Public Disclosure Authorized Report No

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No. 132007-YF

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL FINANCE CORPORATION

MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP FRAMEWORK

Public Disclosure Authorized FOR REPUBLIC OF SERBIA FOR THE PERIOD FY16-FY20

February 13, 2019

Western Balkans Country Unit Europe and Central Asia Region

International Finance Corporation

Public Disclosure Authorized Europe and Central Asia Department

The Multilateral Investment Guarantee Agency Economics and Sustainability Group

Public Disclosure Authorized

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

Bank’s policy on Access to Information. 0

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

FISCAL YEAR January 1-December 31

CURRENCY EQUIVALENTS Exchange Rate Effective January 31, 2019 Currency Unit – Serbian Dinar (RSD) 100.00 = US$ 0.96

WEIGHTS AND MEASURES Metric system

ABBREVIATIONS AND ACRONYMS

ASA Analytical Advisory Services IFI International Financial Institution CAP Common Agriculture Policy (EU) IMF International Monetary Fund CCB Climate co-benefits IPF Investment Project Financing CMU Country Management Unit MIGA Multilateral Investment Guarantee Agency CPF Country Partnership Framework MoF Ministry of Finance DIA Deposit Insurance Agency NBS National Bank of Serbia DFI Development Finance Institution NES National Employment Service DLIs Disbursement Linked Indicators NPLs Nonperforming Loans DPL Development Policy Lending PEFA Public Expenditures and Financial Accountability ECA Europe and Central Asia PforR Program for Results EC European Commission PLR Performance and Learning Review EPS Elektroprivreda Srbije PPPs Public-Private Partnership EIB European Investment Bank RAS Reimbursable Advisory Services EU European Union SCD Systematic Country Diagnostic EBRD European Bank for Reconstruction and SILC Surveys of Income and Living Conditions Development SOE State-Owned Enterprise FDI Foreign Direct Investment SORT Standardized Operations Risk-rating Tool GDP Gross Domestic Product STEP Skills and Training Enhancement Project GTFP Global Trade Finance Program TFs Trust Funds IBRD International Bank for Reconstruction and UN United Nations Development WBG World Bank Group IFC International Finance Corporation

IBRD IFC MIGA Vice President: Cyril E. Mueller Georgina E. Baker Keiko Honda, EVP Director: Linda Van Gelder Wiebke Schloemer Merli M. Baroudi Task Team Leader: Sanela Ljuca Thomas Lubeck Gianfilippo Carboni Levent Karadayi Olga Vybornaia i

PERFORMANCE AND LEARNING REVIEW FY16–20 Country Partnership Framework REPUBLIC OF SERBIA

TABLE OF CONTENTS

I. INTRODUCTION II. MAIN CHANGES IN COUNTRY CONTEXT III. SUMMARY OF PROGRAM IMPLEMENTATION IV. EMERGING LESSONS V. ADJUSTMENTS TO THE COUNTRY PARTNERSHIP FRAMEWORK VI. RISKS TO CPF PROGRAM

TABLES Table 1: Revised CPF Lending Program Table 2: Systematic Operations Risk-Rating Tool

ANNEXES Annex 1: Updated Results Matrix Annex 2: Changes to the Original CPF Result Matrix Annex 3: Detailed Progress as per the Original CPF Results Matrix Annex 4: Detailed Progress per CPF Focus Areas Annex 5: Citizen Engagement

I. INTRODUCTION

1. This Performance and Learning Review (PLR) summarizes the performance of, and presents the changes to, the Serbia Country Partnership Framework (CPF) for FY16-FY20. While a few adjustments to the program are proposed, the PLR confirms that the CPF’s overall objective to assist Serbia to create a competitive and inclusive economy, and promote the country’s integration into the EU, remains relevant and obtainable during the remaining CPF period. The Program remains well aligned with the Government’s medium and long-term strategies and consistent with the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity. The PLR is based on a Country Portfolio Performance Review and extensive internal consultation, as well as consultations with government officials. 2. Overall, implementation of the CPF to date has been satisfactory and the Serbia-World Bank Group partnership has strengthened. There has been progress in strengthening public financial management and improving fiscal sustainability, strengthening financial sector, enhancing business environment, improving efficiency of land and property markets, as well as in energy and transport sectors. Limited progress has been made against the CPF objectives concerning reducing barriers to labor participation and closing skills gaps, as well as privatization. 3. While the CPF Program’s focus areas remain highly relevant, the PLR takes the opportunity to introduce a few adjustments deemed necessary in response to the country’s changed economic context and to improve alignment with government priorities and delivery of results. To that end, the program of support for FY19-20 is clearly defined. Agriculture, which was a priority area identified under the Systematic Country Diagnostic (SCD) undertaken in FY16, is added as an area for analytical and lending support. The planned FY20 lending program includes an operation in the mining sector that emerged from a longstanding WBG engagement in the overall SOE reform agenda and sector dialogue in energy, mining and transport, as well as an operation on innovation and entrepreneurship that builds on a decade-long engagement in this sector. The lending program is expected to stay within the original CPF envelope, depending on country demand and IBRD’s financial capacity. IFC has invested a total of US$248.8million in long term funds and mobilized an additional US$239.2 million, reflecting good progress in private infrastructure projects but also lower demand in the financial sector. No extension to the CPF period is proposed. The Results Matrix of the CPF is adjusted, taking into account the evolving country context and bringing into focus outcomes that the WBG program can realistically achieve in the remaining period.

II. MAIN CHANGES IN COUNTRY CONTEXT

A. Key Political Developments

4. Serbia has experienced a relatively stable political situation during this CPF period, yet there have been impactful changes at high levels. The strong-majority Government created after the 2014 elections was expected to provide Serbia an opportunity to overcome growing political fragmentation and build momentum for reform. For the most part, these expectations were realized. However, there were several changes in the composition of the government, including changes in key counterparts to the WBG. The spring 2017 presidential election led to a major change in the Government, including of the prime minister (as the incumbent became Serbia’s new president), ministers, deputy ministers and senior public administration officers.

5. The negotiations towards Serbia’s accession to the European Union (EU), the country’s officially stated objective, remain largely on track. At the CPF approval time, the country had a self-declared objective, though noted to be very ambitious, of accessing the EU by 2020. To date, Serbia has opened 16 out of 35 negotiation chapters, of which two have been provisionally closed. As per recent discussions of the EU Enlargement Policy, and as reflected in the EU-Western Balkans Strategy1, however, the EU holds that Serbia

1 EU-Western Balkans Strategy – ‘A credible enlargement perspective for and enhanced EU engagement with the Western Balkans’, adopted by the EU Commission on February 6, 2018 1

could become a full member by 2025. The strategy explains the steps that need to be taken by Serbia to complete the accession process by 2025 and this perspective ultimately depends on strong political will, the delivery of real and sustained reforms, and definitive solutions to disputes with neighbors. The latter entails meeting interim benchmarks (towards a legally-binding agreement) related to the normalization of relations with Kosovo.

B. Recent Economic Developments and Emerging Issues

6. Following years of recession and slow growth, the Serbian economy expanded by 1.8 percent on average over the previous three years (2015-2017), while a stronger growth of 4.2 percent is expected for 2018. Over the previous three years, growth started to recover on the back of higher investment (average annual growth of 8.3 percent annually) and strong growth of exports (up 10.7 percent annually in real terms). Consumption recovered as well, but at a slower pace (at 1 percent annually in real terms). Growth of the industry and services sectors contributed most to the overall growth of the economy over the previous three years, while agriculture had a negative contribution to growth in 2015 and 2017. For 2018, growth was broad- based with all three major sectors growing faster than last year. As a result, the new projected growth for 2018 is at 4.2 percent, although there is a possibility that this projection would be revised upwards. The medium-term growth projections depend crucially on deeper and timelier structural reforms and progress with EU accession. 7. With the return to growth, labor market performance improved as well. Labor force participation rate increased to 54 percent in 2017, the highest level since 2005. The average 2017 employment rate reached 46.7 percent, led by services, which created 33,000 new jobs (a quarter of them in wholesale and retail trade), spurred by higher consumption and fast-growing services exports. Manufacturing created another 23,700 jobs (a 6 percent increase in employment in this sector). Youth unemployment has also been dropping, from 35 percent in 2016 to 32 percent in 2017. Strong labor market performance continued in 2018 as well – employment rate reached 47.6 percent in 2018, while unemployment rate was 12.7 percent (average Q1-Q3). 8. Strong revenue performance and spending controls underpinned the budget surplus in 2017 and 2018. Serbia ended the year 2017 with a surplus of 1.2 percent of GDP, led by strong revenue collection, spending controls (including savings from interest payments), and, to some extent, due to under-execution of public investment. Revenues were up by 7.1 percent (in nominal terms); while spending rose only 1.3 percent in 2017. While total public spending went up slightly (in nominal terms), there were major savings on interest payments and activated guarantees that together saved about 0.5 percent of GDP compared to 2016. Similar to 2017, in 2018 the budget is expected to post a surplus of 0.6 percent of GDP despite some relaxation in spending controls. As a result of prudent fiscal policies, public debt continues to decline and stood at 55.5 percent of GDP (preliminary estimates for end 2018), and is expected to continue declining during 2019, albeit at a slower pace. 9. While inflation remains low, external imbalances started to grow. In 2017 the dinar appreciated in nominal terms by 4 percent against the euro but remained broadly stable in nominal terms throughout the first quarter of 2018. Inflation peaked at 4 percent year-on-year in early 2017 but fell to 3 percent in December 2017 and further down to around 2 percent in 2018. Nominal growth of private sector credit was 3.6 percent by year-end; loans to households were up by 7.8 percent, to private enterprises down by 2.1 percent, and to the government down 1.2 percent (all y-o-y, in nominal terms). At the same time, the current account deficit (CAD) almost doubled, from 2.9 percent of GDP in 2016 to 5.3 percent in 2017, with growth in imports outweighing gains in exports performance. Still, increase in CAD did not cause more significant pressures on the external side since non-debt creating inflows (primarily Foreign Direct Investments - FDI) were higher than the CAD and stood at 6.2 percent of GDP in 2017. 10. Although significant macroeconomic improvements have been achieved and the economic outlook for the near-term is generally positive, challenges remain. Growth will depend on accelerating the on-going structural reforms. The government has a stake in more than 600 companies, several of which together have cost the Government 1 percent of GDP in financial support and, thus, a delay in implementation of reforms 2

would have a major impact on the growth outlook. Exports are projected to grow by 7 percent in real terms, while announced increases in public wages and expected increases in employment generally are likely to push up consumption, which could increase the CAD. And, while public investment is expected to rise, it is critical to increase private investment. Meanwhile, acceleration of the EU accession process could send a favorable signal to investors to consider entering Serbia’s market. Investment in connective infrastructure, an EU priority, would also benefit Serbian exporters. 11. Sustained growth remains a necessary, but insufficient, condition for poverty reduction and shared prosperity. While Serbia has made notable progress in reforms in the public sector and fiscal consolidation, growth prospects remain hampered by continued low levels of private investment and lack of competitiveness in productive sectors of the economy. And, while unemployment is falling, creating an economy capable of generating sustained job growth will depend on continued attention to competitiveness of domestic sectors. Agricultural competitiveness remains an important area for attention in terms of addressing poverty and shared prosperity. Further advances in enabling the business environment will be crucial to encouraging private sector investments in other sectors with high potential such as export-oriented manufacturing, infrastructure, and services. And finally, increasing resilience of the economy to the shocks exacerbated by climate change, as the impact of the 2014 and 2017 weather conditions demonstrated, will be increasingly important going forward.

C. Trends in Poverty, Shared Prosperity, and Gender

12. Poor and low-income families faced difficulty in the years following the global financial crisis. Coupled with droughts and floods in 2012 and 2014, economic recessions in this period increased poverty and hurt welfare. Income of the bottom 40 percent of the population declined by 1.7 percent between 2012 and 2015, a bit higher than the decline for the population on average. 13. Poverty reduction has resumed in recent years, though disparities in living standards remain. Based on the Surveys of Income and Living Conditions (SILC) and growth projections, poverty—measured as per- capita income below the standardized upper middle-income-country poverty line of $5.50 in 2011 PPP—is estimated to have declined from 23.8 percent in 2014 to 23.1 percent in 2016 and 22.4 in 2017. Using the national relative poverty line, 25.5 percent of the population in Serbia were earning less than 60 percent of the median income in 2015, still higher than in new EU Member States. Income inequality in Serbia, with the Gini coefficient of per-adult equivalent income at 37.8 percent in 2017, is also relatively high compared to new EU Member States. Poverty is higher in rural and thinly populated areas, with significant variation across the country. Pockets of extreme poverty exist, particularly among the Roma population. 14. Economic growth and labor market recovery are important drivers for poverty reduction. During 2014–17, continued economic growth and labor market recovery led to improved employment rates and increased earnings, mainly driven by wage growth in the private sector. The activity rate increased to 54 percent in 2017 (annual average) while the employment rate stood at 46.7 percent (compare to 45.2 percent in 2016). These factors largely contributed to the decline in poverty, though the growth slowdown and difficult weather in early 2017 slows the pace of poverty reduction overall. A decline in agriculture output in 2017 is likely to have had adverse impacts on livelihoods in rural areas, where the share of the population at risk of poverty is already higher than urban, densely populated areas. Going forward, quality public services and enhanced labor income continue to be important channels for reducing poverty and boosting shared prosperity, while efforts should also be made to mitigate short-term impacts on vulnerable populations of the much-needed structural reforms. To address pockets of poverty among the Roma population, a comprehensive approach is needed to address the multiple and overlapping constraints that prevent this community from building assets and creating opportunities. 15. Labor market outcomes among women have improved, but gender gaps persist. The labor market recovery has translated into an increase in employment and labor force participation among women, including among young women. The female employment rate has systematically improved since 2014, going from 43.7 to 50.8 percent (for women 15-64 years of age) between 2014 and 2017. A similar trend is seen in activity 3

rates. This recovery has seen a slight narrowing in the gender gap, declining by nearly one percentage point for employment between 2014 and 2017, and 1.8 percent points for labor force participation; nevertheless, gaps remain high at 13.1 and 14.2 percentage points, respectively. Among youth, the gender gaps have increased, as young men have seen faster improvement in their labor market engagement than young women. Young women (15-24) had unemployment rates 7.1 percentage points higher than young men in 2017 – a worsening since 2014. The improvements in female employment need to be sustained and accelerated so that gender gaps can close, by continuing to address the barriers and disincentives that women, and in particular young women, face.

16. Women face persistent barriers and disincentives that call for policy action, linked to (i) access to assets (property and finance) with, for example, a relatively low share of registered properties with women owners (39 percent); (ii) constraints embedded in labor taxation and regulation, with taxation that penalizes low- wage and part-time earners among which women are overrepresented, and family leave that relies mostly on maternity leave; and (iii) limited access to services that support economic participation such as child and elder care, with 27 percent of employers saying that hiring women is an issue due to competing demands on their time from family responsibilities (2016 Skills and Training Enhancement Project / STEP Survey). Closing gender gaps in access to labor markets can increase the economic growth prospects of the country.

III. SUMMARY OF PROGRAM IMPLEMENTATION

A. Progress toward achieving CPF Objectives

17. Delivery of the CPF program to date has been strong, albeit progress in some areas such as structural reforms and privatization has been slow. The CPF proposed an ambitious IBRD lending program of about US$ 1.6 billion over five years and the delivery has proceeded largely as planned. To date, 65 percent of the planned lending program has been delivered through 9 operations (including one “front-loaded” from FY19, the CAT DDO DPL). As anticipated, two thirds of the delivery to date was towards development policy support, including the second in the series of State Owned Enterprises Reform DPL and Public Expenditure and Public Utilities DPL series (2 DPLs). Currently four operations (of which one AF) are under preparation for FY19 delivery and another four operations are expected to be approved in FY20 (details in the Table 1, page 12). The key advisory and analytical work has also been delivered or is underway. 18. IFC's own account financing reached US$248.8 million across seven projects2 bolstered by additional mobilization of $239.2 million, reflecting good progress in private infrastructure projects and lower than expected demand in the banking sector. IFC has been active in private infrastructure through its investment and advisory work, including investing and mobilizing financing for new renewable energy and waste management capacities as well as manufacturing facilities. IFC's advisory programs provided much needed support for reforms and institutional capacity building in critical areas including Non-Performing Loans (NPL) resolution, business climate, trade facilitation, digitalization, customs reform, renewable energy and energy efficiency, and municipal services. 19. There has been good progress in meeting the objectives set under the two CPF focus areas and the CPF remains on track to meet its overall objective. The original CPF Results Matrix outlined eleven objectives and nineteen performance indicators. Progress towards the CPF objectives is summarized below, highlighting the achievements and noting the areas with limited progress. A detailed review on progress to date is presented in Annex 4.

Focus areas 1: Economic Governance and Role of the State 20. The robust development lending program contributed to enhanced public expenditure management. Two DPL series, State Owned Enterprises Reform DPL series and Public Expenditure and Public Utilities (PEPU DPL series) contributed to the country’s broader fiscal consolidation and structural reforms program.

2 Including $30 million in a regional project 4

The State Owned Enterprises Reform DPLs supported the SOE reform agenda, supporting in turn stabilization of public debt. To date, more than 350 SOEs, from the former Privatization Agency’s portfolio were resolved, including some of the largest ones. Most of them were resolved through bankruptcy since they were least appealing to investors and their privatization was unsuccessfully attempted for over a decade due to significant legacy issues, including complex liabilities. PEPU DPL series’ support to financial consolidation of public utilities, with a focus on Elektroprivreda Srbije (EPS) and with other IFIs’ support to a similar process in the gas utility Srbijagas, resulted in reducing fiscal pressures from inefficiencies in the public sector. WBG support through two DPL series resulted in improved corporate governance and financial sustainability of four largest utility SOEs (Railways, EPS, Srbijagas and PERS) which are also the largest companies in energy and transport sectors. 21. The efforts towards overall rationalization and modernization of the administration is still work in progress. An extensive advisory and technical assistance program, supported by the EU IPA, was delivered in the form of a horizontal functional review (covering rationalization of the overall government architecture) and vertical functional reviews (in four sectors – finance, education, agriculture and social protection). The reviews have been completed and provided the basis for the Action Plans that were prepared, albeit with a delay, and adopted by the Ministries of Health, Education, Agriculture and Environment. Implementation of the Plans will require additional time. The ongoing Reimbursable Advisory Services (RAS) provides complementary assistance to the Cabinet with a focus on result-based management aspects and is set to conclude in March 2019. 22. There has been progress in improving efficiency of the public power utility and the public transport companies. Efforts on both fronts were and continue to be supported with a mix of instruments. In the transport sector, the ongoing investments program paved the way for reforms in the maintenance, operation and management of the national road network, and management of the transport sector SOEs. PEPU DPLs build upon these reforms by tackling corporate governance and financial consolidation. As for the railways sector, strong progress was achieved with restructuring of the Serbia Railways, and establishment of autonomous infrastructure, freight and passenger companies. On the power utility, the EPS, the results are already seen in the increased collection rates and decreased losses. Further support is being provided through just-in-time technical assistance complemented by a RAS focused on strengthening corporate governance and mainstreaming results-based approaches. In addition to supporting the institutional changes, important analytical pieces contributed to a wider transport sector development agenda, most notably to mainstreaming climate resilience in road transport management, and to disclosing the road accident data and publishing online the open database under GIS environment. Finally, the development of the Gender Sensitive Road Sector Action Plan developed with the WBG’s support and adopted by the Government represents gender specific work unprecedented in the transport sector.

23. IFC’s advisory and investment activities in renewable energy and energy efficiency have contributed to greening Serbia’s energy mix, reducing its over-dependence on highly polluting, outdated thermal plants and curbing its vulnerability to climate change. A greener energy profile will enable Serbia to meet its Energy Community obligations to have at least 27 percent renewable energy by 2020. IFC, through its advisory program, has been helping the Government to create markets and to promote private sector investments in the renewable energy and energy efficiency sectors. As a result of IFC’s market-enabling work, Serbia experienced increased private sector investment in renewable energy, particularly in the wind power sector. In FY17-18, IFC financed two transformative projects (Alibunar and Dolovo wind power plants) to construct over 200 MW of renewable energy capacity. These two investments have created a significant demonstration effect, paving the way for other renewable energy projects to access long-term financing from IFIs. Furthermore, IFC has been leveraging resources across the WBG which allows the city of Belgrade to access a range of WBG products to design an energy efficiency strategy and develop a pipeline of investment projects with IFC as the city's key partner of choice. A notable achievement was the landmark €330 million waste-to-energy PPP project, where IFC contributed as lead advisor and helped the city of Belgrade to structure and successfully tender the project. This was the first traditional PPP contract signed in

Serbia, demonstrating the bankability of the PPP framework in the country. IFC is actively considering financing in this project. 24. IFC supported modernization of Belgrade’s Airport – a landmark “Maximizing Finance for Development” (MFD) transaction. In FY19 IFC provided a financing package of $207 million for the Belgrade Airport project with EBRD, Proparco and six commercial banks coming in as co-investors. The airport had been previously operated as an SOE. In addition to generating a significant upfront concession fee of €502 million for the government, which corresponds to 1.2 percent of Serbia's estimated 2018 GDP, the project also introduces international best practices in operations and will undertake a much-needed capacity expansion without directly burdening public finances. Unlocking the physical capacity constraint will help close the connectivity gap by significantly expanding the passenger capacity and will support the development of Serbia's tourism potential. The project serves as a regional example of successful private participation in infrastructure. Focus Area 2 Private Sector Growth and Economic Inclusion 25. A broad set of reforms has been undertaken in recent years to strengthen the business environment. In the last three years Serbia implemented substantive changes in the regulatory environment in the following key areas: i) starting a business ii) registering property and iii) dealing with construction permits. As per the findings of the Doing Business (DB) Reports, Serbia’s overall ranking has been improving over the years: in the recently released DB2019 Serbia holds the 48th position globally. In addition, Serbia has moved to 11th place globally when it comes to dealing with construction permits, making it faster by introducing an electronic application system, which is directly supported by the WBG’s engagement. IFC provided advisory support to improve the insolvency legal framework, train judges and bankruptcy administrators on implementation, as well as to the establishment of a new bankruptcy agency to centralize all bankruptcy procedures and administration. 26. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at creating a new regional market for investment in the Western Balkans 6 (WB6) by removing barriers to cross- border and intra-regional investment. By fostering greater harmonization of regional investment policies and better alignment with EU standards, the project aims at unlocking higher levels of FDI and intra-regional investment, thereby fostering faster economic growth and job creation in the region. IFC also launched a digitalization project to support the migration of the most burdensome licenses and permits from a paper- based system to an electronic system. 27. The CPF Program assisted in creating a more stable and accessible financial sector. IFC’s investments in financial intermediaries helped improve access to finance of SMEs and households through various products including SME finance, mortgage lending, microfinance, local currency lending and trade finance. IFC also leveraged regional and global platforms and projects to support Serbia’s private sector and improve financial access. IFC invested in the European Fund for Southeast Europe (EFSE), a collective debt investment vehicle to channel long-term resources for housing finance and on-lending to SMEs; in a newly created Real Estate Investment Trust (REIT) focused on retail property assets in the Western Balkans; and in a manufacturer of electric motors expanding its production in Serbia, leading to creation of 1,100 new jobs. Serbia has made significant progress in the area of distressed-asset resolution, with the NPLs steadily declining from 23 percent of total loans in 2015 to 5.5 percent as of November 2018. Through its global DARP program, IFC helped finance the purchase of one NPL portfolio. The mix of WBG lending and technical assistance activities strengthened the Deposit Insurance Agency (DIA) as an important institution in the financial safety net. Cumulative inflows into the Deposit Insurance Fund ended up beyond the original target and the premium rate was kept at 0.6 percent. Enhancing the institutional capacity of the DIA and MoF was an important part of the WBG engagement and contributed to several legal changes strengthening the DIA and clarifying its responsibilities. 28. On the other hand, privatization and implementation of the overall reform strategy for state-owned banks and financial institutions requires additional efforts. Due to unclear political commitment, there has been no progress on the privatization of the largest state-owned bank, Komercijalna Banka (KB), despite 6

IFC's strong efforts and involvement in the process in close collaboration with other Development Finance Institutions (DFIs). To date, a process for engaging a privatization advisor for KB was initiated. The privatization process has been initiated for one of the other state-owned banks (Jubmes). WBG support to this agenda continues, both with IFC’s engagement as well as through IBRD lending that aims to support the Government with implementation of the reform strategy for state owned financial institutions which aims to divest from selected state-owned banks and financial institutions. 29. There has been limited progress to date when it comes to reducing barriers to the labor market. Delays and changes arising from elections and high-level staff turnover impacted decision-making dynamics. No progress has been made to date regarding reforming the social contribution system and the labor taxation law to incentivize part-time and low-wage employment. The set of measures that the program originally anticipated to support social assistance beneficiaries’ activation demanded full commitment from the Client to design and implement, including legislative changes and financing. This has not materialized because of the lack of commitment of the key players to these complex measures. Nevertheless, the WBG continue engaging in this area in support of strengthening employment outcomes, which are the most important channel for sustained poverty reduction and shared prosperity. The ongoing and planned activities focus on selected public programs that indirectly support this goal and the efforts undertaken to date resulted in enhanced performance of the National Employment Services (NES), partly contributing to increased numbers of registered unemployed finding jobs. Cross-cutting theme: Responding to climate change and disaster risks 30. Mitigating the impact of climate change and making the economy more climate resilient are of increasing importance in Serbia's development agenda. The WBG engaged in several aspects of this complex agenda. The Disaster Risk Management (DRM) DPL-CAT DDO was delivered in FY17, ahead of the originally planned timeline to ensure Serbia is better equipped to respond to a natural disaster. In addition, the WBG supports the Government in implementation of the National Disaster Risk Management Program (NDRMP) through a programmatic TA and advisory program focusing on foundational activities required to further expedite the implementation of the NDRMP, in close coordination with EU and UN. These include, among others, designing and establishing a national DRM system, generating more information and strengthening risk assessment methodologies as well as relevant institutions. Finally, in line with the WBG’s increased focus on climate change, much effort was put to maximize climate co-benefits (CCB) in the Serbia portfolio. For example, significant dialogue on public utilities reform shaped development policy lending to support a set of measures expected to have positive environmental impact and bring climate co-benefits, such as energy price adjustments expected to incentivize moving away from electricity heating and introducing climate resilience standards in the design of road rehabilitation. Other projects also achieved adaptation and/or mitigation opportunities; for example, the Enhancing Infrastructure Efficiency and Sustainability Program for Results (PforR) which will support reduction in GHG emissions as a result of the renovated, efficient buildings. The teams continue to diligently explore all potential to maximize the CCBs, and new investments in agriculture, trade and transport, cadaster and mining sector projects are expected to contribute the most in additional climate mitigation or adaptation co-benefits.

B. Portfolio performance

31. The current IBRD portfolio comprises twelve operations totaling US$1.782 million. It includes eight IPFs (US$1.118 million) and two PforRs (US$193.6 million) and three DPLs (US$470 million). The portfolio contains five investment loans that have been under implementation from the previous CPF. While two of them received additional financing, the portfolio was renewed with seven new operations that contribute to the core objectives of the CPF. The renewed loan portfolio focuses on more efficient public utilities, modernization of public services, enhanced public service delivery (including land, health and education), road infrastructure (including road safety), and jobs and competitiveness. This portfolio is coupled with a rich portfolio of Trust Funds and ASAs. Trust Funds (TFs) are particularly focused on judicial reform, innovation and technology transfer and disaster risk management.

32. IBRD portfolio performance remained overall satisfactory, with good disbursements. FY16 disbursement ratio was 30.6 percent, well above other countries in the Western Balkans and ECA. While FY17 disbursement ratio was a more modest 16.4 percent, disbursements have picked up to 28 percent at end FY18, while the FY19 disbursement ratio stands at 24.7 percent. Such good performance is in part due to large ongoing contracts, mostly under the Emergency Recovery Project and Corridor X, the largest projects in the portfolio as well as accelerated implementation of some of the Disbursement Linked Indicators (DLI) -based operations. When it comes to the more recent approvals, it generally took a year or so for the disbursements and the overall implementation pace to pick up, mostly a result of effectiveness delays caused by lengthy processes of ratification and/or setting up project implementation units. On the other side, proactivity has been high and concerted efforts of the Government and the WB were made to restructure slow performing components and problem projects to address implementation bottlenecks and adjust scope, timeline and financing plans to changed circumstances, as needed. 33. IFC portfolio quality has been improving, after a spike in the NPL ratio. At the beginning of the CPF period, NPL share in Serbia’s outstanding loan portfolio was 18%. Subsequently it went to about 45% in FY 17-18, largely on account of a single project, and is now at 9%. Following strong restructuring efforts, IFC resolved its largest non-performing loan in the country and has made progress in resolving two other real sector problem projects. Privatization efforts have stalled on a major state-owned bank, where IFC took a pre-privatization equity stake alongside other DFIs and the Serbian Government. Other IFC financial sector investments are performing well and implementation of advisory services, in particular in the two projects delivered through the Global Practices, remains strong. 34. During the CPF period, IFC commitments are expected to be in the order of US$400 to 600 million, depending on the pace of Government implementation of needed reforms, with a total committed portfolio of US$228.5 million. New commitments within the CPF period reached US$248.8 million in own account and US$239.2 million in mobilization. The total committed portfolio amounts to US$228.5 million as of December 31, 2018. In addition, through its Global Trade Finance Program (GTPF), IFC provided US$34.9 million in trade finance to support Serbian exporters. The current project pipeline remains focused on infrastructure and renewable energy. IFC was well positioned to invest large amounts to support privatization of several SOEs, including Srbija Telekom, which was unexpectedly pulled from the market. Government commitment to future privatization remains unclear. 35. MIGA’s total exposure in Serbia reached US$850 million as of January 31, 2019, across five active projects. Currently, MIGA’s engagement is solely concentrated in the financial sector, where MIGA has issued Political Risk Insurance guarantees to international financial institutions against the risk of expropriation of funds. Through these guarantees, MIGA helps to ease the capital pressure on these banks, therefore providing the enabling conditions for faster loan growth of their local subsidiaries in Serbia. Going forward, MIGA is currently considering providing political risk insurance guarantees for the waste-to-energy PPP project with the city of Belgrade jointly with IFC. 36. While Serbia has now reached 100% compliance for citizen engagement, the portfolio has struggled with the quality and the level of implementation of genuine mechanisms in a number of projects. The results are reported according to the ECA Citizen Engagement Quality Index in Annex 5, together with a Citizen Engagement Roadmap which sets out the steps that will be taken to: introduce a new level of performance vis à vis citizen engagement in upcoming projects, take corrective action on projects facing challenges in implementation, and ensure inclusion in citizen engagement processes. The portfolio has two opportunities to significantly enhance the CE under implementation (education, roads), and three opportunities for transformative platforms (health, trade and transport, and digital governance).

C. Evolution of Partnerships

37. Cooperation and engagement with development partners continues to play an important role in achieving Serbia’s development goals. Given the prominence of the EU accession agenda, the EU is the key interlocutor and the WBG continued the partnership in a wide range of areas during the CPF period. The 8

EU’s support and IPA financing was provided to the public administration reform area, specifically to WBG’s undertaking of vertical and horizontal functional reviews. The EU (alongside Switzerland) is one of the key contributors to the WBG’s work regarding the above discussed DRM agenda. The WBG is also implementing EU-financed Serbia Research, Innovation and Technology Transfer Project that promotes commercialization of public R&D in Serbia and facilitates strategic planning in its research sector. In the transport sector, the coordination and co-financing arrangements are in place to support large infrastructure investments, as well as reforms in the road sector, jointly with EBRD and EIB. Among bilateral partnerships, Switzerland is one of the largest contributors in the areas of public finance and corporate financial reporting area, financial sector, judicial reform, and disaster risk management. Other bilateral partnerships with Norway, Sweden, the Netherlands, UK, Germany, Austria, and Japan continue with coordinated financing and Multi Donor Trust Fund (MDTF) arrangements supporting several sectors, including competitiveness and innovation, judicial reform, and disaster risk mitigation. EBRD, EIB and other bilateral IFIs are strong investment and advisory partners alongside of IFC. 38. The WBG works in close collaboration with the International Monetary Fund (IMF) in supporting the Governments ambitious fiscal consolidation and structural reform agenda. The IMF relied on the technical support and complementary financing of the DPL series (both the State Owned Enterprises Reform DPL series and the PEPU DPL series) to identify reforms to embed in its Program in order to achieve the macro-fiscal targets. In the end, the IMF, DPL and TA elements all fit together in support to the key elements of the Government’s reform program to deliver on the fiscal consolidation and structural reform goals. In July 2018 the IMF approved a 30-month macroeconomic and structural reform program supported by the non-financial Policy Coordination Instrument (PCI).

VI. EMERGING LESSONS

39. Coordination and capacity constraints continue to affect implementation in several ways. Inter-agency coordination remains a challenge and continues to impact the pace of both preparation and implementation of projects. In addition, insufficient capacity and/or high staff turnover in key technical positions and implementing units has taken a toll on the implementation pace (e.g., Serbia Competitiveness and Jobs, Serbia Second Health Project). The capacity for coordination and implementation appears to be particularly stretched in cases of institutions and units in charge of complex programs or multiple activities supported by various development partners. Another aspect of capacity constraints is related to service providers. In the transport sector, poor performance is noted with respect to design and construction services due to limited competition and market constraints. Going forward, the WBG can work with the Client to address these constraints primarily in two ways: 1) ensuring project readiness, including having functioning implementation and operational arrangements in place at the time of project approval and 2) continuously providing formal and informal (hands-on) training to key counterparts (such as on project / contract management, procurement and safeguards). 40. Projects with parallel implementation and co-financing options, have proven to be rather challenging to implement. In the transport sector, the harmonization of procedures for co-financed activities between the involved IFIs took years to resolve, causing substantial delays and some extra transaction cost for the Client. Much effort had to be made to fully resolve the issue and operationalize functional processes (e.g., delegation of certain approvals to the Bank). This experience provides an important lesson for discussing joint engagements with other development partners in the future and in particular on the importance on agreeing on and formalizing clear coordination mechanisms by project approval. 41. The WBG remains one of the key partners in the development dialogue and should explore additional opportunities for leveraging MFD approach to increase private sector involvement and financing. In the current CPF period to date, the WBG efforts were focused on restructuring SOEs to make them more efficient and on the resolution of mostly small SOEs. Higher and more sustainable growth for Serbia requires a more ambitious engagement and enabling the private sector to invest more and thus create more jobs. Combining the available financing and knowledge, the WBG should seek to support innovative programs to exploit opportunities for the design and implementation of PPPs, especially in viable SOEs being resolved. 9

For the Government, this would include, inter alia, leveling the playing field to allow for fair competition and creating conditions to enable private investment in transport, energy and other infrastructure. Overall, the potential for MFD exists in the areas where the state chooses to speed up the privatization process as well as in areas where competitiveness could benefit from private sector initiative such as agriculture, and possibly mining / extractive industries. Such potential will be closely explored in developing projects planned in these areas in the final year of this CPF.

V. ADJUSTMENTS TO COUNTRY PARTNERSHIP FRAMEWORK

42. The program’s three main areas of engagement remain highly relevant and thus no significant change in areas of focus is required. Some important adjustments to the Program are however introduced to enable the WBG to respond appropriately to the changed circumstances and increased demand from the Government, as well as to an important regional initiative. Accordingly, and as anticipated at the CPF approval, the program for the remainder of the CPF, i.e. for FY19 and FY20, is now well defined. 43. The Serbia RAS program, including a first RAS approved in the Western Balkans countries, engages the WBG in support of results-based management. The work under the first RAS (signed February 2017) focuses on designing results-based management mechanisms and strengthening capacities among a core of ministers, state secretaries and assistant ministers for better policy decision making and implementation. The Government has established dedicated structures and mechanisms, primarily ministerial and implementation groups, to facilitate the roll out of results-based management practices and to support team building at the political and senior civil service levels. A modification to this RAS in April 2018 permitted the Bank to provide just in time technical assistance for Serbia to update its Money Laundering/Terrorist Financing National Risk Assessment using the tools and methodology developed by the WBG. The second RAS, Serbia EPS Results Based Management Project, was signed in April 2018. It responds to the Government’s request for assistance with improving performance of the national power company EPS, through results-based management and strengthening of institutional capacity of EPS. Specifically, this RAS will provide support to strengthen corporate governance in EPS reflecting best international practice for the governance of state own enterprises, mainstream results-based approaches and best management practices used in modern power corporations and corporatize EPS. The RAS program represents a significant expansion of the WBG’s support to fully achieving the CPF objectives related to more efficient public administration and improved service delivery, and a more efficient power company. 44. Agriculture remains one of the high priorities for the Government, with an important dimension to shared prosperity, and the WBG’s support to this area will be expanded. At the CPF preparation stage, agriculture was identified as a high priority area in the SCD, yet the Government was at that stage looking to other partners, especially the EU, to lead efforts in in this area. The WBG maintained policy dialogue and the Government recently expressed interest in additional support from the WBG. The proposed FY20 Commercial Agriculture operation is expected to focus on strengthening agricultural sector competitiveness on and off-farm. Integrating smaller producers into existing value chains or helping them reach new markets will require an integrated approach, including ensuring that the WBG engagement be closely aligned with the related EU requirements and frameworks. While the results are not expected during this CPF cycle, this operation is in line with the overall goal of private sector growth and economic inclusion. In particular, given the importance of agriculture as the main source of (self) employment in the rural areas, this operation will address agricultural productivity and rural incomes to improve the welfare of the poor and reduce poverty. The operation will also support efforts in greening agriculture and diversification of products, which will be an important contribution to the WBG’s overall efforts towards supporting the country to better respond to climate change and disaster risks. 45. The lending program will also include the Regional Trade and Transport Facilitation Project, not envisaged by the CPF. Over the last several years, the WBG has engaged in several activities to support the Western Balkans countries to advance the goal of economic integration within the region and within the European Union, as laid out in the Berlin process (and the Multi Annual Action Plan). To this end, an agreement was reached to support a regional project to facilitate trade and transport within the Western 10

Balkan countries, with the ultimate objective to reduce trade costs and increase transport efficiency. The project includes measures that substantially build on the ongoing Program addressing CPF priorities of strengthening public sector management and service delivery and improving business environment for accelerated private sector growth and boosting employment, while selected investments on key corridors will contribute to enhanced infrastructure networks. Serbia will be part of phase one of the project, together with Albania and North Macedonia. In Serbia, activities will include adoption and implementation of a National Single Window (NSW) solution, installation of Electronic Data Interchange (EDI) systems at seven railway border crossing points, developing overall ITS architecture and deploying the Intelligent Transport Systems (ITS) on Corridor X, and improving specific railway level crossings on the network. 46. The lending program of the final year of this CPF includes projects that emerged from the WBG’s long term and multifaceted engagement in key sectors. Support to the Mining Sector Transition Project emerged from long term engagement and dialogue in the overall SOE reform agenda and builds on the developments and potential for growth in this sector. Fully in line with the CPF’s goal of creating a competitive and inclusive economy, this project intends to enable new private sector engagement in mining, thus creating potential for jobs creation. The Accelerating Innovation and Growth Entrepreneurship (SAIGE) Project follows a decade-long cooperation between the WBG, EU and the GoS, and builds on the successes achieved to date in the innovation sector. It will expand access to knowledge and innovation financing and reinforce transparent and sustainable financing mechanisms. The proposed projects respond to government requests and present opportunities for co-financing (e.g., with EU), significant climate co-benefits (e.g., through coal mine closures), as well as MFD possibilities with regard to untapped lithium endowments. 47. The WBG team is engaging in a series of Advisory Services and Analytics that will support the Government in gaining more in-depth knowledge of the overall growth and jobs agenda. The new Growth Agenda Country Economic Memorandum (CEM) is expected to provide a stronger evidence base on which to formulate policy options, contributing to the overall goal of expanding the engines of growth and job creation in Serbia. Through a mix of analytical, technical advice, and outreach activities, the CEM will develop a package of policy recommendations to support Serbia in the implementation of growth-related reforms. These analytical products will serve as the background for policy dialogue with government and for outreach activities to the public and stakeholders. The Bank will also complete analytical work in education focused on finding key obstacles and opportunities for addressing the skills gaps in the economy. These knowledge products will inform future lending operations, including the development policy operation under preparation (Public Sector Efficiency and Growth DPL). 48. The ongoing WBG engagement is realigned in response to changed circumstances affecting the labor reform agenda. Given the lack of progress to date with respect to key legislation and related measures, the WBG will continue to support this agenda indirectly, both through the ongoing operation and the ASA program. The focus remains on activation of social assistance beneficiaries, through improvements in Active Labor Market Programs (ALMPs) and better functioning of National Employment Services (NES), as well as other selected public programs, to help alleviate constraints to competitiveness and job creation (including investment and export promotion and innovation). In addition, the CEM that is being prepared will include a note on labor market, with proposed work on enhancing understanding of labor demand (also a clear knowledge gap that had been identified in the SCD). The ASA work undertaken in education will help identify key obstacles and opportunities for promoting acquisition of the skills demanded by the labor market and reducing skills gaps. 49. Similarly, the WBG’s approach to closing the skills gap is realigned in response to a shift of Government’s focus as well as developments under the related WBG’s operation. Skills development and inclusion of vulnerable groups were clearly identified as strategic priorities at the CPF preparation, and the Early Childhood Education and Care Project is expected to help in laying the necessary foundation for skills development early on and for narrowing the equity gap in education access and performance. However, the project was at an early stage of preparation and some of the original CPF indicators (e.g., on vocational education) do not reflect its final scope. Furthermore, the project faced effectiveness and implementation

delays, thus significant results are not expected in this CPF cycle. For this reason, no alternative CPF-level objective and indicators could be proposed; instead, the objective is dropped from the CPF Results Matrix. 50. The CPF Results Matrix has been revised to reflect implementation experience and changed circumstances. Several objective and supplementary indicators were adjusted to reflect changes to the Program, with the formulations, definitions and targets revised to also better capture the expected results. All the changes remain entirely consistent with the CPF areas of engagement and the ongoing Program and are reflected in the updated CPF Results Matrix (Annex 1).

Table 1: Revised CPF Lending Program

VI. RISKS TO CPF PROGRAM

51. The risks identified in the original CPF remain largely relevant. Overall, high risk to achieving CPF objectives emanates from the political changes and governance, as well as environmental factors. Also, macroeconomic outlook and institutional capacities for implementation pose a substantial risk to reaching CPF objectives. The overall risk to the program is rated as substantial for the remainder of the CPF period, as reflected in the Systematic Operations Risk-Rating Tool (SORT) below.

Table 2: SORT CPF Original PLR Revised Risk Categories Ratings Ratings Political and governance H H Macroeconomic H S Sector strategies and policies M M Technical design of project or program M M Institutional capacity for implementation and sustainability S S Fiduciary M M Environment and social H H Stakeholders M M Overall Substantial Substantial

52. The risk of political and governance factors adversely affecting CPF development objectives remains. Despite the political stability and continuity over the CPF period, following the 2016 and 2017 elections, there were changes at the level of ministers and other decision-makers that impacted decisions on some aspects of the WBG Program (e.g., labor sector reform discussed above). Government reshuffling (periodically contemplated) and the likelihood that such changes may result in shifts in priorities and affect decision-making processes remains a risk to full achievement of the CPF objectives. This is especially so with the politically sensitive structural reforms, including the SOEs resolution agenda and public-sector wage reform. Finally, some political risks are related to the country’s external relations with its neighbors, especially with regard to Kosovo. This remains fragile and may have an impact on the pace of EU accession processes and on the overall growth. As for governance, while steps are being taken to strengthen public sector management system, the improvements are yet to be demonstrated. Delays in infrastructure project implementation, slow pace of business reforms and of privatization, and continued lack of demand for reforms in the financial sector constitute the bulk of the risks to the IFC program implementation. The WBG will continue to strongly support and advocate the significance of completing the reforms, including through additional analytics (e.g., CEM). Depending on the developments on the political economy side, the Program will be realigned to focus on activities and instruments that are deemed likely to produce results and in areas where there is commitment of key players. 53. Macroeconomic risks stemming from emerging or continuing domestic and external imbalances remain but are considered substantial rather than high (as in the original CPF) for the remainder of the CPF period. The fiscal deficit has reduced over the last few years, concluding with budget surpluses in 2017 and 2018 and the public debt was also reduced (55.5 percent in November 2018) and is projected to follow a downwards trajectory in the coming years. The new IMF program was endorsed by the IMF Board on July 18, 2018. On the other hand, the current account deficit is projected to remain relatively high (around 4 percent of GDP) in the coming years and prospects for expansion of exports remain unclear and susceptible to external shocks. Increases in public sector wages, subsidies to SOEs, and delays in reforming the public wage system remain as threats to fiscal stability. If the commitment to and the pace of the reforms weakens, and if the macro-economic situation deteriorates, delivery of the planned lending program – and FY20 DPL in particular – by the end of this CPF will be impacted. 54. The risks related to climate change and natural disasters, and most notably those of impacts from extreme weather conditions, remain high for the rest of the CPF period. Natural disasters in Serbia are severe and happen often, underscoring the importance of adaptation to climate change. In fact, because of climate-change-related disasters, since 2000 agriculture has made a negative contribution to GDP growth 10 years out of 17. With climate change and continued urbanization and concentration of assets in vulnerable areas, the risk is expected to double or quadruple by 2080. The WBG continues to support the country to mitigate these risks through the ongoing program (in particular, the CAT DDO and the Emergency Recovery Loan), and the new operations in agriculture and mining sectors will expand the measures being put in place over next years to mitigate climate change effects and support environmental clean-up actions.

55. As foreseen in the original CPF, the risk emanating from institutional capacity for implementation and sustainability is substantial and remains so for the rest of the CPF period. This stems from the low capacity for timely completion of a complex and multi-sectoral reform in support of the SOEs resolution agenda. While the implementation of some difficult reforms especially the SOEs and public utilities reform agenda progressed, these took longer than anticipated and the resolution and / or privatization of some of the largest SOEs is still pending and the risk of stalling or reversal remains. Another dimension is related to periodic discontinuity in staff implementing the WBG program. This can be exacerbated by the high turnover of staff due to ministerial changes and by lengthy processes of hiring key staff in the implementing agencies, both witnessed over the last few years. New staff required time to become fully familiar with ongoing projects, therefore slowing overall implementation besides undermining institution-building efforts and sustainability. To mitigate these risks, the WBG continues intensive policy dialogue with the Government and stands ready to address the developments in the key areas with additional analytics and financing as needed, as well as by providing strong implementation support to expedite the overall pace of implementation.

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

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE CPF Objective 1a: Sustainable public expenditure management CPF Objective Indicators Supplementary Progress Indicators WBG Program Completed: Reduction of public expenditures Allocation from the Budget for subsidies and soft through lower direct subsidies and loans to the SOEs in the former Privatization Agency Serbia State Owned Enterprises Reform DPL series (two guarantees to SOEs portfolio DPLs, FY15 and FY17) Public Expenditure and Public Utilities DPL 1 (FY 17) Direct subsidies3 (million Euro): Baseline (average 2013-14): 72 million EUR Target (2019): less than 10 million EUR Public Expenditure and Financial Accountability (PEFA) Baseline (average 2012-2013): 293 million EUR (out of which Decrease in gross tax and contribution arrears by Serbia Public Finance Review 73m for SOEs in the PA SOEs in the former Privatization Agency portfolio Serbia A&A ROSC update portfolio) Target (2019): 25% reduction Baseline (2013): 197 million EUR Ongoing: (less than 220 million EUR) Target (2019): less than 25 million Second Public Expenditure and Public Utilities DPL Annual guarantees for liquidity Freeze on public sector wage indexation in line with (FY18) purposes (million Euro): the agreement reached with IMF CAT DDO (FY17)

Baseline (average 2012-2014): Freeze on public sector pension indexation in years Programmatic Poverty Assessment 265 in which pension spending is expected to exceed 11 Improving the Quality and Flow of Public Finance Data Target (2019): less than 50 percent of GDP Planned: Attrition and targeted reduction of public sector Public Sector Efficiency and Growth DPL (FY20) employees

CPF Objective 1b: More effective public administration & select service delivery improvements CPF Objective Indicators Supplementary Progress Indicators WBG Program

A plan to strengthen the policy-making Right Sizing (Organizational rationalization) plans Completed: and coordination system prepared by end for at least 4 sectors designed and implemented by Wage bill management ECA PFM TF 2016 and implemented by 2020 (2019) Right Sizing TA (IPA financed)

Ongoing:

3 The indicator includes direct subsidies to: Railroads, PE Resavica, Airport and PE Roads of Serbia, plus soft loans and subsidies to SOEs from the PA portfolio. 15

Indicator: Metcalfe Scale rating Overall institutional architecture strengthened to Second Health Sector Project (FY14) and Additional improved manage EU Accession process Financing (FY18) PforR on Modernization and Optimization of Public Baseline (2015): 2 Justice sector has started to implement the Administration (FY16) Target (2019): 4 recommendations contained in the Serbia Judicial CAT DDO (FY17) Functional Review beginning with a freeze on filling Serbia Result Based Management RAS vacant positions before the analysis on right-sizing is Note: Metcalfe Scale is a comparative tool for completed. All recommendations to be implemented MDTF for Justice Sector Support measuring coordinating capacity based on the Guttman scale, with cumulative progression from by end 2018 TF on Disaster Risk Management lower to higher levels. The scale has following Implementing Open Data Plan for Serbia nine levels: 1) Independent Organizational Functional review completed for the Serbia health Decision-Making; 2) Communication to other sector, which identifies priorities and targets for Planned: Organizations (Information Exchange); 3) reducing non-medically trained staff, including Enabling Digital Governance in Serbia (FY19) Consultation with other Organizations (Feedback); 4) Avoiding Divergences among confirming baseline and targets for 15% reduction of Public Sector Efficiency and Growth DPL (FY20) Organizations; 5) Search for Agreement on non-medical staff Policies; 6) Arbitration of Policy Differences; 7) Setting Parameters for Action; 8) Establishing Priorities; 8) Overall Strategy.

Reduce percentage of non-medical staff employed in public health facilities in Serbia (by 15 percent)

Baseline: 30 percent of public sector health workers are not medically trained (estimate based on 2013 data)

Target: 25 percent or less of public sector health workers are not medically trained CPF Objective 1c: A more efficient and sustainable power utility CPF Objective Indicators Supplementary Progress Indicators WBG Program

EPS corporate governance and financial Legal transformation (roadmap for establishment of Completed: sustainability achieved JSC) of the EPS into a JSC by June 2019 Public Expenditure and Public Utilities DPL 1 (FY17) Serbia Energy Affordability TA Indicators: Debt/EBITDA ratio below 3 (2016-2019, average)

Collection rates increase from No further accumulation of SOE and budgetary Ongoing: 93% (2014) to 95% (2019) institutions payables/arrears to EPS Emergency Recovery Loan (FY15)

Distribution losses decrease Second Public Expenditure and Public Utilities DPL from 14% (2014) to 12.1% by (FY18) 2019 Enhancing Infrastructure Efficiency and Sustainability PfR (FY18) Serbia EPS Results Based Management Project RAS Increase Serbia’s renewable energy IFC engagement on transport and utility sector PPPs generation capacity in wind by 100 MW Energy tariff reforms and impact on the poor and vulnerable Baseline (2015): Wind energy: 0 MW

Target (2019): Wind energy: 100 MW

CPF Objective 1d: More efficient public transport companies CPF Objective Indicators Supplementary Progress Indicators WBG Program

Serbia Railways restructured and cargo Establishment of autonomous infrastructure, freight Completed: company operating without subsidies and passenger companies Public Expenditure and Public Utilities DPL 1 (FY17) Mainstreaming Climate Resilience in Road Transport Subsidy to cargo company RSD Management in Serbia (FY18) 10.4 Billion in 2014, and zero in Number of traffic units (passenger km + ton km) per 2019 staff Ongoing: Road Rehabilitation and Safety Project (FY13) Baseline (2013): 206,500 Corridor X Highway Project (FY10) Roads maintained under Performance Target (2017): 290,000 Enhancing Infrastructure Efficiency and Sustainability based maintenance reaches 3000 PfR (FY18) kilometers Second Public Expenditure and Public Utilities DPL Transform Roads of Serbia into autonomous agency (FY18) Kilometers of roads under with guaranteed budget and accountability for results IFC engagement on transport and utility sector PPPs, performance-based maintenance including in waste management advisory services for the in 2015: 0 Milestone: service level agreement signed Municipality of Belgrade Target for 2019: 3000 and in effect (2019) IFC Integrated Environmental, Social and Corporate Governance Advisory

CFRR regional EU-REPARIS4 program, and EQ- FINREP5 country project

Planned: IFC investment in Belgrade Waste Management Project IFC Belgrade Airport PPP IFC Belgrade Electric Busses Project Public Investment in Transport TA CPF Objective 1e: Resolution of SOE assets in Privatization Agency Portfolio CPF Objective Indicators Supplementary Progress Indicators WBG Program Resolution of unproductive SOEs and state divestment from commercial SOEs Number of companies under PA portfolio resolved Completed: under the Privatization Agency through asset and equity sales: 178 by end 2017 Serbia State Owned Enterprises Reform DPL series (FY15 Number of remaining companies and FY17) in the PA portfolio by 2019: <50 FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION CPF Objective 2a: Priority business climate improvements CPF Objective Indicators Supplementary Progress Indicators WBG Program Improve Doing Business Distance to Frontier (DTF) Amendments to the insolvency law and regulations; Ongoing: DB2015: 62.57; trainings and awareness campaign for insolvency Serbia Competitiveness and Jobs RBF (FY16) Target DB2019: 72 practitioners, courts and other stakeholders by end 2015 IFC Western Balkans Agribusiness Competitiveness Special focus on: Program Trading across Borders DTF: IFC Western Balkans Debt Resolution and Business Exit baseline DB 2015 – 72.13; Project Target DB2019 – 85 IFC Integrated Environmental, Social and Corporate Governance Advisory Paying taxes DTF: IFC Serbia Improving Investment Climate ASA baseline DB2015 – 48.9; target DB2019 - 64 TF funded CFFR Accounting and Auditing project New Growth Agenda Country Economic Memorandum Resolving insolvency: (CEM) baseline DB2015 – 57.9 target DB2019 – 74 CPF Objective 2b: More stable and more accessible financial sector

4 Road to Europe: program of accounting reform and institutional strengthening 5 Enhancing quality of financial reporting 18

CPF Objective Indicator Supplementary Progress Indicators WBG Program Completed: Reduction of share of Non-Performing No state-owned banks with negative profitability Strengthening Deposit Insurance Agency Project (FY14) Loans (NPLs) in total loans provided Deposit Insurance Fund replenished and balance Ongoing: Baseline: 22.5 percent (2014) sustained State Owned Financial Institutions Reform Project Target: less than 18 percent (in (FY18) 2019) Increased debt recovery rate through out of court Western Balkans Financial Sector TA 6 workouts and insolvency CFRR regional EU-REPARIS program, and EQ- 7 Increased availability of enterprise Indicator: proceedings FINREP country project financing coming from banks Baseline: 29.2 % (2014) IFC Western Balkans Debt Resolution and Business Exit Percent of firm financing Target: 40% percent (2018) Program coming from banks MIGA Expro of funds guarantees (capital optimization) 2013: 15 percent Credit growth exceeds GDP growth from 2018 2019: 29 percent Proposed: IFC lending to Financial Intermediaries (SME lending, mortgage, and microfinance) CPF Objective 2c: More efficient land and property markets CPF Objective Indicator Supplementary Progress Indicators WBG Program Improve Doing Business Distance to Frontier (DTF) System for electronic issuing of building permit Ongoing: Construction Permits DTF: established and applied Real Estate Management Project (FY15) Baseline DB2015 – 29.14; Target DB2019 - 44 Rules, procedures, methodologies and information Planned: on property registration widely and easily accessible Real Estate Management Project AF (FY19) Efficiency of property registration and procedures operate for public to verify their system improved information Average number of days to complete recording of Valuers operating in accordance with valuation purchase/sale of property in the standards in compliance with international standards land administration system 2015: 48 2019: 4 CPF Objective 2d: Enhanced transport infrastructure networks CPF Objective Indicators Supplementary Progress Indicators WBG Program

5BEEPs Survey; 2008 percentage was 29 percent and the goal is to return to the pre-crisis level 6 Road to Europe: program of accounting reform and institutional strengthening 7 Enhancing quality of financial reporting 19

Corridor X completed Financing for all Corridor X lots secured by end Completed: 2015 Mainstreaming Climate Resilience in Road Transport Kilometers to be completed by Management in Serbia (FY18) Public Expenditure and end 2019: 46 Public Utilities DPL 1 (FY17)

National roads rehabilitated Ongoing: Kilometers to be rehabilitated Corridor X Project (FY10) with safety measures Road Rehabilitation and Safety Project (FY13) incorporated Second Public Expenditure and Public Utilities DPL Target: 121km (2019) (FY18) IFC advisory support and financing of PPPs Serbia Railways Asset Management Plan using Life Cycle Costs Proposed: IFC PPPs in municipal infrastructure and transport sectors Public Investment Management Energy tariffs reform and impact on the Bottom 40 CPF Objective 2e: More efficient employment facilitation CPF Objective Indicators Supplementary Progress Indicators WBG Program

NES services enhanced: Percentage of total NES staff that is operating as Completed: certified case worker Serbia State Owned Enterprises Reform DPL series Performance indicators: (FY15 and FY17)

Number of active job seekers per Ongoing: case worker: Serbia Competitiveness and Jobs RBF (FY16) Western Balkans Jobs TA 2014: 1,238 (registered New Growth Agenda Country Economic Memorandum unemployed) (CEM) 2019: 800 (active job seekers)

Increased number of registered unemployed who found formal job Baseline: 232,280 (2014)

Increased number of registered unemployed women who found formal job

Baseline: 122,491 (2014)

Increased number of registered unemployed youth (15-24) who found formal job:

Female: 19,100 (2014) Male: 22,498 (2014)

Increased number of registered unemployed Roma who found formal job:

Female: 633 (2014) Male: 959 (2014)

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

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE CPF Objective 1a: Sustainable public expenditure management CPF Objective Indicators Action Reduction of public expenditures through lower direct subsidies and guarantees Revised. Due to issues with comparability, both baseline and target for the to SOEs first part of this indicator (on subsidies) are adjusted to reflect the changes in reporting on subsidies in the budget. For clarification and final reporting purposes it is noted that this indicator now includes direct subsidies to: Railroads, PE Resavica, Airport and PE Roads of Serbia, plus soft loans and subsidies to SOEs from the PA portfolio. Supplementary Project Indicators Allocation from the Budget for subsidies and soft loans to the SOEs in the New former Privatization Agency portfolio Decrease in gross tax and contribution arrears by SOEs in the former New Privatization Agency portfolio Freeze on public sector wage indexation in years in which the share of general Revised. The definition of public sector wage bill has been revised in government salaries (excluding severance payments) is expected to exceed 7 agreement between the Government and IMF to also include the share of percent of GDP taxes and social insurance contributions payable by employees. Therefore, the wage bill to GDP ratio was revised accordingly for the previous years: 8.8 to10.4 in 2015, 8.3 to 9.8 2016, 8.1 to 9.5 2017. The indicator is adjusted to refer to related agreements reached with IMF rather than a fixed percentage value. Freeze on public sector pension indexation in years in which pension spending is No change expected to exceed 11 percent of GDP Attrition and targeted reduction of public sector employees in line with the Revised. The language of the indicator is revised to remove linkage to budget calendar adoption of the Fiscal Strategy Fiscal Strategy. No related annual decrees have been systematically adopted in previous years but that was not crucial to reductions of public sector employees.

CPF Objective 1b: More effective public administration & select service delivery improvements CPF Objective Indicators Action A plan to strengthen the policy-making and coordination system prepared by end No change 2016 and implemented by 20198 Reduce percentage of non-medical staff employed in public health facilities in No change Serbia (by 15 percent)

8 8 Metcalfe Scale is a comparative tool for measuring coordinating capacity based on the Guttman scale, with cumulative progression from lower to higher levels. The scale has following nine levels: 1) Independent Organizational Decision-Making; 2) Communication to other Organizations (Information Exchange); 3) Consultation with other Organizations (Feedback); 4) Avoiding Divergences among Organizations; 5) Search for Agreement on Policies; 6) Arbitration of Policy Differences; 7) Setting Parameters for Action; 8) Establishing Priorities; 8) Overall Strategy. 22

Supplementary Project Indicators Action Right Sizing (Organizational rationalization) plans for selected sectors designed Revised. The timeline to reach this target is extended given the additional and implemented by end 2017 time needed for plans to be finalized and implementation. Overall institutional architecture of the administration rationalized by end 2017 Dropped. Given lack of progress made and for lack of mechanisms to support going forward, this indicator is removed. Overall institutional architecture strengthened to manage EU Accession process New Justice sector has started to implement the recommendations contained in the No change Serbia Judicial Functional Review beginning with a freeze on filling vacant positions before the analysis on right-sizing is completed. All recommendations to be implemented by end 2018 Functional review completed for the Serbia health sector, which identifies No change priorities and targets for reducing non-medically trained staff, including confirming baseline and targets for 15% reduction of non-medical staff CPF Objective 1c: A more efficient and sustainable power utility CPF Objective Indicators Action EPS corporatization completed and financial sustainability achieved Revised. The indicator is revised to clarify and reflect more realistic results expected to be achieved and increase attributability of the results to the ongoing WBG support to the sector. Increase Serbia’s renewable energy generation capacity in wind by 100 MW No change. Minor error from the original RM (word “increase” used two times) corrected Supplementary Project Indicators Action EPS established as a Joint Stock Company (2017) Revised. The indicator is revised to reflect more realistic timeline and results expected to be achieved and increase attributability of the results to the ongoing WBG support to the sector. Strategic partner for EPS identified and equity stake sold by 2019 Dropped. Given lack of progress made and for lack of WBG’s direct support going forward, this indicator is removed. Debt/EBITDA ratio below 3 by end 2016 Revised. The indicator is revised to suggest more adequate measurement and remove the target year so to retain it in the matrix for end CPF assessment. No further accumulation of SOE and budgetary institutions payables/arrears to Revised. The indicator is revised to remove the end target year (2017), and EPS by end-2017 is retained for the end of the CPF assessment, given the important link to the overall objective. CPF Objective 1d: More efficient public transport companies CPF Objective Indicators Action Serbia Railways restructured and cargo company operating without subsidies No change. Roads maintained under Performance based maintenance reaches 3000 Revised. The timeline to reach the target is extended to reflect the additional kilometers time needed for implementation of all foreseen contracts.

Supplementary Project Indicators Action 23

Establishment of autonomous infrastructure, freight and passenger companies No change Number of traffic units (passenger km + ton km) per staff No change Transform Roads of Serbia into autonomous agency with guaranteed budget and Revised. The timeline to reach the target is extended to reflect the additional accountability for results time needed for implementation of SLA, as redefined by the implementation schedule of the supporting WBG operations. CPF Objective 1e: Productive SOE assets transferred to private ownership CPF Objective Indicators Action Commercial SOEs under the Privatization Agency Privatized Revised. There was limited traction in privatizing a substantial portion of the SOEs in the Privatization Agency portfolio as these were not appealing to private investors, due mostly to legacy issues including complex liabilities difficult to resolve through privatization. These SOEs were thus either resolved through bankruptcy or remain in state ownership. In this context, the team realigned both the formulation of the Objective 1e as well as the objective indicator to reflect the implementation reality. Supplementary Project Indicators Action Number of companies under PA portfolio resolved through asset and equity No change sales: 178 by end 2017 FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION CPF Objective 2a: Priority business climate improvements CPF Objective Indicators Action Improve Doing Business Distance to Frontier (DTF) No change Supplementary Project Indicators Action Trade facilitation - intermediate steps: Improvements of customs information Dropped. Given more time than expected to implement the preparatory system that would simplify procedures and automate clearances by end 2017 project mapping, the IT solutions will take time and will unlikely be completed during the CPF period. Simplification of tax procedures through better usage of on line filing and Dropped. Activities planned ins Serbia under the regional IFC SEE Tax and elimination of redundant processes by 2018. Transparency Project did not get the needed support and co-financing from the Government and were thus significantly scaled down, with no progress towards simplification achieved or expected by end CPF period. Amendments to the insolvency law and regulations; trainings and awareness No change campaign for insolvency practitioners, courts and other stakeholders by end 2015 CPF Objective 2b: More stable and more accessible financial sector CPF Objective Indicators Action Reduction of share of Non-Performing Loans (NPLs) in total loans provided No change Increased availability of enterprise financing coming from banks No change Supplementary Project Indicators Action Number of state owned banks reduced to a maximum of 3 by end 2018 Dropped. Given that the progress on this agenda has been limited and given uncertainly on the timing of next steps towards privatization, this indicator

is dropped and a new indicator (below) added to better capture the contribution of the WBG’s engagement. No state-owned banks with negative profitability New Deposit Insurance Fund replenished and balance sustained No change Increased debt recovery rate through out of court workouts and insolvency No change Credit growth exceeds GDP growth from 2018 No change CPF Objective 2c: More efficient land and property markets CPF Objective Indicators Action Improve Doing Business Distance to Frontier (DTF) - Construction Permits DTF No change Efficiency of property registration system improved No change. Baseline year corrected to 2015 (2005 was a typing mistake) in the original RM) Supplementary Project Indicators Action System for electronic issuing of building permit established and applied No change Rules, procedures, methodologies and information on property registration No change widely and easily accessible and procedures operate for public to verify their information Five mobile teams operational in major registration offices to assist people with Dropped. Development of the e-services system has changed the concept of disabilities; Roma; women in rural areas and others with difficulties accessing providing services to people with disabilities, and is putting in place land administration services. functional mechanisms. Creation of additional mobile teams is deemed to be of limited value, and this indicator is removed. Valuers operating in accordance with valuation standards in compliance with New international standards CPF Objective 2d: Enhanced transport infrastructure networks CPF Objective Indicators Action Corridor X completed Revised. The timeline to reach the target is adjusted to the extended closing date of the project (September 30, 2019). Power exchange SEEPEX by Q3 2016 and market coupling 4M MC (Hungarian, Dropped. Given that the activities supporting these efforts are outside of the Romania, Czech Republic, and Slovakia) by Q2 2017. WBG’s scope of support, and thus the concerns of attributability, this indicator is removed. Accordingly, the formulation of the Objective 2d is revised to narrow it to the enhancements in transport infrastructure networks, where the results can be attributed to the WBG’s program. National roads rehabilitated New Supplementary Project Indicators Action Financing for all Corridor X lots secured by end 2015 No change Volume of trade in SEEPEX to reach 5 percent of domestic consumption by end Dropped. Given that the activities supporting these efforts are outside of the 2017. WBG’s scope of support, and thus the concerns of attributability, this indicator is removed. CPF Objective 2e: More efficient employment facilitation CPF Objective Indicators Action 25

Social Security contribution system rationalized to incentivize part time and low Dropped. The activities originally foreseen under the WBG operation no wage employment longer have the support from some of the key Government players, making the support to the needed reform challenging. This indicator is thus removed, and the respective operation restructured to account for this shift. Accordingly, the formulation of the Objective 2e is revised to reflect the revised scope of the WBG’s program and refocus on the support provided in particular to the NES services. NES services enhanced (all related indicators): No change

Supplementary Project Indicators Action Legislation passed to reform Social Security system Dropped (both indicators). The activities originally foreseen under the Reduced tax wedge for low-wage earners WBG operation no longer have the support from some of the key Government players, making the support to the needed reform challenging. This indicator is thus removed, and the respective operation restructured to account for this shift. Number of Certified Case managers reaches 600 Revised. The indicator is revised to suggest more adequate measurement of results achieved. CPF Objective 2f: Closing medium and long-term skill gaps – DROPPED Indicator 2f and all of the related indicators are dropped given that: 1) the operation that was intended to support them (Early Childhood Education and Development Project) is just starting implementation and results are expected at a later stage; and 2) activities initially foreseen (on vocational education) have either proven not to be in line with the Government priorities or have otherwise lost relevance.

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

FOCUS AREA 1: ECONOMIC GOVERNANCE AND THE ROLE OF THE STATE CPF Objective 1a: Sustainable public expenditure management CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators Completed: Reduction of public On track (both indicators) Freeze on public sector On track expenditures through lower wage indexation in years in A revised target of 8 percent Serbia State Owned direct subsidies and which the share of general had been agreed with IMF. Enterprises Reform guarantees to SOEs government salaries Wage freeze resulted in DPL series (FY15 (excluding severance controlled wage bill and and FY17) Direct subsidies Status (2018): 240 million payments) is expected to reduction from 10.4% of GDP Public Expenditure (million Euro): EUR subsidies (out of exceed 7 percent of GDP in 2015 to 9.9% in 2018. and Public Utilities which 8 million for SOEs in Slight increase of salaries in DPL 1 (FY 17) Baseline (average the PA portfolio) selected sectors had however 2010-2014): 250 been approved for 2016, 2017 Public Expenditure Target (2020): to be and 2018 (army, education, and Financial less than 150 social protection, increases Accountability between 2 and 4 percent). The (PEFA) rest of the salaries remained Annual guarantees Status (2015): 1 under freeze. In line with the Serbia Public for liquidity There have been no (0) agreement with the IMF, no Finance Review purposes (million guarantees since 2016 further increases to the salaries Serbia A&A ROSC Euro): onwards, and to date. are to be approved prior to update implementation of the new Baseline (average Law on Public Sector Salaries. Ongoing: 2012-2014): 265 Target (2015): less Freeze on public sector On track Second Public than 50 pension indexation in years Pension expenses are currently Expenditure and in which pension spending around 11.3%. There had Public Utilities is expected to exceed 11 earlier been a progressive DPL (FY18) percent of GDP decrease of pensions, followed CAT DDO (FY17) by a 2% increase in 2016 and 1.5% increase in 2017. The Programmatic current estimate for 2018 is Poverty that the pensions expenses are Assessment at about 10.4% of GDP. Improving the According to the proposal for Quality and Flow selective pensions increase in 27

2019, the expenses will still of Public Finance remain close to that level. Data

Attrition and targeted On track Planned: reduction of public sector Law on maximum number of Public Sector employees in line with the employees in public sector Efficiency and budget calendar adoption of adopted in 2015, with limited Growth DPO the Fiscal Strategy duration till 2018, to be (FY20) applied for four years in a row. Nevertheless, annual decrees on ceiling have not been adopted every year. Since the end of 2014 the total number of general government employment (plus local public utilities) has been reduced for more than 25,000. These gains were partly offset by hired fixed-term and contractual hiring (more than 11,000). CPF Objective 1b: More effective public administration & select service delivery improvements CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators A plan to strengthen the Current Metcalfe scale policy-making and rating is estimated at 3 and Right Sizing Partly achieved Completed: coordination system is attributed to (Organizational Based on the Wage bill prepared by end 2016 and achievements and progress rationalization) plans for at recommendations from management ECA implemented by 2019 in the following: least 4 sectors designed and Functional Reviews, PFM TF implemented by end 2017 Ministries of Health, Right Sizing TA Indicator: Metcalfe Policy Note on Policy Education, Agriculture and (IPA financed) Scale rating Management and Environment have prepared improved Implementation Tracking and adopted Action Plans. At Ongoing: Assessment was prepared in the central level, based on the Second Health Baseline (2015): 2 2016. Decision-making and Horizontal Functional Review, Sector Project Target (2019): 4 implementation PAR council adopted Action (FY14) and management platform was Plan which is a base for EU Additional formally introduced in funded Sector Budget Support. Financing (FY18) 2017, as a main vehicle for Full implementation of the PforR on monitoring implementation Action Plans will however Modernization and of the Action Plan for require additional time. Optimization of 28

Implementation of the Public Government Program. Overall institutional Not achieved Administration Regular reporting routines architecture of the There was an increase of (FY16) have been established administration rationalized number of ministries after the CAT DDO (FY17) between the line ministries by end 2017 cabinet reshuffle in June 2017. Serbia Result and the center of It is hard to establish firm Based Management government. Serbia Result structure of the Government RAS Based Management RAS due to frequent reshuffling activities are also (mergers and separations of MDTF for Justice supporting gradual line ministries – Agriculture Sector Support transition from reporting and Environment, SEIO TF on Disaster activities to problem became Ministry for EU Risk Management solving and escalating clear, integration). Implementing analytically based Open Data Plan for recommendations for Justice sector has started to Off track Serbia action. implement the Judiciary is filling vacant recommendations contained positions of judges and Planned: Action Plan for in the Serbia Judicial prosecutors. Full Enabling Digital Implementation of the Functional Review implementation of Governance in Public Administration beginning with a freeze on recommendations will require Serbia (FY19) Strategy (APIPAS) for filling vacant positions more time and adoption of the Public Sector 2018-2020 was updated in before the analysis on right- HR strategy for justice sector Efficiency and July 2018. Furthermore, sizing is completed. All which will be developed in Growth (FY20) recommendations from the recommendations to be 2019. Implementation will be Horizontal Functional implemented by end 2018 delayed until 2020. To Review of Central expedite implementation of Governmenti related to recommendations from strengthening of capacities Judicial Functional review and for strategic planning and from Action Plan for Chapter reporting in line ministries 23 the GoS is working with and other government the EU delegation on a sector institutions will be budget support which should implemented through the start in 2020 revised APIPAS. Functional review Achieved The Planning System Law completed for the Serbia Functional review for Health was adopted in April 2018 health sector, which sector was completed in mid- and came into effect on identifies priorities and 2017. Based on the October 29, 2018. The law targets for reducing non- recommendations from establishes legislative medically trained staff, functional review, an 29

framework for transparent including confirming operational plan for policy development, baseline and targets for 15% modernization is to be coordination, monitoring, reduction of non-medical prepared. and reporting process. staff. Internal consultations for two corresponding bylaws are under way. Adoption of these bylaws, planned for the end of 2018, will further strengthen regulatory framework for implementation of the Planning System Law.

Additionally, technical support in a form of just in time policy issue notes and collective leadership exercise with the Cabinet is being provided under Reduce percentage of non- Result-based Mngmnt RAS. medical staff employed in public health facilities in On track. Serbia (by 15 percent) Currently the percentage of non-medical staff is being Baseline: 30 percent reduced through attrition of public sector but will continue based on health workers are the result of the functional not medically trained review for the health sector. (estimate based on 2013 data) Status (as of end-2017): 21.1% non-medical staff Target: 25 percent or employed in public health less of public sector (21,468 out of total health workers are 101,853) not medically trained CPF Objective 1c: A more efficient and sustainable power utility CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

EPS corporatization On track completed and financial The latest available data EPS established as a Joint Not Achieved Completed: sustainability achieved (for end 2017, indicators Stock Company (2017) The effort of transforming Public Expenditure monitored on yearly basis) EPS into a JSC is alive but the and Public Utilities Indicators: indicate that overall there is earliest date for such an event DPL 1 (FY17) a trend of increase in will be 2019. Collection rates collection rates and a Serbia Energy increase from 93% decrease in distribution Strategic partner for EPS Off track Affordability TA (2014) to 95% losses. identified and equity stake While the effort to transform (2019) sold by 2019 into a JSC is ongoing, the Ongoing: Collection rates per year: Government is not considering Emergency Distribution losses 2015: 93.80% a strategic partner for EPS or Recovery Loan decrease from 14% 2016: 92.81% an IPO. (FY15) (2014) to 12.1% by 2017: 98.14% (vs target of Second Public 2019 95.5%). Debt/EBITDA ratio below 3 Mostly achieved Expenditure and by end 2016 EBITDA ratio was 2.8 for Public Utilities Distribution losses per 2015, and 3.4 for 2016, thus DPL (FY18) years: 3.1 on the average. Enhancing 2015: 14.02% Infrastructure 2016: 12.95% No further accumulation of Not achieved Efficiency and 2017 (: 12.93% (vs. 12.8% SOE and budgetary Taking start of 2015 as Sustainability PfR target) due to extremely institutions payables/arrears baseline, the figures show that (FY18) cold Q1 2017, the losses to EPS by end-2017 the level of arrears has were higher than normal as increased by approx. RSD Serbia EPS Results there was extreme 14.1 billion for the top 20 Based Management electricity consumption for debtors. The net increase by Project RAS heating purposes in the year (offsetting individual residential sector. increase and decrease and IFC engagement on aggregating across 20 transport and utility Increase Serbia’s renewable Achieved customers) is as follows: sector PPPs energy generation capacity IFC invested in two wind including in in wind increase by 100 MW power projects with over 2015: RSD 6.6 billion (arrears renewable energy Baseline (2015): 200 MW of capacity. have increased for 18 Wind energy: 0 MW customers) Energy tariff Target (2019): Wind reforms and impact energy: 100 MW 2016: RSD 7.0 billion (18 on the poor and customers) vulnerable

2017: RSD 0.5 billion (15 customers). It is to note that in 31

2017, EPS has written off debt (RSD 2.7 billion) from Railways in accordance with the agreement with GoS, so the year is not necessarily representative in terms of systemic improvement.

The group of top 20 customers with arrears is pretty stable, only 3 customers dropped out (entered) this group in 2017 vs. 2016 while only 1 customers dropped out (entered) in 2016 vs. 2015. CPF Objective 1d: More efficient public transport companies CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

Serbia Railways restructured Achieved Establishment of Achieved. Completed: and cargo company Serbia Railways autonomous infrastructure, The three companies Public Expenditure operating without subsidies restructured and cargo freight and passenger established and functioning as and Public Utilities company operating without companies independent companies DPL 1 (FY17) Subsidy to cargo subsidies starting from 2016 (property divided, first balance Mainstreaming company RSD 10.4 of payments submitted). Climate Resilience Billion in 2014, and in Road Transport zero in 2019 Number of traffic units Achieved Management in (passenger km + ton km) 2017: 303,125 Serbia (FY18) per staff Roads maintained under On track Ongoing: Performance based Tender for 3000 kilometers Baseline (2013): Road maintenance reaches 3000 was launched and 3 206,500 Rehabilitation and kilometers contracts for 1,500 Target (2017): Safety Project kilometers have been signed 290,000 (FY13) Kilometers of roads and will be implemented in Corridor X under performance- 2018. Contracts for Highway Project based maintenance remaining 1,500 kilometers Transform Roads of Serbia Not achieved (FY10) in 2015: 0 are pending signature by into autonomous agency Service Level Agreement Enhancing Target for 2018: PERS and should be with guaranteed budget and between MCTI and PERS to Infrastructure 3000 implemented in 2019. accountability for results achieve the transformation Efficiency and 32

expected to be signed by Sustainability PfR Milestone: service December 2019. (FY18) level agreement Second Public signed and in effect Expenditure and by end 2016 Public Utilities DPL (FY18)

IFC engagement on transport and utility sector PPPs, including in waste management advisory services for the Municipality of Belgrade IFC Integrated Environmental, Social and Corporate Governance Advisory

CFRR regional EU- REPARIS9 program, and EQ- FINREP10 country project

Planned:

IFC investment in Belgrade Waste Management Project IFC Belgrade Airport PPP

9 Road to Europe: program of accounting reform and institutional strengthening 10 Enhancing quality of financial reporting 33

IFC Belgrade Electric Busses Project

Public Investment in Transport TA CPF Objective 1e: Productive SOE assets transferred to private ownership CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

Commercial SOEs under the On track Number of companies under Achieved Completed: Privatization Agency Current status (2018): less PA portfolio resolved A total of 350+ companies A Privatized than 90 companies remain through asset and equity total of 350+ companies were Serbia State Owned in the portfolio. sales: 178 by end 2017 resolved, with 300+ resolved Enterprises Reform Number of through bankruptcy, due to the DPL series (FY15 remaining lack of interested investors. and FY17) companies in the PA Some of the most difficult portfolio by 2020: companies were resolved <50 recently (RTB Bor, Azotara, PKB) while a few still remain to be resolved (Simpo, Lasta, MSK, Petrohemija). FOCUS AREA 2: PRIVATE SECTOR GROWTH AND ECONOMIC INCLUSION CPF Objective 2a: Priority business climate improvements CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators Improve Doing Business Mostly Achieved Distance to Frontier (DTF) Trade facilitation - Not achieved Ongoing: DB2015: 62.57; Status DB2017: 72.87 intermediate steps: Customs initiated preparatory Serbia Target DB2019: 72 Status DB2018: 73.13 Improvements of customs project mapping of all Competitiveness Status DB2019: 73.49 information system that processes to get ready for the and Jobs RBF would simplify procedures future automation of exports (FY16) The target for DTF has been and automate clearances by and imports. However, they fully achieved and end 2017 are at the very initial stage of IFC Western surpassed, as well as the this process and developing Balkans results for the two out of the the IT solution can take place Agribusiness three areas of focus below. only afterwards and will Competitiveness There was very limited require more time. Program progress on the last one.

Thus, on balance, it is Simplification of tax Not achieved IFC Western considered that this procedures through better IFC Southeast Europe Balkans Debt indicator is mostly usage of on line filing and Regional Tax and Resolution and Special focus on: achieved. elimination of redundant Transparency Project did not Business Exit processes by 2018. produce the planned results in Project Trading across Status DB2019: 96.64 Serbia regarding IFC Integrated Borders DTF: (same as DB2017 and simplification. Due to Environmental, baseline DB 2015 – DB2018) Government’s limited interest Social and 72.13; in providing cash contribution, Corporate Target DB2019 – 85 activities in Serbia were Governance significantly scaled down Advisory Paying taxes DTF: Status DB2019: 74.75 compared to the original plan. IFC Serbia baseline DB2015 – (improved from 73.63 in Improving 48.9; DB2018 and DB2017) Amendments to the Achieved Investment Climate target DB2019 - 64 insolvency law and The Law on Consensual ASA regulations; trainings and Financial Restructuring was Resolving Status DB2017: 59.66 awareness campaign for amended to include individual TF funded CFFR insolvency: Status DB2018: 60.49 insolvency practitioners, entrepreneurs, and the Law on Accounting and baseline DB2015 – Status DB2019: 60.78 courts and other Bankruptcy Supervision Auditing project 57.9 stakeholders by end 2015 Agency (BSA) was enacted target DB2019 – 74 establishing a new bankruptcy agency centralizing processes. Note: DB2019 results The Insolvency Law prepared confirm that there has been with the Project’s technical overall continued progress. assistance and endorsed by the These results are likely to IMF was adopted in December be maintained till the end of 2017. The new law is expected the CPF. to accelerate bankruptcy procedures and lead to further reduction in NPLs. More than 3,400 key actors (insolvency practitioners, judges and other stakeholders) were trained, increasing capacity to support the implementation. CPF Objective 2b: More stable and more accessible financial sector CPF Objective Indicator Progress to date Supplementary Progress Progress to date WBG Program Indicators

Reduction of share of Non- On track Number of state owned Off track Completed: Performing Loans (NPLs) in A declining trend in the banks reduced to a There are currently four state Strengthening total loans provided banking sector’s total gross maximum of 3 by end 2018 owned banks. The Deposit Insurance NPLs continued into Q4 privatization process was Agency Project Baseline: 22.5 2017. Gross non- initiated for one of the banks (FY14) percent (2014) performing loans to total (Jubmes). A strategy which Target: less than 18 gross loans amounts 9.8 % outlines the divestiture process Ongoing: percent (in 2019) at end 2017, as per latest for the other banks is yet to be State Owned available data. put in place. Financial Institutions Reform Deposit Insurance Fund On track Project (FY18) Increased availability of replenished, and balance The DIF balance equals 3.4% enterprise financing coming Not verified sustained of the insured deposit level (as Western Balkans from banks No BEEPs12 surveys have of end 2017). This achieved Financial Sector Percent of firm been done in CPF period. and surpassed the 2.5% target TA CFRR regional EU- financing coming However, a BEEPs Survey as defined in the Deposit 13 from banks will be completed in fall of Insurance Strengthening REPARIS program, and EQ- 2013: 15 percent 2019, and will provided the project. 14 2019: 29 percent11 needed assessment. FINREP country Increased debt recovery rate On track project through out of court DB 2018 report points to a workouts and insolvency steady increase in the recovery IFC Western rate under the resolving Balkans Debt Indicator: proceedings insolvency category since Resolution and Baseline: 29.2 % 2014. Business Exit (2014) DB2018: 34%. Program Target: 40% percent (2018) Proposed: Credit growth exceeds GDP On track growth from 2018 Year-on-year growth in IFC lending to domestic loans sped up to Financial Intermediaries

12 BEEPs Survey; 2008 percentage was 29 percent and the goal is to return to the pre-crisis level 13 Road to Europe: program of accounting reform and institutional strengthening 14 Enhancing quality of financial reporting 36

4.5% in June (excluding the (SME lending, exchange rate effect). mortgage, and Excluding the effect of NPL microfinance) write-off during 2016 and 2017, the y-o-y growth of total lending accelerated to 6.7%. Although banks’ increased activities on NPL resolution are working towards a decrease in the stock of loans, a positive effect on this account is expected in the coming period because the cleansing of bank balance sheets from distressed assets opens up room for new lending. CPF Objective 2c: More efficient land and property markets CPF Objective Indicator Progress to date Supplementary Progress Progress to date WBG Program Indicators Improve Doing Business System for electronic Distance to Frontier (DTF) On track issuing of building permit Achieved Ongoing: established and applied System established and in use. Real Estate Construction Permits DTF: Status DB2018: 82.38 Management baseline DB2015 – 29.14; (Rank 10) Rules, procedures, Project (FY15) target DB2019 - 44 methodologies and On track information on property Property registration related Planned: registration widely and information available for Real Estate Efficiency of property On track easily accessible and public viewing and verifying. Management registration system improved Status (October 2018): 12 procedures operate for Some property related services Project AF (FY19) public to verify their already provided as e-services Real Estate Average number of Introduction of on-line information including application tracking Development days to complete property transaction Guarantee and e-appeal. recording of registration application for purchase/sale of notaries will contribute to Five mobile teams Off track property in the land further shorten the average operational in major Development of the e-services administration time it takes to complete registration offices to assist system has changed the system recording of purchase/sale people with disabilities; concept of providing services 2015: 48 of property. Roma; women in rural areas to people with 2019: 4 and others with difficulties disabilities. Namely, an 37

accessing land arrangement (through MOU administration services. already signed) has been put in place by which the National Association of People with Disabilities will have access to the e-services and will be supporting the persons with disabilities in getting the service they need. Also, it is worth to note that the one mobile team established in Belgrade received only one call in the last year, and creating more teams is deemed too have little value (this is being reflected in the restructuring of the Real Estate and Registration Project that is underway). CPF Objective 2d: Enhanced infrastructure networks CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

Corridor X completed On track Financing for all Corridor X Achieved Completed: Status: 40.3 kilometers lots secured by end 2015 Additional Financing Public Expenditure Kilometers to be completed, remaining 6 approved and Public Utilities completed by end kilometers to be completed DPL 1 (FY17) 2017: 46 by the extended project date Volume of trade in SEEPEX Mainstreaming (September 2018) to reach 5 percent of Not verified Climate Resilience domestic consumption by in Road Transport Not achieved end 2017. Management in Power exchange SEEPEX by SEEPEX has been ready for Serbia (FY18) Q3 2016 and market the coupling since 2016. coupling 4M MC Member tests have been Ongoing: (Hungarian, Romania, Czech conducted successfully and Corridor X Project Republic, and Slovakia) by final regulatory issues are (FY10) Q2 2017. cleared. However, the Road market coupling with has Rehabilitation and been postponed for internal Safety Project 4M MC reasons (one (FY13) 38

country has not agreed). Second Public This coupling is also Expenditure and included in the list of Public Utilities priority actions for the DPL (FY18) CESEC initiative (covering WB6 and neighboring EU IFC advisory countries) in the power support and sector. financing of PPPs

Serbia Railways Asset Management Plan using Life Cycle Costs

Proposed:

IFC PPPs in municipal infrastructure and transport sectors Public Investment Management Energy tariffs reform and impact on the Bottom 40 CPF Objective 2e: Reduced barriers to labor market participation CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

Social Security contribution Off track Legislation passed to reform Off track (both indicators) Ongoing: system rationalized to No progress has been made Social Security system No progress has been made to Serbia State Owned incentivize part time and low to date regarding reforming date regarding reforming Enterprises Reform wage employment social contribution system Reduced tax wedge for low- social contribution and the DPL series (FY15 and the labor taxation law. wage earners labor taxation law, to and FY17) Percentage of total incentivize part-time and low- Serbia formal employment Indicator: Tax wedge on wage employment (identified Competitiveness in part time work income from half-time job as top priority). and Jobs RBF at minimum wage for single (FY16) 39

2014 (Q3): 106,000 earner with no children Western Balkans (Source: LFS) reduced from 44.6 percent Jobs TA 2019 (Q3): 150,000 (2015) to 37.1 percent or (Source: LFS) lower by 2019

On track On track NES services enhanced: There has been some Number of Certified Case Overall activities under related progress towards improving managers reaches 600 Competitiveness and Jobs the performance of the RBF are underway, making National Employment the caseload of caseworkers in Service, partially due to the branch offices and even across Bank’s engagement branch offices more (Competitiveness and Jobs manageable. RBF and related ASA), but also due to improved labor market conditions.

Performance indicators:

Number of active job seekers per case worker: Status (end-June 2018): 912 2014: 1,238 (registered unemployed) 2019: 800 (active job seekers)

Increased number of registered unemployed who found formal job Status (2017): 268,497 Baseline: 232,280 (2014)

Increased number of registered unemployed women who found formal job Status (2017): 138,152 Baseline: 122,491 (2014)

Increased number of registered unemployed youth (15-24) who found formal job:

Female: 19,100 Status (2017): (2014) Female: 20,057 Male: 22,498 (2014) Male: 26,100

Increased number of registered unemployed Roma who found formal Status (2017): job: Female: 1,562 Female: 633 (2014) Male: 2,588 Male: 959 (2014) CPF Objective 2f: Closing medium and long term skill gaps CPF Objective Indicators Progress to date Supplementary Progress Progress to date WBG Program Indicators

By 2019, 98 percent of all Progress not attributable Body for accreditation of Not verified / Progress not Closed: children attend pre-school to WBG program preschool institutions and attributable to WBG Serbia Innovation education at age 6 programs established program Project (IPA financed, FY 12) Baseline: 92 percent (school year Introduce mandatory career Not verified / Indicator no Ongoing: 2012/13) counselling for all VET longer relevant Serbia Technology students Transfer Project Target: 98 percent (IPA financed (2019) FY15) 41

Inclusive Early Better alignment of Childhood vocational curricula and skill Not verified / Indicator no Education and Care demands from employers longer relevant Project (FY17) (e.g. through effective sector councils and different Ongoing TA governance structures of Regional training institutions) Educational Supporting the effective integration of (Roma) returnees in the WB

ANNEX 4. DETAILED PROGRESS PER CPF FOCUS AREAS

Focus areas 1: Economic Governance and Role of the State

30. Activities in this area are aligned with the five CPF objectives: a) sustainable public expenditure management, b) more effective public administration & select service delivery improvements, c) a more efficient and sustainable power utility, d) more efficient public transport companies, and e) productive SOE assets transferred to private ownership. All five objectives broadly remain on track i.e, achievable by end CPF, and adjustments are introduced to some of the related indicators to increase their relevancy and attributability to the WBG Program. 31. The robust development lending program contributed to sustainable public expenditure management. Both DPL series, State-Owned Enterprises Reform (SOE DPL series) and Public Utilities and Public Enterprises (PEPU DPL series) contribute significantly to country’s broader fiscal consolidation and structural reforms program, and the results achieved under this Focus Area. Most notably, no new guarantees for liquidity purposes have been issued to SOEs (neither in 2016 and 2017) and as of 2017 the subsidies have declined to below 165 million EUR (vs. 150 million CPF target). The share of government salaries as percentage of GDP is down from 8.8 percent in 2015 to 8.3 and 8.1 percent for 2016 and 2017, respectively. While this is only slightly off the 8 percent target15, it is to be noted that not all the salaries remained under freeze, and salaries in selected sector, as well as pensions, have continued to see slight (up to 4 percent max) increases over last 3 years. The SOE Reform DPL series supported the Government’s structural reform program for the SOE sector, supporting in turn stabilization of public debt that was at the core of its 2015-2018 economic program. More than 350 small companies were resolved to date, yet the efforts need to continue as some of the most difficult (and larger) companies still remain to be resolved. 32. Public Expenditure and Public Utilities DPL series presents a showcase of the comprehensiveness of approach and political commitment to make progress on the critical reforms. WBG support to financial consolidation of public utilities, with a focus on EPS and with other IFIs support to a similar process in the gas utility Srbijagas, resulted in reducing fiscal pressures from inefficiencies in the public sector. Along these reforms, the Government is committed to continue with targeted assistance program on energy affordability among vulnerable households and to increase its coverage, protecting most vulnerable consumers. In the same way, improving the quality of infrastructure and service delivery of transport public enterprises is critical to achieving the goals of the ongoing fiscal consolidation. Quality of roads and railway infrastructure, enhanced efficiency and quality of service delivery were tackled by the improvements in sector-level policies and governance, as well as in the corporate governance and operational management of the public transport companies. 33. Important progress was made towards overall rationalization and modernization of the administration and addressing systemic constraints in public sector management. This process is supported by the PforR program on Modernization and Optimization of Public Administration underpinned by an extensive advisory and technical assistance program. These efforts are jointly supported by the WBG and the EU. The EU IPA provided funding for technical assistance for undertaking horizontal functional review (covering rationalization of the overall government architecture) and the rightsizing of critical sectors (vertical functional reviews of four sectors – finance, education, agriculture and social protection). The reviews have been completed and provided the basis for the Action Plans that were prepared, albeit with delay, and adopted by

15 The original CPF target is 7 percent yet adjusting the target to 8 percent has been discussed with the IMF. 43

Ministries of Health, Education, Agriculture and Environment. Implementation of the Plans will require additional time. 34. Improving efficiency of the public transport companies is supported with a mix of instruments. The ongoing Road Rehabilitation and Safety Project paved the ground for reforms in the maintenance by introduction of competitive tendering of maintenance works, operation and management of national road network, and management of the transport sector SOEs. Series of PEPU DPLs build upon these reforms by tackling corporate governance and financial consolidation and finally, the recently approved Enhancing Infrastructure Efficiency and Sustainability PforR, contributes to strengthening institutional arrangements. The introduction of PforR enhances ownership of the program and allows for acceleration of reforms that are under the way. As for the railways sector, strong progress was achieved with restructuring of the Serbia Railways, and establishment of autonomous infrastructure, freight and passenger companies, and with the cargo company operating without subsidies since 2016. IFC has been mandated to finance Belgrade Airport’s modernization. 35. IFC’s advisory and investment activities in renewable energy and energy efficiency have contributed to greening Serbia’s energy mix, reducing its over-dependence on highly polluting, outdated thermal plants, and curbing its vulnerability to climate change. With more than half of its electricity generated from coal-fired plants, Serbia is among the largest greenhouse gas emitters per capita in Europe. In 2014, the energy sector was most severely hit as the two major lignite mines that serve as a source of fuel for thermal plants were flooded due to inclement weather conditions. Promoting green energy alternatives will help Serbia reduce its high dependence on highly polluting dated thermal plants, curb its vulnerability to climate change, and meet its obligations under the EU Energy Community Treaty, to have 27 percent of energy consumption from renewable sources by 2020. 36. Serbia is part of IFC’s Western Balkans Renewable Energy Program Advisory Program (recently expanded to cover the entire region under the ECA Power Advisory Program). IFC has been helping the Government to create markets and to promote private sector investments in the renewable energy and energy efficiency sectors. Since 2013, IFC has been helping Serbia to improve key regulatory frameworks for renewable energy to introduce off-take tariffs for renewable energy technologies, develop a sustainable model for collecting renewable energy fees from electricity consumers, and implement for the first time Power Purchase Agreement (PPA scheme) that introduced key risk-mitigation instruments. IFC’s market-enabling work facilitated increased private sector interest to invest into the renewables, particularly in the wind power sector. In FY17-18, IFC financed two landmark wind power projects (Alibunar and Dolovo wind power plants) to construct over 200 MW of renewable energy capacity. These two investments have created significant demonstration effect, paving the way for other renewable energy projects to access long-term financing from IFIs. More recently, IFC signed an agreement with Serbia Biogas Association to help improve market conditions for biogas technology contributing to electricity generation and climate change agenda. 37. IFC is collaborating closely with the city of Belgrade to help scale up energy efficiency solutions. To achieve maximum results, IFC has been leveraging resources across the WBG including the ECA Cities Initiative, ECA Energy & Water (CASEE), PPP Advisory, and FCI GP, to support the city of Belgrade in designing an energy efficiency strategy and developing a pipeline of energy efficiency projects, including in green building, waste-to-energy, street lighting, district heating, and other urban infrastructure. A notable achievement was, the landmark €330 million waste-to-energy PPP project, where IFC contributed as lead advisor and helped the city of Belgrade to structure and successfully tender the project, with commercial close in November 2017. This was the first traditional PPP contract signed in Serbia demonstrating the bankability of the PPP framework in the country. IFC will consider its financing in this project. As part of its strategic

partnership approach, IFC will continue to support the city through new investments and advisory support under its Sustainable Cities program, including modern electric busses project and related infrastructure IFC is considering investing, which will be complemented by an advisory project on energy efficiency.

Focus Area 2: Private Sector Growth and Economic Inclusion

38. Activities in this area are aligned with six CPF objectives: a) priority business climate improvements, b) More stable and more accessible financial sector, c) more efficient land and property markets, d) Enhanced infrastructure networks, e) Reduced barriers to labor market participation, and f) closing medium and long-term skill gaps. Most of the objectives (the first four) remain on track and are deemed achievable by end CPF. As to the objective of reducing the barriers to labor market participation, adjustments are introduced to the indicators to reflect the revised scope of the WBG support. The last objective, on closing the skills gap, is being dropped as the activities originally foreseen will not yield results in the course of this CPF. 39. A broad set of reforms has been undertaken in recent years to strengthen the business environment. In 2017, Serbia was among the 10 countries with biggest improvements in the business environment, improving its ranking from 54th to 47th place, and in 2018 Serbia holds the 48th position globally. More specifically, Doing Business 2018 finds that Serbia implemented substantive changes in the regulatory environment in three key areas: i) starting a business easier by reducing the signature certification fee and increasing the efficiency of the registry, reducing the time for business registration, ii) registering property and iii) dealing with construction permits. In addition, Serbia has moved to 11th place globally when it comes to dealing with construction permits, which is fruit of reforms in this area supported by Real Estate Management Project and other Bank engagement in Serbia under this Focus Area. 40. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at creating a new regional market for investment in the Western Balkans 6 (WB6) through identifying and removing barriers to cross-border and intra-regional investment. By fostering greater harmonization of regional investment policies and better alignment with EU standards, the project aims at unlocking higher levels of FDI and intra-regional investment, faster economic growth and job creation in the region. The project will focus on supporting targeted investment climate reforms in the economies of the region to ease investment entry, strengthen investor protections and facilitate investment retention and re-investments. The project is fully aligned with the objectives and priorities of the Multiannual Action Plan to establish a Regional Economic Area in the WB 6 (MAP REA), which was adopted by the Prime Ministers of the region at the Trieste summit in July 2017. IFC’s SEE Reginal Tax Advisory project (completed) supported building institutional capacity of Serbia’s tax administration and Ministry of Finance in risk analysis and transfer pricing areas, while no progress was achieved in tax simplification since the project’s scope was reduced due to frequent political changes. IFC also launched a digitalization project to support the migration of the most burdensome licenses and permits from a paper-based system to an electronic system. 41. The CPF Program supports private sector growth and economic inclusion, among others through assisting in creating a more stable and accessible financial sector. The Deposit Insurance Agency (DIA) Project was an important contribution to strengthening the DIA as an important institution in the financial safety net and therewith contributed to a more stable financial sector. Cumulative inflows into the Deposit Insurance Fund ended up beyond the original target and the premium rate was kept at 0.6 percent, even though this was initially only expected to be a temporary arrangement. Strengthening the institutional capacity of the DIA and MoF was an important part of the Project, and contributed to several legal changes related to the functions of

the DIA. The WBG team reviewed and provided comments to the Deposit Insurance Agency Law, the Deposit Insurance Law and the Law on Bankruptcy and Liquidation of Banks and Insurance Companies, in coordination with the IMF. The revisions of these laws were important foundations for strengthening the DIA and clarifying its responsibilities. By building its financial and institutional capacity, the Project enabled the DIA to meet future deposit insurance and bank resolution obligations, which is fundamental for creating and maintaining financial stability. 42. During the CPF period to date, no progress has been achieved in privatization of the state- owned banks. Despite IFC's strong efforts and close collaboration with other DFIs including the EBRD, DEG, and Swedfund, the privatization on a major state-owned bank did not materialize due to lack of strong commitment from the government. The privatization process has been initiated for one of the state-owned banks (Jubmes). The support to the financial sector will continue, both with IFC’s engagement as well as through the recently approved IBRD loan for the State Owned Financial Institutions (SOFI) Project aiming to support the Government with implementation of the reform strategy for state owned financial institutions which aims to divest from selected state- owned banks and financial institutions. 43. IFC continues to provide financing to Serbian banks to reach SMEs and households. In FY16, IFC invested EUR35 million in Eurobank a.d. to support its housing/mortgage lending and trade finance activities. IFC's financing aims to Serbia's mortgage market development through improved access to finance of low income clients. In addition, through its Global Trade Finance Program (GTPF), IFC provided US$33.2 million in trade finance to support Serbian exporters. IFC will continue to support growth and export promotion by increasing access to short-term financing for working capital and trading needs of companies in Serbia. In FY18, IFC provided the first local currency funding to the only licensed microfinance lender in the country and promoting local currency finance as one of the Government's key objectives. In addition to local currency funding, IFC's financing will support the bank to increase its lending to underserved segments facing access to finance hurdles including the agriculture sector, women entrepreneurs, and rural areas. 44. Serbia has made significant progress in the area of distressed-asset resolution. Non- performing loans (NPL) have steadily declined since 2015 from 23 percent of total loans to 9.8 percent as of December 2017, and further down to 6.7 percent as of July 2018. Through the Western Balkans Debt Resolution Program, IFC supported the Government of Serbia in the adoption of the Non-Performing Loans (NPL) Resolution Strategy in 2015, which has played key role in addressing the legacy issue of chronically high NPLs. In the first phase of project implementation, IFC provided advisory support to improve the insolvency legal framework, including training judges and bankruptcy administrators on implementation; supporting amendments in the Financial Restructuring law, adoption of a new Insolvency law (in 2017 jointly with IMF), and the law on Bankruptcy Supervision Agency (BSA); and establishing a new bankruptcy agency to centralize all bankruptcy procedures and administration. The changes in the bankruptcy/insolvency regimes are expected to lead to further reduction in NPLs and unclog the credit channels in the financial system. The second phase of the program will focus on closing the regulatory gaps identified during Phase I, assessment of the regulatory framework for individual entrepreneurs' insolvency, raising the qualifications of main stakeholders (insolvency administrators, courts and supervisory authority) and raising awareness of the new mechanisms. 45. IFC leveraged regional and global platforms and projects to support Serbia’s private sector and improve financial access. IFC invested in the European Fund for Southeast Europe (EFSE), a collective debt investment vehicle initiated by KfW to channel long-term resources for housing finance and on-lending to MSEs through banks, specialized microfinance institutions, and viable microfinance non-profit organizations. Serbia is the second largest exposure in EFSE’s portfolio (EUR130 million allocated in 6 Serbian financial institutions). In FY18, IFC invested in a newly created Real Estate Investment Trust (REIT) focused on retail property assets in Serbia, North

Macedonia, and Montenegro. The investment will help local companies that operate income generating commercial property to access international capital markets and fund their growth, while setting best-in-class energy efficiency standards by upgrading commercial properties into certified green building facilities. In FY16, IFC invested US$30 million into a vertically integrated manufacturer of electric motors and related components, to expand their production in Serbia, leading to 1,100 new jobs creation. 46. IFC’s Western Balkans Regional Investment Policy and Promotion ASA project aims at creating a new regional market for investment in the Western Balkans 6 (WB6) through identifying and removing barriers to cross-border and intra-regional investment. By fostering greater harmonization of regional investment policies and better alignment with EU standards, the project aims at unlocking higher levels of FDI and intra-regional investment, faster economic growth and job creation in the region. The project will focus on supporting targeted investment climate reforms in the economies of the region to ease investment entry, strengthen investor protections and facilitate investment retention and re-investments. The project is fully aligned with the objectives and priorities of the Multiannual Action Plan to establish a Regional Economic Area in the WB 6 (MAP REA), which was adopted by the Prime Ministers of the region at the Trieste summit in July 2017. 47. There has been limited progress to date when it comes to reducing barriers to labor market. Due to challenges and delays arising from parliamentary and presidential election that impacted decision making and caused shifts in some of the Government’s priorities, lack of progress was registered in areas related to reducing labor market barriers (in particular with legislation) and measures to increase activation of social assistance beneficiaries. Activities supported under the ongoing Results-Based Competitiveness and Jobs operation, which is a part of a broader WBG engagement in this area, were recently realigned in response to changed circumstance so to maximize the support provided to selected public programs that help alleviate constraints to competitiveness and job creation (including investment and export promotion, innovation, active labor market programs, labor intermediation). The efforts undertaken to date resulted in enhanced performance of the National Employment Services (NES), partly contributing to increased numbers of registered unemployed finding jobs. Furthermore, significant funding from EU IPA came through the Serbia Research, Innovation and Technology Transfer Project that promotes commercialization of public R&D in Serbia and facilitates strategic planning in its research sector. It provides assistance with design and establishment of technology transfer practices and grant schemes for collaborative R&D. 48. Serbia's ranking in the World Bank Logistics Index fell from 63 in 2014 to 76 in 2016, indicating the need for further improvement in areas such as customs processing, trade and transport infrastructure, and institutional capacity of customs agencies. Through the ongoing ECA Trade Facilitation Support Program (ECA TFSP), IFC helps Serbia align with the WTO Trade Facilitation Agreement (TFA) and improve efficiency and simplify procedures in border processing and clearances. As of 2017, the program delivered three main outcomes: (i) implementation of a Time Release Study (TRS), measuring border agency processing times at selected border crossing points and inland terminals; (ii) an update of the WTO TFA Category B and C articles, and (iii) support to the establishment of the National Trade Facilitation Committee, as required by CEFTA and the WTO TFA. Future areas of support include harmonization of customs legislation with international requirements, facilitating border controls with North Macedonia, development of ICT solutions for customs, and post-custom clearance audits.

ANNEX 5: CITIZEN ENGAGEMENT

1. In Serbia, the citizen engagement corporate requirements are implemented in a context where voice and accountability (as measured by global indicators) is considered to be declining. On the Worldwide Governance Indicator (WGI) for Voice and Accountability, Serbia has declined marginally hovering about 53-55 in the worldwide rankings).16 Media freedom in Serbia has also declined with media outlets working under financial and editorial pressures; Reporters Without Borders (RSF) logged a series of threats and verbal attacks by pro-government media against critical journalists in February 2018.17 The vibrancy of the civil society sector, including citizen action traditionally visible in the grassroots activist movements, has seen some repression over the past four years.18 Comparatively, the country also has a fairly weak record of citizen engagement within the context of Bank-financed operations. 2. Since 2014 when the Citizen Engagement corporate requirements were introduced, efforts were stepped up to embed citizen engagement in all IPFs in the Serbian portfolio. In summary, during FY14-FY18, six projects in Serbia were subject to corporate requirements, although another two also comply. With regards to compliance with the CE requirements, after a lag in FY14 and FY15, by FY16, 100% of Serbia projects approved by the Board were fully compliant with both requirements. 3. A review of the quality of the citizen engagement in all IPFs was undertaken in 2016 and updated in early 2018 to inform this PLR. This review of quality of citizen engagement measured four attributes of citizen engagement of the six projects approved since FY14. Of those projects that have included citizen engagement activities, 85% enable citizens to provide feedback at least annually (frequency of engagement). The portfolio largely relies on three mechanisms (GRMs, satisfaction surveys and consultations) which do not provide an opportunity for direct interaction or active engagement (depth of engagement), some which were established for safeguards (restrictions on feedback). Apart from GRMs, citizens are able to provide feedback through satisfaction surveys in two projects (multiple channels for feedback). Citizen engagement of projects under implementation were assessed in FY18 to ensure that the commitments made at Board approval were demonstrating progress in implementation. 87% of projects described CE in the PAD; 63% of projects have developed the systems and guidance to put in place most or some of the citizen engagement tools proposed, and 63% of projects have started reporting. The Corridor X project has consistently carried through all aspects of implementation, with good budgets and solid reporting on results. 4. To address the gaps in quality and implementation, during the remainder of the PLR period, specific actions are planned to improve quality and strengthen implementation. To ensure genuine improvement, it will be vital to: (i) deepen knowledge of constraints to voice and accountability in Serbia and the challenges for PIUs operationalizing CE within the Serbian enabling environment; (ii) expand the scope of the citizen engagement mechanisms currently being implemented (e.g. checking the use of GRMs and expanding safeguards-related GRMs to accept feedback on any issue, provide awareness building within target areas, ensuring that all citizens, including women, youth and vulnerable have access to information they need to provide feedback, ensuring feedback occurs annually); and (iii) target capacity building to PIUs implementing CE commitments, to overcome hurdles in operationalization and implementation. In the existing portfolio a key focus will be on the Inclusive Early Childhood Education and Care Project (IECEC) project to develop engagement through community-based initiatives consulting parents and enabling them to

16 Worldwide Governance Indicator for Voice and Accountability, Serbia, 2014-2016. 17 Reporters without Borders: "Verbal attacks on journalists by pro-government Serb media", February 12, 2018. 18 Freedom House, Serbia Profile 2017. 48

participate in school planning and monitoring. Efforts will be made to support all upcoming operations in the pipeline (by end FY20) and ensure more in-depth citizen engagement tools which are inclusive and linked to government systems, and thus establishing a new standard for implementation. To create new models three transformative platforms are proposed. The Citizen Engagement Country Roadmap also includes a corrective citizen engagement supporting action plan – to step up efforts in support of PIUs implementing CE activities. 5. To enhance inclusion, a cross-cutting initiative is planned to put in place mechanisms to develop voice within Roma communities for improved access to services.

Table 1. Serbia Citizen Engagement Country Road Map (for the remainder of the CPF)

4 IMPROVED RESULTS

CONCRETE ACTIONS 1. Enhanced engagement mechanisms for dialogue • Support innovative approaches to CPF consultation, reaching community, with civil society on local levels and a broad range of CSOs, think tanks, academics etc. country engagement • Undertake a Serbia Voice and Accountability study, (incl. addressing Roma inclusion), to inform areas of the forthcoming CPF (prior to CPF).

2. Targeted, transformative  TRANSFORMATIVE PLATFORMS platforms for citizen

engagement approved in • Western Balkans Trade and Transport Facilitation upcoming IPFs, and designs (by end FY19)

taken forward into the • Enabling Digital Governance in Serbia (by end FY19)

initial stages of

Implementation.

 SUPPORTING CHANGE

Citizen Engagement Supporting Action Plans 3. Enhanced • Action Plans developed to support all post FY14- IPFs implementation of citizen • Improve frequency, opportunities, remove restrictions on scope engagement in IPFs • Ensure inclusion of all groups in CE activities

• Provide regular capacity building to all PIUs to address challenges in • PIU capacity building to implementation of CE tools. help overcome • Support PIUs to implement inclusive approaches, (particularly in regard to blockages in Roma) implementation; • Establish and implement a set of agreed country standards to ensure: (i) beneficiary feedback is genuine and reflects best practice (frequency, • enforce country disclosure, responsiveness, accessibility), standards (ii) inclusion of vulnerable groups in implemented citizen engagement

• CE Supporting Action mechanisms is given proper attention (linking support to the Roma Filter

application, and Plans (iii) indicators provide meaningful action-oriented information (by end

FY19).

• Improve functionality and use of GRMs (as they represent a key channel for feedback in most Serbia operations) or find alternative. Ensure feedback can be provided on any issue, not just resettlement-related issues (by end FY19).

4. Bank-supported CE activities monitored and • Improve PIU and Bank reporting - through ISRs – 100% of IPFs by end FY19 tracked through • Introduce CE Monitoring in annual portfolio reviews with govt., by end FY19, including tracking quality and level of implementation transparent platform. • Disseminate information on portfolio CE improvements and innovative,

genuine models of engagement – by end FY19.