Romania - Employment and Social Protection Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6267-RO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$55.4 MILLION TO ROMANIA FOR AN EMPLOYMENT AND SOCIAL PROTECTION PROJECT OCTOBER 31, 1994 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIYALENTS Currency Unit = Leu (Plural Lei) AVERAGE EXCHANGE RATES 199 IM9 3/9 -9/94 US$1.00 = 76 308 600 1725 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CIC Career Information and Counseling IAS Industrial Adjustment Service LDP Letter of Development Policy MOLSP Ministry of Labor and Social Protection SAL Structural Adjustment Loan TA Technical Assistance TACI Technical Assistance and Critical Imports ROMANIA - FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ROMANIA EMPLOYMENT AND SOCIAL PROTECTION PROJECT Louan and Project Summary Borrower: Romania Beneficiary: Ministry of Labor and Social Protection (MOLSP) Amount: US$55.4 million equivalent Terms: Twenty years, including five years of grace, at the Bank's standard variable interest rate Financing Plan: Loca Foreign Total -- US$ million ----- Government 30.5 6.6 37.0 Canada 0.0 0.7 0.7 Germany 0.0 0.9 0.9 US Dept. of Labor 0.0 1.2 1.2 IBRD 9.6 45.8 55.4 TOTAL 40.1 55.1 95 2 Economic Rate of Return: Not applicable Poverty Category: Program of Targeted Interventions (see para. 20) Staff Appraisal Report: Report No. 12769-RO Map: IBRD No. 25020R This document has a restricted distribution and may be used by recipients only in the performance otheir official duties. Its contents may not otherwise be disclosed without World Banlk authorization. I   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ROMANIA FOR AN EMPLOYMENT AND SOCIAL PROTECTION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to Romania for the equivalent of US$55.4 million to assist in developing the social safety net needed to support the transition to a market economy. The loan will be at the Bank's standard variable interest rate, with a maturity of twenty years, including a five-year grace period. 2. Country and Sector Context. Romania's economy, after a decade of stagnation in the 1980s, has deteriorated dramatically over the past four years since the end of the Ceausescu era in December 1989. Output has dropped by 33 percent, and inflation has risen drastically, reaching 200 percent in 1992 and 295 percent in 1993. Although inflation appeared to be declining in early 1994, the level of unemployment rose to about 11 percent - a level which will continue to increase as the process of economic restructuring is undertaken. Improvements in economic performance and social welfare will require a number of difficult structural adjustments to overcome the economic policy distortions of the Ceausescu era, such as the forced industrialization of the economy and artificially maintained full employment. One result of these policy distortions has been that the majority of public enterprises are very poorly prepared to operate in a market economy. As in the past, they are overstaffed, employ obsolete technology, and are managed with little regard for market incentives. Moreover, the private sector remains small, and its limited growth under the slow pace of reforms has not yet substantially contributed to net job creation. Problems of structural unemployment, which are already developing, will undoubtedly continue to worsen. 3. Although wide-ranging economic reforms will be key to reversing these negative trends in Romania, measures to alleviate the unemployment resulting from these reforms also need to be implemented as a matter of top priority. These measures extend well beyond paying unemployment benefits; they include the creation of employment services which can provide proactive assistance to individuals - such as aggressive job placement programs, improved counseling in job search methods, the development of special approaches for dealing with large-scale layoffs, and the provision of demand-driven adult retraining. Nevertheless, the reality is that the current capacity of labor offices to effectively implement such measures is extremely limited: labor offices presently operate under a client:staff ratio greater than 600:1 (compared to an average of 100:1 in OECD countries) - barely enough capacity to keep up with even the most basic, "reactive' task of processing unemployment claims. 4. With respect to social assistance, the present system was designed for a socialist, full- employment economy, focussing only on the needs of special individuals, such as widows, orphans or the handicapped. This system, too, is overwhelmed by the social dislocation resulting from economic reforms. Many unemployed workers, having already exhausted their eligibility for unemployment benefits, have no recourse but to fall back on social assistance programs. Moreover, the effectiveness of present social assistance programs is aggravated by a number of institutional weaknesses, such as: excessive reliance on in-kind assistance through food canteens or orphanages; excessive fragmentation of social services; and lack of sufficient emphasis on targeted cash benefits to households in poverty. 5. The social insurance system, which provides pensions and disability benefits, also has serious problems of financial viability, and the urgent need to reform the system must confront these fiscal realities. Romania can no longer afford the previous levels of spending on social insurance (about 7 percent of GDP in 1992). GDP has fallen 32 percent over the past three years and is not expected to rise soon, a reality which, along with an aging population, lies at the heart of the social insurance problem. Poverty among pensioners is increasing due to rapid inflation over past years -- a prospect faced by many other older workers about to retire. Romania simply cannot afford a generous social insurance systems on the order of the well known French, German or Scandinavian systems; and even in these high-income countries, fiscal realities and labor market concerns -- such as weak incentives for workers to rejoin the labor force or firms  - 2 - to create jobs - are causing policymakers to reconsider benefits and contributions features that have long been taken for granted. 6. Government Strategy. A Letter of Development Policy (LDP), signed jointly by the Ministers of State for Finance and for Labor and Social Protection, was received by the Bank in October 1993. This LDP outlines the Government's policy framework with regard to social safety net issues, including its commitment to strengthening and improving systems already in place in the areas of unemployment benefits, employment services, and retraining programs, and relinquishing its monopoly over the latter in favor of a more flexible approach guided by a partnership of private and public employers, trade unions and ministries. 7. It should also be noted that the MOLSP, as the lead agency of the Government in the provision of a social safety net, has completed two substantial White Papers, one on social assistance and the other on social insurance. These White Papers, which spell out the Government's reform program in social assistance and insurance, were prepared over the past year with the full participation of MOLSP top management and professional staff, announced in press conferences, and then published for public discussion and comment prior to formulating legislation. The Social Assistance White Paper proposes the introduction a new system of cash benefits focused on those in deepest poverty and most likely to suffer economic hardships during the transition. The Social Insurance White Paper proposes unifying the many different pension funds, raising the retirement age, introducing better financial management of social insurance funds and beginning the gradual development of a private pension system to complement the public one. These White Papers were well received and generated significant attention in the press. Given the repressive policies of the Ceausescu regime, this open discussion marks a significant change in Romanian social policy and has fostered strong Government ownership of the social policy strategy being pursued. 8. Rationale for Bank Involvement. In order for sustainable economic and employment growth to resume, the Government must undertake comprehensive macroeconomic and sectoral reforms. The Bank is supporting such macroeconomic reforms through the FY92 Structural Adjustment Loan (SAL), which includes reforms in the social sectors, such as extending child allowances to workers in the private sector and limiting the budgetary impact of child allowances to less than 2 percent of GDP. The most recent Country Assistance Strategy, discussed at the Board on April 5, 1994, recognizes the economic justification for the public sector to play the major role in the social safety net, thus freeing private firms to operate more efficiently in a market environment. Recognizing both the urgency and the difficulty of developing an effective social safety net, the MOLSP has requested Bank support for developing a unified set of programs to cope with both the employment and social consequences of these reforms. Thus, the project is central to the success of the Government's strategy for structural adjustment and is consistent with the Bank's Country Assistance Strategy to Romania. 9. Lessons Learned from Previous Bank Operations. The Bank has acquired the requisite sector knowledge through its analytical work and dialogue with the Government in the social sectors, which resulted in a red cover report (Romania: Human Resources and the Transition to a Market, 1992) covering social sector issues in detail. This report was widely discussed in Romania. An Employment Component was included in the Technical Assistance and Critical Imports (TACI) Project (FY91) to meet critical needs and to establish the MOLSP's capacity to prepare and implement a larger follow up project. The preparation of the Employment and Social Protection Project and the Education Reform Project (Loan 3724- RO, FY94) was begun in parallel so that a coherent strategy could be followed in related areas, such as vocational training, occupational standards, and employment counseling. To supplement the support of the TACI Project, the Bank arranged for two Japan Grants of approximately US$425,000 for employment and training activities (shared with the Ministry of Education) and US$600,000 for social protection (which supported the preparation of the White Papers for the reform of social protection and pilot project offices for social assistance).  - 3 - 10. Although the PCU established in the MOLSP to coordinate the implementation of the Employment Component of the TACI Project initially experienced a number of management problems - this project being the first Bank-financed project for the MOLSP -- the performance of the Unit is much improved, and it is now successfully carrying out its tasks. The PCU has already been expanded in preparation for the Employment and Social Protection Project, and additional training in crucial areas such as procurement has been provided. The project will also provide for technical assistance (TA) to the PCU in those areas where difficulties have arisen in the TACI Project (e.g., preparing and evaluating bids, and general project management skills). 11. Project Objectives. The specific project objectives are to: (a) strengthen the capacity of the labor offices to administer the increasing numbers of claims for unemployment benefits and active labor adjustment services; (b) develop a flexible adult training system which responds to evolving labor market demand resulting from economic restructuring; and (c) implement reforms in social insurance and assistance programs, targeting those population groups which are most vulnerable to falling into poverty during and after the transition to a market economy. 12. Project Description. The project, which will be implemented over a five-year period, will finance civil works, equipment and materials, vehicles, computer hardware and software, technical assistance, external and local training, and incremental operating costs. The project has three components: General Management and Policy Component (US$26.5 million). (a) Monitoring and Policy Analysis of the programs to be introduced under the two components below so that the MOLSP will have the capability to evaluate and improve the cost-effectiveness of these programs; (b) Automation of the labor and social protection offices to support and improve the management of the programs to be introduced; and (c) Project Management support to expand the already functioning PCU under the TACI Project, enabling support (e.g., overall coordination, procurement) to the technical departments responsible for implementation. Employment and Training Component (US$46.1 million). (a) Employment Services which will improve the organization and delivery of services in the labor offices, including development of Industrial Adjustment Services to deal with large-scale layoffs; (b) Career Information and Counseling (CIC) which will develop modern materials and techniques to support occupational counseling in labor offices and schools; and (c) Adult Training for employed and unemployed workers to reorient and improve their skills for a market-oriented environment. Social Protection Component (US$9.0 million). (a) Social Insurance reforms, based upon a Government White Paper, which will restructure the social insurance agency to unify the various pensions funds, and improve its financial management, contributions records system, and benefit disbursements; and (b) Social Assistance reforms, also based upon a recently completed Government White Paper, which will develop an integrated system of cash benefits to replace the currently fragmented system, improve the organization and effectiveness of social service delivery and target assistance to those most vulnerable to poverty. 13. Project Costs and Financing. Total project cost is estimated at US$95.2 million equivalent, including taxes and duties. The foreign exchange component of the project cost is estimated at US$55.1 million (about 58 percent of total project costs). The Bank loan will be for US$55.4 million, and cofinanciers (Canada and Germany) will provide an estimated US$1.6 million in grant funds for technical assistance, agreements for which must be finalized as a condition of effectiveness. To allow more time for finalizing an agreement with the United States' Department of Labor for an estimated US$1.2 million in grants for technical assistance, the condition of effectiveness applies only to the US$1.6 million of cofinancing (see para. 17). The Government will provide US$37.0 million equivalent in support of project  - 4 - activities. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement, and information on disbursements are shown in Schedule B. The timetable of key project processing events, and the status of Bank Group operations in Romania are presented in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 12769-RO, is being distributed separately. 14. Project Implementation and Sustainability. The project will be implemented by the MOLSP. The PCU of the TACI Project is now operating satisfactorily, with all TA activities nearing completion and the first major procurement of computers under way. The PCU has already been expanded for this project, and its support role to the Technical Departments has been more clearly defined. The MOLSP is committed to adding the staff needed to sustain the required development and expansion of its services that will take place under the project. The incremental staffing costs of the project will average about US$2.8 million per year over the life of the project (or about 1.3 times the salary budget of the MOLSP in 1992). However, the Government has agreed with the Bank and the IMF to reduce budget subsidies in other areas, which in turn will make the incremental recurrent costs of this project sustainable. In addition, cost recovery in the form of enterprises paying a share of the training cost for their workers will also enhance sustainability. 15. The budgetary costs of the social insurance and assistance benefit payments are not included in project costs since these are neither investment nor recurrent costs, but represent transfer payments for social protection. The actuarial projections and analysis carried out during preparation of the Social Insurance White Paper (October 1993) show that the State Insurance Fund (SIF) will remain in balance, or at a slight surplus, as a result of reforms that will increase the retirement age. Thus, it will not be necessary to cover the SIF expenditures from the State budget. However, the public budget will be the source of financing for new cash benefits targeting households in deepest poverty. The reforms will limit the eligibility criteria and the level of benefits so that the total cash benefits programs amount to less than one percent of GDP. Thus the social insurance and assistance transfer payments will not constitute an undue fiscal burden. 16. During negotiations the Government provided assurances that it will: (a) ensure that all essential staff required for the carrying out of the Project shall be appointed by June 30, 1995 and it is expected that the Government would i) designate at least seven full- time staff (from the Employment Department of MOLSP or the Research Institute for Labor and Social Protection) to be responsible for the implementation of the employment services component, ii) identify, in cooperation with the NTB, the host agency for the IAS and appoint the core working team, and iii) assign, in cooperation with the other agencies signing the CIC Protocol, ten full-time professional staff, in addition to sufficient support staff to ensure development and ongoing implementation of the CIC in Romania (no later than June 30, 1995); (b) review sectoral reform progress annually with the Bank according to an agreed set of monitoring indicators and prepare jointly with the Bank a mid-term review to verify that the project components are operating according to the agreed criteria and procedures and to incorporate modifications where necessary (no later than June 30, 1997). 17. Conditions of effectiveness are that all conditions precedent to the effectiveness of Cofinaniciers Agreements providing for loans and grants in an aggregate amount of US$1.6 million equivalent have been fulfilled and that the firm to provide TA for the PCU has been selected. 18. As conditions of disbursement on the social insurance and social assistance subcomponents, the Government agreed that withdrawals shall be subject to the enactment of Social Insurance and Social Assistance laws, reflecting the principles set forth respectively in the Social Insurance White Paper and the  Social Assistance White Paper (previously finalized by the Government and agreed with the Bank), and the completion of the implementing arrangements for these laws. 19. Environmental Aspects. This project is in category C. Consideration will be given to environmental issues, where appropriate, in the design of training programs. 20. Proeram Objective Categories. The project falls with the category of program of targeted intervention by alleviating poverty and improving labor mobility, skills, and public sector management. Therefore, the following categories are applied: Poverty Reduction and Human Resources Development - 60 percent; Economic Management - 30 percent. 21. Benefits. The project will greatly assist in the restructuring of the economy by strengthening the capacity to cope with unemployment, improving labor mobility, and providing the new skills needed in a market economy for both workers and managers. Moreover, the social safety net which the project will help to build up, will strengthen the political will to persevere with economic reforms during a period when poverty and other social problems intensify. 22. Risks. A major risk to successful implementation of the project is that the present implementation capacity of the MOLSP is insufficiently developed relative to the complexity of the tasks of building up both reactive and proactive employment and social protection programs. Although MOLSP has now acquired implementation experience in the smaller-scale TACI Project, this much larger project will require strengthening the implementation capacity of the MOLSP. The implementation plan incorporates lessons learned in the TACI Project, and appropriate and sufficient amounts of TA and training, focusing on helping the MOLSP make the transition to large-scale project management. Nonetheless, intense supervision from headquarters and the resident mission will be required to minimize the risks posed by weak implementation capacity. 23. A second important risk to successful implementation of the project is that of inadequate financing for the incremental recurrent costs, especially for additional staffing required under the Employment Services Component. This has been a problem in other countries in the region, especially as unemployment rises sharply and Government budgets become increasingly constrained, where additional staff budgets are not allocated to increase and improve the quality of services. This risk is being addressed by explicitly highlighting the need for incremental staffing, including it in the project cost and financing plan. 24. Recommendation. I am satisfied that the proposed loan will comply with the Articles of Agreement of Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. October 31, 1994  -6 - Schedule A ROMANIA EMPLOYMENT AND SOCIAL PROTECTION PROJECT Estimated Costs and Financing Plan ' (US$ million) Local Foreign Total I. General Management & Policy A. Monitoring & Policy Analysis 0.8 3.1 3.9 B. Automation 6.9 14.3 21.2 C. Project Management 0.4 1.0 1.4 Subtotal 8.1 18.4 26.5 II. Employment & Training A. Employment Services 12.9 5.8 18.8 B. Career Information & Counseling 2.7 3.5 6.2 C. Adult Training 6.5 14.6 21.1 Subtotal 22.2 23.9 46.1 HI. Social Protection A. Social Insurance 0.8 3.0 3.8 B. Social Assistance 2.8 2.4 5.3 Subtotal 3.6 5.4 9.0 Total BASELINE COSTS 33.9 47.7 81.6 Physical Contingencies 3.2 4.2 7.5 Price Contingencies 3.1 3.1 6.2 Total PROJECT COSTS 40.2 55.1 95.2b" Financing Plan: Lol Foreign lal - USS million Government 30.5 6.6 37.0 Canada 0.0 0.7 0.7 Germany 0.0 0.9 0.9 US Dept. of Labor 0.0 1.2 1.2 IBRD 9.6 45.8 55.4 TOTAL 40A 15A 2 AI Figures may not add up to totals due to rounding. k/ Including taxes and duties equivalent to US$8.7 million.  -7- Schedule B Page 1 of 2 ROMANIA EMPLOYMENT AND SOCIAL PROTECTION PROJECT Procurement Methods and Disbursements Summary of Proposed Procurement Arrangements (USS million) p/ P r o c u r e m e n t M e t h o d International Competitive Other N.3.F. b/ Total Bidding 1. Civil Works 1.1 Rehabilitation - - 3.8 c/ 3.8 1.2 New Construction 7.2 c/ 7.2 2. Goods 2.1 Equipment/Materials 20.4 2.9 23.3 (16.8) (1.9)d/ e/ (18.7) 2.2 Comfiputers 10.6 0.7 11.3 (8.7) (0.5)d/ (9.2) 2.3 Vehicles 0.7 0.7 (0.6) (0.6) 3. Consultancies & Training 3.1 Implementation Support - 1.0 - 1.0 (1.0) (1.0) 3.2 Institutional Development 11.7 1.5 f/ 13.2 (11.7) (11.7) 3.3 Studies 1.2 1.2 (1.2) (1.2) 3.4 Training 5.4 1.3 9/ 6.7 (5.4) (5.4) 4. Incremental Operating Costs 7.6 d/ 19.3 h/ 26.9 (7.6) (7.6) TotaL 31.6 30.6 33.1 95.2 (26-1) (29.3) (55.4) Note: Figures in parentheses represent the respective amounts financed by IBRD. a/ Figures may not add to totals due to rounding. t/ Non-Bank Financed. USS11.0 Govermnent financing. d/ International and Local Shopping: US$7.0 miLlion and USS3.0 million aggregate, respectively, including USS7.6 milLion for supplies. S/ Contracts for goods which the Bank agrees are of proprietary nature may be awarded after direct negotiation with suppliers, in accordance with procedures acceptable to the Bank. p/ US$0.2 million Canada; USS0.4 million Germany; US$0.9 million U.S. Department of Labor. gJ USS0.4 million Canada; USS0.5 million Germany; USS0.4 million U.S. Department of Labor. h/ Incremental operating costs, primarily incremental staff salaries and equipment maintenance, financed by the Government.  -8 - Schedule B Page 2 of 2 ROMANIA EMPLOYMENT AND SOCLAL PROTECTION PROJECT Disbursement 1/ Category IMOU X to be Financed (US$ million) 1. Goods 36.7 lOOX of foreign expenditures, lOOX of local expen- ditures (ex-factory cost) and 80X of local expenditures for other items procured locally 2. Consultants, services 6.4 lOOX and training 3. Incremental Operating 7.5 lOOX Costs (supplies) 4. Unallocated 4.8 Total 55.4 Estimated Disbursements IBRD FY 1995 1996 1997 1998 19I9 2000 2001 3/ Annual 5.0 13.8 17.6 7.4 6.0 5.0 0.6 Cumulative 5.0 18.8 36.4 43.B 49.8 54.8 55.4 Cumulative 9 34 66 79 90 98 100 as X of total I/ Figures may not total exactly due to rounding. 2/ Including taxes and duties of US$8.7 million. Actual disbursements have been estimated over six calendar years (i.e., 12 semesters), assuming project effectiveness 3rd quarter FY95.  -9 - Schedule C Page 1 of 1 ROMANIA EMPLODYMENT AND HUMAN RESOURCES PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: 20 months (b) Prepared by: Government, with external consultants and Bank assistance. (c) First Bank mission: February 1992 (d) Appraisal mission departure: June 1993 (e) Negotiations: September 1994 (f) Planned date of effectiveness: January 1995 (g) List of relevant PCRs and PPARs: None.  -10- THE STATUS OF BANK GROUP OPERATIONS IN ROMANIA A. STATEMENT OF BANK LOANS (as of September 30, 1994) Amount (USS million) Fiscal (less cancellations) Loan No. Year Borrower Purpose Bank Undisbursed Twenty-six non-pooled loans and seven pooled loans 2182.22 0.00 were committed from FY74 to FY82. These loans were fully disbursed by end-FY87 and fully prepaid by FY89. 3363-RO 1991 Romania Technical Assistance 180.00 32.56 and Critical Imports 3409-RO 1992 Romania Health Rehabilitation 150.00 111.73 3481-RO 1992 Romania Structural Adjustment 400.00 71.79 3486-RO 1992 Romania Private Farmer and 100.00 65.59 Enterprise Support 3593-RO 1993 Romania Transport 120.00 104.12 3724-RO 1994 Romania Education 50.00 50.00 3723-RO 1994 Romania Petroleum Sector Rehab 175.60 175.60 3735-RO 1994 Romania Industrial Development 175.00 175.00 TOTAL 1350.60 786.39 THE STATUS OF BANK GROUP OPERATONS IN ROMANIA B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1994) Amount (USS million) DATE BORROWER PURPOSE Loan Equity Total 1992 Alcatel Communication 5.85 0.69 6.54 Total Gross Commitments 5.85 0.69 6.54 Less: Cancellations, Terminations, Exchange, Adjustments, Repayments, Write-offs & Sales 1.24 0.00 1.24 Total Commitments now by IFC 4.61 0.69 5.30 Total Undisbursed IFC 3.98 0.01 3.98 Total Outstanding IFC 0.63 0.69 1.32 M:\ROM\SCHED-D  A 'S - S N ;4 FED, RP OF-- Vim g f puo t: : - ' t -Y E -t - S - e 2 y s 4R b : ,_ y ~~~~~~~~~~~~~~~~~~~~~~~~~~~/ Ah - AL;sA-~- *t , ,;L; =: d _ J 4 ',i ,- 1 - ' X --wA/ \' ,3 -