Romania - Employment and Social Protection Project

Document of The World Bank Report No. 12769-R0 STAF APPRAISAL REPORT RMIA EmPLOYmHEIT MID SOCIAL PRCTEEOIW PROJECT OCTOBER 31, 1994 IhZan Resources Sector Operations Division Central and Soutbern Europe Departments Europe and Central Asia Region  CU1RRENCYEOIANT Currency Unit - Leu (Plural Lei) US$1.00 = Lei 1725 (September 1994) WEIGHS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CICAG Career Information and Counseling Advisory Group CICWG Career Information and Counseling Working Group COPP Central Office of Pension Payments CTB Country Training Board ES Employment Services IAS Industrial Adjustment Service ICB International Competitive Bidding IRMD Information Resources Management Directorate LCB Local Competitive Bidding LDP Letter of Development Policy MOE Ministry of Education MOF Ministry of Finance MOI Ministry of Industry MOLSP Ministry of Labor and Social Protection NTB National Training Board OECD Organization for Economic Cooperation and Development POM Project Operating Manual PCU Project Coordination Unit RATC Regional Adult Training Center SBDs Standard Bidding Documents SOE Statement of Expenditures TA Technical Assistance TACI Technical Assistance and Critical Imports (Project) TCC Technical Coordination Committee TD Technical Department TOR Terms of Reference UB Unemployment Benefit VAT Value Added Tax DEFlNMflONS Romania is divided into 41 counties or districts called 'judets' which form the geographical base for both the territorially deconcentrated central govermment administration and the local government system. The counties are in turn divided into 2,948 municipalities, including 260 urban communities and 2,688 rural communities.  ROMMAIA Em"fOifAM RaECIN ROPCT grAFF Table of Contents Loan and Project Summary ............................................. i I. ECONOMIC REFORM AND THE SOCIAL SAFETY NET ...................... 1 A. 1ntrduction ............................................... 1 B. Ihe Curront System of Employment Services and Social Protection . ............ 1 C. Labor MarketIssues . ......................................... 3 D. Soci Policy IsNues .............................. 6 E. Govenment Sector Policies and Rationale for Ban............... 7 H. THE. T ................................................ 10 A. Project Objectives ........................................... 10 B. Project Description 1. General M naemet and Policy ............................. 11 2. Employent and Training Component ......................... 13 3. Social Protection ....................................... 18 M. P C FINANCING AND I.L...NTA.................... 22 A^. Projet Cons . ................................................. 22 B. Project Financig . .......................................... 26 C. Project Management and Implementation ............................ 27 D. Project Procurement and Disburement ............................. 31 E. Project Reporting ad Evaluation ................................. 34 F. Status of Prepaation ......................................... 34 TV. EEF. AND RSKS ............. .............................. 36 A. Benefits . ............................................... 36 B. Risks................................................... 6 V. AGREEMENTSREACHED AND RECOMMENDATION ..................... 37 This reort is based on findig of an appraial mission which visitod Romnia in JunmJuly 1993. Th nison compnped Maurice Boissim (Task Mag), Svemr Sirs i (Smnior Implemeation Specia), Louis Fox, (Eonomis), David Frtwel (Siior Employmmnt and Training Specialist), Richad Freami ojctx Officer - Reddeot Mision), Salbina Huffua (Program Assistant), and co.urtant Azas Ardhr (Social Asistnc), Phillip Juvis (Counsin, Jea-Paul Pe (Manageu Trn g), and Cnelo Uribe (Socia Astc). Ros Pam ad Toni Kol pwovide a tance with text proceig and editig. The Peor Rviwers are Arvil van Adam (ESP), Emmnuel Jim z (PRDPH) ad Sverir Sigurdason (ESP). Mr. Ralph W. Harbison is the Divisio Cief, and Mr. Michael H. Wih= the Contry Director.  RiMANI E3fPLQXNMaN AND SOCIAL PROIfEC1ON PROlECr rAEI APPRALREPOR Table of Contents (Continued) Table 3.1: Project Summary by Project Component ........................... 22 Table 3.2: Project Summary by Category of Expenditure ........ ................ 23 Table 3.3: Expenditure Accounts by Components ............. ............... 25 Table 3.4: Project Components by Financiers ............................... 26 Table 3.5: Expenditure Accounts by Source of Financing ........ ............... 27 Table 3.6: Financing Requirements by Project Year ........................... 27 Table 3.7: Procurement Arrangements .31 Chart 3.1: Implementation Arrangements .28 Annee Annex 1: Institutional Description of the Cash Benefit System .................... 41 Annex 2: Labor and Social Statistics ................................... 59 Annex 3: Leter of Deveoment Policy .................................. 69 Annex 4: Social Assistance White Paper: Executive Summary ....... ............. 77 Annex 5: Social Insurance White Paper: Executive Summary ....... ............. 85 Annex 6: Career Infbrmation and Counseling Protocol ......... ............... 93 Annex 7: National Training Board Protocol ............................... 97 Annex 8: Criteria for Adult Training Programs ............................. 101 Annex 9: Detailed Costs and Implementation Schedule ........ ............... 111 Annex 10: Summary of Technical Assistance . .............................. 133 Annex 11: Summary of Fellowships andT ............Train............... 139 Annex 12: Estimated Disbursement Profile ................................ 143 Annex 13: Monitoring Indicators .145 Annex 14: Project Objectives and Activities Matrix .151 Annex 15: Implementation Plan .185 Annex 16: Supervision Plan .195 Annex 17: Base Procurement Implementation Plan .197 Map: IBRD 25020R  ROMANIA EIOYMT AND SOC&IA PROTECrION PROJECT Loan and Project Summary Borrower: Romania Benefcdaa: Ministry of Labor and Social Protection (MOLSP) Amount: US$55.4 million equivalent TerIms: Twenty years, including a five-year grace period at the BRD standard variable interest rate. Project Objectives: The project will support the Government's efforts to alleviate unomployment and poverty, improve the efficiency and affordability of employment and social protection services, and promote labor productivity and economic competitiveness. The specific objectives of the project are to: (a) strengthen the capacity of labor offices to administer increasing mumbers of claims for unemployment benefits and active labor adjustment services (e.g., job placement, employment counseling, training); (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. Project Description: The project will be implemented over a five-year period by the MOLSP. The total project cost is estimated at US$81.6 million base cost, and US$95.2 million total cost (including contingencies). The project will finance civil works, equipment and materials, vehicles, computer hardware and software, technical assistance, external and local training, and incremental operating costs. lhe project comprises three interrelated components structured as fbllows: I. General Management and Policy: (a) Monitoring and Policy Analysi of the programs to be introduced under Components II and m below, so that the MOLSP will have the capability to evaluate and improve the cost- effectiveness its programs; (b) Automation of the labor and social protection offices to support and improve the management of programs to be introduced; and (c) Project Management support to expand and stregthen the already functioning Project Coordination Unit established under the Technical Assistance and Critical Imports (TACI) Project, enabling support (e.g., overall coordination, procurement) to the technical departments responsible for implementation.  _jj- II. Eplonyelnt and Training: (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 which will develop modem materials and techniques to support occupational counseling in labor offices and schools; and (c) Adult Trainig for employed and unemployed workers to reorient and improve their skdlls in a market-oriented environment. m. Sodal Protection: (a) Sodal Insurance reforms, based upon a receady completed government White Paper, which will restructure the social insurance agency to unify the various pension 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 of social service delivery and target assistance to those most vulnerable to poverty. Benenfts adARbka: Benefia. The project will significantly assist in the restructuring of the economy by stengthening the capacity to cope with unemployment, improving labor mobility, and providing the new skills needed in a market economy. Upon completion of the project, Romania will have in place an employment service and job training system which will quickly respond to shifting market needs. The MOLSP will improve Its organization and management capabilities through the automation and project monitoring to be put into place. The social safety net, which the project will help build up, will strengthen the political will needed to pursue economic reforms during the period when poverty and other social problems intensify. These benefits from the social safety net are not just of a humantarian nature but, as demonstrated by the experience of OECD countries, represent a significant investment in human resources and contribute to financial savings by avoiding more serious problems resulting from neglect of pressing social needs. Risk. A major risk to successful implementation of the project is that the present implementaion 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 incorporate lessons learned in the TACI Project, and appropriate and sufficient amouns of TA and training, focusing on helping the MOLSP make the transition to largescale project management. A project supervision plan has been formulated to assist the MOLSP in following Bank guidelines by helping in the preparation of standard bidding and contract documents. Nonetheless, intense supervision from headquarters and the resident mission will be required to minimize the risk posed by weak implementation capacity.  A second important risk to successful implementation is that of inadequate financing for the incremental operating 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. Ibis risk is being addressed by explicitly highlighting the need for incremental staffing, including it in the project cost esdmates, and securing the commitment of both the Ministry of Finance and the MOLSP to adequate staffing levels.  -iv- Estimate Project Costml L L Forein T -USS million- 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 H. Employment & Training A. Employment Services 12.9 S.8 18.8 B. Career Information & Counseling 2.7 3.5 6.2 C. Adult Training 6.5 14.6 21.1 SubIoal 22.2 23.9 46.1 m. Social Protection A. Social Insurance 0.8 3.0 3.8 B. Social Assistance 2.8 2.6 5.3 SubtotaI 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 PROJCT COSTS 40.1 55.1 95.2Lb Financng Plan: -JUSS 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 2 Estimated Disbursemet IBRD FY l9 9S 1226 1227 1299 2QQ ZQ1! Annual 5.0 13.8 17.6 7.4 6.0 5.0 0.6 Cumulative 5.0 18.8 36.4 43.8 49.8 S4.8 55.4 cumulative 9 34 66 79 90 98 100 as % of total 11 Figures may not total exaucly du to rounding. 21 Including taxes and dutie of US$8.7 million. 1/ Acual disburments have bee estimaed over ax calendar year, assummg project effectiveness tird quarter FY95.  ROMANIA EMPLOYMENT AND SOCIAL PROTECTION PROJECr I. ECONOMIC REFORM AND THE SOCIAL SAFErY NET A. Introductio 1.1 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 infladon 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 munber 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. 1.2 The current social protection system, which was designed for a socialist, full employment economy, and met only the special needs of individuals, such as widows, orphans or the handicapped, has also been overwhelmed by developments over the past four years. This outdated system cannot cope with the social consequences of structural adjustment. Although living standards may well rise in the medium to long run as structural adjustment proceeds, the Government recognizes the urgency of developing new active labor market policies and social safety net programs that aim to help alleviate unemployment and poverty during and after the transition period. B. The Current System of Employment Services and Social Protection 1.3 There are two broad categories of cash benefits provided by the current system - those based on contributions by beneficiaries, such as unemployment benefits and pensions, and those funded out of the state budget, such as child allowances and social assistance benefits. These benefits are administered mainly by the Ministry of Labor and Social Protection (MOLSP) with some involvement from enterprises for social insurance benefits, and from local governments for social assistance benefits. Most of these benefits, especially the pro-natalist ones to encourage larger families, were inherited from the communist era, but others have been put in place since 1990, such as the unemployment benefit (UB) scheme which became law in December 1990 and was extended in 1992. Cash benefits and services for the handicapped were created and their administration transferred from MOLSP to the Secretariat for the Handicapped in 1991; other benefits were reformed (child allowance, social canteens). There were no means-tested cash benefits programs targeted on poor households.  -2- 1.4 To carry out its programs, the MOLSP has an extensive network of local offices throughout the country. In each of Romania's 40 districts or counties (judets) there is a MOLSP directorate, which is the deconcentrated authority of the MOLSP in the judet and has the same structure as the Ministry (see Annex 1 for an organization chart and detailed description of benefit programs). Most districts have a main MOLSP office and several branch offices; the Municipality of Bucharest is divided into seven district offices. All of the 40 judet main offices include sections (and sometimes separate facilities) for labor (employment), social assistance and pensions services. Including branch offices, the resulting network totals about 170 labor offices and about 50 social assistance and pension offices, representing the MOLSP's safety net service delivery points. 1.5 Unenployment benefits (UB). At present, eligibility for UB extends to anyone over 18 years old who is unemployed due to liquidation or shrinkage of a firm or is a new entrant to the labor force 1'. The UB scheme is funded by a 5 percent tax on the wage bill of enterprises and a 1 percent tax on the wages of employees. The level of benefit ranges from 50-60 percent of the annual average wage in the last job (depending upon the length of time in the labor force) or from 75-85 percent of the minimum wage if the last wage was below minimum wage. The duration of benefit is 270 days, with a possible extension of 270 days at a lower rate of benefit. Benefit checks, once approved by the local labor offices, are delivered through the postal system. The unemployed report to the local labor offices to register, and must report back at least once a month to confirm their unemployment status. 1.6 ocial insurance. Social insurance has widespread coverage in Romania. It includes essentially universal entitlement to old age, disability, and survivors' pensions, as well as sick and maternity leaves. The system is complicated by the existence of multiple social insurance funds. The main state pension system covers roughly three quarters of the labor force. There are at least ten other smaller social insurance funds, the agricultural fund being the most important one. The other funds attend to specific occupational categories (artists, clergymen, etc.). The average pension benefit from the main State fund equals about 40 percent of the average gross wage, and the replacement rate is 52 percent on average (higher for recent retirees). Social insurance benefits are not taxable. They are funded by a payroll tax, paid mostly by the employer on behalf of the employee. Sick leave and maternity leave are administered mainly through the enterprises. The Central Office of Pension Payments (COPP), under the supervision of MOLSP, along with the enterprises and the banking system, is much more involved in the administration of the old age and disability pensions. The banks receive the insurance contributions from enterprises which are then transferred to the pension fund account of MOLSP. Pensioners must visit the Social Protection unit within the local MOLSP office to register and have their eligibility for pensions approved, but payments are made regularly through the postal system. In 1992, responsibility for funding and monitoring the first ten days' sick leave was transferred from the social insurance agency to the enterprises, resulting in a substantial reduction of expenditures on these benefits. 1.7 Sialaistanc. Social assistance, by contrast, has reduced coverage and consists mostly of the delivery of cash benefits, most of which are not means tested. In the past, the system included the provision of expanded social support services, but since the 1970s this function has been reduced. At present, very limited social support services are offered: they include free meals at social canteens, [/ Thu Ia fsswi a ae2Uy a mm tod benet an apli oly to unemployed school leve fm low inwom househods. It iu to be iegratd inw the ne sa easistm befit schem.  -3- voluntary placement of children in foster families, placement of the elderly in pensioners' homes and of juveniles in detention centers, and one center for street children. Each MOLSP district office has a social assistance unit with an average staff of five; the central unit at the Ministry consists of 16 staff. The benefits paid through social assistance offices include the allowances for mothers of three or more children, birth indemnities, benefits for the wives of soldiers, voluntary foster family placement benefits, and circumstantial benefits for pensioners. Although not based on contributions, the child allowance for children of State workers was traditionally administered through the enterprises. Recently, a new law stipulated that the allowance is for all children, not just those whose parents are State workers, and its administration has been shifted from the enterprises to the social assistance system. These child allowances account for 80 percent of all social assistance expenditures. Approval of free meals at social canteens and of quarterly benefits for the destitute is given by social assistance offices and funded by MOLSP and local government, and these services are administered by the local authorities. Although the MOLSP is not directly responsible, institutionalization of children is widely used for children's welfare. In 1991, more than 92,000 children were living in these institutions which are, like other institutions for the handicapped and the elderly, administered by other ministries and bodies. No programs exist to assist the working poor. C. Labor Market Issues 1.8 A successful transition to a market economy requires the development of functioning labor markets as well as product and financial markets. During this period of stabilization and restructuring, labor market problems will intensify. Unemployment will continue to increase. lnstitutions need to be strengthened to accelerate market adjustment. However, present employment services are inadequate. In some cases, unemployment will result from large-scale layoffs that affect whole communities and require special approaches. Active labor market measures, such as retraining, are also needed for some workers. These issues are discussed in the following paragraphs. 1.9 Rising unemployment and ineffective employment services. By September 1993, labor offices had a client:staff ratio of 668:1, compared to an average of 100:1 in OECD countries. Consequently, staff can barely keep up with the most basic activity of processing unemployment claims (see Annex 2 for statistical information on unemployment and the labor force). However, it is not enough merely to process unemployment claims and let the unemployed fend for themselves without any other kind of support, especially in countries where unemployment is a new phenomenon. 'here is the need for more proactive measures, in addition to unemployment benefits, such as effective job development and placement programs for clients, improved counseling of clients in job search methods, directing clients who can benefit from retraining to appropriate programs, and screening clients likely to be successful in self-employment and direcing them to the appropriate small business assistance agencies. All of these new services require increases in staffing, especially at a time of rising unemployment, as well as a different skills mix among the staff. 1.10 Private employment services could play a role in helping meet this need. These services are allowed to operate under Romanian commercial law, which places no more restrictions on them than on any other commercial venture. It is expected that these services will become providers of specialized manpower services, as has been the case in other OECD and formerly centrally planned economies. Private employment services are usually effective in special niches of the labor market, such as certain professional occupations, and develop on their own based upon private profit incentives without the need for government subsidies, as long as the legal framework does not hamper them. However, private employment services cannot profitably provide, in Romania anymore than  -4- elsewhere in the world, the integrated system of unemployment and social assistance claims processing and the needed assistance to workers lacking in basic educational background or in need of extensive, retraining. The existence of capital market and information imperfections and social externalities provides a theoretical rationale for carefully designed improvements in public employment services. There is also the practical rationale that the public employment services already exist, and constitute a significant charge on the public budget while operating ineffectively and inefficiently, coupled with the reality that it will take some time for an extensive private sector to fully develop. Through careful improvements in public employment services while allowing private employment services to continue to develop, Romania should move towards a good balance of private and public employment services, which will complement rather than compete with one another; this shift will move Romania into the mainstream practice with OECD and middle-income industrialized countries. 1.11 Coping with large-scale lavoffs. Although quantitative estimates of future large-scale layoffs are not easy to obtain, many informed observers conclude that at least 20-25 percent of workers currently in State enterprises can potentially be considered surplus. This conclusion is plausible considering that industrial output has dropped by 50 percent since 1989, and industrial employment has only dropped by 25 percent.2' To date there have not been any large-scale layoffs, but the MOLSP esimates that, if these enterprises are restructured or privatized, an additional 1.5 million workers would be threatened with job loss in the process. There is no specific advance notice legislation pertaining to layoffs of large groups of workers, other than the standard two week notice applicable to all workers under labor regulations governing hiring and firing. Experience in other countries clearly shows that adequate advance notice legislation in the case of large-scale layoffs provides a useful first step in facilitating the smooth adjustment of affected workers. Effective advance notice legislation is intended to ensure that the employees to be laid off, the enterprise, the community, and the local authorities are sufficiently forewarned of the actual layoff to allow for early intervention. Most countries with functioning labor adjustment mechanisms have two to three months advance notice provisions. Mass layoff techniques, such as bringing together the management and workers of firms before the layoffs take place, would prove useful in those regions most heavily affected by unemployment. Professionally trained facilitators can assist management and workers by preparing profiles of the firm's labor force and how best to assist in their redeployment to other jobs. However, in addition to appropriate legal measures, effective mass layoff techniques require a set of functioning proactive employment measures, such as job training or small business assistance programs, as well as a service delivery mechanism to access these measures effectively, none of which exist in Romania. 1.12 Structural unemployment and inadequate adult training. The gap between the skills distribution demanded by the emerging market economy and that supplied by a labor force trained under central planning has already resulted in structural unemployment (as contrasted with cyclical, 2I However, emtn pl labor ill formly otmly plauned ecomm ia ompo d ia moat oouni woud requir relia umple wneys of firm. In a ompoettive nud eonomy, a 25% fall in emlynut due to a 50% fall in output wWld imply an employm-outut eiaatiay of 0.5, flectinS hift in product demand, facor propoat, etc., nthr thin hoarding of kW naum of labor. Nonedwle, k hs bem domento in the comparatve economics itaure tht labor hoarding w* a conmm pattem of behavio on the put of firm in most caliat e_conom pior to 1989. In addition, theme .od other Loctive nsfrlienoie, e.g., abaidized Stat finne contitaing to peduce thd wnig mix of prduct. Viaib by Bank niasions to Romanian anteprim confirm unwaratod inventoy accumulation, uch - machine lather, for wbich them is no realisic maukt denand.  -5- frictional or seasonal unemployment). lhis is based on the view of the labor market, not just as an aggregate demand and supply system, but as a system of distinct, intng labor markets that determine the structure of wages, employment, vacancies and unemployment. Recent research on labor markets and economic restructuring in Romania shows that unemployment already has a significant structural component, in addition to unemployment from the drop in aggregate demand.> While sound macroeconomic policy is needed to address aggregate demand deficiency, active labor market programs, e.g., improved job matching and retraining, are needed to address structural unemployment. Yet vocational training institutions, under the MOE, continue to graduate narrowly trained workers using outdated pedagogy and equipment. State enterprises are more interested in shedding than training workers and, when they do provide training, are only capable of on-the-job training in fields for which there is declining demand. Furthermore, young adults have traditionally been trained in a system with an excessively high proportion of overly specialized technical and vocational secondary schools (75 percent of secondary level enrollment). 1.13 At present, both schools and labor offices lack a comprehensive, national source of caree (occupational, educational, training, labor market) information. Career decisions are based more upon traditional family influence and examination results than informed choice. As a result, most youth and adults are exposed to incomplete and often inaccurate information on only a fraction of their actual career options. 1.14 In addition, few individuals are being retrained in Romania Oess than two percent of the unemployed in 1991 as opposed to 10-20 percent in OECD countries), and the current retraining programs of the MOLSP are not effective. Labor office sponsored training programs have low placement rates (about 15 percent on average) because, among other reasons, the staff cannot provide proper screening and counseling backed up by adequate labor market analysis. With unemployment rates which could average above 10 percent for the next five to ten years, large nmubers of workers will need effective retraining annually. Although precise forecasts are not feasible, with the Romanian labor force numbering about 11 million workers, training even 10 percent of the pool of unemployed (about 1.1 million) would require an adult training system that could meet the needs of 100,000 workers each year. In addition to unemployed workers, many workers change jobs without any or very short periods of unemployment, yet many of them also need retraining to improve their productivity in their new jobs. If Romania is to increase its human capital stock per worker to complement the needed expansion and renovation of its physical capital per worker, a major restructuring of the adult training system is required. As in the case of the employment services, the adult training system must rely upon private financing where the private rate of return is adequate and State financing where the social returns exceed the private returns. There should also be an appropriate balance of both private and public provision of training. 1.15 A dynamic, market-driven system of adult training, outside the monopoly control of the Ministries of Labor and Education, administer primarily by employer and labor representatives, is needed. A diversified and decentralized approach is needed to develop such a system. First, some I/ Rmreh in Romaia wa oonductd a pe of a Iuger DI a sDu qond resaeh projet on Eoononm Reatuictg iN Labor Markaul in the Esm Euepe and Russia. All of th couriy cae sudies in this reerh project dommet this to varyin degree, but th Romania ca dy confimu that es panning under the Ceausescu reime inroduoed mom bvee dimortions. See EmDlvmeat wnd Wan Detminaton. Unmolobnta and Labor Policies in Rom, J. Ear and 0. Oprs (Pae prepard for World BDan Canfeence on Unmuploymat, R _saucuin and the Labor MareW in Etrn Earope and Ruasia, October 1993).  -6- individual training programs in existing public institutions can be revitalized, and new private training programs encouraged, provided they meet minimum pedagogical and labor market demands. Second, a more comprehensive overhaul of the governance and operation of exist taining facilities should be undertaken so that they can provide the broader range of community-based waining services needed by adults that are common in modern market economies, but not yet available in most Romanian institutions. It is crucial tha such a diversified approach be used becuse, while some capacity exists for adult training, the broad institutional base for a modern adult training system does not exist in Romania. Financial support to exist training institutions, without a major change in govenance and approach, or encouraging a frgmented short-term response from the private sector, will not result in the types of adult training services needed in Romania. D. Social Policy Issa 1.16 Even if the issues discussed above are successfully addressed, a well functioning labor market still may not prevent some individuals and households from falling below society's minimally accepted standards of living and dignity - as is more likely to be the case during the period of transition to a market economy. Thus issues of poverty alleviation, institutional weaknesses in delivering new social safety programs, and the affordability of such programs in light of fiscal constraints need to be addressed. 1.17 mM. The hardships inherited from decades of communism are compounded in Romania by new problems stemming from the transition to a market economy. During the communist era, guaante jobs and pensions worked as a social safety net bcause many benefits were dispensed at the workplace, although salaries and pension levels were very low. Substantial subsidies for food, housing and transportation complemented these benefits, allowing most of the population to avoid poverty, albeit at a fairly meager standard of living. These subsidies have now been dismantled as part of the reform process. Furthermore, recent trends of growing unemployment and inflation, self-employed workers outside the formal structures of social security, street children and increased delinquency aggravate already difficult conditions for the population. The forme system of socia protection is not nearly adequate to address these new problems. Two major groups at risk of falling into poverty are the elderly, and households with dependent children where parents are affected by unemployment and loss of income. To address these issues, a new approach to social protection in Romania, which would rely more upon targeting cash assistance to families and less upon in-kind services, must be designed and implemented. 1.18 Institutional wealcnesses. The present organizational structure of social protection is clearly outdated for the social safety net needed in Romania today. Both social insurance and social assistance programs have much to gain from greater harmonization, and this need for coordination will only increase as the system develops and has a greater impact upon the lives of the Romanian people. Problems persist with the adjudication mechanisms, overlap of some benefits, and insufficient transparency of the system. Outreach for recipients who are enitled to benefits but don't know about them must be improved. Too much time is spent on administrative tasks while strategic planning is nonexistent. Much improvement can be obtained from introducing automation, strengthening policy and evaluation capability, and implementing other organizational improvements. 4/ Cra, Iva. *Pauaw of Aduk Pautiipta in Laning Activt, Wo*w Edmio ad Tuin Poicis Puaje, Nai=Wl Incu for Work and Leaning, WahingSt D.C., 1980.  -7- 1.19 Affordability and fiscal constraints. Ihe urgent need to reform the social protection system must also confront fiscal realities. Romania will not be able to afford a universal social protecdon system on the order of the French, German or Scandinavian systems. Even in these countries, fiscal realities and labor market concerns are causing policymakers to rethink benefits and contributions features that have long been taken for granted. Although Romania needs to move in the general direction of the OECD systems, it must carefully review the broad spectrum of alternatives and determine an appropriate and fiscally susainable reforms that would address immediate concerns and start the evolution towards a viable, long-term system. 1.20 Specific issues to be addressed in the social lnsurance reform include: (a) too many funds - there are currently at least ten funds, which are not financially viable, and impede labor mobility; (b) improper benefit structure - in many cases, benefits are poorly related to contributions, and discourage formal labor force participation; and (c) affordability - the tax burden from the earmarked taxes which is too high, discouraging employment and encouraging evasion (e.g., non-payment by small firms and the sef-employed) and a benefit structure, given long-term demographic trends, which will be even less affordable in the future. Resources from the general budget are not likely to be available, especially as the need for social assistance grows, implying that oveal expenditures will have to be reduced as part of the benefit restructuring. A thorough reform of the social insurance policy framework is essential, to be accomplished by measures to assist in its implementation through automation of key acvities, such as contributions recordkeeping, and improvements in organizational and financial management. 1.21 In social assistance reform, specific issues include: (a) too small and too narrow a focus - Romania's system is oriented toward a small group of disabled or handicapped people and is not prepared to help households lift themselves out of poverty; (b) confused legal framework - a flood of laws and regulations have been issued in response to the imminent increae of the destitute and to respond to pressure groups; these have simply added to the benefits existing from the Ceausescu years, without priorities being established; (c) fragmentation of services throughout many agencies - there is a large number of agencies involved in the delivery of social assistance, creating coordination difficulties, spreading the benefits into small amounts, and producing inefficiency; (d) unused entitlements and lack of community outreach - even for approved benefits many potential beneficiaries are not receiving them for lack of a deliberate outreach effort towards those in need; (e) data inadequacies - Romania is forced to design a system in a vacuum, as the lack of random sample comprehensive household survey data leaves Romania with no way to analyze who are the poor/disadvantaged, what are their needs, and how can these needs be met; and (f) shortage of skills and institutional capacity - the shortage of trained social workers, social program managers, and social scientists is an impediment to designing and implementing reform programs. E. Govemnment Sector Policies and Rationale for Bank Assistance 1.22 The Government is concerned about protecting the living standards of the population as the transition proceeds, yet, at the same time, it recognizes the severe fiscal constraints that it faces. To assist the Government in formulating a strategy for addressing these issues, the Bank undertook sector  work with the Government in late 1990, which culminated in a red cover sector report -'. This report laid out the recommended policy reforms for all of the social sectors and provided the sectoral strategy for a sequence of Bank operations to assist those sectors. The rationale underlying the sector strategy is to focus, first, on the most basic services which are critical for the short- to medium-term social safety net and, then, on those services that are essential for a sustainable transition to a market economy. Although the standard public economics arguments, such as social externalities or capital market failures, apply to the social sectors, the sector strategy recognizes that there still should be an appropriate mix of private and public finance and provision of servces. 1.23 A Letter of Development Policy (LDP), signed jointly by the Ministers of State for Finance and for Labor and Social Protection, was sent to the Bank in October 1993 (see Annex 3 for the text of this letter). The LDP oudines the overall policy framework the Government intends to pursue with regard to social safety net issues. In addition to the LDP, the MOLSP, as the Government's lead agency in the provision of a social safety net, has completed two substantia White Papers, one on social assistance and the other on social insurance. These White Papers, which spell out the Government's specific reform program in these areas, were prepared during the past year with full pardcipation of MOLSP top management and professional staff, announced in press conferences, and then published for public discussion and comment prior to formulating legislation. The Socia Assistance White Paper (see Annex 4 for an executive summary) introduces a new system of cash benefits focused on those in deepest poverty and most likely to suffer economic hardships during the trasition. The Social Insurance White Paper (see Annex S for an executive summary) focuses on unifying the many different pension funds, raising the retirement age, introducing better financial management of social insurance funds, and gradually developing 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. 1.24 In line with the sector stategy, the first project activity in the sector augmented the capacity of the Government to set up a targeted social safety net by supporti the itroduction of critical programs (such as unemployment benefits) through the Employment Component of the Technical Assistance and Critical Imports Project (TACI, Loan 3363-RO, FY91). The project would follow up on these initial efforts of the TACI Project by supporting the implementation of far-reaching policy reforms. A Health Rehabilitation Project (Loan 3409-RO, FY91) followed soon after the TACI Project, aiming to address the serious crises in the public health system as a result of years of underinvestment and mismanagement. In the area of education, the Education Reform Project (Loan 3724-RO, FY94) supports the reform of educational curricula, teacher training, textbook provision (including competitive bidding by textbook firms), and improved management and financing of basic education. In a parallel project, financing for a major component (prepared and appraised as an integral component of this project) to reform provision of secondary and vocational training within the formal education system is being provided by the European Union. Finally, development of private universities and the reform of public universities and research institutes are the subject of a strategy paper being prepared by the Government. A project to implement these reforms will be identified on I/ See the red cover sector repost, Romnwia: Human Reourceo and the Tnsition to a Markt Econona (1992), for a dailed anslyi of sector isues. The policy reform matrix in Chapter 1 of the repolt numarizeu the _ecoinmmdatiom for ell of the aciso subectors.  -9- the basis of the Bank's dialogue with the Government concerning this higher education and research strategy paper. Together, these operations, as well as underlying sector work and policy dialogue and development, constitute a coherent, if parsimonious, initial approach to overall sector reform in Romania. 1.25 The Bank has now accumulated substantial social sector project experience in Romania, and a number of lessons have been learned as result. Those lessons have been reflected in the design of the project. First, the inexperience of project agency staff in procurement and disbursement practices of the Bank requires extraordinary education and training efforts on the part of Bank staff to ensure an adequate working inowledge in implementing agencies. Second, the generally weak public administration capacity of the social sector ministries causes both preparation and implementation problems. Third, the planning and budgeting methods of the Ministry of Finance and the sectoral ministries have serious rigidities which need to be taken into account to ensure the tidmely flow of local counterpart funds to project activities. To address these issues the Project Coordination Unit (PCU), currently under the TACI Project, will be expanded and more intensive training in procurement and other aspects of implementation will be provided to PCU staff. In addition, coordination between the MOF and the MOLSP has been fostered by insisting that the Government financing plan for all activities supported by the project be prepared jointly by these two agencies to ensure commitment and clear understanding of financing requirements.  -10- H. THEPROQiCr A. Project Objectives 2.1 The project will support the Govennment's eflorts to alleviate unemployment and poverty, improve the efficiency and affordability of employment and social protection services, and promote labor productivity and economic competitiveness. The specific objectives of the project are to: (a) strengthen the capacity of labor offices to administ increasing numbers of claims for unemployment benefits and active labor adjustment services (e.g., job placement, employment counseling, training); (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. B. Project DescriRtioo 2.2 The project will be implemented over five years by the Ministry of Labor and Social Protection (MOLSP). Total project cost is estimated at US$95.2 million including contingencies, of which US$81.6 million represents base cost. The project will finance civil works, equipment and materials, vehicles, computer hardware and software, technical assistance, external and local training, and incremental operating costs. It comprises three interrelated components structured as follows: I. General Management and Policy A. Monitoring and Policy Analysis B. Automation C. Project Management II. Employment and Training A. Employment Services B. Career Information and Counseling C. Adult Training m. Social Protection A. Social Insurance B. Social Assistance  -11- Component I: General Manageument and Policy l 2.3 The overall objective of this component is to improve management, planning, execution, cost- effectiveness, and evaluation of MOLSP social programs. 2.4 Monitoring and Policy Analysis (USS3.9 million). Under this subcomponent, the project will support the development of a Management I#onnation System (MIS) to track and evaluate ongoing programs and help refine new policies introduced under the project. Ihese evaluation procedures, based upon the analysis of administratve data generated by the MIS, will be tested in at least two judets, and then introduced in the other judets for evaluating, planning and budgeting for local employment and social assistance programs. Guidelines for integrating data collection and evaluation procedures into the MIS will be finalized, materials developed, and at least one labor office staff person in each judet trained in Integrating these procedures into local operations. 2.5 An applied research and evaluation program will be developed under this subcomponent to complement administrative data obtained from the MIS. This program will be based on special household and establishment surveys necessary to obtain information on persons not currently participating in MOLSP programs, thereby establishing appropriate control groups necessary to evaluate overall program effectiveness. The concerned MOLSP departments will together decide upon the aspects of program effectiveness to be investigated, plan and carry out the sample surveys (the MOLSP will work with the National Statistical Commission, or with a private survey firm, to execute the survey field work), and analyze and publish results. In addition to the special surveys, a second round of Integrated Household Surveys (the first round is being conducted under the ongoing TACI Project) will be carried out with a view to monitoring trends in nutrition status and other living standards in the aggregate, as well as for the bottom deciles of the population. 2.6 Finally, a data collection system for occupational sqfety will be developed.-' In the past, rather than directly addressing the real causes of unsafe work conditions, workers were paid extra allowances and bonuses as incentives for taking up hazardous occupations. Workcplace accident statistics were deliberately underreported, making it difficult to design appropriate program interventions. The project will support improvements in the collection of occupational safety statistics, including studies of ways to initiate low-cost interventions aiming to reduce accidents and contribute to improved productivity. It is expected that some of these initiatives could then be incorporated into the adult training programs under the Employment and Training Component (described in paras. 2.14-2.34). 6/ Estimated project cot in this chptwr ae prvided wihout physical or price contingencies. 7/ MOLSP equesed a modea stast be undraen in this am, for which it hs responsibility, beeuse ocuponal afety wu neglected under the prevow egime. See the gry cover envionent ctor repot, Roman E mit Sutr Paper (July 1992), for a set of a oin th ares of oocuptional safety and hlth. Action No. 7 of the Acio Plan (Chptr 7) in this rport wecnwnds to begin, by the ond of 1992, introduction and mrforeenut of occ_paonAl safety and health tAndua..  -12- 2.7 In support of the above activities, the project will finance office equipment and computers for the responsible MOLSP departments, technical assistance (79 months foreign, 106 months local), and fellowships and training (55 months foreign and 224 months local). v 2.8 Automation (IbSS21.2 million). The automation subcomponet will help to improve the overall management, planning, and execution of the MOLSP core responsibilities by sdectively introducing automation of a number of activities, such as the contributions records system of social insurance, and the unemployment benefit system. A long-term strategic plan comprising three phase has been drafted by the MOLSP to serve as the framework for this undertaking. Phase I, involving installation of PCs in the main labor and social istance offices, is nearing completion; this phase has been supported by the ongoing TACI Project. The subcomponent in the current project will support Phase U, which aims to increase the availability and use of information technology through the use of Local Area Networks (LANs), and mid-range computers for larger data bases. 2/ 2.9 Also as a part of Phase I activities supported by the project, organizational changes to better manage information technology will be implemented. An Information Resources Management Directorate (RMD) will be established in the MOLSP to be responsible for managing, planning, and coordinating automation activities. It will also provide general administrative support in the Ministry for financial management, budgeting, planning, personnel, payroll, procurement, and property and inventory management. 2.10 Specific activities to be supported under the automation subcomponent are: (a) refinement of the long-term strategic plan and short-term action plans to implement strategic objectives; definition of functional requirements, specifications of hardware and software for Phase II; coordination with end-users in other subcomponents of the project; and procurement of equipment and services; (b) design and testing of software applications (e.g., for unemployment benefits, social assistance benefits and pensions), and development and implementation of software and user training; and (c) installation of computers and reated hardware, including the establishment of the National Data Center equipped with a mainframe and, for the judets, mid-range computers with a mix of terminals and PCs. 2.11 The project will finance, in addition to hardware and software requirements, incremental operating costs, and the necessary rehabilitation of buildings to prepare them for hardware installation. All of the 170 offices labor, social assistance and social insurance) of the MOLSP will receive PCs; however, only the ten largest judet offices will receive large-capacity servers for the