CPS Final Review

Validation

Raising development impact through evaluation

EvaluationIndependent

MaldivesValidation of the Country Partnership Strategy Final Review Update, 2014–2019

Validation Report August 2020

Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019 This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

Independent Evaluation: VR-40

NOTES

(i) The fiscal year (FY) of the Government of Maldives ends on 31 December.

(ii) In this report, “$” refers to United States dollars.

(iii) For an explanation of rating descriptions used in Asian Development Bank (ADB) evaluation reports, see Independent Evaluation Department. 2015. 2015 Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila: ADB.

Director General Marvin Taylor-Dormond, Independent Evaluation Department (IED) Deputy Director General Director

Véronique Salze-Lozac’h, IED Walter Kolkma, Thematic and Country Division, IED

Team leaders Tomoo Ueda, Principal Evaluation Specialist, IED Team members Alvin Morales, Senior Evaluation Officer, IED

Valerie Melo-Cabuang, Senior Evaluation Assistant, IED The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, IED does not intend to make any judgments as to the legal or other status of any territory or area.

Abbreviations

ADB – Asian Development Bank ADF – Asian Development Fund BDSC – business development service center BESS – battery energy storage system BML – Bank of Maldives CAPE – country assistance program evaluation COBP – country operations business plan COVID-19 – coronavirus disease CPS – country partnership strategy CPSFRU – country partnership strategy final review update DMF – design and monitoring framework EIB – European Investment Bank EIRR – economic internal rate of return ESG – environmentally sustainable growth GDP – gross domestic product GMEIWM – Greater Malé Environmental Improvement and Waste Management HDFC – Housing Development Finance Corporation ICPS – interim country partnership strategy IED – Independent Evaluation Department IEG – inclusive economic growth IFC – International Finance Corporation IMF – International Monetary Fund IMSMSED – Inclusive Micro, Small, and Medium-Sized Enterprises Development IsDB – Islamic Development Bank JFJCM – Japan Fund for the Joint Crediting Mechanism KHE – Kulhudhuffushi Harbor Expansion km2 – square kilometer MMA – Maldives Monetary Authority MSME – micro, small, and medium-sized enterprise NDP – National Development Plan NSO – nonsovereign operation NSW – National Single Window PCR – project completion report POISED – Preparing Outer Islands for Sustainable Energy Development PMU – project management unit PSM – public sector management PPP – public–private partnership RCI – regional cooperation and integration SAP – Strategic Action Plan SARD – South Asia Department SASEC – South Asia Subregional Economic Cooperation SME – small and medium-sized enterprise SOE – state-owned enterprise TA – technical assistance UNDP – United Nations Development Programme WUS – water and other urban infrastructure services

Currency Equivalents (as of 31 June 2020)

Currency unit – rufiyaa (Rf) Rf1.00 = $0.0649350649 $1.00 = Rf15.400000

Contents

Acknowledgments vii Executive Summary ix Chapter 1: Rationale and Context 1 A. Validation Purpose and Rationale .................................................................................. 1 B. Country Context ............................................................................................................ 2 C. Recent Economic Performance ....................................................................................... 5 D. Key Challenges ............................................................................................................... 6 E. Government Development Plans in the Context of the Country Partnership Strategy,

2014–2019 .................................................................................................................... 9 F. Country Partnership Strategy and ADB Portfolio .......................................................... 10 Chapter 2: Validation of the Country Partnership Strategy Final Review Update 15 A. Relevance ..................................................................................................................... 15 B. Effectiveness ................................................................................................................ 23 C. Efficiency ..................................................................................................................... 27 D. Sustainability ............................................................................................................... 30 E. Development Impacts .................................................................................................. 32 F. ADB and Borrower Performance .................................................................................. 35 G. Overall Assessment ...................................................................................................... 37 H. Assessment of Country Partnership Strategy Final Review Update Quality ................... 38 Chapter 3: Conclusion, Lessons, Issues, and Recommendations 39 A. Conclusion ................................................................................................................... 39 B. Lessons ........................................................................................................................ 39 C. Key Issues .................................................................................................................... 40 D. Recommendations to ADB ........................................................................................... 41 Appendixes: 1. Linked Document 44 2. ADB Country Portfolio for Maldives during the Country Partnership Strategy Final Review

Update Period, 2014‒2019 45

Acknowledgment This validation report is a product of the Independent Evaluation Department (IED) of the Asian Development Bank. The validation was led by Tomoo Ueda. Team members were Alvin C. Morales and Valerie Melo-Cabuang. The consultants were Asita De Silva, Alexis Arthur Garcia, and Elizabeth Lat. Valuable inputs and comments at various stages were received from Jaime Jaramillo-Vallejo (external peer reviewer) and Joanne Asquith (internal commenter). The report benefited from the overall guidance of the IED director general, Marvin Taylor-Dormond; deputy director general, Véronique Salze-Lozac’h; and director, Walter Kolkma. The team is grateful to the Asian Development Bank staff at headquarters and the Government of Maldives officials and other stakeholders for useful discussions and inputs. IED retains full responsibility for this report.

Executive Summary

The series of Asian Development Bank (ADB) interim country partnership strategies (ICPSs) for Maldives, 2014–2019 aimed to support the country’s objective of establishing an environmentally sustainable and economically inclusive society. ADB’s country program sought to contribute to improving connectivity and expanding access to public infrastructure and services; better economic management and revenue enhancement; micro, small, and medium-sized enterprises development; and more recently, to improving solid waste management. This validation finds the program successful. It was relevant to the country’s development needs and government priorities. It was effective in delivering outputs and key outcomes. It was efficient, despite delays experienced by two completed projects (one relating to small and medium-sized enterprises [SMEs], the other to nonsovereign housing finance), with the ongoing portfolio, particularly the largest renewable energy project, showing strong disbursement and implementation progress. In addition, the validation notes risks to the program’s sustainability. It was less than likely sustainable due to a high debt and long-term financial sustainability concerns, including concerns with regard to a completed project’s business development service centers (BDSCs). The development impacts of the program are assessed satisfactory. The report makes four recommendations for ADB’s new country partnership strategy (CPS) for this upper-middle-income country: (i) embed sharper diagnostics in the CPS and develop a clear results framework; (ii) enhance the strategy to support private sector development; (iii) fully mainstream climate change adaptation work; and (iv) apply a programmatic approach to the technical assistance (TA) program, focusing on select priority areas, and strengthen the program’s value addition.

The Independent Evaluation Department (IED) of ADB validated the CPS final review update prepared by the South Asia Department for the Maldives program over the period 2014–2019 (Appendix 1). The final review update rated ADB’s program successful: relevant, effective, efficient (on the low end), likely sustainable, and with satisfactory development impacts. This validation rates ADB’s Maldives program over 2014–2019 relevant, effective, efficient, with satisfactory development impacts, though less than likely sustainable. The validation relied on information presented in the CPS final review update; relevant project documents; analysis of available country data; and interviews with ADB staff, government officials, and other stakeholders through teleconferencing, given that field missions were not possible due to travel restrictions stemming from the coronavirus disease (COVID-19) pandemic (March 2020 onwards).

Country Context Maldives is an archipelago of nearly 1,200 low-lying islands grouped into 26 atolls that are spread across a 90,000 square kilometer (km2) sea area. About 190 of the islands are inhabited and 145 are designated as resort islands. In 2018, Maldives had a population of 515,000 people, comprising 366,000 Maldivians and 146,000 foreign residents (mostly migrant workers). About 40% of the population lives in the capital. Maldives has seen strong economic growth and improvements in living standards over the 2000s. Economic growth averaged 5.6% a year since 2000, driven by strong, sustained growth in the tourism industry. Gross domestic product (GDP) per capita rose from $2,230 in 2000 to $10,300 in 2018; and in 2010 Maldives, became an upper-middle-income country. However, it faces a continuing range of development challenges:

x Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

inequality remains high and sharp regional disparities exist in living standards; the economy remains narrowly based on tourism and vulnerable to economic shocks; commercial activity is constrained by a range of factors; the dispersed population raises the costs of basic service provision; the low-lying islands are experiencing more pronounced effects of sea-level rise; and the country is vulnerable to natural disasters. Because of limited employment generation and poor links between the enclave tourism sector and the rest of the economy, a key element of Maldives’ progress in improving human development outcomes to date has been the strong role of the state in income distribution. While tourism accounts for about a third of the country’s GDP, it only contributes to 16% of its employment. Links between resorts and the local economy are similarly limited, with very few products and services supplied by local enterprises. Employment of Maldivian women in the tourism industry faces particular obstacles. The government maintains a range of social welfare programs, including universal subsidies on food and electricity, and has a substantial role in the delivery of goods and services through state-owned corporations. The public sector accounts for 40% of total employment. GDP growth averaged 6% a year in 2014–2018, compared to less than 4% in 2009–2013. Average tourist arrivals rose to 1.3 million annually in 2014–2018 from 0.9 million a year in 2009–2013. Construction, driven by new tourist resorts, large infrastructure projects, and new housing developments, also saw strong growth over the period. The government expected this growth to be sustained, until COVID-19 appeared. Government Development Plans Following the presidential election in 2013 and the parliamentary election in 2014, the incoming government began to prepare a long-term national development strategy. However, its preparation encountered successive delays and a formal strategy was not put in place during the government’s tenure. Instead, the government’s development priorities were based on the

election manifesto of the winning party. An initial emphasis was placed on improving economic management and enhancing revenues. After 2016, the government moved away from the existing strategy of decentralization and developing the outer atolls toward a strategy of developing the Greater Malé region, where the population was expected to be increasingly concentrated. After the 2018 and 2019 elections, the new government introduced a 5-year Strategic Action Plan (SAP) in 2019. The SAP identifies several long-term development objectives for Maldives, including enhancing sustainable economic activities; progressing on health, education, and social protection; building resilience to climate change and natural disasters; and ensuring good governance. The government intends to institutionalize the SAP into a 5-year planning cycle that identifies government implementation priorities toward its long-term objectives.

In June 2019, the government organized a Partnership Forum for bilateral and multilateral development partners for the first time since 2010. It focused on five areas: (i) the macroeconomic and fiscal situation; (ii) addressing inclusivity and sustainability in economic development; (iii) enhancing social outcomes (including healthcare, education, housing, youth, gender issues, and culture); (iv) building robust institutions, including in governance and justice; and (v) collaborating with the private sector. The forum was expected to be the first in a series of collaborative forums to engage development partners over 2019–2024. ADB Objectives and Program ADB had intended to prepare a full CPS, 2015–2019 for Maldives in tandem with the finalization of the government’s National Development Plan. However, as a national development strategy was not finalized after 2014, ADB did not prepare a full CPS during 2014–2019. Instead, ADB’s strategy and priorities in Maldives during the period were reflected in three ICPSs: (i) the ICPS, 2012–2013 (FY2012); (ii) the ICPS, 2014–2015 (FY2015); and (iii) the ICPS, 2016 (FY2016). The annual country

Executive Summary xi operations business plans (COBPs) after 2017 outlined adjustments in ADB’s pipeline projects or activities. The ICPS, 2012–2013 identified three areas of focus for ADB in Maldives: (i) micro, small, and medium-sized enterprises (MSMEs) development; (ii) transport; and (iii) energy. The ensuing ICPS, 2014‒2015 maintained the same three ADB priority sectors, but with an increased focus on energy and transport. ADB also sought to enhance cofinancing in projects as well as seek areas for nonsovereign operations (NSOs). The ICPS, 2016 focused on just one sector—transport—as a priority area for ADB support because of the limited financial allocations for the country. From September 2014 to December 2019, approvals for sovereign loans and grants totaled $187 million, which included $89 million in cofinanced support. This means ADB’s financing was confined to less than $100 million, or around $20 million a year. In addition, three projects for $39 million that had been approved prior to 2014 were active during the period. Overall, five loan projects in four sectors were active in 2014–2019:

(i) the Inclusive Micro, Small, and Medium-Sized Enterprises Development (IMSMSED) Project (loan of $17.6 million approved in 2012);

(ii) the South Asia Subregional Economic Cooperation (SASEC) National Single Window (NSW) Project (loan of $10.0 million approved in 2019);

(iii) the Preparing Outer Islands for Sustainable Energy Development (POISED) Project (loan of $115.0 million approved in 2014);

(iv) the Kulhudhuffushi Harbor Expansion (KHE) Project (loan of $9.7 million approved in 2016); and

(v) the Greater Malé Environmental Improvement and Waste Management (GMEIWM) Project (loan of $35.1 million approved in 2018).

There were no new NSO approved in 2014–2019. One existing housing finance project approved in 2008 with a loan of $12.0 million was active during the period.

ADB approved 16 TA projects in 2014–2019: 11 for capacity development and 5 for project preparation. The total of the grants was $11.0 million, $3.5 million of which was funded by other development partners. Assessment Relevance. Because of Maldives’ evolving political situation, rather than having a sequence of CPSs, ADB agreed to make minor adjustments to the 2012 country strategy, adding several new projects through its annual programming missions. The ICPSs that were prepared in 2014–2016 did not group results by holistic results framework pillars, which are usually present in CPS results frameworks. Instead, they only identified sectors for ADB investment that were most relevant to one or two of the focus areas defined by the government at the time. The ICPS, 2016 did not have a results framework and stated that it would continue to be selective in its sector programs, as identified in the 2014–2015 and 2012–2013 ICPSs. The new project pipeline in water and other urban infrastructure services (WUS)—the Greater Malé Connectivity Improvement Project, and GMEIWM Project—were added through the COBP, 2016–2018. The CPS final review update acknowledged that it varied significantly from the draft CPS, which ADB had at the time prepared. IED considers the lack of a proper CPS for so long inappropriate and found the portfolio to be essentially a set of disparate projects. Nevertheless, it finds the projects related to the objective of private sector development fully relevant. The IMSMSED Project sought to help diversify the economy and broaden participation in commercial activities through stronger business environment; better access to technologies and market information; and broader access to finance. ADB’s NSO investment in the Housing Development Finance Corporation (HDFC) was also appropriate given the lack of alternative sources of long-term finance that HDFC needed for its mortgage lending operations and the role the investment played in helping privatize the state-owned enterprise. However, a greater focus on establishing linkages in the tourism industry and addressing

xii Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

policy and infrastructure constraints in fisheries may have been warranted to support MSMEs development. The tourism industry remains a large potential market that can drive local MSMEs production of goods and services. The dispersed population over a vast area raises the unit costs of basic social and economic infrastructure provision. Maldives is also vulnerable to the effects of climate change and natural disasters. Its capital city is heavily congested, and it has high levels of youth and women unemployment. Limited job opportunities, especially for low-skilled labor, might have played an important role in limiting the contribution of growth to poverty reduction. ADB projects dealing with these issues do not come out well in the program adopted. Recently approved infrastructure projects in energy, transport, and solid waste that are still ongoing are in line with the SAP through the new government’s focus on the blue economy, caring state, and dignified family (or society). ADB also complemented the infrastructure loan projects with capacity and knowledge TA for demand assessment in renewable energy, maritime transport, and development of the capital Malé. As for strategic agendas, the program could have included more short-term interventions to support economic diversification. On balance, IED rates the program relevant. Effectiveness. ADB’s support helped improve access to finance and advisory services for MSMEs and improve access to housing finance. Under the line of the credit component of the IMSMSED Project, the Bank of Maldives (BML) disbursed $1.6 million in loans to 164 MSMEs. The state-owned BML proved an effective partner because of its sound lending practices, branch network, and trained staff. Support for BDSCs helped expand access to advisory services for MSMEs. Under the nonsovereign HDFC investment, HDFC substantially expanded its provision of mortgage finance and also introduced products to reach low-income groups. Substantial contributions were also made to the capacity and management of the HDFC through the NSO investment. The privatization of the HDFC was one of the first

public–private partnerships (PPPs) that the government entered and the HDFC emerged as one of the country’s leading, well-managed, specialized financial institutions. The ADB-financed portion of the renewable energy project’s main component—installing photovoltaic cells—is almost completed. The project is awaiting the cofinanced funding to be completed, enabling the generation of 21 megawatts. No data showing development results is currently available for the KHE Project because while it is undergoing construction, the existing harbor is still operating, but no data is being collected on passenger or cargo volume. The absence of an appropriate country program results framework during 2014–2019 makes it difficult to assess ADB’s contributions to the country’s development goals. The ICPS, 2016 did not introduce any new indicators. It added a minor update to the previous ICPS and attached to the COBP, 2016–2018 the first core area of infrastructure, focusing solely on transport. The latest ICPS final review update attached the ICPS, 2014–2015 results framework, which also covers energy. More recent COBPs, e.g., for 2018–2020, cover the WUS program in the sector results framework, but only with indicative resource commitments, and no program targets. Of the 16 TA projects that were approved or active during the CPS period, 5 were completed. Of these, four were successful and one was highly successful. On these grounds, and notwithstanding the poor results framework, the program was rated effective. Efficiency. There were frequent delays in design, preparation, and implementation of operations. Three infrastructure projects are ongoing, and the SASEC NSW project was approved in 2019. The only completed sovereign project was the IMSMSED Project, which the project completion report rated less than efficient. The report attributed the rating primarily to an 18-month delay in implementation and the cancellation of 71% of the loan. Delays in the project resulted from changes in government and elections, high turnover of project management unit (PMU) staff and consultants, delays in the

Executive Summary xiii signing of financing agreements, delays in the establishment of PMUs, and cumbersome management of consultancy and procurement packages. IED also evaluated private sector investment in the HDFC, which showed positive financial returns. However, the two completed loans comprise a little less than 15% of the value of the overall portfolio, and the ongoing portfolio, particularly the largest renewable energy project (close to 60% of the value of the portfolio), is on track in terms of implementation. The end of 2019 disbursement ratio (particularly without the policy-based lending, focusing on project loans and grants only) shows strong performance compared to the South Asia regional average or ADB-wide, thus making the overall rating efficient. Sustainability. Several achievements in private sector development are likely sustainable. The BML maintained sound appraisal practices in lending against the line of credit, including assessing business feasibility, financial statements, collateral quality, and tax records. The HDFC has also maintained a healthy portfolio, with a 2018 non-performing loan ratio of 1.5%. It also integrated sound environmental and social practices. The renewable energy project has provided training to more than 12,000 targeted island inhabitants on renewable energy and demand-management. However, the sustainability of some achievements in MSMEs development is uncertain. The BML portfolio has a relatively high ratio of non-performing loans of 7%. The government opted to provide the services of the seven BDSCs free of charge rather than on a cost-recovery basis, resulting in their continued dependence on government funding. While the government has showed commitment to funding them, their sustainability may be subject to political will and fiscal pressures in the future and is therefore uncertain. Moreover, in 2018, the government established the state-owned SME Development Finance Corporation to lend to MSMEs. If this agency does not lend at commercial rates, it may undermine BML’s ability to sustain its MSMEs lending levels. Since 2014, the government has also introduced various other lending schemes for SMEs that have raised some fiscal risks. The International Monetary Fund’s 2019 Article IV Consultation

Staff Report recommended that caution be exercised in managing the operations of the SME Development Financial Corporation and Maldives Monetary Authority credit guarantee scheme to avoid large losses. The sustainability of the ADB program is assessed less than likely. Development impacts. ADB’s program contributed to Maldives’ development goals. However, for some contributions the evidence is not yet strong because of the lack of data. ADB support contributed to inclusive economic growth in Maldives by improving access to finance and advisory services for MSMEs, including those outside Malé. Under the IMSMSED Project, several key institutions were strengthened. A 2016 BML survey of MSMEs financed under the project suggests that the companies used the funds to acquire assets; business continuity and repayment capacity was sound; companies experienced increases in sales volumes; and new jobs were created. Increased housing finance helped increase access to housing in Maldives and contributed to development of the construction industry, a key driver of growth in the country since 2009. However, MSMEs in Maldives remain significantly underdeveloped. The government’s SAP, 2019–2023 still lists several of the development objectives of ADB’s interventions during 2014–2019 as constraints to the operation of MSMEs. A lack of linkages with the tourism industry remains a major gap in the environment for MSMEs development. All ADB projects during the ICPSs period have included some gender mainstreaming measures, although the real impact is difficult to verify given that IED is currently unable to check the changes on the ground. For the completed IMSMSED Project, the following was achieved: (i) amendments were adopted to the SME Act, 2013 on gender equity and youth; and (ii) a national gender policy was drafted. ADB likewise made a positive contribution to environmentally sustainable growth (ESG) through its infrastructure projects. ADB also extended demand-based capacity and knowledge support that are contributing to ESG.

xiv Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

The most recently approved SASEC NSW is very much focused on the third strategic agenda of regional cooperation and integration, which aims to leverage information and communication technology to improve efficiency in cross-border control procedures. Overall, the results of ADB’s program were supportive of the selected national development priority sectors. The development impact of the ADB program is assessed satisfactory. Overall performance. The program performance is overall successful based on the compounded score following the IED guidelines. Performance of ADB. IED agrees with the CPS final review update’s assessment that ADB lacked a coherent CPS results framework over the period. As mentioned, IED finds the absence of a CPS for 10 years inappropriate, even though the government did not update its own strategy comprehensively over that period. Nevertheless, ADB maintained a reasonably relevant approach and set of interventions. ADB continued to respond to the presiding government’s priorities despite significant adjustments such as a shift from an emphasis on decentralization and development of the outer atolls to a focus on Greater Malé development followed by a shift to more geographically balanced development. Based on these points, the performance of ADB was assessed satisfactory. Borrower’s performance. This was mainly assessed based on the compliance with loan covenants and conditions, and provision of project implementation unit staff and counterpart funding. The final review update noted the lack of clear strategic direction, the limited capacity of executing and implementing agencies, and the scarce attention to donor coordination and financial management issues. However, even without a resident mission, and the absence of permanent ADB staff in Malé, with the active use of social media and e-mail correspondence, the executing and implementing agencies are gaining experience in preparing and evaluating bid documents and effectively managing the experts hired under projects in ADB’s four key sectors. IED agrees with the final review update’s view of satisfactory borrower’s performance.

The capacity of implementing agencies to manage projects remains a challenge. The South Asia Department has sought to apply retroactive financing and advance procurement actions in its member countries to mitigate implementation delays, but Maldives has not systematically utilized these. Lessons A small island economy, even with good tourism income and having reached upper-middle-income status, can still be fragile. This is exemplified by the current COVID-19 pandemic, which is having a heavy adverse impact on the economy and employment. Small islands continue to have many problems also related to a limited skill base and project implementation capacity. Effective evaluation through the design and monitoring frameworks is essential for the assessment of project outcomes. An absence of good outcome indicators will inhibit the collection of outcome information during project implementation. The government does not track the effect of the project on beneficiaries. Spatial analysis can help improve the regional balance of the ADB program. The ADB program does not seem to be based on much spatial analysis; there is little evidence of this analysis in the sector assessments and project documents. Even the recent transport or energy sector projects do not seem to have in their documentation a sound analysis of their reach in terms of regions or poor populations. Securing a sustainable blue economy for Maldives and other atoll nations will take time. External investment, as well as capacity building, will be required to help secure better economic ownership and development and to adapt physical infrastructure against sea-level rise, storms, and coral bleaching. The overall goal should be for Maldives and atoll countries to strengthen the economic returns on limited resources they have. Other key climate-change-adaptation issues to consider are (i) internal population relocation and consolidation, (ii) impacts of sea-level rise on sovereign boundaries and resources, (iii) external

Executive Summary xv population relocation, and (iv) complexities of land reclamation and elevation. Key Issues The validation identifies the following key issues. The immediate challenge is for Maldives to recover from the impact of the pandemic. The central bank expects a sharp drop in tourist arrivals in 2020 that will have negative spillover effects on all sectors of the economy. Some Maldivians are likely to relapse into poverty. Changing political circumstances and lack of government strategy development have kept ADB from renewing its own strategy and results frameworks. Political instability and lack of government policy continuity are issues that have played havoc with ADB planning processes. They have induced a prolonged absence of a CPS for Maldives and course changes in programming of projects. A challenge for Maldives is to broaden participation in economic growth. Maldives’ strong tourism-driven economic growth has not fully translated into broad improvements in living standards. The enclave tourism industry employs few Maldivians and has limited links to the rest of the economy. However, the tourism industry remains a large potential market that can drive local production of goods and services, including fruits and vegetables, fish products, handicrafts, and services for resorts and tourists. A challenge therefore remains to expand the links between local producers and the tourist resorts and their suppliers. Greater processing and value-addition in the fisheries sector also offers potential for increased employment and participation by local firms in the sector. Maldives remains a challenging environment for ADB’s nonsovereign operations. The prospects for NSOs have been limited. The tourism industry has been able to attract foreign investment without the need for support from international finance institutions. Outside the tourism industry, opportunities are constrained. Maldives is an extremely fragile environment. It is very susceptible to the adverse impacts of climate change and further human expansion,

leading to environmental degradation and pollution. Severe issues include land degradation, depletion of groundwater, and contamination by pesticides and aquifers through poor sewerage. Climate experts assume that by the end of the century, the global mean sea-level will rise a minimum of 0.4m to 0.5m. Communities must plan for high temperatures, scarce resources, stronger storms, higher wave overtopping, and sea-level-related flooding such as groundwater inundation and storm drain back flow, and coastal erosion. A challenge remains to ensure that the role of state-owned enterprises (SOEs) in the economy deliver benefits efficiently and do not undermine private sector development. SOEs can be a fiscal burden undermining the competitive environment and inhibit the entry and growth of local private sector firms in the supply and distribution of goods and services. Limited interest from development partners. Given Maldives’ status as a small island developing state, development partners generally have relatively limited financial allocations for the country. ADB has also practiced strict selectivity and limited the extent of its engagement in the past because of constrained funding allocations. Recommendations to ADB ADB should consider the following actions in anticipation of the new CPS, 2020–2024: 1. Embed sharper diagnostics in the CPS and

develop a clear results framework. (i) Intensify analytical work on the anticipated

social stresses that skewed economic growth and the COVID-19 will present. Topics could include the stabilization fund, basic income, social protection, rural development, and other areas relevant to Maldives.

(ii) Set out clear institutional targets in the country results framework, making explicit the importance of institutional strengthening in relation to infrastructure development. At the same time, the results framework should be flexible, and it should be mandatory to update the framework after unforeseen political changes have

xvi Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

made it necessary to change the program. 2. Enhance the strategy to support private

sector development. (i) Undertake analysis in the upcoming CPS,

define a coherent strategy, and broaden participation in economic growth.

(ii) Consider support for the development of MSME linkages in the tourism sector. Focus on the development of value chain linkages between MSMEs and the tourist resorts, including encouraging tourist resorts and their suppliers to develop local linkages (including through COVID-19 Pandemic Response Option programs).

(iii) Help assess and rationalize the role of SOEs in commercial activity to improve the private sector’s competitive environment.

(iv) Make greater efforts to realize a “One ADB” approach that links sovereign and nonsovereign lending through upstream development of potential bankable projects, including PPPs.

3. Fully mainstream climate change adaptation

work. (i) Address ESG upfront as part of development

initiatives. (ii) Base future project selection on holistic

integrated adaptation plans at an island or national level. Given that space is the primary limiting factor on atoll development, good spatial planning is crucial. All infrastructure design should assume that there will be a continued and likely accelerating global mean sea-level rise.

(iii) Address the issues of land degradation, the depletion of groundwater, and

contamination by pesticides and aquifers through poor sewerage. Further developments must factor in rising temperatures, stronger storms, higher wave overtopping, and sea-level-related flooding such as groundwater inundation and storm drain back flow, and coastal erosion.

(iv) Expand coverage of wastewater and excreta collection, transport, and treatment services in outer islands to improve environmental (especially ocean) health and public health.

4. Apply a programmatic approach to the

technical assistance program, focusing on selected priority areas, and strengthen the program’s value addition.

(i) Pay special attention to a programmatic

approach in climate change support. The knowledge TA program should focus on priority areas where ADB can add value. Given that Maldives is an upper-middle-income country, project financing models need to evolve carefully, examining ADB products’ competitive terms, and ADB’s capacity in providing quality advisory and knowledge services needs to be strengthened. Given that Maldives has been classified as a country at high risk of debt distress for 5 years and will be part of the Asian Development Fund 13, ADB should look for opportunities to support the government’s efforts to reduce public debt.

(ii) Examine the feasibility of a country office in Malé. Close communication with clients will be key.

CHAPTER 1

Rationale and Context A. Validation Purpose and Rationale 1. The Asian Development Bank (ADB) is preparing a new country partnership strategy (CPS) for Maldives covering 2020–2024, aiming to align this strategy with the Government of Maldives’ Strategic Action Plan (SAP), 2019–2023.1 To support the formulation of the new CPS, this evaluation of the current CPS assesses its objectives against actual project approvals, implementation, and portfolio performance.2 Since 2012, ADB’s Maldives program has been informed by a country assistance program evaluation (CAPE), 2011 (covering 2008 to 2010)3 and a validation of the CPS final review update (CPSFRU), 2007–2013. 4 Similarly, the anticipated CPS, 2020–2024 will be informed by a validated CPSFRU. The Independent Evaluation Department (IED) received another final review update from the South Asia Department, on 7 February 2020, for the period 2014–2019.5 This review update (to be called CPS final review or CPSFRU here) assessed ADB’s operations successful, based on assessing the program relevant, efficient (on the low end), effective, likely to be sustainable, and with a satisfactory development impact. 2. This report aims to (i) validate the final review findings and assessments related to the Maldives Interim CPSs (ICPSs) of 2014–2015 and 2016, and to the country operational business plans (COBPs) issued in 2017, 2018, and 2019 (Appendix 1); (ii) identify lessons and recommendations for ADB’s future operations; and (iii) contribute to the formulation of the CPS, 2020–2024 for Maldives. 3. The validation gathered evidence from a review of the ICPSs and COBPs, other relevant literature, and consultations with government agencies, development partners, and other stakeholders from the ADB headquarters during 29 April–26 May 2020 (via videoconference). 6 Because of the coronavirus disease (COVID-19) pandemic and guidance to limit ADB missions to essential ones only, this validation was conducted without the usual country mission. The validation is prepared in accordance with IED’s 2015 Guidelines for the Preparation of Country Assistance Program Evaluation and Country Partnership Strategy Final Review Validations. 7 4. When Maldives ICPS, 2016 was prepared in 2015, it maintained the focus on sector selectivity, as identified in the ICPSs for 2014–2015 and 2012–2013.8 The latest ICPS stated that both these earlier ICPSs were based on the 2011 CAPE recommendations from IED. ADB had announced that the new full

1 Government of Maldives. 2016. 12th Five-Year Plan Guideline (2018–2023) Report. https://www.gnhc.gov.bt/en/?p=700. 2 ADB. 2015. Interim Country Partnership Strategy: Maldives, 2016. Manila. 3 IED. 2011. Country Assistance Program Evaluation: Maldives. Manila: ADB. 4 IED. 2015. Country Partnership Strategy Final Review Validation: Maldives, 2007–2013. Manila: ADB. 5 IED received this document via a memo signed by the deputy director (officer-in-charge) of the South Asia Department.

Appendix 1 has the hyperlink to this document. 6 IED conducted interviews with officials of the Ministry of Finance; the director general of the energy division, South Asia

Department, (Preparing Outer Islands for Sustainable Energy Development [POISED] Project); and project managers from the Greater Malé Environmental Improvement and Waste Management (GMEIWM) Project, the Kulhudhuffushi Harbor Expansion (KHE) Project, and South Asia Subregional Economic Cooperation (SASEC) National Single Window (NSW) Project.

7 IED. 2015. Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila: ADB.

8 This ICPS validation will not directly assess the ICPS, 2012‒2013 because it was evaluated under IED’s previous CPSFRV, 2015. However, the ICPS, 2014–2015 was rather slim document that hinged much on the analysis of the ICPS, 2012–2013. Hence, whenever necessary and relevant, ADB analyses and statements will be referred to in this exercise.

2 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

CPS was to be prepared in 2016, based on IED’s final review validation, which was produced in December 2015. The Government, however, requested a postponement of the new CPS, 2016 until its own development strategy was completed. The government published its SAP, 2019–2023 in October 2019, and this now serves as the basis for ADB’s preparation of a new CPS. As the publication of the SAP, 2019–2023 was more than 4 years after the previous final review update and its validation, ADB and IED agreed to update these two documents. 5. The CPSFRU indicates that it was prepared using new guidelines8F

9 and that it recognizes the pillars identified in the ICPS, 2016, i.e., inclusive economic growth (IEG), environmentally sustainable growth (ESG), and regional cooperation and integration (RCI). However, it mostly discusses sector programs under each evaluation criterion, with little attempt at assessing cross-sector objectives. IED recognizes the structure choices made in the CPS and ICPS final review, but nonetheless will also assess the CPS against its thematic objectives (pillars) on the criteria of relevance (i.e., their appropriateness) and development impact (i.e., their results). 6. The validation covers all ADB loans (sovereign and nonsovereign), grants, and technical assistance (TA) approved for Maldives during 2014–2019 (the validation period). In addition, this validation also reviewed projects that were approved before 2014 but were still active and implemented during the validation period. A list of the ongoing and completed loans, grants, nonsovereign operations (NSOs), and TA is provided in Appendix 2.9F

10 7. IED faced several limitations during the validation exercise. As mentioned, the usual IED mission was not carried out because of the evolving COVID-19 pandemic. Another limitation was the lack of readily available monitoring documentation for some projects that were ongoing at the time of the validation. In addition, the validation was conducted as the pandemic was unfolding under movement restrictions, thus IED chose not to hire any local consultant. B. Country Context 8. The Republic of Maldives is an upper-middle-income small island developing state. Maldives comprises an archipelago of nearly 1,200 low-lying islands, grouped into 26 atolls that are spread across a 90,000 km2 area. About 190 of the islands are inhabited and 145 are designated as resort islands. In 2019, Maldives had a population of about 534,000 people, comprising 373,000 Maldivians and 161,000 foreign residents.10F

11 About 40% of the population lives in the capital and the rest are dispersed across the archipelago. Among Maldives’ natural assets are (i) a pristine natural environment, coral reefs, and sandy beaches that make it an attractive tourist destination; (ii) vast fisheries resources across an exclusive economic zone of 860,000 km2; and (iii) proximity to major international shipping routes. 9. Maldives has seen strong economic growth and improvements in living standards during 2000–2020. Economic growth in Maldives has averaged 5.1% a year since 2000, driven by strong, sustained growth in the tourism industry. Maldives was able to capitalize on its natural attractions and develop a high-end tourism industry that directly accounts for a quarter of gross domestic product (GDP) and indirectly, for two-thirds of GDP.11F

12 GDP per capita rose from $2,235 in 2000 to $10,790 in 2019 and in 2010, Maldives became an upper-middle-income country (Table 1).12F

13 The strong economic growth along

9 In late 2015, the CPS business process was reformed to favor thematic and cross-sector outcomes and provide a clear statement

of the CPS objectives. Revised CAPE and CPS final review validation guidelines of the same year placed greater attention on assessing CPS cross-sector objectives (footnote 7).

10 The validation list encompasses the stated coverage of the CPS final review and also covers some operations that spilled into the current CPS final review that were not mentioned in the earlier review.

11 Government of Maldives, National Bureau of Statistics. 2020. Statistical Pocketbook of Maldives, 2020. Malé. 12 World Bank. 2020. The World Bank in Maldives. https://www.worldbank.org/en/country/maldives/overview. 13 World Bank. Data. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=MV (accessed July 2020).

Rationale and Context 3 with increased government social expenditures helped substantially improve human development indicators. In 2018, Maldives was classified as a “high human development” country and ranked 104 out of 189 countries in the Human Development Index. 14 Life expectancy at birth increased from 70.2 years in 2000 to 78.6 in 2018; the maternal mortality rate declined from 119 per 1,000 in 2000 to 68 in 2018; and the poverty headcount rate (using the international poverty line for upper-middle-income countries of $5.50 a day) declined from 75.0% in 2002 to 6.6% in 2016.15

Table 1: Gross Domestic Product per Capita Growth Rate in Maldives, 2000–2019

Year GDP Per Capita

($)

5-year Growth Rate

(%) 2000 2,235 2005 3,640 62.9 2010 7,077 94.4 2015 9,033 27.7 2019 10,791 19.5

GDP = gross domestic product. Note: Growth rate from 2015 to 2019 is for 4 years. Source: World Bank. Data. https://data.worldbank.org/indicator/SI.POV.UMIC?locations=MV (accessed July 2020).

10. Notwithstanding the strong progress made to date, Maldives faces continuing challenges in ensuring sustainability of achievements and in broadening its improvements in living standards. Inequality remains high and sharp regional disparities exist in incomes and access to basic infrastructure and services, employment, education, and affordable housing. 16 Poverty rates vary widely across geographic areas and Maldivians in the southern atolls are particularly affected by poverty, with almost one in five being poor (footnote 12). According to the World Bank, the poverty rate is highest in the central, northern, and southern atolls. 17 Malé is home to the largest share of poor individuals because of sustained migration from the smaller atolls. Limited job opportunities, especially for low-skilled labor, have constrained the contribution of growth to poverty reduction. 11. Maldives’ economy remains narrowly confined to tourism and vulnerable to shocks. The tourism industry in Maldives has followed an enclave model, relying on imported goods, labor, and finance.18 While tourism accounts for about a third of the country’s GDP, it only contributes to 16% of employment in the country. Linkages between resorts and the local economy are limited, with very few products and services supplied by local enterprises. The employment of Maldivian women in the tourism industry faces particular obstacles, including cultural norms that discourage women from working at resorts (also, more than half of the women employed at the resorts are foreign nationals). Apart from tourism and fisheries, which is a large employment and export generator, there are few sizable economic activities in the country. Commercial activity is constrained by a small domestic market, limited natural resources, a shortage of skilled workers, remoteness, and difficult inter-island transport (footnote 18). While substantial progress has been made, there is still some works to be done to reach its policy goal of transforming fragmented social safety net programs into a comprehensive social protection system. The dispersed population over a vast area raises the unit costs of basic social and economic infrastructure provision. Maldives is also vulnerable to the effects of climate change and natural disasters. Its capital city is heavily congested and it has high levels of youth and women unemployment.

14 United Nations Development Programme (UNDP). 2019. Human Development Report 2019. New York. 15 World Bank. Data. https://data.worldbank.org/indicator/SI.POV.UMIC?locations=MV (accessed July 2020); and UNDP. 2019.

Human Development Report 2019—Briefing Note for Maldives. http://hdr.undp.org/sites/all/themes/hdr_theme/country-notes/MDV.pdf.

16 Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé. 17 World Bank. 2018. Performance and Learning Review of the Country Partnership Framework for the Republic of Maldives,

FY2016–2020. Washington, DC. 18 World Bank. 2015. Identifying Opportunities and Constraints to Ending Poverty and Promoting Shared Prosperity: Systematic

Country Diagnostic. Washington, DC.

4 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

12. Climate change risk is the constant threat. Climate change could cause annual economic losses of more than 12% of Maldives’ GDP by 2100. Because of rising sea-levels, the entire country could be submerged before the end of the century as 80% of the land is less than 1 meter (m) above sea-level. With 42% of the population and more than 70% of critical infrastructure within 100m of shoreline, this would have dire social and economic consequences, notably for the poor and most vulnerable (footnote 18). Despite past efforts, the country is not prepared to withstand a rise in sea-levels, as most lifeline infrastructure (e.g., power houses, hospitals, and harbors), population centers (such as schools), and dwellings are not adequately designed. Climatic risks and long-term resilience are not adequately integrated into atolls land use planning or into coastal development and protection policies and practices, and past autonomous risk reduction efforts have sometimes had maladapted effects. 19 There are estimates and studies on sea-level rise for Maldives, in which the sea surface height change for the central and southern atolls is projected to vary from 0.40m to 0.48m during 2001–2100 with an uncertainty of 0.36m to 0.50m. Other estimates predict a surface height change as high as 1m.20 These projections include uncertainties in the modeling scenarios and the global models.21 13. The COVID-19 pandemic is likely to have a major adverse effect on the Maldivian economy. The dependence of the Maldives economy on tourism suggests a major decline in economic activity in 2020 until the pandemic is brought under control, countries relax travel restrictions, and the global tourism industry can gradually recover. In January to April 2020, total tourist arrivals decreased by 41% in annual terms. 22 The central bank expects a sharp drop in tourist arrivals in 2020 that will have negative spillover effects on all major sectors of the economy, including transport and communications, construction, and the wholesale and retail trade (footnote 22). The International Monetary Fund (IMF) projected a GDP contraction of –8.1%, a current account deficit of –23.0% of GDP, and a fiscal deficit of –11.7% of GDP in 2020 (assuming a resumption of tourist arrivals in June). 23 The government has prepared three scenarios for the resumption of tourism activities and the first, and best-case scenario, has this resumption occurring in July 2020 (resorts eventually reopened on 15 July); the other two are in October 2020 and January 2021. The decline in tourism is likely to substantially reduce government revenues as most tax and non-tax revenue is derived directly or indirectly from tourism, through the airport service charges and development fees, green tax, rent from resorts, tourism goods and services tax, business income taxes, and import duties. 24 The export fisheries sector has also been adversely affected in the immediate aftermath of lockdowns in major markets in Europe and Asia and there have been disruptions in the air and maritime transport industries, and supply chain ruptures. 25 Some Maldivians are likely to relapse into poverty. A 2019 World Bank report suggested that “many Maldivians are vulnerable to falling into poverty in the event of negative shocks, as many are bunched just above the poverty line.”26 The severity of the impact of the pandemic on the Maldivian economy and livelihoods is likely to depend on the speed at which the global tourism industry can recover. As discussed below, the government, with the support of international development partners, has initiated a range of measures to ameliorate the impact of the crisis in the country.

19 M. Burkett et al. 2016. Addressing the Risk of Maladaptation to Climate Change. WIREs Climate Change. 7 (5). pp. 646–665. 20 ADB. 2013. Maldives Maritime Transport Master Plan. Consultant’s report. Manila (TA 6337-REG). PADECO under funding by

ADB, Department of Foreign Aid and Trade, Australia and Government. “Sea-levels are projected to rise within the range of 10 to 100 centimeters by year 2100, threatening submergence of the entire country in the worst-case scenario.”

21 Government of Maldives, Ministry of Environment and Energy. 2016. Second National Communication of Maldives to the United Nations Framework Convention on Climate Change. Malé.

22 Maldives Monetary Authority (MMA). 2020. Economic Update, 2020. 2 (5). Malé. 23 IMF. 2020. Republic of Maldives: Staff Report for the Request for Disbursement under the Rapid Credit Facility. IMF Country

Report. No. 20/133. Washington, DC. https://www.imf.org/en/Publications/CR/Issues/2020/04/23/Maldives-Request-for-Disbursement-Under-the-Rapid-Credit-Facility-Press-Release-Staff-Report-49368.

24 World Bank. 2020. Maldives: COVID-19 Emergency Response and Health Systems Preparedness Project. Washington, DC. 25 UNDP. 2020. COVID-19 Crisis: Maldives Economic Update. New York. 26 World Bank. 2019. Maldives First Fiscal Sustainability and Budget Credibility Development Policy Financing Operation.

Washington, DC.

Rationale and Context 5

C. Recent Economic Performance 14. During 2014–2019, Maldives saw continued strong economic growth but also some sharp policy shifts. High growth rates continued since 2014, driven by the tourism and construction industries. GDP growth averaged 6.0% a year in 2014–2018, compared to 3.7% in 2009–2013 (a period affected by the global financial crisis). 27 Average tourist arrivals rose to 1.3 million a year in 2014–2018 from 0.9 million a year in 2009–2013. Construction, driven by new tourist resorts, large infrastructure projects, and new housing developments also saw strong growth over the period (footnote 12). Maldives also saw some major policy changes as initiated by successive government administrations. The government’s strategy prior to the 2013 elections was focused on decentralization and developing access to public services and markets in the outer islands After 2013, the government’s strategy evolved toward developing the Greater Malé area and encouraging the population to concentrate in this area to enable more efficient delivery of public infrastructure and services (Figure 1). Following the 2018 elections, the government has re-emphasized decentralization and empowering local councils in its strategy (footnote 16).

Figure 1: Current Account Balance in Maldives Country Partnership Strategy Period

GDP = gross domestic product. Source: ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Manila.

15. Since 2015, large increases in current account deficits and external debt have threatened macroeconomic stability. The current account deficit saw a significant deterioration over the period, rising from –3.2% of GDP in 2014 to –26% in 2019 (footnote 22). The widening deficit was driven by a large increase in imports linked to new resort and housing developments as well as the large public infrastructure projects, such as the new airport runway and terminal building and a bridge connecting Malé to Hulhule–Hulhumalé.28 These public investments were largely financed by external debt, including debt on commercial terms raised through two sovereign bonds in 2017 and 2018. Total debt service (as a percentage of exports of goods, services, and primary income) rose from 5.4% in 2014 to 9.2% in 2018 and according to the IMF, Maldives remains at high risk of debt distress. 29 Gross international reserves, equivalent to 2.4 months of imports in early 2019 were below IMF recommended levels (footnote 29). The fiscal deficit deteriorated from –2.4% of GDP in 2014 to –10% in 2016, but then improved to –5.6% of GDP in 2019 (Figure 2) following fiscal consolidation efforts that included increased import duties, introduction of an Airport Development Fee, and containing recurrent spending, including

27 World Bank. 2019. Data. World Development Indicators. Washington, DC.

https://data.worldbank.org/country/maldives?view=chart (accessed July 2020). 28 IMF. 2019. Republic of Maldives: Staff Report for the 2019 Article IV Consultation. IMF Staff Country Report. No. 19/156.

Washington, DC.; and World Bank. 2019. Program Document for Development Policy Financing with Cat DDO and Pandemic Emergency Financing Facility. Washington, DC.

29 IMF. 2019. Republic of Maldives: Staff Report for the 2019 Article IV Consultation. IMF Staff Country Report. No. 19/156. Washington, DC.

6 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

the public wage bill. 30 In the near term, the impact of COVID-19 is likely to exacerbate macroeconomic risks in Maldives.

Figure 2: Fiscal Indicators in Maldives Country Partnership Strategy Period

GDP = gross domestic product. Source: ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Manila.

16. Maldives remains at high risk of debt distress following the impact of COVID-19. In 2019, total public and publicly guaranteed debt was 77% of GDP. About 50% was domestic, held by the national pension fund, commercial banks, and the central bank. Of the external debt, more than half (53%) was to the People’s Republic of China and two international sovereign bonds had been issued in 2015–2016 on commercial terms. Increased external debt after 2015 was associated with capital expenditure in public housing, airport expansion, and other infrastructure projects. Most bilateral and multilateral debt was on concessional terms and included grant elements. Prior to 2018, Maldives was eligible for 100% grant financing from ADB and the World Bank because of its high risk of debt distress. However, after the government raised external financing on commercial terms in 2015 and 2016, it breached eligibility criteria for fully grant funding and since 2018, both ADB and World Bank financing has been on mixed grant and/or loan terms. In May 2020, following the impact of the COVID-19 pandemic, the IMF assessed Maldives’ debt to be sustainable but at high risk of distress. External debt service risks were mitigated by rescheduling of a sovereign bond, as well as accumulation of funds in Maldives’ Sovereign Development Fund. However, debt sustainability in the IMF’s analysis depended on continued government commitment to reprioritizing and reducing capital expenditures, a V-shaped recovery in tourism, and strong medium-term growth prospects (footnote 23). ADB’s debt sustainability analysis in May 2020 arrived at a similar conclusion: public debt was sustainable, but at a high risk of distress.31 D. Key Challenges

17. The 2019 Strategic Action Plan aims to develop a long-term approach to addressing Maldives’ development challenges. The government’s 2019 SAP outlines long-term development objectives that include (i) enhancing sustainable economic activities; (ii) progressing on health, education, and social protection; (iii) building resilience to climate change and natural disasters; and (iv) ensuring good governance. The government intends to institutionalize the SAP into a 5-year planning cycle that lays out the government’s implementation priorities toward its long-term objectives (footnote 16). In June 2019, the government organized a Partnership Forum for bilateral and multilateral development partners. It focused on five areas: (i) the macroeconomic and fiscal situation; (ii) addressing inclusivity and sustainability in economic development; (iii) enhancing social outcomes (including healthcare, education, housing, youth, gender issues, and culture); (iv) building robust institutions, including in governance and justice; and (v) collaborating with the private sector. During the forum, the government signed

30 MMA. 2020. Economic Update, 2020. 2 (5). Malé; and World Bank. 2019. Maldives First Fiscal Sustainability and Budget

Credibility Development Policy Financing Operation. Washington, DC. 31 ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility

Loan, Grant, and TA Grant to Republic of Maldives for the COVID-19 Active Response and Expenditure Support Program. Manila.

Rationale and Context 7 memorandums of understanding with nine development partners, including India, Japan, the United States, and the European Union. The forum was expected to be the first in a series of collaborative forums to engage development partners over the next 5 years. 18. The immediate challenge is for Maldives to recover from the impact of COVID-19. The government, with the support of international development partners, has taken several measures to ameliorate the impact of COVID-19 on the economy and livelihoods in Maldives. On 20 March 2020, it announced an economic recovery plan equal to 2.8% of GDP that aimed to (i) increase funds for the health sector, (ii) subsidize electricity and water consumption, (iii) provide special unemployment allowances, and (iv) ensure access to working capital for businesses. The central bank also intends to intervene to keep the exchange rate stable. On 25 March 2020, ADB approved a $500,000 grant from its Asia Pacific Disaster Response Fund to help finance emergency medical goods and supplies, diagnostic equipment, materials for critical care facilities, including intensive care unit beds, and personal protection and other key medical equipment. On 2 April 2020, the World Bank approved a $7.3 million COVID-19 Emergency Response and Health Systems Preparedness Project that aims to help Maldives prevent, detect, and respond to COVID-19 and strengthen its public health preparedness. On 22 April 2020, the IMF approved a $28.9 million disbursement to Maldives to help cover balance of payments and fiscal needs arising from COVID-19. The IMF program is expected to catalyze additional grants and concessional loans from development partners (footnote 23). On 28 May 2020, ADB approved a budget support loan and grant to the value of $50 million called COVID-19 Active Response and Expenditure Support Program, with two components: (i) COVID-19 health response measures, and (ii) social protection measures (footnote 31). 19. A longer-term challenge is to expand the linkages between the tourism industry and the local economy. Maldives’ strong tourism-driven economic growth has not fully translated into broad improvements in living standards across the archipelago. To a large extent, the tourism industry acts as an enclave industry, importing most goods and employing expatriate staff. A challenge exists to further the linkages between the tourist resorts and locally produced goods and services as well as increase employment of Maldivians in tourism. Key constraints to greater local employment include (i) cultural norms that discourage women from working at the resorts; (ii) undesirability of service-related jobs at the resorts; (iii) limited transport options for Maldivians living in inhabited islands to commute to work in resort islands; (iv) and limited resort-provided staff accommodations for families. 32 In addition, the tourism industry remains a large potential market that can drive local production of products and services. There’s a prospective to enhance the local supply of goods and services to resorts and tourists. These include fisheries, local crops, fruits and vegetables, local delicacies and handicrafts, travel and other tourism-related services for tourists, and a range of services to resorts. A challenge, therefore, remains to expand the linkages between local producers and the tourist resorts and their suppliers. 20. Further development and value-addition in the fisheries sector also remains a key challenge to help diversify the Maldivian economy away from tourism. At present, fisheries accounts for just 3.2% of GDP and is characterized by sluggish growth and declining fish volumes. 33 To some extent, the regulatory environment may be a constraint. A 2016 World Bank report, for example, found that the skipjack tuna industry, which is regulated through the issue of processing licenses, had shown declining catch volumes and employment and low added-value exports, whereas the unlicensed yellowfin tuna segment had shown increasing catch volumes, high-value exports, and increasing employment (footnote 30). Studies suggest that there is potential to (i) increase processing and value-addition prior to export, (ii) exploit island resorts as markets, (iii) develop aquaculture, (iv) reorganize collection and buying systems, (v) develop new landing facilities to better exploit seasonal gluts and changes in fish concentrations, and (vi) develop additional transport and handling infrastructure in key fisheries

32 World Bank. 2016. Maldives: A Systematic Country Diagnostic. Washington, DC. 33 MMA. 2019. Quarterly Economic Bulletin, Volume 25 Issue 4. Malé.

http://www.mma.gov.mv/documents/Quarterly%20Economic%20Bulletin/2019/QEB-Q4-2019.pdf

8 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

locations.34 Improvements in the policy and regulatory environment and infrastructure in the fisheries sector may therefore be warranted to catalyze growth, value-addition, and further employment. 21. Efforts to rationalize and improve the efficiency of social transfer measures may help ease fiscal pressures and ensure they do not undermine the private sector environment. Given limited employment and linkages between the enclave tourism sector and the rest of the economy, a key element of Maldives’ progress in improving human development outcomes has been the strong role of the state in income distribution using tourism revenues. The government maintains a range of social welfare programs, including universal subsidies on food and electricity; the public sector is the largest employer of Maldivians and accounts for 40% of total employment; and the government maintains a substantial role in delivery of goods and services through state-owned corporations (footnote 23). A stated goal of the government’s small and medium-sized enterprise (SME) policy is to “provide SMEs with subsidies to minimize the difference between the rich and the poor and to encourage a business environment that will extend more economic benefits to the public.”35 While the transfer role of the state has shown clear results in advancing living standards among Maldivians, there may be room to rationalize and improve the efficiency of some programs in order to alleviate fiscal pressures as well as ensure that measures do not undermine private sector development, the competitive environment, and growth of other sectors of the economy (Figure 3). According to the IMF, in 2018 the fiscal deficit exceeded the budget target by 1.3% of GDP, mainly because subsidy expenditure increased by 1.0% of GDP because of higher fuel prices and reversal of the 2016 food subsidy reforms. According to a World Bank study, poor targeting and weak administration of safety net programs (i) reduce their impact on the most vulnerable; (ii) challenge their fiscal sustainability; and (iii) disproportionately benefit the rich, who consume higher amounts of goods and services with universal subsidies (footnote 32). In addition, the extent of public sector jobs as well as public–private wage differentials may discourage jobseekers from taking private sector jobs (footnote 12).

Figure 3: Supply-Side Contributions to Growth for Maldives

Source: ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Manila.

22. A further challenge also remains to ensure an optimal role for state-owned enterprises in the economy that both delivers benefits and does not undermine the private sector. There are 34 state-owned enterprises (SOEs) in Maldives engaged in two broad types of activity: (i) public infrastructure, such as airports, power, sanitation, seaports, telecommunication, and water; and (ii) commercially-oriented activity, such as transport services, banking, housing, tourism, retail and wholesale trade, food processing, agriculture, and oil and gas.36 In 2017, total revenues generated by 23 SOEs with available data represented 38% of GDP (footnote 36). To some extent, the large role of SOEs in the Maldivian economy reflects difficulties in achieving economies of scale and high unit costs of delivering goods and

34 ADB. 2019. Maldives: Economic Update 2019. Manila; Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé;

and World Bank. 2016. Maldives: A Systematic Country Diagnostic. Washington, DC. 35 Government of Maldives, Ministry of Economic Development. SME Development. Malé. http://www.trade.gov.mv/page/sme-

development. 36 ADB. 2019. Maldives Economic Update, 2019. Manila.

Rationale and Context 9 services to a population widely scattered across the archipelago (footnote 29). At the same time, however, some of the SOEs can be a fiscal burden on the government or impede the emergence of private enterprises. Some SOEs fail to generate profits and require continuous government budgetary support. Others have undertaken external government-guaranteed debt that creates substantial fiscal risks for the government. Of concern, moreover, is that some SOEs engaged in commercial activities may undermine the competitive environment and inhibit the entry and growth of local private firms in the supply and distribution of goods and services. An ongoing challenge for Maldives is to optimize the role of SOEs in the economy to maximize public benefits while minimizing their fiscal burden and potential to undermine the competitive environment and emergence and growth of private enterprises.

23. Addressing Maldives’ exposure to natural disasters and climate change also remains a long-term challenge. Previous National Development Plans (NDPs) have referred to (i) the Paris Agreement and Nationally Determined Contributions, and (ii) the Sendai Framework for Disaster Risk Reduction along with Sustainable Development Goals as key international development requirements, against which country policy priorities need to be aligned. United Nations agencies and other multilateral development banks, such as the World Bank, have placed emphasis on extending support to the government effort to elevate preparedness and resilience to climate change, natural disasters, and other shocks (footnote 17). The World Bank says that one of the ways to work closely on these elements is to provide capacity building support to apply the new safeguards framework (Environmental and Social Framework 2018) to ongoing and planned projects. E. Government Development Plans in the Context of the Country Partnership

Strategy, 2014–2019 24. Prior to 2014, a comprehensive National Development Plan was in place. The government’s SAP, 2009–2013 emphasized five areas: (i) establishment of a nationwide transport system, (ii) affordable living costs, (iii) affordable housing, (iv) quality health care for all, and (v) prevention of narcotics abuse and trafficking. The SAP had three key themes: (i) good governance, (ii) social justice, and (iii) regional development. It included sector plans under the themes of (i) public sector reform; (ii) regional development and decentralization; (iii) micro, small, and medium-sized enterprises (MSMEs) development, employment, and human resource development; (iv) environment, and water and sewerage services; and (v) energy. 25. During 2014–2018, a comprehensive National Development Plan was not finalized. Following the presidential in 2013 and the parliamentary election in 2014, the incoming government formed began to prepare a long-term national development strategy. However, its preparation encountered successive delays and a formal strategy was not put in place during the government’s tenure. The government’s development priorities were instead based on the election manifesto of the winning party. An initial emphasis was placed on improving economic management and enhancing revenues. After 2016, the government moved away from the existing strategy of decentralization and developing the outer atolls toward a strategy of developing the Greater Malé region, where the population was expected to be increasingly concentrated. There was broad support to reduce the size of the government for efficient administration and the state’s role in economic activities by privatizing SOEs, and to improve public sector governance. ADB’s CPSFRU noted that 2014–2019 was marked by an uncertain domestic situation. Contested election results were followed by successive governments with different versions and policy objectives for the country and were accompanied by periodic unrest and protest and some policy reversals. 26. After the 2018 and 2019 elections, the new government introduced a 5-year Strategic Action Plan in 2019. With the smooth transfer of power in November 2018 and the legislative election in April 2019, the Maldives government has now set out its long-term development objectives. The government embarked on a series of reforms to restore democratic institutions and the freedom of the press, reestablish the justice system, protect fundamental human rights, and deal with climate change.

10 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

In October 2019, the president unveiled SAP, 2019–2023, a roadmap that will serve as a guide for his government’s policymaking as it seeks to achieve its development goals. 37 The SAP focuses on five priority sectors: (i) blue economy (sustainable economic development), which includes tourism, SMEs, fisheries and marine resources, agriculture, labor and employment, and economic diversification;38 (ii) caring state (health, education, social protection, prevention of narcotics, and drug rehabilitation); (iii) dignified family (housing, youths, community empowerment, Islamic faith, sports, and family); (iv) Jazeera Dhiriulhun (quality of island life) (clean energy, waste as a resource, environment protection, information and communication technology, water and sanitation, transport, art and culture, and decentralization); and (v) good governance (national security and public safety, accountable state, independent institutions and public service reform, rule of law and judicial reform, gender equality, foreign affairs, and eliminating corruption). According to the SAP, there are 33 subsectors. A results matrix was developed for each of these subsectors that serves as the main implementation and monitoring framework and guidance that the SAP provides to the implementing agencies, as designated in the document. The SAP measurement framework includes a timeline for the actions and targets for each of the policies in each subsector. 27. Although there are some changes, the current government strategy maintains a focus on core areas of the past. There are different emphases in the government’s focus area because of government changes, however, consistent focus was placed on (i) governance or public sector reform, (ii) environment and water, and (iii) MSMEs. The latest SAP incorporates additional focus on (i) labor and employment, and economic diversification; (ii) caring state, particularly on education and social protection; and (iii) dignified family (youths, community empowerment, Islamic faith, sports, and family). The earlier focus on national (maritime) transport may have given way to these new areas. F. Country Partnership Strategy and ADB Portfolio

1. ADB Interim Country Partnership Strategy, 2012–2013, 2014–2015, and 2016 28. ADB did not prepare a fully-fledged country partnership strategy during 2014–2019. ADB had intended to prepare a full CPS, 2014–2019 for Maldives in tandem with the finalization of the government’s NDP. However, as a national development strategy was not finalized after 2014, ADB did not prepare a full CPS during 2014–2019. Instead, ADB’s strategy and priorities in Maldives during the period were reflected in three interim country partnership strategies (ICPS): (i) the ICPS, 2012–2013 (FY12); (ii) the ICPS, 2014–2015 (FY15); and (iii) the ICPS, 2016 (FY16). The annual COBPs played the role of outlining any adjustments in ADB’s approach or activities, sometimes including an update to the country results framework (without sector analysis). Each time a new loan was approved, the country results framework could be seen as being fundamentally updated. 29. There were some shifts in ADB’s strategy and priorities in Maldives over the period as identified in the interim country partnership strategies and the country operations business plans. The ICPS, 2012–2013 identified three areas of focus for ADB in Maldives: (i) MSMEs development, (ii) transport, and (iii) energy. The ensuing ICPS, 2014‒2015 maintained the same three ADB priority sectors, but with an increased focus on energy and transport. It cited IED’s recommendation in the Midterm Review of Strategy 2020 report that the Maldives program should be limited to fewer sectors with better focus. 39 ADB would also seek to enhance cofinancing in projects as well as seek areas for NSOs. The ICPS, 2016 continued to emphasize sector selectivity in ADB support because of the limited financial allocations for the country. It stated that “given the limited Asian Development Fund (ADF) country allocation for the country, it is important to be highly focused.” It identified the transport sector as the priority area for

37 World Bank. 2019. Country Context: Maldives, Economist Intelligence Unit, 14 February 2020. Washington, DC. 38 The World Bank defines the Blue Economy as “sustainable use of ocean resources for economic growth, improved livelihoods

and jobs, and ocean ecosystem health. [It] encompasses many activities: renewable energy, fisheries, maritime transport, tourism, climate change, and waste management.” https://presidency.gov.mv/SAP/

39 ADB. 2014. Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila.

Rationale and Context 11 ADB support. The ICPS, 2016 outlined risks to the strategy in the areas of governance risks, public financial management, procurement, anticorruption, and capacity constraints of government agencies. The key risks in meeting expected outcomes were seen as (i) maintaining the momentum of the reform agenda; (ii) governance challenges in public and private sectors; (iii) natural hazard-related disasters; and (iv) security, and law and order.

2. ADB Approved and Active Portfolio 30. The validation covers all investment projects that were either ongoing or completed during 2014–2019. From September 2014 to December 2019, approvals for sovereign loans and grants totaled $187 million, which included $89 million in cofinanced support (Table 2, and Appendix Tables A2.1 and A2.2). In addition, three projects (including one nonsovereign loan) for $39 million that had been approved prior to 2014 were active during the period. Five loan projects are covering four sectors, i.e., industry and trade (two loans for SMEs, $17.0 million, and the South Asia Subregional Economic Cooperation [SASEC] National Single Window [NSW] Project, $10.0 million); energy (Preparing Outer Islands for Sustainable Energy Development [POISED] Project, $115.0 million); transport (Kulhudhuffushi Harbor Expansion [KHE] Project, $9.7 million); and water and other urban infrastructure services (WUS) (Greater Malé Environmental Improvement and Waste Management [GMEIWM] Project, $35.0 million). The objective of the SASEC NSW Project is to promote trade facilitation and RCI through the electronic management of cross-border control procedures. This project made use of the regional cooperation loan and grant funds. On the nonsovereign side, there were no new operations approved during 2014–2019. One existing $12 million loan for a housing finance project that had been approved in April 2008 was active during the period (Appendix Table A2.3). 31. Several technical assistance projects were also implemented over the period. There are 16 TA projects, which were either approved or implemented from 2014 onwards. The total TA approved amount is $14.6 million, of which $3.5 million was funded by development partners. Eleven TA projects were for capacity development TA and five were for project preparatory TA. The project preparatory TA financed feasibility studies for the following loan-funded projects: (i) POISED, (ii) SASEC NSW, (iii) KHE, (iv) Laamu Gan-Fonadhoo Community Connectivity, and (v) GMEIWM. Four of the five project preparatory TA projects led to loan approvals (the Laamu Gan-Fonadhoo Community Connectivity Project did not eventuate). The earliest loan approved during the ICPS period was for the Inclusive Micro, Small, and Medium-Sized Enterprises Development (IMSMSED) Project, which was approved in May 2012 and closed in April 2019. Of the five projects, this is the only one for which a project completion report (PCR) is available.40 A detailed description of the TA projects is in Appendix Table A2.4.

40 ADB. 2019. Completion Report: Inclusive Micro, Small, and Medium-sized Enterprises Development Project in Maldives. Manila.

12 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

Table 2: Summary of Country Portfolio: Loans, Grants, Equities, and Technical Assistance during 2014–2019a ADB Support

Approved before 2014–2019 but Ongoing and/or Completed during 2014–2019

Approved during 2014–2019 Total

No.

ADB Approved Amount

($ million)

Cofinanced Approved Amount

($ million)

Total Project

Financing ($ million)

No.

ADB Approved Amount

($ million)

Cofinanced Approved Amount

($ million)

Total Project

Financing ($ million)

No.

ADB Approved Amount

($ million)

Cofinanced Approved Amount

($ million)

Total Project

Financing ($ million)

Sovereign Loans and Grants 2 17.05 10.30 27.35 3 81.07 79.00 160.07 5 98.12 89.30 187.42 Technical Assistanceb

8 5.83 1.95 7.78 8 5.30 1.50 6.80 16 11.13 3.45 14.58

Subtotal 10 22.88 12.25 35.13 11 86.37 80.50 166.87 21 109.25 92.75 202.00 Nonsovereign Equity and Loans 1 12.00 1 12.00 12.00

Total 11 34.88 12.25 47.13 11 86.37 80.50 166.87 22 121.25 92.75 214.00 ADB = Asian Development Bank. a Includes approved projects during the validation period (2014–2019) and those approved before the validation period that are ongoing and/or completed during the validation

period. ADB’s additional financing projects and technical assistance (TA) projects are not counted separately from the original project and TA projects. ADB’s two supplementary financing TA projects under the public sector management were approved during the validation period.

b Includes stand-alone and attached TA. Sources: ADB (Controller’s Department Database, accessed 31 December 2019); and ADB e-Ops and project website (accessed 13 February 2020).

Rationale and Context 13

3. Comparison with Planned ADB Country Program 32. There were two main differences in actual versus planned operations. The major changes were the cancellation of the two transport projects—Laamu Gan-Fonadhoo Community Connectivity Project and Greater Malé Connectivity Improvement Project—during 2017–2019. The Laamu Gan-Fonadhoo Community Connectivity Project was cancelled because of its lack of economic viability, and the Greater Malé Connectivity Improvement Project was replaced by an environmental improvement and waste management project. Table 3 provides a comparison of planned operations in COBPs versus approved operations for the CPS period. The data needs to be treated cautiously since the planned operations span multiple COBP periods. Some operations were late in their approval, being postponed from one COBP to another, and some operations were approved for amounts considerably above their planned allocation. Table 3: Sovereign Loans and Grants Planned and Approved in Maldives Country Partnership Strategy,

2014–2019 Project/Sector

Planned Approved

Remarks

Loan/ Grant

($ million)

Initial Year

Planned

Loan/ Grant

($ million) Year

Approved Energy 1 Preparing Outer Islands for

Sustainable Energy Development Project

38.0 2014 38.0 2014

Subtotal 38.0 38.0 Industry and Trade 2 SASEC National Single Window

Project 2.0 2019 10.0 2019 Approved in 2019 with an increased

allocation of $5 million in COL and $5 million in ADF grants

Subtotal 2.0 10.0 Transport 3 SASEC Transport Project 18.0 2015 0.0 Initially planned for 2015 in COBP

2014–2016 4 Kulhudhuffushi Harbor

Expansion Project 9.7 2016 9.7 2016

5 Laamu Gan-Fonadhoo Community Connectivity Project

15.7 2018 0.0 Initially planned for 2017 standby in the COBP, 2015–2017 as “L. Gan-Fonadhoo Major Cross-Roads Project”; moved to firm in 2018 but dropped in COBP, 2017–2019 at the request of the government. Instead, two new programs to support the government’s new connectivity and economic infrastructure projects in the Greater Malé region were added: (i) the Greater Malé Connectivity Improvement Project programmed for 2019 with preparatory project planned in 2017, and (ii) the Greater Malé Environmental Improvement and Waste Management Project, programmed for 2018.

6 Greater Malé Connectivity Improvement Project (TA Grant)

6.0 2017 0.0 Initially planned for 2017 in the COBP, 2017–2019 but later dropped in the COBP, 2018–2020 because the project's economic viability has not been confirmed.

7 Greater Malé Connectivity Improvement Project

31.4 2019 Initially planned for 2019 in the COBP, 2017–2019 but later dropped in the COBP, 2018–2020 because the project's economic viability has not been confirmed.

Subtotal 80.8 9.7

14 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

Project/Sector

Planned Approved

Remarks

Loan/ Grant

($ million)

Initial Year

Planned

Loan/ Grant

($ million) Year

Approved Water and other Urban Infrastructure and Services 8 Greater Malé Environmental

Improvement and Waste Management Project

24.8 2018 33.1 2018 Formerly “Greater Malé Environmental Improvement and Waste Management Project (Phase 1)”; undergone sector reclassification from energy to water and other urban infrastructure services following the shift in project focus from energy supply to waste management.

9 Greater Malé Waste-to-Energy Project

26.8 2019 0.0 Formerly “Greater Malé Environmental Improvement and Waste Management Project (Phase 2)”; moved to 2020 in the COBP, 2019–2021 and renamed because the main component of the project has been identified as the waste-to-energy treatment facility.

Subtotal 51.6 33.1 TOTAL 172.4 90.8

ADF = Asian Development Fund, COBP = country operations business plan, COL = concessional OCR lending, SASEC = South Asia Subregional Economic Cooperation, TA = technical assistance. Note: Totals are not provided as the data spans shifts in the program over multiple COBP periods: 2014–2016, 2015–2017, 2016–2018, 2017–2019, 2018–2020, and 2019–2021. Source: Asian Development Bank’s Loan, TA, Grant, and Equity Approvals Database (accessed 13 February 2020).

33. Table 3 also shows all the projects in the sovereign operations that were approved in the CPS period, disaggregated by sector. As mentioned, the decline in the transport program is high, as is the increase in the Industry and Trade program—the SASEC NSW Project was increased from the original $2 million to $10 million. The TA approved in the CPS period was $14.6 million, slightly more than the total NSO loan ($12.0 million) during the same period (Figure 4).

Figure 4: ADB-Approved Projects in Maldives, 2014–2019 by Type of Assistance ($ million)

ADB = Asian Development Bank, TA = technical assistance. Source: ADB’s Loan, TA, Grant, and Equity Approvals Database (accessed 13 February 2020).

34. The spread of different sources of modality is similar to that of other small countries in South Asia like Maldives where the TA portfolio is relatively high at 24% of total loans and grants combined. Five of the 16 TA projects served to prepare loans and grants, including for energy (POISED), transport (KHE and the Laamu Gan-Fonadhoo Community Connectivity), industry and trade (SASEC NSW), and water and other urban infrastructure services (WUS) (GMEIWM) (Table 3). The remaining TA projects were either capacity development or policy advisory TA projects and were mostly in public sector management (PSM).

0 20 40 60 80 100 120 140

Grants

TA

Non-sovereign loans

Sovereign loans

CHAPTER 2

Validation of the Country Partnership Strategy Final Review

Update A. Relevance 35. The country partnership strategy final review assessed ADB’s program as relevant over the course of the country partnership strategy period. The validation reaches the same conclusion. The final review and the validation applied three criteria: (i) the appropriateness of CPS objectives in meeting country needs and supporting the national development priorities as well as ADB corporate objectives; (ii) ADB strategic positioning, which emanates from the relative significance of ADB resources applied to meeting priority needs, alignment between CPS objectives and sector allocations, and the complementarity of ADB interventions with those of development partners; and (iii) the design quality of the ADB program and the extent to which the country and sector programs were aligned with the positioning of the interim CPS. This includes an assessment of the quality at entry of the ICPS, 2014–2015 and 2016; choice of modalities; partnerships forged; and quality of the CPS results framework. The criteria used are in line with ADB guidelines. Some key points made in the CPS final review are summarized with additional comments from the validation team.

1. Appropriateness of Country Partnership Strategy Objectives

36. ADB’s interim strategies over the period lacked a comprehensive results framework. Maldives’ recent interim CPSs have not set up results framework pillars that cover the whole country program. This is usually done for the programs in larger developing member countries, and even for those in smaller countries when they prepare a comprehensive 3-year CPS. The previous SAP, 2009–2013 had five areas of focus: (i) a nation-wide transport system, (ii) affordable living costs, (iii) affordable housing, (iv) health for all, and (v) prevention of narcotics abuse and trafficking. ADB planned the KHE Project for approval in 2016 in the transport sector. The Housing Development Finance Corporation (HDFC), a nonsovereign project, was approved before the SAP in 2008. ADB’s ICPS, 2014–2015 had two focus sectors: energy and transport. ADB’s POISED Project was approved in September 2014, but it does not correspond with any of the five core areas of the SAP, 2009–2013. According to the ICPS final review, the KHE Project was a follow-up to an earlier investment in Malé Port, with the objective of strengthening regional harbor facilities outside the capital region. The final review justified the KHE and POISED projects as not being fully aligned with the SAP because they were aligned with “the priorities initially expressed by the government that came into power in 2013.” The government included diversification of energy sources and establishment of a robust maritime transport system to “foster access”. 37. The ICPS, 2016 no longer had a country results framework (limited coverage on transport), however, it stated that it would continue to focus on sector selectivity, as identified in the previous ICPSs for 2014–2015 and 2012–2013. ADB added the new project pipeline in the WUS—Greater Malé Connectivity Improvement, and GMEIWM—through the country operations business plan (COBP), 2016–2018. It is acknowledged in the CPS final review that it was a significant variation from the draft CPS, which ADB had prepared at the time. In 2019, ADB approved the SASEC NSW. The project aims to support

16 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

the government’s promotion of trade facilitation and regional cooperation through the electronic management of cross-border control procedures. The SAP, 2019–2023 has five priority sectors, including, for the first time, the blue economy, which included sub-targets related to processing time for trade and reduction of transaction costs. The CPS final review explained that the country had participated in regional TA projects in the trade sector, but it had not directly taken action to implement their recommendations. Subsequently, ADB and Maldives took advantage of the emerging momentum among South Asian trading partners. 41 This had not been planned at the TA stage; it was added recently. 38. Although it formed a core part of ADB’s ongoing support, support for private sector development was not emphasized in ADB’s interim country partnerships strategy documents for Maldives during 2014–2019. The CPS that was effective in 2012–2013 identified MSMEs development as one of the three priority sectors of ADB engagement in Maldives (alongside transport and energy). The objective was to help develop and expand MSMEs, particularly in the outer atolls, to generate more broad-based, sustainable, and inclusive growth led by the private sector. In addition, ADB put efforts to seek areas for NSOs as further means to support private sector development. The ICPS, 2014–2015, however, did not identify MSMEs or private sector development as areas of support for sovereign operations. Its priority areas were transport, energy, increasing cofinancing in ADB-financed projects, and seeking possible areas for nonsovereign investments. The ICPS, 2016 also did not identify MSMEs development or private sector development as objectives of ADB assistance. It underlined the importance of being highly focused and identified the transport sector as ADB’s priority sector. The four COBPs that covered 2014–2018 also did not include any objectives or targets related to private sector development in the CPS results framework. The COBP, 2018–2020 introduced targets related to industry and trade that the FY2019 SASEC NSW Project would seek to further and the target was maintained in the subsequent COBP, 2019–2021.

2. Strategic Positioning of the Country Partnership Strategy 39. The results framework in the ICPS, 2014–2015 linked energy with two Strategy 2020 core areas (infrastructure and environment), and transport with one core area (infrastructure). Country development goals in the results framework were associated with “better economic management and revenue enhancement,” which was taken from the election pledges and the national budget for FY2014. The ICPS, 2016 repeated the same two points and also referred to the policy analysis at the time under the national development strategy formulation process that was originally planned but did not materialize. 40. ADB tends to justify that the selected sectors and subsectors in the CPS were critical to economic expansion (energy, maritime connectivity, industry and trade) and orderly growth (urban waste management), which are contributing areas for IEG. To justify this continuity, the CPS would have benefited from situating ADB’s support more clearly within the overall configuration of government and development partner efforts in the energy and transport sectors to show why its limited support in those sectors was appropriate. The recent WUS sector GMEIWM Project seeks to establish a modern waste collection, transfer, and disposal system and a community-based outer island waste management system, and raise public awareness in “reduce, reuse, and recycle” behaviors. Although these projects would benefit all income groups, they do not specifically target the urban poor. National Poverty Line (Rf74) rates are highest (23.8%) in South Huvadhu atoll compared to 1.7% in Malé.42 The CPS should have provided a stronger rationale to explain the ADB program’s emphasis on both (e.g., other development partners, such as the World Bank investing in coastal management in Fuvahmulah [Gnaviyani Atoll]). 41. The environmental sustainability pillar rests on contributions in energy and WUS. These include interventions that consider sustainability, either in avoiding environmental harm (e.g., through renewable energy) or mitigating the effect of an already altered environment (e.g., urban waste).

41 Para. 14 of the CPS final review (attached to this validation). 42 National Bureau of Statistics, Ministry of Finance & Treasury. 2016. Household Income & Expenditure Survey, Statistical Release

IV: Poverty & Inequality. Malé.

Validation of the Country Partnership Strategy Final Review Update 17 42. Although the SASEC NSW project directly contributes to RCI, it had not been contemplated at the time of the ICPS, 2016 formulation. Maldives’ ICPSs did not provide strong links or supporting sector analysis to Strategy 2020’s three strategic development agendas (IEG, ESG, and RCI).

3. Program Relevance and Design Quality 43. Program development over the period was sporadic. There were two significant variations between planned allocations and approved projects in the transport sector (Chapter 1, Table 3). In general, the planning conducted in the CPS and the COBPs was rather abrupt because of the change of government and its priorities. Two operations—one approved in 2018 (planned in the COBP, 2018–2020), the other in 2019 (planned in the COBP, 2019–2021)—were related to sectors (WUS, and industry and trade) that were not the focus of the CPS. No allocations had been planned in these sectors in the CPS. The transformation in the scope of some operations during their long gestation suggests that the project design process has in cases been protracted. The changes may reflect the inevitable evolution that comes from a long exploratory and responsive approach to design, but it may also indicate some uncertainty with respect to needs, demand, and appropriate response. In part, this lack of strategic purposefulness reflects some shortcomings in the analytical base for project design. Sector assessments were not conducted in the preparation of the ICPSs (2014–2015 and 2016) for the key infrastructure sectors; ADB used an extension of the previous CPS sector goals.

4. Sectors with Completed Programs during the Country Partnership Strategy Period 44. Industry, trade, and private sector operations are interrelated. There are three projects in the industry and trade sector: two are sovereign operations and one is an NSO. As the NSO intervention is relevant to the industry and trade sector, IED decided to include the NSO in this assessment. Of the two sovereign projects, one—the IMSMSED Project (approved May 2012, closed in 2019)—was completed and the other—SASEC NSW Project (approved 30 May 2019, for almost $10 million)—has just been processed. The $12 million nonsovereign equity investment and loan to the HDFC were approved on 9 April 2008. 45. IED agrees with the country partnership strategy final review update that the objectives related to private sector development were fully relevant. The FY2012 IMSMSED Project comprised a loan of $5.6 million and a grant of $4.5 million and was cofinanced by the Islamic Development Bank (IsDB) with a $10.3 million loan. Its objective was to contribute to private sector development, overall economic growth, and economic inclusion in Maldives by bolstering economic activities, including in remote islands, through more opportunities and access to finance for MSMEs. This would be achieved through (i) stronger business development infrastructure, (ii) better access to technologies and market information, and (iii) broader access to finance. The development objectives of the nonsovereign investment in the HDFC were to (i) help meet urgent housing needs in Maldives, (ii) increase availability of mortgage lending, (iii) support privatization, and (iv) strengthen capacity in the HDFC. The objectives of these projects were consistent with government priorities, ADB’s key focus areas, and development needs in Maldives. The government’s 2009–2013 national development strategy recognized “the potential of the SME sector to create a more resilient and diversified economy and to create employment opportunities, in particular in the outer atolls.” ADB’s investment in HDFC was also fully appropriate given the lack of alternative sources of long-term finance that HDFC needed for mortgage lending and the role the investment played in helping privatize the SOE. In turn, a strengthened HDFC supported development of the mortgage finance and increased access to housing in Maldives. Both interventions were designed in coordination with other development partners: the International Finance Corporation (IFC) also made an equity investment in the HDFC and the IsDB provided a line of credit to the Bank of Maldives (BML) under the IMSMSED Project.

18 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

46. However, there was no coherent strategy for ADB’s support of private sector development, and the relevance of some aspects may have waned with changing government priorities. The inability to develop a fully-fledged CPS because of political changes meant that ADB was not able to articulate a clear strategy to support private sector development over the period. Its objectives comprised ad hoc project-level objectives. The interventions were thereby not positioned within a broader overall strategy. While the interventions focused on aspects of the business environment and access to finance, a range of other constraints affected MSMEs: (i) limited land areas, (ii) energy and water constraints, (iii) high inter-island transport costs, (iv) limited access to market information, (v) underdeveloped market linkages between small and large enterprises, (vi) an unskilled workforce, (vii) impediments to land ownership and property rights, (viii) difficulty in enforcement of contracts, and (ix) the heavy presence of the public sector in commercial activities. 43 The extent to which these constraints were addressed in parallel to the IMSMSED project is not clear. Moreover, given that the priorities of the government changed in 2016 from decentralization and development of outer atolls to a focus on developing infrastructure and public services in the Greater Malé region and larger islands, the relevance of some aspects of the IMSMSED Project that sought to help develop MSMEs in the outer islands may have declined. 47. The South Asia Subregional Economic Cooperation National Single Window Project reflects a relevant effort to improve trade and enhance regional cooperation. SASEC NSW’s strategic agenda areas are (i) RCI and (ii) IEG. Clearly, the project’s relevance and contribution to the latest government SAP’s focus are on economic diversification. The primary focus of the project is to (i)enhance Maldives’ position within SASEC countries by reforming and streamlining the trade supply chain with its trade partners, and (ii) ensure that processes and procedures developed extend to all cross-border trade. This focus is expected to ensure that the stakeholders involved in (i) importing, exporting, and transiting of goods; (ii) providing services that support stakeholders who import and export; or (iii) providing transportation, and custody of goods and clearances services reduce costs through simplification and transparency. 48. The renewable energy project is also relevant to the development needs in Maldives. The single loan processed in the sector is the POISED project, which was approved in September 2014 with a total of $129 million, comprising ADB grants—including Japan Fund for the Joint Crediting Mechanism (JFJCM)—and cofinancing loans from the European Investment Bank (EIB) and the IsDB. The project is in line with the CPS’s main pillar on both (i) infrastructure and (ii) environment, including climate change. According to the CPS final review, this is the largest energy sector operation in Maldives to date. The project is most relevant to the environment pillar, as the loan is seeking potentials for significant renewable energy resources on solar energy, and potentially wind power. The project document explained that Maldives was the only country in South Asia to achieve 100% access to electricity, and ADB and the government are continuing to work together to transform the existing energy grids on the archipelago into a hybrid renewable energy system. 49. ADB and other multilateral development partners are still studying the new Organisation for Economic Co-operation and Development–Development Assistance Committee evaluation criterion of coherence that was adopted towards the end of 2019.44 However, the coherence of the ADB program with other external donor support is very important for a small country like Maldives. There was some level of coherence, notably in the POISED project, but it was not perfect. ADB had secured cofinancing from the EIB and the IsDB, though the EIB loan was late and only declared effective on 21 November 2019. 45 This late effectiveness delayed the implementation of the POISED project in 81 islands. The government redirected the IsDB support for the POISED project to the waste management sector. To fill

43 ADB. 2012. Micro, Small, and Medium-Sized Enterprise Sector Analysis. Internal ADB document. Manila. 44 Organisation for Economic Co-operation and Development–Development Assistance Committee Network on Development

Evaluation. 2019. Better Criteria for Better Evaluation: Revised Evaluation Criteria, Definitions and Principles for Use. Paris. 45 The main reason for the delay is that after every election, the change of management for the energy agencies had to be submitted

to EIB.

Validation of the Country Partnership Strategy Final Review Update 19 the gap caused by this redirection, ADB is now considering supplementary financing for the POISED project for $10 million equivalent. This project is in line with the new government’s SAP on Jazeera Dhiriulhun, which includes clean energy, and is thus relevant to ADB’s focus on climate change. 50. The transport project is also relevant. There was only one project in the transport sector, the KHE Project, for which ADB approved $9.69 million with one attached TA project—Capacity Development for Sustainable Harbor Operation and Maintenance ($0.5 million). The project aims to contribute to ADB’s Strategy 2020 ESG and IEG strategic development agendas. The project argued that it supports IEG on the rationale that it is important to improve the connectivity of scattered archipelago populations and reduce the high cost associated with large distances in combination with a lack of economies of scale, current limited economic activity on remote atolls, and adverse seasonal weather conditions. This presents a strong case for an increase in the accessibility to socioeconomic activities (which is the first focus in the new government’s SAP) and services for the island nation population. 51. The water and other urban infrastructure services sector project is fully consistent with ADB priorities and Maldives development needs. There was only one project in the WUS sector during the ICPS period—the GMEIWM project—which was approved on 16 August 2018, along with the Improving Community-Based Solid Waste Management Project, funded by the Japan Fund for Poverty Reduction (G9195) with a combined grant amount of $40.50 million. This project’s strategic area also covers both ESG and IEG, but again, in IED’s view, the project’s contribution to ESG is sufficiently justifiable, as it envisages treating solid waste in the next phase by applying waste-to-energy techniques (incineration with electricity generation), which minimize landfilling requirements in line with good practice in waste management. 46 This is in line with the new government’s SAP, fourth item on Jazeera Dhiriulhun, which stems from urbanization surrounding the Malé atoll. The government has banned open burning of waste, but in Malé, there are frequent open natural fires that produce a lot of smoke. The second phase of the project is expected to lead to a loan of $130 million and is planned for approval by mid-2020. The first phase has three other components, covering community-based outer island waste management systems, building institutional capacity, and public awareness.

5. Coordination with Other Development Partners

a. Activities of Other Major Development Partners

52. Several bilateral and multilateral development partners have had active programs in Maldives since 2014. Maldives became an upper-middle-income country in 2010. Prior to 2018, it was eligible for 100% grant financing from ADB and the World Bank because of its classification as a country at high risk of debt distress. In 2015 and 2016, however, the government raised external financing on commercial terms that breached the eligibility criteria for fully grant funding. As a result, after 2018, both ADB and the World Bank financing was on mixed grant and/or loan terms. The activities of the main development partners during 2014–2019 were as follows: 47

(i) World Bank Group. The World Bank’s strategy for Maldives for FY2014–FY2016 sought to deepen dialogue on macro-fiscal issues, strengthen analytical work, and support projects in public financial management and renewable energy.48 The FY2016–FY2020 strategy sought to help (a) improve economic opportunities through improvements in education, fisheries, and access to finance; (b) improve resilience to climate change, natural hazards, and other exogenous shocks; and (c) strengthen fiscal sustainability

46 European Commission. 2019. Waste Framework Directive: Directive 2008/98/EC. Brussels.

https://ec.europa.eu/environment/waste/framework/ 47 Government of Maldives, Ministry of Finance. International Cooperation. https://www.finance.gov.mv/ministry/international-

cooperation. 48 World Bank. 2014. Interim Strategy Note for the Republic of Maldives. World Bank Report No. 86176-MV. Washington, DC

20 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

through improved public financial management. 49 As of April 2020, The World Bank had eight active projects in Maldives with a total net commitment of $136 million. The projects were in renewable energy (FY2014); public financial management (FY2014 and FY2018); fisheries (FY2017); solid waste management (FY2017); youth employment (FY2019); fiscal management (FY2020); emergency disaster management (including COVID-19 Pandemic Response Option programs) with a catastrophe Deferred Drawdown Option (FY2020); and urban development (FY2020). 50 The World Bank also provided analytical and advisory services in macroeconomic monitoring, the financial sector, youth and gender, health financing, social protection, and poverty. In 2016, it prepared a systematic country diagnostic that is expected to be updated in 2020. The IFC has one active project in Maldives: a $2.25 million equity investment in the HDFC that it made alongside ADB in 2008. The recent interviews with ADB and the government reveal that the World Bank will also consider the following: (a) infrastructure projects outside the Greater Malé region, in the north and south atolls; (b) support for renewable energy; and (c) support for PSM.51

(ii) Islamic Development Bank. The IsDB had nine active projects in Maldives as of March

2020. These were projects in: fisheries (FY2010), health (FY2012), microenterprise finance (FY2013), sanitation (FY2013), fiscal support (FY2013), reconstruction of harbors (FY2014), real estate development (FY2015), refined petroleum products (FY2017), and five equity investments in Maldives Islamic Bank (FY2008‒FY2019).52

(iii) Export-Import Bank of China. Since 2010, the Export-Import Bank of China has provided

loans to Maldives for various projects, including in housing development, transport, and infrastructure, mainly in Hulhumalé island. At present, it is involved in the development of the Velana International Airport. Sinamalé Bridge (formerly China–Maldives Friendship Bridge) was completed in 2018.

(iv) United Nations agencies. The United Nations Development Assistance Framework for

2016–2020 identified four strategic focus areas for assistance from United Nations (UN) agencies: (a) youth and children, (b) gender, (c) governance, and (d) environment and climate change. Eleven UN agencies are engaged in Maldives. There are currently four resident UN agencies in Maldives: United Nations Development Programme, United Nations Children’s Fund, World Health Organization, and United Nations Population Fund. The nonresident agencies are United Nations Office for Project Services; UN Women; International Organization for Migration; Food and Agriculture Organization; United Nations Office on Drugs and Crime; United Nations Educational, Scientific and Cultural Organization; International Labour Organization; and United Nations Environment Programme. 53

(v) European Investment Bank. The EIB approved one project during FY2014–FY2019:

Maldives Sustainable Energy Development Project (2016). (vi) Other donors. Other donors, including (a) the Abu Dhabi Fund for Development;

(b) the Kuwait Fund for Arab Economic Development; (c) the Saudi Fund for Development; and (d) the Organization of the Petroleum Exporting Countries Fund for

49 World Bank. 2016. Country Partnership Strategy for Maldives, 2016–2019. Washington, DC. 50 World Bank. Projects & Operations. https://projects.worldbank.org/en/projects-operations/projects-list?searchTerm=maldives. 51 Based on an interview with SARD’s Regional Cooperation and Operations Coordination Division on 29 April 2020. 52 IsDB. Project Database. https://www.isdb.org/projects/data?loc=MV&sector=&status=active 53 A. Naeem. 2019. Final Evaluation Report of the United Nations Development Assistance Framework (UNDAF) 2016–2020 for

Republic of Maldives. Malé.

Validation of the Country Partnership Strategy Final Review Update 21

International Development have provided loans, grants, and TA in transport, energy, fisheries, harbors, water supply and sewerage, health, education, housing, environment, budgetary support, and development of the Velana International Airport. In recent months, under the current government, the United States Agency for International Development has also strengthened its support to Maldives, particularly PSM support (footnote 51). India provides concessional budget support, and a line of credit for water and sewerage facilities in selected islands and the construction of an international port and other transport health sector infrastructure. The Japan International Cooperation Agency and the Government of Japan provide support for human resource development, public financial management, transport, education, telecommunications, and economic and social development.

b. Strategic Cooperation

53. Because of its small resource envelope, ADB sought to specialize in a few areas and coordinate with partners with active long-term programs. During 2010–2019, the government did not hold any development partner meetings to coordinate development programs and facilitate division of labor. There was also no formal NDP in place during the period. ADB sought to broadly coordinate the sectors of its engagement with other development partners with active programs in the country. ADB’s ICPS, 2014–2015 for Maldives concentrated its support in a narrow range of areas because of the limited financial envelope and a prior IED recommendation to enhance coordination and ensure complementary support with other development partners. 54 As reported in the ICPS final review, ADB consulted with partners with active long-term programs and presence in the region, including the World Bank, United Nations Development Programme, and Japan during country consultations and country programming missions. The World Bank states that it met regularly with ADB to exchange information and coordinate activities (footnote 17). Table 4 identifies the main development partners and their sectors of engagement during 2014–2019. There were multiple donors engaged in some sectors, such as transport infrastructure, and environment and climate change. In others, however, such as private and financial sector development, there were fewer external development partners engaged. 54. The 2019 development partner forum enabled a new impetus in development partner coordination. In June 2019, the government held the Maldives Partnership Forum in which it presented its 2019 NDP to bilateral and multilateral development partners. The forum focused on five areas: (i) the macroeconomic and fiscal situation; (ii) addressing inclusivity and sustainability in economic development; (iii) enhancing social outcomes (including healthcare, education, housing, youth, gender issues, and culture); (iv) building robust institutions, including in governance and justice; and (v) collaborating with the private sector. The government also identified a range of projects it was working on, including the proposed development of the Gulhifalhu Port, the Greater Malé Connectivity Project, and completion of Velana International Airport. During the forum, the government signed eight memorandums of understanding with eight development partners: the governments of Georgia, India, Japan, and the United States; and ADB, United States Agency for International Development, and the European Union. The forum was expected to be the first of a series of collaborative forums over the next 5 years.

54 ADB. 2014. Interim Country Partnership Strategy: Maldives, 2014‒2015. Manila.

22 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

Table 4: Development Partner Areas of Engagement in Maldives (2014–2019)

Partner and/or Sector

Envi

ronm

ent,

C

limat

e C

hang

e,

Dis

aste

r Ri

sk

M

Tran

spor

t In

fras

truc

ture

Wat

er a

nd

Sani

tati

on

Gov

erna

nce

and

Publ

ic

Sect

or

Man

agem

ent

Hea

lth

Ener

gy

Educ

atio

n

Fish

erie

s

Priv

ate

and/

or

Fina

ncia

l Sec

tor

Asian Development Bank X X X X X X World Bank (IFC included) X X X X X X Islamic Development Bank X X X X X UN Agencies X X X X X European Investment Bank X OPEC Fund for International Development X X X X EXIM Bank of China X Kuwait Fund for Development X X X Abu Dhabi Fund X X Saudi Fund for Development X X X X Japan/JICA X X X X X X USAID X X India X X X EXIM Bank of China = Export-Import Bank of China, IFC = International Finance Corporation, JICA = Japan International Cooperation Agency, OPEC = Organization of the Petroleum Exporting Countries, UN = United Nations, USAID = United States Agency for International Development. Sources: Asian Development Bank (South Asia Department); and the Government of Maldives, Ministry of Finance.

c. Project Coordination and Cofinancing

55. ADB also sought to leverage its support beyond its directly funded program by seeking cofinancing in its projects. ADB set an explicit objective of actively seeking cofinancing in its projects. ADB’s Interim Strategy for 2013–2014 for Maldives indicated that ADB would seek to further its long-term objective under Strategy 2020 of having total annual direct cofinancing exceed the value of ADB’s stand-alone project financing. As reported in the CPS final review, cofinancing mobilized was substantial relative to the ADB program (88% of ADB financing). In some cases, the sources of some funds did not have a presence or program in Maldives and relied on ADB’s appraisal and negotiation capabilities for project preparation.

56. Cofinancing by the Islamic Development Bank helped expand the scope of the Inclusive Micro, Small, and Medium-Sized Enterprises Development Project and introduced Islamic micro-, small- and medium-sized enterprise finance. The IsDB provided $10.3 million in cofinancing for the IMSMSED Project, which was signed on 23 April 2013. The IsDB financed (i) a line of credit through BML, (ii) a capacity development and management information system for Islamic finance, and (iii) a marketing and incubator program in business development service centers (BDSCs). The IsDB’s participation helped expand the components of the project that were also financed by ADB, including increasing the activities of the BDSCs and establishing a further 41 MSMEs under the incubator mentoring program. 55 In addition, the IsDB’s participation helped introduce the first Islamic finance scheme for MSMEs in BML. The program saw considerable delays because of the need for training and systems for sharia-compliant products, but was fully established in BML by 2018. ADB’s completion report for the project found the IsDB’s overall performance to be satisfactory, as its contributions enabled synergy and complemented ADB’s activities. However, there was no formal coordination mechanism in place during implementation and a lesson learned was that a formal coordination mechanism between ADB and the IsDB would have strengthened monitoring of the project’s targets that were dependent on the IsDB’s activities. 57. ADB and the International Finance Corporation collaborated on an effective partnership in the housing finance sector. During the review period, ADB supervised its equity investment and loan to the

55 ADB. 2019. Completion Report: Inclusive Micro, Small, and Medium-Sized Enterprises Development Project in Maldives. Manila.

Validation of the Country Partnership Strategy Final Review Update 23 HDFC, which had been approved in 2008. The project sought to help privatize the HDFC and enhance the provision of mortgage finance in Maldives. The IFC participated in the project with a parallel equity investment and loan. The IFC and ADB each took an 18% stake in the HDFC, the HDFC of India took a 15% stake, and the government retained 49% of the company. Both ADB and the IFC were entitled to nominate a director on the board. The IFC also provided a TA grant to help improve the HDFC’s policies, procedures, and internal controls; train management and staff; and instill a “culture of innovation and customer management.”56 The HDFC of India served as a technical and strategic partner and provided off-site training for staff at its training center in India. The structure worked well and the HDFC emerged as a well-managed specialized financial institution that has attracted commercial funding, maintained a high-quality loan portfolio, and expanded access to housing finance in the country. 58. Overall, the ADB program was relevant to the development challenges faced by Maldives. The CPS could have outlined more clearly the rationale behind the prioritization of certain sectors and articulated a more coherent results framework. B. Effectiveness 59. The CPS final review assessed the ADB program effective; this validation does likewise. As in the case of the final review, the validation assessment encompasses sector outcomes and the main outputs and outcomes of key projects that have been completed or have sufficient implementation to allow some results achievement. Additionally, the effectiveness of NSOs is examined as part of ADB’s industry and trade program. 60. Most of the physical outputs of the transport and WUS projects have not progressed enough. Some underperformance (in terms of the gap between the committed loan and the disbursement) is noted in transport and WUS outputs, though the WUS loan was approved in 2019, and projects in Maldives tend to have a slow start in the first 2 years of implementation.

1. Progress Toward Sector Outcomes

61. At first glance, the ICPS final review’s treatment of ADB’s contribution to sector outcomes as placed in the CPS results framework appears to be less than comprehensive, as Appendix 5 only placed a copy of the originally set framework in the ICPS, 2014–2015 without the achievement of the target indicators. Instead, the main text provided narratives on the main sectors, i.e., Private Sector Operations Department—IMSMSED, energy, and transport, complemented by the ongoing status with TA projects. There is very limited information on the SASEC NSW and GMEIWM projects, as they are both at an early stage of implementation. There is also an appendix in the final review document (Appendix 3), which outlines the key progress (just past the midterm status) for energy (POISED) and transport (KHE), as completion reports for these two projects have not yet been initiated and those two projects are expected to contribute to the results framework targets in Appendix 4. 62. It is difficult to assess the original targets of the ICPS results framework as the final review does not assess the achievement of the outcome indicators. This is because the POISED project has disbursed only 76% of its loan amount and the KHE Project has disbursed only 51%.57 Appendix 3 provides the output indicator achievement ratio by project components. Based on that updated progress information, the assessment is that the energy results are likely or highly effective, and likely effective for transport results. For the transport program, no data is available on the outcomes identified in the KHE Project design and monitoring framework (DMF) for the number of passengers or volume of goods transiting

56 IED. 2017. Validation Report: Housing Development Finance Corporation in the Maldives. Internal ADB document. Manila: ADB. 57 IED learned through an interview with the PMU in late May that the current disbursement is at 88%.

24 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

through the Kulhudhuffushi Harbor.58 The project management unit (PMU) for the KHE Project confirmed that data for passengers, cargo volume, and students using the existing (old) Kulhudhuffushi Harbor were not collected during the construction of the new harbor. 63. The latest ICPS did not have its own new results framework indicators, but a minor update was made for the previous ICPS, 2014–2015 and this was attached to the COBP, 2016–2018, for transport only. The latest ICPS final review reattached the ICPS, 2014–2015’s results framework, which also covers energy. Energy covers both infrastructure and environment. This means that the latest CPS results framework did not cover other sectors, including industry and trade, WUS, or PSM (which was supported by TA projects). More recent COBPs, for example the COBP, 2020–2022, cover WUS in the sector results framework, but only with indicative resource commitment figures, and no sector targets.

2. Effectiveness of Completed Programs

64. ADB-financed projects helped improve access of micro, small, and medium-sized enterprises to finance in Maldives over the period. Under the line of credit component of the IMSMSED Project, the BML disbursed $1.6 million in 2014–2018 to 164 MSMEs. The loans were mainly for working capital in retail businesses, such as bakeries, local delicacy producers, information and communications technology providers, and tailoring, as well as traditional sectors such as agriculture, tourism, and fisheries (footnote 40). More than half (58%) of the borrowers were women-led MSMEs. The state-owned BML proved an effective partner because of its sound lending practices, dedicated SME banking unit, branch network, trained staff, and effective collaboration with BDSCs. In 2016, the central bank, Maldives Monetary Authority (MMA), established a credit guarantee scheme under which it guaranteed 90% of a qualifying loan to an MSMEs, thereby enabling access to credit without collateral. Under the nonsovereign HDFC investment, the HDFC substantially expanded its provision of mortgage finance and as of 2018, its housing loan and facility portfolio had reached Rf1.6 billion, up from Rf154 million in 2008. Over the decade, HDFC also introduced several products to reach low-income groups, including (i) pooling of extended family income to determine loan eligibility, (ii) enabling half the required 20% equity down payment at application and the other half during construction, (iii) an out-reach program to provide mortgages to outer atolls, and (iv) an off-balance sheet government-guaranteed social housing program. 59 65. ADB also helped improve access to advisory services and technology for micro, small, and medium-sized enterprises. The capacity of the BDSCs was strengthened under the IMSMSED Project. The BDSCs were expanded to all seven provinces and provide advisory services on business start-up; product development and marketing; legal, tax, and accounting issues; accessing trade networks; obtaining finance; and accessing government services. Two business incubator programs were also set up that supported some 175 MSMEs under the project. The central bank’s Credit Information Bureau was also strengthened to facilitate access to finance based on reputational collateral and the MMA indicates that credit reports are widely used by financial institutions. 60 According to the World Bank’s 2019 Doing Business Report, credit registry coverage in Maldives rose from 17.7% of adults in 2012 to 23.6% in 2019, substantially higher than the South Asia average of 4.8%. 61

58 The transport operations experienced some delays at the beginning of their implementation, as construction was delayed for

almost 2 years. The local council requested a realignment of the structural design of the harbor, but this request was later dropped. The final review states that the transport program’s outcomes and indicators in the two ICPS periods focused on Malé Port and are not particularly relevant to assess the progress of the KHE Project.

59 ADB. 2016. Extended Annual Review Report: Housing Development Finance Corporation in Maldives. Internal ADB document. Manila.

60 IMF. 2019. Republic of Maldives: Staff Report for the 2019 Article IV Consultation. IMF Staff Country Report. No. 19/156. Washington, DC.

61 World Bank. 2019. Doing Business 2019 Training for Reform: Economy Profile of Maldives. Washington, DC.

Validation of the Country Partnership Strategy Final Review Update 25 66. Substantial contributions were also made to the capacity and management of the Housing Development Finance Corporation. The privatization of the HDFC was one of the first public–private partnerships (PPPs) that the government entered into and the HDFC emerged as a leading, well-managed specialized financial institution in Maldives. Over the years, it attracted qualified and experienced management; strengthened governance practices; introduced new lending products, including for low-income segments; and helped deepen the local capital market by pioneering the issue of domestic corporate bonds. In 2018, it had a 26% market share of the mortgage lending market and maintained a high-quality portfolio with a nonperforming loan ratio of 1.5% compared to an average nonperforming loan ratio of 9% among commercial banks in Maldives.62 The HDFC also helped catalyze development in the housing industry by helping establish legislation that enabled freehold title to units of housing so that the assets could then be used as loan collateral.63

67. However, some intended outcomes in micro, small, and medium-sized enterprises development were not realized. The IMSMSED Project had sought to support enactment of amendments to the SME Act, 2013. These amendments were drafted, but as of 2019, had not yet been passed by the legislature.

As a result, weaknesses persist in the policy and regulatory environment for MSMEs, including (i) an absence of widespread awareness and use of a common definition of SMEs, (ii) virtually non-existent targeted data collection on SMEs, and (iii) ad hoc SME policy coordination among government agencies (footnote 16). The project also intended to facilitate access to credit by enabling use of moveable goods as collateral by establishing a Secured Transaction Registry. Although the registry was set up in the central bank in 2018, as of 2019, it had not yet become operational as the required legislation has not yet been enacted. The original intention was to turn the BDSCs into a privately managed network that would provide fee-based services. However, the government subsequently decided to maintain the BDSCs as free-of-charge service providers and in 2017, established a state-owned corporation, the Business Center Corporation Limited, to oversee management of the BDSCs.

68. ADB did not realize any new nonsovereign investments, in part because of underlying constraints to private investment in Maldives. The tourism industry in Maldives has proved able to attract foreign investment without the need for support from international finance institutions. Private investment outside the tourism sector has been partly constrained by inherent limitations in Maldives that are typical to small island states, such as a small domestic market, a narrow natural resource base, a small workforce, and lack of scale in investment projects. Moreover, according to ADB, the prospects for NSOs have been limited by the weak sovereign rating of Maldives; limited demand for foreign currency finance among local financial institutions; lack of convertibility of the Maldivian Rufiyaa; and the availability of competitive local funding. IFC has also not developed any private investments in Maldives since its 2008 investment in HDFC (alongside ADB’s investment). According to IFC, further constraints to developing private sector investments in Maldives include uncertain government support for PPPs, the dominance of the public sector in infrastructure development, and lack of transparency in aspects of the regulatory environment (e.g., in licensing land for new investments) (footnote 17). 69. The Preparing Outer Island for Sustainable Energy Development Project has some unfinished components left before completion. IED obtained a status report based on an interview conducted in May 2020. Most of the ADB-funded solar photovoltaic installations in 14 islands have been completed (10 installations under the State Electric Company Limited [STELCO] have been completed; 4 under Fenaka Corporation Limited have been delayed). Installations on 13 islands that are funded by EIB financing have just started operations as the EIB loan was declared effective in November 2019, but the COVID-19 pandemic put a halt to construction. Eight of the 20 atolls have completed transferring existing mini grids into hybrid energy systems under the POISED Project. Because of COVID-19, the closing date of June 2020 has now been extended. A battery energy storage system (BESS) at Addu City is financed

62 MMA. 2019. Quarterly Economic Bulletin. Malé. 63 IED confirmed this during an interview with the Ministry of Finance in May 2020.

26 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

by JFJCM, which was awarded at the end of 2018, with a different team of experts from Japan under the agreement between the governments of Maldives and Japan. The design works are currently in progress but because of COVID-19, the experts have not been able to work in Maldives. The project conducted a gender-inclusive community awareness outreach program for over 12,000 participants on the use of renewable energy and household demand-side management. IED learned from its interview with the executing agency that there are two ongoing energy projects led by the government: one is the ADB-funded POISED Project, the other is the World Bank-funded Accelerating Sustainable Private Investments in Renewable Energy Project, which is facing delays because thus far, it has been able to install only 1.5 megawatts. The design included some private sector participation, which has generated some complications during implementation. ADB is close to achieving 21 megawatts from the solar photovoltaic installations (project targeting a total coverage of 12 islands). 70. Some progress has been made in improving transport under the harbor development project. Although there is only one transport project, the ICPS, 2015 results framework set out for transport is different from the outcome target set by the KHE Project. The CPS has targets for (i) number of passengers, (ii) increases in the inbound container throughput of general cargo, and (iii) decreases in the average dwell time of cargo vessels nationally. However, for the sole project, the DMF had targets for (i) total passenger trips at the harbor, (ii) goods arriving at the harbor, and (iii) number of students enrolled in tertiary and higher education in Kulhudhuffushi. The only solid data IED has is that the passenger and cargo terminals are well underway, with 87% of the contract committed, and 16% disbursed. Other auxiliary facility construction, such as building a ramp for landing craft and a fish market, has not commenced. 71. Safeguards. The harbor project has been categorized C for involuntary resettlement safeguards and B for environment safeguards. To date there has been no resettlement impact because the project area for the new harbor is located away from the existing harbor on government-owned reclaimed land, which was uninhabited and has been zoned for harbor expansion. There has also been no disruption to livelihoods for community groups in the area, and no encroachment of the land in the project area. Proper safeguards are in place for HIV/AIDS awareness, anti-trafficking, and child labor. On the environmental safeguard side, the latest review mission reported that the project had to replace the project management consultant’s environmental specialist, as the contractor had not submitted progress reports on the site-specific environmental management plan’s actions, including the plans for dredge management, spoil disposal, and emergency management. The ADB mission also advised the contractor to conduct environmental sampling of sea-water quality, reef benthos and fish, and sedimentation rates, as stipulated in the project’s environmental management plan. 72. The water and other urban infrastructure services project is too new to show development results. The project set out four outcome targets in its DMF: (i) increase of solid waste that is collected and transferred to Thilafushi or the island waste management center, (ii) reduction in daily complaints, (iii) controlled dumping at Thilafushi implemented without waste burning, and (iv) disaster risk management plan.

3. Use of Technical Assistance

73. The CPS final review holds that ADB’s TA program effectively complemented the investment projects and contributed to satisfactory development impacts in terms of their cross-sector CPS objectives. During the validation period, 16 TA projects—including five project preparatory TA projects—were approved, ongoing, or completed. Additionally, eight TA projects were carried over from the previous CPS period. Of the 16 TA projects, 6 were in PSM and 10 were in transport. The early period of the CPS was marked by the highest intensity of TA support because of the combination of TA projects carried over and new TA projects approved (Table 4).

Validation of the Country Partnership Strategy Final Review Update 27 Table 4: Technical Assistance Implemented or Approved in the Country Partnership Strategy Period

Item PSM Energy Transport

Industry and

Trade WUS Total Pre-2014 5 2 1

8

2014

1

1 2015

1

1

2016

1

1 2017

1 1

2018 1

1 1 3 2019 1 1

Total 6 2 4 2 2 16 PPTA 0 1 2 1 1 5

PPTA = project preparatory technical assistance, PSM = public sector management, WUS = water and other urban infrastructure services. Source: Independent Evaluation Department, from ADB project documents.

74. Of the 16 TA projects, 7 have been completed; 5 of these were self-assessed and 4 were rated successful or highly successful. These are: (i) Capacity Development of Maldives Energy Authority (CDTA-8000); (ii) Economic Recovery Program (CDTA-7424); (iii) Strengthening Capacity for Operations Management (CDTA-8070), and (highly successful) Developing the Revenue Administration Management Information System (CDTA-7946). One TA project—Enhancing Tax Administration Capacity (TA-8525)—was self-assessed as less than successful. Further assessment of TA complementarity is in paras. 92–106. 75. Four of the five self-assessed TA projects are in PSM, while one supported the energy sector. IED considered the TA support for the energy sector successful as it helped to establish guidelines and extended support to the TA implementing agencies to function with limited staff. However, the performance of the PSM TA projects was mixed. The initial two TA projects were able to achieve their objectives of improving the tax database, collection and audit, and management information systems, which are the pillars of an effective revenue system. This initial success is also attributed to the TA projects’ links to the government loan project: the economic recovery program. The two succeeding TA projects, which were centered on implementing the initial success of previous TA projects, had challenges in terms of a government in transition, lack of policy support, inadequate staff, and delays because of the technical incapacity of the consulting firm to deliver intended software outputs. 76. TA was used markedly in pre-ICPS (2014–2019) periods in PSM for capacity support in revenue administration and tax administration. In the ICPS period, it was used to (i) support country programming; (ii) prepare projects; and (iii) accompany policy-based operations in energy, transport and WUS. The government was appreciative of this support (which was confirmed during the IED interviews), although absorptive capacity varied across administrations. Despite some implementation weaknesses—some of which were the result of government transitions—TA projects successfully supported (i) introducing the government’s financial administration, and (ii) extending the masterplan or strategy formulation of key infrastructure sectors. On these grounds, and notwithstanding the poor results framework, the program was rated effective. C. Efficiency 77. The country partnership strategy final review assessed the program efficient (on the low end, at 1.7); this validation also assesses it efficient. The final review assessment focuses on efficiency ratings, economic internal rates of return (EIRR), and other means of determining economic benefits of projects and overall portfolio performance. In addition to these components, the validation also refers to NSOs. The final review acknowledges several shortcomings in the portfolio performance. As the EIRR at completion is only available for one project and, given the absence of rigorous cost–benefit analyses, the validation estimates that evidence is lacking to be sure that the overall program’s benefits

28 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

outweighed costs by a good margin. The validation’s account of the inefficiencies in the design stage, project processing, and implementation provides evidence to justify the validation’s assessment. 78. Completed projects. In terms of completed interventions, there is only one industry and trade project—the IMSMSED Project—and one NSO project: the equity investment and loan to the HDFC of Maldives Project. Table 5 summarizes the portfolio.

Table 5: Implementation Progress of Maldives Project Portfolio as of 31 December 2019

Project (Approval Year) Time

Elapseda Contract Awardsb Disbursementsb

Inclusive Micro, Small, and Medium-sized Enterprises Development (IMSMSED) (2012) 100% 100% 100% Preparing Outer Islands for Sustainable Energy Development (POISED) (2014) 91% 91% 79% Kulhudhuffushi Harbor Expansion (KHE) (2016) 85% 89% 59% Greater Malé Environmental Improvement and Waste Management (GMEIWM) (2018) 23% 28% 1% South Asia Subregional Economic Cooperation National Single Window (SASEC NSW) (2019) 5% 68% 0.3%

a Time from effectiveness to 31 December 2019 (time from effectiveness to the most recently approved closing date). b The ratio uses the net total project amount as the denominator, so even though part of active loans may be cancelled without

awarding additional contracts, the ratio is below 100% until a loan is closed. Sources: South Asia Department. Interim Country Partnership Strategy Update Final Review Period, 2014‒2019: Maldives. Manila: ADB. Project data sheets; South Asia Department. 2019. Tripartite Portfolio Review Meeting (background documentation). Manila: ADB; and ADB e-Ops and project website (accessed 13 February 2020).

1. Efficiency of Completed Operations

79. The PCR for the sole completed project— Inclusive Micro, Small, and Medium-Sized Enterprises Development—did not include an EIRR analysis, but was rated less than efficient. The completion report attributed the rating primarily to serious delays during implementation and cancellation of a part of the loan. It was delayed by 18 months for a variety of reasons: (i) changes in government and elections, (ii) high turnover in PMU staff and consultants, (iii) delays in the signing of financing agreements and project effectiveness, (iv) delays in the establishment of PMUs, and (v) cumbersome management of consultancy and procurement packages. The contract award and disbursement projections for the loan were revised 14 times and the procurement plan was revised 12 times. Loan utilization reached only 29% because of cancellations, while grant utilization was 94%. 80. The financial performance of the nonsovereign investment in the Housing Development Finance Corporation was satisfactory. The HDFC was able to achieve the development objectives of the investment while maintaining satisfactory financial performance. It has consistently shown a profit since 2009 and its total assets grew from Rf0.3 billion in 2008 to Rf1.7 billion in 2018. At the time of the 2016 extended annual review report, its economic return on invested capital was calculated at 13%, which was 1.3 times the weighted average cost of capital. ADB investment profitability was also satisfactory. ADB’s loan to the HDFC was fully repaid in February 2016 and the internal rate of return on the equity investment had generated an internal rate of return of 19.2% on a dollar basis at the time of the extended annual review report.

2. Efficiency of Ongoing Loans, Grants and TA Implementation Performance

81. Maldives’ overall portfolio financial performance, in terms of contract award ratio, was higher than that of the South Asia Department (SARD) or the ADB-wide average. During 2016–2020, it was consistently high, from 72% to 105%; compared to 30%–39% for SARD as a whole, and 17%–30% for ADB. However, the disbursement ratio was at 17%–30%, the same ratio as ADB or lower in some years. The time between Maldives’ loan approval and effectivity was about the same as the ADB-wide average (a little less than 3 months). The portfolio rating in the project performance report system for projects in Maldives judged as at implementation risk was higher than the ADB- or SARD-wide rating: 25%–33% compared to SARD’s 12%–21%, or ADB’s 20%–27% (Table 6).

Validation of the Country Partnership Strategy Final Review Update 29

Table 6: Key Portfolio Performance Indicators (Based on Commitment) for Maldives, 2014–2019

Item 2014 2015 2016 2017 2018 2019

Financial Performancea Active Committed Portfolio ($ million) 57.2 62.2 71.8 71.9 105.7 97.8 Contract Award Ratiob (%) 1.5 25.3 21.9 65.0 14.7 55.5 SARD-wide contract award ratio (%) … 29 30 39 35 … ADB-wide contract award ratio (%) 27.8 26.1 29.7 27.6 25.7 25.5 Disbursement ratio c (%) 17.5 4.4 17.4 21.4 30.5 21.8 SARD-wide disbursement ratio (%) … 16 19 26 25 … ADB-wide disbursement ratio (%) 25.7 29.5 27.2 25.7 27.7 29.1 Start-Up Compliance Active Committed Loan portfolio (number|$ million) 1| 2.8 1| 2.7 1|2.7 1| 2.7 1| 1.6 1| 5.0 Loan (number approved* | number signed**) 0|0 0|0 0|0 0|0 0|0 1|1 Average time from approval to signing (months) 0.6 Average time from signing to effectivity (months) 3.9 ADB-wide average time from approval to signing (months) 3.5 3.5 3.4 3.6 3.5 3.2 ADB-wide average time from signing to effectivity (months) 3.4 3.4 3.3 3.2 3.2 3.1 Active Committed Grant portfolio (number|$ million) 3| 54.5 4| 59.5 5| 69.1 5| 69.1 7| 104.1 6| 92.8 Grant (number approved* | number signed**) 2|2 1|1 1|1 0|0 2|2 1|1 Average time from approval to signing (months) 2.8 3.4 3.1 2.6 2.1 Average time from signing to effectivity (months) 3.0 2.2 2.2 2.5 2.9 ADB-wide average time from approval to signing (months) 3.1 3.0 3.0 3.0 2.8 2.4 ADB-wide average time from signing to effectivity (months) 2.3 2.4 2.5 2.6 2.6 2.8 Active Committed TA portfolio (number|$ million) d 5| 2.8 7| 5.0 6| 3.8 5| 2.8 5| 3.4 4| 4.2 Average time from approval to signing of TA agreement (months) 1.8 1.4 1.8 1.0 1.0 0.9 ADB-wide average time from approval to signing of TA agreement

(months) 2.6 2.6 2.5 2.6 2.3 2.0

Portfolio Ratinge On Track [number (%)] 1(100) 2(100) 2(67) 2(67) 3(75) 4(100) Potential problem [number (%)] 1(33) 1(33) 1(25) Actual problem [number (%)] Projects with implementation risk (%) 33 33 25 SARD-wide projects with implementation risk (%) 17 18 14 21 12 … ADB-wide projects with implementation risk (%) 20 24 20 27 25 26

… = not available, ADB = Asian Development Bank, SARD = South Asia Department. Note: The portfolio is based on commitments (signing). Data on regional department-wide indicators are rounded as reported in the annual portfolio performance reports. There are no reported region-wide data (based on commitment) in 2014 except for projects with implementation risk. a Contract award ratio does not cover policy-based loans and grants. b Contract award ratio is the ratio of total contracts awarded during the year to the total value for contract awards available at the beginning of the year, including newly committed projects (loans and grants) during the year. c Disbursement ratio is the ratio of the total disbursements during the year (including disbursement from newly committed operations during the year) to the undisbursed balance at the beginning of the year. d Includes nonsovereign TA projects. e Covers all loan and grant projects (including cofinancing). * Number of loans (grants), including supplementary approved during the year (includes additional financing). **Number of loans (grants), including supplementary signed during the year. Source: Procurement, Portfolio and Financial Management Department. Portfolio Management Indicators 2014–2019. Manila: ADB.

82. South Asia Subregional Economic Cooperation National Single Window Project, and water and other urban infrastructure services. This project was declared effective less than a year ago, and it is too early to assess its efficiency. The civil works for GMEIWM Project (WUS sector) were approved in June 2018; and as of February 2020, disbursement is only 34% of the original projection (as of February 2020, less than $2 million was disbursed out of the $33 million loan). 83. Energy. Except for a few smaller components under EIB cofinancing and JFJCM-supported BESS, the POISED Project has so far disbursed as per plan and progressed considerably. The only remaining phases that IED has on paper are phases (2a) and (3), and BESS. However, during IED’s interview with the executing agency in mid-May, the PMU indicated that the only substantial component remaining is the BESS. Disbursement ratio was 42% at the end of 2019.

30 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

84. Transport. The Kulhudhuffushi Harbor has a project implementation performance rating of 90%, with disbursement of 5% (against the contract award of 9%) as of end of 2019. 85. Overall, an efficient portfolio. Despite the two completed projects having been rated less than efficient, 64 on the whole, the contract award and disbursement of the overall portfolio during validation 2014–2019 have picked up, particularly the largest project, POISED, 65 and the validation rates the performance efficient. In terms of disbursement ratio of the project or grant projects only (excluding the policy-based loan), Maldives was 117% in the fourth quarter of 2019 and it was higher than those of Bangladesh (92%), India (44%), and Nepal (65%), but lower than Bhutan (184%). Maldives’ disbursement ratio showed relatively strong performance compared to the SARD average, which was 94%, and ADB-wide (76%).66 D. Sustainability 86. The country partnership strategy final review rating of the program was likely sustainable; the validation assesses it less than likely sustainable. As in the CPS final review, the assessment is based on government commitment to reform policies and capacity development and efforts to ensure adequate attention and funding of operation and maintenance. 87. The CPS final review notes that the PCRs rated the loan and grant operations completed during 2014–2019 likely sustainable. Of the two completed operations (the MSMEs sovereign loan and the HDFC nonsovereign loan), only the HDFC NSO was independently assessed and all sub-ratings for development results were highly satisfactory (contribution to private sector development; economic development; environmental, social, health, and safety performance; and business success). Of the other ongoing projects in three sectors (i.e., energy, transport, and WUS), the transport and WUS programs are not easy to asses in terms of their sustainability, as their civil works are still ongoing and outcome data are not collected during the implementation period (data is collected during the completion report stage). The energy project is close to completion, with just a few small components remaining. 88. Several of the achievements in private sector development are likely sustainable. The BML maintained sound appraisal practices in lending against the line of credit, including assessing business feasibility, financial statements, collateral quality, and tax records. The BML enhanced its capacity for MSMEs lending and developed new MSMEs products. The HDFC also emerged as a financially sound, well-managed institution. It has maintained a healthy portfolio, with a 2018 nonperforming loan ratio of about 1.5%. It also integrated sound environmental and social practices comprising (i) an environmental and social screening and assessment system to assess environmental and social issues and their financial implications; (ii) review of any national and local permits or clearances, including those for land use, zoning, sanitation, mechanical operations, and occupancy; and (iii) environmental and social audits whenever necessary to quantify the extent of environmental and social impacts associated with the mortgage lending and identify mitigation measures; (iv) assessment of the adequacy of environmental and social plans; and (v) environmental and social monitoring based on agreements between the customer and the HDFC.67 The nonperforming loan ratio of line of credit under the project was around 7.0% in 2018 (latest year—IED has data access to the HDFC annual report), which, though relatively high, is lower than the BML’s average nonperforming loan ratio during 2014‒2016 of 12.2%.

64 The completed projects (IMSMSED and Private Sector Operations Department) were both rated less than efficient and the

portfolio ratio of the two loans was about 15%. 65 The POISED Project is the largest loan ($115 million) in the ongoing portfolio ($199 million), representing 58% of the total.

According to the latest, time elapsed is 91%, the contract award is 91%, and disbursement is 79%. 66 ADB (Procurement, Portfolio and Financial Management Department). 2019. Fourth Quarter of Quarterly Portfolio Review. Policy-

based lending + project loan + grant combined, Maldives was 117%, higher than Bangladesh (91%), and India (44%). It was also higher than the SARD average (94%) and the ADB-wide disbursement ratio (78%).

67 HDFC. 2019. Prospectus. Malé.

Validation of the Country Partnership Strategy Final Review Update 31 89. However, the sustainability of some achievements in micro, small, and medium-sized enterprises development is uncertain. The government opted to provide the services of the seven BDSCs free of charge rather than on a cost-recovery basis. The sustainability of the centers therefore depends on continued government funding. While the government has to date showed commitment to funding them, their sustainability may be subject to political will and fiscal pressures in the future and is therefore uncertain. Moreover, in 2018, the government established the state-owned SME Development Finance Corporation to provide financial products and ancillary services to MSMEs and entrepreneurial start-ups. According to the completion report of the IMSMSED Project, it was unclear if the agency would lend at commercial rates. If it does not, it is likely to undermine the BML’s ability to sustain its MSMEs lending levels. Since 2014, the government has also introduced various other lending schemes for SMEs that have raised some fiscal risks. A recommendation of the 2017 IMF Article IV Consultation Staff Report was to rationalize the SME credit program to reduce possible fiscal risks.68 The 2019 IMF Article IV Consultation Report also recommended that caution be exercised in managing the operations of the SME Development Financial Corporation and the MMA credit guarantee scheme to avoid large losses (footnote 60). In mortgage finance, the HDFC has seen its market share shrinking substantially in recent years, mostly because of competition from the BML. In 2014, it held a 46% share of the mortgage market, but this had declined to 26% in 2018. 90. It is too early to assess the sustainability of the development contributions of ongoing projects. The SASEC NSW Project was implemented less than a year ago. The project has a piggy-backed capacity development TA (TA-9739), which aims to help build capacity of stakeholders and prepare guidance tools that will support sustainable implementation and raise awareness among stakeholders. In the energy sector, in terms of institutional sustainability, from the records accessible to IED, all the involved agencies, i.e., STELCO (responsible for the main Malé atoll and 30 islands) and Fenaka (in charge of the north and south atolls with 150 islands), and up to 60 staff (this included at least 25% women) were trained to implement the roadmap for the renewable energy system. There are no detailed verification documents available, but based on an interview conducted with the executing agency in May 2020, it appears that the institutional strengthening targets are on track. The ICPS final review notes that, once completed, the POISED Project will have covered 86% of the 187 inhabited islands in the country. However, it is not clear for what percentage of the population power capacity has been installed from renewable sources. 91. The POISED Project reported delayed submission of audited project financial statements. Executing agencies in Maldives have traditionally not been able to comply with this requirement in several cases, although some effort was made to improve this. Initially, off-peak tariff reduction was intended for SMEs headed by women, but tariff management turned out to be complicated, and the project had to change its plans. Now solar panels are being introduced for those households that were originally targeted to have their financial burden reduced. 69 Also, POISED’s direct contribution to the tariff reduction is not clear, more than that of the drop in the global price on imported oil. It is too early to warrant a rating on the Kulhudhuffushi Harbor Project in transport, as the main passenger and cargo terminal facility are still under construction. However, the interview revealed that while the new terminal and other associated facilities are under construction, no data on passengers, cargo, and students is being collected at the old terminal. The ongoing GMEIWM Project is too early to assess with less than 5% disbursement and with slow progress because of the COVID-19 pandemic restrictions.

68 IMF. 2017. Republic of Maldives: Staff Report for the 2017 Article IV Consultation. IMF Staff Country Report. No. 17/357.

Washington, DC. 69 SARD provided STELCO’s tariff information (in Maldivian Dhivehi) in March 2013, February 2016, and 2019. The information

shows that for the first bracket (1–100 kilowatts and 101–200 kilowatts), the tariff was Rf2.25 and Rf2.50 in 2013, and Rf1.5 and Rf1.7 in 2019. However, there are newspaper articles stating that the planned 2016 tariff discount did not happen. Later in 2019, the discount was set at the lower rate because of the drop in oil prices. The tariff reduction is mainly through a drop in global oil prices, and IED could not prove that it was because of the solar photovoltaic (PV) equipment installations through the POISED Project. Also, recent 2020 local media reports that the government has introduced a 40% subsidy from April 2020 onwards as a counter-COVID-19 measure. See also online articles (accessed July 2020): https://maldivesindependent.com/politics/maldives-cuts-electricity-subsidies-121777 and https://edition.mv/news/17676.

32 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

E. Development Impacts

1. Completed Projects Performance

92. The country partnership strategy final review assessed development impacts as satisfactory; the validation assesses these as satisfactory as well. ADB’s overall contribution to development impacts is assessed on the basis of progress toward selected country development goals, CPS objectives, cross-sector development objectives, and ratings of assessed projects in terms of their development impacts.

2. Progress Toward the Government’s Overall Targets and Country Partnership Strategy Objectives

93. The latest ICPS, 2016 did not attach a country results framework because the government at the time was working on a national development strategy that was based on its election manifesto and growth prospects. However, a strategy was only issued by October 2019. Instead, the country results framework was updated in the COBP, 2016–2018. That framework had the same country development goals as in the ICPS, 2014–2015 in four areas: (i) budget deficit as percentage of GDP reduced to 3.0%; (ii) foreign debt–GDP ratio reduced to 23.5% by 2015; (iii) recurrent expenditure reduced to 65% of budget by 2015; and (iv) revenue as percentage of GDP increased to 38% by 2015. 94. As for the government’s sector objectives, the COBP, 2016–2018 had only one transport objective: “Enhanced movement of people and goods, including at regional level.” COBPs from 2017 onwards have resorted to a sector-level focus (called country assistance results areas), which changed every year. In the COBP, 2017–2019, the sectors supported were energy, transport, and PSM. In the COBP, 2018–2020, the sectors were WUS and industry and trade. The COBP, 2019–2021, added energy and the latest COBP, 2020–2022, had WUS and energy as focal areas. 95. In this way, the CPS final review lacks a clear account of the progress made toward the CPS objectives in its development impact discussion.

a. Inclusive Economic Growth

96. ADB support contributed to inclusive economic growth in Maldives by improving access to advisory services and finance for micro, small, and medium-sized enterprises, including those outside Malé. Under the IMSMSED Project, several key institutions—including the credit information bureau, the BDSCs, and a leading commercial bank (BML)—that supported increased access to finance and business services were strengthened. The ADB credit line to the BML financed 164 MSMEs. A 2016 BML survey of 63 MSMEs financed by phase 1 of the credit line suggested that the companies used the funds to acquire assets; business continuity and repayment capacity was strong; 60% of businesses experienced increases in sales volumes; and 38% of businesses created new jobs. Out of 98 loans in phase 1, 80% were to MSMEs in sectors other than fisheries and tourism, and 39 were to MSMEs outside Malé. The number of loan accounts in the banking system nearly doubled from 35,000 in 2013 to 67,000 in 2018.70 Increased housing finance helped increase access to housing in Maldives and contributed to sustained growth in the construction industry over the past decade. Since 2014, construction has become a key driver of growth, growing at about 16% a year in 2014–2018 and rising from 4.9% of GDP in 2014 to 6.5% in 2018.71

97. However, micro-, small- and medium-sized enterprise development remains constrained in Maldives. Notwithstanding these improvements, the MSMEs sector in Maldives remains significantly

70 MMA. 2019. Financial Access Survey, 2006–2018. Malé. http://www.mma.gov.mv/#/statistics/financialsector. 71 MMA. 2019. National Account Statistics. Malé. http://www.mma.gov.mv/#/statistics/realsector.

Validation of the Country Partnership Strategy Final Review Update 33 underdeveloped. The government’s SAP for 2019–2013 still lists several of the development objectives of ADB’s interventions in 2014–2019 as constraints to the operation of MSMEs: (i) limited business incubation facilities, (ii) obstacles to the use of technology and innovation stemming from the low level of capital investment and underutilization of ICT and e-commerce platforms and payment methods, (iii) limited access to finance with continuing high collateral requirements and interest rates for bank loans, (iv) absence of a land valuation system that could help enable a collateralized system, and (v) shortcomings in the policy and regulatory environment for MSMEs. 72 Domestic credit by banks to the private sector averaged just 27% of GDP in 2014–2018, which is a drop from 2009–2013 (partly because of more stringent central bank regulations) as well as substantially below other countries in the region and other small states (Table 7).73

Table 7: Domestic Credit to Private Sector by Banks

(% of Gross Domestic Product) Country Name

2014

2015

2016

2017

2018

Average 2009–2013

Average 2014–2018

Maldives 26.5 26.6 27.6 28.4 28.1 39.8 27.4 Upper middle income 93.4 107.4 110.7 110.3 118.1 78.7 108.0 Middle income 82.1 92.5 94.7 94.5 100.9 70.2 93.0 Pacific island small states 49.6 51.8 54.8 55.7 58.0 50.2 54.0 South Asia 47.0 47.0 45.5 45.7 46.9 46.3 46.4 Small states 56.3 67.2 69.7 68.4 64.9 59.9 65.3

Source: World Bank. Data. https://data.worldbank.org/indicator/FD.AST.PRVT.GD.ZS (accessed July 2020).

98. Lack of linkages with the tourism industry remains a gap in the environment for micro, small, and medium-sized enterprises development. The IMSMSED Project sought to help diversify economic activities beyond tourism and fisheries through the provision of business and technical advice and access to finance. However, there remain strong structural constraints that inhibit development of viable MSMEs in Maldives beyond the core sectors of tourism and fisheries, particularly in the outer atolls. The IMSMSED PCR mission conducted some focus group interviews with beneficiaries of the line of credit. Among their findings was that the major structural constraints for fully-fledged and diversified MSMEs development continue to be “small-scale and geographically segregated local markets, relatively unsophisticated needs of local communities compared to urban centers, and inability to create sales volume due to limited number of inhabitants in small villages and towns in remote atolls.” Meanwhile, the tourism industry remains a large potential market that can drive local MSME production of products and services. However, there remain weak links between local producers and the tourist resorts and their suppliers. A 2016 World Bank study suggested the need for further analysis of local crop production to enhance local supply chains, including inputs, logistics, knowledge, employment desirability, and availability of land (footnote 32). It also noted that agricultural markets were highly centralized in Malé, reducing the competitiveness of local production by increasing transport costs and reducing the freshness of products. Effectively, a product could be produced in a remote atoll, brought to Malé—incurring high costs and transport time—bought in Malé, and then returned to the same atoll by the buyer. 99. Gender mainstreaming. All the ADB projects during the ICPSs period have included some gender mainstreaming measures, although the real impact is difficult to verify. The completed IMSMSED Project achieved (i) amendments to the SME Act, 2013 on gender equity and youth, and (ii) drafting of the national gender policy. The national gender policy was based on a study that looked at opportunities for women’s engagement in MSMEs. The completion report referred to testimonials during the PCR mission from six entrepreneurs that benefitted from ADB’s line of credit facility. 100. Energy, transport, and WUS programs had some components specially targeting women or households headed by women or SMEs. For the POISED Project, the key implementing agencies

72 Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé. 73 World Bank. Data. https://data.worldbank.org/indicator/FD.AST.PRVT.GD.ZS (accessed April 2020).

34 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

(or project implementation units) were STELCO and Fenaka as these two entities are responsible for supplying electricity to the communities of inhabited islands. The POISED Project aimed mainly to (i) conduct a demand side management program to improve energy efficiency, targeting women household consumers who will further develop Fenaka’s community outreach program; and (ii) create an enabling environment for developing women’s microenterprises. As mentioned in para. 91, this has not been straightforward and has needed some adjustment during implementation. The KHE Project mandated in the safeguards provision that two of the five members of the grievance redress committee should be women. In the recently approved GMEIWM Project, participation of women in community-based waste management activities in the poor outer island communities and capacity building measures were incorporated in the project design. It is still too early in the implementation to assess the real impact. The new SASEC NSW Project also has some gender mainstreaming or support to women entrepreneurs, but the exact nature of the support to be mainstreamed in the single window enhancement is not yet clear, other than that it is broadly defined as “removing conventional barriers.”

b. Environmental Sustainable Growth

101. ADB has played a positive role in environmentally sustainable growth through its key infrastructure sectors. It is clear from IED’s interviews with ADB and the government that the three recent governments have consistently expressed strong ADB support for energy and transport because the bank has been one of the largest lending donors and softer, non-infrastructure sectors can be borne by other partners through grants. Earlier, ADB provided support for industry and trade, however, the IMSMSED Project suffered serious delays and cancellations, reducing both the bank and the government’s appetite for continuing support to the finance sector. ADB and the government would prefer to shift ADB’s focus back to the infrastructure sector. Energy and transport projects were prioritized under the banner (ICPS strategic pillar) of ESG. The main justification observed through the IED interviews was that ADB traditionally has had more expertise in these infrastructure sectors, while bilateral donor agencies and some multilateral development partners were willing to extend grants in soft sectors such as education and health. 102. Capacity development for long-term climate impact studies. ADB extended demand-based capacity and knowledge support that are contributing to ESG. Some TA-based knowledge products are highly useful and precious resources that the government can use to formulate master plans for the energy, transport, and WUS sectors. They are essentially future demand and climate change impact assessments of renewable energy, maritime, and solid waste management. Although the government has not fully endorsed all of these products, the analyses have garnered high interest among policy makers and concerned ministry officials. The TA projects culminated in either draft master plans or midterm strategies and vision. These include (i) Roadmap for the Low Carbon Development of the Energy Sector of Maldives (2018–2025), (ii) Roadmap for the Energy Sector of Maldives (2020–2030), (iii) Maldives Maritime Transport Master Plan, and (iv) Strategy for Development of the Greater Malé Region. The government asked that the Greater Malé strategy be further refined. All of these capacity development TA projects provided technical advice to the government to draw out sector challenges and offer suggestions for selecting options and prioritizing investments. 103. ADB support to small island developing states. ADB is not only extending support to climate change risk estimations for planned infrastructure projects, as part of ADB’s Strategy 2030, the bank has made commitments to scale up climate finance to $80 billion cumulatively during 2019–2030. ADB has also drawn up an action plan for sustainable blue economies, 74 which the government’s SAP lists as one of its five focus areas. ADB’s action plan is aligned with climate resilience issues, which include the blue economy, ecosystem management, pollution control, and sustainable infrastructure. ADB aims to bring

74 ADB. 2019. Action Plan for Healthy Oceans: Investing in Sustainable Marine Economies for Poverty Alleviation in Asia and the

Pacific. Manila. https://www.adb.org/sites/default/files/am-content/484066/action-plan-flyer-20190430.pdf.

Validation of the Country Partnership Strategy Final Review Update 35 that program forward to explore how to mobilize “blue finance” and new initiatives, such as sustainable tourism and nature-based solutions for resilience (footnote 74). 104. The other main industry, fisheries, also contains policy distortions that may inhibit greater participation by local micro-, small- and medium-sized enterprises in the value chain. The World Bank systematic country diagnostic study also noted that the skipjack tuna industry was regulated through processing licenses while yellowfin tuna was not. The two segments showed markedly different trends: the regulated skipjack industry showed declining catch, low added-value exports, and declining employment, while the unlicensed yellowfin tuna segment was characterized by increasing catch volumes, high-value exports to prime markets, and increasing employment. More recently, according to the MMA, in the last quarter of 2019, there was a “significant decrease in the export volume of frozen skipjack tuna…that was offset to an extent by an increase in the volume of frozen yellowfin tuna exports…” (footnote 30). Studies suggest that there is potential to (i) develop aquaculture; (ii) increase value-added product; (iii) exploit island resorts as potential markets; (iv) develop longline fisheries; (v) reorganize collection and buying systems to overcome seasonal gluts, reduce waste, and enhance returns to dried fish producers; (vi) establish new processing and handling facilities on different islands to better exploit seasonal changes in fish concentrations; and (vii) develop new transport infrastructure in key fisheries locations. 75 However, the matter should be further studied in the context of sustainable fisheries management.

c. Regional coordination and integration 105. The SASEC NSW Project is obviously an RCI-focused project, which intends to leverage information and communication technology to improve efficiency in cross-border control procedures. It supports the development of an automated system that will enable sharing of harmonized data between cross-border regulatory agencies: Maldives Ports Limited and Maldives Airports Company Limited. It aims to establish an NSW in Maldives as an electronic platform that will allow targeted agencies in trade and transport to lodge standardized information and documents at a single-entry point to fulfill all import- and export-related statutory requirements. This is intended to impact on: (i) a labor-saving set of standardized and transparent international trade procedures, (ii) enhanced border control, and (iii) more readily available data on trade flows. These outcomes are expected to foster RCI, strengthen governance and institutional capacity, and promote the use of advanced technologies in line with the priorities of ADB’s Strategy 2030. 106. Overall. ADB’s program was supportive of the select national development priority sectors. Hence, the prioritized sector programs contributed directly to the three pillars of ADB’s Strategy 2020, i.e., IEG, ESG, and RCI. Interventions were skewed partly towards energy, transport, and industry and trade, where ADB felt that it had a comparative edge in terms of sector expertise and experience in the country. The program could have included more direct and short-term interventions to support greater inclusiveness and economic diversification.

F. ADB and Borrower Performance

1. ADB Performance

107. The CPS final review assesses ADB’s performance satisfactory, notwithstanding that it finds the design of the CPS results framework poor. It nonetheless views ADB’s moderate accomplishments in program design and supervision of implementation as key considerations in the overall positive assessment, also noting that there were three changes of government during the ICPS period, and each

75 ADB. 2019. Maldives: Economic Update, 2019. Manila; Government of Maldives. 2019. Strategic Action Plan, 2019–2023. Malé;

and World Bank. 2016. Maldives: A Systematic Country Diagnostic. Washington, DC.

36 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

government’s priorities have changed drastically, emphasizing development in the outer atolls, then in Greater Malé, and now taking a more balanced national approach. 108. Based largely on the feedback received during the mission from government and development partners, the validation also assesses ADB’s performance satisfactory, but qualifies some of the points made in the CPS final review and offers other insights. Given there is no resident mission in Maldives, most of the sector PMUs expressed that ADB headquarters provided quick and responsive support through the good use of social networking application service and Internet of Things platforms. However, Maldives has attained upper-middle-income country status, and ADB is emphasizing knowledge-based support with possibly reimbursable TA projects for such member countries. This will be done by closely monitoring political developments in the country and customizing client services, which requires a stronger local presence. Although e-mails and texting may currently be sufficient for day-to-day operational queries on procurement and disbursement, ADB is the lead external development bank, and that status would be stronger felt if there was a stronger ADB staff presence in the country. ADB can justify the cost of cross-fertilization of climate change knowledge and expertise, gaining sophistication in tailoring development support with small island states in the Pacific Department. 109. IED’s 2015 CPS final review validation made five recommendations: (i) support expansion of the revenue base for fiscal management, (ii) diversify the economic base, (iii) enable an environment for greater economic inclusiveness, (iv) support ESG, and (v) improve project management capabilities. The three projects that were approved after the CAPE—KHE, GMEIWM, and SASEC NSW—have tackled mostly (i), (iii), and (iv). ADB could tackle the second recommendation—diversifying the economic base—by involving more private sector development initiatives and investment by the Private Sector Operations Department. 110. ADB structured its CPS to closely match the ruling government’s priorities and demands at the time of formulating the ICPSs. However, both the CPS and CPS final review had some shortcomings. The CPS pillars simply grouped related interventions largely under the heading of pre-CPS rather than setting out development objectives or promising areas of intervention that would then be elaborated in the sectors of focus. The CPS also did not function as a very useful strategic guide, as several projects emerged during the CPS that had little underpinning in the CPS and/or sector assessments. The CPS final review had useful analysis of context, government policies, and specific projects, but exhibited shortcomings in drawing balanced assessments at the sector and evaluative criteria level.

2. Borrower Performance

111. The CPS final review assesses the government’s performance satisfactory (on the lower end) on the basis of the government’s commitment to international development goals, compliance with loan covenants and conditionalities, and provision of the PMU staff and counterpart funding. The final review noted the lack of clear strategic direction, limited capacity of executing and implementing agencies, and scarce attention to donor coordination and financial management issues. 112. The government that came to power in 2019 continued to show a commitment to reforms across many sectors and in overall governance, which are outlined in the new SAP. The government has not made a consistent effort to coordinate development partners, allowing for a fragmented institutional set-up—mainly relying on external consultants. This set-up can cause confusion, particularly in discerning development partner interest and ability to respond to government needs. Nevertheless, the government has been able to avoid duplication in development partner support and to largely achieve complementarity where key development partners, including sovereign funds from the Middle East, have populated the same sectors. 113. Government agencies managing ADB-financed projects have worked with ADB, particularly during most annual country programming missions, to find ways to increase project management

Validation of the Country Partnership Strategy Final Review Update 37 performance. They have sought to undertake project readiness measures that can expedite project approval, signing, and effectiveness (e.g., establishing PMUs and/or project implementation units, and preparing contracts with the help of TA-funded consultants in some loans). They have also urged ADB to provide additional training on ADB procedures for new staff engaged in projects. 114. The validation assesses borrower performance satisfactory despite the lack of consistent development priorities over recent years and the limited attention to donor coordination.76 G. Overall Assessment 115. ADB has adjusted its Maldives program in response to changing governments’ aspirations and priorities to achieve economic growth, expand connectivity infrastructure, and address the quality of life, mainly focusing on transport in Greater Malé, energy nationally, and policy and capacity development in the small and medium enterprises. Its focus on energy, transport, and urban development exhibits continuity with sectors where ADB has traditionally had expertise in the donor community. ADB also tried to support industry and trade through the IMSMSED Project, which was carried over from the previous CPS policy-based support, so as to ensure IEG. In most of these four sectors, ADB used TA to help the government achieve policy actions and compile masterplans for future policy revamping and strategic investment planning. Toward the end of the CPS, ADB responded to the government’s need for greater emphasis on sustainable environmental growth by quickly embarking on a waste management development program. 116. The validation assesses the ADB program performance successful. The rating weighs and averages the individual sector program ratings in terms of their relevance, effectiveness, efficiency, development impacts, and sustainability. The results are summarized in Table 8.

Table 8: Program (Sector Emphasis) Ratings Comparison between the Country Partnership Strategy Final Review and Validation

Evaluation Criteria CPSFRU Ratings

Validation Ratings Reasons for Rating Deviations

Relevance Relevant Relevant Effectiveness Effective Effective

Efficiency Efficient (low end)

Efficient

Sustainability Likely Less than Likely

Sustainability of the BDSC in the IMSMSED Project depends on continued government funding, high debt-to-GDP ratio and the central bank’s relatively high nonperforming loan ratio.

Development impact 77 Satisfactory Satisfactory Overall rating Successful Successful ADB performance Satisfactory Satisfactory Borrower performance Satisfactory

(low end) Satisfactory

CPSFRU Quality Satisfactory ADB = Asian Development Bank, BDSC= business development service center, CPSFRU = country partnership strategy final review update, GDP = gross domestic product, IMSMSED = inclusive micro, small, and medium-sized enterprises development. Source: Independent Evaluation Department validation assessment.

76 For ADB and the Borrower performance, IED uses the four scale ratings only. 77 Development impact incorporates the relevance of the CPS cross-cutting objectives discussed in paras. 92–106.

38 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014–2019

H. Assessment of Country Partnership Strategy Final Review Update Quality 117. The validation assessed the quality of the CPS final review satisfactory. The final review had a rich description of context and ADB operations and reflected the latest views of the government counterparts and some key donor partners. 118. With regard to content, the CPS final review covers the main areas and criteria required in ADB guidance for a CPS final review. It is rightly critical of some aspects of the CPS, e.g., the results framework, which impeded proper assessment and accountability of the ADB program. The final review employed data, when available, but does not indicate whether comprehensive monitoring and evaluation indicators and performance stocktaking is being undertaken for the ongoing projects. That left significant gaps. It is quite thorough in presenting project results of completed projects. It is candid about shortcomings in implementation efficiency, but takes an optimistic view of these in its conclusion on the efficiency of the overall ADB program.

CHAPTER 3

Conclusion, Lessons, Issues, and Recommendations

A. Conclusion 119. Following a decade of sustained economic growth, Maldives is already an upper-middle-income small island country, driven by tourism and the construction industry. In 2018, the country was classified as a “high human development country.” The CPS final review stated that the country had achieved most Millennium Development Goals by 2015 and has the highest per capita GDP in South Asia. Before the COVID-19 pandemic came to fore, the EIB was projecting an average economic growth of 4.9% in 2020–2021, but as of April 2020, the IMF is projecting –8.1% of GDP, a current account deficit of –23% of GDP, and a fiscal deficit of –11.7% in 2020 (assuming a resumption of tourist arrivals in July). For the country’s resumption of economic growth, it is not hard to imagine that the reopening of the tourism industry is vital, together with a resumption of the export of fish to Europe and Asia. Many Maldivians have fallen below or are floating just above the poverty line, as nearly all income-generating activities have contracted. 120. Maldives faces the same pitfalls as other middle-income countries that have had rapid economic growth to sustain their achievements. Inequality remains high and there are high regional disparities in (i) income levels and access to basic services, and (ii) opportunities such as education, employment, and affordable housing. The southern atolls are especially disadvantaged, with almost one in five being poor. Maldives’ economy remains mostly dependent on tourism, which is vulnerable to external shocks. Some of the key constraints that the country has to deal with are (i) a small domestic market, (ii) limited natural resources, (iii) a shortage of skilled personnel, and (iv) geographical remoteness. The country is also highly vulnerable to the effects of climate change and natural hazards because most of the population is concentrated in Male, which is the center of key commercial activities outside of tourism. 121. The first step for many countries is to recover from the impact of the COVID-19 pandemic. On 20 March 2020, the government announced an economic recovery plan—estimated to be worth about 2.8% of GDP—to (i) finance expenditure in the health sector, (ii) subsidize electricity and water consumption, (iii) provide an unemployment allowance, and (iv) ensure access to working capital for business. A longer-term challenge is to expand the linkages between the tourism industry and the local economy, as the tourism-driven economic growth has not led to improvements in living standards across the whole nation. B. Lessons 122. A small island economy, even with good tourism income and having reached upper-middle-income status, can still be fragile. This is exemplified by the current COVID-19 pandemic, which is having a heavy adverse impact on the economy and employment. Small islands continue to have many problems also related to a limited skill base and project implementation capacity. 123. Effective evaluation through the design and monitoring frameworks is essential for the assessment of project outcomes. An absence of good outcome indicators will inhibit the collection of

40 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014‒2019

outcome information during project implementation. The government does not track the effect of the project on beneficiaries. 124. Spatial analysis can help improve the regional balance of the ADB program. The ADB program does not seem to be based on much spatial analysis; there is little evidence of this analysis in the sector assessments and project documents. Even the recent transport or energy sector projects do not seem to have in their documentation a sound analysis of their reach in terms of regions or poor populations. 125. Securing a sustainable blue economy for Maldives and other atoll nations will take time. External investment, as well as capacity building, will be required to help secure better economic ownership and development and to adapt physical infrastructure against sea-level rise, storms, and coral bleaching. The overall goal should be for Maldives and atoll countries to strengthen the economic returns on limited resources they have. Other key climate-change-adaptation issues to consider are (i) internal population relocation and consolidation, (ii) impacts of sea-level rise on sovereign boundaries and resources, (iii) external population relocation, and (iv) complexities of land reclamation and elevation. C. Key Issues 126. The immediate challenge is for Maldives to recover from the impact of the pandemic. The central bank expects a sharp drop in tourist arrivals in 2020 that will have negative spillover effects on all sectors of the economy. Some Maldivians are likely to relapse into poverty. 127. Changing political circumstances and lack of government strategy development have kept ADB from renewing its own strategy and results frameworks. Political instability and lack of government policy continuity are issues that have played havoc with ADB planning processes. They have induced a prolonged absence of a CPS for Maldives and course changes in programming of projects. 128. A challenge for Maldives is to broaden participation in economic growth. Maldives’ strong tourism-driven economic growth has not fully translated into broad improvements in living standards. The enclave tourism industry employs few Maldivians and has limited links to the rest of the economy. However, the tourism industry remains a large potential market that can drive local production of goods and services, including fruits and vegetables, fish products, handicrafts, and services for resorts and tourists. A challenge therefore remains to expand the links between local producers and the tourist resorts and their suppliers. Greater processing and value-addition in the fisheries sector also offers potential for increased employment and participation by local firms in the sector (footnote 18). 129. Maldives remains a challenging environment for ADB’s nonsovereign operations. The prospects for NSOs have been limited. The tourism industry has been able to attract foreign investment without the need for support from international finance institutions. Outside the tourism industry, opportunities are constrained. 130. Maldives is an extremely fragile environment. It is very susceptible to the adverse impacts of climate change and further human expansion, leading to environmental degradation and pollution. Severe issues include land degradation, depletion of groundwater, and contamination by pesticides and aquifers through poor sewerage. Climate experts assume that by the end of the century, the global mean sea-level will rise a minimum of 0.4m to 0.5m. Communities must plan for high temperatures, scarce resources, stronger storms, higher wave overtopping, and sea-level-related flooding such as groundwater inundation and storm drain back flow, and coastal erosion.78

78 2019. Presentation material from Resilient Atoll Nations in Productive Oceans. Malé.

Conclusion, Lessons, Issues, and Recommendations 41 131. A challenge remains to ensure that the role of state-owned enterprises in the economy deliver benefits efficiently and do not undermine private sector development. SOEs can be a fiscal burden undermining the competitive environment and inhibit the entry and growth of local private sector firms in the supply and distribution of goods and services (footnote 18). 132. Limited interest from development partners. Given Maldives’ status as a small island developing state, development partners generally have relatively limited financial allocations for the country. ADB has also practiced strict selectivity and limited the extent of its engagement in the past because of constrained funding allocations. D. Recommendations to ADB 133. Four recommendations are offered in the CPS final review, relating to (i) the need for sharper strategic approaches with a clear results framework, (ii) strengthening further MSMEs development, (iii) thorough climate change impact assessment, and (iv) enabling large-scale investments with cofinancing. These are in large part supported by the observations made by this validation. To these recommendations, the validation adds four others to fully address the findings and issues observed. ADB should consider the following actions in anticipation of the new CPS, 2020–2024:

1. Embed sharper diagnostics in the CPS and develop a clear results framework.

(i) Intensify analytical work on the anticipated social stresses that skewed economic growth and the COVID-19 will present. Topics could include the stabilization fund, basic income, social protection, rural development, and other areas relevant to Maldives.

(ii) Set out clear institutional targets in the country results framework, making explicit the importance of institutional strengthening in relation to infrastructure development. At the same time, the results framework should be flexible, and it should be mandatory to update the framework after unforeseen political changes have made it necessary to change the program.

2. Enhance the strategy to support private sector development.

(i) Undertake analysis in the upcoming CPS, define a coherent strategy, and broaden

participation in economic growth.

(ii) Consider support for the development of MSME linkages in the tourism sector. Focus on the development of value chain linkages between MSMEs and the tourist resorts, including encouraging tourist resorts and their suppliers to develop local linkages (including through COVID-19 Pandemic Response Option programs).

(iii) Help assess and rationalize the role of SOEs in commercial activity to improve the private sector’s competitive environment.

(iv) Make greater efforts to realize a “One ADB” approach that links sovereign and nonsovereign lending through upstream development of potential bankable projects, including PPPs.

42 Maldives: Validation of the Country Partnership Strategy Final Review Update, 2014‒2019

3. Fully mainstream climate change adaptation work.

(i) Address ESG upfront as part of development initiatives.

(ii) Base future project selection on holistic integrated adaptation plans at an island or

national level. Given that space is the primary limiting factor on atoll development, good spatial planning is crucial. All infrastructure design should assume that there will be a continued and likely accelerating global mean sea-level rise.

(iii) Address the issues of land degradation, the depletion of groundwater, and contamination by pesticides and aquifers through poor sewerage. Further developments must factor in rising temperatures, stronger storms, higher wave overtopping, and sea-level-related flooding such as groundwater inundation and storm drain back flow, and coastal erosion.

(iv) Expand coverage of wastewater and excreta collection, transport, and treatment services in outer islands to improve environmental (especially ocean) health and public health.

4. Apply a programmatic approach to the technical assistance program, focusing on

selected priority areas, and strengthen the program’s value addition.

(i) Pay special attention to a programmatic approach in climate change support. The knowledge TA program should focus on priority areas where ADB can add value. Given that Maldives is an upper-middle-income country, project financing models need to evolve carefully, examining ADB products’ competitive terms, and ADB’s capacity in providing quality advisory and knowledge services needs to be strengthened. Given that Maldives has been classified as a country at high risk of debt distress for 5 years and will be part of ADF 13, ADB should look for opportunities to support the government’s efforts to reduce public debt.

(ii) Examine the feasibility of a country office in Malé. Close communication with clients will be key.

Appendixes

APPENDIX 1: LINKED DOCUMENT

Maldives: Country Partnership Strategy Final Review Update, 2014–2019

https://www.adb.org/sites/default/files/linked-documents/MLD-CPSFR-Update.pdf

APPENDIX 2: ADB COUNTRY PORTFOLIO FOR MALDIVES DURING THE COUNTRY PARTNERSHIP STRATEGY FINAL REVIEW UPDATE PERIOD, 2014‒2019

Table A2.1: List of Sovereign Loans and Grants Approved, Ongoing, and Completed in 2014–2019 for Maldives

Project Number

Project Count Project Name

Approval Number

Approval Date

Closing Date

Total ADB Approved Amount

($)

Total Approved

Cofinancing Amount

($)

ADB + Cofinancing

Amount ($)

Self-Assessment Rating | IED Validation

Rating

Source of ADB Fund

Source of Cofinancing

Energy Approved During 2014–2019 46122-003 1 Preparing Outer Islands for Sustainable

Energy Development Project G0409 29-Sep-14 30-Jun-20 38,000,000 ADF ADF G0410 29-Sep-14 31-Jul-19 12,000,000 SCF G0429 29-Sep-14 30-Jun-20 5,000,000 JFJCM Loan 29-Sep-14 31-Dec-19 60,000,000 IsDB| EIB

Subtotal (1) 38,000,000 77,000,000 115,000,000 Sector Total (1) 38,000,000 77,000,000 115,000,000 Industry and Trade Approved Prior but Ongoing and/or Completed during 2014–2019 43566-013 2 Inclusive Micro, Small, and Medium-

Sized Enterprises Development Project G0290| L2867

25-May-12 11-Jan-19 7,360,365

Successful ADF| COL

Loan 25-May-12 8-Apr-19

10,300,000 IsDB Subtotal (1) 7,360,365 10,300,000 17,660,365 Approved during 2014–2019 51330-001 3 South Asia Subregional Economic

Cooperation National Single Window Project

G0646| L3794

30-May-19 31-Dec-23 10,000,000 COL| ADF

Subtotal (1) 10,000,000

10,000,000 Sector Total (2) 17,360,365 10,300,000 27,660,365 Transport Approved during 2014–2019 36111-013 4 Kulhudhuffushi Harbor Expansion Project G0489 16-Aug-16 30-Jun-20 9,690,000 9,690,000 ADF Subtotal (1) 9,690,000

9,690,000

Sector Total (1) 9,690,000

9,690,000 Water and Other Urban Infrastructure Services Approved during 2014–2019 51077-002 5 Greater Malé Environmental

Improvement and Waste Management Project

G0580 28-Jun-18 31-Dec-23 33,070,000

ADF

Improving Community-based Solid Waste Management in Small Outer Islands of Zone 3

G9195 28-Jun-18 31-Dec-23

2,000,000 JFPR

Subtotal (1) 33,070,000 2,000,000 35,070,000 Sector Total (1) 33,070,000 2,000,000 35,070,000

46 Appendix 2

Project Number

Project Count Project Name

Approval Number

Approval Date

Closing Date

Total ADB Approved Amount

($)

Total Approved

Cofinancing Amount

($)

ADB + Cofinancing

Amount ($)

Self-Assessment Rating | IED Validation

Rating

Source of ADB Fund

Source of Cofinancing

Total Approved Prior but Ongoing and/or Completed during 2014–2019 (2)

17,050,365 10,300,000 27,350,365

Total Approved during 2014–2019 (3) 81,070,000 79,000,000 160,070,000 TOTAL (5) 98,120,365 89,300,000 187,420,365

ADF = Asian Development Fund, COL = concessional OCR lending, EIB = European Investment Bank, IsDB = Islamic Development Bank, JFJCM = Japan Fund for the Joint Crediting Mechanism, JFPR = Japan Fund for Poverty Reduction, OCR = ordinary capital resources, S = successful, SCF = Strategic Climate Fund. Sources: ADB (Controller’s Department database, accessed 31 December 2019); and ADB e-Ops and project website (accessed 11 February 2020).

Table A2.2: Overall Loans, Grants, Equity, and Technical Assistance during 2014–2019

Sector

Sovereign Nonsovereign Technical Assistance

Total Project Financing ($ million)

Overall Sector Share

(%)

No. of Projects

ADB Approved Amount

($ million)

Cofinanced

Amount ($ million)

No. of Projects

ADB Approved Amount

($ million)

No. of

TA Projects

ADB Approved Amount

($ million)

Cofinanced

Amount ($ million)

Energy 1 38.00 77.00 0 2 0.80 1.10 116.90 54.63 Approved before the validation period 2 0.80 1.10 1.90 Approved during the validation period 1 38.00 77.00 115.00

Industry and Trade | Finance 2 17.36 10.30 1 12.00 2 0.70 0.50 40.86 19.09 Approved before the validation period 1 7.36 10.30 1 12.00 29.66 Approved during the validation period 1 10.00 2 0.70 0.50 11.20

Public Sector Management 0 0 6 5.93 0.85 6.78 3.17 Approved before the validation period 5 4.28 0.85 5.13 Approved during the validation period 1 1.65 1.65

Transport 1 9.69 0 4 2.60 12.29 5.74 Approved before the validation period 0 1 0.75 10.44 Approved during the validation period 1 9.69 3 1.85 1.85

WUS 1 33.07 2.00 0 2 1.10 1.00 37.17 17.37 Approved during the validation period 1 33.07 2.00 0 2 1.10 1.00 37.17

Total 5 98.12 89.30 1 12.00 16 11.13 3.45 214.00 100.00 Approved before the validation period 2 17.05 10.30 1 12.00 8 5.83 1.95 47.13 Approved during the validation period 3 81.07 79.00 0 8 5.30 1.50 166.87

ADB = Asian Development Bank, TA = technical assistance, WUS = water and other urban infrastructure services. Sources: ADB (Controller’s Department database, accessed 31 December 2019); and ADB e-Ops and project website (accessed 13 February 2020).

ADB Country Portfolio for Maldives during the Interim CPS Final Review Update Period, 2014‒2019 47

Table A2.3: List of Nonsovereign Loans and Grants Approved, Ongoing, and Completed in 2014–2019 for Maldives

Project Number Investment

No. Loan/Grant

No. Project Count Project Name

Approval Date

Total ADB Approved Amount

($) Subsectors Status Source of

Fund Finance Approved Prior but Ongoing and/or Completed during 2014–2019

41914-014 7274 2418 1 Housing Development Finance Corporation (HDFC) of Maldives

9-4-08 12,000,000 Housing Finance

XARR (2016)—S; XVR (2017)—S

Equity| OCR

Subtotal (1) 12,000,000 Sector Total (1) 12,000,000

Total Approved Prior but Ongoing and/or

Completed during 2014–2019 (1)

Total Approved during CPS, 2014–2019 (0) 12,000,000 TOTAL (1) 12,000,000

ADB = Asian Development Bank, OCR = ordinary capital resources, S = successful, XARR = extended annual review report, XVR = XARR validation report. Source: Independent Evaluation Department; status of projects updated per available information as of 31 January 2020.

48 Appendix 2

Table A2.4: List of Technical Assistance Projects Approved, Ongoing, and Completed in 2014–2019 for Maldives

Project Number

TA Count TA Type

Approval Number TA Name

Approval Date

Closing Date

Total ADB Approved Amount

($)

Total Cofinancing

Amount ($)

TCR Rating

Source of ADB Fund

Source of Cofinancing

Energy Approved Prior but Ongoing and/or Completed during 2014–2019

45079-001 1 CDTA 8000 Capacity Development of Maldives Energy Authority

14-Dec-11 31-Jul-18 400,000 400,000 S TASF SCF

46122-001 2 PPTA 8268 Preparing Outer Islands for Sustainable Energy Development

10-Dec-12 31-Jan-16 400,000 700,000

TASF SCF

Subtotal (2) 800,000 1,100,000 Sector Total (2) 800,000 1,100,000 Industry and Trade Approved during 2014–2019

51330-002 3 PPTA 9520 SASEC National Single Window Project 9-May-18 26-Oct-19 200,000

TASF 51330-001 4 CDTA 9739* SASEC National Single Window Project 30-May-19 30-Jun-23 500,000 500,000

TASF HLTF

Subtotal (2) 700,000 500,000 Sector Total (2) 700,000 500,000 Public Sector Management Approved Prior but Ongoing and/or Completed during 2014–2019

39658-013 5 CDTA 7424* Economic Recovery Program (formerly Public Resource Management Reform Program)

9-Dec-09 31-Oct-14 3,225,000

S TASF

44414-012 6 CDTA 7946

Developing the Revenue Administration Management Information System

5-Dec-11 31-Oct-14 500,000

HS TASF

Developing the Revenue Administration Management Information System (Additional Financing)

29-Nov-12 31-Oct-14 225,000

45416-001 7 CDTA 8070 Strengthening Capacity for Operations Management

4-Apr-12 28-Feb-18 225,000

S TASF

47150-001 8 CDTA 8525 Enhancing Tax Administration Capacity 4-Dec-13 22-Dec-17

850,000 LS

JFPR 47385-001 9 CDTA 8614 Support for Improved Advocacy and

Implementation of the Gender Equality Law 17-Dec-13 8-Feb-18 100,000

TASF

Subtotal (5) 4,275,000 850,000 Approved during 2014–2019

45416-001 (7) CDTA 8070

Strengthening Capacity for Operations Management (Supplementary)

2-Jun-14 28-Feb-18 100,000

TASF

Strengthening Capacity for Operations Management (Supplementary)

16-Jul-15 28-Feb-18 500,000

TASF

52006-001 10 CDTA 9515

Capacity Building for Country Programming and Portfolio Management

19-Apr-18 31-Mar-23 550,000

TASF

Capacity Building for Country Programming and Portfolio Management (Supplementary)

17-Sep-19 31-Mar-23 500,000

TASF

Subtotal (1) 1,650,000 Sector Total (6) 5,925,000 850,000

ADB Country Portfolio for Maldives during the Interim CPS Final Review Update Period, 2014‒2019 49

Project Number

TA Count TA Type

Approval Number TA Name

Approval Date

Closing Date

Total ADB Approved Amount

($)

Total Cofinancing

Amount ($)

TCR Rating

Source of ADB Fund

Source of Cofinancing

Transport Approved Prior but Ongoing and/or Completed during 2014–2019

47283-001 11 CDTA 8519** Preparing Business Strategy for Port Development

26-Nov-13 28-Feb-15 750,000

TASF

Subtotal (1) 750,000 Approved during 2014–2019

36111-012 12 PPTA 8829 Kulhudhuffushi Harbor Expansion Project 16-Dec-14 31-Mar-17 750,000

TASF 49220-001 13 PPTA 8972** Laamu Gan-Fonadhoo Community

Connectivity Project 6-Oct-15 31-Jul-16 600,000

TASF

36111-013 14 CDTA 9155* Sustainable Harbor Operation and Maintenance

16-Aug-16 4-Jul-19 500,000

TASF

Subtotal (3) 1,850,000 Sector Total (4) 2,600,000 Water and Other Urban Infrastructure Services Approved during 2014–2019

51077-001 15 PPTA 9327 Greater Malé Environmental Improvement and Waste Management Project

6-Jun-17 16-May-22 600,000 1,000,000

TASF HLTF

51077-002 16 CDTA 9543* Strengthening Capacity for Sustainable Solid Waste Management in the Greater Malé Region

28-Jun-18 30-Jun-21 500,000

TASF

Subtotal (2) 1,100,000 1,000,000 Sector Total (2) 1,100,000 1,000,000 Total Approved Prior but Ongoing and/or Completed

during 2014–2019 (8) 5,825,000 1,950,000

Total Approved During 2014–2019 (8) 5,300,000 1,500,000 TOTAL (16) 11,125,000 3,450,000

* = attached technical assistance, ** = cancelled, ADB = Asian Development Bank, CDTA = capacity development technical assistance, HLTF = high-level technology fund, HS = highly successful, JFPR = Japan Fund for Poverty Reduction, LS = less than successful, PPTA = project preparatory technical assistance, S = successful, SASEC = South Asia Subregional Economic Cooperation, SCF = Strategic Climate Fund TA = technical assistance, TASF = technical assistance special fund, TCR = technical assistance completion report. Sources: ADB (Controller’s Department database, accessed 31 December 2019); ADB e-Ops and ADB’s project website (accessed 11 February 2020).