IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IDA-47520) ON A LOAN/CREDIT IN THE AMOUNT OF US$4 MILLION / US$8 MILLION ST.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IDA-47520) ON A LOAN/CREDIT IN THE AMOUNT OF US$4 MILLION / US$8 MILLION TO ST. LUCIA FOR AN Report No: ICR1978 ECONOMIC AND SOCIAL DEVELOPMENT POLICY LOAN/CREDIT December 19, 2011 Poverty Reduction and Economic Management Department Caribbean Countries Country Management Unit Latin America and Caribbean Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective October 6, 2011) Currency Unit = Eastern Caribbean Dollars (ECD) EC$ 1.00 = US$ 2.70 FISCAL YEAR January 1 December 31 ABBREVIATION AND ACRONYMS ASYCUDA BAICO M&E CCRIF CLICO NLTA DPL ECCB ESF ES DPL/DPC FDI ICR IMF OECS PDO RPS SLC-HBC SSN SSNA TEPA VAT Automated System for Customs Data British American Insurance Company Monitoring and Evaluation Caribbean Catastrophe Risk Insurance Facility Colonial Life Insurance Company Non-lending Technical Assistance Development Policy Loan Eastern Caribbean Central Bank IMF Exogenous Shock Facility Economic and Social Policy Development Policy Loan/Credit Foreign Direct Investment Implementation Completion and Results Report International Monetary Fund Organization of Eastern Caribbean States Program Development Objectives Regional Partnership Strategy Survey of Living Conditions and Household Budget Social Safety Net Social Safety Net Assessment Trade and Export Promotion Agency Value Added Tax Vice President: Pamela Cox Country Director: Francoise Clottes Sector Manager: Auguste Tano Kouame Task Team Leader: Ole Hagen Jorgensen ICR Team Leader: Ole Hagen Jorgensen ICR Primary Author: David E.Yuravlivker

3 ST. LUCIA Economic and Social Development Policy Loan/Credit CONTENTS DATA SHEET A. Basic Information.... i B. Key Dates.... i C. Ratings Summary.....i D. Sector and Theme Codes.....ii E. Bank Staff.....ii F. Results Framework Analysis....iii G. Ratings of Program Performance in ICRs v H. Restructuring....v Contents 1. Program Context, Development Objectives and Design Context at Appraisal Original Program Development Objectives (PDO) and Key Indicators (as approved) Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification Original Policy Areas Supported by the Program (as approved) Revised Policy Areas (if applicable) Other significant changes Key Factors Affecting Implementation and Outcomes Program Performance Major Factors Affecting Implementation Monitoring and Evaluation (M&E) Design, Implementation and Utilization Expected Next Phase/Follow-up Operation (if any) Assessment of Outcomes Relevance of Objectives, Design and Implementation Achievement of Program Development Objectives Justification of Overall Outcome Rating Overarching Themes, Other Outcomes and Impacts Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Bank Performance Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2: Program Matrix For The Proposed Economic and Social Development Policy Loan/ Credit (ES DPL/DPC) Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents MAP... 36

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5 A. Basic Information Country: St. Lucia Program Name: Economic and Social Development Policy Loan Program ID: P L/C/TF Number(s): IBRD-79190,IDA ICR Date: 10/26/2011 ICR Type: Core ICR Lending Instrument: DPL Borrower: Original Total Commitment: Revised Amount: USD 12.00M Implementing Agencies: Ministry of Finance Cofinanciers and Other External Partners: B. Key Dates GOVERNMENT OF ST. LUCIA USD 12.00M Disbursed Amount: USD 12.01M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 07/15/2009 Effectiveness: 09/24/ /12/2010 Appraisal: 04/20/2010 Restructuring(s): Approval: 06/08/2010 Mid-term Review: Closing: 06/30/ /30/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Unsatisfactory Substantial Moderately Satisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Unsatisfactory Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: N/A Overall Bank Overall Borrower Moderately Moderately Satisfactory Performance: Performance: Unsatisfactory i

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General industry and trade sector Non-compulsory pensions and insurance Other social services Theme Code (as % of total Bank financing) Other financial and private sector development Public expenditure, financial management and procurement Regulation and competition policy Social safety nets Trade facilitation and market access E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Francoise Clottes Yvonne M. Tsikata Sector Manager: Auguste Tano Kouame Rodrigo A. Chaves Program Team Leader: Ole Hagen Jorgensen Zafer Mustafaoglu ICR Team Leader: ICR Primary Author: Ole Hagen Jorgensen David E. Yuravlivker ii

7 F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) 1) Improve the business environment, competitiveness, and strengthen the financial sector, by supporting reforms to reduce delays in starting a business, buttress financial sector regulatory environment, mitigate regional contagion risks, and promote investment. 2) Improve public sector governance and economic management, by supporting reforms to improve public service efficiency and performance, increase the efficiency of tax collection, enhance fiscal discipline and strategic allocation of resources, strengthen accountability, and help cope with the adverse consequences of the global economic downturn. 3) Improve the effectiveness and efficiency of social safety nets, by supporting efforts to develop objective beneficiary selection criteria and transparent targeting mechanisms and prioritize social spending to vulnerable groups. Revised Program Development Objectives (if any, as approved by original approving authority) N/A (a) PDO Indicator(s) N/A (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) iii Formally Revised Target Values Actual Value Achieved at Completion or Target Years Legislation is in place requiring basic solvency margin (capital requirements) for life insurance companies and annuity definitions are tightened to ensure that products offered are clearly defined as insurance products and that they are covered under the relevant regulations No capital requirements and definition of annuity products was large and included deposit type products. As above. N/A The new insurance Legislation has passed the Parliament s first reading only. Parliament created a special committee, chaired by the Speaker, to revise the draft in consultation with stakeholders. Final approval is expected by end The new Act would include the above mentioned features. Date achieved 06/08/ /17/ /07/2011

8 Comments (incl. % achievement) Indicator 2 : Value (quantitative or Qualitative) Partially Achieved. Fiscally sustainable wage bill ensuring key public services coverage and quality do not decline Expenditures on wages and salaries were EC$316.2 million (10.77% of rebased GDP) in 2009/10 and EC$342.7 million (10.84% of rebased Central government GDP) in 2010/11. The Central government expenditure on ratios with respect to expenditure on wages and wages and salaries the old GDP series salaries projected to contained to below N/A were 11.87% and increase from 11.7% of 12% of GDP in 11.92%, respectively. GDP in 2009 to 12.4% of 2010 and reduced to However, the actual GDP in 2010; 10.3% of GDP in number of established the medium term. employees in central government was 6,632 in 2008/09, 6,834 in 2009/10 and 7,050 in 2010/11, i.e., above the cap of 6,884 established in 2008/09. Date achieved 06/08/ /17/ /07/2011 Comments (incl. % achievement) Partially Achieved. Indicator 3 : Higher efficiency on tax and customs administration. Value (quantitative or Qualitative) Operating costs of collecting EC$1 were 3.3 cents; Operating costs of collecting EC$1 are 3.0 cents Date achieved 06/08/ /17/ /07/2011 Comments (incl. % achievement) Not Achieved. iv N/A For customs only, the operating cost of collecting EC$1 was 3.30 cents in FY2008/09, 3.25 cents in FY2009/10, and 3.39 cents in FY2010/11. The equivalent costs of Inland Revenue were 1.37, 1.57, and 1.62, respectively. The total costs for Customs and Inland Revenue combined were: 2.40, 2.51, and 2.59 cents.

9 Indicator 4 : Value (quantitative or Qualitative) Critical information exists to allow developing objective selection criteria for beneficiaries and functional targeting mechanisms for social programs No such information available. As above N/A There is no new specific information for the selection of beneficiaries and targeting mechanism. The Ministry of Social Transformation views information from the Survey of Living Conditions and Household Budget Survey (SLC-HBC) of 2006, as still pertinent Date achieved 06/08/ /17/ /07/2011 Comments (incl. % achievement) Not Achieved. G. Ratings of Program Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 06/29/2010 Satisfactory Satisfactory /11/2011 Moderately Unsatisfactory Moderately Unsatisfactory H. Restructuring (if any) Not Applicable v

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11 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. Although more diversified than other small Caribbean economies, St. Lucia is highly vulnerable to economic and natural shocks. First, St. Lucia suffers from the myriad disadvantages of limited scale due to its size. Second, St. Lucia has a strong degree of openness and is subject to commodity booms and busts, which compound the challenges of macroeconomic management and create uncertain growth paths. Third, the six Organization of Eastern Caribbean States (OECS) countries consistently rank in the top ten in the world in terms of their exposure to natural disasters and climate change impacts. Fourth, St. Lucia has not benefited much from international aid for years, in part due to its middle-income status. Overall, due to a combination of high exposure to natural disasters, a small size and limited diversification, St. Lucia is much more sensitive to external shocks than most other countries in the world and faces increasingly difficult policy choices, especially in the wake of the global financial crisis. 2. After growing 3.6 percent annually on average during , economic activity slowed down sharply due to a series of external shocks: Hurricane Dean in August of 2007, an earthquake in November 2007, and the food and energy price spikes in In addition, St. Lucia was hit hard by the global financial crisis: real GDP contracted by 1.3 percent in 2009, after growing by 5.8 percent in 2008 (Table 1). The recession in the United States and Europe resulted in fewer tourism arrivals, as well as lower foreign direct investment (FDI) inflows and remittances. At the same time, the failure of the CL Financial Group in Trinidad and Tobago, which hit hard most OECS countries, had a much smaller impact on St. Lucia due to the prudent capital requirements established in 1995 and to a forceful enforcement of insurance regulations. 3. The Government of St Lucia implemented sound macroeconomic policies prior to the crisis. The satisfactory track record of macroeconomic performance enabled St. Lucia to obtain a disbursement of SDR6.9 million (approximately US$10.7 million) under the Rapid- Access component of the Exogenous Shocks Facility (ESF) from the International Monetary Fund (IMF) in July However, facing weaker than anticipated economic activity, the authorities expanded capital expenditures to mitigate the adverse impact of the external shocks on employment and the poor. Higher capital expenditures coupled with lower revenues and grants resulted in a primary deficit of 1 percent of GDP compared with a projected surplus of 0.8 percent of GDP in The percentage of the population living in poverty reached 28.8 percent in 2005/2006. The Country Poverty Assessment in 2005/2006 found that almost 60 percent of the poor were below the age of 25. Poverty rates in rural districts were significantly higher than the national average, giving rise to rapid migration to the north-west of the island. The unemployment rate reached 16.8 percent by end-2008, with much higher rates among youth and females, and there was no unemployment insurance program. 1

12 Table 1: Selected Economic Indicators, Projections (Annual percentage change) National income and prices GDP at constant prices CPI Inflation (end of period) Food Inflation (end of period) Money and credit Credit to the private sector Money and quasi-money (M2) (In percent of GDP, unless otherwise indicated) Central Government Revenue and Grants Total Expenditure Wages and Salaries Primary balance Interest Overall balance External Sector Current account balance of which exports of goods and services of which imports of goods and services Capital and Financial Account Tourism Receipts Foreign Direct Investment Public and publicly guaranteed debt Domestic External Sectoral Growth Decomposition, Growth Decomposition by Sector (Annual percentage change) Government Services Agriculture Industry Construction Hotels & Restaurants Banking Trade and Transport Other Sectors GDP Growth Source: IMF 2010 Art IV and World Bank Staff Calculation: Note: The SLU authorities launched a new accounting methodology for GDP yielding a 14 percent higher GDP for These new GDP figures pulled SLU s debt-to- GDP ratio back to 63 percent from 72 percent for 2009, which keeps the country under a moderate risk of debt distress. In addition, fiscal measures related to GDP look in better shape. 2

13 5. The medium term agenda and the specific priorities of the St. Lucian Government were stated in Budget Speeches for FY2009/10 and FY2010/11. The program placed a strong emphasis on private sector development through strengthening the partnership between the Government and the private sector to stimulate the economy and set the stage for higher and sustained growth in the medium term. It emphasized the need to ensure the health of the financial sector through measures to strengthen the supervisory and regulatory framework, and it also emphasized the need for regional integration. To address the social impact of the crisis, the program focused on economic and social empowerment of households and poverty reduction. Lastly, it called for greater effectiveness and efficiency of the public service and operations of Government Departments. 6. The Government continued to implement reforms in 2009 and 2010, despite challenges created by the global crisis. Advances in the reform program included the creation of an online portal for company registration, submission to Parliament of the new Insurance Bill aiming at improving the regulatory environment and mitigating the risk of contagion from international financial markets, appointment of a Judicial Manager to perform a financial review of British American Insurance Company (BAICO) with a view to reach an orderly resolution, introduction of a cap on public employment in order to contain the rise in public spending on wages, initiation of functional review of Public Departments, and creation of a Steering Committee to improve targeting of social safety net programs. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) Key Development Objectives: Improve the business environment, competitiveness, and strengthen the financial sector by supporting reforms to reduce delays in starting a business, buttress financial sector regulatory environment, mitigate regional contagion risks, and promote investment. Improve public sector governance and economic management by supporting reforms to improve public service efficiency and performance, increase the efficiency of tax collection, enhance fiscal discipline and strategic allocation of resources, strengthen accountability, and help cope with the adverse consequences of the global economic downturn. Improve the effectiveness and efficiency of social safety nets by supporting efforts to develop objective beneficiary selection criteria and transparent targeting mechanisms and prioritize social spending to vulnerable groups. Key Outcome Indicators: Legislation is in place requiring basic solvency margin (capital requirements) for life insurance companies and annuity definitions are tightened to ensure that products offered are clearly defined as insurance products and that they are covered under the relevant regulations (Baseline: no capital requirements and definition of annuity products was large and included deposit type products in 2009). Fiscally sustainable wage bill ensuring key public services coverage and quality do 3

14 not decline (Baseline: Central government expenditure on wages and salaries projected to increase from 11.7% of GDP in 2009 to 12.4% of GDP in 2010; Target: Central government expenditure on wages and salaries contained to below 12% of GDP in 2010 and reduced to 10.3% of GDP in the medium term). Higher efficiency on tax and customs administration (Baseline: operating costs of collecting EC$1 were 3.3 cents in 2008; Target: operating costs of collecting EC$1 are 3.0 cents). Critical information exists to allow developing objective selection criteria for beneficiaries and functional targeting mechanisms for social programs (Baseline: no such information available prior to August 2009). 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification N/A 1.4 Original Policy Areas Supported by the Program (as approved) 7. The Economic and Social Policy Development Policy Loan/Credit (ES DPL/DPC) supported policies and reforms intended to assist the Government of St. Lucia in dealing with the global crisis and further advancing the country s longer term development agenda. In particular, it supported measures to improve public service delivery and social assistance, enhance the country s competitive position and better manage the inherent vulnerability of a small and open economy. The ES DPL/DPC was organized around three pillars, consistent with the Government s Program as outlined in the previous section. Consequently, the program supported core measures to help: (i) improve the business environment and financial sector; (ii) improve public sector governance and economic management; and (iii) strengthen social safety nets Component 1: Improving Competitiveness and Strengthening the Financial Sector 8. The move toward Caricom Single Market Economy posed new challenges for private sector activities in St. Lucia. In particular, the diversification strategy that turned the country into one of the most diversified islands in the region was no longer relevant. To adjust to this new reality, the authorities prepared a new Private Sector Development Strategy jointly with a National Investment Strategy that focused on bringing more Foreign Direct Investment, including from nationals living abroad. In addition, the government prepared a Competition Law to ensure that the benefits of the Caribbean Single Market Economy are not lost to anticompetitive practices. The government was also reviewing the proposal of the creation of a new Trade and Export Promotion Agency (TEPA). 9. To facilitate the registration of new companies, the Registrar s office moved from manual to electronic registration process. The objective was to put all records of the Registry Office in electronic format. To completely eliminate manual barriers, a new Electronic Transaction Act was envisioned to allow online collection of fees. 4

15 10. The government was fully aware of the risks in regional financial markets and intended to move ahead with a new Insurance Act to improve regulations and mitigate contagion risks. The new insurance act was to follow recommendations of the Eastern Caribbean Central Bank with the aim of strengthening the existing legislative and institutional capacity for better regulation of the market. 11. The government also appointed a Judicial Manager to handle the BAICO financial fallout. The financial collapse of BAICO and Colonial Life Insurance Company (CLICO) called for both a short term response to protect policy holders and a longer term financial regulatory reform. In the short term, the ES DPL/DPC supported the appointment of a Judicial Manager by the Ministry of Finance and the Registrar of Insurance as a positive step towards addressing the financial resolution of BAICO. The Judicial Manager would manage and take stock of the company s assets by initially preventing policyholders from recovering any money while under its control and thus safeguard the interest of policyholders. Further, it would prepare a comprehensive report of the financial status of the company within 90 days of his appointment, and present recommendations to resolve the BAICO case to the Courts. 12. Consistent with these objectives, the ES DPL/DPC prior actions under this pillar were: (i) the online company registration portal had been launched; (ii) The Borrower has submitted to its Parliament an Insurance Bill; and (iii) The Borrower, through its High Court, has appointed a Judicial Manager to perform a review of BAICO within the Borrower s territory, with a view to recommending an orderly resolution in connection with the insolvency of BAICO Component 2: Improving Public Sector Governance and Economic Management 13. The ultimate objective of this component was to increase efficiency in the public administration, improve productivity in public service delivery and achieve a more sustainable and predictable wage bill. In the short term, the Program focused on keeping the public wage bill fiscally sustainable through aggregate measures such as capping the level of public employment and identifying efficiency and productivity gains through functional and institutional reviews. Following consolidation of two Ministries (Ministry of Finance and Ministry of Economic Planning and National Development), the Program supported the initiation of the process for reviewing the existing human resource management system together with the pay and classification systems in the public administration. 14. The Program also supported the government s efforts to reinforce revenue generation capacity and improving efficiency of tax collection. A new Value Added Tax (VAT) would replace 4 consumption taxes. The introduction of the VAT would facilitate efficient collection, strengthen the revenue flow and create incentives for expanding savings. In addition, the Program supported a modernization of customs through the implementation of Automated System for Custom Data (ASYCUDA) World. Both the VAT and the custom reforms were expected to help the private sector comply with laws and regulations. 15. To achieve these objectives, the Program supported the following measures: (i) a cap on public service employment to hold the size of funded positions at the FY 2008/2009 levels, and no funding of vacant approved positions as outlined in the FY 2009/2010 budget; (ii) 5

16 merger of the Ministry of Finance and the Ministry of Economic Planning and National Development to create the Ministry of Finance, Economic Affairs and National Development under the administration of a single Permanent Secretary; (iii) institutional review of the Ministry of Foreign Affairs and operation and efficiency reviews for the Ministry of Social Transformation and the Ministry of Communications, Works, Transport and Public Utilities have been initiated; (iv) submission to Parliament of a Value Added Tax Bill and establishment of a VAT Implementation Unit with functional with adequate staffing and resources; and (v) implementation of ASYCUDA World program in its customs department, including providing the required financing for implementation of that program in the FY 2009/2010 budget, training customs administration personnel, completion of a prototype software for ASYCUDA World program, and developing a corporate strategic and business plan outlining a sequential implementation of the ASYCUDA World program for the following three years Component 3: Improving the Effectiveness and Efficiency of Social Safety Nets 16. The objective of this component was to strengthen the crisis response capacity of St. Lucia s social safety net (SSN), and to improve its effectiveness and efficiency in the medium and long term. The first step would be a Social Safety Net Assessment (SSNA) to evaluate the social assistance programs and to identify immediate steps to improve their support to poor beneficiaries. In the long term, the Program supported actions to build consensus for reform of the social safety net among key stakeholders and establish appropriate actions and sequencing of tasks to undertake that reform. 17. Among the immediate actions to improve safety net outcomes identified by the SSNA was the improvement of the targeting mechanism of the Koudemain program. This program is a pilot modeled on Chile s Puente program, covering 47 of the poorest households in 4 communities in St. Lucia. Koudemain connects these households with all relevant social assistance programs, and provides them with intensive psychological support over a two-year period. The SSNA recommended a review of the targeting mechanism by an econometrician to validate its quality or make recommendations for improving it. The Government would then assess whether it is appropriate to use that instrument for other social assistance programs, including Public Assistance. Another key recommendation of the SSNA was to consolidate all programs targeted to the poor under the Ministry of Social Transformation. Introducing a transparent targeting mechanism, streamlining payment mechanisms, and documenting policies and procedures, would also strengthen the efficiency and effectiveness of the program. It was expected that the consolidation of programs targeted to the poor, the strengthening of the Public Assistance program, and improved targeting of social assistance programs, would yield fiscal savings. 18. The longer term reforms would come about as part of the process of building constituencies for SSN improvement, and through critical actions to strengthen its efficiency and effectiveness that would necessarily take a longer time than the life of the ES DPL/DPC. The process of building support for change is a critical first step in the reform process, as has been demonstrated by the experience of Jamaica. In the case of St. Lucia, Cabinet established a Steering Committee to spearhead reforms and to elaborate an Action Plan to do so. In coordination with the implementation of the ES DPL/DPC, the Bank provided Non- 6

17 lending Technical Assistance (NLTA) to the Government of St. Lucia and other OECS countries in the area of social safety net reform. 1.5 Revised Policy Areas (if applicable) N/A 1.6 Other significant changes N/A 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 19. All the reforms supported by the DPL were conditions for Board presentation, and thus were deemed to be implemented prior to approval of the Credit/Loan. The status of those reforms, as well as the status of the Expected Outcomes of the Program as of October 2011, is reported in Table 2 below. 20. While the government stayed the course in its reform program, implementation was slower than expected. For several months, government agencies focused their efforts in alleviating the damage caused by Hurricane Tomas, and implementation of reforms became slower. Little progress was made on the public sector governance and economic management component, with merely one outcome indicator achieved. On the social safety net component, two of the three outcome indicators were not achieved. However, with regard to the BAICO resolution, St. Lucia made substantial progress on revising the draft of the new Insurance Act in consultation with stakeholders. Policy Actions Supported by ES DPL/DPC to be met prior to Board Approval Table 2: Prior Actions and Status of the Reforms (Core policy actions are in bold. Program implementation milestones are not) Expected Outcomes from Actual Outcomes (October 2011) ES DPL/DPC (by June 2011) Component I. Improving Business Environment, Competitiveness, and Strengthening the Financial Sector. The online company registration portal has been launched. Time required to register a business has been reduced by 80 percent (Baseline: 20 days to register a business in 2009). 7 Partially Achieved. The online company registration portal, which was launched in April 2009, includes a search component and a company registration component. The first component has been in operation, while the second has not. As of October 2011, no companies had been registered through the portal. According to Doing Business reports, the number of days to register a business was reduced from 20 days in 2009 to 14 days

18 Policy Actions Supported by ES DPL/DPC to be met prior to Board Approval Expected Outcomes from ES DPL/DPC (by June 2011) Actual Outcomes (October 2011) in Several private sector lawyers involved in company registration indicated that the registration process took on average 5-10 days in January- June The Borrower has submitted to its Parliament an Insurance Bill. Legislation is in place requiring basic solvency margin (capital requirements) for life insurance companies and annuity definitions are tightened to ensure that products offered are clearly captured as insurance products and that they are covered under the relevant regulations (Baseline: no capital requirements and annuity products included deposit type products in 2009). Partially Achieved. The new Legislation has passed the Parliament s first reading only. Thereafter, Parliament created a special committee, chaired by the Speaker, to revise the draft in consultation with stakeholders. Final approval is expected by end-2011, and in full effect in early Existing legislation has many of the required measures. The new Act would increase capital requirements as well as solvency margins for general insurance, and it would establish a solvency margin for life insurance. The new Act would also define annuities to ensure that they are insurance products and not partly cash deposit type instruments. The Borrower, through its High Court, has appointed a judicial manager to perform a review of BAICO within the Borrower s territory, with a view to recommending an orderly resolution in connection with the insolvency of BAICO. A regional plan for the orderly resolution of BAICO/CLICO collapse has been developed and St Lucia actively participates in implementing the regional resolution (Baseline: no mitigation plan existed in 2009). Component II. Improving Public Sector Governance and Economic Management Achieved. A regional plan for the resolution of BAICO has been developed. St. Lucia plays an active part in the resolution plan through the participation of Mr. Calixte Leon, Director of the Financial Supervision Unit, in the regional Technical Core Committee for resolution of BAICO/CLICO. Mr. Leon also chairs the regional committee of insurance regulators. The Borrower has established a cap on public service employment to hold the size of funded positions at the FY 2008/2009 levels (6884 funded positions), and stopped the funding of vacant approved positions as outlined in the FY 2009/2010 budget (7603 approved positions) in said sector The Borrower has merged its Ministry of Finance and the Fiscally sustainable wage bill ensuring key public services coverage and quality do not decline (Baseline: Central government expenditure on wages and salaries projected to increase from 11.7% of GDP in 2009 to 12.4% of GDP in 2010; Target: Central government expenditure on wages and salaries contained to below 12% of GDP in 2010 and reduced to 10.3% of GDP in the medium term). Achieved. Expenditures on wages and salaries were EC$316.2 million (10.77% of rebased GDP) in 2009/10 and EC$342.7 million (10.84% of rebased GDP) in 2010/11. The ratios with respect to the old GDP series were 11.87% and 11.92%, respectively. Funded established positions were 6,732 in 2009/10 and 6,840 in 2010/11. However, the actual number of established employees was higher than the funded positions in 2009/10 and 8

19 Policy Actions Supported by ES DPL/DPC to be met prior to Board Approval Ministry of Economic Planning and National Development to create the Ministry of Finance, Economic Affairs and National Development under the administration of a single Permanent Secretary, pursuant to its Cabinet Decision No. 989 of Institutional review of the Ministry of Foreign Affairs and operation and efficiency reviews for the Ministry of Social Transformation and the Ministry of Communications, Works, Transport and Public Utilities have been initiated.. The Borrower has: (a) submitted to its Parliament a Value Added Tax Bill; and (b) has established a VAT Implementation Unit and made said unit functional with adequate staffing and resources. The Borrower has commenced the implementation of ASYCUDA World program in its customs department as follows: (a) allocated an amount of approximately EC$1.5 million for the implementation of said Expected Outcomes from ES DPL/DPC (by June 2011) Enhanced efficiency and performance of public sector institutions (Baseline: No rigorous reviews with the objective of improving public service efficiency and performance are undertaken; Target: Recommendations to achieve better strategic management and policy operations, and enhance public sector efficiency in select ministries are submitted to Cabinet for Approval.) Government s indirect tax collection (inland revenue and customs) improved by EC$28 million, or 1.0 percent of GDP (Baseline: Indirect tax collection on instruments replaced by the VAT was EC$168 or 6.0 percent of GDP in FY2009/10). Higher efficiency on tax and customs administration (Baseline: operating costs of collecting EC$1 were 3.3 cents in 2008; Target: operating costs of collecting EC$1 are 3.0 cents). Actual Outcomes (October 2011) 2010/11: The number of employees in central government was 6,632 in 2008/09, 6,834 in 2009/10 and 7,050 in 2010/11. Part of the increase in 2010/11 was due to the recruitment of police officers to address the rising security concern. Partially Achieved. Functional reviews were carried out in the Ministry of Social Transformation and in the Ministry of Communication, Works, Transport, and Public Utilities. The Ministry of Social Transformation supported the recommendations of the review, which included additional resources for the Ministry. However, the Ministry of Communication, Works, Transport, and Public Utilities did not concur. Thus, Cabinet took note of the recommendations but did not adopt them. Not Achieved. Introduction of the VAT has been postponed. The 2011/12 Budget Address indicates that the VAT will be implemented by April Government indirect tax collections (inland revenue and customs) improved from EC$473.4 million in FY2009/10 to EC$493.8 million in FY2010/11. The VAT will replace four taxes: (i) consumption tax (on imports and domestic good); (ii) environmental levy; (iii) mobile phones; (iv) motor car rental. These four taxes yielded EC$174.1 million in FY2009/10 (5.92% of GDP) and the estimated revenue for 2010/11 is EC$153.2 million. Taking into consideration that in FY2010/11 the consumption tax on fuel was converted into an excise tax, which raised EC$44 million, revenues of those taxes increased by about EC$23 million in 2010/11. Not Achieved. For customs only, the operating cost of collecting EC$1 was 3.30 cents in FY2008/09, 3.25 cents in FY2009/10, and 3.39 cents in FY2010/11. The equivalent costs of Inland Revenue were 1.37, 1.57, and 1.62, respectively. The total costs for Customs and Inland 9

20 Policy Actions Supported by ES DPL/DPC to be met prior to Board Approval program in the FY 2009/2010 budget; (b) launched a training program for its customs administration personnel; (c) completed a prototype software for ASYCUDA World program; and (d) developed a corporate strategic and business plan outlining a sequential implementation of said ASYUDA World program for the next three years. Expected Outcomes from ES DPL/DPC (by June 2011) Actual Outcomes (October 2011) Revenue combined were: 2.40, 2.51, and 2.59 cents. Component III. Improving Effectiveness and Efficiency of Safety Nets The Borrower has: (a) completed a Social Safety Net Assessment; and (b) conducted subsequent stakeholder consultations on the results of said assessment. Critical information exists to allow developing objective selection criteria for beneficiaries and functional targeting mechanisms for social programs (Baseline: no such information available prior to August 2009). Not Achieved. There is no new specific information for the selection of beneficiaries. The Ministry of Social Transformation views information from the Survey of Living Conditions and Household Budget Survey (SLC-HBC) of 2006, which was part of the Country Poverty Assessment, as still pertinent for an objective beneficiaries selection criteria and targeting mechanism. The next Survey is planned for September In addition, the Ministry intends to use information from the 2010 national census, and it is now preparing a Multiple Indicators Cluster Survey with support of UNICEF. The Borrower has established a Social Safety Net Steering Committee to spearhead reform efforts of its Social Safety Net System. An Action Plan has been formulated by the Social Safety Net Steering Committee whose priorities will include the upgrading of the Public Assistance Program, and review of the Public Assistance Law. The government has initiated the review of the targeting mechanism for the Koudemain program in An action plan for reforming the social safety nets has been developed and is being implemented (Baseline 2009: no action plan or strategy). Review of targeting for Koudemain is completed and mechanism is revised based on this review. A technical ground 10 Not Achieved. The first Action Plan was not implemented for lack of budget. A Poverty Reduction Strategy and interim work plan were completed in July 2011, and were scheduled to be submitted to cabinet by end-october Phase 1 of the reform will address the public assistance program, and other programs will follow. Partially Achieved. The St. Lucia Social Development Fund and the Ministry of Social Transformation have carried out

21 Policy Actions Supported by ES DPL/DPC to be met prior to Board Approval order to lay the ground for a proxy means test that can be used for the broader social safety net programs. Expected Outcomes from ES DPL/DPC (by June 2011) exists for proxy means testing for broader social safety net programs Actual Outcomes (October 2011) separate reviews of the targeting mechanism of the Koudemain program. The conclusion of the Ministry, however, was that the targeting mechanism used by the Koudemain, which is based on the Poverty Assessment, was not appropriate for other programs. The Ministry is now developing a new mechanism using proxy means testing, which would be piloted by Koudemain as it expands its coverage from 47 households to about 150 starting in November Major Factors Affecting Implementation 21. Several factors affected implementation of the Program. First, the scope of the Program was broad, given that this was a one-tranche operation covering reforms in three complex areas. Further, reforms in two of these areas public sector governance and the social safety net take substantial time to design and even more time to implement. Second, the time span of the Program 12 months, was too short, particularly as implementation was disrupted by Hurricane Tomas in late October Following the huge destruction caused by the hurricane, the authorities focused their attention on recovery efforts, and that slowed down implementation of the Program. Third, and also partly because of the hurricane, Government asked the Bank to postpone a supervision mission planned for early Eventually, the mission visited St. Lucia only a couple of weeks before the closing date. An earlier visit by the Bank team could have pointed out areas where more action was needed, and could have recommended that appropriate technical assistance was procured for that purpose. Fourth, there are several bottlenecks in the drafting and legal preparation of legislation, and consequently there was a backlog of legislation that needed to be drafted, reviewed by cabinet and approved by Parliament. Fifth, there were technical glitches in several systems, such as the online portal for company registration. And last but not least, the slow pace of progress was largely due to limited capacity of implementation in the public sector. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 22. Design. The Ministry of Finance, Economic Affairs and National Development was responsible for coordinating actions among other concerned ministries and agencies, including the Ministry of Social Transformation, Public Service, Human Resource Development, Youth and Sports; the Ministry of Health Wellness, Family Affairs, National Mobilization, Human Services and Gender Relations; the Ministry of Commerce, Industry and Consumer Affairs, and Customs Administration. As part of the preparation process, the Bank discussed with all relevant institutions the development of M&E process to ensure adequate feedback to policy-makers. The government and the Bank agreed on a results framework with a number of process, output and outcomes indicators to be assessed in June 2011 the closing date of the program. Those were the agreed benchmarks for evaluation of the program supported by the ES DPL/DPC. 11

22 23. Implementation and Utilization of the M&E framework was limited. Attention of the St. Lucia government was drawn by Hurricane Thomas and its aftermath. The Bank responded quickly with an Emergency Recovery Loan, which was approved by the Board in March 2011, but there were no supervision missions for the DPL/DPC until mid-june 2011, i.e., three weeks before the closing date. 2.4 Expected Next Phase/Follow-up Operation (if any) 24. In June 2011, during the supervision mission, the authorities requested a follow-up operation, to consolidate the reforms included in this DPL/DPC and to take their reform program to the next stage. As elections would probably take place in late 2011, they would like to be ready with a set of measures to introduce in the first year of the new government the best time in the political cycle to implement structural reforms. The request is now under consideration at the Bank. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 25. The objectives of the DPL/DPC program were relevant when the operation was appraised and they remain relevant to date. The vulnerability of St. Lucia to external shocks (Section 1.1) is a structural given, and the international financial crisis is not over yet. If anything, financial instability in Europe became more acute in Thus, both the structural as well as the temporary external conditions remain very important reasons for St. Lucia to become more competitive, enhance the efficiency and efficacy of its public sector, and improve the effectiveness of its social safety net. 26. The ES DPL/DPC was consistent with the Regional Partnership Strategy (RPS) FY10-14 of the OECS and the World Bank discussed by the Board of Directors in June The FY10-14 RPS rests on two pillars: (i) Building Resilience; and (ii) Enhancing Competitiveness and Stimulating Sustainable Growth. In this context, FY10-14 RPS focuses on improving fiscal and debt sustainability, increasing efficiency and transparency of public spending and service delivery, sustaining macroeconomic and financial stability, strengthening policy coordination and economic management, and rationalizing social safety net programs and improving targeting systems. These objectives were fully reflected by the PDOs of the ES DPL/DPC, and are critical for strengthening the ability of St. Lucia, as well as other OECS countries, to respond to exogenous shocks and laying the foundation for growth in the medium term. 3.2 Achievement of Program Development Objectives 27. The program document of the ES PDPL/DPC states that this operation was envisaged in the FY10-14 RPS as a single tranche operation and (was) viewed as the beginning of a multiyear engagement (para. 6). Consequently, while this DPL/DPC was approved as a self standing operation, the last column of its policy matrix describes the Second Phase of Government Reforms (Annex 1). Thus, in order to evaluate the achievement of this DPL/DPC s PDOs it s 12

23 necessary to have a broader perspective of the various policy measures included in the Program. At the same time, 12 months is a relatively short period of time to implement such an ambitious agenda, particularly when a major natural disaster struck the island in that period and deflected the authorities attention towards recovery efforts for several months Component 1: Improve the business environment, competitiveness, and strengthen the financial sector. Moderately Satisfactory 28. As mentioned above, St. Lucia is highly vulnerable to external shocks, and it was hit hard by the international financial crisis. Thus, improving the business environment and becoming more competitive overall would help in the current recovery and enhance resilience of the economy in the future. 29. In April 2011, Parliament approved the new Financial Service Regulatory Act. This Act consolidates supervision of non-banking financial activities, including insurance, cooperatives, credit unions and money services (domestic banks are regulated by the ECCB). This consolidation is broadly in line with the prevailing international trend, including most of the Caribbean, of moving away from separate regulators per category towards more consolidated regulation. The regulatory authority is now being formed, and it is expected to become operational in January The time that it takes to register a company affects the ease of doing business. Usage of the internet has facilitated that process in many countries. In April 2009, St. Lucia launched an online company registration portal, which included a search component and a company registration component. The first component has been in operation for some time, but the second component was undermined by technical glitches. Consequently, as of October 2011, no companies had been registered through the portal, and the Registrar of Companies and Intellectual Property Office continues to do the process manually. According to the Doing Business 2011, the number of days it takes to register a business in St. Lucia was reduced from 20 days in 2009 to 14 days in That Report indicates that 5 steps were needed to complete the process, the second of which was at the Registrar s office, which took 6 days. That is consistent with information received by the ICR mission from 4 lawyers working on registration of companies, who said that the process at the Registry takes 5-10 working days. Meanwhile, in a step that would facilitate online registration of companies, Parliament approved the Electronics Transaction Act in March Currently, about two thirds of businesses are informal, as many small businesses find the registration process too cumbersome and expensive. 31. Caribbean countries were hit hard by the collapse of two insurance companies - BAICO and CLICO in early Both companies sold executive flexible premium annuities, which were in fact investment products yielding 8.5% for 2 to 5 years, and invested heavily in real estate in the United States. As result of the US real estate market downturn, the companies could not meet their commitments. The collapse of both companies, which were very prestigious in the Caribbean, revealed the weakness of the regulatory environment in the islands and the fact that existing regulations were not properly enforced. 13