Document ofThe World Bank

Report No: 56839-MK

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING OF

BUSINESS ENVIRONMENT REFORM & INSTITUTION STRENGTHENING PROJECT

LOAN NUMBER 4793 MK

JUNE 21, 2005

TO

FORMER YUGOSLAV REPUBLIC OF MACEDONIA

September 30, 2010

ABBREVIATIONS AND ACRONYMS

BERIS Business Environment Reform and Institution Strengthening Project

BoM Bureay of MetrologyCRM Central Registry of MacedoniaGS General SecretariatEU European UnionIARM Institute for Accrediation ISRM Institute for StandardizationIT Information TechnologyMOE Ministry of EconomyMSTQ Metrology Standards Testing and QualityOPCS Operation Policy and Country ServicesPDO Project Development ObjectivesPIU Project Implementation UnitRIA Regulatory Impact AssessmentSER Sector for Economic Policies and Regulatory Reforms

Regional Vice President: Philippe H. Le HouerouCountry Director: Jane Armitage

Sector Manager / Director: Lalit Raina/Gerardo CorrochanoTask Team Leader: Sylvie K. Bossoutrot

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DATA SHEET

Restructuring Status: Submitted to CLRestructuring Type: Level twoLast modified on date : 09/28/2010

1. Basic InformationProject ID & Name P079552: BUSINESS ENVIRONMENT REFORM &

INSTITUTION STRENGTHENINGCountry Macedonia, former Yugoslav Republic ofTask Team Leader Sylvie K. BossoutrotSector Manager/Director Lalit RainaCountry Director Jane ArmitageOriginal Board Approval Date 06/21/2005Original Closing Date: 03/31/2010Current Closing Date 12/31/2010Proposed Closing Date [if applicable]EA Category C-Not RequiredRevised EA Category C-Not Required-Not RequiredEA Completion DateRevised EA Completion Date

2. Revised Financing Plan (US$m)Source Original Revised BORR 3.29 0.17 IBRD 11.30 8.38 Total 14.59 8.55

3. BorrowerOrganization Department Location

Former Yugoslav Republic of Macedonia

Macedonia, former Yugoslav Republic of

4. Implementing AgencyOrganization Department Location

Ministry of Economy Macedonia, former Yugoslav Republic of

5. Disbursement Estimates (US$m)Actual amount disbursed as of 09/28/2010 2.39

Fiscal Year Annual Cumulative 2010 0.00 2.39 2011 6.16 8.55 Total 8.55

6. Policy Exceptions and Safeguard PoliciesDoes the restructured project require any exceptions to Bank policies? N

Does the restructured projects trigger any new safeguard policies? If yes, please select from the checklist below and update ISDS accordingly before submitting the package.

N

7a. Project Development Objectives/OutcomesOriginal/Current Project Development Objectives/OutcomesThe overall objective of the BERIS is to strengthen the capacity of the Government to improve selected areas of the business environment in an EU-oriented context.

7b. Revised Project Development Objectives/Outcomes [if applicable]

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BUSINESS ENVIRONMENT REFORM & INSTITUTION STRENGTHENING PROJECT

RESTRUCTURING PAPER

A. SUMMARY

The proposed Level 2 restructuring is pursuant to requests from the Borrower in letters dated June 10, 2010 and June 29, 2010 requesting the following changes: (a) partial cancellation of proceeds of the Loan in the total amount of 2.4 million EUR, which has already been acknowledged by the Bank effective June 10, 2010, (b) improvement and refinement of the Results Framework, namely the PDO indicators and intermediate result indicators, and, (c) revision of the name and broadening of the scope of Component 3 (currently Competition Policy) of the Project to cover a broader set of activities related to the industrial policy strategy and competitiveness strategies. The partial cancellation also necessitates a reallocation.

The proposed changes do not affect the Development Objectives, the implementation arrangements, or the appraisal summary of the Project.

B. PROJECT STATUS

The Project has been making substantial progress toward achieving the development objectives. The Company Law was revised and investor protection strengthened according to European Union (EU) requirements. Business registration has been simplified and shortened to one day. Over 100 laws and by-laws have been developed and adopted using the Regulatory Impact Assessment and 56 laws and 481 by-laws were streamlined by the Regulatory Guillotine. The Strategy for Industrial Policy 2009-2010 in line with the EU acquis communautaire (Chapter 20) was adopted by the Government. The Disaster Recovery System (1.2 million EUR) was implemented providing back-up of all business registration data of the Central Registry. A link between the Central Registry, Employment Agency and Health Insurance Fund has been operational. The One-Stop-Shop Phase 2 (1.9 million EUR) is under implementation and will establish electronic registration of businesses, the first employees as well as leasing, pledge and bankruptcy registries. The new equipment for the Bureau of Metrology (800,000 EUR) is under implementation.

Successful implementation of the large procurement packages is important for the country’s EU accession agenda in coordination with the financial Instrument of Pre-Accession of the European Commission. Additional procurement activities totaling 230,000 EUR for consulting activities to support priority areas for economic growth and competitiveness have been in advanced stages of completion. The Project Implementation Unit (PIU) of the Ministry of Economy (MOE) has increased its operational capacity by hiring new, experienced staff, namely a Program Manager and a Financial Manager which will additionally enhance the fiduciary management, implementation and disbursement.

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The Project was restructured in February 2010 and in June 2010, respectively, (a) through a 9-month extension, to allow for sufficient time to implement the complex activities (One-Stop-Shop Phase 2, equipment for the Bureau of Metrology and the Disaster Recovery System), which are important for the country's path to the European Union, and (b) through a partial cancellation of proceeds of the Loan in the amount of 2.4 million Euro, which cannot be utilized until the new closing date of the Project due to involvement from other donors and new financing priorities of the Borrower and Bank in the country.

Total disbursement to date is 1,844,000 EUR or 28% of the total current loan amount1, which represents an increase of 11% on the current loan amounts since March 2010. Total commitments in signed contracts (The One Stop Shop Phase 2, Disaster Recovery System, equipment for the Bureau of Metrology, Innovation Scoreboard and Crafts Strategy) in 2010 is around 4,250,000 EUR. With their implementation by December 2010, the disbursement will increase to 87%. In addition, approximately 300,000 EUR or 4.6% of the total loan amount are allocated to ongoing and planned procurement activities (technical assistance for the implementation of the Industrial Policy Strategy, revision of the Tourism Development Strategy and IT equipment for the Ministry of Economy and the Institute for Accreditation), which are expected to be completed soon.

C. PROPOSED CHANGES

Results/indicators (Annex 1):

The Project Development Objective: Strengthening of the capacity of the Government to improve selected areas of the business environment in an-EU oriented context remains the same.

We propose to introduce PDO level result indicators and refine the intermediary result indicators to better reflect and measure the results of the originally envisioned Project Development Objectives in a new EU-oriented context. The original outcome (PDO) indicator (Demonstrated capacity to coordinate and implement regulatory reforms, and deliver selected public services in compliance with EU requirements) is vague in scope and not defined with specific measurable indicators. We propose to add the following PDO level results indicators: (a) Number of EU Directives dealing with business regulation and operation transposed in the national legislation; (b) Ranking on the ease of doing business in the Doing Business Report; and (c) Overall assessment of the business environment areas supported by the Project in the annual EU Progress Report.

A revision of the intermediary result in Component 3 (currently Competition Policy Regime) is proposed in order to correspond to the proposed revision of the

1 Following the cancellation of 2.4 million EUR, effective June 10, 2010, the current total amount of the Loan is 6.4 million EUR. Prior to the approval and acknowledgment of the partial cancellation, it was agreed with Operations Policy and Country Services (OPCS) that the partial cancellation would be the first phase of a two phase restructuring (the second phase is the revision of Component C and the results framework) and be formally documented in this restructuring paper.

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name and scope of Component 3 (into Industrial and Enterprise Policy and Competitiveness Support).

While most of the original intermediary result indicators have been only refined by reference to EU requirements or best practices, a few new intermediary indicators and corresponding targets are proposed in Component 2 (indicators 1 and 2) and in Component 4 (indicator 2):

Component 2: MSTQ System

Intermediate Result indicator One: Cumulative number of trained technical staff at the MSTQ institutions.Intermediate Result indicator Two: Cumulative number of types of measurements (field+ranges) in which the Bureau of Metrology is able to provide calibration services.

Component 4: Access to Information

Intermediate Result Indicator Two: Cumulative number of business registrations.

The revised framework is attached as Annex 1 to this Restructuring Paper. A revised supplemental letter relating to the indicators will be obtained from the Borrower.

ComponentsWe propose to amend Component C (Competition Policy Regime) through: (a) reduction of subcomponent (i), (b) renaming of the Component C as Industrial and Enterprise Policy and

Competitiveness Support and to modify, accordingly, its scope to correspond to the new priorities of the Government in its path to the European Union.

Specifically, the proposed changes are due to the following reasons: (a) in the last two years the original beneficiary in subcomponent (i), the Commission for Protection of Competition, has been receiving technical assistance from other donors to support activities and capacity building originally envisioned to be supported by BERIS; (b) the newly adopted Industrial Policy Strategy 2009-2020, which was developed under the Project and is important for EU accession under Chapter 20 (Enterprise and Industrial Policy) of the acquis needs further support until an EU-financed project starts in late 2011 or early 2012. The Industrial Policy includes five areas of intervention: (i) Foreign direct investment; (ii) Applied research, development and innovation; (iii) Small and medium enterprise (SME) development; (iv) Ecological products and sustainable development; and (v) Support to business clusters and networks.

The new Government priorities for support of the business environment and competitiveness also include revision of the Strategy for Development of Tourism, development of the Crafts Strategy and assistance with the development of the special economic zones and export promotion. In the last year, the Ministry

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of Economy and the Sector for Economic and Regulatory Reforms (Office of the Deputy Prime Minister for Economic Affairs) requested technical assistance and just-in-time advice from the Bank through BERIS in these areas.

The modification of the scope of Component 3 will not affect the purpose of the Project and, specifically, the Component to help build the institutional framework and capacity to systematically improve the quality of business regulations. The new focus of the Component will remain in an area where substantial acquis communautaire exist (Chapter 20 - Enterprise and Industrial Policy) in which BERIS will help increase FYR Macedonia’s compliance with the acquis and also bring it closer to EU best practices (e.g. foreign investment and export promotion, tourism development).

While the Project provided equipment and technical assistance to the Commission for Protection of the Competition in the past to strengthen its capacity, the main proposed beneficiaries of Component 3 are the Ministry of Economy (Industrial Policy Unit, SME Development Department, Department for Tourism and Department for European Integration/BERIS Project Implementation Unit), and the Sector for Economic Policies and Regulatory Reform. The Industrial Policy Unit at the Ministry of Economy has a successful track record with BERIS with the design of the Industrial Policy and also has a role of coordination with the State Aid Unit at the Commission for Protection of Competition to ensure that the industrial policy does not violate state-aid rules and does not adversely affect the market competition, and/or increase the regulatory burden considering the existing links between industrial policy and competition policy.

The description of Component C, in the Legal Agreement (Schedule 2, Description of the Project), would be amended as follows:

Part C: Industrial Policy and Enterprise Competitiveness Support:The provision for institutional development and capacity building of the Borrower’s capacity to implement a European Union-compliant industrial policy, enterprise competitiveness support and competition regime through (i) strengthening of the institutional capacity of the Industrial Policy Unit to design and implement industrial policy measures in line with European Union requirements; (ii) strengthening of the institutional capacity of the Ministry of Economy and the Sector for Economic Policies and Regulatory Reform2 to design and implement sector competitiveness policies in line with European Union requirements and best practices; (iii) increasing public awareness of industrial and competition policy issues; and (iv) providing training and seminars for relevant stakeholders in industrial, competitiveness and competition policies, through the provision of technical assistance, training, equipment, goods and study tours.

Financing

2 The Sector for Economic Policies and Regulatory Reform is the successor department to the Sector for Economic Reform

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Project Costs: Upon the request from the Borrower dated June 10, 2010, a partial cancellation of proceeds of the Loan in the amount of 2.4 million EUR (27% of the original Loan amount of 8.8 million EUR) was acknowledged by the Bank effective June 10, 2010. The partial cancellation was based on a thorough assessment and finding from the Borrower that the funds cannot be utilized by the closing date of the Project due to involvement from other donors, limited capacity of the Ministry of Economy/Project Implementation Unit and new financing priorities (infrastructure, energy) of the Government and Bank in the country (see below for more details).

o Consequently, the project costs per components/activities are amended as follows:

Project Costs (EUR 000)Components/Activities Original3 Revised

Component 1: Business Regulation 1,984 725Component 2: MSTQ System 4,037 1,243Component 3: Competition Policy Regime (proposed: Industrial and Enterprise Policy and Competitiveness Support)

1,308 857

Component 4: Access to Information 3,676 3,450Component 5: Project Coordination Support 313 253

TOTAL PROJECT COSTS: 11,318 6,528

o Reallocations: The cancellation of project proceeds in the amount of 2.4 million EUR effective as of June 10, 2010 (see below), resulted in the following reallocation:

Category of Expenditure AllocationCurrent Revised Original Revised Current

Goods, services, including auditing services, incremental operating costs,

and Training6,806,000 5,356,000 100%

Goods Under Part B (i) of the Project for the Bureau of Metrology

1,950,000 1,000,000 100%

o Cancellations

3 Original “Total Project Costs” as in the Project Appraisal Document (PAD). The financing plan for original costs included a large Borrower financing of Euro 2.56 million that is no longer part of the project financing and not reflected in the revised project costs. The Borrower co-financing amounts to Euro 127,691 that represents co-financing of the project costs up to December 2009 when the Bank financing % was changed from 90% to 100%.

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In June 2010, the Borrower’s request for cancellation of funds in the amount of 2.4 million EUR of the Loan was based on a prior assessment of the Borrower and their discussions with the Bank about the needs and priorities for financing. It was determined that the amount of 2.4 million could not be utilized until the new closing date of the Project, due to (a) gap between the originally projected and realistic financing needs under the Project due to which the equipment for the Bureau of Metrology was reduced from originally planned 1.9 million EUR to 800,000 EUR, and the project costs in Component 1 (Business Regulation) were decreased from 1.5 million EUR to 650,000 EUR, (b) limited capacity of the Project Implementation Unit (streamlined into the Ministry of Economy as per the more recent Bank model/standard of streamlined PIUs) to handle multiple parallel procurement activities including some complex large IT ones at the same time, and (c) availability of other financing sources including international donors (USAID, the UK), to support some capacity building activities originally envisaged under the Project (e.g. in the areas of, market inspections, regulatory impact assessment, competition policy).

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ANNEX 1:Results Framework and Monitoring

MACEDONIA, FORMER YUGOSLAV REPUBLIC OF: BUSINESS ENVIRONMENT REFORM & INSTITUTION STRENGTHENING PROJECT

Project Development Objective (PDO):

Strengthening of the capacity of the Government to improve selected areas of the business environment in an-EU oriented context.

Revised Project Development Objective:Not revised

PDO Level Results Indicators* C

ore

D=DroppedC=ContinueN= New

R=Revised

Unit of Measure

Baseline2005

Target Values

Frequency

Data Source/

Methodology

Responsibility for Data CollectionYR 1 YR 2 YR 3 YR 4 YR5

Indicator One:

Number of EU Directives dealing with business regulation and operation transposed in the national legislation.

New Number and Text

N/A

Business regulation not in compliance with EU requirements

1

Competition policies strengthened

N/A 1

Corporate governance regulation in line with EU

1

Shareholder rights strengthened

Company Law and Securities Lawfully compatible with EU directives

Annual Reports, interviews, EU Progress Report,

Ministry of Economy and Sector for Economic and Regulatory Reforms at the General Secretariat

Ranking on the ease of doing business in the Doing Business Report.

New NumberN/A N/A 100 80 70 50 Annual Doing

Business Report

Overall assessment of the business environment areas supported by the

New Text N/A N/A Improvement noted in the Free

Significant improvement noted

Recommendation to start negotiations for accession

Annual EU Progress Report

Project in the annual EU Progress Report.

Movement of Goods, Free Movement of Capital and Company Law Chapters of the acquis

in Free Movement of Goods, Free Movement of Capital, Company Law, Competition Policy and Industrial Policy Chapters of the acquis

to the European Union

INTERMEDIATE RESULTS

Intermediate Result (Component One – Business Regulation): Government has well functioning mechanisms and policies in place for applying the Guillotine and other RIA complementary mechanism to business sector regulations.

Revised Intermediate Result (Component One): Not revised

Intermediate Result indicator One: Cumulative number of regulatory regimes in business law streamlined using Regulatory Impact Assessment

R Number 0 0 0 1 2 2 Semi-annual Reports,results ofsurveys,interviews

Ministry ofEconomy/PIU

Intermediate Result indicator Two: Cumulative number of laws and by-laws streamlined using Regulatory Guillotine

R Number 0 0 0 0 50 laws 500 by-laws Semi-annual Progressreports,publications,amendmentsto legislation,

Ministry ofEconomy/PCUInCoordinationwith the

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interviews General Secretariat

:Intermediate Result (Component Two – MSTQ System): The Bureau of Metrology (BoM), Institute for Standardization (ISRM) and Institute for Accreditation (IARM) have acquired the ability to monitor and evaluate business sector needs for metrology, testing, standards and quality services.

Revised Intermediate Result (Component Two): Not revised

Intermediate Result indicator One: Cumulative number of trained technical staff at the MSTQ institutions

New Number 40 N/A 50 60 70 80 Semi-annual/Annual

Reports, results of surveys, interviews

MoE, BoM, ISRM, IARM,

Intermediate Result indicator Two: Cumulative number of types of measurements (field+ranges) in which the Bureau of Metrology is able to provide calibration services.

R Number 0 0 0 10 20 30 Semiannual/Annual

Reports, results of surveys, interviews

BoM and

MoE/PCU

Intermediate Result indicator Three: Annual number of calibrations done by the Bureau of Metrology in line with EU standards

R Number 0 0 0 10 50 100 Semi-

annual/Annual

Reports, results of surveys, interviews

BoM and

MoE/PCU

Intermediate Result Indicator Four: Cumulative number of accreditations granted in accordance with European cooperation for Accreditation (EA)

R Number 3 0 10 10 20 10 Semi-annual/Annual

Reports, results of surveys, interviews

IARM and

MoE/PCU

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standards

Intermediate Result Indicator Five: Cumulative number of standards harmonized with EU (CEN and CENELEC)

R Number 18 0 1,00 1,000 1,000 2,000 Semi-

annual/Annual

Reports, results of surveys, interviews

ISRM and

MoE/PCU

:

Intermediate Result (Component Three – Competition Policy): The Commission for Protection of Competition (CPC) and State Aid Commission (SaC) have developed the capacity to implement effectively competition and state aid policies and have strengthened their advocacy role.

Revised Intermediate Result (Component Three - Industrial and Enterprise Policy and Competitiveness Support): The Department for Industrial Policy and SME Department at the Ministry of Economy (MOE) and the General Secretariat-Sector for Regulatory Reforms (SER) have developed the capacity to effectively implement the national Industrial Policy Strategy 2009-2020 and SME competitiveness strategies in line with EU.

Intermediate Result indicator One: Cumulative number of national policies and strategies on competitiveness developed and adopted by Government in line with EU

New Number 0 0 0 1 1 2 Semi-annual/Annual

EU progress report, MOE’s website and progress reports, interviews.

MoE and SER

Intermediate Result indicator Two: Cumulative number of Government officials trained in implementation and monitoring of national competitiveness policies

New Number 0 N/A N/A 10 20 20 Semi-annual/Annual

Reports, surveys

MoE and SER

:

Intermediate Result (Component Four – Access to Information): The Central Registry implements a simple and transparent business registration system.

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Revised Intermediate Result (Component Four): Not revised

Intermediate Result indicator One: Cumulative number of days required to register a business (in working days)

C Number 40 40 30 10 8 5 Semi-annual/Annual

Internal statistics and Doing Business Report

CRM and

MoE/PCU

Intermediate Result Indicator Two: Cumulative number of business registrations

New Number N/A 80,000 90,000 95,000 100,000 105,000 Semi-annual/Annual

Reports, internal statistics

CRM and

MoE/PCU

:

Intermediate Result (Component Five – Project Coordination Support): The PCU/MOE and the SER have acquired the capacity to monitor and evaluate progress in improving the business environment.

Revised Intermediate Result (Component Five): Not revised

Annual number of workshops organized by the MoE and SER to discuss Government’s progress in business environment reforms with relevant stakeholders, including progress made in BERIS-supported reforms.

R Number 0 2 2 4 8 4 Semi annual/Annual

Reports, interviews, meetings

:

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