RECENT ECONOMIC AND SECTORAL DEVELOPMENTS Growth and External Performance

After a modest economic recovery in 2011, when real growth reached 1.6 percent, Serbia entered into recession again in 2012. According to preliminary estimates, the Serbian economy slowed 1.7 percent in 2012. Although the economy is in recession, there was a small decrease in the unemployment rate, which stood at 22.4 percent in October, after reaching a peak in April 2012 of 25.5 percent. In many ways, 2012 was very difficult for Serbia. The year was marked by political instability (presidential and parliamentary elections); closure of the largest exporter (US Steel); and severe weather (both winter and summer). As a result, the economy is again in recession. Industrial output in the first three quarters of 2012 was 4.5 percent lower than in the same period of 2011. There was a short-lived recovery of output in October, but industry declined again in November (-3.4 percent, month-on-month). Retail trade turnover contraction continued in October, when turnover dropped by 10.9 percent compared to the same month in 2011.
Figure 1. Real Economy Growth
3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 Q1 Q2 Q3 Q4

External adjustment in 200910 was significant, but the current account deficit (CAD) has been on the rise since 2011. After falling from 22 percent of GDP in 2008 to around 7 percent in 2009 and 2010, the CAD in 2011 jumped back to about 8.9 percent. The CAD in the first three quarters of 2012 reached 2.5 billion (or 8.5 percent of projected annual GDP). There was some improvement in the second and third quarters, primarily due to a slowdown in imports. Still, the CAD in the first nine months 2012 was 28 percent higher than in the same period of 2011 (in euro terms). The projection for the 2012 CAD is between 10.5 and 11.5 percent of GDP. In 2011, both
Figure 2. Current Account Deficit, as % GDP

0.0
Q1 -1.0 -2.0 Q2 Q3 Q4

-3.0
-4.0 2010 -5.0 2011 2012

GDP, quarterly growth rates

foreign direct investments (FDI) and portfolio investments were significantly higher than in previous years, which compensated for decreasing financial loans. However, this trend reversed in 2012, when net inflows of FDI dropped to an estimated 200. This is primarily due to the Serbian Governments repurchase of a stake in Serbia Telekom from a Greek investor for 430 million. The exchange rate was volatile through much of 2012, with the dinar having depreciated 8.7 percent against the euro. The National Bank of Serbia (NBS) intervened in the foreign exchange market throughout the year, primarily selling foreign currency reserves to prevent a sharper depreciation of the dinar. Overall, the NBS sold 1.4 billion in the foreign exchange market. As a result, foreign exchange reserves decreased 1.1 billion by the end of 2012. Going forward, it is important that the new Government and the NBS make progress in discussions with the International Monetary Fund (IMF) in order to agree on a new program.

2010

2011

2012

There were some positive developments, however. According to the latest Labor Force Survey in October, the unemployment rate dropped to 22.4 percent, an improvement over the 25.5 percent from the April survey. The increase in exports is due primarily to an increase in production at the Italian carmaker, FIAT. Many new exports also emerged, such as U.S. tire producer Coopers, as well as some Italian textile producers. However, according to the third quarter data, agriculture output declined by nearly 20 percent through September.

The current IMF program is off-track and a new one is expected to be discussed in May 2013.

Fiscal Performance
The fiscal deficit for 2012 is estimated to have been 6.6 percent of GDP. While fiscal policy in the first three years of the mandate of the previous Government was in line with what was agreed with the IMF under the Stand-By Arrangement (SBA) program, there was a major fiscal slippage before the elections. The previous Government increased spending on all items, and in particular on wages and subsidies. This led to a significant increase in the budget deficit, which reached 3.4 percent of GDP by June 2012. As a result, public debt increased significantly to reach 61 percent of GDP by year end.
Figure 3. Public Debt
20,000.0 18,000.0 16,000.0 14,000.0 12,000.0 10,000.0 8,000.0 6,000.0 Jan-08 Nov-08 Dec-10 Jun-08 Sep-09 Feb-10 Apr-09 Oct-11 May-11 Mar-12 Aug-12 Jan-13 Jul-10
in EUR (left axis) as % GDP (right axis) Fiscal Rule

finances. The treasury manages a modern, integrated information system incorporating a single chart of accounts used by all budget organizations, and controls payments through a single account in the NBS. The organic Budget Systems Law was refined in 2009 and 2010 to incorporate improvements in budgeting, accounting, financial control, internal auditing, debt management, and fiscal responsibility, but few of the changes have been fully implemented. The coherence of the budget has been endangered by the creation of numerous extrabudgetary funds (200812), and the effectiveness of the single treasury account has been weakened by the introduction of own revenues among various direct and indirect budget users. One of the first decisions of the new Government was to bring back on budget all own-revenues and to close a number of extra-budgetary funds. Financial management control and internal audit are moving toward European Union (EU) standards, but there is still a significant need to build capacity in this area across government. The State Audit Institution (SAI) is continuing to improve in capacity and scope, and has increased the number of completed audits covering the central government, local governments, public enterprises, and the NBS. The World Bank is supporting public financial management through its Development Policy Loan (DPL) program and through targeted small grants. Bank support is helping, for example, to improve debt management, support the implementation of budget accounting rules at the level of local governments, and provide specific advice on the subject of fiscal responsibility.

70.0 60.0 50.0 40.0 30.0 20.0 10.0

0.0

The 2013 deficit target is set at 3.6 percent of GDP, which represents a major fiscal adjustment. With high and increasing public debt, the Government needed to prepare a budget that can bring the public debt back to a sustainable path. It is important that the Government implements the budget as planned and improve financial discipline, including through the reduction of arrears.

Financial Sector
The Serbian financial system weathered the first wave of the global financial crisis, but a weak economic recovery and significant depreciation resulted in a substantial increase in nonperforming loans (NPLs) and a deterioration in asset quality. Confidence in the banking sector was affected in the first wave of the crisis, which was reflected in the withdrawal of almost 20 percent of household deposits from banks in late 2008. Nonetheless, a conservative regulatory approach had left the banking system with capital and liquidity buffers large enough to withstand these shocks. Confidence was restored through a coordinated response by the NBS and the Government, in close cooperation with the banking 2

Public Financial Management

After initial significant improvements in public financial management, Serbia has regressed over the last couple of years. According to the Public Expenditure and Financial Accountability (PEFA) assessment (from 2010), notable improvements had been made in the effectiveness of the treasury system, including the establishment of improved financial control and accountability arrangements and increased transparency in public

community, international financial institutions (IFIs), and the EU, under the Vienna initiative and its more recent successor. As a result of these measures, confidence gradually returned; household deposits stabilized in early 2009 and have been growing since then, and they are now at a record level of about 8 billion. In spite of that, with a very sluggish economic recovery and the dinars depreciation trend (the banking system in Serbia is highly euroized, with close to 75 percent of loans in or indexed to foreign currency), asset quality continues to deteriorate. Gross NPLs have doubled, from 10.2 percent of overall loans in the third quarter of 2008 to 19.9 percent in the third quarter of 2012. Some reassurance comes from the fact that the banking system in general continues to have relatively substantial buffers; the capital adequacy ratio (CAR) of the entire banking sector is at 16.4 percent as of the third quarter of 2012 (though down from 19.7 percent a year ago), and regulatory loan loss reserves are at 122 percent of NPLs.
Figure 4. NPLs and Regulatory Loan Loss Reserves
200 160 120

risks is linked to state-owned banks (eight banks that control about 16 percent of the banking sector). The World Bank supported building a more efficient and stable financial sector as one of the three key pillars of the Private and Financial Sector Development Policy Loan (PFDPL) series. There was additional, more recent Bank support via the Private and Financial Sector Policy Based Guarantee (PFSPBG), and previously through the Capital Markets Technical Assistance.

Poverty and Social Protection

The recent downward trend in the incidence of poverty in Serbia was reversed in 2009 by the financial crisis. More than 200,000 people were lifted out of poverty during 200608 as a result of strong economic growth. However, the economic contraction that started in 2009 brought about a reversal in the national poverty headcount of 3.1 percentage points. At 9.2 percent at end-2010, poverty increased well above the 2007 levels (8.3 percent). Rural areas were most affected. While the incidence of urban poverty remained unchanged between 2008 and 2009, in rural areas and Belgrade, poverty became both more prevalent and deeper. Furthermore, the data indicate that those at the bottom end, who gained from the precrisis growth period, were among those hardest hit by the crisis.
Figure 5. Poverty Incidence, % 8.3 6.1 6.9 9.2

LLR/NPL
(line, left scale)

NPL/total loans
(bars, right scale)

25 20 15

80 40
0

10 5
0

Overall, banks are thus far generally managing to withstand the pressures. However, individual banks are facing significant challenges. A mid-sized domestic bank recently failed and was bailed out by the state; its assets and liabilities were subsequently merged with another state-owned bank in late 2012. More recently, another small state-owned bank was bailed out using a similar mechanism. Going forward, the main challenges will be to deal with the large NPL overhang and to cope with the Eurozone crisis contagion pressures (over half the banking sector is owned by parent banks from Greece, Italy, Austria, and Hungary). In addition, a specific set of 3

2007

2008

2009

2010

The social assistance reforms introduced by the Government were designed to mitigate the poverty impact of the crisis, as they aimed to increase access to means-tested programs, which are small relative to other programs (0.4 percent of GDP). The largest of them, the Financial Social Assistance (FSA), formerly known as MOP (material support for families), reaches only a fraction of the poor (only

6.7 percent of the poorest population quintile, and only 40 percent of the extreme poor, according to the 2007 Living Standard Measurement Survey [LSMS]). The FSA covers the equivalent of 30 percent of the consumption of the population in the bottom quintile. In 2011, the Government adopted a new Social Assistance Act governing the provision of lastresort social assistance (LRSA), linking it to social care and employment services. The act also removes certain disincentives stemming from the design of the social assistance programs to pursue a job search and/or participate in public works. The recently introduced reforms are expected to enhance the adequacy of the FSA and widen the coverage to households with three or more family members, including by raising the limit for FSA recipients from five to six per family. Simulations suggest that the changes brought by the new Law on Social Welfare could lead to an increase in the theoretical FSA coverage by 22 percent (and thus benefit an additional 11,828 households). Beneficiaries in the bottom income decile would experience an 11 percent increase in benefits, which would result in a 3.5 percent increase in their disposable income. However, the poverty impact of these reforms will depend on the success of the outreach effort, the elimination of administrative barriers, and the size of the benefit increase. Through the Public Expenditure Development Policy Lending Program (PEDPL) program and analytical work, the Bank has been supporting the reform of the social assistance system, especially for cushioning the impact of the economic crisis and enhancing the coverage of the social assistance programs going forward.

copayments, and reducing the generosity of the benefit package. However, the area of prevention, especially with regard to noncommunicable diseases (NCDs), remains inadequate.
Photo 1. Hospital in Zrenjanin is Part of the Health Project Financed by the World Bank

Financing reform and improving efficiency in health care delivery remain the main challenges in the sector. Despite many improvements in recent years, the health care system still suffers from numerous inefficiencies and low productivity. The Ministry of Health and the Health Insurance Fund initiated financing reforms at both the primary and secondary levels that will replace the input-based system of financing in the health sectorin which providers were paid according to historical budgetswith a new system that will introduce a productivity factor into the payment of providers. For primary care, the Government opted for performance-based payment (a formula combining per capita, number of services, and preventive care services). Under this approach, patients register and get treated by an individual doctor of their choice who then becomes the primary point of contact, thus limiting the need for referrals. A portion of the salaries of primary health care providers would be directly linked to the number of patients registered and the number of services provided. All the preparatory steps for the introduction of a productivity-based payment system have been completed. The state provided the legal ground for the implementation of this reform by adopting the Amended Law on Salaries of Public Servants in December 2011 and the relevant bylaws closely defining payment in January 2012. Despite protests from professional medical unions requesting adjustments to the formula, the output4

Health Sector
Recent trends in Serbias health indicators point to steady improvement. Health outcomes have improved significantly over the last decade, and Serbia now has an epidemiological pattern like most countries in Eastern Europe. Additionally, many indicators are equal or better than those in the most recent EU member states. Average life expectancy, for example, at 73.7 years, is almost equal to averages in the new EU members. The sector took steps towards rationalization of the system by setting the groundwork for productivity-based payment, reducing the number of beds and staffing, increasing

based payment system linking a percentage of salaries to productivity started in September 2012. In the secondary, hospital level of care, the Ministry of Health and the Health Insurance Fund are moving towards a Diagnosis Related Group (DRG) system. DRG is a hospital payment system of care in which hospitals are paid on a percase basis, calculated on an average cost of treating a patient during an entire episode. The DRG system creates an incentive to increase the number of treated cases, while at the same time minimizing costs. International experience shows that implementing such reforms can generate substantial savings, while increasing productivity. The Bank supports the health sector in Serbia through the Delivery of Improved Local Services (DILS). DILS is an investment that seeks to improve the access to, and the efficiency and quality of, local health, education, and social protection services. Additional Financing for the Health Sector Development Project, with the main objective of building capacity for a performanceoriented health care system, closed in March 2012. The Government has asked for a new health project, which would aim to further strengthen its capacity to implement financing reform in health. The Public Expenditure DPL series also supports policy reforms in the health sector, specifically the introduction of performance-based payments.

improve the quality of teaching and learning in schools, and implement inclusive education policies as legislated in the Framework Education Law of 2009. The Government has been addressing these challenges through: (i) efforts to optimize the existing school network, consolidate class sizes, and rationalize the education labor force, in order to adjust the size of the education system to the declining number of students; (ii) the piloting of a draft formula for per student financing in 16 municipalities (10 percent of all Serbias municipalities) during the school year 201112, as a part of the per student financing reform; (iii) the introduction of learning standards, a reform of the final examinations at the end of compulsory and secondary education, and efforts to strengthen the schools external evaluation system; and (iv) extensive work on introducing a mechanism to support the inclusion of the most vulnerable groups of children, including Roma and the disabled, into the regular education system.
Figure 6. Progress in PISA Average Scores, 200609

Education
Despite a relatively high level of public expenditure on education, Serbias education system is performing below international averages in terms of student achievements. Results of the Program for International Student Assessment (PISA) in 2003, 2006, and 2009 revealed that (a) Serbias 15-year-olds are performing below the Organisation for Economic Co-operation and Development (OECD) averages in reading, mathematics, and science literacy, and (b) the portion of students considered functionally illiterate is still very high (roughly one-third of students taking the PISA test). However, the PISA results also revealed that Serbias students significantly improved their scores between 2006 and 2009. The key reform challenges in the education sector in Serbia are the need to increase the efficiency of public spending in education, 5 The Bank has supported the education sector in Serbia through multiple instruments. The DILS project supports the delivery of local services in the sectors of education, health, and social protection. Until the fall of 2012, the Bank provided multiannual support to the Serbia Education Technical Assistance (TA) in order to help the Government address the challenges in educational quality and financing. The TA supported the creation of expenditure databases for Serbia covering 200510, using government budget data and the BOOST methodology for the analysis of public expenditure. Under this effort, a separate Serbia Education Module for 2010 was created, with data on school and municipal characteristics, student achievements, and spending on education. The TA included an assessment with recommendations on monitoring student achievements, teacher policies, and school finance strategies. Under the Public

Expenditure DPL series, the education sector is working with the relevant Serbian institutions on policy reforms to contain education expenditures by right-sizing the network of schools and staff in the sector, while in parallel, the DILS investment loan supports the long-term effort of the Government to shift financing to a per student modality. Pending work in the education sector includes implementation of TA with funding from the Western Balkans Investment Framework (WBIF), a multilateral instrumentincluding the European Commission (EC), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Council of Europe Development Bank (CEB), the World Bank, and bilateral donorsestablished to support the accession of Western Balkan countries to the EU. In Serbia, the WBIF is financing the development of systems to monitor education inclusion, with the World Bank as a main implementing partner. Also, the grant for the Poverty and Social Impact Assessment of the per student formula piloting will help Serbias Ministry of Education, Science and Technological Development to mitigate the risks of teacher redundancies and/or school dropouts once the new financing reform is scaled up to the national level.

with a mandatory pension system, there is also a voluntary (third pillar) pension system supervised by the NBS. Since 2008, the Serbian pension system has been administered through a single Pension and Disability Fund of the Republic of Serbia (PDF), established through the consolidation of three formerly separate funds (for employees, the selfemployed, and farmers). For the past seven years, all of these reforms have been supported by the Bank through a mix of investment (Consolidated Collection and Pension Administration Reform Project, otherwise called PARIP that closed in September 2012) and TA support. In addition, pension reform is at the core of policy reforms supported through the Banks ongoing Public Expenditure DPL series.

Agriculture
In Serbia, the agricultural sector has great economic, social, and political significance. The share of primary agriculture in Serbias GDP (in constant 2002 prices) is currently 10 percent, and it has been steadily decreasing over the last decade (13.110.0 percent). The real annual growth rate of the agricultural sector has mainly been negative over the past 10 years, with the exception of 200809, when it was boosted by soaring food prices on the international market, which benefited Serbian agricultural exports. In the same period, while the average annual growth rate (AGR) of GDP was 4 percent, the average AGR of agriculture was only 0.9 percent. Trade liberalization, particularly access to EU markets, allowed Serbia to become a net food exporter, although exports could be higher. Increased access to EU and regional markets through trade agreements created the conditions for Serbia to become a net exporter of food. This was recorded for the first time in 2005, with a surplus of about US$255 million. In 2012, agri-food exports amounted to over US$1 billion. The share of agricultural products in Serbias total export grew from 7.9 percent in 2011 to 8.5 percent in 2012. Prices of many agriculture and food products in Serbia show high volatility, rising higher than EU prices in periods of shortage and dropping lower than EU prices in times of surplus. This volatility indicates a lack of competition and efficiency in the marketing chains, and makes it 6

Pension System
The Serbian pension system is the single largest expenditure item in the state budget, and Serbia has the second highest pension spending to GDP ratio in the Europe and Central Asia (ECA) region, second only to Ukraine. The problems include a benefit level that is too high and eligibility conditions that allow more than half of new retirees to retire below the normal retirement age of 65 for men and 60 for women. Both the benefit levels and the retirement age were addressed in the 2003 and 2005 pension legislation, but those efforts proved to be insufficient to resolve the problem. In 2010, the Parliament approved new legislation that gradually raises the earliest retirement ages and limits the indexation of pensions to bring the benefit levels closer to international norms, thus enhancing the fiscal sustainability of the pension system. Although the changes introduced in the new law are rather modest in scope, it is a step in the right direction. Along

difficult to achieve a continuity of exports, with obvious negative effects on consumers. Market developments are also changing the farm structures in Serbia, with the gradual emergence of a commercial farm sector. There is an increasing divide between those commercial farms that have risen to the opportunities and challenges of modern agricultural technology and markets, and the many small farms that continue to produce in traditional ways, marketing either through informal channels or supplying processors from a weak bargaining position. Such a structure is not unusual in transition economies, but the economic options for small farmers remain very limited. The relative importance of cereal production in Serbia is the highest in Europe, while livestock production is declining. The share of cereals in the total production value in Serbia is the highest among the European countries (34 percent in Serbia vs. 11 percent in the EU), encouraged by the area payment system. Meanwhile, livestock output is declining rapidly in response to international competition, with no effective policy response from the Government. The pursuit of EU accession will affect agriculture more than any other sector, but it is also the sector that will benefit the most. The preaccession period requires great adjustments and investments at all levels of the agriculture and food industries. Serbian agricultural policy has created uncertainty over the last decade, and has been redesigned into a two-year cycle since 2000, leading to an unstable political environment. This policy uncertainty has had negative effects on investments in the sector, as well as on its restructuring. The performance of the sector is also affected by public expenditure and legislation. The agriculture budget needs to be restructured and increased, as it is small by international standards and its share in the total budget has declined from 5 percent in 2004 to 2.5 percent in 2012. However, the size of expenditure for the agriculture and food sector as a share of total public expenditure increased in 2013 to 4 percent, which is still not sufficient to fulfill the tasks of the Government adequately. The main part of expenditure (over 80 percent) is used for area payments. This spending focuses on a specific section of farmers with respect 7

to size, production, and region, which distorts the production pattern. The decline in milk production over the last several years is partly due to this pattern of agricultural support. If Serbia wants to become a member of the EU, it has to develop a functioning market economy in which the main role of the Government will be to provide public goods and deal with market failure. The approach to agriculture policy making must also change; it will need to be based on evidence and analysis of the underlying problems, not just on a quick response to the perceived needs.
Figure 7. Agriculture Export Commodities, Serbia 2012

Vegetables

Fruit

Cereal

Oil seed

Livestock

There is a critical need for a balanced, welltargeted, and consistent agricultural policy that would be implemented under a multiannual program with a multiannual budget. Strategic decisions are needed to bring agricultural sector policy in line with the EU Common Agricultural Policy (CAP). The World Bank supports the agriculture sector in Serbia through the Irrigation and Drainage Project and the Transitional Agriculture Reform Project.

Transport
The integration of the Serbian transport network into the regional and Pan-European network is crucial for Serbias economic and social development. The National Infrastructure Council prepared a plan for infrastructure construction for 200812, which calls for some 1.58 billion from IFIs for the completion of the missing links on road Corridor X.

Although roads are recognized as a key asset of the country, the condition of the road network remains poor, mainly due to the lack of investments and very little new construction in the last 20 years. Moreover, the quality of the overall transport infrastructure declined further in the past few years. According to the Global Competitiveness Report (GPR) 20112012, Serbia is ranked 131st out of 142 countries on the quality of roads, down from 117th out of 133 countries in the 20092010 GPR. Total expenditures in the road sector have increased, but this is due mainly due to road rehabilitation and upgrading. Recurrent expenditures on maintenance were stable for years at the level of US$383 million per year until 2012, when they dropped significantly as a result of the financial crisis and the Governments commitment to completing the
Figure 8. Annual Fatalities and Injuries in Serbia

4.65.0 billion spent on maintenance between 2009 and 2027. Notwithstanding a welcome drop in the total number of fatalities recently, road safety remains a major concern in Serbia and represents a growing social and economic cost for the country. Some estimates suggest that the cost of fatalities could be as high as 0.8 percent of GDP and the cost of serious injuries equivalent to 1.2 percent of GDP, based on 2008 accident figures. The Government recognized the importance of road safety and adopted a new road safety law in 2009. That was the first major update in legislation since the 1980s that incorporates many aspects of the EU acquis communautaire. The Bank supports the transport sector through the recently closed Transport Rehabilitation Project and the ongoing Corridor X Project. A new Road Rehabilitation and Safety Project is under preparation. All three projects aim to improve road safety through the (re)construction and improvement of the standards of the Serbias road network.
Figure 9. Road Conditions in Serbia
90% 80% 70% 60% 50% Good Fair Poor Very Poor

Corridor X Highway Project and the Belgrade bypass. The above amount is close to what is estimated to be required for normal maintenance. However, there is a significant maintenance backlog estimated at US$700900 million. The need to control the fiscal deficit in line with set targets is likely to result in a further reduction of expenditures on road maintenance by 30 percent this year. The Government would like to address the maintenance backlog issue and to improve the overall quality of road infrastructure through an IFI-supported road rehabilitation and maintenance program, and has initiated a National Road Network Rehabilitation Program to deal with these concerns. The plan is to rehabilitate about 1,200 kilometers of road sections with the financial support of several IFIs over the next 10 years. This draws from the Ministry of Transports 2009 Transport Strategy and Master Plan that envisages 8

40% 30% 20% 10% 0% Motorw ays Main Regional Total

Energy
The Government has led a remarkable turnaround in the energy sector over the last decade. Nevertheless, Serbia still faces the risk of electric power shortages. Serbia is ranked poorly in the 2013 World Bank Doing Business report with respect to the reliability of electricity (it costs more than five times the OECD average as a percentage of GDP to establish a secure electricity supply), and the Banks 2008 Business Enterprise and Performance Survey (BEEPS) showed that 33 percent of firms considered electricity a problem, more than double the level in 2005 and representing

the sharpest increase in any of the obstacles registered in the survey. The entire electricity system is old, with low system reliability and low efficiency. In generation, 53 percent of the power plants are more than 30 years old and will have to be retired over time, despite the ambitious rehabilitation programs that are planned. Less than 25 percent of the transmission lines and substations are in good condition. As a result, capacity constraints in the transmission system make it difficult to accommodate new generation capacity (especially renewables) and increased regional trade. There is therefore an urgent need to invest in new generation, transmission, and distribution to address the supply gap and an unfinished reform agenda. Already by 2008, generation capacity was not able to meet peak demand. This trend is expected to continue, with a gap of about 400 megawatts by 2015. Total investment needs to address the supply gap are estimated at about 16 billion by 2020 (about 4 percent of GDP annually), with the public sector able to provide no more than a quarter of that amount. Hence, private sector participation would need to increase from almost nothing today to 12 billion by 2020. The new Energy Law is a step in the right direction, as it facilitates competition in the sector. Further corporatization plans for EPS and EMS (stateowned enterprises that produce and distribute electric power, respectively) will also improve their ability to compete in the market. The Serbian economy is highly energy intensive, and wastes a lot of this scarce resource. Consumption of primary energy in Serbia for every dollar of GDP is 13 times higher than in Germany, 10 times higher than in France, five times that in Slovenia, and almost twice that of Romania. Problems in the energy sector reflect the cumulative effect of policies that channeled mass subsidies to firms and the population through cheap energy. This stimulated excessive and wasteful consumption, making the Serbian economy very energy intensive and at the same time depriving the energy sector of capital to develop its capacity to meet the growing demand. Compounding these challenges, the need to comply with the strict environmental requirements of the EU will call for yet more funding. Existing large power plants will have to reduce their emissions, and the required standards 9

will be tightened even more after 2016. Total estimated investment requirements to meet EU Directives in the power sector are on the order of 800900 million. The Bank has supported the energy sector of Serbia through the Energy Efficiency Project and the Energy Community of Southeast Europe Program, whose goals are to improve energy efficiency in public buildings and the power transformation system. The Bank remains ready to support Serbias energy sector in the process of EU integration.

THE WORLD BANK PROGRAM IN SERBIA

In May 2001, Serbia, together with Montenegro, assumed membership in the World Bank. Since 2006, Serbia has been a World Bank member as an independent country. To date, the Bank has provided financing for 14 projects in various sectors totaling almost US$1.5 billion of International Development Assistance (IDA) credits and grants, and International Bank for Reconstruction and Development (IBRD) loans. The lending envelope for the ongoing Country Partnership Strategy (CPS) FY1211 could reach US$800 million, with the possibility of financial assistance divided evenly between investment operations and development policy lending. This program, plus the allocation of an additional US$200 million for budget support to respond to the economic crisis in the country, signals the Banks commitment to Serbia. Analytical and Advisory (AAA) Program: The lending program is underpinned by strong AAA activities carried out over the past several years as well as new AAA activities. In particular, the CPS was shaped by a comprehensive Country Economic Memorandum - The Road to Prosperity: Productivity and Exports, prepared with the Government and in collaboration with the EC. Further, the PEDPL series was fundamentally shaped by the Public Expenditure Review (PER) carried out during the previous CPS. The World Bank provided multiannual TA support to the education sector, with new TA grants, including the Western Balkans
The World Bank fiscal year (FY) starts on July 1 and ends on June 30.
1

Investment Framework (WBIF) and the Poverty and Impact Assessment of the Per Student Financing reform (PSIA). At this time, it is finalizing work on the Serbia Municipal PER. In January 2013, the portfolio consisted of six active investment projects for a total of US$619.2 million, and eight trust funds in the amount of US$24.12 million. Overall, Serbias portfolio is performing well, with the consolidated Investment Lending (IL) project disbursement ratio at 35 percent and the FY13 disbursement ratio at 8.4 percent. Significant improvements in the disbursements were recorded in FY12, with a FY12 disbursement ratio of 23 percent. Two projects closed in the last six months of 2012 (Transport Rehabilitation and Consolidated Collection and Pension Administration Reform), and one will be substantively restructured by the end of FY13 (Bor Regional Development). By the end of FY13, two more projects are scheduled to close: Transitional Agriculture Reform and Energy Efficiency Additional Financing, with a third project closing in December 2013 (Delivery of Improved Local Services Project). Two projects are currently under preparationone in the health sector and another in transport. In addition to the IDA2/IBRD portfolio, there is a Multi-Donor Trust Fund for Judicial Reform in the amount of US$6.1 million, and an EU Instrument for Pre-Accession Assistance (IPA)funded Serbia Innovation Project in the amount of US$10.56 million, as well as a portfolio of four recently closed Institutional Development Fund (IDF) grants and one grant funded by the Swedish International Development Cooperation Agency (SIDA) in the amount of US$3.02 million. Serbia is a participant in the Road to Europe Program of Accounting Reform and Institutional Strengthening (REPARIS). This program helps countries to adapt laws and regulations governing financial reporting and to develop the related institutions, and also assists countries in bringing their financial reporting framework in line with EU requirements. REPARIS is a Bank- and recipient-executed (hybrid) MultiBy the end of the FY13, all IDA funded projects in Serbia will close.
2

Donor Trust Fund (MDTF) currently funded by the governments of Austria, Switzerland, and Luxembourg, and managed by the World Bank Centre for Financial Reporting Reform (CFRR).

International Finance Corporation

Serbia became a shareholder and member of IFC in 2001. IFC works with private sector clients, government, and civil society to bring the benefit of global expertise to the country through its advisory services and investment projects. As of December 31, 2012, IFCs portfolio in Serbia was US$680 million. In FY12, IFC invested US$351.2 million and mobilized US$152.8 million. IFCs priorities in Serbia include crisis response, agribusiness, climate change, and improvements in the investment climate. IFC is also focusing its investment services on increasing access to finance by supporting the development of local financial institutions, especially ones that concentrate on small and medium-sized enterprises (SMEs). Across all sectors, IFC prioritizes investment in Serbias less-developed regions and in projects that contribute to greater economic diversification and regional integration. Recent IFC investment projects in Serbia include: 57 million loan to Victoria Group to support the development of the private sector in Serbia, where revitalizing agribusiness is essential for creating jobs. 50 million loan to Atlantic Group to support development of agribusiness and cooperation in the region (including Serbia) that is still recovering from the crisis. 12.5 million loan to Serbias beverage maker Vino Zupa to support the development of agribusiness in the country. 50 million for a minority stake in Titan Cement Cyprus, owned by Greek cement manufacturer Titan Cement. The investment will support Titans subsidiaries in the Western Balkans: Cemertara Kosjeric in Serbia, Cementarnica USJE in FYR Macedonia, and SharrCem in Kosovo 70 million loan to the Serbian unit of Socit Gnrale to finance agricultural development. 45 million loan to MK Group, a Serbian food producer, to modernize and expand production.

10

20 million loan to PMC Automotive Serbia, a joint venture between Italian automotive suppliers CLN Group and PROMA Group. 50 million loan to UniCredit, equally divided between a housing line (focus on low-income households) and an agribusiness line supporting one of Serbias key sectors.

IFC has also invested in the following Serbian banks and companies: Banca Intesa, Cacanska Banka, Continental Bank, EFG, Komercijalna Banka, Unicredit Bank, Vojvodjanska Banka, ProCredit Bank and ProCredit Leasing, Farmakom, Kronospan, and Porr. Recent advisory projects include: The Balkans Renewable Energy Project works to develop the renewable energy market, with a special emphasis on small hydropower plants (SHPPs) in Western Balkan countries with the highest impact potential: Albania, Bosnia and Herzegovina, FYR Macedonia, and Serbia. Supported by the Ministry of Finance of Austria. The Southeast Europe Tax Transparency and Simplification Program works in Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR

Macedonia, Montenegro, and Serbia to achieve two objectives: simplify tax administration procedures to reduce tax compliance costs, particularly for SMEs; and improve the legal framework and efficiency of the administration of international taxation procedures, with a focus on transfer pricing and double taxation treaties. Supported by the Swiss State Secretariat for Economic Affairs (SECO). The Western Balkans Trade Logistics Project works in Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR Macedonia, Montenegro, and Serbia to achieve two objectives: reduce the number of documents and days needed for goods to be exported and imported; and streamline procedures for the flow of cargo by road, air, and river. The project is supported by the European Union. Public-Private Partnerships: IFC provides advice on designing and implementing publicprivate partnership (PPP) transactions to national and municipal governments to improve infrastructure and access to basic services such as water, power, health, and education. The program is supported by donor partners Austria, Norway, and Switzerland.

11

SERBIA: DELIVERY OF IMPROVED LOCAL SERVICES (DILS) PROJECT

Key Dates: Approved: March 18, 2008 Effective: March 10, 2009 Closing: Original, December 31, 2012; Revised, December 31, 2013 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed
IBRD Government of Serbia Other Donors Total Project Cost 46.40 0 0 46.40** 25.23 25.23 19.20 19.20

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. ** N.B. The loan was made in Euros, and the USD amount changes in line with exchange rates.

Context at Project Design: The Government was considering the decentralization of service delivery and the accompanying reform of the inter-governmental public finance system, which are both critical to improving health, education, and welfare outcomes in Serbia. In these social sectors, decentralization was seen as a key feature of sector strategies adopted by the line ministries towards achieving the desired improvements. The Project Development Objective is to increase the capacity of institutional actors and beneficiaries in order to improve access to, and the efficiency, equity, and quality of, local delivery of health, education, and social protection services in a decentralizing environment. Project restructuring took place in July 2012, when the project description and the results framework were refined. The range of sector issues addressed by the project include: (1) transforming financing models through the development of a public financing framework that increases efficiency while compensating for inequities across municipalities and promoting rationalization of the service networks at the local level; (2) improving access and equity through the use of new approaches and models for delivering services to excluded groups; (3) improving accountability and quality by supporting sector ministries, local authorities, and other local service providers to assume their new roles and responsibilities, including regulation, oversight, quality assurance, management, planning, budgeting, and service delivery; and (4) supporting project implementation. Results achieved to date: Education Financing: National per student funding formula for preuniversity education (primary and secondary schools) developed, and local formulas are being developed through the pilots. First pilot took place in 16 of Serbias municipalities (10 percent of all) in the school year 201112. Piloting to continue in 2013, in order to make further progress on adjustments to the local formulas; Access and equity: School and municipal grants are used in support of capacity building for inclusive education of children with learning difficulties, disabilities, and/or socioeconomic disadvantages (including Roma), where schools and preschools benefit from teacher training (21,000 participants), small civil works, and purchase of various teaching tools and equipment; Accountability and quality: Student learning outcomes are monitored through Serbias participation in the Program for International Student Assessment (PISA) 2009 and 2011, Trends in International Mathematics and Science Study (TIMSS) 2011, and the Teaching and Learning International Survey (TALIS) 2013, and the strengthening of the school external evaluation system. Health Financing: With amended health legislation, current laws and bylaws allow the use of capitation- and output-based formula; and the framework with methodology and criteria for allocation of equalization funds was developed (both PDIs met); Access and equity: Nearly 500 medical staff and associates trained to recognize the needs of vulnerable groups; 15 Roma health mediators financed from the loan funds resulting in 3,600 vaccinated children, over 2,500 registered with a primary health care (PHC) physician, 600 pregnant and new mothers receiving health checks, and more than 1,200 women able to choose a gynecologist. In 2012, the Government institutionalized Roma health mediators by funding their salaries from the Republic of Serbia (RS) national budget; Accountability and quality: 14 percent of PHC centers completed quality accreditation process; 31 out of the targeted 50 PHC centers adopted clinical pathways; and 75 percent of PHCs use fully operational health management information system (HMIS) platform. Social Protection Access and equity: Internal operating procedures of the Disability Fund of the Ministry of Labor and Social Policy (MoLESP) reformed to enable funding of the results-oriented projects; and innovative services developed, piloted, and scaled up across the country (sign language interpretation services for the deaf, and escort services for the blind and people with impaired vision); Accountability and quality: The development of the Management Information System in the MoLESP is making progress but more time is needed for the development of software and the finalization of the WAN network covering over 260 centers for social work and other social protection institutions. Key Partners: The Bank team worked closely with (i) the Ministry of Health, Ministry of Education, and Ministry of Labor and Social Policy, as beneficiary agencies; and (ii) the Standing Conference of Towns and Municipalities, as the key national partner in contact with local authorities. Key Development Partners include the European Commission, the United Nations Childrens Fund (UNICEF), United Nations Development Programme (UNDP), the UK Department for International Development (DfID), and the Swiss Agency for Development and Cooperation (SDC).

12

SERBIA: ENERGY EFFICIENCY ADDITIONAL FINANCING Key Dates: Approved: March 16, 2004 Effectiveness: June 29, 2004 Additional Financing Approval: June 20, 2007 Additional Financing Effectiveness: November 13, 2008 Closing: April 30, 2013 Financing in million US Dollars*:

Financier

Financing
31 18 49

Disbursed Undisbursed

IDA Credit IBRD Loan Total Project Cost

47.76

1.62

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.

Context: The inefficient use of energy is a major concern in Serbia. Consumption of primary energy for every dollar of GDP is significantly higher than in the EU. Serbia has a large, unrealized potential for energy-efficiency improvements in the building sector. Various studies have revealed that buildings in Serbia have either very poor or no insulation, worn-out building seals, and inefficient heating supply systems. The Project Development Objective is to improve the energy efficiency in buildings in order to make heating more affordable and to improve the functional and health environment of the users. An important associated objective is to reduce the local and global environmental impact of the use of dirty fuels for heating buildings in Serbia. The project objectives will be achieved by financing (i) energy system conversion and modernization of the Clinical Center (CC) of Serbia in Belgrade and of the Ni Clinical Center; (ii) energy-efficiency improvements in about 62 public buildings (schools, hospitals, and social care institutions); and (iii) technical assistance to the Serbia Energy Efficiency Agency. The principal aim of the Additional Financing (May 2007) was to enable the Borrower to complete the original scope of the project (energy-efficiency improvements in three social care buildings, but nine schools and six hospitals left out due to a cost overrun), and to scale up energy-efficiency improvements to include: (a) rehabilitation of the heat supply system of the Ni Clinical Center along with energy-efficiency improvements in all 17 contiguous buildings on the campus; complete retrofitted lighting in a number of schools, and (b) energy-efficiency improvements in a number of social care institutions, schools, and hospitals across Serbia. Results achieved: Savings arising from the energy system rehabilitation are around US$2.5 million per year, and the earnings of the Clinical Center of Serbia from delivering heat to third parties are around US$600,000; The results achieved and monitored at the four completed and monitored buildings retrofitted show (a) about 47 percent savings in energy consumption, and (b) about 52 percent reduction in C02 emissions equivalent. The installation of energy-efficiency equipment and retrofitting in schools, hospitals, orphanages, and other social care buildings included 26 primary schools and four buildings of the University of Kragujevac, 33 hospitals (out of which 17 in Ni CC) and 10 orphanages, as well as complete lighting retrofits in 10 schools and partial lighting retrofits in 10 other schools. Key Partners: The Bank team is working closely with the (i) Ministry of Mining and Energy of the Republic of Serbia, which is responsible for overall project implementation; (ii) Ministries of Health, Education, and Labor and Social Policy of the Republic of Serbia, which are the main beneficiaries and recipients of project funds; and (iii) Serbia Energy Efficiency Agency (SEEA).

13

SERBIA: IRRIGATION AND DRAINAGE REHABILITATION PROJECT Key Dates: Approved: July 12, 2005 Effective: March 6, 2006 Closing: May 31, 2013 Financing in million US Dollars*:

Financier

Financing
25.00 49.37 74.37

Disbursed Undisbursed
18.43 37.38 56.81 7.23 11.99 19.32

IDA Credit IBRD Loan Total Project Cost

*As of December 31, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.

Context: In the 1990s, the Serbian water sector suffered due to an inability to provide sufficient levels of operation and maintenance funds for water-related infrastructure. Following a decade of economic sanctions and declining operation and maintenance budgets, the flood control and drainage infrastructure deteriorated. The regulatory and legal framework, designed for different socioeconomic conditions, was outdated and funds and arrangements were not in place. Following the democratic changes in 2000, the Banks review of the water sector concluded that significant rehabilitation and reinstatement activities were necessary to restore the functionality of the essential drainage and flood control infrastructure, in order to serve the needs of Serbian agriculture. Additionally, there was a need for longer term institutional reform to make the sector more productive, efficient, and sustainable. The Project Development Objective is (a) to support the high-priority rehabilitation of the drainage and irrigation infrastructure; (b) to reduce the risk of damage from flooding to people, land, crops, property, and infrastructure in project areas; and (c) to improve water resources management and strengthen the associated water resource management institutions and policies. The project is addressing a range of interconnected sector issues by (1) financing the rehabilitation of the flood control, irrigation, and drainage infrastructure; (2) providing support in raising the technical capacity of weather-forecasting institutions and financing activities related to the provision of better conditions for flood forecasting; and (3) supporting the preparation of water-related legislation and raising the capacity of water management institutions by adopting modern water management techniques. Results achieved to date: 35 schemes for flood control and drainage have been rehabilitated, with over 400,000 hectares country-wide protected from floods, providing an increased level of protection to over 1 million people; the work on eight others is ongoing. Four Water User Associations established, and two schemes are in rehabilitation with the use of counterpart funds. Procurement completed for the high-power Doppler weather radar for improved forecasting capacity of the Republic HydroMeteorological Institute. Continued support to the development of water-related legislation including the Water Law (enacted in May 2010), as well as the drafting of the Water Users Associations relevant legal documents, which is entering the final phase. As of December 31, 2011, 35 percent of technical staff of the Directorate of Water trained in water resources management through trainings and study tours. Key Partners: The Bank team works closely with the Ministry of Agriculture, Forestry and Water Management (MAFWM) and its Directorate of Water, which is responsible for overall project implementation. The beneficiaries also include the public companies Serbia Waters and Vojvodina Waters, which are in charge of the operation and maintenance of flood control and drainage infrastructure, and the Republic Hydro-Meteorological Institute, which is in charge of hydromet forecasting.

14

SERBIA: TRANSITIONAL AGRICULTURE REFORM PROJECT Key Dates: Approved: June 20, 2007 Effective: November 12, 2008 Closing: May 31, 2013 Financing in million US Dollars*:

Financier

Financing
13.82 4.50 18.32

Disbursed Undisbursed
10.21 3.61 13.82 3.47 0.89 4.36

IBRD Loan GEF Grant Total Project Cost

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.

Context: The predominantly small-scale Serbian farms and small, domestically oriented processing plants are currently overwhelmed by strong regional and international competition and by stringent food quality and safety requirements. The Government of Serbia Agricultural Strategy (August 2005) sets out a roadmap for growth and competitiveness based on: (i) completing the move to a competitive market economy, (ii) increasing Serbias share of EU markets by harmonizing with EU sanitary and phytosanitary (SPS) quality and agro-environmental requirements; (iii) improving competitiveness through the adoption of modern, cost-effective production technologies; and (iv) promoting rural development, especially in poor regions, through transparent, EU-type rural development grant mechanisms. The project was designed to support this strategy. The Project Development Objective is to enhance the competitiveness of Serbian agriculture. The global environmental objective is to conserve the globally important ecosystem in the Stara Planina mountainous area. The project objectives were to be achieved through public investments aiming to improve: (i) the Governments system for delivering rural development investment grants and evaluating their impact; (ii) the capacity of agricultural producers and processors to make use of these funds; and (iii) the management of the Stara Planina Nature Park in partnership with local communities. Results achieved to date: An EU-compliant system for the transparent processing and efficient transfer of funds for agriculture and rural development is being developed. A Payment Directorate has been established, supported by the project with technical assistance, equipment, furniture, and vehicles. It is currently undergoing a process of preparation for EU accreditation (so that it could process Instrument for Pre-Accession Assistance for Rural Development (IPARD) funds). The knowledge transfer system in agriculture has been strengthened by providing training to both public and private farm advisers and through a grant program to support farm advisory services and applied research in agriculture. Some 25,000 farmers implement activities directly related to knowledge products developed with project assistance. There are 360 farm advisors accredited with special competences to provide extension service to farmers. The Management Plan for the area under environmental protection, the Stara Planina Nature Park, has been developed by the Government of Serbia Park Managing Authority Srbijasume. The project supported Srbijasume with equipment and technical assistance to build its capacity for the integrated management of the park. A visitor center has been reconstructed, to be managed by Srbijasume. In the Stara Planina Nature Park area, almost abandoned three years ago, an environmentally friendly grazing practice has been reestablished on around 3,000 hectares, some of which are endangered pastures, and floristic composition of a high value is being utilized again as a result of 177 grants provided to support local livestock farmers, agro-processors, and rural households in this region. Studies for the protection of a geographical name for traditional products coming from this area were prepared, as well as a preparatory study for the Stara Planina Biosphere Reserve nomination. Infrastructure rehabilitation projects for villages are financed. Farmers attitudes towards ecologically sustainable farming practices substantially improved and grants provided as an incentive to adopt these practices; and infrastructure rehabilitation projects for villages financed. Key Partners: (1) The Ministry of Agriculture, Forestry and Water Management (MAFWM); (2) Delegation of the EU in Serbia; (3) U.S. Agency for International Development (USAID); and (4) the Global Environment Facility (GEF). 15

SERBIA: CORRIDOR X HIGHWAY PROJECT Key Dates: Approved: June 9, 2009 Effectiveness: November 6, 2009 Closing: December 31, 2015 Financing in million US Dollars*:

Financier

Financing
388.00 60.00 448.00

Disbursed
65.38 0 65.38

Undisbursed
316.75 60.00 376.75

IBRD Loan Government of Serbia Total Project Cost

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.

Context: The integration of the Serbian transport network into the core regional transport network is recognized as a key policy objective for the economic and social development of the country. The Serbian section of Corridor X, with its 792 kilometers of roads and 760 kilometers of railway lines, forms a part of the South East Europe Transport Observatory (SEETO) regional Comprehensive Network and is a part of two important Pan-European transport infrastructure networks. One is connecting Budapest with the Bulgarian capital of Sofia, and the other links Greece to the north. The Government views the development of Corridor X as the countrys key transport priority that will help facilitate sustainable economic development and ensure that the country capitalizes on its geographical position. The Bank was requested to assist the Government with the preparation of the entire program for the two southern sections of Corridor X. The Government also requested that the Bank contribute financing in parallel to the other international financial institutions (IFIs) and the Hellenic Plan for the Economic Reconstruction of the Balkans (HiPERB). During project preparation, the Bank led a review of the technical and economic viability, a review of the preparation of the Resettlement Policy Framework, the two Corridor Level environmental impact assessments, and a review of the proposed engineering design. The Project Development Objectives are to increase transport efficiency and improve traffic safety on the three project sections of Corridor X, between Nis and Dimitrovgrad, and Grabovnica and Donji Neradovac, respectively, and to improve road management and road safety in Serbia. The project objectives will be achieved by financing (i) the construction of two sections of the motorway on E-75, totaling 31.9 kilometers between Grabovnica and Grdelica, and between Vladiin Han and Donji Neradovac; (ii) construction of 8.67 kilometers of the motorway on an E-80 section of the corridor between Dimitrovgrad and the border with Bulgaria (Dimitrovgrad Bypass); (iii) technical assistance in the area of road safety; and (iv) implementation assistance and institutional support. Results achieved to date: For the construction of two motorway sections between Grabovnica and Grdelica (5.6 kilometers) and between Vladicin Han and Donji Neradovac (26.3 kilometers) on the E-75 road to FYR Macedonia, all four lots on the E-75 were awarded in March 2012. The works started in May 2012, and are expected to finish by September 2014. For the construction of 8.67 kilometers of the Dimitrovgrad Bypassa motorway between Ni and the border with Bulgaria, close to Dimitrovgrad (E-80)the road construction on Lot 1 is at 54 percent of completion; on Lot 2, the bridge is at 88 percent, while the tunnels construction on Lot 3 is at 15 percent of completion. A Lead Agency has been established under the new Road Safety Law, and the preliminary methodology for monitoring road safety has been proposed. The Action Plan for the Reform of the Roads of Serbia (PEPS) has been prepared. Key Partners: The Bank team worked closely with the Ministry of Infrastructure of the Republic of Serbia; Corridors of Serbia, a limited liability company; and the public enterprise Roads of Serbia. Key Development Partners include international financial institutions: European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), and the Hellenic Plan for Economic Reconstruction of the Balkans.

16

SERBIA: BOR REGIONAL DEVELOPMENT PROJECT Key Dates: Approved: June 20, 2007 Effective: December 16, 2008 Closing: Original, September 30, 2012; Revised, March 31, 2013 Financing in million US Dollars*: Financier Financing Disbursed Undisbursed
IDA Credit IBRD Loan Total Project Cost 10.0 33.0 43.0 0 9.00 9.00 10.0 24.00 34.00

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.
Context: Initially, the Project had a broader focus and aimed at the mitigation of poorly managed legacy sites from mining operations in Serbias Bor region and social impacts from restructuring of the local RTB Bor mining and metallurgical company. With partial results from the job creation component and uncertainty whether some of the project sites earmarked for environmental remediation could be redeveloped under concessions to private investors, it was decided to comprehensively restructure the Project in early 2013 and focus the project on the replacement of a collector under one of the mine tailing disposal facilities and discontinue or cancel all other activities. The Project Development Objective is to support the GoS in addressing the structural hazard of the river water collector of the Veliki Krivelj tailings disposal facility, which is one of the most urgent environmental legacy issues of the mining sector in the Bor region. The Project focuses on: The replacement of the Veliki Krivelj collector (a 2.5 km concrete main pipe with a diameter of 3 meters) that rests at the bottom of the mine tailings facility which has been constructed on top of it, is considered the most pressing environmental concern of the original project interventions. The collector, carrying much more weight from the material above than what it was designed for, is in a very poor condition and regular repair works have managed so far to maintain its integrity. Collapse of the collector would block the river discharge and immediately jeopardize the stability of the massive mine tailings disposal facilities that have been constructed in the Kriveljska River valley. The full replacement of the collector with a by-pass tunnel in hard-rock around the tailings disposal facility is considered the only viable solution to eliminate this high risk. Results achieved to date: Environmental liabilities of the mining sector in the Bor region :

Conditions are in place to implement the works to replace the Veliki Krivelj collector, including the full design/technical specifications, the Environmental Impact Assessment, construction permits, and the works contract signed; and All interface arrangements with RTB Bor are in place.

Fostering new sources of economic growth and job creation in the Bor region (component discontinued): Nearly 850 unemployed people benefited from the temporary employment programs (i.e. public works); as of June 2012, nine training programs for over 600 unemployed persons were completed. The reconstruction works of the future location of the Business Incubator in Majdanpek is completed. However, the registration of the incubator, the selection of tenants, and the procurement of necessary equipment were not finalized. Under the microfinance program, as of June 2012, the OBS disbursed 53 loans. However, due to the slow disbursements resulting from low demand, the credit line is cancelled.

Key Partners:
The Bank team worked closely with (i) the Ministry of Energy, Development and Environmental Protection, which was responsible for implementation of the environmental management and remediation component; (ii) Ministry of Economy and Regional Development, which was focusing on socioeconomic regeneration activities; and (iii) Project Management Unit housed within the Privatization Agency. Key Development Partners: Project preparation activities were funded by a Japanese PHRD (Policy and Human Resources Development) grant while an EU-EAR grant financed TA for the restructuring and privatization of RTB Bor.

17

SERBIA: BUDGET SUPPORT SERBIA PUBLIC EXPENDITURE DEVELOPMENT POLICY LENDING PROGRAM (PEDPL) Key Dates: Approval: PEDPL1: November 17, 2009; PEDPL2: April 28, 2011 Amount: PEDPL1: US$100 million; PEDPL2: US$100 million Effective: Disbursed in full: PEDPL1: January 2010; PEDPL2: October 2011 PEDPL3 currently in stand-by status, but it could be processed quickly in the coming months, subject to confirmation by the IMF that Serbia is implementing a sound macroeconomic policy. Context: The level of public spending in Serbia is high relative to other countries in the region. The Public Expenditure DPL series is designed to help the Government create a smaller and more efficient public sector while improving the quality of key social services. This DPL series consists of three programmatic operations (amounting in total to US$300 million). It builds on previous World Bank work with the Government of Serbia as supported by previous Structural Adjustment Operations and is complemented by another DPL series aimed at supporting Serbias private and financial sector development. The Project Development Objective was to help reduce the size of Serbias large public sector by supporting reforms that would help improve the productivity of public spending. It was structured around three key policy areas:(i) public expenditure allocation reforms aimed at restraining growth in public sector wages and pension obligations; (ii) public expenditure management reforms aimed at improving efficiency in the education and health sectors and addressing weaknesses in budget planning, procurement, financial reporting, and debt management; and (iii) reforms in social assistance to cushion the impact of the economic crisis and enhance the coverage of social assistance programs going forward. The reform program has been done in phases, with PEDPL1 focusing on overarching public expenditure reforms and PEDPL2 focusing on containment of the public wage and pension bills. A proposed PEDPL3 will focus on expenditure rationalization in the social sectors, including payment reform in health and rationalization of the school network. Expected Results: The expected overall outcome of the operation was an improvement in the quality and efficiency of Government spending. This would assist the Government in bringing about the necessary reduction in aggregate public spending levels over the medium term while improving the current levels of service delivery. Key outcome indicators included: Wage spending as a share of GDP fell from 11 percent in 2009 to 10 percent in 2011; Pension spending as a share of GDP fell from 14.3 percent in 2009 to 12.7 percent in 2011; A minimum of 10 percent of salaries of primary health care providers were calculated based on performance; A per capita financing system in primary and secondary education was virtually piloted in at least five municipalities; Multiyear fiscal planning improved; Internal controls for non-salary spending and the effectiveness of internal audit improved; The scope, nature, and follow-up of external audit improved; Government debt management improved, as evidenced by (i) completion of a borrowing plan for 2012 based on the Governments 2011 strategy, and (ii) the updating of the medium-term debt management strategy, including analysis of main market risks; Last-resort cash assistance coverage increased. Key Partners: The Bank team worked closely with the Ministry of Finance and Economy of Serbia, which was coordinating the overall dialogue, as well as with sector ministries. Key Development Partners included the IMF and the EC. The EC also provided budget support and had an extensive TA agenda in the area of public financial management. The Bank regularly convened a donor meeting group consisting of donors in the area of public financial management.

18

SERBIA: JUSTICE SECTOR SUPPORT MULTI DONOR TRUST FUND FOR JUSTICE SECTOR SUPPORT (MDTF-JSS) IN SERBIA Key Dates: Approved: November 2008 Effective: January 2009 Closing: June 2012 Financing in thousand US Dollars*: Financier Financing Disbursed Undisbursed
MDTF Total Project Cost 6.10 3.00 3.10

*Source MyTF as of January 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement.

Context: Since its political transformation in 2000, Serbia has accelerated its justice sector reforms, recognizing their importance for EU accession. The reform efforts were focused on strengthening governance, improving the business climate, combating corruption, and improving state accountability and effectiveness. However, the overall reform impact so far has been less than anticipated; public trust and confidence in the judiciary remain low, institutional capacity constraints affect reform coordination, and the implementation of fragmented donor-financed projects and programs have overtaxed the already low capacity of the Ministry of Justice (MOJ), whose overall ability to coordinate, prioritize, sequence, resource, and implement a multiyear sectoral strategy remains weak. The Project Development Objective was to facilitate the acceleration of Serbias EU integration pertaining to the justice sector by providing an appropriate financing vehicle, the necessary tools, focused short-term analytical and policy advice, and capacity-building technical assistance to Serbias MOJ and judiciary. This hybrid Trust Fund (TF) consists of five components, where the second component is executed by the Client and other components are executed by the Bank. Component 1 provides advisory services to strengthen justice sector reform in the areas of: (i) Institutional Capacity Building of MOJ, the judiciary, and the Ministry of Finance and the Economy (MoFE); (ii) Resource Management and Aid Coordination; (iii) Legal and Institutional Environment; (iv) Judicial Facilities and Infrastructure; and v) Outreach, Monitoring, and Evaluation. Component 2 provides technical assistance in the same five areas, as well as in the area of access to justice. Component 3, 4 and 5 cover supervision, administration, and program management of the TF.
Results achieved:

Recipient-Executed

The MOJ (i) created a Project Implementation Unit and a Reform Facilitation Unit, staffed with short-term and long-term experts in judicial reform; (ii) mobilized resources for the development of a comprehensive IT strategy for Serbias justice sector , with the strategy to be finalized by December 2012; (iii) shared leadership and organization of the Partners Forum; and (iv) in the area of access to justice, drafted the new Law on Free Legal Aid, to be reviewed by the ministry in 2013. The MDTF will support its implementation through the training of free legal aid providers and an outreach program for free legal aid users.

Bank-Executed

Supported the Ministry of Justice in the transformation process of the MDTF-JSS to a hybrid facility; Through advisory work, supported the production of a set of products: (i) through the Review of the Results and Implementation Status of the 2006 National Judicial Reform Strategy and the facilitation of the collaborative effort, assisted the MOJ in developing the National Judicial Reform Strategy 20122017; (ii) supported the baseline survey of justice sector performance and service delivery in 2010; and (iii) delivered the Judicial Public Expenditure and Institutional Review in early 2012; In the area of resource management, the capacity-building program to support the introduction of an automated case management system in courts of general jurisdiction was completed in 2010; In the area of legal and institutional environment, a Review of the Criminal Chain Process was finalized by December 2012; The TF has a critical role in coleading the work of the Partners Forum that brings together the representative s of international donor partners who are the TF contributors; As an outreach tool, a TF website was established (http://serbiamdtfjss.org). Key Partners: The Bank team worked closely with (i) the Ministry of Justice of the Republic of Serbia; (ii) High Judicial Council, State Prosecutorial Council, Republic Prosecutor Office, and other key justice sector institutions, and (iii) MDTF-JSS Contributing Partners (SIDA, DfID, the Governments of Switzerland, Slovenia, Denmark, the Netherlands, Spain, and Norway). Key Development Partners included the EU Delegation in Serbia, USAID, and the Organization for Security and Cooperation in Europe (OSCE), with which the Bank team coordinated closely on reform priority issues.

19

SERBIA: INNOVATION PROJECT (TRUST FUND) Key Dates Approved: June 1, 2011 Closing: November 30, 2014 Financing in million US Dollars*: Financier Financing
2011 IPA funds Recipient-executed Bank-executed Total project cost 10.56 9.6 0.96 10.56

Disbursed
1.72 0.29 2.01

Undisbursed
7.87 0.67 8.54

*As of January 14, 2013; Note: Disbursements may differ from financing due to exchange rate fluctuations at the time of disbursement. Context: As it approaches EU accession, Serbia is focused on enhancing its competitive positioning by promoting knowledge-based economic growth. This growth is likely to be a factor in both productivity improvements from technology upgrading in the short term and innovation generated by internationally oriented dynamic firms in the long term. In an attempt to modernize the national innovation system, the Government of Serbia has implemented a series of reforms focused primarily on the public research and development (R&D) sector, including science infrastructure improvement. Research and Development Institutes (RDIs) are the primary recipients of public financing. Technology transfer and diffusion from RDIs is quite low, with only a few spin-offs and real technology-based start-ups, indicating the need to place greater emphasis on supporting the various stages of technology development and innovation within enterprises. This project addresses some missing elements of the Serbian innovation system and ailing aspects of the research sector that are likely to be vital for improving Serbias long-term competitiveness. The Project Development Objective is to assist in building the institutional capacity to stimulate innovative activities in the enterprise sector by: (i) supporting the operationalization of the Serbia Innovation Fund (IF); (ii) piloting financial instruments for technological development and innovation in enterprises; and (iii) encouraging selected RDIs to engage in technology transfer and commercialization, and assisting in formulating RDI sector reform policy. Results achieved Recipient-Executed Capacity Building of the Innovation Fund (IF): Strong advisory team established in the IF, including Strategic, Operations, and Regional Advisors. Diaspora-led Investment Committee established, with experience in venture funds, and the technology and research sectors. IF staff trained internationally on due diligence and management of innovation support programs. Implementation of Financial Instruments to Support Enterprise Innovation: Two grant programs (Mini and Matching) established to finance innovative ideas in start-ups and technology development in existing firms. Two calls for proposal conducted: 11 firms financed in the first round and 14 in the second round. Bank-Executed TA to Research and Development Institutes: Detailed technical assessment reports delivered to three RDIs, focused on improving management, technology transfer, and commercialization practices. In September 2012, the Bank team delivered a two-day workshop on RDI institute management. Mini Policy Note on the RDI sector delivered upon the request of the Ministry of Education, Science and Technological Development (MoESTD), to guide the Governments RDI sector reform program. The Note was discussed at a high-level workshop in December 2012, with representatives from MoESTD, RDIs, universities ,and enterprises.
Key Partners: The Bank team works closely with (i) the MoESTD, which is leading the science, technology, and innovation reform program in Serbia, (ii)the IF, which is implementing Components 1 and 2 of the project, and (iii) Serbian RDIs, the main recipients of TA under Component 3. Through the project Steering Committee, the team also engages the Ministry of Finance and Economy, the National Council, and the EU Delegation. Key Development Partners include the European Commission. The EC is funding this initiative through European Union Instrument for Pre-Accession Assistance (IPA) 2011 funds that support the national innovation system.

20

Projects Closed in the Last Six Months (IBRD, IDA)

21

SERBIA: TRANSPORT REHABILITATION PROJECT Key Dates: Approved (IDA): May 25, 2004 Effectiveness (IDA): September 7, 2004 Closing date (IDA): June 30, 2011 Additional Financing Approval (IBRD): June 20, 2007 Additional Financing Effectiveness (IBRD): December 16, 2008 Closing date (IBRD): September 30, 2012 Financing in million US Dollars*:

Financier

Financing

Disbursed Undisbursed

IDA Credit (closed) 57.3 56 1.3 IBRD Loan 50 41 9 Government of Serbia 7 7 0 Total Project Cost 114.3 104 10.3 *Source Client Connection as of August 1, 2012; Note: Disbursements may differ from financing due
to exchange rate fluctuations at the time of disbursement.

Context: The integration of the Serbian transport network into the core regional transport network is recognized as a key policy objective for the economic and social development of the country. The road network in Serbia represents a major asset for the country, but the condition of the network remains poor. A recent survey revealed that while 30 percent of the total network, primarily the main and regional roads, was found to be in good condition, 53 percent was in poor or very poor condition. In addition, Serbias ranking in international comparisons (The Global Competitiveness Report 20112012) indicates that infrastructure is placing Serbia at a competitive disadvantage in doing business compared to selected regional comparators. The project represented the first major program to improve maintenance on the main and regional road networks over the last 15 years. The Project Development Objective was to assist the Government in reducing costs and improving safety for road users through: (a) improving the condition of selected road sections of the main and regional road network; (b) improving the effectiveness of road maintenance through the introduction of performance-based contracting in two pilot regions (Mava and Kolubara); and (c) introducing safe road design principles, road safety audits, and targeted improvement measures. The Project financed (i) institutional strengthening, which included technical assistance, training, services, and the improvement of the road asset databases, as well as the establishment of a computerized system for contract management and improving the procurement and supervision of road works; (ii) consultancy services for the supervision of road maintenance and rehabilitation works, and equipment, materials, and supplies for improved road management capability; and (iii) the enhancement of road maintenance, rehabilitation, and road safety, including the rehabilitation of priority sections of the main road, as well as performance-based road maintenance, on a pilot basis, in the regions of Mava and Kolubara. Results achieved to date: The project included a major program of rehabilitation of 10 sections under IDA funding and nine sections under IBRD funding. In total, 281 kilometers of roads were rehabilitated and another 40 were expected to be completed by September 30, 2012. In addition, road safety interventions and redesign were undertaken on 18 black spots. The project assisted in establishing a functioning asset management system to allow the professional management of the road network, and technical assistance to harmonize road construction and design standards according to good international practices. In addition, the project has piloted, for the first time in the Western Balkan countries, the undertaking of winter and routine maintenance on an output basis on 1,200 kilometers of roads in the Mava and Kolubara regions. This approach realized significant benefits, with the cost of winter maintenance falling to about 50 percent of the average from the remainder of Serbia. Key Partners: The Bank team worked closely with (i) the Ministry of Transport, which was responsible for the overall project implementation and (ii) the Public Enterprise Roads of Serbia, the main beneficiaries and recipients of project funds.

22

SERBIA: CONSOLIDATED COLLECTION AND PENSION ADMINISTRATION PROJECT Key Dates: Approved: May 5, 2005 Effective: December 20, 2005 Closing: Original: September 30, 2010; Extended: September 30, 2012
Financing in million US Dollars*:

Financier

Financing
25.00 0 0 25.00

Disbursed
18.00

Undisbursed
7.00

IDA Credit Government of Serbia Other Donors Total Project Cost

the time of disbursement.

*As of June 2012; Note: Disbursements may differ from financing due to exchange rate fluctuations at

Context at Project Design: With total expenditures rising from 11.2 percent of GDP in 2001 to almost 16 percent of GDP in 2004, and a deficit of 5.5 percent of GDP, the Serbian PAYGO pension system was imposing a significant burden on the Governments fiscal accounts. The project was designed to contribute to sustainable reductions in the fiscal deficit. The then pension system was operated through three separate pension funds, which were reformed by the Law on Pension and Disability Insurance (2003), and the Law on Compulsory Social Insurance Contributions (2004). Major changes included a rise in the retirement age; a rise in the minimum age at which the pension can be drawn; an increase in the averaging period for the salary on which the pension is based; the introduction of a point system, whereby each individual receives points for every year of contribution, with the number of points per year depending on the individuals contribution wage relative to the average wage; a reform of the pension indexation; tightened criteria for determining disability; and the establishment of a minimum pension at 20 percent of the average wage. Project Development Objectives were to develop a framework to consolidate the collection of all social contributions and, if feasible, personal income taxes; to improve the effectiveness and efficiency of Serbias pension system through the modernization and streamlining of its institutional capacity to improve administration; and to develop the capacity for policy identification and analysis, monitoring, and increased public understanding of the pension system. In August 2010, the Government of Serbia was granted a first extension of the project closing date to September 30, 2011, and another extension to September 30, 2012 to finalize the activities envisaged under the project and meet project development objectives.
Results achieved to date: As envisioned by the Pension Law and supported by the Pension Administration Reform Project (PARIP), in January 2008, the three public pension funds were consolidated into a single Republic Pension and Disability Insurance Fund (RPDIF). The project supported the preparation of a strategy for the new fund, which is currently under implementation. As of January 2012, the Military Pension Fund was made part of a single RPDIF, which was not envisioned by the original project design. The concept of the new consolidated collection and reporting system was agreed to and translated into the Law on Central Registry of Mandatory Social Insurance, adopted by Parliament in May 2010, de iure establishing the Central Registry (CR) as an independent institution. Data registries at the Tax Administration and the Pension and Disability Insurance Fund have been improved to allow the preparation of a unified database for the CR. The capacity for pension policy development has been strengthened through various trainings for the Department of Pension Policy in the Ministry of Labor and Social Policy and the Department for Voluntary Pension Insurance within the National Bank of Serbia, which is in charge of supervising the third pillar of pension insurance in Serbia. An extensive public information campaign was completed, based on public opinion poll data on the pension system. In August 2011, the CR entered the phase of contract implementation for the CR Information System to develop a CRIS software solution and enable the CR to purchase needed hardware. The hardware is in place and the software is in the testing phase. The PDO related to setting up the Central Registry of Mandatory Social Insurance has been partially achieved, given that the new systems operationalization, and the full accomplishment of this dimension of the PDO, depends on the adoption and enactment of technical amendments to legislation that establishes legal conditions for full, real-time CRIS system implementation only after January 1, 2013. The Government is currently engaged in the legislative process leading to the adoption of the respective amendments. Key Partners: The Bank team worked closely with (i) the Ministry of Labor and Social Policy and the Ministry of Finance, as responsible agencies, as well as with the Cabinet of the Deputy Prime Minister in charge of pension policy reform; and (ii) a set of beneficiary institutions, including the three Public Pension Funds, now consolidated into a single Republic Pension and Disability Insurance Fund, Tax Administration, Health Insurance Fund, the National Employment Services, and the Central Registry of Mandatory Social Insurance. Key Development Partners included the U.S. Agency for International Development (USAID), with which the Bank team coordinated on policy issues.

23

IFC Projects - Active

24

SERBIA: VINO ZUPA Key Dates: Approved: May 25, 2012 Signed: June 7, 2012 IFC financing (million US Dollars): Financier Loan Amount 16.52 Fiscal Year 2012

Originally established in 1956, Vino Zupa was privatized in 2002 through an auction and listed on the Belgrade Stock Exchange. Following a successful turnaround post privatization, the company has exhibited strong growth, with production per annum increasing from 2 million liters to over 90 million liters in 2010. In the process, 53 million was invested in new equipment and upgrades in order to add new capacity and improve efficiencies, remove production bottlenecks, and settle prior obligations to workers and third parties. IFCs project consists of a corporate loan of up to 12.5 million (equivalent $16.52 million) to be used for capital investments, including additional bottling and fruit concentrate capacity and investment in the energy block (3 million); wastewater treatment improvements (1.5 million); refinancing of a portion of its existing debt on a longer term basis (6 million); and the provision of additional, permanent working capital (2 million). The Project Development Objective. IFC provided Vino Zupa with long-term financing that is currently not possible to secure from commercial banks or capital markets locally. By providing a loan to Vino Zupa, IFC is supporting the development of the private sector in Serbia, where revitalizing agribusiness is essential for creating jobs and lowering a 20 percent unemployment rate. The development impact of the Project is expected to include: Strengthening of agribusiness linkages and indirect support to farmers; Support of a company based in a frontier region in southern Serbia, one of the least-developed areas in the country; Support of an agriculture company involved in value added production and exports in a sector important to the Serbian economy; and

Job preservation in a severely underdeveloped region where a substantial portion of the local population depend on the company for their livelihoods. IFCs expected additionality includes: Longer tenors: provision of long-term financing at reasonable rates suitable to the companys needs that is otherwise not readily available in the market; Financing in a crisis: provision of permanent working capital, reducing refinancing risk; and Environmental and social standards/implementation: provision of financing and expertise in environmental, health, and safety standards by assisting the company in bringing its wastewater filters into compliance with IFC Performance Standards and EU norms. Key Partners: N/A.

25

SERBIA: VICTORIA GROUP Key Dates: Approved: February 2012 Signed: February 2012 IFC financing (million US Dollars): Financier Loan Amount 74.13 Fiscal Year 2013

Victoria is a leading agro-industrial group in Serbia with a primary focus on processing soybean and sunflower oilseeds and grain trading. The Group employs over 1,800 people. IFCs loan of 57 million (equivalent US$74.13 million) will be used to finance the Groups permanent working capital financing needs and restructure the Groups debt financing towards a longer term, more stable structure that is suitable for the nature of the Groups operations. The long-term facility will be used partially to provide input financing to farmers needed to produce oilseeds for processing on the Groups plants. Thereby, IFCs investment is expected to strengthen the support to farmers and increase the sustainability of the Groups operations. The Project Development Objective. IFC provided Victoria Group with long-term financing that is currently not possible to secure from commercial banks or capital markets locally. By providing a loan to Victoria Group, IFC is supporting the development of the private sector in Serbia, where revitalizing agribusiness is essential for creating jobs and lowering a 20 percent unemployment rate. The development impact of the Project is expected to include: Strengthening of agribusiness linkages and support to farmers: given the strong linkages of Victoria Group with farmers, provision of longer term permanent working capital will help ensure stable access of pre-harvest financing to farmers; Job preservation: the Group employs about 1,800 people across its operation and collaborates with about 400 partners, which in turn supply the Group from over 25,000 farmers; Increase tax revenues: IFCs investment will contribute to the growth of government revenues from taxation; and Addressing food security concerns: IFCs investment will contribute to food security and to meeting the challenges of increasing demand and the food crisis. IFCs expected additionality includes: Crisis response and countercyclical support: In light of the fluid economic situation in Serbia in the context of the Eurozone crisis, the local banking sector has cut liquidity on the domestic market. Through the project, IFC is stepping up its presence on the local market, helping to restore confidence and increase investment in Serbia. Diversified funding base: At a time of financial strain for local banks, IFC is starting its relationship with Victoria, a new partner that will benefit from a further diversified funding base as a result of IFCs presence. Key Partners: N/A.

26

SERBIA: SOCIT GNRALE Key Dates: Approved: June 18, 2012 Signed: June 25, 2012 IFC financing (million US Dollars): Financier Loan Amount 94.5 Fiscal Year 2012

In the context of the Joint IFI Action Plan for Central and Eastern Europe (CEE), Socit Gnrale (SocGen), which is the French bank with the largest exposure in the CEE region, has approached IFC to provide an investment package to eight subsidiaries, including Serbia, for an aggregate investment amount of up to 270 million (equivalent US$365 million). IFC provided Socit Gnrale Srbija with a 70 million (equivalent US$94.5 million) loan to increase access to finance for Serbian agribusinesses, supporting economic growth, employment, and exports. In 2010, IFC also approved a 40 million agribusiness loan to Socit Gnrale in Serbia. The Project Development Objective. The loan is part of IFCs strategy to strengthen the regions banking sector and support the countrys economic recovery by boosting lending to the agribusiness sector. In Serbia, about 45 percent of the population lives in rural areas and about one-third rely on agriculture for their livelihood. Agriculture is a key part of Serbias economy, accounting for about 20 percent of GDP. In 2011, Serbias total agricultural exports increased by 20 percent year-on-year, reaching US$2.8 billion (2.2 billion). The development impact of the Project is expected to include: Strengthening financial institutions Serbia Supporting agribusiness projects in Serbia in partnership with SocGen subisidiaries Contribution to economic growth and poverty reduction

IFCs expected additionality includes: Enhancing the capacity of SocGen subsidiaries in Serbia to provide funding to agribusiness whose access to finance has been curtailed by the global financial crisis; and Providing financing under the Joint IFI Action Plan.

Key Partners: N/A.

27

SERBIA: PMC Key Dates: Approved: March 22, 2012 Signed: March 30, 2012 IFC financing (million US Dollars): Financier Loan Amount 26.88 Fiscal Year 2012

IFC provided a 20 million loan to PMC Automotive Serbia, a new metal-stamping factory near Kragujevac, to strengthen Serbias car industry and boost the overall economy. PMC Automotive Serbia is a joint venture between CLN Group and PROMA Group, two Italian automotive suppliers. The PMC factory will supply parts to FIATs plant in Kragujevac. The FIAT plant will manufacture the new FIAT 500L, a subcompact car with improved fuel efficiency. The current production capacity of the FIAT plant, 20,000 cars per year, is expected to grow to 140,000 cars per year in 2013, and possibly more than double that number by 2015. The Project Development Objective. The PMC factory, located in a supplier park less than a kilometer from FIATs plant, is expected to generate 370 jobs. The total cost of the project is estimated at 37 million. The project will strengthen Serbias car industry and generate new exports. The development impact of the Project is expected to include: Sustainable employment creation: The project is expected to create at least 367 skilled jobs in Sumadija District, a frontier region of Serbia. Support FDI in Serbia: Channeling foreign direct investment is a priority for Serbia. The project will contribute to balancing Serbias large current account deficit. Support export oriented industry: The project will sell its products to FIAT assembly plant in Kragujevac, which will export 90 percent of the production.

Technology transfer: CLN and PROMA are FIAT trusted suppliers and have state-of-the-art technologies and efficient processes. Local staff will be trained to new, highly competitive standards. IFCs expected additionality includes: Crisis response and counter-cyclical role: Current market conditions in Europe magnify IFCs countercyclical role, as most of the European banks, especially the Italian banks that are active in Eastern Europe, have been limiting their exposure to emerging markets due to funding and capital constraints. By providing long-term financing that matches the cash flow of the project, IFC is sending a signal to the market that it is willing to finance sound projects and companies. Risk mitigation: CLN and PROMA are still in the early stages of their expansion to the emerging markets and the project is their first investment in Serbia. Partnering with IFC especially in frontier regions provides comfort to CLN and PROMA in terms of country knowledge and contacts in the public and private sectors. Key Partners: N/A.

28

SERBIA: MK GROUP Key Dates: Approved: June 6, 2012 Signed: June 14, 2012 IFC financing (million US Dollars): Financier Loan Amount 55.82 Fiscal Year 2012

Based in Belgrade and Novi Sad but with operations across Serbia and Ukraine, the MK Group is involved in (i) agricultural crop production; (ii) sugar production; (iii) storage, transportation, and trading of agricultural commodities, and (iv) other miscellaneous activities. Established in 1983, the MK Group is a privately owned company and a market leader in all of its key lines of business. MK Group has embarked on a 87 million investment plan that consists of: (i) the acquisition of Carnex AD Meat Industry (Carnex), the Serbian brand leader in processed meat products; (ii) the upgrade and expansion of Carnexs vertically integrated operations; and (iii) the expansion and modernization of the Groups primary agriculture operations. IFCs support to this project entails a 45 million (equivalent US$55.82 million) loan. The Project Development Objective. IFC provided MK Group with long-term financing that is currently not possible to secure from commercial banks or capital markets locally. By providing a loan to MK Group, IFC is supporting the development of the private sector in Serbia, where revitalizing agribusiness is essential to creating jobs and lowering a 20 percent unemployment rate. IFCs loan will enable the Group to further diversify and expand its operations in sectors where it already operates as well as adjacent industries, namely livestock and meat production. The development impact of the Project is expected to include: Operational turnaround and efficiency improvements at Carnex, a large employer and former regional leader; Support to an agricultural company involved in value-added production in a sector important to Serbias economy; Extend the MK Goups reach to farmers and improve the agricultural infrastructure; Demonstration effect by encouraging other companies to invest in the region; and

Increased tax revenues. IFCs expected additionality includes: enabling the company to conservatively leverage its growth through acquisition and investment upgrades by providing financing at reasonable rates and longer tenors appropriate for the type of investment and not otherwise available in the country; diversifying the Groups funding base; sharing its global and industry knowledge as the Group enters new product segments. Key Partners: N/A.

29

MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) GUARANTEES

HVB BANKA JUGOSLAVIJA A.D. Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Sector Gross exposure Project type HVB Banka Jugoslavija a.d. 5819 2004 Active Bank Austria Creditanstalt AG Austria Serbia Banking US$9.0 million Non-SIP

MIGA issued 7.125 million (US$8.47 million) and 0.475 million (US$0.56 million) guarantees to Bank Austria Creditanstalt AG for its 7.5 million loan guarantee and 0.5 million shareholder loan made in support of HVB Banka Jugoslavija a.d. (HVB-SAM) in Serbia and Montenegro. The guarantees are for a period of 10 years and provide coverage against the risks of transfer restriction, expropriation, and war and civil disturbance. HVB-SAM was established in December 2001 and offers a wide range of products and services, including payment services, deposits, and term account maintenance; trade finance services and corporate finance, including long-term lending and treasury services; and investment banking services. The project will provide for an expansion of HVB-SAM operations by allowing it to increase its lending portfolio, mainly to small and medium-sized enterprises (SMEs), including retailers, and general commerce and food-related enterprises. HVB-SAMs additional loans will be provided predominantly to SMEs, which will increase SMEs access to financing and support economically sound projects.

30

RAIFFEISEN LEASING D.O.O.

Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Sector Gross exposure Project type

Raiffeisen Leasing d.o.o. 5629 2005 Active Raiffeisenbank a.s. Czech Republic Serbia Financial Services US$24.8 million Non-SIP

MIGA has provided Raiffeisenbank a.s of the Czech Republic a US$24.8 million guarantee covering its nonshareholder loan to Raiffeisen Leasing d.o.o. (RLSM) in Serbia and Montenegro. The guarantee covers the risks of transfer restriction and expropriation for a period of five years. This is the third project supported by MIGA involving a loan to RLSM. The project is part of an overall regional expansion strategy of Raiffeisen International Bank-Holding AG. By expanding operations in Serbia and Montenegro, RLSM will increase the availability of financing alternatives, providing leasing services to manufacturers and exporters in Serbia and Montenegro, mostly SMEs.

31

HVB BANKA SERBIA AND MONTENEGRO A.D.

Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Sector Gross exposure Project type

HVB Banka Serbia and Montenegro a.d. 5819 2005 Active Bank Austria Creditanstalt AG Austria Serbia Banking US$11.7 million Non-SIP

MIGA issued a guarantee for US$11.7 million to Bank Austria Creditanstalt (BACA) AG covering its guaranty for a loan made by the German Development Bank (Kreditanstalt fr Wiederaufbau, KfW) to BACAs subsidiary, HVB Banka Serbia and Montenegro a.d. (HVB-SAM), in Belgrade, Serbia and Montenegro. The guarantee is for 10 years, and covers the risks of transfer restriction, expropriation, and war and civil disturbance. MIGA issued two guarantees to the investor covering an 8 million investment in the project in fiscal 2004. The project is expected to increase longer term financing and generate competitive pricing for retail and corporate clients. The funds will be dedicated almost exclusively to SMEs, including in the retail and food sectors. HVB-SAM is expected to play an important role in the ongoing restructuring of Serbia and Montenegros financial sector by providing knowledge, technical solutions, and new products. HVB-SAM employs 146 staff in seven branches and expects to add more local employees over the next five years. HVBSAMs staff will benefit from on- and off-site training. The project is part of an overall World Bank Group effort to help Serbia and Montenegro stimulate shortterm growth and build effective institutions.

32

RAIFFEISEN LEASING D.O.O. (RLRS)

Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type

Raiffeisen Leasing d.o.o. (RLRS) 7991 2010 Active Raiffeisen Zentralbank AG (RZB) Austria Serbia FI Leasing April 15, 2009 May 14, 2009 US$40.1 million Non-SIP

MIGA has issued a guarantee of up to US$40.1 million covering Raiffeisen Zentralbank sterreich AGs (RZB) 30 million shareholder loan to its subsidiary, Raiffeisen Leasing d.o.o. (RLRS) in Serbia. The coverage is for a period of up to six years against the risks of transfer restriction and expropriation of funds. The Serbian financial sector is currently feeling the effects of the financial crisis and experiencing a flattening of customer demand. At the same time, leasing products as a financing vehicle for SMEs are vital. Therefore RZB plans to extend this 30 million loan to allow RLRS to continue to serve its existing clients, as well as generate new business. This would be MIGAs fifth guarantee in support of this project. This project is expected to contribute to the development of the financial sector in Serbia by improving access to finance, particularly to segments of the economy that are currently underserved. The project will meet the increasing demand for leasing as a form of asset financing. One of the main objectives of the World Bank Groups Country Partnership Strategy for Serbia for 200811, which is broadly structured around the Serbian governments development strategy, is encouraging dynamic private sector-led growth. The project is consistent with this objective, as it will support investment flows into Serbia at a time when investor appetite has largely disappeared due to the ongoing global financial crisis.

33

UNICREDIT BANK SERBIA JSC

Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type

UniCredit Bank Serbia JSC 8060 2009 Active UniCredit Bank Austria AG Austria Serbia FI Banking June 05, 2009 June 23, 2009 US$134.1 million Non-SIP

MIGA has issued a guarantee of up to 95 million covering UniCredit Bank Austria AGs (UBA) 100 million shareholder loan to its subsidiary, UniCredit Bank Serbia JSC (UBSR). The coverage is for a period of up to five years against the risks of transfer restriction, expropriation, and war and civil disturbance. The loan will provide UBSR with long-term liquidity and improve UBSRs asset-liability management by matching assets and funding of similar maturities. The loan is part of a broader funding strategy of the UniCredit Group to finance its subsidiaries, and is particularly important in view of the current turmoil in financial markets worldwide, including Serbia. MIGA supports this project in conjunction with the Financial Sector Initiative framework recently presented to MIGAs Board of Directors as part of a coordinated international response to the ongoing global financial crisis. Serbia, like many other countries in the Europe and Central Asia region, is currently facing difficult fiscal adjustments along with the need for external financing. MIGAs support to the project will supplement the International Monetary Funds program for Serbia by injecting liquidity into the UBSR, boosting confidence in Serbias financial sector, and contributing to the improvement of the countrys financial stability. One of the main objectives of the World Bank Groups country partnership strategy for Serbia for 200811 is to encourage dynamic private sector led growth. The proposed project is fully consistent with this objective.

34

RAIFFEISEN RENT D.O.O. (RRRS)

Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type

Raiffeisen Rent d.o.o. (RRRS) 8314 2010 Active Raiffeisen Zentralbank sterreich AG Austria Serbia FI Leasing November 13, 2009 December 02, 2009 US$13.8 million Non-SIP

MIGA has issued a guarantee of up to US$13.8 million covering Raiffeisen Zentralbank sterreich AGs (RZB) 10 million shareholder loan to its leasing subsidiary, Raiffeisen Rent d.o.o. (RRRS) in Serbia. The coverage is for a period of up to six years against the risks of transfer restriction and expropriation of funds. The Serbian leasing market is currently feeling the effects of the financial crisis, with most leasing entities experiencing a decrease in liquidity. At the same time, the demand for operating leases as an asset financing option continues to increase for SMEs. RZB plans to extend this 10 million loan to allow RRRS to maintain its business by servicing its existing clients and to expand its operations by attracting new clients. This is MIGAs sixth guarantee in support of RZBs leasing subsidiaries in Serbia. This project is expected to contribute to the development of the financial sector in Serbia by improving access to finance, particularly to segments of the economy that are currently underserved. The project will also help meet the increasing demand for leasing as a form of asset financing. The project is consistent with the World Bank Groups Country Partnership Strategy for Serbia for 200811. The strategy supports the encouragement of private sector-led growth, as well as providing opportunities and broadening participation in growth.

35

PROCREDIT GROUP CENTRAL BANK MANDATORY RESERVES COVERAGE Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type ProCredit Group Central Bank Mandatory Reserves Coverage 9987 2011 Active ProCredit Holding Germany Serbia FI Banking October 05, 2010 November 23, 2010 US$4.4 million Non-SIP

On December 22, 2010, MIGA issued a guarantee of US$4.4 million to ProCredit Holding (PCH) covering its investment in its subsidiary in Serbia. The coverage is for a period of up to 10 years against the risk of expropriation of funds for mandatory reserves held by the subsidiary in the central bank of its jurisdiction. This project is part of a master contract that MIGA has issued. PCH is headquartered in Germany and is the parent company of 21 banks (ProCredit group). The ProCredit group is a provider of finance to some 750,000 micro, small, and medium-sized enterprises (MSMEs) in Latin America, Eastern and Central Europe, and Africa. Throughout the world, banks are required to maintain mandatory reserves with the central banks of their respective jurisdictions. The ProCredit groups capital adequacy ratio (CAR) is calculated accord ing to the German Banking Act. Under this act, at a consolidated level, reserves deposited at the various central banks can attract a risk weighting of 100 or even 150 percent, depending on the country. This risk weighting determines the amount of equity required to maintain a specified CAR in accordance with the German Banking Act. The guarantee issued by MIGA will help PCH obtain capital relief from the CAR requirements. By obtaining MIGAs insurance against the risk of expropriation of funds, the risk weighting for mandatory reserves held at the central bank can be reduced. A lower risk weighting will allow PCH to free up equity currently tied up for CAR maintenance purposes, thereby allowing these funds to be injected into its subsidiary banks. This in turn will allow PCHs emerging market subsidiary banks across its network to increase their lending activities. MIGAs support will help PCH optimize its capital management across its 21 banks, allowing PCH to direct equity to subsidiaries with the greatest need. These banks will be able to offer additional financial services to MSMEs at a time of macroeconomic challenges. Supporting productive small businesses will help stimulate growth, generate employment, and reduce poverty. MIGAs support for this project is aligned with the World Bank Groups microfinance strategy, which includes improving the supply of microfinance in large, but underserved markets; enhancing deposit capacity by assisting microfinance institutions in savings mobilization; promoting capacity building; creating and shaping markets; and fostering innovation.

36

PROCREDIT GROUP CENTRAL BANK MANDATORY RESERVES COVERAGE Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type ProCredit Group Central Bank Mandatory Reserves Coverage 9987 2012 Active ProCredit Holding AG & Co. KGaA Germany Serbia FI Banking October 05, 2010 November 23, 2010 US$80.6 million Non-SIP

On July 28, 2011, MIGA issued a guarantee of US$80.6 million to ProCredit Holding (PCH) covering its investment in its subsidiary in Serbia. The coverage is for a period of up to 10 years against the risk of expropriation of funds for mandatory reserves held by the subsidiary in the central bank of its jurisdiction. MIGA was previously covering a total of US$4.4 million under the project. The additional coverage of US$80.6 million complies with ProCredits request to convert outstanding capacity to current coverage in order to consolidate all of its political risk insurance requirements under the MIGA framework. This project is part of a master contract that MIGA has issued. PCH is headquartered in Germany and is the parent company of 21 banks (ProCredit group). The ProCredit group is a provider of finance to some 750,000 MSMEs in Latin America, Eastern and Central Europe, and Africa. Throughout the world, banks are required to maintain mandatory reserves with the central banks of their respective jurisdictions. Currently, the ProCredit groups capital adequacy ratio (CAR) is calculated according to Basel II, but in the future it will also be calculated according to the German Banking Act. Under this act, at a consolidated level, reserves deposited at the various central banks can attract a risk weighting of 100 or even 150 percent depending on the country. This risk weighting determines the amount of equity required to maintain a specified CAR in accordance with the German Banking Act. PCH has approached MIGA to obtain capital relief from the capital adequacy ratio requirements. By obtaining MIGAs insurance against the risk of expropriation of funds, the risk weighting for mandatory reserves held at the central bank can be reduced. A lower risk weighting would allow PCH to free up equity currently tied up for CAR maintenance purposes, thereby allowing these funds to be injected into its subsidiary banks. This in turn will allow PCHs emerging market subsidiary banks across its network to increase their lending activities. MIGAs support will allow PCH to direct equity to subsidiaries with the greatest need. The additional services these banks will be able to offer will help stimulate growth, generate employment, and reduce poverty. MIGAs support for this project is aligned with the World Bank Groups microfinance strategy, which includes improving the supply of microfinance in large, but underserved markets; enhancing deposit capacity by assisting microfinance institutions in savings mobilization; promoting capacity building; creating and shaping markets; and fostering innovation.

37

MERCATOR SERBIA Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type Mercator Serbia 10203 2012 Active Ljubljana (SID Bank, Inc.; Ljubljana) SID Slovenska Izvozna in Razvojna Banka, d.d. Slovenia Serbia FI Services June 09, 2011 June 23, 2011 US$12.8 million Non-SIP

On July 15, 2011 MIGA issued a guarantee of US$12.8 million for reinsurance of the SID Bank, Inc.; Ljubljana coverage to the Mercator retail group (Mercator) in Serbia. MIGAs reinsurance for the investment results in a gross exposure of US$277.4 million. MIGA is reinsuring the investment for a period of up to six years, against the risks of transfer restriction, expropriation, and war and civil disturbance. MIGAs support to SID Bank, Inc.; Ljubljana is in accordance with MIGAs mandate to cooperate with national entities of its member countries, as stated in MIGAs Convention. By providing facultative reinsurance, MIGA is allowing SID Bank, Inc.; Ljubljana to reduce its net exposure to Mercator and to free up capacity for other investment insurance projects. Mercator is helping to stimulate exports among Balkan countries by carrying goods from the other countries in each of its retail locations. As a result, Mercator is expanding the venue for suppliers to sell not only in their respective countries, but also in neighboring countries where Mercator has an established presence. In addition, Mercators further expansion in the Balkans, supported by SID Bank, Inc.; Ljubljana and MIGA, will provide employment and retail training opportunities in these countries. MIGA is also helping to establish best practices with respect to corporate governance, as well as environmental and social policies in the host countries.

38

MERCATOR SERBIA Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type Mercator Serbia 10205 2012 Active Ljubljana (SID Bank, Inc.; Ljubljana) SID Slovenska Izvozna in Razvojna Banka, d.d. Slovenia Serbia FI Services June 09, 2011 June 23, 2011 US$16.7 million Non-SIP

On July 15, 2011, MIGA issued a guarantee of US$16.7 million for reinsurance of the SID Bank, Inc.; Ljubljana coverage to the Mercator retail group (Mercator) in Serbia. MIGAs reinsurance for the investment results in a gross exposure of US$277.4 million. MIGA is reinsuring the investment for a period of up to six years, against the risks of transfer restriction, expropriation, and war and civil disturbance. MIGAs support to SID Bank, Inc.; Ljubljana is in accordance with MIGAs mandate to cooperate with national entities of its member countries, as stated in MIGAs Convention. By providing facultative reinsurance, MIGA is allowing SID Bank, Inc.; Ljubljana to reduce its net exposure to Mercator and to free up capacity for other investment insurance projects. Mercator is helping to stimulate exports among Balkan countries by carrying goods from the other countries in each of its retail locations. As a result, Mercator is expanding the venue for suppliers to sell not only in their respective countries, but also in neighboring countries where Mercator has an established presence. In addition, Mercators further expansion in the Balkans, supported by SID Bank, Inc.; Ljubljana and MIGA, will provide employment and retail training opportunities in these countries. MIGA is also helping to establish best practices with respect to corporate governance, as well as environmental and social policies in the host countries.

39

EUROBANK AD BEOGRAD CENTRAL BANK MANDATORY RESERVES COVERAGE Project name Project ID Fiscal year Status Guarantee holder Investor country Host country Environmental category Sector Date SPG disclosed Project Board date Gross exposure Project type Eurobank AD Beograd Central Bank Mandatory Reserves Coverage 10753 2013 Active Eurobank Ergasias S.A. Greece Serbia FI Banking February 7, 2013 February 26, 2013 US$250.1 million Non-SIP

On March 1, 2013, MIGA issued a guarantee totaling 190.0 million (approximately $250.1 million) covering an investment by Eurobank Ergasias S.A. (Eurobank) of Greece in its Serbian subsidiary, Eurobank AD Beograd. The coverage is for a period of three years against the risk of expropriation of funds for mandatory reserves held by the subsidiary in the central bank of its jurisdiction. Eurobank is a universal banking group with a significant network of retail banks across Central, Eastern, and Southeastern Europe. The groups subsidiary banks are required to maintain mandatory reserves at the central banks of their respective jurisdictions, generally based on the volume of customer deposits that these subsidiaries hold. The banks are thereby exposed to the risk of expropriation of funds by the respective central bank. This exposure leads to higher risk weights on these assets at the consolidated level, resulting in increased capital allocation for country risk exposure. At the consolidated group level, the risk weighting determines the amount of equity required to maintain a specified capital adequacy ratio (CAR) in accordance with Greek banking law. MIGAs guarantee will help Eurobank obtain capital relief from the CAR requirements. By obtaining MIGAs insurance against the risk of expropriation of funds, the risk weighting for mandatory reserves held at the central bank can be reduced. This will free up equity tied up for country risk purposes, which can be deployed to support its subsidiarys franchise in Serbia. Eurobank Beograds role in supporting productive businesses, including small and medium enterprises, through credit extension helps stimulate growth, employment generation, andultimatelypoverty reduction in Serbia. As a participant of the European Bank Coordination Initiative (also known as the Vienna Initiative), Eurobank pledged to support its Serbian subsidiary, keeping it well capitalized. Eurobanks continuing support for its systemically important subsidiary contributed to supporting the Serbian economy in the aftermath of the financial crisis. Capital adequacy well in excess of the regulatory requirement provides Eurobank Beograd in Serbia with a cushion to withstand potential shocks and helps position the bank for future growth. MIGAs coverage to Eurobank is consistent with the goals of the crisis response initiative for the ECA region launched by the World Bank Group in January 2012. As part of the initiative, MIGA seeks to support capitalconstrained banks active in the region. The project is also aligned with the World Bank Groups strategy for Serbia as it seeks to address the spillover from the financial crisis. 40