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Implementation Completion Report (ICR) Review - Gz - Prdp Support Iv


  
1. Project Data:   
ICR Review Date Posted:
04/02/2013   
Country:
West Bank & Gaza
Is this review for a Programmatic Series?
 No
First Project ID:
P123437
Appraisal
Actual
Project Name:
Gz - Prdp Support Iv
Project Costs(US $M)
 40  40
L/C Number:
Loan/Credit (US $M)
 40  40
Sector Board:
Public Sector Governance
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  03/06/2012
 
 
Closing Date
06/30/2012 06/30/2012
Sector(s):
Sub-national government administration (44%), Central government administration (22%), Power (22%), Other social services (12%)
Theme(s):
Public expenditure financial management and procurement (31%) Rural policies and institutions (24%) Other accountability/anti-corruption (19%) Social safety nets (13%) Other public sector governance (13%)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Clay Wescott
Stefano Migliorisi Ismail Arslan IEGPS2

2. Project Objectives and Components:

a. Objectives:
The operation aimed to help the Palestinian Authority(PA) continue to implement the Palestinian National Development Plan (PNDP). Following on the development policy grants (DPGs) I, II and III, PNDP DPG-IV supported efforts to improve the fiscal position and increase government transparency and accountability (program document, p. 21).

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:


    There are two key policy areas supported by the operation. The first is strengthening the PA's fiscal position to address reduced and unpredictable aid and revenue flows, border restrictions enforced by Israeli authorities, and the lower than expected growth. The second is increasing transparency and accountability through improved public financial management and enhanced efficiency of public expenditures, contributing to the economic foundation for Palestinians to manage the economy of a possible future state.

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

The grant was approved on March 6, 2012, and became effective on March 30, 2012. The single tranche of $40m was fully disbursed on April 30, 2012, and the operation closed on June 30, 2012. There were no extensions, revisions, or delays.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:

High. The objective supported the 2011-2013 PNDP component within the governance pillar of attaining financial independence and economic stability through prudent fiscal policies. It also remained relevant with the Bank's Interim Strategy Note 2012-2014, and its pillar to strengthen the institutions of a future state to efficiently manage public finances and ensure services to citizens. The objective of improved fiscal management was also relevant to addressing the lower than expected donor funding, shortfalls in revenue, higher than expected expenditures, the run-up of government debt and accumulated pension arrears, and the need for improved public services to buttress the legitimacy of the PA in an extremely challenging, conflict-affected context. Support to public financial management was also found relevant as a priority for the Bank in IEG's Country Program Evaluation for West Bank and Gaza, 2001-2009.

b. Relevance of Design:

Substantial. The objectives are clearly stated. The results framework broadly presents a clear, logical chain between funding from the Bank and other partners, prior actions, and intended outcomes. For example, the new payroll system supported by a prior action is linked to the outcome of reducing the public sector wage bill, and the publishing of monthly fiscal reports is linked with the outcome of presenting the budget in a more transparent manner. One design issue is that a target on improving sustainability of cash transfers was not clear, nor was it directly linked to any prior action. The PA has a well-targeted cash transfer system costing a modest 1 per cent of GDP, but it is significantly dependent on donor financing. Also, while in most respects the design takes into account exogenous factors including severe restrictions on movement, and sharp reduction in development partner assistance, this isn't always the case. For example, the outcome target on increasing overall revenues as a percentage of GDP was not appropriate, since 70% of revenue is collected by Israeli authorities at border crossings. The PA has to accept Israeli rates for VAT and customs, and the actual amounts transferred can be held up and/or reduced at the discretion of Israeli authorities. The ongoing unwillingness of Gaza authorities to transfer revenues to the PA is also outside their control, and further constrains meeting any revenue target. An appropriate outcome target would have focused only on the 30% of revenue that the PA collects itself, and can directly influence.


4. Achievement of Objectives (Efficacy) :

Achievement will be assessed for each of the sub-objectives based on achievement of the prior actions and associated outcome targets. Given the scale of other assistance to the sector, is likely that many of the achievements also received support from other operations. However, it is reasonable to conclude that DPG support contributed to the achievements, in the context of mutually reinforcing support from other development partners, in an extremely challenging context including a 27% reduction in donor support to the recurrent budget between 2010 and 2011.

Improving the fiscal position. Modest. - Of the seven prior actions, five were met. One concerning pension reform was not met, and another concerning a new payroll system failed in an initial pilot, but is planned to be redesigned based on lessons learned and rolled out soon. The original payroll system continues to function during this transitional period. Of the five outcome indicators, two were achieved, including reduction of the recurrent budget balance, and reduction in the civil service wage bill. The outcome indicator on improving collection by electricity companies was also partially achieved. The target on improved domestic revenue collection was not achieved, with revenues dropping as a proportion of GDP rather than increasing. This was due, inter alia, to the PA's lack of control over 70% of revenue collection. In addition, Israel unexpectedly raised fuel prices, leading to widespread protests in the West Bank and Gaza. Israel also raised the tax on electricity; to avoid additional protests, the PA decided to absorb this increase without increasing electricity prices, but this added to its fiscal burden. These and other unexpected constraints also contributed to the delay on politically sensitive pension reform. Overall, as has been the case since the Bank started working on PFM in 2004, Bank support under the DPG had only a modest impact on the sub-objective of fiscal stability and strengthening fiscal independence.

Increasing government transparency and accountability. Substantial. All three prior actions were achieved, including publication of monthly fiscal reports, adoption of a new procurement law, and auditing of financial statements. Of three outcome indicators, two were achieved, including budget transparency, and publicly available audited accounts. The indicator on strengthening public procurement was partially achieved, with establishment of the Higher Council for Public Procurement Policies a step towards implementing the new law, but with slow adoption of associated institutional changes and training of relevant staff.


5. Efficiency (not applicable to DPLs):

6. Outcome:

The objectives were highly relevant to strengthening the institutions of a future state to efficiently manage public finance and ensure services to citizens. The design is substantially relevant, building on analytical work and achievements supported by many prior operations supported by the Bank and other development partners. Results are mixed, with most prior actions and outcome measures achieved or partially achieved, but with moderate shortcomings in the objective of improving the fiscal position, including declining revenue as a proportion of GDP, lack of progress on pension reform, and a slower rate of collection by electricity companies than planned. Taking these factors into account, the overall outcome of the project is moderately satisfactory.


a. Outcome Rating: Moderately Satisfactory

7. Rationale for Risk to Development Outcome Rating:


The territory will continue to be in an extremely difficult development context, with high dependence on external aid, challenges from Israeli controls on revenues collected at borders and energy cost and restrictions on movement constraining private sector development, and in turn opportunities for enhanced domestic revenues, and a fragile political context. It is likely that these and other challenges will continue to shape the context, and that this will have a serious impact on the efficacy of the PFM measures achieved. The reform setbacks in 2006 following the Hamas victory in the Palestinian Legislative Council elections show what can happen: for the period 2006-7, the Ministry of Finance didn't publish a single financial report, the government used parallel accounts, the Single Treasury Account stopped functioning, and line ministries did not have bank accounts. Yet these setbacks were then reversed after June 2007 following the appointment of a new cabinet, demonstrating how setbacks may be only temporary. A planned Public Expenditure and Financial Accountability (PEFA) Assessment in 2013 (P144179) will help to confirm where there has been progress, and point out shortcomings still needing to be addressed. The prominence of PFM support in the current Interim Strategy Note(ISN) will help to mitigate the risk through continuing support, including a planned Governance and PFM technical assistance (TA) project for 2013 (P132672) building on the PEFA, and DPG-V (p129742). However, adopting needed reforms may be technically and/or politically infeasible if there is either a major resumption of violence or reduction in external assistance, both of which have happened in the recent past.

a. Risk to Development Outcome Rating: Significant

8. Assessment of Bank Performance:

a. Quality at entry:

The design builds on the PA's reform achievements (for example, in budget classification, and with the integrated financial management information system) supported by the 2004 PFM Reform Structural Adjustment Operation, the PFM Reform Trust Fund, three prior DPGs I, II and III, and the ongoing Public Financial Management - Governance TA (P123607) and Public Procurement Support Project (P124239), along with complementary technical assistance from the Bank's Palestinian Reform and Development Plan Trust Fund, the IMF, United Kingdom Department for International Development, l’Agence Française de Développement, the European Commission, and the United States Agency for International Development (ISN, Annex 3). The design is consistent with recommendations from the 2004 CFAA and the 2007 PER (including a simplified PEFA), and more recent analytical work, including Coping with Conflict: a report on Governance and the Wage Bill (2010), Observance of Standards and Codes (2010), Rationalizing Pensions for Government Workers in West Bank and Gaza (2010), Poverty and Inclusion in the West Bank and Gaza (2011) that addressed, inter alia, issues of public sector employment, West Bank and Gaza Improving Governance and Reducing Corruption (2011), and an informal Public Expenditure and Financial Accountability (PEFA) assessment (2011). Even the most politically sensitive reforms supported, e.g. pension and electricity reform, seemed at the time of appraisal to have broad support. The Bank's use of the Central Treasury Account since 2008 helped to encourage other donors to use the PA's financial management systems, and to provide budget support. The DPGs and budget support from other donors help to reduce aid volatility and maintain some resistance to shocks. The prior actions supported by the DPG took these past achievements to the next level. The DPG was targeted on measures that had strong support at the time of appraisal, including reasonable measures to ensure fiscal balance and accountability. M&E quality was substantial. There were two main weaknesses. First, there were some weaknesses in the monitoring framework, including the adoption of an outcome indicator on revenue that the PA did not have sufficient control over. Secondly, more extensive preparation should have been carried out on the supported action on payroll to ensure that the recommended system was the right one, and that there was sufficient government capacity to carry it forward.

Quality-at-Entry Rating: Moderately Satisfactory

b. Quality of supervision:

There was an appropriate range of supervision, including from the TTL, the Country Office staff, and mutually reinforcing messages from teams working on related operations such as the Reforming Pensions in the West Bank and Gaza Project. Supervision was built on a strong foundation of M&E arrangements by the borrower. Resident financial management Bank staff provided continual support on PFM reforms, including the testing and redesign of a new, more decentralized payroll system linked to the human resources database.

Quality of Supervision Rating: Moderately Satisfactory

Overall Bank Performance Rating: Moderately Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

Government commitment to the supported actions was strong, and many challenging measures were carried out to reduce unnecessary expenditures and improve financial management systems. The achievements are particularly noteworthy given the difficult environment. For example, there was no improvement in movement restrictions following the modest improvements in 2008-9, which highly constrained private sector development that could contribute to domestic revenue growth. In addition, external assistance to the PA recurrent budget had been reduced by over half between 2008 and 2011, most revenues are collected and transferred at the discretion of Israeli authorities, and electricity and fuel prices are also set in Israel. Given these challenges, the Government was not able to deliver on some of the most difficult reforms it had committed to adopt, including pension reform, electricity cost recovery, and increasing revenue collection as a share of GDP.

Government Performance Rating: Moderately Satisfactory

b. Implementing Agency Performance:

The Ministry of Finance organized effective monitoring arrangements to facilitate quarterly reporting from line ministries and other government agencies both on the DPG and on the related PNDP and MDTF. It achieved many of the planned actions and outcomes. However, the pilot payroll system to be set up in the Ministry had to be discontinued due to design flaws and weak capacity; while seeking additional funds to launch another attempt, the current system continues to function, albeit with delays due to its centralized structure.

Implementing Agency Performance Rating: Moderately Satisfactory

Overall Borrower Performance Rating: Moderately Satisfactory

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

a. M&E Design:

The design was well coordinated with the Ministry of Finance, other line ministries and government agencies, and other development partners, with agreement on the results framework and on respective monitoring responsibilities. For example, there is a shared results framework between the DPG and the Palestinian Recovery and Development Program supported by the Multi-Donor Trust Fund. However, as mentioned above, one DPG indicator was not supported by prior actions in the operation. In another case, there is not a direct causal link between a prior action (setting up a macro-fiscal unit in MoF) and the targeted outcome of recurrent budget balance. The overall revenue target is not under the PA's control. In another case (improved electricity revenue collection) data are not fully available to assess achievement of the outcome indicator.

b. M&E Implementation:

The PA prepared quarterly reports to monitor performance, compiling inputs from all relevant organizations. The pilot introduction of a new payroll system revealed problems concerning system development, and inadequate training of staff. A new system is being designed that takes measures to address these issues.

a. M&E Utilization:

Because of the short time-span of the operation, there was not time to use the findings of the quarterly monitoring reports to inform decision making during the operation. However, these findings have influenced the design of DPG V. For example, it was determined that the envisaged pension reforms could not be carried out at this time both due to political sensitivity, and because the Palestinian Legislative Council has not been operational since 2007, and the President is unwilling to use the alternative of issuing a decree; this has influenced the design of DPG V, which supports only the limited action on financial reporting of pension obligations that is politically feasible.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:

No safeguard policies were triggered by the operation.

b. Fiduciary Compliance:

The operation was executed through the Government's PFM systems, which were deemed to meet the Bank's standards for approval of development policy operations based on a 2011 fiduciary assessment. While the residual fiduciary risk level is assessed as significant, there are many ongoing improvements, including use of the Integrated Financial Management System that has been rolled out in all line ministries, use of a Central Treasury Account, use of zero-balance bank accounts in line ministries and agencies, strict limits on non-wage expenditures, payment of salaries through direct deposit to bank accounts, and improvements in budget transparency, internal and external audit. The external audit report for DPG-IV expressed an unqualified "clean" opinion on the dedicated account, and did not find significant weaknesses in the PA's internal control system.

c. Unintended Impacts (positive or negative):
none

d. Other:
none



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Moderately Satisfactory
Moderately Satisfactory
 
Risk to Development Outcome:
Significant
Significant
 
Bank Performance:
Moderately Satisfactory
Moderately 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:

Lessons from the ICR are all supported:

1. In a high risk, fragile and conflict state context, some challenging reforms in public financial management can be effectively supported by a development policy operation when linked with the government's own medium term economic program, and with complementary TA and other assistance from the Bank and other development partners.

2. Targeted outcomes should be those that the authority has control over, or at least scope for some influence.

3. To ensure good M&E, results need to be measurable with baselines, and causally linked to the actions supported.

4. The technical challenges of implementing reforms need to be anticipated in advance, and actions supported calibrated to ensure they are realistic.


14. Assessment Recommended?

No

15. Comments on Quality of ICR:

The ICR is frank and comprehensive. It could have been improved with a fuller discussion on the relatively small scope for control or influence by the PA over the amount of revenues collected.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6DPL-Jun-2011)
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