Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 48666-PL

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

POLAND COUNTRY PARTNERSHIP STRATEGY

FOR THE PERIOD 2009-13

June 2, 2009

Central and South-Central Europe and the Baltic Countries Europe and Central Asia Region

This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Date of Last Country Partnership Strategy: March 29, 2005

CURRENCY EQUIVALENTS (Exchange Rate as of June 2, 2009) Currency Unit = Polish Zloty (PLN)

US$1.00 = 3.13 PLN

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytic and Advisory Activities AAU Assigned Amount Unit AHK Polish-German Chamber of Industry and Commerce CAT DDO Catastrophe Deferred Drawdown Option CEM Country Economic Memorandum CIS Commonwealth of Independent States CIT Corporate Income Tax COP14 Conference of the Parties CP Convergence Program CPS Country Partnership Strategy CTF Clean Technology Fund DPL Development Policy Loan DRG Diagnosis Related Group EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia ECB European Central Bank EIB European Investment Bank ERM2 European Exchange Rate Mechanism ESW Economic and Sector Work EU European Union EU8 Member States that joined the EU on May 1, 2004,

excluding Malta and Cyprus EU10 EU8 plus Member States that joined the EU on January 1, 2007 FBS Fee-based Service FCL Flexible Credit Line FDI Foreign direct investment FIAS Foreign Investment Advisory Service FSAP Financial Sector Assessment Program GDDKiA General Directorate for Public Roads and Motorways GDP Gross Domestic Product GEF Global Environment Facility GIS Green Investment Scheme IBRD International Bank for Reconstruction and

Development

IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund LA Lisbon Agenda LFS Labor Force Survey MIC Middle Income Countries MOH Ministry of Health MTEF Medium-Term Expenditure Framework NATO North Atlantic Treaty Organization NBP National Bank of Poland NFZ National Health Insurance Fund NGO Non-Governmental organization NHF National Health Fund NMS New Member States OECD Organization for Economic Cooperation and

Development PER Public Expenditure Review PIT Personal Income Tax PiS Law and Justice party PKO BP Powszechna Kasa Oszczędności Bank Polski PLN Polish Zloty PO Civic Platform Powiat County administrative unit, (379) NUTS3 PPP Public Private Partnerships PSL Polish Peasant’s Party R&D Research and Development SME Small- and medium-sized enterprises SWAp Sector Wide Approach TA Technical assistance TEN-T Trans-European Transport Network UNFCC United Nations Framework Convention on Climate

Change USD United States dollar VAT Value Added Tax WDR World Development Report

IBRD Vice President Shigeo Katsu Director Theodore Ahlers Team Leader Thomas Laursen

TABLE OF CONTENTS

I. Introduction………….……………………… …….………………………………1 II. Country Context……………………………………………………………………1

A Geopolitical Context, EU Relations, and Political Situation.................................1 B Economic Developments, Labor Markets and Poverty Profile…….…..……..…2 C. Medium-Term Economic and Fiscal Outlook………………………………..….6

III. Country Development Program………………………………………………….10 A. Overarching Objectives………………………………………………..………..10 B. Government Priorities…………………………………………………………..11

IV. World Bank Program………………………………………………………..……13

A. Implementation of 2005 CPS and Lessons Learned…...….…….….……….….13 B. External Partners and Key Areas of World Bank Value-added…........…….….15 C. Strategic Pillars of Collaboration……..………………………..……………..…17

Pillar 1: Social and Spatial Inclusion……......………………..……….……18 Pillar 2: Public Sector Reform……………………………..………….……21 Pillar 3: Growth and Competitiveness………………………..……….……22 Pillar 4: Regional and Global Public Goods………………..……….……...25

D. Proposed Program………………………………………………..……….……..27 E. Poverty and Social Impact……………………………………………..….……..29 F. Results Framework………………………………………………..……….…….30

V. Risks…………………………………………………………………….…….…….30 VI. Consultations with Government and Other Partners……………………….…...31 Boxes, Charts, Figures, Tables: Box 1: Poverty in Poland since EU Accession Box 2: Supporting High and Sustainable Economic Growth in Poland over the Medium

Term Box 3: External Partners Chart 1: At Risk of Poverty Rate in the EU8 (percent) Chart 2: Public Debt Sustainability Figure 1: EIB Lending to Poland in 1990-2008 Figure 2: EBRD Commitments by year Table 1: Poverty in Poland since EU Accession Table 2: Economic Developments and Prospects in Poland 2004-2011 Table 3: Fiscal Developments and Prospects in Poland 2004-2011 Table 4: Proposed IBRD Lending Program and Selected Non-lending Services

Annexes: A1 Results Framework A2 Poland at a Glance B2 Selected Indicators of Bank Portfolio Performance and Management B3 IBRD Program Summary IFC Program Summary B4 Poland Summary of Non-lending Services B5 Poland Social Indicators B6 Poland Key Economic Indicators B7 Poland Key Exposure Indicators B8 IBRD Operations Portfolio IFC Operations Portfolio C 2005 CPS Completion Report Map (IBRD 33467R) The Poland Partnership Strategy was prepared by a core team comprised of the following World Bank Group staff: Thomas Laursen (TTL), Radek Czapski, Charles Griffin, Leszek Kasek, Ewa Korczyc, Anna Kowalczyk, Alberto Rodriguez, Jan Rutkowski, and Penny Williams. Henry Kerali, Christine Kessides, John Pollner, and Gary Stuggins also provided helpful contributions.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the World Bank authorization

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Poland – Country Partnership Strategy 2009-13

I. INTRODUCTION 1. This Country Partnership Strategy (CPS) sets out the country context, country development program, and envisaged World Bank program for Poland for the period 2009-13, the remaining five years of the 2007-13 European Union (EU) financial perspective. It also discusses the risks to this strategy and the planned consultations with Government and other partners. The CPS replaces the open-ended 2005 CPS, which has been superseded by recent crisis-related events in the global economy, although several aspects of it remain valid. 2. The CPS should be viewed as a flexible tool to support the Bank’s work in Poland, in line with the strategy for middle-income countries (MIC). The Bank’s dialogue with Poland is constantly evolving depending on external and domestic political and economic circumstances, and this strategy reflects more our current assessment of priorities and potential for Bank engagement in Poland than a firmly agreed strategy and pipeline with the Government, at least beyond the first year. The Government is interested in a continued partnership with the Bank, including both borrowing (at least in the current adverse external environment) and analytic and advisory Activities (AAA) drawing on the Bank’s global knowledge. It is envisaged that while lending may be increased significantly in the coming couple of years, it would be phased out gradually over the medium term. Meanwhile, AAA would be expected to increasingly be provided on a fee-for-service basis. 3. Although a secondary partner to the EU, the Bank can continue to add significant value to Poland’s development and convergence agenda for many years to come, while its active policy dialogue and technical cooperation also benefits the Bank through enhancing its knowledge to the benefit of other client countries both in the region and beyond. This is thus a win-win relationship. 4. A Regional Framework paper for the ten countries in the Central and South-Central Europe and the Baltic region is under preparation. The Framework will provide a broad diagnosis of the key challenges facing the countries in the region; describe the Bank’s value-added; and outline the main areas of Bank activity in the region. This Poland CPS shares common elements with the proposed Framework paper.

II. COUNTRY CONTEXT

UA. Geopolitical Context, EU Relations, and Political Situation

5. Poland has successfully managed its integration into the EU since accession in 2004. The EU and its institutions are now Poland’s main external partners, to which the World Bank is committed to play a supporting role. Poland has access to considerable external financing, including large volumes of EU Structural and Cohesion Funds on a grant basis and market financing (although absorption of EU funds has been somewhat slow and market financing recently has become more difficult with the escalation of the global economic and financial crisis). While external relations are anchored in EU and North Atlantic Treaty Organization (NATO) membership, for historical reasons Poland is also seeking closer ties with its Eastern neighbors, particularly with Ukraine to support closer integration with the EU and co-hosting of the 2012 European Soccer Championship.

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6. The majority Government, formed after elections in late 2007 by the Civic Platform (PO) and the Polish Peasant’s Party (PSL) and led by Prime Minister Donald Tusk of PO, has remained broadly stable and enjoys strong social support. Recent opinion polls show that support for the PO oscillates around 50 percent and that of PSL around 5 percent. 7. However, lack of qualified majority in Parliament may make it increasingly difficult for the Government to advance its reform program over the next year and a half as Presidential elections in fall 2010 approach. Consensus for major reform initiatives may not be achieved given the strength of the main opposition Law and Justice (PiS) party. In some cases, such as the recent tightening of early retirement conditions, the Government was able to overcome a Presidential veto of the proposed legislation with support from the smaller opposition Social Democratic party. Elections to the European Parliament scheduled for mid–2009 and subsequent Local Government elections are expected to generate heated political debate.

8. Poland does not have serious governance problems. Poland has a strong multi-party democracy and a vibrant, free press. Governance indicators suggest Poland is in the 50-75 P

thP percentile in governance matters worldwideTPF

1FPT and roughly equal to its peers in

Transparency ratings.TPF

2FPT Poland’s Ministry of Interior and Administration prepared a national

anti-corruption strategy in 2002 and this is updated regularly. Since 2006, the Central Anti-corruption Bureau has also been involved in anti-corruption activities, most recently focusing on prevention and education.

UB. Economic Developments, Labor Markets and Poverty 9. Poland is being strongly affected by the deterioration in the external environment, but its vulnerability remains moderate. The initial position of the Polish economy has been robust and able to face the repercussions of the global crisis after five years of strong growth and a historically low unemployment rate. Meanwhile, inflation, the current account deficit and external debt as well as public debt are moderate, and the financial system is relatively sound. While Poland avoided much of the initial, direct financial market shock, it is being strongly affected by second-round effects through the real economy: declining demand for Polish exports, tightening of credit conditions, and lower FDI inflows. The sharp weakening of the zloty in the last quarter of 2008 and early 2009 showed that there is little room for complacency. 10. Poland’s financial system is well-poised to cope with the current adverse external environment. While the banking system is dominated by foreign banks whose external funding conditions appear to have deteriorated owing to the problems in parent banks, there are also some significant domestic banks including a large state-owned bank. Further, credit growth in Poland and the overall level of credit-to-gross domestic product (GDP) has been moderate and much lower than in most of the other countries in the region, and most of the credit expansion has been financed through domestic deposits, although foreign financing has been playing an increasing role in recent years. A large share of domestic investment has been financed through enterprise profits. While there are some concerns related to foreign currency mortgage lending, the overall level of lending is relatively small and the recent depreciation of the zloty has taken place after the strong real TP

1PT World Governance Indicators 2008.

TP

2PT Poland ranks 58P

thP in Transparency International’s Corruption Perceptions Index, equal to Lithuania and only

slightly behind regional peers such as Hungary, Latvia and the Slovak Republic.

3

exchange rate appreciation in 2007 and much of 2008. Bank profits have been record-high in recent years and all banks remain well-capitalized. Credit conditions are likely to tighten significantly this year and some enterprises may find it difficult to roll-over maturing short-term loans (which constitute about one-half of total enterprise loans). 11. Growth has slowed sharply but could remain slightly positive in 2009. Growth was expected to slow down for cyclical reasons, but while growth remained buoyant at close to 5 percent in the third quarter of 2008, the economy slowed more sharply to less than 3 percent growth in the fourth quarter of 2008 and 0.8 percent in the first quarter of 2009 in connection with the worsening of international financial and economic conditions. Investment growth has slowed sharply while consumption growth remains more resilient with continued real wage increases, only slowly increasing unemployment, and still robust credit growth. Poland is less reliant on external demand than other, more open countries in the region and will be relatively less affected by a recession in the euro area. In 2009, the contribution of net exports is likely to remain broadly neutral as weaker prospects for exports will be accompanied by moderation of imports due to lower domestic absorption and exchange rate depreciation. Overall, in the best case scenario, growth could remain slightly positive at 0-1 percent in 2009. However, forecasts are subject to unusually large uncertainty in the current environment and there could be significant variations in growth in both directions, depending mainly on external developments (notably in the euro-zone).TPF

3FPT

12. The higher than planned Government consumption and lower than assumed non-tax revenues other than social contributions (largely EU funds) together with the slowdown in economic activity towards the end of 2008 contributed to an unexpected increase in the fiscal deficit. The 2008 general Government fiscal deficit reached 3.9 percent of GDP, some 1.2 percentage points higher than projected by the Government in the December 2008 Convergence Program. This was due to higher-than-expected deficits of both local and central Governments (due to higher than planned expenditure and lower than expected revenue), while social security funds performed according to plan. Poland is very likely to enter the EU Excessive Deficit Procedure, which is triggered when the deficit-to-GDP ratio exceeds 3 percent or debt-to-GDP ratio exceeds 60 percent and which requires countries to produce a plan for how this will be corrected. The EC initiated this process on May 13.

13. Inflation accelerated in 2008, but the peak was reached in August and inflation eased significantly as the crisis escalated. With GDP growth expected to slow sharply in 2009 and world commodity prices falling, expectations for inflation have eased and the National Bank of Poland (NBP) began reducing interest rates in late 2008. Inflation is projected to return to around the middle of the target range of 1.5-3.5 percent in 2009 although in April it remained above the upper end of the target range. 14. The balance of payments has come under some pressure but Poland’s external position remains relatively strong. The current account deficit widened slightly to 5½ percent of GDP in 2008, while weaker capital inflows were associated with a sharp depreciation of the zloty in late 2008 and early 2009 following strong appreciation in recent years. Following a hiatus of seven months, the Government returned to international capital markets with a euro 1 billion issue in January at a spread of about 300 basis points above German Bunds and 5-year maturity.TPF

4FPT In early May, the issue was re-opened and Poland

TP

3PT The IMF and EC project a decline in GDP of 0.7% and 1.4% in Poland, respectively.

TP

4PT At the end of April 2009, the City of Warsaw successfully placed a 5-year fixed rate euro-denominated bond

of EUR 200 million, priced at around 470 basis points above German Bunds.

4

successfully placed EUR750 million at a spread of about 40 basis points below the January level. Poland’s external debt of about 56 percent of GDP is moderate by regional standards, but gross financing needs are sizeable.TPF

5FPT However, the IMF precautionary Flexible Credit

Line (FCL) arrangement of USD 20.6 billion approved in May should safeguard against downside risks in financial markets. The ongoing economic slowdown and recent zloty depreciation should translate into a lower current account deficit (about 4 percent of GDP in 2009). Inflows of EU funds and FDI should finance a major part of the external gap. In current circumstances, Poland’s floating exchange rate regime is serving it well to help absorb the external shock. 15. After a remarkable improvement of labor market performance in recent years, unemployment is expected to rise in 2009 on the back of the economic slowdown. In recent years, Poland recorded an unprecedented improvement of labor market conditions. The Labor Force Survey (LFS) unemployment rate fell from over 20 percent in 2004 to about 7 percent in 2008. The data disaggregated by gender indicate that female unemployment rates in Poland remain slightly higher than those for men, but also decreased considerably. Unemployment is expected to rise back to over 10 percent this year in tandem with the economic slowdown. 16. The decline in unemployment was associated with lower poverty. Relative poverty levelsTPF

6FPT have decreased (see Chart 1) and are now concentrated in rural areas and

among the long-term unemployed. Nonetheless, despite vibrant growth of real GDP and domestic consumption, Poland still has a relatively high poverty rate compared to other countries in the region, especially among children, although the 2004 reform to the family benefit system has led to an improvement in the income status of families with children, including single-parent families. Absolute poverty levels are considerably lower although measurement depends on the choice of poverty line (see Box 1, Table 1).

Chart 1. At Risk of Poverty Rate in the EU8 (percent)

16

10

18 1921 21 22

19 19

12

24

17

11 12

17

11

0

5

10

15

20

25

30

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

Age

d<1

8YTo

tal

CzechRepublic

Estonia Latvia LithuaniaHungary Poland Slovenia Slovakia

2005

2007

Source: Eurostat.

TP

5PT About one-third of external debt is short term. Foreign currency reserves of USD 64 billion (April 2009)

provide a cushion to absorb external pressures; covering about 95 percent of short-term debt. TP

6PT The EU poverty measure (“at risk of poverty”) is defined as the share of the population living in households

with income below 60 percent of the national median disposable income after transfers.

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BOX 1. POVERTY IN POLAND SINCE EU ACCESSION

Household data available through 2007 show Poland’s substantial strides in lowering poverty. Poverty – measured as the percentage of population below the social assistance income threshold – dropped from 19 percent in 2004 to 14.6 percent in 2007. The poverty gap also narrowed, meaning that the incomes of the poor moved closer to those of the non-poor. The main determinants of poverty in Poland include rural residence, low educational attainment of a household head, unemployment of a household member, and a large number of children in the household. Poorer households are generally well served by the social protection system. The multiple elements of Poland’s social protection system (pensions, family benefits, and social assistance taken as a whole) cover 76 percent of the population, and 95 percent of the poorest 20 percent. The system provides benefits to 98 percent of households in extreme poverty. Reflecting the geography of Poland’s poor areas, the system covers 81 percent of the rural population (as compared to 73 percent of the urban population).

The Government’s growing concern is for the newly vulnerable households in the wake of slowing economic growth. The Government is planning targeted regional interventions to support the powiats that are most affected by the drop in economic activity by both improving the effectiveness of existing programs (employment and social assistance programs) and, if necessary, by allocating additional resources and implementing extraordinary programs.

Vulnerability to the crisis is being mapped to target interventions. This initiative has three components: first, the creation of a regional crisis vulnerability map to identify powiats that are at the highest risk of suffering from the current global economic crisis; second, implementation of a monitoring system that will screen powiats that are actually hit by the crisis; and third, the creation of an agency with a mandate to support the worst affected powiats. The initiative will be ready by September 2009. The regions that are considered the most vulnerable to the crisis are those with an export-oriented economy, rather than the poor, lagging regions. The latter – rural, predominantly agricultural regions – are insulated from the crisis, at least temporarily, and well covered by existing social protection programs.

Table 1. Poverty in Poland since EU Accession Poverty rate Percentage of population living in households below 2004 2005 2006 2007

50% of median expenditure 20 18 17.7 17.3 Social assistance threshold 19 18 15.1 14.6 Subsistence minimum 12 12 7.8 6.6 Poverty gap Distance below poverty line 2004 2005 2006 2007 50% of median expenditure 23 22 21 21 Social assistance threshold 24 23 21 21 Subsistence minimum 22 22 19 19

Source: HBS 2007

17. The authorities have taken steps to preserve financial stability in the current difficult external environment. In reaction to the escalation of the global crisis in the fall of 2008, the NBP, the Government/Parliament and the Financial Supervision Authority took

6

steps to maintain confidence and support the effective functioning of the financial system. In October, the NBP announced a “package of confidence” aimed at preserving trust and liquidity in financial markets through expansion of its term liquidity management operations and foreign exchange swap operations. The European Central Bank (ECB) agreed to provide a EUR 10 billion repo facility. Further, the Parliament approved a bill raising the household deposit insurance limit from euro 22,500 to euro 50,000. Legislation regulating state guarantees for interbank deposits has been adopted by Parliament and is currently awaiting the President’s approval. The NBP also introduced other measures supporting bank liquidity like early buy back of T-bonds maturing in 2012 or extending the maturity of repo operations. In late November, the NBP started reducing interest rates (for the first time since March 2006), with a series of cuts bringing the rate down from 6 percent in November to 3.75 percent in May. 18. Meanwhile, the Government has also moved to support the economy. In late November, the Government announced a 7 percent of GDP “Plan for Stability and Development” aimed at supporting the economy in 2009-2010, including a doubling of the limit on state guarantees, support for lending to small- and medium-size enterprises, acceleration of investments co-financed from EU structural funds, new investments in renewable energy, already scheduled personal income tax cuts and value added tax (VAT) simplification, and creation of a Reserve of Social Solidarity to support people vulnerable to the projected economic slowdown (financed through higher luxury excise taxes). While some of these measures were planned even before the crisis, and new direct spending programs are only a smaller part of this package, it nevertheless constitutes an appropriate response to the crisis in a constrained fiscal environment.

UC. Medium-Term Economic and Fiscal Outlook 19. The global financial crisis has worsened Poland’s macroeconomic and fiscal outlook, although Poland is faring better than other countries in the region. With fewer resources and in a fast evolving economic environment, the Government faces the difficult challenge of reconciling three objectives: ensuring fiscal consolidation over the medium term as required under the EU Excessive Deficit Procedure; protecting priority programs for economic and social development to enhance growth prospects; and mitigating the social costs of the crisis. The room for fiscal maneuver is constrained both by the need to preserve public debt below levels that trigger corrective action according to the Constitution and the Government’s aim to join the euro-zone in 2012 (discussed in more detail below). 20. Growth is projected to recover only slowly in 2010 in tandem with the expected easing of the crisis and expected slow recovery in industrialized countries. Growth is likely to remain subdued through 2010, with most projections around 1 percent, before a stronger recovery in 2011. Inflation is expected to remain stable at around the central inflation target of 2.5 percent. Lower domestic absorption should lead to a significant moderation of imports and an improvement in the external current account deficit (around 4 percent of GDP in 2009-2010). Table 1 shows the recent macroeconomic forecasts for Poland prepared by the Government and international organizations. Needless to say, projections for next year are even more uncertain than for this year.

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Table 2. Economic Developments and Prospects in Poland 2004-2011 (change in percent unless otherwise indicated)

2004 2005 2006 2007 2008 2009 2010 2011CP December 2008 6.7 5.1 3.7 4.0 4.5EC Spring Forecast May 2009 6.6 4.8 -1.4 0.8 --IMF WEO April 2009 6.7 4.8 -0.7 1.3 --WB May 2009 6.7 4.8 0.5 1.0 3.0CP December 2008 5.0 5.3 4.5 3.7 3.8EC Spring Forecast May 2009 5.0 5.3 0.6 0.2 --IMF WEO April 2009 5.0 5.3 1.0 1.5 --WB May 2009 5.0 5.4 1.9 1.4 4.4CP December 2008 17.6 6.5 4.4 5.0 8.6EC Spring Forecast May 2009 17.6 7.9 -6.2 -0.8 --IMF WEO April 2009 17.6 7.9 -4.5 2.5 --WB May 2009 17.6 7.9 -5.4 3.1 9.4CP December 2008 2.6 4.2 2.9 2.5 2.5EC Spring Forecast May 2009 2.6 4.2 2.6 1.9 --IMF WEO April 2009 2.5 4.2 2.1 2.6 --WB May 2009 2.5 4.2 3.1 2.7 2.5

CP December 2008 -4.7 -5.1 -4.2 -3.6 -3.8EC Spring Forecast May 2009 -5.1 -5.3 -4.7 -3.7 --IMF WEO April 2009 -4.7 -5.5 -4.5 -3.9 --WB May 2009 -4.7 -5.5 -4.3 -3.6 -4.1

6.56.4

Real GDP (% change)

Private consumption (% change)

Gross fixed capital formation (% change)

5.3 3.6

4.3 2.1

Consumer prices (% change) 3.6 2.2

-4.4 -1.2Current Account Deficit (% of GDP)

14.9

1.3

-2.9

6.2

5.0

Source: Poland’s Convergence Program (CP) - Update December 2008; recent publications of international financial institutions; and World Bank staff. 21. Against this background, the fiscal position is likely to weaken further in 2009 and possibly 2010. The Government is trying to adhere to fiscal targets for the state budget, while financing infrastructure investment through extra-budgetary borrowing and allowing automatic stabilizers to operate in the rest of the general Government (social security funds and local Governments). In late January 2009, the Government revised downwards the 2009 real GDP growth forecast from 3.7 percent, as estimated in the December 2008 Convergence Program, to 1.7 percent. To compensate for the expected shortfall in revenue, line ministries were asked to prepare plans for reducing state budget expenditures by 0.8 percent of GDP. Certain expenditure items, such as pension and disability payments, capitation grants to local Governments for primary and secondary education, public sector wages, debt servicing, and co-financing for the absorption of EU funds, were protected from these reductions. In addition, the Government shifted transport infrastructure spending of 0.8 percent of GDP off the state budget to the National Road Fund.TPF

7FPT With growth prospects further weakening, a

formal amendment of the budget is expected in June/July. This could include a combination of additional expenditure rationalization and possibly an increase in the state budget deficit target. The Government is now projecting the general Government fiscal deficit to reach 4.6 percent of GDP in 2009.TPF

8FPT

TP

7PT While this measure reduces the state budget deficit, it leaves the general Government deficit unchanged.

TP

8PT This is slightly higher than the IMF but lower than the EC which expects a deficit of 6.6 percent of GDP (but

this assumes to corrective action).

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Table 3. Fiscal Developments and Prospects in Poland 2004-2011 (percent of GDP unless otherwise indicated)

Source 2004 2005 2006 2007 2008 F 2009 F 2010 F 2011 F

CP December 2008 -2.0 -2.7 -2.5 -2.3 -1.9EC Spring Forecast May 2009 -1.9 -3.9 -6.6 -7.3 --Gov. Fiscal Notification, April 2009 -1.9 -3.9 -4.6 -- --IMF FCL Arrangement, April 2009* -- -3.9 -3.9 -2.0 -3.9 -4.3 -4.2 --

CP December 2008 -2.4 -3.2 -2.6 -2.0 -1.8EC Spring Forecast May 2009 -3.2 -5.3 -6.0 -5.6 --Gov. Fiscal Notification, April 2009 -- -- -- -- --IMF FCL Arrangement, April 2009* -- -- -- -- -- -- -- --

CP December 2008 0.5 -0.3 0.1 0.2 0.5EC Spring Forecast May 2009 0.4 -1.7 -3.7 -4.3 --Gov. Fiscal Notification, April 2009 -- -- -- -- --IMF FCL Arrangement, April 2009* -- -1.3 -1.3 0.3 -1.7 -1.8 -1.5 --

CP December 2008 44.9 45.9 45.8 45.5 44.8EC Spring Forecast May 2009 44.9 47.1 53.6 59.7 --Gov. Fiscal Notification, April 2009 44.9 47.1 51.0 -- --IMF FCL Arrangement, April 2009* -- 47.5 47.8 44.9 47.1 51.6 53.3 --CP December 2008 6.7 5.1 3.7 4.0 4.5EC Spring Forecast May 2009 6.6 4.8 -1.4 0.8 --Gov. Fiscal Notification, April 2009 6.6 4.8 -- -- --IMF FCL Arrangement, April 2009* 6.7 4.8 -0.7 1.3 --

CP December 2008 -- -- -- 1.1 1.2 0.1 -0.4 -0.4EC Spring Forecast May 2009 0.6 0.1 1.7 3.4 3.5 -1.5 -3.8 --Gov. Fiscal Notification, April 2009 -- -- -- -- -- -- -- --IMF FCL Arrangement, April 2009* -- -- -- -- -- -- -- --

*) Based on IMF definition (including pension reform costs)

Output gap

Real GDP (% change) 5.3 3.6 6.2

Fiscal balance

Structural balance

Primary balance

Public debt 47.145.7 47.7

-3.8

-4.1

-1.1

-4.3-5.7

-4.1-5.9

-0.3-1.2

Source: Poland’s CP and EC Spring Forecast, May 2009. 22. The 2010 budget will need to strike a careful balance between maintaining reasonable fiscal discipline as required under the EU excessive deficit procedure and necessary for euro adoption, and supporting the recovery. It is too early to judge the appropriate fiscal stance for next year, but it will be critical for the budget to be placed in a strong, Medium-Term Expenditure Framework (MTEF) consistent with renewed fiscal consolidation that targets an ambitious reduction in the structural fiscal deficit, at least stabilizes public debt, and supports euro adoption. This commitment should be institutionally strengthened by rapid passage of the amendment to the Public Finance Law aimed at enhancing the MTEF,TPF

9FPT consolidating budgetary units, strengthening precautionary debt rules,

and increasing performance-orientation in the budget. Given the recent lowering of taxes and the expenditure pressures arising from the need to protect or expand productive spending in e.g. infrastructure and education and to strengthen social safety nets during the downturn, medium-term fiscal consolidation will require ambitious expenditure reforms aimed at rationalizing unproductive and inefficient spending programs, including in health and remaining privileged pension arrangements.

23. Analysis done by the IMF in the context of the FCL suggests that public debt is sustainable over the medium term even in the presence of moderate further shocks. Fiscal rules on public debt - embedded in the Polish Public Finance Law - prompt corrective action when public debt reaches 50 and 55 percent of GDP and there is the 60 percent of GDP cap imposed by the Constitution. TP

9PT Further efforts will be needed going forward to establish a truly strong MTEF.

9

Chart 2. Public Debt Sustainability: (public debt in percent of GDP)

Source: IMF report for the Flexible Credit Line arrangement. 24. Poland’s economic and fiscal outlook remains subject to unusually large uncertainty in view of the unclear prospects for global economic recovery. While the forceful policy responses in many countries have contained the risks of a systemic financial meltdown, there are reasons to remain concerned about the potential impact on activity of the financial crisis. The process of deleveraging could be more protracted than has been factored

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into the macroeconomic projections for emerging markets. Another risk relates to the growing risks of deflationary conditions in advanced economies. Maintaining or accelerating the reform momentum will be key to both ensuring a rapid return to high growth and further enhancing the growth potential of the economy over the medium term.

BOX 2. SUPPORTING HIGH AND SUSTAINABLE ECONOMIC GROWTH IN POLAND OVER THE MEDIUM TERM

Although recent economic performance has been impressive, Poland still faces important growth constraints which may slow down the real convergence process over the medium-long term. In 2007, Poland’s GDP per capita at purchasing power parity amounted to 53.6 percent of the average for the EU-27. A continued rapid reduction of the income gap requires high and sustainable growth based on sustained productivity increases and higher employment and investment rates.

There is broad consensus (including among the World Bank, the EC, the International Monetary Fund (IMF), and the Organization for Economic Cooperation and Development (OECD)) that policy interventions aimed at promoting high and sustainable growth should be focused on the following three broad areas:

(a) Public finance and administrative reform. Public finance and administrative reforms aimed at continued fiscal consolidation, lowering of the tax burden, re-orientation of spending towards more productive areas, improved public finance management, and enhanced public administration. Further fiscal consolidation is needed to improve macroeconomic stability and provide room for countercyclical fiscal policy. A lower tax burden and simpler tax system is needed to encourage formal private sector activity. A re-orientation and restructuring of spending is needed to provide fiscal space for increased productive spending, notably on infrastructure, and improved outcomes of key public services (including health and education). Public administration reforms are needed to support more efficient management and service delivery, including better policy coordination. This should include reforming and modernizing Poland’s courts (which are a source of major delay for business transactions) and enhancing the capacity and results-orientation of the civil service and the public administration at all levels of Government.

(b) Structural reforms. Promoting private sector development through an improved investment climate, higher product market flexibility, and restructuring of key sectors. Structural reforms are needed to improve the general investment climate and support the restructuring of low-productivity sectors. Poland ranks low on Doing Business Indicators even among its regional peers, and further deregulation is needed. This should include a simplification of Poland’s onerous legal, tax and administrative environment for entrepreneurship and business development. Licensing requirements and business startup regulations are particularly burdensome. In addition, the Government could facilitate the continued shift away from old industrial and low-productivity sectors to new job-rich, high-productivity sectors. This would include restructuring sectors such as coal or energy generation and removing incentives for people to remain in low-productivity agriculture while accelerating the privatization process (including in what are considered strategic sectors). The Government could also further support the high productivity sectors by promoting private sector research and development.

(c) Labor supply mobilization. Increasing labor force participation and employment including to further reduce poverty and encourage social inclusion. Labor supply mobilization is needed to raise low employment rates, not least among the older cohorts and women, and improve the skills of the workforce. This requires reform of the system of social protection and labor taxation in order to enhance incentives to work along with development of more flexible forms of employment, improved active labor market programs targeted at disadvantaged worker groups and promotion of life-long learning. Limiting the number of professions entitled to early retirement would be in line with the principles of the pension reform introduced in 1999 and in support of increased labor force participation. Continued reforms in the education system are also needed to improve labor market relevance and skills.

III. COUNTRY DEVELOPMENT PROGRAM

A. UOverarching Objectives

25. Rapid real convergence to average EU living standards remains the overarching policy objective and the Government sees joining the euro-zone as soon as possible as a central strategy in this regard. Euro adoption is one of the key elements and obligations of all the NMS, and countries that do not satisfy the Maastricht criteria in this regard are required to prepare Convergence Programs that show how and when these criteria will be met. The Government sees rapid euro adoption as key to maximizing the gains from European integration and minimizing the risks associated with rapid capital flows and

11

potential currency mismatches. It also provides an important anchor for the conduct of fiscal policy and thus critical element in preserving market confidence during the ongoing crisis. Further, fiscal discipline allows for an easier monetary policy. Euro adoption requires amendment of the Constitution, which in turn would require qualified majority support in Parliament.

26. In September 2008, the Government announced 2012 as the target year for euro adoption, but acknowledges that there may be a short delay as a result of the crisis. Earlier plans to enter the ERM2 in mid-2009 have been abandoned on the background of increased foreign exchange market volatility, a worse than expected fiscal outturn in 2008, and difficulties gathering the required support in Parliament for changing the Constitution. The Government now hopes that these problems will be overcome later in the year. While it is possible to enter the ERM2 prior to changing the Constitution, this would add an undesirable element of uncertainty to the process. Euro adoption in 2012 would require that the general Government fiscal deficit is reduced to below 3 percent of GDP in 2010, which now looks very difficult. 27. The Government is also seeking to accelerate structural reforms. Economic policy objectives in the medium-term were identified by the Government in the March 2008 CP and confirmed in the December 2008 Update of the program. These objectives are: (i) reduction of the tax burden; (ii) increase of growth-enhancing expenditure (infrastructure, science, education, and research and development (R&D)), shifting social spending towards programs supporting growth of economic activity, and changes in health and pensions aimed at enhancing efficiency; (iii) increase of labor activity; (iv) economic liberalization (elimination of obstacles to doing business, administration reform, and better functioning of judiciary); and (v) acceleration of privatization. These objectives are fully consistent with the key impediments to growth identified in Box 2 above. In addition to these objectives, the National Development Strategy 2007-13 includes regional and rural development and increased territorial cohesion. 28. The main strategy for offsetting the fiscal costs of tax and pension/labor market reforms is based on general expenditure control, with only small nominal increases in budgetary allocations across line ministries, along with increases in indirect taxes (notably excises on alcohol, tobacco, and cars). There is significant scope for rationalization of administrative spending in line ministries, without adversely affecting core and mandated spending programs, but a more strategic restructuring of public expenditures to enhance the quality of public finances is needed.

B. Government Priorities

29. As mentioned above, the priorities of the Government are to improve the structure of public finances, increase employment, and promote private sector development. The key plans in the various areas include:

Public sector reform • Reducing the tax burden: overall, changes are oriented towards shifting the tax

burden from direct to indirect taxes. In 2009, the Personal Income Tax is being simplified and reduced, along with other changes to support taxpayers working abroad, while Corporate Income Tax is being be lowered for producers of bio-components. In indirect taxes, simplified procedures are being introduced in VAT, while excise duties on tobacco products are being hiked in line with EU requirements and in order to finance the recently created Reserve of Social Solidarity.

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• Increase in and greater efficiency of growth-enhancing expenditure: the Government

is planning significant investments in transport, particularly in road construction and rehabilitation to offset the projected slowdown in private investment. A broader program of infrastructure investment will support the Euro 2012 Soccer Championship to be hosted by Poland and Ukraine. Associated with this program, Poland will streamline and enhance its regulatory and legal framework as well public procurement practices. The Government is also planning a shift towards a low-carbon economy both in order to comply with international and EU long-term policies on climate change mitigation and to preserve energy security. Opportunities for emissions reduction or carbon sequestration in agriculture, transport or forestry and to tap new climate-related sources of financing will be explored.

• Reforms in education and health aim to increase efficiency and effectiveness: in

education, curriculum reforms in upper secondary will integrate general and vocational education and make teaching more relevant for the job market. High-quality early education, which has a widely recognized and well-documented impact on education outcomes, will be expanded as will pre-school education through increased flexibility for non-publicly managed institutions. Reforms in health aim to improve resource mobilization and increase efficiency in resource allocation with improved service delivery. The reforms include rationalization and corporatization of public hospitals and reform to the single health insurance system to introduce competition among public and private insurers. Subsequent phases would include developing a risk-equalization mechanism between insurers, establishing an independent regulatory authority, and creating independent insurance supervisory bodies with oversight of the insurance and provider market. The Government is also analyzing managed-care models.

• Public finance management. Poland has made substantial progress in the last three

years in performance budgeting. An indicative performance budget—including a programmatic breakdown of expenditures, program objectives, and key performance indicators—is now presented to the Parliament for information alongside the traditional annual budget. Further improvements are underway in public financial management to support fiscal consolidation and enhancing the quality of public finances: a new Law on Public Finance is expected in late 2009 and is associated with organizational changes to make the budget more transparent and performance-oriented while strengthening the medium-term orientation of the budget through introduction of a multi-year State financial plan. The Law would also tighten corrective measures triggered by increases in public debt, and expenditure control would be strengthened through new regulations on internal control and external audit.

Private sector development • Improving the business climate: the tax burden on labor is being reduced (see above)

and onerous legal, tax and administrative obstacles for entrepreneurship are being reviewed and streamlined. Reform proposals include amendments to the laws on the freedom of economic activity and accounting. Work is underway on a package of laws aimed at facilitating the start-up and closure of a business, reducing red tape, simplifying licensing and inspection procedures, and enhancing tax administration. Building an electronic administration is also an important part of the planned changes.

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• Privatization: the Government aims to sell state shares in more than 700 enterprises over the coming three years, although the program may move more slowly than envisaged given current market conditions. The Government is also keen to explore options for Public Private Partnerships (PPPs) to help finance the large infrastructure investment program.

Labor market • Increase in labor mobility: the Government plans to reduce inactivity incentives

created by social transfers and associated taxes. The tax wedge on labor has already been substantially reduced, while a new program, known as “Intergenerational Solidarity – 50+” includes incentives to stimulate labor force participation of older workers through a tightening of early retirement provisions and “bridge pensions”. A new law to regulate the payment of second-pillar pensions was proposed along with a law on individual pension accounts (third pillar) that would double the annual limit of savings for retirement exempted from capital gain taxation. Active programs include enhancing workforce skills, developing life-long learning, reforming labor market intermediation services, more effective active labor market programs, supporting post-natal re-entry into the labor force and social campaigns to promote longer working lives.

IV. WORLD BANK PROGRAM

A. Implementation of 2005 CPS and Lessons Learned

30. The CPS did not adequately differentiate the Bank’s potential role from that of other development partners. Following EU accession, a range of other financing sources were available to the Polish authorities, including grants from the EU and loans from regional institutions and development banks. The CPS for Poland did not situate the Bank’s role and comparative advantage clearly within this context, and as a result, the Bank’s potential contribution to Poland’s development goals was not clear. 31. The flexibility inherent in the CPS design was appropriate but did not facilitate a focused or strategic dialogue. The CPS was designed as a menu of options for the Polish Government. This flexibility was appropriate for a MIC that had just gone through a major transition by joining the EU and for which client interest in a relationship with the Bank was uncertain. However, the menu of options left the dialogue with the Government of Poland somewhat open and unfocussed, which hindered a strategic dialogue or implementation of a coherent program. While the CPS aimed to move the Poland program beyond traditional Investment Loans by introducing Sector Wide Approach (SWAps), it did not pave the way for a new type of relationship with a MIC that was based on the Bank’s knowledge services.

32. Implementation of the CPS was also hindered by successive changes in counterparts. The CPS period was marked by several changes of Government. As a result, the dialogue and the program lacked an anchor at the heart of Government. There was little in the CPS to guide the relationship through changes in commitment or interest from the authorities. 33. The following lessons may be drawn:

• Define the Bank’s role and value added:

14

o Establish clearly the Bank’s role and value-added vis-à-vis other external partners and funding sources such as the EU, European Investment Bank (EIB), EBRD and OECD;

o Practice selectivity in Bank involvement in terms of areas of involvement and modalities of support, focusing on the knowledge agenda;

o Test Bank involvement against the criteria defined as areas of Bank value-added, strategic relevance and impact.

• Establish a flexible framework of activities that can be scaled up or down

according to client interest: o Establish a strategic and cohesive program of Bank activities that is not

wholly dependent upon one counterpart or one instrument; o Maintain a core set of Economic and Sector Work (ESW) and diagnostic

products as a basis for scaling up or developing new activities; o Be prepared to scale down or disengage if the Bank’s involvement is

perceived to lack strategic focus or impact and switch gradually to a knowledge-based partnership through reimbursement agreements.

• Manage political transitions:

o Seek continuity of dialogue by developing relations at technical levels of the civil service;

o Maintain contacts across the political spectrum and with strategic non-Government partners and sub-national entities;

o To the extent possible, align CPS and programming cycles around electoral cycles.

34. These lessons have been incorporated into the design of this CPS:

o Complementarity and Value-Added: The Bank’s value-added has been explicitly defined in this CPS (see below) and these definitions are used as criteria to test and select areas of Bank engagement. For example, while EIB tends to provide larger, faster funds for infrastructure construction, the Bank will focus on a complementary role with smaller investments in institutional capacity, preparatory work, regulatory and safety issues. Another example would be focusing the Bank on implementation of standards and goals that are defined by the European Commission (EC).

o Flexibility: The last CPS started with an open menu of options, which made it

difficult to anchor the program. This CPS program is well-defined in the near term and left more flexible in the outer years. In the first year of the CPS, the program is anchored with a DPL series and a few innovative operations supporting economic activity during the crisis and the longer-term development agenda. This is underpinned by core analytical work, such as a Public Expenditure Review (PER) and a Climate Change Economic Memorandum. In the outer years of the CPS, the program will develop in some of the areas outlined as Strategic Pillars of Collaboration (see below) and the mid-term CPS Progress Report will further define the particular areas and operations proposed. The lending program could be scaled down if the crisis abates more rapidly than anticipated and demand for borrowing declines while the non-lending program could be scaled up if there is client interest and willingness to pay. This is described in the Proposed Program section (see below).

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o Managing political transitions: While not necessarily clear in the CPS document, the Poland team’s engagement strategy reflects these lessons – communications take place with all levels of Government and are inclusive of stakeholders from all political parties and spectrum of society (see Consultations section below). Further, close relations have been established with staff at the Ministry of Finance, which is acting as the focal point for relations with the Bank and helps coordinate activities with line ministries.

B. External Partners and Key Areas of World Bank Value-Added

35. The EU and EU-related institutions have become Poland’s main external partners. The EU has committed 67 billion euro in grants to Poland over the period 2007-13, equivalent to about 2.5 percent of Poland’s GDP per year, to support income convergence of the country and its regions with the wealthier parts of Europe. This support is focused on development of a knowledge economy and infrastructure (see Box 3 below). The EIB is also playing an important role in providing required co-financing for the EU structural and cohesion funds through loans on attractive terms, and his stepped up its lending substantially in recent years with further increases envisaged in response to the ongoing global financial and economic crisis. The EIB has traditionally focused on infrastructure (especially transport) projects, but has become more involved in other sectors of the economy as well as sub-national lending. The EIB intends to step up its support for energy efficiency projects as part of the EU climate change agenda. Meanwhile, the EBRD has largely phased out of Poland and the Central Europe region, although this is changing again in response to the crisis. 36. In the medium term, the International Finance Corporation (IFC) will continue its current selective strategy to support the entry of Polish companies into less developed markets of the Commonwealth of Independent States (CIS) and Southern Europe. In some cases, Poland may provide an opportunity to invest in innovative structures or products. IFC will also explore opportunities in climate change related projects. In the financial sector, IFC is supporting a specialized microfinance bank in order to improve access to credit by micro enterprises and SMEs and stimulate their expansion and new job creation. Strengthening micro enterprises and SMEs will also facilitate greater competitiveness of the economy. In addition, as part of the Joint IFI Action Plan for Central and Eastern Europe launched in February 2009 with the EBRD and the EIB, the IFC and MIGA are poised to play a more active role in supporting Poland’s banking sector and lending to the real economy. 37. The Bank can still add significant value to Poland’s development agenda in a number of areas within the domain of the Bank’s broader institutional and regional strategic priorities and as a complement to EU programs. The Bank can play an important role in helping to address global and regional public goods and in exchanging knowledge on global development lessons. It can also complement the EU’s Lisbon Agenda (LA) in support of growth and competitiveness and public sector reform, and it can be a key partner on social sector reform—an area largely excluded from the EU Acquis Communautaire and EU-support programs—and in the discussion of regional development policy, all drawing on its long-standing engagement in Poland in these areas and its global knowledge. Both the Government and the EU thus see a continued important role for the Bank to play. At the same time, a continued engagement with Poland is important for the Bank in that the knowledge acquired and lessons learned are likely to be of value for other, less-advanced clients in the region and beyond.

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BOX 3. EXTERNAL PARTNERS

The EU’s structural funds For the 2007-13 period, Poland has been allocated approximately EUR 67.3 billion: EUR 66.6 billion under the Convergence objective and EUR 731 million under the European Territorial Cooperation objective. To complement EU investments, Poland’s contribution should amount to EUR 18.3 billion, bringing the total amount available for Cohesion policy activities in Poland to some EUR 85.6 billion over the seven-year period.

Table 1. Breakdown of EU funds by operational

program 2007-13

Operational Program EU

allocation EUR mln

16 Regional OPs: 16,556 OP Development of Eastern Poland 2,274 OP Infrastructure & Environment 27,914 OP Innovative Economy 8,255 OP Technical Assistance 517 OP Human Capital 9,707 Performance reserve 1,331 Convergence Objective 66,553 European Territorial Cooperation Objective

731

TOTAL 67,284 Source: European Commission, staff calculations

The European Investment Bank The EIB operations in Poland cover a variety of economic sectors ranging from basic infrastructure, manufacturing and services including: support to small- and medium-sized enterprises (SMEs) through local financial institutions to education and promotion of a knowledge-based economy. The EIB’s projects have grown from small amounts to a total of more than EUR 18 billion at the end of 2008, of which more than EUR 10 billion has been granted after Poland joined the EU.

Figure 1. EIB Lending to Poland in 1990-2008*

Breakdown by sector EUR 18.3 bln Breakdown by year (EUR bln)

AgricultureTransport

Telecom

ServicesIndustry

Health, education

Global loans

Urban infrastructure

Energy

Composite infrastructure

Water, sewage

-

0.5

1.0

1.5

2.0

2.5

3.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: EIB, staff calculations Notes: 2008 does not include projects that were signed in 2008, but not disbursed before Dec. 31, 2008

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The European Bank for Reconstruction and Development The European Bank for Reconstruction and Development (EBRD) has been present in Poland since 1992. By the end of 2007, EBRD had contributed EUR 3.3 billion to more than 190 projects of a total value exceeding EUR 13 billion. EBRD assisted Poland in its economic transition and the restructuring of enterprises in different sectors from agribusiness to steel. After Poland joined the EU, EBRD has focused its activities around the enterprise and financial sector, as well as infrastructure and environment, but new commitments have declined substantially.

Figure 2. EBRD Commitments by year (EUR mln)

Source: EBRD

The International Monetary Fund In the context of the ongoing financial and economic crisis, the Fund plays an important role in Poland. In addition to the regular Article IV consultations, the FCL arrangement in the amount of SDR 13.69 billion (about USD20.6 billion and 1000 percent of quota) approved by the IMF Board in early May 2009 is central to the Fund involvement in Poland. The FCL is treated as a precautionary arrangement. Moreover, the Fund provides just-in-time technical assistance in the area of Public Finance Management focused on introduction of the Medium-Term Expenditure Framework (MTEF).

The Organization for Economic Co-operation and Development The OECD does regular macroeconomic monitoring and forecasting and occasional analytical work on structural reforms (including education) and other issues such as regional development, climate change. It also conducts regular bi-annual country reports for Poland covering important issues of structural agenda.

C. Strategic Pillars of Collaboration

38. The Bank’s envisaged strategic partnership with Poland would be based on four pillars: (i) Social and Spatial Inclusion; (ii) Public Sector Reform; (iii) Growth and Competitiveness; and (iv) Regional and Global Public Goods. Key policy areas identified within these broader themes would include social sector reform, regional development, public finance and financial management reform, transport infrastructure development, deregulation and the enabling environment for doing business, climate change (notably focused on the energy sector), and financial sector stability. In the short term, particular attention would be given to supporting adequate social safety nets during the economic downturn, interventions aimed at supporting private sector credit growth and SME access to finance, and infrastructure investments, while not losing sight of the reforms needed to support strong and high quality growth over the medium-long term. While this is still a fairly broad agenda, these are all critical areas of the development agenda where the Bank can add important value, and it is necessary to preserve some flexibility in the program, especially beyond the first year, as Government priorities for collaboration with the Bank evolve. Lending and strategic AAA would be limited to a narrower subset of core areas, while in other areas it is envisaged that collaboration would rely increasingly on fee-for-service.

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Pillar 1: Social and Spatial Inclusion Social Sectors Reform

39. Pursuing the EU Lisbon Agenda of making Poland a competitive, knowledge-based economy with more and better jobs and greater social cohesion requires reforms in the social sectors in order to improve the utilization of labor resources, including raising labor participation rates among women, and to increase the productivity of the workforce. This involves increasing the employment-to-population ratio (which at 57 percent is well below the Lisbon target of 70 percent), enhancing social inclusion (including the reduction in the incidence of long-term unemployment), improving the quality of and access to education and promoting the responsiveness of the education system to the fast changing labor market needs, and enhancing labor productivity through better health services.

• Labor Market and Social Protection. The employment rate is low in Poland mainly due to very low labor force participation of older workers (which at 29 percent is well below the Lisbon target of 50 percent) and women. This reflects disincentives created by the social security system. Recent reforms to the pension system,TPF

10FPT which aimed at

substantially reducing early retirement options, are likely to result in more favorable employment outcomes among older workers. However, more needs to be done, including lower subsidization of the farmers’ social security system (KRUS), limiting access to disability pensions, developing the system of adult education to equip older workers with the required skills, and promoting flexible forms of employment. Moreover, in order to encourage employers to hire older workers, the generous employment protection provisions granted to this worker group need to be revised. Reaching the full employment target also requires improving labor market adaptability so as to reduce the effects of adverse demand shocks on employment and unemployment. This entails, among other things, the need for greater working time and wage flexibility. Furthermore, addressing labor market exclusion – which manifests itself in the relatively high incidence of long-term unemployment – requires implementing activation policies and improving the human capital of the long-term unemployed. The cost-effectiveness and targeting of existing active labor market programs needs to improved, as does the coordination between employment and social welfare offices. Finally, women face additional labor constraints due to the role they perform as primary care providers to children and elderly.

• Education reform. In education, the main challenge continues to be the relevance of

skills for the labor market. In this regard, reforms in secondary education have been successful in expanding and improving general secondary instruction while delaying vocational schooling. Continuing and deepening these reforms is important. Moreover, to increase the availability of financial resources for quality investments in primary and secondary education, Poland will need to increase the flexibility of teacher management and deployment to respond to the rapid demographic changes that are reducing the size of student cohorts. At the same time, it is critical to revise the financing mechanisms in tertiary education to make the system more equitable and fiscally sustainable. Furthermore, Poland would be well advised to phase in mandatory schooling from age six and to expand coverage and improve efficiency of

TP

10PT Unlike many EU countries, Poland's pension system appears to be generally sustainable in the long run. First

pillar deficits are expected to fall over time, and second pillar pensions have earned healthy rates of return since the inception of the multipillar system in 1999. The projections of system balances have to be verified, though, and there are concerns about the adequacy of future pensions.

19

preschool education. At the other end of the education cycle, a platform for life-long learning and a strategy for adult training should be developed.

• Health sector reform. The key challenges of health sector reforms in Poland are to achieve higher efficiency in resource allocation along with improved service delivery. The health system is well placed to protect the vulnerable during the economic downturn as well as to protect critical public health programs. The efficiency agenda includes both debt management and provider payment reform. With important exceptions, hospitals have consistently accumulated public debts (failure to pay social security and other taxes) and commercial debts (mainly to suppliers). The current Government is aiming to solve this problem permanently through an initiative to corporatize hospitals under commercial law, but this will be done initially using a voluntary approach. Close monitoring will be required for hospitals that are unlikely to be corporatized but for which debt accumulation has been a persistent problem, as well as for hospitals affiliated with universities. In addition, Poland has implemented DRGs (Diagnosis Related Groups) as a cost accounting mechanism in all facilities in 2009. Further, the corporatization of hospitals will allow the Ministry of Health (MOH) and NHF to improve the regulatory framework under which hospitals and clinics operate. Other reform areas, including introduction of a multiple competitive private insurance system and expansion of long-term care services, are seen as more medium-term challenges.

40. The Bank is uniquely positioned to assist Poland in building capacity to address the challenges posed by the Lisbon Agenda and in developing the implementation strategy The Lisbon Agenda identified four priority areas: investing in people and modernizing labor markets, unlocking the business potential, investing in knowledge and innovation, and energy and climate change. These priorities correspond closely to the Bank’s strategic development pillars, which makes the Bank and the EU natural partners. This is particularly the case given that the Lisbon Agenda, despite great efforts to re-focus it in terms of goals and policy areas, provides limited practical guidance on what to do and, more importantly, how to do it. Such capacity is critical since sizable amounts of EU structural and cohesion funds are linked to the implementation of reforms related to the Lisbon strategy (some 60 percent of cohesion policy funds for EU10 will be targeted for activities and investments intended to meet Lisbon targets). 41. In recent years, the Bank has provided extensive support to the Government on social sector reforms through investment lending, development policy lending, and AAA. The 2008 DPL-1 contained a labor market component that aimed at improving labor supply incentives and increasing the labor force participation rate, especially among older workers. In addition, Bank staff contributed to a government policy paper on priorities for labor market reforms, which provided the analytical underpinnings for the DPL-1. In education, the Bank has engaged in policy dialogue through a Technical Cooperation program with the Ministry of National Education and the Ministry of Science and Higher Education. In both cases, the program is focused on providing analytical and policy support for designing and implementing key reforms in the education sector. One example is the Bank’s participation in a workshop on higher education reform and World Class Universities (March 2009). In the health sector, the Bank supported the MOH during 2005/06 in preparing a “business plan” to map out a strategy for improving the efficiency and effectiveness of public expenditures on health care, enhancing the quality of health services, and increasing the regulatory, planning and policy-making capacity of the MOH. In addition, the National Health Insurance Fund (NFZ) was assisted in conducting a needs assessment to strengthen the health management information system and build analytical capacity. The Government also actively participated

20

in Bank-organized workshops on private-public collaboration in health (Slovenia, December 2006) and on pharmaceutical governance (Hungary, February 2007). 42. Looking ahead, the Government is interested in continued Bank support for social sector reforms, including employment promotion and pensions, social assistance, education, and health care. This support would be provided through the ongoing policy lending program - DPL2 has a strong focus on social sectors aimed at fiscal consolidation, protecting priority programs and mitigating the social cost of the crisis - and AAA, both ESW (including the ongoing PER, which underpins the DPL) and technical cooperation. In labor markets and social protection, the Government may be interested in technical cooperation with the Bank on: (a) improving functions and coordination between employment and social welfare offices; (b) improving the targeting and cost-effectiveness of active labor market programs; (c) designing modern activation policies; (d) strengthening the capacity of the Ministry of Labor to monitor and evaluate the net impact of labor market programs; (e) modeling and policy assistance for the agricultural pension system; (f) review of social assistance legislation and implementation; and (g) review and sharing of international best-practice in integration of various types of social benefits and information-sharing across benefit types. During the crisis, priority would be given to supporting active labor market programs and strengthening the system of unemployment insurance. In designing Bank assistance in these areas, equal gender opportunity policies would be taken into account and mainstreamed into the planned operations. In education, the ongoing program of technical cooperation would be continued with the aim of improving Poland’s student assessment systems and outcomes, as well as creating world-class universities and centers of innovation that enhance Poland’s competitiveness. A similar program would be developed in health, focusing on long-term care, health insurance competition and associated regulatory agencies and supervisory bodies as well as the different types of non-public insurers and risk-equalization mechanisms, hospital reform (including PPPs and corporatization, hospital debt management, and approaches to increase financial and management autonomy). Regional Development 43. Since regional development and cohesion policies are the pillars around which the EU financial support is provided, the effectiveness of this policy framework and capacity of Polish institutions involved in this process are key pre-conditions for successful implementation of regional development programs in Poland. The Ministry of Regional Development is currently in the process of updating the National Development Strategy for 2007-15. The new strategy will provide a legal framework for the government policy towards regions with a focus on the mechanism of cooperation and coordination between sub-national entities. With this in mind, the three main goals for the regional policy of the Government are: increased competitiveness of regions, use of their internal capacity, and provision of equal opportunities. Several international and bilateral partners support the Ministry to achieve these objectives. 44. The Bank has supported the regional development agenda through various analytical and advisory activities and indirectly through some of its projects. The analytical work on regional development in Poland includes “Poland - Directions in Regional Policy” (2004 and 2006 Update) and to some degree the Living Standards Assessment (2004) which also looked at regional disparities. Also, in February 2009, the Bank co-hosted a seminar on the lessons for Poland from the 2009 World Development Report (WDR) on economic geography. Further, some of the objectives of the Rural Development Project (closed 2005) as well as the on-going Post-Accession Rural Support

21

Project such as increasing social inclusion in underdeveloped municipalities and enhancing the institutional capacity of local government have an indirect regional development focus. 45. The Bank can continue to add value to the Polish authorities in their current medium-term strategic assessment of regional development objectives and programs for 2009-13 and beyond. Based on the Bank’s global perspective as reflected in the 2009 WDR and its knowledge of the specific conditions in Poland, further analytical and advisory support could be provided through focused studies on particular issues, seminars or workshops, and technical assistance in the following areas: (i) analysis of challenges to economic integration across regions and with neighboring countries using the WDR framework; (ii) assessing patterns of economic density, economic distance and divisions and implications for range a of policies going beyond existing regional development program approaches (e.g., by addressing issues of labor qualifications, land market distortions, business climate—i.e., spatially blind institutions); (iii) fostering and/or reinforcing opportunities for inter- and intra-regional market linkages through urban agglomerations, in part by means of spatially connective infrastructure; (iv) maximizing the allocative efficiency and effectiveness of different components implemented within Regional Operational Programs, including the support to lagging regions; (v) introducing methodology for results-focused monitoring and evaluation of EU and Government supported priorities related to regional, spatial, and territorial development. It is envisaged that future Bank services in this area would largely be provided on a fee-for-service basis. There may also be interest in sub-national lending to support lagging regions/municipalities or emerging growth poles (see transport infrastructure section below). Pillar 2: Public Sector Reform

46. The public sector reform agenda remains one of the most challenging in Poland. In the area of public finance management, the top priority of the Government’s medium-term strategy is to meet the conditions necessary for euro adoption in a sustainable manner. Therefore, the most important challenge for fiscal policy in the medium-term is to sustain fiscal consolidation and continue to enhance the “quality” of public finances. The latter would not only contribute to meeting the obligations under the Stability and Growth Pact but also to better fulfilling citizens’ demands for improved quality of public service while promoting growth and competitiveness. Improving public service delivery for citizens and businesses alike also requires strengthening of public administration and governance.TPF

11FPT This

includes improved policy coordination, further reforms in the civil service and judicial system, and good governance across the entire public sector.TPF

12FPT

47. The Bank has been actively engaged over the years in helping Poland improve its public sector and this is widely seen as a key area where the Bank can continue to add important value. In the area of public finance management, the Bank has done extensive AAA, both in the form of regional and national ESW and targeted Technical Assistance, and most recently also provided support through the on-going policy lending program (Public Finance Management, Employment, and Private Sector Development Programmatic Policy

TP

11PT See for example the Bank’s recent study on Public Administration Reform in the NMS: “Administrative

Capacity in the New Member States: The Limits of Innovation?” World Bank (2006). TP

12PT The major areas vulnerable to corruption include construction and spatial planning, public procurement, and

sub-national Government.

22

Loan).TPF

13FPT In the area of public administration reform and governance, the dialogue was quite

intense at the turn of the decade but has since faded.TPF

14FPT

48. Looking ahead, Bank support would target (i) analysis and capacity building aimed at improving the quality of public finances; (ii) strengthening public finance management practices and institutions, including performance-based budgeting, public investment planning, and the medium-term fiscal framework; and (iii) efforts to enhance public administration and governance. Bank support would not be restricted to the central government level but would increasingly involve also sub-national governments that are responsible for a large share of public services delivery and recipients of large amounts of EU cohesion funds. Bank support would be provided through both the ongoing DPL program and AAA, including on a fee-for-service basis. 49. Cooperation is already under way and will be further developed in a number of different areas at national and sub-national levels. At the central government level, the Bank is updating its PER, focusing on both legal and institutional reforms to further strengthen the quality of public finances over the medium term and measures to address the more immediate challenges of ensuring an adequate social safety net during the economic downturn within the tight fiscal constraints. This PER is part of the analytical underpinning for the on-going policy-based lending program. The Bank is also continuing to support the development of Performance-Based Budgeting and MTEF through technical cooperation. This could also include support for upgrading and integrating financial information systems. Further, the Ministry of Justice may be interested in renewing cooperation on legal reform issues, including the functioning of courts and case load management, while the Central Anti-corruption Bureau has expressed interested in learning about good practices in corruption prevention and education. There may also be interest in Bank support for the Government’s update of its Anti-Corruption Program and Strategy (beyond 2009). At the sub-national level, a program of cooperation is under way with the Mazowieckie region, including an innovative sub-national Public Expenditure Review to improve capital investment planning and debt management strategies and TA on a fee-for-service basis for management of the transport infrastructure investment program. Similarly, cooperation with other subnational partners will be pursued, using a broad range of financing schemes, in various areas of their responsibility such as: (i) public passenger transport; (ii) health, education and other social services; and (iii) public private partnerships. Pillar 3: Growth and Competitiveness 50. There is broad consensus that development of infrastructure with emphasis on transport and improving the environment for private sector development are critical for high growth in Poland over the medium-long term. The road network, especially motorways, remains severely underdeveloped, with even main cities/growth centers not well connected. Railways and alternative modes of transportation, including inland waterways, TP

13PT The AAA includes the Public Expenditure and Institutional Review (2003), the Country Financial

Accountability Assessment (2006), co-organization of an International Conference on Performance Based Budgeting – Lessons for Poland (2007), and the ongoing program of regional (EU10) Regular Economic Reports (with several Special Topics on public finance issues) and fiscal studies. TP

14PT The World Bank issued its first report on corruption in Poland in 1999. The report generated broad interest

from policy-makers, experts, business organizations, and civil society. Subsequently, the Bank supported a number of anti-corruption activities in the early 2000s, both at the country and regional levels. The Bank also co-financed research work of non-Governmental organizations (NGOs), including on political parties financing and conflict of interest, which lead to adoption of anti-corruption regulations in these areas.

23

will also need to play a much more prominent role, not only in meeting Poland’s transport needs but also in helping to address the significant climate change challenges related to the country’s dependence on coal (the energy sector agenda is discussed under Pillar 4 below). Investment needs substantially exceed what can be financed from EU structural and cohesion funds, and PPPs will take time to phase in successfully. Although a small player, the Bank can play an important role both in contributing to the financing of these investments, including often neglected maintenance and rehabilitation, and in supporting the development of the institutional framework. Poland’s business environment remain hampered by excessive regulations and red tape as evidence in the country’s relatively poor Doing Business rankings, and the Bank is uniquely suited to help address these challenges. Transport Infrastructure Development 51. Underdeveloped transport infrastructure is perceived as one of the major obstacles for further development of Poland. Development of transport infrastructure is one of the main priorities within the National Development Strategy with the majority of EU grant funds earmarked to co-finance new land transport infrastructure (roads and rail). The planned increase in the road construction program will require strengthening the capacity of the General Directorate for Public Roads and Motorways (GDDKiA), which needs to adopt a commercial administrative structure and to use modern asset and project management tools for planning, programming and project implementation. Similar challenges are faced by the railway sector which requires modernization and an improved regulatory regime aimed at improving competitiveness of the sector. 52. While the EU and EU institutions, notably the EIB, are the main partners and external sources of financing for transport infrastructure development, the Bank can continue to play an important role in helping to build institutions and in complementary investments. With its extensive engagement in recent years in the roads sector, the Bank is well placed to support the road agency GDDKiA to commercialize its management practices, particularly to improve the efficiency of resource utilization. In the rail subsector, Poland has taken steps to implement the separation of rail operations from infrastructure management in accordance with EU requirements, and the Bank can support the reform process harnessing the vast experience from other EU member states. Further, the Bank can support investments, policy analysis and related reforms in areas such as: (i) maritime infrastructure and inland waterways; (ii) public transport financing as requested by the City of Warsaw; (iii) management and financing of transport in the regions and municipalities; (iv) improving road safety; and (v) increasing private sector participation in transport infrastructure. 53. Bank financing for the transport sector could support three broad categories of activities to supplement programs financed by the Government, the EU and other International Financial Institutions (IFI): (i) ongoing rehabilitation programs for road and rail infrastructure that are not eligible for EU grants; (ii) improvement of transport infrastructure to support the development of poorer regions within Poland; and (iii) policy reforms and investment lending supporting the climate change agenda, including improvement of public transport in urban areas or development of maritime and inland waterways infrastructure. Financing from EU grants are focused on improving the infrastructure along the Trans-European Transport Network (TEN-T) corridors with co-financing from EIB. Although financing for maintaining transport infrastructure is not eligible for EU grants, this must remain a priority in order to protect the asset value in the existing road and rail networks. Poland also needs to invest in intra-regional connectivity, particularly to improve access to its poorer regions. The Bank could support the local

24

authorities to better prepare projects that are eligible for EU grant financing, and strengthen the capacity of the regions to plan and implement projects. For large urban areas, Bank support could focus on financing public transport investments aimed at reducing carbon emissions, improving urban transport policy, regulatory frameworks, and tariff structures, and providing alternatives to motorized transport through green investments (e.g. pedestrian and cycle paths, inland waterways, etc.). 54. Bank support to the transport sector can be provided through investment lending, policy lending or a range of advisory services. Financing for the maintenance of existing transport infrastructure could be through SWAp arrangements that would co-finance with the Government and other partners the multi-annual investment programs or subprograms. The third in a series of three such SWAps is currently underway with the aim of improving the quality, efficiency, financial viability and safety of Poland’s roads. Large and complex individual projects or a group of projects that are of priority importance to the Government could be financed through traditional investment lending or through policy-based lending if significant reforms are necessary beforehand (e.g. reform of financing for public transport in large cities). The Bank’s advisory and analytical services could be deployed to support the analytical work preceding such reforms. This could include a strategic review of transport sector investment priorities. The Ministry of Infrastructure is also interested in Bank support for analyzing the feasibility of high-speed railways and implementing PPPs in transport (the latter also being important for subnational governments). In the absence of new lending, much of these advisory services would be expected to be provided on a cost sharing or fee-for-service basis. Private Sector Development 55. Private sector development remains hampered by important constraints to the business environmentTPF

15FPT and an unfinished privatization agenda. Poland is ranked around

the middle in the global Doing Business indicators, significantly below several of the other New Member States (NMS) and with little or no improvement in recent years. The main constraints relate to enforcing contracts, paying taxes, and obtaining permits for construction etc. Further, the state remains in control of “strategic” enterprises in energy and other network sectors and retains a large amount of minority shareholdings in a range of non-strategic companies. 56. The Bank has played, and can continue to play, an important role in supporting the environment for private sector development. The Government pays close attention to the annual Doing Business rankings, and has been working with the Bank’s experts on identifying in more detail the key shortcomings in the Polish business environment and analyzing reform plans and legislative proposals. In this regard, the Bank may also help the Government look at the important gender dimensions to the business environment, in particular the inequalities in terms of women entrepreneurship and employment arising from barriers to entry of new, small businesses. The Government is also interested in working with the Bank on options for streamlining tax administration, including unification of tax, social

TP

15PT According to new research conducted by the Polish-German Chamber of Industry and Commerce (AHK),

Poland is the most attractive location for foreign investment in the region. Eighty two percent of respondents are content with the decision to locate their investment projects in Poland, with the opposite opinion expressed by 8 percent of the polled investors. In the eyes of foreign entrepreneurs and companies, Poland’s biggest assets include presence in the EU, broad range of local sub-suppliers, and the qualifications, commitment and productivity of Polish employees. On the other hand, investors are most disappointed with the quality of public infrastructure, the tax system and administration, and the regulatory burden on businesses.

25

security, and customs payments.TPF

16FPT Further, the Bank has done a lot of work on knowledge

economy issues, including innovation, and more is under way as part of a broader regional study. In addition to technical assistance and ESW, the Bank is supporting the broader private sector development agenda, including privatization, through its programmatic DPL. 57. Another initiative that is aimed at improving the enabling environment for businesses in Poland is the Financial Reporting Technical Assistance Project under the Swiss-Polish Cooperation Program. The program is planned for 2009-2015 and funded with a CHF 10 million Swiss grant. It will focus on improving the business environment and access to financing for SMEs through introduction of international financial reporting and auditing standards for Polish companies. The Bank has been invited to help implement this project. 58. The Ministry of Economy is interested in broadening the cooperation with the Bank. In particular, the Ministry has asked the Bank to look at on-going initiatives and lessons/best practices from other countries in: (i) PPP implementation (especially in non-transport sectors such as health and education); (ii) linear investments legislation (pipeline investments in energy, telecommunications, etc.); and (iii) streamlining the system of state supervision and control over the activities undertaken by business entities. While some technical cooperation can be provided in the context of the DPL program, it is expected that such services would largely be provided on a fee-for-service basis. Pillar 4: Global and Regional Public Goods Climate Change 59. Poland will face major challenges in meeting the EU climate change targets. At the December 2008 EU Summit, EU members approved the “Energy and Climate Change Package” referred to as “20x3 by 2020”. While the package is less stringent than the EC proposals from early 2008, it will still require substantial medium-long term adjustment in Poland towards low carbon growth, especially given its dependence on coal for energy production. Further, the EU targets are not accompanied by clear strategies on how countries should reach the targets.

60. The Bank has been actively engaged in Poland in various areas relating to the climate change agenda. In recent years, the World Bank has been active in supporting the development of Poland’s capacity to respond to natural disasters. The Odra River Basin Flood Protection Project (2007) supports investments in the Upper and Middle Odra River watershed to protect the population in the River Basin from loss of life and damage to property caused by severe and increased flooding. The Bank has also remained engaged in a few energy efficiency projects (wind farm, coke-to-gas, geothermal heating), particularly aiming to provide models that could be adopted by private financing. Further, it supported a Green Investment Scheme (GIS) Regional Forum in June 2008 in Warsaw, and during the United Nations Framework Convention on Climate Change (UNFCC) Conference of the Parties (COP14) held in Poznan in December 2008, the Bank signed a Memorandum of Understanding with the Polish Government for a GIS transaction of 10 million Assigned Amount Units (AAUs). The Bank actively participated in COP14 events, including a High Level Event in Warsaw for Finance Ministers on “Low Carbon Growth”. Several discussion papers, a recent regional report on adaptation to climate change, and the forthcoming World Development Report 2010 pave the way for a substantive engagement on the analytical agenda. TP

16PT There is scope for collaboration with the IMF in this area.

26

61. The Bank can continue to supplement the activities driven by other partners (EU, EIB, OECD and IMF) and add value to the climate change agenda in Poland. The EIB is planning to expand its lending activity for energy-related projects. The IMF is focused on analytical activities relating to the impact of climate on the macro-economy, in particular fiscal developments. Finally, the OECD has prepared many regional and global reports related to climate change mitigation and adaptation. The Government is interested in support for assessing the future costs and benefits of various policy interventions leading to the abatement of carbon emissions. Therefore, the Bank would focus primarily on energy as the main source of CO2 emissions in Poland; but also on transport (options for “greening” through development of railways and waterways, promotion of bicycle paths in cities and towns. etc.) and environment. 62. Responding to the need for core diagnostics, the Bank has started work on an innovative Climate Change Country Economic Memorandum (CEM) for Poland. The study would help develop a climate change strategy aimed at minimizing the costs and maximizing potential benefits according to various carbon mitigation scenarios. The study will model the sector impact of mitigation under different assumptions, estimate their macroeconomic implications, and illustrate an integrated, long-term, low-carbon growth strategy. The work would draw on the considerable and growing body of knowledge from existing carbon studies in several other countries as well as the Clean Technology Fund plans underway in some of these and other countries. The sector investigations will discuss key sector policy initiatives, including sector-specific taxes and subsidies, regulatory changes, and R&D measures, as well as potential financing mechanisms for the identified investments and interventions. Further, there is interest in Bank support to look at ways to enhance competition in the energy sector, including competitive access to the grid.

63. Various operational interventions could be envisaged arising from this work. On climate change mitigation, potential Bank interventions could include energy efficiency projects, natural disaster mitigation (in particular against floods and also through the Catastrophe Deferred Drawdown Option (CAT DDO)), assisting with GIS transactions, supporting “clean carbon” technologies (including carbon capture and storage), and renewable energy investments. On adaptation to climate variability and change in the water sector related to natural disasters, potential World Bank interventions could include: (i) increasing flood/disaster preparedness through development of a flood/disaster insurance pool; (ii) spatial planning in flood plains to support vulnerable local and regional governments in their risk assessment in local spatial plans; (iii) strengthening institutional capacity towards emergency preparedness, including improvement of flood forecasting and management.

Financial sector stability

64. In recent years, the Bank worked jointly with the IMF on FSAP reports - the last update was made in 2006. The objective of the Financial Sector Assessment Program (FSAP) was to assist the Polish authorities in identifying strengths and potential vulnerabilities in the financial system that could have macroeconomic consequences, as well as challenges in the development of the financial system. The report attempted to identify measures to improve the functioning, reduce the risks, and strengthen the operation and oversight of the financial system in Poland. 65. Since Poland has one of the most solid financial systems in Europe, there has been little reason for more active Bank intervention, but the environment has changed

27

dramatically following the outbreak of the global financial crisis. Given the significant uncertainty around the financial crisis and its repercussions, the Polish authorities may be interested in a renewed and broader Bank engagement in this area. Aside from technical cooperation, this could also involve lending aimed at supporting those segments in the economy which are most affected by the financial crisis. For example, the credit line under preparation to support SMEs through PKO BP (as a wholesale bank) is primarily a response to the crisis and current short-term funding and risk aversion in the Polish financial system.

D. Proposed Program

66. The extent of World Bank engagement will depend on client demand for borrowing and final resolution of the procurement issue related to fee-for-service business.TPF

17FPT Client demand for borrowing is likely to be significant given large investment

needs and current adverse international financial market conditions. In addition to the ongoing budget support related to the DPL program, several ministries and local governments have expressed interest in borrowing from the Bank and the Ministry of Finance has expressed its willingness to consider additional, preferably quick-disbursing, operations as well as guarantees for non-sovereign borrowing. The Bank may also provide various types of credit enhancement instruments. While the Bank has recently concluded a partial fee-for-service agreement and another is pending, development of this line of business has been constrained by the lack of clarity in the Polish procurement law regarding sole sourcing of Bank advisory services.TPF

18FPT

67. The planned lending program is guided by the assumption that the global crisis will not be protracted and by the Bank’s notional lending resources available for Poland. Lending is expected to be substantial in FY09-10 before declining in FY11, with total exposure increasing to about USD seven billion. Lending would be focused on the DPL program and a limited number of other operations supporting economic activity and the longer-term development agenda. This would be accompanied by a limited program of AAA activities related to the DPL program and some additional strategic ESW. There would be a modest expansion of the cost-sharing/fee-based service (FBS) business over the medium term. During the course of this CPS, the Bank’s business model in Poland is assumed to gradually rely more and more on fee-based provision of knowledge services which could be scaled up if there is client demand, including at the subnational government level. While FBS would by nature be more opportunistic, they would still be confined to the strategic areas of engagement defined in the CPS. If the crisis were to be deeper or more protracted, the Bank’s ability to increase lending volumes would need to be revisited. 68. The program in the first year will include continued implementation of the current active portfolio. The portfolio has a total exposure of about USD 2 billion and consists of a recently disbursed single-tranche DPL and four investment operations: one in the roads sector (for maintenance and rehabilitation); one for flood protection on the Odra River; one for rural support; and a Global Environment Facility (GEF) energy efficiency project, as well as two Prototype Carbon Fund (renewable energy) operations. Disbursement rates slowed during the last CPS period due to delays in establishing the necessary arrangements for new projects, protracted inter-agency communications and decision-making, but the FY09 disbursement ratio has picked up and is almost 22 percent, which TP

17PT The planned engagement is based on existing Bank administrative resources for Poland.

TP

18PT Polish procurement law prohibits sole-sourcing for contracts below [value], while the Bank cannot engage in

competitive bidding. An interpretation of Polish procurement law issued by the Polish Procurement Office in May 2009, following intensive discussions with Bank staff, should allow the Bank to undertake work for the Polish authorities when requested in the future as fiscal pressures ease.

28

compares favorably with the overall Bank and Europe and Central Asia (ECA) region (19 and 12 percent, respectively). Two of the investment projects—road maintenance and rural support—are performing well with project objectives either largely met or implementation progressing steadily towards their achievement. The energy efficiency project very successfully implemented energy efficiency projects in more than 20 schools in Krakow, but the guarantee component has not taken off satisfactorily due to delays in finding the right counterpart bank and reduced risk appetite due to the financial crisis; the Odra river project was significantly delayed by changes in Government counterpart and a lengthy contracting process during the first year of implementation, but is now picking ups. Both project teams are pro-actively engaged with counterparts to overcome the delays and bring implementation back on track. The delays through the last CPS period and the current turn-around in portfolio performance are closely correlated with the Government’s renewed interest in working with the World Bank. 69. Overall financial management performance of the current portfolio is satisfactory and the residual financial management risk is moderate. The portfolio includes large, complex and innovative projects using country system procedures or implemented in a highly decentralized environment. This results in a substantial level of risk that is mitigated by measures embedded in the design and supervision of each operation. Only one active project (the Odra river project) is not currently rated satisfactory on financial management, due only to delays. A remedial action plan is under implementation and is being closely monitored by the Bank. The project is expected to be upgraded shortly. 70. The program in the first year of this CPS will be anchored in the on-going DPL series, while supporting economic activity and the longer-term development agenda through innovative, non-sovereign loans. The DPL series provides an anchor for the program as it cuts across most of the strategic pillars of engagement. The associated AAA work includes the ongoing PER focused on social sector reform, regional and Poland-specific work on public finance management reform (especially implementation of MTEFs and Performance-Based Budgeting), and ESW/TA in education, health, and social protection. In addition, two non-sovereign loans are planned to support economic activity and the longer term development agenda: a sub-national transport infrastructure investment loan with the City of Warsaw and a financial intermediary loan with PKO to support SME development. The former would be accompanied by a number of analytical studies, including on optimal long-term tariff policy. There is also an ongoing, innovative sub-national PER for the Mazowieckie region that will be relevant for the City of Warsaw loan. This is part of a broader, cost-sharing arrangement with the region that will also support transport planning. Further, an innovative climate change CEM is under preparation, and we plan a strategic transport policy review. Finally, the Ministries of Infrastructure, Economy, and Regional Development are interested in working with the Bank on a fee-for-service basis on various issues in line with the CPS pillars.

71. Beyond the first year, the program is less well-defined at present. However, depending upon client demand, non-lending services could potentially be scaled up, primarily on a fee-for–service basis. Lending would focus on transport infrastructure, climate change mitigation and adaptation, and sub-national development. The Ministry of Infrastructure is keen to enhance its cooperation with the Bank and the climate change CEM could lead to new lending opportunities. If the City of Warsaw project is successful, it is expected that this could be replicated in other major cities or less advantaged regions in Poland. However, the lending program beyond FY10 should be considered tentative and subject to the Bank’s financial capacity to support it. There is also strong demand for further AAA work that complements the social sector aspects of the DPL agenda and ongoing PER,

29

as well as in other areas of Bank comparative advantage. If client demand for lending falls, the program could shift downwards towards a program of niche, fee-based services to complement the Government’s own program and that of other external partners. Table 4. Proposed IBRD Lending Program and Selected Non-lending Services TPF

19FPT

Proposed IBRD Lending Program FY Amount US$(M) DPL 2 2009 1250 Warsaw City SIL/Swap 2010 500 PKO BP Credit Line 2010 500 DPL3 2010 1250 City 2 2011 250 Climate Change 1 2011 300 City 3 2012 150 Climate Change 2 2012 300 TOTAL -- 4500 Recent/ Proposed Non-lending Services Completion FY Performance-Based Budgeting 2009 Poznan Climate Change 2009 DPL Education Reform TA 2009-10 Mazowieckie Public Expenditure Review 2009-10 Climate Change CEM 2009-10 PER 2009-10 DPL Health TA 2010 DPL Social Protection TA 2010 Warsaw City ESW 2010 Transport Policy Note 2010 City 2/3 AAA 2011 Energy ESW 2011 Transport/railways ESW 2011 City 4/5/6 AAA 2012

E. Poverty and Social Impact

72. The CPS supports sustainable poverty reduction in a number of ways. First, the proposed program assists Poland to address the rapid deterioration of the economic environment which, through a slowdown in growth and rise in unemployment, is lowering living standards across all income quintiles. By ensuring a recovery of growth over the medium term, government reforms supported by the CPS create the space for raising living standards among poor households. Second, the CPS supports measures that can be expected to enhance Poland’s investment climate and competitiveness while improving Poland’s capacity to respond to climate change. This in turn would facilitate employment creation, economic growth and poverty reduction over time. Third, the CPS supports structural reforms in the areas of education, health, pensions, infrastructure, and labor markets to ensure equitable delivery of basic public service. Fourth, the CPS supports mitigation measures to shield poor people from major adverse impacts of the economic crisis. 73. As part of the analytical underpinnings of the DPL series, the Bank is drawing on the 2007 Poland Household Budget survey to update the profile of poverty and vulnerability and provide an incidence analysis of public expenditures in the social sectors. This will form the basis for an assessment of the social and poverty impact of the economic crisis, and of the effectiveness of government programs to mitigate the impact of the crisis on poor

TP

19PT For further details, please see Annexes B3 and B4

30

households. This analysis will be updated with the help of the 2008 Household Budget Survey which is expected to become available in September 2009.

F. Results framework

74. The envisaged Bank engagement is expected to support the achievement of key Government objectives. In addition to the general day-to-day policy dialogue, the envisaged lending and AAA program should be supportive of key Government objectives in various policy areas. The results framework largely reflects the results anticipated from the existing portfolio and those operations planned for the first year of the CPS (see Annex A1). However, the Bank program would be small in the context of Poland’s overall development program and spending and cannot be expected to have an independent and measurable contribution to broader outcomes. Nevertheless, the envisaged partnership and selected interventions within broader policy areas is seen as preferable to a potentially more narrowly focused and substantive engagement where outcomes perhaps could be more closely related to the Bank’s activities.

V. RISKS Economic 75. The medium-term macroeconomic scenario of slowing economic growth and moderating inflation is subject to further downside risks. While inflationary pressures have abated significantly with the recent global slowdown and tighter credit conditions as well as moderation of wage pressure, the recent depreciation of the zloty could rekindle inflationary pressures. Poland has one of the most solid financial systems in Europe, but the interbank market remains constrained due to lack of confidence. The authorities may need to respond with additional confidence-restoring and liquidity-enhancing measures. In the context of the euro adoption agenda which requires fiscal discipline, the supply side of the economy needs to be further stimulated through acceleration of structural reforms. 76. Poland’s external and financial vulnerability may be further affected by global and regional developments. Recent developments demonstrate the existing risk of contagion from other countries in the region, and access to external financing sources may become more difficult and more expensive. Entering the ERM2 during significant volatility on global financial markets poses risks for exchange rate stability over a minimum two-year period as required by the relevant Maastricht criterion. At the same time, there is risk of a misaligned EUR/PLN central parity in ERM2 and during the ultimate conversion rate from zloty into euro. On the other hand, the Government’s firm euro adoption plan and lends credibility to fiscal policy and may help preserve confidence in a very difficult external environment.

77. If these economic risks materialize and the crisis is longer or deeper than currently anticipated, there could be calls for the IFIs (including the Bank) to increase their funding. The Bank could do this either by augmenting the DPL series and/or with investment loans. This is likely to be possible financially, given the small size of Poland’s outstanding debt to IBRD, but would stretch existing staff and resources. Political 78. The projected deterioration of economic prospects may undermine social support to the Government and reduce its willingness to push for more radical reforms.

31

Reform momentum is already constrained by the risk of Presidential veto on new proposed legislation, in particular in the area of social services. In this context, there is a risk of general elections earlier than scheduled for fall 2011. This may be provoked, for example, by internal tensions in the governing PO and in the coalition if Prime Minister Tusk decides to run for President in 2010. The Government’s lack of constitutional majority in Parliament and elusive compromise with the opposition PiS, which demands a referendum on euro adoption, could complicate the euro adoption plan and aggravates risks related to the ERM2 transition period.

79. Public and political support for a significant reform agenda is often difficult. The Government has been making strong communication efforts to explain the need for reform and the global crisis has only heightened awareness of the need for reforms to remain competitive. If public and political pressures weaken the reform agenda, the DPL program may need to be scaled back. The Bank could continue with AAA and a lighter financing program. Institutional 80. Policy formulation and coordination in Poland has tended to be fragmented and technical and administrative capacity in some ministries remains weak. Aside from the forthcoming election years, elements of the heavy bureaucracy may also be opposing change. Absorption of the very large EU structural and cohesion funds and the organization of the UEFA Soccer Championship in 2012 will require additional capacity and efforts from public administration. In the absence of this, public investment would be unable to compensate for the projected slowdown in private investment, and weaker absorption of EU funds could also have political repercussions. 81. This is an on-going risk that is difficult to mitigate. However, capacity-building is very much part of the Bank’s agenda and weaknesses are likely to delay, rather than derail, the Bank’s program. 82. All the risks above are considered to be low-to-moderate in likelihood and impact.

VI. CONSULTATIONS WITH GOVERNMENT AND OTHER PARTNERS

83. The CPS design and implementation is informed by broad consultations. In addition to the ongoing dialogue with the Government, including on priorities for further cooperation, the Bank circulated the draft CPS to key government ministries for comments following the ROC meeting. Subsequently, consultations—based on a power-point presentation—were also held with Parliament representatives and other stakeholders, including civil society (the latter jointly with the Ministry of Finance). Further, web-based consultations were conducted. In parallel with the Bank-wide review, the draft CPS was also shared with the IMF and the EC for comments. Following Board discussion, the final multimedia CPS package would be posted on the web site. The final and endorsed CPS would be also presented in a press briefing organized jointly with the Ministry of Finance, and an op-ed would be prepared in one of the leading Polish dailies. Time permitting, the CPS would also be presented and discussed in the major Polish cities (Warsaw, Gdansk, Krakow, Poznan, Lodz) as part of the Bank’s regional outreach effort.

Annex A1

32

RESULTS FRAMEWORK

GOVERNMENT OBJECTIVES

CPS OBJECTIVES OUTCOMES AND OUTPUTS ANTICIPATED

(those in brackets can only be achieved if the associated WB

activity goes ahead)

WB INSTRUMENTS

CLIMATE CHANGE & ENERGY Comply with international and EU long-term policies on climate change mitigation and preserve energy security to households and enterprises Seek, elaborate and implement environment friendly solutions (e.g. low-emission, energy-efficient, material-saving production (National Reform Program for 2008-2011 – Innovative Economy Priority Measure 6) Using innovation in terms of environmental protection (National Reform Program for 2008-2011 – Innovative Economy Priority Measure 6) Improvement of the condition of the technical infrastructure, incl. protection against natural disasters, in particular against floods and their effects, incl. activities of a legal and organizational character (National Development Strategy 2007-2015 – Priority 2e)

Overarching objective: to assist the Government in the area of mitigation and adaptation of the Polish economy to the challenges of climate change

Integrated climate change strategy to minimize costs and maximize potential benefits, given various carbon mitigation scenarios Increased public and private sector investments in energy efficiency in buildings Poland participates in the system of international emissions trading under the Kyoto Protocol, implementation of “greening” programs supported by the revenues from the sale of assigned amount units (AAUs) Systems for flood/natural disaster insurance, preparedness and mitigation, spatial planning in flood plains. Protection of people and property in Odra River Basin against floods of 1997 magnitude by 2013

Climate Change Country Economic Memorandum for Poland (CEM) GEF Energy efficiency project Green Investment Scheme Odra River Basin Project

Annex A1

33

GOVERNMENT OBJECTIVES

CPS OBJECTIVES OUTCOMES AND OUTPUTS ANTICIPATED

(those in brackets can only be achieved if the associated WB

activity goes ahead)

WB INSTRUMENTS

DEREGULATION & DOING BUSINESS Provide favorable regulatory and institutional environment for entrepreneurship, innovation and investment (National Reform Program for 2008-2011 – Innovative Economy Priority Measure 1)

Overarching objective: to assist in improving business regulations in Poland and provide Government with global best practice in this area

New business regulations developed in line with global best practices. The cost of SME registration and start-up and of obtaining licenses is reduced by 20% to below PLN 10,000 by 2010.

Doing Business and Deregulation TA (cost-sharing) DPL program

PUBLIC SECTOR REFORM Implement task-based budgeting, in particular 3-year task-based planning (National Reform Program for 2008-2011 – Efficient Institutions Priority Measure 2) Improve public finance sector efficiency and public funds management (National Reform Program for 2008-2011 – Efficient Institutions Priority Measure 2); reduce fiscal deficit to enable a secure and sustainable fulfillment of the convergence criterion and Euro adoption in Poland by 2012 (as envisaged in the Convergence Programme) Develop modern public administration (National Reform Program for 2008-2011 – Efficient Institutions Priority Measure 1)

Overarching objective: to assist the Government in improving Public Finance Management systems

Increased effectiveness and efficiency of public spending through introduction of performance based budgeting Improved prioritization between various types of expenditure and greater control of public finances in the context of fiscal constraints imposed by Euro adoption plans (Improved administration efficiency and strengthened capacity of human resources to enhance social service delivery and business environment)

Performance Based Budgeting (TA at the central and sub-national level) DPL program Public Expenditure Review (ESW at the central and sub-national level) DPL program Modernization of public administration (including revenue collection) and civil service reform (AAA) [TBC]

Annex A1

34

GOVERNMENT OBJECTIVES

CPS OBJECTIVES OUTCOMES AND OUTPUTS ANTICIPATED

(those in brackets can only be achieved if the associated WB

activity goes ahead)

WB INSTRUMENTS

SOCIAL SECTOR REFORM EU Lisbon Agenda to make Poland a competitive knowledge-based economy with more and better jobs and greater social cohesion; National Action Plan for Employment 2009-11 Modernize the social security system (National Reform Program for 2008-2011 – Active Society Priority Measure 2), Strengthen educational outcomes and improve the responsiveness of the educational system to the changes in the job market, and achieve an efficient and accountable educational system (National Reform Program for 2008-2011 – Active Society Priority Measure 1) Introduce additional voluntary health insurance (National Reform Program for 2008-2011 – Active Society Priority Measure 6) Improve the management of the healthcare sector establishments and exercise control over the medical services quality (National Reform Program for 2008-2011 – Active Society Priority Measure 6) Improve the condition of social

Overarching objective: to help improve labor supply incentives and enhance labor market competitiveness, achieve efficient and accountable education system, improve efficiency in allocation and use of resources in the health sector

Labor markets and social protection Increase in employment/working age population ratio to 60% by 2012 and in labor force participation rate of population aged 55-64 to 33% by 2010 and in proportion of unemployed who receive job search assistance and vocational counseling to 30% by 2010. Policy options for the restructuring of farmers’ pension system; positive effect on public finance in the medium-term Education reform Successful implementation of higher education reform; better labor market outcomes of the youth Improved outcomes of student learning in Math, Science and Reading in PISA 2009 and increased participation rates in pre-primary and upper secondary education. Health reform (Improved efficiency of hospitals and rationalized service delivery network to allow eallocation of resources towards primary and preventive care.) (Debt of corporatized hospitals reduced to 7.5% of total annual revenues by December 2010.)

DPL program and TA focused on long-term unemployment, labor market exclusion through modern activation policies and cost-effective ALMP and improved coordination between employment and social assistance offices Modernization of social assistance systems (TA) - KRUS modeling tools DPL program and associated AAA program: Skills for the labor market (ESW); Responsive higher education institutions (TA) DPL program DPL program Hospital corporatization (TA) [TBC]

Annex A1

35

GOVERNMENT OBJECTIVES

CPS OBJECTIVES OUTCOMES AND OUTPUTS ANTICIPATED

(those in brackets can only be achieved if the associated WB

activity goes ahead)

WB INSTRUMENTS

infrastructure (National Development Strategy 2007-2015 – Priority 2b)

(Set of policy options for the reform of the current single health insurance system to enhance resource mobilization and improve efficiency in resource allocation.) Review of policy options for financing the system of long-term care.

Feasibility study of health insurance reform (ESW) [TBC] System of long-term care (TA and ESW) [TBC]

INFRASTRUCTURE DEVELOPMENT Provide transport and other infrastructure appropriate for the needs of modern economy (National Reform Program for 2008-2011 – Innovative Economy Priority Measure 4) Provide transport and other infrastructure appropriate for the needs of modern economy as well as favorable regulatory and institutional environment for entrepreneurship, innovation and investment (National Reform Program for 2008-2011 – Innovative Economy Priority Measure 1 and Measure 4) Improve the condition of technical infrastructure, incl. housing infrastructure (National Development Strategy 2007-2015 – Priority 2b)

Overarching objective: to provide support in developing and rehabilitating infrastructure to enhance private investment and productivity growth

Contribution to the strategy for transport sector development (incl. climate change agenda) (Improved transport infrastructure and road safety.) (Increased efficiency of transport and reduced negative impact on the environment.) (A system of strategic and operational planning and management program for development and rehabilitation of roads infrastructure; improved legal framework and institutional capacity to deal with infrastructure projects preparation, implementation and monitoring.) (Contribution to the development of system of high speed passenger railways in Poland, including technical, environmental, economic/financial aspects and potential involvement of private

Strategic Transport Sector Review (ESW) Transport Infrastructure Rehabilitation Loan [subject to renewed client interest and lending resource availability] Investments and rehabilitation programs in roads, railways and maritime sectors [subject to renewed client interest and lending resource availability] Strategic and Operational Planning (TA/FBS, central and sub-national level) Supporting concept development for High Speed Railways in Poland (TA/FBS)

Annex A1

36

GOVERNMENT OBJECTIVES

CPS OBJECTIVES OUTCOMES AND OUTPUTS ANTICIPATED

(those in brackets can only be achieved if the associated WB

activity goes ahead)

WB INSTRUMENTS

sector partners.) (Increased involvement of private sector partners in maintenance and development of infrastructure and provision of public sector services.) Improvements in the envisaged reforms to national program of social rental housing (so called “TBS Program”) that promote efficiency and access for low-income groups.

Development of Public-Private Partnership (PPP) enabling environment and good practices (TA/FBS, central and sub-national level) Social Housing Finance (TA, cost-sharing)

REGIONAL DEVELOPMENT Improve the condition of technical infrastructure (National Development Strategy 2007-2015 – Priority 2) Support to regional convergence of Eastern Poland as defined in NSRF 2007-13 Regional development and raising of the territorial cohesion (National Development Strategy 2007-2015 – Priority 6)

Overarching objective: to provide advisory, technical and financial assistance in supporting internal convergence, including financial assistance in the context of Eastern Poland Operational Program

Improved capital investment planning and debt management in major cities (Support for alleviation of urban infrastructure bottlenecks, incl. climate change agenda) Improved utilization of EU funds through capacity building and co-financing

• Improving understanding of trade-offs in regional policy

• More strategic allocation of EU funds

Subnational lending (Warsaw City and possibly other but less-developed cities) Subnational AAA Potential Credit Line Facility for Eastern Poland [subject to renewed client interest and lending resource availability] Policy dialogue and AAA (FBS):

• WDR 2009 discussions and follow-up activities

• Dialogue on NDS 2007-13 update • TA for M&E

Annex A2 Page 1 of 2

37

Poland at a glance 5/12/09

Europe & UpperKey Development Indicators Central middle

Poland Asia income(2008)

Population, mid-year (millions) 38.1 446 824Surface area ( thousand sq. km) .. 23,972 41,497Population growth (%) 0.0 0.2 0.7Urban population (% of total population) .. 64 75

GNI (Atlas method, US$ billions) 373.2 2,697 5,854GNI per capita (Atlas method, US$) 9,790 6,052 7,107GNI per capita (PPP, international $) 15,500 11,262 12,072

GDP growth (%) 4.9 6.9 5.8GDP per capita growth (%) 4.9 6.7 5.0

(most recent estimate, 2003–2008)

Poverty headcount ratio at $1.25 a day (PPP, %) <2 4 ..Poverty headcount ratio at $2.00 a day (PPP, %) <2 9 ..Life expectancy at birth (years) .. 70 71Infant mortality (per 1,000 live births) .. 21 21Child malnutr ition (% of children under 5) .. .. ..

Adult literacy, male (% of ages 15 and older) 100 99 95Adult literacy, female (% of ages 15 and older) 99 96 93Gross primary enrollment, male (% of age group) .. 98 112Gross primary enrollment, female (% of age group) .. 96 109

Access to an improved water source (% of population) .. 95 95Access to improved sanitation facilities (% of population) .. 89 83

Net Aid Flows 1980 1990 2000 2008 a

(US$ millions)Net ODA and official aid .. 1,320 1,396 1,524Top 3 donors ( in 2007): European Commission .. 289 838 1,101 France .. 2 197 197 Austria .. 27 124 83

Aid (% of GNI) .. 2.4 0.8 0.6Aid per capita (US$) .. 35 36 40

Long-Term Economic Trends

Consumer prices (annual % change) .. 70.3 10.1 4.2GDP implicit deflator (annual % change) .. 55.2 7.2 3.1

Exchange rate (annual average, local per US$) .. 0.9 4.3 2.4Terms of trade index (2000 = 100) .. 104 100 102

1980–90 1990–2000 2000–08

Population, mid-year (millions) 35.6 38.1 38.5 38.1 0.7 0.1 -0.1GDP (US$ millions) .. 58,976 171,276 526,923 .. 4.7 4.3

Agr iculture .. 8.3 5.0 4.2 .. 0.5 1.3Industry .. 50.1 31.7 30.9 .. 7.1 5.6 Manufacturing .. .. 18.5 17.0 .. 9.9 8.2Services .. 41.6 63.3 64.9 .. 5.1 4.0

Household final consumption expenditure .. 48.0 63.1 60.6 .. 5.2 3.7General gov't final consumption expenditure .. 19.3 18.5 17.9 .. 3.7 3.7Gross capital formation .. 25.6 24.8 25.0 .. 10.6 6.6

Exports of goods and services .. 28.6 27.1 39.5 .. 11.3 10.2Imports of goods and services .. 21.5 33.5 43.0 .. 16.7 9.3Gross savings .. 15.9 18.8 23.2

Note: F igures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available.a. Aid data are for 2007.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of to ta l population

Age distribution, 2007

� �

0

10

20

30

40

50

60

1990 1995 2000 2007

Poland Europe & Central Asia

Under-5 mortality rate (per 1,000)

-10-8-6-4-202468

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

Annex A2 Page 2 of 2

38

Poland

Balance of Payments and Trade 2000 2008

(US$ millions)Total merchandise exports ( fob) 31,729 165,647Total merchandise imports (cif) 49,023 195,906Net trade in goods and services -10,904 -19,371

Current account balance -10,343 -29,029 as a % of GDP -6.0 -5.5

Workers' remittances and compensation of employees (receipts) 1,726 10,496

Reserves, including gold 27,466 62,180

Central Government Finance

(% of GDP)Current revenue (including grants) 38.1 39.2 Tax revenue 19.8 22.8Current expenditure 38.2 37.8

Technology and Infrastructure 2000 2007Overall surplus/deficit -3.0 -3.9

Paved roads (% of total) 68.3 69.7Highest marginal tax rate (%) Fixed line and mobile phone Individual 40 40 subscribers (per 100 people) 46 136 Corporate 28 19 High technology exports

(% of manufactured exports) 3.3 3.8External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed 64,834 217,376 Agricultural land (% of land area) 60 52Total debt service 10,156 17,435 Forest area (% of land area) 30.6 ..Debt relief (HIPC, MDRI) – – Nationally protected areas (% of land area) 9.6 ..

Total debt (% of GDP) 37.9 41.3 Freshwater resources per capita (cu. meters) 1,402 1,406Total debt service (% of exports) .. .. Freshwater withdrawal (billion cubic meters) 16.2 ..

Foreign direct investment (net inflows) 9,343 19,198 CO2 emissions per capita (mt) 7.8 7.9Portfolio equity (net inflows) 447 -2,134

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 5.1 5.7

Energy use per capita (kg of oil equivalent) 2,325 2,562

World Bank Group portfolio 2000 2007

(US$ millions)

IBRD Total debt outstanding and disbursed 2,229 1,870

Disbursements 349 3 Principal repayments 199 261 Interest payments 122 89

IDA Total debt outstanding and disbursed – – Disbursements – –

Private Sector Development 2000 2008 Total debt service – –

Time required to start a business (days) – 31 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 18.8 Total disbursed and outstanding portfolio 111 46Time required to register property (days) – 197 of which IFC own account 91 46

Disbursements for IFC own account 8 0Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 21 10 Tax rates .. 57.5 Access to/cost of financing .. 50.7 MIGA

Gross exposure 2 0Stock market capitalization (% of GDP) 18.3 48.8 New guarantees 0 0Bank capital to asset ratio (%) 7.1 7.4

Note: F igures in italics are for years other than those specified. 2008 data are preliminary. 5/12/09.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Contro l of corruption

Rule of law

Regulatory qual ity

Poli tical stabi lity

Voice and accountabi lity

Country's percenti le rank (0- 100)higher values imply bet ter rat ings

2007

2000

Governance indicators, 2000 and 2007

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 2006IDA , 0 IMF, 0 Other mult i-

lateral, 750

Bilateral, 1615

Private, 152640

Short-term, 60365

�

US$ mi llions

Annex B2

39

As Of Date 2009-04-07

Indicator 2006 2007 2008 2009Portfolio AssessmentNumber of Projects Under Implementation a 10 8 7 4Average Implementation Period (years) b 2.9 3.0 3.4 3.1Percent of Problem Projects by Number a, c 0.0 25.0 14.3 50.0Percent of Problem Projects by Amount a, c 0.0 13.0 1.5 42.0Percent of Projects at Risk by Number a, d 0.0 25.0 14.3 50.0Percent of Projects at Risk by Amount a, d 0.0 13.0 1.5 42.0Disbursement Ratio (%) e 69.2 43.5 9.7 21.9Portfolio ManagementCPPR during the year (yes/no)Supervision Resources (total US$)Average Supervision (US$/project)

Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 40 8Proj Eval by OED by Amt (US$ millions) 4,404.3 1,020.8% of OED Projects Rated U or HU by Number 20.0 25.0% of OED Projects Rated U or HU by Amt 11.0 6.7

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

Selected Indicators* of Bank Portfolio Performance and ManagementCAS Annex B2 -

Annex B3 Page 1 of 2

40

Poland

As Of Date 4/7/2009

Proposed IBRD Lending Program a

Fiscal year Proj ID US$(M) Strategic Rewards b (H/M/L)

Implementation b Risks (H/M/L)

2009 DPL 2 1,250.0 H M/LSub-total 1,250.0

2010 Warsaw City SIL/Swap 500.0 M MPKO BP Credit Line 500.0 M MDPL3 1,250.0 H M/LSub-total 2,250.0

2011 City 2 250.0 M MClimate Change 1 300.0 H MSub-total 550.0

2012 City 3 150.0 M MClimate Change 2 300.0 H MSub-total 450.0

TOTAL 4,500.0

CAS Annex B3 - IBRD Program Summary

Annex B3 Page 2 of 2

41

Annex B3

Poland: IFC Investment Operations Program

2006 2007 2008 2009

Commitments (US$m)Gross 8470.00Net* 8470.00

Net Commitments by Sector (%)EQUITY 20,690LOAN 79,310Total 0 0 0 100,000

Net Commitments by Investment Instrument (%)Equity 20,690Loan 79,310Total 0 0 0 100,000

* IFC's Own Account only

Annex B4

42

Product Completion FY Cost (US$000) Audience a/ Objective b/

Recent completionsAnti-corruption Follow-up TA 2006 73.1 G/D/B KG/PSPublic Administration Reform TA 2006 24 G/B KG/PSTransition Brief 2006 56.2 G/B KG/PSSecond Generation PPP in Roads Sector 2006 50.4 G/D/B KG/PSNational Development Plans 2006 149 G/D/B KG/PD/PSFinancial Services Development Plan 2005-07 307.6 G/B KG/PSTechnical Assistance Dialogue 2007-08 94.8 G/B KG/PSOwnership Policy for SOEs II 2007 55.4 G/D/B KG/PSPerformance-Based Budgeting 2009 138.9 G/D/B KG/PS

Underway c/

Poznan Climate Change 2009 50 G/D/B KGDPL Education Reform TA 2009-10 142 G/B KG/PSMazowieckie Public Expenditure Review 2009-10 195 G/B KG/PSClimate Change CEM 2009-10 450 G/D/B/PD KG/PD/PSPER 2009-10 300 G/B KG/PS

Planned d/

DPL Health TA 2010 100 G/B KG/PSDPL Social Protection TA 2010 100 G/B KG/PSWarsaw City ESW 2010 300 G/D/B KG/PSTransport Policy Note 2010 100 G/D/B KG/PSCity 2/3 AAA 2011 300 G/D/B/PD KG/PSEnergy ESW 2011 100 G/D/B/PD KG/PSTransport/railways ESW 2011 100 G/B KG/PSCity 4/5/6 AAA 2012 300 G/D/B/PD KG/PS

FBSe/

Social Housing/Mortage (underway) 2009-10 150 G/B KG/PSMazowieckie Transport 2010 150 G/B KG/PSMinistry of Infrastructure 2010 250 G/B KG/PSMinistry of Economy 2010 250 G/B KG/PSMinistry of Regional Development 2010 100 G/B KG/PS

____________a. Government, donor, Bank, public dissemination.b. Knowledge generation, public debate, problem-solving.c. Some costs shown for these tasks are estimates.d. Costs shown fo r these tasks are estimates.e. Amounts shown for these tasks are overall costs of activities.

As of 4/7/2009

PolandSummary of Nonlending Services

Annex B5

43

Poland Social IndicatorsLatest single year Same region/income group

Europe & Upper-Central middle-

1980-85 1990-95 2001-07 Asia income

POPULATION Total populat ion, mid-year (millions) 37.2 38.6 38.1 445.1 822.9 Growth rate (% annual average for period) 0.9 0.2 -0.1 0.0 0.7Urban population (% of populat ion) 59.9 61.5 61.4 63.6 75.2Total fertility rate (births per woman) 2.3 1.6 1.3 1.6 2.0

POVERTY(% of population)Nat ional headcount index . . 23.8 . . .. .. Urban headcount index . . . . . . .. .. Rural headcount index . . . . . . .. ..

INCOMEGNI per capita (US$) . . 2,970 9,840 6,051 6,987Consumer price index (2000=100) 0 55 119 159 152Food price index (2000=100) 0 62 103 .. ..

INCOME/CONSUMPTION DISTRIBUTIONGini index 25.2 32.4 34.9 .. ..Lowest quintile (% of income or consumption) 9.8 6.5 7.4 .. ..Highest quintile (% of income or consumption) 35.0 39.1 42.5 .. ..

SOCIAL INDICATORSPublic expenditure Health (% of GDP) . . . . 4.3 4.1 3.6 Education (% of GDP) . . 5.2 5.5 4.6 4.7Net primary school enrollment rate(% of age group) Total . . 97 96 91 94 Male . . 97 96 92 94 Female . . 97 96 90 94Access to an improved water source(% of population) Total . . . . . . 95 95 Urban . . 100 100 99 98 Rural . . . . . . 88 83Immunization rate(% of children ages 12-23 months) Measles 92 96 99 97 94 DPT 94 96 99 95 96Child malnutrit ion (% under 5 years) . . . . . . .. ..Life expectancy at birth(years) Total 71 72 75 69 70 Male 67 68 71 64 67 Female 75 76 80 74 74Mortali ty Infant (per 1,000 live births) 19 14 6 23 22 Under 5 (per 1,000) 21 15 7 26 26 Adult (15-59) Male (per 1,000 population) 254 250 190 299 258 Female (per 1,000 population) 105 94 66 123 137 Maternal (modeled, per 100,000 live births) . . . . 8 44 97Births attended by skilled health staff (%) . . . . 100 95 94

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due tochange from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before oneyear of age or at any time before the survey.

World Development Indicators database, World Bank - 10 September 2008.

Annex B6 Page 1 of 2

44

Poland - Key Economic Indicators

EstimateIndicator 2005 2006 2007 2008 2009 2010 2011 2012 2013

National accounts (as % of GDP)Gross domestic producta 100 100 100 100 100 100 100 100 100 Agriculture 5 4 4 4 4 4 4 4 4 Industry 31 31 32 31 32 32 33 33 34 Services 65 65 64 65 64 63 63 62 62

Total Consumption 81 81 79 79 80 79 79 79 79Gross domestic fixed investment 18 20 22 22 23 24 25 26 27 Government investment 3 4 4 4 5 5 5 5 5 Private investment 15 16 17 18 19 19 20 21 22

Exports (GNFS)b 37 40 41 40 34 35 34 33 33Imports (GNFS) 38 42 44 43 38 38 38 38 39

Gross domestic savings 19 19 21 21 20 21 21 21 21Gross national savingsc 18 18 20 19 19 20 21 22 21

Memorandum itemsGross domestic product 303912 341670 424790 526923 405094 419374 442754 467437 493497(US$ million at current prices)GNI per capita (US$, Atlas method) 7270 8340 9790 11880 11810 11550 11260 11930 12640

Real annual growth rates (%, calculated from 02 prices) Gross domestic product at market prices 3.6 6.2 6.7 4.8 0.5 1.0 3.0 3.0 3.0 Gross Domestic Income 4.1 6.3 7.5 4.1 0.2 1.8 3.7 3.7 3.7

Real annual per capita growth rates (%, calculated from 02 prices) Gross domestic product at market prices 3.7 6.3 6.7 4.8 0.6 1.1 3.1 3.1 3.1 Total consumption 2.8 5.3 4.7 4.0 2.6 0.6 3.6 3.6 4.5 Private consumption 2.1 5.1 5.0 5.4 2.1 1.5 4.5 5.5 5.2

Balance of Payments (US$ millions) Exports (GNFS)b 112653 138060 174127 212735 183970 195232 202303 209851 217920 Merchandise FOB 96395 117468 145337 177278 143144 149425 155581 162194 169310 Imports (GNFS)b 114681 144330 186466 232106 204319 212161 226282 241308 255386 Merchandise FOB 99161 124474 162394 201655 172864 179625 191976 205135 217247 Resource balance -2028 -6270 -12339 -19371 -20349 -16930 -23979 -31457 -37466 Net current transfers 8183 10612 13651 14296 16000 16200 16300 17400 18500 Current account balance -3716 -9394 -20100 -29029 -23453 -20468 -24200 -30202 -34624

Net private foreign direct investment 6951 10727 17976 12951 6500 7500 8500 9500 10500 Long-term loans (net) 4059 -367 4627 26559 19339 13749 18328 24309 27492 Official -7514 -1976 -2533 -2125 -2125 -716 775 443 418 Private 11573 1609 7160 28684 21464 14465 17554 23866 27074 Other capital (net , incl. errors & ommissions) 841 1514 10534 -12445 -2800 200 200 200 200 Change in reservesd -8135 -2480 -13037 1964 415 -981 -2829 -3807 -3568

Memorandum itemsResource balance (% of GDP) -0.7 -1.8 -2.9 -3.7 -5.0 -4.0 -5.4 -6.7 -7.6Real annual growth rates ( YR02 prices) Merchandise exports (FOB) .. .. .. .. .. .. .. .. .. Primary .. .. .. .. .. .. .. .. .. Manufactures .. .. .. .. .. .. .. .. .. Merchandise imports (CIF) .. .. .. .. .. .. .. .. ..

(Continued)

Actual Projected

Annex B6 Page 2 of 2

45

Poland - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 2005 2006 2007 2008 2009 2010 2011 2012 2013Indicator

Public finance (as % of GDP at market prices) e

Current revenues 38.8 39.7 40.0 39.2 39.0 38.9 38.9 39.0 39.0 Current expenditures 39.0 39.0 37.3 37.8 38.9 38.6 38.0 36.8 36.3 Current account surplus (+) or deficit (-) -0.2 0.6 2.6 1.4 0.1 0.3 0.9 2.2 2.7 Capital expenditure 4.4 4.8 4.8 5.4 4.8 4.9 4.9 5.0 5.0 Foreign financing 1.5 0.3 -0.3 2.5 0.2 0.1 0.3 0.6 0.5

Monetary indicators M2/GDP 42.2 45.4 46.7 52.0 46.3 47.6 48.8 50.0 50.3 Growth of M2 (%) 12.6 15.9 14.2 20.2 -8.4 6.5 8.1 8.2 6.1 Private sector credit growth / 103.6 109.7 132.4 92.5 100.7 109.1 108.7 108.2 108.2 total credit growth (%) Price indices( YR02 =100) Merchandise export price index .. .. .. .. .. .. .. .. .. Merchandise import price index .. .. .. .. .. .. .. .. .. Merchandise terms of trade index .. .. .. .. .. .. .. .. ..

Real exchange rate (US$/LCU) f 133.3 136.0 141.8 155.9

Real interest rates Consumer price index (% change) 2.1 1.0 2.5 4.2 3.1 2.7 2.5 2.5 2.5 GDP deflator (% change) 2.6 1.5 3.9 3.1 2.4 2.5 2.5 2.5 2.5

a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources. e. Consolidated central Government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

.. .. .. .. ..

Annex B7

46

As Of Date 2009-04-07

Actual EstimatedIndicator 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total debt outstanding and 98821 125831 182940 217376 217376 239404 271067 304558 319752disbursed (TDO) (US$m)a

Net disbursements (US$m)a 327 -3105 16551 21691 21691 22029 31663 33491 15194

Total debt service (TDS) 16612 16898 20819 17550 17550 25558 22853 33294 42522(US$m)a

Debt and debt service indicators (%) TDO/XGSb 81.4 83.9 97.1 95.1 93.5 96.4 104.3 111.7 111.6 TDO/GDP 32.5 36.8 43.1 41.3 56.3 58.8 63.1 67.1 65.5 TDS/XGS 13.7 11.3 11.0 7.7 7.5 10.3 8.8 12.2 14.8 Concessional/TDO 1.4 0.9 0.4 0.2 0.1 0.1 0.0 0.0 0.0

IBRD exposure indicators (%) IBRD DS/public DS .. .. .. 5.8 5.8 3.8 4.6 8.8 4.6 Preferred creditor DS/public .. .. .. 6.2 6.2 4.6 6.3 11.6 7.2 DS (%)c

IBRD DS/XGS 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.1 IBRD TDO (US$m)d 1796 1961 1870 1776 4408 5922 6161 6415 6650 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 1 2 2 2 2 2 2 2 2 IDA TDO (US$m)d .. .. .. 0 0 0 0 0 0

IFC (US$m) Loans Equity and quasi-equity /c

MIGA MIGA guarantees (US$m)

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital.b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements.d. Includes present value of guarantees.e. Includes equity and quasi-equity types of both loan and equity instruments.

Projected

CAS Annex B7 - Key Exposure Indicators - Poland

Annex B8 Page 1 of 2

47

Closed Projects 45

IBRD/IDA *Total Disbursed (Active) 236.20 of which has been repaid 0.00Total Disbursed (Closed) 6,066.65 of which has been repaid 3,554.61Total Disbursed (Active + Closed) 6,302.85 of which has been repaid 3,554.61

Total Undisbursed (Active) 238.21Total Undisbursed (Closed) 0.34Total Undisbursed (Active + Closed) 238.55

Active Projects

Project ID Project Name Development Objectives

Implementation Progress Fiscal Year IBRD GRANT Cancel. Undisb.

P070246 ENERGY EFFICIENCY (GEF) MU MU 2005 11.0 2.4P086768 ODRA RIVER BASIN FLOOD PROT S MU 2007 184.0 168.4P065270 POST-ACC RUR SPPRT MS MS 2006 88.8 54.8P096214 ROAD MAINTENANCE & REHAB 3 S S 2006 180.2 15.0

TOTAL 453.0 11.0 240.7

Supervision Rating

Poland

Last PSR

As Of Date 2009-04-07

CAS Annex B8 -

Operations Portfolio (IBRD/IDA and Grants)

Original Amount in US$ Millions

Annex B8 Page 2 of 2

48

PolandCommitted and Disbursed Outstanding Investment Portfolio

As of 2009-03-31(In USD Millions)

Committed Disbursed Outstanding

FY Approval Company Loan Equity**Quasi Equity *GT/RM

Partici pant Loan Equity

**Quasi Equity *GT/RM

Partici pant

1997 Cpf 0,000 0,240 0,000 0,000 0,000 0,000 0,140 0,000 0,000 0,0000 Esco polska 0,000 0,020 0,000 0,000 0,000 0,000 0,020 0,000 0,000 0,0002009 Fundusz 4,530 1,110 0,000 0,000 0,000 2,340 0,000 0,000 0,000 0,0001994 Peters 0,220 0,000 0,000 0,000 0,000 0,220 0,000 0,000 0,000 0,0000 Schwarz group 33,510 0,000 0,000 0,000 0,000 33,510 0,000 0,000 0,000 0,000

Total Portfolio: 38040 1110 0 0 0 35850 0 0 0 0

* Denotes Guarantee and Risk Management Products.** Quasi Equity includes both loan and equity types.

B8 (IFC) for Poland

Annex C

49

CPS COMPLETION REPORT

I. Background

1. The Country Partnership Strategy (CPS) for Poland was designed to align the Bank’s program both with Poland’s development challenges and priorities as a new EU member. The CPS provided a broad and flexible framework for the World Bank to support Poland in a selective manner in an environment where the need for external borrowing was modest. The strategy took as its starting point Poland’s development priorities, including: i) high and sustained economic growth with the objective of reaching two-thirds of the EU average per capita income by 2013, ii) improved competitiveness of firms and regions, iii) recovery of employment, and (iv) strong social cohesion. These priorities and overall strategy were contained in Poland’s National Development Plan (NDP) 2004-06 and National Development Strategy (NDS) 2007-13. 2. The CPS set out a flexible framework to help the Government meet its objectives. Key elements of the CPS framework were:

(i) Strategic and demand driven work program consistent with the Government’s priorities: • Fiscal consolidation • Convergence/competitiveness • Employment and poverty reduction

(ii) Clear guidelines for engaging the Bank: • Demonstrated demand from Poland for Bank services • Significant policy or structural issues involved • Bank value added in terms of technical excellence and comparative advantage • Effective partnerships • Rapid response and simplification of procedures

(iii) A single lending case based on a conducive macroeconomic framework (iv) Open-ended duration of the CPS predicated on continued demand for Bank

services and existence of a conducive macroeconomic environment consistent with Poland’s convergence program under the EU’s Stability and Growth Pact.

II. Poland's Strategic Goals

3. At the time of the CPS, the Government’s overriding goal was for Poland to move towards convergence with the rest of the EU by reaching two-thirds of the EU’s per capita average income by 2013. The CPS was launched at the time that Poland had achieved its overriding goal of EU membership on May 1, 2004. The Government's post-accession development strategy was contained in its NDP 2004-2006, and in the NDS 2007-2013. The overriding objective of the strategy was to put the economy on a path of high and sustainable growth through improved competitiveness of firms and regions, to contribute to the recovery of employment, and promote strong social cohesion. The strategy laid out three challenges to be met:

• Convergence to European income levels: To achieve the stated aim of reaching two-thirds of per capita EU average income by 2013, the Government recognized that medium term convergence to European income levels would require sustained high growth averaging 4.5 percent based on strong competitiveness in European and world

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markets. This would entail continued structural reforms to: (a) improve the business environment, including broadening and deepening financial intermediation, initiating judicial system reform and deepening public administration reform, including being able to use the available resources from the EU effectively and efficiently; (b) improve the energy and transport infrastructure: and (c) develop the knowledge economy, including initiating tertiary education reform.

• Fiscal consolidation and meeting the requirements for euro adoption: The

Government's medium-term macroeconomic plans were centered on meeting the conditions for euro adoption in 2009. Poland’s convergence program in 2004 envisaged a reduction of the general Government deficit below 3 percent of GDP by 2007, while maintaining public debt below 60 percent of GDP in line with its EU convergence program in the context of the Stability and Growth Pact (SGP).TPF

20FPT In

addition, ambitious reforms were foreseen for sectors that had been a burden to the budget such as coal mining, railways and health, as well as reforms of social transfers aimed at increasing labor market incentives (notably the farmers' pension system and disability pensions). Public expenditure management systems and tax administration also required further improvement.

• Increasing employment and reducing poverty: In Poland, there is a strong

correlation between family income levels and employment status of heads of household. Employment creation remained sluggish at the start of the CPS period, and was indeed lower than it had been in the past when it had offset the considerable job destruction associated with economic transition. As a result, unemployment was high and long-term unemployment was increasing, leading to growing pockets of long-term poverty and social exclusion. To stimulate new job creation, labor market reforms were needed and small and medium enterprise (SME) development needed to be revitalized. Large inequalities in education and skills were a key barrier to citizens' capacity to find and hold a job and, thus, to staying out of poverty. There was also a need to examine the system of social transfers for better targeting, as evidence suggested that in some circumstances social transfers had created a disincentive to more active participation in the labor market. Growing pockets of long-term unemployment and poverty also had to be dealt with, requiring actions to increase the level of social inclusion.

III. Poland’s Progress towards its Strategic Goals

4. Poland has successfully managed its integration into the European Union (EU). Macroeconomic performance through most of the CPS period has been favorable, with strong output growth and a rapid decline in unemployment combined with low inflation and external imbalances. Meanwhile, buoyant tax revenues have led to a decline in the fiscal deficit. Growth has been built on a vibrant private sector which now accounts for three-quarters of the economy. High growth in domestic consumption reflects the rapid increase in living standards for most Polish citizens. Likewise, poverty levels have decreased considerably over recent years. Poland has weathered the financial crisis that hit the region in 2008 relatively well, but is not immune from the effects of the global economic downturn, which could reverse some of the gains. TP

20PT The main objective of the SGP is to enforce discipline in the Euro zone as a means to support price stability

and sustainable growth.

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5. While Poland’s reform momentum slowed down following EU accession, it has nonetheless met or exceeded most of its strategic goals set out in the CPS:

• Growth and income convergence with the EU accelerated over the CPS period, but growth has suffered a setback due to the global economic crisis and sustaining strong growth will require renewed reforms: Economic growth averaged 5.5 percent in 2004-2007, but will dip sharply in 2009 due to the global crisis. As a result, Poland’s GDP per capita at purchasing power parity reached 55.5 percent of the average for the EU-27 in 2008. The strong growth from 2004-07 reflects to a significant extent a rebound from the economic slowdown in the earlier part of the decade combined with a favorable external environment until the recent global financial crisis hit. A continued rapid reduction of the income gap with the EU would require sustained high growth based on strong productivity increases and higher employment and investment rates. This in turn would require a renewed focus on reform which had slowed down in recent years: (i) public finance reforms to improve the quality and efficiency of public finances, (ii) structural reforms to improve the general investment climate and support restructuring of low-productivity sectors, and (iii) labor supply mobilization to further raise low employment rates, and improve skills of the workforce.

• Robust growth was accompanied by broadly sound macroeconomic

fundamentals. In line with global tendencies, from late 2007 inflation accelerated above the inflation target (of 2.5 +/-1 percent), driven largely by cost factors (higher food and energy prices) but also rising unit labor costs resulting from the sharp labor market tightening. In response, interest rates were hiked gradually from spring 2007, while accompanying zloty appreciation made monetary conditions even more restrictive. Although the external current account deficit widened further to 5.5 percent of GDP in 2008, it remained moderate by historical and regional standards and was almost fully financed by net foreign direct investment (FDI). Nonetheless, the foreign-debt-to-GDP ratio increased to around 57 percent of GDP in 2008, partly because of the significant zloty depreciation in late 2008.

• The fiscal stance improved significantly from 2005 to 2007, which helped Poland

move closer towards Euro adoption by 2012. The general government deficit, including the costs of pension reform (around 2 percent of GDP per annum), amounted to 2 percent of GDP in 2007 compared to 3.8 percent of GDP in 2006 and 4.3 percent of GDP in 2005. This impressive outcome was achieved due to strong revenues and tight spending control, but this achievement may be at risk given the sharp slowing of demand for Polish exports in Western Europe. Due to strong nominal GDP growth, zloty appreciation, and a primary fiscal surplus of around 0.5 percent of GDP, the public debt-to-GDP ratio declined from over 47 percent of GDP in 2005-2006 to 45 percent of GDP in 2007. At the end of 2007, Poland met the reference values for deficit and debt and fulfilled the inflation and interest rate criteria of the Maastricht Treaty. In June 2008 the EC recommended closing Poland’s Excessive Deficit Procedure (imposed in 2004) on the basis of Poland’s updated Convergence Program and confirmed that the deficit was reduced below the reference value of 3 percent of GDP in a credible and sustainable manner. In late 2008, the Government announced a roadmap to euro adoption in 2012, which implied joining the ERM-2 around the middle of 2009. However, the economic crisis pushed Poland towards a larger fiscal deficit than envisaged. According to the Spring 2009 Fiscal Notification to Eurostat, the fiscal deficit in 2008 reached 3.9 percent of GDP and is

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projected to increase further to 4.6 percent of GDP in 2009. Because of a deficit higher than the Maastricht threshold of 3 percent of GDP, in May 2009 the European Commission issued a report initiating the re-opening of the Excessive Deficit Procedure. In addition, due to excessive exchange rate volatility and lack of political consensus to amend the Constitution, the plans for ERM-2 entry in the first half of 2009 were abandoned, which may delay euro adoption.

• Employment conditions improved considerably. Strong growth created new jobs

during 2004-07. As a result of rising labor demand, and to a lesser degree external migration, the unemployment rate fell from about 20 percent in 2003 to 7 percent in 2008. In tandem, the incidence of long-term unemployment has recently declined significantly. The growth in employment was accompanied by strong growth in real wages, which averaged 3 percent per year over the last 5 years, accelerating in the last two years and outpacing productivity gains. But despite the considerable progress in reducing unemployment, the employment/population ratio remains one of the lowest in the EU (57 percent against the EU average of about 65 percent) and well below the Lisbon target of 70 percent primarily due to the low labor force participation of older workers (ages 55 to 64). Anecdotal evidence suggests that some migration flows to Western Europe are now declining or reversing.

• The improvement in labor market conditions had a positive effect on poverty. As

a result, the official poverty rate dropped by almost 5 percentage points in just three years: from the peak of 19.2 percent in 2004 to 14.6 percent in 2007, with the trend continuing in 2008, although these gains may be at risk with a temporary rise in poverty anticipated in 2009 in particular among those in export industries as a result of the global economic crisis. Poland’s tax and benefit system have also played a strong redistributive role, thereby helping reduce income inequality considerably (the Gini coefficient is 0.329 – comparable with that of UK, Estonia or Greece). Poverty is concentrated in rural areas and among the long-term unemployed.

Poland: Selected Economic Indicators, 2004-2010

as percent of GDP unless otherwise indicated

2004 2005 2006 2007 2008e 2009 2010Real GDP (% change) 5.3 3.6 6.2 6.7 4.9 -0.7 1.3Consumer prices (% change) 3.5 2.1 1.0 2.5 4.2 2.1 2.6Current account deficit -4.0 -1.2 -2.7 -4.7 -5.5 -4.5 -3.9Gross external debt 42.0 44.1 46.6 48.0 56.6Fiscal balance* -5.7 -4.3 -3.9 -1.9 -3.9 -4.6 n.a.Public debt* 45.7 47.1 47.7 44.9 47.1 51.0 n.a.Employment rate (%, 15-64) 51.7 52.8 54.5 57.0 59.2Unemployment rate (%, 15-64) 19.4 18.0 14.0 9.7 7.2Poverty incidence (%)** 19.2 18.0 15.1 14.6 na

IMF WEO Apr09

*) Including the cost of pension reform of around 2% of GDP per annum. 2009 forecasts come from the Spring 2009 Fiscal Notification to Eurostat. **) Official poverty line (refers to people eligible for cash social assistance benefits). Note: Recently, the CSO revised the 2008 growth rate to 4.9% from 4.8% but because detailed national accounts data were available in Annex B6 we use the growth rate before the revision. Source: Eurostat, Central Statistical Office, World Bank, Ministry of Labor and Social Affairs, Ministry of Finance.

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IV. CPS Objectives 6. The CPS set out a flexible framework to help the Government meet its objectives. In view of Poland’s middle income status, the CPS did not set out a pre-determined program of Bank activities but rather a flexible partnership arrangement in which Bank activities in Poland would be strategic and demand driven focusing on areas which were considered consistent with Poland’s development priorities as laid out in its National Development Plan, and where (i) significant policy or structural issues were involved; (ii) the Bank could add value in terms of its technical excellence and comparative advantage; and (iii) effective partnerships could be maintained with internal and external partners, including EU, EIB, EBRD and CEDB. The Bank would support Poland with a full set of lending and non-lending instruments with Bank activities determined on an annual basis and consistent with the Polish planning and budgeting cycle. Flexibility of the CPS framework would permit rapid response to emerging demand, with the intent to simplify project designs, shorten preparation times, and simplify and align World Bank procedures with Polish and EU practices in line with the World Bank’s initiative on the use of country systems. The CPS framework was designed to remain in force as long as Bank services were in demand and the macroeconomic environment was consistent with Poland’s convergence program under the EU’s Stability and Growth Pact. 7. The CPS was to support three broad strategic priorities (the three CPS pillars) laid out in Poland’s National Development Plan:

• Fiscal Consolidation: Promote fiscal adjustment and reverse negative debt dynamics through restructuring of public expenditures;

• Convergence/Competitiveness: Promote convergence with the EU through an improved investment climate and enhanced competitiveness; and

• Employment and Poverty: Reduce poverty, encourage social inclusion, and bring employment closer to the Lisbon targets.

8. Overall, the priorities and framework for engagement laid out in the CPS have been appropriate. The strategic priorities supported by the CPS have continued to be relevant as demonstrated by the reform areas which continue to be important for securing Poland’s future high growth. The flexible engagement framework of the CPS was also appropriate and consistent with the Bank’s new approach in such well-performing middle income countries (MICs). The following sections on CPS outcomes and results (section V below) and Bank performance (section VI below) will ascertain whether CPS implementation followed these principles of engagement.

V. CPS Outcomes /Results

Major factors affecting CPS implementation and outcomes 9. Poland’s recurring political changes and related policy changes had a significant, adverse impact on CPS implementation. The CPS period saw three different governments with diverse interests in economic policy. Each of the governments was based on coalitions with narrow parliamentary majorities, which in one case led to early elections. Within 6 months of the CPS launch a significant political shift took place following general elections, with a coalition led by conservative Law and Justice (PiS) party taking over from the coalition led by the left-leaning Democratic Left Alliance (SDL). The PiS-led coalition collapsed in the summer of 2007 which led to early elections and the emergence of another

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coalition led by the Civic Platform (PO) party and Prime Minister Donald Tusk. All these political changes made for a challenging turbulent political background and lack of continuity for CPS implementation.

10. Frequent changes in Government also led to rapid turnover of key counterparts which further affected continuity and ownership of Bank activities. Besides frequent policy reversals, there was a frequent turnover of counterparts – ministers, undersecretaries and even non-political staff. On various occasions, activities were started based on understandings reached with one set of counterparts which had to be suspended after preparation had advanced as a new set of interlocutors had moved in. This turned out to be a problem in many of the AAA activities undertaken.

11. In addition, reform implementation slowed down as a result of reform fatigue following Poland’s recent EU accession. As noted, Poland has seen robust economic performance in recent years. This was, in part, due to a natural catch-up after Poland’s slow growth earlier in the decade, the positive effects of its recent EU membership, and a buoyant external environment. Nonetheless, Poland still has a considerable reform agenda in completing privatization, improving the business environment, enhancing the quality and efficiency of public finances, developing infrastructure, and addressing emerging bottlenecks in the labor market. The current Government has restarted reforms in a number of these areas, which has opened the way for renewed Bank engagement in the form of a programmatic policy loan (DPL) in support of public finance management, employment and private sector development (FY09). 12. Finally, EU accession also brought access to new financing sources, including sizeable EU grants, and market finance. These likely contributed to decline in interest in IBRD loans. Interest in Bank loans re-surfaced with the recognition of the significant analytical support associated with IBRD projects.

CPS Outcomes

13. There has been progress in achieving the outcomes foreseen under each of the CPS Pillars. These outcomes have been assessed against the intermediate indicators included in the CPS Results Matrix under each of three CPS Pillars (Fiscal Consolidation, Convergence/Competitiveness, and Employment and Poverty).

Pillar 1: Fiscal Consolidation

(a) Consolidate public finances for entry into ERM-2 14. There is broad consensus on the need to reform public finances in order for Poland to enter the ERM-2 and subsequently adopt the Euro. The Government has announced its intention to join ERM-2 in 2009 and prepare for euro adoption in 2012. Until 2009, Poland had made sustained progress towards meeting the requirements to enter the ERM-2: the budget deficit was reduced from 5.7 percent of GDP in 2004 to 3.9 percent of GDP in 2008 and public debt increased slightly from around 46 percent of GDP in 2004 to 47 percent of GDP in 2008, safely below the Maastricht Treaty reference value of 60 percent of GDP. The Bank’s AAA work in this area (the EU8 Fiscal Policy work in 2005 - 2008 and the Regional Economic Reports) has contributed both to the analytic underpinning of these issues and to broader public understanding and debate. However, the effects of the financial

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crisis and economic downturn in Europe, and automatic stabilizes operating outside of the state budget, pushed the fiscal deficit above the 3 percent of GDP threshold in 2008.

(b) Eliminate state support for reform of selected sectors and ensure their sustainability

15. There has been substantial progress in eliminating the need for future state support to reform selected sectors and ensure their financial sustainability. Specifically, the hard coal mining companies have been operating within a hard budget constraint, have met all of their obligations, including taxes and social benefits, have been profitable in 2005 and 2006, and all further restructuring costs are to be paid by the coal companies and not by the state budget. The restructuring of the railway sector, while incomplete, has also made it possible to progress toward a sustainable level of budget support for socially necessary services, primarily as a result of devolving the responsibility for regional passenger services to regional governments and capping subsidies at their 2005 levels. In the health sector, the Act on Health Care Services Financed from Public Funds (2004) is being implemented. Work is ongoing to redefine a basic benefit package to be delivered within the existing health insurance resources. 16. The Hard Coal Restructuring Program 2004-06 (2004-06 Program) was largely implemented with the support of two Bank loans. While progress was significant, the specific targets were not fully met in terms of reduction of employment (from 136,500 to 119,000 instead of the target of 117,000) and capacity (from 102.6 million tons per year (tpy) to 97 million tpy instead of 94.8 tpy), mainly as a result of the buoyant coal market, which allowed companies to be profitable and meet all obligations, including taxes and social benefits without budget support. The planned privatization was delayed due to the lack of consensus with social partners but important preparatory steps were taken. While much has been achieved, the largest company, Kompania Weglowa (KW) remains financially vulnerable to declines in coal prices and made losses in the fourth quarter of 2006 due to falling export prices. The Bank’s AAA work for the Hard Coal Sector has provided inputs into the Government’s Action Plan for the sector for 2007-15. It addresses areas not fully completed under the 2004-06 Program. It assumes that long-term viability of the sector will be sustained by mining companies taking actions to: (i) control costs to keep production costs below the coal price; (ii) adjust the production capacity of coal to domestic market needs and economically justified export markets; (iii) sustain financial liquidity and secure credit worthiness of the companies; and (iv) identify new uses for coal and new markets for coal. In addition, the plan calls for limited privatization of coal mining companies through public listing on the Warsaw Stock Exchange. Such privatization would help strengthen the governance of the mining companies and provide access to new sources of capital. Privatized coal companies would enhance energy security for Poland just as they do for other major producers such as Australia, South Africa, Canada and the United States.

17. In the health sector, the Bank supported the Ministry of Health to implement the Act on Health Care Services Financed from Public Funds (2004), and more broadly, to improve the efficiency and effectiveness of public expenditures on health care, enhancing the quality of health services, and increase the regulatory, planning and policy-making capacity of the MOH. A “business plan” to map out a strategy for achieving the above objectives was prepared, which has been used by MOH to: (i) pass a law for implementing a comprehensive emergency care program; (ii) start the design of a basic benefit package of health services for financing through the public health insurance system; and (iii) develop a drug policy comparable to EU standards and practices. Resources for implementing these reforms will

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come from the State and the National Health Insurance Fund (NFZ). No external financing is required: resources were included in the budget for 2007 and provisions have been made in the budgets for 2008 and 2009. In addition, the Bank supported the NFZ in conducting a needs assessment to strengthen the health management information system and build analytical capacity at the NFZ. The NFZ plans to finance the implementation of next steps suggested in these assessments. The Government also actively participated in Bank-organized workshops in Slovenia on private-public collaboration in health (December 2006), and in Hungary on pharmaceutical governance (February 2007).

Pillar 2: Convergence/Competitiveness

(a) Improve the business climate 18. There has been an improvement in the business environment since 2005 despite a slight deterioration in Poland’s ranking from 74 to 76 in the ease of doing business as reported in the 2009 Doing Business Report. This deterioration has resulted from other countries reforming their business environments more aggressively than Poland rather than from a deterioration of the environment in Poland. In fact, there has been steady progress in business confidence in Poland as evidenced by increasing levels of both domestic and foreign investment. Despite these positive signs, a dynamic business climate requires continuous policy refinement and reform. The Bank’s ROSC assessments of accounting and auditing, and corporate governance, and the report on Obstacles to Contract Enforcement identified important prospective reforms which are incorporated in the strategic documents prepared by the Government for implementation by 2009. In particular they include: (i) the reform of business, land and collateral registries, and of legal information system; (ii) automation of registers and courtrooms; and (iii) enhancing the skills of the workforce, including judges, Ministry officials, court staff etc., to improve the productivity and performance of public officials. Various development partners such as the EU, Norway, and the World Bank are expected to assist the Government finalize its approach and implement the reforms. 19. The financial sector is performing relatively well amid the global turmoil, but several developmental challenges remain and these have been exacerbated lately. The sector has been expanding steadily over the last five to six years, primarily due to the pension and insurance sectors, but banking has also grown and its indicators are generally positive, although some risks are emerging related to a large increase in foreign currency lending. The level of financial intermediation has been increasing, but it remains lower than the regional average. In addition, much of the growth in bank credit is attributable to housing finance, which has grown faster than overall bank finance, suggesting a slowdown in corporate financing. A weak information environment may be a cause of the slowdown in corporate lending, in particular as it relates to the operation of credit information bureaus. Several of the Bank’s recommendations in this area provided in a series of financial sector policy notes and an update of the FSAP have been taken on board by the Government and are now being implemented. The unification of supervisory functions under the Financial Supervision Authority in 2007 was a significant step forward. 20. There has been limited progress in improving the effectiveness, efficiency and friendliness of the public environmental financing system to the private capital market. While the targets for the share of private funds in the sector operational program for environment were increased in the final Government document compared to the 2005 proposal, achieving these targets will require further efforts and concrete public financial products to attract private financial institutions to environmental investments. Bank efforts to

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work with the Government to strengthen the public environmental financing system in the 2007-2013 EU financing period were limited to a diagnostic assessment of Poland’s progress towards meeting environmental commitments of the National Environmental Policy and the EU Accession Treaty obligations, and an analysis of environmental and water management priorities of structural instruments of the NDS 2007-2013.

(b) Improve infrastructure 21. There have been continued improvements in infrastructure, in particular in road and rail transport, but also in the energy sector and in flood prevention. In the road sector, there has been some progress, although slower than initially anticipated, in the modernization of the national road agency (GDDKiA), including the preparation of a modernization action plan, implementation of which will require a clear Government commitment. GDDKiA is now able to develop rolling multi-annual expenditure programs, which are based on objective, economic criteria; the annual programs for 2006 and 2007 have been generated largely on the basis of these criteria. The design of a Management Information System has been completed and is now being implemented with expected completion in 2009. There has also been continuous and measurable improvement in the quality of the national road network. The percentage of roads in good condition has increased from 45.5 percent in 2004 to 54.9 percent in 2007, and the backlog of roads in bad condition declined from 25.8 percent in 2004 to 22.5 percent in 2007. The yearly program of rehabilitation of roads in the national network has been implemented in full during calendar years 2004-2006 with the support of the Bank through its series of three Road Maintenance and Rehabilitation loans pooling resources with the state budget together with parallel financing from the European Investment Bank (EIB). The use of these resources has been closely linked to progress in the modernization and capacity building activities supported by the Bank as described above. 22. Progress in the railway sector has been mixed. The restructuring of the national railway company (PKP Group) has not been fully implemented, and although there have been improvements in labor productivity and finances of the railway sector, several challenges remain to ensure the financial sustainability of the sector. Reforms supported by a Bank loan that closed in December 2005 helped improve labor productivity by reducing staffing levels from 190,000 to 145,000, and splitting the previous monolithic company into a number of separate businesses within a holding structure. However, the assets have not yet been fully allocated and transferred to the different companies, and their outstanding debt has not been fully waived or restructured. Policy dialogue continued under the Bank’s Roads II loan and focused on regional passenger services, preparatory work for the privatization of cargo services and the development of economic plans for the rehabilitation of transport infrastructure. Responsibility for financing and subsidizing regional passenger services was devolved to regional self-governments contributing to a change from a loss of just over PLN 2 billion in 2004 to a profit of PLN 18 million in 2007, still below the expectations at the start of the restructuring process. Standards and required levels of passenger service have not yet been finalized; leaving room for further improvement in this area. Contracts on the standards and levels of service have not yet been finalized; this includes performance contracts between the holding and subsidiary companies and between the holding company and the Government. Consequently, there is no clear agreement on future infrastructure standards, quality of service, strategy for financing the backlog of maintenance and reduction of operating costs. There has been no concrete progress on privatization, which was largely a result of strong trade union resistance and insufficient political impetus. The latest strategy paper for the railway sector adopted by the

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Government in 2007 and currently under implementation aims to resolve gradually most of the outstanding issues. 23. Improvements were made in improving Poland’s seaport and maritime infrastructure. Polish ports are handling approximately 30 percent of total foreign trade, so the current governmental strategy or seaports infrastructure development, adopted in 2007, aims at further improvement in competitiveness of the Polish ports through their modernization and development with approximately Euro 700 million earmarked for their development until 2013. As part of a Port Sector Modernization Program that began in 1996 and focused on institutional reform and improved connections with land transportation networks, the Bank supported a second phase during this CPS period with an investment loan focusing on the Szczecin-Swinoujscie port complex and seaway. The loan aimed to improve port capacity to handle container traffic and to clarify and consolidate the division of roles and responsibilities between public port authorities and private port operators. Successful civil works were undertaken to reinforce the embankment of the Piastowski canal, which significantly improved navigational safety by sheltering vessels from strong, irregular currents; rebuild the breakwaters to prevent deterioration of the channel; provide navigation lights on breakwater heads to improve traffic safety; slope protection along the banks of the Katowice Peninsula and construction of new berthing facilities on Grabowski Island. Two civil works activities that were not completed: (i) the containment facility, and (ii) unfinished works on Katowicki Peninsula. Traffic cargo and container traffic increased, although this may be due, in part, to strong global growth. In addition, the project provided significant technical assistance to the seaway authorities in environmentally safe disposal methods for contaminants. Finally the project facilitated the concession agreement that has established a private operator in Szczecin port. 24. The program for the prevention of floods in the Odra River Basin has been finalized with technical support under the Bank supported Emergency Flood Recovery project which was completed in 2005 and is now being implemented. The EUR 505 million flood prevention program will be financed with resources from the Government of Poland, EU Cohesion Funds, the Council of Europe Development Bank and a Euro 140 million World Bank loan approved in March 2007. The program aims to eliminate the risk of flooding, loss of life and damage to property for a population of more than 2.5 million people in towns and rural settlements in three provinces in the Lower Silesia region. The project aim will be achieved through the construction of infrastructure as well as continued institutional strengthening aimed at better preparedness for emergencies through improvements in flood forecasting and management. The Bank is currently providing support on the resettlement plan in relation to the Raciborz dry polder. 25. In the energy sector, the Government is still working within the general framework of the “Poland Energy Policy Until 2025.” It has adopted a specific “Program for the Power Sector” which maps out the way ahead in opening the electricity market according to the EC Electricity Directive. Some progress has been achieved in transferring the transmission system assets to an independent transmission system operator but there is scope for improving the regulatory framework to create more competition and protect consumer interests. The Bank stands ready to support the Government in the implementation of this Program. Another concern is that progress on implementing energy efficiency measures remains slow and that grant funds for energy efficiency in public sector buildings (especially structural funds) are used inefficiently with little leveraging of private sector finance. The Bank's Krakow Energy Efficiency Project has demonstrated a replicable model

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of combining grant funds with commercial finance through Energy Service Companies (ESCOs).

(c) Develop the knowledge economy 26. Since 2004, there has been sustained progress in developing the Knowledge Economy in Poland. Legislation on an Innovation Fund with Government and EU financing has been enacted (embodying the concept proposed in the Bank’s Knowledge Economy Assessment (KEA)) to provide grants to innovating firms. A Capital Fund (similar to the one proposed in the KEA) has been established to provide seed capital, and legislation is being considered to alter the incentives for state owned research institutes by providing a VAT rebate when revenues from the commercial sector exceed 50 percent. The Government has also adopted a strategy for Life Long Learning, one of the education sector reforms proposed in the KEA. EU accession has driven the liberalization of the ICT sector, along with product and labor markets.

Pillar 3: Employment and Poverty

(a) Support employment creation 27. After years of stagnation and even negative growth, employment started to increase in 2005 and especially in 2006 with total employment (14.67 million) reaching its highest level in the decade. Overall, employment increased by 600,000 net new jobs since the end of 2004, mainly as a result of robust economic growth and increasing investment. However, the employment rate is still one of the lowest in the EU. Increasing employment will continue to be one of Poland’s critical challenges. This issue has featured prominently in the Bank’s AAA work: it was raised in the regional study on internal labor mobility (FY06) and earlier in several special topics of the Quarterly/Regular Economic Reports (labor taxation - April 2005, sustainability of pension systems - October 2005, sources of economic growth - February 2006, public finances - May 2006, international migration – September 2006), EU8 cross-country fiscal studies (higher education – FY 2005, vocational education and social assistance – FY 2006), and the informal policy note for the new Government (autumn 2005). Bank studies supported the public debate on impediments affecting weak labor market performance in Poland and the labor tax wedge was reduced. Further adjustments of the social security system are anticipated in the DPL loan series.

(b) Increase level of social inclusion 28. Along with gradually declining unemployment and poverty, social exclusion also shows a declining trend, although not at the same pace. Progress is being made in increasing delivery of social services geared towards promoting social inclusion in 500 least developed communities through the implementation of the Bank-financed Post Accession Rural Support Project (PARSP). Local social integration strategies have been completed and 4,606 contracts for the delivery of social services have been signed and are now being implemented. The project has been praised by local officials and civil society activists for its innovative approach and impact in mobilizing local communities for social integration.

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VI. Bank Performance

a) Strategic Relevance, Impact 29. As noted, the CPS framework and overall priorities were broadly appropriate. The three overall CPS priorities – fiscal consolidation, convergence/competitiveness, and employment and poverty – have continued to be relevant to the development challenges faced by Poland. These priorities also match the broad areas where the Bank could expect to provide continued value added to Poland’s development agenda. The flexible nature of the CPS, with Bank activities determined as part of annual business plans agreed with the Government, also underscored the demand orientation of the Bank’s involvement with an advanced middle income country and helped address the lack of continuity in an uncertain political environment by allowing for changes in the Bank program during CPS implementation.

30. But CPS implementation fell short in terms of its strategic relevance, overall coherence and impact. On the lending side, the Bank focused its involvement on a number of niche areas where it had developed its reputation for technical excellence and had strong connections with counterpart institutions. As a result, Bank lending continued in road transport and flood protection, social support in rural areas as follow-up to the earlier rural development lending, and final involvement in the coal mining sector based on the Bank’s long standing involvement. The AAA program in turn was rather piecemeal with limited connections to the lending program. It lacked core or flagship products such as a Public Expenditure and Institutional Review (PEIR), Living Standards Assessment, and Knowledge Economy Assessment undertaken in the previous CAS. While there were important activities clustered around a set of financial sector activities (a series of policy notes, FSAP update), sector policy dialogue (education, health, railways, energy, legal system), and ROSCs (corporate governance, accounting and auditing, insolvency and creditor rights), they had limited impact on the policy debate and only partially supported the overall CPS strategic framework. As noted also by a QAG reviewTPF

21FPT, which included a review of six AAA activities

implemented under the CPS, the AAA program was rather opportunistic and not adequately strategized upfront. While the internal quality of the AAA work was generally considered to be of high standard, QAG felt that the Bank’s comparative advantage in carrying out certain activities was not always apparent. It also gave low ratings for both coherence and integration, and likely impact of the AAA program.

31. The weak strategic orientation of CPS implementation reflected the nature of the Bank’s dialogue in Poland which lacked a strong anchor and coordination on Government side. The Bank’s dialogue was largely bottom-up and built on the strong connections it had built with selected ministries and agencies. For much of the CPS period, the Ministry of Finance showed limited interest in cooperating with the Bank as it was ambivalent about Bank lending in Poland in view of its improved access to market finance and the ample availability of EU grant funds. In the absence of another coordination point for Bank involvement, the Bank built its activities around connections and demand from selected counterpart agencies.

32. The recent re-engagement of the Bank with the new Government has resulted in a more strategic approach around a set of core policy areas. At the center of this dialogue has been a broad understanding with the Prime Minister’s Office and MOF on the nature of TP

21PT QAG Review carried out in FY06/07

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the Bank’s future involvement in support of key policy areas closely linked to Poland’s future growth and convergence agenda. This has resulted in recent agreement on an integrated program of policy lending and AAA focused on improvements in public finance management, employment, and private sector development.

b) Quality of Bank Services 33. In tandem with Poland’s increased access to external finance, the Bank’s lending portfolio has reduced over the CPS period. During the period, four new lending projects were approved as foreseen at the time of the CPS while eight projects closed. As a result, the lending portfolio (before the recent approval of the DPL) fell from 13 projects for a total net commitment of about $1.4 billion in FY05 to 7 projects with total commitment of $734 million in FY09. Until the recent approval of the Public Finance Management, Employment and Private Sector Development DPL, the lending portfolio in Poland was declining and entirely made up of investment projects with a strong infrastructure orientation built around a series of roads rehabilitation projects, as well as railways, flood emergency/protection, rural development, and two coal sector operations (social mitigation and mine closure). The roads projects used a sector-wide (SWAp) design which allowed for quick disbursement of Bank funds in support of the Government budget for road rehabilitation and maintenance and which was extended as part of the two roads projects approved during the CPS period.

34. The quality of the lending portfolio has been mixed. As shown in the table below, despite a declining portfolio both the number of problem projects and the commitments at risk of active projects in the portfolio has increased over the CPS period. In addition, IEG rated the outcomes of two of the eight closed projects as marginally unsatisfactory (geothermal district heating and environment, and coal mine closure). Sustainability of outcomes was considered ‘likely’ for six operations, and for the other two (hard coal social mitigation and coal mine closure) IEG found that there was moderate and significant risk to development outcome. With one exception (the geothermal project), Bank performance was considered satisfactory. The earlier strong disbursement performance also weakened over the CPS period as the quick disbursing roads projects came to an end and the more recent projects (post-accession rural support, Odra flood protection) did not pick up the disbursement pace. Somewhat surprisingly in view of Poland’s advanced status, the portfolio has suffered from a number of implementation problems which have resulted in delays and weaker than expected outcomes. These involve institutional weaknesses, including slow establishment of project implementation organizations, excessive bureaucracy in decision making, turnover of project staff, and inter-agency problems.

Poland: Investment Loan Portfolio Indicators, FY05-09

FY05 FY06 FY07 FY08 FY09P

b/P

No. Projects Under Implementation P

a/P 13 13 11 8 7

Net Comm Amt ($ mln) 1,374.4 1,504.5 1,318.2 816.4 734.5 # Problem Projects 1 0 2 1 2 Comm At Risk ($ mln) 5.5 0.0 99.8 11.0 195.0 % Problem Projects 7.7 0.0 18.2 11.1 28.6 % Proactivity 100 - 50 50 % Realism 100 - 100.0 100.0 100.0 Disbursement ($ mln) 414 201.3 163 32.7 177

Disbursement Ratio (%) 82.6 69.2 43.5 9.7 21.9

P

a/P Includes projects that have closed during the FY.

P

bP/ Does not include US$1,250 million DPL.

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35. Despite the rather weak strategic orientation and coherence of the AAA program noted above, the quality of individual AAA activities has generally been good. Despite an overall reduced involvement in Poland, the Bank continues to have a high reputation for its knowledge and analytical work. The QAG AAA review undertaken in FY06/07 for activities undertaken during FY02-06 (including six activities during the CPS period) rated the overall internal quality of the products sampled as satisfactory, including for the quality of analysis and of conclusions and recommendations of the individual products. Participation, consultation and dissemination efforts were seen as a particularly strong element of the Bank’s AAA activities in Poland. There was considerable involvement by Polish counterparts, academics, institutes and local consultants. Dissemination in many cases involved workshops and conferences, involvement of the media, and translation into Polish language. But as mentioned, the rapid turnover of counterparts in the Polish administration diminished the ownership and impact of the Bank’s AAA activities. Under these circumstances arguably even more should have been done to publicly disseminate the Bank’s work and to involve non-governmental partners, as much of the analysis and recommendations has a shelf life that exceeds the tenure of a particular government. Overall, QAG assigned a moderately satisfactory rating for the AAA activities it reviewed. QAG’s conclusions on the quality of Bank’s AAA in Poland continue to be relevant for activities undertaken in FY07-08 given the nature of the much reduced AAA output in these years. On a positive note, mention should be made of the considerable impact and visibility of the Bank’s regional economic studies, particularly the ongoing EU8+2 Quarterly Economic Reports and the series of EU8 Fiscal Policy Studies undertaken in 2005, 2006 and 2007, which addressed key areas relevant to improving fiscal management in Poland and the other new EU members. Each of these reports received broad public attention in Poland and helped maintain the good name of the Bank in terms of its analytical work and regional/global knowledge.

c) Delivery of Bank Services 36. Most of the Bank activities foreseen for FY05-06 as part of the flexible CPS framework were undertaken, although some AAA activities were suspended given changes in counterparts and Government priorities. All four of the new lending projects envisaged in the CPS (Roads maintenance and rehabilitation II and III, Post-accession rural support, and Odra river basin flood protection) were prepared, approved and launched, albeit with some delays. Total new lending commitments during FY05-07 exceeded CPS expectations (actual commitments of US$709.5 million equivalent as compared with the $620-680 million range foreseen in the CPS). Similarly, most of the AAA activities envisaged for FY05-06 were undertaken although some were suspended given the change of counterparts following the changes of government in 2005 and 2006. A few significant additional AAA activities were undertaken in FY06 beyond those foreseen in the CPS, including an FSAP Update, a Country Financial Accountability Assessment (CFAA), and a Transition Brief for the then new Government outlining Poland’s key policy challenges and possible role of the Bank. Attachments 2 and 3 show details of the lending and non-lending activities included in the CPS and their actual status, together with any additional activities carried out. 37. But beyond FY06, new Bank activities were much reduced until a renewed engagement with the new Government took shape in FY08-09. During FY06-07, Bank involvement was reduced to monitoring the portfolio of ongoing projects and a few AAA activities which built on the Bank’s previous involvement (see Annex 2 for details). In tandem, the quarterly Regional Economic Reports and regional fiscal studies kept up the

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visibility of the Bank’s analytical work in Poland. Only with engagement of the new Government starting in early 2008 did a new program of Bank activities start to emerge which is now being launched, centered around a Programmatic Policy Loan and related AAA activities in public finance management, labor markets and employment, pensions and social assistance, private sector development, healthcare and education sector reform. 38. Work is now underway to develop AAA services under reimbursable arrangements to respond to demands for more specialized work or demands which exceed the program foreseen in the CPS. Government interest for these services includes such areas as implementation of the power market program, housing rental policy, ownership policies for SOEs, and performance budgeting. These reimbursable arrangements are particularly relevant for development of a new line of Bank AAA services at the sub-national level. Such sub-national business has considerable promise in Poland and initial engagement with a number of regions and municipalities has shown the potential for future Bank involvement on reimbursable basis.

d) Country dialogue 39. As noted, the Bank’s country dialogue in Poland was problematic given the frequent changes in government and lack of coordination of Bank activities on the Polish side. While for much of the CPS period the Ministry of Finance showed limited interest in both Bank analytical work and financing given availability of other sources of funds, the Bank continued its engagement with selected ministries and agencies with which it had developed strong relations in the past. This led to a rather opportunistic, bottom-up approach in formulating the Bank’s role and activities in Poland. The flexible CPS framework with Bank activities determined as part of annual business plans to be agreed with Government was an appropriate approach in the case of Poland but could not be fully implemented given the lack of a clear coordination point for Bank activities. The overriding attention of the administration to meeting the needs of the EU following EU membership contributed to the difficulties in engaging the Government.

VII. Overall Assessment and Lessons 40. The CPS was designed and implemented in a challenging country context. On the whole, Poland performed well during the period of CPS design and implementation. It had just achieved its overriding objective of EU membership in May 2004. Economic growth accelerated to the 6 percent per year range aided by a stable macroeconomic framework and favorable external conditions. This helped accelerate implementation of Poland’s overriding goal of moving towards income convergence with the EU. High unemployment was sharply reduced and poverty fell during the period. EU membership also facilitated Poland’s access to ample external funds which reduced the interest in Bank financing. At the same time, frequent changes in government officials contributed to a slowdown in Poland’s reform momentum. With much of the administration’s attention focused on meeting the needs of the EU and its institutions, and in the absence of a clear statement of the Bank’s value-added vis-à-vis other external partners, the Government’s interest in a continued strategic engagement with the Bank was limited for most of the CPS period. 41. In this context, the design of the CPS was generally appropriate. It set up a more flexible, demand-driven arrangement around a broad set of strategic themes: fiscal consolidation, convergence/competitiveness, and employment and poverty. These priorities also match the areas where the Bank could expect to provide continued value added to

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Poland’s development agenda. The flexible nature of the CPS, with Bank activities determined as part of annual business plans agreed with the Government, was appropriate for the engagement with an advanced MIC and helped address the lack of continuity in an uncertain political environment by allowing for changes in the Bank program during CPS implementation. 42. But CPS implementation was mixed with insufficient strategic focus and cohesion. The Bank focused its continued involvement on a number of niche areas where it had developed its reputation for technical excellence and had strong connections with counterpart institutions. But without an anchor in the MOF, the AAA program was rather piecemeal, lacked core products and had only limited impact on the domestic policy debate. In the absence of a more strategic engagement with Poland the Bank may have continued too long in a fairly traditional country relationship based on a mix of investment lending and ad hoc AAA activities rather than moving to a more selective knowledge partnership.

43. The recent re-engagement of the Bank with Poland has resulted in a more strategic approach around a set of core policy areas. At the center of this dialogue has been a broad understanding with MOF and the Prime Minister’s Office on the nature of the Bank’s future involvement in support of key policy areas closely linked to Poland’s growth and convergence agenda. This has resulted in recent agreement on an integrated program of policy lending and AAA focused on improvements in public finance management, employment, and private sector development.

Lessons learned: • Establish a flexible framework of activities that can be scaled up or down

according to client interest: o Establish a strategic and cohesive program of Bank activities that is not

wholly dependent upon one counterpart or one instrument; o Maintain a core set of Economic and Sector work (ESW) and diagnostic

products as a basis for scaling up or developing new activities; o Be prepared to scale down or disengage if the Bank’s involvement is

perceived to lack strategic focus or impact and switch gradually to a knowledge-based partnership through reimbursement agreements.

• Define the Bank’s role and value added:

o Establish clearly the Bank’s role and value-added vis-à-vis other external partners and funding sources such as the EU, European Investment Bank (EIB), EBRD and OECD;

o Practice selectivity in Bank involvement in terms of areas of involvement and modalities of support, focusing on the knowledge agenda;

o Test Bank involvement against the criteria defined as areas of Bank value-added, strategic relevance and impact.

• Manage political transitions:

o Seek continuity of dialogue by developing relations at technical levels of the civil service;

o Maintain contacts across the political spectrum and with strategic non-Government partners and sub-national entities;

o To the extent possible, align CPS cycles around electoral cycles.

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Annexes:

1. CPS Results Matrix 2. Lending: Planned versus Actual 3. Analytical & Advisory Activities: Planned versus Actual

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Poland CPS Results Matrix – FY05-07

Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

A. Fiscal Consolidation (Pillar 1) Consolidate public finances for entry into ERM-2.

Consensus on key elements of public finance reform.

Sustained progress towards reduction of general government deficit and evolution of public debt in line with convergence program for entry into ERM-2 (deficit below 3% of GDP and debt below 60% of GDP).

Sustained progress towards fulfillment of the Maastricht criteria related to public finances: - Fiscal deficit fell from 5.7% of GDP in 2004 to 2.0% of GDP in 2007 before rising to 3.9% of GDP in 2008. - Public debt fell from 45.7% of GDP in 2004 to 44.9% of GDP in 2007 before increasing to 47.1 % of GDP in 2008.

Lending: None. AAA: - EU8 Cross-country Public Finance Reform. - EU8 Quarterly Economic Reports. - Country Financial Accountability Assessment (CFAA), 2004 – 2006. - CGE model of Poland's economy - including simulations of the labor market effects of key structural fiscal policy reforms, initiated in 2004. - TA on Performance-Based Budgeting: Co-organization of international conference in November 2007.

Eliminate the need for future state support to reform selected sectors and ensure their financial sustainability, including public and private funding.

Viable coal sector that operates without budget support, meets all obligations, including taxes and social benefits, and is largely privatized. Viable and competitive railway sector which

Implementation of Hard Coal Restructuring Program 2004-2006. Implementation of Restructuring and Privatization Strategy

Program largely implemented. - 2 out of 3 uneconomic mines were closed. - Environmental Management Plans for the two liquidated mines were prepared but not implemented. - Mines showed higher labor productivity and adherence to hard budget constraints. - Steps towards opening up the sector to full competition and private sector participation. - Labor restructuring successfully continued with PKP staffing levels reduced as targeted, resulting in significant cost savings.

Lending: - Hard Coal Mine Closure Project. AAA: - Hard Coal Sector Dialogue. - Health Reform Implementation Dialogue. - Railway Reform Implementation Policy Dialogue. - Ownership Policy for SOEs. - FSAP Update. - Transition Brief. - Anti-corruption Update.

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

operates at a sustainable level of budget support only for socially necessary services, and is largely privatized. Health service delivery as required by law within

of PKP Group. Implementation of the Act on Health Care Services Financed

- Financial restructuring largely implemented. - The financial situation of PKP and associated companies improved but not as envisaged at appraisal. - Enterprise profitability as measured by the working ratio improved steadily. - Establishment of necessary legal and regulatory framework for more commercial and private railway operations has progressed with continuous increase in private sector market share in railway freight transport. - Second stage of restructuring of regional passenger services undertaken in 2008 by passing ownership over the respective company to regional self-governments. - No progress in privatization, with privatization of key state owned railway companies postponed until 2010. - Government compensation for social services was restored and maintained. - Systemic financial support to infrastructure provided through budget support (based on three-year agreement with railway company) and creation of the Railway Fund carved out from the Roads Fund, financed from road charges included in fuel price. - Supply of railway services has improved but was lower than target. - Slow increase in passenger and freight traffic noted in 2005-2007. - Hospital restructuring resulted in deficit reduction in hospitals. - Hospital payment reform is being implemented

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

established contributions and without further accumulation of debts.

from Public Funds (2004).

gradually. - Health insurance reform has been discussed by different stakeholders but not implemented.

B. Convergence/Competitiveness (Pillar 2) Improve the business climate.

Increased stakeholder awareness of importance of a good business climate on the competitiveness of the economy. Greater ease of firm entry and exit.

Improvement in perception of private sector about business climate. Reduction in the average number of days to start a new business, and to enforce contracts through the courts from the current level of 1,000 days. Better access to finance through broadening and deepening of financial intermediation.

Although the topic has been intensively debated (under Kluska Package, Szejnfeld Package, Parliamentary Committee Friendly State), Poland has not improved its rank in Doing Business report in recent years. No specific targets established in umber of days needed to start a new business; 31 days in 2008 (31 days in 2005). No specific targets established in average number of days needed to enforce contracts through courts; 830 days in 2008 (1000 days in 2005).

Lending: None. AAA: - IDF Accounting and Auditing reform - ROSC updates (corporate governance and accounting & auditing modules). - Influence of the legal system on the financial market in Poland National Development Plan 2007-13. - Financial Services Development. - Public Administration Improvement Program. - Poland – Contract Enforcement Study. - National Development Plan 2007-2013 Policy Dialogue.

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

Increased stakeholder awareness of the impact of an efficient public sector on business climate.

Improved environmental effectiveness and economic efficiency of the public environmental financing system and greater leveraging of private finance for environmental projects.

Public environmental financing system requires further improvement of effectiveness, efficiency and friendliness to private capital market.

Improve infrastructure.

Continued development of a coherent road expenditure program with an adequate maintenance-investment balance to meet the country’s needs.

Updated rolling multi-year expenditure program elaborated on the basis of economic criteria. GDDKiA Management Information System adopted and implemented. Improvement of quality in existing national road network and reduction of backlog of roads in bad condition.

Multi-year rolling expenditure program elaborated on the basis of economic criteria in place. - Better planning and coordination of rehabilitation works. - Implementation of computer-based information system started and was continued, although process was slower than foreseen due to system complexities and changes of top management. Baseline: <37%. Increased share of roads in acceptable conditions reaching the level of 54.9% (2007).

Lending: Road Rehabilitation & Maintenance II Road Rehabilitation & maintenance III Odra River Basin Flood Prevention AAA: - PPPs for roads. - Initiation of the work on Climate Change CEM.

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

Viable and competitive railway sector which operates at a sustainable level of budget support only for socially necessary services, and is largely privatized. Improved flood protection in the Odra River Basin. Increased energy efficiency on supply and demand sides. Improved competition in energy market, energy security and regional energy trade.

Implementation of Restructuring and Privatization Strategy of PKP Group. Implementation of Odra River Basin flood prevention program Implementation of “Poland Energy Policy Until 2025” program.

(See Pillar 1.) Program approved and financing negotiated in December 2006, including USD 184 m from the Bank. Resettlement and land & property acquisition in Raciborz reservoir areas began by implementing agencies. Poland has still to take significant steps to implement the National Energy Efficiency Action Plan (NEEAP) as part of requirement to reduce energy consumption by 9% from present level by 2016. It is relevant to note that a major discussion is related to the general burden sharing in the EU in relation to the 20/20 by 2020 decision which could be very expensive for Poland since they are very heavily reliant on coal. Poland has finished unbundling of electricity sector entities and the result is in accordance with the guidelines determined by the European Commission.

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

Develop Knowledge Economy.

Improved linkages between tertiary education and requirements of the labor market in the new knowledge economy.

Adoption of proposed Higher Education legislation linked to law on Science Financing from Oct. 2004.

Legislation on an Innovation Fund with Government and EU financing has been enacted (embodying the concept proposed in the WB’s Knowledge Economy Assessment –KEA) to provide grants to innovating firms. A Capital Fund (similar to the one proposed in the KEA) has been established to provide seed capital, and legislation is being considered to alter the incentives for state owned research institutes by providing a VAT rebate when revenues from the commercial sector exceed 50 percent. The Government has also adopted a strategy for Life Long Learning, one of the education sector reforms proposed in the KEA. EU accession has driven liberalization of the ICT sector, along with that of product and labor markets. Implemented reform of secondary education, by which general secondary education is strengthened and vocational education is modernized, streamlined and better aligned with needs of industry and the labor market.

Lending: None. AAA: - EU8 cross-country public finance reform, chapter on financing of higher education - Technical Assistance to Ministry of Education and Ministry on Higher Education focused on higher education reform, world-class higher education institutions, and use of PISA results for policy-making in basic education.

C. Employment and Poverty (Pillar 3) Support employment creation.

Increased dialogue on issues related to fostering job creation and enhancing labor market adaptability.

Implementation of strategies to foster job creation through improving the investment climate and enhancing labor market adaptability in accordance with the (revised) Lisbon

Employment rate (aged 15-64, LFS) has increased from 51.7% in 2004 (13.50 million) to 60.0% in the 3Q 2008 (15.75 million). Two million new jobs within four years were created, primarily as a result of strong economic growth and increasing investment. In 2007-2008, payroll taxes were lowered by 7 percentage points. The unemployment rate fell from 19.0% in 2004 to 7.0 in 2008.

Lending: See Programmatic Policy Loan under Pillar 1. AAA: - EU8 cross-country labor market CGE model building - EU8 quarterly economic reports, including Special Topic on Labor

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Development Challenges

Outcomes Influenced by WB Program

Intermediate Indicators to

Track Progress

Progress Against Indicators Related Bank Activities

agenda targets.

Markets in EU10+Cro. - Technical Assistance to Ministry of Labor on labor market reforms.

Increase level of social inclusion.

Increased level of social inclusion.

Increased social inclusion service delivery by 30% in 400-500 least developed gminas (communities).

Significant front-loading of training and capacity building activities has taken place; 27 regional consultants have been recruited to improve service; social inclusion index is being conducted.

Lending: Post accession rural support loan. AAA: EU8 social assistance report.

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Poland: Planned and Actual Deliveries, FY05-09

A. Lending Deliveries

FY CPS Plans US$mln Actual US$mlnFY05 Hard Coal Mine Closure 1/ 100.0 Hard Coal Mine Closure 1/ 126.0 Road Maintenance & Rehab. II 130.5 Road Maintenance & Rehab. II 130.5 Subtotal FY05 230.5 Subtotal FY05 256.5 FY06 Road Maintenance & Rehab III 195.0 Road Maintenance & Rehab III 180.2 Post-Accession Rural Support 65.0 Post-Accession Rural Support 88.8 Odra River Basin Flood

Protection 130-190

Subtotal FY06 390-450 Subtotal FY06 269.0 FY07 None Odra River Basin Flood

Protection 184.0

Subtotal FY07 184.0 FY08 None None - FY09 None Development Policy Loan

(DPL) 1,250.0

Subtotal FY09 1,250.0 Total FY05-09 620.5-680.5 Total FY05-09 1,859.5 1/ Approved on July 1, 2004, prior to the CPS. The operation was included in the previous CAS

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74

B. Non-Lending Deliveries, FY05-08

(excluding Regional Studies)

FY CPS Plans Actual FY05 Corporate Governance ROSC Update Actual, FY05

Accounting & Auditing ROSC Update Actual, FY05 Financial Services Development (Policy

Notes) Actual FY06

Influence of the Legal System on the Financial Market

Actual FY06; Converted to: Barriers to Contract Enforcement

Additional Actual Products: Education Policy TA

FY05-06 Health Reform Implementation Dialogue

Actual, FY05

Railways Reform Implementation Dialogue

Actual, FY05

Public Administration Reform TA Actual, FY06 Policy Dialogue on National

Development Plan 2007-13 Actual, FY06

Second Generation PPP in Roads Actual, FY06 CGE Model Building Actual, FY0x Public Environmental Financing Dropped (work suspended in FY06) Energy Policy Dialogue Dropped IDF Accounting and Auditing Reform Actual, FY05-08

FY06 Renewable Energy Dropped Additional Actual Products: FSAP Update Transition Brief Anti-corruption Update Country Financial Accountability

Assessment (CFAA) Directions in Regional Policy

FY07 None Ownership Policy for SOEs Hard Coal Sector Dialogue

FY08 None Performance Based Budgeting Conference

Insolvency and Creditor Rights ROSC