Document of The World Bank FOR OFFICIAL USE ONLY Report No: 77628-PL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION POLAND COUNTRY PARTNERSHIP STRATEGY (CPS) FOR THE PERIOD FY14-17 July 15, 2013 Central Europe and the Baltic Countries Europe and Central Asia Region International Finance Corporation Europe and Central Asia Department This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's policy on Access to Information. The last Poland Country Partnership Strategy (CPS) Report No. 48666-PL was discussed by the Board of Executive Directors on June 30, 2009, and the last Poland CPS Progress Report No. 61315- PL was dated May 9, 2011. ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IDF Institutional Development Fund AAU Assigned Amount Unit IEG Independent Evaluation Group CEB Council of Europe Development Bank IFC International Finance Corporation CHF Swiss Francs IL Investment Loan COP Conference of the Parties ILO International Labor Organization CPS Country Partnership Strategy IPSAS International Public Standards Assessment Standards CPSCR Country Partnership Strategy Completion Report IMF International Monetary Fund DG ECFIN Directorate General for Economic & Financial Affairs M&E Monitoring and Evaluation DG REGIO Directorate General for Regional Policy MIGA Multilateral Investment Guarantee Agency DPL Development Policy Loan NBP National Bank of Poland EBRD European Bank for Reconstruction and Development OECD Organization for Economic Co-Operation EC European Commission & Development ECA Europe and Central Asia PFM Public Financial Management EIB European Investment Bank PLK Polskie Linie Kolejowe ERM European Exchange Rate Mechanism PLN Polish Zloty ESA European System of national and regional accounts PO Civic Platform Party ESW Economic and Sector Work PSL Polish Peasants Party EU European Union PPP Public Private Partnership EUR Euro RAS Reimbursable Advisory Services FCL Flexible Credit Line R&D Research and Development FDI Foreign Direct Investments RER Regular Economic Report FSAP Financial Sector Assessment Program SDR Special Drawing Rights FY Fiscal Year SME Small and Medium Enterprise GDP Gross Domestic Product TA Technical Assistance GHG Greenhouse Gases TF Trust Fund GNI Gross National Income US$ US Dollar IBRD International Bank for Reconstruction and Development WBG World Bank Group IBRD IFC Vice President Yvonne Tsikata (Acting) Dimitris Tsitsiragos Country Director Mamta Murthi Tomasz Telma (Regional Director) Task Team Leader Xavier Devictor Hester Marie DeCasper Co-Task Team Leader Marcus Heinz CURRENCY EQUIVALENTS Currency unit: Zloty (PLN) as of May 1, 2013 US$1 = PLN 3.154 POLAND FISCAL YEAR WORLD BANK FISCAL YEAR January 1 - December 31 July 1 - June 30 This Country Partnership Strategy (CPS) was prepared under the guidance of Mamta Murthi, IBRD Country Director and Tomasz Telma. The IBRD team was led by Xavier Devictor, Task Team Leader (TTL) and IBRD Country Manager for the Republic of Poland and Marcus Heinz, Co-Task Team Leader (Co-TTL). The IFC team was led by Hester Marie DeCasper, Economist, IFC Europe and Central Asia Department. MIGA participation was led by Franciscus J. Linden, Senior Risk Management Officer. The CPS Core Team included: Nina Arnhold, Ozerk Aslan Anna Bokina, Elisabetta Capanelli, Agnes Couffinhal, Radoslav Czapski, Leszek Kasek, Isfandyar Zaman Khan, Ewa Korczyc, Anna Kowalczyk, Jean Francois Marteau, Valentina Martinovic, Malgorzata Michnowska, Marcin Piatkowski, Katarzyna Popielarska, Ismail Radwan, Jan Rutkowski, Nishta Sinha, Emilia Skrok, Gallina Vincelette and Iwona Warzecha. The following Poland Country Team Members and other colleagues have also made important contributions to this strategy: Clara Alvarez, Lawrence Bouton, Sabina Djutovic- Alivodic, Nagaraju Duthaluri, Karina Izaguirre, Rajiv Kalsi, Andy Kircher, Jeni Klugman, Robert Lesnick, Marius Koen, Anat Lewin, Laszlo Lovei, Andrei Markov, Luisa Masutti, Ana Maria Mihaescu (IFC), Francois Nankobogo, John Nasir, Michael Nelson, Shilpha Pradhan, Francois Rantrua, Michelle Rebosio, Revenga, Gail Richardson, Keta Ruiz, Ana Kristyn Schrader, Kenneth Simler, Roberto Tarallo, Yvonne Tsikata and Sergiy Zorya. Other members of the Bank-wide Poland Country Team (including IBRD, IFC and MIGA) have also contributed. Special thanks are extended to Pascal Boijmans, who peer reviewed the document, and his colleagues in the European Commission and the counterpart team of the Government of the Republic of Poland. POLAND COUNTRY PARTNERSHIP STRATEGY FY14-17 TABLE OF CONTENTS I. IN TR O D U C TIO N ................................................................................................................. 1 II. POLAND: POLITICAL, SOCIAL AND ECONOMIC CONTEXT............................. 2 A. POLITICAL PROFILE..................................................... 2 B. SOCIAL PROFILE (POVERTY AND GENDER) ...................................2 C. RECENT ECONOMIC DEVELOPMENTS .............................. .........5 D. ECONOMIC OUTLOOK....................................................7 E. MEDIUM-TERM DEVELOPMENT CHALLENGES ......................... 12 III. WORLD BANK GROUP ENGAGEMENT STRATEGY........................................... 14 A. GOVERNMENT STRATEGY.................................... ................ 14 B. LESSONS LEARNED FROM FY09-13 .................. ................ 16 C. PROPOSED WORLD BANK GROUP CPS FOR POLAND .................. ......... 19 A TRANSFORMING PARTNERSHIP .......................................... 19 STRATEGIC OVERVIEW ......................................... ......... 21 PLANNED ACTIVITIES IN CPS AREAS OF ENGAGEMENT .......... ............. 23 D. IMPLEMENTING THE WORLD BANK GROUP CPS FOR POLAND ..................28 WBG ONGOING PROGRAM ............................................... 28 FINANCIAL ENVELOPE AND INDICATIVE KNOWLEDGE SERVICES ................... 29 PARTNERSHIP AND DONOR COORDINATION ................................. 31 MANAGING THE WBG PROGRAM................ .................... ..... 32 IV. M ANAGING RISK S ........................................................................................................... 33 ANNEXES: Annex 1: Poland - CPS FY14-17 Results Matrix ..........................................34 Annex 2: Shared Prosperity - An Agenda for Poland ....................................38 Annex 3: Poland - CPS Completion Report (CPSCR) FY 2009-2013 .........................42 Annex 4: Poland - IBRD Indicative Financing Program .................................. 67 Annex 5: IBRD Indicative Knowledge Services Program FY14/15 ......... .................68 Annex 6: Selected Indicators* of Bank Portfolio Performance and Management in Poland ................. 69 Annex 7: Operations Portfolio (IBRD/IDA and Grants) ........................ ...........70 Annex 8: IFC - Committed and Disbursed Outstanding Investment Portfolio (Poland) . .............71 FIGURES, BOXES, TABLES: Figure 1: Poverty and Inequality in Poland, 2004-11 ..................................... 3 Figure 2: Shared Prosperity Progress in Poland (2007-11) .....................................4 Figure 3: Real GDP growth in percentage points ....................................5 Figure 4: External Debt Sustainability.............................................. 10 Figure 5: Public Debt Sustainability ....................................... ......... 10 Box 1: Poland and the 2008-2009 crisis ................................. ............. 6 Box 2: Poland and the Euro ...................................................... 9 Box 3: Europe 2020 targets state of play in Poland.....................................14 Box 4: Systematic relations of Polish strategic documents ................................ 15 Box 5: EC Cohesion Policy Funding Priorities for 2014-2020...............................16 Box 6: Illustrative examples of "public goods knowledge products" developed in Poland .. ......... 19 Box 7: CPS relationship to national and EU objectives. ........................ .......... 23 Box 8: Ongoing knowledge program in key CPS areas .................................... 29 Table 1: Key Macroeconomic Indicators ....................................................11 I. INTRODUCTION 1. Poland's relationship with the World Bank Group (WBG) is both a partnership of choice and a two-way knowledge partnership. It is based on mutual trust and on the recognition that the WBG's presence in the country continues to generate value-added for both sides - for Poland through access to financial and knowledge services to support its convergence process within the European Union (EU) - for the WBG through the strengthening of a solid relationship with an emerging actor on the global development scene and the development of sophisticated knowledge products which can inform the sectoral dialogue in other countries. The authorities are interested in further strengthening this partnership and in benefiting from a broad range of WBG services. Yet, the WBG is a relatively minor player in Poland and needs to coordinate closely with the European Commission (EC) and to engage selectively only in those areas where it can add the most value, in line with its overall strategy. 2. The ongoing partnership provides a sound basis to design the new WBG program. The previous World Bank Country Partnership Strategy (CPS) was discussed by the Board of Executive Directors on June 30, 2009. It was devised to help mitigate the negative effects of the global economic and financial crises on Poland through a series of Development Policy Loans (DPLs) and advisory services across a number of niche areas. The 2011 Progress Report adjusted the CPS by (i) framing the WBG engagement within the broader context of Poland's EU membership and the "Europe 2020" strategy, and (ii) incorporating selective engagement by the International Finance Corporation (IFC) in the areas of energy efficiency and renewable energy following a period of limited IFC activity in Poland. 3. This partnership is to continue to evolve in the coming period, to reflect Poland's economic and social progress as well as the challenges the country continues to face (including in view of the external environment). While the government has indicated its preference not to graduate from the WBG at this stage, and while WBG management concurs that a continued engagement can bring mutual benefits, both parties agree on the need to further transform the nature of the WBG involvement, with a strengthened strategic focus on boosting shared prosperity, an increased reliance on knowledge products, and the use of cost-sharing arrangements to finance selected advisory and analytical services. 4. Against this backdrop, the FY14-17 CPS' two-fold aim is: (i) to foster sustainable income growth for the bottom 40 percent of the population within the context of Poland's economic convergence process within the EU, and (ii) to support Poland's emerging role as a global development partner. The WBG program is expected to remain very selective and demand-driven engagement. It will rest on four strategic engagement areas, which are aligned with the "Europe 2020" strategic agenda of smart, sustainable, and inclusive growth and with the national development strategy 1: (i) economic competitiveness; (ii) equity and inclusion; (iii) climate action; and (iv) Poland as a global development partner. A CPS Progress Report in FY16 will take stock of implementation and will allow the WBG to make mid-term adjustments in the strategy if and as may be needed to respond to changing needs and to ensure 1 The Government's strategy is articulated in the following key strategic government documents: "Poland 2030 - Development Challenges" (2009), "National Development Strategy 2020 - Active Society, Competitive Economy, Efficient State" (2012), "Republic of Poland - Convergence Programme" (2012 Update) and "Republic of Poland - National Reform Programme - Europe 2020" (Update 2012/2013). 1 a continued alignment with the country's priorities and the WBG strategy. The CPS Progress Report may also revisit the desirable pace and timing of graduation. 5. The CPS is informed by the WBG's overall strategic goals. In a country like Poland, where extreme poverty is marginal, the WBG program is aimed at promoting shared prosperity - economic competitiveness, to spur economic growth in a difficult external environment - equity and inclusion, to ensure that the benefits of growth are enjoyed by the bottom 40 percent of the population - and climate action to support the sustainability of Poland's economic and social development. The CPS is also aligned with the Europe and Central Asia (ECA) Regional Strategy, which is aimed at supporting inclusive and sustainable globalization through a focus on competitiveness, inclusion, and climate change and a renewed emphasis on governance as a cross-cutting theme. The Regional Strategy is based on a close partnership with the EU and requires country programs to respond flexibly with financial and analytical support to any spillover effects from the Euro zone crisis. The design of the FY14-17 CPS for Poland reflects these priorities and also stresses that countries in the ECA region and beyond could gain from knowledge transfers out of Poland. II. POLAND: POLITICAL, SOCIAL AND ECONOMIC CONTEXT A. POLITICAL PROFILE 6. Poland has become a major actor within the EU. With a population of about 38.2 million, and a GNI per capita of US$12,480 (2011), Poland has the largest economy in Central Europe. Since joining the EU in 2004, the country's ambitions have been marked by the desire to fully catch up with the core of the EU in terms of economic growth and living standards (GNI per capita currently stands at only 63 percent of the EU average) and to become one of the drivers of European integration. 7. The Government has a mandate for further economic reform. Poland is a stable parliamentary democracy with a decentralized system of government.2 The coalition formed in late 2007 by the Civic Platform (PO) and the Polish Peasants Party (PSL), and led by Prime Minister Donald Tusk (PO), obtained a second four-year mandate in October 2011 (the first time in recent Polish history a governing coalition is not replaced after elections). With a small but workable majority in Parliament, the government has shown a determined, yet cautious approach to reforms. It was able to adopt and implement several ambitious policy measures, in particular in the areas of fiscal consolidation, business environment, and pensions. The next general elections are scheduled for the fall of 2015. B. SOCIAL PROFILE (POVERTY AND GENDER) 8. Poverty has been on a declining trend since 2004 but the pace of reduction slowed down with the 2008-09 global financial crisis (Figure 1). About 6.5 percent of the population 2 The country, is divided into 16 regions (voivodships), subdivided into 373 districts (powiats) which are in turn made up of 2489 municipalities (gminas). All subnational Governments are elected. 2 still lives below the national poverty line and 11.8 percent live on less than US$ 5 a day (ECA poverty income threshold). The incidence of poverty is generally high among the unemployed, families with household heads with low education, families with several children (44 percent of families with more than 3 children), and households in small towns and rural areas. There is also a relatively large cohort of working poor: at 11.4 percent the poverty rate among employed people is the fifth highest in the EU. With the slowdown of poverty reduction, there is a risk that some of the affected groups will be trapped in long-term economic and social marginalization. 9. The crisis has also had a negative impact on the bottom 40 percent. Before the crisis, per capita income growth of this group outpaced the growth rate for the total population. Since 2009, per capita income growth for the bottom 40 percent fell behind the growth rate for the entire population. In 2011 it also turned negative (see Figure 2). The average per capita income of the bottom 40 percent stands at 49.6 percent of the overall average (for the entire population). While all other groups have recorded some gains in the period 2008 to 2011, the income per capita of the lowest decile has essentially remained unchanged. Figure 1: Poverty and Inequality in Poland, 2004-113 - Gini coefficient - ECAPOV $5/day Social assistance threshold - Eurostat poverty or social exclusion 50 40 30 20 10 0, 2004 2005 2006 2007 2008 2009 2010 2011 Source: HBS, GUS, World Bank staff calculations From 2006 to 2011, the real value of the social assistance threshold was declining, as the threshold was not updated to keep pace with inflation, leading to a sharper decline than in the comparable ECA US$5/day moderate poverty threshold. 3 Figure 2: Shared Prosperity Progress in Poland (2007-11) 12% Income per capita 10% - (bottom 40%) 8% 0Growth rate (year to year) 6%- 4% 2% ()% Source: World Bank staff calculations 10. There remains a substantial gender gap in the labor market. The CPS FY14-17 is based on the 2012 OECD report "Closing the Gap - Act Now" which includes country level gender disaggregated data for Poland on employment, education, entrepreneurship and public policies in general (a summary for Poland is contained in the "Country Note for Poland" published in parallel to the OECD report). This and other available gender diagnostics4 point to several persistent issues, especially in terms of labor force participation: in 2011, 59 percent of women and 73 percent of men (aged 15-64 years) participated in the labor force. This gap was particularly large for 25-35 year olds (even though more young women than men have completed a tertiary education) and those 55 and older. Women are being overrepresented in certain sectors (such as education, health, and social work) and occupations (e.g., service and clerical work) and underrepresented in others (e.g., information and communication). This appears to be largely due to traditional gender roles in the family, as well as to the relative lack of caregiving services for both children and older relatives. The gender pay gap (10 percent at median earnings) and the women's representation in managerial and board positions (respectively 40 percent and 7 percent) highlight the persistence of implicit discriminations. 4 Other recent gender diagnostics are available: World Bank, 2012, Opportunities for Men and Women: Emerging Europe and Central Asia; Central Statistical Office, 2012, Women and Men in the Labor Market, Warsaw; Central Statistical Office, 2012, Reconciliation between work and family life in 2010, Warsaw. 4 C. RECENT ECONOMIC DEVELOPMENTS 11. In a deteriorated external environment, Poland is facing strong headwinds. Between 2008 and 2011, Poland's performance was strong by regional standards. It was the only EU member to avoid recession in 2009 thanks to a combination of sound fundamentals and proactive counter-cyclical policies (see Box 1), and it recorded sound economic growth in 2010 and 2011, thanks to strong domestic consumption and a rebound in investment (largely driven by the absorption of EU funds). Poland's cumulative growth over the period, at about 16 percent, was the highest in the EU. Yet, the economy is now slowing down and Poland has lost its place as a leader of economic growth in the EU. GDP growth slowed to 1.9 percent in 2012 and further decelerated in early 2013 as renewed turmoil in the Euro zone weakened business' and consumers' confidence, leading to a drop in investment and stagnation in private consumption. The deceleration is further amplified by the negative impact of the ongoing fiscal consolidation effort, by the closing of the investment cycle under the 2007-13 EU financial perspective, and by negative growth of real wages. Figure 3: Real GDP growth in percentage points 8 6 4 2 -*-Poland -U-Germany 0 EU27 -2 2007 2008\ 2009 // 2010 2011 2012 -2 -4 -6 Source: Eurostat 5 Box 1: Poland and the 2008-2009 crisis The global economic and financial crisis generated a demand shock for Poland (demand for Polish exports was hurt by the recession in high-income countries while domestic demand was lowered by a reduction in capital inflows). Yet, the country was the only EU member state to avoid a recession. Poland's performance is commonly attributed to a series of factors: (i) The structure of the economy - diversified, well integrated in supply chains, closely linked to the German economy (making it possible for Poland's manufacturing to benefit from the German stimulus), and serving a relatively large domestic demand. (ii) Strong macroeconomic fundamentals at the inception of the crisis, including limited macroeconomic imbalances and a healthy, tightly supervised financial sector (with a far less dramatic credit expansion in the pre-crisis years than in other Central European economies). (iii) A depreciation of the Polish zloty during the crisis, which boosted competitiveness on export markets; (iv) A proactive, counter-cyclical fiscal policy to mitigate the decline of demand (including through the use of large EU transfers). As the economy is now again facing a difficult environment, observers note that the room for using fiscal and monetary instruments in a counter-cyclical manner is more limited than in 2008 (due to the increase in public debt). 12. The labor market is deteriorating. The unemployment rate rose from about 7.5 percent before the crisis, to around 9.5 percent during 2009-11, to 10.4 percent in end-2012 (in spite of a relatively low labor force participation). Unemployment continued to rise to 10.8 percent in April 2013 due to large lay-offs in the crisis-affected construction and labor-intensive manufacturing sectors, and to the decision by many employers to shed jobs rather than reduce working hours in a context of continued uncertainty. This trend is expected to result in a slowdown of the pace of poverty reduction and will further jeopardize the progress made in the first part of the 2000s for the lower earning 40 percent of the population. 13. Yet, Poland has managed to reduce external imbalances. The current account deficit has gradually narrowed from 6.6 percent in 2008 to 3.5 percent in 2012. The improvement reflected the combination of two diverging trends: an improvement in the trade balance (as exports growth outpaced imports) vs. a widening income account (due to increased transfers to foreign debt holders). Nearly 90 percent of the current account deficit was financed by EU capital transfers (around 2.2 percent of GDP in 2012) and net Foreign Direct Investments, FDI (around 0.9 percent of GDP). External debt, which was around 55 percent of GDP in the pre- crisis period increased to 70 percent of GDP by end-2012, reflecting the increase in government indebtedness. The share of short-term debt in total external debt dropped from around 25 percent in 2007-2010 to 19.2 percent in December 2012. The level of international reserves remained broadly adequate, covering 5.6 months of imports as of February 2013). 14. Poland has also maintained effective counter-cyclical monetary and exchange rate policies. In 2008-2009, monetary policy helped mitigate the impact of the crisis: cuts in liquidity rates and liquidity provisions resulted in a depreciation of the currency which boosted exports. During the rebound from 2010 to mid-2012, inflation expectations were anchored with a 1.25 percentage point increase in policy rates, and inflation was reduced from a peak of 5 percent in 6 May 2011 to 3.4 percent in October 2012. Towards the end of 2012, monetary policy became accommodative again: between November 2012 and June 2013, the policy rate was cut by 200 basis points to 2.75 percent. Overall, the authorities demonstrated their commitment to using all available tools to mitigate the risks of contagion from the global (and later Euro zone) crisis. 15. In spite of some vulnerabilities, the financial sector proved resilient to both the global crisis and the deleveraging of Western European banks. Thanks to a strong initial position and to tight financial sector supervision, the impact of the crisis remained moderate (and no financial institution required public support). The capital adequacy ratio continues to be strong (at 14.7 percent in December 2012) and banks enjoy high liquidity and profitability. However, asset quality, in particular the share of nonperforming loans (especially for consumer credit and corporate loans) has deteriorated since the pre-crisis period: if left unchecked, this could pose a risk to some institutions in the medium-term. As of yet, the deleveraging of the Euro zone banks, which have a predominant share in the Polish banking system, occurred in an orderly manner: the fall in foreign funding was offset by rising domestic deposits. While there seems to be enough supply of credit, the private sector credit growth slowed to less than 1 percent at the end of 2012 (from above 13 percent a year ago) on account of deteriorating business and consumer confidence. 16. Since 2011, the government has engaged in a fiscal consolidation effort. Counter- cyclical fiscal policies in 2008-2010 (both reduced revenues and sustained public spending) resulted in a worsening of the fiscal balance: the general government deficit increased from 3.7 percent of GDP in 2008 to 7.9 percent of GDP in 2010 and public debt rose from 47.1 percent of GDP in 2008 to 54.8 percent of GDP in 2010. In 2011 the public debt-to-GDP ratio continued to increase and reached around 56.2 percent of GDP, mainly due to Polish Zloty (PLN) depreciation in the second half of 2011. With the growth rebound in 2011, the government initiated a process of fiscal consolidation aimed at rebuilding fiscal buffers through a combination of revenue and expenditure measures. The general government deficit declined to around 3.9 percent in 2012 (from 5.0 percent in 2011) and public debt-to-GDP ratio declined to 55.6 percent of GDP (the structural deficit dropped from 5.4 percent of GDP to 3.8 percent of GDP in 2012). D. ECONOMIC OUTLOOK 17. Prospects for economic growth reflect developments in the Euro zone, as the Polish economy is closely linked to the EU through trade and financial flows. In a difficult external environment, Poland's GDP growth is expected to decline to about 1.3 percent in 2013: domestic private consumption will remain subdued due to negative labor market developments; investment growth is likely to slow down due to weak business confidence and continued fiscal consolidation; yet, net exports are expected to make a positive contribution with export growth outpacing import growth thanks to a relatively favorable exchange rate. Prospects beyond 2013 will largely depend on developments in the Euro zone: assuming that the external environment strengthens and investment increases (in the context of the new EU financial perspective) growth could reach 2.4 percent in 2014. 18. In a deteriorated external environment, the government is expected to focus on adopting short- and medium-term growth-supporting measures, while maintaining a fiscally 7 prudent stance to bolster market confidence. This includes a short-term stimulus program through a guarantee scheme for banks issuing loans to Small and Medium Enterprises (SME) and through the recently-announced "Polish Investment Program" (which is to be financed from the transfer of shares from state-owned companies)5. It also includes measures expected to bolster the resilience of the financial sector by establishing a Systemic Risk Board, implementing a macro-prudential framework, and revamping the bank resolution system. In addition, the government is aiming to further enhance the business environment and to soften the impact of the slowdown on employment by increasing the flexibility of the Labor Code and improving the operation of Labor Offices. 19. Substantial transfers of EU cohesion policy funds are expected to help mitigate the impact of the Euro zone crisis: Poland will remain the main beneficiary of EU structural and cohesion funds in the next EU financial perspective (2014-2020), with around EUR72.9 billion (in grants), compared to EUR68.7 billion in the current period (2007-2013) - i.e. almost 3 percent of GDP per year. Poland has a strong track record in absorbing such resources at both central and subnational levels, with a sizable number of large projects still under implementation and expected to be completed by 2015. Poland will also benefit substantially from the EU's Common Agricultural Policy with expected fund allocations of EUR28.5 billion until 2020. 20. Monetary policy is expected to remain accommodative. The inflation rate is forecasted to stay within the National Bank of Poland (NBP) tolerance band (1.5 to 3.5 percent) through the forecasting period. A continued lack of domestic demand pressures and moderating commodity prices are likely to keep the inflation rate in check and could provide space for further monetary easing. 21. Adopting the euro is among priorities of the Polish government. The Government aims to achieve this goal as soon as the necessary conditions of a secure euro area membership are met. An important milestone was the preparation of National Euro Changeover Plan in 2011. However, due to the large number of institutional changes being implemented in the EU and the euro area this Plan needs to be revised - a process that is expected to be completed by the end of 2013. While looking at prospective membership, Poland is considering the situation in the Euro zone (including institutional and regulatory developments) as well as its own so-called "real convergence criteria" - a set of economic reforms which would prepare the economy to function successfully in the Euro zone, including steps to increase Poland's competitiveness and measures to deal with its aging population. Several nominal convergence criteria are also yet to be fulfilled (see Box 2). 22. External debt sustainability is robust. The current account deficit is projected to stay close to 3.5 percent of GDP over the medium term. It will continue to be financed mostly by EU transfers and FDI inflows. External debt is forecast to remain close to 70 percent of GDP over the medium-term, with a maturity structure that is not expected to change significantly from 2012. Roll-over rates are expected to stay around the average of the last four years, i.e. around 110 percent. The sustainability of the external debt position is generally robust according to 5 The Polish Investment Program-announced by the Prime Minister in October 2012-is aimed at providing financial resources for investment into energy, infrastructure, and R&D in Poland. Part of the privatization proceeds will be used to boost the capital base of the state development bank (BGK) and a special investment vehicle (Polskie Inwestycje Rozwojowe) to leverage private sector resources for investment. 8 a range of standard stress scenarios, including an increase in nominal interest rates, lower GDP growth, and higher current account deficit (see Figure 4). 23. The Government has indicated its continued commitment to fiscal consolidation but the pace of adjustment is expected to slow down to reflect the deteriorating external environment. The fiscal deficit is projected to be around 3.5 percent of GDP in 2013 and to further decline to around 3 percent of GDP in 2014. In subsequent years, the Government is expected to pursue further fiscal consolidation to gradually reduce its structural fiscal deficit to 1 percent of GDP in line with its medium-term objective. Box 2: Poland and the Euro Under the EU Treaty, all EU Member States, except those with opt-out clauses, have to join the Euro zone once the necessary conditions are fulfilled. Poland does not yet meet all the legal preconditions and relevant convergence criteria. The slower than expected nominal convergence is to a large extent a consequence of external conditions - the global financial crisis and the Euro area sovere gn debt crisis. interest rate .4 60 public 2.3 7 price - Poland debt stability - Reference Value 3.9 deficit Source: Estimates of the Polish MOF (June 2013) Notes: Conclusions of the Convergence Report 2013 not yet included. Convergence criterion 1: long-term interest rates: fulfilled Average long-term interest for last 12 months rate at 4.4 percent (reference value 4.7 percent) Convergence criterion 2: price stability: not fulfilled Average 12-month inflation rate at 2.7 percent (reference value 2.3 percent) Convergence criterion 3: soundness and stability of public finances: not fulfilled Excessive deficit procedure in effect (deficit (2012) at 3.9 percent of GDP vs. 3 percent of GDP reference value; public debt at 55.6 percent of GDP versus 60 percent of GDP reference value) Convergence criterion 4: exchange rate stability: not fulfilled Poland not participating in European Exchange Rate Mechanism II (ERM II) 24. In a context of weaker growth, the public debt-to-GDP ratio is expected to increase in the short-term. According to the European System of national and regional accounts, ESA'95 methodology, public debt is projected to be close to 56 percent of GDP in 2013 and 2014 before it declines towards 55 percent in 2016. This would still be consistent with the 9 Maastricht ceiling of 60 percent of GDP (as calculated according to ESA'95 methodology) and the key national debt limit of 55 percent of GDP (calculated according to national 67 methodology). Yet, stress tests suggest that the debt path is highly sensitive to a growth shock, which under certain scenarios could bring the level of public debt above the EU threshold of 60 percent of GDP (see figure 5). Figure 4: External Debt Sustainability8 - Baseline --- Interest rate - Growth .***** Current Account 75 70 .... 65 60 55 50 45 40 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: MOF, NBP, World Bank staff calculations.9 Figure 5: Public Debt Sustainability - Baseline --- Interest rate - Growth .*****Primary Balane 75 70 65 505 50 45 200B 2009 2010 2011 2012 2013 2014 2015 2016 Source: MOF, World Bank staff estimates. 'o 6 The Public Finance Act prompts corrective action when the public debt reaches 55 percent of GDP, in addition to the constitutional ceiling for public debt at 60 percent of GDP. Starting in 2013, the Government is planning to change the rules for calculating public debt to GDP ratio (national methodology) with respect to the applicability of sanctions. In case public debt to GDP ratio exceeds any of the precautionary thresholds, the ratio will be re-calculated using the average (instead of end-of period) exchange rate for the calculation of public debt stock. Corrective actions will be triggered only if the re-calculated ratio is not with compliance with public debt safety thresholds. 7 In this scenario real GDP growth rate is at baseline minus 2 percentage points in each year of the projection period. Public debt in Poland is largely domestic. Under the described GDP growth shock scenario, public debt is more sensitive to changes in GDP than external debt. Under this scenario, the current account deficit narrows leading to a lower external debt in year (t+1), while the general government primary deficit increases (as automatic stabilizers increase expenditures, while revenue collection suffers), thus leading to a higher public debt 9 External debt projections as percent of GDP; the shaded area reflects historical values. The nominal interest rate is at baseline plus one-half standard deviation, real GDP growth is at baseline minus one-half standard deviations, non-interest current account is at baseline minus one-half standard deviations 10 Table 1: Key Macroeconomic Indicators" 2010 2011 2012 2013 (f) 2014(f 2015(f 2016(t Real economy Annual percentage change, unless otherwise indicated GDP (billion zloty) 1,416.6 1,528.1 1,595.3 1,644.7 1,713.8 1,802.9 1,902.1 Real GDP 3.9 4.5 1.9 1.3 2.4 3.2 3.5 Per Capita GDP (In US$ Alas Method) 12,390 12,340 12,670 12,900 13,080 13,590 14,290 Contributons: Consumption 2.7 1.3 0.5 0.1 -- -- -- Investment 1.9 2.4 -0.7 0.0 -- -- -- Netexports -0.7 0.9 2.1 1.2 -- -- -- Imports 13.9 5.5 -1.8 1.5 6.5 6.9 7.3 Exports 12.1 7.7 2.8 3.8 6.9 7.0 7.1 Unemploymentrate(lLOdeinition) 9.7 9.7 10.1 11.0 11.5 11.3 10.6 CPI (average) 2.6 4.3 3.7 1.8 1.8 2.0 2.0 Fiscal Accounts Percent of GDP, unless otherwise indicated Expenditures 45.4 43.4 42.3 42.6 41.5 41.2 40.7 Revenues 37.6 38.4 38.4 39.1 38.5 38.4 38.2 General Government Balance -7.8 -5.0 -3.9 -3.5 -3.0 -2.8 -2.5 Structural Government Balance -8.3 -5.1 -3.4 -2.1 -1.7 -1.6 -1.5 General GovernmentDebt(ESA95) 54.8 56.2 55.6 56.3 56.5 55.5 55 Genral Government Debt(national methodology) 52.8 53.5 52.7 -- -- -- -- Selected Monetary Accounts Annual percentage change, unless otherwise indicated Base Money 1.6 -1.1 21.0 Creditto non-government (eop) 8.4 13.4 1.5 -- Interest (key policy interest rate, eop) 3.50 4.50 4.25 -- Balance of Payments Percent of GDP, unless otherwise indicated CurrentAccount Balance -5.1 -4.9 -3.5 -3.5 -3.6 -3.4 -3.5 Imports 37.8 40.5 39.8 40.3 39.1 38.2 38.3 Exports 35.2 37.8 38.4 39.0 38.0 37.6 37.9 Foreign Direct Investment 1.4 2.3 0.9 1.8 1.9 2.1 2.4 Gross Reserves (in millions US$, eop) 93,514 97,866 108,915 -- -- -- -- In months of next years imports 6.3 5.6 6.4 -- -- -- -- As% ofshort-termexternal debt 90.4 109.9 108.6 -- -- -- -- External Debt 66.4 71.7 70.8 69.8 68.6 68.3 67.0 Terms of Trade (index 1995=100) 97.7 96.4 95.0 93.8 94.2 95.0 95.2 Exchange Rate (average) 3.02 2.96 3.26 Other memo items e.g., GDP nominal (in billions of US$) 469.7 515.7 489.8 -- Source: MoF, IMF, World Bank staff estimates 10 Public debt projections as percent of GDP; he shaded area reflects historical values. Real interest rate is at baseline plus one standard deviation. Real GDP growth is at baseline minus one-half standard deviation. Primary balance is at baseline minus one- half standard deviation. " Data for 2012 are estimates, based on actual data available by mid-Feb 2013. The main difference between the national and ESA'95 definitions of public debt is that the national definition excludes debts of the National Road Fund (which are included in the ESA'95 definition). 11 25. Overall, the outlook remains challenging for the bottom 40 percent of the population. The unemployment rate is expected to further increase until 2014 and, even under relatively optimistic scenarios, may start to decline only in 2015 if growth accelerates. This is expected to affect both income opportunities and wage levels in a manner that may further erode the gains of the early 2000s. The necessary process of fiscal consolidation and the increased targeting of social benefits will further reduce government outlays (direct and indirect) to the lower middle class. E. MEDIUM-TERM DEVELOPMENT CHALLENGES 26. Beyond the short-term, Poland is facing a number of challenges, which may negatively affect potential income growth for the bottom 40 percent of society. These include a possible gradual reduction of the country's long-term growth potential (due to the aging of society and to the need to renew the growth model), difficulties in ensuring adequate economic inclusion of parts of the population (due to the incomplete institutional transformation and persistent regional imbalances), and threats to the environmental sustainability of Poland's development. 27. Poland is a rapidly aging society. Poland's demographics are daunting. Overall population numbers have already declined (from 38.6 million in 1995 to 38.2 million in 2010) due to birth rates which are far below replacement rates (at about 1.38 children per woman) and emigration. The median age is set to increase from 38.1 in 2010 to 38.5 in 2020 and to 40.0 in 2035, one of the highest median ages in Europe. While recent reforms (including a significant increase in the retirement age) have strengthened the sustainability of the pensions system, there remain significant aging-related challenges in terms of labor force participation (among the lowest in the Organization for Economic Co-Operation and Development (OECD) for the workers aged 55 to 64), productivity of an older workforce, health care (including long-term care and its financing), and old age poverty or exclusion. 28. Poland's current growth model may be gradually approaching its limit. Over the last two decades, Poland's growth has been driven by a "post-transition" catching up, in terms of productivity growth and capital accumulation. Yet, as income per capita (and labor costs) increases, Poland will need to further move up the value chain and achieve productivity gains through innovation. Poland remains one of the least innovative economies in the OECD and still needs to make efforts to best equip its workers to the need of a modern economy. Addressing this will require a combination of steps to foster more effective "ecosystems" for innovation (and in particular links between research, entrepreneurs, and financiers), to strengthen public support to innovation, to enhance the quality and relevance of general, vocational, and higher education, and to further develop skills and entrepreneurship. 29. Poland's institutional transformation remains unfinished. Since the early 1990s, Poland has made significant progress in developing solid and sophisticated institutions. The challenge in the next period is to further enhance the efficiency and effectiveness of the public sector, at both national and decentralized levels. This will include efforts to attract and retain high-skilled staff for senior positions, to enhance cooperation across entities, to modernize the 12 functioning of several key segments of the public sector, and to effectively use budget instruments to foster reform. 30. Poland faces challenges related to territorial disparities. The process of national convergence within the EU has been accompanied by increased internal divergence among and within regions. Several of Poland's 16 regions have made significant progress in terms of growth and living conditions, but five of them (those located in the Eastern part of the country) have experienced a relative loss. These regions remain among the 20 poorest regions of the EU-27. In addition, disparities within each region have been on the rise (typically with large cities faring relatively well, while rural areas and small towns are falling behind) and now rank among the highest in the OECD. Poverty and the risks of economic marginalization have a significant territorial component, due to accessibility constraints, mixed quality of public services, as well as initial resources endowments. The challenge is to help people living in the poorest parts of the country escape a vicious cycle of impoverishment and low investment and private sector activity. 31. Poland's economy is among the least emissions-efficient in the EU, mainly due to the country's dependence on coal (especially in the power sector), to very high rates of emission growth in the transport sector, and to an energy efficiency performance that remains below EU averages. The EU has set a goal for Poland to limit the growth of greenhouse gases (GHG) emissions to 14 percent between 2005 and 2020 (i.e. significantly below the expected cumulative rate of economic growth over this period).12 This implies a change in production structures and energy consumption patterns. A recent World Bank study showed that the transition is expected to generate economic costs in output and employment until 2020 that are higher than for the average EU country, but that the shift towards low emissions through better fuel efficiency, energy efficiency and other measures would eventually boost Poland's economic growth in the medium-term. 12 This goal was set as part of the broader effort to reduce GHG emissions by 20 percent EU-wide (with different targets for each EU member). 13 III. WORLD BANK GROUP ENGAGEMENT STRATEGY A. GOVERNMENT STRATEGY 32. Poland's development strategy is framed within the broader context of the EU's "Europe 2020" strategy, which is designed around the concept of "sustainable, smart and inclusive growth". Europe 2020 proposes a set of specific targets for each EU member country, including Poland (see Box 3). It is supported by seven flagship initiatives and ten Integrated Guidelines for economic and employment policies of Member States (highlighted as relevant in the results matrix in Annex 1). Box 3: Europe 2020 targets state of play in Poland EJJ Hadlin TombNational Targets for Poland Curret under the Europe 2020 Strategy rren Employment rate 75 percent 71 percent of the population aged 20-64 employed 64.8 percent (2011) R&D of GDP 3 percent 1.7 percent of GDP invested in R&D 0.74 percent (2010) CO emission reduction targets - 20 percent (compared to 1990 levels) Greenhouse gas emissions +14 percent compared to 2005 +12 percent (2010) C02 emission reduction targets Renewable energy 20 percent 15 percent energy from renewable energy sources 10.9 percent (2011) 20 percent Increase in energy 13.6 percent increase in energy efficiency n/a13 efficiency equaling 368Mtoe Early school leaving 10 percent Share of early school leavers under 4.5 percent 5.4 percent (2010) Tertiary education 40 percent At least 45 percent of 30-34 years old completed a tertiary 35.3 percent (2010) education Reduction of population at risk of Reduction of 1.5 million people at risk of poverty or 10,196 million poverty or social exclusion 20 000 000 exclusion 14 . (2011) persons (base year 2008: 11,491 million) - 1,295 million 33. The government has defined its long-term strategic vision in "Poland 2030 Development Challenges", a 2009 report by the Board of Strategic Advisers to the Prime Minister. The report aims to identify the key challenges that Poland will have to face in the coming two decades, with a two-fold focus on managing the risks stemming from long-term global trends and on transforming the existing welfare state model to create better conditions for dynamic growth and social inclusion. It emphasizes the need to increase capital and labor supply in the economy (through changes in the fiscal, institutional, and organizational incentive structure), to enhance productivity (through investments in infrastructure, education and science, economic regulations, and institutional reforms, specifically in the labor market), and to develop social capital and social cohesion. 13 The EC cannot present an assessment (methodology to express 2020 energy consumption impact was only recently agreed). 14The "people at risk of poverty or exclusion' target describes persons affected by at least one of the conditions measured by three indicators surveyed by EUROSTAT: the at risk-of-poverty rate, the severe material deprivation rate and the share of people living in households with very low work intensity. 14 34. To operationalize its long-term vision the government in September 2012 adopted a "National Development Strategy 2020". This document spells out national objectives for the medium-term, to be implemented through individual sectoral and thematic strategies under the responsibility of different ministries (see Box 4). The National Development Strategy is closely aligned with the strategic agenda of "Europe 2020" and aims to bring GDP per capita to a target of 74 to 79 percent of the EU average by the year 2020. It is articulated around several priority areas: an effective and efficient state (governance, public sector performance, public financial management, services delivery, etc.); a competitive economy (macroeconomic stability, entrepreneurship, innovation, labor market, infrastructure, energy efficiency, skills, etc.); and social and territorial cohesion (regional development, inclusion, social exclusion, basic public services, etc.). Box 4: Systematic relations of Polish strategic documents thematic areas t E 7- E vi E um E E E Source. National Development Strategy 2020 35. Poland is also aspiring to play an increasingly stronger role in European institutions and in the international scene, in line with its demographic weight, economic performance, and political capacity. The Government is aware of the potential importance of development cooperation in Poland's foreign policy, in particular to advance the country's values, especially democratization and good governance; to help raise Poland's profile and influence in selected areas; and to contribute to the stability and development of its neighbors and partners. Poland is also playing an increasingly strong role in a broad range of international forums (and it will host the Conference of the Parties, COP, on climate change in Warsaw in November 2013). From an economic angle, the authorities are keen on supporting the internationalization of Polish firms, 15 and on developing links with the Polish diaspora and with Poles living abroad to help promote Poland's interests in the world. 36. EU cohesion policy funds are expected to provide the overwhelming share of financing to support Poland's development priorities. Europe 2020 provides the strategic framework for the use of EU resources to be made available under the 2014-2020 financial perspective. The EC has identified four priorities in this respect: (i) modern network infrastructure for growth and jobs; (ii) an innovation friendly business environment; (iii) increased labor market participation through improved employment, social inclusion and education policies and (iv) an environment-friendly and resource-efficient economy. These four funding priorities are linked to the eleven thematic objectives under the new Structural Funds regulation (see Box 5 below). Poland is in the process of preparing the corresponding thematic strategies and Operational Programs to identify the corresponding investments and instruments. Box 5: EC Cohesion Policy Funding Priorities for 2014-2020 Funding priorities Related thematic objectives Modem network infrastructure for growth and jobs Promoting sustainable transport and removing bottlenecks in key network infrastructures; Supporting the shift towards a low-carbon economy in all sectors (network infrastructure): Enhancing access to, and use and quality of, information and communication technologies (network infrastructure): Innovation-fiendlvybusiness environment Strengthening research, technological development and innovation; Enhancing access to. and use and quality of. infonnation and communication techmologies (non-networkinfrastructure); Enhancing the competitiveness of small and medium-sized enterprises, the agricultural sector and the fisheries and aquaculture secror, Enhancing institutional capacity and an efficient public administration; Increasing labour market participation through improved Promotingemployment and supporting labourmobility employment, social inclusion and education policies Promoting social inclusion and combating poverty; Investing in education, skills and lifelong learning; Environment-friendly and resource-efficient economy Supporting the shift towards a low-carbon economy in all sectors (non- network infrastructure); Promoting climate change adaptation, risk prevention and management; Protecting the environment and promoting resource efficiency. Source: EC (DG Regio) B. LESSONS LEARNED FROM FYO9-13 37. The 2009-2013 CPS was devised to help mitigate the negative effects of the global economic and financial crises on Poland. Planned support included a series of Development Policy Loans (DPLs), selected Investment Loans (ILs), and niche knowledge services (including for subnational governments). Overall, the program of activities was delivered, with the notable exception of ILs (in the global crisis context, the Government decided to focus on DPLs only). 16 38. The Completion Report (see Annex 3) assesses progress made towards the achievement of the CPS program outcomes and the WBG performance during the implementation period - both rated Moderately Satisfactory. * Successful features of the WBG engagement include: (i) the development of a solid, trust-based relationship with a broad range of Polish counterparts; (ii) the flexibility and responsiveness demonstrated in the face of changing circumstances; (iii) the delivery of a solid package of fast-disbursing lending and knowledge support (successive DPL series were instrumental in advancing policy dialogue, high quality knowledge services provided timely inputs for decision makers); (iv) the overall quality of the lending portfolio (Implementation Completion Reports (ICR), and the corresponding Independent Evaluation Group (IEG) evaluations, rated performance of DPL series as satisfactory; two ILs were closed as moderately satisfactory and one as moderately unsatisfactory). * Challenges and disappointments include: (i) implementation issues with selected operations including long delays in starting implementation of the Odra River Basin Flood Protection Project (ii) difficulties in developing effective instruments and approaches to provide a substantial amount of advisory services to subnational governments (transaction costs proved high, while the capacity to absorb such services remains limited); (iii) slow uptake of Reimbursable Advisory Services (RAS) to finance knowledge services over and above what the WBG can finance from its own resources; and (iv) an initial reluctance to engage on global development issues (beyond the Poland program). 39. The Completion Report draws lessons and recommendations which were taken on board in preparing the new CPS for the period FY14-17. * There is a continued demand for WBG knowledge services. Poland is valuing and requesting WBG knowledge services in a number of areas. Under the new CPS the challenge for the WBG is to identify those areas where it can best contribute to policy- making and add value to the services otherwise available from private consultants or from other partners, especially the EC. Experience suggests that the WBG's comparative advantage varies across sectors but typically includes: (i) the ability to provide independent expert advice, with a combination of knowledge and operational experience; (ii) the combination of global experience and local knowledge and the ability to tailor global solutions to local circumstances; (iii) a strong commitment to results, i.e. an engagement that is not limited to a contractual relationship; and (iv) a focus on poverty reduction and shared prosperity, which provides the set of "values" that underpin the partnership. * The WBG ought to align its program to the EU strategy. Throughout the CPS period, Poland received large amounts of EU grants and European Investment Bank (EIB) loans. WBG financing was typically one to two orders of magnitude smaller. This implies that the WBG needs not only to coordinate with other actors and to identify "niches" and focus areas, but to fully align its program to the EU strategy. The new CPS FY14-17 therefore is closely aligned to funding priorities of the EC and fully coherent with the Europe 2020 strategy. * In most technical areas, the Bank needs to manage a dialogue rather than deliverables. Throughout the CPS period, influence came from the day-to-day dialogue 17 with counterparts. The traditional focus on deliverables (specific, pre-agreed outputs) showed some limitations. The WBG was most successful (e.g., in the case of reforms aimed at enhancing the business environment) when it focused on establishing and managing a dialogue, providing formal or informal contributions on an ad hoc basis (and in a very rapid manner) with a focus on supporting the decision-making process in real time and with solid accountability for results. During the new CPS period, the WBG will further shift from a "task-focused" to a "dialogue-focused" engagement, which has an impact on both decentralization and quality control processes. * Selectivity, flexibility, quality, and timeliness are keys to success. These are well known factors of success in any development context, but they apply somewhat differently in a country like Poland. In particular, the WBG has to continuously adjust to an evolving demand if it is to remain relevant. In this context, the new CPS aims to provide an overall strategic framework and a set of specific selectivity criteria to help prioritizing areas for engagement as new demands for support emerge. The Bank will also make a particular effort to reflect lessons learned from the delays of the Odra program for its future investment loans, such as the need to strengthen capacity of implementing entities, to ensure solid cross-agency cooperation, and to ensure adequate project readiness. * Continued important role for lending in the delivery of knowledge services. Throughout the CPS implementation period, the WBG effectively used stand-alone knowledge services to make a contribution to policy-making in a number of areas. Yet, lending, and especially the successive DPL series, also played a major role in advancing the policy dialogue, especially in some of the most difficult areas. Overall, it is the combination of (well-articulated) lending and analytical and advisory activities that can provide for the most effective way to engage. The CPS FY14-17 therefore includes a continued financial engagement in tandem with knowledge services. * Knowledge-focused results matrix. The results from stand-alone knowledge activities will often be intermediate outcomes in a longer results chain. This presents a conceptual challenge for developing a results matrix. A knowledge activity in Poland may help develop the capacity for improved service delivery in an area, but the WBG may not be involved in the delivery of the service itself and as such it will have only an indirect effect on the final beneficiary. The new CPS results matrix focuses indicators of progress on results to which the WBG will make a significant contribution. 40. Public goods aspect of knowledge activities. The relationship with Poland, a demanding and sophisticated client, is such that a number of knowledge products have been the subject of an intense back-and-forth process of comments and adjustments between the Government and the WBG. This has made it possible to develop high-quality products that went even beyond what was initially contemplated. In turn, several of these products have provided a solid foundation for engagement in other countries, where the findings and recommendations developed for Poland provided a reference point or a benchmark for similar work (see Box 6). In parallel, some of the lessons learned by Poland through its successful transition experience can usefully inform the policymaking debate in other countries. In this context, the WBG can substantially benefit from its knowledge partnership with Poland. 18 Box 6: Illustrative examples of "public goods knowledge products" developed in Poland Business environment. The Polish experience in improving its business environment (especially with regard to insolvency) is informing the policy dialogue in this area in Ukraine. Regional Development Strategy. The methodology developed by the Bank to assess the Regional Development Strategy for the Lubelskie region (combining a "place-based" and "people-based" approach) was used to support other authorities, including the Kakheti region in Georgia. Climate change modeling. The analytical work developed in Poland provided the basis for similar analysis on "transition to low emissions economy" in the Former Yugoslav Republic of Macedonia and for an ECA-wide peer-learning event held in Warsaw in May 2013. Local Bond Market Development. Poland's experience will be central to raising awareness of the increasing reliance of fast growing emerging market countries on local bond markets to finance business investment and infrastructure. The WBG and the National Bank of Poland are planning to co- host the Annual Gemloc Investor-Country Conference and Advisory Services Workshop in FY14. The WBG is also facilitating multiple exchanges of experience including in areas such as environment management (e.g., with Kazakhstan), procurement (e.g., with Vietnam), etc. C. PROPOSED WORLD BANK GROUP CPS FOR POLAND A TRANSFORMING PARTNERSHIP 41. The government has indicated its preference not to graduate from International Bank for Reconstruction and Development (IBRD) at this stage. Poland is one of 28 IBRD borrowers which have crossed the current threshold (US$7,035) triggering the IBRD to work together with the authorities to review the country's overall economic, social, and financial situation and to determine its capacity to sustain a long term development program without further support from the Bank.15 The authorities have expressed their interest in continuing to benefit from WBG financing and knowledge services, which they see as important ingredients to inform policy making and more generally to support the reform process in selected strategic areas. 42. WBG management concurs with the government's position that IBRD support continues to generate development value-added for the country, in particular in light of the slowdown in poverty reduction and convergence within Poland across different regions, the unfinished structural reform agenda and of the external risks posed by the continued Euro zone crisis for the shared prosperity agenda. In addition to Poland's own demand for WBG financing and knowledge services, WBG management considered three factors in assessing the country's graduation scenario, i.e.: 15 The Board in 2002 confirmed that the Bank's graduation policy does not require automatic graduation of a client if the country becomes a member in an economic or other union with richer countries such as in Poland's case with the EU. See reference in SecM2004-0283, Framework for World Bank support to the European Union (EU) new member countries of central and eastern Europe, p. 7f. 19 * Poland's progress in establishing key institutions for economic and social development. Although major progress has been achieved over the last two decades, significant efforts are still needed to enhance the functioning and capacity of important public sector entities and to modernize the regulatory apparatus (and its application), so as to meet the country's goals of smart, sustainable, and inclusive growth (and to make the best of EU cohesion funds available under the new financial perspective) and to foster income growth of the bottom 40 percent of the population. * Poland's ability to access financial markets on reasonable terms. Poland has access to capital markets on sound terms, yet the current uncertainties stemming from the Euro zone crisis are associated with risks of financial market volatility.16 WBG management also noted that, in spite of such access to financial resources, Poland continues to value the WBG's financial support for the "signaling effect" it may have on markets, and for the support it provides to the implementation of difficult reforms. * Poland's efforts to foster income growth for the bottom 40 percent of the population and to ensure the environmental sustainability of its development. This remains a largely unfinished agenda, and an area where the WBG can provide significant added value through advocacy and awareness raising, technical and policy advice, as well as support to the design and implementation of selected reforms. The Government has also expressed its interest in further benefiting from the WBG support to that effect. 43. WBG management also notes that a continued engagement in Poland has significant positive spillover effects for other countries and global programs. Continued engagement in Poland has the potential to create a number of further "public good" knowledge products, which can inform the policy dialogue with other client countries. It can also help foster a solid partnership with Poland to start working together on international development efforts and global public goods. WBG management hence assesses that the relationship can be a two-way, win-win partnership. 44. In this context, the WBG will continue to provide a broad range of services to Poland, including financing, analytical, and advisory services. Yet, in a context of limited availability of lending and Bank budget resources, the WBG will focus its involvement selectively, based on the following set of criteria: * IBRD lending resources will be limited to operations (either DPLs or ILs) which complement other donors' activities and support policy or institutional reforms by: (i) supporting reforms in the implementation phase (as a follow up to advisory services for the design phase), especially for politically or technically difficult endeavors; (ii) serving a demonstrable signaling function for outside stakeholders; and/or (iii) creating a lasting impact on institutional capacity in the country. It is expected that the overall access to lending resources during the CPS period should be substantially lower than under the 2009 CPS, and decline gradually as the relationship further matures and the external environment improves. 16 In view of this uncertainty and of the corresponding heightened risks to the balance of payments, the International Monetary Fund (IMF) provided renewed access to a two-year precautionary Flexible Credit Line (FCL) arrangement in the amount of SDR 22 billion in January 2013. 20 * IBRD budget resources for stand-alone knowledge activities will be allocated in priority to those activities which have a high likelihood of creating positive spillover effects through the creation of new knowledge which the Bank could use in its dialogue with other countries. Financing for other services will increasingly have to be arranged by way of Reimbursable Advisory Services (RAS), except possibly in areas which IBRD sees as critical for the implementation of the bottom 40 percent agenda and where RAS may not be a feasible option. 17 * IFC is considering a selective re-engagement in Poland following several years of limited activity due to a perceived lack of role. With the economy now on a slower growth trajectory, declining investment and ongoing fiscal consolidation, IFC has a role to play in supporting short- and medium-term pro-growth measures. Subject to market demand and conditions, IFC investments will be focused on those areas where IFC can (i) have a significant demonstration or catalytic effect, for example in markets where risk perceptions are high and private sector capital remains limited; (ii) facilitate additional resource mobilization; (iii) co-finance EU-funded projects in the private sector or at the sub-national level and/or (iv) support the growth of Polish companies outside of their domestic market. 45. WBG management will reconsider the issue of graduation in the CPS Progress Report, to ensure the WBG engagement remains relevant and meaningful. In particular, WBG management will base this analysis on the Government's demand for WBG services; the WBG's ability to achieve results for the bottom 40 percent of the population during the first two years of CPS implementation; and the overall economic environment Poland will face at that time. STRATEGIC OVERVIEW 46. The proposed CPS program reflects a series of conversations with a multiplicity of stakeholders. Key strategic choices were discussed in depth with and endorsed by the Government and the National Bank of Poland (which holds the WBG Governor role). The WBG also held conversations with the private sector and selected civil society figures to seek insights on the challenges faced by Poland and the ways the WBG could support the country. Consultations were held with the EC (in Brussels), the European Bank for Reconstruction and Development (EBRD), and the EIB about the planned areas of engagements to confirm the WBG's proposed program is complementary to the activities of these institutions. 47. The WBG's overall objective during the CPS period is two-fold: (i) to foster sustainable income growth for the bottom 40 percent of the population within the context of Poland's economic convergence process within the EU, and of the "smart, sustainable, and inclusive growth" agenda, and (ii) to promote and support Poland's role as a global development partner and to learn from the Poland program to the benefit of other client countries. 48. The WBG program is articulated around four strategic areas of engagement, which are aligned with the overall WBG strategy to reduce poverty and boost shared prosperity, the ECA Regional Strategy and the "smart, sustainable, and inclusive" agenda. Within each area, the 17 World Bank management will ascertain in such circumstances that RAS do not lead to any form of market distortion 21 CPS focuses on those objectives for which there is both a clear demand and a track record of successful dialogue, and aims to deepen or expand existing engagements. The four areas consist of: (i) economic competitiveness, with a focus on business environment, innovation, and public finance effectiveness; (ii) equity and inclusion, with a focus on inclusive labor market, balanced regional development and strengthened health care and health prevention in an aging society; (iii) climate action, with a focus on informed climate change policy making, adaptation and flood protection, and resource efficient infrastructure; and (iv) Poland as a global development partner with a focus on enhancing Poland's contribution to development cooperation and global public goods. 49. The alignment between the proposed strategic areas of engagement and the WBG's overarching goals is discussed in Annex 2. Activities under the economic competitiveness pillar aim to help sustain overall economic growth, which is key to the bottom 40 percent prospects - to mitigate the impact of the difficult external environment in the short-term and to avoid a sharp decrease of Poland's long-term growth potential. Activities under the equity and inclusion pillar target three groups within the bottom 40 percent of the population which are among those facing the most difficult odds - the unemployed, those living in lagging regions, and the older / less healthy people. Activities under the "climate action" pillar are directly focused on strengthening the environmental sustainability of Poland's development. Finally, activities under the "Poland as a global development partner" pillar are geared towards facilitating Poland's contribution to other countries' development agenda. 50. The WBG is expecting to implement the CPS with a degree of flexibility, so as to be able to adjust the program to an evolving demand. The WBG will prioritize new demands for its services on the basis of a set of criteria which include: (i) strategic focus (supports the CPS overall strategic objectives through engagement in an area which is consistent with the WBG's overarching goals and where the WBG has a comparative advantage); (ii) demand (reflects a clear demand by a counterpart committed to implementing reforms); (iii) operational capacity to deliver and Bank Group approach (coordinated response between IBRD, IFC and MIGA); and (iv) mainstreaming of gender considerations (operations in relevant areas, especially, but not limited to, those related to strengthening labor force participation will be designed in a gender- responsive way and include at least one sex-disaggregated indicator to monitor progress). WBG interventions are not necessarily expected to deliver development results exclusively in their target pillar but some also have potential positive impacts in other engagement areas (e.g. labor market reforms for equity and inclusion can at the same time also improve sustainable public finances under economic competitiveness) due to the multidimensional, cross-cutting nature of most operations. 51. The proposed strategy is in full coherence with the EC's strategic approach and programs in Poland (see Box 7). The EC peer reviewed the CPS and confirmed that the proposed engagement is closely aligned with both the EU strategy 2020 and the corresponding funding priorities under the new programming period. The EC sees the WBG as uniquely placed to support policy reforms which can make the large EU-funded investments more effective. In particular, the WBG strategy will cover investment areas where the EC encountered implementation difficulties in the previous programming period (e.g., rail, flood protection) as well as investment areas which will grow in importance in the upcoming programming period 22 (e.g. innovation/R&D). The WBG is committed to monitoring the continued complementarity of the programs through a regular and active dialogue with the EC. Box 7: CPS relationship to national and EU objectives The WBG aims to support Poland in the implementation of its development agenda as articulated in the National Development Strategy 2020 which translates the broad headline targets under the Europe 2020 strategy into national targets. The relationship between the different strategic levels is illustrated below with CPS Outcome 2, "Increased Innovativeness". Similar relationships for each CPS Outcome are indicated in Annex 1. GOAL ACTION * Flagship Initiative 1.7 percent of GDP Innovation Union * Flagship Initiative Industrial invested in R&D Policy for the Globalization Era * Improved incentive system National Increased to finance R&D D _I * Building "Innovation Development innovativeni Culture" among Strategy 2020 entrepreneurs Enhance environment E5W Innovation Ecosystems for private-sector led * TA/RAS Innovation, Smart Specialization and innovation Innovation Instruments 52. Results Framework. Annex provides a results framework which aims to help monitor and evaluate progress in the implementation of the CPS (including on gender equality in the labor force). The definition of specific outcome indicators focuses on those results that could be unambiguously attributed to the Bank - in the context of a knowledge-focused program where the WBG's engagement in a number of areas consists only of analytical and advisory services (and hence where results can often be no more than intermediate outcomes in a longer results chain). PLANNED ACTIVITIES IN CPS AREAS OF ENGAGEMENT Strategic Engagement Area 1: Economic Competitiveness 53. This first Strategic Engagement Area is focused on sustaining overall economic growth, which is key to foster income growth for the bottom 40 percent of the population. The challenge is two-fold. In the short-term, Poland ought to further mitigate the impact of a difficult external environent and a slowdown in economic activity. Beyond this horizon, Poland needs to avoid that its long-term growth potential declines too sharply as a result of both the aging of society and the diminishing returns of its current "catching up" growth model. Action is required on a multiplicity of fronts. Based on the government's demand, and on the 23 track record to date, the WBG will focus on three areas: enhanced business environment, increase innovativeness, and effective public finance. 54. Country Development Goal 1: Enhanced businesses environment. Much remains to be done to enhance the business environment in Poland, as illustrated by the country's ranking under Doing Business 2013 (55, below the EU average), with particular weaknesses in starting a business, dealing with construction permits, getting electricity, enforcing contracts, paying taxes and resolving insolvency. This is a priority area for Government action in the coming years. Over the last period, IBRD has been successfully providing technical advice (including under a RAS arrangement) to strengthen the insolvency law, revamp the bank resolution framework, and improve contract enforcement. During the CPS period, IBRD will provide continued support, with a focus on (i) reducing unnecessary regulatory burdens for private sector development (especially in those areas where Poland is lagging the most in the Doing Business surveys), (ii) further strengthening the financial sector, and (iii) enhancing financial auditing, accounting and reporting. In parallel, IFC could support the development of Poland's bond market, for instance through participation in a bond issuance. Instruments: Policy Lending, technical assistance and reimbursable advisory services (Business Regulatory Environment, Financial Reporting). 55. Country Development Goal 2: Increased innovativeness. To sustain its economic performance, Poland will need to increasingly rely on innovation as a key engine for growth. Yet the country ranks among the least innovative economies in both the EU and the OECD. Large resources are expected to be made available to support private sector-led innovation under the new EU financial perspective. Both the national and subnational governments are developing "innovation and smart specialization strategies" to provide a framework for using these resources effectively. Over the last period, the WBG carried out a review of the public support to innovation system and helped develop innovation strategies. During the CPS period, IBRD will build on these activities and support the operationalization of this agenda, in terms of both strategic approaches and instruments. Efforts to develop human capital for R&D, in particular with regard to higher education, will also be supported. Instruments: economic and sector work (Innovation Ecosystems), technical assistance and reimbursable advisory services (Innovation, Smart Specialization, Innovation Instruments, and Higher Education). 56. Country Development Goal 3: Effective public finance. To accompany the ongoing fiscal consolidation effort, the government is contemplating reforms aimed at strengthening fiscal rules and institutions and improving the quality of expenditure and public sector effectiveness including in social sectors. The Bank has been actively engaged in this area, through successive DPL series, analytical work, and technical assistance, in close cooperation with the EC and the IMF. During the CPS period, IBRD will support the design and adoption of selected public finance reforms through demand-driven, just-in-time knowledge services to support the evolving government agenda, as well as financial support (including to provide a strong signal of support to other financiers and financial markets as appropriate). The initial areas of engagement include: (i) further developing fiscal rules and institutions, (ii) strengthening the quality of public finance, (iii) planning for the macroeconomic challenges associated with the aging of society, and (iv) preparing for the eventual adoption of the Euro. Instruments: Policy Lending, economic and sector work (Public Finance Review, Savings and Growth, Social Sectors Service Delivery), technical assistance and reimbursable advisory services (Justice). 24 Strategic Engagement Area 2: Equity and Inclusion 57. This second Strategic Engagement Area is focused on ensuring that the bottom 40 percent of the population can enjoy the benefits of economic growth, including in terms of accessing economic opportunities as well as benefiting from efficient social services. This is a multi-tiered agenda, where specific support is needed for each of the various groups that altogether constitute the "bottom 40 percent of the population". Based on the government's demand, and on the track record to date, the WBG will focus on three groups which are among those facing the most difficult odds - the unemployed (inclusive and effective labor market), those living in lagging regions (balanced regional development), and the older / less healthy people (strengthened health care and health prevention in an aging society). 58. Country Development Goal 4: Inclusive and effective labor market. Increased participation in the labor market is key for Poland's sustained economic growth as well as for social inclusion and poverty reduction. The government is making efforts to improve the functioning of the labor market, including by reviewing unemployment services and activation policies (with support from the European Social Fund). Over the last period, IBRD's dialogue in this area has been relatively limited to ad hoc technical support. During the CPS period, the WBG will aim to scale up its engagement, especially to support reforms in the areas of labor market and employability and the use of EU funds. This will include a specific focus on identified gender related issues, including female participation in the labor market, segregation and pay gaps. This work will be conducted in close coordination with the multi country work in ECA on activation and skills to ensure exchange of good practice and joint learning as well as other synergies at the regional level. Instruments: Investment Lending (Social Inclusion project), economic and sector work (Aging), technical assistance and reimbursable advisory services (Labor Market, Social Assistance). 59. Country Development Goal 5: Balanced regional development. Significant EU resources are expected to be available in the next period to finance investments at the subnational level, where local governments have a solid track record for disbursing such funds. An important objective for Poland is to develop public-private partnerships, especially to raise the number of hybrid projects. The challenge is two-fold: to maximize results (beyond disbursements), especially with regard to reducing the inequality of opportunities across and within regions which stand in the way of creating shared prosperity; and to ensure the sustainability of these investments (in particular by strengthening local public finance to free up resources for cofinancing, operations, and maintenance). Over the last years, the WBG worked in close cooperation with the EC, provided a range of knowledge services, and developed solid relationships with several key counterparts, at both national and subnational level. During the CPS period, the WBG will build on this dialogue and provide focused knowledge services in support of strengthening subnational strategies (and their implementation) and enhancing subnational public finance. The WBG will also help prepare a "small area poverty map" to allow for a better geographical focus of relevant poverty reduction measures. Instruments: economic and sector work (Equitable Resource Reallocation for Regional Development and Service Delivery) technical assistance and reimbursable advisory services (Subnational Development, Subnational Finance). 60. Country Development Goal 6: Reformed health care for an aging society. A growing elderly population is associated with increased health care service utilization as well as with 25 increased risks on old-age exclusion. Poland's objective in the health sector is to develop an effective care system which can deliver quality services and cope with demographic changes in a fiscally constrained environment. Achieving this will in particular require the strengthening of spatial planning for health service delivery to account for the health needs of an aging population, streamlining hospital infrastructure and developing less hospital-centric care practices. This will also include developing measures to limit the growth of long-term care needs by prevention, rehabilitation, and support of capacity of independent living. Significant reforms have been engaged in particular to transfer the responsibility for hospitals management (and financial losses) to subnational governments, which heighten the pressures for consolidation and restructuring. Over the last years, the WBG provided analytical and financial support to reforms in the sector, first at national level and increasingly at the subnational level (in line with the decentralization process). During the CPS period, the WBG will build on this dialogue and further work in close cooperation with the EC and EIB to strengthen capacity to effectively create and manage hospital networks at the subnational level, to facilitate a sound and structured process for hospital restructuring, and to inform further reforms in the health sector (e.g., on private health insurance). IFC will explore opportunities to complement these activities with selected direct and Public Private Partnership (PPP) advisory or investments in the health sector. Instruments: Investment Lending (Hospital Reform Project), economic and sector work (Aging), technical assistance and reimbursable advisory services (Health); possible IFC investments and PPP advisory in health sector). Strategic Engagement Area 3: Climate Action 61. This third Strategic Engagement Area is focused on enhancing the sustainability of the country's economic development, in particular with regard to climate change. This is about climate-informed policy-making, climate change adaptation, and climate change mitigation. Once again, this is a multi-fold agenda, which calls for action across a number of areas. Based on the government's demand, and on the track record to date, the WBG will focus on three areas: helping to develop methodological tools to inform climate change policy decisions; protecting against floods, as part of the mitigation effort, and developing or improving resource-efficient infrastructure (e.g., railways, renewable energy, energy efficiency) to reduce emissions. 62. Country Development Goal 7: Informed climate change policy. The government is keenly interested in developing a better understanding of the implications of climate change policy decisions on the overall economy, especially with regard to the impact on growth prospects and relevant macroeconomic aggregates, so as to be able to analyze policy options and trade-offs. Over the last period, the WBG carried out analytical work and provided technical assistance, which were highly appreciated. During the CPS period, the WBG will build on this effort and provide continued support especially with regard to building capacity for macroeconomic modeling of climate policy decisions, and climate change strategy-making. Instruments: economic and sector work (Economic Effects and Financing of Energy Program Implementation), technical assistance and reimbursable advisory services (Economic Modeling for Climate Policy), IDF grant on low emissions. 63. Country Development Goal 8: Enhanced protection against floods. Large parts of the country are exposed to flood risks, especially in the basins of the two main rivers (the Odra and 26 the Vistula) due to both inadequate protection infrastructure and insufficient arrangements for institutional coordination. The government has developed a comprehensive program to enhance flood protection along the Upper Odra River (which was affected by a devastating flood in 1997) and is now preparing similar plans for the Upper Vistula River. Over the last period, the Bank has supported these efforts, by providing technical leadership and mobilizing other financiers (EC and CEB) to implement the Odra River program. During the CPS period, the Bank will focus on completing implementation of this program. In partnership with others, the Bank may also support the design and implementation of a Vistula River flood protection program. Instruments: Investment Lending (implementation of Odra River Basin Management and Flood Protection Project; Vistula River Basin Management and Flood Protection Project). 64. Country Development Goal 9: Resource-efficient and safe infrastructure. In close cooperation with the EC, Poland is making efforts to gradually strengthen its low carbon infrastructure systems, including for transport (railways) and energy (energy efficiency, alternatives to coal). Yet, this is proving a challenging endeavor, and the authorities have had difficulties in absorbing the corresponding EU funds. Over the last period, with the encouragement of both the government and the EC, the WBG initiated a dialogue to support reforms of the railways sector and especially of the infrastructure company, PLK (to reduce staffing levels, improve safety, and strengthen capacity for absorbing EU funds). The WBG also provided targeted (and limited) advisory services in the area of energy efficiency. During the CPS period, the WBG will build on these engagements, with a focus on supporting in particular: (i) implementation of the PLK reform; (ii) the design of effective strategic approaches and instruments to develop resource-efficient infrastructure (including through PPPs); (iii) efforts aimed at developing alternative energy systems and at improving energy efficiency including through possible IFC investments in renewable energy and other climate-friendly projects; and (iv) enhanced road safety. Instruments: Investment Lending (Railways Restructuring Project); technical assistance and reimbursable advisory services (Road Safety) IFC advisory or investment in PPPs. Strategic Engagement Area 4: "Poland as a Global Development Partner" 65. This last Strategic Engagement Area aims to benefit the developing world at large and to contribute to the WBG's overall objectives at a global level. It will also benefit Poland by strengthening its voice on the international scene. 66. Country Development Goal 10: Contribution to development cooperation and global public goods. Poland is a new actor on the global development scene (the first law framing development cooperation efforts was passed in late 2011). Yet, as a Central European power and a strong voice within the EU, the country has the potential to play a significant role by influencing international debates, sharing its successful experience of economic transition, and gradually providing increased amounts of financing to support global development efforts. This is expected to be an endeavor that can yield its full results only over the medium-term, not only because of the short-term fiscal constraints, but also because it requires an evolution of the society's mindset (from recipient to donor). During the CPS period, the WBG will aim to advance this dialogue by identifying at least three areas (e.g., specific global public goods, support to selected countries, aid effectiveness themes; concrete target areas will be identified by the time of the CPS Progress Report) in which it could work in partnership with Poland in 27 support of global development goals. Through IFC, the WBG will also seek opportunities to work with Polish companies interested in investing outside of Poland in emerging markets. Instruments: possible IFC co-investments with Polish companies outside of Poland, advisory services (Poland as a Global Partner). D. IMPLEMENTING THE WORLD BANK GROUP CPS FOR POLAND WBG ONGOING PROGRAM 67. The IBRD lending portfolio is limited to a single ongoing investment operation. This reflects the WBG's focus on successive series of DPL loans as the main instruments to support reforms. The ongoing Odra River Flood Protection Project (US$ 184 million, of which US$ 140.3 million undisbursed), which is cofinanced with the EC and the Council of Europe Development Bank (CEB), is currently rated Moderately Satisfactory. The initial difficulties and delays in implementing this operation provide important lessons which will be reflected in potential investment loans under the new CPS, including: (i) the need to strengthen capacity of implementing entities, (ii) the importance of solid cross-agency cooperation, and (iii) the criticality of adequate project readiness. The current TF portfolio consists of 14 active TFs/grants. Current TF commitments amount to over US$ 50 million, with very solid disbursements of about US$ 52 million in FY12/13, with sizable engagements for (i) the sale of Polish Assigned Amount Units (AAUs) to the Carbon Fund for a total of EUR21 million; (ii) three Prototype Carbon Fund projects; (iii) a highly-appreciated program funded by the multi-donor Global Road Safety Facility; and (iv) an Institutional Development Fund (IDF) grant for strengthening capacity to prepare a low emissions strategy. 68. The IBRD ongoing knowledge program is significant. This program has proven a successful way to engage with the authorities in support of reforms. Over the last few years, it has gradually expanded in several sectors, in support of a number of counterparts. It is closely aligned with the government's own priorities for reform as well as with the EC's program. It provides the basis for a sustained engagement in selected areas. It is mainly financed through the WBG's own resources, though there is a nascent RAS program. 69. IFC and MIGA currently have a very limited involvement in Poland. IFC has three active projects in Poland in discount grocery retail, microfinance, and an exposure to an SME fund. As of end of May 2013, a total of US$ 17.09 million were committed in loans, equity and quasi-equity of which a total of US$ 15.52 million were disbursed and are outstanding. The net exposure of MIGA in Poland amounts to US$ 2.9 million in two projects, both in support of foreign investment in the telecommunications sector. 28 Box 8: Ongoing knowledge program in key CPS areas Strategic Engagement Area 1: Economic Competitiveness Enhanced business environment. The WBG is providing technical assistance to the Ministry of Justice (on contract enforcement and insolvency) and to the Ministry of Infrastructure (on construction permits), under a series of RAS agreements. The WBG also helped draft a modem banking resolution framework and recently completed an Financial Sector Assessment Program (FSAP) which identified priorities for further reforms. With financing from the Swiss Development Cooperation, IBRD is managing a multi-year program aimed at strengthening accounting and auditing practices and the effective implementation of modem standards in this area. Increased innovativeness. Building on a recently-completed and well-received analysis of public support to innovation, the WBG is supporting the development of operational instruments to better support innovation under the new EU perspective, under a RAS agreement. The WBG is also supporting the preparation of innovation strategies, at both national and subnational (for the Swietokrzyskie region) levels, to inform the use of resources under the upcoming EU perspective, also under RAS agreements. Effective public finance. The WBG is working closely with the government within the context of the fiscal consolidation agenda. The WBG is completing a review of international experience to inform an eventual reform of public sector pay. The WBG is also reviewing the issue of savings in Poland (level, structure, adequacy, and medium-term trends). Strate2ic En2a2ement Area 2: Equity and Inclusion Inclusive and effective labor market. The WBG has initiated a dialogue on in-work poverty and profiling of the unemployed. Balanced regional development. The WBG is supporting the development of regional strategies (for Eastern Poland and the Slaskie region), building on best practice strategy work for the Lubelskie region. The WBG is also working closely with subnational governments (and the MoF) on subnational debt management issues. Reformed healthcare for an aging society. This ESW is part of a regional effort to look at challenges related to ensuring a healthy, active, and prosperous aging. It looks in particular at issues of labor force participation, health care (including long-term care), health condition of workers and pensions / social assistance systems. Strategic Engagement Area 3: Climate Action Informed climate change policy. The WBG is working with the Ministries of Finance, Economy, and Environment to develop modeling capacity to assess the macro impact of climate change-related policy decisions. The WBG is also supporting the strengthening of capacity in the Ministries of Economy and Environment for the preparation of low-emissions strategies. Enhanced protection against floods. The WBG will continue to provide knowledge support at policy and sector management level in this area through the ongoing and planned projects on the Odra and the Vistula. Resource-efficient and safe infrastructure. The WBG is supporting the development of new instruments to help operationalize EU priorities for energy efficiency, renewable, and environment, under a RAS agreement. The WBG is also providing support for the preparation of a new road safety strategy. Strategic Engagement Area 4: Contribution to development cooperation and global public goods The WBG has engaged in a dialogue with the authorities for the preparation of the upcoming climate change Conference of the Parties (COP), expected to take place in Warsaw in November 2013, and in possible synergies in selected countries. The WBG is also engaged in discussions with non-governmental stakeholders to help promote Poland's role on the global development scene. FINANCIAL ENVELOPE AND INDICATIVE KNOWLEDGE SERVICES 70. The demand for IBRD financing over the CPS period is estimated at US$ 3.2 billion. The indicative financing program for FY14 (at about US$ 900 million) is reasonably firm. The 29 actual lending volumes in FY15-FY17 will depend on economic developments and external risks, Poland's performance and priorities, IBRD lending capacity, and demand from other borrowers. In accordance with the government's preferences, the bulk of the resources is expected to be provided through policy lending, with the possibility of a small number of ILs in selected areas where the Bank can provide added value through its global expertise and through its engagement. The IBRD indicative financing program is presented in Annex 4. For FY14 and FY15 it includes a DPL series of two operations with a focus on a pro-growth policy agenda, a possible railway restructuring project, and a possible hospital restructuring project. The program for the remainder of the CPS period may be adjusted in the CPS Progress Report in consultation with the government based on the evolution of the country's priorities. At this stage, the pipeline for FY16/17 could include a further DPL series (to support structural reforms in view of the economic environment at the time of design), a possible Vistula River Basin Flood Protection Project, and a possible Social Inclusion Project. Selection of activities for IBRD support will be guided by the government's demand and the criteria for IBRD financial engagement (signaling function, additional resource mobilization, emergency policy response, or lasting impact on institutional capacity). 71. IFC is considering a focused re-engagement in light of the challenges facing Poland's economy. Subject to market demand and conditions, IFC will explore opportunities to invest selectively in renewable energy and other climate-friendly projects; to engage in the health sector through the financing of public-private partnerships as well as direct investments; to support development of Poland's bond market and to support the internationalization of Polish firms through cooperation in projects beyond Polish borders. Support in structuring and implementing PPPs in health and other sectors in particular has the potential to contribute to the mobilization of private investment into vital infrastructure during a time of economic stress and limited public resources; to support Poland's progress towards energy efficiency targets; to mitigate real and perceived market and regulatory risk; and to demonstrate the potential of PPPs to neighboring countries with less developed or untested regulatory frameworks. IFC's efforts are expected to be complementary to IBRD's activities within the broader framework of the WBG engagement. The level of IFC commitments during the CPS period will depend on market demand and adequate role for IFC, but could be in the range of US$25-50 million per year. 72. MIGA is expected to remain a minor partner in Poland. MIGA will continue to underwrite projects in Poland, encourage inward FDI, and contribute to the WBG's efforts to promote the internationalization of Polish firms. 73. The core of IBRD program will consist of knowledge products: Economic and Sector Work (ESW) and Technical Assistance (TA) in support of all CPS strategic engagement areas. The indicative analytical program for the first two years of the CPS is reasonably well defined (see Annex 4), though it may be adjusted to reflect evolving demands for specific activities. It often builds upon an existing engagement, either to deepen the level of analysis, to operationalize earlier recommendations, or to expand the dialogue to connected issues. Particular attention will be paid to the development of knowledge products which can also benefit other countries (e.g., by developing methodologies for Poland which can then be used in other parts of the region). Poland is also expected to benefit from analytical work at the regional level, including through the periodic Regular Economic Reports (RER) which will continue to analyze short-term economic developments and present an economic and social outlook. A large part of the TA will 30 be provided on a programmatic basis, so as to support a multi-year dialogue in a flexible yet sustained manner. IBRD ESW and technical assistance (especially in the areas of labor force participation and aging) are expected to address gender issues. 74. IBRD will continue to make efforts to develop the use of RASs, as a way for IBRD to expand its capacity to deliver knowledge services over and above what can be financed from Bank budget. RASs are governed by the same quality and fiduciary standards as the rest of IBRD's program, and the same procedures of monitoring and evaluation apply. The key to produce results for Poland through the RAS instrument are a close client relationship, flexibility and a clear value proposition. In the short-term, the demand is expected to remain relatively limited (due to both the fiscal consolidation environment and administrative obstacles) and IBRD's approach will consist in focusing on a few strategic areas where it has established a solid track record and a trust-based relationship, and in developing a modular approach with a series of relatively small, successive tasks (the definition of each task being adjusted at the time of inception to reflect shifting circumstances and priorities). The RAS portfolio is expected to grow in size (as budget resources are heavily constrained), yet to remain limited compared to other EU members which have hired IBRD to help with administrative reforms to support better implementation of EU funds. IBRD will continue to finance analytical and advisory services in areas which it sees as critical for the implementation of the bottom 40 percent agenda and where RAS may not be a feasible option - as well as for selected knowledge activities where the WBG engagement in Poland could contribute to informing the policy dialogue in other countries. 75. The fiduciary risks for program implementation remain moderate. Following significant improvements in Public Financial Management (PFM) during the EU accreditation process, the PFM enshrines enhanced budget transparency, predictability and performance- orientation over the medium term. The reform agenda (based on the 2009 Public Finance Act (PFA), amended in 2010) introduced performance-oriented four year rolling budget planning with binding annual cash based budget, cash management consolidation, and strengthened internal control over public expenditures and debt via new regulations on corrective actions triggered by debt thresholds. The Ministry of Finance is currently implementing multiyear performance budgeting program. More efforts are expected to streamline the national flow of funds and budgetary processes, to harmonize public sector accounting and reporting standards and practices on EU level as led by EC and supported with further integration of IT systems. PARTNERSHIP AND DONOR COORDINATION 76. The WBG is committed to ensuring a tight alignment at both strategic and operational levels of its activities with EU priorities and programs, as discussed above. A significant part of the WBG advisory services will be aimed at strengthening capacity to make the most of available EU resources. The WBG also maintains a close partnership with the EC through the organization of regular knowledge-sharing events (including dissemination in Brussels of key knowledge products) and the development of ad hoc cooperation in selected areas (in particular in areas where the WBG's technical expertise and local knowledge can contribute to advancing the EU agenda). 77. The WBG cooperates closely with other multilateral institutions and development partners. The WBG conducts regular consultations with the IMF. It is also cofinancing a project 31 with the CEB, and will look for further cofinancing opportunities with both EIB and CEB. The WBG is also implementing a large program of technical assistance on financial reporting, which is financed by the Swiss Development Cooperation (for CHF 10 million), and will strive to further strengthen this relationship. The WBG will also aim to closely coordinate with the IMF and seek synergies with EIB, CEB, and EBRD 78. The WBG aims to support Poland's growing and varied civil society in its partnership roles. This will include further outreach to local NGOs as a mean to seek insights and exchange on Poland's development challenges and possible solutions; to research institutions and think tanks as partners in the definition and design of technical solutions within the context of the WBG's knowledge work; and to universities as centers of excellence and centers of influence on the public debate. MANAGING THE WBG PROGRAM 79. The WBG will track progress towards achieving the country outcomes defined in the CPS results framework, spelled out in Annex 1. On this basis, the WBG will conduct an annual CPS implementation review for assessing progress under the CPS and possible adjustments to the WBG program. This review process is also expected to provide inputs for the planned CPS Progress Report in FY16 when adjustments in the CPS results framework will be made if necessary. 80. IBRD's program management will also include an annual review process with the government and will build on it with the purpose of strengthening portfolio implementation, improving lending efficiency, furthering the knowledge agenda, and leveraging resources through strategic partnerships with Polish institutions and multilateral agencies. To maintain the quality of knowledge services delivery and portfolio performance, the country management unit works closely with technical teams to ensure a proactive approach in solving issues during implementation. 81. The WBG will make a particular effort to develop adequate systems to monitor the impact and effectiveness of knowledge products, as part of a WBG-wide level exercise. This will require defining approaches and instruments to assess what can be attributed to the WBG involvement in the reforms implemented and the development results achieved by the country. 32 IV. MANAGING RISKS 82. The implementation of the proposed CPS program face political, economic, social, and implementation risks. The WBG is proposing measures to address and mitigate these risks. (i) Impact of 2015 Parliamentary elections. In the run-up to the elections, the pace of reform may slow down. The WBG will phase its engagement accordingly and aim to help frontload key reforms well ahead of the beginning of the campaign. The elections results may also lead to a change or at least a reshuffling of the government, with potentially significant consequences on both the reform agenda and the partnership between Poland and the WBG. The FY16 CPS Progress Report will provide an opportunity and an instrument for the WBG to adjust it program to the new circumstances, if and as may be needed. (ii) Persistent turmoil in the Euro zone. Poland's economic performance will continue to depend on developments in the Euro zone. The Government is well aware of these risks which combine with internal factors such as tepid household consumption and a sharp slump in public investment and is taking steps to mitigate the impact of the crisis. The WBG will remain flexible to adjust its program to changing circumstances, and in particular to intensify its support (both financial and non-financial) in the case of a further deterioration of the external environment. (iii) Social resistance to reforms. The government has taken an overall cautious stance on reforms to avoid antagonizing critical constituencies. Yet it has also demonstrated its capacity to move forcefully when needed. In parallel, over the last period, the Polish society has shown its maturity by supporting some difficult reforms (e.g., raising the pension retirement age). The WBG will focus its activities in areas where there is a demonstrated commitment to reform, and support the authorities in their communication strategy, if and as may be appropriate. (iv) Implementation risks. Implementation risks are low, in an environment where fiduciary controls are strong. The main implementation risks are related to possible delays in specific activities, an issue that falls under management's responsibility. The development of a RAS program may continue to be hampered by legal and administrative issues (and in particular constraints on the sole source contracting of the WBG for the delivery of analytical and advisory services). 83. Notwithstanding the risks, the engagement between Poland and the WBG is expected to bring high development rewards for both Poland and the WBG. For Poland, the development impact will come through the implementation of the WBG-supported program presented in this strategy, in particular through increased engagement on structural reforms in support of a shared prosperity agenda. For the international community, the rewards will be channeled through the development of "public good" knowledge services and an enhanced contribution of Poland to the global development agenda. 33 Annex 1: Poland - CPS FY14-17 Results Matrix Country Development Development Challenges CPS Objectives and Outcome WrdBn ru Goals addressed by CPS Objectives IndicatorsPrgaan Development Partners Strategic Engagement Area 1: Economic Competitiveness GoalThe business enviroment CPS Objective 1: Enhanced business remains below EU average Unnecessary regulatory burdens for Multisectoral DPL environment oan "Doing Buinss private sector development reduced, (FY 14/15- new) oveal o "oig usnes" especially in those areas where TA / RAS Business (This outcome is linked in 2013). Poland is lagging the most in the Regulatory Environment to the following Europe 202 tefoloicg E9ens Performance is particularly Doing Business surveys. ("Doing Business" - new) 2020weak in the following areas: TA/RAS Financial Flagship Initiative "An s Outcome Indicators: Reporting (ongoing) industrial policy for the satn uies eln globtalatifera and with construction permits, Significantly improved performance Prnr globalization r n and getting electricity. as measured under the Doingand Guideline 6 "ImprovingBusiness methodology in starting Swiss Development the business and a business (time reduced from 32 Cooperation (funding consumer environment days to 21 days), construction the Financial Reporting and modernizing the permits (time reduced from 301 Technical Assistance industrial baseT) days to 200 days), and getting Program) electricity (time reduced from 186 days to 123 days). Goal 2: Poland is one of the least CPS Objective 2: WBG innovative EU and OECD Increased economies. Environment for private sector-led ESW Innovation mnnovativeness innovation at national and Ecosystems (new) Significant resources are subational level enhanced. TA / RAS Innovation, (This outcome is linked available under the upcoming Smart Specialization, to the following Europe EU Financial Perspective to Outcome Indicator: and Innovation 2020 strategic elements:7 support private sector-led Instrument to effectively support Instruments (ongoing) National Europe 20202 inovation. private sector-led innovation TA Higher Education - target (for Poland): 1.7 (including an increased focus on (ongoing) percent of GDP invested The goverment is to design SMEs and the introduction of non- in R&D and Flagship and implement strategies and grant mechanisms) adopted and used Initiatives "An instruments to expend these under the upcoming EU Financial EC (funding innovation industrial policy for resources. Perspective, support programs under the globalization era" the upcoming Financial and "Innovation Perspective) Union'") _______________ Goal 3: In a deteriorating exterual CPS Objective 3: WBG envirorment, Poland faces Effective public finance challenges to reduce its fiscal Public finance sustainability Multisectoral DPL deficit in a sustainable manner strengthened. (FY 4/15 -new) (This outcome is linked (and to exit the EU Excessive istlag Sviitss andgGr to thefollowing Europe Deficit Procedure).utcome Indicators: 2020 strateSic elements: Adoption of a permanent fiscal rule ESW Public Finance Guidelinea The goverument is engaged ensuring the sustainability of fiscal Review (new) "Ensuring the quality in a three-fold effort: fiscal deficit reduction; introduction of an ESW Social Sectors and the sustainability consolidation in the short term; accounting system for farmers (as Service Delivery (new) ofpublic finances" development of fiscal rules and a step towards taxation of the TA / RAS Justice (new) and Guideline 2 institutions for the medium- agriculture sector); aligment of "Addressing term (including in the context resource allocation with strategic macroeconomic of an aging society); and priorities for the functioning of EC (engaged in a policy imbalances") improved effectiveness of commercial courts, dialogue under the the public sector. Excessive Deficit _______________________________________ _________________________Procedure) 34 IMF (engaged in a policy dialogue under regular monitoring activities, and financing a Flexible Credit Line) 2020strteielment: rmaiStwaeseciEalleorenstre2:umty eined toIfcivel Goal 4: 200 terpsol wi the labor Partner Inclusive and effective wom e nd y o ese cl o o rorkes Ec ig Inclusion and labor cet ooet of rsin w n ) and employment support (This outcome is linkedTALbrM ke(nw to the following Europe Ye,lbrfrepriiain OtoeidctrTASilIcusn(ew 2020 stratejzic elements: rmislw seilyfr Isrmn eindt fetvl National Europe 2020 tregop:odrwres upr nlso hog h ao ate targets (for Poland): wmn n ot.I diin akt(seilyfrodrwres C(udn nlso n (i) 71 percent of the inacnetoriigwmnanyot)aotdad mpyetsuot population aged 20-64 unemployment, the quality of used under the upcoming EU programs under the new employed employment services is mixed. Financial Perspective EU Financial Perspective) (ii) Reduction of 1.5 million people at risk Significant resources are ofpoverty or exclusion; available under the new EU Flagship Initiatives: Financial Perspective to "European platform promote inclusion through against poverty"; labor force participation. "An agenda for new skills andmjobsaw)rketiswidel Goal 5: There are significant disparities CPS Objective 5: WBG of economic opportunities both Balanced regional across and within regions Capacity for strategic plauning ESW Equitable Resource development standing in the way of boosting strengthened by supporting the Reallocation for Regional shared prosperity. design and implementation of Development and Service (This outcome is linked regional development strategies, Delivery (FY14/FY15 - to theYfollowing Europe Significant resources will regional operation programs and new) 2020 stratezc element: be available to reduce these associated fiscal arrangements. TA Subniational Flagship Initiative disparities under the new EU Development (ongoing) "European platform Financial Perspective. Outcome Indicator: TA Subnational Finance against poverty') At least five key regional plauning (new) The government and sub instruments (i.e., regional Partners national authorities are development strategies, regional operational programs, or subnational EC (funding regional torpae and instment medium term fiscal plans), prepared development programs tepesnd esrurets with Bank support, under under the new EU Instrumentation Financial Perspective) Strategic capacity and the ,EI (funding regional ability to mobilize counterpart infrastructure and co- funds vary across regions and financing EU programs) are the two main potential constraints for maximizing the impact of available EU resources on shared prosperity. Goal 6: Poland's objective is to develop CPS Objective 6: WBG Refored halthcare an effective care system which Cpct teghndt utial optlrfr rjc Reformd healh care can deliver qunlity services and Cpct teghndt utial optlrfr rjc sector in an aging cope with an aging society, in modernize the hospital network (new) society and a system particular by streamlining and ESW Aging 9ongoing) ensuring access to LTC redefining the role of hospitals. Outcome indicator: Moderu hospital TA Health (new) services for those in networks in at least three Possible FC investments need. Significant reforms have been voivodships (i.e. hospitals are and PPP advisory in health engaged in particular to transfer ,Ereorganized, networked, or merged Fisector (new) 35 (This outcome is linked the responsibility for hospitals using needs-based and spatial to the following Europe management (and financial planning as well as economic 2020 strategic element: losses) to subnational analyses to concentrate specialized EC, EIB Flagship Initiative governments, which heighten services and/or limit duplications, "European platform the pressures for consolidation improve patients flows, integrate in against poverty') and restructuring. - and out-patient and/or health and social care). maaeetadgi finalra:CimtAto Goal 7: The EU 2020 goal for climate CPS Objective 7: WBG schange mitigation requires the implementation of a broad change policy range of policy measures across based climate policy making and Financing of Energy sectors strengthened. Program Implementation (This outcome is linked (new) to the following Europe Yet, there is limited capacity Outcome Indicator: TA Economic Modeling 2020 strategic elemen: to date to assess the impact Economic model to assess the for Climate Policy National Europe 2020 of such measures on the overall impact on the overall economy of (ongoing) target (for Poland): economy and hence to select climate change-related policy IIDF grant on low Increase ofgreenhouse the most effective and options in use. emissions gas emissions restricted economically efficient policy Strategy (ongoing) to +r14 percent options for Poland. Partnea compared to 2005)c EC (engaged in a dialogue on climate change objectives and policies) Ga8:Flood protection is an CPS Objective 8:WB Enhanced protection important part of the climate Odra River Basin Flood against floods change adaptation agenda Protection inifrastructure along the Protection project in Poland. Odra and Vistula Rivers improved. (ongoing) (This outcome is linked Vistula River Basin Flood to the following Europe Large parts of the country Outcome Indicator: Protection Project (new) 2020 strategic element: remain exposed to flood risks, Reduction in risk for about 2.5 Flagship Initiative due to inadequate protection million people in the Wroclaw area Partners 'Resource Efficient infrastructure and insufficient and for urban centers upstream of E n E c-iacn Europe ( arrangements for institutional Wroclaw against -in- 1000 years coordination, flood episodes, such as the 1997 the Odra Project) flood. Goal 9: Developing low-carbon CPS Objective 9: WBG iifrastructure systems is an Resure-ffiiet nd important part of the climate Conditions for shift to low carbon, Railways Restructuring safe infrastructure change mitigation agenda safe and efficient ifrastructure Project (new) in Poland. systems improved (with an initial Possible IFC advisory (This outcome is linked focus on railways management). services or investment in to thefollowing Europe In the transport sector, one PPPs(new) 2020 strategic element: of the main factors to reduce Outcome Indicator: Satisfactory Possible IFC investments Flagship Initiative emissions would be to shift implementation of the 2013 railways in energy efficiency (new) 'Resource Efficient traffic from road to rail. This infrastructure company (PLK) TA Road Safety (TF Europe )is made difficult by the poor reform program, especially as Global Road Safety performance of the railways regards staffing levels, safety Facility ongoing) sector. The government has systems, and administrative capacity Partners prepared a restructuring plan for managing investment programs of the railways company. EC (funding physical investments for railways and energy efficiency under the upcoming Financial Perspective) 36 deeopettop rat Eggmn Ae :Pln a lblDveomn ate Goal 10: Poland is an emerging actor CPS Objective 10: WBG on the global development scene, with particular interest development cooperation in sharing its transition Poland and the WBG on issues Partner (ongoing) and global public goods experience, and in playing of common interest, including a larger role in some thematic specific global public goods, support areas. to selected countries, and aid effectiveness The WBG is interested in learning from Poland's Outcome Indicator Memorandum experience and in partnering of Understanding signed and under with Poland on the global implementation to develop development scene, partnerships in at least three areas of common interest 37 Annex 2: Shared Prosperity - An Agenda for Poland 1. The World Bank Group (WBG) has established ambitious but achievable goals to anchor its overarching mission and to galvanize international and national efforts in this endeavor. Accordingly, the institution will strive to (i) end extreme poverty at the global level within a generation and (ii) promote what may be called "shared prosperity": a sustainable increase in the well-being of the poorer segments of society. This second goal reflects the fact that all countries aspire to rapid and sustained increases in living standards for all of their citizens, not just the already privileged. The corresponding indicator can be summarized as: foster income growth of the bottom 40 percent of the population in every country. Yet, promoting shared prosperity must also be achieved in such a way as to be sustainable over time and across generations, which requires promoting environmental, social, and fiscal sustainability. 2. In a country like Poland, the WBG needs to focus on the shared prosperity agenda. Extreme poverty, as defined by an income per capita below US$ 1.25 per day, is marginal. Yet, the bottom 40 percent of the population continues to struggle with issues of unemployment, lack of relevant skills, and uneven access to services and opportunities. Furthermore, the crisis has eroded some of the gains that were made in previous years and income growth for this part of the population is now slower than for the top 60 percent. There are also difficult issues of sustainability, especially on the environmental side, where Poland remains one of the most carbon-reliant EU economies. 3. The shared prosperity agenda to create an "opportunity society" ought to reflect a three-fold approach: (i) sustain overall economic growth, which is key to the bottom 40 percent's prospects - by mitigating the impact of the difficult external environment in the short- term and by avoiding a sharp decrease of Poland's long-term growth potential due to aging and to the end of the "catching up" growth model; (ii) ensure that the bottom 40 percent of the population can enjoy the benefits of such growth, including in terms of accessing economic opportunities as well as benefiting from efficient social services; and (iii) enhance the sustainability of the country's economic development, in particular on the environmental front. 4. The FY14-17 CPS for Poland is articulated along these lines. Activities under the first pillar, "economic competitiveness", aim to help sustain overall economic growth with a focus on business environment, innovation, and public finance effectiveness. Activities under the second pillar, "equity and inclusion", target three groups which are facing difficult circumstances among the bottom 40 percent of the population - the unemployed (inclusive labor market), those living in lagging regions (balanced regional development), and the older / less healthy people (strengthened health care and health prevention in an aging society). Activities under the third pillar, "climate action", are directly focused on strengthening the environmental sustainability of Poland's development, with a focus on informed climate change policy making, adaptation and flood protection, and resource efficient infrastructure. Finally, activities under the last pillar, "Poland as a global development partner", are geared towards facilitating Poland's contribution to other countries' development agenda. 5. The matrix below expands on the regular results matrix in Annex 1 by discussing the "line of sight" between the CPS goals and the shared prosperity challenges faced by Poland. 38 Country Development Goals and CPS Shared Prosperity Challenges addressed under the CPS Objectives and "Line of Sight" Strategic Engagemnent Area 1: Economic Competitiveness The CPS airns to help sustain overall economic growth, which is key to the bottom 40 percent prospects -by mitigating the impact of the lifficult external environment ing a sharp decrease of Poland's lone-term growthr t potential nue to aging and to the end of the "catchin up" growth model. Country Development Goal 1:Insieoitreetpors,Plnreas55hinhe21Dig Enhanced business environment ounes to grwhirecome CPeving theS fObjet cti and ve creation1: CPSOjectie1:newdirms andrjobss) wSE)hich in s turngwllgt duincras econictoppotunits anhencvae fstr. inomein gothe fornes tenbottomprent of te popultion.t Unnecessary regulatory burdens for private miiaigteipcoftecssinhehr-em,ndoehnig sector development reduced, especially in those overdth last-tec P growth has been drivenb a"post- areas where Poland is lagging the most in thepoutivit growt an c DinI spitness accu ofitiof i ess, folare artn ofthe incoe 2013 fong devo the CPS Objective t frm n o then p lation o st n h c reat h l me and job eationriss Er Tita w and hlio csts) ing cosupoland witl Enohenmee fosther mnhoe ug the au siness nd arhent pr ocrtiit gato I a ed n i nl n d nati n evt g hin g th i o n of transi r iss e n t i ar to ev nth ar h an c in gi n Poland's ionu-term growth prospects, andrn bothce athe ario k of ecooii opp e the bottom 40 percent of the population it suci economic n opuati to ar the imo er tc s . a lo ine me, Poland E ~ ~ ~ ~ ~ ~ ~~~~~ne o teghnn h nvironment for private sector-led iunovation.ne ofrhrmv ptevlecanadaheepoutvt an Line of Sight: Achieving the CPS Objective will facilitate privaent a the cation, o nwfrs(jos,which in turn will cotiueteeoingcrewscorc oppowth,unites ionts econoim-opportuntie andsheps fotrng iencoe getroto forfh enc fo tie grt for the bottom 40 percent of the population. Country Development Gonl 3:aTh sn i of pu lnae th reductin o f eficitsand evnt inonvt ie e ebt esaiwe as e iese eicieyines the bufferEstrotePn gnvironment for private sector-led innovationa Pubicinaceustinaiiysrentheed. iOr that wo ecallegin extrnln'sironmet. hroughen trivengb reviewt ftrhit efcin ,nd etinvterms of pblroindiin asty e growthq anita puic eonic eihry aunthe sd ofovret code be grow nth tbottom 40 percent of the population.Tostanuceoomcgwh and sustaiablemau. At th sm retonaia ( ngthening scial setynts and Effectvepu licfnancneedntoal fuh e tomov e t vas lu c h in achevsed producivity ginsh at naionaland sbnatonal evelnhancd.vtroug inovatubion Thrics ransin iental tpareventtha shardprodeieyi Polands meimtrgot protetPln gi spuecs manhenihc s a depeatiolo mitigating the impact of fiscal consolidation on the bottom 40 percent is of utmost importance. Line of Sight: Achieving the CPS Objective will help create an environment where public services can be delivered in a more efficient, cost-effective, and sustainable manner, which in turn will make it possible to foster income growth for the bottom 40 percent of the population in a mauner that is fiscally sustainable over the m iedium-term. 39 Strategic Engagement Area 2: Equity and Inclusion The CPS airns to help ensure that the bottom 40 percent of the population can enjoy the benefits of economic growth, including Efetvns finclurso prograsn acnd mcopruiisa ela eeiigfo fiin oilsrie Country Development Goal 4: In an environment of growing unemployment, of a relatively high share of working poor, and of difficulties for women to fully participate in the labor market and to achieve equal pay for equal work, labor market issues are one CPS Objective 4: of the key factors that constrain income growth for the bottom 40 percent of the population. Significant resources are available, including under the new Effectiveness of inclusion programs and EU Financial Perspective. employment services strengthened. Line of Sight: Achieving the CPS Objective will make it possible to enhance the impact of inclusion programs and employment services, which will in turn contribute to fostering income growth for the part of the bottom 40 percent of the population who are facing labor market issues. Country Development Goal 5: There are significant disparities of economic opportunities both across and Balancedwithin regions which stand in the way of economic and social development Balacedregonaldevlopentfor those in living in lagging regions (and in lagging areas in relatively CPS Objective 5: wealthier regions). Poverty in Poland has a territorial dimension - and hence fostering income growth for the bottom 40 percent of the population. Capacity for strategic planning strengthened Significant resources will be available to reduce these disparities under the by supporting the design and implementation new EU Financial Perspective. of regional development strategies, regional operation programs and associated fiscal Line of Sight: arrangements. Achieving the CPS Objective will make it possible to enhance effectiveness in the deployment and the use of these resources, which in turn will increase their impact, and hence contribute to fostering income growth for the part of the bottom 40 percent of the population who live in lagging regions or areas. Country Development Goal 6: Poland's aging is raising a number of challenges. While recent reforms (including a significant increase in the retirement age) have strengthened the y sustainability of the pensions system, there remain significant issues for and a system ensuring access to long-term care older and less healthy members of society in terms of securing their health hcare needs, which is related to both labor force participation and old age CPS Objective 6: poverty or exclusion. The current health system, with its over-reliance on hospitals, is both costly and ineffective in addressing these issues. Capacity strengthened to sustainably modernize the hospital network Line of Sight: Achieving the CPS Objective will make it possible for the authorities to enhance effectiveness in the management and moderization of their hospital networks, which in turn will contribute to developing a more effective care system which can deliver quality services and cope with the needs of an aging society. This in turn will result in enhanced health outcomes, increased opportunities to participate in the labor market for vulnerable parts of society and reduced (or delayed) old age disability (and hence poverty) - which will contribute to fostering income growth for the part of part of the bottom 40 percent of the population who are aged. Strategic Engagement Area 3: Climate Action The CPS aims to enhance the sustainability of the country's economic development, in particular on the environmental front Country Development Goal 7: Poland's economy is among the least emissions-efficient in the EU, mainly due to the country's dependence on coal (especially in the power sector), to very high rates of emission growth in the transport sector, and to an energy CPS Objective 7: efficiency performance that remains below EU averages. The EU has set a goal for Poland to limit the growth of greenhouse gases (GHG) emissions Government capacity for evidence-based to 14 percent between 2005 and 2020 (i.e. significantly below the expected climate policy making strengthened. cumulative rate of economic growth over this period). This implies a change in production structures and energy consumption patterns, which is resisted by powerful constituencies. 40 Line of Sight: Achieving the CPS Objective will facilitate the adoption of the most effective policies (under the existing political / social constraints), which in turn will facilitate and / or accelerate Poland's transition to a lower carbon economy. This will help ensure the environmental sustainability of efforts aimed at fostering income growth for the bottom 40 percent of the population. Country Development Goal 8: The most immediate negative impact of climate change in Poland is the increased odds of intense floods, which can have devastating human and economic consequences. Such disasters typically tend to affect the poor and CPS Objective 8: vulnerable disproportionately. Protection infrastructure along the Odra Line of Sight: and Vistula Rivers improved. Achieving the CPS Objective will strengthen Poland's ability to mitigate the impact of such floods and hence the sustainability of efforts aimed at fostering income growth for the bottom 40 percent of the population. Country Development Goal 9: Infrastructure choices have long-lived and difficult-to-reverse impacts on the Resource-efficient and safe infirastructure carbon, land, and water intensity of future patterns of development making it a key concern for the sustainability of the shared prosperity agenda. CPS Objective 9: Line of Sight: Conditions for shift to low carbon, safe Achieving the CPS Objective will make it possible to gradually increase the and efficient infirastrncture systems improved reliance on low carbon infrastructure (in particular by supporting reforms (with an initial focus on railways management) aimed at increasing the efficiency and hence the attractiveness of railways, compared with road transport). This in turn will translate into diminished emissions over time, which will contribute to mitigating the impact of the Polish economic development on global climate, and hence to the sustainability of the WBG's poverty eradication and shared prosperity agenda. Strategic Engagement Area 4: Poland as a Global Development Partner The CPS airns to facilitate Polaind's contribution to other countries' development agenda. Country Development Goal 10: Line of Sight: t tAchieving this CPS Objective will contribute to integrating Poland as a new Contribution to development cooperation donor into the global donor community. This in turn will contribute to and global public goods strengthening the WBG's ability to engage effectively in support of the CPS Objective 10: poverty eradication and shared prosperity agenda in other countries. Solid partnerships forged between Poland and the WBG on issues of common interest, including specific global public goods, support to selected countries, and aid effectiveness 41 Annex 3: Poland - CPS Completion Report (CPSCR) FY 2009-2013 Date of CPS: June 2, 2009 (Report No. 48666-PL), Board discussion on June 30, 2009 Date of Poland CPS Progress: May 9, 2011 (Report No. 61315-PL) Period covered by the CPS Completion Report: July 2009 to June 2013 CPS Completion report prepared by: Anna Bokina (IBRD) with inputs from Xavier Devictor, Marcus Heinz and the WBG Poland Country Team TABLE OF CONTENTS: I. IN TRODU CTION ................................................................................................................. 43 II. PROGRESS TOWARDS POLAND DEVELOPMENT GOALS..................................... 44 III. CPS PROGRAM PERFORMANCE ................................................................................. 45 IV. WORLD BANK PERFORMANCE ................................................................................... 48 V. LESSONS LEARNED AND RECOMMENDATIONS.................................................... 51 TABLE OF FIGURES, BOXES, TABLES: Table 1: Summary of the Poland CPS 2009-2013 Program Self-evaluation ........... .........55 Table 2: Planned Lending Program and Actual Deliveries................. ............... 63 Table 3: Non lending Services and Actual Deliveries ....................... ................ 64 Box 1:The WBG's comparative advantage ...........................................51 Box 2: Areas of focus for WBG financial support.......................................53 42 I. INTRODUCTION 1. This Country Partnership Strategy Completion Report (CPSCR) assesses the World Bank Group's (WBG) partnership with Poland under the Country Partnership Strategy (CPS) for FY2009-13. The CPS was presented to the Board on June 2, 2009. The program remained largely valid throughout the implementation period, though it was slightly adjusted in the May 9, 2011 CPS Progress Report (CPSPR), in particular to increase the focus on the European perspective and to further advance the concept of a two-way knowledge partnership (and to adjust the Results Matrix accordingly). The present Completion Report (i) evaluates progress made towards the achievement of the CPS program outcomes; (ii) assesses the WBG performance during the implementation period; and (iii) draws lessons and recommendations for the preparation of the forthcoming CPS (FY2013- 17). The CPSCR uses the updated CPSPR Results Matrix as the reference for assessing CPS program performance. 2. The WBG is a relatively minor player in Poland, yet a well-appreciated one. In the 1990s and early 2000s, the WBG had a large financing and analytical program in a broad range of sectors. With the country's entry into the EU in 2004, the WBG saw its role and activities diminish substantially. In financial terms, current IBRD's annual lending represents at most 7 percent of EU grants, and a fraction of the European Investment Bank (EIB) operations - and IFC and MIGA are providing marginal support. The EU also provides significant opportunities for knowledge acquisition (through exchanges and discussions with other EU members, and the implementation of its directives and regulations). Still, the WBG's image is good and its technical expertise is widely respected. 3. The implementation of the CPS was affected by the global crisis, but the flexibility built in the CPS program proved to serve Poland well. The environment in which the CPS was implemented significantly deteriorated compared to what had been expected, as Poland suffered from the contagion of the global, and later Euro area crisis. Yet, within the broad strategic parameters set in the CPS, the WBG strove to best respond to the evolving demand of the Government and managed to make an effective contribution in several areas. This was achieved in large part through the flexible delivery of knowledge services. In parallel, IBRD reengaged on the financial side, with several large policy-based lending operations, which provided an anchor to the partnership. 4. Both program and Bank performance are rated as moderately satisfactory. Out of the 25 CPS anticipated outcomes 14 were fully achieved (including those that required the most significant policy actions), and 11 were partially achieved. The largest progress was made in reforming social sectors and public finance as well as in supporting regional development and strengthening the business environment and the financial sector. Challenges remain to better support innovation, to further advance reforms in infrastructure sectors, and to implement an effective climate change mitigation agenda. In parallel, the WBG performance in designing and implementing the CPS program was overall sound. Areas of strength included the strategic selection of areas of engagement (and corresponding instruments) as well as the technical quality of knowledge-based activities and development policy loans. Yet, the CPS results framework proved insufficient to allow for an effective monitoring of results, and part of the program was not implemented (especially on the lending side). Some of the most innovative areas of engagement (e.g., Poland as a donor) also remain challenging. 43 II. PROGRESS TOWARDS POLAND DEVELOPMENT GOALS 5. The CPS period was marked by political stability and Government continuity. The coalition formed in late 2007 by the Civic Platform (PO) and the Polish Peasants Party (PSL), and led by Prime Minister Donald Tusk (PO), remained broadly stable and enjoyed relatively strong social support. In the October 2011 Parliamentary elections, the coalition obtained a renewed mandate to govern for a second four-year term (the first time in recent Polish history a governing coalition is not replaced after elections). With a small but workable majority in the Parliament, the coalition Government was able to adopt and implement a solid set of policy reforms, in particular in the areas of crisis mitigation, fiscal consolidation, social protection and pensions, and business environment. 6. The CPS period also coincided with a time of economic slowdown, spurred by the global and later Euro area crisis. While the domestic economy remained relatively solid until 2012, Poland's economy, which is deeply integrated within the EU, was substantially affected by the crisis. The main contagion channels included exports as well as business and consumers' confidence (the financial sector remained relatively solid, profitable, and well capitalized, thanks to a strict supervision of financial authorities). Since 2008 unemployment rose continuously (by 4 percentage point over the period) reaching 13.4 percent of the active population in 2012. 7. The Government managed an effective policy response to these challenges: * Through proactive fiscal and monetary policies. The Government financed a relatively large stimulus in 2009 / 2010, which contributed to mitigating the impact of the crisis. As economic growth strengthened, the authorities engaged in a vigorous effort of fiscal consolidation over 2011 and 2012, while also adopting a number of policy measures aimed at strengthening the quality of public finance management. In parallel, the authorities effectively implemented counter cyclical monetary and exchange rate policies. * Through the implementation of an ambitious agenda of structural reforms, especially in the social sectors and to support private sector development. Some of the flagship reforms included: increasing the retirement age to 67 (from 60 for women and 65 for men) and removing some of the privileges of the uniformed services' pension system; and introducing a number of policy reforms to strengthen the business environment (Poland was the "top performer" under the Doing Business 2013 ranking and improved by 19 places over the 2009- 2012 period). * Through the effective absorption of a sizeable amount of EU funds. Poland was the main beneficiary of EU structural and cohesion funds under the current EU financial perspective (2007-2013), with a seven-year envelope of C68.7 billion. The authorities managed to effectively absorb these resources, at both central and subnational levels, which stimulated public investment and largely compensated for the decline in private financing. EU grants were largely used to support infrastructure development, in particular in the transport, environment and ICT sectors - as well as to enhance innovation, entrepreneurship and human capital development. 8. Overall, despite the crisis, Poland made continued progress towards its primary goal, i.e. a rapid convergence towards European Union (EU) living standards. In a difficult environment, Poland managed to maintain a sound economic performance and was the EU country whose economy grew the most, in aggregate terms, between 2009 and 2012 (it was also the only EU country to avoid recession in 2009) - though average growth was significantly below that of the 44 earlier period. Economic activity weakened significantly in 2012 (to 2.1 percent) due to the worsening external environment. Overall, Poland's per capita income increased from 56 percent to 64 percent of the EU average during the CPS period, though there remain significant gaps in the country's development, e.g. in terms of infrastructure or innovation. The Gini coefficient at 0.31 suggests relatively limited inequalities, but the fast rate of poverty reduction that the country experienced until 2008 slowed to a halt due to the crisis: since 2009, the poverty rate has remained somewhat stable (and poverty is increasingly concentrated in specific groups such as the unemployed, families with low education, families with many children, and households in small towns and rural areas). 9. Over the medium-term, Poland's objective is to pursue and eventually complete this convergence process, in terms of economic growth and enhanced living standards. In the longer- term, Poland will need to make a five-fold adjustment. First, further move from a growth model based on post-transition catching up to one spurred by innovation-driven productivity gains, and further move up the value chain. Second, meet the needs of an aging of society: while recent reforms have ensured the sustainability of the pensions system, there remain significant challenges in terms of labor force participation, health care (including long-term care), and old age poverty/exclusion. Third, complete the process of institutional transformation and modernization. Fourth, ensure a balanced development across the country, and help the poorest regions catch up (the recent convergence with the EU has been accompanied by a divergence across regions). And fifth, tackle environmental and climate-related challenges and gradually move from a coal-based to a low- emissions economy. III. CPS PROGRAM PERFORMANCE 10. The Completion Report rates program performance as Moderately Satisfactory. Out of 25 anticipated outcomes in the CPS Results Matrix, 14 were fully achieved (including those requiring the most difficult policy actions) and 11 were partially achieved. In this section the Report evaluates progress in achieving key CPS outcomes by strategic engagement pillars and themes. A comprehensive CPS Results Matrix is attached in Annex 1 to this CPSCR. Pillar 1: Social and Spatial Inclusion 11. Poland undertook ambitious reforms in the social sectors, in particular regarding pensions. Performance in implementing the program supported under the CPS in the areas of labor market, social assistance and pensions was satisfactory, and outcome indicators were largely reached. In spite of the crisis, the employment rate remained stable at around 60 percent of population aged 20-64 in 2008-2011. In the same period the labor force participation rate of population aged 55-64 rose by over 6 percent from 33.3 percent to 39.6 percent. This was stimulated by the tightening of early retirement privileges, a new program (50+), which aimed at increasing employment of older workers as well as less generous unemployment benefits, and more flexible working arrangements during the crisis. In parallel, the mandatory length of service for uniformed services, including the military (under the Ministry of Defense) and police, border security, fire-fighting services and government security (under the Ministry of Interior) increased from 15 to 25 years and the statutory retirement age for these groups increased to 55 years. The program of the first series of DPLs Employment Entrepreneurship and Human Capital (DPL2-DPL3) largely supported this agenda as it concentrated on the core aspects of public finance management, labor market efficiency and social sector expenditures. The Public Finance Development series of DPLs (PFD DPL) further supported 45 reforms, including the increase of the statutory retirement age. The IBRD lending program was underpinned by strong analytical work, in particular by Public Expenditure Review (PER) ESW. 12. Poland successfully introduced further improvements in the education sector. All CPS outcomes in this sector were fully achieved. In particular, Poland managed to significantly increase the pre-school participation rates among 5-year old children to nearly 97 percent in the school year 2011/2012. In parallel, the Government successfully pursued higher education reforms, in particular through the implementation of a pro-quality financing system and a precise definition of a catalog of free of charge education services provided to students by tertiary schools, in line with the CPS objectives. The WBG largely supported this agenda through the DPL series (DPL2-DPL3) with the accompanying package of technical assistance, in particular in higher education. 13. Poland made progress in strengthening efficiency in the health sector. All CPS outcomes in this sector were achieved. In particular, progress was made in improving efficiency of hospitals through the implementation of a "Diagnostically Related Group" (DRG) system, which covered 91 percent of hospitals in end-2010. A voluntary program converting public hospitals into corporate entities operating under the Commercial Code was implemented and over 220 hospitals were corporatized by end-2010. The WBG actively assisted the Government in implementing these reforms, in particular through the DPL series (DPL2-DPL3) and technical assistance. 14. Poland moved forward on its regional development agenda, including with regard to the decentralization of responsibilities for managing and implementing EU funds. The two corresponding CPS outcomes were fully achieved. The technical capacity of regional governments to use EU funds has increased since 2007 when they became responsible for designing, planning and implementing EU funds through Regional Operational Programs (ROPs): the absorption capacity of regions has been strong during the entire EU financial perspective 2007-13, and the ROPs have been the best performing EU programs in Poland. Improvements were also observed in sub-national debt and asset management due to improved regulations and stronger capacity. The WBG supported the authorities through a series of analytical products, hands-on technical assistance at both national and subnational levels, and a substantive policy dialogue, in particular around the World Development Report (WDR) 2009 on Reshaping Economic Geography. Pillar 2: Public Sector Reform 15. In a time of crisis, the Government placed a high priority on improving the quality of public finance. Satisfactory progress was made towards the achievement of all corresponding CPS outcomes. The Government made substantive progress in improving effectiveness and efficiency of public spending, as evidenced by regular monitoring reports of the WBG, International Monetary Fund, and European Commission, though performance-based budgeting is still under development. The Government managed to reduce the fiscal deficit from nearly 8 percent in 2010 to 5.1 percent in 2011 and 3.4 percent in 2012. This brought Poland's government deficit in line with the reference value of 3 percent of GDP. Poland also introduced strengthened fiscal control in 2011 as part of a broader fiscal consolidation agenda. This agenda was largely supported by the first operation from the second DPL series Public Finance Development (PFD DPL), which focused on the consolidation of public finances and fiscal institutions, and by analytical work including the Public Expenditure Review (PER) and the EU10 Fiscal Study on Performance-Based Budgeting, which informed and enriched the discussion in Poland on the introduction of the performance-based budgeting requirement. 46 Pillar 3: Growth and Competitiveness 16. The Government further improved transport infrastructure. Two of the CPS outcomes in this area were fully achieved and two were partially achieved. The Government adopted a comprehensive legal package, which provided for significant improvements in the implementation of infrastructure projects, including to facilitate the use of PPPs. Total roads in good conditions increased from 49 percent in 2005 to 63 percent in 2012, in most part due to large EU financing and stable funding for maintenance (in spite of the reduction of financial resources for rehabilitation). The IBRD Road Maintenance and Rehabilitation Project (RMR3), as a continuation of two IBRD Road Maintenance and Rehabilitation loans (RMR] and RMR2) contributed to the improvement of national road rehabilitation and maintenance systems, particularly in areas of quality, efficiency of spending and by laying the ground for further progress towards financial viability. The WBG substantially contributed to policy development at the subnational level, in particular through a package of policy notes delivered to the City of Warsaw on Sustainable Urban/Metropolitan Transport and Spatial Development. 17. Poland significantly improved the business environment. Progress in pursuing regulatory reforms was well ahead of the expected CPS outcomes. In 2012 Poland managed to reduce the cost of obtaining business licenses to 13 percent of per capita income and the time to register property to 54 days. Significant simplifications for entrepreneurs were introduced in 90 various pieces of legislation through the implementation of the Law on Reduction of Administrative Barriers for Citizens and Entrepreneurs. The law reduced administrative fees, especially the cost of SME start - ups, and fastened business processes such as starting a business, property registration, paying taxes, enforcing contracts, and protecting investors. The WBG supported the deregulation agenda through the DPL1-DPL3. To further improve the business regulatory environment, the Government sought the WBG's assistance through a Reimbursable Advisory Services agreement on "Towards a stronger contract enforcement and insolvency in Poland", which was successfully delivered in FY13. 18. Poland made only marginal progress in promoting innovation in the private sector. CPS program performance has been moderately satisfactory in this area. There have been some slight improvements in spending on public R&D, primarily driven by EU funds, but at a low level: from 0.19 percent in 2009 to 0.21 percent in 2011. Patent applications (8 patents per million inhabitants) remained an order of magnitude below the EU average of 108.6 patents per million inhabitants. The WBG provided the Government with a review of the public system that is responsible for supporting and promoting innovation in Poland, through technical assistance (which was co-financed by the government) on Review ofPublic Enterprise Innovation Support Systems. Pillar 4: Regional and Global Public Goods 19. On energy and climate change, performance was moderately satisfactory. In a number of areas progress has been encouraging, but given that the majority of the CPS outcome indicators refer to target year end-2013, their final evaluation could be possible only in mid-2014. The Government established mechanisms to operationalize trading system for White Certificates18, and all regulations are now in place, with the first white certificates to be issued in 2013. In parallel, progress was made in increasing the share of renewable energy in final energy consumption from 8 percent in 2009 to 18 White Certificates are a relatively new policy instrument. Specific time-bound energy saving targets are established for energy suppliers or distributors who must meet those targets by implementing energy efficiency measures among their clients. Energy suppliers or distributors, who exceed the targets, can sell their unused white certificates to suppliers/distributors that fall short of their target. Alternatively they can buy white certificates against a substitute or penalty fee from the Regulator. 47 10.6 percent in 2011; in increasing the share of cogeneration to 16.6 percent in 2011; and in installing 109,000 smart meters with an additional 310,000 scheduled to be installed in 2013. The Energy Efficiency and Renewable Energy DPL (EE DPL) reinforced the Government agenda in this area. The policy dialogue was underpinned by a CEM on Poland's Transition to Low-Emissions Economy and technical assistance on Economic Modeling for Climate Policy (to strengthen the Government's analytical capacity to simulate the economic impact of climate policy decisions). 20. After some initial delays, progress was made in strengthening flood protection system along the Odra River. Flood protection in this region has been a long-standing challenge, which includes both physical and institutional aspects. Progress was made in strengthening cooperation across the various entities involved, and in launching major construction works upstream of and around the city of Wroclaw. Based on current progress, the CPS outcome indicator is expected to be achieved, though with a two-year delay. The WBG supported this effort through the Odra River Basin Flood Protection Project. 21. Poland was successful in preserving financial sector stability during the financial crisis. The Government implemented EU and G20 mandatory regulatory initiatives to increase bank core capital and counter cyclical loss reserves. Progress toward CPS outcomes has been largely satisfactory as domestic banking sector remained well capitalized, liquid and profitable throughout the crisis. In 2012 capital to asset ratio exceeded 14 percent and non-performing loans (NPLs) stabilized at about 8.5 percent. The Polish authorities sought further WBG's assistance to improve system preparedness for potential future shocks and the Bank resolution framework TA provided Poland with a solid framework and layout for the future system. IV. WORLD BANK PERFORMANCE 22. The Completion Report rates Bank performance as Moderately Satisfactory. Positive aspects of Bank performance included: (i) the establishment of a trust-based relationship with Polish counterparts; (ii) the flexibility and responsiveness demonstrated by the WBG in the face of changing circumstances; (iii) the delivery of a solid package of support, including analytical and advisory services as well as financing during the crisis; and (iv) the delivery of quality knowledge work in line with the intended objectives of the CPS. Bank performance was less satisfactory with regard to: (i) the delivery of part of the original CPS program (in particular investment loans); (ii) the development of a sound portfolio of Reimbursable Advisory Services (RAS); and (iii) the establishment of a mature partnership with Poland on global development issues. 23. The CPS program was well aligned with the Government priorities, and provided a good and realistic framework for WBG activities over the four-year period. The strategic priorities were sound and adequately reflected Poland's development challenges and the authorities' policy agenda. The CPS flexible design allowed the Bank to introduce timely adjustments to the program, and in particular to support the Government in mitigating the impact of the crisis while pursuing its long-term development agenda. The mid-term Progress Report introduced minor modifications to the CPS to better reflect the changing global environment and to coordinate the WBG's activities around Poland's EU role more effectively. The CPSPR also placed an increased emphasis on knowledge partnerships and Poland's role as a global partner. 24. The CPS result matrix, updated in the CPSPR, did not provide a strong framework for monitoring and evaluation. The CPS outcomes indicators were aligned with the country-level development goals, which posed difficult attribution issues and made it challenging to assess the actual contribution by the WBG in program implementation. Some outcomes indicators had a target 48 year in end-2013, which did not allow for a solid evaluation of program performance at this stage (since data will be available in mid-2014). In hindsight, a smaller number of CPS outcomes, focused on strategic achievements, with clear attribution would have provided a stronger framework. 25. Three sets of risks identified in the CPS - economic, political, and institutional were well managed, and no other significant risk emerged during the CPS period. Poland managed to weather the consequences of the global crisis reasonably well. The CPS period was marked by political stability, and the Government demonstrated a continued commitment to reform. Also, while technical capacity remains uneven in some areas (especially at decentralized level), it proved sufficient for Poland to implement reforms and effectively manage large inflows of EU funds. 26. The CPS lending program was focused on development policy loans. The program was anchored around successive programmatic DPL series in support of Government policy reforms, which were crucial to maintain Poland's convergence process on track (public finance, labor market and social sectors, private sector development as well as climate change). The program of 5 DPLs delivered during the CPS period (and one scheduled for Board for June 18, 2013) amounted to USD 6 billion. At the same time, none of the investment loans planned in the CPS materialized, including a Program for Results operation, which had been contemplated in the energy and / or transport sectors. This was due to the Government's focus on crisis mitigation reforms and its limited investment capacity. In addition, lending operations supporting sub-national governments and SMEs planned in the CPS did not materialize either due to constraints in providing guarantee to non- sovereign borrowers. The investment portfolio decreased over the course of the CPS from four projects to currently one under implementation. The detailed planned lending program and actual deliveries is attached in Annex 2. 27. The quality of the lending portfolio was overall satisfactory, with some weak elements. The successive ICRs (and corresponding IEG evaluations) available for two policy loans delivered under the CPS rated performance of each individual loan as satisfactory. Performance under the investment portfolio (with typically much smaller projects) was mixed: some projects faced implementation difficulties resulting in delays and project restructuring. Consequently, out of three projects closed during the period, two were rated moderately satisfactory and one moderately unsatisfactory. Across the portfolio, fiduciary performance was consistently strong. 28. The delivery of Analytical and Advisory Activities was strong, and overall satisfactory. Ten pieces of Economic and Sector Work (ESW) and twenty-two Technical Assistance (TA) tasks were delivered during the CPS implementation period. The strategic relevance of this program was strong, in large part thanks to an effective dialogue with demanding counterparts. The entire list of ESW anticipated in the CPS was delivered, though the specific focus of each piece was altered to reflect changing circumstances. In this respect, additional pieces were included (e.g., on competitiveness) as a just-in-time response to the revised priorities of the Government. The original TA program was also adjusted in response to the client's changing needs. This includes both dropping activities, for which the government gave less priority as well as expanding the list by those of particular importance. The comprehensive list of non-lending services, planned and actual deliveries, is attached in Annex 3. 29. Technical quality and relevance of knowledge services remained strong. This was mainly due to the mobilization of strong Bank-wide sectoral teams in specific areas. Yet, timeliness of delivery was uneven, with several pieces being delayed beyond the original deadlines. The AAA program benefited from a strong client engagement, which materialized in valuable comments and adjustments for a number of tasks (this process was very beneficial as it strengthened the quality and 49 relevance of these products). Performance in the dissemination of AAA products was mixed, with the WBG often pursuing a conventional approach to dissemination (final "delivery workshop" and press interview) While individual products have enjoyed considerable media coverage, challenges remain in terms of reaching out to broad audiences and using new communication tools (website, social media) to share the findings and recommendations made by the WBG in its AAA work. Overall, the impact of the AAA tasks was solid, though variable across sectors, typically ranging from informing the public debate to providing the foundation for a new legislation that was effectively adopted. 30. The development of Reimbursable Advisory Services (RAS) has been relatively limited, especially compared to other EU members. This partly reflects Poland's stronger administrative capacity (in particular to manage and absorb EU funds) and a more advanced stage of policy reform and stronger institutions. It also reflects a business culture that is wary of large-scale, medium-term contractual arrangements in an environment where demands are constantly shifting and where the authorities prefer to keep some leverage on their partners. The development of RAS was also hampered by administrative difficulties on the Polish side (a number of entities remain reluctant to engage the WBG on a sole-source basis). Some progress was made during the CPS implementation period, and initial agreements were signed (and delivered) with a few partners - but this is an engagement that is yet to be consolidated and deepened. 31. The WBG also made efforts to engage in a "stretch area" which proved challenging, i.e. to establish a mature partnership with Poland on global development issues (as the country becomes an increasingly strong voice within the EU and OECD). This agenda proved difficult in the absence of a strong institutional champion on the Polish side. In an environment of fiscal consolidation, ODA contributions are not perceived as a priority. Time will be necessary to make progress around a well-defined agenda, including dimensions such as Poland as knowledge provider and Poland as an ally in selected global forums. 32. During the CPS period, the WBG strengthened its partnership with the European Commission (EC), as well as with the European Investment Bank (EIB) and Council of Europe Development Bank (CEB). The WBG engagement was largely placed within the broader framework of complementarity and support of the EC's program (which became explicit in the CPSPR). The partnership with the EC was centered on knowledge sharing on issues of particular importance and relevance to Poland and the EU, e.g. low-emissions growth, innovation and smart specialization. 33. IFC's role during the CPS period was limited due to Poland's strong economic performance and the growing availability of private financing in the country. IFC provided USD 27 million in support to a microfinance bank to increase access to finance for micro and small entrepreneurs through two investments in FY09 and FY10. At the end of the CPS period, IFC maintained a committed portfolio of USD 17.1 million (USD 15.5 million outstanding) with three clients in the retail, funds and financial markets sectors. 34. MIGA's contribution to the WBG's program in Poland over the last four years was relatively modest. During the 2009-13 CPS period, MIGA's gross exposure amounted to US$ 54.8 million, mainly in support of debt and equity investments into local Polish subsidiaries of European banking groups. 50 V. LESSONS LEARNED AND RECOMMENDATIONS 35. The partnership between Poland and the WBG provides a number of lessons that can inform both the upcoming CPS and the Bank-wide knowledge and shared prosperity agenda. Indeed Poland is one of the most developed WBG clients, and the lessons learned through this engagement can usefully be reflected in the WBG's approach to upper Middle-Income Countries and in knowledge-based support programs. A number of the specific, sector-level lessons are outlined in the Results Matrix. This section focuses on the broader, more strategic learning - and its implications for the design of the next CPS. 36. The first set of lessons relates to the delivery of knowledge services: * Even in a sophisticated OECD member country, there is a continued demand for WBG knowledge services. With its well-trained cadre of civil servants and its solid network of think tanks, academic institutions, and reputed professional networks, Poland is still valuing some of the WBG knowledge services. The challenge for the WBG is to identify those areas, where it can best contribute to policy-making, and add value to the services otherwise available from private consultants or from other partners, especially the EC (Box 1). Box 1:The WBG's comparative advantage The WBG's comparative advantage varies across sectors but typically includes: - The ability to provide independent, neutral advice from a perspective of technical expertise - which is helpful in advancing the debate in some of the politically difficult areas (e.g., on pensions reform); - The ability to bring to the fore "development solutions", i.e. a combination of knowledge and operational experience to translate such knowledge into action, in a broad range of technical areas (e.g. on the design of enhanced business regulations); - A strong commitment to result, i.e. an engagement that is not limited to a contractual relationship, but consists of a true partnership aimed at providing support until the effective adoption or implementation of reforms (e.g., on strengthening the analytical basis for moving towards a low-carbon economy); - The combination of global experience (which is of particular interest to the Polish authorities, who are often keen on learning from other countries, both European and non-European) and local knowledge and the ability to tailor global solutions to local circumstances (e.g., to inform the design of a modem bank resolution framework); and - A focus on poverty reduction and shared prosperity, which provides the set of "values" that underpin the partnership (e.g., support to local NGOs promoting social inclusion). * The Bank's approach needs to reflect its position as a relatively small player. Throughout the CPS period, Poland received large amounts of EU funds (in the form of grants) and substantial financing from EIB (in the form of subsidized loans). WBG financing during the CPS period of USD 6 billion represented only a fraction of EU structural and cohesion funds available for Poland in the current EU financial perspective (2007-2013), which amounted to EUR 68.7 billion. This implies that the WBG needs not only to coordinate with other actors and to identify "niches" and focus areas but also to fully align its program to the EU strategy. For the WBG to be relevant, it needs to be seen as helping Poland shape some of its positions or instruments to best influence the EU debate, or as supporting the implementation of commitments Poland made as an EU member. This is a challenging role for the WBG, where its influence results from engagement on the design or implementation of specific measures, 51 rather than from helping the country to define a broad development strategy. Experience during the CPS period suggests however that this is an important and useful role. * Key to success are selectivity, flexibility, quality, and timeliness. These are well known factors of success in any development context, but they apply somewhat differently in a country like Poland. o Selectivity. The WBG has been most successful when: (i) it positioned itself in technical "niches", where it could bring expertise that would not be easily available otherwise (e.g., on climate change modeling); (ii) it nurtured a debate by providing facts, figures, and analyses that helped stakeholders to reflect on some strategic or medium-term issues (e.g., analysis of spending in social sectors under a Public Expenditure Review); (iii) it provided an independent advice to a difficult set of reforms (e.g., in the health sector); (iv) it provided the technical anchor around which other financiers could be mobilized (e.g., on flood protection); or (v) it raised the profile of selected issues that would otherwise not be central to the domestic debate (e.g., on the gender impact of pension reform). o Flexibility. It is clear that to be relevant the WBG has to continuously adjust to an evolving demand. In this context, the new CPS should not aim to provide an exhaustive list of activities to be undertaken during the implementation period, but rather an overall strategic framework and a set of specific selectivity criteria to help prioritize areas for engagement. o Quality and timeliness. It is worth noting that the WBG has been consistently able to mobilize the type of expertise that is needed to provide relevant advice in a sophisticated economy - though this has often been testing (or even stretching) the limits of the WBG's internal organization for the delivery of knowledge services. * Lending continues to play an important role in the delivery of knowledge services, in addition to targeted analytical and advisory services. Throughout the CPS implementation period, the WBG effectively used stand-alone knowledge services to make a contribution to policymaking in a number of areas. Yet, lending, and especially the successive DPL series, also played a major role in advancing the policy dialogue, especially in some of the most difficult areas. Overall, it is the combination of (well-articulated) lending and analytical and advisory activities that can provide for the most effective way to engage. The CPS experience highlights that lending in a context like Poland ought to be focused on areas where the WBG can best contribute to the advancement of specific reforms (see Box 2). Lending should also limited to those areas where an equivalent result cannot be achieved through analytical or advisory services (in an environment where WBG resources are small compared to those available from other financiers), i.e. in areas where a hands-on Bank involvement in implementation is critical for success. * Knowledge activities in support of a demanding and sophisticated client have a public good aspect and constitute the basis for a mutually beneficial partnership. The relationship with Poland is such that a number of knowledge products have been the subject of an intense back- and-forth process of comments and adjustments between the Government and the WBG. This has made it possible to develop high-quality products that went even beyond what was initially contemplated, for examples in some of the education policy notes or in the CEM on low- carbon economy. In turn, these products can provide a solid foundation for engagement in other countries, in the ECA Region and beyond, where the findings and overall recommendations developed for Poland can constitute a reference or a benchmark for similar work. In parallel, some of the lessons learned by Poland through its successful transition 52 experience can usefully be applied in other countries, once again in ECA and beyond. In this context, the WBG can substantially benefit from its knowledge partnership with Poland. Box 2: Areas of focus for WBG financial support WBG lending should focus on areas where it can best contribute to the advancement of specific reforms, i.e. by: - Serving a demonstrable signaling function for outside stakeholders (financial markets, labor unions, users associations, etc), by providing an endorsement of a specific reform or of the Government response to deteriorated external circumstances (e.g., through the DPL series); - Facilitating significant additional resource mobilization, in particular EU funds and other IFIs (e.g through the Odra River Basin Flood Protection Project); - Creating a lasting impact on institutional capacity in the country. The rationale for the WBG to be involved in more traditional investment projects (e.g., Road Maintenance and Rehabilitation Projects) has now faded. 37. The second set of lessons pertains to the approaches the Bank can take to best deliver such services * Trust is the key. In a country like Poland, the relationship with the WBG is a partnership of choice, and it is up to the WBG to demonstrate it can add value and contribute to the country's development. The quasi-complete absence of an investment portfolio also implies that there are no "structured relationships" between the Government and the Bank, where a technical dialogue is nurtured by daily interactions on implementation issues. Instead, throughout the CPS period, the challenge for the WBG was to generate interest, and a demand, for each knowledge product, before actually delivering it. To that effect, the WBG benefits from a solid reputation of technical expertise and a positive image in the public opinion. Yet, to capitalize on such reputational assets, the WBG ought to establish and nurture a series of trust-based relationship with key counterparts, at the central and sectoral levels, and at the national and subnational levels. * In most technical areas, the Bank needs to manage a dialogue rather than deliverables. Throughout the CPS period, influence came from the day-to-day dialogue with counterparts. This is especially true in those areas where the WBG did not provide financing. In such areas, performance varied significantly across sectors. The traditional focus on deliverables (specific, pre-agreed outputs financed through a technical assistance code) often yielded somewhat disappointing results (in terms of outcomes). The WBG was far more successful (e.g., in the case of reforms aimed at enhancing the business environment) when it focused on establishing and managing a dialogue, providing formal or informal contributions on an ad hoc basis (and in a very rapid manner) with a focus on influencing the decision-making process in real time and with clear accountability mechanisms. This suggests a need to shift from a "task-focused" to a "dialogue-focused" engagement, which has an impact on both decentralization and quality control processes. A focus on knowledge presents a conceptual challenge for developing a results matrix, as those will often be intermediate outcomes in a longer results chain. A knowledge activity in Poland may help develop the capacity for improved service delivery in an area, but the WBG may not be involved in the delivery of the service itself and as such it will have only an indirect 53 effect on the final beneficiary (or the consumer of the service). Furthermore, the WBG is a relatively small partner in a country like Poland, which raises difficult attribution issues in a number of areas. The design of CPS objectives and outcomes has to take this into account. 54 Table 1: Summary of the Poland CPS 2009-2013 Program Self-evaluation 1: Social Sector Reform Labor Market, Social Lending: Program performance in his area Assistance and Pensions: 9 Employment Entrepreneurship and illustrates the importance of closely Human Capital DevelopmentPL2-PL3 aligning the WBG program with 1. Help Government achieve 1. Partially achieved (FY9-10) national priorities. its objective to increase In spite of the crisis, the Government managed to 9 Public Finance Development PL 1 (FY12) employment rate from 60% maintain the employment rate at a stable level, of 9 Progress on issues where there (2010) and labor force around 60% in period of 20082012. AAA: was strong Government leadership participation rate ofpopulation Labor force participation rate for population 55-64 * Public expenditure review (PER) on was significant, even for difficult aged 55-64 from the current increased from 33.3 percent in 2008 to 36.7 percent public finance management, public wages reforms (e.g., on pensions) - while level of37% in 2010. in 2010 and 39.6 percent in 2011. and social sector (ESW) (FY1) technical assistance that was not 2. Policy options for bringing 2. Achieved Europe 2020 Fueling Growth and underpinned by a trust-based spcalsheepeson n ie The statutory retirement age for uniformed services, Competitiveness in Poland Through dialogue had a relatively limited specal-chem pesion inlin Employmfent, Skills, andGovernmentomanagedtt with the main pension system including the military (under the Ministry of Defense) identified and implementation and police, border security, fire-fighting services and (ESW) (FY1 1) started. Increase in minimum govenment security (under the Ministry of Interior) Tax expenditure report (TA) (FY1) years of service to qualiftLfor was increased to 55 years. Also the mandatory length Qualitative field research on coverage and pension for police/militaryfrom of service for these groups rose from 15 to 25 years. leakage in social assistance (TA) (FY10) 15 years to 20 years, and the 3 Training for govement officials on introduction of the minimum World Bank simulation tool for pension retirement age of . reform (PROST) (TA) (FY10) 19 Indicate the Status (Non-observable, Dropped; Achieved, Partially Achieved, Not Achieved); Describe the progress made, report supporting data/information such as outcome indicators, proxy indicators, and actions taken; Describe the reasons for less than full progress (Not Achieved or Partially Achieved), and key contributors or enabling factor in case of full progress; explain the reasons why an outcome was Dropped or is Non-observable. 1yert20 yas n h itList lending and non-lending activities that directly contributed to the outcome, with approval and completion dates, and ICR/activity completion ratings; and most recent SR ratings for ongoing lending operations. Describe key lessons emerging from the engagement in this area, highlighting what worked and what did not work; and provide suggestions for consideration by the team in preparing the new CPS 55 Education Lending: In the context of a solid sectoral . Employment Entrepreneurship and dialogue, technical assistance 1. Successful implementation 1. Achieved Human Capital Development PL2-PL3 focused on a just-in-time response of higher education reform, A new Higher Education Law was enacted in 2011, (FY9-10) to a series of ad hoc client requests in particular: implementation which covers all key areas (pro-quality financing proved to be an effective way for ofpro-quality financing system, system, free of charge education on second faculty AAA: the WBG to contribute to policy including financial support for for best performing students, precise catalog of free * Regional conferences on higher reforms. entities which obtain the status of charge education services provided to students by education reform (TA) (FY10) ofNational Leading Scientific tertiary schools). * Policy advice on linkages between * Because of the sophistication Center (Krajowy Naukowy science curricula and development of the sectoral dialogue, some of the Osrodek Wiodacy, KNOW); of human capital for research, science knowledge products developed free of charge education on and technology (TA) (FY10) in cooperation with the Polish second and more faculty in a . Policy note on enhancing teacher authorities have become references public university for students, performance and assessing the quality that can be used in the dialogue with who receive Rector's of educational services at higher other client countries. scholarship for best students; education institutions (ESW)(FYI1) precise definition of the * Europe 2020 Poland. Fueling Growth catalogue offree of charge and Competitiveness in Poland Through educational services provided Employment, Skills, and Innovation to students by tertiary schools. (E SW) (FY1 1) 2. Increased pre-school 2. Achieved * Human Capital Development Strategy participation rates among Enrollment rate of 5-yr olds increased from 750 (HCDS) TA, including workshop children aged 5 yearswfrom in 2008/09 to 81l in 2010/2010 and 96.3( u in on Lifelong Learning (FY12) the 2008/09 level of 74.8s. 2011/2012 Higher Education TA (under Regional ECCU Higher Education) (FY1 3) Health Lending: Program performance illustrates the 1. Improved efficiency 1. Achieved * Employment Entrepreneurship and need for complementary of hospitals and rationalized 9100 of hospitals covered by DRGs by end of 2010. Human Capital Development PL2-PL3 interventions at central and service delivery network (FY9-10) subnational levels. During the first through implementation * Public Finance Development PL 1 (FY12) phase of the CPS implementation, of diagnostically related groups the dialogue focused on national (DRG,)system. By end-20]0, AAA/ TA: authorities. When a new health law, 90%o of hospitals to be covered Study on fiscal implication of supported by the DPL, increased the by DRG*system. demographic change on long-term care responsibilities and obligations of (ESW)-ECCU5 regional governments, the WBG 2. 60 hospitals corporatized 2. Achieved h Workshop on PPP health sector for shifted the dialogue towards the under Commercial Code Over 220 hospitals had been corporatized by mid- Mazowieckie voivodship (TA) regions, with a view to enhance by end-20o0. 2010. e Dialogue with sub-national governments their capacity and help them fulfill on strengthening hospitals and service their new roles. The challenge is to 56 delivery find the right balance between national interventions, essentially focused on broad policy reforms, and a sub-national engagement aimed at the operational and implementation aspects of reforms. 2: Regional Development 1. Improve planning and debt 1. Achieved AAA: In a decentralized country like and asset management, As assessed by the Bank staff, debt and asset 9 WDR 2009 discussions and follow-up Poland, engagement with sub- as reflected by Bank staff management at the local level has improved, activities (TA) (FY09/10) national governments is important assessments of medium-term as a result of: (i) the introduction of rules imposing 9 Public Expenditure Review for the WBG to achieve its goals. debt management strategies limits on the level of deficit and public debt of sub- of Mazowieckie Voivodship on capital The CPS period saw the for selected bigger cities. national entities, including bigger cities investment planning, spending and debt development of a substantive (i.e. "the Golden Rule"); (ii) the development management (ESW) (FY1 0) dialogue with sub-national of a methodology on the preparation of multi-year 9 Strategic planning of development, governments and a confirmation financial projections. rehabilitation and maintenance of of the demand for WBG knowledge regional roads in Mazowieckie services by these authorities. 2. Increase technical capacity 2. Achieved Voivodship (TA / RAS) (FY10) ofselected regional Technical capacity of regional governments increased 9 Warsaw City Policy notes on Public While the WBG substantially governments to design since 2007 when they became responsible Transport Financial Sustainability, contributed to policy development and improve strategy design, for designing, planning and implementing European Metropolitan Institutions, and Public at the sub-national level through planning and implementation, Union (EU) funds through Regional Operational Land and Property Asset Management technical assistance, it faced and reduce development Programs (ROPs). ROPs are among highest (ESW)(FYIO) major impediments in supporting obstacles in key economic performing programs implementing EU funds * Debt management workshop for sub- policy dialogue financially. Planned sectors at regional level in Poland. Given this performance, the European national governments (FY12) lending operations, directly to sub- reflected in a positive Commission has proposed further decentralization Lubelskie: Support for Regional national entities and through a assessment of the European of EU funds in the upcoming EU financial perspective Development Strategy (ESW) (FY12) financial intermediary did not Commission on Regional 2014-2020. materialize due to constraints in Operational Programs derived KuTaningPforsieosiop providing guarantee to non- from regional developmentKuwsoomskevidhop srat egis. eelpmn on regional/local strategy development sovereign borrowers. Asia il ni( 1 Yet, the engagement and transaction costs of WBG cooperation with sub- national governments proved to be high while the capacity to absorb Bank's advice remains limited in some cases. Selectivity is hence critical: the WBG should focus on a 57 few strategic areas with a clear operational focus, and seek opportunities for replication across regions. Public Finance 1. Increased effectiveness and 1. Partially achieved Lending: The WBG's responsiveness and efficiency ofpublic spending Effectiveness and efficiency of public spending 9 Employment Entrepreneurship and flexibility in meeting Poland's through introduction of increased as evidenced by regular monitoring reports Human Capital Development PL2-PL3 changing needs has helped the performance-based budgeting of the ", Intemational Monetary Fund, European (FY9-10) Government to mitigate the impact Commission, but performance-based budgeting is still 9 Public Finance Development PL 1 (FY12) of the crisis. IBRD lending also under development. helped strengthen Poland's position AAA: during the crisis by: (i) informing 2. Improved prioritization 2. Achieved * PER on public finance management, the detailed design of critical policy between various types of Prioritization of expenditures has improved and public wages and social sector (ESW) reforms through the provision of expenditures and greater greater control over public financed has been (FY10) targeted technical assistance; and control ofpublicfinances in the introduced through, among others, implementation EUO fiscal study on performance-based, (ii) sending a positive signal to context offiscal constraints of a temporary fiscal rule (CPI+ 1). Poland is expected medium-term budgeting (ESW) (FY09) financial markets through financial imposed by euro adoption to exit the European Union Excessive Deficit 9 Public Expenditure Review of support to a solid package of plans, as assessed by the EU of Procedure in 2014 as the general government deficit is Mazowieckie voivodship (ESW)(FYIO) reforms. Poland's convergence projected to decline to around 2.7 % of GDP. 9 Tax expenditure workshop (TA) programs * Social s Close cooperation spening ncidnceanalsis TA) European Commission proved to be 3. Help Government to achieve 3. Partially achieved mutually beneficial. its fiscal deficit target of "close Fiscal deficit has been reduced from close to 8 percent to" 3 percent of GDP in 2012 in 2010 to 5.1 percent in 2011 and 3.4 percent in through strengthening its fiscal 2012. Temporary fiscal rule (CPI+1) has been responsibility framework introduced. Permanent fiscal rule is under (indicator: introduction of development. permanent fiscal rule for the Central Government). 58 1: Transport Infrastructure Development 1. Contribution to the strategy 1. Partially achieved Lending: Measuring the actual contribution for transport sector A Land Transport Policy Note was developed 9 Two Road Maintenance and of the WBG is challenging development (including climate in parallel with the preparation by the Government Rehabilitation loans (RMRI and RMR2) in a sector where the program is change agenda and medium of the Transport Sector Strategy for Poland (2013- (FY10) dwarfed by support from other long-term financing). 2020). The Policy Note contributed to the discussions 9 Road Maintenance and Rehabilitation financiers, such as the EU and BIB. with Polish authorities and provided strategic Loan RMR3 (FY12). considerations for transport sector development 9 In this context, to achieve impact, in Poland. AAA: the Bank must align its program 9Land Transport Policy Note (ESW) with other donors' agenda and 2. % of roads in good condition 2. Achieved (FY11) focus on providing complementary improved from 49% (2005) to The percentage of national roads in good conditions 9 Mazowieckie Region Strategic Road support in areas of strategic 60% and adequately maintained reached 63% (2012). In spite of the global crisis Planning (TA; RAS) (FY10) importance. (2013) financial resources were maintained at a stable level. e Warsaw City - Sustainable 3. Urban/Metropolitan Transport and Spatial and operational planning at Systems of strategic and operational planning at 10) central and subnational levels the central level improved due to, among others, up o and programs for development/ partial introduction of a modem IT system at the Developen S tregta rehabilitation of land transport General Directorate for National Roads infrastructure. and Motorways. Programs for development component (ESW) (FY12) /rehabilitation of land transport infrastructure Rsaw CTy, Roa Safet CapacIty at central and sub-national level were largely implemented. e Road Safety Strategic Planning and Management Capacity Review - support 4. Improved legal framework 4. Partially achieved for National Road Safety Council and institutional capacity The legal framework for private sector involvement (ongoing) forpreparation, implementation in infrastructure development has improved, with and monitoring of the adoption and effective application of legislation infrastructure projects. on land acquisition for infrastructure investments (2008), concessions in construction and services); public private partnership (2009); and electronic toll collection systems on roads (2009, with ETC system actually introduced in 2011). 22 GRSF - Global Road Safety Found 59 2: Private Sector Development 1. Regulatory reforms 1. Achieved Lending: 9 Given the sophistication facilitating business start-up, 9 The cost of obtaining business licenses was 9 Employment Entrepreneurship and of counterparts, the Bank's operations and licensing, reduced from 122% of per capita income in 2008 (DB Human Capital Development PL2-PL3 comparative advantage lies and other business-to- 2009) to 13% of per capita income in 2012 (DB (FY9-10) in providing high quality advisory government requirements 2013). work, including by drawing (taxes, closures, trade), have * The time to register property was reduced from AAA: on lessons from global benchmarks been made showing a reduction 197 days in 2008 (DB 2009) to 54 days in 2012 (DB Improving the business regulatory and developed countries - and in time, cost and transactional 2013) thanks to a full digitization of real estate environment in five Doing Business areas, in proving an independent and steps. Indicators: records. where Poland lags behind the most: objective perspective that can help 0 cost of obtaining business 9 The timne to close a business indicator is no longer starting a business, property registration, inform the national debate. A large licenses reduced by at least reported in the DB ranking. The recovery rate in paying taxes, enforcing contracts, and part of the advisory services were 20% from current levels insolvency proceedings improved from 34,1% (DB protecting investors (TA; RAS) (FY11) delivered in a programmatic (currently 122% ofper capita 2009) to 54.4% (DB 2013). 9 "Towards a stronger contract enforcement mauner, with a focus on income), and time to register and insolvency in Poland" (TA;RAS) a continuous dialogue rather than property and close a business (FY12-13) individual output deliveries, which reduced by 20% to z120 days 9 "Review of Public Enterprise Innovation proved very effective. and below 2.5 years, Support Systems" (TA; EFO) (FY1 12). Promoting reforms in an area with respectively, by 2012. entrenched vested interests 2. Partially achieved is inherently difficult. Yet, the 2. Programs to promote 9 Spending on R&D increased to 0.77% of GDP combination of solid analytical business innovation made more in 2011, driven by increased EU funding. Spending work ("putting facts in the open") effective via further R&D on business R&D improved only marginally to 0.21% and a trust-based relationship with resource allocations to such of GDP in 2011. some of the critical stakeholders programs as measured by an 9 Patent applications submitted to the European makes it possible to spur increase in public R&D to GDP Patent Office increased from 231 in 2008 to 308 a domestic debate that is the pre- ratio from 0.68%; R&D for in the latest year available, 2010 (8 patents per million condition for change. Further business/GDP: 0.19% (2009); inhabitants), but remained well below the EU27 developing the partnership with and orienting these towards average at 108.6 patents per million inhabitants, both Polish authorities and the commercialization ofproducts European Commission is key in several sectors (indicator: to move from ideas to action. patent applications submitted to 9 The decentralization model used US patent office increased from by the WBG team with a dialogue 8.91 per million managed from the field and back- inhabitants (2009)), as well as up technical support provided from increasing R&D institute headquarters when / as needed linkages with the business proved to be an effective way community. to deliver results 60 1: Energy and Climate Change 1. Improved energy efficiency 1. Partially achieved Lending: 9 This is an area where the WBG has (9% saving in final energy Established mechanisms to operationalize trading 9 Energy Efficiency Renewable Energy carried out analytical work which consumption in 2008-2016). system for White Certificates, all regulations in place. Development PL (FY11) became a good example and Progress in 2013 measured First white certificates to be issued in 2013. 9 Odra River Basin Project (FY07-FY15) reference for other countries by issuance of tradable white 9 GEF Energy Efficiency project (FY07- to address their climate change certificates and their associated FY12) needs: the CEM on Poland's energy efficiency obligations. Transition to Low-Emissions AAA: Economy, which reflected 2. Help Government meet its 2. Achieved 9 Poland's Transition to Low-Emissions a sophisticated dialogue with target of 1r% offinal energy The share of renewable energy in final energy Economy (CEM) (FY1) counterparts, has provided a from renewable energy sources consumption increased to 10. 6% in 2011 and is 9 Economic Modeling for Climate Policy foundation for strengthening by 2013 from 8% in 2009. plauned to further increase to 11% in 2013 according (TA) (FYI13-ongoing) the sectoral dialogue not only to the calculation of the Ministry of Economy. with Poland, but also with other countries in the ECA Region and 3. Increased use of 3. Partially achieved beyond. Similarly, the ongoing cogeneration to decrease total The share of cogeneration in the power mix increased Economic Modeling for Climate energy use. Indicator: to 16.6% in 2011. Data for 2012 not available yet. Policy technical assistance is likely Cogeneration 17% of total to have an impact that goes far electricity supply by 2013 from beyond Polish borders through 16% (2009). a replication process. 4. Install 200,000 Smart Meters. 4. Partially achieved * The work in this area of flood 109,000 Smart Meters installed in 2012. Next 3 10,000 protection highlights the WBG's are to be installed in 2013. convening role. The WBG's technical leadership of the Odra 5. Systems for flood/nhatural 5. Partially achieved Project, for both preparation and disaster insurance, Establishment of anti-flood system in Odra River implementation support, provided preparedness and mitigation; Basin in progress. The last phase of system the anchor for a team of financiers spatial planning in flood plains. development under implementation (together with the EC, Council Protection ofpeople and of Europe Bank). On the ground, property in Odra River Basin the WBG's involvement was key against floods of 1997 to foster an effective cooperation magnitude by 2013. between a number of local and sectoral institutions (each in charge of a separate aspect of the flood protection system) and integrate 61 their efforts towards a common result. 2: Financial Sector Stability and Development 1. Implementation ofEU and 1. Achieved AAA/ TA: The WBG is at its best when G20 mandated regulatory 9 Capital / Asset ratio exceeded 14% as of end August 9 Credit union supervision (ESW/TA) it provides the highest quality initiatives resulting in increases 2012, of which more than 12% is in the form of Tier (FY11) of technical advice and works of bank core capital and 1 capital, making the banking sector compliant with 9 ROSC (BCP/1AIS) (FY11) closely with counterparts counter cyclical loss reserves; Basel III regulations. 9 Bank resolution framework (TA) (FY12) throughout technical assistance improved supervision from 9 Non-performing loans (NPLs) have stabilized at 9 Financial reporting (TA/RAS) (FY11- process. FY11 ROSC from baseline: about 8.5% in August 2012, with 7.5% NPL ratio FY16) Capital/Asset ratio: 13.8%; Non for household loans and 10.3% for corporate loans, The WBG needs to be prepared performing loans: 8.8%; Loss respectively, to provide just-in-time advice in Provisions/Non-performing 9 Loss Provisions/Non-performing loans accounted response to urgent requests. loans: 54.6% (Dec 31, 2010) for 54% as of end 2012. 2. Increased capital market 2. Achieved integration with pan-European *The Warsaw Stock Exchange (WSE) has become securities markets and the largest stock market in Central and Eastem u improved risk management of Europe in terms of market tumnover, ahead of the private2pension assets Vie a Stock Exchange. In 2012, WSE was the European market leader in the number of new iPOs. * Pension assets in the second pillar grew to over PLN 250 billion in November 2012, from less than PLN 138 billion in 2008. Retumns on pension fund investments amounted to 19.3% between September 2009 and September 2012. 3. Improved capacity to oversee 3. Partially achieved and supervise credit unions After a substantial delay caused by the review of the in Poland's regional banking new law by the Supreme Court, in October 2012 the services from baseline. PFSA assumed supervision of credit unions, reducing Delinquent/Total Loans. systemic risks. Financial audits of credit unions are 12.7%, Net ProfiLtAsset ratio. - to be completed by early 2013. 0.2% (March 31, 2010) Delinquent loans /Total loans increased to 13% and Net profit/Asset ratio to 0.5% at the end of 2011. 62 Table 2: Planned Lending Program and Actual Deliveries FY2009 - 2013 US$ (M) US$ (M) IBRD IDA IBRD IDA 2009 DPL2 1250 0 Actual 1300.2 0 DPL 3 1250 0 Actual 1331.3 0 Warsaw City SIL (sub-national 2010 governments lending) 500 Dropped 0 PKO BP Credit Line (SMEs 500 Dropped 0 lending) Subtotal FY2009-2010 3500 0 2631.5 0 2011 PL Energy Efficiency DPL 1000 0 Actual 1114.5 0 Municipal Credit Line (FIL) 1 500 0 Dropped 0 (sub-national governments 2012 lending) 500 Actual 991.4 Public Finance / Administration Reform DPL 1 Municipal Credit Line (FIL) 2 250 0 Dropped 0 (sub-national governments lending) 0 2013 Energy/Roads Results Based Lending 500 0 Dropped Public Finance / Administration Reform DPL 2 250 0 Actual 1300.0 0 Subtotal FY2011-2013 3000 0 Subtotal FY2011-2013 3405.9 0 Total FY2009-2013 6500 0 Total FY2009-2013 6037.4 0 63 Table 3: Non lending Services and Actual Deliveries FY2009-2013 Performance-Based Budgeting (TA) Actual Poznan COP-14 Support (ESW) Actual DPL Education Reform (TA) Completed in FY 2010 Mazowieckie Public Expenditure Review (ESW) Completed in FY 2010 2009 Poland Low Carbon Growth Study (CEM) Completed in FY 2011 Public Expenditure Review Update (ESW) Completed in FY 2010 Poland Housing Finance (TA) (RAS) Actual Warsaw City Policy Notes (ESW) Completed in FY 2010 DPL Health (TA) Completed in FY 2011 DPL Social Protection (TA) Completed in FY 2011 Poland Land Transport Policy Note (ESW) Completed in FY 2011 Regional Roads Mazowieckie Voivodship (TA) (RAS) Actual Additional Products: Regulatory, Business Environment and State Control Reform (TA) Regional Development (TA) 2010 Qualitative field research on coverage and leakage in social assistance (TA) Training for government officials on World Bank simulation tool for pension reform (PROST) (TA) Policy advice on linkages between science curricula and development of human capital for research, science and technology (TA) Policy note on enhancing teacher performance and assessing the quality of educational services at higher education institutions (ESW) 64 PROGRESS REPORT PLANS STATUS Private and Financial Sector (TA) Actual Tax Expenditure Report TA Actual Public Finance (TA) Dropped Lubelskie: Support for Regional Development Strategy (ESW) Completed in FY 2012 Innovation, Knowledge and Competitiveness (EU) accession countries (TA) Completed in FY 2012 Program of Technical Cooperation in Pensions Policy in the New EU Ongoing Member States and Croatia (EU accession countries) (TA) ROSC - Financial Sector Assessment Program Actual 2011 Human Capital Development Strategy (TA) Completed in FY 2012 Additional Products: Europe 2020. Fueling Growth and Competitiveness in Poland Through Employment, Skills, and Innovation (ESW) Improving the business regulatory environment in five Doing Business areas (TA) (RAS) Credit union supervision (ESW/TA) Financial Reporting TA Program 2010-2015 - To be completed in FY 2016 Use of Country Systems for Procurement in Poland Actual Municipal Finance Dropped Subnational Transport 1 Dropped Monitoring & Evaluation TA (RAS) Dropped 2012 Low emissions CEM follow-up TA Ongoing (Economic Modeling for Climate Policy, TA) Roads/Railways Reform TA (RAS) Dropped Administrative Reform TA (RAS) Dropped Subnational RDS/PeR (RAS) Dropped 65 Additional Products: "Review of Public Enterprise Innovation Support Systems" (TA) (EFO) Financial sector - Bank resolution framework (TA) Additional Products: "Towards a stronger contract enforcement and insolvency in Poland" (TA)(RAS), completed in FY 2013 2013 Warsaw City - Road Safety Capacity Review (TA) Road Safety Strategic Planning and Management Capacity Review - support for National Road Safety Council (TA) (ongoing) Public Pay Review (TA) (ongoing) 66 Annex 4: Poland - IBRD Indicative Financing Program Staegi Railwaysv Resruturng100H c E2gmn Hopitler 100un Head I metto FY14-15 Projects SE1 Multisectoral DPL Series 1600 H M (2 operations of US$ 800 million each: FY 14, FY1 5) SE3 Railways Restructuring 100 H H SE2 Hospital Reform 100 H M FY16-17 Projects SE1/SE2/SE3 DPL TBD 1200 H M SE3 Vistula River Basin Flood Protection 100 H H SE2 Social Inclusion 100 H M SE 1 - Strategic Engagement Area 1: Economic Competitiveness SE2 - Strategic Engagement Area 2: Equity and Inclusion SE3 - Strategic Engagement Area 3: Climate Action SE4 - Strategic Engagement Area 4: Poland as a Global Development Partner 23 Lending volumes will depend on the country's performance and priorities, IBRD lending capacity, demand from other borrowers and global economic developments The full lending program for the outer years of the CPS will be determined jointly with the government and will be presented for Board discussion in the CPS Progress Report. A DPL series will explore with the authorities reform agendas dependent on the macroeconomic environment at the time. 24 H - high, M - moderate, L - low 67 Annex 5: IBRD Indicative Knowledge Services Program FY14/15 Aging SE 2 x Savings and Growth SE 1 x FSAP' SE 1 x Public Finance Review SE 1 x Social Sectors Service Delivery SE 2 x Innovation Ecosystems SE 1 x Equitable Resource Reallocation for Regional Development and SE 2 x Service Delivery Economic Effects and Financing of Energy Program Implementation SE 3 x Poland as a Global Partner SE 4 x Public Wages/Public Administration Reform SE 1 x Economic Modeling for Climate Policy SE 3 x Low Emissions Strategy SE 3 x Higher Education SE 1 x Subnational Development SE 2 x Road Safety SE 3 X Innovation and Smart Specialization SE 2 x Financial Reporting SE 1 x Innovation Instruments SE 2 x Justice SE 1 x Subnational Finances/Subnational Debt Management SE 2 x Labor Market SE 2 x Health SE 2 x Social Inclusion SE 2 x Gender SE 2 x Energy Efficiency SE 3 x Business Regulatory Environment (including a possible SE 1 x "Subnational Doing Business") 68 Annex 6: Selected Indicators* of Bank Portfolio Performance and Management in Poland Selected Indicators* of Bank Portfolio Performance and Management As Of Date 5/6/2013 Indicator 2010 2011 2012 2013 Portfolio Assessment Number of Projects Under Implementation a5 5 3 1 Average Implementation Period (years) b 3.5 4.3 4.3 6.1 Percent of Problem Projects by Number a, C 20.0 20.0 33.3 100.0 Percent of Problem Projects by Amount a, C 0.6 0.7 15.5 100.0 Percent of Projects at Risk by Number a, d 20.0 20.0 33.3 100.0 Percent of Projects at Risk by Amount a, d 0.6 0.7 15.5 100.0 Disbursement Ratio (%) e 10.1 14.1 10.2 14.4 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 45 4 Proj Eval by OED by Amt (US$ millions) 6,065.3 1,619.4 % of OED Projects Rated U or HU by 20.0 0.0 Number % of OED Projects Rated U or HU by Amt 8.7 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 69 Annex 7: Operations Portfolio (IBRD/IDA and Grants) Operations Portfolio (IBRD/IDA and Grants) Poland As of Date 5/6/2013 Closed Projects 52 IBRD/IDA * Total Disbursed (Active) 51.63 of which has been repaid 2.75 Total Disbursed (Closed) 7,275.66 of which has been repaid 3,201.22 Total Disbursed (Active + 732729 Closed) of which has been repaid 3,203.97 Total Undisbursed (Active) 133.70 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) Active Projects Difference Between Last PSR Expected and Actual Supervision Rating Original Amount in US$ Millions Disbursements a' Project ID Project Name Develop. Implementation Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd Obiectives Progress ODRA RIVER BASIN P086768 FLOOD PROT MU MU 2007 184 133.6972 92.732381 25.35718 70 Annex 8: IFC - Committed and Disbursed Outstanding Investment Portfolio (Poland) Poland Committed and Disbursed Outstanding Investment Portfolio As of 5/31/2013 (In USD Millions) Committed Disbursed Outstanding **Quasi Partici **Quasi Partici FY Approval Company Loan Equity Equity *GT/RM pant Loan Equity Equity *GT/RM pant 1997 Cpf 0 0.10 0 0 0 0 0 0 0 0 0 Fm bank 0 3.37 7.21 0 0 0 1.9 7.13 0 0 0 Schwarz group 6.50 0 0 0 0 6.50 0 0 0 0 Total Portfolio: 6.50 3.47 7.21 0 0 6.50 1.9 7.13 0 0 * Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types. 71 IBRD 33467R POLAND SELECTED CITIES AND TOWNS PROVINCE (WOJEWÖDZTWO) CAPITALS ® NATIONAL CAPITAL RIVERS MAIN ROADS MAIN RAILROADS PROVINCE (WOJEWÖDZTWO) BOUNDARIES - - INTERNATIONAL BOUNDARIES 14oE 16°E 18°E 20°E 22°E 24°E Baltic Sea Gulfof GJ FEDERATION Gdarisk LIlT H UANIA TOo 4 a d Koszal POM R 5KIE ElbI,9 Wuwalki WARMIN SW - .54N Ys MAZ SKIE - Neubrae 1rgPOMORSKI Z_C r KUJA KO- PODLSASKIE Z. PO KIlEl-= Pgoslcz Noy 'Biafysto G2 c iechanów- W29 ) Knc oc 2e lin Plock mrAmnoE L USŠKIE 7WAR 2°N9 52°N ZieonaoG6r WIEffL KO L 0SKIE Bisaar TOesn S te niewice, Podlaska ITJ Br'i Kali st6Koe1 Sie adz LUBELSKIE DOLN SLASI LODZKE TO Piotrków Radomn Lublin TO Dresden egiaTrybunalski Kove 44 Jelenia Wo h Góra WarzcOLSKIE cl Kielce Zamfod pole SWIE-TOKRZYSKIE TO SA SKI1E Tärnobre Prague ToKtc PODKARPACKIE SD-N ~Tarnow RZeszów TO50 CZE CH R E PUBL ICMAO LSI CBd Nowy Sgczoron 0 25 5 100 Kilometers ' ' -'Ä'Rysy TO UK RA INE 0 25 50 75 Miles (249 m} Ks* This mp~produced by the Map Design Unit of The World Bank S LOV AK R EP O B IIC The boundcries, colors, denominations and any odher information[ 'shown on this map do not imly hn fe part of The World Bank Grop any judgmet on ielglstatus of ony territory, or any endorsemntoracceptanceofuch boundaries 18°E 20°E 22°E 24°E MARCH 20/7