Moldova - Social Insurance Management Project

Report No. PID7257 Project Name Moldova-Social Insurance Management... Project Region Europe and Central Asia Sector Human Development Project ID MDPE51173 Borrower Government of Moldova Implementing Agency Ministry of Labor and Social Protection of the Family 1 Hincestri Street Chisinau, Moldova Tel: 72-96-90 Fax: 73-51-81 Environment Category C Date This PID Prepared December 22, 1998 Projected Appraisal Date March 20, 1999 Projected Board Date June 29, 1999 Country and Sector Background 1. The current social insurance system in Moldova inherited from the pre- transition era cannot deliver effective social protection due to its poor policy framework, fragmented institution structure, extremely weak administrative capacity, as well as the lack of communication with and understanding of the public about the system. The overall economic difficulties faced by the country further undermine the sustainability of the system. 2. Policy Framework. The underlying policies that govern Moldova's current social insurance system require fundamental reform. The pension system does not treat people equally in the sense that the benefit one receives does not depend on his/her contributions. A variety of privileged groups still enjoy preferential treatment based on either their occupations or their family status. The heavy hidden redistribution makes the system non-transparent and unjust, and overall policies are not consistent with the principle of financial sustainability. There is a lack of financial discipline; the responsibilities of individuals and the state are not clearly defined. Despite the high social tax rate, pension finances in Moldova have deteriorated significantly, leading to long delays in pension payment, placing the system effectively in bankruptcy. Adding to this, the current social insurance system is intermixed with various social assistance programs. No careful assessment has been done to asses the need for, and impact of, social assistance programs. Social protection policies are in general not formulated based on adequate economic analysis, and the impact of such policies is not monitored and evaluated. As a result, little is known about the efficiency and effectiveness of social insurance policies. 3. Administrative Capacity. The state social insurance system has serious problems in its organizational structure and capacity. First, the  responsibilities of social tax collection and inspection is unclear. In 1996, the Tax Inspectorate was given total responsibility for the collection of social tax revenues. However, the Social Fund continues to exercise its role in collecting large amounts of contributions in the form of goods and services leaving the system extremely vulnerable to evasion and abuse. Second, the management of the pension system is inadequate and inefficient. Accounting practices are not consistent with international standards, and there are no internal controls in place to ensure financial integrity. Information technology is inadequate and lacks the ability to maintain individual contribution records. 4. There is no long term human resource development strategy and training is limited to on the job instruction for new staff. The lack of a career structure makes it difficult for the ministry to recruit qualified staff, while existing staff are not motivated, and prolonged wage arrears for civil servants has only worsened the situation. An over involvement in day to day problems leaves the MLSPF and Social Fund without strong management control, or strategy. 5. Communications. The level of awareness of the general public about their rights and responsibilities, and the operation of system is extremely low. There is a general lack of understanding in the MLSPF of the importance of information and communication, and as a consequence, lack of a long term plan to educate and inform the stakeholders. Information provision is done in a very passive fashion, which further increased the difficulty in promoting reforms. At every level, there is serious lack of capacity to design, implement, and evaluate communication programs. No institutional arrangements are in place, no in-house technical skills are available, and no baseline data is collected regarding the awareness and perceptions of stakeholders. 6. In sum, today's social insurance system in Moldova cannot deliver the much needed protection to the elderly in particular, and the poor in general. The government strategy in commencing the new pension law is the first step towards a reformed system, but will also place additional demands on an inadequate administration. Government Strategy 7. Since independence in 1991 the Government of Moldova has been faced with a series of short term economic crisis. Revenues to the Social Fund have been falling and political pressures to maintain and increase pension levels have continued, while at the same time the number of Moldovans living in poverty is increasing. In recent years various attempts have been made to re-structure the pensions and social assistance provisions, but these have either had a short term focus, or where a longer-term view has been taken it has been overturned in the short term by either political pressure, or changing circumstances. 8. In early 1997, with assistance from the Bank and the EU, the MLSPF started to work on a longer term pension strategy. A strategy paper was produced in spring 1997, and proposed legislation in October 1997. Unfortunately the proposed legislation again focused on addressing the short to medium term problems without producing any structural change or a longer term pension strategy. Intensive work in the MLSPF, with Bank support, during the early part of 1998, resulted in a revised long term pension strategy and draft - 2-  legislation. 9. The new government have declared their intention to re-focus their attention on longer-term reform policies and one of the first indications of this was the pension legislation finally approved by Parliament in December 1998. This now forms a clear longer term pension strategy, removing all the previous privileges and providing a clear link between social contributions paid and pensions earned. The new pension legislation retains the PAYG concept with a significantly reduced redistributive element, but provides PAYG pensions in a way that can be adapted in future into either a notional or fully funded scheme when the macro economic position would support it. The Proposed Loan/Credit 10. The basic thrust of the project is to develop the capacity of the MLSPF to administer the reformed pension strategy. To do this will require a mixture of new administrative activities, and improvements in current activities. New administrations will be created to record and make use of personal social revenue data, and to provide for the revised calculation of pension benefits. Improvements will be sought in the general administration of pensions covering the speed and efficiency of the provision of pensions. The project will support the development of a consistent social protection policy framework through the creation of a trained Policy Unit within the MLSPF and the strengthening of the current monitoring and evaluation system; improved administration, by building capacity in the areas of organizational development, human resource development, accounting and information systems; and the strengthening of the MLSPF's capacity to design and implement information, education and advocacy programs; and a project management component. Objectives 11. The proposed project would support the development of the Social Protection System and would aim to improve the provision of the 'right social protection benefit, to the right people in the right time according to the principles of social justice, equity, individual rights and responsibility' (as defined by the MLSPF in their mission statement). The project would aim to increase the economic sustainability of the system through the improved use of resources, improved benefit delivery, and the better use of information to improve social contribution compliance. Description 12. It is envisaged that the project will have four components: a) Social Protection Policy Analysis, Monitoring and Evaluation: This component would develop a consistent social protection policy framework through the creation and strengthening of a Policy Unit and Policy Working Group within the MLSPF, the development of the information collection and analysis, the creation of an integrated monitoring and evaluation system and the provision of technical assistance in the area of policy and legislation development. b) Social Protection Administration: This component is aimed at strengthening the capacity of the social protection system administration through -3 -  rationalizing the structure and functions of the administration, the design and implementation of a human resource development plan, and design and installation of a comprehensive information system. The component would finance consultant services, training, equipment, hardware/software and some small civil works. c) Public Information Provision and Communication: This component would strengthen the capacity of the MLSPF to design and implement a national information, education and advocacy program through the creation of a Public Relations Unit within the ministry, training, social surveys and technical assistance to design and implement a comprehensive strategy. d) Project Coordination: This component would develop and operationalize a Project Coordination Unit through the identification and training of staff, the provision of equipment and software and the creation of a project monitoring and reporting system. Financing 13. The project would cost a total of US $14.5 million. IBRD/IDA would finance US $10 million. The Government would finance US $3 million, and donor funds would be sought for $1.5. The traditional investment lending instrument would be used. Implementation 14. It is envisaged that the project would be implemented over a four year period through the MLSPF. The project will be under the overall management of a Project Director, a senior official in the MLSPF. Each component will appoint a Component Manager. A Project Coordination Unit (PCU) established within the Ministry, will be staffed with a PCU Director, an accountant, and a procurement officer. A Project Steering Committee would be established, consisting of the component managers, the PCU Director, and chaired by the Project Director. The Project Director would provide the strategic link between the implementation of the pension reform and effective delivery of the project. The PCU would become the key point of communication on the project and the Ministry's tool for facilitating project preparation, implementation, and monitoring. Sustainability 15. The project will be sustainable as improvements in efficiency should will free resources and reduce the drain on federal budget. A closer review will be done in the context of the overall economic analysis of the project. Lessons learned from past operations in the country/sector 16. Lessons from social sector lending in the ECA region and also Bankwide have shown that (a) integration of administration in policy design is extremely important - attention must be given to the institutional aspects of reform in order for the objectives of the reform to be achieved; (b) investment to support structural adjustment is essential; (c) projects which are overly complex often do not implement well; (d) monitoring and evaluation of project progress is important; (e) early consideration of project implementation arrangements can help to avoid future delays; (f) careful attention should be given to ensure that the government does not over extend itself on its commitment for counterpart funds; and (g) clear communication and earlier ownership of the project are key factors to its success. The project team has - 4 -  taken care to keep these in mind throughout the design stage. Agreement on project design has been sought and ownership built up through a stakeholder workshop. Key steps for processing have been outlined with the Government to avoid delays. Poverty Category - N/A Environmental Aspects 17. The project is aimed at institutional capacity building and is not envisaged to impact the environment. Some minor civil works may be financed by the project, but they would not effect the environment. Program Objective Categories 18. The Economic Management category was chosen for this project since it is directly linked to the public sector reform objective of the CAS with the aim to improve the quality of public spending and expenditure management. Project Benefits 19. The benefits of the project are: (1) the ability to implement the pension reform for the public of Moldova; (2) . strengthened institutional capacity for the MLSPF: more relevant policies through increased analytical capacity, and an improved pension administration through better management practices, increased efficiency, and transparency of financial systems. Local offices of the Ministry will be more accountable through decentralization and provision of tools to enhance their performance; (3) increased efficiencies are expected to free up scarce resources and be less of a drain on the federal budget; (4) removing the responsibility for collection of "in-kind" social taxes from the Social Fund would allow the Tax Inspectorate to gain tighter controls and could have an positive effect on collection action. Project Risks 20. Efforts are being made to mitigate the project risks which are: (1) Tax collection office does not improve its ability to collect taxes; (2) Budget allocations to social protection do not remain constant; (3) Improved SP policies and legislation not approved by parliament.; (4) Lack of Government commitment to social protection reform; (5) Burdens on the Social Protection system increase; and (6) MLSPF leadership are not committed to the vision for reform and manages the change process ineffectively. These risks may also change during preparation. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Alan Thompson, ECSHD The World Bank 1818 H Street N.W. Washington, DC 20433 Telephone No.:(202) 458-5864 Fax No.: (202) 522-3504 Email: AThompsonl@Worldbank.org - 5 -  Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending January 15, 1999. - 6 -