Poland - First and Second Development Policy Loan Projects

 Document of The World Bank Report No: ICR00004253 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-83840, IBRD-85220) ON A SERIES OF TWO LOANS IN THE AMOUNT OF EUR 1.61 BILLION (US$ 1.97 BILLION EQUIVALENT) TO THE REPUBLIC OF POLAND FOR DEVELOPMENT POLICY LOANS I-II December 21, 2017 Macroeconomics and Fiscal Management Global Practice Central Europe and the Baltics Country Unit Europe and Central Asia  CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 31, 2016) Currency Unit US$ 1.00 = 4,18 PLN EUR 1.00 = 4.42 PLN FY January 1 – December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities GDP Gross Domestic Product Implementation Completion and CFC Controlled Foreign Corporation ICR Results Report CPS Country Partnership Strategy IMF International Monetary Fund Country Partnership Strategy CPSPR LG Local Government Progress Report Capital Requirements Regulation and CRD IV MTO Medium-Term Objective Directive Organization for Economic Co- DPL Development Policy Loan OECD operation and Development EC European Commission PA Prior Action EDevP Enterprise Development Program PDO Project Development Objective EMU European Monetary Union PER Public Expenditure Review ESA European System of Accounts RER Regular Economic Report Smart Growth Operational ESW Economic and Sector Work SGOP Program EU European Union SMEs Small and Medium Enterprises FCL Flexible Credit Line SRB Systematic Risk Board Financial Sector Assessment FSAP TA Technical Assistance Program FX Foreign Currency TTL Task Team Leader FY Fiscal Year Vice President: Cyril Muller Country Director: Arup Banerji Practice Manager: Lalita Moorty Theo Thomas Task Team Leader: Ewa Korczyc ICR Team Leader: Emilia Skrok, Leszek Kąsek ICR Primary Author: Ludwik Kotecki  POLAND DEVELOPMENT POLICY LOANS I-II: FIRST RESILIENCE AND GROWTH DEVELOPMENT POLICY LOAN (P146243) SECOND RESILIENCE AND GROWTH DEVELOPMENT POLICY LOAN (P149781) IMPLEMENTATION COMPLETION AND RESULTS REPORT CONTENTS A. Basic Information ........................................................................................................... ii B. Key Dates ....................................................................................................................... ii C. Ratings Summary .......................................................................................................... iii D. Sector and Theme Codes............................................................................................... iv E. Bank Staff ...................................................................................................................... vi F. Results Framework Analysis ....................................................................................... viii G. Ratings of Program Performance in ISRs ................................................................... xiii H. Restructuring (if any) ................................................................................................... xx 1. Program Context, Development Objectives and Design ................................................ 1 2. Key Factors Affecting Implementation and Outcomes .................................................. 6 3. Assessment of Outcomes .............................................................................................. 15 4. Assessment of Risk to Development Outcome ............................................................. 29 5. Assessment of Bank and Borrower Performance ......................................................... 30 6. Lessons Learned............................................................................................................ 33 7. Comments on Issues Raised by Borrower .................................................................... 35 Annex 1 Bank Lending and Implementation Support/Supervision Processes.................. 36 Annex 2. Beneficiary Survey Results ............................................................................... 38 Annex 3. List of People Consulted during ICR Preparation ............................................. 39 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ......................... 40 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ........................... 40 Annex 6. List of Supporting Documents ........................................................................ 451 MAP ................................................................................................................................ 462 A. Basic Information Program 1 First Resilience and Country Poland Program Name Growth Development Policy Loan Program ID P146243 L/C/TF Number(s) IBRD-83840 ICR Date 12/21/2017 ICR Type Core ICR GOVERNMENT OF Lending Instrument DPL Borrower POLAND Original Total USD 965.80M Disbursed Amount USD 899.01M Commitment Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners Program 2 Second Resilience and Growth Country Poland Program Name Development Policy Loan Program ID P149781 L/C/TF Number(s) IBRD-85220 ICR Date 12/21/2017 ICR Type Core ICR GOVERNMENT OF Lending Instrument DPL Borrower POLAND Original Total USD 1,000.00M Disbursed Amount USD 1,025.33M Commitment Implementing Agencies Ministry of Economy Ministry of Labor and Social Policy Ministry of Finance Cofinanciers and Other External Partners B. Key Dates First Resilience and Growth Development Policy Loan - P146243 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 11/26/2013 Effectiveness: 09/04/2014 Appraisal: 04/07/2014 Restructuring(s): Mid-term Approval: 01/07/2014 Review: Closing: 12/31/2015 12/31/2015 Second Resilience and Growth Development Policy Loan - P149781 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 02/13/2015 Effectiveness: 09/07/2015 Appraisal: 06/15/2015 Restructuring(s): Mid-term Approval: 07/23/2015 Review: Closing: 12/31/2016 12/31/2016 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Moderate Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Quality of Implementing Satisfactory Satisfactory Supervision: Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators First Resilience and Growth Development Policy Loan - P146243 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at Quality of No None any time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status Second Resilience and Growth Development Policy Loan - P149781 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No) Problem Program at Quality of No None any time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status D. Sector and Theme Codes First Resilience and Growth Development Policy Loan - P146243 Original Actual Major Sector Public Administration Central Government (Central Agencies) 34 34 Social Protection Social Protection 33 33 Industry, Trade and Services Other Industry, Trade and Services 33 33 Major Theme/Theme/Sub Theme Economic Policy Fiscal Policy 17 17 Tax policy 6 6 Finance  Financial Stability 11 11 Financial Sector oversight and 11 11 policy/banking regulation & restructuring Human Development and Gender Labor Market Policy and Programs 34 34 Active Labor Market Programs 17 17 Labor Market Institutions 17 17 Private Sector Development Business Enabling Environment 22 22 Investment and Business Climate 33 33 Jobs 100 100 Public Sector Management Public Administration 6 6 Transparency, Accountability and Good 6 6 Governance Public Finance Management 17 17 Domestic Revenue Administration 6 6 Public Expenditure Management 6 6 Second Resilience and Growth Development Policy Loan - P149781 Original Actual Major Sector Public Administration Other Public Administration 11 11 Financial Sector Banking Institutions 11 11 Social Protection Social Protection 22 22 Industry, Trade and Services Other Industry, Trade and Services 56 56 Major Theme/Theme/Sub Theme Economic Policy Fiscal Policy 17 17 Tax policy 6 6 Finance Financial Stability 11 11  Financial Sector oversight and 11 11 policy/banking regulation & restructuring Human Development and Gender Labor Market Policy and Programs 34 34 Active Labor Market Programs 17 17 Labor Market Institutions 17 17 Private Sector Development Business Enabling Environment 22 22 Investment and Business Climate 33 33 Jobs 100 100 Public Sector Management Public Administration 6 6 Transparency, Accountability and Good 6 6 Governance Public Finance Management 17 17 Domestic Revenue Administration 6 6 Public Expenditure Management 6 6 E. Bank Staff First Resilience and Growth Development Policy Loan - P146243 Positions At ICR At Approval Vice President: Cyril E Muller Laura Tuck Country Director: Arup Banerji Mamta Murthi Practice Lalita M. Moorty Satu Kristiina J. Kahkonen Manager/Manager: Task Team Leader: Rogier J. E. van den Brink Theo David Thomas Emilia Skrok, Leszek Pawel ICR Team Leader: Kasek ICR Primary Author: Ludwik Feliks Kotecki Second Resilience and Growth Development Policy Loan - P149781 Positions At ICR At Approval Vice President: Cyril E Muller Laura Tuck Country Director: Arup Banerji Mamta Murthi Practice Lalita M. Moorty Ivailo V. Izvorski Manager/Manager: Task Team Leader: Rogier J. E. van den Brink Theo David Thomas ICR Team Leader: Emilia Skrok, Leszek Pawel Kasek ICR Primary Author: Ludwik Feliks Kotecki F. Results Framework Analysis Program Development Objectives (from Program Document) The original Program Development Objective was to support resilience and growth through three reform pillars: (i) enhancing macroeconomic resilience, by reducing the general government fiscal deficit and debt levels toward the Medium Term Objective1 (MTO) and bolstering macro-prudential oversight; (ii) strengthening labor market flexibility and employment promotion; and (iii) improving private sector competitiveness and innovation. Revised Program Development Objectives (as approved by original approving authority) N.A. (a) PDO Indicator(s) 1 The country-specific medium-term objective (MTO) corresponds to the structural budgetary position that EU Member States should achieve, and maintain, over the cycle, in order to ensure sustainable public finances and provide room to respect and safeguard of Treaty reference values for deficit and debt at times of negative output gaps. Poland’s MTO is a structural deficit of one percent of GDP. DPL series PDO Indicators • Poland: First Resilience and Growth Development Policy Loan (DPL1) - P146243 • Poland: Second Resilience and Growth Development Policy Loan (DPL2) - P149781 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Indicator 1 : Fiscal deficit (as percent of GDP) reduced. Value (quantitative or 4.1 percent 3.0 percent 3.2 percent 2.6 percent qualitative) Date achieved 2013 2015 2015 2015 Comments Achieved. The baseline value was revised from 4.5 to 4.1 (incl. % achievement) subsequent to EUROSTAT revisions. Indicator 2 : Public debt (as percent of GDP) reduced. Value lower than 52 (quantitative or 55.7 percent - 51.1 percent percent qualitative) Date achieved 2013 2015 2015 Achieved. The baseline value was set before ESA2010 Comments methodological revisions. The actual value for 2015 includes the (incl. % achievement) impact of changes in pension funds on the debt. Indicator 3 : Issuance of mortgage bank (covered) bonds. Value (quantitative or EUR 116 mn EUR 416 mn qualitative) Date achieved 2013 2015 Comments Achieved. The issuance of mortgage-backed securities in 2015 (incl. % achievement) was more than 250% higher than in 2013. Indicator 4 : Number of registered long-term unemployed reduced. Reduction by at least 30 Value 1,107 Reduction by at thousands, of 1,083 thousands (quantitative or thousands least 30 which two- qualitative) (average) thousands thirds would be women Date achieved 2013 December 2015 December 2015 Achieved. Long-term unemployment was reduced by 75.6 Comments thousands, 47.3 thousands of which were women, more than (incl. % achievement) double the target reduction. Indicator 5 : Reduction in the time it takes to start a business. Value no more than 7 (quantitative or 32 days 25 days - days qualitative) Date achieved 2013 2016 2015 Comments Achieved. Time to start a business was dramatically reduced. (incl. % achievement) Reduction in the time it takes to obtain a construction permit. The progress was less than expected due to the fact in the first Indicator 6 : stage the reform supported residential sector, which is not well captured in the Doing Business ranking. Value (quantitative or 161 days - 140 days 156 days qualitative) Date achieved 2013 2016 2016 Comments Partly achieved, with half of the target reduction. (incl. % achievement) Indicator 7 : Simplified restructuring permitted. Forms available for procedure No permitting Value ‘simplified’ approval of (quantitative or Introduced restructuring a qualitative) procedures. restructuring plan after creditors’ votes. Date achieved 2013 2016 2016 Comments Achieved. A new insolvency law, with a focus on restructuring (incl. % achievement) was introduced. Indicator 8 : Total R&D spending (as a percent of GDP) increased. Value (quantitative or 0.88 1 percent - 0.94 qualitative) Date achieved 2012 2014 2014 Comments Not achieved until 2015, due stronger nominal growth of GDP (incl. % achievement) (denominator for the indicator). (b) Intermediate Outcome Indicator(s) NA G. Ratings of Program Performance in ISRs Poland: First Resilience and Growth Development Policy Loan (DPL1) - P146243 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 09/25/2012 Satisfactory Satisfactory 899.01 Poland: Second Resilience and Growth Development Policy Loan (DPL2)- P149781 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 09/03/2013 Satisfactory Satisfactory 1,025.33 H. Restructuring (if any) NA SECTION 1. PROGRAM CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN 1. This Implementation Completion and Results Report (ICR) assesses the achievements of the expected results of the programmatic series of Resilience and Growth Development Policy Loans to the Republic of Poland during 2014-2015. The first operation (DPL1) of EUR 700 million (US$965.8 million) was approved by the World Bank’s Board of Directors on July 1, 2014 and disbursed upon loan effectiveness on September 4, 2014. The second operation (DPL2) of EUR 921.7 million (US$1 billion) was approved on July 23, 2015, and disbursed upon loan effectiveness on September 7, 2015. The second and last operation in the series closed on December 31, 2016. 2. The World Bank had engaged with Poland through successive DPL series to support timely and critical policy reforms, backed by complementary analytic and advisory services that helped foster greater knowledge exchange. The first DPL series (2008-2010) was designed to focus on structural reforms central to EU convergence but was redirected to help mitigate the negative effects of the global economic and financial crises on Poland. Following the countercyclical fiscal response to the crisis in 2009-2010 and subsequent expansion of the deficit to more than seven percent of GDP, the second DPL series (2011-2012) supported the strengthening of public finances to bolster economic resilience in the face of strong external pressures, to preserve favorable access to financial markets, to protect fiscal space for growth-enabling investments, and to boost fiscal sustainability. The third DPL series, under evaluation in this ICR, played a major role in advancing the policy dialogue, by tackling some of the most difficult remaining areas critical for economic resilience and medium- and long-term shared prosperity. 3. The coalition government reelected in parliamentary elections in 2011 was able to adopt and implement numerous ambitious policy measures, in particular in the areas of fiscal consolidation, business environment, and the labor market. The second four-year mandate obtained by the coalition formed in late 2007 by the Civic Platform (PO) and the Polish Peasants Party (PSL) was the first time in recent Polish history that a governing coalition survived an election. In its second term, the coalition government showed a cautious yet determined approach to reforms in a difficult external economic environment. Poland’s GDP growth declined to about 1.7 percent in 2013, reflecting developments in the Euro zone and the Polish economy’s close links to the EU through trade and financial flows. Domestic private consumption remained subdued due to negative labor market developments; investment growth slowed down due to weak business confidence and continued fiscal consolidation; net exports provided a modest positive contribution with export growth outpacing import growth thanks to a relatively favorable exchange rate. 1.1 Context at Appraisal 4. Facing a deteriorated external environment, the government focused on adopting short- and medium-term growth-supporting measures, while maintaining a fiscally prudent stance to bolster market confidence. To sustain the recovery which started in the 1 second half of 2013, the authorities prioritized reforms to strengthen public finances and financial sector oversight, supplemented by reforms aimed at bolstering the economy’s long- term competitiveness. Challenges to achieving sustainable growth required a new macroeconomic framework designed to help Poland cope with future external shocks, while strengthening labor markets (by increasing flexibility and raising participation rates), improving the business environment, and promoting innovation. These reforms were critical to ensuring that the economy remain competitive while pursuing higher productivity and diversification into new product markets. Continuing to bolster financial sector resilience was seen as key to a more sustainable recovery in credit and investment. A stronger financial sector would further reduce risks stemming from such phenomena as the divergent monetary policy in the EU and US or regional geopolitical instability (in particular, related to the war in Ukraine). 5. When the first operation (DPL1) in this program was appraised in May 2014, economic growth was on an upward trend. However, in the second quarter of 2014, GDP growth decelerated to 0.6 percent (quarter-on-quarter, seasonally adjusted), following 1.1 percent growth in the first quarter. Economic growth was driven mainly by domestic demand, with a negative contribution from net exports. According to the official forecast in 2014, GDP growth in Poland was to have reached 3.3 percent as a result of continued recovery in domestic demand (and actual growth came in at 3.4 percent). Data indicated an improvement in labor demand, the current account deficit remained sustainable, and inflation pressure was at a very low level (-0.2 percent in July 2014). In the Convergence Program update from April 2014, the government presented its commitment to reduce the imbalance in public finances without creating a threat to medium-term prospects for Poland’s economic development. 6. When the second operation (DPL2) was appraised in June 2015, solid GDP growth was continuing. In the first and second quarters of 2015, seasonally adjusted quarter-on-quarter GDP growth remained robust at 1.0 percent and 0.9 percent respectively. As a result, GDP stood at 3.6 and 3.3 percent higher than the previous year. Domestic demand was still the main contributor to GDP growth. The current account deficit remained very low (0.1 percent of GDP), and inflation pressures remained very weak (with the CPI below 0 percent and core inflation below 1 percent). In June 2015, the EU Council closed the excessive deficit procedure for Poland. The government remained committed to further reducing the imbalance in public finances towards the Polish MTO (a structural deficit of one percent of GDP). 7. This programmatic series of policy loans was at the core of the Bank’s engagement in Poland in the areas of public finance, labor markets, and private sector development, as described in the Country Partnership Strategy presented to the Board on July 15, 2013. In particular, the DPL series’ objectives were fully in line with two Strategic Engagement Areas in CPS 2014-17: 1) Economic Competitiveness and 2) Equity and Inclusion. Within the two areas, four Country Development Goals can be specified which were supported by these two DPLs: a. Country Development Goal 1: Enhanced businesses environment, b. Country Development Goal 2: Increased innovativeness, c. Country Development Goal 3: Effective public finance, 2  d. Country Development Goal 4: Inclusive and effective labor market. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 8. The Program Development Objectives were structured around three pillars: a. enhancing macroeconomic resilience, by reducing the general government fiscal deficit and debt levels toward the Medium Term Objective (MTO) and bolstering macro- prudential oversight, b. strengthening labor market flexibility and employment promotion; and, c. improving private sector competitiveness and innovation. 9. The Key (Results) Indicators for each pillar are below: a. enhancing macroeconomic resilience: Indicators: By the end of 2015, the public debt-to-GDP ratio (ESA definition) is lower than 52 percent of GDP, including pension fund changes, and the general government deficit is 3 percent of GDP or lower. b. strengthening labor market flexibility and employment promotion: Indicators: By the end of 2015, the number of registered long-term unemployed is reduced by at least 30,000 persons, i.e. from 1,107 thousands in 2013 to less than 1,077 thousands. c. improving private sector competitiveness and innovation: Indicators: The Doing Business Report 2016 shows an improvement in the time taken to start a business (25 days or fewer) and total spending on R&D rises from 0.9 percent of GDP in 2012 to 1 percent in 2014. 1.3 Revised PDO (if any, as approved by original approving authority) and Key Indicators, and Reasons/Justification 10. The program development objective were unchanged. There were some adjustments to the Key Indicators made in DPL2: a. Under enhancing macroeconomic resilience, reference to pension fund changes as part of the fiscal deficit were dropped since they had become part of the standard definition. The target for the general government deficit was changed from 3.0 to 3.2 percent of GDP. A new indicator was added about the start of the covered bond market which would contribute to ongoing deepening of financial markets. 3  b. Under strengthening labor market flexibility and employment promotion, the reduction of long-term unemployed was further specified by adding that two-thirds of the reduction should be women. c. Under improving private sector competitiveness and innovation, an improvement in the time taken to issue construction permits (140 days or fewer) was added as an indicator. A second new indicator under this pillar was that a new ‘simplified’ procedure for corporate restructuring would be introduced. 1.4 Original Policy Areas Supported by the Program (as approved): 11. The policy areas supported by the DPL series were grouped into three “pillars