Documentof The World Bank FOROFFICIAL USEONLY ReportNo. 47304-IQ INTERNATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION INTERIMSTRATEGY NOTE FOR THEREPUBLICOFIRAQ FOR THE PERIODMIDFY09-FY11 February 19,2009 .. . . . . . . Iraq CountryManagementUnit Middle East and North Africa Region The InternationalFinanceCorporation Middle East and NorthAfrica Region This document has a restricted distribution and may be used by recipients only in the performance of official duties. Its contents may not otherwisebe disclosedwithout WorldBank authorization. Last Interim StrategyNote was discussedby the ExecutiveDirectors on September 15,2005 Currency Equivalents (As ofJanuary 29,2009) US$l.OO = 1100IraqiDinars Government FiscalYear January 1to December 31 ACRONYMS AND ABBREVIATIONS AAA Analytic and Advisory Activities IHSES IraqHousehold Socio Economic Survey ABP Annual Business Planning IMF International MonetaryFund BSA Board of SupremeAudit IRRF IraqRelief and ReconstructionFund CAG Community Action Group IRFFI InternationalReconstructionFundFacility CAS Country Assistance Strategy for Iraq CBI Central Banko f Iraq ISBFF IraqSmall Business Financing Fund CDD CommunityDrivenDevelopment I S N Interim Strategy Note CFAA Country Financial Accountability ITF IraqTrust Fund Assessment I Z InternationalZone COFE Council of Financial Experts KRG Kurdistan Regional Government COI Commissiono f Integrity MENA Middle East andNorth Africa COR Council of Representatives MIC MiddleIncome Country COSIT Central Organization for Statistics and MIGA Multilateral InvestmentGuaranteeAgency InformationTechnology NBP NationalBoardo f Pensions CPA CoalitionProvisional Authority N D S NationalDevelopment Strategy CPPR Country Portfolio Performance Review NGO Non-Governmental Organization CSA Country Social Analysis PCF Post Conflict Fund CSDI Consultative Service Delivery Initiative PEIA Public Expenditure and Institutional DA Designated Accounts Assessment DFI DevelopmentFundfor Iraq PEP Private Enterprise Partnership DFID Department for International Development PER Public Expenditure Review EC European Commission PFM Public FinancialManagement EITI Extractive Industries Transparency Initiative PMT Project Management Team ESW Economic Sector Work PPF Project Preparation Facility FMA Fiduciary Monitoring Agent PPP Public Private Partnership FY FiscalYear PSD Private Sector Development GDP Gross Domestic Product PRT Provincial ReconstructionTeam Go1 Government o f Iraq PSIA Poverty and Social ImpactAnalysis IAMB InternationalMonitoring andAdvisory SME Small-Medium Enterprise Board SOE State Owned Enterprise IBRD InternationalBank for Reconstructionand SOFA Status o f Forces Agreement Development SPBF State and PeaceBuilding Fund ICA InvestmentClimate Assessment SPSS StatisticalProgram for the Social Sciences IC1 tnternational Compact with Iraq SSN Social Safety Net ID traqi Dinar T A Technical Assistance IDA InternationalDevelopment Association UN UnitedNations IEG IndependentEvaluation Group UNDP UnitedNations DevelopmentProgram IFC InternationalFinance Corporation USAID UnitedStates Agency for International IFMIS IraqFinancialManagement Information Development System USG UnitedStates Government IBRD IFC Vice President Daniela Gressani RashadR. Kaldany Director HediLarbi Michael Essex Task Team Leader Jorge Araujo Ahmed Attiga Core Task Team Janet Dooley, Jean-Michel Happi, Pilar Gulrez Hoda, Mariko Highasi, Rapti Maisterra, Jane Sansbury, Ziad Badr, Aseel Goonesekere, Manva Al-Nasaa, NesreenAbu- Barghuthi,Yahia Said, Hania Sahnoun, Suleiman ISabahMoussa, Mary Eunice Barroso, Marian Saleh FOROFFICIAL USE ONLY ACKNOWLEDGEMENTS This I S Nwas prepared by a core team including Jorge Araujo, Janet Dooley, Jean-Michel Happi, Pilar Maisterra, Ahmed Attiga, Jane Sansbury, Ziad Badr, Aseel Barghuthi,Yahia Said, Hania Sahnoun, Sabah Moussa, Mary Eunice Barroso, and Marian Saleh under the overall guidance and leadership o f Hedi Larbi. Michael Essex provided overall guidance to the IFC team working on the ISN. Members o f the Iraq Country Team and throughout the Bank Group including Tariq Alhaimus, Mouna A1 Chami, Nazaneen Ali, Ghassan Alkhoja, Sana A1Nimer, Abduljabbar Hasan Al-Qathab, Husam Beides, Robert Beschel, David Biggs, Kame1Braham, Hyacinth Brown, Rafika Chaoli, Monali Chowdhurie, Ditte Fallesen, Jean-Jacques Frere, Celine Gavach, Abdelmoula Ghzala, Maged Hamed, Luis Alvaro Sanchez, Rapti Goonesekere, Marie Claude Haxaire, Conor Healy, Mariko Higashi, Gulrez Hoda, Farmkh Iqbal, Sima Kanaan, Veronique Kessler, Nadir Mohammed, Sabah Moussa, Sahar Nasr, John Nasir, Hoveida Nobakht, Douglas Pearce, Susan Razzaz, John Schwartz, Ahmed Shawky, Nikolai Soubottin, David Steele, Simon Stolp, Inder Sud, Steve Wan, Tevfik Yaprak, as well as other team members provided invaluable contributions throughout the development o f this ISN. May Ibrahim, Hanan Al-Kortany, Lana Mourtada, Ali Ayad, Mona Ziade, Guitta El Elam, Nada Abou-Rizk, Rola Assi, Dalia Abbas Ahmad AI Baghdadi, Vahe Kevork Vassilian, George Eid Eid, Sharon Hainsfurther, Portia Brown-Winston and Roger Sullivan were indispensable in organizing the I S N consultations. The ISN benefited from invaluable comments and inputs from the International Monetary Fund (IMF) team working on Iraq, notably Erik De Vrijer, Susan George, Udo Kock, David Grigorian and Maria Oliva-Amengol. We would also like to recognize the members o f the Fiduciary Monitoring Agent and the Bank consultants on the ground in Iraq as critical in carrying out the Bank's Iraq program. The World Bank Group greatly appreciates the collaboration and contributions o f the Iraqi government in the preparation of this Interim Strategy Note (ISN), particularly duringthe consultations inWashington, Baghdad and Beirut with special mentionto Drs. Azez Jaafar, Faik Rasool, and Huda Malik, whose comments and views shaped the document as well as the other Iraqi government officials who participated in the ISN consultations, Iraqi private sector, trade unions, NGOs and the donor community which all contributed to the design o f this strategy. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. INTERIMSTRATEGY NOTE FORIRAQ(FYO9-FY11) TABLEOFCONTENTS EXECUTIVE SUMMARY ..................................................................................................................... i 1.INTRODUCTION ............................................................................................................................. 1 11.COUNTRY CONTEXT.................................................................................................................... 1 A.Political Context ..................................................................................................................... 1 B.ImplementationofEconomicReforms: 2003-2008 ............................................................... 4 C. Recent Economic Developments and Prospects..................................................................... 5 111.IRAQ'S ANDDEVELOPMENT RECONSTRUCTION PROGRAM AND THE INTERNATIONAL RESPONSE................................................................................................................................... 8 Iv.THEWORLDBANKGROUPENGAGEMENT IRAQ:STOCKTAKING WITH AND LESSONSLEARNED .................................................................................................................... 9 A.The WorldBank's EngagementwithIraq.............................................................................. 9 B.Lessons Learnedfrom the Implementationofthe Firstand SecondISNs............................ 12 v.THEWORLDBANK'SASSISTANCESTRATEGYUNDERTHE INTERIMSTRATEGYNOTE (FY09-FY11) ............................................................................................................................ 14 A.Theme I: Continuingto Support OngoingReconstructionand Socio-Economic Recovery Efforts........................................................................................................................................ 20 B.Theme 11:Improving Governance andthe Management ofPublic Resources, Including Human,NaturalandFinancial................................................................................................... 22 C. Theme 111:SupportingPolicies and Institutions that Promote Broad-Based, Private-Sector Led Growth................................................................................................................................ 25 VI.IMPLEMENTINGTHEI S N.......................................................................................................... 28 A.Enhancingthe Effectiveness ofInstitutionBuildingandAnalytical and Advisory Activities............................................................................................................ 29 B. Strengthening the Implementationofthe CurrentPortfolio................................................. 33 C. Introducing More FlexibilityinImplementationArrangements andBusiness Processes....36 D.FosteringDonor Coordination.............................................................................................. 37 E.MonitoringFramework......................................................................................................... 38 F.Resourcesto Iraq................................................................................................................... 40 VI1.RISKS ANDMITIGATION ......................................................................................................... 41 VI11.BENCHMARKS FURTHERENGAGEMENT FOR ........................................................................ 42 ANNEXES: ANNEX 1 MONITORING . FRAMEWORK IRAQ........................................................................... FOR 44 ANNEX 11DONOR . ASSISTANCE MATRIXMAPPEDIC1PILLARS.............................................. TO 46 ANNEX 111MAINACHIEVEMENTS IRAQ'S . OF REFORMEFFORTS .................................................. 52 ANNEX Iv:SUMMARYOFITFANDIDAFINANCEDPROJECTS.................................................... 54 ANNEX v:LISTOFANALYTICAL ANDADVISORY ACTIVITIES................................................... 57 ANNEX VI IRAQ'S FORIBRDLENDING . CREDITWORTHINESS ...................................................... 61 ANNEX VII: FIDUCIARYCONTROLS FORPROJECTSFINANCEDTHROUGHTHEWORLDBANK 62 ..... ANNEX VI11.INTERIM STRATEGYNOTE CONSULTATIONSWITH STAKEHOLDERS ....................... 64 ANNEX .IRAQAT GLANCE..................................................................................................... A 67 ANNEX .KEYSTATISTICAL INFORMATION x ................................................................................. 70 ANNEX XI.KEY EXPOSUREINDICATORS ...................................................................................... 71 ANNEX XI1. wc PROGRAMSUMMARY.......................................................................................... 72 ANNEX XI11. STATEMENTOF FC'S HELD AND DISBURSED PORTFOLIO...................................... 73 Table 1: GDP Estimates and Projections ................................................................... TABLES: 7 Table 2: Ongoing or Planned FY09-Launched Activities ....................................... 19 BOXES: Box 1: Iraq: Changes inLeadership: Main Characteristics ....................................... 2 Box 2: How the World Bank Group Works inIraq................................................. 11 Box 3: World Bank Group: Examples of AssistanceResults.................................. 13 Box 4: CommunityService DeliveryInitiative (CSDI) .......................................... 21 Box 5: A Framework for Public FinancialManagement Support ........................... 23 Box 6: What are we doing differentlythrough this Strategy?................................. 29 Box 7: Examples ofWorld Bank InstitutionBuildingSupport: Statistics and PensionReform ........................................................ 32 Box 8: Recommendations on the PMT Model ........................................................ 36 Box 9: Review of Donor Activity inGovernance ................................................... 39 INTERIM STRATEGYNOTE IRAQ (FYOB-FY11) FOR EXECUTIVE SUMMARY 1. Recent positive developments suggest that Iraq has made important progress towards political and economic stabilization, although the situation remains fragile and reversible. Recent months have seen a sharp decline in incidents o f violence, especially in the Baghdad area, and a corresponding decrease in the rate o f internal displacement o f the population. This reflects improved security as well as successful initial steps towards political reconciliation. Macroeconomic performance has also improved although growth has been volatile. ii. The Government has been demonstratingits commitment to reformand reconstruction, indicating that continued engagement with Iraq may produce further concrete results. The Government has succeeded in sharply reducing inflation and containing recurrent spending, while increasing capital expenditures to accelerate the recovery process. In addition, the machinery o f government i s slowly reviving as Iraq emerges from conflict. A more proactive and confident government i s likely to devote more attention to the economy. Finally, high oil prices and - to a lesser extent - an increase in production produced an estimated US$70 billion o f revenues in 2008, although a deterioration in Iraq's fiscal balance is expected during part o f the I S N period inview o fthe recent declining trend inoil prices. iii. However, results from past and ongoing reform efforts remain far from meeting the needs and expectations of the Iraqi people. Unemployment remains extremely high and access to basic services severely limited. Electricity supply i s unreliable and i s far exceeded by demand; access to clean water and sanitation i s the lowest in the Region. Recent improvements in access to education and health services have not yet translated into significant welfare gains on the part o f the people o f Iraq. iv. Iraq i s resource rich and has benefited from a substantial increase in oil revenues over the past few years. At the same time, it i s still subject to conflict, insecurity, political instability and revenue volatility. As a conflict-affected, IBRD- eligible middle-income country, the main challenge for Iraq - in addition to security and political stability - i s to mobilize and effectively use its own vast resources to improve the welfare o f the Iraqi people and to rebuild its infrastructure in a sustainable manner through market-based reforms. The main role for the international community, including the World Bank Group, i s therefore to help Iraq use its own resources more effectively and to support the creation o f a healthy business climate. v. Working in Iraq has been challenging for the Bank Group and other donors. As in other fragile environments, while some notable successes have been achieved, the effectiveness o f assistance has been hampered by issues related to both the country's operating environment and the approach followed by the donors. Operating environment issues - which also affect the Government's ability to execute its own investment budget -include:thefragilepoliticalandsecuritysituation; theunstablepolicyandinstitutional environment; the Government's weakened institutional capacity, and weaknesses in Iraq's banking system. Issues related to the approach o f the Bank to Iraq include the i selectivity o f assistance as well as business processes and fiduciary arrangements which have been unfamiliar to Iraqi counterparts and are challenging for Ministries with limited capacity. vi. The design of this third Interim Strategy Note benefited from a stocktaking of the Bank Group's engagement with Iraq to date. The goal o f the stocktaking exercise was to identify the key bottlenecks for the implementation o f the previous ISNs and to extract lessons for this ISN. This exercise informed the design o f this ISN: (i) the continuing centrality of institution building; (ii) the critical importance o f interest and engagement on the part o f ministries and implementing agencies; (iii) need for the increased selectivity in terms of the ability to identify and seize opportunities as they arise to achieve concrete results; (iv) the need to focus on reform efforts that do not overtax Iraq's existing capacity and that more clearly reflect the country's current political and security situation; and (v) the need for increased flexibility inthe design and programming o f Bank assistance and for experimentation with alternative implementation arrangements for the Bank's assistance program for Iraq. vii. The I S N also benefited from extensive consultations with the Government of Iraq, the donor community, and other stakeholders, including representatives from private sector and civil society organizations. These consultations were helpful in identifylng the country priorities, defining promising engagement arrangements to maximize Bank assistance results, and highlightingthe centrality o f donor coordination. Some o f the main priority areas identified during the consultations include: (i) public financial management; (ii) bankingsector reform; (iii) to planning processes and support strategy design (not only at the central level, but also at the sectoral and provincial levels); (iv) private sector development; and (v) energy and services. viii. Given Iraq's difficult operating environment and the uncertainties that lie ahead, an I S N is the appropriate strategy vehicle at this point in time. This I S N i s also proposed for a longer time horizon - from mid-FY09 through FYll- than the typical ISN. This interim strategy contains lessons and principles o f engagement. The work programbeyond FY09 would be kept up to date through Annual Business Planning, jointly with the Iraqi Government to ensure it meets the evolving needs o f the Government as well as evolving opportunities for engagement. ix. The central guiding principle of this I S N i s that Iraq is well-endowed with natural and financial resources, and that the main role for the World Bank in this context is to help Iraq use its resources more effectively and transparently and to lay the ground work for an increased role for the private sector. This principle impacts both the form and the content o f the proposed work program for the next two years. However, it needs to be tempered by recent developments in the global economy and their impact on Iraq's projected oil revenues for the next few years and its increasing need for external financing in the short-to-medium term. Hence, this ISN anticipates IBRDfinancial support as requestedbythe Iraqi authorities. .. 11 x. Regarding the form of the assistance, the main instruments of Bank Group support under this ISN include: (i) operational support to accelerate implementation of the current portfolio, totaling about US$1billion; (ii) advisory services inselected sectors and areas; (iii) IBRDfinancial support inpriority sectors to be selected on the basis of funding needs and implementation capacity; (iv) IFC investment and advisory services products; and (v) MIGA's political risk guarantee products. Under this ISN, an IBRD envelope o f US$500 million can be committed for investments projects over FY09-11. The Bank i s currently administering 15 active grants funded from the Iraq Trust Fund, totaling US$481.6 million to provide textbooks, schools, health clinics, improved social safety nets, water supply and sanitation, irrigation and drainage, and a comprehensive household survey. The ongoing IDA portfolio consists o f five projects, worth US$508.5 million, in the areas o f education, roads, electricity, and water supply. IFC will support PSD through prioritized investments and advisory services in key sectors. The Bank's Analytical and Advisory Activities (AAA) program will support the Government inits efforts to enhance its ability to effectively use its oil revenues to the benefit o f the Iraqi people. Key analytical work undertaken since re-engagement in 2003 includes a Study on Subnational Public Financial Management (2007), a joint IFC/IBRD Construction Industry Study (2008), a Country Economic Memorandum (2006), a Pension Reform Study (2005), a Report on Iraq's Public Distribution System (2005), an Investment Climate Report (2004), and a Study on State- owned Enterprise Reform (2004). The Government has also expressed interest in borrowing from IBRD as the need arises, increasing IFC support, and getting MIGA guarantees that could leverage private financing. Other instruments include the State and Peace BuildingFund, and possibly, Treasury services. xi. With respect to the content of the assistance, activities under this I S Nwill fall under one or more of three thematic areas of engagement: (i) continuing to support ongoing reconstruction and socio-economic recovery; (ii) improving governance and the management of public resources, including human, natural and financial; and (iii) supporting policies and institutions thatpromote broad-based,private-sector-led growth, with the goal o f revitalizing the private sector and facilitating job creation. IFC and MIGA will play a key role particularly (but not exclusively) with respect to the third thematic area. New activities under the ISN will be chosen on the basis o f criteria for selectivity reflecting opportunities to achieve concrete results on the ground. xii. The three thematic areas are closely linked with the key goals of the International Compact with Iraq. The first I S N theme responds to the goals o f the International Compact with Iraq (ICI) which are related to Iraq's reconstruction and recovery efforts, including strengthening the energy sector and developing a stable, competitive and sustainable agriculture. The second ISN theme responds to the IC1goals of improving public financial management as well as strengthening institutions and improving governance. The third I S N theme responds to the IC1 goals o f implementing economic reform to create an enabling environment for private investments as a driver for broad-based growth. xiii. To achieve tangible results in a relatively short term, the Bank Group will place a renewed emphasis on how this I S N will be implemented. Building on lessons ... 111 learned from the implementation of the previous Interim Strategy Notes, the various consultations held, and other relevant country experiences, this I S N will aim to: (a) enhance the effectiveness o f institution buildingand analytical and advisory activities; (b) strengthen the implementation o f the current portfolio; (c) introduce more flexibility in the Bank Group's programming and ability to experiment with alternative implementation arrangements; and (d) foster donor coordination. For planning purposes, this ISN is based on the assumption that progress inthe security situation over the next two to three years would continue to be slow andincremental, with a risk o freversal. xiv. Risks. There are highrisks to the World Bank Group's program in Iraq. The most important risk pertains to the political and security situation, which remains fkagile, as does the country's operating environment. To mitigate this risk, the strategy emphasizes flexibility, and the Bank will adjust its activities as appropriate. Given the current limitations on mobility within the country, maintaining a vibrant dialogue with counterparts on issues o f policy reform as well as implementation, and ensuring adherence to core fiduciary and safeguard requirements will remain challenging. These risks are substantial despite the Bank's mitigating measures, which include capacity building,local oversight capacity, andprudent financial management procedures. iv I.INTRODUCTION 1. This Interim Strategy Note (ISN) for Iraq outlines the World Bank Group's work program for the next two and a half years. It draws on lessons learned from the implementation o f the first and second ISNs and reflects Iraq's evolving and fluid political, security, and socio-economic situation. The design o f this I S N benefited from extensive consultations with the Government o f Iraq, the donor community, and other stakeholders, including representatives from private sector and civil society organizations. 2. As the second ISN covered the period FYO6-07, there is a need for an updated strategic framework to guide the Bank Group engagement in Iraq. Iraq's improving but still fragile situation is not yet conducive to a full CAS. Therefore, an ISNremains the most appropriate instrument o f engagement while Iraq i s still transitioning to a more stable political, social and security situation. This I S N will cover the remainder o f FY09 through FY11. From a corporate perspective, this ISN for Iraq will be closely linked with four o f the six strategic themes for the Bank Group: (i) post-conflict and fragile states; (ii) middle- income countries; (iii) the Arab World Initiative; and (iv) knowledge and learning. 3. The central guiding principle of this I S N i s that Iraq i s well-endowed with financial resources, and that the main role for the World Bank Group inthis context i s to help Iraq use i t s resources more effectively and transparently, and to lay the ground work for an increased role for the private sector. This principle impacts both the form and the content o f the proposed World Bank Group's work program for the next two and a halfyears. 4. This document is organized as follows. SectionI1outlines the country context for this ISN. Section I11describes Iraq's reconstruction and development program and the international response to it. Section IV takes stock o f and draws lessons from the implementation o f the previous ISNs. Section V discusses the objectives and scope o f this ISN. Section VI addresses key implementation issues. Section VI1 discusses the risks to which this I S N is subject to as well as associated risk mitigation measures. Section VI11 outlines benchmarks for further engagement. 11.COUNTRYCONTEXT A. PoliticalContext 5. Iraq i s an oil-rich country. Its economy i s highly dependent on the oil sector and therefore subject to significant world oil price volatility and risks. The share o f oil GDP has averaged 61 percent over the past four years. Crude oil exports represent 98 percent o f total exports and oil revenues make up 96 percent o f total budget revenue (excluding grants). 6. Iraq is going through a complex political and economic transition compounded by a difficult security situation. It i s shedding its legacy o f a centrally planned economy and adjusting to politically difficult economic reforms implemented from 2003 to 2008. Iraq is also shifting from one political system to another: from a unified, non-democratic central government to a democratic, decentralized and possibly to a federal state. Iraq's political landscape remained in flux from 2004 to 2007 and sometimes stalled government operations. In addition, a fragile security situation hamperedreconstruction and development efforts. 7. The focus on security and the political process (three elections in one year; drafting of a constitution in a few months) captivated most of the attention of the emerging new leadership (see Box 1). Iraq experienced a violent conflict o f considerable intensity from 2003 until the end of 2007. Moreover, since 2003, Iraq has seen four different administrations (See Figure 1). After a year o f administration under the Coalition Provisional Authority (CPA), sovereignty was handed over to an appointed Iraqi government on June 28, 2004. The first post-2003 election was held on January 30, 2005, for a 275-seat Transitional National Assembly which formed the Iraq Transitional Government'. Following the approval, through a popular referendum, o f the draft constitution in October 2005, elections for a four-year government were held inDecember 2005. Each province contributed a predetermined number o f seats to a Council of Representatives (COR). Voters chose lists representing their confessional affiliation and/or regions, and Shiite and Kurdish parties emerged dominant. The COR was inaugurated on March 16, 2006. A 37-member cabinet led by Prime Minister Maliki was voted on M a y 20, 2006. I Box 1: Iraq: Changes in Leadership: Main Characteristics Political transition in Iraq has brought to the fore a new set o f leaders. Since 2003, Iraq has seen four different administrations. A March 2006 Special Report drafted by the United States Institute o f Peace' examining the new Iraqi leadership found that: *Iraq's new leadership is educated (47 percent hold doctoral degrees or their equivalent) and the majority is middle aged (average age 54). *A high percentageo fthe new leaders are former exiles with years o f opposition to the Ba'ath regime and were unfamiliar with today's Iraq. With some exceptions, most held no real experience ingovernment. *There are virtually no hold-over from the Ba'ath era. The "de-Baathification" program implemented by the CPA (CPA order 1) resulted inthe removal o f 30,000 Iraqis at the four top levels o f the Ba'ath Party and barred any o f these top level officials from holding public office. This fundamental change contributed to insufficient carryover in leadership experience. *Ministers have changed posts frequently. It was thus difficult to build institutions or develop expertise in managing their departments. In addition, this time constraint did not allow leaders to develop ties with the lower levels o f the administration. The election also formed four-year termprovincial councils inall 18 provinces (41seats per council; 51for Baghdad), and a Kurdistan regional assembly (111seats) under the "Transitional Administrative Law" (TAL, enacted March8,2004). 'This box draws largely from USIP' Special Report160: Who are Iraqs new leaders? Whatdo they want? March2006. 2 Figure 1 IraqInterimGovernment Governmentof Iraq Prime Minister:NunAi April 2003- May 2005- June 2004 May 2006 June 2004- Mav 2006-to date January 2005 PrimeMinisterlbrahimAI Ja'afari 8. Violence and political wrangling in Iraq delayed implementation of reconstruction and economic development priorities. Although Iraq's security situation has improved significantly over the year, it has had significant impact on the economy and the politics inIraq since 2006. Incessant violence forced thousands o f people to leave their homes every month presenting Iraq and the international community with a large scale humanitarian crisis. Delivery o f basic public services was also severely limited. The economy suffered directly from conflict with constrained real GDP growth in 2006 and 2007 and below-target oil production. Continued conflict and the unsettled political situation impacted ownership and implementation o f the post-conflict reconstruction agenda. Ongoing violence also hampered private and public investment. In addition, between 2007 and 2008, the 37-member cabinet did not function at its full capability. In early 2007, withdrawal o f 17 cabinet members belonging to various political parties impeded government operations. Key legislation such as the passing o f the budget was delayed over the past three years. Furthermore, negotiations over a Hydrocarbons Law and provincial elections were difficult and continuously stalled. 9. Despite these challenges, progress was made on a number of legislative benchmarks supported by an improvement inthe security situation. In2008, the COR approved a Justice and Accountability Law (formerly called de-Baathification law) and an Amnesty law which should grant amnesty to thousands o f political detainees, both key demands. Along with these key legislative benchmarks adopted, political parties that boycotted the government rejoined the cabinet inJuly. Another key piece o f legislation, the provincial elections law, was adopted on September 24, 2008. Provincial elections took place3 on January 31, 2009 except in Kirkuk. The legislation mandates a parliamentary committee to review the Kirkuk issue and make recommendations on resolving it by March 2009. Provincial elections are perceived for many as a pivotal step to promoting national reconciliation by giving voice to constituencies that boycotted the vote inJanuary 2005. These elections were originally planned for October 1, 2008. They were delayed due to disagreement over the status o f the oil-rich city o f Kirkukand other disputed internal boundaries. 3 10. Important challenges remain for the reconciliation process in Iraq. Chief among those are: (a) the type o f federal system to be adopted in Iraq; (b) the degree o f devolution o f powers to the regions; (c) the status o f Kirkuk and other disputed internal boundaries; (d) the modalities andmechanisms o f oil revenue management, particularly in view o f (a)-(c) above4; (d) the nature ofthe political system, particularly with respect to the potential for further sectarian polarization; and (e) Iraq's place in the broader geopolitical context, in light o f the Status o f Forces Agreement, and its evolving relationships with neighboring countries. B.Implementation of Economic Reforms: 2003-2008 11. Inthe early post-war years, attempts were made to implement reforms similar to the "shock therapy" programs of the mid-90s in some transition economies of Eastern Europe. The main thrust o f the reforms revolved around the assumption that market-friendly reforms and the creation o f appropriate legal and regulatory arrangements to facilitate private investment would lead to reconstruction and growth. Reforms were oriented towards creating an attractive investment climate for foreign investors and a new economy. Foreign investors would be allowed 100 percent ownership of Iraqi assets, repatriation o fprofits and equal legal standingwith local firms, except inthe oil production and refining sectors. Foreign banks were permitted to establish operations and purchase equity shares in existing Iraqi financial institutions. Income and corporate taxes were capped at 15 percent. Tariffs were reduced to a universal 5 percent with none on food, drugs, books and other humanitarian imports. Iraq's State-Owned Enterprises, except for those inthe oil sector, were to be privatized. 12. Some of these reform efforts were premature for Iraq and lacked domestic ownership, often leading to disappointing results. Only relatively few o f the policy reforms implemented in Iraq in the early postwar years were tailored to the local context. These reforms were at times ill-informed and revealed a lack o f appreciation o f local context and needs. This disconnect was exacerbated by the massive brain drain that occurred duringthe period. Local capacity was unavailable and sometimes inadequate. The Iraqi economy, particularly in the wake o f the 1991 Gulf War, had suffered from high inflation, capital consumption and rapidly falling living standards. Iraq's institutions were also shaped by 30 years o f authoritarian legacy, decades o f sanctions, war and dictatorship where rent seeking and patronage reigned and oil provided the state with a tool to garner public compliance. The state provided Iraqis with free services and utilities such as gas, electricity and water. Most prices were controlled, many consumer goods and foodstuffs rationed, and the money andbanking system was developed to finance the state apparatus. 13. Nonetheless, significant progress was achieved during the past few years with the support of the international financial organizations. Under the monitoring o f three consecutive IMF programs, the Government succeeded in drastically improving macroeconomic performance. Growth i s projected to increase from 1.5 percent (2007) to Contention on the Hydrocarbon Law revolves around the extent o f foreign participation in the oil sector. Some favor a regional sharing of responsibilities while others prefer a national oil investment and production framework which would allow oversight o f foreign investment. 4 9.8 percent (2008). Authorities managed to curb inflationary pressures and reduce dollarization o f the economy. The Government's record demonstrates its commitment to fiscal sustainability and sound macroeconomic policies. As such, direct budgetary fuel subsidies were eliminated by 2008 except for a small subsidy on kerosene, which will be abolished in 2009. With the support of the IMF and the World Bank, progress in strengtheningbudget management and banking sector reform is underway5.With support from the IMF, the Government also executed a debt restructuring program with all Paris Club creditors which should be completed by December 2008. Non- Paris Club restructuring i s still on-going. However, a trade-off remains between curbing spendingto maintain financial discipline with the need for public sector investments andjob creation. C.Recent Economic Developmentsand Prospects 14. As a direct result of conflict, real GDP growth between 2003 and 2007 has been fragile Figure2 Economic growth and volatile. After reaching 46 percent in 2004, real RealGDP goulh: 2005-2008 GDP growth marked a slowdown between 2005 and (mpercent) 2007, moderating to 1.5 percent in 2007. Economic 12 activity in 2008 benefited from an increase in oil production and exports, reaching record highs since 2004. Oil output has been consistently averaging 2.5 z mbpdinQ3/2008. After missingits yearly production 0 l.2 i / V / target since 2005, Iraq's oil sector was above target for most of 2008. The rise inproductioni s due to rising output from the North and secured oil-related facilities and personnel. Real GDP growth is estimated to have risen to almost 10 percent in 2008. Non-oil activity appears to have regained some momentum in 2008 although lack o f data continues to hamper accuratereporting of this sector. Non-oil activity has suffered from years of embargo and ill-conceived policies. The informal economy has expanded significantly since the 1990s and especially after 2003, mix. Since November 2006, the CBI had allowed a gradual ::F "'O .. - -- 290 !i appreciation of the ID against the dollar and raised its 1300 '*O0 policy interest rate to 20 percent as o f January 2007. Between end-2007 and July 2008, the CBI lowered its 1400-- 130 Annex I11provides a summary o f the main achievements of Iraq's reformprocess. 5 conducive to better functioning o f the banking sector. Accumulation o f gross international reserves reached US$40 billion at end July 2008 (equivalent to about 11months o f imports o f goods and services). 16. Iraq's fiscal position remained strong while oil prices were on the rise. Fiscal surpluses were achieved for four consecutive years. Risingoil revenues and a low rate o f execution o f the capital budget strengthened the fiscal position. The balance in the Development Fund for Iraq (DFI) reached US$23.5 billion by end September 2008, an 85 percent increase from end-2007. Direct budgetary fuel subsidies were eliminated in 2008 except for a small subsidy on kerosene. These had amounted to 13 percent o f GDP in 20046. The overall budget surplus reached 13.5 percent o f GDP in 2007. Rising output in 2008 has allowed the COR to boost this year's budget in a supplementary spending bill approved earlier in August. The supplementary budget includes significant increases in current and capital spending in priority sectors while preserving fiscal sustainability. The inflationary impact o f this fiscal stimulus is expected to be modest. A preliminary overall surplus for 2008 is estimated at about 8 percent despite the recent downturn in world oil prices and the supplementary budget. In addition, capital spending has increased two-fold from 2007 levels but i s still below budget. 17. Iraq's current account i s estimated to have reached a surplus of 17.3 percent of GDP in 2007. Due largely to the predominance o f oil exports, the current account balance i s expected to reach 15 percent o f GDP in 2008. The overall balance o f payments is projected to deteriorate in2009 as oil prices retreat and aid flows decline. 18. Iraq's debt restructuring has made substantive progress. With the third and last stage o f Paris Club debt reduction that went into effect in December 2008, Iraq has restructured its external debt with all o f its eighteen Paris Club creditors. Debt agreements have also been concluded with 11non-Paris Club creditors. Negotiations are ongoing with the remainder. In July, the United Arab Emirates announced full cancellation o f Iraq's outstanding debt Most o f Iraq's commercial debt was successfully renegotiated over 2004-2006, leaving Iraq with an outstanding debt o f US$5.2 billion by end-2007 (down from US$21.9 billion). The old debt was swapped (with an 80 percent discount) into a 20- year bond. By end-2007, Iraq's total external debt amounted to US$103 billion, or about 165 percent o f GDP. The debt-to-GDP ratio could be reduced to a third o f that figure in 2009 ifagreements with all nonParis Club creditors were completed along terms similar to the 2004 agreement with Paris club creditor^.^ Based on the Paris Club Agreement, Iraq will start making repayments on the remainder o f the debt stock by 2011. However, the recent slump in world oil prices has increased Iraq's external vulnerability given the country's dependence on oil exports. 19. GDP growth of about 8 percent is projected for 2009. This assumes continued progress in the security situation and a sustained increase o f oil production and exports. Assuming the former, non-oil sector activity is expected to pick up further in 2009, and However, indirect subsidies are expected to increase to 6.5 percent o f GDP in 2008 due to higher international oil prices. The largest bilateral creditors (mostly Gulf countries) have yet to negotiate agreements on terms comparable to the Paris Club. 6 inflation i s projected to be contained at 10 percent. A zero current account balance i s projected for 2009. Provided a continuing rise in oil export volumes and upturn in oil prices, the current account balance is expected to improve by 2010. Refer to Table 1 below. Table 1. GDPEstimates and Projections Source: Central Bank o f Iraq, World Bank and IMF staff estimates andprojections (p: projections). Nominal GDP for 2009 takes into account the effect o f falling oil export prices. 20. While the direct impact of the global financial crisis on the economy remains limited, the indirect impact through declining oil prices may be significant. Iraq's banking sector is underdeveloped and centered on the domestic market. Levels o f direct foreign investment and private capital flows are very low. However, the financial crisis has set off a global recession. Crude oil prices fell 25.8 percent in November 2008, averaging US$54.0/bbl, and fell to a low o f US$40/bbl in early December 2 0 0 8 4 o w n more than US$100/bbl or 72 percent since peaking in early July. Oil prices are not expected to recover to early 2008 levels inthe immediate future. Due to this recent fall in prices, the Government revised the initial 2009 spending budget twice with a lower oil export price (currently US$50). 21. As a result, the 2009 budget projects a fiscal deficit, reflecting declining oil prices. It envisages cuts inrecurrent spending and adjustinginvestment to implementation capacity. It still provides for an increase in capital spending compared to expected 2008 outturns and a rise in security spending. A deficit o f about 17 percent i s projected. Financing o f the fiscal balance will come from the draw down o f resources in the Development Fundfor Iraq (DFI).The Government announced that public spendingwould be reduced in a supplementary budget if oil export revenues are substantially lower than budgeted. The Iraqi authorities remain committed to fiscal sustainability and, assuming a gradual recovery inoil prices, a surplus should be envisaged by 2012. 22. Despite notable achievements in putting macroeconomic policies on a sustainable path, the medium-term economic outlook for Iraq i s subject to considerable risks. Reversal o f the current security situation or increased political instability could lower economic growth and amplify inflationary pressures as well as stall the structural reform agenda. Moreover, the slump in world oil prices is posing a serious riskto Iraq's fiscal andexternal accounts. The global recession could be particularly severe 7 and prolonged. Lower than projected oil export prices for the next two years could translate into more economic and political volatility in the medium term, indicating a potentially increasingneed for external financing. 23. While some reform efforts are showing positive results, they have yet to trickle down to the Iraqi population. Violence and conflict have created an unparalleled movement o f population in Iraq, the largest in the Middle East since 1948. An estimated total o f over 2.5 million are internally displaced and over 1.5 million are refugees*. Unemployment remains highand access to basic services continues to be severely limited. Electricity supply i s unreliable and far exceeded by demand; access to clean water and sanitation is among the lowest in the Region; and recent improvements in access to education and health services have not yet translated into significant welfare gains on the part o f the people o f Iraq. 111.IRAQ'S RECONSTRUCTIONAND DEVELOPMENT PROGRAMAND THE INTERNATIONAL RESPONSE 24. The Government's reconstruction and reform programhas been spelled out in the National Development Strategy (NDS) and the International Compact with Iraq (ICI). In addition, drawing on newly available information on poverty from the recently completed Iraq Household Socio-Economic Survey (IHES), Iraq's High Committee on Poverty Reduction has initiated work on a Poverty Reduction Strategy for Iraq. 25. The NDS, presented in July 2005 by the Iraqi Transitional Government, covered the period 2005 - 2007. The NDS was structured around four pillars for sustainable development, which remain relevant to Iraq's present conditions: (i) strengthening the foundations o f economic growth; (ii) revitalizing the private sector as the engine of growth andjob creation; and (iii) improvingthe quality of life; and strengthening good governance and improvingsecurity. 26. The International Compact with Iraq (ICI) was launched on M a y 3, 2007 by Prime Minister Nouri al-Maliki and UN Secretary General Ban Ki-Moon. The IC1i s an initiative o f the Government o f Iraq for a new partnership with the international community. As such, the IC1 i s the platform for Iraq's cooperation with the international donor community. The primary focus o f the IC1 i s "to build a framework for Iraq's economic transformation and integration into the regional and global economy". 27. The IC1 concentrates on four reform and investment areas as well as in two sectors: (i) resource management; (ii) public governance and institutions; (iii) economic reforms; (iv) social sector reform; (v) energy; and (vi) agriculture. The first annual review conference o f the IC1was held on May 29, 2008 in Stockholm. The review examined the achievements and noted the progress made by the Iraqi government in meeting the Compact benchmarks during2007-2008. `This includes an estimated 1.2 million who were internally displaced before February 2006 and 500,000 refugees before 2006. IOM Emergency Needs Assessments, Post February Displacement in Iraq, November 2008. 8 28. The international community has committed in excess of US$29.2 billion of financial assistance to Iraq between June 2003 and June 2008. A significant proportion o fthis assistance was provided through the U S Government Iraq Relief and Reconstruction Fund (IRRF) as grants. Other significant contributions include those o f Japan and the European Commission and the multi-donor International Reconstruction Fund Facility for Iraq (IRFFI) comprising contributions from 25 donor nations. The majority o f international financial assistance has been aimed at reconstruction and development o f essential services infrastructure (water, electricity, health, education), with further infrastructure grants to the oil, security and transportation sectors, primarily by the US Government. More recently, international assistance has increasingly become focused on policy advice, capacity development and technical assistance to unlock Iraq's own significant financial resources for economic development, and to develop private sector engagement inIraq. Iv.THEWORLDBANKGROUPENGAGEMENT WITH IRAQ: STOCKTAKINGAND LESSONS LEARNED A. The World Bank's Engagementwith Iraq 29. Iraq has a long history of engagement with the Bank Group. Iraq was a founding member of the World Bank and IFC, and received six loans from the International Bank for Reconstruction and Development (IBRD) between 1950 and 1973 for agriculture, education, flood control, telecommunications, and transport. The last loan closed in 1979. The World Bank Group re-engaged with Iraq inthe summer o f 2003 when it prepared a needs assessment together with the United Nations (UN).The UN-World Bank Joint Needs Assessment was the basis for the October 2003 International Conference on Iraq in Madrid. The International Reconstruction Fund Facility for Iraq (IRFFI) was endorsed at the Madrid Conference, in response to international requests for donors to channel their resources and coordinate their support for reconstruction and development activities in Iraq. In close consultation with Iraqi authorities and donors, the World Bank and UNcreated the structure, governance, andmodalities o f IRFFI. The IRFFIstructure is designed to ensure that activities financed by the Facility are aligned with Iraq's priorities. IRFFI encompasses two trust funds: the World Bank Iraq Trust Fund (ITF) administered by the World Bank, and the UN Development Group Trust Fund (UNDG Trust Fund) administered by the United Nations Development Program (UNDP) on behalf o f itself and participating UN organizations. The World Bank Board o f Executive Directors approved the World Bankto act as Administrator o f the ITF inJanuary 2004.9 30. World Bank Group support to Iraq since 2003 has been framed around two Interim Strategy Notes. The first ISN (FY04-05) for Iraq was presented to the Board o f Executive Directors in January 2004. It built on the Bank's work in 2003, including the preparation of Watching Briefs in key sectors as well as on the joint Needs Assessment undertaken in collaboration with the UN. It was designed to rely on the Bank's Iraq Trust The ITF finances 18 grants (US$481.6m). There are 4 new projects in the pipeline for a total planned allocation of US$37m. The ITF is comprised of the following countries: Australia, Canada, EC, Finland, Iceland, India, Japan, Korea, Kuwait, Netherlands, Norway, Qatar, Spain, Sweden, Turkey, UK, and USA. The largest donor is the EC (US$179.7m), followed by Japan (US$l30.6m) and UK (US$71.4m). 9 Fundto finance emergency projects. Activities under the first ISN were organized under three tracks: (i)Build Iraqi institutional capacity; (ii) prepare and start implementing emergency operations to address urgent needs; and (iii) lay the groundwork for Iraq's medium-term reconstruction and development program. 31. The second I S N (FYO6-07) was discussed by the Board of Executive Directors in September 2005. It provided the framework for up to US$500 million from IDA as well as additional resources from the Iraq Trust Fund. Under the overall umbrella of institution building, the second ISN was organized around four pillars: (i) basic restore service delivery; (ii) enable private sector development; (iii) strengthen social safety nets; and(iv) improve public sector governance. 32. The Bank has approved since 2003 a total of US$990.1million infinancing for Iraq: US$481.6 million in grants from the World Bank Iraq Trust Fund and US$508.5 million in soft loans from IDA. Both the first and second ISNs envisaged possible IBRD support (in the order o f US$500 million), which did not materialize in view o f Iraq's limitedabsorptive capacity. 33. Since the inception of IFC's work in Iraq in 2003, the Corporation has undertaken a range of investment and technical assistance activities. The primary focus o f the program has been to support for the financial sector, the construction sector, and SMEs. IFC committed US$115 million in 3 projects since 2003. IFC has 10 percent stake in Credit Bank (US$5 million), provided US$12 million loan to Iraq National Bank (INB) to support SME lending, and committed US$99 million to support the construction o fthe first private cement company inSuleimanya, Kurdistan.lo 34. The Iraq Small Business and Finance Facility (ISBFF) was approved by the IFC Board in December 2003, and has been operational since mid-2004. The facility has funding of US$83 million, comprising an investment component o f US$68 million (from UK, U S and IFC) to provide funding to local financial institutions for on-lending to micro and SMEs and a technical assistance component o f US$15 million (from Japan and Spain) to create capacity on the ground for M S M E financing. Iraq National Bank (INB) was the first bank to be selected under the Facility. 35. Numerous capacity building activities and knowledge products covering different sectors have been delivered since 2003. Analytical work includes a Study on Sub-national Public Financial Management (2007), a Country Economic Memorandum (2006), a Pension Reform Study (2005), a Report on Iraq's Public Distribution System (2005), an Investment Climate Report (2004), and Study on State-owned Enterprise Reform (2004). More recently, sector strategies have been completed or initiated with Bank support, including inthe water, education and electricity sectors (see Annex V). 36. Through PEP-MENA, IFC's advisory services since 2003 included: (i) training to around 250 Iraqi bankers (ii) completing SME advisory to INB in collaboration with lo tosponsorissues,projectrelateddevelopments,andsecuritycircumstances,bothINl3andthecement Due project have been cancelled in2008. 10 Rabobank o f Holland, (iii)supporting, together with World Bank and UN-Habitat the development o f a local land development strategy andthe construction industry sector; (iv) successfully implementing its SME management training program, Business Edge; and (v) organizing a conference to discuss the development o f the country's cement sector, which brought together key investors, government leaders, donors, and the private sector. 37. Since the security situation has limited World Bank Group staff from freely traveling to and around Iraq, the World Bank Group employs special measures to supervise project implementation and mitigate risks for its program in Iraq. Iraqi staff and consultants, backed by staff inAmman, Beirut, and Washington, monitor project progress and support the Project Management Teams (PMTs) on a daily basis. While task teams typically conduct semi-annual project supervision missions, task teams supervise projects in Iraq 3-4 times per year. These supervision missions have usually been conducted at the Interim Office for Iraq in Amman and sometimes in Beirut. This arrangement has facilitated the gathering o f large teams with numerous counterparts as well as consultations that require a commitment o f several days at a time (see Box 2). Box2: How the WorldBankGroup Works inIraq Iraqi StaffKonsultantsthroughout Iraq. The World Bank has had a continuous presence in Iraq since mid-2004, employing several professional-level Iraqis. Several national staff and consultants work out of their homes (using satellite phone and email connections) and in the executing agencies to support the implementation of projects. Their access to the former "Green Zone" was constrained due to security risks and complex clearance procedures at check points to enter that Zone. In the KRG, however, staff and consultants were able to function normally, attending meetings and visiting project sites as needed. International Staff in Baghdad. International staff based in a secured area in Baghdad focus on overall policy dialogue and donor coordination and are playing an increasing role in portfolio oversight. From mid-2004 to mid- 2007, the UK's Department for International Development (DFID) facilitated an expatriate consultant based in the former "Green Zone" to serve as a liaison for the World Bank with the Iraqi Government and donors. In2007, that role was expanded to that o f a Country Manager for Iraq. The World Bank hired a new Country Manager and a new public sector specialist both located in Baghdad as of the last quarter of 2008. In addition, a DfID-funded private sector development specialist and a senior operations officer are being recruited to further strengthen the Country Office's capabilities. Bank staff in Baghdad are supported by a projects assistant and support staff. IFC staff visited Iraq to conduct field appraisalof one project Interim Office for Iraq in Amman. The Amman Office was established in 2003, after the bombing of the UN headquarters in Baghdad, which also housed the Bank`s office, which killed one Bank consultant and injured several staff. The Amman Office provides key logistical support for Bank staff and consultants located in Iraqand for visiting missions, including support for staff travel, security, and medical emergencies, in addition to administrative support to the Iraq program, it also provides a cost-effectiveand secure venue to hold meetings and workshops that require large teams to work closely over several days, as is required for appraisal, negotiations, and supervision missions.. The IFC Jordan Office in Amman. The office is responsible for covering IFC's programs inJordan and Iraq and is co-located with the World Bank's Interim Office for Iraq. The office allowed for improved communication with Iraqi government counterparts and the private sector community. Many major Iraqi businessmen and private sector companies are located in Jordan. It has also allowed for better coordination with the donor community, and improved coordinationwith the World Bank. Fiduciary Monitoring Agent (FMA). The Bank employs an Iraqi firm in Baghdad, to help ensure that funds are disbursed only for the purposes intended and according to applicable World Bank procedures. The FMA employs about two dozen Iraqi staff, predominantly professional engineers and accountants, who visit project sites and ministries on a daily basis. The FMA reports its findings to the World Bank task team and the Project Management Teams inthe implementing agencies. Videoconferencing (VC) Facilities. In2004, the World Bank installed four video-conferencing facilities in Baghdad (located in the Convention Center in the former Green Zone, Ministry o f Planning, Ministry of Finance, and Central Bank of Iraq). The VC hub at the convention center was dismantled without warning in mid-2006 by Iraqi officials. The World Bank procured and installedportableVC equipment inthe World Bank office. 11 38. The World Bank also engages a local Iraqi firm as a Fiduciary Monitoring Agent (FMA) to help supervise project implementation. The FMA assists PMTs in buildingtheir capacity inproject management, visits project sites and supports the PMTs to monitor the physical implementation o f projects and the implementing agency's compliance with the required procurement and financial management procedures. The FMA reports issues to the World Bank's task teams as they arise, to ensure the teams can follow up on any implementation concerns. The FMA's monthly reports describe and document the physical progress o f projects, report key findings, and make recommendations for follow-up actions to be carried out by the PMT and World Bank task team. Reports include digital photos, which provide evidence o f the delivery o f goods, and assess the quality and progress o f the work o f contractors. Staff o f the FMA also participated in supervision missions, working closely with the task team and P M T to improve project implementation. The FMA performance i s evaluated each year by the Bank. B.LessonsLearnedfrom the Implementation of the Firstand Second ISNs. 39. The design of this Interim Strategy Note benefited from a stocktaking of the Bank Group engagement with Iraq over the past five years. The goal o f the stocktaking exercise was to identify the key bottlenecks for the implementation o f the previous ISNs and extract lessons for this ISN. 40. Achieving results in the Bank's program and implementation experience are linked. Difficulties in the operating environment have led to delays in many projects reaching their development objectives yet, although some emergency reconstruction projects have yielded results. Some projects - such as the ITF-funded Textbook Provision, Household Survey, and Community Infrastructure projects - have been successful while other projects are encountering implementation delays as a result o f a number o f factors, which can be classified in two categories: (i)issues related to Iraq's operating environment; and (ii) Bank-related issues. Implementation issues are further addressed in Section VI, while Box 3 summarizes some o f the key achievements so far associated with Bank-supportedprojects. 41. Operating environment issues comprise security; the policy and institutional environment; counterpart engagement; and weaknesses inthe banking system. > Lack of security affects Bank Group activities in a number o f ways: (i) the safety o f Iraqi officials and Iraqi Bank staff i s at constant risk; (ii) Bank Group staffs ability to visit Iraq i s constrained and when possible limited to secured areas in Baghdad or with high levels o f security arrangements or Kurdistan, offering very limited direct interaction with high officials; (iii) most project supervision missions and interactions with Iraqi counterparts are held outside the country; and (iv) IFC's ability to conduct its required field appraisal o f projects i s significantly hampered. Security concerns have affected the willingness o f international contractors and consultants to bid for projects in 12 Iraq, and have contributed to work stoppages and long delays in many instances. P Iraq 's policy and institutional environment has not been conducive to a smooth implementation o f the Bank Group's assistance program. Main bottlenecks include: (i) weakened capacity of ministries and implementing agencies as a result o f the large-scale departure o f talented professional staff; (ii) likewise, pre-existing private capacity to a large extent eroded by the exodus o f skilled professionals; (iii)lack o f familiarity with World Bank procedures and approaches to project management; (iv) a decision-making process hampered by an atmosphere o f uncertainty and by a history o f overly centralized processes; (v) lengthy procedural delays and inability or unwillingness to delegate functions within ministries; and (vi) fiequent changes in leadership leading to turnover in government counterparts at all levels. Furthermore, private sector development activities by IBRD and IFC are further constrained byincomplete legal and regulatory frameworks, weak enabling environment for businesses, limited financial capacity of project sponsors, insufficient understanding o f the requirements o f project finance, and unavailability o f financial statements and feasibility studies o fprojects. P Counterpart engagement has been uneven across ministries and implementing agencies. In addition, lack o f qualified human resources combined with frequent changes in ministry staff slow implementation and often setback progress. P Weaknesses in the banking system have contributed to delays in payments to local contractors, becoming a major impediment to project implementation. Box3. World Bank:Examplesof AssistanceResults (Asof December2008) Financed the printing and distribution o f more than 82 million textbooks, averaging approximately 11 textbooks per pupil, and exceeding the original objective o f distributing 69 millionbooks. Rehabilitated 133 schools and constructed 46 schools. Rehabilitated 8 hospital emergency units, 6 o f which have been officially handed over to MOH, supplied essential equipment and drugs, trained 48 doctors and 60 nurses in Advanced Trauma Life Support andtrained 22 doctors inEmergency Preparednessand Response. Completed 22 labor-intensive rural water supply subprojects in 14 governorates. Completed the first nationwide household income and expenditure survey since 1998, covering 17,000 households. Results will help Iraq establish a poverty line and make data-basedpolicy decisions. Conducted 22 workshops for 600 Iraqi officials to provide essential project implementation tools and helpIraqiofficials develop professional networks withregional neighbors. Carried out more than 60 workshops for over 1,200 Iraqi officials in economic management, public sector management and social safety nets. 42. Bank-relatedissuesrefer to the focus of Bank assistance; and Bankprocesses and fiduciary arrangements. P Bank assistance to Iraq has largely responded to the country's multiple reconstruction needs as identified in the 2003 Joint Needs Assessment carried out jointly with the United Nations (and later reiterated by the National Development 13 Strategy). The downside o f this approach i s that the Bank's assistance program may not have been suflciently selective, being to some extent driven by the highly charged and visible internationalfocus on Iraq at the time. While the Bank did not want to put `all its eggs in one basket', the Bank has been involved -both interms o f financial support and AAA - invirtually every sector inIraqwithout sufficiently clear engagement criteria. Implementation, as discussed further in Section VI proved difficult. As already identified in ISN2, the Bank could have better managed expectations and assumptions as results were lower than expectations given the weakened institutional capacity, and what ended up being a worsened security situation over the implementation period. A greater sense o f pragmatism and adaptation to the Iraqi context would have enhanced the impact o f the Bank's assistance efforts. > While procurement and disbursement procedures were adapted to Iraq's circumstances, the Project Management Teams still find Bank processes and fiduciary arrangements challenging, as highlighted duringthe consultation process. To respond, the Bank provides regular training on Bank procedures, such as financial management and procurement. The Bank also uses its most flexible procedures for emergency situations and addresses implementation issues as they arise, as well as through the CPPR mechanism. 43. Therefore, the key lessons for this ISN from past experience are: (i) planning for purposes, it should be assumed that progress in the security situation over the next two to three years would continue to be slow and incremental, with a significant risk o f reversal due to the outstanding sensitive political issues yet to be addressed; (ii) the mixed despite results obtained thus far in terms o f institution building in Iraq, it continues to be an imperative for the Bank's engagement with Iraq, and its delivery should be customized to the varied needs encountered and to the Bank's own ability to meet those needs; (iii) interest and engagement on the part o f ministries and implementing agencies should be a criterion for Bank support; (iv) more selectivity i s needed interms o f the ability to identify and seize opportunities as they arise to achieve concrete results; (v) the design o f new investment projects, analytical products, and institution-building activities should support reform efforts that do not overtax Iraq's existing capacity and that more clearly reflect the country's current political and security situation; and (vi) additional flexibility is needed in the design and programming o f Bank assistance, in the scope for experimentation with alternative implementation arrangements, and inthe way IFC conducts its field appraisal o f projects. v.THEWORLD BANK'SASSISTANCESTRATEGY UNDERTHE INTERIMSTRATEGYNOTE (FY09-FY11) 44. Iraq's unsettled political and security situation calls for an I S N that is flexible inboth design and implementation arrangements. Flexibility indesign means that this I S Nwill not be overly specific about individual activities, but it will rather contain a broad menu o f options to: (i) respond in a demand-driven way to Iraq's evolving needs and priorities, while taking into account the Bank's comparative advantages; and (ii) seize opportunities as they arise to achieve concrete results. Flexibility inimplementation means 14 that the Bank Group will explore ways to increase the effectiveness o f its activities and engage with, parliamentarians, civil society and the private sector. This includes experimenting with other implementation and monitoring arrangements such as third party execution, and direct transfers to NGOs, as discussed inSectionVI. 45. Given Iraq's difficult operating environment and the uncertainties that lie ahead, an I S N i s the appropriate strategy vehicle at this point in time. The period for this ISN is two and a half years, to be updated to a full Country Assistance Strategy broadly in line with the benchmarks for further engagement spelled out in Section VIII. The work program beyond FY09 would be kept up to date through Annual Business Planning, jointly with the Iraqi Government to ensure it meets the evolving needs o f the Government, as well as evolving opportunities for actual institutional and policy improvements. This would be complemented by periodic briefings to the Board on the status o f the program. 46. Reflecting these realities, and broadly consistent with the goals of the NDS and the ICI, this I S N will focus on three thematic areas of engagement: k Theme 1: Continuing to support ongoing reconstruction and socio-economic recovery efforts. Activities under this theme will support Government policies and public investments that will help restore and modernize Iraq's physical andhuman capital. k Theme 2: Improving governance and the management of public resources, including human, natural and financial. Activities under this theme aim to strengthen the institutional context wherein Government policies andpublic investmentstake place. k Theme 3:Supportinrr policies andinstitutionsthat promotebroad-based, private-sector- led wowth. Activities under this theme will support the transition to a more private- sector-oriented development process over the medium to long-term. This definition o f objectives will allow the Bank Group to focus its assistance in areas where it has a comparative advantage and where there i s strong demand from and engagement by the Iraqi counterparts, while at the same time building to the extent possible on work already initiated under the previous ISNs. The achievement o f these objectives will be supported by both analytical/advisory activities (AAA) and financial assistance, both through the ongoing portfolio, as well as new IBRD and IFC commitments. 47. The three thematic areas of engagement ("themes") are mutually reinforcing and, if successfully implemented, can help create a virtuous cycle of development. For example, a stronger public financial management (PFM) system (theme two) should accelerate the implementation and increase the success rate o f public investments (theme one), while improving the business environment wherein the private sector can flourish (theme three). At the same time, a thriving private sector (theme three) can strengthen the demand and add pressure for continuing institutional reform (theme two) and for more growth-oriented public investments (theme one). 15 48. The three themes are closely linked with the key goals of the International Compact with Iraq (ICI). The ISN theme of supporting ongoing reconstruction and socio-economic recovery efforts responds to the IC1 goals o f strengthening the energy sector and developing a stable, competitive and sustainable agriculture. The I S N theme o f improving the management o f public resources responds to the IC1 goals o f improving public financial management as well as strengthening institutions and improving governance. The ISN theme o f supporting policies and institutions that promote broad- based, private-sector-led growth responds to the IC1 goals o f implementing economic reform to create an enabling environment for private investments as a driver for broad- based growth. 49. The design of the I S N was informed by consultations held with the Iraqi authorities, the donor community and other stakeholders, including representatives from labor unions, women's organizations, and private sector as well as parliamentarians. A key conclusion o f the consultations with the Iraqi authorities was that the assistance to Iraq under the ISN should focus on areas o f Bank comparative advantage, while aligning with the most pressing priorities o f the country leading to sustained growth. They include: (i) public financial management; (ii)banking sector reform; (iii)support to planningprocesses and strategy design (not only at the central level, but also at the sectoral and provincial levels); (iv) SMEs development, and (v) energy and services (covering most o f the Bank's current portfolio in Iraq). The authorities also emphasized the need for (a) greater sectoral focus (with priority given to energy and agriculture, but also including municipalities and water); (b) a more comprehensive approach to capacity building (emphasis on institution building- including organizational issues, systems, processes and policies - rather than just training individuals); and (iii) strengthened donor coordination. Many o f these broad conclusions were echoed by the other stakeholders. Similarly, the donors singled out institution building support as the mainstay o f the Bank's work in Iraq. In this context, most donors agreed that public financial management and private sector development should be at the forefront o f the Bank Group assistance, and that the Bank's AAA and IFC advisory services work should also support the design o f sector strategies. 50. IBRD's work program in Iraq under this I S N will mainly include ongoing operations and advisory activities. A key goal o f this ISN i s to increase the development effectiveness o f the Bank's current assistance program in Iraq. This issue is tackled in detail insubsection V1.B below. 51. New activities under this I S N will be decided on the basis of clear criteria for selectivity - not interms of the sector cut, but identifying and seizing opportunities as they arise to achieve concrete results. Opportunities for engagement would not only be sought beyond the project level but also at the sector and national levels. Success in specific projects or sectors could trigger "demonstration effects" that could spread to other areas in a virtuous cycle. Utmost efforts will be made to producing high quality work in line with a demanding M I C client and makinguse o f the Bank's role as a knowledge Bank, with top expertise, and access to worldwide best practice while taking into account Iraq's specia1circumstances. 16 52. The proposed selectivity criteria are as follows: Support the Government's goals as stated inthe IC1and the NDS as well as the objectives o f this ISN. Particular attention will be given to activities supporting capacity strengthening o f government institutions and better use o f Iraq's own resources. Respondto the assistance needs of, and demand from, the Government o f Iraq, andfully take into account Iraq's specific socio-economic circumstances. Support reforms and/or sectors for which champions have been identified inthe relevant Government ministries or agencies and the private sector and that are committed to engage with the Bank Group and the donor community more broadly. Reflect the Bank Group comparative advantages vis-a-vis other donor agencies. A close working relationship with other donors is necessary as well as a clear division o f labor such as what has emerged with Public Financial Management. With regard to the ongoing portfolio, projects going particularly well will be considered for continuation or deepening. Projects that are experiencing delays andnot deliveringresults will be considered for restructuring or dropping. 53. The proposed themes should be seen as a useful organizing framework, and not as a straightjacket. First, some activities may contribute to more than one theme; they do not necessarily "belong" to any one theme, although their focus and contribution may be more strongly linked with a particular ISN objective. Second, one o f the Bank's comparative advantages i s its ability to undertake multi-sectoral or cross-sectoral work, which by design would straddle more than one I S N theme. Third, activities under all themes can potentially contribute to generating both short-term and longer-term results. 54. Under the proposed themes, the Bank Group would also provide support to activities which have a regional dimension. For example, under Theme 111, the Bank has also initiated work on regional trade logistics and facilitation involving Iraq, Jordan, Lebanon and Syria, in addition to discussions which are underway on a specific Iraq- Jordan border crossing project. IFC could also play a key role in mobilizing South-South capital flows for investment inIraq. 55. While activities launched in FY09 are clearly identified and underway, the programfor the outer years will be decided inconsultation with the Government on a yearly basis. Activities for FY10-11 will be confirmed through an Annual Business Planning (ABP) exercise conducted jointly with the Government o f Iraq. This approach should ensure that the activities and services provided by the Bank are relevant to the country needs and enhance ownership. However, on its side the Bank must ensure that its work in Iraq serves the institution's broader goals and meets institutional standards. The ABP process i s further discussed in subsection V1.C. At the same time, some potential activities for the outer years have been identified during the consultation process as part o f 17 a "menu" o f options for Bank assistance. A summary list o f the identified and potential activities launched over the course o f FY09 is provided inTable 2. This list i s not meant to be exhaustive. 18 Table 2. Ongoingor PlannedN09-LaunchedActivities" Theme 1.Continuing to support Theme 2. Improving the Theme 3. Supporting policiesand ongoingreconstructionand socio- managementof publicresources, institutionsthat promote longer- economic recovery efforts includinghuman, naturaland termbroad-based, private-sector- financial ledgrowth FinancialAssistance Education Sector ReformProject Public Financial Management Supplemental Financing for the (ITF,US$3m) Reform Project (ITF,US$18m) Emergency Private Sector Development Project (ITF,US$1Om) Community-Driven Activities PensionReform Project (ITF, Scaling-Up (SBPF) US$6m) BankRestructuring Project (ITF, US$lOm) 7 AAAJTA Poverty Assessment Fiscal Federalism and Private Sector Development Policy Decentralization Notes and TA Food Safety Net TA Kurdistan Civil Service Reform Investment Climate Assessment Social Safety Net Implementation NoteITA Support TA. TA for Economic and Social Sector Strategies and Priority Investment Programs EITI IFC(Investments andAdvisory Sei ices) andMIGA-FY09-FY11Acti~ ies Supporting financing o fprojects in key sectors. Mobilizingadditional financial resources. Support with PPP initiatives and SOE reforms. Development o f the fmancial sector and banking capacity building and restructuring. SME accessto finance. Improving Business Enabling Environment and Industry-Specific Policy Reforms. Supporting investment through MIGA's guarantee product. The table does not show operations and advisory activities launched before FY09 (shown inAnnex V) nor potential activities to be launched inthe outer years (FY10-11). 19 A. Theme I:Continuing to Support Ongoing Reconstructionand Socio-Economic Recovery Efforts 56. The Bank's portfolio provides support to reconstruction, socio-economic recovery and restoration of basic services in a wide range of sectors. Many o f the results to be achieved during the ISN period will be through the ongoing Bank- and ITF- financed portfolio (see discussion on Monitoring Framework, subsection V1.E). Most o f these activities fall under this theme, and include projects in health, education, water, environment, community-driven development scaling up and other basic infrastructure sectors. These areas are in line with the National Development Strategy to strengthen the foundations o f economic growth, improve quality o f life and strengthen service delivery at the community level. A priority for this I S N will be to ensure that the current program i s being implemented rapidly andwell (see discussion insubsection V1.B). 57. Ongoing or planned FY09-launched activities under this theme include: > Expanding government-citizen consultative development initiatives and providing local basic services. The Bank Group will explore with the authorities the opportunity for piloting and/or expanding community-driven development-type activities at the national and regional levels. This would benefit from (i) data collected during the two-year Country Social Analysis (CSA); (ii)subsequent field research findings; and (iii) lessons-learned from the the current Bank-fundedpilot inthe Kurdish north (see Box 4). k Financial support through an ITF-financed Education Sector Reform Project. The project will meet the sector needs identified by the government in (i) Development o f a National Education Strategy; (ii) Institutional Strengthening o f the Ministries of Education (Baghdad and KRG); (iii)Institutional Strengthening for Higher Education and Scientific Research; and (iv) Capacity Buildingfor Vocational Training andEducation. > Preparation o f a Poverty Assessment. Based on the recently-completed Iraq Household Socio-Economic Survey, the assessment will describe and analyze the poverty situation in Iraq and provide inputs to the preparation o f Iraq's first Poverty Reduction Strategy. The household survey contains gender- disaggregated data, allowing also for the analysis o f the gender dimension o f poverty and inequality inIraq. > Support to the implementation o f Iraq's Social Safety Net (SSN) Law (currently in draft) through a Social Safety Net Implementation Support TA. The Law is currently under deliberation at the Council o f Ministers, and expected to be passed soon. This work will support the transition from universal subsidies to targeted safety nets which will be efficient, equitable, and provide adequate protection to the poor and vulnerable. This i s expected to be programmatic and to continue through FY10. 20 Box 4. Community Service Delivery Initiative (CSDI) A consultative service delivery project has been piloted in Sulaimaniya governorate within Iraq with funding from the Post-Conflict Fund (US$1million). The purpose o f project is two-fold: 1) to further the state o f the Bank's knowledge on sustainable, consultative decision-malung inIraq, while at the same time providing tangible improvements in service delivery, and 2) to inaugurate a long term, sustainable and transparent utilization o f the country's resources. Nine months into implementation the project i s delivering solid results. Since January 2008 eight community action groups (CAGs) have been established and introduced to the CSDI within Sulaymaniya governorate. The CAGs are created in community-wide meetings using public nominations followed by elections. Each CAG numbers eight to W e e n persons, including women and youth representatives. W i t h a relatively short period of time the CAGs have accomplished much interms of training andjoint project planning with government officials. CAG members collect project ideas fiom provincial and local authorities, civic actors, and informal social and neighborhood networks. The projects selected tend to be within the areas o f water, electricity, youth and women. Several of the CAGs had already started planning for more projects, inaddition to the CSDI supported project in cooperation with district and local municipalities and the Provincial Council. CAGs had succeeded inraising funds fiom other sources than the CSDI program. These sources included government sources, the private sector and/or individual community members. The CSDI program is well perceived by all engaged parties, including the implementing agency, the local communities and the district and local municipalities. Creating sustainable CAGs will require time as the CAGs will need support over an extended period o f time to ensure that the methodology and structures are durable. 58. Possible additional activities under this theme would aim to strengthen Bank support to Iraq's reconstruction and recovery process, ultimately helping to strengthen the country's physical and human capital. First, a broader Community Sewice Delivery Project would provide a test o f local service delivery mechanisms usinga CDD approach which could be jointly financed by the Iraq Government and IBRD resources. Second, a Water Resources Management and Infrastructure Rehabilitation Program, currently under preparation with Bank assistance, could benefit from technical and financial support from the Bank ifrequested by the Government. Third, possible future activities in the electricity sector could include Partial Risk Guarantees for private investments in generation; technical assistance for implementation of an electricity sector structuring and organization strategy; and new lending in IBRD terms to support development of new generation plants. Fourth, the Ministry of Health has expressed interest in Bank-supported technical assistance on health systems/policies and financing. Fifth, a Poverty and Social Impact Analysis (PSIA) could be carried out to gauge the welfare impact o f recent economic reforms, particularly regarding petroleum price subsidies. Finally, analytical work on Gender and Conflict, focusing on labor markets and poverty, could be carried out on the basis of gender-disaggregated data from the Household Survey. 59. A critical element in ensuring success in the implementation of Theme Iis delivering on the current portfolio, particularly as a significant component o f Bank assistance under Theme Iconsists o f existing projects. 21 B. Theme 11:Improving Governance and the Management of Public Resources, Including Human, Natural and Financial 60. Activities under Theme I1 will focus on helping the Iraqi Government to develop the institutions, systems and processes needed to manage public services efficiently, effectively, transparently and accountably. An important component o f this will be strengthening the management o f Iraq's public resources. They will also support the efforts o f the Iraqi government to fight corruption, formulate consistent and realistic national and sectoral plans and strategies, successfully implement its public investment program, and strengthen its social protection system. Particular attention will be given under this objective to enhancing institutional capacity o f Iraq's public sector. These efforts are expected to generate results over the medium to longterm. 61. Ongoing or planned FY09-launched activities under this theme include: P Financial assistance through the ITF-financed Public Financial Management (PFM) Reform project. This project aims to improve allocation, execution, transparency and accountability in the mobilization and use o f all public resources. Cross-cutting reform o f the PFM will be addressed by the reform o f the national system, by strengthening budget formulation, execution and control, improving public financial reporting, strengthening public procurement anddeveloping capacity inPFM, bothat the central andthe governorate levels. P Programmatic assistance through a Fiscal Federalism and Decentralization A M . The objective o f this programmatic AAA is to examine various aspects o f intergovernmental management o f Iraq's petroleum value chain, including the current and suggested expenditure assignments as the basis for revenue distribution and management. It will provide short briefing notes and policy advice to the Iraqi Constitutional Review Committee and other policy makers in Iraq to familiarize them with international experiences and good practice in fiscal federalism, including revenue assignment and revenue sharing as they draft new laws and amend their Constitution. P Preparation o f an Iraq Kurdistan Civil Service Reform Note. The note will undertake a systemic assessment and evaluation of the capacity o f the civil service in the KRG, identify a set o f reform priorities, and propose a realistic set o freforms which could beundertakento address the identified shortcomings and make progress towards achieving intermediate outcomes. This will support the KRG Government's efforts in the development o f a comprehensive diagnostic o f the public administration, contribute to the formulation o f a public sector reform strategy, and continue policy dialogue with the government. P Support for pension reform through an ITF-financed Pension Reform Implementation Support TA. This i s a continuation o f work already started and will support implementation o f the recently enacted UnifiedPension Law. This i s expected to be programmatic and to continue through FY10. 22 62. The selection of additional activities under this theme will reflect a policy of "strategic opportunism". It will place public financial management (including public procurement) at its heart supplemented by other potential interventions that focus on specific entry points and issues that emerge over time where there i s potential for traction. These would target civil service reform, legal andjudicial reform and anti-corruption. The strategy i s based on an analysis o f donor activity as well as consideration o f the Bank's comparative advantage and in-country operating capability. 63. Public financial management will continue to feature prominently in the Bank's governancework. Apart from the PFM reform project mentioned earlier, it i s likely that the Iraq programwill focus on a number of other key areas. First, the Bank will also continue to support the Extractive Industries Transparency Initiative (EITI) to help the Government's efforts to translate its vast resources into benefits for the Iraqi people. Iraq has announced its intention to sign up to the EITI, and the Bank will provide support on request. Second, an understanding o f Iraq's P F M framework would not be complete without an assessment of revenue controls and collection, including the oil sector financial flows that feed into the Development Fund for Iraq and ultimately the State Budget. Third, the Bank could provide technical assistance to help clarzj, and streamline relations between the various oversight and control agencies (such as the Board of SupremeAudit), introducing greater transparency (including working with Parliament and the public) and improving qualitative evaluation methodologies including performance audits. Fourth, a Public Expenditure Review - building on the Public Expenditure and Institutional Assessment - could help the Government strengthen its ability to conduct pro- growth public expenditure policy, including at the sectoral level, where linkages with line ministries' service delivery capacity could be further explored. Fifth, for selected sectors, the Bank could provide assistance in the design of sectoral strategies and priority investmentprograms to better inform the national budget process. Finally, the Bank could support institutional assessments to help inform institution building activities for selected ministries and governmental agencies (see discussion in subsection V1.A). A framework for PFM support i s outlined inBox 5. Box 5. A Framework for Public Financial Management Support The main challenge facing the Government o f Iraq today is how to transform oil wealth into public goods and services and create the conditions for a diversified, sustainable economy. Given the context o f conflict andstateweakness the transformation needsnot only to be efficient and sustainable but also equitable. The budget is the framework within which this transformation takes place. The budget reflects the government's policy priorities and its ability to deliver services. The budget process could be notionally dividedinto two interwoven cycles - a policy cycle and a financial cycle (see chart). The first includes policy design, planning, implementation, evaluation and review. The second includes financial planning, budget design, approval and execution, auditing and reporting. Revenue and expenditure management tools ensure transparency, efficiency and controlthroughout the system. 23 There are many challenges along each o f those cycles and in ensuring that they are properly intertwined. While it i s not possible to address all those challenges at once, it is necessary to keep the whole cycle in sight when identifying areas where targeted intervention and assistancewill have the greatest impact. Ongoing World Bank engagements focus on certain aspects o f the process such as expenditure management, policy planning and the budget cycle at both national and sub-national levels. Additional areas for Bank engagement inthe context o f this framework include: (i) revenue management; and (ii)public expenditure policy. Revenue Management.Given Iraq's extreme level o f dependence on oil revenues, control by the Ministry o f Finance over oil revenues is critical. This includes a sound interaction with the Ministry o f Oil, the oil companies, and other agencies involved inthe hydrocarbon value chain. The Development Fund for Iraq (DFI) offers a simple yet effective mechanism for control, transparency and accountability o f oil revenues. It also ensures the Iraqi government's monopoly on oil exports. As the arrangement for DFI expires the Government o f Iraq may need advice and assistance in establishing a successor regime. A successor regime could go beyond standing up the Council of Financial Experts (COFE) to Replace the International Monitoring and Advisory Board (IAMB). It could include assistance in delineating and streamlining the relationship between the various actors along the hydrocarbon value chain - operating companies, State Oil Marketing Organization, Trade Bank o f Iraq, the Ministry o f Finance and others ina way that improves efficiency and removes opportunities for abuse. Public Expenditure Policy. The centerpiece o f Bank support on public expenditure policy (as opposed to public expenditure management, covered by the PEIA) would be a Public Expenditure Review (PER). Key areas for a PER would include: (i) refocusing public spending policies towards a more pro-growth andpro- poor orientation; (ii)reviewing and strengthening the design o f Iraq's Public Investment Program; and (iii) rationalizing and streamlining Iraq's complex and inefficient subsidy stmcture. ~~ ~~~ 64. Inthe justice sector, possible areas for Bank-supported TA would include: 0 Contract Enforcement to help develop programs aimed at improving effective resolution o f business disputes. This includes alternate dispute resolution mechanisms (ADR) within the overall framework o f improving investment climate for foreign and local businesses. 0 Court Administration through complementing efforts by other partners including the U.S Government by providing technical expertise in areas such as budgeting, 24 administrative and financial management, and procurement for the Higher Judicial Council. 0 Legal Aid Services for the Vulnerable through supporting the establishment o f legal aid schemes for the most vulnerable groups including widows, orphans, the unemployed and displaced citizens. These services, which could be provided by government or non-governmental organizations, or by a combination o f the two, would help these groups enforce and protect some o f their most essential socioeconomic rights - for example property, health and education rights. 65. The actual choice of additional activities under Theme I1 will require the application of the appropriate selectivity criteria discussed above. Possible additional areas include: (i) an indirect approach to anti-corruption support, seeking to strengthen the institutional arrangements for public accountability and transparency; and (ii) civil service reform, an area with hitherto limited Bank engagement due to the difficulty o f finding a suitable counterpart in Baghdad.'* As with other activities under the ISN, in order to be undertaken, support inthese additional areas would require the full backing and ownership o f the Government. The authorities have emphasized public financial management, revenue management, public expenditure policy, fiscal federalism and support to the formulation o f sectoral strategies as the main areas for Bank engagement under Theme 11. C.Theme 111:Supporting Policies and Institutions that PromoteBroad-Based, Private-Sector Led Growth 66. Activities under Theme I11would support an enabling policy environment for private sector investment, employment generation, and financial sector development inIraq. Byvirtue ofits dependence on oil, the Iraqi economy is dominatedbythe public sector. Iraq's currently weak environment for private-sector-led growth i s illustrated by the fact that it ranks low at 152 out o f 181 countries in Doing Business 2009. Iraq faces a multitude o f challenges as it seeks to mobilize oil rents to serve economic diversification andprivate sector growth. Manyo fthese challenges are commonto other economies inthe MENA region: Missing or incomplete reforms, policy uncertainty, and an uneven playing field for investors may all adversely shape the private sector's expectations o f returns and risks, depressing investment demand.l3 67. The security situation and a damaged or outdated infrastructure are key Iraq-specific factors deterring private-sector-led growth. Should recent security gains prove lasting, and further improvements in infrastructure as well as in the investment climate are achieved, foreign and local investors are likely to be attracted to Iraq's energy, telecommunications, constructiodreal estate and other key sectors. The Bank Group, includingIFC and MIGA, can play a central role in implementing private sector-support activities that prepare the ground for sustained private-sector-led growth in Iraq. However, There are other active donors in the civil service reform field, including the United Nations, Canada, Korea, the UnitedKingdom and, especially the United States. l3World Bank (2008). From Privilege to Competition: Policies and Institutions to Unlock Private-Led Growth in the Middle-East and North Africa. MENARegionFlagship Report. 25 given the longer-term nature o f this theme, only limitedresults would be sought inthis I S N period. 68. Bank assistance i s proposed to follow three parallel tracks: (i)supporting an enabling environment for private sector investment drawing on IBRD and IFC advisory services; (ii) supporting the restructuring of non-oil State-owned enterprises (SOE), and (iii) supporting PSD through prioritized IFC investments in key sectors. This three-track approach reflects the main policy priorities for private sector-led growth identified by the Iraqi authorities and representatives o f the private sector during the I S N consultations. Financial support will also be provided drawing on the wide range o f World Bank Group instruments. 69. The Bank Group will also support policies that would have a positive direct or an indirect impact on Iraq's business environment. This track would comprise policies that directly promote private sector development, SME development, as well as complementary macroeconomic and structural policies that indirectly contribute to increasing the role o f the private sector indrivingnon-oil growth inIraq. 70. Ongoing or planned FY09-launched activities under the first track include: k Financial assistance through the ITF-financed Bank Restructuring Project.l4 This project will support the restructuring o f the two main state-owned commercial banks and streamlining their role and activities in the financial sector-in parallel with ongoing efforts to strengthen the banking sector regulatory and supervisory framework inline with international standards-and would foster more efficient financial intermediation in the medium-term. The project would thus help inre-establishing the country's financial system, which i s necessary for the revival o f the private sector and economic recovery. k Financial assistance through the ITF-financed Emergency Private Sector Development Additional Financing. This additional financing will continue to support the original project goal o f providing capacity buildingto help lay the foundation for increased investment and growth. k Continuing advisory assistance through Private Sector Development Policy Notes, focusing primarily on issues related to business environment, institutions for private sector and SME development, as well as trade logistics (cross border). 71. Further analytical and advisory support under the first track would help frame the reform agenda for private sector development in Iraq going forward. An Investment Climate Assessment (ICA) could play a key role inthat regard. While there is a substantial amount o f written work on PSD issues in Iraq, it appears that a strategic, consolidated piece o f analytical work clearly setting out the mainpriorities i s not available. l4This project will support the financial andoperationalrestructuring oftwo state-owned banks, Rafidainand Rasheed. However, its ultimate goal is to support private-sector-led growth through improved financial services and increased access to finance. 26 An ICA's value would come mostly from its pullingtogether all available information on PSD in Iraq as well as complementing the insights generated by the Doing Business reports. Some o f the main PSD issues already identified during the consultation process include (i) capacity buildingfor the Investment Commission as well as the provincial-level Investment Promotion Agencies; (ii)general capacity building for the private sector, including the development o f the advisory, accounting, audit, export and other business services that firms (including reformed SOEs) will increasingly need from the private sector; (iii) improving the legal and regulatory framework to strengthen the business environment; and (iv) taking stock and providing advisory support with respect to industrial parks and border zones. A matching grant program, oriented towards export promotion, might also be an attractive option to channel inexpensive finance to small and medium enterprises. The collaboration between the Bank and IFC to implement this track is crucial to its success. 72. In addition to support directly geared towards improving the business environment, the Bank Group would also support complementary policies that can foster broad-based, private-sector-led growth and counterbalance "Dutch Disease" effects. These policies could be spelled out in a Country Economic Memorandum, which would help the Government review its overall policy framework (including macroeconomic policies) from the point o f view o f facilitating broad-based, private-sector- led growth and reducing the adverse impact o f oil wealth on other sectors. It would also provide inputs for an update o f the IC1and the NDS as well as for the Government's next Five-Year Plan. Additional support for the improvement of national socio-economic statistics would also help inform policymaking and provide critical information for potential investors. 73. The second track - support to restructuring non-oil SOEs - i s also essential for the transition towards a more private sector-oriented growth process. The sector as a whole represents an unsustainable drain on public resources. However, the hundreds o f state owned enterprises scattered across Iraq not only provide employment for tens o f thousands o fpeople, they also represent the accumulation o f decades o f investment, human and financial. While many are idle, some provide critical goods and services including, medicine, financial services and construction materials. The key to effective restructuring o f state owned enterprises i s for the state to act as a good corporate owner seeking greater efficiency in the delivery o f goods and serves and maximum return on investment. This approach is necessary to address two o f the main challenges posedby SOEs, their drain on public coffers andunfair competition with the private sector. 74. The third track will involve IFC support for viable projects in the private sector. As the situation stabilizes, IFC anticipates strong demand for funding o f projects in infrastructure, tourism, agribusiness, and manufacturing industries. IFC will continue to support the financial sector and enhance SMEs access to finance as well as supporting microfinance activities. IFC has been in continuous contact with Iraqi and foreign businesses and project sponsors exploring opportunities in the country and many are poised and ready once the environment improves. IFC could also play a key role in mobilizing South-South capital flows for investment inIraq. The MIGA guarantee product i s also available to support viable and eligible private sector investments. 27 75. Duringthe ISNconsultation process, the Iraqiauthorities expressed interestin Bank Group assistance to SOE restructuring. Some o f the key policy issues that could be addressed under this assistance include: (i) separation o f policy making and regulatory functions from the ownership and operations; (ii) establishment o f corporate governance and finance structures that ensures independent operationon commercial terms; (iii) design o f a regulatory framework that ensure smooth transition o f those enterprises to commercial operation, maintains a level playing filed for all actors regardless o f ownership, and promotes private public partnership (PPPs); and (iv) reorientation o f public investment in SOEs towards preparing them for independent operation under market conditions, rather than providing them with an open-ended subsidy. Likewise, IFC's range of advisory services' products can be selectively mobilized to help with this objective. 76. Critical to the implementation of these three tracks under Theme I11is the role of IFC. IFC will continue, security permitting, to ramp up activities and branch out to include new initiatives. IFC believes that the private sector in Iraq has tremendous potential under stable circumstances. Together with the Bank, IFC intends to be a partner with Iraq in its transition to a market-driven economy and from an oil-based, single commodity dependency to a more diversified, productive, job creating economy. 77. Iraq's membership inMIGA i s very recent, and MIGA's activities inIraq will follow a demand-driven orientation. MIGA's program will be aligned with the ongoing or planned Bank and IFC activities. Private investors have already shown interest in partnering with MIGA for investments inIraq. 78. The Bank Group would also be available to provide on-demand support to the oil and gas sector beyond revenue management issues. The Bank has played a limited role in the oil and gas sector, essentially maintaining a watching brief. It has also undertaken the preparation o f three studies including: (i) Fiscal System for a National Oil Company in Iraq; (ii) Aspects o f Petroleum Regulation and Management in Iraq; Federal and (iii) Impact o f Fiscal Parameters on Oil Revenue Volatility. Any further assistance the would respond to specific Government requests and build on the results o f the existing studies. Establishment o f the legal framework for the hydrocarbons sector would facilitate foreign investment inthat sector. VI.IMPLEMENTINGTHEI S N 79. Each of the two previous Bank strategies for I r a q responded to the context and circumstances of the time, and the present I S N also aims to be context-specific. Given the current situation and lessons learned based on implementation experience to date, this ISN proposes to continue some efforts and activities that have worked well or are now starting to yield results while proposing some new ideas to move forward in the Bank's engagement with Iraq. These are summarized inBox 6. 80. While strengthening public resource management and helping develop the private sector are medium-to-long term objectives, the ISN will also focus on achieving tangible results in a relatively short term. To deliver tangible results more 28 quickly and effectively, close attention will be paid on how this I S N will be implemented. This is the object o fthis Section. Box 6. What are we doingdifferently through this Strategy? e N o w that conditions are relatively more conducive, working more closely with Government on design and implementation o fthis strategy. e Strengthening Bank presence in Iraq and empowering the Baghdad office (portfolio management, policy dialogue and assistance in priority areas: PFM, PSD agenda). PFM specialist now based in Baghdad; PSD specialist to be based inBaghdad, supported through DFID. Country Manager to cover portfolio implementation locally, plus recruiting a portfolio assistantinBaghdad. e Introducing more flexibility through Annual Business Planning jointly with Government to focus on priorities with "champions" and compliant with selection criteria. e Introducingselection parameters for fiture activities. (Para 49). e Incorporating the "how to" as an integral part o fthe ISN. e Implementation challenges have been continually identified and addressed following reengagement with Iraq. Ths regular analysis and efforts to unblock bottlenecks will be continued and special efforts made to draw incorporate level support as part o f the CPPR process and when otherwise needed. e Expanded the use o f the FMA for IDAprojects as well as ITF. e Looking at institution building ina new way, with concrete proposals, andplacing greater emphasis on &IS within the strategy. Previously, this approach was through many workshops and institutional capacity building through PMT model. While these will be continued, this I S N also proposes an institutional assessment o f key ministries; and working with Government on strategies to transfer knowledge. e Building on PEIA and other good examples, working with other donors jointly on AAA and projects, such as PFM and Banking. e Proposing to expand use o f designated accounts, implicatedaccepting a higher level o f fiduciary risk. e A special focus on private sector development and increased engagement o f IFC and new engagement o f MIGA. 0 . Revitalizingdonor coordination efforts inBaghdad. 81. The Bank will engage in a number of actions in order to strengthen its effectiveness in Iraq. They include: (i) enhancing the effectiveness o f institution building and analytical and advisory activities; (ii) strengthening the implementation o f the current portfolio; (iii) introducing more flexibility inthe Bank's implementation arrangements and business processes, including through Annual Business Planning; and (iv) fostering donor coordination. A. Enhancingthe Effectiveness of InstitutionBuilding and Analytical and Advisory Activities 82. A key stabilizing factor for Iraq is to build public confidence in government institutions. The challenge is two-pronged: First, to improve Iraq's allocation and management o f its resources and revenue; and second, to ensure the effective delivery o f critical services and infrastructure to its communities. Addressing these challenges requires buildingeffective institutions and systems for service delivery andjob creation at the local and national levels. 29 83. A great deal of capacity building, technical assistance and training activities has been delivered with support from the donors, including from the Bank Group under the first and second ISNs. Despite the many efforts to build institutional capacity inIraq, the actual impact on the ground - while difficult to assess accurately - seems to have been limited, except in some specific cases (e.g., procurement and financial management; statistical capacity). Some of these efforts did not fully address the chief capacity issue in Iraq, which i s not so much at the individual level but rather relates to the Government's ability to effectively design and implement plans, strategies, and the state budget. The main drawbacks o f previous capacity building efforts include: (i) insufficient attention has been paid to the need to build or strengthen the basic core functions of governmental institutions; and (ii)excessive emphasis has been placed on training for second or even third-generation policy reform issues.l5 84. Institution building efforts going forward should fully take into account Iraq's particular circumstances. This means that institution building efforts would need to factor in: (i) the existing capacity in Iraq as well as existing government systems, by findingways to reinvigorate the strong elements or enhance the weaker elements o fwhat is already available; and (ii) the difficult operating environment and the security situation in Iraq. 85. Taking advantage of recent security improvements, this I S N will strive to implement a more comprehensive and tailored approach to institution building. While AAA and IFC advisory services will continue to be a vehicle for policy dialogue at the national and sectoral levels, the bulk of institution building activities under this ISN will focus on strengthening the core functions of key ministries and governmental organizations, with the ultimate goal of improving their service delivery capacity. The mainprinciples for the proposed approach to institutionbuildinginIraqunder this ISN are: Bank Group support will be demand-driven, responding to Government requests and priorities. It will be more finely tuned to specific and varied needs across ministries and other government agencies, while taking into account the beneficiaries' capacity andthe Bank's own comparative advantages. Bank Group support will be selective, seizing opportunities as they arise and focusing on those ministries and agencies with strong, demonstrated demand and engagement as well as high potential development impact and cross- sectoral synergies. Bank Group support will be delivered in two broad stages: First, the Bank will assist the relevant ministry or agency inconducting an institutional assessment, on the basis o f which an action planfor institution building would be devised. Second, the Bank will assist inthe implementation o f the resulting action plan. Bank Group assistance will be implemented in close collaboration with other donor-supported capacity buildingefforts inIraq. l5It is conceivable that some of the training may have facilitated further "brain drain", with officials leaving their jobs for other opportunities inthe wake o freceiving donor-supported training. 30 86. The proposedinstitutional assessments would provide a comprehensive review of the existing capacity as well as reform needs of selected Government institutions, including at the provincial or governorate level. These assessments would cover the selected institutions' mandate; overall policy and strategic framework; organizational structure; business systems and processes; human resources; and monitoring & evaluation systems. A key element o f such assessments i s the link between capacity development and outputs/results o f Ministry's activities. As noted above, the assessments would culminate in specific action plans for institution building, the implementation o f which could be assisted by the Bank. 87. Ultimately, this proposed approach for institution building aims to: (i) ensure that Iraqi public institutions and agencies are involved inthe institution-building process in its entirety; (ii)strengthen the necessary systems, processes, and human resources underpinning such institutions and agencies; and (iii) encouraging the Iraqi leadership to focus first and foremost on building institutional capacity in a comprehensive and sustainable manner. While the specific institutions for which this approach could be piloted would be identified in collaboration with the Government o f Iraq, the principles outlined above would help identify possible entry points for engagement on institution building. Possible early beneficiaries of this proposed approach could include: the Council o f Ministers Secretariat, the Ministry o f Finance; the Ministry o f Planning and Development Cooperation, the Prime Minister's Advisory Council; ministries in charge o f the delivery o f a key public services; or selected governorates. 88. Support to institution building inIraq under the I S Nwill draw on the findings of a recent evaluation16 by the Independent Evaluation Group (IEG) of the effectiveness of Economic and Sector Work (ESW) and technical assistance. Among the main factors enhancing effectiveness o f ESW and TA identified inthe IEG evaluation, the following are particularly pertinent to Iraq: (i) government receptivity to the proposed ESW/TA; (ii) collaboration with the client country, from inception to the design o f close recommendations; (iii) sustained follow-up beyond one-off dissemination; and (iv) better and rapid translation o f reports into national languages. Several of these factors were present in the delivery o f Bank TA to Iraq's Central Organization for Statistics and Information Technology (COSIT) under the Household Survey project and are also envisaged for the upcoming PensionReform TA (see Box 7). l6Independent Evaluation Group (2008). The World Bank's Economic and Sector Work and Technical Assistance, FYOO-06, discussed by CODE on July 9, 2008. 31 Box 7. Examplesof WorldBankInstitutionBuildingSupport:StatisticsandPensionReform A. Statistics Over the past few years, muchprogress was made instrengthening COSIT's capacity. A generation ago, Iraq was a regional leader in many areas including statistics. However, the years o f sanctions and a repressive regime stifled statistical capacity inIraq, which was also severely hampered by the post-2003 conflict. The Bank has been working very closely with COSIT under the Household Survey project, which has literally provided thousands o f person days o f training. The Bank worked very closely with COSIT inthe development o f the IHSES and encouraged it to try many innovative approaches. These included field- based data entry allowing early detection o f problems and an opportunity to correct them, use o f smart data entry software to detect possible errors, and use o fremote access software to compensate for mobility problems. Since then, COSIT has applied the techniques thus learned on other surveys. Most importantly, COSIT has improved in its ability to make use o f the data it collects. Through the Household Survey project, COSIT has begunto interact systematically with policy makers-- letting policy makers define the kind o f information needed. COSIT established a Data Analysis Unit comprised o f a group o f young, qualified staff who are now trained inSPSS and Stata and are increasingly called uponby policy-makers from the various ministries to provide analysis using IHSES data and their enhanced analytical skills. COSIT still has a long way to go. Macroeconomic data, for example, continues to be relatively weak. Nevertheless, COSIT actually seems stronger than many statistical agencies inthe region interms ofitsstaffswillingness to sharedataandeagernessto learn. B. PensionReform The Pension Reform Implementation Support Technical Assistant project incorporates key features that illustrate the I S N proposed approach to institution building. The project aims to build the capacity o f the National Board o f Pensions (NBP) to implement the provisions o f the Unified Pension Law, enacted in December 2007. Some o f the main features include: (i) centrality o f institutional building, through the development o f NBP guidelines, regulations, and human resource development activities; (ii) while the World Bank will provide key technical assistance inputs, the Government is committing to provide financial support to key investment areas; (iii) the World Bank team will also provide technical assistance support to elaborate the capital investment requirements for the NBP; (iv) the project will finance full-time Baghdad-based national staff, who will provide on-the-ground support for the work; (v) periodic (at least three times per year) reviews will be undertaken by the World Bankteam responsible for implementation, to ensure flexibility in adapting to changing circumstances; and (vi) support to Government for donor coordination inthe area o fpensionreform. 89. The Bank would also consider experimenting with alternative institution building approaches for selected ministries. One possibility is a Senior Executive Advisors' program, which would consist o f support to the Government in bringing Iraqi professionals on a performance-based, renewable contract basis to help conduct institutional assessments as well as to design and implement the action plan. This approach would initially be implemented on a pilot basis, providing initial lessons for possible expansion or mainstreaming. Another possibility i s to organize a World Bank fellowship program which would provide ongoing mentoring and support to qualified young Iraqi professionals who could assist ministry departments in the hands-on 32 implementation o f the technical elements o f the reform process. In some cases, a combination o f these two options will be considered. B. Strengtheningthe Implementation of the Current Portfolio 90. This ISN starts with US$928.8 millionworth of active projects inthe portfolio. As of December 2008, ITF projects are 75 percent contracted and 45 percent spent. IDA projects have been more recently made effective (end 2007)17 and virtually undisbursed, with about 10percent contracted. This will give the Bank the opportunity to contribute to development results in a broad range o f sectors, and most o f the results at the end o f this I S Nperiod will be from the existing portfolio. A central theme for this I S N i s to maximize the effectiveness of the existing projects. The current implementation model for Bank- supported projects i s based on project management teams (PMTs) established by the Government ministries. The PMT model, with its emphasis on country execution and on embedding implementation capacity within ministries, i s a distinctive feature o f the Bank's engagement with Iraq. The Bank's approach o f working through the Government rather thanexternalimplementing agencies for project executionhelpsstrengthen the institutional capacity o f key governmental institutions. However, it also affects the pace o f implementation. There i s a trade-off between timely disbursements on one side, and sustainability, institutionbuilding, and buildingfiduciary safeguards on the other. 91. While security has improved since 2007, the operating environment remains extremely difficult, delaying project implementation. Security issues affect portfolio implementation through a number o f channels: (i) discouraging contractors from bidding for contracts; (ii) delaying the delivery of goods, the progress o f civil works, and the inspection o f project sites; and (iii) preventing staff access to ministry offices and to project sites. To some extent, these risks are mitigated by the Iraqi execution o f projects andthe engagement o f local contractors. The broad geographical coverage o fthe projects, with subprojects often located in9 to 18 governorates, also reduces the impact o f localized instability. 92. The World Bank and Government held Country Portfolio Performance Reviews (CPPR) in 2006 and 2007 to identify issues that hamper project implementation, and to reach agreement on actions to be taken to address weaknesses and improve project performance. The main factors hampering project implementation identified duringthe 2007 CPPR exercise include: > Frequent changes in P M T staff, leading to overall diminished project management and fiduciary capacity; > Lengthy procedural and approval delays within line ministries; P Unevencollaborationbetweenthe Bank andlineministries; P Volatile securityconditions; > A lack o fliquidity inproject accounts; l7IDA projects were all initially delayed due to time it took Government to determine the legal process to ratify and make international loans effective. 33 > Inefficient domestic banking system, causing delays inIraqi Dinar payments; and > Currency fluctuations andprice escalations. 93. Several measures were taken to address these issues. > The Government appointed a senior staff member within the Ministry o f Finance to oversee the implementation of the World Bank program and facilitate actions to improve implementation. This working relationship now needs to be developed. > One project (Water Supply, Sanitation and Urban Development) was restructured inFebruary 2008 andthe Bank and Governmenthave agreedonrestructuring plans for two projects (Disabilities and Baghdad Water Supply and Sanitation). Options for restructuring the Third Emergency Education project i s under discussion with the authorities. Additional financing was provided to projects that have been performing well; or negatively impactedby exchange rate fluctuations. > The Bank initiated actions to improve local currency payments by: (i) processing withdrawal applications for Iraq on a priority basis; (ii) closely monitoring the flow o f funds through the entire chain o f intermediary banks; (iii) providing training and support on payment instructions; (iv) requesting commercial banking partners to establish a more effective network of correspondent banks within Iraq. Despite improvements, some projects continue to suffer from liquidity problems and an inefficient banking system. > The World Bank i s also piloting Designated Accounts (DA) in Iraq to advance project funds rather than the Bank making direct payments to individual contractors. DAs are typically used for projects in which there are no significant concerns about the recipient's ability to properly safeguard and account for the funds. Since the control environment in Iraq i s considered to be relatively weak, additional mitigating measures were put in place to manage incremental fiduciary risk. World Bank management approved the use o f a DA for two projects is currently evaluating their use. > The World Bank holds financial management and disbursement workshops and meetings to review World Bank guidelines and fiduciary requirements, analyze disbursement and financial management problems faced in the projects, anticorruption, introduce the designated account concept and its associated controls, and provide an opportunity for participants to analyze and address specific issues that affect project implementation. 94. Although the Iraq portfolio continues to face implementation delays, these measures have led to some significant improvements, and there are signs that portfolio implementation i s picking up. As o f December 2008, the number o f problem projects inthe portfolio has been reduced from 71 percent in FY07 to 50 percent inFY08 and at the time o f writing, stands at 47 percent inFY09. As o f the second quarter o f FY09, the disbursement ratio i s already at the same level as what it was for the whole year of FY08. And the pace o f commitments and disbursements, particularly for ITF projects, has substantially picked up since 2007. 34 95. The Government and Bank will continue to engage in a constructive dialogue to decide on the appropriate course of action to expedite project implementation. It will also continue to rely on the CPPR mechanism to monitor portfolio-wide performance. Other instruments include a focused implementation support mission as part o f the CPPR, quarterly portfolio status monitoring, and case by case project review to address potential or actual problem projects, for example, project restructuring or cancellation if problems are too deeply entrenched to be solved within a reasonable amount o f time. This dialogue will involve all relevant levels in the Iraqi Government, from implementers to decision- makers. Corporate level support within the Bank will be sought as needed to help unblock the particular bottlenecks o f the Iraq work context, such as accepting a higher level o f risk with appropriate mitigatingmeasures (such as the designated account pilot). 96. Given the security situation and the difficulties for the Bank teams to undertake field visits in Iraq, a full Country Financial Accountability Assessment (CFAA) has not been possible. An internal re ort entitled Financial Management Accountability Assessment based on a desk review` o f available reports and assessment issued by the IMF, the Bank and other donors, was prepared to inform the Bank project preparation and design. Although the Government o f Iraq, along with the Bank and other donors, has embarked on a number o f activities to strengthen the PFM system, the current levels o f fiduciary risks are very high and will remain as such for some time, until these PFM activities and reforms yield results in the medium term. A number o f other reports undertaken by the Bank and the other agencies have confirmed the above assessment and led to considering Iraq as one o f the "high risk-weak control environment countries" that require special attention. As such, the Bank is puttinginplace several mitigating measures (see Annex VII). 97. At the country and sector levels, the Bank would also continue the dialogue with the Government in the area of expenditure controls, through the following mechanisms: 9 At the sector level, the institutional assessments to be carried out with selected government institutions could also look at ways to enhance FM procedures and processes and strengthen the internal audit function. 9 At the country level, the Bank would continue with the dialogue with the Board of Supreme Audit, seeking ways to strengthen its capacity inplaying their role as the external auditor o f the government accounts. The Bank could also review the roles and work of government oversight agencies in charge o f expenditure controls and internal audit. l8"Financial Management Accountability Assessment". 35 98' The Bank willcontinue to rely on the PMT model as the basic Box 8. Recommendations on the PMTModel Use consistent job descriptions mechanism for project e Enhance authority (decision-making) o f PMT - . implementation in most cases. -, director Discussions with the authorities during Raise thresholds for contractlpayment approval by the I S N consultations put forward PMT. recommendations to improve PMTs, Key responsibilities inPMT should be filled by based on successful PMT models (see full-time dedicated staff to project implementation Consider providing incentives to PMT staff Box 8). During the ISN period, the PMT mustbe fully integratedwithin ministry Bank may also explore further the departments (physical & managerial) possibility o f supporting the PMT director to report project progress and establishment o f a semi-independent implementation issuesto minister implementation agency, staffed with Ensure project has needed liquidity highlyqualified Iraqiprofessionals. Optionally engage procurement agent, depending on needs o f particular ministry Provide additional training C.Introducing More Flexibility inImplementationArrangements and Business Processes 99. Until January 2009, Baghdad's security landscape consisted of a "red" and "green" zone, which greatly constrained Bank staff's ability to operate in-country as well the line ministries' ability to move around Baghdad. Currently, Bank Group staff are limited to working in secured areas in Baghdad or inKRG. Since most line ministries located outside the former international zone and their staff cannot always safely move throughout Baghdad, World Bank Group interaction with counterparts andprivate sector in Iraq i s severely constrained. With the Status of Forces Agreement (SOFA), the Iraqi authorities now have full responsibility over the former International Zone. At this stage, it is still uncertain what impact this will have on Bank staff or counterpart mobility in or around Baghdad. The Bank will continue to rely on a number o f implementation arrangements established under the previous ISNs. First, Bank task teams will engage local consultants to help PMTs implement projects. Second, the Bank will continue to engage a Fiduciary Monitoring Agency (FMA) to help task teams monitor physical implementation and PMT compliance with Bank procedures. Third, sector missions will continue to get support from the Amman-based Interim Office for Iraq. Finally, the Bank's Country Office in Baghdad will continue to be responsible for high-level policy dialogue with the Iraqi authorities and donors inBaghdad. Inaddition, the Country Office will be responsible for portfolio management. In order to enhance day-to-day support to portfolio implementation, the Bank i s exploring the possibility o f recruiting additional locally-hired professional Iraqis to liaise with the Government and PMTs who have greater mobility. International Bank Group staff travel to Iraq will be increasingly consideredbut will depend on security conditions, business needs andcost-effectiveness. 100. The Bank's policy on Rapid Response to Crises and Emergencies - OPBP 8.00, for which Iraq is eligible - allows for additional flexibility. In addition to streamlined processing procedures, OP/BP 8.00 allows for the application o f additional flexibility in support o f project implementation in a number o f ways: (i) possibility for limited the 36 recourse to Bank execution when counterpart capacity does not exist; (ii)increased financial flexibility through increased US$5 million limit on Project Preparation Facility (PPF) financing; (iii) the possibility to finance up to 40 percent of total granvcredit amount to retroactive financing; (iv) the possibility to finance against a positive list o f goods (and not just imports); (v) flexibility on eligibility of expenditures; and (vi) the application o f flexible procurement procedures. However, it i s likely that for some operations (e.g. particularly high fiduciary risk or those that are complex with a longer term gestation period) it will be more appropriate to go through the regular appraisal process, outside the OP/BP 8.00 framework, thus benefiting from additional peer reviews and providing for more ex ante risk mitigation and control measures, including on safeguards. 101. Further flexibility will need to be introduced in the implementation arrangements and business processes inorder to increase the Bank's responsiveness to the fluid situation on the ground in Iraq. Key elements o f this added flexibility would include: (i) Annual Business Planning (ABP) with the Government to determine each year's work program; (ii) asidefundsincontingencytobeabletorapidlyrespondtoGovernmentrequests setting as they arise; (iii)an expanded use o f designated accounts, if the pilots are deemed successful; and (iv) a focused effort to tap the Bank's top available expertise in order to respond quickly to Iraq's evolving needs. D.FosteringDonor Coordination 102. In recent years, the global aid architecture has become increasingly complex, with a growing proliferation of aid channels and a significant degree of fragmentation of assistance. The very complexity o f the aid architecture may reduce the effectiveness o f assistanceby increasing transaction costs o f aid for donors and recipients alike." The Paris Declaration on Aid Effectiveness - of which Iraq i s a signatory - i s an important step towards strengthening donor harmonization and alignment with recipient country development programs, as well as inreducing aid-related transaction costs. 103. Donor coordination in Iraq could be strengthened. Donor-financed capital investments are often not reflected in Iraq's national budget; investments are therefore often made without consideration o f associated recurrent costs to the national budget; and the efficiency o f the international community's assistance is weakened by uncoordinated parallel work activities. Donor coordination issues include conflicting goals and procedures as well as divergent approaches to development. Preliminary evidence suggests that considerable transaction costs may hamper the effectiveness of foreign aid to Iraq.20 Although the National Development Strategy outlined the mechanisms by which it would undertake donor coordination, these are yet to be successfully implemented. Sector working groups established under the NDS have now all but ceased to function. However, the Baghdad Coordinating Group, a meeting between Government and heads o f development agencies, does continue to convene occasionally in relation to the International Compact for Iraq. l9IDA (2007). Aid Architecture: An Ovewiew of theMain Trendsin Oflcial Development AssistanceFlows. Paper presented to the IDADeputies as part o f the IDA15 Replenishment discussions, February. *'Kanayan, S. (2007). "Proliferation and Fragmentation of Donor Aid to Iraq". Iraq's Ministry of Planning and Development Cooperation. 37 104. The International Compact with Iraq offers an opportunity for enhanced Government leadership in the donor coordination process. Donor coordination will become less o f a constraint as Iraq assumes this role by signaling its own needs and priorities. The Government o f Iraq has established an IC1 Secretariat, and sector working groups for economic and social development, public resource management, energy and agriculture. Whilst these working groups are currently internal to the Iraq Government and their function is slowly evolving, it i s the Government's intention that their mandate be expanded to include donor coordination in these focal areas. Furthermore, the Iraqi Government has recently endorsed the Paris Declaration on Aid Effectiveness, thereby facilitating a partnership with the donor community to harmonize legislation, institutional procedures, regulations andpractices inline with Paris Declarationprinciples. 105. The political and security contexts have prevented the Bank from playing a stronger coordinating role in Iraq. This may change as the Iraqi authorities - emerging from conflict -increase their focus on economic development. Within the context o f Iraq's leadership in donor coordination, andthe UN's strong local presence, the Bank will be part o f the effort to support and strengthen local donor coordination. 106. While Government leadership i s crucial to ensure that donor assistance are coordinated and aligned with national priorities, the Bank can contribute to this process ina number of ways. First, the Bank can together with other donors to map donor activity in key sectors or themes in Iraq. Box 9 provides an example o f such mapping in the crucial area o f governance. Second, the Bank can conductjoint work with other donors inthe delivery o f specific assistance to Iraq, as illustratedby the collaborationwith DFID in the support to the design of Iraq's PFM reform action plan. Third, the Bank can co- organize - together with the UN agencies - regular donor meetings in Baghdad. Finally, the Bank can support and actively participate inthe sector working groups organizedunder the ICI. E.MonitoringFramework 107. While neither the first or second I S N contained a monitoring framework, this I S N proposes to indicate program performance against a set of indicators aimed at reflecting key outcomes of the Bank assistance program in each important development area. Given the challenges faced in Iraq, these indicators have been kept simple and realistic. The indicators, presented in Annex I,reflect Iraq's current situation and the timeframe o f this ISN. 108. It is important to highlight the time dimension in the process of monitoring and evaluating results from the Bank Group assistance to Iraq. Many of the results expected to be achieved over the next two and a half years are expected to come from the current portfolio. On the other hand, much of the work being initiated by this ISN, focusing on PFM, private-sector-led growth and institution building, is expected to bear fruit over the mediumto long-term. 38 Box 9. Review of Donor Activity inGovernance Notwithstanding the difficulties of tracing all the development assistance that has been provided in the area of governance, it is clear that several donors have paid considerable attention to this important area of reform. As with other issues, the most prominent donor has been the United States, which has engaged heavily across all key governance issues. Other active donors have included the United Kingdom (principally through its development assistance agency, the Department for International Development (DFID)), the United Nations through a number of its agencies, especially the United Nations Development Program (UNDP), the European Commission, Japan, Canada, Sweden and Korea. Much o f t h ~ sassistance has been channeled through the ITF. Public Financial Management: The wide-ranging US assistance has included assistance to the General Administration for Taxes, provision o f advisory and training services on a variety o f issues including budget management (formulation and implementation), government accounting, financial controls, internal and external audit and procurement and the Iraq Financial Management Information System (IFMIS). The support has been provided through a number o f USG departments and agencies including State, Treasury, Defense and USAID. The UK has been a strong supporter of economic and financial management reform for several years, with a team o f resident PFM specialists and economists being based in Baghdad. These specialists have worked closely with their Bank and US colleagues in a number o f key areas including training events and workshops. The UNDP has supported Iraq's supreme audit institution, the Board o f Supreme Audit inits strategic planningandhumanresource management, and the Ministryo fPlanning. Anti-Corruption: The United Nations has taken the lead interms of organizing and hosting a number o f high-profile conferences o f key Go1 ministers and officials. These events have been supported by a broad range o f governance programs. The United States has tried a variety o f ways o f supporting anti-corruption efforts, including working with the Inspectors General and the Commission o f Integrity (COI). Sweden has provided funding through the International Reconstruction FundFacility for Iraq (IRFFI) for several general good governance and democracy programs. The Bank has brought together high-level officials from the COI, BSA and Inspectors General, together with the Chief Justice and other senior legal officials to discuss international approaches to fighting corruption including asset retrieval andbetter ways o f working together. Legal and Judicial Reform: The US continues to be the main donor supporter of legal and judicial reform, having provided large amounts o f assistanceto thejustice sector. This has included the rehabilitation o f courts, the restoration o f critical services at the Ministry o f Justice, support to the Iraq Property Claims Association and a number o f conferences on legal matters. I t currently has a major rule o f law program in operation. The UNhas also operated various rule o f law and human rights programs, and is updating and launching an Iraqi legal database, while Sweden has supported the education o f Iraqi judges, lawyers and prosecutors. Civil Service Reform: Although there i s not yet any coherent Government program of civil service reform, donors have been supporting institutional development at the federal, regional, governorate and local levels. These initiatives have taken place both inside and outside Iraq with support from a large group o f owners, including the Us, UK, UNDP, Sweden, Canada, Korea, Japan and, indirectly, the EC through Trust Fundarrangements. Decentralization: Decentralization has received substantial assistance from the UK and, especially, the US. The latter has operated a large Local Governance Program funded by USAID which has worked closely intwo phases with Iraqis inall 18 governorates typically through Provincial Reconstruction Teams (PRTs), to promote diverse and representative citizen participation inprovincial, municipal, and district government. Similarly, the UK financed a major Governorates Capacity Building Program. 109. The proposed indicators are organized according to the three themes of this I S N and were designed to reflect both new and ongoing Bank operations in Iraq, which are expected to influence development outcomes during this I S N period. Progress against these indicators will be assessed on an ongoing basis, through regular 39 consultations with the Iraqi authorities, the donor community, and key domestic stakeholders. F.Resources to Iraq 110. World Bank Group support available for Iraq under this I S N includes the ongoing portfolio, new advisory services and technical assistance, and the resources outlined below. The Government has indicated interest in IBRD borrowing. Given the recent deterioration in Iraq's fiscal situation brought about by declining oil prices, financial support from IBRD would help the Government implement much-needed public investments. World Bank Group resources - including IBRD, IFC and MIGA - could leverage other sources o f financing - including Iraq's own revenues, donor grants, and financial institutions - to support high-impact development activities and well-targeted capacity building. 111. Clear progress has been made since the last I S N towards the restoration of Iraq's creditworthiness. Under this ISN, an envelope of US$500 million can be committed for investments projects over FY09-11. The current situation i s that Iraq's income per capita i s well above the IDA operational cut-off and Iraq does not have access to IDA 15 resources. Iraq has witnessed gains in all the major components o f creditworthiness, although to varying degrees with the most significant advances made in the past twelve to eighteen months. Furthermore, these achievements have included the overall improvement in security and political conditions. These two factors, in turn, have facilitated the passage of critical legislative reforms, the satisfactory completion o f successive IMF programs, an eventual increase in oil production and exports, and a series o f generous debt reduction deals with many Paris Club, non-Paris Club and commercial creditors. Yet, Iraq's overall creditworthiness for non-concessional borrowing remains limited, in large part because o f the fragility o f the recent progress. Looking forward, a further improvement increditworthiness will depend on greater stabilization o f the security situation, a strengthening of the domestic political consensus around lasting compromises, and an easing o fregional political tensions.21 112. This ISNwill tap the following additionalfinancing sources: > Co-Financing or Parallel Financing Arrangements. The Bank will work with the Iraqi authorities to identify public investment projects where co-financing or parallel financing arrangements with the Iraqi Government could be set up. > Iraq Trust Fund. The limited resources that remain inthe IraqTrust Fund(ITF) will be used duringthe first year o f this I S Nperiod to support activities such as a P F M reform project, a Bank Restructuring project, a Pension Reform project, an Education Sector Reform project, and additional financing for the Emergency Private Sector Development project. > IFC and MIGA Support. Private sector-support activities under this ISN will benefit from IFC's financial products and services as well as from MIGA 21Annex VI presents a more detailed discussion o f Iraq's creditworthiness for IBRD financing. 40 guarantees. IFC and MIGA activities could also be complemented by IBRD guarantees. IFC can also mobilize additional funding for private sector investments through its syndication (B-loan) program. > State and Peace Building Fund (SPBF). Resources from the newly-created SPBF will be used to support institution building activities; the scaling-up o f community-driven activities initiated under the Post-Conflict Fund (PCF); and innovative approaches to delivering basic services. WI.RISKSANDMITIGATION 113. As was the case for the previous ISNs, this ISN is subject to substantial risks. The risks to the Bank program in Iraq can be grouped inthree categories: (i) and political security-related risks; (ii) economic performance-related risks; (iii) fiduciary risks; and (iv) risks that project-related implementation issues pose to the achievement of development results. 114. A first critical risk is that the ability of the Bank Group to engage with Iraq becomes constrained by a reversal of recent, hard-won security gains. Related to that, a deterioration inthe political environment either inIraq or inthe Region would also affect the Bank's ability to implement its assistance program. As such, engagement with Iraq can follow an adaptive approach topolitical and security issues. Under this approach, staffing in the Baghdad office, the frequency of missions to Iraq, and the launching and implementation o f specific activities would be tailored to the evolving political and security situation on the ground. In addition, the continuing reliance on the Interim Iraq IBRD Office in Amman would be an important tool for business continuity should the political and security situation take an unexpected turn for the worse. 115. A second critical risk is that Iraq's economic performance worsens inview of the impact of the current global financial crisis, making it more difficult to implement much-needed reforms. As discussed before, the main channel o f impact o f the crisis on the Iraqi economy would be through oil prices, export volumes and fiscal revenues. This risk could take the form o f a higher (iftemporary) fiscal deficit, renewed inflation, and a worsening current account. The change in the external and domestic economic environment could make it harder for the Iraqi Government to implement sensitive reforms such as the elimination of fuel price subsidies or the phasing out o f the Public Distribution System. To help mitigate these risks, the Bank Group will continue to work with the Iraqi Government in supporting the implementation of critical economic reforms - including helping address oil revenue volatility issues - through policy dialogue, analytical/advisory work, and financial support through operations such as the P F M Reform and the Bank Restructuring projects. 116. A third critical risk is that weaknesses in Iraq's institutional environment increase the exposure of the Bank's portfolio to fiduciary problems. To mitigate these risks, the Bank has adopted specific measures to reduce fiduciary risks, mitigate weaknesses in the control systems o f Iraqi agencies, and compensate for a difficult operating environment, which limits travel throughout Iraq. They include: a more 41 systematic approach to institution building based on ministry- or agency-specific institutional assessments and action plans; strengthening o f the Bank Baghdad Country Office; continuing use of a Fiduciary Monitoring Agent to supervise project implementation; and support to Iraq's action planto improve public financial management, both through the P F M Reform project and forthcoming analytical and advisory work. Rules and controls used in Bank-supported operations inIraq are outlined inAnnex VI. In addition, fiduciary risk issues are being addressed through the Bank's work with the control bodies in Iraq. The Bank has provided two ITF-financed workshops for the top management of Iraq's Board of Supreme Audit (BSA), dealing primarily with the application of risk-based external auditing. Representatives o f the Inspectors General have also participated in Bank workshops. The overall control environment within Iraq raises important fiduciary concerns, which are addressed through the proposed mitigation measures. 117. A fourth critical risk is the risk that the Bank's current portfolio does not achieve its intended development impact due to project implementation issues. While some issues, such as security, are beyond the Bank's control, portfolio risk will be mitigated through the measures discussed above. The need to ensure that concrete development results are achieved calls for a balanced approach toward fiduciary and reputational risks on the part o fthe Bank. WII.BENCHMARIGFORFURTHER ENGAGEMENT 118. The main benchmark for further engagement by the World Bank is a sustained improvement in the security situation. Other benchmarks, which will be monitored, are: 9 Political and institutional stability. Continued consolidation of political and institutional stability as demonstrated by events and as appraised by the international community. > Results achieved and improved portfolio performance. Bank support would be expected to continue or increase on demand commensurate with the extent to which Bank supported activities are achieving results as well as improvements inportfolio performance. 9 Commitment by relevant Government agencies to respective projects. Demonstratedcommitment through successful project implementation can pave the way for further engagement in the respective areas or sectors. On the other hand, should projects stall for an excessive amount o f time or not have traction with the involved Ministry,cancellation or not engaging inthose areas would be considered, even ifit is a priority sector. 9 Consolidation of a new National Strategy. As a MIC, Iraq does not need a Poverty Reduction Strategy as a platform for Bank assistance, although one is being developed. A full fledged updated national strategy, which provides prioritized and reasonably costed objectives for recovery and national development, 42 as jointly appraised by Fund and Bank staff, would provide a basis to align the Bank's program. 119. These benchmarks constitute a broad indicative framework on the basis of which further engagement - including the move to a full Country Assistance (or Partnership) Strategy - could be considered. In the event o f a deterioration in the security situation, lack o f progress inproject implementation, or very limited engagement by counterpart institutions, the World Bank Group would adjust its operations as needed. Inpractice, this would mean revising implementation schedules and planned activities, or inthe case of severe obstacles, a partial suspension of activities. Nevertheless, the World Bank Group would remain committed to staying engaged inIraqover the long-term, even inthe event that activities would needto be scaled down. 43 ANNEX I.MONITORING FRAMEWORK IRAQ FOR Overarching Goal: To help Iraq use its resources more effectively and transparently. I S N Thematic Areas of Outputsthe WBG expectstoinfluence[byJune 20111 Engagement Theme 1.Continuingto Output 1(Electricity): Increasedgeneration capacity of support ongoingreconstruction targeted plants for rehabilitationas measuredby: (a) andsocio-economicrecovery Dokanhydropower plant capacity increased from 65% efforts to at least 80%; (b) Derbandikhanhydropower plant capacity increased from 60% to a minimumof 75%. (c) Restorationo f original capacity (400 MW) ofUnits 2 and 3 at Hartha Plant). Output 2 (Education): Alleviation o f school building hazards and overcrowding inprimary and secondary schools as measuredby: (a) Rehabilitationo f at least 100schools; (b) Construction of at least 80 new schools. Output 3 (Water): Restore basic water supply, sanitation andurbanservices as measuredby: (a) 20 million cubic meters (MCM) per year o f additional water made available; (b) Construction of 400 kmof water pipeline intargeted areas. Output 4 (Roads): Improved capacity bothat the State Commission for Roads and Bridges and KRG-General Directorate for Roads and Bridges as measuredby the Emergency Roads RehabilitationProject including: (a) Development o f road asset management tools and their effective use; and (b) Increase inPercentageo f population intargeted villages with access to an all- weather road. Output 5 (Community Infrastructure): Undertaking measures to addressurgent rural water needs, as determined by: targeting improvement to about 111,000 hectaresof targeted irrigated areas. Theme 2. Improvingthe Output6 (PFM): Improve the implementation ofthe management of public budget as measuredby (a) Improvedreporting resources,includinghuman, framework inplace, leading to 30% reductionin naturalandfinancial unused, outstanding balances in SpendingUnits (baseline ID9.5 trillion at end-2007 (12 percent o f GDP); (b) Improvedbudget preparationas measured bycompletingat least one sector strategy inapilot sector. 44 Output7 (EITI): Supporting improvements in transparency o f oil revenue flows through the validation o f Iraq's EITIcandidacy. This requires meetingthe four EITIvalidation criteria, which include: (a) Government issuingunequivocal public statement o f its intentionto implement EITI; (b) Government committingto work with civil society and companies onEITIimplementation; (c) Government appointing a senior individual to lead onEITI implementation; and (d) Publishing, andmaking widely available, a costed Country Work Plan containing measurable targets, a timetable for implementation and an assessment o f capacity constraints (government, private sector and civil society). Output 8 (Pensions): (a) The public pension scheme maintains adequatebenefits, and is financially sustainable inthe long-term, as assessedby actuarial evaluation; (b) A database of contributors and beneficiaries, basedon individual records, i s fully populated, operational and regularlymaintained. Output 9: (Institution Building): Completion of an institutional needsassessment intwo pilot ministries. Theme 3. Supporting policies Output 11(State-owned banks): Satisfactory and institutions that promote implementation ofthe banking reformstrategy action longer-term broad-based, planas measuredby the BankingSector Reform private-sector-led growth Project including: (a) Improvedquality o f banking regulations; and (b) Improvedcorporate performance of the two state-owned banks Rafidain and Rasheed. Output 12 (Telecom): Improve telecommunications network as measuredby: National Telecommunications Networkrehabilitated, providing modem digital links between Baghdadand cities in 13 districts andbenefitinggovernment, businesses and individuals. Output 13 (PSD): Improve export capacity of private sector companies as measuredby: 100 f m s assistedto prepare export plans and access new sources of financing. Output 14 (Public-privatepartnership):Improve PPP framework to attract privateparticipation inkey projects. 45 ANNEX 11.DONOR ASSISTANCEMATRIX MAPPEDIC1PILLARSzz TO IC1Goals Ongoing(Active) New Commitments Commitments Expectedbetween UntilDecember31,2008 Jan~ary1,2009- AnalytidAdvisoryWork December 31,2010 Sponsor Amount Sponsor Expected 2007-08 I 2009-10 Committed Commitments (Actuals and (Planned) Expected) IC1CompactPillar: 4.1 PublicResourceManagement (PRM) 4.1.1 Oil Revenues: i WB Policy Papers: WB Support Establish a transparent : - Fiscal System for a : to EITI single petroleum I NatlOil Co. inIraq. account and an -Federal Aspects of equitable petroleum PetroleumRegulation ~ revenue sharing : & M g t inIraq. framework. : -Private Sector Participation inIraq Electricity Generation. -Oil and Gas Sector i ' reforms. 4.1.2 Public Financial : WB-ITF US$18m WB PolicyPapers: Management (PFM): . - ImprovingMgtof j Align PFM and : Public Distribution procurement system System (including i with sound i training) international practice. -Sub-National PFM ' ; (including workshops). -Decentralized PFM : ' -WB Fiscal Sustainability Note. -WB Public ; Expenditure & Institutional : Assessment (PEIA) -PFM training in ................................................................................................................................................................................................................................................................,KRG. DFID US$4m DFID US$lOm ..................... ................I .................................................................................................................................................................................................................................................................\ ' USAID.......................................................................................................................................... ................... US$26.2m USAID ........................................................................ US$6m us ............................................................................... , ............................................... ~ US$36.5m Embassy .............................................................................................................................................................. ........................................................ .................................................................................................................................. ........................................................................................ ............................ ....................................................................................................... ............................. ....................................................................... :......................................................... 22 Table indicates informationreceived from donors as o fNovember 2008 and may not reflect all donor activities inIraq. 23 All USG financing is based on a fiscal year running from October through September. 46 I IC1Goals Ongoing(Active) New Commitments Commitments Expectedbetween UntilDecember31,2008 January 1,2009- AnalytidAdvisoryWork December 31,2010 Sponsor Amount Sponsor I Expected 2007-08 I 2009-10 Committed Commitments (Actuals and I (Planned) Expected) CompactPillar: 4.2 StrengtheningInstitutions andImprovingGovernance 4.2.1 Engaging with US$136.3m USAID US$163.2m ................................................... USAID CivilSociety: *........................................................................................................................ *.................................................................................. us ................................................................................... ................................................................................ ~ t : US$5m Building a consensus .................................................................................................................. Embassy ~ ............................................................................................................ on economic reforms through dialogue and engagement with civil society. 4.2.2 Good WB-ITF .......................................................................................................................................................... j US$7m ............................................................................ ................................................................................. ............................................................................. Governance and Anti- .................. Japan ............................................ US$23m ! ............................................................................................................................................................................. : ~ i ~ ............................................................................................................................................................. corruption: i .................................................................................................................. ....................................................... USAID US$145m USAID US$106.5m ' : ................................................................................... ............................................................................ Develop a legal us : ~~ US$281.7m : US US$150m framework and build ............................................................................................................ ................................................................................................................................. ................................................................................................................................................................ Embassy I I Embassy I institutional capacity to : i deter corruption at all levels o f government. 4.2.3 CivilService : : -WBKurdistan Reform: Civil Service : Establisha civil i Note. service corps on the - Data Analysis ' principles o f : Training. professionalism, : -Household integrity and non- SurveyLocal j partisanship. i Supervisor Training. -Inter-Ministerial i Poverty Committee Workshop. -Living j Standards Measurement : Survey Course. -Utility Reform j ......... .................................................................................................................... Training. i ............................................................................................................................................................................................................................. ...................................................................................... DFID US$19.5m .......................... DFID .................................................................................................. US$8m .................................... ................................................................. ....................................................................... /. ...................................................................................................................................... Japan US$4m ..................................................................................................................................................................................................................................... .............................................................................................................................................................. *.................................... USAID . US$4.6m USAID US$4.6m ....................... ......,.................................................................... .................... ................................................. 47 IC1Goals Ongoing(Active) New Commitments 1 Commitments Expectedbetween UntilDecember 31,2008 January 1,2009- AnalytidAdvisoryWork December 31,20 10 Sponsor Amount Sponsor Expected 2007-08 2009-10 Committed Commitments (Actuals and (Planned) Expected) 4.3 Econo-&c Reform 4.3.1 Reforming USAID US$5.2m ' USAID US$0.6m IWB .......................... .................................................................................................... , .......................................... I..................................... ........................................... ............................................................................................................................... :WB................................. Subsidies: The " us ~ ~ j US$lO.Sm ~ government shall work Embassv : to phase out inefficient and inequitable universal subsidy programs while ensuring the protection o f the vulnerable. 4.3.2 Private Sector WB-ITF i US$65m WB/IFCReviewof : IFC Development and ; Build-Own-Operate Investment I Contracts : I C A Promotion: Create an ............................................................................................................. .......................................................................................................................................................................................................... : ................ ....................... ...................................................... ~ WB-IDA US$135m US$18m enabling environment ...................................................*....................................................................................................................& . DFID .............................................. ................................................................................................ : ............................................................... for private investment Japan 42,500m Yen andjob creation. .............................................................................................................. (Loan) ....................................................................................................................................... USAID US$18.4m USAID US$18.4m ................................................................................................................. ......................................................................................................................................................... us US$9.65m : Embassy 4.3.3 Financial Sector -WBFM& Restructuring: WB-ITF : US$lOm Disbursement Promote public savings Workshop for Project and investment and Financial Officers. , continue reformingthe -Local Budgeting & Financial Sector. FMTraining. -Independent External Auditors Workshop. -Auditand Accountability Workshop with Board o f Supreme Audit. -WB/IFC TA to Iraq's Financial ................................................. *........................................................................................................................................................ Sector. ............................................................................................................................... USAID US$14.3m ; USAID . US$1.7m 4.3.4 Regional and WB WB International USAID .................................................................................... US$2.8m ............................ USAID .................................................................................................................... US$2.8m ................................................................................................. ............................................................ Economic Integration: 4 > Reintegrate Iraq into 48 IC1Goals I Ongoing(Active) I New Commitments Commitments Expectedbetween UntilDecember 31,2008 January 1,2009- AnalytidAdvisoryWork December 31,20 10 Sponsor Amount Sponsor Expected 2007-08 2009-10 Committed Commitments (Actuals and (Planned) Expected) 4.4.1 DeliveringBasic : ........................................................ WB-ITF US$9.lm .................................................................................................................. .................................................................................. : .i..................................................................................................... .;........................................................ Services: Achieve .............................................................................................................................................................................................................................................. DFID US$40m DFID US$6m ' ..,................................................................................................. : ............................................................ significant progress in US US$492m I US US$140m 1 : meeting the 2015 UN Embassy j Embassy i Millennium ................................................................................................................... i................................................... * ............................................................................... ................................................................................................ ........................ .............................. Development Goals. 4.4.1.2Employment: .....USAID . US$379m : USAID US$132.5m :........................................................ Buildhumancapital US US$O.Sm ; necessaryto sustain ................................................................. Embassy ........................................................................................................................................................ ..................................... ~.. ................................................................................................... !......(.... .............................................. growth, reduce ..................................................... ........................................................ .................................................. ....................................................................................................................................................... ................,............................................................ unemployment by one / ........................................................................................................................ ......................................................................................................................................... ...................................................................................................... ' .......................................... half and double labor j ~ .................................................... *................................................................................................................................................................................................................................................................Q force participation for in the economy. .................................................................................................................. ....................................................................................................................................... i .............................................................................................. : ................................................... ~ 4.4.1.3 Education: ................................................. WB-ITF ................................................. US$66m Achieve significant ................................................... WB-IDA ..................................................... US$100m progress towards: i.Fullprimary completionby 2015 ii.Genderparityin education by 2015 iii.Improveadult literacy by 25% Increase education budget to 5% o f GDP. 4.4.1.4 Health: .................................................................................................................. WB-ITF US$33.7m ............................. ................................................................. ................................................................................................................................... ~ Improve health and ...................................................................................................................... ................................................... Japan US$77.35m : ~.................................................................................... ......................................................................................... ......................................................... nutrition o f all Iraqis as ~ US US$3m a cornerstone o f welfare ................................................................................................................................................................................................................................................................} Embassy and economic ................................................................................................ ........................... ........................ ,.................................................................................. ..................................................... development. * ................................................................. : 49 IC1Goals Ongoing(Active) New Commitments Commitments Expectedbetween UntilDecember31,2008 January 1,2009- AnalytidAdvisoryWork December 31,20 10 Sponsor Amount Sponsor Expected 2007-08 2009-10 Committed Commitments (Actuals and (Planned) I Expected) I 4.4.1.5 Environment, WB-ITF US$175m- , -WB Training on Water & Sanitation, i Water Envir & SOC ~ and Housing: i US$5m- I Safeguard Policies Preserve Iraq's Envir. I -WB Housing environment and ensure .............................................................................................................................................................................................. j Construction-& careful exploitation o f WB-IDA US$109.5m I i Finance Policv PaDer. * . ......................................................... its natural resources for : WB- the benefit o f all .................................................. PHRD :.................................................................................................................... ............................................................................................................................................................................................................................................. citizens, improve access I i : : Japan 2,800m Yen to housing by 15%, and j (Loan) improve access to water ............................................................................................................... ............................................................................................................................................................................. ................................................................. ......................................................... i L and sanitation by 113. 4.4.1.6 Gender: USAID , US$4m I USAID US$4m ! Reduce gender : discrimination, increase ........................................................................................................ .......,......................................... ...............*............................... ......................................................................................................................................................... participation i I WB Policy Paper: :...................................................... o f women inpublic life j -Womeninthe andlabor market, Economy: increase women's Microfinance for participation at the .................................................. ................................................................................................................................................................................................................................................................T : Women inIraq. decision making level and their involvement inthe democratic process, andprotect women fiom violence andmobilize their potential to promote peace. 4.4.2 Social Sector WB-ITF US$8m- WB-ITF US$6.2m - SOCProtection TA Reform and Social Workshop. Integration of Protection -Pension TA Vulnerable US$19.5m- Workshop. Populations: Protect Disabilities -WB workshops to the poor and vulnerable develop a PRS. groups from the fallout -WB Poverty o f change and ....................................................................................... ........................................................................ .................................. .................................................................. Assessment. ......................./................ .......,...... ............................................... reintegrate them into ................................................................................................................................................................................................................................................................· Japan US$21.7m ' society, community and ............................................... USAID .......................................................................................................................... US$37.2m ' USAID US$76.lm ...................................................................... , ................................................................................ ,................................................ economy. us US$216m ' US US$200m Address the needs o f Embassy Embassy IDPs, refugees and returnees while also enabling them to realize their potential as contributing members of the economic community. 50 I IC1Goals Ongoing(Active) New Commitments I Commitments UntilDecember 31,2008 Expectedbetween January 1,2009- AnalytidAdvisoryWork Committed Commitments (Actuals and I C 4.5 Energy (Oil; Gas, Electricity) 4.5.1 Oil and Gas: Japan 4,100m Yen Promulgation o f a ............................................................................................................................................. .....................i ........................................................................... (Loan) +............................................................................................... ....................................................... ~ hydrocarbon law and USAID ' US$6.lm . USAID US$6.lm ' improved oil and gas investmentproject execution. ! 4.5.2 Electricity: An WB-IDA US$164m : WE3 Workshop on aligned institutional and Private Participation legal framework inEnergy ......................... ............................ ............................................................................................................................................................................... ............................................................................................................................................. supporting efficient i ................................................................................................................... WB-ITF US$6m , ................................................... ..................................................... rehabilitation of the : Japan ; 27,100mYen power sector. ................................................................................................................................................................................................................................................................M (Loan) ........................................................................................................................................................................... USAID ; US$6m : USAID US$6m '................................................................................ ................................................................ us i .................................................................................. i US$12m i Embassy IC1Compact Pillar: 4.6 AgricultureandWater ManagementStrategy 4.6. Agriculture and WB-ITF ' US$46m : -WE3 Water Management Capacity Strategy: To support BldgTA & the development o fthe Training for agriculture sector to the Water achieve food security, Sector. generate employment, Japan 4,800m Yen 4,700m Yen diversify the economy (Loan) (Loan) after and preserve the 2010: countryside and to Irrigation create an enabling environment for a market oriented agricultural sector. Embassy .............................................................................................................................................................................................................................. "...................................................................................................................................................... USDA US$12.2m .......................................................................................... : ..... .................................................................................................................................................................................................................................................. I US$8.4m ....................... 51 ANNEX 111.MAINACHIEVEMENTSOFIRAQ'S REFORMEFFORTS PublicFinance,ResourceandDebtManagement 0 The final review of the second IMF SBA took place in October 2008 and was completed in December 2008. Completion o f this review triggered the third and final stage of Iraq's Paris Club debt reduction agreement, for a total debt reductionof 80 percent inNPV terms. 0 Year on year inflation was reduced to 5 percent by end-2007, compared with 65 percent end- 2006. The government continues to tackle inflation usingthe policy tools at its disposal. 0 Investment budget spending reached 55 percent of allocation in2007. 0 There has been significant progress made on increasing transparency of allocations to sub- national governments; the 2007 budget law, for the first time in Iraq's history enshrined rule basedallocations to the provinces and regions. 0 Inregulatingoilrevenuesandtheir distribution, the government hasestablished acommitteeof financial experts to: i. EnsuretightmonitoringofIraqioilrevenue; ii. Monitortheperformanceofexternalauditors; iii. Follow-uponDFIauditsand; iv. Monitor government spending. 0 The Ministryof Oil (MOO)now publishes a monthly report on their website and ina national newspaper, comprised of details on Iraq's oil exports. It also now advertises the methodology for crude oil sale contractingand details o fthe pricingmechanism. The Ministry of Finance (MoF) organized a number o f workshops concerning economic reform and transparency with attendees from MOO,MoPDC and CBI. 0 The system of oil measurement throughout all fields and facilities has been revised by MOO and the processof installing meteringbeganin2007. 0 By July 2008, bilateral agreements with all 18 Paris Club member countries, and agreements with 11Non-Paris Club creditors on terms comparable to Paris Club have been signed. About 97% of private sector debt has been settled. The Ministry of Agriculture i s reducing subsidies on agricultural products reform o f the land tenure systemi s under consideration. Rent on state-owned landhas also beenreduced by 50%. 0 A budget classification system was implemented based on the IMF's Government Finance Statistics (GFS) andU N ' s classification o f Function of Governments (COFOG) 0 A unit has been established within the Prime Minister's office to oversee the administrative reform agenda and address issues such as the size and structure o f government and human resource policy. 0 Financing to private entrepreneurs as well as SMEs has been improved, and concessionary financing has become available from both state-owned banks. 0 The Government o f Iraq passed a law prohibiting regions and provinces from erecting barriers impedingthe free flow of goods within Iraq. Transparency & Anti-Corruption 0 The Joint Board for Combating Administrative Corruption was established by the Presidential Order under the chairmanship o f the Secretary General Council of Ministers to ensure efficiency, integrity,and transparency inthe implementation of the Governments economic and social policies and to enable coordination among anti-corruption bodies represented on the Board. 0 The Government launched a national initiative geared at combating administrative corruption ina conferenceheldbythePrimeMinister inJanuary2008. An International Anti-Comption Conference was held in Baghdad on 17-18 March 2008 which culminatedinthe BaghdadDeclarationon Corruption. 52 e The Government ratified and implemented the UN Convention on Anti-Cormption in April 2008 (UNCAC). e The Government has committed to join the Extractive Industries Transparency Initiative (EITI) andhaswritten to EITIto expressthis commitment. Social andHuman Development A categorical targetingbased social safety net (SSN) has been established to facilitate subsidy reform; it consists o f cash benefits (US$lOO per household), microfinance opportunities, and employment services. One million households are registered in this program, with 850,000 families currently receiving payment. This system has been automated in Baghdad by the Ministry of Labor and Social Affairs (MoLSA) and will be automated in several other locations. In2007 MoLSA provided vocational training to 8,500 Iraqis, the majority of which were in governorates outside of Baghdad. A US$lOO minimumwage permonthhas beenimplementedinthe public sector. In2007 the Government established the Department of non-formal education and the budget for education was increased from 3% of GDP in2006 to 5% in2008. At the end of 2007 a public education and consultationprogram to ensure public support for subsidyreformwas developed. Child allowance has been expanded, conditional upon primary school attendance o f children in low-income families includedunder the SSN program. The Iraq Housing Fund has been restructured to include support for refugees, internally displaced persons (IDPs) and other disadvantaged social categories. Loans have also been disbursed to approximately 10,000 poor and low income government-employee households. A Commission for Women's Affairs was established within the office of the Prime Minister and an annual budget has been allocated to this end. 53 ANNEX IV: SUMMARY OF ITFAND IDA FINANCED PROJECTS December 31,2008 Grant Signing/ Project Amount Implementing Effectiveness Project ObjectiveandDescription: (US% m) Agency Date ITF First Capacity Build the capacity of the Iraqi authorities Building 2.5 World Bank 2/14/04 to enable them to define, prioritize, and implement development projects. Second Build on the First Capacity Building Capacity 7.0 World Bank 12/6/04 project to help authorities introduce Building reforms to lead to a diversified and market-driveneconomy. Provide 69 million textbooks to improve Textbook Ministryof learning conditions in primary and Provision 38.8 Education 5/15/04 secondary schools throughout Iraq. Build institutional capacity of the ministry. School Alleviate school building hazards and Rehabilitation Ministry of overcrowding in primary and secondary and 60.0 Education 10114/04 schools through construction of new Construction schools and the major rehabilitation of existing schools. Marshland Construct about 30 new schools in the School 6.0 Ministry of 10/12/06 marshlands area of Basra, Nasiriyah and Construction Education Missan, emphasizing local stakeholder involvement. Water Supply, Ministryof Restore basic water supply and sanitation Sanitation, and Municipalities services and urban services in the poorest Urban 110.0 andPublic 12/8/04 areas of the country, choosing subprojects Reconstruction Works that will havehigh impact. Baghdad Mayoralty of Restore basic water supply and sanitation Water Supply 65.0 Baghdad 1218104 services for Baghdad and provide capacity building to the Mayoralty of Baghdad. Community Ministry of Undertake a flexible program of labor- Infrastructure 20.0 Water 12118/04 intensive civil works, generating near-term Rehabilitation Resources employment while improving rural irrigation, drainage, and water supply. Community Expand the impact of the Community Infrastructure Ministry of Infrastructure Rehabilitation Project, by Rehabilitation 26.0 Water 07101108 rehabilitating additional sites, enhancing (Additional Resources community participation, and Financing) strengthening the regional directorates of the ministry. Improve emergency services in 10 Health Ministryof hospitals (to ensure at least one well- Rehabilitation 25.0 Health 12/4/04 equipped emergencyunitper governorate), and provide 12 hospitals with basic medical equipment andpharmaceuticals. 54 I Grant Signing1 Project Amount Implementing Effectiveness ProjectObjective and Description: (US%m) Agency Date Improve services to the disabled by helping Iraq develop a comprehensive Ministry of policy and legal framework for disabilities, Disabilities 19.5 Health 11/23/05 strengthen Government-NGO partnerships, and reconstruct 11 rehabilitationcenters. ~ ~ Ministryof Regional Health of To assist the KRG establish rapid, Emergency 8.7 Kurdistan 07/01/08 coordinated and effective emergency Health Regional responseservices to health emergencies. Response Government ~ ~ Ministryof Lay the foundation for the development of Planning and the private and financial sectors by Private Sector 65.0 I- 12/6/04 installing essential communications Development Ministryof Telecom- infrastructure and addressing selected munication priorities ininstitution building. ~ Finance technical assistance to upgrade technical skills in operations, maintenance Electricity and of power utilities, in coordination with 6.0 Ministryof 4/4/01 Reconstruction Electricity the US$124 million IDA project that aims to restore the base loadgeneration capacity of the Harthapower station. ~ Strengthen key institutional and regulatory functions of the ministry to enable it to Environment Ministry of undertake policy analysis, formulate Management 5.0 Environment 12120106 regulations, monitor environmental Project quality, promote environmental awareness, and conduct technical studies. Finance a comprehensive household income and expenditure survey and data Ministry of analysis, to enable the Government to 5.5 Planning and 7/24/06 establish a poverty line, target social Household KRG assistance to the neediest, and make Survey and informed policy decisions. Policies for Poverty Provide the technical support needed for Reduction Iraq to undertake modem data collection and analysis for the companion ITF grant 3.6 World Bank 5131/06 implemented by the Ministry of Planning Center of Statistics and the KRG Statistics Unit. Assist Iraq to implement modem management and information systems to Ministry of improve the delivery of social safety nets, Social 8.0 Labor and 6/6/2006 and enhance the impact of its social safety Protection Social Affairs net andpensionsprograms. Total 481.6 55 IDA Alleviate school overcrowding through the Third 100.0 Ministryof construction of 82 new schools in 15 Education 10/15/2007 governorates, benefiting 57,000. The Emergency construction program will be Education supplemented by technical assistance to lay the groundwork for comprehensive education reform ~ Emergency Assist in the rehabilitation of highways and village access roads in central and Road Ministryof Rehabilitation 135.0 Construction lO/l5/2007 Southern Iraq. Three floating bridges will also be replaced with permanent structures. Part of Iraq's overall electricity Master plan and will provide electricity primarily Dokan and Kurdistan 40.0 Regional Derbandikhan in the Kurdistan region but also nationally Government- through its connection to the national grid. Hydropower 10/30/2007 Ministryof An estimated 490,000 households will Electricity benefit directly as well as a number of industries. Aims to restore the baseload generating Emergency Ministryof capacity o f the Hartha power plant and Electricity 124.0 Electricity 12/17/2007 build capacity at the Ministry of Electricity. Improve the quantity and quality of water availability in 4 selected high priority Emergency Ministryof governorates through rehabilitation and Water Supply 109.5 Water 10/15/2008 upgrading of water supply and distribution Resources infrastructure. Engage with the government on developing a sustainable policy framework for the water sector. Total 508.5 Grand Total 990.1 56 ANNEXV: LISTOFANALYTICALAND ADVISORYACTIVITIES 1. PolicyPapers Oil and Gas Sector Reform Background Paper - Jun. 2004 The Fiscal System for a National Oil Company inIraq Mar. 2007 FederalAspects o fPetroleum Regulation and Management inIraq Mar.2007 Private Sector Particiuation inIraa ElectricitvGeneration Mav 2007 I OilandGas Sector PolicvNote I Feb. 2008 I 1 Financial Sector Notes I Am. 2005 1 I T .essnns for Trao Iraq's Evolving Inter-Governmental Structures: Implication for Local Service I I Deliverv May2005 I Public Expenditure and Institutional Assessment Social ProtectionPolicv (executive summarv available inArabic) I Mav2005 Pension SystemReform I Jun. 2006 Countrv Social Analvsis I Jun. 2008 I IraqWater Resources Assistance Strategy I Jun.2006 I 57 2. Technical Assistance and Training Programs IEnvironment and Social Safeguard Policies * Mar./AF2FO4/ Mar.. 2907 - -_. . -- - Project Management: Procurement and Financial Management (ongoing) * 2004-2008 Procurement and Financial Management * Apr. 2005 Workshop on Master ImplementationManual, comprising project management, procurement and financial management * Jan. 2006 Training Workshop on Public Procurement * Jul. 2006 Financial Management and Disbursement Workshop for Project Financial Officers * Jun./Sep./Oct. 2007 NationalProcurement Technical Assistance (ongoing) * Dee. 2007 State-Owned Enterprises Apr./May 2004 Macroeconomics inTransition Countries (Granada, Spain) Jul./Aug. 2004 Infrastructure Regulations* Jul./Aug. 2004 Formulationo f the National Development Strategy Sep. 2004 Statistical CapacityNeeds Assessment Workshop * Dec. 2004 Iraqi Labor Markets (ILO-led, Bank Staff participation) Dec. 2004 Regional Capacity Building Program inGender and Economic Policy, Statistics May 2005 Sector Reform, Restructuring, Public Private Partnerships, and Economic Regulation May 2005 I 58 International Trade Statistics Jul. 2005 Modem Methods inSurvey Fieldwork * Jan. 2006 Budget andPlanning Capacity for the Judiciary * Mar.2006 1 Iraa'sFederalism (iointlv with UNAMI) Am. 2006 1 v , Anti-Corruution * I Jul. 2006 Emergency PreparednessTraining * Aug. 2006 Policy Dialogue on Constitutionalism * Nov. 2006 Improving the Management o f the Public Distribution System - FoodRationing* Mar./Jun./Sep. 2007 UtilityReform May 2007 Macroeconomic Modeling and Forecasting * Mar.2007 Capacity Building o f the Iraq Higher Judicial Council* Sep. 2007 1 Living StandardsMeasurement Survev Course * I Jan. 2008 I I Dec. 2004 I IRoads Network Planning and Management (Birmingham) IApr. May 2004 I 59 1I UrbanManagement. Resettlement andReconciliation inDost-war Lebanon I Mav/Jun. 2004 ComDrehensive Citv Develonment Planning * I Jun./Jul. 2006 1 II TelecommunicationsPolicv * Telecommunications Sector Reform * I Mar.2004 I .Tun. 2007 1I Water and Sanitation Study Tour* I Jun. 2005 IraqWater Resources Assistance Strategy Workshop* I May2006 * ITF-fundedactivities. 60 ANNEX VI. IRAQ'S CREDITWORTHINESSFORIBRD LENDING Creditworthiness for IBRD lending is assessed by evaluating the sovereign's ability and willingness to repay the IBRD on time and in full over the foreseeable future. The major components o f this assessment include an evaluation of: political and security risks, macroeconomic risks with a particular emphasis on fiscal balances, balance o f payment risks and monetary challenges, financial sector risks, structural economic strengths and weaknesses and external debt sustainability. At the time of the second I S N in the Fall of 2005, Iraq was assessed to be only marginally credit worthy for IBRD lending. Risks were identified to be exceptionally high in all major components o f creditworthiness. Yet, the ISN agreed that ifthe available ITF and IDA resources were fully committed under the second ISN and if critical progress towards IBRD creditworthiness was achieved, a continuum o f IBRDresources of up to US$500 million could be provided. Inthe event, IDA and ITF resources were sufficient to finance the Bank's program in Iraq during the ISN implementationperiod, and IBRD lending was not contemplated. Clear progress has been made since the last I S N towards the restoration of Iraq's creditworthiness. Under this ISN, an envelope of US$500 million can be committed for investments projects over FYO9-11. The current situation i s that Iraq's income per capita i s well above the IDA operational cut-off and Iraq does not have access to IDA 15 resources Iraq has witnessed gains in all the major components o f creditworthiness, although to varying degrees with the most significant advances made in the past twelve to eighteen months. These achievements have included the overall improvement in security and political conditions. These two factors, in turn, have facilitated the passage o f critical legislative reforms, the satisfactory completion o f successive IMF programs, an eventual increase in oil production and exports, and a series o f generous debt reduction deals with many Paris Club, non-Paris Club and commercial creditors. Yet, Iraq's overall creditworthiness for non concessional borrowing remains limited, in large part because of the fragility of the recent progress. First, with regard to security and politics, new shocks and reversals are likely, and it may take years before stability i s fully entrenched. Second, Iraq's economy remains extremely dependent on its hydrocarbons sector, which i s very exposed to price and volume shocks. Third, structural reforms are only in their infancy. Finally, several GCC countries have yet to enter into formal negotiations on Iraq's debt obligations and would need to effectively conclude very generous debt reduction deals in line with the Paris Club arrangement. Overall, numerous risks cloud Iraq's medium and long-term capacity, and possibly willingness, to honor current and future financial obligations. Looking forward, a further improvement in creditworthiness will depend on greater stabilization of the security situation, a strengthening of the domestic political consensus around lasting compromises, and an easing of regional political tensions. 61 ANNEXVI:FIDUCIARY CONTROLSFOR PROJECTSFINANCED THROUGHTHE WORLD BANK DuringProject Preparation: The implementing agency establishes a project management team (PMT) staffed by qualified employees fiom the recipient agency and assisted as needed by consultants. The Bank and implementing agency agree on detailed terms o f reference for P M T staff and a matrix o froles and responsibilities. 0The PMT includes a qualified and experienced accountant, financial officer, and procurement specialist, and the Bank trains and supports the P M T in modern procurement, financial management, andproject management techniques. 0The Bank and implementing agency define a clear flow o f funds and information. 0The PMT is required to maintain accounting and financial monitoring systems for the project, and retain project records and supporting documents for review by Bank staff or their delegates and the appointed auditor. DuringProject Implementation: 0A project-launch workshop takes place at the start o feachproject, to ensure the PMT is prepared for project implementation. The Bank applies low thresholds for prior Bankreview of contracts. 0Bank procurement and financial management staff in Baghdad, Amman, and Beirut actively support PMTs and review procurement documents. Together with the Bank task team, they ensure on-the-job training and support are available to P M T staff throughout the life o f the project. 0Task teams conduct frequent project supervision missions, four times per year. Due to the security and logistical constraints o f travel for both Bank and P M T staff, supervision missions are usually conducted at the Interim Office for Iraq in Amman. Bank teams conduct workshops with PMT staff to address project-specific procurement and financial management issues and to simultaneously build P M T capacity duringeach supervision mission. 0The Bank typically disburses through direct payment to contractors and suppliers. To help overcome deficiencies in the domestic banking system that have caused severe delays inlocal currency payments to small contractors, the Bank is pilotingthe use o f a "designated account" in two ITF-financed projects. (A designated account is a revolving account, which i s provided an advance fiom the trust fund.) Full documentationi s required for both disbursement methods. Bank task teams employ Iraqi consultants outside the former International Zone, who work from their homes and the ministries, to help supervise project implementation, visiting project sites and supporting the PMT responsible for project implementation on a constant basis. 0The Bank also engages a local firm o f about 24 professional consultants as a Fiduciary Monitoring Agent (FMA), to help monitor the physical implementation o f projects, and the implementing agency's compliance with procurement and financial management requirements. The FMA reports issues to the Bank as they arise, to ensure the teams 62 can follow up on any implementation concerns. The FMA also provides monthly reports that document the physical progress o f projects, report findings, and make recommendations for follow-up actions. Reports include digital photos, which provide evidence o f the delivery o f goods, as well as the quality and progress o f the work o f contractors. Each project is subject to an external audit that i s carried out by an independent auditor who is acceptable to the Bank and has international experience, in accordance with terms o f reference acceptable to the Bank. The Bank monitors compliance with the audit requirement for each project. 0The ITF is also subject to annual external audits by the Bank's auditor. Audit reports for 2005, 2006, and 2007, which were unqualified, have been provided to donors together with management letters. 0All Bank-administered trust funds are subject to the single audit process that enables senior Bank management to assert that funds entrusted to the Bank are administered under an appropriate control framework. Task teams confirm that trust fund disbursements have been made in accordance with the terms o f trust fund agreements and that effective internal control systems have been maintained by the business unit responsible for the trust fund. 0The Bank completed an internal audit o f its Iraq program in June 2008. The audit focused on management's handling o f the special risks inherent in Iraq, and the effectiveness o f key financial and administrative controls. While the study recommended closer management o f staff turnover, and increased oversight o f expenditures, and procurement and disbursement processes, the audit also noted several good practices, including the use o f an FMAand local consultants to assist with supervision, the on-going provision o f training to PMTs, and the careful management o f travel and the budget. The donors to IFWFI commissioned an independent review o f the projects financed by the Bank and UN Iraq Trust Funds. Preliminary results noted that, despite extreme security conditions: (i) most projects showed a meaningful impact and were making progress toward their development objectives; and (ii) projects are strengthening some Government capacity and contributing to medium-term service delivery. For Bank projects, the quality o f project monitoring was judged to be robust and the quality of project reporting was rated good. The review did not encounter evidence o f systematic corruption, and noted that the level o ftransparency was good. Despite such efforts, there remains a highresidual risk o f operating inIraq. 63 ANNEX WII. INTERIM STRATEGYNOTE CONSULTATIONSWITH STAKEHOLDERS 1. The World Bank Group held a series of consultations, betweenJune and December 2008, to obtain feedback onthe proposed third InterimStrategy Note (ISN) for Iraqfor FY09-11. IFC, with whom the Bank i s preparing the strategy, played an active role insome of these consultations. The purpose of this exercise was: (i) to better understandthe perspectives of the Iraqi government and other stakeholders on the World Bank's ongoing and future engagement as well as the strategic priorities for the country moving forward, and how the Bank can best support them; and (ii) to share the draft I S N to ensure that it accounts for these strategic priorities and i s fully aligned with the Iraqi National Development Strategy (NDS) and the International Compact for Iraq (ICI). The consultations were rich and presentations and summaries of the discussions were provided separately at these sessions. This summary provides anoverview o f some key messagesthat were raised. 2. June 7,2008- Povertv Reduction Strategy Higher Committee (PRS), Amman: The PRS Committee has multi-sectoral representation and i s comprised of a number o f senior Iraqi officials and Parliamentarians. The objective was to discuss main priorities for Bank engagement inIraq. 3. July 3, 2008- Iraqi authorities and the donor community, Baghdad: The mission consulted with senior representatives from the Deputy Prime Minister's office, the Ministry of Finance, Ministry of Planning and Development Cooperation, and other line ministries, as well as representatives from a number of donor agencies. Some key messages on Bank engagement from these discussions include: (i) Leverage comparative advantage in public financial management and banking sector reform; (ii) Buildinstitutionalcapacity andprovide technical assistanceandtraining; and (iii) Bring the donor community together and coordinate activities vis-bvis a stronger presenceinIraq. 4. October 20, 2008- PRS Committee, Beirut: The PRS Higher Committee was consulted a secondtime for the purpose of sharing the draft I S Nand obtaining comments. Issues raised onBank engagement include: (i) Need to encourage increased private-sector led growth (including privatization); (ii) Improve donor coordination inIraq; and (iii) Build capacity of ministries to conduct financial management, procurement, andproject oversight. 5. November 4, 2008- IRFFI Executive Committee, Baghdad: Consultations on the draft I S N was held with donors within the framework o f the Iraq Partners Forum. The meeting was attended by representatives of over 17 partners, some in Baghdad and others in Amman through video-conference. These included Denmark, Germany, Greece, Italy, Japan, Norway, Spain, UnitedKingdom, United States, European Commission, UNAMI, UNDP and other UN specialized agencies. Donors welcomed the draft and praised the Bank's initiative to consult withthem early onthis document. 64 The maindiscussionpoints include: (i) Support o f the main thrust of the I S N and its strategic focus on public sector capacity building, public financial management, and private sector development. (ii) Appreciation of the implementationmodel of Bank assistanceprograms, which emphasizes Iraqi ownership, develops project management capabilities, and strengthensbeneficiary institutions and ministries. (iii) Concern on role and impact of having separate project implementation units and the risks of losing capacities and knowledge if those mechanisms are not fully integrated into government structures. (iv) Request for further clarifications on the scope of the proposed work program onprivate sector development. 6. November 23-24. 2008- Government of Iraq (Gon, Beirut: Consultations with Government officials were held to share the revised draft I S N and obtain feedback on the proposed strategic directions. Several line ministries representing a variety of sectors as well as other government institutions such as the Board of Supreme Audit (BSA), ISRB, and IC1 Secretariat, as well as representatives from the Kurdistan Regional Government (KRG) were inattendance. Inorder to Mher discuss approach and relatedWBG support, four working groups were held on the following topics: Policies for Institution Building, Public Resource Management, Portfolio Implementation, and Private Sector Development. The Government welcomed the opportunity to comment on the draft I S N and stressedthe needto improve implementation o f the current portfolio. Onthe draft ISN, participantsmentionedthe following elements: (i) Include possibility of IBRDborrowing; (ii) IFC should be more involved in investment in Iraq particularly supporting SMEs access to finance. (iii) Support development o f sector strategies; (iv) Concern that the Bank will be moving toward Technical Assistance and away from Financing. 7. December 3, 2008- Iraqi Civil Societv and Private Sector, Amman: The World Bank Group met with representatives from NGOs, the private sector, trade unions and parliamentarians. The purpose o f this consultationwas to present and discuss the draft I S N andto engage Iraqi Civil Society inobtaining feedback and establishing priorities. The following mainpointswere discussed: (i) Bank should support increased private sector-led growth and development; (ii) IFC and World Bank requested to advise the Go1on how to refine the existing monetary policy to encourage private sector development as the then prevailing 20% interest rate created disincentives for investment. (iii) IFC requested to help strengthen Iraqiprivatebanks; and (iv) NGOs requested that cooperation with Civil Society Organizations, especially NGOs, be added to the main points o f the draft ISN, and to be built into the capacity buildingprojects. 65 8.Throughout the various consultations the central points o f consensus among stakeholders included: (i) Crucialroleofprivate-sector ledgrowthinpropelling Iraqtowards afree market economy; (ii) Critical role of donor coordination inpromoting ownership and ensuring harmonization of activities; (iii) SignificanceofincreasedflexibilityinthedraftISN; (iv) Engagement in Public Resource Management (including integration of donor resources into the government budget); (v) Security permitting, strengthen the Bank's physicalpresenceinIraq. The mainpoints of debate included: (vi) While the political and security situation has improved considerably in Iraq, the situation continues to evolve andpolitical challenges continue to exist. (vii) The public sector i s encouraging donors to assist the private sector by improving access to financing and establishing a sound regulatory framework. It is equally important for the Government of Iraqto engage the private sector inthe fiscal reform process, identify obstacles to private sector development and, indoing so, creating a business-friendlyenvironment. 66 ANNEX Ix.IRAQ AT A GLANCE Iraa at a dance Januaw26,2009 ~ M. East Lower I;:A Key Development Indicators' 8 North middle iraq Africa income Age distribution, 2005 (2007) Male Female Population,mid-year (millions)' 29.6 313 3,437 Surface area (thousand sq. km) 438 8,778 35,510 Popuiationgrowth (%) 2.8 1.7 1.o Urban population (%of total population) 67 57 42 GNI (Atlas method, US$ billions)' 58.6 876 6,485 JO-L GNI per capita (Atlas method, US$) 1,982 2,794 1,887 M-24 GNI per capita (PPP, international $) 7,413 4,544 10-14 0 4 15 10 5 Dercent 5 0 10 15 GDP growth (%) 2.8 5.8 9.7 GDP per capita growth (%) 0.0 4.0 8.6 (most recentestimate, 2000-2005) 1 Povertyheadcount ratio at $1 a day (PPP, %) 5 Povertyheadcount ratio at $2 a day (PPP, %) 19 Under-5 mortality rate (per 1,000) Life expectancyat birth (years) 61 70 69 Infant mortality(per 1,000 live births) 82 34 41 Child malnutrition (%of children under 5) 16 25 Adult literacy, male (%of ages 15 and older) 84 83 93 Adult literacy,female (% of ages 15and older) 64 63 85 I I Gross primaryenrollment,male (% of age group) 108 108 112 Gross primary enrollment, female (% of age group) 89 103 109 Access to an improved water source (% of population) 61 89 88 Access to improved sanitation facilities (% of population) 79 75 54 1880 18D5 2000 2004 0 Iraq 81 MiddleEast& North Afnca Net Aid Flows 1990 2000 2006 2007 (US$millions) ODA and official aid3 63 101 6,178 2,305 Growth of GDP and GDP per capita (Oh) Top 3 donors (in 2005): United States' 336 0 Japan -20 0 United Kingdom 54 14 Aid (% of GNI) 0.1 12.5 3.9 Aid per capita (US$) 3 4 221 78 Long-Term Economic Trends Consumer prices (annual %change) 5.0 64.8 4.7 GDP implicit deflator (annual % change)b 47.4 48.6 24.7 +GDP - GDP per capita Exchangerate (annual average, local per US$) 0.3 1,930.0 1,467.4 1,254.9 Terms of trade index (2000 = 100) 1980-90 1990-2000 2000-05 (averageannualgrowth %) Popuiation,mid-year (millions) 18.5 25.1 27.9 29.6 2.7 3.0 2.8 GDP (US$ millions) 48,657 25,763 49,529 62,383 -11.4 (% of GDP) Agncuiture 5.4 8.6 -3.6 Industry 84.4 70.I -17.0 Manufacturing 0.9 1.7 -12.8 Services 10.3 21.3 5 9 Householdfinal consumption expenditure 37.4 41.9 Generalgov't final consumotion exoenditure 38.4 30.5 Gross capital formation 18.0 Exportsof goods 57.4 59.5 Importsof goods 41.2 41.4 Gross national savings 27.1 22.9 Note: Figures in italics are for years other than those specified...indicatesdata are not available. (a) 2006 Indicators for Middle East and North Africa and Lower middle income countnes 1.Staff estimates 2. GNI is caicuiated as sum of GDP and net icome on annual exchange rate and differs from the atlas method. 3. ODA and official aid are total official receiptsfor the year 2007. 4. GDP deflator in U.S. dollar terms. 6. Gross savings are gross national savings denved from GNI minus gross domestic consumption plus net transfers. Middle East and North Africa, Social and Economic DevelopmentGroup (MNSED) 67 Iraq Balance of Payments and Trade 2000 2007 (US$ millions) Governance indicators, 2000 and 2007 Total merchandiseexports (fob) 20,603 37,835 .- Total merchandiseimports(ci9 13,384 20,628 Voice andacmuntability Nettrade in ooods ' .. 17,207 Politicalstability Workers'remittances and compensationof employees(receipts) Regulatoryquality Currentaccount balance ., 10,794 as a % of GDP .. 17.3 Reserves,includinggold .. 31,455 Central Government Finance 02007 Countvs percenblerank(0-100) (% of GDP) * 12000 higher values imply better rafiogs Kevenue- .. 71.3 Tax revenue .. 1.6 Expense' .. 45.9 Technology and Infrastructure 2000 2007 Cashsurplus/aeticit- .. 9.8 Pavedroads (% of total) 84.3 Highestmarginaltax rate(Yo) tixea lineana mobilephone" Individual 15 subscribers(per 1,000people) 27 57 Corporate 15 High technology exports (% of manufacturedexports) 0 External Debt and Resource Flows Environment (US$ mrlhons) Totaldebt outstandingand disbursed ., 101,900 Agnculturalland (% of land area) 22 23 Total debt service .. 700 Forestarea (% of landarea,2000 and 2005) 1.9 1.9 HIPCand MDRldebt relief(expected;flow) - - Nationallyprotected areas (% of land area) 0.001 Total debt (%of GDP) .. 163.3 Freshwaterresources per capita(cu meten) 2,800 Total debt service(% of exports) .. 1.9 Freshwaterwithdrawal (YOof internalresources) 150.0 Foreigndirectinvestment(net inflows) .. 964 CO2emissions per capita(mt) 3.0 2.7 Porffolioequity (netinflows) 0 GDP per unitof energyuse I (2000 PPP 5 per kg of oil equivalent) Composition of total external debt, 2007 I Energyuse per capita (kg of oil equivalent) I,038 1,099 private 4 100 Shortterm 0 I1ISPm,ii,nnc I Private Sector Development 2000 2008 Time requiredto start a business(days) - 77 Costto start a business(% of GNIper capita) - 1507 Time requiredto registerproperty(days) - a Rankedas a majorconstraintto business ("hof managerssurveyedwho agreed) n.a. n.a Stock marketcapitalization(%of GDP) Bank branches(per 100,000 people) 2 Note Figuresin italicsarefor years otherthan those specified 2007data are preliminaryestimates January26,2009 indicates data are not available -indicates observation is not applicable 1 net trade is denved byoffsetbngimportsof goodsagainst exportsof goodsdueto limiteddata on Exports and Importsof services2 Revenueexcluding currentgrants 3 Theseare recurrentexpenditures and do not includecapital expenditureswhich amountto 124 percentof GDP in 2007 4 Excluding arants 5 Irao's NationalCommunications & Media Commission estimates mobile-ohonesubscibers at 4 millionend-2006 MiddleEastand NorthAfrica, Socialand EconomicDevelopmentGroup(MNSED) 68 Millennium Development Goals Iraq Withselected targets to acheve between 1990and 2015 (estimate closestto date shown +/- 2years) Goal 1:halve the rates for $1 a day poverty and malnutrition Povertyheadcountratioat $1 a day (PPP, % of population) Povertyheadcountratioat nabonalpovertyline (% of population) Shareof incomeor consumptionto the poorestqunitile(%) Prevalenceof malnutntion(% of children under5) Goal 2: ensurethat children are able to complete primaryschooling Primaryschool enrollment(net, %) Primarycompletionrate(% of relevantage group) Secondaryschoolenrollment(gross, %) Youth literacyrate (% of peopleages 15-24) Goal 3: eliminate gender disparity in education and empower women Ratioof girls to boys in primaryand secondaryeducation(%) Women employedinthe nonagriculturalsector (% of nonagriculturalemployment) Proportionof seats held bywomen in national parliament(%)I Goal 4: reduce under-5 mortality bytwo-thirds Under-5mortalityrate(per 1,000) Infant mortalityrate(per 1,000livebirths) Measles immunization(proportionof one-yearolds immunized,%) Goal 5: reduce maternal mortality bythreefourths Maternal mortalityratio(modeledestimate per 100,000live births) Birthsattendedbyskilledhealthstaff (% of total) Goal 6: halt and beginto reverse the spread of HlVlAlDS and other major diseases Prevalenceof HIV (% of populationages 15-49) Contraceptiveprevalence(% of women ages 15-49) Incidenceof tuberculosis(per 100,000people) Tuberculosiscases detectedunderDOTS (%) Goal 7: halvethe proportion of people without sustainable access to basic needs - Access to an improvedwater source(%of populauon) 03 82 80 77 Access to improvedsanitationfacilities (% of population) ri 72 Forest area(% of totallandarea) 1 8 19 ?76e Nationallyprotectedareas (% of total landarea) 00 CO2emissions(metrictons percapita) 2 6 3 4 2 9 3 0 GDP per unit of energyuse(constant2000 PPP $ per kg of oil equivalent) Goal 8: develop a global partnershipfor development Fixedline and mobilephonesubscribers(per 1,000people) 3 8 3 0 2 7 38 Internetusers(per 1,000 people) 0 5 0 0 ( I O 40 3 Personalcomputers(per I 000 people) 0 0 0 0 0 2 Youth unemployment(% of total laborforce ages 15-24) 08 Education indicators (%) Ueaslesimmunization (% of I-year olds) ICT indicators (per 1,000 people) I loo 754 3000 1885 2000 2004 2005 -0-Primary netenrollmentratio +Ratio of girlsto boys in pnmary& 0Iraq ;IMiddleEast&NorthAfnca Note: Figuresin italics are for years other than those specified. .. indicatesdata are not available. January26,2009 1.2006data MiddleEastand NorthAfrica, Social and EconomicDevelopmentGroup (MNSED). 69 ANNEXX. KEYSTATISTICAL INFORMATION Iraq: Key MacroeconomicIndicators 2005 2006 2007 2008 Economic growth and prices Nominal GDP (US$million) 31,380 49,457 62,383 93,817 o fwhich Non-oil GDP (%o f GDP) 37.8 42.5 43.4 35.8 RealGDP (%change) -0.7 6.2 1.5 9.8 o fwhich Non-oil GDP (%change) 12 7.5 -2.0 5.0 GDP per capita (US dollars) 1,124 1,720 2,108 3,085 Oilproduction(million bpd) 1.8 2.1 2.2 2.4 Oil exports (million bpd) 1.4 1.5 1.6 1.8 ConsumerPrice Index (%change) 31.6 64.8 4.7 6.8 National Accounts (uercent of GDP) Gross domestic investment 23.4 18.4 16.1 21.1 Ofwhich public 19.8 17.0 11.9 17.3 Gross domestic consumption 78.8 71.0 63.0 61.8 Ofwhich generalgovernment 60.1 38.4 34.0 33.4 Gross national savings 32.0 32.0 33.4 36.2 O fwhich public 26.5 28.1 25.5 24.6 Fiscal and oil sector accounts (uercent of GDP) Revenuesandgrants 107.4 80.4 75.0 77.5 o fwhich Oilrevenues 76.7 65.2 67.6 70.9 Foreigngrants 27.9 12.5 3.7 1.6 Expenditures 96.5 69.4 61.5 69.8 Operating expenditures 100.8 52.4 49.0 52.3 O.W. Salariesandpensions 20.4 15.2 16.4 18.5 O.W. Security related expenditure 6.9 5.7 8.7 11.7 Capital expenditures 19.8 17.0 11.9 17.3 Overall fiscal balance (including grants) 6.5 11.0 13.5 7.8 Balance of Payments (uercent of GDP, unless otherwise indicated) Current account balance 8.6 13.6 17.3 15.1 Tradebalance 16.1 20.9 27.6 22.6 Merchandise exports 73.6 60.5 60.6 66.1 of which oil (in percent of total exports) 97.0 97.5 97.7 98.8 Merchandise imports 57.5 39.5 33.1 -43.5 Incomeandservices (net) -32.5 -17.7 -12.0 -8.6 Transfers 25.0 10.3 1.7 1.1 Financial Account -7.0 1.4 1.3 0.5 Foreigndirect investment 1.6 0.2 1.5 2.3 Overall external balance 6.1 16.3 17.2 15.6 Financing -7.3 -16.2 -18.3 -16.4 Central Bankreserves (increase -) -13.0 -16.2 -18.3 -16.4 Net change inarrears (decrease -) -51.0 -31.3 -0.1 -70.1 Debtforgiveness 53.0 29.7 0.0 70.1 ExternalPublic Debt (I) EstimatedDebt Stock (US$ billion) 109.3 97.9 01.9 40.4 in percent of GDP 348 I98 I63 43 MemorandumItems Population(millions, mid-year) 27.9 28.7 29.6 30.4 Oil prices (USS per barrel) 43.9 55.6 63.0 93.3 Gross Reserves(US$billion) 12.0 20.0 31.5 46.8 Gross reserves in months of imports 5.5 9.3 8.0 11.6 Exchange rate, IDper US$l (period average) 1467 1459 1255 1193 Notes:2007 data are preliminaryestimates; (..) not available. (1) Debt data assume full applicationof the first (2004) and second (2005)tranches of the Paris Club debt reschedulingagreement by the dates stipulatedby the Paris Club, and of comparabletreatment by other creditors, but not the third tranche of debt relief. The figure assumes debt reductioncomparableto the 2004 Paris Club agreementfor creditors with whom a debt agreement has been signed. Debt reductionis assumed to take place at end - 2008 for the remainder of non Paris Club creditors. Sources: IMF and World Bank staff estimates, COSIT.Trade: UN Comtrade reported by partnercountries. 011: InternationalEnergy Agency. 70 ANNEXXI. KEYEXPOSURE INDICATORS Total debt outstandingand 142.400 122.700 109,300 97,900 101,900 31,800 33,200 34,700 34,400 disbursed (TDO) (US$m)a Net disbursements (US$m)a 436.0 0.0 0.0 -450.9 60.9 544.6 899.8 1445.2 Total debt service (TDS) 200 200 1,200 700 900 600 700 3,400 (US$mIa Debt and debt service indicators (%) TDOIXGS~ 690.0 465.9 323.4 262.1 51.3 96.4 80.7 67.6 TDO/GDP 476.3 348.3 197.9 163.3 33.9 39.8 36.6 31.8 TDS/XGS 1.I 0.9 4.0 1.8 1.5 1.7 1.6 6.7 ConcessionaVTDO' 0.0 0.0 0.0 0.0 0.2 1.5 0.4 0.7 IBRD exposure indicators(YO) IBRD DSlpublic DS 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 Preferred creditor DS/public 0.5 7.8 1.8 67.9 0.0 1.o 2.6 1.o DS (%)d IBRD DS/XGS 0 0 0 0 0 0.002 0.0024 0.0054 IBRD TDO (US$m)e 0 0 0 0 0 11 59.0 154.0 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 0 0 0 0 0 0 0 0.1 IDA TDO (US$m)' 9.7 50.5 88.1 101.0 a. Includes public and publicly guaranteed debt, private nonguaranteed. use of IMF credits and net short- term capital. Net disbursements are Gross disburements minus principal payments Iraq's debt reconciliation process is still ongoing. Estimates of the debt stock may differ from other publications and may include unreconciled data. The third tranche of the Paris Club agreement was triggered by the completion of the second and last review of the IMF SBA in December 2008. The third tranche of debt reduction from Paris Club creditors is estimated at approximately US$ 8 billion. Estimates and projections assume debt reduction comparableto the 2004 Paris Club agreement for creditors with whom an agreement has been signed. For the remaining non-Paris Club creditors, debt reduction is assumed to be effective by end-2008. All debt to private creditors is assumed to be setled by end-2009. Debt service is actual amount paid, including repayment of arrears to Turkey Total debt data is provided by the IMF staff report. b. "XGS"denotes exports of goods and services, includingworkers' remittances. c. Bilateral debt is treated as concessional up to 2009. Beyond 2009 bilateral debt is assumed to be non-concessional. d. Preferred creditors here are defined as all multilaterals including IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. Public Debt Service is equivalent to Total Debt service for Iraq. Estimates and projections assumes no disbursement under the current precautionary IMF Stand By Agreement. The Program will end in March 2009. e. Includes present value of guarantees. 71 ANNEXXII. IFC PROGRAM SUMMARY Iraq: IFC InvestmentOperations Program 2006 2007 2008 2009 Commitments(US$m) Gross 98.30 2.40 Net** 98.30 2.40 Net Commitmentsbv Sector General Manufacturing& Services 98.30 FinancialMarkets 2.40 Total 100 100 0 0 Net Commitmentsbv Investment Instrument(%) Equity 8.44 I00 Loan 91.56 Quasi equity*** Total 100 100 0 0 ** IFC'sOwn Account only *** Quasi Equity includes both loan and equity types 72 Yw4a (u 0 0 v)eb z 3-n Y.- 2 2 2 D 0 Q, 0 0 0 v) 0 0