POLAND: Country Partnership
Strategy 2005-07
Draft for Consultation
December 2, 2004
Table of Contents (1 of 2)
I.
II.
Context
Poland’s Development Agenda
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•
III.
Poland and the World Bank
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IV.
Development Priorities
Medium Term Economic and Social Challenges
Past Relationship and Lending
Lessons and Rationale for Continued Support
Implications for the Future
World Bank’s Proposed Strategy
•
•
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Principles for Engagement
Operational Approaches
Priorities
Outcomes
Coordination with other Partners
Table of Contents (2 of 2)
V.
VI.
Risks and Creditworthiness
CPS Consultations
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•
•
VII.
Government
Political Parties
CSO
Annexes
I. Context
CPS Context
• Poland joined the EU on May 1, 2004
• Government is implementing a wide range of reforms,
including fiscal expenditures although at a slower pace due
to political and capacity constraints
• Well targeted WB technical assistance to overcome
capacity constraints, mainly embedded in modest lending is
highly valued
• Access to sovereign borrowing (BBB+ rating) and sizeable
amounts of EU funds (EURO 13 billion until end 2006)
• Poland’s development priorities until end 2006 defined in
EU programming documents; potential WB lending cannot
result in new expenditures, because of limited fiscal space
Political Context
• Dynamics still dominated by remnants of “communist/anticommunist” distinction, but with a rise of populism
• Despite decisive victory in 2001 elections, governing
coalition fell apart leading to minority Government since
Feb 2003, the resignation of the PM and Cabinet in May,
2004 and a new Government which secured two votes of
confidence in June and October, 2004 respectively
• Government now likely to continue until elections in 2005;
until then situation to remain uncertain
• Uncertainty complicates reform agenda & implementation,
but some progress is still possible
Social Context – Poverty and
Employment
• Poverty directly related to person’s ability to hold a job;
the phenomenon of the working poor is not yet present
• Direct correlation with economic growth, thus during the
economic slow-down 1999-2003, unemployment increased
from 13% to 20%; despite resumed growth since mid
2003, unemployment has stayed high and only started to
decrease this year to 19%
• Ability to find and hold a job directly related to person’s
level of education
• Social transfer have helped alleviate poverty, but there is
evidence that it proved a disincentive to a more active
participation in the job market
Economic Achievements
2002 CAS vs Current Situation
2002 CAS
Current Situation
Growth around 1% per year
Accelerating growth 6% per year
Structural reforms, including
privatization practically stalled due
to unfavorable political situation
Structural reforms recovering
slowly, political situation expected
to be clearer after election in 2005
Fiscal policy deteriorating due to
lower revenues; 6% deficit
Fiscal policy improving; deficit in
2004 around 7%, but 1.5% lower in
2005 and below 3% in 2007. Fiscal
austerity plan being gradually
implemented; revenues buoyant
Current account improved due to
suppressed demand
Strong current account (deficit
below 2%) reflects rapid export
growth
Economic Achievements
2002 CAS vs Current Situation
2002 CAS
Current Situation
Indebtedness external at safe levels, External debt at safe levels,
domestic deteriorating
domestic debt still increasing,
peaking in 2006 below the legal
limit and then diminishing
Monetary policy easing cycle
Monetary policy tightening cycle
Inflation low
Inflation low, but increasing
Exchange rate floating; level neutral Exchange rate floating, but
to favorable
preparations to peg to Euro within
ERM-2; level favorable
FDI trough of the cycle
FDI gradually recovering
Unemployment stubbornly high
Unemployment stubbornly high
II. Poland’s Development Agenda
Challenges of EU Membership
• Capacity to take advantage of EU membership and
use available resources wisely
• Adoption of EURO will require fiscal
consolidation and expenditure restructuring and
continued economic growth
• Convergence to European income levels will
require increasing the overall competitiveness of
the economy and trade-offs with internal
convergence
Poland’s Development Agenda
• To manage the economy prudently and meet the
conditions required for adoption of the EURO
• To converge to European income levels and be
fully competitive in European and World markets
• To reduce poverty & increase employment
Medium-term Economic and Social
Priorities (1 of 2)
• Maintain a sound macroeconomic framework
• Continue implementation of structural reforms, including
in the areas of public expenditure and administration,
health, education, coal and railways
• Continue improving the business environment, including
streamlining of administrative procedures, predictability of
taxes, and improvements in infrastructure in roads,
railways and ports
• Support the development of a knowledge economy,
including reforms in education and fostering private sector
innovation
Medium-term Economic and Social
Priorities (2 of 2)
• Improve governance and the judiciary
• Generate employment and reduce poverty, including
reforms in education, labor markets and social benefits, as
well as incentives for employment generation
• Deepen financial sector intermediation
• Accelerate privatization of remaining industries, including
coal, energy and railways
• Euro adoption by 2009
Public Expenditure Reforms
• Improvement of the Public Expenditure Management
System
• Optimizing the link between fiscal policies and the labor
market
• Promotion of long-term growth enhancing expenditure
policies
• Streamlining tax administration to promote good
investment climate
Health Sector Reform
• Operationalize and implement Health Financing Reform as outlined
by the New Health Financing Act
• Introduce appropriate cost-saving and efficiency enhancing
incentives in health financing and delivery
• Improve performance of National Health Fund and its regional
branches
• Reduce systemic indebtedness
• Improve clinical quality of health services
• Rationalize hospital capacity across regions
• Strengthen governance and management in hospitals
• Introduce comprehensive and effective regulatory and oversight
mechanisms
• Improve collection and redistribution of health insurance premiums
Education Sector Reform
• Implementation of Poland’s Education Development
Strategy is only beginning and many challenges remain:
• Improve competitiveness by reducing number of people
with low skills and reorienting education to labor market;
• Prepare citizens to live in knowledge society through
improving access and quality of educational services;
• Provide life long learning system to take into account
changing demographic profile of learners in Poland;
• Link tertiary education system to needs of an innovation
society and ensure equitable system of allocation of
budgetary funds.
Coal Sector Reform
• Government’s 2003-2006 reform program under
implementation, but slowed in part due to buoyant coal
market and prices
• Target for voluntary reduction of labor not met and
unlikely, unless mandatory – further reduction beyond
target may be necessary for long-term viability
• Reduction of production capacity proceeding but with
strong opposition from workers and mining companies
• Privatization delayed; Government needs to move to rapid
implementation to use unique opportunity provided by
buoyant market
Railways Reform
• Government’s reform program under implementation, but
slowed-down
• First round of lay-offs completed as well as organization
and financial restructuring, but sector still far from
sustainability
• Commitment to privatization not yet clear; process needs
to start in earnest with Government assuming control of
the process, and moving quickly to privatize cargo services
• Additional lay-offs and financial restructuring may be
necessary, but best if done in connection with privatization
Improve Business Environment
• Improve contract enforcement and commercial dispute
resolution mechanisms (including out of court settlement);
• Improve quality of infrastructure services and develop
mechanisms to enhance private sector participation;
• Implement privatization program;
• Reduce the tax wedge (for social security premiums) and
enhance predictability of the tax regime;
• Reduce the costs of regulatory compliance;
• Strengthen corporate governance;
• Develop capacity to self-benchmark against competitors
and continuously monitor and as necessary improve the
business environment.
Legal Reform Agenda
• Enhanced capacity needed to better manage the
courts/judicial system
• Better court statistics and access to them needed by
decision-makers
• Better case load management needed to improve/shorten
time required for dispute resolution
• Regulatory impact assessment needed to evaluate impact
of new laws
Roads Agency Modernization
• Need to improve the agency’s investment planning
capacity so as to impact the quality and timing of project
implementation
• Build internal capacity for prioritization and selection of
investments on economic basis using modern
programmatic tools
• Eradicate large road maintenance backlog
Development of Knowledge Economy
• Increase Polish R&D expenditure from its current level of
0.7% of GDP with only 1/3 of this amount by private sector
(EU target is 3% of GDP with 2/3 by private sector);
• Develop absorptive capacity by increasing indigenous R&D
in order to benefit from FDI;
• Develop R&D financing instruments – from venture capital
to grants;
• Improve intellectual property rights regime;
• Improve quality and relevance of formal education and lifelong learning systems and linkage between academia and
scientific and business communities;
• Finalize liberalization of telecom and increase competition
in communications to reduce cost of telephone and internet
access – to facilitate introduction of e-government for
businesses and citizens.
Unemployment is too high
• More needs to be done to stimulate the creation of
new sources of employment
• Labor market constraints still need to be addressed
• Social transfers need to be better targeted so as not
to be a disincentive to more active participation in
the job market
Agriculture Sector Reforms
• Development of small and medium sized farms to increase
its value added
• Create modern marketing groups to achieve economy of
scale in marketing
• Create modern producers groups to introduce production
techniques that improve profitability, salability, and
environmental friendliness of production
Financial Sector Reforms
• Create a more conducive environment for bank lending
(improving creditor rights, quality of financial statements,
credit information)
• Develop non-bank sources of finance (leasing, factoring,
venture capital, commercial paper and bond markets)
• Further strengthen financial sector oversight (prepare for
Basel 2, develop risk-based insurance and pension fund
regulation & supervision, create accounting standards
board and public oversight body for the audit profession)
• Develop mortgage finance markets
III. Poland and the World Bank: Past
Relationship and Lessons
Past Relationship
• Policy advice and analytic work has been well received by
this as well as previous governments
• Lending was substantial in the 1990s, but it has decreased
steadily, although demand continues and is expected to
remain at a level of USD 350-400 million per year
• A large amount of technical assistance and capacity
building was, and continues to be embedded in lending.
Poland has not borrowed for technical assistance on a
stand alone basis
Past Lending
• A total of 66 loans have been approved since 1990, for
total lending (approved less cancellations) of USD 4.8
billion, of which 570 million are still undisbursed
• Current portfolio includes 14 loans supporting Coal Sector
and Railways reforms, modernization of ports and Roads
Agency and road rehabilitation, rural development, energy
efficiency, electricity transmission and geothermal energy,
regional water supply, and flood reconstruction and
prevention)
Lessons from the Past and rationale for
Continuing Support (1 of 2)
• Poland’s per capita income is still below the threshold for
World Bank graduation
• There is still a significant agenda of needed reforms in
areas in which the World Bank has been, and continues to
be engaged , and where it can add value from the
perspective of the client (coal sector, railways, roads and
ports modernization, health financing, education, public
finance management, financial sector development)
• Capacity to formulate and implement projects for EU
funding is still limited, creating an opportunity for World
Bank support (TA embedded in lending - partial cofinancing)
Lessons from the Past and rationale for
Continuing Support (2 of 2)
• Poland needs and appreciates WB technical and, in relative
terms, limited financial assistance
• Its capacity to design and implement reforms is
constrained by the speed at which public administration
and institutions can be reformed. World Bank support in
the form of analytic work and TA embedded in lending has
helped, and can continue to help address this constraint
• World Bank’s engagement in the form of an operational
program has been, and continues to be significant to
leverage and promote, as well as, endorse needed reforms
Implications for the Future
• Need to align World Bank priorities with Poland’s
priorities, consistent with World Bank corporate priorities
• Need to align World Bank procedures with those of Poland
in line with “Use of Country Systems” initiative and “entity
and sector accreditation” in Framework Paper
• Need to have a significant operational program to leverage,
promote and endorse needed reforms
• Need flexibility in CPS:
– move away from triggers and lending scenarios to broad criteria
that define the minimum standards for continued engagement, and
to a ceiling based on creditworthiness considerations;
– define rolling 18 month program on a yearly basis in line with
Poland’s budget cycle
IV. World Bank’s Proposed Strategy
CPS – Principles for Engagement
World Bank activities in Poland will need to be both strategic
and opportunistic, focusing on areas that are consistent
with the strategic priorities of Poland and where:
• Significant policy or structural issues are involved
• The World Bank can add value, as perceived by the Polish
authorities (technical excellence and comparative
advantage, including cost of financing)
• Effective partnerships are continued with Polish (including
private sector, youth and CSOs) and external partners (EC,
EIB, OECD, Council of Europe Development Bank) based
on the March, 1998 MOU
World Bank Assistance to Poland
consistent with Framework Paper
Development objectives:
• Help Poland complete the transformation process ensuring
the best possible framework for sustainable and rapid real
convergence
• Promote other long-term development goals, including
poverty reduction
Operational Approaches
• Facilitate effective and full utilization of EU structural and
cohesion funds during the period of initial EU membership
• Simplify and align WB procedures to Poland’s practice in
line with Use of Country Systems initiative to lower
transaction costs
• Lending and Non-Lending activities identified for an 18
month period and updated annually to coincide with
Poland’s budget cycle; program through Q2 FY06 is firm;
lending amounts will depend on client demand
• Possible instruments:
– Investment lending using SWAp modality with embedded TA
– TA lending in line with TA Facility in Framework Paper, although
so far no interest
– AAA and ESW
– Paid TA under reimbursable arrangements
Key Priorities for CPS
• Promote growth and reverse negative debt
dynamics through reduction of budget deficit and
restructuring of expenditures (Fiscal
Consolidation)
• Improve investment climate and enhance
competitiveness (Competitiveness)
• Reduce poverty, encourage social inclusion and
grow employment (Employment and Poverty)
WB Proposed Program
Fiscal Consolidation
Until December 2005
Lending
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•
•
Railways Reform & Privatization
Coal Reform & Privatization
Flood Prevention-Odra River Basin
Non-Lending
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•
•
•
Health Reform Implementation
ECCU7 cross-country ESW on
Fiscal Policy
Implementation of CFAA
recommendations
Policy dialogue on preparation of
National Dev. Plan 2007-13
Beyond December 2005
Lending
•
Support reforms to reduce burden
on the budget
Non-Lending
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•
•
•
Continue policy dialogue for ongoing and new reforms
Implement recommendations from
ESW work
Public Administration Reform
Review of National Development
Plan 2007-13
WB Proposed Program
Convergence/Competitiveness
Until December 2005
Lending
Beyond December 2005
Lending
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•
•
•
•
•
Coal Reform and Privatization
Railways Reform & Privatization
Modernization of Roads Agency
and Maintenance Backlog
Modernization of Ports
Private Sector Innovation Develop
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•
Non-Lending
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•
Tertiary Education & Knowledge
Society Requirements
PPPs in Roads and Other
Infrastructure
Energy Efficiency
FSD Policy Notes
Updates of CG and AA ROSCs
Contract Enforcement Study
Continue support to reform and
privatize Coal Sector and Railways
Continue support to modernization
of Road Agency and Maintenance
Backlog
Support compliance with EU standards
(environment, wastewater treatment
standards) and absorption of EU funds
Non-Lending
•
•
TA for compliance with EU standards
(environment, wastewater treatment
standards, accounting and auditing,
financial services)
TA to improve business climate and
financial intermediation
WB Proposed Program
Poverty and Employment
Until December 2005
Lending
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•
Post Accession Rural Support
Depressed Area Rehabilitation
Beyond December 2005
Lending
•
Non-Lending
•
ECCU7 cross-country ESW on
Labor Markets
Support on-going and new
programs to support employment
growth particularly in rural and
depressed areas (regional capacity
building for gmina management of
social programs)
Non-Lending
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•
•
ESW on Labor Markets
TA on implementation of ESW
work
TA on better targeting of social
assistance benefits
Outcome/Output Indicators (1 of 2)
Fiscal Consolidation
• Sustained progress towards Maastricht criteria as defined
in Poland’s convergence program:
– Declining budget deficit as per convergence program
– Declining debt dynamics and debt below constitutional limit
Convergence/Competitiveness
• Viable coal mining sector operates without budget support;
meets all obligations, including taxes and social benefits
• Sustained progress toward eradication of road maintenance
backlog, roads in good condition up from x% to y%
• Viable & competitive railway sector operates at sustainable
level of budget support only for socially necessary
services, and contributes to economic development through
efficient and competitive passenger and cargo services
Outcome/Output Indicators (2 of 2)
• Successful implementation of acquis communautaire
• Improved KE indicators
Poverty Reduction and Employment
Assistance from Other Development
Partners
• EU structural and cohesion funds approximately
EURO 13 billion for 2004-6 period in accordance
with Poland’s priorities as defined in the
programming documents
• EIB has a substantial program in Poland (in
particular in infrastructure), as do the Council of
Europe Development Bank (in particular in the
social sectors), and EBRD
V. Risks
CPS Basic Assumptions
• Continued economic growth exceeding EU average
• Low underlying inflation within band of 2.5% +/- 1%
• Public sector deficit declining in line with convergence
path
• Current account deficit to remain at around 2%-3% of
GDP
• Negative debt dynamics peaking in 2006 at below the
constitutional limit and declining thereafter
• Satisfactory progress towards Maastricht criteria
Poland’s Creditworthiness and World
Bank Exposure
• Poland is rated BBB+
• While Poland’s debt dynamic has deteriorated from 41% in
2001 to 51.6% of GDP in 2003, the combination of
continued strong economic growth, adoption and
implementation of the “Hausner” plan, and adoption of
ESA-95 methodology should keep debt below the
constitutional limit and arrest the negative dynamics
• World Bank debt comprises only 2% of total debt
Risks
• The inability to consolidate public finances and improve the budgeting
process may result in:
– another, perhaps even worse, fiscal situation (than that of 2001-2)
when growth slows down cyclically next time.
– lack of space for the private sector to develop and, hence, a
detriment to the growth potential
– problems in the efficient absorption of EU funds.
– undermining of convergence and delay in Euro adoption
• EU membership mitigates largely any remaining sovereign risks over
the medium term
• Political – the lack of stability has prevented the aggressive pursuit of
the unfinished reform agenda
• Unemployment needs to be reduced; improvements are needed in the
investment and overall business climate to incentivize creation of jobs;
recovery thus far has been jobless
VI. CPS Consultations
Consultations with Government
• Formal consultations with Government will take place
between November and the first half of January
• Consultations will include meetings with relevant
counterparts in late November/early December. In
preparation for meetings this draft will be sent to
Government in early November
• A draft CPS document (in Word format) incorporating all
comments will be prepared in late December for the WB
internal upstream review meeting
Consultations with Political Parties
• Consultations will take place with the main political parties
during the period between November and early January.
• Consultations will mirror those being proposed for
Government
Consultations with CSO
• Process started in early September with establishment of
informal CSO advisory committee to assist the Bank in
designing the consultation process
• Process will involve electronic discussion of the draft CPS
during the months of November and December, as well as
three half-day workshops in the north (Gdansk/Szczecin),
Warsaw, and in the south (Katowice); workshops will take
place between Dec 6-8
• Advisory committee is preparing lists of invitees for Bank
approval; each workshop will involve 30-35 participants
representing CSOs, private sector, trade unions, local
governments and political parties
• There will be two separate meetings in Warsaw, in addition
to the above, with: (i) private sector; and (ii) youth
VII. Annexes
World Bank Proposed Lending
(until December 2005)
Fiscal Consolidation
• Coal Reform & Privatization
• Railway Reform & Privatization
Convergence/Competitiveness
• Roads Maintenance Backlog
• Modernization of Ports
• Odra River Basin Flood Protection
• Private Sector Innovation Development
Poverty and Unemployment
• Post Accession Rural Support
• Depressed Area Rehabilitation
Coal Sector Reform and Privatization
• Viable and competitive coal sector that is not a
drain on the budget but contributes to economic
development
• Employment downsizing with redeployment of
excess workforce to other sectors and social
mitigation measures
• Capacity downsizing in an environmentally sound
and safe manner
• Privatization of sector for sustainability
Railway Reform and Privatization
• Viable and competitive sector at sustainable levels
of budget support only for socially necessary
services; contributes to economic development
through efficient passenger and cargo services
• TA for privatization of cargo services
• TA and possible loan or guarantee for provision of
regional passenger services to local governments
by private sector operators
Roads Sector Partnership
• Road rehabilitation and maintenance 2
• Improvements in institutional capacity to
speed up and sustain road infrastructure
investments
Modernization of Ports
• Modernization of Gdynia and Gdansk ports
Odra River Basin Flood Protection
• Elimination of flood risk to population of more than 2.5
million people in several towns and rural settlements in the
three provinces in the Lower Silesia Region, through:
– construction of Racibórz Dry Polder, and
– improvement of Wrocław Water Way
• Institutional capacity strengthening towards emergency
prepardness, improvement of flood forecasting and
management
• Financing with partners, including EU cohesion funds,
government and Council of Europe Development Bank
Private Sector Innovation Development
• Participatory Matching Grants (with royalties) for
development of R&D projects
• Pilot Seed Capital Trust
– Matching equity investments on a 1:2 basis with private
venture capital providers
– Matching grants for preparation of venture capital
investment proposals
• Exit mechanisms for VC investments through
private sales (to Polish pension funds & insurers)
and IPOs (developing WASDAQ market)
Post Accession Rural Support
• Off-farm job creation and rural
development
• Development of bank and non-bank rural
financial system
• Rural pension reform
• Rural social assistance
• Administration of Education Social
Stipends Program
Depressed Area Rehabilitation
• Reduce unemployment and poverty in selected
localities by designing, financing & implementing
comprehensive turn-around model
• Capacity building and institutional development
• Provision of infrastructure for new business
development
• Develop project related businesses
• Matching grants for enterprises
• Life-long learning program
WB Non-Lending
(until December 2005)
Fiscal Consolidation
•
•
•
•
•
Health Financing Reform Implementation
ECCU7 Cross-country ESW on Fiscal Policy
Implementation of CFAA recommendations
Policy dialogue/review of National Dev. Plan 2007-13
Public Administration Reform
Convergence/Competitiveness
•
•
•
•
•
•
Tertiary Education & Knowledge Society Requirements
PPPs in Roads and Other Infrastructure
Energy Efficiency
Financial Services Development Policy Notes
Updates of Corporate Governance and Accounting & Auditing ROSCs
Contract Enforcement Study
Poverty and Unemployment
• ECCU7 Cross-Country Study on Labor Markets
Energy Efficiency
• Scaling up of energy efficiency investments
• Support integration of energy infrastructure into
EU energy system by co-financing projects under
TEN-Energy
• Possible TA for set up of institution to manage
basins for oil and gas reserves and co-financing of
infrastructure
• Co-financing of projects using structural funds
WB Assistance: Convergence
National Development Plan TA
• TA to review Government’s National
Development Plan NDP 2007-13, including:
• Review of draft NDP and support seminar with
international experts for discussion of draft
• Review and provide inputs to sectoral strategies
on demand by sector ministries
• Review and provide inputs to regional
development strategies on demand by local
governments
• Review and provide inputs to country-wide
regional strategy on demand from MOE
Education TA
Human Capital a strong predictor of economic growth
CPS to line up with Poland’s Education Development
Strategy ( National Development Plan: 2007-13)
Improve competitiveness by reducing number of people with
low skills and reorienting education to labor market;
Prepare citizens to live in knowledge society through
improving access and quality of educational services;
Provide life long learning system to take into account
changing demographic profile of learners in Poland;
Link tertiary education system to needs of an innovation
society.
Health Sector Reform
• Active participation in policy formulation and decision making in the
health sector;
• Support for the preparation of resources redistribution algorithm;
• Support for development of Provider Payment Mechanisms and rules of
contracting;
• TA for design of provider’s licensing system;
• Support for design and implementation of Health Management
Information System;
• TA for design of oversight mechanism at MOH, a Health Policy Unit at
MOH responsible for monitoring of health sector reforms
• Support for National Health Fund (NHF) in design and analysis of the
institutional audit;
• Series of seminars and technical discussions with NHF on issues related
to: control of drug prescription, patient information, introduction of a
„smart card”, management information system for NHF, etc.
Public Administration Reform
• Administrative improvement program at the
Ministry of Finance supporting its change from a
process oriented institution into a knowledge
based organization with a focus on:
• Becoming a center of excellence for Poland
• Cost efficiency in the perspective of development
• Managing performance
• Client orientation
Cross-country Fiscal Policy ESW
• Multi-year work covering 8 EU new member
countries in Central & Eastern Europe and the
Baltics in particular topics (areas of focus in 1st
year appear in parenthesis, below):
– Health (Health care financing)
– Education (Tertiary education financing)
– Social Insurance (Sickness benefits, unemployment
insurance, other social programs)
– Fiscal Risks (Public-private partnerships)
– Public administration reform (Decentralization)
– Tax reform (None)