Document of The World Bank TRANSPORT AND TRADE FACILITATION IN SOUTHEAST EUROPE: PROGRAM AND PROJECT PERFORMANCE ASSESSMENT REPORT

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1 Document of The World Bank Report No.: TRANSPORT AND TRADE FACILITATION IN SOUTHEAST EUROPE: PROGRAM AND PROJECT PERFORMANCE ASSESSMENT REPORT Transport and Trade Facilitation in Southeast Europe Project Bosnia and Herzegovina (P070079) Transport and Trade Facilitation in Southeast Europe Project Moldova (P073626) Transport and Trade Facilitation in Southeast Europe Project Serbia (P074090) June 25, 2010 Sector Evaluations (IEGSE) Independent Evaluation Group (World Bank)

2 Currency Equivalents (annual averages) Bosnia and Herzegovina Currency Unit = Convertible Mark (KM) 2000 US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $1.57 Moldova Currency Unit = Moldovan Leu (MDL) 2001 US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $12.14 Serbia Currency Unit = New Serbian Dinar 2001 US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $ US$1.00 $58.45

3 Abbreviations and Acronyms ASYCUDA BEEPS BiH CAFAO CAS CPS CEFTA DB DFID EBRD EU EUBAM IBRD ICR IDA IEG ISR IT ITA MCS MIC NTBs OHR PAD PID QAG RS RSC SCA SECI SECI PRO TA TI TIR TTFSE UNCTAD USAID VAT WCO WGI WTO Automated System for Customs Data Business Environment and Enterprise Performance Survey (EBRD and World Bank) Bosnia and Herzegovina Customs and Fiscal Assistance Office (EU) Country Assistance Strategy Country Partnership Strategy Central European Free Trade Area Doing Business (Annual World Bank Survey) Department for International Development (UK) European Bank for Reconstruction and Development European Union European Union Border Assessment Mission (Moldova) International Bank for Reconstruction and Development Implementation Completion Report International Development Association Independent Evaluation Group Implementation Completion Report Information Technology Indirect Tax Administration (Bosnia and Herzegovina) Moldova Customs Service Middle Income Country Non-tariff Barriers Office of the High Representative (Bosnia and Herzegovina) Project Appraisal Document Project Identification Document Quality Assurance Group (World Bank) Republika Srpska (Bosnia and Herzegovina) Regional Steering Committee (Set up to coordinate the TTFSE Program) Serbia Customs Administration Southeast European Cooperative Initiative Southeast European Cooperative Initiative Public Private Partnersh Technical Assistance Transparency International Transport International Routier (Convention on Internation Road Transport) Trade and Transport Facilitation in Southeast Europe United Nations Conference on Trade and Development United States Agency for International Development Value Added Tax World Customs Organization World Governance Indicators World Trade Organization Fiscal Year (same for all three countries) January 1 December 31 Director-General, Evaluation : Mr. Vinod Thomas Director, Independent Evaluation Group (World Bank) : Ms. Cheryl Gray Manager, Sector Evaluations (IEGSE) : Ms. Monika Huppi

4 Task Manager : Mr. Roy Gilbert IEGWB Mission: Enhancing development effectiveness through excellence and independence in evaluation. About this Report The Independent Evaluation Group assesses the programs and activities of the World Bank for two purposes: first, to ensure the integrity of the Bank s self-evaluation process and to verify that the Bank s work is producing the expected results, and second, to help develop improved directions, policies, and procedures through the dissemination of lessons drawn from experience. As part of this work, IEGWB annually assesses about 25 percent of the Bank s lending operations through field work. In selecting operations for assessment, preference is given to those that are innovative, large, or complex; those that are relevant to upcoming studies or country evaluations; those for which Executive Directors or Bank management have requested assessments; and those that are likely to generate important lessons. To prepare a Project Performance Assessment Report (PPAR), IEGWB staff examine project files and other documents, interview operational staff, visit the borrowing country to discuss the operation with the government, and other in-country stakeholders, and interview Bank staff and other donor agency staff both at headquarters and in local offices as appropriate. Each PPAR is subject to internal IEGWB peer review, Panel review, and management approval. Once cleared internally, the PPAR is commented on by the responsible Bank department. IEGWB incorporates the comments as relevant. The completed PPAR is then sent to the borrower for review; the borrowers' comments are attached to the document that is sent to the Bank's Board of Executive Directors. After an assessment report has been sent to the Board, it is disclosed to the public. About the IEGWB Rating System IEGWB s use of multiple evaluation methods offers both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or sectoral approach. IEGWB evaluators all apply the same basic method to arrive at their project ratings. Following is the definition and rating scale used for each evaluation criterion (additional information is available on the IEGWB website: Outcome: The extent to which the operation s major relevant objectives were achieved, or are expected to be achieved, efficiently. The rating has three dimensions: relevance, efficacy, and efficiency. Relevance includes relevance of objectives and relevance of design. Relevance of objectives is the extent to which the project s objectives are consistent with the country s current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers, Operational Policies). Relevance of design is the extent to which the project s design is consistent with the stated objectives. Efficacy is the extent to which the project s objectives were achieved, or are expected to be achieved, taking into account their relative importance. Efficiency is the extent to which the project achieved, or is expected to achieve, a return higher than the opportunity cost of capital and benefits at least cost compared to alternatives. The efficiency dimension generally is not applied to adjustment operations. Possible ratings for Outcome: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Risk to Development Outcome: The risk, at the time of evaluation, that development outcomes (or expected outcomes) will not be maintained (or realized). Possible ratings for Risk to Development Outcome: High Significant, Moderate, Negligible to Low, Not Evaluable. Bank Performance: The extent to which services provided by the Bank ensured quality at entry of the operation and supported effective implementation through appropriate supervision (including ensuring adequate transition arrangements for regular operation of supported activities after loan/credit closing, toward the achievement of development outcomes. The rating has two dimensions: quality at entry and quality of supervision. Possible ratings for Bank Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Borrower Performance: The extent to which the borrower (including the government and implementing agency or agencies) ensured quality of preparation and implementation, and complied with covenants and agreements, toward the achievement of development outcomes. The rating has two dimensions: government performance and implementing agency(ies) performance. Possible ratings for Borrower Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory.

5 v Contents Principal Ratings... vii Key Staff Responsible...viii Preface... ix Summary... xi 1. The Regional Context: Disintegration and Reintegration The Transport and Trade Facilitation in Southeastern Europe Program... 2 Strategic relevance... 2 Approach, objectives and design... 3 Components and costs... 5 Monitoring and evaluation... 6 Efficacy... 9 Trade expansion... 9 Trade Facilitation developments in Corruption and smuggling Externalities and spin-offs Efficiency Bank performance Governments and implementing agencies performance The bottom line Cross-Cutting Issues and Major Lessons Cross-cutting issues Lessons References Annex A. Evaluation of the Trade and Transport Facilitation Project in Bosnia and Herzegovina Basic Data Sheet: Bosnia and Herzegovina Annex B. Evaluation of the Trade and Transport Facilitation Project in Moldova Basic Data Sheet: Moldova Annex C. Evaluation of the Trade and Transport Facilitation Project in Serbia Basic Data Sheet: Serbia This report was prepared by Salvatore Schiavo-Campo. Maria Margarita Sanchez provided administrative support.

6 vi Tables TTFSE Program, Components and Costs... xii Table 1. TTFSE Projects, Components and Costs (US$ millions) *... 7 Table 2. Merchandise exports and imports of TTFSE countries, Table 3. Cross-Border Trading Indicators, TTFSE Countries, Table 4. Main Trade Facilitation Indicators, Border Posts, TTFSE Project period * Table 5. indicators of corruption in customs, ttfse and eca, 2005, Table 6. Principal Ratings, TTFSE Projects and Program * Table 7. Appraisal, Actual Costs and Financing Table 8. Bosnia and Herzegovina: Merchandise trade, table 9. Summary of Clearance Performance Indicators, BiH, Table 10. Selected Customs Effectiveness Indicators, BiH, Table 11. Indicators of corruption and regulatory quality, BiH, Table 12. Sub-ratings and Outcome Rating Table 13. Appraisal, Actual Costs and Financing Table 14. Moldova: Merchandise trade, Table 15. Moldova: Number of Import Customs Declarations, Table 16. Summary of TTFSE Clearance Performance Indicators, Moldova, Table 17. Sub-ratings and Outcome Rating Table 18. Appraisal, Actual Costs and Financing Table 19. Serbia: Merchandise trade, Table 20. Summary of TTFSE Clearance Performance Indicators, Serbia, Table 21. TTFSE Performance Indicators After Project Closing, Serbia, Table 22. Revenue and Customs Effectiveness Indicators, Serbia, Table 23. Sub-ratings and Outcome Rating Boxes Box 1. Cooperation through co-location: The joint Croatia-Bosnia border post Box 2. The Single-Window System at Moldova s Border Posts Box 3. Who Really Steals at the Border... 78

7 vii Principal Ratings Bosnia and Herzegovina Trade & Transport Facilitation in South East Europe Project - P ICR* ICR Review* PPAR Outcome Satisfactory Satisfactory Moderately Satisfactory Institutional Development Impact** Risk to Development Outcome Substantial Substantial Significant Sustainability*** Likely Likely Bank Performance Satisfactory Satisfactory Moderately Satisfactory Borrower Performance Satisfactory Satisfactory Moderately Unsatisfactory Moldova Trade & Transport Facilitation in South East Europe Project - P ICR* ICR Review* PPAR Outcome Satisfactory Satisfactory Satisfactory Risk to Development Outcome Negligible to low Negligible to low Negligible to low Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory Serbia-Trade & Transport Facilitation in South East Europe Project - P ICR* ICR Review* PPAR Outcome Satisfactory Satisfactory Highly Satisfactory Risk to Development Outcome Negligible to low Negligible to low Negligible to low Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Satisfactory * The Implementation Completion Report (ICR) is a self-evaluation by the responsible Bank department. The ICR Review is an intermediate IEGWB product that seeks to independently verify the findings of the ICR. **As of July 1, 2006, Institutional Development Impact is assessed as part of the Outcome rating. ***As of July 1, 2006, Sustainability has been replaced by Risk to Development Outcome. As the scales are different, the ratings are not directly comparable.

8 viii Key Staff Responsible Bosnia & Herzegovina Project Task Manager/ Division Chief/ Sector Director Country Director Appraisal Gerald Paul Ollivier Eva Molnar Christiaan J. Poortman Completion Paulus A. Guitink Peter D. Thomson Orsalia Kalantzopoulos Moldova Project Task Manager/ Division Chief/ Sector Director Country Director Appraisal Anca Cristina Dumitrescu Eva Molnar Luca Barbone Completion Anca Cristina Dumitrescu Motoo Konishi Paul G. Bermingham Serbia Project Task Manager/ Division Chief/ Sector Director Country Director Appraisal Gerald Paul Ollivier Eva Molnar Christiaan J. Poortman Completion Gerald Paul Ollivier Motoo Konishi Orsalia Kalantzopoulos

9 ix Preface The World Bank s Southeastern Europe Trade and Transport Facilitation Program (hereafter, the TTFSE or the Program) was a $120 million regional initiative covering projects for eight countries (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Romania, and Serbia) between 2000 and The main objectives were to reduce non-tariff costs of trade and transport, and reduce smuggling and corruption at border crossings. The Program was elaborated in the context of international efforts to help restore the economic linkages among these countries, most of which had been part of a common economic space until the events of the early 1990s. This report is an assessment by the Independent Evaluation Group (IEG) of the Program as a whole, based on an evaluation of the three projects more recently completed (Bosnia- Herzegovina, Moldova, Serbia), as well as on an earlier 2005 IEG study of the first three TTFSE projects (Bulgaria, Macedonia, Romania hereafter, the case study ), a documentary review of all eight projects--including the Project Appraisal Documents, Implementation Completion and Results Reports, and other relevant documents--and discussions with the relevant Bank staff and managers, in Washington and in the field. As per IEG guidelines, the assessment takes into account the most recent information relevant to the Program objectives and outcomes. The assessment of the Program is in the main text, and the detailed evaluation of the three more recently-completed projects in Bosnia-Herzegovina, Moldova, and Serbia are in Annexes A, B, and C, respectively. For the evaluation of the three projects, an IEG mission visited Bosnia-Herzegovina, Moldova and Serbia in November 2009, including extensive in-country travel to border customs posts, and met with about 70 interlocutors, including government officials, customs officers, private sector representatives, traders, truck drivers, and journalists. IEG gratefully acknowledges the enabling environment and invaluable practical support provided by the World Bank offices in Belgrade, Sarajevo and Chisinau. The draft report was sent to the appropriate government entities and no comments were received.

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11 Summary The World Bank s Southeastern Europe Trade and Transport Facilitation Program (TTFSE or the Program) was a regional initiative covering projects for eight countries (Albania, Bosnia- Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Romania, and Serbia) between 2000 and 2007, in the context of international initiatives to help restore the economic linkages among these countries and bring them closer to the European Union. The two interrelated objectives were to: (i) reduce non-tariff costs of trade and transport; and (ii) reduce smuggling and corruption. This report assesses the Program as a whole, based in part on an evaluation of the three projects more recently completed (Bosnia-Herzegovina, Moldova, Serbia) and in part on other evidence from the other five projects and the Southeast Europe region. This summary assesses the TTFSE Program as a whole, the evaluation of the three projects is presented in annexes A, B and C. The TTFSE Program The Program s strategic relevance and timeliness were of high order-- following on the end of major conflict in the region, capitalizing on the strong interest of the countries in closer integration with the European Union and the reciprocal interest of the European Union in trade liberalization, and setting two objectives consistent with the Bank strategy for the countries. Largely through the dialogue leading to the TTFSE, the Bank helped foster the understanding that regional cooperation would be necessary to take advantage of the substantial market access granted by the European Union. The need for measures to facilitate transport and trade among one another flowed from this understanding. The projects designs were sound. The TTFSE was an umbrella program with common objectives, menu of components and performance framework. Both development objectives were important, and the infrastructure, information technology, procedural customs reforms, and training and dissemination to be provided through the project were well suited to their achievement. Although anti-corruption has been an explicit objective in a number of Bank operations, one may argue that, as an outgrowth of other factors, reduction in corruption is not a valid project objective on conceptual grounds. However, on balance, it may be considered appropriate in this case. The regional approach added value to the projects and was critical to the outcomes. In other respects, each project was tailored to the country and supported a specific mix of activities. The combination of country-specific activities and the common framework produced consistency with the regional strategy while providing effective support to the individual countries. (Also, the project design was participatory with the governments concerned.) The components were appropriate and costs were moderate. The total cost of the projects was $129.6 million (8 percent above estimate), of which the Bank accounted for over 90 percent, with the remainder from governments contributions and cofinancing, mainly by the United States and the European Union Customs and Fiscal Assistance Office (CAFAO). The size of the individual projects ranged from about $9 million (in Moldova) to about $25 million (in Croatia), with the majority clustered around $15 million. The menu of components was the same for all eight projects, comprising:

12 xii support to information systems (including transit and inland control systems) institutional modernization of customs improvement of customs terminals and border crossing facilities trade facilitation development (mainly training and dissemination) program implementation As shown below, within this menu the weight of each component differed in the various projects, with physical infrastructure accounting for the largest share of costs in Bosnia-Herzegovina, Bulgaria and Romania, and information technology for the main cost component in Moldova and Serbia. Measures for the institutional modernization and integrity of customs, however, were included in every project and were key to the outcomes. TTFSE PROGRAM, COMPONENTS AND COSTS (US$ millions) Component Appraised Actual Actual as % of appraised Component as % of actual Institutional Development and Trade Facilitation Information Technology Physical Infrastructure Program Implementation Total Cost The monitoring framework was simple and robust on the trade facilitation side. The main indicators covered the performance of customs offices at pilot inland terminals and pilot border crossings (measured in terms of clearance time required), as well as the administrative efficiency of the customs agency as a whole. Partly owing to the ambiguity of the corruption reduction objective itself, the indicators for the second objective were necessarily less precise and - as is always the case - relied on perception surveys and indirect evidence. Moreover, the nature of the objective precluded setting specific targets in advance - making it especially difficult after the fact to arrive at a solid conclusion without recurring to a variety of direct and indirect evidence. Actual monitoring was close and reporting was regular - helping to keep the focus on progress and largely preventing backsliding. More attention could have been given to assuring sustainability of the monitoring framework itself, but a majority of governments voluntarily continued to monitor customs performance on the same or similar basis as in the TTFSE projects. Efficacy and efficiency The efficacy of the Program was substantial, in terms of both cost reduction and reduction in smuggling and corruption. The TTFSE Program also contributed to an extent to the rapid expansion of Southeast Europe s trade during the Program years (from about US$63 billion in 2000 to $312 billion in 2008), although that expansion was caused mainly by other factors, primarily the restoration of stability and the liberalization of trade policies. The achievement of the cost-reduction objective was substantial in all countries and high in some-- whether measured by the Program s own indicators or by other indicators of customs

13 xiii efficiency, as in the Doing Business survey (DB) and Business Environment and Enterprise Performance (BEEPS) survey. Through the introduction of risk analysis and other measures, for Southeast Europe as a whole the average percentage of trucks inspected was cut by almost three-fourths (and along with it the opportunities for corruption), and customs clearance entry time was reduced from an average of over two and a half hours to less than one hour. At the end of their project periods, Bulgaria, Croatia, and Macedonia had the shortest clearance times, with Moldova and Romania lagging behind. The largest relative improvements were registered by Bosnia-Herzegovina, Macedonia, Moldova, and Serbia, and the smallest improvements by Bulgaria and Croatia (as can be expected, since Bulgaria and Croatia had the shortest clearance times at the start of the projects). The single most noteworthy improvement was registered by Macedonia which, despite a comparatively short clearance time at the start of the project achieved one of the largest percentage improvements in the Balkans. Serbia, too, registered substantial progress, especially considering that the Government measures entry time to include all inspections (such as phytosanitary and veterinary) and not only customs. Smuggling and corruption in customs were also significantly reduced from their high levels at the turn of the century, although smuggling is still a major problem in some countries, especially in Moldova, and corruption in customs persists to some degree in most TTFSE countries. The BEEPS survey shows a reduction in frequency of customs bribes in Southeast Europe, from 19 percent in 2005 to 5 percent in 2008 (compared to a reduction from 13 percent to 7 percent for Europe and Central Asia as a whole.) At individual country level, additional specific evidence exists of improvements in overall public integrity and in customs in particular. Not all of the reduction in corruption in customs can be attributed to the Program measures, however, as a contribution was also made by the overall improvement in governance and climate of integrity in many countries. The efficiency of the TTFSE projects was substantial. The transport cost savings from the reduction in clearance times were in almost all countries larger than originally estimated. The economic rate of return of the TTFSE Program has been higher than projected in the project appraisal documents ranging from 19 percent to over 75 percent including a conservative estimate of the additional indirect benefits from the trade expansion made possible by the reforms under the projects (but not including the gains from the reductions in smuggling and corruption.) Bank and governments performance Bank and government performance were generally satisfactory. Bank performance was satisfactory in all countries, with quality at entry ranging from moderately to highly satisfactory and quality of supervision satisfactory or better. A signal accomplishment of Bank supervision was the evolution of government ownership, shaky in some countries at the start of the project but strong in almost every country at the end of the project. The performance of project implementation teams was consistently satisfactory, despite initial doubts on their appropriateness, while government performance was more variable -- best in Macedonia, Serbia and (recently) in Moldova, and with shortcomings and slippages in Bosnia-Herzegovina and Romania.

14 xiv Ratings and overall conclusion Based on the evidence provided by the supervision reports during projects implementation, the implementation completion reports, and the broader and more recent evidence assembled through this assessment, the ratings for the eight projects and the Program are shown in Table 6 in the text. As of early 2010, the most successful of the eight TTFSE projects were Macedonia and Serbia, with Croatia and Moldova next. This assessment concludes that only in Bosnia- Herzegovina was the outcome less than fully satisfactory. Overall, the TTFSE Program must be rated as a very effective intervention - costing less than US$130 million, supporting critical international goals, covering eight countries in varying degrees of initial political and economic difficulty, with a high rate of return, and satisfactory outcomes. Cross-cutting issues Regional vs. multicountry projects. The experience of the TTFSE Program sheds light on a major difference between a multicountry project and a genuinely regional project. A regional project can be defined as a multicountry project that either reinforces a functioning preexisting regional organization or is a vehicle for the creation of a new one (as in the Southeast Europe Energy Community). While the TTFSE Program was not regional in the above sense, any added costs from the multicountry coverage were more than offset by the savings from the common approach, menu of components, and M&E framework for all eight projects, leading to a low cost of implementation arrangements. It would be useful for the Bank to conduct a top-to-bottom analysis of the costs, in the various sectors, of preparing and supervising regional projects compared to the costs of doing so for national projects. Is reduction of corruption a valid project development objective? Reducing corruption is an explicit objective in a number of Bank operations, and corruption and smuggling were a very serious problem in Southeast Europe at the start of the Program. There is an argument, however, that reducing corruption is not a valid independent objective, because corruption is primarily an outgrowth of governance and public management weaknesses. Moreover, for the TTFSE, opportunities for smuggling and corruption were closely related to the regulatory complexities and transport difficulties, the alleviation of which underpinned the first objective. The two objectives were therefore closely interrelated. Also, if the nature of the objective precludes a priori clarity and precision (not necessarily quantification), and thus setting realistic targets, ex post evaluation of the degree of achievement of the objective is difficult. On balance, the objective should be considered valid in the case of the TTFSE, but the reciprocal linkages between broad governance developments and trade facilitation could have been explored more adequately. Pilot sites and traffic diversion. The TTFSE projects focused on pilot sites, and the failure to compare performance between those sites and other border posts might have resulted in overlooking possible traffic diversion. From field visits and on closer examination this did not occur, mainly because the project pilot sites included the major crossings and accounted in most countries for the bulk of road traffic. A different issue emerges, however. Performance at borders must be compared with the inland terminals, to assure that the elimination of some

15 xv unnecessary procedure or bribe opportunity at the border is not simply shifted to the inland terminals. (The contrast between the problems in Moldova in this respect and the comparatively good experience in Serbia is instructive.) The need for complementarity. The TTFSE Program experience shows that complementarity in this sector has three aspects: across borders, between components, and with human interaction. First, the evaluation confirms that infrastructural or procedural improvements should occur on both sides of the border in order to be fully effective. The need for complementarity is also evident among components infrastructural investments in the absence of institutional reforms are likely to be partly wasted, but if the infrastructural bottlenecks had been left unattended transaction costs and clearance times would not have improved much despite the institutional reforms--especially considering the large expansion of intra-regional trade and transit traffic in Southeast Europe. (With good donor coordination, however, such complementarity need not be provided by the Bank project itself.) Finally, there is complementarity between physical infrastructure and trade facilitation, on the one hand, and the fostering of human contacts, on the other--with functional facilities providing the physical enabling environment for constructive interaction between the customs managers on both sides of the border. The need for cooperation. Within the country, complementarity requires cooperation among the border agents concerned customs, police, various inspectors but cooperation at the border cannot be sustained unless there is also cooperation among the respective headquarters. Between countries, cooperation is necessary to address potential inconsistencies between interventions on the two sides of the border. Lessons The main lessons drawn from the TTFSE Program as a whole are as follows. Make haste slowly. It s sustainability that matters, especially in institution-intensive projects, and a slow start need not be a major concern so long as there is evidence that the institutional foundation is in fact being built. A related point especially relevant to information technology- -is the need to consider carefully whether consistent small steps can, in time, achieve the desired outcome faster than a simultaneous comprehensive initiative. In transport and trade facilitation, it is especially important not to underestimate the power of small practical improvements to make a big difference. In the same spirit, and especially relevant to the Balkans, the small steps taken to rebuild social capital proved important, as post-conflict reconciliation flows from the accretion of such specific trust-rebuilding measures. Embed good practice. Sustainability is in part a function of ownership, and a proof of genuine ownership of the TTFSE projects is that most governments continued to track performance after project closing. It is important to explore at the outset ways to consolidate the performance monitoring habit, by embedding the indicators in the country s own system and/or by explicit understanding that monitoring will continue after the project closing. Beware of champions Rely on institutions, not persons. While all change requires individual leadership, the TTFSE experience shows the risks of excessive reliance on individual champions. (In Serbia, the over-dependence on a high customs official caused the project to come to a complete halt when he was replaced.) One should instead look to organizations as the real

16 xvi champions. In Moldova, for example, the new monitoring unit in the Customs Service provides guidance on change management, and in Bosnia-Herzegovina the customs human resources department succeeded in undoing some of the ethnic cleansing and in breaking up patronage networks. Foster high-level partnerships. In ensuring momentum and buy-in, the Program strongly benefited from high-level support from private and official external parties. In particular, the Business Advisory Councils promoted the need for trade facilitation, using various channels of communications to the decision makers, and the main development partners provided key support for designing the program, as well as parallel financing and implementation assistance. Never forget the power of incentives. Very low salaries may be sufficient for corrupt behavior, in customs as in other public functions, but are not necessary. The only outcome of raising customs salaries, without any other change, is to pay corrupt officers better. However, when salaries are increased in conjunction with strengthening accountability mechanisms and rule compliance, the impact can be powerful, as demonstrated by the experience of several TTFSE countries (for example, in Serbia, when the 150 percent salary raise during the project period interacted with stronger rule enforcement and organizational streamlining to produce a six-fold increase in customs revenue collected per custom staff member). Do not neglect the governance dimension. Just as one country can be adversely affected by infrastructural or procedural defects occurring across the border, so it can be positively influenced by improvements in the quality of governance in the neighboring countries. (The signal example in this case is the large reduction in smuggling into Bosnia-Herzegovina resulting from governance improvement in neighboring Serbia). A multicountry project thus requires an assessment of the governance aspects, not only in the individual countries, but also in terms of inter-country relations and the credibility and capacity of the regional organization--if one exists. This may require either raising the bar in terms of the review of the project at the preparation stage and/or a different sort of review--focused as much on the governance environment as on technical design. Vinod Thomas Director General Evaluation

17 xvii 1. The Regional Context: Disintegration and Reintegration 1.1 The break-up of the former Yugoslavia and the other political changes in Eastern Europe and the former USSR fragmented what had been common economic spaces into disparate entities many at war for the first half of the 1990s. A number of international initiatives were taken to help gradually reintegrate the economies concerned, alongside political developments and peace-making efforts. Among these, the most relevant for the evaluation of the World Bank s Transport and Trade Facilitation Program are the Central European Free Trade Area (CEFTA) and the Stability Pact for South Eastern Europe. 1.2 CEFTA began in 1992 when Poland, Hungary and Czechoslovakia joined in association with the European Union, and progressively expanded to include Albania, Moldova, Romania, Bulgaria and all countries of the former Yugoslavia. As and when some of these countries became European Union (EU) members they left CEFTA, which currently therefore includes all Southeast European countries except Bulgaria and Romania. 1.3 The Stability Pact for South Eastern Europe was approved in 1999 in Sarajevo at the initiative of the European Union. It was intended to replace the ad hoc and reactive crisis interventions with a comprehensive strategy to strengthen the efforts of countries of South Eastern Europe (SEE) to foster peace, democracy, respect for human rights and economic prosperity, in order to achieve stability in the whole region. In addition to the SEE countries themselves, the Pact includes the EU members, other major countries (including the U.S., Russia, and Turkey), and the principal international organizations concerned. Among other things, the Pact undertook to draw South Eastern Europe "closer to the perspective of full integration... into [EU] structures", including eventual full membership Under the Pact, a Working Group on Trade Liberalization and Facilitation brought together trade representatives from all the SEE countries, the EU, the World Trade Organization (WTO, the World Bank, and major interested governments, including the U.S. and Turkey. Through this working group, the SEE countries signed a Memorandum of Understanding in 2001 to improve the trade environment in the region, and subsequently concluded 31 bilateral free trade agreements. To address the complications resulting from the large number of these bilateral agreements, the working group later recommended replacing them with an inclusive agreement to produce a harmonized trade regime (and also to take into account other policy issues such as trade in services, government procurement, state aid, and intellectual property rights). In April 2006, the summit meeting of SEE countries in Bucharest agreed to create a single free trade area in the region through the simultaneous enlargement and amendment of the Central European Free Trade Area. Negotiations to that 1 For details, see and

18 2 effect were concluded in December 2006; and the first CEFTA joint committee meeting was held in September 2007 in Ohrid, Macedonia. 1.5 Around the time of the signing of the Stability Pact and in the context of the discussions that led to the memorandum of understanding (MOU) on trade liberalization in SEE, the Bank designed a regional program to facilitate trade and transport and improve integrity in customs in Southeast European countries. This was the Trade and Transport Facilitation for Southeast Europe Program (hereafter, the TTFSE or the Program ), a $120 million initiative covering similar projects in eight countries the six Balkan countries of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia and Serbia, in addition to Moldova and Romania. 2. The Transport and Trade Facilitation in Southeastern Europe Program 2.1 The description and assessment of the Program rest on in-depth evaluations of the TTFSE projects for Bosnia-Herzegovina, Moldova and Serbia, as well as a 2005 IEG study of the first three TTFSE projects (Bulgaria, Macedonia, Romania hereafter, the case study ); a desk review of the documentation on all the eight projects; other current traderelated information on Southeast Europe as a whole; and extensive interviews with a variety of official and non-official stakeholders. The three country project evaluations are annexed. They include some recapitulations of objectives, indicators and other information common to all TTFSE projects, but only to the minimum necessary to make each evaluation selfcontained. The experience of all eight projects is included in this report as appropriate for the assessment of the TTFSE Program as a whole. Strategic relevance 2.2 The Program strategic relevance and timeliness were of high order -- following on the end of major conflict in the region, and capitalizing on the strong interest of the countries in closer integration with the EU and the reciprocal EU interest in trade liberalization. 2.3 Conflict-prevention strategies and trade treaties gain operational meaning only when implemented with the support of concrete measures to improve transport and facilitate crossborder trade. The TTFSE Program aims of facilitating trade and reducing corruption were thus central to the edifice designed by the Stability Pact and CEFTA, and their implementation was concurrent with the gradual improvement of economic policies and governance practices in Southeast European countries. 2.4 A number of other goals and also activities converged onto the same general agenda-- harmonization of SEE tariffs and standards and norms with those of the European Union; accelerated WTO accession efforts on the part of the non-member countries; completion of the bilateral trade agreements within Southeast Europe; and increased emphasis on liberalization of trade in services.

19 3 2.5 The political context of the countries was mixed and capacity varied substantially (e.g., in Albania and in Bosnia-Herzegovina where the state had responsibilities in the trade area not commensurate with its capacities). All countries had significant initial reservations against regional cooperation but all shared a strong European ambition. Largely through the TTFSE dialogue, the Bank played a major role in fostering the understanding that regional cooperation would be necessary to take advantage of the substantial market access granted by the EU. The ensuing need for measures to facilitate transport and trade flowed logically from this understanding. Approach, objectives and design 2.6 The Program was implemented during the period , at different times for each country project. Below are the appraisal and closing dates, respectively: Albania: 11/02/ / BiH: 11/06/ /30/2005 Bulgaria: 11/29/ /30/2005 Croatia: 06/08/ /31/2005 Macedonia: 11/13/ /31/2005 Moldova: 06/10/ /30/2007 Romania: 11/06/ /30/2004 Serbia: 06/04/ /31/ The TTFSE approach was grounded on major analytical studies by the World Bank, as part of its general effort to engage the countries of South Eastern Europe as well as major partners primarily the EC -- in a dialogue on trade relations in the region. One such study was the strategy for South East Europe (World Bank, 2000), and another was the Regional Trade Study on SE Europe (World Bank, 2002). 2 Studies on trade in services and trade standards were also prepared. 2.8 The liberalization of trade policies envisaged through the international efforts would have been impeded by a continuation of the severe de facto restrictions, customs inefficiencies, smuggling and corruption prevalent in most of the region at the turn of the century. Listing the components of economic distance provides a simple frame for understanding the linkages among trade policy, non-tariff costs, and other barriers that underpinned the logic of the Program: Economic distance = f (Transport, Insurance, Customs Duties, NTB, Transaction Costs); Transaction Costs = g (Cost of regulation, Corruption) 2.9 The TTFSE was thus conceived as an integral part of the reduction in economic distance to be achieved through the lowering in customs duties and formal non-tariff barriers 2 These studies were very favorably reviewed by the Quality Assurance Group (QAG) and were rated highly satisfactory for strategic relevance and in several other dimensions.

20 4 envisaged in the regional trade liberalization agenda. 3 Accordingly, the Program set the two objectives to reduce non-tariff costs to trade and transport; and reduce smuggling and corruption at border crossings. 4 Although separable, these two objectives are interrelated to a substantial extent-- and were both to be pursued through a variety of infrastructural improvements, new information technology, organizational reforms in customs, and training and dissemination In particular, improvements in information technology--both hardware and software were intended to introduce risk analysis in customs and minimize personal contacts with customs officers as well as facilitate information exchange among border agencies and with other countries. Institutional reform of customs was to be pursued through preparing a new legislative and regulatory framework, streamlining customs procedures, monitoring customs performance, and fostering interagency cooperation at border crossings The procedural and infrastructural improvements were to be introduced at the major inland terminals and at pilot posts at the borders. The inland terminals selected were those in each country s capital. The pilot posts were selected on the basis of volume of traffic, coverage of the national territory, and importance for transnational trade as the major road corridors to/from Greece and Turkey go through most of the countries in the region. (As discussed later, the pilot post terminology was misleading, insofar as it gave the impression of small-scale experimentation even though they accounted for the bulk of road traffic.) Also, the procedural and organizational implications of the projects affected the performance of the customs agencies as a whole Well situated within a strategy of improved integration among the countries concerned and between them and the rest of Europe, the TTFSE was an umbrella program with common objectives, menu of components and performance framework. The common objectives and approach were critical to Program success. In other respects, each of the eight projects was tailored to the country and supported a country-specific mix of activities. The combination of country-specific activities with the common objectives, indicators and menu of components, produced consistency with the regional strategy while providing effective support to the individual countries. Moreover, the project design was participatory with the government concerned which emphasized even more the country-focus of the activities This approach had the advantage of generating full ownership in most of the eight countries, but also the drawback of missing out on the complementarity of the reforms and infrastructural improvements on both sides of the border. To an extent, this was an inevitable reflection of the political landscape of the peninsula and attitudes at the turn of the century 3 In particular, the EU had identified customs administration and enforcement practices as critical constraints to meeting the requirements for accession. 4 The formulation of the project development objectives is slightly different in the DCAs, which specify reducing smuggling and corruption at the Borrower s crossings. This may appear to be a distinction without a difference, since the Borrower s borders cannot be crossed without affecting the neighboring country. However, the wording difference is revealing of the dissonance between the Bank s single country-orientation and its encouragement of regional activities. Moreover, in this particular case, the PDOs cannot be fully achieved if improvements in transport and trade procedures are limited to the Borrower s territory, as discussed later.

21 5 which made it very difficult to persuade neighboring Balkan countries to agree to joint activities One design feature that worked well and was common to all projects was the inclusion of provisions for close public-private cooperation. Every project entailed the creation of new consultation mechanisms including government officials, transport operators, freight forwarders, shipping firms, and businessmen. A special role in training in the new customs procedures and their dissemination was assigned, in most countries, to the national Chambers of Commerce. Also constructive was the activity of the SECI-PRO Committees. Established under the Southeast Europe Cooperation Initiative (SECI), these committees brought together private and public stakeholders to improve international trade through the simplification and harmonization of procedures and practices on administration, commerce and transport. Each country had its PRO committee, identified by the country initials e.g., CROPRO for Croatia, MOLDPRO for Moldova etc. (See for details.) 2.15 In addition to the PRO committees, consultation on common trade and transport issues and dissemination of good practices were facilitated by the widespread appreciation of the Bank s involvement and the use of its convening power. Components and costs 2.16 The menu of components was the same for all eight projects, comprising: support to information systems (including transit and inland control systems) institutional modernization of customs improvement of customs terminals and border crossing facilities trade facilitation development (mainly training and dissemination) program implementation 2.17 Within this general menu, the actual project contents varied widely. Table 1 summarizes the project components and costs. The total cost of the TTFSE projects was $129.6 million (8 percent above the appraised estimate), of which Bank loans or IDA credits accounted for over 90 percent, with the remainder covered by governments contributions and cofinancing, mainly by the US and the EU Customs and Fiscal Assistance Office (CAFAO) The variation in the weights of each component in the different projects is evident, with physical infrastructure accounting for the lion s share of costs in Bosnia, Bulgaria and Romania, and information technology the main cost component in Moldova and Serbia. The temptation to consider a more balanced project cost structure (as in Albania, Croatia or Macedonia) as preferable to an unbalanced one (as in Bosnia or Bulgaria) was appropriately resisted. Targeting the resources to the major specific problems of the country is appropriate, and demonstrates responsiveness to the client. Also, the excellent partnership between the Bank and other donors entailed a certain division of labor that made it appropriate for activities heavily financed by another donor to receive only a small portion of TTFSE project resources. (What may be of some concern, however, is the significant

22 6 underestimation of the costs of the IT interventions, by a weighted average of about 33 percent.) 2.19 Finally, program administration costs lower than 3 percent of total disbursements indicate a high degree of cost-effectiveness that reflects the soundness of the initial arrangements and, more importantly, the ownership and in-kind contributions by most of the national customs agencies and their own staff. Monitoring and evaluation 2.20 The monitoring framework, also common to all projects, was satisfactory in design as well as implementation and in most countries utilization. The performance indicators were directly relevant to the objectives, clear, adequate, and with good arrangements for monthly monitoring and reporting although for smuggling and corruption they were necessarily less precise and more indirect. The main indicators relevant to the first objective of cost reduction covered the performance of customs offices at pilot inland terminals and pilot border crossings (measured mainly in terms of clearance time required), as well as the administrative efficiency of the customs agency as a whole. Because there is no direct objective measure of corruption, the indicators for the second objective of reduction of corruption and smuggling were based on surveys of the incidence of bribery at the borders and on indirect measures such as the value of recorded imports. 5 One important indicator, the percentage of trucks inspected, was relevant to both the cost reduction and the corruption reduction objectives--as the introduction of risk analysis through the project would permit to reduce clearance times for low-risk cargos as well as cut down on individual discretion. (Another indicator of corruption, used in this report but not specified in the TTFSE, is the unit value of the recorded import declaration. Although increases can arise from a number of factors, especially large increases over a short period of time suggest a reduction in the bribes given to customs officers in exchange for registering artificially lower import values and thus pay less customs duty.) Unlike the M&E framework of some multi-country TTFs, which have been complex and excessively detailed, the TTFSE Bank teams did not over interpret Bank guidance on result frameworks, and accepted the responsibility for robust selectivity that attaches to their special competence in the sector. Actual monitoring was close and reporting was regular -- helping keep the focus on progress and largely preventing backsliding. 5 The surveys, financed with trust fund resources, were terminated in 2003 owing to lack of funding. Although they were followed in most countries by surveys by Transparency International or other entities, including corruption in customs, the bases were not exactly comparable, adding to the necessity to assemble other evidence of developments in corruption at customs. 6 Nor could the customs officer just pocket the amount saved, as the revenue collection discrepancy would be obvious from the recorded import declaration and the duty rates.