Mozambique - SIMPLIFIED - Poverty Reduction Support Credit

 ICRR 12554 Report Number : ICRR12554 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 12/06/2006 PROJ ID :P075805 Appraisal Actual Project Name :SIMPLIFIED - Poverty Project Costs 60 60 Reduction Support Credit US$M ) (US$M) Country :Mozambique Loan/ Loan US$M ) /Credit (US$M) 60 60 Sector (s):Board: ): US$M ) PO - General public Cofinancing (US$M) administration sector (65%), Banking (10%), General industry and trade sector (10%), General education sector (9%), Health (6%) L/C Number :C3950 FY ) Board Approval (FY) 05 Partners involved : Closing Date 06/30/2005 06/30/2005 Evaluator : Panel Reviewer : Division Manager : Division : Michael R. Lav Kris Hallberg Lily L. Chu IEGCR 2. Project Objectives and Components a. Objectives The overall objectives of the program are to consolidate the basis for helping the Government to attack poverty in a comprehensive manner by promoting growth and employment and strengthening governance and public sector management. PRSC I aimed more specifically at building public sector capacity and accountability, improving the investment climate, and expanding service delivery in the education sector . b. Components (or Key Conditions in the case of Adjustment Loans ): 1. Build public sector capacity and accountability A. Maintain a sound macroeconomic framework . B. Improve public sector financial management by improving budget formulation, execution and reporting and improving targeting to priority sectors, and, inter alia through the PRSC series, reduce aid dependency by increasing tax revenues, and improve monitoring and evaluation (particularly concerning the impact of government programs on poverty). C. Improve governance by strengthening procurement, reforming public sector institutions, promoting decentralization, reducing corruption, and promoting legal sector reforms . 2. Improve the investment climate A. Strengthen the financial sector B. Improve the regulatory environment by reducing trade tariffs, survey the time needed for and cost of business startups to assess steps needed for improvements which could be included in subsequent operations, and establish a tripartite body (comprising government, private sector, labor unions ) to discuss and propose reforms to improve labor market flexibility. C. Improve infrastructure services including telecommunications, electricity and natural resource use to improve the environment. 3. Expand service delivery in education by improving school construction and education capacity . c. Comments on Project Cost, Financing, Borrower Contribution, and Dates The project cost US$60 million financed by a one tranche IDA credit which was disbursed on effectiveness . The project was appraised in March, 2004, approved by the Board on July 6, 2004, made effective on September 16, 2004, and closed on schedule on June 30, 2005. 3. Relevance of Objectives & Design : PRSC I's objectives and design were fully relevant . The PRSC I was included in the FY04-07 CAS as a base case operation, which saw it as a key vehicle to support the Government's Action Plan for the Reduction of Absolute Poverty (PARPA). PRSP I was aligned with PARPA, and also with other donor support, including the IMF's PRGF as well as the combined donors' Performance Assessment Framework (PAF). However, it did not mesh fully with the government's budget cycle. PRSP I was designed on the basis of a poverty assessment, a country economic memorandum, two public expenditure reviews, a CFAA and a CPAR, as well as AAA on financial sector, a legal and judicial sector assessment, and investment climate assessment . Simultaneous with PRSC I, participatory and social impact analyses are being carried out as part of PARPA implementation . 4. Achievement of Objectives (Efficacy) : 1. Build public sector capacity and accountability - Substantial achievement A. GDP growth averaged more than 7 percent for 2004 and 2005, while inflation declined from 12.6 percent to 6.3 percent. Interest rates declined from 22.0 percent to 19.5 percent, although with the decline in inflation this implies a sharp increase in real rates. Sustained strong GDP growth rate indicates a reduction in poverty, and the CEM estimates that the percent of the population below the national poverty line has decreased from 69 percent for 1996-2002 to 54 percent for 2003-2005. B. The domestic primary deficit declined by about 2 percent of GDP in 2005 compared to 2004, based on an increase in domestic revenue of 1.5 percent of GDP and expenditure reduction of 0.5 percent of GDP (according to the IMF). The integrated financial management system (SISTAFE) is being implemented, with a roll-out to key ministries expected by mid-2006 and to all central ministries and other levels of government for late 2006 and 2007. (Under PRSC II, the Ministry of Finance and the Ministry of Education and Culture are now using SISTAFE . There is a quality assurance group for SISTAFE of which the Bank is a member .) No impact data is yet available for this . Monitoring and evaluation appears to be improving, based on the Performance Assessment Framework included in the Program Document for PRSC II. The ratio of aid to GDP declined from 15.7 percent in 2003 to 14.4 percent in 2004 and 13.5 percent in 2005. Government spending on priority sectors was targeted at 65 percent of total spending, reaching 64.9 percent of total expenditure in 2003, 63.3 percent in 2004. For 2005, 65 percent of total spending was allocated to priority sectors, although only 63.3 percent of actual expenditures went to these sectors . While budget allocations for auditing are increasing, there is no evidence available on impact . Similarly, the CFAA appears to have been helpful in identifying reforms needed for improved budget management, but no evidence on impact is offered. C. 1. The work towards improving procurement supported by PRSC I came to fruition under PRSC II with the adoption of a new procurement code and its implementation . The new procurement decree was not implemented on schedule, and there is no data available on the impact of actions to date . Concerning the three key governance reforms achieved as triggers for PRSC 1 (land registration, industrial registration and visas issued at the border ), data is inconclusive or unavailable on their impact . Nor is data presented on the impact of the Decentralization Law approved by the National Assembly . Implementation of the revised Commercial Code was delayed, although work towards a revised Commercial Code supported by PRSC I assisted in adoption of a new Commercial Code under PRSC II. However, information on the impact of the new code is not presented in the ICR . The integrated strategic plan for legal sector reform which was completed, and is being implemented under PRSC II which saw a new law of judicial courts introduced which included commercial sections . Similarly, work to combat corruption supported by PRSC I laid the groundwork for a greatly increased program in which a new Central Office for the Fight Against Corruption replaced a much smaller and ineffective Anti -Corruption Unit. However, data on impact is not yet available. 2. Improve the Investment Climate - substantial achievement A. The new Financial Law was formulated under PRSC I and was approved and promulgated under PRSC 2. The increased autonomy of the central bank appears to be an improvement . The IMF indicates that prudential ratios have continued to improve, and that the ratio of non -performing loans to total loans has fallen below 5 percent. While these reforms are important, they may only have a gradual impact on investment, and, for example, the Doing Business report of 2006 did not yet show improvement in the investment climate . B. The highest levels for trade tariffs have been reduced from 30 percent to 25 percent but there is not yet any evaluation of the impact of this reduction on effective protection . A new labor law was promulgated under PRSC 2, based on preliminary work supported in PRSC I, which should improve labor market flexibility, but no evidence is offered on impact. C. Reforms to restructure telecommunications and electricity sectors are being implemented but no information is available on impact. 3. Expand service delivery - modest achievement. The improved service delivery concerning schools supported by PRSC I took the form of a direct support program for schools which is being implemented, but no evaluation is yet available . Therefore, a rating of modest achievement is assigned to this component . 5. Efficiency : IEG does not evaluate the efficiency of adjustment operations . 6. M&E Design, Implementation, & Utilization: The monitoring framework is well formulated in the Program Document's Program matrix . The ICR uses this same format, as does the follow-on PRSC II. However, monitoring indicators are not well developed to gauge the impact of many of the reforms supported by the PRSC series . This shortcoming is somewhat offset by the PAF which provides an important anchor for monitoring and implementation of the PRSC I reforms, as does monitoring for the Government's Economic and Social Plan (PES). 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): There is no evidence of any safeguard or fiduciary issues, nor of unintended impacts . 8. Ratings : ICR ICR Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Lack of data and perspectives on impacts of a number of reforms, even in subsequent PRSC II and IMF documentation, makes a firm judgment difficult. However, on the basis of overall trends and the broad implementation of the reform program, outcome appears satisfactory Institutional Dev .: Substantial Substantial Sustainability : Highly Likely Likely In the absence of better indicators of the effect of a number of key reform, it is premature to assign a sustainability rating of highly likely. Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: 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. - ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness . 9. Lessons: 1. Monitoring indicators should focus on the impact of reform measures supported by adjustment operations . For example, a more robust anti-corruption effort is an important objective, but it would be important to gauge impact by indicators such as the number of cases prosecuted, rather than increased budget allocations . 2. It is important to fully align reforms supported by adjustment operations with the government's program, including its budget cycle, and with support from other donors . While this was not fully accomplished under PRSC I, it appears that PRSC II is an integral part of the Government's reform program fully aligned with its budget cycle and fully integrated with support from other donors . 3. It is important to time the implementation of reforms so that they take full account of political processes . In this case, the timing of the procurement law and other reforms were delayed by the government because of the election cycle. 10. Assessment Recommended? Yes No Why? The PRSC I is the first in a proposed series of three programmatic operations for Mozambique . The series will have important implications for the country's future, and an assessment of all three operations would be an important basis on which future Bank assistance should be based . 11. Comments on Quality of ICR: The ICR was prepared in November, 2005. Because of a glitch in the system, and through no fault of the Region, it was only recently made available to IEG for review . As a result, more data on impact is now available on impact than was available when the ICR was drafted . Therefore, this ICR Review cites some data and information from PRSC II and IMF PRGF documentation that was not available at the time that the ICR was drafted . Nevertheless, the ICR could have made a greater effort to marshal evidence in support of its ratings . This said, the ICR is rated satisfactory on the basis of the evidence it does bring to bear on this operation .