Document of

The World Bank

FOR OFFMCIAL USE ONLY

/Ak 1 333- - '

Repxt No. P-5501-POL

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$100 MILLION

TO THE

REPUBLIC OF POLAND

FOR AN

EMPLOYMENT PROMOTION AND SERVICES PROJECT

MAY 15, 1991

Tbis document has a restricted distribution and may be used by recipients only In the performance oftheir official duties. Its contents may not otherwise be discloswd without World Bank authorization.

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CUR U CY B y ALM

Currency Unit - Zloty (ZL)

AVERAGE EXCHANGE RATES(Zlotys per US$)

12l2 122k 1991(Feb.)

US$1.00 - ZL 1,400 9,500 9,500

ABBREVIATIONS AND ACRONYMS

EDF Enterprise Development FundlAS : Industrial Adjustment ServicesLWO Local Labor OfficeMOLSP Ministry of Labor and Social PolicyNGO Non-Governmental OrganizationOECD Organization for Economic Cooperation and

DevelopmentSWO Social Welfare Office

POLAND FISCAL

January 1 - December 31

FOR OFFICIAL USE ONLY

EUPLO1XEN1 PROMOTION AND LiERVICS pROMMCT

Loan and Project Summarv

Borrower: Republic of Poland

)Lgfi1clarLga: Ministry of Labor and Social Policy (MOLSP), localemployment and social welfare offices, and selected localtraining and micro-enterprise development institutions.

Amount: US$100 Million

Manns: Seventeen years, including a five year grace period, at theIBRD standard variable interest rate.

ProeiacelasrjnLtan: The loan will finance equipment and technical assistance for

development of employment policies and programs to supportthe emerging market economy.

Management Infrastructure. This component will improvecost-effectiveness and coverage of employment and socialwelfare programs by refining policy, improving managementinformation, automating national and local services, andenhancing labor market information.

income Support. This component will refine unemployment andsocial welfare programs aimed at assisting the unemployedand other vulnerable groups to cope with short and long-term income fluctuations brought about by introduction ofthe market economy.

Emnlovment Services. This component will improve rapidresponse to mass layoff, career counseling, job search andlabor exchange techniques, thereby promoting labor mobility.These services will actively assist job seekers to obtaininitial employment or be redeployed in situations offrictional unemployment.

Adult Training. This component will improve productivity,promote investment and enhance labor force mobility byretraining the unemployed and improving qualifications oflow/semi-skilled workers. These programs will buildcapacity for response to structural unemployment.

Micro-Enternrise Development. This component will supportpilot programs to generate employment by activating localinstitucions and support systems for creation and expansion

This document has a restricted distribution and may be used by recipients only in t'.e performanceof their official duties. Its contents may not otherwise be disclosed without x V' 4Ank authoriMion.

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of private micro-enterprises by the unemployed. Theseefforts will strengthen local capacity to respond tounemployment caused by a lack of demand for labor.

Local Foreigt Ial-US$ Millions-

IBRD - 100.0 100.0Government 42.1 - 42.1

42.1 100.0 142.2

Keonomic Rate of Return: Not Applicable

Staff Aopraisal Report: 9408-POL

NOg: IBRD No. 22897

a/ Figures may not total exactly due to rounding.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE REPUBLIC OF POLAND FORAN EMPLOYMENT PROMOTION AND SERVICES PROJECT

1. The following memorandum and recommendation on a proposed loan to theRepublic of Poland for US$100 million is submitted for approval. The proposedloan will assist the Government to develop improved employment policies,institutions, and programs which will mitigate the negative impact of economicadjustment on the labor force and contribute to a resurgence of economicgrowth. The loan will have a maturity of 17 years, including a grace periodof five years, at the standard variable interest rate.

2. Backaround. The ambitious economic reform program launched in Polandin 1989, with Bank support, will require parallel reforms on the demand andsupply sides of the labor market. Because previous labor policies andinstitutions did not acknowledge the existence of unemployment, the Governmentnow faces considerable challenge in efforts to manage large-scale joblessness,expand labor market flexibility, facilitate labor mobility, and redirect humancapital formation to support a market economy. Both national and localinstitutions are experiencing serious difficulty in responding to growingunemployment. The number of registered jobless has increased from55,800 persons in January 1990 to more than 1.1 million or about 6.1 percentof the labor force by the end of 1990. U.aemployment is expected to reach 2.0million persons (10.6 percent of the labor force) by the end of 1991.

3. The Ministry of Labor and Social Policy (MOLSP) has establishedpriorities for reform of employment policy and programs. Labor and socialwelfare legislation have undergone major revisions in 1990 and 1991. Somerefinement will be needed to improve targeting and cost-effectiveness ofindividual employment assistance programs, coordinate benefits between incomesupport programs such as unemployment and social welfare, and allocateresources among programs. Local libor offices will need to be reoriented andstrengthened to provide the services individuals need to cope with economicrestructuring and changing conditions in a market economy. Office operationswill need to be automated, staff will need training in counseling and masslayoff response techniques, and supporting materials will need to be developedand disseminated. There exist many local non-government and semi-privateagencies to provide training, placement and micro-enterprise developmentservices to the unemployed, but they lack incentives, expertise and modernequipment to work with labor offices and enterprises. These institutions mustbe activated to assist adults who are unemployed or need retraining, developcustomized training that will promote new investment and employment, andsupport entrepreneurial initiative among the unemployed.

4. Rationale for Bank Involvement. Inadequate attention to the humancapital base could constrain and possibly paralyze economic reform in Poland.Ongoing aralytical work in labor markets and unemployment, education andtraining, science and technology, and health is assisting the Bank andGovernment to identify the human capital constraints to generating andmaintaining the needed supply response to the new economic environment. Thisproject is intended to be the first of .everal planned to address pressingrequirements of human resource development in Poland. With respect toemployment promotion and services, there is a need for investment in both

proactive labor programs that promote employment and reactive income supportprograms that assist the unemployed and help to avert poverty. The Bank is ina position to bring to Poland experience in other countries with employmentpolicy, income support, employment services and employment promotion issues.Bank staff are cooperating with bilateral and multilateral agencies that aredeveloping parallel programs. The Structural Adjustment Loan (Ln. 3247-POL)addresses policy issues of income support programs for workers displaced byeconomic restructuring. The proposed project will support and strengthendelivery of these and more proactive programs.

5. Project Objectives. The goal of the project is to promoteemployment, investment and economic growth by improving labor forcedevelopment programs. The specific objectives are to: (a) improve the cost-effectiveness of existing employment and social welfare programs; (b) increaseoccupational, sectoral and geographic mobility of the labor force;(c) increase productivity of the labor force and promote investment; and(d) test mechanisms for job creation by the unemployed through micro-enterprise development.

Prolect DescrintIon

6. Management Infrastructure. This component will improve theadministrative efficiency and coverage of programs supported under theEmployment and Social Welfare Laws. This will be done in consultation withregional and local Labor and Social Welfare Offices, Employment Councils, andthe Central Statistics Office. MOLSP will undertake initiatives in generaladministration, automation of labor and social welfare offices, and labormarket information systems.

7. Income Sum,ort. This component will improve the efficiency of incomesupport programs by: (a) establishing criteria for client means testing atSocial Welfare Offices (SWOs); (b) developing and implementing SWO stafftraining; (c) improving SWO facilities; and (d) creating an unemploymentbenefit and financing system coordinated with other cash benefit systems andfinancially independent from programs supported by the Employment Law.

8. Zmloyment Services. This component will expand and improve existingservices. The project will support: (a) development and implementation ofIndustrial Adjustment Services (IAS), a rapid response mechanism to assistenterprises and communities experiencing mass layoffs; (b) development ofmaterials, techniques and facilities to improve occupational counseling; and(c) improvement of national and Local Labor Office (LLO) staff training.

9. Adult Training. This component will support establishment ofnational guidelines and procedures and development of local training programsfor unemployed adults. At the ngtional level, MOLSP will develop modelprocedures for LLOs to use in awarding contracts to local traininginstitutions. MOLSP, in cooperation with selected local traininginstitutions, will also develop models for marketing and implementingcustomized training to support revitalization of existing enterprises andentrepreneurs seeking to start new enterprises. At the local leval, theproject will provide resources to institutions to develop vocational, juniorand middle management, foreign language, mobile training and basic educationprograms. Selection of sites for all programs will be made by MOLSP accordingto criteria agreed with the Bank (e.g., the need to reskill the workforce to

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respond to structural change, the level of unemployment, the availability ofretraining resources in a region).

10. Micro-Enterprise DeveLopment. This small component will strengthenthe ability ̂f local non-governmental organizations (e.g., Chambers ofCommerce, Agencies for Local Initiative) to provide improved services: (a) tothe unemployed who have shown the aptitude to start micro-enterprises; and(b) to LLOs to strengthen the existing entrepreneurship program. Activitiessupported under the project will be divided into two overlapping phases.Phase I will provide technical assistance to build the general understandingof micro-entrepreneurship in MOLSP and LLOs and the capacity of local NGOs topromote micro-enterprise development by the unemployed. Phase II will providetechnical assistance, and limited credit for sub-projects proposed by theselocal NGOs to: (a) furnish technical services to micro-entrepreneurs;(b) establish incubators, providing affordable space and other services, formicro-enterprise development; and (c) test the feasibility of providing non-subsidized credit for new and early-stage micro-enterprises which havedifficulty obtaining credit from commercial sources, due to lack ofcollateral. Credit will be provided through pilot Enterprise DevelopmentFunds (EDFs) managed by local NGOs, supplemented by a loan review committeeincluding at least one representative from a commercial bank. Capital will beprovided in the early stage of business development and will act as atransition financing mechanism until the enterprise is able to obtain creditfrom commercial sources.

11. The total cost of the project is estimated at US$142.2 million, witha foreign exchange component of US$100.0 million (70 percent). A breakdown ofcosts and the financing plan are shown in Schedule A. Amounts and methods ofprocurement and of disbursements are shown in Schedule B. A timetable of keyproject processing events and the status of Bank Group operations in Polandare given in Schedule C. The Staff Appraisal Report, No. 9408-POL, dated May15, 1991, is being distributed separately.

12. Actions Agreed. During negotiations the Government gave assurancesthat: (a) revisions to the existing legislative framework for employmentprograms will be submitted to Parliament by December 31, 1992 to improve cost-effectiveness, targeting, and financing of such programs at the local level;(b) a comprehensive plan will be developed by June 30, 1992 to supportautomation and sharing of information between labor and social welfare officesat the local, regional, and national levels; (c) revised legislation forbenefits and financing of the unemployment, social welfare, and related incomesupport systems will be submitted to Parliament by December 31, 1992; (d) aframework, including job titles, for a new national occupationalclassification system, satisfactory to the Bank, will be developed for use inall MOLSP programs by December 31, 1991; (e) criteria agreed with the Bankwill be used to identify local sub-projects in social welfare, adult trainingand micro-enterprise development; and (f) the MOLS2 will substantially staffall units supporting major project components by December 31, 1991.

13. During negotiations the Government also confirmed that (a) technicalassistance will be procured in accordance with terms of reference and aschedule agreed with the Bank; (b) the Government will furnish an annual auditof expenditures six months after the end of each fiscal year; and (c) theGovernment will provide a project technical and financial report by November30 of each year and conduct an annual Government-Bank review of implementation

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progress and the program for the following year.

14. Benefits. The major benefit will be to refine and improve the costeffectiveness of significant investments the Government is making inemployment programs (about US$2 billion in 1991). These programs must promotea quick and flexible supply response to changing economic conditions and willbe a key factor in the transition to a market economy in Poland. The policyframework for the employment and social welfare systems will be furtherclarified through refinement of legislation. The unemployed and othervulnerable groups will be better served by well-coordinated and efficientlyadministered income support programs. Mobility of labor between occupations,economic sectors, and regions will be facilitated through improved employmentservices and training programs. Modeis of proactive training and employmentpromotion programs will be developed, tested and replicated, thus wideningalternatives to prolonged and costly income support in the face of structuralunemployment and deficient demand for labor. The capability of national andlocal institutions will be enhanced to deliver the employment programs neededfor a smoothly functioning labor market in a market economy and to develophuman capital to support economic development.

15. Risks. The major risks are that: (a) the Government's broadpolicies for economic restructuring may not sufficiently compel enterprises toshift emphasis from employment to productivity; (b) employment and socialwelfare institutions may not have sufficient resources and services to copewith major displacements in the labor force, or may misdirect resources if theeconomic restructuring program is not implemented effectively; and(c) training and micro-enterprise support institutions may not be capable ofproviding services to enable new investment and enterprise development. Theserisks have been addressed in the project through review of employment andsocial welfare budget support, legislation and policy, organization andstaffing of national and local institutions, and methods of deliveringservices to clients. MOLSP has made adjustments in all these areas along thelines recommended by the Bank and will continue to improve institutionalcapabilities during project implementation. All components of the projectprovide for substantial technical assistance which should assist withsupervision and evaluation of project activities and improve institutionalcapabilities and performance at the national and local levels.

16. Recommendation. I am satisfied that the proposed loan will complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

AttacbmentsWashington, D.C.Nay 15, 1991

- S - Schedule A

ONwyK33T PROOTI AND S1RVICES PROECT

IogAl loreian Total.-.------ US$ Million -------

Estimated Costs

Managerial Infrastructure 20.7 30.3 50.9Income Maintenance 0.7 5.5 6.2Employment Services 1.6 2.9 4.5Adult Training 6.5 43.3 49.9Micro-Enterprise Development 5.7 2.5 8.2

Total Base Costs 35.2 84.4 119.7

Physical Contingencies 3.5 8.4 12.0Price Contingencies 3.4 7.2 10.5

TIotal Costs 42.1 100.0 142.2

FinPancng Plan

Government of Poland 42.1 0.0 42.1International Bank for Rec. & Dev. 0.0 100.0 100.0

... .. ... .....

Total Financing Reauirements 42.1 100.0 142.2

A/ Figures may not total exactly due to rounding.

-6 - Schltld BPage 1 of 2

ZQL&

mm.1IU? ROM=TO AnD SERICES PROJE

(US$ Million)

Pol curement Methods A/Category of Expenditure ICB Local Other N/A TOTAL

Technical Assistance 16.5 16.5(14.3) h (14.3)

Equipment 51.9 2.5 0.3 54.7(51.9) (2.5) (0.3) E/ (54.7)

Equipment with TA (Turnkey) 29.1 29.1(29.1) (29.1)

Software 0.5 0.5(0.5) 4/ (0.5)

Enterprise Develo1,ment Funds 1.4 1.4(1.4) a/ (1.4)

Building Jkehabilitation 12.1 12.1(0.0) (0.0)

incremental Staffing 8.5 8.5(0.0) (0.0)

Materials 19.3 19.3(0.0) (0.0)

.. ... ... . . ........ --- -----

Tota FinaniLng Reauirements 81.0 2.5 50.2 8.5 142.2

Total Bank Financing (81.0) (2.5) (16.5) (0.0) (100.0)

I/ Figures in brackets are the respective amounts financed by the Bank loan.hi Procured in accordance with "Guidelines for the Use of Consultants by

World Bank Borrowers and by the World Bank as Executing Agency.*£/ Procured in accordance with local shopping procedures acceptable to the

Bank.I/ Intellectual properties procured following negotiations with property

owners.I/ Procured following normal local commercial practices.

Note: Figures may not total exactly due to rounding.

- 7 - figSch4dulpBPage 2 of 2

I8RD Disbursements(US$ Million)

Cate&ov Amnount X ogf Exonditures to be Financed

Equip., Materials, Software 84.3 100l of foreign expenditures(C.I.F.); 100l of local expenditures(ex-factory); and 80X of localexpenditures for other items procuredlocally.

Technical Assistance 14.3 1001 of foreign expenditures forforeisn consultancy services andfellowships, and 100l of local costsof consultants domiciled in theterritory of the Borrower and fortraining therein.

Subloans 1.4 801.

Estimated IBRD Disbursements

IEBRD FY *$ million} FY FY94 FFY96 EZ

Annual 8.0 20.0 33.0 10.0 20.0 9.0Cumulative 8.0 28.0 61.0 71.0 91.0 100.0

- 8 - Schedule C

POIAND

EMPLOYMENT PROMOTION AND SERVICES PROJECT

Timetable of Key Protect Processing Events

(a) Time taken to prepare: 12 months

(b) Prepared by: Government with Bank assistance

(c) Appraisal mission departed: January 1991

(d) Negotiations: April 1991

(e) Planned date of effectiveness: July 1991

(f) List of relevant PCRs and PPARS: None

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Schedule D

Page 1 of 1

STATUS OF BANK GROUP OPERATIONS IN POLAND. . ........ .............. . ...........

A. STATEMENT OF BANK LOANS 1/(as of March 31, 1991)

Armunt in US$ millionsLoan Fiscal (Less cancellations)No. Year Borrower Purpose Sank UndLisbursed

. _- . _..... . --------. ........ .... ----------- .. .....

3166 1990 Natt Bank of Poland Ind. Export Development 260.00 248.113167 990 Natt Bank of Poland Agroind. Exp. Development 100.00 85.093190 1990 Republic of Poland Environment Management 18.00 17.363193/ 2/ 1990 Republic of Poland Transport 4.75 4.753194 1990 Polish Railway Corp. Transport 145.00 141.833215 1990 Polish Oil & Gas Corp. Energy Resources Devt. 250.00 231.313247 1991 Republic of Poland SAL I 300.00 221.38

Subtotal 1077.75 949.83of which repaid 3/ 0.00

Total now outstanding 1077.75Amnount Sold 0.00

Total now held by Bank 3/ 1077.75Total undisbursed 949.83

B. STATEMENT OF IFC INVESTMENTS(as of March 31, 1991)

Fiscal Loan Equity TotalYear Obligor Type of Business ------ ...... .....------ ------- ---------------- -------- USS Millions-.....

1989 Hortex Horticulture 17.12 17.121990 Export Devt. Bank Export credit 31.66 31.661991 Bristol Hotel Hotel development 10.06 10.06

TOTAL Original Gross Commitments 58.84 0.00 58.84

LESS Cancellations, Terminations, ExchangeAdjustments, Repayments, Write-offs & Sales 2.12 2.12

TOTAL Commitments rnow held by IFC 56.72 0.00 56.72

TOTAL Undisbursed 42.15 42.15

TOTAL Outstanding 14.57 0.00 14.57

1/ The status of projects listed in Part A is described in a separate report on all Bank/IDAfinareed projects in execution, which is updated twice yearly and circulated to theExecutive Directors on April 30th and October 31st.

2/ Two loans for one project3/ Prior to exchange adjustments.

* SAL, SECAL or Program Loan.

File: m:\pol\mopd.wklApril 17, 1991

U. S. S. R.POLANDREGISTERED UNEMPLOYED

Ga"K ~~~~~~AS PERCENTAGE OF~~ ~~. ~LABOR FORCE

ASOF DECEMBER 31,1990)zcw ~~~~~~~~~~~~~~~~~~~~~~~~~~UNEMPLOYMENT:

/.7 LESS TH-AN 3.0%

50~~~~~~~~~~~~~~~~~~~. 50 6 0

[JMORE THAN 6 0%

z >: ~~~~~~~~~~~~~~~~~~~~~~~® NATIONAL CAPITAL

-VOTVODSH-IP BOUNDARIES

ui ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~INTERNATIONAL BOUNDARIES

U. S. S. R. 0

5 $, 4-7tWws/t f*7tttf J la, 22* 24 02I I ,,.. 1 l. ........................... . '