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Implementation Completion Report (ICR) Review - Sac 3

1. Project Data:   
ES Date Posted:
Project Name:
Sac 3
Project Costs(US $M)
 30  10
Loan/Credit (US $M)
 30  10
Sector, Major Sect.:
Crops, General agriculture fishing and forestry sector, Central government administration, Telecommunications, General industry and trade sector,
Agriculture fishing and forestry; Agriculture fishing and forestry; Law and justice and public administration; Information and communications; Industry and trade
Cofinancing (US $M)
L/C Number:
Board Approval (FY)
Partners involved
Closing Date
09/30/2003 09/30/2003
Prepared by: Reviewed by: Group Manager: Group:  
Michael R. Lav
George T. K. Pitman Kyle Peters OEDCR

2. Project Objectives and Components:

a. Objectives
To reduce poverty and improve the business environment. An additional objective was to provide financing for Moldova to assist in meeting its debt payments.

b. Components
A. Macro Framework: Maintain a sound macroeconomic policy as indicated by satisfactory completion of the IMF's PRGF review. B. Poverty Alleviation: (i) Monitoring: Improve poverty monitoring and its input into line ministry activities; (ii) Improve basic education; (iii) Health - Improve social service delivery; (iv) Social Protection (Pensions) - Improve financial soundness of and enhance real benefits from the pension scheme. C. Improving the business environment: (i) General - Measure the quality of business environment and improve the business environment; (ii) Energy Sector - Maintain gains in privatization (three electricity companies had been privatized) and efficiency to date; (iii) Winery privatization - Halt deterioration of winery assets and improve production, and privatize 10 wineries; (iv) Telecom sector - Improve competitiveness of telecoms and privatize the telecommunications company; (v) Agriculture- Pursue improved productivity through private initiatives, adhere to the MOU for agriculture which limited government intervention.

c. Comments on Project Cost, Financing and Dates
The project as approved cost US$30 million, financed by an IDA credit, to be disbursed in three equal tranches. Only the first tranche was disbursed, and the last two were cancelled. The project was appraised in February, 2002, approved by the Board in June, made effective two months later, and closed on schedule on September 30, 2003.

3. Achievement of Relevant Objectives:

All of the objectives were highly relevant but overall they were not achieved. Moldova did not achieve a satisfactory macroeconomic framework, its poverty alleviation program was only improved by a modest extent, while there was only negligible improvement in the business environment. Shortfalls in each of these areas are enumerated in section 5.

4. Significant Outcomes/Impacts:

Compared to the policy reform agenda, impacts were generally narrow and mis-focussed. Out of many reforms supported by the project, only a few have achieved their full objectives, including: (1) Poverty monitoring has improved and an improved household survey is now on a Government website, (2) The quality of basic education should improve somewhat with the new institutional structures for curriculum revision, new learning assessments, and better textbook availability, and (3) the groundwork was laid for donor support for data gathering and analysis in other areas including a national census planned for 2004, (4) the Government implemented the Second Cost of Doing Business Survey and the inspections system was reformed. Government did enact a new civil code intended to protect property rights, but its actions detailed in section 5 below cast doubt on how meaningful these efforts have been. Finally, the double VAT was eliminated.

5. Significant Shortcomings (include non-compliance with safeguard features):

The wide range of shortcomings enumerated below led to the cancellation of the second and third tranches of the credit.

A. A satisfactory macro framework was not maintained (the IMF terminated its program). B. Poverty: Government adopted but then ceased to implement the hospital restructuring plan. Concerning pension reform, the Government undermined its newly adopted indexation formula when the Government increased pensions by more than called for by the index. Government did not adopt a new sector strategy to address increasing inequities in the education system, although a new structure for curriculum revision was introduced, national examinations for grades 4 and 9 were implemented, a core textbooks rental scheme was initiated, and additional teacher training was added. C. Business environment. (1) Privatization of wineries was an important objective with very mixed results. The Government is still providing off-budget support for selected wineries, counter to the objective of establishing hard budget constraints. An investor conference was held, but the required bidding documents were not produced. Of 10 wineries planned for privatization, only five were offered for sale and only three were privatized. Despite this, the government claims that the privatization process is continuing, although the assets of the wineries (as well as the tobacco companies) continue to deteriorate. (2) To improve the competitiveness of the Telecoms sector, Government carried out (only) the first phase of tariff rebalancing, but this was undermined by the exemption of large numbers of consumers from the rebalanced tariffs. While the Government did establish a telecommunications regulatory agency which the government states will be maintained in the future, its independence appears to have been compromised (while privatization efforts were undermined with, apparently, some elements of corruption). (3) Although licensing was streamlined under a centralized Chamber of Licenses, line ministries have introduced new requirements for companies prior to their going to the one-stop chamber for licensing. (4) In the Energy Sector, the environment for private sector development was compromised when The Court of Accounts (CoA) challenged the privatization of three (out of the country's five) electricity companies which had been purchased by the Spanish firm Union Fenosa. After the case reached the Supreme Court, the government withdrew its challenge, but considerable damage was done in this case to Moldova's image in the broader business community. This record appears to have largely undermined improvements such as Government's passage of amendments to make it easier to privatize electricity distribution companies and its establishment of an energy regulatory agency which government states be maintained in the future. (5) Concerning agriculture, the government largely adhered to the MOU which was useful in preventing government intervention in this sector, but this only had the effect of minimizing backsliding.

6. Ratings:ICROED ReviewReason for Disagreement/Comments
Institutional Dev.:
Bank Performance:
SatisfactorySatisfactory Although risks are noted in the President's Report's Credit and Program Summary, risk analysis is not adequately reflected in the PR's Medium Term Economic Outlook section. That analysis is pitched to a more optimistic outlook: "Moldova's growth now seems sustainable" (paragraph 12 and elaborated through the section) with only a passing one sentence reference to a hypothetical low case. While the decision to go ahead with the operation appears warranted to avoid reform reversal, the financing could have been back loaded even more to reflect risks. The Bank's prompt cancellation of the 2nd and 3rd tranches when the Government failed to live up to its commitments was appropriate and an important factor in assessing Bank Performance as "Satisfactory".
Borrower Perf.:
Quality of ICR:

7. Lessons of Broad Applicablity:

1. The need for adequate appreciation of political economy of proposed reforms is essential. Adjustment loans in risky situations should be multi-tranched and not frontloaded. The three tranche formulation of this loan was an appropriate risk mitigation strategy. 2. With unsatisfactory performance, terminating an operation rather than giving extensions sends a clear message to the government, which sets a firm basis for the future country assistance strategy.

8. Audit Recommended?  No


9. Comments on Quality of ICR:

The ICR covers most of the necessary material. However, it could have discussed with more clarity the role of corruption in undermining the reform program. The ICR could also have explored the political economy of proceeding with this operation in more depth, as well as the role of Moldova's debt in determining whether to proceed with the operation.

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