Mozambique - Second Poverty Reduction Support Credit

 ICRR 12590 Report Number : ICRR12590 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 03/02/2007 PROJ ID :P056201 Appraisal Actual Project Name :Second Poverty Reduction Project Costs 120 120 Support Credit US$M ) (US$M) Country :Mozambique Loan/ Loan US$M ) /Credit (US$M) 120 120 Sector (s):Board: ): US$M ) PO - General public Cofinancing (US$M) administration sector (40%), General industry and trade sector (30%), General finance sector (20%), General education sector (5%), Health (5%) L/C Number :C4111 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 Ali Khadr IEGCR 2. Project Objectives and Components a. Objectives Support national policy priorities defined in the Performance Assessment Framework (PAF) for the Government's Action Plan for the Reduction of Absolute Poverty (PARPA). b. Components (or Key Conditions in the case of Adjustment Loans ): 1. Build public sector capacity and accountability : (i) maintain macroeconomic stability (ii) improve public financial management (iii) enhance governance and fight corruption 2. Improve the investment climate: (i) strengthen the financial sector by enhancing supervision by the central bank, proceed with divestiture of government interests in the banking system, and transition the banking sector to international financial reporting standards (ii) improve the regulatory framework by reducing impediments to entry and exit (iii) improve the labor market environment (iv) expand infrastructure services to reduce the costs of production and marketing 3. Expand service delivery by channeling at least 65 percent (excluding interest payments ) of government expenditures to priority sectors of the PARPA (agriculture, health, education, rural water supply, infrastructure, justice, and related sectors ) with the objective of achieving basic outcome and output indicators established in the PAF and PARPA. c. Comments on Project Cost, Financing, Borrower Contribution, and Dates The project cost US$120 million in two equal tranches financed by an IDA credit in that amount . The project was appraised in March, 2004, approved by the Board on July 6, 2004, made effective on September 16, 2004, the second tranche was released on October 13, 2005, and the loan closed on schedule on June 30, 2005. 3. Relevance of Objectives & Design : PRSC 2 was included in the FY04-07 CAS base case scenario and supported the government's reform program and its performance assessment program . It also was fully consistent with the IMF's Poverty Reduction and Growth Facility for Mozambique. PRSC's three components addressed central constraints to reducing poverty and accelerating growth in Mozambique. 4. Achievement of Objectives (Efficacy) : Absolute poverty appears to be declining with increases in income . The Mozambique CEM (September 2005) reports that poverty rates declined from 69 percent in 1997 to 54 percent in 2003, and the ICR reports on a study for the National Statistical Institute of Mozambique which indicates a further decline to 50 percent by end 2005. Since this data is from different sources and presented in the ICR in summary fashion, conclusions concerning the precise numbers must be considered tentative, although the overall trend seems confirmed . The PDO itself does not present a specific target for poverty rate reduction . The PAF contains some 50 targets for 2005-2007 (and some targets have more than one component ). The ICR presents evidence on the 25 quantitative indicators (see Annex 1), as summarized below. In addition, the PAF contains a total of 25 indicators for policy measures, of which 5 were prior actions for PRSC 2 (a sixth prior action relating to budget allocation for priority sectors is also covered in the quantitative indicators ) and an additional 6 were conditions of second tranche release . PRSC 2 explicitly does not cover the remaining 14 qualitative indicators of the PAF, many of which were not part of this operation and are not relevant to the objectives of PRSC 2 (such as reductions in the time prisoners await trial ). 1. Build public sector capacity and accountability - substantial achievement. All seven quantitative targets were met . (i) Macroeconomic stability was maintained as the economy grew by 7.9 percent in 2003, 7.5 percent in 2004, and 7.7 percent in 2005. Inflation declined steadily from 16.8 percent in 2002 to 6.4 percent in 2005, and the fiscal deficit declined from 17.3 percent of GDP (before grants) in 2002 to 8.9 percent of GDP in 2005. (ii) Public financial management (PFM) improved through the rollout of the integrated financial management system (e-SISTAFE) and three ministries (planning, finance, and education and culture ) are now using ministerial versions of it. This will allow for full tracking of sources of funds and of expenditures . Donor financed projects have begin to be integrated into this system. Donor funding is being brought into the budget . (iii) Regarding governance and fighting corruption, a new decentralization law was approved along with a framework for decentralized planning and finances . Government has allocated direct transfers to districts in 2006 for the first time. However, the IMF noted some ambiguities in the fiscal responsibilities of the subnational units and these need to be resolved. A new procurement code was approved which meets international standards and procurement audits have been carried out in several ministries . Standard bidding documents have been approved and published, and a training program to use them has been instituted . The legal framework for business was improved with the approval of a new commercial code. The Notary Code was revised and the Code for Registry of Legal entities was approved . However, the number of corruption cases prosecuted by the Central Office for the Fight Against Corruption stagnated (despite a tenfold increase in budget allocation in 2006). The specific achievements noted above have not yet had much of an impact on corruption as there has been little improvement in Mozambique's rating in Transparency International's corruption perception index for 2005. 2. Improve the investment climate and the environment for private sector development - substantial achievement. All six quantitative targets were met . However, lack of administrative capacity has been cited as brake on investment climate reforms (See "An Evaluation of World Bank Investment Climate Activities, OED, October 22, 2004, which includes a case study of Mozambique . ) and this is not specifically addressed by PRSC 2. (i) Strengthen the financial sector by enhancing supervision by the central bank, proceed with divestiture of government interests in the banking system, and transition the banking sector to international financial reporting standards. The ICR reports that the new Financial Institutions Law enables the Central Bank to use prudential regulations for the governance of both the banking and the non -banking sector. With this law, the Bank of Mozambique has now completed the drafting of the prudential regulations required to comply with Basle 1 principles, along with an inspection manual, all of which are being reviewed now . Arrangements are being made to train inspectors. While it is still early to measure the impact of these measures, the financial system is now stronger as indicated by Financial Soundness Indicators for the Banking Sector (IMF). Financial sector performance shows some distinct improvement. The ratio of nonperforming loans to gross loans decreased from 14.42 percent in 2003 to 6.42 percent in 2004 and 3.82 percent in 2005, while the spread between reference loan and deposit rates decreased from 17.39 percentage points to 14.67 and 11.48 percentage points during those years . (ii) Improve the regulatory framework by reducing impediments to entry and exit . The ICR reports that according to Doing Business, the number of days to register a business in 2005 was 113, down from 153 days before the reforms. The ICR also notes that land registration now requires only 90 days, and the time required for visas and industrial registration has also been reduced . Mozambique rates better (according to "Doing Business" indicators) than the Regional average in categories such as trade across borders, paying taxes, protecting investors, and dealing with licenses, but lags regional averages in the number of days to register a business (113 days vs. 61 days), bankruptcy resolution (5 years vs. 2 years), and contract enforcement (1010 days vs. 581 days). Therefore, while a start has been made in PRSC 2, much remains to be done. (iii) improve the labor market environment . Initial steps have been taken including approval of Decree 57/03 which allows businesses to restructure and to increase hiring . No results are reported on implementation . 3. Expand service delivery by channeling at least 65 percent (excluding interest payments ) of government expenditures to priority sectors of the PARPA (agriculture, health, education, rural water supply, infrastructure, justice, and related sectors ) with the objective of achieving basic outcome and output indicators established in the PAF and PARPA - Modest Achievement. Of twelve targets, 5 were met, including the important umbrella allocation to priority sectors, 3 were not met, and 4 were partially achieved. (i) overall allocation to priority sectors . The IMF reports that 66.3 percent of relevant expenditure was targeted to the agreed priority areas in 2005, and a projected 69.5 percent for 2006. (ii) education. Female and total enrollment rates for primary school exceeded targets, the number of institutional deliveries of 49 percent was met. (iii) health. Vaccination objectives were not met . Expenditure targets to treat HIV -AIDS were met, but the number or HIV positive pregnant women receiving PMTC (Prevention of Maternal to Child Treatment ) Prophylaxis did not reach the target. (iv) infrastructure. 1902 km of roads were rehabilitated (exceeding the target of 1091 km of roads) and the target for periodic maintenance of roads was achieved for 1932 km of roads (exceeding the target of 1635 km of roads). However, routine maintenance targets were not met . The target for access to potable water was not met (40.4 percent of the population against the target of 44.2 percent), while no information was available concerning the percent of population with access to sanitation services . In sum, out of 5 targets in infrastructure, 2 were achieved, 2 were not achieved, and there is inadequate information on one . 5. Efficiency : IEG does not evaluate efficiency for adjustment operations . 6. M&E Design, Implementation, & Utilization: With the unfortunate and major exception of poverty rates, M&E design for PRSC 2 carefully follows the main components of this operation and provides key indicators which enable an assessment of progress . These indicators appear to be well utilized by Bank staff . However, the extent to which the monitoring process is also internalized by the government is much less clear, and this requires attention if the government is to effectively manage the development process. 7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative): There appear to be no issues concerning safeguards or fiduciary issues, nor any unintended impacts . 8. Ratings : ICR ICR Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely 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. Enhancing government's monitoring and evaluation capacity should be a focus of comprehensive operations such as PRSC 2, which would greatly enhance sustainability . 2. A coordinated donor position greatly increases the value of donor support. PRSC 2 was formulated and implemented with this as a central goal, and this appears to be paying off. 3. Political time tables and budget cycles ought to be a central basis for the timing of adjustment operations . 10. Assessment Recommended? Yes No Why? The PRSC 2 is a central component of Bank assistance to Mozambique and should be assessed with others at the completion of this series of operations . 11. Comments on Quality of ICR: The ICR presents a large body of information needed for the evaluation of this complex operation . The presentation with only a few exceptions is quite clear and user friendly . Annex 1 is particularly helpful in understanding progress on quantitative indicators. In addition, many, though not all, of the balance of 25 targets which concerned design/implementation of policy measures and reforms are usefully presented in Table 3. Those not covered concern issues not directly addressed by the PRSC 2, but since they form part of the overall framework, they could have been discussed at least briefly in the ICR . Finally, the ICR could have presented something more on the lessons from PRSC 1 used in formulating PRSC 2.