Malaysia - Social Sector Support Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 28047-MA PROJECT COMPLETION NOTE MALAYSIA SOCIAL SECTOR SUPPORT PROJECT Loan No. 4452-MA March 1, 2004 Human Development Sector Unit East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (January 2004) Currency Unit = Ringgit Ringgit 1.00 = US$0.26 US$1.00 = Ringgit 3.80 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS GOM - Government of Malaysia UNDP - United Nations Development Programme Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Ian Porter, EACTF Sector Manager: Fadia Saadah, EASHD Sector Director: Emmanuel Jimenez, EASHD Task Team Leader: Darren Dorkin, EASHD  PROJECT COMPLETION NOTE MALASIA SOCIAL SECTOR SUPPORT PROJECT (Lu. 4452-MA) A. Introduction 1. This is the Project Completion Note for the Malaysia Social Sector Support Project, for which the Board approved Loan 4452-MA in the amount of US$60.0 million on March 30, 1999. The Government of Malaysia (GOM) requested cancellation of the Loan on April 14, 2000. Consequently, the Bank's management agreed to the GOM's request and cancelled the Loan on April 19, 2000. An amount of US$59.4 million was cancelled. No disbursement was made from the Loan and a front-end fee of US$0.6 million was deducted from the Loan principal. In accordance with OP 13.55, this note is in lieu of an Implementation Completion Report reflecting the fact that cancellation of the Loan took place before meaningful project implementation. B. Background 2. As a response to the East Asia economic crisis that started in 1997, the Government of Malaysia requested fast disbursing assistance to mitigate the adverse social consequences of the crisis, and to finance a preemptive reform program. The World Bank approved a US$300.0 million Economic Recovery and Social Sector Loan in June 1998. As the recession deepened, the Government requested additional support and the World Bank prepared a Country Assistance Strategy (CAS) and an initial pipeline of operations in the social sectors. The World Bank's primary objective in the CAS was to minimize the erosion of social sector achievements and provide instruments to restore growth and confidence and enhance Malaysia's competitiveness. The Government and World Bank agreed on a lending program of three projects, totaling US$404.0 million, which were prepared on a rapid timetable, and included the Education Sector Support Project, the Social Sector Support Project, and the Y2K Technical Assistance Project. The Social Sector Support Project was appraised in November 1998, negotiated in February 1999, and approved by the Board of Directors on March 30, 1999. The Loan Agreement was signed on March 31, 1999 and the Loan became effective on June 28, 1999. Total project costs were estimated at US$88.1 million, including US$60.0 million financed by the Loan, and US$ 1.0 million co-financed by a grant from the United Nations Development Programme (UNDP). C. Project Objectives 3. The project had two main objectives. The first objective was to support the National Economic Recovery Plan strategy for ameliorating the adverse impacts of the economic crisis on the poor and vulnerable by maintaining their welfare and access to essential social services, particularly by those groups located in the poorest districts. The second objective was to strengthen the monitoring of poverty over time as well as of the effectiveness of programs designed to reduce poverty and to mitigate the adverse impact of the crisis, particularly those supported by the project. D. Project Design 4. The project consisted of four main components that were to be implemented over a three year period: (A) Rural Development and Poverty Alleviation, to support (i) in-site community development in 60 villages with a high percentage of hard core poor, and (ii) the construction of 400 preschools and upgrading of another 1,300 in villages located in the poverty districts; (B) Health Clinics, to support the construction and equipping of 31 rural community and ten urban health clinics in underserved areas; (C)  Social Assistance for Disadvantaged Groups, to support the Ministry of National Unity and Social Development and its strategic partners in delivering socio-economic services to disadvantaged groups; and (D) Poverty Monitoring and Impact Assessment, to carry out (i) an enhanced Household Income Survey to collect baseline information on crisis impacts, and an in-depth impact evaluation of selected poverty programs, and (ii) beneficiary assessments to evaluate the impact of programs supported by the project, and a national participatory assessment to monitor the impacts of the crisis. E. Project Effectiveness and Implementation 5. There were two conditions for Effectiveness that were fulfilled within 90 days after Loan signing, including: (i) appointment in each project ministry of a person to be responsible for project accounting functions; and (ii) issuance of procedural and management guidelines for the Special Account and adoption of such guidelines by the project ministries. The project launch workshop was held shortly after Board Approval in April 1999. Since three of the project components (A, B and C) supported ongoing government programs, implementation was expected to commence without delay. However, a number of factors impeded project progress. First, the Govemment did not open the Special Account during implementation and did not seek retroactive financing for potentially eligible expenditures. Therefore, apart from the fee income of US$0.6 million deducted from Loan principal, no Loan funds were disbursed in the ten months following Loan Effectiveness. Second, the October 1999 supervision mission discovered that the GOM had contracted suppliers through National Competitive Bidding to construct health clinics without receiving the required Bank's prior approval, and the potential existed that these contracts may not have been eligible for Bank financing. In addition, there were significant delays in the preparation of the procurement plans for the project, which resulted in delayed construction and equipping of health clinics. Procurement delays also raised the probability of project extension beyond the three year life of the project. 6. Finally, there was a difference of views between the GOM and the World Bank on important issues related to Component D -- Poverty Monitoring and Impact Assessment. This component was to strengthen govemment capacity to assess the social effects of the crisis and the effectiveness of interventions, to be financed by a UNDP grant of US$1.0 million. Finalization of a Project Document between the Govemment and UNDP by September 1, 1999 was stipulated as a Remedy of the World Bank in the Loan Agreement. However, the GOM did not execute the UNDP Project Document and in September 1999 requested that the component be cancelled because the economic crisis had decelerated. The World Bank disagreed and emphasized that the assessments were still valuable to design future poverty reduction programs and leam important lessons about the social impacts of the crisis. The World Bank further advised that since effectiveness of the UNDP Document fell under Remedies of the World Bank, failure to finalize the Document, or obtain alternative funds for the Poverty Component, meant that the World Bank could avail itself of a number of legal remedies under the General Conditions applicable to the Loan Agreement. The Poverty Component was not implemented at the time of Loan cancellation. F. Project Cancellation 7. The GOM requested cancellation of the Loan in April 2000, explaining that project complexity and lack of familiarity with Bank procedures (e.g., procurement) at district level caused poor project performance, and noting that the GOM would use govemment funding for implementation of project activities. World Bank management agreed with the GOM's request and cancelled the Loan on April 19, 2000. The reasons behind the request for cancellation stem from a variety of factors. 8. The Economic Recovery and Social Sector Loan (ERSL) that had been approved at the Onset of the crisis was disbursed as a single tranche on the same day of Effectiveness. However, after ERSL  approval, no fast disbursing loans were envisaged under the World Bank's three year lending program that was proposed in the March 1999 CAS, and instead the above mentioned three sector investment loans comprised the lending package. It may be noteworthy that the design of the SSSP operation as a sector investment loan, and in particular procurement planning and compliance with Bank procurement procedures, caused significant delays in project implementation. Perhaps simpler approaches could have been adopted. These delays were coupled with the issue surrounding the GOM's request to cancel the Poverty Component. These combined factors help explain the reasoning behind the Govemment's decision to cancel the Loan. G. Lessons Learned 9. The experience of the Social Sector Support Project provides a number of key lessons learned for future human development sector interventions in Malaysia, as well as interventions formulated to respond to economic crises: * Successful implementation of projects prepared to respond to crises depends upon widespread support among key stakeholders both inside and outside government. This is especially important in an environment where macroeconomic events provide the main impetus for project dialogue and design. While the GOM requested World Bank assistance to cope with the economic crisis, there was insufficient time for broad collaboration and consultations to engender extensive support for project design. As the economic crisis diminished, GOM support for the project waned. The experience also points to the importance of choice of lending instrument, and that related implementation issues need to be carefully discussed at the project concept stage with the client. * Careful consideration should be given to the procurement design if an investment operation is selected. There are cases where fast disbursing operations may be better suited, or procurement design needs to be tailored to the specific conditions of the country and the project to ensure quick implementation. * Application of World Bank rules and procedures when a client country does not have adequate experience with such procedures may create implementation delays. This was partly the case with Malaysia where, although the World Bank provided assistance in procurement training and financial management, the GOM was not sufficiently prepared to implement the project in three years as designed, given that it had been an inactive Borrower for four years. * Designation of three ministries responsible for project implementation did not help accelerate implementation. In such cases, perhaps fast disbursement programs would have been better suited or the project design should have been simpler. * For project components that probe or research areas of increased sensitivity, especially those carried out by technical assistance, strong government ownership is crucial from the time of initial design throughout implementation.