World Bank Document · Moldova was hit hard by the economic crisis. The global crisis undermined...

Document of The World Bank

Report No: ICR00001905

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-47620)

ON A

CREDIT

IN THE AMOUNT OF SDR 16.6 MILLION (US$25 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MOLDOVA

FOR AN

ECONOMIC RECOVERY DEVELOPMENT POLICY CREDIT

June 27, 2011

Poverty Reduction and Economic Management Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2010)

Currency Unit = Moldovan Leu US$ 1.00 = 12.1539 MDL

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities

ANRE National Energy Regulatory Agency

ANRCETI National Regulatory Agency for Electronic Communications and Information Technology

CEM Country Economic Memorandum

CHP Combined Heat and Power (cogeneration plant)

CPS Country Partnership Strategy

DPO Development Policy Operation

ECSP Electronic communications service provider

ESRP Economic Stabilization and Recovery Plan

FDI Foreign Direct Investment

GDP Gross Domestic Product

HBS Household Budget Survey

ICR Implementation Completion and Results report

IFC International Finance Corporation

IMF International Monetary Fund

ITC Information Technology and Communications

MTIC Ministry of Information, Technology and Communications

NBM National Bank of Moldova

PRSC Poverty Reduction Support Credit

TSA Targeted Social Assistance

TTL Task Team Leader

Vice President: Philippe Le Houérou

Country Director: Martin Raiser

Sector Manager: Benu Bidani

DPC Task Team Leader: Dino Merotto

ICR Team Leader: Mame Fatou Diagne

REPUBLIC OF MOLDOVA ECONOMIC RECOVERY DEVELOPMENT POLICY CREDIT

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design............................................. 1 2. Key Factors Affecting Implementation and Outcomes............................................... 4 3. Assessment of Outcomes ............................................................................................ 8 4. Assessment of Risk to Development Outcome......................................................... 17 5. Assessment of Bank and Borrower Performance...................................................... 18 6. Lessons Learned........................................................................................................ 19 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 20 Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 21 Annex 2. Summary of Borrower’s ICR and/or Comments on Draft ICR ..................... 22 Annex 3. List of Supporting Documents....................................................................... 23

MAP

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A. Basic Information

Country: Moldova Program Name: Economic Recovery Development Policy Oeration

Program ID: P112625 L/C/TF Number(s): IDA-47620

ICR Date: 06/27/2011 ICR Type: Core ICR

Lending Instrument: DPL Borrower: GOVERNMENT OF MOLDOVA

Original Total Commitment:

XDR 16.6M Disbursed Amount: XDR 16.6M

Revised Amount: XDR 16.6M

Implementing Agencies: Ministry of Finance

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 03/01/2010 Effectiveness: 11/12/2010 11/16/2010

Appraisal: 04/26/2010 Restructuring(s):

Approval: 06/24/2010 Mid-term Review:

Closing: 12/31/2010 12/31/2010

C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Satisfactory

Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Not Applicable

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Not Applicable

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Moderately Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

D. Sector and Theme Codes Original Actual

Sector Code (as % of total Bank financing)

District heating and energy efficiency services 30 30

General finance sector 20 20

Information technology 20 20

Other social services 20 20

Roads and highways 10 10

Theme Code (as % of total Bank financing)

Climate change 30 30

Infrastructure services for private sector development 10 10

Regional integration 15 15

Regulation and competition policy 25 25

Social safety nets 20 20

E. Bank Staff Positions At ICR At Approval

Vice President: Philippe H. Le Houerou Philippe H. Le Houerou

Country Director: Martin Raiser Martin Raiser

Sector Manager: Benu Bidani Benu Bidani

Program Team Leader: Dino Leonardo Merotto Dino Leonardo Merotto

ICR Team Leader: Mame Fatou Irene Aminata Diagne

ICR Primary Author:

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F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The program’s objectives are to: adequately fund priority expenditures for economic recovery and social protection during fiscal correction and lay foundations for a sustained post-crisis recovery through exports and private investment. Revised Program Development Objectives (if any, as approved by original approving authority)

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Government Decision on 2010 Road Fund Budget shows planned increase in road maintenance in line with recommendations agreed by road sector working group

Value (quantitative or Qualitative)

2009 allocation for road maintenance (Lei 242 million)

MDL 582.9 m for maintenance and repair works in 2010

MDL 582.9 m for maintenance and repair works in 2010

Date achieved 12/31/2009 12/31/2010 12/31/2010 Comments (incl. % achievement)

Achieved

Indicator 2 : Investment subsidies as a share of total subsidies increased to 40% of total in 2010


38% in 2009 40% in 2010 53% in 2010


Achieved

Indicator 3 : Share of subsidies to individual farmers Value (quantitative or Qualitative)

20% in 2009 Increases in 2010 24% in 2010


Achieved

Indicator 4 : Share of the social assistance benefits going to the poorest 20% of population Value 28% in 2008 At least 2 thirds of On average 64% of

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(quantitative or Qualitative)

eligible beneficiaries receive TSA in 2010.

eligible beneficiaries received the TSA. 86% of TSA recipients were in the bottom consumption quintile in 2010(administrative source).


Achieved.

Indicator 5 : Income threshold for TSA Value (quantitative or Qualitative)

430 Lei in 2009 530 Lei in 2010 530 Lei in 2010


Indicator 6 : Budget allocations for: (i) nominal compensation; (ii) TSA and (iii) child allowance


2009 Budget: (w/o banking and postal service costs): (i) 369.8m Lei; (ii) 114.7m Lei; (iii) 46.8m Lei

2010 Budget (w/o banking and postal service costs): (i) 385.6m Lei; (ii) 208.1m Lei and (iii) 0.

2010 budget execution: (i) nominal compensation: 354.4m Lei; (ii) TSA: 282m Lei and (iii) 4.1 million Lei


Achieved.

Indicator 7 : Real domestic farm-gate prices for grapes Value (quantitative or Qualitative)

Average farm gate price 2006-2008: 199.8US$ per ton.

Increases in 2010 Farm-gate price in 2010: 258.7US$ perton.


Achieved.

Indicator 8 : Volume of exports of "technical grapes, bulk wine, bottled wine, distilled wine products


Technical grapes 2009 -1615.7 tons; volume of bulk wine 2006-2008 average: 4,738

Increases in 2010

Technical grapes 2010: 26,800 tons Bulk wine: 7,066 thousand dal;

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thousand dal; bottled wine 2006-2008 average: 6318 thousand dal; wine: 255 thousand dal (sparkling); distilled wine 2006-2008 average 116 thousand dal

Bottled wine: 5,220 thousand dal ; Bottled wine (sparkling): 319 thousand dal ; Distilled wine: 249 thousand dal ;


Achieved.

Indicator 9 : Energy Efficiency Law submitted by April 2010


Energy Efficiency Program adopted by June 2010

Energy Efficiency Law was approved in June 2010 but Energy Efficiency Program has not been adopted (as of May 2011).

Date achieved 06/30/2010 12/31/2010 Comments (incl. % achievement)

Partially achieved.

Indicator 10 : Heating tariff charged by Termocom at cost recovery level as per ANRE methodology by end of heating season 2009-2010.


Lei 540/Gcal (corporate &industrial), Lei 233/Gcal (residential)

Approx Lei 699/Gcal minimum tariff level (corporate and industrial)

Lei 659/Gcal in January 2010 and 821MDL/Gcal in May 2010. Adjusted again, to MDL898 in Jan. 2011.


Not achieved as of December 2010 but achieved in January 2011. Tariff is in full compliance with methodology since January 2011.

Indicator 11 : No further accumulation of arrears to Moldovagaz by CHPs and Termocom by end 2010 heating season.


Lei 1.9 billion (awaiting data Moldovagaz)

Lei 1.9 billion (end April 2010)

Some arrears were accumulated (47.1 million Lei as of April 2010), raising the stock of arrears from 1.79 billion lei at the end of 2009 to 1.84 billion lei at the end of April 2010.

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Partially achieved. An MoU signed in May 2010 provided for a process of payments to ensure current arrears are paid for on an ongoing basis.

Indicator 12 : Pensioners, low paid workers and the poorest families receive compensation that offsets their increased heating bills.


Around 40,000 families, 67,000 individuals and pensioners who receive less than 700 lei per month receive targeted heating compensation for 2010.

About 177,000 beneficiaries in March 2010 and 506,000 in December 2010.

Date achieved 12/31/2010 12/31/2010 Comments (incl. % achievement)

Achieved.

Indicator 13 : Increase the international connectivity of Moldova Value (quantitative or Qualitative)

Connectivity 12.8 gigabits per second (Gbps) in 2009

Connectivity of 100 Gbps by end 2010.

91.7 as of 12/31/2010.


Partially achieved.

Indicator 14 : Number of permits issued (for electronic communications service providers)


No private investor making cross border cable connection in 2009

Two connections by end June 2010

Two operators in March 2010 (Orange Moldova and Starnet) and one in July 2010 (Norma).


Achieved

Indicator 15 : Time and cost to register a business Value (quantitative or Qualitative)

2009: 15 days, 8.9% income per capita




Partially achieved

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(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : .Value (quantitative or Qualitative)

Date achieved Comments (incl. % achievement)

G. Ratings of Program Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

H. Restructuring (if any) Not Applicable

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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal This operation was designed in the context of the global economic crisis as well as changed economic and political realities in Moldova. It replaced and scaled up the third annual PRSC identified in the FY09-FY11 Country Assistance Strategy. It supported a reform-minded Government as it started to implement measures to address a deep fiscal crisis brought on by the global recession and pre-election spending. Under high political uncertainty, it was designed as a one-year operation, with the potential to serve as a bridge to a longer-term program of annual support.

Moldova was hit hard by the economic crisis. The global crisis undermined all of the main sources of growth in previous years: remittances, private consumption, exports and private investment, resulting in weaker domestic and external demand, fiscal imbalances and limited financial intermediation. GDP growth dropped dramatically from 7.8 percent in 2008 to -6 percent in 2009, with FDI decreasing by 82 percent during the same period. Economic sectors such as mining, agriculture and construction recorded large declines in output, ranging from 12 to 60 percent in 2009.

Fiscal imbalances grew. The crisis contributed to a fall in tax revenues by 8 percent. Meanwhile, pre-election spending hikes in early 2009 increased spending by 5 percent (public wages by 22 percent), opening an unsustainable fiscal deficit that reached 6.3 percent of GDP in 2009.

The global crisis exposed the unsustainable nature of remittance-financed and import-intensive economic growth. Prior to the crisis, economic growth in Moldova had averaged 6 percent between 2004 and 2008, on the back of strong domestic and external demand. The remittance-financed consumption and investment widened the balance of trade. Remittances drastically declined – by 37.4 percent (year on year) in 2009, to 20.8 percent of GDP (from about 30 percent of GDP in 2008), leading to a collapse in domestic demand. The slowdown in investment, remittances and exports put pressure on the exchange rate and the National Bank of Moldova lost a third of its international reserves in attempts to defend the currency. The banking sector was strained. The quality of the banks’ loan portfolio deteriorated rapidly in 2009, with non-performing loans (NPLs) reaching 16.3 percent of total loans (up from 4.6 percent in 2008). The real cost of borrowing increased, making access to loans expensive for firms, thereby compressing demand and prolonging the “credit crunch”.

The downturn in Moldova’s economy was expected to have a strong impact on poverty, especially for rural households. Previously strong growth had reduced poverty in Moldova from 30.2 percent in 2006 to 26.4 percent in 2008. It was expected that the decline in consumption induced by the downturn could increase the incidence of poverty significantly in 2009. The introduction of new targeted social assistance and the gradual reform of the old schemes were delayed, preventing improved targeting to those most in need.

Even with political uncertainty, the new Government began implementing comprehensive reforms that entailed a shift in economic management and international development relations. After two rounds of heavily contested elections, the Communist Party lost its majority in Parliament and the four centrist parties in opposition to the Communists formed a majority coalition, the Alliance for European Integration (AEI). However, the AEI had insufficient parliamentary votes to elect a President (requiring a 60 percent majority under the Constitution). Still, the new Government launched in October 2009 the ‘Economic Stabilization and Recovery

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Plan’ (ESRP). It built on the set of Policy Notes that the Bank, with other development partners, had prepared on key economic and social challenges to address the impact of the crisis and build the platform for post-crisis growth and improved competitiveness. The ESRP had three pillars: (i) Stabilization and streamlining of public finance; (ii) Economic recovery; and (iii) Securing an efficient and fair social protection. A 3-year Extended Credit Facility and Extended Fund Facility program with the IMF was approved in January 2010. The World Bank team considered that this program provided a credible medium-term macroeconomic framework. It focused primarily upon reversing the fiscal deterioration that occurred in 2008-9 and restoring the fiscal deficit to a sustainable level by 2012. Under the ESRP, Government began implementing a comprehensive and detailed action plan of legal and administrative reforms to “de-regulate, liberalize and de-monopolize” the economy. Government also began implementing an action plan for integration with Europe, entitled “European Integration: Freedom, Democracy, Welfare 2009-2013”. The ERSP provided the basis for the Consultative Group meeting that was jointly organized by the EU and the World Bank in March 2010. Development partners pledged 2.6 billion to support reforms during 2010-13.

The rationale for Bank assistance under a single tranche Economic Recovery DPO was to support the Government’s ESRP. The Moldova Poverty Reduction Support Credit (PRSC) programmatic series, which consisted of three operations of $10 million each, was discontinued after PRSC2. In the run-up to two elections in April and July 2009, several actions proposed under the planned PRSC3 had been delayed or partially implemented. The third operation was cancelled. The new policy orientation after the elections and the anticipated impact of the global economic crisis demanded that the Bank realign its support (to reflect Moldova’s new economic and political priorities) and provide more significant financing for the ESRP than envisaged in the initial PRSC series. A USD 25 million Economic Recovery DPO (including USD 11.2 million from the IDA Crisis Response Window) was to provide much-needed budget support and focus the reform agenda on laying the foundations for post-crisis recovery. It focused strongly on the second and third pillars of the Government’s ESRP [(ii) Economic recovery and (iii) Ensuring an efficient and fair social protection].

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)

The objectives of the DPL were to support the Government’s efforts to adequately fund priority expenditures for economic recovery and social protection during fiscal correction, while laying the foundations for a sustained post-crisis recovery through exports and private investment. The operation was designed to realign World Bank policy support lending to reflect Moldova’s changed economic and political realities. It replaced and scaled up the third annual PRSC identified in the FY09-FY11 Country Assistance Strategy. The reform program supported by the operation: (i) aligned behind the policy shift signaled by a new Government, and (ii) responded to the new challenge of addressing the global crisis by complementing an IMF-supported program for fiscal correction with measures to improve the composition of the budget and structural measures to stimulate economic recovery. The increase in funding from $10 million to $25 million reflected the need for additional budgetary funding to smooth over fiscal correction of a deficit of 6.3 percent of GDP in 2009. The key Program Development Objectives were the following:

i. Adequately fund priority expenditures for economic recovery and social protection during fiscal correction. The measures under the first pillar support efforts to better maintain roads, redirect the declining support for agriculture towards investment and better target social assistance.

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ii. Lay foundations for a sustained post-crisis recovery through exports and private investments. The measures under the second pillar support efforts to increase the profitability of traditional exports, make the energy sector more commercially viable while compensating poor people, remove barriers to private sector investment and FDI in telecoms and remove bureaucratic red tape.

The key outcome indicators were:

(i) Better maintained roads a. Government Decision on 2010 Road Fund Budget shows planned increase in

road maintenance in line with recommendations agreed by road sector working group.

(ii) Declining support for agriculture redirected towards investment a. Investment subsidies as a share of total subsidies increased to 40% of total in

2010. b. Share of subsidies to individual farmers increases in 2010.

(iii) Better targeted social assistance a. At least two thirds of eligible beneficiaries receive Targeted Social Assistance

(TSA) in 2010. b. Income threshold for TSA raised to 530 Lei in 2010. c. 2010 Budget allocations for nominal compensation (385.6m Lei), TSA (208.1m

Lei) and child allowance (0 Lei). (iv) Profitability of traditional exports increased

a. Real domestic farm-gate prices for grapes increase in 2010. b. Volume of exports of “technical” grapes, bulk wine, bottled wine, distilled wine

products increases in 2010. (v) More commercially viable energy sector whilst compensating poor people

a. Energy Efficiency Law submitted by April 2010. b. Heating tariff charged by Termocom is at cost recovery level as per ANRE

methodology by end of heating season 2009-2010. c. No further accumulation of arrears to Moldovagaz by CHPs and Termocom by

end 2010 heating season. d. Pensioners, low-paid workers and the poorest families receive compensation that

offsets their increased heating bills. (vi) Barriers to private sector investment and FDI in telecoms removed

a. Increase the international connectivity of Moldova b. Number of permits issued to electronic communications service providers

(ECSPs) to construct and operate cross-border telecommunications cable facilities.

(vii) Bureaucratic red tape removed a. Reduce time and cost to register a business to 10 days and 7.0% of income per

capita in 2010 (compared to 15 days and 8.9% of income per capita in 2011).

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification PDO were not revised.

1.4 Original Policy Areas Supported by the Program (as approved) The operation supported short-term corrective policies in the new Government’s Economic Stabilization and Recovery Program in two ways:

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• First, the operation aimed to protect priority expenditures for economic recovery and social protection during fiscal correction. It supported enhanced funding for targeted social assistance and road maintenance and a redirection of declining agricultural subsidies towards more efficient investment grants. Targeted social assistance was required to cushion the impact of the severe crisis-induced recession on poor people. Road maintenance and the redirection of agricultural subsidies were to enhance economic activity.

• Second, the operation aimed at laying the foundations for a sustained post-crisis recovery through exports and private investment. The policy objective in this area is to remove long-standing structural policy constraints and cumbersome regulations which retard improvements in Moldova’s productivity and competitiveness, restrain exports, limit foreign direct investment, and which have led to jobless growth in recent years. The removal of these constraints was expected to dampen the recession and place Moldova on firmer foundations for growth and job creation once export demand recovered. Since the impact of the crisis on poor people in Moldova was anticipated to be more acute in rural areas, emphasis was placed on measures which could stimulate traditional wine exports. Complementing these measures, the program sought to initiate reforms which first make the energy sector financially viable and which then pave the way for an injection of private investment in energy and telecommunications. The energy sector reforms supported under the program aimed at stemming the drain of subsidized heating on Moldova’s fiscal space, whilst protecting poor people from rising heating costs and providing a framework for cost-cutting energy efficiency measures in the future. The telecommunications sector reform focused on removing barriers to private sector investment and FDI by de-monopolizing cross-border telecommunications cable access. Last, reforming firm-registration regulations was an important step towards reducing bureaucratic red tape and improving the investment climate.

1.5 Revised Policy Areas (if applicable) N/A

1.6 Other significant changes N/A

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance Under a single-tranche operation, all the reforms supported by this DPC were conditions for the Board presentation, and thus were met prior to approval of the Loan. The implementation of prior actions is summarized in Table 2.1.

Table 2.1.: Prior actions

Description Status and comments 1. Adequate provision for road maintenance made in 2010 budget.

Met, remains effective. MDL 582.9 allocated for road maintenance in the 2010 Budget through Law No. 138 dated December 29, 2009.

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2. Redirect the subsidy scheme to increase support for investment while reducing recurrent subsidies by approving a Government Decision on the 2010 Regulation of the Use of Agricultural Support Fund Resources.

Met. Government Decision No. 167 (dated March 9, 2010) on the Regulation of the Use of Agricultural Support Fund Resources aiming to redirect the subsidy scheme to increase support for investment while reducing recurrent subsidies in the agriculture sector. However, a subsidy for the purchase of fertilizers and pesticides was reintroduced through Parliament Decision #172 (dated July 9, 2010). Furthermore, another recurrent subsidy for fertilizers and pesticides has been introduced, with Government Decision #786 (Sept 2, 2010).

3. Improve targeting accuracy of new TSA and increase its coverage of the extremely poor by adopting a Government resolution that:

• Revises the proxies system to improve targeting;

• Ignores cadastre income when household is exclusively elderly, disabled or children;

• Reintroduces income ‘disregard’ in calculation of the household’s monthly income of applicants.

Met, remains effective. Government Decision No. 37 dated February 2, 2010.

4. Prevent Nominative Compensation from expanding at cost of the new social assistance scheme:

• Freeze the Nominative Compensation for utilities for current beneficiaries and allow no new beneficiaries.

• Abolish the child allowance with a threshold of 54 lei and integrate it with the TSA.

Met, remains effective. Recipient adopted: (i) Law No. 135 dated December 29, 2009 to freeze the level of Nominative Compensation for utilities payments for current beneficiaries and not introduce new beneficiaries; (ii) Government Decision No. 19 dated January 19, 2010 to abolish child allowance of 54 MDL per child and integrate this child benefit into the new TSA.

5. Liberalize wine exports by: (a) Abolishing restrictions on the

exports of bulk wine, grapes for wine, and distilled wine;

(b) Eliminating certification for each shipment of wine;

(c) Abolishing state trademarks on alcoholic products for export;

(d) Dissolving the independent agency Moldova Vin, and delegating its functions to the Ministry of Agriculture and Food Industries.

Met, remains effective. Law No. 31 dated October 7, 2009 adopted and Government Decisions No. 597 dated October 21, 2009 and No. 793 dated December 2, 2009.

6. Submit to Parliament Energy Efficiency Law.

Met, remains effective. Government submitted to Parliament a new Energy Efficiency Law through the Government Decision No. 306 dated April 23, 2010. Approved in June 2010.

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7. ANRE establishes district heating tariff for Chisinau at a level high enough to allow Termocom to be current on its payables while implementing capital programs submitted in its tariff calculation.

Met, remains effective. Law No. 107 dated December 17, 2009 and ANRE Decision No. 364 dated January 14, 2010.

8. Government approves the Law for Social Compensations for the Cold Period of the Year 2010 to protect poor people from higher heating prices.

Met. Adopted law No. 15 dated February 26, 2010 for Social Compensations for the Cold Period of the year 2010 and Government Resolution No. 162 dated March 5, 2010.

9. De-monopolize cross-border telecommunications cable access by:

(i) Issuance of the Government letter to MTIC dated January 29, 2010 and MTIC’s letter to ANRCETI dated February 22, 2010 which provided formal confirmation of the legal rights of all licensed electronic communications service providers (ECSPs) to construct and operate cross-border telecommunications cable facilities; and

(ii) ANRCETI sending an approval letter to at least one ECSP’s request to construct and operate a cross-border telecommunications cable facility from a permitted ECSP.

Met, remains effective. ANRCETI’s letters of approval dated March 31, 2010 of two ECSP’s requests to construct and operate a cross-border telecommunications cable facility from permitted ECSPs.

10. Approve and submit to Parliament amendments to the Law on State Registration of Companies to enable the Chamber of State Registration to become a one-stop shop for registration for health, statistical and social insurance purposes (CNAM, BNS, CNAS)

Met, remains effective. Government approved and submitted to Parliament the amendments to the Law on State Registration of Companies No. 220 dated November 19, 2007 to enable the Chamber of State Registration to become a one-stop shop for registration for health, statistical and social insurance purpose through Government Decision No. 282 dated April 15, 2010. Law No. 127 of 18 June 2010 has institutionalized the “one-stop shop” for business registration.

2.2 Major Factors Affecting Implementation: Although continued political uncertainty had an impact on the pace of reforms, the government showed increased ownership and commitment to implementing important reforms in the economic and social sectors. After two failed attempts to elect a President, another early parliamentary election took place in November 2010. The governing coalition, the Alliance for European Integration, gained an increased majority but was still short of the number of seats to elect a President. In spite of this political uncertainty, the population has high hopes for change and the government has been implementing its Economic Stabilization and Recovery Program 2009-2011, which also provided the basis for the IMF’s 3-year Extended Credit Facility and Extended Fund Facility Program. The operation was underpinned by extensive economic and sector work, conducted over the previous five years. The Economic and Sector Work was conducted over the previous five years

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and summarized in the Policy Notes prepared for the new Government (in partnership with other donors). The Policy Notes were instrumental to the formulation of the Government’s ESRP (which in turn the DPO aimed to support). This ensured Government ownership and commitment to the program. It also enabled rapid preparation of the operation. The operation’s design was selective and realistic. It reflected well lessons learned from the shortcomings of the previous PRSC series (by reducing the number of policy areas supported), and took into account the constraints imposed by the capacity of the implementing agencies as well as the political uncertainty at the time. It also adequately focused on mitigating social risks that could affect poverty reduction objectives or lead to policy reversal. Selectivity was enabled by strong complementarities with the IMF and other partners. Moldova now benefits from considerable external support, especially from Europe. The Government’s pro-European orientation accelerated progress in key areas of programmatic alignment between the Bank and the EU (including social protection and energy). Risks to development outcomes were well-identified at appraisal and effective mitigation measures were put in place. Social risks were mitigated through the social assistance system. Technical assistance complemented reform efforts in the energy and telecommunications sector.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: The main reform areas under the DPO were centered on two thematic pillars with well-specified policy actions, measures, baseline values, target indicators and medium-term policies and outcomes. Targets to be reached were properly quantified and were adequate measures of progress. They were well-connected with policy actions, enabling attribution to the extent possible. They were also realistic, with the exception of two energy-related medium-term objectives to which short-term target dates were appended. Another shortcoming in the results framework was the absence of a target for one indicator (share of social assistance benefits going to the poorest 20% of population) but this omission was balanced by the inclusion of another well-defined and relevant target (share of eligible beneficiaries receiving the TSA).

The State Chancellery played the primary role in coordinating monitoring and program implementation. Data collection was appropriate and largely timely.

Beyond the operation’s implementation, it is worth noting the sustainability of M&E arrangements with respect to targeted social assistance. As a result of the supported conversion of nominal compensation into targeted social assistance, M&E arrangements have become sounder, with higher quality, frequency and reliability of data used to measure coverage and targeting of social assistance for the poorest. Indicators of targeting and coverage are regularly monitored using administrative and household budget surveys. They are also incorporated in the social assistance and insurance database maintained by the Bank’s Social Protection team.

2.4 Expected Next Phase/Follow-up Operation: The Government shows commitment to post-crisis structural reforms and the Bank expects to continue its support in Moldova. Government has laid out a reform program in "European Integration: Freedom, Democracy, Welfare, 2011-2014" and prepared an action plan for 2011-2014. Under the Country Partnership Strategy for FY09-FY13, Bank support is to focus on three pillars: (i) Improving economic competitiveness to support sustainable economic growth; (ii) Minimizing social and environmental risks, building human capital, and promoting social inclusion; and (iii) Improving Public sector governance. A Competitiveness DPO series is envisioned, based on the in-depth diagnostic provided in the CEM and supporting the Government’s competitiveness and private sector job creation agenda. The focus is expected to be

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on the business climate, as well as sector policies in key areas (for e.g., agriculture, ICT, energy, education) that would lift the current constraints to growth.

However, a follow-up operation will have to incorporate political realities and the risks to the sustainability of reform posed by political uncertainty. Continued engagement and dialogue on the main policy areas supported under the Economic Recovery DPO can contribute to sustaining benefits, including through continued monitoring of the program’s targets and medium-term outcomes.

As outlined in the updated CPS, the Bank will continue to be selective, to leverage strategic partnerships with others, and to play an important advisory role in the design and implementation of structural reforms. The on-going and planned Analytic and Advisory Activities (AAA) and Technical Assistance (TA) activities for FY12-FY13 include:

• Follow-up work on Competitiveness and structural reform as well as continued programmatic fiscal work (including studies using the BOOST, an innovative tool for analyzing public expenditures);

• AAA and Technical assistance in critical sectors: finance (Financial sector monitoring, Credit Bureau, Risk Management , Financial Sector Assessment Program); private sector development (Investment Climate Reform), agriculture (Food security, Agricultural Competitiveness); energy efficiency; and education Rationalization.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The Economic Recovery DPO supported Moldova through the financial and economic crisis, and provided the opportunity to open a dialogue with the newly elected Government on a longer-term reform agenda. The objectives of the DPL program were closely aligned with the Government’s program. They were highly relevant when the operation was appraised and they remain relevant to date. The reform program supported by the DPO was well-anchored into the medium-term reform agenda of the Government and the Bank’s Country Partnership Strategy.

The design of the operation and the implementation arrangements were also highly relevant, with a sound result framework (albeit with minor shortcomings). Logical links between policy actions, indicators and medium-term policies and outcomes supported implementation monitoring arrangements. Consistent with Moldova’s limited administrative capacity and lessons learned in the previous PRSC series, the operation policy areas were selective.

The reforms supported by this operation were prioritized: they addressed key structural rigidities and were implementable despite continued political uncertainty. The objectives of critical and comprehensive structural reforms on business regulation, de-monopolization, regulatory environment and improved competitiveness remain crucial to foster growth in Moldova.

3.2 Achievement of Program Development Objectives

Overall, the Program Development Objectives were achieved with only minor shortcomings. Development outcomes are summarized in Table 3.1.

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Table 3.1. Development outcomes Objectives Expected Outcomes by December

2010 Actual Outcomes by December 2010

I. Adequately fund priority expenditures for economic recovery and social protection during fiscal correction

Better maintained

roads

Allocation for road maintenance: MDL 582.9 m for maintenance and

repair works in 2010 (from MDL 242 million in 2009).

Achieved. MDL 582.9 m for maintenance and repair works in 2010.

Investment subsidies as a share of total subsidies increased to 40% of total in 2010 (from 38% in 2009).

Achieved. 53% in 2010 (including payments in 2010 and amounts to be paid

in 2011).

Declining support for agriculture redirected towards

investment

Share of subsidies to individual farmers increases in 2010 (20% in

2009).

Achieved. 24% in 2010.

At least 2 thirds of eligible beneficiaries receive TSA in 2010.

Share of the social assistance benefits going to the poorest 20% of

population (no target).

Achieved. Administrative data shows substantial fluctuations in the number of beneficiaries over the course of the year, with a 32,000 monthly average (64% of eligible beneficiaries) but the program expanded during the year. 86% of TSA

recipients were in the bottom consumption quintile in 2010.

Income threshold for TSA: 530 Lei in 2010 (430 Lei in 2009)

Achieved. 530Lei in 2010

Better targeted

social assistance

2010 Budget allocations for: (i) nominal compensation: 385.6m Lei; (ii) TSA: 208.1m Lei and (iii) child

allowance: 0

Achieved. 2010budget execution: (i) nominal compensation: 354.4m Lei; (ii) TSA: 282m Lei and (iii) 4.1 million Lei

II. Lay foundations for a sustained post-crisis recovery through exports and private investment Profitability of traditional

exports increased

Real domestic farm-gate prices for grapes increases in 2010 (relative to average farm gate price 2006-2008:

199.8US$ per ton.)

Achieved. Farm-gate price in 2010: 258.7US$ per ton.

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Volume of exports of technical grapes, bulk wine, bottled wine and distilled wine products increases in

2010. Technical grapes 2009 – 1,615.7 tons; Wine (2006-2008 averages): o Bulk wine: 4,738 thousand dal o Bottled wine 6,318 thousand dal o Bottled wine (sparkling): 255

thousand dal o Distilled wine: 116 thousand dal

Achieved.

Technical grapes 2010: 26,800 tons Wine (2010): o Bulk wine: 7,066 thousand dal o Bottled wine: 5,220 thousand dal o Bottled wine (sparkling): 319

thousand dal o Distilled wine: 249 thousand dal

Energy Efficiency Law submitted by April 2010 and Energy Efficiency Program adopted by June 2010.

Partially achieved. Energy Efficiency Law was approved in June 2010 but Energy

Efficiency Program has not been adopted.

Heating tariff charged by Termocom at cost recovery level as per ANRE

methodology by end of heating season 2009-2010: Approx Lei 699/Gcal minimum tariff level

(corporate and industrial)

Not achieved as of December 2010 but achieved in January 2011. Tariff is in full

compliance with methodology since January 2011. Lei 659/Gcal in January 2010 and 821MDL/Gcal in May 2010.

Adjusted again, to MDL898 in Jan. 2011.

No further accumulation of arrears to Moldovagaz by CHPs and Termocom by end 2010 heating season. Lei 1.9

billion (end April 2010).

Partially achieved. Some arrears were accumulated (47.1 million Lei as of April

2010), raising the stock of arrears from 1.79 billion lei at the end of 2009 to 1.84 billion

lei at the end of April 2010. An MoU signed in May 2010 provided for a process of payments to ensure current arrears are

paid for on an ongoing basis.

More commercially viable energy sector whilst compensating poor people

Around 40,000 families, 67,000 individuals and pensioners who

receive less than 700 lei per month receive targeted heating compensation for 2010.

Achieved. About 177,000 beneficiaries in March 2010 and 506,000 in December

2010.

Increase the international connectivity of Moldova: 100 gigabits per second (Gbps) by end 2010 (from 12.8 Gbps

in 2009).

Partially achieved. 91.7 as of 12/31/2010. Barriers to

private sector investment &

FDI in telecoms removed

Number of permits issued (for electronic communications service providers): two connections by end

June 2010.

Achieved. Two operators in March 2010 (Orange Moldova and Starnet) and one in

July 2010 (Norma).

Bureaucratic red tape removed

Time and cost to register a business: 10 days, 7.0% of income per capita in

2010 (from 15 days and 8.9% of income per capita in 2009).

Partially achieved. 2010: 10 days, 10.9% income per capita

Macroeconomic framework The Government took actions to reduce the deficit, and with additional fiscal measures under an IMF program and a faster than expected recovery, the deficit for 2010 is expected to be

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below 3 percent of GDP. After taking office in September 2010, the Alliance for European Integration took immediate steps to address the impacts of the economic crisis and pre-election spending hikes by the previous Government. Public sector pay increases were delayed, excise taxes increased, 4,000 Government staff positions were eliminated, agricultural subsidies were reduced and spending on goods and services was cut.

Macroeconomic trends started to improve by the end of 2009 and a strong recovery was registered in 2010. Real GDP increased by 6.9 percent in 2010. Goods and services exports increased by 12.8 percent and imports by 13.7 percent. However, this growth has not been associated with corresponding increases in employment. It is expected that economic recovery will continue, but this is essentially dependent upon political stability in Moldova, as well as economic growth throughout the rest of Europe. With a big share of the workforce already abroad, fast economic growth is unlikely to come only from an increase in remittances.

Pillar I: Adequately fund priority expenditures for economic recovery and social protection during fiscal correction

a) Better maintained roads

The 2010 budget allocation for road maintenance increased as required by the Law on the Road Fund. The law required that not less than 50% of excise tax were directed to the Road Fund in 2010 and that this share would increase to 65% in 2011 and 80% in 2012. Accordingly the 2010 allocation for road maintenance increased to MDL 582.9 million (from MDL 242 million in 2009) and will increase to 788 million Lei in 2011.

These increases are necessary to stem the deterioration of Moldova’s roads and can be expected to help lower transport prices over time. Indeed, evidence from the Doing Business Survey (2010) shows that nearly three-quarters of the total cost of exporting containerized freight and general cargo by maritime transport is due to high land transport costs to the seaports. This is compared to 39 percent in neighboring Romania, despite the relatively short transport distances (within Moldova and to the nearest seaports in Ukraine and Romania). Serious efforts to improve transport infrastructure started several years ago but are only now showing the first effects. It will take many years of sustained investment and maintenance before clear results are visible on a broad scale. There is currently no data available to track the evolution of transport prices.

Beside roads, more progress is required to increase the efficiency of railway transport and customs clearance. Moldovan exporters typically spend 3 days clearing the border (compared to 2 days in Ukraine and 1 day in Romania), according to the Doing Business Survey for 2010.

b) Declining support for agriculture redirected towards investment

The VAT subsidy on fertilizers and pesticides was abolished (in conformity with the related DPO policy action) but another recurrent subsidy was introduced in July 2010 in a different form and at a lower rate. The subsidy is no longer a VAT rebate (VAT of 20% was charged on inputs). Instead a direct subsidy of 15% of the cost of fertilizers and pesticides was created. For 2011, the Ministry of Agriculture did not include the fertilizer subsidy in the version of the draft regulation on the use of the subsidy fund that was discussed at the beginning of the year during consultations with stakeholders and civil society. But on April 21, 2011, a Government decision listed the fertilizer subsidy among the measures to be applied in 2011. The current version of the draft regulation for the use of the subsidy fund (as of May 20, 2011) sets the 2011 fertilizer subsidy rate at 10%.

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Nevertheless, recurrent subsidies were reduced and there has been a redirection of agricultural subsidies towards investment. Recurrent subsidies fell by 59% in 2010, to MDL 214 million (including amounts not paid in 2010 and to be paid in 2011). Consequently, the share of investment subsidies in total agricultural subsidies increased to 53% in 2010 (up from 36% in 2009 and exceeding the DPO’s 40% target). The reintroduction of input subsidies highlights a lack of political consensus on reforms in this area. But the planned decrease in the subsidy rate (for 2011) is another step towards the reduction of inefficient and inequitable subsidies.

The redirection of subsidies towards investment was not made at the cost of lower equity in the distribution of budget resources. While corporate farms continued to receive the largest share of agricultural subsidies, the share going to individual farmers increased to 24% in 2010, from 20% in 2009. Small farmers benefited from the assistance of extension services in applying for subsidies.

Low crop productivity, inadequate rural storage capacity, credit constraints and an inadequate food safety system continue to limit agricultural growth. Modern post-harvest infrastructure that provides for increased value-added in agriculture is largely missing. There is a critical need for increasing storage capacity, particularly cold and controlled atmosphere storage, collection points, field cooling facilities, packing houses for post-harvest treatment, grading, sorting and handling of horticultural produce. Food quality and safety problems limit access to higher value markets in the European Union and have increased the volatility of exports to the Russian market on which Moldova remains heavily dependent.

c) Better targeted social assistance

Under the reforms supported by this operation, there has been significant progress in gradually converting the previous nominal compensation schemes (based on individual categories rather than incomes) into the new targeted social assistance scheme (TSA). The two main nominative schemes that were addressed through the program included the nominative compensation for utilities, and child allowances. The Nominative Compensation for utilities was frozen for current beneficiaries and no new beneficiary was allowed, resulting in a small decline in the number of beneficiaries and expenditure on this type of social assistance. The budget execution for 2010 indicates MDL 354.4 million for nominative compensation, which is slightly lower than the level in 2009 (MDL 369.8m) A more rapid pace of transition between the two generations of social assistance would require additional measures. The child allowance with a threshold of MDL 54 per month per person was abolished in January 2010, which limited budgetary expenditure on this item to MDL 4.1 million in 2010 (from MDL 46.8 million in 2009). Finally, the expansion of the new TSA accelerated in 2010-2011, with expenditure increasing to MDL 282 million in 2010 (greater than the MDL 208.1 million initial allocation for 2010 and up from MDL 114.7 million in 2009).

About two-thirds of eligible beneficiaries received the TSA in 2010 (not including the assistance for the cold season). Household Budget Survey data indicates that 50,000 households were eligible and that 54% of these received TSA benefits in the first three quarters of 2010. Administrative data shows a monthly average of 32,000 recipients in 2010 (64% of the eligible households). There was a large amount of turnover in the recipients (as most recipients have to resubmit an application every six months) and large month-to-month variation in the number of recipients (with a peak during the summer).

The new TSA program has been successful in improving targeting accuracy and the coverage of the poor. This was achieved by revising the proxy system to improve targeting, ignoring

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cadastre income for certain households and reintroducing some income ‘disregard’ in the calculation of household monthly income. The revision of the proxy system corrected the initial regulation in order to account for special circumstances such as disability, remittances receipts or informal sector work. The income disregard consisted in ignoring 60 lei of income for every working household member and resulted in an increase in the share of TSA beneficiaries who also receive a salary. The monthly income threshold for TSA was raised to 530 Lei in 2010 and 742 in the cold season (to account for higher expenditure on utilities). It is expected to be raised again to 575 Lei in July 2011 and 805 lei in the cold period. Targeting accuracy of the TSA is by construction superior to that of nominative compensations: 86% of TSA recipients were in the bottom consumption quintile, versus only 27% for the nominative compensations system. Nominative compensations remain the program with the second largest coverage ratio of the poorest quintile (after old-age pensions): they are received by 24% of those in the lowest quintile. Nevertheless, the coverage of the new TSA is expanding rapidly: already 14% of those in the lowest quintile received it in 2010. Pillar II: Lay foundations for a sustained post-crisis recovery through exports and private investment

a) Profitability of traditional exports increased The liberalization of wine exports led to the expected increases in prices and export volumes. Previous export bans, export restrictions and regulations had resulted in declines in farm-gate prices and export volumes. The DPO supported the abolition of restrictions on the exports of bulk wine, grapes for wine and distilled wine, as well as the elimination of certain certification requirements and the dissolution of the independent agency Moldova Vin. Following these measures, the average farm-gate price of grapes increased 29.4% in 2010 to 3200 Lei per ton (USD 258 per ton), up from 1,500-2,000 lei/kg in 2009 (and similar to 2.8-3,600 lei/ton in 2006). The volume of wine and wine products exports also rebounded to pre-2009 levels.

b) More commercially viable energy sector whilst compensating poor people The Energy Efficiency Law was adopted and an energy efficiency agency is being instituted but the energy efficiency program has not been adopted yet (as of May 2011). Nevertheless, this program (prepared in 2008 with the assistance of the World Bank), has been reviewed and the action plans it called for have been prepared.

Although the heating tariffs set in 2010 were not fully compliant with ANRE’s methodology for determining cost-recovery level, the regulator has shown commitment to the principle of cost recovery and, in January 2011, a fully compliant tariff was set. In June 2010, the responsibility of tariff setting was transferred from the Municipality of Chi�in u to the National Energy Regulatory Agency (ANRE), thus depoliticizing tariff setting in Chi�in u. The agency is now responsible to Parliament rather than Government, which strengthens its autonomy. The heating tariff charged by Termocom was raised from 540 MDL/Gcal in 2009 to Lei 659 MDL/Gcal in January 2010 and 821 MDL/Gcal in May 2010. The 2010 tariffs did not apply the methodology in full, as the calculation notably reflected a transitory derogation from requirements for depreciation and the rate of return on new assets in ANRE’s formal methodology. In January 2011, the tariff was raised again (to 898 MDL/Gcal), in full compliance with the methodology. It is expected to be re-adjusted during the year as required by the methodology.

Some arrears to Moldovagaz were accumulated by CHPs and Termocom during the 2010 heating season, and the parties signed a Memorandum of Understanding for repayment. These arrears reflect two institutional factors: the two-week delay in adjusting gas tariffs (as per the required procedure, which involves a consultation with ANRE, utilities, consumers and trade unions) and the possibility that customers have to pay their bills in installments. Such arrears are

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recurrent under the current institutional setup and have accumulated again in the 2010-2011 season. Consequently, the target of no further accumulation of arrears to Moldovagaz by the end of April 2010 was unrealistic. As of April 2010, CHPs and Termocom had accumulated 47.1 million lei in new debts to Moldovagaz. This increased the debt stock to 1.84 billion lei, in April 2010, from 1.79 billion lei in December 2009. Current debts have been managed through a Memorandum of Understanding signed in May 2010 between the three main companies in the heating sector (Termocom and the two CHPs), the main creditors (Moldovagaz and Chi�in u-Gaz) and the Chi�in u Municipality. The Memorandum of Understanding provided for a process of payment to ensure that current arrears are paid for on an ongoing basis. It also affirmed the resolve of the parties to develop a solution to the non-current portion of the debt. A new Memorandum of Understanding is in preparation following the 2010-2011 heating season.

Progress is needed to address the long-term debts, a critical concern for the reliability and efficiency of district heat, electricity and gas supply in Moldova. In response to the accumulation of these debts, Moldovagaz (the gas supplier) suspended gas supplies for two weeks in 2008, during the winter, causing severe hardship to many of Chi�in u’s residents. Despite pressure from suppliers and technical assistance provided by the World Bank and other donors, a debt restructuring program for the energy sector has yet to be prepared and agreed upon. Although challenging, the resolution of the historical debt problem remains a crucial step for the viability of the energy sector. With support from the World Bank, a “Chi�in u heat and electricity supply institutional and financial restructuring study” was completed in April 2011. It lays out options for restructuring the sector, including financial, institutional and technical aspects. This study is a significant contribution to the debt restructuring process, as well as planning for future investments required to raise efficiency and modernize the sector.

The valuation of gas assets financed by Government, which should be an input into the restructuring of the sector was not completed and will require more time and resources. Amore realistic short-term target would be to establish rapidly the valuation methodology and have it agreed by Moldovagaz and all other stakeholders.

Considering the poverty and social impact of the proposed increases in tariffs, the DPO supported compensations to protect poor people from higher heating prices through the social assistance system. These compensations were implemented and received by the targeted population. Already in 2009, the share of utility consumption in total household consumption had risen to 22.5% for households in the lowest quintile (from 16.5% in 2008), raising concerns of affordability for the poorest. The law for Social Compensations for the Cold Period of the Year 2010 provided temporary assistance to various categories of beneficiaries, including pensioners earning less than MDL 700, public sector employees in certain categories, and families benefiting from social assistance. In the last two months of 2010, the list of eligible categories was revised to exclude public sector employees and raise the threshold for pensioners to MDL 900. About 177,000 beneficiaries received this assistance in March 2010 and 506,000 in December 2010. Beginning in 2011, compensations for the Cold Period have been incorporated into the new Targeted Social Assistance (based on an income assessment rather than categories). They were received by over 540,000 recipients.

c) Barriers to private sector investment and FDI in telecoms removed The DPO-supported de-monopolization of cross-border telecommunications cable access unleashed competition in the internet and mobile telecommunications sector. It led to the connection of new high-capacity fiber optic cables into Romania, increased competition in the international bandwidth market, brought down prices and improved the quality of Internet services at the retail level. Following the revision of the policy framework and the simplification

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of procedures by the regulator, two new operators were issued permits and established connections (Orange de Moldova and Starnet in March 2010) and a third one did in July 2010 (Norma). Prior to that, no private investor was allowed to establish a cross-border cable connection. There was a rapid development of the internet market (albeit from a small base, with coverage at 7%) and in mobile telephone subscriptions, with both growing about 20 percent Competition in the market increased; the incumbent broadband provider’s market share dropped from 72 percent to 56 percent.

As a result of de-monopolization, the international connectivity of Moldova soared in 2010. It increased from 12.8 gigabits per second in 2009 (Gbps), to 91.7 at the end of the year 2010. Of this, Moldtelecom (the state-owned incumbent) accounted for 47.2Gbps. The new optic fiber enables further increases in bandwidth. Although regulations on price and quality remain to be developed, international bandwidth resale prices fell by over 80% between 2009 and 2010. Moldtelecom has also begun to offer so-called ‘bitstream’ access, which can develop competition by allowing other suppliers to access its infrastructure; however, an appropriate price needs to be set for such services.

In the medium-term, competition remains imperfect for certain services or market. In particular, the fixed telephone market remains dominated by Moldtelecom: it retains over 97% of the subscriber base owing to its large existing network but also to its ability to provide below-cost domestic telephone call service that undercuts competition. The company charges a quarter of its fixed line telephone subscribers (including the majority of those living in rural areas) a low tariff of MDL 6/month that does not cover variable costs and is implicitly cross-subsidized through higher tariffs on international calls. Greater competition in the broadband and mobile markets (and the associated erosion of Moldtelecom’s margins) have altered this equilibrium, thereby facilitating a renewed dialogue on tariff rebalancing. Also, in April 2011, the regulator (ANRCETI) gave Moldtelecom a “significant share operator” status (in the broadband, ‘bitstream’ and fixed telephone markets) and imposed an accounting separation requirement on the company. IFC is currently providing strategic advisory support with respect to potential private participation in Moldtelecom.

On the institutional front, the regulator ANRCETI is now operational and has been exercising its regulatory functions in a much more active way. Ongoing technical assistance provided by the EBRD has allowed ANRCETI to develop regulatory instruments to foster competition in various telecommunications markets. Finally, the reform of tertiary training institutions for ICT skills still has to come, although one operator describes staff retention as a greater problem than their education.

d) Bureaucratic red tape removed The law enabling the Chamber of State Registration to become a one-stop shop for business registration was adopted on June 18, 2010 but in its current application, it will not reduce time to register a business to the expected extent. The Chamber of State Registration now cooperates with public authorities in charge of health, statistical and social insurance registration and the Chamber delivers registration numbers. Nevertheless further interactions between new entrepreneurs and these various authorities continue to be necessary. This is due to incomplete exchange of information between institutions, which can be overcome by connecting electronic systems. Because the one-stop shop reform was adopted after the cutoff date for the 2011 Doing Business report, it will be reflected in the 2012 report.

A previous reform creating an expedited company registration service reduced the time to register a business to 10 days in 2010 (from 15 days in 2009). Although it is faster, the

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expedited service involved an increase in costs, to10.9% of income per capita (from 8.9% of per capita income in 2009).

The Government Action Plan for removing administrative barriers is being implemented. Certification or authorization requirements for certain goods were eliminated, the number of activities subject to licensing was reduced and licensing procedures were simplified, some customs clearance procedures were simplified, as well as VAT refund procedures. Employer contribution rates for social security were reduced. Other recent reforms that are expected to reduce the cost of doing business in Moldova relate to contract enforcement and construction permits (which nevertheless remain costly and cumbersome).

Although markets remain highly concentrated and anti-competitive practices persist, de-monopolization and liberalization are in progress in a few sectors. These include the trade of wastes of ferrous and non-ferrous metals, wine products and (edible) oil products.

The 2008 Competition Act was not ratified and a new draft Competition Law is being prepared. The new law would replace the Competition Act (2000) and notably deal with measures taken by associations of enterprises that have the effect of limiting competition, other anti-competitive practices, the abuse of dominant position and unfair competition. It is also expected to define more precisely the role of the competition agency and its means of action, as well as advance the EU harmonization agenda.

3.3 Justification of Overall Outcome Rating Rating: Satisfactory The overall outcome for this DPO is rated as satisfactory. This reflects the operation’s high relevance of objectives, design and implementation, and the achievement of the operation’s objectives (with only minor shortcomings).

3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The operation was successful in mitigating the effect of fiscal adjustment (by protecting the share of agricultural subsidies going to individual farmers, improving the targeting, coverage and generosity of social assistance for the poorest, and compensating them for heating tariff increases) and in making the social assistance system more efficient and equitable. Micro-simulations based on 2010 growth projections indicate that the poverty rate should fall to 24% in 2010. However, due to the short period of implementation and data limitations, it is difficult to attribute any specific impact on poverty to this operation.

The explicit objective of helping to mitigate the effect of fiscal correction on the most vulnerable was met. The revision of eligibility rules for the new Targeted Social Assistance improved both targeting accuracy and coverage: 86 percent of the new TSA recipients were in the poorest consumption quintile, and the program expanded, covering 14% of those in the poorest quintile in 2010. The generosity of social assistance also improved, with the new TSA accounting for 30 percent of the consumption of those in the lowest quintile (compared to 7% for nominative compensations). The implementation of the Law for Social Compensations for the Cold Period of the Year 2010 helped protect poor people from higher heating prices: about 580,000 households received heating compensation in 2010, ahead of the introduction of the targeted heating compensation in 2011. Last, the protection of the share of subsidies going to individual farmers was relevant to protecting the incomes of small farmers in a context of increasing poverty in rural areas.

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Improvements to the targeting accuracy of the new Targeted Social Assistance (through the revisions to the proxy system for targeting) improved Moldova’s capacity to protect its population in a more fiscally sustainable and equitable way. This will be an asset in responding to future crises. The various measures implemented by the previous Government in 2009 prevented poverty increases but they were fiscally unsustainable (costing close to 4.1% of GDP) and did not guarantee equity among different population categories. These measures included increases in pensions and wages, as well as social assistance benefits. The leakage of such policies was significant, with social protection income increasing by 28 percent among the poor and 36 percent among the non-poor. The 2009 Household Budget Survey data indicate national poverty rates at 26.3 percent in 2009, slightly down from 26.4 percent in 2008. However, the significant expansion of pensions could not offset the losses associated with declining remittances and lower incomes for small farmers. Rural poverty increased. Also, the policies implemented in 2009 were more effective in reducing poverty among retirees and those with tertiary education. Poverty increased among those with basic and secondary education, youth and the middle-age groups. (b) Institutional Change/Strengthening The Development Policy Operation contributed to a number of institutional changes:

• An institutional framework to improve the targeting accuracy of social assistance and its coverage of the poor is in place;

• Important sectors were liberalized or de-monopolized (wine sector, cross-border telecommunications);

• The capacity and autonomy of the energy and telecommunications regulators were raised, thus supporting the development of a competitive and sustainable environment for growth and investment in these sectors;

• Regulations for registering businesses were streamlined; • The DPO strengthened the process of consultations with relevant stakeholders on

Government’s reform programs by involving participatory consultations on the measures supported under the ESRP. At each stage of policy implementation under the DPO, Government has held press conferences to explain the measures being taken.

(c) Other Unintended Outcomes and Impacts (positive or negative, if any)

The increase in heating tariffs to cost recovery is expected to foster energy efficiency. While the measure was mandated by concerns over the unsustainable financial situation of energy utilities (and the risk it posed to the stability of energy supply), it complemented the Energy Efficiency agenda supported by the Bank.

4. Assessment of Risk to Development Outcome Rating: Significant Political uncertainty continues to pose a significant risk to development outcomes. The stalemate over the election of a President could limit Government’s commitment to reforms. The governing coalition is fragile, with differing views amongst coalition members over the pace and depth of reforms. These differences reflect social and political rifts throughout the wider population including concerns about the impact of a transition to a market economy on different segments of the population. Although the Alliance partners are bound by their desire for European integration, the difficult approval of the 2011 Budget Law in parliament has stirred fresh hostilities between the partners. Given these uncertainties and the results of the June 2011

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local general elections (which showed increased support for the Communist Party), it remains to be seen whether the Alliance can maintain support for its reform agenda. Despite the strong performance under the DPL and the authorities’ commitment to its objectives, the risks to development outcomes continue to be significant. The Project Appraisal Document considered the various risks involved in the operation. These risks influenced the decision to design the operation as a single-tranche DPO. In particular, political economy and fiscal risk could undermine the structural sustainability of Moldova’s fiscal policy in the medium term (if continued political uncertainty continues to delay sensitive reforms on civil service, school consolidation and pensions). The pace of reform could slow down if there is another change of Government and there is a risk of policy reversal (especially in agriculture and deregulation). Moldova is also vulnerable to external shocks and balance of payments risks that could threaten macroeconomic stability and raise poverty, for instance through a rise in energy import prices or, with respect to exports, through any renewed tightening by Russia of license requirements for the export of wine and alcoholic beverages. Given the continued uncertainty over the future course of developments in Moldova, these risks remain.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory The decision to cancel the planned PRSC3 and prepare a scaled-up and realigned operation was appropriate in light of Moldova’s changed or economic conditions, challenges and high political uncertainty. The DPO reoriented Bank support to align with the new Government’s priorities. Through policy dialogue during preparation and implementation, it addressed immediate concerns while laying the groundwork for recovery.

Early engagement with the Government in designing its ERSP ensured alignment between the operation and the government program. This also allowed rapid preparation of the operation, capitalizing on previous analytical work and participatory processes.

The DPO targeted key reform areas that were realistic and had immediate development impacts. Risks were well identified and mitigation arrangements were adequate. In particular, the reversibility risk was mitigated by focusing on policy actions that strengthened institutional capacity, and had immediate benefits for the population (notably in telecoms and social assistance). The results framework was sound (albeit with some shortcomings) and monitoring arrangements adequate.

The design of the operation incorporated the lessons learned from the previous PRSC series. In particular, the operation’s design was selective and well-adjusted to the country’s administrative capacity, with fewer policy areas. This selectivity was enabled by good collaboration with the IMF and other development partners.

(b) Quality of Supervision Rating: Satisfactory

The operation was well supervised, with adequate focus on development impact and sustainability. The team monitored sector and macroeconomic developments It monitored risks and continued its dialogue with Government on key policy issues based on its ongoing analytical work.

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(c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The Bank performance was rated satisfactory on both dimensions.

5.2 Borrower Performance (a) Government Performance

Rating: Moderately Satisfactory Government ownership of the reform program supported by this DPO and commitment to achieving development objectives were strong overall. Commitment fell short, however, in the agricultural sector, with the introduction of new recurrent subsidies on fertilizers and pesticides soon after their abolition under the DPO program. Implementation arrangements (including across ministries, agencies and the Bank) were adequate, as well as monitoring and evaluation arrangements. (b) Implementing Agency or Agencies Performance

Rating: The government and implementing agency are not to be distinguished. (c) Justification of Rating for Overall Borrower Performance

Rating: Moderately Satisfactory The government and implementing agency are not to be distinguished.

6. Lessons Learned Strategic and extensive analytical work can help with both program design and government commitment. The Bank used its leading analytical expertise and investment in AAA to engage early with the Government in outlining the Economic Stabilization and Recovery Program. Together with the EC, UN, DFID, SIDA and IMF, the Bank prepared Policy Notes on key economic and social challenges to address the impact of the crisis. The Notes were instrumental in the preparation of the Government Plan (ESRP) for 2009-2011. As the DPO supported the ESRP, this early engagement through analytical work ensured alignment and commitment.

Good coordination with other development partners can help advance reform. Coordination not only helped produce high-impact policy advice, it also facilitated selectivity and helped leverage Bank resources through the mobilization of donors’ support to Moldova’s reform agenda.

The choice of the number of policy areas supported must balance the gains from cross-sectoral synergies with the burden of intersectoral coordination. Selectivity is important to achieve results when institutional capacity is limited. Accordingly, this operation focused on only a few policy areas. At the same time, this operation enhanced sustainability by linking protection objectives to economic recovery and efficiency objectives (for example, by linking social protection measures to energy reforms).

Reforms with a fragile and polarized support base can be achieved in an uncertain political environment, but their sustainability is fragile. This was illustrated by the abolition of recurrent subsidies for pesticides and fertilizers (under the DPO) through a government resolution, followed by the creation of another recurrent subsidy at the initiative of the Parliament, and Government’s subsequent plans to pursue this type of subsidies.

Opportunistic sequencing and an understanding of the political economy of reform are required to foster progress under high political uncertainty. In this operation, sequencing was facilitated by a range of analytical work that was reflected in the Policy Notes, and ongoing work under the CEM. This work helped identify so-called “low-hanging fruit”, i.e. low-cost reforms

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that require limited action but would generate substantial gains. Also, the DPO policy actions focused mostly on actions for which there was strong commitment among alliance members, notably those related to its EU integration objectives. The focus on “low-hanging fruit” in a single-tranche operation was appropriate given (i) the uncertain political dynamics and (ii) the lack of in-depth knowledge about the political economy of some of the deeper reforms that could affect vested interests. As shown by the slower pace of reforms in the business climate and agriculture, such knowledge will be needed to promote reforms of the scale and scope required to lift Moldova to a new growth path.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/Implementing agencies

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Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Dino Merotto Senior Economist ECSP3 Task Team Leader Olasupo Olusi Economist ECSP3 Macroeconomics Shinya Nishimura Senior Energy Specialist ECSS2 Energy

Victor Sulla Economist ECSP3 Poverty and Social Impact

Asa Hoglund Giertz Consultant DECOS Agriculture Siddhartha Raja Consultant TWICT ICT Felicia Pricop Consultant ECSS1 Agriculture Martin Melecky Financial Economist ECSF1 Private sector Sandu Ghidirim Operations Officer ECSS2 Transport Ruslan Piontkivsky Senior Economist ECSP3 Macroeconomics

Iaroslav Baclajanschi Economist ECSP3 Macroeconomics and program coordination in Chisinau

Juan Navas-Sabater Lead ICT Policy Specialist TWICT ICT Oxana Druta ETC ECSO3 Fiduciary Matthias Grueninger Senior Agriculture Economist ECSS1 Agriculture Katerina Petrina Senior Social Protection Specialist ECSH3 Social assistance Sergiu Panaghiu Information Analyst ECCMD ICT Andreas Schliesser Lead Transport Specialist ECSS5 Transport Victor Burunsus Consultant Private Sector Ruxandra Costache Counsel LEGEM Legal

Lilia Razlog ETC ECSPE Fiduciary and program coordination in Chisinau

Arcadii Capcelea Senior Environmental Specialist ECSS3 Environmental safeguards

Supervision Mame Fatou Diagne Young Professional ECSP3 ICR Team Leader Iaroslav Baclajanschi Economist ECSP3 Economist

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage No. of staff weeks USD Thousands (including

travel and consultant costs) Lending Total: 55.8 288.0 Supervision/ICR Total: 11.2 58.8

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Annex 2. Summary of Borrower’s ICR and/or Comments on Draft ICR

The borrower reviewed the ICR on June 24, 2011, suggesting a few corrections to reflect updated statistics. These changes were incorporated in the ICR.

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Annex 3. List of Supporting Documents

Economic Consulting Associates (2011). Chisinau Heat and Electricity Supply Institutional and Financial Restructuring Study. Revised first draft report, April, 2011.

IMF (2010). Republic of Moldova: 2010 Article IV Consultation and Staff Report for the 2010 Article IV Consultation, IMF Country Report No. 10/234, July 2010.

IMF (2010). Republic of Moldova: Selected Issues Paper, IMF Country Report No. 10/232, July 2010.

World Bank, IMF, European Commission, United Nations, DFID and Sida (2009). Moldova: Policy Notes for the Government. May 2009.

World Bank (2010a). International Development Association Program Document for a proposed Economic Recovery Development Policy Operation for Moldova. Report No. 52669-MD, May 14, 2010.

World Bank (2010b). Financing Agreement (Economic Recovery Development Policy Financing) between Republic of Moldova and International Development Association, August 12, 2010.

World Bank (2010c). Doing Business 2011. November 2010.

World Bank (2011a). Moldova. After the global crisis: Promoting competitiveness and shared growth. Country Economic Memorandum. Report No. 55195-MD, April 4, 2011.

World Bank Document · Moldova was hit hard by the economic crisis. The global crisis undermined...

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