Mozambique - Fisrt Poverty Reduction Support Credit Project : Mozambique - First Poverty Reduction Support Credit Project

Document of The World Bank Report No.34007 SIMPLIFIED IMPLEMENTATION COMPLETION REPORT MOZAMBIQUE FIRST POVERTY REDUCTION SUPPORT OPERATION IDA39500 NOVEMBER 29, 2005 Poverty Reduction and Economic Management 1 AFTP1 Africa Region  Simplified Implementation Completion Report For Programmatic Development Policy Lending Operations Operation ID: P075805 Operation Name: First Poverty Reduction Support Operation Team Leader: Gregor Binkert TL Unit: AFTP1 Report Date: June 9, 2004 1. Program Data Name: First Poverty Reduction Support Operation L/C IDA39500 Number: Country/Department: Mozambique/AFTP1 Region: Africa Sector/subsector: Gen pub admin (65%), Gen ind/trade (10%), Gen educ (9%), Health (6%), Banking (10%) Theme: Regulation and competition policy (P), Public expenditure/financial management/procurement (P), Tax policy and a (P), Decentralization (S), Infrastructure services for private sector development(S) KEY DATES Original Revised/Actual PCD/PD: 02/18/2004 Effective: 09/16/2004 09/16/2004 Appraisal: 03/24/2004 MTR: Approval: 07/06/2004 Closing: 06/30/2005 06/30/2005 Borrower/Implementing Agency: Republic of Mozambique Other Partners: none STAFF Current At Appraisal Vice President: Gobind T. Nankani Callisto Madavo Country Director: Michael Baxter Darius Mans Sector Manager: Emmanuel Akpa Emmanuel Akpa Team Leader at ICR: Gregor Binkert Antonio Franco and Johannes Zutt ICR Primary Author: Maria-T. Benito-Spinetto 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: N/A Operation at Risk at Any Time: N/A  - 2 - 3. Program Description 3.a. Description of the Overall Program 1. The first PRSC series was designed as an integral part of the Bank's strategy to support the implementation of Mozambique's first Action Plan for the Reduction of Absolute Poverty (PARPA, in Portuguese, or PRSP, in English). While recognizing the importance of each of the fundamental areas of the PARPA, the PRSC series were designed to focus on cross-cutting and institutional issues which will deepen Bank support to the Government's reform agenda by: (i) building public sector capacity and accountability through strengthening public financial management, decreasing aid dependency, improving monitoring and evaluation (M&E), and accelerating public sector reform; (ii) improving the investment climate through strengthening the financial sector, easing constrains in the regulatory environment, and expanding infrastructure services; and (iii) enhancing service delivery in health, education, and water and sanitation. 3.b. Description of the Operation 2. The PRSC1 is a single-tranche credit of SDR40.9 million (US$60 million equivalent), the first of a series of three operations to be delivered over FY2004-06, each justified by reforms already completed by the Government (prior actions) in implementation of the PARPA. In line with the program envisioned in the three year PRSC framework, the PRSC1 was designed to focus mainly on the first component of the PRSC series, that is, building public sector capacity and accountability by supporting cross-sectoral actions to strengthen public sector reform and enhance efficiency and effectiveness in the use of public resources. The following key areas of reforms support those objectives: implementing a new integrated electronic financial management system (SISTAFE); allocating near 65 percent of Government budget on PARPA priority sectors; implementing revenue-raising measures; and taking steps to enhance the quality of governance (passing legislation to promote decentralization and fight corruption). To a lesser extent, the PRSC1 also focused on the second component, improving the investment climate, through improvements in the business regulatory framework, in particular, by reducing the import duties from 30 to 25 percent. 4. Achievement of Objectives and Outputs 3. PRSC1 prior actions were completed by the Government before Board presentation on July 6, 2004. The Government maintained a sound macroeconomic policy framework during 2003 and 2004, which was conducive to the success of policy measures and other reforms. GDP grew 12.8 percent in 2003 and 7.2 percent in 2004. Despite some relaxation in the fiscal stance in the period leading to elections in December 2004, 12 month inflation had declined by one percentage point by end June 2004 to 13.3 percent and to 9.1 percent by end December 2004. Although the currency appreciated by 7 percent between June 2003 and June 2004, and further by December 2004, the external current account deficit had narrowed by one third, to 13.8 percent of GDP by end 2004. Interest rates also continued to decline during this period. Prior actions aimed at improving public finance management were also achieved: the Government executed the 2003 budget consistent with the agreed allocation of spending 64.9 percent of the budget on PARPA direct poverty reducing priority sectors, although the target of 65 percent was not quite achieved in 2004 (ratio was 63.3 percent), but is estimated at above 65 percent for the first half of 2005; SISTAFE regulations were adopted; and revenue-raising measures continued to be deployed, such as the automatic fuel tariff adjustments and the withholding of tax to Government employees (these two measures increased Government revenues in 2003 by about 0.7 percent of GDP). Although the agreed prior actions increased revenues in 2003, estimates of overall revenues for 2004 show a slight decline, by half percentage point of GDP, to 12.3 percent, but estimates for  - 3 - 2005 show that they will recuperate to 13.2 percent of GDP enabling further fiscal adjustment and lowering aid dependency. Prior actions focused on improving governance, including approval of the decentralization and the anti-corruption law, achieving land registration in 90 days, expediting industrial registration (decree 39/2003) and issuing visas at the border, as well as prior actions aimed at improving the investment climate, that is, reducing the import duty from 30 to 25 percent were all completed. Most stated outcomes linked to the governance and investment climate are difficult to evaluate now and should be evaluated at the end of this PRSC series given the lag between the actions and the expected results. 4. Measures to be implemented under PRSC1 included those that would trigger PRSC2. Among those triggers were the approval of the new commercial code and the new procurement decree. These were not implemented on schedule, but are now expected to be fully implemented by end 2005. The same applies to the full launching of SISTAFE in the Ministry of Finance. Treasury operations have been conducted through SISTAFE since November 2004. The budget was inputted in the system, and accounting started to be undertaken through it in August, 2005, although the old system still works in parallel. It is expected that direct budget execution will be undertaken in the Ministry of Finance, the Ministry of Plan and Development and the Ministry of Education and Culture at the end of 2005. Otherwise, all other triggers were achieved. The Government continues to maintain a sound macroeconomic framework. GDP grew at 7.7 percent in the first half of 2005, the appreciation of the metical of last year was reversed during the first half of this year, interest rates continue to decline and inflation was 6.1 percent at the end of July despite higher oil prices. Measures aimed at improving the investment climate, that is, the approval of the financial law and decree 57/03 on hiring foreign labor were achieved, although it is too early to assess the stated outcomes, such as having more efficient banks and allowing Mozambican firms to become more competitive. Many of the outcomes will need to be evaluated at the end of this PRSC series. Table 1 shows detailed prior actions taken under PRSC1 and the achievements of triggers for PRSC-2, both linked to stated outcome. 5. On September 13, 2005, the second PRSC was approved by the Bank Board as a two tranche operation to harmonize with other budget-support donors and with Mozambique's budget cycle. The focus of the PRSC2 is to continue supporting the reform agenda supported under PRSC1, i.e. cross cutting institutional reforms to improve public finance management, including public procurement, and begin a second generation of reforms. A key element of PRSC2 is to roll out SISTAFE fully in the Ministry of Finance, and Ministry of Education and Culture including provincial directorates, extend coverage of the budget to include significantly more health expenditures (currently at 30 percent off-budget), and introduce a new procurement code based on international standards, together with a new financial institutions law, a new commercial code, a decree to ease restrictions on hiring foreign labor, and a new law to simplify red tape and strengthen anti-corruption measures. Since PRSC2 is a two tranche operation, it will conclude the first cycle of PRSCs that provided budget support during three years. A PRCS3 will start a new cycle and it is envisioned for 2006.  - 4 - Table 1: Program matrix: List of Prior Action for PRSC1 and Triggers for PRSC2 achievements and outcomes PRSC1 Prior Actions Status PRSC2 Triggers Status Outcome Component 1: Building Public Sector Capacity and Accountability Sub-component 1A: Maintaining a Sound Macroeconomic Policy Framework GoM maintained an adequate macro policy Achieved GoM will maintain an adequate Achieved Maintain a stable macro economic framework macro policy framework environment that enables policies and reforms to move forward as they support the PARPA goals. Achieved. GDP grew 12.8% in 2003 and 7.2% in 2004. 12-month inflation at end- June 2004 declined by one percentage point to 13.3%. Interest rates continued to decline. Current account deficit improved. Sub-component 1B: Improving Public Finance Management GoM executed 2003 budget consistent with agreed Achieved. Spent 64.9% of GoM to formulate 2005 budget Not achieved, but Direct poverty-reducing expenditures as share allocations its budget on PARPA with agreed allocations and progressing of actual expenditures remains near 65%. In priority sectors execute 2004 budget with agreed 2004 ratio was 63.3%, however preliminary allocations estimates for first half of 2005 show ratio above 65%. SISTAFE regulations adopted Achieved SISTAFE will be implemented in Achieved. Treasury GoM better able to manage public MPF (now MF) , incl. provincial operations through expenditures. Ongoing. There were delays in directorates SISTAFE since Nov. rolling out direct budget execution through 04. Current budget SISTAFE to other ministries. Expected to "go inputted into system, live" in Ministry of Finance, Ministry of Plan but no direct budget and Development and Ministry of Education execution yet. and Culture at end of 2005. Revenue-raising measures deployed, incl. Achieved Higher revenues, enabling fiscal adjustment automatic fuel tariff adjustments and withholding and lower aid dependency. Partially tax on GoM employee incomes achieved. Prior actions increased revenues by 0.7 % of GDP in 2003. However, revenues as percent of GDP were about half percent lower in 2004 than in 2003 at 12.3% of GDP. Revenues for 2005 seem to be on target (at 13.2% of GDP). Sub-component 1C: Improving Governance 3 key public sector reform measures achieved Achieved. Allow business to be more efficient. Mixed (land registration in 90 days; industrial registration results. Government created one stop shop in expedited; visas issued at border) 3 provinces, but Doing Business Report 2006, based on data to end 2004, did not show improvements on investment climate. Much red tape has been cut by the new government in 2005 and major new legislation is scheduled for adoption by Parliament before end of 2005. Is too early to evaluate full impact of measures.  - 5 - PRSC1 Prior Actions Status PRSC2 Triggers Status Outcome Council of Ministries will approve Not achieved. Clear, transparent procurement practices new procurement decree in line Delayed to introduced leading to few procurement with int'l practice November 2005 due problems and costs. Not yet achieved to extensive stakeholder consultations including donors. National Assembly approved law on Achieved. Local authority capacity in planning, decentralization (Lei dos Orgaos Locais do budgeting, financial management built to Estado) manage decentralized infrastructure service delivery. Too early to assess, but PAF matrix indicators for 2004 decentralization were partially met. Regulations of the law approved in 2005. Each district to receive investment allocation for the first time in 2006. National Assembly will approve Not achieved, Legal framework for business strengthened. new commercial code Delayed to December Not yet achieved 2005 National Assembly approved anti-corruption law Achieved. Higher GoM capacity to identify corruption issues and develop plans to address them more aggressively. Too early to evaluate Component 2: Improving the Investment Climate Sub-component 2A: Strengthening the Financial Sector National Assembly will approve Achieved More effective supervision of banking and new Financial Institutions law non-banking financial institutions and more efficient banks. Achieved, but full evaluation at end of this PRSC series. Sub-component 2B: Improving the Regulatory Environment Highest level of import duties reduced from 30% Achieved Reduce degree of effective protection to local to 25% industries. To be evaluated at end of this PRSC series. Decree 57/03 on hiring foreign Achieved An efficient and flexible labor law, allowing labor will be revised to ease Moz businesses to restructure, increase hiring, restrictions on firms hiring and profit from knowledge transfers and expatriate employees becoming more competitive. Too early to evaluate Subcomponent 2C: Improving Infrastructure Services There were no prior actions or triggers under this sub-component Subcomponent 2D: Expanding Agricultural Productivity. There were no prior actions or triggers under this sub-component COMPONENT 3: Expanding Service Delivery. There were no prior actions or triggers under this component  - 6 - 5. Major Factors Affecting Implementation and Outcome 6. Four factors affected the implementation and outcome of this operation. The first is the design which appropriately focused on cross-sectoral actions (see Section 3). Second was the successful coordination effort among donors - formalized in a Memorandum of Understanding signed in April 2004 - which made it possible for budget support to be more effective. The budget support process became even deeper with the G-15 group acquiring two new members (now G-17) and the African Development Bank expected to join soon. Third, the PRSC as well as the G-17 use the same government planning and reporting documents that are submitted to Parliament to make the assessments on performance and budget support. This enhances domestic accountability and puts pressure in GoM to improve the quality of such documents. One factor affected implementation and outcome of PRSC1 negatively. This had to do with delays in the approval of the labor law and procurement law caused by the preparation and holding of presidential and parliamentary elections in December 2004. Further, after the elections, it took time for the new Government to be formed, and Parliament passed the budget for 2005 only in May 2005. Nevertheless, most PAF targets (rolling three year matrix of priority actions and indicators agreed between the Government and external partners) were met and the new Government has reaffirmed its commitment to continue and even accelerate economic and governance reforms. 6. Bank and Borrower Performance 7. Bank performance was satisfactory from design to implementation. There are several observations that support this judgment: (i) The PRSC was based on extensive analytical work completed over the past few years, including two PERs (FY01 and FY03), a Poverty Assessment (FY04), A CEM( FY01), a CFFA (FY02) a CPAR (FY03) , a ICA (FY03) and a FSA (FY03); (ii) the PRSC is consistent with the FY 04-07 Country Assistance Strategy (CAS) (Report No. 26747-Moz). The base case scenario of the CAS envisages four consecutive PRSCs to support Mozambique's efforts in building public sector capacity and accountability, improving the investment climate, and expanding service delivery; (iii) for the first time a complete harmonization arrangement with a large number of donors (G-15) was attempted and it was successful. The PAF matrix agreed between the donors and the Government supports the Government's primary objective of reducing absolute poverty and achieving the Millennium Development Goals (MDGs) through the implementation of the Government's PARPA; and (iv) the operation was supervised in a continuous and detailed manner by Bank staff. 8. Borrower performance was satisfactory from design to implementation. The Government was in the driver's seat during the design: it determined the core reform and guided the definition of the main indicators, actions and outcomes to be achieved. This was possible because the Government had prepared the PARPA and then the PAF, which updated the PARPA and the core of the country's reform program. The Government stressed the need for all partners to harmonize with the PARPA and PAF, and the need for substantial, coordinated budget support, as this would increase ownership, which will also increase sustainability of actions in the future and would avoid creating parallel systems where accountability is primarily with the donors. The Government was also at the center of the implementation process. The monitoring was undertaken through regular monitoring, such as the quarterly budget execution reports and semi- annual PES (Economic and Social Plan) and PAF matrices reviews. The Ministry of Planning and Finance (now two separate ministries, Ministry of Finance and Ministry of Plan and Development) monitored the PES and PAF matrices which fed into the PRSP1 matrix. There was  - 7 - continual reporting to the Parliament, which strengthened the accountability foundation of the reform. Despite the slippages due to the electoral cycle, the Government remarked committed to the program stated in the Letter of Development Policy and actually saw the measures through to conclusion. The new government continues to implement and even accelerate the reform agenda. 9. Both Bank and Borrower performance enabled this operation to have a substantial impact on institutional development through the following: first, the creation of national technical teams focused on translating poverty reduction strategies into results is a gain that will endure; second, the approach of using pooled funds freely available to the budget to finance development activities starts a new and more efficient approach to managing them by strengthening local planning and budget execution systems and accountability rather than creating parallel structures: this is a gain that will also endure; and third, the introduction of particular management tools, i.e. SISTAFE makes a permanent change in managing public resources. 7. Findings and Implications for Subsequent Operation(s) in Series 10. Three findings may be identified, that have implications for subsequent operations. First, it became very clear during implementation that it is important to adhere closely to the prior actions and triggers in the PAF matrix as agreed with the Government and donors. Small deviations from the actions intended in the agreed PAF can cause unnecessary disagreements. Subsequent operations should even use the same wording in the chosen prior actions and triggers as in the agreed PAF matrix. Second, it became evident that budgetary support is more effective if provided in coordination with other donors' assistance and in synchrony with the Government's budget process. Already PRSC2 has been aligned with the budget process and subsequent PRSCs will follow the same pattern. And, third, experience with PRSC1 showed that timing of reform implementation should be more realistic by taking electoral cycles into consideration, i.e. the labor law and procurement law were designed to be approved during an election year, and therefore were delayed. Subsequent operations should take into consideration electoral cycles to avoid unnecessary delays in agreed measures.