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PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE September 5th, 2013

Report No.:

Public Disclosure Authorized (The report # is automatically generated by IDU and should not be changed)

Operation Name Second Programmatic Competitiveness DPL Region AND CENTRAL ASIA Country Macedonia, former Yugoslav Republic of Sector General and trade sector (39%); Agro-industry, and trade (22%); General public administration sector (11%); Public administration –other social services (17%); General transportation sector (11%) Operation ID P130847 Lending Instrument Development Policy Lending Borrower(s) FORMER YUGOSLAV REPUBLIC OF MACEDONIA

Public Disclosure Authorized Implementing Agency Ministry of Finance Mito Hadzivasilev Jasmin bb 1000 Skopje Macedonia, former Yugoslav Republic of Tel: (389-2) 311-7288 Fax: (389-2) 311-7280 [email protected] Date PID Prepared August 28, 2013 Estimated Date of Appraisal November 4, 2013 Estimated Date of Board February 20, 2014 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Public Disclosure Authorized I. Key development issues and rationale for Bank involvement Macedonia has a consistent track record with regard to macroeconomic and improving the climate; yet the country’s good macroeconomic performance and improved business environment have not been sufficient to reduce poverty and long-term . The country embarked on a major reform program in 2002 that achieved fiscal consolidation, public sector reform, and labor market reforms. Prudent fiscal policies maintained government debt under 40 percent of GDP during the recent years of global financial turmoil. Recent reforms have also led to visible improvements in the business climate, as measured by international rankings. FYR Macedonia was the fifth most improved country among the top 50 economies in the world according to the Doing Business 2013 report, jumping from the 92nd position in 2006 to 23rd in 2012, outstripping peer countries in the region. Key reform areas included improving the business Public Disclosure Authorized registration and construction permitting process, making property registration easier, strengthening investor protection, facilitating access to finance and paying taxes.

The challenge facing FYR Macedonia is to transition the economy to a higher growth trajectory by developing more competitive and export-oriented enterprises. To improve the competitiveness of major export-oriented sectors and jumpstart economic growth and job creation, the Government of FYR Macedonia is embarking on a reform program that will make it easier for greenfield investors to locate in FYR Macedonia, strengthen the technological and exporting capabilities of manufacturing companies, stimulate upgrading of producers, address inefficiencies in key factor markets (land, labor, skills), and facilitate trade.

The proposed operation continues the Bank’s program of support under the Programmatic Competitiveness DPL series, which aims at strengthening three key export-oriented economic sectors with strong potential for growth and — manufacturing, , and trade logistics. Building on the reforms supported by the first DPL (DPL1), the proposed operation advances the competitiveness agenda in several important ways. It puts more emphasis on reforms to incentivize productive investment and technology upgrading in each of these key sectors; puts in place enabling conditions to progressively increase labor market flexibility and skills development; and pays more attention to agribusiness development, in alignment with the Government’s heightened recognition of the importance of that sector.

II. Proposed Objective(s) The main Program Development Objective is to strengthen the competitiveness of FYR Macedonia’s economy by incentivizing productive investment and technological upgrading in the manufacturing, agribusiness and trade logistics sectors, and establishing enabling conditions to progressively increase labor market flexibility and skills development.

Actions to be supported under the DPL 2 will contribute to achieving the development goals under the Competitiveness Pillar of the Country Partnership Strategy FY11-14.

III. Preliminary Description The Competitiveness DPL series supports sector-specific and cross-cutting reforms to strengthen the competitiveness of FYR Macedonia’s economy. The Program will support the development of high value-added manufacturing, facilitate the restructuring of agribusiness, and improve the efficiency of trade logistic services. This will be achieved by prioritizing actions that incentivize investment and technological upgrading, and by removing bottlenecks that hinder firm entry and firm growth in major export-oriented sectors of the economy. The DPL will also support actions that put in place enabling conditions to foster labor market flexibility and develop job-relevant skills.

Further, the actions of DPL2 will improve the effectiveness of the public programs supporting private sector development, increasing the efficiency of public expenditures. By improving the institutional basis and regulatory framework for these support programs, the DPL will raise the efficiency of public expenditures, improve transparency and strengthen accountability.

• Developing high value-added manufacturing— The actions will support the development of high value-added manufacturing through measures that (a) maximize the impact of government interventions to stimulate greenfield investment in advanced manufacturing ; and (b) enhance support to exporters so that local firms can become more closely connected to global firms and global markets. Further, the measures will establish stronger regulatory and monitoring and evaluation (M&E) frameworks to improve the allocation and effective use of fiscal resources in the instruments that are being deployed.

• Unlocking the potential of the agribusiness sector— The actions will improve agricultural land administration, including the adoption of a new valuation methodology for agricultural land based on actual market prices, which will help with the implementation of the program of competitive sales of state-owned land leased; and will strengthen the overall transparency of the budget administration by simplifying administrative requirements, reducing subsidy payment leakages and improving beneficiary assessment to reduce the number and cost of inspections.

• Upgrading trade logistics services— The actions will support the ongoing upgrading of the trade logistics sector through measures that facilitate trade at border crossings by improving the efficiency of the customs controls and technical inspections through expansion of the risk-based approach, in line with EU best practices. This will address inefficiencies and delays as well as additional direct and indirect costs negatively affecting the competitiveness of the private sector.

• Establishing enabling conditions for labor market flexibility and skills development— The actions will improve the incentives for formal work by reforms in the Law on Labor Relations and the Law on Employment and Insurance Against Unemployment which facilitate seasonal employment contracting, and will support participation in major international assessments of educational quality (TIMSS and PISA) in order to assess bottlenecks in the skills supply originating in the system and help with designing evidence-based reforms in education.

IV. Poverty and Social Impacts and Environment Aspects

Poverty and Social Impacts

The DPL series is designed to improve FYR Macedonia’s competitiveness by supporting policies aimed at increasing investment, exports and employment in the high value-added manufacturing, agribusiness, trade logistics and labor sectors. These policies are expected to have neutral or positive poverty and social impacts overall, predominantly by increasing total employment and in some cases increasing the returns to employment. A Poverty and Social Impact Assessment (PSIA) is being undertaken with a focus on the distributional impacts and potential of the policies in the agribusiness pillar (Pillar 2).

At this stage, the reform of agricultural support undertaken in the first DPL is expected to have neutral or positive poverty and social impacts, with no adverse impacts on any sub-groups, although there is a possibility of negative impacts on small in the long term. There is a possibility that in the long run, as the shift from direct payments to incentivizing rural development takes hold, small farmers, who depend most heavily on subsidies are they are now structured, may have to rely on other public goods for support. The PSIA will look at these possible impacts.

To help assess the progress of initial actions under the first DPL and to further inform the second DPL about the poverty and social impact of reforms of agricultural support, a qualitative study is being undertaken. The study will utilize focus groups and semi-structured interviews with low and high-income farmers, both men and women. The analysis will also benefit from consultations with representatives of the Ministry of Economic Affairs; the Ministry of Agriculture, and Water Economy (MAFWE); the National Extension Service (NEA) and the Agency for Financial Support of Agriculture and Rural Development (AFSARD).

Environment Aspects

As with DPL1, none of the policy reforms to be supported by DPL2 are expected to result in significant direct negative environmental impacts, and most reforms will continue to have to have a neutral or positive environmental impact. However, for policy actions that could have an indirect impact on the environment, mitigation measures are in place: (a) Investments in existing TIDZs, and the development of new zones, could increase pressure on the environment. Potential impacts will be mitigated through higher environmental standards in the zones and oversight of the activities in the TIDZs by state authorities; (b) The new National Program for Agriculture and Rural Development is intended to accelerate the growth of agriculture production, which could lead to increased use of to increase the intensity of cropping. This risk will be mitigated by promoting compliance with the CGAP; (c) In addition to capacity building and training, potential environmental impacts will continue to be mitigated, as they were under DPLI, by the quality of the institutional and legal framework.

FYR Macedonia is making sustained progress in aligning its legislation with the EU’s environmental acquis and to effectively implement and enforce EU environment standards in the medium term.

V. Tentative financing

Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 50 Borrower/Recipient IBRD Others (specify) Total 50

VI. Contact point Contact: John Gabriel Goddard Title: Senior Economist Tel: (202) 458-8623 Fax: (202) 522 3687 Email: [email protected] Borrower Contact: Ms. Suzana Peneva Title: State Adviser, Ministry of Finance Tel: (389-2) 311-7288 Email: [email protected]

VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop