Countries and Regions

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Country Strategy and Program Update 2002-2004: Maldives

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II. ADB's Development Experience

A. Factual Summary of ADB Assistance

50. Since the start of its lending program in the Maldives in 1981, ADB has provided nine loans from its Special Funds resources amounting to about $55.2 million,¹² mainly focusing on infrastructure development in Malé in the energy and port sectors. Three loans have been provided to the transport sector, three to the energy sector, one to the education sector, one to multisectors (mainly energy and ports), and one was for planning and regional development. Six loans have closed and the current ADB loan portfolio comprises one loan in the energy sector, one in the education sector, and one in regional development. The 37 technical assistance (TA) activities ($12.6 million) provided by ADB have had a wider sector coverage than the loan program and included assistance for national planning, financial sector development, and public sector management and good governance. Ten TAs were for preparing loan projects and 27 were for advisory activities. Since the previous country operational strategy (COS) for 1996–2001,¹³ ADB lending operations averaged $6.3 million per annum during 1996–2001. TAs averaged $1.2 million during the same period.

B. Summary Evaluation of ADB Assistance

1. Relevance

51. The 1995 COS for the Maldives was formulated when macroeconomic instability, regional disparity, environmental vulnerability, and skill shortages were the major concerns. The COS was designed to address three key issues: (i) improvement of fiscal management, (ii) promotion of regional development together with human resource development, and (iii) environmental protection. As the macroeconomic situation improved, the Government advised ADB and IMF that it would no longer need external assistance to improve the fiscal situation. It asked ADB to redirect assistance to support improvement in public sector management and human development.

52. To strengthen public sector management, ADB assistance has included developing a system of national accounts, supporting the audit function and public accounting system, improving the judicial system and legal education, improving management efficiency of public utilities, and upgrading the institutional capacity of the customs services. Considering the close linkage between fiscal management and the financial sector, ADB has also developed a strategic framework for financial sector restructuring and enhancing the capacity of the Central Bank.

53. Following the refocusing of the COS, human development became a high priority of ADB support. Efforts were made to raise education and skill levels, thus meeting the demands of a rapidly modernizing economy and reducing the heavy reliance on foreign workers. ADB assisted in preparing the Education Master Plan¹⁴ and is currently helping to restructure and strengthen the postsecondary education system to improve the quality and quantity of skilled labor force in the country.¹⁵

54. Regional development across atolls became a high priority of ADB assistance in the late 1990s. The Regional Development Project¹⁶ aimed at developing the northern and southern development regions. In 2001, proposed assistance includes two loans, for outer islands electrification and information technology development. The former focuses on islands electrification through community participation, and the latter aims at improving public sector management efficiency, transparency, and accountability, and facilitating the Government’s decentralization programs to empower local decision making in support of regional development through the development of an information and communication network.

55. With respect to the environment, the Government has been able to mobilize grant assistance from bilateral and multilateral sources to address its main concerns. Accordingly, ADB operations have not included stand-alone environment projects, but have addressed environmental issues through other development projects. Given the logistical challenge of monitoring 200 inhabited and 1,000 uninhabited islands over a vast stretch of ocean, this approach is realistic.

2. Effectiveness and Efficiency

56. Since the 1995 COS was the first for the Maldives, it is early to examine whether ADB assistance achieved the goal and objectives of the COS. The time span has been too short to realize visible improvement in regional development or in the capacities of key public institutions. Success in regional development and the upgrading of human resources calls for strong and sustained commitment over a long period of time. However, ADB assistance has become more focused and is more carefully monitored.

57. When the previous COS was formulated, little was known about the extent of poverty and vulnerability. Subsequently, efforts were made to prepare strategies for poverty reduction, private sector development, financial sector development, and regional development. As a result of the VPA, which combined empirical and strategic research, much more is now known about the extent, causes, and consequences of poverty in the Maldives. This will enable the Government and ADB to better define and focus on poverty reduction efforts.

3. Major Sector Reviews: Success and Failure

58. Education. ADB’s assistance strategy in the human development sector has largely focused on expanding access and improving the quality of postsecondary education. It supports the consolidation and upgrading of various postsecondary institutions into one institution, and the expansion of access to postsecondary education. It extends assistance for strengthening the capacity of MCHE and the existing institutes, and in the process, increases the number of graduates that will contribute to economic development. ADB’s support for postsecondary education, together with the World Bank’s support for primary and secondary education, will contribute to the balanced development of education and greater job opportunities. ADB has also supported the development of a strategy and action plan for science and technology, and strengthening of the capacity of the newly established Ministry of Communication, Science and Technology.

59. Energy. ADB is by far the main contributor in the energy sector. ADB assistance has included (i) provision of a diesel generating set in Malé and six smaller generating sets for two atolls,¹⁷ (ii) the construction of a new power plant in Malé,¹⁸ (iii) provision of new generating units and the development of a distribution system in Malé,¹⁹ and (iv) provision of diesel generator sets in Malé and strengthening of management and human resources development of the State Electricity Company, Ltd. (STELCO) .²⁰ One of the main successes in the energy sector was the restructuring of the utility part of the Maldives Electricity Board (MEB) as a corporation. The Government converted MEB into STELCO in July 1997 under the new Companies Act. Operational performance of STELCO has now been significantly improved, making the company profitable and financially sound. ADB has also financed two TAs²¹ to improve MEB’s accounting systems and management. Overall, ADB assistance to the energy sector has helped to meet the demand for electricity in Malé in a cost-effective and environmentally acceptable manner and the impact of its assistance on policy and institutional changes has been significant, which contributed to improved financial management, operational efficiency, productivity, and economic growth.

60. Finance and Public Sector Management. In early 1995, the Government expressed its interest in a financial sector reform program loan by ADB. In 1997, the loan was prepared but not concluded, since the Government was unable to proceed with financial market reforms. Despite the difficulties in forging policy reform, ADB has contributed to improvements in the financial sector including strengthening prudential regulations and bank supervision by the Central Bank. Legal drafting has begun for protecting creditor rights. To help guide future financial sector development, a strategy for future financial sector development has also been prepared. For public sector management, ADB has assisted with the national audit, the public power utility, national accounts, the public accounting system, and the customs service. This effort has greatly contributed to good governance, which is one of the primary objectives of the Maldives national development plans.

61. Transport. ADB’s principal involvement in the sector has been in the development of ports. ADB is by far the main contributor. Previous ADB assistance included (i) setting up a regular interisland shipping service; (ii) deepening Malé and priority island harbors, and providing meteorological equipment; and (iii) providing a tugboat and equipment for foreign cargo handling, and constructing alongside berths at Malé port. The assistance to the port sector improved the cargo handling capacity of Malé port and helped to reduce the bottlenecks that delayed the transshipment of goods between Malé and the outer regions. TAs have been provided mainly for institutional strengthening of the Ministry of Ports Administration (MPA). ADB has also assisted the Government to draft an action plan to improve cost controls, financial management, operational efficiency, and productivity. The action plan has successfully resulted in improvements in MPA’s operations and financial position, which included improvements in port operations, equipment handling and maintenance, and workshop management. The second MPA TA helped to improve maritime safety through training, licensing, regulation, and provision of necessary equipment; and provided additional facilities to facilitate private sector investment in transportation. The scope for greater private sector participation in the management and operation of Maldives’ ports was examined and options for privatization identified.

62. Water Supply and Urban Development: Water supply and sanitation issues are critical in the Maldives because all islands are low-lying and coral-based, with very limited groundwater supply and thin soil cover. The rapidly expanding population base has meant higher demand for safe water, while sanitation and waste disposal are threatening to become critical problems. A 1998 study finds that 1 in 8 of the atoll population depends on untreated well water, and 1 in 4 experiences either periodic or severe shortages of drinking water. The Regional Development Project that assists the Government’s regional development efforts on institutional, infrastructure, and environmental improvement combines an innovative effort to monitor the freshwater lens with the provision of clean drinking water for residents of the southern and northern atolls. The successful implementation of the project, whose initial progress lags behind schedule and whose poor performance was observed in timely provision of counterpart support, will decide whether it will be extended to a second project for the southcentral and north-central atolls.

C. Portfolio Performance and Status

63. Overall, the Maldives has made good use of ADB assistance and has demonstrated satisfactory absorptive capacity. Since 1996, two projects have been postevaluated and both of them were rated as successful (Appendix 3). ADB currently has only three active loans in the Maldives, amounting to $21.3 million. The disbursement ratio has therefore varied according to project implementation stages. Experience indicates delays occurring primarily in the initial phases of project implementation, the appointment of consultants, procurement, and contract awards. Disbursement and submission of audited accounts and financial statements were generally satisfactory. Only rarely have loan extensions been required. Compliance with the loan covenants on social and environmental measures has also been generally satisfactory, as well as those on participation and ownership, budget availability, operation and maintenance, and benefit monitoring systems.

D. Conclusions and Lessons for the Country Strategy and Program

64. Although ADB is one of the Maldives’ largest development partners, ADB’s record in fostering positive policy change is mixed. In areas in which ADB has had a long-standing involvement, such as the energy sector, the record on incorporating sector policy reforms as part of lending operations is good. Free-standing policy reform operations, such as that planned for the financial sector, were less effective. The Government’s reluctance to borrow for policy reform purposes, from any of the international financial institutions, is an important consideration in the design of future operations, particularly in light of the major policy and institutional reform challenges facing the nation.

65. Most TAs during the past COS were aimed at building institutional capacity for prudent fiscal management and a more market-oriented financial system. Progress in both areas has been below expectations. While fiscal controls have improved, revenues are still narrowly based and the fiscal deficit remains large. The financial system continues to be dominated by four commercial banks, and bank reserve requirements act to restrain financial market expansion. Capacity building remains an important Government objective, but, to enhance effectiveness, advisory assistance should be more clearly aimed at providing the tools and training needed to implement policy and institutional reforms already agreed upon by the Government. Linking capacity building efforts more closely to the delivery of sector-based investments can also help raise the payoff to costly institutional change.

66. More recently, a shortage of suitably qualified counterpart staff has become an impediment to the implementation of projects supported by external assistance. This is particularly the case in the atolls, which have a dearth of trained technicians, laborers, and suppliers. Future projects will need to assess this problem carefully.

67. While investment requirements are manifold in the atolls, weak institutions, a narrow economic base, fragile ecology, and limited fiscal capacity hinder the absorption of external assistance. In light of these constraints, it would be appropriate for ADB to limit its lending operations to the Maldives to one new loan per year.

68. The 1995 COS is clearly focused in selected areas and the Government is clearly committed to effectively implementing loan and TA projects. Concentrating on a few key, high impact sectors, while steadily contributing to the development of institutional capacity in the Government, has helped overcome the problem of limited Government human resource capacity.

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