PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE January 6, 2014 Report No.: Operation Name Albania Public Finance DPL Region EUROPE AND CENTRAL ASIA Country Albania Sector General Public Administration (100 percent) Operation ID P147226 Lending Instrument Development Policy Lending Borrower(s) GOVERNMENT OF ALBANIA Implementing Agency Date PID Prepared January 6, 2014 Estimated Date of Appraisal March 20, 2014 Estimated Date of Board May 29, 2014 Approval Corporate Review Decision N/A. Key development issues and rationale for Bank involvement Albania’s public debt has surged from 54.7 percent in 2008 to 62.9 percent in 2012 and to 71.8 percent in 2013. The government has accumulated general government arrears of around 5.4 percent of GDP. This operation supports the newly elected coalition government’s reform agenda to clear arrears, strengthen public finance management and improve Albania’s fiscal outlook through pension and energy sector reforms. Proposed Objective(s) The objectives of the proposed operation are: i) Strengthening public financial management. Central government arrears have risen sharply, in particular in the transport, health, and electricity sectors, and from delayed tax refunds. Clearance of these arrears is expected to reduce non-performing loans (NPLs) which are currently stifling credit to the private sector and restraining investment and growth. Strengthening budget preparation and execution will increase transparency and credibility of public finances and limit the accumulation of new arrears. More rigorous prioritization of capital spending combined with commitment controls will raise the efficiency of public investment. ii) Improving the fiscal outlook. An increasing pension deficit and significant fiscal transfers to the energy sector are projected to put upward pressure on public debt in the future. Maintaining the pension deficit at a sustainable level while improving the poverty-focus of pensions and reducing energy sector related fiscal risks are important for putting Albania’s public debt on a sustainable trajectory and for safe-guarding macro-economic stability. Preliminary Description The proposed operation supports i) a transparent process for arrears clearance; ii) improvements in public financial management; iii) pension reform; and v) energy sector reforms. The Government has accumulated arrears which are estimated to amount to Lek 68.5 for the central government and Lek 4 billion on local government centrally financed contracts as of end August 2013, totaling 5.4 percent of GDP. The accumulation of arrears is undermining public confidence in government’s fiscal policy and its ability to meet its future payment obligations. It is also contributing to the buildup of NPLs in the banking system. These problems limit the ability of productive firms to raise financing from the banking sector, depressing domestic demand. Arrears in the energy sector have also been a recurring source of budgetary pressure and the poor performance of the sector threatens competitiveness and economic performance. The clearance of arrears, and the prevention of new arrears, is thus an essential step towards restoring confidence in public fiscal management and in unlocking the flows of finance to the private sector needed to support growth. Albania’s public debt has increased rapidly in recent years and going forward, it will be important to put it again a sustainable path. Overall expenditures in Albania are low at 29.7 percent of GDP in 2013 and there is limited scope for cutting expenditures. A the same time, unfunded ad-hoc increases in benefits and perverse incentive effects are threatening the longer term financial stability of the pension system despite Albania’s relatively young population. Also, the poverty focus of the pension system could be strengthened. A comprehensive pension reform would improve fiscal sustainability, fairness and incentives of the current system. The energy sector contributes to significant fiscal risks which this operation will help to reduce. The DPL is aligned with the Country Partnership Strategy (CPS) FY11-FY14 CPS for Albania, endorsed by the Board in January 2011. It directly addresses the first of the three strategic objectives identified in the CPS namely “supporting a recovery in economic growth by improving competitiveness through fiscal consolidation, better public sector management, an improved business climate, deeper access to credit and reduction of infrastructure bottlenecks�. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts Overall, the policies supported by the DPL series are expected to have neutral or positive poverty and social impacts, including gender impacts. Arrears clearance as well as reforms in pension, and energy will significantly improve the fiscal outlook by: (i) providing a foundation for growth which is the main driver of shared prosperity, and (ii) ensuring that the gains in poverty reduction, as well as achievements in boosting shared prosperity, are long-lived and not achieved at the cost of prosperity of future generations. In addition, reforms are expected to improve the predictability of fiscal policy - limiting ad hoc fiscal contractions at the expense of social policies and programs – and open fiscal space to strengthen social programs, as foreseen in the 2014 budget. The envisioned pension reform is expected to lead to a more sustainable and fair pension system. Environment Aspects The specific country policies supported by the DPL are not likely to cause effects on the country’s environment and natural resources. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 100 Borrower/Recipient IBRD Others (specifiy) Total 100 Contact point World Bank Contact: Doerte Doemeland Title: Senior Economist Tel: (202) 458-1238 Email: ddoemeland@worldbank.org Borrower Contact: Title: Tel: Email: For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop