World Bank Document€¦ · sector. In 2015, following a six-year recession, the country began its...

Document of

The World Bank Group

Report No. 106507-HR

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND INTERNATIONAL FINANCE CORPORATION

AND MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW

OF

THE FY14-17 COUNTRY PARTNERSHIP STRATEGY FOR

THE REPUBLIC OF CROATIA

Croatia Country Office

Central/Southern Europe and Baltics

Europe and Central Asia Region

The International Finance Corporation

Europe and Central Asia

The Multilateral Investment Guarantee Agency

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CURRENCY EQUIVALENTS

(Exchange Rate as of June 30, 2016)

Currency Unit = Croatian Kuna (HRK)

US$1.00 = 6.75355 HRK

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ASA Advisory Services and Analytics LROs Land Registration Offices

COs Cadastral Offices M&E Monitoring & Evaluation

CLR Completion and Learning Review MOST Bridge of Independent Lists

CPF Country Partnership Framework MSMEs Micro Small and Mediums Sized Enterprises

CPS Country Partnership Strategy NPL Non-Performing Loan

CSR EU Country Specific Recommendations PCG Partial Credit Guarantee

CHF Swiss Francs RF Results Framework

DH District Heating R&D Research and Development

DLI Disbursement Linked Indicator SCD System Country Diagnostic

DPO Development Policy Operation SDP Social Democratic Party

DPL Development Policy Loan SPSMP Social Protection System Modernization Project

EBRD European Bank for Reconstruction and Development SME Small and Medium Enterprise

EC European Commission SOEs State Owned Enterprises

EDP Excessive Deficit Procedure (EDP) M&E Monitoring and Evaluation

EFIL Export Finance Intermediation Loan PforR Program for Results

ERDPL Economic Recovery Development Policy Loan PPP Public Private Partnership

EU European Union RAMP Revenue Administration Modernization Project (RAMP)

FDI Foreign Direct Investments RAS Reimbursable Advisory Services

GDP Gross Domestic Product R&D Research and Development

GHG Green House Gas SCD Systematic Country Diagnostic

GEF Global Environment Facility STP2 Second Science and Technology Project

HBOR Croatian Bank for Reconstruction and Development TA Technical Assistance

HERA Croatian Energy Regulating Agency WBG World Bank Group

HDZ Croatian Democratic Union WPP Wind Power Plant

HRK Croatian Kuna

IBRD International Bank for Reconstruction & Development

ICRR Implementation Completion and Results Report

ICR Implementation Completion Report

ICT Information and Communication Technology

IFC International Finance Corporation

IOTA International Organization of Tax Administrators

JPR Joint Portfolio Review

IBRD IFC MIGA

Vice President:

Director:

Regional Manager:

Task Team Leader:

Cyril Muller

Arup Banerji

Andrea Kucey/Carlos Pinerua

Dimitris Tsitsiragos

Tomasz Telma

Thomas Lubeck

George Konda/Magdalena

Soljakova

Karin Finkelston (VP & COO)

Dan Biller (Acting)

Gianfilippo Carboni

PERFORMANCE AND LEARNING REVIEW

OF THE COUNTRY PARTNERSHIP STRATEGY

OF THE REPUBLIC OF CROATIA

TABLE OF CONTENTS

I. Introduction ................................................................................................................................ 1

II. Main Changes in Country Context ............................................................................................. 1

III. Summary of Program Implementation ....................................................................................... 4

IV. Emerging Lessons .................................................................................................................... 12

V. Adjustments to CPS and Future Engagement........................................................................... 13

VI. Risks to CPS Program .............................................................................................................. 16

Annex 1: Updated CPS Results Matrix................................................................................................ 17

Annex 2: Matrix of changes to original CPS Results Matrix .............................................................. 21

Annex 3: Matrix summarizing progress towards CPS Objectives ....................................................... 26

1

I. Introduction

1. The World Bank Group (WBG) endorsement of the Country Partnership Strategy (CPS) in June

2013 coincided with Croatia’s membership as the 28th country to join the European Union. (EU). The

program supported Croatia’s efforts to maximize the benefits of EU accession, including access to

European Structural and Investment Funds and opportunities to strengthen institutions. The FY14-17 CPS

focused squarely on the most pressing challenges to improving the country’s growth prospects: the need

for fiscal adjustment and to enhance competitiveness. These themes remain strategically relevant today.

2. At the time of the CPS, the challenges facing the Croatian economy required a strong structural

reform agenda and ownership, including to meet EU Country Specific Recommendations (CSR), which

proved to be increasingly difficult in the lead up to the political transition. The WBG program supported

government efforts first with the ERDPL2, and also through analytical work. Croatia’s economic

fundamentals have improved since the approval of the CPS and economic growth returned in 2015 for the

first time since the 2008 crisis. The expectation is that growth will continue at a gradual pace, however

advances on structural reforms will depend on political developments, including the results of upcoming

snap elections, called for by the Croatian Parliament.

3. The WBG program articulated in the CPS is on track to deliver results by the end of the FY14-17

period. The Performance Learning Review (PLR) introduces some modest adjustments to define expected

outcomes with greater precision. Given a thorough understanding of development challenges and

constraints could help Croatia unleash its full growth potential, the WBG will focus efforts during the

remaining year of implementation on the preparation of the Systemic Country Diagnostic (SCD). The

SCD will provide an input for informing national policies, lay the foundation for the future Country

Partnership Framework (CPF), and allow for a tighter alignment of the WBG program with the Twin

Goals.

II. Main Changes in Country Context

4. Accession to the EU implied additional responsibilities that tested the capacity of

government to deliver. At the time of CPS delivery, the country was led by the Social Democratic Party

(SDP) in a coalition Government with a stable majority. After an active reform effort, with WBG support,

the administrative capacity for effective policy design and implementation of complex reforms came

under stress from a difficult political environment and the demands of trying to absorb a seven-fold

increase in EU funds. While there were notable successes, the Government’s ability to build the

consensus needed to accelerate the pace of reforms proved more challenging than expected, and continues

to be challenging given political uncertainty.

5. CPS implementation was affected by political developments related to an intense pre-

electoral period and change of Government. Following elections in November 2015, further political

uncertainty persists. A coalition government was voted in on January 22, 2016, consisting of two main

partners, the center-right coalition led by HDZ (Croatian Democratic Union) and MOST, the Bridge of

Independent Lists. The Government, led by the Prime Minister, Tihomir Oreskovic, formulated a national

reform program that defines key strategic actions for this administration, including to promote

macroeconomic stability, improve the business environment and investment climate, and to achieve

public sector efficiencies and greater transparency. However, the Parliament was dissolved effective July

2

15, 2016, following a breakdown in the coalition. A technical government remains in place until a new

Government is established after elections due in early September.

6. Economic developments, while not as positive as anticipated in the CPS, reflect an

improvement in fundamentals that are underpinning the modest recovery in growth. Post accession

Croatia has improved its fiscal position, the current account balance, and maintained a stable financial

sector. In 2015, following a six-year recession, the country began its gradual recovery with an annual

growth rate of 1.6 percent. Growth was led by external demand, helped by the EU recovery, and revived

private consumption boosted by oil and food price declines, income tax changes and an improving labor

market.

7. Fiscal vulnerabilities declined in 2015 as a result of concerted efforts in 2014, including on

tax collection and the public sector wage bill. The general government deficit in 2015 declined to 3.2

percent of GDP (on an accrual basis) from 5.5 percent in 2014. Public debt rose further to 86.7 percent of

GDP. The fiscal situation remains an important concern, and in combination with low potential growth

rates has been one force behind the downgrades of the sovereign credit rating to two notches below

investment grade status. The European Commission (EC) maintains a close oversight on fiscal outcomes,

and is working with the Government to meet Excessive Deficit Procedure (EDP) targets over the

medium-term.

8. The financial sector remains stable, despite high Non Performing Loans (NPLs) and an

environment of corporate and domestic deleveraging. Lending activity declined by 2.9 percent in 2015

led by accelerated corporate deleveraging in the non-financial sector which reduced domestic borrowing.

Households reduced their liabilities to the banking sector as well by 1.5 percent, after the conversion and

partial write-offs of Swiss Francs (CHF) loans. In September 2015, the Government adopted a law on the

conversion of CHF loans to euro denominated loans, which is estimated to result in bank losses in 2015

and fiscal revenues foregone in 2016 of 1.41 and 0.2 percent of GDP, respectively. NPLs at 16.6 percent

slightly declined compared to 2014 as the sale of non-performing assets to factoring companies took off.

According to Central Bank stress tests, the domestic banking sector is resilient to external shocks. The

capital adequacy ratio, at 19.9 percent in September 2015, is well above the regulatory minimum of 10

percent, although the high NPL overhang has an impact on economic growth.

9. The external position has been in surplus since 2012. The current account balance recorded a

surplus of 5.2 percent of GDP in 2015. The largest contribution came from a reduced deficit on the

income account. Strong tourism sector performance that underpinned a large surplus on services, while

EU transfers further strengthened the external position of the country. The trade balance deteriorated

despite a strong export growth in pharmaceuticals, ships, car parts, foods and electricity, led by the

recovery of EU demand and Croatia’s integration into global supply chains.

1 Central Bank’s estimate of 1.3 percent of GDP.

3

Table 1. Macroeconomic Indicators2

2 At the time the Croatia CPS was prepared, EU-SILC for Croatia was not accessible, so national poverty

figures reported in the document are based on the Croatia Household Budget Survey for 2008-2010. In contrast, the

national poverty figures reported in the Croatia PLR are constructed using the EU-SILC. They are based on income

(not consumption), and calculated using the EU relative poverty line of 60% of median income.

CroatiaSelected Indicators Avg. '00-14 2012 2013 2014 2015 2016 E 2017 F

Income and economic growthGDP growth (annual %) 1.7 -2.2 -1.1 -0.4 1.6 2.2 2.0

GDP per capita growth (annual %, real) 2.2 -1.9 -0.8 0.0 2.8 2.5 2.3

GDP per capita (US$, nominal) 11129 13236 13575 13481 11629 12003 12382

GDP per capita, PPP (current international $) 17232 21114 21351 21252 21709 22176 22653

Private Consumption growth (annual %) 1.6 -3.0 -1.8 -0.7 1.2 1.8 1.4

Gross Investment ( % of nominal GDP) 23.1 19.6 19.8 19.1 19.1 19.5 20.2

Gross Investment - Public ( % of nominal GDP)1 5.0 3.5 3.7 3.7 2.9 3.2 3.1

Money and Prices

Inflation, consumer prices (annual %, end of period)2 2.6 4.7 0.3 -0.6 -0.5 1.0 1.5

Inflation, consumer prices (annual %, period average)2 2.7 3.4 2.2 -0.2 -0.5 0.9 1.5

M2 ( % of GDP) 64.6 74.6 77.7 80.7 83.6 84.2 84.8

Domestic Credit to the Private Sector ( % of GDP)1 59.8 71.5 71.0 69.9 66.6 66.0 65.8

10 year interest rate (annual average)2 .. .. .. .. .. .. ..

Nominal Exchange Rate (local currency per USD) 6.2 5.9 5.7 5.7 6.9 6.9 6.9

Real Exchange Rate Index (2010=100) 103.1 105.3 104.2 105.4 109.9 110.1 110.2

FiscalRevenue (% of GDP) 42.1 41.7 42.5 42.6 43.7 44.0 43.7

Expenditure (% of GDP) 46.6 47.0 47.8 48.1 46.9 46.7 45.8

Interest Payments (% of GDP) 2.3 3.4 3.5 3.5 3.6 3.6 3.6

Non-Interest Expenditure (% of GDP) 44.3 43.6 44.3 44.6 43.3 43.1 42.2

Overall Fiscal Balance (% of GDP) -4.5 -5.3 -5.3 -5.5 -3.2 -2.7 -2.1

Primary Fiscal Balance (% of GDP) -2.2 -1.9 -1.8 -2.0 0.4 0.9 1.4

General Government Debt (% of GDP) 50.4 70.7 82.2 86.5 86.7 86.0 84.9

External Public Debt (% of GDP)1 24.2 29.3 34.7 36.0 35.4 36.6 36.7

External AccountsExport growth, f.o.b (nominal US$, annual %) 10.0 -7.8 6.4 6.7 -8.2 4.2 4.0

Import growth, c.i.f (nominal US$, annual %) 8.3 -8.8 6.1 3.0 -9.5 4.5 4.3

Merchandise exports (% of GDP) 17.1 19.7 20.5 22.7 24.4 24.6 25.0

Merchandise imports (% of GDP) 35.5 34.0 35.6 37.5 39.5 40.1 40.7

Services, net (% of GDP) 14.3 14.6 15.5 16.9 18.0 18.3 18.3

Current account balance (current US$ millions) -1705 -167 566 1123 2603 1523 1502

Current account balance (% of GDP) -3.6 -0.3 1.0 2.0 5.3 3.0 2.9

Foreign Direct Investment, net inflows (% of GDP) 3.5 2.7 1.9 1.9 0.4 2.7 3.2

External debt, total (% of GDP)1 81.5 103.0 105.6 108.4 103.7 97.2 89.5

Multilateral debt (% of total external debt)1 6.3 8.3 9.0 9.8 11.2 12.6 14.3

Debt service ratio (% of exports goods and non-factor services)1 42.4 63.6 51.4 53.0 51.4 47.4 50.0

Population, Employment and PovertyPopulation, total (millions) 4.4 4.3 4.3 4.2 4.2 4.2 4.2

Population Growth (annual %) -0.5 -0.3 -0.3 -0.4 -1.1 -0.3 -0.3

Unemployment Rate1 13.5 15.9 17.3 17.3 16.3 16.0 15.6

Poverty headcount ratio at national poverty line (% of population)1 20.2 20.4 19.5 19.4 .. .. ..

Poverty headcount ratio at US$5 a day (PPP) (% of population)1 8.5 9.4 9.8 9.8 9.0 8.7 8.4

Inequality - Gini Coefficient1 31.1 30.9 30.9 30.2 .. .. ..

Life Expectancy1 75.7 76.9 77.1 77.6 .. .. ..

OtherGDP (current LCU, millions) 285601 330456 329571 328431 334219 343537 353231

GDP (current US$, millions) 48713 56486 57770 57137 48732 50134 51549

GDP per capita LCU (real) 71692 74976 74385 74419 76504 78445 80276

Doing Business Rank3 39 .. .. 39 40 .. ..

Human Development Index Ranking4 46 47 47 47 .. .. ..

Notes: ".." indicates not available. E = estimate, F = forecast. Data from MFMOD unless otherwise noted.

1/ World Development Indicators Database

2/ World Bank GEM database

3/ This indicator is ranked out of 175 countries in 2007, 178 in 2008, 181 in 2009, and 183 in 2010 and 2011.

4/ The HDI ranking in 2001 is in relation to 175 countries and in 2010 in relation to 169 countries.

Sources: MFMOD Database, World Bank WDI, GEM databases, IMF and national sources.

4

10. The combination of high labor costs and stagnant productivity is limiting the growth

potential of the economy. The increase in labor costs has been largely driven by collective bargaining in

a disproportionately large public sector, including public enterprises. While productivity has been largely

stagnant since 2006, the unit labor costs increased substantially up until 2009 and culminated in job

destruction and higher unemployment rates, in addition to the cyclical factors. Despite moderation since

2010, the average wage level in 2014 is still misaligned with productivity performance and is higher than

in its EU peers (like Hungary and Poland, for example). At 16.3 percent in 2015, unemployment remains

relatively high. Addressing structural reforms for a well-functioning labor market, as well as public

sector, are likely to emerge as a high priority for new administration.

11. Growth and job creation will be the prime determinant for poverty reduction and shared

prosperity. Poverty hit a high of close to 10 percent in 2014, as measured at $5 PPP a day. As growth

gradually recovers, poverty is expected to decline to 8.4 percent in 2017 and further to 7.7 percent in

2018, based on current growth projections. Labor market improvements have helped reduce poverty, in

particular through the service sectors (tourism, construction and professional services). Still labor force

participation at 52.7 percent in 2015 is among the lowest in the EU, and presents a strong determinant of

low household incomes and greater vulnerability to poverty3. Further labor market improvements should

improve unemployment rates, which is affecting disproportionately the bottom 40 percent4.

12. Investment in Croatia continues to contract as a result of structural constraints. Since 2009,

the share of domestic investment in GDP dropped from 25 percent to 19 percent in 2015, although it is

expected to recover in the next several years underpinned by greater EU fund absorption. While the level

of exports has been increasing, Croatia remains a relatively low intensity export economy (48 percent of

GDP, compared to 77.8 percent in Slovenia). Before the global crisis, the country relied heavily on

domestic consumption and public sector investments. Corporate investment has still not recovered, as

companies struggle with high debt levels (despite efforts to deleverage) and the business environment and

high labor costs imply a high cost of operation, hurting their competitiveness and capacity to increase

their exports in markets with growth potential. State-Owned Enterprises (SOE) tie up a disproportionate

part of economic resources and operate at lower productivity and higher cost than private companies,

spreading inefficiencies through trade linkages and through a distortion in wage levels. It would seem that

there is still significant untapped potential in the private sector, which bears further exploration.

13. The modest economic recovery is expected to continue in 2016-2018 with growth averaging

2.1 percent a year. This estimate is based on assumptions of stronger private consumption, export

growth and investment due to improved absorption of EU funds. Private consumption is expected to grow

reflecting labor market recovery, increased consumer confidence and a slowdown in deleveraging.

Stronger utilization of EU funds, along with recovered FDI in tourism and car supply value chain

industries and service sectors (expected at the level of 3 percent of GDP on average per year in 2016-18)

will boost investment. Government consumption is projected to remain subdued in light of the need for

fiscal consolidation under the Excessive Deficit Procedure (EDP) with the EC. Future growth prospects

will be further explored as part of the SCD, which will identify reforms with the potential to increase

resilience, reduce vulnerabilities and accelerate the pace of the convergence process.

3 The CPS included an analysis on gender issues, including female labor force participation. While still high,

gaps in labor market outcomes are narrowing. The labor force participation rate among women (at 46.8 percent) and

men (at 59.2 percent) narrowed by 2 percentage points by 2015 compared to 2012. 4 Based on latest available data, incomes for the bottom 40 percent increased by 1.6 percent compared to the

total population of 0.3 percent in the 2007-12 period.

5

III. Summary of Program Implementation

14. The proposed CPS program presented a unique opportunity to maximize the benefits of Croatia’s

EU membership to develop the country’s economic potential. The two major constraints to development

identified in the CPS, notably the need for fiscal consolidation and to stimulate economic growth, remain

relevant today.

15. Three thematic areas comprise the strategic pillars and form the basis of the CPS Results

Framework (RF): (i) fiscal adjustment through reforms at the sector level; (ii) innovation and trade

competitiveness for growth and shared prosperity; and (iii) helping maximize the economic benefits of

becoming an EU state.

Pillar I. Fiscal adjustment through reforms at the sector level

16. Activities within this pillar targeted primarily measures to improve efficiency within tax

administration, targeting of social assistance programs and rationalization of the health sector. Progress

has been made in this pillar, particularly as many outcomes were frontloaded and are now being

monitored for sustainability.

17. The Government has made good progress in revenue mobilization with the contribution of the

Bank’s Revenue Administration Modernization Project (RAMP) centered on tax efficiency and improved

compliance. The indicator for the RF was the tax gap as a percent of total GDP, and at the end of 2014

this had improved to 2.5 percent from 2.7 percent in 2012. Improvements in revenue mobilization will

continue to be monitored, but in the absence of a tax administration project, another credible alternative

source is needed to track progress.5 The Bank will remain engaged in a dialogue on taxation to ensure

gains made by the government during the first half of the CPS are sustained.

18. The Government is seeking to improve efficiency in its social programs. This includes more

robust targeting of social assistance programs, including expanding the share of mean-tested programs.

Bank support has been through ERDPL2 and will continue through a Social Protection System

Modernization Project (SPSMP) approved in September 2014. Good progress has been made to date. The

share of means-tested social programs in overall central government social spending increased from 16.1

percent in 2012 to 17.2 percent in 2014. The SPSMP operation primarily focuses on realizing

administrative efficiencies in the social sector.

19. The CPS identified improving the quality and efficiency of health spending as a critical goal to

ensure sustainability of the sector. Croatia’s public health spending is relatively high compared to the EU

average, and the country’s ageing population will mean higher demand for health services while a

decrease in the working age population will decrease revenues for health given a payroll-based financing

system. This means Croatia must deliver better value from its health spending by improving quality and

efficiency. Persistent hospital arrears are a manifestation of the inefficiencies embedded in the current

system of service delivery. In 2015, overall liabilities of the health sector grew and hospitals generated

new arrears accounting for about 0.6 percent of GDP.

5 It will not be possible to monitor further gains in closing the tax gap because the supporting

project, RAMP, is closing. IOTA tracks the same indicator but with a considerable lag and thus cannot be used to

track further progress. Thus, the PLR revises the target to the gains by 2014, and use IOTA confirm this progress.

6

20. The CPS Results Framework (RF) monitors progress towards rationalization and efficiency of the

health sector with two indicators. The first was supported by the ERDPL2 and monitors total reduction in

public accrued health spending. The CPS foresaw a drop of .5 percent of GDP in health spending on an

accrual basis and this has been achieved.6 The Bank will continue to monitor sustainability during the

remainder of the CPS period, including efforts to contain hospital arrears. To support efficiency

improvements in the health sector, the Bank approved a Health PforR in May 2014. . This PLR proposes

to replace the RF indicator on rationalization of hospital beds, an indicator that is not being monitored,

with the Disbursement Linked Indicator monitored under the project, i.e., a reduction in the total number

of acute care beds by 20 percent from 15,930 (2012) to 12,800 (2017). The first stage of the DLI was

achieved and the 2017 target is expected to be reached by CPS completion. IFC has offered its help to the

government to structure and implement PPP in the health sector to finance, plan, construct and maintain 6

new hospital buildings in one of the oldest university hospitals in Croatia. The Government decided to

keep the project on hold due to early 2015 elections. After elections, the Government has reiterated its

interest in the PPP in the health sector and asked for more time to assess the project.

21. There is a strong dialogue on public finance. The Public Finance Review (2014) provided an

analysis of options for fiscal consolidation. The Government followed up with a request for a Spending

Review in 2015 to respond to EC Country Specific Recommendations. The Spending Review focused on

five sectors and had a positive impact on the dialogue with respect to EDP, and remains a valid document

to inform future efforts at the sector spending level. Seeking greater public sector efficiencies and

opportunities for consolidation remains a relevant priority going forward, and the WBG is using a

combination of its own-managed resources to continue the dialogue on macro structural adjustments.

Pillar 2. Innovation and trade competitiveness for growth and shared prosperity

22. Objectives in this area include promoting public enterprise restructuring, strengthening the

business environment and private sector led growth. Progress as measured by the Results Framework

indicators is good; however expectations of a broader engagement, particularly in the area of State Owned

Enterprises (SOEs), have not materialized to the extent articulated in the main text of the CPS.

23. The CPS outlined an intention to promote public enterprise restructuring with an initial focus

on transport and energy. Progress has been made on transport with WBG support. On energy, the

Government has advanced the original CPS agenda in the right direction mostly on its own with

institutional reforms, building on analytical work by the Bank; IFC has supported private sector

investments in the renewable energy and transport sectors.

24. The work on railways has the support of a newly approved project which will have its impact in

the following CPF. During the remaining year of this CPS the delivery will focus primarily on the

restructuring plans for the three railway companies and a medium-term strategy for the sector, linked to

the funding from the EU. The indicator of a multi Modal Strategy is on track to be met by CPS

completion.

25. Achieving energy security and reducing greenhouse emissions, in support of the wider European

climate objectives, are key priorities in the Government’s energy strategy. The CPS objective to

6 The drafting of the indicator has been revised to keep the original target of a .5 percent of GDP decrease,

regardless of the baseline, given the impact of national account revisions on benchmarks and targets."

7

contribute to diversity and security of energy supply is considered achieved. Specifically, an action plan

for feed-in tariffs for renewable energy resources and for improving the efficiency of the district heating

(DH) sector was adopted in 2013, with amendments in 2014 and 2015. Through its work on the Energy

System Review, the WBG took stock of the methodology for feed-in tariffs, especially for district heating

sector, and provided recommendations to HERA – Croatian Energy Regulating Agency. Some

recommendations were accepted and adopted in the new tariff system, in particular for the DH. This

included decoupling of establishing prices for DH – to be market-oriented and not to be government-

influenced. A Note on Energy Vulnerability and ways how to mitigate the impact of potentially rising

energy prices on the energy vulnerable was delivered. The Government is moving forward with positive

improvements to rebalance energy tariffs and strengthen institutions, building on work the Bank prepared,

but without direct Bank support. In a complementary manner, IFC supported Croatia’s climate change

objective by investing $25 million and mobilizing $31 million from other financial institutions to

finance a Wind Power Plant (WPP), which has been commissioned in 2016. This brings the total wind

power generation capacity installed with IFC’s support—through its three active portfolio projects—to

108 MW, which constitutes a 50 percent increase in Croatia’s total wind power capacity since 2012.

These IFC projects also contribute to the reduction of greenhouse gas (GHG) emissions with estimated

75,000 tCO2 avoided every year. This is below the original CPS target because an anticipated US$75

million sustainable energy finance project with a Croatian bank focused on renewable energy, has not

materialized; the respective target has been revised accordingly.

26. The CPS will retain its focus on the transport sector. The railway agenda remains highly relevant

to ensure the financial viability of the sector. In the road sector, although facing challenges, IFC stays

committed to support PPPs in the transport sector with its ongoing work in Bina Istra road concession and

Dubrovnik Cruise Passenger Terminal concession. Since the Government plans changed, IFC will not

provide PPP advisory services for the Brijuni National Park concession. Realization of IFC advisory and

investments in PPP will depend on Government commitment to full implementation. In air transport, IFC

has invested US$73 million in the Zagreb airport, aiming to expand the airport capacity by about 35% by

the end of the CPS period, hence contributing to the development of the tourism sector, one of the major

drivers of Croatia’s GDP and employment. More broadly, given the strong link between the restructuring

agenda on transport and fiscal consolidation, this theme will be moved to the first Pillar to ensure a better

fit.

27. The CPS envisioned a strong role for IFC and the Bank in strengthening the business

environment. In Croatia, the World Bank and the Agency for Investment and Competitiveness organized

a workshop to present the key findings of the Doing Business Memorandum for Croatia. The Bank’s

advisory services to improve the investment climate and decrease the costs of doing business are being

discussed for the remaining CPS period. Croatia is also included in a list of countries where a Sub

National Doing Business survey will be done with support of the EC. IFC’s regional Corporate

Governance project promoted better corporate governance practices in the business sector, working

closely with the Zagreb Stock Exchange on development of a corporate governance manual.

28. The agenda on improving the efficiency and reducing the backlog of cases in the judicial

system is on track. Such cases have been reduced from a baseline of around 437,892 in 2012 to 349,051

by April 2016, which exceeds the target in the project document of 394,103 by 2017.7 Disposition times

7 The figures in the CPS Results Framework were not consistent with those in the Project. For the purpose of

assessing progress the correct baseline, target and current status figures have been used.

8

for cases have also shortened. Significant contributions have been made to improving the pace and quality

of work in courts, by automating and streamlining case processing. The Justice Sector Support Project is

due to close in June 2016, but project activities should continue to have positive impacts after project

closure, and the Ministry of Justice and courts remain committed to the reform agenda. The WBG will

monitor progress towards the CPS target. The Integrated Land Administration System Project is also

contributing to improving efficiency. Significant progress has been made in reducing transaction

processing times in land registry and cadaster: from 46 to 17 days for land registries; and from 30 to 5.7

days for cadastres. The Real Property Registration and Cadastre Joint Information System is under

implementation in 108 Land Registration Offices (LROs) and 112 Cadastral Offices (COs), and is

expected to be rolled-out to the City of Zagreb Office for Cadastre and Geodetic Activities in 2016.

Through the ERDPL2 the Bank has supported the reform of business registration as well as the

construction permitting reform that led to an important improvement of the Croatia’s ranking on the

Doing Business list.

29. The WBG has been supporting successfully the financing of exports, including through the

approval of additional financing of €50 million in 2013. Under the Export Finance Intermediation Loan

(EFIL), the volume of medium-to long-term lending to firms under the project has increased, and it is

expected to achieve the final targets by the closing date in August 2016. The level of exports of

beneficiary companies under the EFIL rose by 20 percent, whereas employment rose by 4.5 percent in

2015, meeting the CPS target. Sustainability will be monitored going forward. The WBG also supported

HBOR through the first ever Partial Credit Guarantee for a Financial Intermediation Project. The

Guarantee project attempts to enable access to commercial markets by HBOR at more favorable terms

including reduced lending rates and longer tenure. The first tranche of EUR 50 million was withdrawn in

May 2016.

30. IFC supported competitive local companies through investments in the financial sector,

agribusiness and retail. In the financial sector, IFC has been implementing its strategic approach to

support systemic banks to expand on-lending to SMEs. IFC provided US$68 million long-term finance to

one of Croatia’s systemic banks to help target largely underserved markets such as the agri-sector and

micro, small and medium enterprises (MSMEs). Through this bank, IFC has reached 5,400 MSMEs,

which as of the end of 2014 had an outstanding balance of loans totaling to US$370 million; the relevant

indicator was added to the results matrix. IFC has not seen opportunities for local currency finance as the

Croatian economy remained heavily euro-ized and this is unlikely to change in the foreseeable future

given the anticipated introduction of the Euro. In agribusiness, through the portfolio project committed

during the previous CPS period, IFC continued supporting one of the leading domestic producers of food

and personal care products and a leading distributor of consumer goods in South-Eastern Europe. In retail,

IFC supported the regional expansion of one of the leading German retailers to Croatia. Both companies

procure about 50 percent of their domestic purchases from MSMEs, which totaled about US$200 million

in 2014.

31. The WBG also continued work on enhancing the landscape for research, development and

innovation in Croatia. Technical assistance contributed to the Government’s Smart Specialization

Strategy, an ex-ante conditionality for the use of EU funds for research and development. The

Government also signed a RAS agreement in April 2016 focusing on increasing competitiveness of

clusters. Additionally the Innovation and Entrepreneurship Venture Capital Project was approved and

aims to strengthen risk capital financing for innovative SMEs and startups in Croatia. This is with the

overall aim of making the private sector more dynamic and competitive.

9

10

Pillar 3. Helping maximize the economic benefits of becoming an EU state

32. The third pillar includes two objectives to support greater absorption of EU funds by enhancing

the coherence of national strategies and by building solid project pipelines for EU financing. This Pillar

reinforces the first two pillars, in that stronger national strategies contribute to fiscal consolidation, which

enables the absorption of EU funds; and a strong project pipeline centered on areas related to

competitiveness brings resources for the private sector to invest and contribute to growth. This is

particularly relevant in science and technology, where there has been a sustained engagement.

33. Good progress has been made on formulating sector strategies, with most completed at the

time of this PLR. Sector strategies include: (i) National Education, Science and Technology Strategy –

supported under the Second Science and Technology Project (STP2) and adopted by the Government and

the Parliament in October 2014 – this is an ex-ante conditionality for the use of EU funds; (ii) National

Innovation Strategy - prepared with contribution from STP2 and adopted in December 2014—responds to

the Europe 2020 Strategy which sets clear targets for EU Member States for innovation agenda; (iii)

Research and Innovation Strategy for Smart Specialization—, key ex-ante conditionality for the use of

EU funds in R&D sector; (iv) National Research Infrastructure Roadmap—a document required by all EU

Member States and an input for the Smart Specialization Strategy; and (iv) policy

advice/recommendations provided under the EU Preparedness TA in the areas of public administration,

irrigation, rural development, transport, SME and water/environment sector—e.g., peer review and

analysis of the Partnership Agreement and Operational Program Cohesion and Competitiveness 2014-20;

(v) National Technical and Economic Study for Management of Wastewater Treatment Sludge—prepared

under the Coastal Cities Pollution Control Project 2 and an EU requirement under EU Landfill Directive

and under the Sludge Waste Directive, adopted in 2014. A draft of the National Waste and Leachate

Management Plan was also prepared under the Regional GEF Adriatic project which is a requirement

under the EU Waste Management Directive. Under the National Reform Plan Technical Assistance, the

Bank assisted in reviewing and providing recommendations for strengthening the policy coordination

under the European Semester, designing reform proposals for strengthening social benefits targeting, as

well as assessing fiscal, economic and social impacts of the national reform plans.

34. The CPS indicators set with regard to building a pipeline of projects have been met by the

time of this PLR. Specifically, at least 6 projects are on track for financing in R&D and innovation, in

excess of €50 million. In nature protection, 15 projects for €50 million have been prepared to date. In

judiciary, the Justice Sector Support Project prepared technical documentation for ICT projects to be

funded using EU structural funds, as well as courthouse designs and technical documentation for the

rehabilitation of four courthouses in the lagging regions. This will make an important contribution

towards absorption of EU funds in the next programming cycle. The relevant instruments include the

Second Science and Technology Project and the EU Natura 2000 Integration Project.

WBG Portfolio and Implementation Performance

35. In terms of instruments, the CPS envisaged a maturing of the WBG program in the form of a

smaller investment lending portfolio, a gradual increase in Reimbursable Advisory Services (RAS), and

DPLs as the main instrument to support the structural reform agenda. As anticipated, new investment

lending was frontloaded in the first half of the CPS period, with approximately $600m delivered. The

RAS program has gradually increased to above €5.7 million, although not at the rate envisioned in the

11

CPS. This is, in part, due to the timing of CPS approval towards the end of one EU programming cycle

where Croatia had to manage several EU programming and accreditation processes in parallel.

36. Most of the Planned Lending materialized as expected (see Table 2). However, following

ERDPL2, which closed in FY15, opportunities for subsequent DPOs did not materialize, primarily as a

results of political uncertainty in a pre-electoral period. The WBG remained engaged through dialogue

and analytical work, like the National Reform Program Technical Assistance or the Macro-Fiscal

Structural Dialogue TA, and is well-positioned to support critical fiscal issues. The DPL is an instrument

that is appropriate for Croatia as it can help bring sectors together around common objectives (see

Lessons Learned). Government also appreciates the role of the Bank as an honest broker to facilitate

moving a complex agenda forward across Ministries and agencies. The new Government has expressed

interest in a development policy operation which would likely build on progress achieved during the

previous series.

Table 2: Planned vs. Actual Lending

Planned Lending8

(no volume forecast) Actual Lending

(FY; $US Million)

Policy Support

ERDPL2

DPL *

Economic Recovery Development Policy Loan 2

2014 206.8

Program Support

Health Sector Improving Quality and Efficiency of Health Services

(Program for Results) 2014 103.5

Social Protection Social Protection System Modernization

(IPF with results-based disbursement) 2015 95.55

Project Support

Railways Sustainable Croatian Railways in Europe 2015 183.4

Venture Capital Innovation and Entrepreneurship Venture Capital 2016 21.92

GEF Adriatic Sea GEF Adriatic Sea Environmental Pollution Control Project

(1) Croatia and Bosnia and Herzegovina 2014 4.3

Guarantee

PCG Croatian Export Financing Guarantee Project 2013 256.4

Total 871.87

* DPL was envisaged contingent on continued reforms implementation.

37. Since the beginning of the CPS period, IFC’s committed portfolio has grown by almost 40

percent while outstanding exposure almost tripled, pointing to the acceleration of disbursements. In total,

IFC long-term finance commitments totaled US$ 200 million of which about US$30 million were

mobilized from other financial institutions. In the financial sector, IFC committed a US$68 million loan

to one of the main banks in the country to support its lending to the agribusiness companies and SMEs. In

the infrastructure sectors, IFC provided US$130 million in financing, including funds mobilized from

partners, to support the construction of new renewable energy capacity and the modernization/expansion

of the main airport in the country. IFC portfolio in Croatia is performing well, with no NPLs. Still, it has

8 Listed in Croatia CPS Table 4 (Indicative lending FY14-15). Venture Capital operation, PCG Operation and GEF

Adriatic Sea were listed in paragraphs 71 and 85 of the text respectively. The PCG was approved prior to the CPS period.

12

been under constant pressure of being prepaid due to a low interest rate environment in the EU member

countries. Although IFC has been trying to renegotiate the rates with some of its clients, two companies

prepaid IFC loans for an amount of US$14.3 million.

38. IBRD portfolio performance is uneven and project restructuring is common, with multiple

extensions of closing dates and delayed achievement of results. In 2015, seven projects were restructured,

resulting in six extensions. The implementation period of a Bank-financed project is on average six to

seven years. The delays are sometimes project-specific; however, there are often crosscutting issues

including: poor implementation readiness which results in low disbursements in the first years; ambitious

infrastructure projects that face problems with large civil works components, and governance sector

projects that struggle with design and implementation of complex information systems, such as in tax and

land registry projects. The success of addressing issues is correlated with strong ownership within

Government and with the Bank proactivity.

39. MIGA’s (historical) exposure in Croatia was in the financial sector, supporting Western parent

banks’ shareholder loans to their Croatian subsidiaries, thus addressing country risk management

constraints of the parent banks and enabling continued availability of working capital for on-lending by

their Croatian subsidiaries. Going forward, MIGA looks to re-engage in opportunities in the financial

sector as well as various real sectors including, potentially, in the Croatian transportation sector.

40. The CPS continues to feature a gender focus in implementation. The Bank’s Export Finance

Intermediation Loan, the Second Science and Technology Project and the Partial Guarantee Project all

include gender monitoring indicators. The most recently approved Innovation and Entrepreneurship

Venture Capital Project (2016) is also gender-informed and includes disaggregated targets. An assessment

of overall portfolio results related to gender will feature as part of the Completion and Learning Review

(CLR).

41. The WBG takes full advantage of citizen engagement opportunities. In terms of potential new

lending, Croatia’s legislation requires any potential DPO follow a structured consultation process. The

preparation of a potential transport project would also include a citizen engagement process. All of

Croatia’s Implementation Completion and Results Reports (ICRR) include a stakeholder workshop and

consultations to assess impact for beneficiaries, including surveys to capture broader results. Going

forward the Country Partnership Framework (CPF) would be informed by a Country Opinion Survey and

include broad in-country consultations among all groups of key stakeholders.

IV. Emerging Lessons

42. The WBG is particularly well-positioned as a strategic partner in supporting structural

reforms and as a source of technical assistance, which is confirmed by the client survey results. The

Government continues to value the WBG as a knowledge provider, a source of international best

practices, and advocate for change. In this context, the Government requested the Bank’s advisory

services for the higher education finance reform aimed to support the line ministry and the higher

education institutions to introduce the performance based budgeting, which has set forth the first RAS

engagement in Croatia. Addressing constraints to growth and working towards fiscal consolidation, has

been a long-term agenda for the country which the WBG has supported through DPOs and targeted

analytical work. The WBG is also well-positioned to provide support at regional and local levels to help

in EU Funds absorption and institutional capacity building. This focus should continue, with the

13

Systematic Country Diagnostics (SCD) as an opportunity to provide valuable input on future directions

for the WBG partnership and sharpen priorities to make the most of limited IBRD resources.

43. High level ownership and strong coordination are critical for accelerating the pace of

reform. Implementation of reform policies requires a high degree of coordination and a high level of joint

ownership across government institutions. This has proven challenging in the past, and is likely to

continue to be so for the remainder of the CPS period. While the WBG has played a successful role in

bringing various government agencies around a common set of national priorities, in some cases this has

taken longer than expected and calls for caution and a realistic approach in designing the scope of

development reforms supported by the WBG.

44. Strong ownership is also critical to improve and accelerate implementation of the Bank’s

lending portfolio. Experience has demonstrated that ownership can be fostered through use of a project

steering committee with high-level officials to actively provide strategic advice to project managers and

serve as a decision-making body with a mandate to improve implementation and increase the likelihood

of achieving development objectives. It can also be a useful tool to promote transparency, involve

stakeholders and improve results for beneficiaries. The joint portfolio review (JPR) is another tool that

could be used more strategically to address imminent project issues by adopting strict action plans and

close monitoring. Finally, there are lessons to be learned in specialized government agencies, which tend

to rely less on bureaucratic structures and have stronger accountability frameworks – which are conducive

to resolving problems early on with involvement of relevant stakeholders.

V. Adjustments to CPS and Future Engagement

45. The pillars and objectives of the CPS remain valid and relevant, and the PLR proposes only

modest adjustments. There are a few selected indicators which have been amended to reflect changes in

instruments, the pace of implementation and/or availability of relevant data.

46. Going forward, given the CPS refers to the strategic pillars with different formulations, for ease

of reference and clarity the PLR proposes the following common language:

Pillar I. Fiscal Adjustment through Reforms at the Sector Level

Pillar II. Innovation and Trade Competitiveness for Growth and Shared Prosperity

Pillar III. Helping Maximize the Economic Benefits of Becoming an EU Member State

The paragraphs below summarize proposed amendments and additions to the FY14-17 CPS.

Pillar I. Fiscal Adjustment through Reforms at the Sector Level

47. Within this Pillar the WBG focus on fiscal consolidation will continue to emphasize improving

efficiency in public administration, revenue collection and social assistance and health expenditures, and

to contain the fiscal pressure from SOEs in the transport sector. These are critical objectives to meet

critical macroeconomic goals such as reducing the level of public debt. Efforts to improve absorption of

EU funds, in Pillar 3, also benefits from fiscal consolidation given the need to secure fiscal resources for

co-financing of EU-funded projects. Given the objectives, the Pillar has been reformulated to better

reflect efforts to enhance efficiency.

14

48. Some modest amendments to indicators are proposed within this Pillar. Given the Project in

support of improving tax administration (RAMP) has closed, support for maintaining the gains in the

efficiency of revenue collection will continue through policy dialogue. In order to monitor sustainability

of results already achieved the PLR proposes tracking progress for the remainder of the CPS period

through the recurrent reporting of the Croatia Tax Administration to International Organization of Tax

Administrators (IOTA) on tax effort.

49. There is no adjustment needed with respect to the Social Assistance objective.

50. The Bank remains deeply committed to increasing the efficiency of the health sector and will

continue to work through The Health System Quality and Efficiency Improvement PforR, whose focus is

on the efficiency of the existing health network and improving the health of all of the population, with

special attention of the bottom 40 percent. The CPS results framework indicator has been replaced with

the comparable DLI of the project, related to the number of acute care beds. Given the focus on efficiency

during the remaining years of implementation, the objective has been revised to “introducing cost

rationalization and efficiency measures in the health sector”. The Bank will continue to monitor arrears in

the sector and support sustaining gains related to reducing health expenditures as a percentage of GDP.

Pillar II. Innovation and Trade Competitiveness for Growth and Shared Prosperity

51. The WBG will remain active on the themes and objectives outlined in the CPS under the

competitiveness pillar, which remain relevant to promote growth. The PLR proposes to sharpen the

results in this area during the remaining CPS period.

52. Work on promoting public enterprise restructuring during the remainder of the CPS period will

focus exclusively on strengthening the performance of the railway sector, and not tackle other public

sector enterprises. Given the project supporting this objective seeks to improve the financial sustainability

and operational efficiency of the public rail sector, it is proposed that this objective be moved under Pillar

1. Fiscal Consolidation. On energy, no new additional support is envisioned at this time, and the objective

related to energy is considered achieved. The Government continues to advance reforms of the sector

which have been informed by analytical work developed in collaboration with the Bank.

53. Given the low growth environment and a very slow recovery of the corporate sector investments,

as well as Croatia's access to the EU Structural and Investment Funds for municipal infrastructure

investments, IFC projections for an increased engagement in Croatia will not materialize. Therefore, IFC

is revising the expected investment program during the CPS cycle, from up to US$600 million to up to

US$400 million. IFC will continue to look for opportunities to support solid local export oriented

companies, to increase SME access to financing, to promote foreign investors and transfer of know-how

and technologies, to support private sector investments in the infrastructure sectors, and to help Croatian

companies to expand their market and invest in the region. IFC will also be open to explore opportunities

in municipal finance, but only if they are not being targeted through the EU Structural and Investment

Funds.

54. Regarding the support for SMEs through access to finance, the work under the Export Finance

and Intermediation Loan will be closing in August 2016. The Bank will monitor the performance of the

exports of beneficiaries and use the lessons of the long-term engagement in supporting the export sector

15

through available financing to inform the design of the next CPF. The Croatia Export Financing

Guarantee project although approved in 2013 has taken time to take off, due to the novelty of the

instrument. Immediate efforts will go into finalizing all of the requirements so that these guarantees are

available to private exporters in Croatia. As noted, unless market conditions change, IFC will not offer

products in domestic currency. Therefore, no changes in the original indicators are warranted.

55. The “Innovation and Entrepreneurship Venture Capital” project was approved in 2015 for the

purpose of strengthening the risk capital financing for innovative SMEs and startups. The project will

provide financing for sequential stages of the innovation life cycle – both at the seed stage, through a co-

investment fund, and at the following stage of early commercialization, through a public-private venture

capital fund. These two components will be complemented with a technical assistance aiming at capacity

building and networking activities in support of the key stakeholders identified in the project (HAMAG-

BICRO staff, investors, entrepreneurs and experts). The expected closing date of the project is September

30, 2021. Results are expected to materialize in during the next CPF.

56. In addition, the RAS “Cluster’s Competiveness in Croatia” at a value of €4,9 million that was

signed with the Ministry of Economy is expected to commence June 01, 2016. It aims at strengthening the

country’s competitiveness in selected Global Value Chains, assisting in the implementation of

Competitiveness Cluster Initiative in selected Priority Thematic Areas and Sub-thematic Priority Areas as

defined under the Croatia’s Smart Specialization Strategy (S3), adopted by the Government in March

2016. Activities under total of five components will be carried out: Strengthening the capacity of

beneficiaries and partners; Strategic analysis and competitive positioning; Action plans and policy design;

Design of Academy for Industrial Development; Monitoring and Evaluation of Clusters Initiatives

implementation. Further, with the Justice Sector Support Project due to close in June 2016, the Ministry

of Justice has expressed interest in a follow-up RAS to build on the project’s results and continue targeted

reforms that improve efficiency of justice, particularly for SMEs.


57. The focus on absorption of EU funds remains a priority, particularly to enhance growth prospects

and improve service delivery for the bottom 40 percent. Efforts will continue for preparation of sector

strategies, meeting EU ex-ante conditionality and identifying a strong pipeline of projects. The RAS

instrument has proven to be a relevant tool in this respect in other EU member countries. The Poverty

Mapping RAS (EUR0.6 million) will develop small area poverty data as well as develop indicators of

material deprivation for small areas that would help in identifying local regional development projects for

EU funding under the Operational Program for Competitiveness and Cohesion. The EU Water Sector

Project, foreseen under the CPS, will not be delivered in the CPS period.

58. The SCD will serve as the basis for the WBG’s future engagement in Croatia. The preparation of

the SCD will identify key constraints for Croatia to reach its growth potential and advance towards the

Twin Goals. Shared Prosperity will remain elusive without higher levels of growth to launch employment

generation and create opportunities for the bottom 40 percent. Greater clarity on the actions needed to

stimulate the economy in a tight fiscal environment will facilitate this process. The findings of the SCD

will be leveraged for greater impact and results through a tight alignment with the next Country

Partnership Framework (CPF).

16

VI. Risks to CPS Program

59. The macroeconomic risks identified at the time of the CPS are still valid and are rated

substantial. External factors such as the slowdown in the world economy or tightening of the capital

markets could still undermine the country’s fragile economic recovery. Domestic vulnerabilities, although

not specifically highlighted in the CPS, remain significant as well. There are also some perceptions that

political uncertainties, including calling for early elections, could impact the macroeconomic framework.

Potential DPO support for public finance reforms which has been discussed, could help mitigate macro-

fiscal risks. The WBG is engaging with the authorities on its reform program and could consider scaling-

up support with DPO financing in the future, if appropriate. Since the CPF program was front-loaded, the

expected delivery of CPS results is not substantially affected. The emphasis on public sector efficiency

remains an important agenda and the Bank will continue to provide support through dialogue and

technical assistance.

60. Implementation risks identified at the time of the CPS are valid and rated

substantial. Risks to the outcomes relate to capacity for implementation. As mentioned in the

CPS, delivery of the WBG program, particularly in supporting sector reforms, requires

coordination across sectors, ministries, with the private sector and among various levels of

government. As noted in Section III. Emerging Lessons, implementation delays related to

portfolio performance will require close monitoring and high level ownership. Mitigation

measures will focus on improving portfolio performance and monitoring sustainability. The

latest political developments which include dissolution of Parliament and a technical government

in place until September elections, do not pose a substantial risk to the implementation of the

WBG program. The CPS has less than one year left of implementation, and most of the progress

towards objectives has been achieved. In particular, several outcomes related to the structural

reform agenda were front-loaded as part of the DPL and will continue to be monitored for

sustainability.

61. Overall risk to CPS outcomes is assessed as moderate.

17

Annex 1: Updated CPS Results Matrix

Pillar I: Fiscal Adjustment through Reforms at the Sector Level

CPS Objectives and Indicators Instruments

1. Improving sustainability of revenue enhancing policy as indicated

by:

Improved tax gap as a percentage of total GDP

Baseline: 0.8 (2011)

Target: 0.9 (2013)

ERDPL 2 (delivered 2014)

RAMP (delivered 2015)

Potential DPL

Macro-Fiscal Structural Dialogue

Regular Economic Report (programmatic 2014-2016)

2. Improving the targeting of social assistance programs as indicated

by:

Means-tested programs as a share of all social assistance programs

increased

Baseline: 16% (2012)

Target: 20% (2017)

ERDPL2 (delivered 2014)

Social Protection System Modernization Project (approved in FY15)

Potential DPL

Activation TA (regional, delivered 2015)

PFR and NRP TA (delivered 2014-2015)

Spending Review advisory (delivered 2015)

Regular Economic Report (programmatic 2014-2016

3. Introducing cost rationalization and efficiency measures in the

health sector as indicated by:

Total public accrual health spending reduced by .5 percent of

GDP between 2012 and 2017.

Further rationalization and reorganization of hospital system--:

total number of acute care beds

Baseline 15,930 (2012)

Target: 12,800 (2017)


Development of Emergency Medical Services and Investment Planning

Health PforR (approved 2014)

PFR and Spending Review (delivered 2014-2015)

Potential DPL

Spending Review advisory (delivered 2015)

Regular Economic Report (programmatic 2014-2016)

4. Contributing to the coherence and implementation of strategic

plans in railway and improvements in airport infrastructure as

indicated by:

Implementation of restructuring plans for railway sector

companies and medium-term strategy for the rail sector

consistent with the EU 2014-20 funding period

Railway Policy Note (delivered 2013)

Croatia Energy Sector Review (delivered 2014)

Railway Lending (approved 2015)

Energy Vulnerability Note (delivered 2016)

Partners:

18


Baseline:

Revised restructuring plans of railway companies

Target:

Railway Modal Strategy 2014-2020 and medium term contracts in

place for Passenger Services and Infrastructure Management

consistent with the strategy

Accommodate existing and future air traffic Baseline: 0.44 million unique users in 2013

Target: 0.60 million unique users in 2017

EBRD

EC

IFC financing for Zagreb Airport expansion and modernization

Pillar II Innovation and Trade Competitiveness for Growth and Shared Prosperity

5. Improving efficiency and reducing arrears in the judicial system as

indicated by:

Case backlog in judiciary decreased

Baseline: 437,892 (2012)

Target: 394,103 (2017)

Integrated Land Administration System project (closing in April 2017)

Justice Sector Support project (closing in June 2016)


Justice Sector Public Expenditure and Institutional Review (delivered

2015)

Croatia: A Chronicle of Selected Justice Reforms (delivered 2015)

Potential DPL

Partners:

EC

6. Contributing to diversity and security of energy supply by

financing energy efficiency and renewable energy projects as

indicated

Additional renewable energy generation capacity installed

Target: 108 MW (2017)

GHG emissions avoided per year

Target: 75,000 tCO2 equivalent (2017)

IFC financing for three new Wind Power Plants (Sibenik, Jelinak,

Rudine)

Partners:

EBRD

EC

7. Supporting competitive local companies to expand in the region Export Finance Intermediation Loan (closing in August 2016)

19


and increase exports as indicated by:

Level of exports of beneficiary companies

Baseline: HRK 4.35 billion (2011)

Target: At least preserve the level of exports (2017)

Number of outstanding MSME loans in the portfolio IFC’s client

banks

Baseline: 6,000 (2011)

Target: At least preserve the same level (2016)

RAS Cluster’s Competitiveness in Croatia (approved 2016)

IFC investments in agribusiness and retail companies (Atlantic group,

Lidl Croatia)

Croatia Export Financing Guarantee Project (approved 2013)

IFC financing to export oriented companies, SMEs, private sector

infrastructure investments, FDIs and regional initiatives

IFC investments in financial intermediaries for on-lending to SMEs

(SocGen Croatia)

EPARIS9

Partners:

EIB

CEB

KfW


8. Improving coherence and credibility of national strategic and

policy documents needed for the EU funds absorption and

management as indicated by:

National strategic and policy documents, including sector specific

strategies, needed for the use of EU Funds, adopted by relevant

authorities

Baseline: no documents in place (2012)

Target Sector strategies adopted: (i) National Education, Science and

Technology Strategy; (ii) National Innovation Strategy;

(iii) Research and Innovation Strategy for Smart Specialization; (iv)

Policy advice/recommendations in the areas of irrigation, rural

development, transport, SME and water/environment sector; (v) National

Technical and Economic Study for Management of Wastewater Treatment

Sludge (2017)

EU Preparedness TA ( programmatic 2014-2016)

Public Finance Review (delivered 2014)

Integrated Land Administration System (closing in April 2017)

EU Water sector compliance Project - dropped

NRP TA (delivered 2015)

RAS Spatial Analysis of Poverty and Policies (approved 2016)

Partners

EC

9 Road to Europe Program of Accounting Reforms and Institutional Strengthening

20


9. Contributing to Croatia’s readiness and capacity to build the

project pipeline for absorbing EU Funds in selected sectors as

indicated by:

Number and value of project applications prepared and/or submitted for

financing from EU Funds in research and innovation and nature

protection

Baseline: no project proposals (2012)

Target: (i) At least 6 project applications for financing in research,

development and innovation sector, for the total value of projects

amounting to € 50 million;

(ii) At least 25 project applications for financing in the nature protection

sector, for the total value of projects amounting to € 50 million (2017)

EU Preparedness TA (programmatic 2014-2016)

EU Natura 2000 Integration (closing in April 2017)

Second Science and Technology Project (closing in June 2017)

Entire WB portfolio

Smart Specialization in Croatia – Inputs from Trade, Innovation and

Productivity Analyses

Partners

EC

21

Annex 2: Matrix of changes to original CPS Results Matrix


CPS Objectives and Indicators Revised CPS Objectives and Indicators


by:


Baseline: 2.7% (2012)

Target: 2.0% (2017)


by:


Baseline: 0.8 (2011)

Target: 0.9 (2013)

New Source: IOTA data

2. Improving the targeting of social assistance programs as indicated

by:

Means-tested programs as a share of all social assistance programs

increased


Target: 20% (2017)

No change

3. Introducing cost rationalization measures in the health sector as

indicated by:

Total public accrual health spending reduced

Baseline: 6.6% (preliminary, 2012)

Target 6.1 % (2017)

Further rationalization and reorganization of hospital system

Baseline: 6 beds used for hospital admissions per 1000 inhabitants (2012)

Target: 5 beds used for hospital admissions per 1000 (2017)

2. Introducing cost rationalization and efficiency measures in the

health sector as indicated by:

Total public accrual health spending reduced by .5 percent of

GDP between 2012 and 2017.

Note: the indicator remains unchanged. The change simply avoids the

link to the earlier baseline that was revised.

Updated indicator to be consistent with Health Sector Project

Disbursement Linked Indicator

Further rationalization and reorganization of hospital system--:

total number of acute care beds

Baseline 15,930 (2012)

Target: 12,800 (2017)


plans in railway sector as indicated by:


22




Baseline:


Target:






plans in railway and energy sectors and improvements in airport

infrastructure as indicated by:




Implementation of Croatia Energy Strategy 2009-20 related to the

renewable energy and district heating

Baseline:


Energy Strategy in place (2012)

Target:




Action plan adopted for feed-in tariffs for renewable energy

resources and for improving the efficiency of the district heating

sector.

Accommodate existing and future air traffic Baseline: 0.44 million unique users in 2013

Target: 0.60 million unique users in 2017

Moved to Pillar I (see above)

IFC added new indicator - unique users supported

23


5. Improving efficiency and reducing arrears in the judicial system as

indicated by:


Baseline: 498,601 (2012)

Target: 300,000 (2017)

The baseline and target numbers were not correct and were adjusted to

reflect the number in the project document.

Baseline: 437,892 (2012)

Target: 394,103 (2017)

6. Contributing to diversity and security of energy supply by

financing energy efficiency and renewable energy projects as

indicated by:

Additional renewable energy generation capacity installed

Target: 108 MW (2017)



Revised: The baseline number was not correct. Revised target showing

additional renewable energy capacity installed through IFC

investments.

Revised: IFC has revised its GHG emission target in Croatia because

its $75 million in the PBZ bank, with a focus on renewable energy,

was not disbursed.

7. Supporting competitive local companies to expand in the region

and increase exports as indicated by:



Target: At least preserve the level of exports (2017)

Number of outstanding MSME loans in the portfolio IFC’s client

banks

Baseline: 6,000 (2011)

Target: At least preserve the same level (2016)

IFC added new indicator – MSME loans through financial institutions


8. Improving coherence and credibility of national strategic and

policy documents needed for the EU funds absorption and


National strategic and policy documents, including sector specific

No change

24


strategies, needed for the use of EU Funds, adopted by relevant

authorities


Target Sector strategies adopted: (i) National Education, Science and

Technology Strategy; (ii) National Innovation Strategy;

(iii) Research and Innovation Strategy for Smart Specialization; (iv)

Policy advice/recommendations in the areas of irrigation, rural

development, transport, SME and water/environment sector; (v) National

Technical and Economic Study for Management of Wastewater Treatment

Sludge (2017)

9. Contributing to Croatia’s readiness and capacity to build the

project pipeline for absorbing EU Funds in selected sectors as

indicated by:

Number and value of project applications prepared and/or submitted for

financing from EU Funds in research and innovation and nature

protection


Target: (i) At least 6 project applications for financing in research,

development and innovation sector, for the total value of projects

amounting to € 50 million;

(ii) At least 25 project applications for financing in the nature protection

sector, for the total value of projects amounting to € 50 million (2017)

No change

25

Annex 3: Matrix summarizing progress towards CPS Objectives


CPS Objectives and Indicators Progress to Date (As of March 2016) Instruments

1. Improving sustainability of revenue

enhancing policy as indicated by:

Improved tax gap as a percentage of total

GDP

Baseline: 2.7% (2012)

Target: 2.0% (2017)

On track

Status: 2.5 % (2014)

Source: RAMP ICR

Ongoing activities at time of CPS:


RAMP (delivered 2015)

Planned CPS Activities:

DPL and ASA did not materialize

2. Improving the targeting of social

assistance programs as indicated by:

Means-tested programs as a share of all

social assistance programs increased


Target: 20% (2017)

Status: 17.2 % (2014)

The share of means-tested social programs in

overall central government social spending

increased from 16.1 percent in 2012. Bank

support has been through ERDPL2 and will

continue through the Social Protection System

Modernization Project approved in September

2014. The operation primarily focuses on

realizing administrative efficiencies in the

social sector.

Ongoing activities at time of CPS:


Planned activities:

Social Protection System Modernization

Project (approved in FY15)

DPL (dropped), but could be revamped.

Activation TA (regional, delivered)

PFR and NRP TA (delivered)

3. Introducing cost rationalization

measures in the health sector as indicated

by:

Total public accrual health spending

reduced

Baseline: 6.6% (preliminary, 2012)

Target 6.1 % (2017)

Met

The baseline has been revised to align fully

with an accrual method accounting.

Revised baseline : 7.6 percent (2012)

Status: 6.9 percent (2014)

Note: This target is considered met given the

revised baseline as health spending as a

Ongoing activities:


Development of Emergency Medical Services

and Investment Planning

Planned activities:

Health PFORR (approved)

DPL (dropped), but could be revamped

PFR and Spending Review (delivered)

26


Further rationalization and

reorganization of hospital system

Baseline: 6 beds used for hospital admissions

per 1000 inhabitants (2012)

Target: 5 beds used for hospital admissions

per 1000 (2017)

percentage of GDP has been reduced by .7

points surpassing the original target of .5

percent.

This PLR proposes to replace the

indicator on rationalization of hospital

beds with the DLI monitored under the

project, i.e., a reduction in the total

number of acute care beds by 20 percent

from 15,930 (2012) to 12,800 (2017). The

first stage of the DLI was achieved and

the 2017 target is expected to be reached

by CPS completion.


CPS Objectives and Indicators Progress to Date

(As of March 2016)

Instruments

4. Contributing to the coherence and

implementation of strategic plans in

railway and energy sectors and

improvements in airport infrastructure as

indicated by:

Implementation of restructuring plans for

railway sector companies and medium-

term strategy for the rail sector consistent

with the EU 2014-20 funding period

Implementation of Croatia Energy

Strategy 2009-20 related to the renewable

energy and district heating

On track

The work on railways has the support of a

newly approved project which will have its

impact in the following CPF. During the

remaining year of this CPS the delivery will

focus primarily on the restructuring plans for

the three railway companies and a medium-

term strategy for the sector, linked to the

funding of the EU.

Ongoing activities:

Railway Policy Note

Croatia Energy Sector Review

Planned activities:

Railway Lending (approved)

TA for Public Enterprise Reform (dropped)

Energy Vulnerability Note (delivered)

Partners:

EBRD

EC

27


Baseline:

Revised restructuring plans of railway

companies

Energy Strategy in place (2012);

Target:

Railway Modal Strategy 2014-2020 and

medium term contracts in place for Passenger

Services and Infrastructure Management


Action plan adopted for feed-in tariffs for

renewable energy resources and for improving

the efficiency of the district heating sector.

The indicator of a multi Modal Strategy is on

track to be met by CPS completion.

Met

Action plan adopted for feed-in tariffs for

renewable energy resources and for

improving the efficiency of the district

heating (DH) sector. The feed-in tariff system

for RER and DH was adopted in 2013, with

amendments in 2014 and 2015. The regulator

continues to improve the system and new

amendments are now envisaged.

The Bank contributed by reviewing the

methodology for feed-in tariffs, especially for

district heating sector, and provided

recommendation to HERA – Croatian Energy

Regulating Agency, some of which accepted

and adopted in the new tariff system, in

particular for the DH. Such recommendations

including the establishing prices for DH – to

be market-oriented and not to be government-

influenced.

28

5. Improving efficiency and reducing

arrears in the judicial system as indicated

by:


Baseline: 498,601 (2012)

Target: 300,000 (2017)

Met

Actual: 349,051 (2015)

As of April 2016, there are 349,051

backlogged cases in the courts. That is down

from 437,892 in 2010. This is considered

achieved if you consider the project target

indicator of 394,103 (2017). [Note Revised

figures for Baseline and Target]

Source: Justice Sector Support Project

Note: The Integrated Land Administration

project has made additional contributions by

reducing times to registering property and

reducing corresponding backlogs.

Ongoing activities:

Integrated Land Administration System

project (closing in April 2017)

Justice Sector Support Project (closing in

June 2016)

ERDPL2 (closed)

Planned activities:

TA on Public Administration (not

delivered)

DPL (not delivered)

Partners:

EC

6. Contributing to diversity and security of

energy supply by financing energy

efficiency and renewable energy projects as

indicated by:

Additional renewable energy

generation capacity installed

Target: 108 MW (2017)



Met

IFC has been supporting investments in the

energy sector, which has increased the

renewable energy installed capacity and

contributed to the reduction of the annual

GHG emissions.

WBG

Ongoing activities:

IFC investment in a wind farm

IFC financing to support renewable energy

projects

Planned activities:

IFC financing for renewable energy (three

power plants financed with IFC support

already commissioned)

IFC financing for energy efficiency

projects through financial intermediaries

(did not materialize)

Partners:

EBRD

EC

29

7. Supporting competitive local companies

to expand in the region and increase

exports as indicated by:



Target: At least preserve the level of exports

(2017)

Number of outstanding MSME loans in the

portfolio IFC’s client banks

Baseline: 6,000 (2012)

Target: At least preserve the same level

(2016)

On track

The exports of beneficiary firms has increased

by 20 percent as per the latest ISR of the

Export Finance Intermediation Loan

(P116080)—March 2016. As of the end of 2014, IFC reached 5,400

through the new client bank, which is

expected to increase by at least 10% by the

end of 2016.

Ongoing activities:

Export Finance Intermediation Loan

IFC investments

REPARIS

Planned activities:

Croatia Export Financing Guarantee

Project (approved)

IFC financing to export oriented

companies, SMEs, private sector

infrastructure investments, FDIs and

regional initiatives

REPARIS10

Partners:

EIB

CEB

KfW


8. Improving coherence and credibility of

national strategic and policy documents

needed for the EU funds absorption and


National strategic and policy documents,

including sector specific strategies, needed for

the use of EU Funds, adopted by relevant

authorities


Target Sector strategies adopted: (i) National

Education, Science and Technology Strategy;

(ii) National Innovation Strategy;

Met

National Innovation Strategy has been

prepared with contribution from Second

Science and Technology Project and adopted

Ongoing activities:

EU Preparedness TA (delivered)

Public Finance Review (delivered)

Integrated Land Administration System

EU Natura 2000 Integration

Second Science and Technology Project

Planned activities:

EU Water sector compliance Project

(dropped)

NRP TA (delivered)

Partners

EC

10

Road to Europe Program of Accounting Reforms and Institutional Strengthening

30

(iii) Research and Innovation Strategy for

Smart Specialization; (iv) Policy

advice/recommendations in the areas of

irrigation, rural development, transport, SME

and water/environment sector; (v) National

Technical and Economic Study for

Management of Wastewater Treatment Sludge

(2017)

December 2014 in line with Europe 2020

Strategy.

National Education, Science and Technology

Strategy, an ex-ante-conditionality for EU

funds, has been prepared under STP2, and

adopted by the Parliament in December 2014.

National Research Infrastructure Roadmap

was prepared under STP2 as an input for

Smart Specialization Strategy, as part of EU

funds requirements. The document is now

under revision to reflect the final version of

Croatia’s Smart Specialization Strategy,

which the Government adopted in March

2016.

Policy advice/recommendations in the areas

of irrigation, rural development, transport,

SME and water/environment sector have been

provided through EU Preparedness TA

throughout three years. Peer reviewing also

included the Partnership Agreement and

Operation Program Cohesion and

Competitiveness – the primary strategic

documents for EU funds 2014-20 ;

National Technical and Economic Study for

Management of Wastewater Treatment

Sludge addressed a EU requirement and was

prepared under the Coastal Cities Pollution

Control Project 2. A draft National Waste and

Leachate Management Plan was prepared

under the Regional GEF Adriatic project to

meet requirements under the EU waste

management Directive.

31

9. Contributing to Croatia’s readiness and

capacity to build the project pipeline for

absorbing EU Funds in selected sectors as

indicated by:

Number and value of project applications

prepared and/or submitted for financing from

EU Funds in research and innovation and

nature protection


Target: (i) At least 6 project applications for

financing in research, development and

innovation sector, for the total value of

projects amounting to € 50 million;

(ii) At least 25 project applications for

financing in the nature protection sector, for

the total value of projects amounting to € 50

million (2017)

On track to be surpassed.

The WB will help in the preparation of

applications for absorption of EU funds

estimated at over EUR 500 million, far in

excess of the EUR100 million euros foreseen

initially. Under the Second Science and Technology

project (STP2), six (6) project applications are

on course for an estimated value of EUR 150-

200 million. Of these six, 1 project already

received financing worth EUR 12.8 million; 4

large R&D infrastructure projects are under

preparation. Most of these applications are

expected to be completed by mid-2017, and

the rest by end-2018.

Under EU Natura 2000 Integration Project the

target remains on course. Four project

proposals are accepted and financed from EU

funds, while further 18 visitor infrastructure

projects worth EUR 87 million and 12

projects closely related to the nature

protection worth EUR 117 million are in final

stages of preparation. It is expected that these

projects will be implemented within EU

financial framework 2014-20.

Under Coastal Cities 2 Project, five (5)

projects design are being prepared for around

EUR 230 million and will be completed by

the end of 2016.

Under Rijeka Gateway 2 Project, one (1) EU

Ongoing activities:

EU Preparedness TA (delivered)

EU Natura 2000 Integration

Second Science and Technology Project

Justice Sector Support Project (closing in

June 2016)

Entire WB portfolio

Partners

EC

32

project application under EU Connecting

Europe Facility worth 30 million EUR has

already been approved.

Under the Justice Sector Support Project, the

Bank supported the preparation of two project

applications for EUR 10 million.

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