Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-84360) ON A LOAN

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1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-84360) ON A LOAN IN THE AMOUNT OF EUR 37.4 MILLION (US$ 50 MILLION EQUIVALENT) TO BOSNIA AND HERZEGOVINA FOR THE BUSINESS ENVIRONMENT DEVELOPMENT POLICY LOAN February 28, 2017 Public Disclosure Authorized Trade and Competitiveness Global Practice (GTCDR) South East Europe Country Unit (ECCU4) Europe and Central Asia (ECA)

2 BOSNIA AND HERZEGOVINA FISCAL YEAR January 1 December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 28, 2017) Currency Unit = Convertible Mark (BAM) BAM 1.84 = US$1.00 US$ 0.54 = BAM 1.00 ABBREVIATIONS AND ACRONYMS BiH Bosnia and Herzegovina BAC Business Environment Adjustment Credit BAM Convertible Mark BEEPS Business Environment and Enterprise Performance Survey CAD Current Account Deficit CCS Compliance Cost Savings CPS Country Partnership Strategy DB Doing Business EC European Commission ESW Economic Sector Work EU European Union EUD Delegation of the European Union FBH Federation of Bosnia and Herzegovina FDI Foreign Direct Investment GDP Gross Domestic Product HBS Household Budget Survey IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IFI International Financial Institutions IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions IPA Instrument for Pre-Accession LLC Limited Liability Company MDGs Millennium Development Goals MoAFW Ministry of Agriculture, Forestry and Water Management in Republika Srpska MoAWF Ministry of Agriculture, Water Management and Forestry in Federation BiH MoEMI Ministry of Energy, Mining and Industry in Federation BiH MoERC Ministry of Economic Relations and Regional Cooperation in Republika Srpska MoF Ministry of Finance at the entity level MoFT BiH Ministry of Finance and Treasury MoJ Ministry of Justice MoSPCEE Ministry of Trade and Tourism, and Ministry of Spatial Planning, Civic Engineering and Ecology in Republika Srpska MoT Ministry of Trade in Federation BiH

3 MoTT Ministry of Trade and Tourism in Republika Srpska MoU Memorandum of Understanding MTEF Medium-Term Expenditure Framework NPL Non Performing Loans OSS One-Stop Shop PFM Public Financial Management REER Real Effective Exchange Rate RS Republika Srpska SDR Special Drawing Rights SEA Strategic Environmental Assessment SECO Swiss State Secretariat for Economic Affairs SEE South East Europe Sida Swedish International Development Cooperation Agency SOE State-Owned Enterprise TA Technical Assistance TSA Treasury Single Account USAID United States Agency for International Development VAT Value-Added Tax WBG World Bank Group Regional Vice President: Cyril E. Muller Senior Global Practice Director: Anabel Gonzalez Country Director: Ellen Goldstein Practice Manager: Paulo Guilherme Correa DPL Team Leader: Ruvejda Aliefendic ICR Team Leader: Dusko Vasiljevic

4 BOSNIA AND HERZEGOVINA Business Environment Development Policy Loan CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents Annex 7: Detail of Analytical Work that Contributed to the Operation...28 Annex 8: Map of Bosnia and Herzegovina 29

5 A. Basic Information Country: Bosnia and Herzegovina Program Name: BiH DPL Program ID: P L/C/TF Number(s): IBRD ICR Date: 12/10/2016 ICR Type: Core ICR Lending Instrument: DPL Borrower: Original Total Commitment: Revised Amount: USD 50.00M BOSNIA AND HERZEGOVINA USD 50.00M Disbursed Amount: USD 42.49M Implementing Agencies: Ministry of Finance and Treasury BiH, Ministry of Finance of Republika Srpska, Ministry of Finance of Federation BiH Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/09/2013 Effectiveness: 09/30/ /30/2015 Appraisal: 12/13/2013 Restructuring(s): Approval: 10/03/2014 Mid-term Review: Closing: 12/31/ /31/2015 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Not Applicable Quality of Supervision: Satisfactory Implementing Agency/Agencies: Not Applicable Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Sector Code (as % of total Bank financing) Original Actual Other Industry, Trade and Services Other industry Agricultural markets, commercialization and agribusiness Theme Code (as % of total Bank financing) Other Private Sector Development Regulation and competition policy Trade facilitation and market access E. Bank Staff Positions At ICR At Approval Vice President: Cyril E. Muller Laura Tuck Country Director: Ellen A. Goldstein Ellen A. Goldstein Practice Manager/Manager: Paulo Guilherme Correa Paloma Anos Casero Program Team Leader: Ruvejda Aliefendic Wolfgang Fengler ICR Team Leader: ICR Primary Author: Dusko Vasiljevic Dusko Vasiljevic F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The development objective is to improve BiH's business environment through facilitating business start-up, streamlining investment procedures in inspections and construction, and simplifying processes of cross-border trading.

7 Revised Program Development Objectives (if any, as approved by original approving authority) Not applicable PDO Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years FBH: Business registration cost and time reduced by up to 20 percent BAM 3.7 million registration cost; BAM 1.3 million time equivalent cost Start up cost and time equivalent cost reduced by up to 20 percent Start up cost savings of million (27.5% of savings compared to baseline) and time equivalent costs of BAM 0.62 million (47.7% of savings compared to baseline) Date achieved 12/31/ /31/ /01/2016 Fully achieved, exceeded the target. Verified based on data collected Comments (incl. % achievement) with all 10 registration courts in Federation BiH and compared with the established baseline values. There have been significant savings for the 825 new companies that have been registered since December Indicator 2 : FBH: Specific notary tariffs for start-up businesses reduced by 15 percent Value (quantitative or Qualitative) Specific start-up notary tariffs in FBH for businesses in the range from 175 to 1000 BAM Reduction in notary tariffs on aggregate up to 15 percent Notary not mandatory anymore for registration, and notary tariff reduced Date achieved 12/31/ /31/ /31/2015 Comments (incl. % achievement) Fully achieved, exceeded the target. Verified based on comparative analysis of notary tariffs prior and after the reform as well as with data collected with all 10 registration courts in Federation BIH, and reports

8 based on the decree of Constitutional Court of Federation BIH. Indicator 3 : RS: Incorporation capital for newly established Limited Liability Company is 1 BAM Value (quantitative or 2,000 BAM 1 BAM 1 BAM Qualitative) Date achieved 12/31/ /31/ /31/2015 Fully achieved. Total cost of new single registration for LLC (incl. cost Comments (incl. % achievement) of business registration, Official Gazette Publication, Court certificate, statistics number and tax registration receipt, receipt on VAT registration) down from avg. BAM3500 in 2012 to 250 in 2015 Indicator 4 : RS: Tariffs on notary reward reduced by 30 percent. Value (quantitative or Qualitative) BAM 351 reduced by 30 percent No notary required, tariff fully eliminated Date achieved 12/31/ /31/ /31/2015 Comments (incl. % Fully achieved, exceeded the target. Tariff eliminated through amendments to Notaries Law achievement) Indicator 5 : RS: Business registration procedures reduced to 5 steps (from 11) Value (quantitative or 11 steps 5 steps 5 steps Qualitative) Date achieved 12/31/ /31/ /31/2015 Fully achieved. The number of procedures has been confirmed by Comments (incl. % achievement) interviews during preparation of ICR in October 2016 (details also available at: Indicator 6 : RS: Business registration time reduced to 3 days (from 23) Value (quantitative or 23 days 3 days 3 days Qualitative) Date achieved 12/31/ /31/ /31/2015 Fully achieved. The number of days has been confirmed by interviews Comments during preparation of ICR in October 2016 (details also available at: (incl. % achievement) Indicator 7 : FBH: Increased effectiveness of inspections by 15 percent

9 Value (quantitative or Qualitative) avg. 311 certificates issued per day increase of 15 percent in avg. number of certificates issued per day 13 percent increase Date achieved 12/31/ /31/ /31/2015 Partially achieved (missing the target by 2 percentage points). Based on 2015 Annual Report of FUZIP, avg. of 350 certificates were issued per Comments day, improvement of 13 percent over the baseline. Further (incl. % achievement) improvements are anticipated in 2016 (to be confirmed once the Annual Report for 2016 is issued in mid-2017). Indicator 8 : FBH: Reduced cost for businesses by at least 10 percent following introduction of risk based inspections Value (quantitative or Qualitative) BAM 9 million reduced by at least 10 percent reduced by 12 percent Date achieved 12/31/ /31/ /31/2015 Fully achieved, exceeded the target. Amendments to respective secondary legislation regulating inspection control yielded reduction Comments of costs for businesses in amount of 1.01 million BAM (based on CCS (incl. % achievement) methodology), i.e., ca. 12 % reduction. This trend continues in 2016, and there are additional simplifications planned Indicator 9 : RS: Time required to obtain individual permits reduced to a maximum 15 days Value (quantitative or Qualitative) avg. 45 days to obtain 15 days 15 days each permit Date achieved 12/31/ /31/ /31/2015 Comments (incl. % Fully achieved. Verified based on reporting from authorities (Annual Report of Ministry of Spatial Planning, Civil Engineering and Ecology) achievement) Direct and indirect cost savings resulting from the new law est. at 17 Indicator 10 : million BAM annually Value (quantitative or Qualitative) Total indirect and indirect costs estimated at BAM 180 million Savings of at least BAM 17 million p.a. Savings of BAM 18.1 million

10 Date achieved 12/31/ /31/ /31/2015 Fully achieved, exceeded the target. Introducing streamlined and simplified permitting regime yielded estimated BAM18.1million of Comments savings on annual basis. These savings are significant given that in 2015 (incl. % achievement) there was an increase of ca. 7% in number of issued construction permits over Preliminary data show trend continues in 2016 Indicator 11 : Reduction of direct and indirect costs to obtain licenses, permits and approvals, related to import/export procedures for seven key export sectors by a one-off 5 percent (2 mln BAM) over both entities Value (quantitative or Qualitative) Total costs 47mn (FBH costs: 9.3mn, time eq.costs: 9.9mn; RS costs: 8.8mn, time eq.costs: 19mn Reduction of total costs by one-off of at least 5 percent (ca. BAM 2mn) approx. BAM 1.9mn Date achieved 12/31/ /31/ /31/2015 Largely achieved (reduction was of BAM 1.9mn missing the target of BAM 2mn by 5 percent). Cost estimates based on the Compliance Cost Comments (incl. % achievement) Savings methodology (CCS). Savings per items: FBiH 1.1 million savings in costs, i.e., ca. 12% reduction and ca. 1% reduction in time. In RS the cost has been reduced by BAM 0.6 mn, i.e. ~8% and time by ~5%. G. Ratings of Program Performance in ISRs No. Date ISR Archived Not Applicable DO IP Actual Disbursements (USD millions) H. Restructuring (if any) Not Applicable

11 1. Program Context, Development Objectives and Design 1. The Business Environment Development Policy Loan (BE DPL) was a single Development Policy Operation to Bosnia and Herzegovina (BiH) in the amount of EUR 37.4 million. The operation was approved by the Board of the World Bank on October 3, The program supported a range of initiatives to improve BiH s business environment through facilitating business start-up, streamlining investment procedures in inspections and construction, and simplifying processes of cross-border trading. The activities of the DPL were complemented by technical assistance (TA) provided by the World Bank and advisory services provided by IFC. 1.1 Context at Appraisal 2. After several years of lackluster performance in the aftermath of the global economic crisis of 2008, BiH economy experienced a modest recovery in Following a recession in 2009, BiH went through two years of fragile recovery, and then experienced a second downturn in The 2012 downturn was due to deteriorating external conditions, a severe winter at the beginning of the year, and wildfires in the second half of the year. Consumption, investment and exports each contracted in The post-crisis period was also marked by continued political fragmentation. After the October 2010 elections, it took 18 months for the Council of Ministers to be formed. As a result, the BiH institution-level budget for 2012 was not adopted in a timely manner. 4. A surge in exports supported a modest economic recovery in Real GDP grew by 2.4 percent in 2013, driven primarily by goods exports, which increased by6.6 percent during the year. Industrial production increased by 7.1 percent, led by a strong performance from the manufacturing sector, which grew by 17.1 percent. The currency board continued to support monetary stability, and inflation remained low into The external position also improved during 2013, after two years of large current account deficits. Although the banking sector remained relatively stable in 2013, a high level of nonperforming loans (NPLs) continued to plague the system. 5. The economy was expected to continue recovering in 2014, but the country was hit by devastating floods in May of that year. The floods touched about one third of the country s territory, hitting hardest in the northern and central flatlands, where the main agriculture industry is located. Although it was initially expected that the floods would lead to another recession, the economy grew by 1.1 percent in 2014, and the gradual recovery continued in BiH faced significant challenges maintaining a prudent fiscal policy. The authorities began fiscal consolidation in From 5.5 percent of GDP in 2009, they succeeded in reducing the deficit to 2.0 percent by 2013, in line with the IMF program requirements. This consolidation was necessary due to reduced revenues and lack of financing. Decreases in revenue were mainly due to growing VAT refunds and tax arrears: in 2013, revenues fell by 1.3 percent of GDP partly due to increased tax refunds. 7. To maintain a sustainable fiscal stance in the face of declining revenues, some measures were taken to reduce expenditures. Efforts to contain current spending in 2013 were weak with public sector wages and social benefits together amounting to 27 percent of GDP. 1

12 Total expenditure declined by 1.9 percent of GDP in Public expenditures were, and remain, excessively concentrated in non-growth enhancing areas. Table 1: Selected Macroeconomic Indicators ( ) (est.) National accounts Real GDP growth (% change) Gross investment (in % GDP) CPI (period average, % change) Operations of the general gov t (% of GDP) Revenue Expenditure Net lending Total public debt o/w external Balance of payments Exports of goods and services (EUR mn) Imports of goods and services (EUR mn) Current account balance (% GDP) Foreign direct investment (inflow, EUR mn) Foreign direct investment (inflow, % GDP) Source: IMF Country Report CR To stimulate growth over the medium term, the country faced two main challenges. The first was a weak business environment that was hampering investment and growth, and thus required substantial reforms. The second was a fiscal policy that remained focused on income redistribution (though not necessarily to the poorest) rather than growth. To unleash the economy s growth potential, both improvements to the business environment and re-orientation of public spending towards growth-enhancing investment were needed. 9. The country faced the challenge of political fragmentation and stalemate, which undermined reform processes. The political system in BiH was and continues to be complex, reflecting the provisions of the country s constitution established as part of the Dayton Accords at the end of the war in The general government consists of four levels: the BiH (or central) level, two entities Federation of Bosnia and Herzegovina (FBiH) and Republika Srpska (RS) and Brcko District (BD). The BiH level is governed by a Council of Ministers; each entity has its own government and local government units. In the FBiH, 10 cantons, each with its own government, represent an additional layer between the Government of the FBiH and local government units. 10. As recognized in the World Bank Group s Country Partnership Strategy (CPS) FY12-15, the risk of weak political commitment to reform and of policy reversal was significant. This risk has materialized as the authorities did not advance sensitive reforms related to social and veteran benefits that would have improved the quality of public spending. As support for these reforms waned, the Bank cancelled its planned programmatic Public Expenditure DPO series. 11. There was a much stronger political commitment around business environment reforms, as these were seen both by the authorities and the Bank as an important opportunity to enhance the medium term growth prospects. Governments in both entities as 2

13 well as the Council of Ministers expressed support for strong business environment and investment climate reforms to enhance growth and create jobs. At the same time, the WBG was already deeply engaged in this area. Based on the importance of the reforms and the strong ongoing engagement, the governments and the WBG decided to use the space freed up by the cancellation of the public expenditure series to prepare the Business Environment DPL and leverage the existing efforts. The operation was prepared building on analytical work done by the authorities in BiH and TA provided by WBG 1 to support the adoption of some key policy reforms identified by this work. The operation complemented the existing IMF Stand-By Arrangement, and was also part of a broader engagement of WBG to improve BiH s competitiveness and create jobs. The strategic importance of competitiveness was reflected in the CPS Progress Report of June 2014, as well as in the latest Country Partnership Framework (CPF) for FY Although the public expenditures series was cancelled, the Bank remained engaged in the dialogue with the authorities on the support to strengthening capacity to manage public resources. Under the current CPF, the main immediate vehicle for WBG engagement in this area is the Fiscal Resources for Growth DPL, which was negotiated in February 2017 and is scheduled for Board presentation in March Original Program Development Objectives (PDO) and Key Indicators (as approved) 12. The development objective was to improve BiH s business environment through facilitating business start-up, streamlining investment procedures in inspections and construction, and simplifying processes of cross-border trading. The Operation was designed around three pillars: 1) Facilitating Business Start-up, 2) Streamlining Investment Procedures in Inspections and Construction; and 3) Simplifying Processes of Cross-Border Trading. The key indicators, as stated in the Program Document, were: 2 1. Facilitating Business Start-up FBIH Business registration cost and time reduced by up to 20 percent Specific notary tariffs for start-up reduced by 15 percent RS: Incorporation capital for newly established Limited Liability Company is 1 Bam Tariffs on notary reward reduced by 30 percent Business registration procedures reduced to 5 steps (from 11) Business registration time reduced to 3 days (from 23) 2. Streamlining Investment Procedures in Inspection and Constriction FBIH: Increased effectiveness of inspection by 15 percent Reduced cost for business by at least 10 percent following introduction of risk based inspections RS: Time required to obtain individual permits reduced to a maximum 15 days 1 Section 2.2 provides more details on both 2 List below is from the summary table on page 5 of the PD (the results matrix provides a more detailed definition of key PDO indicators). 3

14 Direct and indirect cost savings resulting from the new law est. at 17 mln Bam annually 3. Simplifying processes of cross-border trading Reduction of direct and indirect costs to obtain licenses, permits and approvals, related to import/export procedures for seven key exports (wood; fruits and vegetables; meat; basic materials; dairy; electrical appliances and metal), by a one-off 5 percent (2 mln BAM) over both entities. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The PDO and Key Indicators were not revised (this was a single operation DPO). 1.4 Original Policy Areas Supported by the Program (as approved) Pillar I. Facilitating Business Start-up Pillar I supported reforms to simplify procedures and reduce costs related to business startups, including by reducing procedures and cost for business registration, and reducing notary tariffs. Pillar II. Streamlining Investment Procedures in Inspections and Construction Pillar II facilitated simplifying of the existing inspections regime and streamlining the process to obtain construction permits. Pillar III. Simplifying processes of cross-border trading: Pillar III supported simplification of cross-border trading, including through reducing the number of documents, time and costs for licensing, permits, and approvals related to import/export procedures in selected sectors in both entities. 1.5 Revised Policy Areas (if applicable) Not applicable. 1.6 Other significant changes Not applicable. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 13. The Business Environment (BE) DPL provided a platform for creating opportunities for job creation and economic growth amidst the fragile economic recovery, the devastating floods of May 2014 and the burden of the recovery effort. The DPL did so by focusing on improving the business environment and thus conditions for private sector competitiveness. In addition to being highly relevant for the BiH economy and benefitting from strong ownership, the operation built on an extensive program of technical assistance (TA) from the WBG, including: (i) TA from IFC that covered key areas including trade facilitation, construction sector regulations, and 4

15 preparations for the new company law and decree on notaries fees; and (ii) TA from the World Bank that supported the improvements in the inspections law and the business registration law. 14. The BE DPL was a single tranche stand-alone operation. It was approved on October 5, 2014, on the basis of prior actions (shown in the Table below) that were implemented during 2013 and The Loan Agreement with the World Bank was signed on January 15, There were significant delays in declaring project effectiveness. These were not related to commitment to reforms supported by the BE DPL, but other institutional and political factors. Effectiveness was declared on September 30, Business Environnent DPO: Prior Actions Pillar 1: Facilitating Business Start-up Prior action #1: Enactment of the Business Registration Reform legislative package and adoption of notary fees regulation in RS Prior action #2: Government adoption and submission to Parliament of the final draft of the new Company Law in Federation BiH Prior action #3: Enactment of the Law on Changes and Amendments to the Business Registration Law and adoption of regulation to reduce notary tariffs in Federation BiH. Pillar 2: Streamlining Investment Procedures in Inspections and Construction Prior action #4: Enactment of the new Inspections Law in FBH Prior action #5 Enactment of the Spatial Development and Construction Law and adoption of three accompanying rulebooks in RS Pillar 3: Simplifying Processes of Cross-Border Trading Prior action #6 Adoption of regulations (rulebooks) to streamline export/import procedures in FBH Prior action #7 Adoption of regulations (rulebooks) to streamline export/import procedures in RS 2.2 Major Factors Affecting Implementation 16. The BE DPL was implemented in a challenging environment, including political and institutional complexities of BiH, limited government absorption capacity, and the fact that the operation was prepared in a period leading up to general elections. Still, the implementation generally went as planned, due to authorities broad-based ownership of the reforms supported by the operation and to strong analytical underpinnings and TA support already in place. The ICR team has identified the factors listed and described below as the most relevant to the operation. Adequacy of government s commitment 17. The BE DPL was closely aligned with BiH s development strategy and priorities, including those related to the EU accession process. The reforms supported by the BE DPL and related TA directly contributed to priorities outlined in a number of different strategic documents, 5

16 including the draft BiH Strategy for Development and BiH Social Inclusion Strategy 3 ; entities Strategic Work plans; and economic policy documents. All of these emphasized the importance of enhancing the business environment and improving competitiveness to facilitate strengthening of private sector and job creation. The importance of urgently improving the business environment was further emphasized in key EU documents, e.g., the European Commission s Enlargement Strategy and Main Challenges report. Consequently, FBiH and RS governments coordinated their approaches and prepared complementary sets of reforms, aligning their scope and creating a more uniform business environment throughout the BiH. Although the timing of this operation was challenging given that general elections took place in October 2014, authorities had proven to be accountable and have the ownership over this specific reform process, as evidenced by dedicated implementation of the various TA supported activities. Overall coordination of the reform efforts was performed by the two entities Ministries of Finance. Eleven different institutions from both entities led the reform efforts supported by this operation, and contributed directly to its design and implementation. Strong analytical and TA underpinnings of the program 18. The structure of the BE DPL and the content of its three pillars significantly benefited from extensive analytical and TA work, including regulatory assessments, studies, data collection and analysis. Some of the main analytical activities which supported the preparation of the operation include the following (further details are provided in Annex 7): - Regulatory Impact Assessment Report on Business Registration process in Republika Srpska (completed in September 2012), informed the design of Prior Action #1 and was used in developing the results framework. - Regulatory Impact Assessment Report on Federation BiH Company Law (completed in March 2013), informed the design of Prior Action #2 and #3 and was used in developing the results framework. - Competitiveness Study for Three Value Chains in the Agribusiness Sector (completed in December 2012), informed the design of Prior Action #6 and #7 and was used in developing the results framework. - Firm-level data collection and analysis of the crisis effect in inspection supervision (completed in March 2013), informed the design of Prior Action #4 and was used in developing the results framework. - EU Final Report of Food and Veterinary Audit carried out in BIH (completed in February 2012), informed the design of Prior Action #4, #6 and #7. - Compliance Cost Savings Assessment in construction permitting (completed in 2013), informed the design of Prior Action #5 and was used in developing the results framework. - Compliance Cost Savings Assessment of export-import procedures in key export sectors (completed in 2013), informed the design of Prior Action #6 and #7 and was used in developing the results framework. The table below summarizes WB and IFC TA provided to authorities during the preparation and implementation of the operation. 3 These two strategic documents, though prepared in a consultative bottom up approach have only been endorsed by the Federation BiH and Brcko District. 6

17 DPO Pillar Prior Action Relation to WBG TA Activity Prior action #1 - Enactment of the Business Registration Reform legislative package and adoption of notary fees regulation in Republika Srpska Facilitating Business Start-Up Streamlining Investment Procedures in Inspections and Construction Simplifying Processes of crossborder trading Prior action #2 Government adoption and submission to Parliament of the final draft of the Company Law in Federation BiH Prior action #3 - Enactment of Law on Changes and Amendments to the Business Registration Law and adoption of regulation to reduce notary tariffs in Federation BiH Prior action #4 - Enactment of the new Inspection Law in Federation BiH Prior action #5 - Enactment of the Spatial Development and Construction Law and adoption of three accompanying rulebooks in Republika Srpska, Prior action #6 - Adoption of regulations (rulebooks) to streamline export/import procedures in Federation BiH Prior action #7 - Adoption of regulations (rulebooks) to streamline export/import procedures in Republika Srpska WB provided technical assistance to RS Government, for assessment of the registration system and preparation of the amended legal framework; IFC provided technical assistance to FBIH Ministry of Energy, Mining and Industry to conduct regulatory impact assessment of legal framework and initiate the drafting of new law; IFC provided technical assistance to FBIH Ministry of Energy, Mining and Industry to conduct regulatory impact assessment of company law identifying business registration as one of key segments that require change; subsequently, IFC provided technical assistance to FBIH ministry of Justice to amend the business registration legal framework streamlining the process and abolishing discrepancies in the general framework; WB provided technical assistance to FBIH Inspectorate in reviewing and drafting the new Law on Inspection as part of multi-annual TA project focusing on inspection supervision and interoperability; IFC provided technical assistance to RS Government as per their individual request to review the RS Law on Spatial Planning and Construction focusing on permitting processes and initiate the drafting of the new law; IFC provided technical assistance to both entities governments and respective ministries to assess procedures and respective legal framework related to export import activities in 7 identified key export sectors, including wood processing; fruits and vegetables; meat and meat processing; basic materials; dairy; and electrical appliances and metal processing. 19. The above mentioned analytical and TA activities, as well as other WBG reports (including Doing Business, Southeast Europe Regular Economic Report, etc.) and regular EU Progress Reports were instrumental in defining the content and scope of this operation. They provided inputs and guidelines for regulatory and legislative reforms supported by BE DPL. Some of these activities also directly contributed to developing the Results Framework for the operation. 7

18 Relevance of the risks identified 20. The overall risk for this operation was substantial and mitigation measures were incorporated into the operation design. Political tensions and frequent shifts in governments 4, as well as preparation for the general elections in October 2014, created a challenging environment for the reform effort. The risk assessment also identified the governments poor track record implementing structural reforms, social unrest in February 2014, and devastating floods in May 2014 as key elements that could jeopardize the operation. 21. Thus, the operation incorporated mechanisms to mitigate the overall risk by: choosing a stand-alone DPL instead of a programmatic series; defining prior actions around reforms that were ongoing and benefitted from strong ownership; and structuring prior actions around reforms for which a comprehensive TA program was already in place to support their design and implementation. Building on dialogue with respective counterparts and their readiness to have ownership over the reform process helped mitigate the risks and ensure successful implementation of the operation. That said, due to the complex governance structure in the country, and in the environment of forthcoming general elections, political and institutional risks posed serious challenges throughout implementation. Overall, this was mitigated by strong and broad-based political support to the program itself, but also through concerted coordination efforts by respective ministries of finance who were relentlessly advocating for the implementation emphasizing the benefits of the reforms. Operation s design 22. The operation was designed around three complementary and mutually reinforcing pillars focusing on some of the key constraints in the business environment, including business registration and operation, as well as cross-border trading. The selection of reforms to be supported was based on their relevance, as well as the capacity to implement, taking into account both the governments capacity and the available technical assistance. The scope of this operation was ambitious (eleven different institutions implementing the supported reforms, and more than 20 laws and regulations to be adopted and implemented). Yet it was realistic, due to: (i) broad support for the reforms as they were closely aligned with the governments priorities; (ii) inclusiveness in the design; and (iii) comprehensive TA support to address capacity gaps. Thus, the choice of the instrument DPL supplemented with strong TA is deemed appropriate for the types of reforms supported. As discussed above, the choice of a stand-alone operation over programmatic series was prudent having in mind challenging environment and timing of the operation. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 23. M&E Design: The operation s results framework was agreed upon with counterparts who were responsible for data collection and reporting. The indicators met the SMART Criteria (specific, measurable, attributable, realistic and time-bound) and were directly linked to the policies supported. Baseline data was included in the Project Document. Reporting relied on official sources including government agencies, as well as figures calculated using internationally accepted methodologies like the Compliance Cost Savings methodology (CCS). Furthermore, 4 Shifts in government refer to political coalition changes at the BiH level throughout 2012 and 2013, which resulted in a difficult political environment within FBiH during the time in which the reform program was enacted. 8

19 indicators of this operation potentially allow for measuring the broader impact, such as streamlined procedures leading to increased number of registered companies and to job creation. The indicators in the results framework also reflect the complementarity of the pillars and spillover effects from the policies supported. For example: streamlined and simplified export-import procedures enhance cross-border trading and also increase the efficiency of inspectorates with mandates related to cross-border trade. 24. There was only one change in the Results Framework as presented in the Program Document. The Program Document indicated Q1 of 2015 for target values of indicators at the end of the operation. In this ICR, values for full 2015 have been used. This is justified as it was assessed that annual figures would provide better indication of the progress rather than the figures for a single quarter only. 25. M&E Implementation: The BE DPL was monitored by the Bank team through continuous dialogue with the governments to assess progress and address bottlenecks, including through preparation of regular progress reports. The involvement of several team members in the field was instrumental to this dialogue. Monitoring was further supported by complimentary TA. 26. The BE DPL has contributed to strengthening the M&E capacities of government institutions. For instance, indicators related to construction permitting incorporated data that was collected and analyzed for the first time ever: the number of individual permits issued by every municipal authority in RS, including individual prices and time required. This comprehensive data collection exercise was undertaken by the RS Ministry of Spatial Planning and Construction by surveying municipal departments and assessing the data collected. Also, during the operation, government counterparts benefited from technical assistance provided by WBG that supported the development and application of Compliance Cost Savings model. Further, while implementing this operation, and with the support of TA provided, some of the government counterparts indicated that they would use similar M&E models for other activities under their mandate. Although all M&E data was generally delivered in a timely manner and in an adequate format, government counterparts still have further room for strengthening their M&E capacities. 27. M&E Utilization: The BiH Ministry of Finance and Treasury, as well as entities Ministries of Finance were responsible for the overall coordination of data collection on M&E indicators. The WBG team continuously monitored progress towards the DPL s objectives through regular communication and meetings with the relevant authorities. Achievement of milestones set in this operation were captured by progress reports provided by governments. The M&E framework used for this operation was directly utilized in developing parts of the Activities Framework for the new Country Partnership Framework (CPF) for FY It was also utilized as a baseline for a number of reform activities planned under the Reform Agenda 5. For instance, to help manage and track reform implementation, the Reform Agenda is accompanied by a detailed Action Plan. The Action Plan identifies specific activities for each of priority areas of the Reform Agenda, institutions that are to lead the work on specific activities, milestones, and goals and progress indicators for each activity. 5 Council of Ministers of Bosnia and Herzegovina, the Government of Republika Srpska, the Government of the Federation of Bosnia and Herzegovina (FBiH), and all ten cantonal governments have agreed to a Reform Agenda in July 2015, committing to a set of major structural reforms, and outlining mid-term reform priorities. 9

20 2.4 Expected Next Phase/Follow-up Operation (if any): 28. Following the completion of the BE DPL, the Bank team has continued a very active dialogue with government counterparts on the policy areas supported by operation. The current CPF envisages support to a set of business environment reforms that directly build on the BE DPL through a new Business Environment Strengthening Project (BESP) currently under preparation for FY18. In its current design it is envisaged that the project will consist of: (i) a component that will put emphasis on expanding access to markets, facilitating cross-border trade and aligning segments of the quality infrastructure to EU requirements; and (ii) a component that will foster enterprise development by removing and reducing specific barriers to enterprise operation and (re)investment. Finally, the project will seek to catalyze business environment reforms by promoting innovative business ideas as a demonstration effect of how businesses can be assisted to start and grow. The proposed project is well aligned with the priorities that the BiH governments have set out in their Reform Agenda. The design of this project is being informed by the ongoing analytic and advisory work on trade and competitiveness as well as by the lessons of prior engagement on business environment and SME support by both WB and IFC. It should be noted that the authorities have limited previous experience with use of results based lending. Possible impact on preparation and implementation of using the instrument will need to be carefully considered. 29. WBG also continues to have a robust portfolio of analytical and advisory activities on investment climate, business environment, and trade. The Local Investment-friendly Environment (LIFE) Project 6 is aiming to strengthen local competitiveness and create more stable and dynamic economy. The Investment Climate and Access to Markets (ICAM) Project 7 is supporting entity and national level governments to improve the business environment and national quality infrastructure, enable access to markets, and increase competitiveness with special focus on agribusiness value chains. The Investment Climate and Institutional Strengthening Trust Fund (ICIS) 8 is responding to the constraints in the transparency and accountability needed to align business inspections to EU requirements. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives Rating: High 30. The objectives and policy areas of the BE DPL are highly relevant to BiH development priorities. This was the case both at the time of approval of the operation and at the time of this ICR. 6 Advisory project implemented by the WBG in partnership with the British Embassy in Bosnia and Herzegovina 7 Advisory project implemented by the WBG in partnership with the British Embassy in Bosnia and Herzegovina, the Council of Ministers of Bosnia and Herzegovina (BiH), the Federation BiH Government, and the Republika Srpska Government. 8 Advisory project implemented by the WBG in partnership with the Swedish International Development Cooperation Agency 10

21 31. The objectives of the BE DPL are fully aligned with several key strategies, including draft BiH Strategy for Development and Social Inclusion , entities Strategic Work Plans (FBiH Government s Work Plan ; RS Strategic Plan for Investment Climate Improvement) and economic policy documents (e.g. Economic Policy Document ), which all highlight economic growth and improved competitiveness underpinned by improved business environment as one of the priorities, and outline a roadmap for reforming it. The operation supported a number of critical laws and regulations to enhance BiH s business environment. 32. The continued relevance of the objectives supported by the BE DPL is clearly reflected in the fact that the Reform Agenda, a key strategic document issued in 2015 by governments in BiH, is building on the reforms supported by the operation. Addressing some of the difficult challenges that the country faces with respect to the business environment will require efforts over the longterm by successive governments, and this commitment is highlighted in the Reform Agenda. For example, the Reform Agenda section on improving business environment explicitly acknowledges the importance of and continued relevance of measures to streamline business registration, simplify issuance of construction permits, improve work of inspections and simplify procedures for cross-border training. These priorities address long-standing institutional challenges in BiH. The DPL contributed to making progress on addressing these challenges; for example, the DPL s support to facilitating business start-up through establishing a One-Stop- Shop in RS. 33. The operation also supported BiH EU accession aspirations, by focusing on reforms that will foster productivity convergence with the EU countries and strengthening institutions through capacity building activities. 34. The preparation and implementation of BE DPL overlapped with Country Partnership Strategy for FY At the time of the CPS Progress Report 13, the BE DPL was seen as a key instrument to support the Bank s strategic shift away from deeper fiscal reform (Pillar II of the CPS) where political will was insufficient, toward improvement of the business environment and investment climate (Pillar I), where ownership of reforms was sufficient across all levels of government and results would stimulate growth and job creation. 35. The agenda supported by BE DPL remains highly relevant in the current Country Partnership Framework (CPF) for FY Improvements to the business environment, including those building on the results already achieved in the BE DPL, are among the main objectives of the CPF under Focus Area 2: Creating Conditions for Accelerated Private Sector Growth. The CPF envisages the Business Environment Results-Based Lending operation that is discussed in section 2.4. The CPF also proposes WBG advisory programs to focus on subnational investment climate, improving the business environment, competitiveness and regional integration in selected value chains and exports in general, and will complement the proposed results-based lending operation. 9 BA&template_id=140&pageIndex= Report number 64428, August 30, Report number 87928, June 3, Report number 99616, November 14,

22 Relevance of Design Rating: High 36. The design of the BE DPL was highly relevant to achieve the operation s objectives. The selection of prior actions in the three complementary and mutually reinforcing pillars was based on their relevance to achieve the objectives. The choice of pillars and prior actions was based on: (i) the significance of reforms undertaken by the government; (ii) the degree of reform ownership; and (iii) the available WBG technical assistance. The reforms supported by the operation substantially contributed to the broader governments reform program. The reform program was subsequently reaffirmed in the governments Reform Agenda (and with continued support by the WBG, discussed in more detail in paragraphs 28 and 29). 37. The choice of instrument (stand-alone DPL with broad complementary TA) and the types of reforms supported was relevant based on lessons learned from previous lending operations and institutional capacity in BiH. Given capacity constraints and the novelty of this intervention for some of counterparts, the design significantly relied on leveraging technical assistance that was ongoing or could be mobilized quickly, mitigating implementation risks. Also, as discussed in paragraphs 20 and 21, the choice of stand-alone DPL over programmatic series, supplemented with strong TA support, was prudent having in mind challenging environment and timing of the operation. 3.2 Achievement of Program Development Objectives 38. The objective of the BE DPL was to improve BiH s business environment through facilitating business start-up, streamlining investment procedures in inspections and construction, and simplifying processes of cross-border trading. The Operation was designed around three pillars: 1) Facilitating Business Start-up, 2) Streamlining Investment Procedures in Inspections and Construction; and 3) Simplifying Processes of Cross-Border Trading. As discussed below, the results anticipated in the BE DPL program document were largely met The performance of BiH on Doing Business indicators gradually improved over the previous five years (as measured by the Distance to Frontier score), both overall, and by individual sub-indicators. This includes three sub-indicators which track reforms in the areas supported by the operation. However, Doing Business scores were not directly used in evaluating the achievement of objectives for the operation. The main reason is that the Doing Business scores for BiH are based on a hypothetical firm in FBiH, and thus by definition do not capture the improvements in RS (which was the focus of several prior actions). For example, important reforms around introducing One-Stop-Shop, or the major overhaul of the construction permitting process were by definition and methodology used not captured by Doing Business indicators. The assessment of the objectives was thus primarily based on the results framework developed during operation preparation, which has more granularity and more closely tracks the effects of the reforms supported by the operation. Additionally, Doing Business indicators underwent a major methodological update in the previous couple of years. Tracking the progress of indicators over previous five years and directly linking those with the effects of reforms supported by the operation would have to account for those methodological changes and would be difficult in terms of proper attribution 12

23 Pillar 1: Facilitating Business Start-up Rating: Substantial 39. Globally, studies have repeatedly confirmed that heavier regulation of entry is generally associated with greater corruption and a larger unofficial economy, but not with better quality of private or public goods. 16 Easier entry also typically leads to more firms and jobs created in the short-term. Compared internationally, market entry in BiH is not easy. For example, in Doing Business (DB) 2013 report, on the Starting a Business indicator BiH was among the lowest ranked countries in the region, with the Distance to Frontier (DTF) score of Pillar 1 of the BE DPL supported government interventions to simplify procedures and reduce costs related to starting a business. It included the following prior actions: (PA1) Enactment of the Business Registration Reform legislative package and adoption of notary fees regulation in RS; (PA2) Government adoption and submission to Parliament of the final draft of the new Company Law in Federation BiH; (PA3) Enactment of the Law on Changes and Amendments to the Business Registration Law and adoption of regulation to reduce notary tariffs in Federation BiH. 41. At the time of DPL preparation, detailed analysis of the existing process revealed that to register a business in RS would take 23 days, 10 or 11 procedures and between 1,100 BAM to 1,500 BAM in registration cost. To simplify the procedures and reduce costs, the authorities in RS decided to adopt a One-Stop-Shop (OSS) approach. This decision was based on a regulatory impact assessment that the authorities performed, and on a comprehensive public consultation process, which included setting up a working group in 2012 with representatives both from the government and the private sector. The regulatory impact assessment also served to provide inputs for a sectoral regulatory guillotine 42. To facilitate the creation of OSS, a unique registry of business entities was created, and housed within the Intermediary Agency for IT and Financial Services (APIF). Previously, there were different registries kept by courts, Tax Office and Statistical Office. The registration of business remained with the courts, and a unified information system was developed to link APIF and courts. The DPL supported adoption of a regulatory package which included amendments to 13 laws and several by-laws needed to implement the OSS. The amendments from the package were adopted during the second half of Introduction of OSS significantly simplified the business registration procedure in RS. As per the results matrix, it now takes only 3 days and 5 procedures to register a business in RS, and the related costs have been markedly reduced. About 30 percent more new businesses compared to baseline are being registered annually since the introduction of OSS. 44. With the creation of the OSS, the first phase of business registration simplification has been completed. The RS authorities are now implementing the second stage of the reform, which aims to introduce on-line registration. Currently, key prerequisite of digitalizing court archives is being implemented. This process is progressing well, with the biggest challenge to digitalize the largest archive, in the Banja Luka court, as this would require physically dislocating the large archive for a period of time. 16 Such studies include The Regulation of Entry in 2002 and many others since then. 13

24 45. Reforms in the FBiH were primarily aiming to reduce costs of business registration but also to simplify procedures. The DPL supported amendments to the FBiH Company Law (these included reducing the minimum required capital for a limited liability company from BAM 2,000 to BAM 1,000) and amendments to the FBiH Business Registration Law, as well as adoption of regulation to reduce notary tariffs. The amendments to the regulation supported by the DPL have been adopted during 2013 and 2014 and have become fully effective since December As a result of amendments to laws and regulations supported by the operation, costs associated with business registration in FBiH have been reduced (in particular through decreasing by half the required incorporation capital, and by eliminating many of the requirements related to notary fees). As per the results matrix of the operation, this has led to estimated savings in startup costs of approximately 1 million BAM since the changes become effective, or approximately 27 percent annually of the baseline cost. The reforms also resulted in an estimated 48 percent reduction in time cost (baseline value for the time cost was BAM 1.3 million). Pillar 2: Streamlining Investment Procedures in Inspections and Construction Rating: Substantial 47. Pillar 2 focused on the reforms to streamline the procedures related to issuance of construction permits and improve the functioning of inspections. It included the following prior actions: (PA4) Enactment of the new Inspections Law in FBH; (PA5) Enactment of the Spatial Development and Construction Law and adoption of three accompanying rulebooks in RS. 48. In FBiH, inspection reform was viewed as a systemic public sector reform that has significant impact on private sector development. Reforming the inspections system and strengthening vertical coordination in official controls was one of the main aims of the reforms, as well as modernizing the work of inspections and improving their organizational setup. 49. Supported by the BE DPL, a new Inspection Law was adopted by FBiH Parliament in June 2014, and it became effective in September The new law further overhauled the inspection system in FBiH, building on the previous Inspections Law from The organizational setup of Federal Department for Inspection Affairs (FUZIP) was strengthened. FUZIP was established in 2006 (it started operating in 2007) and all of the FBiH level inspections have been consolidated within FUZIP, facilitating improved coordination. In total, there are 11 inspectorates in FUZIP. With the new law, the new Federal Food Inspectorate was established to meet EU accession requirements. Importantly, based on the new law a Sector for Internal Control has been established in FUZIP. In addition, a new Sector for Border Inspections has also been established. Predictability and transparency of the work of inspections is being improved both by consolidating them within FUZIP, and by introducing mandatory check-lists that inspectors have to follow when performing inspections. A strong effort is being made to improve technical capacity of inspectors, with the new law envisioning introduction of training and certification for inspectors. 50. As per the results matrix, the efficiency of inspections improved as a result of overhauling the system. In 2015 number of issued certificates increased by about 13 percent over the baseline (broadly in line with the target of 15 percent), and estimated savings for businesses are about BAM 1 million in 2015, or about 12 percent of the baseline (better than the target of 10 percent). 14

25 51. In RS, the reforms supported under Pillar 2 focused on streamlining the process of issuing construction permits. As noted in the BE DPL program document, insufficient permitrelated legislation due to lack of transparency and consistency is a challenge for SMEs with limited connections. The Doing Business 2014 report ranked BiH at 175th place (out of 189 economies) on obtaining construction permits, with 17 procedures, 170 days, and at a cost of 1,100 percent of income per capita. 52. Supported by the operation, a new Law on Spatial Development and Construction was adopted by RS Parliament in April 2013 and supporting regulations, including three rulebooks, have been adopted subsequently. The new law was adopted after a broad public consultation process across many different municipalities in RS. The new Construction Law introduces a riskbased approach and streamlined and cost efficient procedures. The Law provides for faster and more efficient administrative processing of infrastructure projects. For instance, under the new provisions, for buildings of up to 400 m2 the requirement to obtain a site/urban permit is abolished when a spatial/zoning plan has been adopted in the locality. The law also streamlined the types of various planning documents. Further, the law replaced obsolete references to building standards, some dating back to 1960s, with new and up to date rule books. 53. The process for issuing construction and usage permits has been streamlined, and as per the results matrix businesses can obtain both in 15 days, as compared to 45 days before the new law was adopted. Further, there are important savings on direct and indirect costs related to obtaining all construction related permits: against the baseline of BAM 180 million, estimated savings of BAM 18.1 million have been achieved in 2015 (better than the target of BAM 17 million). Improvements in the regulatory framework supported by the operation have contributed to a 7 percent increase in number of construction permits issued in 2015 over the previous year. According to the RS Statistical Office, the value of construction works in RS increased from around BAM 620mn in 2012 and BAM 690mn in 2013 to approximately BAM 755mn on average in 2014 and Further, the number of hours worked on construction sites increased from about 12.7 million in 2012 and 2013 to about 14.3 million in 2014 and 15 million in 2015, also suggesting a recent increase in construction activity. Pillar 3: Simplifying Processes of Cross-Border Trading Rating: Substantial 54. Pillar 3 supported efforts to simplify targeted cross-border trading procedures in important sectors. It included the following prior actions: (PA6) Adoption of regulations (rulebooks) to streamline export/import procedures in FBH; (PA7) Adoption of regulations (rulebooks) to streamline export/import procedures in RS. 55. According to estimates calculated during project preparation, businesses spend around US$135 million annually to comply with complex export/import procedures. Reforms under this pillar were aiming to reduce costs in seven key exporting sectors (wood processing, machinery, electronic appliances, metal processing, dairy, meat and meat processing, and fruits and vegetables). The reforms targeted 154 procedures in FBH and RS, with associated cost reductions of up to BAM 2 million from the identified baseline of close to BAM 50 million Baseline and costs are defined in order to calculate the impact indicator by applying the Compliance Cost Savings (CCS) methodology of the Investment Climate Department of the World Bank Group. This methodology is not a comprehensive cost-benefit analysis. It is a one-sided view of the reforms benefits to 15

26 56. In FBiH a package of export/import regulations was adopted in March - August In RS, Ministry of Agriculture, Forestry and Water Management adopted in July 2013 a decree to streamline export/import procedures in RS. All of the regulations adopted under this pillar benefited from comprehensive TA support by the WBG. 57. Adoption of these regulations resulted in savings which were largely in line with project targets of up to BAM 2 million or 5 percent savings. Actual savings are estimated at approximately BAM 1.9 million (approximately BAM 1.1 mn in FBiH and BAM 0.8 million in RS). 58. The reforms contributed to overall positive export trends in these sectors 18. Overall BiH exports of goods increased from BAM 7.86 billion in 2012 to BAM 8.99 billion in , a total growth of 14.4 percent over the period. Against this overall trend, agricultural and food products (dairy, meat and meat processing are bulk of this sector) exports grew from BAM 488 million in 2012 to BAM 619 million in 2015, a total increase of 27 percent over the period. Their share in total exports has increased from 6.2 percent in 2012 to 6.9 percent in Exports of wood, wood products and cork grew from BAM 503 million in 2012 to BAM to BAM 664 million in 2015, a growth of 32 percent over the period. Their share in total exports has increased from 6.4 percent in 2012 to 7.4 percent in Exports of machinery and electrical appliances 20 grew from BAM 779 million in 2012 to BAM to BAM 1,003 million in 2015, a growth of 29 percent over the period. Their share in total exports has increased from 9.9 percent in 2012 to 11.2 percent in On the other hand, metal and metal processing exports have dropped from BAM 1.64 billion in 2012 to BAM 1.50 million in 2015, and their share in total exports has decreased from 20.8 percent in 2012 to 16.7 percent in Justification of Overall Outcome Rating Rating: Satisfactory 59. The overall outcome of the operation is satisfactory. This rating reflects the high degree of relevance of the operation s design and development objectives, and the successful implementation and results achieved during implementation of the BE DPL. The operation s design and objectives are highly relevant both to the strategic priorities of the country and to the current and past Bank assistance strategies. Of the reforms implemented, there is no reversal in any of the areas, and in fact, the authorities are building on most of them with additional reform efforts (outlined in the Reform Agenda). The operation supported an ambitious yet realistic set of reforms. Further, the satisfactory outcome also reflects the fact that the three sub-objectives or the private sector and it provides an indication of the resulting extra resources that private businesses may use, at least in part, to expand their businesses or make new investments. The baseline and calculated savings are based on official 2012 data (frequencies, time, fees, taxes, average labor costs, number of operating businesses and other support statistics data) and verified by CCS specialists. 18 The only exception is negative trend in metals sectors, which is to a large extent linked with global commodity price dynamics 19 Source: Annual bulletins on external trade, BiH Statistical Office 20 Data for this category were calculated using the exports of the category Machinery and Transport Equipment minus exports of sub-categories road vehicles and other transport equipment. 16

27 pillar areas were fully achieved, as nine out of eleven indicators were fully achieved (in most cases exceeding expectations) and the other two were partially and largely achieved. In addition to direct positive effects of the supported reforms, they also had important demonstration effects. For example, positive experiences with OSS in RS are being used by the authorities in FBiH in developing their business registration reforms. Similarly, the streamlined process of issuing construction permits supported by the operation is now being used to guide the reforms in construction permitting in the Sarajevo Canton, and several other cantonal governments are contemplating a similar approach. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 60. The policies supported under the DPL were expected to have positive impacts on poverty, social and gender, primarily as a better business environment was expected to contribute to an overall increase in economic activity and improved employment outcomes,. Although no recent statistics on poverty are available 21, Labor Force Survey statistics show modest improvements both in the employment rate, which went from 31.7 percent in 2012 to 32.2 percent in 2016, and a gradual decrease in unemployment rate from 28.0 percent in 2012 to 25.4 percent in Overall, after contracting by -0.9 percent in 2012, real GDP grew in all of the years from 2013 to 2015, at an average annual rate of 2.2 percent. It was not possible to link these economic outcomes directly to the project; however, as noted above, the results chain of the project explains how a better business environment would contribute to improved macroeconomic outcomes. (b) Institutional Change/Strengthening 61. The operation had an important impact on institutional strengthening, including through increasing capacity of the institutions participating in the operation. The operation built on previous technical assistance, reinforcing the capacities and efficiency of selected institutions and improving legal predictability and enforcement. For example, building on previous technical assistance that resulted in establishing of FUZIP in 2006, within this operation further technical assistance was provided to FUZIP in order to strengthen their institutional capacities, efficiency and building a strong basis for risk-based assessment in inspection supervision. The new FBIH Law on Inspections in 2014 supported qualitative changes in the internal organization of the institution itself, with the introduction of Food Inspectorate and Sectors for Internal Audit and for Border Controls. This addressed important institutional shortcomings that had been ongoing since FUZIP s establishment. Further, supporting FBIH ministries in amending notary regulation, business registration regulation and the Company Law created a solid basis for activities aiming to introduce OSS for business registration in FBIH. Also, introducing regulatory impact mechanisms in both entities put in place the tools to improve the quality of new legislation. Targeting the trade procedures related to key export sectors of BIH and support to the respective institution, including in agriculture, led to streamlining and simplification of these procedures. This also contributed to the initiation of development of strategies for improving quality infrastructure. Implementing this operation accelerated the progress in these specific reform areas 21 According to latest (2011) Extended Household Budget Survey (EHBS) data, 15 percent of the population in BiH were below the poverty threshold. This is based on the WB poverty methodology and LSMS poverty threshold of 205KM per person per month in 2007 prices. 22 However, most of the improvements in the unemployment rate are due to a drop in unemployment rate for men, from 26.4 percent in 2012 to 22.5 percent in 2016, while for women it mostly remained high, at 30.7 percent in 2012, peaking at 31.2 percent in 2014, and then going back 30.0 percent in

28 and triggered further engagement by authorities to address the challenging institutional environment and the need for continued capacity development. 62. Having in mind the challenging environment in the country, there remains a need for continued capacity upgrading. After the completion of this operation, WBG has continued supporting these efforts, primarily through technical assistance in key segments, including inspection interoperability and increased efficiency, introduction of OSS for business registration in FBIH and improvement in RS, as well as strengthening the strategic framework for quality infrastructure mechanisms in BIH. The results and lessons of this operation are being used in follow up reforms in BiH. For example, the authorities in FBiH are adopting the OSS for business registration approach based on its successful implementation in RS, which was supported by the operation. Similarly, as noted in paragraph 59, streamlined process of issuing construction permits supported by the operation is now being used to guide the reforms in construction permitting in the Sarajevo Canton. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) Not applicable. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risk to Development Outcome Rating: Moderate 63. The operation was largely successful in achieving the expected outcomes, thus contributing to improvements in the business environment in the areas of business start-up, streamlining investment procedures in inspections and construction, and simplifying processes of cross-border trading. The risk of policy reversal in the supported areas is low. In fact, the authorities have committed in the Reform Agenda to further build on the reforms supported by the operation. Further, the authorities in different entities, as well as some sub-entity level governments, are planning to introduce some of the reforms implemented in the other entity. For example, as noted in section 3.5 above, FBiH government is looking into options of implementing One-Stop-Shop based on the successful implementation in the RS; and Sarajevo Canton government is considering adopting new construction permitting legislation based on the positive experiences of the reforms supported by the BE DPL. 64. Ensuring long-term sustainability of reforms will require continuous capacity building. Although the risk of reversal is low, the risk of underperformance in fully implementing and further advancing the reforms is not negligible. Although institutional capacity of government agencies has improved, it may not be adequate to continue advancing the agenda. For example, FUZIP is facing challenges in staffing some of the key positions and in implementing training and certification program. If this situation continues over a prolonged period, the capacity built during the preparation and implementation of the operation could be eroded. Further risks stem from the institutional complexity of the country. For the benefits of the supported reform program 18

29 to fully materialize, much more work on institutional harmonization and creation of single economic space will be needed. 65. Both WBG and authorities are aware of these risks. On the authorities side, there is a clear commitment, including in the Reform Agenda, to continue implementing the reforms, continue building institutional capacity, and work on advancing single economic space. On the WBG side, the reform efforts continue to be supported both by the ongoing TA and by preparation of a new business environment results based operation. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 66. The Bank responded in a timely and pragmatic manner to shifting country development priorities and the request of the BiH governments to support business environment reforms. As noted at the decision meeting, in the initial discussions about a possible operation, it originally included a fiscal component, which was excluded due to lack of political consensus (as a result the proposed loan amount was reduced by half to $50 million). At the same time, there was clear political commitment around business environment reforms, and these were seen as crucial in putting in place the conditions for improved medium term growth prospects. To leverage the political commitment, already ongoing efforts in this area, and the existing deep technical engagement, the team focused on developing an operation to support business environment reforms. Due to the uncertain political situation the prudent choice was made to apply a standalone operation and not a programmatic series. The operation had high relevance to national development priorities and the Bank s Country Partnership Strategies. The operation also benefited from strong linkages with IFC activities in the country. 67. The design of the BE DPL had strong analytical underpinnings, including through very close collaboration with IFC. The objectives were realistic within a reasonable timeline and focused on leveraging existing reforms efforts. The results framework broadly struck a good balance between seeking ambitious outcomes and proper attribution to program actions. The objectives of the operation and relevance of supported reforms were clearly explained in the Program Document. (b) Quality of Supervision Rating: Satisfactory 68. The operation was well supervised, through frequent missions and through the fact that some of key team members were based in the country. Supervision by the Bank took place on a regular basis and was combined with intensive implementation of the complimentary technical assistance. The Bank team also contributed to coordination efforts between different institutions and agencies preparing and implementing the operation. 19

30 69. The team closely monitored the preparation and implementation of the measures around prior actions. In discussions with the ICR team, the authorities were clear that although most of the reforms supported were generally uncontroversial, there were still significant difficulties in introducing the reforms, and the fact the World Bank operation supported them greatly contributed to their adoption. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 70. The Bank s performance is rated as satisfactory to reflect the satisfactory quality at entry and satisfactory rating of quality of supervision. 5.2 Borrower Performance Rating: Satisfactory 71. As the Government and Implementing Agency cannot be distinguished separately for the BE DPL, the rating in this section should be considered as the overall rating for the borrower. 72. The borrower s performance is rated as satisfactory. The borrower had overall high ownership of the implementation of the objectives as the operation objectives were in line with the national development and EU accession framework priorities. Even though the implementation, particularly the process of legislation adoption, was affected by the complex political circumstances, the Borrower stayed persistent in achieving the goals supported by the operation. In particular, the Ministries of Finance, both at the BiH level and at entity levels, played a key role in coordinating the reform efforts of other participating institutions. That said, the operation still experienced some delays, in particular with regards to achieving the effectiveness. These were caused by political dynamics between different factions which resulting in a stalled parliamentary approval process, and not related to commitment to reforms supported by the operation. The staff, in numbers and knowledge, was adequate in most of the institutions implementing the operation, with some capacity gaps addressed by the technical assistance from the WBG. 6. Lessons Learned 73. Government ownership and alignment with national priorities are crucial for reform success and make such success possible in even highly complex political and institutional environments. The BE DPL demonstrated that even in highly complex political and institutional circumstances a targeted set of reforms, aligned with country priorities, can move the needle and result in measurable improvements in the business environment. Government ownership and alignment with national priorities are crucial for DPL success. The operation was designed around existing reform initiatives, and it provided an additional impetus for their adoption and implementation. Keys to success include: a. The underlying policy program should be selective. The DPL focused on a welldefined set of reforms in relatively narrow areas b. It is important to work on clearly defining targets from the outset. In discussions with authorities, this was emphasized on several occasions. c. Aligning the PDO and policy actions of the DPL with priorities being supported through other high-level processes can significantly contribute to catalyzing the 20

31 reforms. In the case of BiH, these were the priorities defined in the EU accession process, including EU s increasing focus on economic governance. 74. The BE DPL also demonstrated importance of flexibility and pragmatism in addressing country needs. When the political support for further fiscal consolidation efforts sharply waned, the Bank worked with the authorities to design a more politically palatable, yet substantive, program of reforms supported by the operation. In its design and implementation, the operation successfully blended support for legislative and regulatory reforms with actions to promote institutional strengthening. Going forward, the focus in improving business environment is expected to shift from addressing policy and regulatory gaps, supported by the BE DPL, to support for reform implementation. Other types of instruments, including results based lending or PforR, are well suited for deepening policy reforms and supporting reform implementation over the medium term. 75. Having appropriate analytical, TA, and supervision resources available before and during the operation was essential for successful implementation of the operation. The BE DPL was developed on the basis of rich analytical and advisory work, provided both by the WB and IFC, over several years prior to start of preparation of the operation and during implementation of the operation. A number of different TA programs provided support to authorities in areas where capacity gaps were identified. Strong implementation support, including through presence of key team members in the country, was a major factor that contributed to timely adoption and sustained implementation of the reforms. The Bank is generally seen by various institutions as an honest broker, and this helped it to act as convener when reforms got stalled and needed concerted efforts of multiple stakeholders to move them forward. 76. More significant benefits from the supported reforms were suppressed by various difficulties related both to institutional setup, as well as capacity gaps. For example, major improvements in the inspection system at FBiH level did not fully translate to better operating environment for many of the firms, as they largely fall under the jurisdiction of cantonal inspections. Similarly, improvements brought about by new streamlined process of issuing construction permits in RS can be offset by lack of supporting planning documents and by limited capacity of some municipal governments. Careful and comprehensive analysis of institutional, political economy and implementation capacity constraints is necessary to reduce these indirect risks to development outcomes. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 77. The authorities overall endorsed the ICR. The Borrower did not prepare a completion report for this operation. The draft ICR was shared with Ministry of Finance and Treasury BiH, Ministry of Finance of Republika Srpska, Ministry of Finance of Federation BiH on December 29, Comments were received from the RS Ministry of Finance, relating mostly to terminology used in the ICR and names of various institutions and documents. These comments were reflected in the final version of the ICR. The FBiH had no comments to the proposed draft ICR. (b) Cofinanciers Not applicable. 21

32 (c) Other partners and stakeholders Not applicable. 22

33 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/ Specialty Lending Wolfgang Fengler Lead Economist GTCDR Task Team Leader Ruvejda Aliefendic Sr. Private Sector Specialist GTCDR Private Sector Specialist Simon Davies Sr. Economist GMFDR Economist Senka Eminagic Private Sector Specialist GTCEU Private Sector Specialist Sandra Hlivnjak Economist GMFDR Economist Tarik Sahovic Sr. Private Sector Specialist GTCEU Private Sector Specialist Alexandru Cojocaru Sr. Economist GPVDR Economist Nichola Dyer Program Manager GFADR Operations Officer Gallina Andronova Vincelette Practice Manager GMFDR Economist Caterina Ruggeri Laderchi Sr. Economist GPVDR Economist Lamija Marjanovic Sr. Financial Management Specialist GGOPR Financial Specialist Esma Kreso Sr. Environmental Specialist GENDR Environmental Specialist Maria Davalos Sr. Economist GPVDR Economist Lidia Ceriani Economist DECWD Economist Jose Janeiro Sr. Finance Officer WFALA Finance Officer Maiada Kassem Finance Officer WFALA Finance Officer Elena Kantarovich Financial Sector Analyst GFMD1 Operations Officer Nejme Kotere Program Assistant ECCU4 Program Assistant Amanda Schneider Sr. Program Assistant SBS Program Assistant Charlotte Wu Homme Consultant GFMD1 Economist Lejla Zaimovic Program Assistant ECCBM Program Assistant Supervision Dusko Vasiljevic Sr. Private Sector Specialist GTCDR ICR TTL (b) Staff Time and Cost Stage Lending Supervision/ICR Staff Time and Cost (Bank Budget Only) USD Thousands (including No. of staff weeks travel and consultant costs) FY , FY , Total: , FY , Total: ,

34 Annex 2. Beneficiary Survey Results Not Applicable 24

35 Annex 3. Stakeholder Workshop Report and Results Not Applicable 25

36 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR The Borrower did not prepare a completion report for this operation. The draft ICR was shared with Ministry of Finance and Treasury BiH, Ministry of Finance of Republika Srpska, Ministry of Finance of Federation BiH on December 29, Comments were received from the RS Ministry of Finance, relating mostly to terminology used in the ICR and names of various institutions and documents. These comments were reflected in the final version of the ICR. The FBiH had no comments to the proposed draft. 26

37 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Not Applicable 27

38 Annex 6. List of Supporting Documents Bosnia and Herzegovina - Country partnership strategy for FY12-FY15, World Bank Group report no , August 2011 Bosnia and Herzegovina - Country partnership strategy progress report for the period FY12-FY15, World Bank Group report no , June 2014 Bosnia and Herzegovina - Country partnership framework for the period FY , World Bank Group report no , November 2015 Bosnia and Herzegovina - Staff Report for the 2012 Article IV Consultation and Request for Stand-By Arrangement, International Monetary Fund Country Report no. 12/282, October 2012 Bosnia and Herzegovina - Request for Extended Arrangement under the Extended Fund Facility, International Monetary Fund Country Report no. 16/291, September 2016 Bosnia and Herzegovina Report 2016, European Commission Bosnia and Herzegovina Report 2015, European Commission 2014 Progress Report for Bosnia and Herzegovina, European Commission 2013 Progress Report for Bosnia and Herzegovina, European Commission 2012 Progress Report for Bosnia and Herzegovina, European Commission 2011 Progress Report for Bosnia and Herzegovina, European Commission Reform Agenda for Bosnia and Herzegovina , Council of Ministers of Bosnia and Herzegovina, Government of the Federation of Bosnia and Herzegovina, Government of the Republika Srpska, the governments of: Una-Sana Canton, Posavina Canton, Tuzla Canton, Zenica-Doboj Canton, Bosnia-Podrinje Canton, Central Bosnia Canton, Herzegovina-Neretva Canton, West Herzegovina Canton, Sarajevo Canton, Canton 10 (West Bosnia Canton), Government of Brcko District, July 2015 White Book 2010/11, BiH Foreign Investors Council, 2011; White Book 2012/13, BiH Foreign Investors Council, 2013; White Book 2015/16, BiH Foreign Investors Council,

39 Annex 7: Detail of Analytical Work that Contributed to the Operation As stated in paragraph 18 of the main document above, the structure of the BE DPL and the content of its three pillars significantly benefited from extensive analytical and TA work. Below, further detail of this work is provided: - Regulatory Impact Assessment Report on Business Registration process in Republika Srpska (completed in September 2012): a comprehensive impact assessment of priority area of business registration; RS Government s working group consisting of 21 different institution in detail assessed the process identifying bottlenecks and proposing different reform options; Based on this assessment RS Government initiated the comprehensive reform and introduced the one-stop shop (OSS), supported under Pillar 1 of the operation. - Regulatory Impact Assessment Report on Federation BiH Company Law (completed in March 2013): FBIH Ministry of Energy, Mining and Industry initiated this process aiming to assess the legal framework for companies in FBIH, especially due to the fact that the given law was enacted in 1999 and had undergone 14 amendments and changes; the inter-institutional working group established for the first time at the level of FBIH Government, assessed three key areas covered by this law, including business registration, corporate governance and operations of associated enterprises; This process resulted in drafting and adoption of the new Company law in Federation BIH streamlining and simplifying business registration process and reducing the founding capital by 50 percent, supported under Pillar 2 of the operation. - Competitiveness Study for Three Value Chains in the Agribusiness Sector (completed in December 2012): respective authorities conducted these studies aiming to define a strategic approach to product development, trade and investments; furthermore, studies summarized policy recommendations that led to streamlining of export-import procedures enhancing cross-border trading, supported under Pillar 3 of the operation. - Firm-level data collection and analysis of the crisis effect in inspection supervision (completed in March 2013 based on 2012 data): respective data has been collected by inspectorates assessing the number of controls, duration of single control, as well as time spent and inspectors efficiency. These were used to help drafting of the new Inspection Law under Pillar 2. - EU Final Report of Food and Veterinary Audit carried out in BIH (completed in February 2012), contributed to work on inspections reform under Pillar 2 and to streamlining export import procedures under Pillar 3. - Compliance Cost Savings Assessment in construction permitting (completed in 2013 based on 2012 data) whereas data had been collected from all municipalities implementing construction related legislation assessing procedures, time and cost related to permitting processes. This was used to help shape reforms supported under Pillar 2 and estimate their impact. - Compliance Cost Savings Assessment of export-import procedures in key export sectors (completed in 2013 based on 2012 data) whereas data had been collected from respective inspectorates and ministries competent for these procedures assessing steps, time and cost related thereto. This was used to help shape reforms supported under Pillar 3 and estimate their impact. 29

40 Annex 8: Map of Bosnia and Herzegovina 30