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Implementation Completion Report (ICR) Review - SIMPLIFIED: Programmatic Adjustment Loan - II

1. Project Data:   
ICR Review Date Posted:
Project Name:
SIMPLIFIED: Programmatic Adjustment Loan - II
Project Costs(US $M)
 150  125
Loan/Credit (US $M)
 150  125
Sector, Major Sect.:
General public administration sector, General education sector, General finance sector, Health, General industry and trade sector,
Law and justice and public administration; Education; Finance; Health and other social services; Industry and trade
Cofinancing (US $M)
L/C Number:
Board Approval (FY)
Partners involved
Closing Date
12/31/2004 03/31/2005
Evaluator: Panel Reviewer: Division Manager: Division:  
Michael R. Lav
Jorge Garcia-Garcia Kyle Peters IEGCR

2. Project Objectives and Components:

a. Objectives
To support the government's medium term program of which the main objectives are the achievement of average annual growth rates of 4.5-5.0 percent during 2002-2005, the reduction of the poverty rate by half by 2005 compared to 2001, and the reduction of the unemployment rate from 18.1 percent to 2001 to 12-14 percent in 2005, while making substantial progress towards EU accession, which it is hoped will occur in 2007. This medium term program balances a strategy of private sector led growth with reducing social exclusion and increasing empowerment to ensure wide participation in growth.

b. Components (or Key Conditions in the case of Adjustment Loans):
1. Sustaining structural reforms in the enterprise sector with emphasis on the completion of privatization and on the restructuring of the energy, railway, telecommunications, and water sectors.

2. Establishing a market-friendly business environment, focussing on reducing entry and exit constraints and regulatory costs, improving the delivery of public services to business, and enhancing the competitive environment, including through continuing labor market reforms.
3. Deepening the financial sector by improving the legal framework for lending, completing banking reform, and developing financial markets.
4. Improving public sector governance by strengthening public administration capacity, improving service delivery, reducing corruption, strengthening accountability and transparency, strengthening public expenditure management, and increasing the efficiency and effectiveness of the judicial system.
5. Investing in human capital and strengthening social programs by improving quality, access, and efficiency in education and health, continuing pension reforms, increasing social assistance effectiveness, providing for better integration of the disabled and reducing the institutionalization of children.

c. Comments on Project Cost, Financing, Borrower Contribution, and Dates
The project's cost was appraised at US$150 million, equivalent to Euro 123.7 million, in two tranches, a first tranche for 103.7 million Euros and a second (floating) tranche for 20 million Euros which was cancelled. Financing was through an IBRD loan. The project was appraised in March, 2004, approved by the Board on June 10, 2004, made effective on August 24, 2004, and closed on March 31, 2005, three months behind schedule.

3. Relevance of Objectives & Design:

The project's objectives are quite broad, yet each component is clearly identified as essential to the broad progress sought under the government's program. Therefore, the objectives are fully relevant, as reflected in the design of the PAL.

4. Achievement of Objectives (Efficacy) :

I. Overall Objectives
1) GDP growth averaged 5.0 percent per year for 2003/2004, compared to 4.1 percent in 2001 and 4.9 percent in 2002. Substantial Achievement
2) the poverty rate was reduced from 24 percent in 2001 to 21.9 percent in 2003 (latest available), compared to the objective of a reduction by half by 2005 compared to 2001. Modest Achievement
3) the unemployment rate was reduced from 19.8 percent in 2001 (a revised estimate higher than the estimate available at the time the Project Document was written which was 18.1 percent) to 12.0 percent in 2004 (latest available) compared to the target of unemployment rate from 18.1 percent to 2001 to 12-14 percent in 2005. Substantial Achievement
4) Bulgaria has made substantial progress towards EU accession, closing 26 of 30 chapters of the acquis communautaire and signing a treaty in April, 2005 for EU Accession on January 1, 2007. Substantial Achievement

II. Achievement of main implementation components intended to support achievement of overall objectives above:
1. Sustaining Structural Reforms - Partial implementation of intended program. The Government:
a. completed the privatization of the State Savings Bank, the Varna Shipyard, 25 small hydro-power plants and over 60 percent of the remaining small state-owned enterprises. However, the Government failed to privatize Bulgartabak which led to the cancellation of the second (floating) tranche of the loan.
b. opened the energy market to private participation in line with EU Electricity and Gas Directives through the enactment of new energy legislation and regulations, implementation of tariff adjustments to achieve cost recovery and eliminate cross-subsidization, and strengthening the capacity of the independent regulator.
c. continued restructuring the railway sector, by reducing the railway labor force by 10 percent over 2001 levels, rationalizing services including separating freight and passenger services and terminating some 199 km of loss making services, and increased cost recovery.
d. continued liberalization of the telecom sector with the enactment of a New Telecommunications Law that ensures competition in line with EU accession commitments, institutional strengthening of the Communications Regulation Commission, and approval of the future privatization of the Bulgaria Telecommunications Company.
e. adopted a new strategy for the water sector emphasizing private participation and enacted a new Water Regulatory Law
f. issued Environmental Impact Assessment regulations.

2. Establishing a Market-Friendly Business Environment. Substantial implementation of intended program. The government:
a. streamlined business regulations by eliminating and /or modifying over 40 percent of the 360 centrally mandated regulatory regimes (according to the text of the ICR, although Table 2 says 80 percent of 360 regimes were modified and/or eliminated which would be 288), and enacting new legislation and guidelines to regularize the design and implementation of regimes.
b. adopted regulations for implementation of the Law on State Aid to ensure consistency with the acquis communautaire designed to strengthen competition policies.
c. failed to reform Bulgaria's labor market regulations as had been foreseen, although it did make some improvements in labor regulations by amending the Labor Code and enacting legislation to discourage discrimination, amending the Employment Promotion Act to allow for the private provision of employment services and establishing regulations to improve employer and employee representation in tripartite arrangements. However, the large fall in unemployment was mainly due to a massive government-sponsored labor market program which is unlikely to be sustainable.
d. accelerated the resolution of insolvency cases from which required an average of 3.8 years in 2003 to an average of 3.3 years in 2004 by enacting amendments to the Commercial Code to simplify procedures, establish shorter, binding deadlines and strengthen creditor powers, and other reforms

3. Deepening the Financial System - Substantial implementation of intended program. The government:
a. Completed the outstanding banking reform agenda by amending the Law on Registered Pledges to increase secured lending and the Anti-Money Laundering Law in line with international standards.
b. Established the Financial Supervision Commission to oversee the securities markets, insurance companies, and pension funds
c. Amended the Commercial Code and the Law on Public Offering of Securities to strengthen minority shareholder protection and corporate governance.
d. Consolidated the Mandatory Social Insurance Code and the Voluntary Supplementary Pensions Insurance Act into a new Social Security Code intended to strengthen governance structures and fiduciary standards for private pension funds.

4. Improving Governance - Substantial implementation of intended program. The government:
a. Approved an updated medium term public administration reform strategy and action plan and established a monitoring system to track outcomes, with annual reporting to the Cabinet.
b. Increased the merit basis of the civil service by introducing mandatory open competition for all external recruitment, merit-base procedures for filling internal vacancies and clear criteria for which procedures apply, by amending the Civil Service Law and introducing related secondary legislation, etc.
c. Started implementation of a program to re-organize all ministries and agencies by completing three pilot functional reviews of central administration structures.
d. Continued implementing budget reforms by completing program budgets for 2004 for three pilot ministries and undertook an external audit for the first pilot's program budget in 2003.
e. Established the National Investment Division in the Ministry of Finance to coordinate policy, agree on medium-term targets for spending on capital investment and operations and maintenance and a priorities program for EU pre-accession funds in the 2004 budget, all designed to improve the management of capital investment spending.
g. Delegated internal audit teams in all central and local government entities with the intention of strengthening the audit function.
h. Fully funding centrally-mandated delegated functions in the 2004 and 2005 budgets based on agreed expenditure standards, adopted a transparent mechanism for allocating revenues to local governments, and agreed on a program to address outstanding municipality arrears, all designed to improved the system of intergovernmental financing.
i. Continued implementing the National Anti-Corruption Strategy adopted under PAL 1 by approving the 2004-2005 program with specific strategies for education, health, and the judiciary, widely disseminating the first annual progress report, implementing anti-corruption action plans at the Ministry of Interior and in the tax and customs administrations.
j. Created a new accountability framework for the judiciary by adopting constitutional and legislation amendments intended to limit judicial immunity, irreplaceability, and the mandate of senior judicial appointments and introduce performance appraisals.

5. Investing in Human Capital and Strengthening Social Protection - Substantial Implementation of intended program. The government:
a. Reformed the Guaranteed Minimum Income benefits, child allowance and heating benefit rules and amended the Social Assistance Act with the intention of strengthening the legal framework for private and NGO provision of social assistance, etc.
b. Prepared a new national educational reform strategy and action plan emphasizing adjustments to the teaching and learning process, the structure, governance, management and financing mechanisms of the education system and changed the basis of primary and secondary education funding from inputs to enrollments adjusted for classroom size.
c. Updated the strategy and plan for the educational integration of children from minorities, including introducing an obligatory preschool year to benefit early integration of children from minority ethnic groups, with the intention of improving access and integration of disadvantaged children in the education system.
d. Restructured hospitals and developed a positive drug list to guide reimbursements at the National Health Insurance Fund with the intention of improving the efficiency of health spending and financing.
e. Implemented the Child Protection Act intended to provide incentives for foster care and community child welfare services with the intention of improving the effectiveness of child protection programs.
f. Enacted an Anti-Discrimination Law, prepared a draft Act on Integration of People with Disabilities, approved a Strategy for Equal Opportunity for the Disabled, and started implementation of a National Plan for Integration of Children with Special Education Needs in the Public Education System by introducing the regular curriculum in a number of special education schools, all with the intention of improving access by the disabled to education and employment.

5. Efficiency:

Efficiency is not rated for adjustment operations.
6. M&E Design, Implementation, & Utilization:

The Program Document contains a detailed M&E system. Performance benchmarks are presented in Annex 6 for all of the PAL 2 components with specific indicators. Annex 6C presents a detailed list of progress indicators to be achieved by the end of PAL-2 which are set against the program's medium term desired outcomes. The 60 odd performance indicators shown in Table 2 give explicit evidence of improvements supported by the components of the PAL's five component pillars. These reflect a good deal of careful thought on how to monitor the program, and how to identify the desired impact of agreed reforms.
7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative):

There were no special issues presented by the PAL concerning safeguards or fiduciary issues.

8. Ratings:
ICR Review
Reason for Disagreement/Comments
SatisfactoryModerately SatisfactoryThe moderately satisfactory outcome rating (not available to the Region) largely reflects the failure to privatize Bulgartabac which led to the cancellation of the floating tranche. In addition, the poverty reduction objective has apparently not been met. To warrant an outcome rating of "satisfactory" given in the ICR, the project would need to have achieved most of its major relevant objectives with only minor shortcomings (according to IEG guidelines). The cancellation of the project's only floating tranche cannot be regarded as a minor shortcoming. In addition, poverty reduction was certainly an important objective. Therefore, although the project achieved a great deal, its shortcomings relative to its objectives require an outcome rating of "Moderately Satisfactory".
Institutional Dev.: 
Bank Perf.: 
Borrower Perf.: 
Highly SatisfactorySatisfactoryA rating of highly satisfactory requires that the Borrower met or exceeded all covenants and commitments with no shortcomings (according to IEG guidelines). The failure to privatize Bulgartabac, and to implement labor market reforms as foreseen, preclude a rating of "highly satisfactory" for Borrower Performance.
Quality of ICR: 

- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

9. Lessons:

1. A broad multisectoral policy-based operation can be useful in helping the government to coordinate a wide range of reforms if the program is carefully set out and if the Bank can devote adequate resources to work with the relevant line ministries and agencies. For much of this program, the Bank succeeded in mustering adequate support so that the program achieved a great deal. 2. The Bank needs to carefully consider whether objectives are achievable before giving them prominence. In this case, the decision to highlight the privatization of Bulgartabac by isolating it as the focus of a floating tranche seems not to have given adequate weight to the difficulties associated with achieving this reform.

10. Assessment Recommended?  Yes

          Why?  This PAL should be assessed together with PAL 1 and PAL 3 at the completion of PAL 3, since the series are a major reform effort which support the transformation of the economy and the proposed accession to EU membership.

11. Comments on Quality of ICR:

The ICR is very clearly written, frankly discusses the programs numerous achievements and several shortfalls, and provides clear lessons. The ICR is very strong on monitoring and evaluation with the presentation of a detailed set of monitoring indicators. However, as noted in the Borrower's comments, these indicators would have been even more useful if they had all referred to annual rates, rather than the rates for one quarter as was used for some of the indicators. There are instances where the ICR notes passage of legislation, formulation of plans, etc, and states that these represent progress, but for which indicators are lacking. The ICR should have mentioned the loan amount and the amount for the floating tranche which was cancelled. Despite these shortfalls, the ICR is very good, especially for a Simplified ICR.

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