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Implementation Completion Report (ICR) Review - Economic Recovery Development Policy Operation


  
1. Project Data:   
ICR Review Date Posted:
10/24/2011   
Country:
Moldova
Is this review for a Programmatic Series?
 No
First Project ID:
P112625
Appraisal
Actual
Project Name:
Economic Recovery Development Policy Operation
Project Costs(US $M)
 25  25
L/C Number:
Loan/Credit (US $M)
 25  25
Sector Board:
Economic Policy
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  06/24/2010
 
 
Closing Date
12/31/2010 12/31/2010
Sector(s):
District heating and energy efficiency services (30%), General finance sector (20%), Other social services (20%), Information technology (20%), Roads and highways (10%)
Theme(s):
Climate change (30% - P) Regulation and competition policy (25% - P) Social safety nets (20% - P) Regional integration (15% - P) Infrastructure services for private sector development (10% - P)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Anwesha Prabhu
Rene I. Vandendries Ismail Arslan IEGPS2

2. Project Objectives and Components:

a. Objectives:


    The objectives of the single-tranche Moldova Economic Recovery DPO, as stated in the Program Dcoument (pg 25) were to: (1) Adequately fund priority expenditures in the budget during fiscal correction; in particular; (i) better maintain roads; (ii) redirect agriculture support towards investment and; (iii) better target social assistance to protect the poorest Moldovans; (2). Lay foundations for a sustained post-crisis recovery in exports and investment.

b. If this is a single DPL operation (not part of a series), were the project objectives/key associated outcome targets revised during implementation?
No

c. Policy Areas:

The two objectives were also the two policy areas covered in the program. There were 10 prior actions. All prior actions were met at approval.

Policy Area 1. Adequately fund priority expenditures in the budget during fiscal correction.

a) Better maintained roads- The focus here was reform of road maintenance financing and a large increase in funding for road maintenance, both considered important for road investment financing by external partners.

b) Reduced inefficient agricultural subsidies- The focus here was to redirect the subsidy scheme to increase support for investment while reducing recurrent subsidies.

c) Better targeted social assistance- In mid 2008, Moldova launched a new “Targeted Social Assistance Program” (TSA) that verified eligibility based on income and proxy means. In 2010, the Government of Moldova (GoM) suggested further improvements in the TSA program and increasing its coverage of the extremely poor. It also intended to reduce the expansion of the older nominative compensation scheme. The operation was designed to support these changes to alleviate the impact of the crisis on the poor population.

Policy Area 2. Lay foundations for a sustained post-crisis recovery in exports and investment
a) Increase profitability of traditional exports -The operation supported removal of trade restrictions to raise the profitability of wine, the main agro-food export, and other rural products.

b) Make the energy sector more commercially viable whilst compensating poor people- Under-pricing in the District Heating Company in Chisinau (Termocom) had led to accumulation of arrears to Moldovagaz by its heat and power suppliers (the Combined Heat and Power plants (CHPs)) and Termocom. The program supported reforms to make the energy sector more viable by depoliticizing heating tariff setting in Termocom, and providing compensation to protect poor people from higher heating prices through the social assistance program.

c) Lower barriers to private investment in telecoms- The operation proposed to de-monopolize cross-border fiber optic cable access in order to open up competition in the internet and mobile telecommunications sector.
d) Reduced red tape- To develop a more internationally competitive and export-led economy, the operation supported the government efforts to reduce red-tape and bureaucratic hurdles to reduce time and cost of business registration

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates

The single tranche Development Policy Operation was approved on June 24, 2010 for USD 25million (including USD 11.2million in pilot Crisis Response Window (CRW) resources). The DPO became effective on November 16, 2010 and fully disbursed on December 2, 2010. It closed on schedule on December 31, 2010.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:

The objectives of the program were and remain highly relevant. The operation was designed to support the Public Finance component of the GoM’s Economic Stabilization and Recovery Plan (ESRP) 2009-11. It was consistent with the Bank’s Country Partnership Strategy (FY09-12) which had envisaged at least one single-tranche DPO to support economic recovery. The case for using Crisis Response Window (CRW) resources to finance this operation was strong. The different components of the program aimed for Moldova to stabilize the economy, cushion the impact on the poor and stimulate recovery. These objectives are consistent with those of the Pilot Crisis Response Window, in particular with the aim to provide financial assistance to protect core spending to mitigate the impact of the global financial crisis.

The selected reform areas remain of vital importance to boosting growth in Moldova while improving efficiency and productivity in those areas. For example, since the poor were particularly harmed by the crisis, the program appropriately focused on improving the targeted social assistance program. Actions to bring about de-monopolization in the telecom sector and liberalization in wine exports were also much needed to remove inefficiencies and promote growth.

b. Relevance of Design:

The design of the program is substantially relevant. Given the political uncertainty in the country, the choice of a single-tranche DPO was instrumental in responding effectively and quickly to the global crisis. The DPO drew on lessons from the preceding PRSCs and earlier policy operations in Moldova and was supported by extensive economic and sector work . The operation also built on other donors’ work (for example, DFID’s proposed reforms in the government’s Targeted Social Assistance program). These analytical reports helped in informing the areas of reform. The prior actions required under each sub-objective were well-defined and reasonably linked to the Program development objectives (PDO) and medium term program of the government. The results matrix had an overall sound design. However, there were some shortcomings. The results matrix did not have an outcome indicator to measure whether the objective of better maintained roads was achieved. Some of the outcome indicators did not specify a target value (for example, the indicators used to measure increases in the share of subsidies to individual farmers and real farm gate prices for grapes.)


4. Achievement of Objectives (Efficacy) :


Achievement of objectives is assessed against the stated indicators in the Policy matrix (PAD, Annex 2). All prior actions were met prior to Board approval. A 3-year Extended Credit Facility and Extended Fund Facility program with the IMF was approved in January 2010. The ICR notes that the Bank team considered that the Fund supported program provided a credible macroeconomic framework.

Policy Area 1. Adequately fund priority expenditures in the budget during fiscal correction
Overall efficacy in this area is rated Substantial
a) Better maintained roads- The prior action under this sub-objective required that the GoM allocate MDL 582.9 million for road maintenance in the 2010 budget. The PDO indicator was the same as the prior action, i.e., an increase in allocation for road maintenance from MDL 242 million in 2009 to MDL 582.9 million in 2010. This was an important step to check the deteriorating condition of Moldova’s roads and lower transport costs. However, the indicator does not give us information on the outcome of this increased allocation. It is not clear whether the increased budget was actually used to improve road maintenance. Still, according to the additional information provided by the project team ,the percentage of roads in good condition was almost 20 percent as of May 2011, up from 7.3 percent in 2007.

b) Reduce inefficient agricultural subsidies- The prior action required reduction in recurrent subsidies in order to re-direct more funds towards investment. The PDO indicator was an increase in the share of investment subsidies in total agricultural subsidies from 36 percent in 2009 to 40 percent in 2010. In spite of the government having introduced another recurrent subsidy in July 2010 , the target indicator was surpassed at the end of the program with the actual share of investment subsidies increasing to 53 percent in 2010. The share of subsides to individual farmers was 24 percent in 2010, up from 20 percent in 2009; however, the corporate farms continued to receive the largest share of subsidies.

c) Better targeted social assistance- The prior actions required reforms to improve targeting accuracy of the new Targeted Social Assistance (TSA) which was introduced in 2008 , and increasing its coverage of the extremely poor population, and preventing expansion of the already existing nominative compensation scheme at the cost of the new social assistance scheme. The PDO indicator was an increase in benefits going to the bottom quintile under the TSA program. This was achieved --compared to only 27 percent of the benefits that were going to the bottom quintile in 2008 under the nominative compensations, 86 percent of TSA recipients in 2010 were in the bottom quintile. The target on ensuring that at least two-thirds of eligible beneficiaries receive TSA In 2010 was also met. The PDO target on increasing the income threshold for TSA was also achieved.
Another PDO indicator was to change the composition of budget allocation for social assistance, specifically to reduce share of nominative compensation and child allowance and increase that of TSA. This was achieved in the 2010 budget execution.

Policy Area 2.Lay foundations for a sustained post-crisis recovery in exports and investment
Overall efficacy in this area is rated Modest. There was good progress in increasing profitability of traditional exports and lowering barriers to private investment in telecoms. However progress was mixed in the energy sector and in reducing red tape.

a) Increase profitability of traditional exports- The prior actions required the GoM to take steps to liberalize wine exports. Export bans and restrictions forced farmers (mostly smallholder farmers) to be confined to the domestic market, thereby lowering farm-gate prices. Given the vast importance of agriculture in Moldova’s economy, the DPO supported actions to remove trade restrictions in order to facilitate liberalization of wine exports. The PDO indicator was an increase in the real domestic farm-gate price of grapes: it went up by 29% in 2010, from an average of USD 200 per ton in 2006-08
to USD 258 per ton in 2010. The volume of wine and distilled wine products exports also rebounded to pre-2009 levels.


b) Making the energy sector more commercially viable whilst compensating poor people- The prior actions required submission to Parliament of a new Energy Efficiency Law, restructuring of district heating tariff setting for Chisinau and providing social compensation to protect the poor people from higher heating tariffs. The Energy Efficiency Law was adopted and an energy efficiency agency is being instituted but the energy efficiency program has not been adopted yet. Heating tariffs charged by Termocom have been in full compliance with the National Energy Regulatory agency (ANRE) methodology since January 2011.
One other PDO indicator was that there should not be any further accumulation of arrears to Moldovagaz . This was not achieved; as of April 2010, 47.1 million Lei of new arrears to Moldovagaz were accumulated by CHPs and Termocom, raising the stock of arrears from 1.79 billion lei at the end of 2009 to 1.84 billion lei at the end of April 2010.

The PDO indicator on reforms to protect the poor from increased heating tariffs measured the increase in beneficiaries receiving targeted heating compensation. The target was achieved -about 177,000 beneficiaries in March 2010 and 506,000 beneficiaries in December 2010, whose income was less than 700 lei per month, received targeted heating compensation to offset the increased heating bills.

c) Low barriers to private investment in telecoms Prior actions in this area supported de-monopolizing cross-border fiber optic cable access to stimulate competition in the ICT sector which has immense potential to attract private investment. It led to the connection of new high-capacity fiber optic cables into Romania, increased competition in the international bandwidth market, lowered prices and improved the quality of internet services in the country. The PDO indicator measured speed of international connectivity which rose sharply from 12.8 gigabits per second (Gbps) in 2009 to 91.7 gigabits per second (Gbps) in 2010, but fell short of the target rate of 100 Gbps that was laid out in the results framework. Compared to not even a single private investor making cross border cable connections in 2009, three electronic service providers had been issued permits to construct and operate cross border telecommunications cable facility by June 2010, thereby meeting the PDO target.

d) Reduce red tape- Actions in this area supported government’s efforts to reduce the time and costs of business registration to attract small and medium enterprises. The prior action required amendments to the law on State Registration of Companies that would enable the Chamber of State Registration to become a one-stop-shop for registration for health, statistical and social insurance purposes.
The PDO indicator which measured time and cost to register a business was partially achieved. Time to register a business went down from 15 days in 2009 to 10 days in 2010 but the cost to register a business went up from 8.9 percent of income per capita to 10.9 percent over the same period.

5. Efficiency (not applicable to DPLs):

6. Outcome:


The development objectives of the program were relevant, focused and closely aligned with the government’s economic recovery program. The program was well-designed and the Bank closely collaborated with other donors in designing this operation while incorporating findings from its own analytical work. However, there were three indicators that did not have a specific target value in the results framework, thereby making it hard to judge the level of progress. The operation aided the government to take steps crucial to help the economy recover from the global crisis. On efficacy, the progress was mixed. While all six target PDO indicators were achieved under the first policy area, progress in the second policy area was slightly limited-three out of nine PDO indicators were either partially met or not achieved at all. These included failure of the government to adopt the Energy Efficient program, accumulation of further arrears to Moldovagaz and increase in cost to register a business.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:

The program document cites three main kinds of risks that the proposed operation was faced with- political economy (especially fiscal) risks, external shocks to economic growth and financial sector risks. As the ICR notes, political uncertainty continues to pose a significant risk to development outcomes. Moldova is susceptible to external shocks and balance of payment risks that could threaten macroeconomic stability. There remains a risk that some reforms could be reversed especially in agriculture and exports. Further, renewed tightening by Russia of license requirements for wine exports could prove detrimental to the current account balance, thereby throwing the reforms off-track. Given all these uncertainties in the domestic political and external environment, the Risk to development is High.

a. Risk to Development Outcome Rating: High

8. Assessment of Bank Performance:

a. Quality at entry:

The DPO drew on lessons from the preceding PRSCs I & II, and earlier policy operations in Moldova. It was supported by extensive economic and sector work (including two multi-sector PERs, an agriculture PER, two FSAPs, two PEFA studies, and a Country Economic Memorandum). The operation also built upon other donors’ work. Bank support through this operation complemented the IMF supported program- whilst the IMF program focused on the stabilization pillar of ESRP, the Bank could concentrate its efforts on economic recovery and social protection. The Bank team worked closely with the Fund on energy sectors reforms in the program.

Quality-at-Entry Rating: Satisfactory

b. Quality of supervision:

The operation was well supervised with adequate focus on development impact and sustainability. There was one supervision mission which noted that the progress towards achievement of PDOs was highly satisfactory.

Quality of Supervision Rating: Satisfactory

Overall Bank Performance Rating: Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

The ICR reports strong overall country ownership of the proposed reform. However the government’s commitment did fall short in certain areas. For example in the agriculture sector, the government introduced new recurrent subsidies on fertilizers and pesticides soon after their abolition under the DPO.

Government Performance Rating: Moderately Satisfactory

b. Implementing Agency Performance:
The government and implementing agency were the same.

Implementing Agency Performance Rating: Moderately Satisfactory

Overall Borrower Performance Rating: Moderately Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:

The policy matrix was overall well designed and realistic with clear-cut policy areas and progress indicators, including baseline values and short-term targets as well as medium-term objectives. It did have a few shortcomings. Three target indicators in the matrix were not precise; for example, the indicator on increasing the share of subsidies to individual farmers was not quantified. Also, some policy actions did not have outcome indicators. The indicator to achieve better maintained roads measured only the increase in budget allocation and not actual results in terms of improved road conditions.

b. M&E Implementation:

Implementation of the M&E system relied on the State Chancellery which played the primary role in coordinating monitoring and program implementation. Data collection was appropriate and timely.

a. M&E Utilization:

The ICR notes that as a result of supported conversion of nominal compensation into targeted social assistance, M&E arrangements have become sounder and more reliable. Indicators of targeting and coverage are regularly monitored using administrative and household budget surveys and are also incorporated in the Bank’s Social Protection team’s social assistance and insurance database

M&E Quality Rating: Modest

11. Other Issues:

a. Safeguards:
N.A

b. Fiduciary Compliance:

The program document notes that the 2006 and 2008 PFM assessments based on PFM methodology confirmed that the current weaknesses in Moldova’s PFM system are mainly due to weak institutional capacity issues typical for a country in transition. A broad PFM reform has started thereby enhancing the credibility of Moldova’s PFM framework. The document regarded fiduciary risk for the operation as acceptable.

c. Unintended Impacts (positive or negative):

The increase in heating tariffs to cost recovery is expected to foster energy efficiency.

d. Other:



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Satisfactory
 
Risk to Development Outcome:
High
High
 
Bank Performance:
Satisfactory
Satisfactory
 
Borrower Performance:
Moderately Satisfactory
Moderately Satisfactory
 
Quality of ICR:
 
Satisfactory
 
NOTES:
- 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.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:

IEG agrees with the lessons cited in the ICR. The ICR contains useful lessons which highlight the importance of strategic and extensive analytic work, coordination with other development partners and selectivity in the design of the operation. It was reasonable and appropriate for the Bank to focus on reforms for which there was strong support both from the government and other development partners.

14. Assessment Recommended?

No

15. Comments on Quality of ICR:

The ICR is candid, well written and easy to read. It provides information on outcomes, including in areas in which there was inadequate quantification in the program. The information provided is complete yet concise at the same time.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6DPL-Jun-2011)
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