Report No. 76310-MD Moldova Public Expenditure Review Capital Expenditures: Making Public Investment Work for Public Disclosure Authorized Competitiveness and Inclusive Growth in Moldova June 2013 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized CURRENCY AND EQUIVALENT UNITS (Exchange Rate as of June 1, 2013) Currency Unit = Moldovan Lei USD 1.00 = 12.52 MDL WEIGHTS AND MEASURES Metric System ABBREVIATIONS AIPA Agency for Interventions and Payments LTIS Land Transport Infrastructure Strategy in Agriculture CAP Common Agricultural Policy MDG Millennium Development Goal CID Capital Investment Division MoF Ministry of Finance CPA Central Public Authorities MTBF Medium-Term Budget Framework CPI Consumer Price Index NANFA Net Acquisition of Nonfinancial Assets DCFTA Deep and Comprehensive Free Trade NBM National Bank of Moldova Agreement DFID Department for International NBS National Bureau of Statistics Development DSA Debt Sustainability Analysis NDS National Development Strategy EC European Commission NPL Non-Performing Loans ECA Europe and Central Asia OECD Organization for Economic Cooperation and Development EFA-FTI Education for All –Fast Track Initiative PEFA Public Expenditure and Financial Accountability ENPARD European Neighborhood Program for PER Public Expenditure Review Agriculture and Rural Development EU European Union PFM Public Finance Management EUWI European Water Initiative PIM Public Investment Management FDI Foreign Direct Investment PPA Public Procurement Agency GDP Gross Domestic Product PPL Public Procurement Law GFS Government Finance Statistics PPP Public Private Partnerships GoM Government of Moldova SOE State Owned Enterprise HVA High Value Added TLS Transport and Logistics Strategy ICT Information and Communications VAT Value-Added Tax Technology IFI International Financial Institution VET Vocational Education and Training IFMIS Integrated Financial Management WDI World Development Indicators Information System LPA Local Public Authorities WHO World Health Organization Vice President : Philippe Le Houérou Country Director : Qimiao Fan Sector Director : Yvonne Tsikata Sector Manager : Carolina Sanchez-Paramo Task Leader : Mame Fatou Diagne CONTENTS ACKNOWLEDGMENTS ................................................................................................... I INTRODUCTION ............................................................................................................... I EXECUTIVE SUMMARY ................................................................................................II 1. MACROECONOMIC OUTLOOK AND IMPLICATIONS FOR FISCAL POLICY . 1 A. MACROECONOMIC OUTLOOK................................................................................................ 1 B. THE FISCAL POLICY CHALLENGE: SUPPORTING GROWTH AND COMPETITIVENESS WITH SIGNIFICANT BUDGET AND INSTITUTIONAL CONSTRAINTS .................................................. 5 2. PUBLIC CAPITAL EXPENDITURE IN MOLDOVA: TRENDS AND ALLOCATION .............................................................................................................. 9 A. STRUCTURE AND CLASSIFICATION OF THE CAPITAL BUDGET............................................. 9 B. RECENT TRENDS IN CAPITAL EXPENDITURE LEVELS AND EXECUTION .............................. 12 C. CURRENT SECTOR ALLOCATIONS AND TRENDS ................................................................. 14 D. PUBLIC INVESTMENT AND ECONOMIC TRANSFORMATION................................................. 16 E. EQUITY AND REGIONAL DISTRIBUTION.............................................................................. 17 F. CONCLUSION ...................................................................................................................... 18 3. IMPROVING PUBLIC INVESTMENT MANAGEMENT IN MOLDOVA: ISSUES AND RECOMMENDATIONS.................................................................................... 19 A. INTRODUCTION................................................................................................................... 19 B. KEY ISSUES AND RECOMMENDATIONS............................................................................... 20 C. CONCLUSIONS: MAIN RECOMMENDATIONS AND SEQUENCING .......................................... 39 4. IMPROVING CAPITAL EXPENDITURE OUTCOMES: SECTOR POLICY REFORM OPTIONS.................................................................................................... 45 A. TRANSPORT:REHABILITATING ROADS AND PROTECTING ASSET VALUE........................... 45 B. AGRICULTURE:BETTER TARGETING INVESTMENT SUBSIDIES FOR INCLUSIVE GROWTH... 51 C. UTILITIES:IMPROVING WATER AND SANITATION OUTCOMES ........................................... 58 D. EDUCATION:FROM NETWORK OPTIMIZATION TO QUALITY IMPROVEMENTS .................... 61 E. HEALTH:OPTIMIZING THE NETWORK TO IMPROVE QUALITY AND EFFICIENCY................. 65 APPENDIX 1: MOLDOVA’S CLASSIFICATION OF CAPITAL EXPENDITURE.................................. 69 APPENDIX 2: THE MOLDOVA BOOST MODULE FOR CAPITAL EXPENDITURE ANALYSIS......... 70 APPENDIX 3: SUMMARY ASSESSMENT OF MOLDOVA’S PUBLIC INVESTMENT MANAGEMENT SYSTEM .............................................................................................................................. 72 TABLES Table 1.1: Main Macroeconomic Indicators, 2006–2012................................................................ 2 Table 3.1: Distribution of New Central and Local Investment Objects by Estimated Total Cost. 25 Table 3.2: Scoring of PEFA Indicators PI-11 and PI-12 for Moldova.......................................... 27 Table 3.3: Capital Investment Objects of Local Public Authorities, as Planned by Government and Approved by Parliament ..................................................................................... 29 Table 3.4: Central Public Authority Capital Investment Projects, as Planned by Government and Approved by Parliament ............................................................................................ 31 Table 4.1: Moldova Agricultural Support in Regional Perspective ............................................. 51 Table 4.2: Individual and Corporate Beneficiaries of Agricultural Support, 2010-2012.............. 54 Table 4.3: Summary of Proposed Reform Options for Agricultural Investment Programs .......... 57 FIGURES Figure 1: GDP Growth, 2001-2012 ................................................................................................ iii Figure 2: Expenditure Structure in Moldova, 2008-2012 (percent of GDP).................................. iii Figure 3: Large Sector and Economic Shifts in Capital Expenditure Allocation and Execution... iv Figure 4: Average Spending on Investment per Project, 2001-2011............................................... v Figure 5: Start Dates for Local Projects .......................................................................................... v Figure 1.1: GDP Growth, 2001-2012 .............................................................................................. 1 Figure 1.2: GDP Growth Decomposition in Moldova (percentage points)..................................... 1 Figure 1.3: Poverty Rates in Moldova (2006-2011), percent .......................................................... 2 Figure 1.4: Private Sector Credit and CPI, percent yoy (2008-2012) ............................................. 3 Figure 1.5: Exchange Rates and Foreign Exchange Reserves......................................................... 3 Figure 1.6: Investment and Savings (percent of GDP).................................................................... 3 Figure 1.7: Current Account and Foreign Direct Investment (percent of GDP) ............................. 3 Figure 1.8: Public and Publicly Guaranteed Debt Dynamics as a Share of GDP............................ 5 Figure 1.9: External Debt Dynamics as a Share of GDP................................................................. 5 Figure 1.10: General Government Fiscal Balance, 2002-2012 ....................................................... 6 Figure 1.11: Revenue Structure in Moldova, percent of GDP ........................................................ 7 Figure 1.12: Expenditure Structure in Moldova, percent of GDP................................................... 7 Figure 1.13: Comparative Budget Revenue Structure in Europe and Central Asia (2011)............. 8 Figure 1.14: Comparative Budget Expenditure Structure in Europe and Central Asia (2011) ....... 8 Figure 2.1: Economic Classification of Capital Expenditure in Moldova, 2006-2012 ................. 11 Figure 2.2: Road Fund Spending by Economic Classification, 2006-2012 .................................. 11 Figure 2.3: Trends in Capital Spending (excluding transfers for road maintenance), 2006-2012 12 Figure 2.4: Evolution of Central and Local Approved and Executed Capital Budgets................. 12 Figure 2.5: Capital Expenditure as a Share of GDP in ECA, 2011............................................... 13 Figure 2.6: Capital Expenditure and GDP Per Capita, 2011......................................................... 13 Figure 2.7: Large Sector and Economic Shifts in Capital Expenditure Composition................... 14 Figure 2.8: Per Capita Capital Spending by District, 2006-2012.................................................. 17 Figure 3.1: Average Spending on Investment per Object, 2001-2011