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. ........................................................................................................................................................................................