For Official Use Only CLR Review Independent Evaluation Group 1. CPS Data Country: Croatia CPS Year: FY13 CPS Period: FY14 – FY17 CLR Period: FY14-FY17 Date of this review: April 17, 2019 2. Ratings CLR Rating IEG Rating Development Outcome: Moderately Satisfactory Moderately Satisfactory WBG Performance: Good Good 3. Executive Summary i. This review of the Croatia’s Completion and Learning Review (CLR) of the World Bank Group’s (WBG) Country Partnership Strategy (CPS) covers the CPS period, FY14-FY17, and the Performance and Learning Review (PLR) of 2016. ii. Croatia is an upper middle-income country with a GNI per capita of $12,570 in current dollars that joined the European Union (EU) on July 1, 2013. Its economy relies primarily on services, which accounted for 58 percent of GDP in 2017. Annual GDP growth averaged 2.2 percent during the program period (2014-17), recovering from -1.1 percent during 2010-13, albeit remaining low when compared to central and eastern European peers. Growth picked up with a surge in the export-oriented industry, and a revival of trade, hotel, and restaurant services, lifted by robust tourism performance. According to the Systematic Country Diagnostic, 1 poverty increased from 5.9 percent of the population in 2009 to 9.4 percent in 2012, before falling to 7.5 percent in 2014. Croatia ranked 46 of 189 countries in the 2017 Human Development Index (HDI), putting it in the very high human development category. EU accession has played a key role in strengthening institutions, developing a modern legislative framework in line with the EU, and increasing the availability of funds. However, following the 2015 election the momentum for reform was reduced as was the consistency of government policies over the program period. iii. The World Bank Group program had three focus areas: (i) promoting fiscal consolidation, (ii) improving competitiveness to spur growth, and (iii) maximizing the benefits of EU membership. These were broadly congruent with the government’s 2013 Economic Program, which covered fiscal consolidation with a particular focus on pension reform and rationalizing hospitals; growth and competitiveness through a sustainable development strategy based on the knowledge economy; and absorption of EU funds available to Croatia. iv. At the beginning of the CPS period lending commitments were $766 million consisting of twelve operations in the form of investment projects in the trade, energy, environment, justice, and science and technology sectors. During the CPS period, new lending commitments amounted to 1 Croatia: Systematic Country Diagnostic (SCD), May 4, 2018. The SCD uses 2005 PPP per day methodology to measure poverty. Using the poverty headcount ratio based on the national poverty line, the poverty headcount fell from 20.6 in 2009 to 19.5 in 2015. CLR Reviewed by: Peer Reviewed by: CLR Review Coordinator Juan José Fernández-Ansola Mauricio Carrizosa, Jeff Chelsky IEGEC Consultant IEGEC Consultant Manager, IEGEC Takatoshi Kamezawa Xiaolun Sun Senior Evaluation Officer, IEGEC CLRR Coordinator, IEGEC CLR Review For Official Use Only Independent Evaluation Group 2 $634.5 million, slightly higher than planned at PLR stage ($611 million). New lending commitments comprised seven operations in the form of six investment projects and a Development Policy Loan, covering macro, trade and investment, environment, health, social protection, railways, and innovation and entrepreneurship. A planned Development Policy Loan was dropped in light of changed priorities of the authorities following the change in administration after the election. During the CPS period, five trust-funded activities (TFs) for a total of $14.8 million complemented World Bank operations in environment, and fiscal issues, including treasury systems. At the same time, IFC made net commitments of $151.2 million, and its largest project was a $60 million investment in a power plant in FY16. v. IEG rates the CPS development outcome as Moderately Satisfactory. Of the nine objectives, seven were rated Achieved or Mostly Achieved, and two Not Verified. Under Focus Area I, there was substantial progress in enhancing airport infrastructure, implementing an energy strategy, and introducing cost rationalization and efficiency measures in the health sector. However, progress was limited in improving the sustainability of revenue enhancing policy, and improving the targeting of social assistance programs. Under Focus Area II, there was progress in reducing the backlog of cases in the judicial system, diversifying and making more secure energy supply, increasing exports in beneficiary companies of a World Bank project, and providing loans to MSMEs. Under focus Area III, the Government prepared strategy documents needed for EU funds absorption and prepared project applications in the areas of research and development, and innovation, and in nature protection. vi. On balance, IEG rates WBG performance as Good. The CPS addressed key challenges facing the country, including EU accession, and was congruent with the Government’s 2013 Economic Program and aligned with the WBG’s twin goals. The initial design of the program was appropriate, but over time the program suffered reform reversals brought by political changes, and program design lost relevance to country priorities during implementation. ASA was broadly aligned with CPS plan, emphasizing complying with EU directives and helping absorb EU funds. Technical assistance covered energy reforms, equity and gender, EU preparedness, fiscal issues including support for a spending review, environment, and waste management. The analytical work undertaken by the World Bank contributed to the 2018 Systematic Country Diagnostic Study (SCD), and addressed fiscal issues as well as issues in the justice system, energy, and smart specialization. Portfolio performance was comparable with the ECA region and the World Bank, but some interventions were affected by changes in government priorities. Projects that closed with unsatisfactory performance, such as the Revenue Administration project (FY07) and the Social Protection System Modernization project (FY15), contained major institution and system reforms that were not embraced by the authorities following the 2016 election. Differences of view could not be addressed effectively through project restructurings. vii. The Bank Group identified a number of risks to the program coming from the macro area and domestic policy implementation. The main risk that materialized for the program—and which had not been fully identified—was that a new administration might have different priorities affecting important aspects of the program. The mitigation measures that had been envisaged—primarily, an EC monitoring framework strong enough to keep the World Bank program on track—proved too weak to refocus the Government’s reform orientation in light of new political realities. There was substantial World Bank-IFC collaboration, with IFC supporting three of the nine CPS objectives. IFC investments complemented World Bank programs and projects in air traffic, energy, and financing of medium and small enterprises. This cooperation was captured appropriately in the results framework. The key development partnership in Croatia involved cooperation with the EC and alignment of the program with the country’s EU policies. Such alignment by and large focused the World Bank program on issues relevant for Croatia’s EU aspirations. No Inspection Panel case was documented during the review period. Safeguard issues under some projects were addressed satisfactorily as they arose. viii. The CLR contains several lessons: (i) keep a focus on results but be flexible on the use of instrument; (ii) critical to consider the potential impact of political change; (iii) the World Bank Group CLR Review For Official Use Only Independent Evaluation Group 3 has a role in policy design and process underpinning reforms in the public sector; and (iv) for EU member countries with access to financing, IFC can still play a role in the success of a project. ix. It is not clear how lesson (i) flows from the CLR. It would be useful were the CLR to be more explicit on how it was derived. x. Lesson (ii) notes the importance of considering the potential impact of political change. Indeed, in all client countries political changes can derail World Bank programs due to changes in policy priorities. In this context, the World Bank may need to develop alternative scenarios during program preparation to respond with flexibility in the event of program-disruptive political change. xi. Lesson (iii) as stated is uncontentious, with limited value added as a lesson. 4. Strategic Focus Relevance of the WBG Strategy: 1. Congruence with Country Context and the Country’s Program. The CPS was congruent with both the country context and the country’s own program. The Bank Group program had three broad themes: (i) promoting fiscal consolidation, (ii) improving competitiveness to spur growth, and (iii) maximizing the benefits of EU membership. These addressed key challenges to the country, including fiscal imbalances and weak competitiveness. 2 In addition to addressing such challenges, the WBG strategy was broadly congruent with the Government’s 2013 Economic Program. The theme of fiscal consolidation was linked to the Government’s objective to emphasize fiscal consolidation with a particular focus on pension reform and rationalizing hospitals. The theme of improving competitiveness was linked to the Government’s objective to promote growth and competitiveness through the “smart specialization strategy” 3 and other sector related programs. The third theme— maximizing the benefits of EU membership—related to the Government’s objective to absorb efficiently EU funds available to Croatia. 2. Relevance of Design. The initial design of the program was appropriate. Development Policy Loans (DPLs) in the health and social protection sectors would combine policy reforms with budget finance. Reforms initiated under the DPLs were to be continued under a Health Program for Results (PforR) and a Social Protection project. The proposed complementarity between World Bank with IFC activities supported competitiveness objectives, with the Bank focusing on the efficiency of the judicial system and IFC supporting export development, access to financing, and infrastructure. Advisory Services and Analytics (ASA) work would facilitate absorption of EU funds. Primarily through Reimbursable Advisory Services (RAS), the World Bank would help develop strategic sector frameworks, sector policy notes, as well as institutional guidelines to prepare a solid pipeline of projects to be financed by EU funds, and strengthen project management capacity. Coordination with key partners (the European Commission, the European Investment Bank, the European Bank for Reconstruction and Development, and the International Monetary Fund) would be critical for Croatia’s progress following accession. Nevertheless, the program proved susceptible to reform reversals brought by political changes. A design around DPLs that required continued government support for reform exposed the program to significant reversals. 4 The change in administration in 2016 brought policy changes that adversely affected key components of the program. Health sector policies were reversed, and the consolidation of social protection programs was abandoned. 2 The SCD ranked as the first three priorities: fostering a more competitive environment, boosting justice system performance, and unleashing firm innovative capabilities. 3 The smart specialization strategy refers primarily to sustainable development and transition to a knowledge economy. In the near term, these goals are being pursued by increasing the renewable share of energy consumption along with an increase in energy efficiency as called for by the Europe 2020 strategy, to which Croatia is aligned. 4 According to the CLR, experience during the CPS demonstrated the resilience of smaller-sized operations in areas of longstanding World Bank Group engagement, or that are embedded in a government-funded program, such as the EU Natura 2000 Integration Project (FY10). CLR Review For Official Use Only Independent Evaluation Group 4 Selectivity 3. EU accession provided the right framework for selectivity and the rationale to focus on nine objectives within the CPS’s focus areas. The program was anchored on the requirements for a new EU member State. In particular, it considered the EU’s fiscal and other policy requirements, and addressed capacity building needs of institutions that would receive a major increase in EU funds. Objectives and interventions rested on adequate analytical foundations. The Bank Group had comparative advantage to support Croatia under the three focus areas: structural fiscal reforms, competitiveness, and helping maximize the benefits under EU membership. The latter, in particular, is an area where the World Bank has developed expertise overtime through its engagement with other new EU Member States. The EU framework also provides a degree of confidence on the sustainability of institutional change promoted by the program, as well as its long-term impact. Alignment 4. There is no explicit reference to the twin goals in the CPS. At the same time, its objectives and interventions contributed directly and indirectly to the twin goals. Under Focus Area I, the program supported measures to improve the targeting of social benefits to the most vulnerable. Under focus area II, the emphasis on competitiveness for growth was expected to create jobs and improve shared prosperity. The appropriate use of EU funds, promoted under focus area III, would help the government focus on lagging regions, and thus on reducing poverty and regional disparities. 5. Development Outcome Overview of Achievement by Objective: Focus Area I: Fiscal Adjustment Through Reforms at the Sector Level 5. Focus Area I had four objectives: (i) improve (reduce) the tax gap as a percentage of GDP, (ii) improve the targeting of social assistance programs, (iii) introduce cost rationalization and efficiency measures in the health sector, and (iv) contribute to the coherence and implementation of strategic plans in railway and improvements in airport infrastructure. Objective 1: Improve sustainability of revenue enhancing policy 6. This objective was supported through the Revenue Administration Modernization project (FY09). It had one indicator. • Improve the tax gap as a percentage of GDP: Baseline: 0.8 (2011); Target: 0.9 (2013). The link between a measure of the “tax gap” and the objective of policy “sustainability” is unclear. Moreover, baseline and target dates for the indicator are prior to the CPS period and therefore do not provide information on the impact of the CPS. This indicator was reformulated at the Performance and Learning Review (PLR) stage, but it was not possible to measure under the methodology used. The CLR used an alternative indicator from the Intra-European Organization of Tax Administrations (IOTA) which shows that the value-added tax (VAT) gap for Croatia was reduced from 3 percent in 2014 to 1 percent in 2016. However, the results indicator measured the tax gap in total taxes. Therefore, the inconsistency in the data presented does not allow to verify this indicator. IEG rates Objective 1 as Not Verified. Objective 2: Improve the targeting of social assistance programs 7. This objective was supported through the Social Protection System Modernization project (FY15), a Public Finance Review (FY15), and technical assistance on Support for the Spending Review (FY15) The objective had one indicator: • Increase means-tested programs as a share of all social assistance programs (from 16 percent in 2012 to 20 percent in 2017): According to the CLR, the share of means- tested social programs increased from 16.1 percent in 2012 to 17.1 percent in 2016. The CLR Review For Official Use Only Independent Evaluation Group 5 World Bank calculations were based on data provided by the Croatian government. IEG did not have access to the data to verify achievement of this indicator. Not Verified 8. IEG rates Objective 2 as Not Verified. Objective 3: Introduce cost rationalization and efficiency measures in the health sector 9. This objective, with two indicators, was supported through the Economic Recovery DPL (FY14) and the Improving Quality and Efficiency of Health Services PforR (FY14), a Public Finance Review (FY15), and technical assistance on Support for the Spending Review (FY15). This objective had two indicators: • Total public accrual health spending reduced by 0.5 percentage points of GDP between 2012 and 2017: The baseline for health spending was 7.6 percent of GDP in 2012. The CLR reports a drop of 1 percentage point of GDP through 2016. Data from Eurostat reports that health expenditure represented 6.5 percent of GDP in 2016 down from 7.2 percent of GDP in 2012. The target for this indicator was achieved ahead of schedule (in 2016), and the November 2018 supervision report of the Improving Quality and Efficiency of Health Services PforR project (FY14) indicates continued progress in the reduction of health spending and reform of the health system. Achieved • Further rationalization and reorganization of the hospital system measured by the number of acute care beds. 5 The number of hospital beds in rationalized hospitals classified as acute care beds reached 12,161 as of March 2017, compared with a target of 12,800 (Baseline was 15,930 in 2012). Mostly Achieved 10. Although the two indicators capture significant aspects of rationalization and efficiency in the health sector, there are other aspects where there was little progress or some reversals. The Implementation Status and Results Report of the Quality and Efficiency of Health Services PforR (FY14) from October 2017 noted delays with the implementation of some key reforms, such as implementing hospital reshaping schemes, reducing hospital arrears, implementing hospital accreditation, and joint/centralized procurement of drugs, medical supplies and devices. On balance, IEG rates Objective 3 as Mostly Achieved. Objective 4: Contribute to the coherence and implementation of strategic plans in railway and energy sectors and improvements in airport infrastructure 11. This objective was supported through the Sustainable Croatian Railways in Europe project (FY15), the Modernization and Restructuring of the Road Sector project (FY17), the Croatia Energy Reforms Non-Lending Technical Assistance (FY14), the Energy Affordability Study (FY15), the EU 11 Programmatic Energy Affordability (FY15), and IFC support. In addition, there was a Public Finance Review (FY15) and technical assistance on Support for the Spending review (FY15), and Policy Notes (FY16). This objective had three indicators: • Implement restructuring plans for railway sector companies and a medium-term strategy for the rail sector consistent with the EU 2014-20 funding period: 6 Preparation of the railway strategy was delayed, and implementation of railway restructuring has been slow. Partially Achieved • Implementation of Croatia Energy Strategy 2009-20 related to renewable energy and district heating: The target for this process-oriented indicator was met. Achieved 5 Health costs are considered unsustainable, and a reduction in acute care beds in hospitals is seen as an essential part of rationalization of the health care system. 6 Baseline: Revised restructuring plans of railway companies. Target: Railway Modal Strategy 2014-20 and medium-term contracts in place for Passenger Services and Infrastructure Management consistent with the strategy. CLR Review For Official Use Only Independent Evaluation Group 6 • Accommodate existing and future air traffic: 7 IFC financing for Zagreb airport expansion and modernization project supported this indicator. The CLR—based on data from the National Airport Authority—reports that the number of passengers reached 3.1 million, implying 0.59 million unique 8 users in 2017, against a target of 0.60 million unique users. Based on data for the first two months of 2018 the authorities expected 0.66 million users in 2018. Achieved 12. In both the railway and energy sectors, the Bank Group supported useful upstream policy work and used process indicators to measure progress. IEG rates Objective 4 as Mostly Achieved. 13. On balance, IEG rates Focus Area I as Moderately Unsatisfactory. Assessment of progress toward objectives was made more challenging by several shortcomings in the results framework. Of the four objectives, two were rated Mostly Achieved, and two Not Verified. There was substantial progress in enhancing airport infrastructure, implementing an energy strategy, and introducing cost rationalization and efficiency measures in the health sector. However, there was limited progress in improving the sustainability of revenue enhancing policy and improving the targeting of social assistance programs. Focus Area II: Innovate and Improve Trade Competitiveness for Growth and Shared Prosperity. 14. Focus Area II had three objectives: (i) improve efficiency and reduce arrears in the judicial system, (ii) contribute to diversify energy supply and its diversity by financing energy efficient and renewable energy projects, and (iii) support competitive local companies to expand in the region and increase exports. Objective 5: Improve efficiency and reduce arrears 9 in the judicial system 15. Slowness in the judicial process—for example key business transactions related to the cadaster and land registry—is considered a key impediment to doing business in Croatia. This objective, with one indicator, was supported through the Justice Sector Support project (FY10). • Case backlog in judiciary decreased: IEG’s Implementation Completion Report Review of the Justice Sector Support project (FY10) reports that court case backlogs were reduced from 437,892 to 349,051 as of April 2016, against a target of 394,103 in 2017. Achieved 16. Efficiency is measured through the reduction in case backlog, which makes redundant its inclusion in the objective. IEG rates Objective 5 as Achieved. Objective 6: Contribute to the diversity and security of energy supply by financing energy efficiency and renewable energy projects 17. Achieving energy security and reducing greenhouse emissions are key priorities of the Government’s energy strategy. This objective was supported through three IFC wind power plants (WPP) projects: the Sibenik project (FY12), the Jelinak project (FY13), and the Rudine project (FY15). This objective had two indicators: • Install additional renewable energy generation capacity (108 MW by 2017): The Sibenik project added capacity of 43.7 MW, the Jelinak added 30 MW, and the Rudine an additional 34.2 MW. In all, IFC WPP projects added capacity for 107.9 MW as confirmed by the Croatian Operator of the Energy Market (HROTE) and IFC documentation. Achieved 7 Baseline: 0.44 million unique users in 2013. Target: 0.60 million unique users in 2017. 8 This means different users, as one user can be a passenger several times. 9 Refers to judicial case arrears or case backlog, as clarified by the Croatia team. CLR Review For Official Use Only Independent Evaluation Group 7 • GHG emissions avoided per year (75,000 tCO2 equivalent by 2017): Information from The IFC projects (Sibenik, Jelinak, Rudine) reduced GHG emissions by 100,000 tCO2. Achieved 18. The second indicator refers more to environmental concerns than to the diversity and security of energy supply. IEG rates Objective 6 as Achieved. Objective 7: Support competitive local companies to expand in the region and increase exports 19. This objective, with two indicators, was supported through the Export Finance Intermediation Loan (FY10); an IFC investment in a local bank also supported this objective. • Level of exports of beneficiary companies (at least preserve the level of exports by 2017): Beneficiary firms increased exports by 18 percent, above the target of at least preserving the level of exports in 2011. Achieved • Number of outstanding MSME loans in the portfolio of IFC client bank (at least preserve the baseline of 6,000 in 2011 by 2016): In 2016, IFC reached 5,125 MSME loans through its client bank. Mostly Achieved. 20. Exports of beneficiary firms expanded significantly although it should be noted that the target (i.e., at least preserve the level of exports in 2011) is unambitious relative to an objective of increasing exports. IEG rates Objective 7 as Mostly Achieved, 21. On balance, IEG rates Focus Area II as Satisfactory. Of the three objectives, two were rated Achieved, and one Mostly Achieved. There was progress in improving efficiency in the judicial system, diversifying and making more secure energy supply, increasing exports in beneficiary companies of a World Bank project, and providing loans to MSMEs. Focus Area III: Help Maximize the Economic Benefits of Becoming an EU Member State 22. Focus Area III had two objectives: (i) improve the coherence and credibility of national strategic and policy documents needed for EU funds absorption and management, and (iii) contribute to Croatia’s readiness and capacity to build the project pipeline for absorbing EU funds in selected sectors. Objective 8: Improve the coherence and credibility of national strategic and policy documents needed for EU funds absorption and management 23. This objective, with one indicator, was supported through the Second Science and Technology project (FY13), Coastal Cities Pollution Control 2 project (FY09), the Smart Specialization Economic and Sector Work (FY15), the EU Preparedness Technical Assistance (FY15), and the National Reform Program technical assistance (FY14). • Adopt national strategic and policy documents, including sector specific strategies, needed for the use of EU funds: The World Bank helped develop sector strategies through the Second Science and Technology project (FY13), the Coastal Cities Pollution Control 2 project (FY09), economic sector work, and technical assistance. Such strategies, which were adopted, covered the areas of National Education, Science, and Technology, Innovation, Smart Specialization, National Research Infrastructure, public administration, irrigation, rural development, transport, SME, and water/environment sector, and Management of Wastewater Treatment Sludge. Under the National Reform Program technical assistance (FY4), the World Bank assisted the authorities on strengthening policy coordination and assessment. Achieved 24. While the World Bank produced a lot of work and advice as noted under the indicator, the link is weak between the indicator, mostly related to the provision of advice or production of documents, and the objective of improving the coherence and credibility of national strategic and policy documents. Moreover, it does not have baseline or target dates, making an assessment of impact CLR Review For Official Use Only Independent Evaluation Group 8 difficult. The CLR did not provide significant evidence of improved coherence and credibility in the various areas of World Bank advice. On balance, IEG rates Objective 8 as Mostly Achieved. Objective 9: Contribute to Croatia’s readiness and capacity to build the project pipeline for absorbing EU funds in selected sectors 25. This objective, with one indicator, was supported through the Second Science and Technology project (FY13), the EU Natura 2000 Integration project (FY11), the Coastal Cities Pollution Control 2 project (FY09), and the Rijeka Gateway 2 project (FY09). • Number and value of projects applications prepared and/or submitted for financing from EU funds in research and innovation and nature protection (at least 6 projects applications for EUR 50 million for research and development, and 25 project applications for EUR 50 million in nature protection): The CLR reports that 6 project applications in research and development, and innovation are on course for and estimated value of EUR 168 million, thereby meeting the target of 6 projects valued at EUR 50 million or more. IEG could verify the status of only one of these projects—valued at EUR 72 million—from the latest supervision report of the Second Science and Technology Project (FY13). In addition, the CLR reports that in nature protection, 32 project proposals were made, exceeding the target of 25. As a result, Croatia was granted EUR 213 million from the EU Structural Fund for the period 2014-2020. Mostly Achieved 26. As in objective 8, the CLR presents little evidence on how project preparation for EU financing improved government readiness and capacity to build a project pipeline in a sustainable way, which is a key aspect of the objective. IEG rates Objective 9 as Mostly Achieved. 27. On balance, IEG rates Focus Area III as Moderately Satisfactory. The Government prepared several strategy documents needed for EU funds absorption, as well as project applications in the areas of research and development and innovation, and in nature protection. The project applications resulted in Croatia obtaining substantial funding, including from the EU Structural Fund. Nevertheless, there is weak evidence that these improved coherence and credibility of strategies or raised readiness and capacity to build the project pipeline for EU financing. Overall Assessment and Rating 28. IEG rates the CPS development outcome as Moderately Satisfactory. Of the nine objectives, seven were rated Achieved or Mostly Achieved, and two Not Verified. Under Focus Area I, there was substantial progress in enhancing airport infrastructure, implementing an energy strategy, and introducing cost rationalization and efficiency measures in the health sector. However, progress was limited in improving the sustainability of revenue enhancing policy, and improving the targeting of social assistance programs. Under Focus Area II, there was progress in reducing the backlog of cases in the judicial system, diversifying and making more secure energy supply, increasing exports in beneficiary companies of a World Bank project, and providing loans to MSMEs. Under focus Area III, the Government prepared strategy documents needed for EU funds absorption and prepared project applications in the areas of research and development, and innovation, and in nature protection. Objectives CLR Rating IEG Rating Focus Area I: Fiscal Adjustment Through Reforms at Moderately Satisfactory Moderately Unsatisfactory the Sector Level Objective 1: Improve sustainability of revenue Mostly Achieved Not Verified enhancing policy Objective 2: Improve the targeting of social assistance Not Achieved Not Verified programs Objective 3: Introduce cost rationalization and efficiency Achieved Mostly Achieved measures in the health sector CLR Review For Official Use Only Independent Evaluation Group 9 Objective 4: Contribute to the coherence and implementation of strategic plans in railway and Achieved Mostly Achieved improvements in airport infrastructure Focus Area II: Innovate and Improve Trade Moderately Satisfactory Satisfactory Competitiveness for Growth and Shared Prosperity. Objective 5: Improve efficiency and reduce arrears in Achieved Achieved the judicial system Objective 6: Contribute to the diversity and security of energy supply by financing energy efficiency and Achieved Achieved renewable energy projects Objective 7: Support competitive local companies to Mostly Achieved Mostly Achieved expand in the region and increase exports Focus Area III: Help Maximize the Economic Benefits Satisfactory Moderately Satisfactory of Becoming an EU Member State Objective 8: Improve the coherence and credibility of national strategic and policy documents needed for EU Achieved Mostly Achieved funds absorption and management Objective 9: Contribute to Croatia’s readiness and capacity to build the project pipeline for absorbing EU Achieved Mostly Achieved funds in selected sectors 6. WBG Performance Lending and Investments 29. At the beginning of the CPS period lending commitments were $766 million consisting of twelve operations in the form of investment projects in the trade, fiscal, environment, justice, and science and technology sectors. During the CPS period, new lending commitments amounted to $634.5 million, slightly higher than planned at PLR stage ($611 million). New lending commitments comprised seven operations in the form of six investment projects and a Development Policy Loan, covering macro, trade and investment, environment, health, social protection, railways, and innovation and entrepreneurship. Accordingly, the new program afforded more attention to macro, health, and social protection issues. Nevertheless, a planned DPL on social protection was dropped in light of changed priorities following the 2015 election. During the CPS period, five trust-funded activities (TFs) for a total of $14.8 million complemented World Bank operations in environment, fiscal issues, including treasury systems. 30. During the CPS period, Croatia’s portfolio performance at exit was in line with the Europe and Central Asia (ECA) regions and World Bank-wide averages. 10 The average risk to development outcome by commitment volume with moderate or low risk was 50 percent, lower than the ECA average (60 percent) and in line with the World Bank (51 percent) average. However, in terms of percent of projects, Croatia (75 percent) had a significantly higher share of moderate and low risk projects than both ECA (50 percent) and the World Bank (42 percent). 31. During the CPS period from FY14 to FY17, IFC made net commitments of $151.2 million, which were concentrated in FY14. The largest project was IFC’s $60 million investment in a power plant during FY16. A client bank for an IFC loan canceled the engagement with IFC and proceeded with prepayment ahead of time due to a change in market conditions and decrease in demand for financing by local firms. During the review period, IEG did not validate any Expanded Project 10 In terms of number of projects, IEG rated seven out of nine closed projects (78 percent) as Moderately Satisfactory or better, compared to the Europe and Central Asia (ECA) region (80 percent) and World Bank- wide (74 percent). In terms of volume of lending both ECA (94 percent) and the World Bank as a whole (85 percent) did better than Croatia (77 percent). CLR Review For Official Use Only Independent Evaluation Group 10 Supervision Reports (XPSRs) of IFC investment projects. MIGA did not write any new guarantee during the CPS period. Analytic and Advisory Activities and Services 32. During the CPS period, the World Bank delivered a total of 23 Advisory Services and Analytics (ASA) products: seven Economic and Sector Work (ESW) products and sixteen Technical Assistance (TA) pieces. Technical assistance covered a wide range of topics, including energy reforms, equity and gender, EU preparedness, fiscal issues including support for a spending review, environment, and waste management. The CLR did not systematically analyze the relevance of this work for program objectives, although several of them were on topics related to the objectives. The analytical work undertaken by the World Bank helped inform the Systematic Country Diagnostic Study (SCD) in 2018, and also addressed issues in the justice system, energy, and smart specialization. ASA was broadly aligned with CPS plan, emphasizing issues aimed at complying with EU directives and helping absorb EU funds. Analytical and technical assistance work complemented well lending interventions. For example, the Public Finance Review complemented well lending interventions in the health and social protection sectors under Focus Area I. The program envisaged that ASA would increasingly be financed on a reimbursable basis. This shift did not materialize as anticipated, and the CLR notes that the reason for this outcome was both slow availability of EU funds and the limited understanding by counterparts. 33. During the review period, IFC did not approve any new advisory service project and IEG did not validate any Project Completion Reports (PCRs) of IFC’s AS project. Results Framework 34. Overall, the results framework reflected well the link between the medium-term country goals, key issues and obstacles, outcomes and intermediate indicators to which the World Bank Group expects to contribute, and WBG instruments supporting the program objectives. However, the results framework had four significant shortcomings. First, some indicators could not be tracked. This is the case of objective 1, where several tax gap methodologies make it difficult to determine progress in reducing the gap. Second, some of the targets had no specific target date. Such is the case of objective 4 for railway and energy strategic plans. Third, in other instances, process-oriented indicators did not adequately reflect the intended objectives. Such is the case of Focus Area III, where production of strategies documents, and project applications do not necessarily translate into improvements in the coherence and credibility of national strategies or the readiness and capacity to build a project pipeline. Partnerships and Development Partner Coordination 35. The Bank Group did not have an explicit partner coordination strategy. The CPS provides little detail and the CLR lists partners in each area but says little about coordination efforts or division of labor. The key development partnership in Croatia was cooperation with the EC and alignment with the country’s EU policies. The CLR notes that this was maintained during the program period. For example, by linking financing instruments to the government reform program and connecting development objectives of investment projects to the EU agenda. The World Bank worked jointly with the EU and the European Bank for Reconstruction and Development (EBRD) on restructuring the railways. Coordination with the IMF was discussed in very general terms (there was reference to macro and fiscal issues), but there was no explicit division of labor (e.g., which institution would take the lead in which area). Safeguards and Fiduciary Issues 36. Nine operations were closed and validated by IEG during the CPS, of which eight triggered environmental and social safeguards in the governance, health, water, environment and natural resources practices. The CLR reports satisfactory compliance. According to the projects’ ICRs and IEG’s ICRRs, the operations complied with all applicable social and environmental requirements. Issues recorded during implementation included weak capacity, delays, and construction noise, CLR Review For Official Use Only Independent Evaluation Group 11 especially with environmental safeguards. No Inspection Panel case was documented during the review period. Ownership and Flexibility 37. There was broad alignment between the Bank Group program and the Government’s 2013 economic program, which in turn was based on commitments for accession to the EU. The Bank Group carried out dialogue with the government as well as the European Commission to ensure that the program was owned by government counterparts. Initially, the government through consultation showed broad ownership which enabled program implementation. The change in administration in 2016 brought policy modifications that affected adversely key components of the Bank program. Policies in the health sector were reversed. Similarly, the consolidation of social protection programs was abandoned due to a change in the government’s vision and priorities. The Bank had difficulties adjusting to this mid-way change of course, which brought significant delays in program implementation, and the need to restructure some operations. Although the Performance and Learning Review noted the potential difficulties associated with a change of government in 2016, it kept them as risks to the macroeconomic framework, and made only modest adjustments for the remainder of the Bank Group program. WBG Internal Cooperation 38. There was substantial World Bank-IFC collaboration, with IFC supporting three of the nine CPS objectives. This was facilitated by a World Bank-IFC Joint Business Plan (September 2014). There was joint work between the World Bank and IFC on the privatization of district heating companies, and the Bank provided advice on feed-in-tariff legislation that was a prerequisite for IFC windfarm investments. There was also cooperation in the transport sector and regulation of financial institutions and products. IFC investments complemented Bank program and projects in air traffic, energy, and financing of medium and small enterprises. This cooperation was captured appropriately in the results framework. In air traffic, IFC supported the expansion of Zagreb International Airport. In energy, it helped develop sources of renewable energy through investments in wind power. IFC also invested in a local bank to expand financing to small and medium enterprises, some of which were expected to expand in the region and increase exports. Risk Identification and Mitigation 39. The CPS and PLR identified risks from macroeconomic instability, notably from external shocks, implementation problems due to failures in policy coordination of a large number of actors, and a slowdown of reforms after EU accession. The plan was to mitigate risks through policy dialogue on macroeconomic and external developments, portfolio reviews to address implementation obstacles, and collaboration with the EC to rely on its monitoring framework and offset program slippages. 40. In practice, the main risk that materialized—and that had not been fully identified—was the change in priorities on important aspects of the program as a result of the political transition. The mitigation measures that had been envisaged—primarily, the EC monitoring framework being strong enough to keep the World Bank program on track—failed to refocus reform in light of new political realities. The World Bank then sought to restructure underperforming projects, but this proved to be difficult in operations with strong institutional reform components, such as the Revenue Administration Modernization Project (FY07) and the Social Protection project (FY15). Overall Assessment and Rating 41. On balance, IEG rates WBG performance as Good. The CPS addressed key challenges facing the country, including EU accession, and was congruent with the government’s 2013 Economic Program and aligned with the WBG’s twin goals. The initial design of the program was appropriate. ASA was broadly aligned with the program, emphasizing complying with EU directives and helping absorb EU funds. Technical assistance covered a wide range of topics, including energy reforms, equity and gender, EU preparedness, fiscal issues, environment, and waste management. The analytical work undertaken by the World Bank helped prepare a Systematic Country Diagnostic Study CLR Review For Official Use Only Independent Evaluation Group 12 (SCD) in 2018, and also addressed issues in the justice system, energy, and smart specialization. The WBG identified a number of risks to the program coming from macro developments and domestic policy implementation but failed to articulate political economy risks. The results framework covered the country goals, outcomes to which the World Bank Group expected to contribute, and WBG instruments supporting the program’s objectives. However, it suffered from inadequate and poorly monitored indicators. Planned coordination with EU institutions and the IMF was appropriate in light of accession driven policies and Croatia’s challenging public finances. 42. During implementation, the program experienced reform reversals brought by political changes. The new 2016 administration changed priorities related to important aspects of the program. The mitigation measures that had been envisaged—primarily, the EC monitoring framework being strong enough to keep the World Bank program on track—failed to refocus the government reform orientation in light of new political realities. Portfolio performance at exit was comparable with the ECA region and the World Bank, but some interventions were affected by changes in government priorities. Projects that closed with unsatisfactory performance, such as the Revenue Administration project (FY07) and the Social Protection System Modernization project (FY15), contained major institutional and system reforms that were not embraced by the authorities following the 2016 change in administration. Such issues could not be addressed effectively through project restructurings. The number of active projects at risk remained stable and at levels comparable to EEC region and the Bank overall. There was substantial World Bank-IFC collaboration, particularly on energy, financial institutions and financial products. No Inspection Panel case was documented during the review period. Safeguard issues under some projects were addressed satisfactorily as they arose. 7. Assessment of CLR Completion Report 43. The CLR is clear and concise and provides a good discussion of the CPS achievements and WBG performance. However, it was insufficiently critical of shortcomings in the results framework and choice of indicators. In addition, it could have provided more information on the links between indicators and objectives under objectives 8 and 9 related to EU fund absorption and management and it would have been useful to have more evidence from the CLR on how World Bank activities translated into coherence and credibility of Croatia’s policy documents, and on how the help with project preparation improved government readiness and capacity to continue building the project pipeline, which will be essential for future absorption of EU funds. Similar comments apply to some of the other objectives that are supported by technical assistance or economic sector work. The discussion of selectivity and the results framework also would have benefitted from more elaboration. Similarly, the discussion of risks is thin, particularly with respect to the main risk that materialized— and that had not been fully identified (i.e., the change in priorities on important aspects of the program as a result of the political transition after 2015). 8. Findings and Lessons 44. The CLR contains several lessons: (i) keep a focus on results but be flexible on the use of instrument; (ii) critical to consider the potential impact of political change; (iii) the World Bank Group has a role in policy design and process underpinning reforms in the public sector; and (iv) for EU member countries with access to financing, IFC can still play a role in the success of a project. 45. It is not clear how lesson (i) flows from the CLR. It would be useful were the CLR to be more explicit on how it was derived. 46. Lesson (ii) notes the importance of considering the potential impact of political change. Indeed, in all client countries political changes can derail World Bank programs due to changes in policy priorities. In this context, the World Bank may need to develop alternative scenarios during program preparation to respond with flexibility in the event of program-disruptive political change. 47. Lesson (iii) as stated is uncontentious, with limited value added as a lesson. CLR Review Annexes Independent Evaluation Group 13 Annex Table 1: Summary of Achievements of CPS Objectives – Croatia Annex Table 2: Planned and Actual Lending for Croatia, FY14-FY17 ($, millions) Annex Table 3: Advisory Services and Analytics Work for Croatia, FY14-FY17 Annex Table 4: Croatia Grants and Trust Funds Active in FY14-FY17 ($, millions) Annex Table 5: IEG Project Ratings for Croatia, FY14-FY17 ($, millions) Annex Table 6: IEG Project Ratings for Croatia and Comparators, FY14-FY17 Annex Table 7: Portfolio Status for Croatia and Comparators, FY14-FY17 Annex Table 8: Disbursement Ratio for Croatia, FY14-FY17 Annex Table 9: Net Disbursements and Charges for Croatia, FY14-FY17 ($, millions) Annex Table 10: Total Net Disbursements of Official Development Assistance for Croatia ($, millions) Annex Table 11: Economic and Social Indicators for Croatia Annex Table 12: List of IFC Investments in Croatia ($, millions) Annex Table 13: List of IFC Advisory Services in Croatia ($, millions) Annex Table 14: IFC net commitment activity in Croatia, FY14 - FY17 ($, millions) Annex Table 15: List of MIGA Projects Active in Croatia, 2014-2017 ($, millions) CLR Review Annexes Independent Evaluation Group 15 Annex Table 1: Summary of Achievements of CPS Objectives – Croatia CPS FY14-FY17: Focus Area I: Fiscal Adjustment through Actual Results IEG Comments Reforms at the Sector Level 1. CPS Objective: Improving sustainability of revenue enhancing policy Indicator 1: Improved tax gap The Revenue Administration Modernization Before the PLR, Focus as a percentage of total GDP: Project –RAMP (P102778, FY07) supported Area 1’s name was: this objective. “Public Finance”. Baseline: 0.8 (2011) The CPS original baseline Target: 0.9 (2013) As reported in the CLR, the CPS used the and target were: RAMP-specific method to measure tax gap Baseline: 2.7% (2012) and when the project closed in June 2015, it Target: 2.0% (2017) was no longer possible to monitor further so the Intra-European Organization of Tax As indicated by the CLR, Administrations (IOTA) methodology was used the VAT Gap is the to validate data (see Management ICR: MU difference between the which reports that the quality of data for tax VAT Total Tax Liability gap estimates is an issue). The CLR also (VTTL) and the amount of reports that the Croatian Tax Administration VAT collected. The CLR (CTA) did not adopt IOTA methodology. specifies that in 2014- 2016, the VTTL increased As an alternative indicator, the CLR, using by 7% mainly on the data from the European Commission (see account of household report) indicates that the Value-added tax consumption recovery (VAT) Gap for Croatia has dropped from 3% to after a prolonged 1% between 2014 and 2016 (see IEG recession. In the same comment). period, the amount of VAT The CLR indicates that decline in the VAT gap revenues collected rose Major is consistent with the RAMP activities by 9%, reflecting among Outcome completed by the CTA in 2016, related to the other things measures Measures RAMP-supported Compliance Risk taken to improve the tax Management System (CRMS) and which collection. provides data sets allowing the CTA to analyze risk of non-compliance and improve tax The Strategy of Croatian revenues. ICRR: MU reports that, at project Tax Administration for closure (June 2015), the CRMS had not been 2016-2020 reports that the implemented (see IEG comment). The establishment of a full inconsistency of data presented does not allow functionality of risk to verify this indicator. management system (CRMS) as an opportunity Not Verified for development. It does not confirm its current use. 2. CPS Objective: Improving the targeting of social assistance programs Indicator 1: Means-tested The Social Protection System Modernization As reported in the CLR programs as a share of all Project (P145171, FY15) supported this and Management ICR: U social assistance programs Objective. of project P145171, a new increased: IEG ICRR: HU reports that the project failed to Social Welfare Law was introduce strict means testing for child adopted in 2013 (see Act) Baseline: 16% (2012) allowances, preventing the realization of the which introduced a new Target: 20% (2017) expected results and does not report data Guaranteed Minimum related to the share of means-tested Benefit (GMB), which programs. consolidated four different social assistance benefits The CLR reports that the share of means- and applied means testing tested social programs in overall central CLR Review Annexes Independent Evaluation Group 16 CPS FY14-FY17: Focus Area I: Fiscal Adjustment through Actual Results IEG Comments Reforms at the Sector Level government social spending increased from to protect the most 16.1 percent in 2012 to 17.1% in 2016 vulnerable. according to WBG calculations based on data provided by the Croatian government and to The Economic Recovery which IEG did not have access to. Development Policy Loan 2 - ERDPL 2 (P127665, Not Verified FY14) also supported this objective. As reported in the CLR and IEG ICRR: MS, the project supported the introduction of a management information system for social welfare and targeting social benefits using means- testing. 3. CPS Objective: Introducing cost rationalization and efficiency measures in the health sector Indicator 1: Total public The ERDPL 2 (P127665, FY14) supported this The CPS original baseline accrual health spending Indicator. and target were: reduced by .5 percent of GDP The CLR reports that public accrual spending Baseline: 6.6% between 2012 and 2017: was 6.6% in 2016 (and 6.9% in 2014) (preliminary, 2012) according to WBG calculations based on data Target 6.1 % (2017) Baseline: 7.6% (2012) provided by the Croatian government and to Target: 7.1% (2017) which IEG did not have access to. Other measures were IEG ICRR: MS for project P127665 reports achieved such as the that reduction in real health expenditures implementation of e- achieved 12% as of 2014 (with total public prescriptions; health spending reduced from 25.2 HRK standardized medical million to 22.6 HRK million between 2012 and technology and orthopedic 2014). Data from Eurostat reports that health devices and centralized expenditure represented 6.5% of the GDP in procurement– these were 2016 and 7.2% in 2012. prior actions of the Achieved ERDPL2 (see Management ICR: MS). Indicator 2: Further The Improving Quality and Efficiency of Health The CPS original baseline rationalization and Services PforR project (P144871, FY14) and target were: reorganization of hospital supported this indicator. Baseline: 6 beds used for system - total number of acute As reported in the April 2018 ISR: MU, the hospital admissions per care beds: total number of hospital beds in rationalized 1000 inhabitants (2012) hospitals classified as acute care beds Target: 5 beds used for Baseline: 15,930 (2012) reached 12,161 as of February 2018 – this hospital admissions per Target: 12,800 (2017) data was already reached as of March 2017 1000 (2017) (see October 2017 ISR: MU). Mostly Achieved 4. CPS Objective: Contributing to the coherence and implementation of strategic plans in railway and improvements in airport infrastructure Indicator 1: Implementation of The Sustainable Railways in Europe Project The TDS assesses and restructuring plans for railway (P147499, FY15) supported this indicator. defines future measures sector companies and (infrastructure, operation medium-term strategy for the The CLR reports that the Transport and organization) in the rail sector Development Strategy (TDS) 2017-2030 has transport sector, for all CLR Review Annexes Independent Evaluation Group 17 CPS FY14-FY17: Focus Area I: Fiscal Adjustment through Actual Results IEG Comments Reforms at the Sector Level consistent with the EU 2014-20 been adopted in 2017 and approved by the transport segments, funding period: EC as part of ex-ante conditionality for the use including railway. Only the of EU funds (see EU page and PAD for the April 2017 TDS draft Baseline: Revised restructuring Modernization and Restructuring of the Road document was available plans of railway companies Sector project, P155842, FY17). IEG could not online. verify the adoption of the TDS by the Target: Railway Modal Strategy government (see IEG comment). The Spending Review TA 2014-2020 and medium-term (P154273, FY15) also contracts in place for Passenger The CLR reports that, medium-term contracts supported this indicator, Services and Infrastructure for Passenger Services Obligation (PSO) in providing support to the Management consistent with the HZ Passenger (HZP) consistent with the redesign of PSO contracts strategy strategy have been in place since 2017 while (see Final Report). the January 2018 ISR: MS of project P147499 reports that the Ministry of Transport and the The CLR also reports that government have announced that they will interim/annual contracts effectively start sector reform in 2018. The are also in place with latest ISR: MS of November 2018 reports that more detailed annual the finalization of the new multi-annual PSO operational plans, contract was expected by end of July 2019. including the national Finally, additional information shared by the budget components for Country Team indicates that a multi-annual EU funds projects. This PSO contract for 2019-2028 were signed. information could not be Nevertheless, according to IEG information verified by IEG. railway companies restructuring did not achieve the expected level of progress. Partially Achieved Indicator 2: Implementation of The WBG supported the Croatia Energy Croatia Energy Strategy 209- Reforms non-lending technical assistance 2020 related to the renewable (P144564, FY14); the Energy Affordability energy and district heating: study (P150385, FY15, see final study) and the EU 11 Programmatic Energy Affordability Baseline: Energy Strategy in programmatic approach (P147497, FY15, see place (2012) completion summary). Target: Action plan adopted for As reported in the CLR, the Bank reviewed the feed-in tariffs for renewable methodology for feed-in tariffs, especially for energy resources and for district heating (DH) sector (under project improving the efficiency of the P144564), and provided recommendation to distinct heating sector. the Croatian Energy Regulating Agency, some of which were accepted and adopted in the new tariff system. The CLR reports that an action plan for feed-in tariffs for renewable energy resources and for improving the efficiency of the DH sector was adopted and that the feed-in tariff system for RER and DH was adopted in 2013, with amendments in 2014 and 2015 (see 2013 and 2015 documents). Achieved CLR Review Annexes Independent Evaluation Group 18 CPS FY14-FY17: Focus Area I: Fiscal Adjustment through Actual Results IEG Comments Reforms at the Sector Level Indicator 3: Accommodate The IFC Financing for Zagreb Airport Indicator added at PLR. existing and future air traffic: expansion and modernization project (31969, FY14, see IFC brief) supported this indicator. Baseline: 0.44 million unique users in 2013 The CLR reports, using data from the National Target: 0.60 million unique users Airport Authority, that the number of in 2017 passengers in 2017 reached 3.1 million, meaning that there were 0.59 million unique users in 2017. It also reports that IFC financing for Zagreb Airport expansion is expected to reach in 2018 0.66 million unique users (or 3.45 million passengers) based on the increase in the number of passengers in 2017 and the first two months of 2018. Achieved CPS FY14-FY17: Focus Area II: Innovation and Trade Actual Results IEG Comments Competitiveness for Growth and Shared Prosperity 5. CPS Objective: Improving efficiency and reducing arrears in the judicial system Indicator 1: Case backlog in The Justice Sector Support Project (P104749, Under Integrated Land judiciary decreased FY10) supported this indicator. Administration System Baseline: 437,892 (2012) IEG ICRR: MS reports that Court case Project (P122219, FY12), Target: 394,103 (2017) backlogs were reduced from 437,892 to transaction processing 349,051, as of April 2016. As reported in the times in the land registry CLR, this reduction was made possible notably and cadaster were thanks to the piloting and implementation of a reduced from, new integrated case management system respectively, 48 and 30 (ICMS). days to 17.8 and 3.5 days as of March 2018 (see Achieved June 2018 ISR: S). Major Before the PLR, Focus Outcome Area 2’s name was: Measures “Competitiveness”. The CPS original baseline and target were: Baseline: 498,601 (2012) Target: 300,000 (2017) The CLR indicates that comparable data for 2017 is not available given that the methodology applied currently in the Croatian judicial system is not comparable with how this was tracked under the WBG Justice Project. CLR Review Annexes Independent Evaluation Group 19 CPS FY14-FY17: Focus Area II: Innovation and Trade Actual Results IEG Comments Competitiveness for Growth and Shared Prosperity 6. CPS Objective: Contributing to diversity and security of energy supply by financing energy efficiency and renewable energy projects Indicator 1: Additional Various IFC projects contributed to this Before the PLR, the renewable energy generation indicator: original baseline and capacity installed - The Sibenik wind power plant (WPP) target were: Target: 108 MW (2017) project (31606, FY12) – IEG confirms that Baseline: 180MW (2012) the WPP has capacity of 43.7 MW, and it is Target: 354 MW (2017) the largest WPP in Croatia producing about 100 gWh yearly as reported by CLR. (http://www.rp- global.com/wind/croatia/danilo/) - The Jelinak project (32218, FY13) – IEG confirms that it has the capacity of 30 MW (as per the IFC Brief and https://www.acciona-energia.com/areas-of- activity/wind-power/major-projects/jelinak- wind-farm/) - The Rudine WPP project (34079, FY15) – IEG confirms that the WPP has capacity of 34.2 MW as reported by CLR (http://www.rp- global.com/wind/croatia/rudine/) IEG confirms that IFC investments in the energy sector have increased the renewable energy installed capacity by 107.9 MW. Achieved Indicator 2: GHG emissions Before the PLR, the avoided per year The information of the project company states original baseline and Target: 75,000 tCO2 equivalent that two WPPs financed by IFC reduced the target were: (2017) GHG emission by 100,000 tCO2. Baseline: 0 (2013) Achieved Target: 0.32 million (2017) 7. CPS Objective: Supporting competitive local companies to expand in the region and increase exports Indicator 1: Level of exports of The Export Finance Intermediation Loan beneficiary companies (P116080, FU10) supported this indicator. Baseline: HRK 4.35 billion As reported in IEG ICRR: S the level of (2011) exports of beneficiary firms has increased by Target: At least preserve the 18.9% collectively, with the total value exports level of exports (2017) increasing by EURO 225 million during the project life (by August 2016) and a median growth rate of 25%. Achieved Indicator 2: Number of The IFC investment with the relationship bank Indicator added at PLR. outstanding MSME loans in (project 32317, FY14) supported this indicator. the portfolio IFC’s client banks The CLR reports that in 2016, IFC reached Baseline: 6,000 (2011) 5,125 MSME loans through its client bank. It adds that the number was expected to grow CLR Review Annexes Independent Evaluation Group 20 CPS FY14-FY17: Focus Area II: Innovation and Trade Actual Results IEG Comments Competitiveness for Growth and Shared Prosperity Target: At least preserve the but that due to a change of market conditions same level (2016) and decrease in demand for financing, the client bank decided to cancel the engagement and proceed with prepayment ahead of time. Mostly Achieved CPS FY14-FY17: Focus Area III: Helping Maximize the Actual Results IEG Comments Economic Benefits of Becoming an EU Member State 8. CPS Objective: Improving coherence and credibility of national strategic and policy documents needed for the EU funds absorption and management Indicator 1: National strategic The Second Science and Technology project As reported in the CLR, the and policy documents, (P127308, FY13) and the Smart National Research including sector specific Specialization ASA (P154855, FY15, see infrastructure Roadmap strategies, needed for the use WBG Final Report) supported this indicator. has been updated following of EU Funds, adopted by the approval of the Smart relevant authorities The following policy advice was provided and Specialization Strategy strategies have been adopted during the (see document). Baseline: no documents in place CPS: (2012) (i) as reported in project P127308 ISR: S of October 2018, the National Strategy on Target: Sector strategies adopted: Education, Science and Technology was (i) National Education, Science adopted by the Parliament in October 2014 and (see EU document); Technology Strategy; (ii) as reported in the CLR, a National (ii) National Innovation Strategy; Innovation Strategy has been prepared and (iii) Research and Innovation adopted December 2014 (see EU document). Major Strategy for Smart Specialization; (iii) the Smart Specialization Strategy has Outcome (iv) Policy advice/ been approved by the European Commission Measures recommendations in the areas of in March 2016 (see EU page and EU irrigation, rural development, document) transport, SME and water/ (iv) the CLR reports that Policy advice in the environment sector; areas of irrigation, rural development, (v) National Technical and transport, SME and water/environment Economic Study for Management sector has been provided through EU of Wastewater Treatment Preparedness TA (P131000, FY15) during Sludge (2017). three years (see WBG Summary of Results and Report) (v) the Coastal Cities Pollution Control Project 2 (P102732, FY09) supported the preparation of a technical and economic study on treatment and disposal of waste and waster sludge (see IEG ICRR: S). A national Waste Management for 2017-2022 was also prepared by the Government (see document). Achieved CLR Review Annexes Independent Evaluation Group 21 CPS FY14-FY17: Focus Area III: Helping Maximize the Actual Results IEG Comments Economic Benefits of Becoming an EU Member State 9. CPS Objective: Contributing to Croatia’s readiness and capacity to build the project pipeline for absorbing EU Funds in selected sectors Indicator 1: Number and value As reported in the CLR, various projects of project applications supported this Objective: prepared and/or submitted for financing from EU Funds in (i) The CLR reports that under the Second research and innovation and Science and Technology project (P127308, nature protection FY13), 6 project applications are in course for an estimated value of EUR 168 million - Baseline: no project proposals of these, 2 projects have already received (2012) financing worth EUR 34 million. 1 R&D grant scheme has been prepared (EUR 5 million), Target: (i) At least 6 project and of the remainder 3 large R&D applications for financing in infrastructure projects, applications for 2 research, development and have been completed (Jaspers issued innovation sector, for the total completion notes), and one is in an value of projects amounting to € advanced stage of preparation (O-zip project 50 million by Rudjer Boskovic Institute worth EUR 72 million). This information could not be verified (ii) At least 25 project applications by IEG using the most recent ISR (October for financing in the nature 2018 ISR: S) which reports distinct data. protection sector, for the total Only the status of the O-Zip project could be value of projects amounting to € verified. 50 million (2017) The CLR also reports that (ii) The CLR reports that the WBG has under the Justice Sector supported the preparation of applications for Support Project, (P104749, absorption of EU funds estimated at over and FY10) the Bank EUR 650 million, far more than the EUR100 supported the preparation million euros foreseen initially: of two project applications - Under the EU Natura 2000 Integration for EUR 11 million, which Project (P111205, FY1) 32 project have already been proposals were made to EU Structural implemented. This Funds, of which 17 were approved for information is not reported funding, 10 were in the process of in IEG ICRR: MS. approval and 5 were rejected (see IEG ICRR: S). As reported in the ICRR, as a result Croatia has been granted EURO 213 million from the EU Structural Fund for programming in 2014-2020. - Under the Coastal Cities Pollution Control Project 2 (P102732, FY09), five projects design were prepared for around EUR 230 million and processing was underway for these proposals given that they were completed towards the end of the project (see IEG ICRR: S). - The CLR reports that under the Rijeka Gateway 2 Project (P102365, FY09) one EU project application under EU CLR Review Annexes Independent Evaluation Group 22 CPS FY14-FY17: Focus Area III: Helping Maximize the Actual Results IEG Comments Economic Benefits of Becoming an EU Member State Connecting Europe Facility worth 30 million EUR has already been approved and contracting is underway. The June 2018 ISR: MS reports that the construction of the Zagreb Container Terminal was progressing well and was on track to be completed by end December 2018 (see European Commission document). Mostly Achieved CLR Review Annexes Independent Evaluation Group 23 Annex Table 2: Planned and Actual Lending for Croatia, FY14-FY17 ($, millions) Approved Project Proposed Approval Closing Proposed Proposed Project name IBRD ID FY FY FY Amount Amount Amount CPS PLR Project Planned Under CPS/PLR P133471* Croatia Export Financing Guarantee Project** 2013 2013 2018 0.0 0.0 GEF Adriatic Sea Environmental Pollution Control P143921* FY14-15 2014 2019 4.3 4.3 Project P127665 ECONOMIC RECOVERY DPL 2 FY14-15 2014 2015 206.8 206.8 Dropped Development Policy Loan FY14-15 P144871 Health Sector Reform Project FY14-15 2014 2020 103.5 103.5 SOCIAL PROTECTION SYSTEM P145171 FY14-15 2015 2018 95.6 95.6 MODERNIZATION P147499 Croatia Railway FY14-15 2015 2020 183.4 183.4 P152130* Croatia Innovation & Entrepreneurship VC FY14-15 2016 2018 21.9 21.9 Total Planned 800 611.2 611.2 Approved Project Proposed Approval Closing Proposed Proposed Project name IBRD ID FY FY FY Amount Amount Amount CPS PLR Project Unplanned Under CPS/PLR P155842 Modernization and restructuring of roads** 2017 2022 23.33 Total Unplanned 23.33 Approved Project Proposed Approval Closing Proposed Proposed Project name IBRD ID FY FY FY Amount Amount Amount CPS PLR On-going Projects During the CPS/PLR Period P093767 TRADE & TRANS INTEG 2007 2016 75.3 P102778 REVENUE ADMIN MODERN (RAMP) 2007 2015 68 P086669 EMS & INVEST PLANNING (DEMSIP) 2009 2014 28.3 P102365 RIJEKA Gateway II (new FY09) 2009 2019 122.5 P102732 COASTAL CITIES POLLUTION CONTROL 2 2009 2016 87.5 P104749 JUSTICE SECTOR SUPPORT PROJECT 2010 2016 36.3 P116080 EXPORT FIL 2010 2017 141.22 P111205 EU NATURA 2000 2011 2017 28.8 P118260 AF-TRADE & TRANSPORT INTEGRATION 2012 2016 66.92 P122219 INTEGRATED LAND ADMIN SYSTEM 2012 2022 23.8 P127308 Science and Technology II 2013 2019 26.24 P129220 CROATIA EFIL AF 2013 2017 61.41 Total On-going 766.29 Source: Croatia CPS, WB Business Intelligence Table 2a.4, 2a.7, and 2b.1 as of 01/29/2019. * Projects planned but not listed in Croatia CPS Table 4 - P152130 (par. 71), P065416 (par. 85), P133471 approved prior to CPS ** Partial credit guarantee of $256.4 million for P133471 and $330.7 million for P155842. *** Rating of parent project. CLR Review Annexes Independent Evaluation Group 24 Annex Table 3: Advisory Services and Analytics Work for Croatia, FY14-FY17 Project Fiscal Economic and Sector Work Report Type Global Practice ID Year Sector or Thematic P129039 Croatia Case Study FY14 Governance Study/Note Public Expenditure P122054 Justice Sector Public Expdr & Instnl Rvw FY14 Governance Review (PER) Public Expenditure Macroeconomics, Trade and P127662 Public Finance Review FY14 Review (PER) Investment P150385 Croatia Energy Affordability FY15 Other Poverty Study Poverty and Equity Knowledge P154855 Croatia Smart Specialization FY15 Trade & Competitiveness Management Product Sector or Thematic Macroeconomics, Trade and P156959 Croatia Policy Notes 2015 FY16 Study/Note Investment P160376 Croatia CEQ & input to regional flagship FY17 Other Poverty Study Poverty and Equity Project Fiscal Technical Assistance Output Type Global Practice ID Year P145233 Venture Capital FY14 Technical Assistance Trade & Competitiveness P144564 Energy Reforms FY14 Technical Assistance Energy & Extractives Macroeconomics, Trade and P147844 National Reform Program FY14 Technical Assistance Investment P143280 EU Equity and Gender FY14 Technical Assistance Poverty and Equity * P143351 ECCU5 Activation and Skills for FY14 Technical Assistance Social Protection & Labor * Employability and Protection Finance, Competitiveness and P153993 Banking Sector - Croatia FY15 Technical Assistance Innovation ML/FTNational Risk Assessment of Finance, Competitiveness and P149740 FY15 Technical Assistance Croatia Innovation Social, Urban, Rural and Resilience P131000 EU Preparedness FY15 Technical Assistance Global Practice Macroeconomics, Trade and P154273 Croatia: Support for Spending Review FY15 Technical Assistance Investment P153715 Croatia National Reform Program VC FY15 Technical Assistance Other P146139 Danube Water Program State of the FY15 Technical Assistance Water * Sector P153528 Croatia National Reform Program FY16 Technical Assistance Transport & Digital Development Finance, Competitiveness and P156355 Tax Treatment of NPL resolution FY16 Technical Assistance Innovation P159627 Spatial Analysis of Poverty and Policies FY16 Technical Assistance Poverty and Equity Macroeconomics, Trade and P156273 Croatia Macro-Fiscal Structural Dialogue FY17 Technical Assistance Investment P153133 Croatia--RAS Higher Ed Finance Reforms FY17 Technical Assistance Education Assessing financial gap for implementation P163660 of Croatian National Waste Management FY17 Technical Assistance Environment & Natural Resources Plan (2017-2022) Source: WB Business Intelligence 01/29/2019. * Regional Projects CLR Review Annexes Independent Evaluation Group 25 Annex Table 4: Croatia Grants and Trust Funds Active in FY14-FY17 ($, millions) Project Approval Closing Approved Project name TF ID ID FY FY Amount Neretva and Trebisnjica River Basin Management Project P084608 TF 91967 2009 2015 8.0 (BiH/Croatia) P102395 Second Coastal Cities Pollution Control Project TF 92704 2009 2016 6.4 P144257 PEFA Study for Local Governments in Croatia TF 14175 2013 2014 0.1 P144257 PEFA Study for Local Governments in Croatia TF 14177 2013 2015 0.1 Croatia: SAFE Trust Fund for Modernizing Treasury P131562 TF 12382 2013 2014 0.2 Systems in Croatia Total 14.8 Source: WB Client Connection as of 01/29/2019. * Rating of parent project; ** IEG validates RETF that are 5M and above. Annex Table 5: IEG Project Ratings for Croatia, FY14-FY17 ($, millions) Exit Project Total Project name IEG Outcome IEG Risk to DO FY ID Evaluated MODERATELY 2014 P086669 EMS & INVEST PLANNING (DEMSIP) 23.0 MODERATE SATISFACTORY Neretva and Trebisnjica River Basin MODERATELY 2015 P084608 7.9 MODERATE Management Project (BiH/Croatia) SATISFACTORY MODERATELY 2015 P102778 REVENUE ADMIN MODERN (RAMP) 15.8 LOW UNSATISFACTORY MODERATELY 2015 P127665 ECONOMIC RECOVERY DPL 2 202.1 SIGNIFICANT SATISFACTORY 2016 P093767 TRADE & TRANS INTEG 135.8 UNSATISFACTORY SIGNIFICANT P102732 2016 COASTAL CITIES POLLUTION CONTROL 2 80.8 SATISFACTORY LOW * MODERATELY 2016 P104749 JUSTICE SECTOR SUPPORT PROJECT 21.4 MODERATE SATISFACTORY 2017 P111205 EU NATURA 2000 25.3 SATISFACTORY # 2017 P116080 EXPORT FIL 188.1 SATISFACTORY MODERATE Total 700.2 Source: WB Business Intelligence Key IEG Ratings as of 01/29/2019. * Includes GEF grant from P102395. Annex Table 6: IEG Project Ratings for Croatia and Comparators, FY14-FY17 RDO % RDO % Total Total Outcome Outcome Moderate or Moderate or Evaluated Evaluated % Sat ($M) % Sat (No) Lower Lower ($M) (No) Sat ($) Sat (No) Croatia 700.2 10 77 80 50 78 Europe and Central Asia 17,341.2 134 94 80 60 50 World 89,286.3 956 85 74 51 42 Source: WB Business Intelligence as of 01/29/2019 and IEG staff calculations. CLR Review Annexes Independent Evaluation Group 26 Annex Table 7: Portfolio Status for Croatia and Comparators, FY14-FY17 Fiscal Year 2014 2015 2016 2017 Ave FY14-FY17 Croatia # Proj 11 11 9 8 10 # Proj At Risk 3 2 1 2 2 % Proj At Risk 27 18 11 25 20 Net Comm Amt ($M) 999.5 1,039.7 808.1 600.2 861.9 Comm At Risk ($M) 288.5 146.3 122.5 117.5 168.7 % Commit at Risk 29 14 15 20 19 Europe and Central Asia # Proj 202 207 197 202 202 # Proj At Risk 36 30 40 34 35 % Proj At Risk 18 14 20 17 17 Net Comm Amt ($M) 26,638.2 26,192.1 27,213.5 25,219.5 26,315.8 Comm At Risk ($M) 2,619.0 3,507.2 4,288.2 5,460.1 3,968.6 % Commit at Risk 10 13 16 22 15 World Bank # Proj 1,386 1,402 1,398 1,459 1,411 # Proj At Risk 329 339 336 344 337 % Proj At Risk 24 24 24 24 24 Net Comm Amt ($M) 183,153.9 191,907.8 207,350.0 212,502.9 198,728.6 Comm At Risk ($M) 39,748.6 44,430.7 42,715.1 50,837.9 44,433.1 % Commit at Risk 22 23 21 24 22 Source: WB Business Intelligence as of 01/29/2019. Annex Table 8: Disbursement Ratio for Croatia, FY14-FY17 Fiscal Year 2014 2015 2016 2017 Overall Result Croatia Disbursement Ratio (%) 23 25 25 22 24 Inv Disb in FY ($M) 96.0 77.0 119.7 76.0 368.7 Inv Tot Undisb Begin FY ($M) 426.2 304.4 470.3 351.1 1,552.0 Europe and Central Asia Disbursement Ratio (%) 23 23 17 21 21 Inv Disb in FY ($M) 2,613.6 2,664.9 2,276.3 2,858.7 10,413.5 Inv Tot Undisb Begin FY ($M) 11,470.0 11,343.0 13,032.3 13,778.8 49,624.1 World Bank Disbursement Ratio (%) 21 22 19 20 21 Inv Disb in FY ($M) 20,759.3 21,854.1 21,153.6 22,128.0 85,895.0 Inv Tot Undisb Begin FY ($M) 99,856.9 100,345.8 108,603.7 108,150.7 416,957.0 Source: WB Business Intelligence as of 01/29/2019. CLR Review Annexes Independent Evaluation Group 27 Annex Table 9: Net Disbursements and Charges for Croatia, FY14-FY17 ($, millions) Period Disb. Amt. Repay Amt. Net Amt. Charges Fees Net Transfers FY14 97.4 133.2 -35.8 13.9 0.2 -49.9 FY15 287.5 107.7 179.7 13.9 1.0 164.8 FY16 155.9 277.2 -121.4 11.1 2.1 -134.5 FY17 75.4 101.7 -26.4 8.6 0.4 -35.4 Report Total 616.1 619.9 -3.8 47.5 3.7 -55.0 Source: WB Business Intelligence as of 01/29/2019. Annex Table 10: Total Net Disbursements of Official Development Assistance for Croatia ($, millions) Development Partners 2014 2015 2016 2017 No data available. Development Partners, Total Source: OECD Stat database as of 01/29/2019. Annex Table 11: Economic and Social Indicators for Croatia Europe and Croatia Central World Series Name Asia 2014 2015 2016 2017 Average 2014-2017 Growth and Inflation GDP growth (annual %) -0.1 2.4 3.5 2.9 2.2 2.1 2.8 GDP per capita growth (annual %) 0.3 3.2 4.3 4.1 3.0 1.6 1.6 GNI per capita, PPP (current 21,640.0 22,860.0 23,740.0 25,810.0 23,512.5 30,954.6 16,012.3 international $) GNI per capita, Atlas method 13,290.0 12,970.0 12,360.0 12,570.0 12,797.5 24,055.7 10,563.1 (current $) Inflation, consumer prices (annual %) -0.2 -0.5 -1.1 1.1 -0.2 0.8 1.8 Composition of GDP (%) .. .. .. Agriculture, value added (% of 3 3 3 3 3 2 4 GDP) Industry, value added (% of GDP) 22 22 22 22 22 23 26 Services, etc., value added (% of 58 58 58 58 58 65 64 GDP) Gross fixed capital formation (% of 19 20 20 20 20 20 23 GDP) Gross domestic savings (% of 21 22 24 23 22 24 26 GDP) External Accounts .. .. .. Exports of goods and services (% 45 48 49 51 48 42 31 of GDP) Imports of goods and services (% 43 46 46 49 46 39 30 of GDP) Current account balance (% of GDP) 1 5 3 5 3 .. .. External debt stocks (% of GNI) .. .. .. .. .. .. .. Total debt service (% of GNI) .. .. .. .. .. .. .. Total reserves in months of imports 7 7 6 7 7 8 13 CLR Review Annexes Independent Evaluation Group 28 Europe and Croatia Central World Series Name Asia 2014 2015 2016 2017 Average 2014-2017 Fiscal Accounts* .. .. .. General government revenue (% of 43 44 46 .. 44 .. .. GDP) General government total 48 48 47 .. 48 .. .. expenditure (% of GDP) General government net -5 -3 -1 .. -3 .. .. lending/borrowing (% of GDP) General government gross debt (% 86 85 82 .. 84 .. .. of GDP) Health .. .. .. Life expectancy at birth, total 77.5 77.3 78.0 .. 77.6 77.2 71.9 (years) Immunization, DPT (% of children 95 94 93 92 94 93 85 ages 12-23 months) People using at least basic 97 97 .. .. 97 96 68 sanitation services (% of pop) People using at least basic drinking 100 100 .. .. 100 98 88 water services (% of pop) Mortality rate, infant (per 1,000 live 4.2 4.1 4.0 3.9 4.1 8.4 30.8 births) Education .. .. .. School enrollment, preprimary (% 61 63 63 .. 62 74 48 gross) School enrollment, primary (% 99 98 95 .. 97 102 103 gross) School enrollment, secondary (% 99 98 98 .. 98 106 77 gross) Population .. .. .. Population, total (Millions) 4.2 4.2 4.2 4.1 4.2 909.4 7,400.8 Population growth (annual %) -0.4 -0.8 -0.7 -1.2 -0.8 0.5 1.2 Urban population (% of total) 56 56 56 57 56 72 54 Poverty .. .. .. Poverty headcount ratio at $1.90 a 1 1 .. .. 1 2 10 day (2011 PPP) (% of pop) Poverty headcount ratio at national 20 20 .. .. 20 .. .. poverty lines (% of pop) Rural poverty headcount ratio at national poverty lines (% of rural .. .. .. .. .. .. .. pop) Urban poverty headcount ratio at national poverty lines (% of urban .. .. .. .. .. .. .. pop) GINI index (World Bank estimate) 32.1 31.1 .. .. 31.6 .. .. Source: WB Development Data Platform as of 01/29/2019. *International Monetary Fund, World Economic Outlook Database, October 2018. CLR Review Annexes Independent Evaluation Group 29 Annex Table 12: List of IFC Investments in Croatia ($, millions) Investments Committed in FY14-17 Project Cmt Project Primary Sector Project Size Net Loan Net Equity Net Comm ID FY Status Name 34079 2015 Active Electric Power 61.3 24.6 - 24.6 Transportation 31969 2014 Active and 173.8 72.6 15.8 72.1 Warehousing Finance & 32317 2014 Closed 65.0 68.0 - 68.0 Insurance Transportation 34380 2014 Active and 1.2 1.2 - 1.2 Warehousing Sub-Total 301.3 166.5 15.8 166.0 Investments Committed pre-FY14 but active during FY14-17 Project CMT Project Primary Sector Project Size Net Loan Net Equity Net Comm ID FY Status Name 32218 2013 Active Electric Power 57.5 20.0 - 20.0 Food & 32454 2013 Active 339.2 20.5 - 20.5 Beverages Wholesale and 33394 2013 Active 67.8 38.5 - 38.5 Retail Trade 31606 2012 Active Electric Power 74.0 24.8 - 24.8 Sub-Total 538.5 103.8 - 103.8 TOTAL 839.8 270.3 15.8 269.8 Source: IFC-MIS Extract as of 9/30/18 Annex Table 13: List of IFC Advisory Services in Croatia ($, millions) Advisory Services Approved in FY14-17 Primary Project Impl Impl Project Total Project Name Business ID Start FY End FY Status Funds Line No approved projects Sub-Total - Advisory Services Approved pre-FY14 but active during FY14-17 Primary Project Impl Impl Project Total Project Name Business ID Start FY End FY Status Funds Line Sub-Total - TOTAL - Source: IFC AS Portal Data as of 9/30/15 CLR Review Annexes Independent Evaluation Group 30 Annex Table 14: IFC net commitment activity in Croatia, FY14 - FY17 ($, millions) 2014 2015 2016 2017 Total Long-term Investment Commitment Financial Markets - - 68.2 (5.3) 62.9 Agribusiness & Forestry - - - - - Manufacturing - - - - - Tourism, Retail, Construction & Real Estates - - (TRP) 0.5 - 0.5 Infrastructure 75.0 13.6 (0.6) (0.2) 87.8 Total IFC Long Term Investment Commitment 143.8 8.3 (0.6) (0.2) 151.2 Total Short-term Finance/Trade Finance / - - Average Outstanding Balance (GTFP) - Source: IFC MIS as of 12/3/18 Note: IFC began reporting average outstanding short-term commitments (not total commitments) in FY15 and no longer aggregates short-term commitments with long-term commitments. IEG uses net commitment number for IFC's long-term investment. For trade finance guarantees under GTFP, average commitment numbers have been used. Annex Table 15: List of MIGA Projects Active in Croatia, 2014-2017 ($, millions) Project Max Gross Contract Enterprise FY Sector Status Issuance No Active MIGA Projects Total - Source: MIGA 12/4/18 w/ Project Briefs