Document of The World Bank FOR OFFICIAL USE ONLY Report Number: 61715-HR INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT FOR REPUBLIC OF CROATIA FOR THE PERIOD FY2009 – FY2012 August 22, 2011 Central Europe and the Baltic Countries Europe and Central Asia Region Central and Eastern Europe Department International Finance Corporation This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization. CROATIA GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of August 2, 2011) US$ 1.00 HRK 5.160 WEIGHTS AND MEASURES Metric System ABBREVIATION AND ACRONYMS AAA Analytical and Advisory Activities HBOR Croatian Bank for Reconstruction and CEDB Council of Europe Development Bank Development CCPC II Coastal Cities Pollution Control II IBRD International Bank for Reconstruction CNB Croatian National Bank and Development CPS Country Partnership Strategy IFC International Finance Corporation CPSPR Country Partnership Strategy Progress Report IFIs International Financial Institutions DPL Development Policy Loan IMF International Monetary Fund EBRD European Bank for Reconstruction and IPA Instrument for Pre-Accession Development MIGA Multilateral Investment Guarantee Agency EC European Commission MIS Management Information System ECA Europe and Central Asia NPL Non-Performing Loans CEFIL Croatia Export Finance Intermediation Loan OP Operational Program EIB European Investment Bank PAL2 Programmatic Adjustment Loan 2 ERP Economic Recovery Program PISA Program for International Student EU European Union Assessment EU-15 EU Member States prior 2004 PPP Public Private Partnerships FBS Fee Based Service R&D Research and Development GEF Global Environment Facility SME Small and Medium-size Enterprises GDP Gross Domestic Product The World Bank Group Team IBRD IFC Vice President: Philippe H. Le Houérou Vice President: Rashad Kaldany Country Director: Peter Harrold Director: Nena Stoiljkovic Team Leaders: Hongjoo Hahm, Sereen Juma Team Leader: Magdalena Soljakova Table of Contents I. Introduction .............................................................................................................................. 1 II. Political and Economic Developments .................................................................................... 2 III. CPS Implementation and Progress Toward Objectives ........................................................ 4 Progress toward Pillar 1: Macroeconomic Stability .................................................................. 6 Progress toward Pillar 2: Private Sector-Led Growth and EU Convergence ............................ 6 Progress toward Pillar 3: Improving Quality and Efficiency in the Social Sectors ................... 7 Progress toward Pillar 4: Increasing Sustainability of Long Term Development ..................... 8 IV. Proposed Modifications and Future Program ....................................................................... 8 V. Risks ......................................................................................................................................... 10 Annex 1 Results Framework: Progress towards Achieving CPS results................................................ 12 Annex 2 CPS Planned vs. Actual Lending and AAA Program ............................................................... 18 Annex 3 Croatia-EU Relations ................................................................................................................ 19 Annex 4 World Bank Support to Croatia’s EU Goals ............................................................................. 20 Annex 5 Croatia-at-a-Glance................................................................................................................... 30 Annex 6 Selected Indicators of World Bank Portfolio Performance and Management .......................... 33 Annex 7 IBRD and IFC Investment Operations Program ....................................................................... 34 Annex 8 Summary of IBRD Knowledge and Advisory Services ........................................................... 35 Annex 9 Social Indicators ....................................................................................................................... 36 Annex 10 Key Economic Indicators ........................................................................................................ 37 Annex 11 Key Exposure Indicators ......................................................................................................... 38 Annex 12 IBRD Operations Portfolio ..................................................................................................... 39 Annex 13 IFC Committed and Outstanding Investment Portfolio .......................................................... 40 Tables Table 1: Planned vs. Actual Lending ........................................................................................................ 5 Map (IBRD 33394R1) ...................................................................................................................... 41 CROATIA COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT On June 24, 2011, the European Council gave the green light for Croatia to become the 28th member state to join the European Union on July 1, 2013. To mark this historic milestone, this Country Partnership Strategy (CPS) Progress Report proposes to sharpen the World Bank’s focus on supporting Croatia make the most of its imminent EU membership. The Report also takes stock of achievements since the start of the CPS in FY09. Upon EU accession, Croatia will gain access to substantial amounts of EU Structural and Cohesion funds. Therefore, the Bank envisages a more selective approach to lending and complementarity with EU-financed initiatives. This Report also sets in motion a gradual transition from a project- to knowledge-based partnership with Croatia in the remaining year of the CPS. Increased emphasis will be placed on knowledge products and technical assistance that provide added value in supporting Croatia’s EU-related responsibilities and contribute to an enabling environment to absorb EU grant funds. I. INTRODUCTION 1. This Progress Report reviews the implementation of the FY09-FY12 Country Partnership Strategy (CPS), which was prepared as Croatia was in the midst of EU accession negotiations and prior to the onset of the global financial crisis. Anchored in Croatia’s overarching goal of joining the European Union (EU) and accelerating income convergence with EU member states, the CPS consists of four pillars: (i) sustaining macroeconomic stability; (ii) strengthening private sector-led growth and accelerating EU convergence; (iii) improving quality and efficiency in the social sectors; and (iv) increasing the sustainability of long-term development. The CPS envisaged an annual lending of about US$300 million under a base case scenario of investment loans only. Provisions were made for possible development policy lending (DPL) under an alternative scenario that could reach $400 million per year. 2. When the global crisis hit, the CPS’ flexible architecture enabled the Bank to adapt its program to support the Croatian authorities with quick-disbursing development policy operations. The Government took steps to strengthen the macroeconomic framework and rein in social spending. As Croatia begins to emerge from the crisis today, the Government’s focus is on two priorities: (i) to put the economy on a path towards sustainable growth with long-delayed structural reforms under the Economic Recovery Program; and (ii) to take Croatia to EU membership with a competitive economy. 3. While the CPS’ four-pillar framework remains relevant, in view of Croatia’s imminent EU entry, the Progress Report proposes to (i) calibrate the CPS framework with a stronger European focus; and (ii) evolve from a project to a knowledge partnership. These modifications will entail adopting a more selective approach to lending and Analytical and Advisory Activities (AAA) products in the remaining year of the CPS, to ensure that they directly support or are aligned with the EU policy agenda. Moreover, to enable Croatia to reap the benefits of EU membership, the Progress Report proposes that future knowledge and advisory services increasingly place emphasis on strengthening the policy framework and institutional capacity to meet EU-related obligations and prepare for the absorption of EU Structural and Cohesion Funds that will be available to Croatia upon entry into the EU. 1 II. POLITICAL AND ECONOMIC DEVELOPMENTS 4. Public discontent has increased in the face of economic hardship. Despite the Government’s determined efforts to fight corruption, including holding senior officials to account, there is widespread perception that corruption remains prevalent. This public discontent comes at a time when the Government is trying to implement difficult reforms under the Economic Recovery Program (ERP) and with parliamentary elections slated to take place in late 2011. There is broad consensus on Croatia’s development challenges and national priorities, as presented in the ERP across the political spectrum. However, implementation has lagged and concerted political effort will be necessary to accelerate the pace of reforms. 5. The European Council gave the green light for Croatia to become the 28th country to join the European Union on the target date of July 1, 2013. The EU accession process provided Croatia with a strong incentive to adopt reforms and harmonize its legislation with the EU acquis communautaire. On June 30, 2011, Croatia closed the last four policy chapters out of the 35 EU negotiation chapters. Two chapters in particular had posed the biggest challenge─Chapter 23 on judiciary and fundamental rights, and Chapter 11 on competition. The 2010 EU Progress Report emphasized the need to accelerate reform efforts in judiciary and fundamental rights. It called for strengthening the judiciary’s independence and efficiency, the fight against corruption and organized crime, competition policy as well as the effectiveness of public administration. Croatia has made important strides over the last year in the fight against corruption, including overhauling the legislative framework, building the capacities of state attorney offices, police forces and the judiciary, as well as prosecuting senior public figures for corruption across many sectors of the economy. Progress on these reforms will continue to be monitored by the European Commission until formal accession. 6. When the CPS was presented to the Board in the fall of 2008, Croatia was enjoying a stretch of strong economic growth averaging four percent over the five years preceding crisis. Growth was driven by a boom in private investments and consumption, fueled in part by large capital inflows. Although exports grew significantly, import growth was much stronger, which, together with the deterioration in terms of trade, led to the widening of the current account deficit to nine percent of Gross Domestic Product (GDP) by 2008. While only half of the current account deficit was financed through non-debt creating inflows, external debt soared to 90 percent of GDP. 7. By the end of 2008, the Croatian economy began to feel the negative effect of the global financial crisis. Reduced private capital inflows and external demand aggravated existing imbalances. With a large current account deficit, a high level of external debt, and significant balance sheet exposures to interest and exchange rate risks, market confidence in Croatia deteriorated sharply in early 2009. Financial asset prices collapsed and sovereign spreads shot up, while output contracted by six percent in 2009, led by large drops of domestic demand. Driven by imports decline by more than one-third, the current account deficit nearly halved to five percent of GDP in 2009. 8. Croatian authorities moved swiftly to stabilize the financial sector. The Croatian National Bank (CNB) eased regulatory requirements and ran repo auctions to address liquidity shortages, while intervening on the foreign exchange markets to ease pressure on the local currency. Commercial banks were able to maintain adequate capitalization (at 16 percent in 2009), although credit quality worsened (non-performing loans at 9 percent in 2009) and profitability declined, largely reflecting an increase in provisioning for non-performing loans. 9. As the crisis unfolded, public finances also came under substantial strain. Declining tax revenues led to a series of fiscal policy adjustments to protect macroeconomic stability and ensure regular 2 debt service. Politically difficult measures on both the revenue and spending sides were implemented, while the social safety net remained protected. These measures included public wage cuts, suspension of pension indexation and the introduction of a solidarity tax. Nevertheless, the headline general government deficit rose to 3.1 percent of GDP in 2009 (including the activation of a guarantee for a state-owned shipyard) and widened further to 4.3 percent of GDP in 2010.1 By end-2010, public debt with government guarantees surged to 58 percent of GDP. Subsequently, the S&P credit rating agency downgraded Croatia’s sovereign credit rating by a notch to BBB- with a negative outlook, reflecting the country’s deteriorating fiscal position and weak external funding flexibility. 10. The global crisis exposed Croatia's two key economic vulnerabilities─fiscal sustainability and private sector competitiveness. Given the large share of public spending (at about 43 percent of GDP), particularly in the social sectors and administration, fiscal consolidation continues to be a challenge. High external debt and low export base call for sustained improvements in competitiveness. The economy is characterized by labor market rigidities, ineffective state-owned enterprises (railways, shipyards) that drain the budget and inefficient administration. This limited policy space has compromised Croatia’s ability to respond to shocks and further underscores the need to boost competitiveness through structural reforms and fiscal consolidation. 11. The crisis provided impetus for the Government to move ahead with long overdue reforms. In April 2010, the Government launched a comprehensive Economic Recovery Program (ERP). This ambitious program aims at: (i) improving the business environment with the finalization of the privatization agenda, public administration reform and acceleration of judicial reform and anti-corruption efforts; (ii) increasing the contribution of labor to growth by addressing skill mismatches through education reform and advancing the flexibility in the labor market; and (iii) deepening trade integration and supporting innovation. The ERP received broad support from political and social partners, as well as International Financial Institutions (IFIs) who called for swift and steadfast implementation of the program. Implementation, however, has proved more difficult than expected, particularly ahead of the general elections. 12. Prospects for economic recovery remain fragile and slower than expected, suggesting the need to accelerate reforms. The economy started recovering in early 2011, but continues to lag behind those of new EU member states. Growth prospects, estimated at 1 to 1.5 percent for 2011, have been dampened by weak domestic demand on the back of high unemployment rates, banks’ risk aversion and uncertainty. Without reforms, near-term growth is expected to remain sluggish—reaching 3 percent by 2015— constrained by poor competitiveness and limited capital inflows resulting from low investor confidence. 13. Croatia has maintained dialogue with the International Monetary Fund (IMF) through Article IV Consultations. The Fund has highlighted risks linked to the high external indebtedness, concerns about the sustainability of public finance and the medium-term growth prospects given deep- rooted structural rigidities and competitiveness problems. The government’s goal to reduce the fiscal deficit to 2 percent of GDP by 2013 was seen as broadly appropriate, but would require front-loaded implementation of the ERP’s expenditure-saving measures (in particular public sector retrenchment, privatization, pension and health sector reforms), a more flexible wage-setting mechanism, and better targeting of social benefits. Implementation of a consistent set of macroeconomic, structural, and financial sector policies was recommended to ensure sustained growth. 1 The adjusted fiscal balance that includes pensioners’ debt, called shipyards’ guarantees and Croatian Highways rose from 2.5 percent of GDP in 2008 to 5.2 percent of GDP in 2010. 3 III. CPS IMPLEMENTATION AND PROGRESS TOWARD OBJECTIVES 14. The CPS was endorsed by the Board in September 2008, just before the outbreak of the global financial crisis, and served as a relevant framework for Croatia’s overarching goal of EU accession. The CPS aimed to support Croatia’s efforts to complete the EU accession process and achieve rapid income convergence with EU members in a fiscally, socially and environmentally sustainable manner. The CPS envisaged $300 million of annual lending under a base case scenario of investment loans only. Given the mixed record with past programmatic adjustment loans, provisions were made for possible DPLs, under an ‘upside’ lending scenario of about $400 million per year. The DPLs would be based on actual performance and in the form of one-tranche operations with a relatively narrow policy agenda. International Finance Corporation’s (IFC) strategic focus in Croatia was underpinned by its regional priorities of increasing access and quality of infrastructure services; addressing climate change; and enhancing competitiveness, including supporting South-South investments. 15. The global financial crisis resulted in the use of DPLs and a surge in FY10 lending. At the peak of the crisis in 2009, the Government of Croatia sought Bank financing to help mitigate the impact of the crisis. A $141 million line of credit for exporters through the Croatian Bank for Reconstruction and Development (HBOR) and a $271 million DPL were added to the FY10 program—increasing FY10 lending to $474 million. Moreover, a $213 million DPL—the first in a programmatic series—was added to the FY11 program to support the government’s Economic Recovery Program. The DPLs and export credit line were used strategically to complement the investment lending portfolio and to ease the Government’s fiscal constraints caused by the crisis. The CPS’ flexible approach enabled the Bank to respond quickly to Croatia’s evolving financing needs and accelerate much-needed fiscal consolidation and structural reforms. 16. Only half of the envisaged investment lending program was ultimately delivered, due in part to evolving priorities during the crisis (see Table 1 below). Large repeater or additional finance operations such as Rijeka Gateway II and Coastal Cities Pollution Control II, which underpinned the project portfolio, were delivered in the first year of the CPS. Three planned projects—Disaster Risk Management, Irrigation, and Education II—were dropped due to a combination of the Government’s fiscal constraints and efforts by the Bank to complement the EU agenda and streamline the portfolio. Moreover, the tentative proposals for lending in railway and energy did not materialize since the Bank ultimately did not engage in these sectors. The Croatian authorities, however, expressed interest in two new repeater projects: the Integrated Land Administration Systems project, to continue modernization reforms in land administration supported under the Real Property Registration and Cadastre project and the Science and Technology project aimed at strengthening institutions to effectively absorb EU Structural Funds. The former was delivered in early FY12, along with the planned additional financing for Trade and Transport Integration project. The latter is expected to be delivered in the second half of FY12. 17. The planned AAA program was partially delivered and was driven largely by DPL-related policy dialogue focusing on macroeconomic sustainability, private sector growth, and social sectors. At the height of the crisis, the Bank prepared public sector policy notes which provided timely advice to the authorities, including the Social Impact of the Crisis, Fiscal Responsibility Framework, and Institutional Framework and Fiscal Risk Assessment of Public Private Partnerships (PPP). Like many countries in the region, Croatia’s biggest demographic challenge is managing the social and fiscal implications of an aging population. The Bank produced policy notes that addressed long-term care for the elderly and pension reform options and updated the poverty assessment to inform policy measures supported by the programmatic DPL. As part of the dialogue aimed at creating an enabling business environment, the Bank produced strategic AAA on labor markets, follow-up to Doing Business report, and on science, innovation and technology policy. The EU Convergence Report was a major work undertaken in this area, engaging policymakers and stakeholders on accelerating growth through greater 4 labor force participation, productivity, trade integration and innovation. The envisaged AAA in energy and transport did not materialize as dialogue in these sectors did not gain traction, possibly due to the Government’s focus on crisis response, but two products on integrated waste management and brownfield redevelopment were delivered. In addition, active policy dialogue in the port sector through investment lending projects resulted in the transformation of the financing mechanisms in Croatia’s two largest ports. There remains room for further strengthening the policy dialogue in infrastructure, particularly in water and transport, where the Bank has been active on the lending side. Table 1: Planned vs. Actual Lending Planned Lending ($US Million) Actual Lending ($US Million) FY09 FY09  Judicial Reform 35  Dev. of Emergency Medical Services  Dev. of Emergency Medical Services & Investment Planning 28 & Investment Planning 27  Rijeka Gateway II 123  Rijeka Gateway II 130  Coastal Cities Pollution Control II* 88  Coastal Cities Pollution Control II 90 FY09 TOTAL 239  Disaster Risk Management 48 FY10 FY09 TOTAL 330  Export Finance Intermediation Loan 141 FY10  Fiscal, Social and Financial DPL 297  Education II (or additional financing) 100  Judicial Reform 36  Port Development (or additional financing) 70 FY10 TOTAL 474  Climate Adaptation/irrigation 100 FY11  Nature Protection 30  Nature Protection (EU Natura 2000) 29 FY10 TOTAL 300  Economic Recovery DPL 213 FY11-12 (no volume forecast) FY11 TOTAL 242  DPL FY12  Railway Developments  Port Development AF (Trade & Transport) 67  Energy Generation or Transmission  Integrated Land Administration System 24  Science & Technology Repeater 29 *does not include accompanying GEF grant of $6 million. FY12 TOTAL 120 18. Project restructurings led to substantial improvements, but the portfolio continues to be hampered by implementation delays. As of end FY11, the portfolio consisted of 14 operations2 with net commitments of $1.2 billion—compared with 18 projects and net commitment of $1.1 billion at end- FY09. A comprehensive portfolio review in 2008 resulted in the restructuring of 6 out of 15 reviewed projects. This, combined with maturing projects, gradually improved the disbursement ratio from 12.7 percent in end-FY08 to 23 percent in end-FY11. However, the ratio of problem projects stood at seven percent, with one project rated moderately unsatisfactory due to implementation constraints and low disbursements. Moreover, seven projects and one GEF grant were rated moderately satisfactory, reflecting implementation difficulties. 19. The Government of Croatia and the Bank have taken steps to resolve implementation bottlenecks. Annual joint portfolio reviews (JPR) revealed that projects experienced a slow start and low disbursements during the first year of implementation due to poor readiness and capacity. Combined with effectiveness delays and slow decision making, these projects were unable to make up for lost time and required multiple extensions. Recent JPRs have recommended early restructuring of problem projects. Increased focus has been placed on ensuring implementation readiness of new projects, including having 2 Includes one DPL for $213 million (€150 million). 5 a monitoring and evaluation framework in place and taking advantage of project preparation facilities. Drawing on lessons of past experience, the Government is now applying a more rigorous implementation readiness and ownership criteria for new Bank projects, similar to those applied to EU pre-accession assistance. These efforts are starting to yield results. Three projects approved in FY10 and FY113 have effectively absorbed funds from the project preparation facility. They became effective within three months of approval (compared to the portfolio average of six months), with disbursement levels in line with or exceeding disbursement projections. Progress toward Pillar 1: Macroeconomic Stability 20. Croatia’s progress towards achieving macroeconomic stability slowed down during the crisis when its public finances came under pressure. The fiscal deficit widened from 2.5 percent of GDP in 2008 to 5.3 percent in 2010, and public debt with guarantees reached 58 percent in 2010. The Fiscal, Social and Financial Sector DPL (FSF DPL) supported fiscal consolidation efforts and mitigation of the social impact of the crisis. The crisis gave the Government a strong impetus to launch the Economic Recovery Program (ERP) in April 2010,4 consisting of long-term structural measures to boost competitiveness. The Economic Recovery DPL (ERDPL) supported important ERP measures, such as the Fiscal Responsibility Act, which aims to reduce public spending in social sectors and administration by 1 percentage point of GDP per year until fiscal balance is achieved, and a fiscal board to monitor implementation of fiscal rules. 21. The EU accession process was an important driver of public financial management reforms. Croatia closed Chapter 32 of the acquis on financial control. Public sector auditing, accounting and reporting standards have been strengthened, and internal audit and control functions established. The budget execution process has been steadily strengthened through the expansion of the treasury single account. The FSF DPL supported the Government’s public finance management reforms. 22. The financial sector was also affected by the recession, but the sector overall remained resilient. Non-performing loans rose to 11 percent in 2010 and will require close monitoring. However, the presence of foreign banks and effective policy measures adopted by the Croatian National Bank have ensured adequate liquidity and stability in the sector. With support from the FSF DPL and targeted AAA, Croatia formulated a comprehensive regulatory framework for financial institutions, in line with Basel II and through the Credit Institutions Act, Capital Markets Act, and the Consumer Credit Act. Progress toward Pillar 2: Private Sector-Led Growth and EU Convergence 23. Croatia took concrete steps to create an enabling environment for the private sector, but a substantial agenda remains. Public administration remains costly and bureaucratic, lagging behind EU standards, and comprehensive reforms have faced delays due to opposition from unions. The ERDPL supported amendment to the Civil Service Law which strengthens the appraisal system and paves the way for outsourcing. But the Government continues to face a difficult dialogue with unions on civil service pay. Meanwhile, Croatia has moved decisively on judicial reforms, driven largely by EU accession goals. Under the Programmatic Adjustment Loan 2 (PAL2), the Government functionally consolidated the court network and reduced case backlogs. The Real Property Registration and Cadastre project reduced backlogs in land registration by 84 percent, and the ongoing Justice Sector Support project is supporting the physical rationalization of the court network and improved court management practices. Corporate financial reporting has been enhanced with support from the Bank’s Program of Accounting Reform and 3 Export Finance Intermediation Loan, Justice Sector Support Project and EU Natura 2000 Integration Project. 4 Headline government deficit widened from 0.9 to 4.3 percent of GDP from 2008 to 2010. 6 Institutional Strengthening, financed by a multi-donor trust fund, resulting in the EC placing Croatia’s public oversight system at par with EU member states. 24. Progress on privatization has been slow and administrative barriers continue to challenge businesses. The Government took measures to liquidate state-owned enterprises—though privatization of shipyards was a difficult hurdle to EU accession—and to eliminate investment barriers in business registration, land acquisition, permits and taxation. The ERDPL supported the establishment of a single agency for the Management of State Property to accelerate the privatization of majority state shareholdings. In infrastructure, the Rijeka Port Authority recently concluded the first transaction to secure private investment for Croatia’s largest container terminal under the Rijeka Gateway Program. The transaction reaffirms international interest in Croatian ports, with two more transactions in the pipeline. R&D spending, critical for Croatia to shift to innovation-driven growth, is low and concentrated in the public sector. The Government is preparing draft laws aimed at promoting collaboration between universities and research institutes and businesses, as well as increasing private sector investments in science. 25. IFC and MIGA activities focused on providing strategic support to enterprises, including through immediate crisis response. During the CPS period, IFC invested $56.4 million in the post- privatization restructuring of a previously state-owned asset, the steel mill CMC Sisak, and supported Agrokor, a Croatian food and retail group, in their €40 million expansion in Serbia. IFC’s portfolio reached almost $260 million as of end-June 2011, with focus on investments in agribusiness, tourism and construction materials sectors. In the area of Advisory Services, IFC is working with Agrokor’s PIK Vrbovec on identifying areas of energy and water consumption savings, which will ultimately lead to cost savings and climate change benefits. MIGA issued a guarantee of up to $278.6 million for Unicredit Bank Austria’s $200 million shareholder loan to its Croatian subsidiary, Zagrebacka Banka. The coverage is for a period up to eight years against the risks of transfer restriction, expropriation, and war and civil disturbance. The MIGA guarantee is part of the World Bank Group’s Financial Sector Initiative framework which coordinated international response to the global crisis and is aimed at contributing to stability in Croatia’s banking sector by injecting liquidity. Progress toward Pillar 3: Improving Quality and Efficiency in the Social Sectors 26. Croatia achieved significant progress in reforming its costly social assistance system, benefiting in part from DPLs. Under the ERP, the Government took the first in a series of steps to rationalize privileged pensions, but clawing back privileged pensions for war veterans (about 1.5 percent of GDP) remains controversial. In health spending, policy measures were introduced to streamline pharmaceutical spending and to decrease co-payment exemptions. At the same time, income-testing for exemptions were strengthened to ensure exemptions were applied to the most vulnerable. In 2009, during the crisis, the Government simplified the different social protection programs at central and local levels to enhance administrative efficiency. Supported by the Social Welfare Development project, the Ministry of Health and Social Welfare adopted a new Management Information System (MIS) to be rolled out in social welfare centers across the country. In addition, a new Social Welfare Law, supported by the ERDPL, was introduced to reduce social exclusion and improve targeting and efficiency. 27. In education, the significant reduction in triple-shift schools, supported by the Education System Development project, did not translate into improved learning outcomes. Croatia’s 2009 Program for International Student Assessment (PISA) scores, while high compared to recent EU entrants such as Bulgaria or Romania, dropped slightly compared to its 2006 PISA scores. The Bank plans to strengthen its policy dialogue with Croatia in education, with a focus on higher education. 7 Progress toward Pillar 4: Increasing Sustainability of Long Term Development 28. Croatia made steady progress in aligning its environmental agenda to EU requirements. As part of the EU accession agreement, Croatia needs to increase the coverage and quality of waste water services, and to maintain seawater quality along its Adriatic coastline. Under the ongoing Coastal Cities Pollution Control II (CCPC II), the Bank is supporting wastewater investments in 22 coastal municipalities and building capacity to prepare projects to absorb EU funds. Similar investments are also being supported in the inland regions of Croatia. In nature conservation, Croatia will have to meet the requirements of the Birds and Habitats Directives, the EU’s main legal instruments for biodiversity protection. The EU Natura 2000 project will assist Croatia to implement Natura 2000 (EU network of protected areas) objectives in investments and strengthen capacity for EU-compliant reporting and biodiversity monitoring. The ongoing Agricultural Acquis Cohesion project supported EU accession negotiations in agriculture with the creation of a Paying Agency and land parcel information system, required by the acquis. 29. Croatia has significant regional disparities and has taken steps to resolve them. EU accession process will result in the allocation of large volumes of EU funds to promote development in lagging regions. To prepare for this, the Social and Economic Recovery project supported socioeconomic revitalization of disadvantaged and war-affected regions and capacity-building for regional and local authorities for planning and implementing regional development approaches in line with EU principles. 30. Croatia continues to face the challenge of moving toward an energy-efficient, low-carbon economy given its limited natural resources and energy-intensive economy. When it becomes an EU member state, Croatia will be obliged to meet the EU 20-20-20 targets.5 Under the Renewable Energy Resources project, Croatia introduced legislation and regulatory framework that created an enabling environment for renewable energy investments. Similarly, the Energy Efficiency project, accompanied by a Global Environment Facility (GEF) grant, supported Croatia’s national utility company in financing some $30 million in energy efficiency investments in public buildings, hospitals and universities, and street lighting. A key challenge ahead is to scale up energy efficiency efforts nation-wide including residential buildings, which so far have seen only limited success in reducing their energy consumption. IV. PROPOSED MODIFICATIONS AND FUTURE PROGRAM 31. The CPS objectives of supporting Croatia’s EU accession and income convergence with the EU served as a useful framework for supporting the Government’s development goals during the last two years. The CPS’ flexible architecture enabled the Bank to adapt its program to respond to the crisis (DPL, Croatia Export Finance Intermediation Loan). The four-pillar strategy remains relevant and will continue to underpin the Bank’s engagement with Croatia for the remainder of the CPS period. 32. As Croatia exits from the crisis and prepares for ratification of the EU accession treaty, the CPS will be calibrated to take into account imminent EU membership. Existing and future activities will be aligned to at least one of three distinct criteria that the Bank’s regional framework applies in EU member states: (i) supporting policy reforms for the Europe 2020 Strategy and convergence; (ii) supporting strategies and institutions to better absorb EU funds and; (iii) providing selective financing 5 In 2007, the EU committed to a set of ambitious energy and climate targets of (i) reduction in EU greenhouse gas emissions of at least 20% below 1990 levels; (ii) 20% of EU energy consumption to come from renewable resources; and (iii) 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency 8 which complements EU financing (see Annex 4 describing how the current portfolio has been aligned to support EU accession). The Bank’s role as provider of development finance is increasingly being matched by other sources. Croatia enjoys access to markets and receives financing support from European and international IFIs. More significantly, when Croatia enters the EU, it will receive more than €1 billion in grants annually through the Structural and Cohesion Funds. Through the Instrument for Pre-Accession (IPA), the EC has already allocated approximately €750 million for Croatia for 2007-2011. Croatia’s absorption rate of IPA funds currently stands at 43 percent of the 2007-2009 allocation of €315 million. Thus, the CPS will adopt a more selective approach to lending in the remaining year. Focus will be placed on areas where the Bank can provide added value in supporting Croatia’s EU-related responsibilities and contributing to an enabling environment to absorb EU grant funds. 33. In the remaining year, the CPS will initiate a transition from a focus on projects to knowledge as a prelude to the next CPS. The current program, which is characterized by a large lending portfolio, will begin to evolve toward a stronger partnership in AAA, focusing on policy challenges and institutional capacity-building related to EU membership. Future AAA will address a combination of structural reforms to boost economic competitiveness and institutional reforms to promote a strong policy framework and strategic investment planning. These reforms are particularly relevant to Croatia’s ability to absorb EU funds. The lending portfolio is currently highly diversified, occupying significant amount of administrative resources, leaving limited room for AAA. The proposed transition from projects to knowledge will therefore be important in terms of creating space to undertake more AAA in the future. 34. Total new lending during this CPS period is expected to reach $1,074 million, of which DPLs will account for nearly half of total lending volume. In FY12, the final year of the CPS, two investment projects will exit the portfolio and three operations will be added. The Integrated Land Administration System (ILAS) project ($24 million) builds on a previous successful project supporting cadastre and land registry reforms, with co-financing from the EC’s CARDS program. The ILAS project will support the development of a national spatial data infrastructure in line with the EU’s INSPIRE Directive which Croatia must meet as a member state. Additional Financing for the Trade and Transport Integration project ($67 million) builds on an existing project aimed at increasing private sector involvement and strengthening the infrastructure capacity in the Port of Ploce, which lies along an important trade corridor. The operation will scale up the bulk terminal currently under construction and cover the financing gap. It is ultimately expected to boost trade with neighboring Bosnia and Herzegovina. A third project, a repeater of the Science and Technology project ($29 million), will be delivered in the second half of FY12 and will support Croatia’s R&D institutions to prepare for the use of EU Structural Funds. 35. The CPS will also explore opportunities to apply innovative instruments and approaches to support Croatia. Building on the recent strong partnership with HBOR, Croatian Bank for Reconstruction and Development, which has provided important support to the recovery of Croatia’s real economy, the World Bank may explore possible limited additional financing and guarantee operations to support HBOR’s future bond issuance. Another area of engagement could include deepening the relationship with the World Bank Treasury where Croatia can tap into innovative and customized instruments, such as foreign currency swaps on their bond denomination, to strengthen their debt exposure management. 36. IFC will remain focused on its three regional priorities of improving infrastructure services, addressing climate change and enhancing competitiveness. PPP investments in infrastructure remain challenging, as the sector was not open for private investments until recently. In the past year, the Government opened up some sub-sectors such as ports and airports to various PPP schemes, and IFC will look at opportunities to finance these ventures. In the area of climate change, IFC will continue to work with companies investing in the renewable energy and engage with regulators to promote projects in the 9 sector. A possible investment in a scrap recycling company is under consideration. In the financial sector, IFC will seek investment opportunities with financial institutions to improve the range of financial products delivered to SMEs, such as climate change-related products and agribusiness lines. 37. The Bank will provide knowledge services to support institution-building and policy reforms. The activities below are envisaged in FY12:  Railway extended policy note to identify quantitative and qualitative issues facing the sector.  Education policy note on performance-based contracting in higher education, building on the ongoing cooperation in education.  Programmatic Public Expenditure and Institutional Review, continuing dialogue in this area.  Policy note series that will outline the challenges and policy options in key economic sectors for the incoming Government following the general elections at the end of the year. 38. IFC’s Advisory Services will continue to focus on PPP advisory in infrastructure and on cleaner production. At least one advisory mandate for PPP-related projects in infrastructure will be explored, possibly with a pilot at the sub-national level. In the area of cleaner production, IFC will work with Agrokor’s PIK Vrbovec on identifying areas of energy and water consumption savings, which will ultimately lead to cost savings and climate change benefits. 39. In sum, the proposed modification to this CPS are aimed at laying the groundwork for a strong knowledge partnership with Croatia as a full-fledged EU member state by the time of the next CPS. Croatia’s per capita income stands at $13,810, nearly twice the level at which graduation from the International Bank for Reconstruction and Development (IBRD) is addressed. Croatia also has reasonable access to international capital markets. Given its short history as an independent nation, however, it continues to face significant weaknesses in institutional capacity and the challenge of achieving a sustainable economic recovery. Therefore, graduation is considered pre-mature for this CPS period, but will be discussed during the preparation of the next CPS. The knowledge partnership would be expected to continue to address institutional and policy challenges related to EU convergence, an area where the Bank is well placed to provide added value. With the decline in the Bank’s administrative resources, it is envisaged that the future partnership with Croatia will evolve into one in which knowledge and advisory services are provided under fee-based service (FBS) arrangements. FBS is emerging as an important business model in the Bank’s engagement with EU member states and advanced economies, and it is anticipated that the next phase of partnership with Croatia will increasingly tap into this instrument. V. RISKS 40. Risks identified in the CPS─external vulnerability, uneven reform performance and weak project implementation─continue to be a challenge. Croatia has so far weathered the crisis, but high external debt and heavy reliance on tourism and Europe’s export markets makes the economy vulnerable to a downturn in the Eurozone economies. A slower than projected growth could further strain the fiscal stance, the corporate sector and consequently the commercial banks. This could jeopardize progress towards macroeconomic stability and fiscal sustainability. In the near term, downside risks also arise from high commodity prices and contagion from euro area periphery countries. Macroeconomic stability will require fiscal sustainability, that is, rationalization of public expenditures. Sustained growth will require improved competitiveness. Both require major structural reforms. The above risks are somewhat mitigated by the EC’s continued monitoring of Croatia’s reform efforts until ratification of the accession treaty and the Government’s continued implementation of fiscal consolidation plans. 10 41. While the pace of reforms has picked up, uneven reform implementation continues to be a concern given the political economy and complexity of some measures. Restructuring of shipyards proved politically difficult to implement under a coalition government, but is being addressed to meet EU state aid regulations. Important steps were taken to scale back privileged pensions, but war veterans’ pensions remains a thorny issue. With parliamentary elections scheduled later this year, the window for advancing difficult reform measures will narrow. Public discontent with the Government is already high in the wake of increased unemployment and corruption cases. Any change in government may further delay reform implementations as a new administration comes to terms with a new reform agenda. 42. Progress in project implementation has been uneven, largely due to insufficient preparation resulting in poor project readiness and capacity, and will need to be monitored closely. In recent years, EU accession-related preparations, among other issues, have consumed the time and capacity of Croatia’s public administration, affecting the implementation of Bank-financed projects that now rely largely on civil service. To address implementation delays, the Ministry of Finance has taken on a stronger coordination role, and the Joint Portfolio Reviews have become instrumental in identifying and monitoring bottlenecks. A mechanism is now in place for quarterly follow-up of projects experiencing difficulties. It is expected that the proposed modifications in the CPS to gradually transition from a project to knowledge based partnership, and to align Bank activities with the EU policy agenda will strengthen synergies and facilitate management of a smaller Bank portfolio. 11 Annex 1 Results Framework: Progress towards Achieving CPS results6 EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES PILLAR I: SUSTAINING MACRO-STABILITY  Further fiscal Further fiscal consolidation as  Implementation of select  Fiscal consolidation: Revenue fall Lending - Active consolidation as per per the government’s program Public Finance Review and during the global crisis led deficit to  Revenue Administration the government’s to contain general government Programmatic Public surge to 5.2 percent of GDP in 2010 & Modernization (FY07) program to reduce deficit from 2.5 percent of GDP Expenditure Work (from 2.6 percent in 2007). The 2011-  Economic Recovery DPL general government recommendations. 13 budget projects fiscal deficit to I (FY11) in 2008 and its peak of 5.8 deficit from 2.3  Tax payers’ audits narrow to 2.4 percent in 2013, led by percent of GDP percent of GDP in 2011 to strengthened and tax arrears public spending reduction of over 1 Lending - Closed towards balanced below 5 percent of GDP in reduced by 20 percent from percent of GDP per year.  PAL2 (FY07) budget by 2010-11. 2012. HRK 31.8 billion in 2006.  Arrears: reduced by 0.3 percent of  Fiscal, Social &  Functional reorganization of GDP from 1.1% in 2007 to 0.8% in Financial Sector DPL  Improved tax No change CTA introduced. 2010. (FY10) compliance rate from  E-taxation used by VAT tax  Taxpayer compliance rate increased 84 percent in 2007 to payers increased from 3 to 20 from 84 percent in 2007 to 89 percent 87 percent in 2011. percent. based on the 2008 data survey, AAA  Implementation of select  E-taxation increased to 7.7% in 2010  Public Administration  Programming Regional Performance-Based since introduction in 2007. Reform Support TA budgeting improved No change Budgeting Work and JPEIR  Budgeting: 2008 Organic Budget Law (FY09) and performance recommendations. introduced medium-term performance  Institutional Framework budgeting piloted. budgeting under implementation for & Fiscal Risk the second year. Assessment for  Strengthened No change  Implementation of select  FSAP recommendations: all PPP(FY10) regulatory/supervisory Financial Sector Assessment addressed. Supervisory frameworks  Fiscal Responsibility framework for banks Program and ROSCs for banking and non-banking Framework (FY11) and non-banks with recommendations. institutions aligned with Basel II  Governance Reforms for improved financial  Corporate Governance Codes through implementation of Credit Competitiveness & stability applied by 50 percent of Institutions Act, Capital Market Act Growth (FY11) companies listed at the stock and Consumer Credits Act. 6 Revised CPS outcomes and milestones are shown in italic text and reflect (i) scaled-back targets due to constraints posed by global crisis on meeting original targets (e.g. PAL2, Fiscal, Social & Financial Sector DPL, Rijeka Gateway Program, Trade & Transport Integration); (ii) projects that were dropped as a result of the crisis (e.g. Natural Disaster Risk Management, Irrigation Development, Education Development II); (iii) the change in design of the associated project (e.g. EU Natura 2000); and (iv) the need to disaggregate outcome indicators according to associated projects (Coastal Cities Pollution Control II, Inland Waters). 12 Annex 1: Results Matrix EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES  Corporate governance codes: exchange. Regional AAA mandatory for all listed companies  Performance-Based introduced through the Capital Market Budgeting (FY10) Act. PILLAR II: STRENGTHENING PRIVATE SECTOR LED-GROWTH & ACCELERATING EU CONVERGENCE  Government Government effectiveness  Greater rationalization of  Public administration reform: Slow Lending - Active effectiveness improved improved as measured by WB public administration progress with slight increase of  Revenue Administration as measured by WB Governance Indicators from 70 functions and structures as government effectiveness index to &d Modernization Governance Indicators percent in 2006 to over 72 per functional review 70.5. (FY07) from 70 percent in recommendations.  Civil service depoliticized to level of  Trade & Transport percent in 2011. 2006 to over 75  Civil Service depoliticized directors (former assistant ministers) Integration (FY07) percent in 2011. and new performance-based following 2007 elections.  Rijeka Gateway I and II salary system introduced.  Court Rationalization: In 2009, 108 (FY04, FY09)  Civil service No change  10 out of 50 courts municipal courts were rationalized to  Export Financial depoliticized. rationalized. 67; 114 misdemeanor courts to 63; and Intermediation Loan  Zagreb court case backlogs 71 state attorney offices to 55. (FY10)  Improvement in the No change reduced by 40 percent.  Court case backlog: Case backlog  Justice Sector Support efficiency of judiciary  Indicators of judicial reduced by 23 percent between 2006 (FY10) evidenced by performance and efficiency and 2009 to 800,000 cases. Approx.  Economic Recovery DPL independently identified, adopted and 40% of reduction in Zagreb. I (FY11) verifiable performance tracked. indicators, including a Lending - Closed steady reduction in  Real Property court case backlogs. Registration & Cadastre  Increased private No change  Implementation of select  Private Sector Share of GDP: (FY03) sector share in GDP recommendation of increased from 60% in 2006 to 70  Science & Technology towards 80 percent Investment Climate Chapter percent of GDP in 2010. (FY06) through continued of EU Convergence Report  2011 Cost of Doing Business:  PAL2 (FY07) privatization of the and the Doing Business Croatia ranked 84, five places up from  Fiscal, Social & CPF portfolio and Reports. 97 place in 2008. Financial Sector DPL accelerated removal of  Tax compliance cost  Tax compliance cost: stands at 0.2% (FY10) regulatory obstacles reduced. of total taxpayers’ revenues in 2010 and reduction of cost (baseline). of doing business. AAA  EU Convergence Report  Increased capacity of Increased capacity of the Port  Rijeka Port container (TEU)  Rijeka Container Terminal: (FY10) the Port of Rijeka and of Rijeka and Port of Ploce with capacity increased from 150k physical expansion under way, private  Institutional Framework Ploce with revenues significant private sector TEU in 2007 to 250k TEU by capital secured to increase capacity. and Fiscal Risk increasing from $80 million in 2007 to investment. 2012 and container traffic increased from 145k TEU in  Ploce Port bulk productivity: Assessment for PPP 13 Annex 1: Results Matrix EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES $115 million in 2012 2007 to 240k TEU in 2012. increased from 150 tons/hour in 2006 (FY10) by addressing critical  Concession agreement for to 700 tons/hour in 2009.  Governance Reforms for port capacity  Ploce Container Terminal opened operations of at least three Competitiveness and constraints, with port terminals in Croatia for operation in 2011 with initial Growth (FY11) significant private based on cost capacity of 66 k TEU.  Labor Market Issues in sector investment. recovery/market principles  Concession agreements: Rijeka’s Croatia (FY11) with over $60 million in Brajdica Container Terminal extended  Science, Technology and private investments. Innovation Policy and majority ownership transferred to international private operator against (FY11) $38 million of private capital; two  Doing Business follow- agreements signed for new terminals up (FY11) in Ploce in 2010; all concessions on  IDF: Enhancing cost recovery basis. Corporate Financial  Applied research Commercialization of public  Around 30 R&D institutions’  R&D institutions contracts with Reporting (FY11) promoted and research results promoted, contracts signed with industry: 69 contracts of approx.  MiFID Assessment increased share of industry. €11M signed in 2011, up from 2 (FY11) more private sector innovation R&D spending by  Around 30 license contracts of €0.5M in 2006.  EU & Croatian Bank generated and increased share private sector from agreements/spin offs/joint  License agreements: 13 license Resolution Regimes of R&D spending by private (FY11) current one-third of ventures signed or agreements, 5 spin offs/joint ventures total towards the sector from current one-third of established patents of €3.8M in 2011vs. none in 2006; 5 Lisbon agenda target total towards the Lisbon filed/approved. core patents approved and 36 patent Regional AAA of two-thirds. agenda target of two-thirds.  Volume of private R&D applications by technology transfer  Justice Sector Peer mobilized (through programs offices vs. none in 2006. Assisted Learning Research and Development supported by Science and  Volume of private R&D mobilized (FY11) spending as a share of GDP Technology Project) through SME-supported programs  Innovating through the increases to 1.1 percent by  SMEs that have new or doubled from €6.0M in 2006 to €13.7 Crisis (FY11) significantly improved M in 2011.  Program of Accounting 2012. products (innovation).  SMEs with new or improved Reform & Institutional products: 10.8 percent per EU 2008 Strengthening Community Innovation Survey (CIS), (REPARIS) (FY09-12) compared to 7.2 percent in 2006 CIS. PILLAR III: IMPROVING QUALITY & EFFICIENCY IN SOCIAL SECTORS  Administrative cost of No change  Administrative cost of  Privileged pensions reduced in 2009- Lending – Active pension funds reduced. pension funds reduced 2010 by a cumulative 20 percent  Education Sector  Implementation of select above a certain threshold. Development (FY06) Public Finance Review  Early retirement decrement doubled  Revenue Administration recommendations. except for beneficiaries with more Modernization (FY07) than 40 years of service.  Development of  Administrative costs of second pillar Emergency Medical 14 Annex 1: Results Matrix EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES reduced in 2010 through a reduction Services & Investment of mandatory pension funds’ asset Planning (FY09) management fee from 0.75 percent to  Economic Recovery DPL 0.65 percent. 1 (FY11)  Improved efficiency of No change  Percent of population exempt  Categorical exemptions: exempt Lending – Closed health spending and from co-payments reduced population reduced by 18.5 percent  Pension System effectiveness of the and the remaining between 2009-2010. Income-tested Investment (FY03) EMS system. exemptions applied are well exemptions also strengthened in 2009,  Social Welfare targeted. supported by DPL. Development (FY05)  Reduced response time for  Fiscal, Social & EMS intervention at the Financial Sector DPL scene from 17 to 12 minutes, (FY10) of which 80 percent within 10 minutes in urban and 20 AAA minutes in rural areas.  Financing, Providing &  Regional variation in EMS Regulating Long-term teams per capita decreases care for the Elderly from 0.5 (coefficient of (FY11) variation) to 0.4 (or 20  Pension Reform Options percent reduction in the (FY11) variation).  Poverty Assessment  Improved student No change  Pre-school, primary and  Pre-school and secondary school Update (FY11) learning and system secondary school gross gross enrollment rates: increased performance with enrollment rates increased from 53 and 87 percent respectively in Regional AAA performance of from 53, 95 and 87 percent to 2006 to 60 and 88 in 2009. Croatian pupils at 60, 97 and 90 percent,  Primary school gross enrollment  Long-term Care (FY11) PISA 2009 stable or respectively. rates unchanged at 95 percent. improved compared to  Triple shift schools  Number of students in triple shift EU average. eliminated and number of primary schools reduced from 9 students in single-shift percent in 2006 to below 2 percent in primary schools increased 2010 while number of students in from 13 percent to 25 single-shift schools increased from 12 percent. percent in 2006 to 48 percent in 2010.  National curriculum for  New national curriculum primary and secondary framework for pre-school, primary education developed and and secondary education developed implemented. and approved.  Improved efficiency No change  Introduction of new social  New social policy planning and transparency of policy planning methodology methodology: developed and 15 Annex 1: Results Matrix EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES social programs. at county-level.implemented in 10 counties   New social welfare MIS software: Electronic national social welfare beneficiaries’ completed, piloted and in use in three pilot counties, to be rolled out after the registry established and operational. delivery of IT hardware.   Social workers’ time spent on direct Social workers’ time spent work with clients increased as a result on direct work with client of the introduction of one-stop-office increased from 37 percent to 55 percent. work model in centers for social  welfare and will be further increased Deinstitutionalization after the full roll-out of the MIS. program continued with the  Deinstitutionalization: despite number of persons in decrease in number of persons in state- residential institutions owned residential institutions, total reduced from 25,543 to 24,700. number of persons in residential institutions declined only slightly from 25,543 in 2007 to 25,523 in 2009 due to increase in private residential care. PILLAR IV: INCREASING SUSTAINABILITY OF LONG-TERM DEVELOPMENT  Improved coverage of Improved water supply and  At least 300,000 people  Improved coastal wastewater Lending – Active water and wastewater wastewater services and flood benefitting from improved services: Under CCPCP I, over  Inland Waters (FY07) services in 25 protection measures in wastewater services , and 220,000 people benefitted from  Agricultural Acquis municipalities, Croatia’s inland municipalities. additional 100,000 from improved wastewater services in Cohesion (FY06) contributing to the improved water services. coastal area (number of permanent  GEF: Agricultural government’s plan to  Reduced agriculture population, number of person served Pollution Control (FY08) increase it from 75 Maintained quality of Croatia’s pollution through adoption of during tourist season is significantly  Coastal Cities Pollution percent and 44 percent coastal waters to meet environment-friendly higher). Control II (FY09) applicable EU and national respectively agricultural practices by 40  Improved inland water and  EU Natura 2000 standards in participating percent of farmers in select wastewater services: Under ongoing Integration (FY11) municipalities. areas of Danube river basin. IW project, 25,000 people already  Improved conservation  Nature protection project benefitted from improved wastewater Lending-Closed of biodiversity and applications made to EU services and 10,000 from improved Increase in annual capital and Structural Funds and  Coastal Cities Pollution management of natural other investment expenditure water services. Control I (FY04) accepted in the funding resources, including an across the parks estate pipeline.  Flood Protection: Under ongoing IW  Energy Efficiency increase of protected project, retention volume for flood (FY04) areas from 11 percent protection increased from 600M m3 in  GEF: Energy Efficiency to 15 percent of 2008 to 720M m3 in 2010, (FY04) national territory. safeguarding the population and  Social and Economic property in Sava River Basin. 16 Annex 1: Results Matrix EXPECTED CPS REVISED MILESTONES PROGRESS TO DATE WB PROGRAM OUTCOMES EXPECTED CPS DELIVERED OUTCOMES  Increased coverage in This indicator was dropped  Efficient and properly Recovery (FY05) precise weather event since associated project did not equipped country early  GEF: Renewable Energy now-forecasting (from materialize. warning system for Resources (FY05) 30 percent to 80 emergencies and natural percent of the territory) disasters. AAA and reduced response  Proper capacity in place to  Integrated Waste time to disasters and evaluate and prioritize Management Facility emergencies. interventions in forest fire (FY09) prevention.  Increased irrigated area This indicator was dropped  Flood protection measures on  Famework for RE incentives: Regional AAA for farming (increased since associated project did not the Sava/Drava/Danube achieved under the RER project.  SE Europe Water & from 9000 ha). materialize. Basin meeting EU directives.  Financial closure achieved for 40 Climate Adaptation  Ready renewable energy MW of RE projects through HBOR (FY11)  Implemented projects for 95 MW capacity. contingent loan facility. Additional 79 framework with  Energy efficiency projects MW on track to reach financial No change closure in 2011. incentives for and guarantees covered provision of renewable through ESCO.  HEP ESCO financed energy energy and scaled-up efficiency investments totaled US$30 roll-out of programs million in Feb 2011. for energy efficiency.  Established capacity to No change  Small community  405 sub-projects completed under develop a pipeline of infrastructure, income- SERP: 125 for social inclusion; 69 for high quality regional generation and social small community infrastructure; and and municipal-level inclusion projects 211 in support of SMEs, crafts and development projects implemented in the areas of cooperatives) benefitting 84,000 including for donor special state concern (150 people residing in areas of special financing in 13 projects). state concern; 1,359 new jobs were counties.  Functional food safety created and €11 million in additional management and control in revenue was generated by the SMEs.  Improved agriculture place, increasing use of  Alignment with EU’s agricultural productivity and integrated approach to acquis: payment agency established further alignment with No change sustainable production and land parcel information system the EU acquis. system aligned with the developed to improve transparency acquis. and accountability in agricultural  Land registration upgraded sector. and integrated with cadastre  Integrated and upgraded cadastre (5 percent of registry and land registry data in 6% of the integrated). country. 17 Annex 2 CPS Planned vs. Actual Lending and AAA Program FY09 FY10 FY11 FY12 PLANNED U$M ACTUAL U$M PLANNED U$M ACTUAL U$M PLANNED U$M ACTUAL U$M PLANNED U$M ACTUAL U$M Pillar I - Sustaining Macro Stability LENDING FSF DPL √ 297 ERDPL √ 213 AAA PUBLIC.ADMIN. REFORM INSTITUT. FRAMEWORK & FISCAL RESPONSIBILITY PUBLIC EXPENDITURE & SUPPORT TA 1/ √ FISCAL RISK ASSESS. FOR PPP √ RAMEWORK √ INSTITUT REVIEW GOVERNANCE REFORMS SOCIAL IMPACT OF CRISIS √ (COMPETITIVENESS) IDF: ENHANCING CONSUMER PROTECTION √ CORPOR. FIN. REPORT √ Mi FID ASSESSMENT √ Pillar II - Private Sector-Led Growth and EU Convergence LENDING JUSTICE SECT INTEGRATED LAND JUDICIAL REFORM 3/ 35 SUPPORT 2/ 36 ADMIN 24 √ 24 EXPORT FINANCE TRADE & TRANSPORT AF INTERMEDIATION 1/ 141 √ 141 3/ 67 √ 67 RIJEKA GATEWAY II 130 √ 123 PORT DEVELOP AF 70 SCIENCE & TECHNOLOGY 29 AAA DUTCH EFO JUSTICE EU CONVERGENCE REPORT √ LABOR MARKET ISSUES √ SECTOR SUPPORT DOING BUSINESS UPDATE √ SCIENCE, TECH. & INNOVATION POLICY Pillar III- Quality and Efficiency in Social Sectors LENDING DEVELOP OF EMS & INVEST PLANNING 27 √ 28 EDUCATION II AF 100 Dropped AAA LONG-TERM CARE FOR HIGHER EDUCATION ELDERY √ AAA PENSION REFORM OPTIONS √ POVERTY ASSESSMENT UPDATE Pillar IV - Sustainability for Long-Term Development LENDING COASTAL CITIES POLLUTION CONTROL II 90 √ 88 CLIMATE ADAPT/IRRIG 100 Dropped EU NATURA GEF COASTAL CITIES 1/ 6 √ 6 NATURE PROTECTION 30 2000 4/ 29 DISASTER MANAGEMENT 48 RAILWAY DEVELOP Dropped ENERGY GEN.TRANSMISS Dropped AAA INTEGRATED WASTE BROWNFIELD MGMT (PPIAF) √ REDEVELOPMENT √ RAILWAY POLICY NOTE TRANSPORT SECTOR REVIEW/CLIMATE Dropped ENERGY SECTOR Dropped √ Del i vered 1/ Unpl a nned 2/Rena med Jus ti ce Sector Support a nd s l i pped to FY10 3/Refers to pl a nned Port Devel opment AF moved to FY12 4/Rena med EU Na tura 2000 Integra ti on a nd moved to FY11 18 Annex 3 Croatia-EU Relations After six years of demanding and difficult negotiations, the European Council gave the green light at the June 2011 European Summit for Croatia to join the EU as the 28th Member State on the target date of 1 July 2013. The negotiations, which were launched in 2005, were officially concluded on June 30, 2011 with the closing of the four outstanding policy chapters out of a total of 35.7 The four chapters were Chapter 13 on Fisheries, Chapter 33 on Financial and Budgetary Provisions, Chapter 8 on Competition Policy and Chapter 23 on Judiciary and Fundamental Rights. The EC disclosed in March 2011 that Croatia made considerable progress in meeting these closing benchmarks, and that further concerted efforts are needed in particular regarding the independence and efficiency of the judiciary, the fight against corruption, and the human rights issues. The European Commission will continue to monitor Croatia’s reform progress during the ratification process, in particular those related to the judiciary and fundamental rights. Croatia is preparing for future access to the Structural and Cohesion Funds through implementation of the Instrument for Pre-Accession Assistance (IPA). Croatia has been using IPA8 – the EU financing program to support the country’s preparation for membership, since 2007. More than €1 billion, or on average €150 million a year, has been available to Croatia through IPA for the period 2007- 2013. The IPA consists of five components: (i) Transition Assistance and Institutional Building; (ii) Cross-border Cooperation; (iii) Regional Development; (iv) Human Resources Development; and (v) Rural Development/IPARD Program. The broad objectives of these components are to support the accession process and specific benchmarks established under the negotiations9; and prepare projects for post-accession funds. The components’ different co-financing modalities and programming procedures are intended to reflect similar arrangements to various Structural and Cohesion Funds. Therefore, by using IPA funds, Croatia is building capacities and resources as well as preparing the project pipeline to absorb large volumes of post-accession funds. In May 2011, overall IPA absorption rate for the 2007-2009 allocation of €315 million10 stood at 43 percent. This is expected to rise to 70 percent with completion of several larger tenders that are under way. Preliminary results show strong absorption for the Component I (Transition Assistance and Institutional Building), at about 90 percent or €37 million. The absorption rate for the Regional Competitiveness (Component III) is 45 percent. For the Human Resources Development (Component IV), this figure is 71 percent. The IPARD program, which received a €130 million allocation has the lowest absorption rate, at about 10 percent or €10 million. The Rural Development Component or IPARD program has the most complex procedures, and current absorption of funds has not led to improvements compared to the earlier SAPARD funds. However, improvements are expected in 2011 with accreditation of new measures. Low absorption of funds were attributed to the availability of funds provided through national programs, with less complex procedures for similar activities, which will be discontinued, as well as difficult access to loans for farmers. Late contracting remains a concern, in particular now that several yearly allocations are being tendered and contracted in parallel. Late contracting reduces the implementation period until the disbursement deadline, which may affect the quality and absorption of funds. Therefore, a risk of automatic de-commitment of funds (so-called "n+3' rule") remains relevant and requires close attention. 7 Chapter 35 – Other Issues is not being negotiated. 8 Overall, before IPA, Croatia has implemented a financial envelope amounting to €550 million, which included the following financial instruments: OBNOVA 1996-2000, CARDS 2001-2004, PHARE 2005-2006, ISPA and SAPARD. 9 There are also reverse cases where implementation of IPA affects the negotiations process; for instance, one of the closing benchmarks for the Competition chapter has been to tender 80 percent of the amount available under IPA Component III. 10 Includes the first four components of IPA. 19 Annex 4 World Bank Support to Croatia’s EU Goals Convergence Between World Bank-Funded Projects and Croatia's EU Accession Agenda (May 2011): Contribution of Bank-Funded Projects to Croatia’s Efforts in Meeting Three Criteria: Political, Economic and Criteria Related to Ability to Assume Membership Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements Ongoing projects Rijeka Increase trade - - - - Gateway competitiveness of Croatia Program by improving intl. transport chain through Rijeka Port for RGI: freight and passenger US$M204.5 (o/w transport. Port $10.3M modernization, connecting cancelled) seaways to European roads RGII: US$M122.5 and railways corridors, such as corridor V. Education Experience of EU states - - - - Sector shows that education is key Development to strengthen the country’s competitiveness and labor US$M85.0 force effectiveness. Croatian education benefits from a sector-wide development project focused on strengthening the planning, management and monitoring of education as essential requirements in the context of European knowledge economies. Agricultural The project will contribute to - Develop sustainable systems Strengthen capacity for the Investments in Acquis increased competitiveness of and capacities in the Ministry absorption of EU funds rehabilitation and Cohesion the rural sector in Croatia. of Agriculture to ensure through financing the equipment of key compliance with the acquis in preparation and setting up of institutions in the Loan the rural sector. the SAPARD Agency agricultural sector, such US$M30.1 institutional arrangement, and as National Veterinary 20 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements Dutch TF building the capacity in the Institute and its regional US$M4.7 Ministry of Agriculture to offices, Food Safety establish the management and Agency, Plant Protection administration system able to Institute, Inspection address the requirements of services, as to ensure that the CAP. they could be fully The project supported the functioning at the time of development of Land Parcel the accession Information System thus Construction of a GMO helping improve transparency laboratory in Osijek for and accountability of tracing GMO in food Government support programs stuffs, and support to the in the agricultural sector. Food Agency in Osijek to raise consumer awareness of their rights and issues related to food quality. Trade and The project contributes to - - - - Transport development of trade along Integration corridor Vc through improving the capacity, US$M75.3 efficiency and quality of Co-financed with services at the southern part EBRD and EIB of the corridor, in particular through the port of Ploce. Inland Waters - - TA component supports Preparation of wastewater Coverage and quality of institutional strengthening of projects in Krapina-Zagorje water supply and US$M133.4 the Croatian Waters and county (€M1.3) for financing wastewater services in Ministry of Regional by the EU structural funds. Croatia are below those of Development, Forestry and This includes feasibility EU member states and Water Management to studies, design, environmental recent entrants and implement the Water assessments, and bidding require improvements to Management Strategy. This documents, supporting future meet standards under the will include training on investments estimated at EU Drinking Water and programming for EU funds. €M50. Urban Wastewater The component also includes A model for the preparation of Treatment Directives. strengthening of beneficiary future wastewater investments Project supports water utility companies, for HV is also being financed, investments in water which will in turn promote as basis for the preparation of supply, wastewater 21 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements better management for the investment packages for EU collection and treatment provision of financing. through 13 sub-projects in water/wastewater services. An €40,000 study financed as the inland part of the basis for a €M1 grant (through country. By 2012, a total IPA Cross-Border of €M 82 will be invested Cooperation Program). The into these activities. grant will be used for The project also supports revitalization of Vuka river the flood protection near Laszlovo, to reduce flood measures that will risk in the adjacent area. increase the retention volume for flood protection, and reduce the risk of downstream flood damage, as consistent with the EU Floods Directive objectives to reduce flood risks. Revenue Increasing the capacity of the Legislative changes Technical advisory services Project will complement the To address the provision Administration tax administration to tackle introducing the new to develop and implement the EU support provided through of e-tax services and thus Modernization the tax evasion and increase personal identification Strategic Plan for IPA funds (under IPA improve the client tax collection capacity; number (PIN) will lead to modernization of the Component I) focused on services, as required by US$M68.0 (o/w reducing the tax compliance facilitated exchange of tax Croatian Tax Administration strengthening administrative the EU, investments in IT $34M cancelled) cost which directly reduces information among (CTA), incl. visits to good and organizational capacity of management systems are the cost of doing business. government agencies, one practice locations, training CTA expected. Investments in of the issues emphasized and strategic planning. strengthening the tax in the EU accession Project also supports building audit functions, discussions institutional capacity, with strengthening the large new organizational and tax payer’s office staffing arrangements, guided functions. by an HR strategy, as to further align Croatia with EU procedures and best practices. Support to the CTA’s strategic plan for tax modernization helps in harmonization of tax administration policies and 22 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements operations with the EU accession expectations. Agricultural - Support the country's Develop agri-environment Public information campaign The project has a grant Pollution efforts to transpose the measures by establishing and and dissemination of scheme to finance sub- Control Nitrate and Water implementing Code of Good information about the project projects for variety of Framework Directives, by Agricultural Practice. benefits for possible sustainable manure GEF Grant increasing the use of replication/scale up of management practices to US$M5.0 environmentally friendly activities through IPARD. reduce nutrient loads to agricultural practices as to water bodies, leading to reduce nutrient discharge improving appropriate from agricultural sources. nitrates management, per EU requirements Regional - Maintain and conserve The project facilitates the The project will support more Reduce water pollution to Neretva and water-dependent institutionalized cooperation efficient irrigation approaches Neretva and Trebisnjica Trebisnjica ecosystem and on basic natural resources in the Croatian delta and bring through high-priority biodiversity according to between Croatia and BH thus the practices more in line with investments in five Croatia: the requirements of the supporting the territorial the Common Agricultural municipalities and one US$M2.0 EU Water Framework cohesion objective, one of the Policy. industrial sector in BH, BH: Directive through key requirements under the which includes water US$M6.0 improved resource EU Regional Policy. infrastructure, such as management at Project supports the wastewater technology Neretva/Trebisnjica river establishment of river basin improvements, or basin at transboundary management agencies per improvements in level through a regional river basin, thus wastewater collection and project of Croatia and implementing the Water treatment. This helps BH. Preparation of the Framework Directive (Water bring the countries better River Basin Management Agency for Trebisnjica in line with the Plan, supported by the established in February Directives on Wastewater project, is a key element 2010). Treatment and on Nitrates of the environmental acquis. Development - - Institutional support for See under institutional - of EMS and strategic planning (€M1.9) strengthening Investment will, among others, finance Planning building of capacity in the Ministry of Health and Social US$M28.3 Welfare for accessing and managing EU funds, through 23 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements training 30 staff of which 10 train-the-trainers. Preparation of five project proposals are under way for applications to EU structural funds, which could finance infrastructure related to the restructuring of health care facilities, IT upgrades, training of human resources for health, and a variety of e-health initiatives. Coastal Cities The project helps protect the The project will support Institutional strengthening of - In line with goals outlined Pollution quality of the Adriatic Sea, a alignment and Croatian Waters (HV) to in the Water Management Control II key objective in the implementation of implement Water Strategy, the project Government's tourism legislation to meet EU Management Strategy and supports investments in Loan amount: strategy by reducing disposal Directives (Water further align the sector to EU the wastewater sector, US$M87.5 of untreated wastewater, Framework Directive and accession priorities. needed to comply with GEF amount: which has a significant Urban Wastewater Institutional strengthening of EU Urban Wastewater US$M6.4 impact on the seawater Treatment Directive). participating utilities to Directive. The funds are quality and is a constraint to Specifically, studies improve their financial and allocated to tourism (Croatia's tourist prepared under the project operating efficiency. approximately 30 cities revenues amount to up to will serve as a basis for Improve capacity of the and municipalities along 25% of GDP). drafting the secondary Ministry of Environmental the coast, for Project also contributes the legislation. Protection and HV construction/extension of Government’s efforts to laboratories for sewerage networks, enhance the effectiveness of environmental monitoring collectors, pumping public spending by and increased focus on EU stations, wastewater increasing the level of cost compliance. treatment plants and recovery from local submarine outfalls. governments and consumers. Export Finance Medium and long-term - - Indirectly the project helps - Intermediation funding provided, in line increase HBOR's ability to Loan with Europe 2020 Strategy, possibly act as financial as to maintain a steady flow intermediary in transmitting US$M141.2 of credit to the private sector. and monitoring the use of EU This helps enhance Croatia's funds. competitiveness and faster convergence with the EU27 24 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements per capita income levels. Justice Sector Judicial performance and Requirements under the Court resource management The resource requirements of Investments in the court Support efficiency (timeliness and justice sector are part of capacity building through the justice sector for network through cost) supported through the the Copenhagen training of court officials, modernizing the sector IT and rehabilitation of US$M36.3 project are relevant: (i) for (political) criteria. Hence, institutional capacity and physical facilities (for courts, courthouses and SAO convergence of Croatia's harmonization of strengthening of the State prosecutor offices, and network, and justice sector policies and Croatia's justice sector Attorney's Offices (SAO), penitentiaries) is modernization of the procedures with the EU through new legislation and strengthening the conservatively estimated at information systems for systems (including mutual and policies aligns the Ministry of Justice more than EUR 100 million. the courts (upgrade of the recognition of judgments and practices and make it management functions, At the request of the Ministry Integrated Case information-sharing in justice more uniform and building on earlier EU of Justice, the project is Management System) and sector); (ii) to improve the predictable, leading to support. providing technical support to the SAO offices, will country's more efficient The project also supports improve capacity and increase contribute to investment/business climate collaboration between EU strengthening of the justice the possibility of the justice improvement of (e.g., performance of member states. sector IT systems with focus sector to access and absorb efficiency of the justice commercial courts); and (iii) on statistical and post-accession EU structural system. to contribute to rapid performance monitoring funds, through financing convergence of country's systems for courts and the consultancy (€100,000) for: income levels. prosecution. preparing EU programming Refinement of case documents for structural funds management standards, (SF), developing institutional guidelines and processes also structure for SF management, compliments the EU support support for technical aspects (IPA Component I). for SF projects and programs, as well as developing and conducting relevant training. EU Natura - - Support to the Ministry of Project is expected to support €10.9 million investments 2000 Culture, State Institute for development of at least 20 in protected areas and Integration Nature Protection, National project proposals (nature national ecological sites and Nature Parks and county protection project to promote Natura 2000 US$M28.8 public institutions to develop applications) to EU structural objectives as defined by integrated management of funds. EU Birds and Habitat EU Natura 2000 sites with Directives. Locally other stakeholders – to meet driven investments were the EU Nature protection proposed using legislation (the Birds and requirements similar to Habitats Directive). Develop those required by future biological inventory and data EU structural funds. 25 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements systems to fulfill EU Project will support biodiversity reporting development of agri- requirements. environment and cross- Project is expected to compliance measures increase capacity (training focused on biodiversity and consultancy) to respond conservation and Natura to EU funding opportunity 2000 sites ( €1 million). for nature Nationwide biodiversity protection/conservation. inventory and development of ecological network data system in line with EU INSPIRE Directive (€4.6 million). Economic Support to reduced - Support to more efficient - - Recovery administrative burden and public administration that Development regulatory barriers to meets EU standards related to Policy Loan business. Project supports merit and professionalism. speedier enforcement of Measures under the ERDPL US$M213.0 judicial decisions through the will directly contribute to adoption of the new strengthening the civil Enforcement, Bailiffs and the servants appraisal system and new Act on Execution of management mechanisms, Cash Assets, flagged by the through legislative changes EU as one of key areas for and introduction of HR improvements needed to registry for all public sector close the EU negotiations institutions. Finalization of under the Chapter 23 - the reform of the public Judiciary and fundamental sector wage system, also rights. recommended by the EU, is Support to improvements in currently envisaged to be fiscal policy, through new supported under ERDPL2. Fiscal Responsibility Law, as well as increased efficiency is social sectors spending will contribute to meeting the EU fiscal deficit targets. 26 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements Projects that closed during CPS period Social and Support to municipalities The project supported - Preparation of ROPs to See under income Economic heavily lagging behind the development of Regional support the EU Regional convergence Recovery rest of the country, in Development Programs Development requirements. improving economic (ROPs) in four counties of ROPs are standard planning US$M45.7 convergence - in line with special state concern, instruments for identifying the EU regional development which were prepared in development vision and public policies. line with the EU regional investment priorities in a The project contributes to the development policy given regional unit and were reduction of regional requirements. prepared with the principles of disparities. EU structural funds. This contributed to building the capacity for participatory regional development and absorption of pre-accession and accession funds. Additionally, project operation manuals and applications were revised to meet the requirements for the EU pre- accession grant funds. Science and The project supports - The project helped strengthen Project financed the Manager - Technology development and financing capacity of Business of IPA Science & Innovation schemes for innovative Innovation Center of Croatia Investment Fund (SIIF) in the US$M40.0 (o/w SMEs and fosters innovation (BICRO), a key government Ministry of Science, and $1.3M potential of both public innovation agency that served as a model to design €6 cancelled) research institutions and the supports knowledge-based million IPA SIIF grant private sector, critical for the SMEs. BICRO is in process schemes/TA for technology country's long-term growth of accreditation by the EC as transfer and start-ups. Three and competitiveness. It intermediate body for future STP beneficiary institutions reinforces cooperation structural funds on behalf of (Rudjer Boskovic Institute and between universities, the Ministry of Science, the universities of Zagreb and research and business, and Education and Sport, as part Rijeka) were awarded funds prioritizes expenditures for of the Operational Program from SIIF fund on competitive greater private R&D on Regional basis. investments - in line with Competitiveness. The project also financed the the EU innovation agenda Project supported integration €0.5 million detailed design 27 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements and Europe 2020 Strategy in European Research Area and engineering of the aimed to ensure the (ERA) Biosciences Technology diffusion of technology and increasing human capital Commercialization and across the EU. in science and technology, Incubation Center-(BioCenter) which is below EU average, as part of the preparation of through Unity through €18 million IPA BioCenter Knowledge Fund (UKF) that Project, approved by the EU in financed joint scientific and March 2011. technological projects of With the project’s €4 million Croatian scientific invested, UKF projects institutions with foreign attracted €9 million of R&D researchers and institutions funding from the EU Seventh and the business. Framework Program for Croatian partners (total of €60 million approved for FP7 projects). Project also supported €2.8 million UKF application to the EU Marie Curie Co-funding of Regional, National and International Programmes (COFUND). Energy - - TA for setting up the HEP Develop pipeline of projects to Develop the EE market Efficiency Energy Efficiency Company be financed from other and demand for EE (HEP ESCO) and setting up sources, including from EU projects thus helping Loan: US$M5.0 the ESCO model. structural and cohesion funds; Croatia attain the GEF: US$M7.0 the pipeline is currently country's goals re. estimated at about US$M20. Europe's energy policy on 20/20/20 ratios. Real Property The project contributed to Amendments to the Land - CAP funds and some other EU - Registration improving the investment Registry Act eliminated programs related to land use and a follow up climate and decreasing the non-adjudicative (agriculture, nature protection, project informality of the economy, functions of judges (e.g., etc.) require the land users to prominent topics of the land registration and show their connection to the country's EU agenda. titling, maintenance of the land through ownership US$M25.7 Positive impacts on Croatia's company registry, documents, lease agreements, convergence made through: execution of judgments or similar instruments. This Follow up project reduction of case backlog, and similar administrative requires clear land rights to be 28 Annex 4: World Bank Support to Croatia’s EU Goals Legislation Institutional changes Investments to meet EU Project Income convergence EU funds absorption harmonization and capacity requirements indicative: increased data consistency tasks), a key source of determined and registered - US$M24.0 between cadastre and land inefficiency and case which the project is helping to registry, reduced transaction backlog in the justice support. time, all contributing to more sector (land registration The project was co-financed efficient real property cases alone formed about with the EU through three markets. 50-60 % of the backlog). Bank-administered trust funds (€M11.3). A follow up project complements the IPA-planned TA (Component I), with focus on efficiency of business processes, further improvement of investment climate and court rationalization. GEF - Key legislation and The establishment of the Through streamlining of - Renewable regulatory framework on Renewable Energy Advisory procedures, forming a Energy RER was introduced and Facility (REAF) within technical advisory facility for Resources aligned with the EU MoELE and continuous project preparation and Directive on Promotion of training of the staff led to creation of RER Registry, a US$M5.5 Electricity from creation of RER Registry and pipeline of project has been Renewable Energy, pipeline, which currently created, of which many of creating an enabling contains more than 300 them will seek EU finding. environment for investing pipeline projects. The project in RER-based power. has been very successful in The project supported capacity building activity incentives for RER-based which is a prerequisite for a power and heat including successful implementation of tariff design, sub-laws on EU 20/20/20 strategy for grid-code, licensing and green energy by 2020. permitting procedures. Fiscal, Social Mitigation measures to Support to legislation Support to financial - - and Financial address adverse impact of the harmonization with the institutions’ regulatory Sector global crisis through EU acquis requirements framework through policy Development strengthened public finance, in public procurement measures leading to Policy Loan social sector resilience and system and financial successful implementation of improved efficiency and sector system. EU MiFID Directive in non- US$M296.8 stability of the financial bank financial institutions sector. and Basel II standards. 29 Annex 5 Croatia-at-a-Glance Croatia at a glance 1 1 5/1 /1 Ke y D e v e lo pm e nt Indic a t o rs High Cro atia inco me Age distribution, 2009 (2009) Male Female P o pulatio n, mid-year (millio ns) 4.4 ,1 0 11 75-79 Surface area (tho usand sq. km) 57 35,527 60-64 P o pulatio n gro wth (%) -0.1 0.7 Urban po pulatio n (% o f to tal po pulatio n) 57 77 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 61.2 42,825 15-19 GNI per capita (A tlas metho d, US$ ) 13,820 38,596 GNI per capita (P P P , internatio nal $ ) 19,040 37,144 0-4 6 4 2 0 2 4 6 GDP gro wth (%) -6.0 0.3 percent of total population GDP per capita gro wth (%) -5.9 -0.4 ( m o s t re c e nt e s t im a t e , 2 0 0 3 – 2 0 0 9 ) .25 P o verty headco unt ratio at $ 1 a day (P P P , %) <2 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) <2 .. Life expectancy at birth (years) 76 80 20 Infant mo rtality (per 1,000 live births) 5 6 Child malnutritio n (% o f children under 5) 1 .. 5 A dult literacy, male (% o f ages 1 and o lder) 100 99 10 5 A dult literacy, female (% o f ages 1 and o lder) 98 98 Gro ss primary enro llment, male (% o f age gro up) 94 101 Gro ss primary enro llment, female (% o f age gro up) 94 101 0 A ccess to an impro ved water so urce (% o f po pulatio n) 76 100 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 99 99 1990 1995 2000 2008 Croatia High income a N e t A id F lo ws 19 8 0 19 9 0 2000 2009 (US$ millio ns) Net ODA and o fficial aid – 0 66 397 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2008): Euro pean Co mmissio n – 0 12 337 15 Germany – 0 5 21 10 A ustria – 0 5 9 5 0 -5 A id (% o f GNI) – 0.0 0.3 0.6 -10 A id per capita (US$ ) – 0 15 90 -15 -20 Lo ng- T e rm E c o no m ic T re nds -25 95 05 Co nsumer prices (annual % change) .. 122.6 4.6 2.4 GDP implicit deflato r (annual % change) .. 99.3 4.6 3.3 GDP GDP per capita Exchange rate (annual average, lo cal per US$ ) .. 0.0 8.3 5.3 Terms o f trade index (2000 = 100) .. .. 100 100 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 0 9 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 4.6 4.8 4.4 4.4 0.4 -0.8 0.0 GDP (US$ millio ns) .. 8,1 1 56 21,520 63,435 .. 0.5 3.8 (% o f GDP ) A griculture .. 10.9 6.5 5.4 .. -5.5 2.0 Industry .. 35.8 28.5 26.3 .. -2.2 3.9 M anufacturing .. 29.3 20.3 15.8 .. -3.5 2.6 Services .. 53.4 65.0 68.2 .. 2.2 4.2 Ho useho ld final co nsumptio n expenditure .. 52.5 60.4 55.4 .. 1.9 3.6 General go v't final co nsumptio n expenditure .. 36.3 23.8 21.5 .. 2.6 2.8 Gro ss capital fo rmatio n .. 12.4 19.1 27.1 .. 7.2 9.1 Expo rts o f go o ds and services .. 27.5 41.7 35.4 .. 6.3 3.8 Impo rts o f go o ds and services .. 28.7 45.0 39.4 .. 4.9 5.7 Gro ss savings .. -15.4 18.0 21.5 No te: Figures in italics are fo r years o ther than tho se specified. 2009 data are preliminary. .. indicates data are no t available. a. A id data are fo r 2008. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 30 Annex 5: Croatia-at-a-Glance Croatia B a la nc e o f P a ym e nt s a nd T ra de 2000 2009 Governance indicators, 2000 and 2009 (US$ millio ns) To tal merchandise expo rts (fo b) 4,574 10,736 To tal merchandise impo rts (cif) 7,770 21,025 Voice and accountability Net trade in go o ds and services -947 -2,274 Political stability Current acco unt balance -533 -3,314 Regulatory quality as a % o f GDP -2.5 -5.2 Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 641 1,476 Control of corruption Reserves, including go ld 3,525 14,896 0 25 50 75 100 2009 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings 2000 (% o f GDP ) Source: Kaufmann-Kraay-Mastruzzi, World Bank Current revenue (including grants) 40.0 38.6 Tax revenue 36.5 33.9 Current expenditure 40.7 38.5 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2008 Overall surplus/deficit -3.5 -5.0 P aved ro ads (% o f to tal) 85.4 89.1 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual .. 45 00 subscribers (per 1 peo ple) 62 175 Co rpo rate 35 20 High techno lo gy expo rts (% o f manufactured expo rts) 8.5 9.1 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 1 1 ,426 61,885 A gricultural land (% o f land area) 37 22 To tal debt service 2,037 10,381 Fo rest area (% o f land area) 35.3 39.4 Debt relief (HIP C, M DRI) – – Terrestrial pro tected areas (% o f surface area) .. 7.5 To tal debt (% o f GDP ) 53.1 97.6 Freshwater reso urces per capita (cu. meters) 8,491 8,502 To tal debt service (% o f expo rts) 21.4 42.9 Freshwater withdrawal (billio n cubic meters) .. .. Fo reign direct investment (net inflo ws) ,1 1 05 1,645 CO2 emissio ns per capita (mt) 4.6 5.6 P o rtfo lio equity (net inflo ws) 727 374 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 6.9 8.0 Composition of total external debt, 2009 IDA, 0 IBRD, 1229 Energy use per capita (kg o f o il equivalent) 1,760 2,101 IMF, 0 Other multi- Short-term, lateral, 2182 7015 Bilateral, 1339 Wo rld B a nk G ro up po rt f o lio 2000 2009 (US$ millio ns) IB RD To tal debt o utstanding and disbursed 421 1,229 Private, 50120 Disbursements 52 192 P rincipal repayments 22 128 Interest payments 19 46 US$ millions IDA To tal debt o utstanding and disbursed 0 0 Disbursements 0 0 P riv a t e S e c t o r D e v e lo pm e nt 2000 2009 To tal debt service 0 0 Time required to start a business (days) – 22 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 8.4 To tal disbursed and o utstanding po rtfo lio 55 303 Time required to register pro perty (days) – 104 o f which IFC o wn acco unt 46 276 Disbursements fo r IFC o wn acco unt 19 63 Ranked as a majo r co nstraint to business 2000 2009 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 2 38 Legal System .. 28.9 A ntico mpetitive o r info rmal practices .. 20.0 M IGA Gro ss expo sure 52 274 Sto ck market capitalizatio n (% o f GDP ) 12.7 40.4 New guarantees 30 279 B ank capital to asset ratio (%) 1 1 .9 13.5 No te: Figures in italics are fo r years o ther than tho se specified. 2009 data are preliminary. 5/4/11 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 31 Annex 5: Croatia-at-a-Glance Millennium Development Goals Croatia With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) C ro a t ia G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2008 .25 P o verty headco unt ratio at $ 1 a day (P P P , % o f po pulatio n) <2 .. <2 <2 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. .. 8.8 10.0 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) .. .. 8.2 8.4 P revalence o f malnutritio n (% o f children under 5) .. 0.6 0.8 0.6 G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) 79 82 92 92 P rimary co mpletio n rate (% o f relevant age gro up) .. 82 92 102 Seco ndary scho o l enro llment (gro ss, %) .. 81 85 94 Yo uth literacy rate (% o f peo ple ages 1 5-24) 100 100 100 100 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) 96 97 96 96 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) 45 45 45 44 P ro po rtio n o f seats held by wo men in natio nal parliament (%) .. 9 23 21 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 13 10 9 4 Infant mo rtality rate (per 1,000 live births) 11 9 7 5 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 91 92 93 98 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) 11 12 7 7 B irths attended by skilled health staff (% o f to tal) 100 100 100 100 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. .. 69 .. G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) .. .. .. 0.1 Incidence o f tuberculo sis (per 100,000 peo ple) 55 44 36 23 Tuberculo sis case detectio n rate (%, all fo rms) 80 87 87 87 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) .. .. 95 76 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 68 61 100 99 Fo rest area (% o f to tal land area) 31.5 36.9 35.3 39.4 Terrestrial pro tected areas (% o f surface area) .. .. .. 7.5 CO2 emissio ns (metric to ns per capita) 5.2 3.9 4.6 5.6 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 7.1 6.5 6.9 8.0 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt 00 Telepho ne mainlines (per 1 peo ple) 17.2 27.6 38.9 42.4 00 M o bile pho ne subscribers (per 1 peo ple) 0.0 0.7 23.3 132.6 00 Internet users (per 1 peo ple) 0.0 0.5 6.8 50.5 00 P erso nal co mputers (per 1 peo ple) 1.6 2.1 1 1 .3 18.0 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 200 180 100 160 75 75 140 120 50 50 100 80 25 60 25 0 40 20 2000 2002 2004 2006 2008 0 0 1990 1995 2000 2008 2000 2002 2004 2006 2008 Primary net enrollment ratio Fixed + mobile subscribers Ratio of girls to boys in primary & secondary Croatia High income education Internet users No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. 5/4/11 Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 32 Annex 6 Selected Indicators of World Bank Portfolio Performance and Management As of Date 6/30/2011 Indicator 2008 2009 2010 2011 Portfolio Assessment Number of Projects Under Implementation a 16 17 14 12 Average Implementation Period (years) b 3.5 3.9 3.7 4.1 Percent of Problem Projects by Number a, c 12.5 11.8 21.4 8.3 Percent of Problem Projects by Amount a, c 25.0 15.1 16.5 2.8 Percent of Projects at Risk by Number a, d 12.5 11.8 21.4 8.3 Percent of Projects at Risk by Amount a, d 25.0 15.1 16.5 2.8 Disbursement Ratio (%) e 12.7 22.6 24.3 23.1 Portfolio Management CPPR during the year (yes/no) yes yes yes yes Supervision Resources (total '000 US$) 1,582 1,642 1,538 1,429 Average Supervision ('000 US$/project) 99 97 110 119 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 28 9 Proj Eval by OED by Amt (US$ millions) 1,352.6 264.7 % of OED Projects Rated U or HU by Number 21.4 11.1 % of OED Projects Rated U or HU by Amt 14.9 1.8 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 33 Annex 7 IBRD and IFC Investment Operations Program CAS Annex B3 - IBRD/IDA Program Summary Croatia As of Date 6/30/2011 Proposed IBRD/IDA Base-Case Lending Program a Strategic Rewards b Implementation b Fiscal year Proj ID US$(M) (H/M/L) Risks (H/M/L) 2009 (actual) Rijeka Gateway II 122.5 H M Develop. of EMS and Invest. Planning 28.3 H M Coastal Cities Pollution Control II 87.5 H M Subtotal IBRD 238.3 Coastal Cities Pollution Control II (GEF) 6.4 H M 2010 (actual) Fiscal, Soc. and Financ. Sector DPL 296.8 H H Justice Sector Support 36.3 H H Export Finance Intermediation Loan 141.2 H M Subtotal IBRD 474.3 2011 (actual) Economic Recovery DPL 213.0 H H EU Natura 2000 Integration 28.8 H M Subtotal IBRD 241.8 2012 (plan) AF - Trade and Transport Integration 67.0 H M Integrated Land Administration System 24.0 H M Science and Technology Repeater 29.0 H M Subtotal IBRD 120.0 Total FY2009-2012 IBRD 1,074.4 Croatia: IFC Investment Operations Program 2009 2010 2011* Commitments (US$m) Gross 56.4 0.0 0.0 Net** 56.4 0.0 0.0 Net Commitments by Sector (%) Food & Beverages - - - Primary Metals 100% - - Total 100% 0% 0% Net Commitments by Investment Instrument (%) Equity - - - Guarantee - - - Loan 100% - - Quasi loan - - - Risk product - - - Total 100% 0% 0% * As of end June, 2011 ** IFC's Own Account only 34 Annex 8 Summary of IBRD Knowledge and Advisory Services As of date 06/30/2011 Product Completion FY Cost (US$000)Audience a Objective b Completions To Date During CPS Period TA for Public Admin Reform Support 2009 50 G/D/B KG/PS Waste Mgmt Facility in NW Croatia: private sector participation potential and options (PPIAF) 2009 123 G/D/B KG/PS EU Economic Convergence Report 2010 416 G/D/B/PD KG/PD/PS Diagnostic Review of Consum Protec & Fin. Literacy 2010 264 G/D/B/PD KG/PD/PS Social Impact of the Crisis and Building Resilience 2010 130 G/D/B/PD KG/PD/PS Management of Brownfield Redevelopment 2010 234 G/D/B/PD KG/PD/PS Instit. Framework and Fiscal Risk Assessm. for PPP (PPIAF) 2010 50 G/D/B KG/PS Fiscal Responsibility Framework in Croatia 2011 50 G/D/B KG/PS IDF Grant: Enhancing Corpor Financ Report 2011 77 G KG/PS Assessment of Croatia’s Mark ets in Financial Instruments (MiFID) Directive Implementation 2011 80 G/D/B KG/PS Policy Note on Labor Market Issues in Croatia 2011 40 G/D/B KG/PS Policy Note on Pension Reform Options 2011 40 G/D/B KG/PS Long-term Care for the Elderly 2011 10 G/D/B KG/PS Underway Policy Note on Poverty Assessment Update 2012 40 G/D/B KG/PS Governance Reforms in Support of Competit. & Growth 2012 103 G/D/B/PD KG/PS/PD Croatia Science, Technology and Innovation Policy 2012 200 G/D/B KG/PS Justice Sector Public Expend & Institutional Review (Dutch Externally Fin. Output ) 2012 140 G/D/B/PD KG/PD/PS Planned The Higher Education TA 2012 100 G/D/B KG/PS ____________ a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 35 Update from LDB Croatia Annex 9 Social Indicators Social Indicators Latest single year Same region/income group .. HIC High- 1980-85 1990-95 2003-09 incom e POPULATION SP.POP.TOTL Total population, mid-year (millions) 4.7 4.7 4.4 1,116.6 SP.POP.TOTL.ZG Grow th rate (% annual average for period) 0.5 -0.5 0.0 0.7 SP.URB.TOTL.IN.ZS Urban population (% of population) 52.3 55.8 57.0 77.3 SP.DYN.TFRT.IN Total fertility rate (births per woman) .. 1.6 1.5 1.8 POVERTY (% of population) SI.POV.NAHC National headcount index .. .. 10.0 .. SI.POV.URHC Urban headcount index .. .. .. .. SI.POV.RUHC Rural headcount index .. .. .. .. INCOME NY.GNP.PCAP.CD GNI per capita (US$) .. 3,530 13,820 37,970 FP.CPI.TOTL Consumer price index (2005=100) .. 81 131 111 INCOME/CONSUMPTION DISTRIBUTION SI.POV.GINI Gini index .. .. 23.6 .. SI.DST.FRST.20 Low est quintile (% of income or consumption) .. .. 8.4 .. SI.DST.05TH.20 Highest quintile (% of income or consumption) .. .. .. .. SOCIAL INDICATORS Public expenditure SH.XPD.PUBL.ZS Health (% of GDP) .. 7.0 6.3 6.8 SE.XPD.TOTL.GN.ZS Education (% of GNI) .. .. .. 5.0 Net prim ary school enrollm ent rate (% of age group) SE.PRM.NENR Total .. 82 92 95 SE.PRM.NENR.MA Male .. .. .. 95 SE.PRM.NENR.FE Female .. .. .. 95 Access to an im proved w ater source (% of population) SH.H2O.SAFE.ZS Total .. .. 76 100 SH.H2O.SAFE.UR.ZS Urban .. .. .. 100 SH.H2O.SAFE.RU.ZS Rural .. .. .. 98 Im m unization rate (% of children ages 12-23 months) SH.IMM.MEAS Measles .. 92 98 93 SH.IMM.IDPT DPT .. 90 96 95 SH.STA.MALN.ZS Child malnutrition (% under 5 years) .. 1 1 .. Life expectancy at birth (years) SP.DYN.LE00.IN Total 71 72 76 80 SP.DYN.LE00.MA.IN Male .. 69 72 77 SP.DYN.LE00.FE.IN Female .. 77 80 83 Mortality SP.DYN.IMRT.IN Infant (per 1,000 live births) 17 9 5 6 SH.DYN.MORT Under 5 (per 1,000) .. 10 4 7 Adult (15-59) SP.DYN.AMRT.MA Male (per 1,000 population) 233 21 16 120 SP.DYN.AMRT.FE Female (per 1,000 population) 106 10 6 63 SH.STA.MMRT Maternal (per 100,000 live births) .. 12 13 15 SH.STA.BRTC.ZS Births attended by skilled health staff (%) 100 100 100 99 CAS Annex B5. This table w as produced from the CMU LDB system. 1 1 05/1 /1 Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey. 36 Key Economic Indicators Annex 10 B6 - Croatia Key Economic Indicators Annex Actual Estimate Projections 2005 2006 2007 2008 2009 2010 2011 2012 2013 National Accounts (as % of GDP) Gross domestic product a) 100 100 100 100 100 100 100 100 100 Agriculture 5 5 4.9 5.2 5.4 6 6 6 6 Industry 29 28 27.5 27.9 26.3 27 28 29 29 Services 66 67 67.6 66.9 68.2 67 66 65 65 T otal Consumption 79 78 78 78 77 77 77 77 77 Gross domestic investment 27 29 29 31 27 23 24 25 25 Government investment 5 4 4 4 3.1 2 3 3 2 Private investment (incl. increase in stocks) 23 26 25 27 24 21 21 22 23 Exports GNFSb) 42 43 42 42 35 38 41 42 42 Imports GNFSb) 49 50 50 50 39 39 43 44 44 Gross domestic savings 21 22 22 22 23 23 23 23 23 Gross national savingsc) 22 23 22 21 21 22 21 21 22 Mem orandum item s Gross domestic product (US$ mill at current prices) 44,816 49,843 59,319 69,920 63,435 60,830 62,162 65,233 70,000 GNP per capita (US$, Atlas method) 9,730 10,850 12,180 13,720 13,820 13,820 13,690 14,070 14,860 Real annual growth rates (%, calculated from previous years prices) Gross domestic product at market prices 4.3 4.9 5.1 2.2 -6.0 -1.2 1.5 2.5 3.0 Gross domestic investment 7.3 13.6 6.2 6.9 -13.5 -11.8 3.2 4.8 6.1 Real annual per capita growth rates (%, calculated from previous years prices) Gross domestic product at market prices 4.2 5.0 5.2 2.2 -5.9 -1.2 1.5 2.5 3.0 T otal consumption 3.5 3.8 6.3 1.2 -7.1 -0.9 1.0 1.9 2.0 Private consumption 4.0 3.2 6.4 0.9 -8.3 -0.9 1.2 2.5 2.7 Balance of Payme nts (US$ millions) Exports GNFSb) 18,881 21,445 25,094 29,623 22,626 24,164 25,605 27,424 29,481 Merchandise FOB 8,960 10,644 12,623 14,460 10,736 12,239 13,083 14,025 15,077 Imports GNFSb) 21,702 24,679 29,465 35,007 24,900 24,534 26,653 28,688 30,857 Merchandise FOB 18,301 21,131 25,556 30,416 21,025 20,710 22,657 24,492 26,451 Resource balance -2,821 -3,234 -4,371 -5,385 -2,274 -370 -1,048 -1,264 -1,377 Net current transfers 1,475 1,390 1,431 1,526 1,450 1,611 1,678 1,731 1,786 Current account balance -2,555 -3,325 -4,445 -6,251 -3,314 -1,203 -1,990 -2,333 -2,601 Net private foreign direct investment 1551 3200 4713 4696 1645 1190 2150 2460 2761 Net portfolio investments - 1,508 - 629 34 - 826 374 501 248 266 260 Long-term loans (net) 2,229 3,565 3,783 4,401 1,466 - 1,516 - 1,542 - 1,354 - 1,149 Other capital (net, incl. errors & ommissions) 1,241 - 926 - 3,141 - 2,434 1,131 1,039 841 508 246 Change in reservesd) - 1,022 - 1,727 - 982 391 - 1,363 - 97 204 307 209 Mem orandum item s Resource balance (% of GDP) -6.3 -6.5 -7.4 -7.7 -3.6 -0.6 -1.7 -1.9 -2.0 Current account balance (% of GDP) -5.7 -6.7 -7.5 -8.9 -5.2 -2.0 -3.2 -3.6 -3.7 Annual value growth rates (%) Merchandise exports (FOB) 9.1 18.8 18.6 14.6 -25.8 14.0 6.9 7.2 7.5 Merchandise imports (FOB) 10.5 15.5 20.9 19.0 -30.9 -1.5 9.4 8.1 8.0 Public finance (as % of GDP at marke t price s) e) Overall surplus (+)/ deficit (-) -3.1 -2.9 -2.6 -2.5 -5.1 -5.4 -5.8 -4.6 -2.9 Current revenues 39.6 40.0 41.1 40.1 38.9 37.9 36.4 36.4 35.9 Current expenditures 35.7 36.3 36.6 36.3 38.5 38.9 37.9 36.8 35.0 Current surplus (+) /deficit (-) 3.9 3.7 4.6 3.9 0.4 -1.0 -1.5 -0.4 0.9 Capital expenditure 6.8 5.7 6.2 6.1 5.4 4.2 4.2 4.1 3.8 Foreign financing -1.5 -1.2 -0.5 -0.3 2.2 2.3 2.7 2.8 2.6 Mone tary indicators M4/GDP 58.0 62.7 67.8 65.2 66.6 69.6 72.0 73.4 75.1 Growth of M4(%) 10.5 18.0 18.3 4.3 -0.9 4.4 6.7 7.5 8.2 Private sector credit growth (%) 17.2 22.9 15.0 10.5 -0.6 6.9 9.4 6.4 6.9 Domestic credit / GDP (%) 55.9 63.0 66.2 67.5 69.1 74.0 78.5 79.2 80.1 Price de ve lopme nts Real exchange rate (1995=100) f 99.9 100.5 99.5 96.0 93.3 93.0 92.8 92.9 93.1 Exchange rate at end year (LCU/US$) f 6.2 5.6 5.0 5.2 5.1 5.6 5.6 5.6 5.6 Real interest rates 6.5 6.0 6.6 4.5 8.6 8.5 6.1 5.8 5.9 Consumer price index (% change) g 3.3 3.2 2.9 6.1 2.4 1.1 2.7 2.6 2.5 GDP deflator (% change) 3.3 4.0 4.1 6.1 3.3 1.0 1.6 2.9 2.7 a) GDP at factor cost b) 'GNFS" denotes "goods and nonfactor services" c) Includes net unrequired transfers excluding official capital grants. d) Includes use of IMF resources. e) Consolidated general government. f) "LCU" denotes "local currency units". An increase in real exchange rate denotes depreciation. g) Retail price index by 2002; since 2003 CPI 37 Annex 11 Key Exposure Indicators CAS Annex B7 - Key Exposure Indicators - Croatia Actual Estimate Projections Indicator 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total debt outstanding and 30,480 38,545 48,383 55,584 61,885 60,703 61,745 62,521 62,917 a disbursed (TDO) (US$m) Net disbursements (US$m)a 3,309 5,424 7,059 9,780 8,441 4,553 1,042 776 396 Total debt service (TDS) 4,632 8,275 9,062 8,249 10,381 9,113 11,761 10,997 10,443 (US$m)a Debt and debt service indicators (%) TDO/XGSb 154.7 174.4 188.5 183.8 267.5 245.7 235.7 222.7 208.3 TDO/GDP 68.0 77.3 81.6 79.5 97.6 99.8 99.3 95.8 89.9 TDS/XGS 23.5 37.4 35.3 27.3 44.9 36.9 44.9 39.2 34.6 Concessional/TDO 1.9 1.5 1.0 0.5 0.0 0.0 0.0 0.0 0.0 Interest payments/GDP 1.8 2.2 2.6 2.7 2.5 2.4 2.6 2.6 2.5 IBRD exposure indicators (%) IBRD DS/public DS 5.0 5.0 6.5 7.4 5.6 5.5 4.2 5.2 4.9 c Preferred creditor DS/public DS (%) 8.8 9.2 12.0 14.0 10.8 13.4 11.5 13.8 14.7 IBRD DS/XGS 0.5 0.5 0.6 0.6 0.8 0.7 0.7 0.7 0.5 IBRD TDO (US$m)d 808 1,031 1,087 1,215 1,229 1,435 1,625 1,716 1,676 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes equity and quasi-equity types of both loan and equity instruments. 38 Annex 12 IBRD Operations Portfolio Operations Portfolio (IBRD/IDA and Grants) As Of Date 7/6/2011 Closed Projects 33 IBRD/IDA * Total Disbursed (Active) 463.03 of w hich has been repaid 50.49 Total Disbursed (Closed) 1,162.97 of w hich has been repaid 764.21 Total Disbursed (Active + Closed) 1,626.00 of w hich has been repaid 814.70 Total Undisbursed (Active) 537.81 Total Undisbursed (Closed) 2.00 Total Undisbursed (Active + Closed) 539.81 Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a/ Development Implementation Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd Objectives Progress P104749 JUSTICE SECTOR SUPPORT S S 2010 36.3 34.19736 -0.79859 P100639 AGRI POLLUTION (GEF) MS S 2008 5 3.666877 -0.23312 P091715 AGRIC ACQUIS COHESION S S 2006 30.14 10.72445 7.0804598 3.576155 P102732 MS COASTAL CITIES POLLUTION CTRL MS 2009 87.5 80.59214 13.98728 P102395 MS Coastal Cities Pollution Control 2 -GEF MS 2009 6.4 6.112109 2.2121088 P086671 MS EDUC SECTOR DEV PROGRAM (CRL) S 2006 85 7.89823 1.88429 P086669 EMS & INVEST PLANNINGMU (DEMSIP) U 2009 28.3 27.44748 11.49297 P111205 EU NATURA 2000 S S 2011 28.8 27.55678 P116080 EXPORT FIL S S 2010 141.22 33.52341 -25.85401 P098948 INLAND WATERS PROJECT S MS 2007 133.41 88.28477 41.709931 35.46993 P102778 REVENUE ADMIN MODERN (RAMP) MS MS 2007 68 34 26.10269 22.026742 -2.47326 P043195 RIJEKA GATEWAY MS MS 2004 204.5 10.48322284 49.35872 -5.193052 12.10422 P102365 RIJEKA Gateway II (new FY09)S MS 2009 122.5 122.1938 6.903207 P093767 TRADE & TRANS INTEG S MS 2007 75.3 29.93272 15.726911 Overall Result 1040.97 11.4 44.48322284 547.5915 88.565804 48.44392 39 Annex 13 IFC Committed and Outstanding Investment Portfolio Amounts in US Dollar Millions as of 06/30/2011 COMMITTED OUTSTANDING EQUIT QUASI- PARTICI EQUIT QUASI- PARTICI FY Approval Company LOAN GT/RM** LOAN GT/RM Y EQUITY* -PANT Y EQUITY -PANT 1990/ 1998/ 1999/ 2003 Belisce 3.62 0 0 0 0 3.62 0 0 0 0.00 2006/ 2008 Belje 52.11 0 0 0 0 52.11 0 0 0 0.00 2009 CMC Sisak 57.90 0 0 0 0 21.71 0 0 0 0.00 2000/ 2003 E&S Bank 3.86 0 0 0 0 3.86 0 0 0 0.00 2007 GSHR Holding Ltd 39.81 2.73 0 0 27.50 39.81 0.00 0 0 27.50 2005 PBZ 50.66 0 0 0 0 50.66 0 0 0 0.00 2008 PIK Vrbovec 28.95 0 0 0 0 28.95 0 0 0 0.00 2004/ 2005/ 2010 Schwarz Group 19.90 0 0 0 0 19.90 0 0 0 0.00 256.8 27.50 Total Portfolio 2.73 0 0 220.63 0.00 0 0 27.50 2 *Quasi Equity includes both loan and equity types **Denotes Guarantee and Risk Management Products 40 IBRD 33394R1 CR O ATI A This map was produced by the Map Design Unit of The World Bank. The boundaries, SELECTED CITIES AND TOWNS MAIN ROADS colors, denominations and any other information shown COUNTY (ZUPANIJA) CAPITALS RAILROADS on this map do not imply, on the part of The World Bank NATIONAL CAPITAL COUNTY (ZUPANIJA) BOUNDARIES Group, any judgment on the legal status of any territory, or any endorsement or RIVERS INTERNATIONAL BOUNDARIES acceptance of such boundaries. 14°E 15°E 16°E 17°E 18°E 19°E A US TR U AU STR I A To Zalaegerszeg To MEDIMURSKA To Graz Kaposvar Cakovec To Varazdin VARAZDINSKA KOPRIVNICKO- HUNGA RY Ljubljana Koprivnica KRIZEVACKA Krapina KRAPINSKO- Durdevac To 46°N Baja 46°N ZAGORSKA To SLOVEN SLOVENI S LOVEN I A To ZAGREBACKA Bjelovar Pecs To Pecs To Ljubljana ZAGREB Virovitica Sombor Ivanic BJELOVARSKO- ZAGREBACKA GRAD Grad BILOGORSKA OSJECKO- VIROVITICKO- To To To ZAGREB Daruvar PODRAVSKA BARANJSKA To Sombor Trieste Trieste Ljubljana Osijek K up a Sisak Karlovac Sav POZESKO-SLAVONSKA Nasice a Novska ˘ Pozega Vukovar un D ISTARSKA Rijeka ay ( Glina Danube) Pazin Vinkovci SISACKO-MOSLAVACKA BRODSKO- Slav ˘ Porec To PRIMORSKO- KARLOVACKA POSAVSKA Brod VUKOVARSKO- Novi Sad GORANSKA SRIJEMSKA To Dvor To To To Stalije Krk Bihac Prijedor Banja Luka Ruma 45°N 45°N Senj To Doboj To To Pula Doboj Tuzla Otocac To Bihac Cres Rab LICKO- Jablanac SENJSKA Un a Losinj Karlobag Gospic Pag Udbina SERBIA Gracac To BOSNI A A ND BO SNIA AND Zadar ZADARSKA Glamoc HERZEGO VINA Pasman 44°N Dugi 44°N Knin Dinara Otok (1830 m) Vodice To Sibenik Livno SIBENSKO- Sinj Adr iat ic KNINSKA Trogir Split Sea Imotski To Mostar SPLITSKO- I TA LY DALMATINSKA Brac Makarska To Mostar Hvar 43°N Vis Ploce Metkovic 43°N Korcula Peljesac DUBROVACKO- MONTENEGRO Mljet To NERETVANSKA Trebinje Dubrovnik CROATIA Gruda To Podgorica 0 20 40 60 Kilometers 0 20 40 Miles 42°N 14°E 15°E 16°E 17°E 18°E 19°E JULY 2006