Document of

The World Bank Public Disclosure Authorized

Report No.: 16487-LV Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT

ON A PROPOSED INVESTMENT LOAN

IN THE AMOUNT OF DM 30.4 MILLION

TO THE REPUBLIC OF LATVIA

FOR A

WELFARE REFORM PRO.IECT Public Disclosure Authorized

April 16, 1997

Public Disclosure Authorized Municipal and Social Services Division Country Department IV Europe and Central Asia Region CURRENCY EQUIVALENTS

Currency Unit = Lat Lat I = US$1.82 US$1 = Lats 0 S5

WEIGHTS AND MEASURES Metric System

LATVIA - FISCAL YEAR January 1 - December 31

CAS - Country Assistance Strategy CPI - Consumer Price Index EU - European UJnion GDP - Gross Domestic Product ICB - International Competitive Bidding IMF - International Monetary Fund MOF - Ministry of Finance MOW - Ministry of Welfare NCB - National Competitive Bidding PCU - Project Coordination Unit SPRP - Social Policy Research Program PHRD - Policy and Human Resources Development Fund (formerly Japanese Grant Facility) SAD - Social Assistance Department (Ministry of Welfare) SID - Social Insurance Department (Ministry of Welfare) SSIF - State Social Insurance Fund SOE - Statement of Expenditure TOR - Terms of Reference UNDP - United Nations Development Program USD - United States Dollar

Vice President, Europe and Central Asia Region: Johannes F. Linn Director, Europe and Central Asia Country DepartmnentIV: Basil G. Kavalsky Chief, Municipal and Social Services Division, Country Department IV: Thomas Blinkhorn Staff Member/Project Task Manager: Louise Fox (Senior Economist, EC4MS) Republic of Latvia Welfare Reform Project

Project Appraisal Document

Table of Contents

PROJECT FINANCING DATA1 ...... 2

BLOCK 1: PROJECTDEp CtIPTION...... 2 1. Project Development Objectives...... 2 2. Project ' Thmponents...... 2 3. Benefits and Target Population...... 2 Institutionaland ImplementationArrangements ...... 4 BLOCK 2: PROJECT RATIONALE... 5...... 5 5. CA O S bjective(s)Supported by the Project .5 6. Main Sector Issues and Government Strategy .5 7. Sector Issues to be Addressed by the Project and Strategic Choices .7 8. Project Alternatives Considered and Reasons Rejected .8 9. Major Related Projects Financed by the Bank and/or Other DevelopmentAgencies .8 10. Lessons Learned and Reflected in the Project Design...... 9 ]1. Indicators of Borrower Commitmentand Ownership...... 0 12. Value Added of Bank Support...... 0 BLOCK 3: SUMMARYPROJECT ASSESSMENTS...... 10 13. Economic Assessment...... 10 14. Financial Assessment ...... 10 15. Technical Assessment...... 10 16. InstitutionalAssessment ...... 11 17. Social Assessment ...... 1I1 18. EnvironmentalAssessment ...... ;1.1 19 Participatory Approach.11...... I 20. Sustainability...... 12 21. Critical Risks ...... 12 22. Possible ControversialAspects ...... 14 BLOCK 4: MAIN LOAN CONDITIONS...... 14 23. EffectivenessConditions ...... 14 24. Other...... 14 BLOCK 5: COMPLIANCEWITH BANK POLICIES...... 15 ii Anne

ANNEX 1: PROJECT DESIGN SUMMARY AND MONITORING INDICATORS ...... 17

ANNEX 2: DETAILED PROJECT DESCRIPTION ...... 22

ANNEX 3: ESTIMATED PROJECT COSTS ...... 28

ANNEX 4: COST EFFECTIVENESS ANALYSIS SUMMARY ...... 29

ANNEX 5: FINANCIAL SUMMARY ...... 34

ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS ...... 35

ANNEX 7: PROJECT PROCESSING BUDGET AND SCHEDULE...... 42

ANNEX 8: DOCUMENTS IN THE PROJECT FILE ...... 43

ANNEX 9: STATUS OF BANK GROUP OPERATOINS ...... 44

ANNEX 10: LATVIA AT A GLANCE ...... 45

TEXT B

BOX 1: LATVIAN PENSION REFORM ...... 16

MAP IBRD No. 28614 INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENT AsSOcIATION

Europe and Central Asia Regional Office Country Department IV

Project Appraisal Document

Republic of Latvia Welfare Reform Project

Date: April 16, 1997 [] Draft [x ] Final Task Manager: Louise Fox, Senior Economist, EC4MS Country Manager: James Q. Harrison, Chief, EC4CI Project ID: LV-PA-35807 Sector: Social Lending Instrument: Specific Investment Loan PTI: [x] Yes [I No

Project Financing Data [x] Loan [] Credit [ Guarantee [] Other [Specify]

For Loans/Credits/Others:

Amount: DM 30.4 million (US$18.1 million equivalent) roposedTerms: [j Multicurrency [xj Single currency Grace period (years): 3 [ I Standard [x] Fixed [] LIBOR-based Variable Years to maturity: 15 Commitment fee: 0.75% Service charge: none ...... -...... ,...... Financingplan: (US$ millions) Source Local Foreign Total Government 12.8 0.0 12.8 IBRD 8.9 9.2 18.1 Donors 0.7 7.0 7.7 TOTAL 22.4 16.2 38.6

Borrower: Republic of Latvia Guarantor: N/A Responsible agencies: Ministry of Welfare; Ministry of Finance; State Social Insurance Fund; Kandava Municipality ...... Estimateddisbursements (BankFY/US$M: 1997 1998 1999 2000 2001 2002 Annual 2.7 6.5 5.4 2.4 1.0 0.2 Cumulative 2.7 9.2 14.5 16.9 17.9 18.1

Expected effectiveness date: June 30, 1997 Closing date: December 31, 2002 2 Block 1: ProjectDescription 1. Project developmentobjectives (see Annex 1 for key performanceindicators):

The project objectiveis to supportthe developmentof a more efficientand effectivesocial welfare system. As a result of the policy reformsalready approvedbut not yet implemented,as well as thoseto be developedand implementedduring the project period, Latvia shouldhave a modem, fully affordablesocial insuranceand old-age security system. Progress in achievingthis developmentobjective will be evaluatedon the basis of the following: (a) improvedfinancial health of the social insurance systemresulting from successfulimplementation of the Government'sreform program;(b) a client-orientedsocial insurance administrationwill be implemented,measured by improvementsin cost efficiency,processing speed and accuracy,improved externalaccountability and transparency,effective internalmonitoring and evaluation,uniform handlingof legislationand good client service, and flexibilityto introducenew regulations;(c) private pensionplans will becomeprofessionally supervised, financiallystable, and viewed by the public as a viable savings alternative;(d) more efficientand effectivedelivery of social assistance will occur, includingan increasein the numberof clients of programsthat provide alternativesto institutionalization of vulnerablegroups; (e) high quality and professionalpolicy monitoringand evaluationwill becomethe norm, with Governmentand Parliamentusing applied social policy researchoutputs in their work; and (e) efficientand timely implementationof the project will occur. 2. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

Contingemcies (S$M %f Component Caego tal 1. Social InsuranceDevelopment: to improve Policy;institution building; physical 32.2 83.4 the development and implementation of social insurancepolicy by the Social Insurance Department,and the managementand administrationof the social insurancebudget by the State SocialInsurance Fund 2. Regulationof PrivatelyManaged Institutionbuilding 0.4 1.1 Pensions:supports the provision of safe and supervisedoptions for the Latvian public to make personalprovisions for retirementthrough privately-managedsavings schemes. 3. SocialAssistance Administration: to Policy; institutionbuilding; physical 2.9 7.5 improvethe performanceof the Social AssistanceDepartment in developingsocial assistancepolicy, and the municipalitiesin deliveringlocal level services. 4. Monitoringand Evaluationof Social Policy; institutionbuilding 1.9 4.9 Policy: supportsthe development, implementation,monitoring and evaluationof the Ministry of Welfare's social policy agenda. 5. ProjectCoordination: supports the Project management 1.2 3.1 effectiveprovision of support and efficient managementof the project in order to achieve the welfare reform project goals.

...... TotalI...... 38.6 100.0 3. Benefitsand targetpopulation:

Benefits: * Social insurance:The component will allow the State Social Insurance Fund to implement the social insurance reform program. This reform programimproves the affordabilityand equity of the social safety net and also 3

improves resource allocation while increasing public savings. As a result, the income level of the population should increase. Implementation of most of this reform would be impossible without the proposed investments. The expected benefits are:

a) After ten years, and given successful implementation, the expenditures on pensions are projected to be one-third lower than they would have been under the old system (see "Latvian Pension Reform" in project file). This represents a savings of about 2 percent of expected GDP. This is primarily the effect of delayed retirement, and decreased benefits for early retirement, but it also results from switching to price (from wage) indexation of benefits. These savings will be gradually allocated to privately managed second pillar accounts. By 2005, it is expected that about ten percent of total contributions will be privately-managed and invested -- a potential increase in national savings of about I percent of GDP per year. Because of the strong incentives to delay retirement, the system dependency ratio will fall steadily from eighty-five percent to below fifty percent by the end of the period. At the same time, the payroll tax rate will be progressively reduced. Implementation of these reforms could raise economic growth by 10- 20 percent over the project period, and even more thereafter.

b) The new organization and administration of social insurance will be significantly more effective, flexible enough to adapt to future change in a cost-effective way, and focused entirely on serving the clients. Under the new organization (1) new regulations and procedures will be easily introduced; (2) the time of clients (employers and beneficiaries) will be saved, with some benefit decision times reduced from days or weeks to the first client visit; (3) standard treatment of clients will be provided under the law; (4) effective payment systems will be in place; (5) new accounting and financial management systems will improve external accountability and transparency; and (6) internal monitoring and evaluation will be more effective. Fast and reliable public information on rights and responsibilities would be made available. The new system will also increase the collection of tax revenue.

* Regulation ofprivately managedpensions: This component will increase old age security by providing a safe and secure place for private savings for old age. The system should be of benefit to all labor force participants and their families. The privately managed pension system in Latvia may have as much as I percent of GDP under management beginning in 1998. This is expected to grow and will reach an estimated 20 percent of GDP by the year 2025 through mandatory and voluntary contributions. This development will introduce institutional investors to the capital markets of Latvia. Their appetite for long-term investments will provide the vehicle for financing options that are not available to local entrepreneurs at present, as well as a supply of local financing for large projects such as infrastructure requirements. The financing burden of the state government will thus be sharply reduced. The development of pension funds, with their long-term savings nature, will lead to a deepening of the capital markets in Latvia.

. Social assistance: The project activities will strengthen'the capacity of the national government to assist localities in targeting and assisting the poor, including providing poor and vulnerable groups with services that are more responsive to their needs during the transition to market. Successful replication of the Kandava pilot will improve the quality of life and productivity of individuals in danger of isolation, homelessness, or institutionalization. The project will also support the development of an appeals mechanism that will provide benefit adjudication rights consistent with Latvian law.

* Monitoring and Evaluation of Social Policy: In 1995, total government expenditures on social insurance and assistance amounted to 14.9 percent of the Latvian Gross Domestic Product (GDP), but the effectiveness of this spending is not known. Weak evaluation capacity results in imprecise assessments of social policy options, resulting in policies that fail to achieve their goals. Improved social policy monitoring and evaluation will allow policy-makers to identify groups that are the most vulnerable and to design and implement effective policy responses. Better targeted social policy should reduce poverty and improve the efficiency of public spending.

Beneficiaries: This project will benefit social insurance contributors, employers, poor and other vulnerable groups, pensioners, Kandava municipality, the Ministry of Welfare, the State Social Insurance Fund, and the Inspectorate of Private Pensions. 4 Povertyfocus: The social assistanceand monitoringand evaluationcomponents specifically target the poorestand most vulnerablepopulations in Latvia.

Genderfocus: Project design has incorporateda gender focus. In the Monitoringand Evaluationcomponent, training programswill include an analysis of gender issues in transition,and research projects in this topic are eligible for funding under the project supportedPolicy Research Program, which should assist policy-makersto assess gender related issuesand appropriatepolicy responses. In the Social Assistancecomponent, the Kandavapilot center will undertakea needs assessment, mid-termand final evaluationthat will pay specialattention to gender issues, includingthe needsand characteristicsof women in the region, and the developmentand impact of regionalprograms on women. 4. Institutional and implementation arrangements: Implementation period: June 30, 1997 - June 30, 2002 Executingagencies: Ministry of Welfare;Ministry of Finance;State Social InsuranceFund; KandavaMunicipality

Projectcoordination: A Project CoordinationUnit was establishedin July, 1996. Currently, there are 5 full-timepositions, which are all filled. With financing from the SwedishGovernment and UNDP, the PCU has receivedextensive training, and has begun handling complexprocurement, disbursement, and accountingtasks associatedwith the project PPF and projecttrust funds. The PCU will be responsiblefor the timely implementation,monitoring, and evaluationof project activities and will ensure effective administrationof critical project activities. For this purpose an OperationalManual describing the organization of the PCU, its functions, and responsibilities,and the linkagesbetween the different entities, as well as report formats and administrativesteps to be followedin implementingand monitoring the project is being prepared by the PCU. The PCU will also be the focal point for public informationabout the project and donor activity coordination.

Project oversight (policyguidance, etc.): The project SteeringCommittee will provide overall policy guidance. The Steering Committeeis chairedby the Ministerof Welfare,and includesrepresentatives from the senior managementof the MoW and State Social InsuranceFund (SSIF). The PCU will report directlyto the SteeringCommittee and serves as its secretariat.

Accounting, financial reporting and auditing arrangements: The PCU will maintain separate accounts and records for each project component, and consolidatethem into the project accountsand SOEs. Supporting documentationwill be made available to Bank missions and independentauditors as required. It will also prepare and provide the Bank semi-annual reports on implementationprogress along with a financial statementof project expenditures. The PCU will be responsiblefor monitoring the project's financialinformation, ensuring that all project expendituresand commitmentsare consistent with the project's agreed allocationsfor expenditure categories.

All project-relatedaccounts will be prepared in accordancewith internationallyaccepted accountingprocedures. Project accounts, includingthe SpecialAccount and SOEs, will be audited annually in accordance with appropriateauditing principles applied by external private independentauditors acceptableto the Bank, with terms of reference for auditors and reports approved by the Bank. The costs of the consultantservices to be employedfor such annual audits will be fully incurred by the Govermment.Audit reports will be furnished to the Bank within six months of the end of the Government's fiscal year. The OperationalManual will provide guidance on accountingand auditing to the Governmentin the implementationof Bank assistedprojects, drawing from information providedin the Financial AccountingReporting and AuditingHandbook (FARAH). The OperationalManual will also provide template formats for financial statements, standard forms for audit documentation,and samplegeneric terms of reference for audits.

Monitoringand evaluationarrangements. The Steering Committeeand the PCU will be responsiblefor monitoringproject implementationactivities. The MonitoringPlan (includedin the OperationalManual) includes component perfornance indicatorsdeveloped by the working groups which will be used to track progressmade towards objectives(see Annex I). The PCU will ensure that all reporting requirementsunder the project are carried out in accordancewith the appropriateformats and with the agreed submissionschedules.

Semiannualproject implementationreports will be submittedto the Bank by June 30 and December31 of each calendar year, with the latter also includinga draft Annual Action Plan for the upcoming calendar year for Bank approval. The Governmentand the Bank will conductjoint reviews in an annual supervisionmission on the progress made in the implementationof the project of each year. During these reviews, the Bank and the Governmentwould agree upon proposed Action Plans incorporatingthe results of the process evaluations.Only those activities in the approved plans would be eligible for project financing. A formal mid-term review will be conductedby the Bank and the Government, where progress toward all targets will be assessed. Project design will be adjusted if needed. An ImplementationCompletion Report would be submittedto the Bank promptly after the completionof the project, but in any event no later than six monthsafter the Loan Closing Date.

Block 2: Project Rationale 5. CAS objective(s)supported by the project:

Objective: Improved deliveryand sustainabilityof the social safety net and basic social services. Document number and date of latest CAS discussion: Category 4 country, assistance strategy update discussed December 19, 1996,in the contextof the StructuralAdjustment Loan (R96-246). 6. Main sector issues and Governmentstrategy: By 1993, Latviarealized that the social protectionsystem inheritedfrom the Soviet periodwas: (a) too expensivegiven current fiscal resources;(b) inequitable;(c) non-transparent,encouraging rent-seeking behavior; and (d) lackingthe flexibilityneeded during the transition. In 1994, the Governmentprepared a comprehensivenew set of legislationgoverning cash benefits and non-cashsocial assistanceto families,covering: (i) social assistance,(ii) unemploymentbenefits; (iii) pensionbenefits; (iv) work injurybenefits; (v) sicknessand maternityleave, and (vi) socialinsurance financing. This legislationall passed Parliamentin 1995. In social assistance,the legislationwas designedto implementLatvia's plan to decentralizesocial services. In social insurance,the goal was to tie benefitsmore closelyto contributions. This requiredremoving non-insurance benefits from the insuranceprogram financing,placing them in the statebudget. Includedin this legislativepackage was the first step in a fundamentalreform of the pension system: creatinga new, three tier system with increasedreliance on individualsavings efforts (privatelymanaged) for incomereplacement in old age (see Box 1: LatvianPension Reform).

In 1996, three additionalpieces of legislationregulating the welfare systemwere submittedto Parliament. The first was legislationcreating the regulatoryframework for licensingand supervisingprivately-managed pensions. Initially,most of these programswill be employersponsored plans. However,it is envisagedthat in 1998, a portion of the mandatorycontributions to the Pay-as-you-go(PAYG) scheme will be channeledinto privately-managedfunds. The secondwas a piece of consolidating legislation,rationalizing coverage and contributionrates across insuranceprograms and adoptingstandard definitions (consistent with other legislation,including other tax codes). Reducedpayroll tax rates (correspondingto reduced insurancecoverage) will be offeredbeginning in 1998 for farmers, the self-employed,and those over 60 who continueto work. This legislationalso sets the stage for the transfer of the administrationof socialinsurance contribution collection (the social tax) to the State Revenue Service (SRS). In 1997, legislationcompleting this transferwill be prepared,as will legislationregulating the assignmentof contributionsfrom the public PAYG systemto privately-managedfunds (the secondtier). Finally, a new disabilitypension formula was put in place, harmonizingthis systemwith the rest of the reforms. This policy agendais also supportedby the LatviaSAL.

Implementingthis ambitiouspolicy agenda will be a five year task. Policy-makingand administrativeagencies need to be transformedto handle their new responsibilities.For example,in order for the incentivesin contribution-basedsystem to function,individual accounts must be establishedand maintainedby the social insuranceagency. This infornation must also be availableto contributorson a timely basis. Regulatoryagencies must be strengthenedto insure that financial intermediaries investingpension funds are protectingthe safety and securityof assets. Municipalitiesneed support to assume their new responsibilities. The Ministry of Welfareneeds to developeffective monitoring and evaluationmechanisms in order to track progresstowards policy objectives,and to improvethe abilityto developeffective policies in the future.

Socialinsurance. The Ministry of WelfareSocial InsuranceDepartment is formallyresponsible for developingpolicy, drafting legislationand submittingit to Governmentand Parliament,monitoring the impact of policy, and overseeingthe Social InsuranceFund. The State Social InsuranceFund is the agencyresponsible for administeringbenefits, system budgeting, providingfinancial and managementinformation to the Social InsuranceDepartment, and assessingthe administrative implicationsof new legislation. The SSIF preparesits own plans and budgetsand submitsthem to the SID. 6

The current organization, facilities and equipment of the SSIF are inadequate to administer the new social insurance laws. * Inadequate financial management systems have resulted in no differentiation between Fund assets and liabilities for benefits and Fund administration to date, and no ability to properly analyze administrative costs. Accountability is thus limited under the existing system.

* The antiquated computer system does not permit the maintenance of individual accounts as envisaged by the legislation. Nor does it allow for sharing of information on clients among offices and across services, slowing benefit processing and limiting the cross-checking needed to prevent fraud and abuse of the system.

* Local office organization is functionally disjointed, so that the functions have specialized administrative systems. This results in poorly developed information and work flows between the systems and with the central office. Each administrative function is undertaken by an overly bureaucratic apparatus that engages in activities that frequently do not add value or that are duplicative. The organization has too many levels to operate efficiently, and system controls are inefficient.

Social assistance. The Ministry of Welfare's Department of Social Assistance oversees policy design, most state programs, licensing of institutions, and adjudication of disputes over local benefits. Since the passage of the 1994 decentralization and social assistance legislation, the financing and administration of social assistance and care is divided between the national government, 26 regions, the 7 largest cities in Latvia, and 562 municipalities. The seven cities perform all of the functions of both the region and the municipality. Each municipality/city is required by law to open a social assistance office, but the size and organizational structure of that office is left to its discretion. Institutions are mostly managed by the state or the region, as defined in the legislation. The social assistance office administers the legally mandated means-tested benefit and any other benefits at its discretion. Municipalities have autonomy in determining eligibility and assessing benefit levels for the means- tested benefit within the criteria set by state law.

The social assistance reform is ambitious in its objectives to move away from the highly centralized Soviet-era social assistance system, towards a system which responds to the needs of the community and individual. However, the design of the system has a number of shortcomings.

. A national social safety net to ensure universal coverage and facilitate the transition to market is not realized. Under the 1994 decentralization program, municipalities were granted full autonomy in spending and full responsibility for financing and administering the safety net. The Government has attempted to address the gaps in provision to the truly needy through the issuance of detailed regulations. However, these are generally not followed at the local level. As a result, Latvia has an uncoordinated network of 595 local, city and regional offices, and a mixed provision of social assistance with no guarantee that the poor or categorical groups will receive equivalent treatment.

* The new financing system does not encourage the development of community-based alternatives to institutional care. Multiple financing sources for institutions (all with input-based budgeting) do not encourage the substitution of community based alternatives for institutional care.

Many municipalities are too small to develop and effective social assistance system. Most municipalities range in size from 500 to 5,000 residents, and spend some 15 percent of their budgets on administration alone. Small municipalities do not have the resources to provide a full range of services -- in some cases, there are only one or two staff who may lack professional training. Because many municipalities are so small, branch offices are reportedly overburdened by the services they are expected to provide, and they are also largely unable to develop new forms of care or service due to the administrative demands that are placed upon them (municipal staff engaged in means tested and other administration of cash benefits have little or no possibility to develop a community based senior citizens program). A baseline assessment in the Municipality of Kandava in late 1996 showed that four poorly trained social workers were serving 124 children in families with severe problems such as battering and alcohol abuse, 240 residents over the age of 80 and 243 other elderly living alone, 252 disabled adults and 21 children, and 991 children in families with less severe hardships but on the margin. 7 The Government has developed a strategy to address these key institutional development priorities. * In the Ministry of Welfare, the two relevant policy departments, (Social Insurance Department and Social Assistance Department) have both reviewed their activities, processes, and organization in light of their new responsibilities. Business plans for their development have been prepared.

* Two new agencies are being created under the supervision of the Ministry of Welfare. The existing State Social Insurance Fund (SSIF) is being transformed into the independent Social Insurance Services Agency (see Section 7), with a new organizational structure focusing on delivering services in an efficient, client-oriented manner. An independent Social Assistance Fund has been created to oversee the increasingly decentralized network of social care institutions and to support the development of community-based alternatives to institutionalization for vulnerable groups. Both of these agencies have also prepared business plans describing their institutional goals and means for achievement.

* The Ministry of Welfare has created a new Strategic Department, responsible for overall policy monitoring and evaluation as well as for assisting specialized departments to perform their own monitoring and evaluation functions. A project coordination unit has been formed within the Strategic Department to oversee project implementation.

. The Ministry of Finance is strengthening the Department of Insurance Supervision to handle the enhanced responsibility of supervising pensions.

* A local government reform program is being prepared to improve the efficiency of subnational governments. The regional level of government will be abolished by 1999, and smaller municipalities will be consolidated. Implementation of this reform should go a long way to improving the efficiency of social service delivery at the sub-national level. Once this reform is prepared, the Ministry of Welfare will propose a new financing system for social assistance which will move from an input-based system, favoring institutionalization, to one where "money follows the client," favoring least-cost, community-based solutions.

[For further information, see documents in project file and the President's Report on the Structural Adjustment Loan (P-7019, LV)] 7. Sector issues to be addressed by the.project.andistrategic oices T e chfirst str aegic choice faced by the Government was on the principles, and timing and sequencing of the welfare reform prograrn. The government chose the very ambitious approach of reforming all entitlements at once. Timing and sequencing was motivated by: (a) the strong desire to decentralize social service delivery as far as possible (social assistance); and (b) by concerns about the affordability, efficiency effects, and equity of the system of social insurance inherited from the Soviet period. In reforming entitlements, the Government sought to create a system which would serve Latvia in the transition to a more open society, integrated into Western Europe, and a market economy through: (a) separating insurance benefits from assistance ones; (b) moving the responsibility for administering the assistance benefits to as close to the target population as possible through decentralization; (c) basing entitlements to insurance on contributions (reducing the inefficiency associated with social insurance); and (d) increasing the role of private and public savings in assuring old-age income support.

Once the Government developed the main policy proposals for the reform and drafted the legislation, the institutional development effort began. Ideally, this effort would have commenced simultaneously with the development of policy. Inexperience typical of a transition economy, combined with the sheer ambitiousness of the Latvian effort, probably caused the early neglect of implementation capacity. However, the Government has now moved rapidly on this issue. The key strategic choice has been what kind of agency or agencies should be responsible for administering contributions and benefits, and the financial management of the separate social insurance budget.

* With respect to contributions, the Government has decided to stop investing in two separate agencies (SSIF and State Revenue Service (SRS)), and instead to consolidate all revenue administration functions in one agency: the SRS. This transfer of responsibilities will occur over the next 18 months, and is also supported by the SAL. * With respect to benefit administration and financial management, the Government has decided to create one independent public sector agency for this purpose, rejecting the alternative of separate agencies for each program. 8

By 1998,the agencywill be independentof the civil service, with its own personnelstructure, and a new organizationaland managementstructure will be in place, focusingon client serviceand flexible,efficient and professionalservice delivery. A new financialmanagement system will also be put in place, following InternationalAccounting Standards (IAS) principles. To regulateprivately-managed pensions, the Governmenthas decidedto expand the Departmentof Insurance Supervisionto includepensions, rather than to createa new agency or to assign the responsibilityelsewhere in the Government.

Major changes in the institutionalframework of the social assistance systemwill depend on the outcome of the reform of local governments,including the decision on what, if anything,will replace the regionallevel. However,the businessplans of the national agenciesboth recognizethe decentralizationgoals and propose increasedemphasis on support to municipalities throughtraining and disseminationof best practice,moving ...... away from the traditional"control" approach of the...... Soviet system. 8. Project alternatives considered and reasons rejected: Type ofproject: The government requested a broad-based investment project, supporting the whole program of welfare system reform. A more narrowly-focused project was therefore rejected. Also rejected was a hybrid loan to support both policy and institutional development, as the Government requested a SAL which covered this area (and more).

Guarantee: The option of including Bank support for a guarantee scheme for the privately-managed pension system was discussed in the Bank and with the Government. This option was rejected. If Bank financing for such a scheme is eventually needed, it will be considered in a subsequent operation.

Social assistance component: Various options for Bank support to the evolving social assistance system were discussed. However, development of this system is dependent on the on-going local government reform, since the responsibility for social assistance has been devolved to the sub-national level of government. The MoW and the Bank agreed that this operation would support a small pilot effort to develop new program models, and limited training and technical assistance in the Ministry. Once more viable political units are created at the local level, these models could be replicated with support from other donors or local funds.

A number of sites were considered for the pilot location. The locality of Kandava was chosen because this area was already working with the Ministry of Local Government Affairs on consolidation of social service delivery. This pilot then formed a part of this on-going effort. 9. Major related projects financed by the Bank and/or other development agencies (complete, ongoing and planned): Sector Issue Project Latest Form 590 Ratings IP DO BANK-FINANCED PROJECTS

Transition to the market oriented Structural Adjustment Loan. S S economy supported by strengthening US$60.0 million. LV-PE-44123. fiscal management. Signed 12/20/96, closes 12/31/97.

Technical, financial, and economic Municipal Services Development. S S management of municipal services US$27.3 million. LV-PE-34584. under decentralization supported. Signed 1/26/96, closes 6/30/01.

OTHER DEVELOPMENT AGENCIES

Support for Ministry of Welfare Social Insurance Reform Project. -- -- to prepare and implement a Swedish International Development welfare reform program Cooperation Agency (Sida). TF020906 and TF020907. SEK 15,422,400 (1996- 1997). 9

Sector Issue Project Latest Form 590 Ratings IP DO

Support for social work training Social Work Training Program. Sida. -- -- SEK 871,800. (1996-1997).

Improving the efficiency and Strategic Support to Mo W Program. -- -- effectiveness of the MoW organization EU-PHARE. LE 9502. ECU 600,000 in carrying out its core functions (1997-1998).

Developing management capacity Social Insurance Management ProgramL -- -- of the social insurance organization EU-PHARE. LE 9502. ECU 836,000 (1996-1998).

Developing Social Assistance Department - Social Assistance Department/NGO Program. -- -- NGO cooperation EU-PHARE. LE 9502. ECU 540,944 (1996-1997).

Training a supervisory body for Private Pension Supervision Project -- -- private pensions and developing proper UK Know-How Fund. US$288,028 organization, administration, and staffing to be finalized (1997-1998)

Developing capacity to monitor and evaluate Social Policy Monitoring and Evaluation-- -- the impact of social policy during the Project. Netherlands/UNDP/World Bank. transition...... to market ...... LAT/95/003...... US$410,000...... (1996-1999) 10. Lessons learned and reflected in the project design: To date, the Bank has implemented a Rehabilitation Loan in Latvia (FY96). The lessons learned from that project (Report 15173) include:

. Strong and sustained Government commitment to policy reform is needed along with aflexible and active policy dialogue. Government commitment to social welfare system reform has been amply demonstrated by the legislation already adopted (including the first major reform of a public pension system in Eastern Europe). The project will provide the Government with the resources necessary to sustain its commitment to a new, innovative social welfare system. . The appointment of well qualif ed procurement and disbursement advisers to the Project Coordination Unit is important given the inexperience of this new borrower: The Project Coordination Unit (PCU) was established and fully staffed immediately after pre-appraisal. Extensive technical assistance and training has been provided to set up the necessary procurement, disbursement, and accounting systems. The project will provide continued support to the PCU during implementation. . Higher than average resources are needed when working with new borrowers, particularly in loans that include policy reform components. Project preparation activities included substantial technical assistance and training programs supported by donor funds (Sida and PHRD). These activities will continue during the project period. Supervision requirements during the first year are estimated at 20 staff weeks.

Successful projects in the social sectors are usually characterized by (i) a supportive policy framework, assessed by the Bank prior to project preparation; (ii) a high degree of local ownership, including of project stakeholders; and (iii) well-prepared implementation plans, with clear and monitorable goals. In this project, preparation activities focused on developing ownership by the counterparts of project objectives, activities, and outputs. Stakeholders are involved at the local and central levels in the preparation of all components. All components have developed clear implementation plans with measurable monitoring indicators (see project files). 10

11. Indicatorsof borrowercommitment and ownership: * During preparation, two project workshopswere held with all MoW managementand staff involvedin the project, as well as representativesfrom other concerned ministriesand stakeholders,to discuss and agree on project objectives, activities, and monitoringplans. One of these workshopswas facilitated to encourage counterpartparticipation.

* All main componentshave prepared their own strategy documentsas part of the preparationprocess.

* A project PCU has been establishedand is managingthe project well, includingthe executionof a special trust fund.

. H V..i * i ...A; PPFa ...... (US$1.99 million, dated October 18, 1996)has been agreed and signed. 1' 12. Value added of Banksupport: This project continuesWorld Bank support for the design and implementationof the Region's first significantpension reform, which is serving as a model for other countries in the region. The Latvia pension reform is based on the innovative"notional defined-contribution"approach to public pension entitlement. The Bank is uniquely placed to support the ongoing reform given our internationalexperience in this area. Especiallyimportant is the assistance to the Governmentacross sectors and ministriesto support developmentobjectives, such as the implementationof regulated privately managed pension options. Implementationof this reform is a complex task requiring a coordinated program of support including technicalassistance, training and equipment.

There is an essential public role to be played in the provision of a social safety net and the insuranceof risks that are either uninsurableprivately or that require a national program for efficient risk pooling. No private agency can provide this type of financialassistance, nor is any other donor agencyable to respond in this sector.

This project has attracted significantdonor support, with approximately20 percent of project costs covered by donor financing,allowing the Bank to serve as the financier of last resort. Most donors active in this area are now coordinating their programs with the Bank through parallel financing of project activities.

Block 3: Summary Project Assessments (Detailed assessmentsare in the projectfile. See Annex 8) 13. EconomicAssessment [ Cost-BenefitAnalysis : NPV=US$ [xl Cost Effectiveness [] Other (see Annex 4): million;ERR= % Analysis: [Specify] Fiscal impact (for allprojects): Detailed economicanalysis was only carried out for component 1 (83.4 percentof project costs). The fiscal impact by the end of the project periodfrom full implementationof the welfare reform program is expected to be about 50 million 1997 Lats per year. After 10 years, this impact shouldrise to about 100 million Lats per year, or about 2.5 percentof projectedGDP. Investmentsin component 1 will result in administrativecost savings equal to the investment cost after 6.7 years. In addition,benefit processingtime will fall from up to 2 weeks, to less than I day, with a lowererror rate, saving clients' time. The automated system will also save taxpayerstime, as forms will be simplifiedand filed electronically.

Benefits to the economyas a whole are summarizedin section3 above.

Cost recoverymeasures will be appliedwhere appropriate. For example,once the pension regulatoryagency is set up and in full operation,fees will be imposedon fund managementcompanies to cover the costs of runningthe agency. 14. FinancialAssessment: Not applicable ...... 15. TechnicalAssessment: This project is technicallysound. * Organizationalchanges to be implementedin this project reflectbest practice in public sector servicedelivery agencies in OECD countries. The client-serviceprinciples followed in this design will lead to more flexible and efficient organizations,saving time of clients and staff. 11

* The computersolution chosen for the social insuranceagency representsa good balance betweenfunctionality and cost. It uses a combinationof object-orientedand traditionalapproaches to data-basemanagement. All software will be fully tested in pilot operations beforeimplementation nation-wide.

* The automationand civil works investmentprograms were designedonly after the core businessprocesses had been reviewedand assessedto ensure that efficient,effective, client serviceprinciples were applied. A full informationmodel was constructedto considerhow to effectivelyintroduce automation into the system,and what were the technical needs. This project preparationsequence insures that the project will not involve automating manual processes,but will insteaduse automationas a tool to improvebusiness.

Investmentand recurrentcost estimates for the project are based on estimates of prevailingmarket unit cost (includingrecent experiencein procurementunder Bank-financedproject in other transitioneconomies), with appropriateallowance for inflation. 4An ~.l adequate .... W ...... allowance for physical contingenciesI...... has also been included in project costs. 16. Institutional Assessment: a. Executing agencies: All executing agencies are young agencies, created after Latvia regained independence. Despite this relative inexperience they have designed and implemented one of the most far-reaching reforms in any transition economy. They have benefited from substantial technical assistance and training during this period, which has built strong technical and managerial capacity in the executing agencies. This has been demonstrated by the high quality of the project preparation documents prepared by the agencies.

It is expected that the need for technical assistance and training will decline over the project period. However, staff turnover is always a risk, given low public sector salaries relative to opportunities in the private sector. Ample technical assistance and training are included in project plans to mitigate this risk (especially important in the IT area). b. Project management: The PCU has done an excellent job in managing the project to date, despite the MoW's limited experience in implementing externally-financed projects. The proposed technical assistance and training for the PCU under the project will help to deepen its capacity to manage more complex tasks in the areas of financial management, procurement, accounting and reporting. 17. Social Assessment: Social assessments were u dertaken during project preparation to ensure that the project design and strategy are the most appropriate. A nationwide survey on societal knowledge and attitudes towards social insurance was commissioned and undertaken in the summer of 1996 (about 6 months after the initial wave of reforms). This survey found a very weak knowledge base in both employers and employees on the provisions of the new legislation. The project communication strategy is designed to address this knowledge gap. The effects of new organizational changes piloted in the Ziemelu social insurance office were evaluated rather informally in 1996. Clients expressed satisfaction with the changes, including the reduced waiting times which resulted from improved organization. A full client survey will be undertaken in 1997 by SSIF. A thorough sociological mapping of the population of the Kandava region was undertaken in 1996 in order to design the pilot. This survey identified a number of vulnerable groups who were not yet being served by social assistance services. An assessment of public knowledge and attitudes towards the newly developing private pension industry will be undertaken in early 1997 by the Government. The project will support follow-up social assessments of both social insurance/private pension clients (ongoing) and the Kandava municipality (middle and end of project). To build up local capacity, training in beneficiary assessment will occur as part of the Monitoring and Evaluation component. nvironmental Assessment: Environmental A B [x] C Category The proposed project is not expected to have a negative environmental impact. i..c-~ i ...... l~...... 19. Participatory Approach*: IdenU&fatioazPrearation Implementation Operation Beneficiaries/community groups COL COL COL Intermediary NGOs/Academic institutions COL COL COL Local government COL COL COL Other donors COL COL COL *COL (collaboration);IS (informationsharing); CON (consultation) 12

20. Sustainablity: This project will develop the institutional capacity of the Ministry of Welfare and the State Social Insurance Fund. It is expected to be both cost-saving and quality enhancing. Borrower ownership is high, owing to the extent of participation in preparation activities.

* Social insurance: The improvements in systems, processes and facilities will permit improved performance at a lower cost per standardized benefit. These efficiency improvements, combined with an improved financial position of the social insurance budget from implementation of the policy reforms, will ensure project sustainability (see Annex 4).

. Privately-managedpensions: Initially, the costs of the supervisory system will be paid for by the state budget. However, by the end of the project period, licensing fees will be imposed on pension funds to recover the annual recurrent costs of the system.

* Social assistance: The component supports the development of more cost-effective approaches to assisting vulnerable groups. Ongoing monitoring and evaluation activities will help to ensure sustainable models are developed.

* Monitoring and evaluation: At the end of the project, a research network will be established that is sustainable beyond the life-time of the proposed activities. The acquired skills and attitudes in the training will be passed on to new civil servants and will be useful in the future, although it may be necessary to update the knowledge continuously. The Social Policy Research Program (SPRP) is expected to be continued beyond the lifetime of this project with increasing support from the Latvian government for local researchers and declining need for donor funds to finance foreign technical assistance. The need for policy analysis will remain, and changes in policies will have to be monitored and evaluated. Researchers will be trained in performing social research and the increase in private research institutes will raise the demand for research funds. The increased supply of high-quality research should also help ensure the sustainability of the SPRP. 21. Critical Risks:* Project outputs to development objectives Risk RiskAa#ig Risk Mininuzation Measure Policy change: A major shift in policy NR A number of activities are in place to strengthen direction in Latvia could undermine the institutionalization of the policy reforms: achievement of the development objectives. . The SSIF has prepared and is implementing a communications program on the new pension system and the SSIF organizational development. A similar strategy is also under preparation for the privately-managed pension system (to be launched once the regulatory system is ready) and the social assistance reforms.

. Monitoring and evaluation activities are being strengthened to track the fiscal and social impact of welfare policy. This information will be used to identify needed policy adjustments as well as to keep policy makers and the population informed of social developments . Technical assistance activities have strengthened the policy making and implementation capacity in the Ministry. Finally, should policy adjustments occur, SSIF business is now being organized in a way that will allow the maximum possible flexibility in benefit delivery. Organizational response time to policy change should be rapid. Staffchanges: The large difference between MR All components have been designed by Ministry staff, who are public sector and private sector salaries always committed to these activities. The opportunity to participate in leads to a risk of staff turnover slowing international training and otherwise learn on the job are also 13 implementationor even disruptingproject factors which help to retain staff. In the new SISA, a new, activities. more flexible salary structureand consultantcontracting procedurewill be put in place to help retain core staff, includingin particularIT staff.

Monitoringand evaluation:Better information MR Technicalassistance activities will includeeffective and analysismay not be used by policy makers. communicationstrategies. Bank participationin the policy dialogue may also lessen this risk.

Social assistance:Proposed changes in the MR The project will providesubstantial technical support for the financingof institutionalcare, (to be developed implementationof the White Paperon SocialAssistance Policy followingthe regionalreformn) may not take (January, 1997),which proposesa phased programto transfer place. If the state continuesto financemuch responsibilityfor financingof care to the municipalitiesonce institutionalcare, the incentivesto provide the regionalreform is complete. alternativesocial care provisionconsistent with the lessons of the Kandavapilot will be weakened. Project componentsto outputs lU£A Risk Ratin Risk MinimizationMeasur Social insurance:The Wide Area Network NR The SSIFwill be actively involvedin the developmentof the underdevelopment in Latvia and envisaged as network. Alternativetechnical strategies for internalsystem part of the automationplan would not be communications,particularly with somerural areas, are under developedsufficiently in the next five years, preparation. slowing planned communicationsbetween offices.

A new bankingcrisis would disrupt the NR Emergencybenefit payment procedureswill be developed. envisionedautomated payment links.

The chosen technologicallevel in the IT NR The new IT-systemswill be thoroughlydefined in light of systems could be too high, which would lead requirementsand fully tested. Substantialtraining in this to complicatedsystems that are not working project componentwill be provided.

The new SISA might not be able to attract MR The independentSISA will not be subject to civil service skilled people thus could not manage the rules, and will have flexible compensationand staff organizationand the project. developmentpolicies designed to attract and retain high quality staff. The replacementof the existing computer NR center and staff could go wrong and pensions A special organizationfor employeeswho have to leave the and benefits would not be paid properly. organizationwill be set up in order to get all to feel safe even if they are dismissed.

Privatepensions: Due to the lack of MR The Inspectoratestaff will be trained so they can serve in a experiencedfinancial managers in Latviaand supervisorycapacity in respectof both private pension low salaries in the Government,it may be insurancecompanies and private pensionfunds. The difficultto recruit and retain competentstaff for Inspectoratewill not be subjectto the normalcivil service the Inspectoratefor PrivatePensions. salary scale, and will have more flexibilityin staff compensation(allowing it to competewith the private sector).

Social assistance:Replication of lessons MR The pilot's final evaluationwill includea financingstudy learnedat the pilot could be hamperedby aimed at facilitatingsuitable replication, including the municipalitiesincorporating only some pilot examinationof appropriatecost recoverymechanisms featuresin order to save costs 14 Monitoringand evaluation:Inadequate internal NR All Ministry departmentsand agencies concernedhave been communicationand coordinationmay limit the involvedin the preparationof this component. The Ministry effectivenessof training and technical has also requestedtechnical assistancefrom EU PHAREto assistance activities. improvecommunication in the Ministry

Project managementand disbursement:The NR Intensivetechnical assistance has been providedto the PCU disbursementprojections are optimistictargets. and the component I team to help them reach these targets. Lack of experience with Bank projects could Adequatecontingencies have been includedto insure sufficient cause a disbursementdelay initially. project funds. Disbursementperfornance will be reviewed annually and targets revised if necessary. Overallproject risk rating

Risk aRiskng Risk Minimiation Measur Overall project risk rating NR Overall project risks are mitigatedby the well-developedpolicy dialogue in the socialsectors, and the Government'sclear commitmentto a mediumterm reform that is consistentboth with Latvia's transitionto a market economy(as it is fiscally sound) and democraticsociety (as it is sociallyresponsible, and consistentwith the intent of the municipalreform). The risks are further mitigatedby strong coordinationwith other external donors, and by a well-designedsupervision strategy.

*HR (high risk, >75%);SR (substantialrisk, 50-74%o);MR (modestrisk, 2549o); NR (low/negligiblerisk, <25%). 22. PossibleControversial Aspects: None

Block 4: MainLoan Conditions 23. EffectivenessConditions

As conditionsof loan effectiveness,the Governmentwould cause:

(a) the SSIF SubsidiaryLoan Agreementto have been executedon behalf of the Borrowerand SSIF;

(b) an implementationprotocol to have been executedon behalf of MOF and MoW on terms and conditions satisfactoryto the Bank; and

...... (c) the Borrowerto have adopted an OperationalManual satisfactory to the Bank. 24. Other [classifyaccording to covenanttypes used in the Legal Agreementsdatabase.]

1. ProjectManagement

The Borrowershall maintainthe Project CoordinationUnit withinMoW.

2. Flow and Utilizationof ProjectFunds

The Borrowershall cause SSIFto have its records,accounts and financialstatements for each fiscal year auditedin accordancewith appropriateauditing principles consistently applied by independentauditors acceptable to the Bank.

3. Project Monitoring, Review and Reporting

The Borrowershall and shall cause SSIFand the Municipalityof Kandavato maintainpolicies and proceduresadequate to enable it to monitor and evaluateon an ongoingbasis, in accordancewith indicatorsacceptable to the Bank, the carrying out of the Project and the achievementof the objectivesthereof. 15

4. Project Implenentation

(a) the Borrower shall apply an Operational Manual satisfactory to the Bank.

(b) a Kandava Subsidiary Agreement satisfactory to the Bank shall be executed on behalf of the Borrower and the Municipality of Kandava prior to any loan withdrawals for this component.

(c) The Borrower shall ensure that the automation plans for computer equipment, agreed with the Bank, are followed during Project implementation.

(d) The Bank shall receive civil works plans satisfactory to the Bank for civil works to be financed under the Project.

Block 5: Compliancewith BankPolicies [x] This project complies with all applicable Bank policies. [The following exceptions to Bank policies are recommended for approval: The project complies with all other applicable Bank policies.]

T'askManager: L use Fox, enior Economist (EC4MS) Country Manag^: BasilG sy ietr EC4 16

Box 1: Latvian pension reform

Latviahas becomethe first countryin EasternEurope to begin implementationof a major reform of the publicpension system. In November 1995, Parliamentapproved legislationcreating a new public system for those who retire after 1995 (pensionsfor current pensionerswere not affected). The Latvian pension concept provides an entirely new formula for calculatingfuture pensions, one in which benefitsare directlylinked to individualcontributions and to the retirementage. It also provides for the introductionof funded pensionprograms, initiallyas a supplementto the public system. In 1998, contributorswill be allowedto allocate a portion of their payroll tax to individual,privately managed accounts(the second pillar).

The new pension system is a "notionaldefined contribution"one, It is designedto mimic the contribution-based pensionthat would be offered in the private sectorby an efficientinsurance company. The systemstarts by givingeveryone paying the social tax an individualaccount. As contributionsearmarked for the pension system are paid, the account is credited,as if it were a savings account. The "capital"in the accountearns a rate of returnjust like a savingsaccount. This rate of return is equal to the growthof the sum of wageson which contributionsare collected(the contributionwage base). At retirement,the pensionpaid is equal to the total capitalin the person'saccount divided by the expectedpost-retirement life span for all those of that person'sage. For example,if a personhas 10,000Lats in their accountat retirement,and is expectedto live 10 more years, the pensionwould be 1000Lats per year or 83 Lats per month. The pensionwill be indexed,adjusting for price changes. In the new system,there is no mandatoryretirement age and no "full pension." The minimumretirement age will be 60 years for most participants. But the system provides strong incentivesto work longer. Longer working years reduces the number of payments,allowing each to be higher, and increasesthe initial capital. The new system includesa minimumguaranteed pension for all thosewho reach the age of 60.

How Do the Actual Benefits Compare Under the Old and New Systemns? Assumingthat under the old system,the required quarterly indexationwould have taken place in 1996,most new pensionerswith full years of serviceretiring after 60 do not suffer a benefitdecline compared with the old system. For those who work longer,benefits increase -- by over 200 percentfor those who work another 10 years. Benefits are also larger for those with higher incomes (who in the future will also contributemore). Early retireeswill be penalized. For example,a woman who retiresat 55 will experienceon averagea 25 percentdecrease in her pensionunder the new system if she stops contributing. Those who retire even earlierwill suffer an even greater loss of benefits. It is expectedthat these strong incentivesto work and contributewill drasticallyreduce the numberof early retirees.

Macroeconomic Impact. After 10 years,the expenditureson first tier pensionsare projectedto be 1/3lower than they would have been underthe old system(see also Block 1.3 and Annex 4). The system dependencyratio will fall steadilyto below 50 percent by the end of the period. ProvidedLatvia realizes at least some economicgrowth, the affordabilityof the system shouldbe achieved.

Other Economic Effects. As benefitsare completelyand fully dependenton contributionsin the new system,a large partof the disincentiveeffect of a traditionalsocial insurancetax disappears. Whenbenefits are unrelatedto contributions,the social insurancecontribution becomes a tax, and like any other tax embodiesa loss of incomeand utility to the payee. The closer benefits are related to contributions,the less loss of income and utility the system implies, and the easier administration becomes. There is alwayssome lossof incomeand utilityassociated with a mandatorycontribution system, however.

The new system also permitsa flexibleadjustment of benefitsto changes in life expectancy. This avoids the acrimonious debate over retirementage. The system also has the advantage of containingone simple fornula which covers all circumstances. In doing so, it provides a wider range of optionsfor older workers. Anyone over the age of 60 can take a pensionif they desire. Or they can continueworking and get a higher pensionlater. Or they can do both, and get a slightly higherpension later. Or they can stop workingfor a while,and then start up again. Theseoptions can be especiallyimportant for women (whotend to have greaterresponsibility for taking careof dependentfamily members),and those whosehealth may be weakening,but still wish to work part time and requirelimited income support. 17

Annex I

Latvia Welfare Reform Project Project Design Summary

Narrative Summary Key Performance Indicators | Means of Verification Critical Assumptions CAS Objective

To improve the delivery and I Sustained improvements in I Annual reviews of financial sustainability of the social the Social Insurance Fund performance safety net and basic social balance sheet services 2 Improved client satisfaction 2 Annual client surveys Project Development Social Insurance System (PDO to CAS Objective): Objectives

To develop a more efficient I Affordability of the social I Annual reviews of financial Economic growth is and effective social welfare insurance system is improved, performance sustainable system as indicated by reduced pension expenditures and Lessons learned in the increased revenues into the Kandava pilot fully replicated Social Insurance budget. by municipalities

2 Standard service cost per 2 Agency Annual Report benefit or contribution reduced by 20 percent from 1997-2001

3 Rate of client satisfaction 3 Annual client surveys increases by 10 percent per year from 1997-2000

4 Number of residents well 4 Annual sample surveys by informed about rights and the new SSIF Evaluation responsibilities increases by Division 10% by 1999 and a further 15% by 2000

Privately Managed Retirement System 5 Private pension plans viewed 5 Annual review of volume of by public as viable savings private pension savings; and alternative mid-term and final project evaluation

Social Assistance 6 Introduction of a streamlined 6 Site inspections benefit system

7 Introductionof central 7 Mid-term and final dissemination of best practice evaluation in social assistance delivery that is supportive of community-based programs to I help the poor and vulnerable. 18

Narrtiv Summary 01Key Performance Indicators Means of Verification Critical Assumptions I 8 Introduction of new 8 Annual review of SAD financing system for institutional monitoring system institutional care leads to more and municipalities' programs non-institutional care being provided by 2002.

9 By December, 1999, 9 Mid-term and final recurrent costs per person evaluation served at the Kandava pilot are lower than the recurrent costs per institutionalized person.

10 By December 1999, 10 Client survey at mid-termnas improved service delivery in compared with baseline survey pilot area leads to 50% rise in satisfaction levels.

Monitoring and Evaluation

11 High quality policy 11 Independent review of monitoring and evaluation the Annual Social Reports, norm Research reports Project Outputs: (Project Outputs to PDO)

1 Improved development and 1.1 Policies furthering the 1.1 Annual policy review No major shift in welfare implementation of social Government's social insurance policy insurance policy by Social policy agenda are developed Insurance Department, and and successfully implemented Ability to recruit and retain improved management and competent staff for the PCU, administration of the Social 1.2 SID and SSIF business 1.2 Annual review of Business Inspectorate for private Insurance Budget by the State plans implemented, including Plan targets by new SSIF Pensions and the new SISA. Social Insurance Fund introduction of the new Evaluation Division organization Policy makers interested in social policy research. 1.3 Object oriented databases 1.3 Site inspection are functional and connected to Proposed changes in the central databases by 12/31/99 financing of social care take place. 1.4 Social tax collection 1.4 Site inspection transferred to State Revenue Consolidation of local Service (SRS) by 1/1/98 government units proceeds according to schedule. 1.5 New and transparent 1.5 Site inspection accounting system in place for SSIF by 1/98

2 Improved regulation of 2.1 Number of licenses 2.1 Reports published by the privately managed pensions granted, voluntary participants, Inspectorate (supervision and publication of an annual mission confirmation of report by the Inspectorate. quality)

2.2 Staff of lnspectorate and 2.2 Staff skills assessment at of funds use newly acquired mid-term and final project skills in their work stages. 19

Narrative Summary Key Performance Indicators [ Means of Verification J Critical Assumptions 2.3 Number and nature of 2.3 Inspectorate records complaints received and reviewed.

2.4 Public relations materials 2.4 Site visits/press reviews disseminated to public beginning in 1997

2.5 Inspectorate employs 2.5 Site visits administrative tools effectively, such as supervision manuals, reporting formats, and newly automated fund monitoring systems

3 The performance of the 3.1 New organization and 3.1 Site inspections Social Assistance Department administration of SAD in place in developing social assistance by 1/98 policy improves 3.2 Over 70 percent of SAD 3.2 Staff skills assessment staff apply new skills and administered by SAD in 1/98 knowledge by 12/01 and annually thereafter

3.3 Submission to Parliament 3.3 Departmental reports of legislative package on new principles for financing institutional care by end- 1997, and streamlined package of means-tested and categorical benefits by mid-1999

3.4 SAD develops and 3.4 SAD report on impact of implements a new adjudication new system by end-2000 system by mid-1999 that leads to more uniform benefit delivery

3.5 MoW and municipalities 3.5 Seminar and workshop cooperate to develop and evaluation. site visits implement best practice in service delivery

3.6 Kandava pilot office 3.6 Mid-term and final begins operations by end-1997, evaluation site visits a mid-term evaluation is carried out by end- 1999, and a final evaluation including a plan for replication by mid- 2001

4 MoW's development, 4.1 Municipalities report 4.1 Mid-term and final review implementation, monitoring monthly to national level using and evaluation of its social new administrative monitoring policy agenda improves system 20

Narrative Summary Key Performance Indicators Means of Verification Critical Assumptions 4.2 Ministry provides quarterly 4.2 Site visits feedback report to municipalities on data system

4.3 Municipalities employ 4.3 Site visits information to improve social assistance administration

4.4 Annual Social Report 4.4 Site visit published regularly beginning in 1997

4.5 10 MoW staff trained in 4.5 Site visit evaluation methods

4.6 Evidence of active 4.6 Parliamentary record, press references to the Report by review policymakers and the public

4.7 Staff use skills in social 4.7 Staff surveys policy design, monitoring and evaluation

4.8 At least 50 percent of 4.8 Press record major conceptual proposals of social policy issues are discussed in public by 1999

4.9 Capacity of research 4.9 Independent review of institutes developed; high social policy research quality social policy research supported by ministry meeting international standards is performed

5 Effective provision of 5.1 Resources procured in 5 Supervision mission support and efficient conformity with all interviews with PCU staff and management of the project specifications, and in stakeholders, reported accordance with World Bank periodically in Form 590 guidelines

5.2 Project accounts provide a reliable basis for financial management and planning

5.3 Satisfactionby all stakeholders with PCU performance is high 21

Narrative Summary Key Performance Indicators Means of Verification I Critical Assumptions Components: Inputs: (Components to Outputs): (See Annex 2 - Detailed (See Annex 3 - Estimated Project Description) Project Costs) Quarterly disbursement reports Ability to recruit and retain I Social insurance: 1 US$ 32.2 million for each component competent staff for the PCU, * improving policy design Inspectorate for private * developing system Pensions and the new SISA. administration * support for organizational The Wide Area Network change (WAN) is developed on * support for information schedule. technology Accounting system in place to 2 Private pensions: 2 US$0.4 million track standard service cost per * legislative development benefit. * system supervision * training in new methods Internal communication and * communication strategy coordination will be adequate to achieve training and 3 Social assistance: 3 US$2.9 million technical assistance objectives. * improving social assistance policy development and implementation * community based social services * Kandava pilot evaluation and dissemination

4 Monitoring and evaluation: 4 US$1.9 million * support the Kandava pilot data collection system and evaluate its suitability for other municipalities

5 Project coordination: 5 US$1.2 million * provide timely and accurate flows of essential information * provide support to working groups in: financial management: management of technical assistance and training; and procurement 22

Annex 2

Latvia Welfare Reform Project

Detailed Project Descriptioni

Project Component 1 - Social Insurance Development US$ 32.15 million (total cost of component).

This component of the project would help reform and modernize the Ministry of Welfare's Social Insurance Fund by supporting:

(i) a flexible and efficient system for managing and administering social insurance;

(ii) the capacity of the social insurance administration to manage the social insurance budget under the forthcoming reforms, including the development of core skills for system pers;onnel;

(iii) a client orientation, by developing during project preparation a pilot in a branch office at Ziemelu to demonstrate new ways of providing service, evaluating the pilot, and expanding its positive elements to other offices during project implementation; and

(iv) improved accountability and transparency through better reporting and handling of information, clearer lines of managerial and financial subordination, and improved control mechanisms

SubcomponentA: Improving Policy Design

This subcomponent supports the design and implementation of strategically oriented policy by the Social Insurance Department (SID), and to develop and implement the second tier legislation. It will assist the SID to present clearly and transparently the strategic goals of policy, to revise the policy strategy on an annual basis, to draft appropriate system regulations in a timely fashion, and to implement a Business Plan aimed at (a) clarifying the respective roles of the SID and the SSIF; and (b) improving the efficiency and effectiveness of the SID's work methods. tinder this subcomponent, the project will finance local and foreign technical assistance and training, civil works t) upgrade the offices, furniture and equipment.

i. SID Business Plan: The subcomponent will assist the SID to implement a Business Plan to improve the organization and management of the Department. It will also assist the SID to implement a long term policy plan for developing and amending the current legislation. Technical assistance and training will be provided to improve the quality of policy analysis (such as through the development of tools to analyze policy scenarios and trends), and policy formulation and presentation to clients (primarily Government, Parliament, and public).

Subcomponent B: Developing System Administration

This subcomponent supports the implementation of the social insurance reforms by improving the recording of revenues and benefit administration. It will develop and introduce administrative procedures that are consistent with the new legislation, and revise the layout of the local social insurance offices in order to improve client service (based on the results of a pilot office in Ziemelu that was evaluated during project preparation). A business plan has been drafted by the SSIF. Under this subcomponent, the project will finance technical assistance, training and study tours, some equipment, and minor works.

i. Contributions recording: This subcomponent will develop the capacity of the administration to record contribution related information in a timely, reliable, and accurate manner. It will support the eventual transfer to the Ministry of Finance of contribution collection functions. 23

ii. Benefit administration: The subcomponent will help ensure that benefits are administered properly and on time, within a more efficient administration that can manage multiple benefits and variable rates of contribution.

Subcomponent C: Supporting Organizational Change

The objective of this subcomponent is to support the ability of the SSIF to undertake its core functions. A business plan has been drafted by the SSIF, and a preliminary audit and accounting prestudy is to be revised. A communications strategy has been adopted and is soon to be under implementation. Under this subcomponent, the project will finance technical assistance, training and study tours.

i. Project planning and management: This will assist the SSIF to employ new planning and management tools to improve the efficiency and effectiveness of its daily work.

ii. Financial management: These activities will support the introduction of a new financial management system, including a new accounting system and an improved planning/audit cycle.

iii. Communication/PR: These activities will support more effective SSIF communication with clients, and the development of a coherent PR strategy.

iv. HR Development: These activities will support a more flexible and effective HR system, including recruitment, staff development/training, etc.

v. Introduction of Object Oriented Information Base: These activities will support the introduction, testing and upkeep of an object oriented information base that will provide for the information needs of SSIF management through a system that requires minimal maintenance, while allowing the efficient transfer of information and data across regions concerning a wide range of benefit types. Through improved technology, it is expected that service to the client will improve through much faster and more effective processing. The new system will be designed in accordance with management requirements. The information model will consist of data 'objects' that correspond to a particular individual, piece of legislation, etc. The system will select the appropriate objects and algorithms for a particular calculation or processing event, and will also process system-wide data in order to provide information to managers.

Subcomponent D: Supporting Information Technology

The objective of this subcomponent is to support the introduction of hardware and software in order to meet the automation needs of the new system. A detailed draft automation plan has been completed. Under this subcomponent, the project will finance technical assistance, training and study tours, equipment, and minor works.

i. Technology platform: This will assist the SSIF to introduce a new hardware platform, with networking within the local offices.

ii. Telecommunications/networking: These activities will support the introduction of a new wide area network (WAN) through linkages with the Post Office system.

iii. Information/programming: These activities will support more effective programming, including programming necessary for the introduction of the new information model

Project Component 2 - Regulation of Privately Managed Pensions USS0.44 million (total cost of component)

This component supports the provision of safe and supervised options for the Latvian public to make personal provisions for retirement through privately-managed personal savings schemes. 24

Subcomponent A. Legislative Development

This subcomponent will provide technical assistance and training to support the monitoring and evaluation of the private pension law and related legislation and regulation, and assist with the necessary policy development over the project period.

Subcomponent B. System Supervision

This subcomponent will assist the Inspectorate of Private Pensions to become an effective supervisory body. It will support the implementation of an automation plan prepared during project preparation that will allow the Inspectorate to function effectively. Technical assistance will be provided to assist in the organization and training of staff, the development of work instruments such as procedural manuals, and the introduction of appropriate accounting standards.

Subcomponent C. Training in New Methods

This subcomponent will support the implementation of a detailed training plan for those who will be involved in the management and supervision of the system (accountants, auditors, asset managers, fund managers, and others).

Subcomponent D. Communication Strategy

This subcomponent will provide technical assistance and training to support the implementation of a program to communicate to target groups the merits and advantages of privately-managed pension plans. This strategy should assist in overcoming the lack of confidence that is perceived to exist in the minds of potential participants in private pensions.

Project Component 3 - Social Assistance Administration US$2.90 million (total cost of component)

The objective of this component is to ensure that all needy receive effective and efficient social services. The project will improve the performance of the Ministry of Welfare Social Assistance Department in developing social assistance policy, and the municipalities in delivering local level services. A pilot social assistance office in Kandava region will seek to demonstrate best practice in service delivery, and disseminate lessons learned throughout Latvia. Under this subcomponent, the project will finance civil works, equipment, training, technical assistance, and furniture. SubcomponentA: Improving Social Assistance Policy Development and Implementation

This subcomponent will support the development of an effective and efficient central level social assistance policy development and administration through improved legislation, a clearly defined organization, and stronger institutional capacity and performance of the Social Assistance Department.

i. Supporting Legislative Development: This set of activities will provide technical assistance and training to the Social Assistance Department to implement the plan for legislative and regulatory development over the medium term outlined in the White Paper. This will include support to develop and introduce the new financing system for institutional care and simplified benefit system, training for the social assistance department on policy development, and technical assistance to develop safe and appropriate regulation of care.

ii. Implementation of a Business Plan for Social Assistance: This subcomponent will support the implementation of the Business Plan, including the new SAD organization. Technical assistance and training will assist the MoW to develop a monitoring system for the Business Plan and a mechanism for annual review and adjustments, implement a program to privatize MoW social enterprises (such as those producing prostheses) and to monitor the quality and costs of institutional care, develop and introduce an effective adjudication system, and develop and introduce a training program that assesses gaps in social assistance skills and supports the dissemination of information nationally on best practice in delivery. 25

SubcomponentB: CommunityBased Social Services: KandavaPilot

The objective of this subcomponent is to encourage the development of a uniform cash benefit system to improve targeting of those in need, the efficient use of staff, and to develop a less expensive and more effective community social service alternative to institutions. Technical assistance, training, civil works, furniture and vehicles will be provided to develop a pilot office in Kandava (in western Latvia) which has been selected as a model region for the proposed municipal reform, and which covers a population of some 6,000. The municipality will demonstrate the advantages of consolidation of local administration across all sectors, including social assistance, and will show how social care can be responsive to local needs and result in fewer individuals being placed in institutional care. The activities under this subcomponent will support pilot design (including agreement on service provision and financing plan for investment and recurrent costs), development, facility renovation, staff training and implementation of a community social assistance center. The services to be delivered are:

(i) a benefit information and payment department will provide a full range of information services to clients on available cash and non-cash assistance, including the selection and purchase of institutional care, and that will administer cash assistance. The client base of the department is expected to cover some 900 residents of the municipality, many of whom receive little or no service today. Four full-time social workers will provide the assistance. Of those residents who are already institutionalized, it is expected that this department may be able to facilitate the return of a small number to their homes.

(ii) a home care program that will provide those in need with limited mobility (such as disabled and elderly) with access to trained social workers at home (five will be employed by the program). The client base of the program is expected to cover some 160 residents of Kandava, mostly the very old or very disabled living alone and with little or no support from their families. The social workers will primarily work to ensure that the clients receive adequate support to meet their nutritional, mnedical, and other needs.

(iii) a program to support families at risk, which aims to provide a range of services such as support to battered women, and to children who may be at risk of institutionalization because of parental unemployment/family poverty, or alcohol abuse. The client base of this program covers some 46 families (124 children). One social worker and one family therapist will work with those fanilies (perhaps 30 percent) that may only require assistance with finding employment or other sources of income to overcome crisis. The other families will be provided with information on and support for options aimed at protecting, for example, the wife or children from further abuse.

(iv) a day center for the elderly to provide elderly in the community with assistance on problems they face on issues such as health care and personal finances, and to improve their quality of life by providing social and recreational opportunities. A social worker and a nurse will be on site to provide assistance, which will include support to those who suffer from dementia such as Alzheimer's disease. Some 25-30 elderly are expected to visit the center each week. The day center activities will be coordinated with the home help program.

(v) a day center to provide rehabilitation and support to the handicapped and support and training to their home care-givers. This center will provide follow-up support for those who have received rehabilitative and occupational therapy in a residential center, in order to support independent living, a return to work (where possible) and avoid further institutionalization. The client base is expected to be a large fraction of the 270 handicapped individuals currently living in Kandava.

SubcomponentC: KandavaPilot Evaluationand Dissemination

The subcomponent will support the monitoring and evaluation of the implementation of the Kandava pilot. Monitoring and evaluation will draw off of a baseline study of the demand for social services in the region and currently available service provision, and will include the following: (i) establishment of a case monitoring system and bi-annual site reports; (ii) annual conferences to review the pilot projects; (iii) a mid-term evaluation of service 26

provision; and (iv) a final evaluation including the plan for replication. These activities will be used to determine if the pilot projects are providing cost effective and replicable services to the region. The subcomponent will finance local and foreign technical assistance and staff training.

Project Component 4 - Monitoring and Evaluation of Social Policy USS1.89 million (total cost of component)

The objective of this component is to ensure that Government, Parliament and society are regularly informed about the impact of social policies by developing adequate organizational potential, and human and material resources in the MW to design, implement, monitor and evaluate social policy. The component will support the development, implementation, monitoring and evaluation of the MW social policy agenda. It will improve the allocation of human and financial resources within the Ministry through improved internal and external organization and communication. The component will strengthen the capacity to develop a workable social policy strategy. It will also strengthen local capacity to prepare high quality social policy analysis through training for the staff of the MW and for researchers in the field.

Subcomponent A: Improving Local Monitoring

This subcomponent will support the envisaged pilot social assistance office in Kandava to establish a more effective administrative data collection system and to replicate the lessons learned throughout Latvia. It will assist the municipalities with the monitoring of social assistance benefit administration by providing technical assistance, training and standardized procedures to deal with revenues, benefits and clients and by avoiding the wasting of resources. After implementation, the local authorities and the MW will be provided with the information needed to monitor social assist- ance policy and to evaluate its impact.

i. Determination of data needs for monitoring and evaluation. the Strategic Department and the Social Report Group will determine their data needs with regard to clients, target groups and the Kandava population.

ii. Standardized procedures: within the Kandava pilot, standardized procedures to manage information on budgets, benefits and clients will be developed, allowing the municipality to register its records in an easy and accessible way that can be used for policy monitoring and evaluation. This activity includes a baseline study of the current situation in Kandava, the development of new~information procedures, a local data management system, and data communication management.

iii. Evaluation and dissemination: after the first stage in the Kandava pilot, the implementation of the tools and the devices will gradually be extended towards others mtnicipalities in Latvia as warranted.

Subcomponent B: Annual Social Report

This subcomponent will assist the Ministry of Welfare to produce an annual report on social policy for Government, Parliament and the public (first one to be published in 1997). This subcomponent will take the form of an ongoing activity during the entire training and assistance period. It will create a working group that should start working on an Annual Social Report. At the end of the period this Report will review (a) the actual social situation in the country, using empirical information from in house analyses and academic research. (b) the policy actions undertaken during the report- period; (c) an evaluation of the policy measures taken; and (d) an action plan for future policy initiatives.

Subcomponent C: DevelopingAnalytical Capacity

This subcomponent will support the implementation of a training and technical assistance progran for users of the new household budget survey and other data related to social policy. Users will include the Departments within the Ministry, research institutes, universities, NGO's and local consultants. 27

i. Applied empirical policy analysis: This subcomponent encompasses training and updating skills and knowledge of MW Officials as well as outside specialists in the area of applied policy analysis. It will support exercises with large survey data sets, intermediate and advanced econometric analyses and panel data exercises.

ii. Rapid appraisal: Training in rapid appraisal studies on new policy initiatives, in merging data and in advanced software applications will be supported.

iii. Seminars: Seminars and workshops on designing evaluation programs, on modem developments in OECD Welfare States and on evaluating Social Security and Social Assistance Reform in Latvia will be supported.

Subcomponent D: Social Policy Research Program

This subcomponent will support competitively selected research proposals in applied social policy analysis. It will provide the MW with the resources to commission out social policy research to researchers and research institutes, using a process of competitive tendering, in order to assist the Ministry to improve the quality of policy monitoring and evaluation activities. The Social Policy Research Program will consist of a dedicated fund, financed out of donor financing and other resources. The procedures and bylaws will guarantee the policy focus of the projects, the independence of researchers as well as their academic integrity. Competitive tendering, peer review and academic discussion will improve the quality of the research.

ProjectComponent 5 - Project Coordination US$1.18million (total cost of component)

This component will ensure the effective provision of support and efficient management of the project in order to achieve the welfare reform project goals. 28

Annex 3

Latvia Welfare Reform Project

Estimated Project Costs

(US$ Million) % of Local Foreign Total Base Cost A. Social Insurance Development 1. Policy Design (Legislation) 0.13 0.95 1.09 3.40 2. Administration Development 8.43 1.05 9.48 29.70 3. OrganizationalChanges 2.07 2.10 4.18 13.08 4. Informational Technology Development 4.93 6.74 11.67 36.57 Subtotal 15.57 10.85 26.41 82.76

B. Privately Managed Pensions 0.08 0.32 0.40 1.24

C. Social Assistance 1. State Administration & Organization 0.17 0.78 0.96 2.99 2. Pilot Project Kandava 0.80 0.46 1.26 3.93 3. Kandava Pilot Evaluation & Dissemination 0.10 0.20 0.30 0.93 Subtotal 1.07 1.44 2.51 7.86

D. Monitoring & Evaluation of Social Policy 1. Improving Local Monitoring 0.01 0.05 0.06 0.19 2. Annual Social Report 0.03 0.33 0.35 1.11 3. Training Program (Improving Analytical Capacity) 0.05 0.28 0.33 1.03 4. Social Policy Research Program 0.41 0.47 - 0.88 2.76 Subtotal 0.50 1.12 1.62 5.09

E. Project Coordination Unit 0.49 0.49 0.97 3.05

Total Baseline Costs 17.70 14.22 31.91 100.00

Physical Contingencies 1.73 1.35 3.08 9.65 Price Contingencies 2.99 0.58 3.57 11.19

Total Project Costs 22.42 16.14 38.56 120.83

Annex3.xls 29

Annex 4

Latvia Welfare ReformProject

Cost EffectivenessAnalysis Summary

A detailed economicanalysis was only carried out for component 1 (83.4 percent of project costs). For other components,the directionof the fiscal impact was estimated. The assumptionsand results are summarizedin the table. The text below explainsthe analysis,including the key assumptions.

Project Fiscal Impact

(millions of 1997 Lats) Fiscal Impact: Component Cost Revenue Fiscal Impact:Expenditure' 1: Social insurancedevelopment 18.4 72.4 -38.4 2: Regulationof privately-managed 0.2 +/0 0 pensions _ __ 3: Social assistanceadministration 1.7 0 -0.1 4: Monitoringand evaluationof social 1.0 +/0 unclear policy _- 5: Projectcoordination 0.6 0 0

SocialInsurance Development

Fiscal impact. This componentwill assist the State Social Insurance Fund (SSIF) to develop an administrationthat can implementthe Government'sWelfare reform. At present, the main elementsof the reform (contributionrelated benefits based on individualaccounts; increasedsavings in privately managed pensionprograms) cannot be implemented,as administrativesystems cannot perform their responsibilities. The main fiscal gain, therefore, is from implementingthe reform and the behavioralresponse. The non-projectscenario, therefore, impliesthat key provisions of the new legislation are not implemented.

On the revenue side, the projected 5-year increaseof 72.4 million Lats into the social insurance budget comes from two behavioralassumptions.

* Longer working lifeprovides more system revenue:given informationabout the new benefit structure and the incentivesto work longer, average retirementage will rise gradually.

* Better informationsystems combinedwith new benefitformulas graduallyincreases contributions:Direct linkage of benefits to wages, includingaccurate informationon contributionsprovided regularly to employees, will encourage voluntarycompliance. Improved tracking of individualcontributions under the automatedsystem will allow faster detection of tax evasion.

On the expenditure side, the projected 5-year savingsof 38.4 million Lats comes from decreasedbenefits for early retirees under the new formula and postponedretirement. Other positive expenditure effects from the new legislation (e.g. price indexationinstead of wage indexation)were not considered here, as new informationand administrationsystems are not needed to realize these savings. The savings to other programs (e.g. social assistanceprograms, unemployment benefits, etc.) from better monitoring of individualspermitted by the nationwidecomputer network is also not included, although this will be an externalityof the project. Also not consideredis the revenue effect on other tax bases of lowered incentivesto join the informal sector. If all of these effects are considered, the total fiscal impact after 10 years is expected

Over 5 year peri')d, exclusive of -roject costs and depreciation of investme it 30 to be about 2.5 percent of GDP per year. (For further information, see Fox, Palmer, and Mclsaac, 1996, in the project file).

IWhatis the most cost-effectiveapproach to the design of the new system?

The administrativereform will be primarily based on the principle of client orientation, in order to develop an administrationthat is significantlymore effective, and flexible enough to adapt to future change in a cost-effectiveway. Client orientationis based on the followingthree principles,

* All business is focusedon serving the client * One inspectorhandles one benefit at a time * All necessary informationmust be availableduring the handlingtime

Introducingthese principle will require that SSIF's businessbe reorganized, new systems installed,the premises reconstructedand the personnel trained. A successfulreorientation should lead to an organizationthat can handle benefits in minutes instead of weeks, higher quality and accuracy, and a dramatically more effective organization. Currently, the SSIF employs about 1500 people, with a total administrativebudget in 1996 of 6.2 million Lats, or 1.9 percent of revenues.

During the design phase, three approaches to system improvementwere considered for SISA as it implementsthe current reform. One alternativeconsidered was marginal modificationsto the current organization and administration. Two involvedthe introductionof a client-orientedsystem. These scenarios are summarizedin the componentworking paper. The costs and benefits of each scenario, as well as the non-project scenario are summarizedin the table below. The alternativeswere judged for effectivenessin accordingto the followingcriteria:

- It will permit the implementationall provisions of the new legislation It will improve cost-efficiency(lower administrativecosts per standardizedbenefit) - Uniform handling of the laws and good client service will be provided - Effectivepayment systems will be in place - It will provide transparent accounting - Effectivemonitoring and evaluationwill occur 31

Summaryof Costs and Effectivenessof Each Scenario

Invest -ment Admin. cost Cost Other Meets Scenario ($mil) Savings Impacts criteria Comments 1. Non-project scenario 1,0 None Can not administer No The administration will be modem welfare system; overwhelmed within a year by difficult to control fraud massive information system and abuse; clients' time failure. is wasted Option 1. Keep current 10,0 None Can not implement new No A system similar to other FSU organizational structure; pension system; difficult countries. No transparency; modest upgrade for IT to control fraud and information to clients is very system; no new abuse; clients' time is limited and thus behavioral accounting system wasted incentives do not work. Qption.2. Limited 20,8 Pay-off in Modem welfare system Partly Weak client service and investments in a client 6,5 years is implemented, leading information in non-networked oriented organization; (not to lower expenditures offices; weaker financial new IT system but including and higher growth; management; fewer efficiency without full national fiscal fraud and abuse control gains and weaker network impact) tightened in 70 percent sustainability. of the country Option 3. Full 24,7 Pay off in Modern welfare system Fully A modem system meeting all investments in a client 6,7 years is implemented, leading requirements of the reform. oriented organization; to lower expenditures Nationwide network allows new IT system with full and higher growth; better financial management national network and new fraud and abuse control and improve fraud control for financial management tightened in 100 percent all welfare system programs. system of the country (for full discussion, including financial analysis, see component working paper).

Key assumptionsin the analysis

* timeframe: 10 years

* interest costs: not included in pay-off cost. Net present value over 10 years is 0 with 6 percent real rate of interest for Options 2 and 3. Net present value is negative for Option 1.

* depreciation (options 2 & 3): replacement /maintenance investments are projected at $1 million in year 5 and $2 million in year 7.

* staff cost savings: none in non-project scenario and option 1 (more staff will be needed to manually process information); 550 jobs (net) are eliminated over the first three years of the project in option 2; 800 jobs (net) are eliminated over the first three years of the project in option 3. Layoffs are assumed to be costless.

* externalities: economic effects such as the time savings of clients, or reductions in administrative costs for other programs are excluded from the financial analysis, as these are very difficult to quantify.

Based on this analysis, Option 3 was chosen for this component. Option 1 does not yield any cost savings. It actually wastes money. Option 2 is viable and cost-effective. However, it would leave roughly 1/3 of the country out of the network. Processing time in these offices would be slow, wasting clients' time. Nationwide cross-checking of individuals to detect fraud would be much slower, and less rigorous. Local social assistance offices would not be able to tap into the 32 networkto check income information during means-testing. More staff would be needed than for option 3, and as a result, the total savings is not much different from Option 3.

Regulationof privatelymanaged pensions

Fiscal impact. Plans for the developmentof a private pensionssystem in Latvia call for the creationof funds that will be receiving up to 5 percent of covered payroll for all workers in Latvia. From the first year of operationof such funds,they may have as much as I percent of GDP under management. This is expectedto grow and will reach an estimated20 percent of GDP by the year 2025. This developmentwill introducevery substantialinstitutional investors to the capitalmarkets of Latvia. They will have an appetite for long-terminvestments, providing the vehicle for financingoptions that are not available to local entrepreneursat present and providinga supplyof local financingfor large projectssuch as infrastructurerequirements. The financingburden of the public sectorwill thus be sharplyreduced.

Latvia has previouslyestablished a State Insurance SupervisionInspectorate (SISI). Due to the similarityin the functionsrequired to carry out the two types of supervision,it has been decidedto assignthe pensionfund supervisory responsibilitiesto SISI. It is estimatedthat the incrementalcost to the Ministryof Finance to establishthe pension supervision will involve the additionof two staff-membersto SISI for an annualcost not exceeding30,000 Lats. The pensionsupervisory system would share the overheadand infrastructurecosts of SISI, thus producingeconomies of scale for both parties.

Cost recovery. Once the system is set up, it is envisagedthat a licensingfee will be collectedfrom all pensionfunds each year. Once the systemreaches maturity,as early as five years from the start, the fees should be sufficientto completely defray the costs of supervisionof pension plans incurredby the Ministry.

Is the componentthe best and most cost-effectivealternative?

The alternativeto establishinga regulatoryand supervisoryregime for privately-managedpension funds is notto do so. Individualswould have to depend on their own resourcesto monitorthe accountingfor their depositsand for the safe handling of the funds. The risk of financialloss to savers in such a system is high. It would not be advisableunder these circumstances to channelany mandatorycontributions into privately-managedaccounts, so the pensionreform would not be possible. In addition, the retirementincome of participantscould turn out to be less than promised.

Anotheroption would be to create a separateagency to carry out the supervisionof private pensions. This would be a more costly altemativethan the one proposed. The new agency would requirea completestaff and infrastructure,certainly more than two persons. Such a choice would also magnify the difficultyof finding competentofficials to staff the regulatory agency.

Socialassistance administration

Fiscal Impact of ProvidingAlternatives to InstitutionalCare. A baselinesurvey in Kandavaregion (the pilot locality) in late 1996 is indicativeof the gap in social serviceprovision that will increaseinstitutionalization in the absenceof reform. In this time of rapid economicand social change,the surveyfound that a total of four poorly trained social workersare availableto serve 124 childrenin familieswith very severe problems(battering, alcohol abuse, etc.), 240 residentsover the age of 80 and 243 other elderly living alone, 252 disabledadults and 21 children, and 991 childrenin familiesfacing less severe hardshipsbut on the margin. Little is offered these groups other than direct cash assistanceor referralto an institution-- only 8 residentsreceive home care. Successfulimplementation of a reform requiringmunicipal payment for institutionalcare for residentsin state care will mean that municipalitieswill face the choice of (a) institutionalbed-month costs that range from roughlyUS$180 per month to US$300per individual(1996 figures)depending on type of care; or (b) divertinginstitutional referrals into altemative care that would roughlycost US$40 per individualserved per month, based on preliminaryfigures from the Kandavapilot. While it is impossibleto predict how high demand for institutionalcare will rise, a one percent increasein institutionalizationin Latviawould lead to some 120 new placements. 33

Monitoringand evaluationof social policy

Fiscal impact. In 1995, total government expenditures on social insurance and social assistance amounted to 14.9 percent of the Latvian Gross Domestic Product (GDP), but the effectiveness of this spending is not known. Undeveloped information systems and skill gaps result in imprecise evaluations of social policy options resulting in policies that fail to achieve their goals, or do so at high costs. The analysis of social policy before and after implementation provides an instrument for monitoring and evaluation of social regulations and the resulting expenditures. This component will support the development of skills through an applied training program in social policy, a policy monitoring and evaluation plan, and the strengthening of local research capacity. Monitoring and evaluation will provide informnationon different policy options serving as an input for government and parliament in their decision-making activities. Social policy research will provide the necessary data on the most vulnerable groups of the population allowing policy makers to allocate the benefits in the optimal way.

Better targeted social policy resulting in less poverty and a better motivated labor force will contribute to a climate favorable to investment in human capital. This in turn will improve conditions for economic growth and hence government income. Moreover, improved policy monitoring will enhance policy efficiency, effectiveness and adequacy, which will lead to easier tax collection and less tax evasion. The non-component scenario would result in the population suffering from badly targeted social policy activities, a need for increasing the expenditures on social policy, wasting of resources, demotivated Ministry staff, and a 'brain-drain' from academics initially interested in social research. 34

Annex 5

Latvia Welfare Reform Project

Financial Summary

Implementation Period ($Million)

1997 1998 1999 2000 2001 2002 Total

Investment Costs 6.13 11.71 8.41 4.13 2.20 0.15 32.73 Recurrent Costs 0.23 0.92 1.06 1.16 1.21 1.25 5.83 Total Project Costs 6.36 12.63 9.47 5.29 3.41 1.40 38.56

Sources of Financing (SMillion)

Bank 2.71 6.47 5.35 2.35 0.98 0.24 18.10 Cumulative 2.71 9.18 14.53 16.88 17.86 18.10 18.10 43% 51% 56% 44% 29% 17% 47%

Government 2.10 3.52 2.49 2.02 1.80 0.83 12.76 Cumulative 2.10 5.62 8.11 10.13 11.93 12.76 12.76 33% 28% 26% 38% 53% 59% 33%

Donors 1.55 2.64 1.63 0.92 0.63 0.33 7.70 Cumulative 1.55 4.19 5.82 6.74 7.37 7.7 7.70 24% 21% 17% 17% 18% 24% 20%

Total Project Costs 6.36 12.63 9.47 5.29 3.41 1.40 38.56 Cumulafive 6.36 18.99 28.46 33.75 37.16 38.52 38.56 100% 100% 100% 100% 100% 100% 100%

Annex5bb.xis 35

Annex 6

Latvia Welfare ReformProject

Procurementand DisbursementArrangements procurement

Procurement methods (Table A)

Prior review thresholds (Table B)

Disbursement

Allocation of loan proceeds (Table C) 36

Annex 6 Annex 6 Page 1 of 6 Latvia Welfare Reform Project

Table A: Project Costs by Procurement Arrangements (in USSmillion equivalent)

Procurement Method Total Cost Consulting (Including Expenditure Category ICB NCB Other Services N.B.F. contingencies)

A. Works 1. SSIF 2.66 5.28 7.94 (2.65) (2.65) 2. KANDAVA 0.35 0.15 0.50 (0.28) (0.28) 3.01 5.43 8.44 (2.93) (2.93) B. Goods 1. MOW 0.51 0.51 (0.38) (0.38) 2. SSIF 5.84 0.85 0.97 7.66 (5.84) (0.70) (6.54) 3. KANDAVA 0.15 0.15 (0.15) (0.15) 5.84 1.51 0.97 8.32 (5.84) (1.23) (7.07)

C. Consultancies 1. MOW TA 4.47 0.28 4.75 (0.74) (0.74) TRNG. 0.64 0.06 0.70 (0.14) (0.14) 2. SSIF TA 7.07 7.07 (5.03) (5.03) TRNG. 3.00 3.00 (2.17) (2.17) 3. KANDAVA TA 0.35 0.35 (0.02) (0.02) TRNG. 0.07 0.07 15.60 0.34 15.94 (8.10) (8.10) D. Miscellaneous 1. MOW 0.15 0.07 0.22 2. SSIF 5.22 5.22 3. KANDAVA 0.41 0.41 0.15 5.70 5.85

Total: 5.84 3.01 1.61 16.76 12.44 38.56 (5.84) (2.93) (1.23) (8.10) - (18.10)

Totals may not add due to rounding Figuresin parenthesisare the respective amountsfinanced by IBRD N.B.F - Not Bank Financed; N.C.B- NationalCompetitive Bidding;I.C.B. - IntemationalCompetitive Bidding Other Methods of procurementinclude International Shopping (IS) - US$0.38;and Natinal Shopping(NS) - US$0.85

newproca.xds 37

Annex 6 Annex6 Page2 of 6 LatviaWelfare ReformProject ProcurementSchedule

MinistryOf Welfare

Total _ Procurement Issuanceof Submission Signingof Completion Packages Cost(SM) Method Invitationto Bid of Bids Contract of Package A. Goods 1.1 Fumiture 0.03 N.S. Jul-97 Aug-97 Sep-97 Sep-97 1.1 ComputerEquip. 0.12 1.S. Jan-98 Feb-98 Mar-98 Mar-98 1.1 Copier($M.002) 0.00 N.S. Jul-97 Aug-97 Sep-97 Sep-97 2.0 Computersetc.(printer,fax modem,copier) 0.02 I.S. Jul-97 Aug-97 Sep-97 Sep-97 3.1 ComputerEquip./Software 0.01 I.S. Jul-97 Aug-97 Sep-97 Sep-97 3.3 TrainingEquip./Reporting Mat. (SM.0005) 0.00 N.S. Jan-99 Feb-99 Mar-99 Mar-99 4.2 Pub.InfoMat/Computer Equipments 0.30 N.S. Jul-97 Aug-97 Sep-97 Sep-97 5.0 ComputerEquip./ for PCU 0.01 I.S. Dec-96 Jan-97 Jan-97 Feb-97 5.0 AccountingSoftware ($M0.004) 0.01 I.S. Jul-97 Aug-97 Sep-97 Sep-97 0.51 B. Consultancies TechnicalAssistance 1.1 TechnicalAssistance (Local & Foreign) 1.04 S.L. Jul-97 Aug-97 Sep-97 Dec-01 2.0 ForeignTA (SystemSupervision, EDP system) 0.32 S.L. Jul-97 Aug-97 Sep-97 Dec-97 2.0 LocalTA (Legislative dev. local accounting) 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-97 2.0 LoralTA (Legislativedev. local accounting) 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-97 3.1Technical Assistance (Foreign) 0.60 S.L. Jul-97 Aug-97 Sep-97 Dec-97 3.1 TechnicalAssistance (Local) 0.09 S.L. Jul-97 Aug-97 Sep-97 Dec-97 3.3 TechnicalAssistance (Foreign) 0.22 S.L. Jul-97 Aug-97 Sep-97 Dec-01 3.3 TechnicalAssistance (Local) 0.08 S.L. Jul-97 Aug-97 Sep-97 Dec-01 4.1 T.A. (Foreign)Improv. Loc. Monitoring 0.06 S.L. Jul-97 Aug-97 Sep-97 Dec-98 4.1 T.A. Local 0.01 S.L. Jul-97 Aug-97 Sep-97 Dec-98 4.2 T.A. (AnnualSocial Report) Foreign 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-99 4.2 T.A.(Local) (SMO.003) 0.00 S.L. Jul-97 Aug-97 Sep-97 Sep-99 4.3 T.A.(Frgn TA + Translation& Interpretation) 0.27 S.L. Jul-97 Aug-97 Sep-97 Dec-00 4.3 T.A.(Local) (0.039) 0.04 S.L. Jul-97 Aug-97 Sep-97 Sep-99 4.4 T.A.(Foreign Research) 0.55 S.L. Jul-98 Aug-98 Sep-98 Dec-01 4.4 T.A. (Research) 0.28 N.B.F. . . 4.4 T.A.Translation & Interpretation 0.03 S.L. Jul-97 Aug-97 Sep-97 Sep-00 5.0 T.A. P.C.U.Staff Salaries/Foreign TA 0.35 S.L. Sep-96 Oct-96 Dec-96 Dec-01 5.0 T.A. P.C.U.(Local) 0.09 S.L. Sep-96 Oct-96 Dec-96 Dec-01 5.0 T.A.for PCU 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-01 5.0 T.A.for PCU 0.42 S.L. Jul-97 Aug-97 Sep-97 Dec-01 5.0 T.A.(Local) for Projectsupport group 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-01 4.75 Training 1.1 Training(Local/Study Tours) 0.06 S.L. Jul-97 Aug-97 Sep-97 Dec-01 2.0 TrainingSISA staff on pensionfund/study tours 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-01 2.0 TrainingSISA staff (SMO.002) 0.01 N.B.F. . . 3.1 Training(Foreign) 0.24 S.L. Jul-97 Aug-97 Sep-97 Dec-01 3.1Training (Study Tours) 0.12 . S.L. Jul-97 Aug-97 Sep-97 Dec-01 3.3Training (Local) 0.03 S.L. Jul-00 Aug-00 Sep-00 Dec-00 4.2 Training (Conferencefacilities) 0.03 N.B.F. . . 4.3 TrainingOverseas/Local (Conference facility) 0.08 S.L. Jul-97 Aug-97 Sep-97 Dec-01 5.0Training (Overseas/Local) 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-99 5.0Training (Study Tours) 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-99 5.0 Training (Workshops) 0.02 N.B.F. . 0.70 C. RecurrentExpenditure 3.3 Staff salariestbldg. maint./admincosts 0.02 N.B.F. . . 4.4 Additional staff 0.01 N.B.F 4.4 Additionalstaff/publication & dissemenation/conf. 0.15 S.L. 5.0 ProjectCoordinator/Maint. costs 0.04 N.B.F. 0.22

Total Cost: LIda _

Note: () = Bank Financed N.S.- NabonalShopping (USS.34M): I.S. Intematonal Shopping (USS.16M) S L - ShortListng for ConsultngServices (US5S.26M), N s.F -Nonsank Financed (USS0.40M)

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Annex 6 Annex 6 Page3 of 6 LatviaWelfare ReformProject ProcurementSchedule

State Social InsuranceFund

Total _ Procurement Issuanceof Submission Signingof Completion Packages Cost (SM) Method Invitationto Bid of Bids Contract of Package A. Works 1.2 Central Building 2.77 N.B.F. 1.2 Local office reconstruction(l)(70% Bank) 1/ 2.04 N.C.B. Jul-97 Sep-97 Oct-97 Dec-97 1.2 Local office reconstruction(l)(30% NBF) 1/ 0.88 N.B.F. Jul-97 Sep-97 Oct-97 Dec-97 1.2 Local office reconstruction(li)(11 % Bank) 1/ 0.14 N.C.B Jul-97 Sep-97 Oct-97 Dec-97 1.2 Local office reconstruction(ll) (89% NBF) 1/ 1.13 N.B.F. Jul-97 Sep-97 Oct-97 Dec-97 1.2 IT building renovation 0.49 N.B.F. 1.2 IT building renovation 0.49 N.C.B Jul-97 Sep-97 Oct-97 Dec-98 7.94 B. Goods 1.2 Mobile Archive 0.07 N.B.F. Jul-97 Aug-97 Sep-97 Oct-98 1.2 Shredder, TVNideo, Screen, Blackboardsetc. 0.07 N.B.F. Jan-98 Feb-98 Mar-98 Mar-98 1.2 Daugavpils local office 0.08 N.S. Jul-97 Aug-97 Sep-97 Nov-97 1.2 MobileArchive 0.18 N.S. Jul-97 Aug-97 Sep-97 Oct-98 1.2 Shredder,TVNideo, Screen, Blackboards,copier 0.14 N.S. Jan-98 Feb-98 Mar-98 Mar-98 1.2 Central Archive 0.26 N.S. Jul-97 Aug-97 Sep-97 Sep-99 1.2 Furniturefor IT Center;local;Cesu;Daugavpilsetc. 0.68 N.B.F. Jul-97 Aug-97 Sep-97 Nov-97 1.2 Minibus for central & local offices 0.12 I.S. Jan-98 Feb-98 Mar-98 Mar-99 1.3 Accounting system (Software) 1.11 . .C.B. Jul-97 Aug-97 Sep-97 Nov-97 1.4 Computer equip. (educ. training/upgrade/dev.etc.) 2.83 l OC.B. Jul-97 Aug-97 Sep-97 Nov-97 1.4 Computer equip. (local off.) 2.01 . C.B. Jun-98 Aug-98 Sep-98 Sep-00 1.4 Computerequip. (LAN) 0.11 N.B.F. Jun-98 Aug-98 Sep-98 Sep-00 7.66 C. Consultancies2Z TechnicalAssistance 1.2 Foreign T.A. (Second tier, insurance, PR, Admin.) 0.54 S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.2 Local T.A. (Admin dev.,rehab.,eng.design,PR) 0.04 S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.3 Foreign T.A (Mgmt.,personnel,actng.,P.R.,eval.) 1.00 S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.3 Local T.A. (Mgmt.,Personnel,PR,MonitoringActiv.) 0.07 S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.4 Foreign T.A. (ToR #1, TOR#2 & TOR #3) 0.49 S.L. Jul-97 Aug-97 Sep-97 Sep-99 1.4 ForeignT.A. (TOR #1,2,3) 0.46 S.L. Jul-97 Aug-97 Sep-97 Sep-99 1.4 Software Development(Local) 1.94 S.L. Jul-97 Aug-97 Sep-97 Sep-99 1.4 Software Development(Foreign) 2.53 S.L. Jul-97 Aug-97 Sep-97 Sep-99 7.07 Training 1.2 Overseas Training 0.55 S.L. Jul-97 Aug-97 Sep-97 Dec-98 1.2 LocalTraining 0.28 . S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.2 Local Training (EU-Phare) 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-01 1.3 Overseas Training (central level experts) 0.25 S.L. Jul-97 Aug-97 Sep-97 Dec-98 1.3 Local Training (central level experts) 0.01 S.L. Jul-97 Aug-97 Sep-97 Dec-99 1.3 Others (Info. material, implementationof new laws) 1.89 S.L. Jui-97 Aug-97 Sep-97 Dec-01 3.00 D. RecurrentExpenditure 1.2 Maintenance Costs (Vehicles,equipments,opcosts) 0.53 N.B.F. 1.3 Staff salaries/maintenancecost of equipments 0.77 N.B.F. 1.4 Staff salaries & Maintenancecosts 3.92 N.B.F. 5.22

Total amount _ _

1/ up to 26contracts are expected. 21 Tentative.This list includes all major packages For donors not following World Bank procurement guidelines, this will not apply. Note: N.B.F.- Not BankFinanced - uss 1 .42M:N.C.B.- National Competitive Bidding - U532 66M:ICB - IntemationalCompetetive Bidding - uSss95M; I.S.- InternationalShopping usso.12M; N & - NationalShopping USS0.66M: S L. - ShortListing uSs10.07M () = BankFlnanced Totalsmay not add due to rounding prcssif2.xIs 39

Annex6 Annex6 Page4 of 6 LatviaWelfare Reform Project ProcurementSchedule

Kandava

Total Procurement Issuanceof Submission Signingof Completion Packages Cost (SM) _ Method Invitationto Bid of Bids Contract of Package

A. Works

3.2 Restructuringof Pilot Offices 0.35 . N.C.B. Jan-97 Jan-97 Jan-97 Jan-98 3.2 Purchaseof Building 0.15 N.B.F. 0.50

B. Goods

3.2 Fumiture 0.03 N.S. Jul-97 Aug-97 Sep-97 Sep-98 3.2 Specialequipment for rehabilitation 0.01 I.S. Jul-97 Aug-97 Sep-97 Nov-97 3.2 Computerequipment 0.02 I.S. Jul-97 Aug-97 Sep-97 Nov-97 3.2 Office equipmentfor Pilot (copier,fax,software) 0.03 I.S. Jul-97 Aug-97 Sep-97 Nov-97 3.2 Vehicle 0.06 I.S. Jul-97 Aug-97 Sep-97 Nov-97 0.15

C. Consultbncies 1/

TechnicalAssistance 3.2 ForeignTA 0.33 S.L. Jul-97 Aug-97 Sep-97 Dec-00 3.2 LocalTA 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-01 0.35

Training 3.2 OverseasTraining (study tours for pilot implem.) 0.05 S.L. Jul-97 Aug-97 Sep-97 Dec-98 3.2 LocalTraining (Kandavamunicipality) 0.02 S.L. Jul-97 Aug-97 Sep-97 Dec-99 0.07 Jul-97 Aug-97 Sep-97 Dec-98 D. RecurrentExpenditure

3.2 Bldg./vehiclemaintenance,salaries,admin. costs 0.41 N. B.F.

1.48

1t. Tentative This list inctudes atlmayor parkages. For donors not following World Bank procurement guidelines. this will not apply (-) = Bank Financed Note: N C.B - National Competitive Bidding US$0.35M, N.B.F. - Not Bank Financed USS0 56M; I S. - lnternaional Shopping USSo 12M; N.S. - National Shopping USS O3M: S L. - Short Listing for Consulting Services USS42M

prockand2 40 Annex6 Annex 6 Page5 of 6 LatviaWelfare Reform Project

TableB: Thresholdsfor ProcurementMethods and PriorReview ContractValue Expenditure (Threshold) Procurement ContractsSubject Category (US$Million) Method to PriorReview

A. CivilWorks US$8.44 N.C.B. All packagesabove (Lessthen US$200,000,and US$2million) first two contracts equvalent) B. Goods Equipment,Supplies, US$8.32 All packages andVehicles Contractsabove above$400,000 US$400,000 I.C.B. US $75,000 I.S. First Package below$75,000 N.S. First Package

C. Consultancies Training,Consultancies US$15.94 Consulting Firmsabove andfellowships All Contracts Services $100,000;Indiv- dualsabove $50,000; All SoleSources D. Miscellaneous (RecurrentVPPFRefund) US$5.85

Total: USS38.56

Note: N.B.F.- NotBank Financed; N.C.B. - NationalCompetitive Bidding OtherMethods of procurementinclude International Shopping (IS); NationalShopping (NS)

Annex6b.xis 41 Annex6 Page6 of 6 Annex6

LatviaWelfare Reform Project TableC: Allocationof LoanProceeds Expenditure Amount Financing Category (USSMillion) Percentage

A. Civil Works 2.35 100%of foreignexpenditures and82% of localexpenditures

B. Equipment,Supplies, and Vehicles 5.95 100%of foreignexpenditures, 100%of localexpenditures (ex-factorycost) and 82%of localexpenditures for other itemsprocured locally

C. ConsultingServices and Training 4.86 100%

D. Refundingof ProjectPreparation Advance 1.99 Amountdue pursuantto Section2.02 (c) of the Loan Agreement E. Unallocated 2.5

Total: 18.10

tabcpad.xls 42

Annex 7

Latvia Welfare Reform Project

Project Processing Budget and Schedule

A. PrjectBudget(US$'000): 444.7

B. Project Schedule Planne Actual

Time taken to prepare the project (18 months)

First Bank mission (identification) 07/03/1995 07/03/1995 Appraisal mission departure 02/01/1997 2/11/1997* Negotiations 04/01/1997 03/30/1997 Planned Date of Effectiveness 06/30/1997

*The decision meeting for the project PAD took place on this date, and at that meeting the Country Director declared the project successfully appraised on the basis of the results of a December, 1996 mission and an updated PAD.

Prepared by: Ministry of Welfare; Ministry of Finance; State Social Insurance Fund; Kandava Municipality

Preparation assistance: Project Preparation Facility of US$1.99 million dated October 18, 1997. Swedish Grant (TF020906) of SEK 8,078,400 dated May 14, 1996. Swedish Grant (TF020907) of SEK 7,344,000 dated May 14, 1996. Policy and Human Resources Development Fund (formerly Japanese Grant Facility, TF022701) of Yen 53,000,000 dated March 16, 1994 (included support for development of proposed FY98 Health Project as well).

Bank staff who worked on the project included: Messrs./Mmes. Louise Fox (EC4MS, task manager); Philip Goldman (EC4MS, deputy task manager, design and implementation); Inguna Dobraja (EC4BS, deputy task manager, supervision of local preparation); Alan Thompson (PSP, management and administration of benefits); Don Mclsaac, Monika Queisser (FSD, regulation of privately managed pensions); Richard James (EC4MS, project costing, operations); Eric N. Peterson (EC4MS, civil works). The legal counsel was Aly Abu-Akeel. Rajakumari Stephen (EC4MS) provided secretarial support. Peer reviewers were Timothy King (EC3HR) and Martha de Melo (PRDTE). Basil Kavalsky is the managing Department Director for the Europe and Central Asia Region, and Thomas Blinkhom is Chief of the Municipal and Social Services Division. 43

Annex 8

Latvia Welfare Reform Project

Documents in the Project File

A. Draft Project Operational Manual Project Implementation Plan Detailed cost tables Project account formats Procurement/disbursement arrangements Project implementation agreements Policy Research Program by-laws and procedures Terms of reference

B. Bank Staff Assessments Working Paper #1: Social Insurance Component (January, 1997) Working Paper #2: Regulation of Privately Managed Pensions Component (January, 1997) Working Paper #3: Social Assistance Component (December, 1996) Working Paper #4: Policy Monitoring and Evaluation Component (December, 1996) Working Paper #5: Project Coordination Component (January, 1997)

C. Other Latvian Pension Reform (Louise Fox, Ed Palmer, Don Mclsaac: May, 1996) White Paper on Social Assistance (January, 1997) Business Plans for the Social Insurance Fund (January, 1997) Business Plan for the Social Insurance Department (January, 1997) Business Plans for the Social Assistance Fund/Social Assistance Department (January, 1997) Kandava Baseline Social Assessment Survey of State Social Insurance Employers (August 1996) Survey of State Social Insurance Employees (August 1996) 44

Annex 9

THE REPUBLIC OF LATVIA A. STATUS OF BANK GROUP OPERATIONS (As of February 28, 1997)

US$ Mlllion (Less cancellations) Loan No. FY Borrower Project Loan |Undisbursed |Closing Date

1 Loan Closed Rehabilitation Loan 41.86 $2.64 Cancelled

Active Loans L36950-LV 1994 Latvia Agriculture Development 25.00 7.72 12/31/97 L37950-LV 1995 Latvia Enterp. Financial Sector 20.00 6.29 12/31/98 L37960-LV 1995 Latvia Enterp. Financial Sector 10.00 5.90 12/31/98 L37961-LV 1995 Latvia Enterp. Financial Sector 5.00 4.06 12/31/98 L38140-LV 1995 Latvia Liepaja Environment 4.00 1.73 3/31/00 L38900-LV 1995 Latvia Jelgava Dist. Heat 14.00 11.00 6/30/00 L39640-LV 1996 Latvia Mun. Services Development 2730 26.83 6/30/01 L41260-LV(S) 1997 Latvia SAL 60.00 54.12 12/31/97 L41450-LV 1997 Latvia Highway 20.00 2Q0. 6/30/01

Total number Loans = 9 185.30 137.65

Total: */ 227.16

* Total Approved, Repayments, & Outstanding balance represent both active & inactive Loans & Credits.

B. STATUS OF IFC OPERATIONS (As of February 28, 1997)

Approval Committed Disbursed Fiscal Year Company Loan Equity Loan Equity

1995 Lattelekom SIA 5.39 13.67 2.86 13.55

1996 Vereinsbank Riga 0.00 1.76 0.00 1.75

1996 Vika Wood 2.00 0.00 0.00 0.00

Total Portfolio: 7.39 15.43 15.30

Commitments consist of approved and signed projects.

latschd.xls ANNEX 10 Page 1 of 2 45 Latvia at a glance

Europe& Lower- POVERTY and SOCIAL Central middle- Latvia Asia income Developmentdiamond* Populationmid-1995 (millions) 2.5 488 1,154 GNP per capita 1995 (US$) 2,420 2,240 1,700 Lifeexpectancy GNP 1995(billions US$) 6.1 1,093 1,962 Average annual growth, 1990-95 Population(%) -1.2 0 4 1.4 GNP Gross Labor force (%) -0 8 0.6 1 8 per d primary Most recent estimate (latestyear availablesince 1989) capita enrollment Poverty:headcount index (% of populaton) Urbanpopulation (% of total population) 73 66 56 Lifeexpectancy at birth (years) 69 68 67 Infant mortality(per 1,000live births) 16 23 36 Accessto safe water Child malnutrition(% of childrenunder 5) Access to safe water (% of population)a! 92 . 78 Illiteracy(% of populationage 15+) Latvia Gross primaryenrollment (% ofschool-agepopulation) 83 97 104 Lalia Male 83 97 105 Lower-middle-incomegroup Female 82 97 101

KEY ECONOMICRATIOS and LONG-TERMTRENDS 1976 1985 1994 1995 Economicratios' GDP (billions US$) . 5 8 6.1 Gross domesticinvestment/GDP 19 1 20 8 Opennessof economy Exports of goodsand non-factorservices/GDP 46.5 42 7 Gross domesticsavings/GDP 21.2 15 5 Gross nationalsavings/GDP 25.1 17 3 Currentaccount balance/GDP -2 1 -3.2 Interest payments/GDP 0 3 0.4 Savings e_ Investment Total debt/GDP 6.5 7 2 Total debt service/exports 1.7 1 5 Presentvalue of debt/GDP 5.6 .. Presentvalue of debt/exports 25.8 Indebtedness

1975-84 1985-95 1994 1996 1996-04 (average annualgrowth) - Latvia GDP 0.6 -1.6 4 6 1 GNP per capita 2.1 1.2 4 5 Lower-middle-incomegroup Exportsof goodsand nfs .. . -8.2 11 2 8.4

STRUCTUREof the ECONOMY 1975 1985 1994 1995 GrowthratesofoutputandinvestmentI%) (% of GDP) G Agriculture 9.15 9.3 ,o Industry 313 310 40. Manufacturing 19.9 181 a Services 59.2 59.7 __

Private consumption 58.5 64.9 -80 General governmentconsumption 201 19.6 GW GDP Importsof goods and non-factorservices 44.4 48.0

(averageannual growth) 197644 1986-95 1994 1996 Growthrates of exports and Imports I%) Agriculture .. .. -15.6 -2.0 so Industry -5.8 -2.6 Manufacturing -106 -7.7 25 Services 8.7 -0.9 0 -

Private consumption 16.8 18.3 -25 i 9 / 92 3 95 General governmentconsumption -0.9 3 1 Gross domesticinvestment 54.0 -26.1 n50 Importsof goodsand non-factorservices 12 1 27.1 Exports imports Gross national product 0 6 0.0 e

Note: 1995 data are preliminaryestimates. The diamondsshow four key indicatorsin the country (in bold) comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. 46 ANNEX 10 Page 2 of 2

Latvia

PRICESand GOVERNMENTFINANCE 1976 1986 1994 1995 1 Domesticprices Inflation (% change) 1 000 Consumerprices .. 36.0 25.0 ImplicitGDP deflator . . 38.3 24.0 500 Governmentfinance (% of GDP) 0 Current revenue .. 36.5 35 5 90 91 92 93 94 95 Currentbudget balance .. -0.6 1 9 - GDPdef. -O-CPI Overallsurplus/deficit .. -4.0 -3.4

TRADE - 1976 1986 1994 1995 (millions US$) Exportand import levels (mill. US$) Total exports (fob) .. 997 1,368 2,000 Food n.a. .. 1,500 Manufactures . 363 Total imports (cif) 1,375 1,947 1,000 1111111

Exportprice index (1987=100) .89 90 9 92 93 941 Import price index (1987=100) Exports a Imports Terms of trade (1987=100)

BALANCEof PAYMENTS 1975 1986 1994 1995 (millionsUJSS) . Currentaccount balance to GDPratio (%) Exportsof goods and non-factorservices bl .. 1,513 2,017 2 Importsof goodsand non-factorservices c/ .. 1,672 2,266 Resourcebalance . . -159 -249

Net factor income 9 1tCl. , -I l 92 [T - Netcurrenttransfers . . 25 41 93 94

Current accountbalance, -2, before official transfers . . -125 -198

Financingitems (net) .. 275 158 Changesin net reserves .. .. -150 40 -4 Memo: Reservesinduding gold (mill. US$) 620 623 Conversionrate (locallUS$) 0.3 0.4

EXTERNALDEBT and RESOURCEFLOWS 1975 1985 1994 1995 (millionsUS$) Compositionof total debt, 1995(mill. US$) Total debt outstandingand disbursed .. .. 379 437 IBRD 45 55 G A F 7 5 IDA . 0 0 69

Totaldebt service .. . 26 33 IBRD .. .. 2 3 IDA °0 0

Compositionof net resourceflows 61 Officialgrants 1..9 18 C Officialcreditors .. 60 23 , 160 Private creditors .. 14 44 Foreigndirect investment .. 214 35 D Portfolioequity .. 0 World Bank program Commitments ., 60 18 A-IBRD E-Bilateral Disbursements . 22 9 B - IDA D -Othermultilateral F- Prvate Principalrepayments 0 0 C - IMF G - Short-term Net flows . 22 9 _ Interest payments .. 2 3 Net transfers . . 20 6

IntemationalEconomics Department and EC4C1 10/7196 Note: Estimatesfor economiesof the former SovietUnion are subjectto more than the usual range of uncertainty. a. Pipedwater. b. Exportsof goodsand net non-factorservices. c. Importsof goodsonly. FINLAND Thismap was produced 24 27 SWEDEN by the Mop DesignUnit of TheWorld Bank Theboundlaries, colors,W J deominObwadtiaonrsondonriy E F RP OJ C ESTONIA( otherinformation shown W ELFA RE R EFO RM PROJ ECT RUSSIAN on thismap do not ,_ ' onthe EDpart imply,of t KANDAVA PILOTPROJECT PORTS TheWorld BankGroup, 0 SELECTEDCITIES RIVERS *Rigo anyjudlgment on thelegol 69 statusof anyterritory, MAIN ROADS * NATIONALCAPITAL LATIA or any endorsement N. 7 '> \ J or acceptanceof such RAILROADS INTERNATIONAL N,, Th.- ~boundories. BOUNDARIES N LITHUANIA L Kihnu ToLelle E RUSSIAN TOLetle .. 8\ ;ELARUS 589 .. (D POLAND Riljiena *-j Ta Tarts A

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Report No.: 16487 LV Type PAD