Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Project Name Region Sector Project ID Borrower Report No. PIC2827 Latvia-Welfare Reform Project Europe and Central Asia Social Sector Adjustment LVPA35807 Republic of Latvia Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Implementing Agency Ministry of Welfare Ms. Vineta Fortina, Director Project Coordination Unit Ministry of Welfare Riga, Latvia Tel: Fax: Date Initial PID Prepared October 18, 1995 Date This PID Prepared March 17, 1997 Appraisal Date 2/11/97 Projected Board Date 05/13/97 Country and Sector Background 1. Latvia, with a population of about 3 million, regained independence in september 1991 after the dissolution of the soviet union. Prior to 1991, the republic developed a relatively sophisticated industrial base and skilled work force, but underwent severe economic and social shocks with the abandonment of central planning and the disruption of trade links with the other republics. Per capita gnp was estimated at $2,420 in Life expectancy at birth in 1993 was 69.0, with a female advantage over men of 11.6 years. The country is now implementing a comprehensive market-oriented reform program, including the development of a modern and well targeted social safety net system. 2. By 1993, Latvia realized that the social protection system inherited from the Soviet period was: (a) too expensive given current fiscal resources; (b) inequitable; (c) non-transparent, encouraging rent-seeking behavior; and (d) lacking the flexibility needed during the transition. In 1995, the Parliament passed a comprehensive new set of legislation governing cash benefits and non-cash social assistance to families, covering: (i) social assistance, (ii) unemployment benefits; (iii) pension benefits; (iv) work injury benefits; (v) sickness and maternity leave, and (vi) social insurance financing. In social assistance, the legislation was designed to implement Latvia's plan to decentralize social services. In social insurance, the goal was to tie benefits more closely to contributions. Included in this legislative package was the first step in a fundamental reform of the pension system: creating a new, three tier system with increased reliance on individual savings efforts (privately managed) for income

2 replacement in old age. In 1996, three additional pieces of legislation regulating the welfare system were submitted to Parliament. The first was legislation creating the regulatory framework for licensing and supervising privately-managed pensions. The second was a piece of consolidating legislation, rationalizing coverage and contribution rates across insurance programs and adopting standard definitions. This legislation sets the stage for the transfer of the administration of social insurance contribution collection (the social tax) to the State Revenue Service (SRS). Finally, a new disability pension formula was put in place, harmonizing this system with the rest of the reforms. 3. Implementing this ambitious policy agenda will be a five year task. Policy-making and administrative agencies need to be transformed to handle their new responsibilities. For example, in order for the incentives in contribution-based system to function, individual accounts must be established and maintained by the social insurance agency. Regulatory agencies must be strengthened to insure that financial intermediaries investing pension funds are protecting the safety and security of assets. Municipalities need support to assume their new responsibilities. The ministry of welfare needs to develop effective monitoring and evaluation mechanisms in order to track progress towards policy objectives, and to improve the ability to develop effective policies in the future. Project Objectives 4. The project objective is to support the development of a more efficient and effective social welfare system. As a result of the policy reforms already approved but not yet implemented, as well as those to be developed and implemented during the project period, Latvia should have a modern, affordable social insurance and oldage security system. Progress in achieving this development objective will be evaluated on the basis of the following: (a) the Government's social insurance reforms will have been successfully implemented; (b) a client-oriented social insurance administration will be implemented, measured by improvements in cost efficiency, processing speed and accuracy, improved external accountability and transparency, effective internal monitoring and evaluation, uniform handling of legislation and good client service, and flexibility to introduce new regulations; (c) private pension plans will become professionally supervised, financially stable, and viewed by the public as a viable savings alternative; (d) more efficient and effective delivery of social assistance will occur, including an increase in the number of clients of programs that provide alternatives to institutionalization of vulnerable groups; (e) high quality and professional policy monitoring and evaluation will become the norm, with Government and Parliament drawing on applied social policy research outputs such as a new annual Social Report, in their work; and (e) efficient and timely implementation of the project will occur. Project Description -2-

3 5. This project will support the implementation of the government's welfare reform program. Items to be financed include equipment, civil works, and foreign and local technical assistance and training. The five agreed components are: Component 1: Social Insurance Development The objective is the efficient and effective development, management and administration of social insurance policy. Subcomponent A. Improving Policy Design: This subcomponent supports the design and implementation of strategically oriented policy by the Social Insurance Department (SID), and the development and implementation of the second tier legislation. It will assist the SID to present clearly and transparently the strategic goals of policy, to revise the policy strategy on an annual basis, to draft appropriate system regulations in a timely fashion, and to implement a Business Plan aimed at (a) clarifying the respective roles of the SID and the SSIF; and (b) improving the efficiency and effectiveness of the SID's work methods. Subcomponent B. Developing System Administration: This subcomponent supports the implementation of the social insurance reforms by improving the recording of revenues and benefit administration. It will develop and introduce administrative procedures that are consistent with the new legislation, and revise the layout of the local social insurance offices in order to improve client service. Subcomponent C. Supporting Organizational Change: The objective of this subcomponent is to support the ability of the SSIF to undertake its core functions. A business plan has been drafted by the SSIF, and a preliminary audit and accounting prestudy is to be revised. Subcomponent D. Supporting Information Technology: The objective of this subcomponent is to support the introduction of hardware and software in order to meet the automation needs of the new system. Component 2: Regulation of Privately Managed Pensions The objective is to provide safe and supervised options for the Latvian public to make personal provisions for retirement through privately-managed personal savings schemes. This component will assist the Ministry with legislative development, improved system supervision, enhanced system communication, training to those who will be involved in the management and supervision of private pension funds, and the implementation of appropriate standards for reporting and accounting requirements for private pension plans. Component 3: Social Assistance Administration The objective of this component is to ensure that all needy receive effective and efficient social services. The project will improve the performance of the Ministry of Welfare Social Assistance Department in developing social assistance policy, and the - 3-

4 municipalities in delivering local level services. A pilot social assistance office in Kandava region will seek to demonstrate best practice in service delivery, and disseminate lessons learned throughout Latvia. Component 4: Monitoring and Evaluation of Social Policy The objective of this component is to ensure that Government, Parliament and society are regularly informed about the impact of social policies by developing adequate organizational potential, and human and material resources in the MW to design, implement, monitor and evaluate social policy. The component will support the development, implementation, monitoring and evaluation of the MW social policy agenda. It will improve the allocation of human and financial resources within the Ministry through improved internal and external organization and communication. The component will strengthen the capacity to develop a workable social policy strategy. It will also strengthen local capacity to prepare high quality social policy analysis through training for the staff of the MW and for researchers in the field. Component 5: Project Coordination This component will ensure the effective provision of support and efficient management of the project in order to achieve the welfare reform project goals. Project Financing 6. After appraisal, the total project costs were estimated to be about us$40 million equivalent, excluding taxes and duties. The bank's loan of us$16.8 million (representing about 42 percent of total financing requirements) will contribute about 50 percent of foreign costs and about 37 percent of local costs. Counterpart financing of about us$14.2 million (representing about 36 percent of the total project cost) will be provided by the government. The government is seeking grant financing for the balance. Project Implementation 7. Project preparation has been facilitated by extensive technical assistance on policy reform and implementation by a team of consultants from the swedish national social insurance board. As part of that technical assistance, the ministry prepared an analysis of the implementation challenges the new legislation poses. Working groups have been organized to prepare project components. These working groups have been supported through the whole preparation process by the swedish team, financed by the swedish government (sida). Preparation has also been facilitated by a phrd grant, which has financed the development of a new household survey instrument. The monitoring and evaluation component has received a substantial commitment of donor support over three years through a joint government of the netherlands/undp program. 8. During preparation, two project workshops were held with all - 4 -

5 MoW management and staff involved in the project, as well as representatives from other concerned ministries and stakeholders, to discuss and agree on project objectives, activities, and monitoring plans. One of these workshops was facilitated to encourage counterpart participation. All main components have prepared their own strategy documents as part of the preparation process. A project PCU has been established and is managing the project well, including the execution of a special trust fund. In addition, a Project Preparation Facility has been agreed and signed. 9. Specific performance indicators for monitoring each component's progress have been developed. A system for conducting periodic implementation progress reports and joint annual and midterm reviews has been established. Project Sustainability 10. This project will develop the institutional capacity of the Ministry of Welfare and the State Social Insurance Fund. It is expected to be both cost-saving and quality enhancing. Borrower ownership is high, owing to the extent of participation in preparation activities: (i) Social insurance. The improvements in systems, processes and facilities will permit improved performance at a lower cost per standardized benefit. These efficiency improvements, combined with an improved financial position of the social insurance budget from implementation of the policy reforms, will ensure project sustainability; (ii) Privately-managed pensions. Initially, the costs of the supervisory system will be paid for by the state budget. However, by the end of the project period, licensing fees will be imposed on pension funds to recover the annual recurrent costs of the system; (iii) Social assistance. The component supports the development of more cost-effective approaches to assisting vulnerable groups. Ongoing monitoring and evaluation activities will help to ensure sustainable models are developed; and (iv) Monitoring and evaluation. At the end of the project, a research network will be established that is sustainable beyond the life-time of the proposed activities. The acquired skills and attitudes in the training will be passed on to new civil servants and will be useful in the future, although it may be necessary to update the knowledge continuously. Lessons Learned from Past Operations in the Country/Sector 11. Successful projects in the social sectors are usually characterized by (i) a supportive policy framework, assessed by the bank prior to project preparation; (ii) a high degree of local ownership, including of project stakeholders; and (iii) wellprepared implementation plans, with clear and monitorable goals. Latvia's recent reforms provided the supportive policy framework. The bank has been assessing these reforms continuously over the last year. Attention and effort has been devoted to developing ownership by the counterparts of project objectives, activities, and outputs. Stakeholders are involved at the local and central levels for the preparation of the social assistance and social - 5-

6 insurance components. Monitoring and evaluation of program impact is being developed in the preparation stage through the creation of a new household survey instrument and by the formulation of a survey user training program. Poverty Category 12. The social assistance and monitoring and evaluation components specifically target the poorest and most vulnerable populations in Latvia. Program Objective Category 13. Poverty Alleviation (PA). Participatory Approach:* Identification/Preparation Implementation Operation Beneficiaries/ community groups COL COL COL Intermediary NGOs/ Academic institutions COL COL COL Local government COL COL COL Other donors COL COL COL *COL (collaboration); IS (information sharing); CON (consultation) Environmental Aspects 14. Environmental category c ("no appreciable environmental impact") has been provided consistent with the provisions of operational directive 4.01, annex e. The proposed project is not expected to have a negative environmental impact. Project Benefits 15. Social insurance: The component will allow the State Social Insurance Fund to implement the social insurance reform program. This reform improves the affordability and equity of the social safety net and also improves resource allocation while increasing public savings. Implementation of most of this reform would be impossible without the proposed investments. The fiscal impact by the end of the project period from full implementation of the welfare reform program is expected to be over 2.5 percent of projected GDP. Investments in component 1 will result in administrative cost savings equal to the investment cost after 6.7 years. In addition, benefit processing time will fall from up to 2 weeks, to less than 1 day, with a lower error rate, saving clients' time. The automated system will also save taxpayers time, as forms will be simplified and filed electronically. 16. Regulation of privately managed pensions: This component will increase old age security by providing a safe and secure place for savings for old age. The system should be of benefit to all workers. The privately managed pension system in Latvia may have as - 6-

7 much as 1 percent of GDP under management beginning in This is expected to grow and will reach an estimated 20 percent of GDP by the year 2025 through mandatory and voluntary contributions. 17. Social assistance: The project activities will strengthen the capacity of the national government to assist localities in targeting and assisting the poor, including providing poor and vulnerable groups with services that are more responsive to their needs during the transition to market. Successful replication of the Kandava pilot will improve the quality of life and productivity of individuals in danger of isolation, homelessness, or institutionalization. 18. Monitoring and Evaluation of Social Policy: In 1995, total government expenditures on social insurance and assistance amounted to 14.9 percent of the Latvian Gross Domestic Product (GDP), but the effectiveness of this spending is not known. Weak evaluation capacity results in imprecise assessments of social policy options, resulting in policies that fail to achieve their goals. Improved social policy monitoring and evaluation will allow policy-makers to identify groups that are the most vulnerable and to design and implement effective policy responses. Better targeted social policy should reduce poverty and improve the efficiency of public spending. Project Risks 19. Social Insurance: A major shift in policy direction in Latvia could undermine the achievement of the development objectives. A number of activities are in place to strengthen institutionalization of the policy reforms: (i) the SSIF has prepared and is implementing a communications program on the new pension system and the SSIF organizational development; (ii) monitoring and evaluation activities are being strengthened to track the fiscal and social impact of welfare policy; (iii) technical assistance activities have strengthened the policy making and implementation capacity in the Ministry; and (iv) should policy adjustments occur, SSIF business is now being organized in a way that will allow the maximum possible flexibility in benefit delivery -- organizational response time to policy change should be rapid. 20. Social assistance: Replication of lessons learned at the Kandava pilot could be hampered by municipalities incorporating only some pilot features in order to save costs. The pilot's final evaluation will therefore include a financing study aimed at facilitating suitable replication, including the examination of appropriate cost recovery mechanisms. 21. Monitoring and evaluation: Inadequate internal communication and coordination may limit the effectiveness of training and technical assistance activities. All Ministry departments and agencies concerned have thus been involved in the preparation of this component. The Ministry has also requested technical assistance from EU PHARE to improve communication in the - 7-

8 Ministry. Contact Point: Louise Fox, Task Manager The World Bank 1818 H Street N.W. Washington, D.C (202) (tel) (202) (fax) Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 4,