IBRD Results. Bulgaria Case: Challenge. Results. Making a Difference in an Eu Member State. the world bank

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1 the world bank Bulgaria Case: Making a Difference in an Eu Member State IBRD Results SYNOPSIS Bulgaria s efforts to transition to a market economy were rewarded by membership in the European Union in 2007 but the country still faced steep challenges to elevate the income of its more than seven million people to the average seen in the EU. Partnering with IBRD, Bulgaria continues to make great strides in improving financial management, channeling increased revenue to programs that are delivering new or improved water connections, better schools, and renovated homes for the elderly. Challenge Bulgaria has come a long way from its difficult early years of transition to a market economy. Buoyed by a decade of sound macro-economic policies and deep structural reforms, Bulgaria and its 7.6 million people joined the European Union (EU) January 1, At that time, Bulgaria s per capita income stood at only 37 percent of the EU average. In 2008, this figure increased marginally to 41.8 percent. Bulgarians are eager to reap the benefit of EU membership and aspire to equal living standards; however raising the productivity of Bulgaria s economy remains a major challenge especially against the background of a declining and ageing population. Bulgaria s population is projected to shrink by 18 percent (about 1.5 million people) between 2000 and 2025, the second largest forecast population decrease in the Europe and Central Asia region. Today, Bulgaria s main challenges are to mitigate the negative impact of the global prices, to enhance productivity, strengthen public institutions and governance to accelerate convergence of living standards to average EU countries. Results IBRD s work in Bulgaria is an example of how a global knowledge and finance institution can make a difference in a middle-income country that has plenty of options to turn to for both these needs. During the past decade, the World Bank Group has been a trusted partner, supporting Bulgaria as it emerged from economic crisis and triple-digit inflation to join the EU. The Bank s work focused on enhancing productivity and competitiveness, improving the efficiency and effectiveness of public spending, and strengthening governance and institutions with the overarching objective of boosting the incomes of Bulgarians to a level closer to that in the EU. IBRD s contributions, through three projects over a decade, have provided tangible results: More than 700,000 people benefited from small social infrastructure improvements and services on the municipal and community levels through the Social Investment and Employment Promotion Project. Improvements in revenue administration and strong economic growth contributed to an increase in tax and social contribution revenues by 4.6 percentage points of GDP between 2002 and 2008, the highest revenue gain among new EU member states. Turnaround times for registering a real estate transaction and mortgage, and for cadastre map services, were reduced to a single day from seven days. The Revenue Administration and Reform Project (US$34.15 million equivalent, approved by the Board in March 2010

2 2 Bulgaria Case: Making a Difference in an Eu Member State According to Krasimir Stefanov, the National Revenue Agency Executive Director, due to the implementation of the Revenue Administration Reform Project, the Agency has become an effective institution, responsible for the collection of state revenues from taxes and social contributions. We learned a lot of lessons during project implementation, but the key outcome for us was the creation of a team of professionals, which is especially important now when we face new challenges. One of the NRA future priorities is to guarantee the continuity and sustainability of the project s objectives and outcomes. 2003) supported the integration of tax and social contribution revenue (pension, health and other contributions) collection to improve the effectiveness and efficiency of the public revenue collection system in Bulgaria and facilitate private sector development. In the 2008 Doing Business report, Bulgaria was ranked among the top ten reformers worldwide for streamlining procedures related to paying taxes, licensing, and enforcing contracts. Bulgaria is currently ranked 44 out of 181 countries worldwide on the ease of doing business. More detailed results from this project include: Voluntary compliance revenue collection improved steadily between 2002 and 2008 by 15 percentage points for value-added tax (VAT), by 13 percentage points for corporate income taxes, and by 7 percentage points for personal income taxes. Tax and social contribution revenues increased by 4.6 percentage points of GDP between 2002 and 2008, the highest revenue gain among EU new member states. Compliance gains allowed the government to reduce tax rates to levels that are the lowest among the new member states firms allocate 31.4 percent of their profits on taxes and social contributions according to Doing Business 2010 report. Territorial tax departments were consolidated to 29 from 340 in 2002, with further consolidation currently underway. Revenue collected per National Revenue Agency employee increased to EUR 1.16 million in 2008 from EUR 380,000 in Collection costs declined to 0.8 percent of revenues in 2008 from 1.4 percent in 2002 and currently are much lower than in the other new EU member states. Another example of tangible results in improving the business environment is the implementation of the Bulgaria Registration and Cadastre Project, approved by the Board in 2001 and financed with USD 30 million equivalent by IBRD, and a USD 2 million grant by the Netherlands government). The improved cadastre and property registration systems in Bulgaria contributed to a secure and efficient real estate market the number of real estate transactions rose by 27 percent per year in the past three years and hence to increased investments and economic growth. Main results include: Turnaround times for registering a real estate transaction and mortgage, and for cadastre map services, were reduced to one day from seven days. Security of data and of ownership, and efficient and quick online customer service were ensured through the joint Information Technology system introduced under the project. Five million properties were covered by cadastre maps. Rapid mortgage development facilitated 70 percent of recent property transactions. Services and revenues of both agencies doubled on an annual basis in the past three years. A further example of results delivered at the project level is the Social Investment and Employment Promotion Project. The original USD 50 million was approved by the World Bank Board in 2002, and in 2007 the Board approved additional financing in the amount of USD 19.3 million. Designed to reach out to poor and vulnerable groups in disadvantaged areas, the project supported more than 580 municipal and community micro-projects in its investment portfolio. These projects included school improvements, energy efficiency, water supply and sewerage in small villages, and the rehabilitation of homes for the elderly The project impact on people s lives was articulated by a beneficiary from the town of Lovech who received cadastre services: The new system has made service much faster and better. Now we no longer have to go to several institutions, but receive services at one desk.

3 IBRD RESULTS 3 and for children without parental care. More than 700,000 people have benefited from the small social infrastructure improvements and services on municipal and community level through these demand-driven subprojects. More than 930,000 man-days of temporary and permanent work were created. Close to 1,600 of the people employed under the infrastructure micro-projects came from the pool of longterm unemployed. Among others, and as part of the nonemployment related social impact of the micro-projects, more than 110 communities have been linked to tap water or received improvements in the quality of their water supplies or sewage systems; 120 schools and kindergartens were refurbished to provide better learning conditions and improve energy efficiency; and 80 municipal social centers, facilities for disabled people, orphanages and homes for the elderly were upgraded for the benefit of their inhabitants. Under the active labor market component, 21,000 people received employment-related services or were placed into jobs through 700 small contracts for employment services and support to unemployed. Approach Lubomir Tsekov, Mayor of Koprivshtitsa, a small town in south-west Bulgaria, says: Our community benefited from the reconstruction of the kindergarten under the Social Investment and Employment Promotion project. There are better conditions for our children and staff now the kindergarten now is warmer and more energy efficient. The World Bank Group s comparative advantage is the combination of analytical depth that brings both global and regional best practice, substantial financing, and hands-on implementation experience based on detailed country and sector knowledge. It is considered a trusted, unbiased partner and solid reform proponent that, over the years, contributed substantially and transparently to policy dialogue with stakeholders and civil society in Bulgaria. Given EU membership and advanced middleincome country status, demand for World Bank support is focused on complex policy reforms, intricate institutional strengthening cases, multifaceted implementation issues, and critical analytical work. The Bank s approach combines development policy and investment lending, underpinned by high quality policy advice and in-time analytical support. Through more than 30 country-tailored reports delivered over the last four years, the World Bank Group s strong analytical and knowledge services have helped Bulgaria choose the appropriate mix of policies to promote strong economic growth, sound fiscal management, and improved service delivery. These reports facilitated discussion and consensus among stakeholders and society on the Bulgaria s reform agenda. They also shaped the way policy makers see and address development challenges. The reports include: i. Accelerating Bulgaria s Convergence report that highlights the multi-faceted challenge of increasing the productivity of the economy; ii. From Red to Grey (Implications for Bulgaria) report that focuses on the impact of demographic trends on growth and fiscal balances; iii. Various reports on the business climate, including on Regulatory Reform, Investment Climate, Financial Services and Consumer Protection, etc; and iv. Sectoral policy, expenditure, institutional reviews including on Agriculture, Forestry, Judiciary and Railways. Some of the recommendations in these reports were included in subsequent government programs and budgets, and others triggered subsequent investment and institutional reforms.

4 4 Bulgaria Case: Making a Difference in an Eu Member State Given these options, it is telling that Bulgaria has turned to the Bank to deliver flexible, timely and tailored financial services, knowledge services, and strategic advice in support of reforms that facilitate accelerated integration and convergence with the EU. These have taken the form of (i) a series of programmatic Development Policy Lending operations that greatly helped improve the effectiveness, efficiency and transparency in the education, health and social sectors; (ii) investment projects that significantly improved the business environment, including the Revenue Administration and Reform Project and the Registration and Cadastre Project; and (iii) investment projects such as the Social Investment and Employment Promotion Project that target the social inclusion of vulnerable groups, restore social infrastructure, increase access to services, and support labor market participation. Ibrd Contribution The World Bank Group s engagement in Bulgaria is based on strategic principles of outcomes, selectivity and flexibility, and knowledge-sharing. Both the impact of the economic crisis, but also the ambitious objective of accelerated EU integration requires that collaboration with the government and related investment produce tangible results. In terms of financing, the World Bank is a secondary source for the government after the support from the EU, the European Investment Bank (EIB), or commercial markets. The total IBRD contribution for the three projects described above totaled USD million equivalent. The overall World Bank lending program for the fiscal years amounts to US$754 million equivalent. During the same period, the Bank also delivered about 30 pieces of analytical and advisory work. Engagement of World Bank Group IFC support to Bulgaria is aimed at improving the country s competitiveness through supporting domestic companies and attracting foreign private investors. During the past 5 years, approximately US$290 million in investments were made in six projects in financial markets, general manufacturing, energy, oil and gas, and agriculture. Partners The Bank s understanding of, and engagement in, key sectors in Bulgaria, including education, health, social protection, labor and product markets, is greatly appreciated by the European Commission, a key stakeholder that has channeled EUR 1.3 billion in pre-accession-related aid to Bulgaria. The dialogue with the Bank on sectoral and technical issues has been increasingly intensified, in particular

5 IBRD RESULTS 5 in priority areas of interest such as helping Bulgaria meet the Lisbon agenda targets; and advice on strengthening the capacity of the public administration, including in the areas of policy design, budgeting, investment planning and evaluation, and absorption of EU grant funds. In the context of the new intergovernmental means of governance in the European Union (based on the voluntary cooperation of its member states known as the Open Method of Coordination), Bulgaria conducts close dialogue and shares experiences with other EU member states. It has consistently invited the Bank to contribute to this dialogue. In the past, the Japanese government, through the Japan Policy and Human Resources Development Fund technical assistance program and Japan Social Development Fund grants, has provided critical and timely support for capacity building and technical assistance for project preparation and implementation. The Netherlands government s support was focused on implementation of the common EU legislature (known as aquis communautaire) and building administrative and institutional capacity. Close consultation and stakeholders involvement not only improved the quality of the analytical work but also increased receptiveness of stakeholders to the policy recommendations, many of which are sensitive and touch upon vested interests. Dissemination of analytical work: A deliberate and carefully focused dissemination strategy was an essential ingredient to enhancing the impact of reports and recommendations. Policy dialogue in the context of the development policy loans was greatly facilitated by timely and high quality analytical work and technical support on important elements of the government s reform agenda. Synergies between investment and policy lending offered additional potential for progress in achieving the country s development objectives. Even in complex reform projects, such as tax and tax administration reform, long-term engagement, investment in institutional capacity, and a deliberate communication strategy with and among stakeholders and beneficiaries strengthened the implementation of reforms and achievement of sustainable results. Next Steps Bulgaria s government values the high-quality policy dialogue and related timely advisory services of the Bank, which accompanied its investment support. The Bank has been perceived as a knowledge bank, and a reliable partner committed to supporting Bulgaria s EU convergence agenda. At times, demand for services exceeds the Bank s capacity to deliver. The Bank is currently engaging with the new government, which took office in July 2009, on a new Country Partnership Strategy for the fiscal years. Good Practices Developed/ Replicated (Optional)

6 6 Bulgaria Case: Making a Difference in an Eu Member State learn more Read more for the World Bank s projects in Bulgaria here Learn more about World Bank knowledge support here Revenue Administration and Reform Project Multimedia/Pictures/Testimonies: Footage: Revenue Administration Reform Project Photos Project Movie Link The Revenue Administration office in Varna, which was renovated in 2005, collects close to 5 percent of all revenues in Bulgaria Improving the on-going program of training has been key in establishing a professional revenue administration staff in Bulgaria With the establishment of the National Revenue Agency a change in the institutional culture has taken place taxpayers and contributors are now perceived and treated as stakeholders and clients NRA staff in Stara Zagora (continued on next page)

7 IBRD RESULTS 7 learn more (continued) Modern institutional management capacity and organizational framework have supported an improved operational efficiency. NRA staff discuss the Strategic Plan for the Agency for Bulgaria Registration and Cadastre Project Multimedia/Pictures/Testimonies: Footage: Project Movie Link Slideshow: Slideshow Link Bulgaria Registration and Cadastre Project Photos* 1. The 15-years program for reform in the registration sector started in One of its main objectives was the update and digitization of the cadastral maps in Bulgaria. The World Bank Registration and Cadastre Project aimed to accelerate the implementation of this reform. 2. The project contributed to the effective and secure functioning of the real estate market, allowing for the growth of mortgage lending and enhanced economic growth through increasing investments, development of tourism and infrastructure projects. (continued on next page)

8 8 Bulgaria Case: Making a Difference in an Eu Member State learn more (continued) 3. The establishment of a Digital Property Register and a modern joint Information System for cadastre and property was the core part of the project. Each property was incorporated in the new centralized information system. This includes both village houses in countryside and the urbanized parts of the country. 4. The information system is designed to service both the general public and companies. The Registry Agency offers on-line verification service. A check up can be made 24/7 from anywhere in the world. 5. The Registry Agency and the Cadastre Agency span their networks all over the country. Anyone willing to acquire property now is able to receive information on its characteristics and the possibility for building on the site. 6. The offices of the Cadastre Agency and Registry Agency were fully repaired and equipped under the project. Efficient storage equipment is important for ensuring quality of the service. 7. Bulgaria has one of the highest home ownership rates in the world (at 94%) and domestic demand continues to be one of the main drivers of market growth. The number of real estate transactions rose by an average of 27% per year in the past 3 years, while average property prices grew by about 30% a year (continued on next page)

9 IBRD RESULTS 9 learn more (continued) The Social Investment and Employment Promotion Project Multimedia/Pictures/Testimonies: Footage: Footage: Employment Promotion Movie Link Social Investment Movie Link Project Slideshow Slideshow Link The Social Investment and Employment Promotion Project Photos* 1. The project has funded more than 580 municipal microprojects, including school and kindergarten improvements, energy efficiency and rehabilitation of elderly homes and homes for children without parental care, water supply and sewerage in small villages, etc the opening of a renovated school in Zavet municipality 2. A kindergarten was rehabilitated in Aksakovo Municipality (continued on next page)

10 10 Bulgaria Case: Making a Difference in an Eu Member State learn more (continued) 3. And kindergarten improvements were also funded in Lyaskovets village, Stambolovo municipality, thus improving the quality and capacity for child care in this community 4. The project also contributed to the municipal infrastructure an old bridge was rehabilitated in the small town Pestera From Red to Gray Report Read the report here 1. Report Public Discussion, December 2007 Demographic transition: two page summary on implications for Bulgaria see here