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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 132007-YF

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL FINANCE CORPORATION

MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW

OF THE COUNTRY PARTNERSHIP FRAMEWORK

FOR

REPUBLIC OF SERBIA

FOR THE PERIOD FY16-FY20

February 13, 2019

Western Balkans Country Unit

Europe and Central Asia Region

International Finance Corporation

Europe and Central Asia Department

The Multilateral Investment Guarantee Agency

Economics and Sustainability Group

This document will be made publicly available after the Board consideration in accordance with the

Bank’s policy on Access to Information.

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The date of the last Country Partnership Framework was May 22, 2015 (Report No. 98687-YF)

FISCAL YEAR

January 1-December 31

CURRENCY EQUIVALENTS

Exchange Rate Effective January 31, 2019

Currency Unit – Serbian Dinar (RSD) 100.00 = US$ 0.96

WEIGHTS AND MEASURES

Metric system

ABBREVIATIONS AND ACRONYMS

ASA Analytical Advisory Services

CAP Common Agriculture Policy (EU)

CCB Climate co-benefits

CMU Country Management Unit

CPF Country Partnership Framework

DIA Deposit Insurance Agency

DFI Development Finance Institution

DLIs Disbursement Linked Indicators

DPL Development Policy Lending

ECA Europe and Central Asia

EC European Commission

EPS Elektroprivreda Srbije

EIB European Investment Bank

EU European Union

EBRD European Bank for Reconstruction and

Development

FDI Foreign Direct Investment

GDP Gross Domestic Product

GTFP Global Trade Finance Program

IBRD International Bank for Reconstruction and

Development

IFC International Finance Corporation

IFI International Financial Institution

IMF International Monetary Fund

IPF Investment Project Financing

MIGA Multilateral Investment Guarantee Agency

MoF Ministry of Finance

NBS National Bank of Serbia

NES National Employment Service

NPLs Nonperforming Loans

PEFA Public Expenditures and Financial Accountability

PforR Program for Results

PLR Performance and Learning Review

PPPs Public-Private Partnership

RAS Reimbursable Advisory Services

SCD Systematic Country Diagnostic

SILC Surveys of Income and Living Conditions

SOE State-Owned Enterprise

SORT Standardized Operations Risk-rating Tool

STEP Skills and Training Enhancement Project

TFs Trust Funds

UN United Nations

WBG World Bank Group

IBRD IFC MIGA

Vice President:

Director:

Task Team Leader:

Cyril E. Mueller

Linda Van Gelder

Sanela Ljuca

Georgina E. Baker

Wiebke Schloemer

Thomas Lubeck

Levent Karadayi

Olga Vybornaia

Keiko Honda, EVP

Merli M. Baroudi

Gianfilippo Carboni

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PERFORMANCE AND LEARNING REVIEW

FY16–20 Country Partnership Framework

REPUBLIC OF SERBIA

TABLE OF CONTENTS

I. INTRODUCTION

II. MAIN CHANGES IN COUNTRY CONTEXT

III. SUMMARY OF PROGRAM IMPLEMENTATION

IV. EMERGING LESSONS

V. ADJUSTMENTS TO THE COUNTRY PARTNERSHIP FRAMEWORK

VI. RISKS TO CPF PROGRAM

TABLES

Table 1: Revised CPF Lending Program

Table 2: Systematic Operations Risk-Rating Tool

ANNEXES

Annex 1: Updated Results Matrix

Annex 2: Changes to the Original CPF Result Matrix

Annex 3: Detailed Progress as per the Original CPF Results Matrix

Annex 4: Detailed Progress per CPF Focus Areas

Annex 5: Citizen Engagement

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I. INTRODUCTION

1. This Performance and Learning Review (PLR) summarizes the performance of, and presents the

changes to, the Serbia Country Partnership Framework (CPF) for FY16-FY20. While a few

adjustments to the program are proposed, the PLR confirms that the CPF’s overall objective to assist Serbia

to create a competitive and inclusive economy, and promote the country’s integration into the EU, remains

relevant and obtainable during the remaining CPF period. The Program remains well aligned with the

Government’s medium and long-term strategies and consistent with the World Bank Group’s twin goals of

ending extreme poverty and boosting shared prosperity. The PLR is based on a Country Portfolio

Performance Review and extensive internal consultation, as well as consultations with government officials.

2. Overall, implementation of the CPF to date has been satisfactory and the Serbia-World Bank Group

partnership has strengthened. There has been progress in strengthening public financial management and

improving fiscal sustainability, strengthening financial sector, enhancing business environment, improving

efficiency of land and property markets, as well as in energy and transport sectors. Limited progress has been

made against the CPF objectives concerning reducing barriers to labor participation and closing skills gaps,

as well as privatization.

3. While the CPF Program’s focus areas remain highly relevant, the PLR takes the opportunity to

introduce a few adjustments deemed necessary in response to the country’s changed economic context

and to improve alignment with government priorities and delivery of results. To that end, the program

of support for FY19-20 is clearly defined. Agriculture, which was a priority area identified under the

Systematic Country Diagnostic (SCD) undertaken in FY16, is added as an area for analytical and lending

support. The planned FY20 lending program includes an operation in the mining sector that emerged from a

longstanding WBG engagement in the overall SOE reform agenda and sector dialogue in energy, mining and

transport, as well as an operation on innovation and entrepreneurship that builds on a decade-long

engagement in this sector. The lending program is expected to stay within the original CPF envelope,

depending on country demand and IBRD’s financial capacity. IFC has invested a total of US$248.8million

in long term funds and mobilized an additional US$239.2 million, reflecting good progress in private

infrastructure projects but also lower demand in the financial sector. No extension to the CPF period is

proposed. The Results Matrix of the CPF is adjusted, taking into account the evolving country context and

bringing into focus outcomes that the WBG program can realistically achieve in the remaining period.

II. MAIN CHANGES IN COUNTRY CONTEXT

A. Key Political Developments

4. Serbia has experienced a relatively stable political situation during this CPF period, yet there have

been impactful changes at high levels. The strong-majority Government created after the 2014 elections

was expected to provide Serbia an opportunity to overcome growing political fragmentation and build

momentum for reform. For the most part, these expectations were realized. However, there were several

changes in the composition of the government, including changes in key counterparts to the WBG. The spring

2017 presidential election led to a major change in the Government, including of the prime minister (as the

incumbent became Serbia’s new president), ministers, deputy ministers and senior public administration

officers.

5. The negotiations towards Serbia’s accession to the European Union (EU), the country’s officially stated

objective, remain largely on track. At the CPF approval time, the country had a self-declared objective,

though noted to be very ambitious, of accessing the EU by 2020. To date, Serbia has opened 16 out of 35

negotiation chapters, of which two have been provisionally closed. As per recent discussions of the EU

Enlargement Policy, and as reflected in the EU-Western Balkans Strategy1, however, the EU holds that Serbia

1 EU-Western Balkans Strategy – ‘A credible enlargement perspective for and enhanced EU engagement with the Western Balkans’, adopted by the EU

Commission on February 6, 2018

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could become a full member by 2025. The strategy explains the steps that need to be taken by Serbia to

complete the accession process by 2025 and this perspective ultimately depends on strong political will, the

delivery of real and sustained reforms, and definitive solutions to disputes with neighbors. The latter entails

meeting interim benchmarks (towards a legally-binding agreement) related to the normalization of relations

with Kosovo.

B. Recent Economic Developments and Emerging Issues

6. Following years of recession and slow growth, the Serbian economy expanded by 1.8 percent on

average over the previous three years (2015-2017), while a stronger growth of 4.2 percent is expected

for 2018. Over the previous three years, growth started to recover on the back of higher investment (average

annual growth of 8.3 percent annually) and strong growth of exports (up 10.7 percent annually in real terms).

Consumption recovered as well, but at a slower pace (at 1 percent annually in real terms). Growth of the

industry and services sectors contributed most to the overall growth of the economy over the previous three

years, while agriculture had a negative contribution to growth in 2015 and 2017. For 2018, growth was broad-

based with all three major sectors growing faster than last year. As a result, the new projected growth for

2018 is at 4.2 percent, although there is a possibility that this projection would be revised upwards. The

medium-term growth projections depend crucially on deeper and timelier structural reforms and progress

with EU accession.

7. With the return to growth, labor market performance improved as well. Labor force participation rate

increased to 54 percent in 2017, the highest level since 2005. The average 2017 employment rate reached

46.7 percent, led by services, which created 33,000 new jobs (a quarter of them in wholesale and retail trade),

spurred by higher consumption and fast-growing services exports. Manufacturing created another 23,700

jobs (a 6 percent increase in employment in this sector). Youth unemployment has also been dropping, from

35 percent in 2016 to 32 percent in 2017. Strong labor market performance continued in 2018 as well –

employment rate reached 47.6 percent in 2018, while unemployment rate was 12.7 percent (average Q1-Q3).

8. Strong revenue performance and spending controls underpinned the budget surplus in 2017 and 2018.

Serbia ended the year 2017 with a surplus of 1.2 percent of GDP, led by strong revenue collection, spending

controls (including savings from interest payments), and, to some extent, due to under-execution of public

investment. Revenues were up by 7.1 percent (in nominal terms); while spending rose only 1.3 percent in

2017. While total public spending went up slightly (in nominal terms), there were major savings on interest

payments and activated guarantees that together saved about 0.5 percent of GDP compared to 2016. Similar

to 2017, in 2018 the budget is expected to post a surplus of 0.6 percent of GDP despite some relaxation in

spending controls. As a result of prudent fiscal policies, public debt continues to decline and stood at 55.5

percent of GDP (preliminary estimates for end 2018), and is expected to continue declining during 2019,

albeit at a slower pace.

9. While inflation remains low, external imbalances started to grow. In 2017 the dinar appreciated in

nominal terms by 4 percent against the euro but remained broadly stable in nominal terms throughout the

first quarter of 2018. Inflation peaked at 4 percent year-on-year in early 2017 but fell to 3 percent in December

2017 and further down to around 2 percent in 2018. Nominal growth of private sector credit was 3.6 percent

by year-end; loans to households were up by 7.8 percent, to private enterprises down by 2.1 percent, and to

the government down 1.2 percent (all y-o-y, in nominal terms). At the same time, the current account deficit

(CAD) almost doubled, from 2.9 percent of GDP in 2016 to 5.3 percent in 2017, with growth in imports

outweighing gains in exports performance. Still, increase in CAD did not cause more significant pressures

on the external side since non-debt creating inflows (primarily Foreign Direct Investments - FDI) were higher

than the CAD and stood at 6.2 percent of GDP in 2017.

10. Although significant macroeconomic improvements have been achieved and the economic outlook for

the near-term is generally positive, challenges remain. Growth will depend on accelerating the on-going

structural reforms. The government has a stake in more than 600 companies, several of which together have

cost the Government 1 percent of GDP in financial support and, thus, a delay in implementation of reforms

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would have a major impact on the growth outlook. Exports are projected to grow by 7 percent in real terms,

while announced increases in public wages and expected increases in employment generally are likely to

push up consumption, which could increase the CAD. And, while public investment is expected to rise, it is

critical to increase private investment. Meanwhile, acceleration of the EU accession process could send a

favorable signal to investors to consider entering Serbia’s market. Investment in connective infrastructure,

an EU priority, would also benefit Serbian exporters.

11. Sustained growth remains a necessary, but insufficient, condition for poverty reduction and shared

prosperity. While Serbia has made notable progress in reforms in the public sector and fiscal consolidation,

growth prospects remain hampered by continued low levels of private investment and lack of competitiveness

in productive sectors of the economy. And, while unemployment is falling, creating an economy capable of

generating sustained job growth will depend on continued attention to competitiveness of domestic sectors.

Agricultural competitiveness remains an important area for attention in terms of addressing poverty and

shared prosperity. Further advances in enabling the business environment will be crucial to encouraging

private sector investments in other sectors with high potential such as export-oriented manufacturing,

infrastructure, and services. And finally, increasing resilience of the economy to the shocks exacerbated by

climate change, as the impact of the 2014 and 2017 weather conditions demonstrated, will be increasingly

important going forward.

C. Trends in Poverty, Shared Prosperity, and Gender

12. Poor and low-income families faced difficulty in the years following the global financial crisis. Coupled

with droughts and floods in 2012 and 2014, economic recessions in this period increased poverty and hurt

welfare. Income of the bottom 40 percent of the population declined by 1.7 percent between 2012 and 2015,

a bit higher than the decline for the population on average.

13. Poverty reduction has resumed in recent years, though disparities in living standards remain. Based

on the Surveys of Income and Living Conditions (SILC) and growth projections, poverty—measured as per-

capita income below the standardized upper middle-income-country poverty line of $5.50 in 2011 PPP—is

estimated to have declined from 23.8 percent in 2014 to 23.1 percent in 2016 and 22.4 in 2017. Using the

national relative poverty line, 25.5 percent of the population in Serbia were earning less than 60 percent of

the median income in 2015, still higher than in new EU Member States. Income inequality in Serbia, with

the Gini coefficient of per-adult equivalent income at 37.8 percent in 2017, is also relatively high compared

to new EU Member States. Poverty is higher in rural and thinly populated areas, with significant variation

across the country. Pockets of extreme poverty exist, particularly among the Roma population.

14. Economic growth and labor market recovery are important drivers for poverty reduction. During

2014–17, continued economic growth and labor market recovery led to improved employment rates and

increased earnings, mainly driven by wage growth in the private sector. The activity rate increased to 54

percent in 2017 (annual average) while the employment rate stood at 46.7 percent (compare to 45.2 percent

in 2016). These factors largely contributed to the decline in poverty, though the growth slowdown and

difficult weather in early 2017 slows the pace of poverty reduction overall. A decline in agriculture output in

2017 is likely to have had adverse impacts on livelihoods in rural areas, where the share of the population at

risk of poverty is already higher than urban, densely populated areas. Going forward, quality public services

and enhanced labor income continue to be important channels for reducing poverty and boosting shared

prosperity, while efforts should also be made to mitigate short-term impacts on vulnerable populations of the

much-needed structural reforms. To address pockets of poverty among the Roma population, a

comprehensive approach is needed to address the multiple and overlapping constraints that prevent this

community from building assets and creating opportunities.

15. Labor market outcomes among women have improved, but gender gaps persist. The labor market

recovery has translated into an increase in employment and labor force participation among women, including

among young women. The female employment rate has systematically improved since 2014, going from 43.7

to 50.8 percent (for women 15-64 years of age) between 2014 and 2017. A similar trend is seen in activity

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rates. This recovery has seen a slight narrowing in the gender gap, declining by nearly one percentage point

for employment between 2014 and 2017, and 1.8 percent points for labor force participation; nevertheless,

gaps remain high at 13.1 and 14.2 percentage points, respectively. Among youth, the gender gaps have

increased, as young men have seen faster improvement in their labor market engagement than young women.

Young women (15-24) had unemployment rates 7.1 percentage points higher than young men in 2017 – a

worsening since 2014. The improvements in female employment need to be sustained and accelerated so that

gender gaps can close, by continuing to address the barriers and disincentives that women, and in particular

young women, face.

16. Women face persistent barriers and disincentives that call for policy action, linked to (i) access to assets

(property and finance) with, for example, a relatively low share of registered properties with women owners

(39 percent); (ii) constraints embedded in labor taxation and regulation, with taxation that penalizes low-

wage and part-time earners among which women are overrepresented, and family leave that relies mostly on

maternity leave; and (iii) limited access to services that support economic participation such as child and

elder care, with 27 percent of employers saying that hiring women is an issue due to competing demands on

their time from family responsibilities (2016 Skills and Training Enhancement Project / STEP Survey).

Closing gender gaps in access to labor markets can increase the economic growth prospects of the country.

III. SUMMARY OF PROGRAM IMPLEMENTATION

A. Progress toward achieving CPF Objectives

17. Delivery of the CPF program to date has been strong, albeit progress in some areas such as structural

reforms and privatization has been slow. The CPF proposed an ambitious IBRD lending program of about

US$ 1.6 billion over five years and the delivery has proceeded largely as planned. To date, 65 percent of the

planned lending program has been delivered through 9 operations (including one “front-loaded” from FY19,

the CAT DDO DPL). As anticipated, two thirds of the delivery to date was towards development policy

support, including the second in the series of State Owned Enterprises Reform DPL and Public Expenditure

and Public Utilities DPL series (2 DPLs). Currently four operations (of which one AF) are under preparation

for FY19 delivery and another four operations are expected to be approved in FY20 (details in the Table 1,

page 12). The key advisory and analytical work has also been delivered or is underway.

18. IFC's own account financing reached US$248.8 million across seven projects2 bolstered by additional

mobilization of $239.2 million, reflecting good progress in private infrastructure projects and lower

than expected demand in the banking sector. IFC has been active in private infrastructure through its

investment and advisory work, including investing and mobilizing financing for new renewable energy and

waste management capacities as well as manufacturing facilities. IFC's advisory programs provided much

needed support for reforms and institutional capacity building in critical areas including Non-Performing

Loans (NPL) resolution, business climate, trade facilitation, digitalization, customs reform, renewable energy

and energy efficiency, and municipal services.

19. There has been good progress in meeting the objectives set under the two CPF focus areas and the CPF

remains on track to meet its overall objective. The original CPF Results Matrix outlined eleven objectives

and nineteen performance indicators. Progress towards the CPF objectives is summarized below, highlighting

the achievements and noting the areas with limited progress. A detailed review on progress to date is

presented in Annex 4.

Focus areas 1: Economic Governance and Role of the State

20. The robust development lending program contributed to enhanced public expenditure management.

Two DPL series, State Owned Enterprises Reform DPL series and Public Expenditure and Public Utilities

(PEPU DPL series) contributed to the country’s broader fiscal consolidation and structural reforms program.

2 Including $30 million in a regional project

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The State Owned Enterprises Reform DPLs supported the SOE reform agenda, supporting in turn

stabilization of public debt. To date, more than 350 SOEs, from the former Privatization Agency’s portfolio

were resolved, including some of the largest ones. Most of them were resolved through bankruptcy since they

were least appealing to investors and their privatization was unsuccessfully attempted for over a decade due

to significant legacy issues, including complex liabilities. PEPU DPL series’ support to financial

consolidation of public utilities, with a focus on Elektroprivreda Srbije (EPS) and with other IFIs’ support to

a similar process in the gas utility Srbijagas, resulted in reducing fiscal pressures from inefficiencies in the

public sector. WBG support through two DPL series resulted in improved corporate governance and financial

sustainability of four largest utility SOEs (Railways, EPS, Srbijagas and PERS) which are also the largest

companies in energy and transport sectors.

21. The efforts towards overall rationalization and modernization of the administration is still work in

progress. An extensive advisory and technical assistance program, supported by the EU IPA, was delivered

in the form of a horizontal functional review (covering rationalization of the overall government architecture)

and vertical functional reviews (in four sectors – finance, education, agriculture and social protection). The

reviews have been completed and provided the basis for the Action Plans that were prepared, albeit with a

delay, and adopted by the Ministries of Health, Education, Agriculture and Environment. Implementation of

the Plans will require additional time. The ongoing Reimbursable Advisory Services (RAS) provides

complementary assistance to the Cabinet with a focus on result-based management aspects and is set to

conclude in March 2019.

22. There has been progress in improving efficiency of the public power utility and the public transport

companies. Efforts on both fronts were and continue to be supported with a mix of instruments. In the

transport sector, the ongoing investments program paved the way for reforms in the maintenance, operation

and management of the national road network, and management of the transport sector SOEs. PEPU DPLs

build upon these reforms by tackling corporate governance and financial consolidation. As for the railways

sector, strong progress was achieved with restructuring of the Serbia Railways, and establishment of

autonomous infrastructure, freight and passenger companies. On the power utility, the EPS, the results are

already seen in the increased collection rates and decreased losses. Further support is being provided through

just-in-time technical assistance complemented by a RAS focused on strengthening corporate governance

and mainstreaming results-based approaches. In addition to supporting the institutional changes, important

analytical pieces contributed to a wider transport sector development agenda, most notably to mainstreaming

climate resilience in road transport management, and to disclosing the road accident data and publishing

online the open database under GIS environment. Finally, the development of the Gender Sensitive Road

Sector Action Plan developed with the WBG’s support and adopted by the Government represents gender

specific work unprecedented in the transport sector.

23. IFC’s advisory and investment activities in renewable energy and energy efficiency have contributed

to greening Serbia’s energy mix, reducing its over-dependence on highly polluting, outdated thermal

plants and curbing its vulnerability to climate change. A greener energy profile will enable Serbia to meet

its Energy Community obligations to have at least 27 percent renewable energy by 2020. IFC, through its

advisory program, has been helping the Government to create markets and to promote private sector

investments in the renewable energy and energy efficiency sectors. As a result of IFC’s market-enabling

work, Serbia experienced increased private sector investment in renewable energy, particularly in the wind

power sector. In FY17-18, IFC financed two transformative projects (Alibunar and Dolovo wind power

plants) to construct over 200 MW of renewable energy capacity. These two investments have created a

significant demonstration effect, paving the way for other renewable energy projects to access long-term

financing from IFIs. Furthermore, IFC has been leveraging resources across the WBG which allows the city

of Belgrade to access a range of WBG products to design an energy efficiency strategy and develop a pipeline

of investment projects with IFC as the city's key partner of choice. A notable achievement was the landmark

€330 million waste-to-energy PPP project, where IFC contributed as lead advisor and helped the city of

Belgrade to structure and successfully tender the project. This was the first traditional PPP contract signed in

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Serbia, demonstrating the bankability of the PPP framework in the country. IFC is actively considering

financing in this project.

24. IFC supported modernization of Belgrade’s Airport – a landmark “Maximizing Finance for

Development” (MFD) transaction. In FY19 IFC provided a financing package of $207 million for the

Belgrade Airport project with EBRD, Proparco and six commercial banks coming in as co-investors. The

airport had been previously operated as an SOE. In addition to generating a significant upfront concession

fee of €502 million for the government, which corresponds to 1.2 percent of Serbia's estimated 2018 GDP,

the project also introduces international best practices in operations and will undertake a much-needed

capacity expansion without directly burdening public finances. Unlocking the physical capacity constraint

will help close the connectivity gap by significantly expanding the passenger capacity and will support the

development of Serbia's tourism potential. The project serves as a regional example of successful private

participation in infrastructure.

Focus Area 2 Private Sector Growth and Economic Inclusion

25. A broad set of reforms has been undertaken in recent years to strengthen the business environment.

In the last three years Serbia implemented substantive changes in the regulatory environment in the following

key areas: i) starting a business ii) registering property and iii) dealing with construction permits. As per the

findings of the Doing Business (DB) Reports, Serbia’s overall ranking has been improving over the years: in

the recently released DB2019 Serbia holds the 48th position globally. In addition, Serbia has moved to 11th

place globally when it comes to dealing with construction permits, making it faster by introducing an

electronic application system, which is directly supported by the WBG’s engagement. IFC provided advisory

support to improve the insolvency legal framework, train judges and bankruptcy administrators on

implementation, as well as to the establishment of a new bankruptcy agency to centralize all bankruptcy

procedures and administration.

26. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at creating a

new regional market for investment in the Western Balkans 6 (WB6) by removing barriers to cross-

border and intra-regional investment. By fostering greater harmonization of regional investment policies

and better alignment with EU standards, the project aims at unlocking higher levels of FDI and intra-regional

investment, thereby fostering faster economic growth and job creation in the region. IFC also launched a

digitalization project to support the migration of the most burdensome licenses and permits from a paper-

based system to an electronic system.

27. The CPF Program assisted in creating a more stable and accessible financial sector. IFC’s investments

in financial intermediaries helped improve access to finance of SMEs and households through various

products including SME finance, mortgage lending, microfinance, local currency lending and trade finance.

IFC also leveraged regional and global platforms and projects to support Serbia’s private sector and improve

financial access. IFC invested in the European Fund for Southeast Europe (EFSE), a collective debt

investment vehicle to channel long-term resources for housing finance and on-lending to SMEs; in a newly

created Real Estate Investment Trust (REIT) focused on retail property assets in the Western Balkans; and in

a manufacturer of electric motors expanding its production in Serbia, leading to creation of 1,100 new jobs.

Serbia has made significant progress in the area of distressed-asset resolution, with the NPLs steadily

declining from 23 percent of total loans in 2015 to 5.5 percent as of November 2018. Through its global

DARP program, IFC helped finance the purchase of one NPL portfolio. The mix of WBG lending and

technical assistance activities strengthened the Deposit Insurance Agency (DIA) as an important institution

in the financial safety net. Cumulative inflows into the Deposit Insurance Fund ended up beyond the original

target and the premium rate was kept at 0.6 percent. Enhancing the institutional capacity of the DIA and MoF

was an important part of the WBG engagement and contributed to several legal changes strengthening the

DIA and clarifying its responsibilities.

28. On the other hand, privatization and implementation of the overall reform strategy for state-owned

banks and financial institutions requires additional efforts. Due to unclear political commitment, there

has been no progress on the privatization of the largest state-owned bank, Komercijalna Banka (KB), despite

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IFC's strong efforts and involvement in the process in close collaboration with other Development Finance

Institutions (DFIs). To date, a process for engaging a privatization advisor for KB was initiated. The

privatization process has been initiated for one of the other state-owned banks (Jubmes). WBG support to

this agenda continues, both with IFC’s engagement as well as through IBRD lending that aims to support the

Government with implementation of the reform strategy for state owned financial institutions which aims to

divest from selected state-owned banks and financial institutions.

29. There has been limited progress to date when it comes to reducing barriers to the labor market. Delays

and changes arising from elections and high-level staff turnover impacted decision-making dynamics. No

progress has been made to date regarding reforming the social contribution system and the labor taxation law

to incentivize part-time and low-wage employment. The set of measures that the program originally

anticipated to support social assistance beneficiaries’ activation demanded full commitment from the Client

to design and implement, including legislative changes and financing. This has not materialized because of

the lack of commitment of the key players to these complex measures. Nevertheless, the WBG continue

engaging in this area in support of strengthening employment outcomes, which are the most important

channel for sustained poverty reduction and shared prosperity. The ongoing and planned activities focus on

selected public programs that indirectly support this goal and the efforts undertaken to date resulted in

enhanced performance of the National Employment Services (NES), partly contributing to increased numbers

of registered unemployed finding jobs.

Cross-cutting theme: Responding to climate change and disaster risks

30. Mitigating the impact of climate change and making the economy more climate resilient are of

increasing importance in Serbia's development agenda. The WBG engaged in several aspects of this

complex agenda. The Disaster Risk Management (DRM) DPL-CAT DDO was delivered in FY17, ahead of

the originally planned timeline to ensure Serbia is better equipped to respond to a natural disaster. In addition,

the WBG supports the Government in implementation of the National Disaster Risk Management Program

(NDRMP) through a programmatic TA and advisory program focusing on foundational activities required to

further expedite the implementation of the NDRMP, in close coordination with EU and UN. These include,

among others, designing and establishing a national DRM system, generating more information and

strengthening risk assessment methodologies as well as relevant institutions. Finally, in line with the WBG’s

increased focus on climate change, much effort was put to maximize climate co-benefits (CCB) in the Serbia

portfolio. For example, significant dialogue on public utilities reform shaped development policy lending to

support a set of measures expected to have positive environmental impact and bring climate co-benefits, such

as energy price adjustments expected to incentivize moving away from electricity heating and introducing

climate resilience standards in the design of road rehabilitation. Other projects also achieved adaptation

and/or mitigation opportunities; for example, the Enhancing Infrastructure Efficiency and Sustainability

Program for Results (PforR) which will support reduction in GHG emissions as a result of the renovated,

efficient buildings. The teams continue to diligently explore all potential to maximize the CCBs, and new

investments in agriculture, trade and transport, cadaster and mining sector projects are expected to contribute

the most in additional climate mitigation or adaptation co-benefits.

B. Portfolio performance

31. The current IBRD portfolio comprises twelve operations totaling US$1.782 million. It includes eight

IPFs (US$1.118 million) and two PforRs (US$193.6 million) and three DPLs (US$470 million). The

portfolio contains five investment loans that have been under implementation from the previous CPF. While

two of them received additional financing, the portfolio was renewed with seven new operations that

contribute to the core objectives of the CPF. The renewed loan portfolio focuses on more efficient public

utilities, modernization of public services, enhanced public service delivery (including land, health and

education), road infrastructure (including road safety), and jobs and competitiveness. This portfolio is

coupled with a rich portfolio of Trust Funds and ASAs. Trust Funds (TFs) are particularly focused on judicial

reform, innovation and technology transfer and disaster risk management.

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32. IBRD portfolio performance remained overall satisfactory, with good disbursements. FY16

disbursement ratio was 30.6 percent, well above other countries in the Western Balkans and ECA. While

FY17 disbursement ratio was a more modest 16.4 percent, disbursements have picked up to 28 percent at end

FY18, while the FY19 disbursement ratio stands at 24.7 percent. Such good performance is in part due to

large ongoing contracts, mostly under the Emergency Recovery Project and Corridor X, the largest projects

in the portfolio as well as accelerated implementation of some of the Disbursement Linked Indicators (DLI)

-based operations. When it comes to the more recent approvals, it generally took a year or so for the

disbursements and the overall implementation pace to pick up, mostly a result of effectiveness delays caused

by lengthy processes of ratification and/or setting up project implementation units. On the other side,

proactivity has been high and concerted efforts of the Government and the WB were made to restructure slow

performing components and problem projects to address implementation bottlenecks and adjust scope,

timeline and financing plans to changed circumstances, as needed.

33. IFC portfolio quality has been improving, after a spike in the NPL ratio. At the beginning of the CPF

period, NPL share in Serbia’s outstanding loan portfolio was 18%. Subsequently it went to about 45% in FY 17-18,

largely on account of a single project, and is now at 9%. Following strong restructuring efforts, IFC resolved its

largest non-performing loan in the country and has made progress in resolving two other real sector problem

projects. Privatization efforts have stalled on a major state-owned bank, where IFC took a pre-privatization

equity stake alongside other DFIs and the Serbian Government. Other IFC financial sector investments are

performing well and implementation of advisory services, in particular in the two projects delivered through

the Global Practices, remains strong.

34. During the CPF period, IFC commitments are expected to be in the order of US$400 to 600 million,

depending on the pace of Government implementation of needed reforms, with a total committed

portfolio of US$228.5 million. New commitments within the CPF period reached US$248.8 million in own

account and US$239.2 million in mobilization. The total committed portfolio amounts to US$228.5 million

as of December 31, 2018. In addition, through its Global Trade Finance Program (GTPF), IFC provided

US$34.9 million in trade finance to support Serbian exporters. The current project pipeline remains focused

on infrastructure and renewable energy. IFC was well positioned to invest large amounts to support

privatization of several SOEs, including Srbija Telekom, which was unexpectedly pulled from the market.

Government commitment to future privatization remains unclear.

35. MIGA’s total exposure in Serbia reached US$850 million as of January 31, 2019, across five active

projects. Currently, MIGA’s engagement is solely concentrated in the financial sector, where MIGA has

issued Political Risk Insurance guarantees to international financial institutions against the risk of

expropriation of funds. Through these guarantees, MIGA helps to ease the capital pressure on these banks,

therefore providing the enabling conditions for faster loan growth of their local subsidiaries in Serbia. Going

forward, MIGA is currently considering providing political risk insurance guarantees for the waste-to-energy

PPP project with the city of Belgrade jointly with IFC.

36. While Serbia has now reached 100% compliance for citizen engagement, the portfolio has struggled

with the quality and the level of implementation of genuine mechanisms in a number of projects. The

results are reported according to the ECA Citizen Engagement Quality Index in Annex 5, together with a

Citizen Engagement Roadmap which sets out the steps that will be taken to: introduce a new level of

performance vis à vis citizen engagement in upcoming projects, take corrective action on projects facing

challenges in implementation, and ensure inclusion in citizen engagement processes. The portfolio has two

opportunities to significantly enhance the CE under implementation (education, roads), and three

opportunities for transformative platforms (health, trade and transport, and digital governance).

C. Evolution of Partnerships

37. Cooperation and engagement with development partners continues to play an important role in

achieving Serbia’s development goals. Given the prominence of the EU accession agenda, the EU is the

key interlocutor and the WBG continued the partnership in a wide range of areas during the CPF period. The

9

EU’s support and IPA financing was provided to the public administration reform area, specifically to WBG’s

undertaking of vertical and horizontal functional reviews. The EU (alongside Switzerland) is one of the key

contributors to the WBG’s work regarding the above discussed DRM agenda. The WBG is also implementing

EU-financed Serbia Research, Innovation and Technology Transfer Project that promotes commercialization

of public R&D in Serbia and facilitates strategic planning in its research sector. In the transport sector, the

coordination and co-financing arrangements are in place to support large infrastructure investments, as well

as reforms in the road sector, jointly with EBRD and EIB. Among bilateral partnerships, Switzerland is one

of the largest contributors in the areas of public finance and corporate financial reporting area, financial

sector, judicial reform, and disaster risk management. Other bilateral partnerships with Norway, Sweden, the

Netherlands, UK, Germany, Austria, and Japan continue with coordinated financing and Multi Donor Trust

Fund (MDTF) arrangements supporting several sectors, including competitiveness and innovation, judicial

reform, and disaster risk mitigation. EBRD, EIB and other bilateral IFIs are strong investment and advisory

partners alongside of IFC.

38. The WBG works in close collaboration with the International Monetary Fund (IMF) in supporting the

Governments ambitious fiscal consolidation and structural reform agenda. The IMF relied on the

technical support and complementary financing of the DPL series (both the State Owned Enterprises Reform

DPL series and the PEPU DPL series) to identify reforms to embed in its Program in order to achieve the

macro-fiscal targets. In the end, the IMF, DPL and TA elements all fit together in support to the key elements

of the Government’s reform program to deliver on the fiscal consolidation and structural reform goals. In

July 2018 the IMF approved a 30-month macroeconomic and structural reform program supported by the

non-financial Policy Coordination Instrument (PCI).

VI. EMERGING LESSONS

39. Coordination and capacity constraints continue to affect implementation in several ways. Inter-agency

coordination remains a challenge and continues to impact the pace of both preparation and implementation

of projects. In addition, insufficient capacity and/or high staff turnover in key technical positions and

implementing units has taken a toll on the implementation pace (e.g., Serbia Competitiveness and Jobs, Serbia

Second Health Project). The capacity for coordination and implementation appears to be particularly

stretched in cases of institutions and units in charge of complex programs or multiple activities supported by

various development partners. Another aspect of capacity constraints is related to service providers. In the

transport sector, poor performance is noted with respect to design and construction services due to limited

competition and market constraints. Going forward, the WBG can work with the Client to address these

constraints primarily in two ways: 1) ensuring project readiness, including having functioning

implementation and operational arrangements in place at the time of project approval and 2) continuously

providing formal and informal (hands-on) training to key counterparts (such as on project / contract

management, procurement and safeguards).

40. Projects with parallel implementation and co-financing options, have proven to be rather challenging

to implement. In the transport sector, the harmonization of procedures for co-financed activities between the

involved IFIs took years to resolve, causing substantial delays and some extra transaction cost for the Client.

Much effort had to be made to fully resolve the issue and operationalize functional processes (e.g., delegation

of certain approvals to the Bank). This experience provides an important lesson for discussing joint

engagements with other development partners in the future and in particular on the importance on agreeing

on and formalizing clear coordination mechanisms by project approval.

41. The WBG remains one of the key partners in the development dialogue and should explore additional

opportunities for leveraging MFD approach to increase private sector involvement and financing. In

the current CPF period to date, the WBG efforts were focused on restructuring SOEs to make them more

efficient and on the resolution of mostly small SOEs. Higher and more sustainable growth for Serbia requires

a more ambitious engagement and enabling the private sector to invest more and thus create more jobs.

Combining the available financing and knowledge, the WBG should seek to support innovative programs to

exploit opportunities for the design and implementation of PPPs, especially in viable SOEs being resolved.

10

For the Government, this would include, inter alia, leveling the playing field to allow for fair competition

and creating conditions to enable private investment in transport, energy and other infrastructure. Overall,

the potential for MFD exists in the areas where the state chooses to speed up the privatization process as well

as in areas where competitiveness could benefit from private sector initiative such as agriculture, and possibly

mining / extractive industries. Such potential will be closely explored in developing projects planned in these

areas in the final year of this CPF.

V. ADJUSTMENTS TO COUNTRY PARTNERSHIP FRAMEWORK

42. The program’s three main areas of engagement remain highly relevant and thus no significant change

in areas of focus is required. Some important adjustments to the Program are however introduced to enable

the WBG to respond appropriately to the changed circumstances and increased demand from the

Government, as well as to an important regional initiative. Accordingly, and as anticipated at the CPF

approval, the program for the remainder of the CPF, i.e. for FY19 and FY20, is now well defined.

43. The Serbia RAS program, including a first RAS approved in the Western Balkans countries, engages

the WBG in support of results-based management. The work under the first RAS (signed February 2017)

focuses on designing results-based management mechanisms and strengthening capacities among a core of

ministers, state secretaries and assistant ministers for better policy decision making and implementation. The

Government has established dedicated structures and mechanisms, primarily ministerial and implementation

groups, to facilitate the roll out of results-based management practices and to support team building at the

political and senior civil service levels. A modification to this RAS in April 2018 permitted the Bank to

provide just in time technical assistance for Serbia to update its Money Laundering/Terrorist Financing

National Risk Assessment using the tools and methodology developed by the WBG. The second RAS, Serbia

EPS Results Based Management Project, was signed in April 2018. It responds to the Government’s request

for assistance with improving performance of the national power company EPS, through results-based

management and strengthening of institutional capacity of EPS. Specifically, this RAS will provide support

to strengthen corporate governance in EPS reflecting best international practice for the governance of state

own enterprises, mainstream results-based approaches and best management practices used in modern power

corporations and corporatize EPS. The RAS program represents a significant expansion of the WBG’s

support to fully achieving the CPF objectives related to more efficient public administration and improved

service delivery, and a more efficient power company.

44. Agriculture remains one of the high priorities for the Government, with an important dimension to

shared prosperity, and the WBG’s support to this area will be expanded. At the CPF preparation stage,

agriculture was identified as a high priority area in the SCD, yet the Government was at that stage looking to

other partners, especially the EU, to lead efforts in in this area. The WBG maintained policy dialogue and

the Government recently expressed interest in additional support from the WBG. The proposed FY20

Commercial Agriculture operation is expected to focus on strengthening agricultural sector competitiveness

on and off-farm. Integrating smaller producers into existing value chains or helping them reach new markets

will require an integrated approach, including ensuring that the WBG engagement be closely aligned with

the related EU requirements and frameworks. While the results are not expected during this CPF cycle, this

operation is in line with the overall goal of private sector growth and economic inclusion. In particular, given

the importance of agriculture as the main source of (self) employment in the rural areas, this operation will

address agricultural productivity and rural incomes to improve the welfare of the poor and reduce poverty.

The operation will also support efforts in greening agriculture and diversification of products, which will be

an important contribution to the WBG’s overall efforts towards supporting the country to better respond to

climate change and disaster risks.

45. The lending program will also include the Regional Trade and Transport Facilitation Project, not

envisaged by the CPF. Over the last several years, the WBG has engaged in several activities to support the

Western Balkans countries to advance the goal of economic integration within the region and within the

European Union, as laid out in the Berlin process (and the Multi Annual Action Plan). To this end, an

agreement was reached to support a regional project to facilitate trade and transport within the Western

11

Balkan countries, with the ultimate objective to reduce trade costs and increase transport efficiency. The

project includes measures that substantially build on the ongoing Program addressing CPF priorities of

strengthening public sector management and service delivery and improving business environment for

accelerated private sector growth and boosting employment, while selected investments on key corridors will

contribute to enhanced infrastructure networks. Serbia will be part of phase one of the project, together with

Albania and North Macedonia. In Serbia, activities will include adoption and implementation of a National

Single Window (NSW) solution, installation of Electronic Data Interchange (EDI) systems at seven railway

border crossing points, developing overall ITS architecture and deploying the Intelligent Transport Systems

(ITS) on Corridor X, and improving specific railway level crossings on the network.

46. The lending program of the final year of this CPF includes projects that emerged from the WBG’s

long term and multifaceted engagement in key sectors. Support to the Mining Sector Transition Project

emerged from long term engagement and dialogue in the overall SOE reform agenda and builds on the

developments and potential for growth in this sector. Fully in line with the CPF’s goal of creating a

competitive and inclusive economy, this project intends to enable new private sector engagement in mining,

thus creating potential for jobs creation. The Accelerating Innovation and Growth Entrepreneurship (SAIGE)

Project follows a decade-long cooperation between the WBG, EU and the GoS, and builds on the successes

achieved to date in the innovation sector. It will expand access to knowledge and innovation financing and

reinforce transparent and sustainable financing mechanisms. The proposed projects respond to government

requests and present opportunities for co-financing (e.g., with EU), significant climate co-benefits (e.g.,

through coal mine closures), as well as MFD possibilities with regard to untapped lithium endowments.

47. The WBG team is engaging in a series of Advisory Services and Analytics that will support the

Government in gaining more in-depth knowledge of the overall growth and jobs agenda. The new

Growth Agenda Country Economic Memorandum (CEM) is expected to provide a stronger evidence base on

which to formulate policy options, contributing to the overall goal of expanding the engines of growth and

job creation in Serbia. Through a mix of analytical, technical advice, and outreach activities, the CEM will

develop a package of policy recommendations to support Serbia in the implementation of growth-related

reforms. These analytical products will serve as the background for policy dialogue with government and for

outreach activities to the public and stakeholders. The Bank will also complete analytical work in education

focused on finding key obstacles and opportunities for addressing the skills gaps in the economy. These

knowledge products will inform future lending operations, including the development policy operation under

preparation (Public Sector Efficiency and Growth DPL).

48. The ongoing WBG engagement is realigned in response to changed circumstances affecting the labor

reform agenda. Given the lack of progress to date with respect to key legislation and related measures, the

WBG will continue to support this agenda indirectly, both through the ongoing operation and the ASA

program. The focus remains on activation of social assistance beneficiaries, through improvements in Active

Labor Market Programs (ALMPs) and better functioning of National Employment Services (NES), as well

as other selected public programs, to help alleviate constraints to competitiveness and job creation (including

investment and export promotion and innovation). In addition, the CEM that is being prepared will include a

note on labor market, with proposed work on enhancing understanding of labor demand (also a clear

knowledge gap that had been identified in the SCD). The ASA work undertaken in education will help

identify key obstacles and opportunities for promoting acquisition of the skills demanded by the labor market

and reducing skills gaps.

49. Similarly, the WBG’s approach to closing the skills gap is realigned in response to a shift of

Government’s focus as well as developments under the related WBG’s operation. Skills development

and inclusion of vulnerable groups were clearly identified as strategic priorities at the CPF preparation, and

the Early Childhood Education and Care Project is expected to help in laying the necessary foundation for

skills development early on and for narrowing the equity gap in education access and performance. However,

the project was at an early stage of preparation and some of the original CPF indicators (e.g., on vocational

education) do not reflect its final scope. Furthermore, the project faced effectiveness and implementation

12

delays, thus significant results are not expected in this CPF cycle. For this reason, no alternative CPF-level

objective and indicators could be proposed; instead, the objective is dropped from the CPF Results Matrix.

50. The CPF Results Matrix has been revised to reflect implementation experience and changed

circumstances. Several objective and supplementary indicators were adjusted to reflect changes to the

Program, with the formulations, definitions and targets revised to also better capture the expected results. All

the changes remain entirely consistent with the CPF areas of engagement and the ongoing Program and are

reflected in the updated CPF Results Matrix (Annex 1).

Table 1: Revised CPF Lending Program

VI. RISKS TO CPF PROGRAM

51. The risks identified in the original CPF remain largely relevant. Overall, high risk to achieving CPF

objectives emanates from the political changes and governance, as well as environmental factors. Also,

macroeconomic outlook and institutional capacities for implementation pose a substantial risk to reaching

CPF objectives. The overall risk to the program is rated as substantial for the remainder of the CPF period,

as reflected in the Systematic Operations Risk-Rating Tool (SORT) below.

13

Table 2: SORT

Risk Categories CPF Original

Ratings

PLR Revised

Ratings

Political and governance H H

Macroeconomic H S

Sector strategies and policies M M

Technical design of project or program M M

Institutional capacity for implementation and sustainability S S

Fiduciary M M

Environment and social H H

Stakeholders M M

Overall Substantial Substantial

52. The risk of political and governance factors adversely affecting CPF development objectives remains.

Despite the political stability and continuity over the CPF period, following the 2016 and 2017 elections,

there were changes at the level of ministers and other decision-makers that impacted decisions on some

aspects of the WBG Program (e.g., labor sector reform discussed above). Government reshuffling

(periodically contemplated) and the likelihood that such changes may result in shifts in priorities and affect

decision-making processes remains a risk to full achievement of the CPF objectives. This is especially so

with the politically sensitive structural reforms, including the SOEs resolution agenda and public-sector wage

reform. Finally, some political risks are related to the country’s external relations with its neighbors,

especially with regard to Kosovo. This remains fragile and may have an impact on the pace of EU accession

processes and on the overall growth. As for governance, while steps are being taken to strengthen public

sector management system, the improvements are yet to be demonstrated. Delays in infrastructure project

implementation, slow pace of business reforms and of privatization, and continued lack of demand for

reforms in the financial sector constitute the bulk of the risks to the IFC program implementation. The WBG

will continue to strongly support and advocate the significance of completing the reforms, including through

additional analytics (e.g., CEM). Depending on the developments on the political economy side, the Program

will be realigned to focus on activities and instruments that are deemed likely to produce results and in areas

where there is commitment of key players.

53. Macroeconomic risks stemming from emerging or continuing domestic and external imbalances

remain but are considered substantial rather than high (as in the original CPF) for the remainder of

the CPF period. The fiscal deficit has reduced over the last few years, concluding with budget surpluses in

2017 and 2018 and the public debt was also reduced (55.5 percent in November 2018) and is projected to

follow a downwards trajectory in the coming years. The new IMF program was endorsed by the IMF Board

on July 18, 2018. On the other hand, the current account deficit is projected to remain relatively high (around

4 percent of GDP) in the coming years and prospects for expansion of exports remain unclear and susceptible

to external shocks. Increases in public sector wages, subsidies to SOEs, and delays in reforming the public

wage system remain as threats to fiscal stability. If the commitment to and the pace of the reforms weakens,

and if the macro-economic situation deteriorates, delivery of the planned lending program – and FY20 DPL

in particular – by the end of this CPF will be impacted.

54. The risks related to climate change and natural disasters, and most notably those of impacts from

extreme weather conditions, remain high for the rest of the CPF period. Natural disasters in Serbia are

severe and happen often, underscoring the importance of adaptation to climate change. In fact, because of

climate-change-related disasters, since 2000 agriculture has made a negative contribution to GDP growth 10

years out of 17. With climate change and continued urbanization and concentration of assets in vulnerable

areas, the risk is expected to double or quadruple by 2080. The WBG continues to support the country to

mitigate these risks through the ongoing program (in particular, the CAT DDO and the Emergency Recovery

Loan), and the new operations in agriculture and mining sectors will expand the measures being put in place

over next years to mitigate climate change effects and support environmental clean-up actions.

14

55. As foreseen in the original CPF, the risk emanating from institutional capacity for implementation and

sustainability is substantial and remains so for the rest of the CPF period. This stems from the low

capacity for timely completion of a complex and multi-sectoral reform in support of the SOEs resolution

agenda. While the implementation of some difficult reforms especially the SOEs and public utilities reform

agenda progressed, these took longer than anticipated and the resolution and / or privatization of some of the

largest SOEs is still pending and the risk of stalling or reversal remains. Another dimension is related to

periodic discontinuity in staff implementing the WBG program. This can be exacerbated by the high turnover

of staff due to ministerial changes and by lengthy processes of hiring key staff in the implementing agencies,

both witnessed over the last few years. New staff required time to become fully familiar with ongoing

projects, therefore slowing overall implementation besides undermining institution-building efforts and

sustainability. To mitigate these risks, the WBG continues intensive policy dialogue with the Government

and stands ready to address the developments in the key areas with additional analytics and financing as

needed, as well as by providing strong implementation support to expedite the overall pace of

implementation.

15

ANNEX 1. UPDATED CPF RESULTS MATRIX (2016 – 2020)

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE

CPF Objective 1a: Sustainable public expenditure management

CPF Objective Indicators Supplementary Progress Indicators WBG Program

Reduction of public expenditures

through lower direct subsidies and

guarantees to SOEs

Direct subsidies3 (million Euro):

Baseline (average 2012-2013):

293 million EUR (out of which

73m for SOEs in the PA

portfolio)

Target (2019): 25% reduction

(less than 220 million EUR)

Annual guarantees for liquidity

purposes (million Euro):

Baseline (average 2012-2014):

265

Target (2019): less than 50

Allocation from the Budget for subsidies and soft

loans to the SOEs in the former Privatization Agency

portfolio

Baseline (average 2013-14): 72 million EUR

Target (2019): less than 10 million EUR

Decrease in gross tax and contribution arrears by

SOEs in the former Privatization Agency portfolio

Baseline (2013): 197 million EUR

Target (2019): less than 25 million

Freeze on public sector wage indexation in line with

the agreement reached with IMF

Freeze on public sector pension indexation in years

in which pension spending is expected to exceed 11

percent of GDP

Attrition and targeted reduction of public sector

employees

Completed:

Serbia State Owned Enterprises Reform DPL series (two

DPLs, FY15 and FY17)

Public Expenditure and Public Utilities DPL 1 (FY 17)

Public Expenditure and Financial Accountability (PEFA)

Serbia Public Finance Review

Serbia A&A ROSC update

Ongoing:

Second Public Expenditure and Public Utilities DPL

(FY18)

CAT DDO (FY17)

Programmatic Poverty Assessment

Improving the Quality and Flow of Public Finance Data

Planned:

Public Sector Efficiency and Growth DPL (FY20)

CPF Objective 1b: More effective public administration & select service delivery improvements

CPF Objective Indicators Supplementary Progress Indicators WBG Program

A plan to strengthen the policy-making

and coordination system prepared by end

2016 and implemented by 2020

Right Sizing (Organizational rationalization) plans

for at least 4 sectors designed and implemented by

(2019)

Completed:

Wage bill management ECA PFM TF

Right Sizing TA (IPA financed)

Ongoing:

3 The indicator includes direct subsidies to: Railroads, PE Resavica, Airport and PE Roads of Serbia, plus soft loans and subsidies to SOEs from the PA portfolio.

16

Indicator: Metcalfe Scale rating

improved

Baseline (2015): 2

Target (2019): 4

Note: Metcalfe Scale is a comparative tool for

measuring coordinating capacity based on the

Guttman scale, with cumulative progression from

lower to higher levels. The scale has following

nine levels: 1) Independent Organizational

Decision-Making; 2) Communication to other

Organizations (Information Exchange); 3)

Consultation with other Organizations

(Feedback); 4) Avoiding Divergences among

Organizations; 5) Search for Agreement on

Policies; 6) Arbitration of Policy Differences; 7)

Setting Parameters for Action; 8) Establishing

Priorities; 8) Overall Strategy.

Reduce percentage of non-medical staff

employed in public health facilities in

Serbia (by 15 percent)

Baseline: 30 percent of public

sector health workers are not

medically trained (estimate

based on 2013 data)

Target: 25 percent or less of

public sector health workers are

not medically trained

Overall institutional architecture strengthened to

manage EU Accession process

Justice sector has started to implement the

recommendations contained in the Serbia Judicial

Functional Review beginning with a freeze on filling

vacant positions before the analysis on right-sizing is

completed. All recommendations to be implemented

by end 2018

Functional review completed for the Serbia health

sector, which identifies priorities and targets for

reducing non-medically trained staff, including

confirming baseline and targets for 15% reduction of

non-medical staff

Second Health Sector Project (FY14) and Additional

Financing (FY18)

PforR on Modernization and Optimization of Public

Administration (FY16)

CAT DDO (FY17)

Serbia Result Based Management RAS

MDTF for Justice Sector Support

TF on Disaster Risk Management

Implementing Open Data Plan for Serbia

Planned:

Enabling Digital Governance in Serbia (FY19)

Public Sector Efficiency and Growth DPL (FY20)

CPF Objective 1c: A more efficient and sustainable power utility

CPF Objective Indicators Supplementary Progress Indicators WBG Program

EPS corporate governance and financial

sustainability achieved

Indicators:

Legal transformation (roadmap for establishment of

JSC) of the EPS into a JSC by June 2019

Debt/EBITDA ratio below 3 (2016-2019, average)

Completed: Public Expenditure and Public Utilities DPL 1 (FY17)

Serbia Energy Affordability TA

17

Collection rates increase from

93% (2014) to 95% (2019)

Distribution losses decrease

from 14% (2014) to 12.1% by

2019

Increase Serbia’s renewable energy

generation capacity in wind by 100 MW

Baseline (2015):

Wind energy: 0 MW

Target (2019):

Wind energy: 100 MW

No further accumulation of SOE and budgetary

institutions payables/arrears to EPS

Ongoing:

Emergency Recovery Loan (FY15)

Second Public Expenditure and Public Utilities DPL

(FY18)

Enhancing Infrastructure Efficiency and Sustainability

PfR (FY18)

Serbia EPS Results Based Management Project RAS

IFC engagement on transport and utility sector PPPs

Energy tariff reforms and impact on the poor and

vulnerable

CPF Objective 1d: More efficient public transport companies

CPF Objective Indicators Supplementary Progress Indicators WBG Program

Serbia Railways restructured and cargo

company operating without subsidies

Subsidy to cargo company RSD

10.4 Billion in 2014, and zero in

2019

Roads maintained under Performance

based maintenance reaches 3000

kilometers

Kilometers of roads under

performance-based maintenance

in 2015: 0

Target for 2019: 3000

Establishment of autonomous infrastructure, freight

and passenger companies

Number of traffic units (passenger km + ton km) per

staff

Baseline (2013): 206,500

Target (2017): 290,000

Transform Roads of Serbia into autonomous agency

with guaranteed budget and accountability for results

Milestone: service level agreement signed

and in effect (2019)

Completed:

Public Expenditure and Public Utilities DPL 1 (FY17)

Mainstreaming Climate Resilience in Road Transport

Management in Serbia (FY18)

Ongoing:

Road Rehabilitation and Safety Project (FY13)

Corridor X Highway Project (FY10)

Enhancing Infrastructure Efficiency and Sustainability

PfR (FY18)

Second Public Expenditure and Public Utilities DPL

(FY18)

IFC engagement on transport and utility sector PPPs,

including in waste management advisory services for the

Municipality of Belgrade

IFC Integrated Environmental, Social and Corporate

Governance Advisory

18

CFRR regional EU-REPARIS4 program, and EQ-

FINREP5 country project

Planned:

IFC investment in Belgrade Waste Management Project

IFC Belgrade Airport PPP

IFC Belgrade Electric Busses Project

Public Investment in Transport TA

CPF Objective 1e: Resolution of SOE assets in Privatization Agency Portfolio

CPF Objective Indicators Supplementary Progress Indicators WBG Program

Resolution of unproductive SOEs and

state divestment from commercial SOEs

under the Privatization Agency

Number of remaining companies

in the PA portfolio by 2019: <50

Number of companies under PA portfolio resolved

through asset and equity sales: 178 by end 2017

Completed:

Serbia State Owned Enterprises Reform DPL series (FY15

and FY17)

FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION CPF Objective 2a: Priority business climate improvements

CPF Objective Indicators Supplementary Progress Indicators WBG Program

Improve Doing Business Distance to

Frontier (DTF)

DB2015: 62.57;

Target DB2019: 72

Special focus on:

Trading across Borders DTF:

baseline DB 2015 – 72.13;

Target DB2019 – 85

Paying taxes DTF:

baseline DB2015 – 48.9;

target DB2019 - 64

Resolving insolvency:

baseline DB2015 – 57.9

target DB2019 – 74

Amendments to the insolvency law and regulations;

trainings and awareness campaign for insolvency

practitioners, courts and other stakeholders by end

2015

Ongoing:

Serbia Competitiveness and Jobs RBF (FY16)

IFC Western Balkans Agribusiness Competitiveness

Program

IFC Western Balkans Debt Resolution and Business Exit

Project

IFC Integrated Environmental, Social and Corporate

Governance Advisory

IFC Serbia Improving Investment Climate ASA

TF funded CFFR Accounting and Auditing project

New Growth Agenda Country Economic Memorandum

(CEM)

CPF Objective 2b: More stable and more accessible financial sector

4 Road to Europe: program of accounting reform and institutional strengthening 5 Enhancing quality of financial reporting

19

CPF Objective Indicator Supplementary Progress Indicators WBG Program

Reduction of share of Non-Performing

Loans (NPLs) in total loans provided

Baseline: 22.5 percent (2014)

Target: less than 18 percent (in

2019)

Increased availability of enterprise

financing coming from banks

Percent of firm financing

coming from banks

2013: 15 percent

2019: 29 percent

No state-owned banks with negative profitability

Deposit Insurance Fund replenished and balance

sustained

Increased debt recovery rate through out of court

workouts and insolvency

Indicator: proceedings

Baseline: 29.2 % (2014)

Target: 40% percent (2018)

Credit growth exceeds GDP growth from 2018

Completed:

Strengthening Deposit Insurance Agency Project (FY14)

Ongoing:

State Owned Financial Institutions Reform Project

(FY18)

Western Balkans Financial Sector TA

CFRR regional EU-REPARIS6 program, and EQ-

FINREP7 country project

IFC Western Balkans Debt Resolution and Business Exit

Program

MIGA Expro of funds guarantees (capital optimization)

Proposed:

IFC lending to Financial Intermediaries (SME lending,

mortgage, and microfinance)

CPF Objective 2c: More efficient land and property markets

CPF Objective Indicator Supplementary Progress Indicators WBG Program

Improve Doing Business Distance to

Frontier (DTF)

Construction Permits DTF:

Baseline DB2015 – 29.14;

Target DB2019 - 44

Efficiency of property registration

system improved

Average number of days to

complete recording of

purchase/sale of property in the

land administration system

2015: 48

2019: 4

System for electronic issuing of building permit

established and applied

Rules, procedures, methodologies and information

on property registration widely and easily accessible

and procedures operate for public to verify their

information

Valuers operating in accordance with valuation

standards in compliance with international standards

Ongoing:

Real Estate Management Project (FY15)

Planned:

Real Estate Management Project AF (FY19)

CPF Objective 2d: Enhanced transport infrastructure networks

CPF Objective Indicators Supplementary Progress Indicators WBG Program

5BEEPs Survey; 2008 percentage was 29 percent and the goal is to return to the pre-crisis level 6 Road to Europe: program of accounting reform and institutional strengthening 7 Enhancing quality of financial reporting

20

Corridor X completed

Kilometers to be completed by

end 2019: 46

National roads rehabilitated

Kilometers to be rehabilitated

with safety measures

incorporated

Target: 121km (2019)

Financing for all Corridor X lots secured by end

2015

Completed:

Mainstreaming Climate Resilience in Road Transport

Management in Serbia (FY18) Public Expenditure and

Public Utilities DPL 1 (FY17)

Ongoing:

Corridor X Project (FY10)

Road Rehabilitation and Safety Project (FY13)

Second Public Expenditure and Public Utilities DPL

(FY18)

IFC advisory support and financing of PPPs

Serbia Railways Asset Management Plan using Life

Cycle Costs

Proposed:

IFC PPPs in municipal infrastructure and transport

sectors

Public Investment Management Energy tariffs reform

and impact on the Bottom 40

CPF Objective 2e: More efficient employment facilitation

CPF Objective Indicators Supplementary Progress Indicators WBG Program

NES services enhanced:

Performance indicators:

Number of active job seekers per

case worker:

2014: 1,238 (registered

unemployed)

2019: 800 (active job seekers)

Increased number of registered

unemployed who found formal

job

Baseline: 232,280 (2014)

Percentage of total NES staff that is operating as

certified case worker

Completed:

Serbia State Owned Enterprises Reform DPL series

(FY15 and FY17)

Ongoing:

Serbia Competitiveness and Jobs RBF (FY16)

Western Balkans Jobs TA

New Growth Agenda Country Economic Memorandum

(CEM)

21

Increased number of registered

unemployed women who found

formal job

Baseline: 122,491 (2014)

Increased number of registered

unemployed youth (15-24) who

found formal job:

Female: 19,100 (2014)

Male: 22,498 (2014)

Increased number of registered

unemployed Roma who found

formal job:

Female: 633 (2014)

Male: 959 (2014)

22

ANNEX 2. CHANGES TO THE ORIGINAL CPF RESULTS MATRIX (2016 – 2020)

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE

CPF Objective 1a: Sustainable public expenditure management

CPF Objective Indicators Action

Reduction of public expenditures through lower direct subsidies and guarantees

to SOEs

Revised. Due to issues with comparability, both baseline and target for the

first part of this indicator (on subsidies) are adjusted to reflect the changes in

reporting on subsidies in the budget. For clarification and final reporting

purposes it is noted that this indicator now includes direct subsidies to:

Railroads, PE Resavica, Airport and PE Roads of Serbia, plus soft loans and

subsidies to SOEs from the PA portfolio.

Supplementary Project Indicators

Allocation from the Budget for subsidies and soft loans to the SOEs in the

former Privatization Agency portfolio

New

Decrease in gross tax and contribution arrears by SOEs in the former

Privatization Agency portfolio

New

Freeze on public sector wage indexation in years in which the share of general

government salaries (excluding severance payments) is expected to exceed 7

percent of GDP

Revised. The definition of public sector wage bill has been revised in

agreement between the Government and IMF to also include the share of

taxes and social insurance contributions payable by employees. Therefore,

the wage bill to GDP ratio was revised accordingly for the previous years:

8.8 to10.4 in 2015, 8.3 to 9.8 2016, 8.1 to 9.5 2017. The indicator is

adjusted to refer to related agreements reached with IMF rather than a fixed

percentage value.

Freeze on public sector pension indexation in years in which pension spending is

expected to exceed 11 percent of GDP

No change

Attrition and targeted reduction of public sector employees in line with the

budget calendar adoption of the Fiscal Strategy

Revised. The language of the indicator is revised to remove linkage to

Fiscal Strategy. No related annual decrees have been systematically adopted

in previous years but that was not crucial to reductions of public sector

employees.

CPF Objective 1b: More effective public administration & select service delivery improvements

CPF Objective Indicators Action

A plan to strengthen the policy-making and coordination system prepared by end

2016 and implemented by 20198

No change

Reduce percentage of non-medical staff employed in public health facilities in

Serbia (by 15 percent)

No change

8 8 Metcalfe Scale is a comparative tool for measuring coordinating capacity based on the Guttman scale, with cumulative progression from lower to higher levels. The scale has following nine levels: 1) Independent

Organizational Decision-Making; 2) Communication to other Organizations (Information Exchange); 3) Consultation with other Organizations (Feedback); 4) Avoiding Divergences among Organizations; 5) Search for

Agreement on Policies; 6) Arbitration of Policy Differences; 7) Setting Parameters for Action; 8) Establishing Priorities; 8) Overall Strategy.

23

Supplementary Project Indicators Action

Right Sizing (Organizational rationalization) plans for selected sectors designed

and implemented by end 2017

Revised. The timeline to reach this target is extended given the additional

time needed for plans to be finalized and implementation.

Overall institutional architecture of the administration rationalized by end 2017 Dropped. Given lack of progress made and for lack of mechanisms to

support going forward, this indicator is removed.

Overall institutional architecture strengthened to manage EU Accession process New

Justice sector has started to implement the recommendations contained in the

Serbia Judicial Functional Review beginning with a freeze on filling vacant

positions before the analysis on right-sizing is completed. All recommendations

to be implemented by end 2018

No change

Functional review completed for the Serbia health sector, which identifies

priorities and targets for reducing non-medically trained staff, including

confirming baseline and targets for 15% reduction of non-medical staff

No change

CPF Objective 1c: A more efficient and sustainable power utility

CPF Objective Indicators Action

EPS corporatization completed and financial sustainability achieved

Revised. The indicator is revised to clarify and reflect more realistic results

expected to be achieved and increase attributability of the results to the

ongoing WBG support to the sector.

Increase Serbia’s renewable energy generation capacity in wind by 100 MW No change. Minor error from the original RM (word “increase” used two

times) corrected

Supplementary Project Indicators Action

EPS established as a Joint Stock Company (2017)

Revised. The indicator is revised to reflect more realistic timeline and

results expected to be achieved and increase attributability of the results to

the ongoing WBG support to the sector.

Strategic partner for EPS identified and equity stake sold by 2019 Dropped. Given lack of progress made and for lack of WBG’s direct

support going forward, this indicator is removed.

Debt/EBITDA ratio below 3 by end 2016 Revised. The indicator is revised to suggest more adequate measurement

and remove the target year so to retain it in the matrix for end CPF

assessment.

No further accumulation of SOE and budgetary institutions payables/arrears to

EPS by end-2017

Revised. The indicator is revised to remove the end target year (2017), and

is retained for the end of the CPF assessment, given the important link to the

overall objective.

CPF Objective 1d: More efficient public transport companies

CPF Objective Indicators Action

Serbia Railways restructured and cargo company operating without subsidies No change.

Roads maintained under Performance based maintenance reaches 3000

kilometers

Revised. The timeline to reach the target is extended to reflect the additional

time needed for implementation of all foreseen contracts.

Supplementary Project Indicators Action

24

Establishment of autonomous infrastructure, freight and passenger companies No change

Number of traffic units (passenger km + ton km) per staff No change

Transform Roads of Serbia into autonomous agency with guaranteed budget and

accountability for results

Revised. The timeline to reach the target is extended to reflect the additional

time needed for implementation of SLA, as redefined by the implementation

schedule of the supporting WBG operations.

CPF Objective 1e: Productive SOE assets transferred to private ownership

CPF Objective Indicators Action

Commercial SOEs under the Privatization Agency Privatized Revised. There was limited traction in privatizing a substantial portion of

the SOEs in the Privatization Agency portfolio as these were not appealing

to private investors, due mostly to legacy issues including complex

liabilities difficult to resolve through privatization. These SOEs were thus

either resolved through bankruptcy or remain in state ownership. In this

context, the team realigned both the formulation of the Objective 1e as well

as the objective indicator to reflect the implementation reality.

Supplementary Project Indicators Action

Number of companies under PA portfolio resolved through asset and equity

sales: 178 by end 2017

No change

FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION CPF Objective 2a: Priority business climate improvements

CPF Objective Indicators Action

Improve Doing Business Distance to Frontier (DTF) No change

Supplementary Project Indicators Action

Trade facilitation - intermediate steps: Improvements of customs information

system that would simplify procedures and automate clearances by end 2017

Dropped. Given more time than expected to implement the preparatory

project mapping, the IT solutions will take time and will unlikely be

completed during the CPF period.

Simplification of tax procedures through better usage of on line filing and

elimination of redundant processes by 2018.

Dropped. Activities planned ins Serbia under the regional IFC SEE Tax and

Transparency Project did not get the needed support and co-financing from

the Government and were thus significantly scaled down, with no progress

towards simplification achieved or expected by end CPF period.

Amendments to the insolvency law and regulations; trainings and awareness

campaign for insolvency practitioners, courts and other stakeholders by end 2015

No change

CPF Objective 2b: More stable and more accessible financial sector

CPF Objective Indicators Action

Reduction of share of Non-Performing Loans (NPLs) in total loans provided No change

Increased availability of enterprise financing coming from banks No change

Supplementary Project Indicators Action

Number of state owned banks reduced to a maximum of 3 by end 2018

Dropped. Given that the progress on this agenda has been limited and given

uncertainly on the timing of next steps towards privatization, this indicator

25

is dropped and a new indicator (below) added to better capture the

contribution of the WBG’s engagement.

No state-owned banks with negative profitability New

Deposit Insurance Fund replenished and balance sustained No change

Increased debt recovery rate through out of court workouts and insolvency No change

Credit growth exceeds GDP growth from 2018 No change

CPF Objective 2c: More efficient land and property markets

CPF Objective Indicators Action

Improve Doing Business Distance to Frontier (DTF) - Construction Permits DTF No change

Efficiency of property registration system improved No change. Baseline year corrected to 2015 (2005 was a typing mistake) in

the original RM)

Supplementary Project Indicators Action

System for electronic issuing of building permit established and applied No change

Rules, procedures, methodologies and information on property registration

widely and easily accessible and procedures operate for public to verify their

information

No change

Five mobile teams operational in major registration offices to assist people with

disabilities; Roma; women in rural areas and others with difficulties accessing

land administration services.

Dropped. Development of the e-services system has changed the concept of

providing services to people with disabilities, and is putting in place

functional mechanisms. Creation of additional mobile teams is deemed to be

of limited value, and this indicator is removed.

Valuers operating in accordance with valuation standards in compliance with

international standards

New

CPF Objective 2d: Enhanced transport infrastructure networks

CPF Objective Indicators Action

Corridor X completed Revised. The timeline to reach the target is adjusted to the extended closing

date of the project (September 30, 2019).

Power exchange SEEPEX by Q3 2016 and market coupling 4M MC (Hungarian,

Romania, Czech Republic, and Slovakia) by Q2 2017.

Dropped. Given that the activities supporting these efforts are outside of the

WBG’s scope of support, and thus the concerns of attributability, this

indicator is removed. Accordingly, the formulation of the Objective 2d is

revised to narrow it to the enhancements in transport infrastructure

networks, where the results can be attributed to the WBG’s program.

National roads rehabilitated New

Supplementary Project Indicators Action

Financing for all Corridor X lots secured by end 2015 No change

Volume of trade in SEEPEX to reach 5 percent of domestic consumption by end

2017.

Dropped. Given that the activities supporting these efforts are outside of the

WBG’s scope of support, and thus the concerns of attributability, this

indicator is removed.

CPF Objective 2e: More efficient employment facilitation

CPF Objective Indicators Action

26

Social Security contribution system rationalized to incentivize part time and low

wage employment

Dropped. The activities originally foreseen under the WBG operation no

longer have the support from some of the key Government players, making

the support to the needed reform challenging. This indicator is thus

removed, and the respective operation restructured to account for this shift.

Accordingly, the formulation of the Objective 2e is revised to reflect the

revised scope of the WBG’s program and refocus on the support provided in

particular to the NES services.

NES services enhanced (all related indicators): No change

Supplementary Project Indicators Action

Legislation passed to reform Social Security system Dropped (both indicators). The activities originally foreseen under the

WBG operation no longer have the support from some of the key

Government players, making the support to the needed reform challenging.

This indicator is thus removed, and the respective operation restructured to

account for this shift.

Reduced tax wedge for low-wage earners

Number of Certified Case managers reaches 600

Revised. The indicator is revised to suggest more adequate measurement of

results achieved.

CPF Objective 2f: Closing medium and long-term skill gaps – DROPPED

Indicator 2f and all of the related indicators are dropped given that: 1) the operation that was intended to support them (Early Childhood Education and

Development Project) is just starting implementation and results are expected at a later stage; and 2) activities initially foreseen (on vocational education) have

either proven not to be in line with the Government priorities or have otherwise lost relevance.

27

ANNEX 3. DETAILED PROGRESS AS PER THE ORIGINAL CPF RESULTS MATRIX (2016 – 2020)

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE

CPF Objective 1a: Sustainable public expenditure management

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Reduction of public

expenditures through lower

direct subsidies and

guarantees to SOEs

Direct subsidies

(million Euro):

Baseline (average

2010-2014): 250

Target (2020): to be

less than 150

Annual guarantees

for liquidity

purposes (million

Euro):

Baseline (average

2012-2014): 265

Target (2015): less

than 50

On track (both indicators)

Status (2018): 240 million

EUR subsidies (out of

which 8 million for SOEs in

the PA portfolio)

Status (2015): 1

There have been no (0)

guarantees since 2016

onwards, and to date.

Freeze on public sector

wage indexation in years in

which the share of general

government salaries

(excluding severance

payments) is expected to

exceed 7 percent of GDP

Freeze on public sector

pension indexation in years

in which pension spending

is expected to exceed 11

percent of GDP

On track

A revised target of 8 percent

had been agreed with IMF.

Wage freeze resulted in

controlled wage bill and

reduction from 10.4% of GDP

in 2015 to 9.9% in 2018.

Slight increase of salaries in

selected sectors had however

been approved for 2016, 2017

and 2018 (army, education,

social protection, increases

between 2 and 4 percent). The

rest of the salaries remained

under freeze. In line with the

agreement with the IMF, no

further increases to the salaries

are to be approved prior to

implementation of the new

Law on Public Sector Salaries.

On track

Pension expenses are currently

around 11.3%. There had

earlier been a progressive

decrease of pensions, followed

by a 2% increase in 2016 and

1.5% increase in 2017. The

current estimate for 2018 is

that the pensions expenses are

at about 10.4% of GDP.

According to the proposal for

selective pensions increase in

Completed:

Serbia State Owned

Enterprises Reform

DPL series (FY15

and FY17)

Public Expenditure

and Public Utilities

DPL 1 (FY 17)

Public Expenditure

and Financial

Accountability

(PEFA)

Serbia Public

Finance Review

Serbia A&A ROSC

update

Ongoing:

Second Public

Expenditure and

Public Utilities

DPL (FY18)

CAT DDO (FY17)

Programmatic

Poverty

Assessment

Improving the

Quality and Flow

28

Attrition and targeted

reduction of public sector

employees in line with the

budget calendar adoption of

the Fiscal Strategy

2019, the expenses will still

remain close to that level.

On track

Law on maximum number of

employees in public sector

adopted in 2015, with limited

duration till 2018, to be

applied for four years in a row.

Nevertheless, annual decrees

on ceiling have not been

adopted every year. Since the

end of 2014 the total number

of general government

employment (plus local public

utilities) has been reduced for

more than 25,000. These gains

were partly offset by hired

fixed-term and contractual

hiring (more than 11,000).

of Public Finance

Data

Planned:

Public Sector

Efficiency and

Growth DPO

(FY20)

CPF Objective 1b: More effective public administration & select service delivery improvements

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

A plan to strengthen the

policy-making and

coordination system

prepared by end 2016 and

implemented by 2019

Indicator: Metcalfe

Scale rating

improved

Baseline (2015): 2

Target (2019): 4

Current Metcalfe scale

rating is estimated at 3 and

is attributed to

achievements and progress

in the following:

Policy Note on Policy

Management and

Implementation Tracking

Assessment was prepared in

2016. Decision-making and

implementation

management platform was

formally introduced in

2017, as a main vehicle for

monitoring implementation

of the Action Plan for

Right Sizing

(Organizational

rationalization) plans for at

least 4 sectors designed and

implemented by end 2017

Partly achieved

Based on the

recommendations from

Functional Reviews,

Ministries of Health,

Education, Agriculture and

Environment have prepared

and adopted Action Plans. At

the central level, based on the

Horizontal Functional Review,

PAR council adopted Action

Plan which is a base for EU

funded Sector Budget Support.

Full implementation of the

Action Plans will however

require additional time.

Completed:

Wage bill

management ECA

PFM TF

Right Sizing TA

(IPA financed)

Ongoing:

Second Health

Sector Project

(FY14) and

Additional

Financing (FY18)

PforR on

Modernization and

Optimization of

29

Implementation of the

Government Program.

Regular reporting routines

have been established

between the line ministries

and the center of

government. Serbia Result

Based Management RAS

activities are also

supporting gradual

transition from reporting

activities to problem

solving and escalating clear,

analytically based

recommendations for

action.

Action Plan for

Implementation of the

Public Administration

Strategy (APIPAS) for

2018-2020 was updated in

July 2018. Furthermore,

recommendations from the

Horizontal Functional

Review of Central

Governmenti related to

strengthening of capacities

for strategic planning and

reporting in line ministries

and other government

institutions will be

implemented through the

revised APIPAS.

The Planning System Law

was adopted in April 2018

and came into effect on

October 29, 2018. The law

establishes legislative

Overall institutional

architecture of the

administration rationalized

by end 2017

Justice sector has started to

implement the

recommendations contained

in the Serbia Judicial

Functional Review

beginning with a freeze on

filling vacant positions

before the analysis on right-

sizing is completed. All

recommendations to be

implemented by end 2018

Functional review

completed for the Serbia

health sector, which

identifies priorities and

targets for reducing non-

medically trained staff,

Not achieved

There was an increase of

number of ministries after the

cabinet reshuffle in June 2017.

It is hard to establish firm

structure of the Government

due to frequent reshuffling

(mergers and separations of

line ministries – Agriculture

and Environment, SEIO

became Ministry for EU

integration).

Off track

Judiciary is filling vacant

positions of judges and

prosecutors. Full

implementation of

recommendations will require

more time and adoption of the

HR strategy for justice sector

which will be developed in

2019. Implementation will be

delayed until 2020. To

expedite implementation of

recommendations from

Judicial Functional review and

from Action Plan for Chapter

23 the GoS is working with

the EU delegation on a sector

budget support which should

start in 2020

Achieved

Functional review for Health

sector was completed in mid-

2017. Based on the

recommendations from

functional review, an

Public

Administration

(FY16)

CAT DDO (FY17)

Serbia Result

Based Management

RAS

MDTF for Justice

Sector Support

TF on Disaster

Risk Management

Implementing

Open Data Plan for

Serbia

Planned:

Enabling Digital

Governance in

Serbia (FY19)

Public Sector

Efficiency and

Growth (FY20)

30

Reduce percentage of non-

medical staff employed in

public health facilities in

Serbia (by 15 percent)

Baseline: 30 percent

of public sector

health workers are

not medically trained

(estimate based on

2013 data)

Target: 25 percent or

less of public sector

health workers are

not medically trained

framework for transparent

policy development,

coordination, monitoring,

and reporting process.

Internal consultations for

two corresponding bylaws

are under way. Adoption of

these bylaws, planned for

the end of 2018, will further

strengthen regulatory

framework for

implementation of the

Planning System Law.

Additionally, technical

support in a form of just in

time policy issue notes and

collective leadership

exercise with the Cabinet is

being provided under

Result-based Mngmnt RAS.

On track.

Currently the percentage of

non-medical staff is being

reduced through attrition

but will continue based on

the result of the functional

review for the health sector.

Status (as of end-2017):

21.1% non-medical staff

employed in public health

(21,468 out of total

101,853)

including confirming

baseline and targets for 15%

reduction of non-medical

staff.

operational plan for

modernization is to be

prepared.

CPF Objective 1c: A more efficient and sustainable power utility

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

31

EPS corporatization

completed and financial

sustainability achieved

Indicators:

Collection rates

increase from 93%

(2014) to 95%

(2019)

Distribution losses

decrease from 14%

(2014) to 12.1% by

2019

Increase Serbia’s renewable

energy generation capacity

in wind increase by 100 MW

Baseline (2015):

Wind energy: 0 MW

Target (2019): Wind

energy: 100 MW

On track

The latest available data

(for end 2017, indicators

monitored on yearly basis)

indicate that overall there is

a trend of increase in

collection rates and a

decrease in distribution

losses.

Collection rates per year:

2015: 93.80%

2016: 92.81%

2017: 98.14% (vs target of

95.5%).

Distribution losses per

years:

2015: 14.02%

2016: 12.95%

2017 (: 12.93% (vs. 12.8%

target) due to extremely

cold Q1 2017, the losses

were higher than normal as

there was extreme

electricity consumption for

heating purposes in the

residential sector.

Achieved

IFC invested in two wind

power projects with over

200 MW of capacity.

EPS established as a Joint

Stock Company (2017)

Strategic partner for EPS

identified and equity stake

sold by 2019

Debt/EBITDA ratio below 3

by end 2016

No further accumulation of

SOE and budgetary

institutions payables/arrears

to EPS by end-2017

Not Achieved

The effort of transforming

EPS into a JSC is alive but the

earliest date for such an event

will be 2019.

Off track

While the effort to transform

into a JSC is ongoing, the

Government is not considering

a strategic partner for EPS or

an IPO.

Mostly achieved

EBITDA ratio was 2.8 for

2015, and 3.4 for 2016, thus

3.1 on the average.

Not achieved

Taking start of 2015 as

baseline, the figures show that

the level of arrears has

increased by approx. RSD

14.1 billion for the top 20

debtors. The net increase by

year (offsetting individual

increase and decrease and

aggregating across 20

customers) is as follows:

2015: RSD 6.6 billion (arrears

have increased for 18

customers)

2016: RSD 7.0 billion (18

customers)

2017: RSD 0.5 billion (15

customers). It is to note that in

Completed:

Public Expenditure

and Public Utilities

DPL 1 (FY17)

Serbia Energy

Affordability TA

Ongoing:

Emergency

Recovery Loan

(FY15)

Second Public

Expenditure and

Public Utilities

DPL (FY18)

Enhancing

Infrastructure

Efficiency and

Sustainability PfR

(FY18)

Serbia EPS Results

Based Management

Project RAS

IFC engagement on

transport and utility

sector PPPs

including in

renewable energy

Energy tariff

reforms and impact

on the poor and

vulnerable

32

2017, EPS has written off debt

(RSD 2.7 billion) from

Railways in accordance with

the agreement with GoS, so

the year is not necessarily

representative in terms of

systemic improvement.

The group of top 20 customers

with arrears is pretty stable,

only 3 customers dropped out

(entered) this group in 2017

vs. 2016 while only 1

customers dropped out

(entered) in 2016 vs. 2015.

CPF Objective 1d: More efficient public transport companies

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Serbia Railways restructured

and cargo company

operating without subsidies

Subsidy to cargo

company RSD 10.4

Billion in 2014, and

zero in 2019

Roads maintained under

Performance based

maintenance reaches 3000

kilometers

Kilometers of roads

under performance-

based maintenance

in 2015: 0

Target for 2018:

3000

Achieved

Serbia Railways

restructured and cargo

company operating without

subsidies starting from 2016

On track

Tender for 3000 kilometers

was launched and 3

contracts for 1,500

kilometers have been signed

and will be implemented in

2018. Contracts for

remaining 1,500 kilometers

are pending signature by

PERS and should be

implemented in 2019.

Establishment of

autonomous infrastructure,

freight and passenger

companies

Number of traffic units

(passenger km + ton km)

per staff

Baseline (2013):

206,500

Target (2017):

290,000

Transform Roads of Serbia

into autonomous agency

with guaranteed budget and

accountability for results

Achieved.

The three companies

established and functioning as

independent companies

(property divided, first balance

of payments submitted).

Achieved

2017: 303,125

Not achieved

Service Level Agreement

between MCTI and PERS to

achieve the transformation

Completed:

Public Expenditure

and Public Utilities

DPL 1 (FY17)

Mainstreaming

Climate Resilience

in Road Transport

Management in

Serbia (FY18)

Ongoing:

Road

Rehabilitation and

Safety Project

(FY13)

Corridor X

Highway Project

(FY10)

Enhancing

Infrastructure

Efficiency and

33

Milestone: service

level agreement

signed and in effect

by end 2016

expected to be signed by

December 2019.

Sustainability PfR

(FY18)

Second Public

Expenditure and

Public Utilities

DPL (FY18)

IFC engagement on

transport and utility

sector PPPs,

including in waste

management

advisory services

for the

Municipality of

Belgrade

IFC Integrated

Environmental,

Social and

Corporate

Governance

Advisory

CFRR regional EU-

REPARIS9

program, and EQ-

FINREP10 country

project

Planned:

IFC investment in

Belgrade Waste

Management

Project

IFC Belgrade

Airport PPP

9 Road to Europe: program of accounting reform and institutional strengthening 10 Enhancing quality of financial reporting

34

IFC Belgrade

Electric Busses

Project

Public Investment

in Transport TA

CPF Objective 1e: Productive SOE assets transferred to private ownership

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Commercial SOEs under the

Privatization Agency

Privatized

Number of

remaining

companies in the PA

portfolio by 2020:

<50

On track

Current status (2018): less

than 90 companies remain

in the portfolio.

Number of companies under

PA portfolio resolved

through asset and equity

sales: 178 by end 2017

Achieved

A total of 350+ companies A

total of 350+ companies were

resolved, with 300+ resolved

through bankruptcy, due to the

lack of interested investors.

Some of the most difficult

companies were resolved

recently (RTB Bor, Azotara,

PKB) while a few still remain

to be resolved (Simpo, Lasta,

MSK, Petrohemija).

Completed:

Serbia State Owned

Enterprises Reform

DPL series (FY15

and FY17)

FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION

CPF Objective 2a: Priority business climate improvements

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Improve Doing Business

Distance to Frontier (DTF)

DB2015: 62.57;

Target DB2019: 72

Mostly Achieved

Status DB2017: 72.87

Status DB2018: 73.13

Status DB2019: 73.49

The target for DTF has been

fully achieved and

surpassed, as well as the

results for the two out of the

three areas of focus below.

There was very limited

progress on the last one.

Trade facilitation -

intermediate steps:

Improvements of customs

information system that

would simplify procedures

and automate clearances by

end 2017

Not achieved

Customs initiated preparatory

project mapping of all

processes to get ready for the

future automation of exports

and imports. However, they

are at the very initial stage of

this process and developing

the IT solution can take place

only afterwards and will

require more time.

Ongoing:

Serbia

Competitiveness

and Jobs RBF

(FY16)

IFC Western

Balkans

Agribusiness

Competitiveness

Program

35

Special focus on:

Trading across

Borders DTF:

baseline DB 2015 –

72.13;

Target DB2019 – 85

Paying taxes DTF:

baseline DB2015 –

48.9;

target DB2019 - 64

Resolving

insolvency:

baseline DB2015 –

57.9

target DB2019 – 74

Thus, on balance, it is

considered that this

indicator is mostly

achieved.

Status DB2019: 96.64

(same as DB2017 and

DB2018)

Status DB2019: 74.75

(improved from 73.63 in

DB2018 and DB2017)

Status DB2017: 59.66

Status DB2018: 60.49

Status DB2019: 60.78

Note: DB2019 results

confirm that there has been

overall continued progress.

These results are likely to

be maintained till the end of

the CPF.

Simplification of tax

procedures through better

usage of on line filing and

elimination of redundant

processes by 2018.

Amendments to the

insolvency law and

regulations; trainings and

awareness campaign for

insolvency practitioners,

courts and other

stakeholders by end 2015

Not achieved

IFC Southeast Europe

Regional Tax and

Transparency Project did not

produce the planned results in

Serbia regarding

simplification. Due to

Government’s limited interest

in providing cash contribution,

activities in Serbia were

significantly scaled down

compared to the original plan.

Achieved

The Law on Consensual

Financial Restructuring was

amended to include individual

entrepreneurs, and the Law on

Bankruptcy Supervision

Agency (BSA) was enacted

establishing a new bankruptcy

agency centralizing processes.

The Insolvency Law prepared

with the Project’s technical

assistance and endorsed by the

IMF was adopted in December

2017. The new law is expected

to accelerate bankruptcy

procedures and lead to further

reduction in NPLs.

More than 3,400 key actors

(insolvency practitioners,

judges and other stakeholders)

were trained, increasing

capacity to support the

implementation.

IFC Western

Balkans Debt

Resolution and

Business Exit

Project

IFC Integrated

Environmental,

Social and

Corporate

Governance

Advisory

IFC Serbia

Improving

Investment Climate

ASA

TF funded CFFR

Accounting and

Auditing project

CPF Objective 2b: More stable and more accessible financial sector

CPF Objective Indicator Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

36

Reduction of share of Non-

Performing Loans (NPLs) in

total loans provided

Baseline: 22.5

percent (2014)

Target: less than 18

percent (in 2019)

Increased availability of

enterprise financing coming

from banks

Percent of firm

financing coming

from banks

2013: 15 percent

2019: 29 percent11

On track

A declining trend in the

banking sector’s total gross

NPLs continued into Q4

2017. Gross non-

performing loans to total

gross loans amounts 9.8 %

at end 2017, as per latest

available data.

Not verified

No BEEPs12 surveys have

been done in CPF period.

However, a BEEPs Survey

will be completed in fall of

2019, and will provided the

needed assessment.

Number of state owned

banks reduced to a

maximum of 3 by end 2018

Deposit Insurance Fund

replenished, and balance

sustained

Increased debt recovery rate

through out of court

workouts and insolvency

Indicator: proceedings

Baseline: 29.2 %

(2014)

Target: 40% percent

(2018)

Credit growth exceeds GDP

growth from 2018

Off track

There are currently four state

owned banks. The

privatization process was

initiated for one of the banks

(Jubmes). A strategy which

outlines the divestiture process

for the other banks is yet to be

put in place.

On track

The DIF balance equals 3.4%

of the insured deposit level (as

of end 2017). This achieved

and surpassed the 2.5% target

as defined in the Deposit

Insurance Strengthening

project.

On track

DB 2018 report points to a

steady increase in the recovery

rate under the resolving

insolvency category since

2014.

DB2018: 34%.

On track

Year-on-year growth in

domestic loans sped up to

Completed:

Strengthening

Deposit Insurance

Agency Project

(FY14)

Ongoing:

State Owned

Financial

Institutions Reform

Project (FY18)

Western Balkans

Financial Sector

TA

CFRR regional EU-

REPARIS13

program, and EQ-

FINREP14 country

project

IFC Western

Balkans Debt

Resolution and

Business Exit

Program

Proposed:

IFC lending to

Financial

Intermediaries

12 BEEPs Survey; 2008 percentage was 29 percent and the goal is to return to the pre-crisis level 13 Road to Europe: program of accounting reform and institutional strengthening 14 Enhancing quality of financial reporting

37

4.5% in June (excluding the

exchange rate effect).

Excluding the effect of NPL

write-off during 2016 and

2017, the y-o-y growth of total

lending accelerated to

6.7%. Although banks’

increased activities on NPL

resolution are working towards

a decrease in the stock of

loans, a positive effect on this

account is expected in the

coming period because the

cleansing of bank balance

sheets from distressed assets

opens up room for new

lending.

(SME lending,

mortgage, and

microfinance)

CPF Objective 2c: More efficient land and property markets

CPF Objective Indicator Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Improve Doing Business

Distance to Frontier (DTF)

Construction Permits DTF:

baseline DB2015 – 29.14;

target DB2019 - 44

Efficiency of property

registration system improved

Average number of

days to complete

recording of

purchase/sale of

property in the land

administration

system

2015: 48

2019: 4

On track

Status DB2018: 82.38

(Rank 10)

On track

Status (October 2018): 12

Introduction of on-line

property transaction

registration application for

notaries will contribute to

further shorten the average

time it takes to complete

recording of purchase/sale

of property.

System for electronic

issuing of building permit

established and applied

Rules, procedures,

methodologies and

information on property

registration widely and

easily accessible and

procedures operate for

public to verify their

information

Five mobile teams

operational in major

registration offices to assist

people with disabilities;

Roma; women in rural areas

and others with difficulties

Achieved

System established and in use.

On track

Property registration related

information available for

public viewing and verifying.

Some property related services

already provided as e-services

including application tracking

and e-appeal.

Off track

Development of the e-services

system has changed the

concept of providing services

to people with

disabilities. Namely, an

Ongoing:

Real Estate

Management

Project (FY15)

Planned:

Real Estate

Management

Project AF (FY19)

Real Estate

Development

Guarantee

38

accessing land

administration services.

arrangement (through MOU

already signed) has been put in

place by which the National

Association of People with

Disabilities will have access to

the e-services and will be

supporting the persons with

disabilities in getting the

service they need. Also, it is

worth to note that the one

mobile team established in

Belgrade received only one

call in the last year, and

creating more teams is deemed

too have little value (this is

being reflected in the

restructuring of the Real Estate

and Registration Project that is

underway).

CPF Objective 2d: Enhanced infrastructure networks

CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Corridor X completed

Kilometers to be

completed by end

2017: 46

Power exchange SEEPEX by

Q3 2016 and market

coupling 4M MC

(Hungarian, Romania, Czech

Republic, and Slovakia) by

Q2 2017.

On track

Status: 40.3 kilometers

completed, remaining 6

kilometers to be completed

by the extended project date

(September 2018)

Not achieved

SEEPEX has been ready for

the coupling since 2016.

Member tests have been

conducted successfully and

final regulatory issues are

cleared. However, the

market coupling with has

been postponed for internal

4M MC reasons (one

Financing for all Corridor X

lots secured by end 2015

Volume of trade in SEEPEX

to reach 5 percent of

domestic consumption by

end 2017.

Achieved

Additional Financing

approved

Not verified

Completed:

Public Expenditure

and Public Utilities

DPL 1 (FY17)

Mainstreaming

Climate Resilience

in Road Transport

Management in

Serbia (FY18)

Ongoing:

Corridor X Project

(FY10)

Road

Rehabilitation and

Safety Project

(FY13)

39

country has not agreed).

This coupling is also

included in the list of

priority actions for the

CESEC initiative (covering

WB6 and neighboring EU

countries) in the power

sector.

Second Public

Expenditure and

Public Utilities

DPL (FY18)

IFC advisory

support and

financing of PPPs

Serbia Railways

Asset Management

Plan using Life

Cycle Costs

Proposed:

IFC PPPs in

municipal

infrastructure and

transport sectors

Public Investment

Management

Energy tariffs

reform and impact

on the Bottom 40

CPF Objective 2e: Reduced barriers to labor market participation CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

Social Security contribution

system rationalized to

incentivize part time and low

wage employment

Percentage of total

formal employment

in part time work

Off track

No progress has been made

to date regarding reforming

social contribution system

and the labor taxation law.

Legislation passed to reform

Social Security system

Reduced tax wedge for low-

wage earners

Indicator: Tax wedge on

income from half-time job

at minimum wage for single

Off track (both indicators)

No progress has been made to

date regarding reforming

social contribution and the

labor taxation law, to

incentivize part-time and low-

wage employment (identified

as top priority).

Ongoing:

Serbia State Owned

Enterprises Reform

DPL series (FY15

and FY17)

Serbia

Competitiveness

and Jobs RBF

(FY16)

40

2014 (Q3): 106,000

(Source: LFS)

2019 (Q3): 150,000

(Source: LFS)

NES services enhanced:

Performance indicators:

Number of active

job seekers per case

worker:

2014: 1,238

(registered

unemployed)

2019: 800 (active

job seekers)

Increased number of

registered

unemployed who

found formal job

Baseline: 232,280

(2014)

On track

There has been some

progress towards improving

the performance of the

National Employment

Service, partially due to the

Bank’s engagement

(Competitiveness and Jobs

RBF and related ASA), but

also due to improved labor

market conditions.

Status (end-June 2018): 912

Status (2017): 268,497

earner with no children

reduced from 44.6 percent

(2015) to 37.1 percent or

lower by 2019

Number of Certified Case

managers reaches 600

On track

Overall activities under related

Competitiveness and Jobs

RBF are underway, making

the caseload of caseworkers in

branch offices and even across

branch offices more

manageable.

Western Balkans

Jobs TA

41

Increased number of

registered

unemployed women

who found formal

job

Baseline: 122,491

(2014)

Increased number of

registered

unemployed youth

(15-24) who found

formal job:

Female: 19,100

(2014)

Male: 22,498 (2014)

Increased number of

registered

unemployed Roma

who found formal

job:

Female: 633 (2014)

Male: 959 (2014)

Status (2017): 138,152

Status (2017):

Female: 20,057

Male: 26,100

Status (2017):

Female: 1,562

Male: 2,588

CPF Objective 2f: Closing medium and long term skill gaps CPF Objective Indicators Progress to date

Supplementary Progress

Indicators

Progress to date

WBG Program

By 2019, 98 percent of all

children attend pre-school

education at age 6

Baseline: 92 percent

(school year

2012/13)

Target: 98 percent

(2019)

Progress not attributable

to WBG program

Body for accreditation of

preschool institutions and

programs established

Introduce mandatory career

counselling for all VET

students

Not verified / Progress not

attributable to WBG

program

Not verified / Indicator no

longer relevant

Closed:

Serbia Innovation

Project (IPA

financed, FY 12)

Ongoing:

Serbia Technology

Transfer Project

(IPA financed

FY15)

42

Better alignment of

vocational curricula and skill

demands from employers

(e.g. through effective sector

councils and different

governance structures of

training institutions)

Not verified / Indicator no

longer relevant

Inclusive Early

Childhood

Education and Care

Project (FY17)

Ongoing TA

Regional

Educational

Supporting the

effective

integration of

(Roma) returnees in

the WB

43

ANNEX 4. DETAILED PROGRESS PER CPF FOCUS AREAS

Focus areas 1: Economic Governance and Role of the State

30. Activities in this area are aligned with the five CPF objectives: a) sustainable public expenditure

management, b) more effective public administration & select service delivery improvements, c) a

more efficient and sustainable power utility, d) more efficient public transport companies, and e)

productive SOE assets transferred to private ownership. All five objectives broadly remain on track

i.e, achievable by end CPF, and adjustments are introduced to some of the related indicators to

increase their relevancy and attributability to the WBG Program.

31. The robust development lending program contributed to sustainable public expenditure

management. Both DPL series, State-Owned Enterprises Reform (SOE DPL series) and Public

Utilities and Public Enterprises (PEPU DPL series) contribute significantly to country’s broader

fiscal consolidation and structural reforms program, and the results achieved under this Focus Area.

Most notably, no new guarantees for liquidity purposes have been issued to SOEs (neither in 2016

and 2017) and as of 2017 the subsidies have declined to below 165 million EUR (vs. 150 million

CPF target). The share of government salaries as percentage of GDP is down from 8.8 percent in

2015 to 8.3 and 8.1 percent for 2016 and 2017, respectively. While this is only slightly off the 8

percent target15, it is to be noted that not all the salaries remained under freeze, and salaries in

selected sector, as well as pensions, have continued to see slight (up to 4 percent max) increases

over last 3 years. The SOE Reform DPL series supported the Government’s structural reform

program for the SOE sector, supporting in turn stabilization of public debt that was at the core of

its 2015-2018 economic program. More than 350 small companies were resolved to date, yet the

efforts need to continue as some of the most difficult (and larger) companies still remain to be

resolved.

32. Public Expenditure and Public Utilities DPL series presents a showcase of the

comprehensiveness of approach and political commitment to make progress on the critical

reforms. WBG support to financial consolidation of public utilities, with a focus on EPS and with

other IFIs support to a similar process in the gas utility Srbijagas, resulted in reducing fiscal

pressures from inefficiencies in the public sector. Along these reforms, the Government is

committed to continue with targeted assistance program on energy affordability among vulnerable

households and to increase its coverage, protecting most vulnerable consumers. In the same way,

improving the quality of infrastructure and service delivery of transport public enterprises is critical

to achieving the goals of the ongoing fiscal consolidation. Quality of roads and railway

infrastructure, enhanced efficiency and quality of service delivery were tackled by the

improvements in sector-level policies and governance, as well as in the corporate governance and

operational management of the public transport companies.

33. Important progress was made towards overall rationalization and modernization of the

administration and addressing systemic constraints in public sector management. This

process is supported by the PforR program on Modernization and Optimization of Public

Administration underpinned by an extensive advisory and technical assistance program. These

efforts are jointly supported by the WBG and the EU. The EU IPA provided funding for technical

assistance for undertaking horizontal functional review (covering rationalization of the overall

government architecture) and the rightsizing of critical sectors (vertical functional reviews of four

sectors – finance, education, agriculture and social protection). The reviews have been completed

and provided the basis for the Action Plans that were prepared, albeit with delay, and adopted by

15 The original CPF target is 7 percent yet adjusting the target to 8 percent has been discussed with the IMF.

44

Ministries of Health, Education, Agriculture and Environment. Implementation of the Plans will

require additional time.

34. Improving efficiency of the public transport companies is supported with a mix of

instruments. The ongoing Road Rehabilitation and Safety Project paved the ground for reforms in

the maintenance by introduction of competitive tendering of maintenance works, operation and

management of national road network, and management of the transport sector SOEs. Series of

PEPU DPLs build upon these reforms by tackling corporate governance and financial consolidation

and finally, the recently approved Enhancing Infrastructure Efficiency and Sustainability PforR,

contributes to strengthening institutional arrangements. The introduction of PforR enhances

ownership of the program and allows for acceleration of reforms that are under the way. As for the

railways sector, strong progress was achieved with restructuring of the Serbia Railways, and

establishment of autonomous infrastructure, freight and passenger companies, and with the cargo

company operating without subsidies since 2016. IFC has been mandated to finance Belgrade

Airport’s modernization.

35. IFC’s advisory and investment activities in renewable energy and energy efficiency have

contributed to greening Serbia’s energy mix, reducing its over-dependence on highly

polluting, outdated thermal plants, and curbing its vulnerability to climate change. With

more than half of its electricity generated from coal-fired plants, Serbia is among the largest

greenhouse gas emitters per capita in Europe. In 2014, the energy sector was most severely hit as

the two major lignite mines that serve as a source of fuel for thermal plants were flooded due to

inclement weather conditions. Promoting green energy alternatives will help Serbia reduce its high

dependence on highly polluting dated thermal plants, curb its vulnerability to climate change, and

meet its obligations under the EU Energy Community Treaty, to have 27 percent of energy

consumption from renewable sources by 2020.

36. Serbia is part of IFC’s Western Balkans Renewable Energy Program Advisory Program

(recently expanded to cover the entire region under the ECA Power Advisory Program). IFC

has been helping the Government to create markets and to promote private sector investments in

the renewable energy and energy efficiency sectors. Since 2013, IFC has been helping Serbia to

improve key regulatory frameworks for renewable energy to introduce off-take tariffs for

renewable energy technologies, develop a sustainable model for collecting renewable energy fees

from electricity consumers, and implement for the first time Power Purchase Agreement (PPA

scheme) that introduced key risk-mitigation instruments. IFC’s market-enabling work facilitated

increased private sector interest to invest into the renewables, particularly in the wind power sector.

In FY17-18, IFC financed two landmark wind power projects (Alibunar and Dolovo wind power

plants) to construct over 200 MW of renewable energy capacity. These two investments have

created significant demonstration effect, paving the way for other renewable energy projects to

access long-term financing from IFIs. More recently, IFC signed an agreement with Serbia Biogas

Association to help improve market conditions for biogas technology contributing to electricity

generation and climate change agenda.

37. IFC is collaborating closely with the city of Belgrade to help scale up energy efficiency

solutions. To achieve maximum results, IFC has been leveraging resources across the WBG

including the ECA Cities Initiative, ECA Energy & Water (CASEE), PPP Advisory, and FCI GP,

to support the city of Belgrade in designing an energy efficiency strategy and developing a pipeline

of energy efficiency projects, including in green building, waste-to-energy, street lighting, district

heating, and other urban infrastructure. A notable achievement was, the landmark €330 million

waste-to-energy PPP project, where IFC contributed as lead advisor and helped the city of Belgrade

to structure and successfully tender the project, with commercial close in November 2017. This

was the first traditional PPP contract signed in Serbia demonstrating the bankability of the PPP

framework in the country. IFC will consider its financing in this project. As part of its strategic

45

partnership approach, IFC will continue to support the city through new investments and advisory

support under its Sustainable Cities program, including modern electric busses project and related

infrastructure IFC is considering investing, which will be complemented by an advisory project on

energy efficiency.

Focus Area 2: Private Sector Growth and Economic Inclusion

38. Activities in this area are aligned with six CPF objectives: a) priority business climate

improvements, b) More stable and more accessible financial sector, c) more efficient land and

property markets, d) Enhanced infrastructure networks, e) Reduced barriers to labor market

participation, and f) closing medium and long-term skill gaps. Most of the objectives (the first four)

remain on track and are deemed achievable by end CPF. As to the objective of reducing the barriers

to labor market participation, adjustments are introduced to the indicators to reflect the revised

scope of the WBG support. The last objective, on closing the skills gap, is being dropped as the

activities originally foreseen will not yield results in the course of this CPF.

39. A broad set of reforms has been undertaken in recent years to strengthen the business

environment. In 2017, Serbia was among the 10 countries with biggest improvements in the

business environment, improving its ranking from 54th to 47th place, and in 2018 Serbia holds the

48th position globally. More specifically, Doing Business 2018 finds that Serbia implemented

substantive changes in the regulatory environment in three key areas: i) starting a business easier

by reducing the signature certification fee and increasing the efficiency of the registry, reducing

the time for business registration, ii) registering property and iii) dealing with construction permits.

In addition, Serbia has moved to 11th place globally when it comes to dealing with construction

permits, which is fruit of reforms in this area supported by Real Estate Management Project and

other Bank engagement in Serbia under this Focus Area.

40. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at

creating a new regional market for investment in the Western Balkans 6 (WB6) through

identifying and removing barriers to cross-border and intra-regional investment. By fostering

greater harmonization of regional investment policies and better alignment with EU standards, the

project aims at unlocking higher levels of FDI and intra-regional investment, faster economic

growth and job creation in the region. The project will focus on supporting targeted investment

climate reforms in the economies of the region to ease investment entry, strengthen investor

protections and facilitate investment retention and re-investments. The project is fully aligned with

the objectives and priorities of the Multiannual Action Plan to establish a Regional Economic Area

in the WB 6 (MAP REA), which was adopted by the Prime Ministers of the region at the Trieste

summit in July 2017. IFC’s SEE Reginal Tax Advisory project (completed) supported building

institutional capacity of Serbia’s tax administration and Ministry of Finance in risk analysis and

transfer pricing areas, while no progress was achieved in tax simplification since the project’s scope

was reduced due to frequent political changes. IFC also launched a digitalization project to support

the migration of the most burdensome licenses and permits from a paper-based system to an

electronic system.

41. The CPF Program supports private sector growth and economic inclusion, among others

through assisting in creating a more stable and accessible financial sector. The Deposit

Insurance Agency (DIA) Project was an important contribution to strengthening the DIA as an

important institution in the financial safety net and therewith contributed to a more stable financial

sector. Cumulative inflows into the Deposit Insurance Fund ended up beyond the original target

and the premium rate was kept at 0.6 percent, even though this was initially only expected to be a

temporary arrangement. Strengthening the institutional capacity of the DIA and MoF was an

important part of the Project, and contributed to several legal changes related to the functions of

46

the DIA. The WBG team reviewed and provided comments to the Deposit Insurance Agency Law,

the Deposit Insurance Law and the Law on Bankruptcy and Liquidation of Banks and Insurance

Companies, in coordination with the IMF. The revisions of these laws were important foundations

for strengthening the DIA and clarifying its responsibilities. By building its financial and

institutional capacity, the Project enabled the DIA to meet future deposit insurance and bank

resolution obligations, which is fundamental for creating and maintaining financial stability.

42. During the CPF period to date, no progress has been achieved in privatization of the state-

owned banks. Despite IFC's strong efforts and close collaboration with other DFIs including the

EBRD, DEG, and Swedfund, the privatization on a major state-owned bank did not materialize due

to lack of strong commitment from the government. The privatization process has been initiated

for one of the state-owned banks (Jubmes). The support to the financial sector will continue, both

with IFC’s engagement as well as through the recently approved IBRD loan for the State Owned

Financial Institutions (SOFI) Project aiming to support the Government with implementation of the

reform strategy for state owned financial institutions which aims to divest from selected state-

owned banks and financial institutions.

43. IFC continues to provide financing to Serbian banks to reach SMEs and households. In FY16,

IFC invested EUR35 million in Eurobank a.d. to support its housing/mortgage lending and trade

finance activities. IFC's financing aims to Serbia's mortgage market development through

improved access to finance of low income clients. In addition, through its Global Trade Finance

Program (GTPF), IFC provided US$33.2 million in trade finance to support Serbian exporters. IFC

will continue to support growth and export promotion by increasing access to short-term financing

for working capital and trading needs of companies in Serbia. In FY18, IFC provided the first local

currency funding to the only licensed microfinance lender in the country and promoting local

currency finance as one of the Government's key objectives. In addition to local currency funding,

IFC's financing will support the bank to increase its lending to underserved segments facing access

to finance hurdles including the agriculture sector, women entrepreneurs, and rural areas.

44. Serbia has made significant progress in the area of distressed-asset resolution. Non-

performing loans (NPL) have steadily declined since 2015 from 23 percent of total loans to 9.8

percent as of December 2017, and further down to 6.7 percent as of July 2018. Through the Western

Balkans Debt Resolution Program, IFC supported the Government of Serbia in the adoption of the

Non-Performing Loans (NPL) Resolution Strategy in 2015, which has played key role in addressing

the legacy issue of chronically high NPLs. In the first phase of project implementation, IFC

provided advisory support to improve the insolvency legal framework, including training judges

and bankruptcy administrators on implementation; supporting amendments in the Financial

Restructuring law, adoption of a new Insolvency law (in 2017 jointly with IMF), and the law on

Bankruptcy Supervision Agency (BSA); and establishing a new bankruptcy agency to centralize

all bankruptcy procedures and administration. The changes in the bankruptcy/insolvency regimes

are expected to lead to further reduction in NPLs and unclog the credit channels in the financial

system. The second phase of the program will focus on closing the regulatory gaps identified during

Phase I, assessment of the regulatory framework for individual entrepreneurs' insolvency, raising

the qualifications of main stakeholders (insolvency administrators, courts and supervisory

authority) and raising awareness of the new mechanisms.

45. IFC leveraged regional and global platforms and projects to support Serbia’s private sector

and improve financial access. IFC invested in the European Fund for Southeast Europe (EFSE),

a collective debt investment vehicle initiated by KfW to channel long-term resources for housing

finance and on-lending to MSEs through banks, specialized microfinance institutions, and viable

microfinance non-profit organizations. Serbia is the second largest exposure in EFSE’s portfolio

(EUR130 million allocated in 6 Serbian financial institutions). In FY18, IFC invested in a newly

created Real Estate Investment Trust (REIT) focused on retail property assets in Serbia, North

47

Macedonia, and Montenegro. The investment will help local companies that operate income

generating commercial property to access international capital markets and fund their growth, while

setting best-in-class energy efficiency standards by upgrading commercial properties into certified

green building facilities. In FY16, IFC invested US$30 million into a vertically integrated

manufacturer of electric motors and related components, to expand their production in Serbia,

leading to 1,100 new jobs creation.

46. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at

creating a new regional market for investment in the Western Balkans 6 (WB6) through

identifying and removing barriers to cross-border and intra-regional investment. By fostering

greater harmonization of regional investment policies and better alignment with EU standards, the

project aims at unlocking higher levels of FDI and intra-regional investment, faster economic

growth and job creation in the region. The project will focus on supporting targeted investment

climate reforms in the economies of the region to ease investment entry, strengthen investor

protections and facilitate investment retention and re-investments. The project is fully aligned with

the objectives and priorities of the Multiannual Action Plan to establish a Regional Economic Area

in the WB 6 (MAP REA), which was adopted by the Prime Ministers of the region at the Trieste

summit in July 2017.

47. There has been limited progress to date when it comes to reducing barriers to labor market.

Due to challenges and delays arising from parliamentary and presidential election that impacted

decision making and caused shifts in some of the Government’s priorities, lack of progress was

registered in areas related to reducing labor market barriers (in particular with legislation) and

measures to increase activation of social assistance beneficiaries. Activities supported under the

ongoing Results-Based Competitiveness and Jobs operation, which is a part of a broader WBG

engagement in this area, were recently realigned in response to changed circumstance so to

maximize the support provided to selected public programs that help alleviate constraints to

competitiveness and job creation (including investment and export promotion, innovation, active

labor market programs, labor intermediation). The efforts undertaken to date resulted in enhanced

performance of the National Employment Services (NES), partly contributing to increased numbers

of registered unemployed finding jobs. Furthermore, significant funding from EU IPA came

through the Serbia Research, Innovation and Technology Transfer Project that promotes

commercialization of public R&D in Serbia and facilitates strategic planning in its research sector.

It provides assistance with design and establishment of technology transfer practices and grant

schemes for collaborative R&D.

48. Serbia's ranking in the World Bank Logistics Index fell from 63 in 2014 to 76 in 2016,

indicating the need for further improvement in areas such as customs processing, trade and

transport infrastructure, and institutional capacity of customs agencies. Through the ongoing

ECA Trade Facilitation Support Program (ECA TFSP), IFC helps Serbia align with the WTO Trade

Facilitation Agreement (TFA) and improve efficiency and simplify procedures in border processing

and clearances. As of 2017, the program delivered three main outcomes: (i) implementation of a

Time Release Study (TRS), measuring border agency processing times at selected border crossing

points and inland terminals; (ii) an update of the WTO TFA Category B and C articles, and (iii)

support to the establishment of the National Trade Facilitation Committee, as required by CEFTA

and the WTO TFA. Future areas of support include harmonization of customs legislation with

international requirements, facilitating border controls with North Macedonia, development of ICT

solutions for customs, and post-custom clearance audits.

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ANNEX 5: CITIZEN ENGAGEMENT

1. In Serbia, the citizen engagement corporate requirements are implemented in a context where voice

and accountability (as measured by global indicators) is considered to be declining. On the

Worldwide Governance Indicator (WGI) for Voice and Accountability, Serbia has declined

marginally hovering about 53-55 in the worldwide rankings).16 Media freedom in Serbia has also

declined with media outlets working under financial and editorial pressures; Reporters Without

Borders (RSF) logged a series of threats and verbal attacks by pro-government media against

critical journalists in February 2018.17 The vibrancy of the civil society sector, including citizen

action traditionally visible in the grassroots activist movements, has seen some repression over the

past four years.18 Comparatively, the country also has a fairly weak record of citizen engagement

within the context of Bank-financed operations.

2. Since 2014 when the Citizen Engagement corporate requirements were introduced, efforts were

stepped up to embed citizen engagement in all IPFs in the Serbian portfolio. In summary, during

FY14-FY18, six projects in Serbia were subject to corporate requirements, although another two

also comply. With regards to compliance with the CE requirements, after a lag in FY14 and FY15,

by FY16, 100% of Serbia projects approved by the Board were fully compliant with both

requirements.

3. A review of the quality of the citizen engagement in all IPFs was undertaken in 2016 and updated

in early 2018 to inform this PLR. This review of quality of citizen engagement measured four

attributes of citizen engagement of the six projects approved since FY14. Of those projects that

have included citizen engagement activities, 85% enable citizens to provide feedback at least

annually (frequency of engagement). The portfolio largely relies on three mechanisms (GRMs,

satisfaction surveys and consultations) which do not provide an opportunity for direct interaction

or active engagement (depth of engagement), some which were established for safeguards

(restrictions on feedback). Apart from GRMs, citizens are able to provide feedback through

satisfaction surveys in two projects (multiple channels for feedback). Citizen engagement of

projects under implementation were assessed in FY18 to ensure that the commitments made at

Board approval were demonstrating progress in implementation. 87% of projects described CE in

the PAD; 63% of projects have developed the systems and guidance to put in place most or some

of the citizen engagement tools proposed, and 63% of projects have started reporting. The Corridor

X project has consistently carried through all aspects of implementation, with good budgets and

solid reporting on results.

4. To address the gaps in quality and implementation, during the remainder of the PLR period, specific

actions are planned to improve quality and strengthen implementation. To ensure genuine

improvement, it will be vital to: (i) deepen knowledge of constraints to voice and accountability in

Serbia and the challenges for PIUs operationalizing CE within the Serbian enabling environment;

(ii) expand the scope of the citizen engagement mechanisms currently being implemented (e.g.

checking the use of GRMs and expanding safeguards-related GRMs to accept feedback on any

issue, provide awareness building within target areas, ensuring that all citizens, including women,

youth and vulnerable have access to information they need to provide feedback, ensuring feedback

occurs annually); and (iii) target capacity building to PIUs implementing CE commitments, to

overcome hurdles in operationalization and implementation. In the existing portfolio a key focus

will be on the Inclusive Early Childhood Education and Care Project (IECEC) project to develop

engagement through community-based initiatives consulting parents and enabling them to

16 Worldwide Governance Indicator for Voice and Accountability, Serbia, 2014-2016. 17 Reporters without Borders: "Verbal attacks on journalists by pro-government Serb media", February 12, 2018. 18 Freedom House, Serbia Profile 2017.

49

participate in school planning and monitoring. Efforts will be made to support all upcoming

operations in the pipeline (by end FY20) and ensure more in-depth citizen engagement tools which

are inclusive and linked to government systems, and thus establishing a new standard for

implementation. To create new models three transformative platforms are proposed. The Citizen

Engagement Country Roadmap also includes a corrective citizen engagement supporting action

plan – to step up efforts in support of PIUs implementing CE activities.

5. To enhance inclusion, a cross-cutting initiative is planned to put in place mechanisms to develop

voice within Roma communities for improved access to services.

50

Table 1. Serbia Citizen Engagement Country Road Map

(for the remainder of the CPF)

• Western Balkans Trade and Transport Facilitation (by end FY19)

• Enabling Digital Governance in Serbia (by end FY19)

4 IMPROVED RESULTS

CONCRETE ACTIONS

3. Enhanced

implementation of citizen

engagement in IPFs

• PIU capacity building to

help overcome

blockages in

implementation;

• enforce country

standards

• CE Supporting Action

Plans

2. Targeted, transformative

platforms for citizen

engagement approved in

upcoming IPFs, and designs

taken forward into the

initial stages of

Implementation.

• Support innovative approaches to CPF consultation, reaching community,

local levels and a broad range of CSOs, think tanks, academics etc.

• Undertake a Serbia Voice and Accountability study, (incl. addressing

Roma inclusion), to inform areas of the forthcoming CPF (prior to CPF).

1. Enhanced engagement

mechanisms for dialogue

with civil society on

country engagement

4. Bank-supported CE

activities monitored and

tracked through

transparent platform.

• Improve PIU and Bank reporting - through ISRs – 100% of IPFs by end FY19

• Introduce CE Monitoring in annual portfolio reviews with govt., by end

FY19, including tracking quality and level of implementation

• Disseminate information on portfolio CE improvements and innovative,

genuine models of engagement – by end FY19.

TRANSFORMATIVE PLATFORMS

• Provide regular capacity building to all PIUs to address challenges in

implementation of CE tools.

• Support PIUs to implement inclusive approaches, (particularly in regard to

Roma)

• Establish and implement a set of agreed country standards to ensure:

(i) beneficiary feedback is genuine and reflects best practice (frequency,

disclosure, responsiveness, accessibility),

(ii) inclusion of vulnerable groups in implemented citizen engagement

mechanisms is given proper attention (linking support to the Roma Filter

application, and

(iii) indicators provide meaningful action-oriented information (by end

FY19).

• Improve functionality and use of GRMs (as they represent a key channel for

feedback in most Serbia operations) or find alternative. Ensure feedback

can be provided on any issue, not just resettlement-related issues (by end

FY19).

Citizen Engagement Supporting Action Plans • Action Plans developed to support all post FY14- IPFs

• Improve frequency, opportunities, remove restrictions on scope

• Ensure inclusion of all groups in CE activities

SUPPORTING CHANGE