Document of The World Bank Report No: ICR00004018 IMPLEMENTATION COMPLETION AND RESULTS REPORT FOR A SERIES OF IDA CREDITS (Credit No.5288-KG and Credit No.5478-KG) IN THE AMOUNT OF SDR 9.20 MILLION (US$13.75 MILLION EQUIVALENT) AND SDR 8.99 MILLION (US$13.89 MILLION EQUIVALENT) AND SERIES OF IDA GRANTS (Grant No.H869-KG and Grant No.H9630-KG) IN THE AMOUNT OF SDR 7.60 MILLION (US$11.25 MILLION EQUIVALENT) AND SDR 7.19 MILLION (US$11.11 MILLION EQUIVALENT) TO THE KYRGYZ REPUBLIC FOR THE FIRST AND SECOND DEVELOPMENT POLICY OPERATIONS May 19, 2017 Macroeconomic and Fiscal Management Global Practice South Caucasus and Central Asia Country Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2017) Currency Unit = Som US$ 1.00 = Som 67.50 FISCAL YEAR: Calendar year ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities Accounting Standards ADB Asian Development Bank ISPs Internet Service Providers BEEPS Business Environment and LDP Letter of Development Policy Enterprise Performance Survey LITS Life in Transition Survey CBEM Capacity Building for Economic MBLIF Monthly Benefit for Low Income Management Project Families CHP Central Heating Plan MoE Ministry of Education CIS Commonwealth of Independent MoF Ministry of Finance Sates MoH Ministry of Health COA Chamber of Accounts MoTC Ministry of Trade and COI Conflict of Interest Communication CPI Corruption Perception Index MTEF Medium-Term Expenditure CPS Country Partnership Strategy Framework CU Customs Union MTTP Medium-Term Tariff Policy DB Doing Business NBKR National Bank of the Kyrgyz DFID Department for International Republic Development NSDS National Sustainable Development DPO Development Policy Operation Strategy DAS Debt Sustainability Analysis PEFA Public Expenditure and Financial EBRD European Bank for Reconstruction Accountability and Development PER Public Expenditure Review ECF Extended Credit Facility PIP Public Investment Program EEU Eurasian Economic Union PFM Public Financial Management EU European Union PPD Public Procurement Department FBO Food Business Operator PPL Public Procurement Law FIAS Foreign Investment Advisory Service PSDP Private Sector Development Program GCI Global Competitiveness Index PSRR Public Sector Reform Roadmap GDP Gross Domestic Product SCA State Communications Agency GoKR Government of the Kyrgyz Republic SDR Special Drawing Rights HACC Hazard Analysis Critical Control SME Small and Medium Enterprise Point SPS State Personnel Service IDA International Development VAT Value-added Tax Association WBG World Bank Group IFC International Finance Corporation WDR World Development Report IMF International Monetary Fund WGI World Governance Indicators IPSAS International Public Sector Vice President: Cyril Muller Country Director: Lilia Burunciuc Sector Manager: Maria Gonzalez Miranda Task Team Leader: Kamer Karakurum-Ozdemir/ Evgenij Najdov ICR Team Leader: Bakyt Dubashov KYRGYZ REPUBLIC Development Policy Operations I and II (2013 and 2014) 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 ............................................... 10 3. Assessment of Outcomes .......................................................................................... 17 4. Assessment of Risks to Development Outcomes ....................................................... 24 5. Assessment of Bank and Borrower Performance ..................................................... 25 6. Lessons Learned........................................................................................................ 28 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 29 Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 31 Annex 2. Beneficiary Survey Results ........................................................................... 33 Annex 3. Stakeholder Workshop Report and Results ................................................... 34 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 35 Annex 5. Comments of Co-financiers and Other Partners/Stakeholders ...................... 40 Annex 6. List of Supporting Documents ...................................................................... 41 i A. Basic Information Program 1 Programmatic Country Kyrgyz Republic Program Name Development Policy Operation 1 IDA-52880, IDA- Program ID P126034 L/C/TF Number(s) H8690 ICR Date 10/14/2016 ICR Type Core ICR Lending Instrument DPL Borrower KYRGYZ REPUBLIC Original Total XDR 16.80M Disbursed Amount XDR 16.80M Commitment Implementing Agency: Ministry of Finance Co-financiers and Other External Partners: Not applicable Program 2 Programmatic Country Kyrgyz Republic Program Name Development Policy Operation 2 IDA-54780, IDA- Program ID P126274 L/C/TF Number(s) H9630 ICR Date 10/14/2016 ICR Type Core ICR Lending Instrument DPL Borrower KYRGYZ REPUBLIC Original Total XDR 16.18M Disbursed Amount XDR 16.18M Commitment Implementing Agency: Ministry of Finance Co-financiers and Other External Partners: Not applicable B. Key Dates Programmatic Development Policy Operation 1 - P126034 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/25/2012 Effectiveness: 12/06/2013 Appraisal: 01/10/2013 Restructuring(s): Approval: 07/25/2013 Mid-term Review: Closing: 09/30/2014 09/30/2014 Programmatic Development Policy Operation 2 - P126274 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 12/04/2013 Effectiveness: 07/11/2014 Appraisal: 04/02/2014 Restructuring(s): ii Approval: 06/10/2014 Mid-term Review: Closing: 12/31/2015 12/31/2015 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Moderately satisfactory Risk to Development Outcome High Bank Performance Moderately satisfactory Borrower Performance Moderately unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Moderately Quality at Entry Government: unsatisfactory Implementing Moderately Quality of Supervision: Satisfactory Agency/Agencies: unsatisfactory Overall Bank Overall Borrower Moderately Moderately satisfactory Performance Performance unsatisfactory C.3 Quality at Entry and Implementation Performance Indicators Programmatic Development Policy Operation 1 - P126034 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA) DO rating before Satisfactory Closing/Inactive status Programmatic Development Policy Operation 2 - P126274 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of Supervision No None time (Yes/No): (QSA) DO rating before Closing/Inactive status iii D. Sector and Theme Codes Programmatic Development Policy Operation 1 - P126034 Original Actual Major Sector Public Administration Law and Justice 25 25 Central Government (Central Agencies) 31 31 Financial Sector General finance sector 6 6 Energy and Extractives Other Energy and Extractives 13 13 Industry, Trade and Services Other Industry, Trade and Services 25 25 Major Theme/Theme/Sub Theme Private Sector Development Business Enabling Environment 25 25 Regulation and Competition Policy 25 25 Public Sector Management Public Administration 50 50 Transparency, Accountability and Good 50 50 Governance Public Finance Management 25 25 Public Expenditure Management 25 25 Programmatic Development Policy Operation 2 - P126274 Original Actual Major Sector Public Administration Other Public Administration 34 34 Law and Justice 11 11 Financial Sector Banking Institutions 22 22 Energy and Extractives Other Energy and Extractives 11 11 Industry, Trade and Services Other Industry, Trade and Services 22 22 Major Theme/Theme/Sub Theme Finance Financial Stability 11 11 Financial Sector Integrity 11 11 iv Financial Sector oversight and policy/banking 11 11 regulation & restructuring Private Sector Development Business Enabling Environment 25 25 Regulation and Competition Policy 25 25 Public Sector Management Public Administration 50 50 Transparency, Accountability and Good 50 50 Governance Public Finance Management 25 25 Public Expenditure Management 25 25 Rule of Law 11 11 Judicial and other Dispute Resolution Mechanisms 11 11 E. Bank Staff Programmatic Development Policy Operation 1 - P126034 Positions At ICR At Approval Vice President: Cyril Muller Philippe Le Houerou Country Director: Lilia Burunciuc Saroj Kumar Jha Practice Maria Gonzalez Miranda Ivailo Izvorski Manager/Manager: Task Team Leader: Afsaneh Sedghi ICR Team Leader: Bakyt Dubashov ICR Primary Author: Saumya Mitra/Bakyt Dubashov Programmatic Development Policy Operation 2 - P126274 Positions At ICR At Approval Vice President: Cyril Muller Laura Tuck Country Director: Lilia Burunciuc Saroj Kumar Jha Practice Maria Gonzalez Miranda Ivailo Izvorski Manager/Manager: Kamer Karakurum- Task Team Leader: Ozdemir/Evgenij Najdov ICR Team Leader: Bakyt Dubashov ICR Primary Authors: Saumya Mitra / Bakyt Dubashov F. Results Framework Analysis Program Development Objectives (from Program Document) DPO-I defined the program development objectives as follows: (i) strengthening governance and anti- corruption efforts and putting in place enforcement and evaluation and monitoring mechanisms, implementing key priority areas in the judicial sector to promote the rule of law, and to improve public sector accountability and efficiency in the management and use of public resources, and (ii) sharpening competitiveness and enhancing the attractiveness for private investment through improving v transparency and governance in the energy sector, reforms in the financial sector, and improving the environment for the development of private businesses. Revised Program Development Objectives (as approved by original approving authority) DPO-II considered the main program development objective to be the promotion of sustainable growth through more accountable use of public resources and an improved environment for doing business. Under the first pillar – Improving Public Sector Governance, the program was intended to support increased accountability and transparency in the use of public resources, which was expected to improve the quality of public service and generate savings that would strengthen fiscal sustainability and allow re-allocation of some spending to priority areas. The second pillar – Enhancing the Business Environment – was designed to support actions to address the constraints to a more vibrant development of the private sector, including through improved business inspection systems, a more effective judiciary, improved banking supervision, and a stronger deposit protection framework. Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1: Worldwide Governance Indicator Control of Corruption – percentile rank. Value (quantitative or 9.95 15 11.54 Qualitative) Date achieved 2011 2014 2014 Comments Not achieved. The prior action on the verification of asset declarations of civil (incl. % servants and submission of summary results was carried out. However, this step achievement) has to be followed by a systemic use of data gathered to investigate accumulation of assets that seem unreasonable. The methodology for this task is still to be implemented and additional resources will be necessary. Composition of expenditure out-turns compared to original approved budget. Indicator 2: (PEFA PI-2) Value (quantitative or C B D+ Qualitative) Date achieved 2009 2014 2014 Comments Not achieved. While the budget outturn as measured by total expenditures was (incl. % close to original budget estimates, the composition of spending has diverged achievement) substantially from budget estimates. Indicator 3: Effectiveness of internal audit increased (PEFA PI-21). Value (quantitative or D C C Qualitative) Date achieved 2009 2014 2014 vi Achieved. Internal audit reforms have been commendable. An internal audit Comments council ensures the independence and quality of internal audits, and the coverage (incl. % of internal audit has been gradually widened. The internal audit reports are being achievement) streamlined into the regular work program of ministries and lessons are being learned. Indicator 4: MoF public procurement report shows increasing compliance with the PPL. No information Information made Information made Value provided on available on available on (quantitative or effectiveness of public effectiveness of effectiveness of Qualitative) procurement public procurement public procurement Date achieved 2011 2014 2014 Achieved. Procurement reforms have advanced, with all public procurement Comments taking place through a portal, managed by the Ministry of Finance. The portal (incl. % provides public information on current and past procurements. An inter-agency achievement) independent commission adjudicates over complaints. Annual reports contain efficiency and effectiveness indicators. Key operational and financial performance indicators and key decisions of the Indicator 5: power sector are regularly disclosed. Value No indicators are Key operational Performance (quantitative or disclosed and financial indicators and key Qualitative) performance decisions are indicators are disclosed, but not disclosed regularly or without undue lags, and with a sparser coverage than was the expected result. Date achieved 2011 2014 2014 Partially achieved. Audits of energy distribution companies are performed, but not fully or regularly published. The ministry, the regulator and the companies have established websites to disclose the agreed information on performance, but Comments these are often outdated and incomplete. The transparent and competitive (incl. % procurement of fuel resources for generation is taking place. Escrow accounts achievement) with regard to exports are being maintained. The action of selecting the general directors and executive bodies of the energy companies based on transparent and competitive procedures has not been met. Indicator 6: Increase in the budget of the judiciary. Between 2014 and Value 10 percent annual 2016, the budget of (quantitative or increase the judicial sector Qualitative) was nearly doubled. Date achieved 2014 2015 2016 vii Comments Achieved. There have been institutional improvements in the working of the (incl. % court department, in court procedures, in the operations of the supreme and achievement) appellant courts. Indicator 7: Reduction in the number of days to register a business. Value A reduction in the 20 days Reduced by 10 days (quantitative or number of days by Qualitative) 14 days in 2016. Date achieved 2011 2014 2016 Comments Achieved. The process of business registrations has been streamlined in the (incl. % Ministry of Justice, and the necessary information to registrants is provided both achievement) online and onsite. Indicator 8: Strength of investor protection index (sub-indicator of DB) improved. The result was 6.3 in Value score 7 score 8 2015 and it remains (quantitative or 6.3 in 2017. Qualitative) Date achieved 2011 2015 2015/2017 Not achieved. Parliament decided not to legislate the reforms in corporate Comments governance directed at strengthening the responsibilities of members of (incl. % management bodies of companies as they considered other corporate governance achievement) reforms to be more salient. Indicator 9: Risk-based inspection by MoE and pilot agencies reduce inspection burden. Value Inspections are not risk- Inspections are Inspections were (quantitative or based risk-based risk-based on a pilot Qualitative) basis in 2014 and are currently risk-based country-wide. Date achieved 2011 2014 2014/2017 Achieved. A single automated database is used for the conduct of inspections in a Comments risk-based manner. The inspection reforms enjoy strong support within the (incl. % government and businesses, and have led to a substantial improvement in the achievement) business climate and reduced opportunities for corruption. NBKR regularly collects credit information from banks and microfinance Indicator 10: institutions and enhances supervision. Value No records on parallel Parallel loans are Loans obtained by a (quantitative or loans tracked single borrower Qualitative) from different sources, were not able to be tracked in 2014 as required by the results matrix, but are now being tracked. Date achieved 2011 2014 2016 Comments Partly achieved. Through methodological improvements in the conduct of (incl. % supervision, the reporting requirement for banks, the formation of the credit viii achievement) registry, and growing capacity in the central bank on understanding and making use of data from the credit registry and on parallel loans, the central bank has been able to reinforce its supervisory capabilities. Indicator 11: Increased confidence in banks as evidenced by increasing deposits/GDP. Value (quantitative or 16 percent 20 percent 25 percent Qualitative) Date achieved November 2013 December 2014 December 2014 Achieved. The amendments to the deposit protection law bolstered confidence on the part of the insured (the depositors) of prompt and full payments up to the ceiling, went into effect in 2016. Although the results indicator was satisfied, its Comments design is questionable. The deposit to GDP ratio is influenced by much more (incl. % powerful factors than the state of the deposit insurance system; and even if a achievement) fundamental reform in the deposit insurance system were to occur, it can hardly be expected to have an impact on the level of deposits within such a short time frame as one year. G. Ratings of Program Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 11/23/2013 Satisfactory Satisfactory 0.00 H. Restructuring (if any) Not Applicable ix 1. Program Context, Development Objectives and Design This Implementation Completion and Results Report (ICR) assesses the achievements of the expected results of the programmatic series of Governance and Competitiveness Development Policy Operations to the Kyrgyz Republic. The Development Policy Operations series was intended to support the Kyrgyz Government’s reform efforts in two critical areas: (i) Improving Public Sector Governance and (ii) Enhancing the Business Environment. The first theme was designed to support increased accountability and transparency in the use of public resources; the second to support actions to address the constraints to a more vibrant development of the private sector. The first operation (DPO I) of US$24 million was approved by the World Bank’s Board of Directors on July 25, 2013. The second operation (DPO II) of US$24 million was approved on June 10, 2014. Both operations had a 55-45 percent credit-grant element. 1.1 Context at Appraisal The Kyrgyz Republic remains a low-income country in the Europe and Central Asia region, with a GNI per capita in 2015 of $1100. The Kyrgyz economy largely depends on gold production, which accounts for about 10 percent of GDP and about 40 percent of exports, and on migrant workers’ remittances, equivalent to about 25 percent of GDP. The informal sector of the economy is high, employing 70 percent of those employed. In 2015, 32 percent of the population lived in poverty. The DPO series was central to the Bank’s strategic engagement with the Kyrgyz Republic, following the 2010 political turmoil. The development policy operations were prepared over a two-year period (2012-13) that followed the removal of the president from office, by public protests, and the adoption of a new constitution whereby the erstwhile presidential system was replaced by a parliamentary one, in the belief that wider dispersal of powers would help counter mis-governance. The government’s reforms program focused on improving governance and the judicial system, strengthening the business climate and promoting financial sector development, as well as the development of energy as a strategic industry. The DPO series was designed squarely to help the Kyrgyz authorities deliver on these priorities. At the time of DPO-I, the macroeconomic framework was broadly adequate, although the growth performance was affected by shocks, which the DPOs were meant to help mitigate. In 2012, the macroeconomic situation was stable; however real GDP declined by 0.1 percent due to a large drop in gold production. The non-gold sector grew at 6.3 percent, driven by private consumption, which was mainly fueled by increased remittances (Table 2). An expansionary fiscal policy, driven by higher social spending as well as increased capital outlays for energy infrastructure projects was geared to support growth in the short-term. The Kyrgyz Government further articulated its strategic reforms in the Medium-Term Development Program for 2012-2014, which was adopted by Parliament in 2012. The main objectives of the program were to reduce poverty and improve the quality of life of the population through securing economic growth led by the private sector, improving governance, and raising the quality of public services. The program envisaged a broad range 1 of actions aimed at improving business regulatory policies, establishing an efficient tax system, increasing access to finance, strengthening public finance management, budget discipline and transparency, and enhancing public property and assets management. By the time DPO-II was appraised, the macroeconomic performance remained adequate. Real GDP growth rebounded to 10.9 percent in 2013, as gold production recovered, and remained strong at 5.6 percent in the first quarter of 2014. Growth was driven by private consumption, public investment and gold exports. The fiscal balance improved as steps were taken to restraint spending (e.g. wage freeze) and to increase revenues by improving tax policy and administration. The DPO series was aligned with Bank’s strategy. DPO-I was central to the Bank’s Interim Strategy Note (FY12-13), which had as its three pillars governance, economic recovery and reconstruction, and social stabilization. By appraisal of DPO-II, the Bank had developed the Country Partnership Strategy (FY 13-17), which had a focus on public administration, the business climate, and management of natural resources and infrastructure. Thus, the DPOs were designed to be the critical instruments for advancing the Bank’s assistance goals. By supporting policy reforms, these operations have also facilitated a set of technical and institution-building support as well as investment project support provided by the Bank and given them a coherent framework. A further critical rationale for the operations lay in ensuring that the budget was fully funded so that high-priority social expenditures could be safeguarded. Table 1: Selected Macroeconomic and Social Indicators, 2010-2016 2010 2011 2012 2013 2014 2015 2016 Prel. (Percent, unless otherwise indicated) National Income and Prices Nominal GDP (bln. of soms) 220.4 286.0 310.5 350.0 400.7 430.5 458.0 Nominal GDP per capita (US$) 875 1,120 1,182 1,282 1,266 1,109 1,073 Real GDP growth -0.5 6.0 -0.1 10.9 4.0 3.9 3.8 Real non-gold GDP growth -1.0 6.3 6.3 6.1 5.0 4.9 3.7 Private consumption growth 2.7 9.3 11.2 8.0 3.0 -6.0 2.2 Gross investment (percent of GDP) 23.9 24.3 26.2 26.1 29.2 29.4 30.1 Consumer price inflation, year-end 19.2 5.7 7.5 4.0 10.5 3.4 -0.5 Real effective exchange rate (2010=100) 105.5 107.1 107.3 106.9 120.3 108.4 111.7 (Current US$ millions, unless otherwise indicated) External Accounts Merchandise exports, of which: 1,833 2,365 2,247 2,518 2,483 1,619 1,594 Gold exports 668 1,006 562 737 717 665 771 Merchandise imports 2,993 4,022 4,955 5,614 5,290 3,860 3,680 Current-account balance -307 -403 -991 -1,022 -1,191 -742 -616 as percent of GDP -6.4 -6.5 -15 -14.1 -15.9 -11.1 -9.4 Total official international reserves 1,705 1,835 2,067 2,238 1,958 1,778 1,969 External debt, as percent of GDP 88.4 76.7 78.6 83.3 80.5 94.5 92.6 (Percent of GDP, unless otherwise indicated) Consolidated Fiscal Accounts Revenues 30.5 31.8 33.8 33.9 34.4 34.4 33.3 Expenditures 36.8 36.4 39.1 37.9 38.5 37.4 39.8 Overall fiscal balance -6.3 -4.6 -5.3 -4.0 -4.1 -3.0 -6.6 Primary fiscal balance -5.4 -3.6 -4.4 -3.1 -3.2 -2.0 -5.4 Total public debt 60.3 50.1 49 47.7 53.6 67.2 61.4 (Percent, unless otherwise indicated) Social Indicators Poverty rate, international (percent of population) 32.2 30.3 31.3 35.8 29.2 32.9 32.8 Sources: World Bank staff calculations and estimates based on official data published and provided by the authorities. 2 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The Program Document (PD) of DPO-I defined the PDOs as follows: (i) strengthening governance and anti-corruption efforts and putting in place enforcement and evaluation and monitoring mechanisms, implementing key priority areas in the judicial sector to promote the rule of law, and to improve public sector accountability and efficiency in the management and use of public resources, and (ii) sharpening competitiveness and enhancing the attractiveness for private investment through improving transparency and governance in the energy sector, reforms in the financial sector, and improving the environment for development of private businesses. The key outcome indicators, as presented in DPO-I, were the following: Strengthening Governance and Anti-Corruption Reforms 1. Semi-annual report on implementation of the anti-corruption action plan Base: no report Target: implementation report published semi-annually 2. Global Competitiveness Index (Institutions Pillar Rank) by World Economic Forum Overall Base: rank 137 out of 144 Target: rank 120 out of 144 (ECA average is 84) 3. Judicial appointment process finalized. Base: all judges (35) of the Supreme Court and all judges (11) of the Constitutional Chamber in place Target: appointment of all local court judges (401) completed and all judges working in their courts 4. PEFA PI-2. Composition of expenditure out-turns compared to original approved budget Base: C Target: B 5. PEFA PI-21. Effectiveness of internal audit Base: D Target: C 6. Quality of the Public Procurement Law (PPL) and implementation capacity Base: public procurement reports are not published Target: timely publication of annual public procurement reports by the Ministry of Finance Sharpening Competitiveness and Enhancing the Attractiveness for Private Investment 7. Reduction in number of days to register a business Base: 20 days Target: Reduced by 10 days 3 8. Extent of director liability (sub-indicator of the protecting investors’ indicator of DB). Improvement in the score of director liability will contribute to protecting minority shareholder against directors’ misuse of corporate assets for personal gain. Base: score 7 Target: score 8 9. Implementation of a risk-based approach to inspection that will lead to 30% reduction by redirecting of focus on high risk businesses Base: No risk based approach to business inspections Target: Risk based inspection used by MoE and pilots: 1. Vet., Sanitary and Phito-Sanitary Safety and 2. Environmental and Technical Safety to manage risk based inspections, and further expanded to all of controlling agencies, and the info on 60% of businesses which are subject to inspections is in the database 10. Increased transparency – regular disclosure of the power sector’s financial and operational performance indicators Base: no indicators are disclosed Target: key operational and financial performance indicators of the sector and key decisions are regularly disclosed 11. Adoption of modern bank supervision methods Base: supervisory framework lacking modern supervision methods Target: the supervisory framework is based on the Basel norms and standards 12. The Deposit Protection Law is in line with the best international practices without gaps and mismatches with other legislation and provides effective framework for DPS Base: Deposit Protection Law not in line with international best practice Target: Enhanced financial sector stability and effective framework for DPS, increased public confidence in banks as evidenced by increasing deposit/GDP indicator 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification DPO-II considered the main program development objective to be the promotion of sustainable growth through more accountable use of public resources and an improved environment for doing business. Under the first pillar of the operation, the objective was to support the government efforts in improving public sector governance by increased accountability and transparency in the use of public resources. The second pillar objective was to support efforts in enhancing business environment by actions to address the constraints to a more vibrant development of the private sector, including through improved business inspection systems, a more effective judiciary, improved banking supervision, and a stronger deposit protection framework. 4 The final key outcome indicators of the DPO series were as follows: Improving Public Sector Governance 1. Worldwide Governance Indicator Control of Corruption – percentile rank Baseline: 9.95 (2011) Target: 15 (2014) 2. Composition of expenditure out-turns compared to original approved budget (PEFA PI- 2) Baseline: C Target: B 3. Effectiveness of internal audit increased (PEFA PI-21) Baseline: D (2009) Target: C (2014) 4. Public procurement report of the Ministry of Finance shows increasing compliance with PPL Baseline: no information provided on effectiveness of public procurement (2011) Target: information available on effectiveness of public procurement (2014) 5. Key operational and financial performance indicators and key decisions of the power sector are regularly disclosed. Baseline: no indicators are disclosed (2011) Target: key operational and financial performance indicators are disclosed (2014) Enhancing the Business Environment 6. Increase in the budget for the judiciary Target: annual rate of increase of 10 percent (2015) 7. Reduction in the number of days to register a business Baseline: 20 days Target: Reduced by 10 days 8. Strength of investor protection index (sub-indicator of DB) improved Baseline: score 7 (DB2011) Target: score 8 (DB2015) 9. Risk-based inspection by the Ministry of Economy and pilot agencies reduces inspection burden Baseline: inspections are not risk-based (2011) Target: inspections are risk based (2014) 10. NBKR regularly collects credit information from banks and microfinance institutions and enhances supervision. Baseline: no records on parallel loans (2011) Target: parallel loans are tracked (2014) 11. Increased confidence in banks as evidenced by increasing deposits to GDP ratio Baseline: 16 percent (November 2013) Target: 20 percent (December 2014) The PDOs of DPO-II were fully consistent with those of DPO-I, representing an elaboration and a further development of the PDOs of the first operation. 5 Table 2: DPO-I and DPO-II Results Indicators and Reasons for the Adjustment DPO-I Results Indicators DPO-II Results Indicators Notes Pillar 1: Strengthening Governance Pillar 1: Improving Public Sector and Anti-Corruption Reforms Governance Semi-annual report on Worldwide Governance The initial indicator was replaced implementation of Indicator Control of with one believed to be stronger, the anti-corruption action plan. Corruption – percentile rank and more specific and relevant Base: No report Baseline: 9.95 (2011) Target: to the revised action in DPO-II. Target: Implementation report 15 (2014) published semi-annually. Global Competitiveness Index The initial indicator was (Institutions Pillar Rank) by dropped because DPO-II World Economic Forum included a more specific Overall indicator on corruption. Base: rank 137 out of 144 Target: rank 120 out of 144 Judicial appointment process The initial indicator was finalized dropped because it was seen as Base: All judges (35) of the redundant with a new indicator Supreme Court and all judges set under Pillar 2: Enhancing the (11) of the Constitutional Business Environment. Chamber in place Target: Appointment of all local court judges (401) completed. PEFA PI-2. Composition of Composition of expenditure No change. expenditure out-turns out-turns compared to compared to original approved original approved budget budget. (PEFA PI-2) Base: C Baseline: C Target: B Target: B Effectiveness of internal audit Effectiveness of internal No change. increased (PEFA PI-21) audit increased (PEFA PI-21) Baseline: D Baseline: D (2009) Target: C Target: C (2014) Quality of the Public Public procurement report of No change. Procurement Law (PPL) and the Ministry of Finance implementation capacity. shows increasing compliance Base: Public procurement with PPL. reports are not published. Baseline: no information Target: Timely publication of provided on effectiveness of annual public procurement public procurement (2011) reports by MoF that include a Target: information available section on compliance with the on effectiveness of public PPL through conducting procurement (2014) sample compliance tests to document number of bidders 6 DPO-I Results Indicators DPO-II Results Indicators Notes and timeliness of public notification of procurement. Pillar 2: Sharpening competitiveness Pillar 2: Enhancing the Business and enhancing the attractiveness for Environment private investment Reduction in number of days to Reduction in number of days No change. register a business. to register a business. Base: 20 days Base: 20 days Target: Reduced by10 days Target: Reduced by10 days Extent of director liability (sub- Strength of investor No change. indicator of the protecting protection index (sub- investors’ indicator of DB) improved. indicator of DB). Improvement Baseline: score 7 (DB2011) in the score of director liability Target: score 8 (DB2015) will contribute to protecting minority shareholder against directors’ misuse of corporate assets for personal gain. Base: score 7 Target: score 8 Implementation of a risk-based Risk-based inspection by the The indicator target was revised approach to inspection that will Ministry of Economy and to reflect the realization that lead to 30% reduction by re- pilot agencies reduces attribution between reductions in derestricting of focus on high inspection burden. inspections and the shift to a risk- risk businesses. Baseline: inspections are not based approach could not be Base: No risk based approach risk-based (2011) Target: quantitatively established to business inspections. inspections are risk based rigorously. Target: Risk based inspection (2014) used by MoE and pilots: 1. Vet., Sanitary and Phito- Sanitary Safety and 2. Environmental and Technical Safety to manage risk based inspections, and further expanded to all of controlling agencies, and the info on 60% of businesses which are subject to inspections is in the database. Increased transparency – Key operational and financial No change. regular disclosure of the power performance indicators and sector’s financial and key decisions of the power operational performance sector are regularly disclosed. indicators. Baseline: no indicators are Base: No indicators are disclosed (2011) disclosed. Target: key operational and Target: Key operational and financial performance financial performance indicators are disclosed indicators of the sector and key (2014) decisions are regularly disclosed. 7 DPO-I Results Indicators DPO-II Results Indicators Notes Legislation (a new electricity The indicator was dropped law) approved clearly defining because the trigger for DPO-II sector management and (in the first operation) was regulation framework. changed in the second operation. Adoption of modern bank NBKR regularly collects The indicator was changed supervision methods. credit information from because the trigger for DPO-II Base: Supervisory framework banks and microfinance (in the first operation) was lacking modern supervision institutions and enhances changed in the second operation. methods. supervision. Target: The supervisory Baseline: no records on framework is based on the parallel loans (2011) Target: Basel norms and standards. parallel loans are tracked (2014) Increase in the budget for the A new indicator was added, judiciary replacing the indicator initially set Target: annual rate of for the action on judicial reform increase of 10 percent (2015) in DPO-I. The Deposit Protection Law is Increased confidence in No change. in line with the best banks as evidenced by international practices without increasing deposits to GDP gaps and mismatches with other ratio. legislation and provides Baseline: 16 percent effective framework for DPS. (November 2013) Target: 20 Base: Deposit Protection Law percent (December 2014) not in line with international best practice. Target: Enhanced financial sector stability and effective framework for DPS, increased public confidence in banks as evidenced by increasing deposit/GDP indicator. 1.4 Original Policy Areas Supported by the Program (as approved) The original policy areas supported by the DPO series were: Pillar 1: Strengthening Governance and Anti-Corruption Reforms Policy Area 1.1 - Supporting the Government’s Anti-Corruption Program. Reducing corruption and improving governance and transparency were key in the government’s reform program. The country’s ratings in the Transparency International’s Corruption Perception Index and in the World Economic Forum’s Global Competitiveness Index were among the lowest, reflecting a legacy of vested interests, weak institutions and low capacity. Business surveys showed corruption to be one of the biggest obstacle in doing business. DPO actions were intended to contribute to government efforts to reduce corruption, strengthen the rule of law and property rights protection. 8 Policy Area 1.2 - Improving Budget Discipline and Transparency in Use of Budget Resources. Low transparency in budget planning and execution, a lack of consistency between annual budgets and mid-term budget frameworks, and a weak system of internal control and internal audit in public institutions were identified as key issues in the PFM. The DPO measures, thus, aimed at strengthening budget credibility and discipline, improving medium-term budgeting and increasing clarity of the overall budget cycle. Policy Area 1.3 - Strengthening Public Procurement. While the government made progress in building an efficient procurement system, there were still issues related to oversight and transparency. Moreover, the review process of tender violations was unclear and there was an institutional gap in monitoring adherence to procurement rules. The DPO actions were designed to enhance transparency and to support legislative changes to improve public procurement performance and efficiency. Pillar 2: Sharpening Competitiveness and Enhancing the Attractiveness for Private Investment Policy Area 2.1 - Improving Business Environment to Promote Private Sector Development. The prevalence of complicated procedures, inadequate competition frameworks, weak accounting and auditing practices, and poor implementation of corporate governance laws and standards were identified as major constraints to private sector growth. The government made efforts to address these issues by undertaking reforms in the overall regulatory framework. In particular, amendments to regulations pertaining to business registration, licensing and inspection, and starting a business were made. The DPO measures were intended to support the implementation of these reforms, reduce administrative barriers and improve transparency. Policy Area 2.2 - Energy Sector Reforms. Poor financial performance, below cost recovery tariffs, weak governance and regulatory environment led the sector to severe under- maintenance and erosion of physical assets. In addition, financial flows and flows of electricity were not recorded or reported in a comprehensive way, affecting incentives for good performance and improved management. To address these issues, the government developed an energy sector development strategy for 2012-15. The DPO actions were designed to help the authorities to implement this strategy to improve transparency and accountability of energy companies. Policy Area 2.3 - Financial Sector Reforms to Ensure Stability. The domestic crisis of 2010 revealed major weaknesses in the supervisory and regulatory frameworks for the banking system. In particular, the NBKR’s supervision, stress testing, contingency planning and crisis management were not effective to bring appropriate remedies at the earliest stage of bank problems. The NBKR’s guidelines were not comprehensive to deal with credit risk and liquidity risk management issues. In addition, the deposit protection system had deficiencies in providing deposit protection and in governance and procedures. The DPO measures were targeted to help the NBKR enhance its capacity to supervise and regulate the banking sector as well as to strengthen the deposit protection system. 9 1.5 Revised Policy Areas (if applicable) Not applicable. 1.6 Other significant changes No other changes. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance The programmatic series comprised two single-tranche Development Policy Operations disbursed upon effectiveness, in the total amount of US$48 million. Table 2 provides key milestones dates. All policy actions were completed prior to the approval of the operations by the Board of Directors (Table 3). Table 3: Program Implementation Operation Approval Effectiveness Disbursed Closing Date Amount DPO-I 07/25/2013 12/06/2013 US$24m 09/30/2014 DPO-II 06/10/2014 07/11/2014 US$24m 12/31/2015 In summary, the authorities broadly maintained macroeconomic stability through exchange rate flexibility and they limited fiscal deficits to the 3½ - 4 percent of GDP range over 2013- 15, but with a deterioration to 6.6 percent of GDP in 2016 that needs to be urgently corrected. Public investment spending rose markedly as greater external financing was made available – a factor that should add to the growth potential of the economy. Nevertheless, the macroeconomic outlook is fragile, with fiscal space having been eroded and external debt distress risks having risen. A detailed account of program performance in terms of prior actions is given in Table 4 below. The prior actions were met, but with amendments. Two prior actions that constituted triggers for DPO-II had to be replaced by more realistic actions. 10 Table 4: Program Implementation Prior Actions Status DPO-I Pillar 1: Improving Public Sector Governance Governance/anticorruption reform:  Government, through Resolution No. 596 dated August 30, 2012, adopted the Completed Anticorruption Program and Action Plan for 2012 – 2014 and has established a framework for monitoring its implementation that includes independent experts and non-governmental organizations. Improve budget discipline and transparency in use of budget resources:  A Protocol of cooperation dated October 23, 2012 signed between Ministry of Completed Finance and the National Bank of the Kyrgyz Republic (NBKR), specifying the roles and responsibilities of the treasury, banking and accounting functions, and the oversight of payments/settlements, including the financial and information security controls for operation of the Single Treasury Account at the NBKR.  Government, through Resolution No. 605 dated September 4, 2012, delegated Completed authority to approve a Unified Chart of Accounts to the Ministry of Finance of the Kyrgyz Republic, and through Order No. 177-П dated September 4, 2012 the Ministry of Finance of the Kyrgyz Republic approved a Unified Chart of Accounts. Completed  Government through Resolution No. 718 dated October 15, 2012, “On Enactment of the Budget Code of the Kyrgyz Republic” submitted to Parliament a revised draft Budget Code that strengthens controls over non-allocated funds in the treasury, eliminates non-transparent reserve funds, advances the introduction of internal audit and medium term budgeting, and provides greater clarity to the overall budget cycle. Completed  The Prime Minister through letter No. 1-4118 to the Speaker of Parliament dated November 30, 2012, has requested an amendment to the proposed Budget Code that would require prior Parliamentary approval of the issuance of sovereign guarantees. Transparency in public procurement:  The Ministry of Finance published a Public Procurement Report on the use of Completed the 2011 allocated budget.  Government, through Resolution No. 661 of September 27, 2012, adopted the Completed Public Procurement Development Strategy for 2012- 2014 in line with international best practice. Increasing energy sector transparency, governance and accountability:  Government, through Resolution No. 611 dated September 7, 2012, adopted an Completed action plan to enhance transparency, accountability and governance in the energy sector, including through: (i) carrying out annual audits of financial statements of energy companies following international accounting practices and making the audit reports public; (ii) setting up and maintaining web-sites for the Ministry of Energy, the Energy Regulatory Department, and the energy companies; (iii) ensuring transparent and competitive procurement of fuel resources; (iv) maintaining escrow accounts for power export revenues for the National Electrical Grid of Kyrgyzstan Joint Stock Company and the Power Plants Joint 11 Stock Company; and (v) selecting the general directors and executive bodies of the energy companies based on transparent and competitive procedures. Pillar 2: Enhance business environment Judicial reform:  The Presidential Decree No. 147 dated August 8, 2012, “On the Measures to Completed Improve Justice in the Kyrgyz Republic,” has established the Judicial Reform Council and identified priorities for judicial reform. The Judicial Reform Council under the President approved a Strategic Action Plan on reforming the judicial system (Resolution No.2, dated October 12, 2012). Business startup and operations:  Government through the Ministry of Justice issued Order No. 134 dated October Completed 11, 2012, containing: (i) a checklist for registry offices to clarify on what basis a registration application for the establishment of a business can be rejected; and (ii) instructions that applicants will receive upon the first submission of all requests identifying what additional information is required. Business inspections:  Government, through Resolution No. 108 dated February 18, 2012, introduced Completed transparent, risk-based criteria for planning and conducting business inspections and has developed a risk-based inspections coordination module (Kontr Pro 3) within the MoE, including a database of businesses subject to inspection. DPO-II Pillar 1: Improving Public Sector Governance Governance/anticorruption reform:  State Personnel Service, has completed the first round of verification of asset Completed declarations of civil servants in political functions and shared the summary results with the Government. Improve budget discipline and transparency in use of budget resources:  The Government has established the Internal Audit Council through issuing the Completed Resolution No. 498, on the System of Public Financial Management and Control, dated September 19, 2013; the Government has adopted guidelines on the System of Public Financial Management and Control through issuing a Resolution No. 722 dated December 31, 2013, and the Government has established ethics standards for internal auditors through issuing Decree No. 721, dated December 31, 2013. Transparency in public procurement:  The Government through its Resolution No. 69, dated February 3, 2013, “On Completed Enactment of the Public Procurement Law of the Kyrgyz Republic,” has submitted to Parliament a draft of said law that meets good international practices, and the Government, through the Resolution No. 68, dated February 3, 2014 “On Public Procurement Department of the Kyrgyz Republic”, has strengthened the role of the public procurement regulatory body within the Recipient’s Ministry of Finance. Increasing energy sector transparency, governance and accountability:  The Ministry of Energy and Industry has issued the Order No. 174, dated October 10, 2013, which aims to increase the transparency of the energy sector Completed by requiring Energy Companies to regularly publish on their respective websites the following information: (i) monthly balances of the special accounts and transit accounts of Energy Companies; (ii) quarterly operational and technical 12 performance data of the Energy Companies, as well as power sector; and (iii) annual financial statements together with audit reports. Pillar 2: Enhance business environment Judicial reform:  The Government, through the Resolution No. 174 “On Government Target Completed Program on Development of the Judicial System of the Kyrgyz Republic for 2014-2017”, dated March 19. 2014, has submitted to Parliament the draft of said program which aims to increase the financial independence of the judicial sector. Access to finance:  The Government, through its Resolution No.610 “On Enactment of the Law on Completed Joint Stock Companies of the Kyrgyz Republic,” has submitted to Parliament a draft of said law that aims to strengthen the responsibilities of executive directors. Business inspections:  The Government, through operationalizing the single automated database for inspections Completed of businesses (KontrPro3) in the Ministry of Economy and six inspectorates in the City of Bishkek has reduced the burden of inspections on businesses. Reinforcement of the NBKR supervisory function and enhancing financial sector stability:  The Government, through the Resolution No. 20/7 of the National Bank of the Kyrgyz Republic (NBKR) “On Amending the Regulation on Periodic Bank Reporting”, dated Completed June 26, 2013, and the Resolution No. 27/1 of the Supervision Committee of NBKR “On Amending the Methodological Guidelines for Periodic Bank Reporting”, dated August 7, 2013 has strengthened bank reporting and NBKR’s new credit registry has become functional. Strengthening of the Deposit Protection System (DPS) legal framework:  The Government through its Resolution No. 528 “On Enactment of the Deposit Completed Protection Law of the Kyrgyz Republic”, dated September 27, 2013, has submitted to Parliament a draft of said law that aims to strengthen governance, coordination and operations of the deposit protection scheme. Actions envisaged in DPO-I as triggers for DPO-II, but not met. Energy sector. Adopt a comprehensive electricity law delineating functions of policy setting and independent regulation, and clarifying governance structure and accountability arrangements.1 The timetable for the adoption of a comprehensive energy law proved to be over-ambitious as the considerable technical work and capacity building that was required was under-estimated. Furthermore, there was a lack of agreement across the ministry, the regulator and the companies on the content of the law. However, most of the elements of the intended were incorporated into the action that replaced this trigger. In addition, Bank’s continued policy engagement helped the government introduce amendments to the existing electricity law, which provided for independent regulation and improved governance arrangements. These amendments were passed in 2014 and came into effect in 2015. 1 Replaced by Action 14. 13 Financial Sector. Revise regulations on PRAF2 to improve its effectiveness in terms of timely, adequate and consistent response to developments in banks, including supervisory actions to promptly address material deficiencies in corporate governance policies and practices, to establish clear thresholds for considering: issue recommendations to banks for making improvements in their operations; take corrective actions requiring banks to make improvements; taking enforcement actions.3 This trigger proved to be impossible to achieve in the year envisaged owing to the complexity of the revisions to the regulations supporting the supervisory framework that needed to be designed and the training that had to be absorbed by supervisory staff. Strengthening of PRAF was rightly seen as a part of the overall effort to introduce risk-based supervision – a process that was initiated over 2015-16 and is being pursued under the current Bank-supported financial sector development project. It is expected that a strengthened PRAF will be in place over the medium term. The replacement of this trigger by the action on the credit registry achieved the similar broad aim of strengthening the tools for bank supervision by enriching the information to be placed within the credit registry and adapting supervisory systems and practices to make full use of this information in the conduct of supervision. 2.2 Major Factors Affecting Implementation: The political economy. The development policy operations were implemented following the overthrow of the president and the government in 2010, the ethnic riots of that year, and the adoption of a new parliamentary-based constitution. The fragility of the political environment was evidenced in frequent changes of government and prime minister that resulted in shifting commitments to reform. Such frequent changes led to a fracturing of a common vision on strategic priorities. A steady, coherent leadership on reforms was at times absent. Thus, the need to institutionalize reforms under a powerful, committed champion was not met. Moreover, under the new parliamentary system, long delays in ratification of IDA credits was experienced to the detriment of the timeliness of the reform program. However, political stability was assisted by two factors. First, the new constitution saw a vigorous parliament that held the executive to account, particularly on governance policies. Second, a rapid post-conflict reconstruction program led to the beginnings of ethnic reconciliation. Economic headwinds. The reform program was implemented against a sharp slowdown in the economies of two principal trading partners, Kazakhstan and Russia, triggered by the decline in oil and other commodity prices. This shock was exacerbated by a steep decline in remittances. A sharp depreciation of the local currency in real effective terms followed4, but the nominal exchange rate was maintained against the ruble and appreciated against the Kazakh tenge. Such sharp relative price changes created uncertainty in the real sector of the 2 Prompt and Remedial Action Framework to address actual or imminent financial distress in banks. 3 Replaced by Action 18. 4 Amounting to 12.5 percent between 2012 and 2015 14 economy, particularly dampening private consumption and investment, especially into construction. Capacity and institutional factors. The implementation of deep-seated reforms was affected by capacity constraints in certain areas and persisting institutional weaknesses. The anti- corruption program needs capacity skilled in economic analysis and in designing incentives to strengthen governance, as opposed to current approaches that rely overly on enforcement. Capacity in the central bank is being built up, albeit gradually, to handle complex reforms in banking supervision. The agenda of public financial management reform has advanced slowly over the years, as it has long been plagued by capacity weaknesses and by insufficient institutional priorities being accorded to such reforms, though encouraging results can be seen for example in internal audits and procurement, once resources and priority are given to such reforms. The operation of a genuine single treasury account has been long delayed. The Ministry of Finance has played the role of the overall coordinator of reforms supported by DPOs. But it lacks the full capacity to take the strategic approach to reform design, identifying and prioritizing the critical sub-set of reforms contained in the national development plan that could be supported by DPOs. It seems to have insufficient weight to hold line ministries and public institutions, some of which enjoy considerable autonomy, to their reform undertakings. Consideration should be given to whether these set of strategic and practical functions may be better performed by the Prime Minister’s Office. Analytical foundations. The reforms contained in the DPOs arose out of sound analytical work carried out over the period of project preparation. The reforms on governance were designed relying upon PEFA exercises, procurement reviews and other PFM studies, as well as on the outputs of a Capacity Building for Economic Management project. These provided the constituent elements of a public sector reform roadmap that was developed in 2013. A power sector review provided guidance on improving transparency in the electricity industry. The design of competitiveness reforms was aided by the outputs of IFC advisory services on the business enabling environment, a judicial reform diagnostic, financial sector monitoring and two formal reports, a FSAP and a ROSC. Design aspects. Despite the solid analytical foundations of the DPO-supported reforms, the design of the operation affected its implementation in certain respects. The operations comprised 10 sub-policy areas and had 20 prior actions (after the replacement of two DPO- II triggers identified in the first operation), and, apart from the Ministry of Finance (the key counterpart), actions involved the cabinet of ministers as well as the ministries of economy, energy, justice, the central bank, the National Security Council, the office of the Prosecutor- General, the Supreme Court and the Deposit Protection Agency. Thus, in both the set of prior actions and the principal ministries and institutions responsible for actions, the operation was designed over a broad canvas. This factor added to the complexity of project implementation. The number of policy actions to be undertaken over a two-year period seems to be large, and policy actions in energy and the financial sector proved to be too complex, thereby requiring revisions. Moreover, the Ministry of Finance lacked the full capacity, or authority to oversee or coordinate reforms across such a wide terrain that involved some autonomous judicial and law-enforcement institutions. The robustness of the design suffered from a significant 15 weakness: implementation of parts of the program were beyond the remit of the authorities as they involved these independent institutions. Treatment of risks. The operation contained a candid discussion of political, governance, macroeconomic and fiduciary risks, and presented a well-thought out set of actions to help contain or mitigate some of these risks. The solid, inter-active sector work, partly focused on capacity building, was a clear asset. However, macroeconomic risks could have been addressed with greater firmness by requiring fiscal adjustment; a point addressed more fully in section 4 of this report. Two further types of risks and associated mitigation measures deserved a deeper consideration in the operation: first, the risks of commitment failure and of the management and technical capacity to direct and implement reforms was left insufficiently discussed, for example, in energy and financial sector reforms as well as in governance; second, the implications of the limited authority in the key coordinating body, the Ministry of Finance, to ensure reform implementation in certain critical areas was left unaddressed. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: M&E design. The design of the M&E arrangements built upon those developed under the earlier series of budget support operations. The results framework of the DPOs was jointly designed with the authorities and developed in consultation with other stakeholders. As has been the practice, the results framework was developed not only to monitor progress under the DPOs, but also as a tool for internal review and reporting by the principal ministries and agencies responsible for reform implementation. The results indicators used were directly related to project objectives and the data was collected by the statistics agency and finance and line ministries and other agencies. M&E Implementation. The monitoring arrangements do not appear to have been sufficiently institutionalized in the Ministry of Finance. A robust, unified framework for M&E in the Ministry of Finance would have assisted program implementation. Rather, monitoring was carried out at the implementing ministry or agency level and periodic reports or web-site updates were prepared, for example, in governance or in the energy sector. Annual reports on progress with governance reforms were prepared. The Ministry of Energy updates is websites with monitoring data every six months. In the Ministry of Finance, periodic procurement reports monitor progress with implementation of the law and implementation of new procurement practices. The central bank prepared periodic report on progress with the implementation of risk-based banking supervision and on developments with the credit registry. M&E Utilization. The utilization of M&E data takes place at individual ministries, and the data is used periodically for re-design of policies. However, the process is not fully formalized or well integrated across ministries, and the Ministry of Finance is not able to ensure completeness or upholding of standards in M&E utilization. The central bank intends to use the buildup of data in its supervision system to inform policies and practices. 16 2.4 Expected Next Phase/Follow-up Operation (if any): At the request of the government, the Bank is preparing a new development policy operation to support its strategic development agenda, currently under discussion within the government. The new DPO is expected to deepen the reforms in the themes of governance and competitiveness. It will additionally be grounded in firm fiscal adjustment so as to recover the fiscal space lost in recent years and to bolster external debt sustainability. It will closely monitor performance under past DPO series, even if particular sectors (such as the financial sector or corporate governance) are no longer subsumed under the new operation. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Overall Rating: Substantial (a) Relevance of objectives: High The objectives of the DPO series remain highly relevant today; just as much at the time of preparation of this ICR as at DPO preparation. These objectives rested on thorough diagnostic work on development priorities. More efficient use of public resources contributes to strengthening the sustainability of the fiscal accounts, allowing re-allocation of spending to priority areas and improving public services. Enhancing the business environment through efficient business regulation, stronger property rights, and a resilient financial system lead to a more vibrant development of the private sector. These reforms lay the foundation for stronger growth, reduced poverty and shared prosperity. The National Sustainable Development Strategy, 2013-17, has as its main reform areas combatting corruption, reforming the judiciary, improvements in the business environment and financial sector development, as well as a focus on power as a strategic sector. The PDOs of the planned next operations on governance and competitiveness, therefore, continue to be highly relevant to the national development strategy. (b) Relevance of design: Modest The design of the operations was targeted at achieving the PDOs. The policy actions and results indicators were broadly well-aligned with program objectives. The thrust on governance actions, judicial sector budgets, business climate measures, and energy governance actions remain highly relevant to the final objectives and have significant developmental impacts. These policy areas were supported by Bank and IFC analytical and advisory services. The program reforms were accompanied by technical assistance, e.g. Public Sector Reform Road map, Private Sector Development Action Plan and Capacity Building for Economic Management. The results framework remains consistent with the country’s current development priorities and with the Bank’s current assistance strategy. The programmatic design of the operations was to ensure the completeness of reforms to reach the desired outcomes. 17 However, in some cases the design lacked a complementarity between the first and second operations weakening focus on the expected outcomes. For example, DPO-II did not have any follow up actions related to the implementation of the new Budget Code. In judiciary reforms, policy actions in both operations were confined to the adoption of development plans missing the focus on implementation. A further design shortcoming was a weak link between some policy actions and their expected results indicators. The results indicators, such as the indicator on control of corruption, PEFA and doing business indicators, and deposits/GDP ratio indicator were too general to measure the impact of policy actions of the program. (c) Relevance of implementation: Substantial Implementation arrangements were tailored to local conditions and were relevant. The implementation effort was focused on making sure that the prior actions were taken and that they led to the expected results. The Bank’s implementation assistance was responsive to changing needs as shown by the supervision record; thus, dialogue and technical assistance was intense and near-continuous. In summary, current development priorities are fully consistent with the DPO objectives, design and implementation as evidenced by the new, the successor DPOs being based on identical pillars of governance and competitiveness. Finally, the operation remained important to achieving the development objectives of the country, as well as to the Country Partnership Strategy of the Bank. 3.2 Achievement of Program Development Objectives Overall Rating: Moderately satisfactory The specific objectives laid out in the results framework were derived from the PDOs. The actions supported by the operations were chosen to lead to the outcomes that would advance the PDOs. Overall, commendable progress has been made towards the achievement of the program development objectives, even if progress has fallen somewhat short of DPO expectations. In both these pillars of critical importance to the economy, sustained efforts will be required; and it is encouraging that the follow-on DPO engagements have been directed at deepening reforms in governance and competitiveness. Pillar 1: Improving Public Sector Governance In the area of Public Sector Governance, the implementation of the anti-corruption program, the establishment of the Judicial Reform Council, steps to strengthen public financial management, the introduction of declarations of assets for civil servants and measures to increase transparency in the energy sector were expected to lead to improvements in governance and PEFA indicators, information on procurement and energy sector developments. These objectives were partially achieved. 18 1.1 Governance and anti-corruption reform Expected Result: not achieved. The result related to the worldwide governance indicator for control of corruption, expressed as a percentile rank. The baseline was 9.95 in 2011 and the target was 15 in 2014. The result for 2014 was 11.54. Comment: The prior action on the verification of asset declarations of civil servants and submission of summary results was implemented. However, this step has to be followed by a systemic use of data gathered to investigate conflicts of interest and accumulation of assets that seem unreasonable. The methodology for this task is still to be implemented and additional resources will be necessary. The summary results of the verification exercise should be used as a learning tool to influence future policy and regulatory design. The result appears to have been poorly designed. The action taken – verifying declarations – can be expected to have only a tenuous impact on the control of corruption indication, as several strong follow up steps beyond the mere act of verification are required before control of corruption can be strengthened. Moreover, it can hardly be expected that actions taken in 2013 and 2014 would have a near-immediate impact on this variable in 2014. 1.2 Improve budget discipline and transparency in the use of budget resources Expected Result: not achieved. The result relating to the composition of expenditure out- turns compared to the original approved budget (PEFA PI-2) had a baseline of C and a target of B. This was not achieved; the indicator has slipped to D+. Comment: While the budget outturn as measured by total expenditures has been close to original budget estimates, the composition of spending has diverged substantially from budget estimates. There appears to have been a slippage in this PEFA variable as measured by best comparable indicators between 2009 and 2014. The failure to make adequate progress on the single treasury account is in part responsible for this development. This result was again poorly designed. The DPO-II document was faulty in not specifying the years for the baseline, nor for the target. Nevertheless, it is clear that this result was not achieved. The lag between the PFM actions taken and the timing of the expected results appears to have been over-optimistic. Expected Result: achieved. The effectiveness of internal audit (PEFA PI-21) was targeted to improve from D in 2009 to C in 2014. The result in 2014 was C. Comment: Internal audit reforms have been commendable. An internal audit council ensures the independence and quality of internal audits, and the coverage of internal audit has been gradually widened. The internal audit reports are being streamlined into the regular work program of ministers and lessons are being learned. 1.3 Transparency in procurement Expected Result achieved. Information is being made available on the effectiveness of public procurement through annual reports prepared by the Ministry of Finance. 19 Comment: After years of effort, procurement reforms have advanced, with all public procurement taking place through a portal, managed by the Ministry of Finance. Attempts are being made to adhere to high international standards, including observing WTO procurement guidelines. The portal provides public information on current and past procurements. An inter-agency independent commission adjudicates over complaints. Annual reports contain efficiency and effectiveness indicators. One risk to backsliding exists: there is an attempt to exempt certain procurements from the competitive, portal-based requirement and permit direct or single-source contracting; this should be resisted if the reforms are to be sustainable. 1.4 Increasing energy sector transparency, governance and accountability Expected Results partly achieved. Key operational and financial performance indicators and key decisions of the power companies are disclosed, but not regularly or without undue lags, and with a sparser coverage of the key indicators and decisions than was the expected result. Comment: The prior actions through a government resolution (2012) and subsequently a ministerial order (2013) sought to improve transparency and governance by the adoption of a series of measures. First, audits of energy distribution companies were to be conducted to international standards and the audits published; this has been partially achieved as audits are performed, but not fully or regularly published. Second, the ministry, the regulator and the companies have established websites to disclose the agreed information on performance, but these are often outdated and incomplete. Third, the transparent and competitive procurement of fuel resources for generation is taking place. Fourth, escrow accounts with regard to exports are being maintained. Finally, the action of selecting the general directors and executive bodies of the energy companies based on transparent and competitive procedures has not been met. As discussed in section 2 of this report, the trigger for DPO-II that was set in the first operation for the energy sector was abandoned. The replacement prior action required energy companies to publish a variety of information on their websites. The monthly balances of the special accounts of the power companies and of the generator are published but with unjustified lags. The transit accounts of the four distribution companies are not published monthly in all cases and information is fragmentary and sparse. The quarterly operational and technical performance data are not published regularly nor with quarterly periodicity, and the coverage of the data is sparse. Annual financial statements are published, but audit reports are not. Pillar 2: Enhancing the Business Environment On the Enhancing the Business Environment pillar, the acceleration of business registrations and governance reforms in business inspections, together with a strengthening of corporate governance and measures to improve banking supervision and fortify the deposit insurance system were expected to lead to an improved business climate, easier access to credit, a richer database for bank supervisors and greater confidence in banks. These objectives were broadly achieved. 20 2.1 Judicial reforms Expected Result achieved. Between 2014 and 2016, the budget of the judicial sector was nearly doubled; the target of a rise of 10 percent between 2014 and 2015 was comfortably attained. Comment: The authorities have established the Judicial Reform Council that drafts reform action plans, and steps have been taken to enhance the financial independence of the judiciary. The increased budget improved material and technical support to courts of all levels, including maintenance of court houses across the country. Institutional improvements, in the working of the court department, in court procedures, in the operations of the supreme and appellant courts, and improvements in trial efficiency through partly the use of technology, can be seen. The Council is now drafting the third reform strategy and action plan to cover 2017-2022. 2.2 Business start-up and operations Expected Result achieved. The number of days to register a business fell from 20 in 2011 to six days in 2016. The target was 10 days for an unspecified year. Although the DPO-II document did not specify the reference years for the baseline and the target, the result can be surmised to have been comfortably attained.5 Comment: The process of business registrations has been streamlined in the Ministry of Justice, and the necessary information to registrants is provided both online and onsite. These reforms have clarified the documentation required to register businesses and have reduced the scope for corruption. 2.3 Access to finance Expected Result not achieved. The investor protection index from Doing Business was targeted to improve from 7 in 2011 to 8 in 2015. The result was 6.3 in 2015 and it remains 6.3 in 2017. Comment: Parliament decided not to legislate the reforms in corporate governance directed at strengthening the responsibilities of members of management bodies of companies as they considered other corporate governance reforms to be more salient. Moreover, the result appears to have been poorly designed due to a weak link between the action and the expected outcome. 2.4 Business Inspections Expected Result achieved. Inspections were risk-based on a pilot basis in 2014 and are currently risk-based country-wide. 5 For the purpose of this ICR, the target date is December 31, 2015, the closing date of DPO-II, if it is not specified otherwise. 21 Comment: A single automated database is used for the conduct of inspections in a risk-based manner. The inspection reforms enjoy strong support within the government and businesses and have led to a substantial improvement in the business climate and reduced opportunities for corruption by making inspection plans available to business entities, specifying the mandate of inspectors and introducing a feedback mechanism to inspection results and inspectors’ performance. 2.5 Reinforcement of the Central Bank Supervisory Function and Enhancing Financial Sector Stability Expected Result partly achieved. Parallel loans, i.e., loans obtained by a single borrower from different sources, could not be tracked in 2014 as required by the results matrix, but are now being tracked; all banks comply with the requirement to provide information about borrowers to the central bank’s Periodic Bank Reporting system. Comment: Through methodological improvements in the conduct of supervision, the reporting requirement for banks, the formation of the credit registry, and growing capacity in the central bank on understanding and making use of data from the credit registry and on parallel loans, the central bank has been able to reinforce its supervisory capabilities to the benefit of financial sector stability. Under the program of strengthening of central bank supervision being supported by the Bank financial sector project, it is expected that the ability to implement risk-based supervision will grow and that PRAF will become a part of the supervisory arsenal. 2.6 Strengthening the Legal Framework For the Deposit Protection System Expected Result achieved. The deposit to GDP ratio rose from 16 percent in November 2013 to 25 percent in December 2014, exceeding the target of 20 percent. Comment: The amendments to the deposit protection law that clarified the powers and competencies of the deposit protection institution, added to its financial fire-power, and bolstered confidence on the part of the insured (the depositors) of prompt and full payments up to the ceiling, went into effect in 2016. The sustainability of the system is more assured. The FSAP recommendation of the establishment of a financial stability council chaired by the prime minister was adopted; this permits cross-institutional coordination and information- sharing across key financial sector institutions. Although the results indicator was satisfied, its design is questionable. The deposit to GDP ratio is influenced by much more powerful factors than the state of the deposit insurance system; and even if a fundamental reform in the deposit insurance system were to occur, it can hardly be expected to have an impact on the level of deposits within such a short time frame as one year. 22 3.3 Justification of Overall Outcome Rating Rating: Moderately satisfactory As noted in earlier sections, the operation is judged to be highly relevant in its objectives. The DPO series targeted the key objectives of the national development reform priorities as expressed in the official documents. It is clear that this relevance remains high. It is expected that the objectives will be reinforced in the national strategy document for 2017- 22 currently being drafted; and the next development series operations will be based on similar objectives. The operations were also well aligned with the central goals of the Bank Country Partnership Strategy. Judgements as to relevance in design are more complex. Clearly the design of the operations addressed policies that were central to achieving the objectives of the projects and the objectives of the national development plan. However, policy actions were not parsimonious and involved such a wide range of ministries and agencies that coherence in the operations was undermined, and coordination in certain areas (such as governance reforms) became onerous. Moreover, prior actions in certain areas were pro forma in nature, requiring the adoption of a resolution or a decision, rather than focusing on the follow-on actions necessary for the reforms to yield results. Thus, the satisfaction of prior actions in and of itself did not lead to intended results in areas discussed in earlier sections of this report. In several cases, the link between the prior actions and the results sought were tenuous or time inconsistent; thus, the results framework was, in places, ill-thought out and even cursorily drafted with missing data and baselines. The operations broadly achieved development objectives. In the first pillar – governance –improvements have taken place in public procurement after years of effort. The requirement of asset declarations of civil servants is being implemented. The passage of the Budget Code in 2016 was a major step towards PFM reforms strengthening budget planning, implementation and monitoring, and enhancing fiscal discipline and transparency; and the lessons from internal audit findings are being internalized. These are achievements that contributed to increased accountability over the use of public resources. Further action has to be taken in making the single treasury account truly effective. The objective of transparency in the energy sector has advanced only fitfully; the information gaps and timeliness of information disclosed need to be now addressed. The expected results in this pillar were only partly achieved, largely because of weaknesses in design. In the second pillar – business environment and competitiveness – progress in the areas of business registration and inspections has been broadly good. These were major deterrents to private investment and major sources of corruption in the past. The judicial reform process has met its initial objectives, but reforms have now to be reinforced. The reform on corporate governance was ill-designed, appears not to have been high priority out of the set of ROSC recommendations, and was not achieved. In the financial sector, reform objectives with deposit insurance were fully satisfied, and with central bank supervisory functions the objectives are on the path of being satisfied. 23 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The operations have significant implications for poverty and social development, principally by supporting fiscal stability. Fiscal stability, combined with a well targeted expenditure framework and a sound management of state owned enterprises, will lead to improved quality of public services with greater predictability and assurance of social spending. The development objectives of the operations, through specific policy actions, also indirectly address both poverty and welfare through the strengthening of public revenues and safeguarding their use via stronger PFM and reduced opportunities for corruption; as well as by improved job prospects via sharper competitiveness and a more conducive business climate. These reforms are important prerequisites for sustainable economic growth, the most important tool for poverty alleviation and broader social development. The successor DPO series should aim for a firmer effort at fiscal consolidation; if achieved, fiscal stability – still precarious – will be bolstered. None of the actions supported in the development policy operations were expected to have adverse impacts on poverty or gender. (b) Institutional Change/Strengthening Institutional strengthening has been at the core of this operation. The operation has provided over-arching support for sector institution building, for example in energy and the financial sector, as well as core economic policy themes such as governance and PFM. The operation has supported a multi-year effort in strengthening fiscal institutions and judicial institutions. Reforms have benefitted from a range of ASA and TA in all these areas. No significant unintended outcomes or impacts were experienced. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risks to Development Outcomes Rating: High The operation was implemented in an environment of high overall risk – political, social, macroeconomic, governance, and institutional. The operations took place in still- fragile political and social conditions following the overthrow of a president and inter-ethnic tensions, and the new parliamentary constitution still had to lay roots. A further risk arises from the functioning of an empowered parliament, which is holding the executive to account vigorously – a highly commendable development – but one which has the unintended effect of delaying ratification of Bank operations unduly and of introducing a degree of policy uncertainty and uncertainty on the timing of measures to be taken. 24 Further risks arise from poor governance that have fiscal costs, but also lead to losses in the energy for implementation. The lack of a shared vision or forceful commitment in certain areas – energy reforms, corporate governance, and some aspects of PFM reforms – have added to risks. Two areas are notable: the absence of firm strategic leadership on governance reforms; and coordination weaknesses over the DPO program within the government. The major economic risk arises from volatility in fiscal policies that have led to fiscal space being eaten up over the program period. The extent of fiscal consolidation targeted was clearly inadequate given the fiscal outlook and risks; and deficits turned out to be higher than programmed. This risk can be countered only by a firm adjustment effort over the medium run, which should be a core condition of the next DPO series. The DPO operations recognized the key risks, and mitigation mechanisms to the extent possible were put in place. The partnership with the Fund was aimed at addressing fiscal risks. The reforms were designed to address directly governance risks. Though the risk to development outcomes continue to be high, a well-designed successor DPO series can go a long way to help counter such risks. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately unsatisfactory The development policy operations were designed to address a key sub-set of the reform priorities of the National Sustainable Development Strategy, were strategically aligned with the Country Partnership Strategy, and had solid foundations in the economic and analytical work done in all reform areas. The macroeconomic framework reflected close dialogue with the Fund. The strategic relevance of the operation was high and the approach was appropriate. The Bank carried out a through risk assessment and made best efforts to mitigate risks within the operation. On structural reform aspects, in many cases the prior actions required decisions to be taken, instructions to be issued or resolutions to be adopted by the executive branch: such prior actions had the merit of simplicity and made compliance easy. But in several cases – governance and budget reforms, and to a partial degree in energy and financial sector reforms -- the prior actions did not provide sufficient incentives for the successor steps necessary to achieve the intended result of the reforms to be taken. While this was partly intentional, recognizing that initial legislative and regulatory steps had to precede implementation measures to be followed-on upon in the context of a programmatic multi- year engagement, the design of the operation would have benefitted had these prior actions been framed in terms of the critical steps necessary to achieve the intended result of the reform. An effort could have been made to make the monitoring and evaluation system more robust, partly by reducing its fragmentation across ministries and agencies, and by 25 designing a unified framework to be used by the Ministry of Finance. Such a step would not only have led to improved coordination within the government, but could have added to the authority of the Ministry of Finance as the key implementer of DPO-supported reforms. The results framework also suffered from design shortcomings. There was a tenuous relationship between some of the prior actions and the results expected or in the unrealistic timeframe prescribed for the attainment of the results, e.g., asset declarations and control of corruption, PFM actions and convergence in the composition of budget expenditures, corporate governance actions and investor protection index, deposit protection and financial deepening. However, this is a legitimate constraint facing most development policy operations at the Bank, which the team recognized by utilizing programmatic approach, itself conceived within a longer term expected DPO engagement. In one specific case under the reform area of “Increasing energy sector transparency and governance and accountability”, there may have been insufficient distinction between actions and outcomes. This, however, could be justified by the need to adopt monitoring indicators that are clearly attributable in cases where changes in behavior are difficult to observe and measure. The DPO-II documentation fell somewhat short of standards in several respects. First, little explanation was provided of the background to the non-fulfillment of the triggers for DPO-II set out in DPO-I in the areas of energy and financial sector reforms. The rationale for their replacement by the new DPO-II prior actions was insufficiently explained. Furthermore, the PD for DPO-II contained insufficient discussion of the new prior actions in energy and the financial sector, and did not contain adequate definitions of new concepts introduced such as “special accounts” or “transit accounts” in the energy sector and why these accounts were relevant in the context of reforms sought. Finally, in some cases, base or target years were missing (PFM reforms, business registration) or the result ambiguously drafted (judicial) in the results matrix. Finally, the prior actions did not take into account sufficiently the capacity constraints to implementation, e.g., in energy and financial sector or lack of commitment on the part of the government to certain reforms, e.g., in corporate governance, and possibly a combination of insufficient commitment and lack of technical skills in making the single treasury account truly functional. (b) Quality of Supervision Rating: Satisfactory Supervision was facilitated by a strong and near-continuous dialogue led by the Bank core economic team, with the active participation of sector specialists; the dialogue was focused on development impact. The Bank conducted several supervision missions of both operations to monitor progress and identify issues in implementation; an implementation status report (ISR) on the first operation was submitted between the operations. Emerging problems in implementation were identified pro-actively and in cooperation with the authorities in a candid manner. This team was also charged with the preparation of the follow- up DPO series, thereby giving continuity to the Bank’s assistance effort. 26 The supervision of trust fund operations in PFM, IFC-led strong dialogue with depth of presence in the field on business climate reforms, the preparation of a financial sector project, and the energy team’s engagement on further sector reforms added great thrust to the supervision of the DPOs. The intense engagement on ASA provided new insights into the design and implementation of reforms, notably through a wide-ranging Public Expenditure Review exercise that was initiated during the course of DPO supervision. The effectiveness of supervision was greatly enhanced by its continuous nature, using the strong presence of economic and sector staff in the regional office and the resident mission that covered all the areas of the operation. Highly qualified staff supported by quality ASA engaged in a continuous dialogue with a range of partners to provide support to the government. (c) Justification of Rating for Overall Bank Performance Rating: Moderately satisfactory Quality at entry suffered from design shortcomings resulting in a moderately unsatisfactory rating. This was, however, mitigated with the Bank devoting much effort and attention to both preparation and implementation of the program. Quality of supervision thus is rated as satisfactory reflecting continuous engagement of the DPO team with both sector teams and government officials. An overall rating for Bank performance is therefore ranked as moderately satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately unsatisfactory The performance of the government as the borrower and the implementer of the DPO operations is rated as moderately unsatisfactory. The government developed a coherent overall strategy for reforms that addressed key priorities and needs. But, at the level of reform implementation, the commitment effort was not uniformly strong. In two areas, the authorities demonstrated stamina in commitment and achieved commendable results: judicial and procurement reforms. Success was owed to persistent efforts, in the case of procurement over nearly a decade. Impressive results were also seen in business climate reforms, where in both business registrations and inspections, the authorities mustered firm commitment, built coalitions of support with the private sector, adopted modern technologies (such as Kontra Pro) to achieve decisive change. Reforms with the deposit insurance system took time but were adopted with the result of a credible system now being in place. Commitment has been mixed in areas of PFM reforms, corporate governance, and in the energy sector. In the financial sector, the reform attempt was too ambitious, and commitment is now being demonstrated with implementing risk-based supervision of banks with the assistance of a Bank investment project. 27 Though the government has established elaborate structures for pursuing anti- corruption reforms, the results are still to be seen. There is a need to reinforce commitment and coherence to the complex agenda of reforms in this area, to have clear implementation responsibilities and to tilt the focus from enforcement, to working on incentives and institutions. The authorities have been slow at times to resolve implementation difficulties. In energy, the shortcomings in the reporting by distribution companies have been left addressed as has the issue of non-publication of audit reports. Similarly, prompt and effective action was not taken to ensure the convergence of the composition of expenditure outturns to approved estimates, nor to ensure the full functioning of the single treasury account. A robust monitoring and evaluation system would have assisted with dealing with emerging implementation problems. Taking the factors discussed above into account, a rating of Moderately unsatisfactory for the Borrower is justified. (b) Implementing Agency or Agencies Performance Rating: Not Applicable (c) Justification of Rating for Overall Borrower Performance Rating: Moderately unsatisfactory 6. Lessons Learned First, the number of prior actions and areas covered by operations of this type should be parsimonious, with a more concentrated set of implementation actors. To the extent possible, the prior actions should not take a process orientation, but should drill into the critical actions that need to be taken in order to secure the intended results, and/or ensure that process actions are effectively complemented by implementation measures in follow-on engagement. Second, the programmatic nature of the operations should be reinforced as reforms take several years to be implemented. It is important to build continuity. The focus on governance and competitiveness reforms, given their critical importance for economic and social stability, needs to be maintained. Government commitment and ownership in both these areas has been built up over years; it is now necessary to translate objectives into changes in incentives and institutions so as to achieve sustainable results. Third, the critical foundation of success is a viable fiscal position. The DPO series have countenanced insufficient fiscal adjustment as evidenced by volatility in fiscal deficit outcomes and build-up of external debt. A firm medium-term fiscal adjustment would allow fiscal space to be regained and the prospects of external debt distress reduced. Actions on the efficiency of public spending as analyzed in the public expenditure review notes would raise the quality of fiscal adjustment. 28 Fourth, implementation of reforms can be strengthened through a set of actions. The development of a unified and robust monitoring and evaluation framework that is actively used to manage reform implementation is a high priority. The overall management and coordination of reforms requires a sufficiently empowered government institution that can hold other ministries and agencies to account. The fragmentation of responsibilities in governance reforms should be addressed. The question of whether the overall strategic and implementation responsibility for the operations should rest with the office of the prime minister in view of some political and capacity shortcomings with the Ministry of Finance needs examination. Fifth, prior actions should be focused on reform themes that have the demonstrated commitment of the authorities. If commitment is insufficient in an area deemed to be critical to macroeconomic stability, governance, or private sector growth, the DPO series should be re-programmed to the point where such commitment has been built up. Sixth, the design of prior actions needs to address the critical actions that have to be taken to ensure the purpose of the reforms and secure the intended results. Prior actions crafted so that only the first policy action is taken have failed on occasions to yield the expected results, especially when the authorities lacked the commitment or the incentives to take the critical follow-up steps. Seventh, a candid assessment of commitment and capacity risks should be undertaken together with proposals for mitigation. Supervision efforts should focus to a greater degree on such risks and mitigation proposals should be a part of the dialogue. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies The comments of the Ministry of Finance are attached in Annex 4. The Ministry of Finance states that the draft ICR is “fragmented and incomplete”. This seems to be related to the fact that the draft ICR concludes that the results expected under the Governance and anti-corruption reforms policy area have not been achieved. The ICR authors cannot agree with such a statement. Explaining the result for control of corruption, the draft ICR does indicate that the results framework in this policy area was poorly designed arguing that the policy action - verification of declaration – can have only a tenuous impact on the control of corruption index (Section 3.2 Achievement of Program Development Objectives). Further, the draft ICR points out that the design suffered from a tenuous relationship between the prior actions and the results specifically referring to this policy area (Section 5.1(a) Bank Performance in Ensuring Quality at Entry). On the other policy areas, the Ministry of Finance agrees that the DPO series made good progress in achieving program development objectives. 29 (b) Co-financiers Not applicable (c) Other partners and stakeholders Not applicable 30 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members P126034 – First Development Policy Operation Names Title Unit Responsibility/Specialty Adam Shayne Chief Counsel LEGAM Legal Afsaneh Sedghi Senior Economist GMF11 Senior Economist Aibek Baibagysh Uulu Consultant GPV03 Consultant Anastassia Alexandrova Senior Country Officer SACPA Country Officer Ani Balabanyan Lead Energy Specialist GEE01 Lead Energy Specialist Bakyt Dubashov Economist GMF11 Economist Lead Financial Sector Damodaran Krishnamurti GFM1A Finance Sector Specialist Specialist Dener Cem Lead Governance Specialist, GGO19 Governance Erkin Mamadaliev Senior Operations Officer GSPGL Operations Gary McMahon Consultant GEEX1 Consultant Helen Edmundson Consultant GMF11 Consultant Irina Goncharova Procurement Specialist GGO03 Procurement Jana Kunicova Sr. Public Sector Specialist GGO14 Public Sector Specialist John Ogallo Sr Financial Management OPSPF Finance Jyldyz Abdyrakhmanova Consultant GTCEE Consultant Klaus Decker Sr. Public Sector Specialist GGO17 Public Sector Lilia Saetova Consultant GG015 Consultant Majed El-Bayya Lead Procurement Specialist, GGO03 Procurement Marat Iskakov Consultant GEE03 Consultant Maya V Gusarova Senior Public Sector Specialist GGO15 Public Sector Migara De Silva Senior Economist GGO15 Economist Nagaraju Duthaluri Lead Procurement Specialist GGO01 Procurement Orhan Niksic Economist GMF11 Economist Senior Private Sector Raha Shahidsaless GTC04 Private Sector Specialist Specialist Samuel Munzele Maimbo Practice Manager GFM3A Practice Manager Sarah Nankya Babirye Program Assistant GMF11 Program Assistant Sarosh Sattar Senior Economist GPV03 Senior Economist Saumya Mitra Consultant GMF11 Consultant Sunil Kumar Khosla Lead Energy Specialist GEE02 Energy Specialist Zhanybek Ybraiym Uulu Public Sector Specialist GG015 Public Sector Specialist P126274 – Second Development Policy Operation Names Title Unit Responsibility/Specialty Aibek Baybagysh Uulu Consultant GPV03 Consultant Aliya Kim Financial Management GGO21 Finance Specialist Ani Balabanyan Lead Energy Specialist GEE01 Lead Energy Specialist Bakyt Dubashov Economist GMF11 Economist 31 Names Title Unit Responsibility/Specialty David Nummy Sr. Public Sector Specialist GGO15 Public Sector Evgenij Najdov Senior Economist GMF05 Economist Fredesvinda Fatima Sr. Financial Sector GFM2A Finance Montes Specialist Irina Goncharova Procurement Specialist GGO03 Procurement Jana Kunicová Sr. Public Sector Specialist GGO14 Public Sector Specialist Jasna Mestnik Finance Officer WFALN Finance Jieun Choi Economist GTC03 Economist John Daniel Pollner Lead Financial Sector GFM04 Finance Specialist Joseph Formoso Sr. Financial Management GGO21 Finance Specialist Kamer Karakurum Senior Economist GMF05 Economist Ozdemir Klaus Decker Sr. Public Sector Specialist GGO17 Public Sector Laura Pop Sr. Financial Sector GFM1B Financial Sector Specialist Nagaraju Duthaluri Lead Procurement GGO01 Procurement Specialist Nargiza Tynybekova Consultant GTI11 Consultant Mairam Usupova Sr. Financial Sector GFM2A Finance Specialist Samuel Munzele Practice Manager GFM3A Practice Manager Maimbo Sarah Nankya Babirye Program Assistant GMF11 Program Assistant Sarosh Sattar Senior Economist GPV03 Senior Economist Zhanybek Ybraiym Public Sector Specialist GG015 Public Sector Specialist Uulu (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending P126034 77 385,833 P126274 73 259,295 32 Annex 2. Beneficiary Survey Results Not applicable 33 Annex 3. Stakeholder Workshop Report and Results Not applicable 34 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Below is the English translation of the letter from the Ministry of Finance, the comments on the draft ICR and the summary of the Ministry of Finance’s self-assessment report. The original copies of these documents in Russian are attached in the Portal as supporting documentation. Letterhead of Ministry of Finance August 3, 2017 No. 16-3-2/8761 World Bank Country Office in the Kyrgyz Republic The Ministry of Finance of the Kyrgyz Republic expresses its deep gratitude to the World Bank for the support rendered to our country in the priority areas of the social and economic development of the Kyrgyz Republic. In response to your letter No.2017-3-26 of June 7, 2017, regarding the draft Development Policy Operations (DPO-1 and DPO-2) Implementation Completion and Results Report, we hereby attach the relevant information. Once again, I would like to take this opportunity to express my deepest respect and gratitude for your direct support, as well as my hope for the continued fruitful cooperation. Attachment(s): - Comments on the draft DPO-1 and DPO-2 Program Implementation Completion and Results Report; - DPO-1 and DPO-2 Program Implementation Completion and Results Report. Deputy Minister M. Baigonchokov Department of International Cooperation B. Askarov 664812 35 Comments on the World Bank’s draft Development Policy Operations (DPO-1 and DPO-2) Program Implementation Completion and Results Report Overall, we would like to note that the World Bank’s DPO-1 and DPO-2 implementation completion and results report (ICRR) is fragmented and incomplete, and on the content of information about implementation of paragraph 1.1 (Governance and anti-corruption reform) under Pillar 1 (Improving Public Sector Governance), we would like to note that, according to the information provided in the ICRR, the target value for 2014 was 15 percentiles. However, as the World Bank notes, the actual value achieved in 2014 was only 11.54 percentile. The study of such a discrepancy between the targeted and the achieved values showed that, in the estimation of this indicator, the emphasis was solely on the declaration of income and assets. That is, the authors of the report overlooked any other corruption reduction instruments when determining the anti-corruption progress. Such a lopsided approach may have affected the low score of progress in this area. At the same time, reforms in the Kyrgyz Republic have been focused specifically on the prevention and eradication of corruption starting from 2010. We assume that the calculation of the percentile values has not taken into account certain achievements resulting from the implementation of the state’s anti-corruption strategy, departmental corruption dismantling plans, other government programs, and plans. Today, there is a framework of laws and regulations adopted to combat corruption in the governance area. The State Strategy of the Anti-Corruption Policy of the Kyrgyz Republic was approved by the Decree of the President of the Kyrgyz Republic No.26 of February 2, 2012. The Anti-Corruption Law of the Kyrgyz Republic (Law on combating corruption) No.153 of August 8, 2012, was adopted. State agencies and local authorities have developed their short- and long-term anti-corruption action plans. The Plan of Measures of State Bodies of the Kyrgyz Republic for Implementation of the State Strategy of Anti-Corruption Policy of the Kyrgyz Republic for 2015-2017 was approved by the Resolution of the Government of the Kyrgyz Republic No.170 of March 30, 2015. There are consistent efforts focused on the implementation of these policy documents. To this must be added the corruption prevention mechanisms in the public procurement area, the establishment of the position of designated corruption prevention official (commissioner) in each state body, as well as many other measures. Interview panels study relationships of applicants with their potential state and municipal service employers. As regards the issues of declaration viewed in the report as anti-corruption measures, significant positive results have been achieved in this area since 2013, as well. The issues of income declaration by employees in the governance sector are complemented by the declaration of their expenses, liabilities, and property. 36 There is an Interdepartmental Commission for the verification of declarations, based on the findings of which information on discrepancies is forwarded to the relevant law enforcement agencies. A unique methodology for the verification of declarations has been developed, approved and polished in practice based on a cross-sectional analysis of a large body of data on property and other assets. The practice of verification has started in 2013, which means it must certainly be reflected in the report as progress achieved by 2014. We also note that the following productive results have been achieved under DPO-1 and DPO-2:  Budgetary discipline and transparency in the use of budget resources have been increased, within the framework of which the Budget Code of the Kyrgyz Republic has been adopted, which strengthens control over unallocated funds in the Treasury, eliminates non-transparent contingency funds, promotes the introduction of internal audit and medium-term budget planning, and provides greater clarity to the budgeting cycle as a whole.  Public procurement transparency, where a unified system of electronic public procurement has been introduced. The portal has improved access to information about tenders and reduced paperwork. Thereby, it ensures fair competition among suppliers, that is, entrepreneurs, domestic and foreign companies.  Judicial reform, within the framework of which the Government Target Program for Development of the Judicial System of the Kyrgyz Republic for 2014-2017 has been developed. Implementation of the Target Program resulted in the creation of favorable conditions for the improved budget funding and logistical support for the courts, increased openness, transparency and accessibility of justice, improved efficiency of the judiciary, improved quality of judicial acts, as well as improved execution thereof.  Establishment of new enterprises and business operations, within the framework of which the Ministry of Justice issued an order containing: (a) a checklist for registration offices with specification of the grounds for rejecting business registration applications; and (b) instructions that applicants will receive after the first submission of all requests, with specification of the required additional information. Also, the number of days required for the registration of a business has been reduced by 10 days.  Business inspections: a single automated database for inspections of businesses (KontrPro3) in the Ministry of Economy and eleven inspectorates in the city of Bishkek has been introduced to reduce the burden of inspections on businesses.  Reinforcement of the NBKR supervisory function and enhancing financial sector stability: the program envisaged the development and enforcement of accounting for concurrent loans to borrowers in order to improve supervision; these objectives have been accomplished successfully. Also, commercial banks provide necessary information within their regulatory reporting, which is collected, processed, uploaded to the database, and used by the National Bank within the framework of external supervision and inspection.  Strengthening of the Deposit Protection System (DPS) legal framework , within the framework of which the Concept of the deposit protection system in the Kyrgyz Republic has been developed, which aims to strengthen the management, coordination, and operation of the deposit protection system. 37 Results: Increased confidence in banks, as evidenced by an increase in deposits as a percentage of GDP.  Energy sector transparency: increasing transparency of the energy sector by requiring energy companies to regularly publish on their websites: (i) monthly balances on special accounts of the ES (Power Plants OJSC) and NESK (National Power Grid of Kyrgyzstan OJSC), and transit accounts of Severelectro OJSC, Vostokelectro OJSC, Oshelectro OJSC, and Jalalabatelectro OJSC; (ii) quarterly operational and technical data of the above-mentioned entities; and (iii) annual financial statements, together with audit reports. Summary of the Ministry of Finance’s Self-evaluation Report for DPO1 and DPO2 The Ministry of Finance’s report states that the programmatic series of two development policy operations (DPO1 and DPO2) aimed to support reforms of the Kyrgyz Republic’s Government in such areas as: public financial management, anti-corruption, the court system, and the energy sector. The implementation of DPO1 and DPO2 policy actions involved several government agencies. The report emphasizes that the DPO series was an important program to enhance public sector management, and strengthen the financial, energy, social and private sectors, which are priority areas for the Kyrgyz Republic. The reforms supported by the DPO series contributed to achieving economic growth and social stability. It also notes that the financial support provided by the DPOs was timely for the budget. The report states that the program objectives have been achieved, thanks to reforms aimed at strengthening public management, improving the quality of the public services, supporting the law on public procurement, and enhancing transparency and accountability in the energy sector. In addition, the DPO series has contributed to improving the business environment, streamlining trade procedures, and enhancing the connectivity. These reforms were central to the Government’s Public Sector Reforms Roadmap and Private Sector Development Strategy. The report mentions that the policy actions included in the DPO matrices were consistent with the action plans of individual ministries and agencies which regularly reported on implementation progress to the Kyrgyz Republic Government. The report states that the Kyrgyz Government’s action plan for 2013-17 was focused on the priorities defined in the National Strategy on Sustainable Development covering 2013-17, and on maintaining macroeconomic and social stability as highlighted in Government’s annual plans. The main objectives of these action plans were to improve the living standards of the Kyrgyz citizens and achieve sustainable economic growth. The report states that the main achievement was the maintenance of the positive growth dynamics. Real GDP growth in 2016 was 3.8 percent with positive contributions from all the main sectors of the economy. The revenue of the state budget rose by 1.8 percent to 130.6 billion of soms in 2016 mainly due to tax revenue, which increased by 10.8 percent to 93.8 billion of soms. However, the deficit of the republican budget increased to 4.6 percent of GDP in 2016 from 1.5 percent in 2015 due to increased spending. Public debt amounted to 61.4 percent of GDP as of end-December 2016, down from 67.1 percent in 2015. External public debt, as a share of GDP, fell by 6.9 percent to 56.6 percent of GDP as a result of the nominal appreciation of the som during 2016. 38 The report further refers to the latest scores of the Kyrgyz Republic in international rating such as Doing Business, Economic Freedom, Corruption Perception and Global Competitiveness. These ratings are being used as monitoring indicators for the National Sustainable Development Strategy. The report also mentions actions undertaken by the Government to improve the budget formulation and implementation processes. In particular, it indicates that a new budget code was adopted in May 2016 and a new public financial management strategy for 2017-2025 was approved in December 2016; to enhance transparency in budget formulation process the Ministry of Finance has started to publish the so-called civil budget, which intends to explain the annual budget for laymen. The report also lists actions that the Government undertook to tighten spending in 2016. For instance, one of the decisions was a moratorium on increasing the number of staff in the government offices. The report concludes with highlighting successful outcomes achieved in the policy areas of the DPO series: 1. Governance and anti-corruption: to improve further the asset declaration process of public servants, the government has introduced mechanisms for cross-checking and verification of asset declaration reports; a new law on civil and municipal service defines a procedure for entering the public service, a career planning framework, performance assessment and professional and ethic requirements for public servants. 2. Budget discipline and transparency in the use of budget resources: a new budget code strengthens control over unallocated resources in the treasury, removes non-transparent reserve funds, promotes internal audit in public agencies, and provides increased transparency in budgeting. 3. Transparency in public procurement: the e-procurement portal contains all information about public procurement ensuring fair competition among potential private suppliers including foreign companies. 4. Court system reforms: the implementation of the state program on the court system development increased funding to the court system, improved transparency and accountability of the court system, and enhanced the efficiency of courts. This state program also helped improve enforcement of court decisions. 5. Business startups and operations: the Justice Ministry issued a decree introducing a checklist of required documents for registration of new businesses and mandating the registration office to provide justification and instructions in cases where registration is declined. In addition, the number of days required for registration was reduced by 10 days. 6. Business inspections: a single automated database on business inspections (KontrPro3) was introduced in the Ministry of Economy, and in 11 Inspectorates in Bishkek. This reduced the burden on private companies. 7. Strengthening NBKR’s supervision function and increasing financial sector stability: reporting on parallel loans was developed and introduced; these data are now collected, processed and analyzed by the NBKR for on-site inspections. 8. Strengthening the deposit protection system legislation: a concept aimed at improving management, coordination and functioning of the deposit protection system was developed and introduced; as a result, the ratio of deposits to GDP has increased. 9. Transparency of the energy sector: the energy companies are obliged to regularly publish on their web-sites the following information: (i) end-month balances on their special accounts, (ii) quarterly performance reports, and (iii) annual financial statements with audit reports. 39 Annex 5. Comments of Co-financiers and Other Partners/Stakeholders Not applicable 40 Annex 6. List of Supporting Documents 1. World Bank, Program Document for the First Development Policy Operation, Report No. 68057-KG, June 24, 2013 2. World Bank, Program Document for the Second Development Policy Operation, Report No. 86516-KG, May 12, 2014 3. World Bank, Interim Strategy Note for the period of FY 2012-13, Report No. 62777-KG, June 16, 2011 4. World Bank, Kyrgyz Republic Country Partnership Strategy for the period FY 2014-17, Report No. 78500-KG, June 24, 2013 5. World Bank, Worldwide Governance Indicators, 2011 6. World Bank, Worldwide Governance Indicators, 2014 7. World Bank, Doing Business, 2011 8. World Bank Doing Business, 2015 9. The Government of the Kyrgyz Republic, Medium-Term Development Program for 2012-14 10. The Government of the Kyrgyz Republic, National Sustainable Development Strategy for 2013-17 11. The Kyrgyz Republic, PEFA Assessment Report, December 2009 12. The Kyrgyz Republic, PEFA Assessment Report, March 2015 13. The Ministry of Finance of the Kyrgyz Republic, Cover Letter with Comments on the Draft ICR and Self-Assessment Report 41