Document of The World Bank Public Disclosure Authorized Report NO:25656-YU

PROJECT APPRAISAL DOCUMENT

Public Disclosure Authorized ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 14.7 MILLION (US$20 MILLIONEQUIVALENT)

TO SERBIA AND MONTENEGRO

FOR A

SERBIA HEALTH PROJECT Public Disclosure Authorized April 17,2003

Human Development Sector Unit (ECSHD) South East Europe Country Unit Europe and Central Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective April 1,2003) Currency Unit = Serbian Dinar 1 Dinar = US$0.017 US$1 = 60Dinar

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance Strategy MTEF Medium Term Expenditure Framework CPAR Country Procurement Assessment Report MOH Ministry of Health EA Environmental Assessment MOF Ministry of Finance EAR European Agency for Reconstruction MOFE Ministry of Finance and Economy ECA Europe and Central Asia MOSA Ministry of Social Affairs EIB European Investment Bank MOL Ministry of Labor EMP EnvironmentalManagement Plan NGO Non Governmental Organization ERTP Economic Reconstruction and Transition Program OED Operation Evaluation Development DCA Development Credit Agreement PAD Project Appraisal Document DGF Development Grant Facility PCD Project Concept Document DO Development Objective PECB Public Expenditure Capacity Building FMR Financial Management Report PHRD Policy and Human Resources Development Fund GDP Gross Domestic Product PEIR Public Expenditure and Institution Review GFATM Global Fund to Fight Aids, Tuberculosis and Malaria PCU Project Coordination Unit GOS Govemment of Serbia SPEAG Social ProtectionEconomic Assistance Grant HCRC Health Care Reform Commission SAC StructuralAdjustment Credit HIF Health Insurance Fund SAM Serbia and Montenegro HTA Health Technology Assessment SFRY Socialist Federal Republic of Yugoslavia ICR Implementation Completion Report SOSAC Social Sector Adjustment Credit ICRC IntemationalCommittee of the Red Cross TA Technical Assistance IDA InternationalDevelopment Association TSS Transitional Support Strategy IDP Internally Displaced Persons TOR Terms of Reference IMF InternationalMonetary Fund TB Tuberculosis IPH Institute of Public Health UNICEF United Nations Children’s and Education Fund IRI InternationalRepublican Institute WHO World Health Organization LIC Learning and InnovationCredit

Vice President: Johannes F. Linn Country ManagerDirector: Orsalia Kalantzopoulos Director: Annette Dixon Sector Manager: Armin Fidler Task Team Leadermask Manager: Loraine Hawkins SERBIA AND MONTENEGRO SERBIA HEALTH PROJECT

CONTENTS

A. Project Development Objective Page

1, Project development objective 2 2. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 10

C. Project Description Summary

1. Project components 12 2. Key policy and institutional reforms supported by the project 14 3. Benefits and target population 14 4. Institutional and implementation arrangements 15

D. Project Rationale

1. Project alternatives considered and reasons for rejection 15 2. Major related projects financed by the Bank and/or other development agencies 17 3. Lessons learned and reflected in the project design 18 4. Indications of borrower commitment and ownership 19 5. Value added of Bank support in this project 20

E. Summary Project Analysis

1. Economic 20 2. Financial 20 3. Technical 21 4. Institutional 21 5. Environmental 22 6. Social 24 7. Safeguard Policies 26

F. Sustainability and Risks

1. Sustainability 27 2. Critical risks 27 3. Possible controversial aspects 28

G. Main Conditions

1, Effectiveness Condition 29 2. Other 29

H. Readiness for Implementation 30

I.Compliance with Bank Policies 30

Annexes

Annex 1: Project Design Summary 31 Annex 2: Detailed Project Description 36 Annex 3: Estimated Project Costs 44 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 54 Annex 5: Financial Summary for Revenue-EarningProject Entities, or Financial Summary 61 Annex 6: (A) Procurement Arrangements 62 (B) Financial Management and Disbursement Arrangements 72 Annex 7: Project Processing Schedule 77 Annex 8: Documents in the Project File 78 Annex 9: Statement of Loans and Credits 79 Annex 10: Country at a Glance 80 Annex 11 : Social Assessment 82

MAP(S) IBRD 32323 SERBIA AND MONTENEGRO Serbia Health Project Project Appraisal Document Europe and Central Asia Region ECSHD Date: April 17,2003 Team Leader: Loraine Hawkins Sector Manager: Armin H. Fidler Sector(s): Health (90%), Health insurance (10%) Country Director: Orsalia Kalantzopoulos Theme(s): Health system performance (P) Project ID: PO77675 Lending- Instrument: Specific Investment Loan (SIL) Project FlnancZng Data ~~~ ~ ~ ~ [ ] Loan [x] Credit [ ]Grant [ ] Guarantee [ ] Other:

Amount (Us$m): 20.00 Proposed Terms (IDA): Standard Credit Modified terms: 20 years to maturity; 10 years grace period, with no acceleration clause Grace period (years): 10 Years to maturity: 20 Commitment fee: 0.5% Service charae: 0.75%

IDA 6.31 13.69 20.00 Total: 9.79 13.69 23.48

Project implementation period: 4 years Expected effectiveness date: 09/01/2003 Expected closing date: 02/28/2008

2sllolem I* WE. loa A. Project Development Objective

1. Project development objective: (see Annex 1) To build capacity to develop a sustainable, performance oriented health care system where providers are rewarded for quality and efficiency and where health insurance coverage ensures access to affordable and effective care.

2. Key performance indicators: (see Annex 1)

In the four general hospitals participating the in the project: reduction in arrears, reduction in bed numbers and average length of stay; increase in hospital bed occupancy; reduction in flows of patients from the area to tertiary care; increase in use of primary care and outpatient services. Health Insurance Fund (HlF) and Ministry of Health (MOH) increase the number of staff trained in health policy, health finance, or health management, and use their skills in review of the basic benefits package, the public/private mix in health services, resource allocation and provider payment systems; and a critical mass of these staff remain in post. MOH, with input from other relevant Serbian health sector agencies, monitors and analyzes at least annually the revenue, expenditure and arrears of the HIF and public health care institutions; the distribution of HlF expenditure per capita in different areas and among vulnerable and other population groups (taking account of risk factors); and out-of-pocket expenditure on health by the population MOH, with input from other relevant Serbian health sector agencies, publishes regular analytical reports on the performance of the health system and health sector institutions, using data from enhanced health information systems, and using the WHO World Health Report 2000 categories and local measures.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 24476-W Date of latest CAS discussion: July 18,2002 A CAS, covering FY04-06, is expected to be presented to the Board in the second half of 2003, together with the Government's PRSP.

The Bank's strategic program with Serbia and Montenegro is outlined in a Transitional Support Strategy (TSS) that was endorsed by the IBRD and IDA Board of Directors in May 2001. The TSS outlined a two-phase program of World Bank Group support to the (former) Federal Republic of Yugoslavia (FRY) - urgent activities in a pre-membership phase and a broader program supporting the Economic Reconstruction and Transition Program (ERTP). On July 18,2002, a TSS Update was approved by the Board, and provides a strategic framework for continued Bank assistance. The TSS Update explicitly notes the expected contribution of the health investment project to two of its four development objectives: improving the social well-being of the most vulnerable, and building human capacity and improving governance and building effective institutions. A third can also be added, namely, to restore macroeconomic stability. These are included as project development objectives (DO) in Annex 1.

-2- 2. Main sector issues and Government strategy: POLITICAL AND SOCIOECONOMIC CONTEXT

The union of Serbia and Montenegro consists of two member states - Serbia and Montenegro - with a combined population of 10.6 million and an estimated end 2001 GDP of US$10.6 billion. Serbia is the larger member state, with around 95 percent of the population and a similar share of its GDP. A new Constitutional Charter and associated ImplementationLaw ratified in February 2003 created a new union of the two member states, replacing the constitution of the previous FRY that was established in 1992 following the Socialist Federal Republic of Yugoslavia's dissolution. Under the provisions of the new constitutional charter, Serbia and Montenegro have some joint institutions, including a Presidency, Parliament, and a Council of Ministers, but operate separate economic, fiscal, monetary and customs policies.

Given that health care was a function substantially devolved to the Republican level in the former Yugoslavia and maintained as such in FRY, the constitutional changes have fewer consequences for the health sector than for other sectors. Under the new constitutional charter, the former Federal Ministry of Health, which had a relatively limited regulatory role, has been abolished and its functions delegated to the member states' ministries. The Project covers only Serbia and does not include Montenegro. As part of the constitutional changes, an increase in decentralization of health functions to the Autonomous Province of Vojvodina is envisaged. Note that the discussion that follows refers only to Serbia and does not cover the province of Kosovo which remains under UN administration according to UN Security Council Resolution UNSC-1244.

Economic performance has been solid. Real GDP growth in SAM rebounded from the highly negative rates of 1999 (impact of the Kosovo conflict) to positive rates of about 5-6 percent in 2000 and 2001. For 2002, preliminary estimates put growth at about 4 percent. Exchange rates versus the Euro have been maintained at a nearly stable level in Serbia, and are fixed by definition in Montenegro. Inflation in Serbia fell from 115% in 2000 to 39% in 2001. For 2002, it is estimated at 14.2%, well below the initially projected 20%. One reason is the unexpected real appreciation. Inflation in Montenegro fell from 24% in 2001 to 9.2% in 2002, a level which is still high given the use of the Euro. SAMforeign trade volumes have increased. Following an 18.6 percent rebound in 2000 from the lows of the Kosovo conflict, exports of goods and services (in US dollars) rose by 7.7 percent in 2001 and an estimated 18.2 percent in 2002. Import growth also increased from 29 percent in 2001 to 33 percent in 2002. Buoyant private and official transfers have helped to damp the impact of the rising trade deficit on the current account deficit, which rose from 4.6 percent of GDP in 2001 to 8.9 percent in 2002. At the end of 2000, the external debt totaled US$ 11.3 billion, or 131 percent of GDP, three-fourths of which consisted of principal and interest arrears. By end-2002, the combination of growth, real appreciation and debt relief from the Paris Club had reduced the external debt-to-GDP ratio to a still significant 74.6 percent of GDP. London Club talks are ongoing.

The Poverty Survey 2002 indicates that approximately 20 percent of the Serbian population lives in poverty or at the edge of poverty - consuming less than US$90 per month - of which 10.6 percent of the population consumed less than US$70 per month. The survey indicates that certain groups are more at risk of falling into poverty than the rest of the population: families with unemployed heads, the elderly, school age children, large families (with 3 or more children), rural population, people with low educational levels, and the elderly. Other data sources indicate vulnerability among Roma, refugees, displaced persons and single parents. There are approximately 472,000 refugees and 190,000 internally

-3- displaced persons (IDPs) residing in Serbia today. The number of refugees and IDPs varies greatly by municipality. In Kraljevo (one of the areas that will participate in the Project), with an estimated population of 152,000 as of 1991,25,694 IDPs are estimated to have migrated from Kosovo and Metohija and 6269 refugees to have migrated from other countries of former Yugoslavia. Relatively few data in Serbia are analyzed by gender and consequently, little is known about gender differentials, This has been identified as a priority for the PRSP.

MAIN SECTORAL ISSUES Health Status Despite all the difficult factors during the 1990s (economic crisis, war, sanctions, bombing) in FlRY (excluding Kosovo), all vital indicators improved during that time period according to data based on household surveys conducted by UNICEF in 2000. Under five mortality rate decreased by 29.5 percent while infant mortality rate decreased by 31.5 percent to 11.23 deaths per loo0 live births in 2000. Today, life expectancy at birth is estimated to be 69.8 years for males and 74.5 years for females. Access of the population to improved drinking water sources and sanitary means of excreta disposal is almost universal and vaccine preventable diseases are under control. When looking at causes of death, the picture is clearly one of a developed and transitional country with high levels of heart disease, strokes, and cancer. Smoking is estimated to cause 30% of the mortality in Serbia. Poor nutrition is another major risk factor.

Some minor declines in health status have been reported recently, however, and although not well documented, are of concern given the other conditions in the health sector and experiences in other countries in the region where health status has deteriorated significantly. A high annual incidence of tuberculosis (39 per 100,OOO population) indicates a need to continue to be vigilant about infectious diseases, particularly given the living situation of the most vulnerable population such as IDPs and refugees and the affordability of drugs. The Government's view that there has been a deterioration in health status (Government of Serbia (GOS), Interim Poverty Reduction Strategy, June 2002) has not been documented by reliable data, which is in itself an issue. Of the MDG's health specific goals, the most challenging for Serbia are those around poverty, hunger, and HIV/AIDS. Serbia is very much at risk for future outbreaks of HIV/AIDS, given existing transmission patterns in the region (IV drug use, commercial sex activity). Serbia has received some donor assistance in these areas and has developed programs for HIV/AIDs and TB prevention and control for financing by the GFTAM, so far receiving approval for a US$3.5 million grant in support of HIV/AIDS prevention.

Health Care Financing and Expenditure

According to the recent Public Expenditure and Institutions Review (PER, 23689-YU), public spending on health care in Serbia was over 6 percent of GDP in 2001, and has apparently been slowly decreasing over the past few years. When estimates of private expenditure are added, total health expenditure is estimated to be around 11 percent of GDP - among the highest in the region and close to the levels registered by high income countries. These rather high ratios primarily reflect low GDP numbers. However, Serbia's per capita health expenditure, approximately $62 per person per year in 2001 was one of the lowest in the region, although planned expenditure for 2002 increased to US$82 per person. Financing for the health care system comes from a combination of public finance and private out-of-pocket payments. The cornerstone of the public financing system is the Serbia Health Insurance Fund (HIF). The former Yugoslavian health care system was unique in Eastern Europe because it was historically financed by compulsory social insurance and not directly from the budget. This provides

-4- Serbia with an advantage in terms of experience with provider contracting and payment and some of the basic functions of insurance that other countries in the region have had to learn from scratch. On the other hand, the existence of separate contribution laws and revenue collection responsibilities for health and other social funds creates some administrative complexity and inefficiency. The HIF currently has area branches that are not independent units and essentially perform administrative functions for the central fund. In the past, however, the system was much more decentralized. There is a separate Federal Health Insurance Fund for Military Personnel and their families (FMHIF).

Serbian Denar millions 1998 1999 2000 2001 Health Insurance Fund (HIF) 9,727.1 11,757.9 20,473.7 40, 968.2

Sources: Former FRY and Serbian authorities, World Bank Staff PEIR estimates

The Serbia HIF receives earmarked payroll contributions from employees, employers, self-employed, farmers and the Pension and Labor Market Funds. Transfers from the Serbia govemment budget are intended for financing investments and for covering health care provision for the ‘vulnerable groups’ including refugees (from 2003), and covering the deficit in the HIF. Vulnerable groups include the long- term unemployed and other recipients of social assistance, the elderly (via transfers from the pension fund), the very young, and independent artists.

The amount of private expenditure on health is unknown, although one survey by UNICEF estimates it to be 40 percent and a small household survey conducted in Kraljevo for International Committee for the Red Cross (ICRC) found a similar percentage. Private out-of-pocket spending is considered one of the major issues by the government. It has attempted to capture some of this expenditure through co-payments, but with limited success. The co-payment system has extensive exemptions: around 30 percent of users are required to pay, according to the MOH’s estimate. The Poverty Survey 2002 indicates that on average, patients pay considerably more than the official co-payments for healthcare provided by state institutions: for example, people who were admitted to hospital in the past year on average paid 9752 dinars over the year for hospital care, including drugs, diagnostic tests and procedures.

The financial performance of the HIF over the past five years has been poor, and achieving fiscal sustainability in the HIF is one of the main sectoral issues to be addressed by the Project and health components of adjustment operations. The net accumulated arrears of the Serbian HIF by the end of 2001 were 6.7 billion dinars (1.O% of GDP). The Serbian HIF has in the past met its deficit by: (i)taking out commercial loans; (ii)delaying payments to suppliers, especially pharmaceutical companies; (iii) delaying payments to providers; and (iv) artificially maintaining low reimbursement prices or setting

-5- contractual revenues at levels that do not cover all of the costs of services provided to insurees. Sustainability requires that the gap between HIF revenues and its expenditures be bridged, which in turn, calls for either an increase in revenue or a reduction in expenditure or, preferably, a combination of the two. It is important too that in bridging the gap, costs are not simply pushed to patients in the form of higher out-of-pocket payments for pharmaceuticals and medical and other supplies that are necessary for their treatment under the HIF benefits package. The HIF has taken steps to halt further accumulation of arrears, and has begun to reduce arrears.

On the revenue side, the main issues are evasion of contributions and informal payments. In a system that was designed to provide universal coverage and where the link between contributions and entitlement to services has grown increasingly weak, the incentives to pay the required contributions for the self-employed and the farmers are minimal and, as a result, they are rarely paid. According to the PEIR, these two categories of workers contribute only 3% and 1% of total contributions respectively, while the share of GDP derived from the private sector and non-public agriculture are 40% and 20% respectively. Accumulation of large arrears to the HIF became the norm, and included the Pension and Labor Market Funds falling behind with their contributions.

Any increase in revenue is unlikely to come from further increases in contributions from the wages of workers and their employers in the formal sector, which already account for 81 percent of the HIF's revenue. The exemptions from contribution payments previously granted to employers appear to have been eliminated recently as a measure supported by SAC-I (IDA-35590). Similarly, the social funds have begun to pay their contributions more regularly, which was also a measure under SAC-1. In compliance with the policy conditionalities for the Social Sectors Adjustment Credit or SOSAC (W566-YU, FY03), the Serbia MOF has budgeted for transfers to the HIF for 2003 sufficient to cover the contributions of IDPs, refugees and vulnerable groups, through a combination of increased budget transfers for these groups and a general subsidy to finance the deficit in the HIF. The focus of future efforts to increase revenue therefore must shift to two other potential measures: (i)increasing the proportion of self-employed and farmers who pay their contributions; and (ii)ensuring that contributors pay an amount which reflects ability to pay.

The other side of the equation is expenditure reduction and cost containment. The PEIR concluded that there are still insufficient data to fully understand all of the sources of the inefficiencies in the health systems, but suggests that two of the largest are over-capacity in the hospital sector relative to utilization and a highly monopolistic market and poorly controlled supply chain for pharmaceuticals.

In Serbia, both hospital occupancy rate (68.7 percent) and the average caseload per physician (133) are low by international comparison, and while the official number of hospital beds (5.9 per 1,OOO population) is lower than in many transition and some high income economies, one very preliminary estimate calculated as part of the master planning exercise suggests that there may be 17,000 more beds than necessary in Serbia. This would imply an excess capacity of 30 percent. These numbers must be used with caution, however, because in the absence of improved data for service planning, it is not possible to assess whether hospital utilization should be expected to increase as barriers to access are addressed. Hospital utilization appears to be low relative to other European countries with similar population age structure. Administrative measures indicate hospital admission rates in the range 9.5-12 per 100 population (compared to CEE and EU average of 18.3 per 100), and the Poverty Survey 2002 found a rate of 8.3 hospital admissions per 100 interviewed. Moreover, service planning needs to take account of the social protection that many hospitals provide in their areas, caring for the both the poor, elderly, and mentally ill. Any future restructuring program would look specifically at the future use of these beds in the context of planning for population needs. The need to convert some beds for other

-6- purposes such as long term care, would also need to be considered. Restructuring is likely to entail redistribution of capacity and personnel.

Preliminary findings of a project preparation study in Kraljevo bear out Serbia-wide estimates that there is scope to reduce hospital capacity. It appears possible to maintain the existing level of hospital activity with a reduction from 700 to around 400 beds, and to consolidate hospitals functions into a smaller number of its existing buildings, freeing up one or more buildings for alternative use. The study identified opportunities to shift care from inpatient to outpatient settings and reduce lengths of stay within some specialties (dermatology/venereology for example, currently has an average length of stay of 21 days), through evidence-based changes in clinical practice. The study also identified areas of excess staffing relative to case load.

Public procurement of pharmaceuticals in Serbia has historically taken place in a highly controlled marketplace, typified by excessive closeness between the main public consumer, the HIF, and a small number of domestic manufacturers, represented by a fifteen member cartel, the Industry Lobby of Pharmaceuticals Manufacturers. Five of the fifteen local companies comply with Good Manufacturing Practice standards and local companies together share approximately 70 percent of the market. Recently, a case study of procurement of pharmaceuticals was undertaken as part of the Country Procurement Assessment Report (CPAR, June 2002), which describes in detail the many flaws in existing practices. According to the recently completed CPAR, the health sector is considered the "epicenter" of procurement-related corruption in Serbia. The CPAR did two simulations from different data sources and found the savings on those particular drugs would have been 25 percent if they had been procured competitively. Estimates of pharmaceutical expenditures as a portion of HIF expenditures varies significantly, with the PEIR noting that the HIF reports 17 percent while its own analysis was closer to 11 percent.

Another source of inefficiency in drug procurement is the repeated failure of the public health care system to make available, through public pharmacies, approved drugs which patients have a right to obtain on prescription. In all cases where a public pharmacy fails to fulfill such a prescription, the patient has the right to obtain the prescribed drug from a private pharmacy and obtain a refund from the HIF. The EAR estimates that in 2002, this cost the HIF an additional US$15 million per month. During 2001, in order to mitigate these problems, the number of drugs on the reimbursable list was reduced.

The final and most obvious way to reduce expenditures is to reduce the level of entitlements, which is under consideration in Serbia. The current benefit package is very generous (in theory) and includes coverage of treatment abroad and in military hospitals as well as a set of benefits that are non-health related such as funeral expenses and sick leave which totaled more than 4 percent of total expenditures of the HIF in 2000.

While it is difficult to reduce entitlements, the HIF has taken steps to reduce expenditures. It has developed new contracts with health care providers, and while imperfect, this is reflective of a wish to increase control over public expenditures and to monitor service delivery. However, the current contract does not create incentives for health care providers to increase efficiency (savings in the wage bill, for example, would result in equivalent cuts in revenue). The HIF has also begun to monitor the prescription patterns of health care providers, identifying the outliers. A main objective of the Project is to work with the HIF to further develop these activities and others to improve the incentives for provider performance via contracting and monitoring and evaluation.

-7- Health Delivery System

The existing infrastructure in Serbia is in disrepair and needs basic repairs and re-equipping to restore it to where it can provide a level of minimally acceptable health services. The system is characterized by an extensive network of public facilities, from the ambulantas - the health stations that are scattered throughout the country - to the Clinical Centers - tertiary university hospitals located in Belgrade, Nis, and Novi Sad. Overall, there are approximately 58,500 beds. The level of service inputs (staff numbers, infrastructure) is almost identical to that which was operating in 1990, but the financial resources flowing into the sector have significantly declined. The cut in resources was accommodated by cuts in non-salary operating costs, in capital maintenance, repairs and replacement, and in reduction in the real value of salaries. Only one-third of hospitals in Serbia have functioning sterilization systems. Seventydve percent of the medical equipment in the health facilities is more than 10 years old, an age which most of the producers consider the upper time limit for the manufacturing and stocking of spare parts. (EAR, Assessment of Equipment Needs in Hospitals and Health Centers in Serbia, January 2002) Most facilities use coal or oil for heating, spending more than they would if they switched to gas, and adding significantly to pollution problems. EAR estimates that energy efficiency investments of 100,OOO to 300,000 Euro per hospital could save up to 3040% in fuel costs (EAR, A Report ofthe Status of Hospitals in Serbia out of Belgrade, February 2002).

Given the excess capacity in the hospital sector described above, there is a need to prioritize facilities for investment. The Government has adopted a vision statement for the system (see below on discussion of government strategy), and the next step is to develop planning standards and guidelines which will determine such things as bed and staff ratios to population for planning purposes, guidelines on what services will be provided at primary, secondary and tertiary levels. Background data necessary to prepare a facilities master plan are being collected with financing from the European Agency for Reconstruction (EAR), and development of service restructuring plans and planning standards and guidelines are being undertaken with the support of funds from the Social Protection Economic Assistance Grant (SPEAG, TF050017), a Policy and Human Resource Development grant (PHRD, TF051137) for health project preparation and further EAR funds. Completion of planning standards and guidelines and a masterplan are planned activities to be supported by the Project and is also supported in the Bank's adjustment program as a SOSAC policy conditionality. There is also a need to develop skills in health technology assessment to ensure the most cost-effective procedures, drugs and devices are used. This too will be supported by the Project.

Approximately 115,000 people work in the health sector in Serbia. This figure does not include the health employees from Kosovo. There are reportedly large imbalances by speciality and by area. Physicians have dominated the system, with less emphasis on nursing and other paramedical specialties. Today, 1,400 doctors are reported to be unemployed in Serbia while 1,OOO more graduate each year. In the short term, no plans have been made to cut enrollment in medical school and the annual graduating class is around 1OOO. Temporary cuts have been made in specialist training positions. The average monthly salary (excluding private practice or informal payments) of health professionals as of 2000 stands at € 130 for doctors and € 90 for nurses, as opposed to the €176 of the national average gross salary. As wages have fallen in real terms and basic means for delivering health services have deteriorated, the morale and motivation of the work force has deteriorated. The Government has collected baseline data and is preparing a human resources strategy, with the support of Project preparation grant funds.

A rudimentary framework is in place to allow private practice, and some parts of the system such as dentistry are rapidly moving in that direction. There are, reportedly, 3000 registered private institutions,

-8- doctors and services, employing over 6000 workers full time with 12,000 part time consultants. It is a parallel system that is serving a small portion of the population: those that can pay for services in cash. Many doctors from public services work within the private sector as consultants, creating potential conflict of interests between their two (or more) professional engagements.

GOVERNMENT'S STRATEGY

The highest levels of the Government of Serbia have publicly declared that reforming the health system is a priority. In August 2002, representatives of the Ministry of Health, Health Insurance Fund, and Institute of Public Health participated in an exercise to articulate an overall vision for the health sector in Serbia. This was based on several policy and strategy documents that already exist, including "Basic Principles of the Health Care System Reform in the Republic of Serbia - Policy Paper", a program the Government adopted and presented at the June 29,2001 donors conference and reflected in the Medium Term Economic Recovery and Transition Program, the National Health Policy (February 2002), and the Interim Poverty Reduction Strategy Paper.

The Government's vision statement agreed in August 2002 set out the following nine "guiding principles" or strategic directions (The full text of the vision statement is available on Project files.):

The health care delivery system will be clearly organized in three functional levels to ensure an affordable and effective service to the population by rendering the care at the lowest possible level with sufficient competence and equipment.

There will be equal availability of and access to basic health care services for all citizens and financial coverage for these services from HIF regardless of socioeconomic status of the individual citizen.

Basic health care services will be selected based on cost-effectiveness in reducing the disease burden and HIF-financed basic health care will be affordable and will be efficiently delivered.

There will be a high priority on preventive and primary health care services.

There will be an increase in the involvement of the private profit and non profit sector in the delivery of HIF-financed health care.

The main resource base for the financing of health care will continue to be the mandatory HIF basic health care scheme, but the resource will be expanded through the development of supplementary health insurance and private insurance schemes.

Categorization of health care institutions and development of a master plan will be undertaken as preparation for a later step-by-step decentralization of lower level planning, management and delivery of health services.

The role of users, payers and providers will be well-defined and separated.

Quality of services and facilities will be promoted, strengthened, monitored and controlled based on a quality assurance and licensing system.

-9- 3. Sector issues to be addressed by the project and strategic choices: The small scale of the Project, relative to the size of the sector and the problems it faces, requires a focused approach, and complementarity and coordination with the work of other donors, other Bank operations and the Government's own expenditure plans. The Government's strategy is ambitious and will require implementation to be sustained over the long term. This Project can only support the first phase of reform in selected areas, pilot some key elements of the strategy and help to build capacity within the Serbian health authorities (MOH, HIF, IPH and health care institutions) for continuing strategy development and implementation. The main sector issues to addressed by the Project are: (i) limited capacity in the Serbian lead health authorities (MOH, HIF, and IPH) for policy development, implementation and evaluation in the fields of finance, management, public health, and quality regulation; (ii)unequal and inappropriate distribution of resources, including human resources (too concentrated in Belgrade and at higher levels of care); and (iii)piloting and initial implementation of approaches to increase efficiency and quality in secondary care, as part of a strategy to shift care to lower levels in the delivery system.

During the project preparation period, the Bank strategy has been to maintain a close linkage between the investment project and adjustment lending. This linkage has been used to address some of the causes of fiscal imbalance in the HIF and problems in the pharmaceutical sector, and also to support planning and strategy development for medium to longer term structural reform. Health was one of the four priority areas included in the first SAC-I that went to the Board in FY02. The SOSAC, negotiated in December 2002 and planned to disburse two tranches in FY03, has health as a major component. The IMF program (Extended Arrangement-Supported Program, 2002-2005) includes supportive measures. One of the proposed structural benchmarks in their program (under the fiscal sector) is to improve the cost-effectiveness of health care services by redefining the criteria for medical service contracting and redesigning the prescription drug form, and adjusting the positive drug list. The longer term benchmark (2003-2004) is to eliminate excess capacity, duplication, and other structural problems with the delivery system. The Project, though small, provides the opportunity to support the reform benchmarks in the adjustment operations through capacity building; provision of expert advice on changes to laws and institutions; and development of information systems to support planning, monitoring and management of reform. In addition, engagement of the MoF and Govemment as a whole is critical in health finance reform given the independence of the HIF from the MOH, given the importance of budget transfers to key objectives for stabilizing the HIF and financing coverage for the vulnerable, and given the linkage of health finance reform with other public expenditure and revenue management reform measures.

The Bank's strategy is outlined in a Health Country Assistance Strategy (Health CAS) recently prepared by the Bank's health team (April 2002) and endorsed by both Bank management and the GOS (available on Project files). It identifies the following priorities for Bank assistance, which are reflected in activities planned for the Project: health information systems develotlment, which is required to improve the accuracy and timeliness of health data available for policy making and will support efficient operations of the HIF health financing and health insurance, where the objective will be to help the HIF regain fiscal sustainability through a combination of measures on the revenue and expenditure side and to ensure that out-of-pocket spending does not become a financial burden for the poor; health services restructuring, where the objective will be to improve the quality and efficiency of service delivery; human resources, where the objective will be to introduce adjustment programs that will help Serbia achieve the optimal labor force in terms of distribution, skills, and affordability. The Health CAS also highlighted as a priority public health, where the objective will be to strengthen the capacity of the GOS to address some of the diseases with the highest (or potentially highest) burden of disease. Because other donors are very active in support to public health, Project activities in this area are more limited, and focus on the interaction of public health with other components (information systems, planning, service

- 10- restructuring, financing of public health services). Running through all of this is the objective that the health service remain accessible to the poorest segments of the population, and those that are adversely affected by transition. The monitoring indicators for the Project encompass distribution of resources, access and out-of-pocket payments by the poor. Coordination between reforms in the health sector and other related sectors will also be important to strategies to improve health and access to health services for the poor, and to mitigation of the impacts of restructuring in health services.

Complementarity and coordination with other Bank operations: If success is to be achieved, the Bank's approach must be multi-sectoral and involve the disciplines of public expenditure management, environment, transportation, education, and private sector development. Linkages with the PEIR, SAC-I and SOSAC, described above, will reinforce measures to stabilize revenue, improve expenditure management (pharmaceuticals law, application of public procurement law in the health sector, planning for restructuring) and strengthen transparency and accountability (external audit, financial reporting). The Health CAS sets out in detail linkages with these operations.

In addition, the proposed Serbia District Heating And Energy Efficiency Project (FY03) will provide complementary support for energy efficiency investments in the Belgrade Clinical Center and one or more other general hospitals; and the Employment Promotion Project (Learning and Innovation Credit, FY03) will support labor market adjustment programs for staff affected by restructuring in the health sector in one of the areas (Kraljevo) in which the Health Project will be investing.

Complementarity and coordination with other donor-supported activity: Technical and financial assistance from multiple donors will also be essential to Serbia ifit intends to maintain the planned course of reforms, and donor coordination in support of the Government program provides an opportunity to increase the impact of activities supported by this Project. The largest source of external finance for the health sector over the life of the Project is expected to come from EAR, and the EAR program was developed and began implementation ahead of this Project. The EAR program is expected to address a number of the sector issues discussed in Section B2 above, and the focus of the Bank's support has been selected to complement preexisting donor support plans. EAR is supporting development of pharmaceutical policy and related institutions, capacity building in the MOH and the IPH, assessments of the health services network and studies for hospital restructuring and rehabilitation. The GOS is exploring with EIB the possibility of loan finance for hospital sector development. The intention of MOH, the Bank and EAR is to coordinate the hospital-sector planning and investment activities financed by this Project with the EAR (and potentially EIB) financed activities, into a nation-wide program of restructuring and investment in the network of general hospitals.

- 11 - C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

1. Health Services Restructuring 2. Health Finance, Policy and Management 8.93 38.0 7.44 37.2 3. Project Management, Monitoring and Evaluation 1.53 6.5 0.96 4.8 Total Project Costs 23-48 100.0 20.00 100.0 Total Financing Required 23.48 100.0 20.00 100.0

Health Services Restructuring (estimated total US$13.0 million, including contingencies): This project component, the largest in the Project, will support planning and initial steps in implementation of the Government's strategy for improving the efficiency of healthcare delivery while maintaining quality. At the member state level, it will provide continued support for development of a masterplan for the health care provider network, development of planning standards and guidelines, and health management training. In four areas (Kraljevo, Valjevo, Vranje and Zrenjanin), the Project will support initial restructuring and rehabilitation of physical and human capacity at secondary care level in the general hospital, with a focus on optimising the relationship between primary, secondary and tertiary levels of care, and improving the linkages between local Institutes of Public Health and healthcare planning and management. The areas participating in the Project have been invited to develop proposals with technical assistance financed by PHRD and SPEAG funds. Kraljevo has already developed proposals and will be the first area to carry out these initiatives, and will serve as a demonstration site, In Kraljevo, the Project will build upon the development of basic health services, the piloting of a basic benefits package and a new financing model, and the building of local capacity that has already taken place with the support of an MOWICRC-supported Basic Health Services Pilot Project (also supported by a grant from the Post Conflict Fund). There will be an emphasis on improvement in management and evidence-based clinical practice, supported by training, technical assistance, evaluation and dissemination of lessons learnt. Investments in new medical equipment and refurbished buildings will be used to help leverage facility consolidation and restructuring in order to make the delivery system more efficient, accessible, and of higher quality. The planning, management, and environmental management tools developed in the Kraljevo demonstration site will serve a model for other areas. The development of a masterplan and planning standards and guidelines is also supported by the Bank's adjustment program (SOSAC) and is consistent with PEIR recommendations. Labor restructuring in Kraljevo will be assisted by the Employment Promotion Project (Learning and Investment Credit). Costs of redundancy payments will not be financed by the Health or Labor Credits.

Health Finance, Policy and Management (estimated total US$8.9 million, including contingencies): This component will build the capacity of the GOS to develop, communicate, and effectively implement health financing mechanisms, health policy and health sector regulation. There are five sub-components to be included: (i)basic benefits package and provider payment system: development of institutional capacity in the HIF and MOHto review and improve the basic benefit package, the public/private mix of financing and delivery, the provider payment and contracting systems, including monitoring mechanisms;

- 12- and to increase the equity of distribution of health resources; (ii)public healthfinance: review of public health expenditures and financing (that is, expenditure and financing for disease prevention and health promotion) to address priority public health problems more effectively and efficiently. (iii)licensing and accreditation: development of a system of licensing for health professionals and a system of accreditation for healthcare providers; the Project will support the establishment of a licensing body for health professionals and begin licensing and re-certification; it will also support establishment of an accreditation body for health care providers, though full implementation will extend beyond the life of the project as a long term process to continually improve the quality and safety of health services; (iv) health information systems: development of a health information systems masterplan, data standards for Serbia and a health information service to assist policy advisers and leaders in the GOS in using existing data for decision-making; piloting of a local integrated health information system based on these plans and standards in Kraljevo (building on information systems development initiated under the MOH/ICRC Pilot Project), followed by implementationof local health information systems in Valjevo, Vranje and Zrenjanin; and (v) MOH capacity-building and communication: building capacity in the MOH, €€IFand IPH in health management, analysis and decision-making; assisting these three organisations to clarify and develop their mandates; assisting the health sector decision makers in the MOH, HIF and in their communications strategy for health reform, including enhancement of the flow of information on public, patient and staff perceptions and opinions to health sector decision-makers. Needs assessments for the MOH and the IPH have already been carried out with EAR funding, and Credit-financed developments will be coordinated with planned EAR and UNDP programs to support capacity development in the MOH and IPH. This component will provide technical assistance, training, recurrent costs for new agencies and policy units (on a declining basis), hardware, software and office equipment.

Project Management, Monitoring and Evaluation (estimated total US$l .S million, including contingencies): The project will support operation of a Project Coordination Unit (PCU) within the Ministry of Health. The PCU Director reports to the Assistant Minister responsible for International Relations. The PCU is staffed by full time local consultants (PCU Director, Procurement Specialist, Financial Specialist/accountant, Project Assistant). The PCU will be responsible for day-to-day coordination with MOH sectors and with other agencies benefiting from project activities (notably the HIF and the health centers in Kraljevo, Vranje, Valjevo and Zrenjanin). The PCU will be responsible for all procurement, disbursement, monitoring and reporting. The PCU will also engage four full-time field coordinators to work in each of the four areas participating in project activities, to provide an operational link between the PCU and the local counterparts. A Project Steering Committee chaired by the Minister of Health will be the decision-making forum for strategic decisions and approval of plans for project implementation. A significant portion of the financing will be used to develop and maintain a project monitoring and evaluation system. Financing will be needed for technical assistance and training of staff, office equipment, recurrent costs of PCU staff, and project audit.

- 13- 2. Key policy and institutional reforms supported by the project: Some critical pre-conditions for policy and institutional reforms necessary to implement the Project and achieve its development objectives have been supported by SAC-I or SOSAC. The Project itself seeks to strengthen capacity in the central health authorities that lead, finance and regulate the sector to develop and implement a program of structural reform. It will achieve this through training and technical assistance, together with support for implementation of the first steps in the Government's longer term reform strategies to restructure health services in order to increase efficiency while maintaining or increasing quality. The SAC and SOSAC have included measures to improve the performance of the HIF, such as improving the accountability and transparency of the social funds, and ensuring adequate budget transfers to the HIF to cover the contributions of vulnerable groups. As well, these adjustment operations sought to support expenditure control measures through improved pharmaceutical procurement and new contracts for providers that encourage cost control and begin to monitor performance. During the life of the Project, it is envisaged that the legal frameworks for health insurance, health care facilities and public health regulation will need to be revised, to create greater clarity of roles and mandates among the HIF, MOH and IPU, and to strengthen governance and public accountability for financial performance and health service delivery for the autonomous bodies in the health system (the HIF and healthcare providers). At the same time, the review of laws is likely to increase organizational autonomy for public sector health care providers, and strengthen regulation of private providers. The laws that govern public health regulations and regulation of the safety and quality of health care providers will also undergo revision, Part of this revision will reflect the constitutional changes that delegate many of these functions from former Federal authorities to Serbian institutions. At the same time, the GOS intends to revise its laws in line with European Union norms, and address gaps in regulation (such as regulation of medical waste).

3. Benefits and target population:

I I I Benefits Beneficiaries

Availability of reliable data on a variety of health system General public, the MOH, health providers, and indicators such as performance measurement, health opinion leaders expenditures and public health which increases the level of confidence in the quality of care provided and the viability of the publicly financed system

Improvements in provider payment methods should People currently eligible for publicly financed health encourage providers to provide higher quality health care services; health care providers services, leading to improved health outcomes

Increased revenue for the HIF targeted for vulnerable The poor, who are most liiely to not seek care because groups should lead to a decrease in out-of-pocket payments of an inability to pay

Improved financial position of hospitals due to rationalized Health providers, plus patients who may be less likely services since the available resources will be spread over a to be pressed for informal payments smaller number of facilities. - More informed and engaged public will feel empowered The public, the Government of Serbia to contribute to health reform rather than to merely be affected by it. Likelihood of reforms succeeding increases and possibility of adoption of innovative ideas increases

- 14- 4. Institutional and implementation arrangements: Project Coordination Unit

A Project Coordination Unit (PCU) has been established within the Ministry of Health's Sector for International Relations, which also serves as the donor coordination unit of the MOH. The unit is already using funding from the Social Protection Economic Assistance and PHRD grants to prepare the project. The existing link between the new MOH PCU team and existing SPEAG Project Implementation Unit at the PrivatizationAgency has helped to pass information about procurement and financial management procedures in World Bank financed operations.

The PCU will be responsible for procurement, disbursement, monitoring and reporting on the use of project funds. The PCU is headed by a Director, who will have overall responsibility for the proposed project. The PCU Director will ensure that all project objectives and targets that can be monitored, as specified in the Project Operations Manual (POM), are on track and achieved. The PCU includes a procurement officer (who is supported by an experienced consultant), a project accountant and an administrative assistant.

Funds Flow The International Development Association (IDA) will make funds available to the Government of Serbia and Montenegro (SAM) under the Credit Agreement, goveming the terms and conditions of the IDA credit and specifying the project. The Government of SAM will on-lend the funds on IDA terms to Serbia based on a Subsidiary Credit Agreement with terms and conditions satisfactory to IDA. Project funds will flow from: (i)the IDA, either via a single Special Account established in a commercial bank acceptable to the Bank or by direct payment on the basis of direct payment withdrawal applications; or (ii)the Government, via the Treasury at the Ministry of Finance (MOF) on the basis of payment requests approved by the Treasury.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: The option of not doing a project at all could be considered as an alternative. However, there are several strong justifications for investing in health, including: (i)public sector health spending is a significant drain on scarce budgetary resources; (ii)private, out-of-pocket spending is unaffordable for many people, particularly the poor, and when people do have to pay, it often moves them into poverty; and (iii)there are ready opportunities to improve efficiency and health outcomes. To date, health has played a prominent role in the Banks policy dialogue with the Government and has been included as part of the first Structural Adjustment Credit (SAC-I) as well as the SOSAC. However, it is clear that these policies will not succeed unless there are investments in institutions and capacity building to accompany them. A related question is then, should the Project be a small technical assistance project to support the refinement and implementation of the strategies supported under the SAC and SOSAC? The amount of money allocated to the project is small in any case, and focuses heavily on TA, training and institutional development. The disadvantage of this approach is that it would not yield immediate benefits in the current delivery system, and could therefore undermine public support for the reform and for the current govemment. By adding to the Project investment in a small number of restructuring and refurbishment investments, visible benefits are created and these areas can act as demonstration and learning sites for

- 15- implementation of wider reform.

One lesson learned over the past ten years of implementing health projects in ECA is that it takes much more time than expected to implement health sector reform. The most success has been found in countries where the Bank/Borrower relationship has been relatively stable over time. However, the reality is that there is too much uncertainty about Serbia's relationship with the Bank over the timeframe required for a longer term investment through, for example, an APL. Our longer term involvement in health can only be decided within the context of the upcoming CAS discussions, which will, in part, be based on the PRSP.

The selection of health care financing, delivery system restructuring, and various capacity building activities (such as information systems, communication, and training in management, public health and health policy) was decided within the earlier discussions of the ERTP and TSS. Some important areas, such as pharmaceuticals, most of public health, HIV/AIDS and TB prevention and control, medical education and emergency medicine are not included because they are covered by other donors, although we do provide policy support to the MOHrelevant to these areas.

At the PCD stage of project preparation, consideration was given to a range of options for how the project might support implementation of the restructuring plan, including: (i)selecting pilot sites, including potentially linkage to the ongoing MOWICRC Basic Health Services Pilot Project in Kraljevo; (ii)initially focusing restructuring activities on the Clinical Center, which consume a large portion of total health resources; or (iii)establishing a Health Investment Fund and distributing the funds based on certain criteria, most likely some combination of willingness to adhere to the master plan and need. A variant of the first option has now been selected. Option (ii)was rejected because the estimated amount of project funds would not go very far in facility refurbishment or the purchase of medical equipment in a facility of this size and complexity and so would provide limited leverage, because the Clinical Center has been relatively well resourced in the past, and because it will be difficult to reduce inappropriate patient flows to tertiary level institutions unless secondary level hospitals improve their quality and functionality. It therefore makes sense to begin with investment in secondary level facilities. Aswell, EAR plans a study of the Clinical Center during 2003, that will be a prerequisite for investment. Option (iii)has been rejected because investigation revealed that establishment of a Health Investment Fund would require passage of primary legislation and establishment of a new legal entity, and hence would cause significant delay. Nonetheless, the project preparation process and the project design have built in some of the features of a Health Investment Fund, namely bottom-up development of proposals; and appraisal, ranking and selection of proposals on their merits for investment by either the Bank-financed project or the complementary proposed EAREIB financed program. One consequence of this, however, is that the Health Services Restructuring component of the project will be slow disbursing and will have high supervision costs, because in three of the four areas participating the project (Kraljevo, Valjevo, Vranje and Zrenjanin), detailed preparation and planning for restructuring will take place during the first year of project implementation.

- 16- 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). (Note that this is not a complete list of donor activity in the health sector.)

*tor Issue Project

Implementation Development Progress (IP) Objective (Do) Bank-financed Health financing, reform of the SAC-I S S ielivery system, health policy jevelopment Health project preparation PHRD grant Basic health services pilot project, Post-Conflict DGF S S Kraljevo Health reform-related technical SPEAG (and Canadian S S assistance and training, including: cofinancing) health financing, human resources, hospital restructuring, communications, information systems, reform implementation capacity-building Health financing; pharmaceuticals SOSAC market safety, efficacy and efficiency; masterplanning; health information systems planning Labor adjustment following Employment Promotion Projec restructuring - LIC Hospital energy efficiency Serbia District Heating and Energy Efficiency Credit 3ther development agencies I EAR: Pharmaceuticals supply and regulation; Ongoing Development of diagnosis, treatment Complete and referral protocols; Health institutions needs assessment Ongoing and planning for hospital restructuring; Rehabilitation of hospital and health Ongoing center equipment; Re-organization of blood transfusion Ongoing service; ?ublic health institutional assessment; Complete Public health capacity building; In preparation MOH Capacity building; In preparation Burden of disease study In preparation

- 17- EIB: General hospital rehabilitation and Jnder discussion restructuring;

UK DFID: Health Care Reform Commission; zomplete National Health Accounts; Ingoing

Canada: - EPI, MCH Services and youth :omplete AIDSprevention and children's rights; - Development of family medicine and Ingoing support to public health association

USAID: Community Revitalizationthrough Ingoing Democratic Action (through 5 US NGOs); may include rehabilitation of hospitals and health centers outside of Belgrade;

UNICEF: Child and youth health programs (EPI, Ingoing breastfeeding promotion, emergency services, injury prevention, growth monitoring, HIV/AIDS and substance abuse prevention);

UNAIDWGTFAM: HIV/AIDS prevention and control; ipproved TB prevention and control n preparation - lPD0 Ratings: HS (Highly Satisfactory), S ( stisfactory), U (Unsatisfactory), HI

3. Lessons learned and reflected in the project design:

Serbia is fortunate to be able to benefit from more than ten years of experience of health project implementation in the ECA region by the World Bank and other donors. OED has released an in-depth study of four completed health projects in ECA and the ECA Region's Human Development Department is currently preparing its own assessment of all thirty health projects that have been completed or are under implementation. Some of the main lessons are clear, including: (i)health sector reform is a lengthy, politicized process and expectations for the reform process have been too optimistic for both the World Bank and the client countries; (ii)institutional aspects of reform are important; (iii)greater attention needs to be paid to the political economy of the reform through marketing reforms to lawmakers, the medical community and the public; (iv) projects have been too complex; and (v) adequate resources need to be committed for supervision of projects.

- 18- Given this experience over the past ten years, the proposed Project includes a significant institution building component which will include activities to reach out to the public and make sure they are engaged in the reform process. Support to an institute for training in public health, management, and health policy is also envisaged as part of the project as well as the means by which capacity can systematically be strengthened in these important areas. The OED report noted that support for the establishment and accreditation of health management institutes has helped to increase the credibility of these "new" disciplines, built national capacity, and strengthened constituencies for reform.

In addition to these general lessons, there are also lessons that can be gleaned from the more than 15 countries that have undertaken "restructuring" projects. First, and most importantly, is that the market alone is not sufficient to reduce the size of the sector. Countries that have assumed this are more likely to see financial failure in their health insurance systems as they are unable to control costs. Second, the most successful restructuring projects have been actively supported by adjustment conditionality. Successful examples in ECA include Moldova and Georgia. Close links to SAC-1 and the proposed SOSAC are a key component of this Project's design. Third, many of the earlier projects only provided financing for civil works and medical equipment, but did not cover other expenses associated with restructuring. The ICR for the Albanian Health Project aptly notes:

The project design provided no resources or activities to support [this streamliningJ process, and assumed that stag redeployment and resource allocation would automatically be implemented by the local health authorities. The design underestimated the level of effort and resources required to achieve a health service rationalization and may have overlooked the technical and political complexity associated with such activities.

Fourth, it is necessary to ensure that there is consistency between future provider payment systems, reforms concerning decentralization and ownership of facilities, and legal issues around closing facilities and reducing staff. This project will place a significant amount of attention on getting these things right. Inclusion of health financing in the proposed Project ensures that there will be consistency between future provider payment system and the goals of the restructuring program.

The ECA-wide review also provides some lessons that are relevant for the health financing component. As with restructuring, reforms in health financing have been undertaken in the region often times without a clear governance structure, skilled and committed health care management and administration, or support from health care professionals and the public for the aims of the reforms. Even when carefully designed in sufficient detail, the implementation of activities is often not sequenced correctly. The proposed Project will be able to address this in part through its close ties to the adjustment program. One of the main issues to be resolved is the responsibilities of the key players in the systems and the role of the HIF vis-a-vis the MOH in particular.

4. Indications of borrower commitment and ownership:

The GOS has been clear and active in expressing its wish for a health project. Preparation was initially hampered by the absence of a Minister of Health for a period until June 2002, but made rapid progress subsequently. Specific examples of govemment commitment and ownership include:

0 The Ministry of Health, Health Insurance Fund, Institute of Public Health met on August 23/24,2002 for a two day workshop and developed a health sector vision, including nine guiding principles of the health sector in Serbia. The fact these groups worked together intensively for two days is significant given that before preparation of the project, they had not met in over two years. The full report of this

-19- workshop is available in project files. 0 A Republican Commission for Health Information was formed, including representatives of all major stakeholders and produced a health masterplanning document. 0 The Health Insurance Fund has already begun to introduce some of the reforms needed in contracting, aothough these reforms need development and refinement. 0 The Ministry of Health is commissioning a study of health sector human resources. 0 A public health conference has been held where an assessment of the public health system, produced with the support of EAR, was presented to local stakeholders and donors and international organizations, and plans for a future strategy developed. 0 A PCU was established in the MOHprior to signing of the PHRD grant.

5. Value added of Bank support in this project: After working in the region for more than ten years on many of the very same issues that Serbia is now facing, the Bank brings a wealth of experience and valuable lessons learned that can be applied in Serbia. In many of these areas, such as health care financing, hospital restructuring, and pharmaceuticals, we are able to provide in-house expertise and consultant services. We are also able to take a multi-sectoral approach by calling upon colleagues from other departments within our own institution (such as the linkages with the District Heating and Energy Efficiency, and the Employment Promotion Projects). The Bank together has already demonstrated its ability to bring various players such as the HIF, IPH, and MOH as well as to facilitate donor coordination when required. Our ability to simultaneously engage the Ministry of Finance helps to ensures the compatibility of any proposed health reform program with overall economic reform, and this linkage is supported by our adjustment operations. Finally, the level of donor financing in the sector meets only a small fraction of the needs, particularly for capital investment. There is potential for the proposed Project to provide some capital investment and leverage more from other donors and the private sector, through coordination with EAR in particular.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$ million; ERR = % (see Annex 4) 0 Cost effectiveness 0 Other (specify) Economic evaluation methodology: Cost benefit analysis of health services restructuring and related project investments is set out in Annex 4. Quantifiable efficiency gains achievable by restructuring exceed Project investment costs in net present value terms. In addition, the Project investments can be expected to yield a range of nonquantified benefits (including reduction in hospital acquired infections, reduction in risk of hazards from fire and biomedical waste, reduction in morbidity and mortality for a range of conditions covered by evidence-based clinical guidelines).

2. Financial (see Annex 4 and Annex 5): NFV=US$ million; FRR = % (see Annex 4) Financial analysis not applicable. Annex 5 contains financial sustainability tables.

Fiscal Impact: Counterpart funds requirements for the Project are modest, and at the peak in counterpart funds, requirements amount to less than 1 percent of the MOHbudget in any one fiscal year and are set out in Annex 3. Recurrent costs of operating and maintaining investments made under the Project are

- 20 - principally borne by participating health care institutions that will also benefit from cost reductions arising from efficiencies arising from restructuring. The licensing and accreditation agencies established under the Project are expected to be able to finance their recurrent costs by the end of the project life through fees charged to licensed professionals and accredited providers, based on cost-recovery.

3. Technical:

Component 1: Health services restructuring: The overall strategy for services restructuring is in line with best practice in Europe. The separation of primary health care and shift of patient care to lower cost, local settings is appropriate and should increase efficiency and access to care. The use of needs assessment, health services planning, and development of a facilities masterplan is a robust strategy for helping to use central leverage to adjust capacity, while supporting this with stronger financing incentives for efficiency and a move to a more decentralized management model. Copies of the templates and guidance for development of area health services restructuring proposals, and criteria for selection of proposals are available on project files, together with a detailed appraisal report on the restructuring of health services capacity in Kraljevo.

Component 2: Healthjinance, policy and management: The development of a more sophisticated and pro-active financing function - evidence-based, and supported by data for planning, analysis, monitoring and evaluation - is recognized internationally as one of the best strategies for controlling costs and ensuring cost-effective use of resources in an environment of increased decentralization and private sector development. The specific financing tools to be supported under the Project are accepted tools for achieving these objectives, namely: review of the basic benefits package based on evidence of cost-effectiveness and quality, analysis of the equality of resource allocation (relative to need and risk), review of provider payment mechanisms to create incentives for cost control, efficiency and quality. Licensing and accreditation are now standard tools for assuring minimum standards of safety and quality and encouraging quality improvement in "mixed economy" health systems. Health information systems development is a critical element of the infrastructure needed to support development of strategy and planning, financing, improvement of management of health service provision and system monitoring, and evaluation to feed back in the policy cycle.

4. Institutional:

4.1 Executing agencies: The executing agency for the Project will be the Ministry of Health. The MOHwill work closely with other agencies and institutions, such as the Health Insurance Fund, Institute of Public Health, Kraljevo general hospital and dom zdravlje; and other general hospitals and related health services in Valjevo, Vranje and Zrenjanin, that will be involved in implementation of the Project.

Institutional assessments of the Ministry of Health and the IPH have been undertaken with the support of EAR and are available in project files. The design of the proposed Project seeks to incorporate capacity-building in the MOH, HIF and participating general hospitals and related health services in each area, to boost institutional capacity. Project resources will be used to establish a health finance policy unit, staffed by full time local consultants, working alongside MOH and HIF staff. External technical assistance and training will be provided to support MOHand HIF functions.

4.2 Project management: The PCU has been established in the Sector for International Relations of the Ministry of Health, and the

-21 - Assistant Minister for this Sector has overall responsibility for the Project in the Ministry. Two other Assistant Ministers with relevant responsibilities within MOH have policy oversight for components 1 and 2 of the Project, respectively. Working groups have been established to support the work of the main components. A PCU Director and a Procurement Specialist are in post and have participated in a World Bank-sponsored PCU conference. In addition, they have received on-the-job training from a project management consultant: this training included assistance with preparing the Project Operational Manual. The procurement specialist participated in a Bank procurement training course in procurement of consultant services in February 2003. An international project managemenffprocurement consultant has been recruited and will be present during the first year of project implementation to assist the MOH PCU to function effectively, given that Serbia is a new borrower. The PCU Financial Specialist was appointed in March 2003. Four area coordinator posts will be filled, one located in each of the four areas participating in the Project. In Kraljevo demonstration site, a project structure has already been established under the MOWICRC Basic Health Services Project and is functioning well. The project coordination management of the Kraljevo activities of this project will be coordinated by the same structure, with the addition of one full-time equivalent position. However, all procurement and disbursement functions will be carried out centrally in the MOHand PCU.

4.3 Procurement issues: See the Procurement Capacity Assessment report (available in project files), and the Country Procurement Assessment Report (available in project files).

4.4 Financial management issues: A financial management review was undertaken in December 2002, and updated in March 2003, to determine whether the financial management arrangements for the Project are acceptable to the Bank. It has been concluded that the Project satisfies the Bank's minimum financial management requirements.

The SAM CFAA report notes that there are a number of risks on the management of public funds in SAM. The risks to the public funds include: (a) poor public sector financial management in the past; (b) unfinished reforms - the new governments that were elected have commenced a process of major reform, which looks good as designed, but it is still too early to say if the reforms will be totally successful; (c) capacity constraints in both the SAM and Serbian governments: (d) weak banking sectors; (e) weak audit capacity; (f)poor implementation capacity in line ministries: and (g) the lack of recent Bank implementation experiences within SAM. Since re-joining the membership of the World Bank, SAM has been using individual implementation units for each investment project (traditional PCU model), located within the relevant line ministries or project beneficiaries, to mitigate some of these risks.

Disbursements from the IDA Credit will follow the transaction-based method, Le., the traditional IDA procedures including reimbursements with full documentation, Statements of Expenditure (SOE), direct payments and special commitments. It is not anticipated that the project will migrate to report-based disbursement.

5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The Govemment is preparing a health facilities master plan. That plan will be completed by the end of 2003. It will include an assessment of the current status of health facilities, including their ability to treat

- 22 - medical waste, It will also include a map for the future, which in all likelihood will involve relocating health services and shutting down some facilities. The map for the future will be based on new standards and guidelines that take into consideration the economic reality, current clinical practices, etc.

The EAR and the Bank are currently helping the GOS to prepare this map, or master plan, and to prepare national standards and guidelines for health services planning. These standards and guidelines will include measures to align environmental and health protection standards with EU requirements. Itis beyond the scope of the Project to support full implementation of the plan. The Project will focus on shorter term, incremental improvements in quality and efficiency in four general hospitals. This will involve repairs and maintenance (roofs, windows, electricity, gases, heating systems) and some minor civil works that are expected to make limited changes in the internal partitions and access ways of existing buildings in order to make them more efficient and safe. These repairs and minor works are expected to be in the range of US$1,OOO,OOO - US$2,000,000 per facility. Improvement in energy efficiency is likely to be achievable through investment in minor civil works and in heating systems. In one or more of the areas in which the Project is working, the Serbia District Heating and Energy Efficiency Project may provide support for investment in improving hospital energy efficiency.

How radiological, chemical and biomedical hazards (principally infection control) are handled in the hospital will be part of the national standards and guidelines and will be encompassed in the Environmental Management Plans (EMPs) for the areas participating in restructuring. 5.2 What are the main features of the EMP and are they adequate? The project envisions some relatively minor civil works (repairs and rehabilitation of existing buildings) and is consequently rated a "B". Overall, the Project should have a positive environmental impact by improving infection control and safety within the hospital, reducing the amount of medical waste in Serbia that is not disposed of properly and by improving energy efficiency. The national standards and guidelines to be developed with EAR/IDA support will include regulations for safety in relation to fire, medical radiation, hazardous chemicals, and biomedical waste in the health system. All hospitals refurbished under the Project are required to have an environmental management plan, including a medical waste plan, and to disclose this locally in Serbian in concert with planned communication about health services restructuring.

The Kraljevo EMP includes plans for technical assistance on hospital safety, infection control and medical waste management, and recommended actions are to be financed by the Project. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: February 24,2003

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Determine whether an environmental management plan (EMP) will be required and its overall scope, relationship to the legal documents, and implementation responsibilities. For Category B projects for IDA funding, determine whether a separate EA report is required. What institutional arrangements are proposed for developing and handling the EMP?

An environmental management plan has been developed for the Kraljevo demonstration site and disclosed in Kraljevo. For the remaining three areas participating in the restructuring activities (Valjevo, Vranje and Zrenjanin), the MOHand general hospital managers will prepare environmental management

-23- plans using the Kraljevo EMP as a model and disclose these in their local areas once detailed restructuring plans have been completed (during project implementation). Health facilities waste management issues will be covered in the EMP. The EMP will, among other things, ensure compliance with local environmental and hygiene laws. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? How will stakeholders be consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed EMP?

Consultation regarding the environmental measures in the Kraljevo EMP has taken place with local stakeholders in the health services, municipality and with the MOH. The EMP has been disclosed locally and local stakeholders have already been engaged with health reform plans, in the context of the existing MOH/ICRC Basic Health Services Pilot project. Local project steering committees, with stakeholder representation, will be established in the other three areas and will be the primary counterparts for consultation regarding respective EMPs.

5.6 Are mechanisms being considered to monitor and measure the impact of the project on the environment? Will the indicators reflect the objectives and results of the EMP section of the EA?

The project is likely to have such a negligible impact on the environment that it is not felt to be worthy to establish a monitoring system of this type.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. There are several sets of social issues that arise from the Project. The first relates to access to and affordability of health care for vulnerable groups. The SOSAC and this project are particularly concerned with improving the amount of revenue the health fund receives to cover the costs of services for these groups, improving the targeting of scarce resources so that the poor are exempt from co-payments, and decreasing out of pocket spending for all groups, which would have a greater positive impact on the poor. Financing of health coverage for uninsured groups has been highly problematic in recent years, in particular for the refugee population of around 470,000, placing major strains on facilities which continue to provide care. The planned development outcome in this context will be achieving more equitable access to care, particularly for vulnerable groups, and regardless of ability to pay. Affordability of health care services is an issue, particularly for vulnerable groups and the poorer strata of the population. The Project measures will help to strengthen management of public sector health expenditure which, in turn, will help to ensure appropriate funding for vulnerable groups, and thus facilitate access to health care services. The selection of four areas to participate in the Project has taken into account main social and poverty indicators.

A second set of social issues arises around the health sector workforce and plans to change they way staff are paid and, in some cases, reduce or redistribute staff numbers. There appear to be large structural inefficiencies. In particular, overcapacity in the hospital sector appear to be a likely cause of high spending: both hospital occupancy rate and the average caseload per physician are low by international comparison, although the official number of hospital beds per population is lower than in manytransition and high-income economies. By way of contrast, low caseloads in primary care facilities appears to reflect underutilization of the service more than a high number of doctors. Another cause of concern is the very high number of non-clinical staff. It would be desirable to increase the wages of some health

- 24 - sector employees to reflect labor market conditions, but this can only financed sustainably through a reduction in the total number of staff and other efficiencies. While this will improve the morale of some, others may be losers. Minimizing the social impact of these reductions and supporting social cohesion is a key issue, and will be supported by the Employment Promotion Project and SOSAC. Activities financed from the Employment Promotion Project would help to mitigate expected negative impacts on the workforce, particularly in Kraljevo, where one of the proposed pilot projects will take place. Measures comprise a new set of active labor market programs, including retraining, job search skill training , special employment programs for vulnerable groups (youth, disabled, and minorities); job fairs; and local economic development planning grants.

A final set of issues concerns health reform in general and the impact it will have on the population. The Project proposes to support some significant changes in the way health care is financed and delivered. How well understood and received these reforms are is a key determinant of their ultimate success. The Project will support strengthening communication on health-related issues and the capacity in the Ministry and related agencies, to convey information to the general public, and also to bring information about public perceptions and concerns to decision-makers. The desired social development outcome will be a better informed general public, who take responsibility for their own health and dispose of information on available and appropriate services. The project will help to develop a comprehensive communication campaign addressing all stakeholders. Elements include frequent townhall meetings and discussions with the local communities, grassroots public information campaigns and regular public opinion polls. 6.2 Participatory Approach: How are key stakeholders participating in the project? The main stakeholders in the health sector are the general population, particularly vulnerable groups such as the old and the young, refugees, internally displaced persons, and the unemployed. Other stakeholders comprise the medical profession, paramedical and support personnel in health care institutions, politicians, health care administrators at all levels of the central and local administration, as well as community representatives and municipal institutions (mesna zajednica). Last but not least, NGOs and the international donor community are important players in the health sector, as well.

Extensive stakeholder consultation has taken place prior to and during project preparation. A National Health Council and Health Care Reform Commission have been established to advise on and direct health care reform. Furthermore, the Health Policy of Serbia document and a Health Vision document have been elaborated with extensive stakeholder participation and were adopted by the Government. Working groups comprising representatives of all major stakeholders have led the elaboration of detailed project activities. Findings of these groups were then presented to a larger audience for discussion. Participation of patients and the public in general was assured through the Social Assessment for the Project, which has been conducted for both the SOSAC and this Project, and complemented by the Poverty Survey 2002 and the ongoing Poverty Assessment for Serbia. The assessment serves as a baseline against which the Project can be monitored on important indicators such as targeting mechanisms for the poor, out-of-pocket expenditures, and provider satisfaction. Continued participation during project implementation is assured through extensive collaboration between Government, professional and patients organizations, and by means of strengthening two-way communication and information channels. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The Project will take advantage of the Government's on-going meetings with NGOs and civil society organizations for the PRSP. Another opportunity is via coordination with other donor-financed community development programs that are working with NGOs at the local level (such as the USAID

- 25 - program) in the pilot areas that will participate in the Project. The Licensing and Accreditation sub-component of the Project will work with professional associations and societies. In the context of the communications component, consultations have been held, and close co-operation during project implementation has been envisaged with national and international NGOs working in public opinion research and social communication, such as the Open Society Institute and IN. Furthermore, the project activities in Kraljevo will be implemented in collaboration with ICRC. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Project preparation and implementation are closely linked with the PRSP and related social sectors projects (SPEAG, SOSAC, and the Employment Promotion Project LIC) that are supporting targeting of resources to vulnerable groups and supporting measures to mitigate the impact of labor redeployment. Adverse social impacts that result from the envisaged downsizing of the workforce will be mitigated by the LIC, which provides for re-training and re-deployment opportunities. Strengthening policy making and delivery capacities of health sector institutions and enhancing the ability to respond to social needs would also be supported through technical assistance on mandates and roles during the inception phase of the Project. 6.5 How will the project monitor performance in terms of social development outcomes? Performance monitoring will be consistent with measures identified in the PRSP, the SOSAC and the Employment Promotion Project. Monitoring and evaluation of project impact and outcomes is a key activity under the project management component, and will be carried out by means of a baseline study at project inception, followed by regular updates during project implementation. Furthermore, the Project includes the development of institutional capacity to collect and analyze social development data for policy formulation and program design. This includes, but is not limited to, development of performance information and management system to support cost-effective delivery of health programs; monitoring of changes in the health workforce, particularly of displaced workers; qualitative assessment of health outcomes in the four participating areas; and financial indicators including monitoring of the ability to pay, and quality of services.

7. Safeguard Policies: 7.1 Are anv of the following safeguard Dolicies triggered bv the Droiect?

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Seepara E.5.

- 26 - F. Sustainability and Risks 1. Sustainability: Sustainability of the restructuring activities is the primary issue. Project funding is already scarce and while supporting the preparation of a national facilities based master plan, only providing funding for a micro-portion, This will be considered during preparation of the Plan. For example, are there facilities that are more amenable for private investment, or others that can be converted for other public sector uses?

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): The main risks of the project are expected to arise from political uncertainty and from the challenge of building stable capacity and sustaining coordination of reform effort centrally and locally. Political uncertainty is exacerbated by two factors: first, while the constitutional change and implementing legislation has now been adopted in both member states and at the union level, the implementation challenges facing the new union and its constituent member states will be significant. Second, while the Serbian Government has shown strong leadership and rapid reaffirmation of its policy commitment in the aftermath of the recent assassination of the Serbian Prime Minister, this event, combined with the failure of two rounds of presidential elections in the fall of 2002 owing to insufficient voter turnout could challenge the Government's ability to sustain reform and build capacity.

Risk Mitigation Measure

Stability and coordination among health S Maintain dialogue with MOH, HIF and MOF, sector decision makers is achieved so tha and support key milestones with adjustment policy and plans to be adopted lending where possible

Government commitment to restructurini S Begin with smaller scale initiatives where local and rationalization is sustained commitment is high, and demonstrate the benefits of restructuring in these areas. Timing for milestones for change need to be realistic, recognizing that restructuring inthe social sectors is always a long term process.

Strategies to mitigate possible local S Investment in 2-way communications concerns about service restructuring are strategies, use of local project coordinators and effective. stakeholder groups, and coordination with labor adjustment measures supported by the Labor LIC should help to mitigate concerns.

Hospital revenue is stable and M The HIF has already taken steps to increase expenditure management is adequate to revenue and control expenditure. Barring provide resources to maintain and operati macroeconomic shocks, or major institutional facilities and equipment restructured or instability, this risk is much lower than in rehabilitated under the Project recent years.

From Components to Outputs Stability in institutional and staffing M Focus training on professional staff in arrangements is achieved in the face of subordinate tiers in the organisation, and strive political change €or wide and representative coverage among

- 27 - participants in training.

Staff are able to be released from duties N Use local, modular training programs and to participate in training distance learning to mitigate impact on work commitments.

Legislation is enacted to underpin M Coordinate legislation into a comprehensive changes to licensing, accreditation, roles package; maintain dialogue with key ministries and governance of main health sector on reform and legislative priorities across the institutions, and other reforms supported whole of government (MOF, MOSA). by the Project Consider scope to support legislation milestones through adjustment operations in future CAS.

Political support for transparency and M Maintain dialogue with key ministries (MOF, publication of information and reports on MOSA, Office of PM) on issues of public health system performance and resource accountability and governance, across electoral allocation is maintained cycle. Liaise with civil society organisations, NGOs, and other donors with an interest in health sector.

Delays in project implementation occur M Manage expectations regarding pace of in Vranje, Valjevo or Zrenjanin, because implementation and disbursement; explore these areas were selected for resource mobilisation options within the Bar,, participation in the Project relatively late to ensure adequacy of supervision and support (compared to Kraljevo), as a result of the local project implementation, and coordinate later start and/or lack of supervision with other donors with full-time presence of resources required to address this. health experts in the field. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Ris M (Modest Risk), N Jegligible or Low Risk)

3. Possible Controversial Aspects: Service restructuring plans can cause local concern among employees and citizens, particularly ifthere is a need to reduce staff numbers or change the roles and distribution of some staff. The proposed Project will support the planning phase, but not implementation phase of hospital masterplanning. The Project seeks to mitigate potential public and professional concern about restructuring by beginning with a demonstration project in a region that has already been developing experience with local leadership of change, and seeking to evaluate and disseminate the lessons from reform in this area to other parts of the health system. In the Kraljevo demonstration project, coordination with the Employment Promotion Project will assist to address staff redeployment issues. The Project plans to support technical assistance on some issues regarding the respective mandates of central health authorities, and governance and public accountability issues for the HIF and healthcare institutions. Consideration of changes in the roles of organisations can create uncertainty among the management and staff of these agencies, and for other stakeholders in the health sector that interact with them. The Project will support a consultative approach to changes in these areas, and proceed at a pace to be determined by dialogue and agreement with counterparts during the life of the Project.

- 28 - G. Main Credlt Conditions 1. Effectiveness Condition e Laws adopted by the Parliament of Serbia and Montenegro (national level) ratifying Development Credit Agreement and on-lending to Serbia.

2. Other [classify according to covenant types used in the Legal Agreements.] Dated Covenants

The MOH will ensure that health services restructuringproposals and investment plans for Valjevo, Vranje and Zrenjanin, acceptable to IDA, are completed by September 15,2003;

The MOH will ensure that an EnvironmentalManagement Plan has been carried out and disclosed locally for Vranje, Valjevo and Zrenjanin restructuring activities, prior to the launching of civil works procurement under the Project for each of these areas; e The MOH and HIF have jointly agreed by September 15,2003 on the institutional location, staffing, training, and resourcing of a unit responsible for ongoing review of the health financing policy (including review of the basic benefits package, provider payment systems and resource allocation methods), and have staffed the unit with appropriately qualified personnel by December 15,2003.

Condition of Disbursement

0 No withdrawals shall be made in respect of the Authorized Allocation or in respect of any request or requests for deposit into the Special Account unless and until agreement is reached between the relevant authorities in Serbia and Montenegro and IDA in respect of timely and monitorable mechanisms for the processing of payments for eligible expenditures, including payments made from Government counterpart funds.

Proiect Management e For the duration of the project, the Borrower shall maintain the PCU staff, structure, and other resources satisfactory to IDA (as set out in the Project Operations Manual approved by IDA).

Financial Covenants

The PCU is to maintain a satisfactory Financial Management System, including records and accounts, and to prepare financial statements in accordance with accounting standards satisfactory to the Bank.

0 The PCU is to provide annual project accounts and audit reports to the Bank within six months of each fiscal year (with the audit to be carried out by independent auditors in accordance with International Standards on Auditing, and TORSsatisfactory to the Bank).

- 29 - H. Readiness for Implementation [Iz1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1. b) Not applicable. ix] 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. ix] 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0 4. The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies ix] 1. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

Loraine Hawkins Armin H. Fidler Team Leader Sector Manager Country

- 30 - Annex 1: Project Design Summary SERBIA AND MONTENEGRO: Serbia Health Project Key Performance Data collection Straiegy lndkators Critical Assumptions

Sector-related CAS Goal: Sector Indicators: kctor/ country~. reports: (from Goal to Bank Mission) 1. restore macroeconomic Sustainable financial balance hualreport by MOH on No major economic crises stability in the health insurance system :onsolidated arrears of health and reductionin arrears of ystem public healthcare providers

2. improve the social Reduction in out-of-pocket 'overty survey establishes High out-of-pocket costs for well-being of the most payment for health services laseline; follow-up in healthcare push significant vulnerable and build human and increased use of outpatient iousehold budget surveys numbers of families capacity health services by poorest into/deeper into poverty quartile; increase in utilisation of healthmore equitable distribution of public health finance

3. improve governance and Public and patient satisfaction heline survey and follow up No major social crises or civil build effective institutions with health insurance and urvey to be completed within conflict healthcare provider lroject life institutions increases; roles and objectives are clarified and aligned among MOH, HIF, IPH Project Development Outcome / Impact 'roject reports: (from Objective to Goal) Objective: Indicators: To build capacity to develop a Hospital masterplan and ranslations of relevant Decision makers in MOH, HIF sustainable, performance planning standards and tandards, guidelines and and health institutions use data oriented health care system guidelines adopted. lecrees analyses to address underlying where providers are rewarded financial imbalances, and for quality and efficiency and misallocation of resources. where health insurance In the four general hospitals beline data from hospital coverage ensures access to participating in the project: dministration data, poverty Health care revenues remain at affordable and effective care reduction in financial arrears, urvey data and follow up least constant over the life of reductionin bed numbers & .ousehold surveys the project ALOS; increase in occupancy; reductionin flows of area Consistency of the patients to tertiary care; Government's health care increase in use of primary care reform strategy and stability in and outpatient services. institutional arrangements supported by the project HIF and MOH increase the 'CU project reports; number of staff trained in :anslations of relevant Coordination among the range health policy, finance, and mendments to laws, bylaws of actors involved in health management, and use their nd contracts; annual reports reform, health finance, policy skills in review of the basic my HIF and MOH and delivery is strengthened benefits package, and maintained publidprivate mix, resource allocation and provider Experience of selected local payment systems; a critical initiatives is effectively

- 31 - mass remain in post. eplicated on national level.

Contracts and payment methods for hospitals participating in the project provide improved incentives for efficiency and quality of care; are consistent with restructuring plans; and avoid perverse incentives.

MOWHIF monitors and analyzes at least annually the revenue, expenditure and arrears of the HIF and public healthcare institutions, and out-of-pocket expenditure on health by the population.

Policy and plan adopted for dOH report financing, resource allocation and provider payment methods for public health services, with the aim of increasing the effectiveness of disease prevention and health promotion.

Licensing and recertification icensing and accreditation program for doctors in place. body annual reports

New central HIS information dOWIPH statistics on use of service for Serbia in use and elevant web-sites; PCU metadatabases in use to allow iroject reports coherent approach to HIS development; regional integrated HIS used by management in all participating health institutions.

MOH, HIF, IPHlISM conduct/ SOWIPH reports publish regular analytical reports on performance of health system and health sector institutions, using the WHO WHR 2000 categories, and local measures, agreed with IDA.

- 32 - Key Performance Data Collection Strategy Hierarchy of ObjectiveS IndlCatOrS Critkal Assumptions %tsfromeach Output Indicators: 'roject reports: from Outputs to Objective) Zomponent: Hospitals masterplanning TU project reports &ability and coordination I, Health Services standards and implementation tmong health sector decision teestructuring strategy completed. nakers enable policy and dans to be adopted Number of health service and public health managers trained.

Hospital restructuring and 3ovemment commitment to rehabilitation implemented in Sestructuring and four regional hospitals .ationalizationis sustained. (Kraljevo, Valjevo, Vranje and Zrenjanin). Strategies to mitigate possible ocal concerns about .estructuring are effective.

3ospital revenue is stable and :xpenditure management idequate to maintain and )perate facilities and :quipment :estructured/rehabilitated

2. Health Finance, Policy, and HIFiMOH establish and 'roject reports Stability in institutional and Nanagement maintains a unit located in the staffing arrangements is HIF of at least 4 staff ; achieved in the face of any responsible for reviewing the ~liticalchange benefits package, publictprivate mix, resource Legislation is enacted to allocation and the provider mderpin changes to licensing, payment system; staff in this iccreditation, roles of key unit are trained in health nealth sector institutions amd policy, economics, xher reforms supported by the management, epidemiology or Project other relevant disciplines. Political support for Licensing body is established, transparency of information staffed and is operating a and reporting on health sector licensing and re-licensing performance and resource system for health professionals allocation is maintained with the aim of ensuring quality and up-to-date clinical skills.

Accreditation body is established and staffed, and plan adopted for developing accreditationprocesses with the aim of ensuring safety and minimum quality standards in

- 33 - all hea hcare providers, and encouraging quality improvement.

#,Project Management, Project outputs are produced donitoring, and Evaluation on time and on budget; PCU shows proactivity in solving problems and seeking to achieve outcomes.

Project monitoring system in place and reporting six monthly (quarterly financial reports).

Effective communication and working relationships developed with key representatives in the four areas participating in health services restructuring.

Evaluation of Kraljevo

l initiatives carried out and lessons disseminated for other restructuring initiatives and development of national masterplan.

End of project evaluationof all components, with input from stakeholder workshops.

Annual and final project audit. Key Performance Data Collection Strategy Indicators Criticat Assumptions W+sct Components iputs: (budget for each Droject reports: :from Components to sub-components: omponent)

I. Health Services Restructuring 3.0 Six monthly project reports; Delays in project implementation I.1 Masterplanning luarterly financial reports xcur in Vranje, Valjevo or I.2 Restructuring in Kraljevo Zrenjanin due to later start andor lemonstration Site lack of supervisionresources L.3 Restructuring in Valjevo, required to address this. Vranje and Zrenjanin l. Health Finance, Policy and 9 Six monthly project reports; tability in institutional and vIanagement luarterly financial reports staffing arrangements in the face l.1 Basic Benefits Package and of any political change ?roviderPayment Systems 2.2 Financingof Public Health Legislation is enacted to underpin Services changes to licensing, 2.3 Licensing & Accreditation accreditation, institutional 2.4 Health Information Systems changes and other reforms 2.5 MOH Capacity-buildingand supported by the Project Communication

3. Project Management 5 Six monthly project reports; Monitoring and Evaluation prterly financial reports

- 35 - Annex 2: Detailed Project Description SERBIA AND MONTENEGRO: Serbia Health Project

By Component:

Project Component 1 - US$13.02 million Health Services Restructuring Component

Objective: to build capacity for implementation of restructuring of health services delivery so as to improve the efficiency while maintaining quality: to support initial stages of implementation of short-term restructuring initiatives, focused on general hospitals and related health services in four areas.

Descriution of sub-comuonents and activities:

Sub-component 1.1 - Masterplanning: This sub-component will support planning for restructuring of health services, completion of a masterplan for the network of public sector health facilities, development of planning standards and guidelines, and ongoing work in development of policies for implementing restructuring (including revision of laws, development of standards and guidelines, human resource strategies, and resource allocation and management changes) to support plan implementation. It will also provide TA to propose ways of strengthening the accountability of public sector healthcare institutions for efficiency and quality. It will provide training in relevant planning and analysis skills for MOH, IPH, and HIF staff, and training in management for the healthcare institutions from the four regions participating in the Project. The Credit will finance TA, training, workshops and study tours under this component.

Integration of the public health system into restructuring in the four regional restructuring initiatives: Under subcomponents 1.2 and 1.3, part of the project objective will be to ensure that where the health care delivery system is undergoing restructuring, the public health system is also addressed. In addition to linkages with the restructuring of the delivery system (e.g., to integrate diagnostic services and health information systems), this sub-component will also ensure coordination of restructuring proposals with the health financing component and development of the basic package of health care services as well as with the HIS activities. Community-based public health will be emphasized. In essence, integration of patronage nurses, coordination with civil society at the local level

Sub-component 1.2 - Restructuring in Kraljevo demonstration site: The MOWICRC Basic Health Services Pilot project in Kraljevo has laid the foundations for health service restructuring and wider health reform implementation, and has already engaged the key stakeholders in the health system in Kraljevo in developing proposals to improve efficiency and quality, and rationalize physical and human capacity, focusing on primary care services. Kraljevo health center managers have developed and costed proposals to extend services restructuring to encompass the secondary level as an integrated component of a larger health system. Restructuring will focus on

- 36 - promoting the location of service delivery in the most appropriate care setting. The Kraljevo restructuring plans encompass the following elements: determination of population health needs through public health intelligence, gap analysis of current service provision, site reconfiguration to achieve efficiencies, strengthening the role and quality of secondary services, and enhancing operational liaison and networking with primary care and tertiary referral institutions. A detailed report on the Kraljevo project plans: "Restructuring of Hospital Capacity and Relationship with Primary Care and Tertiary Level Services: Health Center Studenica, Kraljevo" (February 2003) is available on Project Files.

In summary,-. the Lulans entail: 0 clear organizational separation of primary care, secondary care, diagnostic services and non-medical services: 0 training of managers to support their new organizational responsibilities and equip them to develop services, and change the thinking of the Institution (embracing modern service business management methods); 0 development and equipping of a centralized diagnostic center to increase the efficiency of patient flows and improve diagnostic support for emergency services and for PHC; 0 reducing excess hospitals wards, beds and buildings: emptying one building (for commercial leasing), closing two low-occupancy wards, and merging other wards and departments; and redistributing beds: 0 introducing a planned, funded preventive maintenance program; 0 re-sizing human resources in response to the consolidation of services, through redistribution to new or expanded services, early retirement and halting new hiring. Linkages to the Employment Promotion Project will be made to encourage redeployment of staff; 0 pursuing accreditation of the general hospital and licensinghelicensing for its professional staff; 0 decreasing outward referrals by widening the scope of service, and developing guidelines with primary care providers, Novi Pazar hospital, and tertiary sites; 0 planning and developing new services in response to population needs assessment and evidence-based analysis, in coordination with primary care and the IPH; this may include aged care, terminal care, day surgery, interventional radiology, an emergency trauma center; 0 the development of the purchasing function of the Kraljevo branch of HIF, and of piloting of new contracting and payment methods in coordination with the MOH and HIF, with specific reference to the primary care financial model based on capitation, developed and tested through the MOWICRC Basic Health Services Pilot project.

These activities will be supported by five packages of technical assistance and training that have been identified, and terms of reference prepared. These packages cover the following objectives and outputs:

Health service and hospital information analysis and costing: studies and surveys to determine the optimal service configuration based on community needs, and identify supporting financial and activity data requirements: this will cover human resource configuration and training needs, monitoring and evaluation requirements; Strategic planning and management: from the initial implementation stage; this will cover strategic and business planning for the Kraljevo general hospital and related health services, and will also generate inputs to the wider planning of hospital restructuring and development of planning guidelines and standards: Care and Treatment: review and assessment to identify best practice clinical management within the scope of available resources, provide relevant training and support for changes in clinical practice based on evidence; Quality Assurance: to foster the development of systems that manage risk and improve quality of the services provided within available levels of resources

- 37 - (v) Environmental Management: this will include audit to assess the management of hospital waste (clinical, biohazard, industrial, support services), identification of environmental risks associated with rehabilitation and reconstruction and determine appropriate safe handling requirements; identification of sustainable strategies to ensure and implement appropriate waste handling practices, and design, implementation and evaluation of related training requirements.

In addition, under Component 2 (HIS sub-component), Kraljevo will develop a pilot integrated Health Information System, to allow electronic communication between different levels of health care, and exchanges of information with the local IPH and HIF, and communications with central IPH ("Batut") for surveillance and utilization review purposes.

Under Component 3, project management in Kraljevo will be financed, to be located in Kraljevo general hospital and integrated and coordinated with the existing Project Administration Unit for the MOH/ICRC Basic Health Services Pilot project. The Project will also support evaluation dissemination of lessons from the Kraljevo experience to inform planning and restructuring in other areas, both at the primary and secondary level.

The activities of the Project will be complemented through coordination with ongoing and planned future donor support for primary care training from ICRC and CIDA, to enable higher quality, broader range of diagnostic and treatment services to be offered to patients in primary care. Close coordination will ensure that adequate support will be provided for the gradual development and implementation of a package of basic benefits, with the primary care physician taking on a wider range of patient diagnosis and treatment, and taking up the function of gatekeeper for the healthcare system.

The Credit will also finance minor civil works, medical equipment, other equipment, TA (for functional planning, service re-design, improvement in efficiency and quality of clinical practice, and other topics selected to support restructuring), training (in management, in implementation of evidence-based medicine), and workshops.

Sub-component 13 - Restructuring of health services in 3 additional areas: Valjevo, Vranje and Zrenjanin: The MOHhas selected these three areas to participate in the project based on the criteria (set out in background papers available on Project files) related to population need, need for restructuring, and local capacity for management of change. The general hospitals in these areas will be assisted to develop detailed restructuring proposals and investment plans with technical assistance from SPEAG by the time the Credit is submitted for approval by the World Bank Board of Executive Directors. Based on evaluation of these restructuring proposals, investment plans will be prepared for approval by the Ministry of Health and IDA for these three general hospitals to be supported by the Project. These restructuring initiatives will also include a focus on optimisation of the roles of primary and secondary care, and coordination between these levels of care, and a focus on integration of the public health system into health services restructuring. Preliminary proposals for secondary level restructuring have been identified for the three general hospitals in these areas: e Vuljevo: The hospital has the capacity to consolidate all services into a major hospital block from four separate local sites. Utilities upgrading will reduce waste and increase efficiency. Development of a centralized emergency trauma center will enable better triage of patients, faster treatment and increased efficiency. e Vrunje: There is scope to link existing separate building and consolidate services out of poorer quality pavilions. Development of a centralized emergency trauma center will provide similar benefits to those envisaged in Valjevo and encourage a wider range of the surrounding communities

- 38 - to use this hospital. Local primary care, local HIF branch and IPH managers are actively engaged. Zrenjanin: There is potential to consolidate most inpatient services into a new and virtually unused, uncompleted 450 bed hospital block from a range of separate pavilions, subject to negotiation of a viable financing plan for completion of the facility with other financing sources. Development of a centralized emergency trauma center is planned in this hospital also.

Although the scope of this Project could not support nationwide implementation of restructuring, it is envisaged that the Project could be followed by a phased implementation of restructuring in other parts of the country with the support of a follow-on project or from other donorsflenders, principally EAR and EIB.

Project Component 2 - USS8.93 million Health Finance, Policy and Manapement Comwnent

Obiectives: To support policy development and build capacity for analysis, decision-making, health financing, health system regulation and reform implementationin the MOH, HIF and PH, and Serbian health sector regulatory agencies, and to support this with information systems development.

Description of sub-components and activities: Sub-component 2.1 - Basic Benefits Package and Provider Payment Systems: This sub-component will improve the capacity of MOH and HIF to develop and implement improved health financing policies, to improve health system performance. The component will support establishment of a joint health financing policy unit by the MOH and HIF, combining existing staff with full-time local consultants financed by the project, and will aim to provide training in health finance for a critical mass of economists, social medicine specialists, epidemiologists, physicians and lawyers specialising in health policy who would continue to work in the HIF and MOH after the close of the Project. The work of the health finance policy unit will be supported by short-term expert advice from local and intemational experts. The unit, with external advice, will review the following areas of policy and make recommendations for changes to laws, bylaws, contracts and implementation arrangements:

(a) review ofthe basic benefits package: This will involve reviewing the currently available health services and medical interventions covered as benefits of the social health insurance system. Such a review would assess the health-related benefits, and other consequences of specific interventions or technologies, and the costs and/or savings from the inclusion or exclusion of services and interventions in the basic benefits package. This will provide information for explicit decision making on entitlements and revisions to the existing regulations. Defining the basic package of benefits would not only entail decisions on in or exclusion of services but also consideration of issues such as who will provide the service, where services will be provided (institutional, ambulatory, or home care), and the conditions for individuals to access the services. The latter could encompass a referral system from primary to secondary and tertiary care, a differentiated eo-payment system for secondary and tertiary care and pharmaceuticals, and a pre-approval system for high cost secondary and tertiary care by the HIF. This work will be coordinated with health technology assessment (HTA) carried out by the HTA institution, and the Project may support expert advice and training related to HTA, in coordination with support from other donors in this area (notably EAR-financedconsultants). The health finance policy unit will also use information developed under the EAR-funded pharmaceutical project (essential drugs list review) and the EAR-funded clinical guidelines project will provide efficiency and synergy in this health system development effort.

- 39 - (b) review of the private/public mix infinancing and provision of health services: This will involve development of explicit policy on what services should be included in the privately financed package (as distinct from publicly financed services), what private services may be provided by public institutions and/or health staff employed in public institutions, as well as the extent to which private providers could be engaged or contracted to deliver the publicly financed basic benefits package. An assessment of the current situation of private financing and service provision will be done, looking at the role of private and supplemental medical insurance, as well as at private out-of-pocket payments (formal and informal) and the private provision of services. The health finance policy unit would develop a strategy on how to systematically deal with private funding and provision of services.

(c) development of contracting and provider payment tools: Proposed project activities include a review of current contracting arrangements and of the role and capacity of HIF and its branches as effective purchaser, as well as a review of effectiveness of current provider payment systems. The work of the health financing policy unit will be supported by international and local expert advice, training, workshops and study tours.

(d) equitable distribution offunding for health services. This activity aims to develop more equitable funding distribution (for example using a transparent formula related to population to guide changes in HIF resource allocation) for health services across different areas of Serbia. It will support analysis and planning for the gradual redistribution of funds among Belgrade and other areas of Serbia in order to support the restructuring proposed for health services (Component l),which should permit more efficient care delivery in closer proximity to patients. This subcomponent will support the following activities: review of the geographical distribution of funds to Belgrade and other areas with respect to access, equity, efficiency, and quality of necessary care; development of a distribution system that will support the planned shift in care delivery from tertiary to secondary care, from secondary to primary care, and from in- to outpatient care; and implementationplanning. These reviews would take into consideration the implications of constitutional change and government policies on decentralization.

Sub-component 2.2 - Financing of Public Health Services: This activity will assist in prioritizing public health expenditures (meaning expenditures on disease prevention, health promotion and health protection) and in developing new financing mechanisms and incentives to address priority public health problems, Particular attention will be paid to public health functions in the areas participating in the project (complementing activities in Components 1.2 and 1.3). The review will consider how best to finance activities depending on whether they are central (Serbian) programs or local level programs (e.g., immunization programs) or locally directed programs, with resource allocation assigned according to the centralflocal mix of responsibility and authority for the programs. Recommendations for funding the restructured IPHs will be developed with action plans and levels of responsibility defined more completely than they are at present. Background work on this activity is being conducted with SPEAG funds, and will build upon an assessment of the IPH supported by EAR. This activity will be coordinated with related advice on restructuring and development of the IPHs, supported by EAR. This subcomponent will begin immediately on implementation of the Credit, with international recruitment of the main technical assistance (long term public health management consultant). This individual or group will work with a selected local consultant (public health management specialist), and with follow-up workshops held at least yearly through the subsequent years of the project.

Subcomponent 2.3 - Licensing and Accreditation: (a) Licensing: This sub-component will support the establishment in the short term of an effective licensing body for professionals, to guarantee minimum standards of care delivery. For the newly

- 40 - established licensing body, staff members, office space and office equipment will be provided and initially financed from the Credit on a gradually decreasing scale as finance of the licensing body is planned to be gradually taken up from licensing fees paid by the professionals. Activities supported by the Project will include development and implementation of a plan for establishmenthpgrading of the licensing body, technical assistance on international best practice in licensing; implementation of a database on professionals; and establishing a system of criteria and procedures for (re-)licensing, piloting and roll-out of licensing standards.

(b) Accreditation: This sub-component will support the early phase of establishment of an accreditation body for health care providers, which over the medium to long term will continually improve the quality and safety of their services. For the newly established accreditation body, staff members, office space and office equipment will be provided and initially financed from the Credit on a gradually decreasing scale as finance of the organisation is planned to be gradually taken up from accreditation fees paid by the providers. Activities supported by the project will include development and implementation of an accreditation program for Serbia and plan for development of the accreditation body; technical assistance on international best practice in accreditation; training of surveyors and quality coordinators; development of standards and survey procedures; piloting and roll-out of accreditation standards; study tours and training courses.

Sub-component 2.4 - Health Information Systems: This activity will develop ICT services that will enable all health sector stakeholders to use and share a common set of medical and health related data sets with relevant European and international standards, appropriate software, transparency, and communication facilities. The long term vision for information support for health policy, financing, monitoring and evaluation is integration of a network linking the HIF, IPH, MOH and other policy analysis institutions. The Project will put in place the initial conditions for this long term strategy. Due to time and financial constraints, the scope of the HIS project components is not to introduce a comprehensive health information system for Serbia. Rather, the project will focus on development of two activities:

(a) an operational local health information system in the four areas participating in Component 1 of the Project. An integrated local information system will be developed first in Kraljevo, connecting healthcare providers, public health and health financing organizations, and will be managed in coordination with the health services restructuring component in Kraljevo. Drawing on lessons from Kraljevo, local HIS will be developed and implemented in Valjevo, Vranje and Zrenjanin.

(b) a central health sector information service for Serbia, available as a practical resource for MOH and HIF decision makers, health IT system builders and the medical professional community, as a web portal site service (providing meta-databases, a terminology server, IT standards resources, etc.). The two activities will be used as templates and direct sources of building blocks for developing an integrated health information system over time. To ensure appropriate utilization, a proper legal framework, prescribing the utilization of data-models and selected standards has to be implemented by the MOH. This will be developed using as inputs the results of PHRD and SPEAG funded preparatory studies. These grants are financing production of a meta-database of existing ICT resources and code-sets, production of a the set of adapted international health ICT standards, and detailed functional plans of the local system and the health information center (also referred to as a “masterplan for HIS”). These studies will be used as the basis for developing terms of references and technical specifications for the procurement procedures of this subcomponent of the Project. The EAR is also considering financing for more extensive health information systems development in plans for future years activities. At this stage, coordination with these agencies is envisaged to be informal, through exchange of information, to assist

-41 - different actors in taking a consistent approach.

Subcomponent 2.5 - MOHcapacity-building and communication: (a) Clarifying institutional roles and mandates of the MOH, HIF, IPH and other health authorities: The mandates of MOH, HIF (and its branches) and IPH have to be clarified and adjusted, to enable successful capacity development and implementationof the Minister's health strategy. This activity will assist the MOH and other stakeholders with a review of and a proposal for eventual realignment of the mandates, review of relevant laws and regulations, and capacities of the various stakeholders to exercise them. The review is also seen as key to the reform measures in other areas, notably in health insurance policy, health financing, and public health practice. It will also help in the positioning of a health technology assessment institution. The activity will build on previous work, supported by EAR, which mainly addressed the MOH's and IPHs mandates, organization and institutional capacity, and a preparatory study supported by SPEAG. Part of this component will be to review the governance arrangements for autonomous health sector institutions (HIF and healthcare institutions) to ensure external accountability as well as internal control, within a framework of appropriate incentives for performance.

(b) Capacity-building for analysis and decision making: This activity will improve capacity of the MOH, HIF and IPH to use data collected from improved HIS and analysis for strategy development, program planning and evaluation. It will draw upon information tools developed under sub-component 2.4 and will provide training and support to staff working on subcomponent 2.1. Key to success of this component is training and technical assistance in epidemiology, health economics, surveillance, health services research, health policy analysis and communications. The Credit will support costs of local consultants to work full time for the MOH and HIF (some or all of these locally hired professionals will be located in the joint health financing policy unit with the HIF) as policy analysts and advisers. Local consultants (epidemiologist, health economist, health policy analysts), likely to be early in their careers, will be recruited early in Project implementation to build up the MOH human resources. These local experts will be supported throughout the four years of project implementation. Training of these individuals will be supported through international short courses and other longer term professional development. International and local experts in the fields of social medicine, economics, epidemiology, and health policy will be engaged part-time to provide advice to the full time team, and on-the-job peer review and training. Coordination with the IPH will be achieved through the co-location of at least one epidemiologist from the IPH to work with the MOWHIF policy unit. The functions of the policy analysts engaged to work with the MOH and HIF will include monitoring progress on priority health problems, reviewing the cost-effectiveness of various existing or planned health interventions and public health programs, researching the determinants of high-burden health problems (e.g., risk behavior, knowledge gaps, intervention gaps), and making recommendations to MOH and HIF leadership on policy options and implementationplans. These policy analysts and advisers will not be responsible for primary data collection: this will continue to be the responsibility of the IPH and HF.

(c) Communication: This activity will aim to enhance two-way communication between health sector leaders and decision-makers on the one hand, and the public, patients and staff of the health system on the other. Baseline research will be done during project preparation, and regular repetitions will be conducted during implementation. Establishedtechniques, such as focus groups, and surveys will be used to: (i)assess the knowledge and views about the health care system among the health professionals, patients and the general public; (ii)feed back this information to decision-makers to inform policy and management; and (iii)prepare clear and understandable messages about the reform program. On the basis of this research, programs to strengthen public feedback into the reform process at the community level will be developed. Staff in MOH and health professionals around Serbia who deal with the public will be trained in communication skills and tools for implementation of communication strategy developed

- 42 - during the preparation of the project. Furthermore, special information campaigns will be designed and implemented during the project cycle. TA in communication will be provided for MOH that would comprise such issues as communication strategies and training, and support to capacity building.

Project Component 3 - US1.53 million Proiect Management, Monitoring and Evaluation ComDonent

Objective: Project outputs are delivered on time and within budget, and oriented towards achieving project outcomes effectively. Risks are identified and risk management strategies put in place. Project performance is subject to monitoring, audit and evaluation so as to ensure that objectives are achieved and lessons learnt for future health reforms.

Description of activities: (a) Project management: A Project Coordination Unit (PCU) has been established to prepare, implement, and coordinate the activities of the health investment project. The PCU is located in the Ministry of Health, under the supervision of the Assistant Minister in charge of the Sector for International Relations, responsible for all intemationalprojects coordination. The core staff, engaged as local consultants financed by the Credit, include: a PCU Director, a Procurement Specialist, a Project AccountanUFinancial Specialist, and a Project Assistant. The work of project management will be supported by four local field coordinators who will facilitate planning and implementation of activities at the local level for Component 1 of the project.

The activities of PCU will also include administrative and fiduciary responsibilities related to the project (e.g., financial management, procurement, disbursement, monitoring and reporting). The PCU will be responsible for ensuring that all procurement and disbursement activities are done in conformity with the World Bank rules and procedures. All procurement and disbursement will be carried out centrally by the PCU and in coordination with the local project management capacity. A separate financial management system will be established for the project. The Project Operational Manual (POM) sets out details of responsibilities and procedures for procurement and financial management. The POM defines rules under which the MOH delegates day-to-day project implementation responsibility to the PCU except for key stages in large procurement (over US$200,000), which will require approval by the Minister, Deputy or Assistant Minister. Training and technical assistance will be provided to the procurement and financial management specialists by intemationalconsultants. An international procurement advisor will assist the PCU to undertake tasks of logistical planning, development of procurement plans, training plan, and preparationof operating procedures and standard bidding documents for procurement activity.

(b) Monitoring, evaluation and audit: The PCU will take responsibility for production of routine six-monthly project reports (quarterly financial management reports). The Credit provides resources for annual and final project audit, and also for commissioning expert advice on monitoring and commissioning experts to evaluate project activities. This evaluation will focus initially on evaluation of restructuring activities that will be implemented first in Krajlevo, which is intended to serve as a demonstration site for development of policies and strategies that will be extended to other parts of the country. This component will also support evaluation at the end of the project.

- 43 - Annex 3: Estimated Project Costs SERBIA AND MONTENEGRO: Serbia Health Project

Serbia and Montenegro Serbia Health Project (US$ 'OOO) Components Project Cost Summary % YO Total Foreign Base Local Foreign Total Exchange Costs A. Health Services Restructuring 1. Masterplanning 128.0 228.0 356.0 64 2 2. Krallevo Restructuring Demo Project 1,178.2 1,603.6 2,981.8 60 15 3. Health Services Restructuring in 3 Regions 2,973.2 4,365.5 7,338.7 59 36 Subtotal Health Services Restructurlng 4,279.4 6,397.1 10,676.5 60 55 B. Health Finance, Policy & Management 1. Benefits Package & PPS 433.4 442.5 875.9 51 5 2. Public Health Finance 54.5 61.5 116.0 53 1 3. Licensing& Accreditation 493.1 169.3 662.4 26 3 4. Health Information System 799.7 4,314.9 5,114.7 64 26 5. MoH Capacity & Communication 543.5 183.0 726.5 25 4 Subtotal Health Finance, Policy 81 Management 2,324.3 5,171.2 7,495.5 69 39 C. Project Management & Evaluation 854.4 373.5 1,227.9 30 6 Total BASELINE COSTS 7,456.2 11,941.7 19,399.9 62 100 Physical Contingencies 745.5 1,194.0 1,939.5 62 10 Price Contingencies 1,589.5 551.6 2,141.1 26 11 Total PROJECT COSTS 9,793.2 13,687.3 23,460.5 58 121

Serbia and Montenegro Serbia Health Project Expenditure Accounts Project Cost Summary .~ Foreign Base Local Foreign Total Exchange Costs 1. Investment Costs A. Civil Works Construction 2,901.5 1,562.4 4,463.9 35 23 B. Equipment Medica) Equipment 144.0 2.736.0 2,880.0 95 15 Other Equipment & Goods 242.3 31816.7 4,059.0 94 21 Subtotal Equipment 366.3 6,552.7 6,939.0 94 36 C. Consulting services International TA 770.0 2,310.0 3,080.0 75 16 Local TA 1,985.1 352.8 2,337.8 15 12 Subtotal Consulting services 2,755.1 2,662.8 5,417.8 49 28 D. Training Training courses 522.0 522.0 100 3 Study Tours 386.0 386.0 100 2 Workshops 422.0 422.0 2 Subtotal Training 422.0 908.0 1,330.0 66 7 Total Investment Costs 6,464.9 i1,685.8 18,150.7 64 94 II. Recurrent Costs Incremental Staff Salaries 372.0 372.0 2 EauiDment Operation & Maintenance 309.9 166.9 476.8 35 2 Other Operating Expenses 31 1.4 89.0 400.4 22 2 Total Recurrent Costs 993.3 255.9 1,249.2 20 6 rota1 BASELINE COSTS 7,458.2 11,941.7 19,399.9 62 100 Physical Contingencies 745.5 1,194.0 1,939.5 62 10 Price Contingencies 1,589.5 551.6 2,141.1 26 11 Total PROJECT COSTS 9,793.2 13,687.3 23,480.5 58 121

-44- Serbia and Montenegro Serbia Health Project Components by Financiers Local (US$ 'OOO) The Government IDA Total (Excl. Duties& ------Amount % Amount % Amount % For.Exch. Taxes) Taxes A Health Services Restructuring 1. Masterplanning 86.5 21.0 324.5 79.0 411.0 1.8 259.8 79.2 72.1 2. Kraljevo Restructuring Demo Project 422.4 11.7 3,203.4 88.3 3,625.8 15.4 2,069.9 1,327.2 228.6 3. Health Services Restructuring in 3 Regions 908.8 10.1 8,071.7 89.9 8,980.5 38.2 5,016.1 3,542.9 421.5 Subtotal Health Services Restructuring --1,417.7 10.9 11,599.6 89.1 13,017.3 55.4 7,345.8 4,949.3 722.2 B. Health Finance, Policy & Management 1. Benefits Package & PPS 261.8 24.6 803.9 75.4 1,065.6 4.5 505.8 349.6 210.3 2. Public Health Finance 33.3 24.2 104.4 75.8 137.7 0.6 69.0 40.9 27.8 3. Licensing& Accreditation 355.9 41.4 503.0 58.6 858.9 3.7 193.9 592.8 72.2 4. Health Information System 639.7 10.7 5,315.9 89.3 5,955.6 25.4 4,943.8 446.2 566.6 5. MoH Capacity & Communication ------203.9 22.3 711.6 77.7 915.4 3.9 207.7 537.8 169.9 Subtotal Health Finance, Policy & Manaaement"- 1.494.5 16.7 7.438.8 83.3 8.933.3 38.0 5.920.2 1,967.3 1.045.8 C. Project Management & Evaluation ----L.568.3 37.1 961.6 62.9 1529 9 6.5 421.3 839.5 269.1 Total PROJECT COSTS 3,480.5 14.8 20,000.0 85.2 23,480.5 100.0 13,687.3 7,756.1 2,037.1

Serbia and Montenegro Serbia Health Project Expenditure Accounts by Financiers Local (US$ '000) The Government IDA Total (Excl. Duties & Amount Yo Amount % Amount % For. Exch. Taxes) Taxes I. Investment Costs A Civil Works Construction -0.0 -0.0 5,727.9 100.0 5,727.9 24.4 1,798.1 3,929.8 B. Equipment Medical Equipment 165.0 5.0 3,134.5 95.0 3,299.4 14.1 3,134.5 -0.0 165.0 Other Equipment & Goods 232.1 5.0 4,410.2 95.0 4,642.4 19.8 4,362.4 47.8 232.1 Subtotal Equipment 397.1 5.0 7,544.7 95.0 7,941.8 33.8 7,496.9 47.8 397.1 C. Consulting services International TA 1,060.0 30.0 2,473.3 70.0 3,533.3 15.0 2,650.0 - 883.3 Local TA 908.0 30.0 2,118.7 70.0 3,026.7 12.9 405.6 1,864.4 756.7 Subtotal Consulting Services 1,968.0 30.0 4,592.0 70.0 6,559.9 27.9 3,055.6 1,864.4 1.640.0 D. Training Training courses - 603.3 100.0 603.3 2.6 603.3 Study Tours - 438.1 100.0 438.1 1.9 438.1 Workshops -- 559.1 100.0 559.1 2.4 - 559.1 Subtotal Training - 1,600.5 100.0 1,600.5 6.8 1,041.4 559.1 Total Investment Costs 2,365.1 - 10.8 19,465.0 89.2 21,830.1 93.0 13,391.9 6,401.1 2,037.1 II. Recurrent Costs Incremental Staff Salaries 388.3 76.6 118.9 23.4 507.2 2.2 - 507.2 Equipment Operation & Maintenance 429.3 68.4 198.0 31.6 627.3 2.7 193.4 433.9 Other Operating Expenses 297.7 57.7 218.2 42.3 515.9 2.2 102.0 413.9 Total Recurrent Costs 1,115.4 67.6 535.0 32.4 1,650.4 7.0 295.4 1,355.0 Total PROJECT COSTS 3,480.5 14.8 20,000.0 85.2 23,480.5 100.0 13,687.3 7,756.1 2,037.1

- 45 - Serbia and Montenegro Serbia Health Projed Table 1. Masterplanning Detailed Costs (US$ ‘OOO) Quantities Unit Unit Cost - Totals Including Contingencies -Unit 2004 2005 2006 2007 Total Cost Negotiation 2004 2005 2006 2007 Total 1. Investment Costs A TA International TA month 0.625 3.75 5.625 - 10 20 20 13.9 85.0 130.0 - 228.9 Local TA month 6 18 - -24 2 2----- 13.9 45.5 - 59.4 Subtotal TA 27.7 130.5 130.0 - 288.3 B. Training Study tours amount 16.7 17.0 - 33.7 Workshops amount 34.7 - 34.7 Training course 88 8 -24 2 2----- 17.8 18.1 18.5 - 54.4 Subtotal Training 69.1 35.1 18.5 - 122.7 Total -----96.8 165.6 148.5 - 411.0

Serbiaand fvbntemgro Serbia WhRow Table 2. Krdjevo &structuring Dem, Site Detailed Costs (“ooo) QuantRles UIR hlt Cost - Totals Including Contingencies ------UIlt 2004 2005 2006 2007 Total Costsgotlatk 2004 2005 2008 --2007 Total I. Investment Costs A Clvll Wrks Cbnstruction amnt 57.0 3$5.6 819.3 206.4 1,450.2 Bnstruction&sign and Srpetvision amnt -3.3 20.4 47 10.6 78.0 Subtotal Clvll Mrks 60.3 386.0 m0219.01,528.2 E Equipment WiQUiprent amunt 45.6 371.7 426.5 96.7 940.4 aher tipl@l-ent amnt 5.6 23.2 231 5.9 57.8 Subtotal Equipment -51.1 394.9 449.6 --102.6 998.2 C. Technlcal Assistance international TA for restructuring mxlth 2 4 4 3 13 20 20 44.4 90.7 925 70.7 298.3 k.TA Servioe Ranning mxlth 2 2 2 2 8 20 20 44.4 45.3 46.2 47.2 183.2 Local TA mxlth 15 20 20 5 60 2 2 -34.7 50.6 55.1 15.0 156.4 Subtotal Technlcal Asslstance 123.5 186.6 la8-- 132.9 W.9 Training study TMS amnt 222 34.0 34.7 11.8 102.7 WkhCP amnt 11.6 126 15.2 9.0 46.4 Training krses course 4 12 10 4 30 2 2 -8.9 27.2 231 --9.4 68.6 Subtotal Tralnlng 42.7 73.8 730 --30.2 219.7 Total Investment Costs 277.6 1,041.3 1,579.4 484.7 3,383.0 II. Rcurrent Costs A. Quipmnt o&M Is - 28.8 61.1 72.6 162.5 B. Othgr QeratiOnal ticpendture Is -10.8 27.2 283 --13.9 80.2 Total Fbcurrent Costs -10.8 5ao 89.5 --86.4 242.8 Total 288.4 1,097.3 1,8689 571.2 3,M5.8

- 46 - 169.8 1,mE 2,417.5 E51 4,249.2 -----9.9 57.9 1289 31.0 22&5 179.7 1,0947 2,546.4 &569 $477.8

1S.7 1,115.1 817.2 290.0 2m.O 8.3 765 89.4 17.7 171.9 -----145.0 1,191.6 m6 337.7 2530.8

- 6 6 61820 20 - 136.0 138.7 141.5 4182 - 6 6 61820 20 - la0 138.7 141.5 416.2 915 12 9452 2 20.8 37.9 3.1 27.0 1188 -----20.8 309.9 310.5 310.0 951.2

- 17.0 52.0 35.4 104.4 199 19.0 20.7 27.0 80.5

11. Flecurrenl Costs A.tipliiCW Is - w.4 1!21 184.2 4227 B. ahsr watiiti93encfitm Is -----325 81.5 78.0 49.2 241.2 Total Fkcurrent Costs -----325 167.9 23.1 B3.4 663.9 Total 405.2 2,ml 4,115.6 1,591.7 8W.5

- 47 - ctf ice Furiture set 12 - - -12 1 Su#atal Qulprnent for hit 2 TAfor Beneftts Fackage WhSpecialist (ht.) nwth - 1 2 0.5 3.5 20 20 - 227 46.2 11.8 Whtixromst* (Irk) nwth -121423 20 - 227 46.2 23.6 WhSpecialist nwth 6 12 12 12 42 2 2 13.9 30.3 331 36.1 WhhrmW nwth 6 12 12 12 42 2 2 13.9 30.3 33.1 S1 Sdtwaredw~ nwth 333-92 2 ----. a9 7.6 a3 Subtotal TAfor BBnefits padcage 34.7 113.6 166.9 107.5 3 TAfor Wk Wwde MIX WhhrmW m -22-420 20 - 453 46.2 Locall-WthW m 3 6 6 621 2 2 ----. 6.7 13.6 13.9 14.1 Subtotal TAfor WkRhae MIX 6.7 !B9 60.1 14.1 4 Training stl&TURSfb studytm 1 1 - - 2 6 6 6.7 6.8 - Whcps lnpsum ----. - 126 13.8 150 6.7 19.4 13.8 15.0 Subtotal Training ----< SuMotal OBvelopnent of a Benefits package 121.8 la0 240.8 136.7 B Feyment Systems 1. TAfw Payment System WhE"tl&t(H.) nwth -432920 23 - 90.7 68.4 47.2 WhE"tl&t nwth 3 6 6 621 2 2 ----. 6.9 15.2 la5 180 Subtotal TAfor pavment System 6.9 1&8 86.9 66.2 2 Tralning study Ta~sIC studytours 3 3 - - 66 6 20.0 20.4 - iunpsum - 19.0.. ~.20.7 15.0 Whcps ----I 23.7 15.0 Subtotal Tralning ----* 20.0 394 bbtatal peyment Systems ----. 26.9 146.2 1m.6 80.2 Total lmrestment Costs 1488 3372 347.4 216.9 II. brrent Costs A.WO&M Is ----. - 4.8 5.1 5.5 - 4.8 5.1 5.5 Total F¤t costs ----s Total 1488 3420 2525 a4

- 48 - Serbia and Nbntenegro Serbia Health Froject Table 5. financing Rblii Health Services Mailed Costs (“ow Quantities hit UlitCost------Ulit 2004 2005 2006 2007 Total Cost Hgotlatlon 2004 2005 2006 2007 Total I. Investment Costs A. TA for Public Health Rnancing international RMi Health ticpert m3nth 1 1 0.5 - 2.5 20 20 22.2 Z.7 11.6 - 56.4 Local RMc Health &pert Mh 6 66321 2 2 -----13.9 15.2 16.5 9.0 54.6 SubtotalTAfor Public Health Rnancing 36.1 37.8 28.1 9.0 111.0 R Trainina Study tours la studytour 8 - - - 83 3 -----26.7 - - 26.7 Total 62.7 37.8 28.1 9.0 137.7 le Study tour to tirrope for 8 people

- 49 - S~tiaand lvbmengro Sertia Hgath Reject Tatk 6. kensing &Accreditation Detailed Costs (W") Quentlties ullt Cost - Totals lncludlng Contlngencies ------ulit 2004 2005 2006 2007 TotalNsgotlatbn 2004 2005 2006 2007 Total I. Investment Costs A Ucenslng 1. Qulpment for Ucenslng ullt ff f ice equ@mnf/a set -5 -- 5 4.5 - 25.5 - - 25.5 Off ice furniture set -5-. 5 1 ------6.3 - 6.3 Subtotal Qulpment for Ucenslng ullt - 31.8 - - 31.8 2 Technical Aeslstance Qalii Specialist - international mnth -1 11 3 25 - 28.3 28.9 29.5 88.7 WiSpecialist - local mnth - 4 3 3 IO 25 ------12.6 10.3 11.3 34.2 Subtotal Technlcal Asslstance - 41.0 39.2 40.7 121.0 3. Tralnlng Study tours Ib tudytour 5 - -- 5 3 16.7 - - 16.7 Subtotal Ucenslng -----16.7 72.8 39.2 40.7 169.4 B Aeaedltatbn 1. Qulpment for Accredltatbn unlt fffice Equip" /c set -2-*2 4.5 - 11.4 - - 11.4 ff f ice Furriture set -2--2 1 ------25 - 25 Subtotal Qulpment for Accredltatlon unit - 13.9 - - 13.9 2 Technlcal Asslstance Ac" Specialist mnth -1 11 3 25 - 28.3 28.9 29.5 86.7 kalth Econonists rmmh 48 8 222 25 11.6 25.3 27.6 7.5 71.9 Subtotal Technlcal Asslstence -----11.6 53.6 56.5 37.0 158.6 3. Tralnlng Study Tours jtudytour 3 3 - - 6 3 10.0 10.2 - - 20.2 Training Wwkshops /d K&w - 6 8 6 20 3 -----* 22.8 33.1 27.0 829 Subtotal Tralnlng 10.0 33.0 33.1 27.0 103.1 Subtotal Accredltatlon -----21.5 100.5 63.5 64.0 275.6 Total Investment Costs -----38.2 173.3 128.8 104.8 445.0 II. ¤t Costs A Ucenslng 1.6quipm!nto&M mlnt - 20 21 23 6.4 2. Staff salaries for Lioensing Lhii jtaffyear - 5 5 5 15 12 - 75.9 E.7 90.1 248.7 3. Cther off ice fptpenses lunpsurr 6.9 7.6 8.3 9.0 31.8 4. fffice Flent ar-"t - 7.6 8.3 9.0 24.9 Subtotal Ucenslng -----6.9 $3.1 101.4 110.5 311.8 R Accredltatlon 1. 6quipm!nto&M !s - 0.8 0.9 0.9 2.6 2Staff SalariesforAccrediiationLhit/e jtaff year - 2 2 2 6 12 - 30.3 33.1 36.1 99.5 Subtotal Accredltetlon ------31.2 33.9 37.0 1G2.1 Total Rcurrent Costs -----6.9 124.2 136.3 147.4 413.9 Total -----45.1 297.5 264.1 2522 858.9

h KE, printer, sca~er,cwr b for 5 pqikto tirrcpean courttry \c FQ, printer, scam, ccpk W 20 workhops for 10 peode \s5-f for new unit

- 50 - 1. investment Custs A FBgMRid Into Systems 1. Qulpment fareglonal plbl infosystem f-&&ae&sdtwarefcr im,h3use itfosystem/a set -2020-40 Eo - 1,358.9 1,387.1 LANlb Facm-2020-40 P - 4%6 5086 WN/c pacm - -4- 4 20- ----. - E125 Subtatel Qulpnent for regional pilot infosystem - 1,8585 1,9881 2 Consulting Servlces for regional RS h&WbmlTAsdtw~deVebprerf Mh -816 - 24 20 - 181.3 368.9 mTAHSRcXUW mh-11- 2 20 - 227 231 LocalTAsdtwareder~ Mh - 48 64 16 128 25 ----. - 151.7 mX5 6Ql Subtatel Consulting Services for reglaral Rs - 355.7 6195 6Q1 3 User and system admlnlstrstor tralnlng W trairing/d cous - - 83240 5- - 462 1636 s$3terrs €dtliristratatrairing cans-4- 4 8 ----. - 36.3 - Subtatel LBer end system admlnlstrstor tralnlng 36.3 462 1636 ----a ----a - Subtatel Fegiarel AW InfoSystems - 2250.5 2647.9 24a7 E antral kalth Infam9tla Senrlce 1.6quipment for central HS f-&& &Softwarefor centrd */e set -1 1 120 - 138.0 - LAN set -4- 4 36-163.2 - w2beervfY set -1 1 20-227 - mameserver set -1 1 50 ----. - 56.7 - Subtatel Qulpment for central HS - 37a5 - 2 Consulting Services for InfoCentre IrWnddTAWmb- Mh - 1.5 25 - 4 20 - 34.0 57.8 M"ITAf?%kMvare~ mh-24- 8 20 - 45.3 E125 Locd TA for aFfliiand niddervare der. Mh - 8 24 24 56 2 ----. - 20.2 02 721 Subtdai Consulting Services for Info Centre - 99.6 2184 721 3 Training Courses Lber trairing cous - -134 4- - 4.6 14.1 sfiterrs aclniristratar trairing couse - -2- 2 8- ----. - 185 Subtotal Tralnlng Courses ----. - 231 14.1 Tdal Inwtment Cbsts - 272a53887.4 3x0 II. wcurrent costs AWpmentM QiprentwmRkts Is ~OBNI~aIHs Is TOM

\aForthefarregkdsites:df-tbsM sdtware VI VI For the far regional sites. \c For the far regional sites. Wfcr gcqs d end users \s df -tbShelf &Ware

-51 - 111-3 20 22.2 22.7 23.1 - 68.0 222 -6 2 ----- 4.4 45 4.6 - 13.6 26.7 27.2 27.7 - 81.6

- 12.6 23.7 150 48.3 -----26.7 39.6 48.4 150 129.9

11--2 20 22.2 z.7 - - 44.9 6 12 12 12 42 2 13.9 33.3 33.1 36.1 113.3 6 12 12 12 42 2 13.9 33.3 33.1 36.1 113.3 6 12 12 12 42 2 13.3 27.2 27.7 28.3 96.6 -----633 110.6 93.9 100.4 368.1

33--6 6 20.0 20.4 - - 40.4 11.6 126 138 150 520 -----31.5 33.0 13.8 150 93.4 -----94.8 143.6 107.7 1154 481.5

- 3.8 2.8 - 6.5

6 12 3 - 21 25 17.3 37.9 10.3 - 65.6 28.9 126 13.8 37.6 a9 16.5 P.2 16.5 150 70.3 -----64.7 70.8 40.7 526 228.7

28.9 31.6 20.7 7.5 88.7 -----a6 106.2 64.1 €0.1 a.9 -----215.0 289.7 220.2 19Q5 915.4

~ RagM cars?etc. TAtoM=H

- 52 - Serbia and Mntenegro Serbia Health Rqect abl le 9. project mnagemnt Detailed Costs (la") Quantttles ullt Cost - Totals lncludlng Contlngencles ------ullt 2004 2005 2006 2007 Total Negotiation----- 2004 2005 2006 2007 Total 1. Investment Costs A. Off ice refurbishm /a Is 28.5 - - 28.5 R Equipment for PCU Vehicle unit 1 -1 15 16.7 - 16.7 Off ice 6quipnmt /b Is -----44.6 - - 44.8 Subtotal Equipment for FCU 61.5 - - 61.5 C. Technical Assistance International TA f Or NI&Elc month 2 0.5 0.5 0.5 3.5 20 44.4 11.3 11.6 11.8 79.1 InternationalTA Rccuremnt month 64 2 - 12 20 133.3 90.7 46.2 - 270.2 FUJ Director "th 12 12 12 12 48 1.5 20.6 22.8 24.8 27.0 95.4 Financial specialist mnth 12 12 12 12 48 1 13.9 15.2 16.5 18.0 63.6 Rccurerrent specialist month 12 12 12 12 48 1 13.9 15.2 16.5 18.0 63.6 other Specialists Id month 39 9 930 1 3.5 11.4 124 13.5 40.8 Adninktrative Assistant mnth 12 12 12 12 48 0.5 6.9 7.6 6.3 9.0 31.6 kgional Roject Coordinators month 48 48 48 48 192 1 55.4 60.7 66.2 72.1 254.4 WE specialist (local) le month -33 2 - 7.1 7.1 M&E bseiine Study b is 28.9 19.0 20.7 21.0 89.5 I- I- -- Subtotal Technlcal Assistance 321.o 253.7 223.2 197.6 -995.5 LI Tralnlng Study Tours Is 16.7 11.3 11.6 - 39.6 Workshops lg Is -----5.8 6.3 6.9 7.5 B.5 Subtotal Tralnlng 22.4 17.7 18.5 7.5 66.1.. Is 11 1 14 15 16.7 17.0 E Audit /h ----,- 17.3 17.7 68.7 Total Investment Costs 450.1 288.4 259.0 222.8 1,220.2 11. Recurrent Costs A. Quipment O&M Is - 4.0 4.3 4.6 129 B. Off ice Wnt /I lurrpsum 23.1 25.3 27.6 30.0 106.0 C Office running cats 4 Is 6.9 7.6 8.3 9.0 31.8 D. lwrerrental staff Salaries /k month 30 30 30 30120 1 34.7 37.9 41.3 45.1 159.0 Total Recurrent Costs -----64.7 74.8 81.5 88.7 309.7 Total -----514.7 363.2 340.4 311.5 1,529.9 h rehabiiiiation of prenises, etc. \b Rworkstations, server, software, printer, scanner, copier, ceilphones, noteboo& etc, \c design of Roject M&Esystm \d part time specialists for project irrpiemjntation \e RwtWEat corrpletion \f RojectNI&E \g workshcp at project kuwh, pilds in hospitals, etc. \h Annual external audit \iOffice rent for the four hospitaisites. \j Fuel, off ice supplies, comnication costs, tramlation, etc. \kAsscc!ated experts for prow Corrponents, fully funded by Governmnt of Serbia

- 53 - Annex 4: Cost Benefit Analysis Summary SERBIA AND MONTENEGRO: Serbia Health Project

This annex presents the economic assessment of the project. At the time of the project preparation, data availability for the four project hospitals varied significantly. The economic analysis relies on Ministry of Health records and insights from the Kraljevo General Hospital and related health facilities for the most part. A more in-depth economic analysis for the three other participating general hospitals and related services (in Valjevo, Vranje and Zrenjanin) will be conducted during project implementation.

The first section briefly discusses the macroeconomic and social context, without repeating the more detailed presentation in the main report. The second section outlines the characteristics of the four general hospitals and related health services participating in the Project, using the 2002 Serbia Household Poverty Survey data. The third section summarizes the results of a cost-benefit analysis.

1. Macroeconomic and Social Context

Serbia has a population of roughly 10 million, with 48 percent living in rural areas. Total fertility rate is 1.6, down from 2.2 in 1985. (Yearbook of Serbia, 2002.) For the FRY, the GDP was US$10.6 billion in 2001, with a real GDP growth of 5 percent in 2000 and 2001. A recent IMF country report characterizes the fiscal policy in 2001 as “generally conducted prudently”, indicating that Government revenues exceeded program targets in 2001. (Federal Republic of Yugoslavia: Selected Issues and Statistical Appendix. IMF Country Report No. 02/103, May 2002.) Poverty is a major concern in the country, especially among the refugees and internally displaced households - as discussed in Section B.2 above, under the title “Political and Socioeconomic Context”, about 20% of the Serbian population live in or at the edge of poverty.

In 2001,6 percent of GDP was spent on health by the public sector. Life expectancy at birth is 72 years (decreased from 75 years in 1993), and the infant mortality rate is 13 per lo00 live births. These health statistics are quite favorable, but no doubt this is in part because certain health outcomes are slow to react to variations in socioeconomic characteristics, health behavior and health care availability and quality. In Serbia, the health care system, especially as far as capital investments are concerned, has been neglected for some years.

2. Characteristics of the Project Districts

Tables 1 and 2 present characteristics of the districts which the general hospitals participating in the Project serve, and Table 3 reports selected characteristics of the hospital and other health services provided in the participating areas. Such information is useful both to evaluate how the four areas participating in the Project compare to other areas, and to guide the fine-tuning of restructuring at each general hospital and related health services during project implementation.

Table 1 presents differences in wealth, urbanization and age distribution across districts. A household possessions index - intended as a proxy for household wealth, in the absence of recently calculated consumption-based poverty lines - suggests that the households in project districts are either at or below the mean household possessions index for all Serbia. (These findings about poverty in the four districts, based on household possessions, should be treated with caution and checked against consumption-basedpoverty measures for municipalities when these become available.) Consumption-based measures of poverty suggest that the regions surrounding Kraljevo, Vranje and

- 54 - aenjanin have average rates of poverty, and that the area surrounding Valjevo has below average rates of poverty.) However, the poorest district is Kolubara, where Valjevo Hospital is located. Kolubara is also the most “rural” district, with only 37 percent of the population residing in urban areas. On the other extreme there is Raska, where 54 percent of the population live in urban areas. This is still below the Serbia average, which is 56 percent. Finally, while the age distribution of the population in three districts (Central Banat, Raska and Pcinja) are more or less similar to the age distribution of the Serbian population overall, in the Kolubara district share of elderly is very high: 27 percent of the population are 65 or older.

Table 2 presents health outcomes, health care utilization, and out-of-pocket spending by district, urban/rural residence, gender, and wealth. For the purposes of this analysis, it is sufficient to m&e few points here as opposed to commenting on each trend revealed by this table. In Central Banat and Kolubara, more than 34 percent of the population reported having a chronic illness, which is significantly higher than the Serbia average of 27 percent. Females are more likely to report chronic illnesses, as is the case for many other countries in the world. An individual belonging to the poorest quartile of the population is twice as likely to report a chronic illness, compared to an individual from the wealthiest quartile. Acute symptoms are reported more often in Pcinja, which is also the leading district in terms of outpatient visits to state institutions. Outpatient visits to private institutions are more common in Raska and in urban areas. Females are more likely to utilize private institutions, and the wealthiest individuals are twice as likely to utilize private institutions compared to the poorest individuals. Out-of-pocket payments in state institutions do not vary much across the categories considered here: since the poor and rich face similar out-of-pocket payments, this preliminary analysis suggests that the out-of-pocket payment / income ratio would be higher for the poor. As for out-of-pocket payments for private institutions and hospitals stays, the wealthiest group stand out for spending more than others (note that the means are higher, the median values are about the same).

Table 3 turns attention to characteristics of health care institutions. The hospitals participating in the Project are larger than typical general hospitals in Serbia, as suggested by the number of beds that are around 600 for two hospitals and over 800 for the remaining two. (The average number of beds is 447 in Serbian general - district level - hospitals). Other interesting statistics include high average length of hospital stays at around 9 days and low occupancy rates at around 65 percent. More detailed informtion is available for Kraljevo hospital, which shows that the maximum occupancy in a year is around 85 percent. This suggests that the monthly variations in occupancy rates are unlikely to justify low average occupancy rates around 65 percent.

- 55 - xated in (we itea summary st istics). 1 Y Central Banat Kolubara Rash Pcinja All 24 districts t Belgrade Characteristics (Zrenjanin I (Valjevo Hospital) (Kraljevo (Vranje Hospital) Hospital) Hospital)

Household Possessions Index' .41 .43 .42 .43 mean [std. dev in brackets] 1.131 1.121 ~141 [.I21 1.131 .36 Urban (a) 47.96 I 37.42 54.15 50.09 56.41 I I Age group (%) 6.38 7.69 6.16 5.95 8.85 13.05 10.26 8.54 15-64 67 .O 1 62.08 66.67 68.82 67.81 >= 65 17.76 26.66 12.59 14.76 17.70 I I I Sample size I 467 41 1 I 1,080 5 84 19,725

- 56 - - 57 - Hospitals #ofbeds Beds/ 1oOO Beds/loOO Avemgelmgth occupoutcy% WcalStaff NorrMedical -1-/ (municid level) (distdct level) of stay Staff 100 beds

Zrenjanin 820 6.21 3.93 9.20 65.18 1,073 739 130.85

Valjew 835 8.63 4.34 10.00 67.45 1,316 914 157.60

Kraljevo €04 4.96 3.17 8.30 6245 687 678 113.74

Vmje 595 6.82 350 9.00 60.26 620 506 104.20

Averagesforall 447 6.20 3.30’ 8.91 6248 567 427 126.84 4oLtllui4cipl hospitals

Summary of Benefits and Costs:

3. Cost-Benefit Analysis

The objective of the cost-benefit analysis is quite modest, in part because it is a challenge to take into account the full benefits of health interventions in any project; in part because health data are scarce in Serbia; and finally because the payoffs to allocating considerable (time and material) resources for this purpose may be small even if the project appears to produce significant benefits based on the insights from a simple analysis. As the project progresses, the data gaps will be filled through monitoring md evaluation activities.

3.1. Summary and Findings

Project costs for the cost-benefit analysis include recurrent costs and exclude taxes. A 10 rear period is considered for the analysis, including years that follow project completion. Equipment maintenance and operation costs are projected beyond project completion. The 2002 budget of the Ministry of Health allocates US$25.5 million to the equipment purchase category (it is not possible to accurately estimate equipment maintenance budget based on Ministry of Health records). The estimated yearly maintenance and operation costs for the equipment purchased by the project is US$95,000. For the first five years, recurrent costs are those that are used for the remainder of the project document, taking into account the characteristics of the different project components (e.g., for Kraljevo Restructuring Demonstration Project, equipment and other operational expenditures were taken into account while for licensing and accreditation office equipment, staff salaries and office rent were taken into account). For years 6 to 10, recurrent costs are estimated considering only equipment operation and maintenance. In other words, incremental staff salaries are assumed to be self-financing after year 5. For example, staff salaries for the new licensing body - which accounts for the majority of total incremental staff salaries - will be financed through licensing and accreditation fees collected in return for the services provided by this body.

The project benefits are limited to those that can be quantified using available data - and thus real benefits are underestimated. The benefits that are quantified are:

(i) 10 percent reduction in yearly inpatient days;

- 58 - (ii) space and fuel/energy savings (starting from year 3). Discussions with hospital administrators revealed abundance of unused or inefficiently used space. In Studenica hospital in Kraljevo (with 4 major buildings and 32 outpatient facilities) at least one main building can be emptied and rented. Zrenjanin hospital has an unused and uncompleted 450 bed hospital block. In Valjevo hospital, services in 4 detached local buildings can be relocated to the main campus. In Vranje services from poor quality pavilions can be consolidated. For each hospital, a saving (and thus rental income) of 8,500 m2 space is assumed. This is a crude estimate, based on a review of detailed information on Kraljevo facilities; (iii) reductions in days-of-work-missed, through decreases in unnecessary (or unnecessarily long) hospital stays. This calculation is linked to the first item above (Le., reduction in yearly inpatient days); and (W 5 percent reduction in the number of hospital staff (starting from year 3): this applies mostly to non-medical staff (current numbers reported in Table 3), through increased efficiency in part due to the health information system developments. The shadow wage for the cost-benefit analysis - the opportunity cost of labor - is considered to be the prevailing market wage.

The cost of an inpatient day is US17 (estimate provided by the Ministry of Health, excludes space/fuel/energy costs), the monthly per square meter rent for the project districts is estimated to be US$l.3 (using information collected by the 2002 Serbia Household Poverty Survey). (The 2002 Serbia Household Poverty Survey was conducted in May-June 2002. The sample included 6,386 households - 19,725 individuals. Age-specific probabilities of labor force participation and estimated earnings also come from the household survey.) Yearly compensation and wages per employee is US$3260. (This estimate is based on the Kraljevo health center’s 2002 budget; the same figure is used for all four participating health facilities.)

The project may result in some patients being treated in the four Project general hospitals rather than undergoing treatment in tertiary-level facilities. This can be expected to (i)reduce health care costs at the health system level, and (ii)increase number of patients treated in the Project hospitals. The number of patients can also increase in the Project hospitals if, because of the intervention, individuals residing in other areas become more likely to seek treatment in Project general hospitals. Note that the Project will also support training and development of guidelines and protocols for care that will encourage treatment of a wider range of conditions in primary care, and prevention activities, so as to reduce unnecessary referrals to hospital. Other institutions, including ICRC and CIDA, are involved in projects that are complementary to this Project, aiming at increasing quality of health care services offered by primary-level health facilities in the project districts. Thus, it isprobably reasonable to assume that there will not be major shifts in health utilization from primary-level to secondary-level hospitals due to the Project’s positive impact on quality of care in secondary-level hospitals. Such trends are not considered in this analysis both because it is difficult to speculate on the magnitude of the shifts in demand for health care, and because the costs and benefits of such moves across facilities require detailed costhenefit information on primary, secondary and tertiary health care institutions.

Using a real discount rate of 5 percent, the cost-benefit analysis produces a Net Present Value of US$1.27 million. The internal rate of return is 22 percent. As mentioned previously, this calculation significantly underestimates the full scale of project benefits. Among other things improved health status of the population, distributional effects (to the extent that the prbenefits more from reduction of out-of-pocket payments and improved quality of care in general hospitals and related health facilities), and the impact of health financing reform (where the benefits would be nationwide) are not considered in this cost-benefit analysis.

- 59 - Main Assumptions: (Included above.)

Sensitivity analysis / Switching values of critical items: In order to have an idea about the sensitivity of the analysis to variation in expected benefits, switching values are calculated by changing one expected benefit at a time, keeping the remaining benefits unchanged. The NPV of the project (discount rate being 5 percent) remains positive as long as the reduction in yearly inpatient days is not less than 5.5 percent of total yearly inpatient days. Similarly, the NFV stays positive as long as the space/fuel/energy savings do not fall below 45 percent of the estimated savings in the base scenario. Even if there are no reductions in days-of-work-missed because of decreases in inpatient days, the NPV is positive. And finally, staff-cuts can be as low as 2 percent of existing staff levels without leading to negative NPV.

- 60 - Annex 5: Financial Summary SERBIA AND MONTENEGRO: Serbia Health Project Years Ending

I Year1 I year2 I Year3 I Year4 I Year5 I Year6 I Year 7 Total Financing Required Project costs investment Costs 1.7 7.8 9.5 2.9 0.0 0.0 0 -0 Recurrent Costs 0.1 0.4 0.5 0.6 0.0 0.0 0 -0 Total Project Costs 1.8 8.2 10.0 3.5 0.0 0.0 0 .O Total Financing 1.8 8.2 10.0 3.5 0.0 0.0 0.0 Financing IBRDADA 1.5 7.2 8.7 2.6 0.0 0.0 0 -0 Government 0.3 1.o 1.3 0.9 0.0 0.0 0 .o Central 0.0 0.0 0.0 0.0 0.0 0.0 0 .o Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0 .o Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0 .o User FeesBeneficlaries 0.0 0.0 0.0 0.0 0.0 0.0 0 -0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 1.8 8.2 10.0 3.5 0.0 0.0 0 .o

I Year1 I Year2 I year3 I Year4 I Year5 I Year6 I Year 7 Total Financing Required Project costs Investment Costs 1.7 7.8 9.5 2.9 0.0 0.0 0 -0 Recurrent Costs 0.1 0.4 0.5 0.6 0.0 0.0 0 -0 Total Project Costs 1.8 8.2 10.0 3.5 0.0 0.0 0-0 Total Financing 1.8 8.2 10.0 3.5 0.0 0.0 0 -0 Financing IBRDADA 1.5 7.2 8.7 2.6 0.0 0.0 0 -0 Government 0.3 1.o 1.3 0.9 0.6 0.6 0-6 Central 0.0 0.0 0.0 0.0 0.0 0.0 0 -0 Provinclal 0.0 0.0 0.0 0.0 0.0 0.0 0 -0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0-0 User FeesBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0 -0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0 -0 Total Project Financing 1.8 8.2 10.0 3.5 0.6 0.6 0 -6

Main assumptions:

-61 - Annex 6(A): Procurement Arrangements SERBIA AND MONTENEGRO: Serbia Health Project

Procurement

Goods and related technical services under this Project will be procured in accordance with the Bank's Guidelines: Procurement under IBRD Loans and IDA Credit published in January 1995 including all revisions up to January 1999. Contracts for Consulting Services required for the Project will be awarded following the World Bank Guidelines "Selection and Employment of Consultants by World Bank Borrowers" dated January 1997,including all revisions up to May 2002. The project elements, their estimated cost and procurement methods, are summarized in Table A. Other procurement information, including capability of the implementing agency, estimated dates for publication of GPN and the IDA'S review process is presented in Tables A1 and B.

1. Goods

Goods and related technical services consisting of medical equipment, information system softwares and hardware, office equipment and furniture, and printing of materials will be grouped to the extent possible and considering project objectives, in package sizes that will encourage competitive bidding. The following methods of procurement will be followed:

(i) International Competitive Bidding (ICB) procedures will be used for contracts above US$lOO,OOO equivalent for the procurement of medical equipment, information system hard-ware, software and technical services.

Information system hardware, network equipment, software (off-the-shelf) and related technical services which are estimated to cost US$l00,000 or more per contract will be procured in three packages following ICB procedures in accordance with the Bank's Guidelines.

In the comparison of bids for equipment to be procured above through ICB, domestically manufactured goods, if any, will receive a preference in accordance with Appendix 2 of the Bank's Guidelines.

(ii) International Shopping (IS). These procedures will be used for medical equipment, office equipment, furniture and vehicle, estimated to cost less than US$1OO,OOO per contract. Shopping, which requires the implementing agency to obtain three quotations from at least two countries, is used here because more competitive methods are not justified on the basis of cost or efficiency. The ECA Regional sample format for international shopping "Invitation to Quote" available on the ECA Procurement Web Site will be applied.

(iii) National Shopping (NS). These procedures will be used for contracts up to US$50,OOO equivalent, for the purchase of office furniture, supplies and goods readily available in the local market, and printing of materials for Public Information Campaign . The ECA Regional sample format for international shopping "Invitation to Quote" available on the ECA Procurement Web Site will be adjusted for national shopping.

- 62 - (iv) Direct Contracting (DC): will be used, subject to the Bank's prior approval, to procure spare parts of a proprietary nature for the existing medical equipment.

2. Civil Works

Works contracts under the project shall encompass rehabilitation civil works to health facilities in general hospitals in four areas participating in the Project. Works will be packaged to the extent possible at area level bearing in mind the Project ImplementationPlan, in order to increase competition and to limit the number of minor works contracts.

(i) InternationalCompetitive Bidding (ICB). Contracts estimated at more than US$1OO,OOO equivalent per contract, will be procured using International Competitive Bidding (ICB) procedures in accordance with the Bank Procurement Guidelines. Bid documents for ICB will be prepared in accordance with the Bank Standard Bidding Documents (SBD) for Procurement of Small Works.

(ii) Minor Works (MW). Contracts of less than US$lOO,OOO equivalent, Minor Works (MW) procedures will be used. Minor works procedures will be based on sample documents developed by the ECA Region.

3. Selection Procedures for Consulting Services

Contracts for consulting services will be packaged to combine related skills and services, in order to make them attractive and increase competition as well as to reduce the number of contracts to be managed by the PCU. The following methods of procurement will be followed:

Quality and Cost-based Selection (QCBS) procedures will be used for contracting consultant services relating to health information system, health system restructuring, health reform and health finance.

Consultant Qualification (CQ) procedures will be used for contracting most qualified firms for design and supervision (Kraljevo), masterplanning, public information campaign and training workshops under US$lOO,OOO.

Least Cost Selection (LCS) procedures will be used for translation service and auditing services contracts for annual audit throughout the life of the project.

Individual Consultants (IC) will be hired in accordance with Section V of the Guidelines. Individual consultants will be hired for small assignments of short-term duration for consulting services related to project management, health reform policy, and health finance. PCU consultants and an international procurement advisor, who have been competitively selected under PHRD grant and will continue service under the implementation of the Credit, will be hired on a sole source basis in accordance with paragraph 5.4 of the Guidelines.

- 63 - 4. Incremental Operating Costs

IDA will finance, on average for the duration of the project, 32% of the operating costs of administering the newly established agencies for health finance, licensing, and project management, as detailed in annual budgets approved by the Borrower.

Expenses for the study tours under the project related to the project will be covered under training category and disbursed based on SOEs.

5. Notification of Business Opportunities

A General Procurement Notice (GPN) will be published in the UN "Development Business" in May 2003 and will be annually updated. For ICB goods contracts and large-value consultants contracts (more than US$200,000), a Specific Procurement Notice will be advertised in the Development Business and national press, and in the case of NCB, in a major local newspaper (in the national language).

6. Review by the IDA of Procurement Decisions

Scheduling of Procurement. Procurement of goods and services for the project will be carried out in accordance with the agreed procurement plan (Table Al), which will be updated annually, included in the progress report, and reviewed by the IDA.

7. Prior Review

(i) Goods and Technical Services: Prior review of bidding documents, including review of evaluation, recommendation of award and contract will be conducted for all ZCB and DC. The first two contracts for works under NCB and MW and first two IS and NS contracts for goods will require prior review.

(ii) Consulting Services: Terms of reference for all consulting assignments will be subject to prior IDA review. Requests for Proposal (REP), short lists, terms of condition of contracts as well as evaluation reports and recommendation for award will be prior reviewed by the IDA for contracts for individual consultants above US$50,000 and firms above US$ 100,000 and the first contract for CQ and LCS respectively. All documents and recommendations involving sole source contracting will be subject to IDA prior review.

After award of contracts, should any material modifications or waiver of terms and conditions of a contract resulting in an increase or decrease above 15 percent of the original amount, the IDA will undertake a prior review of such modifications (including modifications to contracts for consulting services).

8. Custom Duties and Taxes

All custom duties and taxes for goods specifically imported for the project and for all technical assistance will be financed by the Borrower.

- 64 - 9. Action Plan for strengthening Agency's Capacity to Implement Project Procurement

The following actions will be taken to strengthen the procurement capacity of the PCU:

An intemational procurement advisor has been hired under PHRD funding to assist the PCU in undertaking tasks of logistical planning, development of procurement plans, training plan, and preparation of operating procedures and standard bidding documents for procurement activity.

Initiating a Project Launch Workshop in September 2003 before the credit effectiveness, as part of the project implementatiodcapacity building initiatives, especially in procurement.

The project will be subject to intensified supervision by the Bank. During the first year of project implementation, there will be at least two supervisions.

The PCU procurement consultant will be given the opportunity to receive on-job training by the intemational procurement advisor.

Periodic ex-post review by the Bank of 1 in 5 contracts during the supervision missions.

- 65 - Procurement methods (Table A)

Table A Project Costs by Procurement Arrangements (US$ million equivalent)

(5.42) (0.00) (0.28) (0.00) (5.70) 2. Goods 7.18 0.00 0.76 0.00 7.94 and Technical Services (6.82) (0.00) (0.74) (0.00) (7.56) 3. services 0.00 0.00 6.56 0.00 6.56 Consulting Services, including (0.00) (0.00) (4.60) (0.00) (4.60) audit 4. Miscellaneous 0.00 0.00 1.60 0.00 1.60 Training (0.00) (0.00) (1 -60) (0.00) (1.60) 5. Incremental Operating Cost 0.00 0.00 0.54 1.11 1.65 (0.00) (0.00) (0.54) (0.00) (0.54) Total 12.60 0.00 9.74 1.14 23.48 I (12.24) (0.00) (7.76) (0.00) (20.00)

- 66 - Procurement Plan (Table Al).

APPROVED GPN: TENDER BID REQUEST REQUEST CONTRAC DELIVERY DATE FOR April. OW INVITATI OPENING and AND T SlGNlNG /COMPLE HORTLISTS, SPN ON DATE DATE NO-OBJECTNO-OBJECT DATE ~BON 'OR,RFP,BID Date Tech./ IONFOR IONFOR LATEST DING Flnanclal TECH FIN DATE lOC./INVITAT EVALUATIO EVALUATIO ON TO QUOTl ION TO WQUALlFlC QUOTE ATION

Equipment for Kraljevo Hospital 10 A-3/4/5 Uedi~al Goods ICB 2040 Prior 1 Nov-04 De04 Dec-04 Jan-05 Mar-05 Apr-05 May05 Equipment for Areas 2,3,4 11 A-3/4/6 Medical Goods IS NOV-04 Dec-04 Dec-04 Jan-05

- 67 * 27 A-1 AforService cs Prior May,05 lune,05 Restructuring - 28 I A-1 hAfor Service I I cs Post Jun-03 Jun-03 JuI-03 JuI-03 Planning Area 2,3 - Policy & Management - 29 I B-1 pffice Equipment +Post Sep-03 Sep-03 oct-0: II lfor Benefits

NS -Prior Sep-03 Sep-03 oct-0: N OV-03 - QCBS 367 Prior Sep-03 OCt-03 Jan-04 Feb-04 Mar-04 ervices for Development of Basic Benefits - IC 91 Prior MaW June,03 lune,03 or Public / Private - IC 48 Post May-03 Jun-03 Jun-03 - cs QCBS If Prior Sep-03 Oct-03 Jan-04 Feb-04 Mar44 ervices for lpayment Systems I I - 35 I 8-2 Ilnt. Consultantfor I I CS ic I Prior D~c-03 Jan-04 Jan-04 II IPublic Health I I Flnancing - IC I Post Dec-03 Jan-04 Jan-04 or Public Health IFinancing II - 37 I B-3 bfficeEaui~mentI [Good IS 2 Post Oct-03 Oct-03 NOV-03 Dec-03 or Licensing II kccreditation II I IBodies II - - 38 I B-3 Pfflce Furniture I IGood Prior Sep-03 Sep-03 Oct-03 NOV-03 Licensing & I I kccreditation I I Bodies - - Post Oct-03 Oct-03 Oct-03 eclallst - -Prior Aug-03 Sep-03 NOV-03 Dee03 Jan-04 Feb-04 Oct-Ot I I llnformationcenterl I - -Prior Jun-04 Jun-04 Aug-04 SepO4 Oct-04 Mar-O!

- - QCBS 25 Prior Oct-03 NOV-03 Jan-04 Feb-04 Mar-04 Apr-04 Oct-OI - ICB 961 ~ Prior Jun-04 Jun-04 Aug-04 Sep-04 Oct-04 Mar-O!

- 68 - - - - 7 44 QCBS 77: Prior Apr-04 May-04 May-01 lun-04 Jui-04 AUg-04 SepO4 Oct-04 Apr-07 ealth information

- - ~ - 45 iCB 288! Prior Jan-05 lan-05 Mar-05 Apr-05 May-05 oct-06

I w

2003 lOv-03 Dee03 Jan44 -Feb-04 -- ccrediktion

2003 SepO3 Sep-0: Decialist for Lensing 48 8-3 Local Quality cs Sep-03 Sep-03 ,Specialist for I lticensing II 49 I 6-5 ILocai. Ex~erlfor I I cs OCt-03 OCt-03 A on Mandates

OCt-03 NOV-03 n Mandates & t Apr-04 Epidemiologist Apr-04 I 53 I 8-5 IHealth Policy I I cs Aug-03 + Specilist 54 6-5 HealthEconomist CS Aug-03 I 55 6-5 Local PR cs NOV-03 ialist Apr-04 May-04 Oct-04 + Jun-05

Apr-04

:omponent C - Project Management and M & I 60 C OfficeEquipment Goods Aug,03 Aug,O3 ep,03 Oct.03 Nov,O3 for PCU 61 C Vehicle Goods Aug,O3 62 C Office cw Aug,O3 + May,O4 +7-rJune,04 Jun-0 uly,04 Aug,O3 June,M

~ Aug,O3 I 254. Prior Aug,O3

Aug,03 peclalist (PCU) 1 Aug,O3 peciaiist (PCU) +

- 69 - 69 C Specialistsfor cs IC 40.d Prior 2 2004-2007 project per project implementation demand cs IC 31.8 Prior 1 Aug,03 Aug,03 Aug,O3 June,O7

cs CQ 182.4 Prior 1 NOV,03 Nov,O3 Dec-03 JanW Feb,O7 ------72 C ProjectWE cs IC 7.1 Post Muiti June,% Jun-06 Jul-06 - Evaluation 73 C IProject Audit cs LCS 66.7 Prlor 1 March,03 Apr-03 April,O3 ,May,03 May,03 June,O3 June,OS June,07

Table B: Summary of Procurement Activities

Goods and Works Procurement thresholds Above $100,000

Prior Review

Consultants

Prior Review

* 70 - agreed Bank procurement procedures as described in this document and in the

,bidding, contract award, and completion time for with aggregate limits (within 15%) on specific methods of System (MIS), with a procurement module will help the

-71 - Annex 6(B): Financial Management and Disbursement Arrangements SERBIA AND MONTENEGRO: Serbia Health Project

Financial Manapement 1. Summary of the Financial Management Assessment

Country Issues

The SAM CFAA report notes that there are a number of risks on the management of public funds in SAM. The risks to the public funds include: (a) poor public sector financial management in the past; (b) unfinished reforms - the new governments that were elected have commenced a process of major reform, which looks good as designed, but it is still too early to say if the reforms will be totally successful; (c) capacity constraints in both the SAM and Serbia governments; (d) weak banking sectors, (e) weak audit capacity; (0 poor implementationcapacity in line ministries; and (g) the lack of recent Bank implementationexperiences within SAM. Since re-joining the membership of the World Bank, SAM has been using individual implementation units for each investment project (traditional PCU model), located within the relevant line ministries or project beneficiaries, to mitigate some of these risks. Based on a review of the FM capacity within the Ministry of Health, it is deemed appropriate that this implementation methodology be adopted for the Serbia Health Project.

Strengths and Weaknesses

PCU staff lack experience in managing IDA-financed projects. However, the staff are competent and well experienced and receive some support from the PCU within the PrivatisationAgency.

Implementing Entity

A Project Preparation Unit (PPU) within the Ministry of Health has been established, which will form the nucleus of the Project Coordination Unit (PCU). It is located within the Sector for International Relations of the MOH which also serves as the donor coordination unit of the MoH. Equipment for the PPU has been supplied by WHO. The unit is already using funding from the Social Protection Economic Assistance and PHRD grants to prepare the project. The existing link between the new MoH PPU team and existing SPEAG PCU at the Privatization Agency has helped to pass information about procurement and financial management procedures in World Bank financed operations.

The PCU will be responsible for monitoring the use of funds, including procurement and disbursement, and reporting on the use of project funds. The PCU is headed by a Director, who will have overall responsibility for the proposed project. The PCU Director will ensure that all project objectives and targets that can be monitored, as specified in the Project Operations Manual (POM), are on track and achieved. The PCU includes a procurement officer (who is supported by an experienced consultant), a project accountant and an administrative assistant.

Funds Flow The International Development Association (IDA) will make funds available to the Government of Serbia and Montenegro (SAM) under the Credit Agreement, governing the terms and conditions of the IDA credit and specifying the project. The Government of SAM will on-lend the funds on IDA terms to Serbia based on the Subsidiary Credit Agreement with terms and conditions satisfactory to IDA. Project funds will flow from: (i)the IDA, either via a single Special Account established in a commercial

- 72 - bank acceptable to the IDA or by direct payment on the basis of direct payment withdrawal applications; or (ii)the Govemment, via the Treasury at the Ministry of Finance (MOF) on the basis of payment requests approved by the Treasury.

Staffing of the AccountingBinance Function

The PCU has recently hired a wellqualified Project Accountant. The accountant will receive training from the LO(Turin) in Bank specific disbursement arrangements.

Accounting Policies and Procedures

An Project Operations Manual has been prepared by the PCU describing the functions of each member of the PCU and the internal control structure (including authorization limits, segregation of duties, regular reconciliation, etc.). The PCU will prepare financial reports on a cash basis, initially prepared using a spreadsheet based accounting system. Such a system lacks many of the “software” controls common to modem accounting packages and hence reliance is initially placed on manual controls to ensure the accuracy of financial reporting.

Reporting and Monitoring

The PCU will prepare financial monitoring reports (FMRs) on a quarterly basis. The FMRs include:

0 Project Sources and Uses of Funds 0 Uses of Funds by Project Activity 0 Special Account Statement Plus Local Bank Account Statement 0 Project progress report 0 Procurement report

The fist Financial Monitoring Report will be furnished to the IDA not later than 45 days after the end of the first calendar quarter after the Effective Date, and will cover the period from the Effective Date to the end of the first calendar quarter. Draft FMR formats have been included in the Project Operations Manual.

Information Systems

The MOHexpects to sign a contract with a consultant to install a software-based project accounting system by end of May 2003. Given the timescale for project preparation, it is possible that the PCU will begin operations using a spreadsheet-based accounting system that has already been designed, tested and considered sufficient to satisfy project accounting and reporting requirements until such time as the software system is fully operational.

Supervision Plan The reports of the progress of the project implementation will be monitored in detail during supervision missions. FMRs will be reviewed on a regular basis by the Belgrade-based FMS and the results or issues followed up during the supervision missions. Audited financial reports of the Project will be reviewed and issues identified and followed up.

-73- 2. Audit Arrangements

Internal Audit

As noted in the CFAA, line ministries are subject to intemal audit inspections. However, this function is not conducted systematically and hence the IDA will place no reliance upon internal audit when determining the extent of Project level internal controls necessary to give assurance that funds are adequately protected and transactions are accurately reported.

External Audit

The PCU will be responsible for ensuring that Project financial statements are audited by an independent auditor acceptable to the IDA, in accordance with standards on auditing that are acceptable to the IDA. It was agreed during negotiations that auditing standards acceptable to the IDA are International Standards on Auditing promulgated by the International Federation of Accountants (IFAC). It was also agreed during negotiations that auditors acceptable to the IDA are those auditors that have been unconditionally prequalified to audit IDA-financed projects in SAM. The cost of the audit will be financed from the proceeds of the Credit. The following chart identifies the audit reports that will be required to be submitted by the project implementation agency together with the due date for submission.

Audit Report Due Date

~ Project Within six months of the end of each fiscal year and also at the closing of the project SOE Within six months of the end of each fiscal year and also at the closing of the project SDecial Account Within six months of the end of each fiscal vear and also at the closing of the oroiect I Other(snecifv\ I None I

TORs for the audit of the Project financial statements (including opinions on Special Account and SOE operations) are appended to the operations manual. The TORs for the audit were confirmed during negotiations 3. Disbursement Arrangements It is expected that the proceeds of the Credit will be disbursed over a period of 4 and a half years, which includes six months for the completion of accounts and the submission of withdrawal applications. The estimate of the volume of counterpart funds required to fully implement the Project is based on the Standard Disbursement Profile for Serbia plus approximately 10% contribution to Project costs.

Disbursements from the IDA Credit will follow the transaction-based method, Le., the traditional IDA procedures (e.g., reimbursements, direct payment, special commitments), including the use of Statements of Expenditure (SOE). It is not anticipated that the project will migrate to report-based disbursements.

Allocation of credit proceeds (Table C) The disbursement profile has been based on experience gained during current Bank operations within the sector in neighboring countries as well as in the Region as a whole. The Project has been designed within the capacity of the MOH to execute over a four year period, and Credit funds are expected to be fully disbursed within four and a half years of Credit Effectiveness.

- 74 - Table C: Allocation of Credit Proceeds Expmdlture Category I Amountin~S$mi~tion1 Financing Percentage 1 ]Civil Works I 5.16 I 100% (net of taxes) I Goods, including Technical Services 6.79 95% of foreign expenditures; 100% of local expenditures Consultant Services, including Audit 4.13 70% of foreign and local expenditures Services for individuals; 80% of foreign and local expenditures for firms. Training 1.44 100% Incremental Recurrent Costs 0.48 75% through Aug. 3 1,2004; 50% through Aug. 31,2005; 35% through Aug. 31,2006; and 20% thereafter

Unallocated 2.00 Total Project costs 20.00 Total 20.00

Use of statements of expenditures (SOEs): Some of the proceeds of the Credit are expected to be disbursed on the basis of Statements of Expenditure (SOEs), as follows: (a) services contracts for (i)individuals costing less than US$50,000 equivalent each (except for the first such contract); (ii)firms costing less than US$lOO,OOO equivalent each (except for the first such contract for each selection method); (iii)training for less than US$50,000 equivalent each (except for the first such contract); (b) works and goods contracts (except for the first two such contracts) costing less than US$100,000, or less than US$50,000 in the case of goods procured through National Shopping; and (c) all operating costs. Disbursements against works, goods and services exceeding the above limits will be made against full documentation and respective procurement guidelines. SOEs will be prepared by the PCU. Related documentation in support of SOEs will not be submitted to the Bank, but will be retained by the PCU for at least one year after receipt by the Bank of the audit for the period in which the last withdrawal from the Credit has been made. This document will be made available for review by the auditors and supervisions missions. If ineligible expenditures, including those not justified by evidence furnished, are financed from the Special Account (SA), the Bank will have the right to withhold further deposits in the SA. The Bank may exercise this right until the Recipient has: (a) refunded the amount involved, or (b) (if the Bank agrees) submitted evidence of other eligible expenditures that can be used to offset the ineligible amounts.

Special account: To facilitate timely project implementation, the PCU with the assistance of the MOF will establish, maintain and operate, under conditions acceptable to the Bank, a Special Account in Euro, in a commercial bank acceptable to IDA. An initial authorized Special Account allocation equivalent to 300,000 Euro will be established. An authorized allocation of the Special Account will be equivalent to 600,000 Euro, once the aggregate disbursements of the Credit total SDR 3.0 million or more. Replenishment applications should be submitted by the PCU monthly or when one-third of the funds of

- 75 - the SA have been used, whichever occurs first, and must include reconciled bank statements as well as other appropriate supporting documents.

- 76 - Annex 7: Project Processlng Schedule SERBIA AND MONTENEGRO: Serbia Health Project

PmMt Schedule 1 Planned I Actual Time taken to prepare the project (months) 12 First Bank mission (identification) 05/07/2002 05119/2002 Appraisal mission departure 02/07/2003 02/03/2003 Negotiations 03/23/2003 03/25/2003 IPlanned Date of Effectiveness I 07/3 1/2003 I I

Prepared by:

Preparation assistance:

Bank staff who worked on the projecl ncluded: Name Loraine Hawkins Team Leader, Sr. Health Specialist Jan Bultman Lead Health Specialist Virginia Jackson Sr. Operations Officer Dorothee Eckertz Jr. Professional Officer Yingwei Wu Procurement Accredited Specialist Michael Gascoyne Financial Management Specialist Gabriel Francis Program Assistant Mark Walker Lead Counsel Laura Rose Team Leader until 10/15/02, Sr. Health Economist Marina Petrovic Social Sectors Operations Officer Vesna Kostic Communications Officer Anarkan Akerova Consultant, Lawyer Joseph Paul Formoso Senior Finance Officer

- 77 - Annex 8: Documents in the Project File* SERBIA AND MONTENEGRO: Serbia Health Project

A. Project Implementation Plan The Project Operations Manual (POM), prepared by the Ministry of Health and cleared with IDA, contains the Project Implementation Plan. The POM is available on project files. The cost tables in Annex 3 and the procurement plan set out in Annex 6 (A) of this document summarize the planned implementation activities, and procurement and financial management processes are summarized in Annex 6.

B. Bank Staff Assessments The following assessment reports are available on project files: (a) Staff appraisal report of the health services restructuring activities of the project: Restructuring of Hospital Capacity and Relationship with Primay Care and Tertiary Level Services (February 2003); appraisal report on assessment of restructuring options for Valjevo, Vranje and Zrenjanin (February 2003) (b) Financial management capacity assessment and action plan (November 2002) (c) Procurement capacity assessment (November 2002) (d) Staff reports on health information systems sub-component (September 2002, November 2002, February 2003)

C. Other European Agency for Reconstruction:A Report on the Health Status of Hospitals in Serbia in 2002 European Agency for Reconstruction: Federal Republic of Yugoslavia: Multiannual Indicative Programme 2002-2004 Government of Serbia: Environmental Management Plan, (February 2003) (also available in Infoshop) Government of Serbia: The Health Policy of Serbia (February 2002) Government of Serbia: Vision Statement for the Health System (August 2002) Institute of Public Health of Serbia (Belgrade): Health Status, Health Needs and Utilization of Health Services - in 2000. UNAIDS: HW/AIDS Situation Overview: Federal Republic of Yugoslavia (2002) UNICEF: Strategic Priorities for Children in the Federal Republic of Yugoslavia (excluding Kosovo) World Bank: Assistance Strategy for Health, Serbia (April 2002) World Bank: Poverty Survey 2002 for Serbia and Montenegro World Bank: Public Expenditure and Institution Review for Serbia and Montenegro (Health Background Paper, PER, 23689-YU) World Bark Federal Republic of Yugoslavia: Transitional Support Strategy (Report No. 22909-YU), June 2001

*Including electronic files

- 78 - U

N Annex 10: Country at a Glance SERBIA AND MONTENEGRO: Serbia Health Project Europe& Lowe~ POVERTY ond SOCIAL SAM Central middle-

2001 Population, mid-year (m//l/ons) 10.6 Life expectancy GNP per capita (Aflas mefhod, US$) I/ 990 1,960 1,240 GNP (AUas mefhod, US$ bllllons) I/ 10.5 930 2,677 Aveme annual growth, 199541 Population (%) 0.1 0.1 1 .O Leborbrce (%) 0.5 0.6 1.2 Gross primary Most racent eetlmato (Meet year wallable, 100591) capita enrollment Povelty (% ofpopulafbn below nafbnalpoveffy //ne) 10 Urban population (%of fofal~~/afhn) 52 63 46 Ufe expectancy et bilth (years) 72 69 69 2 ~ Infant mortality (per 1,000 /Me blfths) 13 20 33 Child malnutritlon (% of chlldran under 5) 2 11 Access to Improved water sourca Access to an Improved water source (% ofpopulafhn) so 80 llllteracy (% ofpopulafion age 15+) 3 15 Gross primary enrollment (%of school-agepopulaflon) 89 102 107 -Serbla and Monfenegro (SAM) Male 69 103 107 -Lower-middle-hwme group Female 70 101 107 I KEY ECONOMIC RATIOS ond LONG-TERMTRENDS

Economic ratios. GDP (US$ bllllons) 8.6 11.6 I Gross domestlc InvestmenWGDP .. 14.2 13.6 Trade Exporls of goods and servlces/GDP .. 29.6 23.7 Gross domestic savingdGDP -2.7 -7.2 Gross natlonel savIngdGDP 10.3 9.1 T Current account balance/GDP -3.9 -4.6 Domestic Investment Interest paymentdGDP 2/ 0.5 0.8 savings Total debWGDP .. 132.6 101.4 Tolei debl servicelexports 2/ 2.3 3.9 Present value of debVGDP Present value of debVexports Indebtedness 1081-91 100191 2000 2001 2001.05 (avamge annualgrowth) 4.5 -Serbla and Monfenegro (SAM) .. 18.64.95.0 5.45.57.7" 15.54.2 Lower-mb'd/e-lnwme group GDPExpods per of capite goods and sewlces 31

STRUCTURE ol the ECONOMY

(% olGDP) Agriculture .. 10.1 17.6 Industry .. 43.1 37.6 Manufacturing Services .. 46.8 44.8 .. -20 Private consumption .. 85.3 89.6 .401 17.4 17.4 General government consumption -GDI -GDP lmpolts of goods and services

1981-91 2000 2o01 [Growth 01 oxport* and Imports (%) (avenge annualgrowth) I Agriculture Industry Manufacturing Services Private consumption General government consumption .. -24.5 Gross domestic investment 17.0 9.2"- Expolts -Imports 13.1 28.6 - Imports of goods and services Y ..

Note: 2001 date are preliminary estimates. *The diamonds show four key lndicaton in the country (in bold) compared with Its income-group average. If dele ere missing, the diamond will be I""0lete. 1/ SAM estimate for 2000 excIJdes Kosovo and (1 cekLleted using the market exch rete 2/ On a Cesh basis 31 In aoller term

- 80 - Serbia and Montenegro (SAM1

WllCES and GOVERNMENT FINANCE lael 1Bgl 2000 2001 Inflatton (%) Domstk prices (% Mange) I Consumer prices 71.8 91.1 lmplldt GDP deflatcf 76.8 91.7 Government finance (% of QDP, includes currant grants) 0 I Current revenue 4/ 37.5 39.8 ce~7mww01 Current budget balance 3.0 1 .o GDP dellamr 101CPI surplus/dellcit -0.2 -0.6 - Overall

TRADE 1991 2000 2001 lael Expori and Impori IewIa (US0 mlll.) (US$ ml/IhS) Total exparts (fob) 1,923 2,003 4.m 297 I FWd Other fuel 50 Manufactures 894 Total Imports (fob) Y 3.71 1 4,838 Food 552 Fuel and energy 1,032 Capital goods 1,012 Export price Index (1QQ5=1W) Import price Index (lQ05=100) Terms of trade (lQQS=lW)

BALANCE ot PAYMENTS lael 1991 2000 2001 1 Current account balance to QDP (%) (US$ m////ons) c Exports of goods and seTvIceS 2,547 2,743 Imports of goods and senrlces 4,004 5,160 Resource balance -1,457 -2,417 Net Income -1 -28 Net current transfers 1,119 1,915 Current account balance -338 -528 FlnandngItems (net) 566 1,051 Changes In net reserves 8/ -227 -523 Me": Resews lndudlng gold (US$ mllbna) 516 l,lN Conversionrate (DEC, locaWS$) 44.4 86.7

EXTERNAL DEBT and RESOURCE FLOWS 1gal 1991 2000 2001 (US$ m/") ~ Composltlon ot 2001 de& (US$ mlll.) Total debt outstanding and disbursed 11,407 11,741 I IBRD 71 1,812 1,840 G: 1,028 IDA 0 0 A 1,840 I Total debt service 56 107 IBRD 0 0 IDA 0 0 Composition of net resource flows OfRclal grants 271 591 OMdal credltors 377 333 Private creditors 49 202 Foreigndirect Investment 25 165 Portfolio equity 0 0 Wwid Bank program Commitments 0 E .Bilateral Dlsbursements 0 Prindpl repayments 0 Q .short-term Net Rows 0 0 Interest payments 0 0 Net transfers 0 0

Development Ewnomlcs 3/11/03 4/ lndudes current grants. Y Breakdown is preliminary WB staff estimate. 6/ Excludes IMF net repurchases. 71 lndudes interest arrears and penally Interest.

-81 - Additional Annex 11 : Social Assessment SERBIA AND MONTENEGRO: Serbia Health Project

11.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

There are several sets of social issues that arise from the Project. The first relates to access to and affordability of health care for vulnerable groups. The SOSAC and this Project are particularly concerned with improving the amount of revenue the health fund receives to cover the costs of services for these groups, improving the targeting of scarce resources so that the poor face less out-of-pocket payment for healthcare, and decreasing out of pocket spending for all groups, which would have a greater positive impact on the poor. Financing of health coverage for uninsured groups has been highly problematic in recent years, in particular for the refugee population of around 470,000, placing major strains on facilities in some areas. The planned social development outcome in this context would be achieving a more equitable access to care, particularly for vulnerable groups, and regardless of the ability to pay. Affordability of health care services is an issue particularly for vulnerable groups, and the poorer strata of the population. The Project measures will help to strengthen public sector health financing. which, in turn, will help to ensure appropriate funding for vulnerable groups, and thus facilitating access to health care services.

Project design takes into account the poverty profile in Serbia, and would help to alleviate poverty by means of the above mentioned measures. The recent living standard household survey points at a number of poverty features. First, the rural population is poorer than the urban population, and poverty is becoming a rural phenomenon, as in other transition countries. Strengthening the primary health care system would improve access for the rural population, who have less choice in infrastructure and often receive less qualified services than the population in urban areas. On a nationwide average, 10.6% of the

- 82 - population are qualified as being poor (Poverty line (2002) YUD 4,489, average consumption of the poor YUD 3,539, average lacking resources YUD 950). While there are no apparent differences in poverty between men and women, there is a marked distinction between age groups. The poorest are those older than 65 (the percentage of poor is 14.8%), and the next poorest age group is the children aged 7-14 (12.7% are poor). In geographical terms, inhabitants of south-eastern and western Serbia are on average poorer than in other areas of the country.

Another group suffering particularly from the deteriorating health infrastructure and scarce financing are refugees and internally displaced people. While no detailed figures are available for most groups, it is estimated that at least 470,000 refugees live in Serbia at present. Of these, the main groups are Kosovo, Croatian and Bosnian Serbs. It is not clear if and when they would like to return, and there are many unresolved issues such as dual citizenship. The health care system will most likely have to respond to their demand for services for a long time. Another important population group in Serbia that would benefit from the planned project are Roma. The competition for scarce resources including resources for health care tends to re-inforce discrimination. Investment in the sector would thus help to support social cohesion and inclusion into society.

The project will work in areas with a high proportion of poverty and refugees, particularly in Southern Serbia. One of the areas, Kraljevo, has the highest number of internally displaced people, refugees and social assistance cases in Serbia. A household survey of the area found that Kraljevo also suffers from a chronic shortage of essential drugs, and relatively high poverty-relatedhealth indicators, such as a high incidence of tuberculosis. The World Bank is already supporting the work of the International Committee of the Red Cross in Kraljevo with Post Conflict Grant funds, and will built on this partnership in the planned project. The project would help to further strengthen social inclusion of these groups by improving access to health care services and hitherto improving the health status of these groups. The above mentioned social and poverty indicators have also been taken into account in the selection of the other areas participating in the Project, namely Zrenjanin, Valjevo and Vranje.

A second set of social issues arises around the health sector workforce and plans to change they way staff are paid and in some cases, reduce or redistribute staff numbers. There appear to be large structural inefficiencies. In particular, overcapacity in the hospital sector appears to be a cause of high spending: both hospital occupancy rate and the average caseload per physician are low by international comparison, although the official number of hospital beds per population is lower than in many transition and some high-income economies. By way of contrast, low caseloads in primary care facilities appear to reflect underutilizationof the service more than a high number of doctors. This goes along with results from a patients’ survey which has shown high dissatisfactionwith the attitude of medical staff towards patients. Almost half of the interviewed perceived improving staff attitudes as one of the key issues for health reform. Another cause of concern is the very high number of nonclinical staff. It would be desirable to increase the wages of some health sector employees in line with market wages, but this can only be financed sustainable with a reduction in the total number of staff and other efficiencies. While this will improve the morale of some, others may be losers. More than half of the employees in the medical profession consider better salaries to be the most important aspect of health care reform, in contrast to only one-fifth of the general population. Thus minimizing the social impact of staff reductions and supporting social cohesion is a key issue, and will be supported by the Employment Promotion LIC and SOSAC. With regard to the required downsizing the health sector workforce, particularly doctors, the Government of Serbia has already taken a first step by strictly limiting the number of training places for medical specialists. Activities financed from the Employment Promotion Project would help to mitigate expected negative impacts on the workforce, particularly in Kraljevo, one of the areas where proposed project activities will take place. Measures comprise a new set of active labor market programs, including

- 83 - retraining, job search skill training, special employment programs for vulnerable groups (youth, disabled, and minorities); job fairs; and local economic development planning grants. More detailed figures with regard to future workforce requirements, and estimated redundancies and re-deployments, would be ascertained during implementation, and in the context of developing a masterplan during the first year of Project implementation.

A final set of issues concerns health reform in general and the impact it will have on the population. The project will support some significant changes in the way health care is financed and delivered. How well-understood and received these reforms are is a key determinant of their ultimate success. A recent survey conducted by IRI found out that more than two third of the respondents considered spending on health care as the being the top priority for budget funding. The survey furthermore revealed that modernization of the equipment, developing a better attitude towards patients and fighting corruption in the health care system are considered the top priorities in the context of health care reform. This demonstrates the strong support of the general population for investment and change in the health sector. The project would support strengthening communication on health-related issues and the capacity in the Ministry and related agencies, to convey information to the general public, and to obtain information about public perceptions and concerns as an input to policy and planning. The desired social development outcome would be a better informed general public, who take responsibility for their own health and dispose of information on available and appropriate services. The Project will help to develop a comprehensive communication campaign addressing all stakeholders. Elements include frequent townhall meetings and discussions with the local communities, grassroots public information campaigns and regular public opinion polls.

11.2 Participatory Approach: How are key stakeholders participating in the project?

The main stakeholders in the health sector are the general population, particularly vulnerable groups such the old and the young, refugees, ethnic minorities, internally displaced persons, and the unemployed. Other stakeholders comprise the medical profession, paramedical and support personnel in health care institutions, politicians, health care administrators at all levels of the central and local administration, as well as community representatives and municipal institutions (mesna zajednica). Last but not least, NGOs and the internationaldonor community are important players in the health sector as well.

Extensive stakeholder consultation has taken place during project preparation. In 2001, the Ministry of Health established a consultative and advisory framework comprising a National Health Council (NHC) and the Health Care Reform Commission (HCRC), with the aim to develop a comprehensive health policy and outline the reform agenda and strategic framework for the future. Members of the NHC comprise representatives from the MoH, MoF, MoSA, HIF, specialist health institutes, local health sector institutions, service providers from throughout the country, the professional associations, universities and patients’ and civil society organizations. The HCRC consists of members from the MoH, experts from specialist medical institutions and faculty, and other scientific bodies. Its main task has been to outline the processes for implementation of health care reforms, and to overview of the working sub-groups on policy options in key areas. Followingextensive stakeholder consultations, a “Health Policy of Serbia” document was approved and adopted by the Government in February 2002. Findings of the work groups were also presented to larger audience for discussion. Participationof patients and the attitude of the public in general was ascertained through a Social Assessment, which has been conducted for the SOSAC and this Project. The assessment, together with data from the Poverty Survey 2002, serves as a baseline against which the project could be monitored on important indicators such as targeting mechanisms for the poor, out-of-pocket expenditures, and user and provider satisfaction. The social assessment has been designed to monitor the impact of proposed reforms on the population, to gauge

- 84 - public perception of the current situation, and the need for, and understanding of, social policy reforms. It will comprise quanitative and qualitative instruments, with the general approach being a baseline public opinion survey with regular follow-ups. Qualitative survey instruments comprise focus groups of the population groups most likely to be affected by the project (pensioners, families with children, unemployed, refugees) as well as key informants (government officials, NGOs, academia, etc.). The qualitative survey would also take into account geographic diversity across Serbia. The following table provides an overview of the social assessment design:

Area and Objective Research Questions Affected Groups and Research Stakeholders Instruments What are the most serious Patients, especially the Opinion hprove the efficiency problems with health services in poor and vulnerable survey; and quality of the health Serbia ?What do people think of groups (e.g. elderly, Focus groups; care system; the quality of health care? minorities, children, Poverty Survey; Clarify and stabilize the What are the main obstacles to disabled); Labor force financing base of the HIF; receiving care? Health sector surveys. Are there groups which are not personnel; (specify for Initiate strategic planning covered by health insurance and doctors and nurses in for major structural reforms why ? Are uninsured patients public and private of the health delivery refused services? facilities) system. What formal co-payments are Pharmaceutical patients paying and do they industry (manufacturers influence access tohe of health and pharmacists). care ? Staff in MOH, IPH, What informal co-payments are HIF and their branches. patients paying and do they influence access tohe of health care ? Are pharmaceuticals and medical supplies readily available to health providers ? What are the constraints ? Would users of the system prefer to retain the current facility network with current quality, or have a smaller network with higher quality services ? Are the health sector reforms widely understood by patients, doctors and other stake holders? Are potential users actually going to the health care providers or are they looking for alternatives outside the formal sector, knowing that no adequate help is available @ Are patients bypassing the public providers and going directly to the &ate sector?

Continued participation during project implementation is assured through extensive collaboration between government, professional and patients organizations, and by means of strengthening two-way communication and information channels.

- a5 - 11.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations?

The project will take advantage of the Government's on-going meetings with NGOs and civil society organizations for the PRSP. Another opportunity is via coordination with other donor-financed community development programs that are working with NGOs at the local level (such as the USAID program) in the areas that would participate in the Project. The Licensing and Accreditation sub-component of the Project will work with professional associations and societies. In the context of the communications component, consultations have been held, and close co-operation during project implementationhas been envisaged with national and international NGOs working in public opinion research and social communication, such as the Open Society Institute and IRI. Furthermore, the demonstrationproject in Kraljevo would be implemented in collaboration with ICRC, and it is expected that extensive collaboration with local associations and civil society organizations will also take place in the other three demonstration sites.

11.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes?

Project preparation and implementation are closely linked with the PRSP and related social sectors projects (SPEAG, SOSAC, and Employment Promotion Project) that are supporting targeting of resources to vulnerable groups and supporting measures to mitigate the impact of labor redeployment. Adverse social impacts that result from the envisaged downsizing of the workforce will be mitigated by the Employment Promotion Project, which provides for re-training and re-deployment opportunities. Strengtheningpolicy making and delivery capacities of health sector institutions, and enhancing the ability to respond to social needs would also be supported through technical assistance on mandates and roles during the inception phase of the project.

11.5 How will the project monitor performance in terms of social development outcomes?

Performance monitoring will be consistent with measures identified in the PRSP, the SOSAC, and the Employment Promotion Project. Monitoring and evaluation of project impact and outcomes is a key activity under the project management component, and will be carried out by means of a baseline study at project inception, followed by regular updates during project implementation. Furthermore, the project includes the development of institutional capacity to collect and analyze social development data for policy formulation and program design. This includes, but is not limited to, development of performance information and management system to support cost-effective delivery of health programs; monitoring of changes in the health workforce, particularly of displaced workers; qualitative assessment of health outcomes in the areas participating in restructuring; financial indicators including monitoring of the ability to pay, and quality of services.

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