The World Bank's Strategy in Bulgaria: 2007-2009

Public Disclosure Authorized
Document o f
The World Bank
FOR OFFICIAL USE ONLY
Report No. 36146-BG

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
AND
INTERNATIONAL FINANCE CORPORATION
COUNTRY PARTNERSHIP STRATEGY

FOR THE
REPUBLIC OF BULGARIA
FOR THE PERIOD FY07-FY09
May 16,2006
South Central Europe Country Unit

Europe and Central Asia Region
InternationalFinance Corporation
Southern Europe and Central Asia Department
This document has restricted distribution and may be used by recipients only in the performance o f
their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
The date of the last Country Assistance Strategy Report was May 31,2002.
CURRENCY EQUIVALENTS
(Exchange Rate as of March 30,2006)
Currency Unit = Bulgarian Lev (BGN)

US$= 1.616920 BGN
GOVERNMENT’S FISCAL YEAR:

(January 1 -December 31)
WEIGHTS AND MEASURES

Metric System
ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activity IF1 Internationalfinancial institution

APL Adaptable Program Loan ILO InternationalLabor Organization
BGN Bulgarian Lev IMF InternationalMonetary Fund
BNB BulgarianNational Bank JIM Joint Inclusion Memorandum
CAE Country Assistance Evaluation JPR Joint Portfolio Review
CAS Country Assistance Strategy MDG Millennium Development Goals
CBA Currency Board Arrangement M&E Monitoring and evaluation
CEEC Central and Eastern European Countries MIC Middle Income Country
CEM Country Economic Memorandum MIGA Multilateral Investment Guarantee Agency
CFAA Country Financial Accountability Assessment MoF Ministry o f Finance
CPAR Country Procurement Assessment Report MTHS Multi-Topic Household Survey
CPS Country Partnership Strategy NEK National Electricity Company
DPL Development Policy Loan NGO Non-governmental organization
EBRD European Bank for Reconstructionand Development NSP National Strategic Plan
EC European Commission NSRF National Strategic Reference Framework
ECA Europe and Central Asia OP Operational Program
EIB European Investment Bank OED Operations Evaluation Department
EU European Union PAL Programmatic Adjustment Loan
EU-8 EU Member States as of May 1, 2004, PBA Programmatic Based Approach
excluding Malta and Cyprus PEIR Public Expenditure and InstitutionalReview
EU-15 EU Member States prior to May 1,2004 PFPR Public Finance Policy Review
EU-25 EU Member States as of May 1,2004 PIU Project Implementation Unit
FDI Foreign direct investment PPP Public Private Partnership
FIAS Foreign Investment Advisory Service PPS Purchasing Power Standard
FSAP Financial Sector Assessment Program QAG Quality Assurance Group
GDI Gross Domestic Investment R&D Research and Development
GDFI Gross Domestic Fixed Investment SBA Stand-By Arrangement
GDP Gross Domestic Product SEE South Eastern Europe
GEF Global Environment Facility SDR Special Drawing Rights
GNI Gross National Income SME Small and medium enterprises
HD Human Development TA Technical assistance
HIV/AIDS Human Immunodeficiency Virus/Acquired TTFSE Trade & Transport Facilitation for SE Europe
Immunodeficiency Syndrome UK United Kingdom
IBRD International Bank for Reconstruction and Development UNDP United Nations Development Program
IFA Institutional Fiduciary Assessment USAID United States Agency for International Development
IFC International Finance Corporation USD United States dollar
WBI World Bank Institute
IBRD IFC
Vice President: Shigeo Katsu Acting Vice President, Operations: Declan Duff
Country Director: Anand K. Seth Director: Shahbaz Mavaddat
Task Team Leader: Oscar de Bruyn Kops Task Leader: Gjergi Konda
BULGARIA COUNTRY PARTNERSHIP STRATEGY
CONTENTS
Executive Summary .......................................................................................... i
I. Introduction ........................................................................................................................... 1
I1. Country Context ........... ......................................................... ..................................... 1

A . Political Developments........................................................................................................ 1
B. Economic Developments..................................................................................................... 2
C. Developments in Poverty Reduction, Gender and MDGs ................................................... 5
.
I11 Government Priorities and Development Challenges
. . . ........................................................
8
A. Government Priorities .......................................................................................................... 8
B. Key Challenges for Successful EU Integration ................................................................... 8
(i) Raising productivity and employment for sustaining high private sector led growth ....11
(ii)Improving governance and strengthening institutions.................................................... 13
(iii)Strengthening fiscal sustainability and absorption o f EU funds..................................... 16
(iv) Poverty reduction and social inclusion ........................................................................... 19
.
I V Past World Bank Group Assistance and Lessons Learned............................................. 19
V . Proposed World Bank-Bulgaria Partnership. FY2007-2009........................................... 22

A. Rationale for Future Partnership........................................................................................ 22
B. Implications o f Client Survey Feedback for the CPS ........................................................ 23
C. Strategic Priorities for the CPS .......................................................................................... 24
D. Outline of Initial Bank Program ........................................................................................ 25
E. Bank Support for Strategic Priorities................................................................................. 26
F. Lending Principles ............................................................................................................. 29
G. IFC and M I G A Support for the CPS ................................................................................. 31
H. Partnerships ....................................................................................................................... 32
I. CPS Results Monitoring .................................................................................................... 34
.
V I Creditworthiness and Risk Management .......................................................................... 34
BOXES
Box 1: Bulgaria - Who are the Poor? .............................................................................................. 6

Box 2: Bulgaria’s Progress Toward the MDGs............................................................................... 7
Box 3: National Strategic Reference Framework 2007-20 13 ....................................................... ..9
Box 4: Corruption has reduced but remains a concern.................................................................. 15
FIGURES
Figure 1: Bulgaria: Stability and Growth ........................................................................................ 3

Figure 2: Bulgaria and CEEC: Progress in Structural Reforms, 1999-2004 ................................... 4
Figure 3: Selected Governance Indicators for Bulgaria and EU-8, 2004 ...................................... 14
..
Figure 4: External oebt Composition ............................................................................................ 35
TABLES
Table 1: Summary o f EU Financial Support for Bulgaria, 2007-2009 ......................................... 18

Table 2: Proposed Bank Lending and AAA Program, FY07-09 ................................................... 26
Table 3: CPS Strategic Priorities and Bank Lending & AAA Instruments ................................... 27
Table 4: Policy Performance Indicators for Bank Lending Engagement ...................................... 30
Table 5: Partnerships in Addressing Bulgaria’s Development Challenges .................................. .33
Table 6: IBRD Exposure Indicators for Bulgaria, 2002-2009....................................................... 35
ANNEXES
Annex 1 Results Matrix

Annex A2 Bulgaria at a glance
Annex B2 Selected Indicators o f Bank Portfolio Performance and Management
Annex B3 Bank Group Program Summary
IFC and M I G A Program
Annex B4 Summary o f Non-lending Services
Annex B5 Social Indicators
Annex B6 Key Economic Indicators
Annex B7 Key Exposure Indicators
Annex B8 Status o f Bank Group Operations (Operations Portfolio)
Statement o f IFC’s Weld and Disbursed Portfolio
Annex C CAS Completion Report
Executive Summary
(i) This three-year Country Partnership Strategy builds on Bulgaria’s considerable

achievements over the last eight years which have brought it to the threshold o f EU
accession. Following a difficult transition which culminated in a severe financial and social
crisis in 1996-97, Bulgaria established macroeconomic stability and accelerated structural
reforms. Fiscal discipline was introduced and debt brought well within Maastricht criteria. Most
non-infrastructure enterprises and virtually all banks have been privatized or liquidated, trade
and prices were liberalized, and the investment climate improved. As a result, growth has
accelerated to about 5 percent per year during 2000-05, inflation slowed to single digits,
unemployment declined to 10.7 percent in 2005 from 18 percent in 2000, and poverty levels
dropped during the period. The private sector share in the economy at 75 percent o f GDP i s now
in line with the share in the eight EU new member states (EU-8). Building on these major
achievements, Bulgaria completed formal negotiations on EU membership in April 2005 and i s
expected to realize i t s goal o f EU membership on January 1,2007, following a final go-ahead by
the European Commission in mid-2006.
(ii) At the same time, key challenges remain for Bulgaria’s successful integration with
the EU. Bulgaria’s per capita income, at PPS in 2003, was 31 and 56 percent o f the average
level o f EU-25 and the EU-8 countries respectively. To narrow this large income gap, Bulgaria
will need to improve efficiency o f the economy and set it on a higher growth path leading to
sustained improvements in living standards. Bulgaria also faces an investment gap in both
human and physical infrastructure capital as a result o f years o f relatively low investment which
i s only now catching up. To accelerate convergence with the EU, Bulgaria faces four major
challenges. First, and foremost, to push ahead with reforms to promote productivity and
employment for sustained high private sector led growth. T h i s i s particularly pressing for
Bulgaria as it has the worst demographic conditions in Europe and its employment rate i s well
below EU average. Second, to strengthen institutional capacity and public finance management
for improved service delivery, fiscal sustainability and effective absorption o f EU grant fimds
which could reach about 3.7 percent o f GDP in 2007-09 if managed well. Third, to address
poverty and social exclusion aimed at wider participation in growth. And fourth, to maintain
macroeconomic stability and manage risks related to the widening current account deficit and the
rapid increase in private sector credit as the foundation for continued strong economic growth.
(iii) The CPS seeks to help Bulgaria meet these challenges and facilitate Bulgaria’s
economic and social integration with the EU. The Government has requested that the Bank
continue to stay involved in Bulgaria with a full-service, yet focused, assistance program over
the coming years o f EU accession and integration. In line with the directions o f Government’s
medium t e r m program, and building on Bulgaria’s development priorities and the Bank’s
comparative advantage in Bulgaria, the CPS will support three overall priorities: (i)
productivity
and employment - implementation o f unfinished structural reforms and investments to strengthen
productivity and employment in support o f private sector led growth along the lines o f the EU
Lisbon agenda; (ii) fiscal sustainability and absorption of EU funds - capacity building for
improved public expenditure management, investment planning, and development o f project
pipelines eligible for EU funds, coupled with development o f effective mechanisms to combine
ii Executive Summary
EU, local and IF1 financing; and (iii)social inclusion - policies and investments to reduce
regional imbalances and improve social inclusion for poverty reduction.
(iv) Within this broader strategic framework, the consultations with Government
resulted in a focused set o f priorities f o r initial Bank involvement. The strategic
consultations o n the Bank’s future involvement provided a strong preference for initial Bank
involvement in addressing the unfinished reform agenda in health, education and social
protection, and in implementing fiscally sustainable investment programs in roads, municipal
infrastructure, social inclusion and regional development, coupled with an effective absorption o f
EU funds.
(v) I n line with Bulgaria’s achievements, the Bank will adjust its business model in
future country assistance and move towards a partnership model with greater flexibility.
The new business model will involve (i) a more flexible approach to defining lending and non-
lending activities within the broad CPS strategic priorities, with an agreed assistance program for
FY07 and an indicative program for FY08-09 to be revisited by an annual consultation process
with Government; (ii) lending up to an agreed ceiling based o n continued sound macroeconomic
performance and prudent country risk assessment and IBRD exposure management, including
greater choice in lending instruments and the share o f fast disbursing operations; and (iii)
a move
towards programmatic approaches in lending coupled with gradual alignment o f Bank
procedures with country systems while ensuring compliance with prudent Bank fiduciary
standards.
(vi) The proposed lending program up to US300 million per year would involve three
operations per year based on a series o f Development Policy Loans @PLs) and
programmatic investment loans in support of the above priority areas. A series o f three
programmatic DPLs o f about US$lSO million each would focus on advancing the unfinished
reforms in health, education, and social protection, in support o f growth, employment, fiscal
sustainability and social inclusion. The DPLs would be Complemented by up to two investment
operations per year to help with implementation o f prioritized investment programs and
absorption o f EU b d s in roads and municipal infrastructure, social inclusion, and regional
development. They would build on sound medium-term sector expenditure frameworks.
(vii) The AAA program agreed with the Government would be front loaded to provide
analytical support and advice in core policy areas and underpin the design o f lending
operations. The CPS includes upfront core AAA on strengthening the investment climate for
private sector growth and employment, and a second phase Public Finance Policy Review. A
poverty/living standards assessment would update the Bank’s earlier poverty work in Bulgaria
and support the D P L series. A report on the implementation o f the structural reform agenda is
foreseen as follow-up to the recent CEM. These activities are complemented by TA in selected
policy areas - energy sector reform and regional development. Finally, fiduciary and safeguards
work will facilitate the move towards a program-based lending approach in the roads sector,
while a fiduciary (CFANCPAR) update will underpin the D P L series.
(viii) I F C and M I G A will support Bulgaria’s EU integration agenda. IFC’s strategic

objective will be to help Bulgaria improve i t s competitiveness through supporting domestic
companies and attracting foreign private investors in the country, with focus on (i)
the financial
Executive Summaw iii
sector where IFC i s gradually shifting i t s focus to the non-bank financial sector; (ii)
the corporate
sector where it will continue to support the rehabilitation and modernization o f post-privatized
companies and promote foreign investments to foster technology transfer for productivity gains;
and (iii)infrastructure where it will support public-private partnerships and catalyze FDI. The
Bank and IFC will collaborate in developing a joint program in financing water and waste water
investment needs in selected municipalities. MIGA i s open for opportunities to support foreign
investors through the provision o f political risk guarantees, also on a sub-sovereign level.
(ix) The proposed strategy faces a number o f risks. The main risk would be a possible
slow down in the reform agenda following EU accession which in turn could trigger a slowdown
in growth. This risk i s mitigated by the external discipline provided by the EU accession and
integration agenda. The risks to macroeconomic stability, particularly from the widening current
account deficit and external developments in interest rates, oil prices and FDI flows, are reduced
by the government’s strong record o f sound macroeconomic and fiscal management and the
surveillance roles played by the I M F and the EU’s Stability and Growth Pact upon Bulgaria’s
EU accession.
Board members may wish to discuss the following aspects:
0 Does the CPS adequately respond to the needs o f Bulgaria, balancing flexibility and
client responsiveness with a strategic framework to guide and focus the program?
0 A r e the suggested principles for Bank lending engagement appropriate?

BULGARIA
COUNTRY PARTNERSHIP STRATEGY F Y 2007-2009
I. Introduction
1. This three-year Country Partnership Strategy for Bulgaria (FYO7-09) will cover the
period when the country i s expected to join the EU. The CPS builds on Bulgaria’s
considerable achievements over the last eight years and proposes a Bank program in support o f
Bulgaria’s integration and convergence with the EU. I t follows completion o f the previous CAS
which covered the period FY02-05,’ and which included the completion o f the PAL series in
support o f Bulgaria’s broad structural reform agenda. The CPS would evolve the Bank’s
relationship with Bulgaria towards a flexible arrangement within a three year strategic
framework, also drawing on the Bank’s agenda for well-performing Middle Income Countries
(MICs). The proposed Bank involvement draws on a number o f strategic consultations with the
Government which requested a renewed partnership with the Bank - including a lending
program up to US$300 million per year - focused on a limited set o f priorities for initial Bank
involvement: (i)the unfinished reform agenda in the human development area, and (ii)
implementation o f fiscally sustainable investment programs in infrastructure, social inclusion
and regional development to help absorb the considerable EU grant funds which accompany
Bulgaria’s EU accession. It builds on the lessons from the previous CAS and the Bank’s
involvement in the EU-8 new members states.
11. Country Context

A. Political Developments
2. EU accession on January 1,2007, i s the central focus of the Government. Bulgaria

signed i t s EU accession treaty in April 2005, following completion o f the formal negotiation
process. Since then, the European Commission has tracked Bulgaria’s progress on a few key
outstanding areas. The EU monitoring report o f last October highlighted shortcomings in justice
and organized crime, fraud and corruption, and the preparation o f administrative structures for
channeling EU funds, which would need to be resolved by the time a final monitoring report i s
prepared in May this year to keep accession in 2007 on track. If readiness i s judged insufficient,
a “safeguard clause” in the treaty may be invoked to delay membership by a year.* In the
meantime, the ratification process o f the accession treaty by EU member states has been
underway to permit Bulgaria’s timely accession. Government in the meantime has been
singularly focused on meeting i t s commitments in the remaining areas o f EU concern.
3. The new three-party coalition government has a large majority, but i t s stability will
be tested by the forthcoming Presidential elections. The coalition government i s made up o f
the three largest parties to emerge from the elections last June and has a comfortable two-thirds
’ / FY06 was treated as an interim year between the previous CAS and the CPS to allow preparation of the CPS in
consultation with the new government which took office in August 2005 following the June 2005 general elections.
* / Approval o f the “safeguard clause” would require a unanimous vote among EU members.
2 Bulgaria: Country Partnership Strategy
majority in Parliament. It i s led by the center-left Bulgarian Socialist Party (BSP) which
emerged with most of the votes, and i s further made up o f the two partners in the previous
coalition government - the centrist Simeon I1National Movement (NMS2) and the mainly ethnic
Turkish Movement for Rights and Freedoms (MW). The program o f the new government
centered on EU accession shows a high degree o f continuity from the previous government, with
a focus on economic growth and stability. I t supports a continued conservative fiscal policy and
maintenance o f the currency board which links the local currency to the Euro. The forthcoming
Presidential elections in November may complicate the relations in the coalition with an SNM2
candidate possibly running against the incumbent socialist President. A possible delay in EU
membership may also test the strength and resolve o f the coalition. While such developments
may affect the pace o f reform, the risk o f major deviations from the current reform path i s
reduced by Bulgaria’s EU accession agenda and the strong record o f reform established in the
last eight years.
B. Economic Developments
4. Over the last eight years, Bulgaria has made impressive progress towards long-term
stability and sustained growth. Following a difficult transition which culminated in a severe
crisis in 1996-97, macroeconomic stability was reestablished and has been maintained by
prudent fiscal policies and strict discipline in incomes policy anchored in the Currency Board
Arrangement (CBA) adopted in 1997. Fiscal consolidation reduced the overall fiscal deficit
from 15.2 percent o f GDP in 1996 to a balanced budget in 2003 and generated a fiscal surplus in
2004 (1.7 percent o f GDP) and 2005 (2.3 percent). The external and public debt to GDP ratios
declined from nearly 100 and 107 percent o f GDP respectively in 1997, to about 68 and 32
percent respectively in 2005. As a result o f these policies and deep structural reforms, average
growth reached the levels o f the eight EU New Member States (NMS-8) at about 5 percent per
year in 2000-05. (estimated at 5.5 percent in 2005) and inflation has declined to single digits from
hyperinflation levels (estimated at 5.0 percent in 2005). Unemployment also declined from 18
percent in 2000 to 10.7 percent by end-2005, but masks a continued low labor market
participation rate.
5. A broad structural reform agenda has contributed to solid economic performance.

The severity o f the 1996-97 crisis and the prospect o f EU accession changed the political
economy in the direction o f reforms. Between 1998 and 2002, most o f the non-infrastructure
enterprises and banks were privatized or liquidated, trade and prices were liberalized, energy
reforms made important progress, and the first steps were taken in regulatory reform to improve
the investment climate. As a result, growth i s led by the private sector which now accounts for
75 percent o f Gross Domestic Product (GDP) with an equal share o f total employment.
Integration with external markets expanded with trade in goods and services increasing relative
to GDP from 94 percent in 1998 to almost 140 percent in 2005. Foreign direct investment (FDI)
flows increased during the period, but remained broadly constant as a share o f total investment.
Investor confidence improved over time - both domestically and externally. Bulgaria’s long-
term foreign currency debt was upgraded to an investment grade rating in the summer o f 2004.
Bulgaria: Country Partnership Strategy 3
Figure 1: Bulgaria: Stability and Growth
CPI Inflation
Fiscal Balance
(% change, annual average)
1100
(% o f GDP)
4
900
-1
700
-6
500
300 -11
100 -16
-100 -2 1
rl
External Debt and D e b t Service 1 Investment

-
30
120 (% o f GDP) 30 -10
110 - 25
25
100 -
-20
-
90
20
n 20 -30 a,
g
ml
-
80 15
c)
-40;
70 -
10 15 -50'
-
80
50 -
5 -60
10
0 -70
5 -80
-External Debt
+External Debt Service (RHS)
GDI % of GDP -GDFI (l989=1)
R e a l GDP C u r r e n t Account Deficit and net FDI

(% change) (% o f GDP)
24 24 l6
12
1
20 20
16 16
8
12 12
8 8 4
4 54
0 0 0
-4 -4
-8 -8 -4
-16
-12 -12 -8 OFDl
-16
Source: World Bank staff estimates based on data from SI, BNB, MOF (GFS200Z),and NEA.
6. Despite the positive developments over the last eight years, important gaps in
reforms and performance remain relative to the EU New Members States. Despite a well
diversified trade partnership and a liberal trade regime which provide Bulgarian producers with
easy access to global markets, its economy has yet to benefit more fully from its integration with
the EU and external markets. Bulgaria’s export capacity remains limited compared to the EU-8
countries. Competitiveness remains mostly limited to unskilled labor-intensive and energy-
intensive activities. This can be explained by the remaining gaps in structural reforms in
Bulgaria relative to the EU-8 as shown in Figure 2 below for two phases o f the reform agenda.
Figure 2: Bulgaria and CEEC: Progress in Structural Reforms, 1999-2004

Initial Phase of Reforms Second Phase of Reforms
EBRD Index 5 R D Index
Slovak Rep. Caech Republic
Poland Hungaly
Lithmnia Poland
Latvia jlovak RepuMi
Hungary Estonia
Estonia Latvia
Caech Rep Croatia
Slovenia Bulgaria
Croatia Lithuania
Romania Slovenia
Bulgaria Romania
3.6 3.8 4 4.2 42 0 1 2 3 4
Source: EBRD Transition Indicators; Indicators for the initial phase o f reforms are calculated as unweighted averages o f
indicators for small-scale privatization; price liberalization; trade and foreign exchange system. Indicators for the second
phase of reforms are calculated as unweighted averages o f indicators for large-scale privatization; governance and enterprise
restructuring; competition policy; banking reform and interest rate liberalization; securities markets and non-bank financial
institutions; infrastructure reform.
7. Economic growth i s expected to remain strong. Based on continued growth o f

domestic demand and a recovery in exports, GDP i s estimated to have grown by 5.5 percent in
2005. During 2006-08, growth i s expected to remain strong and stay in the 5.5 to 6 percent
range per year (see Annex B6 for the medium-term macroeconomic fiamework). So far
economic growth has been supported by high private consumption and to lesser extent by
intensified investment activity. Over the medium-term, private consumption growth i s forecast
to slow down, while investments in the real sector and FDI flows are expected to remain high
and the trade balance expected to improve due to the forthcoming EU accession.
8. The widening current account deficit remains a serious concern and poses a
considerable macroeconomic risk. The deficit has been rapidly increasing in the past few
years, reaching an estimated 11.8 percent o f GDP in 2005. The Government has responded by
tightening the fiscal stance and by taking measures to control the growth o f credit to the private
sector. The fiscal surplus was over two percent o f GDP in 2005, and i s expected to rise to about
three percent o f GDP in 2006 to help control the current account deficit. Over the medium-term,
fiscal surpluses are projected to continue. The impact o f these measures has been limited
though. Further restructuring and consolidation o f the budget will also be required to
accommodate the forthcoming flows o f EU grant funds which are estimated to have a net fiscal
impact o f about two percent o f GDP during 2007-093. The fiscal stance will also need to remain
sufficiently flexible to respond to possible external shocks (also see the section on
creditworthiness and risk management below). So far the current account deficits have been
largely covered by FDI inflows, which are projected to remain high given the expected EU
accession. However, sustaining high foreign inflows will require continued improvements in the
business climate, including the needed reforms in the judiciary.
9. T o meet the criteria for entering the euro zone, Bulgaria would also need to further
curtail inflation. Inflation i s projected to pick up to about 7 percent in 2006 as a result o f
increases in excise taxes, impact o f floods last year and this year on agricultural prices, and
possible impact o f further o i l price increases, but to decline in the following years.
10. The IMF has completed the second review o f the Stand-By Arrangement (SBA) in
early April 2006. A precautionary 25-months SBA with access o f SDRlOO million was
approved b y the IMF Board on August 6, 2004, and the first review was completed on M a y 18,
2005. The SBA-supported program seeks to reduce Bulgaria’s increased external vulnerability
and to achieve sustainable high growth through: (i)continued tight fiscal policy and measures to
reduce bank liquidity in order to reduce excess demand in the short run; and (ii)structural
reforms to boost output and export capacity in the medium-term. The current arrangement may
be extended beyond September 2006 to support satisfactory program implementation in light o f
Bulgaria’s continued high external vulnerability. Once Bulgaria joins the EU, its participation in
the EU’s Stability and Growth Pact (SGP),4 with related multilateral surveillance, would help to
sustain Bulgaria’s prudent macroeconomic policies.
C. Developments in Poverty Reduction, Gender and MDGs
11, Continued growth since the 1996-97 economic crisis has led to improvements in
living standards generally, although deep pockets of poverty persist. Per capita income has
increased f i o m US$1,200 in 1997 to US$2,740 in 2004 (GNI, Atlas method). Nevertheless, per
capita GDP, at PPS in 2003, was just over 30 percent o f EU average which makes continued
growth and convergence o f living standards towards EU standards a core policy goal. As
incomes in Bulgaria have risen, poverty has fallen. Poverty, measured at two-thirds o f average
per capita consumption in 1997, fell by two-thirds between 1997 and 2001. The depth and
severity o f poverty also improved. Although there are no comparable surveys for the period after
2001, a more recent study that used econometric techniques to estimate comparable numbers
showed that poverty had fallen from 24 percent in 2001 to 21.9 percent in 2003. T h i s study
showed that the decline was mostly on account o f improvements in rural areas, where poverty
/ The impact o f EU grant flows on the country i s estimated at 3.7 percent o f GDP during 2007-09. The net fiscal
impact estimated at about two percent o f GDP during 2007-09 also takes into account Bulgaria contributions to EU
budget, and co/pre-financing requirements o f EU financed investments.
/ The main objective o f the Stability and Growth Pact (SGP) i s to enforce discipline in the Euro-zone as a means to
support price stability and sustainable growth. Budgetary discipline i s gauged with respect to two criteria: a general
government deficit-to-GDP ratio below three percent, and a debt-to-GDP ratio below 60 percent. Functioning of the
SGP rests on two pillars: multilateral surveillance and corrective mechanisms, As regards surveillance, EU member
states are required to prepare a Convergence Program and update it annually. The European Commission (EC)
prepares an assessment o f such convergence programs on the basis o f which the Council o f the EU issues an
opinion. As regards corrective mechanisms, the Excessive Deficit Procedure identifies and forces corrections o f
excessive deficits, defined under non-exceptional circumstances as a deficit over three percent o f GDP.
continues to be higher than in urban areas. At the same time, inequality in urban areas increased.
The study showed that extreme poverty i s low at 4.8 percent o f households, while food poverty
(a proxy for malnutrition) i s virtually non-existent. As poverty has fallen, the nature o f poverty
has evolved with poverty increasingly concentrated among vulnerable groups. Analysis o f the
2003 data establishes that the poverty profile in Bulgaria has come to resemble poverty patterns
in other CEE countries more closely - key determinants o f household welfare and poverty are
household size, number o f children, education or occupation o f the head o f household, gender,
ethnicity and location (see Box 1).
-
Box 1: Bulgaria Who are the Poor?
The poor are more likely to be found outside Sofia. T h e poverty rate in rural areas was estimated at 29.1
percent in 2003, compared to 18.7 percent in urban areas. Welfare differences by location, however, become
sharper when Sofia city i s compared to other - urban or rural - areas. Even taking into account the differences in
characteristics (such as education, family size, etc.) between rural and urban households, the per capita
consumption o f households living outside Sofia i s 10 to 25 percent lower than that for households living in the
capital city.
People living in large households with two or more children are more likely to be poor. Only a fifth o f the
population lives in households with five or more members, but they account for about 41 percent o f the poor.
People living in households with two or more children account for over a third o f the poor.
A strong correlate of poverty is ethnicity. Roma. households account for about 6 percent o f the population
according to the survey, but for over a fifth o f the poor. Per capita consumption in a Roma household i s only
half o f the consumption o f a similar non-Roma household.
Human capital is a strong policy lever for reducing poverty. Over two-thirds o f the poor consist o f people
living in households where the head has less than high-school education. Per capita consumption i s 30-35
percent higher in households where the head has completed high school or technical education and 45 percent
higher when the head has completed university studies (relative to a household where the head has only
completed primary education).
Private entrepreneurs and employed individuals are relatively protected from paver@. The poverty rate is
significantly lower in households headed by employers, self-employed or employees, while the risk o f poverty i s
twice as high in households headed by the unemployed and inactive (other than pensioners) compared to the rest
J f the population.
Poverty is not gender neutral. The risk o f poverty i s slightly higher in households headed by women, usually
jingle parent households. When differences in education, location and other characteristics are taken into
%ccount,per capita consumption in these households is 10 percent lower than in those headed by men.
iurce: Bulgaria MTHS data, 2003.
12. While Bulgarian men and women have equal legal status, individual and family
rights, and protection under the law, a gender gap persists in the labor market and
participation in political life and decision making, while serious imbalances continue
among Roma women and girls. Equal rights o f men and women are guaranteed by the
Constitution and reinforced by the recent adoption o f the Law on Protection against
Discrimination and o f special provisions for non-discrimination and equal labor opportunities in
the Labor Code. In education, female participation rates are higher at basic and tertiary level and
lower at secondary level. However, women benefit less than men fkom professional education
and life-long learning opportunities. In the labor market, despite legal safeguards women earn
less, are concentrated in low paid sectors and under-represented in managerial positions. The
wage gap for comparable positions i s comparable with EU member states. Roma women and
girls experience particular hurdles despite the increasing efforts to increase Roma women's
limited participation in the labor market and economic and social l i f e in general and to curb the
early drop-out by Roma girls from the education system.
13. Bulgaria i s on track to meet the Millennium Development Goals (MDGs). After
2000, improvements are more pronounced in school enrollments and smaller with respect to
health indicators. It i s important that improvements include gains among the most
disadvantaged: gaps in access to health care and education appear to be narrowing. But gaps in
Bulgarian attendance rates in primary and secondary education remain among the highest in the
ECA region. As with education, financial constraints (formal and informal out-of-pocket costs)
and differences in quality o f services accessed are in part responsible for lower health outcomes
among poor and disadvantaged groups. Minorities, Roma in particular, are more likely to fall
through the cracks o f the education and health systems with their lower access compounded by
social exclusion. Such disparities, unless addressed, will increase differences in future welfare
and result in lower poverty reduction.
___I_ .____-- __
_- ____ ________
-_______
Box 2: Bulgaria's Progress Toward the MDGs
Government Objectives Baseline Data Update on Status 2005 Target 2015 Target
Eradicate extreme poverty
percent o f population 7.9 (2001) n.a. 3.2 1.5
below US$2.15 per day
percent of population below 12.8 (2001) 6.4 (2005)
US$2.76 per day"'
Achieve universal education

percent net enrollment rate - 98.5 (2001-02) 99.7 (2004-05) 97-98 100
primary school
percent net enrollment rate - 83.1(200 1-02) 84.2 (2004-05) 86-90 100
lower secondary school
secondary school
Improve maternal health
Maternal mortality ratio per 19.1 (2001) 10.0 (2004) 18 16
100,000 live births
Combat HIV/AIDS, malaria and
other diseases
0 Tuberculosis incidence (new 48 (2001) 42.4 (2004) 40 26
cases per 100,000)
Polio immunization rate 94.4 (2000) 94.1 (2004) 98 100
(percent of children under two
years o f age)
Reduce infant mortality
D Infant mortality rate per 1000 14.4 (2001) 11.6 (2004) 13 9
live births
Ensure emironmental
rustainability
* GDP per unit o f energy use 568 ( 1997) n.a. 653 75 1
(PPP US$ per kg o f oil
equivalent)
'Due to lack of data, figure for 2005 is based on assumed growth elasticity of poverty o f 1.5. See para. 38.
%!KELE?>E!! sE!!&ic@ln5t@te&wo!!LBF~ uNKEL-____-------__ ____
111. Government Priorities and Development Challenges
A. Government Priorities
14. EU membership in 2007 and successful EU integration and convergence for

improved prosperity are the key priorities o f the new Government as laid out in its political
program and the National Strategic Reference Framework for 2007-2013.5 I t s vision for
Bulgaria b y 2013 i s a country with a high living standard, based on sustainable socio-economic
growth in the process o f full integration in the EU. Accordingly, it has called itself “Government
o f EU Integration, Economic Growth and Social Responsibility”. In the economic sphere, the
Government seeks to promote sustainable economic growth in the range o f 5.5 to 6 percent per
year and reduce unemployment permanently below 10 percent, based on improvements in
productivity and competitiveness through increased investment, innovation and exports, while
maintaining a stable macroeconomic framework with prudent public finances and fiscal
sustainability. I t i s committed to maintaining the currency board until Bulgaria joins the Euro
zone and envisages continued cooperation with the international financial institutions, including
the World Bank. The strategic priorities laid out in the draft National Strategic Reference
Framework (NSRF) for 2007-20 13, focus on increased competitiveness o f the economy,
development o f human capital, improvement o f basic infrastructure, sustainable and balanced
regional development, development o f m a l areas and agriculture, and protection o f the
environment. Based on these priorities, the Government is preparing six Operational Programs
(OPs) and two National Strategic Plans in these priority areas to facilitate future access to EU
f h d s (see B o x 3 for an overview o f these OPs and NSPs, and para 32 for details o n EU funds).
B. Key Challenges for Successful EU Integration
15. Bulgaria’s immediate challenge i s to meet the remaining EU requirements to enable

membership in January 2007. As noted, Bulgaria will have to demonstrate significant progress
over the coming months in a few key reform areas to receive a positive assessment o f the EU
before it makes a final decision on Bulgaria’s readiness for EU membership or consider invoking
the accession treaty’s safeguard clause which could delay membership by a year. The key areas
highlighted by the EU monitoring report o f October, 2005 include: (i)foremost, accelerated
judicial reform to ensure a transparent, honest and eficient judiciary; (ii)further strengthening o f
the institutional capacity for programming, monitoring and control o f EU structural funds; and
(iii)improving the readiness o f the agriculture sector, including the structures for channeling o f
EU funds for agriculture, the integrated administration and control system (IACS), and
veterinary control systems. While Bulgaria has made progress in these last two areas, reform o f
the judiciary i s likely to remain a significant hurdle.
/ In accordance with EU guidelines, the National Strategic Reference Framework replaces the previous National
Development Plan as the strategic document for programming EU funds for 2007-20 13.
Box 3: National Strategic Reference Framework 2007-2013-

Directions of Operational Programs and National Strategic Plans in Priority Areas a/
Improving Competitiveness of the Bulgarian Economy: The main goal i s development o f a dynamic economy
which i s competitive in European and international markets. The main priorities are development o f a knowledge
based economy and innovation potential, development o f a favorable business environment, increased productivity
and financial access by SMEs, and strengthening Bulgaria’s external market position.
Human Resources Development: The objective i s to enhance the quality o f life through employment, access to
high quality education and lifelong learning, and social inclusion by (i)creation o f more and better jobs through
enhancement o f labor force adaptability, mobility and competitiveness; (ii)access to education and training,
improving i t s quality, and strengthening links between communities and education, and (iii)social integration and
employment through development o f the social economy.
Transport: The program aims to achieve balanced and sustainable development o f the national and urban transport
systems o f national, trans-border and European importance. The program aims at the full integration o f the national
transport system into the EU transport network, as well as at improving the quality and safety o f transport services.
Environment: The main goal i s improvement o f the quality o f l i f e and favorable environment and protection o f the
rich natural inheritance through sustainable environmental management. The strategic objectives o f the program are:
(i)protection and improvement o f the condition o f water resources; (ii)improvement o f waste management and soil
protection; (iii)improvement o f air quality and reduction o f noise pollution, and (iv) conservation o f biodiversity
and protection o f nature.
Regional Development: The strategic goal o f the program i s to enhance the quality o f the living and working
environment with better access and opportunities for increased regional competitiveness and sustainable
development. The two program objectives are: (i) developing sustainable and dynamic urban centres connected with
their less urbanized hinterlands, thus enhancing their opportunities for prosperity and development, and (ii)
mobilizing institutional and financial resources for implementation o f regional development policies and programs.
Agricultural and Rural Development: The strategic objectives are: (i) development o f a competitive agriculture
and forestry sector with focus on innovations in the food-processing sector; (ii) conservation o f natural resources
and protection o f the environment in rural areas; and (iii)employment promotion and improvement o f the quality o f
life in rural areas.
Administrative capacity: T h i s horizontal Operational Program aims at building a strong, effective and modern
mblic administration, capable o f meeting the high expectations o f Bulgarian citizens, the business sector and the EU
in terms of enhanced service delivery and high professional ethics, and efficient and effective use o f EU funds.
a/ Based on draft Operational Programs and National Strategic Plans prepared in the context o f the draft National Strategic
Reference Framework, 2007-2013. OPs cover competitiveness, human resource development, transport, environment, regional
development, and administrative capacity. NSPs cover agriculture and rural development, and fisheries (under preparation).
16. Despite a good growth record over recent years, Bulgaria’s income gap with the EU
remains large. Bulgaria’s per capita income, at PPS in 2003, was 31 and 56 percent of the
average level o f EU-25 and the eight EU new member states (NMS-8), respectively. Given
Bulgaria’s large income gap with the EU, improving the efficiency o f the economy and setting it
on a higher growth path will be required to ensure that forthcoming EU accession will rapidly
narrow the gap and result in sustained improvements in living standards.
17. The recent experience o f the EU-8 new member states provides important lessons
for Bulgaria. First, the importance o f setting clear priorities and undertaking as much reform as
possible before accession. Policies and reforms should be anchored in a clear long-term vision
and strategic national development plan for the country. Securing macroeconomic stability,
stimulating the investment climate, strengthening human capital, and enhancing labor market
flexibility, are core prerequisites for high and sustainable growth rates. Second, an efficient and
technically competent public administration i s essential to manage rigorous and properly
sequenced reforms and ensure effective delivery o f public services. Third, the need for
ambitious public finance reform before accession to rationalize expenditures, focus on economic
growth and create space for absorption o f EU finances. There are difficult trade-offs between the
need for fiscal restraint and meeting demographic challenges, and additional investments needed
especially in infrastructure and the environment. Fourth, in tandem with public finance reform,
a special focus on effective absorption o f EU funds will require capacity building at both central
and local levels for preparation and implementation o f needed project pipelines, based on
prioritized sector investment programs within a sustainable medium-term expenditure
framework. Fifth, greater effort i s needed to address early on the issues o f poverty, social
exclusion and regional disparities, including the need for better targeted social policies to ensure
wider participation in growth.
18. T o accelerate convergence and building on NMS-8 lessons, four major challenges
for Bulgaria emerge:
0 First, and foremost, to push ahead with the needed reforms to promote productivity
and employment for sustainable high private sector led growth. These reforms are
particularly pressing for Bulgaria, as it has the worst demographic conditions in Europe
with a rapidly declining working age and graying population as a result o f a negative
natural rate o f population growth (-0.7 percent per year) and out-migration (-0.1 percent
per year). At the same time, Bulgaria’s employment rate (55.8 percent for population
aged 15-64 years in 2004) i s well below the EU average and the EU’s Lisbon
employment target o f 70 percent. Also, a large share o f the population i s in unproductive
segments o f the economy or in areas where labor productivity i s largely stagnant -
agriculture in particular where productivity has fallen sharply. To grow, Bulgaria will
need to get the young to start working earlier in productive jobs and to keep the older
population working longer than i s currently the case. And Bulgaria needs to raise
investment to upgrade i t s lagging capital stock following years of relatively low
investment.
0 Second, to strengthen institutional capacity and public finance management for

improved service delivery, fiscal sustainability and effective absorption of EU funds.
Over the last few years, Bulgaria has implemented a series o f reforms aimed at improving
the functioning o f the public sector. The next stage o f public administration reform will
need to focus on fully implementing the new legislative framework to strengthen delivery
o f public services, promote transparency and accountability, and root out corruption.
Public finance reform will need to address fiscal vulnerabilities in view o f Bulgaria’s
difficult demographic situation, and prudently adjust fiscal policies and build capacity to
make room for growth-oriented public investments and effective absorption o f EU funds
estimated at about 3.7 percent o f annual GDP during 2007-09, in support o f long-term
growth.
0 Third, to address poverty and social exclusion to ensure wider participation in

growth. As mentioned, Bulgaria continues to have a large income gap with the EU and
despite overall poverty reduction deep pockets o f poverty persist. While the growth
agenda i s expected to have a positive impact on poverty, accompanying initiatives to
address regional disparities, increase employment and lift the living standards o f
vulnerable groups - Roma in particular - will be needed to support the poverty reduction
agenda.
And fourth, to address macroeconomic risks and vulnerabilities and maintain

macroeconomic stability as the foundation for future growth. In the short run there
are the pressures from the widening current account deficit and the rapid growth o f
private sector credit. To date, these risks have been partly offset by prudent fiscal
policies. Looking forward, the fiscal stance needs to remain sufficiently flexible to
respond to possible external shocks.
(0 Raising productivity and employmentfor sustaining high private sector led growth
19. The business environment needs further deregulation to reduce the costs o f doing
business in Bulgaria. While much progress has been made in recent years in reducing the cost
o f doing business, the regulatory reform agenda i s far from complete. In 2005 more than half o f
businesses report uncertainty over regulatory policies as a problem o f doing business in Bulgaria,
and the regulatory framework continues to place businesses in Bulgaria at a disadvantage
compared to their regional peers. The number o f procedures to open a business i s more
numerous, and Bulgaria has the highest minimum capital requirements in Europe as share o f per
capita income. Insolvency procedures have been simplified, but closing a business in Bulgaria
remains more expensive than in other countries in the region. Contract enforcement i s overly
complex - it takes 34 procedures to enforce a contract in Bulgaria, compared to 25 in Estonia, 21
in Hungary, and 16 in Ireland. Court inefficiencies magnify the problem. Enforcing a simple
debt contract takes an average 440 days in Bulgaria, compared to 252 days in EU countries, 335
in Romania, and 174 in Germany.
20. Increasing labor market performance and employment will be critical for sustained
growth and convergence to EU income levels. The current share o f long-term unemployed i s
large (60 percent o f jobless are unemployed for more than a year) due to competency and skills
mismatches and l o w employability, while the share o f informal employment remains high. K e y
reforms in this area include: (i) reducing the high payroll taxes to decrease disincentives to
employment creation - a significant cut o f social security contributions in 2006 from 29 percent
to 23 percent o f the payroll already made these taxes compatible with the CEE countries; (ii)
adopting policies for more flexible use o f fixed-tern contracts and working schedules; (iii)
allowing more flexible terms for hiring and firing owing to fluctuations in production levels,
performance and absenteeism; (iv) strengthening the link between wages and performance; (v)
adjusting unemployment benefits to increase incentives to work; (vi) increasing labor force
participation by allowing flexible use o f temporary and part-time contracts; and (vii) improving
the effectiveness and increasing the net impact o f active labor market programs.
2 1. Upgrading education and skills for the knowledge economy. Bulgaria’s education
system faces three major challenges. First, the quality and relevance o f skills i s inadequate for
today’s labor market. According to recent international comparative assessments (PISA 2002
and TIMSS 2003), there i s a decline in Bulgarian secondary school students’ competencies and
skills for the knowledge economy both in terms o f reading proficiency and mathematics and
science achievement. This requires the establishment o f an effective national system for
assessment and control o f the quality of education. Decentralization with accountability systems
and teacher quality will be essential for improving school quality. Likewise, the quality and
12 Bulgaria: Country Partnership Strategv
relevance o f skills provided in higher education does not meet labor market needs. Improved
information and quality assurance, stronger l i n k s with industry, and accountability systems to
deliver results will be crucial. Second, completion o f upper secondary schools i s below NMS-8
countries and the EU Lisbon targets, and children from l o w income families, rural areas, and
Roma in particular, have unacceptably l o w participation rates. Targeted interventions will be
needed to include the hard-to-reach groups. At tertiary level, private provision and finance
should play a larger role in raising participation. Third, more efficient resource use i s needed in
view o f the continuing reduction in school-age population. Down-sizing school infrastructure
and staffing to reallocate resources will require political will to adopt and implement the long-
term Program for Development o f School Education (2006-201 5), strong communication and
incentives. L o w student-teacher ratios and the large number o f small institutions pose similar
challenges in higher education.
22. The poor state o f transport infrastructure i s a major bottleneck for trade
integration and competitiveness. Due to inadequate investment, the existing transport network
i s in poor shape - an estimated 60 percent o f the road network i s in fair or poor condition and
needs urgent rehabilitation and maintenance; railways are in a similar poor condition with l o w
staff productivity and high track access charges; and port efficiency is low. Combined with an
inefficient trade facilitation system, this results in high transport costs for Bulgarian exports and
imports and transit trade, and limits Bulgaria’s external competitiveness. Bulgaria has
committed to completing the upgrade o f i t s main road network to EU standards by 2014, and has
also proposed a motonvay construction program that requires significant investment. EU funds
for transport infrastructure estimated at €1.2 billion from 2007-13 (0.6 percent o f GDP per year)
provide an opportunity, but will require development o f a prioritized road investment program
that fits within government’s medium-term expenditure framework. In parallel, reform o f
maritime ports i s needed with separation o f operational and commercial functions, privatization
o f port services, and concessioning o f terminals to private operators. In addition, the sector
needs improved trade facilitation at border crossings.
23. Reform o f the energy sector has advanced, but energy efficiency remains weak and
sector restructuring and market opening need to be completed. Significant advances have
been made in meeting sector EU accession needs, especially in sector legislation and regulation
and in reducing price distortions. But sector restructuring and market opening have been delayed
which may hinder Bulgaria’s integration into the European energy market and limits the benefits
from regional market liberalization. The unfinished sector agenda includes: accelerating the
liberalization o f both electricity and gas markets; completing the restructuring o f the National
Electricity Company (NEK) to stimulate competition in the wholesale market; opening o f the
natural gas market through restructuring o f Bulgargas; promoting energy efficiency in view o f
Bulgaria’s high energy intensity which i s more than twice EU average; and promoting renewable
energy sources in line with the EU directives which set a target o f renewable sources meeting 12
percent o f total energy consumption by 2010.
24. Agriculture remains largely underdeveloped with low productivity. In contrast to the
NMS-8 countries, the share o f agriculture in employment rose f i o m 18.5 to 25.5 percent from
1990-2003. At the same time, agriculture’s share in GDP fell from 18 to 11 percent. As a result,
sector productivity felI sharply. W h i l e past policies have successfully focused on market
stabilization and liberalization, the supply response has been weak in view o f a fragmentation o f
land ownership following the restitution process in the 1990s and lack o f investment in farming
activity and rural infrastructure. The two major challenges for the sector involve: (i)adopting an
agricultural policy and institutional framework compatible with the EU’s Common Agricultural
Policy (CAP); and (ii) the implementation o f policies and programs to enhance sector investment
and competitiveness. The former will involve a trade-off between direct income support
payments which reduce the incentives to restructure, consolidate and modernize, and the need to
support productivity enhancing measures as the only sustainable path to raising agricultural
income. These would include support for farm consolidation, productivity-enhancing farm
investments, and diversification to off-farm activities.
(ii) Improving governance and strengthening institutions
25. Bulgaria’s institutional development and implementation capacity will be central to

growth prospects but need to catch up with EU standards. The importance o f institutions
and governance to growth and economic development has long been recognized. The process o f
EU accession has contributed markedly to the institutional framework in Bulgaria. Yet in 2004,
selected governance indicators for Bulgaria were lower than for the EU-8 (see Figure 3). The
agenda involves further strengthening o f public administration capacity, improving the quality o f
service delivery, reducing corruption, strengthening accountability and transparency, and,
importantly, increasing the efficiency and effectiveness o f the judicial system. Together with the
need for judicial reform, corruption remains a concern despite adoption o f legislative acts,
strategies and action plans to address the problem (see Box 4). Improved capacity in both central
and local levels also will be critical for effective absorption o f the post-accession EU funds.
26. Moving towards a transparent, honest and efficient judiciary i s one of the key
requirements for improving the business environment and meeting EU accession
requirements. Despite progress over the last years, judicial reform remains one o f the serious
challenges in improving Bulgaria’s institutional framework and i t s readiness for EU
membership. Prevailing public perception is that magistrates are subject to undue influence from
parties and their attorneys, other magistrates, and government officials. Enforcement o f civil
judgments continues to be a major issue. As mentioned, procedures for contract enforcement are
significantly more complex than other countries. Efficiency o f Bulgarian courts is low, and
business perceives courts as slow. There i s limited use o f out o f court settlement, no specialized
commercial courts, and extensive opportunities for debtors to appeal and delay the process.
Finally, the complexity and efficiency o f the penal structures has been highlighted by the EU as
one o f the major shortcomings in the judicial system. Key reforms and actions focus o n
implementation o f already enacted changes, particularly in the areas o f anti-corruption,
improving court organization, and reducing court delays; significant improvements in the
functioning o f courts; speeding up resolution o f commercial disputes; adoption o f a new Penal
Procedural Code; and establishment o f specialized administrative courts.
~~~~~~~ ~ ~ ~~~ ~-
Figure 3: Selected Governance Indicators for Bulgaria and EU-8,2004
27. While there have been significant reforms in Bulgaria's fiduciary systems,
implementation continues to lag in key areas. The Bank's diagnostic work, such as the
Country Financial Accountability Assessment (CFAA), Country Procurement Assessment
Report (CPAR) and Public Expenditure and Institutional Review (PEIR), has shown
considerable progress in Bulgaria's fiduciary environment but also pointed at remaining
weaknesses and risk (with CPAR 2004 rating procurement as a high risk and C F A A rating
financial management as average risk). The C F A A highlighted strong features in several aspects
o f the Public Financial Management (PFM) environment, such as a well functioning automated
treasury system, sound public internal financial control framework, and independent external
audit. Moreover, Bulgaria has developed a sound legal framework for public procurement and
has made progress in the implementation o f the CPAR action plan. Notwithstanding this
progress, the Government will need to continue the reform process by deepening civil service
reforms, strengthening accountability o f the administrative judiciary system, strengthening
management o f capital expenditures and program budgeting, and implementation o f procurement
reforms beyond the regulatory framework. The EU and the Bank will continue to support the
government through further analytical work and TA for strengthening financial management and
procurement practices in the public sector. The Bank will carry out a country fiduciary update in
FY07 to meet the policy requirement for adequate knowledge o f country PFM systems to support
new development policy lending. In the context o f new investment loans, the Bank will focus o n
fiduciary safeguards and capacity building o f implementing institutions, in addition to project
specific controls which are designed to minimize fiduciary risk in Bank funded projects.
Box 4: Corruption has reduced but remains a concern

~~~~ ~~ ~ ~~
Surveys and assessments by national and international organizations confirm that corruption remains a cause for
concern in Bulgaria and affects many aspects o f society. The EU has highlighted corruption as one o f the key
problem areas as Bulgaria prepares for EU accession in 2007. There has been a positive trend as far as
administrative corruption i s concerned, although recent surveys show a slight deterioration between 2004-05.
Transparency International’s 2005 corruption perception index ranks Bulgaria in 55” place among 159 countries. T I
had shown steady improvements for Bulgaria between 1998-2002 with a leveling o f f thereafter. The EBRD-World
Bank Business Environment and Enterprise Performance Survey (BEEPS) on the other hand shows a marked
decline in corruption as a problem o f doing business in Bulgaria from 2002-05, even though the so-called bribe tax
(bribes as a share o f sales) remains comparatively high (see below). As main areas for unofficial payments by firms,
BEEPS shows obtaining government contracts, obtaining business licenses and permits, dealing with customs, and
dealing with the courts.
Corruption as a Problem Doing Business: Bribe Tax:
YOfirms indicating corruption as a problem Bribes as a share of annual sales
o f doing business
2.0
60%d I
1.8
50% 1.6
40% 1.4
1.2
30% 1.0 2002
20% 0.8 2006
0.6
10% 0.4
0% 0.2
Bul SEE ECA 0.0
B ul SEE ECA
While the European Commission’s 2005 Comprehensive monitoring report (CMR) on Bulgaria identified an overall
improvement in administrative corruption, it highlighted Bulgaria’s weak enforcement record with very limited
results in the investigation and prosecution o f high level corruption cases. Public works contracting, including the
health sector, was cited as particularly vulnerable to corruption. The EU acknowledges the considerable
administrative efforts by the Government in implementing its National Strategy for Combating Corruption combined
with an updated action plan implemented by the Commission for the Coordination o f the Fight Against Corruption,
but notes that its capacity remains weak and action plan implementation delayed.
The 2006 Corruption Assessment Report prepared by Bulgaria’s Center for the Study o f Democracy (CSD)
attributes the observed increase in corruption transactions in 2005 following the gradual decline during 1998-2004 to
the impact o f the electoral cycle. The report shows that Bulgarian public perceptions o f corruption are widespread
and reflect a low level o f trust in state institutions. After low incomes and unemployment, corruption is the third
ranked concern in 2005. With a reduction in administrative corruption, political corruption - state capture and
politically connected business - is gaining attention as it shifts from privatization and illegal trafficking to the
spheres o f public procurement, concessions and the use o f EU funds. The report argues that the potential o f ‘‘soft”
measures against corruption (e.g. awareness campaigns, training civil servants, codes o f ethics) i s being exhausted
and that more effective political and institutional mechanisms need to be put in place.
The government has responded by developing and implementing its anti-corruption strategy and related action plans,
moving towards a merit-based and depoliticized civil service, introducing legal provisions for conflict o f interest,
asset declarations, and freedom o f information regulations, and starting reform o f the judiciary, including improved
, accountability and more transparent and merit-based appointment o f judges. More recently, Parliament adopted a
new Penal Procedural Code, and the Council o f Ministers approved an amendment o f the Law on Judiciary to
introduce mandatory competition in the appointment o f magistrates. With the legislative and institutional
foundations for anti-corruption mostly in place, implementation and enforcement i s now the main challenge.
16 Bulgaria: Country Partnership StrategV
28. With regard to corporate financial reporting, Bulgaria has worked towards meeting
compliance with EU standards. The Bank’s Accounting and Auditing Report on the
Observance o f Standards and Codes (ROSC) o f end-2002 concluded that Bulgaria’s legislation i s
largely in line with the EU acquis communautaire, but that shortcomings remain in
implementation and enforcement o f the acquis, International Financial Reporting Standards, and
International Standards on Auditing. Since then, Bulgarian stakeholders have worked o n
enhancing implementation which has been challenging given the significant changes to the
acquis following Europe’s response to recent accounting scandals. In support o f this effort, the
Bank provided TA to the National Accounting Council in developing a comprehensive Country
Action Plan following the ROSC, and has continued to provide assistance through a regional TA
program.
(iii) Strengtheningfwcal sustainability and absorption of EUfunds
29. With about 40 percent of the economy’s resources in the public sector, improving
the efficiency and effectiveness of public expenditures i s central to Bulgaria’s growth
prospects. In addition, Bulgaria has a unique opportunity in putting forthcoming EU funds,
estimated at an average 3.7 percent o f annual GDP during 2007-09, to best use in support o f
long-term growth. To make room for growth-oriented public investments and effective
absorption o f EU funds, and contain spending in the face o f a difficult demographic situation,
Bulgaria will need to contain and improve efficiency o f spending on the health care system,
pensions, and the social assistance system. Reform in these areas should be driven by improving
the quality o f services while increasing the efficiency o f expenditures and their fiscal
sustainability. In addition, effective absorption o f EU funds will require urgent development o f
project pipelines to meet the high investment needs based on prioritized investment programs in
key sectors (transport, municipal services, and environment). T h i s will need to be accompanied
by capacity building at central and local levels.
30. The health sector needs cost containment for financial sustainability, while at the
same time improved quality and access. Eight years after introduction o f the mandatory health
insurance system, health outcomes are beginning to reverse from the negative trends in the
1990s. Yet the reforms remain unfinished, and Bulgaria’s demographic and epidemiological
profile will generate additional pressures on health spending. The two most significant problems
are: (i) slow progress in improving efficiency and cost containment while at the same time
securing quality care; and (ii)inequality in access due to lack o f alternatives for those who
cannot pay for services. Financial sustainability o f the system i s threatened by a combination o f
poor monitoring o f the payment system for inpatient care, the oversized hospital infrastructure,
and high pharmaceutical spending. The focus o f care will need to shift from hospitalization and
curative care towards prevention and outpatient care. Pharmaceutical spending needs to be
contained through regulation in prices and volumes. And consolidation in hospitals will require
the implementation o f the hospital restructuring strategy developed in 2002. The EU as part o f
i t s recent monitoring report has also raised concerns about access to the system, and equity
considerations will have to be part o f any discussion o n restoring financial balance to the system.
31. The challenges of the social security system. Despite substantial reforms since 1999
when Bulgaria moved to a three-pillar pension system, i t s social security system i s not aligned
with the adverse demographic trends. As a result, payroll taxes are high and provide incentives
for informal work as well as under-reporting o f income, both o f which lead to even higher
Bulgaria: Country Partnership StrategV 17
dependency ratios. The public pension pillar has needed budget transfers in the order o f three
percent o f GDP in recent years. This i s exacerbated by the rise in disability pensions which has
been prone to abuse and has further deteriorated dependency ratios. The dual challenges o f the
pension system involve: (i) reducing payroll taxes to boost employment while improving the
system’s financial sustainability; and (ii)reconciling wide-spread non-compliance with long-
term negative welfare considerations o f exclusion. The reform path has been to contain financial
imbalances by increasing retirement ages and tightening the criteria for access to the system.
Additional reforms should include strict discipline in the use o f disability pensions and the
collection o f contributions, increasing the link between benefits and contributions to the system
by further reforms to the funded pension system. The pension system will need to have a basic
pension to keep some segments o f the old age population out o f poverty. Given the financial and
policy challenges involved, detailed work i s needed to assess the feasibility o f alternative
reforms.
32. Effective absorption o f EU funds will require further public expenditure

restructuring and capacity building. With k t u r e EU accession, the EU has committed about
€4.6 billion o f EU grant funds to Bulgaria over the period 2007-09. The bulk o f these funds are
expected to go to implementation o f the European common agricultural policy and
environmental standards, upgrading o f roads and other infrastructure, and support human
resource development (see Table I).The overall financial effect o f expected EU funds i s
projected to be highly positive on Bulgaria, about 3.7 percent o f annual GDP o n average during
2007-2009 if the country takes all available funds. At the same time, however, Bulgaria’s fiscal
position would deteriorate by about two percent o f GDP during the period, if the government
absorbed all available funds and there was no restructuring o f the fiscal framework. Since the
Government intends to keep public expenditures at their current level o f 40 percent o f GDP or
below, fiscal adjustment equivalent to the projected impact o f EU funds (about two percentage
points o f GDP) will be required.
33. At the same time, Bulgaria’s performance on absorption of EU pre-accession funds

has been below potential and will require development o f needed capacity to prepare and
implement high return investments which can support future growth and improve service
delivery. There i s a long lead time in project preparation and the readiness for implementation
o f some projects i s not very high, which leads to delays in contracting and subsequently in
disbursement o f pre-accession funds. For example, under the ISPA instrument for transport and
environment investment support only 25 percent had been contracted by the end o f 2005 while
actual disbursement levels are substantially lower. At the same time, experience f i o m EU-8
countries indicates that, if effectively used, the EU funds can contribute to economic growth both
in the short and long run. In the short run they will increase domestic demand. In the long run,
ifinvested in the improvement o f the physical and human capital with high economic returns,
they have the potential o f making an important contribution to economic growth through the
supply side. But experience also shows that, if badly used, these resources may have only a
short-term positive demand effect on the economy, and in the long term lead to real appreciation
o f the local currency and reduced competitiveness, aid dependency, and undermine the efforts to
improve governance. Effective use o f these funds therefore will require building the needed
capacity for careful advance planning and development o f a pipeline o f high return projects in
the areas eligible for EU funds.
Table 1: Summary of EU Financial Support for Bulgaria, 2007-2009

I
I EU Support Measure Purpose
Allocation*
(€ mln)
t
Budgetary compensations aimed to avoid worsening o f the country’s
240
fiscal stance
Administration
I Cover accession-related expenditures, such as increased

interpretation and translation needs.
nta
* Appropriations for commitments, in 2004 prices

Source: Bulgaria Public Finance Policy Review, World Bank, Report No. 33992-86
34. Meeting the high investment needs in municipal infrastructure to align with EU
environmental directives. The combined EU compliance cost for investments in water and
waste water sector (€6.9 billion) and solid waste management (€0.5 billion) exceeds the
projected medium-term financing possibilities o f the Government. These requirements therefore
will need to be placed within a viable medium-term financing framework, based on prioritization
o f investments and development o f public-private partnerships to attract private investments into
the sector. EIF funds will be available to help meet the investment needs but will require
preparation o f a pipeline o f projects and capacity to implement them. Current sector financing
plans also make unrealistic assumptions about available municipal financing which is predicated
o n overly optimistic increases in tariffs. And the ownership o f water utility companies will need
to be clarified to entice private sector participation. T o move forward quickly in addressing the
high sector investment needs will therefore require institutional and policy reforms to clarify the
central responsibility for municipal infrastructure, strengthen local capacity to prepare and
implement projects, ensure sufficient resources at the local level to support investments,
strengthen the newly formed water regulator to set and enforce service standards and tariffs, and
development o f a functional public private partnership model for the sector.
(iv) Poverty reduction and social inclusion
35. Addressing regional disparities will be an important component o f poverty

reduction. The poverty rate in rural areas, where about 40 percent o f Bulgarians live, was 29.1
percent in 2003 compared to 18.7 percent in urban areas. Rural unemployment i s high (39
percent), with reliance o n subsistence farming and social programs and benefits. A survey o f
rural areas showed employment as main concern, followed by poor conditions in road
infrastructure, the high cost o f health services, marketing o f agricultural products, and access to
credit. Infrastructure in rural villages i s poor, with ffequent interruptions in water and electricity
supply and very limited access to sewerage and solid waste systems. Alongside the needed
consolidation and efficiency improvement in the farming sector, non-farm sources o f income
will be increasingly important in rural areas. Availability o f EU funds for regional development
provides opportunities to generate non- farm employment and increase productivity in small and
medium-sized farms.
36. Addressing the poverty and dependency cycle o f Roma. The Roma minority lives in
deep poverty and social exclusion. Roma households which account for about 6 percent o f the
population represent over a fifth o f the poor. Roma children drop out earlier and more often
from the school system. Close to 16 percent o f Roma adults are illiterate; 6-10 percent o f Roma
adults never attended school. Socio-economic conditions have made many Roma highly
vulnerable to diseases such as tuberculosis. The Government has adopted the Framework
Program for Integration o f Roma and the National Action Plan for the Decade o f Roma
Inclusion, outlining the goals, targets and indicators which it i s committed to achieving and
monitoring in 2005-2015. Fully funding the framework program and action plan remains a
challenge. Key commitments are also undertaken in the Joint Inclusion Memorandum (JIM)
with the EU signed in 2005, the National Employment Action Plan, and the National Plan for
Reducing Poverty and Social Inclusion.
IV. Past World Bank Group Assistance and Lessons Learned

37. From 1990, the Bank has actively supported Bulgaria’s transition. During the 1990s,
Bank support was focused on Bulgaria’s transition f i o m a highly centralized socialist state to
building the foundations o f a market economy and a stable macroeconomic framework. This
was only partly successful as witnessed by the severe 1996-97 economic crisis. From 1998 on,
Bank support was associated with the structural and institutional reforms started by the post-
crisis Government, which formed the basis for Bulgaria recent strong growth record. Bank focus
initially moved to reform o f the financial and enterprise sector, agriculture, social security, and
environmental protection, through a series o f sector adjustment loans accompanied by
investment lending. The previous CAS which covered FY03-05 broadened Bank support to the
reforms and the EU accession process through a series o f three multi-pillar PALStogether with a
number o f investment projects and AAA. As o f today, total lending to Bulgaria amounts to
US$2.1 billion equivalent, o f which 64 percent in adjustment lending.
38. Implementation o f the ambitious three-year PAL program has been successful,
although an unfinished reform agenda remains. The three PALs for a total o f US$425
million during FY03-05 supported the Government’s comprehensive program, organized around
five complementary and mutually reinforcing pillars: (i)sustaining structural reforms in the
enterprise sector, with emphasis on infrastructure; (ii) establishing a market-friendly business
environment; (iii) deepening the financial system; (iv) improving public sector governance; and
(v) investing in human capital and strengthening social protection. By the end o f the program,
two o f the three broader country outcomes to which the P A L program was expected to contribute
had been surpassed and 28 o f the original 31 program triggers fulfilled. GDP growth averaged
5.2 percent during 2002-05 compared with the overall PAL country goal o f 4.5-5.0 percent, and
unemployment at 10.7 percent by end-2005 was well below the Government’s goal o f 12-14
percent. The country goal to halve poverty during 2002-05 has been more elusive, though
poverty certainly declined during the perioda6 The Government’s strong ownership o f the P A L
agenda and its effective monitoring and evaluation capacity were key success factors. Despite
the impressive progress on the overall PAL agenda, some o f the reforms in the human
development area proved more challenging than originally foreseen - education and health care
reform in particular - and have been highlighted by the Government as needing continued
attention with Bank assistance. The lower unemployment rate also masks Bulgaria’s l o w labor
force participation rate, which has become a core challenge to sustaining growth.
39. At the same time, fewer investment projects than had been foreseen in the CAS
moved forward. The CAS program included a pipeline o f seven investment loans totaling
US$300 million o f which just three were approved for a total o f US$llS.4 million (district
heating, social investment and employment, and revenue administration reform). In addition,
four GEFPCF grant investment projects were approved for a total o f US$17.0 million. The
reasons for not pursuing the remaining IBRD projects included: (i) Government’s conservative
debt management which restricted external borrowing for all investment projects while leaving
fiscal space for a few politically important projects (e.g. Belene nuclear plant); (ii)complexity o f
underlying sector reforms (forestry); and (iii) failure o f a precursor project (education APL2).
Actual CAS lending amounted to US$543.4 million (73 percent o f the US$750 million CAS
lending target), o f which 78 percent for the fast disbursing PALs.
40. Performance o f the investment lending portfolio picked up following concerted

efforts to address key issues and accelerate implementation. Despite the Bank’s close
portfolio monitoring efforts, on average one or two projects o f the total eight to ten investment
projects in the portfolio during the CAS period was showing problems with implementation
and/or achievement o f development objectives. A number o f projects showed considerable
delays and the overall portfolio disbursement ratio fell to 9.7 percent in FY04. At the same time,
other projects performed well and have had important impacts on institution building and
reforms (e.g. revenue administration reform, trade and transport facilitation, child welfare
reform, district heating). The semi-annual joint portfolio reviews (JPRs) with Government
flagged project-specific as well as cross-cutting implementation issues, including slow and
insufficient delegation o f decision making, and weak capacity and discontinuity in project
/ Comparable poverty data over the PAL period is not available, and different approximations give different
results. An econometric study (Tesliuc 2004) finds that the fall in poverty between 2001-03 was a little more than
two percentage points (from 24 percent to 2 1.9 percent), and thus the PAL goal not likely to have been met. But
simulations using growth-poverty elasticities find that the target o f halving poverty may have been possible.
management and procurement. Subsequently, a focused review o f projects at risk led to specific
recommendations for project restructuring and speeding up implementation. As a result o f close
joint follow-up, most projects demonstrated improved performance and some even managed to
catch up with earlier delays. Significantly, the average disbursement ratio nearly tripled in one
year to reach 27.9 percent by end-FYOS.
41. The Government has generally valued the Bank’s AAA work and QAG’s
assessment found the quality o f the CAS AAA program to be satisfactory. The AAA
program was built around a set o f core policy pieces (Public Expenditure and Institutional
Review, CEM, fiscal decentralization), diagnostic and fiduciary reports (FSAP, CPAR, CFAA,
accounting & auditing ROSC) and a number o f high impact sectoral reports, policy notes and
workshops (energy, rural development, water and waste water, roads and motor ways
investments reviews, infrastructure strategy review). The Ministry o f Finance also appreciated
the debt management TA provided by the Bank’s Treasury Department, which turned into a fee-
based arrangement in 2003. Q A G judged the program’s strategic relevance, internal quality, and
likely impact as satisfactory. As areas for improvement it underlined the importance o f client
ownership, integration across AAA activities, and dissemination and dialogue with non-official
stakeholders to enhance overall impact.
42. IFC has been active in the corporate and financial sector. A s o f March 2006, IFC has
15 projects in i t s Bulgaria portfolio with total commitment o f US$267 million for i t s own
account and an additional US$75 million syndicated with partner banks. Projects in the
manufacturing and services sectors represent about 80 percent o f IFC’s country portfolio, with
investments in a number o f key projects in electronics assembly, wood panel and board
production, post-privatization restructuring o f a steel mill, two major glass processing plants, a
retail start-up operation, and a first-class hotel. In the financial sector, I F C supported two
specialized SME banks, established Bulgaria’s first micro-lending bank, supported country’s
largest bank, and invested in a venture capital fund that also targets the S M E sector. To support
the design o f a competitive wholesale energy market in Bulgaria, I F C provided technical
assistance to the Ministry o f Economy and Energy and to the National Electricity Company
(NEK).
43. MIGA’s outstanding guarantee portfolio in Bulgaria consists o f four contracts in the
infrastructure sector and one contract in the manufacturing sector. As o f end-March 2006,
MIGA’s gross exposure in Bulgaria i s US$391 million (7.0 percent o f the Agency’s gross
exposure), while the exposure net o f reinsurance amounts to US$140 million (4.2 percent o f
MIFA’s net exposure). About 83 percent o f MIGA’s net exposure in Bulgaria i s in the
infkastructure sector and the balance in manufacturing. In the infrastructure sector, MIGA’s
coverage includes the Maritza East 3 and the Maritza East 1 power plants.
44. A number o f lessons emerge from the implementation of the previous CAS, with
implications for the design and implementation of the CPS. First, the Bank should move
towards a partnership approach with a well-performing M I C client such as Bulgaria, with
demand-orientation in design and delivery o f assistance and flexibility in adjusting the Bank’s
program to the client’s needs. Second, the Bank should engage in new investment lending only
if it has strong client demand and meets i t s expectations o f simpler designs, shorter preparation
and implementation periods, enhanced flexibility, reduced reliance o n freestanding PIUs, and
increased leverage o f other resources, including EU grant funds. Third, swift action i s needed to
address portfolio implementation issues as they arise. This will require timely Government
action and follow-up of problem areas, coupled with proactive project supervision on the Bank
side to turn around and restructure poorly performing projects. Fourth, Bulgaria’s unfinished
human development agenda remaining from the P A L series will need to be addressed to make up
for delays and to support Bulgaria’s growth agenda and readiness for EU accession. Reforms in
education, healthcare and labor markets are urgently needed to increase Bulgaria’s
competitiveness and broaden participation in the country’s growth. Both political will and public
attitude make these reforms now more feasible. A key outcome should be an increase in the
labor force participation rate which remains l o w by international standards. Fifth, effective
Government coordination and M&E systems are critical for successful implementation o f
reforms and Bank support. The successful P A L coordination arrangements linked to a
comprehensive M&E system implemented with strong client support, was one o f its key success
factors. And sixth, political economy aspects need watching in the design and implementatian o f
the overall CPS program and reforms supported by the Bank. The examples o f the failed
privatization o f Bulgartabak (PAL2 conditionality) and stalled forestry reforms which
underpinned the dropped forestry project come to mind.
V. Proposed World Bank-Bulgaria Partnership, FY2007-2009
A. Rationale for Future Partnership
45. The new Government has requested a continued full-service, yet focused, assistance
program with the Bank over the coming years o f EU accession and integration. In the
consultations held with the Government last November and December, it has expressed a
preference for a continued relationship with Bank involving both financial and non-financial
assistance focused on helping Bulgaria achieve a successful integration with the EU. Among the
various options discussed, ranging from a fee-based knowledge sharing relationship to a full-
service assistance program, i t s preference i s for the latter - including a lending program up to
US$300 million per year. At the same time, it has requested the Bank’s initial lending focus for
the coming years on selected priorities linked to the unfinished reforms in the Human
Development (HD) sector and to infrastructure investment support, with a special focus on
effective absorption o f EU funds.
46. The Government recognizes the Bank’s value added and comparative advantage
vis-his Bulgaria’s other development partners, which also draws on the lessons from the
-
EU-8 countries. Bulgaria has access to extensive external assistance both financial and non-
financial. Foremost this includes support from the EU in the context o f accession, as well as the
IMF, EBRD, EIB, UNDP and various active bilaterals (see para 65 for the focus o f various
external partners in supporting Bulgaria’s development challenges). The Bank’s value added
and comparative advantage i s seen in its expertise and assistance in three distinct areas: (i)
design, capacity building and implementation support for structural and institutional reforms
that promote growth and productivity, facilitate EU convergence and social inclusion, and cover
areas not addressed by the EU such as health and education policies and reform; (ii) design and
capacity building for public finance reform that strengthens effective and efficient public
expenditure management in support o f growth and fiscal sustainability; and (iii) design and
financial support for effective absorption o f EU funds based o n the Bank’s expertise in
developing prioritized sector investment programs linked to sustainable medium-term sector
expenditure pameworks, developing the needed Jinancing mechanisms for channeling and co-
jnancing of funds with EU and other IFIs, and preparation of project pipelines to absorb
available funds. The Bank’s strengths are seen in developing systemic, rather than one-off,
solutions, and in sharing lessons from global and EU/EU-8 experience. Recognition o f the
Bank’s role in these areas builds on the implementation o f the PAL program, the institution
building efforts in investment projects, and appreciation o f the Bank’s analytical and advisory
work.
47. At the same time, the Bank i s adjusting its business model in Bulgaria to remain
relevant in its current environment. Bulgaria today i s a different country from just four years
ago at the start o f the last CAS. It has established a strong record o f reform and sustained
growth, built o n prudent macroeconomic policies. Based on these achievements, Bulgaria is now
o n the threshold o f EU accession. And it established investment grade status with access to
capital markets. In this new environment, the Bank i s continued to be seen as relevant -
including a recognition that Bank financial products and instruments have evolved and remain
competitive with Bulgaria’s alternative financing sources. The CPS aims to reflect these new
realities.
48. Accordingly, Bank support will move towards greater flexibility within a strategic
framework that reflects Bulgaria’s priorities, also building on the Bank’s agenda f o r well-
performing MICs. The new partnership will provide greater flexibility than the previous CAS
approach, and allow for adjustment in the Bank’s assistance program based on the evolving
priorities o f the client. While responsive and flexible, Bank assistance will be anchored in a
strategic framework that builds on Bulgaria’s development priorities and o n the Bank’s
comparative advantage in Bulgaria. Accordingly, the evolution from the previous CAS to the
new CPS will involve: (i) a more flexible approach to defining lending and non-lending activities
within a set o f broad priorities for the CPS period with an agreed program for FY07 and an
indicative program for FY08-09 to be revisited by an annual consultation process with
Government7; (ii)lending flexibility up to a lending ceiling based on continued sound
macroeconomic performance and country risk and within IBRD exposure limits, including
flexibility in the use o f lending instruments and share o f fast disbursing operations; and (iii) a
move towards programmatic approaches in investment lending coupled with gradual alignment
o f Bank procedures with country systems while ensuring compliance with Bank fiduciary
standards.
B. Implications o f Client Survey Feedback for the CPS’
49. Most respondents o f the survey felt that the Bank should focus on economic growth
and jobs, followed by infrastructure development, education, poverty reduction, and health
sector issues. They ranked the Bank’s involvement in these areas higher than in EU integration,
even though effective EU integration was viewed by stakeholders as Bulgaria’s overriding
development priority. The feedback points to a preference for the Bank’s involvement in basic
/ Annual consultations are proposed to take place by December each year to precede the Government’s budget
formulation process for Bulgaria’s subsequent fiscal year (e.g. the December 2006 consultations would focus on
Bank activities in Government FYO8 which coincides with calendar year 2008).
* / The survey included a quantitative survey involving 300 responding stakeholders, in-depth interviews with 32
public officials experienced in working with the Bank, and four focus groups on major themes o f Bank involvement
(economic reform, education, health and infrastructure).
24 Bulgaria: County Partnership Strategy
development issues. At the same time, it was felt that the Bank should tailor its approach to
Bulgaria’s EU integration needs. The Bank’s financial resources were seen as the Bank’s
greatest value, followed by its policy and economic advice and ability to build implementation
capacity. As weaknesses respondents cited the Bank’s perceived disregard o f country realities in
proposing solutions and the bureaucratic nature o f operational policies and procedures. At the
same time, impressions o f Bank effectiveness did not always match important areas highlighted
for i t s fbture attention. The survey showed higher effectiveness gaps in areas such as health and
education. These impressions may be linked to the well publicized past implementation problems
o f investment projects in these areas - education in particular.
50. The qualitative survey respondents emphasized the importance of the Bank’s
involvement beyond EU accession and identified a number of recommendations for
enhancing the Bank’s relevance in the future. These included an enhanced partnership
approach and dialogue that builds on Government priorities; Bank support in the priority areas o f
education, healthcare, infrastructure investments, and strengthening o f institutional and
administrative capacity; and a move to co-financing with the EU.
C. Strategic Priorities f o r the C P S
51. I n line with Government’s overall objectives for the coming years, the strategic
framework that i s proposed to guide the three-year CPS program i s focused on facilitating
Bulgaria’s successful economic and social integration with the EU. In support o f this
overarching objective and following the directions o f the Government’s medium-term program,
the CPS directions are proposed to be guided by the following three main priorities:
(i) Productivity and employment: Implementation o f unfinished structural reforms and

investments to strengthen productivity and employment in support o f strong private
sector-led growth along the lines o f EU’s Lisbon agenda;
(ii) Fiscal sustainability and absorption of EU funds: Capacity building for improved
public expenditure management and investment planning to strengthen fiscal
sustainability, sound public investment, and effective absorption o f EU funds; and
(iii)Social inclusion: Policies and investments to reduce regional imbalances and improve
social inclusion for poverty reduction.
52. These priorities would help guide the selection of future Bank financial and non-
financial activities. The annual consultations with Government as part o f the flexible CPS
programming approach (also see para 48) would review current and planned activities in the
context o f the strategic framework, modi@ them as needed, and define additional activities as
appropriate. In the unlikely event that Bulgaria’s EU accession i s delayed by a year, the above
strategic priorities are considered sufficiently robust to continue to guide the Bank’s activities
over the coming three years.
53. Within this broader strategic framework, the consultations with Government
resulted in a focused set of priorities for initial Bank engagement under the CPS. The
strategic consultations o n the Bank’s future involvement provided clear guidance for initial Bank
involvement in: (i) addressing the unfinished reform agenda remaining after the successful PAL
program, (ii)developing a fiscally sustainable medium-term expenditure fiamework and
prioritized investment programs for key sectors, in combination with (iii)a goal o f effective
absorption o f EU funds. The key priority sectors proposed for the Bank’s immediate attention
are health care, education and infrastructure. Specifically, Government seeks the Bank’s
immediate help in addressing the remaining reforms in health, education and social protection,
and in implementing a fiscally sustainable investment program in roads and municipal
infrastructure focused on effective absorption o f EU funds, while remaining open to other ideas
consistent with the above thematic priorities. These priorities draw on the Bank’s
comprehensive diagnostic work undertaken in the context o f the recent C E M (policies for
growth) and Public Finance Policy Review (PFPR), and provide continuity to the unfinished
agenda o f the P A L program and the considerable recent analytical and advisory work undertaken
in the infrastructure sector (roads, and waterlwaste water in particular).
D. Outline of Initial Bank Program
54. The proposed lending program up to US%300million per year would involve 2-3
operations per year based on a series o f DPLs and programmatic investment loans in
support o f the above priority areas. In line with Government’s priorities for Bank
involvement, a series o f three programmatic DPLs o f about US$150 million each would focus on
advancing the unfinished reforms in the HD sectors - health, education and social protection in
particular, in support of growth, employment, fiscal sustainability and social inclusion. The
Government has requested that the DPLs would be complemented by one to two investment
operations per year to help with implementation o f prioritized investment programs and
absorption o f EU funds in roads and municipal infrastructure, social inclusion, and regional
development. These investment projects would be designed to incorporate lessons on investment
lending from the previous CAS (see paras 44 and 62). They would build on sound medium-term
sector expenditure frameworks, and, where feasible, be designed as full or partial programmatic
based approaches (PBAs).
55. The AAA program would be front-loaded to provide analytical support and advice
in core policy areas and underpin the design o f lending operations. The CPS has benefited
greatly from the recently completed core AAA work, particularly the C E M and PFPR which
have also helped inform the Government’s agenda for growth and fiscal adjustment in its
preparation for EU accession. A number o f recent HD policy notes (health, education, social
protection) will also facilitate preparation o f the DPLs. In addition, the proposed program
includes upfront core AAA in FY07 on: (i)strengthening the investment climate for private
sector growth and employment; and (ii) a second phase PFPR to deepen the work on prioritized
medium-term expenditure frameworks for key sectors and absorption o f EU funds. A
poverty/living standards assessment envisaged for FY08 would update the Bank’s earlier poverty
work in Bulgaria and support the D P L series. A report on the implementation o f the structural
reform agenda as follow-up to the recent C E M i s foreseen for FY08. These activities are
complemented by TA in selected policy areas - energy sector reform and regional development
(FY07). The latter would also precede a possible regional development project in FY09.
Finally, fiduciary and safeguards work in FY06 will facilitate the move towards a FY07 PBA
investment project in the roads sector, while a fiduciary ( C F M C P A R ) update in FY07 will
underpin the D P L series. The proposed initial lending and AAA programs are shown in Annexes
B3 and B4 respectively and are summarized below (Table 2).
26 Bulnaria: Country Partnership Strategy
Table 2: Proposed Bank Lending and AAA Program, FYO7-09 a/
Road infrastructure ISIL Municipal infrastructure SIL

Social inclusion S I L
a/ the program is based on consultations with the government, but for FYO8-09 remains indicative and subject to
annual review with government (see para 48).
E. Bank Support for Strategic Priorities
56. The proposed CPS program i s balanced to support the three strategic priorities o f
the CPS while facilitating the overall goal o f Bulgaria’s successful economic and social
integration with the EU. Table 3 shows how the proposed Bank lending and AAA instruments
support the three strategic priorities o f the CPS. As can be seen, many o f the instruments address
more than one o f the strategic priorities. The DPL series would support aspects o f all three
priority areas. At the same time, the Government has requested the Bank to focus i t s
interventions in selected areas o f Bulgaria’s remaining development agenda where it values the
Bank’s comparative advantage and expects to achieve complementarities with the Government’s
own interventions and involvement o f other external partners. Accordingly, Bank support would
not necessarily address all aspects o f Bulgaria’s remaining agenda. Examples o f areas where
Bank assistance i s not foreseen at this stage are agriculture and judicial reform. At the same
time, these areas remain central to the Government’s program and continue to receive support
fiom other external partners (also see para 65 below which shows how various external partners
support Bulgaria’s broader development agenda). Bank support for the three CPS strategic
priorities i s summarized below.
Table 3: CP! Strategic Priorities and Bank Lending & AAA Instruments
Strategic Priorities Bank Instruments Major Contributions
Productivity & Lending:
Employment DPLs (FY07,08,09) Education reform for relevant skills
Reform o f labor framework for increased labor
market flexibility & employability
Easing social contributions for business and
increased labor force participation
Roads Infrastructure S I L I& I1 (FY07,09: Improved roads investment planning& roads
upgrading for better access to markets
Trade & transport facilitation for SE Improved border crossing systems &
Europe 2 SIL (FY07) infrastructure for enhanced trade
u:
Investment climate review for private Reduce constraints to private firms’ investment,
sector growth & employment (FY07) productivity & employment
Public Finance Policy Review Phase 2 Public expenditure restructuringtowards growtk
(FY07)
Energy advisory TA (FY07-08) Advice for completing energy sector reforms
Fiscal sustainability & Lending:
absorption of EU funds DPLs Sustainable financing health system, hospital
restructuring, efficiency pharmaceutical sector
Education finance reform for efficiency &
school consolidation
Lower dependence from social assistance
Municipal Infrastructure SIL (FY08) ) Development of sustainable medium-term
Social Inclusion SIL(FYO8) ) expenditure frameworks & improved absorption
Regional development SIL (FY09) ) EU funds
& l J :
PFPR Phase 2 Public expenditure restructuringfor efficiency
& absorption EU funds
Poverty Reduction &
Social Inclusion Reform disability benefits for employability
Improvedtargeting of risk groups
Improved social service delivery
Social Inclusion SIL Inclusion disadvantaged groups in line EU Joint
Inclusion Memorandum (JIM)
Regional development AAA (FY07) & Reduce regional disparities
SIL (FY09)
@:
Povertylliving standards assessment Updated poverty profile for improved social
lFYO8) policies
57. Productivity and employment: The three programmatic DPLs (FYO7-09) would
contribute to the productivity and employment agenda by focusing on: (i) some o f the needed
education reforms that would help to meet the skill needs o f the knowledge economy by
improving the quality o f education outcomes and reducing dropout rates, and (ii) continuing the
reform o f the labor framework, health system, and social protection system, aiming to increase
labor force participation by lowering payroll taxes, reducing social assistance dependency,
reforming disability benefits, and increasing formal employment through more flexible work
arrangements and better incentives to participate in the formal economy. The focus on
employment leads the DPLs to support the government’s reform efforts in primary and
secondary school education and social protection, in particular reforms to (i)improve outcomes
through assessment o f system performance, and improved evaluation o f teachers and schools; (ii)
introduce a new financing and management model where money follows the pupil in a
fiamework with decentralized management and accountability at the school level. Higher
education reforms may be addressed later in the DPL series. (iii) create more flexible work
arrangements through adjustments to the labor framework; (iv) restructure active labor market
policies; and (v) ease the social contributions burden by lowering pension insurance
contributions and restructuring benefits. These efforts are expected to contribute to increasing
the employment rate from 56 percent in 2005 to 60 percent in 2009, and decreasing the share o f
long term unemployment to total unemployment.
58. Both the two roads inpastructure projects (FY07 & FY09) and the second trade and
transport facilitation for South East Europe (TTFSE2) project (FY07) will help alleviate
transport bottlenecks to trade, identified as one o f the main constraints to growth. The roads
projects would support the Government define a prioritized roads investment program within its
medium-term expenditure framework, develop needed capacity in the Road Executive Agency in
investment programming and implementation, and help finance rehabilitation o f secondary roads
to facilitate regional development and access to markets. These efforts would contribute to
improvements in road network condition in Class I1 and Class I11 roads. The TTFSE2 project
would continue assistance under a successful first project in improving border crossing systems
and infrastructure, which helps speed-up cross-border trade along the major trans-European
transport corridors. Following the recent growth-oriented CEM, the proposed A M focused o n
improving the investment climate for private sector growth and employment (FY07) would
conduct an in-depth evaluation o f investment climate aspects at the firm-level and develop an
agenda o f microeconomic reforms for private sector growth and employment generation. The
proposed report on structural reforms monitoring and dissemination (FY08) will build on the
recent C E M by monitoring the progress and outcomes o f the recommended structural reforms.
The second phase public finance policy review (PFPR2, FY07) will build on the recently
completed PFPR in addressing the needed restructuring o f public expenditures for growth.
Finally, proposed A M on energy advisory services (FYO7-8) in support o f finishing the reforms
in the sector support private sector development for growth.
59. Fiscal sustainability and absorption of EU funds: The DPL series’ focus o n
improving the efficiency o f the health, education, pension and social assistance systems to
support their financial sustainability and effectiveness would help to contain the growth o f
expenditures in these areas in support o f Government efforts to maintain public expenditures at
less than 40 percent o f GDP. Bulgaria’s severe demographic challenge makes efficient spending
in these areas a priority to maintain fiscal stability. In health, the focus will be on improving
financial sustainability o f the National Health Insurance Fund (NHIF), through reforms to the
payment system, restructuring o f the hospital sector, and improved efficiency in the
pharmaceutical sector. In education, the DPLs will support finance and governance reforms that
would help improve both eficiency and quality o f education including fiscal measures to
encourage school mergers and consolidation. T o improve efficiency o f social protection, the
DPLs would contribute toward better targeting o f core risk groups and decreasing new recipients
o f disability pensions due to general sickness. The proposed investment projects (roads I & II,
municipal inpastructure, social inclusion and regional development) would all ensure that
needed investments are undertaken within a sustainable medium-term expenditure framework,
and focus on absorption o f EU funds by supporting preparation o f high priority investment
programs and financing frameworks that would permit co-financing and coordination with EU
funds and IFIs while building capacity at central and local levels for project preparation and
implementation. The municipal inpastructure project will strengthen central and local
institutions responsible for preparing projects that will be eligible for EU grant financing in
support o f improved capacity for programming and committing EU funds. The Bank and IFC
will jointly support the development o f the water sector to allow Bulgaria to meet i t s
environmental commitments to the EU (also see para 63). In addition, AAA on PFPR2 (FY07)
will continue the work started in the first PFPR focused on the needed public expenditure
restructuring for growth and absorption o f EU funds, and on advancing implementation o f
program/performance budgeting systems across Government.
60. Poverty Reduction and Social Inclusion: The DPLs would support policies that
promote further poverty reduction and social inclusion, by granting the poor, Roma in particular,
equitable access to basic social services and supporting their insertion into the labor force, and
increasing labor participation o f youth, older unemployed and disabled. In the health sector, the
DPLs would support improved access to quality health services by helping curb unregulated
payments in the sector. In social assistance, the DPLs would help improve targeting on core risk
groups and continue the reform in child protection through further improvements in service
delivery. The policies promoted by the DPLs would be supported by the proposed social
inclusion project (FYO8) which helps to address the needs o f Bulgaria’s most vulnerable groups
(Roma, people with disabilities, institutionalized children, vulnerable j o b seekers), in support o f
meeting the goals o f the Joint Inclusion Memorandum (JIM) signed with the EU. The proposed
regional development project (FY09) would address regional imbalances by strengthening
capacity to manage the programming and strategic allocation o f EU structural funds, integrate
them into public expenditure management and the inter-governmental fiscal system, and capacity
building at regional and local levels for project preparation and absorption o f EU funds. Both
the DPLs and these investment projects would be underpinned by apoverty and living standards
assessment (FYU8) which updates previous poverty work in Bulgaria and adds a regional
dimension on living standards. These efforts are expected to contribute to reducing rural poverty
and lowering the gap between urban and rural poverty.
F. Lending Principles
61. Annual lending volumes will be determined in consultation with the Government
and consistent with policy performance for Bank lending engagement and with prudent
IBRD risWexposure management within the agreed envelope. W h i l e the most likely scenario
would involve lending up to US$300 million per year during FY07-09, including DPLs which
are expected to cover up to US$lSO million per year, annual lending volumes and instruments
would be agreed with the Government in accordance with the CPS strategic framework and
priorities, and consistent with conducive policies and prudent IBRD risMexposure management
within the agreed lending envelope o f US$300 million per year. T o the extent the Government
may seek higher levels o f fast disbursing lending operations (eg DPLs) than currently envisaged,
the overall envelope would be reduced to ensure exposure remains within the levels
commensurate with the most likely scenario above. This is further based o n the expectation that
Bulgaria will continue to pursue sound macroeconomic policies and that macroeconomic risks do
not worsen. Should macroeconomic performance deteriorate, which may be evidenced by an
increase in external imbalances beyond current levels, increased inflation, continued appreciation
o f the real effective exchange rate, less prudent fiscal policies, a deviation from Government’s
sound debt management, or by downgrading o f creditworthiness ratings by commercial rating
agencies, the lending program and composition would be revisited and revert to a lower level,
which in the case o f a significant deterioration (i.e. a l o w case scenario) would comprise only
investment projects. In the proposed lending program, the DPLs will require a sound
macroeconomic framework. Sectoral lending in turn would be modulated by the need for a
satisfactory sector policy framework and expenditure program. Accordingly, the lending
program would be adjusted for significant adverse changes in the macroeconomic or sector
policy environment. A set o f policy performance indicators shown below (Table 4) will provide
a framework for judging the presence o f a suitable environment for Bank lending engagement.
In the event o f significant changes in the proposed strategy, a CPS progress report would be
prepared for discussion by the Board.
Table 4: Policy Performance Indicators for Bank Lending Engagement

Policy areas Policy performance indicators
Maintenance o f satisfactory 0 Evidenced inter alia by maintenance o f prudent fiscal policies,

macroeconomic performance improved price stability, continued sound public debt management,
and declining external imbalances.
I n addition, after EU accession:
0 Satisfactory progress towards meeting the EU Growth and Stability
Pact provisions and implementation o f Bulgaria’s EU Convergence

Program based o n EU surveillance mechanisms.
62. Building on the lessons from the previous CAS, the choice and design o f lending
operations will follow several principles. The Government has indicated a preference for
future lending to involve a combination o f DPLs and investment operations which move toward
programmatic based approaches (PBAs) and help absorb EU fbnds. More particularly for
investment lending, the following principles would be applied for future Bank engagement: (i)
finance priority activities within a sustainable medium-term fiscal/expenditure framework and
based on prioritized investment programs; (ii)help set up financing mechanisms and build
capacity that facilitate absorption o f EU funds and co-financing with IFIs where appropriate; (iii)
provide systemic solutions with lasting impact on institutional capacity and development, rather
than one-off interventions; (iv) avoid design complexity and limit implementation periods up to
four years; (v) mainstream implementation arrangements within existing Government structures,
while ensuring sound fiduciary safeguards for project implementation; and (vi) where feasible,
move towards programmatic support based on gradual adoption o f country fiduciary and
safeguards systems in accordance with EU standards while ensuring compliance with Bank
fiduciary standards based on fiduciary assessments o f the sectors and institutions involved in
such lending. The Bank i s preparing Country Financing Parameters for Bulgaria in consultation
with the Government to ensure that Bulgaria can benefit from the enhanced flexibility offered by
the Bank’s new expenditure policy.
G. IFC and MIGA Support for the CPS
63. IFC’s strategic objective over the coming years i s to facilitate and support
Bulgaria’s successful EU accession and integration, by improving i t s competitiveness
through supporting domestic companies and attracting foreign private investors in the
country. Through private sector development and increased competitiveness, IFC will help to
reduce Bulgaria’s external trade and current account imbalances and cope with rising
competition in euro zone markets. Priority areas for IFC include:
0 In thefinancial sector, IFC’s strategy aims at increasing efficiency and sustainability o f

the sector through appropriate financial products and instruments. Such support will
continue to remain consistent with policies pursued by the Government and the Bulgarian
National Bank (BNB). IFC i s gradually shifting i t s focus to the non-bank financial
sector. Securities markets, local bond market, and contractual saving institutions are still
underdeveloped and significant opportunities exist to support fbture development in these
areas. IFC will seek opportunities to introduce i t s guarantee, risk management and
structured finance instruments. Given Bulgaria’s high energy intensity, energy efficiency
products and renewable energy will be another area o f priority. To develop such a
product, IFC will provide financing combined with technical assistance programs to
selected banks. In addition, IFC will explore opportunities for TA to support
improvement of financial infrastructure which i s critical to market discipline.
0 In the corporate sector, IFC will continue to support the rehabilitation and modernization
o f post-privatized companies in sectors where Bulgaria has a comparative advantage
and/or export-oriented sectors. In addition, IFC will continue to play an important role in
promoting foreign investments in the areas where the technology transfer through FDI i s
a prerequisite for productivity gains. IFC will support possible sell offs o f locally owned
industrial enterprises to European majors as well as help local companies in their
international establishment. Support for local and international private investments in the
health and education sectors will be another area where IFC expects to have an increasing
role.
0 In the infrastructure sector, IFC’s objectives are to be innovative, foster public private
partnerships and catalyze FDI. IFC pays special attention to support infrastructure
development in coordination with the Bank, EIB, EBRD and the Stability Pact. The Bank
and IFC will collaborate closely in the infrastructure sector, particularly in developing a
joint program in municipal infrastructure financing o f water and waste water sector needs
in selected municipalities. IFCs’ Private Enterprise Partnership - Southeast Europe
Infrastructure (PEP-SE Infrastructure), recently established in Sofia, would lead IFC’s
involvement through i t s efforts to assist Government in attracting private investors and
operators in infrastructure through PPP approaches.
64. M I G A i s open for opportunities to support foreign investors in line with Bulgaria’s
EU integration agenda. A potential area where MIGA can play a role in close coordination
with the Bank and IFC i s supporting projects on a sub-sovereign level.
H. Partnerships
65. Bulgaria benefits from a broad range of assistance from i t s various external
partners. Table 5 shows how Bulgaria’s external partners help address the country’s major
development challenges outlined in Chapter 111. I t shows that each o f these priority areas i s
supported by one or more partners, including areas not covered by the Bank’s CPS program (e.g.
agriculture, public administration reform, judicial reform). I t also underscores the importance o f
effective coordination among partner programs in areas such as transport and municipal
infiastructure where the three IFIs are active. The Government has been leading such
coordination efforts, but further efforts are needed to improve them for the purpose o f
maximizing the effectiveness o f Bulgaria’s external assistance. The Bank will continue to play a
lead role in facilitating such coordination efforts. The design o f Bank-financed investment
projects will also facilitate coordination and possible co-financing with EU and others through
the establishment o f sector expenditure frameworks and financing mechanisms which seek a
sector-wide approach.
66. The EU i s Bulgaria’s main external partner with considerable grant financial
assistance. Prior to accession, Bulgaria benefits from the E C pre-accession assistance mainly
provided by three instruments: PHARE, for strengthening public administration and institutions,
to help implement the acquis communautaire, and promoting economic and social cohesion;
ISPA for support o f large infiastructure projects in transport and environment; and SAPARD for
support o f agriculture and rural development. The total volume o f pre-accession assistance
-
available to Bulgaria i s substantial around €545 million will be available in 2006 for pre-
accession programs. As mentioned, following accession Bulgaria has been allocated €4.6 billion
for the period 2007-09 (see para 32 above).
67. The IMF has had active programs in Bulgaria throughout the transition, with a
focus on prudent fiscal policy underpinning the currency board arrangement. The current
IMF program ends in September 2006, but may be extended until 2007. In August 2004, the
IMF Board approved the current 25-month precautionary SBA in an amount o f SDRlOO million.
The Fund and the Bank have had very close working relations over the years with the Bank
leading the dialogue on the structural aspects o f the reforms, recently in the context o f the PAL
program, while collaborating closely with the Fund to ensure synergies with the macroeconomic
and fiscal aspects o f the reforms.
68. EIB activities in Bulgaria will focus on support for the country’s long-term investment
needs with particular emphasis on supporting and co-financing projects identified under the
Cohesion and Structural Funds. Since 1991 EIB has financed about €1.2 billion in Bulgaria o f
which about 60 percent went to the transport sector while the rest financed key infrastructure and
industrial projects with a European dimension, as well as SMEs. After Bulgaria’s EU accession,
EIB would continue to facilitate Bulgaria’s EU integration by supporting infiastructure and other
investment, with particular emphasis on Trans-European Networks, environment and human
capital sectors, as well as contribute to promoting the development o f SMEs. EIB is offering
technical assistance for project preparation, through the JASPERS initiative, and i s ready to co-
finance projects and programs identified under Cohesion and Structural Funds. I t will also
consider financing non-sovereign projects.
Bulgaria: Country Partnership Strategv 33
Development Challenges Bulgaria’s External Partners

EU IEBRDl EIB I IMF I IBRD I IFC I UNDP, I USAID1 Other
* G=Germany; J=Japan; N=Netherlands; S=Switzerland; U=United Kingdom. *
69. EBRD’s involvement in Bulgaria has increasingly focused on commercial, non-

governmental financing. As o f September 2005, EBRD had made cumulative commitments o f
€1.1 billion. The new EBRD country strategy, approved end-2005, identified three priorities for
the period 2006-07: (i) enterprise sector, including support for restructuring and recapitalization
o f local private firms to increase competitiveness and prepare them for EU entry and compliance
with EU regulations, and supporting foreign direct investment - particularly green-field; (ii)
inpastructure, including municipal financing for urban transport, solid waste, and district
heating, structured on a commercial basis and helping to build institutional capacity; water and
wastewater sector, where it finances regional water companies with ISPA co-financing; and
opportunities in railways and the road sector, and (iii) power and energy efficiency including
support to the energy sector, energy efficiency and renewable energy resources, and
improvements to the sector legal and regulatory framework.
70. The UNDP continues to be active in Bulgaria, while some o f the bilateral partners
are starting to pull back in view of the forthcoming EU accession. UNDP’s 2006-2009
country program approved in June 2005 focuses on: (i)social inclusion and local economic
development for poverty reduction; (ii)good governance for equitable local and regional
development; and (iii)
conserving energy and preserving the natural environment for sustainable
development. The priority areas o f USAID’SGraduation Strategy 2003-2007 are rule o f law,
economic development and increased prosperity, and local governance. UK support i s aimed at
34 Bulgaria: Country Partnership Strate&
justice and home affairs, regional economic development, pro-business environment, and public
administration capacity building - including structural funds access. German bilateral
cooperation focuses on promotion o f SMEs and assistance to the public administration. The
priority areas for the Swiss cooperation program are: sustainable management o f natural
resources, fair and effective social services, favorable framework for the private sector, and
establishment o f efficient infrastructure. The Netherlands support i s focused on implementation
o f the aquis and building administrative and institutional capacity. Japan’s areas o f emphasis
are: development o f a market economy, environmental protection, agriculture, and development
o f economic and social infrastructure. In addition, Bulgaria benefits from the Japan Policy and
Human Resource Development (PHRD) technical assistance program and Japan Social
Development Fund (JSDF) grants which complement Bank financed operations.
I. CPS Results Monitoring
71. The CPS results monitoring will build on the successful PAL monitoring in the
previous CAS and track progress towards achieving outcomes influenced by Bank
interventions agreed to be undertaken as part o f the CPS. Annex 1 shows a CPS results
matrix based on agreed activities for initial Bank involvement. Results monitoring would be
undertaken jointly with Government as part o f the annual consultation process for assessing
progress o f the CPS and possible adjustments to the Bank program. These discussions would
also provide inputs into updating the results matrix to reflect adjustments to the Bank program.
VI. Creditworthiness and Risk Management

72. Bulgaria’s active debt management has achieved a gradual reduction in the share of
public debt to GDP by limiting new borrowing and early repayment o f more costly debt,
while improving the currency and interest rate structure o f debt. Bulgaria reached the
Maastricht public debt criterion already in 2002, and by end-2004 the public debt to GDP ratio
had declined to 41 percent o f GDP and was estimated to have reduced to 32 percent by end-
2005. External public debt also declined from 77 percent o f GDP in 1999 to 33 percent o f GDP
in 2004 and an estimated 25 percent in 2005. The considerable reduction in public external debt
was accompanied by increased private sector borrowing (Figure 4). In line with its debt
management strategy, the Government carried out a number o f early debt-buyback operations,
including selected loans from the World Bank and IMF, and buyback o f the remaining Bulgarian
Brady bonds. Bulgaria’s public debt management strategy further seeks to maintain a stable
nominal amount o f debt, leading to further reductions o f public debt as a share o f GDP, while
increasing the share o f domestic debt and improving currency composition o f debt with a shift
from U S dollar toward Euro-denominated debt. The Government’s efforts in developing
domestic debt markets will help to absorb considerable liquidity in the banking system,
strengthen domestic capital markets, and provide investment alternatives for private pension
funds and insurance companies.
73, Bulgaria’s creditworthiness has improved significantly over the last few years.
Thanks to the improved macroeconomic and structural policies, Bulgaria’s sovereign credit
rating was upgraded several times to investment grade over the period 2003-05. L o w sovereign
bond spreads also indicate continued investor confidence.
Figure 4: External Debt Composition
hternal Debt Compmition (?hGDP) External Debt Composition by Maturity

I
90
90
80
70
80 70
60
70
.g 60
50
50
0
40 60 40
30 30
5?
20 20
40
10 IO
0 30 0
1999 2000 2001 2002 2003 2004 2005 1999 2000 2001 2002 2003 2004 2005
~ L o n g - t c m@81Shon-tem I
Source Bulgarian National Bank
74. In the absence o f substantial adverse shocks to the economy and if‘ current
structural and prudent macroeconomic policy i s maintained, medium-term external
sustainability i s expected to remain reasonably assured and the external debt to GDP ratio
relatively stable. However, the widening current account deficit and increasing consumption
and investment fueled by the private sector credit boom pose vulnerabilities in the context o f
Bulgaria’s currency board arrangement. Careful monitoring o f the situation i s thus warranted.
75. Under the proposed lending scenario, IBRD’s exposure to Bulgaria would increase
but i s expected to remain manageable. Bank exposure to Bulgaria would increase from about
US$1.4 billion in 2005 to about US$1.8 billion in 2009-10. This would represent a slight
increase in Bulgaria’s share o f total IBRD portfolio from 1.3 percent in FY05 to 1.7 percent in
FY09-10. IBRD’s share o f Bulgaria’s total external debt would stay in the 7-8 percent range,
while IBRD debt service as share o f exports would fall to 0.7 percent by 2009 (Table 6). Both
the preferred creditor exposure and IBRD’s debt service as share o f overall external public debt
service would rise in view o f IBRD’s increased exposure combined with the projected continued
decline o f Bulgaria’s external public debt relative to GDP as a result o f Government’s prudent
debt management. As part o f active debt management, Bulgaria recently pre-paid some o f i t s
outstanding commitments to IBRD and the IMF, which explains the increased exposure
indicators in 2006. Government’s decision to continue borrowing from IBRD i s based on its
assessment o f the merits o f a continued engagement with the Bank in addressing i t s remaining
challenges o f EU integration and convergence.
Table 6: IBRD Exposure Indicators for Bulgaria, 2002-2009”
* based on calendar years.

** lower ratios in 2004-05 reflect Bulgaria’s prepayment o f its remaining Brady bonds.
76. There are several risks to the successful implementation o f the strategy - the main
one would be a slowdown in the reform agenda which in turn would trigger a slowdown in
economic growth. As pointed out earlier, sustained high growth will require continued vigorous
reforms in the business environment, human and physical capital investment, strengthening o f
labor markets, and fiscal adjustment. Given Bulgaria’s difficult demographic conditions,
sustaining these reforms will be critical for keeping up productivity improvements for enhanced
growth. At the same time, the reforms now touch more sensitive areas which are meeting greater
political and social resistance. The Bank program itself i s focused on some o f these more
difficult areas, such as health and education reform which have lagged for insufficient public
support. The pressure from the EU accession agenda will help to mitigate the risk o f delays in
the key reform areas. In the now unlikely event o f a delay in Bulgaria’s EU accession, the risk
o f policy slippage i s low, given continued pressure for Bulgaria to meet accession requirements.
In terms o f the Bank program, the link to continued satisfactory progress on macroeconomic
policies in case o f the D P L series and to progress on sectoral reforms in case o f both DPLs and
investment lending would help to modulate the program to progress o n the needed policies. A
proactive effort by the Government and the Bank to engage stakeholders on the costs and
benefits o f the reforms would also mitigate the risk o f slippage.
77. Further, the reforms and growth will be subject to risks to macroeconomic stability.
In the short run, risks to the country’s external debt position include increases in interest rates,
continuing growth in o i l prices, and reduction in FDI flows. Macroeconomic management could
be further complicated if there were greater capital flow volatility induced by the growing
reliance on short-term capital flows. A reduction in domestic interest rates relative to
comparable returns in the euro zone would magnify the risks o f such volatility. The widening
external current account deficit remains a serious concern as stated earlier, and raises questions
about the competitiveness o f Bulgaria’s economy. Real effective exchange rate and unit labor
cost dynamics suggest that competitiveness remains adequate for the time being. In the medium-
term, the intention towards joining the exchange rate mechanism ( E M - 2 ) and monetary
integration with the EU after accession will raise additional challenges in piloting the economy
towards full adoption o f the euro and maintaining it within the strict Maastricht criteria. The task
will be complicated by the large structural differences, both real and financial, between Bulgaria
and the other euro zone countries. These risks are mitigated by government’s strong record o f
sound macroeconomic management since the 1996-97 crisis anchored in the currency board and
a prudent fiscal policy. The current Government has demonstrated its intent to maintaining the
past policies in this regard. A continuation o f the IMF program, at least through the fall 2006
and possibly longer, would provide support for maintaining prudent macroeconomic policies.
Once Bulgaria joins the EU, the EU’s Stability and Growth Pact (SGP) would help provide
further discipline in support o f macroeconomic stability and growth (para 10).
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CAS Annex A2
Page 1 o f 2
Bulgaria at a glance 6/28/06
Europe & Lower-

POVERTY and SOCIAL Central middie-
Develoomentdiamond*
Bulgaria Asia income
2005
Population, mid-year (rnm/lmons) 7.7 473 2,442
GNI per capita (Atlas method, US$) 3,450 3,300 1,690 Life
GNI (Atlas method, US$ billmons) 26.7 1,557 4,116 -
Average annual growth, 1999-05
Populabon (%) -1.o 0.0 0.9
Labor force (%J -0.8 0.5 1.4 GNI Gross
per primary
Most recent estimate (latest year available, 1999-05) capita enrollment
Poverty' (% of populatlon below nationalpoverty /me) 13
Urban population (% of total populatron) 70 64 50
Life expectancy at birth (years) 72 69 71 I
infant mortality (per 1,000 h e brtfhs) 12 29 32

Child malnutntion (% of chrldren under 5) I1 Access to improved water source
Access to an improved water souree (% of populahon) 100 91 81
Literacy (% ofpopulatm age 15+) 99 97 89
Gross primary enrollment (% of school-age populatronl 100 102 112 Bulgaria
Male 1Ot 103 113 Lower-middle-mncorne group
Female 99 101 111
KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985 1995 2004 2005
Economic ratios'
GDP (US$ bmllrons) 17 6 13.1 24.3 26.6
Gross caMal formation/GDP 32 2 15.7 23.5 28.0
Exports of goods and services/GDP 42 8 44.8 58.0 60.8 Trade
Gross domestic savings/GDP 31 8 14.2 13.2 11.4
Gross national savings/GDP 31 7 11.0 15.4 22.0
Current account balance/GDP -0 8 -1.5 -5.8 -11.8
Interest payments/GDP 4.4 2.2
Total debffGDP 79.2 64.4
Total debt service/exports 16.6 15.1
.L
Present value of debffGDP
Present value of debtlexports
Indebtedness
1985-95 1995-05 2004 2005 2005-09
(average annual growth)
GDP -2 0 29 5.7 5.5 5.9 -Bulgaria
GDP per capita -1 2 38 6.5 5.8 6.7 Lower-middle-income group
Exports Of goods and SeNiceS -227 69 13.0 7.2 11.2
STRUCTURE of the ECONOMY

1985 1995 2004 2005 Growth of capital and GDP (K)
(% of GDPJ 30 .I
Agriculture 11.9 10.8 9.3
Industry 62.8 32.7 29.9 30.4 20
Manufacturing 18.6 18.9 10
Services 25.3 59.3 60.3
0
Household final consumption expenditure 51.6 70.6 68.0 72.1 00 01 02 03 04 05
General gov't final consumption expenditure 16.6 15.3 18.8 16.5
Imports of goods and services 43.2 46.3 68.2 77.4
1985-95 1995-05 2004 2005

(average annual growth)
Agriculture -4.2 2.6
Industry -4.0 2.5
Manufacturing 6.4
Services -2.6 1.9
Household final consumption expenditure -3.5 3.4
General gov't final consumption expenditure -5.0 3.4
Gross capital formation -10.7 16.9 13.9 24.6 -Exports -.Ollmpo!tts
Imports of goods and services -26.1 11.8 14.1 14.6
Note: 2005 data are preliminary estimates. Group data are to 2004.
* The diamonds show four key indicators in the country (in bold) compared with its incomegroup average. If data are missing, the diamond will
be incomplete.
CAS Annex A2
Page 2 o f 2
Bulaar ia
PRICES and GOVERNMENT FINANCE
1985 1995 2004 2005 Inflatbn (%)
Domestic prices
12
(% change) io
Consumer prices 62.1 6.2 5.0 8
Implicit GDP deflator 0.2 62.8 4.8 3.8 e
4
Government finance 2
(% of GDP, includes current grants) 1
Current revenue 55.2 38.9 41.2 42.1 00 01 02 03 M 05
Current budget balance -3.3 5.6 7.1 GDP deflator ‘IOI-CPI
Overall surplusldeficit -5.2 1.7 2.3
TRADE
1985 1995 2004 2005 Export and Import levels (US$ rnlll.)
(US$ milhons)
Total exports (fob) 10,688 4,967 9,541 10,212 16,oW T
Consumer goods 2,125 1,360 2,992 3,465 14,000
Commodity 2 1,791 690 8,030 9,354 12,000
Manufactures 800 5,027 5,216 10,000
8,000
Total imports (ciD 11,199 5,319 12,911 13,636
6,WO
Food 545 123 4,000
Fuel and energy 2.217 1,816 2,000
Capital goods 4,532 1,001 3,985 4,175 0
89 00 01 02 03 M 05
Export price index (2000=700) 135 117 140 175
Import price index (2000=100) 53 116 130 163 Exports rn Imports
Terms of trade (2000=700) 257 101 108 107
BALANCE of PAYMENTS
1985 1995 2004 2005 Current account balance to GDP (“A)
(US$ millions)
Exports of goods and services 11,760 6,738 13,852 15,996 99 00 01 02 03 04 05
0
Imports of goods and services 11,872 6,636 16,657 20,585
Resource balance -112 102 -2,805 -4,589 -2
-4
Net income -101 -432 291 312
4
Net current transfers 74 132 1,098 1,144
8
Current account balance -139 -198 -1,416 -3,133 -10
Financing items (net) 562 676 2,029 3,655 -12
Changes in net reserves -423 -479 -613 -522
Memo:
Reserves including gold (US$ millions) 1,545 9,238 8,535
Conversion rate (DEC, local/US$) 0.002 0.067 1.575 1.574
EXTERNAL DEBT and RESOURCE FLOWS

1985 1995 2004 2005 Composltlon of 2004 debt (US$ rnlll.)
(US$ mlons)
Total debt outstanding and disbursed 10,379 15,661
IBRD 444 1,498
IDA 0 0
Total debt service 1,140 2,456
IBRD 31 121
IDA 0 0
Compositton of net resource flows
Offiual grants 0 22 0
Official creditors 38 127
Pnvate creditors -98 1,070
Foreign direct investment (net inflows) 0 90 0
Portfolio equity (net inflows) 0 0 0
F: 7,955
World Bank program
Commitments 193 150 -
A IBRD E -Bilateral
Disbursements 15 204 -
B IDA D Other multilateral F - Private
-
~
Pnncipal repayments 0 80 C IMF G -Short-term

Net flows 15 124
Interest payments 31 41
Net transfers -16 83
Development Economics 6/28/06

Annex 62
Page 1 of 1
CAS Annex 8 2 Bulgaria -

Selected Indicators* of Bank Portfolio Performance and Management
As of 5/8/2006
indicator 2003 2004 2005 2006

Portfolio Assessment
Number of Projects Under Implementation a 10 9 10 8
Average Implementation Period (years) 1.8 2.2 2.9 3.6
Percent of Problem Projects by Number a* 20.0 11.1 20.0 25.0
Percent of Problem Projects by Amount 26.0 7.8 9.5 15.8
Percent of Projects at Risk by Number 20.0 11.1 20.0 25.0
Percent of Projects at Risk by Amount a, 26.0 7.8 9.5 15.8
Disbursement Ratio (%) e 15.2 9.7 27.9 29.4
Portfolio Management
CPPR during the year (yedno) Yes Yes Yes n/a
Supervision Resources (total US$) 755.0 706.0 515.0 620.0
Average Supervision (US$/project) 75.5 78.4 51.5 77.5
Memorandum item Since FY 80 Last Five FYs

Proj Eva1 by OED by Number 25 10
Proj Eva1 by OED by Amt (US$ millions) 1,637.2 740.9
% of OED Projects Rated U or HU by Number 20.0 10.0
% of OED Projects Rated U or HU by Amt 3.7 1.6
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.
Annex 83
Page 1 of 2
-
CAS Annex 8 3 IBRDADA Program Summary Bulgaria -
As of 5/8/2006
Proposed IBRDADA Base-Case Lending Program a

Strategic Rewards b Implementationb
Fiscal year Pmj ID US$(M)
(HIMA) Risks (HIMIL)
2007 DPL 1 150.0 H H

Road Infrastructure 1 SIL 100.0 M L
Trade & Transport Facilitation for SE Europe II SIL 50.0 M L
Sub Total 300.0
2008 DPL 2 150.0 H H

Municipal Infrastructure SIL 100.0 M M
Social Inclusion SIL 50.0 M M
Sub Total 300.0
2009 DPL 3 150.0 H H

Road Infrastructure II SIL 100.0 M L
Regional Development SIL 50.0 M M
Sub Total 300.0
TOTAL 900.0
a. This table presents the proposed program for the next three fiscal years.
b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate
(M), or low (L).
Template created on 06/28/2006.

Annex B3
Page 2 of 2
CAS Annex B3 (IFC & MIGA) for Bulgaria

-
Bulgaria IFC Program, F Y 2003-2006
2003 2004 2005 2006
IFC approvals (US$m) 28.24 101.44 58.48 23.84
Sector (YO)
Finance & Insurance 39 13 11
Industrial & Consum 100
Nonmetallic Mineral 66
Oil, Gas and Mining 61
Primary Metals 21
Wholesale and retail trade 89
Total 100 100 100 100
Investment instrument(%)
Loans 93 91 100 00
Equity 7 9
Quasi-Equity
Other
Total 100 100 100 00
Guarantee Program
M I G A OutstandingExposure (Gross Exposure, $ milllion)
As of end o f fiscal year FYOl FY02 FY03 FY04 FY05 FY06
through
3/31/06
Sectoral Distribution
Finance 1.2 1.2 28.4 28.9 28.8 0.0
Infrastructure 0.0 20.0 280.6 298.0 296.7 365.1
Mining 0.0 0.0 0.0 0.0 0.0 0.0
Oil & Gas 0.0 0.0 0.0 0.0 0.0 0.0
Agribusiness/Manufacturing/Services~ourism 0.4 0.0 24.7 26.2 26.1
_l.ll____ 25.9
1.6 333.7 353.1__
21.2__________ 351.5 390.9
I_
_I_
MIGA's Risk Profile

Transfer Restriction 1.4 1.2 333.7 353.1 351.5 272.1
Expropriation 0.4 20.0 305.3 324.2 322.7 378.9
War & Civil Disturbance 0.4 0.0 305.3 324.2 296.7 365.1
Breach of Contract 0.0 20.0 0.0 0.0 0.0 0.0
MIGA's Gross Exposure in Country 1.6 21.2 333.7 353.1 351.5 390.9
% Share o f MIGA's Gross Exposure 0.0% 0.4% 6.6% 6.8% 6.9% 7.0%
MIGA Net Exposure in Country 1.6 11.2 125.1 131.6 131.0 139.6
YOShare of MIGA's Net Exposure 0.1% 0.4% 3.9% 4.0% 4.2% 4.2%
Annex 84
Page 1 of 1
-
CAS Annex B4 Summary of Nonlending Services Bulgaria -
As of 5/8/2006
Product Completion FY Cost (lJS$OOO) Audience a Objective
Recent completions
Environment Sequencing Strategy 04 48.3 G/PD/B KG/PS
Pension Reform Note 04 41.3 PD KG/PS
Rural Development Assessment 04 39.3 G/PD/B KG/PS
Roads Study 04 42.2 G/PD/B KG/PS
CPAR 04 81.5 G/PD/B KG/PS
Financing Options for the Water 04 35.2 G KG/PS
and Wastewater Sectors
Private Sector Assessment TA 04 83.9 G KG/PS
Cities of Change TA 04 65.8 G/PD KG/PS
Greening M U (Hot Air PCF) 05 92 G KG/PS

Road Investment Financing Options TA 05 39.6 G/PD KG/PS
Water Workshop TA 05 22.5 G KG/PS
CEM - Policies for Growth 06 315 G/D/B KG/PS

Public Finance Policy Review 06 280 G KG/PS
Underway"
Infrastructure Investment Review 06 50 GIB KG/PS
Institutional Fiduciary Assessment - Roads 06 78 GIB KG/PS
Safeguards Assessment 06 20 GIB KG/PS
Planned ' I
Investment Climate for Private Sector
Growth & Employment 07 200 G/PD KG/PS
Public Finance Policy Review II 07 196 G/D/PD KG/PS
Regional Development 07 75 G/PD KG/PD/PS
Energy Sector TA 07 50 G/PD KG/PS
Fiduciary Update 07 50 G/B KG
Poverty/Living Standards Assessment 08 225 GIBIPD KG/PD/PS
Structural Reform Monitoring 08 200 G/D/PD KGIPDIPS
a. Government (G), donor (D), Bank (B), public dissemination (PD).

b. Knowledge generation (KG), public debate (PD), problem-solving (PS).
c. Costs shown for these tasks are estimates
Annex 85
Page 1 of 1
Bulgaria Social Indicators

Latest single year Same regionlincome group
Europe & Lower-
Central middle-
1975-80 1985-90 1998-2004 Asia income
POPULATION
Total population, mid-year (millions) 8.9 8.7 7.8 472.1 2,430.3
Growth rate (YOannual average for period) 0.3 -0.5 -1 .o -0.1 1.o
Urban population (% of population) 61.2 66.4 70.2 63.6 48.6
Total fertility rate (births per woman) 2.1 1.8 1.2 1.6 2.1
POVERTY
(% of population)
National headcount index 12.8
Urban headcount index
Rural headcount index
INCOME
GNI per capita (US$) 2,260 2,740 3,290 1,580
Consumer price index (1995=100) 2 4,254
Food price index (1995=100) 2 3 3,456
INCOMWCONSUMPTION DISTRIBUTION
Gini index 31.9
Lowest quintile (% of income or consumption) 6.7
Highest quintile (YOof income or consumption) 38.9
SOCIAL INDICATORS
Public expenditure
Health (YOof GDP) 4.4 4.2 2.5
Education (% of GDP) 5.2 3.5 4.4 3.5
Net primary school enrollment rate
(% of age group)
Total 86 90 89
Male 86 91 89
Female 86 90 88
Access to an improved water source
(% of population)
Total 100 100 91 81
Urban 100 100 98 93
Rural 100 100 80 70
Immunization rate
(% of children ages 12-23 months)
Measles 98 99 96 92 86
DPT 98 99 96 90 88
Child malnutrition (% under 5 years) 11
Life expectancy at birth
(years)
Total 71 72 72 68 70
Male 68 68 69 64 68
Female 74 75 76 73 72
Mortality
Infant (per 1,000 live births) 20 15 12 29 33
Under 5 (per 1,000 live births) 24 19 17 36 42
Adult (15-59)
Male (per 1,000 population) 190 217 239 317 192
Female (per 1,000 population) 99 97 103 136 123
Maternal (modeled, per 100,000 live births) 32 61 111
Births attended by skilled health staff (YO) 86
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 to
change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one
year of age.
World Development Indicators database, World Bank - 08/29/05
Annex B6
Page 1 of 2
-
Bulgaria Key Economic Indicators
Actual Estimated Projected

Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009
National accounts (as O@/ o f GDP)
Gross domestic product' 100 I00 100 100 100 100 100 100 i00
Agriculture 13 12 12 11 9 10 9 9 8
Industry 30 29 30 30 30 29 28 28 27
Services 57 59 59 59 60 61 62 63 65
Total Consumption 87 87 88 87 89 86 83 82 109
Gross domestic fixed investment 18 18 19 21 24 26 28 29 29
Government investment 4 3 3 4 5 4 6 7 5
Private investment 14 15 16 17 19 22 22 22 23
~xports(GNFS)~ 56 53 54 58 61 66 67 65 62
Imports (GNFS) 63 60 63 68 77 81 80 78 101
Gross domestic savings 13 13 12 13 11 14 17 18 -9
Gross national savings' 17 15 13 15 22 22 26 28 -2
Memorandum items
Gross domestic product 13,599 15,568 19,939 24,300 26,648 28,804 3 1,465 34,113 37,154
(US$million at current prices)
GNI per capita (US$,Atlas method) 1,720 1,790 2,120 2,760 3,450 3,630 3,890 4,240
Real annual growth rates e!,
calculated from 2002 prices)
Gross domestic product at market prices 4.1 4.9 4.5 5.7 5.5 5.6 5.9 6.0 6.1
Gross Domestic Income 4.5 4.4 5.6 6.4 4.8 6.3 6.1 5.8 -8.2
Real annual per capita growth rates (%, calculated from 2002 prices)
Gross domestic product at market prices 6.1 5.4 5.1 6.5 5.8 6.6 6.6 6.7 6.8
Total consumption 6.4 4.1 7.2 5.9 7.1 4.4 4.0 5.5 18.4
Private consumption 7.2 4.0 7.1 6.3 7.9 5 .O 7.1 5.6 23.4
Balance of Payments (US$ millions)
~xp01-t~
(GNFS)~ 7,276 7,557 10,043 13,852 15,996 19,08 1 20,93 1 22,138 23,097
Merchandise FOB 5,113 5,354 7,08 1 9,848 1I,740 13,987 15,258 15,999 16,511
Imports (GNFS)~ 8,604 8,767 12,104 16,657 20,585 23,421 25,195 26,735 37,672
Merchandise FOB 6,693 7,O 13 9,657 13,491 17,139 19,265 20,781 22,07 1 3 2 3 17
Resource balance - 1,328 -1,210 -2,062 -2,805 -4,589 -4,340 -4,264 -4,597 -14,575
Net current transfers 498 547 696 1,098 1,144 1,336 1,998 2,390 552
Current account balance -805 -319 - 1,022 -1,416 -3,133 -3,700 -3,3 14 -3,508 - 14,101
Net private foreign direct investment 803 876 2,070 2,226 1,99 1 2,691 2,748 2,663 1,320
Long-term loans (net) -54 354 633 -196 -765 2,222 1,663 824
Official -152 -109 73 127 -396 28 -129 -254 -365
Private 97 463 560 -324 -369 2,194 1,792 1,077
Other capital (net, id.errors & ommissions) 500 -183 -785 -1 2,429 -283 146 1,215
Change in reservesd -444 -729 -896 -613 -522 -930 - 1,242 -1,194 330
Memorandum items
Resource balance (% o f GDP) -9.8 -7.8 -10.3 -11.5 -17.2 -15.1 -13.6 -13.5 -39.2
Real annual growth rates ( YR02 prices)
Merchandise exports (FOB) 10.6 9.4 28.5 11.0 11.8 14.3 15.9 10.1 5.4
Primary
Manufactures
Merchandise imports (CIF) 17.7 6.4 27.4 13.3 10.0 13.1 8.8 9.8 7.7
(Continued)
Annex B6
Page 2 of 2
-
Bulgaria Key Economic Indicators
(Continued)
Actual Estimated Projected

Indicator 2001 2002 2003 2004 2005 2006 2007 2008 2009
Public finance (as % of GDP at market prices)e

Current revenues 39.5 38.4 40.0 41.2 42.1 39.9 41.3 41.5
Current expenditures 36.3 36.1 37.4 35.6 35.0 32.4 33.6 33.5
Current account surplus (+) or deficit (-) 3.2 2.3 2.6 5.6 7.1 7.5 17.6 7.9
Capital expenditure 4.2 3.0 2.6 3.9 I 4.6 4.5 6.3 7.0
Foreign financing -0.3 1.5 0.0 -1.6 -5.8 -0.7 -0.6 -0.8
Overall surplus (+)/deficit (-) -0.6 -0.6 -0.4 1.7 2.3 2.9 1.2 0.9
Monetary indicators
M2/GDP 41.7 42.9 48.0 51.7 54.7 60.4 61.2 61.4 35.4
Growth o f M2 (%) 25.8 11.7 19.6 19.5 15.9 22.8 10.8 8.7
Private sector credit growth / 88.0 117.0 119.6 121.1 104.1 157.3 308.0 470.8
total credit growth (%)
Price indices (YROZ =loo)

Merchandise export price index 81.6 83.0 84.5 97.5 93.4 111.9 105.3 100.3 98.2
Merchandise import price index 75.5 77.2 82.6 94.9 91.1 113.7 112.8 109.1 149.3
Merchandise terms o f trade index 108.0 107.5 102.3 102.8 102.5 98.4 93.4 91.9 65.8
Real exchange rate (US$/LCU)f
Real interest rates

Consumer price index (% change) 7.4 5.8 2.3 6.4 5.0 7.2 4.1 3.4 3.3
GDP deflator (% change) 6.7 3.8 2.3 4.8 3.8 5.3 3.5 2.8 3.0
a. GDP at factor cost

b. "GNFS" denotes "goods and nonfactor services."
c. Includes net unrequited transfers excluding official capital grants.
d. Includes use o f IMF resources.
e. Consolidated central government.
f. "LCU" denotes "local currency units." A n increase in US$/LCU denotes appreciation.
Annex B7
Page 1 of 1
-
Bulgaria Key Exposure Indicators
Actual Estimate Projected

Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total debt outstanding and 11202 10619 11245 13241 15549 17798 19355 20685 22390
disbursed (TDO) (US$m)'
Net disbursements (LJS%m)a 492 123 375 1960 2361 79 1495 1912 2005
Total debt service (TDS) 990 1306 1121 1248 2498 5301 1826 2038 1893
(US$mY
Debt and debt service indicators

(%I
TDOKGS~ 153.0 139.9 134.2 112.9 102.0 99.7 88.9 85.9 85.2
TDO/GDP 88.9 78.1 72.2 66.4 64.4 67.4 67.8 66.4 66.3
TDSKGS 13.5 17.2 13.4 10.6 16.4 29.7 8.4 8.5 7.2
ConcessionaVTDO 3.2 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0
IBRD exposure indicators (%)

IBRD DS/public DS 8.4 6.8 8.5 11.2 7.6 5.8 27.6 14.7 26.9
Preferred creditor DS/public 40.2 50.8 51.3 51.7 25.9 26.9 76.3 44.8 54.2
DS (%)'
IBRD DSKGS 1.o 1.1 0.9 0.8 0.8 0.9 1.8 0.7 0.7
IBRD TDO (us$mld 824 844 958 1266 1498 1437 1342 1495 1711
O f which present value of
guarantees (US$m)
Share of IBRD portfolio (%) 1 1 1 1 1 1 1 1 2
IDA TDO (us$mld 0 0 0 0 0 0 0 0 0
IFC (US$m)
Loans
Equity and quasi-equity /c
MIGA
MIGA guarantees (US$m)
a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f 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 o f guarantees.
e. Includes equity and quasi-equity types of both loan and equity instruments.
Annex 88
Page 2 of 2
Statement o f IFC’s Committed and Outstanding Portfolio

BULGARIA
As of March 3 1,2006
Amounts in US Dollar Million
Institution LN ET QL+QE All LN ET QL+QE All
Approval Short Name Cmtd- Cmtd- Cmtd- Cmtd- Out Bal- Out-IFC Out-IFC Out-
Fiscal Year IFC IFC IFC Part IFC Part
1999102 BAC Bank 5 0 0 0 0 0 0 0

2001 Bulbank 0 17.47 0 0 0 17.47 0 0
2004 Drujba A.D. 21.63 0 0 0 21.63 0 0 0
2001 EPlQ 4.53 0 0 0 4.53 0 0 0
2006 EPlQ NV 18.02 0 6.01 0 6.01 0 6.01 0
1994 Euromerchant FND 0 1.65 0 0 0 1.64 0 0
20001 01 Kronospan Group 18.63 0 0 8.52 18.63 0 0 8.52
2002 PFS Restr 0 2.01 17.74 0 0 2.01 12.36 0
03/04/2001 Procredit Bulg 12.01 0 0 0 12.01 0 0 0
2004 Schwarz Group 48.06 0 0 0 48.06 0 0 0
1997 Sofia Hilton 7.75 0 2.6 1.72 7.75 0 2.6 1.72
2004 Stomana 20.91 0 0 0 20.91 0 0 0
20041 2005 Trakya Bulgaria 34.81 7.5 0 64.69 29.54 0 0 56.8
20021 2005 Unionbank AD 10.38 0 0 0 5.58 0 0 0
2005 Melrose Facility 10 0 0 0 10 0 0 0
Total 211.72 28.63 26.35 74.93 184.63 21.13 20.97 67.04

Annex C
Page 1 o f 46
BULGARIA CAS COMPLETION REPORT
Date of CAS: May 3 1,2002
Date of CAS Progress Report: NA
Period Covered by CAS Completion Report: FY03-FY05
CAS Completion Report prepared by: Myla Taylor Williams, Country Program Coordinator
Date of CAS Completion Report: April 24,2006

Annex C
Page 2 o f 46
Bulgaria Timeline:
Key Events Related to FYO3-NO5 CAS Implementation
Feb. 2000 Accession negotiations opened

Early 200 I Consultations on draft CAS
June 2001 Parliamentary elections; NMSS-led coalition formed
Feb. 2002 SBA launched
May 2002 CAS finalized
June 2002 Board discussion o f FY03-FY05 CAS
Oct. 2002 EU Regular Report declares Bulgaria a functioning market economy and confirms
negotiations on 22 EU ucguis communuutuire chapters provisionally closed; Public
Expenditure and Institutional Review disseminated
Nov. 2002 Socialist candidate wins presidential run-off election
Dec. 2002 Board approves Social Investment and Employment Promotion loan
Feb. 2003 Board approves PAL I
May 2003 EU sets tentative accession date o f Jan. 1,2007
June 2003 Board approves District Heating and Revenue Administration Reform loans
July 2003 Cabinet reshuffling
Nov. 2003 EU Regular Report confirms negotiations on 26 ucquis chapters provisionally
closed
Dec. 2003 Government attributes poor IBRD portfolio performance to Bank procedures
Mar. 2004 SBA completed; Bulgaria joins NATO; lSt phase Education APL cancelled
May 2004 EU8 accede to EU
June 2004 Board approves P A L 11; negotiations on all 3 1 ucquis chapters provisionally
closed; S&P upgrades Bulgaria’s long-term foreign and local currency debt from
speculative to investment grade; Council on Economic Policy excludes two IBRD
investment loans under preparation from i t s list o f projects recommended to
Council o f Ministers for financing by state borrowing
July 2004 Council o f Ministers excludes two IBRD investment loans under preparation from
projects to be financed by state borrowing
Aug. 2004 New SBA launched; Fitch upgrades Bulgaria’s long-term foreign and local
currency debt from speculative to investment grade; high-level “Plovdiv Meeting”
to define strategic directions for future Bank engagement
Sept. 2004 Limited Portfolio Review by ECA Quality Unit consultant
Oct. 2004 EU Regular Report confirms negotiations on 3 1 ucguis chapters provisionally
closed
Dec. 2004 Accession negotiations closed
Feb. 2005 Prime Minister survives no-confidence vote
Mar. 2005 PAL I1second tranche cancelled
Apr. 2005 EU Accession Treaty signed
May 2005 Forestry loan dropped
June 2005 Board approves P A L I11 Board; Parliamentary elections; improved portfolio
performance by end-FYO5
Aug. 2005 New government formed
Sept. 2005 Draft Country Economic Memorandum and CPS discussion paper shared with
government
Oct. 2005 EU Comprehensive Monitoring Report warns o f possible one-year postponement
o f accession
Nov. 2005 High-level CPS workshop
Annex C
Page 3 of 46
I.INTRODUCTION
1. The last Country Assistance Strategy (CAS) for Bulgaria was discussed by the World
Bank’s Executive Directors in June 2002 and covered the period FYO3-FYO5. This CAS
Completion Report evaluates the effectiveness of the Bank’s program in achieving its expected
results as set out in the CAS and as further elaborated in the performance benchmark matrices of
the series of three Programmatic Adjustment Loans which formed the core of the CAS program.
The CAS Completion Report also identifies lessons learned, with implications for the forthcoming
Country Partnership Strategy covering the period FY06-FY09.
2. This CAS Completion Report i s based on a review of the CAS, other documentation,
and interviews. The documentation includes assessments of implementation of the CAS lending
and non-lending programs, Joint Portfolio Review reports prepared during the CAS period, reports
prepared by the Bank’s Quality Assurance Group and Operations Evaluation Department, and
results from a World Bank Client Survey conducted in Bulgaria in May-June 2005. The last
Country Assistance Evaluation covered 1991-2000, prior to the FY03-FY05 CAS. Interviews were
held with government counterparts, other stakeholders, partners, and members of the Bank’s
Bulgaria Country Team during the CAS implementation period. The discussion of progress toward
country goals and CAS outcomes reflects the findings of the Bank’s recently completed Country
Economic Memorandum, Public Finance Policy Review, and Education and Health Policy Notes,
as well as the preliminary findings of the PAL I11ImplementationCompletion Report (ICR) team.
A. Political and EU Accession Context
3. Parliamentary elections in June 2001 resulted in the replacement of the UDF-led

coalition with a new government coalition led by the National Movement of Simeon the
Second (NMSS), and headed by Prime Minister and former King Simeon the Second Saxe-
Coburg Gotha. In addition to the N M S S , the coalition included the Turkish minority-based
Movement for Rights and Freedom (MRF). With unmet promises of improved prosperity leading
to voter dissatisfaction and skepticism, the socialist candidate, Georgi Parvanov, won the
presidential run-off election in November 2002. In response to declining public support for the
ruling coalition, there was a reshuffle in July 2003 at the Ministerial and Deputy Prime Ministerial
level that resulted in changes in a number of the Bank’s key counterparts. Surviving a no-
confidence vote held in February 2005, this political leadership remained in place for the duration
of the CAS period.
4. When the FYO3-FYO5 CAS was prepared in 2002, EU accession enjoyed broad
popular support in Bulgaria and was a central theme of the Government’s agenda. Accession
negotiations had been under way since February 2000, as with Romania, Lithuania, Latvia, the
Slovak Republic, and Malta.’
B. Alignment of CAS and PAL Program with Country Goal
5. Soon after taking office in mid-2001, the coalition government issued its Executive
Program of the Republic o f Bulgaria which set out a longer term strategic goal that remained
in place for the duration of the CAS period: to move Bulgaria closer to EU accession by (i)
sustaining economic growth through creation of an investment climate that promotes private
’Six other EU candidate countries - the Czech Republic, Cyprus, Poland, Hungary, Slovenia and Estonia -
had begun accession negotiations in March 1998.
Annex C
Page 4 o f 46
sector investment, restructuring, and productivity; and (ii) reducing poverty and creating
employment through empowerment o f the population, especially the poor, to participate in
economic growth.
6. This strategic goal for Bulgaria was very closely aligned with the CAS’s stated
objectives and outcomes o f the CAS and its core instrument, a series of three Programmatic
Adjustment Loans (PALs). (See Table 1.) The CAS’S stated overarching objectives were to: (i)
reduce poverty and raise living standards; and (ii)support Bulgaria’s move towards EU accession.
And the CAS’s stated outcomes were: (i) per capita national income growth; (ii)reduced poverty
rate; (iii)reduced long-term unemployment; and (iv) reduced total unemployment. The Bank’s
PALs, investment lending, and analytical and advisory ( A M ) work in support o f the CAS
objectives and outcomes were organized around three themes consistent with Bulgaria’s longer
term strategic goal:
(i) promoting competitive private sector-led growth;

(ii) strengtheningpublic administration and anti-corruption initiatives; and
(iii) investing in human capital and strengthening social protection.
Table 1: Strategic Alignment of CAS and PALs with Country Goal
Government’s CAS Objectives CAS Desired CAS and PAL P A L Desired

Long-Term Outcomes Themes“ Outcomes
Strategic Goal
To move Bulgaria To support
closer to EU Bulgaria’s move
accession by: towards EU
I accession
(i) Sustaining 1 To raise living (i)Per capita (i)Promoting (i)Average annual
economic growth standards national income competitive private GDP growth rates
through creation o f growth sector-led growth; of 4.5 to 5.0
an investment (ii) Strengthening percent during
climate that public 2002-2005
promotes private administration and
sector investment, anti-corruption
restructuring, and initiatives
productivity
(ii)Reducing To reduce poverty (i) Reduced (iii)Investing in (ii)Reduction of
poverty and poverty rate; human capital and the poverty rate by
creating (iii)Reducedtotal strengthening 50 percent by 2005
employment unemployment social protection compared to the
through rate; rate in 200 1;
empowerment o f (iv) Reduced long- (iii)Reduction o f
the population, term the unemployment
especially the poor, unemployment rate rate to 12 to 14
to participate in percent in 2005
economic growth compared to 17.5
I percent in 200 1.
‘Reflects retrofittingo f third CAS theme a aggregation of first ree PAL themes (pi1 rs), to highlight
close alignment between CAS and PAL programs and design.
Annex C
Page 5 o f 46
7. The series of three PALSwas designed to support the Government’s reform program
aimed at the achievement of the following three outcomes aligned with the three CAS
outcomes:
(i) average annual GDP growth rates o f 4.5 to 5.0 percent during 2002-2005;
(ii) reduction o f the poverty rate by 50 percent by 2005 compared to the rate in 2001;
and
(iii) reduction o f the unemployment rate to 12 to 14 percent in 2005 compared to 17.5
percent in 2001.
8. Underpinning these outcomes was a multitude of outcomes specific to each of the five
pillars under the PAL program and spanning the Government’s four-year time horizon.
These outcomes were articulated in the Program Document and the Government’s Letter o f
Development Policy for PAL I,and carried through the two subsequent PALS with some
adjustments as the program proceeded.
11. PROGRESS TOWARD COUNTRY GOAL AND CAS OUTCOMES
9. I n October 2002 (four months after the CAS was finalized), the European
Commission (EC) concluded that Bulgaria had a functioning market economy but separated
Bulgaria and Romania from the other ten candidate countries by putting them on a slower,
unspecified timetable for accession. This contributed to a greater sense o f urgency for the
Bulgarian Government to meet EU accession requirements, and served as an incentive for the
Government to accelerate its pace o f implementing structural reforms and institutional capacity
building.
10. The Government’s goal of moving Bulgaria closer to EU accession by the time o f the
national elections in June 2005 was achieved. In May 2003 the EU set a tentative accession date
o f January 2007 for Bulgaria and Romania. By mid-2004 Bulgaria had provisionally closed
negotiations an the 3 1 chapters o f the EU acquis communautaire. In April 2005, as the CAS
period was drawing to a close, Bulgaria signed the EU Accession Treaty.
11. Notwithstanding this important milestone, more progress was still needed on a
number of fronts, such that in October 2005 the EU’s Comprehensive Monitoring Report
concluded that accession might be postponed by one year. The shaded areas in Table 2 indicate
those aspects o f the EU’s political and economic criteria, relevant to the CAS, that were cited in the
EU’s annual reports as needing accelerated progress prior to accession. The reports also evaluated
progress in areas covered by the acquis. Although Bulgaria had succeeded in closing negotiations
on all 31 acquis chapters in June 2004, the EU’s October 2005 report flagged areas o f “serious
concern” in need o f further progress prior to accession (e.g., EU funds absorption, anti-corruption
initiatives, food safety). The report also noted that “Little progress has been made in improving
labor market flexibility, which, together with a comprehensive reform o f the education system,
would be crucial for dealing with skills mismatches and improving the adaptability o f the
Bulgarian economy.”
Annex C
Page 6 o f 46
Table 2: Areas o f Concern Flagged in EU Reports
I Political and economic criteria relevant I 2002 Regular I 2003 Regular I 2004 Regular I 2005 Comprehensive I
Judicial reform
Bankruntcv Drocedures
Includingdecentralizationand EU funds absorption.

a/
Key: Shading indicates those areas cited in EU Reports as needing more progress.
A. Sustaining Economic Growth
12. During the CAS period, Bulgaria performed well against i t s objective of sustained
economic growth. (See Table 3 and Figure 1.) When the CAS was designed, Bulgaria’s economy
was performing reasonably well. Sound policies had maintained macroeconomic stability.
Following Bulgaria’s economic and financial crisis in 1996-1997, a Currency Board Arrangement
(CBA) was put in place, and the Central Bank could no longer exercise monetary or exchange rate
policy. Macroeconomic adjustment could be achieved only through strict discipline in fiscal and
incomes policy. By 2001 this cautious fiscal management had brought the external debt to GDP
ratio down to 79 percent from 100 percent in 1997. But growth had slowed (from 5.4 percent in
2000 to 4.1 percent in 200 l ) , per capita income was about 28 percent o f the EU-25 average, and the
current account deficit remained large, at 7.3 percent o f GDP in 2001.
13. During the CAS period, strict fiscal discipline induced by the CBA strengthened
Bulgaria’s financial position. The fiscal deficit was maintained at 0.6 percent o f GDP in 2002
and was eliminated altogether in 2003, The fiscal balance was in surplus (1.7 percent of GDP) in
2004 and was estimated at 2.3 percent in 2005. This fiscal adjustment has been accompanied by
reductions in tax rates and significant reductions in public debt. Bulgaria reached the Maastricht
Treaty target o f a public debt to GDP ratio o f less than 60 percent in 2002, and the ratio estimated
for 2005 i s 32.4 percent, less than half o f the 2001 ratio o f 69.9 percent. This stabilization
contributed to lower inflation during the first several years o f the CAS period, averaging 4.1
percent during 2002-2003, down from 7.4 percent in 200 1.
Annex C
Page 7 o f 46
Table 3: Private Sector-Led Growth Indicators
Estimated
Estimated Average
Indicators: 2001 2002 2003 2004 2005 2002-2005
Cuirent account balance -7.3 -5.6 -9.2 -5.8 -1 1.8 -8.1

to GDP (%)
Public debt to GDP (%) 69.9 56.2 47.8 40.9 32.4 44.3
Private sector to GDP 70.0 70.0 75.0 75.0 75.0 73.8
(%)b’
FDI to GDP (Yo) 5.9 5.8 10.3 9.2 8.6 8.5
Domestic investment 20.1 4.4 18.2 14.8 21.2 14.7
growth (%)
Export growth (fob, %)” 6.0 11.3 32.5 30.6 19.2 23.4
Productivity (GDP per 9.4 9.8 9.6 9.9 10.3 9.9
employee)
14. Bulgaria’s strengthened financial position has helped to stimulate accelerated

economic growth. Bulgaria’s GDP growth rate has increased from i t s 2001 level o f 4.1 percent to
an estimated 5.5 percent in 2005, with an estimated 2002-2005 annual average o f 5.2 percent.
With annual growth rates exceeding the average o f the EU-25, Bulgaria’s per capita income has
grown from about 28 percent o f the EU-25 average in 2001 to an estimated 3 1 percent in 2005. Per
capita income (at purchasing power parity) has increased from US$6,483 in 2001 to US$8,007 in
2004, at an average rate o f 5.5 percent in real terms.
15. The private sector has led Bulgaria’s growth. It accounted for an estimated 75 percent
o f GDP in 2005 compared with 70 percent in 20012, about the same as the average o f the EU New
Member States (NMS), 75.6 percent. Private sector growth has been stimulated largely by private
consumption, which has accounted for more than two-thirds o f GDP during the CAS period. By
contrast, investment accounted for only about 20 percent of GDP, with domestic investment growth
slowing by half during the CAS period. While consumption levels are high, savings rates are low
relative to those o f CEEC3, in part due to per capita income differentials.
EBRD staff estimates published in the 2005 Transition Report.

Central and Eastern European Countries (CEEC) are defined here to include Bulgaria, Croatia, the Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia.
Annex C
Page 8 o f 46
Figure 1: Bulgaria’s Stability and Growth
CPI Inflation
Fiscal Balance
(% change, annual average)
(% o f GDP)
4
-1
-6
-11
-16
-21
30 1 Investment
120 -
External Debt and Debt Service
(% o f GDP) - 30 -10
110 - -- 25 25
-20
100 -
90- -- 20 n 20 -30 a,
80 - -- 15 ;
0
-403
P
70 - -- 10
60 -
5 15 -505
50 - -- 5 -60
10
-70
5 -80
-External Debt
--S-- External Debt Service (RHS)
GDI % of GDP -GDFI (1989=1)
Current Account Deficit and net FDI Real GDP

(% o f GDP) (% change)
3
24
20
16
12 12
8 8
4 54
0 0
-4 -4
-8 -8
-12
-16
Source: World Bank staff estimates based on data from 31, BNB, MOF (GFSZOOI),and NEA.
Annex C
Page 9 of 46
16. Heavier consumer spending, higher international oil prices, and higher food prices
following heavy floods in the spring of 2005 exerted inflationary pressure in the latter part of
the CAS period. Inflation i s estimated to have increased to an average of 5.6 percent during 2004-
2005 from 2.3 percent in 2003.
17. Foreign direct investment (FDI) flows have grown substantially during the CAS
period, from 5.9 percent of GDP in 2001 to an estimated average of 8.5 percent during 2002-
2005, in response to improved macroeconomic stability resulting from implementation of
structural reforms. Cumulative FDI per capita has surpassed the US$500 mark and i s
approaching the critical mass needed to help improve Bulgaria’s ability to compete in external
markets. However, this i s s t i l l well below cumulative FDI per capita levels o f strong trade
performers among the N M S - about US$3,700 in Hungary and nearly US$3,800 in the Czech
Republic.
18. This gap vis-a-vis some N M S reflects the heavy concentration o f Bulgaria’s FDI in
domestically oriented activities, due not only to the attractiveness to foreign investors of
sectors that serve primarily the domestic market, but also to impediments to export-oriented
investment. Such impediments include inadequate basic infrastructure, complex regulatory
frameworks, and an institutional framework that i s not sufficiently reliable or rules-based. The
costs of these inefficiencies in Bulgaria’s economy can be transferred to domestic consumers via
higher prices, but not to consumers in external markets where there i s stronger competition. This
phenomenon, combined with a growing share of the population in agriculture (25 percent in 2004)
despite the sector’s declining share of GDP (1 1 percent in 2004), are reflected in Bulgaria’s flat
productivity levels during the CAS period.
19. Bulgaria’s continued inefficiencies are reflected in not only its investment and
productivity levels but also its current account balance during the CAS period. Through fiscal
tightening the Government was able to bring the external current account deficit down from 7.3
percent in 2001 to 5.6 percent in 2002. But it widened in 2003 to 9.2 percent, due to a large
interest rate differential with Western Europe and the resulting growth in credit. Fiscal tightening
and measures to reduce growth in credit brought the external current account deficit down to 5.8
percent in 2004, but higher prices and volume of oil imports, together with the impact o f the floods,
pushed it up to an estimated 11.8 percent of GDP in 2005. Bulgaria’s large FDI flows have been
financing the current account deficit, and this i s projected to continue. These large external
imbalances make Bulgaria vulnerable to external shocks and adjustments. Hence the current
account deficit i s a serious concern and poses a considerable macroeconomicrisk.
B. ReducingPoverty and Creating Employment Through Empowerment
20. Bulgaria’s sustained economic growth has in turn led to a significant drop in
unemployment. According to the Employment Agency data (the basis for the Government’s
reform program targets referenced in para. 7 above), the unemployment rate fell from 17.5 percent
in 2001 to around 11 percent in 2005. Labor Force Survey data (used in Table 4 because annual
figures are available) indicate somewhat lower unemployment rates for the same period, but they
also show a significant decline in unemployment, The Government’s active labor market programs
have also had an impact.
2 1. Progress in lowering the share o f long-term unemployment and increasingthe labor

force participation rate has been disappointing, however. (See Table 4.) Bulgaria’s labor force
participationrate i s one o f the lowest in the region. This may partly reflect Bulgaria’s labor market
policy, which mandates large benefits (e.g., seniority premiums, regardless of relevance of skills to
current job) for those with long-term, full-time employment contracts and does not allow for
Annex C
Page 10 of 46
flexible hiring through the use o f temporary or part-time contracts. In addition, Bulgaria’s highly
fragmented social assistance system o f more than 34 programs i s largely ineffective at alleviating
p ~ v e r t y .Instead,
~ poverty alleviation in Bulgaria i s heavily dependent on pensions, which are not
means-tested and therefore not an efficient or effective instrument for poverty a l l e ~ i a t i o n . ~
Table 4: Employment Indicators
Sources: Bulgaria Labor Force Survey, N S I

‘EmployedPopulation aged 15+
b’Unemployed looking for a job/(Employed + Unemployed looking for a job)
“(Employed + Unemployed looking for a job)Population aged 15+
‘Unemployed looking for a job for more than one year/Unemployed looking for a job
22. The lack o f comparable and timely data on poverty reduction makes it difficult to
assess progress against the poverty reduction outcome of the CAS. The Bank conducted a
Poverty Assessment Update in 2002 based on 2001 data, which formed the Bank’s baseline for the
CAS period. An JDF grant approved during the previous CAS period aimed to build the
Government’s capacity in poverty monitoring. In late 2003 the Government conducted a survey
using a methodology more aligned with that used by the EU’s EUROSTAT, and not comparable to
the Bank’s 2002 Poverty Assessment Update. The Government’s next planned survey (2006), a
Survey o f Incomes and Living Conditions, w i l l also lack comparability for methodological reasons.
(EUROSTAT measures poverty in terms o f income, while the Bank does so in terms o f
consumption.)
23. As a proxy for assessing progress against the CAS outcome o f poverty reduction,
Bank staff simulated a poverty headcount index, with the 2001 poverty rate o f 12.8 percent
shown in the CAS as a baseline. With average household consumption data available for all
relevant years, the concept o f elasticity was used for poverty approximation. The degree to which
F
poverty responds to growth i s captured in the notion o f rowth elasticity o f poverty which
measures the change in poverty for a given change in growth. Given the experience with poverty
and growth linkages in neighboring countries, there i s a strong possibility that Bulgaria’s growth
elasticity o f poverty i s greater than 1.5.7 Therefore, although direct measurement o f poverty in
2005 i s not possible due to lack o f comparable data, it i s highly likely that the CAS outcome o f
poverty reduction was achieved, with a reduction in the poverty headcount index by at least one-
Cornelia Tesliuc, Social Protectionand Poverty Reduction in Bulgaria- an Update, 2004 mimeo.
World Bank, Bulgaria Country Economic Memorandum, 2005.
6
In general the growth elasticity of poverty would be negative, as growth and poverty tend to move in
opposite directions. For example, if poverty elasticity o f growth i s 2, then a 1 percent increase in growth will
lead to 2 percent reduction in poverty.
During 1998-2003, according to the ECA Regional flagship report, “Growth, Poverty, and Inequality in
ECA” (2005), average growth elasticity ofpoverty for South Eastern Europe (SEE) was estimated at 2.5.
Assuming the SEE countries (including Romania and Serbia) are good proxy for Bulgaria with regard to
poverty and growth linkages, it i s reasonable to expect that growth elasticity of poverty in Bulgaria would be
at least 1.5.
Annex C
Page 11 o f 4 6
half, to 6.4 percent living below the poverty line. (See Table 5.) A model based on growth
elasticity o f poverty assumes that the degree o f inequality remains constant, independent o f growth.
With total and long-term unemployment not increasing, and the labor force participation rate not
decreasing (in fact, they are doing the opposite), it i s reasonable to assume that inequality i s not
increasing, which lends further confidence in the elasticity model as a proxy for determining the
poverty headcount index.8
Table 5: Poverty HeadcountIndex Simulation
Growth elasticity o f poverty = 1.O 10.0 I 8.9 I 8.2

Growth elasticitv o f ~ o v e r t v= 1.5 I 10.0 I 8.7 1 7.2 I 6.4
Growth elasticity o f poverty = 2.0 9.1 7.5 5.8 4.9
Growth elasticity o f poverty = 2.5 8. I 6.4 4.6 3.7
Growth elasticity o f poverty = 3.0 7.2 5.4 3.5 2.7
Projectedbased on the first 10 months data.
24. While the Government's active labor market programs had a positive (albeit likely
unsustainable) effect on employment creation, data trends indicate that Bulgaria's progress
toward facilitation of broader participation in economic growth by improving the education
system fell short of expectations during the CAS period. Recent trends in quality indicators
show some deterioration, despite increased public spending per studentg The Trends in
International Mathematics and Sciences Study (TIMSS) shows a decline between 1995 and 2003 in
mathematics performance by Bulgarian eighth graders, in absolute terms as w e l l as relative t o the
NMS. (See Figure 2.) Data also indicate that ethnic minority children, especially Roma, are
overrepresented in schools o f lower quality due t o discrimination or geographic separation." There
were positive trends, however, with respect to access during the CAS period. (See B o x 1.) Net
enrollment rates in primary school education are impressive, having increased from 96 percent to
near 100 percent. This increase was accompanied by a dramatic reduction in the primary school
enrollment gap between rich and poor." Secondary net enrollment rates increased as well, but they
s t i l l lag behind primary enrollment rates, especially at the upper level (grades 9-12 are at 77
percent). About 20 percent o f Bulgaria's 18-24 year-olds do not have more than a lower secondary
(eighth grade) education. (See Table 6.) Particularly worrisome i s the stagnating f l o w o f students
into Bulgaria's tertiary system at about 40 percent, l o w relative to the NMS, and with continued
8
In Bulgaria many young people are delaying having children and working, and are residing longer with
their employed or pensioner parents. With improved targeting o f social assistance, it i s even less probable
that Bulgarians fitting this profile would be below the poverty line. As in Hungary, it i s possible to have low
foverty rate as well as labor force participation rate in Bulgaria.
World Bank, Bulgaria Public Finance Policy Review: Leveraging EU Funds for Productivity and Growth,
2006.
loWorld Bank, Bulgaria Education Policy Note, 2005.
" World Bank, Growth, Poverty and Inequality in Eastern Europe and Former Soviet Union, 2004.
Annex C
Page 12 o f 46
very low tertiary age enrollment among the poor (6 percent).12 If l e f t unaddressed, these trends do
not augur well for the competitiveness o f Bulgaria’s labor force or for broader participation in
Bulgaria’s future economic growth.
25. A review of selected health indicatorsshows a significant increase in the utilization of

health care services when sick and a slow but steady improvement in both male and female
life expectancy as well as the infant mortality rate during the CAS period, in line with the
Government’s objective of broadened participation in Bulgaria’s economic growth. Health
care utilization increased from 62 percent to 83 percent between 2001 and 2003.13 Female and
male l i f e expectancy increased, respectively, from 74.6 and 67.6 years in 2000 to 75.4 and 68.4
years in 2004 (e~tirnate).’~Over the same period infant mortality steadily improved. (See Box 1.)
Figure 2: Mathematics performance of Bulgarian eighth graders fell from above to below the
N M S average
560 1995 D2003 -NMS (1995) ---NMS (2003)
540
520
500
480
460
440
420
m
‘5M
-a
m
I Selected new member states
Source: World Bank, Bulgaria Education Policy Note, 2005 (based on data from TIMSS; NMS average
computed only for countries that participated in both years).
Table 6: Net EnrollmentRates in the Educational System by Age Groups
98.4 101.2 102.3 102.2 101.6
Source: World Bank, Bulgaria Education Policy Note, 2005 (based on data from National Statistics
Institute),
Note: Net enrollment rates can exceed 100 percent due to incomplete age cohort data.
World Bank, Bulgaria Education Policy Note, 2005.

I3World Bank, Growth, Poverty and Inequality in Eastern Europe and Former Soviet Union, 2004.
l4World Bank, Bulgaria Health Policy Note, 2005.
Annex C
Page 13 o f 46
26. On the other hand, a recent government study15 documents a rise in non-
communicable disease due to unhealthy lifestyles and a healthcare system with insufficient
access to preventive and curative healthcare services. A household survey conducted in 2002
indicated that l o w income groups (especially Roma) cannot afford access to healthcare services,
and estimated that about 12 percent o f households make informal or unregulated payments to
providers. l6
.__
__ _______~_-_ _~
Box 1: Bulgaria's Progress Toward the MDGs During CAS Implementation
Government Objectives Baseline Data Update on Status 2005 Target 2015 Target
Eradicate extreme poverty
percent o f population 7.9 (2001) n.a. 3.2 1.5
below US$2. I 5 per day
percent o f population below 12.8 (2001) 6.4 (2005)
US$2.76 per daya/
Achieve universal education

primary school
percent net enrollment rate - 83.1(2001-02) 84.2 (2004-05) 86-90 100
lower secondary school
secondary school
Improve maternal health
Maternal mortality ratio per 19.1 (2001) 10.02 (2004) 18 16
100,000 live births
Combat HIPVAIDS, malaria and
other diseases
Tuberculosis incidence (new 48 (200 1) 42.4 (2004) 40 26
cases per 100,000)
Polio immunization rate 94.4 (2000) 94.1 (2004) 98 100
(percent o f children under two
Reduce infant mortality

Infant mortality rate per 1000 14.4 (2001) 1 1.6 (2004) 13 9
live births
Ensure environmental
sustainability
GDP per unit o f energy use 568 (1997) n.a. 653 75 1
(PPP US$ per kg o f oil
equivalent)
'Due to lack o f data, figure for 2005 is based on assumed growth elasticity of poverty o f 1.5. See para. 23 and Table 5.
-
Smrces: National Statistical Institute and World Bank; UNICEF. . I __ "-.__ __
III. CAS PROGRAM DESIGN
A. Instrument M i x and Linkages to CAS Outcomes
27. The CAS program was designed around two lending scenarios, a base (most likely)
case and a low case, with 14 triggers to be met for Bulgaria to remain in the base case. These
triggers focused on five areas o f performance:
l5Bulgaria Ministry o f Health, Report on the Health o f the Nation in the Dawn o f the 21" Century, August
2004.
l6World Bank, Bulgaria Health Policy Note, 2005.
Annex C
Page 14 o f 46
a satisfactory macroeconomic framework
portfolio - a disbursement ratio o f not less than 20 percent and satisfactory
performance ratings o f not less than 80 percent o f Bank-financed projects
structural reforms and private sector development - satisfactory progress against
specific benchmarks for privatizations, railways restructuring, and approvals o f
company registration and construction permits; establishment o f a Unified
Revenue Information System; completion o f hnctional reviews for civil servants
in two ministries; and amendment o f the bankruptcy law
social sustainability - satisfactory progress in several aspects o f pension reform
and implementation o f winter energy subsidy programs
fiduciary capacity building - completion o f the CFAA in FY03 and satisfactory
progress in implementing the action plan set out in the FYOO CPAR.
28. The centerpiece o f the CAS base case program was a series of three Programmatic
Adjustment Loans (PALs) totaling US$450 million equivalent, designed to support Bulgaria’s
structural reform agenda and path to EU accession. The PALs supported the Government’s
comprehensive program, organized around five complementary and mutually reinforcing pillars,
each o f which was to contribute to achievement o f the country goal and the three CAS outcomes:
sustaining structural reforms in the enterprise sector, with emphasis on

restructuring o f the infrastructure sectors (energy, railway, telecommunications,
and water);
establishing a market-Ji.iendly business environment by focusing on entry and exit
poIicies, regulatory costs, delivery o f public services, competition, and judicial
reform;
deepening thefinancial system by addressing the constraints to increased lending
by the banking system and the development o f financial markets;
improving public sector governance by implementing the anti-corruption strategy,
strengthening local governments, and reforming public administration and
thejudiciary; and
investing in human capital and strengthening social protection by reforming the
education, health, and pension systems and improving social assistance
effectiveness.
29. I n addition to the base case triggers, the CAS spelled out several negative
macroeconomic and structural developments that would trigger reconsideration of
proceeding with PAL III.” There were also from nine to twelve triggers specific to each o f the
three PALs, reflected in their respective Program Documents.
30. A policy framework of triggers, Board conditions, and benchmarks organized around
the five pillars was presented in the context of the first P A L and remained in place
throughout the PAL series. As stated in the CAS, within this framework each P A L was to have
i t s own strategic focus as well as continue support for policy measures in areas supported under the
previous PAL(s). P A L Iwould advance structural, regulatory and institutional reform in the real
l7 (i)
A material deviation from the downward trend in total public debt to GDP ratios as projected in the
CAS; (ii) a lack o f improvement in the spreads on Bulgaria’s sovereign borrowing vis-&vis countries with
similar risk rating, or deterioration in its own risk rating; (iii)
a material deviation from the improving trend
in the fiscal balance projected in the Government’s medium-term program, reaching fiscal balance by 2005;
(iv) a material slow-down in the present trend o f increasing SMEs’ share in total employment; and (v)
inadequate progress in reducing arrears in tax payments, social insurance contributions, and energy bill
payment as set out in the Government program.
Annex C
Page 15 of 46
sectors key to reforms, including energy. PAL I1 would focus on reform in areas taking longer to
prepare, such as public administration, the legal and judicial system, and anti-corruption measures.
And PAL I11 would focus on labor market and social sector policies, including long-term
sustainability o f the social protection system and restructuring of the health and education sectors.
3 1. The design of the PAL program was complex and multi-sectoral. Across the three-year
program there were 31 triggers, and the number of benchmarks went from 173 in the PAL I
Program Document up to 246 in the PAL I1 Program Document, and down slightly to 232 in the
PAL I11Program Document.
32. The PAL program was complemented by a pipeline o f seven sector investment loans
totaling US$300 million equivalent, balanced across the major sectors: energy, municipal
services, education, employment promotion and investment in social capital, tax administration,
forestry, and rural finance. These were supplemented by three GEF operations and one PCF
instrument. With the social sectors not specifically addressed in the EU acquis communautaire,
investment lending in these areas was informed more by the Bank’s global knowledge and its
poverty reduction agenda. Ongoing loans in the portfolio also covered a broad range of sectors,
including those not addressed by the CAS pipeline, such as health.
33. Adjustment lending accounted for 60 percent of total lending in the CAS program.
During CAS discussions the Bulgarian authorities had requested a program consisting of PALs and
little to no investment lending. However, Bank management set a ceiling of 60 percent for fast-
disbursing loans in light of Bulgaria’s already high level o f indebtedness to the Bank, which would
rise even further once the PALs began to disburse. During the CAS period, the ratio of rSRD debt
service to public and publicly guaranteed debt service was projected to increase from 8.9 percent in
2002 to 1 1.9 percent and the Bank’s share of total debt disbursed and outstanding was projected to
increase from 9.9 percent in 2002 to 11.O-11.8 percent.
34. The centerpiece of the non-lending program in the CAS was to be the Country
Economic Memorandum focusing on the policy agenda for Bulgaria’s successful EU
integration. This was delayed from FY04 delivery to FY06 (so after CAS period), and while the
previous Government was disappointed not to receive it, it was well timed to launch dialogue with
the new Government. A Public Expenditure and Institutional Review preceded the CAS period,
although it was successfully disseminated in the fall of 2002. (See para. 114.) This was to be
followed by a fiduciary report (Country Financial Accountability Assessment), technical assistance
in energy and private sector development, and a combination of sector reports (environment,
energy, and transport) and policy notes (pension, fiscal decentralization, and agriculture). The third
year of the non-lending program (FY0.5) was fairly thin, but it was expected that this would be
fleshed out later in the CAS period, once lending priorities for FY06 and beyond were better
known.
35. While the CAS program instruments were not specifically designed to help Bulgaria
fulfill acquis requirements per se, they were well aligned with the Bank’s institutional
priorities and the CAS outcomes, and consistent with the CAS objective o f moving Bulgaria
closer to EU accession. Attachment E shows these linkages. It also illustrates the extent to which
instruments were concentrated more heavily on the CAS outcome of per capita national income
growth, with fewer focused on the CAS outcomes of reduced poverty and unemployment. The
Government and the Bank believed that sustained per capita income growth in itself would lead to
reduced poverty and unemployment, and so all CAS outcomes would be realized if the CAS
program were focused disproportionately on the growth outcome.
Annex C
Page 16 o f 46
36. I n the event of an unsatisfactory macroeconomic framework, Bulgaria would be in
the low case. The low case CAS program would be limited to investment loans in the areas o f
community-based development, rural development, and poverty reduction, and not to exceed
US$180 million equivalent during the three-year CAS period. Non-lending services would be
limited to analytical work on poverty, social assistance, and energy and environment issues with
significant impact on EU accession. The probability o f the low case was considered low in light of
Bulgaria’s strong performance and commitment to reform.
B. Gaps in CAS Program
37. There were no gaps in the design of the wide-ranging CAS lending program, but the
non-lending program proved to be incomplete, with the result that there were gaps in its
linkages to the lending program. The number o f non-lending instruments in the program more
than doubled relative to what was originally envisioned in the CAS (from 12 to 25). This was
partly in response to client demand for advice in additional areas such as public debt and public
utility regulatory frameworks, as well as grants to address problems faced by ethnic minorities (the
Bank helped launch a multi-country initiative focused on the Roma a year after the CAS was
prepared). And it was partly at the Bank’s initiative, to underpin planned and potential lending
operations for rural development, roads, and infrastructure financing in the energy and water
supply and sanitation sectors. The CAS program should have included a Poverty Assessment in
2005, to gauge progress against the CAS outcome of poverty reduction. (See paras. 22-23.) In
hindsight the Bank’s non-lending program should also have addressed the issue o f capacity
building for effective absorption o f pre- and post-accession EU grant funds, which would prove to
be a critical issue later in the CAS period as well as for the forthcoming FY06-FY09 Country
Partnership Strategy. In addition, the design as well as Government ownership of the education
and health investment loans already in the portfolio during the CAS period (see paras. 121 and 128)
would likely have been strengthened, had there been sector work prior to design o f those operations
during the FY99-FYO1 CAS period, to analyze sector issues and recommend policy options. (The
2002 PEIR addressed education and health sector issues, but several years after the education and
health investment loans had been designed and approved.)
C. Monitoring and Evaluation
38. The system for monitoring and evaluation (M&E) progress toward the CAS outcomes
was successful because it was embedded in the PAL program negotiated with the
Government. The Performance Benchmark matrix for each PAL spelled out measurable
benchmarks and the corresponding specific, expected outcomes. Unlike those in a CAS, PAL
benchmarks and outcomes are legally negotiated and agreed with the Government, and so are more
meaningful. This approach o f detailed, multi-sector benchmarks and outcomes has subsequently
been used in the design of PAL programs in Romania and Croatia with good success. Progress
toward achievement o f the Bulgaria CAS outcomes i s therefore measured to a good extent within
the M&E framework of PALS I- 111. (See Attachment F.)
39. M&E was also successful because it was institutionalizedwithin the Government. The
high-level Council for Structural Policy, later called the Council for Economic Policy, coordinated
and managed implementation of the reforms supported by the PAL program. The Council was co-
chaired by the Deputy Prime Minister and Minister for Economy and was supported by an efficient
secretariat with access across the Government at the ministerial level. Several other committees
were formed to focus on specific components o f reform, and feedback mechanisms were
established for tracking progress toward outcomes.
Annex C
Page 17 of 46
40. Measurement of performance against one of the PAL program outcomes, poverty
reduction, was hindered by the lack of timely poverty data comparable to the 2001 baseline
data in the Bank’s 2002 Poverty Assessment Update. Poverty rates for 2003 were measured by
the Poverty Monitoring Unit within the Ministry of Labor and Social Policy, using a new multi-
topic household survey. Capacity building of the Poverty Monitoring Unit was supported by an
Institutional Development Fund (IDF) grant.” The 2003 survey results, which the Government
chose not to publish for political reasons in the pre-election cycle, were not directly comparable to
the Bank’s 2001 data. The Government now plans to conduct a survey in 2006, aligned with
EUROSTAT’s income-based methodology. In the future, the Bank will need to conduct its own
poverty assessments in view of methodological issues and political factors.
IV. CAS PROGRAM IMPLEMENTATION AND OUTCOMES
41. By the end o f the CAS period, the broad CAS outcomes of per capita national income
growth, poverty reduction, and reduced total and long-term unemployment had all been
achieved And as quantified in the Government’s program and the corresponding PAL program’s
overall outcomes, the specified poverty reduction outcome was likely achieved, and the specified
growth and unemployment outcomes were not only achieved but surpassed. (See Tables 3 and 4.)
42. The CAS outcomes are inter-related. Poverty i s reduced as unemployment declines and
for both, sustained economic growth i s a strong driver. A Bank instrument aimed at sustained
growth therefore has an impact on reduction of poverty and unemployment as well, and a Bank
instrument aimed at reduced unemployment has an impact on poverty reduction. Because they are
more distinct one from another, and at the same each contribute to the achievement of all three
CAS outcomes, the three themes of the CAS and PAL programs - (i)promotion of competitive
private sector-led growth, (ii)strengtheningof public administration and anti-corruption initiatives,
and (iii)investment in human capital and strengthening social protection - are the framework for
the following assessment of the impact of Bank instruments. See Attachment F for detailed
assessment of progress against desired PAL program outcomes within this thematic framework.
A. Impact o f Bank Instruments
Theme I : Promoting Competitive Private Sector-Led Growth
43. Complemented by several investment loans and a sector adjustment ioan, the
primary vehicle for the Bank’s supporting increased competitiveness and private sector-led
growth was the cluster o f the first three pillars of the PAL program: Sustaining Structural
. Reform (Pillar I), Establishing a Market-Friendly Business Environment (Pillar 2), and Deepening
the Financial System (Pillar 3). Bulgaria’s successful implementation o f reforms in these areas
supported by the PAL program contributed to the expansion of the private sector to an estimated 75
percent of GDP in 2005 compared to 70 percent in 2002. As a result, EBRD upgraded Bulgaria’s
transition indicators for large-scale privatizations in 2004, infrastructure and banking reform in
2004, and competition policy in 2005. (See Table 7.) This progress i s also reflected in Bulgaria’s
FDI inflows over the period, averaging US$1.6 billion a year between 2001 and 2004 (60 percent
more than the PAL program’s target) and comparing favorably with those of N M S .
l8 Approved in FY02 in the amount of US$338,000.

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Table 7: Bulgaria’s Improved EBRD Transition Indicators
Infrast
Enterprises Markets and Trade Financial Institutions
ructure
I I
Large- Banking I Securities Infrast
Scale scale market & non- ructure
ex-change interest rate bank financial reform
restructuri system liberalization institutions
44. The objectives of reforms supported by Pillar 1 were largely met. These objectives
were to rationalize the role of the state through privatizations while mitigating associated
environmental risks; improve efficiency in the energy, railway, and water sectors; prepare the
energy sector for EU accession; and liberalize the telecommunications market.
45. The goal of privatization and restructuring of SOEs was successfully achieved under
the PAL program. More than 80 percent o f the remaining SOEs in which the Government had
majority control in 2002 were sold or liquidated, and most companies in which the Government
had minority shares were also divested. These privatizations contributed to the increase in the
private sector’s share o f GDP, from 70 percent to 75 percent during the CAS period. Bulgaria’s
performance in large-scale privatization i s now on a par with the best performing transition
countries. The main outstanding and unfinished agenda in the PAL program’s large non-
infrastructure privatization i s Bulgartabak. As PAL I1was being prepared, it became clear that the
privatization of Bulgartabak, originally envisioned as a PAL I1 Board condition, would be delayed
due to changing market and domestic political conditions, This privatization was therefore shifted
to a second-tranche condition, which made PAL I1 the only multi-tranche operation in the PAL
series. In the end, Bulgartabak was not privatized, and the second tranche o f EUR 20 million was
cancelled. The significance to the international markets of the Government’s privatizing
Bulgartabak diminished over the course of the PAL program, in light o f significant progress in
other privatizations as well as political factors affecting this particular sale, widely publicized in the
pre-election period. (The Minister o f Agriculture was a member o f MRF, a minority party within
the governing coalition, with Bulgaria’s tobacco growers forming part o f the party’s constituency.)
As a compensating measure, the privatizationof BTC was added to the PAL 111Board conditions.
46. Bulgaria’s energy intensity (measured in terms of kg oil equivalent per € 2000 PPP)
was reduced by 10 percent from 2001 to 2004, and while data are not yet available, a further
reduction in 2005 i s likely. Several reform measures supported by the PAL program contributed
to this outcome, including: (i)energy prices brought to cost recovery levels; (ii)an improved legal
and regulatory framework through enactment o f a new Energy Act consistent with EU energy
directives (informed by PPIAF on new gas distribution networks); (iii)upgrading of the
institutional capacity of the State Energy Regulatory Commission (SERC); and (iv) spin-off o f
electricity distribution and generation companies from the former monopoly electricity company
(NEK). The PAL program supported significant private sector entry in the energy sector, through
100 percent privatization of electricity distribution with the sale o f all seven distribution companies
and seven (compared to the target o f five) district heating companies.
47. The energy reforms supported by the PAL program were complemented by several
investment operations, sector work, and technical assistance during the CAS period. PAL
Annex C
Page 19 of 46
benchmarks were informed by the Bank’s Infrastructure and Energy Strategy Review (FY03). The
IBRD-financed District Heating project aims to improve the quality of the Sofia and Pernik District
Heating Companies’ service provision and financial viability, as well as to increase their energy
efficiency and reduce pollution. Results thus far from this project show that more consumers are
returning to the district heating services of both companies, financial viability i s increasing which
has allowed the phase-out of operating subsidies, and heat consumption per apartment i s decreasing
due to tariff increases and demand-side measures supported by the project. The roject builds on
the successfully implemented district heating component of an earlier operation,” which financed
the procurement and installation of heat meters in buildings in 15 district heating systems. In its
Project Performance Assessment Review (PPAR), IEG rated the development impact of this
component high in light of achieved pumping cost savings and water loss reduction.
48. Bulgaria i s undertaking a number of Bank-supported initiatives to help reduce the

energy intensiveness of its economy and meet its obligations under the UN Framework
Convention on Climate Change. A GEF Energy Efficiency Grant (informed by the Bank’s
earlier National Energy Efficiency Study) aims to support a large increase in energy efficiency
investments for reduced greenhouse gas emissions, through development of self-sustaining,
market-based financing mechanism, an energy efficiency revolving fund that reduces investor risk,
independent of public subsidies. Implementation i s still at an early stage. Complementing this
GEF grant and the District Heating loan are three Prototype Carbon Fund Emission Reduction
Purchase Agreements (ERPAs), to help Bulgaria meet i t s obligations under the Kyoto Protocol:
one for a wood residue to energy project (for minimum of US$1.75 million) aimed at reducing
dependence on imported coal through conversion to stockpiled wood, and two signed with the
Sofia and Pernik District Heating Companies (for a total value of close to US3.0 million). These
ERPAs were not planned at the time of the CAS. In addition, Bulgaria implemented a small
Forestry Fuel Switch Pilot (approximately US$900,000 in Bank-administered PHRD grant funds)
to test the installation, operation, and resulting carbon credits o f two fuel-efficient, low-polluting
heating systems, switching from fossil to wood fuel in two municipal buildings. The project
increased public awareness. As these various initiatives indicate, Bulgaria has been a leader within
the region in making use of the Bank’s “green” instruments.
49. PAL restructuring of the railway sector was successful. The Government’s targets for
financial sustainability established for end-2005 had been met by end-2004: operating subsidies
(excluding funds for investment) fell from 0.5 percent of GDP in 2000 to 0.2 percent; financial
working ratios of the operating and infrastructure companies were close to 100 percent (not
including government subsidies); and productivity increased by 12 percent. These outcomes were
achieved through actions supported by the PAL program, including the establishment of a new
railway operating company and a new railway infrastructure state enterprise, termination of loss-
making passenger services, and reduction of the railway labor force by 13 percent from end-2001
to end-2004.20
50. The telecommunications sector was successfully liberalized. Substantial progress was
made toward the PAL benchmarks for increased digitalization of the transfer network, transit
exchanges, and fixed subscribers, the target that 94 percent of households with telecom services
have internet access was met, and telephone connection waiting time was reduced. These results
were achieved through actions to liberalize the sector, consistent with EU requirements and
’’The Water Companies Restructuring and Modernization loan, to which the district heating component was
added when the loan was restructured in 1997 (see para. 51).
*’Aithough less than the 20 percent envisioned at the outset o f the PAL program, as a trigger relating to
railway reform was changed from focusing on labor force reduction to include improved financial
performance through changes in tariff structure and other structural reforms.
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supported by the PAL program, including establishment of the Communications Regulation
Commission, enactment o f a new Telecommunications Law consistent with best practice and EU
requirements, and privatization of BTC and elimination of its monopoly. The Bank’s technical
assistance for telecommunications regulator capacity enhancement, together with a PHRD-funded
assessment of Bulgaria’s telecommunications market and policy, helped to inform the sector
reform agenda.
5 1. Efforts under the PAL program to modernize the water sector were less successful, in
part owing to challenges in coordinating private sector entry with the flow o f EU grant funds
to utilities which have concessions or management contracts. While the reduction in the water
companies’ operating ratio did not likely meet the PAL program benchmark of 86 percent by end-
2005, it did decline to 88 percent in 2004 from 90 percent in 2002. Under the PAL program, the
Government adopted a new Water Sector Strategy emphasizing public-private partnerships for the
provision o f adequate water service for all citizens, wastewater treatment in line with EU
directives, and rehabilitation and construction of water and sewerage networks. A new Water
Regulatory Law was enacted in January 2005, supported by technical assistance from the PPIAF.
PAL benchmarks in the area of water sector reform were informed by two pieces o f analytical
work in FY04 (Financing the Water and Wastewater Sector and Environmental Sequencing
Strategies for EU Accession) and preceded by the Bank’s Water Companies Restructuring and
Modernization loan from an earlier CAS and which closed in December 2002. The loan financed
primarily (i)water and sewerage investments aimed at improving water quality in urban areas,
operating efficiency and cost recovery, and transparency in procurement; and (ii)institutional
strengthening of Regional Water Companies (RWCs). The original project objectives were only
partially achieved in terms o f scale, because nearly half of the US$98 million loan amount was
cancelled due to Bulgaria’s financial crisis in 1996-1997, which reduced the RWCs’ willingness to
take on sub-loans.
52. With respect to environmental mitigation, the Government has been implementing
provisions of the EU Integrated Pollution Prevention and Control (IPPC) Directive and
extending issuance of integrated permits. A new Environmental Protection Act, harmonized
with EU requirements, was adopted. By end-2004, the Government had issued only 7 integrated
environmental permits under the IPPC directive, against the program’s goal o f approximately 225
to cover all enterprises under the IPPC directive by end-2007. With applications pending for 90
more, the Government needs to move more swiftly if it i s to meet i t s end-2007 goal. Given i t s
good track record in addressing privatization-related environmental issues, there i s a good chance
the Government will be able to meet its goal.
53. Two environmental mitigation loans from the previous CAS program, aimed at
promoting growth, were in the portfolio six to twelve months into this CAS period before
they closed. The Environmental Remediation Pilot financed successful clean-up o f an
environmentally hazardous industrial site, MDK Copper Smelter. Discharge of heavy metals and
other pollutants was reduced, and a monitoring system was installed. The project has served as a
model for addressing past environmental damage and liability in the context of privatization and
laid the groundwork for the Environment and Privatization Support Loan (EPSAL). Under the
EPSAL the Government established norms, good by regional standards, for dealing with
environmental liability ensuing from privatizations. The privatization law was amended to clarify
state liability for environmental damages. The loan supported the establishment of a framework for
integrating environmental liabiliaties into privatization of three industrial SOEs. The Government
subsequently applied this framework to complete the privatization of ten additional industrial
SOEs. In addition, there was substantial progress in harmonizing with EU environmental
requirements, An ongoing GEF Wetlands Restoration and Pollution Reduction project was
approved just prior to the CAS period. It aims to support the adoption of sustainable natural
Annex C
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resource management practices by local communities and local authorities in a nature park area and
a protected site area. The wetlands restoration component i s stalled (see para. lll), but the
protected areas management component i s proceeding well, with management plans more than 50
percent completed, with the active participation o f local stakeholders and park administration.
Project outcomes are to be achieved by project closing in 2008.
54. The objectives of Pillar 2 to reduce firm entry constraints and regulatory costs,
improve the Government’s business service delivery, ensure competitive and functioning
markets, and improve the efficiency of the insolvency regime were met, while the objective to
promote flexibility in the labor market was partially met. Competition in the domestic market,
which had been limited by an overly complex regulatory environment and inefficient contract
enforcement, improved following regulatory and judicial reforms supported by the P A L program.
The SME share o f employment increased to 56.7 percent in 2003 from 50.6 percent in 2000 and its
share o f value added increased to 36.2 percent in 2003 from 29.5 percent in 2000. The
Government streamlined regulatory regimes to reduce private sector transaction costs. Most
centrally managed regulatory regimes for licensing, permission and registration were eliminated or
modified. An Internet-based public register o f all current operative regulatory regimes was put in
place for greater transparency and accessibility. A new Law on Administrative Regulation and
Administrative Control on Economic Activities, the enactment o f which was a PAL benchmark,
controls and codifies the principles needed to underpin introduction o f new regimes. This was a
contributing factor in the substantial decline in the shares o f f i r m s indicating business licensing and
permits and uncertainty o f regulatory policies and bribery as problems in doing business. (See
Figure 3.)
Figure 3: Improved BEEPS Results on Business Climate
Regulatory Policies as a Problem Doing Business (% Business Licenses as a Problem Doing

o f firms indicating uncertainty about regulatory policies Business (% o f f i r m s indicating business
as a problem doing business) licensing and permits as a problem doing
IOO%rl business)
80% 40%
‘60% 30%
40% 20%
20% 10%
0% 0%
Bul EU8 SEE
B ul EU8 SEE
2002 .B2005
t#2002 .2006
Source: PAL 111 ICR Team (BEEPS, 2002 and 2005).
55. Enactment o f a new Law on the Bulstat Register (a P A L III trigger) enabled
businesses to use the Bulstat number as the single-identification number for registration as
well as tax and social security payments. This established a unified national register to help
facilitate shifting the registration system from the courts to a non-judicial administrative process.
The release o f judges from routine administrative procedures is reducing delays associated with the
resolution o f commercial disputes. The Bank’s Private Sector Assessment (FY04) helped lay the
groundwork for this reform.
56. Bulgaria’s efforts to promote competition and functioning markets were supported
by the P A L program as well as the ongoing Registration and Cadastre loan, approved during
the previous CAS. Under the P A L program, the Government upgraded the capacity o f i t s
Commission for the Protection o f Competition through enactment o f amendments to the Law on
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the Protection o f Competition (a P A L benchmark). Indicators o f progress include SMEs’ steadily
increasing share o f employment (from 51.6 percent in 2001 to 56.7 percent in 2003) and value
added (from 31.2 percent in 2001 to 36.2 percent in 2003), and a near doubling o f antitrust
decisions during 2003-2004. The Registration and Cadastre loan supports the establishment o f a
Cadastre Agency and a property registration unit within the Ministry o f Justice, to create a unified
cadastre and property registration system that includes information technology, lot creation,
digitalized mapping, survey, and adjudication. Although the loan was approved nearly five years
ago, i t s impact to date has fallen far short o f expectations. (See para. 128.) Successful completion
o f this project will be critical to the development o f a fkctioning land market in Bulgaria.
57. The PAL program supported amendments to the Commercial Code to improve the
insolvency regime and accelerate resolution of insolvency cases. These changes included
guaranteeing the rights and independence o f trustees, strengthened protection o f the rights
o f private creditors, more stringent criteria for licensing and dismissal o f trustees, and strengthened
monitoring and control by the Ministry o f Justice and the courts. Figure 4 shows that the
Government was successful in accelerating the insolvency process and facilitating the exit o f non-
viable enterprises. The P A L objective had already been achieved in 2004 in that the average time
for resolving insolvency cases fell by six months between 2003 and 2004, close to that found in
other advanced transition economies.
Time of insolvency (years) Cost of insoiency (K of estate)
2003 2005
2003 2005
Source: PAL 111 ICR Team (Doing Business, 2004 and 2006).
58. The PAL program Figure 5: UnderemploymentDue to Labor Regulations

initially included as a PAL
I11 trigger enactment o f “If you didn’t have any restrictions (ie., you didn’t have to seek
amendments of the Labor permission, make severance payments, etc.), and you could
Code to promote labor increase the number o f regular full-time workers your firm
market flexibility. However, currently employs, by how much would you increase your
this was later downgraded and number of employees as a percent o f your existing workforce?”
replaced with a benchmark
2
that was met, calling for
6
Government consultation with
stakeholders on labor market
rigidities such as inflexibility
of working time and
insufficient adaptability o f
wages, and the elevation of a
benchmark regarding business But ECA
registration reform to a
trigger. This change was Source: BEEPS, 2002 and 2005
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made due to the political difficulties o f implementing labor market reforms in an election year and
in light o f international comparisons indicating Bulgaria’s labor regulations were not overly
restrictive. However, these comparisons did not take into account Bulgaria’s Currency Board
Arrangement, low employment rate, and aging population, all o f which point to Bulgaria’s need to
outperform other countries in labor market flexibility in order to be competitive. Furthermore, the
BEEPS results indicate that a less restrictive labor code could have a significant impact on
employment. (See Figure 5.) More limited enhancements to labor market flexibility were
achieved than initially planned under the PAL program. These included enactment o f amendments
to the Labor Code to strengthen anti-discrimination provisions,21amendments to the Health Act to
reduce abuse o f sick leave provisions, and removal o f regulatory barriers to the private provision o f
employment services.
59. The objectives of Pillar 3 to improve the legal framework for lending, complete
banking reform, and develop the financial markets and regulatory framework for private
pension funds were met. Building on progress prior to the P A L program, some 98 percent o f
bank assets were privatized by the end o f the PAL program, leading to a well-capitalized, well-
supervised and profitable banking sector, and 100 percent o f Bulgaria’s insurance sector was also
privatized. In addition, the legal framework has been strengthened against terrorist financing and
money laundering, and to introduce global custodianship as well as more flexibility in the
investment regime to facilitate the movement o f pension fund members among funds. As a result
o f these actions, P A L outcomes were met or surpassed, with credit to the private sector increasing
to an estimated 36.9 percent o f GDP in 2004 from 15 percent in 2001. Access to and cost o f
financing as a problem in doing business are now comparable to those o f the EU8 (see Figure 6),
and the EBRD considers Bulgaria’s banking legislation compliance with international standards
very high (EBRD, 2005).
Figure 6: Improved Access to Financing
Access to financing as a problem doing Cost o f financing as a problem doing

business (% o f f i r m s indicating access to business
financing (collateral required or financing not (% o f f i r m s indicating cost o f financing (e.g.,
available from banks) as a problem doing interest rates and charges) as a problem doing
business) business)
I ” I.
60%
60%
40%
30%
20%
10%
0%
Bul EUS SEE
7 1
Source: PAL 111 ICR Team (BEEPS 2002 and 2005).
21This policy was developed by Bulgaria’s National Council on Ethnic and Demographic Issues, with
support from the IDF Grant for Integrationo f Ethnic Minorities.
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60. With the cancellation of several planned Bank loans aimed at stimulating economic
growth in rural areas, the one remaining Bank instrument with this objective was the Survey
on Rural Development Needs. (See paras. 116, 123-124.) This had been envisioned as an
Agriculture Sector Note when the CAS was prepared, but when the Rural Finance loan was
replaced by a Rural Development loan, the scope o f the sector work was modified accordingly.
The Survey served as a basis for Bulgaria’s “National Program for development o f Agriculture and
the Rural Regions 2007-20 13,” a requirement for EU accession.
Theme 2: Strengthening Public Administration and Anti-Corruption Initiatives
61. The primary CAS instruments aimed at strengthening Bulgaria’s public

administration and anti-corruption initiatives were Pillar 4 o f the PAL program (Improving
Public Sector Governance), the Revenue Administration Reform Loan, and the Trade and
Transport Facilitation in South East Europe (TTFSE) loan. The Bank’s fiduciary AAA (the
Country Financial Accountability Assessment and Country Procurement Assessment Report) were
also intended to support these efforts. The Bank also provided technical assistance on to strengthen
the Government’s capacity in debt management. (See Box 2.)
62. The objectives of Pillar 4 of the PAL program were wide-ranging, as public
administration reform and anti-corruption efforts had not been previously tackled. By
contrast, the structural reforms supported by Pillars 1-3 were building on those initiated under
sector adjustment loans during the previous CAS period. Actions supported by the P A L program
included Parliament’s approval o f amendments to the Civil Service Law, and the Government’s
adoption o f a Public Administration Reform Strategy, launch o f fknctional reviews, introduction o f
performance standards, improvement o f budget management systems, adoption o f a legal
framework governing the accountability o f judges, and preparation and implementation o f an Anti-
corruption Strategy and Action Plan. Much o f the reform agenda for Pillar 4 was informed by
studies funded by a PHRD grant, including a comparative analysis o f civil service pay and a
proposal for a results-based compensation system.
Box 2: Debt Management Technical Assistance Program and Use of IBRD Financial Products
In mid-2002 the Ministry of Finance requested technical assistance in public debt management from the Bank’s
Treasury staff, to address Bulgaria’s high proportion of external debt coupled with currency and interest rate risk. A
three-year Government Debt Management Strategy was approved by the Council o f Ministers in March 2003, and
several months later Bulgaria signed a Master Derivatives Agreement“ (MDA) with the Bank. The MDA provided
the contractual framework for a swap between the Bank and the Government to change the currency of Bulgaria’s
net obligation on a VSL (Variable Spread Loan) o f $96 million, €?omUSD to EURO, in line with Bulgaria’s strategic
objective to reduce its share o f USD-denominated debt. The swap took place in November 2003 and was the first
IBRD currency swap under an MDA.
In December 2003 the Bank’s Treasury staff entered into a fee-based technical assistance agreement with the
Bulgarian authorities, with the fee paid by the Bulgarian National Bank (BNB) through the Bank’s Reserve Asset
Management Program’s technical advisory program for international reserves management. The technical assistance
has focused on public debt and cash management, with the objective o f strengthening the institutional capacity of the
Bulgarian State Treasury, in particular its governance and decision-makingarrangements and the technical skills o f
staff below the management level.
During its technical assistance program with the Bank, Bulgaria has successfully implemented its debt management
strategy and strengthened the organizational structure o f the Debt Management Office. Intensive staff training has
taken place, both in Sofia and abroad, and the technical assistance program i s nearing completion,
“ Bulgaria was the second country to do so, after Tunisia.

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63. Key desired outcomes of Theme 2 were achieved. These included implementation o f
merit-based recruitment and pay, with 100 percent o f the civil service affected in some way; all
new recruitment conducted through external recruitment processes in accordance with new
requirements; civil service pay increases exceeding inflation to narrow the gap with the private
sector; and introduction of a new public procurement framework aligned with EU requirements.
Public administration reforms exceeded expectations and were implemented in a relatively short
period o f time. There was progress in certain aspects o f governance as well. Anti-corruption
public councils were established in 21 o f 28 regional administrations. There was a 213 percent
increase in applications to government bodies for access to public information in 2003 compared to
2002. A standing commission was formed within the Supreme Judicial ‘Council to address
corruption within the judiciary. Independent reviews indicate that issues of public governance
have improved, but important challenges remain. This i s reflected in BEEPS results indicatingthat
custom tax regulation and corruption have eased as problems in doing business, but Bulgaria still
fares worse than the N M S in terms of corruption more generally. (See Figure 7.)
Figure 7: Customs Regulations and Corruption in Doing Business
Custom regulations as a problem doing business Corruption as a problem doing business

(% of f m s indicating custom regulations as a problem (% of firms indicating corruption as a problem
doing business) doing business)
40%
60%
30% 50%
40%
20% 30%
20%
10%
10%
0%
0% Bul EU8 SEE
Bul EU8 SEE
2002 M2006
2002 M2005
Source: PAL I11 ICR Team (BEEPS 2002 and 2005).
64. Pillar 4 of the PAL program was complemented by the Revenue Administration
Reform investment loan and informed by the Bank’s report on Issues in Intergovernmental
Relations. The Revenue Administration Reform Project (RAW) i s financing the establishment o f
a sustainable public revenue collection system that facilitates private sector development and
complies with EU accession requirements. I t aims to (i)maximize the level of taxpayer voluntary
compliance, (ii)promote effectiveness and efficiency - thereby enabling tax rate reductions that
would stimulate economic growth, (iii) establish a professional workforce at the National Revenue
Agency established by Parliament in 2002, (iv) reduce the potential for corruption, (v) improve
equity in system administration, and (vi) reduce the taxpayer’s compliance burden. To date,
indicators show significant improvements in revenue collection and compliance rates, with some
efficiency and effectiveness gains due to the separation o f central and municipal revenue collection
functions and transfer of responsibility for local revenue collection to municipalities. These gains
are reflected in tax rate cuts introduced in 2005. The National Revenue Agency began operations
on January 1, 2006, so its longer term impact i s not yet known, but thus far the loan i s meeting its
objectives, and implementation i s proceeding well despite its inherent institution building
challenges.
65. The TTFSE loan was prepared during the previous CAS and remained in the
portfolio for all of this CAS period and closed on September 30,2005. The loan was part of a
regional program that was a collaborative effort among Bulgaria and other countries in South East
Europe, and the EU, with financing by the Bank and the U S Government aimed at reducing non-
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tariff costs to trade and transport and smuggling and corruption at border crossings. Performance
. against outcomes was impressive, with border trade volume significantly increased, as are tariff
revenue collections, while the cost o f collection has declined. In light o f this successful
experience, the Government has requested a sequel operation which i s expected to feature in the
new CPS.
66. A Bank study on Issues in Intergovernmental Relations on fiscal decentralizationwas

completed early in the CAS period to inform the subsequent RARP as well as the public
expenditure management component o f Pillar 4 in the P A L program. Country Financial
Accountability Assessment and Country Procurement Assessment Report (the latter not included in
the CAS program) informed Pillar 4 policy actions as well.
Theme 3: Investing in Human Capital and Strengthening Social Protection
67. The primary CAS instruments aimed at investing in human capital and strengthening
social protection were Pillar 5 of the P A L program and the Social Investment and
Employment Promotion loan. These were supplemented by the Pension Reform Note, the IDF
Grant for Integration o f Ethnic Minorities, the JSDF Grant for Child Development in
Disadvantaged Communities, and the Poverty Assessment Dissemination and Disclosure Pilot. In
addition, there were loans for Education Modernization, Health Sector Reform, and Child Welfare
Reform plus an IDF Grant for Poverty Monitoring, Evaluation, and Policy Design (see paras. 22
and 40) in the portfolio, approved during the previous CAS.
68. With some of these instruments successful and others less so, the objectives o f Theme
3 were partially achieved. Pillar 5 supported reforms in each o f the social sectors. I t s objectives
were to (i)improve the governance, efficiency, quality, and equity o f the education system; (ii)
improve the governance, financial sustainability, quality o f service delivery, access to the health
care system; (iii)improve the administration and targeting o f disability benefits and empower the
disabled to integrate into society; (iv) ensure successful implementation o f pension reform; (v)
improve the effectiveness o f social assistance programs; and (vi) reduce institutionalization o f
children through community-based initiatives. A PHRD grant financed technical assistance in the
areas addressed by Pillar 5.
69. I n the education sector, the main achievement of the P A L program was the
implementation of reforms to improve equity. These included the strengthening o f policies to
increase opportunities for children from poor families and ethnic minorities, integration o f
disadvantaged groups (particularly Roma children) into primary and secondary education, and
integration o f children with special needs into mainstream schools. Building on efforts under
earlier PALSto increase incentives for
school attendance for children from Figure 8: Workers’ Education as a Problem Doing Business
poor families, the Government further Percent of firms indicating skills and education o f
strengthened social benefits, including available workers as a problem doing business
provision o f free textbooks to all
primary school children, introducing
school feeding in primary schools, and
providing transportation to enable
children from remote rural areas to
attend school. The monthly child
allowance benefit was made
conditional on school attendance by
eligible school-age children starting
w ECA
I
Source BEEPS 2002 and 2005
from the school year 2002-03. As a
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result, school non-attendance rates for among 7-18 year olds from the poorest quintile fell by 20
percentage points between 2001 and 2003. (MTHS, 2003) But while the gap between poor and
non-poor enrollment has narrowed, especially at the primary school level, it remains significant at
the secondary and tertiary levels, with gaps of 38.7 and 3 1.9 percentage points, respectivelf. In
addition, education sector actions supported by the PAL program were not sufficiently robust to
address the governance, efficiency, and quality of the educational system, particularly at the
tertiary level. (See Table 6 and Figure 8.) Quality outcomes were not in terms of improved
curricula but increased public expenditure on education as a percentage of GDP to align with that
of OECD countries, not taking account of Bulgaria’s shrinking school-age cohort or fiscal
constraints stemming from the CBA. And efficiency outcomes were in terms of higher student-
teacher ratios rather than the overall budget system and cost structure of the education system,
including administration and schools.
70. The first o f a three-phase Education Modernization APL, designed under the
previous CAS but ongoing during the implementation of PAL I reforms, was very broad in
scope. It aimed to enhance both quality and efficiency at the primary, secondary, and tertiary
levels. Components included introduction of a new curriculum and student assessment system,
new teaching approaches, and more efficient resource use. The scope of objectives proved to be
too ambitious, given that (i)
the Government’s implementationcapacity was severely compromised
by high turnover both at the highest level in the Ministry of Education and in the Project
Coordination Unit, and (ii)public and political support for education reform was not sufficiently
developed. Two-thirds of the loan amount was cancelled when the loan closed in March 2004, the
subsequent two APLs in the series were dropped, and the ICR as well as IEG’s ICR Review rated
achievement of project outcomes as unsatisfactory.
71, Some but not all desired outcomes in the health sector were achieved under the PAL
program. The Government increased the share of the Ministry of Health’s operating budget going
to national public health programs, and health outcomes for life expectancy, infant mortality, polio
immunization rates, and incidence of tuberculosis improved. (See Box 1.) The National Assembly
enacted amendments to the Health Act allowing for earmarking of 1 percent of the tobacco excise
tax to fund the national tobacco control program, and legislation to harmonize tobacco control and
regulations with EU directives. The National Health Insurance Fund’s administrative costs were 3
percent of its total expenditures in 2004, in line with the PAL program goal, and a National Health
Map was updated. As with the education sector, the PAL program’s health sector benchmarks
(some o f which were in terms of developing a strategy, preparation of standards, and launching of
ministry restructuring) did not go far enough to ensure achievement of objectives. There are s t i l l
outstanding issues in the health sector that need to be addressed in order for Bulgaria to attain
health care quality and efficiency of EU standards. The country i s far behind the EU in dealing
with the ownership and management of hospitals, financial sustainability of its health insurance
system in view of its growing arrears, managing demand for healthcare services, defining the role
and development of private supplementary health insurance, and defining the role of social
assistance in health care.
72. The Health Sector Reform loan, under implementation since the previous CAS, is
financing investments and technical assistance aimed at improving access to quality health
services and ensuring their financial and operational sustainability. Two-thirds of the loan
proceeds are financing information technology and related training. Successful implementation i s
dependent on the pace of the health sector reforms it i s designed to support. (See para. 128.) The
new CPS includes development policy loans (DPLs) to support health sector reforms, which should
improve the likelihood that this investment loan will achieve its objectives.
22 World Bank, Bulgaria Education Policy Note, 2005.

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73. Actions to improve targeting of disability benefits and promote social integration of
the disabled were successfully implemented under the PAL program. Legislation was enacted
to disallow disability benefits to those over retirement age and therefore eligible to receive
pensions, and to establish a frameworks for improved disability needs assessments to facilitate
integration into the labor force and society, as well as for fraud detection and accountability of
medical practitioners.
74. Reform measures supported by the PAL program to further develop a multi-pillar
pension system were also successfully implemented. Legislation was enacted to establish a
benefits indexation formula, including maximum and minimum benefits, as well as contribution
rates with a timetable for changing the ratio of employer to employee contributions from 70:30 in
2005 to 5 0 5 0 in 2009. As a result, fiscal sustainability of the pension system has been
strengthened, and there i s greater predictability for beneficiaries, contributors, and investors,
although some concerns regarding long-term sustainability remain. PAL benchmarks were
informed by the Policy Note on Bulgarian Pension Legislation(FY04).
75. Reforms supported by the PAL program to improve the coverage and targeting o f the
Guaranteed Minimum Income (GMI) benefits, child allowances, and energy subsidies in view
o f tariff increases resulted in positive trends, but further progress i s needed, especially in the
targeting o f child allowances. GMI and energy subsidy coverage increased 2.7 and 2.5 times,
respectively from 2001 to 2003. Over the same period, the share of funds channeled to the poorest
quintile increased from 60 percent to 75 percent for GMI, and from 47 percent to 54 percent for
energy subsidies. The share of child allowances going to the poorest quintile increased from 20 to
35 percent, while the share going to the richest two quintiles fell from 40 percent to 23 percent.
76. The PAL program also supported enactment and implementation of legislation to
shift to family and community-based alternatives to institutional care of children. These
changes are being implemented over several years, with desired outcomes defined for 2007. While
there are improvements at the margin in terms of inter alia the number of institutions (3.5 percent
drop from 2001 to 2003) and the number of institutionalized children (9.5 percent drop over the
same period), it i s too early to assess the adequacy of progress. The Child Welfare loan
(cofinanced by the EU PHARE program, the UK, and Japan) was in the previous CAS program
and has complemented the PAL component addressing this issue, by financing inter alia capacity
building in monitoring and evaluation, public awareness and training campaigns, daycare centers
and other community-based services for children from families at risk, and services for street
children. With a prolonged implementation period, it was in the portfolio during the FY03-FY05
CAS and i s due to close at the end of FY06. As of mid-2005 the project indicators were on track
toward desired outcomes, in terms o f absolute as well as rate reduction in child institutionalization,
with a dramatic increase in the number of children from high-risk communities benefiting from
pre-school services. As with a number of other investment loans, insufficient implementingagency
budget allocation for counterpart funding has been a major source of implementation delay. The
loan was complemented by an associated Japan Social Development Fund (JSDF) grant which
supported community-based child development programs in disadvantaged ethnic minority
communities and, significantly, has triggered the introduction of an obligatory pre-school year for
all six year-olds nationwide.
77. The Social Investment and Employment Promotion (SIEP) loan aims to improve the
standard of living o f those locked in persistent “pockets” of poverty in Bulgaria: certain
regions, the long-term unemployed, and specific ethnic minorities (Roma and Turkish, in
particular). With two interventions, the project addresses their social exclusion, weak social
capital, poor access to markets and basic services, low employment, and low income. These
interventions are the (i) Community Infrastructure for Development Initiative, to finance
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development investments identified and managed by such communities themselves; and (ii) the
Bulgarian Active Labor Market Initiative to facilitate employment creation for disadvantaged
individuals in poor communities. Progress against development objectives and indicators thus far
has been positive, but slower than planned. In the first three years of a planned five-year
implementation period, less than one-half of the loan has been disbursed, mainly due to insufficient
implementing agency budget allocation for counterpart funding under the Bulgarian National
Budget framework.
B. Exogenous Factors
78. There were a number of exogenous factors that contributed to the achievement of the
CAS outcomes, with the prospect of EU accession first and foremost among them. Bulgaria’s
being on the EU accession track gave its political leaders the incentive as well as the justification
for implementing difficult reforms needed to meet EU requirements. When in May 2003 the EU
set a tentative accession date of January 1, 2007, this added momentum to the ongoing accession
negotiations. Joining NATO in March 2004 further spurred this momentum, as the Government
and the Bulgarian population considered NATO membership a precursor to EU membership. With
this tangible external encouragement, the pace of implementation of reforms called for in the EU’s
Regular Reports, in line with accession requirements, accelerated as reflected in the significant
reforms achieved during the CAS period under Pillars 1-4 of the PAL program. By contrast,
however, in those sectors not as specifically addressed by EU accession requirements, the pace of
reform was slower (e.g., education and health under Pillar 5), as the lack of external pressure meant
less political will and popular consensus.
79. Bulgaria’s momentum for reform was also due in part to coordinated external
support, in particular from the Bank and IMF. Support for structural reforms in the two
institutions’ respective PAL and SBA programs was designed to be mutually reinforcing and
complementary. (See Attachment G.) Reform progress was most significant where Bulgaria’s
three primary external partners - the EU, the IMF, and the Bank - were closely aligned in the
policies and programs they supported. External support was also coordinated with IFIs (e.g.,
EBRD) and bilateral partners (e.g., USAID, DFID, and The Netherlands). (See Attachment H.)
80. A third important factor contributing to the achievement of the CAS outcomes was
the legacy of Bulgaria’s financial crisis of 1996-1997. The CBA, in place since the crisis and
until Bulgaria joins the Euro zone (likely sometime between July 1, 2009 and January 1, 2010),
imposed a strong discipline on macroeconomic management, and this created a relatively stable
macroeconomic environment in which to be implementing sectoral reforms.
C. Role of Partners
8 1. Development partners played an important role in CAS program implementation and

achievement of the CAS outcomes of growth and reduction o f poverty and unemployment.
They have actively supported the PAL program as well as individual investment operations, as
summarized in Attachment H.
82. Japanese PHRD grants played a critical role by funding analytical work and
technical assistance that helped build Government support for reforms. (See paras. 48,50,62,
68, and 124.) This was especially important for the reform program, because as a matter o f policy
Bulgaria does not borrow for technical assistance.
83. Cooperation between the Bank and the IMF during the CAS period was strong. This
cooperation was focused primarily on support of complementary structural and institutional
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reforms. A 24-month Stand-By Arrangement (SBA) in the amount o f SDR 240 million was
approved by the IMF in February 2002 and extended to mid-March 2004 when it was successfully
concluded. This was followed by a 25-month precautionary SBA in the amount of SDR 100
million, approved by the IMF in August 2004. The SBA programs have focused on medium-term
fiscal challenges and structural reforms with significant macroeconomic, notably fiscal,
implications. Attachment G shows the close complementarity between structural and institutional
reforms supported by the PALSand those specified in the Government’s Memoranda of Economic
Policies (including Supplementals) under the two SBAs. This coordination contributed
significantly to the successful completion of the reform programs being supported by the Bank and
the resulting achievement of the CAS outcomes.
84. The EU played an important role in the achievement of the CAS outcomes through its
large pre-accession grant programs and its annual Regular Reports. Both the PHARE and
ISPA programs contributedto the achievement of higher growth by supporting investments in basic
infrastructure. Aimed at the modernization of agriculture and rural development, SAPARD funds
helped address unemployment and poverty levels, both of which have been higher in rural areas.
The EU’s continuous monitoring and public disclosure of conclusions in its Regular Reports kept
the pressure on the Government to make further progress in meeting the political and economic
criteria and acquis requirements for accession, including in areas directly relevant to the CAS.
(See Table 2.)
85. Government-led partner coordination during the CAS period was a daunting task,
given (i)the large amounts of pre-accession grant funds and other partner financing to be
coordinated, and (ii)the Government’s constrained capacity to undertake it and lack o f a champion
for such an initiative. In April 2002, shortly before the FY03-FY05 CAS was finalized, the first
Government-led partner coordination meeting was held in Sofia, chaired by one of the Deputy
Prime Ministers. At the meeting a new coordination mechanism was established with the aim of
maximizing effective absorption of partner assistance, organized into four priority areas aligned
with the Government’s priorities: (i)business climate; (ii)living standards improvement; (iii)
governance and public administration; and (iv) infrastructure and natural resources management.
Various working groups were established in each of these thematic areas, with each working group
led by the relevant deputy minister and a development partner. Serving as secretariat, the Council
of Ministers’ Directorate for European Integration and Relations with the I F I s established excellent
working relationshipswith the partner community.
86. The Bank was one of the lead partners providingtechnical assistance to the Bulgarian
Government to strengthen its partner coordination during the CAS period. With the
Government’s introduction of a new coordination mechanism in 2002, the Bank took on the role of
lead partner for four o f the Government’s working groups.23 The Bank also provided support and
advice to the Partner Coordination Secretariat at the Council o f Ministers and continued its ongoing
coordination with the EU, includingjoint meetings with the EC Delegation in Sofia, as well as with
UNDP, to further enhance the coordination and integration of programs.
87. Implementation o f the Government-led coordination mechanism during its first year
and a half was mixed. The mechanism itself was rather complicated, with many working groups
but no binding administrative procedures to support it. It suffered from insufficient attention and
ownership at senior levels, lack o f capacity at ministerial and central levels, and inadequate
understanding and commitment at the level o f deputy ministers. As a result, the working groups
23 Poverty/Social Sectorhlinority IssuedAccessto Health Services, Education and Culture,

Agriculture/Forestry, and Energy.
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did not make much progress. Despite this, information sharing and coordination among Bulgaria’s
partners worked well.
88. Initial experience with the new Government-led partner coordination process
prompted Government to look for ways to enhance the mechanism and to make it more
effective. The Council of Ministers, jointly with UNDP, developed a Development Cooperation
Information System database to facilitate Government in external assistance planning and
coordination. The CEP adopted a decision which provides for updating the database on a regular
basis. The working group arrangement continues to be in a state of flux. Successful Government-
led partner coordination will require more high level attention within the Government, to ensure
that Bulgaria i s able to make the best use o f the EU grant funds.
D. Government’s’ Role
89. The Government played a critical role in the successful achievement of the CAS
outcomes. There were five key elements of the Government’s role in connection with the PAL
program, which was closely linked to the CAS outcomes: (i) coordination, (ii)participation and
consultation, (iii)implementation, (iv) monitoring, and (v) communication.
90. Perhaps the most successful aspect of the Government’s role in implementation of the
PAL program was the effective mechanism it put in place to coordinate the comprehensive
effort. During preparation of PAL I the Government gave the Council for Structural Policy,
subsequently renamed the Council for Economic Policy (CEP), responsibility for coordination of
the PAL program. I t was chaired by the Deputy Prime Minister and Minister of Economy and was
under the decision-making body, the Council of Ministers. The CEP was comprised of high-level
representation from the line ministries responsible for key structural reforms: the Deputy Prime
Minister and Minister of Labor and Social Policy, the Deputy Prime Minister and Minister of
Regional Development and Public Works, the Minister of Finance, four other Ministers, two
Deputy Ministers, and the Executive Directors of the Privatization Agency and Foreign Investment
Agency. Several committees were formed to focus on specific components of reform. An eight-
person team in the Directorate for EU Integration and Relations with IFIs, under the Council of
Ministers, served as i t s secretariat and provided continuity despite a reshuffling of the Cabinet in
July 2003. The EU Directorate staff collected information for tracking progress against the
benchmarks in the PAL matrix for weeks prior to each PAL mission, accompanied the Bank’s PAL
mission teams to meetings with the line ministries, and ensured post-mission follow-up.
91. As the PAL program was being developed and implemented, the Government
consulted with the private sector and ensured i t s participation in a public dialogue on the
reform program. The Government consulted private sector organizations such as the Chamber of
Commerce and Industry, the Industrial Association, and the Employers’ Association. It established
several public/private discussion fora, including the Council on Economic Growth and the Tax
Council.
92. With strong Government ownership and commitment to reform, implementation o f

the PAL program was completed on a timely basis, with the exception of the Bulgartabak
privatizationwhich was shifted from PAL Ito the trigger for PAL 11second tranche release.
(See para. 105.) Borrower performance was rated highly satisfactory for PAL Iin the ICR as well
as IEG’s ICR Review. In light o f the Government’s failure to privatize Bulgartabak or implement
labor market reforms as envisioned at the outset of the PAL program, the IEG ICR Review
downgraded the PAL I1 ICR rating of borrower performance from highly satisfactory to
satisfactory, in line with IEG’s guidelines disallowing highly satisfactory ratings if all covenants
and commitments are not fully met.
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93. The Government put in place a number of feedback mechanisms for timely tracking
o f progress toward PAL outcomes. These mechanisms included the Administrative and
Regulatory Cost Survey (ARCS), the Living Standards Survey, and the Judicial System Survey. A
joint EBRD/World Bank Enterprise Survey was also used. The Labor Standards Measurement
Survey (LSMS) Unit in the National Statistical Institute and the Poverty Monitoring Unit in the
Ministry of Labor and Social Policy monitored progress as well.
94. A second weak element of the Government’s role in the context o f the PAL program
was its public communication effort. Believing that democratic elections ensured sufficient
engagement with stakeholders, the Government did not give enough priority to communications
strategies or public information campaigns in support of the reform program. The Bank made a
strong effort to help build capacity in this regard, including with an IDF grant, but without a high-
level champion, the effort was not successful. Funding for such activities was not systematically
included in line ministries’ budgets. The resulting lack of understanding of the reform program
and the public’s expectations for a rapid increase in the standard of living, fueled by the prospect of
EU accession, led to the electorate’s frustration and eventually a change of government, despite the
impressive achievements under the PAL program.
95. While much of the achievement of CAS outcomes i s linked to the Government’s
successful implementation o f the PAL program, Bulgaria would likely be better positioned
for post-accession convergence, had the Government implemented more of the investment
lending program with equal success. (See paras. 115-129 for discussion o f investment loan
portfolio and pipeline issues. See also para. 140.) Implementation of a number of loans in the
portfolio has been significantly delayed, in part due to weak capacity, high turnover, and
insufficient counterpart funding reflecting a lack of ownership (in some instances, resistance to
reforms), particularly of loans prepared with the previous government under the previous CAS. In
addition, much of the CAS investment lending pipeline was dropped due to lack o f Government
ownership. This partly reflects less of a sense of urgency and pressure on the Government to
reform in areas not immediately relevant to accession and therefore where the EU was less directly
engaged. By contrast, implementationof RARP, which was prepared during the CAS period and is
well aligned with the EU agenda, i s proceedingwell.
E. Sustainability o f CAS Outcomes
96. With widespread political support for Bulgaria to continue i t s progress toward
accession in January 2007, sustainability of the CAS outcomes i s likely. The prospect o f EU
membership clearly motivated the NMSS-led Government, as well as the preceding and succeeding
Governments, to stay the course with an accession-oriented reform agenda aimed at private sector-
led growth, poverty reduction, and employment creation. Political support for successful EU
integration after accession i s also likely, such that it i s expected that future governments will
continue to stay the course with reforms post-accession. This political support i s partly based on
the public’s perception that EU membership will bring economic stability and will therefore
prevent another economic crisis. However, to the extent there are political risks to sustainability,
more effective government communications on the reform program would help to mitigate them.
97. I n addition, the CAS outcomes are likely to be sustainable because the structural and
macroeconomic reforms implemented to achieve them were for the most part deep and
systemic. They were generally effected through the enactment of legislation by Parliament (as
opposed to Government decrees or ordinances), affer a painstaking review process by multi-party
Parliamentary commissions, which makes the laws difficult to reverse or amend. The legislation
was typically followed by regulations that were then implemented. As a result, the overall policy
environment has changed, such that reversal i s unlikely. Bulgaria’s prudent macroeconomic
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management and the resulting stability also facilitates sustainability of the structural reforms that
have led to achievement of the CAS outcomes. One exception, however, i s the Government’s
Active Labor Market Program, which provides shorter-term oriented interventions to address the
longer term challenge of increasing employment within an aging population with skills gaps vis-&-
vis the EU labor market in which Bulgaria will be competing more intensely post-accession.
98. A third factor contributing to the sustainability of CAS outcomes i s the

institutionalization of an effective coordination and monitoring mechanism within the
Government’s structure. Originally established by the previous government inter alia to carry
out these functions during implementation of the PAL program, the Council for Economic Policy
remains in place as an active tool of the Council of Ministers for coordinating and monitoring the
current government’s program.
99. Fourth, Bulgaria’s partnership with the Bank during the next CPS period should
contribute to the sustainability of CAS outcomes. Bank support in the areas of Bulgaria’s
unfinished reform agenda (e.g., education, labor market, and health reform) can help sustain
momentum for reforms aimed at EU accession and post-accession convergence with member
states.
100. Finally, Bulgaria’s continued partnership with the Bank during the next CPS period
should contribute to the sustainability of CAS outcomes. Bank support in the areas of
Bulgaria’s unfinished reform agenda (e.g., education, labor market, and health reform) should help
sustain momentum for reforms aimed at EU accession and post-accession convergence and
competitiveness with member states.
V. Bank Performance
10 1. The Bank’s overall performance in supporting the achievement o f the CAS outcomes
and supporting CAS and PAL themes was satisfactory. I t s performancg with regard to
promoting competitive private-sector led growth (Theme 1) and strengthening public
administration and anti-corruption initiatives (Theme 2 ) was highly satisfactoly, while it was
moderately unsatisfactory with regard to investing in human capital and strengthening social
protection (Theme 3).
A. Quality
102. The design o f the PAL program was complex and multi-sectoral, with 31 triggers and
232 benchmarks and actions taken by many ministries and agencies across a wide range of
sectors. However, the Bank team took into account a number of factors that mitigated the risks of
this complexity, and in the end 28 of the 3 1 program triggers articulated at the outset of the PAL
program were completely fulfilled. One factor was strong macroeconomic management
throughout the program, in part due to continuation of the Currency Board Arrangement (CBA) in
place since the financial crisis of 1996-1997. A second factor was strong government ownership of
and commitment to the PAL-supported reforms, aligned with Bulgaria’s EU accession agenda.
Third, the multi-sector PAL instrument was an effective vehicle for inter-ministerial coordination
of reforms within a coalition government. Fourth, there was strong complementarity between the
PAL program and the IMF program. (See Attachment G.) This alignment among three of
Bulgaria’s key development partners gave the PAL program added credibility and leverage. And
fifth, specific outcomes for measuring progress toward overall program outcomes over the three-
year period were built into the policy framework.
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103. Following a series o f SECALs during the previous CAS period when the focus was on
stabilization following the financial crisis, the flexibility afforded by the PAL instrument was
better suited to bringing about structural reform across multiple sectors. The PAL program
was informed by these predecessor sector reform operations, as well as by a number of Bank
studies and reports (e.g., the FSAP, Poverty Assessment, Public Expenditure and Institutional
Review, Issues in IntergovernmentalRelations, and three Poverty and Social Impact Analyses24).
104. Throughout the P A L program, the full Country Team was actively engaged - indeed,
it was the P A L Team. Critical to the effort was the role played by the Country Office staff, in
terms of substance based on their local knowledge as well as day-to-day coordination with
Bulgarian counterparts.
105. The Bank’s performance in PAL I was rated highly satisfactory in the I C R and in
IEG’s ICR Review, while both gave a rating of satisfactory to P A L II. One reason for the
lower rating of PAL I1 was the way the Bank handled the condition related to the privatization of
Bulgartabak. (See para. 92.) When the privatization met with political and market constraints
during PAL I,it was shifted to PAL I1 which accordingly was split into two tranches to allow more
time. The condition called for the privatization outcome, which i s subject to political and market
forces beyond a government’s control, rather than the execution of an appropriate privatization
process. And as noted earlier, the market significance of this particular privatization had
significantly diminished over time, especially in relation to over-performance with other
privatizations. The Bank should have taken these factors into account in the design of PAL 11.
106. There were three additional weaknesses in the Bank’s design and implementation of
the PAL program, all of which relate to Theme 3, which accounts for this report’s moderately
unsatisfactory rating of Bank performance. One was the lack of poverty monitoring data with
which to gauge progress against the CAS and PAL outcome of poverty reduction. The
Government’s shift to an EU-oriented methodology was not unexpected, and to ensure
comparability with the Bank’s previous poverty data using i t s preferred consumption-based
methodology, the CAS should have included a Poverty Assessment to be conducted at the end of
the CAS and PAL periods.
107. A second weakness was the backloading to PAL III of politically difficult reforms in
the social sectors (labor market in Pillar 2 and education and health in Pillar S), thereby
putting them on a collision course with an election year and making them even less politically
viable, In the end, the Bank did not define the benchmarks for education and health as rigorously
as needed (see paras. 69 and 7 I),and compensating for the downgrading of the politically difficult
Labor Code amendment trigger by upgrading an important, but less politically difficult action
related to business environment, diminished the outcome o f Pillar 2. The social sector reforms
would likely have been implemented more successfilly, had they been included more consistently
throughout the PAL program, rather than held for PAL 111. Building support and consensus for
them takes time, as does their implementation. It i s important to allow sufficient time a sustained
effort for this during a government’s tenure.
108. The third weakness relates to the CAS more broadly, as well as to the P A L program.
Increasing the labor force participation rate should have been made an explicit CAS and PAL
outcome, to focus the reform effort more directly on Bulgaria’s exceptionally low labor force
participation. This would have reinforced achievement o f Bulgaria’s goals of private sector-led
24 These analyses assessed the poverty and social impact of privatizationo f Bulgartabak on tobacco farmers,
restructuringo f the railway sector, and energy pricing.
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growth and employment creation. A stud? conducted for the 2002 Poverty Assessment flagged
low labor force participation as an issue, which was then highlighted in the PAL IProgram
Document. But neither the CAS nor the PAL took this on as an explicit outcome and instead
focused on reducing unemployment and long-term unemployment. Although total and long-term
unemployment declined during the CAS period, this did not make a significant dent in Bulgaria’s
low labor force participation rate which, notwithstandingan increase of 4.3 percentage points from
2002 to 2005, still remains very low at only slightly above one-half (52.7 percent). Experience has
shown that growth alone i s not a sufficient antidote. Labor market reforms are needed as well.
109. There were no Quality at Entry Assessments of the three investment loans prepared
during the CAS period. During CAS implementation the Social Investment and Employment
loan (see para. 77) was rated satisfactory until late FY05, when the implementation progress rating
was downgraded to moderately satisfactory due to insufficient implementing agency budget
allocation for counterpart funding that halted project spending less than half-way through 2005 .26
The Revenue Administration Reform loan (see para. 64) has performed especially well, with highly
satisfactory and satisfactory ratings. Nearly all procurement procedures have been completed. The
District Heating project (see para. 47) has had satisfactory ratings since it became effective in 2003.
The GEF Energy Efficiency project, approved three months before the end o f the CAS period, i s
off to a promising start, with the Government having made its f i l l contribution of US$2 million in
seed capital.
Table 8: Ratings of Bank Performance in Sector Loans Closed During CAS Period
Theme Project Amount Board Closing Bank Source
Approval Date Performance
Rating
Environment Water US$98.0 million May 26, Dec. 3 1, Satisfactory IEG
Companies (of which 1994 2002 PPAR
Restructuring US$46.8 million
and cancelled)
Modernization
Environmental US$16.0 million May 12, Dec. 31, Highly IEG
Remediation 1998 2002 satisfactory ICR
Pilot Review
Environmental US$50.0 million Feb. 24, Dec. 3 1, Satisfactory IEG
and equivalent 2000 2003 ICR
Privatization Review
support
Adjustment
Loan
Public Trade and US$7.4 million May 25, Sept. Satisfactory ICR
Administration/ Transport equivalent 2000 30,
4nti- Facilitation in 2005
Zormption South East
Europe
Yuman Capital Education US$14.4 million Sept. 5, March Unsatisfactorf IEG
3evelopment ICR
Review
a Due to ineffect p (three in three years).
25 Rutkowski, Jan, “Why i s Unemployment So High in Bulgaria?” (Draft Working Paper, 2002).
Bulgaria’s fiscal year i s the calendar year.
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110. Eight investment loans in the portfolio, five of which have now closed, were prepared
during the previous CAS. Three focused on the environment and related institutional reform, one
focused on public administration and anti-corruption intiatives, and one on human capital
development. Ratings of Bank performance shown in Table 8 above correlate with project impact,
discussed in Section W.A. above.
111. Three investment loans prepared during the previous CAS are still under
implementation. (See Table 9 below.) The Child Welfare Reform loan (see para. 76), nearly
completed, has consistently been rated satisfactory. See para. 128 regarding implementationissues
with the Health Sector Reform and Registrationand Cadastre loans. One GEF operation, Wetlands
Restoration and Pollution Reduction, prepared during the previous CAS, i s still under
implementation. (See para. 53.) During the first three years of implementation, disbursement was
relatively slow due to cumbersome, centralized contract approval procedures and lack of consensus
among stakeholders regardingthe wetlands restoration component. By the end of the CAS period,
the project was rated moderately unsatisfactory on development objectives as well as
implementationprogress grounds. An upcoming Midterm Review may lead to restructuring.
Theme Project Loan Amount Board Approval Closing Date

Human Capital Health Sector US$63.3 million June 22, 2000 March 3 1,2007
Development Reform
Child Welfare US$8.0 million March 6,2001 June 30,2006
Reform equivalent
Private Sector-Led Registration and US$30.0 million June 21,2001 March 1,2007
1 Growth I Cadastre I equivalent
112. QAG’s Country AAA Assessment found the quality of the delivered Bulgaria AAA
program to be satisfactory overall, and specifically in terms of strategic relevance, internal
quality, likely impact, and Bank inputs and processes. QAG ‘assessed ten of 32 AAA tasks
completed during FY02-FY04. Of these ten, it found eight to be satisfactory, one highly ,
satisfactory, and one marginally satisfactory.
113. A number of AAA tasks were added to the program, many of them frontloaded in the
first two years o f the CAS period, and were a timely, effective response to new opportunities.
Technical assistance in debt management i s one such example. (See Box 2.) This was added to the
program at the request of the Ministry of Finance early in the CAS period and was highly valued
by the client, such that a fee-based arrangement was launched in late 2003. The Bank team was
comprised of staff from i t s Treasury, Legal Finance and Accounting Loan Client and Financial
Services units. This inter-disciplinary team carried out its work in cooperation with the IMF, as
well as with the EU to ensure coherence with the ongoing PHARE programs and to help the
Bulgarian authorities move towards standard EU practice. A number of infrastructure studies2’
were added to the program as well, several of which were done quickly at the request of the
Government as it weighed investment needs and financing alternatives for the roads sector. An
especially significant addition to the CAS program was the Bank’s technical advice and support in
connection with the launch of the Decade of the Roma, which focused more attention on policy
issues and dialogue related to social inclusion of Roma communities.
27 Road Investment Financing Options and Financing the Water and Wastewater Sector, both delivered in
FY04.
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114. While the QAG AAA Assessment found that the Government had a high regard for
the Bank’s analytical and advisory work, it also flagged a number of weaknesses: (i)
inadequate attention to the reality of implementation issues in view o f capacity constraints, when
making policy recommendations; (ii)a striking disparity between the sustained macroeconomic
and infrastructure sector dialogue based on robust analytical work on the one hand, and a dearth of
AAA to sustain dialogue in the health and education sectors on the other; and (iii)a tendency on
the part of the Bank to gear its AAA work to macroeconomic issues while crowding out important
sector work. In addition, QAG found that several pieces of AAA were supply-driven and therefore
lacking in client ownership. A case in point was the CPAR, given that Bulgaria’s procurement
reforms were entirely geared to compliance with EU standards. As a result, the Bank waived the
CAS base case trigger calling for implementation of the action plan developed in the previous
CPAR. QAG also cited a lack of integration among the three fiduciary reports completed during
CAS implementation (the CPAR, CFAA, and PEIR). QAG’s rating of the AAA program’s
coherence and integration was therefore marginally satisfactory. The QAG report also concluded
that while the PEIR and Poverty Assessment2’ (both of which were delivered in FY02) were
exceptions, for the most part dissemination beyond non-official stakeholders was a weakness in the
AAA program, with the development impact of the Bank’s AAA therefore falling short of its
potential. QAG therefore rated the AAA program’s dissemination unsatisfactory, and concluded
that while this was understandable due to Bulgarian public officials’ top-down management
approach and Bank budget constraints, it should be explicitly addressed in the delivery o f the AAA
program of the next CAS. It should be noted, however, that the Survey on Rural Development
Needs was successfully disseminated through a well received workshop and publication.
B. Dialogue and Portfolio Management
115. The Bank’s country dialogue during the CAS period was mixed. On the one hand, the
Bank enjoyed a favorable reputation for its technical expertise and international knowledge, as
evident from Client Survey Results (see paras. 135-138 and Attachment I) as well as stakeholder
and counterpart interviews held by QAG, CAS Completion Report, and PAL I11 ICR missions.
The QAG AAA Assessment rated dialogue as satisfactory. Policy dialogue on Themes 1 and 2, for
which the Bank’s main counterpart was the Ministry of Finance, was substantive and fruitful. On
the other hand, there were a number of areas in which the Bank’s dialogue was difficult, mainly
where line ministries were the primary counterpart. As a result, one year into CAS
implementation, the sector investment lending program was dropped, while the Bank’s PAL
program and associated AAA were proceeding as planned and achieving objectives.
116. Dialogue over the CAS investment lending program was difficult. As noted earlier, the
Government wanted a much higher share of adjustment lending than was acceptable to Bank
management due to IBRD exposure considerations. In addition, for political reasons there was a
lack of consensus within the Government, especially between the Ministry of Finance and the
Ministry of Agriculture, regarding the Bank program in the agriculture and rural sectors. One
month after the Board discussion of the CAS in mid-2002, the Minister of Agriculture asked that
the Rural Finance loan be replaced with a Rural Development loan. The Bank agreed to this
change and undertook a Rural Development Assessment to underpin the loan. Early in preparation,
the Bank proposed several options, including an innovative sector-wide approach (SWAP) to
facilitate the Government’s accessing SAPARD funds by financing the needed counterpart
28 Although the FY02 PEIR and FY02 Poverty Assessment were disseminatedvery effectively (including
through the inclusion o f the Poverty Assessment in OPCPD’s Bankwide information disclosure pilot) several
months after the FY03-FY05 CAS was launched, their impact i s not assessed in this report because they were
in the previous CAS program and were prepared and delivered to the Government during the previous CAS
period.
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funding. The Government opted for a SWAP with the possible inclusion of a component focused
on building capacity of micro-finance institutions in rural areas. Preparation continued until mid-
2004, a turning point in the CAS program dialogue. (See para. 124.)
1 17. Early in the CAS period, portfolio performance was a cause of concern. Six portfolio
reviews were conducted during FY03-FY05. Continuing the semi-annual Joint Portfolio Review
(JPR) cycle o f the previous CAS period, a mid-year JPR was done in the fall of 2002, followed by
a full JPR in the spring of 2003, and another mid-year JPR in the fall of 2003. Following an
agreement to shift to quarterly portfolio monitoring, additional reviews were done in the spring and
summer of 2004, and a limited portfolio review was completed in October 2004. The Mid-Year
Joint Portfolio Review (JPR) in October 2002 concluded that while portfolio management had
improved in some respects (e.g., better alignment of projects with Government priorities and
strengthened coordination by the Council of Ministers’ Directorate for EU Integration and
Relations with the IFIs as well as by the IF1 Department o f the Ministry of Finance), a number o f
problems cited in the February 2002 JPR remained. These included slow decision-making
processes resulting from coordination problems and, in some instances, insufficient buy-in and
disconnect between policy oversight and implementation. The resulting delays were reflected in
slow disbursements. The 2002 Mid-Year JPR Report recommended that the Bank and Government
jointly establish an outcome-based monitoring mechanism and capacity to ,ensure alignment of
current and planned projects with the Government’s reform program and the Bank’s CAS. The
report’s findings were discussed with the Council of Ministers’ Directorate for EU Integration and
Relations with the IFIs, with the Council for Structural Policy, and with the Council of Ministers.
Project oversight was intensified, with monthly meetings by the Council of Ministers with Project
ImplementationUnits (PIUS).
118. Despite efforts by the Bank and the Government to improve portfolio performance,
the pace of project implementation slowed further. The JPR Report of March 2003 cited
continuation o f the problems cited a year earlier, as well as issues with capacity and continuity in
project management, budget planning to ensure sufficient allocations for counterpart funding of
project implementation, and partner coordination on multi-partner projects. By end-FY03 the
disbursement ratio had declined to 15.2 percent. (See Table IO.) Specific actions were agreed for
improving implementationof individual projects, and plans were put in place to address the generic
portfolio issues, including through the establishment of outcome-based monitoring systems at the
project level.
Table 10: Bulgaria’s Investment Loan Portfolio Indicators

C CASPeriod 9
(US$M)
O f which problem
Commitments at risk
Of which problem
1 1
181.1 189.3 ,,,,
b’Ratio o f diskursements during the year;o the undisbursed balance o f the Bank’s portfolio at the beginning
o f the year (investment loans only).
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119. The Bank’s Mid-Year Portfolio Review of October 2003 called for the Government to
address continued poor portfolio performance. The review found that the generic issues flagged
in previous portfolio reviews continuedto persist, with the result that nearly all active projects were
experiencing implementationdelays, some by as much as two years. At any given time during the
CAS period, one or two of four projects2’, out of an investment portfolio of eight to ten investment
projects, were showing problems with implementation and/or achievement of development
objectives. As a result, one or both of the portfolio performance triggers for the CAS base case
was not met during the first two of the three FYs of the CAS. (Bank management decided to waive
these triggers in view of Bulgaria’s strong performance vis-a-vis the other 12 base case triggers,
especially those for structural reforms supported by the PAL program.)
120. I n December 2003, the Government responded that poor portfolio performance was
largely due to problems with the Bank’s procedures during preparation and implementation.
They believed that (i)a number of investment loans were no longer in line with current government
priorities due to long preparation periods and insufficient flexibility in investment project design
compared with the PAL instrument (Le., benchmarks for successor PALSmay be changed prior to
their approval at the Board, and procurement rules do not apply because funds are for budget
support); and (ii)implementation periods were unrealistic, given the time required for Bank
approval of procurement procedures and the time required for civil works. Actively working to
reduce Bulgaria’s debt, the Government noted that implementation delays were costly due to the
additional commitment fees. They also criticized the Bank’s PIU model for not building
sustainable project management capacity and called for a review of the structure of Bank assistance
to Bulgaria, including consideration of approaches involving budget support and implementation
arrangements aimed at building sustainable capacity. While acknowledging some serious
management errors on its part, the Government considered the objectives of the Education
Modernization loan too ambitious and complex and called for its cancellation, and for pursuing the
sector policy dialogue through the ongoing PAL program.
121. I n response to the Government’s observations, the Bank agreed to cancel the
Education Modernization loan. The ICR and IEG’s ICR Review concurred in their
unsatisfactory ratings of this project. While design and preparation were considered satisfactory,
this was quickly overtaken by unsatisfactory supervision (infrequent supervision and frequent
turnover in the Bank’s Team Leader), combined with lack of Government ownership, weak
capacity, high turnover in project management, and ineffective oversight. After three and a half
years of implementation, the loan was closed with two-thirds of the loan amount cancelled. (See
para. 70.)
122. Also in response to the Government’s feedback, the Bank committed to some key
actions to be jointly monitored and reviewed on a quarterly basis: (i)closely monitor potential
problem projects in the portfolio, (ii)develop disbursement targets for March and June 2004 and
monitor progress on a monthly basis, (iii)monitor turnaround times on procurement decision-
making and approvals by both the Government and the Bank, (iv) include in the planned Country
Procurement Assessment Review (CPAR) recommendations for enhancing procurement capacity
in support of the Bank’s lending program, (v) reduce reliance on freestandingPIUs, and (vi) review
proposals for future Bank-financed projects with simplified implementation, accelerated
disbursement profiles (including through the use of SWAPS), and leverage of other resources,
including EU grant funds.
29 Registration and Cadastre, Health Sector Reform, Education Modernization ( lstphase APL), and Wetlands
Restoration and Pollution Reduction (GEF).
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123. I t was about this time that the Government asked the Bank to convert the
Community Services loan shown in the CAS to a Roads loan. Initial dialogue over this issue
was complicated for several reasons. One was that Bank management wanted to retain PHRD
grant eligibility (which i s limited to loans included in CAS programs), and so was prepared to
reorient the loan to a Community (Secondary) Roads project aimed at rehabilitation and
maintenance for low-income communities. The Government wanted to consider other options as
well, including investment to enhance i t s motonvay network in anticipation of increased traffic
associated with EU accession. Yet a Motonvays Study prepared by the Bank at the Government’s
request concluded that traffic volume would not be high enough to generate a minimum
satisfactory economic internal rate of return, and the Government challenged the underlying
assumptions of the analysis. Soon after these issues came to light, the Bank proposed a SWAP for
this operation as well. The Bank’s proposing fast-disbursing SWAP’S for both the Rural
Development and Community Services loans was an effort to respond to the Government’s
feedback in December 2003 that Bank-financed projects needed to be prepared and implemented
more quickly, with greater flexibility and less complexity. Toward the end of the CAS period, the
Bank prepared a Policy Note on Road Investment Financing Options (FYOS), which will inform
Bank support in the roads sector under the new CPS.
124. Four loans were dropped from the pipeline in 2004. A second phase APL in the
education sector was dropped in March, once the first phase loan was cancelled at the
Government’s request due to poor performance. (See paras. 120-121.) The proposed Forestry loan
with an accompanying GEF grant was fully prepared and negotiated, when it was dropped in May
due to political constraints (stemming from vested interests) to institutional reforms supported by
the proposed loan. Preparationof the Rural Development and Community Services loans was well
advanced with support from PHRD grants when in June, without prior notice to the Bank, the
Government decided not to approve state borrowing for either project. The loans were eventually
dropped, and the unused portion (US$969,300) of the two associated approved PHRD grants (one
of which was not yet signed) totaling US$1.34 million was never disbursed. The Government’s
decision was the outcome of its making trade-offs, in light of debt management considerations,
among state loans and guarantees for various public investment priorities, including these two
Bank loans and funding of politically more important projects (e.g., Belene nuclear power project).
In the end, two state guarantees were granted, one for construction of the Calafat Bridge to
Romania and the other for the Belene nuclear plant. Political considerations underpinned this
decision. By end-FY04 the disbursement ratio for Bulgaria had fallen to an all-time low of 9.7
percent.
125. With five partially prepared projects (four IBRD and one GEF) dropping out of the
lending program, the Bank incurred U S $ l million in “drop costs.” In the end, the Government
declined any investment lending after the first year of CAS implementation, only three investment
loans were delivered (vs. seven planned), and actual investment commitments were only 39 percent
(US$I 18.4 million) of the planned base case volume (US$300 million) and 22 percent of total
actual lending. The resulting 78 percent share of adjustment lending exceeded the 60 percent
ceiling Bank management had set due to exposure concerns during CAS discussions. However,
Bulgaria’s active debt management program, particularly i t s buy-back of Brady bonds,
strengthened Bulgaria’s IBRD exposure indicators, such that in retrospect a 78 percent share o f
adjustment lending might have been more acceptable. (See Table 11.) At the same time that the
investment lending pipeline was drying up one year into the CAS period, the investment portfolio
continuedto be a cause for concern.
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Table 11: Bulgaria’s IBRD Exposure Indicators
I 2002 I 2003 I 2004 I 2005
IBRD Debt ServicePublic & Publicly Guaranteed
126. I n August 2004 (ten months before national elections) a joint high-level meeting was
held in Plovdiv to discuss Bulgaria’s future engagement with the Bank. A number of strategic
directions emerged from the discussions: (i)while Bulgaria no longer has an external financing
gap requiring Bank financing, Bank funds can play a usefbl role in debt management by
substituting for more costly sources of financing; (ii)the Government will continue to value the
Bank’s advice on the next generation o f reforms to accelerate growth and competitiveness, ensure a
seamless entry into the EU, reduce poverty and regional disparities, and deepen reforms in key
sectors such as education and health; (iii)the PAL instrument i s highly valued, but future reforms
may be best supported through single-pillar DPLs; (iv) there i s a critical need to support capacity
building to improve management of Bulgaria’s investment programs and improve absorption o f EU
funds by harmonizing Bank support with Bulgaria’s increasingly EU-oriented procurement and
financial management systems; (v) future investment loans need to focus on systemic solutions and
as part of a unified budget, move towards programmatic budget support, with shorter
implementation periods and cofinancing of SWAp’s by the Bank, EU, EBRD, and EIB; and (vi)
Bank should collaborate with IFC and MIGA to facilitate public-private partnerships.
127. To address the persistent portfolio problems, the Bank hired a retired Bank staff
member from the ECA Region’s Quality Unit to undertake a review of projects at risk of not
achieving their development objectives by their closing dates. The review, conducted in
September 2004, was to consider cancellation o f any project components that could not be
completed within one year after closing dates. The resulting report presented several options for
each project at risk. The first option in each instance was to close the loan as scheduled and cancel
the undisbursed proceeds, while the alternative options involved closing date extensions and some
changes in approach, in some instances through restructuring. When faced with the option of
cancelling, however, the Government opted not to do so (perhaps in light of elections less than a
year away) but to restructure the projects. Most of them subsequently demonstrated improved
implementation performance and focus on achieving development objectives, and some even
managed to make up for earlier delays. Through joint efforts and intensive monthly monitoring of
disbursements and implementation on a project-by-project basis, the average disbursement ratio
nearly tripled in one year to 27.9 percent in FY05.
128. Two of the projects at risk were the Health Sector Reform loan and the Registration
and Cadastre loan. The Health Sector Reform loan had a slow start due to delays in health sector
reforms and consequently was rated unsatisfactory in meeting its development objectives during i t s
early years. Although a QAG Assessment found project quality at entry satisfactory, the pace of
sector reform slowed considerably, particularly in the area of hospital restructuring. The loan was
restructured at the end of the CAS period to strengthen complementarity with health sector reforms
under PAL I11 by increasing financing of investments in hospital reform and the information
system of the National Health Insurance Fund (NHIF). The Registration and Cadastre loan was
problematic from the start more than four years ago and suffered from significant implementation
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delays. A threat of suspension was lifted shortly before the time of this writing, after the new
Government implemented actions that had been outstanding for several years and which would
allow more rapid coverage of the country with the cadastre map and property register. In
retrospect, the Bank should have issued a threat to suspend much earlier. In unsatisfactory status
for nearly two years, this project i s now being restructured. Although a QAG Assessment found i t s
quality at entry to be satisfactory, it appears that the project design, which requires cooperation
among three ministries and several agencies, was too ambitious for the available administrative
capacity and, as it turned out, not supported by the Government that had been elected just four days
before the loan was approved by the Bank’s Board.
129. I n sum, the Bank’s country dialogue met with varied results, The results were better
on issues relating to structural reforms and analytical work for which the Ministry of Finance was
the primary counterpart. The Bank’s dialogue on issues where the line ministries were the main
counterpart was more problematic, as evidenced by the erosion of the sector investment lending
pipeline after the first year of CAS implementation. This disparity was due to fractious coalition
dynamics within the Government, weaker capacity in a number o f line ministries, and despite
energetic efforts by the Bank to strengthen the dialogue in mid-2004, the effect of the looming June
2005 elections.
C. CAS Consultation Process
130. I t was expected that the CAS would be completed shortly after the June 2001
elections. It was to serve as a roadmap for the Bank’s engagement with the new government over
the next three fiscal years. The previous CAS had covered FY99-FYO1.
131. I n early 2001 members o f the Bank’s Country Team held CAS consultations through
a series of nine “town meetings” across Bulgaria at which a draft o f the CAS was discussed.
In all, there were more than 500 participants from local administrations, NGOs, the private sector,
business associations, civic groups, and the Bulgaria offices of development partners. Discussions
were also held with the European Commission in Brussels, to coordinate assistance to be provided
in support of Bulgaria’s progress toward full compliance with the requirements of the acquis
communautaire. To broaden the consultation process further, the draft CAS was posted on the
Bank’s Bulgaria website. This generated a good deal o f interest, as more than 2,500 individuals
and organizations visited the Bulgaria CAS website.
132. Feedback during CAS consultations showed broad consensus with the Bank on needs
and how to address them. Priority areas identified were decentralization, municipal finance,
unemployment, HIV/AIDS, social safety net, SME development, rural development, water quality,
earthquake preparedness, and restructuring of the coal, district heating, and railway sectors.
However, stakeholders generally did not share the Bank’s views on needed reforms in the
education and health sectors for cost effectiveness. They also did not share the Bank’s view that
having supported a policy tkamework for efficient investment in the transport and water sectors, the
Bank should leave financing of such investments to EBRD and EIB, consistent with their
institutional mandates.
133. The Bank made some revisions to the CAS to take account of the public consultations,
and the revised draft was the basis for high-level discussions with the newly formed
Government. There was basic agreement between the Bank and the Government on the country’s
priorities. There was also agreement on the Bank’s comparative advantage in support for urgent
reform measures and public sector programs aimed at private sector development and improved
social service delivery. This support would take the form o f the PAL program in the FY03-FY05
CAS.
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134. For a number of reasons, it was another year before the next CAS went to the Board.
First, it took the newly formed, somewhat fractious coalition Government some months to organize
itself and engage with its partners. Second, given the urgency of the EU agenda, the Government
was focusing initially on its relationship with the EU and EC. Third, following the successful
completion of a Stand-By Arrangement by the previous Government in June 2001, the new
Minister of Finance was keen to build on Bulgaria’s progress since the financial crisis o f 1996-
1997 and so focused on developing the next SBA program with the IMF. The Bank collaborated
with the Government and the IMF in these discussions, which led to complementarity between the
SBA and CAS programs (specifically the PAL program) and the structural reforms they supported.
(See Attachment G.) The next SBA began in February 2002, and finalization of the next CAS
followed several months thereafter. But in hindsight, launching CAS preparation and consultations
prior to the June 2001 elections was probably premature and may have weakened the new
Government’s ownership of the CAS program.
D. Client Survey
135. A Client Survey was conducted in June 2005 as input to the preparation of the CPS.
The exercise consisted of a quantitative survey of stakeholders, to which there were 300
respondents (84 percent response rate), and in-depth interviews with 32 public officials
experienced in working with the Bank and four focus groups on major themes o f Bank involvement
(economic reform, education, health, and infrastructure). Respondents to the quantitative survey
included high-level government officials, Parliamentarians, local government officials, multilateral
and bilateral development partners, private sector organizations, NGOs, the media, academia,
think-tanks, trade unions, the judiciary, and employees in ministries, departments, and agencies.
(See Attachment I.)
136. Most respondents to the quantitative survey felt that the Bank should focus on
economic growth and jobs, followed by infrastructure development, education, poverty
reduction, and health sector issues. They ranked the Bank’s involvement in these areas higher
than in EU integration, even though effective EU integration was viewed by stakeholders as
.
Bulgaria’s top development priority The feedback appears to prefer the Bank’s involvement in
basic development areas, rather than EU integration per se. At the same time, it was felt that the
Bank should adjust its policies with the EU integration needs of the country. Interestingly, the
Bank’s financial resources were seen as the Bank’s greatest value, followed by i t s policy and
economic advice, and ability to build implementation capacity. Disregard for country realities and
bureaucratic operational policies and procedures were cited as the Bank’s greatest weaknesses.
137. At the same time, perceptions of Bank effectiveness were not always aligned with
perceived priorities for future Bank involvement. The survey showed wider “impact gaps” in
areas such as strengtheningthe health and education sectors. These impressions may be linked to
the fairly well publicized implementation problems of the Bank-financed investment projects in
these sectors. While respondents ranked poverty reduction very high as a development priority, the
rating o f the Bank’s positive impact on poverty reduction was quite low. The lack of timely and
comparable poverty data may be a factor in this perception. Similarly, while stakeholders
identified greater transparency in governance and strengthening of the judicial system as critical to
EU integration, they did not see much positive impact in these areas on the part of the Bank. This
implies that if the Government wants the Bank’s assistance in these areas, more effective
dissemination and communication could play an important role in increasing development impact.
This i s in line with the findings o f the QAG Country AAA Assessment.
138. The qualitative survey respondents stressed the importance of the Bank’s
involvement beyond EU accession and identified a number o f recommendations for
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enhancing the Bank’s relevance in the future. These included: (i)a client relationship
characterized by more partnership and dialogue that takes into account the views o f the
Government, including on the need to address the social costs of structural reforms; (ii)Bank
support in the priority areas of education, healthcare, infrastructure investments, and strengthening
of institutional and administrative capacity; and (iii)
joint EU/Bank financing.
VI. CONCLUSIONS
A. Role of CAS in Progress Toward Country Goal
139. The additionality of the CAS program i s an important consideration in assessing its
impact on the achievement of Bulgaria’s goal o f moving closer to EU accession by sustaining
economic growth, reducing poverty, and creating employment. One could argue that the
Government would have undertaken many o f the IBRD-supported reforms and investments in any
event, because they were aligned with Bulgaria’s EU accession agenda and because IBRD
financing was not that important with the upgrading o f Bulgaria’s risk rating and the Government’s
resulting enhanced access to capital markets. However, the consensus among consulted
stakeholders, including government counterparts, on this question was that the Bank lent credibility
to Bulgaria’s reform program and therefore played a direct role in the risk rating upgrade, and the
PAL program in particular provided useful external pressure for politically difficult reforms, as
well as an effective framework for mobilizing support and coordinating and monitoring
implementation of multi-sector reform for EU accession across a coalition government. The CAS
program also provided support for reforms in areas the specifics of which were not covered by the
EU acquis, such as public administration, education, health, and labor market reform. W h i l e the
Bank’s international experience in public administration reform was highly appreciated by the
client, the Bank’s support in the latter three areas was not sufficiently effective. This underscores
the linkage between pressure from the EU and government commitment to reform. Where EU
’ attention was relatively low, the Government’s appetite for reform was generally low as well.
140. With so much accomplished with Bank support through the PALS and AAA, one
could ask whether the sector investment lending program envisioned in the CAS but for the
most part subsequently dropped, was actually necessary. If the Rural Development Project
were now underway, more pre-accession grant funds would have been channeled to low-income
areas than has been the case to date. Education sector reforms for enhanced labor market
competitiveness, a major priority in the new CPS, would be more advanced, had the education SILs
been implemented. The IBRD and GEF Forestry operations would have increased the contribution
of the forestry sector to Bulgaria’s GDP while enhancing sustainability through improved
conservation in forest management. Overall, however, implementation o f the FY03-FY05 CAS
likely served to accelerate the pace of reform implementation and Bulgaria’s associated progress
toward EU accession.
B. Lessons Learned and Implicationsfor New CPS
141. A number o f lessons emerge from the Bank’s experience during implementationo f the last
CAS, with implications for both design and implementation o f the next CAS.
142. First, the Bank should ensure a partnership-oriented relationship with Bulgaria,
given that it i s a well-performing M I C with an investment grade credit rating and therefore
access to alternative sources o f financing. The Bank has already signaled this change by calling
the next CAS a Country Partnership Strategy. Partnership will call for the Bank’s working to find
ways to deliver requested services in a timely manner. In keeping with the need for responsiveness
to client demand, the Bank should engage in new investment lending only if it has strong client
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demand - at the highest levels within the Government and with a high-level “champion” in the
relevant line ministry - and meets the client’s expectations for design focus, shortened preparation
and implementation time, management by line ministry staff, and use o f country systems. Care
will need to be taken in addressing the fiduciary aspects o f any SWAPSto ensure that they do not
result in the very delays that they are intended to avoid. It will also be important to prepare a
Bulgaria CPS Progress Report in FY08 or FY09 to facilitate needed adjustments to the Bank’s
partnership program in light o f changing circumstances.
143. Second, timely monitoring mechanisms with time series comparability need to be
included in a CPS program to ensure rigorous measurement of progress toward CPS
outcomes at the end o f the CPS period. T h i s will also apply to a future series of DPL operations.
Methodology, timing, and responsibility should be explicitly agreed between the Government and
the Bank at the beginning of the CPS program, since a good deal o f lead-time for preparation i s
required.
144. Third, successful implementation of a multi-sector reform program requires an

effective, sustained, coordination mechanism with a high-level champion in the Government.
This will be important to carry forward from the PAL program to a DPL program focused on
education and health, to ensure coordination with those two ministries as well as other agencies and
stakeholders.
145. Fourth, swifter action i s needed to address implementation issues with the existing
investment loan portfolio as they arise. One o f the reasons for the success o f the PAL program
was that accommodation for adjustment over time was built into its design from the outset. When
project implementation runs into problems, the Bank team should be more proactive earlier. In
addition to the restructuring option, teams should seriously consider issuing a threat to suspend
disbursements if a loan has been in unsatisfactory status for more than 9-12 months. Portfolio
performance triggers are not appropriate in a well-performing MIC CPS, and although there i s no
indication this was the case with Bulgaria, could potentially create incentives for Bank staff to
inflate project supervision ratings.
146. Fifth, several “do’s and don’t’s’’ have emerged regarding the architecture o f a
programmatic development policy matrix: (i)by backloading Bulgaria’s human development
agenda within the PAL program, the Bank and the Government postponed much needed reforms,
the delay of which has cost Bulgaria time in terms o f i t s readiness for successful EU integration;
(ii)if offsetting changes (“trades”) are made between triggers and benchmarks in light o f
unforeseen realities as a DPL program evolves, the actions in play should be o f comparable
political “weight” within the same pillar, in order to ensure sustained reform momentum across the
full reform agenda (accordingly, the new CPS will need to give high priority to development policy
lending (DPL) instruments to support overdue education, health, and labor market reforms not
adequately addressed in the PAL program); (iii)the sequencing of benchmarks should be designed
with the borrower’s political economy in mind (e.g., there i s typically more scope for bolder reform
earlier rather than later during a government’s tenure); (iv) a key outcome for the CPS and the DPL
instrument should be an increase in the labor force participation rate; and (v) any benchmarks
relating to privatization should not be defined in terms of transaction outcomes, but rather,
execution o f an appropriate, transparent process - beyond which market forces, and not policy-
based loan benchmarks, should dictate.
147. Sixth, investment project design should be commensurate with government

commitment, the enabling sectoral policy environment, and the administrative capacity o f the
implementing unit, and every effort should be made to mainstream project implementation
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functions within line ministries and agencies. This should help to build sustainable capacity,
urgently needed by Bulgaria in this critical pre- and post-accession period.
148. Seventh, the AAA program should be aligned with Government and CAS priorities
and as experience and feedback from stakeholders and QAG have indicated, dissemination
should be built into the design of the Bank’s AAA instruments. Indeed, dissemination should
be considered a standard phase of AAA service delivery, much in the same way as preparation and
supervision for lending instruments, and this will require budget planning at an early stage. And
analytical and advisory services should be strategically sequenced, to inform lending.
Programmatic AAA should be considered for the new CPS to keep the Bank’s advice focused,
timely, and relevant.
149. And finally, the Bank’s support to Bulgaria during the new CPS period should
emphasize the Bank’s role as “the Knowledge Bank” and draw on the experience of the EU8,
the EU25, and Part I countries elsewhere. The last CAS and the Government Program it
supported identified desired outcomes in terms of the evolution o f Bulgaria’s continued progress
since Bulgaria’s financial crisis of 1996-1997. To ensure strategic relevance going forward, the
Bank’s investment lending pipeline will need to focus on issues more specific to Bulgaria’s
eventual EU integration and convergence. Some of the new CPS outcomes should therefore be
defined in terms of Bulgaria’s relative performance vis-a-vis that o f other countries. The Bank’s
knowledge o f EU NMS experience has grown in recent years and according to the Client Survey i s
perceived to be a significant share o f its value added, so the Bank i s well positioned to make a
contribution in this regard.
.. .. *.
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Annex C - Attachment C
BULGARIA - Planned Analytical and Adviswy Services and Actual Deliveries
CAS PLANS (May 31,2002) I COMPLETION REPORT (April 24,2006)

FY Product Status
2003 Pension Reform Note Completed in FY04
Environmental Sequencing Study’ Comdeted in FY04
National Energy Efficiency Study Actual
Service and Fiscal Decentralization Note’ Actual
Country Financial Accountability Assessment Actual
I I Completion advancedfiom FY04: IDF for

Integration o f Ethnic Minorities
Completion advanced9om FY05: Energy TA for
EU Accession
I I Additional Actual Products:

Infrastructure and Energy Strategy Review
Telecom Regulator Capacity Enhancement TA
PPIAF - New Gas DistributionNetworks
Financial Sector Assessment Paper Follow-Up TA
Public Debt TA
Sofia Citv DeveloDment Stratem
ROSC Accounting and Auditing Assessment
2004 CEM Update - Fiscal Impact o f EU Accession’ Completed in FY06
I Private Sector Assessment TA

Transport Strategy Paper
Actual
Replaced by FY03 Infrastructureand Energy
Strategy Review
I IDF: Integrationo f Ethnic Minorities See FY03 above
I
Additional Actual Products:
Countrv Procurement Assessment ReDort
I I
Survey on Rural Development Needs
Financing for Water and Wastewater Sector
Motonvays Study
Cities o f Chanee
v
TA
JSDF: Child Development in Disadvantaged
Communities
2005 Gender, Age and Ethnicity Assessment Dropped
Agriculture Sector Note Replaced by FY04 Rural Development
Assessment
Energy TA for E U Accession See FY03 above
r
Additional Actual Products:
I I Greening Assigned Amount Units (Hot Air) Study

~
-~
Road Investment Financing Options Policy Note
Water Workshop TA
I PPIAF: Establishment of Water Regulator
‘Product title changed to Environmental Sequencing Strategies for X.J Accession.
Product title changed to Issues in Intergovernmental Relations.
Product title changed to CEM - Policies for Growth.
IBRD
Pilot
Water Companies
Restructuring and
Modernization
Environmental and
Privatization Support
Adjustment
Education Modernization
APL I
Trade and Transport

Facilitation in South East
Ongoing:
Wetlands Restoration and
Pollution Reduction
s
Projects from Earlier CAS’Sin FY03-FYOS Portfolio
Amount
US$98.0 million, o f which

US$46.8 million cancelled
US$50.0 million equivalent

Approval Date
May 26, 1994
February 24, 2000
US$l4.4 million equivalent, September 5,2000

o f which US$9.7 million
e uivalent cancelled
US$7.4 million equivalent
US$7.5 million
May 25,2000
June 13,2002
- Annex C - Attachment D
----
Closing Date
December 3 1,2002
December 3 1,2002
December 3 1,2003
March 3 1,2004
P
September 30, 2005
March 15,2008
Annex C - Attachment E
Instrument Linkages to CAS Outcomes and EU Accession Agenda
CAS Outcomes EU Accession Agenda CAS Instruments

Per capita national e Improve energy efficiency and e P A L Program Pillar 1
income growth promote use o f renewable e P A L Program Pillar 2
energy resources e P A L Program Pillar 3
e Accelerate restructuring and e P A L Program Pillar 4
privatization o f SOEs e Private Sector Assessment
e Simplify market entry 0 District Heating SIL
procedures e Rural Finance SIL
e Improve efficiency o f e National Energy Efficiency
bankruptcy procedures Study
e Increase efficiency o f railways e Energy TA for EU Accession
and reduce subsidies e Transport Strategy Paper
e Liberalize telecommunications e Environmental Sequencing
market Study
e Mitigate environmental risks e Service and Fiscal
e Establish legislative framework Decentralization Note
for ensuring competition and e PublicPrivate Infrastructure
functioning markets and Advisory Facility TA
financial sector
e Reduce corruption
e Improve efficiency,
effectiveness, and transparency
o f judicial system
Reduced poverty rate 0 Increase infrastructure e P A L Program Pillar 5
investments for wastewater, e Pension Reform Note
water supply, and waste e IDF for Integration o f Ethnic
management Minorities
e Improve efficiency and coverage e JSDF for Child Development in
o f social assistance programs Disadvantaged Communities
e Social inclusion, including o f e MunicipaVCommunity Social
ethnic minorities
-Services S I L
Reduced total and long- e Lisbon agenda: competitive, e P A L Program Pillar 5
term unemployment dynamic knowledge-based e Education APL 2
economy with more and better
jobs
Note: P A L Pillar 1: Sus lining structural reforms
P A L Pillar 2: Establishing a market-friendly business environment
P A L Pillar 3: Deepening the financial system
P A L Pillar 4: Improving public sector governance
P A L Pillar 5: Investing in human capital and strengthening social protection
3
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Annex C - Attachment G
Page 1 o f 2
Complementaritieso f PAL and SBA Programs

REFORMS SUPPORTED BY:
PAL Program Stand-By Arrangement
Privatizationof Biochim Bank (PAL I) Complete privatization of Biochim Bank (Feb. 2002 SBA)
Privatizationof DZI (PAL I) Issue a tender either to privatize the State Insurance Institute
(DZI), or to transfer management of it to a strategic investor
Privatizationor liquidation o f agreed list of large SOEs

(PAL II*/IIPrivatization
I); or liquidation of 50% of
remaining small SOEs (PAL 11); Privatization or
liquidation of 80% of remaining small SOEs (PAL 111)
*including Bulgartabac
Energy Sector Restructuring:

Enactment of amendments to Energy and Energy
Efficiency Act (PAL I); Enactment o f energy legislation
consistent with EU Electricity & Gas Directives (PAL
11)
Implementation o f average price increase of 20% for
household electricity prices in second half of 2002 and
approval o f indicative timetable for their adjustment to
cost-recovery levels (PAL I); Satisfactory
implementation of the district heating component of the
Energy Strategy approved by the Council of Ministers
on May 11,2002 (PAL l/II/III );
Adoption o f additional
regulations to support electricity market opening
including pricing methodology for access to
transmission, dispatch and other system services (PAL
11); Satisfactory implementation o f electricity tariff
idjustment program (PAL II/III)
Pillar IT: EsUblishlng a Mar ?t-FriendlyBusiness Environment
Reducing Enhy Constraints and Regulatory Costs:
Submissionto Parliament of a draft Law on Submission to Parliament o f amendments to Companies Law,
4dministrative Regulationand Administrative Control Civil Procedure Code, and any other legal instruments
Jn Economic Activities (PAL I); Development by a necessary to transfer business registrationto a nonjudicial
#orking group of a plan for integrating the Bulstat, tax, administrative body and establish a unified national electronic
ind social security registration of companies (PAL I); register with limited judicial oversight and simplified
Znactment of the Law on Administrative Regulation and administrative procedures (Aug. 2004 SBA)
4dministrative Control on Economic Activities (PAL
I); Establishment of a comprehensive public registry of
*egulatoryregimes (PAL 11); Introductionof one-stop
:ompany registration at the Bulstat offices by integrating
Zommercial Register with Bulstat Register (PAL 111)
Annex C - Attachment G
Page 2 of 2
PAL Program Stand-By Arrangement

Improving Business Service Delivery of Government OJ: 'a:
Decision by Council of Ministers to establish National Submit to Parliament draft law establishing unified revenue
Revenue Agency (PAL I)Establishment
; of National agency (Feb. 2002 SBA); Select I T system and Initiate pilot
Revenue Agency (PAL 11); Establishment of Unified in town of Bourgas for National Revenue Agency (Feb. 2002
Revenue Information System and Unified Corporate SBA); Parliamentary approval of agreed NRA procedural
Information System (PAL 111) code (Aug. 2004 SBA); Acquisition of I T system for NRA
(Aug. 2004 SBA)
Initiation of actions implementing Social Policy Strategy Adoption of decree that eliminates portability of seniority
and Strategic Note on agreed Labor Market Reforms bonus and submission to Parliament of amendment to labor
(PAL I); Development of a set of indicators on labor code that facilitates work outside regular hours (Aug. 2004
market flexibility and Active Labor Market Policy SBA)
impact (PAL I); Submission to Parliament of agreed
amendments to Labor Code (PAL 11); Enactment of
amendments to Labor Code (PAL 111)
Enactment of Bank Bankruptcy Law (PAL I) Parliamentary adoption of Bank Bankruptcy Law (Feb. 2002
SBA)
Enactment o f Bank Bankruptcy Law (PAL I) Parliamentary adoption of Bank Bankruptcy Law (Feb. 2002
SBA)
Finalize school and teacher redeployment plan and submit it

efficiency measures in the education system agreed with to Council of Ministers (Feb. 2002 SBA)
the Bank (PAL I); Implement agreed measures to
improve efficiency of education resource use (PAL 11);
Continue implementation of agreed measures to improve
efficiencv of education resource use (PAL 111)
Agreement among Ministry of Finance, Ministry of Complete accreditation process for all hospitals for better
Health, and National Health Insurance Fund (NHIF) on targeting of NHIF spending (Feb. 2002 SBA)
long-term funding approach for hospital services (PAL
I);Achievement of balanced operating budget for NHIF
P A L 111
Enactment of amendments to social insurance code Adoption of law to base annual adjustment of pensions on
setting out benefits indexation formula (including 75% of increase in average CPI in previous year and 25% of
maximum and minimum benefits) and contribution rates increase in average insurable income in previous year (Aug.
(including timetable for establishing 50/50 split of 2004 SBA)
employer/employee contributions and timetable for
increasing second pillar contributions (PAL 111)
lntroduce targeting o f child allowances (PAL I); Adopt a child allowance allocation system, limiting
Implementation of a plan to improve coverage and allowances to most needy families (Feb. 2002 SBA);
increase efficiency of social assistance programs (PAL Approval o f law authorizingNational Social Security Institute
[II) (NSSI) to have its own medical experts verifjdrecertify
disability certifications (Aug. 2004 SBA)
Annex C - Attachment H
CAS Program Partnerships
Coll~botation
Energy sector
Reforms EBRD Energy sector
Pillar 11: Establishing a Market- EC Bankruptcy
Friendly Business Environment USAID Business registration, labor market reform,
commercial law
Pillar IV: Improving Public EC Public administration reform, judicial
Sector Governance reform
DFID Public administrationreform
OECDEU Governance
USAID Governance
Pillar V: Investing in Human USAID Pensions, health, and education
Capital and Strengthening Social decentralization
Protection Child welfare
.. -_---
-..._-welfare
Child
Collaboration
Coordinated funding for reform activities
Switzerland Coordinated fimding for reform activities
Child Welfare Reform EU Closely coordinated parallel projects
2 JSDF grants support project sub-
components
UK training
Social Investment and USAID TA provided within scope of JSDF Grant
Employment Promotion for Building Social Capital in
Disadvantaged Communities
Registration and Cadastre The Netherlands US$2 million for project implementation
Wetlands Restoration and EU PHARE finances one project component
Pollution Reduction (GEF) Austria Financing of one sub-component
Revenue Administration Reform EU Strong collaborationwith PHARE Program
on capacity building o f National Revenue
1 The Netherlands
Agency (NRA)
2 Dutch grants, each EUR 2 million,
directly supporting implementation of
project activities
I DFID
Complementary support of human resource
strategy development and implementation
o f related project sub-component
Water Companies Restructuring EU Coordinationand consultation, including
during supervision
EBRD Coordination and consultation, including
during supervision
3istrict Heating EBRD Implements part o f project
EU Consultancy support for procurement
capacity building
Consultant on private sector participation
~~
USAID
hade & Transport Facilitation in USAID Quarterly coordination meetings;
Southeast Europe consultancy support
EU Quarterly coordination meetings
IMF Quarterly coordination meetings
3nergy Efficiency Austria Support for operation o f Energy Efficiency
Fund
CIDA Development of National Energy
Efficiency Strategy
Annex C - Attachment I
Stakeholder Views on Bank’s Effectiveness
A quantitative survey was mailed to 357 stakeholders. Of the 300 respondents (84 percent), employees o f
ministries, NGOs, and local government officials or staff accounted for 54 percent, while the private sector
and the media accounted for another 23 percent.
Bulgaria’s Priorities: Becoming an effective EU member was rated Bulgaria’s highest development
priority, followed by reducing poverty, and improving Bulgaria’s investment climate and economic
competitiveness.
Priorities for World Bank Support: The top priorities for increased or continued Bank support were
identified as economic growth and j o b creation, infrastructure, judicial reform, poverty reduction, education,
health, and anti-corruption initiatives.
World Bank’s Strengths and Weaknesses: Imposing solutions disregarding country realities and
excessively bureaucratic operational policies and procedures were considered the Bank’s greatest
weaknesses. On the other hand, the Bank received favorable ratings o f i t s effectiveness (particularly i t s
technical competence and global knowledge), strategy recommendations, working relationships, and partner
collaboration.
I Statement I Level of Agreement (Mean)* I

I The Bank i s effective in Bulgaria. I 6.34 I
Strategies recommended by the Bank are sustainable. 6.59
Overall Ilike to workhteract with Bank staff. 7.29
The Bank collaborates with other partners, e.g., EU. 6.83
* 1 = very unfavorable, 10 = very favorable.
“Impact Gap:” Respondents said that in most areas the degree o f the Bank’s perceived impact in a given
area was correlated with the area’s perceived relative importance. In seven areas, however, there was a
pronounced gap (>1 .O), with the Bank’s impact lagging behind importance in each instance.
1 =not at all, 10 = very.

b’Defined as difference between mean of ratings o f “Importance o f Bank Involvement” and mean o f ratings o f “Positive
Impact o f Bank Involvement.”

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FOR OFFICIAL USE ONLY

Report No. 36146-BG

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL FINANCE CORPORATION

COUNTRY PARTNERSHIP STRATEGY

FOR THE PERIOD FY07-FY09

South Central Europe Country Unit

Currency Unit = Bulgarian Lev (BGN)

GOVERNMENT’S FISCAL YEAR:

WEIGHTS AND MEASURES

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activity IF1 Internationalfinancial institution

I1. Country Context ........... ......................................................... ..................................... 1

V . Proposed World Bank-Bulgaria Partnership. FY2007-2009........................................... 22

Box 1: Bulgaria - Who are the Poor? .............................................................................................. 6

Figure 1: Bulgaria: Stability and Growth ........................................................................................ 3

Table 1: Summary o f EU Financial Support for Bulgaria, 2007-2009 ......................................... 18

Annex 1 Results Matrix

(i) This three-year Country Partnership Strategy builds on Bulgaria’s considerable

(viii) I F C and M I G A will support Bulgaria’s EU integration agenda. IFC’s strategic

Board members may wish to discuss the following aspects:

0 A r e the suggested principles for Bank lending engagement appropriate?

11. Country Context

2. EU accession on January 1,2007, i s the central focus of the Government. Bulgaria

5. A broad structural reform agenda has contributed to solid economic performance.

Figure 1: Bulgaria: Stability and Growth

External Debt and D e b t Service 1 Investment

R e a l GDP C u r r e n t Account Deficit and net FDI

Figure 2: Bulgaria and CEEC: Progress in Structural Reforms, 1999-2004

3.6 3.8 4 4.2 42 0 1 2 3 4

7. Economic growth i s expected to remain strong. Based on continued growth o f

C. Developments in Poverty Reduction, Gender and MDGs

Achieve universal education

111. Government Priorities and Development Challenges

14. EU membership in 2007 and successful EU integration and convergence for

B. Key Challenges for Successful EU Integration

15. Bulgaria’s immediate challenge i s to meet the remaining EU requirements to enable

Box 3: National Strategic Reference Framework 2007-2013-

0 Second, to strengthen institutional capacity and public finance management for

0 Third, to address poverty and social exclusion to ensure wider participation in

And fourth, to address macroeconomic risks and vulnerabilities and maintain

(ii) Improving governance and strengthening institutions

25. Bulgaria’s institutional development and implementation capacity will be central to

Figure 3: Selected Governance Indicators for Bulgaria and EU-8,2004

Box 4: Corruption has reduced but remains a concern

(iii) Strengtheningfwcal sustainability and absorption of EUfunds

32. Effective absorption o f EU funds will require further public expenditure

33. At the same time, Bulgaria’s performance on absorption of EU pre-accession funds

Table 1: Summary of EU Financial Support for Bulgaria, 2007-2009

I Cover accession-related expenditures, such as increased

* Appropriations for commitments, in 2004 prices

(iv) Poverty reduction and social inclusion

35. Addressing regional disparities will be an important component o f poverty

IV. Past World Bank Group Assistance and Lessons Learned

40. Performance o f the investment lending portfolio picked up following concerted

V. Proposed World Bank-Bulgaria Partnership, FY2007-2009

A. Rationale for Future Partnership

B. Implications o f Client Survey Feedback for the CPS’

C. Strategic Priorities f o r the C P S

(i) Productivity and employment: Implementation o f unfinished structural reforms and

D. Outline of Initial Bank Program

Table 2: Proposed Bank Lending and AAA Program, FYO7-09 a/

Road infrastructure ISIL Municipal infrastructure SIL

The World Bank's Strategy in Bulgaria: 2007-2009

The World Bank's Strategy in Bulgaria: 2007-2009