BULGARIA COUNTRY PARTNERSHIP STRATEGY 2011-2013 by World Bank in Bulgaria

BULGARIA COUNTRY PARTNERSHIP STRATEGY 2011 - 2013

PARTNERING FOR BULGARIA'S EUROPEAN FUTURE

GROUP

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA FOR THE PERIOD 2011-2013

April 20, 2011

THE WORLD BANK

ÂŠ2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All Rights Reserved Manufactured in the Republic of Bulgaria First printing: June, 2011 Report No.60604-BG Cover page design by Boris Balabanov

Date of Last Country Assistance Strategy: May 16, 2006 CURRENCY EQUIVALENTS (Exchange Rate as of April 5, 2011) Currency Unit = Bulgarian Lev (BGN) US$1.00 = 1.37348 BGN GOVERNMENT’S FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AAA ALMP BDZ EAD BGN

Analytical and Advisory Activity Active Labor Market Programs State-owned Bulgarian Railways Company Bulgarian Lev

GMI GNI HD IBRD

BNB CAP CAS CEDB

IEG IFC IFIs IMF

EC ECA

Bulgarian National Bank Common Agricultural Policy Country Assistance Strategy Citizens for European Development of Bulgaria Council of Ministers Consumer Price Index Country Partnership Strategy Cooperation and Verification Mechanism Development Policy Loan European Bank for Reconstruction & Development European Commission Europe and Central Asia

ECD EE EEA ECOFIN

Early Childhood Development Energy Efficiency European Economic Areas Economic and Financial Affairs Council

MLPS MOEW MoF MRDPW

EIB ERM-2 ERDF ESA 95 ESF EU EU ETS

European Investment Bank Exchange Rate Mechanism 2 European Fund for Regional Development European System of Accounts European Social Fund European Union EU Emissions Trading Scheme

MTHS NGO NHIF NRIC NRP NSI OECD

EU-15 EU-25

EU Member States prior 2004 EU Member States as of 2004

OP PISA

EU-27 FBS FDI GEF GDP GHGGDP GISGHG GIS

EU Member States as of 2007 Fee Based Service Foreign Direct Investment Global Environment Facility Gross Domestic Product Greenhouse GasGross Domestic Product Green Investment SchemeGreenhouse Gas Green Investment Scheme

R&D RIA SIL SIR DPL SIP SME STI TA

Joint Assistance to Support Projects in European Region Knowledge and Advisory Services Limiting Administrative Regulation and Administrative Control on Economic Act Monitoring and Evaluation Ministry of Education, Youth and Science Middle Income Country Municipal Infrastructure Development Project Ministry of Labor and Social Policy Ministry of Environment and Water Ministry of Finance Ministry of Regional Development & Public Works Multi-Topic Household Survey Non-governmental organization National Health Insurance Fund National Railway Infrastructure Company National Reform Program National Statistical Institute Organization for Economic Cooperation & Development Operational Program Program for International Student Assessment Research and Development Road Infrastructure Agency Specific Investment Loan Social Sector Institutional Reform DPLs Social Inclusion Project Small and Medium Enterprises Science Technology and Innovation Technical Assistance

Vice President: Operations Director: Task Team Leaders:

IFC Rashad R. Kaldany Dimitris Tsitsiragos Mariko Higashi, Vladimir Mihailovski

COM CPI CPS CVM DPL EBRD

Vice President: Country Director: Task Team Leaders:

IBRD Philippe H. Le Houérou Peter Harrold Markus Repnik, Sereen Juma

JASPERS KA LARACEA M&E MEYS MIC MIDP

Guaranteed Minimum Income Gross National Income Human Development International Bank for Reconstruction & Development Independent Evaluation Group International Finance Corporation International Financial Institutions International Monetary Fund

FOR OFFICIAL USE ONLY COUNTRY PARTNERSHIP STRATEGY FOR 2011-2013 THE REPUBLIC OF BULGARIA TABLE OF CONTENTS Executive Summary........................................................................................................................ 6 I. Country Context and Achievements........................................................................................ 8 A. Political Context and EU Membership................................................................ 8 B. Recent Economic Performance and Outlook....................................................... 9 C. Living Conditions and Demographic Trends..................................................... 13 D. The Challenge of EU Funds Absorption in Bulgaria......................................... 13 II. Country Priorities and Challenges....................................................................................... 14 A. Government Program and Europe 2020............................................................ 14 B. Smart Growth – Challenges and Government Priorities................................... 16 C. Sustainable Growth – Challenges and Government priorities........................... 16 D. Inclusive Growth – Challenges and Government Priorities.............................. 18 III. Bulgaria-World Bank Group Partnership......................................................................... 20 A. Experience and Lessons Learned...................................................................... 20 B. CPS Principles of Engagement.......................................................................... 22 C. CPS Pillars of Engagement and Outcomes........................................................ 22 (i) Pillar I: Policy Reforms for National Reform Program to Implement Europe 2020 Strategy........................................................................ 24 (ii) Pillar II: Strategies and Institutions to Accelerate EU Funds Absorption....... 26 (iii) Pillar III: Complementing EU Financing........................................................ 28 D. CPS Program..................................................................................................... 29 (i) IBRD Program................................................................................................. 29 (ii) IFC Program.................................................................................................... 30 IV. Risks....................................................................................................................................... 32 Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6:

Boxes:

Results Framework ................................................................................................... 33 Annex 1.1: CPS Pillars and Outcomes................................................................... 34 Annex 1.2: Results Matrix..................................................................................... 35 Bulgaria CPS Completion Report (FY07-FY10)..................................................... 39 CPS Consultations...................................................................................................... 69 Living Conditions and Demographic Trends .......................................................... 71 EU Structural and Cohesion Funds.......................................................................... 74 Standard CPS Annexes.............................................................................................. 76 A2: Bulgaria at a Glance........................................................................................ 76 B2: Selected Indicators of World Bank Portfolio Performance and Management................................................................................ 79 B3: IBRD and IFC Investment Operations Program.............................................. 80 B4: Summary of IBRD Knowledge and Advisory Services.................................. 81 B5: Bulgaria Social Indicators............................................................................... 82 B6: Bulgaria Key Economic Indicators.................................................................. 83 B7: Key Exposure Indicators................................................................................. 84 B8: IBRD Operations Portfolio.............................................................................. 86 B9: IFC Committed and Disbursed Outstanding Investment Portfolio................. 87

Box 1: Bulgaria and the EU: Efforts to Boost Judiciary and Combat Crime and Corruption.............................................................................................. 9 Box 2: Europe 2020 Strategy and Bulgaria’s National Reform Program 2011-2015..................... 14 Box 3: IFC Investments Support Land Consolidation in Bulgaria................................................. 30

Tables:

Table 1: Bulgaria: Selected Indicators 2007-13.............................................................................. 12 Table 2: NRP 2011-2015: Measures to Promote Growth.............................................................. 15 Table 3: Europe 2020 Strategy—Headline and National Targets................................................... 15 Table 4: CPS activities for FY11-12: Ongoing and Under Discussion.......................................... 23 Table 5: Ongoing and Planned World Bank Lending Program for FY11-FY12............................ 30 Tables (Annex 2: Bulgaria CPS Completion Report FY07-FY10): Table 1: At-a-Glance -- Progress towards Country Development Goals....................................... 41 Table 2: IBRD Planned and Actual Lending Operations FY07-FY10.......................................... 43 Table 3: Country Outcome 1 – Indicator (i): Business Environment............................................ 43 Table 4: Country Outcome 1 – Indicator (ii): Human Capital and Skills..................................... 44 Table 5: Country Outcome 1 – Indicator (iii): Employment......................................................... 45 Table 6: Country Outcome 1 – Indicator (iv): Transport.............................................................. 46 Table 7: Country Outcome II – Indicator (i): Education Financing.............................................. 46 Table 8: Country Outcome II – Indicator (ii): Health Financing.................................................. 47 Table 9: Country Outcome II – Indicator (iii): Social Protection................................................. 48 Table 10: Country Outcome II – Indicator (iv): EU Funds Absorption........................................ 48 Table 11: Country Outcome III – Indicator (i): Health Services.................................................. 50 Table 12: Country Outcome III – Indicator (ii): Social Inclusion................................................ 50 Table 13: Country Outcome III – Indicator (iii): Poverty............................................................. 51 Table 14: Summary of Assessments and Rating............................................................................ 52 Table 15: Bulgaria Portfolio Overview, FY07-FY10.................................................................... 53 Table 16: IEG Project Ratings, FY07-10....................................................................................... 54 Table 17: Annual Disbursement Ratio for Bulgaria and ECA....................................................... 54 Table 18: Analytical and Advisory Program Delivered ................................................................ 55 Table 19: IFC Lending Operations (FY07-FY10)......................................................................... 56 Map of Republic of Bulgaria ....................................................................................................... 88

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

COUNTRY PARTNERSHIP STRATEGY FOR 2011-2013 THE REPUBLIC OF BULGARIA EXECUTIVE SUMMARY i. Bulgaria has come a long way from its turbulent political and economic transition in the 1990s to become a member of the European Union in January 2007. Today, it is an upper middle-income economy of 7.6 million people and a GDP per capita of $6,423 in 2009. ii. Until the onset of the crisis in 2009, Bulgaria enjoyed rapid GDP growth. Sound macroeconomic policies and deep structural reforms helped fuel growth with average GDP growth exceeding 6 percent per year during 2004-2007, reaching 6.2 percent in 2008. The global financial crisis and the downturn in the US and the EU had a severe impact on Bulgaria. In 2009, growth declined by 4.9 percent and remained almost flat for 2010. iii. Buffers accumulated during good times helped mitigate the impact of the crisis. Fiscal surpluses accumulated during 2004-2008 were saved into a fiscal reserve account. Total public debt declined by half during this period to 15.5 percent of GDP. Thus, when fiscal revenues worsened in 2009 and 2010, Bulgaria relied on domestic sources to finance emerging fiscal deficits. Growth started to recover in 2010, aided by recovering external demand, and Bulgaria’s medium-term outlook is positive, with growth expected to accelerate to 3.5 percent by 2013. iv. Bulgaria’s current macroeconomic framework is adequate but risks remain. These include slower economic recovery among trading and investment partners, additional financial shocks resulting in higher interest rates and tighter global financial conditions, and energy price increase. High indebtedness of firms is also a source of concern. However, these risks are mitigated by Bulgaria’s solid track record of fiscal discipline and ongoing fiscal consolidation reforms, as well as a well capitalized banking sector, and the large share of intracompany loans in the private external debt. v. On the political front, there is broad support across the spectrum around key institutional, economic and monetary building blocks. Upon taking office in 2009, the Prime Minister formed a singleparty minority government with promise of reforms and faster EU convergence, with a focus on reducing corruption, unfreezing suspended EU funding, and improving quality of public services. No government has been elected for two consecutive terms since the political change in 1989, but all leading parties have expressed full support for the currency board arrangement, EU convergence, and reforms to join the EU’s exchange rate mechanism, a pre-requisite to Euro-entry. vi. Accelerating EU integration and convergence of living standards are Bulgaria’s key mediumterm goals. Bulgaria’s 2011-2015 National Reform Program maintains an overarching focus on boosting competitiveness to achieve the Europe 2020 Strategy. Its four key priorities include better infrastructure, competitive youth, the best business environment in the EU, and higher confidence in state institutions. In addition, the Government has identified the efficient utilization of EU funds as a major opportunity to finance public investments and accelerate EU integration. vii. In recent years, Bulgaria has seen slower than anticipated absorption of EU grant funds. More than three years after EU accession, Bulgaria has only absorbed about 11 percent of the €6.7 billion of Structural and Cohesion Funds in the current programming cycle of 2007-2013. It also stands lose some €200 million in unutilized pre-accession funds which expired in end-2010. viii. The objective of this Country Partnership Strategy is to support Bulgaria in strengthening institutions and policies to achieve smart, sustainable and inclusive growth. The CPS is uniquely focused on Bulgaria’s European agenda and is anchored in the National Reform Program to implement the Europe 2020 Strategy of smart, sustainable and inclusive growth. The CPS also reflects the Government of Bulgaria’s expressed interest in World Bank support to boost EU funds absorption, with a focus on transport and water sectors. ix. To achieve this objective, this CPS proposes a three-pillar framework of support. The first pillar will aim to provide knowledge and advisory support for policy reforms to implement select areas of the 6

Executive Summary National Reform Program. Under the second pillar, the Bank will seek to deliver knowledge and advisory support to strengthen institutions and capacity to accelerate EU funds absorption. The third pillar envisages complementary and selective provision of financing. In addition, the Bank’s existing portfolio of lending operations is being re-aligned to expand support for Bulgaria’s EU funds absorption priority. x. It is the aim that knowledge and advisory services will increasingly be provided through fee-based service arrangements, currently under discussion with the Government and the European Commission. These fee-based services would focus on sector strategies and strengthening institutional capacity in the areas of transport, water, social inclusion and energy efficiency, among others, to improve EU funds management and implementation in the current financing cycle of 2007-2013. They would scale up World Bank-financed knowledge and advisory services and also support preparation for the next financing period of 2014-2020. Given limited World Bank resources, the Government and the World Bank have explored options for support to be financed through the institution-building and technical assistance resources under the EU Structural Funds. The provision of these fee-based services is subject to an agreement between the Government, European Commission and international financial institutions on the modalities for their financing through EU funds. In sum, this CPS proposes a new business paradigm, tailored to Bulgaria’s unique challenges within the European context: it consists of a large program of knowledge and advisory services, intended to be increasingly delivered through fee-based services, complemented by a modest lending program. xi. The World Bank’s modest financing support will concentrate on complex reforms and on activities which are not eligible for financing through grant resources under the EU Structural Funds or lending by European institutions and international financial institutions. A railway sector reform package composed of a series of three development policy loans, and an investment loan to support railway infrastructure maintenance are included within the indicative lending plans. Given Bulgaria’s priority of utilizing limited fiscal resources efficiently, the Bank is offering support for institutional reforms through an innovative financing instrument in which disbursements are linked to achievement of agreed results. Nontraditional instruments such as carbon financing or guarantees may also be considered. xii. The International Finance Corporation will comprise an important element of the World Bank Group strategy in Bulgaria. The IFC will focus its private sector investments on renewable energy and climate change-related infrastructure and industries, social sector private investments and selectively in agriculture. In the short-term, IFC will address the impact of the crisis in Bulgaria by supporting the recovery of the private sector and reducing job losses.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

BULGARIA COUNTRY PARTNERSHIP STRATEGY FOR 2011-2013

he objective of this Country Partnership Strategy is to support Bulgaria’s aspirations to integrate fully with the European Union and achieve convergence with European living standards. As such, this CPS maintains a strong focus on Bulgaria making the most of its EU membership. It aims to partner with Bulgaria in strengthening national institutions and capacity to meet EU targets and in accelerating the absorption of EU grants funds. The CPS proposes a program dominated by knowledge and advisory services, envisioned to be increasingly delivered through fee-based service, complemented by a modest lending program. The scaling up of fee-based service is contingent on the finalization of a mechanism that will allow the Government to partially use EU technical assistance grant funds to complement World Bank financed knowledge and advisory services. In line with the European-focused framework, the CPS period is aligned with current EU financing perspective of 2007-2013. At the time of the progress report, the World Bank Group will determine, in consultation with the Government of Bulgaria, whether this CPS remains relevant to the following EU financial perspective beginning 2014, warranting an extension.

I. COUNTRY CONTEXT AND ACHIEVEMENTS A. Political Context and EU Membership 1. Bulgaria has come a long way from its early years of political and economic transition to becoming a member of the European Union (EU) in January 2007. Bulgaria’s difficult years of transition included a sharp decline in real GDP between 1990 and 1995, and a severe economic crisis in 1996-1997 spurred a further decline of 15 percent in real GDP and triple-digit inflation. These developments led to the establishment of the much valued existing currency board arrangement.1 Buoyed by subsequent sound macro-economic policies and deep structural reforms, the crisis years were followed by a decade of economic growth with annual GDP growth rates of over 5 percent, culminating in Bulgaria’s EU accession. 2. A new administration took office in July 2009 after having won decisively the national elections with the promise of reforms and accelerating EU integration. In contrast to previous governments that were based on multi-party coalitions, the Prime Minister formed a single-party minority government based on the relative success of his Citizens for European Development of Bulgaria (CEDB) party at the elections. CEDB won 39.7 percent of the proportional vote and a total of 116 out of 240 seats in Parliament. While the lack of a parliamentary majority may present some risks in the long run, it also allowed the Prime Minister to appoint a reformed-minded Cabinet with a mandate to implement priority measures to mitigate the impact of the global crisis on Bulgaria and put the economy on a path of sustainable convergence with the EU. 3. There is now momentum in Bulgaria to implement structural reforms with emphasis on regaining public confidence in government with rapid results. The current government is focused on improving governance and public services, making better use of EU funds, and restoring economic growth and net job creation, among others. Joining the Exchange Rate Mechanism-2 (ERM-2) as soon as possible and subsequently adopting the Euro also remains a core objective, which underlies Bulgaria’s fiscally conservative approach. Implementing this agenda is challenging, given fiscal and institutional capacity constraints. At the same time, the global economic crisis created an opportunity to accelerate reforms with added impetus from public sentiment and EU support for reforms. 4. Despite pronounced political divisions among the parties represented in Parliament, there is broad support across the political spectrum around key institutional, economic and monetary building blocks. No government in Bulgaria has been elected for two terms in a row since the political changes of 1989. However, all of the leading parties represented in Parliament since 1997 have expressed full support for the currency board arrangement, for adopting the acquis communautaire and EU membership, and implementing reforms to join the ERM-2. See Anne-Marie Gulde: The Role of the Currency Board in Bulgaria’s Stabilization, Finance & Development, Sept. 1999, Volume 36, #3; http://www.imf.org/external/pubs/ft/fandd/1999/09/gulde.htm 1

I. Country Context and Achievements Box 1: Bulgaria and the EU: Efforts to Boost Judiciary and Combat Crime and Corruption

When Bulgaria and Romania joined the EU in 2007, there were lingering concerns in the European institutions about the slow pace of progress in judicial reforms, fighting corruption and combating organized crime. These shortcomings were seen as serious obstacles to the two countries’ ability to effectively apply EU policies to guarantee the fundamental rights of their people as EU citizens. To help the newest member states to continue to tackle these problems, the European Commission (EC) introduced an unprecedented mechanism, the Cooperation and Verification Mechanism (CVM), to monitor progress through bi-annual reports. Six benchmarks were set for judiciary reforms and for tackling organized crime and corruption. In response to the reports’ findings that Bulgaria was beleaguered by a weak judiciary, corruption and organized crime, in July 2008, the EC sent Bulgaria a strong signal by freezing some €500 million in financial support through the Structural Funds and withdrew the rights of two Bulgarian agencies to manage EU funds. When the centre-right government took office in July 2009, it moved quickly to mend relations with the EU and later that year, the EU unblocked some of the frozen funds. The latest (February 2011) CVM interim report takes note of progress to date, acknowledges that Bulgaria has strengthened its prosecution, initiated structural reforms in revenue and customs agencies and started work on an anti-corruption strategy. But the report calls for “steps to further improve judicial practice and a continued improvement of the way the judiciary, police and other investigative bodies are structured, managed and cooperate.” Given the leadership of the EC among partners on governance issues, the World Bank will only support this area in specific sectors, as requested, such as the work in railways (see paragraph 89 for an example of the proposed approach to sector governance).

B. Recent Economic Performance and Outlook2 5. The global financial crisis of 2008-2009 had a negative impact on Bulgaria. After a decade of sustained growth, Bulgaria entered into deep recession with GDP declining by 4.9 percent in 2009. Exports fell sharply as recession deepened in Bulgaria’s main trading partners, while unemployment rose rapidly to 8 percent in Q4-2009 from record low levels of 5.1 percent in Q4-2008. The investment and consumption boom of the past, which had been the main drivers of growth, was brought to an abrupt end with the sharp contraction of external financing, mainly in the form of foreign direct investment (FDI). Investment declined by 33 percent in 2009. As FDI inflows deteriorated and domestic demand contracted, imports sharply declined, and the trade gap narrowed and the external current account deficit narrowed to 9.9 percent of GDP in 2009 compared to 23.1 percent in 2008. As the recession deepened, demand for credit faltered as banks tightened credit conditions and uncertainty increased. Inflation eased to 2.5 percent in 2009 from 12 percent in 2008 as international prices fell and pressures from wage growth decelerated with declining labor demand in manufacturing, construction, and real estate. These sectors were severely affected by sharp swings in the global demand and rapid deleveraging. 6. The buffers accumulated during good times helped mitigate the impact of the crisis. Fiscal surpluses accumulated during 2004-2008 were saved into a fiscal reserve account which reached 12.1 percent of GDP in 2008. Total public debt (external and domestic) declined by half during this period to 15.5 percent of GDP. Thus, when fiscal revenues worsened in 2009 and 2010, Bulgaria relied on domestic sources to finance emerging fiscal deficits. Sizable fiscal reserves and more stringent reserve requirements for banks in Bulgaria than in the rest of the EU contributed to a buildup of international reserves to 35 percent of GDP at end-2008. Higher capital requirements for banks and agreements with the parent banks to reinvest bank profits helped solidify the banking system in times of high volatility in the financial markets. 7. Growth started to recover in 2010 aided by strong external demand. For the first time since the start of the crisis, GDP grew in Q2-2010 by 0.5 percent year-on-year, with growth accelerating to 1 percent in Q3-2010. Economic recovery was led by exports which rebounded to pre-crisis levels by Q3-2010. Improvements in external demand, however, did not translate into improvements in the domestic demand. Consumption, held back by high unemployment and tight credit market, contracted in the first three quarters of 2010 while investment continued to decline, albeit at a slower pace. Manufacturing, trade, and tourism sectors benefitted from the pick-up in global demand, while construction and real estate, that led growth in the precrisis period, continued to contract. Annual GDP growth remained almost flat in 2010 and is projected to pick up in 2011 to about 2.5 percent. The Government considers that GDP growth may reach 3.6percent in 2011.

World Bank assessments and estimates as of end-January 2011.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 8. Rebound of exports and further weakening of private capital inflows supported welcome adjustment of external imbalances. The external current deficit narrowed to 1 percent of GDP in 2010 from close to 10 percent in 2009 as the trade balance fell to historic lows and the absorption of EU funds rose significantly. Export growth accelerated to some 33 percent year-on-year in 2010, reflecting robust external demand, especially outside the EU, and increased metal and oil prices. Recovery of imports was less impressive and driven mainly by price increases. With overseas borrowing by banks and corporations declining, net capital inflows turned negative in 2010. Corporations were hesitant to borrow from foreign lenders in an environment of lingering economic activity and uncertainty on the pace of recovery. This kept net FDI inflows to close to a third of their level a year ago. 9. With cross-border funding from parent banks declining and domestic demand weakening, credit growth came to a near end while banks’ portfolios worsened, but the banking system nevertheless remained sound. Credit to the private sector decelerated sharply from over 30 percent growth in 2008 to only 1.3 percent in 2010. Deposits, mainly from households, grew steadily, offsetting fully the falling deposits from non-residents. At the same time, demand for credit faltered and the share of non-performing loans increased from 2.5 percent in end-2008 to 11.9 percent in end-2010. However, the existing stringent prudential rules have kept banks well capitalized and liquid. Capital adequacy in Bulgaria in the end of 2010 was 17.5 percent, significantly higher than the required 12 percent in Bulgaria and 8 percent in most EU countries. The Bulgarian National Bank (BNB) further strengthened banking supervision as well as liquidity monitoring and stress testing of banks—exchange of information with parent bank supervisors improved and a Financial Stability Unit was established at the BNB. 10. Fiscal tightening has kept the budget deficit at 3.9 percent of GDP in 2010 on cash basis. The budget included a freeze on pension and wages and continued optimization of public administration, a 20 percent cut in central government spending and a 15 percent cut in municipal spending. Repayment of arrears accumulated in 2009 was advanced, although slowly, and by end-2010 arrears stood at 0.6 percent of GDP, or half of their level a year ago. Deterioration of revenues slowed down, aided by modest recovery of imports and intensified tax compliance measures. As a result, fiscal deficit was contained to 3.9 percent of GDP compared to 4.8 percent planned initially. 11. Bulgaria is expected to see an acceleration of growth in the medium term. Output is projected to expand by 2.5 percent in 2011, with growth speeding up to 3.5 percent by 20133. The positive growth differential that Bulgaria had with the Eurozone dropped markedly in 2009 and 2010, but is expected to rebound in the medium-term. Output growth is expected to come from improved export prospects and a gradual recovery of domestic demand. Ongoing and planned reforms4 aimed at upgrading infrastructure, improving the business environment, and strengthening education and innovation are likely to contribute to enhanced competitiveness of Bulgarian firms. Sustained improvements in export performance would support easing of labor and credit markets, and hence help the recovery of depressed private consumption. Investment is likely to grow in 2011, albeit at a modest rate, as it would be constrained by still low capital inflows from abroad and tighter lending conditions on the domestic market. Large investments, already in the pipeline and planned upgrades in infrastructure, financed almost exclusively with EU Structural Funds, are likely to support recovery of private investment. 12. Inflation is projected to remain at close to three percent in the medium-term. Maintaining relatively low inflation rates and improving product and labor markets would support the Government’s goal of entering ERM-2 in the medium-term and subsequent entry in the Eurozone (thus exiting the currency board arrangement). Inflation is expected to pick up to around 4 percent in 2011, reflecting global food and energy price shocks, and subside to around 3 percent thereafter. 13. Rapid correction of external imbalances that started in 2009 is likely to slow as the economy catches up with the rest of Europe. The current account deficit is expected to pick up to around 3 percent of GDP in 2011 and 2012, and reach around 3.9 percent by 2013, in line with expected gradual recovery of capital flows from abroad. FDI inflows are expected to remain the primary source of balance of payments financing, while funding from parent banks are likely to remain constrained by concerns over sovereign debt and financial sector stability in a number of Eurozone countries. This would lead to gradual reduction of gross external 3 4

The Government’s growth forecasts, based on recent indicators, are 3.6 % for 2011 and 4 % by 2013. National Reform Program for 2010-15 supporting the implementation of the Europe 2020 Strategy, Nov.2010.

I. Country Context and Achievements debt. Current and capital transfers from the EU are expected to increase as absorption of EU Structural Funds intensifies. Moreover, available large domestic savings support the emerging recovery without significant recourse to external financing over the medium term. 14. Fiscal consolidation is expected to continue in the medium-term with restructuring of public spending. The Government’s medium-term fiscal framework envisages reducing the fiscal deficit to below 3 percent of GDP in 2011 and achieving a broadly balanced budget by 2013. The 2011 budget law targets a deficit of 2.5 percent of GDP. Achieving the 2011 fiscal target relies on improved revenue performance— both tax revenues and increased absorption of EU funds—but also on continued spending restraint. On the expenditure side, fiscal consolidation measures include containing the rise in wage and pension expenditure, and strengthening the governance and management of EU-funded projects and health care funding. 15. Total gross external debt to GDP ratio is expected to continue its downward adjustment from 101 percent in 2010 to 88.8 percent by 2013. Public and publicly guaranteed external debt is low at 11.5 percent of GDP in 2010 and is expected to remain almost unchanged by 2013 in line with the planned medium-term fiscal adjustment. General government debt level (both external and domestic, ESA95 definition) remains with adequate currency, interest and maturity structure and in 2011 is projected to be one of the lowest in the EU. Private external debt, which stood at 89.4 percent of GDP in 2010, is expected to decline substantially as the uncertainty that exists in the Eurozone and global financial markets is also serving to limit the debt-financing channels that were experienced in the pre-crisis period. Nearly two-thirds of private sector debt is either intercompany debt or debt to parent banks of Bulgarian subsidiaries. Inter-company debt accounts for 43 percent of external private debt while banks’ borrowing, mainly from parent banks and in the form of short-term deposits, represents another 20 percent. The non-inter-company debt then accounts for about 30 percent of GDP. 16. The continued global deleveraging and sovereign debt problems in some of the Eurozone countries are likely to constrain and may even reverse parent funding. Continued financial difficulties of parent banks could exacerbate this risk. There is also the risk that firms may find it increasingly difficult to service their debts should the economic recovery become slower than anticipated or subjected to a shock. 17. However, these risks are mitigated by the existing buffers in the banking system and the composition of the private sector external debt. For example, the International Monetary Fund (IMF) has noted in its latest analysis of Bulgaria’s debt sustainability (June 2010) that existing capital buffers and stricter macroprudential regulations and supervision are likely to continue to support the stability of the banking sector. It is the Bank’s assessment that these conditions remain valid. In addition, parent banks are likely to keep their exposure to Bulgaria as rates of return, although falling, remain larger than in the Eurozone. The IMF has also noted that the large gross external reserves, accounting for 36 percent of GDP in 2010 provide comfort in case the external environment deteriorates. The high levels of cross-border borrowing by banks observed during the boom years were associated with rapid credit expansion on the domestic market. This is not likely to be repeated in the medium-term as the global financial system continues to deleverage. Banks’ external debt has been declining and now stands at 70 percent of its pre-crisis level and is expected to continue to decline. As foreign capital inflows remain modest, banks rely on attracting deposits on the domestic market which have fully offset the decline in foreign financing. Specifically, while interest rates continue to decline, household deposits have increased every month since end-2008 from €11.3 billion to €13.3 billion at end-November 2010, reflecting robust confidence in the banking sector. On the non-banking corporate sector, the rollover risks for intercompany debt, including to parent banks, are mitigated by the long lasting interest of the foreign investor and the possibility to offer more flexible repayment terms to its subsidiary or even transform debt into equity.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Table 1: Bulgaria: Selected Indicators 2007-13 2007

Actual 2008

2009

Estimated 2010

2011

National accounts and prices Real GDP growth (percentage change) CPI (percentage change) GDP deflator (percent) Nominal wage growth (percent) Public sector Private sector Investment ( percent of GDP) Public investment ( percent of GDP) Private investment ( percent of GDP)

6.5 7.6 9.2 20.6 17.4 23.3 34.1 5.9 28.2

6.2 12.0 8.4 22.7 25.4 22.3 37.5 6.1 31.4

-4.9 2.5 4.1 8.5 9.3 7.4 25.6 5.0 20.6

0.0 3.0 3.0 9.7 5.1 11.8 22.1 4.8 17.3

2.5 3.7 3.1 5.0 3.0 5.8 20.8 5.0 15.8

3.0 3.0 2.2 4.5 2.0 5.3 19.4 5.0 14.4

3.5 3.0 2.3 5.0 2.5 5.8 18.0 5.0 13.0

Monetary indicators Broad money (M3, annual percentage change) Domestic non-government credit (annual percentage change)

31.2

8.8

4.2

6.2

5.3

5.9

62.5

31.6

3.8

1.3

4.8

6.8

7.3

40.0

39.4

36.5

33.9

35.3

35.1

34.7

36.7 3.3

36.5 2.9

37.4 -0.9

37.8 -3.9

37.8 -2.5

36.6 -1.5

35.8 -1.0

18.6

15.5

16.7

19.3

19.2

17.6

-25.2 28.7

-23.1 17.5

-9.9 9.6

-0.8 3.4

-3.2 3.4

-3.6 4.8

-3.9 4.9

-1.5 11.1 14.9 94.3 30.5

-1.4 12.5 13.0 104.7 37.2

-1.9 -9.0 -23.1 107.9 35.3

2.6 9.7 -1.7 102.3 31.6

0.6 6.3 6.6 97.9 29.8

-1.2 6.2 6.2 93.8 28.9

-0.9 6.1 6.0 88.8 28.3

5.9

5.5

8.0

7.4

7.8

7.6

7.4

11,937

12,713

12,919

13,513

14,011

Fiscal Policy Total government revenue*(percent of GDP) Total government expenditure*(percent of GDP) Overall fiscal balance* Gross public and publicly guaranteed debt/ GDP (percent) Balance of payments Current account balance ( percent of GDP) FDI, net (percent of GDP) Merchandise Terms of Trade (percent change) Export volume (percent change) Import volume (percent change) Debt Management External debt ( percent of GDP) Short term external debt ( percent of GDP) Gross international reserves (in months of next year’s imports) Gross international reserves (in millions of euro)

12,977 12,920

Projected 2012 2013

Source: Ministry of Finance, National Statistical Institute, Bulgarian National Bank, IMF and World Bank data and projections as of end-January 2011. / *National classification, on a cash basis.

18. In sum, the current macroeconomic framework is largely appropriate, but risks remain. The large domestic and external imbalances of the last several years have rapidly declined, mainly owing to the sharp decline in capital inflows and the recession in 2009. In addition, the Government is taking further measures to strengthen its public finances and reduce the fiscal deficit to below the reference value of 3 percent of GDP by 2011, as recommended through the EU convergence process.5 In February 2011, the Economic and Financial Affairs Council of the European Union (Ecofin) assessed positively Bulgaria’s progress in correcting the deficit in 2010 and the measures put in place in the 2011 budget to end the excessive deficit. Nevertheless, some macroeconomic risks remain, including slower pace of economic recovery among Bulgaria’s main trading and investment partners and related uncertainty for capital inflows, additional unexpected financial shocks which could result in higher interest rates and tighter global financial conditions, and further energy price increase. Domestic risks relate to imbalances accumulated in the private sector, notably the high indebtedness of firms. As noted above, however, these risks are mitigated by (i) Bulgaria’s solid track record of fiscal discipline and ongoing fiscal consolidation reforms; and (ii) well-capitalized and solid level of provisions in the banking sector. Council Recommendation to Bulgaria with a view to bringing an end to the situation of an excessive government deficit, Brussels, 9 July 2010. 5

I. Country Context and Achievements

C. Living Conditions and Demographic Trends 19. Economic and social policies in Bulgaria during the last decade have led to significant improvements in welfare, but progress in reducing poverty was halted in 2009 due to the global economic crisis. Despite considerable improvement in welfare nationwide as well as largely pro-poor growth, some groups have benefitted more than others. As a result, large and significant disparities still persist. Households felt the crisis primarily through job and wage cuts. The recession resulted in increased unemployment and underemployment, reversing a decade-long trend and in a reduction of the informal sector earnings. As the crisis bottomed in the first quarter of 2010, household living standards showed signs of improvements in the second half of 2010. Annex 4 provides a detailed analysis of living conditions before and after the crisis. 20. Like other countries in Eastern and Central Europe, Bulgaria faces a demographic transition. Bulgaria’s population is expected to shrink by 18 percent, or about 1.5 million people, between 2000 and 2025.6 This is the second largest population decrease in percentage points among the former socialist countries of Central and Eastern Europe and the former Soviet Union over this period. In addition, Bulgaria’s population is aging rapidly: the share of population over age 65 is projected to increase from 16 percent in 2000 to 21 percent in 2025, the fourth-highest in the region. The two potential risks posed by the demographic transition are reduced economic growth due to fewer labor force participants, and increased pressure on fiscal balances due to almost inevitable mounting expenses in pensions, health care and long-term care.

D. The Challenge of EU Funds Absorption in Bulgaria 21. Bulgaria is an important beneficiary of the EU’s Cohesion Policy, which aims to achieve greater economic and social cohesion by transferring resources from more prosperous to the least developed regions. The main financial instruments to support this policy are the Structural and Cohesion Funds. These grant funds are complemented by national co-financing, and are intended to finance activities under each member state’s Operational Programs (OP) that reflect national priorities. See Annex 5 on EU Structural and Cohesion Funds. 22. Under the current EU financial perspective, covering the years 2007–2013, approximately €6.7 billion in Structural and Cohesion Funds has been allocated to Bulgaria. These resources represent approximately one-fifth of Bulgaria’s GDP, and in an environment of fiscal constraints, they present enormous potential for stimulating growth through public investments. 23. However, more than three years after EU accession, Bulgaria’s absorption of structural funds remains very low: only 10.9 percent of EU grants have been disbursed under Bulgaria’s seven OP resources. Absorption rates range from 2 to 25 percent across the seven OPs. The implementation rate, which takes into account only project-related disbursements and excludes advance payments made at the beginning of the programming cycle, is even lower. 24. Pre-accession funds totaling €2.7 billion for the 2000-2006 programming period also remain underutilized after ten years of implementation. Despite significant efforts by the Government to accelerate activities in 2010, the final year for absorbing pre-accession funds, implementation rate fell below expectations. Even with the extension of several projects to 2011 and 2012, Bulgaria stands to lose some €200 million of pre-accession funds. Furthermore, some projects have been marred by irregularities in financial management. 25. Executing EU-financed projects is proving to be a particular challenge. Bulgaria continues to face problems at the level of project implementation. The low rate of contracted and disbursed funds can be attributed to project application processes, project preparation, project evaluation and selection, project implementation at the beneficiary level, as well as legal and institutional issues. The Government has taken steps to improve capacity, the management, and absorption of EU funds, including through the appointment of a minister in charge of EU funds management. 26. In June 2010, Bulgaria’s Prime Minister requested urgent Bank support in accelerating the utilization of EU funds, with a focus on transport and water sectors. Of particular concern was the preparation and implementation of ongoing EU-funded programs and preparations for the next financing From Red to Grey. The “Third Transition” of Aging Populations in Eastern Europe and the former Soviet Union, World Bank, 2007. 6

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 period 2014-20. This request culminated into the signing of a Memorandum of Understanding in August 2010 between the Prime Minster and the World Bank Group President to step up cooperation in the development of Bulgaria’s infrastructure and support accelerated utilization of EU funds through technical advice and financial support.

II. COUNTRY PRIORITIES AND CHALLENGES A. Government Program and Europe 2020 27. Accelerating convergence to EU living standards is Bulgaria’s key medium-term goal.7 The CEDB’s program for 2009-2013 emphasizes “the firm commitment of the Bulgarian Government to modernize Bulgaria and take the country to a new stage of development, much closer to the EU standards.” The cornerstones on which the Government builds its strategy to achieve these objectives are: (i) continued macroeconomic stability based on prudent fiscal policy; (ii) maintaining the currency board arrangement at the current exchange rate until entry into the Eurozone; (iii) accelerated structural reforms to improve the productivity and competitiveness of the economy and efficiency and quality of public services; and (iv) good governance, transparency, and dialogue with social partners. In addition, the Government sees the efficient utilizations of EU funds as an opportunity that Bulgaria cannot miss on its path to accelerated EU integration. The Government thus hopes not only to expedite recovery from the economic crisis, but also to lay the foundation for sustainable economic growth rates. Box 2: Europe 2020 Strategy and Bulgaria’s National Reform Program 2011-2015

In March 2010, the European Commission, the EU’s executive arm, unveiled the Europe 2020 Strategy with the goal of emerging from the crisis and stimulating growth by the end of the decade. The new strategy replaces the Lisbon Strategy adopted in 2000 which failed to transform the EU into globally the most dynamic knowledge-based economy by 2010. Released in the wake of the global crisis, the Europe 2020 Strategy calls on the 27 Member States to concentrate their efforts in three priority areas:  Smart growth: developing an economy based on knowledge and innovation.  Sustainable growth: promoting a more resource-efficient, greener and more competitive economy.  Inclusive growth: fostering a high-employment economy delivering social and territorial cohesion. Under the EU’s new economic governance arrangements, Bulgaria must present its own National Reform Program (NRP) and commit to national targets that will contribute to the achievements of the Europe 2020 Strategy headline targets. As part of the European Semester framework, the NRP also allows the EC and the Council, to conduct surveillance of Member States’ economic policies. Bulgaria’s NRP 2011-2015* identifies medium term priorities which include:  Better infrastructure – better connectivity to Europe, sustainable and competitive cities providing for accessible services and better connectivity to the less developed regions, preservation and development of the Bulgarian natural, cultural and historical wealth;  Competitive youth – reducing the share of early school leavers, increasing the number of young people with higher education, promoting young scientists, and full realization of the potential of young people in Bulgaria;  The best business environment in the EU – lowest tax burden for business and households in the EU, higher employment, more investments (including in R&D and innovations), fiscal stability, and Euro area membership;  Higher confidence in the state institutions – efficient judicial system and ensuring the supremacy of law, protection of the interests of citizens and the business, social justice and security. * The National Reform Program 2011-2015 and the Convergence Program 2011-2014, both adopted by the Government in April 2011, together with the Commission’s assessment and recommendations, will be submitted for endorsement to the June European Council.

28. To accelerate recovery from the crisis, Bulgaria’s National Reform Program (NRP) maintains an overarching focus on increasing competitiveness to take advantage of economic recovery both in Europe and globally. It identifies six factors to promote growth and reform measures. As shown in Table 2, the NRP Based on the following key strategic Government documents: the Program of the Government of European Development of Bulgaria 2009-2013; The National Strategic Reference Framework (2007-2013); the National Reform Program (2011-2015); and the EU Convergence Program (2011-2014) 7

II. Country Priorities and Challenges will rely on financing from EU Structural and Cohesions Fund through operational programs designed to promote EU convergence, supplemented by the national budget in addressing these challenges. Table 2: NRP 2011-2015: Measures to Promote Growth Key Factors to Growth

Measures

Financing

Improving the efficiency of public spending and ensuring a reallocation of public expenditure towards growth-enhancing items

• • • •

Pension reform Reform in healthcare Reform in public social security Delegated budgets in education

Ensuring a well functioning and stable financial sector as a precondition for a sustainable development of the economy

•

Timely and thorough transposition of EU acquis into the national legislation No internal pressure for changes, only following the requirements

Ensuring better and more efficient utilization of the economy’s labor potential

•

• •

• • • •

National budget OP Human Resources Development OP Administrative Capacity IFIs Not applicable

Linking education system with labor market needs ALMPs by target groups, social inclusion, poverty reduction Improved labor market services

• • •

National budget OP Human Resources Development OP Administrative Capacity

Better regulation and reduction of administrative burden Electronic governance Enhancing administrative efficiency through administrative reform

• • • • • •

National budget OP Competitiveness OP Regional Development OP Transport OP Administrative Capacity IFIs

Addressing weaknesses in the business environment and enhancing administrative efficiency

•

Improving the quality and efficiency of the education and training systems

• • •

Tertiary education reform Reducing early school leaving Life-long learning

• • •

National budget OP Competitiveness OP Human Resources Development

Improving infrastructure to ensure access to the Single Market

• •

Transport infrastructure Environment infrastructure—water and waste management

• • • •

National budget OP Regional Development OP Transport IFIs

• •

29. The NRP 2011-2015 has translated the broad headline targets under the Europe 2020 Strategy into national targets, reflecting Bulgaria’s own development challenges and trajectory. Bulgaria’s countryspecific targets mirror the EU’s headline targets as show in Table 3 and include similarly ambitious goals such as achieving 76 percent employment rate in the next decade. Given the uncertainties in the external environment however, the national targets will be revisited at mid-term and revised as necessary. Table 3: Europe 2020 Strategy—Headline and National Targets EU Targets • • • • •

Bulgarian National Targets

75% of the population aged 20-64 should be employed 3% of the EU’s GDP should be invested in R&D The “20/20/20” climate/energy targets should be met The share of early school leavers should be under 10% and at least 40% of 30-34 year olds should have a tertiary or equivalent education. 20 million less people should be at risk of poverty

• • • • •

76% of the population aged 20-64 years should be employed 1.5% of Bulgaria’s GDP should be investment in R&D, coupled with better business environment Achieve 16% share of renewable energy sources in gross final consumption of energy; increase energy efficiency by 25% The share of early school leavers by 2020 reduced to 11% and 36% of people aged 30-34 with higher education 260,000 less people living in poverty

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

B. Smart Growth – Challenges and Government Priorities Innovation 30. Bulgaria joined the EU at a time when science, technology and innovation activities had become one of Europe’s main policy priorities. The Europe 2020 Strategy placed innovation at the forefront of growth strategies and called for stepping up research and development (R&D) investments. Achieving the 1.5 percent R&D to GDP goal set in the NRP will nonetheless prove a significant challenge, as Bulgaria currently has R&D spending of 0.49 percent of GDP. But the concept of innovation is much broader than only R&D spending. Bulgaria has the opportunity to take advantage of the Structural and Cohesion Funds to create a more innovation friendly environment in its urban centers and beyond. Moreover, strengthening the knowledge triangle, namely business-universities-research institutes, is much needed in Bulgaria. More quality research at universities and research institutes could help create innovative forms of business organization, like knowledge and technology transfer centers and strategic entry of high-value added sectors/sub-sectors in global value chains. Education 31. Bulgaria’s education reforms improved efficiency of spending, and focus has now shifted towards improving access and inclusion, accountability for results and quality of education Bulgaria’s extensive education reforms of 2007 and 2008 focused on boosting school autonomy and efficient use of resources. Recent survey results for the Program for International Student Assessment (PISA) 2009 indicate that the deteriorating trend in quality since 2000 was reversed. Although the country registered significant performance gains, it lags behind other EU member states. Within the context of the Europe 2020 Strategy, Bulgaria has set a national target to reduce the share of early school leavers8 to 11 percent by 2020 (vs. 14.7 percent in 2009) and increase the share of people aged 30-34 with higher education to 36 percent by 2020 (vs. 27.9 percent in 2009). The Government has set seven priority actions for achieving this target through adoption of a new legal framework for school and higher education that reforms the educational structure; introduces stronger quality assurance mechanisms at all educational stages; fosters inclusion; improves equity; and gears the accountability system towards performance, heightened quality of service delivery, and provision of knowledge and skills required for the knowledge economy. The Government is trying to address these challenges with a new school education sector law, currently under preparation, and a set of initiatives aimed at improving the legal framework for higher education.

C. Sustainable Growth – Challenges and Government priorities Public Administration and Public Finance 32. Bulgaria’s rapid and large increases in public expenditures during the boom years now require significant adjustment. The Convergence Program 2011-14 and the NRP 2011-15 are anchored in the Medium-term Fiscal Framework which aims to achieve a general government deficit of below 3 percent of GDP and increased efficiency and effectiveness of public expenditures. Fiscal adjustment will rely heavily on rationalization of public expenditures and public administration reform is focusing on consolidation and on modern public sector that provides an enabling environment and basic public goods through professionalization of staff and increased transparency and accountability. Competitiveness – Business Regulatory Environment 33. Improving business regulation to boost growth is indispensable to Bulgaria’s commitment to create favorable conditions for business and competitiveness. The NRP set a priority to improve the business environment, including the functioning of state administration and increasing the administrative efficiency, and better regulation. The existing regime of state fees continues to pose a burden on businesses. Predictability Indicator is measured as percentage of the population aged 18-24 with at most lower secondary education (ISCED 0, 1, 2 or 3c short) and not still in school. 8

II. Country Priorities and Challenges and consistency of regulation remains much lower in Bulgaria compared to the other new EU member states. Bulgaria plans to address the burdensome regulatory environment and to manage, monitor and control the implementation of the Better Regulation Program 2010-2013. Transport – Roads and Rail 34. The Government has made transport infrastructure improvement a top priority to boost economic competitiveness and achieve sustainable growth. The infrastructure backlog represents one of the main impediments to accelerating convergence with the rest of Europe. As a result, some €1.5 billion of financial resources have been allocated under the EU Structural Funds to support economic recovery, facilitate regional economic integration, and improve effectiveness of transport. The availability of these EU grant resources presents an unprecedented opportunity that the Government is keen to make full use of. Hence, effective and efficient absorption of these EU funds is both a top priority and a challenge for the Government. To overcome this challenge requires strengthening the road sector’s governance, including policy and strategy formulation, efficient resource allocation, and building capacity in government institutions. 35. In the rail sector, despite important reforms in the years leading to EU accession, Bulgarian railways continue to underperform. They suffer from very low asset and staff productivity—around one third of the EU’s average productivity. This problem is compounded by the legacy of an extensive railway network that has yet to be adjusted to current market conditions. This not only generates high fixed costs to the railway industry making it less competitive than road transport, but also leads to higher costs to taxpayers. The key challenge for Bulgaria is sustaining a railway system of almost the same network density as the EU average, with one half of the traffic density, one-third of the labor productivity, and four-tenths of the GDP per person. Like the road sector, the absorption of about €600 million of EU funds available to railways remains a serious challenge. The combined passenger and freight traffic in 2009 and 2010 contracted by more than 40 percent from 2007 levels. As a consequence, state-owned companies, the National Railway Infrastructure Company (NRIC) and the Bulgarian Railways Company (BDZ EAD), have had severe short-term cash problems in 2009 and 2010, including problems to fund their operations. The Government took action and embarked on a significant railway reform program. Continuing structural reforms focused on sector governance and on service delivery performance has become urgent, following the recent crisis, and is necessary to make railways in Bulgaria a viable and flexible industry. Green Growth and Climate Action 36. Bulgaria’s economy is the most energy intense in the EU,9 and its energy sector accounts for nearly 70 percent of total greenhouse gas (GHG) emissions, but there is significant energy efficiency potential in the economy, especially in buildings. Under the “climate-energy” package of the NRP, Bulgaria has embraced the most important and politically visible European climate action target of at least 20 percent reduction in GHG emissions from 1990 levels by 2020. In addition, it set its own national target of increasing energy efficiency by 25 percent by 2020, complemented by a 16 percent renewable energy target. Energy efficiency improvements, especially in the buildings sector, are a key area for the use of EU Structural Funds. Bulgaria’s primary energy mix is balanced between domestic coal, crude oil, natural gas and nuclear energy. Energy import dependency is at about 52 percent, which is especially high for natural gas. Several options are being pursued to address security of supply, focused mainly on long-term solutions which would bring diversified gas supplies to the country, but a strategic framework and clear policy is yet to be further developed. 37. While implementation of a GHG mitigation strategy and energy efficiency action plan is underway, a number of areas need strengthening. These include: (i) methodologies for estimating energy savings and audits; (ii) monitoring and reporting requirements; (iii) incentive schemes; and (iv) strengthening the capacity of central agencies and local government staff. In addition, Bulgaria’s capacity to participate in the EU Emissions Trading Scheme (EU ETS) and take advantage of other carbon markets needs significant strengthening. Bulgaria is also highly vulnerable to climate change, and does not have a strategy or an adequate institutional capacity to respond. A National Plan for Climate Change Actions is to be elaborated by 2012. Like many other countries, Bulgaria faces in the medium term the risk of significant increase in mean 2009 Environment Policy Review, SEC(2010) 975, Luxembourg: Office for Official Publications of the European Communities, 2010,: page 50 9

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 annual temperature, drop in mean annual precipitation and an overall occurrence of more extreme weather patterns. Climate sensitive sectors (water, agriculture, forestry) would be particularly impacted, further taxing the country’s economy. Environment, Water, and Agriculture 38. Bulgaria’s water resources are at risk from climate change and the sector’s management is in need of both significant reforms and investment. This sector is also constrained by the comparatively low absorption rate of EU Structural Funds allocated to Operational Program Environment. Similar to other sectors such as transport, important implementation bottlenecks exist, in particular the need to enhance: (i) administrative capacity both at central and local levels; (ii) project management structures and skills; (iii) preparation of project pipelines; and (iv) quality assurance in the project preparation and management. The Government is currently preparing a water resources strategy, including a strategy for water supply and waste water, and is committed to significantly increase investments in water and waste water infrastructure. 39. The contribution of agriculture to sustainable growth and income generation is below potential, despite significant public expenditure and access to EU funds. Land ownership is fragmented and highly polarized, with 75.4 percent of holdings cultivating only 6.6 percent of the agricultural area, and 0.8 percent of holdings cultivating 78.5 percent in large farms. EU payments for farmers benefit only a little more than onequarter of the agricultural population, and the emergence of competitive intermediate farms faces multiple obstacles. In addition, while agriculture in Bulgaria uses two-thirds of the country’s water resources, the irrigation (hydro-amelioration) infrastructure is large and in need of better maintenance, due mainly to the lack of a regulatory framework clarifying both ownership and use rights. Moreover, there is an urgent need for the elaboration of a new “code for agricultural land use” to support land consolidation and help prepare Bulgaria for the next round of discussions on the EU Common Agricultural Policy.

D. Inclusive Growth – Challenges and Government Priorities Social Inclusion - Roma 40. Poverty and other challenges faced by vulnerable groups including the Roma population are a priority issue for the EU. The multidimensional roots of Roma poverty, the diversity of Roma communities, and the European context suggest important policy implications. Bulgaria, as an active participant in the Roma Decade 2005-2015, has been implementing over the last decade, various strategies and programs with a focus on Roma. However, Bulgaria is now placing emphasis on the implementation of a truly integrated approach that can simultaneously address multiple causes of poverty and the significant economic benefits to improved inclusion. World Bank analysis indicates that productivity gains could reach an average of €2,412 per year for each working age Roma in the country. Bulgaria will redraft its strategy for Roma inclusion by the end of 2011, to tackle policy areas where Roma vulnerability is particularly acute: •

Employment: The difficulty Roma face in accessing and reentering the labor market is a main contributor to poverty. Long-term unemployment, in addition to leaving people in poverty, leads to a psychology of dependence on social benefits, which makes reentry into the labor market even more difficult.

•

Education: There are barriers that prevent Roma children from completing school and are oftentimes responsible for the intergenerational circle of poverty.

•

Health care: Relative to the other policy areas, much less is known about health issues facing Roma communities, highlighting the need for better monitoring. Improving access, and better prevention and promotion are important elements of support programs.

•

Housing: Housing is a complex sector that requires close coordination between governments and communities. Effective legislation and enforcement mechanisms are needed to prevent housing discrimination and clarify property ownership.

•

Social assistance: Safety net programs that provide cash assistance to the poor are an important source of income for many Roma families. Continued effort is needed to make them more effective in reaching the poor, without discouraging those who are working. 18

II. Country Priorities and Challenges Social Protection - Pensions and Labor Markets 41. Without continued reforms, the pension system could pose fiscal risks and barriers to Bulgaria’s growth. Bulgaria’s Convergence Program 2011-2014 presents the long-term parameters of pension reform, which will support the current consolidation plans and ensure the long-term sustainability of public finances. These reforms will address on the one hand consolidation and stabilization of social security revenues and on the other hand, seek to improve adequacy of pensions and tackle demographic challenges. Bulgaria’s recently enacted phased changes to the pension system (the first wave of these changes became effective in January, 2011) was designed to improve the sustainability of the system, which consumes about 40 percent of public expenditure. These changes include increases in contribution rate and the required years of contributions, raising the retirement age starting in 2021, and a rise in contribution rate for individual accounts (second pension pillar) from 5 to 7 percent in 2017. Pension ceilings will gradually rise for pensioners and will be eliminated for new pensions starting 2014. 42. Labor market participation is still low, and significant skills mismatch still exists between unemployed labor and the needs of the market. In labor markets, the education reform program is expected to contribute to a long-term rise in quality of the labor force. In the shorter term and as envisioned in the NRP, the Government anticipates making substantial investments in: enterprise-based training that will increase opportunities and reduce unemployment especially for the young; required training for the registered unemployed; assistance for those outside the labor force to reenter; modernization of public employment services into “one-stop shops”; more opportunities using publicly financed vouchers for life-long skills development for both the employed and unemployed; and the social inclusion efforts cited above to improve participation of disadvantaged and ethnic groups. Health 43. The health sector will consume 11.9 percent of public spending in 2011, but is still performing poorly in terms of service efficiency and quality of care. Bulgaria has serious resource allocation and incentive problems in its health care financing system, most clearly evidenced by continuous expansion of the inefficient hospital system. The number of hospitals grew from 298 in 2003 to 351 in 2009, with a concomitant increase in the number of beds, while Bulgaria’s population dropped by 300,000. The need for additional budget consolidation in the future has led the Government to define measures for raising the financial independence of the health sector, as indicated in the upcoming Convergence Program 2011-2014 and NRP 2011-2015, in particular through introducing rules and methods for estimating costs of medical activities, and the development of e-health and rules for financial management and reporting of hospitals. Additional measures are also planned, including implementation of a new national health map and the introduction of diagnostically-related groups as a payment method to hospitals. However, further efforts are needed to resolve the systemic issues. 44. In Bulgaria, there is gender parity in health and education, yet women’s economic participation and opportunity remain considerably lower than men’s.10 For example, women earn only 55 percent of what is earned by men doing similar work, and their average salary is 16 percent lower than men’s. Thus eliminating the gender gap is important in terms of achieving equity and social inclusion, but it is equally important in terms of boosting Bulgaria’s competitiveness—the overarching focus of the NRP.

In the 2010 Global Gender Gap report, Bulgaria ranks lowest among upper middle-income countries in terms of gender parity.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

III. BULGARIA-WORLD BANK GROUP PARTNERSHIP A. Experience and Lessons Learned 45. The FY07-FY10 Country Partnership Strategy (CPS),11 launched prior to EU accession, focused on facilitating Bulgaria’s economic and social integration with the EU. During this period, Bulgaria’s development agenda shifted from meeting EU accession criteria to accelerating convergence with EU living standards. These priorities underpinned the design of the CPS which centered on supporting Government efforts to boost productivity, generate jobs, improve fiscal efficiency and absorption of EU grants, as well as foster social inclusion. Four investment operations and one supplemental financing operation entered the portfolio in the last CPS. In addition, a series of three Development Policy Loans (DPLs) supported structural reforms in health care, education, social inclusion and labor markets, aligned with the Government’s prudent fiscal stance. Net commitments between FY07-FY10 totaled US$ 1.1 billion equivalent.12

Results at a Glance World Bank Group support during the FY07FY10 CPS contributed to important results. More than 700,000 people benefited from small social infrastructure improvements and services on the municipal and community levels (Social Investment and Employment Promotion Project). Improvements in revenue administration and strong economic growth contributed to an increase in tax and social contribution revenues by 4.6 percentage points of GDP between 2002 and 2008, the highest revenue gain among new EU member states (Revenue Administration Reform Project). Turnaround times for registering a real estate

46. The proposed lending program was largely on track in transaction and mortgage, and for cadastre terms of lending volume, albeit with delays and minor adjustments. map services were reduced from seven days In agreement with the Government, the CPS was based on an to a single day (Registration and Cadastre indicative annual lending of approximately $300 million. Lending Project). in FY07 slightly exceeded this figure but planned lending for FY08 was pushed to FY09 and FY10, which resulted in $409 million being delivered in FY09 and $119 million in FY10. The reasons for the delays were twofold. First, Bulgaria was constrained by limited institutional capacities in the early years of EU accession due to increased demands on policy formulation and coordination with the EC and EU partners. Second, the Government had to focus on creating institutions and procedures to absorb EU funds which diverted their attention from non-EU related priorities and delayed project preparation. The global financial crisis also led to unforeseen fiscal constraints, prompting the Government and the Bank to revisit priorities in the portfolio. 47. Portfolio performance was consistently satisfactory during the CPS period until FY10 when cuts in public investment resulted in a slower pace of implementation. The portfolio consisted of 14 operations, including two Global Environment Facility (GEF) grants. Independent Evaluation Group (IEG) review of five operations that closed during the last CPS confirmed the satisfactory ratings. In 2010, two projects saw their ratings downgraded due to slow implementation progress, and the Government has since stepped up efforts to bring portfolio performance on track. 48. A solid, front-loaded Analytical and Advisory Activity (AAA) program was a central feature of the previous CPS, which supported a strong policy dialogue and informed the design of lending programs. During FY07-FY10, some 20 products were delivered, providing advice in core policy areas such as accelerating convergence with the EU, increasing the competitiveness of Bulgaria’s economy, restructuring of public expenditures to boost economic growth, and fiscal sustainability. As a result, when a new government took office in July 2009, the Bank was well positioned to deliver a series of policy notes to the incoming cabinet, highlighting challenges and policy options across 16 sectors—including railways, forestry, pensions, and public finances. 49. During the last CPS period, the International Finance Corporation (IFC) supported 6 projects with total commitments of US$ 371.9 million. The single biggest investment lies in the field of renewable energy in the form of a loan for the construction of Bulgaria’s largest wind park. In line with IFC’s strategic goals for Bulgaria, IFC has supported a company investing in agricultural land and promoting land consolidation. In the financial sector, IFC supported one specialized bank for small and medium enterprises (SME) and invested in a venture fund targeting the SME sector. In other industries, during the last CPS period, IFC also contributed 11 12

The previous CPS originally covered the period FY07-FY09, but was extended FY10. Includes 7 projects which were active from the FY03-FY05 CAS.

III. Bulgaria-World Bank Group Partnership to key manufacturing projects in the country─it supported the modernization and capacity increase of a large steel mill and one glass processing plant. Through these investments, it has been supporting environmentfriendly technologies. 50. Overall performance of the FY07-FY10 CPS program is rated moderately satisfactory. The program achieved substantive progress toward two important CPS outcomes—education and labor reforms— which were priorities on the national agenda and enjoyed strong ownership by the Government. Education and labor reforms were also at the heart of the SIR DPL series, the centerpiece of the CPS. In education, the CPS supported Bulgaria’s efforts to introduce extensive reforms in financing and school assessments, which contributed to positive results in enrollment and student performance. Labor market dynamics were also significantly enhanced with the introduction of a more flexible labor code and stronger employment incentives in social assistance, which helped reduce the number of Guaranteed Minimum Income (GMI) beneficiaries in a period of economic growth. 51. The CPS program, however, made limited progress toward stabilizing public spending on health and increased absorption of EU funds. The difficulty of health reforms such as hospital rationalization was underestimated and looming elections in 2009 delayed action. Nevertheless, the CPS program did lay the foundation for future reforms and the Government recognizes the importance of advancing health reforms. In terms of EU funds absorption, public sector and institutional capacity constraints emerged as the primary obstacles to the preparation and implementation of projects for EU financing, and these were not adequately addressed during the CPS period. Lessons Learned 52. The CPS could have better taken into account Bulgaria’s capacity constraints and scaled back on design and delivery. While the quality of projects implemented during the CPS period were satisfactory, the delivery of some projects experienced delays. These delays can be attributed, among other factors, to limited institutional capacities exposed in the first year of EU accession which brought for Bulgaria substantially increased demands on policy formulation and coordination with the EC and EU partners. Bulgaria also gave priority to setting up EU related institutional structures—possibly delaying World Bank project preparation designed to support Bulgaria in the absorption of EU funds. 53. The CPS could have benefited from a more targeted program to address Bulgaria’s capacity and institutional constraints to meet the EU funds absorption goal. The previous CPS included modest interventions in two projects to provide technical assistance in preparing projects eligible for EU grant financing. The CPS underestimated the extent of institution-building required to achieve this objective, and focused more attention on creating fiscal space. By the end of the previous CPS period, Bulgaria continued to underspend its EU grant allocation. Addressing institutional and capacity constraints have since emerged as a top priority for both the Government and EC, and the Government’s fiscal plan is now aligned with the EU funds absorption objective. Drawing on the lessons from the previous CPS, the 2011-2013 CPS places institutional and capacity building at the heart of the program, with ongoing and proposed activities designed to reflect the EU funds absorption priority. 54. In EU member states with access to significant EU grant funds, the Bank is better placed to support policy reforms aligned with EU priorities and strengthening country capacity and institutions. The Bank’s value-added was clearly perceived to be in the area policy reforms and institutional strengthening rather than financing. Future World Bank lending in Bulgaria should serve as complementary financing in areas where no EU funds are available or where Bank financing is leveraging other resources or fostering innovation. 55. Reforms in Bulgaria need clear demonstration of commitment and ownership before underpinning such reforms with financing. The Bank contributed in significant ways to the debate on reforms in Bulgaria, but has not always waited for clear signs of commitment before proceeding to support such reforms. In education, for example, there was a strong response to the proposals for reform, which were implemented with success. In the health sector, in contrast, there was little evidence of commitment to the reforms supported in the DPL program, and there was little progress in this sector.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 CPS Consultations 56. CPS features were the subject of focused discussions with the Government on the future World Bank Group program and consultations with key national and international stakeholders. In meetings with representatives of think tanks, political parties, civil society including Roma organizations and private sector umbrella organizations, the evolving role of the World Bank Group in Bulgaria was discussed. National stakeholders voiced a commonly shared view that the Bank Group’s value-added is its global and regional knowledge and expertise. This knowledge and expertise should contribute to structural reforms in key sectors and lead to increased absorption of EU funding. While knowledge is perceived as the centerpiece of the evolving partnership, several stakeholders emphasized the need for complementary World Bank financing to support design and implementation of sector reforms. These views were echoed by international partners. The CPS was prepared in close collaboration with the EC, in particular the Directorate General for Regional Policy, which manages a large share of EU funds. The European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) as well as EU ambassadors were also engaged in the CPS dialogue.

B. CPS Principles of Engagement 57. Complementarity. Bulgaria is seeking to maximize the quantitative and qualitative benefits of EU membership, including effective utilization of EU grant funds. The CPS will ensure complementarity with activities supported by European institutions and instruments. Government programs are closely aligned with the EU programming period. Therefore, the World Bank Group will align the CPS cycle with the current EU planning and financing cycle (2007-2013). This will allow the CPS to capture the second part of the current EU programming cycle as well as the important strategic planning and preparatory phase for the next (20142020) financing period. 58. Flexibility. The Bulgarian authorities also emphasized the need for flexibility because of (i) the continued uncertainty as the global economy recovers; (ii) the rapid evolution of the economy as Bulgaria catches up with the rest of the EU, and related required structural changes; and (iii) the fact that the timing and sequencing of critical reforms and their ultimate success is not only subject to technical considerations, but must also take into account the political economy, and thus requires flexible change management by Government. Therefore, the CPS does not attempt to define a program through 2013. Rather, future activities will be determined by the criteria of the three pillars articulated in Section III-C of this document, as well as Government priorities, the Bank’s capacity to respond, and the value-added of proposed Bank support. 59. Knowledge and Innovation Partnership. The Government of Bulgaria has expressed interest in forging a knowledge partnership based on innovation. This enables Bulgaria to tap into the Bank’s global and regional experience, and as well as knowledge and advisory services based on detailed Bulgaria country and sector knowledge. While the World Bank Group will provide global and regional knowledge and good practice in a tailored manner, it will also innovate and learn with and from Bulgaria for the benefit of other countries.

C. CPS Pillars of Engagement and Outcomes 60. World Bank Group support will be anchored in Bulgaria’s National Reform Program to implement the Europe 2020 Strategy. The objective of the CPS is to support Bulgaria in strengthening institutions and policies to achieve smart, sustainable, and inclusive growth. These objectives are closely aligned with the World Bank’s three strategic priorities for the Europe and Central Asia (ECA) region, which focuses on competitiveness, inclusion and climate change. CPS activities are organized under three pillars: (i) knowledge and advisory support for policy reforms to implement the NRP; (ii) knowledge and advisory support to strengthen institutions and capacity to accelerate EU funds absorption; and (iii) complementary and selective provision of financing. Table 4 organizes ongoing activities and those under discussion for FY11-12 according to the Europe 2020 goals of smart, sustainable and inclusive growth. 61. Knowledge and advisory services are envisioned to be increasingly provided through fee-based service arrangements. The Government and the World Bank have explored the possibilities of procuring the Bank’s knowledge and advisory services by utilizing EU Structural Funds. In close coordination with 22

III. Bulgaria-World Bank Group Partnership the European institutions (EC, EIB) and IFIs (EBRD and the World Bank), the Government is currently developing a mechanism for significantly scaled-up technical support for increased EU Funds absorption. Such support would selectively aim to engage with Bulgaria in the preparation and implementation of its investment programs funded from EU Structural Funds in areas where the World Bank can provide valueadded and can respond in a timely manner. For the Government, the principal rationale for a fee-based service program with the World Bank is to achieve more efficient and effective absorption of large volumes of EU funds, while leveraging the Bank’s global knowledge and experience. Table 4: CPS activities for FY11-12: Ongoing and Under Discussion Smart Growth

Sustainable Growth

Pillar 1: Policy Reforms for National Reform Program to implement Europe 2020 Strategy

• Competitiveness Through Innovation AAA (ongoing) • Education and Higher Education Reform AAA (ongoing)

Pillar 2: Strategies and Institutions to Accelerate EU Funds Absorption

• Competitiveness Through Innovation FBS (under discussion)

Pillar 3: Complementing EU Financing

• Education System Results Based Project (under discussion)

• Public Expenditure Policies for Growth & Competitiveness AAA (ongoing) • Better Regulation for Higher Growth (ongoing, FBS under discussion) • Green Economy and Climate Action AAA (ongoing, FBS under discussion) • Security of Gas Supply Study AAA (ongoing) • IDF grant: Forestry Sector Institutions Reform Support (ongoing) • IFC advisory services: Private sector participation and pilot Public Private Partnership project in water (ongoing) • Improving Roads Sector Performance, Capacity and EU Funds absorption AAA (ongoing, FBS under preparation) • Railway Sector Improving EU Funds absorption FBS (under discussion) • Green Growth and Climate Action (FBS under discussion) • Water Sector Strategy, capacity and EU funds absorption AAA (ongoing, FBS under discussion) • €80M Railway Sector DPL (under preparation) • €70M Railway Infrastructure Rehabilitation Project (under preparation) • IFC financing: 12 active projects in power sector (renewable energy / energy efficiency), financial markets, oil & gas and general manufacturing, industry; several projects under discussion.

Inclusive Growth • Poverty & Social Policy Monitoring AAA (ongoing)

• Roma Inclusion: Strategy, Institutions and EU funds absorption AAA (ongoing, FBS under discussion)

62. World Bank knowledge and advisory services would focus on policy reforms, sector strategies and strengthening institutional capacity for increased EU funds absorption. This support would be fully complementary to technical assistance provided by other partners, including EIB and Joint Assistance to Support Projects in European Regions (JASPERS), under the coordinating leadership of the Government. In addition to EU Structural Funds, European Economic Area and Norwegian grant funds constitute potential options for the Government to co-finance and scale up World Bank knowledge and advisory work in NRP areas not directly related to EU funds absorption. 63. Activities within the ongoing lending portfolio from the previous CPS are being realigned to support Bulgaria’s EU funds absorption priority. The ongoing portfolio covering the roads and water sectors is being aligned to the Government objective of increasing EU funds absorption, including strengthening 23

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 institutional capacities. For example, the Municipal Infrastructure Development Project (MIDP) includes a component that will assist the preparation of regional water and wastewater master plans to identify priority investments and plan for EU grant financing through the Operational Program Environment. Similarly, the Road Infrastructure Rehabilitation Project is being restructured to include a component that will support preparation of projects for EU Structural Funds financing under the current EU financing cycle, and develop a pipeline for funding under the next financing cycle (2014-2020). 64. The CPS results matrix will remain a dynamic tool to define and monitor outcomes and milestones. The results matrix in Annex 1 currently captures ongoing activities, new activities agreed upon with the Government as well as potential activities under discussion for FY11-FY12. The proposed results are contingent on the World Bank’s ability to launch the fee-based services through the mechanism being finalized by EC, the Government and IFIs. Given the demand-driven and flexible architecture of the CPS, the results matrix will be adapted to reflect the implementation status of fee-based services, as well as additional World Bank Group activities in the coming years. Annual program review and planning meetings will be held in the Spring, to coincide with the Government’s annual review of the NRP. (i) Pillar I: Policy Reforms for National Reform Program to Implement Europe 2020 Strategy 65. Through the first pillar of engagement, the World Bank will provide knowledge and advisory support on policy reform in select sectors and themes of the NRP. The World Bank has already produced a series of analytical work related to Bulgaria’s NRP priorities during the previous CPS period, and it will continue this support, driven by Government demand and priorities. A key outcome supported by this pillar will be annual improvements in Bulgaria’s NRP as measured by the EC’s assessment of Bulgaria’s submission every year. To achieve this outcome, activities under this pillar will focus on the specific sectors discussed below. Innovation • Outcome: Strengthened policies, aligned instruments and effective institutions for high quality R&D. 66. The NRP targets an increase of public spending for R&D of 1.5 percent of GDP, combined with increased support for science and innovation. World Bank knowledge and advisory services will focus on design and performance of the national R&D and innovation programs and the instruments funded by EU funds under the OP Competitiveness. It is envisioned that the Government would co-finance World Bank advisory work through a fee-based service arrangement. The expected output is to produce detailed diagnoses of the bottlenecks for absorbing EU funds related to administrative capacity, red tape, project pipeline, and overall design. Targeted activities that would also contribute to the CPS Pillar II objective of boosting EU funds are also planned. Substantial redesign and scaling-up of these programs will be required in the EU’s next programming cycle 2014-2020 to achieve Bulgaria’s target of R&D investments totaling 1.5 percent of GDP. Education • Outcome: (i) Improved quality of basic and secondary education by strengthening the accountability framework; (ii) Improved quality and relevance of higher education through strengthened governance, accreditation and performance-based funding. 67. The NRP calls for increased participation in primary and secondary education with a 2020 target of school-aged population out of school reduced to 11 percent. As important input to the new law on basic and secondary education, ongoing World Bank knowledge and advisory services are supporting the Government’s efforts to enhance the accountability framework. This entails working with the Government to refine the school education external assessment system by improving the technical design, data analysis, use, and dissemination of results, as well as making the assessment system financially and institutionally sustainable. The Bank will also support Bulgaria in strengthening the accountability of schools through establishment of school-based mechanisms that engage communities and parents in school decisions. In addition, the Bank would work with Bulgaria in identifying effective performance incentives for high-performing teachers and 24

III. Bulgaria-World Bank Group Partnership schools while creating support and improvement mechanisms for municipalities with high numbers of poorly performing schools. 68. In addition to knowledge and advisory support, the Government is considering World Bank financing to support implementation of the education sector reform. A new education sector law is currently under preparation. In order to best support implementation of the sector reform, potential World Bank financing would be provided through an innovative results-based operation, linking disbursements with achieved reform implementation results. 69. In higher education, the NRP seeks to increase participation in tertiary education to 36 percent of people aged 30–34 by 2020. Increased participation in tertiary education will depend on improved quality and relevance of higher education through strengthened governance, accreditation and performance-based funding - an area where the World Bank will support the Government through knowledge and advisory services in FY11-12. Public Finance and Public Administration • Outcome: Improved efficiency and effectiveness of public expenditures. 70. Higher confidence in state institutions, improved functioning of state administration and increased administrative efficiency is one of the key NRP priorities. World Bank knowledge and advisory services will support the Ministry of Finance (MoF) with recommendations for further improving the efficiency and effectiveness of public expenditures and in conducting joint analysis of the competitiveness of the economy. World Bank engagement will also involve public finance policy analysis of select sectors or topics to be agreed with the MoF through the annual CPS program review and planning. Competitiveness – Business Regulatory Environment • Outcome: Reduced administrative burden at central and local levels through effective implementation of the Better Regulation Program and the Administrative Burden Reduction Action Plan. 71. The NRP aims at creating “the best business environment in the EU.” Bulgaria is aiming for a 2012 target to reduce the administrative burden by 20 percent through improved functioning of state administration and increasing administrative efficiency, as well as better regulation. This will require the implementation of the Better Regulation Program 2010-2013 and Action Plan for Administrative Burden Reduction. Developing a competitive business environment would improve Bulgaria’s prospects for increased firm productivity, growth and international competitiveness. 72. The World Bank is providing knowledge and advisory services focusing on improving the legislative, policy, and institutional set-up at national and local levels to promote better regulation. It is envisioned that advisory services will be scaled up through fee-based service. Building a more competitive business environment will be based on: (i) issuance of a regulatory impact assessment of important legislation and policies; (ii) applying sectoral applications on business self-regulation; (iii) identification of regulatory regimes to be eliminated or to limit their scope; and (iv) conducting surveys among businesses to assess the results of administrative and regulatory burden reduction initiatives. Additional activities under the planned knowledge and advisory services will focus on optimization of the administrative systems at the national and local levels. Outputs will include: (i) implementing the institutional set-up of the authority that will monitor the implementation of the LARACEA Law; (ii) approving a new regime of state fees framework (policy, legislation, institutional set-up); (iii) improving other administrative procedures such as for construction permits, contract enforcement and closing businesses, (iv) conducting surveys of administrative services of municipalities to assess the results of administrative burden reductions; (v) completing trainings in regulatory impact assessments to national and local administrative personnel; and (vi) setting-up and implementing the Administrative Register.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Green Growth and Climate Action • Outcome: Reduced energy consumption in buildings through scaled-up program to improve energy efficiency in public and residential buildings. 73. World Bank knowledge and advisory services will support the Government to roll out a largescale national program to increase energy efficiency of buildings, in partnership with EBRD and EIB, by expanding upon and coordinating existing activities and mechanisms. This will involve setting up an institutional coordination mechanism with key stakeholders, developing/refining the tools and incentives mechanisms, and identifying financing sources. These activities, envisaged to be scaled up through fee-based service, will also contribute to the second pillar of boosting EU funds absorption by devising mechanisms and institutional models that allow expansion of the use of Operational Program funds to include energy efficiency in residential buildings. In addition to evolving energy efficiency support, the World Bank is currently undertaking a Gas Security of Supply Study to facilitate the preparation of strategies and action plans to ensure reliable and diversified energy supplies, including an assessment of investment opportunities and their implications. • Outcome: Improved resilience to climate change and strengthened carbon trading management. 74. In addition to contributing to an adaptation strategy and action plan, the World Bank stands ready to support Bulgaria in mainstreaming adaptation to climate risk in two vulnerable sectors─forestry and agriculture─and institutional strengthening of carbon trading. In forestry, the World Bank would support forest management reforms to improve fiscal efficiency and the sustainable management of forest and biodiversity resources. In agriculture, the World Bank would provide knowledge and advisory services to support its ability to adapt to climate variability. In carbon trading, the World Bank’s knowledge and advisory services would contribute to the (i) development of approaches for identifying potential eligible Joint Implementation projects, consistent with the requirements of the EU Emissions Trading System (EU ETS); (ii) identification of potential eligible Green Investment Scheme (GIS) projects, and improvement in evaluation methodologies; (iii) identification of opportunities for emission reduction from sectors outside the EU ETS (e.g. transport, land use); and (iv) training of staff to strengthen Bulgaria’s participation in the EU ETS. 75. The IFC will place strong emphasis on looking for opportunities to support climate change projects in Bulgaria. Knowledge and advisory services, envisioned to be delivered on a fee-based service basis, will include working with the Government to create an enabling environment to increase the role of private sector in growth and sustainable development, while reducing GHG emissions. Social Inclusion • Outcome: Increased social inclusion by developing better integrated mechanisms for inclusion of vulnerable groups, through early childhood development, as well as increased use of EU funds. 76. The Social Inclusion Project from the Bank’s active lending portfolio will foster social inclusion by better preparing young children from vulnerable groups─including Roma and children with disabilities─for successful school education. Because of their social situation, many vulnerable children reach school age and go to school without the necessary preparation. They are not on equal footing with their peers and they drop out early from school. The project will contribute to the sustainability of the school readiness program by supporting the absorption of European Social Fund (ESF) financing. The Social Inclusion Project also supports the CPS’ third pillar objective of providing complementary financing to EU grant financing. (ii) Pillar II: Strategies and Institutions to Accelerate EU Funds Absorption 77. Bulgaria has a remarkable opportunity to enhance investment levels and significantly alter its development prospects through effective utilization of EU funds. EU grant resources are crucial for co-financing the upgrading of infrastructure and supporting economic recovery, promoting innovation, and increasing employment and developing the skills needed for a new knowledge-based economy. The latter is of particular importance since Bulgaria, as a small open economy with a currency board, is not in a position to conduct its own economic stimulus program without undermining fiscal discipline and endangering macroeconomic stability. 26

III. Bulgaria-World Bank Group Partnership 78. Under the second pillar of engagement, the World Bank will provide knowledge and advisory services aimed at building Bulgaria’s capacity to better absorb, manage and implement EU Structural Funds. EU funds absorption is not an end in itself, but an important vehicle for achieving the goal of improved service delivery, especially in infrastructure and human development, to lay the foundation for sustainable medium-term growth. The Government inherited the challenge of extremely low absorption of EU funds and, in particular, mismanagement of the EU pre-accession programs that led to partial suspension of EU funds. The Government has since regained access to EU funds and made EU funds absorption a top priority, appointing a Minister for EU Funds to streamline procedures. But weak administrative capacity presents a significant obstacle as discussed in Section I-D The Challenge of EU Funds Absorption. A key outcome to be supported by this pillar is to significantly strengthen Bulgaria’s administrative capacity to utilize EU funds such that absorption is quintupled in the sectors in which fee-based services specifically designed to boost EU funds absorption (e.g. roads, water and Roma inclusion discussed below) are launched under a given OP, modulated by the implementation period. 79. The Government has initiated a coordination process with European and international partners in key sectors, including road and water infrastructure, to scale up technical assistance aimed at increasing EU funds absorption. National experts as well as experts from the EC, EIB, JASPERS, EBRD and the World Bank reviewed key bottlenecks for increased EU funds absorption, outlined necessary reforms and institutional strengthening in the respective sectors and agreed to a division of labor. In parallel, the Government is in discussion with the EC on a mechanism that will enable Bulgaria to procure knowledge and advisory services from IFIs using EU funds. As soon as the modalities for such an arrangement are finalized, the World Bank will launch knowledge and advisory services in the form of fee-based service. Three key areas of World Bank partnership for increased EU funds absorption are discussed below. Transport - Roads • Outcome: (i) Strengthened roads sector governance, management and EU funds absorption capacity; (ii) Improved roads and border infrastructure. 80. The World Bank will significantly scale up ongoing cooperation with Bulgaria in the roads sector through knowledge and advisory services aimed at being provided through fee-based service. The proposed program would be implemented over three years and address longer term sector needs and issues. The overall objectives of the program would be: (i) to improve efficiency and sustainability of the roads sector; (ii) to strengthen institutional and human capacity; and (iii) to increase absorption of EU funds in view of the planned large investment in road infrastructure. To achieve these objectives, World Bank support will focus on three main activities: (i) review and update of the 2020 roads strategy and sector operational programs; (ii) hands-on operational support to Ministry of Regional Development and Public Works (MRDPW) / Road Infrastructure Agency (RIA) to improve implementation of projects; and (iii) improving roads sector performance, using the process of EU funds absorption to modernize and enhance roads sector governance through a review of road management functions and support the implementation of respective recommendations. 81. Through two ongoing lending operations, the World Bank will continue its support in upgrading Bulgaria’s roads and border infrastructure. Under the Roads Infrastructure Rehabilitation Project, the World Bank is building the capacity of the National Roads Agency and financing investment in the rehabilitation of regional and local roads network with the objective of expanding access to markets. Under the Second Trade and Transport Facilitation Project, the World Bank is supporting the improvement of border-crossing facilities, and harmonizing and improving telecommunication and cargo data exchange between railway and customs, hence facilitating trade by lowering freight and transport cost. These two lending operation also contribute to the CPS’ third pillar objective of providing complementary financing to the EU. 82. The IFC will also seek to continue to support the Government in its goal to enhance access to infrastructure. This will entail knowledge and advisory services on enhancing the social, environmental and economic benefits of large infrastructure projects with sizeable national impact and potential for private sector participation. This includes possible support to strategic restructuring and PPP advice, know-how and expertise. Such advisory services would be delivered on a fee-based service.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Water • Outcome: Increased EU-financed investments in the water sector through strategic priority setting, water master plans, and strengthened institutional capacity. 83. Consistent with the requirements of the EU Water Framework Directive and OP Environment, the World Bank will provide water sector knowledge and advisory support. This support, planned to be scaled up through fee-based service, will focus on the development and implementation of: (i) an overall water resources management strategy, led by the Ministry of Environment and Water (MOEW); (ii) a water supply and sewerage sector strategy and legislative changes; (iii) rural water management; and (iv) capacity-building of the water institutions including strategic management and budgeting, cost recovery mechanisms, tariff setting, and institutional strengthening of individual utilities. 84. In terms of financing, the World Bank is supporting the water sector through the Municipal Infrastructure Development Project (MIDP), which supports the Government in prioritizing and planning for investments in the water sector to be financed from EU funds. The MIDP also supports the improvement of the reliability and quality of water provision to the communities in selected settlements through investment in three dams and water treatment systems (Luda Yana, Plovdivtsi, and Neikovtsi) and in the rehabilitation of the Studena dam. Social Inclusion - Roma • Outcome: Increased participation of Roma population in society through stepped-up, integrated, transparent and results-focused national strategy and actions. 85. Specific policy areas where Roma vulnerability is particularly important include employment, education, health care, housing, and social assistance. Ongoing World Bank support for Roma integration in Bulgaria is envisioned to be scaled up through fee-based service (FBS). It will seek to strengthen policies through coherent multi-sector strategies for Roma integration; and by developing capacity to design, implement and evaluate effective programs and projects, especially with EU financing. Knowledge and advisory services will be provided to develop a Roma inclusion strategy and support its implementation. As a first step, the Bank will support the Government in bringing Roma stakeholders together for a workshop to map out country challenges and activities that could be scaled up. This workshop will take place in May 2011 and will precede the EC’s high-level Roma forum in Sofia in June 2011. 86. The ongoing Social Inclusion Project, which aims to increase school readiness of children from low-income and marginalized families, also supports increased EU funds absorption under the Human Resources Development Operational Program. The project supports the development of and provides initial financing for social programs eligible for European Social Funds (ESF, a financing category under the EU Structural Funds. (iii) Pillar III: Complementing EU Financing 87. Through the third area of engagement, the World Bank Group will provide limited complementary and innovative financing support to Bulgaria. Given the financing available through the EU’s Structural and Cohesion Funds (€6.7 billion for the current programming period 2007-2013), EIB (€1.8 billion since 2007) and EBRD (€500 million in 2010), World Bank Group financing will selectively focus on areas that are not eligible for financing from the Commission or European institutions. In other words, where EU grants or EIB financing is available, the World Bank will not provide financing. 88. Future World Bank Group financial support will be concentrated on financing policy reforms and results-based operations. Such financing will seek to be innovative in terms of supporting difficult reforms, focusing on results related to reform implementation, or financing innovative private sector activities. Preparation is underway for development policy lending to support the Government’s ambitious railway reforms and to restructure the Bulgarian railways sector to place them on a sustainable path on which they can resume new investments and more effectively absorb EU funding. Given Bulgaria’s priority of utilizing limited fiscal resources efficiently, the World Bank stands ready to support further institutional reforms to ensure that constrained public expenditures are achieving maximum results. Such reforms could be supported by results-based operations, an innovative financing instrument in which disbursements are linked to the achievement of agreed results. 28

III. Bulgaria-World Bank Group Partnership Transport - Rail • Outcome: Financially sustainable and modernized railways system. 89. New lending has been agreed with the Government to modernize the railway sector through a programmatic series of development policy loans (DPL) and one investment loan. The DPLs will consist of three €80 million operations to support the design and implementation of railway reforms and to ensure that public financial support to railway infrastructure and passenger services are consistent with transport market demand, EU transport policies, and Bulgaria’s prudent fiscal policy. The first DPL, under preparation in FY11, will focus on: (i) enhancing railway sector governance; and (ii) improve corporate governance, management and performance of railway service delivery by the two state-owned companies, NRIC and BDZ EAD, in order to provide value-for-money to the state. Investments that are critical to sustain the railway sector reform’s impacts, and which are not eligible for funding under EU programs, will be undertaken under a parallel investment loan. The €70 million Railway Infrastructure Rehabilitation Project will finance the acquisition of infrastructure maintenance equipment for NRIC to improve the quality and efficiency of railway infrastructure services in Bulgaria. 90. In addition, complementary World Bank knowledge and advisory services for increased EU funds absorption in the railways sector will be launched. The Government and the World Bank are discussing a possible fee-based program for the period 2011 – 2013 in close coordination with the EC and the other European financial institutions. Such a program would aim to support the Government in preparing and implementing operational programs (investments) to be funded under the EU Cohesion Fund and European Regional Development Fund (ERDF) available for the transport sector in Bulgaria.

D. CPS Program 91. The CPS program will be reviewed annually and adapted to ensure that World Bank Group support is in pace with Bulgaria’s implementation of the NRP 2011-2015 in the context of Europe 2020 Strategy. Activities presented in Table 4 reflect the ongoing program as well as those activities already agreed upon or under discussion with the Government. At the first annual program review in 2012, implementation progress and results of ongoing activities will be assessed and additional activities will be discussed and agreed upon. 92. A CPS Progress Report will be presented to the Board of Executive Directors. The Progress Report will assess the strategic direction of the CPS based on results agreed with the Government and reflected in the results matrix. (i) IBRD Program 93. The World Bank program will consist of substantial knowledge & advisory services, in response to the Government of Bulgaria’s keen interest in forging a knowledge partnership focused on innovation. This will consist of a tailored program of World Bank-financed analytical and advisory services that address Bulgaria’s unique challenges. The CPS envisions to selectively scale up this knowledge and advisory services program through fee-based service arrangements, in line with lessons learned from the last CPS and in sectors where the Bank can apply its global knowledge and country-specific experience to Bulgaria’s benefit. 94. The knowledge and advisory program will be accompanied by selective World Bank financing focused on complex reforms and which complement EU financing. In recent years, Bulgaria has maintained a lending portfolio of $300-500 million. As of January 2011, World Bank lending commitments stand at $353 million underpinned by infrastructure and social services operations. A railway reform support financing package composed of a series of three DPLs and an investment loan complementary to EU funding are included in the indicative lending program. World Bank potential financial support will be discussed upon the Government’s request, with priority given to results based lending. Non-traditional instruments such as carbon financing or guarantees may also be considered.13 Table 5 summarizes the ongoing and planned World Bank lending program. Overall lending support will depend on, inter alia, IBRD lending capacity, demand from other borrowers and global economic developments. 13

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Table 5: Ongoing and Planned World Bank Lending Program for FY11-FY12 • Road Infrastructure Rehabilitation - €90M (ongoing) • Trade & Transport Facilitation - €41M (ongoing) • Municipal Infrastructure Development - €81M (ongoing) • Social Inclusion - €40M (ongoing) • Programmatic Railway Sector Development Policy - €80M (under preparation) • Railway Infrastructure Rehabilitation - €70M (under preparation) • Education System Results Based Operation (under discussion) • IFC: Heavy Industry, Banking & Power Sectors (under discussion)

(ii) IFC Program 95. In line with the Europe 2020 goals, future IFC financing will support smart, sustainable and inclusive growth, focusing its private sector investments on renewable energy and climate change-related infrastructure and industries, social sector private investments and selectively in agriculture. In the shortterm, IFC will address the impact of the crisis in Bulgaria by supporting the recovery of the private sector and reducing job losses. 96. In the financial markets, IFC’s strategy is to work with local banks and strengthen their capacity to provide loans to underserved sectors and products such as trade finance, agribusiness, and energy efficiency. IFC will consider supporting key banks through funding and balance sheet strengthening, thus helping maintain liquidity and confidence. IFC will also support the introduction of new financial products such as structured finance and risk-sharing facilities. 97. In infrastructure, IFC will support public-private partnerships projects and catalyze FDI. IFC will support new investors in the power sector (generation and distribution) and other network utilities (water, gas, district heating), thus contributing to Bulgaria’s efforts to further diversify its energy production sources and supply. 98. In the real sector, IFC will support local companies to become more competitive in domestic market and expand in other countries in the region, as well as promote South-South investments to/ from Bulgaria. This includes, supporting the rehabilitation and modernization of post-privatized companies and promote foreign investments to foster technology transfer for productivity gains. 99. IFC will selectively support direct investments in agribusiness as well as financial institutions which provides financing to the agriculture sector, which has been largely underserved by the financial sector. IFC’s support to this key sector can encourage additional investment from other financial institutions. Box 3: IFC Investments Support Land Consolidation in Bulgaria

One of IFC’s strategic investments in Bulgaria is a €15 million equity in Advance Terrafund (Atera), the second largest land owner after the state listed on the Sofia Stock Exchange. Bulgaria has about 6.2 million hectares of agricultural land, but the agriculture sector is characterized by low productivity and limited investment. Land fragmentation, remnant of the post-Soviet era land distribution, has resulted in low productivity, underdeveloped infrastructure, difficulties to access credit and for land users to contract with landlords. This is further exacerbated by an aging farmers’ population, with 66 percent of farmers over the age of 55. Like other transition economies, Bulgaria’s Government has been promoting land consolidation and modernization of agriculture. This also fits within the EU’s agricultural policy, which generally favors larger scale, efficient farms, and transitioning away from fragmented crop farming. EU agricultural support in the form of direct payments will be phased out over a number of years, and farm producers will need bigger plots (minimum 10 hectares) to comply with the EU financing requirements. Atera’s business is to acquire small plots of arable land, consolidate them into larger properties and rent them out to commercial farming companies. Atera has acquired the know-how for land identification, negotiation and acquisition, and administrative and legal consolidation into one property that can be rented to a farming company. The agricultural output of the larger property is expected to be significantly higher than that of the fragmented land, generating revenues for Atera through the rental income. Today, Atera manages a portfolio of over 33 000 hectares of arable land and outperforms the local stock index.

III. Bulgaria-World Bank Group Partnership 100. Finally, Bulgaria faces the challenge of increasing investments in low carbon projects and to put its economy on a low-carbon growth path. To achieve this goal, IFC will also work with local financial institutions to provide energy efficiency lending and invest in renewable energy projects (wind and/or biomass). This is particularly relevant in the context of the financial crisis, which translated into a lack of long-term financing availability particularly for climate change projects. This will also enable Bulgaria to meet its national target of 16 percent of gross energy consumption generated by renewable energy sources by 2020.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

IV. RISKS 101. Political Economy Risks. The Government faces the complex challenge of introducing significant structural reforms within the context of post-crisis environment characterized by relatively modest growth and constrained fiscal space. The Government will depend on the continued support of the public and social partners to maintain the momentum of reforms, as municipal and presidential elections are scheduled for end2011. Mitigating factors are the Government’s relatively strong public approval ratings and the broad support in Bulgaria for prudent fiscal policies. 102. Macroeconomic Risks - External Vulnerabilities. The external risks include a possible slowerthan-projected pace of economic recovery of Bulgaria’s main trading and investment partners, additional unexpected financial shocks which result in higher interest rates and tighter global financial conditions, and further energy price increases. There is also uncertainty about the sustainability of recovery and about the measures put in place in the EU and globally to support financial sectors in these countries. These measures can be expected to have implications for capital flows to Bulgaria, coming both from parent banks and from private investors. Domestic risks relate to imbalances accumulated in the private sector, notably the high indebtedness of firms. As noted above, elements mitigating these risks include: (i) Bulgaria’s solid track record of fiscal discipline and ongoing reforms implementing fiscal consolidation; and (ii) well-capitalized and solid level of provisions in the banking sector. 103. General Implementation and Governance Risks. A risk that has been underestimated in the past is the institutional capacity constraint and weak governance. These have undermined the Government’s ability to translate commitment to actual implementation of reforms. These risks are mitigated by the large amounts of technical assistance available to Bulgaria through the Operational Programs and IFIs, as well as the willingness by the Government to overcome the obstacles presented by limited institutional capacity. As noted in Box 1, governance reforms are under careful examination by the EU as a follow-up to the EU accession process, which determined that continued efforts were needed in this area. Significant progress has been recorded in the recent report under the Cooperation and Verification Mechanism, given the determined actions of the current Government. Nevertheless, risks of slippage will inevitably remain. Therefore, at the time of the CPS Progress Report, the Bank will assess the effectiveness of the proposed targeted support to institutional capacity building and sector governance and adapt this approach as appropriate, in agreement with the Government of Bulgaria. In the meantime, as the basis for such a review, the Bank will update its fiduciary assessment for Bulgaria, with particular focus on public financial management. 104. Risks to Implementation of Fee-Based Service. The envisioned scaling up of fee-based services is dependent on the finalization of a mechanism that will allow the Government to partially use EU technical assistance grant funds to complement World Bank financed knowledge and advisory services. Agreement on the mechanism must be reached between the EC, the Government, the World Bank and participating IFIs. Delays in finalizing this mechanism would also delay a significant part of planned World Bank knowledge and advisory support, which would not only impact the expected CPS results, but also Bulgaria’s capacity to fully take advantage of EU funds to modernize its infrastructure and services. If agreement on this mechanism is delayed or does not materialize, the CPS program and outcomes will be calibrated to the proposed lending activities and World Bank-financed knowledge and advisory services in the areas where fee-based service had been envisioned. A related risk is that the Bank may be unable to respond effectively to requests for fee-based services. Such a risk can be mitigated by a screening process within the Bank that will focus on areas where the Bank has a clear comparative advantage. Other IFIs, in particular the EIB and the EBRD, have already and are scaling up their knowledge and advisory support and can intervene in their areas of competence, such as project financing and public-private partnerships.

Pillar 1: Policy Reforms for National Reform ProgramEurope 2020

Pillar 2: Strategies and Institutions to Accelerate EU Funds Absorption

CLIMATE ACTION - Improve resilience to climate change and strengthen carbon trading management.

ROMA - Increase participation of Roma population in society.

Sustainable Growth

SOCIAL INCLUSION INCLUDING - Better integrated mechanisms for inclusion of vulnerable groups.

WATER - Increased EU-financed investments in the water sector through strategic priority setting, water master plans, and strengthened institutional capacity.

ENERGY EFFICIENCY - Reduce energy consumption in buildings.

BUSINESS REGULATION - Reduction of administrative burdens at central and local levels.

PUBLIC FINANCE AND PUBLIC ADMINISTRATION - Improved efficiency and effectiveness of public expenditures.

EDUCATION - Improved quality of basic and secondary education; improved quality and relevance of higher education.

Smart Growth

RAIL - Financially sustainable and modernized railways system.

ROADS - Strengthened roads management and EU funds absorption capacity and improved roads and border infrastructure.

Pillar 3: Complementing EU Financing

INNOVATION - Strengthened policies, aligned instruments and effective institutions for high quality R&D.

Annex 1: Results Framework

ANNEX 1: RESULTS FRAMEWORK Annex 1.1: CPS Pillars and Outcomes* Inclusive Growth

* The Europe 2020 goals of smart, sustainable and inclusive growth are closely aligned with the World Bankâ&#x20AC;&#x2122;s three strategic priorities for the Europe and Central Asia region, which focuses on competitiveness, inclusion and climate change

Outcomes influenced by WBG program during partnership period*

Milestones to track CPS implementation progress World Bank Group Program**

Improved quality and relevance of higher education through strengthened governance, accreditation and performancebased funding

Improved quality of basic and secondary education by strengthening the accountability framework

Strengthened policies, aligned instruments and effective institutions for high quality R&D

• External student assessment system implemented at the end of each educational stage and integrated into school accountability systems by2013

• Strategic /functional review completed for the institutions responsible for science, technology and innovation • New Innovation and R&D Strategy adopted by the Government • Increasing share of government funding for innovation and science is allocated through competitive selection mechanisms • Evaluation of “OP Competitiveness” is completed and its recommendations are adopted in the 2014-2020 programming cycle

Knowledge and Advisory services: • Strengthening performance secondary education AAA(ongoing) • Higher Education AAA (ongoing)

Knowledge and Advisory services: Competitiveness through Innovation AAA (ongoing) and FBS (under discussion)

* Country outcomes to which World Bank Group interventions are contributing. ** Includes ongoing, currently being prepared and discussed World Bank Group financing and knowledge and advisory services. Following the agreements reached with Government at the annual program review and planning meetings, additional activities will be added.

Increased participation in primary and secondary education (NRP target: share of school-aged population out of school reduced to 11 percent by 2020) and increased participation in tertiary education of the people aged 30-34 (NRP target 36 percent by 2020)

Education

Increased public spending for R&D and increased support for science and innovation (NRP target: 1.5 percent of GDP by 2020)

Innovation

Key Outcome: Annual improvements in National Reform Program as measured by the European Commission’s assessment of Bulgaria’s submission every year

Pillar 1: Policy Reforms for National Reform Program to Implement Europe 2020 Strategy

Country Development Goals

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Annex 1.2: Results Matrix (to be updated annually)

Outcomes influenced by WBG program during partnership period*

Higher confidence in state institutions and improved functioning of state administration and increased administrative efficiency (NRP priority) Competitiveness - Business Regulation Improving business environment, including functioning of state administration, and increasing administrative efficiency, and better regulation (NRP priority) including through Better Regulation Program 2010-2013 and Action Plan for Administrative Burden Reduction (target: administrative burden reduction 20 percent by 2012) Green Growth and Climate Action Achieving a 16 percent share of renewable energy sources in the gross final consumption of energy and increasing energy efficiency by 25 percent by 2020 and increase energy security (NRP target)

Public finance reform will continue to maintain stability and provide enabling environment to a gradual transition to export-led growth economy by increasing productivity of the public sector (Convergence Program 2011-14 and NRP priority)

• Strengthened capacity of Ministry of Finance to identify expenditure optimization programs in selected areas (public sector wage bill, employment and public investment) • Enhanced analytical capacity of Ministry of Finance to design public finance policies in support of competitiveness

• Reduction of Administrative and Regulatory Burdens in compliance with national reform programs as assessed/confirmed through surveys of firms • Submission of regulatory impact assessments for key legislation • Adoption of a Policy on State Fees

• Institutional assessment including assessment of capacity needs completed, mechanism for large scale energy efficiency program in public and residential buildings developed, and scaled-up activities launched • Analytical capacity to prepare strategies and action plans in the gas sector to ensure reliable and diversified energy supplies developed

Reduction of administrative burdens at central and local levels, through effective implementation of the Better Regulation Program and the Administrative Burden Reduction Action Plan

Reduce energy consumption in buildings through scaled-up program to improve energy efficiency in public and residential buildings

Milestones to track CPS implementation progress

Improved efficiency and effectiveness of public expenditures

Public Finance and Public Administration

Country Development Goals

Financing: IFC financing: in the power sector with focus on renewable energy and energy efficiency (under implementation and under discussion)

Knowledge and Advisory services • Security of Gas Supply Study AAA (ongoing) • Green Economy, Climate Action and Energy Efficiency AAA, scaled up through FBS (ongoing, FBS under discussion)

Knowledge and Advisory services: • Better Regulation for Higher Growth AAA (ongoing) , scaled up through FBS (under discussion) Financing: • IFC Financing: Heavy Industry; Banking Sector (under implementation and under discussion)

Knowledge and Advisory services: • Public Expenditure Policies for Growth and Competitiveness AAA (ongoing) • On demand AAA on enhancing effectiveness of public spending, fiscal sustainability and competitiveness (to be specified at annual program review and planning)

World Bank Group Program**

Annex 1: Results Framework

Provide better adequacy of social transfers (NRP priority), and providing support to children and families to reduce social exclusion among children (NRP priority)

Increased social inclusion by developing better integrated mechanisms for inclusion of vulnerable groups, including early childhood development, as well as increased use of EU funds

Improved resilience to climate change and strengthen carbon trading management

Developing a Climate Change National Action Plan 2012-2020 (NRP activity)

Social Inclusion, Including Roma

Outcomes influenced by WBG program during partnership period*

Country Development Goals

• Enrollment of (i) children from vulnerable groups including Roma; and (ii) children with disabilities in early childhood education programs increased by 25 percent in 2013 relative to 2011

• Climate change adaptation strategy and action plan prepared and approved by inter-ministerial coordination committee • Institutional capacity for participation in carbon trading strengthened through staff training and development of methodologies and procedures for participation in EU ETS • Analytical capacity for evaluating costs and benefits of GHG mitigation in key sector developed • Government decides on new forest sector institutional setup, based on sound economic and institutional analysis, international best practice, and models of good forest governance.

Milestones to track CPS implementation progress

Knowledge and Advisory services: • Poverty and Social Policy Monitoring AAA (ongoing) Financing: • Social Inclusion Project (ongoing)

Knowledge and Advisory services: • Green Economy, Climate Action and Energy Efficiency AAA, scaled up through FBS (ongoing, FBS under discussion) • IDF grant: Forestry Sector Institutions Reform Support (ongoing)

World Bank Group Program**

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Outcomes influenced by WBG program during partnership period*

Milestones to track CPS implementation progress World Bank Group Program**

Develop water and wastewater infrastructure to meet EU standards and directives and improve the country’s competitiveness

Environment, Water and Agriculture

Better infrastructure for better connectivity to Europe (NRP priority)

Transport - Roads

Increased EU-financed investments in the water sector through strategic priority setting, water master plans, and strengthened institutional capacity

Improved roads and border infrastructure

Strengthened road sector governance, management and EU funds absorption capacity.

• Preparatory works for the completion of three new water dams and water treatment plants as well as one dam rehabilitation are completed and civil works started rehabilitation • Regional Master Plans for water and wastewater for the entire territory of Bulgaria (excl. Sofia City) are prepared • Priority sector investments identified in the Master Plans are selected for future financing from Structural Funds • New strategy for water and waste water utilities is developed and approved by Government. The Water Act is revised to ensure appropriate implementation of the Regional Master Plans

• Road infrastructure agency restructured • Process for decision-making in MRWDP related to absorption of EU funds is reformed • At least 300 km of national roads rehabilitated and road management system effectively used • Two Border-crossing facilities Kapitan Andreevo and Kalotina and 3.5 km access road to Kapitan Andreevo are improved

Knowledge and Advisory services: • Water Sector Strategy, capacity and EU funds absorption AAA (ongoing) to be scaled up through FBS (under discussion) • IFC Advisory: Introducing private sector participation and implementing pilot Public Private Partnership project in water sector (ongoing) Financing: • Municipal Infrastructure Development Project (ongoing)

Knowledge and Advisory services: • Improving Roads Sector Performance, Capacity and EU Funds Absorption AAA (ongoing), FBS (under preparation) Financing: • Road Infrastructure Rehabilitation Project (ongoing) • Trade and Transport Facilitation Project (TTFSE) 2 (ongoing)

Key Outcome: Absorption of EU funds quintupled in sectors in which fee-based services specifically designed to boost EU funds absorption are launched under a given OP, modulated by the implementation period.

Pillar 2: Strategies and Institutions to Accelerate EU Funds Absorption

Country Development Goals

Annex 1: Results Framework

Better infrastructure for better connectivity to Europe (NRP 2020 priority).

Transport – Railways

Pillar 3: Complementing EU Financing

Provide better adequacy of social transfers (NRP priority), and providing support to children and families to reduce social exclusion among children (NRP priority)

Social Inclusion, Including Roma

Country Development Goals

Financially sustainable and modernized railways system

Increase participation of Roma population in society through stepped-up, integrated, transparent and results-focused national strategy and actions.

Outcomes influenced by WBG program during partnership period*

• National railway operator BDZ EAD is restructured and its financial viability improved • Sector productivity is improved: staff productivity improved by at least 45 percent, track productivity improved by at least 25 percent

• Fully integrated one-stop shop or service for Roma social assistance, housing, and labor market services established in at least 10 Roma communities by 2013

Milestones to track CPS implementation progress

Financing: • Railway Infrastructure Rehabilitation Project (under preparation) • Railway Sector DPL series (FY11 DPL under preparation)

Knowledge and Advisory services: • Roma Inclusion: Strategy, Institutions and EU funds absorption AAA (ongoing) to be scaled up through FBS (under discussion)

World Bank Group Program**

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

ANNEX 2: BULGARIA CPS COMPLETION REPORT (FY07-FY10) I. Introduction/Overview 1. Bulgaria achieved a historical milestone when it joined the EU in January 2007, during the first year of the FY07-FY10 Country Partnership Strategy (CPS).1 Bulgaria’s entry into the EU brought with it high expectations. It was not only the newest member state, along with Romania, but also one with the lowest per capita income. Much hope was pinned on EU membership steering the country towards rapid progress in the political and socio-economic spheres and improving quality of life. To meet this daunting challenge, the Government of Bulgaria embraced an ambitious reform agenda aimed at accelerating economic and social integration with the EU. The CPS was, therefore, designed to first support Bulgaria’s accession efforts and to facilitate EU integration thereafter. It focused on three pillars that supported the Government’s reform program: (i) sustained increases in productivity and employment; (ii) fiscal sustainability and absorption of EU funds; and (iii) social inclusion. 2. The CPS consisted of an annual lending program of $300 million centered on a series of development policy loans (DPLs) in the social sectors, complemented by investment loans to enhance roads, municipal infrastructure, social inclusion and regional development. The investment loans included technical assistance to strengthen government agencies’ ability to absorb and effectively utilize the large volumes of EU funds expected to flow into Bulgaria. 3. This CPS Completion Report evaluates the progress achieved towards Bulgaria’s development goals and assesses how the Bank’s lending operations and AAA products under the last CPS contributed to these goals. It draws on portfolio reviews conducted during the CPS period, assessments by task team leaders and the country team, and discussions with key stakeholders. The lessons learned from implementation have been taken into account in the preparation of the next CPS for Bulgaria. II. Bulgaria’s Long Term Strategic Goals 4. At the time the CPS was presented to the Board, Bulgaria was in the final stretch of its journey towards EU accession. Concluding the accession process remained at the heart of newly-formed Government’s agenda.2 Much effort was placed on alignment with the EU agenda, and Bulgaria made continuous progress in addressing lingering EU concerns. For example, the October 2005 EU Monitoring report identified 16 areas of concern, which were reduced to six in the May 2006 EU Monitoring report. The Government was also tasked with establishing a credible and effective institutional structure—as required by the EU—to manage the large volumes of EU grant money that Bulgaria was about to receive for economic convergence with the EU. 5. When Bulgaria entered the EU, it faced the challenge of meeting the high expectations of its citizens. By then, Bulgaria had achieved a good track record of progress. The bitter experience of the 199697 economic collapse, the related establishment of a currency board, and the prospect of EU membership, had propelled Bulgaria along the path toward economic reforms. By 2003, Bulgaria had achieved a balanced budget and has maintained a fiscal surplus until the onset of the global crisis in 2009. Between 2000-2008, it enjoyed an average growth rate of 5.6 percent per year. Unemployment rates fell from close to 20 percent in 2001 to 5.6 percent in 2008 before climbing to 6.8 percent in 2009 as result of the crisis. Structural reforms helped stimulate private sector growth, and FDI flows steadily increased. 6. Yet, by the time of EU membership in 2007, Bulgaria’s per capita income stood at only 37 percent of the EU average3, the lowest among the new member states. Large capital flows from abroad supported booming domestic demand in Bulgaria, but also contributed to widening external imbalances. Strong output growth was associated with steady increase in the employment rate, which reached 96 percent of the EU average in 2007. However, the labor force, constrained by weak skills that did not match the needs of a rapidly transforming economy, was performing below potential. The challenge to accelerate productivity growth and raise incomes to levels of EU member countries was, therefore, pressing. In addition, at the time of accession, the EU underscored the need for continued progress in reforming the judiciary, combating corruption and organized crime and improving institutional structures for administering EU funds. As a result, Bulgaria was required to submit progress reports to the EU, especially on fighting corruption and organized crime. 1 2 3

This CPS was originally intended to cover FY07-FY09 but was extended to FY10. Following the June 2005 general elections, a coalition government led by the Bulgarian Socialist Party took office in August 2005. Measured in purchasing power standards, Eurostat data.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 7. The National Strategic Reference Framework for 2007-2013 which is used to program EU funds, identified a series of priorities vital to Bulgaria’s efforts to successfully integrate into the EU. They included boosting economic competitiveness; strengthening human resources through education, jobs and social inclusion; upgrading basic infrastructure; promoting balanced regional development; agricultural and rural development; protecting the environment; and building administrative capacity for effective public sector delivery and utilization of EU funds. The Convergence Program for 2007-2010 also emphasized sustaining growth by accelerating structural reforms, improving the business environment, and strengthening institutions. At the time of the CPS, Bulgaria set out to meet the following country development goals to achieve its overarching objective of EU integration and convergence: • Attain growth rates of 5.5-6 percent per year in 2007-2013 • Improve competitiveness of the economy • Reduce unemployment rate from 11.5 percent in 2005 to less than 10 percent in 2009. • Reduce inflation from period average of 5.0 percent in 2005 to 3.3 percent in 2007-2009 • Maintain public expenditure as a share of GDP at less than 40 percent • Improve absorption rate of EU funds. • Continued reduction in poverty levels • Reduced inequality based on Gini indicator and urban/rural gap in living standards. III. CPS Objectives 8. The CPS was anchored in Bulgaria’s long-term vision of evolving into a prosperous European nation. It was guided by the priorities laid out in the Government’s strategic framework, and focused on three strategic priorities that are aligned with the country development outcomes sought by the CPS: (i)

Sustained increases in productivity and employment through the continuation of structural reforms and investments to spur private sector growth. This included: • Improving the business environment and labor dynamics • Upgrading human capital and skills for a knowledge economy • Increasing the employment rate • Reducing high transport costs resulting from poor road infrastructure

(ii)

Fiscal sustainability and absorption of EU funds by building capacity for efficient and effective public expenditure management and investment planning. This included: • Reforming financing of the education system • Making the health system financially sustainable • Improving the efficiency of social protection • Upgrading the capacity for absorption of EU funds in infrastructure and at the sub-national level

(iii)

Social inclusion by promoting polices and investments to close the development gap between regions and to reduce poverty. This included: • Improving access to quality health services • Increasing the participation of marginalized groups such as youth, older unemployed and the disabled • Reducing the gap between urban and rural poverty. IV. Bulgaria’s Progress towards Country Development Goals

9. Throughout most of the CPS period, Bulgaria achieved significant progress towards its country development goals (see Table 1). Nearly all targets were achieved with the notable exceptions of (i) reduction in inflation, which rose dramatically in 2008 due to soaring food and oil prices and (ii) absorption of EU funds, which remained at very low levels throughout the CPS period. With regards to reducing poverty and inequality, Bulgaria achieved remarkable progress through 2007. A comparable follow-up survey is not available for subsequent years, although simulations suggest that poverty may have increased in 2009 as a result of the crisis. 40

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) Table 1: At-a-Glance -- Progress towards Country Development Goals Country-Level Indicators

Status

Sustained Increases in Productivity and Employment • Attaining growth rates of 5.5 – 6 percent per year in 2007-13 • Improved competitiveness of the economy • Continued reduction of average unemployment rate from 11.5 percent in 2005 to less than 10 percent in 2009

Achieved through 2008 Achieved Achieved

Fiscal Sustainability and Absorption of EU Funds • Macroeconomic stability with inflation at 5.0 percent (period average) in 2005 to 3.3 percent in 2007-09 • Maintain public expenditures as share of GDP at less than 40 percent. • Improving absorption rate of EU funds Social Inclusion • Continued reduction in poverty levels • Reduced inequality based on Gini indicator and urban/rural gap in living standards

Not achieved Achieved Not achieved Achieved through 2007 Achieved through 2007

Country Outcome I: Sustained Increases in Productivity and Employment 10. Bulgaria enjoyed rapid GDP growth until the onset of the crisis in 2009. Its sound macroeconomic policies and deep structural reforms helped fuel economic growth, with average GDP growth exceeding 6 percent per year during the 2004-2007 period, and reaching 6.2 percent for 2008. However, the global financial crisis and economic downturn in the US and EU have dampened Bulgaria’s medium term prospects. In 2009, growth declined by 4.9 percent. The economy began its recovery in second quarter of 2010, and growth is estimated to remain flat for 2010.4 11. Competitiveness was boosted with regulatory reforms, but there remains need for improvement. Favorable tax regime and improvements in the business environment helped fuel an increase in FDI inflows, which averaged close to 20 percent of GDP since 2005. While the Government has taken steps to cut red tape and reform the regulatory environment, Bulgarian firms continue to signal that burden of regulation remains high. Strong economic growth was associated with substantial improvements in labor market performance. 12. The declining trend in unemployment was maintained until 2008, but was reversed as a result of the global financial crisis. The number of people in employment increased by more than 400,000 between 2004 and 2008, with most of the new jobs generated in the private sector mainly in construction and service sectors, while employment in public sector further declined. In addition, shortages of labor pushed wages up through 2008. The recession in 2009, however, partially erased the employment gains of the boom years. Unemployment, which declined to record low levels in 2008 (from 12.2 percent in 2004 to 5.7 percent in 2008) rose to 6.9 percent in 2009. Exporting firms responded to the worsening external environment and weakened demand by cutting labor. In 2009, Bulgaria’s labor force participation rate stood at 67.3 percent, only marginally lower than the EU10 average of 67.8 percent. Country Outcome II: Fiscal Sustainability and Absorption of EU Funds 13. Prudent fiscal and income policies during good times provided a cushion against the impact of the global crisis. Continued fiscal consolidation and enhanced revenue performance resulted in fiscal surpluses during 2003-2008, which were saved into a fiscal reserve account that reached 12.1 percent of GDP in 2008. Thus, when the economic downturn led to a marked worsening of fiscal revenues in 2009, Bulgaria was able to tap into domestic resources to finance emerging fiscal deficits. Inflation averaged 6.5 percent between 2004 and 2006, and increased to 7.6 percent on average in 2007 due to stronger domestic demand and soaring food and oil prices combined with an increase in administrative prices and harmonization of excises with EU levels. Inflation continued to rise in 2008 as global commodity prices surged and demand pressures remained high. In 2009, it plummeted to 2.5 percent as international prices fell and pressures from wage growth decelerated with declining demand for labor. 4

Source: National Statistical Institute, Bulgarian National Bank, Ministry of Finance, IMF and World Bank

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 14. Public expenditure target was met during the CPS period. Between 2005-2009, public expenditure remained below 38 percent as a share of GDP—well below the 40 percent ceiling envisaged in the Government’s medium-term fiscal framework 15. Absorption of EU Funds remained well below potential, with clear need for capacity improvement. Absorption of pre-accession funds remained relatively low because of administrative capacity constraints, and as in other new member states, picked up by the end of the financing period. Annual inflows of EU pre-accession funds almost doubled between 2004-2007—reaching close to €830 million in 2007. But implementation of some EU funded projects was marred by corruption allegations, leading the EU to suspend more than €500 million in pre-accession financing in 2008. Upon acceding to the EU in 2007, Bulgaria became eligible to receive €6.7 billion in Structural and Cohesion Funds for the 2007-2013 programming cycle. By end-2009 however, Bulgaria received €635 million from the EC—only 9.5 percent of the total allocation. Implementation rate of these funds, at 3 percent, is even lower, pointing to clear need to strengthen management of EU funds. Prime Minister Borissov’s Government declared this a priority when it took office in 2009. Country Outcome III: Social Inclusion 16. Bulgaria achieved remarkable progress in fighting poverty, but the crisis appears to have caused some setback in this area. The poverty rate5 declined dramatically—from 20 percent in 2003 to only 10.2 percent in 2007. During the same period, extreme poverty6 also declined rapidly from 11 percent to 4.5 percent. Much of this progress has been attributed to structural reforms, macroeconomic stability and growth which lifted household consumption levels. However, the financial crisis appears to have some setbacks in this area, and simulations point to a 2 percent increase in the total poverty headcount for 2009 to a level close to 6 percent. Overall, persistent pockets of poverty remain among unskilled adults, ethnic minorities, children in large families, and the elderly with weak family support structure. In 2007, the Roma comprised more than 40 percent of the poor and two-thirds of the extreme poor, which is disproportionally high compared to their share in the total population. 17. Improvement in inequality was concentrated in urban centers. Inequality levels, as measured by the Gini coefficient, declined by 10 percent between 2003 and 2007—dropping to levels lower than recent EU entrants such as Estonia, Lithuania, Poland and Romania. Much of the improvement in inequality occurred in urban areas where inequality declined by close to 11 percent vs. nearly 4 percent in rural areas, pointing to a continued need to address the urban-rural gap in living standards. V. CPS Outcomes Assessment

18. This section reviews the progress achieved towards meeting the development challenges, outcomes and intermediate indicators outlined in the CPS. The results matrix in Attachment 4 summarizes the progress towards outcomes, supported by relevant data, and the Bank Group instruments that contributed to these outcomes. This section provides a general discussion on results achieved organized according to the three country outcomes and the 10 development challenges around which the CPS was designed. 19. The CPS outcomes achieved to date are largely driven by the ongoing portfolio and the DPL program, the centerpiece of the lending program. Processing delays resulted in the lending program planned for FY08 to slip to FY09 and FY10, which has shortened the timeframe to review anticipated outcomes for the final year of the CPS. Hence, the results achieved to date are driven by the policy reform agenda supported by the DPL program, the active portfolio and a robust program of AAA.

Based on headcount poverty, using absolute poverty line of 185 BGN per month per adult equivalent. Bulgaria Living Conditions Before and After EU Accession, July 2008. 6 Based on extreme poverty line of 145 BGN per month per adult equivalent. Bulgaria Living Conditions Before and After EU Accession, July 2008 5

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) Table 2: IBRD Planned and Actual Lending Operations FY07-FY10 FY

Planned

US$ mln equivalent

2007

DPL I Infrastructure I SIL (Roads) Trade & Transport II SIL

150.0 100.0 50.0

Subtotal 2008

DPL II Municipal Infrastructure SIL Social Inclusion SIL Subtotal

2009

DPL III Regional Development SIL Infrastructure II SIL (railway)

Subtotal

DPL I Infrastructure I SIL (Roads) Trade & Transport II SIL Additional: Social Investment Employment Promotion AF

300.0 150.0 100.0 50.0

150.0 122.5 52.8 19.3

Subtotal

344.6

Moved to FY09 Moved to FY09 Moved to FY09

300.0

---Subtotal

150.0 50.0 100.0

DPL II Dropped ($50M reallocated to DPLIII) Postponed to next CPS DPL II (DDO) Social Inclusion SIL

200 --150.0 59.0

300.0

Subtotal Municipal Infra Development SIL

409.0 118.7

Subtotal

118.7 872.3

2010

Total FY07-FY09

US$ mln equivalent

Actual

900.0

Total FY07-FY10

Country Outcome I: Sustained Increases in Productivity and Employment Table 3: Country Outcome I – Indicator (i): Business Environment Development Challenge

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

Improve business environment and labor market dynamics

• Increased flexibility in hiring and firing, working time, and parttime contracts

Achieved

• Amendment to Social Insurance Code to lower pension insurance contribution rate • Amendment to Labor Code to introduce flexibility in hiring and firing, working time, and part-time contracts

Achieved

20. The Government of Bulgaria adopted a series of measures to improve the business climate as part of the overall goal to boost productivity and employment. In April 2008, the Council of Ministers (CoM) adopted the Better Regulation Program 2008-2010 which simplified or removed several regulatory regimes. Business start-up was made easier with the creation of a central database for commercial registration and streamlining registration procedures. To reduce tax burden on business and increase compliance, the Government also implemented tax reforms and overhaul of revenue administration. In 2006-2007, corporate tax was reduced from 15 percent to 10 percent and employers’ labor tax by 7 percentage points. In 2006, the collection of tax and social contributions were integrated with a number of new measures to improve compliance and taxpayer services. In addition, the Law on Encouragement of Investments was amended to promote the high-tech sector, encourage industries that use renewable energy and create jobs in lagging regions. In the 2008 Doing Business report, Bulgaria ranked among the top ten reformers worldwide for streamlining procedures related to licensing, paying taxes and enforcing contracts. 21. Substantive progress was made on tax administration reforms in particular. The Bank supported Bulgaria’s efforts to achieve fiscal sustainability from the revenue side. The Revenue Administration 43

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Reform Project (FY04), launched under the previous CAS (FY03-05) and implemented throughout this CPS period, contributed to an efficient revenue collection system which contributed to improving the business environment. Tax and social contribution revenues increased by 5.4 percentage points of GDP between 2002 and 2007, despite substantial cuts in rates and changes to value-added tax (VAT) payment procedures following Bulgaria’s EU accession. Compliance rates improved for all tax types, improving the level playing field for private sector development and creating room to cut tax rates. Today, Bulgarian companies and individuals enjoy one of the lowest tax rates in Europe. In the Doing Business and Paying Taxes reports, Bulgaria was cited as one of the few countries that consistently improved tax policy and tax administration between 2004-2007. 22. The Bank contributed to the policy dialogue on investment climate reforms through a series of timely AAA work. Accelerating Bulgaria’s Convergence: the Challenge of Raising Productivity reveals that for Bulgaria to converge with EU income levels in 30 years, productivity growth needs to increase to 5 percent per annum—more than double the current rate—by promoting competitive product markets; enhancing flexibility of labor markets; narrowing the skills gap, and strengthening R&D to support innovation. The Regulatory Impact Assessment technical assistance, conducted jointly with the Ministry of Economy and Energy, highlighted the need for a national policy for regulatory reform that calls for institutionalization of national regulatory system, and the role of the private sector in boosting productivity. Many of the recommendations of the RIA TA were included in the Government’s Better Regulation Program 2008-2010. The Investment Climate Assessment (ICA) offered recommendations which the Government is also adopting, including performing a full assessment of Limiting Administrative Regulation and Administrative Control on Economic Activities. For an assessment of measures taken to improve labor market dynamics, please refer to paragraphs 46-47. Table 4: Country Outcome I – Indicator (ii): Human Capital and Skills Development Challenge

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

Upgrade human capital and skills for knowledge economy

• Increase in completion rates in grades 7, 10, & 12 • Reduction in number of students leaving compulsory education without a certificate by 7 percent • Improve measurement of quality of education through introduction of external assessment tests

Achieved

• Implementation of Matura Exam

Achieved

• Improved outcomes in national and international assessments

Achieved

23. The education reforms Bulgaria pursued during the CPS period focused on addressing the declining quality of education and the weak capacity to assess quality. The SIR DPL Series was central to this effort. As part of the prior actions for DPL I (FY07), pilot national assessments were introduced at the 4th and 7th grades, and the Ministry of Education, Youth and Science (MEYS) started to implement what turned out to be a successful National Strategy for the Introduction of Information Technologies in Bulgarian schools. Prior to DPL II (FY09), Bulgaria participated in international assessment tests such as PISA 2006 and 2009, PIRLS 2006 and TIMSS 2007. National reports were issued for all three assessments. In PISA, the 2009 text scores revealed an improvement in student performance in math and reading by 14 and 27 points respectively, compared with the 2006 scores. 24. A major breakthrough supported by the SIR DPL was the introduction of Matura, the secondary school leaving examinations as a secondary education credential. This created an opportunity to recognize the results of these examinations as an entrance criterion for higher education enrollment campaigns. The Matura examinations took place in June and September 2008, and in May 2009. The results to date on continued enrollment beyond secondary education are promising: the percentage of 18-24 years-old with only lower secondary education and not in school is down from 24 in 2004 to 16.3 in 2009. Moreover, dropout rates declined across all age groups between the 2004/05 and 2009/10 school years. 44

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) 25. By the end of the DPL series, Bulgaria strengthened its capacity to systematically supervise or monitor education quality. Thanks to the wealth of student assessment data now available, Bulgaria has been able to use the evidence to improve school and classroom quality and build institutional capacity for system-wide assessment of education quality. In 2008, increased EU financing for the Center for Control and Assessment of the Quality of Education (CKOKO) represented an important breakthrough, supporting the recruitment of new technical staff. These developments reflect that Bulgaria is well into the process of consolidating the capacity for monitoring student achievement and evaluating impact of reforms on education quality. Education reform needs to now expand to vocational and tertiary education—still with very low participation rates compared with EU counterparts—as well as lifelong learning to create the basis for future sustained productivity increases. Table 5: Country Outcome I – Indicator (iii): Employment Development Challenge Increase employment rate

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Increase in employment rate from 56 percent in 2005 to 60 percent in 2009 • Decrease in share of long-term unemployment to total unemployment by 10 percentage points

Largely Achieved

• Reduction in labor taxation

Achieved

• Limitation of social welfare benefits for working age beneficiaries without disabilities

Achieved

26. Strong labor demand in Bulgaria triggered big gains in employment for most of the CPS period. The employment rate increased from 58.6 percent in 2006 to 64 percent in 2008, before dropping to 62.6 in 2009 as a result of the crisis. Compared to the EU27 average, activity and employment rates remained low, and Bulgaria has significant untapped domestic labor reserves—particularly among the young and older workers. At the same time, labor productivity per hours worked, while increasing from 30.5 percent of the EU27 average in 2004 to 35.1 percent in 2009, remains the lowest in the EU. Moreover, the share of Bulgaria’s long-term unemployed as a share of the total unemployed—while declining steadily from 55.8 percent in 2006 to 43.5 percent in 2009—remains higher than that of the EU27. 27. Through the SIR DPL series, the CPS supported Government efforts to remove disincentives to employment creation. As part of the DPL reforms, the Government amended the Labor Code to increase flexibility of working time and fixed term and part-time contracts—a prior action in DPL I. The Government also amended the Social Insurance Code to lower employers’ contribution rate for pension insurance from 29 to 23 percent in January 2006. An additional reduction took place in 2007 and 2008. In 2009, the contribution rate was 18 percent of the payroll. To remove employment disincentives in the social assistance system, the Government also tightened social assistance eligibility: as of July 2006, eligibility for Guaranteed Minimum Income (GMI) for able-bodied working age beneficiaries was limited to a maximum of 18 months. The duration of GMI receipt was further reduced to 12 months as of July 2008, but recent changes aimed at harmonizing with EU practices will remove the limitation for receiving the GMI starting 2011. 28. The CPS contributed to labor market reform by introducing a new model of results-based active labor market programs, which will benefit from EU financing through the Human Resources Development Operational Program. The Social Investment and Employment Promotion (SIEP) project (FY03) helped create more than 930,000 days of temporary and permanent work - 33 percent above target. About 1,600 of the people employed under the infrastructure micro-projects were previously long-term unemployed. More than 700,000 people benefited from the small social infrastructure improvements and services on municipal and community level through the demand-driven subprojects.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Table 6: Country Outcome I – Indicator (iv): Transport Development Challenge Reduce high transport costs due to poor road infrastructure

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Improved road network condition from a baseline of only 37% Class II and 28% Class III roads in good condition in 2004 to 60% Class II and 50% Class III by end-2009

Not Achieved

• Establishment of reliable funding for road rehabilitation and maintenance

Achieved

29. Bulgaria’s overall transport policy is now aligned with the rest of the EU, but investments are still taking longer than envisaged by the Government. Implementation capacity needs to be strengthened and more work is needed to remove cumbersome and bureaucratic hurdles in investment implementation. 30. Road conditions in Bulgaria have started to improve, albeit with delays, with direct impact on road transport costs. Under the Road Infrastructure Rehabilitation Project (FY07) which remains under implementation, the Bank is supporting the Government define a prioritized roads investment program within its medium-term expenditure framework, develop capacity in the Road Infrastructure Agency in investment programming and implementation, and finance rehabilitation of selected primary and secondary roads to facilitate regional development and access to markets. Overall, the share of roads in good condition increased from 35 percent in 2004/05 to about 45 percent in 2009. This increase mostly benefited Class I roads (from 51 percent to 70 percent), and to a lesser extent Class II roads (from 37 percent to 38 percent), and Class III roads (from 28 percent to 40 percent). While this is lower than the CPS’ ambitious targets for Class II and III roads, this does reflect a logical prioritization of Class I roads, since they carry more traffic and suffered from underinvestment in the past. 31. Road asset management practices also improved, with the development of a road asset management system under the Bank’s road project. The system helps prioritize public spending on roads, evaluate efficiency and effectiveness of road programs, and monitor road conditions at a time when significant amounts of money are expected to be spent on roads. It also includes a new revenue generating mechanism through the introduction of a vignette system. Revenue from this vignette system is generating close to €100 million per year from road users, which represents a 50 percent increase over the vignette level in 2005. Country Outcome II: Fiscal Sustainability and Absorption of EU Funds Table 7: Country Outcome II – Indicator (i): Education Financing Development Challenge Reform financing of higher education

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• At least 50% of municipal schools receive funds using per student formula and have delegated budgets, therefore increasing accountability

Achieved

• Enactment of legislation to reform funding system and promote decentralization. • Implementation of school consolidation. • Increase in average number of students per school. • Increase in pupil-teacher ratio

Achieved Achieved Achieved Achieved

32. The 2007 and 2008 Budget Acts which introduced per capita financing for all municipal schools, triggered the largest consolidation of the Bulgarian school system in recent history. The SIR DPL series was central to Bulgaria’s efforts to improve the education system’s fiscal sustainability through the introduction of per capita financing, delegated budgets to schools and school-based management. Bulgaria’s rapidly shrinking school age population had been causing declining class sizes and very inefficient schools which could offer only limited schooling, and a school rationalization was needed both to improve education 46

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) quality and to improve efficiency. In the years before the 2007 Budget Acts, the average number of school closures hovered around 50 per year. This number rose to 90 school closures during the summer of 2007, and 311 closures during the summer of 2008. The school consolidation helped reverse the trend of declining student numbers in schools, with the number of students per school steadily increasing from 287 in 2007/08 to 307 in 2008/09 and 305 in 2009/10. The successful implementation of school optimization programs also resulted in a large adjustment in the number of pedagogical and non-pedagogical personnel. An estimated 30 percent of school personnel were laid off since the start of the DPL program. As a result, the student-teacher ratio in 2008/09 improved significantly for the first time in more than a decade, and is now estimated to exceed 15 across vocational and general education schools in grades 1-12. These new student-teacher ratios are comparable to the Organization for Economic Cooperation & Development (OECD) average at 16.3 in primary schools and 13.5 in secondary schools. 33. Provisions of per capita financing for municipal schools, delegated budget and school-based management continued to be reflected in the 2009 Budget Act. Today, all schools receive funds using per student formula and have delegated budgets. There is widespread unanimity across the political spectrum that a new law on school and pre-school education and preparation would tie together all elements of the financing and governance reforms, and ultimately boost the quality and accountability of the education system. Table 8: Country Outcome II – Indicator (ii): Health Financing Development Challenge Make health system financially sustainable

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Achievement of financial balance for National Health Insurance Fund (NHIF) based on actuarial projections* • Reduction of arrears in the health system by 50%

Achieved

• Improvement in contracting arrangements between NHIF and health care providers • Hospital consolidation is underway • Reform of payment system to the hospital sector • Establishment of a mechanism for quality assurance and control at all levels of the healthcare system

Partially Achieved

Not Achieved Achieved Not Achieved

* Actuarial calculations are not done, but balanced budget maintained between 2000-2007under HRSP.

34. Progress towards increasing the fiscal sustainability of health spending was mixed, given the politically difficult nature of health reforms. The DPL aimed to support the financial sustainability of the National Health Insurance Fund (NHIF) by trying to control growth of its main cost drivers. The NHIF was burdened by ineffective allocation of resources to hospitals and physicians with no ceilings for volume of services; a large hospital infrastructure that continues to grow; and rapid expenditure growth on pharmaceuticals. Supported by the Bank’s DPL series, the Government introduced important measures to contain growth of hospital spending, in particular through the introduction of annual ceilings. In the 2008 NHIF Budget Act, the fee-for-service open-ended payment was replaced with a new formula that allocates resources on a per capita basis with limits. Measures to improve the hospital budget allocation mechanism helped reduce arrears in the health system by more than 50 percent: arrears uncovered by assets declined from BGL 60.8 million in 2005 to BGL 19.6 million in 2008. But in 2009, the arrears increased to BGL 29.7 million. 35. The NHIF maintained its financial health and benefited from strong synergies between the DPL program and the health project. Administrative costs declined from 5.3 percent of its total budget in 2000 to 2.2 percent in 2009, and a balanced budget was maintained under the Health Sector Reform project (FY00). While the DPL program provided a policy framework to improve the health financing system, like pharmaceutical policy and restructuring of hospitals, the health project launched under the previous CAS and implemented throughout this CPS period, supported the implementation of these policies. A major achievement of the HRSP was the launch of a fully integrated information system for the NHIF in 2009 which directly links the payer with providers and users of services, thus improving efficiency and reducing administrative burden.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 36. The hospital masterplan finalized under the DPL was not adopted—and contrary to the plan’s recommendations, Bulgaria saw a rise in the number of hospitals. It was clear that the political will to implement these difficult reforms had been overestimated. The masterplan remains ready to be adopted and implemented. Other DPL-supported reforms included channeling major part of payments for hospital service through the NHIF, making it the single payer and removing the earlier system’s inconsistencies where hospitals received payments for the same service through several publicly-funded mechanisms. But this has not led to selective contracting. The DPL series also supported the accreditation of hospitals, but the quality assurance system including accreditation is weak and no significant improvements have been identified. Table 9: Country Outcome II – Indicator (iii): Social Protection Development Challenge Improve efficiency of social protection

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Decrease in number of households dependent on some form of social protection cash transfer by 7 percentage points • Decrease to the 2000 level the number of new disability pension recipients due to general sickness

Achieved

• Amendment of social assistance legislation to target eligibility on core risk groups

Achieved

• Reform medical disability assessment boards

Not achieved

37. Coverage of social protection in Bulgaria is high, albeit declining, and key social assistance programs (child allowances, heating allowances and the GMI program) are responding to the recent economic crisis. In 2010, 60 percent of the poorest households whose income dropped during the crisis were receiving at least one benefit from the Government’s social package, and more than 70 percent of households received one or more social protection transfers. 38. During the CPS period, the Government introduced several amendments to its social assistance program aimed at boosting targeting for two key anti-poverty programs—GMI and the heating allowance. They are by far the most pro-poor programs, with 64 percent of GMI and 73 percent of heating allowance benefits accruing to households in the first quintile and 54 and 53 percent, respectively, going to the poor. While the amendment of social assistance legislation was not a part of the DPL per se, the DPL II did support ex ante analysis of survey and administrative data pertaining to beneficiaries losing their benefits eligibility, which contributed to Government efforts to design targeted action plans to assist this group. 39. Between 2004 and 2009, the number of GMI beneficiaries declined steadily from approximately 128,000 to 36,000. As a result of the crisis, this number increased in 2010 to approximately 45,000. This increase was supported by the Bank, which took the position that the number of recipients served by the unemployment benefit program and income-tested social assistance programs should be allowed to grow to protect the new poor or unemployed and to allow these programs to fulfill their role as economic stabilizers. During the CPS period, the Bank was not involved in dialogue on disability and thus did not achieve results towards disability-related outcomes. Table 10: Country Outcome II – Indicator (iv): EU Funds Absorption Development Challenge Upgrade capacity for absorption of EU funds in infrastructure and sub-national level

Outcomes Sought by CPS

Status

• Of the EU funds to be managed by the Ministry of Regional Development and Public Works for the water and wastewater sector during the CPS, at least 50% would be programmed

Not achieved (project implementation ongoing)

Intermediate Indicators • EU grants committed to the municipalities where the Bank will assist with project preparation

Status Not achieved (project implementation ongoing)

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) 40. Transparent and efficient administration of EU funds was an important priority for both the EC and Bulgaria, but absorption of EU funds remained a challenge. In July 2008, the EC froze some €500 million in pre-accession funds because of concerns over corruption and organized crime. Later that year, the EC terminated the accreditation of two agencies responsible for PHARE7 funds management (at Ministry of Finance and Ministry of Regional Development and Public Works) as it was not satisfied with measures taken by the Government to address governance issues. This meant that Bulgaria would lose funds totaling approximately €220 million, not yet contracted under the PHARE program. It would also have to finance already contracted projects of about €340 million from its own sources. A portion of the suspended funds for roads projects were later unblocked in 2009, after Bulgaria took steps to improve procedures and auditing in the state road infrastructure agency. When the GERB-led Government took office in 2009, it pledged to accelerate Bulgaria’s absorption of EU funds to spur growth and investments. During the 2007-2013 programming period, Bulgaria is eligible to receive €6.7 billion in grants, of which it absorbed only €635 million by end 2009. 41. To support Bulgaria in overcoming the challenge of EU funds absorption, the CPS proposed a twopronged strategy to (i) improve the efficiency of public spending, especially in the social sectors through the DPL program, in order to create fiscal space; and (ii) support the Government in developing a project pipeline for high-priority investments and strengthen related institutional capacities at the central and local levels. Bank support in improving the efficiency of public spending was timely through the DPL program. With regards to developing a project pipeline and capacity-building, progress was limited due to slippages in delivery of projects that included technical assistance for EU funds absorption, and the very limited scope of these projects with respect to the way EU Funds had been targeted. These projects included the Social Inclusion Project (FY09), and the Municipal Infrastructure Development Project (FY09). The municipal project will prepare regional water and wastewater master plans for water companies across Bulgaria (with the exception of Sofia), and thus help identify priority investments and plan for their financing through the EU’s Operational Program for Environment. An earlier project, the Social Investment and Employment Promotion (SIEP) Project (FY03, FY07) supported capacity-building for national, regional and local stakeholders as well as the service provider sector for implementing projects under the EU’s Operational Program for Human Resources Development. SIEP created a menu of active labor market programs according to the rules and format for European Social Fund (ESF) financing. However, the bulk of EU funds were programmed to support transport, and very little progress was made in this area in absorption, and the Bank did not seek at the time to explicitly target this as an area of intervention. 42. On the AAA front, the Bank provided analytical support to Bulgaria’s efforts to strengthen the judiciary combat corruption—a key EU concern that led to the suspension of EU funds. The Judiciary Public Expenditure and Institutional Review assessed the efficiency and effectiveness of public spending on Bulgaria’s judiciary and proposed measures to introduce a strategic approach for budgeting of the judiciary and improve accountability and transparency. As a result, the judiciary’s 2008 budget request began introducing performance data, and this continued for the 2009 budget. In addition, in response to a request from the Prosecutor General, the Bank mobilized an IDF Grant to enhance the capacity of the Office of the Prosecutor General to combat corruption. The most recent EU report under the Cooperation and Verification Mechanism provided overall a very positive assessment of Bulgaria’s progress in this area, especially its fight against corruption and organized crime. 43. In addition, the Regional Development TA provided a forum to address strategic implementation issues that affect municipal absorption and efficient use of ERDF funds, with a particular focus on the OP Regional Development. Three how-to notes were produced on strengthening: (i) regional implementation structures and project selection criteria and processes; (ii) financing of municipal investments; and, (iii) strategic regional, district, and local development planning. A decision was taken in December 2008 to channel related financial support for regional development through DPL 3 rather than a free standing investment project to the Government’s designated organization for supporting municipalities—the Fund for Local Authorities and Governments (FLAG). However, it must be noted that this area as well has seen little progress in readiness for EU Funds absorption and the modest intervention by the Bank can be seen to have been too small to have had any major impact. PHARE, a pre-accession instrument, was the main channel for the EC’s financial and technical cooperation with countries of Central and Eastern Europe. 7

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Country Outcome III: Social Inclusion Table 11: Country Outcome III – Indicator (i): Health Services Development Challenge Improve access to quality health services

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Reduction in percentage of people who forego medical care for financial reasons by 5%

Not Achieved

• Reduction in informal payments • Restructuring of health care to ensure access and quality in underserved areas

Not Observable Partially Achieved

44. During the CPS period, Bulgaria made modest progress in advancing the agenda to bring healthcare within the reach of citizens. National programs were launched that aimed at including disadvantaged groups in monitoring and prophylactic activities. These programs comprised special mobile screening programs in poor communities, HIV/AIDS testing and provision of free medicines. In addition, the Government set up a fund at the Ministry of Labor and Social Policy (MLPS) to pay for hospital services to uninsured and socially vulnerable persons. Measures were also taken to reduce the number of people without insurance coverage. Pharmaceutical legislation was improved to ensure medicines are offered at competitive prices and that all insured citizens have access to the medicines that are fully or partially reimbursed. However, there was no progress in or perceived commitment to the need for hospital rationalization, and the hospital sector continued to consume a disproportionate share of health expenditures, notably on buildings. 45. The Bank supported Bulgaria’s health reforms through the SIR DPL series and Health Sector Reform Project (FY00), but implementation of pharmaceutical policies was weak. The DPL series proposed to support increased access to basic care by revising reimbursement policies for basic drugs, which were preventing vulnerable groups from obtaining them at affordable prices. By enabling the Government to procure drugs at cheaper rates, the new policies was expected to pass the cost savings to consumers, but ultimately it did not reduce overall pharmaceutical expenditures neither by the NHIF, nor the population as the new drug list included new and expensive drugs. The percentage of people who had foregone medical care for financial reasons increased from 20 to 29 percent between 2003-2007. The explanation for this trend is not clear, but may reflect aging and/or higher demands due to supply-side improvements. 46. Notable improvements were made in the outpatient care sector, where the system of GPs has played a gate-keeping role, but informal payments remain a problem. The HSRP substantially refurbished the outpatient care sector (with equipment and IT for the majority of Bulgaria’s primary care practices), and helped upgrade the hospital sector (through civil works and restructuring at two national and five municipal hospitals, and equipment leasing arrangements for nearly 100 hospitals). The HSRP also provided financing for 260 ambulances to expedite medical assistance in emergencies. Nevertheless, the percentage of people who reported giving a bribe to receive medical services remained largely unchanged between 2000 (7.2 percent) and 2008 (6.1 percent). Table 12: Country Outcome III – Indicator (ii): Social Inclusion Development Challenge Promote social inclusion

Outcomes Sought by CPS

Status

Intermediate Indicators

Status

• Increase in labor participation of youth, older unemployed and disabled

Largely Achieved

• Restructuring of ALMPs towards measures that promote more sustainable outcomes focusing on youth and older unemployed

Achieved

47. Employment rates for young and older workers in Bulgaria have risen in recent years, but remain below EU average for youth—24.8 percent in Bulgaria compared to 35.1 percent for the EU27 in 2009. Even though social inclusion were not explicit themes of the SIR DPL, the policies supported by the program were well placed to positively impact the poor by focusing on the skills gap vulnerable groups and enhancing employment prospects for individuals in low-quality subsidized jobs. Through the policy dialogue with the 50

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) Ministry of Education, Youth and Science, the DPL program supported a set of incentives and mitigating measures in the ministry’s budget so that municipalities consolidating schools could provide additional services to at-risk groups. The same applied to the ex ante and ex post assessments of changes in social welfare policies, which informed the development of employment activation programs for people losing social assistance eligibility. 48. The DPL supported measures to strengthen employment incentives in social assistance, helping reduce the number of GMI beneficiaries in a period of economic growth. Between 2007 and 2009, the number of GMI beneficiaries fell from 93,000 to 38,000. Under DPL2, the Government adopted the 2008 National Action Plan for Employment which continued restructuring active labor market policies (ALMP) to make them more demand-driven and focused on vulnerable groups. The restructured ALMP targeted the unemployed, inactive and discouraged persons, and gave employers incentives to employ ALMP beneficiaries. ALMPs also became more open to life-long learning, creation of sustainable jobs and wider participation of the private sector (instead of municipalities) as providers and financiers, and less prone to confining qualified workers in low-quality subsidized jobs. The Social Investment and Employment Promotion Project (FY03, FY07) contributed to the creation and testing of the operational framework for results-based ALMPs, some of which were then introduced in the mainstream system. Table 13: Country Outcome III – Indicator (iii): Poverty Development Challenge

Outcomes Sought by CPS

Reduce gap between urban and rural poverty

• Reduction in rural poverty from 29 percent in 2004 to 20 percent in 2009

Status

Intermediate Indicators

Status

Largely achieved

• Actions to improve local or community-led development to be determined after the completion of Regional Development AAA

Dropped (Regional Development SIL did not materialize)

49. In spite of significant decline in poverty across the country, Bulgaria’s rural population continues to face higher poverty rates than the urban population. In 2007, the incidence of poverty in rural areas was 6 percentage points higher than in urban areas—down from 13 percentage points differential in 2003. Although the magnitude of the decline in rural poverty was large, the rural population continues to face significantly higher poverty rates than the urban population. Challenges remain to overcome multiple barriers to employment, education and other public services and break the cycle of exclusion. 50. Supported by the DPL series, policies to tackle social exclusion have been introduced, in particular focusing on employment activation measures for disadvantaged job seekers. The Social Investment and Employment Project (FY03, FY07) was also designed to improve living standards in municipalities across the country where pockets of poverty were prevalent. The project targeted the poor and disadvantaged by supporting community-led infrastructure projects and provision of labor market services. More than 700,000 people benefited from the community infrastructure component, and more than 25,000 from the active labor market programs. Bank lending operations designed to reduce poverty and increase social inclusion were underpinned by the Programmatic Living Standards Monitoring Update. Data collected through the Multi-topic Household Survey (MTHS) is providing an update on Bulgaria’s living standards and poverty and baseline indicators for evaluating the Government’s social sector reforms, supported by the SIR DPL series and Social Inclusion Project (FY09). CPS Program Performance Rating 51. Overall the performance of the FY07-FY10 CPS program is rated moderately satisfactory. The program achieved substantive progress toward two key CPS outcomes—education and labor reforms—which were priorities on the national agenda and enjoyed strong ownership by the Government. Education and labor reforms were also at the heart of the SIR DPL series, the centerpiece of the CPS. In education, which was the most successful component of the DPL series, the introduction of financing reforms and school assessments contributed to positive results in enrollment and student performance. Labor market dynamics were also significantly enhanced with the introduction of a more flexible labor code and improved social protection to 51

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 increase incentives for employment generation. Employment during the CPS period was on an increasing trend until 2009, when it fell slightly with the onset of the global economic crisis. Similarly, Bulgaria made strides in reducing poverty and inequality, although the crisis may have reduced these gains. 52. The CPS program, however, made limited progress toward stabilizing public spending on health and increased absorption of EU funds. The health component proved to be the most challenging in the DPL program. Government ownership for politically difficult reforms such as hospital rationalization was overestimated, and looming elections in 2009 delayed action. Nevertheless, the CPS program did lay the foundation for future reforms. The DPL supported the development of a hospital masterplan that is ready for implementation. The introduction of a new IT system for NHIF under the HRSP also set the stage for improved governance and transparency in health spending. In terms of EU funds absorption, public sector capacity constraints and institutional weaknesses emerged as major obstacles to the preparation and implementation of projects for EU financing. These obstacles, combined with (i) slow decision-making and weak planning on the part of the Bulgarian Government and (ii) slippages and implementation delays in Bank projects with components on EU funds absorption, as well as a clear under-diagnosis of what would be needed to achieve this objective, hindered progress on this CPS outcome. By the end of the CPS period, resolving these constraints became a top priority for the Bulgarian Government, and the Bank was asked to shift its focus to providing technical assistance and advisory services to accelerate EU funds absorption in the infrastructure sector. Table 14: Summary of Assessments and Rating CPS Outcomes I. • • • • • • •

Sustained Increases in Productivity and Employment Increased flexibility in hiring and firing, working time, and part-time contracts (Achieved) Increase in completion rates in grades 7, 10, and 12 (Achieved) Reduction in number of students leaving compulsory education without a certificate by 7% (Achieved) Improve measurement of quality of education through introduction of external assessment tests (Achieved) Increase in employment rate from 56% in 2005 to 60% in 2009 (Achieved) Decrease in share of long term unemployment to total unemployment by 10 percentage points (Achieved) Improved road network condition from a baseline of only 37% Class-II & 28% Class-III roads in good condition in 2004 to 60% Class II & 50% Class III by end 2009 (Partially Achieved)

II. Fiscal Sustainability and Absorption of EU Funds • At least 50% of municipal schools receive funds using per student formula and have delegated budgets, therefore increasing accountability (Achieved) • Achievement of financial balance for NHIF based on actuarial projections (Achieved) • Reduction of arrears in the health system by 50% (Partially Achieved) • Decrease in number of households dependent on some form of social protection cash transfer by 7 percentage points. (Achieved) • Decrease to the 2000 level the number of new disability pension recipients due to general sickness (Not Achieved) • Of the EU funds to be managed by the Ministry of Regional Development and Public Works for the water and wastewater sector during the CAS, at least 50% would be programmed (Not Achieved) III. • • •

Social Inclusion Reduction in percentage of people who forego medical care for financial reasons by 5% (Not Achieved) Increase in labor participation of youth, older unemployed, and disabled (Achieved) Reduction in rural poverty from 29% in 2004 to 20% in 2009 (Partially Achieved)

Program Performance Rating: Moderately Satisfactory

VI. World Bank Group Performance World Bank Lending 53. Overall Bank performance during the CPS period was moderately satisfactory. The CPS was designed and implemented during the period when Bulgaria’s development agenda shifted from EU accession to accelerating convergence to EU living standards. These priorities underpinned the design of the CPS which appropriately centered on supporting Government efforts to boost productivity, generate jobs, improve fiscal efficiency and absorption of EU grants as well as foster social inclusion. The CPS maintained this focus 52

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) throughout the implementation period, and the dialogue with the Bulgarian authorities was further strengthened as the Bank positioned itself as a relevant development partner. The Bank pro-actively continued this dialogue through the transition between governments in 2009. Demand for Bank policy advice during the CPS period increased significantly, turning around a Bank-client relationship that had been previously difficult, to an exemplary one in the region. 54. The results framework was designed at a time when Bulgaria was experiencing sustained growth and in that context, the outcome indicators were reasonably realistic. But the anticipated outcomes in the health sector, traditionally a difficult sector, were probably ambitious. More consideration could have been given to the electoral cycle and its impact on reform and project implementation. The CPS design also could have given more consideration to two factors that constrained project implementation, particularly in connection with EU funds absorption: (i) capacity and institutional weaknesses; and (ii) time needed for Bulgaria to adapt to EU membership and the responsibilities that come with it. 55. In terms of lending, the portfolio during the CPS period consisted of a total of 14 operations (including three DPL operations for total commitment amount of US$500 million, and two GEF grants for the total amount of US$17.5 million) with net commitments totaling US$1,095.7 million equivalent. Six out of seven projects from the previous CAS closed during the CPS period, while the remaining in end March 2010. In FY07-FY10, three DPLs totaling US$500 million, four investment operations, and one supplemental financing operation entered the portfolio. Table 15: Bulgaria Portfolio Overview, FY07-FY10 Projects under Implementation* Net Commitments (US$ mln) Approved during FY (US$ mln): Disbursed during FY (US$ mln): Disbursement Ratio (investment) Proactivity Index Realism Index Projects at Risk Problem Projects

DPL Investment DPL Investment

FY07 10 568.0 344.6 150.0 194.6 194.6 153.2 41.4 33.1% 100% 0 0

FY08 9 418.0 57.6 57.6 17.9% 0 0

FY09 11 778.4 409.0 350.0 59.0 393.4 345.5 48 20.4% 0 0

FY10 6 431.9 118.7 118.7 21.8 21.8 9.7% 0 0

*Includes projects that closed during the FY.

56. The quality of the Bulgaria portfolio remained satisfactory until FY10, when the Government’s fiscal austerity resulted in reduced public investments, leading to implementation delays in World Bankfinanced projects. The Road Infrastructure Rehabilitation Project and TTFSE2 experienced a relatively slow start and faced unexpected bottlenecks involving the subsidiary agreement between the Ministry of Finance and the then National Road Infrastructure Fund and amendments in the Duty Free Trade Law. In 2010, two projects —Social Inclusion and the Road Infrastructure Rehabilitation—saw their ratings downgraded due to implementation delays. Projects from the previous CAS, in particular the Registration and Cadastre Project, Revenue Administration Reform Project, and Social Investment and Employment Promotion Project performed well, reaching and even exceeding some of their target indicators. 57. The quality of Bank projects at exit was satisfactory for all projects that closed during the CPS implementation period. IEG evaluations for the projects that exited the portfolio FY07-FY10, were either satisfactory or moderately satisfactory on outcome, borrower performance and Bank performance.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Table 16: IEG Project Ratings, FY07-10 Exit FY

Project

Theme

District Heating

District heating & energy

Registration and Cadastre

Central government administration

Wetlands Restoration (GEF)

General Agri/ Fish/ Forest

Health Sector Reform

Health

Revenue Administration Reform Project

Central government administration

Net Commit. Amnt (US$ mln)

IEG Outcome

Outcome % Satisfactory

IEG Overall Bank Perf.

IEG Overall Borrower Perf.

Net Disconnect

40.5

100%

33.9

100%

7.5

100%

66.8

100%

27.7

100%

58. Except for FY10, the CPS program maintained a high annual disbursement rate, which remained above the regional average most of the CPS period. Table 17: Annual Disbursement Ratio for Bulgaria and ECA Fiscal Year

Bulgaria

ECA

FY07

33.1%

18.8%

FY08

17.9%

18.2%

FY09

20.4%

17.8%

FY10

9.7%

18.6%

59. The FY07 lending program was delivered fully, but planned lending for FY08 slipped to FY09. EU membership posed additional challenges to Bulgarian institutions and their capacity to efficiently absorb the newly-available EU structural funds. As a result, the Government focused its efforts on setting up relevant institutions and procedures to effectively manage and absorb EU funds, which placed additional strain on limited institutional capacity and diverted attention from non-EU related priorities. This is likely to have affected the planned FY08 program which included SIR DPL2, Social Inclusion Project (SIP) and Municipal Infrastructure Development Project (MIDP) and led to delays in project preparation. The presentation of the SIP to the Board may have also been affected by time-consuming discussions between the Ministry of Finance (MoF) and Ministry of Labor and Social Policy (MoLSP) on issues of fiscal space and sectoral budgetary allocations. The delays in MIDP preparation were related to capacity constraints at the Ministry of Regional Development and Public Works (MRDPW, the need to adjust project design8 and delayed decisions on complementary EU financing. This led to cancellation of the PHRD Grant for the preparation of the MIDP, with only 10 percent of the grant amount spent. 60. The DPL program played a central role in delivering results in the CPS. The DPL stayed on track in supporting a structured dialogue on difficult social sector reforms in a complex environment. Different interests required arbitration within a multi-faceted coalition Government in the face of high expectations of rapid increases in living standards and improvements in social service delivery. Furthermore, in the light of the global financial crisis and the economic situation in the country, the Government and the Bank reviewed the FY09 lending program and agreed to re-allocate the resources originally intended for the Regional Development Project to DPL3. The preparation of DPL3 was accelerated and approved by the Board in May 2009. The project design was substantially changed at the request of the GoB. This warranted re-appraisal of the operation, which led to slippage of the Board date to the first quarter of FY10. 8

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) World Bank Analytical and Advisory Program 61. A front-loaded AAA program provided timely support in core policy areas and underpinning the design of lending operations. The AAA program strongly supported Government efforts to improve living standards and accelerate EU convergence. For example, the Accelerating Bulgaria’s Convergence: The Challenge of Raising Productivity report (FY07), and Judicial Public Expenditure and Institutional Review (FY08) facilitated discussion and consensus among stakeholders on the Government’s reform agenda. Some of the reforms and recommendations proposed in Accelerating Bulgaria’s Convergence report in education and R&D were included in the 2009 budget. The Bank responded quickly to Government priorities by preparing a results-based performance framework for modernizing the judicial system, which was followed up by the Judicial Public Expenditure and Institutional Review aimed at enhancing the judiciary’s capacity to justify better budget requests. A series of AAA work on regulatory reforms such as Product Market Regulation in Bulgaria: A Comparison with OECD Countries (FY07), Regulatory Impact Assessment (FY07) and Investment Climate Assessment (FY08) served as a basis of the Government’s Better Regulation Program. 62. The Bank’s analytical work was perceived as relevant, of high quality and impartial by the Bulgarian authorities and sought after by key stakeholders. Several reports were discussed at the highest Government level, including Accelerating Bulgaria’s Convergence report at the Council for Economic Policy and the Investment Climate Assessment report at the Council for Promotion of SMEs. The Government’s interest also extended to the regional studies and analytical work, including ACT-3, Red-to-Grey, and the yearly Doing Business Reports. All these reports generated broad media coverage—in print, radio, television and internet based—in the form of independent reporting, interviews and dedicated presentations. Demand for the Bank’s analytical services continued to outstrip the Bank’s ability to deliver. 63. The AAA program was also instrumental in launching a dialogue with the new Government in 2009 and helped position the Bank as an informed partner for reforms during the transition. As part of the engagement process, the Bank produced a set of 16 policy notes and presented them to the Council of Ministers within two months of the Government taking office. The policy note series built on the work throughout the CPS period and served as a basis for continued policy dialogue in the areas of: (i) economic management; (ii) business environment; (iii) infrastructure development; and (iv) human development and social cohesion. The policy notes aimed to both support the new Government in developing its own program and sector strategies, and to serve as a basis for setting priorities for the Bank’s future work program in Bulgaria – to be agreed on in a subsequent CPS. Table 18: Analytical and Advisory Program Delivered FY 2007

2008

2009

2010

AAA Product - Programmatic Poverty Monitoring - Accelerating Bulgaria’s Convergence: The Challenge of Raising Productivity - Energy sector TA - Institutional Fiduciary Assessment - Investment Climate Assessment - Regional development TA - Programmatic Poverty Monitoring - Energy Sector TA - Investment Climate Assessment - Judicial Public Expenditure & Institutional Review -

Justice Sector Modernization TA Regulatory Impact Assessment TA Product Market Regulation Report Global Road Safety Facility: Road Safety Grant IDF: Strengthening Anti-corruption Capacity in the Office of Prosecutor General

- Accounting &Auditing Report on the Observance of - Standards and Codes and Corporate Governance ROSC - GIS Implementation TA - Catastrophe Insurance Pool TA

Programmatic Poverty Monitoring Energy Sector TA Forest Sector Policy Note Railways Policy Note PFM: Public Expenditure Review for Agriculture Regulatory Impact Assessment II – ESW Regulation of Renewable Energy (ESMAP) TA PF Policy Dialogue HD Policy Notes

Performance-Based Budgeting Impact Evaluation TA Coastal Pollution Reduction Consumer Protection in Financial Services TA

Set of 16 Policy Notes for new Government Customs Reform TA School Autonomy ESW Poverty and Social Policy Monitoring

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 IFC Lending 64. IFC continued its operations in Bulgaria during the CPS period, as the ease of doing business improved, foreign direct investment inflows increased, and private sector financiers stepped in to provide the necessary financing. Nevertheless, due to the country’s accession to the EU, IFC’s engagement has been selective and only if there was a clear strategic rationale. Further to that the focus has centered on areas such as infrastructure, agriculture and renewable energy. During the CPS FY07-10, IFC financed about US$102 million or about 50 percent of FY04-06 IFC’s commitments. IFC invested in 6 projects in financial markets, general manufacturing, energy, oil and gas and agriculture. 65. Overall, IFC’s investments reached USD 371.9 million as the biggest commitment amounted to USD 126 million for the construction of a renewable energy farm in the Municipality of Kavarna (AES Kavarna). This is a project which will considerably improve the renewable energy capabilities of the county and contribute to its sustainable development goals. The wind farm has increased Bulgaria’s electricity output from renewable energy by approx 330 GWh per annum, thereby contributing to Bulgaria progress towards the 16 percent target by 2020. It will decrease the country’s dependence on highly-polluting coal-lignite fired generation and nuclear generation and in doing so save up to approximately 300,000 tons of carbon emissions per year. An indirect intrinsic impact of the project, stemming from the size of the transaction, would be the positive influence on Bulgaria’s ability to attract foreign investment in the renewable energy sector and position Bulgaria as an alternative emerging market destination for wind power investments. The other noteworthy project is an investment supporting the expansion of Advance Terrafund (ATERA), a company investing in agricultural land in Bulgaria promoting land consolidation. IFC’s investment will enable the company to achieve its expansion plans, thus further supporting the development of the real estate and farming markets in the country and addressing the urgent need for consolidation of agricultural land. Farmland consolidation is expected to create opportunities for investment and growth of efficient, modern farming companies, which, in turn are key to a competitive Bulgarian agriculture. A key investment, although not that big is a CPL Cleaner Production loan to Drujba Ad, Bulgaria. It is a CP investment involving which will translate to energy cost savings (electricity and gas) of €286,000 p.a. Furthermore, the project is estimated to reduce GHG emissions by 8,100 tons carbon dioxide equivalent p.a. Table 19: IFC Lending Operations (FY07-FY10) PROJECT STATUS

TOTAL NET CMT (US $ mln)

Financial Markets

ACTIVE

19.1

Drujba - Bucha

Manufacturing

ACTIVE

32.5

26778

Drujba CPLP

Manufacturing

ACTIVE

2008

26737

Atera

Agribusiness

ACTIVE

21.6

2009

26936

AES Kavarna

Energy

ACTIVE

126

2009

26180

Melrose II Expansion

Oil and Gas

ACTIVE

CMT YEAR

PROJECT NUMBER

2007

25325

GED Eastern Fund II

2009

26312

2009

NAME

DEPARTMENT

IFC Analytical and Advisory Program 66. IFC’s Advisory Services consisted of one project under the Advisory Services in Public Private Partnerships Department. The mandate was signed in 2006 when Bulgaria was not yet a member of the EU with the aim of restructuring the country’s water sector by introducing Private Sector Partnership (PSP) and implementing one pilot PPP project. The expected mobilized investment for the country is about US$ 220 million. Following the main principles of IFC’s recommendations while working on the transaction, the Government of Bulgaria decided to modify the existing Water Law and other related legislation rather than to adopt entirely new Water Companies’ Law, thus opening the gates of private sector participation in the water sector. This process has taken longer than expected and the project witnessed changes in the Government, which additionally delayed it. IFC extended its Financial Advisory Services Agreement and is now working on the project at full speed, currently in the process of engaging external legal and accounting consultants. The transaction’s foreseen closing date is December 2011. 56

Annex 2: Bulgaria CPS Completion Report (FY07-FY10) VIII. Lessons Learned and Looking Ahead 67. The CPS could have taken into account Bulgaria’s capacity constraints and scaled back on design and delivery. While the quality of projects implemented during the CPS period were consistently satisfactory, the delivery of some projects experienced delays. These delays can be attributed, among other factors, to limited institutional capacities exposed in the first year of EU accession which brought for Bulgaria substantially increased demands on policy formulation and coordination with the EC and EU partners. Bulgaria also gave priority on setting up EU related institutional structures—possibly at the cost of delaying World Bank project preparation designed to support Bulgaria in the absorption of EU funds. However, the close relationship with the Bulgarian Government has enabled the Bank to maintain its dialogue on the CPS program and carry through on delivery. 68. Boosting EU funds absorption remains a key priority and the Bank must continue to align its strategy to support EU integration. By the end of the CPS period, it became evident that Bulgaria was under-spending its EU grant allocation, hindered by weak institutions and administrative capacities. It is clear now that the CPS seriously underestimated the extent of institution-building that would be needed to achieve this objective and focused its attention on creating fiscal space rather than capacity building. Addressing these constraints emerged as a top priority for both the Government and Commission, particularly with the onset of the crisis, when Bulgaria began to face fiscal constraints. The Government turned to the Bank to restructure existing projects to focus future support on improving capacity to plan for and implement EU-funded projects. This renewed focus on accelerating EU funds absorption is likely to continue through the next programming cycle for 2013-2020. This will require the Bank to coordinate closely with the Commission and other IFIs supporting Bulgaria to leverage synergies and avoid duplication. 69. Knowledge and advisory services must be the primary vehicle for World Bank support in an EU member state with access to significant amounts of grant resources. Throughout CPS period, lending remained modest while demand for policy advice outstripped the Bank’s ability to deliver. The Bank’s value added was clearly perceived to be in the area policy reforms and institutional strengthening rather than financing. Given the resource constraints in the Bank, future lending in Bulgaria should serve as complementary financing in areas where no EU funds are available or where Bank financing is leveraging other resources or fostering innovation. 70. Refors in Bulgaria need clear demonstration of commitment and ownership before any international attempt to underpin such reforms financially. The Bank has contributed in very significant way to the debate on reforms in Bulgaria, but has not always waited for clear signs of commitment before proceeding to provide support to such reforms. In education, for example, there was a strong response to the proposals for reform, and these then proceeded to be implemented with great success. In the health sector, in contrast, there was no clear commitment to the reforms supported in the DPL program, and there was mixed results in this sector. This CPS shows clear lessons for the Bank as it considers future support to reforms in Bulgaria, where the agenda remains significant.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Attachment 1 IBRD Planned and Actual Lending Operations (FY07 - FY10) COMPLETION REPORT

CPS PLANS (May 16, 2006) FY 2007

FORESEEN

US$ mln. equivalent

ACTUAL

Development Policy Loan I (DPL I)

150.0

Actual

150.0

Infrastructure I SIL (Roads)

100.0

Actual

122.5

Trade and Transport Facilitation in SE II SIL

Actual

52.8

Additional: Social Investment and Employment Promotion (SIEP) supplemental financing Subtotal 2008

Subtotal

300.0

19.3 344.6

DPL II

150.0

Moved to FY09

---

Municipal Infrastructure SIL

100.0

Moved to FY09

---

50.0

Moved to FY09

---

Social Inclusion SIL Subtotal 2009

US$ mln. equivalent

DPL III

150.0

Regional Development SIL Infrastructure II SIL (Railways)

Subtotal

300.0

50.0 100.0

Actual

200.0

Dropped (US$50 million re-allocated to DPL III)

---

Postponed for next CPS*

---

DPL II (DDO) (See FY08 above)

Subtotal

300.0

2010

Total FY07-FY09

900.0

59.0

Subtotal

409.0 118.7

Subtotal

118.7

Total FY07-FY10

872.3

* Railway Infrastructure Rehabilitation SIL (up to EUR70 mln) scheduled for Board presentation on May 17, 2011.

150.0

Social Inclusion SIL (See FY08 above)

Municipal Infrastructure Development SIL (See FY08 above) Subtotal

---

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

Attachment 2 IBRD Planned and Actual Analytical and Advisory Program (FY07 - FY10) CPS PLANS (May 16, 2006) FY 2007

COMPLETION REPORT

Product

Status

Programmatic Poverty Monitoring Accelerating Bulgaria’s Convergence: The Challenge of Raising Productivity Energy sector TA Institutional Fiduciary Assessment Investment Climate Assessment Regional development TA IDF: Capacity Building for Quality Improvement and Modernization of Education System

Actual Actual

2008

Programmatic Poverty Monitoring Energy Sector TA Public Finance Management*

Actual Actual Actual Additional Actual Products: Investment Climate Assessment Judicial Public Expenditure and Institutional Review Accounting and Auditing Report on the Observance of Standards and Codes and Corporate Governance ROSC GIS Implementation TA Catastrophe Insurance Pool TA

2009

Programmatic Poverty Monitoring Energy Sector TA

Actual Actual Additional Actual Products: Forest Sector Policy Note Railways Policy Note Performance-Based Budgeting PFM: Public Expenditure Review for Agriculture Impact Evaluation TA Coastal Pollution Reduction Consumer Protection in Financial Services TA

2010

Actual Actual Actual Actual Additional Actual Products: Justice Sector Modernization TA Regulatory Impact Assessment TA Product Market Regulation Report Global Road Safety Facility: Road Safety Grant IDF: Strengthening Anti-corruption Capacity in the Office of Prosecutor General

Additional Actual Products: Regulatory Impact Assessment II – ESW (GoB costsharing) Regulation of Renewable Energy (ESMAP) TA PF Policy Dialogue HD Policy Notes Set of 16 Policy Notes for new Government Customs Reform TA School Autonomy ESW Poverty and Social Policy Monitoring

*This task resulted in two separate outputs/tasks in FY09: (i) Performance-based Budgeting TA; and (ii) PFM: Public Expenditure Review for Agriculture ESW.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Attachment 3 IFC Lending Operations and Analytical and Advisory Program (FY07-10) Lending Operations

DEPARTMENT

PROJECT STATUS

TOTAL NET CMT (US$ mln)

GED Eastern Fund II

Financial Markets

ACTIVE

19.1

26312

Drujba - Bucha

Manufacturing

ACTIVE

32.5

2009

26778

Drujba CPLP

Manufacturing

ACTIVE

2008

26737

Atera

Agribusiness

ACTIVE

21.6

2009

26936

AES Kavarna

Energy

ACTIVE

126

2009

26180

Melrose II Expansion

Oil and Gas

ACTIVE

CMT YEAR

PROJECT NUMBER

2007

25325

2009

NAME

Analytical and Advisory Program

PROJECT NAME Bulgaria Water

APPROVAL FY Â 2007

STATUS ACTIVE

AREA Infrastructure - Water sector

Intermediate Indicators

Outcomes at End of CPS Period

OVERARCHING OBJECTIVE: SUCCESSFUL EU INTEGRATION & CONVERGENCE

Outcomes Sought by CPS

• Increased flexibility in hiring and firing, working time, and part-time contracts

• Amendment to Social Insurance Code to lower pension insurance contribution rate • Amendments to Labor Code to introduce flexibility in hiring and firing, working time, and part-time contracts. • Pension contribution rate is reduced in 2006 from 29 to 23 percent. Contribution rate was further reduced to 22 percent in 2008 and 18 percent in 2009. • Labor Code is amended in 2006 to introduce greater flexibility in working time and guarantee equal rights of part-time and full-time employees. • Rigidity of employment index falls from 23 in 2006 to 19 in 2010, according to Doing Business 2010. Difficulty of hiring index also went down from 28 in 2006 to 17 in 2010. Other indices (rigidity or hours worked, difficulty of redundancy or cost of redundancy) remain stable over this period. • Unemployment declines until onset of crisis. Unemployment rate (for ages 15-64) fell from 9 percent in 2006 to 5.7 percent in 2008. Due to the economic crisis, this figure climbed up to 6.9 percent in 2009.

- Continued reduction of average unemployment rate from 11.5 percent in 2005 to less than 10 percent in 2009

- Improved competitiveness of the economy

- Attain growth rates of 5.5 - 6 percent per year in 2007-13

Country Development Goals:

COUNTRY OUTCOME: SUSTAINED INCREASES IN PRODUCTIVITY AND EMPLOYMENT

Improve business environment and labor market dynamics

Development Challenges

*The results matrix and anticipated outcomes were prepared during a period of economic growth in Bulgaria. Therefore, some of the outcome indicators related to labor market, social protection and poverty fall short of target due to the global economic crisis which affected Bulgaria.

AAA: • PFPRII/Accelerating Bulgaria’s Convergence: the Challenge of Raising Productivity • Regulatory Impact Assessment TA • Investment Climate Assessment • Accounting and Auditing Report on the Observance of Standards and Codes • Consumer Protection and Financial Capability Diagnostic Review

Lending: • SIR DPL series • Road Infrastructure Rehabilitation Project (RIRP) • Second Trade and Transport Facilitation Project (TTFSE2) • Social Investment and Employment Promotion Project (SIEP)*

WBG Instruments

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

Attachment 4: BULGARIA: CPS COMPLETION REPORT (FY07-FY10) RESULTS MATRIX*

Outcomes Sought by CPS

• Increase in completion rates in grades 7, 10, and 12 • Reduction in number of students leaving compulsory education without a certificate by 7 percent • Improve measurement of quality of education through introduction of external assessment tests (quantitative targets to be determined during preparation of HD DPL)

Development Challenges

Upgrade human capital and skills for knowledge economy

• Enrollment rises over the years, especially among older students, while dropout rates fall.  Grades5-8 (ages11-14): net enrollment rates declined between the 2004/05 and 2008/09 school years by 2.2 percent, but this declining trend was reversed with net enrollment rates increasing by 4 percentage points to 82. 4 percent in 2009/10. Moreover, dropout rates for grades 5-8 fell marginally from 3.5 to 3.3 percent during the same period (after spiking at 4.2 percent in 2006/07).  Grades 9-12 (age 15-18): net enrollment rates rose from 77.3 percent in 2004/05 to 78.6 percent in 2009/10, while dropout rates declined from 2.8 percent in 2004/05 to 1.9 percent in 2008/09.  For 18+ year old: net enrollment rates (in vocational/ professional schools) increased from 0.3 percent in 2004/05 to 0.8 percent in the2009/10 school years, while dropout rates fell from 2.8 to 2.3 percent in the same period. • Early school leaving is down. Percentage of 20-24 year olds with only lower secondary education not in school fell from 24 in 2004 to 16.3 in 2009 (Source: Eurostat data). Between 2004/05 and 2008/09 school years, the number of “school leavers” decreased across all education levels:  For grade 1-4, this figure was 2.2 percent;  For grades 5-8, 3.3 percent;  For grades 9-12, 1.9 percent.

• Implementation of Matura exam • Improved outcomes in national and international assessments

• National and international assessment tests introduced across educational system.  Matura Examinations: implemented nationally in June 2008, September 2008. and May 2009. Data is insufficient to compare results and report progress. Since the 2007/08 school year, national tests were administered for fourth, fifth and sixth grades together with state school leaving examinations.  National Assessments: Ministry of Education, Youth & Science conducted census-based 4th grade national assessment for the second time in May 2008, and also census-based 5th grade test for the first time. The tests produced baselines to track progress. National Reports on these national tests were available in 2008 and 2009, and technical seminars with teachers and principals throughout the country were organized by MES to disseminate and discuss results.  International Assessments: Bulgaria participated in PISA 2006 and 2009, PIRLS 2006 and TIMSS 2007. National Reports have been issued for each round of the three. In PISA, Bulgarian students’ performance improved between the 2006 and 2009 testing period: math and reading scores increased by 14 and 27 points respectively. Moreover, the performance of the poorest 20 percent of students was at par with the rest of the population.

Outcomes at End of CPS Period

Intermediate Indicators

WBG Instruments

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

 Of all road classes, the share of roads in good condition increased from 35 percent in 2004/5 to about 45 percent in 2009.  This increase mostly benefited Class I roads (from 51 percent to 70 percent).  Class II roads improved, though to a lesser extent (from 37 percent to 38 percent),  Class III roads also improved (from 28 percent to 40 percent). • Revenue from vignette system is generating close to €100 million per year from road users, which represents a 50 percent increase over the vignette level in 2005.

• Road conditions improve with direct impact on road transport costs, albeit with delays, under Road Infrastructure Rehabilitation Project. In addition, several road rehabilitation programs have been successfully implemented.

• Employment rate rises until onset of economic crisis. Employment rate for15-64 years old increased from 58.6 percent in 2006, to 61.7 percent in 2007 and 64 percent in 2008. Due to the crisis, this figure declined to 62.6 in 2009. • Long term unemployment gradually declines. Share of long-term unemployment in total unemployment fell steadily from 55.8 percent in 2006 to 43.5 percent in 2009 (albeit spiking in 2007 to 58.9 percent.)* • Eligibility for social assistance eligibility is tightened: as of July 2006, eligibility for GMI for able-bodied working age beneficiaries was limited to a maximum of 18 months. The duration of GMI receipt was further reduced to 12 months as of July 2008.

Outcomes at End of CPS Period

WBG Instruments

* The economic crisis led to many new redundancies, resulting in an increase in the number of short-term unemployed, while the number of long-term unemployed remained stable, but slowly growing.

- Improving absorption rate of EU funds

- Maintain public expenditures as share of GDP at less than 40 percent

- Macroeconomic stability with inflation at 5.0 percent (period average) in 2005 to 3.3 percent in 2007-09

Country Development Goals:

COUNTRY OUTCOME: FISCAL SUSTAINABILITY AND ABSORPTION OF EU FUNDS

• Establishment of a reliable funding for road rehabilitation and maintenance

• Improved road network condition from a baseline of only 37 percent Class-II & 28 percent Class-III roads in good condition in 2004 to 60 percent Class II & 50 percent Class III by end 2009.

Reduce high transport costs due to poor road infrastructure

II.

• Reduction in labor taxation (see actions above) • Limitation of social welfare benefits for working age beneficiaries without disabilities

• Increase in employment rate from 56 percent in 2005 to 60 percent in 2009 • Decrease in share of long term unemployment to total unemployment by 10 percentage points

Increase employment rate

Intermediate Indicators

Outcomes Sought by CPS

Development Challenges

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

Reform financing of education system

Development Challenges

• At least 50 percent of municipal schools receive funds using per student formula and have delegated budgets, therefore increasing accountability

Outcomes Sought by CPS • Enactment of legislation to reform funding system and promote decentralization. • Implementation of school consolidation. • Increase in average number of students per school. • Increase in pupil-teacher ratio.

Intermediate Indicators Lending: • SIR DPL series • Municipal Infrastructure Development Project • Revenue Administration Reform Project* • Health Sector Reform Project* • Social Investment and Employment Promotion Project (SIEP)*

• 2007 Budget Act introduces per capita financing for all municipal schools. Since 2007, two consecutive governments have been trying introduce a new law on school and pre-school education, reflecting all recent reforms, including per capita financing, delegated budgets and school-based management. To date, no draft was passed by Parliament. The legal framework is updated through adoption of new by-laws and amendments to the existing People’s Education Act. • School consolidation accelerates. More than 100 schools closed in 2007 and over 300 in 2008. During 20072009, the number of school closures surpassed significantly the total number of schools closed in the preceding 5 years. However, 2009 saw a significant drop in school closures as potential for further optimization reached its limits and “protected” schools were introduced to ensure access to education was not impaired by school rationalization efforts of local governments. • Number of students per school increases with school consolidation. The average number of students per school followed a steady negative trend until the 2007/08 school year: number of students decreased from 304 in 2004/05 to 287 in 2007/08. Following successful implementation of school optimization programs, the trend reversed with number of student per school reaching 307 in 2008/09 and 305 in 2009/10. • Student-teacher ratio in public schools rises across all grades from 12 in 2005/06 school year to 12.7 in 2008/09 and 13 in 2009/10. Disaggregated by levels, the studentteacher ratio in 2009/10 is estimated at 18.1 in primary schools and 11.3 in secondary schools.

Trust Fund: • IDF Grant “Capacity Building for Quality Improvement and Modernization of Education System”

AAA: • Accelerating Bulgaria’s Convergence: the Challenge of Raising Productivity • Public Finance Management Update / Performance Based Budgeting • Impact Evaluation TA • Regional Development TA • Judiciary Public Expenditure and Institutional Review • Accounting and Auditing Report on the Observance of Standards and Codes • Forest Policy Note

WBG Instruments

Outcomes at End of CPS Period

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Make health system financially sustainable

Development Challenges

• Achievement of financial balance for NHIF based on actuarial projections • Reduction of arrears in the health system by 50 percent

Outcomes Sought by CPS • Improvement in contracting arrangements between NHIF and health care providers • Hospital consolidation is underway • Reform of payment system to the hospital sector • The establishment of a mechanism for quality assurance and control at all levels of the healthcare system

Intermediate Indicators • Health sector arrears decline, before rising again in 2009. Between 2005 and 2008, arrears uncovered by assets declined from BGL 60.8 million to BGL 19.6 million. By 2009, these increased to BGL 29.7 million. • NHIF’s financial health improves. Administrative costs were reduced from 5.3 percent in 2000 to 2.2 percent in 2009 and operational surplus reached about BGL 240 million in 2009 budget law. • NHIF-healthcare provider contracting arrangements is enhanced by (i) establishing budget caps per hospital, and (ii) launch of a fully integrated information system for the NHIF in 2009. • Restructuring needs are identified but hospital consolidation is delayed due to political considerations. Master plan for health facilities was developed with Bank support, and the GERB Government is using it as a basis for rationalizing the hospital system—albeit on less ambitious terms. The one action taken by the NHIF is to require a hospital or service to be accredited for one year before receiving an NHIF contract. In 2010, there were 7 fewer hospital contracts than the approx. 350 signed in 2009. • Payment systems are marginally improved by allocating funds based on population per region. • All hospitals are accredited. However, the quality assurance system including accreditation is weak and no significant improvements have been identified. • Savings of about 5-10 percent estimated as of 2009 for both inpatient and outpatient care as a result of new IT system developed under Bank’s health project. It contributes to quality by allowing the insurance fund to deter providers from making unnecessary prescriptions and referrals.

Outcomes at End of CPS Period

WBG Instruments

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

• Of the EU funds to be managed by the Ministry of Regional Development and Public Works for the water and wastewater sector during the CAS, at least 50 percent

Upgrade capacity for absorption of EU funds in infrastructure and sub-national level

Outcomes at End of CPS Period

• Programming target for EU funds in the water and wastewater sector does not materialize. In FY09, Government requested changes in scope of the Municipal Infrastructure Development Project. Under the revised scope, Bank loan will no longer directly prepare projects eligible for EU grant financing. Instead, project will support preparation of master plans for regional water companies across Bulgaria (except for Sofia which has a concession with a private operator). This will help identify priority investments and plan for their financing, including grants from the EU. • Local capacity built for EU funds application. The Social Investment and Employment Promotion Project helped develop local capacity for applying for EU funds, and created a menu of active labor market programs directly eligible for ESF financing.

(MTHS).** • Several amendments are introduced to Social Assistance Programs, helping to boost targeting for two key antipoverty programs. About 85 percent of the main anti-poverty program goes to the bottom quintile, making it among the best targeted program internationally. • Bank was not involved in dialogue on disability during the CPS period.

• Social transfers decline prior to onset of economic crisis. Coverage of households by any type of social transfer decreased from 76.2 to 71.1 between 2003 and 2007

- Reduced inequality based on Gini indicator and urban/rural gap in living standards

- Continued reduction in poverty levels

Country Development Goals:

COUNTRY OUTCOME: SOCIAL INCLUSION

• EU grants committed to the municipalities where the Bank will assist with project preparation

• Amendment of social assistance legislation to target eligibility on core risk groups. • Reform medical disability assessment boards

Intermediate Indicators

WBG Instruments

** As a result of the economic crisis, the Bank took the position that the number of recipients served by the unemployment benefit program and income-tested social assistance programs should be allowed to grow to protect the new poor or unemployed and to allow these programs to fulfill their role as economic stabilizers.

III.

• Decrease in number of households dependent on some form of social protection cash transfer by 7 percentage points. • Decrease to the 2000 level the number of new disability pension recipients due to general sickness.

Improve efficiency of social protection

would be programmed.

Outcomes Sought by CPS

Development Challenges

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

• Reduction in percentage of people who forego medical care for financial reasons by 5 percent

• Increase in labor participation of youth, older unemployed, and disabled

Promote social inclusion

Outcomes Sought by CPS

Improve access to quality health services

Development Challenges

• Restructuring of ALMPs towards measures that promote more sustainable outcomes focusing on youth and older unemployed

• Reduction in informal payments • Restructuring of health care to ensure access and quality in underserved areas

Intermediate Indicators

• Labor force participation steadily improves. For youth (15-24), this figure remained constant at 28.9 percent in 2006 and 2007, went up to 30.1 percent in 2008 but fell slightly in 2009 to 29.5 percent due to the crisis. For older workers, this increased steadily from 43 percent in 2006 to 49.2 percent in 2009. • ALMP is restructured to focus on workers with difficulty reentering the labor market through individual action plans. In 2008, the Government adopted an updated Employment Strategy 2008-2015. Together with the annual employment action plan, this increased focus of ALMPs on training and retraining, on-the-job training, apprenticeship, greater private sector participation as well as execution of big infrastructure projects to enhance employability and get closer to the EC target of 70 percent employment.

Lending: • Health Sector Reform Project* • SIR DPL series • Social Investment and Employment Promotion Project (SIEP)*

• The percentage of sick people who report foregoing medical treatment for financial reasons increases from 20 to 29 percent between 2003 and 2007 (MTHS). • Pharmaceutical policy legislation enacted in 2007 improves access to drugs. It allows for regulations that will reduce the reimbursement rate for basic drugs and a new Positive Drug List was introduced in 2009. • Primary health services expands to cover previously unserviced areas under the Health Sector Reform Project. Emergency care system was improved, increasing access in remote areas. • Undocumented or under-the-table payments amount to more than BGL 75 million in 2006. This is based on a small OSI survey offering a snapshot of a difficult-tomeasure indicator. No follow-up data is available to measure trends. AAA: • Programmatic Poverty Monitoring • Regional Development TA

WBG Instruments

Outcomes at End of CPS Period

Annex 2: Bulgaria CPS Completion Report (FY07-FY10)

Outcomes Sought by CPS

• Reduction in rural poverty from 29 percent in 2004 to 20 percent in 2009

Development Challenges

Reduce gap between urban and rural poverty

• Actions to improve local or community led development to be determined after completion of Regional Development AAA.

Intermediate Indicators • Poverty rate is halved between 2003-2007 to 10 percent, but urban-rural gap persists. By 2007, Bulgaria achieved the objective of bringing rural poverty to below 20 percent—from 27.8 percent in 2003 to 14.3 percent in 2007. Urban poverty rate also fell from 16.5 percent in 2003 to 8.3 percent in 2007. However, simulations suggest that overall poverty headcount for 2009 increased by 2 percent from 1012 percent due to the crisis. • Jobs created under Social Investment and Employment Promotion project which invested in social infrastructure and community microprojects in poor areas – 712,000 beneficiaries, 730,000 mandays of temporary work. • Regional Development TA “how to” notes is delivered in August 2007. GoB initiated the preparation of the Regional Development project (RDP) measures based in part on the Regional Development TA. In December 2008, a decision was taken to channel RDP-related financial support through DPL 3, rather than a free standing investment project.

Outcomes at End of CPS Period

WBG Instruments

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Annex 3: CPS Consultations

ANNEX 3: CPS CONSULTATIONS 1. The CPS was developed in close partnership with the Government, consultations with national stakeholders and collaboration with the European Commission (EC) and international partners. CPS objectives, principles and pillars were jointly developed with the Government and widely endorsed by a broad range of stakeholders and partners. The CPS preparation process included (i) senior and technical level meetings with all respective sector ministries, under the coordination of Ministry of Finance; (ii) outreach, dialogue and consultation with national stakeholders including Parliament, political parties, private sector and civil society representatives through individual meetings, web consultations and a public discussion event; and (iii) continued dialogue with the EC and international partners. 2. The CPS reflects Government priorities related to World Bank Group engagement with Bulgaria. CPS discussions were launched following the August 2010 country visit of the World Bank Group President. At the occasion of this visit, a Memorandum of Understanding (MOU) to step up cooperation in the development of Bulgaria’s infrastructure was signed by the World Bank Group President and Bulgaria’s Prime Minister. The MoU envisions a stronger World Bank role in supporting Bulgaria to better tap into European Union funds for infrastructure investments. Based on this MoU, the CPS features were jointly developed with the Government – emphasizing a knowledge and innovation partnership anchored in the National Reform Program in the context of the Europe 2020 strategy. 3. Consultations with national stakeholders took place through individual meetings, web-based consultation and a public discussion event. In meetings with representatives of think tanks, political parties, civil society including Roma organizations and private sector umbrella organizations, the evolving role of the World Bank Group in Bulgaria was discussed. National stakeholders voiced a commonly shared view that the Bank Group’s value-added is its global and regional knowledge and expertise. This knowledge and expertise should help Bulgaria to advance structural reforms in key sectors and help absorb and leverage EU funding. While knowledge is perceived as the centerpiece of the evolving partnership, several stakeholders emphasized the need for complementary World Bank financing to support design and implementation of sector reforms. 4. The public consultation event brought together more than 40 representatives from Bulgaria’s most important non-governmental institutions for a discussion with the Government and the World Bank Group. In a highly interactive and participatory setting, the dialogue focused on how the World Bank Group could add most value to Bulgaria’s development. While participants from think tanks, private sector associations, and civil society including Roma organizations raised a broad set of development challenges, a recurring theme emerged about the importance of (i) better and less bureaucratic EU funds absorption; (ii) Bulgaria catching up on road, rail and water infrastructure; (iii) more progress on education and health care sector reforms; (iv) better integration of all ethnic minorities, including Roma; (v) increasing efficiency and effectiveness of public administration; and (vi) a “revolution” on the “green” agenda including scaling up of energy efficiency in public and residential buildings. The prime role of the World Bank was seen as a source of knowledge, support and expertise. 5. In order to leverage World Bank Group support, close collaboration with the EC and key partners like EIB and EBRD is crucial. The CPS preparation process served as a vehicle to further deepen relationships with these partners. In several meetings with the EC, including Directorate General for Regional Policy which manages a large share of EU funds, as well as with EIB and EBRD, the evolving role of the World Bank Group in Bulgaria was discussed. World Bank relations with the IMF have been traditionally strong, and the Bank is working closely with the IMF to further support Bulgaria’s strong macroeconomic performance. At the sectoral level, the Government in September 2010 initiated and chaired a series of working group meetings on roads and water, bringing together Government, EC, EIB, JASPERS, EBRD and the World Bank to discuss how international partners could best support the Government on respective sector reforms, strengthening institutional capacity and increasing EU funds absorption in a complementary manner. 6. Throughout the CPS consultation and coordination process, the role of the World Bank as an important knowledge partner was emphasized, given Bulgaria’s access to a substantial amount of EU grant funds. This echoes the feedback the World Bank Group received in Bulgaria through the 2008 Global 69

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Poll. The poll revealed that the Bank is very positively perceived by opinion leaders, emphasizing that Bank Group support has been most effective in infrastructure, private sector development and strengthening civil society. Poll respondents evaluated very highly the results achieved through World Bank Group operations in the country. The Global Poll also reconfirmed the shifting role of the Bank Group towards increased knowledge provision, with Bank-generated knowledge ranked highly by 75 percent of respondents who stated that the Bankâ&#x20AC;&#x2122;s data, reports, analysis, and research largely influenced Bulgariaâ&#x20AC;&#x2122;s development agenda.

Annex 4: Living Conditions and Demographic Trends

ANNEX 4: LIVING CONDITIONS AND DEMOGRAPHIC TRENDS Living conditions pre-crisis 1. Economic and social policies in Bulgaria during the last decade have led to significant improvements in welfare.9 Nationally representative, comparable multi-topic household survey data collected in 2003 and 2007 confirm that household consumption has increased from BGN 339 in 2003 to BGN 410 in 2007 (in 2007 prices), a 21 percent increase in 4 years. The rural areas and the poorest wealth groups experienced relatively higher improvement in their wellbeing. Households in the poorest quintile saw their consumption improve by over 32 percent compared to only 13 percent for the richest quintile. Thus, economic growth has been largely pro-poor. Inequality continues to remain low in Bulgaria. The Gini coefficient of consumption expenditures has declined from 0.313 in 2003 to 0.283 in 2007, a nearly 10 percent reduction in 4 years.10 2. As a result of increased consumption and income, absolute poverty in Bulgaria has declined substantially11. In 2007, 1 out of 10 Bulgarians were poor compared to 1 in 5 just four years earlier, essentially halving the incidence of absolute poverty. More importantly, the data suggest extreme poverty headcount has declined even faster, to 4.5 percent in 2007 compared to 11 percent in 2003. 3. Despite considerable improvement in welfare nationwide as well as largely pro-poor growth, some groups have benefitted more than others from the robust growth experience and, as a result, large and significant disparities still persist. The rural population still faces significantly higher poverty rates than the population in urban areas. Although only a third of the population lives in rural communities, they account for almost 40 percent of the poor â&#x20AC;&#x201C; a share that has by and large remained the same between 2003 and 2007. The fact that the unemployment rates tend to be lower, and participation and employment rates considerably higher in urban compared with rural areas is suggestive of the concentration of the recent growth in and around urban areas and the role it might have played on poverty trends. Also, the unskilled face enormous difficulties in improving their living conditions. Individuals with less than secondary education represent only 37 percent of the population 18 and above, but make up nearly 80 percent of the poor. 4. Deep-seated structural disadvantages prevent a minority of Bulgarians to benefit more from economic growth and social progress. People in the youngest and oldest age groups are at higher risk of being poor. Households with a large number of children, a key feature of Roma families, face much higher risk of poverty. Notwithstanding a substantial decline in their poverty, almost half of the Roma12 continue to live below the poverty line in 2007 -- down from three-quarters in 2003. While the concentration of poverty among these groups suggests that targeting interventions to address poverty would be easier, the large pockets of chronic poverty have remained resilient and hard to overcome. They thus signal a need for policies that address underlying structural disadvantages (rather than transient interventions) and invest in human capital to help break intergenerational transfer of poverty and exclusion.

Bulgaria: Living Conditions before and after EU Accession. Report No. 44289-BG. July 2008 The Gini index is a measure of statistical dispersion most prominently used as a measure of inequality of consumption or income distribution. It is defined as a ratio with values between 0 and 100: A low Gini coefficient indicates more equal consumption or income distribution, while a high Gini coefficient indicates more unequal distribution. For instance, Gini index of 0 corresponds to perfect equality (everyone having exactly the same consumption or income) and Gini index of 100 corresponds to perfect inequality (where one person has all the wealth, while everyone else has zero wealth). 11 The poverty headcount was measured using an absolute definition of poverty and comparable surveys from 2003 and 2007. To welfare aggregate used is household consumption per adult equivalent. The total poverty headcount was estimated against an (absolute) poverty line of BGN 185 per adult equivalent per month, in 2007 purchasing power. The absolute poverty was estimated against a lower poverty line of BGN 145. Source of data: World Bank report â&#x20AC;&#x153;BULGARIA: Living Conditions before and after EU Accession, September 2009â&#x20AC;?. As all EU member states, Bulgaria also monitors poverty using a commonly-agreed methodology, based on relative poverty and a specialized household survey (EU-SILC). One of the most widely used indicators is the share of population living below 60% of the national annual income per adult equivalent. Against this indicator, poverty headcount was higher but stable (indicating the small changes in inequality over this period): 22% in 2006. 21.4% in 2007 and 21.8 in 2008 (source: NSI website and EuroStat). Due to data collection and processing constraints, the relative poverty indicators are only available with a substantial lag; the latest available figure for Bulgaria is 2008. 12 Classification of ethnic groups is based on self-identification of respondents. 9

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013 Crisis impact on living conditions 5. The progress in reducing poverty was halted in 2009 due to the global economic crisis. In the absence of a counter-cyclical social protection policy, poverty could have gone up by 2 percentage points (from 9.7percent in 2008 to 11.3percent in 2009).13 An increase in the generosity of pensions and some social assistance programs during 2009 helped mitigate in part this effect.14 6. While we lack comparable information on absolute consumption poverty, an increase is expected, as the crisis dented average household consumption while leaving inequality constant. Relative poverty estimates based on the 2010 Crisis Monitoring Survey (CMS) are very close to the 2008 numbers, indicating that relative poverty and inequality was stable15. Households felt the crisis primarily through job and wage cuts. The recession resulted in increased unemployment and underemployment, reversing a decade-long trend; and in a reduction of the informal sector earnings. Table 1. Increase in the generosity of social protection transfers during 2009 Income/Payment Minimum wage Guaranteed minimum income Monthly allowances for taking care of a child Monthly income threshold for determining the right to family benefits Minimum and maximum amount of the unemployment benefit Parental benefit for taking care of a small child up to 2 years of age Pensions: • Minimum contributory pensions

Increase 9.1% 18.2% 40.0% 16.7% 20.0% 9.1% 19.9%

• Non-contributory pensions

19.9%

• Contributory pensions (excluding minimum amounts)

19.9%

As of (date) 1.01.2009 1.01.2009 1.01.2009 1.01.2009 1.01.2009 1.01.2009 1.01.2009 (10.0%) 1.07.2009 (9.0%) 1.01.2009 (10.0%) 1.07.2009 (9.0%) 1.04.2009 (approx. 10.0%) 1.07.2009 (9.0%)

Source: “The response of the Bulgarian Government to the EU Questionnaire on the Social Impact of the Crisis, Sep 2009”

7. Who has been affected and how? According to the March 2010 Crisis Monitoring Survey, about a third of the households have been affected by unemployment (5percent) or cuts in wages or duration of employment (another 30percent).16 Workers from the most vulnerable groups — those with a primary education or less, and Roma — have been the most likely to suffer from the most severe labor market shocks, particularly unemployment. Other possible transmission channels of the crisis – like cuts in remittances, arrears to social protection transfers, reduced access to credit or to public services like education or health – were not as important in Bulgaria, compared to other ECA countries. 8. How have they coped? Most households tried to cope with a reduction in income by sending non-working family members to look for work or by seeking additional part-time work—but only the better educated and Report No. 47792-BG, BULGARIA: Poverty Implications of the Global Financial Crisis, May 2009 The social protection policy was the main policy tool used by the Government to arrest the decline in living standards and poor labor market conditions. While the crisis unfolded during 2009, successive Governments took significant steps to moderate the impact of the crisis to protect earnings through a counter-cyclical social protection policy. From the beginning of 2009, the Bulgarian Governments have been using the social protection system to protect the poorest and most vulnerable against the impact of the economic recession. In January 2009, the Government expanded the access to and the generosity of its social assistance system, by increasing the eligibility threshold and the benefit level for a number of social assistance programs, and the minimum level for certain social insurance benefits. Many social minima were increased by 10% to 40% (see Table 1), substantially above the rate of inflation of about 8%. 15 Income-based relative poverty from CMS 2010: the share of population living on less than 60% of per adult equivalent income was 21.1% in March and 21.2% in October 2010 (no significant difference between the two estimates). With the caveat that the CMS questionnaire differs from the EU-SILC, the relative poverty indicators from CMS are similar with the 2008 estimates based on EUSILC of 21.8%. 16 Approximately 30% of households reported a decline in income between March 2009 and February 2010. These income shocks primarily through lost or reduced employment or wages —approximately 34% of workers reporting an income shock through their primary job. Job loss that results in unemployment is the most severe type of labor market shock and has affected 5% of workers. Reductions in wages and work hours, a more moderate shock, are more widespread, affecting close to 30% of workers. 13 14

Annex 4: Living Conditions and Demographic Trends richer individual succeeds in finding additional work. Of households that are crisis-affected and poor, 60 percent looked for additional work, and failed to find any. Key social assistance programs (child allowances, heating allowances and the guaranteed minimum income program) are responding to the crisisâ&#x20AC;&#x201D;60 percent of the households from the poorest quintile who suffered an income shock are receiving at least one benefit from the three programs mentioned above. 9. How did the crisis impact on the welfare of the households? Households responded to the economic contraction by reducing expenditures on basic necessities: 41percent reported reducing use of basic utilities, 29percent reduced consumption of staple foods, and 8percent reported skipping meals. As in other Central and Eastern European countries, crisis-affected households significantly reduced expenditures on health, including stopping the use of regular prescribed medications, and skipping doctorsâ&#x20AC;&#x2122; visits. Crisis-affected households were more likely to stop paying social contributions and health insuranceâ&#x20AC;&#x201D;increasing their vulnerability if exposed to additional shock (falling ill or becoming unemployed). Thus, households that suffer from labor market and income shocks during an economic crisis will suffer from persistently lower income and human development outcomes. 10. As the crisis bottomed in the first quarter of 2010, household living standards show signs of improvements in the second part of 2010. The income of the panel of households followed by the CMS in March and October 201017 improved slightly (from BGN 516 to 521, or by 1percent). For the households in the poorest quintile, the increase was almost 5 percent, indicating that the recovery is pro-poor. Absolute poverty, anchored around 10percent in March, fell to 9.1percent by October 2010. The largest reduction in poverty occurred for the unemployed; large families; and the Roma. Households have also reported an improvement in labor market conditions in October versus March 2010: median earning increased by 5percent; and unemployment rate decreased from 13.9 to 11.8 percent. The distribution of social protection transfers has not significantly changed during the period; given the good targeting accuracy of social assistance programs in Bulgaria before the crisis, this stability indicates that the response of the authorities to the crisis via social assistance transfer continued to be effective.

The improvement in poverty could be due to seasonal effects.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

ANNEX 5: EU STRUCTURAL AND COHESION FUNDS 1. The European Union’s Cohesion Policy aims to achieve greater economic and social cohesion within the EU. While it is a development policy covering the entire territory of the Union, the largest amount of financing is targeted at the less developed parts of the EU. While in the richer parts of the Union, most of the programming takes place at regional level (hence also the name Regional Policy), the poorer (mostly new) Member States have mostly national operational programs, with central ministries managing these. 2. The Cohesion Policy has powerful financing tools at its disposal─the Structural Funds and the Cohesion Fund (CF). The Structural Funds include the European Regional Development Fund (ERDF) and the European Social Fund (ESF). The Structural Funds and the Cohesion Fund represent over 40percent of the EU budget. The ERDF and the Cohesion Fund are implemented through Directorate General for Regional Policy, while the ESF is overseen by Directorate General for Employment and Social Affairs. 3. The financial instruments provide funding to support three objectives—convergence, regional competitiveness and employment, and European territorial cooperation. The ERDF is the largest of the three and finances infrastructure and productive job-creating investments. ESF supports active labor market measures and training initiatives for vulnerable groups, including the unemployed. The CF intended for countries whose per capita GDP is below 90 percent of the EU average, finances transport and environment infrastructure projects, subject to specific criteria. 4. The criteria for allocation of funds across member states include eligible population, national wealth, regional wealth and employment rate. Each Member State decides on how the resources should be divided among the regions by taking into account the geographic eligibility. The overall budget for the current 2007-2013 programming cycle is €347 billion: €201 billion for the ERDF, €76 billion for the ESF, and €70 billion for the CF. 5. Bulgaria’s total allocation for the 2007-2013 programming cycle is €6.7 billion—a significant amount which represents about one-fifth of its GDP18. This excludes still available funds under pre-accession assistance. .Such EU grants funds are complemented by national co-financing and co-financing from other sources, such as the EIB, and are intended to finance activities under Bulgaria’s seven Operational Programs (OP), reflecting national priorities. These seven OPs cover transport, environment, regional development, human resources development, economic competitiveness, administrative capacity, and technical assistance. Table 1 below summarizes the EU grants allocated for each OP, the funding instrument and the amounts absorbed—i.e. payments made to Bulgaria from the allocated amount—as of February 28, 2011. 6. The actual use of EU funds depends on each country’s absorptive capacity, and in Bulgaria’s case, this has been particularly weak. Absorptive capacity has been hindered by Bulgaria’s administrative capacity constraints to control and assess projects, ensure efficient implementation, provide co-financing, and claim refund for expenditure from the European Commission. To date, only about 11 percent of total allocated Structural Funds have been paid to Bulgaria since 2007, and this figure includes advance payments made at the start of operational programs. The real implementation rate, which excludes advance payments and takes into account only project related disbursements, is lower. Figure 1: Implementation rate as of June 2010, 2007-2013

Source: European Commission, World Bank staff calculations 18

This figure excludes € 0.2 billion Territorial Cooperation Objective resources

13%

20%

25%

10%

10.9%

4. OP Human Resources Development / ESF

5. OP Competitiveness of the Bulgarian Economy / ERDF

6. OP Administrative Capacity / ESF

7. OP Technical Assistance / ERDF

Total

ERDF

3. OP Regional Development / ERDF

2. OP Environment/ ERDF & CF

22%

ERDF

2=3/6

OP / FUND

1. OP Transport / ERDF&CF

Absorption rate

Source: Bulgaria Ministry of Finance

75 6,674 €

49 €

154 €

988 €

1,032 €

1,362 €

1,028 €

440 €

1,467 €

1,256 €

369 €

1,625 €

OP Budget - EC financing

1,346 €

9€

28 €

175 €

183 €

241 €

257 €

78 €

335 €

314 €

66 €

380 €

OP Budget national co-financing

1,060 €

7€

41 €

261 €

137 €

230 €

108 €

41 €

149 €

137 €

101 €

238 €

Tranches received from EC as per 28.02.2011

731 €

6€

39 €

198 €

96 €

172 €

98 €

10 €

108 €

34 €

81 €

114 €

EC part

139 €

1€

7€

35 €

17 €

31 €

25 €

2€

27 €

9€

15 €

23 €

National cofinancing part

Paid up to 28.02.2011

870 €

7€

46 €

233 €

113 €

202 €

123 €

12 €

134 €

43 €

95 €

137 €

8=6+7

Total paid until 28.02.2011

Annex 5: EU Structural and Cohesion Funds

Financial Implementation EU Structural Funds (ERDF, ESF) and Cohesion Funds (€ Million)

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

ANNEX 6: STANDARD CPS ANNEXES A2: Bulgaria at a Glance

Bulgaria at a glance

3/7/11

Key Development Indicators

Bulgaria

Europe & Central Asia

Upper middle income

Age distribution, 2008 Male

(2010) Population, mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (% of total population) GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $) GDP growth (%) GDP per capita growth (%)

7.6 111 -0.3 71

404.2 23,549 0.3 64

1001.74 48,659 0.8 75

45.9 6,050 12,888

2,746 6,793 12,633

7,508 7,495 12,466

0.0 0.3

-5.8 -6.1

-2.5 -3.3

(most recent estimate, 2003–2009)

Female

75-79 60-64 45-49 30-34 15-19 0-4 6

percent of total population

Under-5 mortality rate (per 1,000)

Poverty headcount ratio at $1.25 a day (PPP, %) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

<2 2 73 8 2

4 9 69 19 ..

.. .. 71 19 ..

Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

99 98 101 101

99 97 99 99

95 92 112 110

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

100 100

95 89

95 84

60 50 40 30 20 10 0 1990

1995

Bulgaria

2000

2007

2008

2009

Europe & Central Asia

Growth of GDP and GDP per capita (%)

Long-Term Economic Trends Consumer prices (annual % change) GDP implicit deflator (annual % change)

.. 2.8

64.0 26.2

10.3 6.6

3.0 3.0

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

0.0 253

0.0 173

2.1 100

1.5 59

10 8 6 4 2 0 -2 -4 -6 -8 -10 95

GDP

GDP per capita

1980–90 1990–2000 2000–10 (average annual growth %) Population, mid-year (millions) GDP (US$ millions)

8.9 20,040

8.7 20,726

8.1 12,904

7.6 47,766

-0.2 3.4

-0.8 -1.1

-0.6 4.8

Agriculture Industry Manufacturing Services

14.6 54.5 .. 30.9

(% of GDP) 17.0 49.2 .. 33.8

13.6 25.9 17.6 60.6

6.0 29.9 16.2 64.1

-2.1 5.2 .. 4.7

-3.9 -19.5 .. 1.0

-2.1 5.4 5.8 5.5

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

47.3 13.7 34.0

59.9 18.2 25.6

68.4 19.0 18.0

64.5 13.7 23.5

3.1 5.1 2.2

-2.6 -8.0 -5.3

5.5 1.6 10.3

Exports of goods and services Imports of goods and services Gross savings

35.7 30.7 ..

33.1 36.7 ..

50.5 55.8 ..

56.7 58.5 ..

-3.5 -3.3

4.3 2.9

7.3 8.8

Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are through 2008. .. indicates data are not available. a. Aid data are for 2007. Development Economics, Development Data Group (DECDG).

Annex 6: Standard CPS Annexes

Bulgaria Balance of Payments and Trade

2000

2010 Governance indicators, 2000 and 2009

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services Current account balance as a % of GDP

4,825 6,000 -670

20,592 25,084 -673

Voice and accountability

-704 -5.5

-374 -0.8

Regulatory quality

280

1,217

3,460

17,233

Political stability

Rule of law

Workers' remittances and compensation of employees (receipts) Reserves, including gold

Control of corruption 0 2009

Central Government Finance

2000

(% of GDP) Current revenue (including grants) Tax revenue Current expenditure

37.2 31.8 35.2

33.9 26.9 31.4

Overall surplus/deficit

-0.3

-3.9

Highest marginal tax rate (%) Individual Corporate

38 20

10 10

External Debt and Resource Flows

100

Country's percentile rank (0-100) higher values imply better ratings

Source: Kaufmann-Kraay-Mastruzzi, World Bank

Technology and Infrastructure Paved roads (% of total) Fixed line and mobile phone subscribers (per 100 people) High technology exports (% of manufactured exports)

2000

2010

92.1

98.4

169

2.8

7.0

50 30.5 ..

48 34.3 ..

2,669 10.5

2,742 ..

Environment

(US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

11,212 1,296

48,874 5,567

Total debt (% of GDP) Total debt service (% of exports)

86.9 17.1

102.3 19.1

Freshwater resources per capita (cu. meters) Freshwater withdrawal (billion cubic meters)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

998 5

1,601 -214

CO2 emissions per capita (mt)

5.3

5.7

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent)

2.9

3.7

2,325

2,688

2000

2010

IBRD Total debt outstanding and disbursed Disbursements Principal repayments Interest payments

824 71 27 49

1,338 20 90 17

IDA Total debt outstanding and disbursed Disbursements Total debt service

– – –

0 0 0

82 70 53

250 194 0

14 0

142 0

Composition of total external debt, 2010 IMF, 0 Short-term, 15,113

Energy use per capita (kg of oil equivalent)

IBRD, 1,338 Other multilateral, -661

IDA, 0

Agricultural land (% of land area) Forest area (% of land area) Nationally protected areas (% of land area)

Bilateral, 134

World Bank Group portfolio (US$ millions)

Private, 32,950

US$ millions

Private Sector Development

2000

2010

Time required to start a business (days) Cost to start a business (% of GNI per capita) Time required to register property (days) Ranked as a major constraint to business (% of managers surveyed who agreed) Access to/cost of financing Economic and regulatory policy uncertainty Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

18.0 2.0 15.0 2000

2010 .. ..

31.1 27.4

4.8 15.3

17.1 8.5

IFC (fiscal year) Total disbursed and outstanding portfolio of which IFC own account Disbursements for IFC own account Portfolio sales, prepayments and repayments for IFC own account MIGA Gross exposure New guarantees

Note: Figures in italics are for years other than those specified. 2010 data are preliminary. .. indicates data are not available. indicates observation is not applicable.

3/7/11

Development Economics, Development Data Group (DECDG).

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

Millennium Development Goals

Bulgaria

With selected targets to achieve b etween 1990 and 2015

Bulgaria

(estimate closest to date shown, +/- 2 years) Goal 1: halve the rates for extreme poverty and malnutrition Poverty headcount ratio at $1.25 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5) Goal 2:

97 99 92 98

96 98 106 97

99 .. 21

99 52 13

98 53 11

97 52 22

18 14 99

19 16 94

18 14 89

11 9 96

24 .. ..

23 .. 86

28 99 ..

13 99 ..

.. 46 ..

.. 43 ..

100 99 30.1 .. 8.6 2.3

100 100 30.3 .. 6.7 2.5

100 100 30.5 .. 5.3 2.9

100 100 34.3 .. 5.7 3.7

25.0 0.0 0.0 1.1

30.5 0.2 0.1 1.7

35.8 9.2 5.3 4.5

29.6 139.5 35.0 8.9

halve the proportion of people without sustainable access to basic needs

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population) Forest area (% of total land area) Nationally protected areas (% of total land area) CO2 emissions (metric tons per capita) GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) Goal 8:

94 91 81 ..

halt and begin to reverse the spread of HIV/AIDS and other major diseases

Prevalence of HIV (% of population ages 15-49) Incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOTS (%) Goal 7:

.. 101 87 ..

reduce maternal mortality by three-fourths

Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total) Contraceptive prevalence (% of women ages 15-49) Goal 6:

2008 <2 .. 8.7 1.6

reduce under-5 mortality by two-thirds

Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %) Goal 5:

2000 2.6 12.8 6.5 ..

eliminate gender disparity in education and empower women

Ratio of girls to boys in primary and secondary education (%) Women employed in the nonagricultural sector (% of nonagricultural employment) Proportion of seats held by women in national parliament (%) Goal 4:

1995 <2 36.0 6.9 ..

ensure that children are able to complete primary schooling

Primary school enrollment (net, %) Primary completion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24) Goal 3:

1990 <2 .. 10.4 ..

develop a global partnership for development

Telephone mainlines (per 100 people) Mobile phone subscribers (per 100 people) Internet users (per 100 people) Personal computers (per 100 people)

Education indicators (%)

Measles immunization (% of 1-year olds)

ICT indicators (per 100 people)

125

100

180 160 140 120 100 80 60 40 20 0

100

75 50

0 2000

2002

2004

2006

2008

Primary net enrollment ratio Ratio of girls to boys in primary & secondary education

0 1990

Bulgaria

1995

2000

2007

Europe & Central Asia

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

2008

2000

2002

2004

2006

2008

Fixed + mobile subscribers Internet users

3/7/11

Development Economics, Development Data Group (DECDG).

Annex 6: Standard CPS Annexes

B2: Selected Indicators of World Bank Portfolio Performance and Management Annex B2: Selected Indicators* of World Bank Portfolio Performance and Management As Of Date 2/21/2011

Indicator Portfolio Assessment Number of Projects Under Implementation a Average Implementation Period (years) b Percent of Problem Projects by Number a, c Percent of Problem Projects by Amount a, c Percent of Projects at Risk by Number a, d Percent of Projects at Risk by Amount a, d Disbursement Ratio (%) e Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project)

2008

2009

2010

2011

8 4.7 0.0 0.0 0.0 0.0 17.9

5 3.2 0.0 0.0 0.0 0.0 20.4

4 2.1 50.0 51.4 50.0 51.4 9.7

4 2.8 50.0 68.3 50.0 68.3 6.6

Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 32 4 Proj Eval by OED by Amt (US$ millions) 1,804.6 169.0 % of OED Projects Rated U or HU by Number 15.6 0.0 % of OED Projects Rated U or HU by Amt 3.1 0.0

a. b. c. d. e.

As shown in the Annual Report on Portfolio Performance (except for current FY). Average age of projects in the Bank's country portfolio. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). As defined under the Portfolio Improvement Program. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

B3: IBRD and IFC Investment Operations Program Annex B3 - Indicative IBRD Lending Program As Of Date 2/21/2011

Fiscal year

Proj ID

US$(M)

2011

RAILWAY SECTOR DPL

105.0

Railw ay Infrastructure Rehabilitation

92.0

Result

197.0

RAILWAY SECTOR DPL

105.0

Result

105.0

RAILWAY SECTOR DPL

105.0

Result

105.0

2012

2013

Overall Result

Strategic Rewards b Implementation b (H/M/L) Risks (H/M/L)

407.0

Annex B3 Bulgaria: IFC Investment Operations Program

Original Commitments (US$m) IFC and Participants IFC's Own Accounts only

Original Commitments by Sector (%)- IFC Accounts only AGRICULTURE AND FORESTRY ELECTRIC POWER FINANCE & INSURANCE INDUSTRIAL & CONSUMER PRODUCTS NONMETALLIC MINERAL PRODUCT MANUFACTURING WHOLESALE AND RETAIL TRADE Total

Original Commitments by Investment Instrument (%) - IFC Accounts only Equity Guarantee Loan Total

* Data as of February 01,2011

2008

2009

2010

2011*

60.88 60.88

105.23 63.79

61.77 47.37

0.00 0.00

35.52

81.21 52.4

64.48

18.79

100

47.6 100

100 100

35.52 64.48 100

100

100 100

Annex 6: Standard CPS Annexes

B4: Summary of IBRD Knowledge and Advisory Services As Of Date 2/21/2011

Product

Completion FY

a Cost (US$000) Audience

Objective b

Recent completions Institutional Fiduciary Assessment

2007

67.3

G/B

PFPR II / Accelerating Bulgariaâ&#x20AC;&#x2122;s Convergence

2007

255.1

G/B/PD

KG/PD/PS

Regional Development TA

2007

182.1

G/B

KG/PS

Regulatory Impact Assessment

2007

171.1

G/B/PD

KG/PD/PS KG/PS

Support for Justice Sector Reform Energy Sector Advisory TA Catastrophe Insurance Pool Feasibility Study

2007

99.9

G/B/D

2007-2008

113.1

G/B

KG/PS

2008

175.8

G/B/PD

KG/PD/PS

GIS Implementation TA

2008

50.6

G/B

ICA Productivity Study

2008

400.6

G/B/PD

KG/PD/PS

ROSC

2008

101.6

G/B/PD

KG/PD/PS

Judicial Public Expenditure & Institutional Review

2008

302.2

G/B/D/PD

KG/PD/PS

Black SeaCoastal Pollution ReductionStudy

2009

64.9

G/B

2007-2009

218.4

G/B/PD

KG/PD/PS

Monitoring and Evaluation TA

2009

130.8

G/B

KG/PS

Forestry Policy Notes

2009

88.3

G/B/PD

KG/PD/PS

Programmatic Poverty Monitoring

Railways Policy Notes

2009

94.9

G/B

KG/PS

Performance Based Budgeting

2009

122.2

G/B

KG/PS

PFM Update

2009

266.5

G/B

KG/PS

PF Policy Notes

2010

G/B

KG/PS

Policy notes

2010

95.1

G/B

KG/PS

PER Update

2010

11.5

G/B

KG/PS

HD Policy Notes

2010

266.5

G/B

KG/PS

Customs Reform TA

2010

G/B

KG/PS

Regulation of Renewable Energy (ESMAP)

2010

51.2

G/B

KG/PS

2009-2010

111.6

G/B/PD

KG/PD/PS

2010

184.8

G/B/PD

KG/PS

2010-2011

96.4

G/B/PD

KG/PS

2011

160.2

G/B

KG/PS

2011-2012

G/B/PD

KG/PS

Regulatory Reform Schools Autonomy ESW Underway Poverty and Social Policy Monitoring Competitiveness through Innovation TA Better Regulation Security of Gas Supply Study

2011

G/B

KG/PS

Water Sector Strategy

2011

48.5

G/B

KG/PS

Public Expenditure Policies for Growth and Competitiveness

2011

100

G/B

KG/PS

Education Sector

2011

G/B

KG/PS

2011-2012

25*

G/B

KG/PS/PD

2011

G/B

KG/PS/PD

Higher Education (regional program) Roma Inclusion Plannedc Competitiveness through Innovation KA (including FBS)

2012-2014

tbd

G/B

KG/PS/PD

Regulatory KA (including FBS)

2012-2014

tbd

G/B

KG/PS/PD

Education

2011-2013

tbd

G/B

KG/PS

Higher Education (regional program)

2011-2012

tbd

G/B

KG/PS/PD

Public Finance Policy Review KA Green Economy, Climate Action, and Energy Efficiency KA (including FBS)

2011-2012

tbd

G/B

KG/PS

2012-2015

tbd

G/B

KG/PS

Improving Roads Sector Performance, Capacity and EU Funds Absorption KA (including FBS) Railway Sector Improving EU Funds Absorption FBS

2012-2015

tbd

G/B

KG/PS

2012-2015

tbd

G/B

KG/PS

Water Sector Strategy, Capacity and EU Funds Absorption KA (including FBS)

2012-2015

tbd

G/B

KG/PS

Roma Inclusion: Strategy, Institutions and EU Funds Absorption KA (including FBS)

2012-2015

tbd

G/B

KG/PS

____________ a. Governm ent, donor, Bank, public dis s em ination. b. Knowledge generation, public debate, problem -s olving. c. Knowledge and Advis ory Services (including Fee Bas ed arrangem ents ) * Allocation for Bulgaria only.

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

B5: Bulgaria Social Indicators

Bulgaria Social Indicators Latest single year

POPULATION Total population, mid-year (millions) Grow th rate (% annual average for period) Urban population (% of population) Total fertility rate (births per woman) POVERTY (% of population) National headcount index Urban headcount index Rural headcount index INCOME GNI per capita (US$) Consumer price index (2005=100) Food price index (2002=100) INCOME/CONSUMPTION DISTRIBUTION Gini index Low est quintile (% of income or consumption) Highest quintile (% of income or consumption) SOCIAL INDICATORS Public expenditure Health (% of GDP) Education (% of GNI) Net prim ary school enrollm ent rate (% of age group) Total Male Female Access to an im proved w ater source (% of population) Total Urban Rural Im m unization rate (% of children ages 12-23 months) Measles DPT Child malnutrition (% under 5 years) Life expectancy at birth (years) Total Male Female Mortality Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59) Male (per 1,000 population) Female (per 1,000 population) Maternal (per 100,000 live births) Births attended by skilled health staff (%)

Same region/income group

1980-85

1990-95

2003-09

Europe & Central Asia

Upperm iddleincom e

8.9 0.2 64.6 2.0

8.4 -0.7 67.8 1.2

7.6 -0.5 71.4 1.5

404.2 0.3 64.0 1.8

1,001.7 0.8 75.0 2.0

.. .. ..

1,980 .. ..

1,360 2 ..

6,050 133 ..

6,793 141 ..

7,495 127 ..

.. .. ..

31.1 6.9 38.1

29.2 8.7 38.1

.. .. ..

.. ..

4.2 4.1

3.5 4.4

3.4 4.5

.. .. ..

96 96 96

92 93 92

93 93 92

.. .. ..

100 100 100

96 98 89

95 98 86

99 99 ..

94 96 ..

96 94 2

96 95 ..

93 92 ..

71 68 74

71 67 75

73 70 77

69 65 74

71 68 75

16 20

16 19

8 10

19 21

19 23

211 98 .. ..

245 100 23 ..

213 91 13 99

314 130 32 97

203 124 82 95

CAS Annex B5. This table w as produced from the CMU LDB system. 03/07/11 Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey.

Annex 6: Standard CPS Annexes

B6: Bulgaria Key Economic Indicators

Bulgaria - Key Economic Indicators

Indicator National accounts (as % of GDP) Gross domestic product a

Actual 2006 2007

2005

Estimate 2009 2010

2008

2011

Projected 2013

2012

2014

2015

100

Industry

Services

Total Consumption Gross domestic fixed investment Government investment Private investment

88 26 4 21

85 28 5 22

86 29 6 23

83 34 6 27

82 24 5 19

78 22 5 17

80 22 5 17

81 22 5 17

82 21 5 16

83 20 5 15

83 21 5 16

Exports (GNFS)b Imports (GNFS)

41 56

61 79

59 79

58 79

48 56

57 58

58 61

58 62

59 63

57 62

Agriculture

100

Gross domestic savings

Gross national savings c

28895

33209

42114

51825

48722

47766

48126

50660

53639

58293

63349

3640

4080

4530

5700

6030

6300

6410

6640

7020

7500

8080

6.5 9.7

6.5 6.4

6.2 6.2

-4.9 -4.3

0.0 2.0

2.5 1.3

3.0 3.7

3.5 4.9

5.0 4.2

5.0 4.5

Real annual per capita growth rates (%, calculated from 02 prices) Gross domestic product at market prices 6.9 7.1 Total consumption 5.9 8.1 Private consumption 7.3 9.2

7.0 7.7 9.6

6.7 3.0 3.9

-4.4 -3.6 -3.0

0.3 -1.5 -2.7

3.2 1.8 3.0

3.7 3.2 4.1

4.2 4.8 4.7

6.1 5.9 6.3

6.1 6.3 6.5

Memorandum items Gross domestic product (US$ million at current prices) GNI per capita (US$, Atlas method)

Real annual growth rates (%, calculated from 02 prices) Gross domestic product at market prices 6.4 Gross Domestic Income 5.9

Balance of Payments (US$ millions) Exports (GNFS)b Merchandise FOB

16190 11762

20318 15067

25007 18493

30099 22237

23099 16266

27151 20592

27830 20903

29548 22139

31466 23581

33494 25023

36207 26878

Imports (GNFS)b Merchandise FOB Resource balance Net current transfers Current account balance

20651 17241 -4461 1016 -3362

26137 22044 -5819 832 -5838

33318 28409 -8310 854 -10692

40729 34812 -10630 1138 -12058

27098 22069 -3999 1362 -4767

27824 23770 -673 2055 -374

29172 24565 -1343 1502 -1511

31406 26360 -1857 1571 -1839

33759 28300 -2293 1647 -2061

36337 30467 -2843 1885 -2370

39431 32940 -3224 2169 -2566

Net private foreign direct investment Long-term loans (net) Official Private Other capital (net, incl. errors & ommissions)

4411 572 128 444 -769

7627 1282 -320 1602 -831

12086 2551 42 2508 385

9073 1717 8 1708 2255

4688 763 316 447 -1588

1601 -795 10 -805 -941

1641 3597 411 3186 -2648

2419 771 158 613 -366

2645 161 167 -6 27

2740 502 139 363 11

2977 -972 -229 -743 1886

Change in reserves d

-852

-2240

-4330

-986

904

508

-1079

-985

-772

-882

-1325

-15.4

-17.5

-19.7

-20.5

-8.2

-1.4

-2.8

-3.7

-4.3

-4.9

-5.1

4.9 .. .. 12.5

5.3 .. .. 5.1

11.1 .. .. 14.9

12.5 .. .. 13.0

-9.0 .. .. -23.1

9.7 .. .. -1.7

6.3 .. .. 6.6

6.2 .. .. 6.2

6.1 .. .. 6.0

6.0 .. .. 5.9

6.0 .. .. 5.6

Memorandum items Resource balance (% of GDP) Real annual growth rates ( YR02 prices) Merchandise exports (FOB) Primary Manufactures Merchandise imports (CIF)

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

(Continued)

Bulgaria - Key Economic Indicators (Continued)

Indicator

Actual 2006 2007

2005

Public finance (as % of GDP at market prices)e Current revenues 38.7 Current expenditures 32.9 Current account surplus (+) or deficit (-) 5.8 Capital expenditure 2.9 Foreign financing .. Monetary indicators M2/GDP Growth of M2 (%) Private sector credit growth / total credit growth (%) Price indices( YR02 =100) Merchandise export price index Merchandise import price index Merchandise terms of trade index Real exchange rate (US$/LCU)f Real interest rates Consumer price index (% change) GDP deflator (% change)

Estimate 2009

2008

2010

Projected 2012 2013

2011

2014

2015

37.9 31.0 6.9 3.5 ..

38.8 31.0 7.8 4.6 ..

38.2 30.5 7.7 4.9 ..

35.8 34.3 1.5 5.1 ..

34.8 33.5 1.3 5.0 ..

33.9 31.7 2.2 5.1 ..

33.7 31.2 2.5 5.3 ..

36.5 32.4 4.1 5.3 ..

36.0 32.8 3.2 5.3 ..

35.3 33.2 2.1 5.3 ..

55.5 24.3 103.5

61.8 26.9 157.3

69.9 31.3 115.9

65.9 8.7 105.3

69.5 4.3 56.4

71.6 6.1 25.6

71.4 5.3 113.8

72.3 6.6 102.8

73.0 6.9 102.8

71.5 6.5 91.7

70.2 6.7 94.6

180.4 164.6 109.6

219.6 200.3 109.6

242.6 224.7 108.0

259.3 243.7 106.4

208.4 200.9 103.8

240.5 211.1 113.9

229.7 213.4 107.6

229.1 215.6 106.2

229.9 198.5 115.8

246.5 199.8 123.4

232.5 189.2 122.9

6.0 7.4

7.4 6.9

7.6 9.2

12.0 8.4

2.5 4.0

3.0 3.0

3.7 3.1

3.0 2.2

3.0 2.3

3.0 2.4

3.0 2.5

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex 6: Standard CPS Annexes

B7: Key Exposure Indicators Bulgaria - Key Exposure Indicators

Indicator Total debt outstanding and

2005

Actual 2006

2007

Estimated 2009

2008

2010

2011

Projected 2013

2012

2014

2015

17897

26668

41861

50470

53196

48874

47131

47495

47622

48598

49898

444

3791

7246

9882

820

-413

752

877

911

1694

946

5776

3929

6047

6711

7012

5622

7173

6420

7247

6889

8873

TDO/XGSb

95.0

117.1

152.8

153.0

208.1

167.4

154.6

146.2

137.7

132.0

125.8

TDO/GDP

55.1

72.2

94.3

104.7

107.9

102.3

97.9

93.8

88.8

83.4

78.8

TDS/XGS

30.7

17.2

22.1

20.3

27.4

19.3

23.5

19.8

21.0

18.7

22.4

2.7

2.2

1.5

1.4

1.5

1.3

1.2

1.0

0.8

4.9

25.6

9.2

29.4

24.4

18.2

21.5

19.6

7.1

23.6

7.5

30.0

71.4

51.8

44.8

34.8

24.3

44.5

43.4

18.3

55.4

19.6

disbursed (TDO) (US$m)a Net disbursements (US$m)a Total debt service (TDS) (US$m)a Debt and debt service indicators (%)

Concessional/TDO IBRD exposure indicators (%) IBRD DS/public DS Preferred creditor DS/public DS (%)c IBRD DS/XGS IBRD TDO (US$m)d

0.7 1453

1.4 1331

0.5

1.6

1604

1207

0.5 1510

0.4 1338

0.4 1582

0.4 1536

0.4 1479

0.4 1376

0.4 1267

Of which present value of guarantees (US$m) Share of IBRD portfolio (%) IDA TDO (US$m)d

1.4

1.3

1.6

1.2

1.3

1.0

1.1

1.0

0.9

0.8

0.7

IFC (US$m) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m)

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net shortterm capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

301.82 0.00 301.82

Project Name

MUNICIPAL INFRASTRUCT DEVT ROAD INFRASTRUCT REHAB SOCIAL INCLUSION PROJECT TTFSE 2

Project ID

P099895 P099894 P100657 P094018 Overall Result

Active Projects

1,212.66

47.37 0.00 1,243.19 1,212.66 1,290.55

of which has been repaid

Total Undisbursed (Active) Total Undisbursed (Closed) Total Undisbursed (Active + Closed)

IBRD/IDA * Total Disbursed (Active) of which has been repaid Total Disbursed (Closed) of which has been repaid Total Disbursed (Active + Closed)

Closed Projects

MS MS S S

Development Objectives

MU MU MS MS

Implementation Progress

Supervision Rating

Last PSR

As Of Date 2/21/2011

2010 2007 2009 2007

Fiscal Year

Annex B8: Operations Portfolio (IBRD)

118.7 122.5 59 52.8 353

IBRD

GRANT Cancel.

Original Amount in US$ Millions

118.4 86.4 58.8 38.2 301.8

Undisb.

Difference Between a/

3.9 76.1 32.3 35.1 147.4

0.23

Orig. Frm Rev'd

Disbursements

Expected and Actual

COUNTRY PARTNERSHIP STRATEGY FOR BULGARIA 2011-2013

B8: IBRD Operations Portfolio

Aes geo energy Atera Bulbank Drujba Epiq nv Kronospan eood Schwarz group Stomana Trakya bulgaria Unionbank ad

2009 2008 2001 0/08 2006 1/10/2000 0 2004/06 0/04 2005

0 22.17 17.06 0 0 0 0 0 7.5 0 46.73

186.48

1.16

0 0 0 0 1.16 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 52.33

41.1 0 0 0 0 0 11.23 0 0 0

Partici pant

186.48

51.37 0 0 10.48 0 31.89 47.36 21.22 21.54 2.62

Loan

39.23

0 22.17 17.06 0 0 0 0 0 0 0

Equity

1.16

0 0 0 0 1.16 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0

*GT/RM

**Quasi Equity

*GT/RM

**Quasi Equity

Equity

51.37 0 0 10.48 0 31.89 47.36 21.22 21.54 2.62

Loan

* Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types.

Total Portfolio:

Company

FY Approval

Disbursed Outstanding

Committed

Committed and Disbursed Outstanding Investment Portfolio As of 1/31/2011 (In USD Millions)

Annex 9: Operations Portfolio (IFC)

52.33

41.1 0 0 0 0 0 11.23 0 0 0

Partici pant

Annex 6: Standard CPS Annexes

B9: IFC Committed and Disbursed Outstanding Investment Portfolio