements (the final account) will be considered as the audit of the Program. The Government’s annual financial statements (final account) which are subject to financial and compliance audit by the SAI. The audit of the final account for the previous year is delivered by the SAI by the end of the year following the audited period. The SAI issued modified qualified opinion on the final account for 2013. Qualifications related the incomplete information on fixed assets and inability to verify asset valuation. 23. SAI has seen significant development in recent years in terms of number of staff, organizational structure and audit methodology. The mandate of the SAI is exhaustive, and its remit includes financial, compliance (regularity) and performance audits of all public entities, in accordance with national and international auditing standards. SAI performs its audits based on a risk-based Annual Audit Plan which has to be adopted by the end on the current year for the subsequent calendar year. SAI subscribes to the International Organization of Supreme Audit Institutions’ (INTOSAI) International Standards of Supreme Audit Institutions (ISSAIs). The institution conducted its first performance audit in 2013, and the most recent development relates to establishing quality control department within the institution. Manuals for financial and compliance audits, performance audits and quality control were formally approved in April 2015. As a part of financial and compliance audits, apart from accuracy of financial statements and compliance with laws and regulations, SAI also examines the FMC systems (including internal control systems) and IA. 79         24. SAI’s capacity is assessed to be adequate and the audit of the final account will be considered as the audit of the Program. Program expenditures are integral part of the final account and are audited annually within the audit of the Final Account. The World Bank has agreed with the SAI that the audit report will include an explanatory note which will detail program expenditures specifically. The SAI is assessed to have sufficient capacity to produce reliable audit providing sufficient assurance about the use of Program funds. TABLE 20: SUMMARY OF KEY FIDUCIARY RISKS AND MITIGATION MEASURES Primary Risks Potential Impact on Program Key Mitigation Measures Planning and Budgeting Unreliable medium-term Programs included in the Focus on key programs/program expenditure ceilings expenditure framework not activities/projects as indicated in the expenditure executed; risk to achievement framework, with relatively high certainty of of DLIs being included in the budget over the implementation period and with realistic cost estimates available. Inadequate budgetary Programs included in the Funds safeguarded as the program design allocation for Program expenditure framework not ensures achievement of DLIs is a prerequisite activities by the executed; risk to achievement for funding Government of DLIs Risk to implementation mitigated by focus on including vital programs and activities in expenditure framework  Accounting and Financial Reporting In-year reports with May restrict monitoring and Specify the frequency, scope and level of detail varying scope and level of determining amount of program for reporting for the participating institutions aggregation related expenditures and affect disbursement and decision- making for sound Program implementation Poor quality annual Poor quality Program annual - Specify the frequency, scope and level of financial statements financial statements could detail for reporting for the participating affect program monitoring and institutions decision making - Reporting system entails reconciliation of implementing entities’ accounting records and Treasury Main Ledger, constituting double layer reporting mechanism and system of controls - Annual financial statements audited by the SAI Treasury Management and Funds Flow Delays in releasing, and Insufficient funds available for - Commitment by the Government to ensure insufficient Government Program implementation adequate funding and improvements of funds commitment control and cash management through technical part of the program Internal Controls and Internal Audit Weaknesses in internal Risk of Program funds not Annual risk-based fiduciary reviews/supervision control systems and cases being used for the intended to be conducted on the Program in order to of accountability of funds purposes verify the use of funds for intended purposes External audit conducted by the SAI Weak capacity of internal Inadequate internal audit - Annual risk-based fiduciary audit function in terms of coverage reviews/supervision to be conducted on the staff numbers and skills Program in order to verify the use of funds for and lack of functional intended purposes independence - External audit conducted by the SAI 80         Primary Risks Potential Impact on Program Key Mitigation Measures Insufficient capacity of the Risk of Program funds not - Annual risk-based fiduciary budget inspection to cover being used for the intended reviews/supervision to be conducted on the all program expenditures purposes Program in order to verify the use of funds for intended purposes - External audit conducted by the SAI External Audit and Oversight Lack of capacity by SAI Affect timeliness and quality of -Official letter to the SAI to agree on the SAI for audit of all Program Program audits including additional explanatory note in the entities in terms of staff audit of the final account, which would detail numbers and budget program expenditures allocation High incidence of audit Indication of noncompliance Preparing action plans to address the identified report qualifications with FM procedures and issues and the Bank’s follow up and monitoring possible misuse of funds of implementation of the actions PUBLIC PROCUREMENT 25. The regulatory framework public procurement is largely aligned with the EU acquis and provides all the elements required for a functional system. The Serbian Public Procurement Law (PPL) effective as of April 1, 2013, amended in August 2015 defines the procurement environment. The procurement system legislation, rules and procedures are clearly established and easily accessible to the public. The PPL applies to procurement of goods, works and services purchased by state and local Government authorities, State Owned Enterprises (SOEs) and legal persons that use funds provided by the Government of Serbia or local self- Governments. PPL provides for increased transparency in public procurement processes, lays down comprehensive rules for procurement planning, simplifies the procedures for demonstrating compliance with mandatory bidding requirements, provides for the creation of a single register of bidders, reduces the scope for arbitrarily rejecting bids, imposes a duty to record and monitor the implementation of public procurement contracts, regulates centralized public procurement and provides for the possibility of entering into framework agreements. Advance Payment Guarantees and Performance Guarantees are mandatory. 26. Under the PPL, a wide range of procurement information must be published on the Public Procurement Portal. This includes: all announcements of public procurements, by all contracting authorities, information on contract amendments; requests for the protection of bidders’ rights; quarterly reports by contracting authorities on contracts signed and procedures conducted; and the opinions of the PPO on the use of the negotiated procedure. Access to the content posted on the Portal and its downloading by bidders and other interested parties is provided free of charge. Use of the portal has increased dramatically since the 2013 PPL went into effect. In the first year of implementation, the number of daily visits to the portal grew by 5,000, a 600 percent increase. The number of public procurement procedures announced daily averaged 130- representing a 200 percent increase. 27. Amendments to the PPL approved in August 2015 have further strengthened the legislative framework. Entities which have total estimated annual procurements of over one billion dinars must publish, on their websites, an internal plan for preventing corruption in public procurement, as well as information about their internal procurement procedures, their annual procurement plans and all decisions on contract awards and cancelation of procurement 81         procedures. To improve the efficiency of public procurement, the amendments raise the threshold for application of the law, impose shorter deadlines for submission of bids and allows for self-certification by bidders. Additionally, the amendments introduce the use of social criteria and consideration of life cycle costs as elements in evaluating bids, as well as an option of using “technical” product markings to define technical specifications and as selection criteria. Finally, the amendments implement a number of changes to streamline the appeals process and the operation of the Commission for the Protection of Rights. 28. The 2013 Public Procurement Law also sets out the competences of the two core agencies responsible for public procurement systems: the PPO and the Commission for the Protection of Rights in Public Procurement Procedures (RC). PPO has a broad mandate. It oversees the implementation of the PPL, participates in the drafting of procurement regulations, manages the Public Procurement Portal, prepares reports on public procurements, and provides technical assistance to contracting authorities and bidders. The Republic Commission for the Protection of Rights in Public Procurement Procedures is an autonomous and independent body of the Republic of Serbia which provides for grievance redress and tackles fraud and corruption in public procurement. The Commission reports directly to Parliament. 29. Responsibility for conducting procurement is largely decentralized to budget holding entities. There are about 4,900 registered contracting authorities, of which about 166 are central government entities. All of the contracting authorities publish bidding processes through the Public Procurement Portal administered by PPO. However, individual contracting authorities have varying levels of capacity and many unfamiliar familiar with procurement procedures. This has caused delays – it now takes about 120 days to complete a procurement procedure – and has also led to the purchase of inferior goods and services, as tenders are inadequately specified and contracts are awarded solely on the basis of price. Procurement planning is not fully integrated with preparation of budgets or multi-annual budget programs at all levels of Government. Larger works and goods are procured on behalf of most entities by centralized government procurement body, the UZZPRO. Framework Agreements, signed by UZZPRO, are used for procurement of common goods. 30. Each of the Program implementing entities has a unit with one or more certified Procurement Officers who undertake procurement. The procurement capacity of each entity is briefly reviewed below:  MPALSG has a Division for Administrative Matters, Human Resources and Public Procurement staffed with three professionals one of whom is a certified and experienced Procurement Officer. MPALSG conducts procurement procedures for services (total value for 2015 is approximately RSD 50 million or approximately US$ 450,000) and some minor procurement for goods (total value for 2015 is approximately RSD 4,000,000, or approximately US$ 36,000). Works and most of the goods are procured on behalf of the Ministry by the UZZPRO.  PPO has a Department for Financial Affairs with one certified public procurement officer who conducts minor procurement for services. Procurement for maintenance of the Public Procurement Portal is conducted through negotiated procedure without invitation to bid, because the vendor has ownership of the source code in line with the copyright law. The approximate value of procurement is RSD 2,000,000 or approximately US$ 18,000. 82          Treasury has a Department for Legal and Administrative Affairs with five permanent professionals and additional staff to assist on the temporary basis. Staff have acceptable level of experience in public procurement. Procurement is focused on IT services and equipment, software maintenance and equipment and includes some goods, minor works and modest range of services.  NES has a Public Procurement Department with a total of six staff sufficiently experienced in public procurement. In 2014, the Project Implementation Sector was formed within the NES, consisting of two departments: Department for Implementation of IPA Funds and a General Project Department.  Government Human Resource Management Service (SUK) has a Department for Legal, Financial and General Affairs responsible for procurement. Procurement operations conducted are considered minor.  SAI has a Department for Legal and General Affairs responsible for procurement. Two professionals are certified public procurement officers with experience in public procurement. The most used types of procedures are open and low cost procurement procedures, negotiated procedures without invitation are rarely used. Procurement undertaken consists of standard goods, some IT equipment and software. Total estimated value of public procurement for 2015 is approximately 33,000,000 RSD (approximately 300,000 USD). 31. Procurement under the Program will follow the Government procedures. The procurement procedures to be conducted under the Program are relatively modest and consist of IT equipment, consultancy services and training. None of the planned procurement activities, based on their estimated values at the time, will require review and approval of the Operational Procurement Review. Complaints Handling and Grievance Mechanism 32. The Republic Commission for Protection of Rights in Public Procurement Procedures (RC) is responsible for the administrative procurement complaints system. A complaint may be lodged against any phase of public procurement procedure, as well as against decisions on contract awards. Amongst other responsibilities, the RC: decides on requests for protection of rights and appeals filed against the conclusion of the contracting authority and the PPO; monitors and controls implementation of its decisions; annuls public procurement contracts; and imposes fines on contracting authorities and conducts minor offense proceedings in the first instance. 33. The Commission issues decisions that are binding for all parties, without precluding subsequent access to an external higher authority. Further appeals can be made to the Administrative Court. The process for submission and resolution of complaints is clearly set out in the PPL by Articles 148-155 and 157 and is publicly available on the website of the RC (http://www.kjn.gov.rs/sr/zastita_prava/zahtev-za-zastitu-prava.html). Fees charged in the procedures of complaints, as detailed in article 156 of the PPL, are believed to be reasonable and not to prohibit access by concerned parties. 34. The RC annual reports indicate that the number of complaints submitted and resolved are increasing. From the entry into force of the new legal framework in April 2013 until December 2013, RC received 1,696 cases and reached a decision on 1,609 of these cases 83         leading to the annulment of 296 public procurement procedures. During the first half of 2014, RC received 1,442 cases, made 1,282 decisions (958 for protection of rights and 80 upon appeals to conclusions of the contracting authorities), leading to annulment of the public procurement procedure in 244 cases. Comparing the January 1-June 30 periods for 2013 and 2014, there were 37.66% more cases received in the latter, and 41.58% more cases resolved.14 35. The high number of appeals has overwhelmed RC’s capacity and led to some delays in the handling of complaints but processing times are improving. Article 158 of the PPL states that the RC shall decide upon request for protection of rights whose content is in accordance with Article 151 of the PPL within 20 days from receipt of the request, and not later than 30 days. The RC shall decide upon appeal to conclusions of the contracting authorities within eight days from the day of receiving the appeal. In the second half of 2013, the average period deciding upon a request for protection of rights was 23.61 days, and the average period for deciding an appeal to conclusions of the contracting authorities was 14 days. In the first half of 2014, the respective averages were 19.84 days and 13.19 days. Between April and December 2013, out of the 1,609 decisions, 341 were not made within the deadline specified by the PPL.15 During the first half of 2014, out of the 1,282 decisions, 177 decisions were not made within the deadline specified by the PPL.16 Control of Corruption in Procurement  36. The PPL lays out specific measures for prevention of corruption and conflict of interest in public procurement. Each contracting authority is required to pass an internal act which regulates in detail the manner of planning of public procurement, conduct of the procedures, contract implementation and oversight of public procurement. The integrity of procedures is to be protected by excluding all persons who were involved in the preparation of a public procurement from eligibility as bidders and the duty of contracting authorities to reject bids in such cases. RC members cannot be involved in any capacity in procurement transactions or in the process leading to contract award decisions. The law establishes a duty to report corruption to the PPO, the Anti-Corruption Agency and the public prosecution office and provides protection to persons who report corruption. Bidders are required to confirm in writing that their bids are independent and report violation of competition to the Competition Commission. Entities are required to appoint a civil supervisor for all procurements which estimated value exceeds RSD 1 billion. 37. PPO has prepared a Model Internal Plan for Anti-Corruption in Public Procurement for purchasing authorities whose total annual value of procurement is estimated at over 1 billion RSD. A similar model that regulates the internal public procurement procedure within the purchasing authority in more detail has likewise been developed and made available. PPO’s Rulebook on Contents of the Public Procurement Report and Manner of Maintaining Records on Public Procurement is in force.                                                                14 Report by the Republic Commission for the period January 1, 2014-June 30, 2014. 15 Reports by the Republic Commission for the periods: April 1, 2013-June 30, 2013, and July 1, 2013-December 31, 2013. 16 Report by the Republic Commission for the period January 1, 2014-June 30, 2014, page 288. 84         38. The SAI plays an important role in the process of control following well-defined policies and procedures for the audit of public procurement. In accordance with the PPL, contracting authorities are obliged to submit their procurement plans to the SAI together with changes made during implementation. In the process of an audit, the SAI reviews the type of the procedure and all related decisions, bids, evaluation report, decision of contract award and the contract itself. The physical inspection of contract outcomes is subject to audit. The audit report contains findings with recommendations and it is published. The most common audit findings relate to poorly prepared procurement plans, lack of experience in public procurement and unrealistic needs assessments. The SAI monitors implementation of its recommendations and can impose implementation of its recommendations by undertaking further legal steps. 39. The PPO and the SAI can initiate misdemeanor proceedings when they learn in any way of a violation of the PPL. Since the entry into force of the new Law on Misdemeanors in March 2014, the PPO initiated 35 misdemeanor procedures against contracting authorities. The RC is responsible for conducting first-instance proceedings. The PPL extends the deadline for misdemeanor cases in public procurement to three years from the date of commission of the infringement. The PPO and the RC can also initiate proceedings to annul public procurement contracts and the RC can pronounce fines. GOVERNANCE AND ANTI-CORRUPTION ARRANGEMENTS 40. Country’s institutional and legislative framework in mitigation in fraud and corruption risks continues to gradually strengthen. An assessment of the effectiveness of country systems for tackling corruption was undertaken as part of the Program’s Technical Assessment. The assessment concludes that while level of corruption remains high, the institutional and legal framework for tackling corruption is progressively improving and existing Government commitment to addressing corruption is high. 41. Serbia has an overarching Anti-Corruption Strategy (ACS) for the period 2013 – 2018. The strategy and its action plan deal with prevention, institution building and training and contains a specific section dedicated to public finance addressing measures related to public revenues, expenditures, internal financial control, external audit and the safeguarding of EU financial interests. All the entities involved in the Program have adopted Integrity Plans and report on implementation through six-month and annual reports. The Anti-Corruption Agency reports to the National Assembly annually on implementation of the ACS. The EU Screening Report for Chapter 23: Judiciary and Fundamental Rights from 201317 concludes that the ACS and action plan provide an adequate framework for addressing the impediments to better transparency and accountability in the public service. 42. Legal framework for anti-corruption activities is largely in place. Serbia has signed and ratified all major international instruments against corruption, but recent assessments indicate that more needs to be done on aligning the national legislation in order to consistently apply them. Fraud and corruption-related offences are sanctionable under the Criminal Code and include, inter alia, passive bribery and active bribery, embezzlement, fraud, obtaining and                                                                17 European Commission (2013). “Screening Report Serbia- Chapter 23 – Judiciary and fundamental rights”. Available on the web: http://ec.europa.eu/enlargement/pdf/key_documents/2014/140729-screening-report-chapter- 23-serbia.pdf 85         using credit and other benefits under false pretenses, abuse of trust, money laundering, abuse of position by a responsible person, malfeasance in public procurement, abuse of authority in economy, forging of documents, forging an official document, abuse of office and trading in influence. The Law on Protection of Whistle-Blowers entered into force in June 2015 and some rules on whistle-blowers protection are included in the Law on Free Access to Information of Public Importance and the Law on Civil Servants. The Law on Civil Servants and the Code of Conduct for Civil Servants also contain measures to increase integrity in the public sector. The Law on Public Procurement contains a dedicated chapter on the prevention of corruption, requiring the purchasing authority to take corruption prevention measures in all stages of the procurement process and a duty to report corruption. Likewise, the Law addresses potential conflicts of interest in the procurement procedure. 43. The institutional framework for anti-corruption is established and functioning. Anti-corruption institutional framework includes, in addition the procurement institutions referred to above:  Anti-Corruption Agency (ACA) is an independent, autonomous state authority, established by the Law on the Anti-Corruption Agency which came into force on January 1, 2010. ACA is accountable for its work to the National Assembly. ACA’s preventive, oversight and supervisory responsbilities include: oversight of the National Anti- corruption Strategy and associated action plans; imposition of measure arising from violation of the ACA Law; resolution of conflicts of interest; issuing opinions and instructions for the implementation of the ACA Law and National Anti-Corruption Strategy and associated action plans.  Anti-Corruption Council (AC) is an expert, advisory body of the Government, founded with a mission to oversee all aspects of anti-corruption activities, to propose measures to be taken in order to fight corruption effectively, to monitor their implementation, and to make proposals for adoption of regulations, programs and other acts and measures in this area. The Council was established under provisions of the Law on Government (article 26) in 2001. The Council consists of the President, vice-president and five members.  SAIis required by Law to submit to the competent authority, without delay, any evidence relating to misdemeanors or criminal offences, and that body is required to inform the SAI of its decision. It has been noted that this additional duty potentially takes away resources from the audit work. From the Program perspective, this segment of the SAI mandate could be the critical resource in addressing possible instances of fraud and corruption involving Program funding.  Administration for the Prevention of Money Laundering (APML) is the financial- intelligence unit of the Republic of Serbia. APML’s powers and responsibilities are provided for in the Law on the Prevention of Money Laundering and Terrorist Financing. The obliged entities under the AML/CFT Law send to the APML reports on suspicious transactions. APML analyses these reports and share data upon request of another state authority, such as the Courts, Prosecutors’ Office, Police, Security Information Agency, Privatization Agency, and Securities Commission.  Anti-Fraud Coordination Service (AFCOS) is an independent national authority established by the MOF responsible for protecting the EU's financial interests from fraud. AFCOS coordinates the sharing of information between the national fraud-prevention 86         authorities and European Commission Anti-Fraud Office (OLAF). AFCOS is still not fully operational and is missing a comprehensive legal basis to determine its duties, competences and arrangements for cooperation with the European Commission and national authorities responsible for the prevention, detection, investigation and prosecution of corruption. 44. Institutional responsibilities for investigating and prosecuting corruption are clear, but their capacities remain weak. Specialized prosecution office for organized crimes also has jurisdiction over high-level corruption cases. Throughout Serbia, around forty prosecutors work on corruption cases. There is no similar degree of specialization at the level of the police or the courts. Inter-institutional cooperation is formalized in memoranda on cooperation between the competent institutions. The 2013 EU Screening Report on judiciary argues that inter-agency cooperation has improved in recent years but needs to be further developed, data bases should be better inter-connected “and a safe platform to exchange intelligence should be established”.18 In March 2014, Memorandum on Cooperation to regulate the manner of cooperation, coordination and data exchange in the field of anti-corruption was concluded between the SAI, PPO, and Republic Commission for Protection of Rights in Public Procurement Procedures, MOF, Ministry of Economy, Anti-Corruption Agency, Anti-Corruption Council and the Commission for Protection of Competition. It is too early to assess the results of the Memorandum. Alignment with World Bank Anti-Corruption Guidelines (ACGs) 45. Program implementation will be aligned with the ACG applicable to Program for Results operations. The Government of Serbia has agreed to implement the Program in accordance with the ACG applicable to PforR operations dated February 1, 2012, and revised on July 10, 2015. These guidelines will be operationalized in the following ways under the Program: a. Sharing of information on fraud and corruption allegations: Through the official exchange of letters, the SAI will confirm agreement to share with the World Bank any indications or allegations of Fraud and Corruption (as defined by the ACG) in connection with the Program from the public, Government representatives, its own investigation, or otherwise, together with the investigative and other actions that it proposes to take with respect thereto, every six months. b. Application of World Bank debarment and suspension lists of firms and individuals under the Program: The MOF will share with the procuring entities the names of firms and individuals on the World Bank Group’s debarment and suspension lists and will ensure that these firms and individuals are not allowed to bid for contracts or benefit from a contract under operation during the period of debarment or suspension. The MOF and PPO will check compliance and report to the World Bank every six months as part of the reporting requirement of the operation. c. Investigation of Fraud and Corruption Allegations: All allegations of fraud and corruption will be investigated by the SAI and the prosecutor’s office and those found to be credible will be prosecuted. The SAI will report to the World Bank every six months on the actions taken in any such investigations; and promptly, upon the completion of any                                                                18 European Commission (2013). “Screening Report Serbia- Chapter 23 – Judiciary and fundamental rights”, p.29. Available on the web: http://ec.europa.eu/enlargement/pdf/key_documents/2014/140729-screening-report-chapter- 23-serbia.pdf 87         such investigation, report to the Bank the findings thereof. The World Bank’s Institutional Integrity Vice-Presidency (INT) may also jointly with the SAI, or on its own initiative, investigate any allegations or other indications of Fraud and Corruption (as defined in the ACG) in connection with the Program or any part of the Program. In all such cases the Program managers and SAI will collaborate with INT to acquire all records and documentation that INT may reasonably request from the operation regarding the use of the Program financing. If the borrower or the Bank determined that any person or entity has engaged in Fraud and Corruption (as defined in the ACG) in connection with the Program, the Borrow will take timely and appropriate actions , satisfactory to the World Bank, to remedy or otherwise address the situation to prevent its recurrence. d. Cooperation with representatives of the Bank: the Borrow shall fully cooperate with representatives of the Bank in any inquiry conducted by the Bank into allegations or other indicators of Fraud and Corruption (as defined in the ACG) in connection with the Program, and shall take all appropriate measures to ensure the full cooperation of relevant persons and entities subject to the Borrower’s jurisdiction in such inquiry. 46. The Assessment concludes that the Fraud and Corruption risk will remain high. Several fraud and corruption related cases have been filed by SAI in the recent past. In the course of 2014, on the basis of the audit of financial statements from 2013 for all sectors (i.e. central and local Government, public enterprises, extra-budgetary funds), SAI has filed 139 reports (111 for misdemeanor charges, 13 for economic crimes and 15 for criminal charges). Until March 2015 (latest available data), further 103 reports were filed (95 for misdemeanor charges, 6 for economic crimes and 2 for criminal charges). Additionally, starting from March 2014, when the new Law on Misdemeanor Offences entered into force, PPO has filed 26 requests for initiation of misdemeanor proceedings to the Republic Commission for Protection of Rights in Public Procurement Procedures. The Program Action Plan details important actions that would have to be undertaken by the implementing agencies to ensure that Program activities are not affected by Fraud and Corruption. 47. The World Bank’s Guidelines on Preventing and Combating Fraud and Corruption in Program for Results Financing would apply to the whole Program. If requested, the Bank should be provided access to any information related to contracts under said Program (even if held by third parties/contractors) and the Bank should have the right to investigate any allegations of fraud and corruption within the Program. As part of its statutory mandate to audit Government finances, irrespective of source, the SAI will share, with the World Bank, information on allegations of fraud and corruption. The Borrower’s commitment to follow the Guidelines is confirmed in the Minutes of Negotiations. 88   TABLE 21: FIDUCIARY RISKS AND ACTION PLAN Primary Risks Actions Required Responsible Due by Planning and Budgeting Non-compliance with budget expenditure - Strengthening and capacity building of MoF Budget MOF, TA, PPO, Short term ceilings (medium-term and annual) Department MPALSG - Performance measures in the annual performance assessments to promote that these issues are reduced. Inadequate budgetary allocation for Program Program design ensures achievement of DLIs is a MOF … activities by the Government prerequisite for funding Diversion of allocated funds on non- Program Program design ensures achievement of DLIs is a MOF, TA, PPO, … activities by implementing entities or the prerequisite for funding MPALSG Government (in-year amendments) Transparency Key financial information about the Program is Building capacity in the MoF for improved budget MOF Short term partly available or not available to the public transparency. Accounting and Financial Reporting Poor quality financial statements and risk of Building capacity in the MoF for improved legislative MOF, TA Short term noncompliance with IPSAS framework on accounting. In-year reports with varying scope and level of Specify the frequency, scope and level of detail for MOF, TA Short term aggregation reporting for the participating institutions Treasury Management and Funds Flow Possibility for enforced collection procedure Protection of Program funds (similar to how EU funds are MOF, TA Short term against the funds intended for Program protected against enforced collection) implementation Diversion of allocated funds on non- Program Adherence to prudent FM principles MOF, TA, PPO, activities by implementing entities or the MPALSG Government Internal Controls and Internal Audit Weaknesses in internal control systems and -Annual risk-based fiduciary reviews to be conducted on MOF, TA, PPO, In accordance with cases of accountability of funds as per the the Program PMs in the APA. MPALSG PIFC Policy Paper reports of the Auditor General - Stronger follow-up by the Government on the annual (under development) FMC report produced by the CHU Bylaws and guidelines yet to be adopted and MoF to fast-track issuance of Regulations which will MOF In accordance with issued (managerial accountability, M&E tools include guidelines for managerial accountability and M&E PIFC Policy Paper for internal auditors, etc.) tools for internal auditors (under development) 89          Weak capacity of internal audit function in Capacity building training MOF, TA, PPO, In accordance with terms of staff numbers and skills and lack of MPALSG PIFC Policy Paper functional independence (under development) Weak oversight and lack of appropriate Stronger follow-up by the Government on the annual IA MOF, TA, PPO, In accordance with management follow-up of internal audit report produced by the CHU MPALSG PIFC Policy Paper recommendations (under development) Weak social accountability structures including MOF, TA, PPO, public participation and complaints handling Participating entities to set up complaints / corruption MPALSG and corruption reporting mechanisms reporting hot line Insufficient capacity of the budget inspection to Facilitate alignment of budget inspection practice with EU MOF Short-tem handle complaints related to use of Program PIFC requirements to make for more effective irregularity funds management tool Procurement Lack of capacity for investigations of Training/specialization of prosecutors and judges in public MOF, PPO, SAI Intermediate term allegations on inappropriate practices in public procurement area and more efficient investigation and procurement. sanctioning of irregularities in public procurement by judiciary. Lack of capacity for procurement within Strengthening procurement capacities and performance of PPO Intermediate term contracting authorities. contracting authorities by knowledge dissemination and promotion of modern procurement tools such as framework agreements, electronic procurement, value-for-money etc. Lack of capacity within the PPO which leads Strengthening and capacity-building of the PPO MOF Short term insufficient support to the contracting authorities and other stakeholders of the public procurement system. Time for processing public procurement The Government should endeavor to make the complaint Government Intermediate term complaints by the first instance – the RC and handling mechanism more effective and efficient to ensure the second instance – the Administrative Court. the rapid handling and resolution of complaints. Transparency of public procurement Publication of decisions by the Administrative Court Ministry of Short Term complaints handling mechanism in the second Justice, instance. Administrative courts Transparency in public procurement contracts Development of a registry of concluded public procurement PPO Short term implementation contracts Audit and Oversight Lack of capacity by SAI for audit of all Program -Support SAI to obtain appropriate level of resources SAI … entities in terms of staff numbers and budget approved by the National Assembly to conduct Program allocation audit 90         High incidence of audit report qualifications -Incentivize resolution of audit queries as part of the … … Program PG performance measures. Delays by Government in responding and -Incentivize resolution of audit queries as part of the … … resolving audit queries Program PG performance measures. Parliament does not approve the Final Account -… National Short term Assembly 91   ANNEX 6: SUMMARY ENVIRONMENTAL AND SOCIAL ASSESSMENT 1. The Program Environmental and Social Assessment undertaken in September 2015 in consultation with the MPALSG determined that the Program poses no major environmental risks but identified social risks related to potential retrenchment of the public sector employees. Formal consultations with key stakeholders on draft ESSA were held in November 2015. This Annex focuses on the social risk assessment and mitigation measures. CONTEXT AND OBJECTIVES 2. The ESSA examines environmental and social management systems that are applicable to the program in order to assess their compliance with the Bank’s Policy and Directive for Program for Results (2015) that applies to PforR financing. It aims to ensure that the Program’s environmental and social risks will be managed adequately and that the Program complies with the basic principles of sustainable development. Paragraph 8 of the Policy for PforR describes the core principles of environmental and social management that must be met in the ESSA. These core principles are as follows: Environmental Management Systems  Promote environmental and social sustainability in the program design, avoid, minimize or mitigate against adverse impacts, and promote informed decision making relating to a program’s environmental and social effects.  Avoid, minimize or mitigate adverse impacts resulting on natural habitats and physical and cultural resources resulting from the program.  Protect public safety and the safety of workers against the potential risks associated with: (i) construction and/or operation of facilities or other business practices in the program, (ii) exposure to toxic chemicals, hazardous wastes and other dangerous goods under the program; (iii) reconstruction or rehabilitation of infrastructure in areas prone to natural hazards. Social Management Systems  Manage land acquisition and loss of access to natural resources in a way that avoids or minimizes displacement, and assist the affected people in improving or at the minimum restoring, their livelihoods and living standards.  Give due consideration to the cultural appropriateness of, and equitable access to, program benefits, giving special attention to the rights and interests of the Indigenous Peoples and to the needs or concerns of vulnerable groups.  Avoid exacerbating social conflict, especially in fragile states, post-conflict areas, or areas subject to territorial disputes. 3. The ESSA evaluates the compatibility of the program’s systems with the core principles on two basic levels: the systems as defined by laws, regulations and procedures (the "system as defined"); and the institutional capacity of implementation entities under the program to effectively implement the system (the "system as it is applied in practice"). It identifies and analyzes the differences between the national systems and the core principles that apply to the program on the two levels indicated above. The preparation of the ESSA and the development of measures to strengthen the environmental and social management system has benefited from various inputs, information and consultation process, including:   92           Review: the review focused on legislation and current labor regulations, relevant reports related to labor issues (e.g.: Employment and Social Reform Program; Statistical Office data), and on separate specific reports of other World Bank projects related to employment issues.  Initial consultation meetings: to develop a better understanding of procedures, standards and approach for this project, meetings took place with the technical staff in the ministries and other Government agencies, including the MPALSG, the Ministry of Labor, Employment, Veteran and Social Affairs, the NES, the Socio-Economic Council, the Social Inclusion Unit, etc.  Formal consultations: Consultations with key stakeholders were held in a form of series of small meeting in Belgrade in November 2015. The key stakeholders including MPALSG, Ministry of Labor and Ministry of Health agreed on the proposed Action Plan. Program Risks 4. The overall economic impact of the Program is expected to be positive. There are, however, significant social impacts may result from the retrenchment of the public sector employees under the Improvement of Human Resources Management Component of the Program. Targeted workforce reductions including retirement, voluntary termination of employment and retrenchment of the public sector employees must comply with the applicable Labor Law, Law on the Maximum Number of Employees in the Public Sector, Civil Servants Law and applicable collective agreements for respective sectors.   5. The right to work is a fundamental right defined and guaranteed by the Constitution of the Republic of Serbia, Article 60: Right to work shall be guaranteed in accordance with the law. Everyone shall have the right to choose his occupation freely. All work places shall be available to everyone under equal conditions. Everyone shall have the right to respect of his person at work, safe and healthy working conditions, necessary protection at work, limited working hours, daily and weekly interval for rest, paid annual holiday, fair remuneration for work done and legal protection in case of termination of working relations. No person may forgo these rights. Women, young and disabled persons shall be provided with special protection at work and special work conditions in accordance with the law. 6. Negative social impacts associated with potential retrenchment under the Program are expected to be limited to the period 2016 – 2018. This is due to the effectiveness of the Law on the Ceiling on the Number of Employees in the Public Sector (until the end of calendar year 2018) and the Standby Agreement with the IMF in relation to the fiscal consolidation measures. It is likely that significant portion of the workforce reductions will be implemented though the natural attrition (retirement) and hiring freeze measures.   7. Relevant labor legal acts and collective agreements include provisions on redundancy due to technological, economic or organizational changes. The legal framework provides special protections for pregnant women, women on maternity leave, mothers of children under age of two years, persons with disabilities, and persons on disability leave (temporary absence for illness). The redundant workers have a right to redundancy (severance) payment, unemployment benefits, and access to health insurance. The labor legislation requires the employer to prepare a retrenchment plan and consult with relevant unions in regard to the proposed retrenchment plan. 93         8. The nature of the Program does not suggest that specific vulnerable groups could be significantly affected under the Program but there are likely to be differential gender impacts. The Law on Ceilings on the Number of Employees in the Public Sector gives a special consideration to persons with disabilities and persons with the knowledge of language of ethnic minorities. Serbia is not considered as a fragile state, or a post-conflict zone. It should be noted that in many sectors of the public administration and public services, women comprise the majority of the employees. This is especially the case in the education and health sectors. Therefore, potential reductions of the workforce may affect women in a higher degree.   9. The Program is not expected to cause major environmental impacts. There is a small chance that the change in organizational and functional structure of the departments and potential modernization of HR information system might lead to minor maintenance works in the offices such as walls plastering, relocation of the furniture, removal of partitions, provision of the basic IT equipment etc. Such operations are not expected to cause any notable or measurable negative impact from the environmental or health and safety standpoints. The Program does not require preparation of an extensive environmental systems assessment. Social Systems Assessment 10. Serbia has in place relatively well developed policy and legal framework on labor relations and retrenchment along with an institutional system which is generally adequate. The national legal framework is generally in line with international standards. Serbia ratified the ILO Termination of Employment Convention No. 158. In general, the legal framework is consistent with principles of the IFC Performance Standards 2 – Labor and Working Conditions, sections on retrenchment. The identified gaps are related to monitoring the status of retrenched workers; and to the implementation of consultation. The existing labor legislation provides adequate protection of workers in instances when due to technological, economic or organizational changes a particular job becomes redundant or volume of work would be reduced. 11. Labor legal acts provide for considering alternatives to termination of employment in all forms. These include: hiring freeze, outsourcing of particular activities (example, in health), internal transfers and redeployment, and reduction in salaries. Some of these measures such as natural attrition through retirement, hiring freeze, and reduction in salaries have already been implemented in the public sector in 2014 and 2015 as a part of the package of measures to reduce Government spending and increase fiscal sustainability. 12. Labor law requires that the employer prepare a retrenchment plan. The respective union and NES are to provide their opinion on the proposed plan. Legal acts and specific collective agreements that apply to employees in the public sector, stipulate for selection criteria and principles when termination of employment occurs as a consequence of changes in program, organization or structure of work. The selection criteria are grounded on the non-discrimination principles, which are in line with good international practice. These provisions specifically protect employees from being retrenched due to a membership in a union, pregnancy, maternity leave, disability leave, child care leave, personal disability, national and social origin, and other personal characteristics. The collective agreements provide protection for mothers of children of age less than two years and single parent households with under-aged children. 13. Laws and collective agreements provide provisions for redundancy payments and formulas for its calculation. The redundancy payment is calculated on the basis of 30% of average salary prior to retrenchment, for every year of service with the employer. Employees are 94         also entitled to unemployment benefits, health care and pension insurance. While these legal provisions are in accordance with good practice, the experience of large retrenchments in the past, due to privatization of large state owned enterprises indicate that there is a reason for caution. These benefits are provided for a limited period of time. In an environment with high unemployment rate and lack of job supply, it would be unrealistic to assume that majority of retrenched people would find new employment easily. 14. The Labor Law and collective agreement require consultations with unions related to the retrenchment program. However, it seems that in practice consultations with workers are not systematically observed. The Law on Ceilings on the Number of Employees, which serves as an instrument for the rightsizing in the public sector, was adopted under an urgent parliamentary procedure and therefore, it was not a subject to public consultations. The unions and the Socio-Economic Council issued public statements to express their dissatisfaction with lack of consultation and their inputs. It should be noted that relevant laws do not contain specific requirements for monitoring and evaluation of retrenchment programs and status of retrenched employees. 15. There are no requirements for the employers to follow the situation of the retrenched workers or outcomes of assistance provided. Once the labor relations are terminated, the NES follow the status of workers who opt to register with them. In general, the legal framework for the protection of the retrenched workers is broadly in place, but its consistent implementation across the country needs to be ensured, notably in the areas of consultations with workers (unions), transparent retrenchment criteria and follow up monitoring and evaluation of the status of affected workers. Social Systems Assessment Action Plan 16. The Program provides an opportunity to strengthen the procedures to identify and mitigate any adverse effects associated to retrenchment. The assessment has identified some gaps between the existing social management system and international good practice. The Program will support specific measures to enhance performance of the social management system related to retrenchment. These measures will be implemented on the basis of the following actions. 17. The MPALSG is in the process of establishing a Change Management Team staffed by both civil servants and consultants to coordinate, monitor and report on the rightsizing process and its effects on the number of employees. The staff will have relevant competences and experience (knowledge of human resources and labor relations procedures) to coordinate the rightsizing process with other public sector entities and to provide regular periodic reports on the status of actions from this Action Plan including the number of retrenched employees across sectors. 18. MPALSG will ensure that workers and unions were consulted during the elaboration of retrenchment plans. Each employer in the public sector will document how union representatives were consulted in relation to retrenchment and respective retrenchment plans. Each public entity as required by Labor Law submitting the request for redundancy payment to the MPALSG and the Ministry of Health will attach minutes from the consultations or written comments by the unions (workers’ representatives) on the retrenchment plan. If requested, a sample of these reports would be submitted to the World Bank for review. 95         19. The criteria for selection of employees who will be made redundant will be based on principles of transparency and non-discrimination applied consistently and contain appeal procedure. The MPALSG will prepare guidelines on the need for inclusion of clear selection criteria in acts on the termination of employment and in the retrenchment plans. The criteria will be consistent with provisions from applicable national labor legislation and collective agreements, policies on social inclusion of Roma, and guidelines of other respective ministries. The criteria will reinforce protections of following categories of workers: pregnant women; women on maternity leave; single mothers; mothers of children under the age of two; employees on disability leave; and persons with disabilities. Every employer who will reduce its workforce will make the criteria for retrenchment publically available. The retrenchment criteria and the rationale will be included in the retrenchment plans and acts on termination of employment. 20. When Labor Law prescribes that the retrenchment plan must prepared the employers in the public sector will prepare retrenchment plans and document that requirements from the Labor Law, Civil Servants Law and applicable collective agreements were respected. The proposed draft retrenchment plan will be submitted to the relevant unions, and the NES for consultation. The period of advance notice and the length of consultation must follow the provisions from the Labor Law. The consultations will be documented in writing. The retrenchment plan will include the following: a) Rationale for determining the redundancy of employees; b) Total number of employees with the respective employer; c) Number of redundant employees, their qualifications and job positions, age, and length of employment (years) covered by the employment insurance benefits; d) Gender segregated information, number of persons with disabilities; e) Selection criteria for determining redundant employees; f) Measures for alternative employment such as: transfer to other jobs; transfer to other employer; training; part-time work, but not less than 50% of the full time and other measures; g) Resources to address the socio-economic status of the redundant employees; and h) Employment termination deadline. 21. The Government of Serbia will provide of support services to retrenched employees. The Ministry of Employment, Veterans and Social Affairs will include in the 2016, 2017 and 2018 performance agreement with the NES a requirement that: a) NES representative visits every entity that will retrench more than 10 workers and inform workers about available NES services, programs, and benefits, register them with NES, and develop an individual action plan for each registered redundant worker; In instances when less than 10 workers will be retrenched, in collaboration with employers, NES will inform affected worker about available assistance programs, based on the model that has been applied with redundant workers; b) NES will contact at least 20 employers in the same and neighboring municipalities where the public entity resides to offer them NES services and inquire about job vacancies; and c) NES will consult with the local employment council about support for redundant workers. 22. MPALSG will ensure that appropriate measures are undertaken to ensure gender and social inclusion. The MPALSG and the Ministry of Health (Statutory Health Insurance Fund) will require that submitted retrenchment plans and requests for redundancy (severance) 96         include disaggregated information according to gender (number of males/females), age (categories to be defined), education (categories to be defined), and persons with disabilities (number).The Ministry of Employment, Veterans and Social Affairs in collaboration with NES will prepare special measures for active employment for retrenched women, especially women over age of 50. 23. MPALSG will monitor severance payment disbursement and status of retrenched workers. The MPALSG and Ministry of Health will monitor and report annually on the number of workers who received the severance (redundancy) payment, as prescribed in the Law on Ceilings on the Number of Employees in the Public Sector. The Ministry of Employment, Veterans and Social Affairs in collaboration with NES will monitor and report annually on the status of retrenched workers in terms of: number of retrenched workers (number of male/female/persons with disability) who received active employment services from NES; and number of retrenched workers (number of male/female/persons with disability) who found new employment. Institutions, roles, responsibilities and coordination  24. The MPALSG will have overall responsibility for implementation of the actions agreed under ESSA. Consistent with the Action Plan for Implementation of Public Administration Strategy, the MPALSG will also be responsible for coordinating the monitoring and reporting of the Program’s result framework, including the DLIs and the Program Action Plan. The MPALSG will be responsible for transfers of payments for severance payments to other ministries and public sector entities who identified need for targeted staff reductions in accordance with the Law on Ceilings on the Number of Employees. It will also be responsible for preparing the program’s financial reports, and monitoring and evaluation drawing if necessary, on financial reports from other ministries and agencies involved in the Program. In fulfilling these functions, the MPALSG will coordinate with: MOF as the reviewer in the process of establishing of the maximum number of employees in the public sector; and the NES will be responsible for delivering unemployment benefits, and active employment measures to the retrenched workers. 97         ANNEX 7: SYSTEMIC OPERATIONS RISK RATING TOOL (SORT) SERBIA: Program on Modernization and Optimization of Public Administration Rating Risk Category (H,S,M,L) Political and governance High Macroeconomic High Sector strategies and policies Moderate Technical design of project or Program Moderate Institutional capacity for implementation and sustainability Moderate Fiduciary Substantial Environmental and Social Substantial Stakeholders Substantial OVERALL High   98   ANNEX 8: PROGRAM ACTION PLAN Action Description DLI* Covenant* Due Date Responsible Completion Measurement** Fiduciary Assessment Increased involvement of the budget December MOF Adherence to budget calendar and evidence of effective beneficiaries establishing its budgetary 31, 2017 two-way process in budget preparation allocations and multi-year budget requirements. Regular periodic reporting on December Beneficiaries of Evidence of regular reports on arears comprehensive data on arrears. 31, 2016 public funds Improved medium-term planning and December Beneficiaries of Assessment of annual budgets and medium-term plans consideration of medium-term targets in 31, 2016 public funds, preparation of respective annual budgets MOF Instituting ex-ante controls for December MOF, Instituted mechanism of controls over contractual contractual commitments 31, 2016 Beneficiaries of commitments prior to assuming them Public Funds Improved control over multi-annual December MOF, Implementing a systematic approach to approve, record contractual commitments 31, 2016 Beneficiaries of and monitor multi-annual contractual commitments Public Funds The Government to strengthen the December PPO / RC Reports of activities in the first six months of Program complaint handling mechanism to 31, 2016 effectiveness improve its effectiveness efficiency in handling complaints. Social And Environmental Assessment MPALSG has staff assigned to July1, MPALSG Two staff assigned with relevant competences and coordinate, monitor and report on the 2016 experience (knowledge of human resources and labor rightsizing process and its effects. relations procedures) Improve consultations with workers and December Responsible Each public entity submitting the request for redundancy unions 31, 2016 public sector payment to the MPALSG to attach minutes from the December employer consultations or written opinions by the unions 31, 2017 (workers’ representatives) on the retrenchment plan. If requested, a sample of these reports would be submitted to the World Bank for review. December 31 , 2018 99          Prepare a selection criteria The criteria June 30, Responsible Every employer who will reduce its workforce will for selection of employees who will be 2016 public sector make the criteria for retrenchment publically available. made redundant will be based on employer The retrenchment criteria and the rationale will be principles of: transparency, non- January included in the retrenchment plans and acts on discrimination, applied consistently and 30, 2017 termination of employment. contain appeal procedure. Where applicable, the criteria will be based on relevant provision from collective January agreements. 30, 2018 Retrenchment plans prepared ( in cases June 30, Responsible The Retrenchment Plan will include the following: prescribed by the law) 2016 public sector 1) rationale for determining the redundancy of employer employees; June 30, 2) total number of employees with the respective 2017 employer; 3) number of redundant employees, their qualifications and job positions, age, and length of employment (years) covered by the employment insurance benefits; June 30, gender segregated information, number of persons with 2018 disabilities. 4) selection criteria for determining redundant employees; 5) measures for alternative employment such as: transfer to other jobs; transfer to other employer; training; part- time work, but not less than 50% of the full time and other measures; 6) resources to address the socio-economic status of the redundant employees; 7) Employment termination deadline. The proposed draft retrenchment plan will be submitted to the relevant workers’ representatives or union, and the NES for consultation (opinion). The period of advance notice and the length of consultation must follow the provisions from the Labor Law. The consultations will be documented in writing. Transition assistance to retrenched June 30, Ministry of The Ministry of Employment, Veterans and Social employees 2016 Employment, Affairs to include in the 2016, 2017, 2018 performance Veterans and agreement with the NES a requirement that (i) NES January 1, Social Affairs representative visits every entity that will retrench more 2017 than 10 workers and inform workers about available NES NES services, programs, and benefits, register them 100         with NES, and develop an individual action plan for January 1, each registered redundant worker. In instances where 2017 less than 10 workers will be retrenched, in collaboration with employer, NES will inform affected workers about available assistance programs, based on the model that has been applied for redundant workers; (ii) to contact at least 20 employers in the same and neighboring municipalities where the public entity resides to offer them NES services and inquire about job vacancies; and (iii) to consult with the local employment council about support for redundant workers. Gender and social inclusion December MPALSG Submitted retrenchment plans and requests for 31, 2016 Ministry of redundancy (severance payment) include segregated Health information according to gender (number of December males/females), age (categories to be defined), 31, 2017 education (categories to be defined) and persons with disabilities (number), and ethnic minority (number). Statutory Ministry of Labor and NES .will prepare special active December Health employment measures for retrenched women, with 31, 2018 Insurance Fund emphasis on women over the age of 50 Ministry of Labor, Employment, Veteran and Social Affairs NES Monitor severance payment disbursement December MPALSG The MPALSG and Ministry of Health will monitor and and status of retrenched workers 31, 2016 report annually on the number of workers who received the severance payment, as prescribed in the Law on the December Maximum Number of Employees in the Public Sector. Ministry of 31, 2017 Ministry of Labor, with support from NES will monitor Health and report annually on the status of retrenched workers December in terms of: a) number of retrenched workers (number of 31, 2018 Statutory male/female/ persons with disabilities) who received Health active employment services from NES; and b) number Insurance Fund of retrenched workers (number of male/female/ persons with disabilities) who found new employment. 101         Ministry of Labor, Employment, Veteran and Social Affairs NES       102   ANNEX 9: IMPLEMENTATION SUPPORT PLAN 1. The technical, fiduciary and social assessments undertaken during preparation of this Program all stress the need for continued support during implementation. The Bank works closely with other development partners involved in supporting the Government in the implementation of the public sector reform agenda. Additionally, there are other ongoing Bank projects which provide support related to the reforms, notably: the EU-financed BETF and RETFs for Right-Sizing and Restructuring Technical Assistance; the Russian Federation- financed ECA PFM TFs for the Wage Reform and Public Investment Management Technical Assistance; DfID-financed support to Public Procurement Reform. Additionally, the Bank will continue policy dialogue with the Government on the integration of recommendations on PFM reform into the Government’s Public Finance Management Reform Program 2015-2017). 2. The Bank will work closely with the EU to support implementation of the Program Action Plan. The EU is preparing a Sector Budget Support operation with EUR10 Million dedicated to Technical Assistance. The Bank’s Program has been prepared in close consultation with EU counterparts to build synergies and ensure better harmonization of support to Government. Importantly, arrangements will be made to prepare a harmonized Action Plan so as not to burden the Government. Where possible, there will be joint missions with the EU and other development partners involved in supporting the Government’s PAR Strategy Action Plan to ensure that the achievement of Program results builds on ongoing work supported by other partners. 3. The Bank will support Program implementation with a diverse team of Bank specialists. The lead and co-task team leaders are based in the region – the co-TTL in Serbia - and will be engaged with the Government as frequently as necessary during implementation. Other core team members – including Financial Management and Procurement Specialists - are also based in the country office. Both will cover review of fiduciary aspects of the Program. Such close engagement will be useful to anticipate implementation risks, support the Government in the technical aspects of the implementation and work jointly with development partners through the Donor Working Group on the PAR Strategy. Bank implementation support will focus on :  ensuring the Program monitoring framework functions effectively and generates high quality data;  following up on Program implementation to ensure that Program DLIs are met in a timely manner and the Government continues to adhere to the Action Plan;  monitoring the impact of the retrenchment and the implementation of Social Action Plan;  overseeing the validation process for DLIs and verification that the disbursement of loan funds is consistent is less than the value of Program expenditures;  follow-up on the recommendations from the fiduciary assessment; and  providing technical support to Government counterparts.     103          Main focus of Implementation Support Time Focus Skills Needed Resource Partner Role Estimate First twelve Support to implementing - Monitoring and US$150,000 months agencies to finalize Evaluation Program plans and begin - Financial Management implementation, including - Procurement ensuring adequate resource - Human Resource and M&E capacity Management - Social Safeguards Specialist 12-48 Quarterly discussions with - Monitoring and US$150,000 months implementation agencies Evaluation to review progress and - Financial Management plans for next cycle - Procurement - Human Resource Management - Fiduciary - Social Safeguards Specialist Task Team Skills Mix Requirements for Implementation Support Skills Needed No. Staff No. Trips Comments Weeks Task Team Leader 8 4 Region based Task Team Leader 10 - Country Office based Monitoring and Evaluation Specialist 8 4 HQ Based Financial Management Specialist 4 - Country Office based Procurement Specialist 4 - Country Office based Human Resource Management Specialist 4 2 HQ Based Social Development Specialist 4 2 HQ based Public Financial Management Specialist 4 2 HQ based 104         ANNEX 10: DONOR SUPPORT FOR PUBLIC SECTOR REFORM IN SERBIA 1. Besides the IPA funds from EU, the main sources of international support to PAR sector are bilateral assistance from the USA, Switzerland, Sweden, and Norway. These funds of bilateral donors have contributed to PAR sector through enhancing of sustainable local development, building program for budgeting and macroeconomic forecasting models, development of statistics, preparations for better programming and monitoring of EU assistance, reform of the financial sector, implementation of the PAR, and assistance to SAI. 2. Inter-institutional cooperation and coordination has been improved through establishment of the Sector Working Group (SWG) chaired by the MPALSG and the Serbian European Integration Office (SEIO). The purpose of the SWG meetings is to analyze sector priority goals, measures and operations supported by the EU funds and other international donors through a consultative and participatory process. The SWG includes representatives from the Government (representatives from the MOF, General Secretariat, PPS, Legislative Secretariat, etc.), representatives of the bilateral donors and EU Delegation. TABLE 22: INTERNATIONAL DONOR’S SUPPORT TO PUBLIC ADMINISTRATION REFORMS  International Timeline Type of intervention Total Budget Partner (EUR) EU Delegation – 2016-2018 Support ongoing public administration reform 6,950,000 IPA 2014 efforts in order to establish an efficient, professional, accountable and fiscally responsible administration which provides high quality services to citizens and businesses USAID Business 2011-2017 Technical Assistance to the Serbian 400,000 Enabling Project Government in reforms of the public sector (15, 000.000 total financial management and fiscal policy value) making in ways that are relevant for business growth and competitiveness Swiss 2014-2016 Support to the Implementation of the PAR 500,000 Development Action Plan – Local Self- Government Cooperation Reform Office Norway 2015-2016 Capacity building of the MPALSG to be 116,400 better equipped for changes in the public administration 105