THE DEMOCRATIC REPUBLIC OF TIMOR LESTE PROGRAM PAPER DATA SHEET

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE DEMOCRATIC REPUBLIC OF TIMOR LETE Date: January 28, 2010 Country: The Democratic Republic of Timor-Leste Program Name: Planning and Financial Management Capacity Building Program Program ID: P PROGRAM PAPER DATA HEET Task Team Leader: Habib Rab ector Manager: Linda Van Gelder ector Director: Vikram Nehru Acting Country Director: Kanthan hankar Environmental Category: C Borrower: The Democratic Republic of Timor-Leste Responsible Agency: The Ministry of Finance Revised estimated disbursements (Bank FY/U$m) FY Annual Cumulative Current Closing Date: July 10, 2011 Revised Closing Date: no extension is proposed in the Closing Date Indicate if the restructuring is: Board approved X RVP approved _ Does the restructured Program require any exceptions to Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Yes X No Yes _ No Yes X No Revised Program Development Objective/Outcomes Original P rogram Development Objec tive: ustainably strengthened planning, budgeting, public expenditure management and revenue administration for growth and poverty reduction, with emphasis on efficiency, effectiveness, accountability, integrity and service culture, and transparency. Proposed Revised Program Development Objective: Capacity in the Ministry of Finance strengthened for prudent, effective and accountable planning and management of public finances to promote growth and poverty reduction. Does the restructured Program trigger any new safeguard policies? NO Revised Financing Plan (U$m) ource Local Foreign Total Recipient IDA Others (Projected grant resources to the recipient from the Multi-Donor Trust Fund) Total (projected)

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3 Timor Leste: Planning and Financial Management Capacity Building Program (PFMCBP) A. Introductory statement 1. This Program Paper seeks the approval of the Executive Directors to introduce changes in the Democratic Republic of Timor-Leste s Planning and Financial Management Capacity Building Program: IDA Grant No. H210-TP and TF No and any accompanying changes to the Program s legal documents. 2. The Program is funded by an IDA Grant and a Multi-Donor Trust Fund (MDTF). To date, the IDA Grant (DR 4.8 million, U$7.0 million equivalent) has financed the majority of Program expenditure and is more than 98 percent disbursed (Annex 1). The MDTF has financed U$4.0 million of Program spending to date. The proposed restructured Program will be implemented using mainly MDTF resources. The restructuring is necessary to realign the Program with the Ministry of Finance s (MoF) reorganization and reform process, which has been under way since The proposed changes to the Program include: (i) (ii) (iii) (iv) (v) The remapping of the Program s components, to align it with MoF s new organizational structure. The reduction of the scope and complexity of the Program to focus on MoF and highpriority public finance management (PFM) functions. The revision of the Results Matrix and the Program Development Objective (PDO), to ensure they are realistic and consistent with recent developments. The refocusing of capacity building efforts to implement civil service reform measures in MoF and enhance Timorese capacity. The adjustment of the Program s implementation arrangements, to ensure the continued control of fiduciary risks and to strengthen monitoring and evaluation (M&E) and reporting. 3. It is further proposed to adjust the overall PDO to reflect the above changes. The Program s Results Indicators would be revised and aligned with the new priorities. The proposed changes will result in some scaling back of activities, and no direct support will be made outside of MoF through the IDA Grant or the MDTF as initially intended. Resources in the MDTF are now projected to be lower than at appraisal and described in the Project Appraisal Document (PAD). There is no proposed extension to the Closing Date and no proposed reallocation of funds. No new safeguards policies are triggered by the proposed restructuring and the social and environmental categories remain the same. No exceptions to Bank policies are requested. The Program has updated its Procurement Plan based on a revised annual Implementation Action Plan (IAP) and learning from the earlier experience under the project on consultants salaries and compensation. B. Background and reasons for restructuring Original objective, design and scope 4. The original PDO was to sustainably strengthen planning, budgeting, public expenditure management and revenue administration for growth and poverty reduction, with emphasis on 1

4 efficiency; effectiveness; accountability, integrity and service culture; and transparency. The Program was approved on March 21, 2006 and the Grant became effective on November 15, The Program was designed to provide a single umbrella for all PFM capacity-building activities in the then-existing Ministry of Planning and Finance (MoPF). Donors, including IDA, would finance the overall Program through a pooled arrangement to avoid stand-alone and unconnected initiatives. The pooled arrangement includes a MDTF and the alignment of donor support outside the MDTF with the overall Program. 1 The PAD outlined a contingency plan for the use of the IDA Grant (DR 4,830,950 or U$7.0 million equivalent) if donors decided not to directly finance or co-finance the Program. However, the Program is now financed by the IDA grant and co-financed by a MDTF (TF093959, U$21.5 million projected) The scope of the Program spanned ten directorates in the MoPF, five line ministries and thirteen district agencies. The Program was based on the government s three-pillar approach to capacity building, which covered: (i) skills and knowledge; (ii) systems and processes; and (iii) attitudes and behavior. Program performance 7. Early Program implementation was slow because of political and social instability in 2006; capacity constraints; delays in establishing the Program Implementation Unit (PIU); delays in integrating existing bilateral projects into the Program; and insufficient in-country support and supervision from the Bank. Despite some achievements in the first year, overall Program performance was poor. Following elections in 2007, a new Minister of Finance took strong ownership of the Program. With the appointment of a country-based TTL in November 2007, the Bank and the government agreed on a schedule of actions to bring the Program to full functionality by December The schedule of actions has been completed. Program implementation over 2008 accelerated significantly. 8. Over the past two years, the Program has become a more effective instrument for supporting the development of the MoF. There is full government ownership through the active steering and oversight from the Minister of Finance and the Consultative Council on Financial Management (CCFM). 4 The Program is aligned with the MoF reform process and ensures near full harmonization of donor support to MoF. This has promoted efficiency and discipline in a capacityconstrained environment, previously characterized by the fragmentation and proliferation of donor support. 1 This includes support from: (i) the IMF to the Treasury; (ii) the Norwegian government petroleum resource management; and (iii) the Japanese government to Aid Effectiveness. 2 At the time of Program design, U$30.0 million was expected from donors. As of August 2009, pledges amounted to U$25.6 million and actual contributions were U$11.9 million. Out of the total amount of contributions, U$920,000 is dedicated to a Bank- Executed Trust Fund for Program administration, and U$1,095,000 is supporting Bank analytical work. The Recipient-Executed part of the MDTF (TF093959, U$23.5 million projected, though U$2 million has already been spent at time of writing) became effective in March Full functionality refers to: (i) the establishment of the Program's governing structures and management arrangements; (ii) the successful transition of relevant activities previously supported by the long-running AusAID-funded MoPF Capacity Building Project (MPFCBP) to the Program; and (iii) the Program s realignment with the restructured MoF. 4 The CCFM is the Ministry s senior management steering committee, which includes all Directors-General, their enior Management Advisors, and National Directors as and when needed. The CCFM meets on a regular basis and is chaired by the Minister. 2

5 9. The Program has been essential in helping the MoF to maintain operations over a period when government spending more than doubled. MoF has delivered on a heavy policy agenda, including organizational reform to promote transparency and accountability. A summary of achievements by Program component is provided in Annex 2. With the increased pressure to deliver on a challenging but necessary reform agenda, advisors have had to assume in-line functions. Capacity development of Timorese staff has suffered as a result, but the government is committed to refocusing its efforts in this area. Reasons for Program restructuring 10. The reasons for Program restructuring include: (i) a request from the Minister of Finance to realign the Program with the MoF reform and reorganization process; (ii) the simplification of Program design to allow greater flexibility in a rapidly changing and low capacity environment; (iii) increased oil revenues and government spending accentuated the demands placed on the PFM system more quickly than had been envisioned; and (iv) the need to ensure that the new Government s priorities under PFMCBP are implemented consistent with Bank policies. C. Proposed changes Change to the Program Development Objective 11. It is proposed to revise the PDO as follows: (i) (ii) Original Program Development Objective: ustainably strengthened planning, budgeting, public expenditure management and revenue administration for growth and poverty reduction, with emphasis on efficiency, effectiveness, accountability, integrity and service culture, and transparency. Proposed Revised Program Development Objective: Capacity in the Ministry of Finance strengthened for prudent, effective and accountable planning and management of public finances to promote growth and poverty reduction. Other changes 12. Remapping Program components: The original Program components will be revised to match the new organizational structure of MoF. A summary of the changes by component is provided in Annex 3, and a summary of the proposed remapping of components is provided in Annex Reduction of the scope and complexity of the Program: The restructuring will not result in a significant drop in support to the MoF over the short-term. However, it will not provide direct support to line ministries, autonomous agencies or district entities as originally intended. In fact, no direct support beyond MoF has been extended thus far. The restructuring will therefore formalize this. As PFM capacity across the government remains weak, the Program will continue to address this wider challenge through two channels: (i) training to strengthen capacity to implement reforms 3

6 initiated by MoF, such as upgrades to the Financial Management Information ystem (FMI) in line ministries and implementation of new procurement legislation; and (ii) coordination with other technical assistance (TA) projects operating in line ministries to strengthen planning and resource management capacity. 14. Revision of the Results Matrix: The original Results Matrix had over 60 indicators, making it difficult to monitor progress. The revised Matrix sets out the PDO for the overall Program and six intermediate outcomes for the four General Directorates and Program Implementation (Annex 5). Progress against the intermediate outcomes will be measured using 21 indicators set out in Annex 6. The Program will report on the implementation of specific Program activities through the IAPs. An outline of indicative activities for 2009 linked to three to five-year MoF targets and intermediate outcomes is set out in Annex Refocusing of support to enhance capacity building: The PAD set out an indicative five-year training plan. This has been revised into a Professional Development Plan (PDP) that will provide scholarships, supplementary scholarships and training courses. Progress on the PDP has been slow in light of the MoF s major reorganization. The MoF is preparing a detailed training plan based on an assessment of existing skills. This will be underpinned by an Institutional Development and Capacity Building Plan (IDCBP), which will articulate the MoF s strategy for implementing civil service reforms and strengthening capacity. 16. Program implementation arrangements: the MoF has taken steps to further strengthen Program management, now that it is operating at full capacity, and given recent concerns raised on the procurement, remuneration and qualification of consultants. In addition, we have agreed with the Government on the approach to salaries and compensation to ensure continued adherence with Bank requirements. Procurement, Financial Management (FM), Monitoring and Evaluation (M&E) and Program reporting functions will be maintained within the PIU 5. The Bank has also taken steps to ensure closer supervision, including by having a Dili-based TTL and increasing the number of staff in the Task Team. Three covenant positions (Human Resources and Capacity Building; Attitudes and Behaviour; and Coordination and Performance Assessment of Advisors) have been integrated into one enior Advisor for Human Resources and Capacity Development. The responsibility for advisor performance will now be spread across the Program (Annex 8). D. Analysis Economic and financial 17. The economic environment has changed significantly in Timor-Leste over the past three years as a result of large increases in oil revenues. A sharp rise in government expenditure has fuelled rapid economic growth, but the economy is vulnerable to oil price volatility. Program support on macro-fiscal planning and strategic prioritization of government expenditure will be important to help promote sustainability of spending plans. Economic monitoring and analysis is still highly constrained by the lack of reliable data, which will be addressed in part through support to the 5 The PAD (2006) assigned responsibility for Program implementation to the Directorate of Administration and IT in the MoPF. However, given weaknesses in project management capacity and the challenges associated with managing a large program of individual consultants, a PIU was established. 4

7 tatistics Directorate. However, additional funding from external sources will be needed in this area. The rapid growth in the non-oil fiscal deficit may lead to less flexibility in the future to make fiscal adjustments, or lead to large undesirable cuts in expenditure. As the economy grows and petroleum revenue declines over the long-run, domestic tax revenue will need to play a more prominent role. upport to the Tax and Customs areas should help to strengthen the government s non-oil revenue base. Technical 18. A robust link between planning and budgeting is hampered by the lack of a medium-term national development strategy. The Program will work in close coordination with the National Priorities process and the strategic planning exercise in the Prime Minister s Office to help strengthen the link between strategy and resource allocation. 19. On other issues, diagnostic work has been undertaken by the government on customs, taxation, procurement, statistics, Financial Management Information ystem (FMI) and Information Technology (IT). This has helped to establish priorities for support in these areas. A major priority in light of growing government expenditure is to further promote transparency and accountability by strengthening internal controls and audit. Weak internal controls and audit capacity increase the risks of poor quality spending. The Bank will complement Program efforts with analytical work through the designated Bank-Executed Trust Fund in areas such as procurement reforms, public expenditure analysis, and modes for effective capacity building. ustainability 20. The original PDO was based on expectations of extensive capacity development over the five-year timeframe of the Program. The MoF s challenges, however, have grown too quickly over the past three years for capacity development efforts and outcomes to have realistically kept pace given the existing level of capacity. The government s civil service reforms should improve public servants incentives over the medium term through new arrangements for career progression, more competitive remuneration and the introduction of improved performance management systems. However, external support will continue to be needed beyond This is partly because of the highly technical nature of some functions (e.g. petroleum revenue management, legal advice and macro-economic modelling), but also because the Program is starting to tackle new areas which have received limited or no support in the past. 21. In addition to this, the Program must continue to respond pragmatically and to strike the difficult balance between in-line support and capacity building. Most advisors are required to undertake capacity building as their primary objective. ome advisors, however, will have the challenging dual role of also fulfilling in-line functions to ensure that critical services are delivered. To address the issue of sustainability, an IDCBP will be prepared. This should help to set realistic targets and to monitor progress towards the MoF s objective to gradually reduce dependence on international advisors in specific areas. E. Expected Outcomes 5

8 22. It is proposed to change the PDO indicators to the following expected intermediate outcomes for each of the General Directorates, and Program Implementation: (i) (ii) (iii) (iv) (v) (vi) tate Finances: General Budget of the tate is prepared in accordance with the budget timetable based on enhanced coordination, quality and realism of line ministry submissions, reflecting government priorities and medium-term fiscal sustainability Treasury and procurement functions are managed efficiently and transparently with due regard to accountability and quality of expenditure. Revenue and Customs: Government revenue functions are administered efficiently and transparently, with improved revenue performance in line with economic developments and compliance. Policy Analysis and Research: Government policies and budget decisions are better informed by timely economic analysis and projections based on reliable data. Corporate ervices: Accountability, integrity and service culture is strengthened by improved performance of core corporate support functions, and enhanced sustainability of MoF operations. Program Implementation: The Program is effectively implemented through maintenance of operational standards, M&E, and regular reporting on results. F. Benefits and Risks 23. The overall risk to achieving the PDO is rated as substantial. The rating reflects the Program s challenging agenda in a fragile and low capacity environment. An updated risk matrix is provided in Annex An important challenge is to enhance the capacity of Timorese staff to implement the reforms initiated over the past two years. Risks include the diversion of capacity-building efforts to address urgent needs that can only be met through in-line support; insufficient staff capacity even to do basic functions in some areas; qualified staff going on long-term external training; and staff turnover. There is also a risk that PDP resources are not used because of the lack of suitably qualified candidates for certain types of training. These should be addressed through a renewed commitment to comprehensively address capacity development needs, but it is also acknowledged that this is a long-term agenda. 25. The rapid increase in the number of advisors poses challenges to Program management, which should be addressed through the strengthened Program Implementation Team (Annex 8). In addition to continued maintenance of fiduciary standards, the Program needs to better communicate its challenges and results. 26. A lesson from the past two years has been the importance of ensuring Program flexibility to respond to a rapidly changing environment. The restructured Program and expected results are based on an understanding of the current situation and what could be realistically achieved, but there may be shifts which need to be based on informed choices and an understanding of trade-offs. There are also growing needs and a limited pool of resources. There are risks to the harmonized and 6

9 aligned approach achieved to date as the MoF starts to seek outside support, or donors start approaching MoF directly and operating outside the Program framework. It will be important to maintain discipline and the effectiveness of the Program aid instrument. 7

10 Annex 1: Breakdown of IDA spending to date and Financing chedule of Revised Program IDA resources spent to date by program component (U$) Program Component IDA resources spent to date Public Expenditure Management 2,167,454 Revenue Administration and Macroeconomic Management 2,149,883 Program-wide Activities 78,367 upport for Improvement in Governance and Management (IGMA) 1,823,369 Program Implementation 917,408 Total 7,136,480 IDA/MDTF Grant Financing chedule by program component (U$) Program Component IDA Financing MDTF Financing Total for Remaining Activities tate Finances 18,625 4,998,455 5,017,080 Revenue and Customs 18,625 4,352,307 4,370,932 Policy Analysis and Research 18,625 1,907,641 1,926,265 Corporate ervices 18,625 6,305,285 6,323,910 Professional Development Program 18,625 3,981,375 4,000,000 Total 93,124 21,545,063 21,638,187 Note: Corporate ervices includes the costs of the Program Implementation Unit 8

11 Annex 2: ummary of achievements by Program component a) Public expenditure management: FMI, procurement, and treasury systems and processes have been simplified and strengthened, with an increased delegation of responsibilities to line ministries. This has improved efficiency and enabled a dramatic rise in budget execution a chronic problem in the past and of critical concern during Execution of budgeted expenditure has risen from 49% in 2006/07 to 80% in At the same time, transparency has improved through the reconciliation of MoF records with bank accounts, the extension of Free Balance to line ministries, 6 putting payroll onto Free Balance, and quarterly budget execution reports published on the web. Of note is that this has promoted more active and effective public and parliamentary scrutiny of the budget process. With the assignment of multi-year planning responsibilities to the Ministry of Economy and Development (MoED) from 2007, there has been less direct support from the Program to this function. b) Revenue administration and macroeconomic management: A detailed Customs diagnostic study was completed and now provides the basis for the reform and modernization of the Customs Directorate. The Program has supported a revision of the Customs Code and assisted with the implementation of the Automated ystem for Customs Data (AYCUDA). Customs has benefited from strong management, despite very difficult working conditions following the destruction by fire of the Customs building, manuals and records. In the Domestic Tax and Petroleum Revenue areas, the use of the tandard Integrated Government Tax Administration ystem (IGTA) has improved, and a IGTA User upport Unit has been set up. Advisors have assisted national staff with desk audits to improve compliance and with tax reconciliations to promote transparency, and a concerted effort is under way to strengthen Petroleum Tax administration. c) Program-wide activities: upport to IT has helped to provide a stable operating platform for government-wide IT applications and support services. In other areas, however, there has been less progress. Much of the support that had been envisaged for the corporate services area (human resource management, leadership strengthening, professional development, internal audit and FM strengthening) has been delayed, largely pending the outcome of current Ministry restructuring (see below). The Program has enabled the MoF to recruit much-needed audit and legal services, but internal capacity remains weak as MoF does not have national legal staff or qualified audit staff. d) upport for improvement in governance and management: The Program actively supported the MoF to prepare and implement an organization change strategy and to develop a new Organic Law for MoF. This has now been approved, setting out the Ministry s new organizational structure, mandate and objectives. This provides a legal basis for a comprehensive reform program, which includes the strengthening of systems and processes, management and staff, subsidiary legislation, institution building and infrastructure. The Program has supported the design and implementation of an open and transparent process for implementing the reorganization. This has resulted in the appointment of four Directors-General and six National Directors across MoF. 6 At the time of writing, line ministries have full access to the procurement module and read-only access to the financial management module of Free Balance. 9

12 e) Program implementation: Over the past 18 months, the PIU has been successful in managing the considerable administrative load in delivering the Program, the finances of which are now managed on Free Balance. The PIU has also helped to re-establish a focus on capacity building through the development of capacity-building plans, which will be consolidated across the MoF over the coming months. A system for evaluating the performance of advisors is in place to monitor their contributions to the achievement of the Program objectives and to underpin performance management. 10

13 A.1) Planning, Budget Formulation and Budget Execution B.1) Tax Administration and Petroleum Revenue Collection Annex 3: Changes to the original program components Component Proposed changes A) Public Expenditure Management Budget formulation, budget execution, and procurement will be remapped to what is now the General Directorate (GD) of tate Finances. Planning and statistics will be remapped to what is now the GD of Policy Analysis and Research, with possible interim support on strategic planning being provided to the PM s Office. Direct support to statistics will be limited to an international advisor to assist in the implementation of the tatistics Work Plan (WP) and a short-term advisor to assist with drafting new legislation; actual implementation of the WP will be financed from separate funding sources. Management of National Assets will be added as a new area of support. Direct support to line ministries and to district finance entities will no longer be offered, but the Program will provide training in targeted areas including the roll-out of the FMI and decentralization of procurement. There will also be coordination between the Program and projects in line ministries to strengthen budget preparation, execution and reporting. upport to a newly-established Expenditure Review Department will be added to monitor the quality of budget preparation and implementation. B) Revenue Administration and Macroeconomic Management Tax administration and petroleum revenue collection will be remapped to what is now the GD of Revenue and Customs. B.2) Customs Customs will be remapped to what is now the Customs Directorate within the GD of Revenue and Customs. A Diagnostic tudy of Customs conducted in late 2007 provides the road map for Customs reform and modernization and will replace the indicative activities and expected results set out in the PAD. B.3) Macroeconomic Management C.1) Professional Leadership, Work Ethic, Basic Training, and Performance Assessment To assist with the reform and modernization process, support through New Zealand Customs is being considered to provide advisors under a single capacity-building contract. Macroeconomic management will be remapped to what is now the GD of Policy Analysis and Research. New support is proposed for the Petroleum Fund Directorate to assist with the staffing, capacity building and institutionalization of the Directorate. The Program will part finance the costs of the Overseas Development Institute Fellowship scheme in the GD of Policy Analysis and Research. C) Program-wide Activities The five-year training plan in the PAD will be replaced by a PDP and an IDCBP. The latter would include articulating the government s civil service reform initiatives in the MoF, strengthening management and leadership capacity to drive reforms, creating the right incentives for training, and the role of advisors. Monitoring the implementation of the plan will be part of the terms of reference of enior Management Advisors and Lead Advisors. Program resources will be needed to assist with implementation of the new civil service regime and the MoF reorganization, which was not envisaged in 11

14 Component Proposed changes the PAD. This will be mapped to what is now the GD of Corporate ervices. Program support to internal audit will include assisting MoF to define the mandate, functions and powers of the unit and to articulate these through the revised PFM law and Diploma Ministerial. 7 Additional support will be provided for amendments to the Public Finance Management Law. D) upport for Improvement in Governance and Management Limited new support for assisting with and developing an external communications function within MoF is proposed. C.2) Accountability and Transparency in Public Financial Management trategic, transparent and effective management of MoPF and its resources. Effective implementation of the Program by the Administration and IT Directorate. E) Program Implementation It is proposed that three of the covenant positions (Human Resource Capacity Building Advisor, Advisor for the Coordination and Performance Assessment of Advisors, and Management Development Advisor) be integrated into one Human Resources and Capacity Development Advisor to work within the GD of Corporate ervices and support the PIU for core Program strategy and reporting functions. The enior Management Committee will be responsible for the strategic management of Program resources, and the PIU (rather than the Directorate of Administration and IT) will be responsible for Program management. PIU functions are expected to be mainstreamed within the GD of Corporate ervices, once this is fully established. A joint government-donor upervisory Committee will be responsible for regular monitoring and Program oversight. 7 Legal instrument used to define the structure of a Ministry below the level of National Directorate. 12

15 Annex 4: Current vs. Proposed Program Component tructure 8 Current Component tructure A) Public Expenditure Management A.1) Planning, Budget Formulation and Budget Execution A.2) Financial Management Information ystem B) Revenue Administration and Macroeconomic Management B.1) Tax Administration and Petroleum Revenue Collection B.2) Customs B.3) Macroeconomic Management C) Program-wide Activities C.1) Professional Leadership, Work Ethic, Basic Training, and Performance Assessment C.2) Accountability and Transparency in Public Financial Management D) upport for Improvement in Governance and Management trategic, transparent and effective management of MoPF and its resources. E) Program Implementation Effective implementation of the Program by the Administration and IT Directorate. Proposed Component tructure A. upport to General Directorate of tate Finances Director General Budget Directorate Treasury Directorate Procurement Directorate Asset Management Directorate Expenditure review Unit B. upport to General Directorate of Revenue and Customs Director General Domestic Revenue Directorate Petroleum Revenue Directorate Customs Directorate C. upport to General Directorate of Policy and Research tatistics Directorate Macroeconomic Directorate Petroleum Fund Directorate Investment Policy and Analysis Unit D. upport to General Directorate of Corporate ervices Professional Development Program Human Resources Internal audit Legal Information Technology External communications Management Development trategic Planning, Policy and Change Management E. Program Implementation Unit Advisor to Program Implementation Officer Financial Management Procurement TA Performance Management 8 Annex 4A of the PAD sets out the agencies that the project components were linked to. The second column of Annex 4 above replaces this. 13

16 Annex 5: Proposed revisions to PDO indicators Original indicators Annual Combined ources Budget, including Medium-Term Fiscal Framework, reflects petroleum savings policy and is consistent with sustainable growth and poverty reduction; line ministry budgets framed by sector performance indicators. Budget execution improved as indicated by: cash spending > 80% of cash allocations by and beyond FY08. Revenue performance improved as indicated by: periodic audits of petroleum companies; reduced clearance time for Customs. Accountability, integrity, and service culture strengthened as indicated by: adoption and implementation by MoPF of a mission statement and agency codes of conduct; successful implementation of MoPF complaints response function as evidenced by annual report showing number and treatment of complaints; expansion of internal audit function across MoPF and in all program line ministries; improved integrity of tax and customs personnel as evidenced by the adoption of agency codes of conduct and annual public perception survey; improved tax and customs service delivery. Transparency improved as indicated by: publication of annual combined sources budget, quarterly budget execution reports, annual audited accounts, and management letter, all in accessible form including at the district level and to Parliament. ustainability improved as indicated by: recruitment of local staff, especially at levels 5-7; implementation of performance assessment of staff and managers, with gradual reduction in international advisors and increase in the responsibilities and duties performed by national managers and staff. Proposed intermediate outcomes General Budget of the tate is prepared in accordance with the budget timetable based on enhanced coordination, quality and realism of line ministry submissions, reflecting government priorities and medium-term fiscal sustainability. Treasury and procurement functions are managed efficiently and transparently with due regard to accountability and quality of expenditure. Government revenue functions are administered efficiently and transparently, with improved revenue performance in line with economic developments and compliance. Government policies and budget decisions are better informed by timely economic analysis and projections based on reliable data. Accountability, integrity and service culture is strengthened by improved performance of core corporate support functions, and enhanced sustainability of MoF operations. The Program is effectively implemented, through maintenance of operational standards, monitoring and evaluation, and regular reporting on results. 14

17 Annex 6: Revised Program Results Matrix PDO Project Outcome Indicator Use of Program Outcome Information Capacity in the MoF strengthened for prudent, effective and accountable planning and management of public finance to promote growth and poverty reduction Institutional Development and Capacity Building Plan implemented and ongoing needs identified. trategy for ensuring appropriate support for areas of continuing need. Intermediate Outcomes Intermediate Outcome Indicators Indicates 1. General Budget of the tate is prepared in accordance with the budget timetable based on enhanced coordination, quality and realism of line ministry submissions, reflecting Budget: prepared with three-year fiscal forecasts, submitted to Parliament 45 days before the end of the current fiscal year, and approved before the start of the new fiscal year. Projected non-oil fiscal deficit < 90% of non-oil GDP for the 2010 central government budget and < 80% of non-oil GDP for the 2011 central government budget. Quality of budget preparation process. Fiscal sustainability. government priorities and Aggregate revenue and expenditure outturn 80% of budget in the last Credibility of the budget. medium-term fiscal two years. sustainability 2. Treasury and procurement functions managed efficiently and transparently with due regard to accountability and quality of expenditure. 3. Government revenue functions administered efficiently and transparently, with improved revenue performance in line with economic developments and compliance. Quarterly publication of budget execution reports within two months of the end of the quarter. Daily reconciliation of government bank accounts using FMI. Publication of annual audited financial accounts within 30 days after its presentation to the Prime Minister (or within 30 days after the end of parliamentary recess, should it be closed on the date the report is delivered to the Prime Minister). Improving results from public perception surveys, for each Directorate, of efficiency, effectiveness, ethics and integrity. Increasing domestic tax collections as a % of non-oil GDP. Additional revenue collected from Petroleum Revenue compliance activities (difference between submission and collection). Improving average time taken to clear green line Customs declarations - from time of entry lodgement with Customs to the issue of a delivery advice by customs. Public Availability of information on implementation of fiscal plans. Reliability of financial information and internal controls. External scrutiny and transparency of PFM system. Efficiency, transparency and simplicity of tax system. Effectiveness of revenue mobilization. Efficiency of customs. 4. Government policies and budget decisions are better National accounts published by the tatistics Directorate and three staff trained as national accounts specialists by July Capacity for economic planning and monitoring.

18 Intermediate Outcomes Intermediate Outcome Indicators Indicates informed by timely economic analysis and projections based on reliable data. 5. trengthened accountability, integrity and service culture through improved performance of core corporate support functions, and enhanced sustainability of MoF operations. 6. The Program is effectively implemented, through maintenance of operational standards, monitoring and evaluation, and regular reporting on results. tatistics Work Plan agreed by MoF and other stakeholders, with implementation plan agreed and funding secured by end Macroeconomic framework sets annual budget ceilings starting in 2009, with four staff able to update and interpret the framework by July % of leadership and management positions rated as sufficient and above in performance. 75% of Grade B and C positions rated as occupied with qualified staff. 75% of Grade D and E positions rated as occupied with qualified staff. 5 qualified staff appointed to the audit unit and at least 3 audit reports issued. 3 qualified staff appointed to the legal unit and at least 10 legal opinions issued. 80% of IT cases logged have been resolved. 80% of Procurement Plan target implemented at every six monthly review. Improved project supervision rating on implementation progress, procurement and financial management. Commitment to strategy for strengthening statistical capacity. Capacity of national staff in a technical area and appropriate training. Civil service reform. Transparency and internal control. Quality of Program planning. Compliance with rules and procedures for Program implementation. 16

19 Annex 7: Indicative Activities for 2009 linked to Intermediate Outcomes Component 3-5 year targets across MoF Indicative Activities tate Finances Budget Directorate General Budget of the tate is based on a sustainable medium-term Implementation of performance budget module. General Budget of the tate is prepared fiscal framework and reflects the government s policy priorities. Timely presentation to the National Parliament of a General Budget Budget delivered to parliament two weeks before the end of the financial year. in accordance with the budget timetable of tate as agreed by the Council of Ministers. Agencies with a budget mandate are actively engaged in budget Expenditure review unit established and resourced within MoF. based on enhanced decisions and in the provision of appropriate documentation. Training needs of the unit identified and coordination, quality Budget documentation is accurate and accessible to users and the training program developed. and realism of line general public. Regular analytical reports on public ministry expenditure produced. submissions, Treasury Directorate Train line ministry staff to use Free reflecting Improved predictability and effective control in budget execution. Balance for entering CPV and PR. government Timely publication of reconciled and accurate statutory quarterly et up integrated FMI accessible to all priorities and and annual reports; production of timely and informative key users. medium-term fiscal management reports for Minister of Finance and Council of Regular reconciliation of government sustainability Ministers as required. bank accounts. Treasury and Efficient management of the Treasury function, including New staff recruited by the end of procurement maintenance and regular reconciliation of the single Treasury eptember functions managed account. efficiently and Effective provision of Treasury services to budget agencies. transparently with Procurement Directorate due regard to Implementation of procurement module in accountability and Progressively higher rates of budget execution on an annual basis. FMI. quality of Reduction in complaints from suppliers and line ministries. Training of line agencies to enable greater expenditure. Procurement authority devolved in a timely way to trained and volume of devolved transactions. accredited procurement units in line ministries. Audit findings validate the effective application of procurement law and guidelines. National Assets Directorate Government better able to monitor the use, maintenance and disposal of national t assets. Civil servants understand their role and responsibilities in regard to the use, maintenance and disposal of government assets. 17 Implementation, training and use of Free Balance asset management register. Prepare Asset Management Manual, consolidating and merging the different policies and manuals into one. Prepare asset life cycle management

20 Component 3-5 year targets across MoF Indicative Activities policies, guidelines and procedures, including records management requirements. Revenue and Customs Government revenue functions administered efficiently and transparently, with improved revenue performance in line with economic developments and compliance. Policy and Research Government policies Domestic Tax Directorate tronger legislative and integrity framework through implementation of the Taxes and Duties Procedures Law and Penalties Law. Increased non-oil revenue collection as percentage of non-oil GDP, based on application of risk management principles. Public perception surveys reflecting transparency and integrity in services to private sector, reduced corruption, and effective complaints and appeals mechanisms. Petroleum Revenue Directorate tronger legislative and integrity framework through implementation of the Taxes and Duties Procedures Law and Penalties Law. Maximizing petroleum revenue collection on the basis of improved systems and processes. Public perception surveys reflecting transparency and integrity in services to private sector, lower compliance costs, and effective complaints and appeals mechanisms. Customs Directorate tronger legislative and integrity framework. Increased Customs revenue collection as percentage of non-oil GDP, based on application of risk management principles at all posts. Public perception surveys reflecting transparency and integrity in services to private sector, reduced clearance times, and effective complaints and appeals mechanisms. tatistics Directorate Responsibilities for data collection across government are clearly defined and coordinated by the tatistics Directorate. 18 Full collection of revenues due. Public information campaigns on the new tax regime conducted at the national level and in the 13 districts. Income-matching process designed and developed to identify high risks cases of non-compliance. Implementation of taxpayer identification, tax administration, staff manuals, records management, and audits. Negotiate cooperative agreement under the Double Taxation Agreement with the Australian Taxation Office by end Increased Customs presence at land border posts and improved skills among Customs border control staff. New premises in the border areas ready for occupancy by end A well-defined Customs ervice structure put in place as a result of the new legislative framework and review of responsibilities. Implementation of new Consolidated Customs Code and relevant articles of the Taxes and Duties Procedures Law. tatistical Master Plan ready for implementation by end-2009 based on broad consultation.

21 Component 3-5 year targets across MoF Indicative Activities and budget decisions are better informed by timely economic Key economic and social statistics are regularly collected (where applicable by the tatistics Directorate), compiled, evaluated, analyzed and disseminated to the public. analysis and projections based on reliable data. Poverty and other surveys and censuses are updated periodically and coordinated by the tatistics Directorate, and analysis disseminated to the public. Macro-economy Directorate trategic planning undertaken in conjunction with the Prime Minister s Office to prioritize allocation public resources. A macroeconomic model is used to monitor and analyze macro developments to help inform decision-making on government policy and budget. A Medium-Term Fiscal Framework projects aggregate spending and revenue, and helps the Ministry to set the budget envelope and assess trade-offs. Regular macroeconomic analysis and reporting inform policy discussions. Petroleum Fund (PF) Directorate PF Law in place that ensures sound and transparent management of Petroleum Wealth. A medium- and long-term investment strategy of the PF in place, and a corresponding implementation strategy that promotes good return without undue risk. A regularly updated framework and projections for Petroleum Wealth and Estimated ustainable Income estimates to help inform ceilings on withdrawals from the PF. Critical staffing requirements of the Macroeconomic Unit filled by end of June A macroeconomic model is used to monitor and analyze macro developments. Regular macroeconomic analysis and reporting inform policy discussions. Establish the Petroleum Fund ND staffed by Timorese nationals who are responsible for the management and operation of the ND. Build the capacity of Timorese staff so they gradually participate in the technical work of the ND. Corporate ervices trengthened accountability, integrity and service culture through improved performance of core corporate support functions, and IT Division MoF operates on a stable IT platform, supported and maintained from state resources. FMI extended to, and in use by, relevant budget entities. Human Resources Division MoF-wide IDCBP is endorsed by Minister and implemented. 19 Preparation of strategy for the IT unit to provide stable operating platform for MoF and government-wide IT applications while local capacity develops. Enhanced government-wide access to essential IT applications, including districts. HRD established as the driver of key staff development, cultural reform and

22 Component 3-5 year targets across MoF Indicative Activities enhanced HRD effectively manages civil service reforms, performance institutional change initiatives. sustainability of MoF operations. management and professional development initiatives (including PDP ) across MoF. First batch of PDP delivered to eligible MOF staff by June All staff to have a development capacity building plan by end of Legal ervices Unit trategy prepared, and implementation Organizational structure and capacity-building strategy for the General Legal ervices Unit developed and implemented. commenced, for the development of legal services capacity in MoF. Improved contracting and procurement processes as evidenced by reduced number of complaints from vendors. General Legal ervices Unit established and resourced. Improved MoF input to legislation during drafting as evidenced by an increased percentage of draft laws considered by the General Legal ervices Unit. Information and education campaign initiated to build culture within MoF of actively seeking legal advice. Internal Audit Unit Clarification of the role of Internal Audit through revised PFM law and Diploma Ministerial. Effective internal audit function across MoF used as management tool trategic Planning, Policy and Change Management, Budget Implementation Ministry-level planning and budget cycles coordinated, and linkages between Annual Action Plans (AAPs) and Ministry budget strengthened. Ministry trategic Plan, AAP and other ministerial planning instruments updated annually through a consultative process. Harmonization of MoF and Program planning and budgeting 20 Clarification of the mandate and scope of the internal audit unit in relation to other government audit functions, and formalization of the role of the unit through PFM legislation. Communication and education campaign to improve understanding of administrative transparency, roles and responsibilities, etc. trategy for developing internal audit capacity within MoF, including staff recruitment and training, and strategy for maintaining internal audit functions in interim periods. MoF strategic plan translated into actionable items through the AAP/ IAP process. ystems in place to work with all relevant MoF units to undertake planning processes to define the coming year s priorities.

23 Component 3-5 year targets across MoF Indicative Activities processes. Effective delegation by managers to well-qualified, professional, IDCB plan completed. accountable staff. Enhanced sustainability as measured through a reduction in the number of in-line advisors and a corresponding increase in the number of Timorese nationals confirmed in substantive executive civil service positions. Program Wide/ Implementation The Program is effectively implemented, through maintenance of operational standards, monitoring and evaluation, and regular reporting on results. Reduction of advisors in line with available program resources and ongoing need for assistance in highly technical fields. 21

24 Annex 8: ummary of changes to the Program Implementation Team Original Position and Functions Proposed Position and Functions Rationale Advisor to the Program Implementation Officer Reporting to: PIO Counterpart: none. enior Program Manager/Advisor to the PIO Reports to: Minister/PFM Advisor Counterpart: PIO Responsibilities: support program implementation including FM, procurement, M&E, and reporting. Responsibilities: team leader PIU, ensure effective program management including FM, procurement, M&E and reporting. This position has been revised to emphasize senior project management experience and leadership and management skills. Lines of accountability have been clarified, upwards to the Minister of Finance and the PFM Advisor and downwards to two of the other three covenanted positions. The position will also have a flexible fund to finance short-term inputs to assist with program administration. ince the PIO has now been appointed to the position of Director General Corporate ervices, the position now requires more direct Program management responsibilities. The PIO will continue to exercise delegated authority from the Minister. HR and Capacity Building Advisor Reporting to: PIO Counterpart: Head of HR. Responsibilities: selection and recruitment of staff and advisors; implementation of Civil ervice Act; capacity building strategy. Advisor on Attitudes and Behavior Reporting to: PIO. Counterpart: Head of HR. Responsibilities: job descriptions; implementation of codes of conduct; leadership and management training. enior Advisor, Human Resources and Capacity Development Reports to: enior Program Manager Counterpart: Director Human Resources Responsibilities: ensure the effective recruitment and management of a team of consultants, establish best practice capacity development approaches across the program, provide advice to the Director General Corporate ervices on corporate reform. The enior Management Advisor Corporate ervices will now be assigned implementation of codes of conduct, This position has been revised to emphasize the importance of management experience in corporate resources with experience in personnel recruitment and human resource planning, and a track record of managing a public sector reform and/or corporate change process. Lines of accountability have been clarified, with the position reporting to the enior Program Manager. The position is also expected to support the enior Management Advisor Corporate ervices, which is likely to be filled as a part-time position. ome of the reasons for restructuring this position include: The enior Management Advisors now have responsibility for functions previously undertaken by the Advisor on Coordination and Performance Assessment. The enior Advisor will assist the enior Management 22

25 Original Position and Functions Proposed Position and Functions Rationale Advisor on Coordination and Performance Assessment of Advisors Reporting to: PIO Counterpart: Director of Administration and IT. implementation of the Civil ervice Act, and leadership and management training. Responsibilities: coordinate advisors and progress reports on monthly work plans; performance assessment system for advisors. The enior Management Advisors will be assigned responsibilities for the implementation of the performance assessment system for advisors, with a coordinating role remaining for the PIU. Advisor Corporate ervices and counterpart the Director Human Resources, thereby helping to mainstream some functions undertaken by the PIU. Having one senior advisor that can draw on short-term input when needed is more cost effective than three fulltime advisors. Financial Management Officer Reporting to: PIO Counterpart: Finance Officers (Accountancy and Bookkeeping). Responsibilities: program budget management; financial transaction processing; financial information management; financial reporting; coordination of project external audit. Procurement Advisor Reporting to: PIO. Counterpart: procurement staff. Responsibilities: Procurement under the program. Financial Management Officer Reporting to: PIO Counterpart: Finance Officers (Accountancy and Bookkeeping). Responsibilities: program budget management; financial transaction processing; financial information management; financial reporting; coordination of project external audit. Procurement Advisor Responsibilities: Managing and updating the Procurement Plan, monitoring procurement processes, ensuring compliance with procurement guidelines, preparing NOL packages and reporting on procurement outcomes. No change is envisaged in the scope of this position, but the Program has advertised to recruit a national FMO. If a suitable candidate is not found, the position will be re-advertised for an internationally-recruited individual. This position has not yet been recruited under the Program. Most procurement has been managed by the PIO and her advisor, with assistance from the other international advisors in the PIU. For more complex goods and service procurements, the PIO has drawn on advice from one of the Procurement Advisors to the Ministry. Given the complexity of the program and large number of procurements, it is proposed to recruit a full-time national procurement advisor. 23

26 Annex 9: Risk Matrix Interpretation/update of risk identified in the Original PAD 1. High profile of national flagship program (for government and the Bank) results in politically motivated challenges, weakening Ministerial resolve. 2. Reorganization and reform program creates uncertainty and/or backlash among staff, which derails progress. 3. Program does not strike an appropriate balance between capacity building outcomes and in-line support, undermining sustainability. 4. Program complexity and large number of advisors leads to poor coordination and lack of focus on overall Program objective. 5. Major changes in MoF counterparts weaken collective memory and government ownership, stalling the reform process and having a negative impact on implementation. 6. Rapidly changing environment leads to redirection of Program advisory services to address urgent needs. 7. Complex project with large number of individual consultant procurements leads to difficulties in light of capacity constraints and lack of suitable candidates. 8. Lack of internal controls and audit capacity, and weak external audit compromise the quality of spending. Risk Rating April 2009 To Program Development Objective H H Mitigation measures Reinvigorated efforts to communicate Program purposes and wider MoF reform strategy, the MoF s achievements and awareness of risks to parliament, donors and the general public. Increased internal and external communication about changes. Explicit change management strategies to ensure a smooth transition. Implement PDP and an IDCBP with realistic targets for transfer of responsibilities. Advisor performance management system and periodic review of advisory TORs. Continued strong leadership and ownership of the Minister and enior Management Committee ensures strategic management of the Program. Continue to embed management of Program into core MoF functional units, and support increased internal communication. Regular dialogue and Program supervision to update PP as and when needed, ensuring that new support is consistent with Program objectives. Continue to apply clear standards on recruitment processes and close supervision; appoint Procurement Adviser to PIU; develop an Operations Manual; explore option of accessing TA through recruitment firms. upport the strengthening of internal audit capacity, with MoF continuing to draw on services from external commercial auditors. Rating of residual risk M H 24

27 Interpretation/update of risk identified in the Original PAD 1. tate Finances: implementation of technical reforms overloads reform agenda. 2. tate Finances: proposed fiscal decentralization impacts negatively on planning, budgeting and expenditure controls and overloads the reform agenda. 3. Revenue and Customs: lack of key infrastructure prevents the GD from carrying out its functions. 4. Revenue and Customs: weaknesses in enforcement capacity lead to poor compliance on domestic tax. 5. Policy Analysis and Research: program unable to build specialist capacity due to highly technical nature of work and an overly-ambitious research agenda that lacks focus on most urgent needs to inform policy. 6. Policy and Analysis and Research: insufficient government and donor commitment to implementing the tatistical Work Plan. 7. Corporate ervices: implementation of civil service reforms has an adverse impact on MoF operations. 8. Corporate ervices: Program resources do not match actual needs in Corporate ervices, which is of key H importance in the reorganization and reform process. H= High Risk; =ubstantial Risk; M=Modest Risk; N=Negligible Risk Risk Rating Mitigation measures April 2009 To Component Results Provide more intense and frequent training on the use of the Free Balance software to MoF and line ministry staff over an extended period. Budget, procurement, assets and treasury advisors to provide technical support for the implementation of relevant FMI modules. upport MoF through policy advice to promote a realistic agenda for decentralization; coordinate with donors and H work with TA programs in line ministries to anticipate challenges and strengthen planning and resource management. New facilities budgeted and construction commenced with H strong advisory input as required. Enhance focus on initiatives to strengthen compliance H amongst large taxpayer community, and design an income matching project to identify compliance risks. Focus on two to three key analytical areas and supplement local capacity with specialized advisory support and H targeted professional development activities. H Focus on revising statistics legislation, which will demand broader government focus and agreement on appropriate institutional and analytical approaches to statistical development. trengthen support to Human Resources Division to manage implementation of reforms, maintain strong internal communications on reforms as they occur. Pilot CR activities in select areas of the MoF before broader implementation. Redirect support from PIU to support fundamental corporate support functions. Provide limited additional advisory support to the GD to meet critical demands. Rating of residual risk M M 25

28 Annex 10: New tructure of the Ministry of Finance 26