Document o f The World Bank

Report NO: 25656-YU

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 14.7 MILLION (US$20 MILLION EQUIVALENT)

TO SERBIA AND MONTENEGRO

FOR A

SERBIA HEALTH PROJECT

April 17,2003

Human Development Sector Unit (ECSHD) South East Europe Country Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 1,2003)

Currency Unit = Serbian Dinar 1 Dinar = US$0.017

US$1 = 60Dinar

CAS CPAR EA EAR ECA EIB EMP ERTP DCA DGF DO FMR GDP GFATM GOS HCRC HIF HTA ICR ICRC IDA IDP IMF IPH IRI LIC

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Country Procurement Assessment Report Environmental Assessment European Agency for Reconstruction Europe and Central Asia European Investment Bank Environmental Management Plan Economic Reconstruction and Transition Program Development Credit Agreement Development Grant Facility Development Objective Financial Management Report Gross Domestic Product Global Fund to Fight Aids, Tuberculosis and Malaria Govemment of Serbia Health Care Reform Commission Health Insurance Fund Health Technology Assessment Implementation Completion Report Intemational Committee of the Red Cross International Development Association Internally Displaced Persons International Monetary Fund Institute of Public Health International Republican Institute Learning and Innovation Credit

MTEF MOH MOF MOFE MOSA MOL NGO OED PAD PCD PECB PHRD PEIR PCU SPEAG SAC S A M SFRY SOSAC TA TSS TOR TB UNICEF WHO

Medium Term Expenditure Framework Ministry of Health Ministry of Finance Ministry of Finance and Economy Ministry of Social Affairs Ministry of Labor Non Governmental Organization Operation Evaluation Development Project Appraisal Document Project Concept Document Public Expenditure Capacity Building Policy and Human Resources Development Fund Public Expenditure and Institution Review Project Coordination Unit Social Protection Economic Assistance Grant Structural Adjustment Credit Serbia and Montenegro Socialist Federal Republic of Yugoslavia Social Sector Adjustment Credit Technical Assistance Transitional Support Strategy Terms of Reference Tuberculosis United Nations Children’s and Education Fund World Health Organization

Vice President: Johannes F. Linn Country ManagerDirector: Orsalia Kalantzopoulos

Sector Manager: Armin Fidler Director: Annette Dixon

Task Team Leadermask Manager: Loraine Hawkins

SERBIA AND MONTENEGRO SERBIA HEALTH PROJECT

CONTENTS

A. Project Development Objective

1, Project development objective 2. Key performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Main sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices

C. Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank and/or other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added of Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

F. Sustainability and Risks

1. Sustainability 2. Critical risks

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12 14 14 15

15 17 18 19 20

20 20 21 21 22 24 26

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3. Possible controversial aspects

G. Main Conditions

1, Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Annex 2: Annex 3 : Annex 4: Annex 5: Annex 6:

Annex 7 : Annex 8: Annex 9:

Project Design Summary Detailed Project Description Estimated Project Costs Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Financial Summary for Revenue-Earning Project Entities, or Financial Summary (A) Procurement Arrangements (B) Financial Management and Disbursement Arrangements Project Processing Schedule Documents in the Project File Statement o f Loans and Credits

Annex 10: Country at a Glance Annex 1 1 : Social Assessment

28

29 29

30

30

31 36 44 54 61 62 72 77 78 79 80 82

MAP(S) IBRD 32323

SERBIA AND MONTENEGRO Serbia Health Project

Project Appraisal Document Europe and Central Asia Region

ECSHD

IDA Total:

Date: April 17,2003 Sector Manager: Armin H. Fidler Country Director: Orsalia Kalantzopoulos Project ID: PO77675 Lending Instrument: Specific Investment Loan (SIL)

Team Leader: Loraine Hawkins Sector(s): Health (90%), Health insurance (10%) Theme(s): Health system performance (P)

6.31 13.69 20.00 9.79 13.69 23.48

- Project FlnancZng Data

~~~ ~ ~ ~

[ ] Loan [x] Credit [ ]Grant [ ] Guarantee [ ] Other:

Amount (Us$m): 20.00

Proposed Terms (IDA): Standard Credit Modified terms: 20 years to maturity; 10 years grace period, with no acceleration clause Grace period (years): 10 Commitment fee: 0.5%

Years to maturity: 20 Service charae: 0.75%

Project implementation period: 4 years Expected effectiveness date: 09/01/2003 Expected closing date: 02/28/2008

2sllolem I* WE. loa

A. Project Development Objective

1. Project development objective: (see Annex 1) To build capacity to develop a sustainable, performance oriented health care system where providers are rewarded for quality and efficiency and where health insurance coverage ensures access to affordable and effective care.

2. Key performance indicators: (see Annex 1)

In the four general hospitals participating the in the project: reduction in arrears, reduction in bed numbers and average length o f stay; increase in hospital bed occupancy; reduction in flows o f patients from the area to tertiary care; increase in use of primary care and outpatient services. Health Insurance Fund (HlF) and Ministry o f Health (MOH) increase the number of s ta f f trained in health policy, health finance, or health management, and use their sk i l l s in review of the basic benefits package, the public/private mix in health services, resource allocation and provider payment systems; and a critical mass o f these staff remain in post. MOH, with input from other relevant Serbian health sector agencies, monitors and analyzes at least annually the revenue, expenditure and arrears o f the HIF and public health care institutions; the distribution of HlF expenditure per capita in different areas and among vulnerable and other population groups (taking account o f risk factors); and out-of-pocket expenditure on health by the population MOH, with input from other relevant Serbian health sector agencies, publishes regular analytical reports on the performance of the health system and health sector institutions, using data from enhanced health information systems, and using the WHO World Health Report 2000 categories and local measures.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 24476-W Date of latest CAS discussion: July 18,2002

A CAS, covering FY04-06, i s expected to be presented to the Board in the second half of 2003, together with the Government's PRSP.

The Bank's strategic program with Serbia and Montenegro i s outlined in a Transitional Support Strategy (TSS) that was endorsed by the IBRD and IDA Board o f Directors in May 2001. The TSS out l ined a two-phase program of World Bank Group support to the (former) Federal Republic of Yugoslavia (FRY) - urgent activities in a pre-membership phase and a broader program supporting the Economic Reconstruction and Transition Program (ERTP). On July 18,2002, a TSS Update was approved by the Board, and provides a strategic framework for continued Bank assistance. The TSS Update expl ic i t ly notes the expected contribution o f the health investment project to two of i t s four development objectives: improving the social well-being o f the most vulnerable, and building human capacity and improving governance and building effective institutions. A third can also be added, namely, to restore macroeconomic stability. These are included as project development objectives (DO) in Annex 1.

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2. Main sector issues and Government strategy: POLITICAL AND SOCIOECONOMIC CONTEXT

The union of Serbia and Montenegro consists of two member states - Serbia and Montenegro - with a combined population of 10.6 million and an estimated end 2001 GDP of US$10.6 billion. Serbia i s the larger member state, with around 95 percent of the population and a s im i la r share of i t s GDP. A new Constitutional Charter and associated Implementation Law ratified in February 2003 created a new union of the two member states, replacing the constitution of the previous FRY that was established in 1992 following the Socialist Federal Republic of Yugoslavia's dissolution. Under the provisions of the new constitutional charter, Serbia and Montenegro have some joint institutions, including a Presidency, Parliament, and a Council of Ministers, but operate separate economic, fiscal, monetary and customs policies.

Given that health care was a function substantially devolved to the Republican level in the former Yugoslavia and maintained as such in FRY, the constitutional changes have fewer consequences for the health sector than for other sectors. Under the new constitutional charter, the former Federal Min is t ry of Health, which had a relatively limited regulatory role, has been abolished and i t s functions delegated to the member states' ministries. The Project covers only Serbia and does not include Montenegro. As part of the constitutional changes, an increase in decentralization of health functions to the Autonomous Province of Vojvodina i s envisaged. Note that the discussion that follows refers only to Serbia and does not cover the province of Kosovo which remains under UN administration according to UN Security Council Resolution UNSC-1244.

Economic performance has been solid. Real GDP growth in SAM rebounded from the highly negative rates of 1999 (impact of the Kosovo conflict) to positive rates of about 5-6 percent in 2000 and 2001. For 2002, preliminary estimates put growth at about 4 percent. Exchange rates versus the Euro have been maintained at a nearly stable level in Serbia, and are fixed by definition in Montenegro. Inflation in Serbia fell from 115% in 2000 to 39% in 2001. For 2002, i t i s estimated at 14.2%, well below the initially projected 20%. One reason i s the unexpected real appreciation. Inflation in Montenegro fell from 24% in 2001 to 9.2% in 2002, a level which i s s t i l l high given the use of the Euro. SAM foreign trade volumes have increased. Following an 18.6 percent rebound in 2000 from the lows of the Kosovo conflict, exports of goods and services (in US dollars) rose by 7.7 percent in 2001 and an estimated 18.2 percent in 2002. Import growth also increased from 29 percent in 2001 to 33 percent in 2002. Buoyant private and official transfers have helped to damp the impact of the rising trade deficit on the current account deficit, which rose from 4.6 percent of GDP in 2001 to 8.9 percent in 2002. At the end of 2000, the external debt totaled US$ 11.3 billion, or 131 percent of GDP, three-fourths of which consisted of principal and interest arrears. By end-2002, the combination of growth, real appreciation and debt relief from the Paris Club had reduced the external debt-to-GDP ratio to a s t i l l significant 74.6 percent of GDP. London Club talks are ongoing.

The Poverty Survey 2002 indicates that approximately 20 percent of the Serbian population l i v e s in poverty or at the edge of poverty - consuming less than US$90 per month - of which 10.6 percent of the population consumed less than US$70 per month. The survey indicates that certain groups are more at risk of falling into poverty than the rest of the population: families with unemployed heads, the elderly, school age children, large families (with 3 or more children), rural population, people with low educational levels, and the elderly. Other data sources indicate vulnerability among Roma, refugees, displaced persons and single parents. There are approximately 472,000 refugees and 190,000 internally

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displaced persons (IDPs) residing in Serbia today. The number of refugees and IDPs varies greatly by municipality. In Kraljevo (one of the areas that will participate in the Project), with an estimated population of 152,000 as of 1991,25,694 IDPs are estimated to have migrated from Kosovo and Metohija and 6269 refugees to have migrated from other countries of former Yugoslavia. Relatively few data in Serbia are analyzed by gender and consequently, little i s known about gender differentials, This has been identified as a priority for the PRSP.

MAIN SECTORAL ISSUES

Health Status Despite al l the difficult factors during the 1990s (economic crisis, war, sanctions, bombing) in FlRY (excluding Kosovo), all vital indicators improved during that time period according to data based on household surveys conducted by UNICEF in 2000. Under five mortality rate decreased by 29.5 percent while infant mortality rate decreased by 31.5 percent to 11.23 deaths per loo0 live births in 2000. Today, life expectancy at birth i s estimated to be 69.8 years for males and 74.5 years for females. Access of the population to improved drinking water sources and sanitary means of excreta disposal i s almost universal and vaccine preventable diseases are under control. When looking at causes of death, the picture i s clearly one of a developed and transitional country with high levels of heart disease, strokes, and cancer. Smoking i s estimated to cause 30% of the mortality in Serbia. Poor nutrition i s another major risk factor.

Some minor declines in health status have been reported recently, however, and although not well documented, are of concern given the other conditions in the health sector and experiences in other countries in the region where health status has deteriorated significantly. A high annual incidence of tuberculosis (39 per 100,OOO population) indicates a need to continue to be vigilant about infectious diseases, particularly given the living situation of the most vulnerable population such as IDPs and refugees and the affordability of drugs. The Government's view that there has been a deterioration in health status (Government of Serbia (GOS), Interim Poverty Reduction Strategy, June 2002) has not been documented by reliable data, which i s in itself an issue. Of the MDG's health specific goals, the most challenging for Serbia are those around poverty, hunger, and HIV/AIDS. Serbia i s very much at risk for future outbreaks of HIV/AIDS, given existing transmission patterns in the region (IV drug use, commercial sex activity). Serbia has received some donor assistance in these areas and has developed programs for HIV/AIDs and TB prevention and control for financing by the GFTAM, so far receiving approval for a US$3.5 million grant in support of HIV/AIDS prevention.

Health Care Financing and Expenditure

According to the recent Public Expenditure and Institutions Review (PER, 23689-YU), public spending on health care in Serbia was over 6 percent of GDP in 2001, and has apparently been slowly decreasing over the past few years. When estimates of private expenditure are added, total health expenditure i s estimated to be around 11 percent of GDP - among the highest in the region and close to the levels registered by high income countries. These rather high ratios primarily reflect low GDP numbers. However, Serbia's per capita health expenditure, approximately $62 per person per year in 2001 was one of the lowest in the region, although planned expenditure for 2002 increased to US$82 per person. Financing for the health care system comes from a combination of public finance and private out-of-pocket payments. The cornerstone of the public financing system i s the Serbia Health Insurance Fund (HIF). The former Yugoslavian health care system was unique in Eastern Europe because i t was historically financed by compulsory social insurance and not directly from the budget. This provides

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Serbia with an advantage in terms o f experience with provider contracting and payment and some o f the basic functions of insurance that other countries in the region have had to learn from scratch. On the other hand, the existence o f separate contribution laws and revenue collection responsibilities for health and other social funds creates some administrative complexity and inefficiency. The HIF currently has area branches that are not independent units and essentially perform administrative functions for the central fund. In the past, however, the system was much more decentralized. There i s a separate Federal Health Insurance Fund for Military Personnel and their families (FMHIF).

Serbian Denar millions Health Insurance Fund (HIF)

1998 1999 2000 2001 9,727.1 11,757.9 20,473.7 40, 968.2

Sources: Former FRY and Serbian authorities, World Bank Staff PEIR estimates

The Serbia HIF receives earmarked payroll contributions from employees, employers, self-employed, farmers and the Pension and Labor Market Funds. Transfers from the Serbia govemment budget are intended for financing investments and for covering health care provision for the ‘vulnerable groups’ including refugees (from 2003), and covering the deficit in the HIF. Vulnerable groups include the long- term unemployed and other recipients o f social assistance, the elderly (via transfers from the pension fund), the very young, and independent artists.

The amount o f private expenditure on health i s unknown, although one survey by UNICEF estimates i t to be 40 percent and a smal l household survey conducted in Kraljevo for International Committee for the Red Cross (ICRC) found a similar percentage. Private out-of-pocket spending i s considered one of the major issues by the government. I t has attempted to capture some o f th is expenditure through co-payments, but with limited success. The co-payment system has extensive exemptions: around 30 percent o f users are required to pay, according to the MOH’s estimate. The Poverty Survey 2002 indicates that on average, patients pay considerably more than the official co-payments for healthcare provided by state institutions: for example, people who were admitted to hospital in the past year on average paid 9752 dinars over the year for hospital care, including drugs, diagnostic tests and procedures.

The financial performance o f the HIF over the past five years has been poor, and achieving fiscal sustainability in the HIF i s one o f the main sectoral issues to be addressed by the Project and health components o f adjustment operations. The net accumulated arrears o f the Serbian HIF by the end o f 2001 were 6.7 billion dinars (1 .O% of GDP). The Serbian HIF has in the past met i t s deficit by: (i) taking out commercial loans; (ii) delaying payments to suppliers, especially pharmaceutical companies; (iii) delaying payments to providers; and (iv) artificially maintaining low reimbursement pr ices or setting

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contractual revenues at levels that do not cover all of the costs o f services provided to insurees. Sustainability requires that the gap between HIF revenues and i ts expenditures be bridged, which in turn, calls for either an increase in revenue or a reduction in expenditure or, preferably, a combination of the two. I t i s important too that in bridging the gap, costs are not simply pushed to patients in the form of higher out-of-pocket payments for pharmaceuticals and medical and other supplies that are necessary for their treatment under the HIF benefits package. The HIF has taken steps to halt further accumulation o f arrears, and has begun to reduce arrears.

On the revenue side, the main issues are evasion o f contributions and informal payments. In a system that was designed to provide universal coverage and where the link between contributions and entitlement to services has grown increasingly weak, the incentives to pay the required contributions for the self-employed and the farmers are minimal and, as a result, they are rarely paid. According to the PEIR, these two categories of workers contribute only 3% and 1% o f total contributions respectively, while the share of GDP derived from the private sector and non-public agriculture are 40% and 20% respectively. Accumulation o f large arrears to the HIF became the norm, and included the Pension and Labor Market Funds falling behind with their contributions.

Any increase in revenue i s unlikely to come from further increases in contributions from the wages o f workers and their employers in the formal sector, which already account for 81 percent o f the H I F ' s revenue. The exemptions from contribution payments previously granted to employers appear to have been eliminated recently as a measure supported by SAC-I (IDA-35590). Similarly, the s o c i a l funds have begun to pay their contributions more regularly, which was also a measure under SAC-1. In compliance with the policy conditionalities for the Social Sectors Adjustment Credit or SOSAC (W566-YU, FY03), the Serbia MOF has budgeted for transfers to the HIF for 2003 sufficient to cover the contributions o f IDPs, refugees and vulnerable groups, through a combination of increased budget transfers for these groups and a general subsidy to finance the deficit in the HIF. The focus of future efforts to increase revenue therefore must shift to two other potential measures: (i) increasing the proportion of self-employed and farmers who pay their contributions; and (ii) ensuring that contributors pay an amount which reflects ability to pay.

The other side of the equation i s expenditure reduction and cost containment. The PEIR concluded that there are s t i l l insufficient data to fully understand all o f the sources o f the inefficiencies in the health systems, but suggests that two of the largest are over-capacity in the hospital sector relative to utilization and a highly monopolistic market and poorly controlled supply chain for pharmaceuticals.

In Serbia, both hospital occupancy rate (68.7 percent) and the average caseload per physician (133) are low by international comparison, and while the official number o f hospital beds (5.9 per 1 ,OOO population) i s lower than in many transition and some high income economies, one very preliminary estimate calculated as part o f the master planning exercise suggests that there may be 17,000 more beds than necessary in Serbia. This would imply an excess capacity o f 30 percent. These numbers must be used with caution, however, because in the absence of improved data for service planning, it i s not possible to assess whether hospital utilization should be expected to increase as barriers to access are addressed. Hospital utilization appears to be low relative to other European countries with similar population age structure. Administrative measures indicate hospital admission rates in the range 9.5-12 per 100 population (compared to CEE and EU average o f 18.3 per 100), and the Poverty Survey 2002 found a rate o f 8.3 hospital admissions per 100 interviewed. Moreover, service planning needs to take account o f the social protection that many hospitals provide in their areas, caring for the both the poor, elderly, and mentally ill. Any future restructuring program would look specifically at the future use o f these beds in the context o f planning for population needs. The need to convert some beds for other

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purposes such as long term care, would also need to be considered. Restructuring i s likely to entail redistribution o f capacity and personnel.

Preliminary findings of a project preparation study in Kraljevo bear out Serbia-wide estimates that there i s scope to reduce hospital capacity. I t appears possible to maintain the existing level of hospital activity with a reduction from 700 to around 400 beds, and to consolidate hospitals functions into a smal ler number o f i t s existing buildings, freeing up one or more buildings for alternative use. The study identified opportunities to shift care from inpatient to outpatient settings and reduce lengths o f stay within some specialties (dermatology/venereology for example, currently has an average length of stay o f 21 days), through evidence-based changes in clinical practice. The study also identified areas of excess staffing relative to case load.

Public procurement of pharmaceuticals in Serbia has historically taken place in a highly contro l led marketplace, typified by excessive closeness between the main public consumer, the HIF, and a small number o f domestic manufacturers, represented by a fifteen member cartel, the Industry Lobby of Pharmaceuticals Manufacturers. Five o f the fifteen local companies comply with Good Manufacturing Practice standards and local companies together share approximately 70 percent o f the market. Recently, a case study o f procurement o f pharmaceuticals was undertaken as part o f the Country Procurement Assessment Report (CPAR, June 2002), which describes in detail the many flaws in existing practices. According to the recently completed CPAR, the health sector i s considered the "epicenter" o f procurement-related corruption in Serbia. The CPAR did two simulations from different data sources and found the savings on those particular drugs would have been 25 percent if they had been procured competitively. Estimates of pharmaceutical expenditures as a portion o f HIF expenditures var ies significantly, with the PEIR noting that the HIF reports 17 percent while i t s own analysis was c loser to 11 percent.

Another source of inefficiency in drug procurement i s the repeated failure o f the public health care system to make available, through public pharmacies, approved drugs which patients have a right to obtain on prescription. In all cases where a public pharmacy fa i ls to fulfill such a prescription, the patient has the right to obtain the prescribed drug from a private pharmacy and obtain a refund from the HIF. The EAR estimates that in 2002, this cost the HIF an additional US$15 million per month . During 2001, in order to mitigate these problems, the number o f drugs on the reimbursable l i s t was reduced.

The final and most obvious way to reduce expenditures i s to reduce the level o f entitlements, w h i c h i s under consideration in Serbia. The current benefit package i s very generous (in theory) and inc ludes coverage o f treatment abroad and in military hospitals as well as a set o f benefits that are non-health related such as funeral expenses and sick leave which totaled more than 4 percent of total expenditures of the HIF in 2000.

While i t i s difficult to reduce entitlements, the HIF has taken steps to reduce expenditures. I t has developed new contracts with health care providers, and while imperfect, th is i s reflective o f a wish to increase control over public expenditures and to monitor service delivery. However, the cu r ren t contract does not create incentives for health care providers to increase efficiency (savings in the wage bill, for example, would result in equivalent cuts in revenue). The HIF has also begun to monitor the prescription patterns o f health care providers, identifying the outliers. A main objective of the Project i s to work with the HIF to further develop these activities and others to improve the incentives for provider performance via contracting and monitoring and evaluation.

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Health Delivery System

The existing infrastructure in Serbia i s in disrepair and needs basic repairs and re-equipping to restore i t to where it can provide a level of minimally acceptable health services. The system i s characterized by an extensive network of public facilities, from the ambulantas - the health stations that are scattered throughout the country - to the Clinical Centers - tertiary university hospitals located in Belgrade, Nis, and Novi Sad. Overall, there are approximately 58,500 beds. The level of service inputs (staff numbers, infrastructure) i s almost identical to that which was operating in 1990, but the financial resources flowing into the sector have significantly declined. The cut in resources was accommodated by cuts in non-salary operating costs, in capital maintenance, repairs and replacement, and in reduction in the real value of salaries. Only one-third of hospitals in Serbia have functioning sterilization systems. Seventydve percent of the medical equipment in the health facilities i s more than 10 years old, an age w h i c h most of the producers consider the upper time limit for the manufacturing and stocking of spare parts. (EAR, Assessment of Equipment Needs in Hospitals and Health Centers in Serbia, January 2002) Most facilities use coal or oi l for heating, spending more than they would if they switched to gas, and adding significantly to pollution problems. EAR estimates that energy efficiency investments of 100,OOO to 300,000 Euro per hospital could save up to 3040% in fuel costs (EAR, A Report ofthe Status of Hospitals in Serbia out of Belgrade, February 2002).

Given the excess capacity in the hospital sector described above, there i s a need to prioritize facilities for investment. The Government has adopted a vision statement for the system (see below on discussion of government strategy), and the next step i s to develop planning standards and guidelines w h i c h will determine such things as bed and staff ratios to population for planning purposes, guidelines on what services will be provided at primary, secondary and tertiary levels. Background data necessary to prepare a facilities master plan are being collected with financing from the European Agency for Reconstruction (EAR), and development of service restructuring plans and planning standards and guidelines are being undertaken with the support of funds from the Social Protection Economic Assistance Grant (SPEAG, TF050017), a Policy and Human Resource Development grant (PHRD, TF051137) for heal th project preparation and further EAR funds. Completion of planning standards and guidelines a n d a masterplan are planned activities to be supported by the Project and i s also supported in the Bank's adjustment program as a SOSAC policy conditionality. There i s also a need to develop s k i l l s in health technology assessment to ensure the most cost-effective procedures, drugs and devices are used. This too wil l be supported by the Project.

Approximately 115,000 people work in the health sector in Serbia. This figure does not include the health employees from Kosovo. There are reportedly large imbalances by speciality and by area. Physicians have dominated the system, with less emphasis on nursing and other paramedical specialties. Today, 1,400 doctors are reported to be unemployed in Serbia while 1,OOO more graduate each year. In the short term, no plans have been made to cut enrollment in medical school and the annual graduating class i s around 1OOO. Temporary cuts have been made in specialist training positions. T h e average monthly salary (excluding private practice or informal payments) of health professionals a s of 2000 stands at € 130 for doctors and € 90 for nurses, as opposed to the €176 of the national average gross salary. As wages have fallen in real terms and basic means for delivering health services h a v e deteriorated, the morale and motivation of the work force has deteriorated. The Government has collected baseline data and i s preparing a human resources strategy, with the support of Project preparation grant funds.

A rudimentary framework i s in place to allow private practice, and some parts of the system such as dentistry are rapidly moving in that direction. There are, reportedly, 3000 registered private institutions,

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doctors and services, employing over 6000 workers full time with 12,000 part time consultants. It i s a parallel system that i s serving a small portion of the population: those that can pay for services in cash. Many doctors from public services work within the private sector as consultants, creating potential conflict of interests between their two (or more) professional engagements.

GOVERNMENT'S STRATEGY

The highest levels of the Government o f Serbia have publicly declared that reforming the health system i s a priority. In August 2002, representatives of the Ministry o f Health, Health Insurance Fund, and Institute o f Public Health participated in an exercise to articulate an overall vision for the health sector in Serbia. This was based on several policy and strategy documents that already exist, including "Basic Principles o f the Health Care System Reform in the Republic o f Serbia - Policy Paper", a program the Government adopted and presented at the June 29,2001 donors conference and reflected in the Medium Term Economic Recovery and Transition Program, the National Health Policy (February 2002), and the Interim Poverty Reduction Strategy Paper.

The Government's vision statement agreed in August 2002 set out the following nine "guiding principles" or strategic directions (The full text o f the vision statement i s available on Project files.):

The health care delivery system wi l l be clearly organized in three functional levels to ensure an affordable and effective service to the population by rendering the care at the lowest possible level with sufficient competence and equipment.

There w i l l be equal availability o f and access to basic health care services for all citizens and financial coverage for these services from HIF regardless o f socioeconomic status of the individual citizen.

Basic health care services wi l l be selected based on cost-effectiveness in reducing the disease burden and HIF-financed basic health care wi l l be affordable and wi l l be efficiently delivered.

There w i l l be a high priority on preventive and primary health care services.

There w i l l be an increase in the involvement o f the private profit and non profit sector in the delivery o f HIF-financed health care.

The main resource base for the financing of health care wi l l continue to be the mandatory HIF basic health care scheme, but the resource wil l be expanded through the development of supplementary health insurance and private insurance schemes.

Categorization o f health care institutions and development of a master plan w i l l be undertaken as preparation for a later step-by-step decentralization o f lower level planning, management and delivery of health services.

The role of users, payers and providers wi l l be well-defined and separated.

Quality of services and facilities wil l be promoted, strengthened, monitored and controlled based on a quality assurance and licensing system.

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3. Sector issues to be addressed by the project and strategic choices: The small scale of the Project, relative to the size o f the sector and the problems i t faces, requires a focused approach, and complementarity and coordination with the work o f other donors, other Bank operations and the Government's own expenditure plans. The Government's strategy i s ambitious and wi l l require implementation to be sustained over the long term. This Project can only support the f i r s t phase o f reform in selected areas, pilot some key elements o f the strategy and help to bu i l d capacity within the Serbian health authorities (MOH, HIF, IPH and health care institutions) for continuing strategy development and implementation. The main sector issues to addressed by the Project are: (i) limited capacity in the Serbian lead health authorities (MOH, HIF, and IPH) for policy development, implementation and evaluation in the fields o f finance, management, public health, and quali ty regulation; (ii) unequal and inappropriate distribution o f resources, including human resources (too concentrated in Belgrade and at higher levels o f care); and (iii) piloting and initial implementation of approaches to increase efficiency and quality in secondary care, as part o f a strategy to s h i f t care to lower levels in the delivery system.

During the project preparation period, the Bank strategy has been to maintain a close l inkage between the investment project and adjustment lending. This linkage has been used to address some of the causes o f fiscal imbalance in the HIF and problems in the pharmaceutical sector, and also to support planning and strategy development for medium to longer term structural reform. Health was one of the four priority areas included in the first SAC-I that went to the Board in FY02. The SOSAC, negotiated in December 2002 and planned to disburse two tranches in FY03, has health as a major component. The IMF program (Extended Arrangement-Supported Program, 2002-2005) includes supportive measures. One of the proposed structural benchmarks in their program (under the fiscal sector) i s to improve the cost-effectiveness o f health care services by redefining the criteria for medical service contracting and redesigning the prescription drug form, and adjusting the positive drug l is t . The longer term benchmark (2003-2004) i s to eliminate excess capacity, duplication, and other structural problems with the delivery system. The Project, though small, provides the opportunity to support the reform benchmarks in the adjustment operations through capacity building; provision o f expert advice on changes to laws and institutions; and development o f information systems to support planning, monitoring a n d management o f reform. In addition, engagement o f the MoF and Govemment as a whole i s critical in health finance reform given the independence o f the HIF from the MOH, given the importance o f budget transfers to key objectives for stabilizing the HIF and financing coverage for the vulnerable, and g iven the linkage of health finance reform with other public expenditure and revenue management reform measures.

The Bank's strategy i s outlined in a Health Country Assistance Strategy (Health CAS) recently prepared by the Bank's health team (April 2002) and endorsed by both Bank management and the GOS (available on Project files). I t identifies the following priorities for Bank assistance, which are reflected in activities planned for the Project: health information systems develotlment, which i s required to improve the accuracy and timeliness o f health data available for policy making and w i l l support efficient operations o f the HIF health financing and health insurance, where the objective w i l l be to help the HIF regain fiscal sustainability through a combination o f measures on the revenue and expenditure side and to ensure that out-of-pocket spending does not become a financial burden for the poor; hea l th services restructuring, where the objective wi l l be to improve the quality and efficiency o f service delivery; human resources, where the objective wi l l be to introduce adjustment programs that wi l l help Serbia achieve the optimal labor force in terms o f distribution, skil ls, and affordability. The Health CAS also highlighted as a priority public health, where the objective wi l l be to strengthen the capacity o f the GOS to address some of the diseases with the highest (or potentially highest) burden o f disease. Because other donors are very active in support to public health, Project activities in this area are more limited, and focus on the interaction o f public health with other components (information systems, planning, service

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restructuring, financing of public health services). Running through all of this i s the objective that the health service remain accessible to the poorest segments of the population, and those that are adversely affected by transition. The monitoring indicators for the Project encompass distribution of resources, access and out-of-pocket payments by the poor. Coordination between reforms in the health sector and other related sectors wil l also be important to strategies to improve health and access to health services for the poor, and to mitigation o f the impacts o f restructuring in health services.

Complementarity and coordination with other Bank operations: If success i s to be achieved, the Bank's approach must be multi-sectoral and involve the disciplines o f public expenditure management, environment, transportation, education, and private sector development. Linkages with the PEIR, SAC-I and SOSAC, described above, wi l l reinforce measures to stabilize revenue, improve expenditure management (pharmaceuticals law, application o f public procurement law in the health sector, planning for restructuring) and strengthen transparency and accountability (external audit, financial reporting). The Health CAS sets out in detail linkages with these operations.

In addition, the proposed Serbia District Heating And Energy Efficiency Project (FY03) will provide complementary support for energy efficiency investments in the Belgrade Clinical Center and one or more other general hospitals; and the Employment Promotion Project (Learning and Innovation Credit, FY03) wi l l support labor market adjustment programs for staff affected by restructuring in the health sector in one o f the areas (Kraljevo) in which the Health Project wi l l be investing.

Complementarity and coordination with other donor-supported activity: Technical and financial assistance from multiple donors wi l l also be essential to Serbia i f i t intends to maintain the planned course o f reforms, and donor coordination in support of the Government program provides an opportunity to increase the impact o f activities supported by this Project. The largest source of external finance for the health sector over the l i fe o f the Project i s expected to come from EAR, and the EAR program was developed and began implementation ahead of this Project. The EAR program i s expected to address a number o f the sector issues discussed in Section B2 above, and the focus o f the Bank's support has been selected to complement preexisting donor support plans. EAR i s supporting development of pharmaceutical policy and related institutions, capacity building in the MOH and the IPH, assessments of the health services network and studies for hospital restructuring and rehabilitation. The GOS i s exploring with EIB the possibility o f loan finance for hospital sector development. The intention o f MOH, the Bank and EAR i s to coordinate the hospital-sector planning and investment activities financed by this Project with the EAR (and potentially EIB) financed activities, into a nation-wide program o f restructuring and investment in the network o f general hospitals.

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C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

2. Health Finance, Policy and Management 3. Project Management, Monitoring and Evaluation

Total Project Costs Total Financing Required

1. Health Services Restructuring 8.93 38.0 7.44 37.2 1.53 6.5 0.96 4.8

23-48 100.0 20.00 100.0 23.48 100.0 20.00 100.0

Health Services Restructuring (estimated total US$13.0 million, including contingencies): This project component, the largest in the Project, wi l l support planning and initial steps in implementation of the Government's strategy for improving the efficiency o f healthcare delivery while maintaining quality. At the member state level, i t w i l l provide continued support for development o f a masterplan for the health care provider network, development o f planning standards and guidelines, and health management training. In four areas (Kraljevo, Valjevo, Vranje and Zrenjanin), the Project w i l l support initial restructuring and rehabilitation o f physical and human capacity at secondary care level in the general hospital, with a focus on optimising the relationship between primary, secondary and tertiary levels of care, and improving the linkages between local Institutes o f Public Health and healthcare planning and management. The areas participating in the Project have been invited to develop proposals w i t h technical assistance financed by PHRD and SPEAG funds. Kraljevo has already developed proposals and wi l l be the first area to carry out these initiatives, and wi l l serve as a demonstration site, In Kraljevo, the Project wi l l build upon the development of basic health services, the piloting o f a basic benefits package and a new financing model, and the building o f local capacity that has already taken place w i t h the support o f an MOWICRC-supported Basic Health Services Pilot Project (also supported by a grant from the Post Conflict Fund). There wi l l be an emphasis on improvement in management and evidence-based clinical practice, supported by training, technical assistance, evaluation and dissemination of lessons learnt. Investments in new medical equipment and refurbished buildings wi l l be used to help leverage facility consolidation and restructuring in order to make the delivery system more efficient, accessible, and o f higher quality. The planning, management, and environmental management tools developed in the Kraljevo demonstration site w i l l serve a model for other areas. The development o f a masterplan and planning standards and guidelines i s also supported by the Bank's adjustment program (SOSAC) and i s consistent with PEIR recommendations. Labor restructuring in Kraljevo w i l l be assisted by the Employment Promotion Project (Learning and Investment Credit). Costs o f redundancy payments will not be financed by the Health or Labor Credits.

Health Finance, Policy and Management (estimated total US$8.9 million, including contingencies): This component wi l l build the capacity o f the GOS to develop, communicate, and effectively implement health financing mechanisms, health policy and health sector regulation. There are five sub-components to be included: (i) basic benefits package and provider payment system: development o f institutional capacity in the HIF and M O H to review and improve the basic benefit package, the public/private mix of financing and delivery, the provider payment and contracting systems, including monitoring mechanisms;

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and to increase the equity of distribution of health resources; (ii)public healthfinance: review of public health expenditures and financing (that is, expenditure and financing for disease prevention and health promotion) to address priority public health problems more effectively and efficiently. (iii) licensing and accreditation: development of a system of licensing for health professionals and a system of accreditation for healthcare providers; the Project will support the establishment of a licensing body for health professionals and begin licensing and re-certification; i t will also support establishment of an accreditation body for health care providers, though full implementation will extend beyond the l i f e of the project as a long term process to continually improve the quality and safety of health services; (iv) health information systems: development of a health information systems masterplan, data standards for Serbia and a health information service to assist policy advisers and leaders in the GOS in using existing data for decision-making; piloting of a local integrated health information system based on these plans and standards in Kraljevo (building on information systems development initiated under the MOH/ICRC Pilot Project), followed by implementation of local health information systems in Valjevo, Vranje and Zrenjanin; and (v) MOH capacity-building and communication: building capacity in the MOH, €€IF and IPH in health management, analysis and decision-making; assisting these three organisations to clarify and develop their mandates; assisting the health sector decision makers in the MOH, HIF and in their communications strategy for health reform, including enhancement of the flow of information on public, patient and staff perceptions and opinions to health sector decision-makers. Needs assessments for the MOH and the IPH have already been carried out with EAR funding, and Credit-financed developments will be coordinated with planned EAR and UNDP programs to support capacity development in the MOH and IPH. This component will provide technical assistance, training, recurrent costs for new agencies and policy units (on a declining basis), hardware, software and office equipment.

Project Management, Monitoring and Evaluation (estimated total US$l .S million, including contingencies): The project will support operation of a Project Coordination Unit (PCU) within the Ministry of Health. The PCU Director reports to the Assistant Minister responsible for International Relations. The PCU i s staffed by full time local consultants (PCU Director, Procurement Specialist, Financial Specialist/accountant, Project Assistant). The PCU will be responsible for day-to-day coordination with MOH sectors and with other agencies benefiting from project activities (notably the HIF and the health centers in Kraljevo, Vranje, Valjevo and Zrenjanin). The PCU wil l be responsible for all procurement, disbursement, monitoring and reporting. The PCU will also engage four full-time field coordinators to work in each of the four areas participating in project activities, to provide an operational link between the PCU and the local counterparts. A Project Steering Committee chaired by the Minister of Health wil l be the decision-making forum for strategic decisions and approval of plans for project implementation. A significant portion of the financing will be used to develop and maintain a project monitoring and evaluation system. Financing will be needed for technical assistance and training of staff, office equipment, recurrent costs of PCU staff, and project audit.

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2. Key policy and institutional reforms supported by the project: Some critical pre-conditions for policy and institutional reforms necessary to implement the Project and achieve i t s development objectives have been supported by SAC-I or SOSAC. The Project i tse l f seeks to strengthen capacity in the central health authorities that lead, finance and regulate the sector to develop and implement a program of structural reform. I t wi l l achieve this through training and technical assistance, together with support for implementation o f the first steps in the Government's longer term reform strategies to restructure health services in order to increase efficiency while maintaining or increasing quality. The SAC and SOSAC have included measures to improve the performance of the HIF, such as improving the accountability and transparency of the social funds, and ensuring adequate budget transfers to the HIF to cover the contributions of vulnerable groups. As well, these adjustment operations sought to support expenditure control measures through improved pharmaceutical procurement and new contracts for providers that encourage cost control and begin to monitor performance. During the l ife of the Project, i t i s envisaged that the legal frameworks for health insurance, health care facilities and public health regulation will need to be revised, to create greater clarity o f roles and mandates among the HIF, MOH and IPU, and to strengthen governance and public accountability for financial performance and health service delivery for the autonomous bodies in the health system (the HIF and healthcare providers). At the same time, the review of laws i s likely to increase organizational autonomy for public sector health care providers, and strengthen regulation o f private providers. The laws that govern public health regulations and regulation o f the safety and quality o f health care providers w i l l also undergo revision, Part of t h i s revision wil l reflect the constitutional changes that delegate many o f these functions from former Federal authorities to Serbian institutions. At the same time, the GOS intends to revise i t s laws in line with European Union norms, and address gaps in regulation (such as regulation of medical waste).

Benefits

Availability of reliable data on a variety of health system indicators such as performance measurement, health expenditures and public health which increases the level of confidence in the quality of care provided and the viability of the publicly financed system

Improvements in provider payment methods should encourage providers to provide higher quality health services, leading to improved health outcomes

Increased revenue for the HIF targeted for vulnerable groups should lead to a decrease in out-of-pocket payments

Improved financial position of hospitals due to rationalized services since the available resources wil l be spread over a smaller number of facilities.

3. Benefits and target population:

Beneficiaries

General public, the MOH, health providers, and opinion leaders

People currently eligible for publicly financed health care services; health care providers

The poor, who are most l i iely to not seek care because of an inability to pay

Health providers, plus patients who may be less l ikely to be pressed for informal payments

I I I

More informed and engaged public wil l feel empowered to contribute to health reform rather than to merely be affected by it. Likelihood o f reforms succeeding increases and possibility of adoption o f innovative ideas increases

-

The public, the Government o f Serbia

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4. Institutional and implementation arrangements: Project Coordination Unit

A Project Coordination Unit (PCU) has been established within the Ministry of Health's Sector for International Relations, which also serves as the donor coordination unit of the MOH. The unit i s already using funding from the Social Protection Economic Assistance and PHRD grants to prepare the project. The existing link between the new MOH PCU team and existing SPEAG Project Implementation Unit at the Privatization Agency has helped to pass information about procurement and financial management procedures in World Bank financed operations.

The PCU wil l be responsible for procurement, disbursement, monitoring and reporting on the use of project funds. The PCU i s headed by a Director, who will have overall responsibility for the proposed project. The PCU Director will ensure that all project objectives and targets that can be monitored, as specified in the Project Operations Manual (POM), are on track and achieved. The PCU includes a procurement officer (who i s supported by an experienced consultant), a project accountant and an administrative assistant.

Funds Flow The International Development Association (IDA) wil l make funds available to the Government of Serbia and Montenegro (SAM) under the Credit Agreement, goveming the terms and conditions of the IDA credit and specifying the project. The Government of SAM wil l on-lend the funds on I D A terms to Serbia based on a Subsidiary Credit Agreement with terms and conditions satisfactory to IDA. Project funds wil l flow from: (i) the IDA, either via a single Special Account established in a commercial bank acceptable to the Bank or by direct payment on the basis of direct payment withdrawal applications; or (ii) the Government, via the Treasury at the Ministry of Finance (MOF) on the basis of payment requests approved by the Treasury.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: The option of not doing a project at a l l could be considered as an alternative. However, there are several strong justifications for investing in health, including: (i) public sector health spending i s a significant drain on scarce budgetary resources; (ii) private, out-of-pocket spending i s unaffordable for many people, particularly the poor, and when people do have to pay, i t often moves them into poverty; and (iii) there are ready opportunities to improve efficiency and health outcomes. To date, health has played a prominent role in the Banks policy dialogue with the Government and has been included as part of the f irst Structural Adjustment Credit (SAC-I) as well as the SOSAC. However, i t i s clear that these policies wil l not succeed unless there are investments in institutions and capacity building to accompany them. A related question i s then, should the Project be a small technical assistance project to support the refinement and implementation of the strategies supported under the SAC and SOSAC? The amount of money allocated to the project i s small in any case, and focuses heavily on TA, training and institutional development. The disadvantage of this approach i s that it would not yield immediate benefits in the current delivery system, and could therefore undermine public support for the reform and for the current govemment. By adding to the Project investment in a small number of restructuring and refurbishment investments, visible benefits are created and these areas can act as demonstration and learning sites for

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implementation of wider reform.

One lesson learned over the past ten years o f implementing health projects in ECA i s that i t takes much more time than expected to implement health sector reform. The most success has been found in countries where the Bank/Borrower relationship has been relatively stable over time. However, the reality i s that there i s too much uncertainty about Serbia's relationship with the Bank over the timeframe required for a longer term investment through, for example, an APL. Our longer term involvement in health can only be decided within the context o f the upcoming CAS discussions, which will, in part, be based on the PRSP.

The selection o f health care financing, delivery system restructuring, and various capacity building activities (such as information systems, communication, and training in management, public health and health policy) was decided within the earlier discussions o f the ERTP and TSS. Some important areas, such as pharmaceuticals, most o f public health, HIV/AIDS and TB prevention and control, medical education and emergency medicine are not included because they are covered by other donors, although we do provide policy support to the M O H relevant to these areas.

At the PCD stage o f project preparation, consideration was given to a range of options for how the project might support implementation o f the restructuring plan, including: (i) selecting pilot sites, including potentially linkage to the ongoing MOWICRC Basic Health Services Pilot Project in Kraljevo; (ii) initially focusing restructuring activities on the Clinical Center, which consume a large portion of total health resources; or (iii) establishing a Health Investment Fund and distributing the funds based on certain criteria, most likely some combination of willingness to adhere to the master plan and need. A variant o f the first option has now been selected. Option (ii) was rejected because the estimated amount o f project funds would not go very far in facility refurbishment or the purchase o f medical equipment in a facility o f this size and complexity and so would provide limited leverage, because the Cl in ica l Center has been relatively well resourced in the past, and because i t w i l l be difficult to reduce inappropriate patient flows to tertiary level institutions unless secondary level hospitals improve their quality and functionality. It therefore makes sense to begin with investment in secondary level facilities. A s well, EAR plans a study o f the Clinical Center during 2003, that wi l l be a prerequisite for investment. Option (iii) has been rejected because investigation revealed that establishment o f a Health Investment Fund would require passage o f primary legislation and establishment o f a new legal entity, and hence would cause significant delay. Nonetheless, the project preparation process and the project design h a v e built in some o f the features o f a Health Investment Fund, namely bottom-up development of proposals; and appraisal, ranking and selection o f proposals on their merits for investment by either the Bank-financed project or the complementary proposed EAREIB financed program. One consequence o f this, however, i s that the Health Services Restructuring component o f the project wi l l be slow disbursing and will have high supervision costs, because in three o f the four areas participating the project (Kraljevo, Val jevo, Vranje and Zrenjanin), detailed preparation and planning for restructuring wil l take place during the f irst year o f project implementation.

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2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

(Note that this i s not a complete l i s t of donor activity in the health sector.)

*tor Issue Project

Bank-financed

ielivery system, health policy jevelopment Health project preparation Basic health services pilot project, Kraljevo Health reform-related technical assistance and training, including: health financing, human resources, hospital restructuring, communications, information systems, reform implementation capacity-building Health financing; pharmaceuticals market safety, efficacy and efficiency; masterplanning; health information systems planning Labor adjustment following restructuring

Health financing, reform of the

Implementation Progress (IP)

S

S

S

SAC-I

PHRD grant Post-Conflict DGF

SPEAG (and Canadian cofinancing)

SOSAC

Employment Promotion Proj ec - LIC Hospital energy efficiency

3ther development agencies EAR: Pharmaceuticals supply and regulation; Development of diagnosis, treatment and referral protocols; Health institutions needs assessment and planning for hospital restructuring; Rehabilitation of hospital and health center equipment; Re-organization of blood transfusion service; ?ublic health institutional assessment; Public health capacity building; MOH Capacity building; Burden of disease study

Development Objective (Do)

Serbia District Heating and Energy Efficiency Credit

I

Ongoing Complete

Ongoing

Ongoing

Ongoing

Complete In preparation In preparation In preparation

S

S

S

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EIB: General hospital rehabilitation and restructuring;

UK DFID: Health Care Reform Commission; National Health Accounts;

Canada: - EPI, MCH Services and youth AIDS prevention and children's rights; - Development of family medicine and support to public health association

USAID: Community Revitalization through Democratic Action (through 5 US NGOs); may include rehabilitation of hospitals and health centers outside of Belgrade;

UNICEF: Child and youth health programs (EPI, breastfeeding promotion, emergency services, injury prevention, growth monitoring, HIV/AIDS and substance abuse prevention);

UNAIDWGTFAM: HIV/AIDS prevention and control; TB prevention and control

l P D 0 Ratings: HS (Highly Satisfactory), S (

Jnder discussion

zomplete Ingoing

:omplete

Ingoing

Ingoing

Ingoing

ipproved n preparation

stisfactory), U (Unsatisfactory), - HI

3. Lessons learned and reflected in the project design:

Serbia i s fortunate to be able to benefit from more than ten years of experience of health project implementation in the ECA region by the World Bank and other donors. OED has released an in-depth study of four completed health projects in ECA and the ECA Region's Human Development Department i s currently preparing i ts own assessment of al l thirty health projects that have been completed or are under implementation. Some of the main lessons are clear, including: (i) health sector reform i s a lengthy, politicized process and expectations for the reform process have been too optimistic for both the World Bank and the client countries; (ii) institutional aspects of reform are important; (iii) greater attention needs to be paid to the political economy of the reform through marketing reforms to lawmakers, the medical community and the public; (iv) projects have been too complex; and (v) adequate resources need to be committed for supervision of projects.

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Given this experience over the past ten years, the proposed Project includes a significant institution building component which wil l include activities to reach out to the public and make sure they are engaged in the reform process. Support to an institute for training in public health, management, and health policy i s also envisaged as part o f the project as well as the means by which capacity c a n systematically be strengthened in these important areas. The OED report noted that support for the establishment and accreditation o f health management institutes has helped to increase the credibi l i ty o f these "new" disciplines, built national capacity, and strengthened constituencies for reform.

In addition to these general lessons, there are also lessons that can be gleaned from the more than 15 countries that have undertaken "restructuring" projects. First, and most importantly, i s that the market alone i s not sufficient to reduce the size o f the sector. Countries that have assumed th i s are m o r e l ikely to s e e financial failure in their health insurance systems as they are unable to control costs. Second, the most successful restructuring projects have been actively supported by adjustment conditionality. Successful examples in ECA include Moldova and Georgia. Close l i n k s to SAC-1 and the proposed SOSAC are a key component o f this Project's design. Third, many o f the earlier projects only provided financing for civi l works and medical equipment, but did not cover other expenses associated with restructuring. The ICR for the Albanian Health Project aptly notes:

The project design provided no resources or activities to support [this streamlining J process, and assumed that stag redeployment and resource allocation would automatically be implemented by the local health authorities. The design underestimated the level of effort and resources required to achieve a health service rationalization and may have overlooked the technical and political complexity associated with such activities.

Fourth, i t i s necessary to ensure that there i s consistency between future provider payment systems, reforms concerning decentralization and ownership of facilities, and legal issues around c los ing facilities and reducing staff. This project wi l l place a significant amount o f attention on getting these th ings right. Inclusion o f health financing in the proposed Project ensures that there w i l l be consistency between future provider payment system and the goals o f the restructuring program.

The ECA-wide review also provides some lessons that are relevant for the health financing component. As with restructuring, reforms in health financing have been undertaken in the region often t imes without a clear governance structure, skilled and committed health care management and administration, or support from health care professionals and the public for the aims o f the reforms. Even when carefully designed in sufficient detail, the implementation o f activities i s often not sequenced correctly. The proposed Project wi l l be able to address this in part through i t s close ties to the adjustment program. One o f the main issues to be resolved i s the responsibilities o f the key players in the systems and the role o f the HIF vis-a-vis the M O H in particular.

4. Indications of borrower commitment and ownership:

The GOS has been clear and active in expressing i t s wish for a health project. Preparation was init ially hampered by the absence of a Minister o f Health for a period until June 2002, but made rap id progress subsequently. Specific examples o f govemment commitment and ownership include:

0 The Ministry o f Health, Health Insurance Fund, Institute o f Public Health met on August 23/24,2002 for a two day workshop and developed a health sector vision, including nine guiding principles of the health sector in Serbia. The fact these groups worked together intensively for two days i s significant given that before preparation o f the project, they had not met in over two years. The full report of t h i s

- 1 9 -

workshop i s available in project files. A Republican Commission for Health Information was formed, including representatives of a l l major stakeholders and produced a health masterplanning document. The Health Insurance Fund has already begun to introduce some o f the reforms needed in contracting, aothough these reforms need development and refinement. The Ministry of Health i s commissioning a study of health sector human resources. A public health conference has been held where an assessment o f the public health system, produced with the support of EAR, was presented to local stakeholders and donors and international organizations, and plans for a future strategy developed. A PCU was established in the M O H prior to signing o f the PHRD grant.

0

0

0 0

0

5. Value added of Bank support in this project: After working in the region for more than ten years on many o f the very same issues that Serbia i s now facing, the Bank brings a wealth o f experience and valuable lessons learned that can be applied in Serbia. In many o f these areas, such as health care financing, hospital restructuring, and pharmaceuticals, w e are able to provide in-house expertise and consultant services. We are also able to take a multi-sectoral approach by calling upon colleagues from other departments within our own institution (such as the linkages with the District Heating and Energy Efficiency, and the Employment Promotion Projects). The Bank together has already demonstrated i t s ability to bring various players such as the HIF, IPH, and M O H as well as to facilitate donor coordination when required. Our ability to simultaneously engage the Ministry o f Finance helps to ensures the compatibility o f any proposed health reform program with overall economic reform, and this linkage i s supported by our adjustment operations. Finally, the level o f donor financing in the sector meets only a small fraction of the needs, particularly for capital investment. There i s potential for the proposed Project to provide some capital investment and leverage more from other donors and the private sector, through coordination with EAR in particular.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit 0 Cost effectiveness 0 Other (specify) Economic evaluation methodology: Cost benefit analysis of health services restructuring and related project investments i s set out in Annex 4. Quantifiable efficiency gains achievable by restructuring exceed Project investment costs in net present value terms. In addition, the Project investments can be expected to yield a range o f nonquantified benefits (including reduction in hospital acquired infections, reduction in r i s k of hazards from fire and biomedical waste, reduction in morbidity and mortality for a range o f conditions covered by evidence-based clinical guidelines).

NPV=US$ million; ERR = % (see Annex 4)

2. Financial (see Annex 4 and Annex 5): NFV=US$ million; FRR = % (see Annex 4) Financial analysis not applicable. Annex 5 contains financial sustainability tables.

Fiscal Impact:

Counterpart funds requirements for the Project are modest, and at the peak in counterpart funds, requirements amount to less than 1 percent o f the M O H budget in any one fiscal year and are set out in Annex 3. Recurrent costs of operating and maintaining investments made under the Project are

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principally borne by participating health care institutions that wi l l also benefit from cost reductions arising from efficiencies arising from restructuring. The licensing and accreditation agencies established under the Project are expected to be able to finance their recurrent costs by the end of the project l i fe through fees charged to licensed professionals and accredited providers, based on cost-recovery.

3. Technical:

Component 1: Health services restructuring: The overall strategy for services restructuring i s in line with best practice in Europe. The separation of primary health care and shift o f patient care to lower cost, local settings i s appropriate and should increase efficiency and access to care. The use o f needs assessment, health services planning, and development o f a facilities masterplan i s a robust strategy for helping to use central leverage to adjust capacity, while supporting this with stronger financing incentives for efficiency and a move to a more decentralized management model. Copies of the templates and guidance for development of area health services restructuring proposals, and criteria for selection of proposals are available on project files, together with a detailed appraisal report on the restructuring o f health services capacity in Kraljevo.

Component 2: Health jinance, policy and management: The development o f a more sophisticated and pro-active financing function - evidence-based, and supported by data for planning, analysis, monitoring and evaluation - i s recognized internationally as one of the best strategies for controlling costs and ensuring cost-effective use o f resources in an environment of increased decentralization and private sector development. The specific financing tools to be supported under the Project are accepted tools for achieving these objectives, namely: review o f the basic benefits package based on evidence of cost-effectiveness and quality, analysis o f the equality of resource allocation (relative to need and risk), review o f provider payment mechanisms to create incentives for cost control, efficiency and quality. Licensing and accreditation are now standard tools for assuring minimum standards of safety and quality and encouraging quality improvement in "mixed economy" health systems. Health information systems development i s a critical element of the infrastructure needed to support development of strategy and planning, financing, improvement o f management o f health service provision and system monitoring, and evaluation to feed back in the policy cycle.

4. Institutional:

4.1 Executing agencies: The executing agency for the Project wi l l be the Ministry o f Health. The M O H wi l l work closely with other agencies and institutions, such as the Health Insurance Fund, Institute o f Public Health, Kraljevo general hospital and dom zdravlje; and other general hospitals and related health services in Valjevo, Vranje and Zrenjanin, that wi l l be involved in implementation o f the Project.

Institutional assessments o f the Ministry o f Health and the IPH have been undertaken w i th the support of EAR and are available in project files. The design o f the proposed Project seeks to incorporate capacity-building in the MOH, HIF and participating general hospitals and related health services in each area, to boost institutional capacity. Project resources wi l l be used to establish a health finance policy unit, staffed by ful l time local consultants, working alongside MOH and HIF staff. External technical assistance and training wi l l be provided to support M O H and HIF functions.

4.2 Project management: The PCU has been established in the Sector for International Relations o f the Ministry of Health, and the

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Assistant Minister for this Sector has overall responsibility for the Project in the Ministry. Two other Assistant Ministers with relevant responsibilities within MOH have policy oversight for components 1 and 2 o f the Project, respectively. Working groups have been established to support the work o f the main components. A PCU Director and a Procurement Specialist are in post and have participated in a World Bank-sponsored PCU conference. In addition, they have received on-the-job training from a project management consultant: this training included assistance with preparing the Project Operational Manual. The procurement specialist participated in a Bank procurement training course in procurement o f consultant services in February 2003. An international project managemenffprocurement consultant has been recruited and wi l l be present during the f i rs t year o f project implementation to assist the MOH PCU to function effectively, given that Serbia i s a new borrower. The PCU Financial Specialist was appointed in March 2003. Four area coordinator posts wil l be filled, one located in each o f the four areas participating in the Project. In Kraljevo demonstration site, a project structure has already been established under the MOWICRC Basic Health Services Project and i s functioning well. The project coordination management of the Kraljevo activities of th i s project wi l l be coordinated by the same structure, with the addition of one full-time equivalent position. However, all procurement and disbursement functions wil l be carried out centrally in the M O H and PCU.

4.3 Procurement issues: See the Procurement Capacity Assessment report (available in project files), and the Country Procurement Assessment Report (available in project files).

4.4 Financial management issues: A financial management review was undertaken in December 2002, and updated in March 2003, to determine whether the financial management arrangements for the Project are acceptable to the Bank. I t has been concluded that the Project satisfies the Bank's minimum financial management requirements.

The SAM CFAA report notes that there are a number o f r isks on the management of public funds in SAM. The risks to the public funds include: (a) poor public sector financial management in the past; (b) unfinished reforms - the new governments that were elected have commenced a process of major reform, which looks good as designed, but i t i s s t i l l too early to say if the reforms wi l l be totally successful; (c) capacity constraints in both the SAM and Serbian governments: (d) weak banking sectors; (e) weak audit capacity; (f) poor implementation capacity in line ministries: and (g) the lack o f recent Bank implementation experiences within SAM. Since re-joining the membership o f the World Bank, SAM has been using individual implementation units for each investment project (traditional PCU model), located within the relevant line ministries or project beneficiaries, to mitigate some o f these risks.

Disbursements from the IDA Credit w i l l follow the transaction-based method, Le., the traditional IDA procedures including reimbursements with full documentation, Statements o f Expenditure (SOE), direct payments and special commitments. I t i s not anticipated that the project w i l l migrate to report-based disbursement.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The Govemment i s preparing a health facilities master plan. That plan wi l l be completed by the end o f 2003. I t wi l l include an assessment o f the current status o f health facilities, including the i r ability to treat

Environmental Category: B (Partial Assessment)

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medical waste, I t will also include a map for the future, which in all likelihood wi l l invo lve relocating health services and shutting down some facilities. The map for the future wi l l be based on new standards and guidelines that take into consideration the economic reality, current clinical practices, etc.

The EAR and the Bank are currently helping the GOS to prepare this map, or master plan, and to prepare national standards and guidelines for health services planning. These standards and guidelines wi l l include measures to align environmental and health protection standards with EU requirements. I t i s beyond the scope of the Project to support full implementation o f the plan. The Project wi l l focus on shorter term, incremental improvements in quality and efficiency in four general hospitals. This wi l l involve repairs and maintenance (roofs, windows, electricity, gases, heating systems) and some minor civil works that are expected to make limited changes in the internal partitions and access ways of existing buildings in order to make them more efficient and safe. These repairs and minor works are expected to be in the range o f US$1,OOO,OOO - US$2,000,000 per facility. Improvement in energy efficiency i s l ikely to be achievable through investment in minor civil works and in heating systems. In one or more of the areas in which the Project i s working, the Serbia District Heating and Energy Efficiency Project may provide support for investment in improving hospital energy efficiency.

How radiological, chemical and biomedical hazards (principally infection control) are handled in the hospital wi l l be part of the national standards and guidelines and wil l be encompassed in the Environmental Management Plans (EMPs) for the areas participating in restructuring. 5.2 What are the main features of the EMP and are they adequate? The project envisions some relatively minor civil works (repairs and rehabilitation of existing buildings) and i s consequently rated a "B". Overall, the Project should have a positive environmental impact by improving infection control and safety within the hospital, reducing the amount of medical waste in Serbia that i s not disposed o f properly and by improving energy efficiency. The national standards and guidelines to be developed with EAR/IDA support w i l l include regulations for safety in relation to fire, medical radiation, hazardous chemicals, and biomedical waste in the health system. All hospitals refurbished under the Project are required to have an environmental management plan, including a medical waste plan, and to disclose th is locally in Serbian in concert with planned communication about health services restructuring.

The Kraljevo EMP includes plans for technical assistance on hospital safety, infection control and medical waste management, and recommended actions are to be financed by the Project. 5.3 For Category A and B projects, timeline and status o f EA:

Date of receipt o f final draft: February 24,2003

5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?

Determine whether an environmental management plan (EMP) wi l l be required and i t s overall scope, relationship to the legal documents, and implementation responsibilities. For Category B projects for IDA funding, determine whether a separate EA report i s required. What institutional arrangements are proposed for developing and handling the EMP?

An environmental management plan has been developed for the Kraljevo demonstration site and disclosed in Kraljevo. For the remaining three areas participating in the restructuring activities (Valjevo, Vranje and Zrenjanin), the M O H and general hospital managers w i l l prepare environmental management

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plans using the Kraljevo EMP as a model and disclose these in their local areas once detailed restructuring plans have been completed (during project implementation). Health facilities was te management issues w i l l be covered in the EMP. The EMP will, among other things, ensure compliance with local environmental and hygiene laws. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? Do the indicators reflect the objectives and results of the EMP? How wi l l stakeholders be consulted at the stage of (a) environmental screening and (b) draft E A report on the environmental impacts and proposed EMP?

Consultation regarding the environmental measures in the Kraljevo EMP has taken place w i t h local stakeholders in the health services, municipality and with the MOH. The EMP has been disclosed locally and local stakeholders have already been engaged with health reform plans, in the context of the existing MOH/ICRC Basic Health Services Pilot project. Local project steering committees, with stakeholder representation, wil l be established in the other three areas and wil l be the primary counterparts for consultation regarding respective EMPs.

5.6 Are mechanisms being considered to monitor and measure the impact o f the project on t h e environment? Will the indicators reflect the objectives and results o f the EMP section o f the EA?

The project i s likely to have such a negligible impact on the environment that i t i s not felt to b e worthy to establish a monitoring system o f this type.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. There are several sets o f social issues that arise from the Project. The first relates to access to and affordability o f health care for vulnerable groups. The SOSAC and this project are particularly concerned with improving the amount of revenue the health fund receives to cover the costs o f services for these groups, improving the targeting o f scarce resources so that the poor are exempt from co-payments, and decreasing out o f pocket spending for all groups, which would have a greater positive impact on the poor. Financing of health coverage for uninsured groups has been highly problematic in recent years, in particular for the refugee population o f around 470,000, placing major strains on facilities w h i c h continue to provide care. The planned development outcome in this context wi l l be achieving more equitable access to care, particularly for vulnerable groups, and regardless o f ability to pay. Affordabil ity o f health care services i s an issue, particularly for vulnerable groups and the poorer strata of the population. The Project measures wil l help to strengthen management o f public sector hea l th expenditure which, in turn, w i l l help to ensure appropriate funding for