PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE October 11, 2016 Report No.: 109593 Operation Name Second Fiscal Consolidation, Sustainable Energy, and Competitiveness Programmatic Development Policy Financing Region Middle East and North Africa Country Arab Republic of Egypt Sector General energy sector (50%); Macro-Fiscal Management (30%); Trade and Competitiveness (20%) Operation ID P161228 Lending Instrument Development Policy Lending Borrower(s) Arab Republic of Egypt Implementing Agency Ministry of International Cooperation Date PID Prepared October 11, 2016 Estimated Date of Appraisal November 15, 2016 Estimated Date of Board January 12, 2017 Approval Corporate Review Decision November 21. 2016 Country and Sector Background Egypt, the largest country in the MENA region with a population of 89 million, and the fourth largest economy with a GDP of $320 billion in 2014, is at an inflexion point within a region laden with instability and conflict. The 2011 Arab Spring - generated by the long-standing weaknesses in public service delivery, incapacity of growth to produce positive social outcomes, and weak competition and transparency – the government has taken important initial steps in implementing key reforms that, if sustained, are likely to put the economy on a growth track and increase the chances that future growth will be more inclusive than in the past. The DPF series aims to support and strengthen these significant new reforms. Operation Objectives The DPF series is built around three pillars, which are also the Program Development Objectives (PDOs) of this operation: (1) advance fiscal consolidation through higher revenue collection, greater moderation of the wage bill growth, and stronger debt management; (2) ensure sustainable energy supply through private sector engagement; and (3) enhance the business environment through investment laws, industrial license requirements as well as enhancing competition. Rationale for Bank involvement This is the second operation in a series of three DPFs, covering the period 2015-17. Although there are important risks, including from the macroeconomic and reform implementation perspectives, the proposed DPF series will play a key strategic role in deepening Bank support for Egypt’s much needed structural reforms. The Bank’s engagement will also provide global lessons and experience relevant for reform sequencing and implementation. Tentative financing Source (US$, millions) Borrower 0 International Bank for Reconstruction and Development 1,000 Total 1,000 Institutional and Implementation Arrangements The Ministry of International Cooperation is the main coordinating agency for monitoring and evaluation among the five other participating ministries. The Prior Actions detailed in this operation are the prime responsibility of five ministries: Ministry of Finance; Ministry of Electricity and Renewable Energy; Ministry of Petroleum; Ministry of Planning and Ministry of Trade and Industry. The inter-ministerial working group created for the DPF remains functional. The Ministry of International Cooperation is the coordinator with other ministries on monitoring of the results indicators, which are based on routinely published sector indicators. The program outcomes are being monitored through the measurement of the progress toward the achievement of results indicators included in the policy and results matrix. The Ministry of International Cooperation has the responsibility of presenting the information related to the reform implementation and progress made towards results on time and in a format satisfactory to the Bank. Risks and Risk Mitigation The overall risk rating of this operation is high. The major risks that could have a substantial impact on the operation’s ability to achieve its development objective include: (a) macroeconomic challenges associated with high fiscal deficit and low levels of foreign exchange reserves; (b) political and governance challenges; (c) challenges on sector strategies; and (d) weak institutional and implementation capacity. These risks, if materialized, could singularly or jointly impact the Government’s willingness and ability to implement the reforms or make the outcome of the development agenda less successful. However, the risk of not engaging outweighs the program risks: The region is experiencing an unprecedented turmoil with ongoing conflicts in Egypt’s neighborhood. Managing regional stability, promoting sustainable growth, social inclusion and impact of displacement require the highest consideration of the global policy makers; where Egypt’s political, economic and social stability is essential. Any risk for instability in Egypt has enormous implications for the region, Europe and the wider global community. Egypt has taken significant steps towards sustainable private sector led growth that is focused on job creation, and the World Bank Group has a unique opportunity to realign its relationship and facilitate the continued implementation of Egypt’s reform program over the medium term, complimenting with IMF’s proposed three year program on Extended Financing Facility. Poverty and Social Impacts and Environment Aspects The GoE is undertaking a number of deep and structural reforms, the benefits of which will take time to be realized and may have adverse distributional impacts in the short term. The program of reforms supported by the DPF series are areas identified in the World Bank Group’s Systematic Country Diagnostic (SCD) as being important for poverty reduction and shared prosperity in Egypt. For instance, better governance in the power and gas sectors can help improve delivery of these services, potentially benefitting all customers. Several of the measures can indirectly support private sector job creation which would offer a more sustainable way to raise welfare and living standards because households with employed members are significantly less likely to be among the bottom 40. Fiscal transparency measures such as citizen budgets can educate the public about the government’s activities and help build public support for difficult policy reforms provided there is a strong outreach to citizens to raise awareness about such measures. The GoE has committed to reallocating a share of the resources used for energy subsidies to social protection, and this can help households raise their welfare in the long term through better education and health outcomes. Overall, the realization of the long run benefits of these reforms depends on how well they are implemented and how the GoE manages the associated distributional and social consequences in the short term. The policies supported by the proposed DPF are not likely to have negative impacts on the country’s environment or its natural resource base. The World Bank assessed whether specific country policies supported by the DPF are likely to have significant effects on the country’s environment, forests, and other natural resources. The assessment concluded that the proposed DPF operation is expected to result in overall positive effects on Egypt’s environment and natural resources. Pillar 2 of this proposed operation, which pertains to enhancing sustainable energy supply, comprises a number of policy interventions that are expected to bring about significant changes in the country’s energy profile, in particular an increase in fuel switching to natural gas in electricity generation and by the production sectors of Egypt. Other planned changes include the shift toward more renewables in the electricity generation mix. Furthermore, it is anticipated that the planned gradual increase in electricity tariffs will lead to lower consumption through rationalization and higher efficiency of use. These interventions will clearly result in environmental benefits that are to be realized through the decrease in greenhouse gas (GHG) emissions, which contributes to Egypt’s climate change agenda; decrease in lower emissions of air pollutants; and thus contribute to a reduction of health risks and improvement of air quality. Contact point World Bank Contact: Ashish Khanna Title: Lead Energy Specialist Tel: +20-2 2574-1670/1516 Email: akhanna2@worldbank.org Location: Cairo, Egypt (IBRD) Contact: Ibrahim Chowdhury Title: Senior Economist Email: ichowdhury@worldbank.org Location: Cairo, Egypt (IBRD) Borrower Contact: Dr. Sahar Nasr Title: Minister of International Cooperation Email: snasr@moic.gov.eg For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop