Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN EURO 67.8 MILLION (US$85.0 MILLION EQUIVALENT) TO THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Human Development Sector Unit Europe and Central Asia Region Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EURO 67.8 MILLION (US$85.0 MILLION EQUIVALENT) TO THE REPUBLIC OF CROATIA FOR AN EDUCATION SECTOR DEVELOPMENT PROJECT AUGUST 17,2005 Report No: HR This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May 3 1,2005) Currency Unit = Croatian Kuna (HRK) EUR 1 = US$1.25 US$1 = HRK5.79 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADP CARDS CAS CFAA CPAR EC EMIS ESDP ESFA EU EU-8 EU-15 EU-25 ICB IMF MEPPPC MIC MoF MOSES MSTD MTEF NCB NGO OECD PHARE PPL QER SA0 SBD s IL SWAP Annual Development Plan Community Assistance for Reconstruction, Development and Stability Country Assistance Strategy Country Financial Accountability Assessment Country Procurement Assessment Report European Commission Education Management Information System Education Sector Development Project Education Sector Fiduciary Assessment European Union European Union member states that acceded to the EU in 2004 (less CyprudMalta) European Union member states prior to accession of new countries in 2004 European Union member states after accession o f new countries in 2004 International Competitive Bidding International Monetary Fund Ministry of Environmental Protection, Physical Planning and Construction Middle Income Country Ministry of Finance Ministry of Science, Education and Sports Ministry of Sea, Tourism, and Development Medium-Term Expenditure Framework National Competitive Bidding Non-Governmental Organization Organization for Economic Cooperation and Development Poland and Hungary Action for Restructuring of the Economy Public Procurement Law Quality Enhancement Review State Audit Office Standard Bidding Documents Specific Investment Loan Sector-Wide Approach Vice President: Country ManagedDirector: Sector Director: Sector Manager: Task Team Leader: Shigeo Katsu Anand K. Seth Charles C. Griffin Maureen McLaughlin Rosita Van Meel

3 FOR OFFICIAL USE ONLY CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT CONTENTS A. B. C. D. Page STRATEGIC CONTEXT AND RATIONALE Country and Sector Issues... 1 Rationale for Bank Involvement... 3 PROJECT DESCRIPTION Lending Instrument... 3 Project Objectives... 3 Project Priorities... 3 Lessons Leamed and Reflected in the Project Design... 4 Alternatives Considered and Reasons for Rejection... 5 IMPLEMENTATION Partnership Arrangements Institutional and Implementation Arrangements Monitoring and Evaluation of Outcomes and Results Sustainability Critical Risks and Possible Controversial Aspects., Loan Conditions and Covenants... 7 APPRAISAL SUMMARY Economic and Financial Analyses Technical Fiduciary Social Environment Safeguard Policies Policy Exceptions and Readiness This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 ANNEXES Annex 1. Annex 2. Annex 3. Annex 4. Annex 5. Annex 6. Annex 7. Annex 8. Annex 9. Annex 10. Annex 11. Annex 12. Annex 13. Country and Sector Background Major Related Projects Financed by the Bank and Other Agencies Results Framework and Monitoring Detailed Project Description Implementation Arrangements Financial Management and Disbursement Arrangements Procurement Economic and Financial Analysis Safeguard Policy Issues Project Preparation and Supervision Documents in the Project File Statement of Loans and Credits Country at a Glance MAP IBRD33394

5 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Date: August 17,2005 Country Director: hand Seth Team Leader: Rosita Van Meel Sectors: General Education Sector Sector Manager: Maureen McLaughlin Themes: Education for All Project ID: PO86671 Lending Instrument: Specific Investment Loan Environmental screening category: Partial Assessment Safeguard screening category: Limited impact [XI Loan [ ] Credit [ 3 Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (USsm.): 85.0 equivalent, or EUR 67.8 million Proposed terms: FSL, euro, level semesterly payments STRUCTION AND DEVELOPMENT Total: Responsible Agency: Ministry of Science, Education and Sports FY Annual 25.o Cumulative 25.O Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7 [ ]yes [ x j ~ o [ ]Yes [XINO [XIYes [ ]No [XIYes [ ]No Project development objective Ref: PAD B.2

6 The development objective of the ESDP is improved student leaming and system performance. The medium-term goal is that teachers and students will use a wider range of appropriate methods in teaching and leaming, and that system management (including policy development, implementation, monitoring and fiduciary oversight) is strengthened. Project description Re$ PAD B.3, Annex 4 The ESDP is arranged around four priority themes: Priority One - Enriching the Classroom. The Govemment s ESDP has an ambitious aim to renew curriculum in all schools and to shift the focus o f teaching towards active learning, problemsolving and understanding. The ESDP supports this transformation by implementing the National Education Standards now under preparation by MoSES in school curricula, developing teachers professional knowledge and skills, and promoting school-level improvement by creating professional learning communities for teachers in schools. Priority Two - Improving Monitoring and Evaluation. One objective of the ESDP is to establish an externally administrated school leaving examination, Matura. The ESDP supports the design and establishment of this examination and related logistics, and also supports developing policies, activities and structures that aim at improving the capacities of the education system to collect, analyze, assess and disseminate information related to the system s performance. Priority Three - Strengthening Management and Leadership. The ESDP supports efforts to improve management, e.g. policy development, planning and fiduciary capacities at the central level, administration and coordination capacities at the regional level and educational leadership at school level. The ESDP will also support the establishment of a system including facilities for leadership training for school principals, regional and local education authorities and MoSES staff. Priority Four - Supporting Regional Development and Innovations. The ESDP will support regional plans and programs to reduce the number of schools that operate in multiple shifts by supporting regional initiatives and infrastructure investments and by promoting opportunities for schools to provide more optional and non-formal activities. Which safeguard policies are triggered, if any? Re$ PAD D.5, Annex 10 The project was rated Category B (environment). I Significant, nonstandard conditions, if any, for: Re$ PAD C.6

7 Conditions of effectiveness a. The Borrower, through MoSES, shall have adopted the Operational Manual, satisfactory to the Bank. Covenants applicable to project implementation: a. The Borrower shall carry out the Project in accordance with the provisions of the Operational Manual, including provisions of the Environmental Management Plan, and shall not amend, suspend, abrogate, repeal or waive any provision of the Operational Manual without prior approval of the Bank. b. On behalf of the Borrower, MoSES shall have overall leadership and coordination role for the execution of the Project, with staffing and resources adequate to enable it to effectively oversee the Project implementation. MoSES shall designate its Finance Department to: (a) prepare applications for withdrawal of the Loan proceeds; (b) maintain records and accounts related to the Project and to arrange the audit thereof; and (c) incorporate procurement activities reports into its annual ESDP reports. c. The Borrower, through MoSES, shall: (a) not later than October 1 of each year during the implementation of the Project or such later date as may be agreed by the Bank, submit to the Bank an Annual Development Plan (ADP), satisfactory to the Bank and the Borrower, prepared in accordance with the format included in the Operational Manual and which shall include agreed amounts o f Transfers for ADPs for the respective Fiscal Year; (b) not later than June 30 of each year during the implementation of the Project, or such later date as may be agreed by the Bank, provide to the Bank for its review, a report on the progress achieved in the carrying out of the Project during the period preceding the date of said report, as monitored pursuant to indicators and monitoring arrangements, set forth in the Operational Manual; and (c) jointly undertake with the Bank review of the Project activities based on the report referred to in sub-paragraph (b) above.

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9 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Croatia is moving well past the challenges presented by national independence and economic transition, and is now focusing its efforts on European Union (EU) accession and the accompanying structural reform agenda. In June 2004, the European Council (EC) granted Croatia candidate status for EU membership, noting that Croatia (i) is a functioning democracy; (ii) can be regarded as a functioning market economy; and (iii) can be expected to assume the other obligations of membership over the medium term. While EU accession and the related requirements around the acquis communautaire will be the focus of much national attention over the next several years, Croatia is also facing major structural challenges to improve its competitiveness and investment climate, to strengthen govemance, and to ensure broader participation in growth. The development of education in Croatia will occur against the backdrop of fiscal consolidation over the medium term. Public expenditures still account for a little less than 50 percent of GDP, which is very high compared to EU accession and candidate country averages. The Government gradually reduced the fiscal deficit from 8.1 percent of GDP in 1999 to 4.5 percent of GDP in 2002, but these gains were partly reversed as a new round of spending increases led to an increase in the fiscal deficit to an estimated 5.8 percent of GDP in The fiscal deficit in 2004 fell to 4.5 percent of GDP, and the 2005 program is seelung an additional one percent cut in the deficit through additional consolidation. Real GDP growth has been positive, but has declined from 5.2 percent in 2002 to 3.8 percent in The external debt rose from 60 percent of GDP in 2000 to 82.4 percent of GDP in 2003, and despite monetary and fiscal tightening it grew further to 88.1 percent of GDP (in US Dollars; or 80.5 percent of GDP in EUR). The current account balance improved over the last two years from 8.4 percent of GDP in 2002 to 4.9 percent of GDP (if measured in USD; or 4.6 percent of GDP) in The Government is working closely with the IMF and the World Bank Programmatic Adjustment Loan (PAL) team to support further fiscal adjustment and to reduce external vulnerability. As Croatia s opening to the EU continues to advance, there is a stronger consensus than ever between the education authorities and key stakeholders that the system requires significant changes in order to be able to respond to current and future needs of individuals and the society alike. The primary purpose o f the Education Sector Development Project (ESDP) is to help the Ministry of Science, Education and Sports (MOSES) to reflect this demand for change by developing and implementing a comprehensive education strategy that will lead to results on the ground, while helping the management and administration of the education system to monitor and implement the necessary changes. The Education Sector Development Plan (the Plan) was accordingly approved by the Government in June 2005, and the following are the key challenges that the Plan addresses: It is necessary to revisit what is being taught in schools. Despite the best efforts of teachers and students, Croatian schools are operating with curricula that remained to a large extent as it was in the beginning of 1990s. The Croatian National Competitiveness Council (which consists of representatives o f private sector companies, confederations o f trade unions, academia and the Government) has frequently articulated the significant gap between what young employees know and are able to do, and what is expected by increasingly competitive knowledge economies. What is needed is a new national curriculum that stresses knowledge and skills as dynamic transferable processes to be learned in schools, in order to develop the attitude of lifelong learning 1

10 among young people. It is also necessary to renew teaching and leaming materials, to upgrade the educational facilities in schools, and to introduce a national system for in-service training and professional development of teachers. Vocational education and training is ill-equipped to prepare young people for the challenges of today and tomorrow. Vocational education and training suffers from many years of underinvestment and, as a consequence, ill-adjusted programs, materials and equipment, as well as a negative selection of teachers. It may be considered largely out of tune with the needs of the labor market and society at large. Enrolling into a vocational and technical program is now only a second-best choice. Many young people who make the transition from primary to secondary education end up in programs which they have not chosen deliberately. There is an issue o f early streaming o f students, as well as the high risk o f ill-motivated students dropping out of education in an early phase. Most vocational and technical education programs train for very narrow specializations. The capacity of the public administration is not in resonance with sector needs. The rapidly moving societal context in Croatia would challenge even well developed education systems. MOSES needs to strengthen substantially its capacity to develop and implement sector policies. The education information management system is very weak, and is thus not able to support policy development or the monitoring of the system s performance. The sector utilizes several parallel information systems that do not take advantage of modem information technologies. Evaluations of the education system are very rare: for example there is no reliable information about school performance or student achievement. The country s education evaluation policies have not been clearly articulated. Regions and schools need to be more involved in education sector development. Education policy is usually developed by the central administration, but this policy is largely implemented at the local levels, especially in schools. Regional education authorities have some facilities supported by the central Ministry to plan and implement improvements financed from annual budgets. However, the education system needs more dynamic mechanisms that would encourage and support regional and local innovations in education or significant development initiatives of education infrastructure. The structure of public expenditures in education slows down the pace of reforms. Public expenditures for education are just over five percent of GDP, roughly on balance with the average of the EU-25, but below the OECD s 6.2 percent (including private). Much of that expenditure focuses on recurrent costs such as salaries, and under-financing of education in the 1990s and poor expenditure management left a deficit in the system in terms o f greater need for investments in infrastructure and quality improvement. The capacity to adapt to changing needs i s weak due to the lack of robust efficiency control measures, the need for more equity and transparency in budgetary allocation, and the unbalanced structure o f the education budget in terms of categories of expenditure and sources o f funding. Investments in education will be costly, but will require a hard look at the current structure o f expenditures in order to identify potential efficiency gains. There will be fewer Croatian pupils and students in schools in the future. Demographic developments have followed those experienced in many other Eastern European countries. Falling birth rates and migration have caused decline in total population that is now showing dropping school enrolments. According to these forecasts, by 2020 there will be about one quarter fewer students in pre-tertiary schools than in

11 2. Rationale for Bank Involvement As in many other countries, successful and sustainable education change in Croatia will need to twin local expertise with external partnerships and support. In collaboration with the European Union and the OECD, the World Bank will bring to Croatia international and regional knowledge and best practices that will eventually lead the launch of system-wide renewal. The key success factors of the World Bank involvement in the Croatian education sector include the Bank s institutional knowledge and know-how of education reforms, as well as its capacity to help Croatia education authorities, policy-makers, researchers and teachers to learn from the global education community. The World Bank has the potential in Croatia to bring together stakeholders and the international community to provide a needed critical mass that will keep the reform process in the move. Higher level objectives to which theproject contributes. The ESDP supports the overall objectives of the draft Country Assistance Strategy ( , approved by the Government of Croatia on November 1 1, 2004 and endorsed by the World Bank Board on December 21, 2004). In particular, the ESDP will contribute to wider participation in the economic growth by improving the targeting, sustainability, quality, and efficiency of education services. B. PROJECT DESCRIPTION 1. Lending Instrument The loan amount is EUR 67.8 million (US$85.0 million equivalent). The ESDP will support the implementation of the priority areas in the Government s June 2005 Education Sector Development Plan, and is a sector-wide approach (SWAP) financed through a Specific Investment Loan (SIL). Accordingly, the ESDP will finance a share of the MoSES annual education development expenditures as articulated in Annual Development Plans (ADPs). Each ADP will be completed by October 1, or such later date as may be agreed with the Bank. The ADPs will, inter alia, specify the activity plan, required investment needs, agreed schedule, budget and procurement plan for the following year, and will inform the education sector s budget submission to Government and Parliament. The Bank s ESDP financing is restricted to the expenditures specified in the ADPs and included in the approved budget line items for education, and is expected to be less than 50 percent of the ADPs. Annual disbursement levels may be modified in a flexible way based on overall progress in the sector, as well as on changes that may occur in estimated project needs. Disbursements will be made in two advances as specified in each year s ADP beginning in Financial Monitoring Reports (FMRs) will be issued semi-annually in a format agreed in the ESDP Operational Manual. 2. Project Objectives The development objective of the ESDP is improved student learning and system performance. The medium-term goal is that teachers and students will use a wider range of appropriate methods in teaching and learning, and that system management (including policy development, implementation, monitoring and fiduciary oversight) is strengthened. The project will be monitored through an established set of indicators (see Annexes 3, 6 and 7). Progress against those indicators will be reviewed annually by all key stakeholders by June 30 of each year through an independent evaluation report, thus informing the dialogue on each annual ADP. 3. Project Priorities The actions to be supported through ESDP and included in the ADPs o f the MoSES are arranged around four priority themes: 3

12 Priority One - Enriching Classroom Practices. The Government s ESDP has an ambitious aim to renew curriculum in all schools and to shift the focus of teaching towards active learning, problem-solving and understanding. The ESDP supports this transformation by implementing the National Education Standards now under preparation by MoSES in school curricula, developing teachers professional knowledge and skills, and promoting school-level improvement by creating professional learning communities for teachers in schools. Related activities will include training of school curriculum specialists, in-service training for teachers, new teaching and learning facilities including computers and software, upgrading regional teacher training centers, new curriculum materials for teachers and grants to the schools. Priority Two - Improving Monitoring and Evaluation. One objective of the ESDP is to establish an externally administrated school leaving examination, Matura. Beginning in 2009, this examination will become compulsory for all (four-year) secondary school students. The ESDP supports the design and establishment of this examination and related logistics, including incremental recurrent costs required for start up of this new institution, as well as the development of educational evaluation practices within the education system. Moreover, the ESDP supports developing policies, activities and structures, e.g. EMIS and national student assessment system, that aim at improving the capacities of the education system to collect, analyze, assess and disseminate information related to the system s inputs, processes and performance, including students achievement. Priority Three - Strengthening Management and Leadership. The MoSES recognizes the need for overall improvement of educational management at various levels of the education system. The ESDP supports efforts to improve management, e.g. policy development, planning and fiduciary capacities at the central level, administration and coordination capacities at the regional level and educational leadership at school level. The development and refinement of the national steering system of education will be connected to the implementation of the project. The ESDP will also support the establishment of a system including facilities for leadership training for school principals, regional and local education authorities and MoSES staff. Priority Four - Supporting Local Development and Innovations. The ESDP will aim to reduce the number of schools that operate in multiple shifts by supporting local initiatives and infrastructure investments and by promoting opportunities for schools to provide more optional and non-formal activities. 4. Lessons Learned and Reflected in the Project Design The implementation framework of this operation is based on growing Bank experiences with SWAP design and implementation (e.g., Poland Roads, Morocco Basic Education Reform Support Program, India Education, Ghana Health, and a number of others). The content draws from the Bank s direct engagement with the education authorities and counterparts in Croatia, on the education practices and priorities in EU countries, and on international experience in education. In particular, the EU is investing significant resources to assist Croatia to adjust its procedures, structures and policies to those required in the acquis communautaire. The experiences of other states that have successfully completed the EU accession process clearly show the importance of structural reforms in education to strengthen competitiveness and labor force effectiveness. To achieve sustainable leadership and change, the Croatian education system will benefit from sector-wide development rather than reforms through stand-alone projects. Sustainable educational leadership and changes in the ways the system works can be achieved by supporting Government s efforts to improve the entire education system, as described in the Education 4

13 Sector Development Plan. This, among other things, will help the Government to strengthen planning, management and monitoring of education that are essential requirements in the changing European Community and its knowledge economies. 5. Alternatives Considered and Reasons for Rejection A SWAP approach was selected after discussing the relative merits of a traditional investment loan approach with the Government, and reflecting the lessons leamed from the Bank s evolving experience with middle income countries in ECA. The design was also recommended during the ESDP Quality Enhancement Review (QER). A SWAP seemed best suited to address Croatia s needs in a flexible way because: (1) the proposed operation is promoting systemic change to better address the expectations of a changing society, rather than project level change; (2) a SWAP is better suited to address systemic inefficiencies, and Croatia already functions fairly well in terms of access and equity; and (3) sector-wide programmatic approaches provide a superior opportunity for the Bank and other sector partners to engage in continuous education policy dialogue with the Government. C. IMPLEMENTATION 1. Partnership Arrangements The ESDP is available to co-finance the efforts of other aid partners, should the Government so decide as structural funds become increasingly available to the country. The ESDP will be useful in orienting consultations with the Ministry s external partners. The EU, through successive Community Assistance for Reconstruction, Development and Stability (CARDS) projects being implemented between 2003 and 2007, is investing a total of EUR 7.6 million to continue development of secondary vocational education and training and adult learning. Investments in the social sector, including education, will increase considerably thereafter. It has been agreed that, apart from the exchange o f information on a regular basis and ad hoc meetings, EU representatives will be invited to the ESDP review meetings and the Bank ESDP team to the EU coordination meetings. 2. Institutional and Implementation Arrangements The MOSES will lead and coordinate implementation of the Project under the overall guidance of the Ministry s management team and the Assistant Minister for Primary Education, and with overall project, financing and reporting support provided by the Assistant Minister for Finance (see Figure 1). An ESDP Project Manager was appointed in early 2005, and will provide project logistical support on implementation, monitoring and ADP preparation. The Ministry has appointed an official to manage each of the four project priorities. Building on substantial work to date during the preparation of the ESDP, the Bank team will work in partnership with the Ministry to continue to identify and implement areas where the sector s management and administration can be strengthened. The overall areas will include (i) policy development, implementation, monitoring and evaluation; (ii) fiduciary structures and procedures; and (iii) regional and local management capacity. An Operational Manual will provide the overall framework for carrying out the project, and will include the ESDP itself, the activity plan and overall project budget, the monitoring and evaluation arrangements, financial management and disbursement arrangements, detailed description of applicable procurement procedures and format of the procurement plan, and other materials as necessary. The Manual will be regularly revised, in agreement with the Bank, as institutional capacity improves and project implementation progresses. The project will strengthen the Govemment s administrative and fiduciary structures to reduce transaction costs for the Client and the Bank where possible. 5

14 I State Secretaries Primary Secondary Tertiary ESDP ESDP Program Manager (Professional Secretariat for ADP, Monitoring, Overall Coordination A Assistant Ministers and Technical Departments Primary Secondary Tertiary Finance Joint Programs and minorities 41 [Priority 31 [Priority 11 [Priority 21 I 1 [priority I I...,... ~ Adviser: National Education Standards National Evaluation Center: Fiduciary Treasury (FMRs on subaccount) Education (works on all priorities + PISA) 3. Monitoring and Evaluation of Outcomes and Results Project performance will be monitored annually each June through an independent report on ESDP progress using a set of sector-wide indicators partially based on the indicator system under development in the European Union, as well as on project specific activities. These indicators are described in Annex 3. Successful monitoring of the ESDP requires strengthening of the statistical and information management procedures in the MOSES, as well as in the level of overall public administration, so that Croatia can increasingly benchmark its performance against the EU, OECD and global trends. EU CARDS is undertaking a feasibility study on the introduction of the Education Management Information System in Croatia (vocational education section only) and the ESDP will be available to support extending and implementing that plan by Fiduciary indicators are indicated in Annexes 6 and Sustain ability Sustainability will in part depend on visible progress in the sector, so that the current enthusiasm for change can be maintained. The flexible annual financing approach embedded in the ADPs further supports sustainability, as Project activities will be financed within each year s budget framework. Overall fiscal pressures will particularly require that attention be paid to avoiding inefficient investments in allocating funds for building schools and school premises. In addition to the decreasing numbers of school-aged children and youth, there will be a major change of enrolments and student numbers in different secondary forms and fields of secondary education. Sustainability in building institutional capacity needs careful analysis and planning. The Ministry will develop clearer organizational lines for 6

15 (i) education, (ii) science and technology, and (iii) sports. Sustainability of the ESDP and the early impact of its implementation will be supported by targeted advice and support to the MoSES. 5. Critical Risks and Possible Controversial Aspects The ESDP risks are identified in the following matrix. These risks were identified in consultation with the Client. The overall risk rating is moderate as this operation is not attempting to create or modify existing structures or to ring-fence Bank financing. The Client will engage in capacity building within ESDP in order to strengthen sector management and administration. Risk Lack of sustainability of change agenda Weak capacities to implement the Annual Development Plans Education sector development priorities inadequately funded Slower than expected performance on outputs and goals Teaching quality in schools is not improving as quickly as expected Weak fiduciary systems at both countrylevel and sector-level Risk rating Risk Mitigation Measure Project supervision will focus on the technical substance of the ESDP, utilizing the SWAP approach to reduce time spent on administrative processes June reviews will identify if the change agenda in the ESDP is being maintained Institutional assessment and identification of capacity building areas will lead to organizational development at central and local levels and in schools Technical assistance to strengthen sector management Technical assistance to the local levels to carry out ESDP activities Sector expenditure reviews to inform budget dialogue each year Annual Development Plans based on the ESDP Priorities, including financing in the following year budget consistent with overall fiscal agenda Indicators with annual targets will improve identification of shortfalls in implementation Improve central and local capacities to target support directly to schools Identify and implement ways to strengthen community involvement in education Utilize newly established external student assessment system to inform policymakers, teachers and students on education outcomes Country level risks will be addressed through the PAL program. Sector-level risks will be mitigated through capacity building measures at the central and local levels Rating M S S M M S M 6. Loan conditions and covenants. Bv effectiveness: a. The Borrower, through MoSES, shall have adopted the Operational Manual, satisfactory to the Bank. Covenants: a. The Borrower shall carry out the Project in accordance with the provisions of the Operational Manual, including provisions of the Environmental Management Plan, and shall not amend, suspend, abrogate, repeal or waive any provision of the Operational Manual without prior approval of the Bank. b. On behalf of the Borrower, MoSES shall have overall leadership and coordination role for the execution of the Project, with staffing and resources adequate to enable it to effectively oversee the Project implementation. MoSES shall designate its Finance Department to: (a) prepare 7

16 applications for withdrawal of the Loan proceeds; (b) maintain records and accounts related to the Project and to arrange the audit thereof; and (c) incorporate procurement activities reports into its annual ESDP reports. c. The Borrower, through MoSES, shall: (a) not later than October 1 of each year during the implementation of the Project or such later date as may be agreed by the Bank, submit to the Bank an Annual Development Plan (ADP), satisfactory to the Bank and the Borrower, prepared in accordance with the format included in the Operational Manual and which shall include agreed amounts o f Transfers for ADPs for the respective Fiscal Year; (b) not later than June 30 o f each year during the implementation of the Project, or such later date as may be agreed by the Bank, provide to the Bank for its review, a report on the progress achieved in the carrying out of the Project during the period preceding the date o f said report, as monitored pursuant to indicators and monitoring arrangements, set forth in the Operational Manual; and (c) jointly undertake with the Bank review of the Project activities based on the report referred to in sub-paragraph (b) above. D. APPRAISAL SUMMARY 1. Economic and Financial Analysis The social benefits of education, specifically the synergies between education and the promotion of a good investment climate, constitute a primary rationale for the public funding of education in Croatia. A good investment climate provides opportunities and incentives for firms - from micro-enterprises to multinationals - to invest productively, create jobs, and expand. It thus plays a central role in growth and poverty reduction (World Development Report 2005). Improving the investment climate goes hand in hand with enhancing human capital. A skilled workforce is essential for firms to adopt new and more productive technologies, and skill constraints are a common problem for firms, especially those planning to innovate and expand. Conversely, firms that do not experience much competitive pressure may not seek to innovate and expand and may deem skill constraints to be less of a problem. When estimating public expenditures in the education sector in Croatia, it is important to bear in mind that MoSES is the main but not sole actor -- other central govemment ministries also spend on education, and expenditures are incurred at the level of local govemment as well. MoSES expenditures amount to 72 percent of total public education expenditures, while local government expenditures are 26 percent of total education expenditures (over 40 percent of which are for pre-school), and the Ministry of Sea Transport and Development accounts for 2 percent (exclusively for school construction and reconstruction). MoSES itself spans science and sports in addition to education, so that not all its expenditures should count as public expenditures in education. Focusing on MoSES planned 2005 expenditures by economic classification; it is clear that recurrent expenditures constitute the lion s share of total expenditures (92.9 percent). This finding underlies the ESDP s focus on boosting the capital investment budget share within MoSES, particularly given that it is not anomalous for 2005 but represents the recent historical trend. Croatia s Medium-term Expenditure Framework (MTEF) projects incremental increases in the education sector budget share of total Government expenditure over the next three years. It will be increasingly necessary to focus on sector efficiency of expenditure, particularly given the high share of recurrent expenditures within the system. 2. Tech ical The technical design of the ESDP is based on contemporary research and knowledge of large-scale education reforms that aim at qualitative and quantitative changes in education. The weaknesses in the 8

17 education system are functional, i.e. management, administration, organization and monitoring of the system. A project approach that by definition would have focused on the selected elements of the education system rather than on their inter-relatedness would not have a sustainable an impact on intended areas of education. The selected approach that addresses entire education sector is on par with educational good practices in reforming education systems. The ESDP will aim at a performance-based financing modality that would promote efficiency, reform, innovation, and accountability in the education sector. Each year s ADP should set expenditures in accordance with an assessment of progress against output targets, development milestones, and institutional performance benchmarks, as well as on projected sector needs. 3. Fiduciary Croatia s fiduciary systems are malung progress as EU accession approaches. This project will continue to strengthen those systems, while working in partnership with the authorities. A Bank team prepared a draft Education Sector Fiduciary Assessment (ESFA) that examined the main institutions and expenditure systems likely to play a role in the ESDP (see project files). Fiduciary issues will be addressed through an agreed assistance program. Findings are detailed in annexes 6 and 8. As of the date of this report, the Borrower is in compliance with its audit covenants o f existing Bankfinanced projects. Annual audited project financial statements will be provided to the Bank within six months of the end of each fiscal year and also at the closing of the project. Draft formats of the FMRs have been developed and are attached to the minutes of negotiations. The latest drafts of the Croatia CFAA and CPAR reports (November 2004) conclude that the overall fiduciary risk attaching to Croatia s public financial management framework (budgeting, treasury and cash management, accounting and financial reporting, internal control and internal audit, external audit and legislative oversight, and sub-national government) is significant and (moderately) high for public procurement. However, at a disaggregated level there are areas of the Croatian public financial management framework that operate at fairly low levels of risk and which will be relied upon by the ESDP. Most notably, the Treasury systems as used by first-level Budget Holders and ministries in particular appear to be fairly robust. The procedures and controls pertaining to this segment of the Treasury systems appear capable of producing reliable and timely information on Budget execution. Since late 2004, Croatia s public procurement system has entered a phase of changes in preparation for EU accession. The public procurement law (Public Procurement Act, 2001) has gone through an initial round of amendments, which the Cabinet approved in June An amended Public Procurement Act will provide an intermediate legal basis of acceptable standards until a new law is adopted in The ESFA finds that procurement systems at all levels (country, sector and institutional) need to be substantially strengthened to operate in a structured and reliable control environment. MOSES will allocate part of the ADP budget funds for provision of technical assistance to the institutions participating in the implementation of the ESDP. This will allow the Client to start the process of procurement strengthening and improving procurement practices of the participating institutions acting as procuring entities in the education sector. Further details are presented in Annex Social A rapid stakeholder analysishocial assessment has been completed and is summarized in Annex 10 (it is also in the Operations Manual). A desk review of national surveys was conducted, and stakeholder focus groups and interviews were held. The report found broad consensus among stakeholders that reform needs to occur and identified the specific interests and concerns of several stakeholder groups. In 9

18 addition, ongoing consultations with stakeholders have occurred in the course of preparation, and conferences and workshops are planned to continue this consultative process. The 2001 Economic Vulnerability and Welfare study indicates that poverty in Croatia is relatively low and shallow. At the end of 199Os, only four percent of the population lived on less than US$4.30 a day (at the purchasing power parity), and about 10 percent lived on less than US$8.60 a day, which the study suggested is an appropriate poverty line for Croatia. The poverty gap was about 1.8 percent, and on average the consumption of a poor household was 20.7 percent below the poverty line. The report estimated that to lift all poor out o f poverty with perfect targeting would cost only about one percent of GDP. The results also showed that there are no significant differences in the prevalence o f poverty by gender. Income inequality measured by the Gini coefficient was 0.29 in 2002, which is a bit higher than the average in advanced transition countries. Certain regions (Slavonia) have higher poverty rates. An Update is programmed for completion in FY Environment The project has been classified as category B due to anticipated construction of schools and educational facilities through loan financing as part of the government s education sector expenditures. An environmental review has been conducted to assess the application of Croatian environmental laws, permits, and practice to schools construction in Croatia in line with this loan s reliance on national systems. This has been compared with the typical requirements o f World Bank environmental safeguards to assess similarities and gaps in practice. The environmental assessment concluded that the construction proposed under this project would not trigger a full Environmental Impact Assessment under either the Croatia laws or World Bank Policies. The type of environmental impacts of concern are localized in nature and more adequately addressed through environment permits and good construction practice, or in the case of World Bank policies through an environmental management plan (EMP). Issues to be addressed through these instruments include proper waste management and disposal of construction debris (inc. asbestos), proper waste water treatment; heating and fuel system assembly, lab operation safety plans where applicable, dust and noise control, sensitivity of designs to cultural settings; and cultural heritage/chance finds procedures. An environmental management plan (EMP) for the project has been prepared as an example of the issues that will be addressed through the permitting, construction, contracting, and operations of the facilities. This EMP is included in the Operations Manual. In practice, these issues will be addressed through a series o f local permits detailed in the report, through contractor site supervisor oversight, through the local municipality requirements, and in some cases through a small construction unit in the MoSES. Responsibilities for school construction in Croatia has been decentralized to the municipal level, however school construction with national funding remains with some central oversight. MoSES plays a role in establishing guidance to all municipalities through the establishment of a Code of Good Practice. The report recommends that finalization of the Ministry of Education s Code of Good Practice be supported to ensure that it incorporates international and EU standards for the environment as a more systemic way to capture the environmental management plan issues. Training, dissemination and awareness-raising by the Ministry on best practices should also be supported, and a study tour to other EU school systems to review their construction practices would be advisable. Croatia has candidate status for membership in the European Union which includes the need to harmonize national legislation with the acquis communautaire. The environment acquis is one of the most extensive Chapters and updates/revisions are expected to occur over the course o f this project s implementation to align fully with EU practice. Generally this will involve a further expansion of existing public 10

19 participation mechanisms, a greater reliance on up-front screening o f investments, and a stronger reliance on environmental permitting systems (fewer triggered EIAs). EU CARDS funds during this period will be spent on Environmental Impact Assessment Guidelines and Training at the national level. The supervision strategy for the project would include a special mid-term review of construction contracts financed by the Ministry in this period to post-review the application of environmental safeguards and attention to environmental issues. 6. Safeguard Policies OP BP 4.1: The environmental safeguard policy of the Bank is applicable to this project because of the potential construction of school facilities. The project has been assigned a category B rating and has conducted an environmental review with a resulting environmental management plan addressing key issues. This Code will be developed to be fully in line with the EU-acquis communautaire Environment requirements as well as the Croatian systems. The project team will also conduct a post-review of school construction at the mid-term to identify any follow-up actions required to meet safeguard requirements. OP/BP 4.12: World Bank funding will not be used to fund any activities that require land acquisition; therefore, OP 4.12 on Involuntary Resettlement is not triggered. A full Environmental Management Plan and related assessment are included in the Operational Manual. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 7. Policy Exceptions and Readiness There are no exceptions required from Bank policies, and none are anticipated. All disclosure requirements continue to be met. Counterpart funds requirements have been identified and represent part of the 2005 MOSES budget, which was approved by Parliament in November As noted in Annex 3, a comprehensive and results-oriented monitoring plan has been developed and agreed under the project. No co-financing agreements or land acquisition plans have been identified as required at this stage of the project, The executing and implementing agencies have been identified. * By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 11

20 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 1 : Country and Sector Background Croatia is moving well past the daunting challenges of independence and high economic uncertainty, and is now focusing its efforts on European Union (EU) accession and the accompanying structural reform agenda. In June 2004, the European Council (EC) granted Croatia candidate status for EU membership, noting that Croatia (1) is a functioning democracy; (ii) can be regarded as a functioning market economy; and (iii) can be expected to assume the other obligations of membership over the medium term. While EU accession and the related requirements around the acquis communautaire will be the focus of much national attention over the next several years, Croatia is also facing major structural challenges to improve its competitiveness and investment climate, to strengthen governance, and to ensure broader participation in growth. Education will be one of the main determinants of the potential success and prosperity of Croatia as it moves to integrate with the highly competitive and socially diverse European Community. The Education Sector Development Plan was accordingly approved by the Government in June 2005 to address a range of system features and issues, as described below. Curriculum development is needed. Despite the best efforts of teachers and students, Croatian schools are operating with curricula that remained to a large extent as it was in the beginning of 1990s. The Croatian National Competitiveness Council (which consists of representatives of private sector companies, confederations of trade unions, academia and the Government) has articulated the gap between what young employees know and are able to do, and what is expected by increasingly competitive knowledge economies. It is necessary to renew teaching and leaming materials, to upgrade the educational facilities in schools, and to introduce a national system for in-service training and professional development of teachers. The desired shift from an industrial to knowledge-based school organization has a direct impact on the professional development and deployment of teachers. A pressing issue for Croatian education decision-makers today is how to attract able graduates into the teaching profession, how to educate them so they became agents of change and innovation, how to motivate them to continuously improve their knowledge and skills. Participation in compulsory education is high, but the duration is less than in other European systems. The current education system provides widely accessible publicly financed education services from preschool to tertiary and adult education. Pre-tertiary education is provided through eight-year primary school (ages 6 to 14), four-year academic or vocational secondary schools, two-year basic vocational school and secondary level art schools. Participation in primary and secondary education is high with an estimated gross enrollment rates of 96 percent and 82 percent respectively. Approximately 78 percent of pupils who successfully complete primary education continue further studies at the secondary level. Preschool is provided in municipally administrated pre-school institutions to close half (44%) of pre-school children ages three to six, leaving Croatia behind most EU countries with an average participation rate of almost 60 percent. In Croatia, the current eight-year compulsory primary education cycle consists of a 34 week school year with relatively short school days. This, together with an already low school life expectancy (about 25 percent lower in Croatia than in the OECD countries), puts Croatian youth at a disadvantage compared to their peers in Europe (Table 1). 12

21 Country OECD Croatia Age at the end of Length of school Intended instruc- School expectancy compulsory education year (days) tion time (h) (OECD 2002) Multi-shift schools. Although Croatian students benefit from quite generous student teacher ratios at all levels of education, the prevalence o f multi-shift schools presents a real challenge. MoSES estimates that 68.3 percent o f primary and 76.6 percent of secondary schools operate in two shifts and 6 percent of primary schools in three shifts, so the school network is ill-prepared to provide high quality learning opportunities to all students. Teachers are also negatively affected by multiple shifts, as they do not have space for continuous school based professional development activities. There will be fewer Croatian pupils and students in schools in the future. Falling birth rates and migration will lead to lower school enrolments. Projections show that by 2020, there will be about one quarter less students in pre-tertiary schools than in However, the demographic decline will not release pressure on multi-shift schools because of regional differentiations in how populations will change. Age 2000 Total population 4,380, , Total students 2010 Change % 2020 Change % 4,285, ,158, , , , , , , , , , Vocational education and training is ill-equipped to prepare young people for the challenges of today and tomorrow. Enrolling into a vocational and technical program is now only a second-best choice. Many young people who make the transition from primary to secondary education end up in programs which they have not chosen deliberately. There is early streaming o f students, as well as the high risk of illmotivated students dropping out of education in an early phase. Most of these programs train for very narrow specializations. Tertiary education needs substantial improvement. There are a total of 102 tertiary education institutions, offering a wide variety of tertiary education programs. Of these, there are only 5 universities and 7 polytechnics. Tertiary education institutions are autonomous, but they are subject to rigid financing and staffing mechanisms at the center, and little quality control. Faculties in the universities are more independent that their host institutions as a consequence of separate budgeting procedures. This makes it extremely difficult for rectors and university managers to introduce improvements in teaching and research. MoSES estimates that up to 70 percent of students who enrolled in universities never graduate and those who do spent more than seven years to complete study programs of four or five year duration, The introduction of a Council for Quality Assurance in Higher Education will help, over time, to improve the situation at the institutional and program levels. Regions and schools need to be more involved in education sector development. Education policy is usually developed by the central administration, but this policy is largely implemented at the local levels, especially in schools. Regional education authorities have some facilities supported by the central Ministry to plan and implement improvements financed from annual budgets. However, the education 13

22 system needs more dynamic mechanisms that would encourage and support regional and local innovations in education or significant development initiatives of education infrastructure. National minorities. National minorities include Serbian, Italian, Roma, Czech, Hungarian, Slovak, Ukrainian and Jewish populations, and constitute approximately 17,000 students, representing 3 percent of the total number of students attending schools. A significant obstacle for the design of targeted education intervention to address the needs of national minorities is the lack of data regarding their education status and situation. For example, very little is known about the participation of Roma children in education. Despite the effort by the national Government to offer education in the national language of different minorities through three different educational models targeted to the linguistic needs of different ethnic groups, the main issues affecting the provision of education for some minorities is the low quality education received by children in schools and early tracking. Sector management needs strengthening to address the above issues. Croatia s rapidly changing socioeconomic situation would challenge even well developed education systems. MoSES needs to strengthen substantially its capacity to develop and implement sector policies. The education information management system is very weak, and is thus not able to support policy development or the monitoring of the system s performance. MoSES does not have an information base to make valid comparisons of student learning between schools or localities, thus limiting its capacity to design and implement targeted interventions. External evaluations within the education system are rare. The recently approved law on secondary education school leaving examination is one step in that direction. Public expenditures for education are just over five percent of GDP, roughly on balance with Croatia s Western European neighbors. However, much of that expenditure focuses on recurrent costs such as salaries. Moreover, under-financing of education in the 1990s and poor expenditure management left a deficit in the system in terms of greater needs for investments in infrastructure and quality improvement. The capacity to adapt to changing needs is weak due to the lack of robust efficiency control measures, and the need for more equity and transparency in budgetary allocation. The Education Sector Development Plan highlights the above issues, and presents a national vision for the type of education system that best meets Croatia s needs. Because change in education is complex, the ESDP will, in many respects, best serve the education authorities by helping them to prioritize sequence and finance ESDP actions in the sector in a flexible and sustainable way. 14

23 C R 0 AT I A EDUCATION SECTOR DEVELOPMENT PROJECT Annex 2: Major Related Projects Financed by the Bank and/or other Agencies World Bank portfolio The Science and Technology Project (FY05, US$40.0 million programmed) contributes to the reorientation of Croatia's science and technology (S&T) infrastructure, in particular to (i) strengthen and restructure research and development institutions (RDIs) and promote commercialization of research outputs; and (ii) upgrade technological capabilities of enterprises. The operation will be implemented by MOSES. The Social and Economic Recovery Project (FY05, US$30.0 million) addresses the post conflict reconstruction and sustainable development o f Croatia's war-affected and disadvantaged areas. The main development objective is to increase social cohesion and sustainable economic opportunities among different war-affected and marginalized groups within the different ethnic communities living in the project areas. To achieve this, the project will adopt a social fund type of approach to fund communityselected subproject activities. It will include two major components: an investment program, and a local level institutional development program. European Commission The European Commission's Community Assistance for Reconstruction, Development and Stabilisation (CARDS) Programme allocated 8.85 million in 2003 to (i) upgrade vocational education and training by establishing centers of excellence; (ii) decentralize and reorganize the Croatian employment service in order to achieve a better match between labor market needs and supply; and (iii) upgrade labor market statistics to improve, broaden and enhance data collection and processing in line with the EU standards. Now that Croatia has achieved EU candidate status, there may be some funds available for vocational education and lifelong leaming under the Poland and Hungary Action for Restructuring of the Economy (PHARE) program, but these allocations have not been established. Council of Europe Development Bank The Council of Europe Development Bank (CEB) has financed three loans to support the reconstruction of schools that were devastated during the war. The first loan (now closed) supported Eastern Slavonia, and included 34 schools for a total cost of HRK 135 million, of which HRK 67.4 million was financed by CEB. The second loan supported reconstruction of 41 schools in eight war-affected areas through CEB financing of HRK 98.6 million, and is almost 90 percent disbursed. The third loan supports construction or reconstruction of 143 primary and secondary schools in Zagreb and 18 counties that were either directly damaged during the war, or that experienced an increase in the number of students due to refugees or displaced persons, thus incurring indirect war damages to the schools. CEB financing for this last loan is HRK million, and the Framework Agreement was signed on December 15,2004. OECD Croatia will join some twenty-five countries in the ongoing OECD Tertiary Education Review. The ESDP will provide resources to assist Croatia to participate in this review. Croatia will participate in PISA I11 in 2006 that will be included in the ESDP priorities. 15

24 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 3: Results Framework and Monitoring The Ministry of Science, Education and Sports (MoSES) will be responsible for overall monitoring of the ESDP. The ESDP Project Coordinator will be responsible for consolidating information provided by MoSES directorates and subsidiary agencies, as well as other Government agencies, in order to track progress against the monitoring plan. Specific reporting formats are described in the Operational Manual. There will be an independent evaluation of progress against the ESDP indicators completed by end-june of each calendar year of the project, or at a later date as may be agreed with the Bank. Terms of Reference for that evaluation have been prepared and are included in the Operational Manual. This evaluation will assess and present the progress against the indicators in the following tables. Each Annual Development Plan (ADP), which will be completed by October, will include (i) a summary of progress to date, drawing from the June report; (ii) an activity plan; (iii) the budget to finance that plan; and (iii) the updated monitoring, financial, and procurement plans. Education system performance will be monitored internally by MoSES using a set of sector-wide indicators based on the indicator system under development in the European Union. This will allow Croatia to benchmark the development of the education system with the current situation in EU. Successful monitoring of the ESDP requires strengthening of the statistical and information management procedures in the MoSES, as well as in the level of overall public administration. EU CARDS is undertahng a feasibility study on the introduction of the Education Management Information System in Croatia (vocational education section only) and the ESDP will be available to support extending and implementing that plan by Financial Monitoring Reports (FMRs) will be prepared semi-annually, as described elsewhere in this PAD. An annual external audit will also be conducted. 16

25 PDO [mproved student learning and system performance Intermediate Results Priority One: Shift from fact to knowledge based teaching in schools Priority Two: Information regarding education system performance and outcomes systemically used for planning and policy development Priority Three: Improved management and efficiency at all levels Priority Four: Regions capacities to plan and implement changes improved Results Framework Outcome Indicators - Performance o f students on PISA benchmarked, with Croatian performance stable or just improving relative to EU averages - Completion rates at all levels of education increase as a result of quality and access improvements Results Indicators % o f primary and secondary schools with 80 % o f staff attending continuous upgraded professional development % o f faculties are engaging in internal pedagogical development activities % o f primary schools using new curriculum Education Management Information System operational Education system increasingly benchmarking itself against EU and global performance Number of students included in matura Education sector s fiduciary systems upgraded to address issues identified in ESFA (see Annexes 6 and 7) % of primary and secondary school principals completed new school leadership training Percentage o f primary pupils in single shift % o f secondary pupils in single shift Use of Outcome Information Jational policy development and nterventions to regional and local :ducation authorities to identify the ireas where the most urgent im- Jrovements need to be made 3etermine if the ESDP needs reviiions, and feed in to each ADP Use of Results Monitoring YR1-YR4: Low levels may indicate ack of relevant provision or inconrrenient training arrangements for nultiple shift schools. L ow levels in Faculties may flag lack of adequate incentives. This information can be ised to modify the existing professional development programs as well as the curriculum development Effort itself. YR3-YR4: May flag insufficient targeting o f capacity building and other TA efforts YR4: Will inform administrators and practitioners o f improvement gaps CY05: Flags the execution of CY06 disbursement to the MoSES budget CYO6-08: Determine the level of financing of education sector development YR2-YR4: Low levels may flag the inconvenient or irrelevant provision of professional development for school principals CYO5-CYO8: Determine the overall regional education development approach regarding both quality and capital investments YR4: Integrate into MoSES regular education management procedures Utilize information to rationalize the school network in light o f demographic trends and school demand 17

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28 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 4: Project Description 1. The Education Sector Development Project (ESDP) will support the implementation of the priority areas of the Government s Education Sector Development Plan (the Plan) The ESDP will be implemented by the MoSES through Annual Development Plans. Project development objective 2. See PAD Section B.2. ESDP priorities 3. The actions to be supported through ESDP and included in the Annual Development Plans (ADPs) of MoSES are arranged around four priority themes. Priority 1. Enriching the Classroom. The Government s ESDP has an ambitious aim to reform curriculum in all schools and to shift the focus of teaching towards active learning, problemsolving and understanding. The ESDP supports this transformation by converting education standards to school curricula, developing teachers professional knowledge and slulls, and promoting school-level improvement and creation of professional learning communities for teachers in schools. The ESDP ADPs will include training of school curriculum specialists, inservice training for teachers, new teaching and learning facilities, upgrading regional teacher training centers and new curriculum materials for teachers. Priority 2. Improving Monitoring and Evaluation. One objective of the ESDP is to establish an externally administrated school leaving examination, Muturu. Beginning in 2009, this examination will become compulsory for all (general) secondary school students at the end of their studies. The ESDP would support the design and establishment of this examination and related logistics as well as the development of educational evaluation practices within the education system. Moreover, the ESDP would support developing policies, activities and structures (such as EMIS and national student assessment system) that aim at improving the capacities of the education system to collect, analyze and disseminate information related to the system s inputs, processes, outputs and other performance, including students achievement. Priority 3. Strengthening Management and Leadership. The ESDP envisions that the success of the decentralization and strengthened regional and local management as key conditions for sustainable education development. The ESDP would support these initiatives by addressing the efforts to improve management (including policy, planning and fiduciary capacities) at the central level, administration and coordination capacities at the regional level and educational leadership at school level. The development and refinement of the national steering system o f education will be connected to the implementation of the project. The ESDP would also support the establishment of a system (including facilities) for leadership training for school principals, regional and local education authorities and MoSES staff. Priority 4. - Supporting Regional Development and Innovations The ESDP will support the reduction in the number of schools that operate in multiple shifts by supporting regional initiatives and infrastructure investments and by promoting opportunities for schools to provide more optional and non-formal activities. 20

29 4. The following table describes the project dynamics in more detail Focus of ESDP:?roject will focus in developing iational education standards and instructional approaches, Establishing monitoring :apacity, strategic work on school principals training, evaluation of Education outcomes and teacher preservice education, construction on single shift schools Inputs: Matura policy and preparation of facilities and ICT Preparing for PISA 2006 Financing regional development initiatives (both infrastructure and quality improvements) Teacher training outputs: see Annex Focus of ESDP: Project will focus on supporting schools in shifting to a new curriculum and instructional approaches, improving the management and monitoring capacities, strengthening education management, school principals training, evaluation of education outcomes and teacher preservice education. Inputs: Intensified inservice training to primary school teachers (especially ICT) Technical assistance to capacity building (fiduciary, management, monitoring and evaluation) PISA 2006 Financing regional development initiatives PD project for MOSES staff Outputs: see Annex Focus of ESDP: Project will focus on school-based professional development of teachers, helping the capacity building in education management, supporting regions in moving to singleshift schooling in primary level, introducing of EMIS, improving school leadership and introducing new curriculum framework for secondary schools. Inputs: Training of trainers for school-based school improvement Training of county and local education authorities Technical assistance to regional and local level fiduciary, management and planning development Technical support to Examination Centre Financing regional initiatives Outputs: see Annex Focus of ESDP:?roject will focus in strengthening local level nanagement, policy naking and :oordination :apacities, creating sf networks of municipalities and :ities for education improvement, launching of Matura Examination to be held in spring 2009, and establishing the professional development systemicentre for education managers/principals Inputs: Technical assistance to build local education management capacities In-service training of primary and secondary school teachers Training of school principals Financial support to educational research related to the ongoing reform Technical support to Examination Centre Financing regional initiatives Outputs: see Annex Focus of ESDP: Project will focus on strengthening the sustainability o f change, further supporting schools and teachers in maintaining the continuous curriculum development and building of professional leaming communities in schools. It will also have an increased focus on higher education development, especially in supporting pedagogical innovations and broadening the quality assurance practices. Inputs: Technical assistance to strengthen leaming communities In-service training of primary and secondary school teachers Training of school principals Financial support to educational evaluation and research related to the ongoing reform Technical support to Examination Centre Financing regional initiatives Outputs: see Annex 3 USS25.0m USS25.0m US$25.0m USS25.0m US$25m US$25m USS 1 Om USS40m USSOm USS55m 21

30 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 5: Implementation Arrangements Project Coordination and Implementation Arrangements MOSES will lead and coordinate implementation of the ESDP under the overall guidance of the Ministry management team and the Assistant Minister for Primary Education, and with overall project, financing and reporting support provided by the Assistant Minister for Finance (see Figure 1). An ESDP Project Manager was appointed in early 2005, and will provide project logistical support on implementation, monitoring and ADP preparation. The Ministry has appointed an official to manage each of the four project priorities. Building on substantial work to date during the preparation of the ESDP, the Bank team will work in partnership with the Ministry to continue to identify and implement areas where the sector s management and administration can be strengthened. The overall areas will include (i) policy development, implementation, monitoring and evaluation; (ii) central fiduciary structures and procedures; and (iii) regional and local management capacity. ~ ~~ Figure 1: ESDP Project Coordination (central level) Minister of Science, Education and Sports, Assistant Ministers and Technical Departments Primary Secondary Tertiai Finance Joint Programs and minorities [Priority 11 [Priority 21 [+Priority 41 [Priority 31. Adviser: National Education Standards. National Evaluation Center: I Fiduciary staff. Treasury (FMRs on subaccount) I Institute of Education (works on all priorities + PISA) 22

31 An Operational Manual will provide the overall framework for carrying out the project, and will include the ESDP itself, the activity plan and overall project budget, the monitoring and evaluation arrangements, financial management and disbursement arrangements, format of the procurement plan, and details of the procurement procedures and standard documents and other materials as necessary. The Operational Manual will be regularly revised, in agreement with the Bank, as institutional capacity improves and project implementation progresses to reduce transaction costs for the Borrower and the Bank were possible. Annex 3 includes a monitoring plan for assessing performance in fiduciary strengthening. 23

32 C R 0 AT I A EDUCATION SECTOR DEVELOPMENT PROJECT Annex 6: Financial Management and Disbursement Arrangements Country Issues The latest draft of the Croatia CFAA report (November 2004) concludes that the overall fiduciary risk attaching to the Croatian public financial management framework (including the following systems: budgeting, treasury and cash management, accounting and financial reporting, internal control and internal audit, external audit and legislative oversight, and sub-national government) is significant. However, whilst the overall fiduciary risk i s assessed as significant, at a disaggregated level there are areas of the Croatian public financial management framework that operate at fairly low levels of risk and which will be relied upon by the ESDP. Most notably, the Treasury systems as used by first-level Budget Holders and ministries in particular appear to be fairly robust. The procedures and controls pertaining to this segment of the Treasury systems appear capable of producing reliable and timely information on Budget execution. Strengths and Weaknesses This project will be implemented strengthening the fiduciary arrangements o f the education sector in line with the Education Sector Fiduciary Assessment (ESFA). The significant strength of the project s fiduciary financial management arrangements is the robustness of the core Treasury systems used by firstlevel Budget Users and ministries, including those of the MoSES. The Treasury system will be used to capture, control, monitor and report on ESDP project expenditures. The weaknesses of the education sector that directly impact the implementation of the ESDP include the following: (i) the internal audit department in MoSES is fairly new and needs capacity-building before it may be relied upon; (ii) it is currently not possible to produce comprehensive education sector financial statements that include the results of the operations of the various institutions participating in the education sector both at central and decentralized levels of government. Currently, the Treasury system is only able reliably to report on the expenditures of any single first-level Budget Users by economic classification rather than both across many Budget Users, including decentralized Budget Users such as local government, and also by functional classification. These issues will be addressed during the course of project implementation in conjunction with the third thematic priority, that of strengthening management and leadership, prior to the commencement of ESDP activities that cut across education sector institutions. MoSES is in the process of establishing an inter-departmental team to devise a strategic action plan to address these fiduciary issues. Implementing Entities The implementation of the project will be embedded into the MoSES structure. At present, the MoSES has weak capacity to manage education sector as an entity, but rather is managing separate sections of the system, In order to be able to properly plan, implement, and monitor overall sector activities, the MoSES needs to enhance its internal functions, especially those of planning, coordination and monitoring. A table summarizing the education sector s fiduciary financial management and procurement risks by reference to the key institutions having a role in the education sector as well as the main expenditure systems is presented in Annex 6. 24

33 Funds Flow Bank loan funds will flow to the Croatian Budget and be combined with other resources of the Budget. Where ESDP will finance activities that are the responsibility of implementing institutions other than the MoSES (e.g. those activities falling within the remit of the Institute for Education Development, the proposed National Examination Center, or the various decentralized institutions of local government), it is likely that these activities will be financed through and be the responsibility of those other implementing institutions. No Special Accounts will be opened for the purposes of tracking Bank funds. Given the pooling modality, Government counterpart contributions will not be separately identifiable and therefore there will not be any separate accounts maintained by Treasury specifically to track counterpart contributions. A summary flow of funds diagram is presented below: Staffing National Bank of Croatia Budget of. Croatia The The World Bank I uro I I account I ; HRKuna Kuna denominated Budget account no I I I I I HRKuna ESDP Program expenditureslsuppliers The Department for Finance (MoSES) will include someone responsible for coordinating ESDP financial management issues across all participating implementing institutions. All participating implementing institutions will nominate counterparts for the Finance Department to provide all necessary financial management and procurement information required for preparation of progress reports for the ESDP. The primary counterpart in MoSES is the Assistant Minister of Finance and will help also to coordinate all financial management and procurement capacity-building initiatives across the education sector as a whole as identified by the ESFA. Within each implementing institution, the cadre of staff engaged in the institution s routine accounting and procurement activities will perform their normal roles with respect to Budget execution and therefore indirectly play a role in the implementation of the ESDP. 25

34 Accounting Policies and Procedures The ESDP s transactions will be accounted for in accordance with Croatian Budget accounting regulations and denominated in Croatian Kuna (HRK). Although all transactions will be recorded on the participating institutions regular financial management systems, the main system that will be used for the purposes of accounting and reporting on ESDP expenditures will be the Croatian Treasury system that is used Government-wide and is the responsibility of the Ministry of Finance. The main reasons for this approach to rely on the Treasury system rather than the systems of the participating education sector institutions include: (1) the Treasury system is the primary tool of Government to monitor Budget execution; (ii) transactions in respect of the activities falling under the ESDP in the initial phase of project implementation will in any event be captured, controlled, monitored and reported on in the Treasury system; and (iii) the financial management systems of the participating institutions, including MOSES, are currently not as robust as the core Treasury system. The legal fi-amework for the Treasury system includes the 2003 Budget Act (BA); the Treasury General Ledger System and Methods of Managing the Single Treasury Account located in the Central Bank of Croatia (Official Gazette No.97/1995); Internal Organization of the Ministry of Finance (26 Jul 2001); Instructions on the Execution of the State Budget from the Single Treasury Account; and other supporting regulations relating to budget execution, control and reporting. An important component in the Treasury system is performed by FINA, a state-owned financial agency that has evolved from its ZAP roots to become a major player in the banking system o f Croatia (it operates the payment and settlement system for the banking sector) and a critical partner for the Government across a wide range of functions it performs on a contractual basis. Of particular importance with respect to the implementation of the ESDP is the role played by FINA in settling all payment and revenue transactions that involve the Government of Croatia and processing supplier payments approved by the Treasury SAP system by depositing funds in the accounts of suppliers or individuals throughout the country. The Box below is reproduced from the draft CFAA and describes the process followed in the execution of a transaction through the Croatian Treasury system. This process will be followed for the financial management of ESDP project expenditures. 26

35 lox 7-1. Transaction System Process 1. Provided a Budget User (BU) first records a fully coded commitment into its own financial system, based on a purchase order approved by an appropriate authority within the entity. 2. Provided that the commitment is for expenditure within the next month, it is reviewed by the budget execution division for compliance with the appropriation purpose and amount and then recorded in the SAP system.' Next the purchase order is approved by an authorizing authority within the BU in question and sent to the supplier. 3. When the goods are delivered and confirmed, a request for payment is entered into the entity's financial system and separately into the SAP system. 4. The budget execution section checks the request in the SAP system against the available cash in the entity's monthly cash plan. If sufficient resources are in the account, SAP issues a payment request to FINA, which works as the transaction processing agency for government payments. 5. FINA records the transaction and provides copies of the transaction records to the MOF and the BU's Budget & Finance Unit; data is then keyed into their own financial system to reflect the transaction. FINA also captures all domestic revenues and provide records to MOF and SAP. 6. Monthly, the BUS send the MOF a statement of outstanding commitments that are expected to be settled in the following month. Commitments extending beyond this period are not disclosed. SAP does not accommodate commitments beyond the next month. Internal Audit MOSES established an internal audit department in early 2004 which currently comprises three staff who are receiving or have just received training under the EU CARDS project, "Development of PKFC and Internal Audit". Accordingly, the internal audit unit is in its infancy and has not yet formulated any plan of work for CY2005. It is understood that the internal audit unit will, in due course, receive technical assistance under the above-mentioned EU CARDS project to help them formulate a strategic plan, risk assessment and internal audit plan. External Audit As of the date of this report, the Borrower is in compliance with its audit covenants of existing Bankfinanced projects. The project financial statements will be audited by an independent auditor acceptable to the Bank, in accordance with standards on auditing that are acceptable to the Bank. Terms of reference for the audit of the project have been agreed with the Bank and are included in the draft Project Operational Manual. The Croatia CFAA (June 2004) draws attention to a number of weaknesses in the operations o f the State Audit Office (SAO). However, the SA0 is, through a twinning arrangement with the UK NAO and other measures, seeking to improve its capacity. An assessment of the capacity o f the SA0 was undertaken in connection with the preparation of the Croatia Education Sector Support Project and it was determined that, subject to the use of audit terms of reference acceptable to the Bank, the SA0 was eligible to perform the audits of Bank financed projects. The audit scope will include the transactions relating to the ' BUS at lower level (e.g. social centers or schools) who do not have access to SAP terminals submit payment requests to the BUS at the central level (typically a ministry). 27

36 execution of the ESDP project as reflected in the Treasury system for each participating implementing institution. The audited ESDP project financial statements together with the auditor s opinion thereon will be provided to the Bank within six months of the end of the reporting period, being the fiscal year. Reporting and Monitoring As described previously, the financial transactions with respect to the initial phase of the ESDP project will be captured, controlled, monitored and reported through the Treasury system. MoSES would produce budget execution reports on the specific line items in the Budget deemed to comprise the ESDP project in a manner consistent with that in which the Budget was formulated and passed by Parliament (the Sabor). The format of this report will be attached to the minutes of Negotiations. These reports will be produced every calendar quarter by the DSDM and submitted to the Bank within 30 days o f the end of the each semester. From 2006, it is anticipated that the ESDP project will be implemented by a wider number of institutions including other first-line Budget Users such as the Institute for Education but also by decentralized levels of government including primarily municipalities and cities that are currently held responsible for various education sector expenditures such as rehabilitation and construction of school facilities. It is currently not possible to produce comprehensive education sector financial statements that include the results of the operations of the various institutions participating in the education sector both at central and decentralized levels of government. The Treasury system is able reliably to report on the expenditures of any single first-level budget users such as MoSES by economic classification but is neither able to do so across many budget users, including decentralized budget users such as local government, nor by functional classification and MoSES has no function currently in place to collate such information. This issue will be addressed early during the course of project implementation in conjunction with the third thematic priority that of strengthening management and leadership, and in any event prior to the commencement of ESDP activities that cut across these education sector institutions. MoSES is currently in the process of establishing an inter-departmental team to devise a strategic action plan to address this and other fiduciary issues. Information Systems As described previously, the financial transactions with respect to the initial phase of the ESDP project will be captured, controlled, monitored and reported through the Treasury system. The Treasury system is based on SAP, a management information system software package, and although much remains to be done in terms of improving its overall functionality and utility of the system, the core element of the Treasury system applicable to first-level budget users such as MoSES is sufficiently robust to capture, control, monitor and report on ESDP project expenditures during the first phase of ESDP project implementation. Also as described above, although the Treasury system is able reliably to report on the expenditures of any single first-level budget users such as MoSES by economic classification, it is neither able to do so across many budget users, including decentralized budget users such as local government, nor by functional classification. This issue will be addressed early during the course of project implementation in conjunction with the third thematic priority, strengthening management and leadership, and in any event prior to the commencement of ESDP activities that cut across these education sector institutions. MoSES is currently in the process of establishing an inter-departmental team to devise a strategic action plan to address this and other fiduciary issues. 28

37 Disbursement Arrangements MoSES will prepare annually an Annual Development Plan (ADP) and budget for ESDP implementation for the following year and agree this with the Bank by October 1 of the preceding year. This annual plan will be the basis for loan disbursements, one during the first semester and the other during the second semester. Thus there will be one disbursement category, ESDP transfers meaning the amount from the proceeds of Loan transferred by the Bank, through the Borrower s Ministry of Finance, to cover the costs of goods, works and services required for the implementation of ESDP for a particular Project year, as follows: Category Amount of the Loan Allocated (Exm-essed in Euro) % of Expenditures to be financed (1) Transfers for ADPs 67,800,000 Such amount of Eligible Program Expenditures as shall be agreed between the Borrower and the Bank for the respective ADP TOTAL 67, Supervision Plan During ESDP project implementation, the Bank will supervise the project s financial management arrangements in two main ways: (i) review the semi-annual financial reports as well as the annual audited financial statements and auditor s management letter; and (ii) during the Bank s supervision of the ESDP, review the project s ongoing financial management and disbursement arrangements. Fin uncial management strengthening The Education Sector Fiduciary Assessment (ESFA) identified the following areas in which the fiduciary financial management capacity of the education sector could be improved: (i) there are many accounting systems within MoSES that could benefit from reorganization and rationalization; (ii) the rules, procedures and internal controls for new, revised and emerging systems at MoSES could benefit from greater clarity; (iii) the internal audit department in MoSES is fairly new and needs capacity-building in terms of devising a strategic plan for the department including risk assessments and annual work plans; (iv) the systems relating to the salaries of school staff are fairly complex and could benefit from streamlining as well as the introduction of certain key monitoring and reconciliation procedures; (v) the financial management systems of the Institute for Education are in their formative state and could benefit from considerable strengthening; and (vi) the sector is currently unable to produce comprehensive sector financial statements that include the results of the operations of the various institutions participating in the education sector both at central and decentralized levels of government. These issues are described in further detail in the ESFA and will be addressed with the support of the ESDP during the course of project implementation in conjunction with the ESDP s third thematic priority, strengthening management and leadership. MoSES is currently in the process of establishing an inter-departmental team to devise a strategic action plan to address these fiduciary issues. 29

38 h M e,.- C s - u C.- * a s 8 e, v1 E * 3 e, v1.- C * 3 v1 e, v1 C.- * og U a Y 0 m

39 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 7: Procurement Arrangements A. General An Education Sector Fiduciary Assessment (ESFA) was carried out to assess the fiduciary financial and procurement systems of the institutions that are likely to participate in the Education Sector Development Project (ESDP). The analysis of the findings provided a basis for discussions with MoSES, the M of and the Public Procurement Office (PPO) to formulate a fiduciary strengthening plan for the education sector. The ESFA is available in the project files. Country Issues. At present, there are four areas at the national level that are directly affecting procurement in the education sector: (i) the legislative and regulatory framework; (ii) the institutional framework and capacity; (iii) the procurement operations and market practices; and (iv) the integrity of the procurement systems. Procurement planning is constrained by legislative requirements that contracts terminate at the end of each budget year (providing an incentive for more single source contracts). Standard bidding documents are being developed at the national level for use by the sectors, and tendering and contract forms in the sector need improvement. The Public Procurement Office is not always receiving annual procurement statements, and there have been no performance audit arrangements in place. Procurement of information technology is often selective and competition needs strengthening to obtain the best package at the best price. The following actions are being adopted to address national procurement capacity: The Public Procurement Act of 2001 is being amended to address many key weaknesses on an interim basis in Implementing regulations and a users manual are also being completed for the Act, The Cabinet approved the first round of amendments in June A new public procurement law in line with EU directives is under preparation and planned for Standard bidding documents will be completed by late The State Audit Office (SAO) has initiated performance audits for major investment projects and for those institutions with a high volume of procurement, and will publish the results of those audits. Sector Issues MoSES is addressing or preparing to address a number of issues in order to prepare it to respond to the above national initiatives, as well as to implement the ESDP more efficiently. The Assistant Minister of Finance has been appointed to take charge o f the Ministry s fragmented procurement functions and to streamline and harmonize those arrangements. New procurement staff are being hired to report to the Assistant Minister. One key task for this team will be to introduce the country s new standard bidding documents and related manuals for all institutions in the sector (including at the municipal level), so that contractors and suppliers will have an easier time participating in bidding opportunities. There are related needs to reduce some barriers to entry, such as through streamlined performance security requirements and by making evaluation criteria more transparent, so that the private sector s participation is facilitated. Another task will be to improve procurement planning and to pursue multi-year contracts and fewer direct 31

40 contracts, as well as to publish contract awards to improve accountability. Staffing and knowledge of training institutions and local education authorities in procurement i s a concern, particularly as investment resources are channeled to larger projects such as those to address multi-shift schools. The weak capacity of some localities to absorb and utilize decentralized funds for education for effective procurement requires addressing. Assessment of the lead implementing agency (MoSES) The ESFA highlights the issues with procurement by MoSES, and also presents detailed recommendations. To improve the efficiency and transparency of procurement at the sector level, and to avoid delays in implementation, MoSES will undertake the following actions in parallel with the strengthening o f the national procurement legislative and regulatory framework:. Establish operational Procurement Unit under the authority of the Assistant Minister of Finance, and train staff in the new national and sector requirements;. Finalize Procurement Plan for the ESDP; Advertise all upcoming tenders included in the ESDP and results of the contracts awards on the MoSES website;. Undertake procurement capacity assessment and training of decentralized budget holders. B. Procurement Arrangements The ESDP Operational Manual detailing procurement procedures for all type of expenditures included in the project will be finalized by effectiveness. Annual procurement plans will be agreed between the Borrower and the Bank as part of each October s ADP preparation exercise. National Competitive Bidding (Open Tendering) For all goods for which contracts are below EUR 3 million, contracts will be awarded on the basis of the open tendering procedure as defined in Croatia s Public Procurement Act of January 1, The Bank, upon notice to the Borrower, may increase the above threshold for goods to be procured under the Public Procurement Law. The Borrower shall promptly notify the Bank of any amendments to the Public Procurement Act and shall discuss and agree with the Bank, if necessary, on modifications to procurement provisions. Services for logistical organization of workshops, study tours, conferences and seminars, but excluding consultants service for preparation of training events or materials, may be procured in accordance with the Borrower s applicable procedures and/or regulations provided said services are included in the Annual Development Plan. Goods and works estimated to cost less than EUR 80,000 equivalent per contract may be procured under contracts awarded on the basis of shopping procedures including, as a form of such shopping, the electronic bidding carried out by the Borrower s Central State Administrative Office for E-Croatia (Sredisnji drzavni ured za e-hvatsku) for procurement of computer and standard IT equipment. Goods and works which the Bank agrees meet the requirements for Direct Contracting under the Guidelines may be procured in accordance with said method, and such contracts will be included in the Procurement Plan or its updates agreed with the Bank. Operating costs will be procured using the administrative procedures of the participating institutions and following the Croatian Public Procurement Law. The ADP may finance small grants to the schools for programs and activities, which would be transferred from the MoSES budget to the schools bank accounts, and procured in accordance with the Public Procurement Law. 32

41 Intern ation al Competitive Bidding All goods contracts in the ADPs above the level of EUR 3 million will be procured under ICB following the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, and the provisions stipulated in the Operational Manual. Consultants services will be procured in accordance with the World Bank's Guidelines for Selection of Consultants (May 2004) and as described in the Operational Manual. Advertisem enl A General Procurement Notice for ESDP will be published in the on-line edition of Development Business. Special Procurement Notices for all ICB goods contracts and Requests for Expression of Interest for consulting assignments shall be published in the local newspaper (Narodne Novine), and posted on the MOSES website with a minimum of 30 days for the preparation and submission of bids. Bidding Documents Procuring entities shall use the appropriate bidding documents, including draft contract form, acceptable to the Bank for the procurement of goods, works or services. These documents would require public bid opening and reading aloud of bid prices immediately after the deadline for bids submission, explicit monetary quantifiable bid evaluation criteria without use of a point system of evaluation, and an award made to the qualified bidder offering the lowest evaluated bid price without application of any preference. C. Procurement Plan Annual procurement plans for the ADP will cover 12 months of the budget year. The detailed plan for 2005 will be included in the Operational Manual. Following loan effectiveness it will be available in the project's database and in the Bank's external website. D. Frequency of Procurement Supervision The focus of an on-going procurement dialogue would be on systems in place and progress in improving these systems, and would occur as part of the regular ADP and supervision review cycles. The Procurement Plan shall set forth those contracts which shall be subject to the Bank's Prior Review. All other contracts (except ICBs) shall be subject to Post Review by the Bank. 33

42 J 4.Y b

43 CROATIA EDUCATION SECTOR DEVELOPMENT PROJECT Annex 8: Economic and Financial Analysis In the transition economies of Central and Eastern Europe the quality of education system is the key to achieving the goals for the social and economic development of the countries in the region. The need for an educated, skilled population who can operate in open political systems and meet rapidly changing demands of the labor markets goals will be one of the main determinants of Croatia s success in broader Europe. The main challenge for the education system in Croatia is to change the education system from one where students were better trained in simple reproduction of knowledge to a system that focuses on quality of education and that produces graduates that can critically process information, are ready to engage in continuous learning and have greater initiative. The social benefits of education, specifically the synergies between education and the promotion of a good investment climate, constitute a primary rationale for the public funding of education in Croatia. A good investment climate provides opportunities and incentives for firms - from micro-enterprises to multinationals - to invest productively, create jobs, and expand. It thus plays a central role in growth and poverty reduction (World Development Report 2005). Improving the investment climate goes hand in hand with enhancing human capital. A skilled workforce is essential for firms to adopt new and more productive technologies, and a better investment climate raises the returns to investing in education. Skill constraints are a common problem for firms, especially those planning to innovate and expand. Conversely, firms that do not experience much competitive pressure may not seek to innovate and expand and may deem skill constraints to be less of a problem. A pilot survey of Croatian employers from 2,223 enterprises in four counties (Osijek, Rijeka, Zadar, and Zagreb) was conducted in the summer of 2004 by the Croatian Employment Service and others. It shows that, of employers who tried to recruit workers in the previous twelve months, relatively few complained that candidates had insufficient education per se (ranging from 15 to 29 percent), but many more employers complained of lack of suitable skills and experience in applicants. Indeed, almost 50 percent of employers found that job applicants did not have the skills necessary for the job. When asked which skills employers were seeking, over 80 percent o f respondents thought that technical and professional skills were essential. However, 80 percent of employers were also seeking personal skills in their employees, including willingness to learn new skills, teamwork, and the ability to work independently. When estimating public expenditures in the education sector in Croatia, it is important to bear in mind that MoSES is the main but not sole actor -- other central government ministries also spend on education, and expenditures are incurred at the level of local government as well. Furthermore, MoSES itself spans science and sports in addition to education, so that not all its Structure of Total Education Public Sector Expenditure expenditures should count as public expenditures in education. Therefore, in order to gain Higher Education as complete and accurate a picture as possible of planned public education expenditures for 2005, this section first considers total MoSES planned ex- Secondary & penditures, then focuses on Student Housing 21% Administration 6% Preschool 35 43%

44 planned education expenditures under MoSES, then adds planned education expenditures under other central ministries and by local government to arrive at total planned education expenditures. Where possible, projected expenditures for 2006 and 2007 will also be discussed as established under the recent medium-term expenditure framework (MTEF) for Croatia. Thus, the total planned 2005 budget of MoSES, i.e. including science and sport, amounts to 8.7 billion HRK. The 2005 budget for MoSES contains expenditures under the following departments: Science, Education, and Sports; Joint Programs in Science, Education, and Sports; Pre-school; Primary Education; Secondary Education and Student Housing; Sports; Higher Education; Research Institutes; National Information Infrastructure; Technological Research; and International Cooperation. By far the largest spending departments are Primary Education (39.3 percent of total MoSES planned expenditures); Higher Education (23.4 percent); Secondary Education and Student Housing (20.9 percent); and Research Institutes (8.4 percent). All other departments each spend less than 2 percent of total MoSES expenditures. Focusing on MoSES planned expenditures by economic classification, i.e. whether they represent recurrent, capital, or financial expenditures, recurrent expenditures constitute the lion s share of total expenditures (93.9 percent). Furthermore, employee salaries and benefits alone amount to 75.6 percent of total MoSES planned expenditures. Indeed, for the departments of Structure of Education Spending Primary Education and Sec-,M)% ondary Education and Student 90% Housing, employee salaries 80% and benefits constitute a strik- O% ing 92.3 and 91.4 percent of total departmental expendi- 60% tures, respectively. The above 9% findings underlie the ESDP s 40% focus on boosting the capital 30% investment budget of MoSES, 20% particularly given that these,ooh findings are not anomalous o% for 2005 but represent the recent historical trend. The 1 Centra Government Local Government Total education spending findngs will be tempered only slightly by the inclusion of other entities that spend on capital investments in the education sector, as we shall see below. Furthermore, the increment that ESDP is providing to public education expenditures in Croatia (US$lO- 30 million per year, or roughly 1-2 percent of the total budget of MoSES) is in line with the trend apparent in Croatia s MTEF. According to the MTEF, as Croatia strives to reduce its public expenditures and achieve its fiscal targets, the share of the total budget of MoSES in total consolidated central government expenditures nonetheless rises from 8.0 percent in 2004 to 8.4, 8.7, and 8.9 in 2005, 2006, and 2007, respectively. This demonstrates the Government commitment to the education sector and brings the share of MoSES expenditures in central government expenditures closer to the 2001 OECD average for the share of public education expenditures in total public expenditures of 12.7 percent (OECD 2004). However, it is important to reiterate that MoSES expenditures do not correspond to total education expenditures. Beginning with the MoSES education departments (i.e. central administration, pre-school, primary education, secondary education and student housing, and higher education), there are expenditures at the local level for pre-school, primary, and secondary education, as well as expenditures by the Ministry of Sea, Tourism, and Development (MSTD) for school reconstruction and construction. MoSES expenditures in 2004 amounted to 72 percent of total public education expenditures, while local government expenditures 36