Document of The World Bank Report No: ICR00003187 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-81760) ON A LOAN IN THE AMOUNT OF EURO 1 BILLION (US$ 1.333 BILLION EQUIVALENT) TO ROMANIA FOR A DEVELOPMENT POLICY LOAN WITH A DEFERRED DRAWDOWN OPTION (DPL-DDO) November 2, 2015 Macroeconomics and Fiscal Management Global Practice (GMFDR) Central Europe and the Baltic Countries Department (ECCU5) Europe and Central Asia Region (ECA) CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 26, 2015) Currency Unit = RON 1.00 = US$ 0.25 US$ 1.00 = 4.01 FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IFIs International Financial Institutions ANAF National Tax Administration Agency IMF International Monetary Fund ANRE Romania Energy Regulatory Authority LDP Letter of Development Policy CDS Credit Default Spread LoI Letter of Intent CFAA Country Financial Assessment Report MAP Modernize Public Administration CFR Romanian Railways Company MDGs Millennium Development Goals CFR Marfa Freight Railway Company MoH Ministry of Health CNAS National Health Insurance House MoLFSP Ministry of Labor, Family and Social Protection CPAR Country Procurement Assessment Report MoPF Ministry of Public Finance CPS Country Partnership Strategy MoT Ministry of Transport CPSPR CPS Progress Report MoU Memorandum of Understanding DDO Deferred Drawdown Option MTEF Medium-Term Expenditure Framework DGF Deposit Guarantee Fund NBR National Bank of Romania DPL Development Policy Loan NGOs Non-Governmental Organizations EBCI European Bank Coordination Initiative NHIH National Health Insurance House EBRD European Bank for Reconstruction and NPL Non-performing Loans Development EC European Commission NRP National Reform Program EIB European Investment Bank OECD Organization for Economic Cooperation and Development EU European Union OPCOM Electricity Market Operator FBS Fee Based Services PAL Programmatic Adjustment Loan FDI Foreign Direct Investment PEIR Public Expenditure and Institutional Review FEG-DPL Fiscal Effectiveness and Growth Development PFM Public Financial Management Policy Loan FRL Fiscal Responsibility Law PODKA Program for Development of Administrative Capacity FRs Functional Reviews RON Romanian Leu FX Foreign Exchange SASM Social Assistance System Modernization Project FY Fiscal Year SDR Special Drawing Rights GDP Gross Domestic Product SOEs State-owned Enterprises GMI Guaranteed Minimum Income UPL Unitary Pay Law HTA Health Technology Assessment USD United States Dollars IBRD International Bank for Reconstruction and VAT Value Added Tax Development IDF Institutional Development Fund WB World Bank IEG Independent Evaluation Group Vice President: Cyril Muller Country Director: Jean Francois Marteau Global Practice Director: Satu Kahkonen Sector Manager: Ivailo Izvorski Task Team Leader: Pedro L. Rodriguez Task Team Co-Leader Catalin Pauna ICR Team Leader Catalin Pauna ROMANIA DEVELOPMENT POLICY LOAN WITH A DEFERRED DRAWDOWN OPTION CONTENTS Data sheet ............................................................................................................................... i A. Basic Information.............................................................................................................. i B. Key Dates .......................................................................................................................... i C. Ratings Summary .............................................................................................................. i D. Sector and Theme Codes ................................................................................................. ii E. Bank Staff ......................................................................................................................... ii F. Results Framework Analysis ............................................................................................ ii G. Ratings of Program Performance in ISRs .........................................................................v H. Restructuring (if any) ........................................................................................................v 1. Program Context, Development Objectives and Design ...................................................1 1.1 Context at Appraisal ....................................................................................................1 1.2 Original Program Development Objectives (PDO) and Key Indicators ......................2 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification..........................................................................................................4 1.4 Original Policy Areas Supported by the Program........................................................4 1.5 Revised Policy Areas ...................................................................................................6 1.6 Other significant changes in design, scope and scale, implementation arrangements and schedule, and funding allocations: ..............................................................................6 2. Key Factors Affecting Implementation and Outcomes .....................................................6 2.1 Program Performance ..................................................................................................6 2.2 Major Factors Affecting Implementation: ...................................................................6 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: ..........10 2.4 Expected Next Phase/Follow-up Operation:..............................................................11 3. Assessment of Outcomes .................................................................................................11 3.1 Relevance of Objectives, Design and Implementation ..............................................11 3.2 Achievement of Program Development Objectives ..................................................12 3.3 Justification of Overall Outcome Rating ...................................................................17 3.4 Overarching Themes, Other Outcomes and Impacts .................................................17 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops ..........20 4. Assessment of Risk to Development Outcome................................................................20 5. Assessment of Bank and Borrower Performance ............................................................22 5.1 Bank Performance ......................................................................................................22 5.2 Borrower Performance ...............................................................................................24 6. Lessons Learned ..............................................................................................................25 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .................26 Annex 1 Bank Lending and Implementation Support/Supervision Processes ....................28 (a) Task Team members...................................................................................................28 (b) Staff Time and Cost....................................................................................................28 Annex 2. Beneficiary Survey Results ..................................................................................29 Annex 3. Stakeholder Workshop Report and Results..........................................................30 i Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ............................31 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ..............................39 Annex 6. List of Supporting Documents .............................................................................43 MAP .................................................................................................................................44 Tables Table 1. Government Financing Requirements, 2012-2015 (in billion €) ............................3 Table 2. DPL-DDO Prior Actions .........................................................................................5 Table 3. DPL-DDO Selected Macroeconomic Indicators, 2011-2015 ...............................13 Table 4. DPL-DDO Status of PFM Outcome Indicators as Approved ...............................14 Table 5. DPL-DDO Status of Energy Sector Outcome Indicators as Approved ...............15 Table 6. DPL-DDO Status of Health Sector Outcome Indicators as Approved .................16 Box 1: Budget Revenue Mobilization Remains the Main Fiscal Challenge Box 2: Health Standards Remain Below Most EU Member-States ii Data sheet A. Basic Information Development Policy Country: Romania Program Name: Operation - DDO Program ID: P130051 L/C/TF Number(s): IBRD-81760 ICR Date: 10/27/2015 ICR Type: Core ICR Lending Instrument: DPL Borrower: ROMANIA Original Total USD 1.3333 B Disbursed Amount: USD 1.37015 B Commitment: Revised Amount: Implementing Agencies: Ministry of Public Finance Cofinanciers and Other External Partners: International Monetary Fund, European Union B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 02/27/2012 Effectiveness: 09/11/2012 01/11/2013 Appraisal: 04/18/2012 Restructuring(s): N/A Approval: 06/12/2012 Mid-term Review: 10/23/2013 11/06/2013 Closing: 12/31/2015 10/27/2014 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating: Performance any) Potential Problem Program Quality at Entry No None at any time (Yes/No): (QEA): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA): i DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) General public administration sector 34 34 Health 33 33 Transmission and Distribution of Electricity 33 33 Theme Code (as % of total Bank financing) Macroeconomic management 0 20 Health system performance 33 20 Public expenditure, financial management and procurement 22 20 State-owned enterprise restructuring and privatization 34 20 Regulation and Competition Policy 0 10 Tax policy and administration 11 10 E. Bank Staff Positions At ICR At Approval Vice President: Cyril Muller Philippe Le Houérou Country Director: Jean Francois Marteau Peter Harrold Practice Ivailo Izvorski Satu Kahkonen Manager/Manager: Program Team Leader: Pedro L. Rodriguez R. Sudharshan Canagarajah Team Co-Leader Catalin Pauna Catalin Pauna ICR Team Leader: Catalin Pauna ICR Primary Author: Eugen Scanteie F. Results Framework Analysis Program Development Objectives: The DPL-DDO objective was to support the Government of Romania’s efforts to meet the fiscal sustainability goals as defined by the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (henceforth referred to as the Fiscal Compact). The reforms supported by the DPL- DDO aimed to: (i) improve public financial management to enhance the efficiency of public spending and the Government’s revenue-raising capacity through better enforcement of tax laws; (ii) improve governance of SOEs in the energy sector to generate savings, and attract the private capital needed to modernize plants and increase their competitiveness; and (iii) enhance fiscal sustainability of public health care through the reduction of unjustified outlays and the reallocation of resources to high-return preventive care and health promotion programs. ii Revised Program Development Objectives (if any, as approved by original approving authority) Not Applicable (a) PDO Indicator(s) 1 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years PDO Indicator 1 Tax revenue Value €37.0 billion €37.5 billion €41.1 billion Date Achieved 2011 2014 2014 Comments Exceeded. The reform of tax administration yielded increasingly better results. PDO Indicator 2 Reduced tax administration costs as percentage of tax revenue Value 1.11% 1.05% 1.03% Date Achieved 2011 2014 June 2015 Not met in 2014, but met in 2015. Administration costs increased in 2013 to 1.15% due to the restructuring of the Tax Agency, but have come down since 2014, as the Comments costs of restructuring gradually came to an end. At end-June 2015, the administrative costs were 1.03% of the tax revenue collected. PDO Indicator 3 General Government deficit in cash terms as percentage of GDP Value 4.2% Below 3% 1.9% Date Achieved 2011 2012-2014 2014 Exceeded. The cash deficit of the general government came down to 1.9% of GDP Comments in 2014 following substantial fiscal consolidation, mostly on the expenditure side. PDO Indicator 4 Hidroelectrica annual gross pre-tax revenue Value €755 million €898 million €765.8 million Date Achieved 2010 2014 2014 Not met. The 2014 gross pre-tax revenues were below the target due to low water Comments inflows and the decline in wholesale electricity prices, but the profitability of the company increased substantially due to restructuring while in insolvency (see text). Electricity sales to non-residential consumers at regulated tariffs, as percentage of PDO Indicator 5 Romania’s electricity supply Value About 25% 0% 0% Date Achieved 2011 2014 2014 Met. Tariffs were fully deregulated for electricity sales to non-residential Comments consumers on January 1st, 2014. PDO Indicator 6 Electricity sales at regulated tariffs as percentage of Romania’s electricity supply. Value 50% 25% 17.9% Date Achieved 2011 2014 2014 Exceeded. Sales of electricity at regulated prices declined fast due to the full liberalization of the non-household market and the gradual liberalization of the Comments household market by 2018. The target for end 2014 was achieved by a large margin. Percentage of Romania’s electricity generation sold in OPCOM Power Exchange PDO Indicator 7 and Transelectrica balancing market Value 25% Minimum 50% 83% Date Achieved 2011 2014 2014 Exceeded. The Energy Law adopted in 2012 stipulates that electricity for the non- Comments regulated market should be sold exclusively on the OPCOM Exchange. This led to a significant increase in the sales of electricity on OPCOM. iii Percentage of directly negotiated bilateral contracts of SOEs’ electricity generation PDO Indicator 8 sales. Value 25% 20% 9.2% Date Achieved 2011 2014 2014 Exceeded. The new Energy Law does not allow SOEs in the energy sector to negotiate new sale contracts bilaterally (outside the power exchange). At end-2014 Comments there were only three bilateral contracts left in place, of which two expired in 2015 (see below). PDO Indicator 9 Pricing of SOEs’ electricity sales through directly negotiated bilateral contracts. Well below market prices At market prices at All new sale contract Value at OPCOM Power OPCOM Power at market prices Exchange Exchange Date Achieved May 2012 2014 2014 Met. Neither Hidroelectrica nor any other electricity SOE have concluded any new Comments bilateral contracts since 2012. Potential savings estimated at €100 million by 2014 as a result of a revision of the PDO Indicator 10 basic package of health services. Savings of €100 Value Zero savings €26 million million Date Achieved 2011 2014 2014 Not met. The team estimated savings of around €26 million during 2012-2014 from Comments eritropoetine and gingko-biloba. At the same time, more molecules (drugs) were added to the basic package in 2014 (see text). PDO Indicator 11 Number of hospital beds contracted by NHIH Value 129,524 123,127 121,579 Date Achieved 2011 2013 2014 Exceeded. The reduction in the number of beds exceeded initial targets presented in the Hospital Rationalization Strategy. The national hospital bed plan approved Comments by the Government projects further reductions of 1,000 beds in 2015 and 1,000 beds in 2016. Health prevention and promotion programs as percentage of MoH budget for PDO Indicator 12 National Health Programs Value 16% 15% 36.9% Date Achieved 2011 2015 2014 Exceeded. Original PAD baseline of 10% was subsequently recalculated to 16% by MoH. Health prevention and promotion programs received substantial more Comments resources in the MoH budget as part of the strategy of the government to shift the focus of the health policy towards prevention. (b) Intermediate Outcome Indicator(s) Not Applicable 1 A detailed assessment of the progress achieved in meeting the targets captured by the PDO indicators is provided in Section 3.2 Achievement of Program Development Objectives. Figures are year-end unless otherwise stated. iv G. Ratings of Program Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/27/2012 Satisfactory Satisfactory 0.00 2 01/01/2013 Moderately Satisfactory Moderately Satisfactory 0.00 3 10/23/2013 Satisfactory Satisfactory 962.05 4 06/11/2014 Satisfactory Satisfactory 1,370.15 H. Restructuring (if any) Not Applicable v 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. The Development Policy Loan with a Deferred Drawdown Option (DPL-DDO) was appraised and negotiated in April 2012 with the coalition government that had implemented the DPL1-3 program during 2009-2011. The coalition Government which was comprised at the time of the Democratic Liberal Party (DLP), the Hungarian Union of Democrats in Romania (HUDR) and the National Union for the Progress of Romania (UNPR) vigorously pursued fiscal consolidation. The President supported the difficult adjustment measures proposed by the Government, and addressed the nation repeatedly to explain and defend these measures. The coalition enjoyed a frail parliamentary support, counting on a small majority in the lower chamber and almost parity with the opposition in the Senate. In May 2012 a new coalition government was formed by the Social-Liberal Union (USL), comprised of the Social Democratic Party (PSD) and the National Liberal Party (PNL), joined by UNPR and the Conservative Party (PC). The new coalition continued the implementation of the reform agenda supported by the DPL-DDO. 2. During 2009-2011 – prior to the DPL-DDO approval-- Romania implemented a program of steep fiscal consolidation, tight monetary policy and careful management of financial sector risks, with the support of the European Commission, the IMF and the World Bank. The program was necessary because Romania entered the financial crisis with large domestic and external imbalances. In 2008, the headline fiscal deficit reached 4.8 percent of GDP (the structural fiscal deficit was even larger at 7.5 percent of GDP), while the current account deficit was 11.6 percent of GDP, prompting the Government to take swift action to correct the imbalances. As a result of these actions, the structural fiscal deficit fell to 2.8 percent in 2011, annual average inflation declined from 7.8 percent to 5.8 percent, and the financial sector weathered well the impact of the international crisis, with no bank failures and adequate capital adequacy and liquidity ratios. Nonetheless, non-performing loans increased and credit to the economy did not recover. The economy showed signs of recovery in 2011 with a 2.2 percent growth driven by strong performance in agriculture and strong export dynamism. Exports advanced by 31 percent in 2011 in Euro terms compared with 2008. The Government’s program was supported by a €20 billion financial package by the IMF (€13 billion Stand-By Arrangement, SBA), the EU (€5 billion co-financing), the European Bank for Reconstruction and Development (EBRD)/European Investment Bank (EIB) (€1 billion lending), and the International Bank for Reconstruction and Development (IBRD) (€1 billion DPL1-3). 3. The DPL-DDO, together with successive IMF and EU programs, provided a fiscal buffer to the Government in the context of fiscal consolidation and heightened external uncertainty, while supporting the Government’s structural reforms agenda. The external conditions and the pro-cyclical fiscal stance pursued up to the beginning of the crisis forced the Government to center the 2009-2011 reforms on crisis management, with emphasis on fiscal consolidation. Though the repercussions of the global financial crisis began to subside, it became clear that Europe was facing a period of weak growth and heightened uncertainty. At the same time, the crisis brought to surface important weaknesses of the Romanian economy, which required decisive Government reaction. In response, the Authorities focused on the need to consolidate fiscal gains, build fiscal buffers and accelerate structural reforms to boost a sustainable economic recovery in the context of a weak external environment, focusing on reforms in energy, health and state-owned enterprises. Moreover, the Authorities were 1 confronted with new policy challenges stemming from Romania’s adherence to the EU Fiscal Compact that set more stringent fiscal rules and guidelines in response to the protracted economic crisis 2. 4. The 2011-2013 National Reform Program 3 (NRP) of the Government articulated a medium-term agenda of fiscal management and structural reform which helped underpin the DPL-DDO. The NRP marked a gradual shift of the reform agenda away from crisis management and towards renewed growth and competitiveness gains, with a view to resuming and accelerating progress towards convergence with EU incomes and standards of living. In line with the DPL-DDO agenda, the NRP addressed (i) public finance reforms to abide by the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the Fiscal Compact) with the EU; (ii) energy sector reforms and in particular governance of energy state-owned enterprises (SOEs) and energy market liberalization; and (iii) public health care financial sustainability. Public finance reforms planned for 2012-2014 focused on strengthening fiscal discipline, on tax policies and tax administration and on laying the foundations for the strengthening of linkages between planning and spending. Energy sector objectives included improved governance and contracting practices in SOEs, as well as legislative and regulatory reforms to deregulate markets, enhance competition and attract private investment. Health sector reforms sought to contain rising costs, increase the efficiency of public spending for health, and improve the quality and equity of services. 5. The DPL-DDO was requested by the Government during the consultations for the preparation of the mid-term Progress Report on the Country Partnership Strategy (CPS) 4 and was consistent with the FY09-13 CPS. The focus and the design of the DPL- DDO reflected: (i) the more protracted crisis and the greater impact of the unfavorable economic climate in the EU, demanding rapid responses; (ii) the need to harmonize the DPL- DDO objectives and implementation timing with the IMF and EU programs; and (iii) the need to express the institutional and legal reforms proposed by the CPS into quick deliverables with monitorable outcomes. The DPL-DDO was aligned with the objectives of the FY09-13 CPS under the pillars of public sector reform; growth and competitiveness; and social and spatial inclusion, namely to: (i) reduce fiscal vulnerabilities by restoring budget discipline, improving the effectiveness and efficiency of public expenditures, and improving resource mobilization; (ii) improve the business environment and the capacity to enforce competitive business practices in the marketplace; (ii) support Romania in implementing its energy strategy in line with the EU Directives; and (iv) support the design and implementation of the Government’s health sector reform program to improve the efficiency and quality of health services, mobilize additional resources for health and improve health outcomes. 1.2 Original Program Development Objectives (PDO) and Key Indicators 6. The DPL-DDO extended and deepened Romania’s 2009-2011 reform agenda in the areas of public finance, public health, and energy sector governance. In synergy with 2 Romania signed in 2012 the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (known as the Fiscal Compact), committing to reducing its structural fiscal deficit to the Medium-Term Objective (MTO) of one percent of GDP by 2015. 3 The NRP is a program of structural policy measures prepared by the EU members in the context of the EU-wide Europe 2020 Strategy. It presents the three-year ahead policy agenda through which an EU member country proposes to meet its Europe 2020 targets for smart, sustainable and inclusive economic development. 4 The mid-term Progress Report on the CPS was finalized in November 2011 and proposed adjustments to the FY 09-13 CPS, which was prepared before the outburst of the crisis, to respond to the uncertain situation in the EU at the time, help accelerate economic recovery and manage fiscal and financial risks. 2 IMF and EU precautionary programs concluded in 2011 and 2013, the DPL-DDO helped Romania’s efforts to meet the fiscal sustainability goals as defined by the EU Fiscal Compact. Consistent with the timing envisaged for effectiveness, the PDOs of the DPL-DDO were formulated for a three-year period and included: (i) improving public financial management to enhance the efficiency of public spending, and the Government’s revenue-raising capacity through better enforcement of tax laws; (ii) improving governance of SOEs in the energy sector to generate savings and attract the private capital needed to modernize plants and increase competitiveness; and (iii) enhancing fiscal sustainability of public health care through reduction of inefficient outlays and reallocation of resources to high-return preventive care and health promotion programs. 7. The financing provided by the DPL-DDO helped the Government to increase its fiscal buffer (Table 1). The fiscal buffer was defined in the Government’s Public Debt Strategy 2011-13, and was in accordance with the Convergence Program 5 for 2012-2015 and with the agreements with the EC and the IMF. The fiscal buffer consisted of: (i) funds held at the National Bank of Romania (NBR); and (ii) the DPL-DDO funds, which could be drawn upon by the Government in case of shocks that were beyond the control of the Government and could cause challenges to the financing strategy. It was the objective of the Government to build a fiscal buffer equivalent to about 4 months of financing needed for 2012 and beyond amounting to about € 5-6 billion 6. Table 1. Government Financing Requirements, 2012-2015 (in billions of euros) 2012 2013 2014 2015e Government financing requirements Consolidated budget deficit 3.3 3.6 2.8 2.9 Primary deficit 0.9 1.3 0.6 0.5 Interest payments 2.4 2.3 2.2 2.4 Amortization 12.0 13.2 10.9 10.6 Domestic 1/ 10.3 10.8 9.2 7.3 External 1.7 2.4 1.7 3.3 Gross financing requirements 15.3 16.8 13.7 13.5 Fiscal buffer 1/ 3.5 5.5 6.9 5.8 Source: Ministry of Public Finance and Bank staff estimates 1/ December of each year 8. The DPL-DDO outcome indicators included: (i) tax revenue performance and tax administration costs; (ii) cash budget deficits; (iii) Hidroelectrica’s financial performance; (iv) deregulation of electricity tariffs; (v) liberalization of electricity markets, including contractual practices and prices; (vi) containment of costs for drugs and hospital beds reimbursed by the 5 A Convergence Program is a document prepared annually by an EU member state which is not part of the Eurozone in which it outlines its medium term policy agenda (three years ahead) enabling it to reach or maintain its Medium Term Budgetary Objectives (MTOs) as committed to through the Fiscal Compact. 6 This was also stipulated in the Memorandum of Economic and Financial Policies agreed with the IMF and the EC in February 2012. 3 National Health Insurance House (NHIH); and (vii) reallocation of the MoH budget to foster health prevention and promotion programs. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 9. There were no changes in the proposed PDOs and the results framework of the DPL-DDO. However, to better capture the complexity of the reforms supported by the DPL- DDO and their outcomes, four additional indicators were proposed and monitored jointly with the Government outside the original results framework: (i) the consolidated budget revenue ratio to the GDP; (ii) the structural fiscal deficit ratio to the GDP; (iii) Hidroelectrica’s net annual profit; and (iv) the number of Hidroelectrica’s directly negotiated bilateral sales contracts. Progress on all indicators, including the ones above, was discussed with the Government during the quarterly supervision missions. 1.4 Original Policy Areas Supported by the Program 10. The DPL-DDO supported public finance reforms to improve tax compliance, increase tax revenues, reduce tax administration costs and strengthen budget discipline. These reforms aimed at increasing revenue collection, significantly reducing the number of tax offices for small taxpayers (from 362 offices in 2011 to 47 offices by end-2014), the expansion of electronic filing to capture over 90 percent of all legal entities, and strategic fiscal management on the basis of a medium-term fiscal framework consistent with the EU Fiscal Compact. 11. The Authorities implemented significant prior tax and budgeting actions. By April 2012, they: (i) reduced by 39 percent the number of tax offices for small taxpayers; (ii) expanded e-filing by legal entities to 80 percent; (iii) approved the restructuring plan of the National Tax Administration Agency (ANAF) for 2012-14; (iv) enacted the 2012 Budget Law in line with the 2012-14 Fiscal Strategy; and (v) submitted to the EU the Convergence Program Report for 2012-15 including a medium-term fiscal framework consistent with commitments undertaken under the EU Fiscal Compact (Table 2). 4 Table 2. DPL-DDO Prior Actions Prior Actions Status Public Financial Management Reduction in number of local tax offices for small taxpayers to no more than 221 (i.e., by at least 39%) on the Fulfilled basis of Government Decision No. 564/2011 and ANAF President Order No. 2180/2011 as amended Expansion of electronic tax filing by all legal entities to at least 80% on the Basis of the Order of the Minister Fulfilled of Finance and Economy No. 858/2008 as amended, ANAF President’s Order No. 2520/2010 and the Government’s Emergency Ordinance no. 117/2010, for the tax declarations available for e-filing Approval of ANAF restructuring plan for 2012-2014 to further reduce the number of local tax offices for Fulfilled small taxpayers to 47 and expand electronic tax filing for legal entities to 96% for tax declarations available for e-filing, pursuant to the Government’s Memorandum dated April 18, 2012 Enactment of 2012 Budget Law to strengthen fiscal discipline and demonstrate commitment to fiscal Fulfilled consolidation in line with the 2012-2014 Fiscal Strategy Approval and submission to the European Commission of the Convergence Program for 2012-2015 which Fulfilled incorporates a medium-term fiscal framework consistent with the provisions of the EU Fiscal Compact and a financing plan consistent with the above referenced fiscal framework Governance of State-Owned Enterprises in the Energy Sector Fulfilled Government decision (Memorandum No. DPES 172 dated March 8, 2012) to carry out Hidroelectrica’s Fulfilled electricity sales through competitive market processes and to publish information on all bilateral contracts for electricity sales The Government approved and submitted to the Parliament a new Electricity Law that transposes the EU Fulfilled Third Package of Energy Reforms and sets forth the operational and financial autonomy of the energy regulator ANRE The Government approved roadmap for phasing out regulated prices for electricity, pursuant to Memorandum Fulfilled dated March 16, 2012 Health Sector Fulfilled The Government approved by Decision No. 359/2012 exclusion from the lists of compensated drugs of Fulfilled selected drugs for indications outside the terms of their marketing approval or for which there is no scientific medical evidence supporting their indication, and NHIH issued order setting forth the conditions under which drugs in the basic health package services can be reimbursed NHIH has implemented the 2012 National Hospital Master Bed Plan approved by Government Decision No. Fulfilled 151/2011 The Government has established the institutional framework for the implementation of the Health Technology Fulfilled Assessment (HTA) pursuant to Government Decision No. 351/2012 12. Reforms of state-owned energy generation companies aimed at fostering market competition and increasing investment, energy efficiency and economic growth. The SOE sector is large in Romania, especially in energy, and these reforms were necessary to remove market distortions, improve the transparency of contracts and sales and restore the financial situation of the respective SOEs. The DPL-DDO supported the termination or renegotiation of direct bilateral contracts for electricity sales by SOEs, increased reliance on the transparent OPCOM Power Exchange for electricity sales, and the establishment of a gas trading platform, and price and tariff deregulation for electricity and gas. 13. Prior actions in the energy sector included critical legislative and regulatory measures. The Government approved a Memorandum mandating electricity sales by Hidroelectrica (a large SOE producing around 30 percent of Romania’s electricity) through competitive market processes and publishing information on all bilateral contracts for electricity sales 7 . A new Electricity Law was approved by Parliament, through which the Government transposed the EU Third Energy Package of Energy Reforms and set forth the operational and financial autonomy of the energy regulator ANRE, and approved a roadmap for phasing out regulated prices for electricity for companies and households 8 (Table 2). 7 Memorandum No. DPES 172 dated March 8, 2012. 8 Memorandum dated March 16, 2012. 5 14. The DPL-DDO supported efficiency gains and financial sustainability in the health sector. The DPL-DDO supported Government measures to rationalize the use of drugs, treatments, technology and hospital facilities, and reallocate resources to more efficient health prevention and promotion programs. These reforms were necessary to address the heavy bias towards inpatient hospital care and remove inefficiencies and unnecessary services or treatments. 15. Prior actions in the health sector. The Government revised the list of subsidized drugs to exclude drugs being used outside the terms of their marketing approval or for which there is no medical evidence supporting their indication 9 . The National Health Insurance House (NHIH) set forth the conditions under which drugs in the basic health package can be reimbursed 10 and implemented the 2012 National Hospital Master Bed Plan approved by the Government 11 (Table 2). 1.5 Revised Policy Areas 16. There were no changes in the policy areas supported by the DPL-DDO. 1.6 Other significant changes in design, scope and scale, implementation arrangements and schedule, and funding allocations: 17. There were no changes in the DPL-DDO design, scope, scale, implementation arrangements, and funding allocations. The duration of the program was up to three years (until June 2015), with the possibility of an extension for another three years. The Government drew the money under the program in two tranches, closing the loan in October 2014 (see para 19). 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 18. The DPL-DDO program was delivered in a timely manner and funds were fully disbursed one year before the expiration of the program in June 2015. Disbursements were contingent on a satisfactory medium-term macroeconomic framework and satisfactory progress on the reform agenda, which has been the case throughout the effectiveness period. The DPL-DDO was fully disbursed in two tranches, of €700 million in mid-October 2013 and of €300 million at end-June 2014. While the initial intention of the government was not to draw the DPL-DDO, debt management considerations and the unexpected sharp increase in the geo- political tensions in neighboring Ukraine, leading to considerably heightened risks and volatility of the markets, prompted the government to request the withdrawal of the funds to consolidate its fiscal buffer as a precautionary measure. 2.2 Major Factors Affecting Implementation: 19. Political commitment during DPL-DDO preparation. The DPL-DDO was prepared and negotiated with the outgoing Administration that had demonstrated commitment to macroeconomic stabilization and structural reforms during 2009-2011 and had built a sound partnership with the Bank, the EU and the IMF. The Government had taken strong and 9 Government Decision No. 359 dated April 18, 2012. 10 Order No. 118 dated April 27, 2012 11 Government Decision No. 151/2011. 6 unpopular measures during 2009-2010 via wage and pension cuts and VAT and social contribution hikes and implemented reforms in public finance, education, health, public administration, social assistance, public pension system and the financial sector. The IFIs and the EU supported the Government’s program, considered that it was implemented in a satisfactory manner and disbursed €18 billion out of the total commitments of €20 billion. The last tranche of the IMF SBA was converted into a precautionary tranche. DPL1-3 were fully disbursed. 20. Political commitment during implementation. The Government that took office in May 2012 and was responsible for implementing the DPL-DDO assumed fully Romania’s commitments as negotiated by the previous Administration. The governing program of the new Administration reiterated the resolve to pursue fiscal discipline and meet the targets of the EU Fiscal Compact, and to expand and deepen the reform process. At the same time, the new Government pledged to deepen the implementation of structural reforms, particularly in energy, health, and the management of state-owned enterprises (SOEs). The Government also championed the establishment of an independent energy regulator that was crucial to advancing the DPL-DDO agenda, and continued to work on the initial public offerings (IPOs) for energy SOEs. 21. The rationale for continuing Bank policy and financial support was compelling. The effects of the global crisis on the European economy proved longer and more pervasive than expected. Notwithstanding good crisis management during 2008-2011 Romania still needed support for macroeconomic stabilization, financial sector resilience, and incentives to pursue pro-growth and pro-equity policies. The Bank was able to make a considerable contribution to key areas of Romania’s medium-term strategy with knowledge gained in other Eastern European countries and around the globe. The Bank was well respected by the Authorities and by other stakeholders and had a proven record of cooperative relationship with other IFIs and the EU. Moreover, its funding was available on more favorable terms than that from other sources. Bank’s experience with energy and health sector reforms was particularly appreciated by the Romanian authorities, the EU and IMF. The choice for a DPL-DDO instrument, as opposed to a standard DPL, reflected the intention of the Government at the time of the request not to withdraw the money, similarly to the precautionary IMF and EC parallel programs, but rather to use it as insurance against risks. 22. The DPL-DDO was designed and implemented in synergy with the IMF and the EU. A precautionary IMF SBA approved in March 2011 provided €3.5 billion in support of fiscal consolidation, structural reforms to boost growth, and financial assistance against possible external shocks. A follow-up precautionary SBA of €1.98 billion was approved by the Executive Board of the IMF in September 2013. In parallel, the Council of the EU approved two precautionary arrangements in May 2011 and October 2013, amounting to €1.4 billion and €2 billion, respectively. Both 2011 programs were considered successful by the IMF and the EU in preserving macroeconomic stability and advancing economic adjustment, although progress on the structural reform agenda was uneven. No money was drawn by the Authorities under the two programs. The signing of the second precautionary agreements with the IMF and the EC in 2013 provided a framework for updating the reform agenda, although implementation was uneven. Both agreements helped to better fine-tune the direction for the reforms supported by the DPL-DDO, laying the foundation for the next series of DPLs; the first DPL was approved by the Bank’s Board in May 2014. 23. Relevant lessons were taken into account. The DPL-DDO preparation and its implementation benefitted from lessons learned during the implementation of the previous DPL series, the implementation of the Bank portfolio in Romania, feedback from stakeholders 7 during the preparation of the Romania Country Economic Memorandum, which focused on drivers of growth and competitiveness 12, and the IEG study on the WBG response to the global crisis 13. The DPL-DDO built on the Bank’s comparative advantage in development policy lending and in analytical work and coordinated closely with the EU and the IMF in designing and monitoring the program agreed upfront with the Government. The Bank also provided reimbursable and grant technical assistance to address policy and implementation issues, and engaged in a dialogue with the Prime Minister’s Office and the Presidency. But the most important lesson learned that was used during the preparation and implementation of the DPL- DDO program was to forge a professional, open and honest relation with key government counterparts, which was managed for the most part directly from the Bank’s country office in Bucharest. 24. The DPL-DDO was underpinned by relevant analytical work and technical assistance. The Bank carried out analytical work on macroeconomic management, public sector reforms, SOE performance, and energy under the CEM (2011-2013); on public financial management, including on tax and budgeting, under the Public Expenditure and Institutional Review (PEIR) in 2009 and the Functional Review of the Public Finance Sector (2010-2011) 14; on medium-term budgeting, human development and the energy sector under the 2009-2011 Policy Notes for the Government; on health under the Functional Review of the Health Sector (2011); and on energy under the Functional Review of the Energy Sector (2011). Technical assistance on fiscal decentralization, tax administration, the modernization of public administration, health and education was implemented in FY11-12. Long-term institutional reforms initiated by the DPL-DDO (e.g., in tax administration and health sector) have been followed up closely with investment operation that are currently under implementation (see below). 25. The DPL-DDO design was focused, consistent with EU and IMF arrangements and well adapted to Romania’s political situation and capacities, triggering further reforms in the areas covered by the operation. The program was explicitly focused on public sector management priorities which complemented the IMF and EU-supported programs. The success of the reforms pursued under the DPL-DDO catalyzed the interest of the Government towards deepening the reforms in tax administration and health through dedicated investment projects of the World Bank and through the establishment of a Delivery Unit in the Chancellery of the Prime Minister, aimed at helping delivering quick wins in energy, tax administration, public procurement and job creation (see the details below). The choice of a deferred drawdown option (DDO) was made at the request of the outgoing Government. The Ministry of Public Finance was particularly keen in ensuring that the facility be part of a legally established buffer of about 4 months of the annual financing needs of the budget to be used in the event of a new major external shock (about €5 billion). 15 The buffer is being maintained up to this day –with disbursed funds used also to facilitate treasury and debt management operations, such as bond 12 Romania Country Economic Memorandum (CEM): Reviving Romania’s Growth and Convergence: Challenges and Opportunities (Report No. 74635, June 2013). As part of the CEM preparation and dissemination process, ample public debates were organized on the main themes of the report. The debates were attended by all relevant stakeholders (government, business community, academia, trade unions, etc.) and benefitted from international presence, including from the IMF, the EU and European think-tanks. 13 IEG, “World Bank Group Response to the Global Economic Crisis: Phase II”, February 2012. 14 Comprehensive Functional Reviews of the Public Administration financed by EU funds were conducted in FY11-12 in 12 key sectors, including public finance, energy, health, education, policy planning and coordination, and agriculture. 15 The Operations Committee also suggested the option of a regular DPL, but the Government (in hindsight rightly) insisted for a DDO. 8 re-openings, which required a larger amount of liquidity. Thus, the DPL-DDO proceeds were not used to widen either the fiscal deficit and/or directly support routinely public expenditures. 26. Key risks were broadly identified at appraisal, and were largely mitigated: • Economic, fiscal and financial risks stemming mostly from the vulnerability of Romania’s economy and financial sector to the volatile external environment and the severity of the crisis in Europe were successfully mitigated by firm macroeconomic management, strict and pro-active supervision of the financial sector, mobilization of EU structural and cohesion funds, tight public expenditure control and the dynamic response of the economy. External and internal imbalances were substantially reduced (see Table 2) and no bank had to resort to support from the Government or the central bank. Nevertheless, macroeconomic performance during implementation fell short of the outcomes projected at appraisal (See the Macroeconomic Performance section). The risks stemming from the large and poorly performing SOE 16 sector were partly mitigated by imposing harder budget constraints and through corporate governance reforms. Nevertheless, more needs to be done to enhance the governance of SOEs to reduce arrears, attract investment and enhance profitability. The SOE reform agenda is a long term process and is supported by the ongoing DPL series. The time needed for and the costs associated with the restructuring of the Tax Agency were underestimated, as it took longer for the Agency to reduce administrative costs. In addition, the Tax Agency has renounced the plans to further downsize the number of offices, as committed through the 2012-2014 restructuring plan. • Political risks identified were associated with the local and parliamentary elections of 2012 but they did not materialize as the new majority coalition formed in the Parliament following elections in June 2012 and the new Government firmly continued the implementation of the reform agenda supported by the DPL- DDO as agreed with their predecessors. However, progress on the structural reforms slowed down in 2015, delaying the implementation of the programs with the EU, the IMF and of the FEG- DPL. • Social risks identified were associated in particular with potential employment and wage cuts stemming from the restructuring of the public and SOE sectors, an increase in energy prices following markets liberalization and the lingering effects of the 2009- 2010 fiscal austerity package. The social risks were successfully mitigated by the Government. At the macro level, the return of the economy to positive growth and firm expenditure control allowed the Government to find the resources to restore the salary cuts of 2010 in the public sector. The impact of energy price increases under the Third EU Energy Reform Package introduced in the summer of 2012 was mitigated by the coverage of the safety nets for the poorest households (minimum guaranteed income and family benefits) and the heating benefits; with additional resources allocated to these programs in 2013. In particular, the government eliminated a series of assets filters that increased the ability of people to apply to all these programs and also 16 The SOE sector is large in Romania. It consists of more than 1,000 SOEs, of which over 250 are overseen by the central government. SOEs are dominant in energy and transport and have endemically been a source of arrears and fiscal risks. 9 increased budget allocations in the 2013 mid-year rectification 17. Is also important to mention that the increased competition following the liberalization of the electricity market, aided also by the rapid development of the renewable sector, and the elimination of the bilateral contracts of Hidroelectrica, which now sells its output on the OPCOM energy platform, resulted in a decline of the wholesale electricity prices that trickled down to households. As an example, wholesale electricity prices declined by over 15 percent in 2014 relative to 2013 on the OPCOM centralized market for bilateral contracts. Thus, while tariffs for gas were raised (by about 10 percent per year in nominal terms), retail tariffs for electricity –the most widely used source of energy – increased less than initially expected following the liberalization. SOEs’ privatization has not been accompanies by collective lay-offs, with the exception of the rail freight company CFR Marfa. The privatization of CFR Marfa failed in its first attempt, but the process has been restarted, albeit with delays, and is expected to be finalized in 2016 18. • Capacity constraints were partly mitigated by technical assistance, mainly delivered as part of supervision missions for the DPL-DDO, but limited capacity remains a main constraint to policy design and implementation. The Bank helped address this weakness by organizing quarterly supervision missions which offered advice to the implementing agencies on how to approach the reform measures committed to in the program. The Bank has an active Reimbursable Advisory Service Portfolio in Romania, but none of these focus on the core reform areas covered in the DPL-DDO (e.g., Tax Administration, Energy and Health). An investment project in support of the Tax Administration reforms initiated under the DPL-DDO launched in late 2013 is expected to fill in capacity gaps and provide continuity to this dialogue. Similarly for the investment project in Health approved by Banks’ Board in March 2014. But none of these two projects was under implementation (i.e., effective) neither during the period in which the DPL-DDO was approved nor during the time that the further commitments undertaken in the Letter of Development Policy were implemented. In Energy, the DPL-DDO supervision budget facilitated an active and continued presence of a senior bank staff. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 27. M&E design. The DPL-DDO included a policy matrix for prior actions and end- program outcome indicators. The matrix did not propose interim results indicators. Outcome indicators matched the availability of statistics provided by the Government and other publicly- available sources of information. 28. M&E implementation. The Bank agreed with the Government on monitoring arrangements that included a quarterly assessment of the macroeconomic framework and of progress towards the reform agenda, based on the policy matrix and the LDP. The supervision benefited from quarterly visits of Bank technical teams throughout the implementation of the DPL-DDO and was coordinated and sometimes carried out jointly with the IMF and EU. The Bank office in Bucharest, through the Country Management Unit, the Country Economist and the technical experts, provided ongoing M&E of the program and policy dialogue related to the DPL-DDO. The Ministry of Public Finance (MoPF) was responsible for overall Government 17 While the overall increase in 2013 was relatively small (only about 120 million RON) it allow the Ministry of Labor and Social Protection to increase coverage of the two means-tested programs by about 20 percent (from approximately 529,000 to about 630,000 individuals) according to Bank staff estimates. 18 The privatization of CFR Marfa led to around 2,400 redundancies from the company in 2014. 10 specific monitoring duties and coordinated actions among all concerned ministries and agencies. The MoPF provided monitoring reports on the implementation of the agreed macroeconomic framework, on progress towards reforms, and on achievement of the proposed outcomes. MoPF also ensured the Bank’s access to the requisite data and reports produced by the National Bank of Romania (NBR), the Ministries of Economy and Health, and other ministries and agencies as needed. The General Directorate for International Financial Relations in the Ministry of Public Finance devoted staff to accompany supervision missions and actively participated in the drafting of Aide Memoires. They also followed up closely on DPL-DDO implementation issues between supervision missions and liaised with the Bank office in Romania. 29. M&E utilization. The new Programmatic DPL in support of Fiscal Effectiveness and Growth (FEG-DPL) has picked up key follow up steps in the areas of public finance, energy and SOEs that started as part of the LDP in the DPL-DDO. The M&E arrangements for the FEG-DPL are the same as for the DPL-DDO, including on the Government’s side. 2.4 Expected Next Phase/Follow-up Operation: 30. The CPS for 2014-17 proposed two new DPL series, tentatively scheduled to be delivered as one DPL per year 19. The first loan of the two-operation “Fiscal Effectiveness and Growth” DPLs (FEG-DPLs) was approved in May 2014 and extended a loan of €750 million. The second DPL is under preparation and is proposed to be submitted to the Board in the fiscal year 2016. The PDO of the FEG-DPL is to support Romania’s goals of: (i) strengthening fiscal management (debt management and the quality of public spending) and the performance of state-owned enterprises; and of (ii) improving the functioning of the property, energy and capital markets. The DPLs continue and deepen Romania’s reforms in debt management, investment prioritization and the effectiveness of pro-poor spending programs, performance of SOEs; energy, including the implementation of the Roadmaps for electricity and gas liberalization; help improve the functioning of the property market by adopting new cadaster legislation; and support the modernization of the legal and institutional framework for the capital markets. Policy-based sector operations in health, education, energy, social inclusion and justice were also planned. The “Health Sector Reform Project” (€250 million) was approved in March 2014 and focuses on needed hospital rationalization and institutional investments, while the “Romania Secondary Education Project” (€200 million) was approved in March 2015 and it is aimed at improving the transition of the students from upper secondary into tertiary education. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 31. The relevance of objectives, design and implementation to country priorities and Bank assistance strategy is satisfactory: • The relevance of the DPL-DDO objectives to Romania’s development priorities is satisfactory. The DPL-DDO agenda was congruent with Romania’s EU convergence objective, which imposed measures to restore investor confidence, deliver commitments made at the time of EU accession on liberalization of energy markets, and reverse the decline in health standards. 19 IBRD-IFC “Country Partnership Strategy (CPS) for Romania for the Period 2014-17” (Report No 84830-RO, April 28, 2014). 11 • The design relevance is satisfactory. The Government decided to pursue a reform agenda which reflected its policy priorities in budget management, energy and health. The design of the program, the selected outcome indicators and targets matched the expectations of the Government. • The relevance of implementation is satisfactory. The DPL-DDO provided critical substance to the objectives set by the Government in the areas of intervention. The DPL-DDO and parallel Bank activities helped design, implement and monitor the Government’s reform agenda in the areas of tax administration, SOEs’ governance, SOEs’ privatization, liberalization of energy markets, and management of health services. 3.2 Achievement of Program Development Objectives 32. PDOs were achieved to a large extent and most proposed outcomes and outputs were delivered. Romania stayed the course on the reform agenda supported by the DPL-DDO, and by mid- or end-2014 it had met most of the outcome indicators proposed by the operation and of the output indicators advanced by the LDP, or was well on track. (a) Macroeconomic Performance 33. Macroeconomic performance was good but fell short of the performance projected at appraisal. DPL-DDO supervision missions evaluated the implementation of the macroeconomic framework of the program as satisfactory, taking into account the impact of the protracted international economic and financial crisis, and in particular the substantially worse-than-expected impact of the crisis in the EU. Good macroeconomic management throughout the program implementation period led to a significant reduction of the internal and external imbalances. The fiscal deficit reached 1.9 percent of GDP in 2014, the lowest level since 2006. The execution of the consolidated budget at half-year in 2015 showed a budget surplus of 0.9 percent of GDP, driven by expenditure restraint and good revenue collection. The current account deficit was 0.5 percent of GDP in 2014. Inflation was 1.2 percent at end- June-2015, enabling the central bank to cut its policy rate to 1.75 percent in May 2015, the lowest level in the last two decades. The economy also resurged in 2013 –driving mainly by exports although domestic demand started to contribute as well during the last part of 2013— but slowed down again in 2014. Economic growth accelerated further in 2015. Growth was 3.8 percent in the first half of 2015, one the highest in the EU, driven by exports and domestic demand. 34. In retrospect, some of the targets of the original macroeconomic framework for 2012-2014 were optimistic. The initial macroeconomic targets assumed “growth to accelerate gradually to 4 percent by 2015, buoyed primarily by further rising domestic demand and measures to improve competitiveness.” While economic growth indeed picked up significantly in 2013, driven by domestic demand and exports, as predicted at appraisal, the average during the implementation period 2012-14 was around 2.3 percent, strongly affected by the modest performance in 2012. Similarly, demand, savings, investment and credit to the private sector have been lower than anticipated. The cash and structural fiscal deficits during the 2012-14 (at 2.3 and 1.8 percent of GDP, respectively) were also higher than projected (e.g., 1.9 and 0.4 percent of GDP, respectively), mainly on the account of lower than envisaged revenue collection (for the structural deficit, the output gap closed faster than envisaged in part due to revisions to the potential GDP). Exports, however, performed better than expected, and together with imports depressed by sluggish demand led to trade and current account deficits lower than initially projected (Table 3). 12 Table 3. DPL-DDO Selected Macroeconomic Indicators, 2011-2015 Projected at DPL-DDO appraisal Baseline Estimated July 2015 Indicators 2011 2012 2013 2014 Avg. 2012 2013 2014 Avg. 2012-14 act. act. act. 2012-14 Annual percentage change GDP 2.2 1.5 3.0 3.7 2.7 0.7 3.5 2.8 2.3 Domestic demand 2.4 1.8 3.3 3.8 3.0 1.4 -1.1 2.75 1.0 Consumer price (CPI avg.) 5.8 2.9 3.1 2.5 2.8 3.3 4.0 1.1 2.8 Credit to private sector 6.6 4.0 6.4 7.7 5.7 1.3 -3.3 -3.1 -1.7 As percentage of GDP Gross national saving 22.3 25.7 26.5 26.8 26.3 21.6 22.1 23.1 22.3 Gross domestic investment 26.8 30.2 31.3 31.9 31.1 26.0 23.2 23.0 24.1 Current account balance -4.5 -4.4 -4.8 -5.0 -4.7 -4.4 -1.1 -0.5 -2.0 Merchandise trade balance -5.6 -5.5 -5.6 -6.0 -5.7 -5.6 -2.4 -3.7 -3.9 General govt. revenue 32.6 32.5 32.7 33.4 32.9 32.9 31.7 31.7 32.1 General govt. expenditure 36.8 34.7 34.5 35.0 34.7 35.4 34.2 33.6 34.4 Cash fiscal balance -4.3 -2.2 -1.8 -1.7 -1.9 -2.5 -2.5 -1.9 -2.3 Structural fiscal balance -2.8 -0.6 -0.2 -0.3 -0.4 -1.8 -1.8 -1.7 -1.8 General govt. direct debt 32.2 31.6 31.2 30.6 31.1 35.8 36.9 38.0 36.9 Source: World Bank DPL-DDO (PAD, May 2012), “First Fiscal Effectiveness and Growth” (PAD, April 2014); Ministry of Public Finance, NBR. 35. The actual macroeconomic framework during the DPL-DDO was consistent with financial sustainability and economic growth objectives. Driven by strong exports, a robust industrial output and a good agricultural season, the 3.5 percent growth in 2013 was the highest of all EU-28 countries. In 2014 growth slowed down to 2.8 percent, due to the worsening economic conditions in the Europe, but remained above the EU average, as domestic demand gradually picked up and structural reforms such as the liberalization of energy began to take effect. Domestic demand, which was virtually stagnant in 2012-2013, has been slowly overtaking exports as the main driver of growth, but public investment has not picked up significantly partly due to a continued slow absorption of EU funds. Private investment was affected by the global economic conditions and by a needed trimming of a generous subsidy scheme in support of renewable energy. On the other hand, investments by SOEs in the energy sector picked up – partly as a result of the DPL-DDO sponsored reforms to the sector and these SOEs. Inflation remains low mainly due to low energy and food prices, but also due to the reduction in VAT for food, implemented in June 2015 20. Finally, as designed at appraisal, the DPL-DDO funds contributed to the buildup of the fiscal buffer. As indicated in Table 1 above, the fiscal buffer increased to € 5.5 billion in 2013 and has since been maintained over 2013- 2015. 36. Romania’s macroeconomic performance boosted its external credit rating. Due to its achievements in macroeconomic consolidation and economic recovery, in May 2014 Standard & Poor (S&P) raised Romania’s long-term sovereign bond rating from BB+ to BBB-, the lowest investment grade, putting it on a par with Brazil, Russia and Spain. 21 Spreads and yields of sovereign bonds have fallen steadily since 2012. This reflects Romania’s rapid progress in improving its external and internal balances and maintaining financial stability. IPOs by two energy companies (in the Bucharest Stock Exchange but traded also in London) have also put Romania in the radar screen of international investment funds. Fitch and Moody’s upgraded Romania’s rating to a similar level in April 2014. Romania successfully tapped the 20 Starting with June 2015, VAT for food products was reduced from 24 percent to 9 percent. 21 Standard & Poor, “Sovereigns Rating List”, May 2014. 13 international markets with its first ever 30-year bond in 2014 and all Government bonds issued in 2014 and 2015 were substantially over-subscribed. (b) Public Finance Reforms 37. In this area two outcome indicators were exceeded, while one was met later than estimated at appraisal. Tax revenue and cash budget deficit targets were exceeded: tax revenue increased by €4.1 billion equivalent compared to the proposed increase of only €0.5 billion, while the cash budget deficit of the general government declined to 1.9 percent of GDP in 2014, against a proposed target of under 3 percent. The original tax revenue target was however modest to account for the expected temporary disruptions due to the reform of tax administration and the overall economic uncertainty. The tax administration costs target was not met in 2014 (Table 4). However, by mid-2015, administration costs fell to below the end- program target, driven primarily by a good revenue collection performance of the Tax Administration Agency. The fiscal deficit reduction was achieved through cuts in expenditure, both capital expenditure, which declined from 7.7 percent of GDP in 2011 to 6.5 percent of GDP in 2012 and to an estimated 5.4 percent of GDP in 2014, and current expenditure. Tax administration costs marginally increased in 2013 (to 1.15 percent) as a proportion of tax revenue due to delays in the proposed consolidation of the tax offices system, disruptions inherent to the process, and increased expenditure to combat fraud and enhance transparency, by financing the reallocation of about 1,700 staff to prevention and control activities, creation of a General Directorate for Fiscal Antifraud and development of a taxpayers’ portal and a database for both central and local governments. Administration costs declined in 2014 to 1.11 percent in 2014 and to 1.03 at end-June 2015 and the Tax Administration Agency is confident that the costs will further decline in the medium term due to the reorganization. At the same time, the Tax Administration Agency decided to halt the further downsizing of its territorial network, in spite of committing to reduce the number of offices from 221 to 47 for small tax payers through the 2012 restructuring plan. The Bank continues to provide support to the Tax Administration Agency through the RAMP investment project, which helps with the modernization of the business processes, the information systems and risk management. Table 4. DPL-DDO Status of PFM Outcome Indicators as Approved Outcome Indicators Baseline 2011 End of Status Program 2014 Tax revenue €37.0 billion €37.5 billion €41.1 billion Tax administration cost as percentage of tax revenue 1.11% 1.05% 1.11 General government cash budget deficit as percentage of GDP 4.2% <3% 1.9% 38. The Government remains committed to a strong fiscal framework, but risks remain. The general budget deficit was 1.9 percent of GDP in 2014, and has recorded a surplus of 0.9 percent of GDP during the first six months of 2015. The structural budget deficit was 1.8 percent of GDP in 2014 and will likely remain at a similar level in 2015. By end-2015, Ministry of Public Finance projections suggest the headline cash deficit will be below 1.8 percent of GDP. These targets will likely be attained given good revenue projections and expenditure restraint. A recent reduction of the social contributions (by 5 percentage points, in October 2014) was promoted by the Government, as payroll taxes in Romania were among the highest in Europe. Romania continues to maintain its fiscal buffer equivalent to over €5 billion (around four months of budget and debt financing). The fiscal deficit is however expected to widen in 2016 following the decision of the Government to reduce the overall VAT level from 24 percent to 20 percent starting with January 2016. In addition, there will be wage increases 14 for public sector employees, including for doctors and teachers. The Government is nevertheless confident that the consolidated budget deficit will not exceed 3 percent of GDP in 2016. Energy Sector Reforms 39. All but one of the DPL-DDO outcomes on the improved governance of SOEs in the energy sector were met (Table 5). No new directly negotiated bilateral contracts for sale of electricity have been concluded since 2012. The share of SOEs’ electricity sales through direct contracts declined from 25 percent in 2011 to less than 9.2 percent in 2014. In 2014, 83 percent of all electricity generation was sold in OPCOM Power exchange market, compared with 25 percent in 2011. Electricity sales to non-residential consumers were fully deregulated and the share of electricity sales at regulated prices fell from 50 percent in 2011 to 17.9 percent in 2014. Since January 2014, all wholesale electricity sales for non-residential consumers have been done at market prices (zero electricity sales at regulated tariffs). Hidroelectrica’s gross pre-tax revenue increased from €755 million in 2011 to €765.8 million in 2014, but below the target of € 898 million, due to lower than anticipated water inflows and the decline in wholesale prices due to market liberalization (the only outcome target not met in this section). However, due to bold restructuring measures, Hidroelectrica’s net profit increased remarkably, from €1.4 million in 2011 to €214 million in 2014, and the company is on track to beat the 2014 profit record in 2015. At the same time, the ongoing legal disputes between Hidroelectrica and the traders which had benefited from the bilateral contracts forced the company to re-enter insolvency in 2014. The financial position of the company remains nevertheless solid and the company is expected to exit insolvency in 2016. The Government plans to subsequently list Hidroelectrica through an IPO. Table 5. DPL-DDO Status of Energy Sector Outcome Indicators as Approved Outcome Indicators Baseline 2011 End of Status Program 2014 Hidroelectrica annual gross pre-tax revenue €755 mn €898 mn €765.8 mn Electricity sales at regulated tariffs to non-residential consumers, as 25% 0% 0% percentage of electricity supply Electricity sales at regulated tariffs as percentage of electricity supply 50% >25% 17.9% Percentage of electricity generation sold in OPCOM Power Exchange 25% <50% 83% and Transelectrica market * Directly negotiated bilateral contracts as percentage of SOE’s 25% >20% 9.2% electricity generation sales Pricing of SOE’s electricity sales through directly negotiated bilateral Well below At OPCOM None since contracts market prices market prices 2012 Note: The indicator excludes exports 40. Progress in improving the functioning of the energy markets has been remarkable, placing Romania as regional leader in energy market reforms. The reforms supported by the DPL-DDO contributed to the full liberalization of the electricity market for non-households and increased the competitiveness of energy SOEs. The reforms already led to increases in the profits and own investment of energy SOEs, and attracted private capital through privatization and market liberalization. Under the FEG-DPL, the gas market was also fully liberalized for non-residential consumers. The liberalization of the electricity and gas markets for households is on track, and the Government has put in place social measures to mitigate the impact. 15 (c) Health Sector Efficiency Gains 41. In this area, two outcome indicators exceeded the targets and one was not met. The savings from the revision of the basic package of health services were below the target of € 100 million at end-2014. Evidence indicates that NHIH reimbursement of compensated drugs prescribed without compelling medical evidence (in particular the eritropoetine group and the gingko-biloba) was reduced in 2012-14 by an estimated of €26 million cumulatively through the elimination of the two groups of medicines from the basic package. Although below the proposed DPL-DDO savings of €100 million (i.e., the full amount of estimated NHIH reimbursement for these drugs in 2011) this outcome was considered an improvement worth highlighting, as this measure will continue to add savings in the future. At the same time, 16 new molecules (drugs) were introduced on the list of the basic package in May 2014 and another 23 in November 2014, the former without being ex-ante evaluated through the HTA framework, as committed under the DPL-DDO. The MoH does not compute savings from the basic package on a regular basis. The number of hospital beds for acute care contracted by NHIH declined faster than anticipated, from 129,524 in 2011 to 121,579 in June 2014 (by 6.1 percent), below the end-program target of 123,127. 22 Health prevention and promotion programs are being strengthened by the MoH and treatment programs are transferred to NHIH. In 2014, preventive and health promotion programs received 36.9 percent of the state budget for all National Programs compared with 16 percent in 2011 (Table 6). As an example, the MoH allocated in 2014 about €4.3 million to a new program for early detection of cervical cancer, and the treatment of diabetes was moved from the National Program to NHIH, where it belongs. Table 6. DPL-DDO Status of Health Sector Outcome Indicators as Approved Outcome Indicators Baseline End of Status 2011 Program 2014 Savings from the revision of the basic package of health services No savings €100 mn €26 mn2/ Number of hospital beds contracted by NHIH 129,524 123,127 121,579 Health prevention and promotion programs as percentage of 16% 1/ 15% 36.9% MoH budget for national health programs 1/ Baseline revised by MoH. PAD estimated baseline at less than 10%.; 2/from eritropoetine and gingko-biloba. 42. The Government implemented additional measures to control expenditures, and improve the efficiency and effectiveness of healthcare. A negative list of health services and drugs was introduced by NHIH based on the recommendations of the technical assistance activities carried out by the UK National Institute for Health and Clinical Excellence (NICE). The Health Technology Assessment (HTA) department of the MoH is now operational, and designed an interim simplified HTA methodology, currently applied to pre-approved new drugs. Co-payments for hospital services (excluding emergency services), based on modest fixed amounts were introduced in March 2013. The MoH started to implement a comprehensive reform of the healthcare system, focused on a minimum health package, a basic health package, the list of reimbursable drugs, and updating of national health care programs. 43. In 2013 the Ministry of Health (MoH) started to gradually introduce the centralization of procurement of medical supplies and medical devices. The objective of the decision was to lower unit prices, improve transparency and oversight, and the availability and predictability of flow of inputs and move towards standardization. In 2012, MoH was 22 Despite this reduction that followed a 16 percent reduction during 2002-2007 in the number of acute care beds, Romania has 30 percent more beds and 29 percent more hospital admissions per 1,000 population than the EU- 15 average (PAD for “Health Reform Project”, March 2014). 16 designated as the centralized unit for public procurement, empowered to sign framework agreements on behalf of and for the public medical units from its network and from the network of the local governments. At the level of MoH, centralized procurement is organized for a number of medicines, medical equipment, medical devices, protective equipment, services, fuels and lubricants and the list is under expansion. Biddings are organized by the Department of Public Procurement based on the needs estimation done by the technical departments from the MoH. For 2014 a number of 15 packages were developed under procurement procedures producing budgetary savings estimated at around €10 million. 3.3 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 44. The Moderately Satisfactory rating is based on the DPL-DDO relevance, measures and outcomes. The relevance of objectives is satisfactory, while design and implementation, the outcome indicators and the outputs proposed by the DPL-DDO are moderately satisfactory. The DPL-DDO relevance is conferred by its consonance with the Government’s overall reform program, and its consistency with the reform areas supported by IMF and the EU. The design of the operation and its implementation are moderately satisfactory. Some risks were under- estimated during the design phase, such as those associated with the restructuring of the Tax Administration Agency. Implementation also had some shortcomings, mainly in health, where the restructuring of basic package of services did not have the depth expected at appraisal. Proposed outcomes and outputs were met for the most part: nine out of twelve outcome indicators were met or exceeded, two were not met (Hidroelectrica’s gross pre-tax revenues and the potential savings from the restructuring of the health basic package), and one (administrative costs for revenue collection) was met with a delay. 45. The rating takes into account the sustainability of the reform agenda supported by the DPL-DDO. The continuity of Romania’s commitment to fiscal discipline and reform demonstrates broad support across the political spectrum. At the same time, implementation of structural reforms slowed down in 2015, and the calendar of the FEG-DPL is delayed relative to the original plans, although the implementation of the measures supported by the operation continue to progress 23. The slowdown in reforms in 2015 also explains the difference in the rating of the ICR and that of the last ISR. Public acceptance of austerity policies and respect of EU commitments was demonstrated by the muted reaction to unpopular measures (new or higher taxes, cuts in wages and pensions, increased energy tariffs). 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 46. Mitigation of DPL-DDO poverty and social risks. The DPL-DDO was expected to be overall beneficial for the poor, although some measures in energy were initially identified as potentially detrimental. In the end, the risks either did not materialize as envisaged or were well mitigated by the Government. As detailed in para 26, eligibility thresholds and/or benefit 23 The updated calendar of the FEG-DPL envisages a Board date of early 2016. 17 levels were increased 24for the key social assistance programs- subsidies for district heating, the minimum guaranteed income, and the family benefits, together with incentives for the reinsertion of persons with disabilities in the labor market in 2012-2013 25. An analysis of the Ministry of Labor 26 shows that absolute poverty 27 declined from 3.5 percent in 2011, to 3.0 percent in 2012 and to 2.9 percent in 2013. 47. The DPL-DDO had a direct impact on gender and social development, as the increased funding allocated to the well-targeted cash transfer programs, the guaranteed minimum income, the family benefit and the heating subsidy to compensate for the liberalization of the energy prices benefited primarily poor and vulnerable households with women as family head. (b) Institutional Change/Strengthening 48. The DPL-DDO supported substantive institutional reforms. The operation supported or inspired reforms in tax administration, governance of energy sector SOEs and management of public expenditure for health: • Tax administration reforms focused on improving tax collection and compliance. As described in section 3.2, institutional reforms in this area stemmed from the Government’s commitment to meet the EU Fiscal Compact goals of fiscal sustainability. • The governance of energy SOEs benefitted from competitive selection of SOEs’ boards and managers, increased scope of OPCOM marketing of electricity and creation of a gas trading platform. • Management of public expenditure in health is being strengthened through streamlining of the basic health package, more rigorous screening of the reimbursement of compensated drugs, and budget reallocation to health prevention and promotion programs. 49. Policy advice and technical assistance provided by the Bank helped strengthen critical capacities. Bank analytical work and supervision during the DPL-DDO preparation (see section 2.2) helped the Government internalize policy advice and make policy decisions. During DPL-DDO implementation policy advice was extended through the “Growth and Competiveness” Country Economic Memorandum (CEM) in FY13. The DPL-DDO quarterly supervision helped strengthen the M&E capacity of implementing agencies. A reimbursable Advisory Services (RAS) for “Support on the Establishment of a Delivery Unit” (starting in late 2013/early 2014) helped the authorities in the area of taxpayer services. The “Revenue Administration Modernization Project” (RAMP) is expected to provide further and ample technical assistance in 2015 and after. A series of RAS, currently under preparation, are expected to provide substantial technical support for the consolidation of the public administration, in particular in the areas of strategic planning and budgeting starting with 2016. 24 Income poverty among the poorest 20 percent of the population is expected to be further reduced through the consolidation of the three means-tested programs into a single flagship anti-poverty program, the Minimum Social Insertion Income Program. This measure is supported by the FEG-DPL. 25 Website of the Ministry of Labor, Family, Social Protection and the Elderly. 26 Ministry of Labor and Family, Department for Social Services and Social Inclusion Social Inclusion Indicators for 2004-2013 Bucharest, 2014. 27 The national absolute poverty threshold is defined as the equivalent of an intake of 2,550 calories per day per adult-equivalent plus a minimum basked of non-food goods and services. The figures refer to dwellings. For comparison, the figure for the absolute poverty was 15.1 percent in 2004. 18 50. Bank-financed operations stemming from the DPL-DDO policy dialogue agenda support institutional development and capacity-building. Three Bank-financed operations benefitted from the policy dialogue fostered by the DPL-DDO: the FY13 “Revenue Administration Modernization Project” (RAMP, €69 million), the “Health Sector Reform Project” (€250 million) and the “First Fiscal Effectiveness and Growth” DPL (€750 million). All these operations include substantive institutional development, technical assistance and capacity-building activities that steamed from the DPL-DDO dialogue. The RAMP has an €6 million institutional development component supporting organizational development, auditing systems, legal framework management, business processes, and human resources development. The “Health Sector Reform” project finances technical assistance and training in the areas of hospital network rationalization, ambulatory care strengthening and health sector governance and stewardship. The first DPL for “Fiscal Effectiveness and Growth,” (FEG-DPL) approved in July 2014, has provided support to the Government in areas, such as debt management (coordinating closely with Treasury implemented RAS), public expenditure management (budgeting, public investment, pro-poor spending), oversight of SOEs, safeguards of private property rights, and supervision of capital markets. The implementation of the FEG- DPL is supported by technical assistance in the areas of public investment and property markets (through RASs) and capital markets (through Bank-financed analytical work). (c) Other Unintended Outcomes and Impacts 51. The successful implementation of the DPL-DDO encouraged the Government to deepen and broaden the reform agenda in public finance, energy and health, partly with the support of the Bank. The FEG- DPL series supports reforms and institutional strengthening in the PFM area (fiscal management, results-informed budgeting, better management of public debt, public investment and pro-poor spending), the energy sector (stronger governance of SOEs and further liberalization of energy markets), and for economic growth (safeguards for private property rights, in particular cadaster and land registration, and functioning and oversight of capital markets). The “Health Sector Reform Project” supports the implementation of the 2014-2020 National Health Strategy and the mobilization and efficient use of funds, including EU structural and cohesion funds. 52. The DPL-DDO provided the catalyst for stronger coordination of economic, financial and institutional reforms at the center of Government. The Government created in December 2013 a Delivery Unit in the PM’s office to facilitate policy implementation and monitoring across the government in four areas (public procurement, tax payer services, energy and youth employment). The Delivery Unit also developed tools to support the implementation of the Romania Country Specific Recommendations (CSRs) 28. 28 The CSRs provide tailored advice to EU member states on how to boost jobs and growth, while maintaining sound public finances. The European Commission publishes the CSRs every spring, as part of the European Semester, the EU's calendar for economic policy coordination. The CSRs focus on what can realistically be achieved in the following 12-18 months to make growth stronger, more sustainable and more inclusive, in line with the EU's long-term jobs and growth plan, the Europe 2020 Strategy. 19 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 53. Beneficiary Survey and Stakeholder Workshops were not conducted. However, continued meetings with key stakeholders (e.g., unions, local level authorities, parliament, and representatives of the pharmaceutical and private health provision industries) during supervision activities helped the team shape the dialogue during supervision. The team also worked actively with Government counterparts at all levels of the public administration. 4. Assessment of Risk to Development Outcome Rating: Moderate 54. The risk to development outcome is moderate. The risk to DO can be defined in terms of sustainability and the likelihood of reaching targets for reforms that have a longer gestation time: • Risk to sustainability is moderate: (i) macroeconomic stability is likely although not a given. The Fiscal Council estimated that the impact of the package of tax cuts (VAT, excises, special construction tax and others) to be implemented starting with 2016, accompanied by increases in the public sector wages, could push the budget deficit towards 3 percent of GDP next year in the absence of compensatory measures and will lead to an increase in the structural fiscal deficit. The IMF estimates that the implementation cost of the new Fiscal Code will be around 1.0 percent of GDP in 2016 and 1.2 percent in 2017. Policy initiatives with fiscal impact, such as public sector wage increases, could be further promoted in 2016 in the context of the planned parliamentary elections; (ii) tax administration reform has continued and the RAMP is under implementation, which will help the authorities to continue to advance the restructuring of the Tax Agency. The FEG-DPL provides important leverage and assistance for improved fiscal management; (iii) further strengthening of SOEs’ governance and liberalization of energy markets is also supported by the FEG-DPL; and (iv) the Authorities are committed to consolidating and deepening health sector reforms with the support of the “Health Sector Reform” project. • The likelihood of achieving longer-term targets is mixed. Substantial progress is expected in the areas of full liberalization of energy markets. The Authorities plan to continue with the privatization of SOEs, but the pipeline of companies planned for privatization in 2016 is reduced. Slow progress is anticipated for the improvements of health standards. 55. Economic risks are moderate. The economy has been recovering, driven by the gradual pick up in the domestic demand and by exports. Romania had one of the highest GDP growth of all EU member states in the first half of 2015, of 3.8 percent, and the economy would continue to grow in 2015-2016 at a similar pace. Future growth, expected to be driven mainly by investment, industry and, to some extent, by exports, hinges on the Government’s ability to reallocate public expenditure to productive public investment, mobilize EU structural and cohesion funds, and consolidate the confidence of foreign investors. The external environment remains constrained, with the economy of the Eurozone recording modest growth in the last quarters, and with uncertainties surrounding the situation in neighboring Greece. Fiscal pressures will increase in 2016 due to the cut in the level of the taxes through the Fiscal Code and due to increases in the public sector wages. It is therefore important that the commitment of the Government to keep the budget deficit in the limits agreed under the Fiscal Compact is observed. 20 56. Financial risks are moderate. Romanian banks have weathered well the financial crisis but their ability to support economic recovery is hampered by the still high level of non- performing loans (NPLs) and ongoing deleveraging. Asset quality is improving, with NPLs declining from 21.9 percent at end-2013 to around 13 percent at end-2014. Short-term profitability is low. Banks’ reliance on local funding has increased following the gradual withdrawal of parent funding, prompting the decline in loan-to-deposit ratio from 117 percent in 2012 to below 100 percent in 2014, although with significant variation across banks. Credit to the private sector declined by 3.1 percent in real terms in 2014. Stress tests conducted by NBR indicate that the banking system would be resilient to severe shocks, although a number of banks would need to raise additional capital 29. 57. Political risks are moderate. Current economic reforms and policies are broadly agreed with and, thus, not expected to be reversed with the parliamentary elections in 2016. A slowdown in the implementation of the structural reforms occurred however in 2015. 58. Non-government stakeholders’ ownership is relatively weak. One cannot talk about stakeholders’ ownership of reforms, but rather of acceptance. In some cases, e.g., reforms in health and education, stakeholders’ organizations take a more active role. In general, however, proposed reforms and measures met with acknowledgement, and did not trigger opposition, although both energy and health are strongly unionized sectors. 59. Social risks are moderate. The combined effects of a recovering economy, opening of EU job markets and socially-minded policies of the center-left governing coalition (e.g., VAT reduction for food products starting with June 2015, social safety net measures, heating subsidies, stimuli to employment) are expected to mitigate the impact of the convergence of prices and tariffs with the EU. Some lay-offs caused by the privatization or restructuring of SOEs are expected, but they are likely to be concentrated in a handful of companies, such as the energy complex Hunedoara, However, compensatory measures have or will be put in place in those cases 30. 60. Governance risks remain significant. The European Commission reports on the Co- operation and Verification Mechanism (CVM) state that progress notwithstanding, Romania still faces important challenges in ensuring judicial independence, improving the consistency of jurisprudence and judicial practices, strengthening the integrity framework, continuing the fight against high-level corruption and extending it to lower-level corruption. The accountability of public sector management has been enhanced in recent years with the support of DPL1-3, DPL-DDO and the ongoing FEG-DPL, as well as with the support of sector operations in health, education, etc. However, progress towards tangible outcomes has been slow. 61. Institutional and capacity risks are significant. The EU’s and IFIs’ support for institutional reforms, technical assistance and capacity building can mitigate constraints. However, Romania has a record of ad-hoc institutional changes in the structure and responsibilities of government agencies, of low absorption of technical assistance, and of slow progress on capacity building. Root causes include the absence of a coherent longer-term strategy for capacity-building, the frequent and disruptive changes in senior administration and political appointments, and the ingrained culture of a politicized public administration. 29 Romania also completed in 2015 a balance sheet review and stress test of the insurance sector and started a more comprehensive asset quality review and stress test of the banking sector. 30 The restructuring in 2015 of the energy complex Oltenia, one of the largest electricity producers in Romania, led to around 2,000 redundancies. Compensatory measures were put in place by the company and the Authorities. 21 Capacity constraints may become more critical as the reform process is broadened and deepened in coming years. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 62. Strategic relevance and approach. The DPL-DDO supported Romania’s short- to medium-term objectives of fiscal stabilization and reform of the energy and health sectors. Romania had weathered relatively well the impact of the 2008-2011 crisis, but at some social costs and with mixed results: by end-2011 the economy was showing signs of recovery, but government finances had uncomfortable cash and structural deficits, inflation was high, the energy sector contributed little to the budget and was a source of quasi-deficits, was poorly positioned to meet the more stringent EU energy policies and did not have the resources needed to modernize and enhance its competitiveness 31 , and health services were inadequate. The DPL-DDO supported the Government to address some of these issues. 63. Macroeconomic and structural reform goals. The macroeconomic framework agreed with the Authorities and supported by the EU, IMF and WB helped Romania to weather well the effects of the crisis of 2009-2011. The macroeconomic targets included compliance with the EU Fiscal Compact, improved external creditworthiness and financial sector viability. Energy sector reforms aimed to implement the EU Third Energy Package, generate savings, and invest in companies’ modernization and efficiency. Health sector reforms sought to rationalize expenditure on drugs and hospital capacities, and redirect savings to high return health prevention and promotion programs. 64. Poverty, gender and social development. The appraisal of the DPL-DDO had identified the poverty impact and mitigation measures. Improved fiscal management was expected to promote investment and employment, and enhance delivery of public goods and services. Energy sector reforms could improve business access to electricity, reduce prices, and stimulate investment and job creation. The mitigation of energy tariffs increase included increased heating benefits for vulnerable households, and the allocation of additional resources to the well-targeted and cost-effective social assistance programs targeting the poorest quintiles. Efficiency gains in the health sector were expected to finance prevention and promotion programs with a positive impact on health outcomes for the poor. 65. Environmental aspects. The appraisal documented the expected positive impact of the transposition of the EU Third Package of Energy Reforms supported by the DPL-DDO. Market-based pricing, competitive contracting, price deregulation and privatization could foster investment in modernization of plants with up-to-date environmental standards, exploration of cleaner natural gas production and renewable energy. 66. Fiduciary aspects. The DPL-DDO appraisal based its fiduciary analysis on the 2003 Country Financial Accountability Assessment (CFAA) and subsequent steps taken by the 31 “Doing Business 2012” ranked Romania below all other Central and Eastern European countries in 2011 on “getting electricity”, overall and on the cost of electricity. Romania was ranked 165th out of 183 countries (the other Central and Eastern European countries had an average rating of 85), and its cost of electricity represented 556.9% of the per capita income, compared with an average cost of 229.7% for the rest of the EU-11 countries. 22 Government to implement PFM reforms and strengthen internal control, financial reporting and auditing systems. The appraisal noted the 2010 downgrading of Romania’s Open Budget Index Assessment (OBI) but Government action for and during the implementation of the DPL- DDO have mitigated this (e.g., the active consultation with stakeholders, such as the fiscal Council). 67. Policy and institutional aspects. The preparation of the DPL-DDO identified legal and institutional bottlenecks and secured Government’s upfront commitment on addressing them. This included the Government’s request for the establishment of a Delivery Unit in the Office of the Prime Minister and a request for an operation supporting the design and implementation of strategic planning and coordinating capacity in the center of the Government. 68. Implementation, Monitoring and Evaluation arrangements. The Bank agreed with the Government during appraisal on specific implementation and monitoring arrangements which delegated to the MoPF overall coordination responsibility. The MoPF was to manage and monitor the implementation of the macroeconomic framework and the public finance reform, coordinate the implementation of reforms in energy and health managed by the Ministries of Economy and Health, and report quarterly to the Bank on the status of DPL-DDO implementation, including the macroeconomic framework and policy matrix of expected outcomes. Bank supervision was to be carried out quarterly through expert visits to Romania, while the Bank office in Bucharest maintained continuous engagement with the authorities. 69. Risk assessment. Risk assessment was candid but in some instances may have under- or overstated expected difficulties. For example, the impact of the crisis on growth prospects was underestimated, the impact of elections on continuity of reforms was overestimated, and the social impact of the potential increases in energy prices was overestimated. The efforts required to restructure the Tax Administration Agency were underestimated, as well as the capacity of MoH to comprehensively restructure the basic health package. 70. Bank inputs and processes. The Bank’s identification mission advanced a comprehensive agenda of reforms that could be supported by the DPL-DDO and which provided a solid basis for the subsequent appraisal and negotiation of the operation. 32 The pre- appraisal mission narrowed down the DPL-DDO agenda and identified prior actions and outcomes, most of which were agreed with the Government without major changes during negotiation. However, as explained above, some risks were under-estimated at appraisal. The proposed DPL-DDO scope, outcomes and timing were discussed with the IMF and the EU. The DPL-DDO was approved by the Board four months after identification. (b) Quality of Supervision Rating: Satisfactory 71. Focus on development impact. The DPL-DDO supported substantive reforms in the energy sector and fiscal management. These reforms have set the stage for medium-term gains in economic competitiveness and public sector management. Health sector reforms sought to free additional resources for financing priority expenditure. 72. Adequacy of supervision inputs and processes. Quarterly supervision ensured timely monitoring and substantial leverage in motivating the Government to keep the DPL-DDO on track. Aide-memoires provided feedback on the implementation of the macroeconomic 32 Aide-Memoire World Bank Identification Mission, February 16, 2012. 23 framework and the reform agenda and recommendations on specific reforms prepared or/and implemented by the Authorities. 73. Candor and quality of performance reporting. Bank reports were factual, candid and constructive. Aide-Memoires provided the Government with a clear synopsis of the status of reforms, identified openly bottlenecks, and provided explicit advice on managing obstacles to implementation and avoiding excessive delays. The Bank was flexible in evaluating performance and agreeing with the Government on changes in the formulation or timing of specific actions. 74. Transition arrangements. The implementation of the DPL-DDO provided an opportunity for extensive and permanent policy dialogue, which prompted the Government’s request for further policy-based Bank financing to help extend and deepen reforms supported by DPL1-3 and DPL-DDO. Under the CPS for 2014-17, the Government endorsed a lending program that includes four new DPLs and policy-based lending in health, education, social inclusion, energy and justice. A first FEG-DPL and a “Health Sector Reform Project” were approved by the Board in FY14. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 75. Overall Bank performance was moderately satisfactory: moderately satisfactory for quality at entry and satisfactory for supervision. The DPL-DDO was well focused on critical areas of reform, outcomes were explicit, limited in number and adequately complemented by Letter of Development Policy (LDP)-proposed outputs, and implementation risks and constraints were reasonably identified, although some were under-estimated, and included recommendations on mitigation. The operation was implemented timely and with minimal changes. Bank supervision helped maintain momentum, supplemented knowledge and capacity gaps, and ensured adequate coordination with the IMF and the EU. Outcomes and outputs were met for the most part. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 76. Government ownership and commitment to achieving development objectives remained strong throughout the preparation and implementation of the DPL-DDO. During 2012-2014 Romania had three different coalition governments; all endorsed the objectives of the DPL-DDO and secured parliamentary support. The President supported the program regardless of political tensions. 77. DPL-DDO-supported reforms were consistent with Romania’s development objectives. The DPL-DDO agenda was consonant with Romania’s National Reform Program, convergence goals and EU commitments, including commitments assumed under the EU Fiscal Compact and the EU Third Energy Package of Energy Reforms. 78. Implementation arrangements and capacities built on the previous DPL1-3 series and were adequate. Romania had a proven capacity to manage reform programs with the Bank. The DPL1-3 series had been implemented in a satisfactory manner by the same government agencies under the overall responsibility of the MoPF. The Prime Minister’s office participated closely to all policy decisions, arbitrated when necessary diverging views, and facilitated coordination with the Parliament, the National Bank of Romania, and other stakeholders. 24 79. Monitoring and evaluation arrangements were efficient and addressed implementation issues in a timely manner. M&E was carried out jointly with the Government and findings were presented to senior Government officials for endorsement and corrective actions. 80. Coordination with the IMF and the EU was very good. The Government effectively coordinated well the ongoing programs by the Bank with those of the IMF and the EU, all of which were provided with a common macroeconomic framework. The synergies in the structural reform program were also well developed and the Government encouraged joint supervision mission with the IMF and the EU. 81. Transition arrangements are in place. The Government is committed to maintaining the reform momentum and has asked for the Bank’s support through new DPLs and policy- based sector operations. Romania endorsed the CPS indicative lending program that includes four new DPLs and policy-based sector operations in health, education, energy, social inclusion and justice. The Board approved in FY14 the FEG-DPL and the “Health Sector Reform Project”. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 82. The DPL-DDO was coordinated by the MoPF and implemented by MoPF and the Ministries of Economy (Energy Department) and Health. The MoPF coordinated implementation of the DPL-DDO efficiently and transparently, cooperated well with the line ministries in charge of reforms in energy and health, and brought promptly contentious issues to the attention of senior officials, including when necessary to the Prime Minister. The line ministries internalized DPL-DDO-proposed reforms, maintained the commitments and delivered them in a reasonable manner. They submitted reports on time, provided clean audits and explanatory notes and carefully tracked progress in implementation. At the same time, however, capacity limitations were visible in implementation. The implementation of the basic health package by MoH failed to achieve the intended savings and was more limited in scope than initially planned, while the restructuring of the territorial network of the Tax Administration Agency did not reach the committed downsizing. The implementing agencies were responsive to the requests of the Bank experts and maintained a direct contact with the Bank office in Romania. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 83. The Satisfactory rating is predicated on several criteria: Romania’s commitment to reform was strong at both political and technical level; the DPL-DDO program was delivered fully and on time; implementing agencies demonstrated reasonable capacity to manage, monitor and evaluate implementation; implementation was coordinated efficiently and in a constructive manner with external partners; and Romania has sought and obtained Bank support for broadening and deepening the reform process. 6. Lessons Learned 84. General lessons: • DDOs are instruments which give appropriate flexibility when governments seek to insure against exogenous risks. In retrospect, the choice of the DDO instrument was 25 appropriate; the Bank should consider to promote it more actively to clients which seek risk insurance to adverse exogenous shocks rather than direct financing 33. • Continuity of country team and country office involvement is critical for success. The country office maintained an ongoing dialogue with the authorities, helping overcome obstacles to implementation through just-in-time reactions. • Relevant analytical work and synergy with other Bank activities are essential. The DPL- DDO design was built on a solid foundation of country knowledge acquired through thorough analytical work. • Just-in-time policy advice and technical assistance make a difference. The implementing agencies engaged the appropriate sector staff in the local Bank office and in Washington virtually on a continuous basis on policy choices and decisions. 85. Specific lessons: • Disruption created by major institutional reforms (e.g., tax administration reform, which required massive reallocation of staff –around 1,700 people—and the establishment of new offices) should not be underestimated. • Properly assess the strength of vested interests (e.g., when proceeding with the liberalization of energy markets) could be underrated. Political leadership and direct involvement of senior officials (often the Prime Minister) is critical to implement sensitive reforms. • Baseline indicators and targets (e.g., savings from elimination of certain drugs from the list of compensated medicine) must be firmly documented, or when revised must be reflected in amended targets. • Definition of results indicators must be consistent over the lifetime of the operation, or appropriate corrections in targets must be made when revised. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 86. The Government commented on the draft ICR through the Ministry of Public Finance, as coordinating agency for implementation (see Annex 4 on the Borrower’s ICR). The Authorities provided an accurate and candid summary on the implementation of the DPL-DDO. They broadly agreed with the ICR assessment and conclusions and were satisfied with the cooperation with the Bank. The Government continues and deepens reforms in public finance, energy and health, as well as in other areas, with support from the ongoing FEG-DPL series. No particular issues were raised in the Government’s feedback. (b) The IMF and the EU 87. The IMF and the EU largely agree with the ICR assessment and consider that the DPL- DDO made an important contribution to Romania’s management of the crisis and the advancements in structural reforms, particularly in energy. The two institutions call for continued support of the Bank for Romania’s reforms and highlight the short and medium term risks which the country faces. The two institutions emphasized the excellent cooperation with 33 The Romania DPL-DDO was, to our knowledge, the first one implemented in the ECA region. 26 the Bank through the joint supervision of the multilateral support package endorsed by the IFIs and the EU (see Annex 5). 27 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Team support in Raluca Marina Banioti Program Assistant ECCRO Bucharest Carlos Marcelo Bortman Sr Public Health Spec. GHNDR Sector Expert Steen Byskov Sr Financial Economist GFMDR Operations Adviser (formerly Lead Roy S. Canagarajah AFRDE Co-TTL Economist) Bogdan Constantin Financial Sr Financial Management Specialist GGODR Constantinescu management Nancy Sabina Davies-Cole Program Assistant GMFDR Team support in DC Health and Social Richard Florescu Senior Operations Officer GSPDR Protection Joseph Paul Formoso Senior Finance Officer CTRLA Daria Goldstein Senior Counsel LEGCF Antonia T. Koleva Operations Officer GSPDR Jean-Francois Marteau Sector Leader ECCU5 C. Bernard Myers Senior Public Sector Specialist GGODR Public Sector Expert Kari J. Nyman Lead Specialist GEEDR Energy Expert Catalin Pauna Senior Economist GMFDR Co-TTL Supervision Pedro L. Rodriguez Lead Economist LCC6C Co-TTL Alberto Leyton Senior Public Sector Specialist GGODR Tax Administration Note: During supervision Messrs. Rodriguez and Leyton replaced Mr. Canagarajah and Myers, respectively. Health, social protection, energy, fiduciary and legal experts continued as before. (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending Total: 0.00 Supervision/ICR Total: 0.00 28 Annex 2. Beneficiary Survey Results There was no beneficiary survey. 29 Annex 3. Stakeholder Workshop Report and Results There was no stakeholder workshop. 30 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Context and Overall Assessment The DPL-DDO extended and deepened the reform program implemented by Romania during 2009-2011 with the support of International Financial Institutions (IFIs), including the World Bank. The implementation of the Development Policy Loans (DPL) 1-3 contributed significantly to a successful management of the crisis and an emergent recovery in 2011. The DPL-DDO complemented precautionary arrangements concluded by Romania with the IMF and the EU in 2011 and 2013. This report highlights the main goals and achievements under the program. The DPL-DDO was highly relevant to Romania’s progress towards its main development objective of EU convergence. The DPL-DDO objective was to help Romania accelerate progress towards fiscal sustainability through a comprehensive three-year 2012-2014 program for: (1) public financial management (PFM) reform; (2) energy sector reforms; and (3) health sector reforms. Specific objectives included: better enforcement of tax laws to increase budget revenue; improved governance of State-owned enterprises (SOEs) in the energy sector and resumption of their privatization with a view to generating savings and investment for their modernization and increased competitiveness; and improved quality and efficiency of public spending in the health sector. The DPL-DDO was structured around specific outcomes detailed in the Policy Matrix of the Program Document, and additional outputs proposed by the Government’s Letter of Development Policy (LDP). Outcomes included a satisfactory macroeconomic performance and specific targets on tax revenue and budget deficits, Hidroelectrica’s profits, deregulation of energy tariffs, liberalization of energy markets, cost savings and reallocation of expenditure for health to prevention and promotion programs. The LDP proposed PFM legal and institutional reforms, reforms in SOEs’ governance, steps to resume the privatization of energy SOEs, and revision of the basic health package. The implementation of the DPL-DDO was coordinated by the Ministry of Public Finance (MoPF) and executed by MoPF, the Energy Department of the Ministry of Economy 34, and the Ministry of Health. The Government considers that the overall implementation of the DPL-DDO was satisfactory. Program objectives were substantially achieved and the vast majority of outcomes and outputs were delivered as proposed. The main achievements of the program are detailed below. Macroeconomic Framework The macroeconomic framework for the operation remains consistent with internal and external sustainability, able to manage risks and vulnerabilities, and conducive to overall medium-term 34 The Ministry of Energy, Small and Medium Enterprises and the Business Environment (“MEIMMMA”) took over the activities and structures of the former Department of Energy and of the Department of Small and Medium Enterprises, Business Environment and Tourism, except those in the tourism sector - Government Emergency Ordinance no. 86/2014. 31 growth. Growth has resumed, internal and external imbalances have been reduced, and the confidence of investors has increased. Romania had the best growth performance of all EU-28 states in 2013, when the GDP increased by 3.5%. Economic growth was driven by a robust industrial output, strong exports and an abundant harvest. Structural reforms, such as the liberalization of energy markets and the new labor code, are starting to show results. Domestic demand is expected to gradually overtake net exports as the main driver of growth. Investment is projected to regain momentum this year, supported by better absorption of EU funds. Private consumption is expected to pick up moderately as consumer confidence improves and disposable income increases on account of higher real wages. At the same time, credit growth, which was in negative territory in 2013, is expected to remain constrained by the ongoing deleveraging of households and banks. In 2013, the balance of trade in goods and services improved strongly by 4.1% of GDP as export growth was solid and import growth remained subdued. Exports are expected to keep growing on the back of an improvement in the external environment, particularly in the EU. Imports are set to rise over the forecast horizon, alongside domestic demand, outpacing export growth in 2015. Inflation declined significantly. This was mainly because of a drop in food prices thanks to a good harvest, a cut in VAT on flour and bakery products, and because of a favorable base effect from high food prices in 2012. Annual average inflation decelerated further in 2014 amid historical lows, again thanks to falling food and fuel prices. As domestic demand recovers, inflation is expected to pick up in the medium term. Downside risks to growth include the slower than expected recovery in the Eurozone and rising global interest rates. Upside risks would include higher investment induced by better-than-expected absorption of EU funds. Risks to the inflation outlook are balanced over the forecast horizon. The general budget cash deficit was reduced from 3 percent of GDP in 2012 to 1.9 percent in 2014. The consolidation was expenditure-driven, with total expenditures relative to GDP being down by 1.7 percentage points (pps) and total revenues being lower by 1 pp. in 2013. The general budget deficit is forecast at 1.8 percent of GDP in 2015. The structural budget deficit was reduced from 2.8 percent of GDP in 2011 to 1.7 percent in 2013. Public Financial Management reforms a) Budget reforms. We strongly focused on the key pillars of our medium-term fiscal framework, aimed in particular to increase results-informed budgeting and enhance public investment management. In 2013 the Parliament enacted amendments to the Public Finance Law that empowers us to improve results-informed budget programs. In this context, we have prepared a detailed plan to start piloting this approach in two ministries (Ministry of Health and Ministry of Education) and plan to adopt their 2017 budget applying the result based framework. Ministry of Public Finance is closely working with these line ministries to issue relevant norms. These norms are expected to be approved before starting the 2016 budget preparation process. We have established and staffed a Public Investment Evaluation Unit (Unit) within the Ministry of Public Finance based on the Emergency Ordinance no 88/2013. This helps strengthen quality control in the preparation, prioritization, appraisal and management of the 32 significant public investment projects financed by the central government. The significant public investment projects financed by the central government will be subject to prioritization criteria and vetting by this Unit. In March 2014 the Government approved the methodological norms for the implementation of the significant projects prioritization system. A first evaluation and prioritization process using the new approved norms took place on June 2014. Budget execution reports were produced by sub-function (COFOG 2) for four budget chapters’ education, defense, environment protection and public order for 2012. These reports were submitted by the Ministry of Public Finance to the National Institute for Statistics for Eurostat reporting purposes. Budget execution reports were not further extended to other chapters, as initially planned, given that starting with 2014 we start using a new information system, FOREXBUG, that ensures more detailed execution reports, (the third level COFOG 3), for all expenditures financed out of the state budget, local budget and social insurance budget. By the end of the 2015 the system will be implemented also at the level of the public entities partially or entirely financed out of their own resources. On March 31st 2014, five of the six selected ministries 35 submitted to the General Secretariat of the Government (GSG) the updated strategic plans. GSG will help the Ministry of Health (MoH) prepare the updated strategic plan and its 2017 budget based on results according to the new framework, through specific consultant service provided under the current IBRD trust fund. The purpose of this exercise is to improve the linkages between strategic planning and policy, and the process of budget formulation and its execution through the development of strategic sectorial plans anchored in the Fiscal Budgetary Strategy for 2015- 2017. GSG reviewed the strategic plans and made recommendations for improvements so that they become useful input for the budget formulation process. The aim of the GSG is to work together with line ministries to improve the design of the objectives and correlate them with the main strategic documents of the Government (the National Reform Program, the Fiscal Budgetary Strategy, and the Convergence Program). GSG was consulted also by MoPF in its exercise to increase results-informed budgeting. b) Tax administration: In order to increase the revenue collection and efficiency we have intensified the efforts to monitor all aspects of tax collection while continuing with our comprehensive reforms of the tax administration. For this purposes a high-level task force was set up in October 2013 to better understand the low revenue collection in the third and fourth quarters of 2013. As part of ANAF restructuring and modernization, we created eight regional directorates in September 2013 and will set up 47 local offices by 2016. Around 1,700 staff were reallocated to prevention and control activities, and in the Bucharest Region, in particular, the resources have been increased in order to combat fraud, through the creation of the General Directorate for Fiscal Anti-fraud. Voluntary compliance is also improving. Training programs with the assistance of partner country tax administration specialists and IMF technical assistance have been undertaken and a pilot structural compliance project targeted on undocumented labor and tax evasion, in line with the EU version of the Compliance Risk Management Model, has been recently launched. This pilot program is expected to increase voluntary compliance and reduce tax evasion for labor and raise awareness nationwide on the related issues. Efforts have been also made to develop taxpayer services, for example, offered through ANAF’s portal by mid-2014 and by ensuring that the interpretation of the tax law is 35 Ministry of Labor, Family, Social Protection and Elderly; the Ministry of Regional Development and Public Administration; the General Secretariat of the Government; the Ministry of Agriculture and Rural Development; the Ministry of Education; and the Ministry of Health. 33 unambiguous. We will set up a central database that will allow us to manage and assess together with local authorities the data regarding taxes and contributions owed to the general consolidated budget as well as information on properties. This will be an important source of information for taxpayers and should also raise compliance. c) Taxation regime. From September 2013, we reduced on a temporary basis the VAT on flour and bakery products to 9 percent and identified countervailing measures in excises to offset the budgetary impact. In early 2013, MoPF enacted measures to move the VAT collection onto a cash accounting basis for companies with annual turnover below € 500,000. A solidarity levy on the windfall gains from the deregulation of gas prices was introduced starting with February 2013. In the meantime an inter-ministerial working group is preparing a strategy for a new oil and gas taxation regime, to be effective from 2015 through 2024. On the other hand, in May 2014 Government started taking the legal steps to remove 14 non-fiscal taxes and tariffs and to merge other 78. Energy sector reforms Significant progress has been made in particular on: legal and regulatory reforms, safety net for poorest households, transparent and competitive contracting, SOEs privatization and corporate governance a) Legal and regulatory reforms. In 2011 the government re-launched reforms to ensure compliance with the EU third energy package for electricity and gas. In 2012, the Parliament adopted new electricity and gas law (Law of Electricity and Natural Gas. 123/2012), as well as the law ensuring ANRE operational and financial independence and empowering it to continue energy market reform. ANRE has implemented the electricity and gas price road maps as planned. Also the pass-through mechanism for electricity and gas purchases by the supply companies continue to be applied. For electricity, complete deregulation of electricity prices for nonresidential consumers was achieved by January 1, 2014, as scheduled. For natural gas, ANRE increased regulated prices in October 2013 and January 2014 as called for the gas price liberalization road map. Given that the domestic producer prices of gas have reached the level of prices from the relevant European gas hubs, ANRE has concluded that a further regulatory price adjustment in the wholesale gas price (the commodity price of gas) in the regulated tariff of non-residential costumers was not needed in July 2014. The Electricity and Natural Gas Law no. 123/2012, and its amendments, includes provisions to eliminate regulated gas prices: (i) until 31 December 2014 for non-household customers, except that this time there is a significant difference between the selling price of the domestic production and import European price, which could jeopardize the stability of the market, in which the term is extended until 31 December 2015; (ii) until 1 July 2021 for household customers. In line with EU requirements, recent changes to the energy and natural gas legislation set forth a road map for the liberalisation of the prices of natural gas. On the gas market, liberalisation of the prices of natural gas was finalised for non-household consumers (except thermal energy producers, only for the quantities of natural gas used to produce heat in cogeneration plants and heating plants for household consumption) at 1st of January 2015. In line with the last road-map convened at Governmental level (GD no 488/2015), the gas market will be fully liberalised for household consumers in 2021. 34 According to the provisions of Law 123/2012, and its amendments, in order to ensure non- discrimination between the same class of consumers, by the end of the regulation period, household consumers and thermal energy producers, only for the quantities of natural gas used to produce heat in cogeneration plants and thermal power plants for household consumption have the same treatment in terms of ensuring the quantity and selling price of natural gas consumed, whether they chose to be eligible or regulated In order to increase the activity on the gas market and improve liquidity, the regulator imposed (by Order no. 118/2014) that from 1 January 2015 until 31 December 2018, Romanian natural gas producers and their affiliates must trade on the centralised markets, in a transparent and non-discriminating manner, a minimum quantity of gas destined for consumption within the Romanian market (at least 35% in 2015, at least 30% by 2016, at least 25% in 2017 and at least 20% in 2018). The same obligation applies to traders / suppliers (except those that are also gas producers - oil agreement holders) starting with 1 March 2015 and until 31 December 2018 (at least 30% in 2015, at least 25% by 2016, at least 20% by 2017 and at least 15% in 2018). There are currently two centralised markets available, one operated by OPCOM and the other operated by the Romanian Commodities Exchange. The Government adopted on July 9, 2014 a draft law amending the Law of electricity and natural gas no. 123/2012, the Petroleum Law no. 238/2004 and the Government Emergency Ordinance no. 6/2014 on the exercise of rights and obligations arising for the State as shareholder to the National Power Grid "Transelectrica" - SA and the National Gas Transmission Company "Transgaz". In compliance with European requirements of unbundling, "Transelectrica" S.A. and "Transgaz" were transferred to the Ministry of Economy, Commerce and Tourism (Government Emergency Ordinance no. 86/2014). b) Safety net for poorest households. To mitigate the gradual increase in energy prices (gas and electricity), protection measures have been put in place using existing means-tested cash transfer programs: guaranteed minimum income (GMI), family allowances (FA), and heating benefits (HB). In this respect last year we eliminated in part the unnecessary asset filters from means-tested programs to increase their coverage of the poor, and increased their eligibility thresholds and/or benefit levels. On the other hand in order to reduce income poverty among the poorest 20 percent of the population we have already initiated the process for the consolidation of the all means-tested programs - the Heating Benefits, Family Benefits, and Guaranteed Minimum Income program – into a single flagship anti-poverty program, the Minimum Social Insertion Income Program (MSIP). c) The introduction of transparent and competitive contracting for Hidroelectrica. In 2012 the company was placed into insolvency process in order to restructure it and to commercialize its energy production in a transparent manner via the energy exchange platform OPCOM. Thus, the bilateral electricity sales contracts have been cancelled or substantially renegotiated (with higher prices and in some case reduced volumes), all the electricity released being sold on OPCOM. During the insolvency process the Administrator also cancelled or renegotiated hundreds of smaller contracts and proposed investment projects deemed to be against the interest of Hidroelectrica. It came out of insolvency but in February 2014 the Appeals Court placed it back into insolvency until the legal claims of energy traders against the company will be resolved. However, the company has recorded financially progress. We expect that it will exit from insolvency at mid-2016. 35 e) SOEs Corporate Governance. All energy SOEs Boards included in the program has been reconstituted, except for Hidroelectrica 36 . This is a first step to improve the corporate governance standards of the energy SOEs and further guidelines to enhance corporate governance are drafted and implemented. In this respect, an assessment of the implementation of Ordinance no109/2011 was performed. This will provide key inputs to improve the emergency ordinance in order to ensure an enactment of a full ownership policy. MOPF has started to systematically monitor SOEs budgets and arrears. Government approved a Memorandum on state ownership and oversight sharpening the management of the SOE national portfolio, which also promotes good practices, including movement towards international financial reporting standards (IFRS) f) Significant progress in implementing the privatization agenda: i.Through initial public offerings (IPOs) and secondary public offerings (SPOs), we sold 15 % of the shares in Transgaz (SPO) in April 2013, 10% of the shares in the Nuclearelectrica (IPO) in September 2013, and 15 % of the shares in the state-controlled natural gas producer (Romgaz) (IPO) in October 2013. Romgaz is the largest state-owned enterprise by revenue. The Romgaz IPO was oversubscribed and increased both foreign and domestic interest in the equity market and was considered one of the most successful IPOs. The Romgaz IPOs was the first time we issued Global Depository Receipts (GDRs) in conjunction with a public offering on the Bucharest stock exchange. The experience gained through the Nuclearelectrica and Romgaz transactions will be also apply to the preparation of the next IPOs in other energy companies. ii. The IPOs for Electrica was launched on June 16, 2014 in order to sell 177.19 million shares, representing 51 percent of the company’s capital. The shares were listed on the Bucharest Stock Exchange (BVB), and part of the offer were structured in global depository receipts (GDRs Electrica has obtained approximately 1.95 billion RON (€ 444 million) following its initial public offer through an offer of shares and GDRs and the admission to trading the shares on the Bucharest Stock Exchange and the GDRs on the London Stock Exchange. The IPO of Electrica was successful, the oversubscription for the offer was 2.2 times. iii.We have started the preparation of an IPO for Oltenia Energy Complex, hiring a consultant in order to conduct a coal reserve assessment. We have transferred Berbești mine to CET Govora, in order to diminish the company’s arrears and make it more attractive to potential buyers. iv.Government approved a decision for the sale of 15% of Hidroelectrica’s shares (more than we initially planned). The IPOs will be launched as soon as possible after it exits from insolvency. Health Sector Reform The Government’s health sector reform incorporate actions in two areas: (a) increasing the health service quality while improving cost effectiveness; (b) improving the health service delivery model including a rationalization of the public health care sector infrastructure. To control expenditures and ensure efficiency gains on short run the following measures were implemented: i.We introduced a negative list of health services and drugs (prior action under this program), based on the recommendations of the technical assistance carried out by NICE. Health 36 Further to the recent returning into insolvency Hidroelectrica’s Supervisory Board was dismissed 36 Technology Assessment (HTA) department is fully operational and staffed. An interim simplified HTA methodology was designed and is currently applied to the pre-approved new drugs, before being included in the lists of compensated drugs (the full HTA methodology that will be further used is going to be developed under the new loan for health). ii.In 2012 we have started to implement the National Hospital Bed Plan and reduced the number of hospital beds that can be contracted by the National Health Insurance House (according to GD 449/2014 hospital care beds to be contracted by the NHIH are: for 2014 - 121579, for 2015 - 120579 and for 2016 - 119572). iii.In March 2013, we started to introduce co-payments, based on a modest fixed amount depending on services provided, in the hospital sector, excluding emergency services. iv.The MoH is strengthening the prevention and health promotion programs and is transferring treatment programs to the National Health Insurance (NHIH). In 2013 the Ministry of Health started to implement a program for early detection of cervical cancer, the budget allocated to this program being increased from 0 in 2012 to about lei 19 million in 2014. Based on the MoH data the state budget allocated for preventive/health promotion programs reached in 2013 about 24% of the state budget allocated to all the National Programs (toward 16% in 2011) and is estimated to be 39% in 2014. v.In order to raise the efficiency of healthcare spending and improve health outcomes, while improving cost effectiveness ministry of health started to implement a comprehensive reform of the healthcare system, focused on four main pillars: (a) a minimum health package, (b) a basic health package, (c) revision to the list of reimbursable medicines, and (d) revision to existing and introduction of new national health programs. Romania’s Performance in Implementing the DPL-DDO We consider the Government’s performance to have been satisfactory. The Government participated fully in the preparation of the DPL-DDO, made satisfactory arrangements for implementation, delivered outcomes and outputs substantively and timely, and provided high- level political oversight and support. Virtually all outcomes and outputs were met or are in advanced stages of implementation. Risks were managed and mitigated efficiently, and reforms were all accepted by stakeholders and the population at large. The Government considers that the performance of the Bank and other IFIs has also been satisfactory. Our partnership with the Bank has been exemplary. We shared a common philosophy, cooperated in finding adequate solutions, and agreed on most issues. Lessons generated by the cooperation with the IFIs highlight the importance of timely policy advice and technical assistance in preparing and implementing reforms, the need for close high-level political attention and support in resolving incipient disagreements among implementing agencies, and the necessity of adequate monitoring and evaluation arrangements. Future Operations The Government intends to extend and deepen the reform program, and to continue to rely on IFIs’ support to this end. In addition to continuing precautionary arrangements with the IMF and the EU, the Government counts on the Bank’s support. Romania has endorsed the program proposed by the Country Partnership Strategy (CPS) for 2014-2017, which includes four DPLs and several policy-based sector operations in health, education and energy. 37 The First Fiscal Effectiveness and Growth DPL was approved In May 2014 and the Government has implemented agreed reforms in fiscal management, SOEs’ performance and functioning of the property, energy and capital markets. The Health Sector Reform Project approved in March 2014 deepens the reform agenda initiated under DPL 1-3 and DPL-DDO. Concluding Remarks The Government has assisted in the preparation of the Bank’s ICR through the submission of progress reports, extensive consultations with the Bank team, and feedback on the draft ICR. 38 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders IMF Observations on World Bank Participation in Multilateral Support for Romania in 2012-2014 The World Bank was an important partner in the multilateral support of Romania’s economic program in the period 2012-2014 aimed at addressing crisis legacies and advancing structural reforms. Together with the two successive precautionary IMF Stand-by Arrangements and European Commission Balance of Payments Assistance Programs (2011-13, 2013-15), the World Bank DPL-DDO provided a fiscal buffer against external shocks. The DPL-DDO, its monitoring activity, and Reimbursable Advisory Services (RAS) operations, contributed to advancing several macro-critical reforms, in particular in the energy sector, and supported the on-going process of strengthening public institutions, in particular tax administration, state- owned enterprise governance, and public financial management. Many of these reforms encountered delays and are not yet complete, however. Among the key contributions of the DPLs were the following:  Energy sector reform. Bank support helped keeping the energy price deregulation on track, resulting in a full deregulation for electricity prices for non-resident consumers, and greater transparency and competition. At the same time, Bank engagement was targeted at cushioning the impact of energy price developments on the most vulnerable by the support system more targeted and ultimately more generous. Adoption of comprehensive supportive legislation is still pending.  Tax administration. The DPL supported the modernization of the tax administration agency which resulted in a significant reduction in local tax offices, increase in electronic filing, and creation of an anti-fraud unit. Bank engagement and IMF technical assistance worked complementary to foster tax compliance, with the Fund focused on large taxpayers and high net wealth individuals.  Public financial management. With Bank support the authorities developed criteria to prioritize public investment projects, a prior action for the approval of the Fund-supported program, and established an evaluation unit in the Ministry of Public Finance. While public investment planning, executing, and monitoring remain a major weakness, Bank involvement was critical to initiate greater transparency.  Corporate governance of state-owned enterprises (SOEs). Building on the Emergency Ordinance from 2011 that introduced a new SOE corporate governance framework, the Bank’s review of its implementation helped identify shortcomings. Jointly with the Fund, the Bank supported draft amendments that are also aimed at raising the legislative basis of SOE governance. Bank efforts also supported the Ministry of Public Finance’ SOE monitoring unit.  Health care reforms. While significant work still needs to be done to address the fundamental difficulties facing the health care system, Bank support has been important in providing expertise in areas that could eventually improve cost-effectiveness, such as shifting to more preventive care, out-patient treatments, more centralized procurement, and electronic health cards. 39 Coordination during the DPL-DDO operation with the Fund was excellent. Both institutions shared information, agreed on diagnostic and policy recommendations, and conducted many joint missions, including consultations with the government, parliament and other stakeholders. 40 Comments of the European Commission on the World Bank Implementation Complementation Report for the Romania DPL-DDO 12 October 2015 Dear colleagues, Thank you for the opportunity to comment on the report. The Bank's loan to Romania for a DPL-DDO was an important complement of the second (2011-13) and third (2013-15) EU balance of payments financial assistance programmes, both of precautionary nature, and of the IMF's parallel stand-by arrangements. We very much welcome the Bank's assessment of a very positive cooperation between the three institutions, which we fully share. We also agree that the Bank had, and retains, an important role in supporting capacity building among Romania's public actors. Technical support and advisory services from the Bank shall continue to support Romania's administration in building up its capacity to deliver efficiently and timely public services and goods to its population. We largely share the evaluation and the conclusion of the report that the joint effort of the EU, the Bank and the IMF were essential in helping Romania stabilise its economy and correct most external and internal imbalances. During 2009-11, under a first joint EU/IMF programme which the Bank supported, Romania successfully stabilised its fiscal stance, re-established market access for the sovereign and safeguarded financial stability. This effort was further consolidated during the DPL-DDO period. The current account deficit continued to decline, Romania reached its medium-term objective of a structural deficit of 1% of GDP, and the financial sector has further reduced risks to its stability. The report appropriately describes these trends. Conceivably, the report could address more explicitly risks going forward. The slowdown of the reform efforts over the last year – to a large extent after the end of the DPL-DDO – impacts upon important areas covered by our joint programmes. Privatisations, restructuring of SOEs and improvements to their corporate governance have registered little progress in 2015. Reforms in health care provision have slowed down. The announced pro-cyclical fiscal policy in 2016 and 2017 could be a risk to macroeconomic stability. A new unified wage law is being prepared without due integration with the Strategy for the Public Administration adopted by the government in October 2014 and its fiscal impact will need to be addressed. Special pensions have been re-introduce for several professional categories, undoing early progress. We agree that these risks shall not eclipse the many achievements since the financial crisis. Regulatory improvements and reforms of state owned energy companies fostered competition and investment in Romania's energy markets. Financial management in the health sector markedly improved and there has been some effort towards rationalisation of health providing structures. Legal and functional reforms increased the efficiency of the tax authority, reduced administrative burden on companies, and had a visible impact on tax revenues. The Delivery Unit created at the centre of the government improved implementation of policy priorities and fostered a useful debate on the need to strengthen policy design and coordination at the centre of the government. In this context, reinforcing the link between national policy priorities and Romania's responsibilities under the European Union's fiscal and macroeconomic surveillance will be a challenge that Romania must continue to pursue. Under the Stability and Growth Pact and its own legislation Romania defined a medium term objective of a deficit of 1% of GDP in structural terms. This prudent fiscal stance is key to 41 ensure fiscal sustainability in a country prone to boom-bust cycles which often triggered by pro-cyclical fiscal policy. Keeping the budget deficit under, but close, to 3 percent of GDP would be in breach of Romania's commitments and would account for a substantial fiscal stimulus at a moment when the output gap is fast closing. It would be important that the report will be clear about this and encourage Romania to fully oblige by the fiscal rules it helped to develop and which will support sustainable growth. 42 Annex 6. List of Supporting Documents 1. World Bank, Program Document for a Development Policy Loan with a Deferred Drawdown Option, Report No. 66748-RO, May 16, 2012. 2. World Bank, Program Document for the First Fiscal Effectiveness and Growth Development Policy Loan, Report No. 83974-RO, April 29, 2014. 3. World Bank, Program Document for a Revenue Administration Modernization Project, Report No. 74927-RO, March 29, 2013. 4. World Bank, Program Document for a Health Sector Reform Project, Report No. PAD650, March 4, 2014. 5. World Bank, Progress Report on the Country Partnership Strategy for Romania FY09- FY13, Report No. 60255-RO, November 28, 2011. 6. World Bank, Country Partnership Strategy for Romania for the Period 2014-17, Report No. 84830-RO, April 28, 2014. 7. Government of Romania, National Reform Program 2011-2013, April 2011. 8. Government of Romania, Romanian Partnership Agreement for the 2014-2020 Programming Period, October 2013. 9. IMF, Romania - Ex Post Evaluation of Exceptional Access under the 2011 Stand-by Arrangement, IMF Country Report No. 14/88, March 2014. 10. IMF, Romania – First and Second Reviews under the Stand-by Arrangement and Requests for Waiver of Nonobservance of a Performance Criterion, Modification of Program Conditionality, and Rephasing of the Availability Dates of Purchases, March 2014. 11. European Commission, Memoranda of Understanding between the European Union and Romania, 2009, 2011 and 2013. 12. World Economic Forum, The Global Competitiveness Reports 2010-2011 and 2013-2014. 13. IFC, Doing Business Reports, 2008 and 2014. 14. Eurostat Database, June 2014. 15. WHO, World Health Statistics, June 2014. 43 MAP 44